10-K

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.

20549

FORM

10-K

☒

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

Exchange Act of 1934.

For the fiscal year ended

December 31, 2024

☐

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

For the transition period from __________ to __________

Commission File Number:

0-26486

Auburn National Bancorporation, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Delaware

63-0885779

(State or other jurisdiction

of incorporation)

(I.R.S. Employer

Identification No.)

100 N. Gay Street

Auburn,

Alabama

36830

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (

334

)

821-9200

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

Title of Each Class

Trading Symbol

Name of Exchange on which Registered

Common Stock

, par value $0.01

AUBN

NASDAQ

Global Market

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

None

Indicate by check mark if the registrant

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

of the Securities Act. Yes

☐

☒

Indicate by check mark if the registrant

is not required to file reports pursuant to

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

☐

☒

Indicate by check mark whether the registrant

(1) has filed all reports required to be

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

Exchange Act of 1934 during the

preceding 12 months (or for such shorter period

that the registrant was required to file

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

such filing requirements for the past

90 days.

Yes

☒

☐

Indicate by check mark whether the registrant

has submitted electronically every Interactive

Data File required to be submitted pursuant

to Rule 405 of Regulation S-

T (§ 232.405 of this chapter) during

the preceding 12 months (or for such shorter

period that the registrant was required

to submit such files).

Yes

☒

☐

Indicate by check mark whether the registrant

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

filer, or a smaller reporting company. See the

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

“smaller reporting company” in Rule 12b-2

of the Exchange Act. (Check one):

Large Accelerated filer

☐

Accelerated filer

☐

Non-accelerated filer

☒

Smaller reporting company

☒

Emerging Growth

Company

☐

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

has selected not to use the extended

transition period for complying with any

new or revised

financial accounting standards provided pursuant

to Section 13(a) of the Exchange Act.

☐

Indicate by check mark whether the registrant

has filed a report on and attestation

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

over

financial reporting under Section 404(b)

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

by the registered public accounting firm

that prepared or issued its audit

report.

☐

If securities are registered pursuant to Section

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

whether the financial statements of the registrant

included in the filing reflect

the correction of an error to previously

issued financial statements.

☐

Indicate by check mark whether any of

those error corrections are restatements

that required a recovery analysis of incentive-based

compensation received by any of

the registrant’s executive officers during the relevant recovery period

pursuant to §240.10D-1(b).

☐

Indicate by check mark if the registrant

is a shell company (as defined in Rule

12b-2 of the Act). Yes

☐

☒

State the aggregate market value of the

voting and non-voting common equity

held by non-affiliates computed by reference to the

price at which the common equity

was last sold, or the average bid and asked

price of such common equity as of the

last business day of the registrant’s most recently completed

second fiscal quarter:

40,992,280

as of June 30, 2024.

APPLICABLE ONLY TO CORPORATE REGISTRANTS

Indicate the number of shares outstanding

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

of the latest practicable date:

3,493,699

shares of common stock as

of March 10 2025.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the Annual

Meeting of Shareholders, scheduled to

be held May 13, 2025, are incorporated by

reference into Part II, Item 5 and

Part III of this Form 10-K.

Table of Contents

TABLE OF CONTENTS

PART I

PAGE

ITEM 1.

BUSINESS

ITEM 1A.

RISK FACTORS

ITEM 1B.

UNRESOLVED STAFF COMMENTS

ITEM 1C.

CYBERSECURITY

ITEM 2.

PROPERTIES

ITEM 3.

LEGAL PROCEEDINGS

ITEM 4.

MINE SAFETY DISCLOSURES

PART II

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER

MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON

ACCOUNTING AND FINANCIAL DISCLOSURE

122

ITEM 9A.

CONTROLS AND PROCEDURES

122

ITEM 9B.

OTHER INFORMATION

123

ITEM 9C.

DISCLOSURE REGARDING FORGEIN JURISDICTIONS THAT PREVENT

INSPECTION

123

PART III

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

124

ITEM 11.

EXECUTIVE COMPENSATION

124

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND

MANAGEMENT AND RELATED STOCKHOLDER MATTERS

124

ITEM 13.

CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR

INDEPENDENCE

124

ITEM 14.

PRINCIPAL ACCOUNTING FEES AND SERVICES

124

PART IV

ITEM 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

125

ITEM 16.

FORM 10-K SUMMARY

126

Table of Contents

PART

SPECIAL CAUTIONARY NOTE REGARDING

FORWARD

-LOOKING STATEMENTS

Various

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

Discussion and Analysis of Financial Condition

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

Market Risk”, “Risk Factors” “Description of

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

and protections of Section 27A of the

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

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

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

objectives, goals, expectations,

anticipations, assumptions, estimates, intentions and future performance,

and involve known and unknown risks,

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

and which may cause the actual results, performance,

achievements or financial condition of the Company to be materially different

from future results, performance,

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

statements.

You

should not expect us to

update any forward-looking statements.

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

be forward-looking statements.

You

can

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

as “may,” “will,” “anticipate,”

“assume,”

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

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

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

similar words and expressions of the future.

These forward-looking

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

without limitation:

●

the effects of future economic, business and market conditions and

changes, foreign, domestic and locally,

including inflation, seasonality,

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

and tornados, epidemics or pandemics including supply chain disruptions,

inventory volatility, and changes

consumer behaviors;

●

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

sanctions, the value of the U.S.

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

economic conditions, consumer and

business confidence;

●

governmental monetary and fiscal policies, including taxes, federal

deficit spending and the debt required to fund

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

in prices , including changes in

the Federal Reserve’s target

federal funds rate and changes in the Federal Reserve’s

holdings of securities through

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

will keep its targeted federal funds

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

target of 2%;

●

legislative, executive branch and regulatory changes, including changes

by executive orders, the possible

reorganization and/or consolidation of the bank regulatory

agencies and/or the CFPB, changes in the leadership

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

at the bank and securities

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

the numerous new Executive

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

costs and benefits of such changes;

●

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

and its release from conservatorship on

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

loans;

●

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

and regulatory actions, which

may cause uncertainty,

wasted implementation costs and time by the industry,

and lengthy delays until ultimate

resolution;

●

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

application by the regulators, including

capital and liquidity

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

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●

changes in accounting pronouncements and interpretations, including the

required use, beginning January 1, 2023,

of Financial Accounting Standards Board’s

(“FASB”) Accounting

Standards Update (ASU) 2016-13, “Financial

Instruments – Credit Losses (Topic

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

updates issued since June 2016 (collectively,

FASB ASC Topic

326) on Current Expected Credit Losses

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

Restructurings and Vintage Disclosures,

which eliminates troubled

debt restructurings (“TDRs”) and related guidance;

●

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

CECL models to establish our

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

in, and changes to, economic,

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

payment behaviors from those used

in our CECL models and loan portfolio reviews;

●

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

behaviors; the levels,

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

the values and liquidity of loan

collateral, our securities portfolio and interest-sensitive assets and

liabilities; and the risks and uncertainty of the

amounts realizable on collateral;

●

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

securities available for sale, which

adversely affect our stockholders’ equity for financial

reporting purposes and our tangible equity;

●

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

payment behaviors;

●

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

the types of instruments that

may be included as capital for regulatory purposes;

●

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

real estate;

●

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

national and other providers of financial,

investment and insurance services, including the disruptive effects

of financial technology and other competitors

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

requirements, internal controls, and

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

from credit unions, which are not

subject to federal income taxation;

●

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

currency and stable coins

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

payment systems that the banking industry,

including the Company,

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

customers, other financial institutions, including our counterparties, and

confidence in the financial system,

generally;

●

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

space in our Auburn Center headquarters

and in former office locations;

●

the risks of mergers, acquisitions and divestitures, including,

without limitation, the related time and costs of

implementing such transactions, integrating operations as part of these

transactions and possible failures to achieve

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

●

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

or less effective than anticipated;

●

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

systems or customers’

information;

●

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

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

any, could be reduced

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

are less

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

reduction in the amount of net operating loss

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

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●

the risks that our dividends, share repurchases and discretionary

bonuses are limited by regulation to the

maintenance of a capital conservation buffer of 2.5% and

our future earnings and “eligible retained earnings” over

rolling four calendar quarter periods;

●

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

subsequent reports that we make

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

“SEC”) under the Exchange Act.

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

to us are expressly qualified in their entirety

by this cautionary notice.

We have no obligation

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

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

such statements otherwise are made.

ITEM 1.

BUSINESS

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

company registered with the Board of Governors

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

Company Act of 1956, as amended (the

“BHC Act”).

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

its Alabama predecessor as

the bank holding company controlling AuburnBank, an Alabama state member

bank with its principal office in Auburn,

Alabama (the “Bank”).

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

As a bank holding

company, the Company

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

currently

are permitted to the Bank under applicable laws and regulations.

The holding company structure also provides greater

financial and operating flexibility than is presently permitted to the

Bank.

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

primarily in East Alabama, including

Lee County and surrounding areas.

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

“Federal

Reserve Bank”) since April 1995.

The Bank’s primary regulators are the Federal

Reserve and the Alabama Superintendent

of Banks (the “Alabama Superintendent”).

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

“FHLB-Atlanta”) since 1991.

General

The Company’s business is conducted

primarily through the Bank and its subsidiaries.

Although it has no immediate plans

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

indirectly in a number of activities closely related to

banking permitted by the Federal Reserve.

The Company’s principal

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

and its telephone

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

The Company maintains an Internet website at

www.auburnbank.com

The

Company’s website and

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

this report.

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

information with the

SEC.

You

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

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

Washington,

DC 20549.

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

reference rooms.

The SEC maintains an Internet site at

www.sec.gov

that contains reports, proxy,

and other information,

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

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Services

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

Notasulga, and Valley,

Alabama and a loan

production office in Phenix City,

Alabama.

evaluate the utilization of our existing facilities and customer preferences

for online and mobile banking.

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

branch office in Auburn

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

efficiently by another existing Bank branch.

It offers checking, savings, transaction deposit accounts and

certificates of deposit, and is an active residential mortgage

lender in its primary service area.

The Bank’s primary service area includes

the cities of Auburn and Opelika, Alabama and

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

The Bank also offers commercial, financial,

agricultural, real estate construction and consumer loan products,

and other financial services.

The Bank operates ATM

machines in 10 locations in its primary service area.

The Bank offers Visa

Checkcards, which are debit cards with the

Visa logo that work

like checks and can be used anywhere Visa is accepted,

including ATMs.

The Bank’s Visa

Checkcards

can be used internationally through the Plus

network.

The Bank offers online banking, bill payment and other electronic

banking services through its Internet website,

www.auburnbank.com

Our online banking services, bill payment and

electronic services are subject to certain cybersecurity risks.

See “Risk Factors – Our information systems may experience

interruptions and security breaches.”

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

other digital or crypto instruments, stablecoins or

businesses.

Competition

The Bank had the largest share of the Lee County,

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

The banking business in

East Alabama, including Lee County,

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

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

of Alabama.

Other banks have 35 offices in Lee

County.

National and regional competitors that have offices in our market

include J.P.

Morgan Chase, Wells

Fargo, Truist,

PNC, Regions, Valley

National, SouthState and Cadence.

The national and regional banks we compete with have

substantially greater resources, and numerous offices

and affiliates operating over wide geographic areas.

The Bank

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

unions, mortgage companies,

insurance companies, and other local and nonlocal financial institutions,

including institutions offering services through

the

mail, by telephone and over the Internet.

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

services,

competition from nonbank financial institutions may be expected to intensify

further.

Among the advantages that larger financial institutions have

over the Bank are their ability to finance extensive advertising

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

their assets among loans and securities of the

highest yield in locations with the greatest demand.

Many of the major commercial banks or their affiliates operating

in the

Bank’s service area offer

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

banks typically have

substantially higher lending limits than the Bank.

Banks also have experienced significant competition for deposits from mutual

funds, insurance companies and other

investment companies and from money center banks’ offerings

of high-yield investments and deposits, including CDs and

savings accounts.

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

Selected Economic Data

Our market is Lee County,

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

Alabama.

Lee County and Macon

County form the Auburn-Opelika MSA.

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

population was 174,241 in 2020

and an estimated 183,215 in July 2023.

The largest employers in the area are Auburn University,

East Alabama Medical

Center, Lee County School System, Auburn

and Opelika City Schools, Auburn City Schools, Wal

-Mart Distribution

Center, Aptar CSP Technologies,

Pharmavite, LLC, HL Mando America Corporation (automobile

brakes and steering),

SCA (automotive plastics), Borbet Alabama (automotive aluminum

wheels), Golden State Foods and Briggs & Stratton.

Auto manufacturing and related suppliers are increasingly important

along Interstate Highway 85 to the east and west of

Auburn.

Kia Motors has a large automobile factory in nearby West

Point, Georgia, and Hyundai Motors has a large

automobile factory near Montgomery,

Alabama.

Various

suppliers to the automotive industry have facilities in Lee

County.

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

and 3.3% for the State of Alabama

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

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

fastest growing MSA in Alabama.

The Auburn-

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

During the same time, household income is

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

Loans and Loan Concentrations

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

real estate mortgages, real estate

acquisition, construction and development and consumer purposes.

While there are certain risks unique to each type of

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

real estate acquisition, construction and

development, agricultural and consumer lending than with residential real

estate mortgage loans.

To help manage these

risks, the Bank has established underwriting standards used in evaluating

each extension of credit on an individual basis,

which are substantially similar for each type of loan.

These standards include a review of the economic conditions

affecting the borrower,

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

collateral and the

borrower’s past credit performance.

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

throughout the life of the loan.

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

real estate

lending.

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

loans on owner occupied property,

as of December

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

Our regulators’ CRE Guidance excludes loans on owner occupied

property from CRE.

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

(42% of total loans) at year

end 2023.

See “Lending Practices –

CRE.

”

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

primary service area.

Any adverse economic or

other conditions affecting these industries would

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

businesses, and individuals in the community that have entered

into loans with the Bank.

For example, the auto

manufacturing business and its suppliers have positively

affected our local economy,

but automobile sales manufacturing is

cyclical and adversely affected by increases in interest rates.

Decreases in automobile sales, including adverse changes due

to interest rate increases and inflation, tariffs, supply

chain disruptions (including changes resulting from the effects of

tariffs and related changes in countries and producers in

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

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

and employment, and could adversely affect

economic conditions in the markets we serve.

However, management believes that due

to the diversified mix of industries

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

affect other area industries to the same

degree or within the same time frame.

The Bank’s primary service area also is subject

to both local and national economic

conditions and fluctuations.

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

gage loans

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

time to time has purchased loan participations from

outside its primary service area.

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

have

a relationship with the borrower, or

its business or owners.

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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.

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Bank Holding Company Regulation

The Company, as a bank

holding company, is subject to supervision,

regulation and examination by the Federal Reserve

under the BHC Act.

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

managing or controlling

banks, and certain related activities.

The Company is required to file periodic reports

and other information with the

Federal Reserve.

The Federal Reserve examines the Company and its subsidiaries.

The State of Alabama currently does

not regulate bank holding companies.

The BHC Act requires prior Federal Reserve approval for,

among other things, the acquisition by a bank holding company

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

shares or substantially all the assets of any bank, or

for a merger or consolidation of a bank holding company

with another bank holding company.

The BHC Act generally

prohibits a bank holding company from acquiring direct or indirect

ownership or control of voting shares of any company

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

indirectly in any activity other than banking or

managing or controlling banks or performing services for its authorized

subsidiaries.

A bank holding company may,

however, engage in or acquire an interest

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

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

controlling banks as to be a proper incident

thereto.

The Federal Reserve adopted new rules, effective September

30, 2020, simplifying determinations of control of

banking organizations for BHC Act purposes.

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

to, and nonobjection by the Federal Reserve under

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

Superintendent of Banks (the “Alabama

Superintendent”) under the Alabama Banking Code.

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

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

under the Control Act, to file a notice

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

and notices currently required from the Federal

Reserve and the Alabama Superintendent.

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

“well-managed,” as defined in Federal Reserve

Regulation

and whose insured depository institution subsidiaries maintain “satisfactory”

or better ratings under the

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

“financial holding companies.”

Financial

holding companies and their subsidiaries are permitted to acquire or engage

in activities such as insurance underwriting,

securities underwriting, travel agency activities, broad insurance

agency activities, merchant banking and other activities

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

thereto.

In addition, under the BHC Act’s

merchant banking authority and Federal Reserve regulations, financial

holding companies are authorized to invest in

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

as long as the financial holding company makes its

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

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

with any depositary institutions controlled by the financial holding

company.

The Federal Reserve recommended repeal of

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

pursuant to Section 620 of the Dodd-Frank Wall

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

Act”), but has taken no action.

The Company has

not elected to become a financial holding company,

but it may elect to do so in the future.

Financial holding companies

continue to be subject to Federal Reserve supervision, regulation and

examination.

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

of functional regulation to subsidiary activities.

For example, insurance activities would be subject to supervision and

regulation by state insurance authorities and

securities broker-dealer and investment advisory activities are regulated

by the SEC.

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

subject to various restrictions, including that the

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

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

primary federal regulator pursuant to the Bank Merger Act.

The BHC Act and the Bank Merger Act provide various

generally similar statutory factors.

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

Superintendent, an Alabama bank may acquire and operate one or

more banks in other states pursuant to a transaction in

which the Alabama bank is the surviving bank.

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

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

resulting from such transaction may continue to

operate the acquired branches in Alabama.

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

See “Bank Regulation”.

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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.

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The Federal Reserve has adopted the Federal Financial Institutions Examination

Council’s (“FFIEC”) Uniform

Financial

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

institution a confidential composite “CAMELS” rating

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

financial condition and operations:

apital

Adequacy,

sset Quality,

anagement,

arnings,

iquidity and

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

management practices.

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

reflects exposures to

changes in interest rates.

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

to management’s

ability to identify, measure,

monitor and control market risk; the institution’s

size; the nature and complexity of its activities

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

to its level of market risk exposure.

Market risk

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

the financial institution’s earnings

or the

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

exchange rates, commodity prices or equity prices;

management’s ability to identify,

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

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

ratings are based on evaluations of an institution’s

managerial,

operational, financial and compliance performance. The composite CAMELS

rating is not an arithmetical

formula or rigid weighting of numerical component ratings. Elements

of subjectivity and examiner judgment, especially as

these relate to qualitative assessments, are important elements in assigning

ratings.

The Federal Reserve is maintaining a

heightened focus on bank funding pressures based on risk profiles and

management’s ability to manage their

liquidity

positions.

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

assigns a risk-management rating to all state

member banks and bank holding companies.

In February 2021 the Federal Reserve expanded its Guidance for Assessing

Risk Management to institutions with under $100 billion

in assets.

This guidance states that principles of sound

management should apply to all risk confronting a banking organization,

including credit, market, liquidity,

operational,

compliance, and legal risks.

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

solely in traditional banking

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

day-to-day operations, relatively basic risk

management systems may be adequate. In accordance with the Interagency

Guidelines Establishing Standards for Safety

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

information systems, and internal audit that are

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

its activities.

The summary, or composite,

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

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

1 being the highest or best possible rating.

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

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

level of performance and therefore requires the

highest degree of supervisory attention.

Bank mergers, which generally accompany holding

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

bank’s primary federal

regulator.

The Federal Reserve and the Alabama Superintendent must approve mergers

and

acquisitions by the Bank.

The FDIC and the Office of the Comptroller of the Currency

(“OCC”) may comment on mergers

involving the Company or the Bank.

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

to mergers of bank holding companies or

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

policies and rules in September 2024.

The FDIC

adopted a Statement of Policy on Bank Merger Transactions

(the “FDIC Merger Policy”).

The new FDIC Merger Policy

recognizes Biden Administration Executive Order 14036 “Promoting

Competition in the American Economy” (July 9,

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

to consider the impact that

consolidation may have on maintaining a fair,

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

small businesses, startups, and consumers.”

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

2025.

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

methods the FDIC employs in

conducting its independent analysis will continue to be informed

by the United States Department of Justice’s

(“DoJ”)

approach to evaluating competitive effects.”

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

involving national banks and federal

savings associations, deleted expedited and streamline applications for

business combinations and adopted a policy

statement clarifying its review of applications under the Bank Merger

Act’s statutory factors.

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

their views of mergers where the Federal

Reserve is the responsible regulator, especially

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

the OCC.

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

other factors, of the effects of the transaction on

competition.

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

approval under the Bank

Merger Act and the Federal Reserve, in acquisitions and mergers

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

important advisory role in bank and BHC mergers,

but the bank regulators are the primary decision makers.

The bank

regulators may then consider the Antitrust Division’s

competitive factors report as part of their respective review processes,

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

The DoJ and the Federal Trade Commission

adopted new non-binding Merger Guidelines in 2023.

In September 2024, the DoJ revoked its 1995 Bank Merger

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

Guidelines.

The 1995 Bank Merger

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

notwithstanding the FDIC Merger Policy,

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

The Federal Reserve continues to apply the

1995 Bank Merger Guidelines in evaluating bank and bank holding

company mergers.

The GLB Act and related regulations require banks and their affiliated

companies to adopt and disclose privacy policies,

including policies regarding the sharing of personal information with

third parties.

The GLB Act also permits bank

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

permitted to financial holding companies.

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

sharing and use of customer information,

and require that financial institutions have policies regarding information

privacy and security. Some

state laws also protect

the privacy of information of state residents and require adequate security

of such data, and certain state laws may,

in some

circumstances, require us to notify affected individuals

of security breaches of computer databases that contain their

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

regulators or consumer reporting agencies

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

that own data.

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

24, 2023.

It would amend various sections of the

GLB Act and preempt certain state privacy laws.

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

federal standard for comprehensive data privacy and security regulation.

Neither of these bills were adopted.

Other

privacy legislation may be proposed.

Consumer Laws and the Community Reinvestment Act

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

that requires it to regulate consumer

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

their affiliates.

The CFPB has the authority to adopt

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

in Lending Act, the Electronic Funds

Transfer Act, mortgage lending rules, the

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

of Consumer

Financial Information rules.

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

in assets,

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

regulations, and the precedents set in CFPB enforcement

actions and interpretations.

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

CRA regulations.

Under the CRA, all FDIC-

insured institutions have a continuing and affirmative

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

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

moderate-income (“LMI”) neighborhoods.

The CRA

requires a depository institution’s

primary federal regulator to periodically assess the institution’s

record of assessing and

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

ing low- and moderate-income neighborhoods.

The bank regulatory agency’s CRA assessment

is publicly available.

Further, consideration of the CRA is required of

any

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

obtain deposit insurance coverage for all new-

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

relocate an office; or (v) merge or consolidate

with, or

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

institution.

A less than satisfactory CRA rating

will slow, if not preclude,

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

a company from

becoming a financial holding company.

The federal CRA regulations require that evidence of discriminatory,

illegal or

abusive lending practices be considered in the CRA evaluation.

The federal CRA regulations require that evidence of discriminatory,

illegal or abusive lending practices be considered in

the CRA evaluation.

Financial holding company elections and the continuation of financial

holding company activities are permitted, only if

each affiliated bank has received a “satisfactory” or better

CRA rating.

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CRA agreements with private parties must be disclosed and annual

CRA reports must be made to a bank’s

primary federal

regulator.

Community benefit plans have become common in banking mergers,

especially larger bank combinations.

The

National Community Reinvestment Coalition reported

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

plans with banking organizations for an aggregate of

$580 billion for mortgage, small business and community

development lending, investments and philanthropy in

LMI and under-resourced communities. The pending Capital One

Financial Acquisition of Discover Financial Services includes a community

benefit plan with another community

organization valued at $265 billion, which is the largest

ever.

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

28, 2022, with satisfactory

ratings on both its lending and community development

tests.

The Federal Reserve considers the effects of a bank acquisition

proposal on the convenience and needs of the markets

served by the combining organizations. Bank regulators

consider CRA performance in evaluating merger and acquisition

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

expansion proposals, such as new branch

offices.

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

Reserve will assess and emphasize

CRA records of each subsidiary depository institution of the applicant

bank holding company and the target bank in

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

and such records may be the basis for

denying the application.

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

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

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

color, religion, national origin, sex and familial

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

The DoJ’s and the federal

bank regulatory agencies’ Interagency Policy Statement on Discrimination

in Lending provides guidance to financial

institutions in determining whether discrimination exists, how the agencies

will respond to lending discrimination, and what

steps lenders might take to prevent discriminatory lending practices.

The DOJ has prosecuted what it regards as violations

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

New CRA Regulations

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

changes in new CRA regulations, which were

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

1, 2024 (the “New CRA Regulations”).

Most

of the New CRA Regulation’s become

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

data reporting,

are scheduled to become effective January 1, 2027.

The New CRA Regulations confirm that the CRA and fair lending

responsibilities and compliance are mutually reinforcing and that these

regimes recognize the importance of ensuring that

the credit markets are inclusive.

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

other illegal credit practices.

The New CRA Regulations’ objectives include:

●

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

the statute and to encourage

financial inclusion;

●

Adapt to changes in the banking industry,

including the expanded role of mobile and online banking;

●

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

●

Tailor performance

standards to account for differences in bank size and business models

and local conditions;

●

Tailor data collection

and reporting requirements and use existing data whenever possible;

●

Promote transparency and public engagement;

●

Confirm that CRA and fair lending responsibilities are mutually reinforcing;

and

●

Create a consistent regulatory approach that applies to banks regulated

by all three agencies.

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

size and business model.

These rules create a new

framework for evaluating CRA performance.

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

purpose” banks.

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

relative to the

bank asset size thresholds in the old CRA rule.

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

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

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

prior years.

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The new performance evaluation framework establishes two tests for intermediate

banks:

•

the Retail Lending Test;

and

•

the Intermediate Bank Community Development Test,

or if elected by the Bank, the Community Development

Financing Test.

The Bank presently intends to use the Intermediate Bank Community

Development Test.

The community development

evaluation of the prior CRA rules continues.

The New CRA Regulations implement a new retail lending evaluation for

intermediate banks, and provide them the option of evaluation under

a new test for community development financing.

Intermediate banks would be evaluated and assigned conclusions reflecting

their performance under these tests in their

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

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

“Substantial Noncompliance.”

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

banks

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

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

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

to deposit-taking facilities, including main

offices, branches, and deposit-taking ATMs

and other remote service facilities.

Intermediate banks may delineate facility-

based areas of part of a county.

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

“outside retail lending area”

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

retail lending is outside their facility-based

assessment areas.

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

lending relative to its deposit base in its

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

ratio for all reporting banks with at least one

branch in the same facility-based assessment area.

Second, the agencies will evaluate the geographic distribution and

borrower distribution of a bank’s

major product lines in the bank’s

Retail Lending Test Areas (i.e., the

bank’s facility-based

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

retail lending area) using a series of metrics

and benchmarks.

After the agency determines a recommended conclusion for the Retail Lending

Test Area, the agency

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

in which the retail lending

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

retail lending performance, or in which the

benchmarks may not appropriately represent the credit needs and opportunities

in an area.

Banks will receive consideration for any qualified community development

loans, investments, or services, regardless of

location.

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

development investments,

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

assessment areas will depend on the adequacy of

the bank's responsiveness to community development needs and opportunities

within the bank's facility-based assessment

areas and applicable performance context information.

The New CRA Regulations codify agency interpretations under the

former CRA regulations, and provide 11

community development categories.

The agencies will evaluate the extent to

which a bank’s community development

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

community development needs.

An intermediate bank's community development test performance is evaluated

pursuant to

the following criteria:

•

the number and dollar amount of community development loans;

•

the number and dollar amount of community development investments;

•

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

•

the bank's responsiveness through community development loans, community

development investments, and

community development services to community development needs.

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

retail lending remains a core part of a bank's

affirmative obligation under the CRA to meet the credit

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

recognize that, compared to large banks, intermediate banks

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

have a more limited capacity to conduct community development activities,

and may focus on the local communities where

their branches are located.”

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

capacity to conduct community development financing, as they

do under the current approach.

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

that apply to banks with assets of

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

banks with assets greater than $10 billion.

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Overdrafts

The federal bank regulators have updated their guidance several times on

overdrafts, including overdrafts incurred at ATMs

and point of sale terminals.

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

with

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

on overdraft and not sufficient funds

fees.”

Among other things, the federal regulators require banks to monitor

accounts and to limit the use of overdrafts by

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

example, giving customers who overdraw their accounts

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

period, a reasonable opportunity to choose a less

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

coverage.

It also encourages placing appropriate

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

fees for transactions that overdraw an

account by de minimis amounts.

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

of various

litigation against banks in various jurisdictions. The federal bank

regulators continue to consider responsible small dollar

lending, including overdrafts and related fee issues and issued principles

for offering small-dollar loans in a responsible

manner on May 20, 2020.

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

2022) concluded that overdraft fee practices must comply

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

deceptive, and abusive acts or practices in Section 1036

of the Consumer Financial Protection Act.

Further, overdraft fees assessed by financial institutions

on transactions that a

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

with these other consumer laws and

regulations.

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

effective October

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

District of Mississippi.

Among other things, this rule

limits overdraft charges to $5 in most cases.

Residential Mortgages

CFPB regulations require that lenders determine whether a consumer

has the ability to repay a mortgage loan.

These

regulations establish certain minimum requirements for creditors when

making ability to repay determinations, and provide

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

and are not “higher-priced.”

Generally,

these CFPB regulations apply to all consumer,

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

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

Qualified mortgages must generally satisfy detailed

requirements related to product features, underwriting standards,

and requirements where the total points and fees on a

mortgage loan cannot exceed specified amounts or percentages of the total

loan amount.

Qualified mortgages must have:

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

negative amortization, deferral of

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

of the borrower and its credit.

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

loans. Lenders are required under the law

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

lenders make those loans. Loans that meet

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

to repay.

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

(the “2018 Growth Act”) provides that

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

in consolidated assets automatically are

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

requirements to satisfy the criteria listed

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

safe harbor may not have negative

amortization, must follow prepayment penalty limitations included

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

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

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

The CFPB’s mortgage servicing

standards

include requirements regarding force-placed insurance,

certain notices prior to rate adjustments on adjustable-rate

mortgages, and periodic disclosures to borrowers. Servicers are prohibited

from processing foreclosures when a loan

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

before initiating a foreclosure action.

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

and provide prompt review of any loss

mitigation application. Servicers must maintain accurate and accessible mortgage

records for the life of a loan and until one

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

cost and compliance risks of servicing mortgage

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

collateral or the proceeds we may realize

from the sale of foreclosed property.

We focus our

residential mortgage origination on qualified mortgages and those that meet our

investors’ requirements, but

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

mortgages.”

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The Federal Housing Finance Authority (“FHFA”)

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

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

(individually and collectively,

“GSE”). Among these,

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

These rules include the kinds of loan defects that could

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

mortgage loan originator or seller.

The FHFA also has updated

these GSEs’ representations and warranties framework and provided an independent

dispute

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

after the GSEs’ quality control and appeal

processes have been exhausted.

The Bank is subject to the CFPB’s integrated

disclosure rules under the Truth in Lending Act and

the Real Estate

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

secured by real property.

Our residential mortgage

strategy, product

offerings, and profitability may change as these regulations are interpreted

and applied in practice, and

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

the resolution of their conservatorships.

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

for a mortgage, if an additional creditor

offers a consumer a second offer with a lower annual percentage

rate. Congress encouraged federal regulators to provide

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

for consumers and bankers alike. The law also

provides partial exemptions from the collection, recording and reporting requirements

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

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

closed-end mortgages or less than

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

the bank’s rating under the CRA for the

two years has been at least “satisfactory.”

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

Growth Act on August 31, 2018.

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

As a result, the Bank is not

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

on such mortgage loans where the borrower is

entitled to forbearance.

CARES Act Loan Modifications and Forbearance

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

on March 27, 2020.

Section 4013

of that Act allowed banks to temporarily suspend certain GAAP requirements

for restructured loans in light of the effects of

the COVID-19 pandemic.

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

Interagency Statement and later guidance encouraging banks to work

prudently with borrowers on covered modifications.

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

residential mortgage loans sold to Fannie Mae to

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

during the pandemic.

During forbearance,

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

if all contractual payments were fully and timely

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

or related evictions or sales until March

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

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

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

Mae pursuant to the CARES Act and the

Interagency Statement.

Anti-Money Laundering, Countering the Financing of Terrorism

and Sanctions

Under the Uniting and Strengthening America by Providing Appropriate Tools

Required to Intercept and Obstruct

Terrorism Act of 2001

(the “USA PATRIOT

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

financial transactions and account relationships, as well as to enhanced

due diligence and “know your customer” standards

in their dealings with foreign financial institutions and foreign customers.

The USA PATRIOT

Act requires financial institutions to establish anti-money laundering

programs, and sets forth

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

●

the development of internal policies, procedures, and controls;

●

the designation of a compliance officer;

●

an ongoing employee training program;

●

an independent audit function to test the programs; and

●

ongoing customer due diligence and monitoring.

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The International Money Laundering Abatement and Anti-Terrorism

Funding Act of 2001 specifies “know your customer”

requirements that obligate financial institutions to take actions to verify

the identity of the account holders in connection

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

Bank regulators are required to consider compliance with anti-

money laundering laws in acting upon merger and acquisition

and other expansion proposals under the BHC Act and the

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

in an amount equal to twice the sum involved in

the violating transaction, up to $1 million.

Federal Financial Crimes Enforcement Network (“FinCEN”) rules

require banks to know the beneficial owners of

customers that are not natural persons, update customer information

in order to develop a customer risk profile, and

generally monitor such matters.

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

Statement on Risk-Focused Bank

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

Banks that operate in compliance with applicable law,

properly manage customer relationships and effectively

mitigate risks by implementing controls commensurate with the

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

banking services.

Examiners review risk

management practices to evaluate and assess whether a bank has developed

and implemented effective processes to

identify, measure,

monitor, and control risks.

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

AML/BSA enforcement guidance and

clarifying that isolated or technical violations or deficiencies are

generally not considered the kinds of problems that would

result in an enforcement action.

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

the

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

program. It describes how the agencies

incorporate the customer due diligence regulations and recordkeeping

requirements issued by the United States. Department

of the Treasury (“Treasury”)

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

program.

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

rule that would amend the

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

lower the applicable threshold from $3,000 to

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

convertible virtual currencies and digital

assets with legal tender status.

This rule remained a proposal in FinCEN’s

Semiannual Agenda published August 16, 2024.

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

Act of 2020 and the Corporate Transparency Act

(collectively, the

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

programs. Among

other things, the AML Act:

●

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

and foreign entities conducting

business in the U.S.;

●

increases potential fines and penalties for BSA violations and improves

whistleblower incentives;

●

codifies the risk-based approach to AML compliance;

●

modernizes AML systems;

●

expands the duties and powers FinCEN; and

●

emphasizes coordination and information-sharing among financial institutions,

U.S. financial regulators and

foreign financial regulators.

FinCEN regulation 31 C.F.R.

101.380 implements the Corporate Transparency

Act (the “CTA”), and became

effective on

January 1, 2024.

These regulations require entities to report information about their

beneficial owners and the individuals

who created the entity (together, “beneficial ownership

information” or “BOI”).

FinCEN explained that the rule would help

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

for bad actors to conceal their financial

activities through entities with opaque ownership structures.

FinCEN also explained that the proposed reporting obligations

would provide essential information to law enforcement and others to help

prevent corrupt actors, terrorists, and

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

The new rules expand financial institutions’

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

information and verify the beneficial

ownership of legal entities.

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

requirements to report their

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

anti-money laundering diligence activities and

costs.

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

motion to stay a nationwide injunction on enforcement

of the CTA that

was issued by the U.S. District Court of the Eastern District of Texas

Texas Top

Cop Shop, Inc. v.

Garland

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

District of Texas issued a separate

nationwide injunction

of the CTA and

the Beneficial

Ownership Information Reporting Rule (BOI Reporting Rule) in

Smith v. U.S. Department

of the Treasury

, which remined in effect as of January 2025.

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

injunction.

This Alert confirmed

that reporting companies are not currently required to file beneficial ownership

information and are not subject to liability if

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

Bills have been introduced in Congress to repeal the CTA,

and it is unknown whether these will pass or if the

Administration will continue to defend the litigation challenging the

CTA.

Most recently, the Protect Small Business from

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

extend the compliance deadline to December 31,

2025 for submitting BOI for entities existing before 2024.

FinCEN published a request for information and comment on December

15, 2021 seeking ways to streamline, modernize

the United States AML and countering the financing of terrorists.

The United States has imposed various sanctions upon foreign

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

Venezuela,

and certain of their government officials and persons.

Banks are required to comply with these sanctions, which

require additional customer screening and transaction monitoring.

Russia’s February 2022 invasion

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

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

bank regulators have issued alerts that

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

the invasion.

FinCEN has issued four alerts on

potential Russian illicit financial activity since February 2022.

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

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

sanctioned Russian elites, oligarchs, their

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

red flags and typologies involving

attempted sanctions evasion in the commercial real estate sector,

and reminds financial institutions of their Bank Secrecy

Act (BSA) reporting obligations.

On February 6, 2025, the DoJ ended Task

Force Klepto Capture, which was established

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

restrictions taken against Russian financial

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

and anti-money laundering measures

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

Other Laws and Regulations

The Company is also required to comply with various corporate governance

and financial reporting requirements under the

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

adopted by the SEC, the Public Company Accounting

Oversight Board and Nasdaq. In particular,

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

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

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

FDIC rules on internal controls, and

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

compliance with these rules.

If the Company fails

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

affect its reputation, its ability to obtain the

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

and other financial institutions with which

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

sell Company securities on terms and conditions

acceptable to the Company.

The Company’s assessment of its financial reporting

controls as of December 31, 2024 is

included in this report with no material weaknesses reported.

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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”).

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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%

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Basel III Changes in Risk-Weightings

The Basel III Capital Rules significantly change the risk weightings used to determine

risk weighted capital adequacy.

Among various other changes, the Basel III Capital Rules apply a 250% risk-weighting

to MSRs, DTAs that cannot

realized through net operating loss carrybacks and significant (greater

than 10%) investments in other financial institutions.

A 150% risk-weighted category applies to “high volatility commercial

real estate loans,” or “HVCRE,” which are credit

facilities for the acquisition, construction or development of real property,

excluding one-to-four family residential

properties or commercial real estate projects where: (i) the loan-to-value

ratio is not in excess of interagency real estate

lending standards; and (ii) the borrower has contributed capital equal

to not less than 15% of the real estate’s “as

completed” value before the loan was made.

The Basel III Capital Rules also changed some of the risk weightings used

to determine risk-weighted capital adequacy.

Among other things, the Basel III Capital Rules:

●

Assigned a 250% risk weight to MSRs;

●

Assigned up to a 1,250% risk weight to structured securities, including private

label mortgage securities, trust

preferred CDOs and asset backed securities;

●

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

risk weight to most commercial real

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

●

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

exposures and residential mortgages);

●

Assigned a 250% risk weight to DTAs,

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

●

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

●

Increased the risk weight for exposures to qualifying securities firms from

20% to 100%.

HVCRE Risk Weight

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

effective April 1, 2020, to implement Section 214

of the 2018 Growth Act.

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

that is

an acquisition construction or development loan.

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

property made after December 31, 2014 that:

●

primarily finance or refinance the acquisition, development, or construction

of real property;

●

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

property into income producing

property; and

●

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

refinancing of, such real

property.

Various

exclusions from HVCRE are specified.

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

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

to the appraised as completed value, which is

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

HVCRE loans are assigned a 150% risk weight.

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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

unconsolidated subsidiaries were decreased to those amounts that individually

exceed 25% of CET1;

●

Institutions can elect to deduct investments in unconsolidated subsidiaries or subject

them to capital requirements;

and

●

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

1 capital and (iii) total capital.

Effects of CECL Accounting Changes

The Financial Accounting Standards Board’s

(“FASB”) Accounting

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

Instruments – Credit Losses (Topic

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

June 16, 2016, which

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

in place of the incurred loss method.

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

of expected credit losses using the CECL

methodology, and updated

concepts and practices in existing supervisory guidance that remain applicable.

The Company

adopted CECL effective beginning January 1, 2023

and the Company recognized all effects on its regulatory capital

in the

year of adoption.

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Prompt Corrective Action Rules

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

measures and relevant capital levels that

implement the “prompt corrective action” standards.

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

Tier 1 risk-based capital ratio, Common

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

Under the

regulations, a state member bank will be:

●

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

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

greater, a Common equity tier 1 capital ratio

of 6.5% or greater, a leverage capital ratio of

5% or greater and is not

subject to any written agreement, order,

capital directive or prompt corrective action directive by a federal bank

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

●

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

a Tier 1 risk-based capital ratio

of 6.0% or greater, a Common Equity Tier

1 capital ratio of 4.5% or greater, and generally

has a leverage capital

ratio of 4.0% or greater;

●

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

a Tier 1 risk-based capital ratio of less

than 6.0%, a Common Equity Tier 1 capital

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

than 4.0%;

●

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

6.0%, a Tier 1 risk-based

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

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

less than 3.0%; or

●

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

to total assets.

The federal bank regulatory agencies have authority to require additional

capital where they determine it is necessary,

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

bank is determined to have less than a satisfactory

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

higher capital levels may be required in light of

market conditions and risk.

Depository institutions that are “adequately capitalized” for bank

regulatory purposes must receive a waiver from the FDIC

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

rates or brokered deposits that exceeds market

rates by more than 75 basis points.

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

brokered

deposits.

FDICIA generally prohibits a depository institution from making any capital

distribution, including paying

dividends or any management fee to its holding company,

if the depository institution thereafter would be

“undercapitalized”.

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

required to submit a

capital restoration plan for approval.

A depository institution’s parent

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

restoration plan.

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

5% of the depository

institution’s total assets at the time

it became undercapitalized and the amount necessary to bring the institution

into

compliance with applicable capital standards.

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

as if

it is “significantly undercapitalized”.

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

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

the claim against the holding company’s

capital

restoration obligation would be entitled to a priority in such bankruptcy

proceeding over third-party creditors of the bank

holding company.

Significantly undercapitalized depository institutions may be subject

to a number of requirements and restrictions,

including orders to sell sufficient voting stock to

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

cessation of receipt of deposits from correspondent banks.

“Critically undercapitalized” institutions are subject to the

appointment of a receiver or conservator.

Because the Company and the Bank exceed applicable capital requirements,

Company and Bank management do not believe that the prompt corrective

action provisions of FDICIA have had or are

expected to have any material effect on the Company

and the Bank or their respective operations.

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Dividends and Distributions

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

Federal Reserve Regulation Q limits “distributions,”

including discretionary bonus payments from eligible retained

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

capital conservation buffer of common equity Tier

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

declared or paid on common stock, discretionary bonuses and stock

repurchases, redemptions or repurchases of Tier 2

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

“Eligible retained income” for the Bank

and other Federal Reserve regulated institutions is the greater of:

●

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

tax effects not already

reflected in net income; or

●

the average net income over the preceding four quarters.

The Company’s primary source

of cash is dividends from the Bank.

The Bank’s Call Report are used for its calculation

“eligible retained income.”

The Bank’s capital conservation

buffer exceeded 2.5% at December 31, 2024.

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

framework for prompt corrective action. To

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

equity Tier 1, total risk-based, Tier

1 risk-

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

following table. Management has not received any notification from the

Bank's regulators, which changes the Bank’s

regulatory capital status.

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

declared by a state member bank (such as

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

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

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

During 2024, the Bank paid total cash dividends of

approximately $3.8 million to the Company.

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

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

of $9.7 million.

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

policies and requirements relating to the

payment of dividends, including requirements to maintain capital above

regulatory minimums. The appropriate federal and

state regulatory authorities are authorized to determine when the payment

of dividends would be an unsafe or unsound

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

that paying dividends that deplete a state

member bank’s capital base

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

The Federal Reserve

has indicated that depository institutions and their holding companies should

generally pay dividends only out of current

year’s operating earnings.

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

consolidated financial

statements.

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

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

payments, stock redemptions and stock repurchases.

Prior consultation with the Federal Reserve supervisory staff is

required before:

●

redemptions or repurchases of capital instruments when the bank

holding company is experiencing financial

weakness; and

●

redemptions and purchases of common or perpetual preferred stock

which would reduce such Tier 1 capital at end

of the period compared to the beginning of the period.

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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.

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Enforcement Policies and Actions

The Federal Reserve and the Alabama Superintendent examine and

regulate our compliance with laws and regulations,

including the CFPB’s regulations.

The CFPB issues regulations, interpretations and enforcement actions

under the laws

applicable to consumer financial products and services.

Violations of laws and regulations, including

those administered by

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

Reserve and the Alabama Superintendent

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

or taking other formal or informal enforcement actions.

Under certain circumstances, these agencies may enforce

these remedies directly against officers, directors, employees and

others participating in the affairs of a bank or bank holding

company, in the form of fines, penalties,

or the recovery, or

claw-back, of compensation.

Fiscal and Monetary Policies

Banking is a business that depends on interest rate differentials.

In general, the difference between the interest paid by

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

a bank on its loans and securities holdings,

constitutes the major portion of a bank’s

earnings.

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

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

liabilities are subject to the influence of

economic conditions generally,

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

United States

and its agencies, particularly the Federal Reserve.

The Federal Reserve regulates the supply of money through various

means, including open market dealings in United States government

securities, the setting of discount rate at which banks

may borrow from the Federal Reserve, and the reserve requirements

on deposits.

The Federal Reserve has been paying interest on depository institutions required

and excess reserve balances since October

2008.

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

Federal Reserve greater scope to use its

lending programs to address conditions in credit markets while also maintaining

the federal funds rate close to the target

rate established by the Federal Open Market Committee.

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

implement a mandatory policy to reduce excess liquidity,

in the event of inflation or the threat of inflation.

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

Requirements of Depository Institutions)

authorizing the Reserve Banks to offer term deposits to

certain institutions.

Term deposits, which

are deposits with

specified maturity dates, will be offered through a Term

Deposit Facility.

Term deposits will be one

of several tools that

the Federal Reserve could employ to drain reserves when policymakers

judge that it is appropriate to begin moving to a less

accommodative stance of monetary policy.

In 2011, the Federal Reserve repealed its historical

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

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

and the stress in U.S. financial markets,

the Federal Reserve, Congress and the Department of the Treasury

took a host of fiscal and monetary measures. In March

2020, the Federal Reserve reduced the federal funds rate target

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

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

help stabilize the financial system and purchased

large amounts of government and government agency

mortgaged backed securities.

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

inflation as “transitory,” but

as inflation

continued at increasing rates the Federal Reserve’s

policy changed.

The Federal Reserve announced a 25 basis point

increase in the target federal funds range on March 17,

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

0-0.25%.

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

each of June 15, July 27,

September

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

During 2023, the Federal Reserve announced

additional target rate increases of 25 basis points on

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

The

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

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

-5.00%.

Two other reductions in November

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

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The Federal Reserve’s securities

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

from $3.9 trillion in

early March 2020 to $9.0 trillion at April 11,

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

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

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

its securities holdings in an effort to reduce inflation:

●

Reinvestments of principal of maturing Treasury

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

months and thereafter would be $60 billion per month.

●

Reinvestments of principal of maturing agency debt and agency mortgage

-backed securities would be reduced by

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

per month.

●

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

balance sheet was somewhat above the

balance it deemed ample.

On May 4, 2024, the Federal Reserve’s

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

in June

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

reducing the monthly redemption cap on Treasury

securities from $60 billion to $25 billion.

The Committee maintained the monthly redemption cap on agency debt

and

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

remaining principal amounts of maturing securities

in Treasury securities.

The Federal Reserve’s SOMA was $6.4

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

February 28, 2024.

The Federal Reserve seeks to maintain maximum employment and

targets longer term inflation of 2% based on annual

changes in the personal consumption expenditures.

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

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

The economic outlook is uncertain, and the

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

remained above that rate through February

2024.

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

to reduce its target federal funds rate

further at this time.

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

market rates, liquidity issues at two

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

Bank Term Funding

Program

(“BTFP”).

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

credit unions, and other eligible

depository institutions pledging U.S. Treasuries,

agency debt and mortgage-backed securities, and other qualifying

assets as

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

The BTFP expires March 11, 2024, except for

loans outstanding prior to its expiration.

The Company did not participate in the BTFP in 2023.

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

obtain liquidity against a wide range of

collateral through the Federal Reserve’s

discount window,

which was available with the same collateral margins as the

BTFP,

but which offers loans of up to 90 days.

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

values, collateral margins subsequently have been reduced

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

amount of discount depending on the type of collateral.

FDIC Insurance Assessments

The Bank’s deposits are insured

by the FDIC’s DIF,

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

Since 2011, and as discussed above under “Recent

Regulatory Developments”, the FDIC has been calculating assessments

based on an institution’s average

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

accordance with changes mandated by the Dodd-Frank Act.

The FDIC changed its assessment rates which shifted part of

the burden of deposit insurance premiums toward depository institutions relying

on funding sources other than deposits.

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

all risk categories and now uses “financial

ratios method” based on CAMELS composite ratings to determine assessment

rates for small established institutions with

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

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

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

All basis points are annual amounts.

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

as the Bank, for the first assessment period

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

Established Small Institution

CAMELS Composite

1 or 2

4 or 5

Initial Base Assessment Rule

5 to 18 basis points

8 to 32 basis points

18 to 32 basis points

Unsecured Debt Adjustment.

Cannot exceed the lesser of 5

basis points or 50% of the

bank’s initial FDIC

assessment rate

-5 to 0 basis points

Brokered Deposit

Adjustment

N/A

Total Base Assessment

Rate

2.5 to 18 basis points

4 to 32 basis points

13 to 32 basis points

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

CAMELS rating.

For example, Small Banks, with

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

for the period to be billed in June

2023.

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

banks with more than $5

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

to insure all depositors in connection with the

March 2023 failures of Silicon Valley

Bank and Signature Bank.

These special assessments do not apply to the Bank.

The minimum FDIC’s DIF reserve

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

The FDIC Board of directors is

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

a reserve ratio before the beginning of each

calendar year.

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

FDI Act

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

grants the Board sole discretion in

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

The reserve ratio reached 1.36% on

September 30, 2018, exceeding the minimum requirement.

As a result, deposit insurance surcharges on Large

Banks

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

the FDIC for their portion of assessments

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

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

received and applied against the Bank’s

deposit insurance assessments during 2019 and 2020.

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

due to the pandemic and government

stimulus, the DIF’s reserve ratio declined

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

15,

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

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

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

deposit assessment rates by up to two basis

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

to meet the required reserve ratio.

The designated

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

The Company recorded FDIC insurance premiums expenses of $0.5 million

for both 2024 and 2023, respectively,

which

reflects the FDIC’s amended

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

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

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CRE and Leveraged Loans

CRE

The federal bank regulatory agencies released guidance in 2006

on “Concentrations in Commercial Real Estate Lending”

(the “CRE Guidance”).

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

land development and

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

property, and non-farm nonresidential

property

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

rental income associated with the property (that is,

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

third party, non-affiliated,

rental income) or the

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

Loans to REITs and unsecured

loans to

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

also be considered CRE loans under the CRE

Guidance.

Loans on owner occupied CRE are generally excluded.

In December 2015, the Federal Reserve and other bank

regulators issued an interagency statement to highlight prudent risk

management practices from existing guidance that

regulated financial institutions and made recommendations regarding

maintaining capital levels commensurate with the

level and nature of their CRE concentration risk.

The CRE Guidance requires that banks have appropriate processes be in

place to identify, monitor

and control risks

associated with real estate lending concentrations.

This could include enhanced strategic planning, CRE underwriting

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

risk exposure limits as well as appropriately

designed compensation and incentive programs.

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

The CRE Guidance is triggered when either:

●

Total reported loans

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

total capital;

●

Total reported loans

secured by multifamily and nonfarm nonresidential properties and loans for

construction, land

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

total risk-based capital.

This CRE Guidance was supplemented by the Interagency Statement on

Prudent Risk Management for Commercial Real

Estate Lending (December 18, 2015).

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

has significant concentrations of CRE secured by a particular property

type. See “Management’s Discussion and Analysis

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

concentrations of the various types of CRE

loans.

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

and land development loans and $324.0

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

approximately 73% and 286%,

respectively, of

the Bank’s total risk-based capital at December

31, 2024.

The Company has always had significant

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

and the loan needs of both its retail

and commercial customers.

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

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

monitoring and administration

procedures, are generally appropriate to manage its concentrations as required

under the Guidance.

The Federal Reserve joined the other depository institution regulators in issuing

a Policy Statement on Prudent Commercial

Real Estate Loan Accommodations and Workouts

(June 30, 2023).

This Policy Statement builds on and updates existing

guidance to enable financial institutions to work prudently and constructively

with creditworthy borrowers during times of

financial stress.

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

to CRE short term loan

accommodations and longer-term workouts in all

business cycles, particularly in challenging economic environments.

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

in assessing the adequacy of a

financial institution's risk management practices for loan accommodation

and workout activities.

Financial institutions that

implement prudent CRE loan accommodation and workout arrangements

after performing a comprehensive review of a

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

these efforts, even if these arrangements result

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

modified loans to borrowers who

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

subject to adverse classification solely

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

is less than the outstanding loan balance.

The

Policy Statement also describes the classifications of CRE loan accommodations

and workouts and addresses regulatory

accounting and reporting in such situations, including CECL.

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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.

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

compensation is required on a “no fault” basis,

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

responsibility for the erroneous financial

statements. A restatement due to material noncompliance with any financial

reporting requirement under the securities laws

triggers application of the recovery policy.

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

circumstances and existing judicial and administrative interpretations.

The proposed Nasdaq Rule requires recovery for

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

(commonly referred to as “Big R”

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

to previously issued financial statements

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

in the current report or the error correction

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

Nasdaq-listed companies, such as the Company,

are required to recover the amount of incentive-based compensation

received by an executive officer that exceeds the amount the executive

officer would have received had the incentive-based

compensation been determined based on the accounting restatement,

computed without regard to any taxes paid.

Nasdaq

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

earned or vested based wholly or in part upon

the attainment of any “financial reporting measure.”

Incentive-based compensation is deemed received on or after October

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

specified in the incentive-based compensation

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

compensation occurs after the end of that period.

The Company adopted an Erroneously Awarded

Executive Incentive Based Compensation Policy effective

December 1,

2023 to comply with these rules.

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

of the Dodd-Frank Act comparing

their CEO’s total compensation to

the median compensation of all other employees.

These rules applied beginning to fiscal

year 2017 annual reports and proxy statements.

Smaller reporting companies, such as the Company,

are exempted from

this rule.

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

that each company disclose in the proxy materials

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

to purchase financial instruments designed to

hedge or offset decreases in the market value of equity

securities granted as compensation or otherwise held by the

employee or board member.

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

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

any awards under that Plan as of February

12, 2025.

The Company’s insider trading policy,

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

and certain independent contractors and specified related persons (collectively,

“Covered Persons”).

This Policy prohibits

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

transactions involving Company “Derivative

Securities.”

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

put option contracts, including

straddles, and the like.

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

rights or

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

security, including Company Securities.

The

Company’s Insider Trading

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

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

arrangements that encourage inappropriate risk

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

may lead to material losses.

In June 2010, the

federal bank regulators adopted Guidance on Sound Incentive Compensation

Policies, which, although targeted to larger,

more complex organizations than the Company,

includes principles that have been applied to smaller organizations similar

to the Company.

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

“individually

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

to material amounts of risk.”

Incentive

compensation should:

●

Provide employees incentives that appropriately balance risk and reward;

●

Be compatible with effective controls and risk-management;

and

●

Be supported by strong corporate governance, including active and

effective oversight by the organization’s

board

of directors.

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

have less effect on smaller banking

organizations, which typically are less complex and make

less use of incentive compensation arrangements than larger

banking organizations.

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

implementing Section 956 in April 2011,

which would have been applicable to, among others, depository

institutions and their holding companies with $1 billion or

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.

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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.

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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

Senate confirmation.

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The current Acting CFPB Director, on February

8, 2025, ordered all CFPB employees to suspend substantially all

activities, including all supervision, examination and stakeholder

engagement activities, and closed the agency's

headquarters for the week of February 10, 2025.

The Acting CFPB Director also said the CFPB had excessive funding on

hand and would not take the next scheduled drawdown of funds from the Federal

Reserve.

Executive Order 14178 states the Administration’s

policy “to support the responsible growth and use of digital assets,

blockchain technology,

and related technologies across all sectors of the economy.”

“Digital assets” include “any digital

representation of value that is recorded on a distributed ledger,

including cryptocurrencies, digital tokens, and stablecoins.”

This order revoked Executive Order 14067 “Ensuring Responsible Development

of Digital Assets” (March 9, 2022) and

directed the Secretary of the Treasury is directed

to immediately revoke the Department of the Treasury's “Framework

for

International Engagement on Digital Assets,” (July 7, 2022).

These new policies include the following that are applicable to banks:

•

protecting and promoting fair and open access to banking services for all law-abiding

individual citizens and

private-sector entities alike; and

•

providing regulatory clarity and certainty built on technology-neutral

regulations, frameworks that account for

emerging technologies, transparent decision making,

and well-defined jurisdictional regulatory boundaries, all of

which are essential to supporting a vibrant and inclusive digital economy

and innovation in digital assets,

permissionless blockchains, and distributed ledger technologies

The Executive Order 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:

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;

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•

regulations that harm the national interest by significantly and unjustifiably

impeding technological

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.

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;

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●

Continuity risks to us and our service providers due to power,

information technology and telecommunication

disruptions and outages, could affect our customer service,

reputation and our results of operations, financial

condition, customer relationship and reputation;

●

Risks of severe weather, natural disasters, climate changes,

epidemics and severe health issues in the population,

wars and acts of terrorism and other events; and

●

Future acquisitions may disrupt our business, dilute shareholder value

and adversely affect our operating results

and financial condition, among other risks.

Financial risks result in part from our operational risks and the risk of our business,

and include:

●

Increases in costs of funds due to inflation, monetary and fiscal policies, changes

in costumer behaviors and

competitive pressures;

●

Our results of operations and financial condition, including the values of our

assets and liquidity, may be

affected

by changes in interest rates and interest rate levels, the shape of the yield curve and

economic conditions;

●

Liquidity risks, including the costs and availability of funding, and the

liquidity of our assets, including our

investment securities portfolio, and institutional lending sources;

●

Changes in accounting and tax rules;

●

The adequacy of our capital and availability of capital, if needed;

●

Potentially excessive risk taking by our associates;

●

Our ability to pay dividends depends on our earnings, liquidity and regulatory

requirements related to our capital

and our risks; and

●

Our common stock trades in limited volumes.

Legal and regulatory risks include:

●

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

transactions between the Bank and the

Company are limited by law;

●

The Company is required to be a source of financial and managerial strength

to the Bank, even in circumstances

where further investment in the Bank may not be warranted;

●

Privatization of Fannie Mae and Freddie Mac incident to the ending of their conservatorships

and the resulting

effects on the costs and availability of mortgage loans and the mortgage

markets, generally, and

the Company as a

mortgage originator, and seller and

servicer of residential mortgage loans;

●

The scope, volume, complexity and clarity of regulations and regulatory

and legal changes affect us, increase the

time and costs of compliance and may limit our business and adversely

affect our financial condition and results of

operations;

●

The pace and volume of regulatory changes and interpretations, especially by

the bank regulators, the CFPB and

the SEC, and well as numerous Executive Orders, and changes in government

leadership, personnel and policies.

Even where changes ultimately will benefit the Company,

changes in regulation and policies require time and

attention, and involve costs to implement;

●

Litigation, investigations and other claims by government agencies

and private parties and regulatory actions,

including those related to assertions of compliance failures;

●

The amounts and changes in the capital we are required to maintain in respect

of our business and risks, and

regulatory perceptions of us and our industry; and

●

Liquidity requirements and changes in rules that affect brokered

and reciprocal deposits and other sources and

measures of liquidity.

Additional Executive Orders and Administration and regulatory

decisions, directives and actions, including modifications

or changes to those discussed in this report, may occur at any time with currently

unpredictable effects.

Operational Risks

Market conditions and economic cyclicality may adversely affect our industry.

We believe the

following, among other things, may affect us in 2025:

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●

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.”

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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.

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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

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

changes in regulatory views and emphases that

may adversely affect us and may not be disclosable under law.

The

failures

Silicon

Valley

Bank,

Signature

Bank,

First

Republic

and

Heartland

Tri-State

Bank

2023

caused

significant

market

volatility

for

bank

stocks,

and

uncertainty

the

investor

community

and

among

bank

customers,

generally,

greater

bank

regulatory

scrutiny

banking

organizations,

especially

those

experiencing

rapid

growth

and

regional banks

with $100

billion or

more in

assets.

Similarly,

concerns about

credit quality

and capital

adequacy

at New

York

Community

Bank

following

two

acquisitions

raised

market

concerns

and

led

replacement

management

and

dilutive equity capital raise.

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These failures

have resulted

in bank regulators

focusing supervisory

activities, generally,

on capital adequacy

and liquidity

light

growth;

asset,

liability

and

customer

concentrations

and

risks;

CRE;

levels

uninsured

deposits;

crypto

businesses

and

customers;

third-party

vendors

“partners”

providing

digital,

electronic

and

other

services

known

banking

service

(“BaaS”)

and

fintech

relationships;

strategic,

capital

and

liquidity plans

and

contingency

plans;

and

vendor

diligence

and

risk

management.

Such

enhanced

scrutiny

often

applied

part

the

regulatory

examination

processes,

well

through

variety

nonpublic

supervisory

actions

such

“matters

requiring

attention,”

board

director resolutions,

memoranda of

understanding, and

other regulatory

criticism, and

formal, public

enforcement actions.

The

bank

and

bank

holding

examination

processes,

well

any

nonpublic

supervisory

actions,

are

“confidential

supervisory

information”

for

regulatory

purposes,

whose

existence

and

terms,

any,

may

not

disclosed

banking

organizations.

Changes

regulations

have

been

proposed

as part

of the

Basel III

endgame

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.

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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.

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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.

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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.

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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,

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.

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The COVID-19 pandemic, trade wars, tariffs, supply chain

disruptions and changes, wars, sanctions and similar events and

disputes, domestic and international, have adversely affected,

and may continue to adversely affect economic activity

globally, nationally

and locally.

Market interest rates have changed significantly and suddenly.

The Federal Reserve’s

target federal funds rates declined to 0-0.25% in March

2020, where these remained until March 17 2022.

The Federal

Reserve increased the target federal funds rates 11

from March 17, 2022 through July 27, 2023 to 5.25-5.50% due to

inflation.

After three rate cuts during the last four months of 2024, this range was 4.25-4.50% at December

31, 2024, but

such target rates and inflation remain above the Federal Reserve’s

target rate of 2%.

Such events also may adversely affect

business and consumer confidence, generally.

We and our customers, and

our respective suppliers, vendors and processors

may be adversely affected by shortages of needed equipment and

supplies, rising prices and tight labor markets.

The

continuation or worsening of these conditions may adversely affect

our profitability, growth asset quality

and financial

condition.

Financial Risks

Our cost of funds may increase as a result

of general economic conditions, interest rates, inflation

and changes in customer

behaviors and competitive pressures.

Our costs of funds have increased as a result of general economic conditions,

increased market interest rates and

competitive pressures, and inflation, and anticipated future changes in

target short-term interest rates by the Federal

Reserve to reduce inflation.

Traditionally,

we have obtained funds principally through local deposits and borrowings from

other institutional lenders such as the FHLB-Atlanta.

We believe deposits

are a cheaper and more stable source of funds

than other borrowings, generally.

Increases in interest rates have caused consumers to shift their funds to more interest-

bearing instruments and to increase the competition for and costs of deposits.

If customers move money out of bank

deposits and into other investment assets or from transaction deposits to

higher cost, interest-bearing time deposits, we

could lose relatively low-cost sources of funds, increasing our funding costs and

potentially reducing our net interest

income and net income. Additionally,

any such loss of funds could result in lower loan originations and growth, which

could materially and adversely affect our results of operations and

financial condition.

See “Supervision and Regulation –

Fiscal and Monetary Policy.”

Our profitability and liquidity may be affected

by changes in interest rates and interest

rate levels, the shape of the yield

curve and economic conditions.

Our profitability depends upon net interest income, which is the difference

between interest earned on interest-earning

assets, such as loans and investments, and interest expense on interest-bearing

liabilities, such as deposits and borrowings.

Our income is primarily driven by the spread between these rates. Net interest income

will be adversely affected if market

interest rates and the interest we pay on our deposits and borrowings increase

faster than the interest earned on loans and

investments.

Interest rates, and consequently our results of operations, are affected

by general economic conditions

(national, international and local) and fiscal and monetary policies, as well as expectations

regarding interest rate changes,

fiscal and monetary policies and the shape of the yield curve.

As a result, a steeper yield curve, meaning long-term interest

rates are significantly higher than short-term interest rates, would provide

the Bank with a better opportunity to increase net

interest income.

Conversely, a flattening yield curve

could further pressure our net interest margin as our cost of funds

increases relative to the spread we can earn on our assets.

In addition, net interest income could be affected by

asymmetrical changes in the different interest rate indexes,

given that not all of our assets or liabilities are priced with the

same index.

Higher market interest rates and continuing run-off of maturing

securities held by the Federal Reserve in its

SOMA in furtherance of its quantitative tightening policy to fight

inflation, generally reduce economic activity and may

reduce loan demand and growth.

Conversely, the slowing

of the run-off of maturing Treasury

securities held in SOMA

from $60 billion per month to $25 billion that commenced in June 2024,

may reduce the tightening effect of such decreases

in SOMA.

The production of mortgages and other loans and the value of collateral

securing our loans are dependent on demand within

the markets we serve, as well as interest rates.

Lower interest rates typically increase mortgage originations, decrease MSR

values and promote economic growth.

Increases in market interest rates tend to decrease mortgage originations,

increase

MSR values, decrease the value and liquidity of collateral securing loans, result

in unrealized losses on our investment

securities and accumulated other comprehensive losses, and potentially

increase net interest spread depending upon the

yield curve and the magnitude and duration of interest rate increase, and

constrain economic growth, generally.

Reductions

in short term target interest rates by the Federal Reserve in the second half

of 2024 did not have much effect on reducing

longer term mortgage rates.

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Increases in market interest rates also have caused unrealized losses in our investment

securities, all of which are held as

available for sale and carried at fair market values.

Market prices of our investment securities holdings decline as market

interest rates increase for comparable securities and maturities.

Although these unrealized losses do not adversely affect

our regulatory capital, these do reduce our reported income and GAAP tangible

stockholders’ equity.

Sales of securities

with unrealized losses would result in realized losses for GAAP,

regulatory capital and tax purposes.

Increases in interest

rates may also change depositor behaviors as customers seek higher yielding

deposits.

This may adversely affect our costs

of funds, growth, net interest income and net income, and may also adversely

affect our liquidity,

results of operations and

financial condition.

Liquidity risks could affect operations and jeopardize

our financial condition.

The COVID-19 pandemic and related monetary and fiscal stimuli generally

increased our bank deposits, including at the

Bank, while reducing the interest rates earned on loans and securities.

Such excess liquidity and the resulting balance sheet

growth reduced returns on assets and equity.

The growth in deposits exceeded our loan growth, and the difference

was

invested in high-quality,

marketable U.S. government and government agency securities, including

agency mortgage-

backed securities.

Inflation and tightening monetary policies beginning in early 2022 have partially

reversed these trends.

Liquidity is essential to our business.

An inability to raise funds through deposits, borrowings, proceeds from

loan

repayments or sales proceeds from maturing loans and securities, and other

sources could have a negative effect on our

liquidity.

Our funding sources include deposits (primarily core deposits), federal funds purchased,

securities sold under

repurchase agreements, and short- and long-term debt.

We maintain a portfolio of

marketable high-quality securities that

are all held as available for sale, and can be used as a source of liquidity.

As market interest rates rose prior to Fall 2024,

however, we have experienced unrealized

losses on such securities, which would become realized losses upon

the sale of

such securities, and such sales at a loss would reduce our net income and our

regulatory capital.

We are also members

of the FHLB-Atlanta and the Federal Reserve Bank of Atlanta, and we can obtain

advances from

them collateralized with eligible assets, and maintain uncommitted

federal funds lines of credit with other banks.

Other sources of liquidity available to the Company or the Bank, if needed,

include our ability to acquire additional non-

core deposits.

We may be able, depending

upon market conditions, to borrow money or issue and sell debt and preferred or

common securities in public or private transactions.

Our access to funding sources in amounts adequate to finance or

capitalize our activities on terms which are acceptable to us could be impaired

by factors that affect us specifically,

or the

financial services industry,

the economy, market interest rates and

fiscal and monetary policies.

General conditions that are

not specific to us, such as disruptions in the financial markets, failures of other

bank, such as Silicon Valley

Bank,

Signature Bank and First Republic Bank in 2023, or negative views and expectations

about the prospects for the financial

services industry could adversely affect us and our liquidity.

Our ability to realize our deferred

tax assets may be reduced in the future

if our estimates of future taxable income

from

our operations and tax planning strategies do not support this amount, and the amount

of net operating loss carry-forwards

realizable for income tax purposes may be reduced

under Section 382 of the Internal Revenue Code by sales of our capital

securities.

We are allowed

to carry-back losses for two years for Federal income tax purposes.

As of December 31, 2024, we had a

net deferred tax asset of $10.2 compared to $10.3 million one year earlier.

These and future deferred tax assets may be

further reduced in the future if our estimates of future taxable income from our operations

and tax planning strategies do not

support the amount of the deferred tax asset.

The amount of net operating loss carry-forwards realizable for income tax

purposes potentially could be further reduced under Section 382

of the Internal Revenue Code by a significant offering

and/or other sales of our capital securities.

Current bank capital rules also reduce the regulatory capital benefits of deferred

tax assets.

Changes in accounting and tax rules applicable to banks could adversely

affect our financial conditions and results of

operations.

From time to time, the FASB

and the SEC change the financial accounting and reporting standards that govern

the

preparation of our financial statements.

These changes can be difficult to predict and can materially impact how

we record

and report our financial condition and results of operations.

In some cases, we could be required to apply a new or revised

standard retroactively,

resulting in us restating prior period financial statements

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We may

need to raise additional capital in the future, but that capital

may not be available when it is needed or on

favorable terms.

We anticipate that

our current capital resources will satisfy our capital requirements for the foreseeable

future under

currently effective rules.

We may,

however, need to raise additional capital to

support our growth or currently

unanticipated losses, or to meet the needs of our communities, resulting from

failures or cutbacks by our competitors.

Our

ability to raise additional capital, if needed, will depend, among other

things, on conditions in the capital markets at that

time, which are limited by events outside our control, and on our financial

performance.

If we cannot raise additional

capital on acceptable terms when needed, our ability to further expand

our operations through internal growth and

acquisitions could be limited.

Our associates may take excessive risks which could negatively affect our financial

condition and business.

Banks are in the business of accepting certain risks.

Our executive officers and other members of management,

sales

intermediaries, investment professionals, product managers, and

other associates, make decisions and choices that may

expose us to risk. We

endeavor, in the design and implementation

of our compensation programs and practices, to avoid

giving our associates incentives to take excessive risks; however,

associates may nonetheless take such risks.

Similarly,

although we employ controls and procedures designed to prevent

misconduct, to monitor associates’ business decisions and

prevent them from taking excessive risks, these controls and procedures may

not be effective.

If our associates take

excessive risks, risks to our reputation, financial condition and results of

operations could be materially and adversely

affected.

Our ability to continue to pay dividends to shareholders,

repurchase stock and

pay discretionary bonuses in the future

subject to our profitability,

capital, liquidity and regulatory requirements

and these limitations may prevent or limit future

dividends.

Cash available to pay dividends to our shareholders is derived primarily from

dividends paid to the Company by the Bank.

The ability of the Bank to pay dividends, as well as our ability to pay dividends

to our shareholders, will continue to be

subject to and limited by laws limiting dividend payments by the Bank,

the results of operations of our subsidiaries and our

need to maintain appropriate liquidity and capital at all levels of our business consistent

with regulatory requirements and

the needs of our businesses.

We can only

pay dividends, repurchase stock and pay discretionary bonuses, if our capital

conservation buffer exceeds 2.5% and from our eligible retained

income over the last four calendar quarters.

See

“Supervision and Regulation - Dividends and Distributions.”

The Federal Reserve expects bank holding companies to inform and

consult with Federal Reserve supervisory staff

sufficiently in advance of (i) declaring and paying a dividend that

could raise safety and soundness concerns, such as

declaring and paying a dividend that exceeds earnings for the period

for which the dividend is being paid); (ii) redeeming or

repurchasing regulatory capital instruments when the bank holding

company is experiencing financial weaknesses; or (iii)

redeeming or repurchasing common stock or perpetual preferred

stock that would result in a net reduction as of the end of a

quarter in the amount of such equity instruments outstanding compared

with the beginning of the quarter in which the

redemption or repurchase occurred.

Further, the Company is also required

to maintain sufficient capital, liquidity and resources to serve as a source of

managerial and financial strength to the Bank, which may limit its capacity to pay

dividends on Company common stock.

The Federal Reserve may require the Company to commit resources to the

Bank, even where it is not otherwise in the

interests of the Company or its shareholders or creditors.

Our common stock trades in limited volumes, which could result

in price volatility.

Your

ability to sell or purchase common shares depends upon the existence of an active

trading market for our common

stock.

Although our common stock is quoted on the Nasdaq Global Market under

the trading symbol “AUBN,” our trading

volume has been limited historically.

The limited trading volume of our common stock may cause fluctuations

in the

market value of our common stock to be exaggerated, leading to price volatility

in excess of that which would occur in a

more active trading market.

As a result, you may be unable to sell or purchase shares of our common stock

at the volume,

price and time that you desire.

Additionally, whether

the market prices of our common stock reflect a reasonable valuation

of our common stock also is affected by the limited market volumes,

and thus the price you receive may not reflect its true

or intrinsic value.

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Legal and Regulatory Risks

The Company is an entity separate and distinct from

the Bank.

The Company is an entity separate and distinct from the Bank.

Company transactions with the Bank are limited by

Sections 23A and 23B of the Federal Reserve Act and Federal Reserve Regulation

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.

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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.

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We are

required to maintain

capital to meet regulatory requirements,

and if we fail to maintain sufficient capital, our

financial condition, liquidity and results of operations

would be adversely affected.

We and the Bank

must meet regulatory capital requirements and maintain sufficient

liquidity, including liquidity

at the

Company, as well as the Bank.

If we fail to meet these capital and other regulatory requirements, our financial

condition,

liquidity and results of operations would be materially and adversely

affected.

Our failure to remain “well capitalized” and

“well managed”, including meeting the Basel III capital conservation buffers,

for bank regulatory purposes, could adversely

affect us.

See

“Supervision and Regulation—Basel III Capital Rules.”

Although we currently have capital ratios that exceed all these minimum levels and

a strategic plan to maintain these levels,

we or the Bank may be unable to continue to satisfy the capital adequacy requirements

and/or maintain our liquidity for

various reasons, which may include:

●

losses and/or increases in the Bank’s credit

risk assets and expected losses resulting from the deterioration in the

creditworthiness of borrowers and the issuers of investment securities we hold;

●

difficulty in refinancing or issuing instruments upon redemption

or at maturity of such instruments to raise capital

under acceptable terms and conditions;

●

declines in the value of our securities portfolios or sales of securities for losses;

●

revisions to the regulations or their application by our regulators that increase our

capital or liquidity requirements;

●

reduced total earnings on our assets will reduce our internal generation

of capital available to support our balance

sheet growth;

●

reductions in the value of our MSRs and DTAs;

and other adverse developments; and

●

unexpected growth and an inability to increase capital timely.

A failure to remain “well capitalized,” for bank regulatory purposes, including

meeting the Basel III Capital Rule’s

conservation buffer,

could adversely affect customer confidence, and our:

●

ability to grow;

●

the costs of and availability of funds;

●

FDIC deposit insurance premiums;

●

ability to raise or replace brokered deposits;

●

ability to pay or increase dividends on our capital stock.

●

Ability to repurchase our common stock

●

ability to make discretionary bonuses to attract and retain quality personnel;

●

ability to make acquisitions or engage in new activities;

●

flexibility if we become subject to prompt corrective action restrictions; and

●

ability to make payments of principal and interest on any of our capital

instruments that may be then outstanding.

The Federal Reserve may require

us to commit capital resources

to support the Bank.

As a matter of policy, the

Federal Reserve expects a bank holding company to act as a source of financial and managerial

strength to a subsidiary bank and to commit resources to support such subsidiary

bank.

The Federal Reserve may require a

bank holding company to make capital injections into a troubled subsidiary bank.

In addition, the Dodd-Frank Act amended

the FDI Act to require that all companies that control a FDIC-insured depository

institution serve as a source of financial

strength to their depository institution subsidiaries.

Under these requirements, we could be required to provide financial

assistance to the Bank should it experience financial distress, even if further investment

was not otherwise warranted. See

“Supervision and Regulation.”

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Our operations are subject to risk of loss from

unfavorable fiscal, monetary,

regulatory and political developments in the

U.S.

Our businesses and earnings are affected by the fiscal, monetary

and other policies and actions of various U.S.

governmental and regulatory authorities.

Changes in these are beyond our control and are difficult to predict and,

consequently, changes

in these policies could have negative effects on our activities and results of operations.

Failures of

the executive and legislative branches to agree on spending plans and budgets

previously have led to Federal government

shutdowns, which may adversely affect the U.S. economy.

Additionally, any prolonged

government shutdown or

reductions in force at various governmental and regulatory

authorities may inhibit our ability to evaluate the economy,

generally, and affect

government workers who are not paid during such events, and where the absence

of government

services and data could adversely affect consumer and business sentiment,

our local economy,

and business our customers

and our business.

The numerous Executive Orders and other actions taken by the Trump

Administration in its first month

and future changes, and their uncertain effects on the

economy, the markets, our regulators and

regulation, our local

markets, customers and others are unpredictable, and may adversely affect

our business, results of operations and financial

condition.

Litigation and regulatory investigations are

increasingly common in our businesses and may result

in significant financial

losses and/or harm to our reputation.

We face risks of

litigation and regulatory investigations and actions in the ordinary course of

operating our businesses,

including the risk of class action lawsuits.

Plaintiffs in class action and other lawsuits against us may seek very large

and/or

indeterminate amounts, including punitive and treble damages. Due to the vagaries

of litigation, the ultimate outcome of

litigation and the amount or range of potential loss at particular points in time

may be difficult to ascertain.

We do not have

any material pending litigation or regulatory matters affecting

us at December 31, 2024.

Failures to comply with the fair lending laws, CFPB regulations

or the Community Reinvestment Act, or CRA, could

adversely affect us.

The Bank is subject to, among other things, the provisions of the Equal

Credit Opportunity Act, or ECOA and the Fair

Housing Act, which prohibit discrimination based on race or color,

religion, national origin, sex and familial status in any

aspect of a consumer, commercial credit or

residential real estate transaction.

The DOJ’s and the federal bank

regulators’

Interagency Policy Statement on Discrimination in Lending provides

guidance to financial institutions to evaluate whether

discrimination exists, ways to prevent discriminatory lending

practices and how the government agencies will respond to

lending discrimination.

Failures to comply with ECOA, the Fair Housing Act and other fair lending laws and

regulations,

including CFPB regulations or interpretations, could subject us to enforcement

actions or litigation, and could have a

material adverse effect on our business financial condition

and results of operations.

Our Bank is also subject to the CRA and periodic CRA examinations. The

CRA requires us to serve our entire

communities, including low- and moderate-income (“LMI”) neighborhoods.

Our CRA ratings could be adversely affected

by actual or alleged violations of the fair lending or consumer financial

protection laws. The CRA and fair lending

responsibilities are related and mutually reinforcing.

Even though we have maintained a “satisfactory” CRA rating since

2000, we cannot predict our future CRA ratings.

Violations of fair lending

laws or if our CRA rating falls to less than

“satisfactory” could adversely affect our business, including expansion

through branching or acquisitions.

The Federal Reserve and the other federal bank regulators adopted

comprehensive revisions to its CRA regulations

published in the Federal Register on February 1, 2024.

We are evaluating

and working on implementing the new rules,

which could significantly affect our compliance costs and

activities.

See “Supervision and Regulation -

Community

Reinvestment Act and Consumer Laws.”

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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.

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

external service providers;

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•

Monitoring our systems and related software and programming periodically

to update software and

programing, including updating data protection elements, and requiring

that our service providers also engage

in similar programs that are reasonably designed to deter cybersecurity

breaches;

•

Performing initial and ongoing due diligence with respect to our third-party

service providers, including their

cybersecurity practices and safeguards, and service level standards

based on the risk they pose to the Bank;

•

Engaging third-party cybersecurity consultants, who conduct periodic penetration

testing, vulnerability

assessments and other procedures to identify potential weaknesses in our

systems and processes; and

•

Conducting periodic cybersecurity training for our employees and the 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.

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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

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.

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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

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

its present dividend policies.

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The amount of dividends payable by the Bank is limited by law and regulation.

The Company relies upon dividends from

the Bank to pay Company expenses and to pay dividends on Company common stock.

The need to maintain adequate

capital and liquidity in the Bank also limits the dividends that may be paid to the Company.

The Bank and the Company

can only pay dividends, repurchase stock and pay discretionary bonuses,

if our capital conservation buffer of CET1 capital

exceeds 2.5% and from our eligible retained income over the last four calendar

quarters.

Eligible retained income equals

the greater of:

●

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

tax effects not already

reflected in net income; or

●

the average net income over the preceding four quarters.

Federal Reserve policy could restrict future dividends from the Bank or on

Company Common Stock, depending on our

earnings and capital position, risks and likely needs.

The Alabama Banking Code also limits dividends payable by the

Bank.

See “Supervision and Regulation –Dividends and Distributions” and

“Management’s Discussion and Analysis of

Financial Condition and Results of Operations – Capital Adequacy”

and “Risk Factors -

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

Not applicable.

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ITEM 7.

MANAGEMENT'S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS

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

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

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

improved economic forecasts.

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The Company recorded a provision for credit losses of $36 thousand

in 2024 compared to $135 thousand during 2023.

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.

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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.

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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.

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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

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.

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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.

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December 31, 2024

1 year

1 to 5

5 to 10

After 10

Total

(Dollars in thousands)

or less

years

Fair Value

Agency obligations

—

26,655

25,756

—

52,411

Agency MBS

19,863

14,904

138,899

173,676

State and political subdivisions

—

966

8,244

7,715

16,925

Total available-for-sale

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.”

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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%

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.

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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

Consumer installment

Total recoveries

198

223

Net recoveries (charge-offs)

(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

—

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The table below provides information concerning the composition of

nonaccrual loans at December 31, 2024 and 2023,

respectively.

December 31

(In thousands)

2024

2023

Nonaccrual loans:

Commercial and industrial

—

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.

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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.

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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

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The following table reports the variance of net interest income over the next 12 months

assuming a gradual change in

interest rates up or down when compared to the baseline net interest income

forecast at December 31, 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.

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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

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.

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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

5 years

Contractual obligations:

Deposit maturities (1)

895,824

879,185

14,239

2,400

—

Operating lease obligations

246

120

—

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.

Table of Contents

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

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.”

Table of Contents

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.

Table of Contents

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

417

456

470

492

Net interest income (Tax-equivalent)

27,204

26,745

27,622

24,460

24,830

Table of Contents

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

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

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

1.06

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

53.20

7.80

14.23

20.23

To book value

105

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.

wholly-owned subsidiary, AuburnBank.

(d) Calculated by dividing period end share price by

earnings per share for the previous four quarters.

Table of Contents

Table 3

- Average

Balance and Net Interest Income Analysis

Year ended December 31

2024

2023

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

0.48%

3,255

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 of Contents

Table 4

- Volume

and Rate Variance

Analysis

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)

(3,466)

445

1,421

(976)

Federal funds sold

689

665

(185)

1,661

(1,846)

Interest bearing bank deposits

1,911

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

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)

(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.

Table of Contents

Table 5

- Net Charge-Offs (Recoveries) to Average

Loans

2024

2023

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

567,998

—

524,365

0.01

Table of Contents

Table 6

- Loan Maturities

December 31, 2024

1 year

1 to 5

5 to 15

After 15

(Dollars in thousands)

or less

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

Table of Contents

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

Total

Commercial and industrial

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

6,576

6,652

Total loans

66,038

390,456

456,494

Table of Contents

Table 8

- Allocation of Allowance for Credit Losses

2024

2023

(Dollars in thousands)

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.

Table of Contents

ITEM 7A.

QUANTITATIVE

AND QUALITATIVE

DISCLOSURES ABOUT MARKET RISK

The information called for by ITEM 7A is set forth in ITEM 7 under the

caption “Market and Liquidity Risk Management”

and is incorporated herein by reference.

ITEM 8.

FINANCIAL STATEMENTS

AND SUPPLEMENTARY

DATA

Index

Page

Report of Independent Registered Public Accounting Firm

(PCAOB ID:

149

)

Consolidated Balance Sheets

Consolidated Statements of Earnings

Consolidated Statements of Comprehensive Income

Consolidated Statements of Stockholders’ Equity

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

Table of Contents

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

have

audited

the

accompanying

consolidated

balance

sheets

Auburn

National

Bancorporation,

Inc.

and

Subsidiary

(the

“Company”)

December

31,

2024

and

2023,

the

consolidated

statements

earnings,

comprehensive

income,

stockholders'

equity

and

cash

flows

for

the

years then

ended,

and

the

notes

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,

conformity

with

accounting

principles

generally

accepted

the

United

States

America.

Basis for Opinion

These financial statements are

the responsibility of the

Company’s management.

Our responsibility is to express

an opinion

the

Company’s

financial

statements

based

our

audits.

are

public

accounting

firm

registered

with

the

Public

Company

Accounting

Oversight

Board

(United

States)

(PCAOB)

and

are

required

independent

with

respect

the

Company

accordance

with

U.S.

federal

securities

laws

and

the

applicable

rules

and

regulations

the

Securities

and

Exchange Commission and the PCAOB.

conducted

our

audits

accordance

with

the

standards

the

PCAOB.

Those

standards

require

that

plan

and

perform the

audit to

obtain reasonable

assurance about

whether the

financial statements

are free

of material

misstatement,

whether

due

error

fraud.

The

Company

not

required

have,

nor

were

engaged

perform,

audit

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

expressing

opinion

the

effectiveness

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

required

communicated

the

audit

committee

and

that:

(1)

relate

accounts

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

are not,

by communicating

the critical

audit

matters below,

providing

separate

opinions

on the

critical audit matters or on the accounts or disclosures to which they

relate.

Table of Contents

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

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

used

estimate

credit

loss

assumptions

for

consumer

loans.

The

DCF

model

calculates

expected

life-of-loan

loss

percentage

considering

the

forecasted

probability

that

borrower

will default

(the “PD”),

adjusted for

relevant forecasted

macroeconomic factors,

and loss

given default

(“LGD”), which

the

estimate

the

amount

net

loss

the

event

default.

This

model

utilizes

historical

correlations

between

default

experience

and

certain

macroeconomic

factors

determined

through

statistical

regression

analysis.

Projections

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.

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

the

Company’s

judgments

determining

the

macroeconomic

data

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:

●

obtained

understanding

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.

●

evaluated

the

reasonableness

management’s

application

qualitative

factor

adjustments

the

ACL,

including

the

comparison

factors

considered

management

third

party

internal

sources

well

evaluated the appropriateness and level of the qualitative factor adjustments.

●

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.

●

evaluated

subsequent

events

and

transactions

and

considered

whether

they

corroborated

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

Table of Contents

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

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

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

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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

Total interest expense

11,607

8,046

Net interest income

27,125

26,328

Provision for credit losses

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

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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

—

4,714

Other comprehensive (loss) income

(578)

11,891

Comprehensive income

5,819

13,286

See accompanying notes to consolidated financial statements

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AUBURN NATIONAL

BANCORPORATION,

INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

Accumulated

Common

Additional

other

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

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)

Sale of treasury stock

270

—

Balance, December 31, 2023

3,493,614

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

—

Balance, December 31, 2024

3,493,699

3,802

115,759

(29,607)

(11,701)

78,292

See accompanying notes to consolidated financial statements

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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

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

(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

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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.

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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.

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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

prepayments.

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The accrual of interest is generally discontinued when a loan becomes 90 days

past due and is not well collateralized and in

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.

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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

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.

Table of Contents

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.

Table of Contents

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

(445)

Income tax expense

Amortization expense

369

Income tax expense

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NOTE 4: SECURITIES

At December 31, 2024 and 2023, respectively,

all securities within the scope of ASC 320,

Investments – Debt and Equity

Securities

were classified as available-for-sale.

The fair value and amortized cost for securities available-for-sale by

contractual maturity at December 31, 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

Value

Gains

Losses

Cost

December 31, 2024

Agency obligations (a)

—

26,655

25,756

—

52,411

—

7,734

60,145

Agency MBS (a)

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

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)

15,109

22,090

161,058

198,289

—

27,838

226,127

State and political subdivisions

—

9,691

9,051

18,742

2,731

21,472

Total available-for-sale

363

25,448

74,990

170,109

270,910

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

—

173,669

28,901

173,676

28,901

State and political subdivisions

1,798

14,776

2,884

16,574

2,901

Total

1,805

240,856

39,519

242,661

39,536

December 31, 2023:

Agency obligations

—

53,879

8,195

53,879

8,195

Agency MBS

198,223

27,837

198,289

27,838

State and political subdivisions

793

14,408

2,729

15,201

2,731

Total

859

266,510

38,761

267,369

38,764

Table of Contents

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

the

decline

fair

value

largely

due

changes

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

agency

obligations

are

guaranteed

full

and

timely

payments

the

issuing

agency.

Based

management's

analysis

and

judgement,

there

were

credit

losses attributable

the

Company’s

investments

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

state

and

political

subdivisions

are

securities

issued

various municipalities

the

United

States.

The

majority

the

portfolio was

rated

higher,

with

securities

rated

below

investment

grade

December

31,

2024.

Based

management's

analysis

and

judgement,

there

were

credit

losses

attributable

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

—

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

564,017

557,294

Table of Contents

100

Loans secured by real estate were approximately

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

repayment is dependent upon income generated from the real estate collateral. The

underwriting of these loans takes

into consideration the occupancy and rental rates, as well as the financial health of

the borrower.

Other

– primarily includes loans to finance income-producing commercial

properties. Loans in this class include loans

for neighborhood retail centers,

medical and professional offices, single retail stores, industrial

buildings, and

warehouses leased generally to local businesses and residents. Generally,

the primary source of repayment is dependent

upon income generated from the real estate collateral. The underwriting of these

loans takes into consideration the

occupancy and rental rates as well as the financial health of the borrower.

Residential real estate (“RRE”) —

includes loans disaggregated into two classes:

Consumer mortgage

– primarily includes

first or second lien mortgages and home equity lines to consumers that are

secured by a primary residence or second home. These loans are underwritten in accordance

with the Bank’s general

loan policies and procedures which require, among other things, proper documentation

of each borrower’s financial

condition, satisfactory credit history and property value.

Investment property

– primarily includes loans to finance income-producing 1-4 family residential

properties.

Generally, the primary source of repayment

is dependent upon income generated from leasing the property securing the

loan. The underwriting of these loans takes into consideration the rental rates as well as

the financial health of the

borrower.

Table of Contents

101

Consumer installment —

includes loans to individuals both secured by personal property and unsecured.

Loans include

personal lines of credit, automobile loans, and other retail loans.

These loans are underwritten in accordance with the

Bank’s general loan policies and procedures

which require, among other things, proper documentation of

each borrower’s

financial condition, satisfactory credit history,

and if applicable, property value.

The following is a summary of current, accruing past due and nonaccrual loans by portfolio

class as of December 31, 2024

and 2023.

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

—

63,175

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

—

58,228

—

58,228

Total residential real

estate

117,856

771

—

118,627

—

118,627

Consumer installment

9,579

—

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

56,912

Total residential real

estate

117,039

290

—

117,329

128

117,457

Consumer installment

10,781

—

10,827

—

10,827

Total

555,781

602

—

556,383

911

557,294

Table of Contents

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.

Table of Contents

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

—

123

Substandard

181

—

259

Nonaccrual

—

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

—

Construction and land development

Pass

31,144

29,520

16,504

1,794

1,434

104

1,589

82,089

Special mention

—

Substandard

—

Nonaccrual

404

—

404

Total construction and land development

31,548

29,520

16,504

1,794

1,434

104

1,589

82,493

Current period gross charge-offs

—

Commercial real estate:

Owner occupied

Pass

1,921

11,206

6,776

17,114

3,396

12,030

1,552

53,995

Special mention

—

249

—

591

—

840

Substandard

511

—

511

Nonaccrual

—

Total owner occupied

2,432

11,455

6,776

17,114

3,987

12,030

1,552

55,346

Current period gross charge-offs

—

Hotel/motel

Pass

480

6,480

5,303

3,079

1,299

14,437

4,132

35,210

Special mention

—

Substandard

—

Nonaccrual

—

Total hotel/motel

480

6,480

5,303

3,079

1,299

14,437

4,132

35,210

Current period gross charge-offs

—

Table of Contents

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

—

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

—

Investment property

Pass

10,339

10,824

10,651

8,305

11,435

4,794

1,317

57,665

Special mention

—

Substandard

278

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

113

9,549

Special mention

—

Substandard

—

Nonaccrual

—

Total consumer installment

5,054

2,081

1,921

305

113

9,631

Current period gross charge-offs

—

114

Total loans

Pass

113,566

112,867

117,625

65,843

45,114

81,746

22,993

559,754

Special mention

292

332

—

593

486

—

1,712

Substandard

878

284

263

531

—

2,048

Nonaccrual

404

—

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

—

184

Table of Contents

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

203

—

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

—

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

—

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

—

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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

—

Substandard

248

—

233

—

524

Nonaccrual

—

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

—

Substandard

—

Nonaccrual

—

Total consumer installment

5,734

3,873

754

219

106

141

—

10,827

Current period gross charge-offs

—

105

Total loans

Pass

149,630

151,201

83,675

54,868

36,645

62,122

15,820

553,961

Special mention

310

190

305

—

841

Substandard

135

462

398

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

151

—

269

Table of Contents

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

Total provision for (reversal

of) credit losses

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

—

223

Net (charge-offs) recoveries

—

(100)

(46)

Provision

(31)

(61)

138

125

Balance, December 31, 2023

1,288

960

3,921

546

148

6,863

Charge-offs

(9)

—

(61)

(114)

(184)

Recoveries

144

—

198

Net recoveries (charge-offs)

135

—

(52)

(69)

Provision

(179)

(79)

(6)

Balance, December 31, 2024

1,244

1,059

3,842

588

138

6,871

Table of Contents

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

—

Construction and land development

404

—

404

Total

404

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 $

thousand and $

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

Total

(Dollars in thousands)

with no Allowance

with an Allowance

Nonaccrual Loans

December 31, 2024

Commercial and industrial

—

Construction and land development

404

—

404

Total

404

503

December 31, 2023

Commercial real estate

783

—

783

Residential real estate

—

128

Total

783

128

911

The Company had no modifications to loans made to borrowers experiencing

financial difficulty at December 31, 2024 and

2023.

Table of Contents

109

NOTE 6: PREMISES AND EQUIPMENT

Premises and equipment at December 31, 2024 and 2023 is presented

below.

December 31

(Dollars in thousands)

2024

2023

Land and improvements

12,800

Buildings and improvements

36,978

35,442

Furniture, fixtures, and equipment

4,335

3,986

Construction in progress

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.

estimate

the

Company’s

MSRs

determined

using

assumptions

that

market

participants

would

use

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

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

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

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

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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

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

2028

2029

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.

Table of Contents

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

2026

2027

2028

2029

—

Thereafter

—

Total undiscounted

operating lease liabilities

246

Imputed interest

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)

Total deferred income

tax expense (benefit)

438

(195)

Total income

tax expense (benefit)

2,000

(777)

Table of Contents

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

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

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

128

Other

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

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.

Table of Contents

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.

Table of Contents

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 $

thousand and $

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.

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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.

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

(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

borrower’s underlying financial condition.

Table of Contents

116

Mortgage servicing rights, net

Mortgage servicing rights, net, included in other assets on the accompanying consolidated

balance sheets, are carried at the

lower of cost or estimated fair value.

MSRs do not trade in an active market with readily observable prices.

To determine

the fair value of MSRs, the Company engages an independent third party.

The independent third party’s valuation

model

calculates the present value of estimated future net servicing income

using assumptions that market participants would use

in estimating future net servicing income, including estimates of prepayment

speeds, discount rate, default rates, cost to

service, escrow account earnings, contractual servicing fee income,

ancillary income, and late fees.

Periodically, the

Company will review broker surveys and other market research to validate

significant assumptions used in the model.

The

significant unobservable inputs include prepayment speeds or the constant prepayment

rate (“CPR”) and the weighted

average discount rate.

Because the valuation of MSRs requires the use of significant unobservable inputs, all of the

Company’s MSRs are classified

within Level 3 of the valuation hierarchy.

Table of Contents

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

(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

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

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.

Table of Contents

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

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

Table of Contents

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

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.

Table of Contents

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

150

Total liabilities

150

Stockholders' equity

78,292

76,507

Total liabilities and stockholders'

equity

78,385

76,657

Table of Contents

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

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)

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

Table of Contents

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

financial reporting.

Table of Contents

123

ITEM 9B.

OTHER INFORMATION

Trading Plans.

None.

Insider Trading Policy.

The Company maintains an Insider Trading

Policy that was reviewed, amended and approved most

recently on 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

None.

Table of Contents

124

PART

III

ITEM 10.

DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information required by this item is set forth under the headings “Proposal One:

Election of Directors - Information about

Nominees for Directors,” and “Executive Officers,”

“Additional Information Concerning the Company’s

Board of

Directors and Committees,” “Executive Compensation,” “Audit Committee

Report” and “Compliance with Section 16(a) of

the Securities Exchange Act of 1934” in our Proxy Statement, and

is incorporated herein by reference.

The Board of Directors has adopted a Code of Conduct and Ethics applicable

to the Company’s directors, officers

and

employees, including the Company’s

principal executive officer, principal

financial and principal accounting officer,

controller and other senior financial officers performing

similar functions. The Code of Conduct and Ethics, as well as the

charters for the Audit Committee, Compensation Committee, and the Nominating

and Corporate Governance Committee,

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.

Table of Contents

125

PART

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.

Certificate of Incorporation of Auburn National Bancorporation, Inc. (incorporated by reference from

Registrant's Form 10-Q dated June 30, 2002 (File No. 000-26486)).

3.2.

Amended and Restated Bylaws of Auburn National Bancorporation, Inc., adopted as of November 13, 2007

(incorporated by reference from Registrant’s Form 10-K dated March 31, 2008 (File No. 000-26486)).

4.1.

Description of the Registrant’s Securities

19.1

Insider Trading Policy

21.1

Subsidiaries of Registrant

23.1

Consent of Independent Registered Public Accounting Firm

31.1

Certification signed by the Chief Executive Officer pursuant to SEC Rule 13a-14(a).

31.2

Certification signed by the Chief Financial Officer pursuant to SEC Rule 13a-14(a).

32.1

Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of the Sarbanes -Oxley

Act of 2002 by David A. Hedges, President and Chief Executive Offi cer *

32.2

Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of the Sarbanes -Oxley

Act of 2002 by W. James Walker, IV, Senior Vice President and Chief Financial Officer.*

97.1

Policy Relating to Recovery of Erroneously Awarded Compensation (included by reference from Registrant's

Form 10-K/A dated April 12, 2024 (File No. 000-26486))

Table of Contents

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.

Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange

Act of 1934, the registrant has duly caused

this report to be signed on its behalf by the undersigned, thereunto duly

authorized, in the City of Auburn, State of

Alabama, on March 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,

W. James Walker,

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