株探米国株
英語
エドガーで原本を確認する
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
 
20549
 
FORM
10-K
☒
For the fiscal year ended
December 31, 2024
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:
$
40,992,280
 
as of June 30, 2024.
 
APPLICABLE ONLY TO CORPORATE REGISTRANTS
 
Indicate the number of shares outstanding
 
of each of the registrant’s classes of common stock, as
 
of the latest practicable date:
3,493,699
 
shares of common stock as
of March 10 2025.
DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of the Proxy Statement for the Annual
 
Meeting of Shareholders, scheduled to
 
be held May 13, 2025, are incorporated by
 
reference into Part II, Item 5 and
Part III of this Form 10-K.
 
3
PART
 
I
 
SPECIAL CAUTIONARY NOTE REGARDING
 
FORWARD
 
-LOOKING STATEMENTS
Various
 
of the statements made herein under the captions “Management’s
 
Discussion and Analysis of Financial Condition
and Results of Operations”, “Quantitative and Qualitative Disclosures about
 
Market Risk”, “Risk Factors” “Description of
Property” and elsewhere, are “forward-looking statements” within the meaning
 
and protections of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange
 
Act of 1934, as amended (the “Exchange Act”).
Forward-looking statements include statements with respect to our beliefs, plans,
 
objectives, goals, expectations,
anticipations, assumptions, estimates, intentions and future performance,
 
and involve known and unknown risks,
uncertainties and other factors, which may be beyond our control,
 
and which may cause the actual results, performance,
achievements or financial condition of the Company to be materially different
 
from future results, performance,
achievements or financial condition expressed or implied by such forward-looking
 
statements.
 
You
 
should not expect us to
update any forward-looking statements.
All statements other than statements of historical fact are statements that could
 
be forward-looking statements.
 
You
 
can
identify these forward-looking statements through our use of words such
 
as “may,” “will,” “anticipate,”
 
“assume,”
“should,” “indicate,” “would,” “believe,” “contemplate,” “expect,”
 
“estimate,” “continue,” “designed”, “plan,” “point to,”
“project,” “could,” “intend,” “target,” “seek” and other
 
similar words and expressions of the future.
 
These forward-looking
statements may not be realized due to a variety of factors, including,
 
without limitation:
●
the effects of future economic, business and market conditions and
 
changes, foreign, domestic and locally,
including inflation, seasonality,
 
natural disasters or climate change, such as rising sea and water levels, hurricanes
and tornados, epidemics or pandemics including supply chain disruptions,
 
inventory volatility, and changes
 
in
consumer behaviors;
●
the effects of war or other conflicts, acts of terrorism, trade restrictions, tariffs,
 
sanctions, the value of the U.S.
dollar against other currencies, or other events that may affect general
 
economic conditions, consumer and
business confidence;
●
governmental monetary and fiscal policies, including taxes, federal
 
deficit spending and the debt required to fund
such spending, changes in monetary policies in response to inflation and changes
 
in prices , including changes in
the Federal Reserve’s target
 
federal funds rate and changes in the Federal Reserve’s
 
holdings of securities through
quantitative tightening or easing; and the duration that the Federal Reserve
 
will keep its targeted federal funds
rates at or above current target ranges to meet its long term inflation
 
target of 2%;
●
legislative, executive branch and regulatory changes, including changes
 
by executive orders, the possible
reorganization and/or consolidation of the bank regulatory
 
agencies and/or the CFPB, changes in the leadership
and personnel, including reductions in the number and experience of personnel,
 
at the bank and securities
regulators and the CFPB, freezes on changes in regulations and interpretations,
 
the numerous new Executive
Orders, and the uncertain effects of all these, including the
 
costs and benefits of such changes;
●
the effects of the potential privatization of Fannie Mae and Freddie Mac
 
and its release from conservatorship on
the mortgage markets and us as seller and servicer of residential mortgage
 
loans;
●
recent Supreme Court rulings that may lead to more court challenges to regulations
 
and regulatory actions, which
may cause uncertainty,
 
wasted implementation costs and time by the industry,
 
and lengthy delays until ultimate
resolution;
●
changes in banking, securities and tax laws, regulations and rules and their
 
application by the regulators, including
capital and liquidity requirements, and changes in the scope and cost of FDIC insurance; changes in accounting pronouncements and interpretations, including the required use, beginning January 1, 2023,
4
●
of Financial Accounting Standards Board’s
 
(“FASB”) Accounting
 
Standards Update (ASU) 2016-13, “Financial
Instruments – Credit Losses (Topic
 
326): Measurement of Credit Losses on Financial Instruments,” as well as the
updates issued since June 2016 (collectively,
 
FASB ASC Topic
 
326) on Current Expected Credit Losses
(“CECL”), and ASU 2022-02, Troubled Debt
 
Restructurings and Vintage Disclosures,
 
which eliminates troubled
debt restructurings (“TDRs”) and related guidance;
●
the failure of assumptions and estimates, including those used in the Company’s
 
CECL models to establish our
allowance for credit losses and estimate asset impairments, as well as differences
 
in, and changes to, economic,
market and credit conditions, including changes in borrowers’ credit risks and
 
payment behaviors from those used
in our CECL models and loan portfolio reviews;
●
the risks of changes in market interest rates and the shape of the yield curve on customer
 
behaviors; the levels,
composition and costs of deposits, loan demand and mortgage loan originations;
 
the values and liquidity of loan
collateral, our securities portfolio and interest-sensitive assets and
 
liabilities; and the risks and uncertainty of the
amounts realizable on collateral;
●
the risks of increases in market interest rates creating unrealized losses on our
 
securities available for sale, which
adversely affect our stockholders’ equity for financial
 
reporting purposes and our tangible equity;
●
changes in borrower liquidity and credit risks, and changes in savings, deposit and
 
payment behaviors;
●
changes in the availability and cost of credit and capital in the financial markets, and
 
the types of instruments that
may be included as capital for regulatory purposes;
●
changes in the prices, values and sales volumes of residential and commercial
 
real estate;
●
the effects of competition from a wide variety of local, regional,
 
national and other providers of financial,
investment and insurance services, including the disruptive effects
 
of financial technology and other competitors
who are not subject to the same regulation, including capital and liquidity
 
requirements, internal controls, and
supervision and examination, as the Company and the Bank, and competition
 
from credit unions, which are not
subject to federal income taxation;
●
more permissive regulation and/or enforcement regarding digital assets, such as cyber
 
currency and stable coins
that creates additional competition to banks, and greater risks to the
 
payment systems that the banking industry,
including the Company,
 
relies on, and greater risks of fraud and theft of digital assets and their effects
 
on
customers, other financial institutions, including our counterparties, and
 
confidence in the financial system,
generally;
●
the timing and amount of rental income from third parties from office
 
space in our Auburn Center headquarters
and in former office locations;
●
the risks of mergers, acquisitions and divestitures, including,
 
without limitation, the related time and costs of
implementing such transactions, integrating operations as part of these
 
transactions and possible failures to achieve
expected gains, revenue growth and/or expense savings from such transactions;
●
changes in technology or products that may be more difficult, costly,
 
or less effective than anticipated;
●
cyber-attacks and data breaches that may compromise our systems, our vendors’
 
systems or customers’
information;
●
the risks that our deferred tax assets (“DTAs”)
 
included in “other assets” on our consolidated balance sheets, if
any, could be reduced
 
if estimates of future taxable income from our operations and tax planning strategies
 
are less
than currently estimated, and sales of our capital stock could trigger a
 
reduction in the amount of net operating loss
carry-forwards that we may be able to utilize for income tax purposes; the risks that our dividends, share repurchases and discretionary bonuses are limited by regulation to the
5
●
maintenance of a capital conservation buffer of 2.5% and
 
our future earnings and “eligible retained earnings” over
rolling four calendar quarter periods;
●
other factors and risks described under “Risk Factors” herein and in any of our
 
subsequent reports that we make
with the Securities and Exchange Commission (the “Commission” or
 
“SEC”) under the Exchange Act.
All written or oral forward-looking statements that we make or are attributable
 
to us are expressly qualified in their entirety
by this cautionary notice.
 
We have no obligation
 
and do not undertake to update, revise or correct any of the forward-
looking statements after the date of this report, or after the respective dates on which
 
such statements otherwise are made.
ITEM 1.
 
BUSINESS
Auburn National Bancorporation, Inc. (the “Company”) is a bank holding
 
company registered with the Board of Governors
of the Federal Reserve System (the “Federal Reserve”) under the Bank Holding
 
Company Act of 1956, as amended (the
“BHC Act”).
 
The Company was incorporated in Delaware in 1990, and in 1994 it succeeded
 
its Alabama predecessor as
the bank holding company controlling AuburnBank, an Alabama state member
 
bank with its principal office in Auburn,
Alabama (the “Bank”).
 
The Company and its predecessor have controlled the Bank since 1984.
 
As a bank holding
company, the Company
 
may diversify into a broader range of financial services and other business activities than
 
currently
are permitted to the Bank under applicable laws and regulations.
 
The holding company structure also provides greater
financial and operating flexibility than is presently permitted to the
 
Bank.
 
The Bank has operated continuously since 1907 and currently conducts its business
 
primarily in East Alabama, including
Lee County and surrounding areas.
 
The Bank has been a member of the Federal Reserve Bank of Atlanta (the
 
“Federal
Reserve Bank”) since April 1995.
 
The Bank’s primary regulators are the Federal
 
Reserve and the Alabama Superintendent
of Banks (the “Alabama Superintendent”).
 
The Bank has been a member of the Federal Home Loan Bank of Atlanta (the
“FHLB-Atlanta”) since 1991.
General
The Company’s business is conducted
 
primarily through the Bank and its subsidiaries.
 
Although it has no immediate plans
to conduct any other business, the Company may engage directly or
 
indirectly in a number of activities closely related to
banking permitted by the Federal Reserve.
The Company’s principal
 
executive offices are located at 100 N. Gay Street, Auburn, Alabama 36830,
 
and its telephone
number at such address is (334) 821-9200.
 
The Company maintains an Internet website at
www.auburnbank.com
.
 
The
Company’s website and
 
the information appearing on the website are not included or incorporated in, and are not part of,
this report.
 
The Company files annual, quarterly and current reports, proxy statements, and other
 
information with the
SEC.
 
You
 
may read and copy any document we file with the SEC at the SEC’s
 
public reference room at 100 F Street, N.E.,
Washington,
 
DC 20549.
 
Please call the SEC at 1-800-SEC-0330 for more information on the operation of the public
reference rooms.
 
The SEC maintains an Internet site at
www.sec.gov
 
that contains reports, proxy,
 
and other information,
where SEC filings are available to the public free of charge.
 
6
Services
The Bank operates its main office and 7 branches in Auburn, Opelika,
 
Notasulga, and Valley,
 
Alabama and a loan
production office in Phenix City,
 
Alabama.
 
We
evaluate the utilization of our existing facilities and customer preferences
for online and mobile banking.
 
In addition to opening our new main office in 2022, we closed one
 
branch office in Auburn
at the end of 2024, whose customers could be served conveniently and more
 
efficiently by another existing Bank branch.
It offers checking, savings, transaction deposit accounts and
 
certificates of deposit, and is an active residential mortgage
lender in its primary service area.
 
The Bank’s primary service area includes
 
the cities of Auburn and Opelika, Alabama and
nearby surrounding areas in East Alabama, primarily in Lee County.
 
The Bank also offers commercial, financial,
agricultural, real estate construction and consumer loan products,
 
and other financial services.
 
The Bank operates ATM
machines in 10 locations in its primary service area.
 
The Bank offers Visa
®
 
Checkcards, which are debit cards with the
Visa logo that work
 
like checks and can be used anywhere Visa is accepted,
 
including ATMs.
 
The Bank’s Visa
 
Checkcards
can be used internationally through the Plus
®
 
network.
 
The Bank offers online banking, bill payment and other electronic
banking services through its Internet website,
www.auburnbank.com
.
 
Our online banking services, bill payment and
electronic services are subject to certain cybersecurity risks.
 
See “Risk Factors – Our information systems may experience
interruptions and security breaches.”
 
The Bank has not offered any services related to any Bitcoin or
 
other digital or crypto instruments, stablecoins or
businesses.
Competition
The Bank had the largest share of the Lee County,
 
Alabama’s deposits (21.3%) at June 30, 2024.
 
The banking business in
East Alabama, including Lee County,
 
is highly competitive with respect to loans, deposits, and other financial services.
 
Lee County is served by 19 banks, 10 of which are headquartered outside
 
of Alabama.
 
Other banks have 35 offices in Lee
County.
 
National and regional competitors that have offices in our market
 
include J.P.
 
Morgan Chase, Wells
 
Fargo, Truist,
PNC, Regions, Valley
 
National, SouthState and Cadence.
 
The national and regional banks we compete with have
substantially greater resources, and numerous offices
 
and affiliates operating over wide geographic areas.
 
The Bank
competes for deposits, loans and other business with these banks, as well as with credit
 
unions, mortgage companies,
insurance companies, and other local and nonlocal financial institutions,
 
including institutions offering services through
 
the
mail, by telephone and over the Internet.
 
As more and different kinds of businesses enter the market for financial
 
services,
competition from nonbank financial institutions may be expected to intensify
 
further.
 
Among the advantages that larger financial institutions have
 
over the Bank are their ability to finance extensive advertising
campaigns, to diversify their funding sources, and to allocate and diversify
 
their assets among loans and securities of the
highest yield in locations with the greatest demand.
 
Many of the major commercial banks or their affiliates operating
 
in the
Bank’s service area offer
 
services which are not presently offered directly by the Bank, and these other
 
banks typically have
substantially higher lending limits than the Bank.
 
Banks also have experienced significant competition for deposits from mutual
 
funds, insurance companies and other
investment companies and from money center banks’ offerings
 
of high-yield investments and deposits, including CDs and
savings accounts.
 
Certain of these competitors are not subject to the same regulatory restrictions as the Bank.
 
Selected Economic Data
Our market is Lee County,
 
Alabama, including Auburn, Opelika and part of Phenix City,
 
Alabama.
 
Lee County and Macon
County form the Auburn-Opelika MSA.
 
The U.S. Census Bureau estimates Lee County’s
 
population was 174,241 in 2020
and an estimated 183,215 in July 2023.
 
The largest employers in the area are Auburn University,
 
East Alabama Medical
Center, Lee County School System, Auburn
 
and Opelika City Schools, Auburn City Schools, Wal
 
-Mart Distribution
Center, Aptar CSP Technologies,
 
Pharmavite, LLC, HL Mando America Corporation (automobile
 
brakes and steering),
SCA (automotive plastics), Borbet Alabama (automotive aluminum
 
wheels), Golden State Foods and Briggs & Stratton.
 
Auto manufacturing and related suppliers are increasingly important
 
along Interstate Highway 85 to the east and west of
Auburn.
 
Kia Motors has a large automobile factory in nearby West
 
Point, Georgia, and Hyundai Motors has a large
automobile factory near Montgomery,
 
Alabama.
 
Various
 
suppliers to the automotive industry have facilities in Lee
County.
 
As of year-end 2024, the unemployment rate in Lee County was 2.8%,
 
and 3.3% for the State of Alabama
according to the U.S. Bureau of Labor Statistics.
7
Between 2010 and 2022, the Auburn-Opelika MSA was the second
 
fastest growing MSA in Alabama.
 
The Auburn-
Opelika MSA population is estimated to grow 6.6% from 2023 to 2028.
 
During the same time, household income is
estimated to increase 14.25%, to $69,213.
Loans and Loan Concentrations
The Bank makes loans for commercial, financial and agricultural purposes, as well as for
 
real estate mortgages, real estate
acquisition, construction and development and consumer purposes.
 
While there are certain risks unique to each type of
lending, management believes that there is more risk associated with commercial,
 
real estate acquisition, construction and
development, agricultural and consumer lending than with residential real
 
estate mortgage loans.
 
To help manage these
risks, the Bank has established underwriting standards used in evaluating
 
each extension of credit on an individual basis,
which are substantially similar for each type of loan.
 
These standards include a review of the economic conditions
affecting the borrower,
 
the borrower’s financial strength and capacity to repay the debt, the underlying
 
collateral and the
borrower’s past credit performance.
 
We
apply these standards at the time a loan is made and monitor them periodically
throughout the life of the loan.
 
See “Lending Practices” for a discussion of regulatory guidance on commercial
 
real estate
lending.
 
Our commercial real estate (“CRE”) loans, including $55.4 million of
 
loans on owner occupied property,
 
as of December
31, 2024 totaled $290.2 million (51% of total loans).
 
Our regulators’ CRE Guidance excludes loans on owner occupied
property from CRE.
 
Excluding our owner-occupied loans, our CRE loans were $234.8 million
 
(42% of total loans) at year
end 2023.
 
See “Lending Practices –
CRE.
”
The Bank has loans outstanding to borrowers in all industries within our
 
primary service area.
 
Any adverse economic or
other conditions affecting these industries would
 
also likely have an adverse effect on the local workforce, other local
businesses, and individuals in the community that have entered
 
into loans with the Bank.
 
For example, the auto
manufacturing business and its suppliers have positively
 
affected our local economy,
 
but automobile sales manufacturing is
cyclical and adversely affected by increases in interest rates.
 
Decreases in automobile sales, including adverse changes due
to interest rate increases and inflation, tariffs, supply
 
chain disruptions (including changes resulting from the effects of
tariffs and related changes in countries and producers in
 
the supply chains) and a tight labor market, could adversely affect
nearby Kia and Hyundai automotive plants and their suppliers' local spending
 
and employment, and could adversely affect
economic conditions in the markets we serve.
 
However, management believes that due
 
to the diversified mix of industries
located within our markets, adverse changes in one industry may not necessarily
 
affect other area industries to the same
degree or within the same time frame.
 
The Bank’s primary service area also is subject
 
to both local and national economic
conditions and fluctuations.
 
While most loans are made within our primary service area, some residential mort
 
gage loans
are originated outside the primary service area, and the Bank from
 
time to time has purchased loan participations from
outside its primary service area.
 
We
also may make loans to other borrowers outside these areas, especially where we
 
have
a relationship with the borrower, or
 
its business or owners.
 
 
 
 
 
 
 
8
Human Capital
At December 31, 2024, the Company and its subsidiaries had 145 full-time
 
equivalent employees, including 39 officers.
 
Our employees have been with us an average of approximately 11
 
years.
 
We successfully implemented
 
plans to protect our
employees’ health consistent with CDC and State of Alabama guidelines
 
during the COVID-19 pandemic, while
maintaining critical banking services to our communities and experiencing
 
little employee turnover.
 
In addition, we
developed our remote and electronic banking services, and established remote
 
work access to help employees stay at home
where their job duties permitted.
 
This promoted employee retention, and these efforts will provide us proven
 
experience
and flexibility to meet other disruptive events and conditions, and still provide our
 
customers and communities continuity
of service.
We have a talented
 
group of employees, many of whom, have a college or associate degree.
 
We believe the
 
Auburn-
Opelika MSA is a desirable place to live and work with excellent schools and quality
 
of life.
 
Our MSA was the second
fastest growing MSA in Alabama from 2010 to 2022.
 
Auburn University is a major employer that attracts talented students
and employee families.
 
We had a successful
 
management transition in 2022 where our CEO became Chairman,
 
and was succeeded by our CFO,
whose role was then filled by our Chief Accounting Officer.
 
At the time of transition, our Chairman had served the Bank
39 years, our President and CEO had been with us 16 years and our Chief Accounting
 
Officer had been with us for 7 years.
 
Our new President and CFO had careers with major national and regional
 
accounting firms and focused on financial
services before joining the Bank.
We seek to offer
 
competitive compensation and benefits.
 
We provide
 
employer matches for employee contributions to our
401(k) retirement plan.
 
In 2024, our shareholders approved our 2024 Equity and Incentive Compensation
 
Plan (the “2024
Incentive Plan”).
 
The Plan provides for a variety
 
of equity and equity-based awards, including stock options, performance
shares, performance units, stock appreciation rights (“SARs”), restricted
 
stock and restricted stock units (“RSUs”) and cash
incentive awards.
 
We believe that the 2024
 
Incentive Plan provides the flexibility to structure appropriate incentives to
attract and retain talented people in a competitive market where many
 
of our competitors are public companies who offer
stock-based incentives.
 
We encourage
 
and support the growth and development of our employees and, wherever possible, seek
 
to fill positions by
promotion and transfer from within the organization.
 
Career development is advanced through ongoing performance and
development conversations with employees, internally developed
 
training programs and other training and development
opportunities.
Our employees are encouraged to be active in our communities as part of our commitment
 
to these communities and our
employees.
 
Statistical Information
Certain statistical information is included in responses to Items 6, 7, 7A and 8
 
of this Annual Report on Form 10-K.
 
SUPERVISION AND REGULATION
The Company and the Bank are extensively regulated under federal
 
and state laws applicable to bank holding companies
and banks.
 
The supervision, regulation and examination of the Company and the Bank and their
 
respective subsidiaries by
the bank regulatory
 
agencies are primarily intended to maintain the safety and soundness of depository
 
institutions and the
federal deposit insurance system, as well as the protection of depositors,
 
rather than holders of Company capital stock and
other securities.
 
Any change in applicable law or regulation may have a material effect
 
on the Company’s business, and
our results of operations and financial condition.
 
The following discussion is qualified in its entirety by reference to the
particular laws and rules referred to below.
9
Bank Holding Company Regulation
The Company, as a bank
 
holding company, is subject to supervision,
 
regulation and examination by the Federal Reserve
under the BHC Act.
 
Bank holding companies generally are limited to the business of banking,
 
managing or controlling
banks, and certain related activities.
 
The Company is required to file periodic reports
 
and other information with the
Federal Reserve.
 
The Federal Reserve examines the Company and its subsidiaries.
 
The State of Alabama currently does
not regulate bank holding companies.
The BHC Act requires prior Federal Reserve approval for,
 
among other things, the acquisition by a bank holding company
of direct or indirect ownership or control of more than 5% of the voting
 
shares or substantially all the assets of any bank, or
for a merger or consolidation of a bank holding company
 
with another bank holding company.
 
The BHC Act generally
prohibits a bank holding company from acquiring direct or indirect
 
ownership or control of voting shares of any company
that is not a bank or bank holding company and from engaging directly or
 
indirectly in any activity other than banking or
managing or controlling banks or performing services for its authorized
 
subsidiaries.
 
A bank holding company may,
however, engage in or acquire an interest
 
in a company that engages in activities that the Federal Reserve has determined
by regulation or order to be so closely related to banking or managing or
 
controlling banks as to be a proper incident
thereto.
 
The Federal Reserve adopted new rules, effective September
 
30, 2020, simplifying determinations of control of
banking organizations for BHC Act purposes.
Changes in control of bank holding companies are subject to prior notice
 
to, and nonobjection by the Federal Reserve under
the federal Change in Bank Control Act (the “Control Act”) and by the Alabama
 
Superintendent of Banks (the “Alabama
Superintendent”) under the Alabama Banking Code.
 
In August 2024, the FDIC proposed changes to its Control Act
regulations that would result in persons seeking control of a bank holding company
 
under the Control Act, to file a notice
with and obtain non-objection from the FDIC in addition to those filings
 
and notices currently required from the Federal
Reserve and the Alabama Superintendent.
 
Bank holding companies that are and remain “well-capitalized” and
 
“well-managed,” as defined in Federal Reserve
Regulation
Y,
and whose insured depository institution subsidiaries maintain “satisfactory”
 
or better ratings under the
Community Reinvestment Act of 1977 (the “CRA”), may elect to become
 
“financial holding companies.”
 
Financial
holding companies and their subsidiaries are permitted to acquire or engage
 
in activities such as insurance underwriting,
securities underwriting, travel agency activities, broad insurance
 
agency activities, merchant banking and other activities
that the Federal Reserve determines to be financial in nature or complementary
 
thereto.
 
In addition, under the BHC Act’s
merchant banking authority and Federal Reserve regulations, financial
 
holding companies are authorized to invest in
companies that engage in activities that are not financial in nature,
 
as long as the financial holding company makes its
investment, subject to limitations, including a limited investment term,
 
no day-to-day management, and no cross-marketing
with any depositary institutions controlled by the financial holding
 
company.
 
The Federal Reserve recommended repeal of
the merchant banking powers in a September 16, 2016 study undertaken
 
pursuant to Section 620 of the Dodd-Frank Wall
Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank
 
Act”), but has taken no action.
 
The Company has
not elected to become a financial holding company,
 
but it may elect to do so in the future.
 
Financial holding companies
continue to be subject to Federal Reserve supervision, regulation and
 
examination.
The Gramm-Leach-Bliley Act of 1999 (the “GLB Act”) applies the concept
 
of functional regulation to subsidiary activities.
 
For example, insurance activities would be subject to supervision and
 
regulation by state insurance authorities and
securities broker-dealer and investment advisory activities are regulated
 
by the SEC.
The BHC Act permits acquisitions of banks by bank holding companies,
 
subject to various restrictions, including that the
acquirer is “well capitalized” and “well managed”.
 
Bank mergers are also subject to the approval of the resulting bank’s
primary federal regulator pursuant to the Bank Merger Act.
 
The BHC Act and the Bank Merger Act provide various
generally similar statutory factors.
 
Under the Alabama Banking Code, with the prior approval of the Alabama
Superintendent, an Alabama bank may acquire and operate one or
 
more banks in other states pursuant to a transaction in
which the Alabama bank is the surviving bank.
 
In addition, one or more Alabama banks may enter into a merger
transaction with one or more out-of-state banks, and an out-of-state bank
 
resulting from such transaction may continue to
operate the acquired branches in Alabama.
 
Banks, including Alabama banks, may branch anywhere in the United States.
 
See “Bank Regulation”.
10
The Company is a legal entity separate and distinct from the Bank.
 
Various
 
legal limitations restrict the Bank from lending
or otherwise supplying funds to the Company.
 
The Company and the Bank are subject to Sections 23A and 23B of the
Federal Reserve Act and Federal Reserve Regulation W thereunder.
 
Section 23A defines “covered transactions,” which
include extensions of credit and other transactions with affiliates, and
 
limits a bank’s covered transactions
 
with any affiliate
to 10% of such bank’s capital and
 
surplus.
 
All covered and exempt transactions between a bank and its affiliates
 
must be
on terms and conditions consistent with safe and sound banking practices, and
 
banks and their subsidiaries are prohibited
from purchasing low-quality assets from the bank’s
 
affiliates.
 
Finally, Section 23A requires that all of
 
a bank’s extensions
of credit to its affiliates be appropriately secured by permissible
 
collateral, generally United States government or agency
securities.
 
Section 23B of the Federal Reserve Act generally requires covered
 
and other transactions among affiliates to be
on terms and under circumstances, including credit standards, that are substantially
 
the same as or at least as favorable to
the bank or its subsidiary as those prevailing at the time for similar transactions
 
with unaffiliated companies.
 
Federal Reserve policy and the Federal Deposit Insurance Act require
 
a bank holding company to act as a source of
financial and managerial strength to its FDIC-insured subsidiaries and
 
to take measures to preserve and protect such bank
subsidiaries in situations where additional investments in a bank subsidiary
 
may not otherwise be warranted.
 
In the event
an FDIC-insured subsidiary becomes subject to a capital restoration plan with
 
its regulators, the parent bank holding
company is required to guarantee performance of such plan up to
 
5% of the bank’s assets, and such guarantee
 
is given
priority in a bankruptcy of the bank holding company.
 
Where a bank holding company has more than one bank or thrift
subsidiary, each of
 
the bank holding company’s subsidiary
 
depository institutions may be responsible for any losses to the
FDIC’s Deposit Insurance Fund
 
(“DIF”), if an affiliated depository institution fails.
 
As a result, a bank holding company
may be required to loan money to a bank subsidiary in the form of subordinated
 
capital notes or other
 
instruments which
qualify as capital under bank regulatory rules.
 
However, any loans from the holding company
 
to such subsidiary banks
likely will be unsecured and subordinated to such bank’s
 
depositors and to other creditors of the bank.
 
See “Capital.”
The Federal Reserve’s Small Bank
 
Holding Company Policy Statement (the “Small BHC Policy”) covers
 
qualifying bank
and thrift holding companies with up to $3 billion of pro forma consolidated
 
assets.
 
Proposed legislation, entitled the
“Small Bank Holding Company Relief Act” would direct the Federal Reserve
 
raise the permitted consolidated asset level to
$10 billion. Such legislation is among various bills highlighted in February
 
2025 by House Financial Services Committee
hearings.
The Federal Reserve treats the Company as a small banking holding
 
company under the Small BHC Policy.
 
As a result,
unless and until the Company fails to qualify under the Small BHC Policy,
 
the Company’s capital adequacy
 
will continue
to be evaluated on a bank only basis.
 
See “Capital.”
Bank Regulation
The Bank is an Alabama state bank that is a member of the Federal Reserve.
 
It is subject to supervision, regulation and
examination by the Alabama Superintendent and the Federal Reserve, which
 
monitor all areas of the Bank’s operations,
including loans, reserves, mortgages, capital adequacy,
 
liquidity, funding sources
 
and concentrations, issuances and
redemption of capital securities, payment of dividends, establishment of
 
branches, and compliance with laws.
 
The Bank’s
deposits are insured by the FDIC to the maximum extent provided
 
by law, and the Bank is subject to various
 
FDIC
regulations applicable to FDIC-insured banks.
 
See “FDIC Insurance Assessments.”
Alabama law permits statewide branching by banks.
 
The Alabama Banking Code has provisions designed to ensure
Alabama banks have competitive equality with national banks.
 
11
The Federal Reserve has adopted the Federal Financial Institutions Examination
 
Council’s (“FFIEC”) Uniform
 
Financial
Institutions Rating System (“UFIRS”), which assigns each financial
 
institution a confidential composite “CAMELS” rating
based on an evaluation and rating of six essential components of an institution’s
 
financial condition and operations:
 
C
apital
Adequacy,
A
sset Quality,
M
anagement,
E
arnings,
L
iquidity and
S
ensitivity to market risk, as well as the quality of risk
management practices.
 
For most institutions, the FFIEC has indicated that market risk primarily
 
reflects exposures to
changes in interest rates.
 
When regulators evaluate this component, consideration is expected to be given
 
to management’s
ability to identify, measure,
 
monitor and control market risk; the institution’s
 
size; the nature and complexity of its activities
and its risk profile; and the adequacy of its capital and earnings in relation
 
to its level of market risk exposure.
 
Market risk
is rated based upon, but not limited to, an assessment of the sensitivity of
 
the financial institution’s earnings
 
or the
economic value of its capital to adverse changes in interest rates, foreign
 
exchange rates, commodity prices or equity prices;
management’s ability to identify,
 
measure, monitor and control exposure to market risk; and the nature and complexity
 
of
interest rate risk exposure arising from non-trading positions. Composite
 
ratings are based on evaluations of an institution’s
managerial,
 
operational, financial and compliance performance. The composite CAMELS
 
rating is not an arithmetical
formula or rigid weighting of numerical component ratings. Elements
 
of subjectivity and examiner judgment, especially as
these relate to qualitative assessments, are important elements in assigning
 
ratings.
 
The Federal Reserve is maintaining a
heightened focus on bank funding pressures based on risk profiles and
 
management’s ability to manage their
 
liquidity
positions.
In addition, and separate from the interagency UFIRS, the Federal Reserve
 
assigns a risk-management rating to all state
member banks and bank holding companies.
 
In February 2021 the Federal Reserve expanded its Guidance for Assessing
Risk Management to institutions with under $100 billion
 
in assets.
 
This guidance states that principles of sound
management should apply to all risk confronting a banking organization,
 
including credit, market, liquidity,
 
operational,
compliance, and legal risks.
 
For a small community banking organization (“CBO”) engaged
 
solely in traditional banking
activities and whose senior management is actively involved in the details of
 
day-to-day operations, relatively basic risk
management systems may be adequate. In accordance with the Interagency
 
Guidelines Establishing Standards for Safety
and Soundness, a CBO is expected, at a minimum, to have internal controls,
 
information systems, and internal audit that are
appropriate for the size of the institution and the nature, scope, and risk of
 
its activities.
 
The summary, or composite,
rating, as well as each of the assessment areas, including risk management,
 
is delineated on a numerical scale of 1 to 5, with
1 being the highest or best possible rating.
 
Thus, a bank with a composite rating of 1 requires the lowest level of
supervisory attention while a 5-rated bank has the most critically deficient
 
level of performance and therefore requires the
highest degree of supervisory attention.
 
Bank mergers, which generally accompany holding
 
company mergers, are also subject to the approval of the resulting
bank’s primary federal
 
regulator.
 
The Federal Reserve and the Alabama Superintendent must approve mergers
 
and
acquisitions by the Bank.
 
The FDIC and the Office of the Comptroller of the Currency
 
(“OCC”) may comment on mergers
involving the Company or the Bank.
 
Although the Federal Reserve has not issued any new rules or policies applicable
 
to mergers of bank holding companies or
state member banks, the FDIC and the OCC changed their merger
 
policies and rules in September 2024.
 
The FDIC
adopted a Statement of Policy on Bank Merger Transactions
 
(the “FDIC Merger Policy”).
 
The new FDIC Merger Policy
recognizes Biden Administration Executive Order 14036 “Promoting
 
Competition in the American Economy” (July 9,
2021) (“Executive Order 14036”), which, among other things, “instructs U.S. agencies
 
to consider the impact that
consolidation may have on maintaining a fair,
 
open, and competitive marketplace, and on the welfare of workers, farmers,
small businesses, startups, and consumers.”
 
Executive Order 14036 apparently has not been rescinded as of February 17,
2025.
 
The adopting release for the FDIC Merger Policy states that “the analytical
 
methods the FDIC employs in
conducting its independent analysis will continue to be informed
 
by the United States Department of Justice’s
 
(“DoJ”)
approach to evaluating competitive effects.”
In September 2024, the OCC updated its regulations for business combinations
 
involving national banks and federal
savings associations, deleted expedited and streamline applications for
 
business combinations and adopted a policy
statement clarifying its review of applications under the Bank Merger
 
Act’s statutory factors.
It is unclear whether these new FDIC and OCC policies and rules will affect
 
their views of mergers where the Federal
Reserve is the responsible regulator, especially in light of change in the President and changing leadership at the FDIC and The Bank Merger Act and the BHC Act require evaluation, among other factors, of the effects of the transaction on
the OCC.
12
competition.
 
The primary federal bank regulator of a resulting bank, in a transaction subject to
 
approval under the Bank
Merger Act and the Federal Reserve, in acquisitions and mergers
 
subject to the BHC Act, must notify the DoJ, who has an
important advisory role in bank and BHC mergers,
 
but the bank regulators are the primary decision makers.
 
The bank
regulators may then consider the Antitrust Division’s
 
competitive factors report as part of their respective review processes,
and use their own methods for screening and evaluating bank mergers.
 
The DoJ and the Federal Trade Commission
adopted new non-binding Merger Guidelines in 2023.
 
In September 2024, the DoJ revoked its 1995 Bank Merger
Guidelines and replaced these with a 2024 Banking Addendum to its 2023 Merger
 
Guidelines.
 
The 1995 Bank Merger
Guidelines had been adopted together with the federal banking agencies, and
 
notwithstanding the FDIC Merger Policy,
none of the federal banking agencies have withdrawn from those Guidelines.
 
The Federal Reserve continues to apply the
1995 Bank Merger Guidelines in evaluating bank and bank holding
 
company mergers.
The GLB Act and related regulations require banks and their affiliated
 
companies to adopt and disclose privacy policies,
including policies regarding the sharing of personal information with
 
third parties.
 
The GLB Act also permits bank
subsidiaries to engage in financial activities, which are similar to those
 
permitted to financial holding companies.
 
A variety of federal and state privacy laws govern the collection, safeguarding,
 
sharing and use of customer information,
and require that financial institutions have policies regarding information
 
privacy and security. Some
 
state laws also protect
the privacy of information of state residents and require adequate security
 
of such data, and certain state laws may,
 
in some
circumstances, require us to notify affected individuals
 
of security breaches of computer databases that contain their
personal information. These laws may also require us to notify law enforcement,
 
regulators or consumer reporting agencies
in the event of a data breach, as well as businesses and governmental agencies
 
that own data.
The Data Privacy Act of 2023 was introduced in Congress on February
 
24, 2023.
 
It would amend various sections of the
GLB Act and preempt certain state privacy laws.
 
The American Privacy Rights Act of 2024 sought to establish the first
federal standard for comprehensive data privacy and security regulation.
 
Neither of these bills were adopted.
 
Other
privacy legislation may be proposed.
Consumer Laws and the Community Reinvestment Act
The Consumer Financial Protection Bureau (the “CFPB”) has a broad mandate
 
that requires it to regulate consumer
financial products and services, whether or not offered by banks or
 
their affiliates.
 
The CFPB has the authority to adopt
regulations and enforce various laws, including the fair lending laws, the Truth
 
in Lending Act, the Electronic Funds
Transfer Act, mortgage lending rules, the
 
Truth in Savings Act, the Fair Credit Reporting Act and Privacy
 
of Consumer
Financial Information rules.
 
Although the CFPB does not examine or supervise banks with less than $10 billion
 
in assets,
banks of all sizes, including the Bank, are subject to the CFPB’s
 
regulations, and the precedents set in CFPB enforcement
actions and interpretations.
The Bank is subject to the provisions of the CRA and the Federal Reserve’s
 
CRA regulations.
 
Under the CRA, all FDIC-
insured institutions have a continuing and affirmative
 
obligation, consistent with their safe and sound operation, to help
meet the credit needs for their entire communities, including low- and
 
moderate-income (“LMI”) neighborhoods.
 
The CRA
requires a depository institution’s
 
primary federal regulator to periodically assess the institution’s
 
record of assessing and
meeting the credit needs of the communities served by that institution, includ
 
ing low- and moderate-income neighborhoods.
 
The bank regulatory agency’s CRA assessment
 
is publicly available.
 
Further, consideration of the CRA is required of
 
any
FDIC-insured institution that has applied to: (i) charter a national bank; (ii)
 
obtain deposit insurance coverage for all new-
banks; (iii) establish a new branch office that accepts deposits; (iv)
 
relocate an office; or (v) merge or consolidate
 
with, or
acquire the assets or assume the liabilities of, an FDIC-insured financial
 
institution.
 
A less than satisfactory CRA rating
will slow, if not preclude,
 
acquisitions, and new branches and other expansion activities and may prevent
 
a company from
becoming a financial holding company.
 
The federal CRA regulations require that evidence of discriminatory,
 
illegal or
abusive lending practices be considered in the CRA evaluation.
The federal CRA regulations require that evidence of discriminatory,
 
illegal or abusive lending practices be considered in
the CRA evaluation.
 
Financial holding company elections and the continuation of financial
 
holding company activities are permitted, only if
each affiliated bank has received a “satisfactory” or better
 
CRA rating.
13
CRA agreements with private parties must be disclosed and annual
 
CRA reports must be made to a bank’s
 
primary federal
regulator.
 
Community benefit plans have become common in banking mergers,
 
especially larger bank combinations.
 
The
National Community Reinvestment Coalition reported
 
that as of February 2025, it had executed 21 community benefit
plans with banking organizations for an aggregate of
 
$580 billion for mortgage, small business and community
development lending, investments and philanthropy in
 
LMI and under-resourced communities. The pending Capital One
Financial Acquisition of Discover Financial Services includes a community
 
benefit plan with another community
organization valued at $265 billion, which is the largest
 
ever.
The Bank had a “satisfactory” CRA rating in its latest CRA public evaluation dated February
 
28, 2022, with satisfactory
ratings on both its lending and community development
 
tests.
The Federal Reserve considers the effects of a bank acquisition
 
proposal on the convenience and needs of the markets
served by the combining organizations. Bank regulators
 
consider CRA performance in evaluating merger and acquisition
applications under the Bank Merger Act and the BHC Act, as well as other
 
expansion proposals, such as new branch
offices.
 
In the case of bank holding company applications to acquire a bank, the Federal
 
Reserve will assess and emphasize
CRA records of each subsidiary depository institution of the applicant
 
bank holding company and the target bank in
meeting the needs of their entire communities, including LMI neighborhoods,
 
and such records may be the basis for
denying the application.
The Bank is also subject to, among other things, the Equal Credit Opportunity
 
Act (the “ECOA”) and the Fair Housing Act
and other fair lending laws, which prohibit discrimination based on race or
 
color, religion, national origin, sex and familial
status in any aspect of a consumer or commercial credit or residential real estate transaction.
 
The DoJ’s and the federal
bank regulatory agencies’ Interagency Policy Statement on Discrimination
 
in Lending provides guidance to financial
institutions in determining whether discrimination exists, how the agencies
 
will respond to lending discrimination, and what
steps lenders might take to prevent discriminatory lending practices.
 
The DOJ has prosecuted what it regards as violations
of the ECOA, the Fair Housing Act and the fair lending laws, generally.
New CRA Regulations
The Federal Reserve, the OCC and the FDIC jointly adopted extensive
 
changes in new CRA regulations, which were
published in a 649 page adopting release in the Federal Register on February
 
1, 2024 (the “New CRA Regulations”).
 
Most
of the New CRA Regulation’s become
 
effective January 1, 2026, and other requirements, including required
 
data reporting,
are scheduled to become effective January 1, 2027.
 
The New CRA Regulations confirm that the CRA and fair lending
responsibilities and compliance are mutually reinforcing and that these
 
regimes recognize the importance of ensuring that
the credit markets are inclusive.
 
The New CRA Regulations continue to allow downgrading a bank for discriminatory or
other illegal credit practices.
The New CRA Regulations’ objectives include:
●
Update CRA regulations to strengthen the achievement of the core purpose of
 
the statute and to encourage
financial inclusion;
●
Adapt to changes in the banking industry,
 
including the expanded role of mobile and online banking;
 
●
Provide greater clarity and consistency in the application of the regulations;
 
●
Tailor performance
 
standards to account for differences in bank size and business models
 
and local conditions;
●
Tailor data collection
 
and reporting requirements and use existing data whenever possible;
●
Promote transparency and public engagement;
 
●
Confirm that CRA and fair lending responsibilities are mutually reinforcing;
 
and
 
●
Create a consistent regulatory approach that applies to banks regulated
 
by all three agencies.
Similar to the old rules, the New CRA Regulations are based on bank
 
size and business model.
 
These rules create a new
framework for evaluating CRA performance.
 
Banks are classified as either “small”, “intermediate”, “large”, or “limited
purpose” banks.
 
The asset size thresholds would be adjusted annually for inflation and have been increased
 
relative to the
bank asset size thresholds in the old CRA rule.
 
The Bank is currently an “intermediate small bank,” but will become an
“intermediate bank” under the New CRA Regulations because it has assets of $600 million to $2.0 billion in both of the two The new performance evaluation framework establishes two tests for intermediate banks:
prior years.
14
•
the Retail Lending Test;
 
and
 
•
the Intermediate Bank Community Development Test,
 
or if elected by the Bank, the Community Development
Financing Test.
The Bank presently intends to use the Intermediate Bank Community
 
Development Test.
 
The community development
evaluation of the prior CRA rules continues.
 
The New CRA Regulations implement a new retail lending evaluation for
intermediate banks, and provide them the option of evaluation under
 
a new test for community development financing.
Intermediate banks would be evaluated and assigned conclusions reflecting
 
their performance under these tests in their
facility-based assessment area of “Outstanding”; “High Satisfactory”;
 
“Low Satisfactory”; “Needs to Improve”; or
“Substantial Noncompliance.”
 
These conclusions applied to each test would be weighted 50% each for intermediate
 
banks
and combined in a resulting rating of “Outstanding,” “Satisfactory,”
 
“Needs to Improve,” or “Substantial Noncompliance.”
A “facility-based assessment area” is an area that encompasses or is adjacent
 
to deposit-taking facilities, including main
offices, branches, and deposit-taking ATMs
 
and other remote service facilities.
 
Intermediate banks may delineate facility-
based areas of part of a county.
 
The banking agencies will evaluate retail lending in a bank’s
 
“outside retail lending area”
for large banks, as well as for intermediate banks, if the majority of their
 
retail lending is outside their facility-based
assessment areas.
A retail lending volume screen will be used to measure the volume of a bank’s
 
lending relative to its deposit base in its
facility-based assessment area and would compare that ratio to the aggregate
 
ratio for all reporting banks with at least one
branch in the same facility-based assessment area.
 
Second, the agencies will evaluate the geographic distribution and
borrower distribution of a bank’s
 
major product lines in the bank’s
 
Retail Lending Test Areas (i.e., the
 
bank’s facility-based
assessment areas, and, if applicable, retail lending assessment areas and outside
 
retail lending area) using a series of metrics
and benchmarks.
 
After the agency determines a recommended conclusion for the Retail Lending
 
Test Area, the agency
would consider a list of additional factors that are intended to account for circumstances
 
in which the retail lending
distribution metrics and benchmarks may not accurately or fully reflect a bank’s
 
retail lending performance, or in which the
benchmarks may not appropriately represent the credit needs and opportunities
 
in an area.
Banks will receive consideration for any qualified community development
 
loans, investments, or services, regardless of
location.
 
The extent of an agency's consideration of community development loans, community
 
development investments,
and community development services outside of the bank's facility-based
 
assessment areas will depend on the adequacy of
the bank's responsiveness to community development needs and opportunities
 
within the bank's facility-based assessment
areas and applicable performance context information.
 
The New CRA Regulations codify agency interpretations under the
former CRA regulations, and provide 11
 
community development categories.
 
The agencies will evaluate the extent to
which a bank’s community development
 
loans, investments, and services are impactful and responsive in meeting
community development needs.
 
An intermediate bank's community development test performance is evaluated
 
pursuant to
the following criteria:
 
•
the number and dollar amount of community development loans;
•
the number and dollar amount of community development investments;
•
the extent to which the bank provides community development services; and
•
the bank's responsiveness through community development loans, community
 
development investments, and
community development services to community development needs.
 
The release proposing these New CRA rules stated that the agencies believe
 
retail lending remains a core part of a bank's
affirmative obligation under the CRA to meet the credit
 
needs of their entire communities. At the same time, the agencies
recognize that, compared to large banks, intermediate banks
 
might not offer as wide a range of retail products and services,
have a more limited capacity to conduct community development activities,
 
and may focus on the local communities where
their branches are located.”
 
The proposal reflected the agencies’ views that banks of this size should have meaningful
capacity to conduct community development financing, as they
 
do under the current approach.
The new rule exempts small and intermediate banks from certain new data requirements
 
that apply to banks with assets of
at least $2 billion and limits certain new data requirements to large
 
banks with assets greater than $10 billion.
15
Overdrafts
The federal bank regulators have updated their guidance several times on
 
overdrafts, including overdrafts incurred at ATMs
and point of sale terminals.
 
Overdrafts also have been a CFPB concern, which began refocusing on this issue in 2021
 
with
a view to “insure that banks continue to evolve their businesses to reduce reliance
 
on overdraft and not sufficient funds
fees.”
 
Among other things, the federal regulators require banks to monitor
 
accounts and to limit the use of overdrafts by
customers as a form of short-term, high-cost credit, including, for
 
example, giving customers who overdraw their accounts
on more than six occasions where a fee is charged in a rolling 12-month
 
period, a reasonable opportunity to choose a less
costly alternative and decide whether to continue with fee-based overdraft
 
coverage.
 
It also encourages placing appropriate
daily limits on overdraft fees, and asks banks to consider eliminating overdraft
 
fees for transactions that overdraw an
account by de minimis amounts.
 
Overdraft policies, processes, fees and disclosures have been the subject
 
of various
litigation against banks in various jurisdictions. The federal bank
 
regulators continue to consider responsible small dollar
lending, including overdrafts and related fee issues and issued principles
 
for offering small-dollar loans in a responsible
manner on May 20, 2020.
CFPB Consumer Financial Protection Circular 2022-06 (Oct. 26,
 
2022) concluded that overdraft fee practices must comply
with Regulation Z, Regulation E, and the prohibition against unfair,
 
deceptive, and abusive acts or practices in Section 1036
of the Consumer Financial Protection Act.
 
Further, overdraft fees assessed by financial institutions
 
on transactions that a
consumer would not reasonably anticipate are likely unfair even if these comply
 
with these other consumer laws and
regulations.
 
Another CFPB rule applicable to banks with over $10 billion in assets scheduled to become
 
effective October
1, 2025, has been challenged in Federal district court for the Southern
 
District of Mississippi.
 
Among other things, this rule
limits overdraft charges to $5 in most cases.
 
Residential Mortgages
CFPB regulations require that lenders determine whether a consumer
 
has the ability to repay a mortgage loan.
 
These
regulations establish certain minimum requirements for creditors when
 
making ability to repay determinations, and provide
certain safe harbors from liability for mortgages that are "qualified mortgages"
 
and are not “higher-priced.”
 
Generally,
these CFPB regulations apply to all consumer,
 
closed-end loans secured by a dwelling including home-purchase loans,
refinancing and home equity loans—whether first or subordinate lien.
 
Qualified mortgages must generally satisfy detailed
requirements related to product features, underwriting standards,
 
and requirements where the total points and fees on a
mortgage loan cannot exceed specified amounts or percentages of the total
 
loan amount.
 
Qualified mortgages must have:
(1) a term not exceeding 30 years; (2) regular periodic payments that do not result in
 
negative amortization, deferral of
principal repayment, or a balloon payment; (3) and be supported with documentation
 
of the borrower and its credit.
 
On
December 10, 2020, the CFPB issued final rules related to “qualified mortgage”
 
loans. Lenders are required under the law
to determine that consumers have the ability to repay mortgage loans before
 
lenders make those loans. Loans that meet
standards for QM loans are presumed to be loans for which consumers have the ability
 
to repay.
The Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018
 
(the “2018 Growth Act”) provides that
certain residential mortgages held in portfolio by banks with less than $10 billion
 
in consolidated assets automatically are
deemed “qualified mortgages.” This relieves such institutions from many of the
 
requirements to satisfy the criteria listed
above for “qualified mortgages.” Mortgages meeting the “qualified mortgage”
 
safe harbor may not have negative
amortization, must follow prepayment penalty limitations included
 
in the Truth in Lending Act, and may not have fees
greater than 3% of the total value of the loan.
The Bank generally services the loans it originates, including those it sells.
 
The CFPB’s mortgage servicing
 
standards
include requirements regarding force-placed insurance,
 
certain notices prior to rate adjustments on adjustable-rate
mortgages, and periodic disclosures to borrowers. Servicers are prohibited
 
from processing foreclosures when a loan
modification is pending, and must wait until a loan is more than 120 days delinquent
 
before initiating a foreclosure action.
Servicers must provide borrowers with direct and ongoing access to its personnel,
 
and provide prompt review of any loss
mitigation application. Servicers must maintain accurate and accessible mortgage
 
records for the life of a loan and until one
year after the loan is paid off or transferred. These standards increase the
 
cost and compliance risks of servicing mortgage
loans, and the mandatory delays in foreclosures could result in loss of value on
 
collateral or the proceeds we may realize
from the sale of foreclosed property.
 
We focus our
 
residential mortgage origination on qualified mortgages and those that meet our
 
investors’ requirements, but
we may make loans that do not meet the safe harbor requirements for “qualified
 
mortgages.”
16
The Federal Housing Finance Authority (“FHFA”)
 
regulates The Federal National Mortgage Association (“Fannie Mae’s”)
and the Federal Home Loan Mortgage Corporation (“Freddie Mac”)
 
(individually and collectively,
 
“GSE”). Among these,
are repurchase rules applicable to sales of mortgages to the GSEs.
 
These rules include the kinds of loan defects that could
lead the GSEs to request a mortgage loan repurchase or seek other remedies against the
 
mortgage loan originator or seller.
 
The FHFA also has updated
 
these GSEs’ representations and warranties framework and provided an independent
 
dispute
resolution (“IDR”) process to allow a neutral third party to resolve demands
 
after the GSEs’ quality control and appeal
processes have been exhausted.
The Bank is subject to the CFPB’s integrated
 
disclosure rules under the Truth in Lending Act and
 
the Real Estate
Settlement Procedures Act, referred to as “TRID”, for credit transactions
 
secured by real property.
 
Our residential mortgage
strategy, product
 
offerings, and profitability may change as these regulations are interpreted
 
and applied in practice, and
may also change due to any restructuring of Fannie Mae and Freddie Mac as part of
 
the resolution of their conservatorships.
The 2018 Growth Act reduced the scope of TRID rules by eliminating the wait time
 
for a mortgage, if an additional creditor
offers a consumer a second offer with a lower annual percentage
 
rate. Congress encouraged federal regulators to provide
better guidance on TRID in an effort to provide a clearer understanding
 
for consumers and bankers alike. The law also
provides partial exemptions from the collection, recording and reporting requirements
 
under Sections 304(b)(5) and (6) of
the Home Mortgage Disclosure Act (“HMDA”), for those banks with fewer than 500
 
closed-end mortgages or less than
500 open-end lines of credit in both of the preceding two years, provided
 
the bank’s rating under the CRA for the
 
previous
two years has been at least “satisfactory.”
 
The CFPB issued a rule to implement and clarify these provisions of the 2018
Growth Act on August 31, 2018.
 
The Bank sells mortgage loans to Fannie Mae and services these on an actual/actual basis.
 
As a result, the Bank is not
obligated to make any advances to Fannie Mae on principal and interest
 
on such mortgage loans where the borrower is
entitled to forbearance.
CARES Act Loan Modifications and Forbearance
The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted
 
on March 27, 2020.
 
Section 4013
of that Act allowed banks to temporarily suspend certain GAAP requirements
 
for restructured loans in light of the effects of
the COVID-19 pandemic.
 
On April 7, 2020, the Federal Reserve and the other Federal bank regulators issued an
Interagency Statement and later guidance encouraging banks to work
 
prudently with borrowers on covered modifications.
 
Section 4021 of the CARES Act allows borrowers under 1-to-4 family
 
residential mortgage loans sold to Fannie Mae to
request forbearance up to a year if the borrower experienced financial hardships
 
during the pandemic.
 
During forbearance,
no fees, penalties or interest shall be charged beyond those applicable
 
if all contractual payments were fully and timely
paid, and Fannie Mae servicers could not initiate foreclosures or similar procedures
 
or related evictions or sales until March
31, 2021, subject to up to a three-month extension.
 
At December 31, 2024, the Bank had approximately $328 thousand of
deferred loan amounts and $165 thousand of forbearance on loans sold to Fannie
 
Mae pursuant to the CARES Act and the
Interagency Statement.
Anti-Money Laundering, Countering the Financing of Terrorism
 
and Sanctions
Under the Uniting and Strengthening America by Providing Appropriate Tools
 
Required to Intercept and Obstruct
Terrorism Act of 2001
 
(the “USA PATRIOT
 
Act”), financial institutions are subject to prohibitions against specified
financial transactions and account relationships, as well as to enhanced
 
due diligence and “know your customer” standards
in their dealings with foreign financial institutions and foreign customers.
 
The USA PATRIOT
 
Act requires financial institutions to establish anti-money laundering
 
programs, and sets forth
minimum standards, or “pillars” for these programs, including:
 
●
the development of internal policies, procedures, and controls;
●
the designation of a compliance officer;
 
●
an ongoing employee training program;
 
●
an independent audit function to test the programs; and
●
ongoing customer due diligence and monitoring.
17
The International Money Laundering Abatement and Anti-Terrorism
 
Funding Act of 2001 specifies “know your customer”
requirements that obligate financial institutions to take actions to verify
 
the identity of the account holders in connection
with opening an account at any U.S. financial institution.
 
Bank regulators are required to consider compliance with anti-
money laundering laws in acting upon merger and acquisition
 
and other expansion proposals under the BHC Act and the
Bank Merger Act, and sanctions for violations of this Act can be imposed
 
in an amount equal to twice the sum involved in
the violating transaction, up to $1 million.
 
Federal Financial Crimes Enforcement Network (“FinCEN”) rules
 
require banks to know the beneficial owners of
customers that are not natural persons, update customer information
 
in order to develop a customer risk profile, and
generally monitor such matters.
The Federal Reserve, the other bank regulators, the NCUA and FinCEN issued a Joint
 
Statement on Risk-Focused Bank
Secrecy Act/Anti-Money Laundering Supervision (July 22, 2019).
 
Banks that operate in compliance with applicable law,
properly manage customer relationships and effectively
 
mitigate risks by implementing controls commensurate with the
type and level of their risks are neither prohibited nor discouraged from providing
 
banking services.
 
Examiners review risk
management practices to evaluate and assess whether a bank has developed
 
and implemented effective processes to
identify, measure,
 
monitor, and control risks.
On August 13, 2020, the federal bank regulators issued a joint statement on their
 
AML/BSA enforcement guidance and
clarifying that isolated or technical violations or deficiencies are
 
generally not considered the kinds of problems that would
result in an enforcement action.
 
The statement addresses how the agencies evaluate violations of individual pillars of
 
the
Bank Secrecy Act and anti-money laundering (“AML/BSA”) compliance
 
program. It describes how the agencies
incorporate the customer due diligence regulations and recordkeeping
 
requirements issued by the United States. Department
of the Treasury (“Treasury”)
 
as part of the internal controls pillar of a financial institution's AML/BSA compliance
program.
On October 23, 2020, FinCEN and the Federal Reserve invited comment on a proposed
 
rule that would amend the
recordkeeping and travel rules under the Bank Secrecy Act, which would
 
lower the applicable threshold from $3,000 to
$250 for international transactions and apply these rules to transactions using
 
convertible virtual currencies and digital
assets with legal tender status.
 
This rule remained a proposal in FinCEN’s
 
Semiannual Agenda published August 16, 2024.
On January 1, 2021, Congress enacted the Anti-Money Laundering
 
Act of 2020 and the Corporate Transparency Act
(collectively, the
 
“AML Act”), to strengthen anti-money laundering and countering terrorism financing
 
programs. Among
other things, the AML Act:
●
specifies uniform disclosure of beneficial ownership information for all U.S.
 
and foreign entities conducting
business in the U.S.;
●
increases potential fines and penalties for BSA violations and improves
 
whistleblower incentives;
●
codifies the risk-based approach to AML compliance;
●
modernizes AML systems;
●
expands the duties and powers FinCEN; and
●
emphasizes coordination and information-sharing among financial institutions,
 
U.S. financial regulators and
foreign financial regulators.
FinCEN regulation 31 C.F.R.
 
101.380 implements the Corporate Transparency
 
Act (the “CTA”), and became
 
effective on
January 1, 2024.
 
These regulations require entities to report information about their
 
beneficial owners and the individuals
who created the entity (together, “beneficial ownership
 
information” or “BOI”).
 
FinCEN explained that the rule would help
protect the U.S. financial system from illicit use by making it more difficult
 
for bad actors to conceal their financial
activities through entities with opaque ownership structures.
 
FinCEN also explained that the proposed reporting obligations
would provide essential information to law enforcement and others to help
 
prevent corrupt actors, terrorists, and
proliferators from hiding money or other property in the United States.”
 
The new rules expand financial institutions’
obligations under the Customer Due Diligence Rule (“CDD Rule”) to collect
 
information and verify the beneficial
ownership of legal entities.
 
Although the Company and the Bank are exempt from the CTA’s
 
requirements to report their
own respective beneficial owners, the new laws may increase the Bank’s anti-money laundering diligence activities and On January 23, 2025, the Supreme Court granted the government’s motion to stay a nationwide injunction on enforcement
costs.
 
 
18
of the CTA that
 
was issued by the U.S. District Court of the Eastern District of Texas
 
in
Texas Top
 
Cop Shop, Inc. v.
Garland
.
 
Earlier, on January 7, 2025, another judge in the Eastern
 
District of Texas issued a separate
 
nationwide injunction
of the CTA and
 
the Beneficial
 
Ownership Information Reporting Rule (BOI Reporting Rule) in
Smith v. U.S. Department
of the Treasury
, which remined in effect as of January 2025.
FinCEN issued an Alert on January 24, 2025, acknowledging the continuing nationwide
 
injunction.
 
This Alert confirmed
that reporting companies are not currently required to file beneficial ownership
 
information and are not subject to liability if
they fail to do so while the order remains in force.
Bills have been introduced in Congress to repeal the CTA,
 
and it is unknown whether these will pass or if the
Administration will continue to defend the litigation challenging the
 
CTA.
 
Most recently, the Protect Small Business from
Excessive Paperwork Act bill was introduced, which, if enacted, would
 
extend the compliance deadline to December 31,
2025 for submitting BOI for entities existing before 2024.
FinCEN published a request for information and comment on December
 
15, 2021 seeking ways to streamline, modernize
the United States AML and countering the financing of terrorists.
The United States has imposed various sanctions upon foreign
 
countries, including China, Iran, North Korea, Russia and
Venezuela,
 
and certain of their government officials and persons.
 
Banks are required to comply with these sanctions, which
require additional customer screening and transaction monitoring.
Russia’s February 2022 invasion
 
of Ukraine has generated a significant number of new sanctions on Russia, Russian
persons and suppliers of military or dual-purpose products to Russia, The Federal
 
bank regulators have issued alerts that
Russia and others may step up cyber-attacks and data intrusions following
 
the invasion.
 
FinCEN has issued four alerts on
potential Russian illicit financial activity since February 2022.
 
On January 25, 2023, FinCEN issued an alert to financial
institutions on potential investments in the U.S. commercial real estate sector by
 
sanctioned Russian elites, oligarchs, their
family members, and the entities through which they act. The alert listed potential
 
red flags and typologies involving
attempted sanctions evasion in the commercial real estate sector,
 
and reminds financial institutions of their Bank Secrecy
Act (BSA) reporting obligations.
 
On February 6, 2025, the DoJ ended Task
 
Force Klepto Capture, which was established
in March 2022 to enforce sanctions against Russian officials and oligarchs,
 
restrictions taken against Russian financial
institutions, including the prosecution of those who try to evade know-your-customer
 
and anti-money laundering measures
and efforts to use cryptocurrency to evade U.S. sanctions.
Other Laws and Regulations
The Company is also required to comply with various corporate governance
 
and financial reporting requirements under the
Sarbanes-Oxley Act of 2002, as well as related rules and regulations
 
adopted by the SEC, the Public Company Accounting
Oversight Board and Nasdaq. In particular,
 
the Company is required to report annually on internal controls as part of its
annual report pursuant to Section 404 of the Sarbanes-Oxley Act.
 
The Company has evaluated its controls, including compliance with the SEC and
 
FDIC rules on internal controls, and
expects to continue to spend significant amounts of time and money on
 
compliance with these rules.
 
If the Company fails
to comply with these internal control rules in the future, it may adversely
 
affect its reputation, its ability to obtain the
necessary certifications to its financial statements, its relations with its regulators
 
and other financial institutions with which
it deals, and its ability to access the capital markets and offer and
 
sell Company securities on terms and conditions
acceptable to the Company.
 
The Company’s assessment of its financial reporting
 
controls as of December 31, 2024 is
included in this report with no material weaknesses reported.
19
Capital
The Federal Reserve has risk-based capital guidelines for bank holding
 
companies and state member banks, respectively.
 
These guidelines required, beginning December 31, 2019, a minimum
 
ratio of capital to risk-weighted assets (including
certain off-balance
 
sheet activities, such as standby letters of credit) and capital conservation buffer,
 
totaling 10.5%.
 
Tier 1
capital includes common equity and related retained earnings and
 
a limited amount of qualifying preferred stock, less
goodwill and certain core deposit intangibles.
 
Voting
 
common equity must be the predominant form of capital.
 
Tier 2
capital consists of non–qualifying preferred stock, qualifying subordinated,
 
perpetual, and/or mandatory convertible debt,
term subordinated debt and intermediate term preferred stock, up to 45% of pretax
 
unrealized holding gains on available for
sale equity securities with readily determinable market values that are
 
prudently valued, and a limited amount of general
loan loss allowance. Tier 1 and Tier
 
2 capital equals total capital.
 
In addition, the Federal Reserve has established minimum leverage
 
ratio guidelines for bank holding companies not subject
to the Small BHC Policy, and
 
state member banks, which provide for a minimum leverage ratio of Tier
 
1 capital to adjusted
average quarterly assets (“leverage ratio”) equal to 4%.
 
However, bank regulators expect banks and bank
 
holding
companies to operate with a higher leverage ratio.
 
The guidelines also provide that institutions experiencing internal
growth or making acquisitions will be expected to maintain strong capital positions
 
substantially above the minimum
supervisory levels without significant reliance on intangible assets.
 
Higher capital may be required in individual cases and
depending upon a bank holding company’s
 
risk profile.
 
All bank holding companies and banks are expected to hold capital
commensurate with the level and nature of their risks including the volume
 
and severity of their problem loans.
 
Lastly, the Federal Reserve’s
 
guidelines indicate that the Federal Reserve will continue to consider
 
a “tangible Tier 1
leverage ratio” (deducting all intangibles) in evaluating proposals for
 
expansion or new activities.
 
The level of Tier 1
capital to risk-adjusted assets is becoming more widely used by the bank regulators
 
to measure capital adequacy.
 
The
Federal Reserve has not advised the Company or the Bank of any specific minimum
 
leverage ratio or tangible Tier 1
leverage ratio applicable to them. Under Federal Reserve policies, bank holding
 
companies are generally expected to
operate with capital positions well above the minimum ratios. The Federal
 
Reserve believes the risk-based ratios do not
fully take into account the quality of capital and interest rate, liquidity,
 
market and operational risks. Accordingly,
supervisory assessments of capital adequacy may differ
 
significantly from conclusions based solely on the level of an
organization’s
 
risk-based capital ratio.
The Federal Deposit Insurance Corporation Improvement Act of 1991
 
(“FDICIA”), among other things, requires the federal
banking agencies to take “prompt corrective action” regarding depository
 
institutions that do not meet minimum capital
requirements.
 
FDICIA establishes five capital tiers: “well capitalized,” “adequately capitalized,”
 
“undercapitalized,”
“significantly undercapitalized” and “critically undercapitalized.”
 
A depository institution’s capital tier will depend
 
upon
how its capital levels compare to various relevant capital measures and
 
certain other factors, as established by regulation.
 
See
 
“Prompt Corrective Action Rules.”
Basel III Capital Rules
The Federal Reserve and the other federal bank regulators adopted
 
in June 2013 final capital rules for bank holding
companies and banks implementing the Basel Committee on Banking
 
Supervision’s “Basel III: A Global
 
Regulatory
Framework for more Resilient Banks and Banking Systems.”
 
These U.S. capital rules are called the “Basel III Capital
Rules,” and generally were fully phased-in on January 1, 2019.
 
These are included in Federal Reserve Regulation Q.
The Basel III Capital Rules generally limit Tier
 
1 capital to common stock and noncumulative perpetual preferred stock.
 
The Basel III Capital Rules also introduced a new capital measure, “Common
 
Equity Tier I Capital” or “CET1.”
 
CET1
includes common stock and related surplus, retained earnings, and subject
 
to certain adjustments, minority common equity
interests in subsidiaries.
 
CET1 is reduced by deductions for:
●
Goodwill and other intangibles, other than mortgage servicing assets (“MSRs”),
 
which are treated separately,
 
net
of associated deferred tax liabilities (“DTLs”);
 
●
Deferred tax assets (“DTAs”)
 
arising from operating losses and tax credit carryforwards net of allowances
 
and
DTLs;
 
●
Gains on sale from any securitization exposure; and
 
●
Defined benefit pension fund net assets (i.e., excess plan assets), net of
 
associated DTLs.
The Company made a one-time election in 2015 and, as a result, the Company’s
 
CET1 is not adjusted for certain
accumulated other comprehensive income (“AOCI”).
20
Additional “threshold deductions” of the following that are
 
individually greater than 10% of CET1 or collectively greater
than 15% of CET1 (after the above deductions are also made):
●
MSAs, net of associated DTLs;
●
DTAs arising from
 
temporary differences that could not be realized through net operating
 
loss carrybacks, net of
any valuation allowances and DTLs; and
●
Significant common stock investments in unconsolidated financial institutions,
 
net of associated DTLs.
Noncumulative perpetual preferred stock and Tier
 
1 minority interest not included in CET1, subject to limits, will qualify as
additional Tier I capital.
 
All other qualifying preferred stock, subordinated debt and qualifying minority
 
interests will be
included in Tier 2 capital.
The various capital elements and total capital requirements under
 
the Basel III Capital Rules are:
Fully Phased in
January 1, 2019
Minimum CET1
 
4.50%
CET1 Conservation Buffer
 
2.50%
Total CET1
 
7.0%
Deductions from CET1
100%
Minimum Tier 1 Capital
 
6.0%
Minimum Tier 1 Capital
plus
conservation buffer
8.5%
Minimum Total
 
Capital
 
8.0%
Minimum Total
 
Capital
plus
conservation buffer
10.5%
 
 
21
Basel III Changes in Risk-Weightings
The Basel III Capital Rules significantly change the risk weightings used to determine
 
risk weighted capital adequacy.
 
Among various other changes, the Basel III Capital Rules apply a 250% risk-weighting
 
to MSRs, DTAs that cannot
 
be
realized through net operating loss carrybacks and significant (greater
 
than 10%) investments in other financial institutions.
 
A 150% risk-weighted category applies to “high volatility commercial
 
real estate loans,” or “HVCRE,” which are credit
facilities for the acquisition, construction or development of real property,
 
excluding one-to-four family residential
properties or commercial real estate projects where: (i) the loan-to-value
 
ratio is not in excess of interagency real estate
lending standards; and (ii) the borrower has contributed capital equal
 
to not less than 15% of the real estate’s “as
completed” value before the loan was made.
The Basel III Capital Rules also changed some of the risk weightings used
 
to determine risk-weighted capital adequacy.
Among other things, the Basel III Capital Rules:
●
Assigned a 250% risk weight to MSRs;
●
Assigned up to a 1,250% risk weight to structured securities, including private
 
label mortgage securities, trust
preferred CDOs and asset backed securities;
●
Retained existing risk weights for residential mortgages, but assign a 100%
 
risk weight to most commercial real
estate loans and a 150% risk-weight for HVCRE;
●
Assigned a 150% risk weight to past due exposures (other than sovereign
 
exposures and residential mortgages);
 
●
Assigned a 250% risk weight to DTAs,
 
to the extent not deducted from capital (subject to certain maximums);
●
Retained the existing 100% risk weight for corporate and retail loans; and
●
Increased the risk weight for exposures to qualifying securities firms from
 
20% to 100%.
HVCRE Risk Weight
In December 2019, the federal banking regulators published a final rule,
 
effective April 1, 2020, to implement Section 214
of the 2018 Growth Act.
 
This law restricted the bank regulators from assigning a heightened risk to a HVCRE loan
 
that is
an acquisition construction or development loan.
 
The rules define HVCRE loans as loans secured by land or improved real
property made after December 31, 2014 that:
●
primarily finance or refinance the acquisition, development, or construction
 
of real property;
●
the purpose of such loans must be to acquire, develop, or improve such real
 
property into income producing
property; and
●
the repayment of the loan must depend on the future income or sales proceeds from, or
 
refinancing of, such real
property.
Various
 
exclusions from HVCRE are specified.
 
The full value of any borrower contributed land (net of any liens on the
land securing HVCRE exposure) count toward the 15% capital contribution
 
to the appraised as completed value, which is
one of the criteria for exemption form the heightened risk weight.
 
HVCRE loans are assigned a 150% risk weight.
 
 
 
22
Capital Conservation Buffer
Full compliance with the capital conservation buffer
 
was required beginning January 1, 2019.
 
Thereafter, permissible
dividends, stock repurchases and discretionary bonuses will be
 
limited to the following percentages based on the capital
conservation buffer as calculated above, subject to
 
any further regulatory limitations, including those based on risk
assessments and enforcement actions:
Capital Conservation
Buffer %
Buffer % Limit
More than 2.50%
None
> 1.875% - 2.50%
60.0%
> 1.250% - 1.875%
40.0%
> 0.625% - 1.250%
20.0%
≤ 0.625
- 0 -
On March 20, 2020, the Federal Reserve and the other federal banking regulators
 
adopted an interim final rule that
amended the capital conservation buffer.
 
This clarifying rule revises the definition of “eligible retained income”
 
for
purposes of the maximum payout ratio to allow banking organizations
 
to more freely use their capital buffers to promote
lending and other financial intermediation activities, by making the
 
limitations on capital distributions more gradual. The
eligible retained income, as used in the Federal Reserve’s
 
Regulation Q capital rule, as corrected on January 13, 2021, is the
greater of (i) net income for the four preceding quarters, net of
 
distributions and associated tax effects not reflected in net
income; and (ii) the average of all net income over the preceding four quarters.
 
Banking organizations were encouraged to
make prudent capital distribution decisions.
Regulatory Capital Changes
 
Simplification
The federal bank regulators issued final rules on July 22, 2019 simplifying their
 
capital rules.
 
The last of these changes
become effective on April 1, 2020.
 
The principal changes for standardized approaches institutions, such
 
the Company and
the Bank are:
●
Deductions from capital for certain items, such as temporary difference
 
DTAs, MSAs and investments
 
in
unconsolidated subsidiaries were decreased to those amounts that individually
 
exceed 25% of CET1;
●
Institutions can elect to deduct investments in unconsolidated subsidiaries or subject
 
them to capital requirements;
and
●
Minority interests are included up to 10% of (i) CET1 capital, (ii) Tier
 
1 capital and (iii) total capital.
Effects of CECL Accounting Changes
The Financial Accounting Standards Board’s
 
(“FASB”) Accounting
 
Standards Update (“ASU”) No. 2016-13 “Financial
Instruments – Credit Losses (Topic
 
326): Measurement of Credit Losses on Financial Instruments” on
 
June 16, 2016, which
changed the loss model to take into account current expected credit losses (“CECL”)
 
in place of the incurred loss method.
 
On May 8, 2020, the agencies issued a statement describing the measurement
 
of expected credit losses using the CECL
methodology, and updated
 
concepts and practices in existing supervisory guidance that remain applicable.
 
The Company
adopted CECL effective beginning January 1, 2023 and the Company recognized all effects on its regulatory capital in the All of the federal bank regulatory agencies’ regulations establish risk-adjusted measures and relevant capital levels that
year of adoption.
23
Prompt Corrective Action Rules
implement the “prompt corrective action” standards.
 
The relevant capital measures are the total risk-based capital ratio,
Tier 1 risk-based capital ratio, Common
 
equity tier 1 capital ratio, as well as the leverage capital ratio.
 
Under the
regulations, a state member bank will be:
●
well capitalized if it has a total risk-based capital ratio of 10% or greater,
 
a Tier 1 risk-based capital ratio of 8% or
greater, a Common equity tier 1 capital ratio
 
of 6.5% or greater, a leverage capital ratio of
 
5% or greater and is not
subject to any written agreement, order,
 
capital directive or prompt corrective action directive by a federal bank
regulatory agency to maintain a specific capital level for any capital measure;
●
“adequately capitalized” if it has a total risk-based capital ratio of 8.0% or greater,
 
a Tier 1 risk-based capital ratio
of 6.0% or greater, a Common Equity Tier
 
1 capital ratio of 4.5% or greater, and generally
 
has a leverage capital
ratio of 4.0% or greater;
●
“undercapitalized” if it has a total risk-based capital ratio of less than 8.0%,
 
a Tier 1 risk-based capital ratio of less
than 6.0%, a Common Equity Tier 1 capital
 
ratio of less than 4.5% or generally has a leverage capital ratio of less
than 4.0%;
●
“significantly undercapitalized” if it has a total risk-based capital ratio of less than
 
6.0%, a Tier 1 risk-based
capital ratio of less than 6.0%, a Common Equity Tier
 
1 capital ratio of less than 3%, or a leverage capital ratio of
less than 3.0%; or
●
“critically undercapitalized” if its tangible equity is equal to or less than 2.0%
 
to total assets.
The federal bank regulatory agencies have authority to require additional
 
capital where they determine it is necessary,
including where a bank is unsafe or unsound condition or where the
 
bank is determined to have less than a satisfactory
rating on any of its CAMELS ratings. The regulators have confirmed that
 
higher capital levels may be required in light of
market conditions and risk.
Depository institutions that are “adequately capitalized” for bank
 
regulatory purposes must receive a waiver from the FDIC
prior to accepting or renewing brokered deposits, and cannot pay interest
 
rates or brokered deposits that exceeds market
rates by more than 75 basis points.
 
Banks that are less than “adequately capitalized” cannot accept or renew
 
brokered
deposits.
 
FDICIA generally prohibits a depository institution from making any capital
 
distribution, including paying
dividends or any management fee to its holding company,
 
if the depository institution thereafter would be
“undercapitalized”.
 
Institutions that are “undercapitalized” are subject to growth limitations and are
 
required to submit a
capital restoration plan for approval.
A depository institution’s parent
 
holding company must guarantee that the institution will comply with such capital
restoration plan.
 
The aggregate liability of the parent holding company is limited to the lesser of
 
5% of the depository
institution’s total assets at the time
 
it became undercapitalized and the amount necessary to bring the institution
 
into
compliance with applicable capital standards.
 
If a depository institution fails to submit an acceptable plan, it is treated
 
as if
it is “significantly undercapitalized”.
 
If the controlling holding company fails to fulfill its obligations under FDICIA and
files (or has filed against it) a petition under the federal Bankruptcy Code,
 
the claim against the holding company’s
 
capital
restoration obligation would be entitled to a priority in such bankruptcy
 
proceeding over third-party creditors of the bank
holding company.
Significantly undercapitalized depository institutions may be subject
 
to a number of requirements and restrictions,
including orders to sell sufficient voting stock to
 
become “adequately capitalized”, requirements to reduce total assets, and
cessation of receipt of deposits from correspondent banks.
 
“Critically undercapitalized” institutions are subject to the
appointment of a receiver or conservator.
 
Because the Company and the Bank exceed applicable capital requirements,
Company and Bank management do not believe that the prompt corrective
 
action provisions of FDICIA have had or are
expected to have any material effect on the Company
 
and the Bank or their respective operations.
 
24
Dividends and Distributions
The Company is a legal entity separate and distinct from the Bank.
 
Federal Reserve Regulation Q limits “distributions,”
including discretionary bonus payments from eligible retained
 
income” by state member banks, such as the Bank, unless its
capital conservation buffer of common equity Tier
 
1 capital (“CET1”) exceeds 2.5%. “Distributions” include dividends
declared or paid on common stock, discretionary bonuses and stock
 
repurchases, redemptions or repurchases of Tier 2
capital instruments (unless replaced by a capital instrument in the same quarter).
 
“Eligible retained income” for the Bank
and other Federal Reserve regulated institutions is the greater of:
 
●
net income for the four preceding calendar quarters, net of any distributions and associated
 
tax effects not already
reflected in net income; or
●
the average net income over the preceding four quarters.
The Company’s primary source
 
of cash is dividends from the Bank.
 
The Bank’s Call Report are used for its calculation
 
of
“eligible retained income.”
The Bank’s capital conservation
 
buffer exceeded 2.5% at December 31, 2024.
As of December 31, 2024, the Bank is “well capitalized” under the regulatory
 
framework for prompt corrective action. To
be categorized as “well capitalized,” the Bank must maintain minimum common
 
equity Tier 1, total risk-based, Tier
 
1 risk-
based, and Tier 1 leverage ratios as set forth in the
 
following table. Management has not received any notification from the
Bank's regulators, which changes the Bank’s
 
regulatory capital status.
Prior regulatory approval also is required by statute if the total of all dividends
 
declared by a state member bank (such as
the Bank) in any calendar year will exceed the sum of such bank’s
 
net profits for the year and its retained net profits for the
preceding two calendar years, less any required transfers to surplus.
 
During 2024, the Bank paid total cash dividends of
approximately $3.8 million to the Company.
 
At December 31, 2024, the Bank had net profits for the year and retained net
profits for the preceding two calendar years, less any required transfers to surplus,
 
of $9.7 million.
In addition, the Company and the Bank are subject to various general regulatory
 
policies and requirements relating to the
payment of dividends, including requirements to maintain capital above
 
regulatory minimums. The appropriate federal and
state regulatory authorities are authorized to determine when the payment
 
of dividends would be an unsafe or unsound
practice, and may prohibit such dividends. The Federal Reserve has indicated
 
that paying dividends that deplete a state
member bank’s capital base
 
to an inadequate level would be an unsafe and unsound banking practice.
 
The Federal Reserve
has indicated that depository institutions and their holding companies should
 
generally pay dividends only out of current
year’s operating earnings.
 
See “Regulatory Capital Changes” and Note 15 to the Company’s
 
consolidated financial
statements.
Federal Reserve Supervisory Letter SR-09-4 (February 24,
 
2009), as revised December 21, 2015, applies to dividend
payments, stock redemptions and stock repurchases.
 
Prior consultation with the Federal Reserve supervisory staff is
required before:
●
redemptions or repurchases of capital instruments when the bank
 
holding company is experiencing financial
weakness; and
●
redemptions and purchases of common or perpetual preferred stock
 
which would reduce such Tier 1 capital at end
of the period compared to the beginning of the period.
25
Bank holding company directors must consider different
 
factors to ensure that its dividend level is prudent relative to
maintaining a strong financial position, and is not based on overly optimistic earnings
 
scenarios, such as potential events
that could affect its ability to pay,
 
while still maintaining a strong financial position. As a general matter,
 
the Federal
Reserve has indicated that the board of directors of a bank holding company
 
should consult with the Federal Reserve and
eliminate, defer or significantly reduce the bank holding company’s
 
dividends if:
●
its net income available to shareholders for the past four quarters, net of dividends
 
previously paid during that
period, is not sufficient to fully fund the dividends;
 
●
its prospective rate of earnings retention is not consistent with its capital needs and overall
 
current and prospective
financial condition; or
 
●
It will not meet, or is in danger of not meeting, its minimum regulatory capital
 
adequacy ratios.
 
Community Bank Leverage Ratio Framework
Section 201 of the 2018 Growth Act provides that banks and bank holding
 
companies with consolidated assets of less than
$10 billion that meet a “community bank leverage ratio,” established by
 
the federal bank regulators as part of the
community bank leverage ratio framework (“CBLR”).
 
The federal banking agencies have the discretion to determine
 
that
an institution does not qualify for such treatment due to its risk profile. An institution’s
 
risk profile may be assessed by
its off-balance sheet exposure, trading of assets and liabilities, notional
 
derivatives’ exposure, and other methods.
The CBLR framework which became effective
 
January 1, 2020, allows qualifying CBOs to adopt a simple leverage ratio to
measure capital adequacy.
 
The CBLR may be elected by depository institutions and their holding companies
 
and is
intended to reduce regulatory burdens for qualifying community
 
banking organizations that do not use advanced
approaches capital measures, and otherwise qualify.
 
Eligible institutions must have:
●
less than $10 billion of assets;
●
a leverage ratio greater than 9%;
●
off-balance sheet exposures of 25% or less of total consolidated assets; and
●
trading assets plus trading liabilities of less than 5% of total consolidated
 
assets.
The CBLR leverage ratio is Tier 1 capital divided
 
by average total consolidated asset for the latest quarter,
 
taking into
account the capital simplification discussed above and the CECL related capital
 
transitions.
A CBLR banking organization with a ratio above the requirement
 
will not be subject to other capital and leverage
requirements.
 
If elected by a banking organization, The CBLR leverage
 
ratio will be the sole capital measure, and electing
institutions will not have to calculate or use any other capital measure for regulatory
 
purposes.
 
The Company has not
adopted the CBLR, although it believes it is eligible to elect to use the CBLR framework.
 
Management believes that
current risk-based capital measures are useful and reflect the risks of the
 
Company’s earning assets in a manner
 
most
comparable to other banking organizations and which
 
may be useful to investors.
 
It may consider the CBLR in the future.
FDICIA
FDICIA directs that each federal bank regulatory agency prescribe standards
 
for depository institutions and depository
institution holding companies relating to internal controls, information
 
systems, internal audit systems, loan documentation,
credit underwriting, interest rate exposure, asset growth composition,
 
a maximum ratio of classified assets to capital,
minimum earnings sufficient to absorb losses, a minimum
 
ratio of market value to book value for publicly traded shares,
safety and soundness, and such other standards as the federal bank
 
regulatory agencies deem appropriate.
26
Enforcement Policies and Actions
The Federal Reserve and the Alabama Superintendent examine and
 
regulate our compliance with laws and regulations,
including the CFPB’s regulations.
 
The CFPB issues regulations, interpretations and enforcement actions
 
under the laws
applicable to consumer financial products and services.
 
Violations of laws and regulations, including
 
those administered by
the CFPB, or other unsafe and unsound practices, may result in the Federal
 
Reserve and the Alabama Superintendent
imposing fines, penalties and/or restitution, cease and desist orders,
 
or taking other formal or informal enforcement actions.
 
Under certain circumstances, these agencies may enforce
 
these remedies directly against officers, directors, employees and
others participating in the affairs of a bank or bank holding
 
company, in the form of fines, penalties,
 
or the recovery, or
claw-back, of compensation.
Fiscal and Monetary Policies
Banking is a business that depends on interest rate differentials.
 
In general, the difference between the interest paid by
 
a
bank on its deposits and its other borrowings, and the interest received by
 
a bank on its loans and securities holdings,
constitutes the major portion of a bank’s
 
earnings.
 
Thus, the earnings and growth of the Company and the Bank, as well as
the values of, and earnings on, its assets and the costs of its deposits and other
 
liabilities are subject to the influence of
economic conditions generally,
 
both domestic and foreign, and also to the monetary and fiscal policies of the
 
United States
and its agencies, particularly the Federal Reserve.
 
The Federal Reserve regulates the supply of money through various
means, including open market dealings in United States government
 
securities, the setting of discount rate at which banks
may borrow from the Federal Reserve, and the reserve requirements
 
on deposits.
 
The Federal Reserve has been paying interest on depository institutions required
 
and excess reserve balances since October
2008.
 
The payment of interest on excess reserve balances was expected to give the
 
Federal Reserve greater scope to use its
lending programs to address conditions in credit markets while also maintaining
 
the federal funds rate close to the target
rate established by the Federal Open Market Committee.
 
The Federal Reserve has indicated that it may use this authority to
implement a mandatory policy to reduce excess liquidity,
 
in the event of inflation or the threat of inflation.
 
In April 2010, the Federal Reserve Board amended Regulation D (Reserve
 
Requirements of Depository Institutions)
authorizing the Reserve Banks to offer term deposits to
 
certain institutions.
 
Term deposits, which
 
are deposits with
specified maturity dates, will be offered through a Term
 
Deposit Facility.
 
Term deposits will be one
 
of several tools that
the Federal Reserve could employ to drain reserves when policymakers
 
judge that it is appropriate to begin moving to a less
accommodative stance of monetary policy.
 
In 2011, the Federal Reserve repealed its historical
 
Regulation Q to permit banks to pay interest on demand deposits.
In light of disruptions in economic conditions caused by the outbreak of COVID-19
 
and the stress in U.S. financial markets,
the Federal Reserve, Congress and the Department of the Treasury
 
took a host of fiscal and monetary measures. In March
2020, the Federal Reserve reduced the federal funds rate target
 
twice to 0-0.25%. The Federal Reserve established various
liquidity facilities pursuant to section 13(3) of the Federal Reserve Act to
 
help stabilize the financial system and purchased
large amounts of government and government agency
 
mortgaged backed securities.
During 2021 and at the beginning of 2022, the Federal Reserve described
 
inflation as “transitory,” but
 
as inflation
continued at increasing rates the Federal Reserve’s
 
policy changed.
 
The Federal Reserve announced a 25 basis point
increase in the target federal funds range on March 17,
 
2022, the first change since March 2020 when the target was set to
0-0.25%.
 
Further increases were announced in 2022: 50 basis points on May 4, 75 basis points on
 
each of June 15, July 27,
September
 
21, and November 2, and 50 basis points on December 14, 2022.
 
During 2023, the Federal Reserve announced
additional target rate increases of 25 basis points on
 
each of February 1, 2023, March 2022, May 3 and July 26, 2023.
 
The
federal funds target rate range was 5.25-5.50% from May 4, 2023
 
until September 19, 2024, when it was reduced to 4.75%
-5.00%.
 
Two other reductions in November
 
and December resulted in a target range of 4.25%-4.50%.
 
27
The Federal Reserve’s securities
 
holdings in its System Open Market Account (“SOMA”) increased
 
from $3.9 trillion in
early March 2020 to $9.0 trillion at April 11,
 
2021, largely as a result of securities purchases as the Federal Reserve
injected liquidity as a result of the COVID-19 pandemic.
On May 4, 2022, the Federal Reserve announced its plan to reduce
 
its securities holdings in an effort to reduce inflation:
●
Reinvestments of principal of maturing Treasury
 
securities would be reduced by $30 billion per month for three
months and thereafter would be $60 billion per month.
●
Reinvestments of principal of maturing agency debt and agency mortgage
 
-backed securities would be reduced by
$17.5 billion per month for three months and thereafter would be $35 billion
 
per month.
●
These declines would slow and then stop when the Federal Reserve’s
 
balance sheet was somewhat above the
balance it deemed ample.
On May 4, 2024, the Federal Reserve’s
 
Federal Open Market Committee (“FOMC”) announced that beginning
 
in June
2024, it would slow the pace of decline of its securities holdings by
 
reducing the monthly redemption cap on Treasury
securities from $60 billion to $25 billion.
 
The Committee maintained the monthly redemption cap on agency debt
 
and
agency mortgage-backed securities at $35 billion and will reinvest any
 
remaining principal amounts of maturing securities
in Treasury securities.
 
The Federal Reserve’s SOMA was $6.4
 
trillion on February 5, 2025 compared to $7.0 trillion on
February 28, 2024.
The Federal Reserve seeks to maintain maximum employment and
 
targets longer term inflation of 2% based on annual
changes in the personal consumption expenditures.
 
The FOMC stated on January 29, 2024 that the FOMC judges that the
risks to achieving its employment and inflation goals are roughly in balance.
 
The economic outlook is uncertain, and the
Committee is attentive to the risks to both sides of its dual mandate. Inflation
 
remained above that rate through February
2024.
 
The Federal Reserve Chairman has indicated that the FOMC is not in a hurry
 
to reduce its target federal funds rate
further at this time.
On March 12, 2023, as a result of unrealized securities losses resulting from increased
 
market rates, liquidity issues at two
banks with over $100 billion of assets which failed, the Federal Reserve established a new
 
Bank Term Funding
 
Program
(“BTFP”).
 
The BTFP offered loans of up to one year to banks, savings associations,
 
credit unions, and other eligible
depository institutions pledging U.S. Treasuries,
 
agency debt and mortgage-backed securities, and other qualifying
 
assets as
collateral. These assets were valued at par and the margin was 100% of par.
 
The BTFP expires March 11, 2024, except for
loans outstanding prior to its expiration.
 
The Company did not participate in the BTFP in 2023.
 
The Federal Reserve on March 12, 2023 stated that depository institutions also may
 
obtain liquidity against a wide range of
collateral through the Federal Reserve’s
 
discount window,
 
which was available with the same collateral margins as the
BTFP,
 
but which offers loans of up to 90 days.
 
Collateral is valued under the discount window is based on fair market
values, collateral margins subsequently have been reduced
 
to less than 100% of collateral fair market value, with the
amount of discount depending on the type of collateral.
FDIC Insurance Assessments
The Bank’s deposits are insured
 
by the FDIC’s DIF,
 
and the Bank is subject to FDIC assessments for its deposit insurance.
 
Since 2011, and as discussed above under “Recent
 
Regulatory Developments”, the FDIC has been calculating assessments
based on an institution’s average
 
consolidated total assets less its average tangible equity (the “FDIC Assessment Base”)
 
in
accordance with changes mandated by the Dodd-Frank Act.
 
The FDIC changed its assessment rates which shifted part of
the burden of deposit insurance premiums toward depository institutions relying
 
on funding sources other than deposits.
In 2016, the FDIC again changed its deposit insurance pricing and eliminated
 
all risk categories and now uses “financial
ratios method” based on CAMELS composite ratings to determine assessment
 
rates for small established institutions with
less than $10 billion in assets (“Small Banks”).
 
The financial ratios method sets (i) a maximum assessment for CAMELS 1
and 2 rated banks, and (ii) minimum assessments for lower rated institutions.
 
All basis points are annual amounts.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
28
The following table shows the FDIC assessment schedule for Small Banks, such
 
as the Bank, for the first assessment period
of 2023 to be billed in June 2023, which is the latest available:
Established Small Institution
CAMELS Composite
1 or 2
3
4 or 5
Initial Base Assessment Rule
5 to 18 basis points
8 to 32 basis points
18 to 32 basis points
Unsecured Debt Adjustment.
 
Cannot exceed the lesser of 5
basis points or 50% of the
bank’s initial FDIC
assessment rate
-5 to 0 basis points
-5 to 0 basis points
-5 to 0 basis points
Brokered Deposit
Adjustment
 
N/A
N/A
N/A
Total Base Assessment
 
Rate
2.5 to 18 basis points
4 to 32 basis points
13 to 32 basis points
As shown above. these assessments are adjusted based on the bank’s
 
CAMELS rating.
 
For example, Small Banks, with
CAMELS ratings of 1 or 2, have a current total assessment rate of 2.5 to 18 basis points
 
for the period to be billed in June
2023.
 
The FDIC issued a special assessment of 3.36 basis points for a projected eight quarters on large
 
banks with more than $5
billion of uninsured deposits as a result of the systemic risk determination
 
to insure all depositors in connection with the
March 2023 failures of Silicon Valley
 
Bank and Signature Bank.
 
These special assessments do not apply to the Bank.
The minimum FDIC’s DIF reserve
 
ratio is 1.35%, which was set by the Dodd-Frank Act.
 
The FDIC Board of directors is
required by the Federal Deposit Insurance Act (the “FDI Act”) to designate
 
a reserve ratio before the beginning of each
calendar year.
 
There is no upper limit on the reserve ratio and thus, no statutory limit on the size of the fund. The
 
FDI Act
provides for dividends from the fund when the reserve ratio exceeds 1.5 percent, but
 
grants the Board sole discretion in
determining whether to suspend or limit the declaration or payment of dividends.
 
The reserve ratio reached 1.36% on
September 30, 2018, exceeding the minimum requirement.
 
As a result, deposit insurance surcharges on Large
 
Banks
ceased, and smaller banks received credits against their deposit assessments from
 
the FDIC for their portion of assessments
that contributed to the growth in the reserve ratio from 1.15% to 1.35%.
 
The Bank’s credit was $0.2 million, and was
received and applied against the Bank’s
 
deposit insurance assessments during 2019 and 2020.
 
Because of the extraordinary growth in deposits in the first six months of 2020
 
due to the pandemic and government
stimulus, the DIF’s reserve ratio declined
 
below 1.35% to 1.30%. The FDIC issued a restoration plan on September
 
15,
2020 designed to restore the reserve ratio to at least the statutory minimum
 
of 1.35% within 8 years. Although the FDIC, at
that time, maintained its then current assessment rates, the FDIC may increase
 
deposit assessment rates by up to two basis
points without notice, or more following notice and a comment period,
 
to meet the required reserve ratio.
 
The designated
reserve ratio has been 2% since 2010, and was set at this same level for 2025.
The Company recorded FDIC insurance premiums expenses of $0.5 million
 
for both 2024 and 2023, respectively,
 
which
reflects the FDIC’s amended
 
restoration plan increases in the initial base deposit insurance assessment rate schedules
uniformly by 2 basis points, beginning with the first quarterly assessment period of 2023.
29
CRE and Leveraged Loans
CRE
The federal bank regulatory agencies released guidance in 2006
 
on “Concentrations in Commercial Real Estate Lending”
(the “CRE Guidance”).
 
The CRE Guidance defines CRE loans as exposures secured by raw land,
 
land development and
construction (including 1-4 family residential construction), multi-family
 
property, and non-farm nonresidential
 
property
where the primary or a significant source of repayment is derived from
 
rental income associated with the property (that is,
loans for which 50% or more of the source of repayment comes from
 
third party, non-affiliated,
 
rental income) or the
proceeds of the sale, refinancing, or permanent financing of this property.
 
Loans to REITs and unsecured
 
loans to
developers that closely correlate to the inherent risks in CRE markets would
 
also be considered CRE loans under the CRE
Guidance.
 
Loans on owner occupied CRE are generally excluded.
 
In December 2015, the Federal Reserve and other bank
regulators issued an interagency statement to highlight prudent risk
 
management practices from existing guidance that
regulated financial institutions and made recommendations regarding
 
maintaining capital levels commensurate with the
level and nature of their CRE concentration risk.
The CRE Guidance requires that banks have appropriate processes be in
 
place to identify, monitor
 
and control risks
associated with real estate lending concentrations.
 
This could include enhanced strategic planning, CRE underwriting
policies, risk management, internal controls, portfolio stress testing and
 
risk exposure limits as well as appropriately
designed compensation and incentive programs.
 
Higher allowances for loan losses and capital levels may also be required.
 
The CRE Guidance is triggered when either:
●
Total reported loans
 
for construction, land development, and other land of 100% or more of a bank’s
 
total capital;
or
●
Total reported loans
 
secured by multifamily and nonfarm nonresidential properties and loans for
 
construction, land
development, and other land are 300% or more of a bank’s
 
total risk-based capital.
 
This CRE Guidance was supplemented by the Interagency Statement on
 
Prudent Risk Management for Commercial Real
Estate Lending (December 18, 2015).
 
The CRE Guidance also applies when a bank has a sharp increase in CRE loans or
has significant concentrations of CRE secured by a particular property
 
type. See “Management’s Discussion and Analysis
of Financial Condition and Results of Operations - Balance Sheet Analysis” for
 
concentrations of the various types of CRE
loans.
At December 31, 2024, the Bank had outstanding $82.8 million in construction
 
and land development loans and $324.0
million in total CRE loans (excluding owner occupied properties), which represent
 
approximately 73% and 286%,
respectively, of
 
the Bank’s total risk-based capital at December
 
31, 2024.
 
The Company has always had significant
exposures to loans secured by commercial real estate due to the nature of its markets
 
and the loan needs of both its retail
and commercial customers.
 
The Company believes its long-term experience in CRE lending, underwriting policies,
internal controls, and other policies currently in place, as well as its loan and credit
 
monitoring and administration
procedures, are generally appropriate to manage its concentrations as required
 
under the Guidance.
 
The Federal Reserve joined the other depository institution regulators in issuing
 
a Policy Statement on Prudent Commercial
Real Estate Loan Accommodations and Workouts
 
(June 30, 2023).
 
This Policy Statement builds on and updates existing
guidance to enable financial institutions to work prudently and constructively
 
with creditworthy borrowers during times of
financial stress.
 
The Policy Statement provides a broad set of risk management principles relevant
 
to CRE short term loan
accommodations and longer-term workouts in all
 
business cycles, particularly in challenging economic environments.
 
It
states that the regulatory agencies expect their examiners to take a balanced approach
 
in assessing the adequacy of a
financial institution's risk management practices for loan accommodation
 
and workout activities.
 
Financial institutions that
implement prudent CRE loan accommodation and workout arrangements
 
after performing a comprehensive review of a
borrower's financial condition will not be subject to criticism for engaging in
 
these efforts, even if these arrangements result
in modified loans that have weaknesses that result in adverse classification. In addition,
 
modified loans to borrowers who
have the ability to repay their debts according to reasonable terms will not be
 
subject to adverse classification solely
because the value of the underlying collateral has declined to an amount that
 
is less than the outstanding loan balance.
 
The
Policy Statement also describes the classifications of CRE loan accommodations
 
and workouts and addresses regulatory
accounting and reporting in such situations, including CECL.
30
Leveraged Loans
 
In 2013, the Federal Reserve and other banking regulators issued their “Interagency
 
Guidance on Leveraged Lending”
highlighting standards for originating leveraged transactions and managing
 
leveraged portfolios, as well as requiring banks
to identify their highly leveraged transactions, or HLTs.
 
The Government Accountability Office issued a statement on
October 23, 2017 that this guidance constituted a “rule” for purposes of the Congressional
 
Review Act, which provides
Congress with the right to review the guidance and issue a joint resolution
 
for signature by the President disapproving it.
 
No such action was taken, and instead, the federal bank regulators issued a September
 
11, 2018 “Statement Reaffirming the
Role of Supervisory Guidance.”
 
This Statement indicated that guidance does not have the force or effect
 
of law or provide
the basis for enforcement actions, but this guidance can outline supervisory
 
agencies’ views of supervisory expectations and
priorities, and appropriate practices.
 
The federal bank regulators continue to identify elevated risks in leveraged
 
loans and
shared national credits.
The Bank did not have any leveraged loans at year-end
 
2024 or 2023 subject to the Interagency Guidance on Leveraged
Lending or that were shared national credits.
Other Dodd-Frank Act Provisions
The Dodd-Frank Act provides shareholders of all public companies with
 
a say on executive compensation.
 
Under the
Dodd-Frank Act, each company must give its shareholders the opportunity to
 
vote on the compensation of its executives, on
a non-binding advisory basis, at least once every three years.
 
The Dodd-Frank Act also adds disclosure and voting
requirements for golden parachute compensation that is payable to named
 
executive officers in connection with sale
transactions.
 
The SEC is required under the Dodd-Frank Act to issue rules obligating companies to
 
disclose in proxy materials for annual
shareholders meetings, information that shows the relationship between
 
executive compensation actually paid to their
named executive officers and their financial performance,
 
taking into account any change in the value of the shares of a
company’s stock and dividends or
 
distributions.
 
The Dodd-Frank Act also provides that a company’s
 
compensation
committee may only select a consultant, legal counsel or other advisor on methods
 
of compensation after taking into
consideration factors to be identified by the SEC that affect the independence
 
of a compensation consultant, legal counsel
or other advisor.
Section 954 of the Dodd-Frank Act added section 10D to the Exchange Act.
 
Section 10D directs the SEC to adopt rules
prohibiting a national securities exchange or association from listing a company
 
unless it develops, implements, and
discloses a policy regarding the recovery or “claw-back” of executive
 
compensation in certain circumstances.
 
In the event
of an accounting restatement due to material noncompliance with a financial
 
reporting requirement under the federal
securities laws, the policy must require that the company recover from
 
any current or former executive officer,
 
any
incentive-based compensation (including stock options) received
 
during the three-year period preceding the date of the
restatement, which is in excess of what would have been paid based on the restated
 
financial statements.
 
There is no
requirement of wrongdoing by the executive, and the claw-back is mandatory
 
and applies to all executive officers.
 
Section
954 augments section 304 of the Sarbanes-Oxley Act, which requires the
 
CEO and CFO to return any bonus or other
incentive-
 
or equity-based compensation received during the 12 months following the date
 
of similarly inaccurate financial
statements, as well as any profit received from the sale of employer securities during
 
the period, if the restatement was due
to misconduct.
 
Unlike section 304, under which only the SEC may seek recoupment,
 
the Dodd-Frank Act requires the
Company to seek the return of compensation.
 
The SEC adopted, effective January 27, 2023, Commission Rule 10D
 
-1 under the Exchange Act, which requires each
national securities exchange to adopt listing standards for the recovery of erroneously
 
awarded executive compensation.
 
The Commission approved Nasdaq Listing Rule 5608 (“Rule 5608”) on June
 
9, 2023.
 
Under Rule 10D-1, listed companies
must recover from current and former executive officers’
 
incentive-based compensation received during the three
completed fiscal years preceding the date on which the issuer is required to prepare
 
an accounting restatement.
31
Under these SEC and Nasdaq rules, the recovery of erroneously awarded
 
compensation is required on a “no fault” basis,
without regard to whether any misconduct occurred or an executive officer’s
 
responsibility for the erroneous financial
statements. A restatement due to material noncompliance with any financial
 
reporting requirement under the securities laws
triggers application of the recovery policy.
 
The determination regarding materiality of an error should be based on facts and
circumstances and existing judicial and administrative interpretations.
 
The proposed Nasdaq Rule requires recovery for
restatements that correct errors that are material to previously issued financial statements
 
(commonly referred to as “Big R”
restatements), as well as for restatements that correct errors that are not material
 
to previously issued financial statements
but would result in a material misstatement if the errors were left uncorrected
 
in the current report or the error correction
was recognized in the current period (commonly referred to as “little r” restatement).
 
Nasdaq-listed companies, such as the Company,
 
are required to recover the amount of incentive-based compensation
received by an executive officer that exceeds the amount the executive
 
officer would have received had the incentive-based
compensation been determined based on the accounting restatement,
 
computed without regard to any taxes paid.
 
Nasdaq
defines “incentive-based compensation” as any compensation that is granted,
 
earned or vested based wholly or in part upon
the attainment of any “financial reporting measure.”
 
Incentive-based compensation is deemed received on or after October
2, 2023 and in the fiscal period during which the financial reporting measure
 
specified in the incentive-based compensation
award is attained, even if the grant or payment of the incentive-based
 
compensation occurs after the end of that period.
The Company adopted an Erroneously Awarded
 
Executive Incentive Based Compensation Policy effective
 
December 1,
2023 to comply with these rules.
The SEC adopted a rule in August 2013 to implement pay ratios pursuant to Section 953
 
of the Dodd-Frank Act comparing
their CEO’s total compensation to
 
the median compensation of all other employees.
 
These rules applied beginning to fiscal
year 2017 annual reports and proxy statements.
 
Smaller reporting companies, such as the Company,
 
are exempted from
this rule.
The Dodd-Frank Act, Section 955, requires the SEC, by rule, to require
 
that each company disclose in the proxy materials
for its annual meetings whether an employee or board member is permitted
 
to purchase financial instruments designed to
hedge or offset decreases in the market value of equity
 
securities granted as compensation or otherwise held by the
employee or board member.
 
The SEC adopted changes to its Reg. S-K Item 407(i) implementing this Section.
The Company adopted its 2024 Incentive Plan in May 2024, but had not granted
 
any awards under that Plan as of February
12, 2025.
 
The Company’s insider trading policy,
 
which applies to all Company and Bank directors, officers, employees
and certain independent contractors and specified related persons (collectively,
 
“Covered Persons”).
 
This Policy prohibits
Covered Persons, from short-selling Company securities or engaging in
 
transactions involving Company “Derivative
Securities.”
 
This prohibition includes, without limitation, trading in Company-based
 
put option contracts, including
straddles, and the like.
 
Derivative Securities include options, warrants, restricted stock units, stock appreciation
 
rights or
similar rights whose value is derived from the value of an equity or other
 
security, including Company Securities.
 
The
Company’s Insider Trading
 
Policy is included as an exhibit to its annual report on SEC Form 10-K.
Section 956 of the Dodd-Frank Act prohibits incentive-based compensation
 
arrangements that encourage inappropriate risk
taking by covered financial institutions, are deemed to be excessive, or that
 
may lead to material losses.
 
In June 2010, the
federal bank regulators adopted Guidance on Sound Incentive Compensation
 
Policies, which, although targeted to larger,
more complex organizations than the Company,
 
includes principles that have been applied to smaller organizations similar
to the Company.
 
This Guidance applies to incentive compensation to executives as well as employees, who,
 
“individually
or a part of a group, have the ability to expose the relevant banking organization
 
to material amounts of risk.”
 
Incentive
compensation should:
●
Provide employees incentives that appropriately balance risk and reward;
●
Be compatible with effective controls and risk-management;
 
and
●
Be supported by strong corporate governance, including active and
 
effective oversight by the organization’s
 
board
of directors.
The federal bank regulators stated that this Guidance is expected to generally
 
have less effect on smaller banking
organizations, which typically are less complex and make less use of incentive compensation arrangements than larger The federal bank regulators, the SEC and other regulators proposed regulations implementing Section 956 in April 2011,
banking organizations.
 
32
which would have been applicable to, among others, depository
 
institutions and their holding companies with $1 billion or
more in assets.
 
An advance notice of a revised proposed joint rulemaking under Section 956
 
was published by the financial
services regulators in May 2016, but these rules have not been adopted.
Following the failures of Silicon Valley
 
Bank and Signature Bank in early March 2023, Senator Elizabeth Warren
 
and co-
sponsors, filed S.1045 “Failed Bank Executives Clawback Act.”
 
This bill provides that when a bank is placed into FDIC
receivership, all or part of the compensation paid the previous five
 
years to an institution-affiliated party responsible for the
condition of the institution must be paid to FDIC to prevent unjust enrichment
 
and to assure that the party bears losses
consistent with their responsibility.
 
Compensation includes salary,
 
bonuses, awards, and profits from buying or selling
securities.
 
The bill also expands the FDIC’s authority
 
to claw back compensation of parties responsible for financial losses
incurred by a financial company regardless of the process by which FDIC is appointed
 
receiver.
 
Debit Card Interchange Fees
The “Durbin Amendment” to the Dodd-Frank Act and implementing
 
Federal Reserve regulations provide that interchanged
transaction fees for electronic debit transactions be “reasonable” and proportional
 
to certain costs associated with
processing the transactions.
 
The Durbin Amendment and the Federal Reserve rules thereunder are not applicable
 
to banks
with assets less than $10 billion. Such smaller banks, however,
 
compete with banks that are subject to the Durbin
Amendment, and therefore may have to limit their interchange fees, also.
 
Other Legislative and Regulatory Changes
Various
 
legislative and regulatory proposals, including substantial changes in
 
banking, and the regulation of banks, thrifts
and other financial institutions, compensation, and the regulation of financial
 
markets and their participants, and financial
instruments and securities, and the regulators of all of these, as well as the taxation of
 
these entities, are being considered by
the executive branch of the federal government, Congress and various state governments,
 
including Alabama.
 
The 2018 Growth Act, which was enacted on May 24, 2018, amended
 
the Dodd-Frank Act, the BHC Act, the Federal
Deposit Insurance Act and other federal banking and securities laws to provide
 
regulatory relief in these areas:
●
consumer credit and mortgage lending;
●
capital requirements;
●
Volcker
 
Rule compliance;
●
stress testing and enhanced prudential standards;
●
increased the asset threshold under the Federal Reserve’s
 
Small BHC Policy from $1 billion to $3 billion; and
●
capital formation.
The following provisions of the 2018 Growth Act are helpful to banks of
 
our size, and we have benefitted from the Growth
Act’s changes to the deposit rules:
●
“qualifying community banks,” defined as institutions with total consolidated
 
assets of less than $10 billion, which
meet a “community bank leverage ratio, which is currently 9.0%, may
 
be deemed to have satisfied applicable risk-
based capital requirements as well as the capital ratio requirements;
●
section 13(h) of the BHC Act, or the “Volcker
 
Rule,” is amended to exempt from the Volcker
 
Rule, banks with
total consolidated assets valued at less than $10 billion (“community banking
 
organizations”), and trading assets
and liabilities comprising not more than 5.00% of total assets; and
●
“reciprocal deposits” will not be considered “brokered deposits” for FDIC purposes,
 
provided such deposits do not
exceed the lesser of $5 billion or 20% of the bank’s
 
total liabilities.
On July 9, 2019, the federal banking agencies, together with the SEC and the
 
Commodities Futures Trading Commission
(“CFTC”), issued a final rule excluding qualifying community banking
 
organizations from the Volcker
 
Rule pursuant to the
2018 Growth Act. The Volcker
 
Rule change may enable us to invest in certain collateralized loan obligations
 
that are
treated as “covered funds” and other investments prohibited to banking entities by
 
the Volcker
 
Rule.
The FDIC announced on December 19, 2018, a final rule allows reciprocal
 
deposits to be excluded from “brokered
deposits” up to the lesser of $5 billion or 20% of their total liabilities.
 
Institutions that are not both well capitalized and
well rated are permitted to exclude reciprocal deposits from brokered
 
deposits in certain circumstances.
 
33
The FDIC issued comprehensive changes to its brokered deposit rules effective
 
April 1, 2021. The revised rules establish
new standards for determining whether an entity meets the statutory definition
 
of “deposit broker,” and identifies a number
of businesses that automatically meet the “primary purpose exception”
 
from a “deposit broker.”
 
The revisions also provide
an application process for entities that seek a “primary purpose exception,”
 
but do not meet one of the designated
exceptions.”
 
The new rules provide us greater flexibility,
 
but we have limited our brokered deposits.
Reciprocal deposits have expanded our funding and liquidity sources without being
 
subjected to FDIC limitations on
depositor FDIC insurance coverage and potential federal deposit insurance
 
assessment increases for brokered deposits.
 
The applicable agencies also issued final rules simplifying the Volcker
 
Rule’s proprietary trading restrictions
 
effective
January 1, 2020. On June 25, 2020, the agencies adopted a final rule simplifying
 
the Volcker
 
Rule’s covered fund
provisions effective October 1, 2020.
Certain of these new rules, and proposals, if adopted, could significantly change
 
the regulation or operations of banks and
the financial services industry.
 
New regulations and statutes are regularly proposed that contain wide-ranging
 
proposals for
altering the structures, regulations and competitive relationships of
 
the nation’s financial institutions.
Recent Developments – New Administration
Donald J. Trump became President on January
 
20, 2025.
 
The President has issued numerous Executive Orders, and he and
his designees have taken a number of actions that affect financial institutions,
 
and their regulation and regulators, including:
•
Issued an Executive Order “Regulatory Freeze Pending Review” (January
 
20, 2025);
•
Issued Executive Order 14192 “Unleashing Prosperity Through Deregulation”
 
(January 31, 2025);
•
Issued a Presidential Memorandum dated January 20, 2025 freezing
 
the hiring of Federal civilian employees in all
executive departments and agencies
•
Issued Executive Order Implementing the President’s
 
“Department of Government Efficiency” (“DOGE”)
(January 20, 2025);
•
Issued Executive Order 14158 “Establishing and Implementing the President’s
 
‘Department of Government
Efficiency’ Workforce
 
Optimization Initiative” (February 11, 2025);
•
Removed the CFPB Director and appointing acting directors, most recently
 
the Director (the “OMB Director”) of
the Office of Management and Budget (the “OMB”), who will also
 
serve as Acting CFPB Director;
•
Replaced the Acting Comptroller of the Currency with a new Acting Comptroller
 
of the Currency, and nominated
a successor Comptroller of the Currency and a CFPB Director,
 
each subject to Senate confirmation;
•
Issued Executive Order 14178 “Strengthening American Leadership
 
in Digital Financial Technology”
 
(January 23,
2025);
•
Ordered and withdrew (subject to restoration) various tariffs
 
on China, Canada and Mexico, a 25% tariff on all
imported steel and aluminum, and is expected to order “reciprocal” tariffs,
 
which would raise rates on imported
goods to equal foreign levies on U.S. goods and has threatened other tariffs;
•
Issued an Executive Order “Reforming the Federal Workforce
 
to Better Serve Americans”
 
(February 11,
 
2025);
•
Issued an Executive Order “Restoring Democracy and Accountability in
 
Government” (February 11, 2025); and
•
Issued an Executive Order “Ensuring Lawful Governance and Implementing
 
the President’s ‘Department of
Government Efficiency’ Deregulatory Initiative” (February
 
19, 2025).
 
The regulatory freeze order directs all executive department agencies
 
to not propose or issue any rule until
a department or
agency head appointed or designated by President Trump
 
reviews and approves the rule.
 
Any rule or proposed rule sent to
the Office of Federal Register shall be withdrawn until the above
 
review is made.
 
Any substantive action by an agency
(normally published in the Federal Register) that promulgates or is expected
 
to lead to the promulgation of a final rule or
regulation, including notices of inquiry,
 
advance notices of proposed rulemaking, and notices of proposed rulemaking.
 
This
shall also apply to any agency statement of general applicability and future
 
effect that sets forth a policy on a statutory,
regulatory, or technical
 
issue or an interpretation of a statutory or regulatory issue.
 
This order applies to any substantive
action by an agency (normally published in the Federal Register) that promulgates
 
or is expected to lead to the
promulgation of a final rule or regulation, including notices of inquiry,
 
advance notices of proposed rulemaking, and
notices of proposed rulemaking.
 
This shall also apply to any agency statement of general applicability and future effect
 
that
sets forth a policy
 
on a statutory, regulatory,
 
or technical issue or an interpretation of a statutory or regulatory issue.
34
Executive Order 14192 seeks to “significantly reduce the private expenditures
 
required to comply with Federal
regulations.”
 
For the current fiscal year 2025, for each new regulation, at least 10 existing regulations
 
shall be identified for
repeal.
 
Agencies are directed to ensure that the total incremental cost of all new regulations,
 
including repealed regulations,
being finalized this year, shall be significantly
 
less than zero, as determined by the OMB Director.
 
The OMB Director shall
provide agencies with guidance on implementation, including measuring
 
regulatory costs.
 
No regulation shall be added to
or removed from the Unified Regulatory Agenda without the approval
 
of the OMB Director.
 
Regulations and rules are
broadly defined as:
…an agency statement of general or particular applicability and future effect
 
designed to implement, interpret, or
prescribe law or policy or to describe the procedure or practice requirements of
 
an agency, including, without
limitation, regulations, rules, memoranda, administrative orders, guidance
 
documents, policy statements, and
interagency agreements, regardless of whether the same were enacted
 
through the processes in the Administrative
Procedure Act
The hiring freeze provides that no Federal civilian position that is vacant at noon
 
on January 20, 2025, may be filled, and no
new position may be created, subject to certain exceptions.
 
The hiring freeze apparently has resulted in the rescission of
offers to 200 new FDIC examiners.
 
In addition to the hiring freeze, the Office of Personnel Management
 
started the
Voluntary
 
Separation Incentive Payment Authority (the “buyout authority”), which allows agencies
 
that are downsizing or
restructuring to offer employees lump-sum payments up
 
to $25,000 as an incentive to voluntarily separate.
 
It has been
reported that over 2 million federal workers may be eligible to accept such retirement
 
buyouts.
 
The program is subject to
litigation, and deadlines for acceptance by employees were temporarily
 
stayed by a federal court.
DOGE or the “USDS” is in the Executive Office of the President and
 
is headed by an Administrator.
 
Its purpose is to
“implement the President’s
 
DOGE Agenda, by modernizing Federal technology and software to maximize governmental
efficiency and productivity.”
 
The Executive Order includes a U.S. DOGE Service Temporary
 
Organization, which shall be
dedicated to advancing the President’s
 
18-month DOGE agenda.
 
The U.S. DOGE Service Temporary
 
Organization shall
terminate on July 4, 2026.
 
The Executive Order also directs each agency head, in consultation with the USDS
administrator, to establish a “DOGE team” of
 
at least four employees within each agency.
 
These teams will “typically
include” a team lead, an engineer, a human
 
resources specialist, and an attorney.
 
According to the Executive Order, agency
team members may include current agency personnel or new hires designated
 
as “special government employees.”
 
Each
agency’s team is directed to coordinate
 
with USDS and advise its agency head on implementing the DOGE agenda, with an
apparent focus on information technology and human resource management.
 
Among other things, the USDS Administrator
shall work with Agency Heads to promote inter-operability
 
between agency networks and systems, ensure data integrity,
and facilitate responsible data collection and synchronization.
 
Agency Heads are directed to take all necessary steps, in
coordination with the USDS Administrator,
 
and to the maximum extent consistent with law,
 
provide USDS full and prompt
access to all unclassified agency records, software systems, and information
 
technology systems.
 
USDS must adhere to
rigorous data protection standards.
The Executive Order “Establishing and Implementing the President’s
 
‘Department of Government Efficiency’ Workforce
Optimization Initiative” requires the OMB Director to submit a plan to
 
reduce the size of the Federal government's
workforce through efficiency improvements and attrition (Plan).
 
The Plan shall require that each agency,
 
subject to certain
exceptions, hire no more than one employee for every four employees
 
that depart.
 
Each Agency Head is required, in
consultation with its DOGE Team
 
Lead, among other things, to (i) hire in the highest need areas, (ii) fill vacancies unless
the DOGE Team Lead
 
determines such positions need to be filled.
 
Agency Heads shall promptly prepare to initiate large-
scale reductions in force (RIFs) to separate from Federal service temporary employees
 
and reemployed annuitants working
in areas that will likely be subject to the RIFs. All offices that perform
 
functions not mandated by statute or other law shall
be prioritized in the RIFs, including all agency diversity,
 
equity, and inclusion () initiatives.
 
Within 30 days, each Agency
Head shall submit a report to the OMB Director that that identifies any statutes that establish
 
the agency, or subcomponents
of the agency, as statutorily
 
required entities. The report shall discuss whether the agency or any of its subcomponents
should be eliminated or consolidated.
The new Acting Comptroller of the Currency and Acting CFPB Director will serve
 
on the five person FDIC Board of
Directors.
 
The FDIC is currently headed by an Acting Chairman. No person has been nominated
 
to serve as the FDIC
Chair.
 
FDIC director Jonathan McKernan resigned on February 11,
 
2025, and was nominated to be CFPB Director.
 
Jonathan Gould was nominated to be Comptroller of the Currency on the same day. These nominations are subject to The current Acting CFPB Director, on February 8, 2025, ordered all CFPB employees to suspend substantially all
Senate confirmation.
 
 
35
activities, including all supervision, examination and stakeholder
 
engagement activities, and closed the agency's
headquarters for the week of February 10, 2025.
 
The Acting CFPB Director also said the CFPB had excessive funding on
hand and would not take the next scheduled drawdown of funds from the Federal
 
Reserve.
Executive Order 14178 states the Administration’s
 
policy “to support the responsible growth and use of digital assets,
blockchain technology,
 
and related technologies across all sectors of the economy.”
 
“Digital assets” include “any digital
representation of value that is recorded on a distributed ledger,
 
including cryptocurrencies, digital tokens, and stablecoins.”
 
This order revoked Executive Order 14067 “Ensuring Responsible Development
 
of Digital Assets” (March 9, 2022) and
directed the Secretary of the Treasury is directed
 
to immediately revoke the Department of the Treasury's “Framework
 
for
International Engagement on Digital Assets,” (July 7, 2022).
These new policies include the following that are applicable to banks:
•
protecting and promoting fair and open access to banking services for all law-abiding
 
individual citizens and
private-sector entities alike; and
 
•
providing regulatory clarity and certainty built on technology-neutral
 
regulations, frameworks that account for
emerging technologies, transparent decision making,
 
and well-defined jurisdictional regulatory boundaries, all of
which are essential to supporting a vibrant and inclusive digital economy
 
and innovation in digital assets,
permissionless blockchains, and distributed ledger technologies
The Executive Order Reforming the Federal Workforce
 
to Better Serve Americans
 
requires:
•
Agency Heads to coordinate and consult with DOGE to shrink the size of the federal
 
workforce and limit hiring to
essential positions;
•
The Office of Personnel Management to initiate a rulemaking
 
to ensure federal employees are held to the highest
standards of conduct;
•
Upon expiration of the Day 1 hiring freeze and implementation of
 
the hiring plan, agencies to hire no more than
one employee for every four employees that depart from federal service (with
 
appropriate immigration, law
enforcement, and public safety exceptions);
•
Agencies to plan for large-scale reductions in force and determine
 
which agency components (or agencies
themselves) may be eliminated or combined because their functions aren’t
 
required by law.
The Executive Order “Restoring Democracy and Accountability in Government”
 
requires all agencies to submit draft
regulations for White House review with no carveout for so-called independent
 
agencies, except for the monetary policy
functions of the Federal Reserve; and consult with the White House on their priorities and
 
strategic plans.
 
The White
House will set their performance standards.
 
The Office of Management and Budget will adjust so-called
 
independent
agencies’ apportionments of funds.
 
The President and the Attorney General (subject to the President’s
 
supervision and
control) will interpret the law for the executive branch, instead of having
 
separate agencies adopt conflicting interpretations.
The Executive Order “Ensuring Lawful Governance and Implementing
 
the President’s ‘Department of Government
Efficiency’ Deregulatory Initiative” requires Agency
 
Heads, in coordination with their DOGE Team
 
Leads and the OMB
Director, to initiate a process to review,
 
with priority on “significant regulatory actions,” as defined in Executive Order
12866 (Sept. 30, 1993) (“E.O. 19866”), all regulations subject to their
 
sole or joint jurisdiction for consistency with law and
Administration policy and within 60 days:
1.
Identify the following classes of regulations:
•
unconstitutional regulations and regulations that raise serious constitutional
 
difficulties, such as exceeding the
scope of the power vested in the Federal Government by the Constitution;
•
regulations that are based on unlawful delegations of legislative power;
 
•
regulations that are based on anything other than the best reading of the underlying
 
statutory authority or
prohibition;
•
regulations that implicate matters of social, political, or economic significance
 
that are not authorized by clear
statutory authority
 
•
regulations that impose significant costs upon private parties that are not outweighed by public benefits; regulations that harm the national interest by significantly and unjustifiably impeding technological
36
•
innovation, infrastructure development, disaster response, inflation
 
reduction, research and development,
economic development, energy production, land use,
 
and foreign policy objectives; and
•
regulations that impose undue burdens on small business and impede
 
private enterprise and entrepreneurship.
2.
Provide OMB a list of all regulations identified by the above classes and consult with the OMB to
 
develop a
Unified Regulatory Agenda that seeks to rescind or modify these regulations.
Agency Heads shall determine whether ongoing enforcement of
 
any regulations identified in their regulatory review is
compliant with law and Administration policy.
 
Agency Heads shall de-prioritize (i) actions to enforce regulations that are
based on anything other than the best reading of a statute and (ii) enforcement of regulations
 
that go beyond the powers
vested in the Federal Government by the Constitution.
 
Agency heads, in consultation with the OMB Director,
 
shall, on a
case-by-case basis, as appropriate, direct the termination of all such enforcement
 
proceedings that do not comply with law
or Administration policy.
 
Agency Heads shall consult with their DOGE Team
 
Leads and OMB on potential new
regulations in accordance with E.O. 19866’s
 
processes.
Tariffs
 
generally make goods more expensive, and therefore may have inflationary
 
effects that would be expected to slow
consumer spending.
 
Changes in tariffs may also cause changes in supply chains to reduce the effects
 
of the tariffs and such
changes may result in disruptions to the supply chains away from countries
 
and producers to alternatives with higher costs
but more advantageous tariff rates.
 
As of February 12, 2025, the 25% tariffs on all imported steel and aluminum
 
may have
the most immediate effects, especially on the automobile industry
 
and its suppliers.
 
This industry and its suppliers are large
employers in Lee County and nearby areas served by the Bank.
ITEM 1A. RISK FACTORS
Any of the following risks could harm our business, results of operations and
 
financial condition and an investment in our
stock.
 
The risks discussed below also include forward-looking statements, and our
 
actual results may differ substantially
from those discussed in these forward-looking statements.
 
Risk Factor Summary
The following summarizes the risks provided after this summary and is qualified
 
by the more detailed discussion of “Risk
Factors” that follows this Summary,
 
and which should be read in their entirety.
 
Our risks include operational risks,
financial risks and legal and regulatory risks, which are related and
 
intertwined as discussed more fully in the Risk Factors
that follow this summary.
Operational risks are inherent in our business, and include:
●
The effects of local, national and regional market and economic conditions
 
and cyclicality, including the
 
levels
and rates of change in inflation and interest rates, and the effects on depositors,
 
borrowers and markets, including
the real estate and securities markets;
●
Our allowance for credit losses is based on estimates and judgments and may prove
 
to be inadequate to our credit
risks;
●
The risks and costs of nonperforming assets
●
The soundness of other financial institutions and perceptions regarding our
 
industry, especially when other
 
banks
experience difficulties or fail;
●
Our concentrations in commercial real estate loans in our market;
●
We operate in
 
a highly competitive market and compete against a number of larger national and
 
regional
competitors, as well as smaller institutions, nonbanks and credit unions;
●
Our ability to attract and retain key people;
●
Inflation and strong labor markets may affect our non-interest expenses;
●
Technological changes
 
affect our business, and we may have fewer resources than our
 
larger regulated and
unregulated competitors, both in and outside our market area, which may increase
 
the competition we face;
●
Potential gaps in our risk management, including managing the risks related
 
to maintaining our data security and
cybersecurity and those of our third-party service providers; Continuity risks to us and our service providers due to power, information technology and telecommunication
37
●
disruptions and outages, could affect our customer service,
 
reputation and our results of operations, financial
condition, customer relationship and reputation;
●
Risks of severe weather, natural disasters, climate changes,
 
epidemics and severe health issues in the population,
wars and acts of terrorism and other events; and
●
Future acquisitions may disrupt our business, dilute shareholder value
 
and adversely affect our operating results
and financial condition, among other risks.
Financial risks result in part from our operational risks and the risk of our business,
 
and include:
●
Increases in costs of funds due to inflation, monetary and fiscal policies, changes
 
in costumer behaviors and
competitive pressures;
●
Our results of operations and financial condition, including the values of our
 
assets and liquidity, may be
 
affected
by changes in interest rates and interest rate levels, the shape of the yield curve and
 
economic conditions;
●
Liquidity risks, including the costs and availability of funding, and the
 
liquidity of our assets, including our
investment securities portfolio, and institutional lending sources;
●
Changes in accounting and tax rules;
●
The adequacy of our capital and availability of capital, if needed;
●
Potentially excessive risk taking by our associates;
●
Our ability to pay dividends depends on our earnings, liquidity and regulatory
 
requirements related to our capital
and our risks; and
●
Our common stock trades in limited volumes.
Legal and regulatory risks include:
●
The Company is a legal entity separate and distinct from the Bank, and
 
transactions between the Bank and the
Company are limited by law;
●
The Company is required to be a source of financial and managerial strength
 
to the Bank, even in circumstances
where further investment in the Bank may not be warranted;
●
Privatization of Fannie Mae and Freddie Mac incident to the ending of their conservatorships
 
and the resulting
effects on the costs and availability of mortgage loans and the mortgage
 
markets, generally, and
 
the Company as a
mortgage originator, and seller and
 
servicer of residential mortgage loans;
●
The scope, volume, complexity and clarity of regulations and regulatory
 
and legal changes affect us, increase the
time and costs of compliance and may limit our business and adversely
 
affect our financial condition and results of
operations;
●
The pace and volume of regulatory changes and interpretations, especially by
 
the bank regulators, the CFPB and
the SEC, and well as numerous Executive Orders, and changes in government
 
leadership, personnel and policies.
 
Even where changes ultimately will benefit the Company,
 
changes in regulation and policies require time and
attention, and involve costs to implement;
●
Litigation, investigations and other claims by government agencies
 
and private parties and regulatory actions,
including those related to assertions of compliance failures;
●
The amounts and changes in the capital we are required to maintain in respect
 
of our business and risks, and
regulatory perceptions of us and our industry; and
●
Liquidity requirements and changes in rules that affect brokered
 
and reciprocal deposits and other sources and
measures of liquidity.
Additional Executive Orders and Administration and regulatory
 
decisions, directives and actions, including modifications
or changes to those discussed in this report, may occur at any time with currently
 
unpredictable effects.
Operational Risks
Market conditions and economic cyclicality may adversely affect our industry.
 
We believe the
 
following, among other things, may affect us in 2025:
38
●
Extraordinary monetary and fiscal stimulus in 2020 and in early 2021 offset
 
certain of the COVID-19 pandemic’s
adverse economic effects, but together with supply chain disruptions,
 
continued consumer demand, Russia’s war
in Ukraine and its effects on energy and food prices,
 
and tight labor markets, resulted in inflation.
 
Inflation began
running at levels unseen in decades and well above the Federal Reserve’s
 
long term inflation goal of 2.0%
annually.
 
Beginning in March 2022, the Federal Reserve raised its target federal
 
funds interest rates and reduced
its securities holdings in an effort to reduce inflation.
 
Inflation subsided in 2024.
 
In February 2025 inflation
remains above the Federal Reserve’s
 
target rate, the labor market remains strong and the Federal Reserve cut its
target federal funds rate in September through December 2024
 
100 basis points from 5.25-5.50% to 4.25%-4.50%,
and reduced the rate of decline in reinvestments of maturing securities proceeds.
●
The new presidential Administration that took office in January
 
2025 has established DOGE to increase
government efficiency and reduce fiscal expenditures, imposed
 
and threatened tariffs, and proposed tax cuts and
tax cut extensions, the net effect of which is unknown.
 
The nature and timing of any future changes in monetary
and fiscal policies, government policies and their administration and personnel,
 
and their effects on us cannot be
predicted.
 
●
Market developments, including unemployment, inflation
 
and price levels, stock and bond market volatility,
 
and
changes, including those resulting from Russia’s
 
war in Ukraine and governmental fiscal, operational and
monetary policies affect consumer confidence
 
levels, economic activity and interest rates.
 
Increases in market
interest rates and inflation, and adverse changes in consumer and business confidence
 
may change customers’
savings and payment behaviors, including potential increases in loan delinquencies
 
and default rates.
 
These could
affect our credit quality,
 
and our results of operations and financial condition.
●
Our ability to assess the creditworthiness of our customers and those we do business with,
 
and the values of our
assets and loan collateral may be adversely affected and less predictable
 
as a result of inflation and fluctuating
market interest rates and changes in monetary and fiscal policies.
 
We adopted
 
CECL on January 1, 2023 as
required by generally accepted accounting principles (“GAAP”).
 
CECL changed the loss model to take into
account current expected credit losses in place of the incurred loss method used historically
 
under GAAP,
 
and how
to estimate losses inherent in our credit exposures.
 
The process for estimating expected losses requires difficult,
subjective, and complex judgments, including forecasts of economic
 
conditions, unemployment levels in Alabama,
and how those economic predictions might affect the ability of our
 
borrowers to repay their loans or the value of
assets.
 
Changes in economic conditions and factors used in our CECL models may
 
increase the variability of our
provisions for loan losses and our earnings.
●
Changes in market interest rates and the shape of the yield curve affect
 
the value of our investment securities and
our other accumulated other comprehensive income or “AOCI.”
Our allowance for loan losses may prove inadequate
 
or we may be negatively affected by credit risk exposures.
We periodically
 
review the allowance for loan losses for adequacy considering economic conditions
 
and trends, collateral
values and credit quality indicators, including past charge-off
 
experience and levels of past due loans and nonperforming
assets.
 
We cannot be
 
certain that our allowance for loan losses will be adequate over time to cover credit
 
losses in our
portfolio because of unanticipated adverse changes in the economy,
 
including fiscal and monetary policy changes, inflation,
market conditions or events adversely affecting specific customers,
 
industries or markets, including disruptions of supply
chains, the war in Ukraine, changes in taxes and regulations and changes in borrower
 
behaviors.
 
Certain borrowers and their
businesses and real estate and commercial projects and businesses may be adversely
 
affected by inflation and higher interest
rates, and economic slowdowns arising from tighter monetary policies, and
 
may request or need loan modifications and
deferrals.
 
Various
 
businesses will be unable to fully pass on increased costs due to inflation, supply
 
chain disruptions and
changes and other factors, and their profits may shrink.
 
If the credit quality of our customer base materially decreases, if the
risk profile of the market, industry or group of customers changes materially
 
or weaknesses in the real estate markets
worsen, borrower payment behaviors change, or if our allowance for loan
 
losses is not adequate, our business, financial
condition, including our liquidity and capital, and results of operations
 
could be materially adversely affected.
 
CECL, the
accounting standard for estimating expected future loan losses, became effective
 
for the Company beginning January 1,
2023, and its effects upon the Company over a full business cycle
 
are unknown.
 
The CECL model incorporates various
economic condition factors, where changes in fiscal and monetary policy,
 
as well as market interest rates and unemployment
rates in our markets, among other factors, could result in more volatility in
 
our provisions for loan losses under CECL, which
could adversely affect our net income.
 
See Note 1 to our Financial Statements –
“Allowance for Credit Losses – Loans.”
39
Nonperforming and similar assets take significant time to resolve
 
and may adversely affect our results of operations
 
and
financial condition.
Our nonperforming loans were 0.09% of total loans as of December 31, 2024,
 
and we had no other real estate owned as
result of foreclosures or otherwise in full or partial payments in respect of loans (“OREO”).
 
Non-performing assets may
adversely affect our net income in various ways.
 
We do not record
 
interest income on nonaccrual loans or OREO and these
assets require higher loan administration and other costs, thereby adversely
 
affecting our income.
 
Decreases in the value of
these assets, or the underlying collateral, or in the related borrowers’ performance
 
or financial condition, whether or not due
to economic and market conditions beyond our control, could adversely
 
affect our business, results of operations and
financial condition.
 
In addition, the resolution of nonperforming assets requires commitments of time from
 
management,
which can be detrimental to the performance of their other responsibilities.
 
Loan deferrals and modifications made to help
resolve borrower issues and avoid foreclosures may not be successful.
 
There can be no assurance that we will not
experience increases in nonperforming loans in the future, much of which
 
is affected by the economy and the levels of
interest rates, generally.
Changes in the real estate markets, including the
 
secondary market for residential mortgage loans,
 
may continue to
adversely affect us.
 
Beginning in March 2022, inflation and the Federal Reserve increases in interest rates to
 
fight inflation have caused
mortgage rates to increase significantly.
 
Higher interest rates and the increased level of housing costs since 2020 have
slowed housing sales.
 
Although short term interest rates decreased in last half of 2024, longer term rates, including
mortgage rates, have remained elevated.
 
Inventories of existing homes for sale have remained generally low,
 
and many
believe that higher mortgage rates discourage potential sellers from selling
 
their existing houses and incurring higher
mortgage costs on replacement homes.
 
These conditions have adversely affected housing affordability
 
and increased
monthly mortgage payments.
 
These conditions adversely affect our mortgage loan production
 
and may affect the value of
residential mortgage collateral.
 
Commercial real estate projects’ economic assumptions may be adversely
 
affected by
higher interest rates, and certain projects with short term and/or unhedged
 
variable rate debt may be especially affected by
increased interest rates and/or a slower economy.
The CFPB’s mortgage and servicing
 
rules, including TRID rules for closed end credit transactions, enforcement actions,
reviews and settlements, affect the mortgage markets and our mortgage
 
operations.
The Tax Cuts and
 
Jobs Act’s (the “2017 Tax
 
Act”) limitations on the deductibility of residential mortgage interest and state
and local property and other taxes often called “SALT,”
 
could adversely affect consumer behaviors and the volumes of
housing sales, mortgage and home equity loan originations, as well as the value
 
and liquidity of residential property held as
collateral by lenders such as the Bank, and the secondary markets for
 
single and multi-family loans.
 
Acquisition,
construction and development loans for residential development may be similarly
 
adversely affected.
 
The new Trump
administration has indicated it is considering increasing the amount of
 
SALT permitted
 
to be deducted for federal income
taxes.
 
Unless extended, many provisions of the 2017 Tax
 
Act, including the cap on SALT
 
deductions expire at the end of
2025, and the marginal individual tax brackets will increase.
Fannie Mae and Freddie Mac have been in conservatorship since September
 
2008.
 
The newly appointed Secretary of
Housing and Urban Development has stated that coordinating the effort
 
to privatize these GSEs would be his priority.
 
Since these GSEs dominate the residential mortgage markets, any changes
 
in their operations and requirements, as well as
their respective restructurings and capital and the costs of their borrowings
 
as private institutions, could adversely affect the
primary and secondary mortgage markets, and our residential mortgage
 
businesses, our results of operations and the returns
on capital deployed in these businesses.
 
Resolution of these extremely large GSEs will be complex,
 
and the timing and
effects of such resolution and the effects on
 
mortgage originators and the mortgage markets and their participants, including
the Company, cannot be
 
predicted.
We may
 
be contractually obligated to repurchase
 
mortgage loans we sold to third parties on terms unfavorable
 
to us.
As part of its routine business, the Company originates mortgage loans
 
that it subsequently sells in the secondary market,
generally to Fannie Mae.
 
In connection with such loan sales, the Company makes customary representations and
warranties, the breach of which may result in the Company being required
 
to repurchase the loan or loans.
 
Furthermore, the
amount paid may be greater than the fair value of the loan or loans at the time of the
 
repurchase.
 
Although mortgage loan
repurchase requests made to us have been limited historically,
 
if these increased, we may have to establish reserves for
possible repurchases and adversely affect our results of
 
operation and financial condition.
 
 
40
Mortgage servicing rights requirements
 
may change and require
 
us to incur additional costs and risks.
The CFPB’s residential mortgage
 
servicing standards may adversely affect our costs to service residential
 
mortgage loans.
 
Reduced mortgage activity due to higher market interest rates has decreased our
 
generation of new mortgage loans and
related MSRs.
 
This may be offset partially by decreases in mortgage
 
prepayments and refinancings, and corresponding
increases in the duration of our existing MSRs and their values.
 
This net effect could reduce our aggregate income from
servicing these types of loans and make it more difficult and costly to
 
timely realize the value of collateral securing such
loans upon a borrower default.
 
The Basel III Capital Rules relating to MSRs may also increase the potential
 
capital
required as a result of MSRs, when considered with other capital rule adjustments
 
and deductions.
The soundness of other financial institutions could adversely affect us.
We routinely
 
execute transactions with counterparties in the financial services industry,
 
including brokers and dealers,
central clearinghouses, banks, including our correspondent banks and
 
other financial institutions.
 
Our ability to engage in
routine investment and banking transactions, as well as the quality and values of our
 
investments in holdings of obligations
of other financial institutions such as the FHLB-Atlanta, could be adversely affected
 
by the actions, financial condition,
profitability and regulation of such other financial institutions, including
 
the FHLB-Atlanta and our correspondent banks.
 
Financial services institutions are interrelated as a result of shared
 
credits, trading, clearing, counterparty and other
relationships.
The failures of Silicon Valley
 
Bank, Signature Bank and First Republic Bank in March and May 2023 due
 
to concentrations
of deposits and depositors holding large amounts of deposits in
 
excess of FDIC insurance limits, as well as flawed business
models and management, adversely affected the financial
 
system and public confidence.
 
These resulted in increased
regulatory scrutiny of bank liquidity,
 
funding and capital, depressed bank stock values generally,
 
and higher FDIC deposit
insurance premiums on the largest banks.
The federal bank regulators have been advocating more use of the Federal
 
Reserve discount window to improve bank
liquidity.
 
At the same time, the 2023 bank failures have also led to calls to reduce Federal Home Loan Bank lending
 
to
banks.
 
Traditionally,
 
the Federal Home Loan Banks have been stable sources of liquidity and funding for banks.
 
The
Federal Housing Finance Agency (“FHFA)
 
regulates the Federal Home Loan Banks.
 
The FHFA’s
FHLBank System at
100: Focusing on the Future
(Nov. 2023) indicates less traditional
 
Federal Home Loan Bank lending to banks, especially
banks experiencing financial stress.
 
Sandra Thompson, the FHFA
 
Director retired on January 19, 2025 and Bill Pulte has
been nominated to succeed her, subject to
 
Senate confirmation.
 
Mr. Pulte’s
 
views on Federal Home Loan Bank lending to
banks are unknown.
These changes, together with any exposures that other institutions may
 
have to crypto or digital assets, or cybersecurity and
data breaches, could cause disruption and unexpected changes in the industry.
 
The Trump Administration has issued
Executive Order “Strengthening American Leadership in Digital Financial
 
Technology”
 
and Congressional hearings on
“debanking” may increase the use of digital assets and the volume of digital
 
asset transactions with, and the risks to, banks.
 
Any losses, defaults by, or
 
failures of, the institutions we do business with could adversely affect our holdings
 
of the equity
in such other institutions, our participation interests in loans originated by
 
other institutions, and our business, including our
liquidity, financial condition
 
and earnings.
Failures of
 
several banks
 
in 2023
 
resulted in
 
increased
 
market volatility
 
for financial
 
service companies’
 
securities and
 
in
changes in regulatory views and emphases that
 
may adversely affect us and may not be disclosable under law.
The
 
failures
 
of
 
Silicon
 
Valley
 
Bank,
 
Signature
 
Bank,
 
First
 
Republic
 
and
 
Heartland
 
Tri-State
 
Bank
 
in
 
2023
 
caused
significant
 
market
 
volatility
 
for
 
bank
 
stocks,
 
and
 
uncertainty
 
in
 
the
 
investor
 
community
 
and
 
among
 
bank
 
customers,
generally,
 
greater
 
bank
 
regulatory
 
scrutiny
 
of
 
banking
 
organizations,
 
especially
 
those
 
experiencing
 
rapid
 
growth
 
and
regional banks with $100 billion or more in assets. Similarly, concerns about credit quality and capital adequacy at New These failures have resulted in bank regulators focusing supervisory activities, generally, on capital adequacy and liquidity
York
 
Community
 
Bank
 
following
 
two
 
acquisitions
 
raised
 
market
 
concerns
 
and
 
led
 
to
 
replacement
 
of
 
management
 
and
 
a
dilutive equity capital raise.
41
in
 
light
 
of
 
growth;
 
asset,
 
liability
 
and
 
customer
 
concentrations
 
and
 
risks;
 
CRE;
 
levels
 
of
 
uninsured
 
deposits;
 
crypto
businesses
 
and
 
customers;
 
third-party
 
vendors
 
or
 
“partners”
 
providing
 
digital,
 
electronic
 
and
 
other
 
services
 
known
 
as
banking
 
as
 
a
 
service
 
(“BaaS”)
 
and
 
fintech
 
relationships;
 
strategic,
 
capital
 
and
 
liquidity plans
 
and
 
contingency
 
plans;
 
and
vendor
 
diligence
 
and
 
risk
 
management.
 
Such
 
enhanced
 
scrutiny
 
is
 
often
 
applied
 
as
 
part
 
of
 
the
 
regulatory
 
examination
processes,
 
as
 
well
 
as
 
through
 
a
 
variety
 
of
 
nonpublic
 
supervisory
 
actions
 
such
 
as
 
“matters
 
requiring
 
attention,”
 
board
 
of
director resolutions,
 
memoranda of
 
understanding, and
 
other regulatory
 
criticism, and
 
formal, public
 
enforcement actions.
 
The
 
bank
 
and
 
bank
 
holding
 
examination
 
processes,
 
as
 
well
 
as
 
any
 
nonpublic
 
supervisory
 
actions,
 
are
 
“confidential
supervisory
 
information”
 
for
 
regulatory
 
purposes,
 
whose
 
existence
 
and
 
terms,
 
if
 
any,
 
may
 
not
 
be
 
disclosed
 
by
 
banking
organizations.
Changes
 
in
 
regulations
 
have
 
been
 
proposed
 
as part
 
of the
 
Basel III
 
endgame
 
to
 
the
 
capital, liquidity,
 
long
 
term debt
 
and
resolution planning of banking organizations with over
 
$100 billion in assets.
Our concentration of commercial real
 
estate loans could result in further increased
 
loan losses, and adversely affect our
business, earnings, and financial condition.
Commercial real estate, or CRE, is cyclical and poses risks of possible loss due
 
to concentration levels and the risks of the
assets being financed, which include loans for the acquisition and development
 
of land and residential construction.
 
The
federal bank regulatory agencies’ issued guidance on “Concentrations
 
in Commercial Real Estate Lending” in 2006 (the
“CRE Guidance”).
 
The CRE Guidance defines CRE loans as exposures secured by raw land, land development
 
and
construction loans (including 1-4 family residential construction
 
loans), multi-family property,
 
and non-farm non-
residential property,
 
where the primary or a significant source of repayment is derived from rental income associated
 
with
the property (that is, loans for which 50% or more of the source of repayment comes from third
 
party, non-affiliated,
 
rental
income) or the proceeds of the sale, refinancing, or permanent financing of the
 
property.
 
Loans to REITs and unsecured
loans to developers that closely correlate to the inherent risks in CRE markets are also CRE loans.
 
Loans on owner
occupied commercial real estate are generally excluded from CRE for purposes of
 
this guidance.
Excluding owner occupied commercial real estate, we had 42% of our loan portfolio
 
in CRE loans at year-end 2024
compared to 40% at year-end 2023.
 
The bank regulators continue to scrutinize CRE lending and require banks with
elevated CRE under the CRE Guidance, to implement improved underwriting,
 
internal controls, risk management policies
and portfolio stress testing, as well as higher levels of allowances for possible losses and
 
capital levels as a result of CRE
lending growth and exposures.
 
Increases in interest rates beginning in March 2022 and reduced market
 
transactions may
adversely affect the assumptions and performance of CRE, especially
 
for projects financed with short term or unhedged
variable rate debt, and the ability of CRE borrowers to refinance on terms that their
 
projects can support.
 
Lower demand
for CRE and fewer CRE purchase and sale transactions, and reduced availability
 
of, and higher interest rates and costs for,
CRE loans could adversely affect CRE values and liquidity,
 
our CRE loans and sales of OREO, and therefore our earnings
and financial condition, including our capital and liquidity.
Our future success is dependent on our ability
 
to compete effectively in highly competitive markets.
The East Alabama banking markets where we operate are highly competitive
 
and our future growth and success will
depend on our ability to compete effectively in these markets.
 
This MSA is served by 19 banks, 10 of which are
headquartered outside of Alabama.
 
Other banks have 35 offices in our MSA.
 
National and regional competitors that have
offices in our market include J.P.
 
Morgan Chase, Wells
 
Fargo, Truist, PNC, Regions,
 
Valley
 
National, SouthState and
Cadence.
 
We compete for
 
loans, deposits and other financial services and products with local, regional and national
commercial banks, thrifts, credit unions, mortgage lenders, and
 
securities and insurance brokerage firms.
 
Various
 
non-local
competitors offer services through the mail, by telephone
 
and over the Internet.
 
The national and regional financial banks
and financial services companies we compete with have substantially greater
 
resources, and numerous offices and affiliates
operating over wide geographic areas.
 
Lenders operating nationwide over the internet are growing rapidly.
 
Many of our
competitors offer products and services different
 
from ours, and have substantially greater resources, name recognition
 
and
advertising than we do, which helps them attract business.
 
In addition, larger competitors may be able to price loans and
deposits more aggressively than we are able to and have broader and more diverse
 
customer and geographic bases to draw
upon.
 
Out of state banks may branch into our markets.
 
Fintech and other non-bank competitors also compete for our
customers, and may partner with other banks and/or seek to enter the payments system.
 
The failures or sales of other banks
with offices in our markets could also lead to the entrance of new,
 
stronger competitors in our markets.
42
Our success depends on local economic conditions.
Our success depends on the general economic conditions in East Alabama,
 
including Lee County,
 
Alabama.
 
Local
economic conditions in our markets have a significant effect on
 
our commercial, real estate and construction loans, the
ability of borrowers to repay these loans and the value of the collateral securing
 
these loans.
 
Adverse changes in the
economic conditions of the Southeastern United States in general, or in one or more
 
of our local markets, including the
effects of higher market interest rates and inflation, supply
 
chain disruptions, changes in customer behaviors and in the
workforce and demand for space since the COVID-19 pandemic, and the timing
 
and magnitude of future inflation and
interest rates, as well as federal healthcare and education funding, could negatively
 
affect our results of operations and our
profitability.
 
Our local economy is also affected by the growth of automobile manufacturing
 
and related suppliers located
in our markets and nearby.
 
Auto sales and housing sales are cyclical and generally are affected adversely
 
by higher sticker
prices and interest rates, and may be adversely affected by tariffs,
 
especially the 25% tariffs on imported steel and
aluminum and autos, as well as threatened (i) tariffs on automaker
 
suppliers in Canada and Mexico and (ii) reciprocal tariffs
on countries that impose tariffs on U.S. goods.
 
Major employers in our market include education and healthcare, which
may be adversely affected by changes in Federal government
 
policies and funding.
Attractive acquisition opportunities may not be available to us in the
 
future.
 
 
While we seek continued organic growth, including loan
 
growth, we also may consider the acquisition of other businesses.
 
We expect that
 
other banking and financial companies, many of which have significantly greater
 
resources, will compete
with us to acquire financial services businesses.
 
This competition could increase prices for potential acquisitions that we
believe are attractive.
 
Also, acquisitions are subject to various regulatory approvals.
 
If we fail to receive the appropriate
regulatory approvals, we will not be able to consummate an acquisition that
 
we believe is in our best interests, and
regulatory approvals could contain conditions or commitments that reduce
 
the anticipated benefits of any transaction.
 
Among other things, our regulators consider our capital, liquidity,
 
profitability, regulatory compliance
 
and levels of
goodwill and intangibles when considering acquisition and expansion
 
proposals.
 
Any acquisition could be dilutive to our
earnings and shareholders’ equity per share of our common stock.
 
The regulatory agencies carefully review and analyze
financial institution mergers, and the merger
 
application process has lengthened.
Future acquisitions and expansion activities may
 
disrupt our business, dilute shareholder
 
value and adversely affect our
operating results and financial condition.
We regularly
 
evaluate potential acquisitions and expansion opportunities, including
 
new branches and other offices.
 
To the
extent that we grow through acquisitions, we cannot assure you that we will be
 
able to adequately or profitably manage this
growth.
 
Acquiring other banks, branches, or businesses, as well as other geographic and product
 
expansion activities,
involve various risks including:
 
●
risks of unknown or contingent liabilities, and potential asset quality issues;
●
unanticipated costs and delays, including the regulatory application process;
●
risks that acquired new businesses will not perform consistently with our growth
 
and profitability expectations;
●
risks of entering new markets or product areas where we have limited experience;
●
risks that growth will strain our infrastructure, staff, internal controls
 
and management, which may require
additional personnel, time and expenditures;
●
difficulties, expenses and delays of integrating the operations and
 
personnel of acquired institutions, including the
desirability of closing duplicative or overlapping facilities;
 
●
potential disruptions to our business;
 
●
possible loss of key employees and customers of acquired institutions;
●
potential short-term decreases in profitability; and
●
diversion of our management’s time
 
and attention from our existing operations and business.
43
Technological
 
changes affect our business, and we may have fewer resources
 
than many competitors to invest in
technological improvements.
The financial services industry is undergoing rapid technological
 
changes with frequent introductions of new technology-
driven products and services and growing demands for mobile and user-based
 
banking applications. The effective use of
technology may help us better analyze our customers and their needs better,
 
and the effective use of technology may
increase efficiency and reduce our operating costs.
 
At the same time the initial costs of acquiring and implementing
technology may be material, and such technology may entail fraud, compliance
 
with the AML/CFT anti-money laundering
laws and rules, among others, and various operational and other risks.
 
Largely unregulated “fintech” businesses have
increased their participation in the lending and payments businesses, and have
 
increased competition in these businesses.
 
Our future success will depend, in part, upon our ability to use technology
 
effectively to provide products and services that
meet our customers’ preferences and create additional efficiencies
 
in operations, while avoiding cyber-attacks and
disruptions, data breaches, violations of AML/CFT laws, and other potential
 
violations of law.
 
Remote work has
accelerated electronic banking activity and the need for increased operational
 
efficiencies and data security in our electronic
and mobile banking services.
 
We may need
 
to make significant additional capital investments in technology,
 
including
artificial intelligence, cyber
 
and data security, and we may not be
 
able to effectively implement new technology-driven
products and services, or such technology may prove less effective and/or
 
more costly than anticipated.
 
Many larger
competitors have substantially greater resources to invest in technological
 
improvements and, increasingly,
 
non-banking
firms are using technology to compete for loans, payments, and
 
other banking services.
 
As a result, our competition from
service providers not located in our markets has increased.
Operational risks are inherent
 
in our businesses.
Operational risks and losses can result from internal and external fraud;
 
gaps or weaknesses in our risk management or
internal audit procedures; errors by employees or third parties, including
 
our vendors, failures to document transactions
properly or obtain proper authorizations; failure to comply with applicable
 
regulatory requirements in the various
jurisdictions where we do business or have customers; failures in our estimates or
 
the models that we rely on; equipment
failures, including those caused by natural disasters, or by electrical, telecommunications
 
or other essential utility outages;
business continuity and data security system failures, including those caused by
 
computer viruses, cyberattacks, unforeseen
problems encountered while implementing major new computer systems or
 
upgrades, failures to timely and properly
upgrade and patch existing systems or inadequate access to data or poor response
 
capabilities in light of business continuity
plans in the event of data security system failures; or the inadequacy or failure
 
of systems and controls, including those of
our vendors or counterparties.
 
The COVID-19 pandemic presented operational challenges to maintaining
 
continuity of
operations of customer services while protecting our employees’ and
 
customers’ safety, and similar situations
 
may occur in
the future.
 
In addition, we face certain risks inherent in the ownership and operation of our bank premises
 
and other real-
estate, including liability for accidents on our properties.
 
Although we have implemented risk controls and loss mitigation
actions, and substantial resources are devoted to developing efficient
 
procedures, identifying and rectifying weaknesses in
existing procedures and training staff, it is not possible to be certain that
 
such actions have been or will be effective in
controlling these various operational risks that evolve continuously.
44
Potential gaps in our risk management policies and internal audit procedures
 
may leave us exposed to unidentified or
unanticipated risk, which could negatively affect our business.
Our enterprise risk management and internal audit program are designed
 
to mitigate material risks and losses to us. We
have developed and continue to develop risk management and internal
 
audit policies and procedures to reflect the ongoing
review of our risks and expect to continue to do so in the future. Nonetheless, our
 
policies and procedures may not be
comprehensive and may not anticipate and identify timely every risk
 
to which we are exposed, and our internal audit
process may fail to detect such weaknesses or deficiencies timely in our risk
 
management framework. Many of our risk
management models and estimates use observed historical market
 
behavior to model or project potential future exposure.
 
The models used by our business, including our CECL models, are based on
 
assumptions and projections. These models
may not operate properly,
 
or our inputs and assumptions may be inaccurate, or changes in economic
 
and market conditions,
customer behaviors or regulations may adversely affect
 
the accuracy or usefulness of the models.
 
As a result, these
methods may not fully or timely predict future exposures, which can be
 
significantly greater and/or faster than historically.
 
Other risk management methods depend upon the evaluation of information
 
regarding markets, clients, or other matters that
are publicly available or otherwise accessible to us. This information
 
may not always be accurate, complete, up-to-date or
properly evaluated.
 
Furthermore, there can be no assurance that we can effectively review and monitor
 
all risks or that all
of our employees will closely follow our risk management policies and procedures,
 
nor can there be any assurance that our
risk management policies and procedures will enable us to accurately
 
identify all risks and limit our exposures based on our
assessments.
 
In addition, we may have to implement more extensive and perhaps different
 
risk management policies and procedures as
our regulation and technology uses changes.
 
All of these could adversely affect our costs, and our financial condition
 
and
results of operations.
Any failure to protect
 
the confidentiality of customer information could adversely affect our reputation
 
and have a material
adverse effect on our business, financial condition and results
 
of operations
.
Various
 
laws enforced by the bank regulators and other agencies protect the privacy
 
and security of customers’ non-public
personal information. Many of our employees have access to, and routinely
 
process personal information of clients through
a variety of media, including information technology systems.
 
Our internal processes, policies and controls are designed to
protect the confidentiality of customer information we hold and that
 
is accessible to us and our employees.
 
It is possible
that an employee could, intentionally or unintentionally,
 
disclose or misappropriate confidential client information or our
data could be the subject of a cybersecurity attack.
 
Such personal data could also be compromised via intrusions into our
systems or those of our service providers or other persons we do business with such
 
as credit bureaus, data processors and
merchants who accept credit or debit cards for payment.
 
If we fail to maintain adequate internal controls, or if our
employees fail to comply with our policies and procedures, misappropriation
 
or inappropriate disclosure or misuse of client
information could occur.
 
Such internal control inadequacies or non-compliance could materially damage
 
our reputation,
lead to remediation costs and civil or criminal penalties.
 
These could have a material adverse effect on our business,
financial condition and results of operations.
 
See Item 1C. of this report for more information about cybersecurity and our
management and strategies.
Our information systems may experience interruptions and
 
security breaches.
We rely heavily
 
on communications and information systems, including those of third-party service
 
providers, to conduct
our business.
 
Any failure, interruption, or security breach of these systems could result in failures
 
or disruptions which
could affect our business, our customers’ privacy and our customer
 
relationships, generally.
 
Our business continuity plans,
including those of our service providers, for back-up and service restoration,
 
may not be effective in the case of widespread
outages due to severe weather, natural disasters, pandemics,
 
or power, communications and other failures.
 
See Item 1C. of
this report for more information about cybersecurity and our management
 
and strategies.
45
Our systems and networks, as well as those of our third-party service providers,
 
are subject to security risks and could be
susceptible to disruption through cyber-attacks,
 
such as denial of service attacks, hacking, terrorist activities, or identity
theft.
 
Cybercrime risks have increased as electronic and mobile banking activities have
 
increased, and may increase further
as a result of the Russia’s war in Ukraine,
 
tensions with mainland China and other countries, and foreign government
sponsored cybercrime and theft.
 
Other financial service institutions and their service providers have reported
 
material
security breaches in their websites or other systems, some of which have involved
 
sophisticated and targeted attacks,
including use of stolen access credentials, malware, ransomware, phishing
 
and distributed denial-of-service attacks, among
other means.
 
Such cyber-attacks may also seek to disrupt the operations of public
 
companies or their business partners,
effect unauthorized fund transfers, obtain unauthorized
 
access to confidential information, destroy data, disable or degrade
service, or sabotage systems.
 
Any of these, including hacking and identity theft risks, could cause serious
 
reputational
harm.
Despite our cybersecurity policies and procedures and our Board
 
of Directors and management’s efforts
 
to monitor and
ensure the integrity of the systems we and our third-party service providers
 
use, we may not be able to anticipate the rapidly
evolving security threats, nor may we be able to implement preventive measures
 
effective against all such threats.
 
The
techniques used by cyber criminals change frequently,
 
may not be recognized until launched and can originate from a wide
variety of sources, including external service providers, organized
 
crime affiliates, terrorist organizations or
 
hostile foreign
governments.
 
These risks may increase in the future as the use of mobile banking, other internet electronic
 
banking.
 
While
artificial intelligence may be useful generally,
 
it may be used by cyber criminals and may require us to seek additional
defenses.
Security breaches or failures may have serious adverse financial and other
 
consequences, including significant legal and
remediation costs, disruptions to operations, misappropriation of confidential
 
information, damage to systems operated by
us or our third-party service providers, as well as damages to our customers and
 
our counterparties.
 
In addition, these
events could damage our reputation, result in a loss of customer business, subject
 
us to additional regulatory scrutiny,
 
or
expose us to civil litigation and possible financial liability,
 
any of which could have a material adverse effect on our
financial condition and results of operations.
The SEC adopted rules, effective June 15, 2024 for smaller
 
reporting companies, such as the Company,
 
which require
reporting companies to disclose material cybersecurity incidents they
 
experience on SEC Form 8-K within four business
days, including the nature, scope, and timing of the incident, and the
 
material impact or reasonably likely material impact
on the registrant, including its financial condition and results of operations.
 
Annually, reporting companies
 
are required to
disclose material information regarding their cybersecurity risk management,
 
strategy, and governance.
We may
 
be unable to attract and retain key people to support our business.
Our success depends, in large part, on our ability to attract and retain
 
key people. We
 
compete with other financial services
companies for people primarily on the basis of compensation and benefits,
 
support services and financial position. Intense
competition exists for key employees with demonstrated ability,
 
and we may be unable to hire or retain such employees.
Effective succession planning is also important to our
 
long-term success. The unexpected loss of services of one or more of
our key persons and failure to ensure effective transfer
 
of knowledge and smooth transitions involving such persons could
have a material adverse effect on our business due to loss of their
 
skills, knowledge of our business, their years of industry
experience and the potential difficulty of promptly
 
finding qualified replacement employees.
Proposed rules implementing the executive compensation provisions
 
of the Dodd-Frank Act may limit the type and
structure of compensation arrangements and prohibit the payment of
 
“excessive compensation” to our executives.
 
These
restrictions could negatively affect our ability to compete with other
 
companies in recruiting and retaining key personnel.
Severe weather and natural disasters, including
 
as a result of climate change, pandemics, epidemics,
 
acts of war or
terrorism or other external events could have significant
 
effects on our business.
Severe weather and natural disasters, including hurricanes, tornados,
 
drought and floods, epidemics and pandemics, acts of
war or terrorism or other external events could have a significant effect
 
on our ability to conduct business.
 
Such events
could affect the stability of our deposit base, impair the ability of
 
borrowers to repay outstanding loans, impair the value of
collateral securing loans, cause significant property damage, result in
 
loss of revenue and/or cause us to incur additional
expenses.
 
Although management has established disaster recovery and business continuity
 
policies and procedures, the
occurrence of any such event could have a material adverse effect
 
on our business, which, in turn, could have a material
adverse effect on our financial condition and results of operations.
 
46
The COVID-19 pandemic, trade wars, tariffs, supply chain
 
disruptions and changes, wars, sanctions and similar events and
disputes, domestic and international, have adversely affected,
 
and may continue to adversely affect economic activity
globally, nationally
 
and locally.
 
Market interest rates have changed significantly and suddenly.
 
The Federal Reserve’s
target federal funds rates declined to 0-0.25% in March
 
2020, where these remained until March 17 2022.
 
The Federal
Reserve increased the target federal funds rates 11
 
from March 17, 2022 through July 27, 2023 to 5.25-5.50% due to
inflation.
 
After three rate cuts during the last four months of 2024, this range was 4.25-4.50% at December
 
31, 2024, but
such target rates and inflation remain above the Federal Reserve’s
 
target rate of 2%.
 
Such events also may adversely affect
business and consumer confidence, generally.
 
We and our customers, and
 
our respective suppliers, vendors and processors
may be adversely affected by shortages of needed equipment and
 
supplies, rising prices and tight labor markets.
 
The
continuation or worsening of these conditions may adversely affect
 
our profitability, growth asset quality
 
and financial
condition.
Financial Risks
Our cost of funds may increase as a result
 
of general economic conditions, interest rates, inflation
 
and changes in customer
behaviors and competitive pressures.
Our costs of funds have increased as a result of general economic conditions,
 
increased market interest rates and
competitive pressures, and inflation, and anticipated future changes in
 
target short-term interest rates by the Federal
Reserve to reduce inflation.
 
Traditionally,
 
we have obtained funds principally through local deposits and borrowings from
other institutional lenders such as the FHLB-Atlanta.
 
We believe deposits
 
are a cheaper and more stable source of funds
than other borrowings, generally.
 
Increases in interest rates have caused consumers to shift their funds to more interest-
bearing instruments and to increase the competition for and costs of deposits.
 
If customers move money out of bank
deposits and into other investment assets or from transaction deposits to
 
higher cost, interest-bearing time deposits, we
could lose relatively low-cost sources of funds, increasing our funding costs and
 
potentially reducing our net interest
income and net income. Additionally,
 
any such loss of funds could result in lower loan originations and growth, which
could materially and adversely affect our results of operations and
 
financial condition.
 
See “Supervision and Regulation –
Fiscal and Monetary Policy.”
Our profitability and liquidity may be affected
 
by changes in interest rates and interest
 
rate levels, the shape of the yield
curve and economic conditions.
 
Our profitability depends upon net interest income, which is the difference
 
between interest earned on interest-earning
assets, such as loans and investments, and interest expense on interest-bearing
 
liabilities, such as deposits and borrowings.
 
Our income is primarily driven by the spread between these rates. Net interest income
 
will be adversely affected if market
interest rates and the interest we pay on our deposits and borrowings increase
 
faster than the interest earned on loans and
investments.
 
Interest rates, and consequently our results of operations, are affected
 
by general economic conditions
(national, international and local) and fiscal and monetary policies, as well as expectations
 
regarding interest rate changes,
fiscal and monetary policies and the shape of the yield curve.
 
As a result, a steeper yield curve, meaning long-term interest
rates are significantly higher than short-term interest rates, would provide
 
the Bank with a better opportunity to increase net
interest income.
 
Conversely, a flattening yield curve
 
could further pressure our net interest margin as our cost of funds
increases relative to the spread we can earn on our assets.
 
In addition, net interest income could be affected by
asymmetrical changes in the different interest rate indexes,
 
given that not all of our assets or liabilities are priced with the
same index.
 
Higher market interest rates and continuing run-off of maturing
 
securities held by the Federal Reserve in its
SOMA in furtherance of its quantitative tightening policy to fight
 
inflation, generally reduce economic activity and may
reduce loan demand and growth.
 
Conversely, the slowing
 
of the run-off of maturing Treasury
 
securities held in SOMA
from $60 billion per month to $25 billion that commenced in June 2024,
 
may reduce the tightening effect of such decreases
in SOMA.
The production of mortgages and other loans and the value of collateral
 
securing our loans are dependent on demand within
the markets we serve, as well as interest rates.
 
Lower interest rates typically increase mortgage originations, decrease MSR
values and promote economic growth.
 
Increases in market interest rates tend to decrease mortgage originations,
 
increase
MSR values, decrease the value and liquidity of collateral securing loans, result
 
in unrealized losses on our investment
securities and accumulated other comprehensive losses, and potentially
 
increase net interest spread depending upon the
yield curve and the magnitude and duration of interest rate increase, and
 
constrain economic growth, generally.
 
Reductions
in short term target interest rates by the Federal Reserve in the second half of 2024 did not have much effect on reducing Increases in market interest rates also have caused unrealized losses in our investment securities, all of which are held as
longer term mortgage rates.
47
available for sale and carried at fair market values.
 
Market prices of our investment securities holdings decline as market
interest rates increase for comparable securities and maturities.
 
Although these unrealized losses do not adversely affect
our regulatory capital, these do reduce our reported income and GAAP tangible
 
stockholders’ equity.
 
Sales of securities
with unrealized losses would result in realized losses for GAAP,
 
regulatory capital and tax purposes.
 
Increases in interest
rates may also change depositor behaviors as customers seek higher yielding
 
deposits.
 
This may adversely affect our costs
of funds, growth, net interest income and net income, and may also adversely
 
affect our liquidity,
 
results of operations and
financial condition.
Liquidity risks could affect operations and jeopardize
 
our financial condition.
The COVID-19 pandemic and related monetary and fiscal stimuli generally
 
increased our bank deposits, including at the
Bank, while reducing the interest rates earned on loans and securities.
 
Such excess liquidity and the resulting balance sheet
growth reduced returns on assets and equity.
 
The growth in deposits exceeded our loan growth, and the difference
 
was
invested in high-quality,
 
marketable U.S. government and government agency securities, including
 
agency mortgage-
backed securities.
 
Inflation and tightening monetary policies beginning in early 2022 have partially
 
reversed these trends.
Liquidity is essential to our business.
 
An inability to raise funds through deposits, borrowings, proceeds from
 
loan
repayments or sales proceeds from maturing loans and securities, and other
 
sources could have a negative effect on our
liquidity.
 
Our funding sources include deposits (primarily core deposits), federal funds purchased,
 
securities sold under
repurchase agreements, and short- and long-term debt.
 
We maintain a portfolio of
 
marketable high-quality securities that
are all held as available for sale, and can be used as a source of liquidity.
 
As market interest rates rose prior to Fall 2024,
however, we have experienced unrealized
 
losses on such securities, which would become realized losses upon
 
the sale of
such securities, and such sales at a loss would reduce our net income and our
 
regulatory capital.
We are also members
 
of the FHLB-Atlanta and the Federal Reserve Bank of Atlanta, and we can obtain
 
advances from
them collateralized with eligible assets, and maintain uncommitted
 
federal funds lines of credit with other banks.
Other sources of liquidity available to the Company or the Bank, if needed,
 
include our ability to acquire additional non-
core deposits.
 
We may be able, depending
 
upon market conditions, to borrow money or issue and sell debt and preferred or
common securities in public or private transactions.
 
Our access to funding sources in amounts adequate to finance or
capitalize our activities on terms which are acceptable to us could be impaired
 
by factors that affect us specifically,
 
or the
financial services industry,
 
the economy, market interest rates and
 
fiscal and monetary policies.
 
General conditions that are
not specific to us, such as disruptions in the financial markets, failures of other
 
bank, such as Silicon Valley
 
Bank,
Signature Bank and First Republic Bank in 2023, or negative views and expectations
 
about the prospects for the financial
services industry could adversely affect us and our liquidity.
Our ability to realize our deferred
 
tax assets may be reduced in the future
 
if our estimates of future taxable income
 
from
our operations and tax planning strategies do not support this amount, and the amount
 
of net operating loss carry-forwards
realizable for income tax purposes may be reduced
 
under Section 382 of the Internal Revenue Code by sales of our capital
securities.
 
We are allowed
 
to carry-back losses for two years for Federal income tax purposes.
 
As of December 31, 2024, we had a
net deferred tax asset of $10.2 compared to $10.3 million one year earlier.
 
These and future deferred tax assets may be
further reduced in the future if our estimates of future taxable income from our operations
 
and tax planning strategies do not
support the amount of the deferred tax asset.
 
The amount of net operating loss carry-forwards realizable for income tax
purposes potentially could be further reduced under Section 382
 
of the Internal Revenue Code by a significant offering
and/or other sales of our capital securities.
 
Current bank capital rules also reduce the regulatory capital benefits of deferred
tax assets.
Changes in accounting and tax rules applicable to banks could adversely
 
affect our financial conditions and results of
operations.
 
From time to time, the FASB
 
and the SEC change the financial accounting and reporting standards that govern
 
the
preparation of our financial statements.
 
These changes can be difficult to predict and can materially impact how
 
we record
and report our financial condition and results of operations.
 
In some cases, we could be required to apply a new or revised
standard retroactively, resulting in us restating prior period financial statements We may need to raise additional capital in the future, but that capital may not be available when it is needed or on
.
48
favorable terms.
We anticipate that
 
our current capital resources will satisfy our capital requirements for the foreseeable
 
future under
currently effective rules.
 
We may,
 
however, need to raise additional capital to
 
support our growth or currently
unanticipated losses, or to meet the needs of our communities, resulting from
 
failures or cutbacks by our competitors.
 
Our
ability to raise additional capital, if needed, will depend, among other
 
things, on conditions in the capital markets at that
time, which are limited by events outside our control, and on our financial
 
performance.
 
If we cannot raise additional
capital on acceptable terms when needed, our ability to further expand
 
our operations through internal growth and
acquisitions could be limited.
 
Our associates may take excessive risks which could negatively affect our financial
 
condition and business.
Banks are in the business of accepting certain risks.
 
Our executive officers and other members of management,
 
sales
intermediaries, investment professionals, product managers, and
 
other associates, make decisions and choices that may
expose us to risk. We
 
endeavor, in the design and implementation
 
of our compensation programs and practices, to avoid
giving our associates incentives to take excessive risks; however,
 
associates may nonetheless take such risks.
 
Similarly,
although we employ controls and procedures designed to prevent
 
misconduct, to monitor associates’ business decisions and
prevent them from taking excessive risks, these controls and procedures may
 
not be effective.
 
If our associates take
excessive risks, risks to our reputation, financial condition and results of
 
operations could be materially and adversely
affected.
Our ability to continue to pay dividends to shareholders,
 
repurchase stock and
 
pay discretionary bonuses in the future
 
is
subject to our profitability,
 
capital, liquidity and regulatory requirements
 
and these limitations may prevent or limit future
dividends.
Cash available to pay dividends to our shareholders is derived primarily from
 
dividends paid to the Company by the Bank.
 
The ability of the Bank to pay dividends, as well as our ability to pay dividends
 
to our shareholders, will continue to be
subject to and limited by laws limiting dividend payments by the Bank,
 
the results of operations of our subsidiaries and our
need to maintain appropriate liquidity and capital at all levels of our business consistent
 
with regulatory requirements and
the needs of our businesses.
 
We can only
 
pay dividends, repurchase stock and pay discretionary bonuses, if our capital
conservation buffer exceeds 2.5% and from our eligible retained
 
income over the last four calendar quarters.
 
See
“Supervision and Regulation - Dividends and Distributions.”
The Federal Reserve expects bank holding companies to inform and
 
consult with Federal Reserve supervisory staff
sufficiently in advance of (i) declaring and paying a dividend that
 
could raise safety and soundness concerns, such as
declaring and paying a dividend that exceeds earnings for the period
 
for which the dividend is being paid); (ii) redeeming or
repurchasing regulatory capital instruments when the bank holding
 
company is experiencing financial weaknesses; or (iii)
redeeming or repurchasing common stock or perpetual preferred
 
stock that would result in a net reduction as of the end of a
quarter in the amount of such equity instruments outstanding compared
 
with the beginning of the quarter in which the
redemption or repurchase occurred.
 
Further, the Company is also required
 
to maintain sufficient capital, liquidity and resources to serve as a source of
managerial and financial strength to the Bank, which may limit its capacity to pay
 
dividends on Company common stock.
 
The Federal Reserve may require the Company to commit resources to the
 
Bank, even where it is not otherwise in the
interests of the Company or its shareholders or creditors.
Our common stock trades in limited volumes, which could result
 
in price volatility.
Your
 
ability to sell or purchase common shares depends upon the existence of an active
 
trading market for our common
stock.
 
Although our common stock is quoted on the Nasdaq Global Market under
 
the trading symbol “AUBN,” our trading
volume has been limited historically.
 
The limited trading volume of our common stock may cause fluctuations
 
in the
market value of our common stock to be exaggerated, leading to price volatility
 
in excess of that which would occur in a
more active trading market.
 
As a result, you may be unable to sell or purchase shares of our common stock
 
at the volume,
price and time that you desire.
 
Additionally, whether
 
the market prices of our common stock reflect a reasonable valuation
of our common stock also is affected by the limited market volumes, and thus the price you receive may not reflect its true The Company is an entity separate and distinct from the Bank.
or intrinsic value.
 
49
Legal and Regulatory Risks
The Company is an entity separate and distinct from the Bank.
 
Company transactions with the Bank are limited by
Sections 23A and 23B of the Federal Reserve Act and Federal Reserve Regulation
 
W.
 
We depend upon
 
the Bank’s
earnings and dividends from the Bank paid to the Company,
 
which are limited by law and regulatory policies and actions,
for cash to pay the Company’s corporate
 
obligations, and to pay dividends to our shareholders.
 
If the Bank’s ability to pay
dividends to the Company was terminated or limited, the Company’s
 
liquidity and financial condition could be materially
and adversely affected.
 
Legislative and regulatory changes generally
The Biden Administration and its heads of various government agencies,
 
including the bank regulators, CFPB and SEC,
implemented numerous changes to bank and other regulation, SEC rules and corporate
 
tax changes that could have an
adverse effect on our results of operations and financial condition.
The new Trump Administration has taken
 
a number of actions to freeze and reduce new regulations, and may take action in
the future to reverse or ameliorate the effects of various Biden
 
Administration and other policies and regulations.
 
See
“Supervision and Regulation - Recent Developments -New Administration.”
 
New Executive Orders may be issued at any
time and from time to time, which make additional changes, or modify prior
 
action by the current Administration.
 
Such
changes in regulations, potential consolidation or reorganization
 
of regulators, hiring freezes and reductions in force at the
government agencies, including the bank regulators, the CFPB and SEC that directly
 
affect us, and changes in tariffs and
trade rules, are unpredictable.
 
Such changes, and their administration and potential litigation challenging,
 
modifying or
rescinding such changes, create uncertainty and may adversely affect
 
us, our customers and markets, and the economy,
generally.
The bank regulators, the CFPB and the SEC have actively developed a broad range
 
of new and changed rules over the last
several years, many of which are complex and lengthy,
 
such as the new CRA regulations and various SEC rules, including
the cybersecurity rule adopted in September 2023 and climate change
 
rules adopted on March 6, 2024.
 
Some rules, such as
the SEC share repurchase modernization rules, have been struck down by the courts
 
and have been withdrawn, creating
more compliance uncertainty during the pendency of the litigation.
 
Ten states’ attorney generals immediately
 
challenged
the Enhancement and Standardization of Climate-Related Disclosures for
 
Investors rule adopted by the SEC on March 6,
2024, and the SEC stayed that rule’s
 
effectiveness.
 
On February 11, 2025, Acting SEC Chairman Uyeda
 
announced that in
light of the change in Administrations and the Regulatory Freeze Executive
 
Order, the SEC was notifying the United States
Court of Appeals for the Eighth Circuit and requesting that Court
not to schedule the case for argument to provide time for
the SEC to deliberate and determine the appropriate next steps.
Compliance with the volume and complexity of these rule changes, and the potential reversal
 
of various Biden-era rules is
costly and imposes material time and personnel burdens on financial
 
services companies, especially on smaller companies,
such as the Company.
 
Increasing litigation on regulatory rules and whether these exceed the agencies’
 
statutory authority
or have been improperly adopted, which result from recent court decisions,
 
also creates further uncertainty and risks as to
the final timing, content and scope of new rules, and the business changes needed
 
to be made to comply with the effective
dates of the new or changed rules.
Regulatory actions and policies can affect the markets’ outlook,
 
and the valuations and volatility of bank securities
generally, including
 
our common stock.
Changes in taxes and federal budgets
Major tax and budget legislation is pending at the beginning of 2025, which
 
have unpredictable effects on the economy and
on us and our customers.
If the 2017 Tax Act
 
is extended, it would result in an estimated $4.5 trillion of continued and new
 
tax cuts over the next 10
years.
 
Tax and budget legislation contemplates
 
an estimated increase of approximately $2.8 trillion over the next 10 years
and seeks a $4 trillion increase in the debt limit.
 
Such tax cuts and increased federal government spending may adversely
effect the federal government’s
 
credit ratings and interest rates on and costs of the national debt, to the extent not
 
offset by
tariffs.
 
The additional debt could crowd the debt markets and increase interest rates, generally.
50
Unless extended or amended, many provisions of the 2017 Tax
 
Act, including the cap on SALT
 
deductions, expire at the
end of 2025, and the marginal individual tax brackets
 
will increase.
 
The 2017 Tax Act’s
 
reduction in corporate tax rates to
21% do not expire at the end of 2025, absent new legislation.
 
Except to the extent offset by a restoration of uncapped
SALT deductions,
 
increases in marginal individual tax rates may adversely affect
 
consumer confidence, and may reduce the
cash available for deposits and debt service.
We are
 
subject to extensive regulation that could limit or restrict
 
our activities and adversely affect our earnings and the
market value of our common stock.
We and our
 
subsidiaries are regulated by several regulators, including the Federal Reserve, the Alabama
 
Superintendent,
the SEC and the FDIC.
 
Although not regulated or supervised by the CFPB, we are subject to the CFPB’s
 
regulations and
interpretations regarding the offering and provision of
 
consumer financial products or services under the Federal consumer
financial law; and the Federal Reserve’s supervision
 
and examination of our compliance with such CFPB regulations and
pronouncements.
 
Our success is affected by state and federal laws and regulations
 
affecting banks and bank holding
companies, and the securities markets, and our costs of compliance could adversely
 
affect our earnings.
 
Banking
regulations are primarily intended to protect depositors, and the FDIC’s
 
DIF, not shareholders.
 
The financial services
industry also is subject to frequent legislative and regulatory changes and proposed
 
changes, especially following changes
of presidential administrations which most recently occurred on January
 
20, 2025.
 
In addition, the interpretations of
regulations by regulators may change and statutes may be enacted with retroactive
 
impact.
 
From time to time, regulators
raise issues during examinations of us which, if not determined satisfactorily,
 
could have a material adverse effect on us.
 
Compliance with applicable laws and regulations is time consuming and costly
 
and may affect our profitability.
 
Changes in
regulations applicable to us and in our regulators could have a material adverse
 
effect on financial services regulation,
generally, and on our
 
financial condition and results of operations.
 
See “Supervision and Regulation - Recent
Developments-
 
New Administration.”
Litigation and regulatory actions could harm
 
our reputation and adversely affect our results
 
of operations and financial
condition.
A substantial legal liability or a significant regulatory action against us, as well as regulatory
 
inquiries, investigations or
enforcement actions, could harm our reputation, result in material fines or
 
penalties, result in significant legal and other
costs, divert management resources away from our business, and otherwise have
 
a material adverse effect on our financial
condition and results of operations and our ability to expand on our existing
 
business.
 
Even if we ultimately prevail in such
proceedings, our ability to attract new customers, retain our current
 
customers and recruit and retain employees could be
materially and adversely affected.
 
Regulatory inquiries and proceedings may also adversely affect
 
the prices, volatility or
outlook for our common stock or other securities specifically,
 
or bank securities, generally.
As a participating lender in the PPP,
 
the Bank is subject to additional risks of litigation from the Bank’s
 
customers or other
parties regarding
 
the Bank’s
 
processing of loans for the PPP and risks of potential
 
SBA or bank regulatory claims.
 
The Bank participated as a lender in the PPP and made a total of $56.7 million
 
of PPP loans in 2020 and 2021, generally to
support existing customers in the Bank’s
 
markets.
 
All PPP loans made by the Bank have been forgiven by the SBA, except
for one credit where the borrower is voluntarily repaying the loan.
 
Since the beginning of the PPP,
 
various banks have
been subject to litigation regarding the processes and procedures used
 
in processing applications for the PPP,
 
and greater
governmental attention is directed at preventing fraud.
 
We may be exposed
 
to similar litigation risks, from both customers
and non-customers that approached the Bank regarding PPP loans that we
 
extended.
 
 
The SBA, the Department of Justice and the bank regulators are investigating
 
various PPP lenders and borrowers with
respect to potential fraud or improper activities under the PPP loan programs.
 
Although the SBA has not indicated any
issues with the Bank’s participation
 
in the PPP program and honored all PPP forgiveness requests, the Bank
 
could have
potential liability if the SBA later determines deficiencies in the manner in
 
which PPP loans were originated, funded or
serviced by the Bank, such as an issue with the eligibility of a borrower to
 
receive a PPP loan, or its forgiveness of a PPP
properly, including
 
those related to the ambiguities in the laws, rules and guidance regarding the PPP’s
 
operation.
The Bank is unaware of any such investigation or claims. If any such
 
claims are made against the Bank and are not resolved
favorably to the Bank, it may result in financial liability or adversely affect
 
our reputation.
 
Any financial liability, litigation
costs or reputational damage caused by PPP related litigation could have
 
a material adverse effect on our business, financial
condition and results of operations.
51
We are
 
required to maintain
 
capital to meet regulatory requirements,
 
and if we fail to maintain sufficient capital, our
financial condition, liquidity and results of operations
 
would be adversely affected.
We and the Bank
 
must meet regulatory capital requirements and maintain sufficient
 
liquidity, including liquidity
 
at the
Company, as well as the Bank.
 
If we fail to meet these capital and other regulatory requirements, our financial
 
condition,
liquidity and results of operations would be materially and adversely
 
affected.
 
Our failure to remain “well capitalized” and
“well managed”, including meeting the Basel III capital conservation buffers,
 
for bank regulatory purposes, could adversely
affect us.
 
See
“Supervision and Regulation—Basel III Capital Rules.”
 
Although we currently have capital ratios that exceed all these minimum levels and
 
a strategic plan to maintain these levels,
we or the Bank may be unable to continue to satisfy the capital adequacy requirements
 
and/or maintain our liquidity for
various reasons, which may include:
●
losses and/or increases in the Bank’s credit
 
risk assets and expected losses resulting from the deterioration in the
creditworthiness of borrowers and the issuers of investment securities we hold;
●
difficulty in refinancing or issuing instruments upon redemption
 
or at maturity of such instruments to raise capital
under acceptable terms and conditions;
●
declines in the value of our securities portfolios or sales of securities for losses;
●
revisions to the regulations or their application by our regulators that increase our
 
capital or liquidity requirements;
●
reduced total earnings on our assets will reduce our internal generation
 
of capital available to support our balance
sheet growth;
●
reductions in the value of our MSRs and DTAs;
 
and other adverse developments; and
●
unexpected growth and an inability to increase capital timely.
A failure to remain “well capitalized,” for bank regulatory purposes, including
 
meeting the Basel III Capital Rule’s
conservation buffer,
 
could adversely affect customer confidence, and our:
 
●
ability to grow;
●
the costs of and availability of funds;
●
FDIC deposit insurance premiums;
●
ability to raise or replace brokered deposits;
●
ability to pay or increase dividends on our capital stock.
●
Ability to repurchase our common stock
●
ability to make discretionary bonuses to attract and retain quality personnel;
●
ability to make acquisitions or engage in new activities;
●
flexibility if we become subject to prompt corrective action restrictions; and
●
ability to make payments of principal and interest on any of our capital
 
instruments that may be then outstanding.
The Federal Reserve may require
 
us to commit capital resources
 
to support the Bank.
As a matter of policy, the
 
Federal Reserve expects a bank holding company to act as a source of financial and managerial
strength to a subsidiary bank and to commit resources to support such subsidiary
 
bank.
 
The Federal Reserve may require a
bank holding company to make capital injections into a troubled subsidiary bank.
 
In addition, the Dodd-Frank Act amended
the FDI Act to require that all companies that control a FDIC-insured depository
 
institution serve as a source of financial
strength to their depository institution subsidiaries.
 
Under these requirements, we could be required to provide financial
assistance to the Bank should it experience financial distress, even if further investment was not otherwise warranted. See Our operations are subject to risk of loss from unfavorable fiscal, monetary, regulatory and political developments in the
“Supervision and Regulation.”
52
U.S.
Our businesses and earnings are affected by the fiscal, monetary
 
and other policies and actions of various U.S.
governmental and regulatory authorities.
 
Changes in these are beyond our control and are difficult to predict and,
consequently, changes
 
in these policies could have negative effects on our activities and results of operations.
 
Failures of
the executive and legislative branches to agree on spending plans and budgets
 
previously have led to Federal government
shutdowns, which may adversely affect the U.S. economy.
 
Additionally, any prolonged
 
government shutdown or
reductions in force at various governmental and regulatory
 
authorities may inhibit our ability to evaluate the economy,
generally, and affect
 
government workers who are not paid during such events, and where the absence
 
of government
services and data could adversely affect consumer and business sentiment,
 
our local economy,
 
and business our customers
and our business.
 
The numerous Executive Orders and other actions taken by the Trump
 
Administration in its first month
and future changes, and their uncertain effects on the
 
economy, the markets, our regulators and
 
regulation, our local
markets, customers and others are unpredictable, and may adversely affect
 
our business, results of operations and financial
condition.
Litigation and regulatory investigations are
 
increasingly common in our businesses and may result
 
in significant financial
losses and/or harm to our reputation.
We face risks of
 
litigation and regulatory investigations and actions in the ordinary course of
 
operating our businesses,
including the risk of class action lawsuits.
 
Plaintiffs in class action and other lawsuits against us may seek very large
 
and/or
indeterminate amounts, including punitive and treble damages. Due to the vagaries
 
of litigation, the ultimate outcome of
litigation and the amount or range of potential loss at particular points in time
 
may be difficult to ascertain.
 
We do not have
any material pending litigation or regulatory matters affecting
 
us at December 31, 2024.
Failures to comply with the fair lending laws, CFPB regulations
 
or the Community Reinvestment Act, or CRA, could
adversely affect us.
The Bank is subject to, among other things, the provisions of the Equal
 
Credit Opportunity Act, or ECOA and the Fair
Housing Act, which prohibit discrimination based on race or color,
 
religion, national origin, sex and familial status in any
aspect of a consumer, commercial credit or
 
residential real estate transaction.
 
The DOJ’s and the federal bank
 
regulators’
Interagency Policy Statement on Discrimination in Lending provides
 
guidance to financial institutions to evaluate whether
discrimination exists, ways to prevent discriminatory lending
 
practices and how the government agencies will respond to
lending discrimination.
 
Failures to comply with ECOA, the Fair Housing Act and other fair lending laws and
 
regulations,
including CFPB regulations or interpretations, could subject us to enforcement
 
actions or litigation, and could have a
material adverse effect on our business financial condition
 
and results of operations.
Our Bank is also subject to the CRA and periodic CRA examinations. The
 
CRA requires us to serve our entire
communities, including low- and moderate-income (“LMI”) neighborhoods.
 
Our CRA ratings could be adversely affected
by actual or alleged violations of the fair lending or consumer financial
 
protection laws. The CRA and fair lending
responsibilities are related and mutually reinforcing.
 
Even though we have maintained a “satisfactory” CRA rating since
2000, we cannot predict our future CRA ratings.
 
Violations of fair lending
 
laws or if our CRA rating falls to less than
“satisfactory” could adversely affect our business, including expansion
 
through branching or acquisitions.
The Federal Reserve and the other federal bank regulators adopted
 
comprehensive revisions to its CRA regulations
published in the Federal Register on February 1, 2024.
 
We are evaluating
 
and working on implementing the new rules,
which could significantly affect our compliance costs and
 
activities.
 
See “Supervision and Regulation -
Community
Reinvestment Act and Consumer Laws.”
 
 
 
 
 
 
 
53
COVID-19 and Similar Risks
The Company’s assessment of risks related
 
to COVID-19 and its effects on the Company applicable
 
during the pandemic
are discussed in the Company‘s Annual Report on Form 10-K filed with the
 
SEC on March 8, 2022 under the caption “Risk
Factors-COVID 19 Risks” and in our Annual and Quarterly Reports on
 
Forms 10-K and 10-Q through September 30, 2024.
 
The President terminated the COVID-19 national emergencies
 
effective May 11, 2023.
 
Remaining effects of the COVID-
19 pandemic and other epidemics and pandemics are discussed herein,
 
including under “Supervision and Regulation --
Bank Regulation --
Residential Mortgages
 
and -- Fiscal and Monetary Policies; Risk Factors -- Operational
 
Risks --
Market
conditions and economic cyclicality may adversely affect our industry
; --
Our success depends on local economic
conditions
; --
Severe weather and natural disasters, including as
 
a result of climate change, pandemics, epidemics, acts of
war or terrorism or other external events could have
 
significant effects on our business
; and Risk Factors --
"
Financial
Risks
 
-Liquidity risks could affect operations and jeopardize
 
our financial condition."
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
 
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;
•
Implementing layers of controls and not allowing excessive reliance on
 
any single control;
•
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;
•
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 Monitoring our systems and related software and programming periodically to update software and
external service providers;
54
•
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 Company’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 to 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.
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.
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.
 
 
 
55
The Bank owns its main campus in downtown Auburn, Alabama, which
 
comprises over 4 acres and includes the newly
constructed AuburnBank Center, which
 
was completed in May 2022 and had its grand opening in June 2022.
 
The
AuburnBank Center has approximately 90,000 square feet of space.
 
The AuburnBank Center includes the Bank’s
 
main
office, Auburn loan production office, and
 
all of its back-office operations.
 
The main office branch offers the full line of
the Bank’s services and has one
 
ATM.
 
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 Bank has approximately 46,000 square feet of Class A office space
 
and approximately 5,000 square
feet of retail space in the new AuburnBank Center building available for
 
lease to third party tenants, of which
approximately 21,000 square feet is currently leased and occupied.
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 2024, the Bank’s land lease renewe
 
d
 
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 2023, the Bank renewed
 
its lease for another 2 years.
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.
In February 2015, the Bank relocated its branch in the Auburn Kroger store
 
to a new leased location within the Corner
Village Shopping Center in
 
Auburn.
 
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.
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 three ATMs
 
located at various locations
within our primary service area.
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 an option exercisable by September 2025 to renew the sublease for
 
the
remaining term of the
 
Bank’s lease ending in 2028.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
56
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.
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
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
 
2023
First Quarter
$
 
24.50
 
$
 
22.55
 
$
 
0.27
 
Second Quarter
 
24.32
 
 
18.80
 
 
0.27
 
Third Quarter
 
22.80
 
 
20.85
 
 
0.27
 
Fourth Quarter
 
21.99
 
 
19.72
 
 
0.27
 
(1)
 
The price information represents actual transactions.
The Company has paid cash dividends on its capital stock since 1985. Prior to this time,
 
the Bank paid cash dividends since
its organization in 1907, except during the Depression years of
 
1932 and 1933. 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, regula tory and capital requirements and other relevant factors. The Board currently intends to continue The amount of dividends payable by the Bank is limited by law and regulation.
its present dividend policies.
57
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 -
Our ability to continue to pay
dividends to shareholders and repurchase
 
stock in the future is subject to our profitability,
 
capital, liquidity and regulatory
requirements and
 
these limitations may prevent or limit future
 
dividends.”
Issuer Purchases of Equity Securities ITEM 7.
Not applicable.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
58
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following is a discussion of our financial condition at December 31,
 
2024 and 2023 and our results of operations for
the years ended December 31, 2024 and 2023. 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)
2024
2023
Net interest income (a)
$
27,204
$
26,745
Less: tax-equivalent adjustment
79
417
Net interest income (GAAP)
27,125
26,328
Noninterest income
3,474
(2,981)
Total revenue
30,599
23,347
Provision for credit losses
36
135
Noninterest expense
22,166
22,594
Income tax expense (benefit)
 
2,000
(777)
Net earnings
$
6,397
$
1,395
Basic and diluted net earnings per share
$
1.83
$
0.40
(a) Tax-equivalent.
 
See "Table 1 - Explanation of Non-GAAP Financial Measures".
Financial Summary
The Company’s net earnings were
 
$6.4 million for the full year 2024, compared to $1.4 million for the full year 2023.
 
Basic and diluted net earnings per share were $1.83 per share for the full year 2024,
 
compared to $0.40 per share for the full
year 2023.
 
Net earnings for 2023 reflected the sale of $117.6 million
 
of available-for-sale securities for an after-tax loss of
$(4.7) million, or $(1.35) per share related to the Company’s
 
balance sheet repositioning strategy in December 2023.
 
Excluding this non-routine item, net earnings for the full year 2023
 
would have been $6.1 million, or $1.75 per share.
Net interest income (tax-equivalent) was $27.2 million in 2024, a
 
2% increase compared to $26.7 million in 2023. This
increase was primarily due to improved net interest margin.
 
The Company’s net interest margin
 
(tax-equivalent) was
3.06% in 2024, compared to 2.89% in 2023.
 
The increase in net interest margin (tax-equivalent) was primarily
 
due to loan
growth and the December 2023 balance sheet repositioning, which resulted
 
in a more favorable asset mix and higher yields
on interest-earning assets in 2024.
 
Average loans for 2024 were $568.7
 
million, a 9% increase from 2023.
 
At December 31, 2024, the Company’s
 
allowance for credit losses was $6.9 million, or 1.22% of total loans, compared to
$6.9 million, or 1.23% of total loans, at December 31, 2023.
 
Although the balance of the allowance for credit losses was
largely unchanged, the decrease in the allowance for credit losses as a percentage of total loans was primarily due to The Company recorded a provision for credit losses of $36 thousand in 2024 compared to $135 thousand during 2023.
improved economic forecasts.
 
 
 
 
 
 
 
59
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.
 
Noninterest income was $3.5 million in 2024 compared to a loss of $3.0
 
million in 2023.
 
Excluding the pre-tax securities
loss of $6.3 million related to the balance sheet repositioning strategy in 2023,
 
noninterest income would have been $3.3
million for 2023.
 
Noninterest expense was $22.2 million in 2024 compared to $22.6
 
million in 2023.
 
This decrease in noninterest expense
reflects decreases in net occupancy and equipment expenses of $0.4
 
million, professional fees expense of $0.1
 
million,
other noninterest expense of $0.2 million.
 
These decreases were partially offset by increases in salaries and benefits
expense of $0.4
 
million.
The provision for income taxes expense was $2.0 million for an effective
 
tax rate of 23.82% for 2024, compared to a tax
benefit of $0.8 million for a negative effective tax rate of (125.73)%
 
for 2023.
 
The Company’s effective
 
income tax rate is
affected principally by tax-exempt earnings from the Company’s
 
investments in municipal securities, bank-owned life
insurance, and New Markets Tax
 
Credits.
 
The effective tax rate increased primarily due to a decrease in the Company’s
investment in municipal securities following the balance sheet restructuring
 
in the fourth quarter of 2023, and the adoption
of FASB ASU 2023-02
 
Investments – Equity Method and Joint Ventures
 
(Topic323) which allows the
 
proportional
amortization method for our NMTC investments, on January 1, 2024.
 
With the adoption of this ASU, amortization of
NMTCs are now included in income tax expense rather than noninterest
 
expense.
 
Additionally, 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 2024, unchanged
 
from 2023. At December 31, 2024, 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 15.81%, a tier 1 leverage ratio of
 
10.49% and common equity tier 1 or
(CET1) of 14.80% at December 31, 2024.
 
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 FASB ASC 326. 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 5 - Loans and
Allowance for Credit Losses in the notes to our consolidated financial statements
 
in this report.
 
 
60
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
 
13, Fair Value
 
in the notes to the
consolidated financial statements that accompany this report.
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,
 
2024 we had total deferred tax assets of $10.2 million
included as “other assets”, including $9.9 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, 2024.
 
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 10 – Income Taxes
 
in the notes to the consolidated financial statements that accompany this report.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
61
Average Balance
 
Sheet and Interest Rates
Year ended December 31
 
2024
2023
Average
Yield/
Average
Yield/
(Dollars in thousands)
Balance
Rate
Balance
Rate
Loans and loans held for sale
 
$
568,733
5.23%
$
523,838
4.76%
Securities - taxable
248,072
2.19%
335,366
2.15%
Securities - tax-exempt (a)
10,084
3.70%
52,122
3.81%
Total securities
258,156
2.25%
387,488
2.37%
Federal funds sold
17,907
5.24%
5,221
4.79%
Interest bearing bank deposits
44,634
5.23%
8,593
4.92%
Total interest-earning
 
assets
889,430
4.36%
925,140
3.76%
Deposits:
 
 
NOW
192,702
1.39%
193,451
0.99%
Savings and money market
251,778
0.86%
289,235
0.74%
Certificates of deposit
195,097
3.46%
175,085
2.25%
Total interest-bearing
 
deposits
639,577
1.81%
657,771
1.21%
Short-term borrowings
628
0.48%
3,255
2.21%
Total interest-bearing
 
liabilities
640,205
1.81%
661,026
1.22%
Net interest income and margin (a)
$
27,204
3.06%
$
26,745
2.89%
(a) Tax-equivalent.
 
See "Table 1 - Explanation
 
of Non-GAAP Financial Measures".
RESULTS
 
OF OPERATIONS
Net Interest Income and Margin
Net interest income (tax-equivalent) was $27.2 million in 2024, a
 
2% increase compared to $26.7 million in 2023. This
increase was primarily due to improved net interest margin.
 
The Company’s net interest margin
 
(tax-equivalent) was
3.06% in 2024, compared to 2.89% in 2023.
 
The increase in net interest margin (tax-equivalent) was primarily
 
due to loan
growth and the balance sheet repositioning strategy the Company
 
completed in the fourth quarter of 2023, which resulted in
a more favorable asset mix and higher yields on interest-earning assets in 2024.
 
This was partially offset by higher market
interest rates, which increased our cost of funds, generally,
 
and changes in our deposit mix to higher cost interest-bearing
deposits.
 
The tax-equivalent yield on total interest-earning assets increased by
 
60 basis points to 4.36% in 2024 compared to 3.76%
in 2023.
 
Average loans for 2024
 
were $568.7 million, a 9% increase from 2023.
 
The cost of total interest-bearing liabilities increased by 59 basis points to 1.81%
 
in 2024 compared to 1.22% in 2023.
 
Average interest-bearing
 
deposits were $639.6 million during 2024, a 3% decrease compared to $657.8 million
 
during
2023.
 
As of December 31, 2024, average interest-bearing deposits were 71% of average
 
total deposits compared to 69% on
December 31, 2023.
 
Since March 2022, the Federal Reserve increased the target
 
federal funds rate by 525 basis points
before announcing a 50-basis points rate reduction on September 18, 2024,
 
its first decrease in rates since its March 2020
COVID rate reduction,
 
followed by two 25 basis points reduction in October and December 2024.
 
At year end the target
federal funds rate ranged from 4.25% - 4.50%.
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 2025 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 fixed rate loans with current market interest
rates will be important to our net interest margin during
 
2025.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
62
Provision for Credit Losses
The provision for credit losses represents a charge to
 
earnings necessary to establish an allowance for credit losses that, in
management’s evaluation,
 
is adequate to provide coverage for all expected credit losses.
 
The Company recorded a
provision for credit losses of $36 thousand during 2024, compared to $135
 
thousand for 2023.
 
Provision for credit losses
expense is affected by 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, most notably,
 
the anticipated unemployment rate, which may be affected by monetary
 
policy.
 
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,
2024, the Company’s allowance for
 
credit losses was $6.9
 
million, or 1.22% of total loans, compared to $6.9 million, or
1.23% of total loans, at December 31, 2023.
 
Although the balance of the allowance for credit losses was largely
unchanged, the decrease in the allowance for credit losses as a percentage of total
 
loans was primarily due to improved
economic forecasts.
 
Noninterest Income
 
Year ended December 31
(Dollars in thousands)
2024
2023
Service charges on deposit accounts
$
614
$
603
Mortgage lending
608
430
Bank-owned life insurance
403
411
Securities losses, net
—
(6,295)
Other
1,849
1,870
Total noninterest income
$
3,474
$
(2,981)
The Company’s noninterest income
 
from mortgage lending is primarily attributable to the (1) origination and sale of
 
new
mortgage loans 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
normal 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.
 
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 2024 and 2023.
Year ended December 31
(Dollars in thousands)
2024
2023
Origination income
$
261
$
71
Servicing fees, net
347
359
Total mortgage lending
 
income
$
608
$
430
The Company’s income from mortgage
 
lending typically fluctuates as mortgage interest rates change and is primarily
attributable to the origination and sale of new mortgage loans.
 
The increase in mortgage lending income was primarily
related to the Company increasing the number of mortgage loans originated
 
for sale during 2024 relative to the number of
mortgage loans originated and held for investment during 2023.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
63
Income from bank-owned life insurance was $403 thousand and
 
$411 thousand for 2024 and 2023 respectively.
 
Excluding
a $52 thousand non-taxable death benefit received during the first quarter of
 
2023, income from bank-owned life insurance
would have been $359 thousand for 2023.
Securities losses, net for 2023 were related to the Company selling approximately
 
$117.6 million of its available-for-sale
securities, resulting in a net loss of approximately $6.3 million as part of its balance
 
sheet repositioning strategy.
Noninterest Expense
Year ended December 31
(Dollars in thousands)
2024
2023
Salaries and benefits
$
12,534
$
12,101
Net occupancy and equipment
2,508
2,954
Professional fees
1,188
1,299
FDIC and other regulatory assessments
564
631
Other
5,372
5,609
Total noninterest expense
$
22,166
$
22,594
Salaries and benefits increased during 2024 compared to 2023 primarily due
 
to routine annual increases in salaries and
wages.
 
The decrease in net occupancy and equipment expense was primarily
 
due to an increase in leasing income.
The decrease in other noninterest expense was primarily due to the Company’s
 
adoption of ASU 2023-02 which allows the
proportional amortization method for our NMTC investments, on January
 
1, 2024.
 
With the adoption of this ASU,
amortization of NMTCs are now included in income tax expense.
 
During 2023 other noninterest expense included $0.4
million related to our equity method investment in NMTCs.
 
This decrease was partially offset by various increases in other
noninterest expense accounts during 2024.
Income Tax
 
Expense
The provision for income taxes expense was $2.0 million for an effective
 
tax rate of 23.82% for 2024, compared to a tax
benefit of $0.8 million for a negative effective tax rate of (125.73)%
 
for 2023.
 
The Company’s effective
 
income tax rate is
affected principally by tax-exempt earnings from the Company’s
 
investments in municipal securities, bank-owned life
insurance, and New Markets Tax
 
Credits.
 
The effective tax rate increased primarily due to a decrease in
 
the Company’s
investment in municipal securities following the balance sheet restructuring
 
in the fourth quarter of 2023, and the adoption
of FASB ASU 2023-02
 
Investments – Equity Method and Joint Ventures
 
(Topic323) which allows the
 
proportional
amortization method for our NMTC investments, on January 1, 2024.
 
With the adoption of this ASU, amortization of
NMTCs are now included in income tax expense rather than noninterest
 
expense.
 
Additionally, 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.
BALANCE SHEET ANALYSIS
Securities
 
Securities available-for-sale were $243.0 million at December 31, 2024,
 
compared to $270.9 million at December 31, 2023.
 
This decrease reflects a decrease in the amortized cost basis of securities available
 
-for-sale of $27.1 million, and a decrease
of $0.8 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 2.25%
 
in 2024 and 2.37% in 2023.
The following table shows the carrying value and weighted average yield
 
of securities available-for-sale as of December
31, 2024 according to contractual maturity.
 
Actual maturities may differ from contractual maturities of mortgage-backed
securities (“MBS”) because the mortgages underlying the securities may
 
be called or prepaid in whole or in part, with or
without penalty.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
64
December 31, 2024
1 year
 
1 to 5
5 to 10
 
After 10
Total
 
(Dollars in thousands)
or less
years
years
years
Fair Value
Agency obligations
$
—
26,655
25,756
—
52,411
Agency MBS
10
19,863
14,904
138,899
173,676
State and political subdivisions
—
966
8,244
7,715
16,925
Total available-for-sale
$
10
47,484
48,904
146,614
243,012
Weighted average yield (1):
Agency obligations
—
1.35%
1.70%
—
1.53%
Agency MBS
3.14%
1.20%
1.95%
2.20%
2.07%
State and political subdivisions
—
2.37%
1.96%
2.38%
2.17%
Total available-for-sale
3.14%
1.31%
1.82%
2.21%
1.96%
(1) Yields are calculated based on amortized cost.
Loans
December 31
(In thousands)
2024
2023
Commercial and industrial
$
63,274
73,374
Construction and land development
82,493
68,329
Commercial real estate
 
289,992
287,307
Residential real estate
118,627
117,457
Consumer installment
9,631
10,827
Total loans
564,017
557,294
Total loans, net of unearned
 
income, were $564.0 million at December 31, 2024, and $557.3 million
 
at December 31, 2023,
an increase of $6.7 million, or 1%.
 
Four loan categories represented the majority of the loan portfolio at December
 
31,
2024: commercial real estate (51%), residential real estate (21%), construction
 
and land development (15%), and
commercial and industrial (11%).
 
Approximately 19% of the Company’s
 
commercial real estate loans were classified as
owner-occupied at December 31, 2024.
Within the residential real estate portfolio
 
segment,
 
the Company had junior lien mortgages of approximately $11.2
 
million,
or 2%, and $8.7 million, or 2%, of total loans at December 31, 2024 and 2023,
 
respectively.
 
For residential real estate
mortgage loans with a consumer purpose, the Company had no loans
 
that required interest only payments at December 31,
2024 and 2023. 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 5.23% in 2024
 
and 4.76% in 2023.
 
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 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, interest rate fluctuations, 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.”
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
65
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 $22.7 million. Furthermore, we have an internal limit for
 
aggregate credit exposure (loans outstanding plus
unfunded commitments) to a single borrower of $20.4 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, 2024, the Bank had one
loan relationship 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, 2024 (and related balances at December
 
31, 2023).
 
December 31
(In thousands)
2024
2023
Lessors of 1-4 family residential properties
$
58,228
$
56,912
Multi-family residential properties
43,556
45,841
Shopping centers/strip malls
37,349
27,128
Hotel/motel
35,210
39,131
Office buildings
29,780
30,871
On January 1, 2023, the Company adopted ASC 326 and its CECL methodology,
 
which required us to estimate all expected
credit losses over the remaining life of our loan portfolio.
 
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 in the loan portfolio.
The allowance for credit losses was $6.9 million at December 31, 2024 and 2023,
 
respectively, which management
 
believed
to be adequate at each of the respective dates.
 
Our allowance for credit losses as a percentage of total loans was 1.22%
 
at
December 31, 2024, compared to 1.23% at December 31, 2023.
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.
 
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,
2024 and 2023, reasonable and supportable periods of 4 quarters were utilized
 
followed by an 8 quarter straight line
reversion period to long term averages.
 
See Note 5 to our Financial Statements.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
66
A summary of the changes in the allowance for credit losses on loans
 
and certain asset quality ratios for the years ended
December 31, 2024 and 2023 are presented below.
 
Year ended December 31
(Dollars in thousands)
2024
2023
Allowance for credit losses:
Balance at beginning of period
$
6,863
5,765
Impact of adopting ASC 326
—
1,019
Charge-offs:
Commercial and industrial
(9)
(164)
Residential real estate
 
(61)
—
Consumer installment
(114)
(105)
Total charge
 
-offs
(184)
(269)
Recoveries:
Commercial and industrial
144
204
Residential real estate
 
9
14
Consumer installment
45
5
Total recoveries
198
223
Net recoveries (charge-offs)
14
(46)
(Reversal of) provision for credit losses
(6)
125
Ending balance
$
6,871
6,863
as a % of loans
1.22
%
1.23
as a % of nonperforming loans
1,366
%
753
Net charge-offs as a % of average loans
—
%
0.01
Nonperforming Assets
 
At December 31, 2024 the Company had $0.5 million in nonperforming
 
assets compared to $0.9 million at December 31,
2023.
The table below provides information concerning total nonperforming
 
assets and certain asset quality ratios.
 
December 31
(Dollars in thousands)
2024
2023
Nonperforming assets:
Nonperforming (nonaccrual) loans
$
503
911
Total nonperforming
 
assets
$
503
911
as a % of loans and other real estate owned
0.09
%
0.16
as a % of total assets
0.05
%
0.09
Nonperforming loans as a % of total loans
0.09
%
0.16
Accruing loans 90 days or more past due The table below provides information concerning the composition of nonaccrual loans at December 31, 2024 and 2023,
$
—
—
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
67
respectively.
 
December 31
(In thousands)
2024
2023
Nonaccrual loans:
Commercial and industrial
$
99
—
Construction and land development
404
—
Commercial real estate
—
783
Residential real estate
—
128
Total nonaccrual
 
loans
$
503
911
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, 2024
 
and 2023, respectively.
The Company had no OREO at December 31, 2024 and 2023, respectively.
Deposits
December 31
(In thousands)
2024
2023
Noninterest bearing demand
$
260,874
270,723
NOW
199,883
190,724
Money market
153,916
148,040
Savings
89,904
88,541
Certificates of deposit under $250,000
103,594
100,572
Certificates of deposit and other time deposits of $250,000 or more
87,653
97,643
Total deposits
$
895,824
896,243
Total deposits were stable
 
and decreased only $0.4 million to $895.8 million at December 31, 2024,
 
compared to $896.2
million at December 31, 2023.
 
Noninterest-bearing deposits were $260.9 million, or 29% of total deposits,
 
at December
31, 2024, compared to $270.7 million, or 30% of total deposits at December 31,
 
2023.
 
At December 31, 2024, the
Company had $74.1 million reciprocal deposits sold, compared to $59.0
 
million at December 31, 2023.
 
The Company had
no brokered deposits at December 31, 2024 and 2023.
 
The Company had no FHLB-Atlanta advances or other wholesale
borrowings outstanding at December 31, 2024 and 2023.
 
The average rates paid on total interest-bearing deposits were 1.81
 
%
 
in 2024 and 1.21% in 2023.
 
At December 31, 2024, estimated uninsured deposits totaled $359.7
 
million, or 40% of total deposits, compared to $356.3
million, or 40% of total deposits at December 31, 2023.
 
During 2023, the Bank began participating 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 maximizing FDIC insurance.
 
The
Company had reciprocal deposits on balance sheet of $6.9 million at December
 
31, 2024, compared to none at December
31, 2023.
 
Uninsured amounts are estimated based on the portion of account balances
 
that exceed FDIC insurance limits.
 
The Bank’s uninsured deposits at December
 
31, 2024 and 2023 include approximately $223.1 million and $206.2 million,
respectively, of deposits
 
of state, county and local governments that are collateralized by securities having
 
a fair value equal
to such deposits.
 
Deposits of state, county and local governments were 62% and 53% of our estimated
 
uninsured deposits
at December 31, 2024 and 2023, respectively.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
68
The estimated uninsured time deposits by maturity as of December
 
31, 2024 is presented below.
(Dollars in thousands)
December 31, 2024
Maturity of:
3 months or less
$
8,353
Over 3 months through 6 months
23,669
Over 6 months through 12 months
23,939
Over 12 months
2,442
Total estimated uninsured
 
time deposits
$
58,403
Other Borrowings
The Company had no long-term debt at December 31, 2024 and 2023.
 
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 and $61.0 million, respectively,
 
at December 31, 2024 and 2023 with no federal funds borrowed.
 
The
Company had no securities sold under agreements to repurchase, which
 
are entered into on behalf of certain customers, at
December 31, 2024, compared to $1.5 million at December 31, 2023.
 
The Bank is eligible to borrow from the FRB’s
discount window, but had
 
no such borrowings at December 31, 2024 and 2023.
 
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, 2024 and 2023, respectively.
 
At those dates, the Bank had $296.9 million and
$309.1 million, respectively,
 
of available lines of credit at the FHLB-Atlanta.
 
The average rates paid on short-term borrowings were 0.48%
 
and 2.21% in 2024 and 2023, respectively.
 
CAPITAL ADEQUACY
At December 31, 2024, the Company’s
 
consolidated stockholders’ equity (book value) was $78.3 million, or
 
$22.41 per
share, compared to $76.5 million, or $21.9 per share, at December
 
31, 2023. The increase from December 31, 2023 was
primarily driven by net earnings of $6.4 million. The increase were partially
 
offset by cash dividends paid of $3.8 million,
other comprehensive loss of $0.6 million related to unrealized gains/losses
 
on securities available-for-sale, net of tax and
a one-time charge of $0.3 million, net of tax, for the cumulative
 
effect to adopt the NMTC accounting standard on
January 1, 2024.
 
Unrealized securities losses do not affect the Bank’s
 
capital for regulatory capital purposes.
 
The Company paid cash dividends of $1.08 per share in 2024, unchanged
 
from the same period in 2023.
On January 1, 2015, the Company and Bank became subject to the Basel III regulatory
 
capital framework. The rules
included the implementation of 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, 2024
 
and 2023, the Bank had a capital conservation buffer of
7.81% and 7.52%, respectively.
On August 26, 2020, the Federal Reserve and the other federal banking regulators
 
adopted a final rule that amended the
capital conservation buffer.
 
The new rule revises the definition of “eligible retained income” for purposes of
 
the maximum
payout ratio to allow banking organizations to more freely
 
use their capital buffers to promote lending and other financial
intermediation activities, by making the limitations on capital distributions more
 
gradual.
 
The eligible retained income is
now 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.
 
69
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 10.49%, CET1 risk-based capital ratio was 14.80%, tier 1
risk-based capital ratio was 14.80%, and total risk-based capital ratio was 15.81
 
%
 
at December 31, 2024. 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.”
The Bank’s capital conservation
 
buffer was 7.81% at December 31, 2024.
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. For example, if liabilities
reprice faster than assets, and interest rates are generally rising, earnings
 
will initially decline. In addition, assets and
liabilities may reprice at the same time but by different amounts. For
 
example, when the general level of interest rates is
rising, the Company may increase rates paid on interest bearing demand deposit accounts
 
and savings deposit accounts by
an amount that is less than the general increase in market interest rates. Also, short
 
-term and long-term market interest rates
may change by different amounts and at different
 
levels of interest rates and rates of change.
 
For example, a flattening
yield curve may reduce the interest spread between new loan yields and funding
 
costs. The yield curve was inverted until it
began to normalize in September 2024.
 
An inverted yield curve reduces the net interest margin expansion
 
that may be
expected otherwise as interest rates rise.
 
Further, the remaining maturity of various
 
assets and liabilities may shorten or
lengthen as interest rates change. For example, if long-term mortgage
 
interest rates decline sharply, mortgage
 
-backed
securities in the securities portfolio may prepay earlier than anticipated,
 
which could reduce earnings. Interest rates may
also have a direct or indirect effect on loan demand, loan losses, mortgage
 
origination volume, the fair value of MSRs and
other items affecting earnings.
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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
70
interest rates up or down when compared to the baseline net interest income
 
forecast at December 31, 2024.
 
Changes in Interest Rates
Net Interest Income % Variance
 
400 basis points
0.47
%
 
300 basis points
0.74
 
200 basis points
0.67
 
100 basis points
0.35
 
(100) basis points
(0.92)
 
(200) basis points
(1.49)
 
(300) basis points
(1.75)
 
(400) basis points
(2.20)
At December 31, 2024, our earnings simulation model indicated that
 
we were in compliance with the policy guidelines
noted above.
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, to which
 
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, 2024.
 
Changes in Interest Rates
EVE % Variance
 
400 basis points
0.43
%
 
300 basis points
1.69
 
200 basis points
2.05
 
100 basis points
1.41
 
(100) basis points
(2.61)
 
(200) basis points
(8.19)
 
(300) basis points
(17.50)
 
(400) basis points
(30.86)
At December 31, 2024, our EVE model indicated that we were in compliance
 
with the policy guidelines noted above.
71
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. 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.
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, but are not designated as hedging
instruments. At December 31, 2024 and 2023, the Company had
 
no derivative contracts to assist in managing interest rate
sensitivity.
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,
repayment and maturity 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, 2024, the Bank
 
had no FHLB-Atlanta advances outstanding and
available credit from the FHLB-Atlanta of $296.9 million. At December
 
31, 2024, the Bank also had $65.2 million of
available federal funds lines with no borrowings outstanding.
 
 
 
 
 
 
 
 
 
 
72
The following table presents additional information about our contractual
 
obligations as of December 31, 2024, which by
their terms had contractual maturity and termination dates subsequent
 
to December 31, 2024:
 
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)
$
895,824
879,185
14,239
2,400
—
Operating lease obligations
246
81
120
45
—
Total
$
896,070
879,266
14,359
2,445
—
(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.
Off-Balance Sheet Arrangements
At December 31, 2024, the Bank had outstanding standby letters of credit
 
of $0.7 million and unfunded loan commitments
outstanding of $84.7 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, 2024, the unpaid principal balance of residential mortgage
 
loans, which we have originated and sold,
but retained the servicing rights (MSRs) totaled $204.4 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.
 
 
 
73
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, 2024, 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.
The Company was not required to repurchase any loans during 2024 and 2023 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, 2024.
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 which 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 and 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.
 
Beginning in September 2024, in light of inflation moderating, the FOMC had three
 
reductions in its target federal funds
rate range totaling 100 basis points to 4.25% to 4.50%. While the FOMC reaffirmed
 
its target inflation rate of 2% over the
longer run, it indicated it was “recalibrating” its policy based on decreasing
 
inflation rates and the risks of increasing
unemployment, but would act on incoming data, the evolving outlook
 
and the balance of the risks of inflation and
unemployment levels. In the future, the Federal Reserve could further
 
decrease target interest rates, or could increase such
target rates, depending on the data and its outlook.
 
See “Supervision and Regulation – Fiscal and Monetary Policies” and
“- Recent Developments – New Administration.”
74
CURRENT ACCOUNTING DEVELOPMENTS
The following ASU has been issued by the FASB
 
but is not yet effective.
 
●
ASU 2023-09,
Income Taxes
 
(Topic 740):
 
Improvements to Income Tax
 
Disclosures.
Information about this pronouncement is described in more detail below.
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
is effective for annual periods beginning after December
 
15, 2024.
 
The Company does not expect the new standard to have
a material impact on the Company’s
 
consolidated financial statements.
 
 
 
 
 
 
 
 
 
 
 
75
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)
2024
2023
2022
2021
2020
Net interest income (GAAP)
$
27,125
26,328
27,166
23,990
24,338
Tax-equivalent adjustment
79
417
456
470
492
Net interest income (Tax-equivalent)
$
27,204
26,745
27,622
24,460
24,830
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
76
Table 2
 
- Selected Financial Data
Year ended December 31
(Dollars in thousands, except per share amounts)
2024
2023
2022
2021
2020
Income statement
Tax-equivalent interest income (a)
$
38,811
34,791
30,001
26,977
28,686
Total interest expense
11,607
8,046
2,379
2,517
3,856
Tax equivalent net interest income (a)
27,204
26,745
27,622
24,460
24,830
Provision for credit losses
36
135
1,000
(600)
1,100
Total noninterest income
3,474
(2,981)
6,506
4,288
5,375
Total noninterest expense
22,166
22,594
19,823
19,433
19,554
Net earnings before income taxes and
 
tax-equivalent adjustment
8,476
1,035
13,305
9,915
9,551
Tax-equivalent adjustment
79
417
456
470
492
Income tax expense
2,000
(777)
2,503
1,406
1,605
Net earnings
$
6,397
1,395
10,346
8,039
7,454
Per share data:
Basic and diluted net earnings
 
$
1.83
0.40
2.95
2.27
2.09
Cash dividends declared
$
1.08
1.08
1.06
1.04
1.02
Weighted average shares outstanding
Basic and diluted
3,493,690
3,498,030
3,510,869
3,545,310
3,566,207
Shares outstanding
3,493,699
3,493,614
3,503,452
3,520,485
3,566,276
Stockholders' equity (book value)
$
22.41
21.90
19.42
29.46
30.20
Common stock price
High
$
24.57
24.50
34.49
48.00
63.40
Low
16.63
18.80
22.07
31.32
24.11
Period-end
$
23.49
21.28
23.00
32.30
42.29
To earnings ratio (d)
12.84
x
53.20
7.80
14.23
20.23
To book value
105
%
97
118
110
140
Performance ratios:
Return on average equity
 
8.21
%
2.05
12.48
7.54
7.12
Return on average assets
 
0.65
%
0.14
0.96
0.78
0.83
Dividend payout ratio
59.02
%
270.00
35.93
45.81
48.80
Average equity to average assets
7.93
%
6.66
7.72
10.39
11.63
Asset Quality:
Allowance for credit losses as a % of:
Loans
1.22
%
1.23
1.14
1.08
1.22
Nonperforming loans
1,366
%
753
211
1,112
1,052
Nonperforming assets as a % of:
Loans and other real estate owned
0.09
%
0.16
0.54
0.18
0.12
Total assets
0.05
%
0.09
0.27
0.07
0.06
Nonperforming loans as % of loans
0.09
%
0.16
0.54
0.10
0.12
Net charge-offs (recoveries) as a % of average loans
 
—
 
%
0.01
0.04
0.02
(0.03)
Capital Adequacy (c):
CET 1 risk-based capital ratio
14.80
%
14.52
15.39
16.23
17.27
Tier 1 risk-based capital ratio
14.80
%
14.52
15.39
16.23
17.27
Total risk-based capital ratio
15.81
%
15.52
16.25
17.06
18.31
Tier 1 leverage ratio
10.49
%
9.72
10.01
9.35
10.32
Other financial data:
Net interest margin (a)
3.06
%
2.89
2.81
2.55
2.92
Effective income tax rate
23.82
%
(125.73)
19.48
14.89
17.72
Efficiency ratio (b)
72.25
%
95.08
58.08
67.60
64.74
Selected period end balances:
Securities
$
243,012
270,910
405,304
421,891
335,177
Loans, net of unearned income
564,017
557,294
504,458
458,364
461,700
Allowance for credit losses
6,871
6,863
5,765
4,939
5,618
Total assets
977,324
975,255
1,023,888
1,105,150
956,597
Total deposits
895,824
896,243
950,337
994,243
839,792
Total stockholders’ equity
78,292
76,507
68,041
103,726
107,689
(a) Tax-equivalent.
 
See "Table 1 - Explanation of Non-GAAP Financial Measures".
(b) Efficiency ratio is the result of noninterest expense divided by
 
the sum of noninterest income and tax-equivalent net interest income.
(c) Regulatory capital ratios presented are for the Company's
 
wholly-owned subsidiary, AuburnBank.
(d) Calculated by dividing period end share price by
 
earnings per share for the previous four quarters.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
77
Table 3
 
- Average
 
Balance and Net Interest Income Analysis
Year ended December 31
 
 
2024
2023
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)
$
568,733
$
29,735
5.23%
 
$
523,838
$
24,925
4.76%
 
Securities - taxable
248,072
5,430
2.19%
 
335,366
7,208
2.15%
 
Securities - tax-exempt (2)
10,084
373
3.70%
 
52,122
1,985
3.81%
 
Total securities
 
258,156
5,803
2.25%
 
387,488
9,193
2.37%
 
Federal funds sold
17,907
939
5.24%
 
5,221
250
4.79%
 
Interest bearing bank deposits
44,634
2,334
5.23%
 
8,593
423
4.92%
 
Total interest-earning
 
assets
889,430
38,811
4.36%
 
925,140
34,791
3.76%
 
Cash and due from banks
17,779
15,230
Other assets
75,059
81,438
Total assets
$
982,268
$
1,021,808
Interest-bearing liabilities:
Deposits:
 
 
NOW
$
192,702
2,680
1.39%
 
$
193,451
1,907
0.99%
 
Savings and money market
251,778
2,168
0.86%
 
289,235
2,132
0.74%
 
Certificates of deposit
195,097
6,756
3.46%
 
175,085
3,935
2.25%
 
Total interest-bearing
 
deposits
639,577
11,604
1.81%
 
657,771
7,974
1.21%
 
Short-term borrowings
628
3
0.48%
 
3,255
72
2.21%
 
Total interest-bearing
 
liabilities
640,205
11,607
1.81%
 
661,026
8,046
1.22%
 
Noninterest-bearing deposits
262,224
 
289,019
 
Other liabilities
1,918
3,697
Stockholders' equity
77,921
 
68,066
 
Total liabilities and
and stockholders' equity
$
982,268
$
1,021,808
Net interest income and margin
$
27,204
3.06%
 
$
26,745
2.89%
 
 
 
 
(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 4 - Volume and Rate Variance Analysis
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
78
Year ended December 31, 2024 vs. 2023
Year ended December 31, 2023 vs. 2022
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
 
$
4,810
2,463
2,347
$
4,684
1,390
3,294
Securities - taxable
(1,778)
133
(1,911)
632
1,247
(615)
Securities - tax-exempt (1)
(1,612)
(57)
(1,555)
(187)
174
(361)
Total securities
 
(3,390)
76
(3,466)
445
1,421
(976)
Federal funds sold
689
24
665
(185)
1,661
(1,846)
Interest bearing bank deposits
1,911
26
1,885
(154)
2,285
(2,439)
Total interest income
$
4,020
2,589
1,431
$
4,790
6,757
(1,967)
Interest expense:
Deposits:
NOW
$
773
783
(10)
$
1,537
1,574
(37)
Savings and money market
36
359
(323)
1,483
1,762
(279)
Certificates of deposit
2,821
2,128
693
2,635
2,167
468
Total interest-bearing
 
deposits
3,630
3,270
360
5,655
5,503
152
Short-term borrowings
(69)
(56)
(13)
12
40
(28)
Total interest expense
3,561
3,214
347
5,667
5,543
124
Net interest income
$
459
(625)
1,084
$
(877)
1,214
(2,091)
 
(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.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
79
Table 5
 
- Net Charge-Offs (Recoveries) to Average
 
Loans
2024
2023
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
$
135
71,279
0.19
%
$
(40)
64,565
(0.06)
%
Construction and land development
—
 
70,342
—
 
—
 
66,492
—
 
Commercial real estate
—
 
297,140
—
 
—
 
274,779
—
 
Residential real estate
(52)
118,856
(0.04)
(14)
108,891
(0.01)
Consumer installment
(69)
10,381
(0.66)
100
9,638
1.04
Total
$
14
567,998
—
%
$
46
524,365
0.01
%
 
 
 
 
 
 
 
 
 
 
 
 
80
Table 6
 
- Loan Maturities
December 31, 2024
1 year
 
1 to 5
5 to 15
 
After 15
(Dollars in thousands)
or less
years
years
years
Total
Commercial and industrial
$
17,599
13,999
30,093
1,583
63,274
Construction and land development
54,818
25,016
2,659
—
 
82,493
Commercial real estate
23,022
127,619
135,592
3,759
289,992
Residential real estate
9,105
25,768
34,294
49,460
118,627
Consumer installment
2,979
5,528
1,124
—
 
9,631
Total loans
$
107,523
197,930
203,762
54,802
564,017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
81
Table 7
 
- Sensitivities to Changes in Interest Rates on Loans Maturing in More
 
Than One Year
 
December 31, 2024
Variable
Fixed
(Dollars in thousands)
Rate
Rate
Total
Commercial and industrial
$
63
45,612
45,675
Construction and land development
16,383
11,292
27,675
Commercial real estate
148
266,822
266,970
Residential real estate
49,368
60,154
109,522
Consumer installment
76
6,576
6,652
Total loans
$
66,038
390,456
456,494
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
82
Table 8
 
- Allocation of Allowance for Credit Losses
2024
2023
(Dollars in thousands)
Amount
%*
Amount
%*
Commercial and industrial
$
1,244
11.2
$
1,288
13.2
Construction and land development
1,059
14.6
960
12.3
Commercial real estate
3,842
51.5
3,921
51.5
Residential real estate
588
21.0
546
21.1
Consumer installment
138
1.7
148
1.9
 
Total allowance for
 
credit losses
$
6,871
$
6,863
* Loan balance in each category expressed as a percentage of total loans.
 
 
83
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
 
 
 
(PCAOB ID:
149
)
 
 
84
 
86
 
 
87
 
 
88
 
 
89
 
 
90
 
91
 
 
 
 
 
84
Report of Independent Registered Public Accounting Firm
To the Stockholders
 
and Board of Directors of
 
Auburn National Bancorporation, Inc. and Subsidiary
 
Opinion on the Financial Statements
We
 
have
 
audited
 
the
 
accompanying
 
consolidated
 
balance
 
sheets
 
of
 
Auburn
 
National
 
Bancorporation,
 
Inc.
 
and
 
Subsidiary
(the
 
“Company”)
 
as
 
of
 
December
 
31,
 
2024
 
and
 
2023,
 
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, 2024
 
and 2023, and
 
the results of
 
its operations
 
and its
cash
 
flows
 
for
 
the
 
years
 
then
 
ended,
 
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.
 
85
Allowance for Credit Losses
As described in Note 5 to the Company’s
 
consolidated financial statements, the Company has a gross
 
loan portfolio of $564
million and
 
related allowance
 
for credit
 
losses of
 
$6.9 million
 
as of
 
December 31,
 
2024. 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
March 11, 2025
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
86
AUBURN NATIONAL
 
BANCORPORATION,
 
INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31
(Dollars in thousands, except share data)
2024
2023
Assets:
Cash and due from banks
$
15,142
$
27,127
Federal funds sold
37,200
31,412
Interest bearing bank deposits
41,012
12,830
Cash and cash equivalents
93,354
71,369
Securities available-for-sale
 
243,012
270,910
Loans, net of unearned income
564,017
557,294
Allowance for credit losses
(6,871)
(6,863)
Loans, net
557,146
550,431
Premises and equipment, net
45,931
45,535
Bank-owned life insurance
17,513
17,110
Other assets
20,368
19,900
Total assets
$
977,324
$
975,255
Liabilities:
Deposits:
Noninterest-bearing
 
$
260,874
$
270,723
Interest-bearing
634,950
625,520
Total deposits
895,824
896,243
Federal funds purchased and securities sold under agreements to repurchase
—
1,486
Accrued expenses and other liabilities
3,208
1,019
Total liabilities
899,032
898,748
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
3,802
3,801
Retained earnings
115,759
113,398
Accumulated other comprehensive loss, net
(29,607)
(29,029)
Less treasury stock, at cost -
463,436
 
shares and
463,521
 
shares
at December 31, 2024 and 2023, respectively
(11,701)
(11,702)
Total stockholders’
 
equity
78,292
76,507
Total liabilities and stockholders’
 
equity
$
977,324
$
975,255
See accompanying notes to consolidated financial statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
87
AUBURN NATIONAL
 
BANCORPORATION,
 
INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
Year ended December 31
(Dollars in thousands, except share and per share data)
2024
2023
Interest income:
Loans, including fees
$
29,735
$
24,925
Securities:
Taxable
5,430
7,208
Tax-exempt
294
1,568
Federal funds sold and interest-bearing bank deposits
3,273
673
Total interest income
38,732
34,374
Interest expense:
Deposits
11,604
7,974
Short-term borrowings
3
72
Total interest expense
11,607
8,046
Net interest income
27,125
26,328
Provision for credit losses
36
135
Net interest income after provision for credit
 
losses
27,089
26,193
Noninterest income:
Service charges on deposit accounts
614
603
Mortgage lending
608
430
Bank-owned life insurance
403
411
Other
1,849
1,870
Securities losses, net
—
(6,295)
Total noninterest income
3,474
(2,981)
Noninterest expense:
Salaries and benefits
12,534
12,101
Net occupancy and equipment
2,508
2,954
Professional fees
1,188
1,299
FDIC and other regulatory assessments
564
631
Other
5,372
5,609
Total noninterest expense
22,166
22,594
Earnings before income taxes
8,397
618
Income tax expense (benefit)
2,000
(777)
Net earnings
$
6,397
$
1,395
Net earnings per share:
Basic and diluted
$
1.83
$
0.40
Weighted average shares
 
outstanding:
Basic and diluted
3,493,690
3,498,030
See accompanying notes to consolidated financial statements
 
 
 
 
 
 
 
 
 
 
 
 
 
88
AUBURN NATIONAL
 
BANCORPORATION,
 
INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Year ended December 31
(Dollars in thousands)
2024
2023
Net earnings
$
6,397
$
1,395
Other comprehensive (loss) income, net of tax:
Unrealized net holding (loss) gain on securities, net of
 
tax benefit of $
195
 
and tax expense of $
2,407
 
for the years
ended December 31, 2024 and 2023, respectively
(578)
7,177
Reclassification adjustment for net loss on securities
 
recognized in net earnings, net of tax benefit of none and $
1,581
for the years ended December 31, 2024 and 2023, respectively Consolidated Statements of Stockholders’ Equity
—
4,714
Other comprehensive (loss) income
(578)
11,891
Comprehensive income
$
5,819
$
13,286
See accompanying notes to consolidated financial statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
89
AUBURN NATIONAL
 
BANCORPORATION,
 
INC. AND SUBSIDIARIES
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, 2022
3,503,452
$
39
3,797
116,600
(40,920)
(11,475)
$
68,041
Cumulative effect of change in
 
accounting standard
—
—
—
(821)
—
—
(821)
Net earnings
—
—
—
1,395
—
—
1,395
Other comprehensive income
—
—
—
—
11,891
—
11,891
Cash dividends paid ($
1.08
 
per share)
—
—
—
(3,776)
—
—
(3,776)
Stock repurchases
(10,108)
—
—
—
—
(229)
(229)
Sale of treasury stock
270
—
4
—
—
2
6
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
See accompanying notes to consolidated financial statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
90
AUBURN NATIONAL
 
BANCORPORATION,
 
INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Year ended December 31
(In thousands)
2024
2023
Cash flows from operating activities:
Net earnings
$
6,397
$
1,395
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Provision for credit losses
36
135
Depreciation and amortization
1,933
1,700
Premium amortization and discount accretion, net
1,505
2,380
Deferred tax expense (benefit)
438
(195)
Net loss on sale of securities available for sale
—
6,295
Net gain on sale of loans held for sale
(261)
(71)
Loans originated for sale
(10,439)
(4,141)
Proceeds from sale of loans
10,622
4,174
Increase in cash surrender value of bank owned life insurance
(403)
(359)
Income recognized from death benefit on bank-owned life insurance
—
(52)
Net (increase) decrease in other assets
(1,168)
2,652
Net increase (decrease) in accrued expenses and other liabilities
2,149
(2,011)
Net cash provided by operating activities
$
10,809
$
11,902
Cash flows from investing activities:
Proceeds from sales of securities available-for-sale
—
111,269
Proceeds from maturities, paydowns and calls of securities available-for
 
-sale
25,620
30,329
Increase in loans, net
(6,709)
(52,892)
Net purchases of premises and equipment
(2,089)
(418)
Decrease (increase) in FHLB stock
32
(164)
Proceeds from bank-owned life insurance death benefit
—
216
Proceeds from surrender of bank-owned life insurance
—
3,037
Net cash provided by investing activities
$
16,854
$
91,377
Cash flows from financing activities:
Net decrease in noninterest-bearing deposits
(9,849)
(40,648)
Net increase (decrease) in interest-bearing deposits
9,430
(13,446)
Net decrease in federal funds purchased and securities sold
 
under agreements to repurchase
(1,486)
(1,065)
Stock repurchases
—
(229)
Dividends paid
(3,773)
(3,776)
Net cash used in financing activities
$
(5,678)
$
(59,164)
Net change in cash and cash equivalents
$
21,985
$
44,115
Cash and cash equivalents at beginning of period
71,369
27,254
Cash and cash equivalents at end of period
$
93,354
$
71,369
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest
$
11,520
$
7,516
Income taxes
1,244
1,230
See accompanying notes to consolidated financial statements
91
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 ASC 606 include service charges on deposits, investment
services, 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, investment services, 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, 2024. The Company does not believe there
 
are any material subsequent events that would
require further recognition or disclosure.
92
 
 
 
 
 
 
 
 
Correction of Error
The disclosure of loans by vintage in Note 5 – Loans and Allowance for Credit
 
Losses in the Company’s Annual
 
Report on
Form 10-K for year ended December 31, 2023 contained incorrect
 
information as it pertains to loans originated by vintage
and revolving loans.
 
All current period gross charge-off data, total loans by segment
 
and total loans by credit quality
indicator were correctly reported.
 
The loans originated by vintage and revolving loans as of December 31, 2023 have been
corrected in the comparative presentation in Note 5 – Loans and Allowance
 
for Credit Losses in the Notes herein.
 
 
 
 
 
 
 
 
 
 
 
Accounting Standards Adopted in 2024
ASU 2023-02,
Investments – Equity Method and Joint Ventures
 
(Topic
 
323): Accounting for Investments in Tax
 
Credit
Structures Using the Proportional
 
Amortization Method
.
 
ASU 2023-02 now permits reporting entities to elect to account
for their equity investments made primarily to receive income tax credits
 
and other income tax benefits, regardless of the
program from which the income tax credits or benefits are received,
 
using the proportional amortization method if certain
conditions are met. The new standard is effective for fiscal years, and
 
interim periods within those fiscal years, beginning
after December 15, 2023.
 
The Company adopted ASU 2023-02 effective January 1, 2024 and
 
recorded a cumulative effect
of change in accounting standard adjustment which reduced beginning
 
retained earnings by $0.3 million and reduced our
investment in New Markets Tax
 
Credits (“NMTCs”) by $0.4 million.
 
The Company, beginning January
 
1, 2024, accounts
for its investments in NMTCs using the proportional amortization method through
 
charges to the provision for income
taxes. See Note 3, Variable
 
Interest Entities.
ASU 2023-07,
Segment Reporting (Topic
 
280) - Improvement to Reportable Segment
 
Disclosures.
 
The amendments in
ASU 2023-07 improve financial reporting by requiring disclosure of incremental
 
segment information on an annual basis to
enable investors to develop more decisions-useful financial analyses.
 
ASU 2023-07 is effective for fiscal years beginning
after December 31, 2023.
 
The Company has adopted ASU 2023-07 as of January 1, 2024 and has determined that
 
its
banking services and branch locations meet the aggregation criteria of ASC 280,
Segment Reporting
, since each of its
banking services and branch locations offer similar products and
 
services, operate in a similar manner, have similar
customers and report to the same regulatory authority,
 
and therefore operate one line of business located in a single
geographic area.
 
The Company's Chief Executive Officer has been identified as the
 
chief operating decision maker
(“CODM”).
The CODM regularly assesses performance of the aggregated single
 
operating and reporting segment and decides how to
allocate resources based on the net income calculated on the same basis as the net income
 
reported in the Company's
consolidated statements of earnings and other comprehensive earnings
 
and total assets calculated on the same basis as the
total assets reported in the Company’s
 
consolidated balance sheets. The CODM is also regularly provided with expense
information at a level that is consistent with that disclosed in the Company's consolidated
 
statements of earnings and other
comprehensive earnings.
 
Issued not yet effective accounting standards
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
is effective for annual periods beginning after December
 
15, 2024.
 
The Company does not expect the new standard to have
a material impact on the Company’s
 
consolidated financial statements.
93
 
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, 2024, 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.
 
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.
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 The accrual of interest is generally discontinued when a loan becomes 90 days past due and is not well collateralized and in
prepayments.
94
 
the process of collection, or when management believes, after considering economic
 
and business conditions and collection
efforts, that the principal or interest will not be collectible in the
 
normal course of business. Past due status is based on
contractual terms of the loan. A loan is considered to be past due when a scheduled
 
payment has not been received 30 days
after the contractual due date.
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.
 
Accrued interest receivable is excluded from the estimate of credit losses.
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 5, 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 2024, 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.
 
The changes were a result of updating the Company’s
 
peer group and incorporating data through 2022.
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.
95
 
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.
 
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 metho
 
d
 
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 approval 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.
 
96
 
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.
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 13 “Fair Value”
Securities sold under agreements to repurchase
 
Securities sold under agreements to repurchase generally mature less than one
 
year from the transaction date. Securities
sold under agreements to repurchase are reflected as a secured borrowing in the accompanying
 
consolidated balance sheets
at the amount of cash received in connection with each transaction.
 
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.
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 13, Fair
 
Value.
 
97
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 reflect the potential dilution that could occur upon exercise of
 
securities or other
rights for, or convertible into, shares of
 
the Company’s common stock.
 
As of December 31, 2024 and 2023, respectively,
the Company had no such securities or other rights issued or outstanding,
 
and therefore, no dilutive effect to consider for
the diluted net earnings per share calculation.
 
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)
2024
2023
Basic and diluted:
Net earnings
$
6,397
$
1,395
Weighted average
 
common shares outstanding
3,493,690
3,498,030
Net earnings per share
$
1.83
$
0.40
 
 
 
NOTE 3: VARIABLE
 
INTEREST ENTITIES
Generally, a variable interest
 
entity (“VIE”) is a corporation, partnership, trust or other legal structure that does not
 
have
equity investors with substantive or proportional voting rights or has
 
equity investors that do not provide sufficient financial
resources for the entity to support its activities.
 
At December 31, 2024, the Company did not have any consolidated VIEs and
 
had one nonconsolidated VIE, which is
discussed below.
New Markets Tax
 
Credit Investment
The New Markets Tax
 
Credit (“NMTC”) program provides federal tax incentives to investors to make
 
investments in
distressed communities and promotes economic improvement through
 
the development of successful businesses in these
communities.
 
The NMTCs are available to investors over seven years and is subject to recapture if
 
certain events occur
during such period.
 
The Company had one NMTC investment with a balance of $0.9 million and $
1.7
 
million at December
31, 2024 and 2023, respectively,
 
which is included in other assets in the Company’s
 
consolidated balance sheets as a VIE.
While the Company’s investment
 
exceeds 50% of the outstanding equity interests in this VIE, the Company
 
does not
consolidate the VIE because the Company lacks the power to direct the activities of
 
the VIE, and therefore is not a primary
beneficiary of the VIE.
The Company adopted ASU 2023-02 as of January 1, 2024 which allows us to account
 
for our NMTC investment using the
proportional amortization method.
 
The following table presents a summary of our NMTC investment at December
 
31,
2024, and the related tax credit and amortization expense for 2024.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Dollars in thousands)
December 31,
2024
Balance Sheet Location
New Markets Tax Credit
 
investment
$
898
Other assets
(Dollars in thousands)
Year ended
December 31,
2024
Income Statement Location
Income tax credits and other income tax benefits At December 31, 2024 and 2023, respectively, all securities within the scope of ASC 320,
$
(445)
Income tax expense
Amortization expense
369
Income tax expense
 
 
 
 
98
NOTE 4: SECURITIES
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, 2024 and 2023, 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, 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
December 31, 2023
Agency obligations (a)
$
331
10,339
43,209
—
53,879
—
8,195
$
62,074
Agency MBS (a)
32
15,109
22,090
161,058
198,289
—
27,838
226,127
State and political subdivisions
—
—
9,691
9,051
18,742
1
2,731
21,472
Total available-for-sale
$
363
25,448
74,990
170,109
270,910
1
38,764
$
309,673
(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 $
222.3
 
million and $
211.8
 
million at December 31, 2024 and 2023, 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, 2024 and 2023,
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, 2024 and 2023, 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, 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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2023:
Agency obligations
 
$
—
—
53,879
8,195
53,879
$
8,195
Agency MBS
66
1
198,223
27,837
198,289
27,838
State and political subdivisions
793
2
14,408
2,729
15,201
2,731
Total
 
$
859
3
266,510
38,761
267,369
$
38,764
 
 
99
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
 
other
 
market
conditions.
 
For the securities
 
in the
 
previous table,
 
as of December
 
31, 2024,
 
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, 2024.
 
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, 2024.
 
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,
2024.
 
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, 2024.
Realized Gains and Losses
The following table presents the gross realized gains and losses on sales related to securities.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Year ended December 31
(Dollars in thousands)
2024
2023
Gross realized gains
$
—
1
Gross realized losses
—
(6,296)
Realized losses, net
$
—
(6,295)
NOTE 5: LOANS AND ALLOWANCE
 
FOR CREDIT LOSSES
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31
(In thousands)
2024
2023
Commercial and industrial
$
63,274
$
73,374
Construction and land development
82,493
68,329
Commercial real estate:
Owner occupied
55,346
66,783
Hotel/motel
35,210
39,131
Multifamily
43,556
45,841
Other
155,880
135,552
Total commercial
 
real estate
289,992
287,307
Residential real estate:
Consumer mortgage
60,399
60,545
Investment property
58,228
56,912
Total residential real
 
estate
118,627
117,457
Consumer installment
9,631
10,827
Total loans, net of unearned income Loans secured by real estate were approximately
564,017
557,294
100
87.1
% of the total loan portfolio at December 31, 2024.
 
At December 31,
2024, 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 refinance 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 multi-family
 
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 includes loans to individuals both secured by personal property and unsecured.
 
borrower.
 
 
 
101
 
Consumer installment —
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, 2024
and 2023.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accruing
Accruing
Total
30-89 Days
Greater than
Accruing
Non-
Total
 
(In thousands)
Current
Past Due
90 days
Loans
Accrual
Loans
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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2023:
Commercial and industrial
$
73,108
266
—
73,374
—
$
73,374
Construction and land development
68,329
—
—
68,329
—
68,329
Commercial real estate:
Owner occupied
66,000
—
—
66,000
783
66,783
Hotel/motel
39,131
—
—
39,131
—
39,131
Multifamily
45,841
—
—
45,841
—
45,841
Other
135,552
—
—
135,552
—
135,552
Total commercial
 
real estate
286,524
—
—
286,524
783
287,307
Residential real estate:
Consumer mortgage
60,442
—
—
60,442
103
60,545
Investment property
56,597
290
—
56,887
25
56,912
Total residential real
 
estate
117,039
290
—
117,329
128
117,457
Consumer installment
10,781
46
—
10,827
—
10,827
Total
$
555,781
602
—
556,383
911
$
557,294
102
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 presents credit quality indicators for the loan portfolio
 
segments and classes by year of origination as
of December 31, 2024 and 2023.
 
The December 31, 2023 table has been revised to correct revolving loans and properly
allocate loans by year of origination.
 
See Note 1: Summary of Significant Accounting Policies – Correction of Error.
103
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Dollars in thousands)
2024
2023
2022
2021
2020
Prior to
2020
Revolving
Loans
Total
 
Loans
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
—
—
—
—
—
—
—
—
104
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Dollars in thousands)
2024
2023
2022
2021
2020
Prior to
2020
Revolving
Loans
Total
 
Loans
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
105
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Year of Origination
2023
2022
2021
2020
2019
Prior to
2019
Revolving
Loans
Total
 
Loans
(Dollars in thousands)
December 31, 2023:
 
Commercial and industrial
Pass
$
11,571
18,074
13,746
5,602
7,298
7,819
9,003
$
73,113
Special mention
—
—
—
—
—
—
—
—
Substandard
55
203
—
—
3
—
—
261
Nonaccrual
—
—
—
—
—
—
—
—
Total commercial and industrial
11,626
18,277
13,746
5,602
7,301
7,819
9,003
73,374
Current period gross charge-offs
—
—
13
—
151
—
—
164
Construction and land development
Pass
38,646
25,382
1,716
1,526
120
157
782
68,329
Special mention
—
—
—
—
—
—
—
—
Substandard
—
—
—
—
—
—
—
—
Nonaccrual
—
—
—
—
—
—
—
—
Total construction and land development
38,646
25,382
1,716
1,526
120
157
782
68,329
Current period gross charge-offs
—
—
—
—
—
—
—
—
Commercial real estate:
Owner occupied
Pass
12,966
7,337
18,548
10,458
3,948
9,786
2,647
65,690
Special mention
260
—
—
—
—
—
—
260
Substandard
—
—
—
—
50
—
—
50
Nonaccrual
—
—
—
—
783
—
—
783
Total owner occupied
13,226
7,337
18,548
10,458
4,781
9,786
2,647
66,783
Current period gross charge-offs
—
—
—
—
—
—
—
—
Hotel/motel
Pass
9,025
9,873
3,205
1,493
3,881
11,654
—
39,131
Special mention
—
—
—
—
—
—
—
—
Substandard
—
—
—
—
—
—
—
—
Nonaccrual
—
—
—
—
—
—
—
—
Total hotel/motel
9,025
9,873
3,205
1,493
3,881
11,654
—
39,131
Current period gross charge-offs
—
—
—
—
—
—
—
—
106
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Year of Origination
2023
2022
2021
2020
2019
Prior to
2019
Revolving
Loans
Total
 
Loans
(Dollars in thousands)
December 31, 2023:
 
Multi-family
Pass
12,379
17,955
1,953
6,112
3,790
3,043
609
45,841
Special mention
—
—
—
—
—
—
—
—
Substandard
—
—
—
—
—
—
—
—
Nonaccrual
—
—
—
—
—
—
—
—
Total multi-family
12,379
17,955
1,953
6,112
3,790
3,043
609
45,841
Current period gross charge-offs
—
—
—
—
—
—
—
—
Other
Pass
25,810
36,076
31,687
14,597
10,736
15,440
1,052
135,398
Special mention
—
—
—
—
—
—
—
—
Substandard
—
—
—
154
—
—
—
154
Nonaccrual
—
—
—
—
—
—
—
—
Total other
25,810
36,076
31,687
14,751
10,736
15,440
1,052
135,552
Current period gross charge-offs
—
—
—
—
—
—
—
—
Residential real estate:
Consumer mortgage
Pass
20,147
20,177
2,683
2,665
1,281
12,217
249
59,419
Special mention
—
—
—
—
190
305
—
495
Substandard
—
—
—
—
—
528
—
528
Nonaccrual
—
—
—
—
—
103
—
103
Total consumer mortgage
20,147
20,177
2,683
2,665
1,471
13,153
249
60,545
Current period gross charge-offs
—
—
—
—
—
—
—
—
Investment property
Pass
13,398
12,490
9,397
12,209
5,485
1,865
1,478
56,322
Special mention
41
—
—
—
—
—
—
41
Substandard
43
248
—
233
—
—
—
524
Nonaccrual
—
—
—
—
—
25
—
25
Total investment property
13,482
12,738
9,397
12,442
5,485
1,890
1,478
56,912
Current period gross charge-offs
—
—
—
—
—
—
—
—
Consumer installment
Pass
5,688
3,837
740
206
106
141
—
10,718
Special mention
9
25
9
2
—
—
—
45
Substandard
37
11
5
11
—
—
—
64
Nonaccrual
—
—
—
—
—
—
—
—
Total consumer installment
5,734
3,873
754
219
106
141
—
10,827
Current period gross charge-offs
34
57
13
1
—
—
—
105
Total loans
Pass
149,630
151,201
83,675
54,868
36,645
62,122
15,820
553,961
Special mention
310
25
9
2
190
305
—
841
Substandard
135
462
5
398
53
528
—
1,581
Nonaccrual
—
—
—
—
783
128
—
911
Total loans
$
150,075
151,688
83,689
55,268
37,671
63,083
15,820
$
557,294
Total current period gross charge-offs
$
34
57
26
1
151
—
—
269
 
 
 
107
Allowance for Credit Losses
The Company adopted ASC 326 on January 1, 2023, which introduced
 
the Current Expected Credit Losses (“CECL”)
methodology for estimating all expected losses over the life of a financial asset.
 
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 (reversal of) credit losses for the respective
 
periods is presented below.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Year ended December 31,
(Dollars in thousands)
2024
2023
Provision for credit losses:
Loans
$
(6)
$
125
Reserve for unfunded commitments
42
10
Total provision for (reversal
 
of) credit losses
$
36
$
135
 
 
The following table details the changes in the allowance for credit losses by portfolio
 
segment for the years ended
December 31, 2024 and 2023.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(in thousands)
Commercial
and industrial
Construction
and land
Development
Commercial
Real Estate
Residential
Real Estate
Consumer
Installment
Total
Balance, December 31, 2022
$
747
949
3,109
828
132
$
5,765
Impact of adopting ASC 326
532
(17)
873
(347)
(22)
1,019
Charge-offs
(164)
—
—
—
(105)
(269)
Recoveries
204
—
—
14
5
223
Net (charge-offs) recoveries
40
—
—
14
(100)
(46)
Provision
(31)
28
(61)
51
138
125
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
(179)
99
(79)
94
59
(6)
Balance, December 31, 2024
$
1,244
1,059
3,842
588
138
$
6,871
 
 
108
The Company did not recognize any interest income on nonaccrual loans
 
during 2024 and 2023.
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, 2024 and 2023:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Dollars in thousands)
Real
 
Estate
Business Assets
Total Loans
December 31, 2024:
Commercial and industrial
$
—
99
$
99
Construction and land development
404
—
404
Total
 
$
404
99
$
503
December 31, 2023:
Commercial real estate
$
783
—
$
783
Total
 
$
783
—
$
783
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 $
14
 
thousand and $
47
 
thousand for the years ended December 31, 2024
and 2023, respectively.
The following table summarizes the Company’s
 
nonaccrual loan by major categories as of December 31, 2024 and 2023.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nonaccrual loans
Nonaccrual loans
Total
(Dollars in thousands)
with no Allowance
with an Allowance
Nonaccrual Loans
December 31, 2024
Commercial and industrial
$
—
99
$
99
Construction and land development
404
—
404
Total
 
$
404
99
$
503
December 31, 2023
Commercial real estate
$
783
—
$
783
Residential real estate
—
128
128
Total
 
$
783
128
$
911
The Company had no modifications to loans made to borrowers experiencing financial difficulty at December 31, 2024 and NOTE 6: PREMISES AND EQUIPMENT
2023.
 
109
Premises and equipment at December 31, 2024 and 2023 is presented
 
below.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31
(Dollars in thousands)
2024
2023
Land and improvements
$
12,800
12,800
Buildings and improvements
36,978
35,442
Furniture, fixtures, and equipment
4,335
3,986
Construction in progress
38
39
Total premises and
 
equipment
54,151
52,267
Less:
 
accumulated depreciation
(8,220)
(6,732)
Premises and equipment, net
$
45,931
45,535
Depreciation expense was approximately $
1.7
 
million and $
1.4
 
million for the years ended December 31, 2024 and 2023,
respectively, and is a component
 
of net occupancy and equipment expense in the consolidated statements of earnings.
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
 
rate, 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, 2024 and 2023.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Year ended December 31
(Dollars in thousands)
2024
2023
Beginning balance
$
992
1,151
Additions, net
79
38
Amortization expense
(179)
(197)
Ending balance
$
892
992
Valuation
 
allowance included in MSRs, net:
Beginning of period
$
—
—
End of period
—
—
Fair value of amortized MSRs:
Beginning of period
$
2,382
2,369
End of period
2,204
2,382
 
110
Data and assumptions used in the fair value calculation related to MSRs at December
 
31, 2024 and 2023, respectively,
 
are
presented below.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31
(Dollars in thousands)
2024
2023
Unpaid principal balance
$
205,915
216,648
Weighted average
 
prepayment speed (CPR)
7.3
%
6.0
Discount rate (annual percentage)
10.0
%
10.5
Weighted average
 
coupon interest rate
3.6
%
3.5
Weighted average
 
remaining maturity (months)
242
245
Weighted average
 
servicing fee (basis points)
25.0
25.0
At December 31, 2024, the weighted average amortization period
 
for MSRs was
7.1
 
years.
 
Estimated amortization expense
for each of the next five years is presented below.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Dollars in thousands)
December 31, 2024
2025
$
118
2026
104
2027
91
2028
80
2029
71
NOTE 8:
 
DEPOSITS
At December 31, 2024, the scheduled maturities of certificates of deposit
 
and other time deposits are presented below.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Dollars in thousands)
December 31, 2024
2025
$
174,608
2026
7,972
2027
6,267
2028
1,636
2029
764
Thereafter
—
Total certificates of
 
deposit and other time deposits
 
$
191,247
Additionally, at December
 
31, 2024 and 2023, approximately $
87.7
 
million and $
97.6
 
million, respectively, of certificates
of deposit and other time deposits were issued in denominations greater
 
than $250 thousand.
At December 31, 2024 and 2023, the amount of deposit accounts in overdraft
 
status that were reclassified to loans on the
accompanying consolidated balance sheets was not material.
 
111
NOTE 9: LEASE COMMITMENTS
We lease certain office
 
facilities and equipment under operating leases. Rent expense for all operating
 
leases totaled $
0.1
million and $
0.2
 
million for the years ended December 31, 2024 and 2023, respectively.
 
Aggregate lease right of use assets
were $
0.2
 
million and $
0.5
 
million at December 31, 2024 and 2023, respectively.
 
Aggregate lease liabilities were $0.2
million and $
0.5
 
million at December 31, 2024 and 2023, respectively.
 
Rent expense includes amounts related to items that
are not included in the determination of lease right of use assets including expenses
 
related to short-term leases totaling
$
0.1
 
million for the year ended December 31, 2024.
Lease payments under operating leases that were applied to our operating lease
 
liability totaled $
0.1
 
million during the year
ended December 31, 2024. The following table reconciles future undiscounted
 
lease payments due under non-cancelable
operating leases (those amounts subject to recognition) to the aggregate
 
operating lease liability as of December 31, 2024.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Future lease
(Dollars in thousands)
payments
2025
$
81
2026
60
2027
60
2028
45
2029
—
Thereafter
—
Total undiscounted
 
operating lease liabilities
$
246
Imputed interest
15
Total operating lease liabilities
 
included in the accompanying consolidated balance sheets
$
231
Weighted-average
 
lease terms in years
3.47
Weighted-average
 
discount rate
3.20
%
NOTE 10:
 
INCOME TAXES
For the years ended December 31, 2024 and 2023 the components of
 
income tax expense from continuing operations are
presented below.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Year ended December 31
(Dollars in thousands)
2024
2023
Current income tax expense (benefit):
Federal
$
991
(448)
State
571
(134)
Total current
 
income tax expense (benefit)
1,562
(582)
Deferred income tax expense (benefit):
Federal
473
(293)
State
(35)
98
Total deferred income
 
tax expense (benefit)
438
(195)
Total income
 
tax expense (benefit)
$
2,000
(777)
 
 
112
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, 2024 and 2023, is
presented below.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2024
2023
Percent of
Percent of
pre-tax
pre-tax
(Dollars in thousands)
Amount
earnings
Amount
earnings
Earnings before income taxes
$
8,397
618
Income taxes at statutory rate
1,763
21.0
%
130
21.0
%
Tax-exempt interest
(290)
(3.5)
(493)
(79.8)
State income taxes, net of
 
federal tax effect
388
4.6
(43)
(7.0)
New Markets Tax Credit
(58)
(0.7)
(356)
(57.6)
Bank-owned life insurance
(85)
(1.0)
(88)
(14.2)
Other
282
3.4
73
11.9
Total income
 
tax expense (benefit)
$
2,000
23.8
%
(777)
(125.7)
%
At December 31, 2024 and 2023, the Company had a net deferred tax
 
asset of $10.2 million and $10.3 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, 2024 and 2023 are presented
below.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31
(Dollars in thousands)
2024
2023
Deferred tax assets:
Allowance for credit losses
$
1,726
1,724
Unrealized loss on securities
9,929
9,734
Net operating loss carry-forwards
 
—
 
253
Tax credit carry-forwards
 
—
 
356
Accrued bonus
 
207
185
Right of use liability
58
128
Other
99
71
Total deferred tax
 
assets
12,019
12,451
Deferred tax liabilities:
Premises and equipment
1,212
1,315
Originated mortgage servicing rights
224
249
Right of use asset
58
122
New Markets Tax Credit
 
investment
 
—
 
181
Other
333
332
Total deferred tax
 
liabilities
1,827
2,199
Net deferred tax asset
$
10,192
10,252
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, 2024.
 
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.
 
113
 
The change in the net deferred tax asset for the years ended December 31, 2024
 
and 2023, is presented
 
below.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Year ended December 31
(Dollars in thousands)
2024
2023
Net deferred tax asset (liability):
Balance, beginning of year
$
10,252
13,769
Cumulative effect of change in accounting standard
183
276
Deferred tax expense (benefit) related to continuing operations
(438)
195
Stockholders' equity,
 
for accumulated other comprehensive income
195
(3,988)
Balance, end of year
$
10,192
10,252
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, 2024, 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
 
2025 relative to any tax positions taken prior to
December 31, 2024.
 
As of December 31, 2024, 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, 2021 through 2024.
 
NOTE 11:
 
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 both of the years ended December 31, 2024 and 2023,
respectively, and are
 
included in salaries and benefits expense.
NOTE 12:
 
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, 2024 and 2023, the following financial instruments were
 
outstanding whose contract amount represents
credit risk.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31
(Dollars in thousands)
2024
2023
Commitments to extend credit
$
84,667
$
73,606
Standby letters of credit
738
629
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.
 
114
 
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, 2024 and 2023, 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 $
13
thousand and $
9
 
thousand at December 31, 2024 and 2023, 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 13: 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, 2024 and 2023, there
were no transfers between levels and no changes in valuation techniques for
 
the Company’s financial assets and liabilities.
 
 
 
115
 
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.
The following table presents the balances of the assets and liabilities measured at fair
 
value on a recurring as of December
31, 2024 and 2023, 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, 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
—
December 31, 2023:
Securities available-for-sale:
Agency obligations
 
$
53,879
—
53,879
—
Agency MBS
198,289
—
198,289
—
State and political subdivisions
18,742
—
18,742
—
Total securities available
 
-for-sale
270,910
—
270,910
—
Total
 
assets at fair value
$
270,910
—
270,910
—
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 Mortgage servicing rights, net, included in other assets on the accompanying consolidated balance sheets, are carried at the
borrower’s underlying financial condition.
116
 
Mortgage servicing rights, net
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.
117
 
The following table presents the balances of the assets and liabilities measured at fair
 
value on a nonrecurring basis as of
December 31, 2024 and 2023, 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, 2024:
Loans, net
(1)
$
503
—
—
503
Other assets
(2)
892
—
—
892
Total assets at fair value
$
1,395
—
—
1,395
December 31, 2023:
Loans, net
(1)
$
783
—
—
783
Other assets
(2)
992
—
—
992
Total assets at fair value
$
1,775
—
—
1,775
(1)
Loans considered collateral dependent under ASC 326.
(2)
Represents MSRs, net carried at lower of cost or estimated fair value.
Quantitative Disclosures for Level 3 Fair Value
 
Measurements
At December 31, 2024 and 2023, 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, 2024
 
and 2023, 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, 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
%
December 31, 2023:
Collateral dependent loans
$
783
Appraisal
Appraisal discounts
10.0
-
10.0
%
10.0
%
Mortgage servicing rights, net
992
Discounted cash flow
Prepayment speed or CPR
5.9
-
10.6
%
6.0
%
 
Discount rate
10.5
-
12.5
%
10.5
%
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.
 
 
 
118
 
 
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.
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, 2024 and 2023 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, 2024:
Financial Assets:
Loans, net (1)
$
557,146
$
532,344
$
—
$
—
$
532,344
Financial Liabilities:
Time Deposits
$
191,247
$
190,363
$
—
$
190,363
$
—
December 31, 2023:
Financial Assets:
Loans, net (1)
$
550,431
$
526,372
$
—
$
—
$
526,372
Financial Liabilities:
Time Deposits
$
198,215
$
195,171
$
—
$
195,171
$
—
(1) Represents loans, net and the allowance for credit losses.
 
The fair value of loans was measured using an
 
exit price notion.
NOTE 14: 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)
Amount
Loans outstanding at December 31, 2023
$
1,897
New loans/advances
442
Repayments
(578)
Loans outstanding at December 31, 2024
$
1,761
119
During 2024 and 2023, 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, 2024 and 2023 amounted to $
9.9
 
million and $
21.1
 
million, respectively.
NOTE 15: REGULATORY
 
RESTRICTIONS AND CAPITAL
 
RATIOS
As required by the Economic Growth, Regulatory Relief, and Consumer Protection
 
Act of 2018, the Federal Reserve Board
issued rule that expanded applicability of the Board’s
 
small bank holding company policy statement (the “Small BHC
Policy Statement”) and has been added as Appendix C to Federal Reserve Regulation
 
Y.
 
These increased the Small BHC
Policy Statement’s asset limit from
 
$1 billion to $3 billion in total consolidated assets for a bank holding company or
savings and loan holding company that: (1) is not engaged in significant nonbanking activities; (2)
 
does not conduct
significant off-balance sheet activities; and (3) does not have a materi
 
al amount of debt or equity securities, other than trust-
preferred securities, outstanding that are registered with the SEC. The interim
 
final rule provides that, if warranted for
supervisory purposes, the Federal Reserve may exclude a company from
 
this asset level increase. The Federal Reserve has
treated the Company as a small bank holding company for purposes of
 
the Small BHC Policy Statement and therefore has
considered only the Bank’s capital and
 
not the Company’s consolidated capital.
 
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 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, 2024, the Bank is “well capitalized” under the regulatory framework
 
for prompt corrective action. To
be categorized as “well capitalized,” the Bank must maintain minimum common
 
equity Tier 1, total risk-based, Tier
 
1 risk-
based, and Tier 1 leverage ratios as set forth in the
 
following table. Management has not received any notification from the
Bank's regulators that changes the Bank’s
 
regulatory capital status.
 
120
 
The actual capital amounts and ratios for the Bank and the aforementioned
 
minimums as of December 31, 2024 and 2023
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, 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
At December 31, 2023:
Tier 1 Leverage Capital
$
103,886
9.72
%
$
42,732
4.00
%
$
53,415
5.00
%
CET1 Risk-Based Capital
103,886
14.52
32,194
4.50
46,503
6.50
Tier 1 Risk-Based Capital
103,886
14.52
42,926
6.00
57,234
8.00
Total Risk-Based Capital
111,035
15.52
57,234
8.00
71,543
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 considerations could further limit the availability of dividends
 
from the Bank. At December 31, 2024, the
Bank could have declared additional dividends of approximately $
9.7
 
million without prior approval of regulatory
authorities.
 
As a result of this limitation, approximately $
67.2
 
million of the Company’s investment in
 
the Bank was
restricted from transfer in the form of dividends.
 
NOTE 16: 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)
2024
2023
Assets:
Cash and due from banks
$
1,001
1,277
Investment in bank subsidiary
76,852
74,857
Other assets
532
523
Total assets
$
78,385
76,657
Liabilities:
Accrued expenses and other liabilities
$
93
150
Total liabilities
93
150
Stockholders' equity
78,292
76,507
Total liabilities and stockholders'
 
equity
$
78,385
76,657
 
 
121
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CONDENSED STATEMENTS
 
OF EARNINGS
Year ended December 31
(Dollars in thousands)
2024
2023
Income:
Dividends from bank subsidiary
$
3,773
3,776
Noninterest income
1
8
Total income
3,774
3,784
Expense:
Noninterest expense
258
239
Total expense
258
239
Earnings before income tax expense and equity
in undistributed (distributed) earnings of bank subsidiary
3,516
3,545
Income tax benefit
(46)
(30)
Earnings before equity in undistributed (distributed) earnings
of bank subsidiary
3,562
3,575
Equity in undistributed (distributed) earnings of bank subsidiary
2,835
(2,180)
Net earnings
$
6,397
1,395
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CONDENSED STATEMENTS
 
OF CASH FLOWS
Year ended December 31
(Dollars in thousands)
2024
2023
Cash flows from operating activities:
Net earnings
$
6,397
1,395
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Net increase in other assets
(9)
(1)
Net (decrease) increase in other liabilities
(56)
8
Equity in (undistributed) distributed earnings of bank subsidiary
(2,835)
2,180
Net cash provided by operating activities
3,497
3,582
Cash flows from financing activities:
Dividends paid
(3,773)
(3,776)
Stock repurchases
—
(229)
Net cash used in financing activities
(3,773)
(4,005)
Net change in cash and cash equivalents
(276)
(423)
Cash and cash equivalents at beginning of period
1,277
1,700
Cash and cash equivalents at end of period
$
1,001
1,277
122
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, 2024 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,
 
2024.
 
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 it 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 Trading Plans.
financial reporting.
 
 
 
123
ITEM 9B.
 
OTHER INFORMATION
None.
Insider Trading Policy.
 
The Company maintains an Insider Trading
 
Policy that was reviewed, amended and approved most
recently on February 5, 2025.
 
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 ITEM 10.
None.
 
124
PART
 
III
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,
can be found by hovering over the heading “About Us” 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
Accountants” in our Proxy Statement, and is incorporated herein by reference.
 
 
 
 
125
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, 2024 and 2023
 
Consolidated Statements
 
of Earnings for the years ended December 31, 2024 and 2023
 
Consolidated Statements of Comprehensive Income for the years ended
 
December 31, 2024 and 2023
 
Consolidated Statements of Stockholders’ Equity for the years ended
 
December 31, 2024 and 2023
Consolidated Statements of Cash Flows for the years ended December
 
31, 2024 and 2023
Notes to the Consolidated Financial Statements
 
 
(b)
Exhibits
 
 
 
3.1.
 
 
3.2.
 
 
 
4.1.
 
19.1
 
21.1
 
23.1
 
31.1
 
 
 
31.2
 
 
 
32.1
 
 
32.2
 
 
97.1
 
 
 
126
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
None.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 11, 2025.
 
 
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 11, 2025
 
/S/ W. JAMES
 
WALKER,
 
IV
W. James Walker,
 
IV
 
SVP,
 
Chief Financial Officer
(Principal Financial and Accounting Officer)
March 11, 2025
 
/S/ ROBERT W.
 
DUMAS
Robert W.
 
Dumas
 
Chairman of the Board
March 11, 2025
 
/S/ C. WAYNE
 
ALDERMAN
C. Wayne Alderman
 
Director
March 11, 2025
 
/S/ TERRY W.
 
ANDRUS
Terry W.
 
Andrus
 
Director
March 11, 2025
 
/S/ J. TUTT BARRETT
J. Tutt Barrett
 
Director
March 11, 2025
 
/S/ LAURA J. COOPER
Laura Cooper
 
Director
March 11, 2025
 
/S/ WILLIAM F. HAM, JR.
William F.
 
Ham, Jr.
 
Director
March 11, 2025
 
/S/ DAVID
 
E. HOUSEL
David E. Housel
 
Director
March 11, 2025
 
/S/ MICHAEL A. LAWLER
Michael A. Lawler
 
Director
March 11, 2025
 
/S/ SANDRA J. SPENCER
Sandra J. Spencer
 
Director
March 11, 2025
 
/S/ ANNE M. MAY
Anne M. May
 
Director
March 11, 2025
EX-4.1 2 d889705dex41.htm EX-4.1 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 3 d889705dex191.htm EX-19.1 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 lockup agreements.
 
 
 
 
 
 
 
to
 
comply
 
with
 
any
 
applicable
 
Securities
 
Law,
 
banking
 
law
 
or
 
contractual
 
requirements,
 
including
 
any
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 relatively small trades, and the Company does not permit any Insider Trading, even if the trades are small.
 
 
 
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
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 the person adopting the Rule 10b5-1 Plan must include a representation certifying that he or she is adopting the
into
 
the
 
Rule
 
10b5-1
 
Plan.
 
In
 
order
 
for
 
a
 
Rule
 
10b5-1
 
Plan
 
to
 
be
 
approved,
 
the
 
following
 
requirements
 
must
 
be
observed:
 
 
 
•
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 Significant regulatory developments affecting the Company or its subsidiaries;
course;
 
 
 
 
 
 
 
•
•
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 4 d889705dex211.htm EX-21.1 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 5 d889705dex231.htm EX-23.1 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
 
11,
2025, relating
 
to the
 
consolidated financial
 
statements of
 
Auburn National
 
Bancorporation, Inc.
 
and Subsidiary,
 
appearing
in
 
the
 
Annual
 
Report
 
to
 
Stockholders,
 
which
 
is
 
incorporated
 
in
 
this
 
Annual
 
Report
 
on
 
Form
 
10-K
 
of
 
Auburn
 
National
Bancorporation, Inc. for the year ended December
 
31, 2024.
 
/s/ Elliott Davis, LLC
Greenville, South Carolina
March 11, 2025
EX-31.1 6 d889705dex311.htm EX-31.1 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:
 
1. I have reviewed this Annual Report on Form 10-K of Auburn National
 
Bancorporation, Inc.;
2. 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;
 
3. 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;
 
4. 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
 
5. 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 11, 2025
 
/s/ David A. Hedges
 
President and CEO
EX-31.2 7 d889705dex312.htm EX-31.2 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:
 
1. I have reviewed this Annual Report on Form 10-K of Auburn National
 
Bancorporation, Inc.;
2. 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;
 
3. 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;
 
4. 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
 
5. 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 11, 2025
 
/s/ W. James
 
Walker,
 
IV
SVP,
 
Chief Financial Officer
EX-32.1 8 d889705dex321.htm EX-32.1 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, 2024, 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 11, 2025
/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 9 d889705dex322.htm EX-32.2 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, 2024, 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 11, 2025
 
 
/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.