Auburn National Bancorporation, Inc: Form 10-K for the period ended Dec 31, 2025

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 (http://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 (http://www.sec.gov)

that contains reports, proxy, and other information,

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

Services

The Bank operates its main office and 7 branches in Auburn, Opelika, Notasulga, and Valley, Alabama and a loan

production office in Phenix City, Alabama.

We

evaluate the utilization of our existing facilities and customer preferences

for online and mobile banking. In addition to opening our new main office in 2022, we closed one branch office in Auburn

at the end of 2024, whose customers could be served conveniently and more efficiently by another existing Bank branch.

The Bank offers checking, savings, transaction deposit accounts and certificates of deposit, and is an active residential

mortgage lender in its primary service area. The Bank’s primary service area includes the cities of Auburn and Opelika,

Alabama and nearby surrounding areas in East Alabama, primarily in Lee County. The Bank also offers commercial,

financial, agricultural, real estate construction and consumer loan products, and other financial services. The Bank operates

ATM machines in 8 locations in its primary service area. The Bank offers Visa

Checkcards, which are debit cards with

the Visa logo that work like checks and can be used anywhere Visa is accepted, including ATMs. The Bank’s Visa

Checkcards can be used internationally through the Plus

network. The Bank offers online banking, bill payment, online

consumer account opening, and other electronic banking services through its Internet website, www.auburnbank.com (http://www.auburnbank.com) . Our

online banking services, bill payment and electronic services are subject to certain cybersecurity risks. See “Risk Factors –

Our information systems may experience interruptions and security breaches.”

The Bank has not offered any services related to any Bitcoin or other digital or crypto instruments, stablecoins or

businesses.

Competition

The Bank operates in a highly competitive market for loans, deposits and other financial services in East Alabama,

including Lee County. Based on FDIC deposit market share data as of June 30, 2025, the Bank held the largest share of

deposits in Lee County. The Bank competes with 20 national, regional and community banks with offices in Lee County,

which operate offices in the local market and many have substantially greater financial, technological and marketing

resources. The Bank also competes with credit unions, mortgage lenders, insurance companies, investment firms and other

financial service providers. In addition, financial services are increasingly offered through digital and online platforms by

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

Many larger financial institutions have advantages over the Bank, including broader product offerings, higher lending

limits, greater access to capital markets, more extensive advertising and marketing capabilities, and the ability to operate

across larger geographic markets. The Bank also faces significant competition for deposits and other financial services

from investment companies, mutual funds, insurance companies and other financial institutions offering alternative savings

and investment products. Some of these competitors may not be subject to the same regulatory requirements as banks.

The Bank seeks to compete by emphasizing customer relationships, community presence, local decision-making and

responsive service.

Selected Economic Data

The Company’s primary market area is Lee County, Alabama, including the cities of Auburn and Opelika and surrounding

communities in East Alabama. Lee County is part of the Auburn-Opelika metropolitan statistical area. The local economy

is influenced by higher education, healthcare services, public education, distribution and logistics operations, retail and

service businesses, and automobile manufacturing and related suppliers located in the region. Major employers in the area

include Auburn University, regional healthcare providers, public school systems, manufacturing facilities, and distribution

operations. The presence of large automobile manufacturing plants and related suppliers along the Interstate 85 corridor in

eastern Alabama and western Georgia also contributes significantly to economic activity in the region and supports local

employment, business development, and population growth. As of year-end 2025, Lee County’s unemployment rate was

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

Economic conditions in our market area, including employment levels, housing activity, business investment, inflation and

interest rates, influence loan demand, credit quality, deposit growth, and other aspects of our operations. Changes in these

conditions could affect our results of operations and financial condition.

The Auburn-Opelika metropolitan area has experienced population and economic growth in recent years, supported by

expansion in education, healthcare, manufacturing and related industries. Continued growth in these sectors may influence

future economic conditions in our market area.

Loans and Loan Concentrations

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

acquisition, construction and development and consumer purposes. While there are certain risks unique to each type of

lending, management believes that there is more risk associated with commercial, real estate acquisition, construction and

development, agricultural and consumer lending than with residential real estate mortgage loans. To help manage these

risks, the Bank has established underwriting standards used in evaluating each extension of credit on an individual basis,

which are substantially similar for each type of loan. These standards include a review of the economic conditions

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

borrower’s past credit performance.

We

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

throughout the life of the loan. See “Lending Practices” for a discussion of regulatory guidance on commercial real estate

lending.

Our commercial real estate (“CRE”) loans, including $59.6 million of loans on owner occupied property, as of December

31, 2025 totaled $325.5 million (58% of total loans). Our regulators’ CRE Guidance excludes loans on owner occupied

property from CRE. Excluding our owner-occupied loans, our CRE loans were $290.2 million (51% of total loans) at year

end 2024. See “Lending Practices –

CRE.

The Bank has loans outstanding to borrowers in all industries within our primary service area. Any adverse economic or

other conditions affecting these industries would also likely have an adverse effect on the local workforce, other local

businesses, and individuals in the community that have entered into loans with the Bank. For example, the auto

manufacturing business and its suppliers have positively affected our local economy, but automobile sales manufacturing is

cyclical and adversely affected by increases in interest rates. Decreases in automobile sales, including adverse changes due

to interest rate increases and inflation, tariffs, supply chain disruptions (including changes resulting from the effects of

tariffs and related changes in countries and producers in the supply chains) and a tight labor market, could adversely affect

nearby Kia and Hyundai automotive plants and their suppliers' local spending and employment, and could adversely affect

economic conditions in the markets we serve. However, management believes that due to the diversified mix of industries

located within our markets, adverse changes in one industry may not necessarily affect other area industries to the same

degree or within the same time frame. The Bank’s primary service area also is subject to both local and national economic

conditions and fluctuations. While most loans are made within our primary service area, some residential mor tgage loans

are originated outside the primary service area, and the Bank from time to time has purchased loan participations from

outside its primary service area.

We

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

a relationship with the borrower, or its business or owners.

Human Capital

At December 31, 2025, the Company and its subsidiaries had 145 full-time equivalent employees, including 37 officers.

Our employees have been with us an average of approximately 12 years. We successfully implemented plans to protect our

employees’ health consistent with CDC and State of Alabama guidelines during the COVID-19 pandemic, while

maintaining critical banking services to our communities and experiencing little employee turnover. In addition, we

developed our remote and electronic banking services, and established remote work access to help employees stay at home

where their job duties permitted. This promoted employee retention, and these efforts will provide us proven experience

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

of service.

We have a talented group of employees, many of whom, have a college or associate degree. We believe the Auburn-

Opelika MSA is a desirable place to live and work with excellent schools and quality of life. Our MSA was the second

fastest growing MSA in Alabama from 2010 to 2022. Auburn University is a major employer that attracts talented students

and employee families.

We had a successful management transition in 2022 where our CEO became Chairman, and was succeeded by our CFO,

whose role was then filled by our Chief Accounting Officer. At the time of transition, our Chairman had served the Bank

39 years, our President and CEO had been with us 16 years and our Chief Accounting Officer had been with us for 7 years.

Our new President and CFO had careers with major national and regional accounting firms and focused on financial

services before joining the Bank.

We seek to offer competitive compensation and benefits. We provide employer matches for employee contributions to our

401(k) retirement plan. In 2024, our shareholders approved our 2024 Equity and Incentive Compensation Plan (the “2024

Incentive Plan”). The Plan provides for a variety of equity and equity-based awards, including stock options, performance

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

incentive awards. We believe that the 2024 Incentive Plan provides the flexibility to structure appropriate incentives to

attract and retain talented people in a competitive market where many of our competitors are public companies who offer

stock-based incentives.

We encourage and support the growth and development of our employees and, wherever possible, seek to fill positions by

promotion and transfer from within the organization. Career development is advanced through ongoing performance and

development conversations with employees, internally developed training programs and other training and development

opportunities.

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

employees.

Statistical Information

Certain statistical information is included in responses to Items 6, 7, 7A and 8 of this Annual Report on Form 10-K.

SUPERVISION AND REGULATION

The Company and the Bank are extensively regulated under federal and state laws applicable to bank holding companies

and banks. The supervision, regulation and examination of the Company and the Bank and their respective subsidiaries by

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

federal deposit insurance system, as well as the protection of depositors, rather than holders of Company capital stock and

other securities. Various changes in legislation and regulatory rules and practices occur regularly. Any change in

applicable law or regulation may have a material effect on the Company’s business, and our results of operations and

financial condition. The following discussion is qualified in its entirety by reference to the particular laws, rules and

regulatory proposals referred to below.

Bank Holding Company Regulation

The Company, as a bank holding company, is subject to supervision, regulation and examination by the Federal Reserve

under the BHC Act. Bank holding companies generally are limited to the business of banking, managing or controlling

banks, and certain related activities. The Company is required to file periodic reports and other information with the Federal

Reserve. The Federal Reserve examines the Company and its subsidiaries. The State of Alabama currently does not

regulate bank holding companies.

The BHC Act requires prior Federal Reserve approval for, among other things, the acquisition by a bank holding company

of direct or indirect ownership or control of more than 5% of the voting shares or substantially all the assets of any bank, or

for a merger or consolidation of a bank holding company with another bank holding company. The BHC Act generally

prohibits a bank holding company from acquiring direct or indirect ownership or control of voting shares of any company

that is not a bank or bank holding company and from engaging directly or indirectly in any activity other than banking or

managing or controlling banks or performing services for its authorized subsidiaries. A bank holding company may,

however, engage in or acquire an interest in a company that engages in activities that the Federal Reserve has determined

by regulation or order to be so closely related to banking or managing or controlling banks as to be a proper incident

thereto.

Changes in control of bank holding companies are subject to prior notice to, and nonobjection by the Federal Reserve under

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

Alabama state banks, by the Alabama Superintendent of Banks (the “Alabama Superintendent”) under the Alabama

Banking Code.

Bank holding companies that are and remain “well-capitalized” and “well-managed,” as defined in Federal Reserve

Regulation

Y,

and whose insured depository institution subsidiaries maintain “satisfactory” or better ratings under the

Community Reinvestment Act of 1977 (the “CRA”), may elect to become “financial holding companies.” Financial holding

companies and their subsidiaries are permitted to acquire or engage in activities such as insurance underwriting, securities

underwriting, travel agency activities, broad insurance agency activities, merchant banking and other activities that the

Federal Reserve determines to be financial in nature or complementary thereto. In addition, under the BHC Act’s merchant

banking authority and Federal Reserve regulations, financial holding companies are authorized to invest in companies that

engage in activities that are not

Changes in control of bank holding companies are subject to prior notice to, and nonobjection by the Federal Reserve under

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

Alabama state banks, by the Alabama Superintendent of Banks (the “Alabama Superintendent”) under the Alabama

Banking Code.

Bank holding companies that are and remain “well-capitalized” and “well-managed,” as defined in Federal Reserve

Regulation

Y,

and whose insured depository institution subsidiaries maintain “satisfactory” or better ratings under the

Community Reinvestment Act of 1977 (the “CRA”), may elect to become “financial holding companies.” Financial holding

companies and their subsidiaries are permitted to acquire or engage in activities such as insurance underwriting, securities

underwriting, travel agency activities, broad insurance agency activities, merchant banking and other activities that the

Federal Reserve determines to be financial in nature or complementary thereto. In addition, under the BHC Act’s merchant

banking authority and Federal Reserve regulations, financial holding companies are authorized to invest in companies that

engage in activities that are not financial in nature, as long as the financial holding company makes its investment, subject

to limitations, including a limited investment term, no day-to-day management, and no cross-marketing with any depositary

institutions controlled by the financial holding company. The Company has not elected to become a financial holding

company, but it may elect to do so in the future. Financial holding companies continue to be subject to Federal Reserve

supervision, regulation and examination.

The Gramm-Leach-Bliley Act of 1999 (the “GLB Act”) applies the concept of functional regulation to subsidiary activities.

For example, insurance activities are subject to supervision and regulation by state insurance authorities and securities

broker-dealer and investment advisory activities are regulated by the SEC.

The BHC Act permits acquisitions of banks by bank holding companies, subject to various restrictions, including that the

acquirer is “well capitalized” and “well managed”. Bank mergers are also subject to the approval of the resulting bank’s

primary federal regulator pursuant to the Bank Merger Act. The BHC Act and the Bank Merger Act provide various

generally similar statutory factors. Under the Alabama Banking Code, the Alabama Superintendent may approve an

Alabama bank’s acquisition and operation of banks in other states. Also, Alabama banks may enter be acquired by an out-

of-state bank, and the resulting out-of-state bank may continue to operate the acquired branches in Alabama. Banks,

including Alabama banks, may branch anywhere in the United States and out of state banks may branch into Alabama. See

“Bank Regulation”.

The Company is a legal entity separate and distinct from the Bank. Various legal limitations restrict the Bank from lending

or otherwise supplying funds to the Company. The Company and the Bank are subject to Sections 23A and 23B of the

Federal Reserve Act and Federal Reserve Regulation W thereunder. Section 23A defines “covered transactions,” which

include extensions of credit and other transactions with affiliates, and limits a bank’s covered transactions with any affiliate

to 10% of such bank’s capital and surplus. All covered and exempt transactions between a bank and its affiliates must be on

terms and conditions consistent with safe and sound banking practices, and banks and their subsidiaries are prohibited from

purchasing low-quality assets from the bank’s affiliates. Section 23A requires that all of a bank’s extensions of credit to its

affiliates be appropriately secured by permissible collateral, generally United States government or agency securities.

Section 23B of the Federal Reserve Act generally requires covered and other transactions among affiliates to be on terms

and under circumstances, including credit standards, that are substantially the same as or at least as favorable to the bank or

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

Federal Reserve policy and the Federal Deposit Insurance Act require a bank holding company to act as a source of

financial and managerial strength to its FDIC-insured subsidiaries and to take measures to preserve and protect such bank

subsidiaries in situations where additional investments in a bank subsidiary may not otherwise be warranted. In the event

an FDIC-insured subsidiary becomes subject to a regulatory capital restoration plan, the parent bank holding company is

required to guarantee the performance of such plan up to 5% of the bank’s assets, and such guarantee is given priority in a

bankruptcy of the bank holding company. Where a bank holding company has more than one bank or thrift subsidiary, each

of the bank holding company’s subsidiary depository institutions may be responsible for any losses to the FDIC’s Deposit

Insurance Fund (“DIF”), if an affiliated depository institution fails. As a result, a bank holding company may be required to

loan money to a bank subsidiary in the form of subordinated capital notes or other instruments which qualify as capital

under bank regulatory rules. However, any loans from the holding company to such subsidiary banks likely will be

unsecured and subordinated to such bank’s depositors and to other creditors of the bank. See “- Federal Reserve Capital

Rules” and “Prompt Corrective Action.”

The Federal Reserve’s Small Bank Holding Company Policy Statement (the “Small BHC Policy”) covers qualifying bank

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

The Federal Reserve treats the Company as a small banking holding company under the Small BHC Policy. As a result,

unless and until the Company fails to qualify under the Small BHC Policy, the Company’s capital adequacy will continue

to be evaluated on a bank only basis. See “Capital.”

Bank Regulation

The Bank is an Alabama state bank that is a member of the Federal Reserve. It is subject to supervision, regulation and

examination by the Alabama Superintendent and the Federal Reserve, which monitor all areas of the Bank’s operations,

including loans, reserves, mortgages, capital adequacy, liquidity, funding sources and concentrations, issuances and

redemption of capital securities, payment of dividends, establishment of branches, and compliance with laws. The Bank’s

deposits are insured by the FDIC to the maximum extent provided by law, and the Bank is subject to various FDIC

regulations applicable to FDIC-insured banks. See “-FDIC Insurance Assessments.”

Alabama law permits statewide branching by banks. The Alabama Banking Code has provisions designed to provide

Alabama banks competitive equality with national banks.

The Bank’s deposits are insured by the FDIC to the maximum extent provided by law, and the Bank is subject to various

FDIC regulations applicable to FDIC-insured banks. See “-FDIC Insurance Assessments.”

Under the Federal Financial Institutions Examination Council’s (“FFIEC”) Uniform Financial Institutions Rating System

(“UFIRS”), the Federal Reserve assigns state member banks a confidential composite “CAMELS” rating based on an

evaluation and rating of six essential components of an institution’s financial condition and operations:

C

apital Adequacy,

A

sset Quality,

M

anagement,

E

arnings,

L

iquidity and

S

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

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

For most institutions, the FFIEC has indicated that market risk primarily reflects exposures to changes in interest rates.

Regulators’ evaluations of this component, consider management’s ability to identify, measure, monitor and control market

risk; the institution’s size; the nature and complexity of its activities and its risk profile; and the adequacy of its capital and

earnings in relation to its level of market risk exposure. Assessments may be made of the sensitivity of the financial

institution’s earnings or the economic value of its capital to adverse changes in interest rates, foreign exchange rates,

commodity prices or equity prices; management’s ability to identify, measure, monitor and control exposure to market risk;

and the nature and complexity of interest rate risk exposure arising from non -trading positions. See “Management’s

Discussion and Analysis of Financial Condition and Results of Operations – Market and Liquidity Risk Management.”

Composite CAMELS ratings are based on evaluations of an institution’s managerial, operational, financial and compliance

performance. The composite CAMELS rating is not an arithmetical formula or a rigid weighting of numerical component

ratings. Elements of subjectivity and examiner judgment, especially as these relate to qualitative assessments, are important

elements in assigning ratings. In stressful economic times, the Federal Reserve has a heightened focus on bank funding

pressures based on risk profiles and management’s ability to manage their liquidity positions.

In addition, and separate from the UFIRS, the Federal Reserve assigns a risk-management rating to all state member banks

and bank holding companies. In February 2021 the Federal Reserve expanded its Guidance for Assessing Risk

Management to institutions with under $100 billion in assets. This guidance states that principles of sound management

should apply to all risk confronting a banking organization, including credit, market, liquidity, operational, compliance, and

legal risks.

For a small community banking organization (“CBO”) engaged solely in traditional banking activities and whose senior

management is actively involved in the details of day-to-day operations, relatively basic risk management systems may be

adequate. In accordance with the Interagency Guidelines Establishing Standards for Safety and Soundness, a CBO is

expected, at a minimum, to have internal controls, information systems, and internal audit that are appropriate for the size

of the institution and the nature, scope, and risk of its activities. Each assessment category and the overall rating is ranked

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

Bank mergers, which generally accompany holding company mergers, are also subject to the approval of the resulting

bank’s primary federal regulator. The Federal Reserve and the Alabama Superintendent must approve mergers and

acquisitions by the Bank. The FDIC and the Office of the Comptroller of the Currency (“OCC”) may comment on mergers

involving the Company or the Bank.

Bank and bank holding company mergers require evaluation by the federal bank regulators, among other factors, of the

effects of the transaction on competition under the Bank Merger Act and the BHC Act. Applications under these Acts also

are subject to United States Department of Justice (“DoJ”) antitrust review and possible litigation challenges. The DoJ and

the Federal Trade Commission (“FTC”) adopted new non-binding merger guidelines in 2023. The DoJ revoked the 1995

Bank Merger Guidelines that were adopted with the federal bank regulators and adopted a 2024 Banking Addendum to its

2023 merger guidelines. The Federal bank regulators continue to apply the 1995 Bank Merger guidelines in considering the

competitive effects of mergers.

The DoJ has an important advisory role in bank and BHC mergers, but the bank regulators are the primary decision makers.

The bank regulators may consider the Antitrust Division’s competitive factors report as part of their respective review

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

The GLB Act and related regulations require banks and their affiliated companies to adopt and disclose privacy policies,

including policies regarding the sharing of personal information with third parties. The GLB Act also permits bank

subsidiaries to engage in financial activities, which are similar to those permitted to financial holding companies.

A variety of federal and state privacy laws govern the collection, safeguarding, sharing and use of customer information,

and require that financial institutions have policies regarding information privacy and security. Some state laws also protect

the privacy of information of state residents and require adequate security of such data, and certain state laws may, in some

circumstances, require us to notify affected individuals of security breaches of computer databases that contain their

personal information. These laws may also require us to notify law enforcement, regulators or consumer reporting agencies

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

“Open banking” rules were adopted by the Consumer Financial Protection Bureau (“CFPB”) in 2024 that require covered

financial institutions to provide consumers and authorized third parties access to consumer financial data through secure

interfaces, has been the subject of litigation. This would make it easier for customers to move their accounts and assets held

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

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

Consumer Laws and the CFPB

The CFPB has a broad mandate that requires it to regulate consumer financial products and services offered by banks and

nonbanks. The CFPB is authorized to adopt regulations and enforce various laws, including the fair lending laws, the Truth

in Lending Act, the Electronic Funds Transfer Act, mortgage lending rules, the Truth in Savings Act, the Fair Credit

Reporting Act and Privacy of Consumer Financial Information rules. Although the CFPB does not examine or supervise

banks with less than $10 billion in assets, the CFPB’s regulations, and the precedents set in CFPB enforcement actions and

interpretations apply to all banks.

The CFPB limited its funding requests in 2025 and the 2025 One Big Beautiful tax act reduced its funding cap from the

Federal Reserve from 12% in 2024 to 6.9%. The CFPB Acting Director has sought to reduce CFPB staff from

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

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

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

continuing, affirmative obligations on all FDIC-insured institutions, consistent with their safe and sound operation, to help

meet the credit needs for their entire communities, including low- and moderate-income (“LMI”) neighborhoods. The CRA

requires a depository institution’s primary federal regulator to periodically assess the institution’s record of assessing and

meeting the credit needs of the communities served by that institution, including low- and moderate-income neighborhoods.

The bank regulatory agencies’ CRA assessments are publicly available.

Consideration of CRA performance is required for expansion of bank activities under the Bank Merger Act and BHC Act,

and for branching and financial holding company activities. A less than satisfactory CRA rating will slow, if not preclude

such expansion activities. The federal CRA regulations require that evidence of discriminatory, illegal or abusive lending

practices be considered in the CRA evaluation.

CRA agreements with private parties must be disclosed and annual CRA reports must be made to a bank’s primary federal

regulator. Community benefit plans have become common in banking mergers, especially larger bank combinations. The

National Community Reinvestment Coalition reported that as of January 2026, it had executed 22 community benefit plans

with banking organizations for an aggregate of $606 billion for mortgage, small business and community development

lending, investments and philanthropy in LMI and under-resourced communities. The Capital One Financial acquisition of

Discover Financial Services in 2025 included a community benefit plan with another community organization valued at

$265 billion, which is the largest ever.

The Bank had a “satisfactory” CRA rating in its latest CRA public evaluation dated March 3, 2025, with satisfactory ratings

on both its lending and community development tests.

The Federal Reserve considers the effects of a bank acquisition proposal on the convenience and needs of the markets

served by the combining organizations, as well as CRA performance in evaluating merger and acquisition applications

under the Bank Merger Act and the BHC Act and branching applications. In the case of bank holding company applications

to acquire a bank, the Federal Reserve will assess and emphasize CRA records of each subsidiary depository institution of

the applicant and the target in meeting the needs of their entire communities, including LMI neighborhoods. Inadequate

performance records may be the basis for denying an application.

New CRA Rules were adopted by the federal bank regulators in 2023. On July 16, 2025, prior to the new rules, effective

date, the Federal Reserve, the FDIC, and the OCC jointly issued a proposal to rescind the 2023 rule and replace these with

the 1995 CRA regulations, with certain technical amendments. The bank regulators continue to apply the 1995 CRA

regulations.

The Bank is also subject to, among other things, the Equal Credit Opportunity Act (the “ECOA”) and the Fair Housing Act

and other fair lending laws, which prohibit discrimination based on race or color, religion, national origin, sex and familial

status in any aspect of a consumer or commercial credit or residential real estate transaction. The DoJ’s and the federal bank

regulatory agencies’ Interagency Policy Statement on Discrimination in Lending provides guidance to financial institutions.

The DOJ has prosecuted what it regards as violations of the fair lending laws, generally.

Overdrafts

The federal bank regulators have updated their guidance several times on overdrafts, including overdrafts incurred at ATMs

and point of sale terminals. The CFPB began refocusing on overdrafts in 2021. Among other things, the federal regulators

require banks to monitor accounts and to limit the use of overdrafts by customers as a form of short-term, high-cost credit,

including, for example, giving customers who overdraw their accounts on more than six occasions where a fee is charged in

a rolling 12-month period, a reasonable opportunity to choose a less costly alternative and decide whether to continue with

fee-based overdraft coverage. Banks are encouraged to place appropriate daily limits on overdraft fees, and have been asked

to consider eliminating overdraft fees for transactions that overdraw an account by de minimis amounts. Overdraft policies,

processes, fees and disclosures have been the subject of various litigation against banks in various jurisdictions. The federal

bank regulators continue to consider responsible small dollar lending, including overdrafts and related fee issues, and issued

principles for offering small-dollar loans in a responsible manner on May 20, 2020.

CFPB Consumer Financial Protection Circular 2022-06 (Oct. 26, 2022) concluded that overdraft fee practices must comply

with Regulation Z, Regulation E, and the prohibition against unfair, deceptive, and abusive acts or practices in Section 1036

of the Consumer Financial Protection Act. Further, overdraft fees assessed by financial institutions on transactions that a

consumer would not reasonably anticipate are likely unfair even if these comply with these other consumer laws and

regulations.

A CFPB Rule adopted in December 2024 to limit banks with over $10 billion in assets from charging more than $5 for an

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

Residential Mortgages

CFPB regulations require that lenders determine whether a consumer has the ability to repay a mortgage loan. These

regulations establish certain minimum requirements for creditors when making ability to repay determinations, and provide

certain safe harbors from liability for mortgages that are "qualified mortgages" and are not “higher-priced.” Generally,

these CFPB regulations apply to all consumer, closed-end loans secured by a dwelling including home-purchase loans,

refinancing and home equity loans—whether first or subordinate lien. Qualified mortgages must generally satisfy detailed

requirements related to product features, underwriting standards, and requirements where the total points and fees on a

mortgage loan cannot exceed specified amounts or percentages of the total loan amount. Qualified mortgages also must

have: (1) a term not exceeding 30 years; (2) regular periodic payments that do not result in negative amortization, deferral

of principal repayment, or a balloon payment; (3) and be supported with documentation of the borrower and its credit. On

December 10, 2020, the CFPB issued final rules related to “qualified mortgage” loans. Lenders are required under the law

to determine that consumers have the ability to repay mortgage loans before lenders make those loans. Loans that meet

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

The Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 (the “2018 Growth Act”) provides that

certain residential mortgages held in portfolio by banks with less than $10 billion in consolidated assets automatically are

deemed “qualified mortgages”, provided:

the mortgage is documented;

does not include interest only or negative amortizations terms;

any prepayment penalties are within the Truth in Lening act limits; and

fees are less than 10% of the loan value.

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

The Bank generally services the loans it originates, including those it sells. The CFPB’s mortgage servicing standards

include requirements regarding force-placed insurance, certain notices prior to rate adjustments on adjustable-rate

mortgages, and periodic disclosures to borrowers. Servicers are prohibited from processing foreclosures when a loan

modification is pending, and must wait until a loan is more than 120 days delinquent before initiating a foreclosure action.

Servicers must provide borrowers with direct and ongoing access to its personnel, and provide prompt review of any loss

mitigation application. Servicers must maintain accurate and accessible mortgage records for the life of a loan and until one

year after the loan is paid off or transferred. These standards increase the cost and compliance risks of servicing mortgage

loans, and the mandatory delays in foreclosures could result in loss of value on collateral or the proceeds we may realize

from the sale of foreclosed property.

We focus our residential mortgage origination on qualified mortgages and those that meet our investors’ requirements, but

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

The Bank’s mortgage lending is subject to the CFPB’s integrated disclosure rules under the Truth in Lending Act and the

Real Estate Settlement Procedures Act, referred to as “TRID”, for credit transactions secured by real property.

The Federal Housing Finance Authority (“FHFA”) regulates the Federal National Mortgage Association (“Fannie Mae’s”)

and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) (individually and collectively, “GSE”). Among these,

are repurchase rules applicable to sales of mortgages to the GSEs. These rules include the types of loan defects that could

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

The Bank sells mortgage loans to Fannie Mae and services these on an actual/actual basis. As a result, the Bank is not

obligated to make any advances to Fannie Mae on principal and interest on such mortgage loans where the borrower is

entitled to forbearance.

Anti-Money Laundering, Countering the Financing of Terrorism and Sanctions

Under the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct

Terrorism Act of 2001 (the “USA PATRIOT Act”), financial institutions are subject to prohibitions against specified

financial transactions and account relationships, as well as to enhanced due diligence and “know your customer” standards

in their dealings with foreign financial institutions and foreign customers.

The USA PATRIOT Act requires financial institutions to establish anti-money laundering programs, and sets forth

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

the development of internal policies, procedures, and controls;

the designation of a compliance officer;

an ongoing employee training program;

an independent audit function to test the programs; and

ongoing customer due diligence and monitoring.

The International Money Laundering Abatement and Anti-Terrorism Funding Act of 2001 specifies “know your customer”

requirements that obligate financial institutions to take actions to verify the identity of the account holders in connection

with opening an account at any U.S. financial institution. Bank regulators are required to consider compliance with anti-

money laundering laws in acting upon merger and acquisition and other expansion proposals under the BHC Act and the

Bank Merger Act, and sanctions for violations of this Act can be imposed in an amount equal to twice the sum involved in

the violating transaction, up to $1 million.

Federal Financial Crimes Enforcement Network (“FinCEN”) rules require banks to know the beneficial owners of

customers that are not natural persons, update customer information in order to develop a customer risk profile, and

generally monitor such matters.

The Federal Reserve, the depository institution regulators and FinCEN issued a Joint Statement on Risk-Focused Bank

Secrecy Act/Anti-Money Laundering Supervision (July 22, 2019). Under this Join Statement, institutions that operate in

compliance with applicable law, properly manage customer relationships and effectively mitigate risks by implementing

controls commensurate with the type and level of their risks are neither prohibited nor discouraged from providing banking

services. Examiners review risk management practices to evaluate and assess whether a bank has developed and

implemented effective processes to identify, measure, monitor, and control risks.

On August 13, 2020, the federal bank regulators issued a joint statement on their anti-money laundering, Bank Secrecy Act

and countering the financing of terrorism (“AML/CFT”) enforcement, which clarified that isolated or technical violations

or deficiencies generally are not considered the kinds of problems that would result in an enforcement action. The statement

addresses how the agencies evaluate violations of individual pillars of the AML/CFT compliance program. It describes how

the agencies incorporate the customer due diligence regulations and recordkeeping requirements issued by the United States

Department of the Treasury (the “Treasury”) as part of the internal controls pillar of a bank’s AML/BSA compliance

program.

On January 1, 2021, Congress enacted the Anti-Money Laundering Act of 2020 and the Corporate Transparency Act

(collectively, the “Corporate Transparency Act” or the “CTA”), to strengthen anti-money laundering and countering

terrorism financing programs.

FinCEN regulation 31 C.F.R. 101.380 implements the CTA effective on January 1, 2024. These regulations require entities

to report information about their beneficial owners and the individuals who created the entity (together, “beneficial

ownership information” or “BOI”). The new rules expand financial institutions’ obligations under the Customer Due

Diligence Rule (“CDD Rule”) to collect information and verify the beneficial ownership of legal entities. Although the

Company and the Bank are exempt from the CTA’s requirements to report their own respective beneficial owners, the new

laws may increase the Bank’s anti-money laundering diligence activities and costs.

Following litigation and nationwide injunctions, the Treasury Department suspended enforcement of the CTA on March 2,

2025 with respect to U.S. citizens or domestic reporting companies or their beneficial owners. This Alert confirmed

that reporting companies are not currently required to file beneficial ownership information and are not subject to liability if

they fail to do so while the suspension continues.

FinCEN published an interim final rule on March 26, 2025, that revised the definition of “reporting company” in its

regulations implementing the CTA to include only entities formed under the law of a foreign country that have registered to

do business in any U.S. State or tribal jurisdiction by the filing of a document with a secretary of state or similar office

(formerly known as “foreign reporting companies”). FinCEN also formally exempted entities previously known as

“domestic reporting companies” from the CTA’s reporting requirements.

Bills have been introduced in Congress to repeal the CTA, and it is unknown whether these will pass or if the

Administration will continue to defend the litigation challenging the CTA.

The United States has imposed various sanctions upon foreign countries, including China, Iran, North Korea, Russia and

Venezuela, and certain of their government officials and persons. Banks are required to comply with these sanctions, which

require additional customer screening and transaction monitoring.

Russia’s February 2022 invasion of Ukraine has generated a significant number of new sanctions on Russia, Russian

persons and suppliers of military or dual-purpose products to Russia. The Federal bank regulators have issued alerts that

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

Other Laws and Regulations

The Company is required to comply with various corporate governance and financial reporting requirements under the

Sarbanes-Oxley Act of 2002, as well as related rules and regulations adopted by the SEC, the Public Company Accounting

Oversight Board and Nasdaq. In particular, the Company is required to report annually on internal controls as part of its

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

The Company has evaluated its controls, including compliance with the SEC and FDIC rules on internal controls, and

expects to continue to spend significant amounts of time and money on compliance with these rules. If the Company fails

to comply with these internal control rules in the future, it may adversely affect its reputation, its ability to obtain the

necessary certifications to its financial statements, its relations with its regulators and other financial institutions with which

it deals, and its ability to access the capital markets and offer and sell Company securities on terms and conditions

acceptable to the Company. The Company’s assessment of its financial reporting controls as of December 31, 2025 is

included in this report with no material weaknesses reported.

Capital

The Federal Reserve has risk-based capital guidelines for bank holding companies and state member banks, respectively.

These guidelines require a minimum ratio of capital to risk-weighted assets (including certain off-balance sheet activities,

such as standby letters of credit) and capital conservation buffer, totaling 10.5%. Tier 1 capital includes common equity

and related retained earnings and a limited amount of qualifying preferred stock, less goodwill and certain core deposit

intangibles. Voting common equity must be the predominant form of capital.

Tier 2 capital consists of non–qualifying preferred stock, qualifying subordinated, perpetual, and/or mandatory convertible

debt, term subordinated debt and intermediate term preferred stock, up to 45% of pretax unrealized holding gains on

available for sale equity securities with readily determinable market values that are prudently valued, and a limited amount

of general loan loss allowance. Tier 1 and Tier 2 capital equals total capital.

The Federal Reserve also has minimum leverage ratio guidelines for bank holding companies not subject to the Small BHC

Policy, and state member banks, which provide for a minimum leverage ratio of Tier 1 capital to adjusted average quarterly

assets (“leverage ratio”) equal to 4%. However, bank regulators expect banks and bank holding companies to operate with

a higher leverage ratio.

Lastly, the Federal Reserve indicates that it will continue to consider a “tangible Tier 1 leverage ratio” (deducting all

intangibles) in evaluating proposals for expansion or new activities. The level of Tier 1 capital to risk-adjusted assets is

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

Under Federal Reserve policies, bank holding companies are generally expected to operate with capital positions well

above the minimum ratios. The guidelines also provide that institutions experiencing internal growth or making

acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels

without significant reliance on intangible assets. Higher capital may be required in individual cases, depending upon a

bank’s or bank holding company’s risk profile, and the level and nature of their risks, including the volume and severity of

their problem loans. The Federal Reserve believes the risk-based ratios do not fully take into account the quality of capital

and interest rate, liquidity, market and operational risks. Accordingly, supervisory assessments of capital adequacy may

differ significantly from conclusions based solely on the level of an organization’s risk-based capital ratio.

The Federal Reserve has not advised the Company or the Bank of any specific minimum leverage ratio or tangible Tier 1

leverage ratio applicable to them.

The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), among other things, requires the federal

banking agencies to take “prompt corrective action” regarding depository institutions that do not meet minimum capital

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

“significantly undercapitalized” and “critically undercapitalized.” A depository institution’s capital tier will depend upon

how its capital levels compare to various relevant capital measures and certain other factors established by regulation.

See

“Prompt Corrective Action Rules.”

Federal Reserve Capital Rules

General

The Federal Reserve and the other federal bank regulators adopted in June 2013 final capital rules for bank holding

companies and banks implementing the Basel Committee on Banking Supervision’s “Basel III: A Global Regulatory

Framework for more Resilient Banks and Banking Systems.” These “Basel III Capital Rules” in Federal Reserve

Regulation Q were fully phased-in, generally, on January 1, 2019.

The Bank has elected not to have its capital structure evaluated under the community bank leverage framework permitted

by the 2018 Growth Act.

Regulation Q generally limits Tier 1 capital to common stock and noncumulative perpetual preferred stock. Regulation Q

defines “Common Equity Tier I Capital” or “CET1” to include common stock and related surplus, retained earnings, and

subject to certain adjustments, minority common equity interests in subsidiaries. CET1 is reduced by deductions for:

Goodwill and other intangibles, other than mortgage servicing assets (“MSRs”), which are treated separately, net

of associated deferred tax liabilities (“DTLs”);

Deferred tax assets (“DTAs”) arising from operating losses and tax credit carryforwards net of allowances and

DTLs;

Gains on sale from any securitization exposure; and

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

The Company’s CET1 is not adjusted for certain accumulated other comprehensive income (“AOCI”).

Additional “threshold deductions” of each of the following that are individually greater than 25% of CET1 (after the first

deductions above):

MSRs, net of associated DTLs;

DTAs arising from temporary differences that could not be realized through net operating loss carrybacks, net of

any valuation allowances and DTLs; and

Significant common stock investments in unconsolidated financial institutions, net of associated DTLs.

Noncumulative perpetual preferred stock and Tier 1 minority interest not included in CET1, subject to limits, will qualify as

additional Tier I capital. All other qualifying preferred stock, subordinated debt and qualifying minority interests will be

included in Tier 2 capital.

Minimum Capital Requirements

The various minimum capital requirements under Federal Reserve Regulation Q are:

Minimum CET1

4.50%

CET1 Conservation Buffer

2.50%

Total CET1

7.00%

Deductions from CET1

100%

Minimum Tier 1 Capital

6.00%

Minimum Tier 1 Capital plus conservation buffer

8.50%

Minimum Total Capital

8.00%

Minimum Total Capital plus conservation buffer

10.50%

Certain Risk-Weightings

Among other things, Regulation Q as changed by the Basel III Capital Rules Q changed some of the risk weightings used to

determine risk-weighted capital adequacy. Among other things, Regulation Q:

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

Assigns up to a 1,250% risk weight to structured securities, including private label mortgage securities, trust

preferred CDOs and asset backed securities;

Retains existing risk weights for residential mortgages, but assign a 100% risk weight to most commercial real

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

Assigns a 150% risk weight to past due exposures (other than sovereign exposures and residential mortgages);

Assigns a 250% risk weight to DTAs, to the extent not deducted from capital (subject to certain maximums);

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

Increases the risk weight for exposures to qualifying securities firms from 20% to 100%.

HVCRE

Risk Weight

A “high volatility commercial real estate” loan (“HVCRE,”) which has a 150% risk weight generally is a credit facility

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

primarily finances or refinances the acquisition, development, or construction of real property;

has the purpose of providing financing to acquire, develop, or improve such real property into income producing

property; and

the repayment of the loan is dependent upon the future income or sales proceeds from, or refinancing of, such real

property.

Exceptions are made for various things, including loans for (i) the acquisition, development and construction of 1 to 4

family residences, and investments in community development or agricultural land, and (ii) commercial real properties

where the loan-to-value ratio is not more than the maximum supervisory level determined by the Federal Reserve or the

borrower has contributed capital in a form specified by the rule equal to at least 15% of the real property’s “as completed”

value.

Capital Conservation Buffer

The capital conservation buffer is equal to the lowest of the following, calculated as of the last day of the previous calendar

quarter:

(A) The institution's CET 1 capital ratio minus the institution's minimum CET1 ratio;

(B) The institution's tier 1 capital ratio minus the institution's minimum tier 1 capital ratio requirement; and

(C) The institution's total capital ratio minus the institution's minimum total capital ratio requirement.

The capital conservation buffer limits permissible dividends, stock repurchases and discretionary bonuses to the following

percentages based on the capital conservation buffer subject to any further regulatory limitations, including those based on

risk assessments and enforcement actions:

Capital Conservation

Buffer %

Buffer % Limit

More than 2.50%

None

> 1.875% - 2.50%

60.0%

> 1.250% - 1.875%

40.0%

> 0.625% - 1.250%

20.0%

≤ 0.625

- 0 -

Reg. Q amended the definition of “eligible retained income” in 2020 to allow banking organizations to more freely use their

capital buffers to promote lending and other financial intermediation activities, by making the limitations on capital

distributions more gradual. “Eligible retained income, as used in Federal Reserve Regulation Q, is the greater of (i) net

income for the four preceding quarters, net of distributions and associated tax effects not reflected in net income; and (ii)

the average of all net income over the preceding four quarters. Banking organizations were encouraged to make prudent

capital distribution decisions.

Regulatory Capital Changes

Prompt Corrective Action Rules

All of the federal bank regulatory agencies’ regulations establish risk-adjusted measures and relevant capital levels that

implement the “prompt corrective action” standards for depository institutions. The relevant capital measures are the total

risk-based capital ratio, Tier 1 risk-based capital ratio, Common equity tier 1 capital ratio, as well as the leverage capital

ratio. Under the regulations, a state member bank will be:

“well capitalized” if it has a total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 8%

or greater, a Common equity tier 1 capital ratio of 6.5% or greater, a leverage capital ratio of 5% or greater and is

not subject to any written agreement, order, capital directive or prompt corrective action directive by a federal

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

“adequately capitalized” if it has a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio

of 6.0% or greater, a Common Equity Tier 1 capital ratio of 4.5% or greater, and generally has a leverage capital

ratio of 4.0% or greater;

“undercapitalized” if it has a total risk-based capital ratio of less than 8.0%, a Tier 1 risk-based capital ratio of less

than 6.0%, a Common Equity Tier 1 capital ratio of less than 4.5% or generally has a leverage capital ratio of less

than 4.0%;

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

capital ratio of less than 6.0%, a Common Equity Tier 1 capital ratio of less than 3%, or a leverage capital ratio of

less than 3.0%; or

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

The federal bank regulatory agencies have authority to require additional capital where they determine it is necessary,

including where a bank is unsafe or unsound condition or where the bank is determined to have less than a satisfactory

rating on any of its CAMELS ratings. The regulators have confirmed that higher capital levels may be required in light of

market conditions and risk.

Depository institutions that are “adequately capitalized” for bank regulatory purposes must receive a waiver from the FDIC

prior to accepting or renewing brokered deposits, and cannot pay interest rates or brokered deposits that exceeds market

rates by more than 75 basis points. Less than “adequately capitalized” banks cannot accept or renew brokered deposits.

FDICIA generally prohibits a depository institution from making any capital distribution, including paying dividends or any

management fee to its holding company, if the depository institution thereafter would be “undercapitalized”. Institutions

that are “undercapitalized” are subject to growth limitations and are required to submit a capital restoration plan for

approval.

A depository institution’s parent holding company must guarantee that the institution will comply with such capital

restoration plan. The aggregate liability of the parent holding company is limited to the lesser of (i) 5% of the depository

institution’s total assets at the time it became undercapitalized and (ii) the amount necessary to bring the institution into

compliance with applicable capital standards. If a depository institution fails to submit an acceptable plan, it is treated as if

it is “significantly undercapitalized”. If the controlling holding company fails to fulfill its obligations under FDICIA and

files (or has filed against it) a petition under the federal Bankruptcy Code, the claim against the holding company’s capital

restoration obligation would be entitled to a priority in such bankruptcy proceeding over third-party creditors of the bank

holding company.

“Significantly undercapitalized” depository institutions may be subject to a number of requirements and restrictions,

including orders to:

(i)

sell sufficient voting stock to become “adequately capitalized”;

(ii)

Reduce total assets; and

(iii)

Cease receipt of deposits from correspondent banks.

“Critically undercapitalized” depository institutions are subject to the appointment of a receiver or conservator.

The Company’s management believes that the prompt corrective action provisions of FDICIA have not had and are not

expected to have any material effect on the Bank or the Company or their respective operations.

Dividends and Distributions

The Company is a legal entity separate and distinct from the Bank. Federal Reserve Regulation Q limits “distributions,”

including discretionary bonus payments from eligible retained income” by state member banks, such as the Bank, unless its

capital conservation buffer of common equity Tier 1 capital (“CET1”) exceeds 2.5%. “Distributions” include dividends

declared or paid on common stock, discretionary bonuses and stock repurchases, redemptions or repurchases of Tier 2

capital instruments (unless replaced by a capital instrument in the same quarter). The Company’s primary source of cash is

dividends from the Bank.

“Eligible retained income” for the Bank and other Federal Reserve regulated institutions is the greater of:

net income for the four preceding calendar quarters, net of any distributions and associated tax effects not already

reflected in net income; or

the average net income over the preceding four quarters.

The Bank’s Call Report are used for its calculation of “eligible retained income.”

The Bank’s capital conservation buffer exceeded 2.5% at December 31, 2025.

As of December 31, 2025, the Bank is “well capitalized” for bank regulatory purposes. Management has not received any

notification from the Bank's regulators, which changes the Bank’s regulatory capital status.

Prior regulatory approval also is required by statute if the total of all dividends declared by a state member bank (such as

the Bank) in any calendar year will exceed the sum of such bank’s net profits for the year and its retained net profits for the

preceding two calendar years, less any required transfers to surplus. During 2025, the Bank paid total cash dividends of

approximately $3.8 million to the Company. At December 31, 2025, the Bank had net profits for the year and retained net

profits for the preceding two calendar years, less any required transfers to surplus, of $6.5 million.

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

payment of dividends, including requirements to maintain capital above regulatory minimums. The appropriate federal and

state regulatory authorities are authorized to determine when the payment of dividends would be an unsafe or unsound

practice, and may prohibit such dividends. The Federal Reserve has indicated that paying dividends that deplete a state

member bank’s capital base to an inadequate level would be an unsafe and unsound banking practice. The Federal Reserve

also has indicated that banks depository institutions and their holding companies should generally pay dividends only out of

current year’s operating earnings. See “Regulatory Capital Changes” and Note 16 to the Company’s consolidated financial

statements.

Federal Reserve Supervisory Letter SR-09-4 (February 24, 2009), as revised December 21, 2015, applies to dividend

payments, stock redemptions and stock repurchases. Prior consultation with the Federal Reserve supervisory staff is

required before:

redemptions or repurchases of capital instruments when the bank holding company is experiencing financial

weakness; and

redemptions and purchases of common or perpetual preferred stock which would reduce Tier 1 capital at end of

the period compared to the beginning of the period.

Bank holding company directors must consider various factors tis setting a dividend level that is prudent to maintaining a

strong financial position, and is not based on overly optimistic earnings scenarios, such as potential events that could affect

its ability to pay, while still maintaining a strong financial position. As a general matter, the Federal Reserve has indicated

that the board of directors of a bank holding company should consult with the Federal Reserve and eliminate, defer or

significantly reduce the bank holding company’s dividends if:

its net income available to shareholders for the past four quarters, net of dividends previously paid during that

period, is not sufficient to fully fund the dividends;

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

financial condition; or

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

Capital Rule Changes

The Federal Reserve, the FDIC and the OCC have been working on proposed changes to their capital rules, which the FDIC

Board is scheduled to discuss on March 19, 2026. Michelle Bowman, the Federal Reserve Vice Chair for Supervision

outlined the proposals in broad terms in a March 12, 2026 speech, which continued a theme to “right-size” capital to match

actual risk. Although many of the pending proposals focus on large banks, Ms. Bowman stated “smaller banks, which are

more focused on traditional lending activities, will see slightly larger reductions in capital requirements.” The proposals

have not been published for comment, and we cannot predict the effects of these proposals on us.

FDICIA

FDICIA directs that each federal bank regulatory agency prescribe standards for depository institutions and depository

institution holding companies relating to internal controls, information systems, internal audit systems, loan documentation,

credit underwriting, interest rate exposure, asset growth composition, a maximum ratio of classified assets to capital,

minimum earnings sufficient to absorb losses, a minimum ratio of market value to book value for publicly traded shares,

safety and soundness, and such other standards as the federal bank regulatory agencies deem appropriate.

Enforcement Policies and Actions

The Federal Reserve and the Alabama Superintendent examine and regulate our compliance with laws and regulations,

including the CFPB’s regulations.

The Federal Reserve and the Alabama Superintendent examine and regulate our compliance with laws and regulations,

including the CFPB’s regulations. The CFPB issues regulations, interpretations and enforcement actions under the laws

applicable to consumer financial products and services. Violations of laws and regulations, including those administered by

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

imposing fines, penalties and/or restitution, cease and desist orders, or taking other formal or informal enforcement actions.

Under certain circumstances, these agencies may enforce these remedies directly against officers, directors, employees and

others participating in the affairs of a bank or bank holding company, in the form of fines, penalties, or the recovery, or

claw-back, of compensation.

Fiscal and Monetary Policies

Banking is a business that depends on interest rate differentials. In general, the difference between the interest paid by a

bank on its deposits and its other borrowings, and the interest received by a bank on its loans and securities holdings,

constitutes the major portion of a bank’s earnings. The earnings and growth of the Company and the Bank, as well as the

values of, and earnings on, its assets and the costs of its deposits and other liabilities are subject to the influence of

economic conditions generally, both domestic and foreign, and also to the monetary and fiscal policies of the United States

and its agencies, particularly the Federal Reserve. The Federal Reserve regulates the supply of money through various

means, including setting target federal funds rates, open market dealings in United States government securities, the setting

of the discount rate at which banks may borrow from the Federal Reserve, and the reserve requirements on deposits.

The Federal Reserve has been paying interest on depository institutions required and excess reserve balances since October

2008. The payment of interest on excess reserve balances was expected to give the Federal Reserve greater scope to use its

lending programs to address conditions in credit markets while also maintaining the federal funds rate close to the target

rate established by the Federal Open Market Committee (“FOMC). The Federal Reserve has indicated that it may use this

authority to

implement a mandatory policy to reduce excess liquidity, in the event of inflation or the threat of inflation.

In April 2010, the Federal Reserve Board amended Regulation D (Reserve Requirements of Depository Institutions)

authorizing the Reserve Banks to offer term deposits to certain institutions. Term deposits are one of several tools that the

Federal Reserve could employ to drain reserves when policymakers judge that it is appropriate to begin moving to a less

accommodative stance of monetary policy.

In light of disruptions in economic conditions caused by COVID-19 and the stress in U.S. financial markets, the Federal

Reserve, Congress and the Department of the Treasury took a host of fiscal and monetary measures. In March 2020, the

FOMC reduced the federal funds rate target twice to 0-0.25%. The Federal Reserve established various liquidity facilities

pursuant to section 13(3) of the Federal Reserve Act to help stabilize the financial system and purchased large amounts of

government and government agency securities and agency mortgage -backed securities (“MBS”).

During 2021 and at the beginning of 2022, the Federal Reserve described inflation as “transitory,” but as inflation

continued at increasing rates the Federal Reserve’s policy changed from accommodative to restrictive. The Federal

Reserve raised the target federal funds rate eight times in 2022 for a total 4.25%. During 2023, the Federal Reserve four

announced additional target rate increases of 25 basis points each. The federal funds target rate range was 5.25-5.50% from

May 4, 2023 until September 19, 2024, when it was reduced to 4.75% -5.00%. Two reductions in November and

December 2024 resulted in a target range of 4.25%-4.50% at the end of 2024.

In 2025, the FOMC reduced its target federal funds rates three times to target rate of 3.50%-3.75%, where it remains as of

March 2, 2026. In January 2026, the FOMC reaffirmed its long-term goals originally adopted in 2012 that seeks to achieve

maximum employment and inflation at the rate of 2 percent over the longer run based on the annual change in the price

index for personal consumption expenditures.

The Federal Reserve’s securities holdings in its System Open Market Account (“SOMA”) increased from $3.9 trillion in

early March 2020 to $9.0 trillion at April 11, 2021, largely as a result of securities purchases as the Federal Reserve

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

On May 4, 2022, the Federal Reserve announced its plan to reduce its securities holdings in an effort to reduce inflation:

Reinvestments of principal of maturing Treasury securities would be reduced by $30 billion per month for three

months and thereafter would be $60 billion per month.

Reinvestments of principal of maturing agency debt and agency mortgage -backed securities would be reduced by

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

These declines would slow and then stop when the Federal Reserve’s balance sheet was somewhat above the

balance it deemed ample.

Starting in June 2024, the FOMC reduced the monthly redemption cap on Treasury securities from $60 billion to $25

billion. The Committee maintained the monthly redemption cap on agency debt and agency mortgage-backed securities at

$35 billion, reinvested any remaining principal amounts of maturing securities in Treasury securities.

In April 2025, the FOMC further slowed the reduction its SOMA holdings by reducing the monthly redemption cap on

Treasury securities from $25 billion to $5 billion, while maintaining the monthly redemption cap on agency debt and

agency mortgage-backed securities at $35 billion. The FOMC announced on October 29, 2025 that it would conclude the

reduction of its aggregate SOMA securities holdings on December 1, 2025. At its December 2025 meeting, the FOMC

determined to initiate purchases of shorter-term Treasury securities as needed to maintain an ample supply of reserves on an

ongoing basis. Most recently, on January 31, 2026 the FOMC announced that beginning February 1, 2026, it would,

subject to modest deviations for operational reasons:

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

maturing in each calendar month that exceeds $60 billion per month. Treasury coupon securities would be

redeemed up to this monthly cap and Treasury bills would be redeemed to the extent that coupon principal

payments are less than the monthly cap.

Reinvest into agency mortgage-backed securities (MBS) the amount of principal payments from SOMA holdings

of agency debt and agency mortgage-backed securities (“MBS”) received in each calendar month that exceeds a

cap of $35 billion per month.

SOMA holdings as of March 4, 2026, 2026 were $6.23 trillion, including approximately $2 trillion of agency securities and

agency MBS.

FDIC Insurance Assessments

The Bank’s deposits are insured by the FDIC’s DIF, and the Bank is subject to FDIC assessments for its deposit insurance.

Since 2011, the FDIC has been calculating assessments based on an institution’s average consolidated total assets less its

average tangible equity (the “FDIC Assessment Base”). A bank's assessment base and assessment rate are determined each

quarter. Generally, established “small banks” with less than $10 billion in assets are assigned an individual rate based on a

formula using financial data and CAMELS (the “financial ratios method”). The better the CAMELS rating and other

financial ratios, the lower the assessment rate.

The FDIC assessment schedule for Small Banks, such as the Bank, for the first assessment period provides a total annual

assessment rate of 2 to 32 basis points:

As a result of the decision to insure all deposits in Silicon Valley Bank and Signature Bank upon their failures in March

2023, the FDIC made a special assessment of 3.36 points for a projected eight quarters on banks with more than $5 billion

of uninsured deposits. These special assessments did not apply to the Bank.

The FDIC’s minimum DIF reserve ratio is 1.35%, which was set by the Dodd-Frank Act. The FDIC Board of directors is

required by the Federal Deposit Insurance Act (the “FDI Act”) to designate a reserve ratio before the beginning of each

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

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

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

The DIF reserve ratio was 1.42% at December 31, 2025, 14 basis points higher than at the end of 2024, and above the

minimum.

The Company recorded FDIC insurance premiums expenses of $0.5 million for each of 2025 and 2024.

CRE and Leveraged Loans

CRE

The federal bank regulatory agencies released guidance on “Concentrations in Commercial Real Estate Lending” (2006)

(the “CRE Guidance”). The CRE Guidance defines CRE loans as exposures secured by raw land, land development and

construction (including 1-4 family residential construction), multi-family property, and non-farm nonresidential property

where the primary or a significant source of repayment is derived from rental income associated with the property (that is,

loans for which 50% or more of the source of repayment comes from third party, non-affiliated, rental income) or the

proceeds of the sale, refinancing, or permanent financing of this property. Loans to REITs and unsecured loans to

developers that closely correlate to the inherent risks in CRE markets would also be considered CRE loans under the CRE

Guidance. Loans on owner occupied CRE are generally excluded.

The CRE Guidance requires that banks have appropriate processes be in place to identify, monitor and control risks

associated with real estate lending concentrations. This could include enhanced strategic planning, CRE underwriting

policies, risk management, internal controls, portfolio stress testing and risk exposure limits as well as appropriately

designed compensation and incentive programs. Higher allowances for loan losses and capital levels may also be required.

The CRE Guidance is triggered when either:

Total reported loans for construction, land development, and other land of 100% or more of a bank’s total capital;

or

Total reported loans secured by multifamily and nonfarm nonresidential properties and loans for construction, land

development, and other land are 300% or more of a bank’s total risk-based capital.

This CRE Guidance was supplemented by the Interagency Statement on Prudent Risk Management for Commercial Real

Estate Lending (December 18, 2015). The CRE Guidance also applies when a bank has a sharp increase in CRE loans or

has significant concentrations of CRE secured by a particular property type. See Management’s Discussion and Analysis of

Financial Condition and Results of Operations - Balance Sheet Analysis” for concentrations of the various types of CRE

loans.

At December 31, 2025, the Bank had outstanding $56.6 million in construction and land development loans and $325.8

million in total CRE loans (excluding owner occupied properties), which represent approximately 48% and 277%,

respectively, of the Bank’s total risk-based capital at December 31, 2025. The Company has always had significant

exposures to loans secured by commercial real estate due to the nature of its markets and the loan needs of customers. The

Company believes its long-term experience in CRE lending, underwriting policies, internal controls, and other policies

currently in place, as well as its loan and credit monitoring and administration procedures, are generally appropriate to

manage its concentrations as required under the Guidance.

The federal bank regulators, including the Federal Reserve issued a Policy Statement on Prudent Commercial Real Estate

Loan Accommodations and Workouts (June 30, 2023), which updated existing guidance. The Policy Statement provides a

broad set of risk management principles relevant to CRE short term loan accommodations and longer-term workouts in all

business cycles, particularly in challenging economic environments. It states that the regulatory agencies expect their

examiners to take a balanced approach in assessing the adequacy of a financial institution's risk management practices for

loan accommodation and workout activities. Financial institutions that implement prudent CRE loan accommodation and

workout arrangements after performing a comprehensive review of a borrower's financial condition will not be subject to

criticism for engaging in these efforts, even if these arrangements result in modified loans that have weaknesses that result

in adverse classification. In addition, modified loans to borrowers who have the ability to repay their debts according to

reasonable terms will not be subject to adverse classification solely because the value of the underlying collateral has

declined to an amount that is less than the outstanding loan balance. The Policy Statement also describes the classifications

of CRE loan accommodations and workouts and addresses regulatory accounting and reporting in such situations, including

CECL.

Leveraged Loans

The Federal Reserve and other banking regulators issued their “Interagency Guidance on Leveraged Lending” (2006)

highlighting standards for originating leveraged transactions and managing leveraged portfolios, as well as requiring banks

to identify their highly leveraged transactions, or HLTs. The Bank did not have any leveraged loans at year-end 2025, 2024

or 2023 subject to the Interagency Guidance on Leveraged Lending or that were shared national credits.

Certain Dodd-Frank Act Provisions

No Hedging of Equity Incentive Compensation

The Dodd-Frank Act, Section 955, requires the SEC establish rules requiring that companies disclose in their annual

meeting proxy materials whether an employee or board member is permitted to purchase financial instruments designed to

hedge or offset decreases in the market value of equity securities granted as compensation or otherwise held by the

employee or board member. SEC Reg. S-K Item 407(i) implements this Section.

The Company’s Insider Trading Policy applies to all Company and Bank directors, officers, employees and certain

independent contractors and specified related persons (collectively, “Covered Persons”). This Policy prohibits Covered

Persons from engaging in speculative transactions or short-term trading in Company Securities at any time. Short-selling

Company securities or engaging in transactions involving “Derivative Securities” on Company securities are prohibited.

Further, hedging instruments or strategies, including Derivative Securities may not be used to increase the value or reduce

the risks of any awards under the 2024 Incentive Plan. The Company’s Insider Trading Policy is included as an exhibit to

its annual report on SEC Form 10-K.

No Incentives Encouraging Inappropriate Risk-Taking

Section 956 of the Dodd-Frank Act requires the appropriate federal regulators to issue regulations or guidelines that

prohibits incentive-based compensation arrangements that encourage inappropriate risk taking by covered financial

institutions, are deemed to be excessive, or that may lead to material losses to the covered financial institution. In June

2010, the federal bank regulators adopted Guidance on Sound Incentive Compensation Policies, which, although targeted to

larger, more complex organizations than the Company, includes principles that have been applied to smaller organizations

similar to the Company. This Guidance applies to incentive compensation to executives as well as employees, who,

“individually or a part of a group, have the ability to expose the relevant banking organization to material amounts of risk.”

Incentive compensation should:

Provide employees incentives that appropriately balance risk and reward;

Be compatible with effective controls and risk-management; and

Be supported by strong corporate governance, including active and effective oversight by the organization’s board

of directors.

The federal bank regulators have stated that this Guidance is expected to generally have less effect on smaller banking

organizations, which typically are less complex and make less use of incentive compensation arrangements than larger

banking organizations.

The Company’s Compensation Committee Charter provides that the Committee shall identify and limit features of

compensation plans that it reasonably believes would lead to unnecessary and excessive risk-taking, and establish a

compensation strategy to provide balanced risk-taking incentives in alignment with the Company’s risk appetite and

compliance with the various laws and regulations governing executive officer and director compensation.

The federal bank regulators, the SEC and other regulators first proposed regulations implementing Section 956 in April

2011, which would have been applicable to, among others, depository institutions and their holding companies with $1

billion or more in assets. These rules have not been adopted.

Debit Card Interchange Fees

The “Durbin Amendment” to the Dodd-Frank Act and Federal Reserve Regulation II provide that interchange transaction

fees for electronic debit transactions be “reasonable” and proportional to certain costs associated with processing the

transactions. The Durbin Amendment and the Federal Reserve rules thereunder are not applicable to banks with assets less

than $10 billion. Such smaller banks, however, compete with banks that are subject to the Durbin Amendment, and

therefore may have to limit their interchange fees, also. Legislation has been proposed which would regulate credit card

interchange fees.

Other Legislative and Regulatory Changes

Various legislative and regulatory proposals, including substantial changes in banking, and the regulation of banks, thrifts

and other financial institutions, compensation, and the regulation of financial markets and their participants, and financial

instruments and securities, and the regulators of all of these, as well as the taxation of these entities, are being considered by

the executive branch of the federal government, Congress and various state governments, including Alabama.

The 2018 Growth Act

The 2018 Growth Act, which was enacted on May 24, 2018, amended the Dodd-Frank Act, the BHC Act, the Federal

Deposit Insurance Act and other federal banking and securities laws to provide regulatory relief. The following provisions

of the 2018 Growth Act may be particularly helpful to banks of our size, and we have benefited from the Growth Act’s

changes to the deposit rules:

Increased the asset size under the Federal Reserve's Small BHC Policy from $1 billion to $3 billion;

“qualifying community banks,” defined as institutions with total consolidated assets of less than $10 billion, which

meet a “community bank leverage ratio, which is currently 9.0%, may be deemed to have satisfied applicable risk-

based capital requirements as well as the capital ratio requirements;

section 13(h) of the BHC Act, or the “Volcker Rule,” is amended to exempt from the Volcker Rule, banks with

total consolidated assets valued at less than $10 billion (“community banking organizations”), and trading assets

and liabilities comprising not more than 5.00% of total assets; and

“reciprocal deposits” held by banks that are well capitalized and well rated will not be considered “brokered

deposits” for FDIC purposes,

The FDIC issued comprehensive changes to its brokered deposit rules effective April 1, 2021. The revised rules establish

new standards for determining whether an entity meets the statutory definition of “deposit broker,” and identifies a number

of businesses that automatically meet the “primary purpose exception” from a “deposit broker.” The revisions also provide

an application process for entities that seek a “primary purpose exception,” but do not meet one of the designated

exceptions.” The new rules provide us greater flexibility.

Reciprocal deposits have expanded our funding and liquidity sources without being subjected to FDIC limitations on

depositor FDIC insurance coverage and potential federal deposit insurance assessment increases for brokered deposits.

The applicable agencies also issued final rules simplifying the Volcker Rule’s proprietary trading restrictions effective

January 1, 2020. On June 25, 2020, the agencies adopted a final rule simplifying the Volcker Rule’s covered fund

provisions effective October 1, 2020.

New regulations and statutes are regularly proposed that contain wide-ranging proposals for altering the structures,

regulations and competitive relationships of the nation’s financial institutions.

Recent Developments

Executive Order 14192 seeks to “significantly reduce the private expenditures required to comply with Federal

regulations.” For the current fiscal year 2025, for each new regulation, at least 10 existing regulations shall be identified for

repeal. Agencies are directed to ensure that the total incremental cost of all new regulations, including repealed regulations,

being finalized this year, shall be significantly less than zero, as determined by the OMB Director. The OMB Director shall

provide agencies with guidance on implementation, including measuring regulatory costs. No regulation shall be added to

or removed from the Unified Regulatory Agenda without the approval of the OMB Director. Regulations and rules are

broadly defined to include:

…agency statements of general or particular applicability and future effect designed to implement, interpret, or

prescribe law or policy or to describe the practice requirements of an agency, including, without limitation,

regulations, rules, memoranda, administrative orders, guidance documents, policy statements, and interagency

agreements.

The current Acting CFPB Director on February 8, 2025 ordered all CFPB employees to suspend substantially all activities,

including all supervision, examination and stakeholder engagement activities, and closed the agency's headquarters for the

week of February 10, 2025. The Acting CFPB Director also said the CFPB had excessive funding on hand and would not

take the next scheduled drawdown of funds from the Federal Reserve.

Executive Order 14178 states the Administration’s policy “to support the responsible growth and use of digital assets,

blockchain technology, and related technologies across all sectors of the economy.” “Digital assets” include

“any digital representation of value that is recorded on a distributed ledger, including cryptocurrencies, digital tokens, and

stablecoins.” This order revoked Executive Order 14067 “Ensuring Responsible Development of Digital Assets” (March 9,

2022) and directed the Secretary of the Treasury is directed to immediately revoke the Department of the Treasury's

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

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

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

private-sector entities alike; and

providing regulatory clarity and certainty built on technology-neutral regulations, frameworks that account for

emerging technologies, transparent decision making, and well-defined jurisdictional regulatory boundaries, all of

which are essential to supporting a vibrant and inclusive digital economy and innovation in digital assets,

permissionless blockchains, and distributed ledger technologies

The Executive Order “Restoring Democracy and Accountability in Government” (Feb. 11, 2025) requires all agencies to

submit draft regulations for White House review with no carveout for so-called independent agencies, except for the

monetary policy functions of the Federal Reserve; and consult with the White House on their priorities and strategic plans.

The White House will set their performance standards. The Office of Management and Budget will adjust so-called

independent agencies’ apportionments of funds. The President and the Attorney General (subject to the President’s

supervision and control) will interpret the law for the executive branch, instead of having separate agencies adopt

conflicting interpretations.

Changes in the Federal Bank Regulators and the SEC

A new Comptroller of the Currency, and new FDIC and SEC Chairs, and a new Vice Chair for Supervision at the Federal

Reserve were appointed in 2025 and have taken different approaches from their immediate predecessors.

The Federal Reserve’s new Vice Chair for Supervision stated her goals in February 2026:

Community banks are and should be subject to less stringent standards than large banks, and there is significant

opportunity to tailor regulations and supervision to the unique needs and circumstances of these banks.

Increase static and outdated statutory thresholds, including asset thresholds, which may push banks into different

regulatory restrictions, and supervisory and reporting categories more suited to larger institutions.

Tailor the merger and acquisition and

de novo

chartering application processes for community banks, including

accurately considering competition among small banks.

Changes in Basel III capital rules to support market liquidity, affordable homeownership, and safety and

soundness. In particular, the capital treatment of mortgage loans and mortgage servicing assets under the U.S.

standardized approach has resulted in banks reducing their participation in this important lending activity, limiting

access to mortgage credit.

Change bank supervision to focus on the core material risks to banks’ operations and the stability of the broader

financial system. Core material risks include non-financial risks where these pose threats to safety and soundness.

Strong risk management, whether in credit, liquidity, cybersecurity, or operations, remains essential, and will be

part of bank examinations.

Supervision must also be tailored, matching oversight to each institution's size, complexity, and risk profile.

Supervision must also be tailored, matching oversight to each institution's size, complexity, and risk profile.

Review the CAMELS bank ratings framework, and establish clear metrics and parameters for all of the

components to provide transparent and objective supervisory assessments to reflect overall safety and soundness,

n

ot just isolated deficiencies in a single CAMELS component.

Adopt a proposed regulation to avoid bank supervisors encouraging, influencing, or compelling banks to debank or

refuse to bank a customer due to their constitutionally protected political or religious beliefs, associations, speech,

or conduct. At the same time, banks must remain free to make their own risk-based decisions to serve individuals

and lawful businesses.

The Office of the Comptroller of the Currency (“OCC”) and the FDIC have stated similar goals. De novo bank and bank

merger applications are being approved faster by all the Federal bank regulators, and the FDIC has approved the deposit

insurance for several industrial bank applications. The OCC and the FDIC are encouraging innovation and digital asset

activities, and implementing the Guiding and Establishing National Innovation for U.S. Stablecoins Act (GENIUS Act).

The regulators have rescinded prior policies (i) limiting digital activities and (ii) requiring prior regulatory notice and

review of novel activities, including digital activities. The regulators have clarified that banking organizations may engage

in permissible crypto-asset activities, and provide products and services to persons engaged in crypto-asset related

activities, subject to safety and soundness and applicable laws and regulations.

The SEC Chair and the SEC are reevaluating the disclosures required of public company under Regulation S-K, including

the executive compensation disclosures. The SEC Chair’s goals are to promote a more favorable environment for public

companies by:

anchoring disclosures in financial materiality so that investment decisions can turn on economic signals rather than

on regulatory noise;

scale disclosure requirements with a company’s size and maturity;

de-politicizing shareholder meetings by restoring their focus to significant corporate matters; and

allowing public companies to have litigation alternatives so that innovators shielded from the frivolous and

investors from the fraudulent.

These disclosures under this item reflect the Company’s beliefs and opinions as to factors that could materially and

adversely affect the Company and its securities in the future. References to past events are examples only, and are not

intended to be a complete listing or a representation as to whether or not such factors have occurred in the past or their

likelihood of occurring in the future. Any of the following risks could harm our business, results of operations and

financial condition and an investment in our stock. The risks discussed below also include forward-looking statements, and

our actual results and financial condition may differ substantially from those discussed in these forward-looking statements.

Operational Risks

Market conditions and economic cyclicality may adversely affect us and our industry.

The Company’s income depends largely on the difference between interest income earned on its loans and securities

(earning assets) and its interest expense on its deposits and other borrowings. Market interest rates affect the spread

between our interest income and our interest expense and the values of our investment securities. Market rates are affected

by Federal Reserve monetary policy, fiscal policy, inflation and inflation expectations, and various other factors. Inflation

more directly affects our noninterest costs, as well as our customers’ savings and payment behaviors.

Market developments, including unemployment rates, price and inflation levels, stock and bond market volatility, and

changes, including those resulting from Russia’s war in Ukraine and other wars and armed conflicts, tariffs and foreign

policies, and government fiscal, operational and monetary policies affect consumer confidence levels, economic activity

and interest rates. Increases in inflation and market interest rates and future expectations of these, and adverse changes in

consumer and business confidence may change customers’ savings, payment and borrowing behaviors, and may increase in

loan delinquencies and loan losses. These could affect our credit quality, our results of operations and financial condition.

Changes in market interest rates and the shape of the yield curve affect the value of our investment securities. Increased

interest rates may result in unrealized losses on investment securities and accumulated other comprehensive income

(“AOCI”). Increases in AOCI reduce our reported stockholders’ equity.

Our allowance for loan losses is affected by general economic conditions and we may be negatively affected by credit risk

exposures.

Our models for determining our allowance for credit losses are based on “current expected credit losses” (“CECL”)

principles in generally accepted accounting principles (“GAAP”), and may be adversely affected by changes in the

economy. CECL uses current expected credit losses instead of the “as incurred” loss method used historically under GAAP,

to estimate losses inherent in our credit exposures. The process for estimating expected losses requires difficult, subjective

and complex judgments, including forecasts of economic conditions, and how those economic predictions might affect the

ability of our borrowers to repay their loans or the value of assets. Macroeconomic factors used in our CECL model

include the Alabama unemployment rate, the Alabama home price index, the national commercial real estate price index

and the Alabama gross state product. Changes in economic conditions and factors used in our CECL models, including the

effects of changes in government policies, including monetary and fiscal policies, may increase the variability of our

provisions for loan losses and our earnings. The CECL standard has not been in effect over a full business cycle and its

effects in times of severe economic stress may not be fully known. See Note 1 to our Financial Statements –

“Allowance

for Credit Losses – Loans.”

Unanticipated adverse changes in the economy, including those resulting from fiscal, monetary or other government

policies adversely affect us.

We periodically review the expected effects of economic conditions and trends in reviewing our allowance for credit

loss models. We may be adversely affected because of unanticipated adverse changes in the economy, including

fiscal and monetary policy changes, unemployment levels, inflation, market conditions or events adversely affecting

specific customers, industries or markets, including disruptions of supply chains, war and armed conflicts, changes in taxes

and regulation, and changes in borrower behaviors. Borrowers and their businesses, and real estate and commercial

projects and businesses may be adversely affected by inflation and higher interest rates, as well as from tighter monetary

policies, and may request or need loan modifications and deferrals. Businesses may be unable to fully pass on to their

customers increased costs due to inflation, supply chain disruptions, tariffs and other factors, and their cash flows and

profits may be adversely affected. If the credit quality and risk profile of our customers materially change adversely, or if

the risk profile of the market, industry or group of customers changes materially, or conditions in the real estate and other

markets worsen, or borrower payment behaviors change, our business, could be materially adversely affected.

Changes in the real estate markets, including the origination and secondary markets for residential mortgage loans, may

continue to adversely affect us.

Inflation and the Federal Reserve monetary actions to fight inflation have caused residential mortgage rates to increase

significantly. Higher interest rates and the increased prices of housing during and following the COVID-19 pandemic have

slowed housing sales. These conditions have adversely affected housing affordability and increased monthly mortgage

payments. Although short term interest rates have decreased since Fall 2024, longer term mortgage rates have remained

higher than before the pandemic, and purchase money residential mortgages and refinancings continue to be adversely

affected. Our mortgage loan production and income have been adversely affected.

Our concentration of commercial real estate loans could result in further increased loan losses, and adversely affect our

business, earnings, and financial condition.

Commercial real estate (“CRE”) is cyclical. Rapid CRE growth and concentrations of CRE loans, in dollar amounts and

geographic concentrations, present risks of possible loss. Loans for the acquisition and development of land and residential

construction which are generally viewed as higher risk than loans on existing structures.

We had approximately 68% of our loan portfolio in CRE loans at year-end 2025, of which approximately 18% were owner-

occupied. The bank regulators’ CRE Guidance requires banks with high levels of CRE and CRE growth, to implement

improved underwriting, internal controls, risk management policies and portfolio stress testing, as well as higher levels of

allowances for possible losses and capital levels. Increases in interest rates beginning in March 2022 and reduced market

transactions may adversely affect the assumptions and performance of CRE, especially for projects financed with short term

or unhedged variable rate debt, and the ability of CRE borrowers to refinance on terms that their projects can support.

Lower demand for CRE and fewer CRE purchase and sale transactions, and reduced availability of, and higher interest rates

and costs for, CRE loans could adversely affect the values and liquidity of CRE collateral and our CRE loans, and sales of

other real estate owned, and therefore our earnings and financial condition, including our capital and liquidity. See Balance

Sheet Analysis - Loans” and “Supervision and Regulation – CRE.”

Resolution of the Fannie Mae and Freddie Mac Conservatorships may have adverse consequences

Fannie Mae and Freddie Mac (the “GSEs”) have been in conservatorship since September 2008. The federal government is

considering privatizing these GSEs and ending the conservatorship. Since these GSEs dominate the residential mortgage

markets, any changes in their operations and requirements, as well as their respective restructurings, and the costs of their

capital and borrowings as private institutions, could adversely affect the primary and secondary mortgage markets, and our

residential mortgage businesses, our results of operations and the returns on capital deployed in these businesses.

Resolution of these extremely large GSEs will be complex, and the timing and effects of such resolution and the effects on

mortgage originators and the mortgage markets and their participants, including the Company, cannot be predicted.

We may be obligated to repurchase mortgage loans we sold to third parties on terms unfavorable to us.

The Company originates residential mortgage loans. The Company sells these loans, primarily to Fannie Mae, pursuant to

customary contract representations and warranties. Mortgage buyers may request that sellers repurchase mortgages for

breach of their seller obligations, if the mortgages do not perform. Such requests increased substantially during the Credit

Crisis. Although we have had negligible mortgage loan repurchase requests historically, including during the Credit Crises,

a stressed economy could increase mortgage loan credit issues that may increase mortgage repurchase requests.

The soundness of other financial institutions could adversely affect us.

We routinely execute transactions with counterparties in the financial services industry, including securities firms, central

clearinghouses, and banks. Our ability to engage in routine investment and banking transactions, as well as the quality and

values of our investments in holdings of obligations of other financial institutions such as the FHLB-Atlanta, could be

adversely affected by the actions, financial condition, profitability and regulation of such other financial institutions.

Financial services institutions are interrelated as a result of shared credits, trading, clearing, counterparty and other

relationships. Failures and near failures of several mid-sized banks in Spring 2023 caused significant market volatility

issues for bank stocks, regulatory enforcement actions and uncertainty in the investor community and among bank

regulators, customers and investors, generally. In such situations, depositors and other customers tend to reduce their

uninsured deposits and bank supervisors more closely scrutinize bank risks. These failures resulted in bank regulators

focusing, generally, on capital adequacy and liquidity in light of bank growth rates, customer, asset and deposit

concentrations and risks; uninsured deposit levels; CRE; crypto business and customers. About the same time, smaller

banks’ engagement with third-party vendors or “partners” providing digital, electronic and (“BaaS”) and fintech

relationships raised bank regulatory concerns and enforcement actions regarding such activities and their effects on bank

safety and soundness; the banks’ strategic, capital and liquidity plans and contingency plans; and vendor diligence and risk

management.

Any losses, defaults by, or failures of, the institutions we do business with or which affect could adversely affect our

business, including our liquidity, financial condition and earnings.

The federal government’s digital innovation focus may increase our competition and operational risks

The Executive Order “Strengthening American Leadership in Digital Financial Technology” (2025) and the federal bank

regulators’ implementation of it, including rapidly chartering new digital asset banks and trust companies, encouraging

stablecoins and other digital assets, as well as investigating “de-banking” of the crypto industry and others, may increase

the use of digital assets and the volume of digital asset transactions, and the risks of such transactions to banks and to

financial stability, generally. The proposed CLARITY Act legislation may enable the payment of yield or interest

equivalents on stablecoins that may compete with bank transaction accounts. These changes could increase competition,

disruption and unexpected changes in the banking industry, including us. Increases in banks’ and other financial services

companies’ direct and indirect risk exposures to crypto or digital assets may increase their cybersecurity and data breach

risks, fraud risks, and AML/CFT and sanctions compliance risks.

Our future success is dependent on our ability to compete effectively in highly competitive markets.

Lee County and the surrounding areas of East Alabama, where we primarily operate, are highly competitive. Our

future growth and success will depend on our ability to compete effectively in these markets. Lee County is served by 21

banks, including 12 national and regional competitors. We compete for loans, deposits and other financial services and

products with local, regional and national commercial banks, thrifts, credit unions, mortgage lenders, and securities and

insurance brokerage firms, including services offered in our market. Increasingly, non-banking firms are using technology

to compete for loans, payments, and other banking services. Various of these traditional and nontraditional firms offer

services in our market without any physical presence here. Many competitors have numerous offices and affiliates

operating over wide geographic areas and have diverse customer and geographic bases to draw upon. Many of our

competitors offer products and services different from ours, and have substantially greater resources including technology,

name recognition and advertising than we do, which helps them attract business. In addition, larger competitors may be

able to price loans and deposits more aggressively than us. Out of state banks have branched into our markets. See “Item 1

Business.”

Our success depends on local economic conditions.

Our success depends on general economic conditions, especially conditions in our primary market. Adverse changes in

such economic conditions, including higher market interest rates and inflation, supply chain disruptions, changes in

customer behaviors and in the workforce and demand for space since the COVID-19 pandemic, and the timing and

magnitude of future inflation and interest rates, could negatively affect our results of operations and financial condition.

Our local economy is also affected by the growth of automobile manufacturing and related suppliers located in Lee County

and nearby. Auto sales and housing sales are cyclical and generally are affected adversely by higher prices, higher inflation

and interest rates, and tariffs and changes in tariffs. Other major employers in our market include education and healthcare,

which may be adversely affected by changes in Federal government policies, including education and healthcare funding,

and the availability and costs of student loans.

Attractive acquisition opportunities may not be available to us in the future.

We seek continued organic growth, including loan growth, and we also may consider the acquisition of banks, branches,

deposits, or other parts of financial services businesses. We expect that other financial services companies, including credit

unions and nonbanking institutions, some of which have significantly greater resources, will compete with us to acquire

financial services businesses. This competition could increase prices for potential acquisitions that we believe are attractive.

Any acquisition could be dilutive to our earnings and shareholders’ equity per share of our common stock.

Future acquisitions and expansion activities may disrupt our business, dilute shareholder value and adversely affect our

operating results and financial condition.

We evaluate potential acquisitions and expansion opportunities, including new branches and other offices. To the extent

that we grow through acquisitions or new locations, we cannot assure you that we will be able to adequately or profitably

manage such growth. Acquiring other banks, branches, or businesses, as well as other geographic and product expansion

activities involve various known and unknown risks, including credit quality, valuation and pricing, systems conversions,

retention and integration of people, retention and growth of customers, as well as transaction expenses, all of which require

time and coordination with third parties such as service providers. Acquisitions and other expansion activities may fail to

generate the opportunities and customers, revenues or cost savings forecasted.

Technological changes affect our business, and we may have fewer resources than many competitors to invest in and

effectively implement technological improvements; and manage the related risks related to operating technology and

realizing returns on technology investments.

The financial services industry is undergoing rapid technological changes, including new technology-driven products and

ervices and growing demands for user-based banking applications that can be used anywhere.

Artificial intelligence is at an early stage of development and is expensive, but may offer opportunities for better customer

services at reduced costs, but with a high level of unknown risks. The effective use of technology may help us better

analyze our customers and their needs better, and the effective use of technology may enable us to increase efficiency and

reduce our operating costs. At the same time, the initial costs of acquiring and implementing technology may be material,

and such technology requires ongoing attention to the related risks, including fraud, cybersecurity and customer privacy,

compliance with the AML/CFT anti-money laundering and sanctions laws, among others, and various operational and other

risks. Our future success will depend, in part, upon our ability to use technology effectively and efficiently to provide

products and services that meet our customers’ preferences and create additional efficiencies in operations, while

maintaining the security of our systems and data, and complying with applicable law.

Severe weather, natural disasters and conflicts could have significant adverse effects on our business.

Severe weather and natural disasters such as hurricanes, tornados, floods, and acts of war, terrorism, or armed conflict, may

potentially interrupt our business and damage our properties and collateral securing our loans, result in lost revenues and

additional expenses. Such events also could affect the general economic conditions that affect us, the stability of our deposit

base, disrupt our customers’ businesses and impair our borrowers’ capacity to repay loans. Although management has

established disaster recovery and business continuity policies and procedures, severe weather and natural disasters and

these other events could have a material adverse effect on our business.

Potential gaps in our risk management policies and internal audit procedures may leave us exposed to unidentified or

unanticipated risks, which could negatively affect our business.

Our enterprise risk management and internal audit program are designed to mitigate material risks and losses to us. We

regularly review our risks in an effort to maintain risk management and internal audit policies and procedures addressing

our risks. Nonetheless, our policies and procedures may not anticipate and identify timely every risk to which we may be

exposed. Our internal audit process may fail to detect such weaknesses or deficiencies timely. Many of our risk

management models and estimates are based on assumptions, estimates and judgments from observed historical market

behavior to model or project potential future exposure. Other models used by our business, including our CECL models,

also are based on assumptions, estimates and projections. These models may not operate properly or timely, or our inputs,

estimates and assumptions may be inaccurate, or changes in economic and market conditions, customer behaviors or

regulations may adversely affect the accuracy or usefulness of the models. These models may not fully or timely predict

future exposures, which may occur significantly faster or in greater magnitudes than historically. Other risk management

methods depend upon the evaluation of information regarding markets, clients, or other matters that are publicly available

or otherwise accessible. This information may not always be accurate, complete, up-to-date or properly evaluated.

We may have to implement more extensive and perhaps different risk management policies and procedures to reflect

changes in the economy, threats to our systems and data, our markets and customers, regulation, and technology uses and

exposures. All of these could adversely affect our costs.

Any failure to protect the confidentiality of customer information could have material adverse effects on us.

Various laws enforced by the bank regulators and other government agencies protect the privacy and security of customers’

non-public personal information maintained by banks and their vendors. Our internal processes, policies and controls are

designed to protect the confidentiality of customer information we hold and that is accessible to us, our vendors and

employees. It is possible that a vendor or an employee could permit unauthorized access to or improperly use confidential

customer information. Personal customer data also could be compromised via intrusions into our systems or those of our

service providers or other persons we do business with such as credit bureaus, data processors and merchants who accept

credit or debit cards for payment. If our internal controls are inadequate, or if our employees, vendors and other third parties

fail to comply with our policies and procedures, misappropriation or inappropriate disclosure and misuse of customer

information could occur. Any such internal control inadequacies or non-compliance could materially damage our

reputation, lead to remediation costs and civil or criminal penalties. See Item 1C. Cybersecurity for more information

about cybersecurity and our management and strategies.

Our systems, including those provided by third parties may be attacked, which could disrupt our operations and materially

damage our business.

Our systems and networks, including those provided by our third-party service providers, are subject to security risks and

may be disrupted, such as denial of service attacks, hacking, terrorist activities, or identity theft. Cybercrime risks have

increased as electronic and mobile banking activities have increased, and may increase further as a result of wars in Ukraine

or the Middle East, tensions with mainland China and other countries, foreign government sponsored cybercrime and theft,

and the development of intrusion tools using artificial intelligence. Other financial service institutions and their service

providers have reported material security breaches, including use of stolen access credentials, hacking, malware,

ransomware, phishing and distributed denial-of-service attacks, among other means. Attackers using a wide and increasing

variety of tactics have disrupted the operations of public companies, and have demanded ransoms to return hijacked

systems, effected unauthorized transfers, obtained unauthorized access to confidential information, destroyed data, disabled

or degraded service, and sabotaged systems. Any of these could cause material financial, operational and reputational harm.

Despite our cybersecurity policies, and our efforts to monitor and maintain the integrity of the systems we and our third-

party service providers use, we may not be able to anticipate or counter all rapidly evolving security threats. Artificial

intelligence used by cyber criminals, including foreign governments, likely will require additional defenses. The increasing

levels and sophistication of cyber threats may require us and our vendors to spend more resources to protect our data.

Security breaches or failures may have serious adverse financial and other consequences, including disruptions to

operations, misappropriation of confidential information, damage to systems operated by us or our third-party service

providers, as well as damages to our customers and our counterparties, and significant remediation costs. These events

could damage our reputation, result in loss of customer business, subject us to additional regulatory scrutiny, or expose us

to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial

condition and results of operations. See “Item 1C. – Cybersecurity.

We may be unable to attract and retain key people to support our business.

Our success depends, in large part, on our ability to attract and retain key people. We compete with other financial services

companies for people primarily on the basis of our culture, compensation and benefits, support services and financial

position. Intense competition exists for key employees with demonstrated ability, and we may be unable to hire or retain

such employees. The unexpected loss of one or more of our key persons and or the failure to effect timely transitions

involving such persons could have a material adverse effect on our business, earnings or financial condition.

Financial Risks

Our cost of funds may increase as a result of general economic conditions, inflation, interest rates, inflation, changes in

customer behaviors and competitive pressures.

Our costs of funds are affected by general and local economic conditions, changes in market interest rates and competitive

pressures, and inflation, and anticipated future changes in target short -term interest rates resulting from the Federal

Reserve’s anti-inflation measures. Traditionally, we have obtained funds principally through local deposits and borrowings

from the FHLB-Atlanta. Increases in interest rates typically cause consumers to shift their funds to more interest-bearing

instruments and increase the competition for deposits. If customers move (i) money

out of bank transaction deposits into investments, stablecoins or other yield-bearing instruments elsewhere, or (ii) they

move their funds within the Bank from transaction deposits to higher cost, interest-bearing time deposits, our interest

expense may increase, and our net interest income and earnings may be material and adversely affected income. If our total

deposits decreased, our funds to make loans and grow will be reduced. Any of these may adversely affect our business. See

“Supervision and Regulation – Fiscal and Monetary Policy.”

Our profitability and liquidity may be affected by changes in interest rates and interest rate levels, the shape of the yield

curve and economic conditions.

Our profitability is primarily driven by the difference between the interest rates received on our interest earning assets and

the interest we pay on our deposits and borrowings. Net interest income will be adversely affected if market interest rates

and the interest we pay on our deposits and borrowings increase faster than the interest earned on loans and investments,

especially as large portion of our loans have fixed interest rates. Interest rates, and consequently our results of operations,

are affected by general economic conditions (national, international and local), fiscal and monetary policies, and

expectations regarding changes in these, and the shape of the yield curve. Net interest income could be affected by

asymmetrical changes in the different interest rate indexes because not all of our assets or liabilities are priced with the

same index. and the different indices do not change simultaneously or at the same magnitude. Higher market interest rates

and continuing run-off of maturing securities held by the Federal Reserve in its SOMA as quantitative tightening to curb

inflation and to maintain sufficient reserves in the system policy, may limit economic growth, and therefore reduce loan

demand and growth.

The production of mortgages and other loans and the value of collateral securing our loans are dependent on demand within

the markets we serve, as well as interest rates. Increases in market interest rates tend to decrease mortgage originations,

increase MSR values, decrease the value and liquidity of collateral securing loans, and may result in unrealized losses on

our investment securities and increase our accumulated other comprehensive losses. Accumulated other comprehensive

losses reduce our reported GAAP equity and tangible equity. See “Management's Discussion and Analysis of Financial

Condition and Results of Operations Table 5,” “Market and Liquidity Risk Management” and Supervision and Regulation.

Liquidity risks could affect operations and jeopardize our financial condition.

Liquidity is essential to our business. An inability to raise funds through deposits, borrowings or sales of loans and

investments or otherwise, or due to materially reduced or delayed proceeds from scheduled loan and securities payments

and maturities, could have a negative effect on our liquidity. Our funding sources also include federal funds purchased,

securities sold under repurchase agreements, and short- and long-term debt. We maintain a portfolio of marketable high-

quality securities that are all held as available for sale, and can be used as a source of liquidity. As market interest rates

rose prior to Fall 2024, however, we experienced unrealized losses on our securities available for sale, which would become

realized losses upon the sale of such securities, and such sales at a loss would reduce our net income and our regulatory

capital.

Our access to funding sources in amounts adequate to finance or capitalize our activities on terms which are acceptable to

us could be impaired by factors that affect us specifically, or general economic or banking industry issues. General

conditions that are not specific to us, such as disruptions in the financial markets, failures of other banks, such as the Spring

2023 bank failures, or negative views and expectations about the prospects for the financial services industry, could

adversely affect us and our liquidity. Competition, including from stablecoins paying rewards or other interest equivalents

could also adversely affect the availability and cost of deposits and liquidity.

Our ability to realize our deferred tax assets may be reduced if our estimates of future taxable income from our operations

and tax planning strategies do not support this amount, or our tax law reduces or deferred tax assets.

We are allowed to carry-back losses for two years for Federal income tax purposes. As of December 31, 2025, we had a

net deferred tax asset of $6.9 million compared to $10.2 million one year earlier. These and future deferred tax assets may

be reduced in the future if our estimates of future taxable income from our operations and tax planning strategies do not

support the amount of the deferred tax asset.

Changes in accounting and tax rules applicable to banks could adversely affect our financial conditions and results of

operations.

From time to time, the FASB and the SEC change the financial accounting and reporting standards that govern our financial

statements. These changes can be difficult to predict and can materially affect our reported financial condition and results

of operations, and may cause us to restate prior period financial statements

Congress, the Treasury Department and state

and local governments may also change the tax laws or make consequential changes to their interpretation that may

adversely affect us.

If we need to raise additional capital in the future, that capital may not be available on reasonable terms.

We anticipate that our current capital resources will satisfy our capital requirements for the foreseeable future under current

capital rules. If, however, we need to raise additional capital to support our growth, currently unanticipated losses or new

capital requirements, our ability to raise additional capital will depend, among other things, on conditions in the capital

markets at that time. If we cannot raise additional capital on acceptable terms when needed, our ability to grow will be

limited.

Our employees may take excessive risks which could negatively affect our financial condition and business.

Banks are in the business of accepting certain risks. Our management and employees make decisions and choices that may

expose us to risk. Our incentive compensation programs seek to avoid incenting excessive risk-taking; but some employees

may take such risks. Similarly, although we our controls and procedures are designed to govern and monitor associates’

business decisions and prevent them from taking excessive risks and misconduct, these controls and procedures may not be

effective. If our employees take excessive risks, our financial condition, results of operations and reputation could be

materially and adversely affected.

Our ability to pay dividends to shareholders, repurchase stock and pay discretionary bonuses in the future depends on our

profitability, capital, liquidity and regulatory requirements, which may prevent or limit future dividends.

Cash available to pay dividends to our shareholders is derived primarily from dividends paid to the Company by the Bank.

The Bank’s ability to pay dividends, and Company’s ability to pay dividends to our shareholders, continue to depend on our

earnings and maintaining appropriate liquidity and capital at all levels of our business consistent with regulatory

requirements. We generally may pay dividends, repurchase stock and pay discretionary bonuses, from our current year’s

earnings based on “eligible retained income” over the last four calendar quarters if our capital conservation buffer exceeds

2.5%. See “Supervision and Regulation.”

Our common stock trades in limited volumes, which could result in price volatility and inefficient pricing.

Your ability to sell or buy our common stock depends upon a trading market for our common stock. Although our common

stock is quoted on the Nasdaq Global Market under the trading symbol “AUBN,” our trading volume has been limited

historically. The limited trading volume may cause fluctuations in the market value of our common stock to be exaggerated,

leading to price volatility exceeding what may occur in a more active trading market. As a result, you may be unable to

trade our common stock at the volume, price and time that you desire. Due to limited trading volumes, market prices may

not reflect our common stock’s true or intrinsic value.

Legal and Regulatory Risks

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

The Company is an entity separate and distinct from the Bank. Company transactions with the Bank are limited by the

Federal Reserve Act and Federal Reserve Regulation W. The Company cannot generally borrow from the Bank and

depends upon dividends paid by the Bank to the Company, which are limited by law and regulatory policies. The

Company’s liquidity, financial condition and ability to pay dividends or repurchase Company common stock or pay

discretionary could be materially adversely affected if the Bank’s dividends were further limited by law or

regulatory restriction, or if the Bank’s earnings, capital position or liquidity were insufficient.

We are required to maintain capital to meet regulatory requirements, and if we fail to maintain sufficient capital, our

financial condition, liquidity and results of operations would be adversely affected.

The Bank must meet regulatory capital requirements. If we fail to maintain our capital and meet other regulatory

requirements, our financial condition, liquidity and results of operations may be materially and adversely affected. Our

failure to remain “well capitalized” and “well managed” for bank regulatory purposes, including a failure to meet the

capital conservation buffers needed to avoid restrictions on distributions, could adversely affect us, our stock and its price.

A failure to remain “well capitalized,” for bank regulatory purposes, could, among other possible consequences adversely

affect customer confidence and our:

ability to grow;

costs of and availability of funds;

costs of FDIC deposit insurance premiums;

ability to raise or replace brokered deposits;

ability to pay or increase dividends on our capital stock;

ability to repurchase our common stock;

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

ability to make acquisitions or engage in new activities;

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

ability to make payments of principal and interest on any of our capital instruments that may be then outstanding.

See

“Supervision and Regulation.”

The Federal Reserve may require us to commit capital resources to support the Bank.

A bank holding company must act as a source of financial and managerial strength to its subsidiary bank. The Federal

Reserve may require a bank holding company to make capital injections into a troubled subsidiary bank, and we could be

required to provide financial assistance to the Bank if it experienced financial distress, even if further investment is not

otherwise warranted economically. See “Supervision and Regulation.”

We are subject to extensive banking regulation to protect depositors, which could adversely affect our earnings and our

common stock value.

We are subject to extensive regulation by federal and state bank regulators. Our success is affected by laws and regulations

affecting banks and bank holding companies, and our costs of compliance could adversely affect our earnings. Banking

regulations are primarily intended to protect depositors and the FDIC’s DIF, not shareholders. The financial services

industry also is subject to frequent legislative and regulatory changes and proposed changes. Compliance with applicable

laws and regulations, as applied by our bank regulators and their examiners may be is time consuming and costly. Recent

litigation striking new regulations because the regulators exceeded their authority or improperly acted when adopting new

rules, creates uncertainty and results in wasted time and costs of preparing to comply with new rules that never become

effective. See “Supervision and Regulation.”

Our operations are subject to risk of loss from unfavorable fiscal, monetary, regulatory and political developments,

domestic and foreign.

Our businesses and earnings are affected by the fiscal, monetary and other policies and actions of various federal and state

governmental and regulatory authorities. Changes in these are beyond our control and are difficult to predict and,

consequently, changes in these policies could have negative effects on our activities and results of operations. Failures of

the executive and legislative branches to agree on spending plans and budgets previously have led to Federal government

shutdowns, which may adversely affect the U.S. economy. Prolonged government shutdown or reductions in force at

various governmental and regulatory authorities may inhibit our ability to evaluate the economy, generally, and affect

government workers who are not paid during such events, and where the absence of government services and data could

adversely affect consumer and business sentiment, our local economy, and our business. Economic disruptions from

government actions on tariffs, immigration, population growth and labor, wars and military actions, and the availability of

petroleum and raw materials from foreign sources could adversely affect the economy in various ways, including, for

example, supply chain disruptions, increased costs and inflation, and changes in consumer behaviors. Continuing increases

in government deficits may also increase inflation and the interest rates on U.S. government debt. The interest rates on

business and consumer debt, including loans and mortgages, generally reflect a premium over U.S. government debt, and

increased rates could adversely affect the economy, generally.

Our business is subject to litigation that may result in significant financial losses and/or harm to our reputation.

We face risks of litigation in the ordinary course of operating our businesses. Plaintiffs in lawsuits against us may seek very

large and/or indeterminate amounts, including punitive and treble damages and legal fees. The ultimate outcome of any

litigation or threatened litigation and the amount or range of potential loss at particular points in time may be difficult to

ascertain. See “Item 3 legal Proceedings.”

We rely extensively on various information systems and other electronic resources to operate our business. In addition,

nearly all of our customers, service providers and other business partners on whom we depend, including the providers of

our online banking, mobile banking and accounting systems, use their own electronic information systems. Any of these

systems can be compromised by employees, customers and other authorized individuals, and bad actors using sophisticated

and constantly evolving sets of software, tools and strategies, which may include artificial intelligence, to do so. The

threats are domestic and international and range from small to large, including state sponsored, terrorist and criminal

organizations with substantial funds, and technical and other resources, and may increase during wars, armed conflicts and

heightened international tensions.

As a bank, we and our vendors, service providers and customers may be attractive targets, and we confront continuous

cybersecurity threats. Insurance to fully cover these risks is unavailable in sufficient amounts at reasonable costs. We

believe the more effective approach is taking active measures to detect, deter and reduce cybersecurity threats, and be

prepared to address and remediate any breaches and prevent similar breaches in the future. See “Risks Related to

Information Security and Business Interruption” section of the Risk Factors included in Item 1A of this Form 10-K for

additional information.

Accordingly, we have devoted significant resources to assessing, identifying and managing risks associated with

cybersecurity threats, including:

Implementing an Information Security Program that establishes policies and procedures for security

operations and governance;

Establishing an IT Steering Committee that includes participation by directors that is responsible for security

administration, including reviewing assessments of our information systems, existing controls, vulnerabilities

and potential improvements;

mplementing layers of controls and avoiding 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;

Performing initial and ongoing due diligence with respect to our third-party service providers, including their

cybersecurity practices and safeguards, and service level standards based on the risk they pos to the Bank;

Maintaining a vendor management program with pre-engagement and periodic review processes thereafter,

and a third-party risk management program designed to identify, assess and manage risks associated with

external service providers;

Monitoring our systems and related software and programming periodically to update software and

programing, including updating data protection elements, and requiring that our service providers also engage

in similar programs that are reasonably designed to deter cybersecurity breaches;

Performing initial and ongoing due diligence with respect to our third-party service providers, including their

cybersecurity practices and safeguards, and service level standards based on the risk they pose to the Bank;

Engaging third-party cybersecurity consultants, who conduct periodic penetration testing, vulnerability

assessments and other procedures to identify potential weaknesses in our systems and processes; and

Conducting periodic cybersecurity training for our employees and the Compa ny’s board of directors.

Our Information Security Program is a key part of our overall risk management system, which is administered by our IT

Steering Committee and evaluated by our IT Steering Committee and Chief Risk Officer. The program includes

administrative, technical and physical safeguards to help protect the security and confidentiality and availability of

customer records and information.

From time-to-time, we have identified cybersecurity threats that require us to make changes to our processes and equipment

and implement additional safeguards. While none of these identified threats or incidents have materially affected us, it is

possible that threats and incidents we identify in the future could have a material adverse effect on our business strategy,

customer service, data privacy and security, continuity of service and reputation, and our results of operations and financial

condition. See Item 1A. “Risk Factors”.

The Company’s Chief Technology Officer is responsible for the day-to-day management of cybersecurity risks we face and

oversees the IT Steering Committee, which is chaired by a director of the Company’s board. The IT Steering Committee

oversees the information security assessment, development of policies, standards and procedures, testing, training and

security report processes. The IT Steering Committee is comprised of officers with the appropriate expertise and authority

to oversee the Information Security Program, and includes the participation of certain directors.

Our Chief Technology Officer, along with the information technology department, is accountable for managing our

enterprise information security and delivering our information security program. The department, as a whole, consists of

information security professionals with varying degrees of education and experience. The Chief Technology Officer is

subject to professional education and certification requirements. In particular, our Chief Technology Officer, who is also

designated as our Information Security Officer, has relevant expertise in the areas of information security and cybersecurity

risk management.

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.

The Bank conducts its business from its main office, seven full-service branches, and a loan production office.

The Bank owns its main campus in downtown Auburn, Alabama, which comprises over 4 acres and includes the

AuburnBank Center, drive-through facility, and parking deck. The AuburnBank Center, which was constructed in May

2022, has approximately 90,000 square feet of space. The AuburnBank Center includes the Bank’s main office, the Auburn

loan production office, and all of its back-office operations. The main office branch offers the full line of bank services and

has one ATM. The AuburnBank Center has approximately 46,000 square feet of Class A office space and approximately

5,000 square feet of retail space available for lease to third party tenants, of which approximately 32,000 square feet is

currently leased and occupied. The Bank’s drive-through facility located on the main office campus was constructed in

October 2012. This drive-through facility has five drive-through lanes, including an ATM, and a walk-up teller window.

The parking deck has approximately 500 parking spaces, is open to the public and charges hourly, monthly, and special

event rates, and provides parking needs for the Bank’s employees and customers. Of the 500 parking spaces,

approximately 100 to 150 parking spaces have been made available to a third-party under a long-term lease.

The Opelika branch is located in Opelika, Alabama. This branch, built in 1991, is owned by the Bank and has

approximately 4,000 square feet of space. This branch offers the full line of the Bank’s services and has drive-through

windows and an ATM. This branch offers parking for approximately 36 vehicles.

The Notasulga branch was opened in August 2001. This branch is located in Notasulga, Alabama, about 15 miles west of

Auburn, Alabama. This branch is owned by the Bank and has approximately 1,344 square feet of space. The Bank leased

the land for this branch from a third party. In May 2025, the Bank’s land lease renewed for another one-year term. This

branch offers the full line of the Bank’s services including safe deposit boxes and a drive-through window and parking for

approximately 11 vehicles, including a handicapped ramp.

In November 2002, the Bank opened a loan production office in a leased space in Phenix City, Alabama, about 35 miles

south of Auburn, Alabama. In November 2025, the Bank renewed its lease for another year.

In February 2009, the Bank opened a branch located on Bent Creek Road in Auburn, Alabama. This branch is owned by the

Bank and has approximately 4,000 square feet of space. This branch offers the full line of the Bank’s services and has

drive-through windows and a drive-up ATM. This branch offers parking for approximately 29 vehicles.

In December 2011, the Bank opened a branch located on Fob James Drive in Valley, Alabama, about 30 miles northeast of

Auburn, Alabama. This branch is owned by the Bank and has approximately 5,000 square feet of space. This branch offers

the full line of the Bank’s services and has drive-through windows and a drive-up ATM. This branch offers parking for

approximately 35 vehicles. Prior to December 2011, the Bank had operated a loan production office in Valley, which was

originally opened in September 2004.

The Bank operated a branch in the Corner Village Shopping Center in Auburn from 2015 to the end of 2024. After careful

consideration of the Bank’s customers, branch usage, parking issues, the lack of a drive through window and the close

proximity to our other locations in Auburn, the Bank closed the Corner Village branch on December 31, 2024, and its lease

expired January 31, 2025.

In September 2015, the Bank relocated its Auburn Wal -Mart Supercenter branch in south Auburn, which had been opened

in 2004, to a new building which the Bank built in 2015 at the intersection of S. Donahue Avenue and E. University Drive

in Auburn, Alabama. The South Donahue branch has approximately 3,600 square feet of space. The South Donahue

branch offers the full line of the Bank’s services and has drive-through windows and an ATM. This branch offers parking

for approximately 28 vehicles.

In May 2017, the Bank relocated its Opelika Kroger branch to a new location the Bank purchased in August 2016 near the

Tiger Town Retail Shopping Center and the intersection of U.S. Highway 280 and Frederick Road in Opelika, Alabama.

The Tiger Town branch, built in 2017, has approximately 5,500 square feet of space. Prior to relocation, the Bank’s

Opelika Kroger branch was located inside the Kroger supermarket in the Tiger Town retail center in Opelika, Alabama. The

Opelika Kroger branch was originally opened in July 2007. The Tiger Town branch offers the full line of the Bank’s

services and has drive-through windows and an ATM. This branch offers parking for approximately 36 vehicles.

In addition to the seven ATMs at various branch locations, the Bank also has one ATM located in Notasulga, Alabama.

The Bank had a 2,500 square feet loan production office on East Samford Avenue in Auburn, Alabama. When this loan

production office was relocated to the AuburnBank Center in June 2022, the Company entered into a three-year sublease

agreement during 2022. The sublessee has renewed this sublease through October 2026.

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.

OPERATIONS

The following is a discussion of our financial condition at December 31, 2025 and 2024 and our results of operations for

the years ended December 31, 2025 and 2024. The purpose of this discussion is to provide information about our financial

condition and results of operations which is not otherwise apparent from the consolidated financial statements. The

following discussion and analysis should be read along with our consolidated financial statements and the related notes

included elsewhere herein. In addition, this discussion and analysis contains forward-looking statements, so you should

refer to Item 1A, “Risk Factors” and “Special Cautionary Notice Regarding Forward-Looking Statements”. This includes

Table 2 “Selected Financial Data.”

OVERVIEW

The Company was incorporated in 1990 under the laws of the State of Delaware and became a bank holding company after

it acquired its Alabama predecessor, which was a bank holding company established in 1984. The Bank, the Company's

principal subsidiary, is an Alabama state-chartered bank that is a member of the Federal Reserve System and has operated

continuously since 1907. Both the Company and the Bank are headquartered in Auburn, Alabama. The Bank conducts its

business primarily in East Alabama, including Lee County and surrounding areas. The Bank operates full-service branches

in Auburn, Opelika, Notasulga and Valley, Alabama. The Bank also operates a loan production office in Phenix City,

Alabama.

Summary of Results of Operations

Year ended December 31

(Dollars in thousands, except per share data)

2025

2024

Net interest income (a)

29,747

27,204

Less: tax-equivalent adjustment

73

79

Net interest income (GAAP)

29,674

27,125

Noninterest income

3,119

3,474

Total revenue

32,793

30,599

Provision for credit losses

631

36

Noninterest expense

22,951

22,166

Income tax expense (benefit)

1,956

2,000

Net earnings

7,255

6,397

Basic and diluted net earnings per share

2.08

1.83

(a) Tax-equivalent. See "Table 1 - Explanation of Non-GAAP Financial Measures".

Financial Summary

The Company’s net earnings were $7.3 million for the full year 2025, compared to $6.4 million for the full year 2024.

Basic and diluted net earnings per share were $2.08 per share for the full year 2025, compared to $1.83 per share for the full

year 2024.

Net interest income (tax-equivalent) was $29.7 million in 2025, a 9% increase compared to $27.2 million in 2024. This

increase was primarily due to improved net interest margin and a 2% increase in our interest-earning assets. The

Company’s net interest margin (tax-equivalent) was 3.27% in 2025, compared to 3.06% in 2024. The increase in net

interest margin (tax-equivalent) was primarily due to improved yields on interest-earning assets, and a decrease in our cost

of interest-bearing deposits.

At December 31, 2025, the Company’s allowance for credit losses was $7.2 million, or 1.27% of total loans, compared to

$6.9 million, or 1.22% of total loans, at December 31, 2024.

The Company recorded a provision for credit losses of $631 thousand in 2025 compared to $36 thousand during 2024. The

provision for credit losses in 2025 was primarily due to two loans that were individually evaluated. A specific reserve was

established for one loan and the other loan was partially charged off. The provision for credit losses under CECL is

reflective of the Company’s credit risk profile and the future economic outlook and forecasts. Our CECL model is largely

influenced by economic factors including, most notably, the anticipated unemployment rate.

Noninterest income was $3.1 million in 2025 compared to $3.5 million in 2024. The decrease was primarily related to a

decrease in mortgage lending income and other noninterest income .

Noninterest expense was $23.0 million in 2025 compared to $22.2 million in 2024. The increase was primarily related to

increases in salaries and benefits expense and other noninterest expense. These increases were partially offset by a decrease

in net occupancy and equipment expense.

The provision for income tax expense was $2.0 million for an effective tax rate of 21.24% for 2025, compared to

$2.0 million for an effective tax rate of 23.82% for 2024. The Company’s effective income tax rate is affected principally

by tax-exempt earnings from the Company’s investments in municipal securities and loans, bank-owned life insurance, and

New Markets Tax Credits. The provision for income tax expense and the effective tax rates for 2024 included discrete tax

items associated with provision to return adjustments in conjunction with the final 2023 tax return filing and the resolution

of state examination activities, which resulted in additional tax expense.

The Company paid cash dividends of $1.08 per share in 2025 and 2024. At December 31, 2025, the Bank’s regulatory

capital ratios were well above the minimum amounts required to be “well capitalized” under current regulatory standards

with a total risk-based capital ratio of 17.14%, a tier 1 leverage ratio of 10.71% and common equity tier 1 or (CET1) of

16.06% at December 31, 2025.

CRITICAL ACCOUNTING POLICIES

The accounting and financial reporting policies of the Company conform with U.S. generally accepted accounting

principles and with general practices within the banking industry. In connection with the application of those principles, we

have made judgments and estimates which, in the case of the determination of our allowance for credit losses, recurring and

non-recurring fair value measurements, and the valuation of deferred tax assets, were critical to the determination of our

financial position and results of operations.

Allowance for Credit Losses – Loans

The allowance for credit losses is estimated under the CECL methodology set forth in Financial Accounting Standards

Board (“FASB”) Accounting Standards Codification (“ASC”) 326,

Financial Instruments – Credit Losses

. The allowance

for credit losses reflects management’s estimate of the amount of credit losses expected to be recognized over the

remaining life of the loans in our portfolio. This evaluation requires significant management judgment and is based upon

relevant available information related to historical default and loss experience, current and projected economic conditions,

and other portfolio-specific and environmental risk factors. Losses are predicted over a reasonable and supportable forecast

period, and at the end of the reasonable and supportable period losses revert to long term historical averages. The allowance

for credit losses is measured on a collective basis for pools of loans with similar risk characteristics, and on an individual

basis for loans that do not share similar risk characteristics with the collectively evaluated pools. There are factors beyond

our control, such as changes in projected economic conditions, real estate markets or particular industry conditions which

may materially impact asset quality and the adequacy of the allowance for credit losses and thus the resulting provision for

credit losses. The allowance is adjusted through provision for credit losses and decreased by charge-offs, net of recoveries

of amounts previously charged-off. See Note 1 - Summary of Significant Accounting Policies and Note 4 - Loans and

Allowance for Credit Losses in the notes to our consolidated financial statements in this report.

Fair Value Determination

U.S. GAAP requires management to value and disclose certain of the Company’s assets and liabilities at fair value,

including investments classified as available-for-sale and derivatives. ASC 820,

Fair Value Measurements and Disclosures

which defines fair value, establishes a framework for measuring fair value in accordance with U.S. GAAP and expands

disclosures about fair value measurements. For more information regarding fair value measurements and disclosures,

please refer to Note 1 - Summary of Significant Accounting Policies and Note 14, Fair Value in the notes to the

consolidated financial statements that accompany this report.

Fair values are based on active market prices of identical assets or liabilities when available. Comparable assets or

liabilities or a composite of comparable assets in active markets are used when identical assets or liabilities do not have

readily available active market pricing. However, some of the Company’s assets or liabilities lack an available or

comparable trading market characterized by frequent transactions between willing buyers and sellers. In these cases, fair

value is estimated using pricing models that use discounted cash flows and other pricing techniques. Pricing models and

their underlying assumptions are based upon management’s best estimates for appropriate discount rates, default rates,

prepayments, market volatility and other factors, taking into account current observable market data and experience.

These assumptions may have a significant effect on the reported fair values of assets and liabilities and the related income

and expense. As such, the use of different models and assumptions, as well as changes in market conditions, could result in

materially different net earnings and retained earnings results.

Deferred Tax Asset Valuation

A valuation allowance is recognized for a deferred tax asset if, based on the weight of available evidence, it is more-likely-

than-not that some portion or the entire deferred tax asset will not be realized. The ultimate realization of deferred tax assets

is dependent upon the generation of future taxable income during the periods in which those temporary differences become

deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax

planning strategies in making this assessment. At December 31, 2025 we had net deferred tax assets of $6.9 million

included as “other assets”, including $6.5 million resulting from unrealized losses in our securities portfolio. Based upon

the level of taxable income over the last three years and projections for future taxable income over the periods in which the

deferred tax assets are deductible, management believes it is more likely than not that we will realize the benefits of these

deductible differences at December 31, 2025. The amount of the deferred tax assets considered realizable, however, could

be reduced if estimates of future taxable income are reduced. See Note 1 - Summary of Significant Accounting Policies

and Note 9 – Income Taxes in the notes to the consolidated financial statements that accompany this report.

Average Balance Sheet and Interest Rates

Year ended December 31

2025

2024

Average

Yield/

Average

Yield/

(Dollars in thousands)

Balance

Rate

Balance

Rate

Loans and loans held for sale

560,476

5.50%

568,733

5.23%

Securities - taxable

228,793

2.16%

248,072

2.19%

Securities - tax-exempt (a)

9,173

3.77%

10,084

3.70%

Total securities

237,966

2.23%

258,156

2.25%

Federal funds sold

26,535

4.25%

17,907

5.24%

Interest bearing bank deposits

83,648

4.28%

44,634

5.23%

Total interest-earning assets

908,625

4.49%

889,430

4.36%

Deposits:

NOW

205,951

1.33%

192,702

1.39%

Savings and money market

253,668

0.97%

251,778

0.86%

Certificates of deposit

184,047

3.20%

195,097

3.46%

Total interest-bearing deposits

643,666

1.72%

639,577

1.81%

Short-term borrowings

28

7.14%

628

0.48%

Total interest-bearing liabilities

643,694

1.72%

640,205

1.81%

Net interest income and margin (a)

29,747

3.27%

27,204

3.06%

(a) Tax-equivalent. See "Table 1 - Explanation of Non-GAAP Financial Measures".

RESULTS OF OPERATIONS

Net Interest Income and Margin

Net interest income (tax-equivalent) was $29.7 million in 2025, a 9% increase compared to $27.2 million in 2024. This

increase was primarily due to improved net interest margin and a 2% increase in our interest-earning assets. The

Company’s net interest margin (tax-equivalent) was 3.27% in 2025, compared to 3.06% in 2024. The increase in net

interest margin (tax-equivalent) was primarily due to improved yields on interest-earning assets, and a decrease in our cost

of interest-bearing deposits. The Federal Reserve announced a 50-basis points rate reduction on September 18, 2024,

followed by two 25 basis points reduction in October and December 2024 and by three 25 basis points in September,

October and December 2025. At year end the target federal funds rate ranged from 3.5% - 3.75%.

The tax-equivalent yield on total interest-earning assets increased by 13 basis points to 4.49% in 2025 compared to 4.36%

in 2024. This increase was primarily due to changes in our asset mix, as cash and cash equivalents increased and securities

declined. Average interest-earning assets were $908.6 million during 2025, a 2% increase compared to $889.4 million

during 2024.

The cost of total interest-bearing liabilities decreased by 9 basis points to 1.72% in 2025 compared to 1.81% in 2024

following decreases to the federal funds rate.

The Company continues to deploy various asset liability management strategies to manage its risk from interest rate

fluctuations. Deposit and loan pricing remains competitive in our markets. We believe that interest rates, inflation and

monetary policy may continue to fluctuate in 2026 and may be challenging as a result. Our ability to compete and manage

our deposits costs until our interest-earning assets reprice and we generate new loans with current market interest rates will

be important to our net interest margin during 2026.

Provision for Credit Losses

The Company recorded a provision for credit losses of $631 thousand during 2025, compared to $36 thousand for 2024.

Provision expense is affected by organic loan growth in our loan portfolio, our internal assessment of the credit quality of

the loan portfolio, our expectations about future economic conditions and net charge-offs. Our CECL model is largely

influenced by economic factors including, the anticipated Alabama unemployment rate, which may be affected by

government policies, including monetary, fiscal and other policies, including tariffs. The provision for credit losses in 2025

was primarily due to two loans that were individually evaluated. A specific reserve was established for one loan and the

other loan was partially charged off.

Our allowance for credit losses reflects an amount we believe appropriate, based on our allowance assessment

methodology, to adequately cover all expected credit losses as of the date the allowance is determined. At December 31,

2025, the Company’s allowance for credit losses was $7.2 million, or 1.27% of total loans, compared to $6.9 million, or

1.22% of total loans, at December 31, 2024.

Noninterest Income

Year ended December 31

(Dollars in thousands)

2025

2024

Service charges on deposit accounts

619

614

Mortgage lending

474

608

Bank-owned life insurance

414

403

Other

1,612

1,849

Total noninterest income

3,119

3,474

The Company’s noninterest income from mortgage lending is primarily attributable to the (1) origination and sale of new

mortgage loans, including refinancings and (2) servicing of mortgage loans. Origination income, net, is comprised of gains

or losses from the sale of the mortgage loans originated, origination fees, underwriting fees and other fees associated with

the origination of mortgage loans, which are netted against the commission expense associated with these originations. The

Company’s customary practice is to originate mortgage loans for sale in the secondary market and to either sell or retain the

MSRs when the loan is sold.

MSRs are recognized based on the fair value of the servicing right on the date the corresponding mortgage loan is sold.

Subsequent to the date of transfer, the Company has elected to measure its MSRs under the amortization method. Servicing

fee income is reported net of any related amortization expense.

The Company evaluates MSRs for impairment quarterly. Impairment is determined by grouping MSRs by common

predominant characteristics, such as interest rate and loan type. If the aggregate carrying amount of a particular group of

MSRs exceeds the group’s aggregate fair value, a valuation allowance for that group is established. The valuation

allowance is adjusted as the fair value changes. An increase in mortgage interest rates typically results in an increase in the

fair value of the MSRs while a decrease in mortgage interest rates typically results in a decrease in the fair value of MSRs.

The following table presents a breakdown of the Company’s mortgage lending income for 2025 and 2024.

Year ended December 31

(Dollars in thousands)

2025

2024

Origination income

154

261

Servicing fees, net

320

347

Total mortgage lending income

474

608

The Company’s income from mortgage lending typically fluctuates as mortgage interest rates, housing sales and

refinancings change. Origination income decreased in 2025 compared to 2024 due to a decrease in mortgage lending

demand as mortgage interest rates remain elevated.

Other noninterest income was $1.6 million in 2025, compared to $1.8 million in 2024. The decrease in other noninterest

income was primarily due to decreased fee income on reciprocal deposits sold through the Intrafi network.

Noninterest Expense

Year ended December 31

(Dollars in thousands)

2025

2024

Salaries and benefits

13,154

12,534

Net occupancy and equipment

2,353

2,508

Professional fees

1,276

1,188

FDIC and other regulatory assessments

569

564

Other

5,599

5,372

Total noninterest expense

22,951

22,166

Salaries and benefits increased during 2025 compared to 2024 primarily due to routine annual increases in salaries and

wages.

The decrease in net occupancy and equipment expense was primarily due to increased leasing income associated with the

Company’s headquarters, which totaled $1.4 million in 2025 compared to $1.0 million in 2024.

The increase in other noninterest expense was due to a variety of miscellaneous items including increased information

technology and systems expenses and loan-related expenses.

Income Tax Expense

The provision for income taxes expense was $2.0 million for an effective tax rate of 21.24% for 2025, compared to

$2.0 million for an effective tax rate of 23.82% for 2024. The Company’s effective income tax rate is affected principally

by tax-exempt earnings from the Company’s investments in municipal securities and loans, bank-owned life insurance, and

New Markets Tax Credits. The provision for income tax expense and the effective tax rates for 2024 included discrete tax

items associated with provision to return adjustments in conjunction with the final 2023 tax return filing and the resolution

o

f state examination activities, which resulted in additional tax expense.

BALANCE SHEET ANALYSIS

Securities

Securities available-for-sale were $233.3 million at December 31, 2025, compared to $243.0 million at December 31, 2024.

This decrease reflects a decrease in the amortized cost basis of securities available -for-sale of $23.4 million, partially offset

by an increase of $13.7 million in the fair value of securities available-for -sale. The decrease in the amortized cost basis of

securities available-for-sale was primarily attributable to normal paydowns and maturities. The average annualized tax-

equivalent yields earned on total securities were 2.23% in 2025 and 2.25% in 2024.

The following table shows the carrying value and weighted average yield of securities available-for-sale as of December

31, 2025 according to contractual maturity. Actual maturities of mortgage-backed securities (“MBS”) may differ from

contractual maturities because the mortgages underlying the MBS may be called or prepaid in whole or in part, with or

without penalty.

December 31, 2025

1 year

1 to 5

5 to 10

After 10

Total

(Dollars in thousands)

or less

years

years

years

Fair Value

Agency obligations

35,580

18,204

53,784

Agency MBS

20,112

16,171

125,644

161,927

State and political subdivisions

1,590

9,160

6,798

17,548

Total available-for-sale

57,282

43,535

132,442

233,259

Weighted average yield (1):

Agency obligations

1.27%

1.99%

1.52%

Agency MBS

1.19%

1.83%

2.22%

2.06%

State and political subdivisions

1.95%

2.00%

2.42%

2.16%

Total available-for-sale

1.26%

1.93%

2.23%

1.94%

(1) Yields are calculated based on amortized cost.

Loans

December 31

(In thousands)

2025

2024

Commercial and industrial

58,400

63,274

Construction and land development

56,436

82,493

Commercial real estate

325,521

289,992

Residential real estate

116,554

118,627

Consumer installment

8,421

9,631

Total loans

565,332

564,017

Total loans, net of unearned income, were $565.3 million at December 31, 2025, and $564.0 million at December 31, 2024,

an increase of $1.3 million. Four loan categories represented the majority of the loan portfolio at December 31, 2025:

commercial real estate (58%), residential real estate (21%), construction and land development (10%), and commercial and

industrial (10%). Approximately 18% of the Company’s commercial real estate loans were classified as owner-occupied at

December 31, 2025.

Within the residential real estate portfolio segment , the Company had junior lien mortgages of approximately $12.3 million,

or 2%, and $11.2 million, or 2%, of total loans at December 31, 2025 and 2024, respectively. For residential real estate

mortgage loans with a consumer purpose, the Company had no loans that required interest only payments at December 31,

2025 and 2024. The Company’s residential real estate mortgage portfolio does not include any option ARM loans,

subprime loans, or any material amount of other consumer mortgage products which are generally viewed as high risk.

The average yield earned on loans and loans held for sale was 5.50% in 2025 and 5.23% in 2024.

The specific economic and credit risks associated with our loan portfolio include, but are not limited to, the effects of

current economic conditions, including the levels of market interest rates, supply chain disruptions, commercial office

occupancy levels, housing supply shortages, and effects of inflation and tariffs on our borrowers’ cash flows, real estate

market sales volumes and liquidity, valuations used in making loans and evaluating collateral, availability and cost of

financing properties, real estate industry concentrations, competitive pressures from a wide range of other lenders,

deterioration in certain credits, fluctuations in market interest rates, reduced collateral values or non-existent collateral, title

defects, inaccurate appraisals, financial deterioration of borrowers, fraud, and any violation of applicable laws and

regulations. Various projects financed earlier that were based on lower interest rate assumptions than currently in effect

may not be as profitable or successful at the higher interest rates currently in effect and which may exist in the future. See

“Risk Factors.”

The Company attempts to reduce these economic and credit risks through its loan-to-value guidelines for collateralized

loans, investigating the creditworthiness of borrowers and monitoring borrowers’ financial position. Also, we have

established and periodically review, our lending policies and procedures. Banking regulations limit a bank’s credit exposure

by prohibiting unsecured loan relationships that exceed 10% of its capital; or 20% of capital, if loans in excess of 10% of

capital are fully secured. Under these regulations, we are prohibited from having secured loan relationships in excess of

approximately $23.5 million. Furthermore, we have an internal limit for aggregate credit exposure (loans outstanding plus

unfunded commitments) to a single borrower of $21.2 million. Our loan policy requires that the Loan Committee of the

Board of Directors approve any loan relationships that exceed this internal limit. At December 31, 2025, the Bank did not

have any loan relationships exceeding our internal limit.

We periodically analyze our commercial loan portfolio to determine if a concentration of credit risk exists in any one or

more industries. We use classification systems broadly accepted by the financial services industry in order to categorize our

commercial borrowers. Loan concentrations to borrowers in the following classes exceeded 25% of the Bank’s total risk-

based capital at December 31, 2025 (and related balances at December 31, 2024).

December 31

(In thousands)

2025

2024

Lessors of 1-4 family residential properties

56,773

58,228

Multi-family residential properties

51,516

43,556

Hotel/motel

47,870

35,210

Shopping centers/strip malls

42,444

37,349

The Company maintains the allowance for credit losses at a level that management believes appropriate to adequately cover

the Company’s estimate of expected losses over the remaining life in the loan portfolio. The allowance for credit losses was

$7.2 million at December 31, 2025, compared to $6.9 million at December 31, 2024, which management believed to be

adequate at each of the respective dates. Our allowance for credit losses as a percentage of total loans was 1.27% at

December 31, 2025, compared to 1.22% at December 31, 2024.

Our CECL models rely largely on projections of macroeconomic conditions to estimate future credit losses.

Macroeconomic factors used in the model include the Alabama unemployment rate, the Alabama home price index, the

national commercial real estate price index and the Alabama gross state product. Projections of these macroeconomic

factors, obtained from an independent third party, are utilized to predict quarterly rates of default. See “Risk Factors”.

Under the CECL methodology the allowance for credit losses is measured on a collective basis for pools of loans with

similar risk characteristics, and on an individual basis for loans that do not share similar risk characteristics with the

collectively evaluated pools. Losses are predicted over a period of time determined to be reasonable and supportable, and

at the end of the reasonable and supportable period losses are reverted to long term historical averages. At December 31,

2025 and 2024, reasonable and supportable periods of 4 quarters were utilized followed by an 8-quarter straight line

reversion period to long term averages. See Note 4 to our Financial Statements.

A summary of the changes in the allowance for credit losses on loans and certain asset quality ratios for the years ended

December 31, 2025 and 2024 is presented below.

Year ended December 31

(Dollars in thousands)

2025

2024

Allowance for credit losses:

Balance at beginning of period

6,871

6,863

Charge-offs:

Commercial and industrial

(142)

(9)

Commercial real estate

(296)

Residential real estate

(7)

(61)

Consumer installment

(96)

(114)

Total charge -offs

(541)

(184)

Recoveries:

Commercial and industrial

30

144

Residential real estate

84

9

Consumer installment

29

45

Total recoveries

143

198

Net (charge-offs) recoveries

(398)

14

Provision for credit losses - Loans

703

(6)

Ending balance

7,176

6,871

as a % of loans

1.27

1.22

as a % of nonperforming loans

1,489

1,366

Net charge-offs as a % of average loans

0.07

Nonperforming Assets

The Company had $0.5 million in nonperforming assets at both December 31, 2025 and 2024.

The table below provides information concerning total nonperforming assets and certain asset quality ratios.

December 31

(Dollars in thousands)

2025

2024

Nonperforming assets:

Nonperforming (nonaccrual) loans

482

503

Total nonperforming assets

482

503

as a % of loans and other real estate owned

0.09

0.09

as a % of total assets

0.05

0.05

Nonperforming loans as a % of total loans

0.09

0.09

Accruing loans 90 days or more past due

The table below provides information concerning the composition of nonaccrual loans at December 31, 2025 and 2024,

respectively.

December 31

(In thousands)

2025

2024

Nonaccrual loans:

Commercial and industrial

99

Construction and land development

404

Commercial real estate

378

Residential real estate

104

Total nonaccrual loans

The Company discontinues the accrual of interest income when (1) there is a significant deterioration in the financial

condition of the borrower and full repayment of principal and interest is not expected or (2) the principal or interest is more

than 90 days past due, unless the loan is both well-secured and in the process of collection.

There were no loans 90 days past due and still accruing interest at December 31, 2025 and 2024, respectively.

The Company had no other real estate owned at December 31, 2025 and 2024, respectively.

Deposits

December 31

(In thousands)

2025

2024

Noninterest bearing demand

268,026

260,874

NOW

214,827

199,883

Money market

170,352

153,916

Savings

92,920

89,904

Certificates of deposit under $250,000

97,458

103,594

Certificates of deposit and other time deposits of $250,000 or more

79,343

87,653

Total deposits

922,926

895,824

Total deposits were $922.9 million at December 31, 2025, compared to $895.8 million at December 31, 2024. The 3%

increase in deposits compared to December 31, 2024 was primarily related to an increase in money market and interest-

bearing checking accounts. Noninterest-bearing deposits were 29% of total deposits at both December 31, 2025 and 2024.

The Company had no brokered deposits at December 31, 2025 and 2024. The Company had no FHLB-Atlanta advances or

other wholesale borrowings outstanding at December 31, 2025 and 2024.

The average rates paid on total interest-bearing deposits were 1.72 % in 2025 and 1.81% in 2024.

The Bank participates in the Certificates of Deposit Account Registry Service (the “CDARS”) and the Insured Cash Sweep

product (“ICS”), which provide for reciprocal (“two-way”) transactions among banks facilitated by IntraFi for the purpose

of improving FDIC insurance for our depositors. The Company had reciprocal deposits on balance sheet of $9.8 million at

December 31, 2025, compared to $6.9 million at December 31, 2024. At December 31, 2025, the Company had $79.7

million reciprocal deposits sold, compared to $74.1 million at December 31, 2024.

At December 31, 2025, estimated uninsured deposits totaled $392.9 million, or 43% of total deposits, compared to $359.7

million, or 40% of total deposits at December 31, 2024. Uninsured amounts are estimated based on the portion of account

balances that exceed FDIC insurance limits. The Bank’s uninsured deposits at December 31, 2025 and 2024 include

approximately $228.7 million and $223.1 million, respectively, of deposits of state, county and local governments that are

collateralized by securities. Deposits of state, county and local governments were 58% and 62% of our estimated uninsured

deposits at December 31, 2025 and 2024, respectively.

The estimated uninsured time deposits by maturity as of December 31, 2025 are presented below.

(Dollars in thousands)

December 31, 2025

Maturity of:

3 months or less

15,624

Over 3 months through 6 months

31,140

Over 6 months through 12 months

28,306

Over 12 months

4,273

Total estimated uninsured time deposits

79,343

Other Borrowings

The Company had no long-term debt at December 31, 2025 and 2024. The Bank utilizes short and long-term non-deposit

borrowings from time to time. Short-term borrowings generally consist of federal funds purchased and securities sold under

agreements to repurchase with an original maturity of one year or less. The Bank had available federal funds lines totaling

$65.2 million at December 31, 2025 and 2024 with no federal funds borrow ed. The Company had no securities sold under

agreements to repurchase, which are entered into on behalf of certain customers, at December 31, 2025 and 2024. The

Bank is eligible to borrow from the FRB’s discount window, but had no such borrowings at December 31, 2025 and 2024.

The Bank never borrowed from the Federal Reserve’s Bank Term Facility Program (“BTFP”) which ceased making new

loans on March 11, 2024.

The Bank is a member of the FHLB-Atlanta and has borrowed from the FHLB-Atlanta, and in the future may borrow from

time to time under the FHLB-Atlanta’s advance program. FHLB-Atlanta advances include both fixed and variable terms,

and provide various maturities, and generally are secured by eligible assets. The Bank had no borrowings under FHLB-

Atlanta’s advance program at December 31, 2025 and 2024, respectively. At those dates, the Bank had $304.9 million and

$296.9 million, respectively, of available lines of credit at the FHLB-Atlanta.

CAPITAL ADEQUACY

At December 31, 2025, the Company’s consolidated stockholders’ equity (book value) was $92.1 million, or $26.35 per

share, compared to $78.3 million, or $22.41 per share, at December 31, 2024. The increase from December 31, 2024 was

primarily driven by net earnings of $7.3 million and other comprehensive income of $10.2 million due to a decrease in

unrealized losses on securities available-for-sale, net of tax, which was partially offset by cash dividends paid of

$3.8 million. Unrealized losses on securities do not affect the Bank’s capital for regulatory capital purposes.

The Company paid cash dividends of $1.08 per share in 2025 and 2024.

The Company and Bank are subject to the Basel III regulatory capital framework which includes a capital conservation

buffer of CET1 capital of 2.5% that is added to the minimum requirements for capital adequacy purposes. A banking

organization with a capital conservation buffer of 2.5% or less is subject to limitations on “distributions” from “eligible

retained earnings”, including dividend payments, share repurchases and certain discretionary bonus payments. At

December 31, 2025 and 2024, the Bank had a capital conservation buffer of 9.14% and 7.81%, respectively.

The Federal Reserve has treated us as a “small bank holding company’ under the Federal Reserve’s Small Bank Holding

Company Policy. Accordingly, our capital adequacy is evaluated at the Bank level, and not for the Company and its

consolidated subsidiaries. The Bank’s tier 1 leverage ratio was 10.71%, CET1 risk-based capital ratio was 16.06%, tier 1

risk-based capital ratio was 16.06%, and total risk-based capital ratio was 17.14 % at December 31, 2025. These ratios

exceed the minimum regulatory capital percentages of 5.0% for tier 1 leverage ratio, 6.5% for CET1 risk-based capital

ratio, 8.0% for tier 1 risk-based capital ratio, and 10.0% for total risk-based capital ratio to be considered “well capitalized.”

MARKET AND LIQUIDITY RISK MANAGEMENT

Management’s objective is to manage assets and liabilities to provide a satisfactory, consistent level of profitability within

the framework of established liquidity, loan, investment, borrowing, and capital policies. The Bank’s Asset Liability

Management Committee (“ALCO”) is charged with the responsibility of monitoring these policies, which are designed to

ensure an acceptable asset/liability composition. Two critical areas of focus for ALCO are interest rate risk and liquidity

risk management.

Interest Rate Risk Management

In the normal course of business, the Company is exposed to market risk arising from fluctuations in interest rates because

assets and liabilities may mature or reprice at different times and at different rates of change. ALCO measures and

evaluates the interest rate risk so that we can meet customer demands for various types of loans and deposits. ALCO

determines the most appropriate amounts of on-balance sheet and off-balance sheet items. Measurements used to help

manage interest rate sensitivity include an earnings simulation and an economic value of equity model.

Earnings simulation

Management believes that interest rate risk is best estimated by our earnings simulation modeling. On at least a quarterly

basis, we simulate the following 12-month time period to determine a baseline net interest income forecast and the

sensitivity of this forecast to changes in interest rates. The baseline forecast assumes an unchanged or flat interest rate

environment. Forecasted levels of earning assets, interest-bearing liabilities, and off-balance sheet financial instruments are

combined with ALCO forecasts of market interest rates for the next 12 months and other factors in order to produce various

earnings simulations and estimates.

To help limit interest rate risk, we have guidelines for earnings at risk which seek to limit the variance of net interest

income from gradual changes in interest rates. For changes up or down in rates from management’s flat interest rate

forecast over the next 12 months, policy limits for net interest income variances are as follows:

+/- 20% for a gradual change of 400 basis points

+/- 15% for a gradual change of 300 basis points

+/- 10% for a gradual change of 200 basis points

+/- 5% for a gradual change of 100 basis points

The following table reports the variance of net interest income over the next 12 months assuming a gradual change in

interest rates up or down when compared to the baseline net interest income forecast at December 31, 2025.

Changes in Interest Rates

Net Interest Income % Variance

400 basis points

4.67

300 basis points

3.95

200 basis points

2.76

100 basis points

1.40

(100) basis points

(1.97)

(200) basis points

(3.13)

(300) basis points

(4.13)

(400) basis points

(5.16)

At December 31, 2025, our earnings simulation model indicated that we were in compliance with the policy guidelines

noted above.

Economic Value of Equity

Economic value of equity (“EVE”) measures the extent that estimated economic values of our assets, liabilities and off-

balance sheet items will change as a result of interest rate changes. Economic values are estimated by discounting expected

cash flows from assets, liabilities and off-balance sheet items, which are used to establish a base case EVE. In contrast with

our earnings simulation model which evaluates interest rate risk over a 12-month timeframe, EVE uses a terminal horizon

which allows for the re-pricing of all assets, liabilities, and off-balance sheet items. Further, EVE is measured using values

as of a point in time and does not reflect any actions that ALCO might take in responding to or anticipating changes in

interest rates, or market and competitive conditions.

To help limit interest rate risk, we have stated policy guidelines for an instantaneous basis point change in interest rates,

such that our EVE should not decrease from our base case by more than the following:

35% for an instantaneous change of +/- 400 basis points

30% for an instantaneous change of +/- 300 basis points

25% for an instantaneous change of +/- 200 basis points

15% for an instantaneous change of +/- 100 basis points

The following table reports the variance of EVE assuming an immediate change in interest rates up or down when

compared to the baseline EVE at December 31, 2025.

Changes in Interest Rates

EVE % Variance

400 basis points

3.76

300 basis points

4.08

200 basis points

3.44

100 basis points

2.21

(100) basis points

(3.41)

(200) basis points

(9.01)

(300) basis points

(17.83)

(400) basis points

(27.26)

At December 31, 2025, our EVE model indicated that we were in compliance with the policy guidelines noted above.

Each of the above analyses may not, on its own, be an accurate indicator of how our net interest income will be affected by

changes in interest rates. Income associated with interest-earning assets and costs associated with interest-bearing liabilities

may not be affected uniformly by changes in interest rates. In addition, the magnitude and duration of changes in interest

rates may have a significant impact on net interest income. For example, although certain assets and liabilities may have

similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates, and other

economic and market factors, including market perceptions. Interest rates on certain types of assets and liabilities fluctuate

in advance of changes in general market rates, while interest rates on other types of assets and liabilities may lag behind

changes in general market rates. In addition, certain assets, such as adjustable-rate mortgage loans, have features (generally

referred to as “interest rate caps and floors”) which limit changes in interest rates. Prepayment and early withdrawal levels

also could deviate significantly from those assumed in calculating the maturity of certain instruments. The ability of many

borrowers to service their debts also may decrease during periods of rising interest rates or economic stress, which may

differ across industries and economic sectors. Depositors and borrowers may also change their deposit and loan

preferences and behaviors as a result of changes and expected changes in interest rates.

ALCO reviews each of the above interest rate sensitivity analyses along with several different interest rate scenarios in

seeking satisfactory, consistent levels of profitability within the framework of the Company’s established liquidity, loan,

investment, borrowing, and capital policies.

The Company may also use derivative financial instruments to improve the balance between interest-sensitive assets and

interest-sensitive liabilities and as one tool to manage interest rate sensitivity while continuing to meet the credit and

deposit needs of our customers. From time to time, the Company may enter into interest rate swaps (“swaps”) to facilitate

customer transactions and meet their financing needs. These swaps qualify as derivatives, and may be designated as

hedging instruments. At December 31, 2025, the Company had one derivative contract to assist in managing interest rate

sensitivity. The Company had no derivative contracts at December 31, 2024.

Liquidity Risk Management

Liquidity is the Company’s ability to convert assets into cash equivalents in order to meet daily cash flow requirements,

primarily for deposit withdrawals, loan demand and maturing obligations. Without proper management of its liquidity, the

Company could experience higher costs of obtaining funds due to insufficient liquidity, while excessive liquidity can lead

to a decline in earnings due to the cost of foregoing alternative higher-yielding investment opportunities.

Liquidity is managed at two levels. The first is the liquidity of the Company. The second is the liquidity of the Bank. The

management of liquidity at both levels is essential, because the Company and the Bank are separate and distinct legal

entities with different funding needs and sources, and each are subject to regulatory guidelines and requirements. The

Company depends upon dividends from the Bank for liquidity to pay its operating expenses, debt obligations and

dividends. The Bank’s payment of dividends depends on its earnings, liquidity, capital and the absence of any regulatory

restrictions.

The primary source of funding and liquidity for the Company has been dividends received from the Bank. The Company

depends upon dividends from the Bank for liquidity to pay its operating expenses, debt obligations, if any, and cash

dividends on, and repurchases of, Company common stock. The Bank’s payment of dividends depends on its earnings,

liquidity, capital and the absence of any regulatory restrictions. If needed, the Company could also issue common stock or

other securities.

Primary sources of funding for the Bank include customer deposits, other borrowings, interest payments on earning assets,

repayments and maturities of securities and loans, sales of securities, and the sale of loans, particularly residential mortgage

loans. Primary uses of funds include repayment of maturing obligations and growing the loan portfolio.

The Bank has access to federal funds lines from various banks and borrowings from the Federal Reserve discount window,

although it was not used by the Bank. In addition to these sources, the Bank is eligible to participate in the FHLB-Atlanta’s

advance program to obtain funding for growth and liquidity. Advances include both fixed and variable terms and may be

taken out with varying maturities. At December 31, 2025, the Bank had no FHLB-Atlanta advances outstanding and

available credit from the FHLB-Atlanta of $304.9 million. At December 31, 2025, the Bank also had $65.2 million of

available federal funds lines with no borrowings outstanding.

The following table presents additional information about our contractual obligations as of December 31, 2025, which by

their terms had contractual maturity and termination dates subsequent to December 31, 2025:

Payments due by period

1 year

1 to 3

3 to 5

More than

(Dollars in thousands)

Total

or less

years

years

5 years

Contractual obligations:

Deposit maturities (1)

922,926

910,388

9,726

2,812

Operating lease obligations

157

55

102

Total

923,083

910,443

9,828

2,812

(1) Deposits with no stated maturity (demand, NOW, money market, and savings deposits) are presented in the "1 year or less" column

Management believes that the Company and the Bank have adequate sources of liquidity to meet all known contractual

obligations and unfunded commitments, including loan commitments and reasonable borrower, depositor, and creditor

requirements over the next 12 months.

Off-Balance Sheet Arrangements

At December 31, 2025, the Bank had outstanding standby letters of credit of $1.0 million and unfunded loan commitments

outstanding of $48.1 million. Because these commitments generally have fixed expiration dates and may expire without

being drawn upon, the total commitment level does not necessarily represent future cash requirements. If needed to fund

these outstanding commitments, the Bank could use its cash and cash equivalents, deposits with other banks, liquidate

federal funds sold or a portion of its securities available-for-sale, or draw on its available credit facilities or raise deposits.

Residential mortgage lending and servicing activities

We primarily sell conforming residential mortgage loans in the secondary market to Fannie Mae while retaining the

servicing of these loans (MSRs). The sale agreements for these residential mortgage loans with Fannie Mae and other

investors include various representations and warranties regarding the origination and characteristics of the residential

mortgage loans. Although the representations and warranties vary among investors, they typically cover ownership of the

loan, validity of the lien securing the loan, the absence of delinquent taxes or liens against the property securing the loan,

compliance with loan criteria set forth in the applicable agreement, compliance with applicable federal, state, and local

laws, among other matters.

The Bank sells mortgage loans to Fannie Mae and services these on an actual/actual basis. As a result, the Bank is not

obligated to make any advances to Fannie Mae on principal and interest on such mortgage loans where the borrower is

entitled to forbearance.

As of December 31, 2025, the unpaid principal balance of residential mortgage loans, which we have originated and sold,

but retained the servicing rights (MSRs) totaled $188.8 million. Although these loans are generally sold on a non-recourse

basis, except for breaches of customary seller representations and warranties, we may have to repurchase residential

mortgage loans in cases where we breach such representations or warranties or the other terms of the sale, such as where we

fail to deliver required documents or the documents we deliver are defective. Investors also may require the repurchase of a

mortgage loan when an early payment default underwriting review reveals significant underwriting deficiencies, even if the

mortgage loan has subsequently been brought current. Repurchase demands are typically reviewed on an individual loan by

loan basis to validate the claims made by the investor and to determine if a contractually required repurchase event has

occurred. We seek to reduce and manage the risks of potential repurchases or other claims by mortgage loan investors

through our underwriting, quality assurance and servicing practices, including good communications with our residential

mortgage investors.

We service all residential mortgage loans originated and sold by us to Fannie Mae. As servicer, our primary duties are to:

(1) collect payments due from borrowers; (2) advance certain delinquent payments of principal and interest; (3) maintain

and administer any hazard, title, or primary mortgage insurance policies relating to the mortgage loans; (4) maintain any

required escrow accounts for payment of taxes and insurance and administer escrow payments; and (5) foreclose on

defaulted mortgage loans or take other actions to mitigate the potential losses to investors consistent with the agreements

governing our rights and duties as servicer.

The agreement under which we act as servicer generally specifies our standards of responsibility for actions taken by us in

such capacity and provides protection against expenses and liabilities incurred by us when acting in compliance with the

respective servicing agreements. However, if we commit a material breach of our obligations as servicer, we may be subject

to termination if the breach is not cured within a specified period following notice. The standards governing servicing and

the possible remedies for violations of such standards are determined by servicing guides issued by Fannie Mae as well as

our contracts with Fannie Mae. Remedies could include repurchase of an affected loan.

Although to date repurchase requests related to representation and warranty provisions, and servicing activities have been

limited, it is possible that requests to repurchase mortgage loans may increase in frequency if investors more aggressively

pursue all means of recovering losses on their purchased loans. As of December 31, 2025, we believe that this exposure is

not material due to the historical level of repurchase requests and loss trends, the results of our quality control reviews, and

the fact that 99% of our residential mortgage loans serviced for Fannie Mae were current as of such date. We maintain

ongoing communications with our investors and will continue to evaluate this exposure by monitoring the level and number

of repurchase requests as well as the delinquency rates in our investor portfolios.

The Company was not required to repurchase any loans during 2025 and 2024 as a result of representation and warranty

provisions contained in the Company’s sale agreements with Fannie Mae, and had no pending repurchase or make-whole

requests at December 31, 2025.

Effects of Inflation and Changing Prices

The consolidated financial statements and related consolidated financial data presented herein have been prepared in

accordance with GAAP and practices within the banking industry which require the measurement of financial position and

operating results in terms of historical dollars without considering the changes in the relative purchasing power of money

over time due to inflation. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution

are monetary in nature. As a result, interest rates have a more significant impact on a financial institution’s performance

than the effects of general levels of inflation.

Inflation can increase our noninterest expenses. It also can affect our customers’ behaviors, the mix of deposits between

interest and noninterest bearing, the levels of interest rates we have to pay on our deposits and other borrowings, and the

interest rates we earn on our earning assets. The difference between our interest expense and interest income is also affected

by the shape of the yield curve and the speeds and amounts at which our various assets and liabilities, respectively, reprice

in response to interest rate changes. The yield curve was inverted during most of 2024, until September, when it began to

normalize. An inverted yield curve means shorter term interest rates are higher than longer term interest rates. This results

in a lower spread between our costs of funds and our interest income. In addition, net interest income could be affected by

asymmetrical changes in the different interest rate indexes, given that not all of our assets or liabilities are priced with the

same index. Higher market interest rates and reductions in the securities held by the Federal Reserve to reduce inflation

generally reduce economic activity may reduce loan demand and growth, and may adversely affect unemployment rates.

Inflation and related changes in market interest rates, as the Federal Reserve maintains interest rates to meet its longer-term

inflation goal of 2%, also can adversely affect the values and liquidity of our loans and securities, the value of collateral

securing loans to our borrowers, and the success of our borrowers and such borrowers’ available cash to pay interest on and

principal of our loans to them.

See “Supervision and Regulation – Fiscal and Monetary Policies” for more information regarding changes in monetary

policy and interest rates.

CURRENT ACCOUNTING DEVELOPMENTS

The following ASUs have been issued by the FASB but are not yet effective.

ASU 2025-01,

Income Statement Reporting Comprehensive Income - Expense Disaggregation Disclosures (Subtopic 220-

40): Clarifying the Effective Date,

clarifies the effective date of ASU 2024-03,

Income Statement Reporting Comprehensive

Income - Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses

to

stipulate that ASU 2024-03 is effective for public business entities for annual reporting periods beginning after December

15, 2026 and interim reporting periods beginning after December 15, 2027, with early adoption permitted. ASU 2025-01

will be effective for the Company beginning January 1, 2027 for the Company’s annual consolidated financial statements

on Form 10-K and January 1, 2028 for the Company’s quarterly consolidated financial statements on Form 10-Q and is not

expected to have a significant impact on the Company’s consolidated financial statements.

ASU 2025-06,

Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40),

removes all references to

prescriptive and sequential software development stages and clarifies that the threshold for when an entity is required to

start capitalizing software costs is when (1) management has authorized and committed to funding the software project and

(2) it is probable that the project will be completed and the software will be used to perform the function intended. ASU

2025-06 will be effective for the Company beginning January 1, 2028, with early adoption permitted, and is not expected to

have a significant impact on the Company’s consolidated financial statements.

ASC 2025-11,

Interim Reporting (Topic 270): Narrow-Scope Improvement s,

is intended to provide clarity about the current

interim reporting requirements, provides a list of the interim disclosures required by all other Codification topics and

establishes a disclosure principle that requires entities to disclose events since the end of the last annual reporting period

that have a material impact on the entity. ASC 2025-11 will be effective for the Company beginning January 1, 2028, with

early adoption permitted, and is not expected to have a significant impact on the Company’s consolidated financial

tatements.

Table 1 – Explanation of Non-GAAP Financial Measures

In addition to results presented in accordance with GAAP, this annual report on Form 10-K includes certain designated net

interest income amounts presented on a tax-equivalent basis, a non-GAAP financial measure, including the presentation of

total revenue and the calculation of the efficiency ratio.

The Company believes the presentation of net interest income on a tax-equivalent basis provides comparability of net

interest income from both taxable and tax-exempt sources and facilitates comparability within the industry. Although the

Company believes these non-GAAP financial measures enhance investors’ understanding of its business and performance,

these non-GAAP financial measures should not be considered an alternative to GAAP. The reconciliation of these non-

GAAP financial measures from GAAP to non-GAAP is presented below.

Year ended December 31

(In thousands)

2025

2024

2023

2022

2021

Net interest income (GAAP)

29,674

27,125

26,328

27,166

23,990

Tax-equivalent adjustment

73

79

417

456

470

N

et interest income (Tax-equivalent)

29,747

27,204

26,745

27,622

24,460

Table 2 - Selected Financial Data

Year ended December 31

(Dollars in thousands, except per share amounts)

2025

2024

2023

2022

2021

Income statement

Tax-equivalent interest income (a)

40,841

38,811

34,791

30,001

26,977

Total interest expense

11,094

11,607

8,046

2,379

2,517

Tax equivalent net interest income (a)

29,747

27,204

26,745

27,622

24,460

Provision for credit losses

631

36

135

1,000

(600)

Total noninterest income

3,119

3,474

(2,981)

6,506

4,288

Total noninterest expense

22,951

22,166

22,594

19,823

19,433

Net earnings before income taxes and

tax-equivalent adjustment

9,284

8,476

1,035

13,305

9,915

Tax-equivalent adjustment

73

79

417

456

470

Income tax expense (benefit)

1,956

2,000

(777)

2,503

1,406

Net earnings

7,255

6,397

1,395

10,346

8,039

Per share data:

Basic net earnings

2.08

1.83

0.40

2.95

2.27

Diluted net earnings

2.08

1.83

0.40

2.95

2.27

Cash dividends declared

1.08

1.08

1.08

1.06

1.04

Weighted average shares outstanding - basic

3,493,699

3,493,690

3,498,030

3,510,869

3,545,310

Weighted average shares outstanding - diluted

3,495,036

3,493,690

3,498,030

3,510,869

3,545,310

Shares outstanding

3,493,699

3,493,699

3,493,614

3,503,452

3,520,485

Stockholders' equity (book value)

26.35

22.41

21.90

19.42

29.46

Common stock price

High

28.47

24.57

24.50

34.49

48.00

Low

19.48

16.63

18.80

22.07

31.32

Period-end

26.95

23.49

21.28

23.00

32.30

To earnings ratio (b)

12.96

12.84

53.20

7.80

14.23

To book value

102.28

104.82

97.17

118.43

109.64

Performance ratios:

Return on average equity

8.61

8.21

2.05

12.48

7.54

Return on average assets

0.73

0.65

0.14

0.96

0.78

Dividend payout ratio

51.92

59.02

270.00

35.93

45.81

Average equity to average assets

8.45

7.93

6.66

7.72

10.39

Asset Quality:

Allowance for credit losses as a % of:

Loans

1.27

1.22

1.23

1.14

1.08

Nonperforming loans

1,489

1,366

753

211

1,112

Nonperforming assets as a % of:

Loans and other real estate owned

0.09

0.09

0.16

0.54

0.18

Total assets

0.05

0.05

0.09

0.27

0.07

Nonperforming loans as % of loans

0.09

0.09

0.16

0.54

0.10

Net charge-offs as a % of average loans

0.07

0.01

0.04

0.02

Capital Adequacy (c):

CET 1 risk-based capital ratio

16.06

14.80

14.52

15.39

16.23

Tier 1 risk-based capital ratio

16.06

14.80

14.52

15.39

16.23

Total risk-based capital ratio

17.14

15.81

15.52

16.25

17.06

Tier 1 leverage ratio

10.71

10.49

9.72

10.01

9.35

Other financial data:

Net interest margin (a)

3.27

3.06

2.89

2.81

2.55

Effective income tax (benefit) rate

21.24

23.82

(125.73)

19.48

14.89

Efficiency ratio (d)

69.83

72.25

95.08

58.08

67.60

Selected period end balances:

Securities

233,259

243,012

270,910

405,304

421,891

Loans, net of unearned income

565,354

564,017

557,294

504,458

458,364

Allowance for credit losses

7,176

6,871

6,863

5,765

4,939

Total assets

1,018,797

977,324

975,255

1,023,888

1,105,150

Total deposits

922,926

895,824

896,243

950,337

994,243

Total stockholders’ equity

92,053

78,292

76,507

68,041

103,726

(a) Tax-equivalent. See "Table 1 - Explanation of Non-GAAP Financial Measures".

(b) Calculated by dividing period end share price by earnings per share for the previous four quarters.

(c) Regulatory capital ratios presented are for the Company's wholly-owned subsidiary, AuburnBank.

d) Efficiency ratio is the result of noninterest expense divided by the sum of noninterest income and tax-equivalent net interest income.

Table 3 - Average Balance and Net Interest Income Analysis

Year ended December 31

2025

2024

Interest

Interest

Average

Income/

Yield/

Average

Income/

Yield/

(Dollars in thousands)

Balance

Expense

Rate

Balance

Expense

Rate

Interest-earning assets:

Loans and loans held for sale (1)

560,476

30,840

5.50%

568,733

29,735

5.23%

Securities - taxable

228,793

4,949

2.16%

248,072

5,430

2.19%

Securities - tax-exempt (2)

9,173

346

3.77%

10,084

373

3.70%

Total securities

237,966

5,295

2.23%

258,156

5,803

2.25%

Federal funds sold

26,535

1,127

4.25%

17,907

939

5.24%

Interest bearing bank deposits

83,648

3,579

4.28%

44,634

2,334

5.23%

Total interest-earning assets

908,625

40,841

4.49%

889,430

38,811

4.36%

Cash and due from banks

15,414

17,779

Other assets

72,438

75,059

Total assets

996,477

982,268

Interest-bearing liabilities:

Deposits:

NOW

205,951

2,740

1.33%

192,702

2,680

1.39%

Savings and money market

253,668

2,461

0.97%

251,778

2,168

0.86%

Certificates of deposit

184,047

5,891

3.20%

195,097

6,756

3.46%

Total interest-bearing deposits

643,666

11,092

1.72%

639,577

11,604

1.81%

Short-term borrowings

28

2

7.14%

628

3

0.48%

Total interest-bearing liabilities

643,694

11,094

1.72%

640,205

11,607

1.81%

Noninterest-bearing deposits

265,978

262,224

Other liabilities

2,578

1,918

Stockholders' equity

84,227

77,921

Total liabilities and

and stockholders' equity

996,477

982,268

Net interest income and margin

29,747

3.27%

27,204

3.06%

(1) Average loan balances are shown net of unearned income and loans on nonaccrual status have been included

in the computation of average balances.

(2) Yields on tax-exempt securities have been computed on a tax-equivalent basis using an income tax rate

of 21%. See Table 1 - Explanation of Non-GAAP Financial Measures."

Table 4 - Volume and Rate Variance Analysis

Year ended December 31, 2025 vs. 2024

Year ended December 31, 2024 vs. 2023

Net

Due to change in

Net

Due to change in

(Dollars in thousands)

Change

Rate (2)

Volume (2)

Change

Rate (2)

Volume (2)

Interest income:

Loans and loans held for sale

1,105

1,559

(454)

4,810

2,463

2,347

Securities - taxable

(481)

(64)

(417)

(1,778)

133

(1,911)

Securities - tax-exempt (1)

(27)

7

(34)

(1,612)

(57)

(1,555)

Total securities

(508)

(57)

(451)

(3,390)

76

(3,466)

Federal funds sold

188

(178)

366

689

24

665

Interest bearing bank deposits

1,245

(424)

1,669

1,911

26

1,885

Total interest income

2,030

900

1,130

4,020

2,589

1,431

Interest expense:

Deposits:

NOW

60

(116)

176

773

783

(10)

Savings and money market

293

275

18

36

359

(323)

Certificates of deposit

(865)

(511)

(354)

2,821

2,128

693

Total interest-bearing deposits

(512)

(352)

(160)

3,630

3,270

360

Short-term borrowings

(1)

42

(43)

(69)

(56)

(13)

Total interest expense

(513)

(310)

(203)

3,561

3,214

347

Net interest income

2,543

1,210

1,333

459

(625)

1,084

(1) Yields on tax-exempt securities have been computed on a tax-equivalent basis using an income

tax rate of 21%. See "Table 1 - Explanation of Non-GAAP Financial Measures."

2) Changes that are not solely a result of volume or rate have been allocated to volume.

Table 5 - Net Charge-Offs (Recoveries) to Average Loans

2025

2024

Net

Net

Net

(recovery)

Net

charge-off

(recoveries)

Average

charge-off

charge-offs

Average

(recovery)

(Dollars in thousands)

charge-off

Loans

ratio

(recoveries)

Loans

ratio

Commercial and industrial

112

58,986

0.19

(135)

71,279

(0.19)

Construction and land development

82,964

70,342

Commercial real estate

296

293,149

0.10

297,140

Residential real estate

(77)

117,252

(0.07)

52

118,856

0.04

Consumer installment

67

9,011

0.74

69

10,381

0.66

Total

398

561,362

0.07

(14)

567,998

Table 6 - Loan Maturities

December 31, 2025

1 year

1 to 5

5 to 15

After 15

(Dollars in thousands)

or less

years

years

years

Total

Commercial and industrial

17,529

15,596

23,764

1,511

58,400

Construction and land development

36,103

18,842

1,491

56,436

Commercial real estate

56,098

154,297

110,603

4,523

325,521

Residential real estate

6,533

33,027

26,682

50,312

116,554

Consumer installment

2,084

5,264

1,073

8,421

Total loans

118,347

227,026

163,613

56,346

565,332

Table 7 - Sensitivities to Changes in Interest Rates on Loans Maturing in More Than One Year

December 31, 2025

Variable

Fixed

(Dollars in thousands)

Rate

Rate

Total

Commercial and industrial

330

40,541

40,871

Construction and land development

13,627

6,706

20,333

Commercial real estate

18,289

251,134

269,423

Residential real estate

50,365

59,656

110,021

Consumer installment

189

6,148

6,337

Total loans

82,800

364,185

446,985

Table 8 - Allocation of Allowance for Credit Losses

2025

2024

(Dollars in thousands)

Amount

Amount

Commercial and industrial

1,129

10.3

1,244

11.2

Construction and land development

1,304

10.0

1,059

14.6

Commercial real estate

3,777

57.6

3,842

51.3

Residential real estate

837

20.6

588

21.0

Consumer installment

129

1.5

138

1.7

Total allowance for credit losses

7,176

6,871

Loan balance in each category expressed as a percentage of total loans.

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.

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”), the Company’s

management, under the supervision and with the participation of its principal executive and principal financial officer,

conducted an evaluation as of the end of the period covered by this report, of the effectiveness of the Company’s disclosure

controls and procedures as defined in Rule 13a-15(e) under the Exchange Act. Based on that evaluation, and the results of

the audit process described below, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s

disclosure controls and procedures were effective to ensure that information required to be disclosed in the Company’s

reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the

SEC’s rules and regulations, and that such information is accumulated and communicated to the Company’s management,

including the Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow timely decisions regarding

disclosure.

Management’s Report on Internal Control Over Financial Reporting

The Company’s management is responsible for establishing and maintaining adequate internal control over financial

reporting. The Company’s internal control system was designed to provide reasonable assurance to the Company’s

management and board of directors regarding the preparation and fair presentation of published financial statements. All

internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined

to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

Under the direction of the Company’s Chief Executive Officer and Chief Financial Officer, management has assessed the

effectiveness of the Company’s internal control over financial reporting as of December 31, 2025 in accordance with the

criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal

Control – Integrated Framework (2013). Based on this assessment, management has concluded that such internal control

over financial reporting was effective as of December 31, 2025.

This annual report does not include an attestation report of the Company’s independent registered public accounting firm

regarding internal control over financial reporting because the Company is a smaller reporting company.

Changes in Internal Control Over Financial Reporting

During the period covered by this report, there has not been any change in the Company’s internal controls over financial

reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal controls over

financial reporting.