OTC: TYFG

Our
results of operations are dependent primarily upon net interest income and, to a lesser extent, upon other income derived from sales
of one-to-four family residential mortgage loans, loan servicing, trust and insurance services, and customer deposit services. Significant
non-interest expenses include salaries and employee benefits, data processing, occupancy and equipment expense, professional services,
and deposit and other insurance coverage.

Deposits
of the Bank are insured by the Deposit Insurance Fund (the “DIF”) of the FDIC up to the maximum amount allowable under applicable
federal laws and regulations. The Bank is regulated by the Illinois Department of Financial and Professional Regulation (the “IDFPR”),
as the chartering authority for state banks in Illinois, and the FDIC, as the administrator of the DIF. The Bank is also subject to regulation
by the Federal Reserve with respect to reserves required to be maintained against deposits and certain other matters.

The
Bank also owns one mortgage subsidiary, First State Mortgage Services, LLC (“FSM”), and an insurance subsidiary, Tri-County
Insurance Services, Inc. (d/b/a First State Insurance) (“FSI”). FSM, headquartered in Bloomington, Illinois, has lending
capabilities in most states and offers a wide range of residential mortgage loan products. Operations began in 2007, and the entity became
a wholly owned subsidiary of the Bank in 2011. FSM’s revenues and profitability vary greatly based on the mortgage interest rates.
First State Insurance, an independent insurance agency headquartered in Mendota, Illinois, has been serving clients in North Central
Illinois since 2000. Home, auto, motorcycle, health, life insurance coverage is offered to consumers and businesses. The agency also
serves the agricultural community with farm policies, crop hail and multi-peril insurance.

The
Company’s executive office and the Bank’s main office are located at 706 Washington Street, Mendota, Illinois 61342. The
telephone number is (815) 538-2265. Our website address is www.firststatebank.biz. The information contained on our website is not a
part of, or incorporated by reference into, this report.

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Market
Areas

The
Bank’s primary deposit gathering and lending markets are geographically diversified throughout north central Illinois. We are headquartered
in Mendota, Illinois, and have branches in Batavia, Bloomington, Champaign, Geneva, LaMoille, McNabb, North Aurora, Ottawa, Peru, Princeton,
Rochelle, Shabbona, St. Charles, Streator, Sycamore, Waterman and West Brooklyn, Illinois. The primary industries within these respective
markets are also diverse and dependent upon a wide array of industry and governmental activity for their economic base. The Bank has
a designated a community president to oversee the northern market areas and southern market areas (Bloomington and Champaign). FSM and
FSI operate out of our bank branches or ancillary facilities. Additionally, FSM has one loan production office located in Sussex, Wisconsin,
which is our only office location outside of Illinois.

Competition

The
Company faces strong competition both in attracting deposits and making real estate, commercial and other loans. Its most direct competition
for deposits and loans comes from large national and regional banks, local community banks, savings and loan associations, securities
and brokerage companies, mortgage companies, insurance companies, finance companies, money market mutual funds, credit unions, financial
technology (fintech) companies and other non-bank financial service providers located in its principal market areas, including many larger
financial institutions which have greater financial and marketing resources available to them. The ability of the Bank to attract and
retain deposits generally depends on its ability to provide a rate of return, service levels, liquidity and risk comparable to or better
than those offered by competing investment opportunities. The Bank competes for loans principally through the interest rates and loan
fees it charges and the efficiency and quality of services it provides borrowers.

Human
Capital Resources

Employees.
The Company is a relationship driven company and its ability to attract and retain exceptional employees is key to its success. At December
31, 2025, the Bank, FSI and FSM had a total of 287 full-time equivalent employees. In 2025, the Company had one employee, President and
Chief Executive Officer, Timothy McConville. Mr. McConville retired on October 28, 2025. Employees are provided with a comprehensive benefits
program, including basic and major medical insurance, life and disability insurance, sick leave, and a 401(k) profit sharing plan. Employees
are not represented by any union or collective bargaining group, and the Bank considers its employee relations to be excellent.

Talent
development and retention. The Company utilizes various processes to recruit employees with values that align with the Company’s
vision of providing exceptional services to the local communities we serve. The long-term success of the Company revolves around the
ability to continue to develop and retain these employees. The Company encourages and supports the growth and development of its employees
and, wherever possible, seeks to fill positions by promotion and transfer from within the organization. Continual learning and career
development is advanced through ongoing performance and development conversations with employees, internally developed training programs
and external training opportunities.

Lending
Activities

General.

The
Bank strives to provide a full range of financial products and services to individuals as well as to small- and medium-sized businesses
in each market area it serves. The Bank targets consumers for their mortgage needs as well as owner-operated businesses for small business
and commercial real estate. The Bank has a loan committee with authority to approve credits within established guidelines. Concentrations
in excess of those guidelines must be approved by either a corporate loan committee comprised of the Bank’s Chief Executive Officer,
the Chief Credit Officer, and other senior commercial lenders or the Bank’s board of directors. When lending to an entity, the
Bank generally obtains a guaranty from the principals of the entity. The loan mix is subject to the discretion of the Bank’s board
of directors and the demands of the local marketplace.

4

The
following is a description of each major category of the Bank’s lending activity.

Real
Estate Lending.

Commercial
Real Estate Lending. Commercial real estate loans, including multi-family loans, generally have amortization periods of 15 or 20
years. Commercial real estate and multi-family loans are generally limited, by policy, to 80% of the appraised value of the property
and are subject to strict underwriting guidelines. Commercial real estate loans are also supported by an analysis demonstrating the borrower’s
ability to repay. The Bank continues to focus on generating additional commercial real estate loans, which are part of an overall banking
relationship with the customer and does not focus on originating transactional type loans where the borrower does not have other financial
relationships with the Bank. This focus results in more owner-occupied commercial real estate loans that are diversified by borrower
type and geography. The Bank monitors the commercial real estate loan portfolio closely for concentrations in loan types as well as the
financial performance of the borrowers. Currently, the Bank has not identified any negative trends related to the commercial real estate
loan portfolio. The Bank’s loan growth over the past few years has been driven in large part by commercial real estate loans.

One-to-Four
Family Residential Real Estate Lending. The Bank originates one-to-four family residential real estate loans with both fixed and
variable rates. One-to-four family residential real estate loans are typically priced and originated following underwriting standards
that are consistent with guidelines established by the major buyers in the secondary market. Generally, residential real estate loans
retained in the Bank’s loan portfolio have fixed or variable rates with adjustment periods of seven years or less and amortization
periods of typically either 15, 20 or 30 years. A significant portion of these loans prepay prior to maturity. The Bank has no potential
negative amortization loans. While the origination of fixed-rate, one-to-four family residential loans continues to be a key component
of our business, the majority of these loans are sold in the secondary market. One-to-four family residential real estate loans that
exceed 90% of the appraised value of the real estate generally are required, by policy, to be supported by private mortgage insurance,
although on occasion the Bank will retain non-conforming residential loans to known customers. The balances of one-to-four family residential
real estate loans increased as of December 31, 2025 compared to December 31, 2024 primarily due to decreasing mortgage rates, which increased
demand for the Bank’s mortgage loans. While the Bank retains some of the new fixed rate mortgage loan originations, most of the
new fixed rate mortgage loans continue to be sold.

Construction
and Land Lending. Loans in this category include loans to facilitate the development of both residential and commercial
real estate. Construction and land loans generally have terms of less than 18 months, and the Bank will retain a security interest in
the borrower’s real estate. Construction loans are generally limited, by policy, to 80% of the appraised value of the property.
Land loans are generally limited, by policy, to 65% of the appraised value of the property. The balances
of construction and land loans increased as of December 31, 2025, compared to December 31, 2024 primarily due to higher demand from the
Bank’s loan customers for these types of loans as well as due to lower interest rates.

Commercial
Lending.

Commercial
loans include loans to service, retail, wholesale and light manufacturing businesses. Commercial loans are made based on the financial
strength and repayment ability of the borrower, as well as the collateral securing the loans. The Bank targets owner-operated businesses
as its customers and makes lending decisions based upon a cash flow analysis of the borrower as well as a collateral analysis. Accounts
receivable loans and loans for inventory purchases are generally on a one-year renewable term, and loans for equipment generally have
a term of seven years or less. The Bank generally takes a blanket security interest in all assets of the borrower. Equipment loans are
generally limited to 75% of the cost or appraised value of the equipment. Inventory loans are generally limited to 50% of the value of
the inventory, and accounts receivable loans are generally limited to 75% of a predetermined eligible base.

Agricultural
Lending.

Agricultural
real estate loans generally have amortization periods of 20 years or less, during which time the Bank generally retains a security interest
in the borrower’s real estate. The Bank also provides short-term credit for operating loans and intermediate-term loans for farm
product, livestock and machinery purchases and other agricultural improvements. Farm product loans generally have a one-year term, and
machinery, equipment and breeding livestock loans generally have five- to seven-year terms. Extension of credit is based upon the borrower’s
ability to repay, as well as the existence of crop insurance coverage. These loans are generally secured by a blanket lien on livestock,
equipment, feed, hay, grain and growing crops. Equipment and breeding livestock loans are generally limited to 75% of appraised value.
The Bank continues to focus on generating additional agricultural loan relationships in each of its market areas.

5

Consumer
and Other Lending.

Loans
classified as consumer and other loans include automobile, boat, home improvement and home equity loans. With the exception of home improvement
loans and home equity loans, the Bank generally takes a purchase money security interest in collateral for which it provides the original
financing. Home improvement loans and home equity loans are principally secured through second mortgages. The terms of the loans typically
range from one to seven years, depending upon the use of the proceeds, and generally range from 75% to 90% of the value of the collateral.
The majority of these loans are installment loans with fixed interest rates. Home improvement and home equity loans are generally secured
by a second mortgage on the borrower’s personal residence and, when combined with the first mortgage, limited to 90% of the value
of the property unless further protected by private mortgage insurance. Home improvement loans are generally made for terms of five to
seven years with fixed interest rates. Home equity loans are generally made for terms of seven years on a revolving basis with adjustable
monthly interest rates tied to the national prime interest rate. While the Bank primarily provides consumer loans to its existing customers,
consumer lending is not a category the Bank targets for organic growth.

Loan
Origination and Processing

Loan
originations are derived from a number of sources. Residential loan originations result from real estate broker referrals, direct solicitation
by the Bank and FSM’s loan officers, present depositors and borrowers, referrals from builders and attorneys, walk-in customers
and, in some instances, other lenders. Consumer and commercial real estate loan originations generally emanate from many of the same
sources.

Residential
loan applications are underwritten and closed based upon standards which generally meet secondary market guidelines. The loan underwriting
procedures followed by the Bank and FSM conform to regulatory specifications and are designed to assess both the borrower’s ability
to make principal and interest payments and the value of any assets or property serving as collateral for the loan. Generally, as part
of the process, a loan officer meets with each applicant to obtain the appropriate employment and financial information as well as any
other required loan information. The Bank and FSM obtain reports with respect to the borrower’s credit record, and on real estate
loans, orders and reviews an appraisal of any collateral for the loan (prepared for the Bank and FSM by an independent appraiser).

Loan
applicants are notified promptly of the decision of the Bank or FSM. Prior to closing any long-term loan, the borrower must provide proof
of fire and casualty insurance on the property serving as collateral, and such insurance must be maintained during the full term of the
loan. Title insurance is required on loans collateralized by real property.

The
Bank is focusing on the generation of commercial, commercial real estate and agricultural loans to grow and diversify the loan portfolio.
The substantial growth in 2025 was in commercial real estate, consumer real estate, and construction and land real estate. Total portfolio
loan growth increased approximately 3% from year-end 2024.

Deposits

The
Bank has a diversified deposit base. The deposit base consists of retail, commercial and public fund customers located in the markets
in which the Bank operates. The Bank provides a diverse financial suite of products to its deposit customers and seeks to be the primary
financial service provider for these customers. The Bank considers these deposit relationships to be its core deposit base. If the Bank
requires funding that exceeds these customers’ deposit balances, non-core or brokered deposits may be utilized. The balance of
these non-core or brokered deposits at December 31, 2025 was $44.9 million, or 3% of total deposits.

6

In
order for the Bank to attract and retain stable deposit relationships, the Bank offers business cash management solution services to
help local companies better manage their cash flow. The Bank also offers IntraFi and CDARS to provide customers with FDIC insurance coverage
for deposit balances that exceed the insurance limit of $250,000. The expertise and experience of the Bank’s management coupled
with the latest technology accessed through third party providers enables the Bank to maximize the growth of business-related deposits.

As
for consumers, deposit growth is driven by a variety of factors including, but not limited to, population growth, bank and non-bank competition,
local bank mergers and consolidations, increases in household income, interest rates, accessibility of location and the sales efforts
of Bank personnel. Time deposits can be attracted and increased by paying an interest rate higher than that offered by competitors, but
are the costliest type of deposit. The most profitable type of deposits are non-interest bearing demand (checking) accounts, which can
be attracted by offering free checking. However, both high interest rates and free checking accounts generate certain expenses for a
bank and the desire to increase deposits must be balanced with the need to be profitable and the extent of banking relationships with
the customers. The deposit services of the Bank are generally comprised of demand deposits, savings deposits, money market deposits,
time deposits and Individual retirement accounts.

Forward-looking
Statements

This
document (including information incorporated by reference) contains, and future oral and written statements of the Company and its management
may contain, forward-looking statements, within the meaning of such term in the federal securities law. Forward-looking statements are
not historical facts and are generally identifiable by the use of words such as “believe,” “expect,” “anticipate,”
“project,” “possible,” “continue,” “plan,” “intend,” “estimate,”
“may,” “will,” “would,” “could,” “should” or other similar expressions. Additionally,
all statements in this document, including forward-looking statements, speak only as of the date they are made, and the Company undertakes
no obligation to update any statement in light of new information or future events.

The
Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain and, accordingly,
the reader is cautioned not to place undue reliance on any forward-looking statement made by the Company. Actual results could differ
materially from those addressed in the forward-looking statements as a result of numerous factors, including, without limitation:

●
the
effects of future economic, business and market conditions and changes, particularly in our Illinois market area, including prevailing
interest rates and the rate of inflation;

●
governmental
trade, monetary, tax and fiscal policies, including the policy decisions of the Federal Reserve;

●
the
risks of changes in interest rates on the levels, composition and costs of deposits, loan demand and the values and liquidity of
loan collateral, securities and other interest sensitive assets and liabilities;

●
changes
in borrowers’ credit risks and payment behaviors;

●
the
failure of assumptions and estimates used in our reviews of our loan portfolio, underlying the establishment of reserves for possible
credit losses, our analysis of our capital position and other estimates;

●
the
performance of our commercial real estate loan portfolio, including the effects of the elevated interest rate environment, and the
strength of the commercial real estate market;

●
risk
of cybersecurity attacks that could result in damage to the Company’s or third-party service providers’ networks or data
of the Company;

●
technological
changes implemented by us and other parties, including our third-party vendors, which may have unforeseen consequences to us and
our customers;

●
the
timing and scope of any legislative and regulatory changes, including changes in banking, securities and tax laws and regulations
and their application by our regulators;

●
increased
competition in the financial services sector, including from non-bank competitors such as credit unions and fintech companies, and
the inability to attract new customers;

7

●
the
effects of war or other conflicts, acts of terrorism or other catastrophic events, including storms, droughts, tornados and flooding,
that may affect general economic conditions, including agricultural production and demand and prices for agricultural goods and land
used for agricultural purposes, generally and in our markets;

●
the
effects of fraud by or affecting employees, customers or third parties;

●
the
effects of disruption and volatility in capital markets on the value of our investment portfolio;

●
changes
in the prices, values and sales volumes of residential real estate;

●
the
impact of litigation and other claims we may be subject to from time to time;

●
changes
in the availability and cost of credit and capital in the financial markets;

●
the
loss of key executives and employees, talent shortages and employee turnover;

●
changes
in technology or products that may be more difficult or costly to implement, or less effective than anticipated;

●
changes
in accounting policies, rules and practices;

●
the
risks related to mergers, acquisitions and divestitures, including, without limitation, the related time and costs of implementing
such transactions, integrating operations as part of these transactions and possible failures to achieve expected gains, revenue
growth and/or expense savings from such transactions; and

●
the
risks noted in the Risk Factors discussed under Item 1A of Part 1 of this Annual Report on Form 10-K, as well as other risks and
uncertainties set forth from time to time in the Company’s other filings with the Securities and Exchange Commission (the “SEC”).

These
risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such
statements.

Supervision
and Regulation

General

FDIC-insured
banking institutions, their holding companies, and their affiliates are extensively regulated under federal and state law. As a result,
our growth and earnings performance may be affected not only by management decisions and general economic conditions, but also by the
requirements of federal and state statutes, and by the regulations and policies of various banking agencies, including the IDFPR, the
Federal Reserve, the FDIC, and federal and state consumer financial protection agencies. Furthermore, taxation laws administered by the
Internal Revenue Service (the “IRS”) and state taxing authorities, accounting rules developed by the Financial Accounting
Standards Board (“FASB”), securities laws administered by the SEC and state securities authorities, and anti-money laundering
and sanctions laws enforced by the U.S. Department of the Treasury (the “Treasury”) have an impact on our business. The effect
of these statutes, regulations, regulatory policies, and accounting rules are significant to our operations and results.

We
are subject to federal and state banking laws that impose a comprehensive system of supervision, regulation, and enforcement on our operations
that is intended primarily for the protection of the FDIC-insured deposits and depositors of banks, rather than shareholders. These laws,
and the regulations of the banking agencies issued under them, affect, among other things, the scope of our business, the kinds and amounts
of investments that the Company and the Bank may make, required capital levels relative to assets, the nature and amount of collateral
for loans, the establishment of branches, the ability of the Company and the Bank to merge, consolidate and acquire, transactions with
the Company’s and the Bank’s insiders and affiliates, and our payment of dividends.

8

In
response to the global financial crisis, and particularly following the passage of the Dodd-Frank Wall Street Reform and Consumer Protection
Act (“Dodd-Frank Act”), we experienced heightened regulatory requirements and scrutiny. Although the reforms primarily targeted
large banking organizations and systemically important financial institutions, their influence filtered down in varying degrees to community
banking organizations over time and caused our compliance and risk management processes, and the costs thereof, to increase. The Economic
Growth, Regulatory Relief and Consumer Protection Act of 2018 (“Regulatory Relief Act”) eliminated questions about the applicability
of certain Dodd-Frank Act reforms to community banking organizations, including relieving us of any requirement to engage in mandatory
stress tests, maintain a risk committee, or comply with the Volcker Rule’s complicated prohibitions on proprietary trading and
ownership of private funds.

Over
the past year, the federal banking agencies have continued efforts to reduce regulatory burden on banking organizations, including community
banks, through various supervisory, regulatory, and policy initiatives. These efforts have included the rescission or revision of certain
rulemakings and proposals, initiatives to streamline examination and application processes, and efforts to increase transparency and
consistency in supervisory expectations. Congress also has considered additional measures aimed at easing specific compliance obligations
for community banks, although no reforms comparable in scope to the Regulatory Relief Act have been enacted to date. These developments
may be favorable to the operations of the Company or the Bank; however, future changes in laws, regulations, or supervisory priorities,
and their impacts on the Company’s or the Bank’s business, remain uncertain.

The
supervisory framework applicable to U.S. banking organizations subjects banks and bank holding companies to regular examination by their
respective banking agencies. Examinations results in confidential examination reports and supervisory ratings may impact an institution’s
operations, capital levels, growth, and strategic initiatives. Examinations consider not only compliance with applicable laws and regulations,
but also capital levels, asset quality, management ability, earnings, liquidity, and overall risk profile, among other things. The banking
agencies generally have broad discretion to impose restrictions and limitations on the operations of a regulated entity where the agencies
determine, among other things, that such operations are unsafe or unsound, violate applicable law, or are otherwise inconsistent with
laws and regulations. Changes in supervisory approach or emphasis may materially affect the operations and financial results of the Company
and the Bank, as well as the banking industry in general.

In
recent supervisory communications, rulemakings and policy statements, federal banking agencies have indicated an increased focus on core,
material financial risks (rather than risk management processes), greater transparency in supervisory expectations and efforts to reduce
examination burden, particularly for community banks. For example, the FDIC, the Bank’s primary federal regulator, has proposed
or implemented initiatives: (i) to clarify standards for unsafe or unsound practices; (ii) to enhance supervisory appeals processes;
(iii) to streamline examination procedures; and (iv) to revise standards governing the termination of enforcement actions. These initiatives
may enable management to focus more effectively on growth opportunities and the management of material financial risks.

The
following is a summary of the material elements of the supervisory and regulatory framework applicable to the Company and the Bank. It
does not describe all of the statutes, regulations, and regulatory policies that apply, nor does it restate all of the requirements of
those that are described. The descriptions are qualified in their entirety by reference to the particular statutory and regulatory provision.

The
Role of Capital

Regulatory
capital represents the net assets of a banking organization available to absorb losses. Because of the risks attendant to their business,
FDIC-insured institutions, such as banks, as well as their holding companies (i.e., banking organizations), generally are required
to hold more capital than other businesses, which directly affects our earnings capabilities. Although capital historically has been
one of the key measures of the financial health of both bank holding companies and banks, its role became fundamentally more important
in the wake of the global financial crisis, as the federal banking agencies determined that the amount and quality of capital held by
banking organizations prior to that crisis was insufficient to absorb losses during periods of severe stress.

9

Capital
Levels. Banking organizations have been required to hold minimum levels of capital based on guidelines established by the
federal banking agencies since 1983. The minimum capital levels for banking organizations have been expressed in terms of ratios of “capital”
divided by “total assets.” The capital guidelines for U.S. banking organizations beginning in 1989 have been based upon international
capital accords (known as the “Basel” accords) adopted by the Basel Committee on Banking Supervision, a committee of central
banks and bank supervisors that acts as the primary global standard-setter for prudential regulation, as interpreted and implemented
by the U.S. federal banking agencies on an interagency basis. The accords recognized that bank assets, for the purpose of the capital
ratio calculations, needed to be risk weighted (the theory being that riskier assets should require more capital), and that off-balance
sheet exposures needed to be factored in the calculations. Following the global financial crisis, the Group of Governors and Heads of
Supervision, the oversight body of the Basel Committee on Banking Supervision, announced an agreement on a strengthened set of capital
requirements for banking organizations around the world, known as the Basel III accords, to address deficiencies recognized in connection
with the global financial crisis.

The
Basel III Rule. The federal banking agencies adopted the U.S. Basel III regulatory capital reforms, and, at the same time, effected
changes required by the Dodd-Frank Act, in regulations that were effective in 2015 (with certain phase-ins) (the “Basel III Rule”).
The Basel III Rule established capital standards for banks and bank holding companies that are meaningfully more stringent than those
in place previously. The Basel III Rule is applicable to all banking organizations that are subject to minimum capital requirements,
including national and state banks and savings and loan associations, as well as to most bank and savings and loan holding companies.
The Bank is subject to the Basel III Rule.

The
Basel III Rule also increased the required quantity and quality of capital. Not only did it increase most of the required minimum capital
ratios in effect prior to 2015, but, by requiring that capital instruments be of higher quality to absorb loss, it introduced the concept
of Common Equity Tier 1 Capital (“CET1”), which consists primarily of common stock, related surplus (net of treasury stock),
retained earnings, and CET1 minority interests, subject to certain regulatory adjustments and deductions. The Basel III Rule also changed
the definition of regulatory capital by establishing more stringent criteria for instruments to qualify as Additional Tier 1 Capital
(primarily non-cumulative perpetual preferred stock that meets certain requirements) and Tier 2 Capital (primarily other types of preferred
stock and subordinated debt, subject to limitations). The Basel III Rule also limited the inclusion of minority interests, mortgage-servicing
assets, and deferred tax assets in regulatory capital, and it required deductions from CET1 if such assets exceeded prescribed thresholds.

The
Basel III Rule requires banking organizations to maintain minimum capital ratios to be deemed “adequately capitalized” as
follows:

●
A
ratio of CET1 equal to 4.5% of risk-weighted assets;

●
A
ratio of Tier 1 Capital equal to 6% of risk-weighted assets;

●
A
ratio of Total Capital (Tier 1 plus Tier 2 Capital) equal to 8% of risk-weighted assets; and

●
A
leverage ratio of Tier 1 Capital to total quarterly average assets equal to 4%.

In
addition, banking organizations that want to make capital distributions (including dividends and stock repurchases), and pay discretionary
bonuses to executive officers without restriction, must maintain 2.5% in the form of CET1 for a capital conservation buffer. The purpose
of the conservation buffer is to ensure that banking organizations maintain a cushion of capital that can be used to absorb losses during
periods of financial and economic stress. Factoring in the capital conservation buffer increases the minimum ratios described above to
7% for CET1, 8.5% for Tier 1 Capital, and 10.5% for Total Capital.

Well
Capitalized Requirements. The capital ratios described above represent minimum standards for banking organizations to be considered
“adequately capitalized.” Banking agencies uniformly encourage banking organizations to maintain capital at levels above
these minimums and to be “well capitalized.” To that end, federal law and regulations provide various incentives for banking
organizations to maintain regulatory capital at levels in excess of minimum regulatory requirements. For example, a well capitalized
banking organization may: (i) qualify for exemptions from prior notice or application requirements otherwise applicable to certain activities;
(ii) receive expedited processing of other required notices or applications; and (iii) accept, roll-over, or renew brokered deposits.
In addition, the banking agencies may require higher capital levels where warranted by an organization’s specific risk profile
or operating circumstances. For example, the Federal Reserve’s capital guidelines contemplate that additional capital may be required
to take adequate account of, among other things, interest rate risk, or the risks posed by credit concentrations, nontraditional activities,
or securities trading activities. Further, any banking organization experiencing or anticipating significant growth would be expected
to maintain capital ratios, including tangible capital positions (i.e., Tier 1 Capital less all intangible assets), well above
the minimum regulatory levels.

10

Under
the capital regulations of the Federal Reserve and FDIC, in order to be well capitalized, a banking organization must maintain:

●
A
ratio of CET1 to risk-weighted assets of 6.5% or more;

●
A
ratio of Tier 1 Capital to total risk-weighted assets of 8% or more;

●
A
ratio of Total Capital to total risk-weighted assets of 10% or more; and

●
A
leverage ratio of Tier 1 Capital to total adjusted average quarterly assets of 5% or more.

Under
the Basel III Rule, a banking organization may be considered “well capitalized,” while not complying with the capital conservation
buffer requirement described above.

As
of December 31, 2025: (i) the Bank was not subject to a directive from the FDIC or the IDFPR to increase its capital; and (ii) the Bank
was well capitalized, as defined by FDIC regulations.

Basel
III Endgame Proposal. Previously, federal banking agencies proposed a “Basel III Endgame Rule” to complete the implementation
of certain aspects of the Basel III accords, including to the risk weighting of assets; however, the proposal was not adopted, in part
due to stakeholder concerns regarding potential economic impacts, data transparency, and the alignment of certain provisions with statutory
tailoring requirements. Based on public statements from federal agency officials, it is anticipated that a revised proposal may be issued
in the future. Any reproposal of the Basel III Endgame Rule is expected to primarily affect large, complex banking organizations.

Prompt
Corrective Action. The concept of a banking organization being “adequately capitalized” or “well capitalized,”
as defined above, is part of a regulatory enforcement regime that provides the federal banking agencies with broad power to take “prompt
corrective action” to resolve the problems of depository institutions based on the capital level of each particular institution.
The extent of the banking agencies’ powers depends on whether the banking organization in question is “adequately capitalized,”
“undercapitalized,” “significantly undercapitalized,” or “critically undercapitalized,” in each case
as defined by regulation. Depending on the capital category to which a banking organization is assigned, the banking agencies’
corrective powers include: (i) requiring the institution to submit a capital restoration plan; (ii) limiting the institution’s
asset growth and restricting its activities; (iii) requiring the institution to issue additional capital stock (including additional
voting stock) or to sell itself; (iv) restricting transactions between the institution and its affiliates; (v) restricting the interest
rate that the institution may pay on deposits; (vi) ordering a new election of directors of the institution; (vii) requiring that senior
executive officers or directors be dismissed; (viii) prohibiting the institution from accepting deposits from correspondent banks; (ix)
requiring the institution to divest certain subsidiaries; (x) prohibiting the payment of principal or interest on subordinated debt;
and (xi) ultimately, appointing a receiver for the institution.

Community
Bank Capital Simplification. Community banking organizations have long raised concerns with the federal banking agencies about
the regulatory burden, complexity, and costs associated with certain provisions of the Basel III Rule. In response, Congress provided
an “off-ramp” for institutions, like the Company, with total consolidated assets of less than $10 billion as part of the
Regulatory Relief Act. Section 201 of the Regulatory Relief Act specifically instructed the federal banking agencies to establish a single
“Community Bank Leverage Ratio” (“CBLR”) of between 8% and 10%. Under the final rule, a community banking organization
is eligible to elect to comply with its capital requirements under the CBLR framework if it has: (i) less than $10 billion in total consolidated
assets; (ii) limited amounts of certain assets and off-balance sheet exposures; and (iii) a CBLR greater than 9%. In late 2025, the federal
banking agencies proposed changes to the CBLR framework intended to encourage broader adoption, including reducing the required leverage
ratio from 9.0% to 8.0%; however, the proposal has not yet been finalized. The Company and the Bank may elect the CBLR framework at any
time, but have not currently determined to do so.

11

Supervision
and Regulation of the Company

General.
As the sole shareholder of the Bank, we are a bank holding company. As a bank holding company, we are registered with, and are subject
to regulation, supervision, and enforcement by, the Federal Reserve under the Bank Holding Company Act of 1956, as amended (the “BHCA”).
We are legally obligated to act as a source of financial strength to the Bank, and to commit resources to support the Bank in circumstances
where we might not otherwise do so. Under the BHCA, we are subject to periodic examination by the Federal Reserve. We are required to
file with the Federal Reserve periodic reports of our operations, and such additional information regarding us and our subsidiaries as
the Federal Reserve may require.

Acquisitions
and Activities. The primary purpose of a bank holding company is to control and manage banks. The BHCA generally requires
the prior approval of the Federal Reserve for any merger involving a bank holding company, or any acquisition by a bank holding company
of another bank or bank holding company. Pursuant to the BHCA and the Dodd-Frank Act, the Federal Reserve may permit a well capitalized
and well managed bank holding company to acquire banks located in any U.S. state of the United States, subject to federal deposit concentration
limits, applicable nondiscriminatory state deposit-cap laws, and state minimum-existence requirements for target banks (not exceeding
five years).

The
BHCA and implementing regulations generally prohibit us from acquiring direct or indirect ownership or control of more than 5% an outstanding
class of the voting shares of any nonbanking entity, and from engaging in any business other than that of banking, managing and controlling
banks, or furnishing services to banks and their subsidiaries. This general prohibition is subject to a number of exceptions. The principal
exception allows bank holding companies to engage in, and to own shares of companies engaged in, certain businesses found by the Federal
Reserve prior to November 11, 1999 to be “so closely related to banking ... as to be a proper incident thereto.” This authority
permits the Company to engage in a variety of banking-related businesses, including, among other things, the ownership and operation
of a savings association, or any entity engaged in consumer finance, equipment leasing, the operation of a computer service bureau (including
software development), and mortgage banking and brokerage services. The BHCA does not place formal territorial restrictions on the domestic
activities of nonbank subsidiaries of bank holding companies. In addition to approval from the Federal Reserve that may be required in
certain circumstances to make acquisitions or engage in additional activities, the Company also may need to seek prior approval from
other agencies, such as the IDFPR or other agencies that regulate the target company involved in an acquisition.

Financial
Holding Company Election. Additionally, bank holding companies that meet certain BHCA eligibility requirements and elect to operate
as financial holding companies may engage in, or own shares in companies engaged in, a wider range of nonbanking activities, including
securities and insurance underwriting and sales, merchant banking, and any other activity that: (i) the Federal Reserve, in consultation
with the Secretary of the Treasury, determines by regulation or order is financial in nature or incidental to any such financial activity;
or (ii) the Federal Reserve determines by order to be complementary to any such financial activity, as long as the activity does not
pose a substantial risk to the safety or soundness of FDIC-insured institutions or the financial system generally. The Company has not
elected to operate as a financial holding company at this time.

Change
in Control. Federal law prohibits any person or company from acquiring “control” of an FDIC-insured depository institution
or its holding company without prior notice to the appropriate federal banking agency. “Control” is conclusively determined
to exist upon the acquisition of 25% or more of the outstanding voting securities of a bank or bank holding company, but may be presumed
to arise under certain circumstances between 10% and 24.99% ownership.

Capital
Requirements. Bank holding companies are required to maintain capital in accordance with Federal Reserve capital adequacy
requirements. For a discussion of capital requirements, see “—The Role of Capital” above.

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Dividend
Payments. The Company’s ability to pay dividends to its stockholders may be affected by both general corporate law considerations
and the policies and capital requirements of the Federal Reserve applicable to bank holding companies. As a Delaware corporation, the
Company is subject to the limitations of the Delaware General Corporation Law (“DGCL”), which allow the Company to pay dividends
only out of its surplus (as defined and computed in accordance with the provisions of the DGCL) or if the Company has no such surplus,
out of its net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year.

As
a general matter, the Federal Reserve has indicated that the board of directors of a bank holding company should eliminate, defer, or
significantly reduce dividends to shareholders if: (i) the company’s 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; (ii) the prospective rate of earnings
retention is inconsistent with the company’s capital needs and overall current and prospective financial condition; or (iii) the
company will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios.

The
Federal Reserve also possesses enforcement powers over bank holding companies and their nonbank subsidiaries to prevent or remedy actions
that represent unsafe or unsound practices or violations of applicable statutes and regulations. Among these powers is the ability to
proscribe the payment of dividends by banks and bank holding companies. Finally, the Basel III Rule imposes consolidated capital requirements
on banking organizations. As a result, banking organizations must hold a capital conservation buffer of 2.5% of risk-weighted assets
in CET1 above the minimum risk-based capital requirements to avoid regulatory limits on dividends and other capital distributions. See
“—The Role of Capital” above.

Monetary
Policy. The monetary policy of the Federal Reserve has a significant effect on the operating results of bank holding companies
and their subsidiaries. Among the tools available to the Federal Reserve to affect the money supply are open market transactions in U.S.
government securities, and changes in the discount rate on bank borrowings. These means are used in varying combinations to influence
overall growth and distribution of bank loans, investments, and deposits, and their use may affect interest rates charged on loans or
paid on deposits, which may impact the Company’s and the Bank’s business and operations.

Corporate
Governance/Incentive Compensation. The Dodd-Frank Act addressed many investor protection, corporate governance, and executive compensation
matters that will affect most U.S. publicly traded companies. The Dodd-Frank Act increased shareholder influence over boards of directors
by requiring companies to give shareholders a nonbinding vote on executive compensation and so-called “golden parachute”
payments, and authorizing the SEC to promulgate rules that would allow shareholders to nominate and solicit voters for their own candidates
using a company’s proxy materials.

The
Dodd-Frank Act also directed the Federal Reserve, together with the other federal banking and financial services agencies, to promulgate
rules prohibiting excessive incentive-based compensation paid to executives of bank holding companies, regardless of whether such companies
are publicly traded. Although several agencies have made repeated efforts to implement rules under this provision of the Dodd-Frank Act—including
a proposal issued most recently in May 2024, which was subsequently withdrawn—no final rule has been adopted at this time. Nevertheless,
the federal banking agencies have issued interagency guidance on sound incentive compensation practices for banking organizations, reflecting
the agencies’ recognition that incentive compensation practices in the financial industry were among the factors contributing to
the global financial crisis. The interagency guidance recognizes three core principles for effective incentive compensation plans: (i)
appropriately balancing risk and reward; (ii) compatibility with effective controls and risk management; and (iii) support by strong
corporate governance, including active and effective oversight by the organization’s board of directors. Although much of the guidance
is directed at large banking organizations that are expected to maintain systematic and formalized policies and procedures, smaller banking
organizations like us are expected to implement less extensive and less formalized systems pursuant to the guidance.

Supervision
and Regulation of the Bank

General.
The Bank is an Illinois-chartered, nonmember bank. The deposit accounts of the Bank are insured by the FDIC’s DIF to the maximum
extent provided under federal law and FDIC regulations, currently $250,000 per insured depositor, per ownership category. Ongoing policy
discussions at the federal level have focused on potential changes to deposit insurance coverage, including possible adjustments to coverage
limits, although no changes have been enacted.

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As
an Illinois-chartered, FDIC-insured bank, the Bank is subject to the examination, supervision, reporting, and enforcement requirements
of the IDFPR, the chartering authority for Illinois banks. Because the Bank is not a member of the Federal Reserve (i.e., a nonmember
bank), it is subject to the examination, supervision, reporting, and enforcement requirements of the FDIC, as the Bank’s primary
federal regulator.

Deposit
Insurance Assessments. As an FDIC-insured institution, the Bank is required to pay deposit insurance premium assessments to the FDIC.
The FDIC has adopted a risk-based assessment system, whereby FDIC-insured institutions pay insurance premiums at rates based on their
risk classification. For institutions like the Bank that are not considered large and highly complex banking organizations, the risk-based
assessment is based on examination ratings and financial ratios. The total base assessment rates for most institutions generally range
from 2.5 basis points (for the lowest risk institutions) to 32 basis points or beyond (for higher risk institutions).

At
least semi-annually, the FDIC updates its loss and income projections for the DIF and, if needed, increases or decreases the assessment
rates, following notice and comment on proposed rulemaking. For this purpose, the reserve ratio is the DIF balance divided by estimated
insured deposits. In response to the global financial crisis, the Dodd-Frank Act increased the minimum reserve ratio from 1.15% to 1.35%
of the estimated amount of total insured deposits. In its May 2025 report, the FDIC stated that the reserve ratio likely will reach the
statutory minimum by the September 30, 2028 deadline, and no adjustments to the base assessment rates is currently projected.

In
addition, because the cost of the failures of Silicon Valley Bank and Signature Bank attributable to the systemic risk exception to the
DIF was significant, the FDIC adopted a special assessment applicable to banking organizations with $5 billion or more of total assets.
Because the Company is a banking organization with less than $5 billion in total assets, this special assessment does not apply to the
Bank.

Supervisory
Assessments. All Illinois-chartered banks are required to pay supervisory assessments to the IDFPR to fund the operations of that
agency. The amount of the assessment is calculated on the basis of the Bank’s total assets. During the year ended December 31,
2025, the Bank paid supervisory assessments to the IDFPR totaling $163,295.

Capital
Requirements. Banks are generally required to maintain capital levels in excess of other businesses. For a discussion of capital
requirements, see “—The Role of Capital” above.

Liquidity
Requirements. Liquidity is a measure of the ability and ease with which bank assets may be converted to meet financial obligations
to pay deposits or other funding sources. Banks are required to implement liquidity risk management frameworks that ensure they maintain
sufficient liquidity, including a cushion of unencumbered, high quality liquid assets, to withstand a range of stress events. The level
and speed of deposit outflows contributing to the failures of Silicon Valley Bank, Signature Bank, and First Republic Bank in 2023 was
unprecedented and contributed to acute liquidity and funding strain, underscoring the importance of liquidity risk management and contingency
funding planning by insured depository institutions like the Bank, as highlighted in a 2023 addendum to existing interagency guidance
on funding and liquidity risk management.

The
primary role of liquidity risk management is to: (i) prospectively assess the need for funds to meet obligations; and (ii) ensure the
availability of cash or collateral to fulfill those needs at the appropriate time by coordinating the various sources of funds available
to the institution under normal and stressed conditions. The Basel III Rule includes a liquidity framework that requires the largest
insured institutions to measure their liquidity against specific liquidity tests. One test, referred to as the Liquidity Coverage Ratio,
is designed to ensure that the banking organization has an adequate stock of unencumbered high quality liquid assets that can be converted
easily and immediately in private markets into cash to meet liquidity needs for a 30-calendar day liquidity stress scenario. The other
test, known as the Net Stable Funding Ratio, is designed to promote more intermediate and long-term funding of the assets and activities
of FDIC-insured institutions over a one-year horizon. These tests provide an incentive for banks and bank holding companies to increase
their holdings in treasury securities and other sovereign debt as a component of assets, increase the use of long-term debt as a funding
source and rely on stable funding like core deposits (in lieu of brokered deposits).

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Although
these tests do not, and are not expected to, apply to the Bank, we continue to review our liquidity risk management policies in light
of regulatory requirements and industry developments.

Dividend
Payments. The Company’s primary source of funds is dividends from the Bank. Under Illinois banking law, Illinois-chartered
banks generally may pay dividends only out of undivided profits. The IDFPR may restrict the declaration or payment of a dividend by an
Illinois-chartered bank, such as the Bank.

Moreover,
the payment of dividends by any FDIC-insured institution is impacted by the requirement to maintain adequate capital pursuant to applicable
capital adequacy guidelines and regulations, and an FDIC-insured institution generally is prohibited from paying any dividends if, following
payment thereof, the institution would be undercapitalized. As described above, the Bank exceeded its capital requirements under applicable
guidelines as of December 31, 2025. Notwithstanding the availability of funds for dividends, however, the FDIC and the IDFPR may prohibit
the payment of dividends by the Bank if either agency determines that such payment would constitute an unsafe or unsound practice. In
addition, under the Basel III Rule, banking organizations that want to pay unrestricted dividends must maintain 2.5% in CET1 attributable
to the capital conservation buffer. See “—The Role of Capital” above.

State
Bank Investments and Activities. The Bank is permitted to make investments and engage in activities directly or through subsidiaries
as authorized by Illinois law. However, under federal law and FDIC regulations, FDIC-insured state banks are prohibited, subject to certain
exceptions, from making or retaining equity investments that are not permissible for a national bank. Federal law and FDIC regulations
also prohibit FDIC-insured state banks and their subsidiaries from engaging as principal in any activity that is not permitted for a
national bank unless they meet, and continue to meet, minimum regulatory capital requirements, and the FDIC determines that the activity
would not pose a significant risk to the DIF. These restrictions have not had, and are not currently expected to have, a material impact
on the operations of the Bank.

The
Bank may be required to obtain approval from the IDFPR, the FDIC, and other applicable banking or financial services agencies before
engaging in certain acquisitions or mergers under applicable state and federal law. With respect to interstate merger and acquisitions,
federal law permits state banks to merge with out-of-state banks subject to: (i) regulatory approval; (ii) federal and state deposit
concentration limits; and (iii) state law requirements that the merging bank has been in existence for a minimum period of time (not
to exceed five years), prior to the merger. In 2025, the federal banking agencies, including the FDIC and the OCC, rescinded certain
prior administrative actions regarding the review and approval of mergers and acquisitions, with the intent of streamlining and expediting
the regulatory review of certain merger and acquisition applications.

Branching
Authority. Illinois banks, such as the Bank, have the authority under Illinois law to establish branches anywhere in the State of
Illinois, subject to receipt of all required regulatory approvals. The Dodd-Frank Act permits well capitalized and well managed banks
to establish new interstate branches or acquire individual branches of a bank in another state (rather than the acquisition of an out-of-state
bank in its entirety) without impediments.

Affiliate
and Insider Transactions. The Bank is subject to certain restrictions imposed by federal law on “covered transactions”
between the Bank and its “affiliates.” The Company is an affiliate of the Bank for purposes of these restrictions. Covered
transactions subject to the restrictions include extensions of credit to us, investments in our stock or other securities, and the acceptance
of our stock and other securities as collateral for loans made by the Bank. The Dodd-Frank Act enhanced these requirements by expanding
the definition of “covered transactions” and extending the period for which collateral requirements for such transactions
must be maintained.

Certain
limitations and reporting requirements also apply to extensions of credit by the Bank to its directors and officers, to directors and
officers of the Company and its subsidiaries, to principal shareholders of the Company, and to “related interests” of such
directors, officers and principal shareholders. In addition, federal law and regulations may govern the terms on which any person who
is a director or officer of the Company or the Bank, or a principal shareholder of the Company, may obtain credit from banks with which
the Bank maintains a correspondent relationship.

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Safety
and Soundness Standards/Risk Management. The federal banking agencies have adopted operational and managerial standards to
promote the safety and soundness of FDIC-insured institutions. The standards apply to internal controls, information systems, internal
audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset
quality, and earnings.

These
safety and soundness standards generally prescribe the goals to be achieved in each area, and each institution is responsible for establishing
its own procedures to achieve those goals. Although regulatory standards do not have the force of law, if an FDIC-insured institution
operates in an unsafe and unsound manner, its primary federal regulator may require submission of a plan to achieve and maintain compliance.
Failure to submit an acceptable compliance plan, or to implement an approved plan in any material respect, may result in a formal agency
order directing the institution to cure the deficiency. Until such deficiency is resolved, the agency may restrict the institution’s
rate of growth, require additional capital, limit deposit rates, or take other corrective action as deemed appropriate. Noncompliance
with safety and soundness also may constitute grounds for other enforcement action by the federal banking agencies, including cease and
desist orders and civil money penalty assessments.

Federal
banking agencies have emphasized the importance of sound risk management processes and strong internal controls when evaluating the activities
of FDIC-insured institutions. In 2025, however, the agencies signaled a shift toward focusing on the identification and management of
material financial risks, rather than primarily on adherence to prescriptive operational and risk management processes. Although effective
risk management, internal controls, and board and management oversight remain important, supervisory attention may increasingly center
on whether specific practices pose material harm to the institution’s financial condition or create a risk of loss to the DIF.
Despite this potential shift in focus, the agencies continue to evaluate a broad spectrum of risks facing a banking organization including
credit, market, liquidity, operational, and legal risk—emphasizing their potential impact on safety and soundness. Notably, the
federal banking agencies have indicated that they intend to remove reputation risk from consideration, citing concerns about its use
in restricting banking services to certain industries or groups.

The
Bank is expected to have active board and senior management oversight; adequate policies, procedures, and limits; adequate risk measurement,
monitoring, and management information systems; and comprehensive internal controls. The federal banking agencies also have issued guidance
on certain risk management topics, including third-party relationships, in response to the proliferation of relationships between banking
organizations and financial technology companies (although the guidance applies more broadly).

Privacy
and Cybersecurity. The Bank is subject to numerous U.S. federal and state laws and regulations aimed at protecting the non-public
personal and confidential information of its customers. These laws require the Bank to periodically disclose its privacy policies and
practices regarding the sharing of such information, and in certain circumstances, permit consumers to opt out of the sharing of information
with unaffiliated third parties. They also limit the Bank’s ability to share certain information with affiliates and non-affiliates
for marketing and/or non-marketing purposes, or to contact customers with marketing offers. In addition, the Bank is required to implement
a comprehensive information security program that includes administrative, technical, and physical safeguards to ensure the security
and confidentiality of customer records and information. These security and privacy policies and procedures are applied consistently
across all businesses and geographic locations.

Risks
and exposures related to cybersecurity require financial institutions to design multiple layers of security controls, to establish lines
of defense, and to ensure that their risk management processes also address the risk posed by compromised customer credentials, including
security measures to reliably authenticate customers accessing internet-based services of the financial institution. Bank management
is expected to maintain sufficient business continuity planning processes to ensure the rapid recovery, resumption, and maintenance of
the institution’s operations after a cyberattack involving destructive malware. The Bank and the Company also are subject to federal
and state laws and regulations requiring notifications and disclosures regarding certain cybersecurity incidents.

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Community
Reinvestment Act Requirements. The Community Reinvestment Act of 1977 (“CRA”) imposes on the Bank a continuing
and affirmative obligation, consistent with safe and sound operations, to help meet the credit needs of the entire community that it
serves, including low- and moderate-income neighborhoods. The FDIC regularly assesses the Bank’s record of meeting these credit
needs in dedicated CRA examinations. The Bank’s CRA ratings derived from these examinations can have significant impacts on the
activities in which the Bank and the Company may engage. For example, a low CRA rating may impact the review of regulatory applications
made by the Bank.

In
October 2023, the federal banking agencies issued a final rule intended to strengthen and modernize the CRA regulations (the “CRA
Rule”). The CRA Rule subsequently was challenged in court, which prevented it from taking effect. In 2025, the federal banking
agencies issued a proposed rule to rescind the CRA Rule and reinstate the prior CRA regulatory framework adopted in 1995. Additionally,
the FDIC has indicated that it may lengthen the period between CRA examinations for certain banks with less than $3 billion in assets,
such as the Bank.

In
2022, the Bank, as an Illinois-chartered bank, became subject to state-level CRA standards, following passage of the Illinois CRA. As
a result, in addition to federal CRA examinations, the IDFPR also assesses the Bank’s record of meeting the credit needs of its
communities. Similar to the potential impact under the federal CRA regime, the Bank’s CRA performance may affect applications for
additional acquisitions or activities.

Anti-Money
Laundering/Sanctions. The Bank Secrecy Act ( “BSA”) is a U.S. federal statutory framework, as amended and supplemented
by subsequent laws and implemented through regulations, which is designed to combat money laundering, the financing of terrorism, and
other illicit financial activities. The BSA and related anti-money laundering and countering the financing of terrorism (“AML/CFT”)
laws and regulations are intended to prevent terrorists and criminals from accessing the U.S. financial system and have significant implications
for FDIC-insured institutions and other businesses involved in the transmission of funds. Together, this regulatory framework provides
a foundation to promote financial transparency and deter and detect those who seek to misuse the U.S. financial system to launder criminal
proceeds, finance terrorist acts, or facilitate other illicit conduct.

The
BSA and related regulations require financial institutions to establish and maintain policies and procedures addressing: (i) customer
identification and due diligence; (ii) the prevention and detection of money laundering and terrorist financing; (iii) the identification
and reporting of suspicious activities and currency transactions; (iv) compliance with laws relating to currency crimes; and (v) cooperation
with law enforcement authorities. The Bank also must comply with stringent economic and trade sanctions regimes administered and enforced
by the Office of Foreign Assets Control.

Although
core AML/CFT statutory requirements and expectations remain unchanged, federal banking agencies and the Financial Crimes Enforcement
Network have recently pursued or considered efforts to modernize and streamline BSA/AML compliance through a more risk-based approach,
including targeted regulatory relief, revised examination expectations, and efforts to reduce certain reporting and compliance burden,
particularly for lower-risk and community banking organizations.

Federal
Home Loan Bank Membership. The Bank is a member of the Federal Home Loan Bank (“FHLB”), which serves as a central credit
facility for its members. The FHLB is funded primarily from proceeds from the sale of obligations of the FHLB system. It makes loans
to member banks in the form of FHLB advances. All advances from the FHLB are required to be fully collateralized as determined by the
FHLB.

Concentrations
in Commercial Real Estate. Concentration risk exists when FDIC-insured institutions allocate a disproportionate amount of assets
to any one industry or economic segment. Concentration in commercial real estate (“CRE”) lending is one area of regulatory
focus, which has been subject to additional scrutiny by federal banking agencies as well as the SEC (for publicly-traded banking organizations)
in recent years. The Interagency Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices guidance (“CRE
Guidance”) provides supervisory criteria, including the following numerical indicators, to assist bank examiners in identifying
banks with potentially significant CRE loan concentrations that may warrant greater supervisory scrutiny. These indicators include: (i)
total CRE loans exceeding 300% of capital and increasing 50% or more in the preceding three years, or (ii) construction and land development
loans exceeding 100% of capital.

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The
CRE Guidance does not establish a binding limit on CRE lending activities, but rather is intended to inform supervisory assessment of
whether an institution’s risk profile, earnings capacity, and capital levels are commensurate with its CRE exposure. In recent
years, the federal banking agencies issued statements to reinforce prudent risk-management practices related to CRE lending, in response
to observed growth in CRE markets, increased competitive pressures, rising CRE concentrations in banks, and an easing of CRE underwriting
standards. In other statements, the federal banking agencies have reminded FDIC-insured institutions to maintain underwriting discipline
and to identify, measure, monitor, and manage the risks arising from CRE lending, including by holding capital commensurate with those
risks. As of December 31, 2025, the Bank’s CRE lending did not exceed the CRE guidelines.

Consumer
Financial Services. The historical structure of federal consumer protection regulation applicable to all providers of consumer
financial products and services changed significantly on July 21, 2011, when the CFPB commenced operations to supervise and enforce consumer
protection laws. The CFPB has broad rulemaking authority for a wide range of consumer protection laws that apply to all providers of
consumer products and services, including the Bank, as well as the authority to prohibit “unfair, deceptive, or abusive”
acts and practices. The CFPB has examination and enforcement authority over providers with more than $10 billion in assets. FDIC-insured
institutions with $10 billion or less in assets, like the Bank, continue to be examined by their applicable primary federal regulators.

In
response to mortgage-related abuses that contributed to the global financial crisis, the Dodd-Frank Act and CFPB rulemaking significantly
expanded underwriting, disclosure, and anti-predatory lending requirements for residential mortgage loans, including by imposing ability-to-repay
standards and establishing a presumption of compliance for certain “qualified mortgages.” The CFPB has continued to refine
these requirements through additional rulemaking addressing qualified mortgages and ability-to-repay standards.

More
recently, changes in leadership and policy direction at the CFPB have led to: (i) shifts in regulatory priorities, including the rescission
or reconsideration of certain CFPB guidance and rules; (ii) a reduction in CFPB enforcement activity; and (iii) constraints on the CFPB’s
budget and resources, although the CFPB continues to retain broad statutory authority to administer, supervise, and enforce federal consumer
financial protection laws. The CFPB’s retreat from the aggressive approach to regulation (and supervision, where applicable) that
it has previously adopted may benefit the operations of the Bank. However, state banking and other financial services regulatory agencies
retain authority to administer and enforce state consumer financial protection laws and could increase supervisory or enforcement activity
in response to changes in federal regulatory priorities.

The
CFPB’s rules have not had a significant impact on the Bank’s operations, except for higher compliance costs. The Bank also
must comply with certain state consumer protection laws and requirements in the states in which it operates.

Regulation
and Supervision of Bank Subsidiaries

The
Bank has two wholly-owned subsidiaries: FSI and FSM. FSI offers insurance agency services and maintains a state insurance license in
Illinois. FSM offers mortgage banking services. As operating subsidiaries of the Bank, both FSI and FSM are subject to the supervision,
examination, and enforcement authority of the IDFPR and the FDIC as part of the operation of their parent bank.

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