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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.

20549

FORM

10-K

☒

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

Exchange Act of 1934.

For the fiscal year ended

December 31, 2025

☐

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

For the transition period from __________ to __________

Commission File Number:

0-26486

Auburn National Bancorporation, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Delaware

63-0885779

(State or other jurisdiction

of incorporation)

(I.R.S. Employer

Identification No.)

100 N. Gay Street

Auburn,

Alabama

36830

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (

334

)

821-9200

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

Title of Each Class

Trading Symbol

Name of Exchange on which Registered

Common Stock

, par value $0.01

AUBN

NASDAQ

Global Market

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

None

Indicate by check mark if the registrant

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

of the Securities Act. Yes

☐

☒

Indicate by check mark if the registrant

is not required to file reports pursuant to

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

☐

☒

Indicate by check mark whether the registrant

(1) has filed all reports required to be

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

Exchange Act of 1934 during the

preceding 12 months (or for such shorter period

that the registrant was required to file

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

such filing requirements for the past

90 days.

Yes

☒

☐

Indicate by check mark whether the registrant

has submitted electronically every Interactive

Data File required to be submitted pursuant

to Rule 405 of Regulation S-

T (§ 232.405 of this chapter) during

the preceding 12 months (or for such shorter

period that the registrant was required

to submit such files).

Yes

☒

☐

Indicate by check mark whether the registrant

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

filer, or a smaller reporting company. See the

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

“smaller reporting company” in Rule 12b-2

of the Exchange Act. (Check one):

Large Accelerated filer

☐

Accelerated filer

☐

Non-accelerated filer

☒

Smaller reporting company

☒

Emerging Growth

Company

☐

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

has selected not to use the extended

transition period for complying with any

new or revised

financial accounting standards provided pursuant

to Section 13(a) of the Exchange Act.

☐

Indicate by check mark whether the registrant

has filed a report on and attestation

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

over

financial reporting under Section 404(b)

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

by the registered public accounting firm

that prepared or issued its audit

report.

☐

If securities are registered pursuant to Section

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

whether the financial statements of the registrant

included in the filing reflect

the correction of an error to previously

issued financial statements.

☐

Indicate by check mark whether any of

those error corrections are restatements

that required a recovery analysis of incentive-based

compensation received by any of

the registrant’s executive officers during the relevant recovery period

pursuant to §240.10D-1(b).

☐

Indicate by check mark if the registrant

is a shell company (as defined in Rule

12b-2 of the Act). Yes

☐

☒

State the aggregate market value of the

voting and non-voting common equity

held by non-affiliates computed by reference to the

price at which the common equity

was last sold, or the average bid and asked

price of such common equity as of the last

business day of the registrant’s most recently completed

second fiscal quarter:

55,287,550

as of June 30, 2025.

APPLICABLE ONLY TO CORPORATE REGISTRANTS

Indicate the number of shares outstanding

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

of the latest practicable date:

3,493,699

shares of common stock as

of March 16, 2026.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the Annual

Meeting of Shareholders, scheduled to

be held May 12, 2026, are incorporated by

reference into Part II, Item 5 and

Part III of this Form 10-K.

Table of Contents

TABLE OF CONTENTS

PART I

PAGE

ITEM 1.

BUSINESS

ITEM 1A.

RISK FACTORS

ITEM 1B.

UNRESOLVED STAFF COMMENTS

ITEM 1C.

CYBERSECURITY

ITEM 2.

PROPERTIES

ITEM 3.

LEGAL PROCEEDINGS

ITEM 4.

MINE SAFETY DISCLOSURES

PART II

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER

MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON

ACCOUNTING AND FINANCIAL DISCLOSURE

106

ITEM 9A.

CONTROLS AND PROCEDURES

106

ITEM 9B.

OTHER INFORMATION

107

ITEM 9C.

DISCLOSURE REGARDING FORGEIN JURISDICTIONS THAT PREVENT

INSPECTION

107

PART III

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

108

ITEM 11.

EXECUTIVE COMPENSATION

108

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND

MANAGEMENT AND RELATED STOCKHOLDER MATTERS

108

ITEM 13.

CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR

INDEPENDENCE

108

ITEM 14.

PRINCIPAL ACCOUNTING FEES AND SERVICES

108

PART IV

ITEM 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

109

ITEM 16.

FORM 10-K SUMMARY

110

Table of Contents

PART

SPECIAL CAUTIONARY NOTE REGARDING

FORWARD

-LOOKING STATEMENTS

Various

of the statements made herein under the captions “Business,” Properties,” “Risk Factors,”

“Management’s

Discussion and Analysis of Financial Condition and Results of Operations”,

“Quantitative and Qualitative Disclosures

about Market Risk”, and elsewhere, are “forward-looking statements” within

the meaning and protections of Section 27A

of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,

as amended (the “Exchange Act”).

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

objectives, goals, expectations,

anticipations, assumptions, estimates, intentions and future performance,

and involve known and unknown risks,

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

and which may cause the actual results, performance,

achievements or financial condition of the Company to be materially different

from future results, performance,

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

statements.

You

should not expect us to

update any forward-looking statements.

All statements other than statements of historical fact could be forward-looking

statements.

You

can identify these

forward-looking statements through our use of words such as “may,”

“will,” “anticipate,” “assume,” “should,” “indicate,”

“would,” “believe,” “contemplate,” “expect,” “estimate,” “continue,”

“designed”, “plan,” “point to,” “project,” “could,”

“intend,” “target,” “seek” and other similar words and expressions of the

future.

These forward-looking statements may not

be realized due to a variety of factors, including, without limitation:

●

the effects of future economic, business and market conditions and

changes, foreign, domestic and locally,

including inflation, seasonality,

natural disasters such as hurricanes, and tornados and floods, epidemics or

pandemics, supply chain disruptions and changes in consumer behaviors;

●

the effects of war, other conflicts or

attacks, acts of terrorism, trade restrictions, tariffs, sanctions,

the value of the

U.S. dollar against other currencies, or other events that may affect general

economic conditions, and consumer

and business confidence;

●

governmental fiscal and monetary policies and changes, including

taxes, the amount of federal deficit spending

and the debt to fund such spending, changes in monetary policies, including

changes in the Federal Reserve’s

target federal funds rate and in the Federal Reserve’s

holdings of securities through quantitative tightening or

easing; and the duration that the Federal Reserve will keep its targeted federal

funds rates at or above current target

ranges to meet its long term inflation target of 2%;

●

changes in market interest rates and the shape of the yield curve on changes in savings,

deposit and payment

behaviors, the levels, composition and costs of deposits, loan demand and mortgage

loan originations, and the

values and liquidity of and interest-sensitive assets and liabilities;

●

increases in market interest rates that may result in unrealized losses on our

securities portfolio, which adversely

affect our stockholders’ equity for financial reporting purposes and

our tangible equity;

●

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

national and other providers of financial,

investment and insurance services, including the disruptive effects

of financial technology and products, including

stablecoin and other digital assets businesses, which are not subject to the same

regulation, including capital and

liquidity requirements, internal controls, and supervision and examination,

as the Company and the Bank, and

competition from credit unions, which are not subject to federal income taxation;

●

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

currency and stablecoins (including

rewards or other forms of payments functionally similar to interest), that

increases competition to banks, increases

risks to the payment systems, increases risks of fraud and theft of digital assets and their effects

on customers other

financial institutions, including our counterparties, and confidence

in the financial system, generally;

●

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

application by the regulators, including

capital and liquidity requirements, and in the coverage and cost of FDIC deposit

insurance;

Table of Contents

●

legislative, executive branch and regulatory changes, including changes

in policy, leadership and personnel,

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

and securities regulators and the

CFPB, and the uncertain effects of all these, including the costs and

benefits of such changes;

●

the effects of the potential privatization and changes to Fannie Mae

and Freddie Mac and its purchases of

mortgage-backed securities on the mortgage markets and to us as an

originator, seller and servicer of residential

mortgage loans;

●

the assumptions, judgments and estimates made by the Company,

including those used in the Company’s CECL

models to establish our allowance for credit losses and asset impairments, as well as differences

in, and changes to,

economic, market and credit conditions, including changes in employment

levels and payment behaviors from

those used in our CECL models and loan portfolio reviews;

●

changes in accounting pronouncements and interpretations;

●

changes in borrower credit risks, and;

●

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

the types of instruments that

may be included as capital for regulatory purposes;

●

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

costly and risky, or less effective

than

anticipated;

●

threats of potential cyber-attacks and data breaches, in constantly changing

forms and increasing sophistication,

including through the use of artificial intelligence and state sponsorship

of the attacks;

●

the estimates that our future taxable income could be inaccurate, and if lower taxable

income is realized from our

operations, the amount of our deferred tax assets that we anticipate will be reduced;

●

our future earnings and “eligible retained earnings” over rolling four calendar

quarter periods may limit our

dividends, share repurchases and discretionary bonuses; and

●

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

subsequent reports that we make

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

“SEC”) under the Exchange Act.

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

to us are expressly qualified in their entirety

by this cautionary notice.

We have no obligation

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

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

such statements otherwise are made.

ITEM 1.

BUSINESS

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

company registered with the Board of Governors

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

Company Act of 1956, as amended (the

“BHC Act”).

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

its Alabama predecessor as

the bank holding company controlling AuburnBank, an Alabama state member

bank with its principal office in Auburn,

Alabama (the “Bank”).

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

As a bank holding

company, the Company

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

currently

are permitted to the Bank under applicable laws and regulations.

The holding company structure also provides greater

financial and operating flexibility than is presently permitted to the

Bank.

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

primarily in East Alabama, including

Lee County and surrounding areas.

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

“Federal

Reserve Bank”) since April 1995.

The Bank’s primary regulators are the Federal

Reserve and the Alabama Superintendent

of Banks (the “Alabama Superintendent”).

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

“FHLB-Atlanta”) since 1991.

Table of Contents

General

The Company’s business is conducted

primarily through the Bank and its subsidiaries.

Although it has no immediate plans

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

indirectly in a number of activities closely related to

banking permitted by the Federal Reserve.

The Company’s principal

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

and its telephone

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

The Company maintains an Internet website at

www.auburnbank.com

The

Company’s website and

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

this report.

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

information with the

SEC.

You

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

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

Washington,

DC 20549.

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

reference rooms.

The SEC maintains an Internet site at

www.sec.gov

that contains reports, proxy,

and other information,

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

Services

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

Notasulga, and Valley,

Alabama and a loan

production office in Phenix City,

Alabama.

evaluate the utilization of our existing facilities and customer preferences

for online and mobile banking.

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

branch office in Auburn

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

efficiently by another existing Bank branch.

The Bank offers checking, savings, transaction deposit accounts

and certificates of deposit, and is an active residential

mortgage lender in its primary service area.

The Bank’s primary service area includes

the cities of Auburn and Opelika,

Alabama and nearby surrounding areas in East Alabama, primarily

in Lee County.

The Bank also offers commercial,

financial, agricultural, real estate construction and consumer loan products,

and other financial services.

The Bank operates

ATM

machines in 8 locations in its primary service area.

The Bank offers Visa

Checkcards, which are debit cards with

the Visa logo that work like

checks and can be used anywhere Visa

is accepted, including ATMs.

The Bank’s Visa

Checkcards can be used internationally through the Plus

network.

The Bank offers online banking, bill payment, online

consumer account opening, and other electronic banking services through

its Internet website, www.auburnbank.com

Our

online banking services, bill payment and electronic services are subject

to certain cybersecurity risks.

See “Risk Factors –

Our information systems may experience interruptions and

security breaches.”

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

other digital or crypto instruments, stablecoins or

businesses.

Competition

The Bank operates in a highly competitive market for loans, deposits and

other financial services in East Alabama,

including Lee County.

Based on FDIC deposit market share data as of June 30, 2025, the Bank held

the largest share of

deposits in Lee County.

The Bank competes with 20 national, regional and community banks with offices

in Lee County,

which operate offices in the local market and many have substantially greater

financial, technological and marketing

resources.

The Bank also competes with credit unions, mortgage lenders, insurance

companies, investment firms and other

financial service providers. In addition, financial services are increasingly

offered through digital and online platforms by

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

Many larger financial institutions have advantages over

the Bank, including broader product offerings, higher lending

limits, greater access to capital markets, more extensive advertising and

marketing capabilities, and the ability to operate

across larger geographic markets.

The Bank also faces significant competition for deposits and other financial

services

from investment companies, mutual funds, insurance companies and other

financial institutions offering alternative savings

and investment products. Some of these competitors may not be subject

to the same regulatory requirements as banks.

The Bank seeks to compete by emphasizing customer relationships, community

presence, local decision-making and

responsive service.

Table of Contents

Selected Economic Data

The Company’s primary market area

is Lee County, Alabama, including

the cities of Auburn and Opelika and surrounding

communities in East Alabama. Lee County is part of the Auburn-Opelika

metropolitan statistical area. The local economy

is influenced by higher education, healthcare services, public education,

distribution and logistics operations, retail and

service businesses, and automobile manufacturing and related suppliers

located in the region.

Major employers in the area

include Auburn University,

regional healthcare providers, public school systems, manufacturing facilities,

and distribution

operations. The presence of large automobile manufacturing

plants and related suppliers along the Interstate 85 corridor in

eastern Alabama and western Georgia also contributes

significantly to economic activity in the region and supports local

employment, business development, and population growth.

As of year-end 2025, Lee County’s

unemployment rate was

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

Economic conditions in our market area, including employment levels, housing

activity, business investment, inflation

and

interest rates, influence loan demand, credit quality,

deposit growth, and other aspects of our operations. Changes in these

conditions could affect our results of operations and financial

condition.

The Auburn-Opelika metropolitan area has experienced population

and economic growth in recent years, supported by

expansion in education, healthcare, manufacturing and related industries.

Continued growth in these sectors may influence

future economic conditions in our market area.

Loans and Loan Concentrations

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

real estate mortgages, real estate

acquisition, construction and development and consumer purposes.

While there are certain risks unique to each type of

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

real estate acquisition, construction and

development, agricultural and consumer lending than with residential real

estate mortgage loans.

To help manage these

risks, the Bank has established underwriting standards used in evaluating

each extension of credit on an individual basis,

which are substantially similar for each type of loan.

These standards include a review of the economic conditions

affecting the borrower,

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

collateral and the

borrower’s past credit performance.

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

throughout the

life of the loan.

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

real estate

lending.

Our commercial real estate (“CRE”) loans, including $59.6 million of

loans on owner occupied property,

as of December

31, 2025 totaled $325.5 million (58% of total loans).

Our regulators’ CRE Guidance excludes loans on owner occupied

property from CRE.

Excluding our owner-occupied loans, our CRE loans were $290.2 million

(51% of total loans) at year

end 2024.

See “Lending Practices –

CRE.

”

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

primary service area.

Any adverse economic or

other conditions affecting these industries would also likely

have an adverse effect on the local workforce, other local

businesses, and individuals in the community that have entered

into loans with the Bank.

For example, the auto

manufacturing business and its suppliers have positively

affected our local economy,

but automobile sales manufacturing is

cyclical and adversely affected by increases in interest rates.

Decreases in automobile sales, including adverse changes due

to interest rate increases and inflation, tariffs, supply

chain disruptions (including changes resulting from the effects of

tariffs and related changes in countries and producers in

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

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

and employment, and could adversely affect

economic conditions in the markets we serve.

However, management believes that due

to the diversified mix of industries

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

affect other area industries to the same

degree or within the same time frame.

The Bank’s primary service area also is subject

to both local and national economic

conditions and fluctuations.

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

tgage loans

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

time to time has purchased loan participations from

outside its primary service area.

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

have

a relationship with the borrower, or

its business or owners.

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Human Capital

At December 31, 2025, the Company and its subsidiaries had 145 full-time

equivalent employees, including 37 officers.

Our employees have been with us an average of approximately 12 years.

We successfully implemented

plans to protect our

employees’ health consistent with CDC and State of Alabama guidelines

during the COVID-19 pandemic, while

maintaining critical banking services to our communities and experiencing

little employee turnover.

In addition, we

developed our remote and electronic banking services, and established remote

work access to help employees stay at home

where their job duties permitted.

This promoted employee retention, and these efforts will provide us

proven experience

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

customers and communities continuity

of service.

We have a talented

group of employees, many of whom, have a college or associate degree.

We believe the

Auburn-

Opelika MSA is a desirable place to live and work with excellent schools and quality

of life.

Our MSA was the second

fastest growing MSA in Alabama from 2010 to 2022.

Auburn University is a major employer that attracts talented students

and employee families.

We had a successful

management transition in 2022 where our CEO became Chairman,

and was succeeded by our CFO,

whose role was then filled by our Chief Accounting Officer.

At the time of transition, our Chairman had served the Bank

39 years, our President and CEO had been with us 16 years and our Chief Accounting

Officer had been with us for 7 years.

Our new President and CFO had careers with major national and regional

accounting firms and focused on financial

services before joining the Bank.

We seek to offer

competitive compensation and benefits.

We provide

employer matches for employee contributions to our

401(k) retirement plan.

In 2024, our shareholders approved our 2024 Equity and Incentive Compensation

Plan (the “2024

Incentive Plan”).

The Plan provides for a variety of equity and equity-based awards, including stock

options, performance

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

stock and restricted stock units (“RSUs”) and cash

incentive awards.

We believe that the

2024 Incentive Plan provides the flexibility to structure appropriate incentives

attract and retain talented people in a competitive market where many of our

competitors are public companies who offer

stock-based incentives.

We encourage

and support the growth and development of our employees and, wherever possible, seek to

fill positions by

promotion and transfer from within the organization.

Career development is advanced through ongoing performance and

development conversations with employees, internally developed

training programs and other training and development

opportunities.

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

to these communities and our

employees.

Statistical Information

Certain statistical information is included in responses to Items 6, 7, 7A and 8

of this Annual Report on Form 10-K.

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SUPERVISION AND REGULATION

The Company and the Bank are extensively regulated under federal

and state laws applicable to bank holding companies

and banks.

The supervision, regulation and examination of the Company and the Bank and their

respective subsidiaries by

the bank regulatory agencies are primarily intended to maintain the

safety and soundness of depository institutions and the

federal deposit insurance system, as well as the protection of depositors,

rather than holders of Company capital stock and

other securities.

Various

changes in legislation and regulatory rules and practices occur regularly.

Any change in

applicable law or regulation may have a material effect on

the Company’s business, and our results of

operations and

financial condition.

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

and

regulatory proposals referred to below.

Bank Holding Company Regulation

The Company, as a bank

holding company, is subject to supervision,

regulation and examination by the Federal Reserve

under the BHC Act.

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

managing or controlling

banks, and certain related activities. The Company is required to file

periodic reports and other information with the Federal

Reserve. The Federal Reserve examines the Company and its subsidiaries.

The State of Alabama currently does not

regulate bank holding companies.

The BHC Act requires prior Federal Reserve approval for,

among other things, the acquisition by a bank holding company

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

shares or substantially all the assets of any bank, or

for a merger or consolidation of a bank holding company

with another bank holding company.

The BHC Act generally

prohibits a bank holding company from acquiring direct or indirect

ownership or control of voting shares of any company

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

indirectly in any activity other than banking or

managing or controlling banks or performing services for its authorized

subsidiaries. A bank holding company may,

however, engage in or acquire an interest

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

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

controlling banks as to be a proper incident

thereto.

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

to, and nonobjection by the Federal Reserve under

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

holding companies controlling

Alabama state banks, by the Alabama Superintendent of Banks (the “Alabama

Superintendent”) under the Alabama

Banking Code.

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

“well-managed,” as defined in Federal Reserve

Regulation

and whose insured depository institution subsidiaries maintain “satisfactory”

or better ratings under the

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

“financial holding companies.” Financial holding

companies and their subsidiaries are permitted to acquire or engage

in activities such as insurance underwriting, securities

underwriting, travel agency activities, broad insurance agency

activities, merchant banking and other activities that the

Federal Reserve determines to be financial in nature or complementary

thereto. In addition, under the BHC Act’s merchant

banking authority and Federal Reserve regulations, financial holding

companies are authorized to invest in companies that

engage in activities that are not

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

to, and nonobjection by the Federal Reserve under

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

holding companies controlling

Alabama state banks, by the Alabama Superintendent of Banks (the “Alabama

Superintendent”) under the Alabama

Banking Code.

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

“well-managed,” as defined in Federal Reserve

Regulation

and whose insured depository institution subsidiaries maintain “satisfactory”

or better ratings under the

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

“financial holding companies.” Financial holding

companies and their subsidiaries are permitted to acquire or engage

in activities such as insurance underwriting, securities

underwriting, travel agency activities, broad insurance agency

activities, merchant banking and other activities that the

Federal Reserve determines to be financial in nature or complementary

thereto. In addition, under the BHC Act’s merchant

banking authority and Federal Reserve regulations, financial holding

companies are authorized to invest in companies that

engage in activities that are not financial in nature, as long as the financial

holding company makes its investment, subject

to limitations, including a limited investment

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

any depositary

institutions controlled by the financial holding company.

The Company has not elected to become a financial holding

company, but it may

elect to do so in the future. Financial holding companies continue to be subject to Federal

Reserve

supervision, regulation and examination.

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

of functional

regulation to subsidiary activities.

For example, insurance activities are subject to supervision and regulation

by state insurance authorities and securities

broker-dealer and investment advisory activities are regulated by

the SEC.

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

subject to various restrictions, including that the

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

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

primary federal regulator pursuant to the Bank Merger Act. The

BHC Act and the Bank Merger Act provide various

generally similar statutory factors. Under the Alabama Banking

Code, the Alabama Superintendent may approve an

Alabama bank’s acquisition

and operation of banks in other states.

Also, Alabama banks may enter be acquired by an out-

of-state bank, and the resulting out-of-state bank may continue to operate the

acquired branches in Alabama.

Banks,

including Alabama banks, may branch anywhere in the United States and out

of state banks may branch into Alabama.

See

“Bank Regulation”.

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

Various

legal limitations restrict the Bank from lending

or otherwise supplying funds to the Company.

The Company and the Bank are subject to Sections 23A and 23B of the

Federal Reserve Act and Federal Reserve Regulation W thereunder.

Section 23A defines “covered transactions,” which

include extensions of credit and other transactions with affiliates, and

limits a bank’s covered transactions

with any affiliate

to 10% of such bank’s capital and

surplus. All covered and exempt transactions between a bank and its affiliates

must be on

terms and conditions consistent with safe and sound banking practices,

and banks and their subsidiaries are prohibited from

purchasing low-quality assets from the bank’s

affiliates.

Section 23A requires that all of a bank’s

extensions of credit to its

affiliates be appropriately secured by permissible collateral, generally

United States government or agency securities.

Section 23B of the Federal Reserve Act generally requires covered

and other transactions among affiliates to be on terms

and under circumstances, including credit standards, that are substantially the

same as or at least as favorable to the bank or

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

companies.

Federal Reserve policy and the Federal Deposit Insurance Act require

a bank holding company to act as a source of

financial and managerial strength to its FDIC-insured subsidiaries and

to take measures to preserve and protect such bank

subsidiaries in situations where additional investments in a bank subsidiary

may not otherwise be warranted.

In the event

an FDIC-insured subsidiary becomes subject to a regulatory capital restoration

plan, the parent bank holding company is

required to guarantee the performance of such plan up to 5% of the bank’s

assets, and such guarantee is given priority in a

bankruptcy of the bank holding company.

Where a bank holding company has more than one bank or thrift subsidiary,

each

of the bank holding company’s subsidiary

depository institutions may be responsible for any losses to the FDIC’s

Deposit

Insurance Fund (“DIF”), if an affiliated depository

institution fails. As a result, a bank holding company may be required to

loan money to a bank subsidiary in the form of subordinated capital notes or

other instruments which qualify as capital

under bank regulatory rules.

However, any loans from the holding

company to such subsidiary banks likely will be

unsecured and subordinated to such bank’s

depositors and to other creditors of the bank. See “- Federal Reserve Capital

Rules” and “Prompt Corrective Action.”

The Federal Reserve’s Small Bank

Holding Company Policy Statement (the “Small BHC Policy”) covers

qualifying bank

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

The Federal Reserve treats the Company as a small banking holding

company under the Small BHC Policy.

As a result,

unless and until the Company fails to qualify under the Small BHC Policy,

the Company’s capital adequacy

will continue

to be evaluated on a bank only basis.

See “Capital.”

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Bank Regulation

The Bank is an Alabama state bank that is a member of the Federal Reserve.

It is subject to supervision, regulation and

examination by the Alabama Superintendent and the Federal Reserve, which

monitor all areas of the Bank’s operations,

including loans, reserves, mortgages, capital adequacy,

liquidity, funding sources

and concentrations, issuances and

redemption of capital securities, payment of dividends, establishment of

branches, and compliance with laws. The Bank’s

deposits are insured by the FDIC to the maximum extent provided

by law, and the Bank is subject to various

FDIC

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

Assessments.”

Alabama law permits statewide branching by banks.

The Alabama Banking Code has provisions designed to provide

Alabama banks competitive equality with national banks.

The Bank’s deposits are insured

by the FDIC to the maximum extent provided by law,

and the Bank is subject to various

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

Assessments.”

Under the Federal Financial Institutions Examination Council’s

(“FFIEC”) Uniform Financial Institutions Rating System

(“UFIRS”), the Federal Reserve assigns state member banks a confidential

composite “CAMELS” rating based on an

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

financial condition and operations:

apital Adequacy,

sset Quality,

anagement,

arnings,

iquidity and

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

practices.

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

best.

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

reflects exposures to changes in interest rates.

Regulators’ evaluations of this component, consider management’s

ability to identify, measure,

monitor and control market

risk; the institution’s size; the nature

and complexity of its activities and its risk profile; and the adequacy of its capital and

earnings in relation to its level of market risk exposure. Assessments may be

made of the sensitivity of the financial

institution’s earnings or the

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

exchange rates,

commodity prices or equity prices; management’s

ability to identify, measure,

monitor and control exposure to market risk;

and the nature and complexity of interest rate risk exposure arising from non

-trading positions. See “Management’s

Discussion and Analysis of Financial Condition and Results of Operations –

Market and Liquidity Risk Management.”

Composite CAMELS ratings are based on evaluations of an institution’s

managerial, operational, financial and compliance

performance. The composite CAMELS rating is not an arithmetical formula

or a rigid weighting of numerical component

ratings. Elements of subjectivity and examiner judgment, especially

as these relate to qualitative assessments, are important

elements in assigning ratings. In stressful economic times, the Federal

Reserve has a heightened focus on bank funding

pressures based on risk profiles and management’s

ability to manage their liquidity positions.

In addition, and separate from the UFIRS, the Federal Reserve assigns a risk-management

rating to all state member banks

and bank holding companies. In February 2021 the Federal Reserve expanded

its Guidance for Assessing Risk

Management to institutions with under $100 billion in assets. This guidance

states that principles of sound management

should apply to all risk confronting a banking organization,

including credit, market, liquidity, operational,

compliance, and

legal risks.

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

solely in traditional banking activities and whose senior

management is actively involved in the details of day-to-day operations, relatively

basic risk management systems may be

adequate. In accordance with the Interagency Guidelines Establishing

Standards for Safety and Soundness, a CBO is

expected, at a minimum, to have internal controls, information systems,

and internal audit that are appropriate for the size

of the institution and the nature, scope, and risk of its activities. Each assessment category

and the overall rating is ranked

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

attention.

Bank mergers, which generally accompany holding

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

bank’s primary federal

regulator. The Federal Reserve and the Alabama

Superintendent must approve mergers and

acquisitions by the Bank. The FDIC and the Office of the

Comptroller of the Currency (“OCC”) may comment on mergers

involving the Company or the Bank.

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Bank and bank holding company mergers require evaluation by

the federal bank regulators, among other factors, of the

effects of the transaction on competition under the Bank Merger

Act and the BHC Act. Applications under these Acts also

are subject to United States Department of Justice (“DoJ”) antitrust review

and possible litigation challenges. The DoJ and

the Federal Trade Commission (“FTC”) adopted

new non-binding merger guidelines in 2023. The DoJ revoked

the 1995

Bank Merger Guidelines that were adopted with the federal bank

regulators and adopted a 2024 Banking Addendum to its

2023 merger guidelines. The Federal bank regulators continue

to apply the 1995 Bank Merger guidelines in considering the

competitive effects of mergers.

The DoJ has an important advisory role in bank and BHC mergers,

but the bank regulators are the primary decision makers.

The bank regulators may consider the Antitrust Division’s

competitive factors report as part of their respective review

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

mergers.

The GLB Act and related regulations require banks and their affiliated

companies to adopt and disclose privacy policies,

including policies regarding the sharing of personal information with

third parties.

The GLB Act also permits bank

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

permitted to financial holding companies.

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

sharing and use of customer information,

and require that financial institutions have policies regarding information

privacy and security. Some

state laws also protect

the privacy of information of state residents and require adequate security

of such data, and certain state laws may,

in some

circumstances, require us to notify affected individuals

of security breaches of computer databases that contain their

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

regulators or consumer reporting agencies

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

that own data.

“Open banking” rules were adopted by the Consumer Financial Protection

Bureau (“CFPB”) in 2024 that require covered

financial institutions to provide consumers and authorized third parties

access to consumer financial data through secure

interfaces, has been the subject of litigation. This would make it easier for customers

to move their accounts and assets held

in them.

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

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

is uncertain.

Consumer Laws and the CFPB

The CFPB has a broad mandate that requires it to regulate consumer financial

products and services offered by banks and

nonbanks.

The CFPB is authorized to adopt regulations and enforce various laws, including the

fair lending laws, the Truth

in Lending Act, the Electronic Funds Transfer

Act, mortgage lending rules, the Truth in Savings Act, the Fair

Credit

Reporting Act and Privacy of Consumer Financial Information rules.

Although the CFPB does not examine or supervise

banks with less than $10 billion in assets, the CFPB’s

regulations, and the precedents set in CFPB enforcement actions

and

interpretations apply to all banks.

The CFPB limited its funding requests in 2025 and the 2025 One Big Beautiful tax

act reduced its funding cap from the

Federal Reserve from 12% in 2024 to 6.9%.

The CFPB Acting Director has sought to reduce CFPB staff from

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

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

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

CRA regulations.

The CRA imposes

continuing, affirmative obligations on all FDIC-insured

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

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

moderate-income (“LMI”) neighborhoods. The CRA

requires a depository institution’s

primary federal regulator to periodically assess the institution’s

record of assessing and

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

low- and moderate-income neighborhoods.

The bank regulatory agencies’ CRA assessments are publicly available.

Consideration of CRA performance is required for expansion of bank activities

under the Bank Merger Act and BHC Act,

and for branching and financial holding company activities. A less than satisfactory

CRA rating will slow, if not

preclude

such expansion activities. The federal CRA regulations require that evidence of

discriminatory,

illegal or abusive lending

practices be considered in the CRA evaluation.

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CRA agreements with private parties must be disclosed and annual

CRA reports must be made to a bank’s

primary federal

regulator.

Community benefit plans have become common in banking mergers,

especially larger bank combinations.

The

National Community Reinvestment Coalition reported

that as of January 2026, it had executed 22 community benefit plans

with banking organizations for an aggregate of $606

billion for mortgage, small business and community development

lending, investments and philanthropy in LMI and under-resourced

communities. The Capital One Financial acquisition of

Discover Financial Services in 2025 included a community benefit plan

with another community organization valued at

$265 billion, which is the largest ever.

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

3, 2025, with satisfactory ratings

on both its lending and community development tests.

The Federal Reserve considers the effects of a bank acquisition

proposal on the convenience and needs of the markets

served by the combining organizations, as well as CRA performance

in evaluating merger and acquisition applications

under the Bank Merger Act and the BHC Act and branching applications.

In the case of bank holding company applications

to acquire a bank, the Federal Reserve will assess and emphasize CRA records

of each subsidiary depository institution of

the applicant and the target in meeting the needs of their entire communities,

including LMI neighborhoods. Inadequate

performance records may be the basis for denying an application.

New CRA Rules were adopted by the federal bank regulators in 2023. On

July 16, 2025, prior to the new rules, effective

date, the Federal Reserve, the FDIC, and the OCC jointly issued a proposal to rescind

the 2023 rule and replace these with

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

continue to apply the 1995 CRA

regulations.

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

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

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

color, religion, national origin, sex and familial

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

The DoJ’s and the federal bank

regulatory agencies’ Interagency Policy Statement on Discrimination in

Lending provides guidance to financial institutions.

The DOJ has prosecuted what it regards as violations of the fair lending

laws, generally.

Overdrafts

The federal bank regulators have updated their guidance several times on overdrafts,

including overdrafts incurred at ATMs

and point of sale terminals. The CFPB began refocusing on overdrafts in 2021.

Among other things, the federal regulators

require banks to monitor accounts and to limit the use of overdrafts by customers

as a form of short-term, high-cost credit,

including, for example, giving customers who overdraw their accounts on more than

six occasions where a fee is charged in

a rolling 12-month period, a reasonable opportunity to choose a less costly alternative

and decide whether to continue with

fee-based overdraft coverage. Banks are encouraged to place appropriate

daily limits on overdraft fees, and have been asked

to consider eliminating overdraft fees for transactions that overdraw

an account by de minimis amounts. Overdraft policies,

processes, fees and disclosures have been the subject of various litigation against

banks in various jurisdictions. The federal

bank regulators continue to consider responsible small dollar lending, including

overdrafts and related fee issues, and issued

principles for offering small-dollar loans in a responsible

manner on May 20, 2020.

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

2022) concluded that overdraft fee practices must comply

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

deceptive, and abusive acts or practices in Section 1036

of the Consumer Financial Protection Act. Further,

overdraft fees assessed by financial institutions on transactions that a

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

with these other consumer laws and

regulations.

A CFPB Rule adopted in December 2024 to limit banks with over $10 billion in assets from charging

more than $5 for an

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

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Residential Mortgages

CFPB regulations require that lenders determine whether a consumer

has the ability to repay a mortgage loan.

These

regulations establish certain minimum requirements for creditors when

making ability to repay determinations, and provide

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

and are not “higher-priced.” Generally,

these CFPB regulations apply to all consumer,

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

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

Qualified mortgages must generally satisfy detailed

requirements related to product features, underwriting standards,

and requirements where the total points and fees on a

mortgage loan cannot exceed specified amounts or percentages of the total

loan amount.

Qualified mortgages also must

have: (1) a term not exceeding 30 years; (2) regular periodic payments

that do not result in negative amortization, deferral

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

of the borrower and its credit. On

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

loans. Lenders are required under the law

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

lenders make those loans. Loans that meet

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

to repay.

The Economic Growth, Regulatory Relief, and Consumer Protection Act

of 2018 (the “2018 Growth Act”) provides that

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

in consolidated assets automatically are

deemed “qualified mortgages”, provided:

●

the mortgage is documented;

●

does not include interest only or negative amortizations terms;

●

any prepayment penalties are within the Truth

in Lening act limits; and

●

fees are less than 10% of the loan value.

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

requirements.

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

mortgage servicing standards

include requirements regarding force-placed insurance,

certain notices prior to rate adjustments on adjustable-rate

mortgages, and periodic disclosures to borrowers. Servicers are prohibited

from processing foreclosures when a loan

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

before initiating a foreclosure action.

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

and provide prompt review of any loss

mitigation application. Servicers must maintain accurate and accessible mortgage

records for the life of a loan and until one

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

and compliance risks of servicing mortgage

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

on collateral or the proceeds we may realize

from the sale of foreclosed property.

We focus our

residential mortgage origination on qualified mortgages and those that meet our

investors’ requirements, but

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

mortgages.”

The Bank’s mortgage lending is subject

to the CFPB’s integrated disclosure

rules under the Truth in Lending Act and the

Real Estate Settlement Procedures Act, referred to as “TRID”, for

credit transactions secured by real property.

The Federal Housing Finance Authority (“FHFA”)

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

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

and collectively, “GSE”).

Among these,

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

These rules include the types of loan defects that could

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

loan originator or seller.

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

As a result, the Bank is not

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

on such mortgage loans where the borrower is

entitled to forbearance.

Anti-Money Laundering, Countering the Financing of Terrorism

and Sanctions

Under the Uniting and Strengthening America by Providing Appropriate Tools

Required to Intercept and Obstruct

Terrorism Act of 2001

(the “USA PATRIOT

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

financial transactions and account relationships, as well as to enhanced

due diligence and “know your customer” standards

in their dealings with foreign financial institutions and foreign customers.

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The USA PATRIOT

Act requires financial institutions to establish anti-money laundering

programs, and sets forth

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

●

the development of internal policies, procedures, and controls;

●

the designation of a compliance officer;

●

an ongoing employee training program;

●

an independent audit function to test the programs; and

●

ongoing customer due diligence and monitoring.

The International Money Laundering Abatement and Anti-Terrorism

Funding Act of 2001 specifies “know your customer”

requirements that obligate financial institutions to take actions to verify

the identity of the account holders in connection

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

Bank regulators are required to consider compliance with anti-

money laundering laws in acting upon merger and acquisition and

other expansion proposals under the BHC Act and the

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

imposed in an amount equal to twice the sum involved in

the violating transaction, up to $1 million.

Federal Financial Crimes Enforcement Network (“FinCEN”) rules

require banks to know the beneficial owners of

customers that are not natural persons, update customer information

in order to develop a customer risk profile, and

generally monitor such matters.

The Federal Reserve, the depository institution regulators and FinCEN issued a

Joint Statement on Risk-Focused Bank

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

Under this Join Statement, institutions that operate in

compliance with applicable law,

properly manage customer relationships and effectively mitigate

risks by implementing

controls commensurate with the type and level of their risks are neither prohibited

nor discouraged from providing banking

services.

Examiners review risk management practices to evaluate and

assess whether a bank has developed and

implemented effective processes to identify,

measure, monitor, and control risks.

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

anti-money laundering, Bank Secrecy Act

and countering the financing of terrorism (“AML/CFT”) enforcement,

which clarified that isolated or technical violations

or deficiencies generally are not considered the kinds of problems that would

result in an enforcement action. The statement

addresses how the agencies evaluate violations of individual pillars of the

AML/CFT compliance program. It describes how

the agencies incorporate the customer due diligence regulations and recordkeeping

requirements issued by the United States

Department of the Treasury (the “Treasury”)

as part of the internal controls pillar of a bank’s

AML/BSA compliance

program.

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

Act of 2020 and the Corporate Transparency Act

(collectively, the

“Corporate Transparency Act” or the “CTA”),

to strengthen anti-money laundering and countering

terrorism financing programs.

FinCEN regulation 31 C.F.R.

101.380 implements the CTA

effective on January 1, 2024. These regulations require

entities

to report information about their beneficial owners and the individuals

who created the entity (together, “beneficial

ownership information” or “BOI”). The new rules expand financial institutions’

obligations under the Customer Due

Diligence Rule (“CDD Rule”) to collect information and verify the beneficial

ownership of legal entities. Although the

Company and the Bank are exempt from the CTA’s

requirements to report their own respective beneficial owners, the new

laws may increase the Bank’s anti-money

laundering diligence activities and costs.

Following litigation and nationwide injunctions, the Treasury

Department suspended enforcement of the CTA

on March 2,

2025 with respect to U.S. citizens or domestic reporting companies or

their beneficial owners.

This Alert confirmed

that reporting companies are not currently required to file beneficial ownership

information and are not subject to liability if

they fail to do so while the suspension continues.

FinCEN published an interim final rule on March 26, 2025, that revised the definition

of “reporting company” in its

regulations implementing the CTA

to include only entities formed under the law of a foreign country

that have registered to

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

secretary of state or similar office

(formerly known as “foreign reporting companies”).

FinCEN also formally exempted entities previously known as

“domestic reporting companies” from the CTA’s

reporting requirements.

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Bills have been introduced in Congress to repeal the CTA,

and it is unknown whether these will pass or if the

Administration will continue to defend the litigation challenging the

CTA.

The United States has imposed various sanctions upon foreign

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

Venezuela,

and certain of their government officials and persons.

Banks are required to comply with these sanctions, which

require additional customer screening and transaction monitoring.

Russia’s February 2022 invasion

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

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

bank regulators have issued alerts that

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

the invasion.

Other Laws and Regulations

The Company is required to comply with various corporate governance

and financial reporting requirements under the

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

by the SEC, the Public Company Accounting

Oversight Board and Nasdaq. In particular,

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

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

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

FDIC rules on internal controls, and

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

compliance with these rules.

If the Company fails

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

affect its reputation, its ability to obtain the

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

and other financial institutions with which

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

sell Company securities on terms and conditions

acceptable to the Company.

The Company’s assessment of its financial reporting

controls as of December 31, 2025 is

included in this report with no material weaknesses reported.

Capital

The Federal Reserve has risk-based capital guidelines for bank holding

companies and state member banks, respectively.

These guidelines require a minimum ratio of capital to risk-weighted

assets (including certain off-balance sheet activities,

such as standby letters of credit) and capital conservation buffer,

totaling 10.5%.

Tier 1 capital includes common equity

and related retained earnings and a limited amount of qualifying preferred

stock, less goodwill and certain core deposit

intangibles.

Voting

common equity must be the predominant form of capital.

Tier 2 capital consists of non–qualifying preferred

stock, qualifying subordinated, perpetual, and/or mandatory convertible

debt, term subordinated debt and intermediate term preferred stock, up

to 45% of pretax unrealized holding gains on

available for sale equity securities with readily determinable market

values that are prudently valued, and a limited amount

of general loan loss allowance. Tier 1 and Tier

2 capital equals total capital.

The Federal Reserve also has minimum leverage ratio guidelines for

bank holding companies not subject to the Small BHC

Policy, and state member

banks, which provide for a minimum leverage ratio of Tier

1 capital to adjusted average quarterly

assets (“leverage ratio”) equal to 4%.

However, bank regulators expect banks and bank

holding companies to operate with

a higher leverage ratio.

Lastly, the Federal Reserve

indicates that it will continue to consider a “tangible Tier

1 leverage ratio” (deducting all

intangibles) in evaluating proposals for expansion or new activities.

The level of Tier 1 capital to risk-adjusted

assets is

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

Under Federal Reserve policies, bank holding companies are generally

expected to operate with capital positions well

above the minimum ratios.

The guidelines also provide that institutions experiencing internal growth or

making

acquisitions will be expected to maintain strong capital positions substantially

above the minimum supervisory levels

without significant reliance on intangible assets.

Higher capital may be required in individual cases, depending upon a

bank’s or bank holding

company’s risk profile, and the level and

nature of their risks, including the volume and severity of

their problem loans.

The Federal Reserve believes

the risk-based ratios do not fully take into account the quality of capital

and interest rate, liquidity,

market and operational risks. Accordingly,

supervisory assessments of capital adequacy may

differ significantly from conclusions based solely on

the level of an organization’s

risk-based capital ratio.

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The Federal Reserve has not advised the Company or the Bank of any specific

minimum leverage ratio or tangible Tier 1

leverage ratio applicable to them.

The Federal Deposit Insurance Corporation Improvement Act of 1991

(“FDICIA”), among other things, requires the federal

banking agencies to take “prompt corrective action” regarding depository

institutions that do not meet minimum capital

requirements.

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

“undercapitalized,”

“significantly undercapitalized” and “critically undercapitalized.”

A depository institution’s capital tier will depend

upon

how its capital levels compare to various relevant capital measures and

certain other factors established by regulation.

See

“Prompt Corrective Action Rules.”

Federal Reserve Capital Rules

General

The Federal Reserve and the other federal bank regulators adopted

in June 2013 final capital rules for bank holding

companies and banks implementing the Basel Committee on Banking

Supervision’s “Basel III: A Global

Regulatory

Framework for more Resilient Banks and Banking Systems.”

These “Basel III Capital Rules” in Federal Reserve

Regulation Q were fully phased-in, generally,

on January 1, 2019.

The Bank has elected not to have its capital structure evaluated under

the community bank leverage framework permitted

by the 2018 Growth Act.

Regulation Q generally limits Tier 1 capital

to common stock and noncumulative perpetual preferred stock.

Regulation Q

defines “Common Equity Tier I Capital” or “CET1”

to include common stock and related surplus, retained earnings, and

subject to certain adjustments, minority common equity interests in subsidiaries.

CET1 is reduced by deductions for:

●

Goodwill and other intangibles, other than mortgage servicing assets (“MSRs”),

which are treated separately,

net

of associated deferred tax liabilities (“DTLs”);

●

Deferred tax assets (“DTAs”)

arising from operating losses and tax credit carryforwards net of allowances

and

DTLs;

●

Gains on sale from any securitization exposure; and

●

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

associated DTLs.

The Company’s CET1 is not adjusted

for certain accumulated other comprehensive income (“AOCI”).

Additional

“threshold deductions” of each of the following that are individually greater

than 25% of CET1 (after the first

deductions above):

●

MSRs, net of associated DTLs;

●

DTAs arising from

temporary differences that could not be realized through net operating

loss carrybacks, net of

any valuation allowances and DTLs; and

●

Significant common stock investments in unconsolidated financial institutions,

net of associated DTLs.

Noncumulative perpetual preferred stock and Tier

1 minority interest not included in CET1, subject to limits, will qualify as

additional Tier I capital.

All other qualifying preferred stock, subordinated debt and qualifying minority

interests will be

included in Tier 2 capital.

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Minimum Capital Requirements

The various minimum capital requirements under Federal Reserve Regulation

Q are:

Minimum CET1

4.50%

CET1 Conservation Buffer

2.50%

Total CET1

7.00%

Deductions from CET1

100%

Minimum Tier 1 Capital

6.00%

Minimum Tier 1 Capital plus conservation

buffer

8.50%

Minimum Total

Capital

8.00%

Minimum Total

Capital plus conservation buffer

10.50%

Certain Risk-Weightings

Among other things, Regulation Q as changed by the Basel III Capital Rules Q changed

some of the risk weightings used to

determine risk-weighted capital adequacy.

Among other things, Regulation Q:

●

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

institutions;

●

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

label mortgage securities, trust

preferred CDOs and asset backed securities;

●

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

weight to most commercial real

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

●

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

and residential mortgages);

●

Assigns a 250% risk weight to DTAs,

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

●

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

•

Increases the risk weight for exposures to qualifying securities firms from

20% to 100%.

HVCRE

Risk Weight

A “high volatility commercial real estate” loan (“HVCRE,”) which has

a 150% risk weight generally is a credit facility

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

●

primarily finances or refinances the acquisition, development, or

construction of real property;

●

has the purpose of providing financing to acquire, develop, or improve

such real property into income producing

property; and

●

the repayment of the loan is dependent upon the future income or sales proceeds

from, or refinancing of, such real

property.

Exceptions are made for various things, including loans for (i) the acquisition,

development and construction of 1 to 4

family residences, and investments in community development or agricultural

land, and (ii) commercial real properties

where the loan-to-value ratio is not more than the maximum supervisory

level determined by the Federal Reserve or the

borrower has contributed capital in a form specified by the rule equal

to at least 15% of the real property’s “as completed”

value.

Capital Conservation Buffer

The capital conservation buffer is equal to the lowest of the

following, calculated as of the last day of the previous calendar

quarter:

(A)

The institution's CET 1 capital ratio minus the institution's minimum

CET1 ratio;

(B)

The institution's tier 1 capital ratio minus the institution's minimum tier 1 capital ratio

requirement; and

(C)

The institution's total capital ratio minus the institution's minimum total capital

ratio requirement.

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The capital conservation buffer limits permissible dividends,

stock repurchases and discretionary bonuses to the following

percentages based on the capital conservation buffer

subject to any further regulatory limitations, including those based on

risk assessments and enforcement actions:

Capital Conservation

Buffer %

Buffer % Limit

More than 2.50%

None

> 1.875% - 2.50%

60.0%

> 1.250% - 1.875%

40.0%

> 0.625% - 1.250%

20.0%

≤ 0.625

- 0 -

Reg. Q amended the definition of “eligible retained income” in 2020

to allow banking organizations to more freely use their

capital buffers to promote lending and other financial intermediation

activities, by making the limitations on capital

distributions more gradual. “Eligible retained income, as used in Federal

Reserve Regulation Q, is the greater of (i) net

income for the four preceding quarters, net of distributions and

associated tax effects not reflected in net income; and (ii)

the average of all net income over the preceding four quarters. Banking

organizations were encouraged to make prudent

capital distribution decisions.

Regulatory Capital Changes

Prompt Corrective Action Rules

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

measures and relevant capital levels that

implement the “prompt corrective action” standards for depository

institutions.

The relevant capital measures are the total

risk-based capital ratio, Tier 1 risk-based

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

ratio.

Under the regulations, a state member bank will be:

●

“well capitalized”

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

a Tier 1 risk-based capital ratio of 8%

or greater, a Common equity tier 1 capital ratio of

6.5% or greater, a leverage capital ratio of 5% or greater

and is

not subject to any written agreement, order,

capital directive or prompt corrective action directive by a federal

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

●

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

a Tier 1 risk-based capital ratio

of 6.0% or greater, a Common Equity Tier

1 capital ratio of 4.5% or greater, and generally

has a leverage capital

ratio of 4.0% or greater;

●

“undercapitalized”

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

1 risk-based capital ratio of less

than 6.0%, a Common Equity Tier 1 capital

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

than 4.0%;

●

“significantly undercapitalized”

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

risk-based

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

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

less than 3.0%; or

●

“critically undercapitalized”

if its tangible equity is equal to or less than 2.0% to total assets.

The federal bank regulatory agencies have authority to require additional

capital where they determine it is necessary,

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

bank is determined to have less than a satisfactory

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

higher capital levels may be required in light of

market conditions and risk.

Depository institutions that are “adequately capitalized” for bank

regulatory purposes must receive a waiver from the FDIC

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

rates or brokered deposits that exceeds market

rates by more

than 75 basis points.

Less than “adequately capitalized” banks cannot accept or renew brokered

deposits.

FDICIA generally prohibits a depository institution from making

any capital distribution, including paying dividends or any

management fee to its holding company,

if the depository institution thereafter would be “undercapitalized”. Institutions

that are “undercapitalized” are subject to growth limitations and

are required to submit a capital restoration plan for

approval.

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A depository institution’s parent

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

restoration plan.

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

(i) 5% of the depository

institution’s total assets at the time

it became undercapitalized and (ii) the amount necessary to bring the

institution into

compliance with applicable capital standards.

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

as if

it is “significantly undercapitalized”.

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

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

the claim against the holding company’s

capital

restoration obligation would be entitled to a priority in such bankruptcy

proceeding over third-party creditors of the bank

holding company.

“Significantly undercapitalized” depository institutions may be subject

to a number of requirements and restrictions,

including orders to:

(i)

sell sufficient voting stock to become “adequately capitalized”;

(ii)

Reduce total assets; and

(iii)

Cease receipt of deposits from correspondent banks.

“Critically undercapitalized” depository institutions are subject to

the appointment of a receiver or conservator.

The Company’s management believes

that the prompt corrective action provisions of FDICIA have not had and are not

expected to have any material effect on the Bank or the

Company or their respective operations.

Dividends and Distributions

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

Federal Reserve Regulation Q limits “distributions,”

including discretionary bonus payments from eligible retained

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

capital conservation buffer of common equity Tier

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

declared or paid on common stock, discretionary bonuses and stock repurchases,

redemptions or repurchases of Tier 2

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

The Company’s primary source

of cash is

dividends from the Bank.

“Eligible retained income” for the Bank and other Federal Reserve regulated

institutions is the greater of:

●

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

associated tax effects not already

reflected in net income; or

●

the average net income over the preceding four quarters.

The Bank’s Call Report are used for

its calculation of “eligible retained income.”

The Bank’s capital conservation

buffer exceeded 2.5% at December 31, 2025.

As of December 31, 2025, the Bank is “well capitalized” for bank regulatory

purposes.

Management has not received any

notification from the Bank's regulators, which changes the Bank’s

regulatory capital status.

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

by a state member bank (such as

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

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

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

2025, the Bank paid total cash dividends of

approximately $3.8 million to the Company.

At December 31, 2025, the Bank had net profits for the year and retained net

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

of $6.5 million.

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

policies and requirements relating to the

payment of dividends, including requirements to maintain capital above

regulatory minimums.

The appropriate federal and

state regulatory authorities are authorized to determine when the payment

of dividends would be an unsafe or unsound

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

that paying dividends that deplete a state

member bank’s capital base

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

The Federal Reserve

also has indicated that banks depository institutions and their holding companies

should generally pay dividends only out of

current year’s operating earnings.

See “Regulatory Capital Changes” and Note 16 to the Company’s

consolidated financial

statements.

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

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

payments, stock redemptions and stock repurchases.

Prior consultation with the Federal Reserve supervisory staff

required before:

●

redemptions or repurchases of capital instruments when the bank

holding company is experiencing financial

weakness; and

●

redemptions and purchases of common or perpetual preferred stock

which would reduce Tier 1 capital at end of

the period compared to the beginning of the period.

Bank holding company directors must consider various factors tis setting a dividend

level that is prudent to maintaining a

strong financial position, and is not based on overly optimistic earnings scenarios,

such as potential events that could affect

its ability to pay, while

still maintaining a strong financial position. As a general matter,

the Federal Reserve has indicated

that the board of directors of a bank holding company should consult with the

Federal Reserve and eliminate, defer or

significantly reduce the bank holding company’s

dividends if:

●

its net income available to shareholders for the past four quarters, net of dividends

previously paid during that

period, is not sufficient to fully fund the dividends;

●

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

overall current and prospective

financial condition; or

●

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

adequacy ratios.

Capital Rule Changes

The Federal Reserve, the FDIC and the OCC have been working on proposed changes

to their capital rules, which the FDIC

Board is scheduled to discuss on March 19, 2026.

Michelle Bowman, the Federal Reserve Vice

Chair for Supervision

outlined the proposals in broad terms in a March 12, 2026 speech, which continued

a theme to “right-size” capital to match

actual risk.

Although many of the pending proposals focus on large banks, Ms. Bowman

stated “smaller banks, which are

more focused on traditional lending activities, will see slightly larger

reductions in capital requirements.”

The proposals

have not been published for comment, and we cannot predict the effects

of these proposals on us.

FDICIA

FDICIA directs that each federal bank regulatory agency prescribe standards

for depository institutions and depository

institution holding companies relating to internal controls, information

systems, internal audit systems, loan documentation,

credit underwriting, interest rate exposure, asset growth composition,

a maximum ratio of classified assets to capital,

minimum earnings sufficient to absorb losses, a minimum

ratio of market value to book value for publicly traded shares,

safety and soundness, and such other standards as the federal bank

regulatory agencies deem appropriate.

Enforcement Policies and Actions

The Federal Reserve and the Alabama Superintendent examine and

regulate our compliance with laws and regulations,

including the CFPB’s regulations.

The Federal Reserve and the Alabama Superintendent examine and

regulate our compliance with laws and regulations,

including the CFPB’s regulations.

The CFPB issues regulations, interpretations and enforcement actions

under the laws

applicable to consumer financial products and services. Violations

of laws and regulations, including those administered by

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

Reserve and the Alabama Superintendent

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

or taking other formal or informal enforcement actions.

Under certain circumstances, these agencies may enforce

these remedies directly against officers, directors, employees and

others participating in the affairs of a bank or bank holding

company, in the form of fines, penalties,

or the recovery, or

claw-back, of compensation.

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Fiscal and Monetary Policies

Banking is a business that depends on interest rate differentials.

In general, the difference between the interest paid by

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

a bank on its loans and securities holdings,

constitutes the major portion of a bank’s

earnings.

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

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

subject to the influence of

economic conditions generally,

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

United States

and its agencies, particularly the Federal Reserve.

The Federal Reserve regulates the supply of money through various

means, including setting target federal funds rates, open

market dealings in United States government securities, the setting

of the discount rate at which banks may borrow from the Federal Reserve, and

the reserve requirements on deposits.

The Federal Reserve has been paying interest on depository institutions required

and excess reserve balances since October

2008.

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

Federal Reserve greater scope to use its

lending programs to address conditions in credit markets while also maintaining

the federal funds rate close to the target

rate established by the Federal Open Market Committee (“FOMC).

The Federal Reserve has indicated that it may use this

authority to

implement a mandatory policy to reduce excess liquidity,

in the event of inflation or the threat of inflation.

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

Requirements of Depository Institutions)

authorizing the Reserve Banks to offer term deposits to certain institutions.

Term deposits are one

of several tools that the

Federal Reserve could employ to drain reserves when policymakers

judge that it is appropriate to begin moving to a less

accommodative stance of monetary policy.

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

stress in U.S. financial markets, the Federal

Reserve, Congress and the Department of the Treasury

took a host of fiscal and monetary measures. In March 2020, the

FOMC reduced the federal funds rate target twice to

0-0.25%. The Federal Reserve established various liquidity facilities

pursuant to section 13(3) of the Federal Reserve Act to help stabilize the financial

system and purchased large amounts of

government and government agency securities and agency mortgage

-backed securities (“MBS”).

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

inflation as “transitory,” but

as inflation

continued at increasing rates the Federal Reserve’s

policy changed from accommodative to restrictive.

The Federal

Reserve raised the target federal funds rate eight times in 2022

for a total 4.25%.

During 2023, the Federal Reserve four

announced additional target rate increases of 25 basis points each.

The federal funds target rate range was 5.25-5.50% from

May 4, 2023 until September 19, 2024, when it was reduced to 4.75% -5.00%.

Two reductions in November

and

December 2024 resulted in a target range of 4.25%-4.50%

at the end of 2024.

In 2025, the FOMC reduced its target federal funds rates three times to

target rate of 3.50%-3.75%, where it remains as of

March 2, 2026.

In January 2026, the FOMC reaffirmed its long-term goals originally adopted in 2012 that

seeks to achieve

maximum employment and inflation at the rate of 2 percent over the

longer run based on the annual change in the price

index for personal consumption expenditures.

The Federal Reserve’s securities

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

from $3.9 trillion in

early March 2020 to $9.0 trillion at April 11,

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

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

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

its securities holdings in an effort to reduce inflation:

●

Reinvestments of principal of maturing Treasury

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

months and thereafter would be $60 billion per month.

●

Reinvestments of principal of maturing agency debt and agency mortgage

-backed securities would be reduced by

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

per month.

●

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

balance sheet was somewhat above the

balance it deemed ample.

Starting in June 2024, the FOMC reduced the monthly redemption

cap on Treasury securities from $60 billion to $25

billion.

The Committee maintained the monthly redemption cap on agency debt

and agency mortgage-backed securities at

$35 billion, reinvested any remaining principal amounts of maturing

securities in Treasury securities.

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In April 2025, the FOMC further slowed the reduction its SOMA holdings by reducing

the monthly redemption cap on

Treasury securities from $25 billion to $5 billion,

while maintaining the monthly redemption cap on agency debt and

agency mortgage-backed securities at $35 billion.

The FOMC announced on October 29, 2025 that it would conclude the

reduction of its aggregate SOMA securities holdings on December

1, 2025.

At its December 2025 meeting, the FOMC

determined to initiate purchases of shorter-term Treasury

securities as needed to maintain an ample supply of reserves on an

ongoing basis.

Most recently, on January

31, 2026 the FOMC announced that beginning February 1, 2026, it would,

subject to modest deviations for operational reasons:

●

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

of Treasury securities

maturing in each calendar month that exceeds $60 billion per month. Treasury

coupon securities would be

redeemed up to this monthly cap and Treasury bills would

be redeemed to the extent that coupon principal

payments are less than the monthly cap.

●

Reinvest into agency mortgage-backed securities (MBS) the amount

of principal payments from SOMA holdings

of agency debt and agency mortgage-backed securities (“MBS”) received

in each calendar month that exceeds a

cap of $35 billion per month.

SOMA holdings as of March 4, 2026, 2026 were $6.23 trillion, including

approximately $2 trillion of agency securities and

agency MBS.

FDIC Insurance Assessments

The Bank’s deposits are insured

by the FDIC’s DIF,

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

Since 2011, the FDIC has been calculating assessments based

on an institution’s average consolidated

total assets less its

average tangible equity (the “FDIC Assessment Base”).

A bank's assessment base and assessment rate are determined each

quarter.

Generally, established “small banks”

with less than $10 billion in assets are assigned an individual rate based on a

formula using financial data and CAMELS (the “financial ratios method”).

The better the CAMELS rating and other

financial ratios, the lower the assessment rate.

The FDIC assessment schedule for Small Banks, such as the Bank, for the first

assessment period provides a total annual

assessment rate of 2 to 32 basis points:

As a result of the decision to insure all deposits in Silicon Valley

Bank and Signature Bank upon their failures in March

2023, the FDIC made a special assessment of 3.36 points for a projected eight quarters

on banks with more than $5 billion

of uninsured deposits.

These special assessments did not apply to the Bank.

The FDIC’s minimum DIF reserve

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

The FDIC Board of directors is

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

a reserve ratio before the beginning of each

calendar year.

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

FDI Act

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

sole discretion in

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

to DIF members.

The DIF reserve ratio was 1.42% at December 31, 2025, 14 basis points higher

than at the end of 2024, and above the

minimum.

The Company recorded FDIC insurance premiums expenses of $0.5 million

for each of 2025 and 2024.

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CRE and Leveraged Loans

CRE

The federal bank regulatory agencies released guidance on “Concentrations

in Commercial Real Estate Lending” (2006)

(the “CRE Guidance”). The CRE Guidance defines CRE loans as exposures

secured by raw land, land development and

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

property, and non-farm nonresidential

property

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

rental income associated with the property (that is,

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

third party, non-affiliated,

rental income) or the

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

Loans to REITs and unsecured

loans to

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

also be considered CRE loans under the CRE

Guidance.

Loans on owner occupied CRE are generally excluded.

The CRE Guidance requires that banks have appropriate processes be in

place to identify, monitor

and control risks

associated with real estate lending concentrations.

This could include enhanced strategic planning, CRE underwriting

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

risk exposure limits as well as appropriately

designed compensation and incentive programs.

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

The CRE Guidance is triggered when either:

●

Total reported loans

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

total capital;

●

Total reported loans

secured by multifamily and nonfarm nonresidential properties and loans for

construction, land

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

total risk-based capital.

This CRE Guidance was supplemented by the Interagency Statement on

Prudent Risk Management for Commercial Real

Estate Lending (December 18, 2015). The CRE Guidance also applies when

a bank has a sharp increase in CRE loans or

has significant concentrations of CRE secured by a particular property

type. See Management’s Discussion and Analysis of

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

concentrations of the various types of CRE

loans.

At December 31, 2025, the Bank had outstanding $56.6 million in construction

and land development loans and $325.8

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

approximately 48% and 277%,

respectively, of

the Bank’s total risk-based capital at December

31, 2025.

The Company has always had significant

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

and the loan needs of customers.

The

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

policies, internal controls, and other policies

currently in place, as well as its loan and credit monitoring and administration

procedures, are generally appropriate to

manage its concentrations as required under the Guidance.

The federal bank regulators, including the Federal Reserve issued a Policy Statement

on Prudent Commercial Real Estate

Loan Accommodations and Workouts

(June 30, 2023), which updated existing guidance.

The Policy Statement provides a

broad set of risk management principles relevant to CRE short term loan

accommodations and longer-term workouts in all

business cycles, particularly in challenging economic environments.

It states that the regulatory agencies expect their

examiners to take a balanced approach in assessing the adequacy of a financial institution's

risk management practices for

loan accommodation and workout activities.

Financial institutions that implement prudent CRE loan accommodation

and

workout arrangements after performing a comprehensive review of a borrower's

financial condition will not be subject to

criticism for engaging in these efforts, even if these arrangements

result in modified loans that have weaknesses that result

in adverse classification. In addition, modified loans to borrowers who have

the ability to repay their debts according to

reasonable terms will not be subject to adverse classification solely because the value

of the underlying collateral has

declined to an amount that is less than the outstanding loan balance.

The Policy Statement also describes the classifications

of CRE loan accommodations and workouts and addresses regulatory

accounting and reporting in such situations, including

CECL.

Leveraged Loans

The Federal Reserve and other banking regulators issued their “Interagency

Guidance on Leveraged Lending” (2006)

highlighting standards for originating leveraged transactions and managing

leveraged portfolios, as well as requiring banks

to identify their highly leveraged transactions, or HLTs.

The Bank did not have any leveraged loans at year-end 2025, 2024

or 2023 subject to the Interagency Guidance on Leveraged Lending or

that were shared national credits.

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Certain Dodd-Frank Act Provisions

No Hedging of Equity Incentive Compensation

The Dodd-Frank Act, Section 955, requires the SEC establish rules requiring

that companies disclose in their annual

meeting proxy materials whether an employee or board member is permitted

to purchase financial instruments designed to

hedge or offset decreases in the market value of equity securities granted

as compensation or otherwise held by the

employee or board member.

SEC Reg. S-K Item 407(i) implements this Section.

The Company’s Insider

Trading Policy applies to all Company and Bank directors, officers,

employees and certain

independent contractors and specified related persons (collectively,

“Covered Persons”). This Policy prohibits Covered

Persons from engaging in speculative transactions or short-term trading in

Company Securities at any time. Short-selling

Company securities or engaging in transactions involving “Derivative Securities”

on Company securities are prohibited.

Further, hedging instruments or strategies,

including Derivative Securities may not be used to increase the value

or reduce

the risks of any awards under the 2024 Incentive Plan. The Company’s

Insider Trading Policy is included as an exhibit

its annual report on SEC Form 10-K.

No Incentives Encouraging Inappropriate Risk-Taking

Section 956 of the Dodd-Frank Act requires the appropriate federal

regulators to issue regulations or guidelines that

prohibits incentive-based compensation arrangements that

encourage inappropriate risk taking by covered financial

institutions, are deemed to be excessive, or that may lead to material losses to the covered

financial institution.

In June

2010, the federal bank regulators adopted Guidance on Sound Incentive Compensation

Policies, which, although targeted to

larger, more complex organizations

than the Company,

includes principles that have been applied to smaller organizations

similar to the Company.

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

who,

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

organization to material amounts of risk.”

Incentive compensation should:

●

Provide employees incentives that appropriately balance risk and reward;

●

Be compatible with effective controls and risk-management;

and

●

Be supported by strong corporate governance, including active and

effective oversight by the organization’s

board

of directors.

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

have less effect on smaller banking

organizations, which typically are less complex and make

less use of incentive compensation arrangements than larger

banking organizations.

The Company’s Compensation

Committee Charter provides that the Committee shall identify and limit features of

compensation plans that it reasonably believes would lead to unnecessary

and excessive risk-taking, and establish a

compensation strategy to provide balanced risk-taking incentives in alignment

with the Company’s risk appetite and

compliance with the various laws and regulations governing executive

officer and director compensation.

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

implementing Section 956 in April

2011, which would have been applicable to,

among others, depository institutions and their holding companies with $1

billion or more in assets.

These rules have not been adopted.

Debit Card Interchange Fees

The “Durbin Amendment” to the Dodd-Frank Act and Federal Reserve Regulation

II provide that interchange transaction

fees for electronic debit transactions be “reasonable” and proportional

to certain costs associated with processing the

transactions.

The Durbin Amendment and the Federal Reserve rules thereunder are not applicable

to banks with assets less

than $10 billion. Such smaller banks, however,

compete with banks that are subject to the Durbin Amendment, and

therefore may have to limit their interchange fees, also.

Legislation has been proposed which would regulate credit card

interchange fees.

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Other Legislative and Regulatory Changes

Various

legislative and regulatory proposals, including substantial changes in

banking, and the regulation of banks, thrifts

and other financial institutions, compensation, and the regulation of financial

markets and their participants, and financial

instruments and securities, and the regulators of all of these, as well as the taxation of

these entities, are being considered by

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

including Alabama.

The 2018 Growth Act

The 2018 Growth Act, which was enacted on May 24, 2018, amended

the Dodd-Frank Act, the BHC Act, the Federal

Deposit Insurance Act and other federal banking and securities laws to provide

regulatory relief.

The following provisions

of the 2018 Growth Act may be particularly helpful to banks of our size, and

we have benefited from the Growth Act’s

changes to the deposit rules:

●

Increased the asset size under the Federal Reserve's Small BHC Policy from

$1 billion to $3 billion;

●

“qualifying community banks,” defined as institutions with total consolidated

assets of less than $10 billion, which

meet a “community bank leverage ratio, which is currently 9.0%, may

be deemed to have satisfied applicable risk-

based capital requirements as well as the capital ratio requirements;

●

section 13(h) of the BHC Act, or the “Volcker

Rule,” is amended to exempt from the Volcker

Rule, banks with

total consolidated assets valued at less than $10 billion (“community banking

organizations”), and trading assets

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

●

“reciprocal deposits” held by banks that are well capitalized and well rated

will not be considered “brokered

deposits” for FDIC purposes,

The FDIC issued comprehensive changes to its brokered deposit rules effective

April 1, 2021. The revised rules establish

new standards for determining whether an entity meets the statutory definition

of “deposit broker,” and identifies

a number

of businesses that automatically meet the “primary purpose exception”

from a “deposit broker.”

The revisions also provide

an application process for entities that seek a “primary purpose exception,”

but do not meet one of the designated

exceptions.”

The new rules provide us greater flexibility.

Reciprocal deposits have expanded our funding and liquidity sources without being

subjected to FDIC limitations on

depositor FDIC insurance coverage and potential federal deposit insurance

assessment increases for brokered deposits.

The applicable agencies also issued final rules simplifying the Volcker

Rule’s proprietary trading restrictions

effective

January 1, 2020. On June 25, 2020, the agencies adopted a final rule simplifying

the Volcker

Rule’s covered fund

provisions effective October 1, 2020.

New regulations and statutes are regularly proposed that contain wide-ranging

proposals for altering the structures,

regulations and competitive relationships of the nation’s

financial institutions.

Recent Developments

Executive Order 14192 seeks to “significantly reduce the private expenditures

required to comply with Federal

regulations.”

For the current fiscal year 2025, for each new regulation, at least 10 existing regulations

shall be identified for

repeal.

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

repealed regulations,

being finalized this year, shall be significantly

less than zero, as determined by the OMB Director.

The OMB Director shall

provide agencies with guidance on implementation, including measuring

regulatory costs.

No regulation shall be added to

or removed from the Unified Regulatory Agenda without the approval

of the OMB Director.

Regulations and rules are

broadly defined to include:

…agency statements of general or particular applicability and future effect

designed to implement, interpret, or

prescribe law or policy or to describe the practice requirements of an agency,

including, without limitation,

regulations, rules, memoranda, administrative orders, guidance documents,

policy statements, and interagency

agreements.

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The current Acting CFPB Director on February 8, 2025 ordered all CFPB employees

to suspend substantially all activities,

including all supervision, examination and stakeholder engagement

activities, and closed the agency's headquarters for the

week of February 10, 2025.

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

and would not

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

Executive Order 14178 states the Administration’s

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

blockchain technology,

and related technologies across all sectors of the economy.”

“Digital assets” include

“any digital representation of value that is recorded on a distributed ledger,

including cryptocurrencies, digital tokens, and

stablecoins.”

This order revoked Executive Order 14067 “Ensuring Responsible

Development of Digital Assets” (March 9,

2022) and directed the Secretary of the Treasury

is directed to immediately revoke the Department of the Treasury's

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

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

●

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

individual citizens and

private-sector entities alike; and

●

providing regulatory clarity and certainty built on technology-neutral

regulations, frameworks that account for

emerging technologies, transparent decision making,

and well-defined jurisdictional regulatory boundaries, all of

which are essential to supporting a vibrant and inclusive digital economy and

innovation in digital assets,

permissionless blockchains, and distributed ledger technologies

The Executive Order “Restoring Democracy and Accountability in Government”

(Feb. 11, 2025) requires all agencies to

submit draft regulations for White House review with no carveout for so-called

independent agencies, except for the

monetary policy functions of the Federal Reserve; and consult with the White House

on their priorities and strategic plans.

The White House will set their performance standards.

The Office of Management and Budget will adjust so-called

independent agencies’ apportionments of funds.

The President and the Attorney General (subject to the President’s

supervision and control) will interpret the law for the executive branch,

instead of having separate agencies adopt

conflicting interpretations.

Changes in the Federal Bank Regulators and the SEC

A new Comptroller of the Currency,

and new FDIC and SEC Chairs, and a new Vice

Chair for Supervision at the Federal

Reserve were appointed in 2025 and have taken different approaches

from their immediate predecessors.

The Federal Reserve’s new Vice

Chair for Supervision stated her goals in February 2026:

●

Community banks are and should be subject to less stringent standards than

large banks, and there is significant

opportunity to tailor regulations and supervision to the unique needs and circumstances

of these banks.

●

Increase static and outdated statutory thresholds, including asset thresholds,

which may push banks into different

regulatory restrictions, and supervisory and reporting categories more

suited to larger institutions.

●

Tailor the merger

and acquisition and

de novo

chartering application processes for community banks, including

accurately considering competition among small banks.

●

Changes in Basel III capital rules to support market liquidity,

affordable homeownership, and safety and

soundness. In particular, the capital treatment

of mortgage loans and mortgage servicing assets under the U.S.

standardized approach has resulted in banks reducing their participation in

this important lending activity,

limiting

access to mortgage credit.

●

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

the stability of the broader

financial system. Core material risks include non-financial risks where these pose

threats to safety and soundness.

Strong risk management, whether in credit, liquidity,

cybersecurity, or operations,

remains essential, and will be

part of bank examinations.

●

Supervision must also be tailored, matching oversight to each institution's size, complexity,

and risk profile.

●

Supervision must also be tailored, matching oversight to each institution's size, complexity,

and risk profile.

●

Review the CAMELS bank ratings framework, and establish clear metrics

and parameters for all of the

components to provide transparent and objective supervisory assessments to reflect

overall safety and soundness,

ot just isolated deficiencies in a single CAMELS component.

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●

Adopt a proposed regulation to avoid bank supervisors encouraging, influencing,

or compelling banks to debank or

refuse to bank a customer due to their constitutionally protected political or

religious beliefs, associations, speech,

or conduct.

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

and lawful businesses.

The Office of the Comptroller of the Currency (“OCC”) and

the FDIC have stated similar goals.

De novo bank and bank

merger applications are being approved faster by all the

Federal bank regulators, and the FDIC has approved the deposit

insurance for several industrial bank applications.

The OCC and the FDIC are encouraging innovation and digital asset

activities, and implementing the Guiding and Establishing National

Innovation for U.S. Stablecoins Act (GENIUS Act).

The regulators have rescinded prior policies (i) limiting digital activities and

(ii) requiring prior regulatory notice and

review of novel activities, including digital activities.

The regulators have clarified that banking organizations may

engage

in permissible crypto-asset activities, and provide products and services

to persons engaged in crypto-asset related

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

The SEC Chair and the SEC are reevaluating the disclosures required of public

company under Regulation S-K, including

the executive compensation disclosures.

The SEC Chair’s goals are to promote a more favorable environment

for public

companies by:

●

anchoring disclosures in financial materiality so that investment decisions

can turn on economic signals rather than

on regulatory noise;

●

scale disclosure requirements with a company’s

size and maturity;

●

de-politicizing shareholder meetings by restoring their focus to significant

corporate matters; and

●

allowing public companies to have litigation alternatives so that innovators

shielded from the frivolous and

investors from the fraudulent.

ITEM 1A. RISK FACTORS

These disclosures under this item reflect the Company’s

beliefs and opinions as to factors that could materially and

adversely affect the Company and its securities in the future.

References to past events are examples only,

and are not

intended to be a complete listing or a representation as to whether or not such factors

have occurred in the past or their

likelihood of occurring in the future.

Any of the following risks could harm our business, results of operations and

financial condition and an investment in our stock.

The risks discussed below also include forward-looking statements, and

our actual results and financial condition may differ

substantially from those discussed in these forward-looking statements.

Operational Risks

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

The Company’s income depends

largely on the difference between interest income

earned on its loans and securities

(earning assets) and its interest expense on its deposits and other borrowings.

Market interest rates affect the spread

between our interest income and our interest expense and the values of our

investment securities. Market rates are affected

by Federal Reserve monetary policy,

fiscal policy, inflation and inflation

expectations, and various other factors.

Inflation

more directly affects our noninterest costs, as well as our customers’

savings and payment behaviors.

Market developments, including unemployment rates, price and inflation

levels, stock and bond market volatility,

and

changes, including those resulting from Russia’s

war in Ukraine and other wars and armed conflicts, tariffs

and foreign

policies, and government fiscal, operational and monetary policies affect

consumer confidence levels, economic activity

and interest rates. Increases in inflation and market interest rates and future expectations

of these, and adverse changes in

consumer and business confidence may change customers’ savings, payment

and borrowing behaviors, and may increase in

loan delinquencies and loan losses. These could affect our

credit quality, our results of

operations and financial condition.

Changes in market interest rates and the shape of the yield curve affect

the value of our investment securities.

Increased

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

other comprehensive income

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

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Our allowance for loan losses is affected by general economic conditions

and we may be negatively affected by credit risk

exposures.

Our models for determining our allowance for credit losses are based on “current

expected credit losses” (“CECL”)

principles in generally accepted accounting principles (“GAAP”),

and may be adversely affected by changes in the

economy. CECL uses current

expected credit losses instead of the “as incurred” loss method used historically

under GAAP,

to estimate losses inherent in our credit exposures. The process for estimating

expected losses requires difficult, subjective

and complex judgments, including forecasts of economic conditions,

and how those economic predictions might affect the

ability of our borrowers to repay their loans or the value of assets.

Macroeconomic factors used in our CECL model

include the Alabama unemployment rate, the Alabama home price index, the national

commercial real estate price index

and the Alabama gross state product.

Changes in economic conditions and factors used in our CECL models, including the

effects of changes in government policies, including

monetary and fiscal policies, may increase the variability of our

provisions for loan losses and our earnings.

The CECL standard has not been in effect over a full business cycle and

its

effects in times of severe economic stress may not be fully known.

See Note 1 to our Financial Statements –

“Allowance

for Credit Losses – Loans.”

Unanticipated adverse changes in the economy,

including those resulting from

fiscal, monetary or other government

policies adversely

affect us.

We periodically

review the expected effects of economic conditions and trends in reviewing

our allowance for credit

loss models.

We may be adversely affected

because of unanticipated adverse changes in the economy,

including

fiscal and monetary policy changes, unemployment levels, inflation,

market conditions or events adversely affecting

specific customers, industries or markets, including disruptions of supply

chains, war and armed conflicts, changes in taxes

and regulation, and changes in borrower behaviors.

Borrowers and their businesses, and real estate and commercial

projects and businesses may be adversely affected by inflation

and higher interest rates, as well as from tighter monetary

policies, and may request or need loan modifications and deferrals.

Businesses may be unable to fully pass on to their

customers increased costs due to inflation, supply chain disruptions, tariffs

and other factors, and their cash flows and

profits may be adversely affected.

If the credit quality and risk profile of our customers materially change adversely,

or if

the risk profile of the market, industry or group of customers changes materially,

or conditions in the real estate and other

markets worsen, or borrower payment behaviors change, our business,

could be materially

adversely affected.

Changes in the real estate markets, including the

origination and secondary markets for residential mortgage

loans, may

continue to adversely affect us.

Inflation and the Federal Reserve monetary actions to fight inflation have caused

residential mortgage rates to increase

significantly. Higher

interest rates and the increased prices of housing during and following the COVID-19 pandemic

have

slowed housing sales. These conditions have adversely affected

housing affordability and increased monthly mortgage

payments. Although short term interest rates have decreased since Fall 2024, longer

term mortgage rates have remained

higher than before the pandemic, and purchase money residential mortgages

and refinancings continue to be adversely

affected. Our mortgage loan production and income have

been adversely affected.

Our concentration of commercial real

estate loans could result in further increased

loan losses, and adversely affect our

business, earnings, and financial condition.

Commercial real estate (“CRE”) is cyclical.

Rapid CRE growth and concentrations of CRE loans, in dollar amounts and

geographic concentrations, present risks of possible loss.

Loans for the acquisition and development of land and residential

construction which are generally viewed as higher risk than loans on existing

structures.

We had approximately

68% of our loan portfolio in CRE loans at year-end 2025, of which approximately

18% were owner-

occupied.

The bank regulators’ CRE Guidance requires banks with high levels of CRE and

CRE growth, to implement

improved underwriting, internal controls, risk management policies and

portfolio stress testing, as well as higher levels of

allowances for possible losses and capital levels.

Increases in interest rates beginning in March 2022 and reduced market

transactions may adversely affect the assumptions and performance

of CRE, especially for projects financed with short term

or unhedged variable rate debt, and the ability of CRE borrowers to refinance

on terms that their projects can support.

Lower demand for CRE and fewer CRE purchase and sale transactions, and reduced

availability of, and higher interest rates

and costs for, CRE loans could adversely

affect the values and liquidity of CRE collateral and our CRE loans, and

sales of

other real estate owned, and therefore our earnings and financial condition,

including our capital and liquidity.

See Balance

Sheet Analysis - Loans” and “Supervision and Regulation – CRE.”

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Resolution of the Fannie Mae and Freddie Mac Conservatorships

may have adverse consequences

Fannie Mae and Freddie Mac (the “GSEs”) have been in conservatorship

since September 2008.

The federal government is

considering privatizing these GSEs and ending the conservatorship.

Since these GSEs dominate the residential mortgage

markets, any changes in their operations and requirements, as well as their respective

restructurings, and the costs of their

capital and borrowings as private institutions, could adversely affect

the primary and secondary mortgage markets, and our

residential mortgage businesses, our results of operations and the returns

on capital deployed in these businesses.

Resolution of these extremely large GSEs will be complex,

and the timing and effects of such resolution and the effects

mortgage originators and the mortgage markets and their participants,

including the Company,

cannot be predicted.

We may

be obligated to repurchase

mortgage loans we sold to third parties on terms unfavorable

to us.

The Company originates residential mortgage loans. The Company

sells these loans, primarily to Fannie Mae, pursuant to

customary contract representations and warranties. Mortgage buyers

may request that sellers repurchase mortgages for

breach of their seller obligations, if the mortgages do not perform.

Such requests increased substantially during the Credit

Crisis. Although we have had negligible mortgage loan repurchase requests historically,

including during the Credit Crises,

a stressed economy could increase mortgage loan credit issues that may increase mortgage

repurchase requests.

The soundness of other financial institutions could adversely affect us.

We routinely

execute transactions with counterparties in the financial services industry,

including securities firms, central

clearinghouses, and banks. Our ability to engage in routine investment

and banking transactions, as well as the quality and

values of our investments in holdings of obligations of other financial institutions

such as the FHLB-Atlanta, could be

adversely affected by the actions, financial condition, profitability

and regulation of such other financial institutions.

Financial services institutions are interrelated as a result of shared

credits, trading, clearing, counterparty and other

relationships.

Failures and near failures of several mid-sized banks in Spring 2023 caused significant

market volatility

issues for bank stocks, regulatory enforcement actions and uncertainty in

the investor community and among bank

regulators, customers and investors, generally.

In such situations, depositors and other customers tend to reduce their

uninsured deposits and bank supervisors more closely scrutinize bank risks.

These failures resulted in bank regulators

focusing, generally,

on capital adequacy and liquidity in light of bank growth rates, customer,

asset and deposit

concentrations and risks; uninsured deposit levels; CRE; crypto business

and customers.

About the same time, smaller

banks’ engagement with third-party vendors or “partners” providing

digital, electronic and (“BaaS”) and fintech

relationships raised bank regulatory concerns and enforcement actions

regarding such activities and their effects on bank

safety and soundness; the banks’ strategic, capital and liquidity

plans and contingency plans; and vendor diligence and risk

management.

Any losses, defaults by, or

failures of, the institutions we do business with or which affect could

adversely affect our

business, including our liquidity,

financial condition and earnings.

The federal government’s

digital innovation focus may increase our competition

and operational risks

The Executive Order “Strengthening American Leadership in Digital Financial Technology”

(2025) and the federal bank

regulators’ implementation of it, including

rapidly chartering new digital asset banks and trust companies, encouraging

stablecoins and other digital assets, as well as

investigating “de-banking” of the crypto industry and others,

may increase

the use of digital assets and the volume of digital asset transactions, and

the risks of such transactions to banks and to

financial stability, generally.

The proposed CLARITY Act legislation may enable the payment of yield or interest

equivalents on stablecoins that may compete with bank transaction accounts.

These changes could increase competition,

disruption and unexpected changes in the banking industry,

including us.

Increases in banks’ and other financial services

companies’ direct and indirect risk exposures to crypto or digital assets may increase their

cybersecurity and data breach

risks, fraud risks, and AML/CFT and sanctions compliance risks.

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Our future success is dependent on our ability

to compete effectively in highly competitive markets.

Lee County and the surrounding areas of East Alabama, where we primarily operate,

are highly competitive.

Our

future growth and success will depend on our ability to compete effectively

in these markets.

Lee County is served by 21

banks, including 12 national and regional competitors.

We compete for

loans, deposits and other financial services and

products with local, regional and national commercial banks, thrifts, credit

unions, mortgage lenders, and securities and

insurance brokerage firms, including services offered in

our market.

Increasingly, non-banking

firms are using technology

to compete for loans, payments, and other banking services.

Various

of these traditional and nontraditional firms offer

services in our market without any physical presence here.

Many competitors have numerous offices and affiliates

operating over wide geographic areas and have diverse customer

and geographic bases to draw upon.

Many of our

competitors offer products and services different

from ours, and have substantially greater resources including technology,

name recognition and advertising than we do, which helps them attract business.

In addition, larger competitors may be

able to price loans and deposits more aggressively than us.

Out of state banks have branched into our markets. See “Item 1

Business.”

Our success depends on local economic conditions.

Our success depends on general economic conditions, especially conditions

in our primary market.

Adverse changes in

such economic conditions, including higher market interest rates and inflation,

supply chain disruptions, changes in

customer behaviors and in the workforce and demand for space since the COVID-19

pandemic, and the timing and

magnitude of future inflation and interest rates, could negatively affect

our results of operations and financial condition.

Our local economy is also affected by the growth of automobile

manufacturing and related suppliers located in Lee County

and nearby.

Auto sales and housing sales are cyclical and generally are affected

adversely by higher prices, higher inflation

and interest rates, and tariffs and changes in tariffs.

Other major employers in our market include education and healthcare,

which may be adversely affected by changes in Federal government

policies, including education and healthcare funding,

and the availability and costs of student loans.

Attractive acquisition opportunities may not be available to us in the

future.

We seek continued

organic growth, including loan growth, and we also may consider the acquisition

of banks, branches,

deposits, or other parts of financial services businesses. We

expect that other financial services companies, including credit

unions and nonbanking institutions, some of which have significantly

greater resources, will compete with us to acquire

financial services businesses. This competition could increase prices for potential

acquisitions that we believe are attractive.

Any acquisition could be dilutive to our earnings and shareholders’ equity per

share of our common stock.

Future acquisitions and expansion activities may disrupt

our business, dilute shareholder value and adversely affect

our

operating results and financial condition.

We evaluate potential

acquisitions and expansion opportunities, including new branches and

other offices.

To the extent

that we grow through acquisitions or new locations, we cannot assure you that we will be able to adequately

or profitably

manage such growth.

Acquiring other banks, branches, or businesses, as well as other geographic

and product expansion

activities involve various known and unknown risks, including credit

quality, valuation and pricing,

systems conversions,

retention and integration of people, retention and growth of customers,

as well as transaction expenses, all of which require

time and coordination with third parties such as service providers. Acquisitions

and other expansion activities may fail to

generate the opportunities and customers, revenues or cost savings forecasted.

Technological

changes affect our business, and we may have fewer resources

than many competitors to invest in and

effectively implement technological improvements;

and manage the related risks related

to operating technology and

realizing returns on technology

investments.

The financial services industry is undergoing rapid technological

changes, including new technology-driven products and

ervices and growing demands for user-based banking

applications that can be used anywhere.

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Artificial intelligence is at an early stage of development and is expensive,

but may offer opportunities for better customer

services at reduced costs, but with a high level of unknown risks.

The effective use of technology may help us better

analyze our customers and their needs better,

and the effective use of technology may enable us to increase efficiency

and

reduce our operating costs.

At the same time, the initial costs of acquiring and implementing technology

may be material,

and such technology requires ongoing attention to the related risks, including

fraud, cybersecurity and customer privacy,

compliance with the AML/CFT anti-money laundering and

sanctions laws, among others, and various operational and other

risks.

Our future success will depend, in part, upon our ability to use technology effectively

and efficiently to provide

products and services that meet our customers’ preferences and create additional

efficiencies in operations, while

maintaining the security of our systems and data, and complying with applicable

law.

Severe weather,

natural disasters and conflicts could have significant adverse effects on our business.

Severe weather and natural disasters such as hurricanes, tornados, floods, and

acts of war, terrorism, or armed conflict, may

potentially interrupt our business and damage our properties and

collateral securing our loans, result in lost revenues and

additional expenses. Such events also could affect the general economic

conditions that affect us, the stability of our deposit

base, disrupt our customers’ businesses and impair our borrowers’ capacity

to repay loans. Although management has

established disaster recovery and business continuity policies and procedures,

severe weather and natural disasters and

these other events could have a material adverse effect on our business.

Potential gaps in our risk management policies and internal audit procedures

may leave us exposed to unidentified or

unanticipated risks, which could negatively affect our business.

Our enterprise risk management and internal audit program are designed

to mitigate material risks and losses to us. We

regularly review our risks in an effort to maintain risk management

and internal audit policies and procedures addressing

our risks.

Nonetheless, our policies and procedures may not anticipate and identify timely every

risk to which we may be

exposed. Our internal audit process may fail to detect such weaknesses or deficiencies

timely. Many of our

risk

management models and estimates are based on assumptions, estimates and

judgments from observed historical market

behavior to model or project potential future exposure. Other models used

by our business, including our CECL models,

also are based on assumptions, estimates and projections. These models may

not operate properly or timely,

or our inputs,

estimates and assumptions may be inaccurate, or changes in economic

and market conditions, customer behaviors or

regulations may adversely affect the accuracy or usefulness of

the models. These models may not fully or timely predict

future exposures, which may occur significantly faster or

in greater magnitudes than historically. Other

risk management

methods depend upon the evaluation of information regarding markets,

clients, or other matters that are publicly available

or otherwise accessible. This information may not always be accurate,

complete, up-to-date or properly evaluated.

We may have

to implement more extensive and perhaps different risk management

policies and procedures to reflect

changes in the economy,

threats to our systems and data, our markets and customers, regulation, and technology uses and

exposures.

All of these could adversely affect our costs.

Any failure to protect

the confidentiality of customer information could have material adverse effects on us.

Various

laws enforced by the bank regulators and other government agencies protect

the privacy and security of customers’

non-public personal information maintained by banks and their vendors. Our

internal processes, policies and controls are

designed to protect the confidentiality of customer information

we hold and that is accessible to us, our vendors and

employees. It is possible that a vendor or an employee could permit unauthorized

access to or improperly use confidential

customer information. Personal customer data also could be compromised

via intrusions into our systems or those of our

service providers or other persons we do business with such as credit bureaus,

data processors and merchants who accept

credit or debit cards for payment. If our internal controls are inadequate, or

if our employees, vendors and other third parties

fail to comply with our policies and procedures, misappropriation or inappropriate

disclosure and misuse of customer

information could occur.

Any such internal control inadequacies or non-compliance could materially

damage our

reputation, lead to remediation costs and civil or criminal penalties.

See Item 1C. Cybersecurity for more information

about cybersecurity and our management and strategies.

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Our systems, including those provided

by third parties may be attacked, which could disrupt

our operations and materially

damage our business.

Our systems and networks, including those provided by our third-party

service providers, are subject to security risks and

may be disrupted, such as denial of service attacks, hacking, terrorist activities,

or identity theft. Cybercrime risks have

increased as electronic and mobile banking activities have increased,

and may increase further as a result of wars in Ukraine

or the Middle East, tensions with mainland China and other countries, foreign

government sponsored cybercrime and theft,

and the development of intrusion tools using artificial intelligence.

Other financial service institutions and their service

providers have reported material security breaches, including use of stolen

access credentials, hacking, malware,

ransomware, phishing and distributed denial-of-service attacks, among

other means. Attackers using a wide and increasing

variety of tactics have disrupted the operations of public companies, and have

demanded ransoms to return hijacked

systems, effected unauthorized transfers, obtained unauthorized

access to confidential information, destroyed data, disabled

or degraded service, and sabotaged systems. Any of these could cause material

financial, operational and reputational harm.

Despite our cybersecurity policies, and our efforts to monitor and

maintain the integrity of the systems we and our third-

party service providers use, we may not be able to anticipate or counter all rapidly evolving

security threats.

Artificial

intelligence used by cyber criminals, including foreign governments,

likely will require additional defenses.

The increasing

levels and sophistication of cyber threats may require us and our vendors to

spend more resources to protect our data.

Security breaches or failures may have serious adverse financial and other

consequences, including disruptions to

operations, misappropriation of confidential information, damage

to systems operated by us or our third-party service

providers, as well as damages to our customers and our counterparties, and

significant remediation costs. These events

could damage our reputation, result in loss of customer business, subject us to additional

regulatory scrutiny, or expose us

to civil litigation and possible financial liability,

any of which could have a material adverse effect on our financial

condition and results of operations.

See “Item 1C. – Cybersecurity.

We may

be unable to attract and retain key people to support our business.

Our success depends, in large part, on our ability to attract and retain

key people. We

compete with other financial services

companies for people primarily on the basis of our culture, compensation

and benefits, support services and financial

position. Intense competition exists for key employees with demonstrated

ability, and we may be unable

to hire or retain

such employees. The unexpected loss of one or more of our key persons and or

the failure to effect timely transitions

involving such persons could have a material adverse effect on

our business, earnings or financial condition.

Financial Risks

Our cost of funds may increase as a result

of general economic conditions, inflation, interest

rates, inflation, changes in

customer behaviors and competitive pressures.

Our costs of funds are affected by general and local economic conditions,

changes in market interest rates and competitive

pressures, and inflation, and anticipated future changes in target short

-term interest rates resulting from the Federal

Reserve’s anti-inflation measures.

Traditionally,

we have obtained funds principally through local deposits and borrowings

from the FHLB-Atlanta. Increases in interest rates typically cause consumers

to shift their funds to more interest-bearing

instruments and increase the competition for deposits. If customers move (i) money

out of bank transaction deposits into investments, stablecoins or other yield-bearing

instruments elsewhere, or (ii) they

move their funds within the Bank from transaction deposits to higher cost, interest-bearing

time deposits, our interest

expense may increase, and our net interest income and earnings may be material and adversely

affected income. If our total

deposits decreased, our funds to make loans and grow will be reduced. Any of

these may adversely affect our business.

See

“Supervision and Regulation – Fiscal and Monetary Policy.”

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Our profitability and liquidity may be affected

by changes in interest rates and interest

rate levels, the shape of the yield

curve and economic conditions.

Our profitability is primarily driven by the difference between the

interest rates received on our interest earning assets and

the interest we pay on our deposits and borrowings. Net interest income will be adversely affected

if market interest rates

and the interest we pay on our deposits and borrowings increase faster than the

interest earned on loans and investments,

especially as large portion of our loans have fixed interest

rates. Interest rates, and consequently our results of operations,

are affected by general economic conditions (national,

international and local), fiscal and monetary policies, and

expectations regarding changes in these, and the shape of the yield curve. Net

interest income could be affected by

asymmetrical changes in the different interest rate indexes because

not all of our assets or liabilities are priced with the

same index. and the different indices do not change simultaneously

or at the same magnitude. Higher market interest rates

and continuing run-off of maturing securities held

by the Federal Reserve in its SOMA as quantitative tightening to

curb

inflation and to maintain sufficient reserves in the system policy,

may limit economic growth, and therefore reduce loan

demand and growth.

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

securing our loans are dependent on demand within

the markets we serve, as well as interest rates.

Increases in market interest rates tend to decrease mortgage originations,

increase MSR values, decrease the value and liquidity of collateral securing

loans, and may result in unrealized losses on

our investment securities and increase our accumulated other comprehensive

losses.

Accumulated other comprehensive

losses reduce our reported GAAP equity and tangible equity.

See “Management's Discussion and Analysis of Financial

Condition and Results of Operations Table

5,” “Market and Liquidity Risk Management” and Supervision and Regulation.

Liquidity risks could affect operations and jeopardize

our financial condition.

Liquidity is essential to our business. An inability to raise funds through deposits, borrowings

or sales of loans and

investments or otherwise, or due to materially reduced or delayed proceeds

from scheduled loan and securities payments

and maturities, could have a negative effect on our liquidity.

Our funding sources also include federal funds purchased,

securities sold under repurchase agreements, and short- and long-term debt.

We maintain a portfolio

of marketable high-

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

As market interest rates

rose prior to Fall 2024, however, we experienced

unrealized losses on our securities available for sale, which would become

realized losses upon the sale of such securities, and such sales at a loss would reduce

our net income and our regulatory

capital.

Our access to funding sources in amounts adequate to finance or capitalize

our activities on terms which are acceptable to

us could be impaired by factors that affect us specifically,

or general economic or banking industry issues.

General

conditions that are not specific to us, such as disruptions in the financial markets, failures

of other banks, such as the Spring

2023 bank failures, or negative views and expectations about the prospects

for the financial services industry,

could

adversely affect us and our liquidity.

Competition, including from stablecoins paying rewards or other interest equivalents

could also adversely affect the availability and cost of deposits and

liquidity.

Our ability to realize our deferred

tax assets may be reduced if our estimates of future

taxable income from our operations

and tax planning strategies do not support this amount, or our tax law reduces

or deferred tax assets.

We are allowed

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

As of December 31, 2025, we had a

net deferred tax asset of $6.9 million compared to $10.2 million one year

earlier.

These and future deferred tax assets may

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

and tax planning strategies do not

support the amount of the deferred tax asset.

Changes in accounting and tax rules applicable to banks could adversely

affect our financial conditions and results of

operations.

From time to time, the FASB

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

our financial

statements.

These changes can be difficult to predict and can materially affect

our reported financial condition and results

of operations, and may cause us to restate prior period financial statements

Congress, the Treasury Department and state

and local governments may also change the tax laws or make consequential

changes to their interpretation that may

adversely affect us.

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If we need to raise additional capital in the future,

that capital may not be available on reasonable terms.

We anticipate that

our current capital resources will satisfy our capital requirements

for the foreseeable future under current

capital rules.

If, however, we need to raise additional capital to support

our growth, currently unanticipated losses or new

capital requirements, our ability to raise additional capital will depend,

among other things, on conditions in the capital

markets at that time.

If we cannot raise additional capital on acceptable terms when needed, our ability to grow

will be

limited.

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

condition and business.

Banks are in the business of accepting certain risks. Our management

and employees make decisions and choices that may

expose us to risk. Our incentive compensation programs seek to avoid incenting

excessive risk-taking; but some employees

may take such risks. Similarly,

although we our controls and procedures are designed to govern and

monitor associates’

business decisions and prevent them from taking excessive risks and misconduct,

these controls and procedures may not be

effective. If our employees take excessive risks, our financial condition,

results of operations and reputation could be

materially and adversely affected.

Our ability to pay dividends to shareholders, repurchase

stock and pay discretionary bonuses in the future

depends on our

profitability,

capital, liquidity and regulatory requirements,

which may prevent or limit future

dividends.

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

dividends paid to the Company by the Bank.

The Bank’s ability to pay dividends,

and Company’s ability to pay dividends to

our shareholders, continue to depend on our

earnings and maintaining appropriate liquidity and capital at all levels of our

business consistent with regulatory

requirements. We

generally may pay dividends, repurchase stock and pay discretionary

bonuses, from our current year’s

earnings based on “eligible retained income” over the last four calendar

quarters if our capital conservation buffer exceeds

2.5%. See “Supervision and Regulation.”

Our common stock trades in limited volumes, which could result

in price volatility and inefficient pricing.

Your

ability to sell or buy our common stock depends upon a trading market for our common

stock.

Although our common

stock is quoted on the Nasdaq Global Market under the trading symbol “AUBN,” our

trading volume has been limited

historically. The limited

trading volume may cause fluctuations in the market value of our common stock to be exaggerated,

leading to price volatility exceeding what may occur in a more active trading

market.

As a result, you may be unable to

trade our common stock at the volume, price and time that you desire.

Due to limited trading volumes, market prices may

not reflect our common stock’s true or

intrinsic value.

Legal and Regulatory Risks

The Company is an entity separate and distinct from

the Bank.

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

Company transactions with the Bank are limited by the

Federal Reserve Act and Federal Reserve Regulation W.

The Company cannot generally borrow from the Bank and

depends upon dividends paid by the Bank to the Company,

which are limited by law and regulatory policies. The

Company’s liquidity,

financial condition and ability to pay dividends or repurchase Company common

stock or pay

discretionary could be materially adversely affected if the Bank’s

dividends were further limited by law or

regulatory restriction, or if the Bank’s

earnings, capital position or liquidity were insufficient.

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We are

required to maintain

capital to meet regulatory requirements,

and if we fail to maintain sufficient capital, our

financial condition, liquidity and results of operations

would be adversely affected.

The Bank must meet regulatory capital requirements.

If we fail to maintain our capital and meet other regulatory

requirements, our financial condition, liquidity and results of operations may

be materially and adversely affected.

Our

failure to remain “well capitalized” and “well managed” for bank

regulatory purposes, including a failure to meet the

capital conservation buffers needed to avoid restrictions

on distributions, could adversely affect us, our stock and its price.

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

other possible consequences adversely

affect customer confidence and our:

●

ability to grow;

●

costs of and availability of funds;

●

costs of FDIC deposit insurance premiums;

●

ability to raise or replace brokered deposits;

●

ability to pay or increase dividends on our capital stock;

●

ability to repurchase our common stock;

●

ability to make discretionary

bonuses to attract and retain quality personnel;

●

ability to make acquisitions or engage in new activities;

●

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

●

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

instruments that may be then outstanding.

See

“Supervision and Regulation.”

The Federal Reserve may require

us to commit capital resources

to support the Bank.

A bank holding company must act as a source of financial and managerial

strength to its subsidiary bank.

The Federal

Reserve may require a bank holding company to make capital injections into

a troubled subsidiary bank, and we could be

required to provide financial assistance to the Bank if it experienced financial

distress, even if further investment is not

otherwise warranted economically.

See “Supervision and Regulation.”

We are

subject to extensive banking regulation to protect

depositors, which could adversely affect our earnings and our

common stock value.

We are subject to

extensive regulation by federal and state bank regulators. Our success is affected

by laws and regulations

affecting banks and bank holding companies, and our costs of compliance

could adversely affect our earnings.

Banking

regulations are primarily intended to protect depositors and the FDIC’s

DIF, not

shareholders. The financial services

industry also is subject to frequent legislative and regulatory changes and proposed

changes. Compliance with applicable

laws and regulations, as applied by our bank regulators and their examiners

may be is time consuming and costly.

Recent

litigation striking new regulations because the regulators exceeded their

authority or improperly acted when adopting new

rules, creates uncertainty and results in wasted time and costs of preparing

to comply with new rules that never become

effective.

See “Supervision and Regulation.”

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Our operations are subject to risk of loss from

unfavorable fiscal, monetary,

regulatory and political developments,

domestic and foreign.

Our businesses and earnings are affected by the fiscal, monetary

and other policies and actions of various federal and state

governmental and regulatory authorities.

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

consequently, changes

in these policies could have negative effects on our activities and

results of operations.

Failures of

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

previously have led to Federal government

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

Prolonged government shutdown or reductions in force at

various governmental and regulatory authorities may inhibit our ability to evaluate

the economy, generally,

and affect

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

of government services and data could

adversely affect consumer and business sentiment, our

local economy, and our business.

Economic disruptions from

government actions on tariffs, immigration, population

growth and labor, wars and military actions, and the availability

petroleum and raw materials from foreign sources could adversely affect

the economy in various ways, including, for

example, supply chain disruptions, increased costs and inflation, and changes

in consumer behaviors.

Continuing increases

in government deficits may also increase inflation and the interest rates on

U.S. government debt. The interest rates on

business and consumer debt, including loans and mortgages, generally reflect

a premium over U.S. government debt, and

increased rates could adversely affect the economy,

generally.

Our business is subject to litigation that may result in

significant financial losses and/or harm to our reputation.

We face risks of

litigation in the ordinary course of operating our businesses. Plaintiffs in lawsuits against

us may seek very

large and/or indeterminate amounts, including punitive

and treble damages and legal fees. The ultimate outcome of any

litigation or threatened litigation and the amount or range of potential loss at particular

points in time may be difficult to

ascertain.

See “Item 3 legal Proceedings.”

ITEM 1B. UNRESOLVED

STAFF COMMENTS

None.

ITEM 1C. CYBERSECURITY

We rely extensively

on various information systems and other electronic resources to operate our business. In

addition,

nearly all of our customers, service providers and other business partners on whom

we depend, including the providers of

our online banking, mobile banking and accounting systems, use their own

electronic information systems.

Any of these

systems can be compromised by employees, customers and other

authorized individuals, and bad actors using sophisticated

and constantly evolving sets of software, tools and strategies, which may include

artificial intelligence, to do so.

The

threats are domestic and international and range from small to large,

including state sponsored, terrorist and criminal

organizations with substantial funds, and technical

and other resources, and may increase during wars, armed conflicts and

heightened international tensions.

As a bank, we and our vendors, service providers and customers may be attractive targets,

and we confront continuous

cybersecurity threats.

Insurance to fully cover these risks is unavailable in sufficient amounts at reasonable

costs.

believe the more effective approach is taking active measures to detect,

deter and reduce cybersecurity threats, and be

prepared to address and remediate any breaches and prevent similar breaches

in the future.

See “Risks Related to

Information Security and Business Interruption” section of the Risk Factors included

in Item 1A of this Form 10-K for

additional information.

Accordingly, we have devoted

significant resources to assessing, identifying and managing risks associated with

cybersecurity threats, including:

•

Implementing an Information Security Program that establishes policies and

procedures for security

operations and governance;

•

Establishing an IT Steering Committee that includes participation by directors that

is responsible for security

administration, including reviewing assessments of our information

systems, existing controls, vulnerabilities

and potential improvements;

•

mplementing layers of controls and avoiding excessive reliance on any single

control;

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•

Employing a variety of preventative and detective tools designed to monitor,

block and provide alerts

regarding suspicious activity;

•

Continuously evaluating tools that can detect and help respond to cybersecurity

threats in real-time;

•

Leveraging people, processes and technology to manage and maintain cybersecurity

controls;

•

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

service providers, including their

cybersecurity practices and safeguards, and service level standards

based on the risk they pos to the Bank;

•

Maintaining a vendor management program with pre-engagement and periodic

review processes thereafter,

and a third-party risk management program designed to identify, assess and manage

risks associated with

external service providers;

•

Monitoring our systems and related software and programming periodically

to update software and

programing, including updating data protection elements, and requiring

that our service providers also engage

in similar programs that are reasonably designed to deter cybersecurity

breaches;

•

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

service providers, including their

cybersecurity practices and safeguards, and service level standards based

on the risk they pose to the Bank;

•

Engaging third-party cybersecurity consultants, who conduct periodic penetration

testing, vulnerability

assessments and other procedures to identify potential weaknesses in our

systems and processes; and

•

Conducting periodic cybersecurity training for our employees and the Compa

ny’s board of directors.

Our Information Security Program is a key part of our overall risk management

system, which is administered by our IT

Steering Committee and evaluated by our IT Steering Committee and

Chief Risk Officer.

The program includes

administrative, technical and physical safeguards to help protect the security

and confidentiality and availability of

customer records and information.

From time-to-time, we have identified cybersecurity threats that require

us to make changes to our processes and equipment

and implement additional safeguards. While none of these identified threats

or incidents have materially affected us, it is

possible that threats and incidents we identify in the future could have a material

adverse effect on our business strategy,

customer service, data privacy and security,

continuity of service and reputation, and our results of operations and financial

condition.

See Item 1A. “Risk Factors”.

The Company’s Chief Technology

Officer is responsible for the day-to-day management of cybersecurity risks we face and

oversees the IT Steering Committee, which is chaired by a director of

the Company’s board. The IT Steering Committee

oversees the information security assessment, development

of policies, standards and procedures, testing, training and

security report processes.

The IT Steering Committee is comprised of officers with the appropriate

expertise and authority

to oversee the Information Security Program, and includes the participation

of certain directors.

Our Chief Technology

Officer, along with the information

technology department, is accountable for managing our

enterprise information security and delivering our information security program.

The department, as a whole, consists of

information security professionals with varying degrees of education

and experience. The Chief Technology

Officer is

subject to professional education and certification requirements. In particular,

our Chief Technology Officer,

who is also

designated as our Information Security Officer,

has relevant expertise in the areas of information security and cybersecurity

risk management.

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In addition, the Company’s

Board, both as a whole and through directors participating in the IT Steering Committee,

responsible for the oversight of risk management, including cybersecurity

risks. In that role, the Company’s Board

and the

IT Steering Committee, with support from the Company’s

management and third-party cybersecurity advisors, are

responsible for implementing and maintaining risk management processes

designed and implemented by management that

are adequate and functioning as designed.

The Board reviews and approves an information security program, vendor

management policy (including third-party service providers), acceptable

use policy, incident response procedures

and

business continuity planning policy on at least an annual basis. All the aforementioned

policies are developed and

implemented by Company management. To

carry out their duties, the Board receives updates at least quarterly from the

Chief Technology

Officer regarding cybersecurity risks and the Company’s

efforts to prevent, detect, mitigate and

remediate any cybersecurity incidents.

ITEM 2. DESCRIPTION OF PROPERTY

The Bank conducts its business from its main office,

seven full-service branches,

and a loan production office.

The Bank owns its main campus in downtown Auburn, Alabama, which comprises

over 4 acres and includes the

AuburnBank Center, drive-through

facility, and parking deck.

The AuburnBank Center, which was constructed

in May

2022, has approximately 90,000 square feet of space.

The AuburnBank Center includes the Bank’s

main office, the Auburn

loan production office, and all of its back-office

operations.

The main office branch offers the full line

of bank services and

has one ATM.

The AuburnBank Center has approximately 46,000 square feet of Class A office

space and approximately

5,000 square feet of retail space available for lease to third party tenants,

of which approximately 32,000 square feet is

currently leased and occupied.

The Bank’s drive-through facility located

on the main office campus was constructed in

October 2012.

This drive-through facility has five drive-through lanes, including

an ATM,

and a walk-up teller window.

The parking deck has approximately 500 parking spaces, is open to the public and

charges hourly,

monthly, and special

event rates, and provides

parking needs for the Bank’s employees

and customers.

Of the 500 parking spaces,

approximately 100 to 150 parking spaces have been made available

to a third-party under a long-term lease.

The Opelika branch is located in Opelika, Alabama. This branch, built in

1991, is owned by the Bank and has

approximately 4,000 square feet of space. This branch offers

the full line of the Bank’s services and

has drive-through

windows and an ATM.

This branch offers parking for approximately 36 vehicles.

The Notasulga branch was opened in August 2001. This branch is located

in Notasulga, Alabama, about 15 miles west of

Auburn, Alabama. This branch is owned by the Bank and has approximately 1,344

square feet of space. The Bank leased

the land for this branch from a third party.

In May 2025, the Bank’s land lease renewed

for another one-year term. This

branch offers the full line of the Bank’s

services including safe deposit boxes and a drive-through window

and parking for

approximately 11 vehicles, including

a handicapped ramp.

In November 2002, the Bank opened a loan production office

in a leased space in Phenix City,

Alabama, about 35 miles

south of Auburn, Alabama. In November 2025, the Bank renewed

its lease for another year.

In February 2009, the Bank opened a branch located on Bent Creek Road

in Auburn, Alabama. This branch is owned by the

Bank and has approximately 4,000 square feet of space. This branch offers

the full line of the Bank’s services and

has

drive-through windows and a drive-up ATM.

This branch offers parking for approximately 29 vehicles.

In December 2011, the Bank opened a branch

located on Fob James Drive in Valley,

Alabama, about 30 miles northeast of

Auburn, Alabama.

This branch is owned by the Bank and has approximately 5,000 square feet of space.

This branch offers

the full line of the Bank’s services and

has drive-through windows and a drive-up ATM.

This branch offers parking for

approximately 35 vehicles.

Prior to December 2011, the Bank had operated

a loan production office in Valley,

which was

originally opened in September 2004.

The Bank operated a branch in the Corner Village

Shopping Center in Auburn from 2015 to the end of 2024.

After careful

consideration of the Bank’s customers,

branch usage, parking issues, the lack of a drive through window and the

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.

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In September 2015, the Bank relocated its Auburn Wal

-Mart Supercenter branch in south Auburn, which had been

opened

in 2004, to a new building which the Bank built in 2015 at the intersection of

S. Donahue Avenue and E.

University Drive

in Auburn, Alabama.

The South Donahue branch has approximately 3,600 square feet of space.

The South Donahue

branch offers the full line of the Bank’s

services and has drive-through windows and an ATM.

This branch offers parking

for approximately 28 vehicles.

In May 2017, the Bank relocated its Opelika Kroger branch to a new location the

Bank purchased in August 2016 near the

Tiger Town

Retail Shopping Center and the intersection of U.S. Highway 280 and Frederick Road

in Opelika, Alabama.

The Tiger Town

branch, built in 2017, has approximately 5,500 square feet of space.

Prior to relocation, the Bank’s

Opelika Kroger branch was located inside the Kroger supermarket in

the Tiger Town

retail center in Opelika, Alabama. The

Opelika Kroger branch was originally opened in July 2007. The Tiger

Town branch offers

the full line of the Bank’s

services and has drive-through windows and an ATM.

This branch offers parking for approximately 36 vehicles.

In addition to the seven ATMs

at various branch locations, the Bank also has one ATM

located in Notasulga, Alabama.

The Bank had a 2,500 square feet loan production office on East Samford

Avenue in Auburn, Alabama.

When this loan

production office was relocated to the AuburnBank Center in June

2022, the Company entered into a three-year sublease

agreement during 2022.

The sublessee has renewed this sublease through October 2026.

ITEM 3.

LEGAL PROCEEDINGS

In the normal course of its business, the Company and the Bank from time to time

are involved in legal proceedings. The

Company’s management believe

there are no pending or threatened legal proceedings that, upon resolution,

are expected to

have a material adverse effect upon the Company’s

or the Bank’s financial condition or results

of operations.

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

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PART

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY,

RELATED STOCKHOLDER

MATTERS AND

ISSUER PURCHASES OF EQUITY SECURITIES

The Company’s Common

Stock is listed on the Nasdaq Global Market, under the symbol “AUBN”. As of March 10, 2025,

there were approximately 3,493,699 shares of the Company’s

Common Stock issued and outstanding, which were held by

approximately 330 shareholders of record. The following table sets forth,

for the indicated periods, the high and low closing

sale prices for the Company’s Common

Stock as reported on the Nasdaq Global Market, and the cash dividends declared to

shareholders during the indicated periods.

Closing

Cash

Price

Dividends

Per Share (1)

Declared

High

Low

2025

First Quarter

23.37

20.36

0.27

Second Quarter

25.28

19.48

0.27

Third Quarter

28.47

23.13

0.27

Fourth Quarter

27.98

24.00

0.27

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

(1)

The price information represents actual transactions.

The Company has paid cash dividends on its capital stock since becoming

the Bank’s sole stockholder.

Prior to forming

the Company, the Bank paid

cash dividends since its organization in 1907, except during the Depression years

of 1932 and

1933. Holders of Common Stock are entitled to receive such dividends

when, as and if may be declared by the Company’s

Board of Directors. The amount and frequency of cash dividends is determined

in the judgment of the Board based upon a

number of factors, including the Company’s

earnings, financial condition, liquidity,

capital and regulatory requirements and

other relevant factors and the availability of dividends payable by the Bank

consistent with amounts available therefore,

including the Bank’s earnings, financial

condition, liquidity, regulatory

and capital requirements and other relevant factors.

he Board currently intends to continue its present dividend policies.

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

The Company relies upon dividends from

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

The need to maintain adequate

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

The Bank and the Company

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

if our capital conservation buffer of CET1 capital

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

quarters.

Eligible retained income equals

the greater of:

●

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

tax effects not already

reflected in net income; or

●

the average net income over the preceding four quarters.

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

Company Common Stock, depending on our

earnings and capital position, risks and likely needs.

The Alabama Banking Code also limits dividends payable by the

Bank.

See “Supervision and Regulation –Dividends and Distributions” and

“Management’s Discussion and Analysis of

Financial Condition and Results of Operations – Capital Adequacy”

and “Risk Factors”

Issuer Purchases of Equity Securities

ot applicable.

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ITEM 7.

MANAGEMENT'S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS

OPERATIONS

The following is a discussion of our financial condition at December 31,

2025 and 2024 and our results of operations for

the years ended December 31, 2025 and 2024. The purpose of this discussion

is to provide information about our financial

condition and results of operations which is not otherwise apparent

from the consolidated financial statements. The

following discussion and analysis should be read along with our consolidated

financial statements and the related notes

included elsewhere herein. In addition, this discussion and analysis contains

forward-looking statements, so you should

refer to Item 1A, “Risk Factors” and “Special Cautionary Notice Regarding

Forward-Looking Statements”.

This includes

Table 2 “Selected

Financial Data.”

OVERVIEW

The Company was incorporated in 1990 under the laws of the State of Delaware and

became a bank holding company after

it acquired its Alabama predecessor, which was a bank

holding company established in 1984. The Bank, the Company's

principal subsidiary,

is an Alabama state-chartered bank that is a member of the Federal Reserve System and

has operated

continuously since 1907. Both the Company and the Bank are headquartered

in Auburn, Alabama. The Bank conducts its

business primarily in East Alabama, including Lee County and surrounding

areas. The Bank operates full-service branches

in Auburn, Opelika, Notasulga and Valley,

Alabama.

The Bank also operates a loan production office in

Phenix City,

Alabama.

Summary of Results of Operations

Year ended December 31

(Dollars in thousands, except per share data)

2025

2024

Net interest income (a)

29,747

27,204

Less: tax-equivalent adjustment

Net interest income (GAAP)

29,674

27,125

Noninterest income

3,119

3,474

Total revenue

32,793

30,599

Provision for credit losses

631

Noninterest expense

22,951

22,166

Income tax expense (benefit)

1,956

2,000

Net earnings

7,255

6,397

Basic and diluted net earnings per share

2.08

1.83

(a) Tax-equivalent.

See "Table 1 - Explanation of Non-GAAP Financial Measures".

Financial Summary

The Company’s net earnings were

$7.3 million for the full year 2025, compared to $6.4 million for the full year 2024.

Basic and diluted net earnings per share were $2.08 per share for the full year 2025,

compared to $1.83 per share for the full

year 2024.

Net interest income (tax-equivalent) was $29.7 million in 2025, a

9% increase compared to $27.2 million in 2024. This

increase was primarily due to improved net interest margin

and a 2% increase in our interest-earning assets.

The

Company’s net interest margin

(tax-equivalent) was 3.27% in 2025, compared to 3.06% in 2024.

The increase in net

interest margin (tax-equivalent) was primarily due to improved

yields on interest-earning assets, and a decrease in our cost

of interest-bearing deposits.

At December 31, 2025, the Company’s

allowance for credit losses was $7.2 million, or 1.27% of total loans, compared

$6.9 million, or 1.22% of total loans, at December 31, 2024.

The Company recorded a provision for credit losses of $631 thousand

in 2025 compared to $36 thousand during 2024.

The

provision for credit losses in 2025 was primarily due to two loans that were individually

evaluated.

A specific reserve was

established for one loan and the other loan was partially charged

off.

The provision for credit losses under CECL is

reflective of the Company’s credit

risk profile and the future economic outlook and forecasts. Our CECL model is largely

influenced by economic factors including, most notably,

the anticipated unemployment rate.

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Noninterest income was $3.1 million in 2025 compared to $3.5

million in 2024.

The decrease was primarily related to a

decrease in mortgage lending income and other noninterest income

Noninterest expense was $23.0 million in 2025 compared to $22.2

million in 2024.

The increase was primarily related to

increases in salaries and benefits expense and other noninterest expense.

These increases were partially offset by a decrease

in net occupancy and equipment expense.

The provision for income tax expense was $2.0 million for an effective

tax rate of 21.24% for 2025, compared to

$2.0 million for an effective tax rate of 23.82% for 2024.

The Company’s effective

income tax rate is affected principally

by tax-exempt earnings from the Company’s

investments in municipal securities and loans, bank-owned life insurance,

and

New Markets Tax Credits.

The provision for income tax expense and the effective tax rates for

2024 included discrete tax

items associated with provision to return adjustments in conjunction with

the final 2023 tax return filing and the resolution

of state examination activities, which resulted in additional tax expense.

The Company paid cash dividends of $1.08 per share in 2025 and 2024.

At December 31, 2025,

the Bank’s regulatory

capital ratios were well above the minimum amounts required to be

“well capitalized” under current regulatory standards

with a total risk-based capital ratio of 17.14%, a tier 1 leverage ratio of 10.71%

and common equity tier 1 or (CET1) of

16.06%

at December 31, 2025.

CRITICAL ACCOUNTING POLICIES

The accounting and financial reporting policies of the Company conform with

U.S. generally accepted accounting

principles and with general practices within the banking industry.

In connection with the application of those principles, we

have made judgments and estimates which, in the case of the determination of our

allowance for credit losses, recurring and

non-recurring fair value measurements, and the valuation of deferred tax assets, were critical

to the determination of our

financial position and results of operations.

Allowance for Credit Losses – Loans

The allowance for credit losses is estimated under the CECL methodology set forth

in Financial Accounting Standards

Board (“FASB”) Accounting

Standards Codification (“ASC”) 326,

Financial Instruments – Credit Losses

. The allowance

for credit losses reflects management’s

estimate of the amount of credit losses expected to be recognized over the

remaining life of the loans in our portfolio. This evaluation requires significant

management judgment and is based upon

relevant available information related to historical default and loss experience,

current and projected economic conditions,

and other portfolio-specific and environmental risk factors. Losses are predicted

over a reasonable and supportable forecast

period, and at the end of the reasonable and supportable period losses revert

to long term historical averages. The allowance

for credit losses is measured on a collective basis for pools of loans with similar

risk characteristics, and on an individual

basis for loans that do not share similar risk characteristics with the collectively

evaluated pools. There are factors beyond

our control, such as changes in projected economic conditions, real estate markets or

particular industry conditions which

may materially impact asset quality and the adequacy of the allowance for

credit losses and thus the resulting provision for

credit losses. The allowance is adjusted through provision for credit losses and

decreased by charge-offs, net of recoveries

of amounts previously charged-off. See Note 1

- Summary of Significant Accounting Policies and Note 4 - Loans and

Allowance for Credit Losses in the notes to our consolidated financial statements

in this report.

Fair Value

Determination

U.S. GAAP requires management to value and disclose certain of the

Company’s assets and liabilities at fair value,

including investments classified as available-for-sale and

derivatives. ASC 820,

Fair Value

Measurements and Disclosures

which defines fair value, establishes a framework for measuring fair value

in accordance with U.S. GAAP and expands

disclosures about fair value measurements.

For more information regarding fair value measurements and disclosures,

please refer to Note 1 - Summary of Significant Accounting Policies and Note

14, Fair Value

in the notes to the

consolidated financial statements that accompany this report.

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Fair values are based on active market prices of identical assets or liabilities when available.

Comparable assets or

liabilities or a composite of comparable assets in active markets are used when

identical assets or liabilities do not have

readily available active market pricing.

However, some of the Company’s

assets or liabilities lack an available or

comparable trading market characterized by frequent transactions between

willing buyers and sellers. In these cases, fair

value is estimated using pricing models that use discounted cash flows and

other pricing techniques. Pricing models and

their underlying assumptions are based upon management’s

best estimates for appropriate discount rates, default rates,

prepayments, market volatility and other factors, taking into account

current observable market data and experience.

These assumptions may have a significant effect on the reported

fair values of assets and liabilities and the related income

and expense. As such, the use of different models and assumptions,

as well as changes in market conditions, could result in

materially different net earnings and retained earnings results.

Deferred Tax

Asset Valuation

A valuation allowance is recognized for a deferred tax asset if, based on the weight of

available evidence, it is more-likely-

than-not that some portion or the entire deferred tax asset will not be realized. The ultimate

realization of deferred tax assets

is dependent upon the generation of future taxable income during the periods

in which those temporary differences become

deductible. Management considers the scheduled reversal of deferred

tax liabilities, projected future taxable income and tax

planning strategies in making this assessment. At December 31,

2025 we had net deferred tax assets of $6.9

million

included as “other assets”, including $6.5 million resulting from unrealized

losses in our securities portfolio.

Based upon

the level of taxable income over the last three years and projections for future

taxable income over the periods in which the

deferred tax assets are deductible, management believes it is more likely

than not that we will realize the benefits of these

deductible differences at December 31, 2025.

The amount of the deferred tax assets considered realizable, however,

could

be reduced if estimates of future taxable income are reduced.

See Note 1 - Summary of Significant Accounting Policies

and Note 9 – Income Taxes

in the notes to the consolidated financial statements that accompany this report.

Average Balance

Sheet and Interest Rates

Year ended December 31

2025

2024

Average

Yield/

Average

Yield/

(Dollars in thousands)

Balance

Rate

Balance

Rate

Loans and loans held for sale

560,476

5.50%

568,733

5.23%

Securities - taxable

228,793

2.16%

248,072

2.19%

Securities - tax-exempt (a)

9,173

3.77%

10,084

3.70%

Total securities

237,966

2.23%

258,156

2.25%

Federal funds sold

26,535

4.25%

17,907

5.24%

Interest bearing bank deposits

83,648

4.28%

44,634

5.23%

Total interest-earning

assets

908,625

4.49%

889,430

4.36%

Deposits:

NOW

205,951

1.33%

192,702

1.39%

Savings and money market

253,668

0.97%

251,778

0.86%

Certificates of deposit

184,047

3.20%

195,097

3.46%

Total interest-bearing

deposits

643,666

1.72%

639,577

1.81%

Short-term borrowings

7.14%

628

0.48%

Total interest-bearing

liabilities

643,694

1.72%

640,205

1.81%

Net interest income and margin (a)

29,747

3.27%

27,204

3.06%

(a) Tax-equivalent.

See "Table 1 - Explanation

of Non-GAAP Financial Measures".

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RESULTS

OF OPERATIONS

Net Interest Income and Margin

Net interest income (tax-equivalent) was $29.7 million in 2025, a

9% increase compared to $27.2 million in 2024. This

increase was primarily due to improved net interest margin

and a 2% increase in our interest-earning assets.

The

Company’s net interest margin

(tax-equivalent) was 3.27% in 2025, compared to 3.06% in 2024.

The increase in net

interest margin (tax-equivalent) was primarily due to improved

yields on interest-earning assets, and a decrease in our cost

of interest-bearing deposits.

The Federal Reserve announced a 50-basis points rate reduction on September

18, 2024,

followed by two 25 basis points reduction in October and December 2024

and by three 25 basis points in September,

October and December 2025.

At year end the target federal funds rate ranged from

3.5% - 3.75%.

The tax-equivalent yield on total interest-earning assets increased by

13 basis points to 4.49% in 2025 compared to 4.36%

in 2024.

This increase was primarily due to changes in our asset mix, as cash and cash equivalents increased

and securities

declined.

Average interest-earning

assets were $908.6 million during 2025, a 2% increase compared to $889.4 million

during 2024.

The cost of total interest-bearing liabilities decreased by 9 basis points to 1.72%

in 2025 compared to 1.81% in 2024

following decreases to the federal funds rate.

The Company continues to deploy various asset liability management

strategies to manage its risk from interest rate

fluctuations.

Deposit and loan pricing remains competitive in our markets.

We believe that interest rates,

inflation and

monetary policy may continue to fluctuate in 2026

and may be challenging as a result.

Our ability to compete and manage

our deposits costs until our interest-earning assets reprice and we generate

new loans with current market interest rates will

be important to our net interest margin during 2026.

Provision for Credit Losses

The Company recorded a provision for credit losses of $631 thousand during

2025, compared to $36 thousand for 2024.

Provision expense is affected by organic loan

growth in our loan portfolio, our internal assessment of the credit quality

the loan portfolio, our expectations about future economic conditions

and net charge-offs.

Our CECL model is largely

influenced by economic factors including, the anticipated

Alabama unemployment rate, which may be affected by

government policies, including monetary,

fiscal and other policies, including tariffs.

The provision for credit losses in 2025

was primarily due to two loans that were individually evaluated.

A specific reserve was established for one loan and the

other loan was partially charged off.

Our allowance for credit losses reflects an amount we believe appropriate,

based on our allowance assessment

methodology, to adequately

cover all expected credit losses as of the date the allowance is determined.

At December 31,

2025, the Company’s allowance for

credit losses was $7.2 million, or 1.27% of total loans, compared to $6.9 million,

1.22% of total loans, at December 31, 2024.

Noninterest Income

Year ended December 31

(Dollars in thousands)

2025

2024

Service charges on deposit accounts

619

614

Mortgage lending

474

608

Bank-owned life insurance

414

403

Other

1,612

1,849

Total noninterest income

3,119

3,474

The Company’s noninterest income

from mortgage lending is primarily attributable to the (1) origination and sale of

new

mortgage loans, including refinancings and (2) servicing of mortgage

loans. Origination income, net, is comprised of gains

or losses from the sale of the mortgage loans originated, origination fees, underwriting

fees and other fees associated with

the origination of mortgage loans, which are netted against the commission expense

associated with these originations. The

Company’s customary practice

is to originate mortgage loans for sale in the secondary market and to either sell or retain

the

MSRs when the loan is sold.

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MSRs are recognized based on the fair value of the servicing right

on the date the corresponding mortgage loan is sold.

Subsequent to the date of transfer, the Company

has elected to measure its MSRs under the amortization method.

Servicing

fee income is reported net of any related amortization expense.

The Company evaluates MSRs for impairment quarterly.

Impairment is determined by grouping MSRs by common

predominant characteristics, such as interest rate and loan type.

If the aggregate carrying amount of a particular group of

MSRs exceeds the group’s aggregate

fair value, a valuation allowance for that group is established.

The valuation

allowance is adjusted as the fair value changes.

An increase in mortgage interest rates typically results in an increase in the

fair value of the MSRs while a decrease in mortgage interest rates typically results in

a decrease in the fair value of MSRs.

The following table presents a breakdown of the Company’s

mortgage lending income for 2025 and 2024.

Year ended December 31

(Dollars in thousands)

2025

2024

Origination income

154

261

Servicing fees, net

320

347

Total mortgage lending

income

474

608

The Company’s income from mortgage

lending typically fluctuates as mortgage interest rates, housing sales and

refinancings change.

Origination income decreased in 2025 compared to 2024 due to a decrease in mortgage

lending

demand as mortgage interest rates remain elevated.

Other noninterest income was $1.6 million in 2025, compared to $1.8 million in

2024.

The decrease in other noninterest

income was primarily due to decreased fee income on reciprocal deposits sold

through the Intrafi network.

Noninterest Expense

Year ended December 31

(Dollars in thousands)

2025

2024

Salaries and benefits

13,154

12,534

Net occupancy and equipment

2,353

2,508

Professional fees

1,276

1,188

FDIC and other regulatory assessments

569

564

Other

5,599

5,372

Total noninterest expense

22,951

22,166

Salaries and benefits increased during 2025 compared to 2024 primarily due

to routine annual increases in salaries and

wages.

The decrease in net occupancy and equipment expense was primarily

due to increased

leasing income associated with the

Company’s headquarters, which

totaled $1.4 million in 2025 compared to $1.0 million in 2024.

The increase in other noninterest expense was due to a variety of miscellaneous

items including increased information

technology and systems expenses and loan-related expenses.

Income Tax

Expense

The provision for income taxes expense was $2.0 million for an effective

tax rate of 21.24% for 2025, compared to

$2.0 million for an effective tax rate of 23.82% for 2024.

The Company’s effective

income tax rate is affected principally

by tax-exempt earnings from the Company’s

investments in municipal securities and loans, bank-owned life insurance,

and

New Markets Tax Credits.

The provision for income tax expense and the effective

tax rates for 2024 included discrete tax

items associated with provision to return adjustments in conjunction with

the final 2023 tax return filing and the resolution

f state examination activities, which resulted in additional tax expense.

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BALANCE SHEET ANALYSIS

Securities

Securities available-for-sale were $233.3 million at December 31, 2025,

compared to $243.0 million at December 31, 2024.

This decrease reflects a decrease in the amortized cost basis of securities available

-for-sale of $23.4 million, partially offset

by an increase of $13.7 million in the fair value of securities available-for

-sale.

The decrease in the amortized cost basis of

securities available-for-sale was primarily attributable to normal paydowns

and maturities.

The average annualized tax-

equivalent yields earned on total securities were 2.23%

in 2025 and 2.25% in 2024.

The following table shows the carrying value and weighted average yield of

securities available-for-sale as of December

31, 2025 according to contractual maturity.

Actual maturities of mortgage-backed securities (“MBS”) may differ from

contractual maturities because the mortgages underlying the MBS may be called

or prepaid in whole or in part, with or

without penalty.

December 31, 2025

1 year

1 to 5

5 to 10

After 10

Total

(Dollars in thousands)

or less

years

Fair Value

Agency obligations

—

35,580

18,204

—

53,784

Agency MBS

—

20,112

16,171

125,644

161,927

State and political subdivisions

—

1,590

9,160

6,798

17,548

Total available-for-sale

—

57,282

43,535

132,442

233,259

Weighted average yield (1):

Agency obligations

—

1.27%

1.99%

—

1.52%

Agency MBS

—

1.19%

1.83%

2.22%

2.06%

State and political subdivisions

—

1.95%

2.00%

2.42%

2.16%

Total available-for-sale

—

1.26%

1.93%

2.23%

1.94%

(1) Yields are calculated based on amortized cost.

Loans

December 31

(In thousands)

2025

2024

Commercial and industrial

58,400

63,274

Construction and land development

56,436

82,493

Commercial real estate

325,521

289,992

Residential real estate

116,554

118,627

Consumer installment

8,421

9,631

Total loans

565,332

564,017

Total loans, net of unearned

income, were $565.3 million at December 31, 2025, and $564.0 million

at December 31, 2024,

an increase of $1.3 million.

Four loan categories represented the majority of the loan portfolio at December 31, 2025:

commercial real estate (58%), residential real estate (21%), construction

and land development (10%), and commercial and

industrial (10%).

Approximately 18% of the Company’s

commercial real estate loans were classified as owner-occupied at

December 31, 2025.

Within the residential real estate portfolio segment

the Company had junior lien mortgages of approximately $12.3 million,

or 2%, and $11.2 million, or 2%, of total loans

at December 31, 2025 and 2024, respectively.

For residential real estate

mortgage loans with a consumer purpose, the Company had no loans

that required interest only payments at December 31,

2025 and 2024. The Company’s

residential real estate mortgage portfolio does not include any option ARM loans,

subprime loans, or any material amount of other consumer mortgage

products which are generally viewed as high risk.

The average yield earned on loans and loans held for sale was 5.50% in 2025

and 5.23% in 2024.

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The specific economic and credit risks associated with our loan portfolio include,

but are not limited to, the effects of

current economic conditions, including the levels of market

interest rates, supply chain disruptions, commercial office

occupancy levels, housing supply shortages, and effects of

inflation and tariffs on our borrowers’ cash flows, real estate

market sales volumes and liquidity,

valuations used in making loans and evaluating collateral, availability and cost of

financing properties, real estate industry concentrations, competitive pressures

from a wide range of other lenders,

deterioration in certain credits, fluctuations in market interest rates, reduced

collateral values or non-existent collateral, title

defects, inaccurate appraisals, financial deterioration of borrowers, fraud,

and any violation of applicable laws and

regulations.

Various

projects financed earlier that were based on lower interest rate assumptions than currently

in effect

may not be as profitable or successful at the higher interest rates currently

in effect and which may exist in the future.

See

“Risk Factors.”

The Company attempts to reduce these economic and credit risks through

its loan-to-value guidelines for collateralized

loans, investigating the creditworthiness of borrowers and monitoring borrowers’

financial position. Also, we have

established and periodically review,

our lending policies and procedures. Banking regulations limit a bank’s

credit exposure

by prohibiting unsecured loan relationships that exceed 10% of its capital; or

20% of capital, if loans in excess of 10% of

capital are fully secured. Under these regulations, we are prohibited from having

secured loan relationships in excess of

approximately $23.5 million. Furthermore, we have an internal limit for

aggregate credit exposure (loans outstanding plus

unfunded commitments) to a single borrower of $21.2 million. Our loan

policy requires that the Loan Committee of the

Board of Directors approve any loan relationships that exceed this internal

limit. At December 31, 2025, the Bank did not

have any loan relationships

exceeding our internal limit.

We periodically

analyze our commercial loan portfolio to determine if a concentration of

credit risk exists in any one or

more industries. We

use classification systems broadly accepted by the financial services industry

in order to categorize our

commercial borrowers. Loan concentrations to borrowers in the following

classes exceeded 25% of the Bank’s

total risk-

based capital at December 31, 2025 (and related balances at December

31, 2024).

December 31

(In thousands)

2025

2024

Lessors of 1-4 family residential properties

56,773

58,228

Multi-family residential properties

51,516

43,556

Hotel/motel

47,870

35,210

Shopping centers/strip malls

42,444

37,349

The Company maintains the allowance for credit losses at a level that management

believes appropriate to adequately cover

the Company’s estimate of expected

losses over the remaining life in the loan portfolio. The allowance for credit losses was

$7.2 million at December 31, 2025,

compared to $6.9 million at December 31, 2024, which management believed

to be

adequate at each of the respective dates.

Our allowance for credit losses as a percentage of total loans was 1.27% at

December 31, 2025, compared to 1.22% at December 31, 2024.

Our CECL models rely largely on projections of macroeconomic

conditions to estimate future credit losses.

Macroeconomic factors used in the model include the Alabama unemployment

rate, the Alabama home price index, the

national commercial real estate price index and the Alabama gross state product.

Projections of these macroeconomic

factors, obtained from an independent third party,

are utilized to predict quarterly rates of default.

See “Risk Factors”.

Under the CECL methodology the allowance for credit losses is measured on

a collective basis for pools of loans with

similar risk characteristics, and on an individual basis for loans that do not share

similar risk characteristics with the

collectively evaluated pools.

Losses are predicted over a period of time determined to be reasonable and

supportable, and

at the end of the reasonable and supportable period losses are reverted

to long term historical averages.

At December 31,

2025 and 2024, reasonable and supportable periods of 4 quarters were utilized

followed by an 8-quarter straight line

reversion period to long term averages.

See Note 4 to our Financial Statements.

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A summary of the changes in the allowance for credit losses on loans and

certain asset quality ratios for the years ended

December 31, 2025 and 2024 is presented below.

Year ended December 31

(Dollars in thousands)

2025

2024

Allowance for credit losses:

Balance at beginning of period

6,871

6,863

Charge-offs:

Commercial and industrial

(142)

(9)

Commercial real estate

(296)

—

Residential real estate

(7)

(61)

Consumer installment

(96)

(114)

Total charge

-offs

(541)

(184)

Recoveries:

Commercial and industrial

144

Residential real estate

Consumer installment

Total recoveries

143

198

Net (charge-offs) recoveries

(398)

Provision for credit losses - Loans

703

(6)

Ending balance

7,176

6,871

as a % of loans

1.27

1.22

as a % of nonperforming loans

1,489

1,366

Net charge-offs as a % of average loans

0.07

—

Nonperforming Assets

The Company had $0.5 million in nonperforming assets at both December

31, 2025 and 2024.

The table below provides information concerning total nonperforming

assets and certain asset quality ratios.

December 31

(Dollars in thousands)

2025

2024

Nonperforming assets:

Nonperforming (nonaccrual) loans

482

503

Total nonperforming

assets

482

503

as a % of loans and other real estate owned

0.09

as a % of total assets

0.05

Nonperforming loans as a % of total loans

0.09

Accruing loans 90 days or more past due

—

The table below provides information concerning the composition of

nonaccrual loans at December 31, 2025 and 2024,

respectively.

December 31

(In thousands)

2025

2024

Nonaccrual loans:

Commercial and industrial

—

Construction and land development

—

404

Commercial real estate

378

—

Residential real estate

104

—

Total nonaccrual

loans

482

503

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The Company discontinues the accrual of interest income when (1)

there is a significant deterioration in the financial

condition of the borrower and full repayment of principal and interest is not

expected or (2) the principal or interest is more

than 90 days past due, unless the loan is both well-secured and in the process

of collection.

There were no loans 90 days past due and still accruing interest at December 31, 2025

and 2024, respectively.

The Company had no other real estate owned at December 31, 2025 and 2024, respectively.

Deposits

December 31

(In thousands)

2025

2024

Noninterest bearing demand

268,026

260,874

NOW

214,827

199,883

Money market

170,352

153,916

Savings

92,920

89,904

Certificates of deposit under $250,000

97,458

103,594

Certificates of deposit and other time deposits of $250,000 or more

79,343

87,653

Total deposits

922,926

895,824

Total deposits were $922.9

million at December 31, 2025, compared to $895.8 million at December 31, 2024.

The 3%

increase in deposits compared to December 31, 2024 was primarily related

to an increase in money market and interest-

bearing checking accounts.

Noninterest-bearing deposits were 29% of total deposits at both December 31,

2025 and 2024.

The Company had no brokered deposits at December 31, 2025 and 2024.

The Company had no FHLB-Atlanta advances or

other wholesale borrowings outstanding at December 31, 2025 and 2024.

The average rates paid on total interest-bearing deposits were 1.72

in 2025 and 1.81% in 2024.

The Bank participates in the Certificates of Deposit Account Registry Service (the

“CDARS”) and the Insured Cash Sweep

product (“ICS”), which provide for reciprocal (“two-way”) transactions

among banks facilitated by IntraFi for the purpose

of improving FDIC insurance for our depositors.

The Company had reciprocal deposits on balance sheet of $9.8 million at

December 31, 2025, compared to $6.9 million at December 31, 2024.

At December 31, 2025, the Company had $79.7

million reciprocal deposits sold, compared to $74.1 million at December

31, 2024.

At December 31, 2025, estimated uninsured deposits totaled $392.9

million, or 43% of total deposits, compared to $359.7

million, or 40% of total deposits at December 31, 2024.

Uninsured amounts are estimated based on the portion of account

balances that exceed FDIC insurance limits.

The Bank’s uninsured deposits at December

31, 2025 and 2024 include

approximately $228.7 million and $223.1 million, respectively,

of deposits of state, county and local governments that are

collateralized by securities.

Deposits of state, county and local governments were 58% and 62% of our estimated uninsured

deposits at December 31, 2025 and 2024, respectively.

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The estimated uninsured time deposits by maturity as of December

31, 2025 are presented below.

(Dollars in thousands)

December 31, 2025

Maturity of:

3 months or less

15,624

Over 3 months through 6 months

31,140

Over 6 months through 12 months

28,306

Over 12 months

4,273

Total estimated uninsured

time deposits

79,343

Other Borrowings

The Company had no long-term debt at December 31, 2025 and 2024.

The Bank utilizes short and long-term non-deposit

borrowings

from time to time. Short-term borrowings generally consist of federal funds purchased

and securities sold under

agreements to repurchase with an original maturity of one year or less.

The Bank had available federal funds lines totaling

$65.2 million at December 31, 2025 and 2024 with no federal funds borrow

ed.

The Company had no securities sold under

agreements to repurchase, which are entered into on behalf of certain

customers, at December 31, 2025 and 2024.

The

Bank is eligible to borrow from the FRB’s discount

window, but had no such

borrowings at December 31, 2025 and 2024.

The Bank never borrowed from the Federal Reserve’s

Bank Term Facility Program

(“BTFP”) which ceased making new

loans on March 11, 2024.

The Bank is a member of the FHLB-Atlanta and has borrowed from the

FHLB-Atlanta, and in the future may borrow from

time to time under the FHLB-Atlanta’s

advance program.

FHLB-Atlanta advances include both fixed and variable terms,

and provide various maturities, and generally are secured by eligible

assets.

The Bank had no borrowings under FHLB-

Atlanta’s advance program

at December 31, 2025 and 2024, respectively.

At those dates, the Bank had $304.9 million and

$296.9 million, respectively,

of available lines of credit at the FHLB-Atlanta.

CAPITAL ADEQUACY

At December 31, 2025, the Company’s

consolidated stockholders’ equity (book value) was $92.1 million, or

$26.35 per

share, compared to $78.3 million, or $22.41 per share, at December 31, 2024. The

increase from December 31, 2024 was

primarily driven by net earnings of $7.3 million and other comprehensive

income of $10.2 million due to a decrease in

unrealized losses on securities available-for-sale, net of tax, which was partially

offset by cash dividends paid of

$3.8 million.

Unrealized losses on securities do not affect the Bank’s

capital for regulatory capital purposes.

The Company paid cash dividends of $1.08 per share in 2025 and 2024.

The Company and Bank are subject to the Basel III regulatory capital framework

which includes a capital conservation

buffer of CET1 capital of 2.5% that is added to the minimum requirements

for capital adequacy purposes.

A banking

organization with a capital conservation buffer

of 2.5% or less is subject to limitations on “distributions” from “eligible

retained earnings”, including dividend payments,

share repurchases and certain discretionary bonus payments. At

December 31, 2025 and 2024, the Bank had a capital conservation buffer

of 9.14% and 7.81%, respectively.

The Federal Reserve has treated us as a “small bank holding company’ under the Federal Reserve’s

Small Bank Holding

Company Policy.

Accordingly, our capital adequacy

is evaluated at the Bank level, and not for the Company and its

consolidated subsidiaries. The Bank’s

tier 1 leverage ratio was 10.71%, CET1 risk-based capital ratio was 16.06%, tier 1

risk-based capital ratio was 16.06%, and total risk-based capital ratio was 17.14

at December 31, 2025. These ratios

exceed the minimum regulatory capital percentages of 5.0% for tier 1 leverage

ratio, 6.5% for CET1 risk-based capital

ratio, 8.0% for tier 1 risk-based capital ratio, and 10.0% for total risk-based

capital ratio to be considered “well capitalized.”

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MARKET AND LIQUIDITY RISK MANAGEMENT

Management’s objective is to manage

assets and liabilities to provide a satisfactory,

consistent level of profitability within

the framework of established liquidity,

loan, investment, borrowing, and capital policies. The Bank’s

Asset Liability

Management Committee (“ALCO”) is charged with the

responsibility of monitoring these policies, which are designed to

ensure an acceptable asset/liability composition. Two

critical areas of focus for ALCO are interest rate risk and liquidity

risk management.

Interest Rate Risk Management

In the normal course of business, the Company is exposed to market risk arising from

fluctuations in interest rates because

assets and liabilities may mature or reprice at different times and

at different rates of change.

ALCO measures and

evaluates the interest rate risk so that we can meet customer demands for various types

of loans and deposits. ALCO

determines

the most appropriate amounts of on-balance sheet and off-balance sheet

items. Measurements used to help

manage interest rate sensitivity include an earnings simulation and an

economic value of equity model.

Earnings simulation

Management believes that interest rate risk is best estimated by our earnings simulation

modeling. On at least a quarterly

basis, we simulate the following 12-month time period to determine a baseline

net interest income forecast and the

sensitivity of this forecast to changes in interest rates. The baseline forecast assumes an

unchanged or flat interest rate

environment. Forecasted levels of earning assets, interest-bearing

liabilities, and off-balance sheet financial instruments are

combined with ALCO forecasts of market interest rates for the next 12 months

and other factors in order to produce various

earnings simulations and estimates.

To help limit interest

rate risk, we have guidelines for earnings at risk which seek to limit the variance of

net interest

income from gradual changes in interest rates.

For changes up or down in rates from management’s

flat interest rate

forecast over the next 12 months, policy limits for net interest income variances are

as follows:

+/- 20% for a gradual change of 400 basis points

+/- 15% for a gradual change of 300 basis points

+/- 10% for a gradual change of 200 basis points

+/- 5% for a gradual change of 100 basis points

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

assuming a gradual change in

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

forecast at December 31, 2025.

Changes in Interest Rates

Net Interest Income % Variance

400 basis points

4.67

300 basis points

3.95

200 basis points

2.76

100 basis points

1.40

(100) basis points

(1.97)

(200) basis points

(3.13)

(300) basis points

(4.13)

(400) basis points

(5.16)

At December 31, 2025, our earnings simulation model indicated that

we were in compliance with the policy guidelines

noted above.

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Economic Value

of Equity

Economic value of equity (“EVE”) measures the extent that estimated economic

values of our assets, liabilities and off-

balance sheet items will change as a result of interest rate changes. Economic values

are estimated by discounting expected

cash flows from assets, liabilities and off-balance sheet items, which are

used to establish a base case EVE. In contrast with

our earnings simulation model which evaluates interest rate risk over a 12-month

timeframe, EVE uses a terminal horizon

which allows for the re-pricing of all assets, liabilities, and off-balance

sheet items. Further, EVE is measured using values

as of a point in time and does not reflect any actions that ALCO might take in responding

to or anticipating changes in

interest rates, or market and competitive conditions.

To help limit interest

rate risk, we have stated policy guidelines for an instantaneous basis point change

in interest rates,

such that our EVE should not decrease from our base case by more than the following:

35% for an instantaneous change of +/- 400 basis points

30% for an instantaneous change of +/- 300 basis points

25% for an instantaneous change of +/- 200 basis points

15% for an instantaneous change of +/- 100 basis points

The following table reports the variance of EVE assuming an immediate

change in interest rates up or down when

compared to the baseline EVE at December 31, 2025.

Changes in Interest Rates

EVE % Variance

400 basis points

3.76

300 basis points

4.08

200 basis points

3.44

100 basis points

2.21

(100) basis points

(3.41)

(200) basis points

(9.01)

(300) basis points

(17.83)

(400) basis points

(27.26)

At December 31, 2025, our EVE model indicated that we were in compliance

with the policy guidelines noted above.

Each of the above analyses may not, on its own, be an accurate indicator of how our

net interest income will be affected by

changes in interest rates. Income associated with interest-earning

assets and costs associated with interest-bearing liabilities

may not be affected uniformly by changes in interest rates.

In addition, the magnitude and duration of changes in interest

rates may have a significant impact on net interest income. For example,

although certain assets and liabilities may have

similar maturities or periods of repricing, they may react in different

degrees to changes in market interest rates, and other

economic and market factors, including market perceptions. Interest

rates on certain types of assets and liabilities fluctuate

in advance of changes in general market rates, while interest rates on other types

of assets and liabilities may lag behind

changes in general market rates. In addition, certain assets, such as adjustable-rate

mortgage loans, have features (generally

referred to as “interest rate caps and floors”) which limit changes in interest rates.

Prepayment and early withdrawal levels

also could deviate significantly from those assumed in calculating the maturity of

certain instruments. The ability of many

borrowers to service their debts also may decrease during periods of rising interest

rates or economic stress, which may

differ across industries and economic sectors.

Depositors and borrowers may also change their deposit and loan

preferences and behaviors as a result of changes and expected changes in interest rates.

ALCO reviews each of the above interest rate sensitivity analyses along with several

different interest rate scenarios in

seeking satisfactory,

consistent levels of profitability within the framework of the Company’s

established liquidity,

loan,

investment, borrowing, and capital policies.

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The Company may also use derivative financial instruments to improve

the balance between interest-sensitive assets and

interest-sensitive liabilities and as one tool to manage interest rate sensitivity while continuing

to meet the credit and

deposit needs of our customers. From time to time, the Company may enter

into interest rate swaps (“swaps”) to facilitate

customer transactions and meet their financing needs. These swaps qualify

as derivatives, and may be designated as

hedging instruments. At December 31, 2025, the Company had one derivative

contract to assist in managing interest rate

sensitivity.

The Company had no derivative contracts at December 31, 2024.

Liquidity Risk Management

Liquidity is the Company’s ability to

convert assets into cash equivalents in order to meet daily cash flow requirements,

primarily for deposit withdrawals, loan demand and maturing obligations.

Without proper management of its liquidity,

the

Company could experience higher costs of obtaining funds due to insufficient

liquidity, while excessive liquidity

can lead

to a decline in earnings due to the cost of foregoing alternative higher-yielding

investment opportunities.

Liquidity is managed at two levels. The first is the liquidity of the Company.

The second is the liquidity of the Bank. The

management of liquidity at both levels is essential, because the Company

and the Bank are separate and distinct legal

entities with different funding needs and sources, and each are subject

to regulatory guidelines and requirements. The

Company depends upon dividends from the Bank for liquidity to pay its operating

expenses, debt obligations and

dividends. The Bank’s payment of

dividends depends on its earnings, liquidity,

capital and the absence of any regulatory

restrictions.

The primary source of funding and liquidity for the Company has been dividends

received from the Bank. The Company

depends upon dividends from the Bank for liquidity to pay its operating

expenses, debt obligations, if any,

and cash

dividends on, and repurchases of, Company common stock.

The Bank’s payment of dividends

depends on its earnings,

liquidity, capital and the

absence of any regulatory restrictions.

If needed, the Company could also issue common stock or

other securities.

Primary sources of funding for the Bank include customer deposits, other

borrowings, interest payments on earning assets,

repayments

and maturities of securities and loans, sales of securities, and the sale of loans, particularly

residential mortgage

loans. Primary uses of funds include repayment of maturing obligations

and growing the loan portfolio.

The Bank has access to federal funds lines from various banks and borrowings

from the Federal Reserve discount window,

although it was not used by the Bank.

In addition to these sources, the Bank is eligible to participate in the FHLB-Atlanta’s

advance program to obtain funding for growth and liquidity.

Advances include both fixed and variable terms and may

taken out with varying maturities. At December 31, 2025, the Bank

had no FHLB-Atlanta advances outstanding and

available credit from the FHLB-Atlanta of $304.9 million. At December

31, 2025, the Bank also had $65.2 million of

available federal funds lines with no borrowings outstanding.

The following table presents additional information about our contractual

obligations as of December 31, 2025, which by

their terms had contractual maturity and termination dates subsequent

to December 31, 2025:

Payments due by period

1 year

1 to 3

3 to 5

More than

(Dollars in thousands)

Total

or less

years

5 years

Contractual obligations:

Deposit maturities (1)

922,926

910,388

9,726

2,812

—

Operating lease obligations

157

102

—

Total

923,083

910,443

9,828

2,812

—

(1) Deposits with no stated maturity (demand, NOW, money market, and savings deposits) are presented

in the "1 year or less" column

Management believes that the Company and the Bank have adequate

sources of liquidity to meet all known contractual

obligations and unfunded commitments, including loan commitments and reasonable

borrower, depositor,

and creditor

requirements over the next 12 months.

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Off-Balance Sheet Arrangements

At December 31, 2025, the Bank had outstanding standby letters of credit of $1.0

million and unfunded loan commitments

outstanding of $48.1 million. Because these commitments generally

have fixed expiration dates and may expire without

being drawn upon, the total commitment level does not necessarily represent

future cash requirements. If needed to fund

these outstanding commitments, the Bank could use its cash and cash

equivalents, deposits with other banks, liquidate

federal funds sold or a portion of its securities available-for-sale, or draw on its available

credit facilities or raise deposits.

Residential mortgage lending and servicing activities

We primarily

sell conforming residential mortgage loans in the secondary market to Fannie Mae

while retaining the

servicing of these loans (MSRs). The sale agreements for these residential mortgage

loans with Fannie Mae and other

investors include various representations and warranties regarding

the origination and characteristics of the residential

mortgage loans. Although the representations and warranties vary

among investors, they typically cover ownership of the

loan, validity of the lien securing the loan, the absence of delinquent taxes or liens against

the property securing the loan,

compliance with loan criteria set forth in the applicable agreement, compliance

with applicable federal, state, and local

laws, among other matters.

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

As a result, the Bank is not

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

on such mortgage loans where the borrower is

entitled to forbearance.

As of December 31, 2025, the unpaid principal balance of residential mortgage

loans, which we have originated and sold,

but retained the servicing rights (MSRs) totaled $188.8 million. Although

these loans are generally sold on a non-recourse

basis, except for breaches of customary seller representations and warranties,

we may have to repurchase residential

mortgage loans in cases where we breach such representations or warranties

or the other terms of the sale, such as where we

fail to deliver required documents or the documents we deliver are defective.

Investors also may require the repurchase of a

mortgage loan when an early payment default underwriting review reveals

significant underwriting deficiencies, even if the

mortgage loan has subsequently been brought current. Repurchase demands are

typically reviewed on an individual loan by

loan basis to validate the claims made by the investor and to determine if a contractually

required repurchase event has

occurred. We

seek to reduce and manage the risks of potential repurchases or other claims by mortgage

loan investors

through our underwriting, quality assurance and servicing practices, including

good communications with our residential

mortgage investors.

We service all residential

mortgage loans originated and sold by us to Fannie Mae. As servicer,

our primary duties are to:

(1) collect payments due from borrowers; (2) advance certain delinquent

payments of principal and interest; (3) maintain

and administer any hazard, title, or primary mortgage insurance policies relating

to the mortgage loans; (4) maintain any

required escrow accounts for payment of taxes and insurance and

administer escrow payments; and (5) foreclose on

defaulted mortgage loans or take other actions to mitigate the potential losses to

investors consistent with the agreements

governing our rights and duties as servicer.

The agreement under which we act as servicer generally specifies our

standards of responsibility for actions taken by us in

such capacity and provides protection against expenses and liabilities incurred

by us when acting in compliance with the

respective servicing agreements. However,

if we commit a material breach of our obligations as servicer,

we may be subject

to termination if the breach is not cured within a specified period following notice.

The standards governing servicing and

the possible remedies for violations of such standards are determined

by servicing guides issued by Fannie Mae as well as

our contracts with Fannie Mae. Remedies could include repurchase of an affected

loan.

Although to date repurchase requests related to representation and warranty

provisions, and servicing activities have been

limited, it is possible that requests to repurchase mortgage loans may increase

in frequency if investors more aggressively

pursue all means of recovering losses on their purchased loans. As of December

31, 2025, we believe that this exposure is

not material due to the historical level of repurchase requests and loss trends,

the results of our quality control reviews, and

the fact that 99% of our residential mortgage loans serviced for Fannie

Mae were current as of such date. We

maintain

ongoing communications with our investors and will continue to evaluate

this exposure by monitoring the level and number

of repurchase requests as well as the delinquency rates in our investor portfolios.

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The Company was not required to repurchase any loans during 2025 and

2024 as a result of representation and warranty

provisions contained in the Company’s

sale agreements with Fannie Mae, and had no pending repurchase or make-whole

requests at December 31, 2025.

Effects of Inflation and Changing Prices

The consolidated financial statements and related consolidated financial

data presented herein have been prepared in

accordance with GAAP and practices within the banking industry which

require the measurement of financial position and

operating results in terms of historical dollars without considering

the changes in the relative purchasing power of money

over time due to inflation. Unlike most industrial companies, virtually all

the assets and liabilities of a financial institution

are monetary in nature. As a result, interest rates have a more significant impact

on a financial institution’s performance

than the effects of general levels of inflation.

Inflation can increase our noninterest expenses. It also can affect

our customers’ behaviors, the mix of deposits between

interest and noninterest bearing, the levels of interest rates we have to pay on

our deposits and other borrowings, and the

interest rates we earn on our earning assets. The difference between

our interest expense and interest income is also affected

by the shape of the yield curve and the speeds and amounts at which our various assets and

liabilities, respectively, reprice

in response to interest rate changes. The yield curve was inverted during

most of 2024, until September, when it began

normalize.

An inverted yield curve means shorter term interest rates are higher than longer term interest

rates. This results

in a lower spread between our costs of funds and our interest income. In addition,

net interest income could be affected by

asymmetrical changes in the different interest rate indexes,

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

same index. Higher market interest rates and reductions in the securities held by

the Federal Reserve to reduce inflation

generally reduce economic activity may reduce loan demand and growth,

and may adversely affect unemployment rates.

Inflation and related changes in market interest rates, as the Federal Reserve maintains

interest rates to meet its longer-term

inflation goal of 2%, also can adversely affect the values

and liquidity of our loans and securities, the value of collateral

securing loans to our borrowers, and the success of our borrowers and such borrowers’

available cash to pay interest on and

principal of our loans to them.

See “Supervision and Regulation – Fiscal and Monetary Policies” for

more information regarding changes in monetary

policy and interest rates.

CURRENT ACCOUNTING DEVELOPMENTS

The following ASUs have been issued by the FASB

but are not yet effective.

ASU 2025-01,

Income Statement Reporting Comprehensive Income

- Expense Disaggregation Disclosures

(Subtopic 220-

40): Clarifying the Effective Date,

clarifies the effective date of ASU 2024-03,

Income Statement Reporting Comprehensive

Income - Expense Disaggregation Disclosures

(Subtopic 220-40): Disaggregation of

Income Statement Expenses

stipulate that ASU 2024-03 is effective for public business entities for

annual reporting periods beginning after December

15, 2026 and interim reporting periods beginning after December 15,

2027, with early adoption permitted. ASU 2025-01

will be effective for the Company beginning January 1, 2027

for the Company’s annual consolidated

financial statements

on Form 10-K and January 1, 2028 for the Company’s

quarterly consolidated financial statements on Form 10-Q

and is not

expected to have a significant impact on the Company’s

consolidated financial statements.

ASU 2025-06,

Intangibles - Goodwill and Other - Internal-Use Software

(Subtopic 350-40),

removes all references to

prescriptive and sequential software development stages and clarifies that the

threshold for when an entity is required to

start capitalizing software costs is when (1) management has authorized

and committed to funding the software project and

(2) it is probable that the project will be completed and the software will be used to perform

the function intended. ASU

2025-06 will be effective for the Company beginning

January 1, 2028, with early adoption permitted, and is not expected to

have a significant impact on the Company’s

consolidated financial statements.

ASC 2025-11,

Interim Reporting (Topic

270): Narrow-Scope Improvement

is intended to provide clarity about the current

interim reporting requirements, provides a list of the interim disclosures required

by all other Codification topics and

establishes a disclosure principle that requires entities to disclose events since the

end of the last annual reporting period

that have a material impact

on the entity. ASC 2025-11

will be effective for the Company beginning January 1, 2028, with

early adoption permitted, and is not expected to have a significant impact on the Company’s

consolidated financial

tatements.

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Table 1

– Explanation of Non-GAAP Financial Measures

In addition to results presented in accordance with GAAP,

this annual report on Form 10-K includes certain designated net

interest income amounts presented on a tax-equivalent basis, a non-GAAP financial

measure, including the presentation of

total revenue and the calculation of the efficiency ratio.

The Company believes the presentation of net interest income on a tax-equivalent

basis provides comparability of net

interest income from both taxable and tax-exempt sources and facilitates comparability

within the industry. Although

the

Company believes these non-GAAP financial measures enhance investors’

understanding of its business and performance,

these non-GAAP financial measures should not be considered an alternative

to GAAP.

The reconciliation of these non-

GAAP financial measures from GAAP to non-GAAP is presented below.

Year ended December 31

(In thousands)

2025

2024

2023

2022

2021

Net interest income (GAAP)

29,674

27,125

26,328

27,166

23,990

Tax-equivalent adjustment

417

456

470

et interest income (Tax-equivalent)

29,747

27,204

26,745

27,622

24,460

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Table 2

- Selected Financial Data

Year ended December 31

(Dollars in thousands, except per share amounts)

2025

2024

2023

2022

2021

Income statement

Tax-equivalent interest income (a)

40,841

38,811

34,791

30,001

26,977

Total interest expense

11,094

11,607

8,046

2,379

2,517

Tax equivalent net interest income (a)

29,747

27,204

26,745

27,622

24,460

Provision for credit losses

631

135

1,000

(600)

Total noninterest income

3,119

3,474

(2,981)

6,506

4,288

Total noninterest expense

22,951

22,166

22,594

19,823

19,433

Net earnings before income taxes and

tax-equivalent adjustment

9,284

8,476

1,035

13,305

9,915

Tax-equivalent adjustment

417

456

470

Income tax expense (benefit)

1,956

2,000

(777)

2,503

1,406

Net earnings

7,255

6,397

1,395

10,346

8,039

Per share data:

Basic net earnings

2.08

1.83

0.40

2.95

2.27

Diluted net earnings

2.08

1.83

0.40

2.95

2.27

Cash dividends declared

1.08

1.06

1.04

Weighted average shares outstanding - basic

3,493,699

3,493,690

3,498,030

3,510,869

3,545,310

Weighted average shares outstanding - diluted

3,495,036

3,493,690

3,498,030

3,510,869

3,545,310

Shares outstanding

3,493,699

3,493,614

3,503,452

3,520,485

Stockholders' equity (book value)

26.35

22.41

21.90

19.42

29.46

Common stock price

High

28.47

24.57

24.50

34.49

48.00

Low

19.48

16.63

18.80

22.07

31.32

Period-end

26.95

23.49

21.28

23.00

32.30

To earnings ratio (b)

12.96

12.84

53.20

7.80

14.23

To book value

102.28

104.82

97.17

118.43

109.64

Performance ratios:

Return on average equity

8.61

8.21

2.05

12.48

7.54

Return on average assets

0.73

0.65

0.14

0.96

0.78

Dividend payout ratio

51.92

59.02

270.00

35.93

45.81

Average equity to average assets

8.45

7.93

6.66

7.72

10.39

Asset Quality:

Allowance for credit losses as a % of:

Loans

1.27

1.22

1.23

1.14

1.08

Nonperforming loans

1,489

1,366

753

211

1,112

Nonperforming assets as a % of:

Loans and other real estate owned

0.09

0.16

0.54

0.18

Total assets

0.05

0.09

0.27

0.07

Nonperforming loans as % of loans

0.09

0.16

0.54

0.10

Net charge-offs as a % of average loans

0.07

—

0.01

0.04

0.02

Capital Adequacy (c):

CET 1 risk-based capital ratio

16.06

14.80

14.52

15.39

16.23

Tier 1 risk-based capital ratio

16.06

14.80

14.52

15.39

16.23

Total risk-based capital ratio

17.14

15.81

15.52

16.25

17.06

Tier 1 leverage ratio

10.71

10.49

9.72

10.01

9.35

Other financial data:

Net interest margin (a)

3.27

3.06

2.89

2.81

2.55

Effective income tax (benefit) rate

21.24

23.82

(125.73)

19.48

14.89

Efficiency ratio (d)

69.83

72.25

95.08

58.08

67.60

Selected period end balances:

Securities

233,259

243,012

270,910

405,304

421,891

Loans, net of unearned income

565,354

564,017

557,294

504,458

458,364

Allowance for credit losses

7,176

6,871

6,863

5,765

4,939

Total assets

1,018,797

977,324

975,255

1,023,888

1,105,150

Total deposits

922,926

895,824

896,243

950,337

994,243

Total stockholders’ equity

92,053

78,292

76,507

68,041

103,726

(a) Tax-equivalent.

See "Table 1 - Explanation of Non-GAAP Financial Measures".

(b) Calculated by dividing period end share price by

earnings per share for the previous four quarters.

wholly-owned subsidiary, AuburnBank.

(

d) Efficiency ratio is the result of noninterest expense divided by

the sum of noninterest income and tax-equivalent net interest income.

Table of Contents

Table 3

- Average

Balance and Net Interest Income Analysis

Year ended December 31

2025

2024

Interest

Average

Income/

Yield/

Average

Income/

Yield/

(Dollars in thousands)

Balance

Expense

Rate

Balance

Expense

Rate

Interest-earning assets:

Loans and loans held for sale (1)

560,476

30,840

5.50%

568,733

29,735

5.23%

Securities - taxable

228,793

4,949

2.16%

248,072

5,430

2.19%

Securities - tax-exempt (2)

9,173

346

3.77%

10,084

373

3.70%

Total securities

237,966

5,295

2.23%

258,156

5,803

2.25%

Federal funds sold

26,535

1,127

4.25%

17,907

939

5.24%

Interest bearing bank deposits

83,648

3,579

4.28%

44,634

2,334

5.23%

Total interest-earning

assets

908,625

40,841

4.49%

889,430

38,811

4.36%

Cash and due from banks

15,414

17,779

Other assets

72,438

75,059

Total assets

996,477

982,268

Interest-bearing liabilities:

Deposits:

NOW

205,951

2,740

1.33%

192,702

2,680

1.39%

Savings and money market

253,668

2,461

0.97%

251,778

2,168

0.86%

Certificates of deposit

184,047

5,891

3.20%

195,097

6,756

3.46%

Total interest-bearing

deposits

643,666

11,092

1.72%

639,577

11,604

1.81%

Short-term borrowings

7.14%

628

0.48%

Total interest-bearing

liabilities

643,694

11,094

1.72%

640,205

11,607

1.81%

Noninterest-bearing deposits

265,978

262,224

Other liabilities

2,578

1,918

Stockholders' equity

84,227

77,921

Total liabilities and

and stockholders' equity

996,477

982,268

Net interest income and margin

29,747

3.27%

27,204

3.06%

(1) Average loan

balances are shown net of unearned income and loans on nonaccrual status have

been included

in the computation of average balances.

(2) Yields on tax-exempt securities have been

computed on a tax-equivalent basis using an income tax rate

of 21%.

See Table 1 - Explanation of Non-GAAP

Financial Measures."

Table of Contents

Table 4

- Volume

and Rate Variance

Analysis

Year ended December 31, 2025 vs. 2024

Year ended December 31, 2024 vs. 2023

Net

Due to change in

Net

Due to change in

(Dollars in thousands)

Change

Rate (2)

Volume (2)

Change

Rate (2)

Volume (2)

Interest income:

Loans and loans held for sale

1,105

1,559

(454)

4,810

2,463

2,347

Securities - taxable

(481)

(64)

(417)

(1,778)

133

(1,911)

Securities - tax-exempt (1)

(27)

(34)

(1,612)

(57)

(1,555)

Total securities

(508)

(57)

(451)

(3,390)

(3,466)

Federal funds sold

188

(178)

366

689

665

Interest bearing bank deposits

1,245

(424)

1,669

1,911

1,885

Total interest income

2,030

900

1,130

4,020

2,589

1,431

Interest expense:

Deposits:

NOW

(116)

176

773

783

(10)

Savings and money market

293

275

359

(323)

Certificates of deposit

(865)

(511)

(354)

2,821

2,128

693

Total interest-bearing

deposits

(512)

(352)

(160)

3,630

3,270

360

Short-term borrowings

(1)

(43)

(69)

(56)

(13)

Total interest expense

(513)

(310)

(203)

3,561

3,214

347

Net interest income

2,543

1,210

1,333

459

(625)

1,084

(1) Yields on tax-exempt securities have been

computed on a tax-equivalent basis using an income

tax rate of 21%.

See "Table 1 - Explanation

of Non-GAAP Financial Measures."

(

2) Changes that are not solely a result of volume or rate have been allocated

to volume.

Table of Contents

Table 5

- Net Charge-Offs (Recoveries) to Average

Loans

2025

2024

Net

(recovery)

Net

charge-off

(recoveries)

Average

charge-off

charge-offs

Average

(recovery)

(Dollars in thousands)

charge-off

Loans

ratio

(recoveries)

Loans

ratio

Commercial and industrial

112

58,986

0.19

(135)

71,279

(0.19)

Construction and land development

—

82,964

—

70,342

—

Commercial real estate

296

293,149

0.10

—

297,140

—

Residential real estate

(77)

117,252

(0.07)

118,856

0.04

Consumer installment

9,011

0.74

10,381

0.66

Total

398

561,362

0.07

(14)

567,998

—

Table of Contents

Table 6

- Loan Maturities

December 31, 2025

1 year

1 to 5

5 to 15

After 15

(Dollars in thousands)

or less

years

Total

Commercial and industrial

17,529

15,596

23,764

1,511

58,400

Construction and land development

36,103

18,842

1,491

—

56,436

Commercial real estate

56,098

154,297

110,603

4,523

325,521

Residential real estate

6,533

33,027

26,682

50,312

116,554

Consumer installment

2,084

5,264

1,073

—

8,421

Total loans

118,347

227,026

163,613

56,346

565,332

Table of Contents

Table 7

- Sensitivities to Changes in Interest Rates on Loans Maturing in More

Than One Year

December 31, 2025

Variable

Fixed

(Dollars in thousands)

Rate

Total

Commercial and industrial

330

40,541

40,871

Construction and land development

13,627

6,706

20,333

Commercial real estate

18,289

251,134

269,423

Residential real estate

50,365

59,656

110,021

Consumer installment

189

6,148

6,337

Total loans

82,800

364,185

446,985

Table of Contents

Table 8

- Allocation of Allowance for Credit Losses

2025

2024

(Dollars in thousands)

Amount

Commercial and industrial

1,129

10.3

1,244

11.2

Construction and land development

1,304

10.0

1,059

14.6

Commercial real estate

3,777

57.6

3,842

51.3

Residential real estate

837

20.6

588

21.0

Consumer installment

129

1.5

138

1.7

Total allowance for

credit losses

7,176

6,871

Loan balance in each category expressed as a percentage of total loans.

Table of Contents

ITEM 7A.

QUANTITATIVE

AND QUALITATIVE

DISCLOSURES ABOUT MARKET RISK

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

caption “Market and Liquidity Risk Management”

and is incorporated herein by reference.

ITEM 8.

FINANCIAL STATEMENTS

AND SUPPLEMENTARY

DATA

Index

Page

Report of Independent Registered Public Accounting Firm

(PCAOB ID:

149

)

Consolidated Balance Sheets

Consolidated Statements of Earnings

Consolidated Statements of Comprehensive Income

Consolidated Statements of Stockholders’ Equity

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

Table of Contents

Report of Independent Registered Public Accounting Firm

To the Stockholders

and Board of Directors of

Auburn National Bancorporation, Inc. and Subsidiaries

Opinion on the Financial Statements

have audited

the accompanying

consolidated balance

sheets of

Auburn National

Bancorporation, Inc.

and Subsidiaries

(the

“Company”)

December

31,

2025

and

2024,

the

consolidated

statements

earnings,

comprehensive

income,

stockholders'

equity

and

cash

flows

for

the

years then

ended,

and

the

notes

the

consolidated

financial

statements (collectively,

the “financial

statements”).

In our

opinion,

the financial

statements present

fairly,

in all

material

respects, the financial

position of the

Company as of

December 31, 2025

and 2024, and

the results of

its operations

and its

cash

flows

for

each

the

two

years

the

period

ended

December

31,

2025,

conformity

with

accounting

principles

generally accepted in the United States of America.

Basis for Opinion

These financial statements are

the responsibility of the

Company’s management.

Our responsibility is to express

an opinion

the

Company’s

financial

statements

based

our

audits.

are

public

accounting

firm

registered

with

the

Public

Company

Accounting

Oversight

Board

(United

States)

(PCAOB)

and

are

required

independent

with

respect

the

Company

accordance

with

U.S.

federal

securities

laws

and

the

applicable

rules

and

regulations

the

Securities

and

Exchange Commission and the PCAOB.

conducted

our

audits

accordance

with

the

standards

the

PCAOB.

Those

standards

require

that

plan

and

perform the

audit to

obtain reasonable

assurance about

whether the

financial statements

are free

of material

misstatement,

whether

due

error

fraud.

The

Company

not

required

have,

nor

were

engaged

perform,

audit

its

internal control over financial reporting. As part of

our audits, we are required to obtain an understanding of internal

control

over

financial

reporting

but

not

for

the

purpose

expressing

opinion

the

effectiveness

the

Company’s

internal

control over financial reporting. Accordingly,

we express no such opinion.

Our audits included

performing procedures to

assess the risks of

material misstatement of

the financial statements,

whether

due to error or

fraud, and performing

procedures that respond

to those risks. Such

procedures included examining,

on a test

basis, evidence

regarding

the amounts

and disclosures

in the

financial statements.

Our audits

also included

evaluating

the

accounting principles used

and significant estimates made

by management, as well

as evaluating the overall

presentation of

the financial statements. We

believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit

matters communicated

below are matters

arising from

the current period

audit of the

financial statements

that

were

communicated

required

communicated

the

audit

committee

and

that:

(1)

relate

accounts

disclosures that

are material

to the

financial statements

and (2)

involved our

especially challenging,

subjective or

complex

judgments. The

communication of

critical audit

matters does

not alter

in any

way our

opinion on

the financial

statements,

taken

as a

whole,

and

are not,

by communicating

the critical

audit

matters below,

providing

separate

opinions

on the

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

relate.

Table of Contents

Allowance for Credit Losses

As described in Note 4 to the Company’s

consolidated financial statements, the Company has a gross

loan portfolio of $565

million and

related allowance

for credit

losses of

$7.2 million

as of

December 31,

2025. As

described by

the Company

Note 1, the allowance

for credit losses is estimated

by management using

relevant available information,

from both internal

and external

sources, relating

to past

events, current

conditions, and

reasonable and

supportable forecasts.

The Company’s

credit loss assumptions

are estimated using a discounted

cash flow ("DCF") model

for each loan segment,

except consumer

loans.

The

weighted

average

remaining

life

method

used

estimate

credit

loss

assumptions

for

consumer

loans.

The

DCF

model

calculates

expected

life-of-loan

loss

percentage

considering

the

forecasted

probability

that

borrower

will default

(the “PD”),

adjusted for

relevant forecasted

macroeconomic factors,

and loss

given default

(“LGD”), which

the

estimate

the

amount

net

loss

the

event

default.

This

model

utilizes

historical

correlations

between

default

experience

and

certain

macroeconomic

factors

determined

through

statistical

regression

analysis.

Projections

macroeconomic

factors

are

obtained

from

an independent

third

party

and

are utilized

to predict

quarterly

rates

of default

based on the statistical PD models.

The weighted average remaining life

method uses an annual charge

-off rate over several

vintages to

estimate credit

losses. Additionally,

the allowance

for credit

losses calculation

includes subjective

adjustments

for qualitative risk factors that are believed likely to cause estimated credit losses to differ

from historical experience.

identified the

Company’s

estimate of

the allowance

for credit

losses (“ACL”)

as a

critical audit

matter.

The principal

considerations for our determination

of the allowance for credit

losses as a critical audit

matter related to the high

degree of

subjectivity

the

Company’s

judgments

determining

the

macroeconomic

data

the

reasonable

and

supportable

forecasts, as

well as

the qualitative

factors. Auditing

these complex

judgments and

assumptions by

the Company

involves

especially challenging

auditor judgment

due to

the nature

and extent

of audit

evidence and

effort required

to address

these

matters, including the extent of specialized skill or knowledge needed.

The primary procedures we performed to address this critical audit matter included

the following:

●

obtained

understanding

the

Company’s

process

for

establishing

the

ACL,

including

the

selection

and

application of forecasts and the basis

for development and related adjustments

of the qualitative factor components

of the ACL.

●

evaluated

the

reasonableness

management’s

application

qualitative

factor

adjustments

the

ACL,

including

the

comparison

factors

considered

management

third

party

internal

sources

well

evaluated the appropriateness and level of the qualitative factor adjustments.

●

assessed the overall

trends in credit

quality,

including adjustments for

the qualitative factors

by comparing the

overall allowance for credit losses to those recorded by the Company’s

peer institutions.

●

evaluated

subsequent

events

and

transactions

and

considered

whether

they

corroborated

contradicted

the

Company’s conclusion.

/s/

Elliott Davis, LLC

We have served

as the Company's auditor since 2015.

Greenville, South Carolina

arch 17, 2026

Table of Contents

AUBURN NATIONAL

BANCORPORATION,

INC. AND SUBSIDIARIES

Consolidated Balance Sheets

December 31

(Dollars in thousands, except share data)

2025

2024

Assets:

Cash and due from banks

22,335

15,142

Federal funds sold

21,322

37,200

Interest-bearing bank deposits

104,175

41,012

Cash and cash equivalents

147,832

93,354

Securities available-for-sale

233,259

243,012

Loans held for sale

172

—

Loans, net of unearned income

565,354

564,017

Allowance for credit losses

(7,176)

(6,871)

Loans, net

558,178

557,146

Premises and equipment, net

45,600

45,931

Bank-owned life insurance

17,927

17,513

Other assets

15,829

20,368

Total assets

1,018,797

977,324

Liabilities:

Deposits:

Noninterest-bearing

268,026

260,874

Interest-bearing

654,900

634,950

Total deposits

922,926

895,824

Accrued expenses and other liabilities

3,818

3,208

Total liabilities

926,744

899,032

Stockholders' equity:

Preferred stock of $

0.01

par value; authorized

200,000

shares;

issued shares - none

—

Common stock of $

0.01

par value; authorized

8,500,000

shares;

issued

3,957,135

Additional paid-in capital

3,864

3,802

Retained earnings

119,241

115,759

Accumulated other comprehensive loss, net

(19,390)

(29,607)

Less treasury stock, at cost -

463,436

shares at both

December 31, 2025 and 2024

(11,701)

Total stockholders’

equity

92,053

78,292

Total liabilities and stockholders’

equity

1,018,797

977,324

ee accompanying notes to consolidated financial statements

Table of Contents

AUBURN NATIONAL

BANCORPORATION,

INC. AND SUBSIDIARIES

Consolidated Statements of Earnings

Year ended December 31

(Dollars in thousands, except share and per share data)

2025

2024

Interest income:

Loans, including fees

30,840

29,735

Securities:

Taxable

4,949

5,430

Tax-exempt

273

294

Federal funds sold and interest-bearing bank deposits

4,706

3,273

Total interest income

40,768

38,732

Interest expense:

Deposits

11,092

11,604

Short-term borrowings

Total interest expense

11,094

11,607

Net interest income

29,674

27,125

Provision for credit losses

631

Net interest income after provision for credit

losses

29,043

27,089

Noninterest income:

Service charges on deposit accounts

619

614

Mortgage lending

474

608

Bank-owned life insurance

414

403

Other

1,612

1,849

Total noninterest income

3,119

3,474

Noninterest expense:

Salaries and benefits

13,154

12,534

Net occupancy and equipment

2,353

2,508

Professional fees

1,276

1,188

FDIC and other regulatory assessments

569

564

Other

5,599

5,372

Total noninterest expense

22,951

22,166

Earnings before income taxes

9,211

8,397

Income tax expense

1,956

2,000

Net earnings

7,255

6,397

Net earnings per share:

Basic and diluted

2.08

1.83

Weighted average shares

outstanding:

Basic

3,493,699

3,493,690

Diluted

3,495,036

3,493,690

ee accompanying notes to consolidated financial statements

Table of Contents

AUBURN NATIONAL

BANCORPORATION,

INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

Year ended December 31

(Dollars in thousands)

2025

2024

Net earnings

7,255

6,397

Other comprehensive income (loss), net of tax:

Unrealized net holding gain (loss) on securities, net of

tax expense of $

3,427

and tax benefit of $

195

for the years

ended December 31, 2025 and 2024, respectively

10,217

(578)

Other comprehensive income (loss)

10,217

(578)

Comprehensive income

17,472

5,819

ee accompanying notes to consolidated financial statements

Table of Contents

AUBURN NATIONAL

BANCORPORATION,

INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

Accumulated

Common

Additional

other

Common

paid-in

Retained

comprehensive

Treasury

(Dollars in thousands, except share data)

Outstanding

Stock

capital

earnings

(loss) income

stock

Total

Balance, December 31, 2023

3,493,614

3,801

113,398

(29,029)

(11,702)

76,507

Cumulative effect of change in

accounting standard

—

(263)

—

(263)

Net earnings

—

6,397

—

6,397

Other comprehensive loss

—

(578)

—

(578)

Cash dividends paid ($

1.08

per share)

—

(3,773)

—

(3,773)

Sale of treasury stock

—

Balance, December 31, 2024

3,493,699

3,802

115,759

(29,607)

(11,701)

78,292

Net earnings

—

7,255

—

7,255

Other comprehensive income

—

10,217

—

10,217

Cash dividends paid ($

1.08

per share)

—

(3,773)

—

(3,773)

Stock-based compensation

—

Balance, December 31, 2025

3,493,699

3,864

119,241

(19,390)

(11,701)

92,053

ee accompanying notes to consolidated financial statements

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AUBURN NATIONAL

BANCORPORATION,

INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Year ended December 31

(In thousands)

2025

2024

Cash flows from operating activities:

Net earnings

7,255

6,397

Adjustments to reconcile net earnings to net cash provided by

operating activities:

Provision for credit losses

631

Depreciation and amortization

2,113

1,933

Premium amortization and discount accretion, net

1,377

1,505

Deferred tax (benefit) expense

(129)

438

Net gain on sale of loans held for sale

(154)

(261)

Loans originated for sale

(7,074)

(10,439)

Proceeds from sale of loans

7,005

10,622

Increase in cash surrender value of bank owned life insurance

(414)

(403)

Stock-based compensation

—

Net decrease (increase) in other assets

995

(1,168)

Net increase in accrued expenses and other liabilities

682

2,149

Net cash provided by operating activities

12,349

10,809

Cash flows from investing activities:

Proceeds from maturities, paydowns and calls of securities available-for

-sale

22,020

25,620

Increase in loans, net

(1,735)

(6,709)

Net purchases of premises and equipment

(1,485)

(2,089)

Decrease in FHLB stock

—

Net cash provided by investing activities

18,800

16,854

Cash flows from financing activities:

Net increase (decrease) in noninterest-bearing deposits

7,152

(9,849)

Net increase in interest-bearing deposits

19,950

9,430

Net decrease in federal funds purchased and securities sold

under agreements to repurchase

—

(1,486)

Dividends paid

(3,773)

Net cash provided by (used in) financing activities

23,329

(5,678)

Net change in cash and cash equivalents

54,478

21,985

Cash and cash equivalents at beginning of period

93,354

71,369

Cash and cash equivalents at end of period

147,832

93,354

Supplemental disclosures of cash flow information:

Cash paid during the period for:

Interest

11,155

11,520

Income taxes

676

1,244

ee accompanying notes to consolidated financial statements

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AUBURN NATIONAL

BANCORPORATION,

INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING

POLICIES

Nature of Business

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

whose primary business is conducted

by its wholly-owned subsidiary,

AuburnBank (the “Bank”). AuburnBank is a commercial bank located in

Auburn,

Alabama. The Bank provides a full range of banking services in its primary

market area, Lee County,

which includes the

Auburn-Opelika Metropolitan Statistical Area.

Basis of Presentation

The consolidated financial statements include the accounts

of the Company and its wholly-owned subsidiaries, which are

managed as a single business segment. Significant intercompany transactions

and accounts are eliminated in consolidation.

Revenue Recognition

The Company’s sources of

income that fall within the scope of Accounting Standards Codification (“ASC”) 606,

Revenue

from Contracts with Customers,

include service charges on deposits, interchange fees and

gains, and losses on sales of

other real estate, all of which are presented as components of noninterest income.

The following is a summary of the

revenue streams that fall within the scope of ASC 606:

Service charges on deposits and ATM

and interchange fees – Fees from these services are either transaction-based, for

which the performance obligations are satisfied when the individual transaction

is processed, or set periodic service

charges, for which the performance obligations are satisfied

over the period the service is provided. Transaction-based

fees

are recognized at the time the transaction is processed, and periodic service

charges are recognized over the service period.

Gains on sales of other real estate

–

A gain on sale should be recognized when a contract for sale exists and control of the

asset has been transferred to the buyer.

ASC 606 lists several criteria required to conclude that a contract for sale exists,

including a determination that the institution will collect substantially all of

the consideration to which it is entitled. In

addition to the loan-to-value, the analysis is based on various other factors, including the credit quality

of the borrower, the

structure of the loan, and any other factors that may affect

collectability.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally

accepted accounting principles requires

management to make estimates and assumptions that affect

the reported amounts of assets and liabilities and the disclosure

of contingent assets and liabilities as of the balance sheet date and the reported

amounts of income and expense during the

reporting period. Actual results could differ from those estimates. Material

estimates that are particularly susceptible to

significant change in the near term include the determination of

the allowance for credit losses, fair value measurements,

valuation of other real estate owned, and valuation of deferred tax assets.

Reclassifications

Certain amounts reported in the prior period have been reclassified to conform

to the current-period presentation. These

reclassifications had no impact on the Company’s

previously reported net earnings or total stockholders’ equity.

Subsequent Events

The Company has evaluated the effects of events or transactions

through the date of this filing that have occurred

subsequent to December 31, 2025. The Company does not believe there

are any material subsequent events that would

require further recognition or disclosure.

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Accounting Standards Adopted in 2025

Accounting Standards Update (“ASU”) 2023-09,

Income Taxes

(Topic

740): Improvements to Income Tax

Disclosures.

The

amendments in this Update enhance the transparency and decision usefulness of

income tax disclosures.

For public

business entities, the new standard was effective for annual periods

beginning after December 15, 2024.

The Company has

adopted ASU 2023-09.

Issued not yet effective accounting standards

The following ASUs have been issued by the Financial Accounting Standards

Board (“FASB”) but are

not yet effective.

ASU 2025-01,

Income Statement Reporting Comprehensive Income

- Expense Disaggregation Disclosures

(Subtopic 220-

40): Clarifying the Effective Date,

clarifies the effective date of ASU 2024-03,

Income Statement Reporting Comprehensive

Income - Expense Disaggregation Disclosures

(Subtopic 220-40): Disaggregation of

Income Statement Expenses

stipulate that ASU 2024-03 is effective for public business entities for

annual reporting periods beginning after December

15, 2026 and interim reporting periods beginning after December 15,

2027, with early adoption permitted. ASU 2025-01

will be effective for the Company beginning January 1, 2027

for the Company’s annual consolidated

financial statements

on Form 10-K and January 1, 2028 for the Company’s

quarterly consolidated financial statements on Form 10-Q

and is not

expected to have a significant impact on the Company’s

consolidated financial statements.

ASU 2025-06,

Intangibles - Goodwill and Other - Internal-Use Software

(Subtopic 350-40),

removes all references to

prescriptive and sequential software development stages and clarifies that the

threshold for when an entity is required to

start capitalizing software costs is when (1) management has authorized

and committed to funding the software project and

(2) it is probable that the project will be completed and the software will be used to perform

the function intended. ASU

2025-06 will be effective for the Company beginning

January 1, 2028, with early adoption permitted, and is not expected to

have a significant impact on the Company’s

consolidated financial statements.

ASC 2025-11,

Interim Reporting (Topic

270): Narrow-Scope Improvements,

is intended to provide clarity about the current

interim reporting requirements, provides a list of the interim disclosures required

by all other Codification topics and

establishes a disclosure principle that requires entities to disclose events since the

end of the last annual reporting period

that have a material impact on the entity.

ASC 2025-11 will be effective

for the Company beginning January 1, 2028, with

early adoption permitted, and is not expected to have a significant impact on the Company’s

consolidated financial

statements.

Cash Equivalents

Cash equivalents include cash on hand, cash items in process of collection,

amounts due from banks, including interest

bearing deposits with other banks, and federal funds sold.

Securities

Securities are classified based on management’s

intention at the date of purchase. At December 31, 2025, all of the

Company’s securities were classified

as available-for-sale. Securities available-for-sale are used as part of the Company’s

interest rate risk and liquidity management strategy,

and they may be sold in response to changes in interest rates, changes

in prepayment risks or other factors. All securities classified as available-for-sale are recorded

at fair value with any

unrealized gains and losses reported in accumulated other comprehensive income

(loss), net of the deferred income tax

effects. Interest and dividends on securities, including

the amortization of premiums and accretion of discounts are

recognized in interest income using the effective interest method.

Premiums are amortized to the earliest call date while

discounts are accreted over the estimated life of the security.

Realized gains and losses from the sale of securities are

determined using the specific identification method.

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For any securities classified as available-for-sale that are in an unrealized loss position

at the balance sheet date, the

Company assesses whether or not it intends to sell the security,

or more likely than not will be required to sell the security,

before recovery of its amortized cost basis. If either of these criteria are met, the security's

amortized cost basis is written

down to fair value through net income. If neither criterion is met, the Company

evaluates whether any portion of the decline

in fair value is the result of credit deterioration. Such evaluations consider the

extent to which the amortized cost of the

security exceeds its fair value, changes in credit ratings and any other known

adverse conditions related to the specific

security. If the evaluation

indicates that a credit loss exists, an allowance for credit losses is recorded for

the amount by

which the amortized cost basis of the security exceeds the present value

of cash flows expected to be collected, limited by

the amount by which the amortized cost exceeds fair value. Any impairment not

recognized in the allowance for credit

losses is recognized in other comprehensive income.

The Company has elected to exclude accrued interest receivable on

investment securities from the estimate of credit losses.

Accrued interest receivable is written off through interest income

when deemed uncollectible.

Accrued interest receivable totaled $0.8 million and $0.9 million at December

31, 2025 and

2024, respectively.

Loans held for sale

The Company originates residential mortgage loans for sale.

Such loans are carried at the lower of cost or estimated fair

value in the aggregate.

Loan sales are recognized when the transaction closes, the proceeds are collected,

and ownership is

transferred.

Continuing involvement, through the sales agreement, consists of the

right to service the loan for a fee for the

life of the loan, if applicable.

Gains on the sale of loans held for sale are recorded net of related costs, such as

commissions, and reflected as a component of mortgage lending income

in the consolidated statements of earnings.

The Bank makes various representations and warranties to the purchaser of

the residential mortgage loans they originated

and sells, primarily to Fannie Mae.

Every loan closed by the Bank’s mortgage

center is run through Fannie Mae or other

purchasing government sponsored enterprise (“GSE”) automated

underwriting system.

Any exceptions noted during this

process are remedied prior to sale.

These representations and warranties also apply to underwriting the real

estate appraisal

opinion of value for the collateral securing these loans.

Failure by the Company to comply with the underwriting and/or

appraisal standards could result in the Company being required to

repurchase the mortgage loan or to reimburse the investor

for losses incurred (make whole requests) if the Company cannot cure such

failure within the specified period following

discovery.

Loans

Loans that management has the intent and ability to hold for the foreseeable

future or until maturity or payoff are reported

at amortized cost. Amortized cost is the principal balance outstanding,

net of purchase premiums and discounts and

deferred fees and costs. Accrued interest receivable related to loans

is recorded in other assets on the consolidated balance

sheets. Interest income is accrued on the unpaid principal balance. Loan origination

fees, net of certain direct origination

costs, are deferred and recognized in interest income using methods that approximate

a level yield without anticipating

prepayments.

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.

All accrued but unpaid interest is reversed against interest income when

a loan is placed on nonaccrual status. Interest

received on such loans is accounted for using the cost-recovery method,

until the loan qualifies for return to accrual.

Loans

are returned to accrual status when all the principal and interest amounts contractually

due are brought current, there is a

sustained period of repayment performance, and future payments are

reasonably assured. Otherwise, under the cost

recovery method, interest income is not recognized until the loan

balance is reduced to zero.

Allowance for Credit Losses – Loans

The allowance for credit losses is a valuation account that is deducted from

the loans' amortized cost basis to present the net

amount expected to be collected on the loans.

Loans are charged off against the allowance when management

confirms the

loan balance is uncollectible. Expected recoveries do not exceed the aggregate

of amounts previously charged-off and

expected to be charged-off.

The Company has elected to exclude accrued interest receivable on loans from the estimate of

credit losses.

Accrued interest receivable is written off through interest

income when deemed uncollectible.

Accrued

interest receivable totaled $2.0 million at both December 31, 2025

and 2024.

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The allowance for credit losses represents management’s

estimate of lifetime credit losses inherent in loans as of the

balance sheet date. The allowance for credit losses is estimated by management

using relevant available information, from

both internal and external sources, relating to past events, current conditions,

and reasonable and supportable forecasts.

The Company’s loan loss estimation

process includes procedures to appropriately consider the unique characteristics of

its

respective loan segments (commercial and industrial, construction and land development,

commercial real estate,

residential real estate, and consumer loans).

These segments are further disaggregated into loan classes, the level at which

credit quality is monitored.

See Note 4, Loans and Allowance for Credit Losses, for additional information

about our loan

portfolio.

Credit loss assumptions are estimated using a discounted cash flow ("DCF") model

for each loan segment, except consumer

loans.

The weighted average remaining life method is used to estimate credit loss assumptions

for consumer loans.

The DCF model calculates an expected life-of-loan loss percentage by considering

the forecasted probability that a

borrower will default (the “PD”), adjusted for relevant forecasted macroeconomic

factors, and loss given default (“LGD”),

which is the estimate of the amount of net loss in the event of default.

This model utilizes historical correlations between

default experience and certain macroeconomic factors as determined

through a statistical regression analysis.

The

forecasted Alabama unemployment rate is considered in the model for commercial

and industrial, construction and land

development, commercial real estate, and residential real estate loans.

In addition, forecasted changes in the Alabama

home price index is considered in the model for construction and land development

and residential real estate loans.

Forecasted changes in the national commercial real estate (“CRE”) price index

is considered in the model for commercial

real estate and multifamily loans; and forecasted changes in the Alabama

gross state product is considered in the model for

multifamily loans.

Projections of these macroeconomic factors, obtained from an independent third party,

are utilized to

predict quarterly rates of default based on the statistical PD models.

Expected credit losses are estimated over the contractual term of the

loan, adjusted for expected prepayments and principal

payments (“curtailments”) when appropriate. Management's determination

of the contract term excludes expected

extensions, renewals, and modifications, unless the extension or renewal

option is included in the contract at the reporting

date and is not unconditionally cancellable by the Company.

To the extent the lives of the loans

in the portfolio extend

beyond the period for which a reasonable and supportable forecast can be

made (which is 4 quarters for the Company), the

Company reverts, on a straight-line basis back to the historical rates over

an 8-quarter reversion period.

During the first quarter of 2025, as part of the Company’s

ongoing model monitoring procedures, the annual loss driver

analysis and prepayment, curtailment and funding studies were performed.

The analysis and studies resulted in changes for

all DCF models, which were incorporated in the calculation.

The Company performs a refresh of the inputs in the

calculation on an annual basis.

The weighted average remaining life method was deemed most appropriate

for the consumer loan segment because

consumer loans contain many different payment

structures, payment streams and collateral.

The weighted average

remaining life method uses an annual charge-off rate

over several vintages to estimate credit losses.

The average annual

charge-off rate is applied to the contractual

term adjusted for prepayments.

Additionally, the

allowance for credit losses calculation includes subjective adjustments for qualitative

risk factors that are

believed likely to cause estimated credit losses to differ from

historical experience. These qualitative adjustments may

increase reserve levels and include adjustments for lending management

experience and risk tolerance, loan review and

audit results, asset quality and portfolio trends, loan portfolio growth,

industry concentrations, trends in underlying

collateral, external factors and economic conditions not already captured.

Loans secured by real estate with balances equal to or greater than $500 thousand and

loans not secured by real estate with

balances equal to or greater than $250 thousand that do not share risk

characteristics are evaluated on an individual basis.

When management determines that foreclosure is probable and

the borrower is experiencing financial difficulty,

the

expected credit losses are based on the estimated fair value of collateral held

at the reporting date, adjusted for selling costs

as appropriate.

For loans evaluated on an individual basis that are not collateral dependent, the allowance

is measured

using the present value of expected future cash flows, discounted at the loan’s

effective interest rate.

Expected cash flows

are developed using probability of default

and loss given default assumptions specific to the borrower.

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Allowance for Credit Losses – Unfunded Commitments

Financial instruments include off-balance sheet credit

instruments, such as commitments to make loans and commercial

letters of credit issued to meet customer financing needs. The Company’s

exposure to credit loss in the event of

nonperformance by the other party to the financial instrument for off

-balance sheet loan commitments is represented by the

contractual amount of those instruments. Such financial instruments are

recorded when they are funded.

The Company records an allowance for credit losses on off

-balance sheet credit exposures, unless the commitments to

extend credit are unconditionally cancelable, through a charge

to provision for credit losses in the Company’s

consolidated

statements of earnings. The allowance for credit losses on off-balance

sheet credit exposures is estimated by loan segment

at each balance sheet date under the current expected credit loss model using

the same methodologies as portfolio loans,

taking into consideration the likelihood that funding will occur as well as any third-party

guarantees. The allowance for

unfunded commitments is included in other liabilities on the Company’s

consolidated balance sheets.

Premises and Equipment

Land is carried at cost. Land improvements, buildings and improvements,

and furniture, fixtures, and equipment are carried

at cost, less accumulated depreciation computed on a straight-line method

over the estimated useful lives of the assets or the

expected terms of the leases, if shorter.

Expected terms include lease option periods to the extent that the exercise of such

options is reasonably assured.

Nonmarketable equity investments

Nonmarketable equity investments include equity securities that are not

publicly traded and securities acquired for various

purposes. The Bank is required to maintain certain minimum levels of equity investments

in (i) Federal Reserve Bank of

Atlanta based on the Bank’s capital stock

and surplus, and the (ii) Federal Home Bank of Atlanta (“FHLB – Atlanta”)

based on various factors including, the Bank’s

total assets, its borrowings and outstanding letters of credit from the

FHLB -

Atlanta and its “acquired member asset” sales to FHLB - Atlanta.

These nonmarketable equity securities are accounted for

at cost which equals par or redemption value. These securities do not have

a readily determinable fair value as their

ownership is restricted and there is no market for these securities. These securities can only

be redeemed or sold at their par

value by the respective issuer bank or, in

the case of FHLB – Atlanta stock upon FHLB – Atlanta approved sale to another

member of FHLB – Atlanta and law applicable to the member.

The Company records these nonmarketable equity securities

as a component of other assets, which are periodically evaluated for impairment.

Management considers these

nonmarketable equity securities to be long-term investments. Accordingly,

when evaluating these securities for impairment,

management considers the ultimate recoverability of the par value rather

than by recognizing temporary declines in value.

Transfers of Financial Assets

Transfers of an entire financial asset (i.e. loan sales), a group

of entire financial assets, or a participating interest in an entire

financial asset (i.e. loan participations sold) are accounted for as sales when control

over the assets have been surrendered.

Control over transferred assets is deemed to be surrendered when (1)

the assets have been isolated from the Company,

(2) the transferee obtains the right (free of conditions that constrain it from

taking that right) to pledge or exchange the

transferred assets, and (3) the Company does not maintain effective

control over the transferred assets through an

agreement to repurchase them before their maturity.

Mortgage Servicing Rights

The Company recognizes as assets the rights to service mortgage loans which it originates

and sells to others, principally

Fannie Mae.

These servicing rights are called “MSRs”.

The Company determines the fair value of MSRs on sold loans at

the date the loan is transferred.

An estimate of the Company’s MSRs is determined

using assumptions that market

participants would use in estimating future net servicing income, including

estimates of prepayment speeds, discount rate,

default rates, cost to service, escrow account earnings, contractual servicing

fee income, ancillary income, and late fees.

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Subsequent to the date of sale of the residential mortgage loans, the Company has

elected to measure its MSRs on such sold

mortgage loans under the amortization method.

Under the amortization method, MSRs are amortized in proportion to, and

over the period of, estimated net servicing income.

The amortization of MSRs is analyzed monthly and is adjusted to

reflect changes in prepayment speeds, as well as other factors.

MSRs are evaluated for impairment based on the fair value

of those assets.

Impairment is determined by stratifying MSRs into groupings based

on predominant risk characteristics,

such as interest rate and loan type.

If, by individual stratum, the carrying amount of the MSRs exceeds fair value, a

valuation allowance is established through a charge to

earnings.

The valuation allowance is adjusted as the fair value

changes.

MSRs are included in the other assets category in the accompanying consolidated balance

sheets at the lower of

cost or fair value.

See Note 14 “Fair Value”

Derivatives as Part of Designated Accounting Hedges

The Company applies hedge accounting to certain derivative instruments

used for risk management purposes, primarily

interest rate risk. To

qualify for hedge accounting, a derivative instrument must be highly effective

at reducing the risk

associated with the hedged exposure, and the hedging relationship must be formally

documented at its inception. The

Company uses regression analysis to assess the effectiveness of each hedging

relationship, unless the hedge qualifies for

other methods of assessing effectiveness (e.g., shortcut or

critical terms match), both at inception and throughout the life of

the hedge transaction.

The Company has a derivative instrument designated as part of a fair value

accounting hedge. This derivative consists of a

pay-fixed, receive-floating interest rate swap, and was entered into

to hedge changes in the fair value of a fixed-rate loan for

interest rate risk resulting from changes in a benchmark interest rate. In a qualifying

fair value hedge, the Company records

periodic changes in the fair value of the derivative instrument in current period

earnings. Simultaneously,

periodic changes

in the fair value of the hedged risk are also recorded in current period

earnings. Together,

these periodic changes in the fair

value of the derivative instrument and the fair value of the hedged risk are included

in the same line item of the

consolidated statements of earning associated with the hedged item,

and offset each other. Interest accruals

on both the

derivative instrument and the hedged item are also recorded in the same line item,

which effectively converts the designated

fixed-rate asset to a floating-rate asset. The Company structures interest rate

swaps associated with fair value hedges to

match the critical terms of the hedged items, thereby maximizing the economic

and accounting effectiveness of the hedging

relationships, resulting in the expectation that the hedging relationship will be highly

effective. If a fair value hedging

relationship ceases to qualify for hedge accounting, hedge accounting is discontinued

and future changes in the fair value of

the derivative instrument are recognized in current period earnings, until the

derivative is settled with the counterparty.

addition, all remaining basis adjustments resulting from periodic changes

in the fair value of the hedged risk, previously

recorded as a component of the carrying amount of the hedged item, are

amortized or accreted into interest income using

the interest method over the remaining life of the hedged item.

Income Taxes

Deferred tax assets and liabilities are the expected future tax amounts

for the temporary differences between carrying

amounts and tax bases of assets and liabilities, computed using enacted tax

rates. A valuation allowance, if needed, reduces

deferred tax assets to the amount expected to be realized.

The net deferred tax asset is reflected as a component of other

assets in the accompanying consolidated balance sheets.

Income tax expense or benefit for the year is allocated among continuing operations

and other comprehensive income

(loss), as applicable. The amount allocated to continuing operations is the income

tax effect of the pretax income or loss

from continuing operations that occurred during the year,

plus or minus income tax effects of (1) changes in certain

circumstances that cause a change in judgment about the realization of deferred

tax assets in future years, (2) changes in

income tax laws or rates, and (3) changes in income tax status, subject to certain

exceptions.

The amount allocated to other

comprehensive income (loss) is related solely to changes in the valuation allowance

on items that are normally accounted

for in other comprehensive income (loss) such as unrealized gains or

losses on available-for-sale securities.

In accordance with ASC 740,

Income Taxes

, a tax position is recognized as a benefit only if it is “more likely than not” that

the tax position would be sustained in a tax examination, with a tax examination being

presumed to occur. The amount

recognized is the largest amount of tax benefit that is greater than

50% likely of being realized on examination. For tax

positions not meeting the “more likely than not” test, no tax benefit is recorded.

It is the Company’s policy to recognize

interest and penalties related to income tax matters in income tax expense. The

Company and its wholly-owned subsidiaries

file consolidated Federal and State of Alabama income tax returns.

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Fair Value

Measurements

ASC 820,

Fair Value

Measurements,

which defines fair value, establishes a framework for measuring fair value

in U.S.

generally accepted accounting principles and expands disclosures about

fair value measurements. ASC 820 applies only to

fair-value measurements that are already required

or permitted by other accounting standards.

The definition of fair value

focuses on the exit price, i.e., the price that would be received to sell an asset or paid to transfer a

liability in an orderly

transaction between market participants at the measurement date,

not the entry price, i.e., the price that would be paid to

acquire the asset or received to assume the liability at the measurement date.

The statement emphasizes that fair value is a

market-based measurement; not an entity-specific measurement.

Therefore, the fair value measurement should be

determined based on the assumptions that market participants would

use in pricing the asset or liability.

For more

information related to fair value measurements, please refer to Note 14, Fair

Value.

NOTE 2: BASIC AND DILUTED NET EARNINGS PER SHARE

Basic net earnings per share is computed by dividing net earnings by

the weighted average common shares outstanding for

the year.

Diluted net earnings per share reflects the potential dilution that could occur upon exercise

of securities or other

rights for, or convertible into, shares of the

Company’s common stock.

During 2025, the Company granted 3,030 restricted

stock units (“RSUs”), which represent potential common shares.

These RSUs are included in the computation of diluted

net earnings per share using the treasury stock method.

No such securities were outstanding during the year ended

December 31, 2024.

The basic and diluted net earnings per share computations for the respective

years are presented below.

Year ended December 31

(Dollars in thousands, except share and per share data)

2025

2024

Basic:

Net earnings

7,255

6,397

Weighted average

common shares outstanding

3,493,699

3,493,690

Basic net earnings per share

2.08

1.83

Diluted:

Net earnings

7,255

6,397

Weighted average

common shares outstanding

3,493,699

3,493,690

Dilutive effect of restricted stock units

1,337

—

Weighted average

common shares outstanding, diluted

3,495,036

3,493,690

Diluted net earnings per share

2.08

1.83

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NOTE 3: SECURITIES

At December 31, 2025 and 2024, respectively,

all securities within the scope of ASC 320,

Investments – Debt and Equity

Securities

were classified as available-for-sale.

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

contractual maturity at December 31, 2025 and 2024, respectively,

are presented below.

1 year

1 to 5

5 to 10

After 10

Fair

Gross Unrealized

Amortized

(Dollars in thousands)

or less

years

Value

Gains

Losses

Cost

December 31, 2025

Agency obligations (a)

—

35,580

18,204

—

53,784

—

4,727

58,511

Agency MBS (a)

—

20,112

16,171

125,644

161,927

—

19,063

180,990

State and political subdivisions

—

1,590

9,160

6,798

17,548

2,103

19,650

Total available-for-sale

—

57,282

43,535

132,442

233,259

25,893

259,151

December 31, 2024

Agency obligations (a)

—

26,655

25,756

—

52,411

—

7,734

60,145

Agency MBS (a)

19,863

14,904

138,899

173,676

—

28,901

202,577

State and political subdivisions

—

966

8,244

7,715

16,925

—

2,901

19,826

Total available-for-sale

47,484

48,904

146,614

243,012

—

39,536

282,548

(a) Includes securities issued by U.S. government agencies or government

AUBURN NATIONAL BANCORPORATION, INC 10-K