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What changed in AUBURN NATIONAL BANCORPORATION, INC's 10-K — 2023 vs 2024

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Paragraph-level year-over-year comparison of AUBURN NATIONAL BANCORPORATION, INC's 2023 and 2024 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2024 report.

+598 added−620 removedSource: 10-K (2025-03-11) vs 10-K (2024-03-14)

Top changes in AUBURN NATIONAL BANCORPORATION, INC's 2024 10-K

598 paragraphs added · 620 removed · 437 edited across 7 sections

Item 1. Business

Business — how the company describes what it does

155 edited+85 added−67 removed172 unchanged
Biggest changeA financial holding company election, and such election and financial holding company activities are permitted to be continued, only if any affiliated bank has not received less than a “satisfactory” CRA rating. The federal CRA regulations require that evidence of discriminatory, illegal or abusive lending practices be considered in the CRA evaluation.
Biggest changeThe federal CRA regulations require that evidence of discriminatory, illegal or abusive lending practices be considered in the CRA evaluation. Financial holding company elections and the continuation of financial holding company activities are permitted, only if each affiliated bank has received a “satisfactory” or better CRA rating.
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, but the Gramm-Leach-Bliley Act of 1999 the “GLB Act”) applies the concept of functional regulation to subsidiary activities.
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.
After the agency determines a recommended conclusion for Retail Lending Test Area, the agency would consider a list of additional factors that are intended to account for circumstances in which the retail lending distribution metrics and benchmarks may not accurately or fully reflect a bank’s retail lending performance, or in which the benchmarks may not appropriately represent the credit needs and opportunities in an area.
After the agency determines a recommended conclusion for the Retail Lending Test Area, the agency would consider a list of additional factors that are intended to account for circumstances in which the retail lending distribution metrics and benchmarks may not accurately or fully reflect a bank’s retail lending performance, or in which the benchmarks may not appropriately represent the credit needs and opportunities in an area.
The CFPB has the authority to adopt regulations and enforce various laws, including 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.
The CFPB has the authority to adopt regulations and enforce various laws, including the fair lending laws, the Truth in Lending Act, the Electronic Funds Transfer Act, mortgage lending rules, the Truth in Savings Act, the Fair Credit Reporting Act and Privacy of Consumer Financial Information rules.
The Federal Reserve joined the other depository institution regulators in issuing a Policy Statement on Prudent Commercial Real Estate Loan Accommodations and Workouts on June 30, 2023. This Policy Statement builds on and updates existing guidance to enable financial institutions to work prudently and constructively with creditworthy borrowers during times of financial stress.
The Federal Reserve joined the other depository institution regulators in issuing a Policy Statement on Prudent Commercial Real Estate Loan Accommodations and Workouts (June 30, 2023). This Policy Statement builds on and updates existing guidance to enable financial institutions to work prudently and constructively with creditworthy borrowers during times of financial stress.
Overdrafts also have been a CFPB concern, and in 2021 began refocusing on this issue with a view to “insure that banks continue to evolve their businesses to reduce reliance on overdraft and not sufficient funds fees.” Among other things, the federal regulators require banks to monitor accounts and to limit the use of overdrafts by customers as a form of short-term, high-cost credit, including, for example, giving customers who overdraw their accounts on more than six occasions where a fee is charged in a rolling 12 month period a reasonable opportunity to choose a less costly alternative and decide whether to continue with fee-based overdraft coverage.
Overdrafts also have been a CFPB concern, which began refocusing on this issue in 2021 with a view to “insure that banks continue to evolve their businesses to reduce reliance on overdraft and not sufficient funds fees.” Among other things, the federal regulators require banks to monitor accounts and to limit the use of overdrafts by customers as a form of short-term, high-cost credit, including, for example, giving customers who overdraw their accounts on more than six occasions where a fee is charged in a rolling 12-month period, a reasonable opportunity to choose a less costly alternative and decide whether to continue with fee-based overdraft coverage.
At the same time, the agencies recognize that, compared to large banks, intermediate banks might not offer as wide a range of retail products and services, have a more limited capacity to conduct community development activities, and may focus on the local communities where their branches are located.” The proposal reflected “the agencies’ views that banks of this size should have meaningful capacity to conduct community development financing, as they do under the current approach.
At the same time, the agencies recognize that, compared to large banks, intermediate banks might not offer as wide a range of retail products and services, have a more limited capacity to conduct community development activities, and may focus on the local communities where their branches are located.” The proposal reflected the agencies’ views that banks of this size should have meaningful capacity to conduct community development financing, as they do under the current approach.
The policy must require that, in the event an accounting restatement due to material noncompliance with a financial reporting requirement under the federal securities laws, the company will recover from any current or former executive officer any incentive-based compensation (including stock options) received during the three year period preceding the date of the restatement, which is in excess of what would have been paid based on the restated financial statements.
In the event of an accounting restatement due to material noncompliance with a financial reporting requirement under the federal securities laws, the policy must require that the company recover from any current or former executive officer, any incentive-based compensation (including stock options) received during the three-year period preceding the date of the restatement, which is in excess of what would have been paid based on the restated financial statements.
If the Company fails to comply with these internal control rules in the future, it may materially 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.
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.
A retail lending volume screen would be used to measure the volume of a bank’s lending relative to its deposit base in its facility-based assessment area and would compare that ratio to the aggregate ratio for all reporting banks with at least one branch in the same facility-based assessment area.
A retail lending volume screen will be used to measure the volume of a bank’s lending relative to its deposit base in its facility-based assessment area and would compare that ratio to the aggregate ratio for all reporting banks with at least one branch in the same facility-based assessment area.
The new CRA rules codify agency interpretations under the former CRA regulations, and provide 11 community development categories. The agencies will evaluate the extent to which a bank’s community development loans, investments, and services are impactful and responsive in meeting community development needs.
The New CRA Regulations codify agency interpretations under the former CRA regulations, and provide 11 community development categories. The agencies will evaluate the extent to which a bank’s community development loans, investments, and services are impactful and responsive in meeting community development needs.
The release proposing these new CRA rules stated that “the agencies believe retail lending remains a core part of a bank's affirmative obligation under the CRA to meet the credit needs of their entire communities.
The release proposing these New CRA rules stated that the agencies believe retail lending remains a core part of a bank's affirmative obligation under the CRA to meet the credit needs of their entire communities.
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 $80 billion per month. ● Reinvestments of principal of maturing agency debt and mortgage-backed securities would be reduced by $17.5 billion per month for three months and thereafter would be $35 billion per month. ● These declines would slow and then stop when the Federal Reserve’s balance sheet was somewhat above the balance it deemed ample.
On May 4, 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.
The following table shows the FDIC assessment schedule for Small Banks, such as the Bank, for the first assessment period of 2023 to be billed in June 2023, which is the latest available: Established Small Institution CAMELS Composite 1 or 2 3 4 or 5 Initial Base Assessment Rule 5 to 18 basis points 8 to 32 basis points 18 to 32 basis points Unsecured Debt Adjustment.
Table of Contents 28 The following table shows the FDIC assessment schedule for Small Banks, such as the Bank, for the first assessment period of 2023 to be billed in June 2023, which is the latest available: Established Small Institution CAMELS Composite 1 or 2 3 4 or 5 Initial Base Assessment Rule 5 to 18 basis points 8 to 32 basis points 18 to 32 basis points Unsecured Debt Adjustment.
Although the FDIC, at that time, maintained its then current assessment rates, the FDIC may increase deposit assessment rates by up to two basis points without notice, or more following notice and a comment period, to meet the required reserve ratio. The designated reserve ratio has been 2% since 2010, and was set at this same level for 2024.
Although the FDIC, at that time, maintained its then current assessment rates, the FDIC may increase deposit assessment rates by up to two basis points without notice, or more following notice and a comment period, to meet the required reserve ratio. The designated reserve ratio has been 2% since 2010, and was set at this same level for 2025.
The Company’s primary source of cash is dividends from the Bank. The Bank’s Call Report are used for its calculation of “eligible retained income.” The Bank’s capital conservation buffer exceeded 2.5% at December 31, 2023. As of December 31, 2023, the Bank is “well capitalized” under the regulatory framework for prompt corrective action.
The Company’s primary source of cash is dividends from the Bank. The Bank’s Call Report are used for its calculation of “eligible retained income.” The Bank’s capital conservation buffer exceeded 2.5% at December 31, 2024. As of December 31, 2024, the Bank is “well capitalized” under the regulatory framework for prompt corrective action.
To be categorized as “well capitalized,” the Bank must maintain minimum common equity Tier 1, total risk-based, Tier 1 risk- based, and Tier 1 leverage ratios as set forth in the following table. Management has not received any notification from the Bank's regulators that changes the Bank’s regulatory capital status.
To be categorized as “well capitalized,” the Bank must maintain minimum common equity Tier 1, total risk-based, Tier 1 risk- based, and Tier 1 leverage ratios as set forth in the following table. Management has not received any notification from the Bank's regulators, which changes the Bank’s regulatory capital status.
These special assessments do not apply to the Bank. The minimum FDIC’s DIF reserve ratio is 1.35%, which was set by the Dodd-Frank Act. The FDIC Board of directors is required by the Federal Deposit Insurance Act to designate a reserve ratio before the beginning of each calendar year.
These special assessments do not apply to the Bank. The minimum FDIC’s DIF reserve ratio is 1.35%, which was set by the Dodd-Frank Act. The FDIC Board of directors is required by the Federal Deposit Insurance Act (the “FDI Act”) to designate a reserve ratio before the beginning of each calendar year.
The objectives of the new CRA regulations include: ● Update CRA regulations to strengthen the achievement of the core purpose of the statute; ● Adapt to changes in the banking industry, including the expanded role of mobile and online banking; ● Provide greater clarity and consistency in the application of the regulations; ● Tailor performance standards to account for differences in bank size and business models and local conditions; ● Tailor data collection and reporting requirements and use existing data whenever possible; ● Promote transparency and public engagement; ● Confirm that CRA and fair lending responsibilities are mutually reinforcing; and ● Create a consistent regulatory approach that applies to banks regulated by all three agencies.
The New CRA Regulations’ objectives include: ● Update CRA regulations to strengthen the achievement of the core purpose of the statute and to encourage financial inclusion; ● Adapt to changes in the banking industry, including the expanded role of mobile and online banking; ● Provide greater clarity and consistency in the application of the regulations; ● Tailor performance standards to account for differences in bank size and business models and local conditions; ● Tailor data collection and reporting requirements and use existing data whenever possible; ● Promote transparency and public engagement; ● Confirm that CRA and fair lending responsibilities are mutually reinforcing; and ● Create a consistent regulatory approach that applies to banks regulated by all three agencies.
Table of Contents 29 Under these SEC and Nasdaq rules, the recovery of erroneously awarded compensation is required on a “no fault” basis, without regard to whether any misconduct occurred or an executive officer’s responsibility for the erroneous financial statements.
Table of Contents 31 Under these SEC and Nasdaq rules, the recovery of erroneously awarded compensation is required on a “no fault” basis, without regard to whether any misconduct occurred or an executive officer’s responsibility for the erroneous financial statements.
Table of Contents 30 The federal bank regulators, the SEC and other regulators proposed regulations implementing Section 956 in April 2011, which would have been applicable to, among others, depository institutions and their holding companies with $1 billion or more in assets.
Table of Contents 32 The federal bank regulators, the SEC and other regulators proposed regulations implementing Section 956 in April 2011, which would have been applicable to, among others, depository institutions and their holding companies with $1 billion or more in assets.
The Federal Reserve has adopted the Federal Financial Institutions Examination Council’s (“FFIEC”) Uniform Financial Institutions Rating System (“UFIRS”), which assigns each financial institution a confidential composite “CAMELS” rating based on an evaluation and rating of six essential components of an institution’s financial condition and operations: C apital Adequacy, A sset Quality, M anagement, E arnings, L iquidity and S ensitivity to market risk, as well as the quality of risk management practices.
Table of Contents 11 The Federal Reserve has adopted the Federal Financial Institutions Examination Council’s (“FFIEC”) Uniform Financial Institutions Rating System (“UFIRS”), which assigns each financial institution a confidential composite “CAMELS” rating based on an evaluation and rating of six essential components of an institution’s financial condition and operations: C apital Adequacy, A sset Quality, M anagement, E arnings, L iquidity and S ensitivity to market risk, as well as the quality of risk management practices.
In addition, 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.
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.
Additional “threshold deductions” of the following that are individually greater than 10% of CET1 or collectively greater than 15% of CET1 (after the above deductions are also made): ● MSAs, net of associated DTLs; ● DTAs arising from temporary differences that could not be realized through net operating loss carrybacks, net of any valuation allowances and DTLs; and ● Significant common stock investments in unconsolidated financial institutions, net of associated DTLs.
Table of Contents 20 Additional “threshold deductions” of the following that are individually greater than 10% of CET1 or collectively greater than 15% of CET1 (after the above deductions are also made): ● MSAs, net of associated DTLs; ● DTAs arising from temporary differences that could not be realized through net operating loss carrybacks, net of any valuation allowances and DTLs; and ● Significant common stock investments in unconsolidated financial institutions, net of associated DTLs.
Table of Contents 21 Basel III Capital The various capital elements and total capital under the Basel III Capital Rules, as fully phased in on January 1, 2019 are: Fully Phased In January 1, 2019 Minimum CET1 4.50% CET1 Conservation Buffer 2.50% Total CET1 7.0% Deductions from CET1 100% Minimum Tier 1 Capital 6.0% Minimum Tier 1 Capital plus conservation buffer 8.5% Minimum Total Capital 8.0% Minimum Total Capital plus conservation buffer 10.5% Changes in Risk-Weightings The Basel III Capital Rules significantly change the risk weightings used to determine risk weighted capital adequacy.
The various capital elements and total capital requirements under the Basel III Capital Rules are: Fully Phased in January 1, 2019 Minimum CET1 4.50% CET1 Conservation Buffer 2.50% Total CET1 7.0% Deductions from CET1 100% Minimum Tier 1 Capital 6.0% Minimum Tier 1 Capital plus conservation buffer 8.5% Minimum Total Capital 8.0% Minimum Total Capital plus conservation buffer 10.5% Table of Contents 21 Basel III Changes in Risk-Weightings The Basel III Capital Rules significantly change the risk weightings used to determine risk weighted capital adequacy.
The federal bank regulators continue to identify elevated risks in leveraged loans and shared national credits. The Bank did not have any loans at year-end 2023 or 2022 that were leveraged loans subject to the Interagency Guidance on Leveraged Lending or that were shared national credits.
The federal bank regulators continue to identify elevated risks in leveraged loans and shared national credits. The Bank did not have any leveraged loans at year-end 2024 or 2023 subject to the Interagency Guidance on Leveraged Lending or that were shared national credits.
Intermediate banks could delineate facility-based areas of part of a county. The banking agencies will evaluate retail lending in a bank’s “outside retail lending area” for large banks, as well as for intermediate banks, if the majority of their retail lending is outside their facility-based assessment areas.
Intermediate banks may delineate facility- based areas of part of a county. The banking agencies will evaluate retail lending in a bank’s “outside retail lending area” for large banks, as well as for intermediate banks, if the majority of their retail lending is outside their facility-based assessment areas.
The federal bank regulators continue to consider responsible small dollar lending, including overdrafts and related fee issues and issued principals for offering small-dollar loans in a responsible manner on May 20, 2020.
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.
Table of Contents 31 The 2018 Growth Act, which, was enacted on May 24, 2018, amended the Dodd-Frank Act, the BHC Act, the Federal Deposit Insurance Act and other federal banking and securities laws to provide regulatory relief in these areas: ● consumer credit and mortgage lending; ● capital requirements; ● Volcker Rule compliance; ● stress testing and enhanced prudential standards; ● increased the asset threshold under the Federal Reserve’s Small BHC Policy from $1 billion to $3 billion; and ● capital formation.
The 2018 Growth Act, which was enacted on May 24, 2018, amended the Dodd-Frank Act, the BHC Act, the Federal Deposit Insurance Act and other federal banking and securities laws to provide regulatory relief in these areas: ● consumer credit and mortgage lending; ● capital requirements; ● Volcker Rule compliance; ● stress testing and enhanced prudential standards; ● increased the asset threshold under the Federal Reserve’s Small BHC Policy from $1 billion to $3 billion; and ● capital formation.
Table of Contents 6 Banks also have experienced significant competition for deposits from mutual funds, insurance companies and other investment companies and from money center banks’ offerings of high-yield investments and deposits, including CDs and savings accounts. Certain of these competitors are not subject to the same regulatory restrictions as the Bank.
Banks also have experienced significant competition for deposits from mutual funds, insurance companies and other investment companies and from money center banks’ offerings of high-yield investments and deposits, including CDs and savings accounts. Certain of these competitors are not subject to the same regulatory restrictions as the Bank.
As a result, a bank holding company may be required to loan money to a bank subsidiary in the form of subordinate capital notes or other instruments which qualify as capital under bank regulatory rules.
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.
The principal changes for standardized approaches institutions, such the Company and the Bank are: ● Deductions from capital for certain items, such as temporary difference DTAs, MSAs and investments in unconsolidated subsidiaries were decreased to those amounts that individually exceed 25% of CET1; ● Institutions can elect to deduct investments in unconsolidated subsidiaries or subject them to capital requirements; and ● Minority interests would be includable up to 10% of (i) CET1 capital, (ii) Tier 1 capital and (iii) total capital.
The principal changes for standardized approaches institutions, such the Company and the Bank are: ● Deductions from capital for certain items, such as temporary difference DTAs, MSAs and investments in unconsolidated subsidiaries were decreased to those amounts that individually exceed 25% of CET1; ● Institutions can elect to deduct investments in unconsolidated subsidiaries or subject them to capital requirements; and ● Minority interests are included up to 10% of (i) CET1 capital, (ii) Tier 1 capital and (iii) total capital.
The Volcker Rule change may enable us to invest in certain collateralized loan obligations that are treated as “covered funds” and other investments prohibited to banking entities by the Volcke r Rule.
The Volcker Rule change may enable us to invest in certain collateralized loan obligations that are treated as “covered funds” and other investments prohibited to banking entities by the Volcker Rule.
The law also provides partial exemptions from the collection, recording and reporting requirements under Sections 304(b)(5) and (6) of the Home Mortgage Disclosure Act (“HMDA”), for those banks with fewer than 500 closed-end mortgages or less than 500 open-end lines of credit in both of the preceding two years, provided the bank’s rating under the CRA for the previous two years has been at least “satisfactory.” On August 31, 2018, the CFPB issued an interpretive and procedural rule to implement and clarify these requirements under the 2018 Growth Act.
The law also provides partial exemptions from the collection, recording and reporting requirements under Sections 304(b)(5) and (6) of the Home Mortgage Disclosure Act (“HMDA”), for those banks with fewer than 500 closed-end mortgages or less than 500 open-end lines of credit in both of the preceding two years, provided the bank’s rating under the CRA for the previous two years has been at least “satisfactory.” The CFPB issued a rule to implement and clarify these provisions of the 2018 Growth Act on August 31, 2018.
The 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 subsidiar ies.
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.
Reciprocal deposits have expanded our funding and liquidity sources without being subjected to FDIC limitations 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.
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.
The Financial Accounting Standards Board’s (“FASB”) Accounting Standards Update (“ASU”) No. 2016-13 “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” on June 16, 2016, which changed the loss model to take into account current expected credit losses (“CECL”) in place of the incurred loss method.
Effects of CECL Accounting Changes The Financial Accounting Standards Board’s (“FASB”) Accounting Standards Update (“ASU”) No. 2016-13 “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” on June 16, 2016, which changed the loss model to take into account current expected credit losses (“CECL”) in place of the incurred loss method.
See “Prompt Corrective Action Rules.” Table of Contents 19 Basel III Capital Rules The Federal Reserve and the other bank regulators adopted in June 2013 final capital rules for bank holding companies and banks implementing the Basel Committee on Banking Supervision’s “Basel III: A Global Regulatory Framework for more Resilient Banks and Banking Systems.” These U.S. capital rules are called the “Basel III Capital Rules,” and generally were fully phased-in on January 1, 2019.
See “Prompt Corrective Action Rules.” Basel III Capital Rules The Federal Reserve and the other federal bank regulators adopted in June 2013 final capital rules for bank holding companies and banks implementing the Basel Committee on Banking Supervision’s “Basel III: A Global Regulatory Framework for more Resilient Banks and Banking Systems.” These U.S. capital rules are called the “Basel III Capital Rules,” and generally were fully phased-in on January 1, 2019.
Table of Contents 8 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 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.
Section 23A defines “covered transactions,” which include extensions of credit, and limits a bank’s covered transactions with any affiliate to 10% of such bank’s capital and surplus.
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.
Table of Contents 17 Other Laws and Regulations The Company is also required to comply with various corporate governance and financial reporting requirements under the Sarbanes-Oxley Act of 2002, as well as related rules and regulations adopted by the SEC, the Public Company Accounting Oversight Board and Nasdaq.
Other Laws and Regulations The Company is also required to comply with various corporate governance and financial reporting requirements under the Sarbanes-Oxley Act of 2002, as well as related rules and regulations adopted by the SEC, the Public Company Accounting Oversight Board and Nasdaq.
Prompt Corrective Action Rules All of the federal bank regulatory agencies’ regulations establish risk-adjusted measures and relevant capital levels that implement the “prompt corrective action” standards. The relevant capital measures are the total risk-based capital ratio, Tier 1 risk-based capital ratio, Common equity tier 1 capital ratio, as well as the leverage capital ratio.
Table of Contents 23 Prompt Corrective Action Rules All of the federal bank regulatory agencies’ regulations establish risk-adjusted measures and relevant capital levels that implement the “prompt corrective action” standards. The relevant capital measures are the total risk-based capital ratio, Tier 1 risk-based capital ratio, Common equity tier 1 capital ratio, as well as the leverage capital ratio.
Table of Contents 23 Community Bank Leverage Ratio Framework Section 201 of the 2018 Growth Act provides that banks and bank holding companies with consolidated assets of less than $10 billion that meet a “community bank leverage ratio,” established by the federal bank regulators as part of the community bank leverage ratio framework (“CBLR”).
Community Bank Leverage Ratio Framework Section 201 of the 2018 Growth Act provides that banks and bank holding companies with consolidated assets of less than $10 billion that meet a “community bank leverage ratio,” established by the federal bank regulators as part of the community bank leverage ratio framework (“CBLR”).
The Federal Reserve recommended repeal of the merchant banking powers in its September 16, 2016 study pursuant to Section 620 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), but has taken no action.
The Federal Reserve recommended repeal of the merchant banking powers in a September 16, 2016 study undertaken pursuant to Section 620 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), but has taken no action.
The 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 agency’s CRA assessment is publicly available.
The CRA requires a depository institution’s primary federal regulator to periodically assess the institution’s record of assessing and meeting the credit needs of the communities served by that institution, includ ing low- and moderate-income neighborhoods. The bank regulatory agency’s CRA assessment is publicly available.
Federal Financial Crimes Enforcement Network (“FinCEN”) rules effective May 2018 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.
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.
Further, consideration of the CRA is required of any FDIC-insured institution that has applied to: (i) charter a national bank; (ii) obtain deposit insurance coverage for a newly- chartered institution; (iii) establish a new branch office that accepts deposits; (iv) relocate an office; or (v) merge or consolidate with, or acquire the assets or assume the liabilities of, an FDIC-insured financial institution.
Further, consideration of the CRA is required of any FDIC-insured institution that has applied to: (i) charter a national bank; (ii) obtain deposit insurance coverage for all new- banks; (iii) establish a new branch office that accepts deposits; (iv) relocate an office; or (v) merge or consolidate with, or acquire the assets or assume the liabilities of, an FDIC-insured financial institution.
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.
Table of Contents 10 The Company is a legal entity separate and distinct from the Bank. Various legal limitations restrict the Bank from lending or otherwise supplying funds to the Company. The Company and the Bank are subject to Sections 23A and 23B of the Federal Reserve Act and Federal Reserve Regulation W thereunder.
Table of Contents 26 In 2016, the FDIC again changed its deposit insurance pricing and eliminated all risk categories and now uses “financial ratios method” based on CAMELS composite ratings to determine assessment rates for small established institutions with less than $10 billion in assets (“Small Banks”).
In 2016, the FDIC again changed its deposit insurance pricing and eliminated all risk categories and now uses “financial ratios method” based on CAMELS composite ratings to determine assessment rates for small established institutions with less than $10 billion in assets (“Small Banks”).
On January 30, 2020, the Federal Reserve adopted new rules, effective September 30, 2020 simplifying determinations of control of banking organizations for BHC Act purposes.
The Federal Reserve adopted new rules, effective September 30, 2020, simplifying determinations of control of banking organizations for BHC Act purposes.
Bank holding company directors must consider different factors to ensure that its dividend level is prudent relative to maintaining a strong financial position, and is not based on overly optimistic earnings scenarios, such as potential events that could affect its ability to pay, while still maintaining a strong financial position.
Table of Contents 25 Bank holding company directors must consider different factors to ensure that its dividend level is prudent relative to maintaining a strong financial position, and is not based on overly optimistic earnings scenarios, such as potential events that could affect its ability to pay, while still maintaining a strong financial position.
Intermediate banks would be evaluated and assigned conclusions of reflecting their performance under these tests in their facility based assessment area of “Outstanding”; “High Satisfactory”; “Low Satisfactory”; “Needs to Improve”; or “Substantial Noncompliance.” These conclusions applied to each test would be weighted and combined to form a rating of “Outstanding,” “Satisfactory,” “Needs to Improve,” or “Substantial Noncompliance.” A “facility based assessment area” is an area that encompasses or is adjacent to deposit-taking facilities, including main offices, branches, and deposit-taking remote service facilities.
Intermediate banks would be evaluated and assigned conclusions reflecting their performance under these tests in their facility-based assessment area of “Outstanding”; “High Satisfactory”; “Low Satisfactory”; “Needs to Improve”; or “Substantial Noncompliance.” These conclusions applied to each test would be weighted 50% each for intermediate banks and combined in a resulting rating of “Outstanding,” “Satisfactory,” “Needs to Improve,” or “Substantial Noncompliance.” A “facility-based assessment area” is an area that encompasses or is adjacent to deposit-taking facilities, including main offices, branches, and deposit-taking ATMs and other remote service facilities.
Anti-Money Laundering and Sanctions 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.
Table of Contents 17 The International Money Laundering Abatement and Anti-Terrorism Funding Act of 2001 specifies “know your customer” requirements that obligate financial institutions to take actions to verify the identity of the account holders in connection with opening an account at any U.S. financial institution.
Various exclusions from HVCRE are specified. The full value of any borrower contributed land (net of any liens on the land securing HVCRE exposure) count toward the 15% capital contribution to the appraised as completed value, which is one of the criteria for exemption form the heightened risk weight.
Various exclusions from HVCRE are specified. The full value of any borrower contributed land (net of any liens on the land securing HVCRE exposure) count toward the 15% capital contribution to the appraised as completed value, which is one of the criteria for exemption form the heightened risk weight. HVCRE loans are assigned a 150% risk weight.
At the time of transition, our Chairman had served the Bank his entire 39-year career, 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.
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.
In addition, one or more Alabama banks may enter into a merger transaction with one or more out-of-state banks, and an out-of-state bank resulting from such transaction may continue to operate the acquired branches in Alabama. The Dodd-Frank Act permits banks, including Alabama banks, to branch anywhere in the United States. See “Bank Regulation”.
In addition, one or more Alabama banks may enter into a merger transaction with one or more out-of-state banks, and an out-of-state bank resulting from such transaction may continue to operate the acquired branches in Alabama. Banks, including Alabama banks, may branch anywhere in the United States. See “Bank Regulation”.
It is subject to supervision, regulation and examination by the Federal Reserve and the Alabama Superintendent, which monitor all areas of the Bank’s operations, including loans, reserves, mortgages, issuances and redemption of capital securities, payment of dividends, establishment of branches, capital adequacy and compliance with laws.
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.
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. In addition, we developed our remote and electronic banking services, and established remote work access to help employees stay at home where job duties permitted.
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.
The United States has imposed various sanctions upon various foreign countries, such as China, Iran, North Korea, Russia and Venezuela, and their certain government officials and persons. Banks are required to comply with these sanctions, which require additional customer screening and transaction monitoring.
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.
Table of Contents 28 Leveraged Lending In 2013, the Federal Reserve and other banking regulators issued their “Interagency Guidance on Leveraged Lending” highlighting standards for originating leveraged transactions and managing leveraged portfolios, as well as requiring banks to identify their highly leveraged transactions, or HLTs.
Table of Contents 30 Leveraged Loans In 2013, the Federal Reserve and other banking regulators issued their “Interagency Guidance on Leveraged Lending” highlighting standards for originating leveraged transactions and managing leveraged portfolios, as well as requiring banks to identify their highly leveraged transactions, or HLTs.
The rules define HVCRE loans as loans secured by land or improved real property that: ● primarily finance or refinance the acquisition, development, or construction of real property; ● the purpose of such loans must be to acquire, develop, or improve such real property into income producing property; and ● the repayment of the loan must depend on the future income or sales proceeds from, or refinancing of, such real property.
The rules define HVCRE loans as loans secured by land or improved real property made after December 31, 2014 that: ● primarily finance or refinance the acquisition, development, or construction of real property; ● the purpose of such loans must be to acquire, develop, or improve such real property into income producing property; and ● the repayment of the loan must depend on the future income or sales proceeds from, or refinancing of, such real property.
While most loans are made within our primary service area, some residential mortgage 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.
While most loans are made within our primary service area, some residential mort gage loans are originated outside the primary service area, and the Bank from time to time has purchased loan participations from outside its primary service area.
The financial ratios method sets a maximum assessment for CAMELS 1 and 2 rated banks, and set minimum assessments for lower rated institutions. All basis points are annual amounts.
The financial ratios method sets (i) a maximum assessment for CAMELS 1 and 2 rated banks, and (ii) minimum assessments for lower rated institutions. All basis points are annual amounts.
In the case of bank holding company applications to acquire a bank, the Federal Reserve will assess and emphasize CRA records of each subsidiary depository institution of the applicant bank holding company and the target bank in meeting the needs of their entire communities, including low- and moderate-income (“LMI”) neighborhoods, and such records may be the basis for denying the application.
In the case of bank holding company applications to acquire a bank, the Federal Reserve will assess and emphasize CRA records of each subsidiary depository institution of the applicant bank holding company and the target bank in meeting the needs of their entire communities, including LMI neighborhoods, and such records may be the basis for denying the application.
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.
Table of Contents 13 CRA agreements with private parties must be disclosed and annual CRA reports must be made to a bank’s primary federal regulator. Community benefit plans have become common in banking mergers, especially larger bank combinations.
Second, the agencies would evaluate the geographic distribution and borrower distribution of a bank’s major product lines in the bank’s Retail Lending Test Areas (i.e., the bank’s facility-based assessment areas, and, as applicable, retail lending assessment areas and outside retail lending area). using a series of metrics and benchmarks.
Second, the agencies will evaluate the geographic distribution and borrower distribution of a bank’s major product lines in the bank’s Retail Lending Test Areas (i.e., the bank’s facility-based assessment areas, and, if applicable, retail lending assessment areas and outside retail lending area) using a series of metrics and benchmarks.
Thereafter, permissible dividends, stock repurchases and discretionary bonuses will be limited to the following percentages based on the capital conservation buffer as calculated above, subject to any further regulatory limitations, including those based on risk assessments and enforcement actions: Capital Conservation Buffer % Buffer % Limit More than 2.50% None > 1.875% - 2.50% 60.0% > 1.250% - 1.875% 40.0% > 0.625% - 1.250% 20.0% ≤ 0.625 - 0 - On March 20, 2020, the Federal Reserve and the other federal banking regulators adopted an interim final rule that amended the capital conservation buffer in light of the disruptive effects of the COVID-19 pandemic.
Thereafter, permissible dividends, stock repurchases and discretionary bonuses will be limited to the following percentages based on the capital conservation buffer as calculated above, subject to any further regulatory limitations, including those based on risk assessments and enforcement actions: Capital Conservation Buffer % Buffer % Limit More than 2.50% None > 1.875% - 2.50% 60.0% > 1.250% - 1.875% 40.0% > 0.625% - 1.250% 20.0% ≤ 0.625 - 0 - On March 20, 2020, the Federal Reserve and the other federal banking regulators adopted an interim final rule that amended the capital conservation buffer.
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.
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.
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. H.R. 1165, The Data Privacy Act of 2023, was introduced in Congress on February 24, 2023 by Rep.
These laws may also require us to notify law enforcement, regulators or consumer reporting agencies in the event of a data breach, as well as businesses and governmental agencies that own data. The Data Privacy Act of 2023 was introduced in Congress on February 24, 2023.
The Company recorded FDIC insurance premiums expenses of $0.5 and $0.3 million in 2023 and 2022, respectively, which reflects the FDIC’s amended restoration plan increases in the initial base deposit insurance assessment rate schedules uniformly by 2 basis points, beginning with the first quarterly assessment period of 2023.
The Company recorded FDIC insurance premiums expenses of $0.5 million for both 2024 and 2023, respectively, which reflects the FDIC’s amended restoration plan increases in the initial base deposit insurance assessment rate schedules uniformly by 2 basis points, beginning with the first quarterly assessment period of 2023.
Enforcement Policies and Actions The Federal Reserve and the Alabama Superintendent examine and regulate our compliance with laws and regulations, including the CFPB’s regulations. The CFPB issues regulations, interpretations and enforcement actions under the laws applicable to consumer financial products and services.
Table of Contents 26 Enforcement Policies and Actions The Federal Reserve and the Alabama Superintendent examine and regulate our compliance with laws and regulations, including the CFPB’s regulations. The CFPB issues regulations, interpretations and enforcement actions under the laws applicable to consumer financial products and services.
The banking business in East Alabama, including Lee County, is highly competitive with respect to loans, deposits, and other financial services. The area is served by 19 banks, 11 of which are headquartered outside of Alabama and have 26 offices in our market. Larger national and regional competitors that have offices in our market include J.P.
The banking business in East Alabama, including Lee County, is highly competitive with respect to loans, deposits, and other financial services. Lee County is served by 19 banks, 10 of which are headquartered outside of Alabama. Other banks have 35 offices in Lee County. National and regional competitors that have offices in our market include J.P.
The following provisions of the 2018 Growth Act may be especially helpful to banks of our size after regulations were adopted in 2019: ● “qualifying community banks,” defined as institutions with total consolidated assets of less than $10 billion, which meet a “community bank leverage ratio, which is currently 9.0%, may be deemed to have satisfied applicable risk- based capital requirements as well as the capital ratio requirements; ● section 13(h) of the BHC Act, or the “Volcker Rule,” is amended to exempt from the Volcker Rule, banks with total consolidated assets valued at less than $10 billion (“community banking organizations”), and trading assets and liabilities comprising not more than 5.00% of total assets; and ● “reciprocal deposits” will not be considered “brokered deposits” for FDIC purposes, provided such deposits do not exceed the lesser of $5 billion or 20% of the bank’s total liabilities.
The following provisions of the 2018 Growth Act are helpful to banks of our size, and we have benefitted from the Growth Act’s changes to the deposit rules: ● “qualifying community banks,” defined as institutions with total consolidated assets of less than $10 billion, which meet a “community bank leverage ratio, which is currently 9.0%, may be deemed to have satisfied applicable risk- based capital requirements as well as the capital ratio requirements; ● section 13(h) of the BHC Act, or the “Volcker Rule,” is amended to exempt from the Volcker Rule, banks with total consolidated assets valued at less than $10 billion (“community banking organizations”), and trading assets and liabilities comprising not more than 5.00% of total assets; and ● “reciprocal deposits” will not be considered “brokered deposits” for FDIC purposes, provided such deposits do not exceed the lesser of $5 billion or 20% of the bank’s total liabilities.
The new CRA regulations like the old rules, is based on bank size and business model create a new framework for evaluating CRA performance. Banks are classified as either “small”, “intermediate”, “large”, or “limited purpose” banks.
Similar to the old rules, the New CRA Regulations are based on bank size and business model. These rules create a new framework for evaluating CRA performance. Banks are classified as either “small”, “intermediate”, “large”, or “limited purpose” banks.
Morgan Chase, Wells Fargo, Truist, PNC, Regions, Valley National and SouthState. The regional and national banks and bank holding companies that we compete with have substantially greater resources, and numerous offices and affiliates operating over wide geographic areas.
Morgan Chase, Wells Fargo, Truist, PNC, Regions, Valley National, SouthState and Cadence. The national and regional banks we compete with have substantially greater resources, and numerous offices and affiliates operating over wide geographic areas.
Table of Contents 9 Federal Reserve policy and the Federal Deposit Insurance Act, as amended by the Dodd-Frank 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.
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.
These rules became effective January 1, 2016. FHFA also has updated these GSEs’ representations and warranties framework and provided an independent dispute resolution (“IDR”) process to allow a neutral third party to resolve demands after the GSEs’ quality control and appeal processes have been exhausted.
The FHFA also has updated these GSEs’ representations and warranties framework and provided an independent dispute resolution (“IDR”) process to allow a neutral third party to resolve demands after the GSEs’ quality control and appeal processes have been exhausted.
The largest employers in the area are Auburn University, East Alabama Medical Center, Lee County School System, Auburn City Schools, Wal-Mart Distribution Center, Aptar CSP Technologies, Pharmavite, LLC, HL Mando America Corporation (automobile brakes and steering), Golden State Foods and Briggs & Stratton.
The largest employers in the area are Auburn University, East Alabama Medical Center, Lee County School System, Auburn and Opelika City Schools, Auburn City Schools, Wal -Mart Distribution Center, Aptar CSP Technologies, Pharmavite, LLC, HL Mando America Corporation (automobile brakes and steering), SCA (automotive plastics), Borbet Alabama (automotive aluminum wheels), Golden State Foods and Briggs & Stratton.
During 2023, the Bank paid total cash dividends of approximately $3.8 million to the Company. At December 31, 2023, the Bank had net profits for the year and its retained net profits for the preceding two calendar years, less any required transfers to surplus, of $8.2 million.
During 2024, the Bank paid total cash dividends of approximately $3.8 million to the Company. At December 31, 2024, the Bank had net profits for the year and retained net profits for the preceding two calendar years, less any required transfers to surplus, of $9.7 million.
See “Regulatory Capital Changes” and Note 16 to the Company’s consolidated financial statements. Table of Contents 18 Federal Reserve Supervisory Letter SR-09-4 (February 24, 2009), as revised December 21, 2015, applies to dividend payments, stock redemptions and stock repurchases.
See “Regulatory Capital Changes” and Note 15 to the Company’s consolidated financial statements. Federal Reserve Supervisory Letter SR-09-4 (February 24, 2009), as revised December 21, 2015, applies to dividend payments, stock redemptions and stock repurchases.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeOperational risks are inherent in our business, and include: ● The effects of local, national and regional market and economic conditions and cyclicality, including inflation, interest rates and their effects on borrowers and markets, including real estate markets ● The risks and costs of nonperforming assets ● Our allowance for credit losses is based on estimates and judgments and may prove to be inadequate to our credit risks ● The soundness of other financial institutions and perceptions regarding our industry, especially when other banks experience difficulties or fail ● Our concentrations in commercial real estate loans in our market ● We operate in a highly competitive market against a number of larger national and regional competitors ● Future acquisitions may disrupt our business, dilute shareholder value and adversely affect our operating results and financial condition, among other risks ● Technological changes affect our business, and we may have fewer resources than various of our larger regulated and unregulated competitors, inside and outside our market area, which may increase the competition we face ● Potential gaps in our risk management, including managing the risks to us of data security and cybersecurity, including risks to our service providers could affect our results of operations, financial condition, customer relationship and reputation ● Our ability to attract and retain key people ● Risks of severe weather, natural disasters, climate changes, epidemics and severe health issues in the population, wars and acts of terrorism and other events Table of Contents 33 Financial risks result in part from our operational risks and the risk of our business, and include: ● Increases in costs of funds due to inflation, monetary and fiscal policies, changes in costumer behaviors and competitive pressures ● Our results of operations and financial condition, including the values of our assets and liquidity, may be affected by changes in interest rates and interest rate levels, the shape of the yield curve and economic conditions ● Liquidity risks, including the costs and availability of funding, and the liquidity of our assets, including our investment securities portfolio, and institutional lending sources ● Changes in accounting and tax rules ● The adequacy of our capital and availability of capital, if needed ● Potentially excessive risk taking by our associates ● Our ability to pay dividends depends on our earnings, liquidity and regulatory requirements related to our capital and our risks ● A limited trading market exists for our common stock Legal and regulatory risks include: ● The Company is a legal entity separate and distinct from the Bank, and transactions between the Bank and the Company are limited by law ● The Company is required to be a source of financial and managerial strength to the Bank, even where further investment in the Bank may not be warranted in the circumstances ● The scope, volume and complexity of regulations and regulatory and legal changes affect us, increase the time and costs of compliance and may limit our business and adversely affect our financial condition and results of operations ● Litigation, investigations and other claims by government agencies and private parties and regulatory actions, including those related to assertions of compliance failures ● The amount of and changes in the capital we are required to maintain in respect of our business and risk, and regulatory perceptions of us and our industry ● Liquidity requirements Operational Risks Market conditions and economic cyclicality may adversely affect our industry.
Biggest changeOperational risks are inherent in our business, and include: ● The effects of local, national and regional market and economic conditions and cyclicality, including the levels and rates of change in inflation and interest rates, and the effects on depositors, borrowers and markets, including the real estate and securities markets; ● Our allowance for credit losses is based on estimates and judgments and may prove to be inadequate to our credit risks; ● The risks and costs of nonperforming assets ● The soundness of other financial institutions and perceptions regarding our industry, especially when other banks experience difficulties or fail; ● Our concentrations in commercial real estate loans in our market; ● We operate in a highly competitive market and compete against a number of larger national and regional competitors, as well as smaller institutions, nonbanks and credit unions; ● Our ability to attract and retain key people; ● Inflation and strong labor markets may affect our non-interest expenses; ● Technological changes affect our business, and we may have fewer resources than our larger regulated and unregulated competitors, both in and outside our market area, which may increase the competition we face; ● Potential gaps in our risk management, including managing the risks related to maintaining our data security and cybersecurity and those of our third-party service providers; Table of Contents 37 ● Continuity risks to us and our service providers due to power, information technology and telecommunication disruptions and outages, could affect our customer service, reputation and our results of operations, financial condition, customer relationship and reputation; ● Risks of severe weather, natural disasters, climate changes, epidemics and severe health issues in the population, wars and acts of terrorism and other events; and ● Future acquisitions may disrupt our business, dilute shareholder value and adversely affect our operating results and financial condition, among other risks.
Our access to funding sources in amounts adequate to finance or capitalize our activities on terms which are acceptable to us could be impaired by factors that affect us specifically, or the financial services industry, the economy and market interest rates and fiscal and monetary policies.
Our access to funding sources in amounts adequate to finance or capitalize our activities on terms which are acceptable to us could be impaired by factors that affect us specifically, or the financial services industry, the economy, market interest rates and fiscal and monetary policies.
The Bank is subject to, among other things, the provisions of the Equal Credit Opportunity Act, or ECOA, and the Fair Housing Act, both of which prohibit discrimination based on race or color, religion, national origin, sex and familial status in any aspect of a consumer, commercial credit or residential real estate transaction.
The Bank is subject to, among other things, the provisions of the Equal Credit Opportunity Act, or ECOA and the Fair Housing Act, which prohibit discrimination based on race or color, religion, national origin, sex and familial status in any aspect of a consumer, commercial credit or residential real estate transaction.
The CRA requires us to serve our entire communities, including low- and moderate-income neighborhoods. Our CRA ratings could be adversely affected by actual or alleged violations of the fair lending or consumer financial protection laws. The CRA and fair lending responsibilities are related and mutually reinforcing.
The CRA requires us to serve our entire communities, including low- and moderate-income (“LMI”) neighborhoods. Our CRA ratings could be adversely affected by actual or alleged violations of the fair lending or consumer financial protection laws. The CRA and fair lending responsibilities are related and mutually reinforcing.
Our ability to engage in routine investment and banking transactions, as well as the quality and values of our investments in holdings of other obligations of other financial institutions such as the FHLB-Atlanta, could be adversely affected by the actions, financial condition, and profitability of such other financial institutions, including the FHLB-Atlanta and our correspondent 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, including the FHLB-Atlanta and our correspondent banks.
Interest rates, and consequently our results of operations, are affected by general economic conditions (national, international and local) and fiscal and monetary policies, as well as expectations of interest rate changes, fiscal and monetary policies and the shape of the yield curve.
Interest rates, and consequently our results of operations, are affected by general economic conditions (national, international and local) and fiscal and monetary policies, as well as expectations regarding interest rate changes, fiscal and monetary policies and the shape of the yield curve.
See “Supervision and Regulation—Basel III Capital Rules.” Although we currently have capital ratios that exceed all these minimum levels and a strategic plan to maintain these levels, we or the Bank may be unable to continue to satisfy the capital adequacy requirements and/or maintain our liquidity for various reasons, which may include: ● losses and/or increases in the Bank’s credit risk assets and expected losses resulting from the deterioration in the creditworthiness of borrowers and the issuers of equity and debt securities; ● difficulty in refinancing or issuing instruments upon redemption or at maturity of such instruments to raise capital under acceptable terms and conditions; ● declines in the value of our securities portfolios or sales of securities for losses; ● revisions to the regulations or their application by our regulators that increase our capital requirements; ● reduced total earnings on our assets will reduce our internal generation of capital available to support our balance sheet growth; ● reductions in the value of our MSRs and DTAs; and other adverse developments; and ● unexpected growth and an inability to increase capital timely.
See “Supervision and Regulation—Basel III Capital Rules.” Although we currently have capital ratios that exceed all these minimum levels and a strategic plan to maintain these levels, we or the Bank may be unable to continue to satisfy the capital adequacy requirements and/or maintain our liquidity for various reasons, which may include: ● losses and/or increases in the Bank’s credit risk assets and expected losses resulting from the deterioration in the creditworthiness of borrowers and the issuers of investment securities we hold; ● difficulty in refinancing or issuing instruments upon redemption or at maturity of such instruments to raise capital under acceptable terms and conditions; ● declines in the value of our securities portfolios or sales of securities for losses; ● revisions to the regulations or their application by our regulators that increase our capital or liquidity requirements; ● reduced total earnings on our assets will reduce our internal generation of capital available to support our balance sheet growth; ● reductions in the value of our MSRs and DTAs; and other adverse developments; and ● unexpected growth and an inability to increase capital timely.
See “Supervision and Regulation - Payment of Dividends and Repurchases of Capital Instruments.” The Federal Reserve expects bank holding companies to inform and consult with Federal Reserve supervisory staff sufficiently in advance of (i) declaring and paying a dividend that could raise safety and soundness concerns, such as declaring and paying a dividend that exceeds earnings for the period for which the dividend is being paid); (ii) redeeming or repurchasing regulatory capital instruments when the bank holding company is experiencing financial weaknesses; or (iii) redeeming or repurchasing common stock or perpetual preferred stock that would result in a net reduction as of the end of a quarter in the amount of such equity instruments outstanding compared with the beginning of the quarter in which the redemption or repurchase occurred.
See “Supervision and Regulation - Dividends and Distributions.” The Federal Reserve expects bank holding companies to inform and consult with Federal Reserve supervisory staff sufficiently in advance of (i) declaring and paying a dividend that could raise safety and soundness concerns, such as declaring and paying a dividend that exceeds earnings for the period for which the dividend is being paid); (ii) redeeming or repurchasing regulatory capital instruments when the bank holding company is experiencing financial weaknesses; or (iii) redeeming or repurchasing common stock or perpetual preferred stock that would result in a net reduction as of the end of a quarter in the amount of such equity instruments outstanding compared with the beginning of the quarter in which the redemption or repurchase occurred.
Operational risks and losses can result from internal and external fraud; gaps or weaknesses in our risk management or internal audit procedures; errors by employees or third parties, including our vendors, failures to document transactions properly or obtain proper authorizations; failure to comply with applicable regulatory requirements in the various jurisdictions where we do business or have customers; failures in our estimates models that rely on; equipment failures, including those caused by natural disasters, or by electrical, telecommunications or other essential utility outages; business continuity and data security system failures, including those caused by computer viruses, cyberattacks, unforeseen problems encountered while implementing major new computer systems or, failures to timely and properly upgrade and patch existing systems or inadequate access to data or poor response capabilities in light of such business continuity and data security system failures; or the inadequacy or failure of systems and controls, including those of our vendors or counterparties.
Operational risks and losses can result from internal and external fraud; gaps or weaknesses in our risk management or internal audit procedures; errors by employees or third parties, including our vendors, failures to document transactions properly or obtain proper authorizations; failure to comply with applicable regulatory requirements in the various jurisdictions where we do business or have customers; failures in our estimates or the models that we rely on; equipment failures, including those caused by natural disasters, or by electrical, telecommunications or other essential utility outages; business continuity and data security system failures, including those caused by computer viruses, cyberattacks, unforeseen problems encountered while implementing major new computer systems or upgrades, failures to timely and properly upgrade and patch existing systems or inadequate access to data or poor response capabilities in light of business continuity plans in the event of data security system failures; or the inadequacy or failure of systems and controls, including those of our vendors or counterparties.
Financial Risks Our ability to realize our deferred tax assets may be reduced in the future if our estimates of future taxable income from our operations and tax planning strategies do not support this amount, and the amount of net operating loss carry-forwards realizable for income tax purposes may be reduced under Section 382 of the Internal Revenue Code by sales of our capital securities.
Our ability to realize our deferred tax assets may be reduced in the future if our estimates of future taxable income from our operations and tax planning strategies do not support this amount, and the amount of net operating loss carry-forwards realizable for income tax purposes may be reduced under Section 382 of the Internal Revenue Code by sales of our capital securities.
A substantial legal liability or a significant regulatory action against us, as well as regulatory inquiries or investigations, could harm our reputation, result in material fines or penalties, result in significant legal and other costs, divert management resources away from our business, and otherwise have a material adverse effect on our ability to expand on our existing business, financial condition and results of operations.
A substantial legal liability or a significant regulatory action against us, as well as regulatory inquiries, investigations or enforcement actions, could harm our reputation, result in material fines or penalties, result in significant legal and other costs, divert management resources away from our business, and otherwise have a material adverse effect on our financial condition and results of operations and our ability to expand on our existing business.
The failures of Silicon Valley Bank, Signature Bank, First Republic and Heartland Tri-State Bank in 2023 have resulted in significant market volatility for bank stocks, and have caused uncertainty in the investor community and among bank customers, generally, greater bank regulatory scrutiny of banking organizations, especially those experiencing rapid growth and regional banks with $100 billion or more in assets.
The failures of Silicon Valley Bank, Signature Bank, First Republic and Heartland Tri-State Bank in 2023 caused significant market volatility for bank stocks, and uncertainty in the investor community and among bank customers, generally, greater bank regulatory scrutiny of banking organizations, especially those experiencing rapid growth and regional banks with $100 billion or more in assets.
Although we have implemented risk controls and loss mitigation actions, and substantial resources are devoted to developing efficient procedures, identifying and rectifying weaknesses in existing procedures and training staff and potential environmental risks, it is not possible to be certain that such actions have been or will be effective in controlling these various operational risks that evolve continuously.
Although we have implemented risk controls and loss mitigation actions, and substantial resources are devoted to developing efficient procedures, identifying and rectifying weaknesses in existing procedures and training staff, it is not possible to be certain that such actions have been or will be effective in controlling these various operational risks that evolve continuously.
General conditions that are not specific to us, such as disruptions in the financial markets, failures of other bank, such as Silicon Valley Bank, Signature Bank and First Republic Bank in 2023, or negative views and expectations about the prospects for the financial services industry could adversely affect us.
General conditions that are not specific to us, such as disruptions in the financial markets, failures of other bank, such as Silicon Valley Bank, Signature Bank and First Republic Bank in 2023, or negative views and expectations about the prospects for the financial services industry could adversely affect us and our liquidity.
Similarly, although we employ controls and procedures designed to prevent misconduct, to monitor associates’ business decisions and prevent them from taking excessive risks, these controls and procedures may not be effective. If our associates take excessive risks, risks to our reputation, financial condition and business operations could be materially and adversely affected.
Similarly, although we employ controls and procedures designed to prevent misconduct, to monitor associates’ business decisions and prevent them from taking excessive risks, these controls and procedures may not be effective. If our associates take excessive risks, risks to our reputation, financial condition and results of operations could be materially and adversely affected.
The failures of Silicon Valley Bank, Signature Bank and First Republic Bank in 2023 due to concentrations of deposits and depositors holding large amounts of deposits in excess of FDIC insurance limits, as well as flawed business models and management, adversely affected the financial system and public confidence.
The failures of Silicon Valley Bank, Signature Bank and First Republic Bank in March and May 2023 due to concentrations of deposits and depositors holding large amounts of deposits in excess of FDIC insurance limits, as well as flawed business models and management, adversely affected the financial system and public confidence.
Many of our employees have access to, and routinely process personal information of clients through a variety of media, including information technology systems. Our internal processes, policies and controls are designed to protect the confidentiality of client information we hold and that is accessible to us and our employees.
Many of our employees have access to, and routinely process personal information of clients through a variety of media, including information technology systems. Our internal processes, policies and controls are designed to protect the confidentiality of customer information we hold and that is accessible to us and our employees.
We and our customers, and our respective suppliers, vendors and processors may be adversely affected by rising costs and shortages of needed equipment and supplies and tight labor markets. The continuation or worsening of these conditions may adversely affect our profitability, growth asset quality and financial condition.
We and our customers, and our respective suppliers, vendors and processors may be adversely affected by shortages of needed equipment and supplies, rising prices and tight labor markets. The continuation or worsening of these conditions may adversely affect our profitability, growth asset quality and financial condition.
The techniques used by cyber criminals change frequently, may not be recognized until launched and can originate from a wide variety of sources, including external service providers, organized crime affiliates, terrorist organizations or hostile foreign governments. These risks may increase in the future as the use of mobile banking and other internet electronic banking continues to grow.
The techniques used by cyber criminals change frequently, may not be recognized until launched and can originate from a wide variety of sources, including external service providers, organized crime affiliates, terrorist organizations or hostile foreign governments. These risks may increase in the future as the use of mobile banking, other internet electronic banking.
Higher market interest rates and continuing run-off of maturing securities held by the Federal Reserve in furtherance of its quantitative tightening policy to reduce inflation generally reduce economic activity and may reduce loan demand and growth.
Higher market interest rates and continuing run-off of maturing securities held by the Federal Reserve in its SOMA in furtherance of its quantitative tightening policy to fight inflation, generally reduce economic activity and may reduce loan demand and growth.
We periodically review our allowance for loan losses for adequacy considering economic conditions and trends, collateral values and credit quality indicators, including past charge-off experience and levels of past due loans and nonperforming assets.
We periodically review the allowance for loan losses for adequacy considering economic conditions and trends, collateral values and credit quality indicators, including past charge-off experience and levels of past due loans and nonperforming assets.
Technological changes affect our business, and we may have fewer resources than many competitors to invest in technological improvements. The financial services industry is undergoing rapid technological changes with frequent introductions of new technology driven products and services and growing demands for mobile and user-based banking applications.
Table of Contents 43 Technological changes affect our business, and we may have fewer resources than many competitors to invest in technological improvements. The financial services industry is undergoing rapid technological changes with frequent introductions of new technology- driven products and services and growing demands for mobile and user-based banking applications.
Our executive officers and other members of management, sales intermediaries, investment professionals, product managers, and other associates, make decisions and choices that involve exposing us to risk. We endeavor, in the design and implementation of our compensation programs and practices, to avoid giving our associates incentives to take excessive risks; however, associates may nonetheless take such risks.
Our executive officers and other members of management, sales intermediaries, investment professionals, product managers, and other associates, make decisions and choices that may expose us to risk. We endeavor, in the design and implementation of our compensation programs and practices, to avoid giving our associates incentives to take excessive risks; however, associates may nonetheless take such risks.
Table of Contents 40 Any failure to protect the confidentiality of customer information could adversely affect our reputation and have a material adverse effect on our business, financial condition and results of operations . Various laws enforced by the bank regulators and other agencies protect the privacy and security of customers’ non-public personal information.
Any failure to protect the confidentiality of customer information could adversely affect our reputation and have a material adverse effect on our business, financial condition and results of operations . Various laws enforced by the bank regulators and other agencies protect the privacy and security of customers’ non-public personal information.
If customers move money out of bank deposits and into other investment assets or from transaction deposits to higher interest-bearing time deposits, we could lose a relatively low cost source of funds, increasing our funding costs and potentially reducing our net interest income and net income.
If customers move money out of bank deposits and into other investment assets or from transaction deposits to higher cost, interest-bearing time deposits, we could lose relatively low-cost sources of funds, increasing our funding costs and potentially reducing our net interest income and net income.
Under these requirements, we could be required to provide financial assistance to the Bank should it experience financial distress, even if further investment was not otherwise warranted. See “Supervision and Regulation.” Our operations are subject to risk of loss from unfavorable fiscal, monetary and political developments in the U.S.
Under these requirements, we could be required to provide financial assistance to the Bank should it experience financial distress, even if further investment was not otherwise warranted. See “Supervision and Regulation.” Table of Contents 52 Our operations are subject to risk of loss from unfavorable fiscal, monetary, regulatory and political developments in the U.S.
Among other things, our regulators consider our capital, liquidity, profitability, regulatory compliance and levels of goodwill and intangibles when considering acquisition and expansion proposals. Any acquisition could be dilutive to our earnings and shareholders’ equity per share of our common stock. The regulatory agencies are carefully scrutinizing financial institution mergers, and the merger application process has lengthened.
Among other things, our regulators consider our capital, liquidity, profitability, regulatory compliance and levels of goodwill and intangibles when considering acquisition and expansion proposals. Any acquisition could be dilutive to our earnings and shareholders’ equity per share of our common stock. The regulatory agencies carefully review and analyze financial institution mergers, and the merger application process has lengthened.
The Basel III Rules relating to MSRs may also increase the potential capital required as a result of MSRs, when considered with other capital rule adjustments and deductions. Table of Contents 36 The soundness of other financial institutions could adversely affect us.
The Basel III Capital Rules relating to MSRs may also increase the potential capital required as a result of MSRs, when considered with other capital rule adjustments and deductions. The soundness of other financial institutions could adversely affect us.
Our systems and networks, as well as those of our third-party service providers, are subject to security risks and could be susceptible to disruption through cyber-attacks, such as denial of service attacks, hacking, terrorist activities, or identity theft.
Table of Contents 45 Our systems and networks, as well as those of our third-party service providers, are subject to security risks and could be susceptible to disruption through cyber-attacks, such as denial of service attacks, hacking, terrorist activities, or identity theft.
We are required to maintain capital to meet regulatory requirements, and if we fail to maintain sufficient capital, our financial condition, liquidity and results of operations would be adversely affected. We and the Bank must meet regulatory capital requirements and maintain sufficient liquidity, including liquidity at the Company, as well as the Bank.
Table of Contents 51 We are required to maintain capital to meet regulatory requirements, and if we fail to maintain sufficient capital, our financial condition, liquidity and results of operations would be adversely affected. We and the Bank must meet regulatory capital requirements and maintain sufficient liquidity, including liquidity at the Company, as well as the Bank.
Our nonperforming loans were 0.16% of total loans as of December 31, 2023, and we had no other real estate owned as result of foreclosures or otherwise in full or partial payments in respect of loans (“OREO”). Non-performing assets may adversely affect our net income in various ways.
Our nonperforming loans were 0.09% of total loans as of December 31, 2024, and we had no other real estate owned as result of foreclosures or otherwise in full or partial payments in respect of loans (“OREO”). Non-performing assets may adversely affect our net income in various ways.
Table of Contents 47 The Federal Reserve may require us to commit capital resources to support the Bank. As a matter of policy, the Federal Reserve expects a bank holding company to act as a source of financial and managerial strength to a subsidiary bank and to commit resources to support such subsidiary bank.
The Federal Reserve may require us to commit capital resources to support the Bank. As a matter of policy, the Federal Reserve expects a bank holding company to act as a source of financial and managerial strength to a subsidiary bank and to commit resources to support such subsidiary bank.
We may need to raise additional capital in the future, but that capital may not be available when it is needed or on favorable terms. We anticipate that our current capital resources will satisfy our capital requirements for the foreseeable future under currently effective rules.
Table of Contents 48 We may need to raise additional capital in the future, but that capital may not be available when it is needed or on favorable terms. We anticipate that our current capital resources will satisfy our capital requirements for the foreseeable future under currently effective rules.
Such cyber- attacks may also seek to disrupt the operations of public companies or their business partners, effect unauthorized fund transfers, obtain unauthorized access to confidential information, destroy data, disable or degrade service, or sabotage systems. Hacking and identity theft risks, in particular, could cause serious reputational harm.
Such cyber-attacks may also seek to disrupt the operations of public companies or their business partners, effect unauthorized fund transfers, obtain unauthorized access to confidential information, destroy data, disable or degrade service, or sabotage systems. Any of these, including hacking and identity theft risks, could cause serious reputational harm.
Table of Contents 46 The SBA, the Department of Justice and the bank regulators are investigating various PPP lenders and borrowers with respect to potential fraud or improper activities under the PPP loan programs.
The SBA, the Department of Justice and the bank regulators are investigating various PPP lenders and borrowers with respect to potential fraud or improper activities under the PPP loan programs.
Acquiring other banks, branches, or businesses, as well as other geographic and product expansion activities, involve various risks including: ● risks of unknown or contingent liabilities, and potential asset quality issues; ● unanticipated costs and delays; ● risks that acquired new businesses will not perform consistent with our growth and profitability expectations; ● risks of entering new markets or product areas where we have limited experience; ● risks that growth will strain our infrastructure, staff, internal controls and management, which may require additional personnel, time and expenditures; ● difficulties, expenses and delays of integrating the operations and personnel of acquired institutions; ● potential disruptions to our business; ● possible loss of key employees and customers of acquired institutions; ● potential short-term decreases in profitability; and ● diversion of our management’s time and attention from our existing operations and business.
Acquiring other banks, branches, or businesses, as well as other geographic and product expansion activities, involve various risks including: ● risks of unknown or contingent liabilities, and potential asset quality issues; ● unanticipated costs and delays, including the regulatory application process; ● risks that acquired new businesses will not perform consistently with our growth and profitability expectations; ● risks of entering new markets or product areas where we have limited experience; ● risks that growth will strain our infrastructure, staff, internal controls and management, which may require additional personnel, time and expenditures; ● difficulties, expenses and delays of integrating the operations and personnel of acquired institutions, including the desirability of closing duplicative or overlapping facilities; ● potential disruptions to our business; ● possible loss of key employees and customers of acquired institutions; ● potential short-term decreases in profitability; and ● diversion of our management’s time and attention from our existing operations and business.
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.
The process for estimating expected losses requires difficult, subjective, and complex judgments, including forecasts of economic conditions, unemployment levels in Alabama, and how those economic predictions might affect the ability of our borrowers to repay their loans or the value of assets.
Such enhanced scrutiny is often applied as part of the regulatory examination processes, as well as through a variety of nonpublic supervisory actions such as “matters requiring attention,” board of director resolutions, memoranda of understanding, and other regulatory criticism and informal supervisory actions.
Such enhanced scrutiny is often applied as part of the regulatory examination processes, as well as through a variety of nonpublic supervisory actions such as “matters requiring attention,” board of director resolutions, memoranda of understanding, and other regulatory criticism, and formal, public enforcement actions.
We may need to make significant additional capital investments in technology, including cyber and data security, and we may not be able to effectively implement new technology-driven products and services, or such technology may prove less effective than anticipated.
We may need to make significant additional capital investments in technology, including artificial intelligence, cyber and data security, and we may not be able to effectively implement new technology-driven products and services, or such technology may prove less effective and/or more costly than anticipated.
Adverse changes in the economic conditions of the Southeastern United States in general, or in one or more of our local markets, including the effects of higher market interest rates and inflation, supply chain disruptions, changes in customer behaviors and in the workforce and demand for space since the COVID-19 pandemic, and the timing and magnitude of future inflation and interest rates, could negatively affect our results of operations and our profitability.
Adverse changes in the economic conditions of the Southeastern United States in general, or in one or more of our local markets, including the effects of higher market interest rates and inflation, supply chain disruptions, changes in customer behaviors and in the workforce and demand for space since the COVID-19 pandemic, and the timing and magnitude of future inflation and interest rates, as well as federal healthcare and education funding, could negatively affect our results of operations and our profitability.
Failures of several banks earlier in 2023 and in early 2024 have resulted in increased market volatility for financial service companies’ securities and in changes in regulatory views and emphases that may adversely affect us and may not be disclosable under law.
Failures of several banks in 2023 resulted in increased market volatility for financial service companies’ securities and in changes in regulatory views and emphases that may adversely affect us and may not be disclosable under law.
We do not have any material pending litigation or regulatory matters affecting us. Failures to comply with the fair lending laws, CFPB regulations or the Community Reinvestment Act, or CRA, could adversely affect us.
We do not have any material pending litigation or regulatory matters affecting us at December 31, 2024. Failures to comply with the fair lending laws, CFPB regulations or the Community Reinvestment Act, or CRA, could adversely affect us.
Net interest income will be adversely affected if market interest rates and the interest we pay on deposits and borrowings increases faster than the interest earned on loans and investments.
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.
Increases in market interest rates, inflation and consumer and business confidence may cause changes in customers’ savings and payment behaviors, including potential increases in loan delinquencies and default rates.
Increases in market interest rates and inflation, and adverse changes in consumer and business confidence may change customers’ savings and payment behaviors, including potential increases in loan delinquencies and default rates.
Many larger competitors have substantially greater resources to invest in technological improvements and, increasingly, non-banking firms are using technology to compete with traditional lenders for loans, payments, and other banking services. As a result, our competition from service providers not located in our markets has increased. Table of Contents 39 Operational risks are inherent in our businesses.
Many larger competitors have substantially greater resources to invest in technological improvements and, increasingly, non-banking firms are using technology to compete for loans, payments, and other banking services. As a result, our competition from service providers not located in our markets has increased. Operational risks are inherent in our businesses.
We are allowed to carry -back losses for two years for Federal income tax purposes. As of December 31, 2023, we had a net deferred tax asset of $10.3 million compared to $13.8 million one year earlier.
We are allowed to carry-back losses for two years for Federal income tax purposes. As of December 31, 2024, we had a net deferred tax asset of $10.2 compared to $10.3 million one year earlier.
Inventories of existing homes for sale have remained generally low, and many believe that higher mortgage rates are adversely affecting potential sellers from selling their existing houses and incurring higher mortgage interest rates on their replacement home. These conditions have adversely affected housing affordability and increased monthly mortgage payments.
Inventories of existing homes for sale have remained generally low, and many believe that higher mortgage rates discourage potential sellers from selling their existing houses and incurring higher mortgage costs on replacement homes. These conditions have adversely affected housing affordability and increased monthly mortgage payments.
Table of Contents 44 Our ability to continue to pay dividends to shareholders and repurchase stock in the future is subject to our profitability, capital, liquidity and regulatory requirements and these limitations may prevent or limit future dividends. Cash available to pay dividends to our shareholders is derived primarily from dividends paid to the Company by the Bank.
Our ability to continue to pay dividends to shareholders, repurchase stock and pay discretionary bonuses in the future is subject to our profitability, capital, liquidity and regulatory requirements and these limitations may prevent or limit future dividends. Cash available to pay dividends to our shareholders is derived primarily from dividends paid to the Company by the Bank.
The CECL model incorporates various economic condition elements, where changes in fiscal and monetary policy, as well as market interest rates, could result in more volatility in our provisions for loan losses under CECL, which could adversely affect our net income.
The CECL model incorporates various economic condition factors, where changes in fiscal and monetary policy, as well as market interest rates and unemployment rates in our markets, among other factors, could result in more volatility in our provisions for loan losses under CECL, which could adversely affect our net income.
The Tax Cuts and Jobs Act’s (the “2017 Tax Act”) limitations on the deductibility of residential mortgage interest and state and local property and other taxes and federal moratoria on single-family foreclosures and rental evictions could adversely affect consumer behaviors and the volumes of housing sales, mortgage and home equity loan originations, as well as the value and liquidity of residential property held as collateral by lenders such as the Bank, and the secondary markets for single and multi-family loans.
The Tax Cuts and Jobs Act’s (the “2017 Tax Act”) limitations on the deductibility of residential mortgage interest and state and local property and other taxes often called “SALT,” could adversely affect consumer behaviors and the volumes of housing sales, mortgage and home equity loan originations, as well as the value and liquidity of residential property held as collateral by lenders such as the Bank, and the secondary markets for single and multi-family loans.
As market interest rates have risen, however, we have experienced unrealized losses on such securities, which would become realized losses upon the sale of such securities, and such sales at a loss would reduce our net income and our regulatory capital.
As market interest rates rose prior to Fall 2024, however, we have experienced unrealized losses on such securities, which would become realized losses upon the sale of such securities, and such sales at a loss would reduce our net income and our regulatory capital.
Potential gaps in our risk management policies and internal audit procedures may leave us exposed to unidentified or unanticipated risk, which could negatively affect our business. Our enterprise risk management and internal audit program is designed to mitigate material risks and losses to us.
Table of Contents 44 Potential gaps in our risk management policies and internal audit procedures may leave us exposed to unidentified or unanticipated risk, which could negatively affect our business. Our enterprise risk management and internal audit program are designed to mitigate material risks and losses to us.
Our future success will depend, in part, upon our ability to use technology to provide products and services that meet our customers’ preferences and create additional efficiencies in operations, while avoiding cyber-attacks and disruptions, data breaches and anti-money laundering and other potential violations of law.
Our future success will depend, in part, upon our ability to use technology effectively to provide products and services that meet our customers’ preferences and create additional efficiencies in operations, while avoiding cyber-attacks and disruptions, data breaches, violations of AML/CFT laws, and other potential violations of law.
Also, acquisitions are subject to various regulatory approvals. If we fail to receive the appropriate regulatory approvals, we will not be able to consummate an acquisition that we believe is in our best interests, and regulatory approvals could contain conditions that reduce the anticipated benefits of any transaction.
If we fail to receive the appropriate regulatory approvals, we will not be able to consummate an acquisition that we believe is in our best interests, and regulatory approvals could contain conditions or commitments that reduce the anticipated benefits of any transaction.
Compliance with the volume and complexity of these rule changes is costly and imposes material time and personnel burdens on financial services companies, especially on smaller companies, such as the Company.
Compliance with the volume and complexity of these rule changes, and the potential reversal of various Biden-era rules is costly and imposes material time and personnel burdens on financial services companies, especially on smaller companies, such as the Company.
Increasing litigation on regulatory rules and whether these exceed the agencies’ statutory authority or have been improperly adopted has also created further uncertainty and risks as to the final timing, content and scope of new rules, and business changes needed to be made to comply with the effective or compliance dates of the new or changed rules.
Increasing litigation on regulatory rules and whether these exceed the agencies’ statutory authority or have been improperly adopted, which result from recent court decisions, also creates further uncertainty and risks as to the final timing, content and scope of new rules, and the business changes needed to be made to comply with the effective dates of the new or changed rules.
The banking regulators continue to give CRE lending scrutiny and require banks with higher levels of CRE loans to implement improved underwriting, internal controls, risk management policies and portfolio stress testing, as well as higher levels of allowances for possible losses and capital levels as a result of CRE lending growth and exposures.
The bank regulators continue to scrutinize CRE lending and require banks with elevated CRE under the CRE Guidance, to implement improved underwriting, internal controls, risk management policies and portfolio stress testing, as well as higher levels of allowances for possible losses and capital levels as a result of CRE lending growth and exposures.
Our success depends on the general economic conditions in the geographic markets we serve in Alabama. The local economic conditions in our markets have a significant effect on our commercial, real estate and construction loans, the ability of borrowers to repay these loans and the value of the collateral securing these loans.
Local economic conditions in our markets have a significant effect on our commercial, real estate and construction loans, the ability of borrowers to repay these loans and the value of the collateral securing these loans.
The federal bank regulatory agencies released guidance in 2006 on “Concentrations in Commercial Real Estate Lending.” The guidance defines CRE loans as exposures secured by raw land, land development and construction loans (including 1-4 family residential construction loans), multi-family property, and non-farm non-residential property, where the primary or a significant source of repayment is derived from rental income associated with the property (that is, loans for which 50% or more of the source of repayment comes from third party, non-affiliated, rental income) or the proceeds of the sale, refinancing, or permanent financing of the property.
The CRE Guidance defines CRE loans as exposures secured by raw land, land development and construction loans (including 1-4 family residential construction loans), multi-family property, and non-farm non- residential property, where the primary or a significant source of repayment is derived from rental income associated with the property (that is, loans for which 50% or more of the source of repayment comes from third party, non-affiliated, rental income) or the proceeds of the sale, refinancing, or permanent financing of the property.
Additionally, any prolonged government shutdown 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 customers and therefore our business.
Additionally, any prolonged government shutdown or reductions in force at various governmental and regulatory authorities may inhibit our ability to evaluate the economy, generally, and affect government workers who are not paid during such events, and where the absence of government services and data could adversely affect consumer and business sentiment, our local economy, and business our customers and our business.
Inflation is running at levels unseen in decades and well above the Federal Reserve’s long term inflation goal of 2.0% annually. Beginning in March 2022, the Federal Reserve has been raising target federal funds interest rates and reducing its securities holdings in an effort to reduce inflation.
Inflation began running at levels unseen in decades and well above the Federal Reserve’s long term inflation goal of 2.0% annually. Beginning in March 2022, the Federal Reserve raised its target federal funds interest rates and reduced its securities holdings in an effort to reduce inflation. Inflation subsided in 2024.
Since Fannie Mae and Freddie Mac dominate the residential mortgage markets, any changes in their operations and requirements, as well as their respective restructurings and capital, 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.
Since these GSEs dominate the residential mortgage markets, any changes in their operations and requirements, as well as their respective restructurings and capital and the costs of their borrowings as private institutions, could adversely affect the primary and secondary mortgage markets, and our residential mortgage businesses, our results of operations and the returns on capital deployed in these businesses.
The Federal Reserve may require the Company to commit resources to the Bank, even where it is not otherwise in the interests of the Company or its shareholders or creditors. A limited trading market exists for our common shares, which could result in price volatility.
The Federal Reserve may require the Company to commit resources to the Bank, even where it is not otherwise in the interests of the Company or its shareholders or creditors. Our common stock trades in limited volumes, which could result in price volatility.
Increases in market interest rates tend to decrease mortgage originations, increase MSR values, decrease the value and liquidity of collateral securing loans, and potentially increase net interest spread depending upon the yield curve and the magnitude and duration of interest rate increase, and constrain economic growth.
Increases in market interest rates tend to decrease mortgage originations, increase MSR values, decrease the value and liquidity of collateral securing loans, result in unrealized losses on our investment securities and accumulated other comprehensive losses, and potentially increase net interest spread depending upon the yield curve and the magnitude and duration of interest rate increase, and constrain economic growth, generally.
Fintech and other non-bank competitors also compete for our customers, and may partner with other banks and/or seek to enter the payments system. The failures of other banks with offices in our markets could also lead to the entrance of new, stronger competitors in our markets. Our success depends on local economic conditions.
Out of state banks may branch into our markets. Fintech and other non-bank competitors also compete for our customers, and may partner with other banks and/or seek to enter the payments system. The failures or sales of other banks with offices in our markets could also lead to the entrance of new, stronger competitors in our markets.
Table of Contents 45 Legislative and regulatory changes The Biden Administration and its appointees to the various government agencies, including the bank regulators, CFPB and SEC, have proposed, and continue to propose changes to bank regulation, SEC rules and corporate tax changes that could have an adverse effect on our results of operations and financial condition.
Legislative and regulatory changes generally The Biden Administration and its heads of various government agencies, including the bank regulators, CFPB and SEC, implemented numerous changes to bank and other regulation, SEC rules and corporate tax changes that could have an adverse effect on our results of operations and financial condition.
In July 2023, the SEC adopted rules, effective September 5, 2023, that require reporting companies to disclose material cybersecurity incidents they experience on SEC Form 8-K within four business days, nature, scope, and timing of the incident, and the material impact or reasonably likely material impact on the registrant, including its financial condition and results of operations.
The SEC adopted rules, effective June 15, 2024 for smaller reporting companies, such as the Company, which require reporting companies to disclose material cybersecurity incidents they experience on SEC Form 8-K within four business days, including the nature, scope, and timing of the incident, and the material impact or reasonably likely material impact on the registrant, including its financial condition and results of operations.
Even if we ultimately prevail in litigation, regulatory investigation or action, our ability to attract new customers, retain our current customers and recruit and retain employees could be materially and adversely affected. Regulatory inquiries and litigation may also adversely affect the prices or volatility of our securities specifically, or the securities of our industry, generally.
Even if we ultimately prevail in such proceedings, our ability to attract new customers, retain our current customers and recruit and retain employees could be materially and adversely affected. Regulatory inquiries and proceedings may also adversely affect the prices, volatility or outlook for our common stock or other securities specifically, or bank securities, generally.
Certain borrowers and their businesses and real estate and commercial projects and businesses may be adversely affected by inflation and higher interest rates, and economic slowdowns arising from tighter monetary policies, and may request or need loan modifications and deferrals. Various businesses will be unable to fully pass on increased costs due to inflation, and their profits may shrink.
Certain borrowers and their businesses and real estate and commercial projects and businesses may be adversely affected by inflation and higher interest rates, and economic slowdowns arising from tighter monetary policies, and may request or need loan modifications and deferrals.
Traditionally, we have obtained funds principally through local deposits and borrowings from other institutional lenders such as the FHLB- Atlanta, which we believe are a cheaper and more stable source of funds than borrowings, generally. Increases in interest rates have caused consumers to shift their funds to more interest-bearing instruments and to increase the competition for and costs of deposits.
We believe deposits are a cheaper and more stable source of funds than other borrowings, generally. Increases in interest rates have caused consumers to shift their funds to more interest- bearing instruments and to increase the competition for and costs of deposits.
Even though we have maintained an “satisfactory” CRA rating since 2000, we cannot predict our future CRA ratings. Violations of fair lending laws or if our CRA rating falls to less than “satisfactory” could adversely affect our business, including expansion through branching or acquisitions. The Federal Reserve adopted comprehensive revisions to its CRA regulations on October 24, 2023.
Even though we have maintained a “satisfactory” CRA rating since 2000, we cannot predict our future CRA ratings. Violations of fair lending laws or if our CRA rating falls to less than “satisfactory” could adversely affect our business, including expansion through branching or acquisitions.
Our future success is dependent on our ability to compete effectively in highly competitive markets. The East Alabama banking markets which we operate are highly competitive and our future growth and success will depend on our ability to compete effectively in these markets.
Our future success is dependent on our ability to compete effectively in highly competitive markets. The East Alabama banking markets where we operate are highly competitive and our future growth and success will depend on our ability to compete effectively in these markets. This MSA is served by 19 banks, 10 of which are headquartered outside of Alabama.
We cannot be certain that our allowance for loan losses will be adequate over time to cover credit losses in our portfolio because of unanticipated adverse changes in the economy, including the continuing effects of the pandemic and fiscal and monetary response to COVID-19 and the shift beginning in March 2022 from an extraordinarily expansionary monetary policies to a tightening monetary policy to fight inflation, market conditions or events adversely affecting specific customers, industries or markets, including disruptions of supply chains and the war in Ukraine, and changes in borrower behaviors.
We cannot be certain that our allowance for loan losses will be adequate over time to cover credit losses in our portfolio because of unanticipated adverse changes in the economy, including fiscal and monetary policy changes, inflation, market conditions or events adversely affecting specific customers, industries or markets, including disruptions of supply chains, the war in Ukraine, changes in taxes and regulations and changes in borrower behaviors.
While we seek continued organic growth, including loan growth, we also may consider the acquisition of other businesses. We expect that other banking and financial companies, many of which have significantly greater resources, will compete with us to acquire financial services businesses. This competition could increase prices for potential acquisitions that we believe are attractive.
We expect that other banking and financial companies, many of which have significantly greater resources, will compete with us to acquire financial services businesses. This competition could increase prices for potential acquisitions that we believe are attractive. Also, acquisitions are subject to various regulatory approvals.
Sales of securities with unrealized losses would result in realized losses for GAAP, regulatory capital and tax purposes. Increases in interest rates may also change depositor behaviors as customers seek higher yielding deposits. This may adversely affect our costs of funds, growth, net interest income and net income, and may also adversely affect our liquidity.
Although these unrealized losses do not adversely affect our regulatory capital, these do reduce our reported income and GAAP tangible stockholders’ equity. Sales of securities with unrealized losses would result in realized losses for GAAP, regulatory capital and tax purposes. Increases in interest rates may also change depositor behaviors as customers seek higher yielding deposits.
Commercial real estate, or CRE, is cyclical and poses risks of possible loss due to concentration levels and the risks of the assets being financed, which include loans for the acquisition and development of land and residential construction.
Commercial real estate, or CRE, is cyclical and poses risks of possible loss due to concentration levels and the risks of the assets being financed, which include loans for the acquisition and development of land and residential construction. The federal bank regulatory agencies’ issued guidance on “Concentrations in Commercial Real Estate Lending” in 2006 (the “CRE Guidance”).
The COVID-19 pandemic and increased remote work has accelerated electronic banking activity and the need for increased operational efficiencies and data security.
Remote work has accelerated electronic banking activity and the need for increased operational efficiencies and data security in our electronic and mobile banking services.
These could have a material adverse effect on our business, financial condition and results of operations. See Item 1C. of this report for more information about cybersecurity and our management and strategies. Our information systems may experience interruptions and security brea ches.
These could have a material adverse effect on our business, financial condition and results of operations. See Item 1C. of this report for more information about cybersecurity and our management and strategies. Our information systems may experience interruptions and security breaches. We rely heavily on communications and information systems, including those of third-party service providers, to conduct our business.
These changes, together with any exposures other institutions may have to crypto or digital assets, or cybersecurity and data breaches, could cause disruption and unexpected changes in the industry.
Pulte’s views on Federal Home Loan Bank lending to banks are unknown. These changes, together with any exposures that other institutions may have to crypto or digital assets, or cybersecurity and data breaches, could cause disruption and unexpected changes in the industry.
Excluding owner occupied commercial real estate, we had 39.6% of our loan por tfolio in CRE loans at year-end 2023 compared to 40.4% and 42.6% at year-end 2022 and 2021, respectively.
Excluding owner occupied commercial real estate, we had 42% of our loan portfolio in CRE loans at year-end 2024 compared to 40% at year-end 2023.

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Item 1C. Cybersecurity

Cybersecurity — threats and controls disclosure

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Biggest changeAccordingly, 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 of the Board that is responsible for security administration, including conducting regular assessments of our information systems, existing controls, vulnerabilities and potential improvements; • Implementing layers of controls and not allowing excessive reliance on any single control; • Employing a variety of preventative and detective tools designed to monitor, block and provide alerts regarding suspicious activity; • Continuously evaluating tools that can detect and help respond to cybersecurity threats in real-time; • Leveraging people, processes and technology to manage and maintain cybersecurity controls; Table of Contents 49 • Maintaining a vendor management program with periodic review processes, 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 levels based on the risk they pose to the Bank; • Engaging third-party cybersecurity consultants, who conduct periodic penetration testing, vulnerability assessments and other procedures to identify potential weaknesses in our systems and processes; and • Conducting periodic cybersecurity training for our employees and the Company’s board of directors.
Biggest changeAccordingly, we have devoted significant resources to assessing, identifying and managing risks associated with cybersecurity threats, including: • Implementing an Information Security Program that establishes policies and procedures for security operations and governance; • Establishing an IT Steering Committee that includes participation by directors that is responsible for security administration, including reviewing assessments of our information systems, existing controls, vulnerabilities and potential improvements; • Implementing layers of controls and not allowing excessive reliance on any single control; • Employing a variety of preventative and detective tools designed to monitor, block and provide alerts regarding suspicious activity; • Continuously evaluating tools that can detect and help respond to cybersecurity threats in real-time; • Leveraging people, processes and technology to manage and maintain cybersecurity controls; • Maintaining a vendor management program with pre-engagement and periodic review processes thereafter, and a third-party risk management program designed to identify, assess and manage risks associated with external service providers; Table of Contents 54 • Monitoring our systems and related software and programming periodically to update software and programing, including updating data protection elements, and requiring that our service providers also engage in similar programs that are reasonably designed to deter cybersecurity breaches; • Performing initial and ongoing due diligence with respect to our third-party service providers, including their cybersecurity practices and safeguards, and service level standards based on the risk they pose to the Bank; • Engaging third-party cybersecurity consultants, who conduct periodic penetration testing, vulnerability assessments and other procedures to identify potential weaknesses in our systems and processes; and • Conducting periodic cybersecurity training for our employees and the Company’s board of directors.
From time-to-time, we have identified cybersecurity threats that require us to make changes to our processes, equipment and to implement additional safeguards.
From time-to-time, we have identified cybersecurity threats that require us to make changes to our processes and equipment and to implement additional safeguards.
The IT Steering Committee is comprised of directors and officers with the appropriate expertise and authority to oversee the Information Security Program. 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 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.
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 ensuring that the risk management processes designed and implemented by management are adequate and functioning as designed.
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.
In addition, the Company’s Board, both as a whole and through its IT Steering Committee is responsible for the oversight of risk management, including cybersecurity risks.
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.
The Board reviews and approves an information security program, vendor management policy (incl uding third-party service providers), acceptable use policy, incident response policy and business continuity planning policy on an annual basis. All the aforementioned policies are developed and implemented by Company management.
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.
Any of these systems can be compromised, including by employees, customers and other individuals who are authorized to use them, and bad actors using sophisticated and a constantly evolving set of software, tools and strategies to do so.
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.

Item 2. Properties

Properties — owned and leased real estate

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Biggest changeThis 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 Bank’s Notasulga branch was opened in August 2001. This branch is located in Notasulga, Alabama, about 15 miles west of Auburn, Alabama.
Biggest changeThe 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.
Table of Contents 50 The Bank owns its main campus in downtown Auburn, Alabama, which comprises over 4 acres and includes the newly constructed AuburnBank Center, which was completed in May 2022 and had its grand opening in June 2022. The AuburnBank Center has approximately 90,000 square feet of space.
Table of Contents 55 The Bank owns its main campus in downtown Auburn, Alabama, which comprises over 4 acres and includes the newly constructed AuburnBank Center, which was completed in May 2022 and had its grand opening in June 2022. The AuburnBank Center has approximately 90,000 square feet of space.
This drive-through facility has five drive-through lanes, including an ATM, and a walk-up teller window. The Bank has approximately 46,000 square feet of office space and approximately 5,000 square feet of retail space in the new AuburnBank Center building available for lease to third party tenants.
This drive-through facility has five drive-through lanes, including an ATM, and a walk-up teller window. The Bank has approximately 46,000 square feet of Class A office space and approximately 5,000 square feet of retail space in the new AuburnBank Center building available for lease to third party tenants, of which approximately 21,000 square feet is currently leased and occupied.
The 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. Table of Contents 51 In addition to the eight ATMs at various branch locations, mentioned above, the Bank also has four ATMs located at various locations within our primary service area.
The Tiger Town branch offers the full line of the Bank’s services and has drive-through windows and an ATM. This branch offers parking for approximately 36 vehicles. In addition to the seven ATMs at various branch locations, the Bank also has three ATMs located at various locations within our primary service area.
ITEM 2. DESCRIPTION OF PROPERTY The Bank conducts its business from its main office and seven full-service branches. The Bank also operates a loan production office in Phenix City, Alabama.
ITEM 2. DESCRIPTION OF PROPERTY The Bank conducts its business from its main office, seven full-service branches, and a loan production office.
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 2022, the Bank’s land lease renewed for another one year term.
This branch is located in Notasulga, Alabama, about 15 miles west of Auburn, Alabama. This branch is owned by the Bank and has approximately 1,344 square feet of space. The Bank leased the land for this branch from a third party. In May 2024, the Bank’s land lease renewe d for another one-year term.
In November 2022, 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.
In November 2023, the Bank renewed its lease for another 2 years. In February 2009, the Bank opened a branch located on Bent Creek Road in Auburn, Alabama. This branch is owned by the Bank and has approximately 4,000 square feet of space.
This branch offers 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 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.
In September 2018, the Bank opened a loan production office on East Samford Avenue in Auburn, Alabama. The location has approximately 2,500 square feet of space and is leased through 2028. This loan production office was relocated to the newly developed AuburnBank Center in June 2022.
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.
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.
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.
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In February 2022, the Company entered into an agreement to sell a parcel of approximately 0.85 acres to a hotel developer. As part of the agreement, the Bank negotiated a long-term lease with the hotel developer for 100 to 150 parking spaces in the Bank’s parking deck.
Added
Prior to December 2011, the Bank had operated a loan production office in Valley, which was originally opened in September 2004. In February 2015, the Bank relocated its branch in the Auburn Kroger store to a new leased location within the Corner Village Shopping Center in Auburn.
Removed
In October 2022, the Company closed the sale at the agreed upon price of $4.3 million, and recognized a $3.2 million gain. 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.
Added
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.
Removed
In February 2015, the Bank relocated its Auburn Kroger branch to a new location within the Corner Village Shopping Center, in Auburn, Alabama. In February 2015, the Bank entered into a new lease agreement for five years with options for two 5-year extensions. In February 2020, the Bank exercised its option to renew the lease for another five years.
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The sublessee has an option exercisable by September 2025 to renew the sublease for the remaining term of the Bank’s lease ending in 2028. Table of Contents 56
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The Bank leases approximately 1,500 square feet of space for the Corner Village branch. Prior to relocation, the Bank’s Auburn Kroger branch was located in the Kroger supermarket in the same shopping center since August 1988.
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The current Corner Village branch offers the full line of the Bank’s deposit and other services including an ATM, but does not maintain safe deposit boxes.
Removed
The Company entered into a three year sublease agreement, during 2022, with a tenant, which has an option to renew that lease for three additional years.

Item 4. Mine Safety Disclosures

Mine Safety Disclosures — required of mining issuers

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Biggest changeITEM 4. MINE SAFETY DISCLOSURES 51 PART II ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES 51 ITEM 6. SELECTED FINANCIAL DATA 54 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 54 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 82 ITEM 8.
Biggest changeITEM 4. MINE SAFETY DISCLOSURES 56 PART II ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES 56 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 58 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 83 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 83

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeSee “Supervision and Regulation – Payment of Dividends” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Capital Adequacy” and “Risk Factors - Our ability to continue to pay dividends to shareholders and repurchase stock in the future is subject to our profitability, capital, liquidity and regulatory requirements and these limitations may prevent or limit future dividends.” Table of Contents 53 Performance Graph The following performance graph compares the cumulative, total return on the Company’s Common Stock from December 31, 2018 to December 31, 2023, with that of the Nasdaq Composite Index and S&P U.S.
Biggest changeSee “Supervision and Regulation –Dividends and Distributions” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Capital Adequacy” and “Risk Factors - Our ability to continue to pay dividends to shareholders and repurchase stock in the future is subject to our profitability, capital, liquidity and regulatory requirements and these limitations may prevent or limit future dividends.” Issuer Purchases of Equity Securities Not applicable.
The need to maintain adequate capital and liquidity in the Bank also limits the dividends that may be paid to the Company. The Bank and the Company can only pay dividends, repurchase stock and pay discretionary bonuses, if our capital conservation buffer exceeds 2.5% and from our eligible retained income over the last four calendar quarters.
The need to maintain adequate capital and liquidity in the Bank also limits the dividends that may be paid to the Company. The Bank and the Company can only pay dividends, repurchase stock and pay discretionary bonuses, if our capital conservation buffer of CET1 capital exceeds 2.5% and from our eligible retained income over the last four calendar quarters.
The Board currently intends to continue its present dividend policies. Table of Contents 52 The amount of dividends payable by the Bank is limited by law and regulation. The Company relies upon dividends from the Bank to pay Company expenses and to pay dividends on Company common stock.
The Board currently intends to continue its present dividend policies. Table of Contents 57 The amount of dividends payable by the Bank is limited by law and regulation. The Company relies upon dividends from the Bank to pay Company expenses and to pay dividends on Company common stock.
The amount and frequency of cash dividends is determined in the judgment of the Board based upon a number of factors, including the Company’s earnings, financial condition, liquidity, capital and regulatory requirements and other relevant factors and the availability of dividend payable by the Bank consistent with amounts available therefore, including the Bank’s earnings, financial condition, liquidity, regulatory and capital requirements and other relevant factors.
The amount and frequency of cash dividends is determined in the judgment of the Board based upon a number of factors, including the Company’s earnings, financial condition, liquidity, capital and regulatory requirements and other relevant factors and the availability of dividends payable by the Bank consistent with amounts available therefore, including the Bank’s earnings, financial condition, liquidity, regula tory and capital requirements and other relevant factors.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES The Company’s Common Stock is listed on the Nasdaq Global Market, under the symbol “AUBN”. As of March 13, 2024, there were approximately 3,493,674 shares of the Company’s Common Stock issued and outstanding, which were held by approximately 343 shareholders of record.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES The Company’s Common Stock is listed on the Nasdaq Global Market, under the symbol “AUBN”. As of March 10, 2025, there were approximately 3,493,699 shares of the Company’s Common Stock issued and outstanding, which were held by approximately 330 shareholders of record.
Closing Cash Price Dividends Per Share (1) Declared High Low 2023 First Quarter $ 24.50 $ 22.55 $ 0.27 Second Quarter 24.32 18.80 0.27 Third Quarter 22.80 20.85 0.27 Fourth Quarter 21.99 19.72 0.27 2022 First Quarter $ 34.49 $ 31.75 $ 0.265 Second Quarter 33.57 27.04 0.265 Third Quarter 29.02 23.02 0.265 Fourth Quarter 24.71 22.07 0.265 (1) The price information represents actual transactions.
Closing Cash Price Dividends Per Share (1) Declared High Low 2024 First Quarter $ 21.55 $ 18.82 $ 0.27 Second Quarter 19.25 16.63 0.27 Third Quarter 24.35 17.50 0.27 Fourth Quarter 24.57 20.06 0.27 2023 First Quarter $ 24.50 $ 22.55 $ 0.27 Second Quarter 24.32 18.80 0.27 Third Quarter 22.80 20.85 0.27 Fourth Quarter 21.99 19.72 0.27 (1) The price information represents actual transactions.
Federal Reserve policy could restrict future dividends on our Common Stock, depending on our earnings and capital position, risks and likely needs.
Federal Reserve policy could restrict future dividends from the Bank or on Company Common Stock, depending on our earnings and capital position, risks and likely needs. The Alabama Banking Code also limits dividends payable by the Bank.
Removed
BMI Banks – Southeast Region Index (assuming a $100 investment on December 31, 2018). Cumulative total return represents the change in stock price and the amount of dividends received over the indicated period, assuming the reinvestment of dividends.
Removed
Period Ending Index 12/31/2018 12/31/2019 12/30/2020 12/30/2021 12/31/2022 12/31/2023 Auburn National Bancorporation, Inc. 100.00 171.98 138.22 110.10 81.48 79.19 NASDAQ Composite Index 100.00 136.69 198.10 242.03 163.28 236.17 S&P U.S.
Removed
BMI Banks - Southeast Region Index 100.00 140.94 126.37 180.49 146.81 151.44 Table of Contents 54 Issuer Purchases of Equity Securities Period Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs The Approximate Dollar Value of Shares that May Yet Be Under the Plans or Programs October 1 – October 31, 2023 –– –– –– 4,386,264 November 1 – November 30, 2023 –– –– –– 4,386,264 December 1 – December 31, 2023 –– –– –– 4,386,264 Total –– –– –– 4,386,264 On April 12, 2022, the Board of Directors of Auburn National Bancorporation, Inc.
Removed
(the "Company") announced that its Board of Directors had approved a new stock repurchase program to replace the repurchase program that expired on March 31, 2022.
Removed
The new program authorized the repurchase, from time to time, of up to $5 million of the Company’s issued and outstanding common stock through the earliest of (i) the expenditure of $5 million on Share repurchases, (ii) the termination or replacement of the Repurchase Plan and (iii) April 15, 2024.
Removed
The stock repurchases may be open-market or private purchases, negotiated transactions, block purchases, and otherwise. Securities Authorized for Issuance Under Equity Compensation Plans See the information included under Part III, Item 12, which is incorporated in response to this item by reference. Unregistered Sale of Equity Securities Not applicable.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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Biggest changeYear ended December 31 (In thousands) 2023 2022 2021 2020 2019 Net interest income (GAAP) $ 26,328 27,166 23,990 24,338 26,064 Tax-equivalent adjustment 417 456 470 492 557 Net interest income (Tax-equivalent) $ 26,745 27,622 24,460 24,830 26,621 Table of Contents 74 Table 2 - Selected Financial Data Year ended December 31 (Dollars in thousands, except per share amounts) 2023 2022 2021 2020 2019 Income statement Tax-equivalent interest income (a) $ 34,791 30,001 26,977 28,686 30,804 Total interest expense 8,046 2,379 2,517 3,856 4,183 Tax equivalent net interest income (a) 26,745 27,622 24,460 24,830 26,621 Provision for credit losses 135 1,000 (600) 1,100 (250) Total noninterest income (2,981) 6,506 4,288 5,375 5,494 Total noninterest expense 22,594 19,823 19,433 19,554 19,697 Net earnings before income taxes and tax-equivalent adjustment 1,035 13,305 9,915 9,551 12,668 Tax-equivalent adjustment 417 456 470 492 557 Income tax expense (777) 2,503 1,406 1,605 2,370 Net earnings $ 1,395 10,346 8,039 7,454 9,741 Per share data: Basic and diluted net earnings $ 0.40 2.95 2.27 2.09 2.72 Cash dividends declared $ 1.08 1.06 1.04 1.02 1.00 Weighted average shares outstanding Basic and diluted 3,498,030 3,510,869 3,545,310 3,566,207 3,581,476 Shares outstanding 3,493,614 3,503,452 3,520,485 3,566,276 3,566,146 Stockholders' equity (book value) $ 21.90 19.42 29.46 30.20 27.57 Common stock price High $ 24.50 34.49 48.00 63.40 53.90 Low 18.80 22.07 31.32 24.11 30.61 Period-end $ 21.28 23.00 32.30 42.29 53.00 To earnings ratio 53.20 x 7.80 14.23 20.23 19.49 To book value 97 % 118 110 140 192 Performance ratios: Return on average equity 2.05 % 12.48 7.54 7.12 10.35 Return on average assets 0.14 % 0.96 0.78 0.83 1.18 Dividend payout ratio 270.00 % 35.93 45.81 48.80 36.76 Average equity to average assets 6.66 % 7.72 10.39 11.63 11.39 Asset Quality: Allowance for credit losses as a % of: Loans 1.23 % 1.14 1.08 1.22 0.95 Nonperforming loans 753 % 211 1,112 1,052 2,345 Nonperforming assets as a % of: Loans and other real estate owned 0.16 % 0.54 0.18 0.12 0.04 Total assets 0.09 % 0.27 0.07 0.06 0.02 Nonperforming loans as % of loans 0.16 % 0.54 0.10 0.12 0.04 Net charge-offs (recoveries) as a % of average loans 0.01 % 0.04 0.02 (0.03) 0.03 Capital Adequacy (c): CET 1 risk-based capital ratio 14.52 % 15.39 16.23 17.27 17.28 Tier 1 risk-based capital ratio 14.52 % 15.39 16.23 17.27 17.28 Total risk-based capital ratio 15.52 % 16.25 17.06 18.31 18.12 Tier 1 leverage ratio 9.72 % 10.01 9.35 10.32 11.23 Other financial data: Net interest margin (a) 2.89 % 2.81 2.55 2.92 3.43 Effective income tax rate (125.73) % 19.48 14.89 17.72 19.57 Efficiency ratio (b) 95.08 % 58.08 67.60 64.74 61.33 Selected period end balances: Securities $ 270,910 405,304 421,891 335,177 235,902 Loans, net of unearned income 557,294 504,458 458,364 461,700 460,901 Allowance for credit losses 6,863 5,765 4,939 5,618 4,386 Total assets 975,255 1,023,888 1,105,150 956,597 828,570 Total deposits 896,243 950,337 994,243 839,792 724,152 Total stockholders’ equity 76,507 68,041 103,726 107,689 98,328 (a) Tax-equivalent.
Biggest changeYear ended December 31 (In thousands) 2024 2023 2022 2021 2020 Net interest income (GAAP) $ 27,125 26,328 27,166 23,990 24,338 Tax-equivalent adjustment 79 417 456 470 492 Net interest income (Tax-equivalent) $ 27,204 26,745 27,622 24,460 24,830 Table of Contents 76 Table 2 - Selected Financial Data Year ended December 31 (Dollars in thousands, except per share amounts) 2024 2023 2022 2021 2020 Income statement Tax-equivalent interest income (a) $ 38,811 34,791 30,001 26,977 28,686 Total interest expense 11,607 8,046 2,379 2,517 3,856 Tax equivalent net interest income (a) 27,204 26,745 27,622 24,460 24,830 Provision for credit losses 36 135 1,000 (600) 1,100 Total noninterest income 3,474 (2,981) 6,506 4,288 5,375 Total noninterest expense 22,166 22,594 19,823 19,433 19,554 Net earnings before income taxes and tax-equivalent adjustment 8,476 1,035 13,305 9,915 9,551 Tax-equivalent adjustment 79 417 456 470 492 Income tax expense 2,000 (777) 2,503 1,406 1,605 Net earnings $ 6,397 1,395 10,346 8,039 7,454 Per share data: Basic and diluted net earnings $ 1.83 0.40 2.95 2.27 2.09 Cash dividends declared $ 1.08 1.08 1.06 1.04 1.02 Weighted average shares outstanding Basic and diluted 3,493,690 3,498,030 3,510,869 3,545,310 3,566,207 Shares outstanding 3,493,699 3,493,614 3,503,452 3,520,485 3,566,276 Stockholders' equity (book value) $ 22.41 21.90 19.42 29.46 30.20 Common stock price High $ 24.57 24.50 34.49 48.00 63.40 Low 16.63 18.80 22.07 31.32 24.11 Period-end $ 23.49 21.28 23.00 32.30 42.29 To earnings ratio (d) 12.84 x 53.20 7.80 14.23 20.23 To book value 105 % 97 118 110 140 Performance ratios: Return on average equity 8.21 % 2.05 12.48 7.54 7.12 Return on average assets 0.65 % 0.14 0.96 0.78 0.83 Dividend payout ratio 59.02 % 270.00 35.93 45.81 48.80 Average equity to average assets 7.93 % 6.66 7.72 10.39 11.63 Asset Quality: Allowance for credit losses as a % of: Loans 1.22 % 1.23 1.14 1.08 1.22 Nonperforming loans 1,366 % 753 211 1,112 1,052 Nonperforming assets as a % of: Loans and other real estate owned 0.09 % 0.16 0.54 0.18 0.12 Total assets 0.05 % 0.09 0.27 0.07 0.06 Nonperforming loans as % of loans 0.09 % 0.16 0.54 0.10 0.12 Net charge-offs (recoveries) as a % of average loans — % 0.01 0.04 0.02 (0.03) Capital Adequacy (c): CET 1 risk-based capital ratio 14.80 % 14.52 15.39 16.23 17.27 Tier 1 risk-based capital ratio 14.80 % 14.52 15.39 16.23 17.27 Total risk-based capital ratio 15.81 % 15.52 16.25 17.06 18.31 Tier 1 leverage ratio 10.49 % 9.72 10.01 9.35 10.32 Other financial data: Net interest margin (a) 3.06 % 2.89 2.81 2.55 2.92 Effective income tax rate 23.82 % (125.73) 19.48 14.89 17.72 Efficiency ratio (b) 72.25 % 95.08 58.08 67.60 64.74 Selected period end balances: Securities $ 243,012 270,910 405,304 421,891 335,177 Loans, net of unearned income 564,017 557,294 504,458 458,364 461,700 Allowance for credit losses 6,871 6,863 5,765 4,939 5,618 Total assets 977,324 975,255 1,023,888 1,105,150 956,597 Total deposits 895,824 896,243 950,337 994,243 839,792 Total stockholders’ equity 78,292 76,507 68,041 103,726 107,689 (a) Tax-equivalent.
Provision for credit losses 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, most notably, the anticipated unemployment rate, which may be affected by monetary policy.
Provision for credit losses expense is affected by growth in our loan portfolio, our internal assessment of the credit quality of the loan portfolio, our expectations about future economic conditions and net charge-offs. Our CECL model is largely influenced by economic factors including, most notably, the anticipated unemployment rate, which may be affected by monetary policy.
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, 2023, reasonable and supportable periods of 4 quarters were utilized followed by an 8 quarter straight line reversion period to long term averages.
Losses are predicted over a period of time determined to be reasonable and supportable, and at the end of the reasonable and supportable period losses are reverted to long term historical averages. At December 31, 2024 and 2023, reasonable and supportable periods of 4 quarters were utilized followed by an 8 quarter straight line reversion period to long term averages.
Table of Contents 73 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.
Table of Contents 75 Table 1 – Explanation of Non-GAAP Financial Measures In addition to results presented in accordance with GAAP, this annual report on Form 10-K includes certain designated net interest income amounts presented on a tax-equivalent basis, a non-GAAP financial measure, including the presentation of total revenue and the calculation of the efficiency ratio.
From time to time, the Company may enter into interest rate swaps (“swaps”) to facilitate customer transactions and meet their financing needs. These swaps qualify as derivatives, but are not designated as hedging instruments. At December 31, 2023 and 2022, the Company had no derivative contracts to assist in managing interest rate sensitivity.
From time to time, the Company may enter into interest rate swaps (“swaps”) to facilitate customer transactions and meet their financing needs. These swaps qualify as derivatives, but are not designated as hedging instruments. At December 31, 2024 and 2023, the Company had no derivative contracts to assist in managing interest rate sensitivity.
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, 2023.
Based upon the level of taxable income over the last three years and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that we will realize the benefits of these deductible differences at December 31, 2024.
As of December 31, 2023, 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.
As of December 31, 2024, we believe that this exposure is not material due to the historical level of repurchase requests and loss trends, the results of our quality control reviews, and the fact that 99% of our residential mortgage loans serviced for Fannie Mae were current as of such date.
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 affect our noninterest expenses.
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.
The Company was not required to repurchase any loans during 2023 and 2022 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, 2023.
The Company was not required to repurchase any loans during 2024 and 2023 as a result of representation and warranty provisions contained in the Company’s sale agreements with Fannie Mae, and had no pending repurchase or make -whole requests at December 31, 2024.
Banking regulations limit a bank’s credit exposure by prohibiting unsecured loan relationships that exceed 10% of its capital; or 20% of capital, if loans in excess of 10% of capital are fully secured. Under these regulations, we are prohibited from having secured loan relationships in excess of approximately $22.2 million.
Banking regulations limit a bank’s credit exposure by prohibiting unsecured loan relationships that exceed 10% of its capital; or 20% of capital, if loans in excess of 10% of capital are fully secured. Under these regulations, we are prohibited from having secured loan relationships in excess of approximately $22.7 million.
Table of Contents 72 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.
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.
The specific economic and credit risks associated with our loan portfolio include, but are not limited to, the effects of current economic conditions, including inflation and the continuing higher levels of market interest rates, remaining COVID-19 pandemic effects including supply chain disruptions, commercial office occupancy levels, housing supply shortages and inflation, on our borrowers’ cash flows, real estate market sales volumes and liquidity, valuations used in making loans and evaluating collateral, availability and cost of financing properties, real estate industry concentrations, competitive pressures from a wide range of other lenders, deterioration in certain credits, interest rate fluctuations, reduced collateral values or non-existent collateral, title defects, inaccurate appraisals, financial deterioration of borrowers, fraud, and any violation of applicable laws and regulations.
The specific economic and credit risks associated with our loan portfolio include, but are not limited to, the effects of current economic conditions, including the levels of market interest rates, supply chain disruptions, commercial office occupancy levels, housing supply shortages, and effects of inflation on our borrowers’ cash flows, real estate market sales volumes and liquidity, valuations used in making loans and evaluating collateral, availability and cost of financing properties, real estate industry concentrations, competitive pressures from a wide range of other lenders, deterioration in certain credits, interest rate fluctuations, reduced collateral values or non-existent collateral, title defects, inaccurate appraisals, financial deterioration of borrowers, fraud, and any violation of applicable laws and regulations.
Table of Contents 69 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, 2023.
To help limit interest rate risk, we have stated policy guidelines for an instantaneous basis point change in interest rates, such that our EVE should not decrease from our base case by more than the following: 35% for an instantaneous change of +/- 400 basis points 30% for an instantaneous change of +/- 300 basis points 25% for an instantaneous change of +/- 200 basis points 15% for an instantaneous change of +/- 100 basis points The following table reports the variance of EVE assuming an immediate change in interest rates up or down when compared to the baseline EVE at December 31, 2024.
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 2023 and 2022.
An increase in mortgage interest rates typically results in an increase in the fair value of the MSRs while a decrease in mortgage interest rates typically results in a decrease in the fair value of MSRs. The following table presents a breakdown of the Company’s mortgage lending income for 2024 and 2023.
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, 2023.
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 Table of Contents 70 The following table reports the variance of net interest income over the next 12 months assuming a gradual change in interest rates up or down when compared to the baseline net interest income forecast at December 31, 2024.
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. Table of Contents 70 Liquidity is managed at two levels. The first is the liquidity of the Company.
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 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.
Table of Contents 73 The agreement under which we act as servicer generally specifies our standards of responsibility for actions taken by us in such capacity and provides protection against expenses and liabilities incurred by us when acting in compliance with the respective servicing agreements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is a discussion of our financial condition at December 31, 2023 and 2022 and our results of operations for the years ended December 31, 2023 and 2022.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is a discussion of our financial condition at December 31, 2024 and 2023 and our results of operations for the years ended December 31, 2024 and 2023.
Loan concentrations to borrowers in the following classes exceeded 25% of the Bank’s total risk- based capital at December 31, 2023 (and related balances at December 31, 2022).
Loan concentrations to borrowers in the following classes exceeded 25% of the Bank’s total risk- based capital at December 31, 2024 (and related balances at December 31, 2023).
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.
Table of Contents 71 Each of the above analyses may not, on its own, be an accurate indicator of how our net interest income will be affected by changes in interest rates. Income associated with interest-earning assets and costs associated with interest-bearing liabilities may not be affected uniformly by changes in interest rates.
Furthermore, we have an internal limit for aggregate credit exposure (loans outstanding plus unfunded commitments) to a single borrower of $20.0 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, 2023, the Bank had one loan relationship exceeding our internal limit.
Furthermore, we have an internal limit for aggregate credit exposure (loans outstanding plus unfunded commitments) to a single borrower of $20.4 million. Our loan policy requires that the Loan Committee of the Board of Directors approve any loan relationships that exceed this internal limit. At December 31, 2024, the Bank had one loan relationship exceeding our internal limit.
There were no loans 90 days past due and still accruing interest at December 31, 2023 and 2022, respectively. The Company had no OREO at December 31, 2023 and 2022, respectively.
There were no loans 90 days past due and still accruing interest at December 31, 2024 and 2023, respectively. The Company had no OREO at December 31, 2024 and 2023, respectively.
Under the CECL methodology the allowance for credit losses is measured on a collective basis for pools of loans with similar risk characteristics, and for loans that do not share similar risk characteristics with the collectively evaluated pools, evaluations are performed on an individual basis.
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.
These ratios exceed the minimum regulatory capital percentages of 5.0% for tier 1 leverage ratio, 6.5% for CET1 risk-based capital ratio, 8.0% for tier 1 risk-based capital ratio, and 10.0% for total risk-based capital ratio to be considered “well capitalized.” The Bank’s capital conservation buffer was 7.52% at December 31, 2023.
These ratios exceed the minimum regulatory capital percentages of 5.0% for tier 1 leverage ratio, 6.5% for CET1 risk-based capital ratio, 8.0% for tier 1 risk-based capital ratio, and 10.0% for total risk-based capital ratio to be considered “well capitalized.” The Bank’s capital conservation buffer was 7.81% at December 31, 2024.
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 4.76% in 2023 and 4.45% in 2022.
The Company’s residential real estate mortgage portfolio does not include any option ARM loans, subprime loans, or any material amount of other consumer mortgage products which are generally viewed as high risk. The average yield earned on loans and loans held for sale was 5.23% in 2024 and 4.76% in 2023.
Within the residential real estate portfolio segment, the Company had junior lien mortgages of approximately $8.7 million, or 2%, and $7.4 million, or 1%, of total loans at December 31, 2023 and 2022, respectively. For residential real estate mortgage loans with a consumer purpose, the Company had no loans that required interest only payments at December 31, 2023 and 2022.
Within the residential real estate portfolio segment, the Company had junior lien mortgages of approximately $11.2 million, or 2%, and $8.7 million, or 2%, of total loans at December 31, 2024 and 2023, respectively. For residential real estate mortgage loans with a consumer purpose, the Company had no loans that required interest only payments at December 31, 2024 and 2023.
The 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.
Table of Contents 69 The Federal Reserve has treated us as a “small bank holding company’ under the Federal Reserve’s Small Bank Holding Company Policy. Accordingly, our capital adequacy is evaluated at the Bank level, and not for the Company and its consolidated subsidiaries.
The eligible retained income is now the greater of (i) net income for the four preceding quarters, net of distributions and associated tax effects not reflected in net income; and (ii) the average of all net income over the preceding four quarters. This rule only affects the capital buffers, and banking organizations were encouraged to make prudent capital distribution decisions.
The eligible retained income is now the greater of (i) net income for the four preceding quarters, net of distributions and associated tax effects not reflected in net income; and (ii) the average of all net income over the preceding four quarters. Banking organizations were encouraged to make prudent capital distribution decisions.
Inflation and related changes in market interest rates, as the Federal Reserve acts to meet its long term inflation goal of 2%, also can adversely affect the values and liquidity of our loans and securities, the value of collateral for our loans, and the success of our borrowers and such borrowers’ available cash to pay interest on and principal of our loans to them.
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.
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, our determination of credit losses for investment securities, recurring and non-recurring fair value measurements, the valuation of other real estate owned, and the valuation of deferred tax assets, were critical to the determination of our financial position and results of operations.
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.
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.
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.
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 Note 5 to our Financial Statements.
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.
The Company does not expect the new standard to have a material impact on the Company’s consolid ated financial statements.
The Company does not expect the new standard to have a material impact on the Company’s consolidated financial statements.
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.
See “Risk Factors.” Table of Contents 65 The Company attempts to reduce these economic and credit risks through its loan-to-value guidelines for collateralized loans, investigating the creditworthiness of borrowers and monitoring borrowers’ financial position. Also, we have established and periodically review, our lending policies and procedures.
During 2023, the Bank began participating in the Certificates of Deposit Account Registry Service (the “CDARS”) and the Insured Cash Sweep product (“ICS”), which provide for reciprocal (“two-way”) transactions among banks facilitated by IntraFi for the purpose of maximizing FDIC insurance. The Company had no reciprocal deposits at December 31, 2023.
During 2023, the Bank began participating in the Certificates of Deposit Account Registry Service (the “CDARS”) and the Insured Cash Sweep product (“ICS”), which provide for reciprocal (“two-way”) transactions among banks facilitated by IntraFi for the purpose of maximizing FDIC insurance.
Off-Balance Sheet Arrangements At December 31, 2023, the Bank had outstanding standby letters of credit of $0.6 million and unfunded loan commitments outstanding of $73.6 million. Because these commitments generally have fixed expiration dates and many will expire without being drawn upon, the total commitment level does not necessarily represent future cash requirements.
Off-Balance Sheet Arrangements At December 31, 2024, the Bank had outstanding standby letters of credit of $0.7 million and unfunded loan commitments outstanding of $84.7 million. Because these commitments generally have fixed expiration dates and may expire without being drawn upon, the total commitment level does not necessarily represent future cash requirements.
December 31 (In thousands) 2023 2022 Nonaccrual loans: Commercial and industrial $ — 443 Commercial real estate 783 2,116 Residential real estate 128 172 Total nonaccrual loans $ 911 2,731 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.
December 31 (In thousands) 2024 2023 Nonaccrual loans: Commercial and industrial $ 99 — Construction and land development 404 — Commercial real estate — 783 Residential real estate — 128 Total nonaccrual loans $ 503 911 The Company discontinues the accrual of interest income when (1) there is a significant deterioration in the financial condition of the borrower and full repayment of principal and interest is not expected or (2) the principal or interest is more than 90 days past due, unless the loan is both well-secured and in the process of collection.
As of December 31, 2023, the unpaid principal balance of residential mortgage loans, which we have originated and sold, but retained the servicing rights (MSRs) totaled $215.5 million.
As of December 31, 2024, the unpaid principal balance of residential mortgage loans, which we have originated and sold, but retained the servicing rights (MSRs) totaled $204.4 million.
December 31 (Dollars in thousands) 2023 2022 Nonperforming assets: Nonperforming (nonaccrual) loans $ 911 2,731 Total nonperforming assets $ 911 2,731 as a % of loans and other real estate owned 0.16 % 0.54 as a % of total assets 0.09 % 0.27 Nonperforming loans as a % of total loans 0.16 % 0.54 Accruing loans 90 days or more past due $ — — The table below provides information concerning the composition of nonaccrual loans at December 31, 2023 and 2022, respectively.
December 31 (Dollars in thousands) 2024 2023 Nonperforming assets: Nonperforming (nonaccrual) loans $ 503 911 Total nonperforming assets $ 503 911 as a % of loans and other real estate owned 0.09 % 0.16 as a % of total assets 0.05 % 0.09 Nonperforming loans as a % of total loans 0.09 % 0.16 Accruing loans 90 days or more past due $ — — Table of Contents 67 The table below provides information concerning the composition of nonaccrual loans at December 31, 2024 and 2023, respectively.
See "Table 1 - Explanation of Non-GAAP Financial Measures". Financial Summary The Company’s net earnings were $1.4 million for the full year 2023, compared to $10.3 million for the full year 2022. Basic and diluted net earnings per share were $0.40 per share for the full year 2023, compared to $2.95 per share for the full year 2022.
See "Table 1 - Explanation of Non-GAAP Financial Measures". Financial Summary The Company’s net earnings were $6.4 million for the full year 2024, compared to $1.4 million for the full year 2023. Basic and diluted net earnings per share were $1.83 per share for the full year 2024, compared to $0.40 per share for the full year 2023.
At December 31, 2023, the Company’s allowance for credit losses was $6.9 million, or 1.23% of total loans, compared to $5.8 million, or 1.14% of total loans, at December 31, 2022.
At December 31, 2024, the Company’s allowance for credit losses was $6.9 million, or 1.22% of total loans, compared to $6.9 million, or 1.23% of total loans, at December 31, 2023.
It also can affect our customers’ behaviors, and can affect the interest rates we have to pay on our deposits and other borrowings, and the interest rates we earn on our earning assets.
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.
At December 31, 2023 we had total deferred tax assets of $12.5 million included as “other assets”, including $9.7 million resulting from unrealized losses in our securities portfolio.
At December 31, 2024 we had total deferred tax assets of $10.2 million included as “other assets”, including $9.9 million resulting from unrealized losses in our securities portfolio.
Year ended December 31 (Dollars in thousands) 2023 2022 Origination income $ 71 $ 309 Servicing fees, net 359 341 Total mortgage lending income $ 430 $ 650 Table of Contents 61 The Company’s income from mortgage lending typically fluctuates as mortgage interest rates change and is primarily attributable to the origination and sale of new mortgage loans.
Year ended December 31 (Dollars in thousands) 2024 2023 Origination income $ 261 $ 71 Servicing fees, net 347 359 Total mortgage lending income $ 608 $ 430 The Company’s income from mortgage lending typically fluctuates as mortgage interest rates change and is primarily attributable to the origination and sale of new mortgage loans.
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.
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.
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 our assets or liabilities are priced with the same index.
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.
See "Table 1 - Explanation of Non-GAAP Financial Measures". (b) Efficiency ratio is the result of noninterest expense divided by the sum of noninterest income and tax-equivalent net interest income. (c) Regulatory capital ratios presented are for the Company's wholly-owned subsidiary, AuburnBank.
See "Table 1 - Explanation of Non-GAAP Financial Measures". (b) Efficiency ratio is the result of noninterest expense divided by the sum of noninterest income and tax-equivalent net interest income. (c) Regulatory capital ratios presented are for the Company's wholly-owned subsidiary, AuburnBank. (d) Calculated by dividing period end share price by earnings per share for the previous four quarters.
The Company recorded a provision for credit losses of $0.1 million in 2023 compared to $1.0 million during 2022. 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.
The provision for credit losses under CECL is reflective of the Company’s credit risk profile and the future economic outlook and forecasts. Our CECL model is largely influenced by economic factors including, most notably, the anticipated unemployment rate. Noninterest income was $3.5 million in 2024 compared to a loss of $3.0 million in 2023.
At December 31, 2023, the Bank’s regulatory capital ratios were well above the minimum amounts required to be “well capitalized” under current regulatory standards with a total risk-based capital ratio of 15.52%, a tier 1 leverage ratio of 9.72% and common equity tier 1 (“CET1”) of 14.52% at December 31, 2023.
At December 31, 2024, the Bank’s regulatory capital ratios were well above the minimum amounts required to be “well capitalized” under current regulatory standards with a total risk-based capital ratio of 15.81%, a tier 1 leverage ratio of 10.49% and common equity tier 1 or (CET1) of 14.80% at December 31, 2024.
In addition, assets and liabilities may reprice at the same time but by different amounts. For example, when the general level of interest rates is rising, the Company may increase rates paid on interest bearing demand deposit accounts and savings deposit accounts by an amount that is less than the general increase in market interest rates.
For example, when the general level of interest rates is rising, the Company may increase rates paid on interest bearing demand deposit accounts and savings deposit accounts by an amount that is less than the general increase in market interest rates.
The Bank is a member of the FHLB-Atlanta and has borrowed, and may in the future borrow from time to time under the FHLB-Atlanta’s advance program to obtain funding for its growth. FHLB-Atlanta advances include both fixed and variable terms and are taken out with varying maturities, and which generally are secured by eligible assets.
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.
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.
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.
Four loan categories represented the majority of the loan portfolio at December 31, 2023: commercial real estate (52%), residential real estate (21%), construction and land development (12%), and commercial and industrial (13%). Approximately 23% of the Company’s commercial real estate loans were classified as owner-occupied at December 31, 2023.
Four loan categories represented the majority of the loan portfolio at December 31, 2024: commercial real estate (51%), residential real estate (21%), construction and land development (15%), and commercial and industrial (11%). Approximately 19% of the Company’s commercial real estate loans were classified as owner-occupied at December 31, 2024.
Noninterest Income Year ended December 31 (Dollars in thousands) 2023 2022 Service charges on deposit accounts $ 603 $ 598 Mortgage lending 430 650 Bank-owned life insurance 411 317 Gain on sale of premises and equipment — 3,234 Securities (losses) gains, net (6,295) 12 Other 1,870 1,695 Total noninterest income $ (2,981) $ 6,506 The Company’s noninterest income from mortgage lending is primarily attributable to the (1) origination and sale of new mortgage loans and (2) servicing of mortgage loans.
Noninterest Income Year ended December 31 (Dollars in thousands) 2024 2023 Service charges on deposit accounts $ 614 $ 603 Mortgage lending 608 430 Bank-owned life insurance 403 411 Securities losses, net — (6,295) Other 1,849 1,870 Total noninterest income $ 3,474 $ (2,981) The Company’s noninterest income from mortgage lending is primarily attributable to the (1) origination and sale of new mortgage loans and (2) servicing of mortgage loans.
Our ability to compete and manage our deposits costs until our interest-earning assets reprice and we generate new fixed rate loans with current market interest rates will be important to our net interest margin during the monetary tightening cycle that we believe will continue in 2024.
We believe that interest rates, inflation and monetary policy may continue to fluctuate in 2025 and may be challenging as a result. Our ability to compete and manage our deposits costs until our interest-earning assets reprice and we generate new fixed rate loans with current market interest rates will be important to our net interest margin during 2025.
Excluding the pre-tax securities loss of $6.3 million related to the balance sheet repositioning strategy in 2023, noninterest income would have been $3.3 million for 2023, compared to noninterest income of $3.3 million in 2022 after excluding the pre-tax gain of $3.2 million on the sale of land.
Excluding the pre-tax securities loss of $6.3 million related to the balance sheet repositioning strategy in 2023, noninterest income would have been $3.3 million for 2023. Noninterest expense was $22.2 million in 2024 compared to $22.6 million in 2023.
Year ended December 31 (Dollars in thousands) 2023 2022 Allowance for credit losses: Balance at beginning of period $ 5,765 4,939 Impact of adopting ASC 326 1,019 — Charge-offs: Commercial and industrial (164) (222) Consumer installment (105) (70) Total charge -offs (269) (292) Recoveries: Commercial and industrial 204 7 Commercial real estate — 23 Residential real estate 14 26 Consumer installment 5 62 Total recoveries 223 118 Net charge-offs (46) (174) Provision for credit losses 125 1,000 Ending balance $ 6,863 5,765 as a % of loans 1.23 % 1.14 as a % of nonperforming loans 753 % 211 Net charge-offs as a % of average loans 0.01 % 0.04 Nonperforming Assets At December 31, 2023 the Company had $0.9 million in nonperforming assets compared to $2.7 million at December 31, 2022.
Year ended December 31 (Dollars in thousands) 2024 2023 Allowance for credit losses: Balance at beginning of period $ 6,863 5,765 Impact of adopting ASC 326 — 1,019 Charge-offs: Commercial and industrial (9) (164) Residential real estate (61) — Consumer installment (114) (105) Total charge -offs (184) (269) Recoveries: Commercial and industrial 144 204 Residential real estate 9 14 Consumer installment 45 5 Total recoveries 198 223 Net recoveries (charge-offs) 14 (46) (Reversal of) provision for credit losses (6) 125 Ending balance $ 6,871 6,863 as a % of loans 1.22 % 1.23 as a % of nonperforming loans 1,366 % 753 Net charge-offs as a % of average loans — % 0.01 Nonperforming Assets At December 31, 2024 the Company had $0.5 million in nonperforming assets compared to $0.9 million at December 31, 2023.
The following table presents additional information about our contractual obligations as of December 31, 2023, which by their terms had contractual maturity and termination dates subsequent to December 31, 2023: 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) $ 896,243 864,461 16,866 14,916 — Operating lease obligations 551 123 210 177 41 Total $ 896,794 864,584 17,076 15,093 41 (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.
Table of Contents 72 The following table presents additional information about our contractual obligations as of December 31, 2024, which by their terms had contractual maturity and termination dates subsequent to December 31, 2024: Payments due by period 1 year 1 to 3 3 to 5 More than (Dollars in thousands) Total or less years years 5 years Contractual obligations: Deposit maturities (1) $ 895,824 879,185 14,239 2,400 — Operating lease obligations 246 81 120 45 — Total $ 896,070 879,266 14,359 2,445 — (1) Deposits with no stated maturity (demand, NOW, money market, and savings deposits) are presented in the "1 year or less" column Management believes that the Company and the Bank have adequate sources of liquidity to meet all known contractual obligations and unfunded commitments, including loan commitments and reasonable borrower, depositor, and creditor requirements over the next 12 months.
Higher market interest rates and sales or maturities of securities held by the Federal Reserve to reduce inflation generally reduce economic activity and may reduce loan demand and growth.
Higher market interest rates and reductions in the securities held by the Federal Reserve to reduce inflation generally reduce economic activity and may reduce loan demand and growth, and may adversely affect unemployment rates.
Accordingly, the provision for credit losses represents a charge to earnings necessary to establish an allowance for credit losses that, in management's evaluation, is adequate to provide coverage for all expected credit losses. The Company recorded a provision for credit losses of $0.1 million during 2023, compared to a provision for loan losses of $1.0 million for 2022.
Table of Contents 62 Provision for Credit Losses The provision for credit losses represents a charge to earnings necessary to establish an allowance for credit losses that, in management’s evaluation, is adequate to provide coverage for all expected credit losses. The Company recorded a provision for credit losses of $36 thousand during 2024, compared to $135 thousand for 2023.
Table of Contents 55 Summary of Results of Operations Year ended December 31 (Dollars in thousands, except per share data) 2023 2022 Net interest income (a) $ 26,745 $ 27,622 Less: tax-equivalent adjustment 417 456 Net interest income (GAAP) 26,328 27,166 Noninterest income (2,981) 6,506 Total revenue 23,347 33,672 Provision for credit losses 135 1,000 Noninterest expense 22,594 19,823 Income tax (benefit) expense (777) 2,503 Net earnings $ 1,395 $ 10,346 Basic and diluted net earnings per share $ 0.40 $ 2.95 (a) Tax-equivalent.
Summary of Results of Operations Year ended December 31 (Dollars in thousands, except per share data) 2024 2023 Net interest income (a) $ 27,204 $ 26,745 Less: tax-equivalent adjustment 79 417 Net interest income (GAAP) 27,125 26,328 Noninterest income 3,474 (2,981) Total revenue 30,599 23,347 Provision for credit losses 36 135 Noninterest expense 22,166 22,594 Income tax expense (benefit) 2,000 (777) Net earnings $ 6,397 $ 1,395 Basic and diluted net earnings per share $ 1.83 $ 0.40 (a) Tax-equivalent.
Income from bank-owned life insurance was $411 thousand and $317 thousand for 2023 and 2022, respectively. Excluding a $52 thousand non-taxable death benefit received during 2023, income from bank -owned life insurance would have been $359 thousand and $317 thousand for 2023 and 2022, respectively.
Excluding a $52 thousand non-taxable death benefit received during the first quarter of 2023, income from bank-owned life insurance would have been $359 thousand for 2023.
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 $61.0 million with no federal funds borrowed at December 31, 2023 and 2022, respectively.
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.
Also, short-term and long-term market interest rates may change by different amounts. For example, a flattening yield curve may reduce the interest spread between new loan yields and funding costs. The yield curve has been inverted during 2023 and in the first months of 2024.
Also, short -term and long-term market interest rates may change by different amounts and at different levels of interest rates and rates of change. For example, a flattening yield curve may reduce the interest spread between new loan yields and funding costs. The yield curve was inverted until it began to normalize in September 2024.
The Bank’s tier 1 leverage ratio was 9.72%, CET1 risk-based capital ratio was 14.52%, tier 1 risk-based capital ratio was 14.52%, and total risk-based capital ratio was 15.52% at December 31, 2023.
The Bank’s tier 1 leverage ratio was 10.49%, CET1 risk-based capital ratio was 14.80%, tier 1 risk-based capital ratio was 14.80%, and total risk-based capital ratio was 15.81 % at December 31, 2024.
(2) Changes that are not solely a result of volume or rate have been allocated to volume.
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.
Uninsured amounts are estimated based on the portion of account balances that exceed FDIC insurance limits. The Bank’s uninsured deposits at December 31, 2023 and 2022 include approximately $206.2 million and $155.0 million, respectively, of deposits of state, county and local governments that are collateralized by securities having a fair value equal to such deposits.
The Bank’s uninsured deposits at December 31, 2024 and 2023 include approximately $223.1 million and $206.2 million, respectively, of deposits of state, county and local governments that are collateralized by securities having a fair value equal to such deposits.
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. For example, if liabilities reprice faster than assets, and interest rates are generally rising, earnings will initially decline.
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.
See "Table 1 - Explanation of Non-GAAP Financial Measures". RESULTS OF OPERATIONS Net Interest Income and Margin Net interest income (tax-equivalent) was $26.7 million in 2023, compared to $27.6 million in 2022.
See "Table 1 - Explanation of Non-GAAP Financial Measures". RESULTS OF OPERATIONS Net Interest Income and Margin Net interest income (tax-equivalent) was $27.2 million in 2024, a 2% increase compared to $26.7 million in 2023. This increase was primarily due to improved net interest margin. The Company’s net interest margin (tax-equivalent) was 3.06% in 2024, compared to 2.89% in 2023.
Changes in Interest Rates Net Interest Income % Variance 400 basis points (5.45) % 300 basis points (3.85) 200 basis points (2.32) 100 basis points (1.03) (100) basis points (0.57) (200) basis points (1.33) (300) basis points (2.12) (400) basis points (2.95) At December 31, 2023, our earnings simulation model indicated that we were in compliance with the policy guidelines noted above.
Changes in Interest Rates Net Interest Income % Variance 400 basis points 0.47 % 300 basis points 0.74 200 basis points 0.67 100 basis points 0.35 (100) basis points (0.92) (200) basis points (1.49) (300) basis points (1.75) (400) basis points (2.20) At December 31, 2024, our earnings simulation model indicated that we were in compliance with the policy guidelines noted above.
Average loans for 2023 were $523.8 million, a 15% increase from 2022. At December 31, 2023, the Company’s allowance for credit losses was $6.9 million, or 1.23% of total loans, compared to $5.8 million, or 1.14% of total loans, at December 31, 2022.
At December 31, 2024, the Company’s allowance for credit losses was $6.9 million, or 1.22% of total loans, compared to $6.9 million, or 1.23% of total loans, at December 31, 2023.
The Company’s effective income tax rate otherwise is principally affected by tax-exempt earnings from the Company’s investments in municipal securities, bank- owned life insurance, and New Markets Tax Credits. The Company paid cash dividends of $1.08 per share in 2023, an increase of 2% from 2022.
The Company’s effective income tax rate is affected principally by tax-exempt earnings from the Company’s investments in municipal securities, bank-owned life insurance, and New Markets Tax Credits.
A summary of the changes in the allowance for credit losses and certain asset quality ratios for the years ended December 31, 2023 and 2022 are presented below.
See Note 5 to our Financial Statements. Table of Contents 66 A summary of the changes in the allowance for credit losses on loans and certain asset quality ratios for the years ended December 31, 2024 and 2023 are presented below.
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.
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.
Table of Contents 67 On August 26, 2020, the Federal Reserve and the other federal banking regulators adopted a final rule that amended the capital conservation buffer.
At December 31, 2024 and 2023, the Bank had a capital conservation buffer of 7.81% and 7.52%, respectively. On August 26, 2020, the Federal Reserve and the other federal banking regulators adopted a final rule that amended the capital conservation buffer.
An inverted yield curve reduces the net interest margin expansion that may be expected otherwise as interest rates rise. Further, the remaining maturity of various assets and liabilities may shorten or lengthen as interest rates change. For example, if long-term mortgage interest rates decline sharply, mortgage-backed securities in the securities portfolio may prepay earlier than anticipated, which could reduce earnings.
An inverted yield curve reduces the net interest margin expansion that may be expected otherwise as interest rates rise. Further, the remaining maturity of various assets and liabilities may shorten or lengthen as interest rates change.
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 this challenging rate environment will continue in 2024.
At year end the target federal funds rate ranged from 4.25% - 4.50%. The Company continues to deploy various asset liability management strategies to manage its risk from interest rate fluctuations. Deposit and loan pricing remains competitive in our markets.
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.
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.
Table of Contents 75 Table 3 - Average Balance and Net Interest Income Analysis Year ended December 31 2023 2022 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) $ 523,838 $ 24,925 4.76% $ 454,604 $ 20,241 4.45% Securities - taxable 335,366 7,208 2.15% 364,006 6,576 1.81% Securities - tax-exempt (2) 52,122 1,985 3.81% 61,614 2,172 3.53% Total securities 387,488 9,193 2.37% 425,620 8,748 2.06% Federal funds sold 5,221 250 4.79% 43,766 435 1.00% Interest bearing bank deposits 8,593 423 4.92% 58,141 577 0.99% Total interest-earning assets 925,140 34,791 3.76% 982,131 30,001 3.05% Cash and due from banks 15,230 15,108 Other assets 81,438 77,496 Total assets $ 1,021,808 $ 1,074,735 Interest-bearing liabilities: Deposits: NOW $ 193,451 1,907 0.99% $ 197,177 370 0.19% Savings and money market 289,235 2,132 0.74% 327,139 649 0.20% Certificates of deposits 175,085 3,935 2.25% 154,273 1,300 0.84% Total interest-bearing deposits 657,771 7,974 1.21% 678,589 2,319 0.34% Short-term borrowings 3,255 72 2.21% 4,516 60 1.33% Total interest-bearing liabilities 661,026 8,046 1.22% 683,105 2,379 0.35% Noninterest-bearing deposits 289,019 306,772 Other liabilities 3,697 1,933 Stockholders' equity 68,066 82,925 Total liabilities and and stockholders' equity $ 1,021,808 $ 1,074,735 Net interest income and margin $ 26,745 2.89% $ 27,622 2.81% (1) Average loan balances are shown net of unearned income and loans on nonaccrual status have been included in the computation of average balances.
Table of Contents 77 Table 3 - Average Balance and Net Interest Income Analysis Year ended December 31 2024 2023 Interest Interest Average Income/ Yield/ Average Income/ Yield/ (Dollars in thousands) Balance Expense Rate Balance Expense Rate Interest-earning assets: Loans and loans held for sale (1) $ 568,733 $ 29,735 5.23% $ 523,838 $ 24,925 4.76% Securities - taxable 248,072 5,430 2.19% 335,366 7,208 2.15% Securities - tax-exempt (2) 10,084 373 3.70% 52,122 1,985 3.81% Total securities 258,156 5,803 2.25% 387,488 9,193 2.37% Federal funds sold 17,907 939 5.24% 5,221 250 4.79% Interest bearing bank deposits 44,634 2,334 5.23% 8,593 423 4.92% Total interest-earning assets 889,430 38,811 4.36% 925,140 34,791 3.76% Cash and due from banks 17,779 15,230 Other assets 75,059 81,438 Total assets $ 982,268 $ 1,021,808 Interest-bearing liabilities: Deposits: NOW $ 192,702 2,680 1.39% $ 193,451 1,907 0.99% Savings and money market 251,778 2,168 0.86% 289,235 2,132 0.74% Certificates of deposit 195,097 6,756 3.46% 175,085 3,935 2.25% Total interest-bearing deposits 639,577 11,604 1.81% 657,771 7,974 1.21% Short-term borrowings 628 3 0.48% 3,255 72 2.21% Total interest-bearing liabilities 640,205 11,607 1.81% 661,026 8,046 1.22% Noninterest-bearing deposits 262,224 289,019 Other liabilities 1,918 3,697 Stockholders' equity 77,921 68,066 Total liabilities and and stockholders' equity $ 982,268 $ 1,021,808 Net interest income and margin $ 27,204 3.06% $ 26,745 2.89% (1) Average loan balances are shown net of unearned income and loans on nonaccrual status have been included in the computation of average balances.
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.
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.

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