SECURITIES AND EXCHANGE COMMISSION
Annual report pursuant to Section 13 or 15(d) of the SecuritiesExchange Act of 1934.
For the quarterly period ended
December 31, 2022
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the transition period __________ to __________
Commission File Number:
Auburn National Bancorporation, Inc.
(Exact Name of Registrant as Specified in Its Charter)
(State or other jurisdiction
100 N. Gay Street
(Address of principal executive offices)
Registrant’s telephone number, including area code: (
Securities registered pursuant to Section 12 (b) of the Act:
Title of Each Class
Name of Exchange on which Registered
, par value $0.01
Securities registered to Section 12(g) of the Act:
Indicate by check mark if the registrantis a well-known seasoned issuer, as defined in Rule 405of the Securities Act. Yes
Indicate by check mark if the registrantis not required to file reports pursuantto Section 13 or Section 15(d) of the Act.Yes
Indicate by check mark whether the registrant(1) has filed all reports required to befiled by Section 13 or 15(d) ofthe Securities Exchange Act of 1934 duringthe
preceding 12 months (or for such shorterperiod that the registrant was requiredto file such reports), and (2) has been subjectto such filing requirements for the past
Indicate by check mark whether the registranthas submitted electronically every InteractiveData File required to be submitted pursuantto Rule 405 of Regulation S-
T (§ 232.405 of this chapter) duringthe preceding 12 months (or for suchshorter period that the registrant was requiredto submit such files).
Indicate by check mark whether the registrantis a large accelerated filer, an accelerated filer, a non-acceleratedfiler, or a smaller reporting company. See the
definitions of “large accelerated filer,” “accelerated filer”and “smaller reporting company” inRule 12b-2 of the Exchange Act. (Checkone):
Large Accelerated filer
Smaller reporting company
If an emerging growth company, indicate by check mark if the registranthas selected not to use the extendedtransition period for complying with anynew or revised
financial accounting standards provided pursuantto Section 13(a) of the Exchange Act.
Indicate by check mark whether the registranthas filed a report on and attestationto its management’s assessment of the effectiveness of its internalcontrol over
financial reporting under Section 404(b)of the Sarbanes-Oxley Act (15 U.S.C.7262(b)) by the registered public accountingfirm that prepared or issued its audit
If securities are registered pursuant to Section12(b) of the Act, indicate by checkmark whether the financial statements ofthe registrant included in the filing reflect
the correction of an error to previouslyissued financial statements.
Indicate by check mark whether anyof those error corrections are restatementsthat required a recovery analysis ofincentive-based compensation received by anyof
the registrant’s executive officers during the relevant recoveryperiod pursuant to §240.10D-1(b).
Indicate by check mark if the registrantis a shell company (as defined in Rule12b-2 of the Act). Yes
State the aggregate market value of the votingand non-voting common equity held bynon-affiliates computed by reference to the priceat which the common equity
was last sold, or the average bid andasked price of such common equityas of the last business day of the registrant’s most recentlycompleted second fiscal quarter:
APPLICABLE ONLY TO CORPORATE REGISTRANTS
Indicate the number of shares outstandingof each of the registrant’s classes of common stock,as of the latest practicable date:
of March 16, 2023.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for theAnnual Meeting of Shareholders, scheduledto be held May 9, 2023, are incorporated byreference into Part II, Item 5 and
Part III of this Form 10-K.
TABLE OF CONTENTS
SPECIAL CAUTIONARY NOTE REGARDINGFORWARD-LOOKING STATEMENTS
Variousof the statements made herein under the captions “Management’sDiscussion and Analysis of Financial Condition
and Results of Operations”, “Quantitative and Qualitative Disclosures about MarketRisk”, “Risk Factors” “Description of
Property” and elsewhere, are “forward-looking statements” within themeaning and protections of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,as amended (the “Exchange Act”).
Forward-looking statements include statements with respect to our beliefs, plans, objectives,goals, expectations,
anticipations, assumptions, estimates, intentions and future performance, and involveknown and unknown risks,
uncertainties and other factors, which may be beyond our control, andwhich may cause the actual results, performance,
achievements or financial condition of the Company to be materially differentfrom future results, performance,
achievements or financial condition expressed or implied by such forward-lookingstatements.Youshould not expect us to
update any forward-looking statements.
All statements other than statements of historical fact are statements that could be forward-lookingstatements.Youcan
identify these forward-looking statements through our use of words such as “may,”“will,” “anticipate,” “assume,”
“should,” “indicate,” “would,” “believe,” “contemplate,” “expect,”“estimate,” “continue,” “designed”, “plan,” “point to,”
“project,” “could,” “intend,” “target” and other similar words andexpressions of the future.These forward-looking
statements may not be realized due to a variety of factors, including, without limitation:
the effects of future economic, business and market conditions andchanges, foreign, domestic and locally,
including inflation, seasonality,natural disasters or climate change, such as rising sea and water levels,hurricanes
and tornados, COVID-19 or other epidemics or pandemics including supply chain disruptions,inventory volatility,
and changes in consumer behaviors;
the effects of war or other conflicts, acts of terrorism, trade restrictions, sanctionsor other events that may affect
general economic conditions;
governmental monetary and fiscal policies, including the continuing effectsof COVID-19 fiscal and monetary
stimuli, and changes in monetary policies in response to inflations including increasesin the Federal Reserve’s
target federal funds rate and reductions in the Federal Reserve’sholdings of securities;
legislative and regulatory changes, including changes in banking, securities and tax laws,regulations and rules and
their application by our regulators, including capital and liquidity requirements, andchanges in the scope and cost
of FDIC insurance;
changes in accounting pronouncements and interpretations, including the requiredimplementation of Financial
Accounting Standards Board’s (“FASB”)Accounting Standards Update (ASU) 2016-13, “Financial Instruments –
Credit Losses (Topic326): Measurement of Credit Losses on Financial Instruments,” as well as theupdates issued
since June 2016 (collectively, FASBASC Topic 326)on Current Expected Credit Losses (“CECL”), and ASU
2022-02, Troubled Debt Restructurings and VintageDisclosures, which eliminates troubled debt restructurings
(“TDRs”) and related guidance;
the failure of assumptions and estimates, as well as differences in, and changes to, economic,market and credit
conditions, including changes in borrowers’ credit risks and payment behaviors fromthose used in our loan
the risks of changes in market interest rates and the shape of the yield curve on the levels, compositionand costs of
deposits, loan demand and mortgage loan originations, and the values and liquidity of loancollateral, securities,
and interest-sensitive assets and liabilities, and the risks and uncertainty of the amountsrealizable on collateral;
the risks of increases in market interest rates creating unrealized losses on our securities availablefor sale, which
adversely affect our stockholders’ equity for financial reporting purposes;
changes in borrower liquidity and credit risks, and savings, deposit and payment behaviors;
changes in the availability and cost of credit and capital in the financial markets, and the typesof instruments that
may be included as capital for regulatory purposes;
changes in the prices, values and sales volumes of residential and commercial real estate;
the effects of competition from a wide variety of local, regional, nationaland other providers of financial,
investment and insurance services, including the disruptive effectsof financial technology and other competitors
who are not subject to the same regulations as the Company and the Bank and creditunions, which are not subject
to federal income taxation;
the failure of assumptions and estimates underlying the establishment of allowancesfor possible loan losses and
other asset impairments, losses valuations of assets and liabilities and other estimates, andthe allowance of credit
losses for CECL beginning January 1, 2023;
the timing and amount of rental income from third parties following the June 2022opening of our new
the risks of mergers, acquisitions and divestitures, including,without limitation, the related time and costs of
implementing such transactions, integrating operations as part of these transactions andpossible failures to achieve
expected gains, revenue growth and/or expense savings from such transactions;
changes in technology or products that may be more difficult, costly,or less effective than anticipated;
cyber-attacks and data breaches that may compromise our systems, ourvendors’ systems or customers’
the risks that our deferred tax assets (“DTAs”)included in “other assets” on our consolidated balance sheets, if
any, could be reduced if estimates of futuretaxable income from our operations and tax planning strategies are less
than currently estimated, and sales of our capital stock could trigger a reduction in the amount ofnet operating loss
carry-forwards that we may be able to utilize for income tax purposes; and
other factors and risks described under “Risk Factors” herein and in any of our subsequentreports that we make
with the Securities and Exchange Commission (the “Commission” or “SEC”)under the Exchange Act.
All written or oral forward-looking statements that are we make or areattributable to us are expressly qualified in their
entirety by this cautionary notice.We have no obligation anddo not undertake to update, revise or correct any of the
forward-looking statements after the date of this report, or after the respective dates onwhich such statements otherwise are
Auburn National Bancorporation, Inc. (the “Company”) is a bank holding company registeredwith the Board of Governors
of the Federal Reserve System (the “Federal Reserve”) under the Bank Holding CompanyAct of 1956, as amended (the
“BHC Act”).The Company was incorporated in Delaware in 1990, and in 1994 it succeededits Alabama predecessor as
the bank holding company controlling AuburnBank, an Alabama statemember bank with its principal office in Auburn,
Alabama (the “Bank”).The Company and its predecessor have controlled the Bank since 1984.As a bank holding
company, the Companymay diversify into a broader range of financial services and other business activities than currently
are permitted to the Bank under applicable laws and regulations.The holding company structure also provides greater
financial and operating flexibility than is presently permitted to the Bank.
The Bank has operated continuously since 1907 and currently conducts its businessprimarily in East Alabama, including
Lee County and surrounding areas.The Bank has been a member of the Federal Reserve Bank of Atlanta (the“Federal
Reserve Bank”) since April 1995.The Bank’s primary regulators arethe Federal Reserve and the Alabama Superintendent
of Banks (the “Alabama Superintendent”).The Bank has been a member of the Federal Home Loan Bank of Atlanta (the
“FHLB”) since 1991.
The Company’s business is conducted primarilythrough the Bank and its subsidiaries.Although it has no immediate plans
to conduct any other business, the Company may engage directly or indirectly in a numberof activities closely related to
banking permitted by the Federal Reserve.
The Company’s principal executive officesare located at 100 N. Gay Street, Auburn, Alabama 36830, and its telephone
number at such address is (334) 821-9200.The Company maintains an Internet website at
Company’s website and the informationappearing on the website are not included or incorporated in, and are not part of,
this report.The Company files annual, quarterly and current reports, proxy statements, andother information with the
SEC.Youmay read and copy any document we file with the SEC at the SEC’spublic reference room at 100 F Street, N.E.,
Washington, DC 20549.Please call the SEC at 1-800-SEC-0330 for more information on the operation of the public
reference rooms.The SEC maintains an Internet site at
where SEC filings are available to the public free of charge.
The Bank offers checking, savings, transaction deposit accounts andcertificates of deposit, and is an active residential
mortgage lender in its primary service area.The Bank’s primary service area includesthe cities of Auburn and Opelika,
Alabama and nearby surrounding areas in East Alabama, primarily in Lee County.The Bank also offers commercial,
financial, agricultural, real estate construction and consumer loan productsand other financial services.The Bank is one of
the largest providers of automated teller machine (“ATM”)services in East Alabama and operates ATMmachines in 13
locations in its primary service area.The Bank offers Visa
like checks and can be used anywhere Visais accepted, including ATMs.The Bank’s VisaCheckcards can be used
internationally through the Plus
services through its Internet website,
.Our online banking services, bill payment and electronic
services are subject to certain cybersecurity risks.See “Risk Factors – Our information systems may experience
interruptions and security breaches.”
The Bank does not offer any services related to any Bitcoin or other digital or crypto instrumentsor stablecoins or
The banking business in East Alabama, including Lee County,is highly competitive with respect to loans, deposits, and
other financial services.The area is dominated by a number of regional and national banks and bankholding companies
that have substantially greater resources, and numerous offices and affiliatesoperating over wide geographic areas.The
Bank competes for deposits, loans and other business with these banks, as well as with creditunions, mortgage companies,
insurance companies, and other local and nonlocal financial institutions, includinginstitutions offering services through the
mail, by telephone and over the Internet.As more and different kinds of businesses enter the market for financialservices,
competition from nonbank financial institutions may be expected to intensifyfurther.
Among the advantages that larger financial institutions have overthe Bank are their ability to finance extensive advertising
campaigns, to diversify their funding sources, and to allocate and diversify their assets amongloans and securities of the
highest yield in locations with the greatest demand.Many of the major commercial banks or their affiliates operatingin the
Bank’s service area offer serviceswhich are not presently offered directly by the Bank and they typically have substantially
higher lending limits than the Bank.
Banks also have experienced significant competition for deposits from mutualfunds, insurance companies and other
investment companies and from money center banks’ offerings ofhigh-yield investments and deposits, including CDs and
savings accounts.Certain of these competitors are not subject to the same regulatory restrictions as the Bank.
Selected Economic Data
The Auburn-Opelika Metropolitan Statistical Area is Lee County,Alabama, including Auburn, Opelika and part of Phenix
City, Alabama.The U.S. Census Bureau estimates Lee County’spopulation was 181,881 in 2022, and has increased
approximately 29.7% from 2010 to 2022.The largest employers in the area are Auburn University,East Alabama Medical
Center, Lee County School System, Wal-Mart Distribution Center, Baxter Healthcare, ThermoFisher Scientific, Mando
America Corporation (automobile brakes and steering), and Briggs & Stratton.Auto manufacturing and related suppliers
are increasingly important along Interstate Highway 85 to the east and west of Auburn.Kia Motors has a large automobile
factory in nearby West Point,Georgia, and Hyundai Motors has a large automobilefactory in Montgomery,Alabama.
Varioussuppliers to the automotive industry have facilities in Lee County.The unemployment rate in Lee County was
2.0% at year end 2022 according to the U.S. Bureau of Labor Statistics.
Between 2010 and 2022, the Auburn-Opelika MSA was the second fastestgrowing MSA in Alabama.The Auburn-
Opelika MSA population is estimated to grow 6.6% from 2023 to 2028.During the same time, household income is
estimated to increase 14.25%, to $69,213.
Loans and Loan Concentrations
The Bank makes loans for commercial, financial and agricultural purposes, as well as forreal estate mortgages, real estate
acquisition, construction and development and consumer purposes.While there are certain risks unique to each type of
lending, management believes that there is more risk associated with commercial, realestate acquisition, construction and
development, agricultural and consumer lending than with residential real estatemortgage loans.To help manage these
risks, the Bank has established underwriting standards used in evaluating each extensionof credit on an individual basis,
which are substantially similar for each type of loan.These standards include a review of the economic conditions
affecting the borrower, the borrower’sfinancial strength and capacity to repay the debt, the underlying collateral and the
borrower’s past credit performance.We apply these standardsat the time a loan is made and monitor them periodically
throughout the life of the loan.See “Lending Practices” for a discussion of regulatory guidance on commercial real estate
The Bank has loans outstanding to borrowers in all industries within our primaryservice area.Any adverse economic or
other conditions affecting these industries would also likely have an adverseeffect on the local workforce, other local
businesses, and individuals in the community that have enteredinto loans with the Bank.For example, the auto
manufacturing business and its suppliers have positively affectedour local economy, but automobilesales manufacturing is
cyclical and adversely affected by increases in interest rates. Decreasesin automobile sales, including adverse changes due
to interest rate increases, and the remaining economic effects of theCOVID-19 pandemic, including continuing supply
chain disruptions and a tight labor market,could adversely affect nearby Kia and Hyundai automotive plantsand their
suppliers' local spending and employment, and could adversely affect economicconditions in the markets we serve.
However, management believes that due to the diversifiedmix of industries located within our markets, adverse changes in
one industry may not necessarily affect other area industriesto the same degree or within the same time frame.The Bank’s
primary service area also is subject to both local and national economic conditions andfluctuations.While most loans are
made within our primary service area, some residential mortgage loans are originatedoutside the primary service area, and
the Bank from time to time has purchased loan participations from outside its primary servicearea.We also may make
loans to other borrowers outside these areas, especially where we have a relationshipwith the borrower, or its business or
At December 31, 2022, the Company and its subsidiaries had 150 full-time equivalent employees,including 37 officers.
Our average term of service is approximately 10 years.We successfully implementedplans 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 jobduties permitted.This promoted employee
retention, and these efforts will provide us proven experience and flexibilityto meet other disruptive events and conditions,
and still provide our customers and communities continuity of service.
We experiencedlittle turnover as a result of the COVID-19 pandemic and made no staffreductions.As a result, we
received a federal employee retention tax credit of approximately $1.6million in 2022.
We have a talented groupof employees,many of which, have a college or associate degree.We believe the Auburn-
Opelika MSA is a desirable place to live and work with excellent schools and quality of life.Our MSA was the second
fastest growing MSA in Alabama from 2010 to 2022.Auburn University is a major employer that attracts talented students
and employee families.Variousof ouremployees have a family member that is employed by or is attending the University.
Wewere an active PPP lender in our communities during 2020-2021, which required our employees to quicklylearn and
apply a new SBA loan program with frequent overnight changes.All our PPP loans were forgiven by the SBA, except one
where the borrower is repaying its PPP loan without government assistance.
We had a successfulmanagement transition in 2022 where our CEO became Chairman, andwas succeeded by our CFO,
whose role was then filled by our Chief Accounting Officer.Our Chairman has served the Bank his entire 39-year career,
our President and CEO has been with us 16 years and our Chief Accounting Officerhas been with us for 7 years.Our new
President and CFO had careers with major national and regional accountingfirms and focused on financial services before
joining the Bank.
We seek to providecompetitive compensation and benefits.We provideemployer matches for employee contributions to
our 401(k) retirement plan.We encourage andsupport the growth and development of our employees and, wherever
possible, seek to fill positions by promotion and transfer from within the organization.Career development is advanced
through ongoing performance and development conversations with employees,internally developed training programs and
other training and development opportunities.
Our employees are encouraged to be active in our communities as part of our commitmentto these communities and our
employees.Our Chairman is the current President Pro Temporeof the Auburn University Board of Trustees.
Certain statistical information is included in responses to Items 6, 7, 7A and 8 of thisAnnual Report on Form 10-K.
SUPERVISION AND REGULATION
The Company and the Bank are extensively regulated under federal and state laws applicableto bank holding companies
and banks.The supervision, regulation and examination of the Company and the Bank andtheir respective subsidiaries by
the bank regulatory agencies are primarily intended to maintain the safety andsoundness of depository institutions and the
federal deposit insurance system, as well as the protection of depositors,rather than holders of Company capital stock and
other securities.Any change in applicable law or regulation may have a material effecton the Company’s business.The
following discussion is qualified in its entirety by reference to the particular laws andrules referred to below.
Bank Holding Company Regulation
The Company, as a bank holding company,is subject to supervision, regulation and examination by the Federal Reserve
under the BHC Act.Bank holding companies generally are limited to the business of banking,managing or controlling
banks, and certain related activities.The Company is required to file periodic reports and other informationwith the
Federal Reserve.The Federal Reserve examines the Company and its subsidiaries.The State of Alabama currently does
not regulate bank holding companies.
The BHC Act requires prior Federal Reserve approval for,among other things, the acquisition by a bank holding company
of direct or indirect ownership or control of more than 5% of the voting shares or substantiallyall the assets of any bank, or
for a merger or consolidation of a bank holding company with anotherbank holding company.The BHC Act generally
prohibits a bank holding company from acquiring direct or indirect ownership orcontrol of voting shares of any company
that is not a bank or bank holding company and from engaging directly or indirectly in anyactivity other than banking or
managing or controlling banks or performing services for its authorized subsidiaries.A bank holding company may,
however, engage in or acquire an interest in a company thatengages in activities that the Federal Reserve has determined
by regulation or order to be so closely related to banking or managing or controlling banksas to be a proper incident
thereto. On January 30, 2020, the Federal Reserve adopted new rules, effectiveSeptember 30, 2020 simplifying
determinations of control of banking organizations for BHC Act purposes.
Bank holding companies that are and remain “well-capitalized” and “well-managed,”as defined in Federal Reserve
Regulation Y,and whose insured depository institution subsidiaries maintain “satisfactory”or better ratings under the
Community Reinvestment Act of 1977 (the “CRA”), may elect to become“financial holding companies.” Financial holding
companies and their subsidiaries are permitted to acquire or engage in activitiessuch as insurance underwriting, securities
underwriting, travel agency activities, broad insurance agency activities,merchant banking and other activities that the
Federal Reserve determines to be financial in nature or complementary thereto.In addition, under the BHC Act’smerchant
banking authority and Federal Reserve regulations, financial holding companiesare authorized to invest in companies that
engage in activities that are not financial in nature, as long as the financial holdingcompany makes its investment, subject
to limitations, including a limited investment term, no day-to-day management,and no cross-marketing with any depositary
institutions controlled by the financial holding company.The Federal Reserve recommended repeal of the merchant
banking powers in its September 16, 2016 study pursuant to Section 620 of the Dodd-Frank WallStreet Reform and
Consumer Protection Act of 2010 (the “Dodd-Frank Act”), but has taken no action.The Company has not elected to
become a financial holding company,but it may elect to do so in the future.
Financial holding companies continue to be subject to Federal Reserve supervision, regulationand examination, but the
Gramm-Leach-Bliley Act of 1999 the “GLB Act”) applies the concept of functionalregulation to subsidiary activities.For
example, insurance activities would be subject to supervision and regulation by state insuranceauthorities.
The BHC Act permits acquisitions of banks by bank holding companies, subjectto various restrictions, including that the
acquirer is “well capitalized” and “well managed”.Bank mergers are also subject to the approval of the acquiring bank’s
primary federal regulator and the Bank Merger Act.The BHC Act and the Bank Merger Act provide various generally
similar statutory factors.Under the Alabama Banking Code, with the prior approval of the AlabamaSuperintendent, an
Alabama bank may acquire and operate one or more banks in other states pursuant toa transaction in which the Alabama
bank is the surviving bank.In addition, one or more Alabama banks may enter into a mergertransaction with one or more
out-of-state banks, and an out-of-state bank resulting from such transactionmay continue to operate the acquired branches
in Alabama.The Dodd-Frank Act permits banks, including Alabama banks, to branch anywherein the United States.
Bank mergers are also subject to the approval of the acquiring bank’sprimary federal regulator.On March 19, 2022, the
FDIC published a “Request for Information and Comment on Rules, Regulations,Guidance, and Statements of Policy
Regarding Bank Merger Transactions” (the“FDIC Notice”).The FDIC solicited comments from interested parties
regarding the application of the laws, practices, rules, regulations, guidance, and statementsof policy (together, regulatory
framework) that apply to merger transactions involving oneor more insured depository institution, including the merger
between an insured depository institution and a noninsured institution. The FDIC is interestedin receiving comments
regarding the effectiveness of the existing framework inmeeting the requirements of the Bank Merger Act.
The Request described the consolidation of the banking industry,the increase in the number of large and systemically
important banking organizations and the need to evaluate largemergers’ financial stability and resolution of failing bank
risks consistent with the Dodd-Frank Act changes to the BHC Act and the Bank MergerAct, and the effects of banking
mergers on competition.The FDIC Notice also stated that Executive Order Promoting Competition in theAmerican
Economy (July 9, 2021) (the “Executive Order”), among other things, “instructs U.S.agencies to consider the impact that
consolidation may have on maintaining a fair, open,and competitive marketplace, and on the welfare of workers, farmers,
small businesses, startups, and consumers.”The FDIC requested comment on all aspects of the bank regulatory
framework, including qualitative and quantitative support for such responses.The other Federal bank regulators as well as
the U.S. Department of Justice are also considering the framework formergers involving banking organizations, including
the competitive effects of such combinations.The federal bank regulators have not announced any conclusions, but these
reviews could result in changes to the frameworks used to evaluate banking combinationswhich could make such
combinations more difficult, time consuming and expensive.
The Company is a legal entity separate and distinct from the Bank.Variouslegal 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 Actand Federal Reserve Regulation W thereunder.Section 23A defines “covered transactions,” which
include extensions of credit, and limits a bank’s coveredtransactions with any affiliate to 10% of such bank’scapital and
surplus.All covered and exempt transactions between a bank and its affiliates must beon terms and conditions consistent
with safe and sound banking practices, and banks and their subsidiaries are prohibitedfrom purchasing low-quality assets
from the bank’s affiliates.Finally, Section 23A requiresthat all of a bank’s extensions of creditto its affiliates be
appropriately secured by permissible collateral, generally United States governmentor agency securities.Section 23B of
the Federal Reserve Act generally requires covered and other transactions among affiliatesto be on terms and under
circumstances, including credit standards, that are substantially the same as or at least asfavorable to the bank or its
subsidiary as those prevailing at the time for similar transactions with unaffiliatedcompanies.
Federal Reserve policy and the Federal Deposit Insurance Act, as amendedby the Dodd-Frank Act, require a bank holding
company to act as a source of financial and managerial strength to its FDIC-insuredsubsidiaries and to take measures to
preserve and protect such bank subsidiaries in situations where additional investmentsin a bank subsidiary may not
otherwise be warranted.In the event an FDIC-insured subsidiary becomes subject to a capital restorationplan with its
regulators, the parent bank holding company is required to guarantee performance ofsuch plan up to 5% of the bank’s
assets, and such guarantee is given priority in bankruptcy of the bank holding company.In addition, where a bank holding
company has more than one bank or thrift subsidiary,each of the bank holding company’ssubsidiary depository institutions
may be responsible for any losses to the FDIC’sDeposit Insurance Fund (“DIF”), if an affiliated depository institutionfails.
As a result, a bank holding company may be required to loan money to a bank subsidiary in theform of subordinate capital
notes or other instruments which qualify as capital under bank regulatory rules.However, any loans from the holding
company to such subsidiary banks likely will be unsecured and subordinated tosuch bank’s depositors and to other
creditors of the bank.See “Capital.”
As a result of legislation in 2014 and 2018, the Federal Reserve has revised its Small BankHolding Company Policy
Statement (the “Small BHC Policy”) to expand it to include thrift holding companies and increasethe size of “small” for
qualifying bank and thrift holding companies from $500 million to up to $3billion of pro forma consolidated assets.
The Federal Reserve confirmed in 2018 that the Company is eligible for treatment asa small banking holding company
under the Small BHC Policy.As a result, unless and until the Company fails to qualify under the Small BHC Policy,the
Company’s capital adequacywill continue to be evaluated on a bank only basis.See “Capital.”
The Bank is a state bank that is a member of the Federal Reserve.It is subject to supervision, regulation and examination
by the Federal Reserve and the Alabama Superintendent, which monitor all areasof 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.The Bank is a member of the FDIC and, as such, its deposits are insured by
the FDIC to the maximum extent provided by law,and the Bank is subject to various FDIC regulations applicable to FDIC-
insured banks.See “FDIC Insurance Assessments.”
Alabama law permits statewide branching by banks.The powers granted to Alabama-chartered banks by state law include
certain provisions designed to provide such banks competitive equality with nationalbanks.
The Federal Reserve has adopted the Federal Financial Institutions Examination Council’s(“FFIEC”) Uniform Financial
Institutions Rating System (“UFIRS”), which assigns each financial institution aconfidential composite “CAMELS” rating
based on an evaluation and rating of six essential components of an institution’sfinancial condition and operations:
ensitivity to market risk, as well as the quality of risk
management practices.For most institutions, the FFIEC has indicated that market risk primarily reflectsexposures to
changes in interest rates.When regulators evaluate this component, consideration is expectedto be given to: management’s
ability to identify, measure,monitor and control market risk; the institution’ssize; the nature and complexity of its activities
and its risk profile; and the adequacy of its capital and earnings in relation to its level of market risk exposure.Market risk
is rated based upon, but not limited to, an assessment of the sensitivity of the financial institution’searnings or the
economic value of its capital to adverse changes in interest rates, foreign exchange rates,commodity prices or equity prices;
management’s ability to identify,measure, monitor and control exposure to market risk; and the nature andcomplexity of
interest rate risk exposure arising from non-trading positions. Compositeratings are based on evaluations of an institution’s
managerial, operational, financial and compliance performance. Thecomposite CAMELS rating is not an arithmetical
formula or rigid weighting of numerical component ratings. Elements ofsubjectivity and examiner judgment, especially as
these relate to qualitative assessments, are important elements in assigning ratings.The federal bank regulatory agencies
are reviewing the CAMELS rating system and their consistency.
In addition, and separate from the interagency UFIRS, the Federal Reserve assigns a risk-management rating to all state
member banks. The summary,or composite, rating, as well as each of the assessment areas, including risk management,is
delineated on a numerical scale of 1 to 5, with 1 being the highest or best possible rating. Thus,a bank with a composite
rating of 1 requires the lowest level of supervisory attention while a 5-rated bank has themost critically deficient level of
performance and therefore requires the highest degree of supervisory attention.
The GLB Act and related regulations require banks and their affiliated companiesto adopt and disclose privacy policies,
including policies regarding the sharing of personal information with third parties.The GLB Act also permits bank
subsidiaries to engage in “financial activities” similar to those permitted to financialholding companies. In December 2015,
Congress amended the GLB Act as part of the Fixing America’sSurface Transportation Act. This amendmentprovided
financial institutions that meet certain conditions an exemption to the requirement to deliveran annual privacy notice. On
August 10, 2018, the federal Consumer Financial Protection Bureau (“CFPB”)announced that it had finalized conforming
amendments to its implementing regulation, Regulation P.
A variety of federal and state privacy laws govern the collection, safeguarding, sharing anduse of customer information,
and require that financial institutions have policies regarding information privacyand security. Some state laws alsoprotect
the privacy of information of state residents and require adequate security of such data,and certain state laws may, insome
circumstances, require us to notify affected individuals of security breachesof computer databases that contain their
personal information. These laws may also require us to notify law enforcement, regulatorsor 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. McHenry,the
Chairman of the House Financial Services Committee, to which the Bill was referred.It amends various sections of the
GLB Act and preempts certain state privacy laws.Its preemption provisions have triggered opposition by the minority in
the House of Representatives.
Community Reinvestment Act and Consumer Laws
The Bank is subject to the provisionsof the CRA and the Federal Reserve’s CRAregulations.Under the CRA, all FDIC-
insured institutions have a continuing and affirmative obligation,consistent with their safe and sound operation, to help
meet the credit needs for their entire communities, including low-and moderate-income (“LMI”) neighborhoods.The CRA
requires a depository institution’s primaryfederal regulator to periodically assess the institution’srecord of assessing and
meeting the credit needs of the communities served by that institution, including low-and moderate-income neighborhoods.
The bank regulatory agency’sCRA assessment is publicly available.Further, consideration of the CRA is required of any
FDIC-insured institution that has applied to: (i) charter a national bank; (ii) obtain depositinsurance coverage for a newly-
chartered institution; (iii) establish a new branch office that acceptsdeposits; (iv) relocate an office; or (v) merge or
consolidate with, or acquire the assets or assume the liabilities of, an FDIC-insured financialinstitution.In the case of bank
holding company applications to acquire a bank or other bank holding company,the Federal Reserve will assess and
emphasize CRA records of each subsidiary depository institution of the applicant bankholding 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.A less than satisfactory CRA rating will slow,if not preclude, acquisitions, and new branches and
other expansion activities and may prevent a company from becoming a financialholding company.The Federal Reserve
also considers the effect of a bank acquisition proposal on the convenienceand need of the markets served by the
CRA agreements with private parties must be disclosed and annualCRA reports must be made to a bank’s primaryfederal
regulator.Community benefit plans have become common in banking mergers, especiallylarger bank combinations.The
National Community Resolution Coalition reported in February 2023that it had executed more than 20 community benefit
plans with banking organizations.A financial holding company election, and such election and financial holding company
activities are permitted to be continued, only if any affiliatedbank 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.
On December 13, 2019, the FDIC and OCC issued a joint notice of proposed rulemakingseeking comment on modernizing
the agencies’ CRA regulations. The OCC issued final revised CRA Rules effectiveOctober 1, 2020, which were repealed
in 2021.The Federal bank regulators are cooperating and working on new joint CRA regulations,which were proposed in
The Bank is also subject to, among other things, the Equal Credit Opportunity Act (the“ECOA”) and the Fair Housing Act
and other fair lending laws, which prohibit discrimination based on race orcolor, religion, national origin, sex and familial
status in any aspect of a consumer or commercial credit or residential real estate transaction.The Department of Justice
(the “DOJ”), and the federal bank regulatory agencies have issued an Interagency PolicyStatement on Discrimination in
Lending to provide guidance to financial institutions in determining whether discriminationexists, how the agencies will
respond to lending discrimination, and what steps lenders might take to prevent discriminatorylending practices.The DOJ
has prosecuted what it regards as violations of the ECOA, the Fair Housing Act, andthe fair lending laws, generally.
The Bank had a “satisfactory” CRA rating in its latest CRA public evaluation dated February 28,2022, with satisfactory
ratings on both its lending and community development tests.
On December 13, 2019, the FDIC and OCC issued a joint notice of proposed rulemakingse