Auburn National Bancorporation 10K 2021 Annual report

Table of Contents

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 quarterly period ended

December 31, 2021

☐

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

For the transition period __________ 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.)

132 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. Yes

☐

☒

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.

☐

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:

81,577,219

as of June 30, 2021.

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:

3,516,971

shares of common stock as

of March 7, 2022.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the

Annual Meeting of Shareholders, scheduled

to be held May 10, 2022, 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 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 6.

SELECTED FINANCIAL

DATA

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

116

ITEM 9A.

CONTROLS AND PROCEDURES

116

ITEM 9B.

OTHER INFORMATION

116

ITEM 9C.

DISCLOSURE REGARDING FORGEIN JURISDICTIONS THAT PREVENT

INSPECTION

116

PART III

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

117

ITEM 11.

EXECUTIVE COMPENSATION

117

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND

MANAGEMENT AND RELATED STOCKHOLDER MATTERS

117

ITEM 13.

CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR

INDEPENDENCE

117

ITEM 14.

PRINCIPAL ACCOUNTING FEES AND SERVICES

117

PART IV

ITEM 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

118

ITEM 16.

FORM 10-K SUMMARY

119

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PART

SPECIAL CAUTIONARY NOTE REGARDING

FORWARD

-LOOKING STATEMENTS

Various

of the statements made herein under the captions “Management’s

Discussion and Analysis of Financial Condition

and Results of Operations”, “Quantitative and Qualitative Disclosures about Market

Risk”, “Risk Factors” “Description of

Property” 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 are statements that 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,” “plan,” “point to,” “project,”

“could,” “intend,” “target” 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 seasonality, inflation and

supply chain disruptions, including those resulting from natural disasters

climate change, such as rising sea and water levels, hurricanes and tornados, coronavirus

or other epidemics or

pandemics;

●

the effects of war, invasions of other countries

or other conflicts, acts of terrorism, or other events that may affect

general economic conditions;

●

governmental monetary and fiscal policies;

●

legislative and regulatory changes, including changes in banking, securities and tax laws,

regulations and rules and

their application by our regulators, including capital and liquidity requirements, and changes

in the scope and cost

of FDIC insurance;

●

the failure of assumptions and estimates, as well as differences in, and changes to, economic,

market and credit

conditions, including changes in borrowers’ credit risks and payment behaviors from

those used in our loan

portfolio reviews;

●

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 interest-sensitive assets and liabilities, and

the risks and uncertainty

of the amounts realizable;

●

changes in borrower credit risks and payment behaviors;

●

changes occurring in business conditions and inflation;

●

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 the prices, values and sales volumes of residential and commercial real estate;

●

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

and other providers of financial,

investment and insurance services, including the disruption effects of

financial technology and other competitors

who are not subject to the same regulations as the Company and the Bank;

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●

the failure of assumptions and estimates underlying the establishment of allowances

for possible loan losses and

other asset impairments, losses valuations of assets and liabilities and other estimates;

●

the costs of redeveloping our headquarters campus and the timing and amount of rental income

upon completion

of the project, and the satisfaction of closing conditions and the amount and timing of expected

gain on the

pending sale of part of our campus for development as a hotel;

●

the risks of mergers, acquisitions and divestitures, including,

without limitation, the related time and costs of

implementing such transactions, integrating operations as part of these transactions

and possible failures to achieve

expected gains, revenue growth and/or expense savings from such transactions;

●

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

or less effective than anticipated;

●

cyber-attacks and data breaches that may compromise our systems, our

vendor systems or customers’ information;

●

the risks that our deferred tax assets (“DTAs”),

if any, could be reduced

if estimates of future taxable income from

our operations and tax planning strategies are less than currently estimated, and sales

of our capital stock could

trigger a reduction in the amount of net operating loss carry-forwards that we may be able

to utilize for income tax

purposes; and

●

other factors and risks described under “Risk Factors” herein and in any of our 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 are made by us 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 System 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”)

since 1991.

General

The Company’s business is conducted

primarily through the Bank and its subsidiaries.

Although it has no immediate plans

to conduct any other business, the Company may engage directly or indirectly in a number

of activities that the Federal

Reserve has determined to be so closely related to banking or managing or controlling banks

as to be a proper incident

thereto.

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The Company’s principal executive offices

are located at 132 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 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 is one of

the largest providers of automated teller services in East Alabama and

operates ATM

machines in 13 locations in its

primary service area.

The Bank offers Visa

Checkcards, which are debit cards with the Visa

logo that work like checks

but can be used anywhere Visa is accepted,

including ATM

The Bank’s Visa

Checkcards can be used internationally

through the Plus

network.

The Bank offers online banking, bill payment and other electronic

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.”

Competition

The banking business in East Alabama, including Lee County,

is highly competitive with respect to loans, deposits, and

other financial services.

The area is dominated by a number of regional and national banks and bank

holding companies

that have substantially greater resources, and numerous offices and affiliates

operating over wide geographic areas.

The

Bank competes for deposits, loans and other business with these banks, as

well as with credit unions, mortgage companies,

insurance companies, and other local and nonlocal financial institutions, including

institutions offering services through the

mail, by telephone and over the Internet.

As more and different kinds of businesses enter the market for financial

services,

competition from nonbank financial institutions may be expected to

intensify further.

Among the advantages that larger financial institutions have

over the Bank are their ability to finance extensive advertising

campaigns, to diversify their funding sources, and to allocate and diversify their assets among

loans and securities of the

highest yield in locations with the greatest demand.

Many of the major commercial banks or their affiliates operating in

the

Bank’s service area offer services

which are not presently offered directly by the Bank and they typically have substantially

higher lending limits than the Bank.

Banks also have experienced significant competition for deposits from mutual

funds, insurance companies and other

investment companies and from money center banks’ offerings

of high-yield investments and deposits.

Certain of these

competitors are not subject to the same regulatory restrictions as the Bank.

Selected Economic Data

The U.S. Census Bureau estimates Lee County’s

population was 174,241 in 2020, and has increased approximately 24.2%

from 2010 to 2020.

The largest employers in the area are Auburn University,

East Alabama Medical Center, a Wal

-Mart

Distribution Center, Mando America Corporation,

and Briggs & Stratton.

Auto manufacturing and related suppliers are

increasingly important along Interstate Highway 85 to the east and west of

Auburn.

Kia Motors has a large automobile

factory in nearby West Point,

Georgia, and Hyundai Motors has a large automobile

factory in Montgomery,

Alabama.

Between 2010 and 2022, the Auburn-Opelika MSA grew an estimated 23.9%,

the second fastest growing MSA in

Alabama.

The Auburn-Opelika MSA population is estimated to grow 6.73% from 2022

to 2027.

During the same time,

household income is estimated to increase 13.34%, to $67,593.

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Loans and Loan Concentrations

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

well as for real estate mortgages, real estate

acquisition, construction and development and consumer purposes.

While there are certain risks unique to each type of

lending, management believes that there is more risk associated

with commercial, real estate acquisition, construction and

development, agricultural and consumer lending than with residential real estate

mortgage loans.

To help manage these

risks, the Bank has established underwriting standards used in evaluating

each extension of credit on an individual basis,

which are substantially similar for each type of loan.

These standards include a review of the economic conditions

affecting the borrower, the borrower’s

financial strength and capacity to repay the debt, the underlying collateral and the

borrower’s past credit performance.

We apply these standards

at the time a loan is made and monitor them periodically

throughout the life of the loan.

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

estate

lending.

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

manufacturing is

cyclical and adversely affected by increases in interest rates.

Decreases in automobile sales, including adverse changes due

to interest rate increases, and the economic effects of the impact

of COVID-19, including continuing supply chain

disruptions, 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 the Bank’s

primary service area, 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 mortgage loans are originated outside the

primary service area, and the Bank from

time to time has purchased loan participations from outside its primary

service area.

Human Capital

At December 31, 2021, the Company and its subsidiaries had 152

full-time equivalent employees, including 39 officers. In

response to the COVID-19 pandemic, our business continuity plan worked to provide

essential banking services to our

communities and customers, while protecting our employees’ health.

As part of our efforts to exercise social distancing in

accordance with the guidelines of the Centers for Disease Control and the Governor

of the State of Alabama, starting March

23, 2020, we limited branch lobby service to appointment only while continuing to operate

our branch drive-thru facilities

and ATMs.

We continue to provide

services through our online and other electronic channels. In addition,

we established

remote work access to help employees stay at home where job duties permit.

We experienced

little turnover as a result of the COVID-19 pandemic.

We also have

strong employee retention

historically.

Our average term of service is approximately 10 years.

We seek to provide

competitive compensation and benefits.

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 response to Item 7 of this

Annual Report on Form 10-K.

Certain statistical

information is also included in response to Item 6, Item 7A and Item 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.

Any change in applicable law or regulation may have a material effect

on the Company’s business.

The

following discussion is qualified in its entirety by reference to the particular laws and

rules 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

subsidiary.

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. On January 30, 2020, the Federal Reserve adopted new rules, effective

September 30, 2020 simplifying

determinations of control of banking organizations for BHC Act purposes.

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 Federal Reserve recommended repeal of the merchant

banking powers in its September 16, 2016 study pursuant to Section 620 of the Dodd

-Frank Wall Street Reform and

Consumer Protection Act of 2010 (the “Dodd-Frank Act”), but has taken no action.

The Company has not elected to

become a financial holding company,

but it may elect to do so in the future.

Financial holding companies continue to be subject to Federal Reserve supervision,

regulation and examination, but the

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

of functional regulation to subsidiary activities.

For

example, insurance activities would be subject to supervision and regulation

by state insurance authorities.

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”.

Under the Alabama Banking Code, with the prior approval of the

Alabama Superintendent, an Alabama bank may acquire and operate

one or more banks in other states pursuant to a

transaction in which the Alabama bank is the surviving bank.

In addition, one or more Alabama banks may enter into a

merger transaction with one or more out-of-state banks,

and an out-of-state bank resulting from such transaction may

continue to operate the acquired branches in Alabama.

The Dodd-Frank Act permits banks, including Alabama banks, to

branch anywhere in the United States.

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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 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.

Finally, 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, as amended

by the Dodd-Frank Act, require a bank holding

company to act as a source of financial and managerial strength to its FDIC-insured

subsidiaries and to take measures to

preserve and protect such bank subsidiaries in situations where additional

investments in a bank subsidiary may not

otherwise be warranted.

In the event an FDIC-insured subsidiary becomes subject to a capital restoration

plan with its

regulators, the parent bank holding company is required to guarantee performance

of such plan up to 5% of the bank’s

assets, and such guarantee is given priority in bankruptcy of the bank holding company.

In addition, where a bank holding

company has more than one bank or thrift subsidiary,

each of the bank holding company’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 subordinate capital

notes or other instruments which qualify as capital under bank regulatory rules.

However, any loans from the holding

company to such subsidiary banks likely will be unsecured and subordinated

to such bank’s depositors and to other

creditors of the bank.

See “Capital.”

As a result of legislation in 2014 and 2018, the Federal Reserve has revised its Small Bank

Holding Company Policy

Statement (the “Small BHC Policy”) to expand it to include thrift holding companies and

increase the size of “small” for

qualifying bank and thrift holding companies from $500 million to up to $3

billion of pro forma consolidated assets.

The Federal Reserve confirmed in 2018 that the Company is eligible for treatment as

a small banking holding company

under the Small BHC Policy.

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

the

Company’s capital adequacy

will continue to be evaluated on a bank only basis.

See “Capital.”

Bank Regulation

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

It is subject to supervision, regulation and examination

by the Federal Reserve and the Alabama Superintendent, which monitor

all areas of the Bank’s operations, including

loans,

reserves, mortgages, issuances and redemption of capital securities, payment of dividends,

establishment of branches,

capital adequacy and compliance with laws.

The Bank is a member of the FDIC and, as such, its deposits are insured by

the FDIC to the maximum extent provided by law,

and is subject to various FDIC regulations.

See “FDIC Insurance

Assessments.”

Alabama law permits statewide branching by banks.

The powers granted to Alabama-chartered banks by state law include

certain provisions designed to provide such banks competitive equality with

national banks.

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The Federal Reserve has adopted the Federal Financial Institutions Examination

Council’s (“FFIEC”) rating system,

which

assigns each financial institution a confidential composite “CAMELS” rating based

on an evaluation and rating of six

essential components of an institution’s

financial condition and operations:

Capital Adequacy,

Asset Quality, Management,

Earnings, Liquidity and Sensitivity to market risk, as well as the quality of risk

management practices.

For most

institutions, the FFIEC has indicated that market risk primarily reflects exposures

to changes in interest rates.

When

regulators evaluate this component, consideration is expected to

be given to: 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.

Market risk is rated based upon, but not

limited to, an assessment 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. Composite 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 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.

The federal bank regulatory agencies are reviewing the CAMELS

rating system and their consistency.

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” similar to those permitted to financial

holding companies. In December 2015,

Congress amended the GLB Act as part of the Fixing America’s

Surface Transportation Act. This amendment

provided

financial institutions that meet certain conditions an exemption to the requirement to deliver

an annual privacy notice. On

August 10, 2018, the federal Consumer Financial Protection Bureau (“CFPB”)

announced that it had finalized conforming

amendments to its implementing regulation, Regulation

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.

Community Reinvestment Act and Consumer Laws

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

regulations thereunder.

Under the CRA, all

FDIC-insured institutions have a continuing and affirmative obligation,

consistent with their safe and sound operation, to

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

and moderate-income 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 agency’s

CRA assessment is publicly available.

Further, consideration of the CRA is required of any

FDIC-insured institution that has applied to: (i) charter a national bank; (ii) obtain deposit

insurance coverage for a newly-

chartered institution; (iii) establish a new branch office that accepts

deposits; (iv) relocate an office; or (v) merge or

consolidate with, or acquire the assets or assume the liabilities of, an FDIC-insured

financial institution.

In the case of bank

holding company applications to acquire a bank or other bank holding company,

the Federal Reserve will assess the records

of each subsidiary depository institution of the applicant bank holding company,

and such records may be the basis for

denying the application.

A less than satisfactory CRA rating will slow,

if not preclude, acquisitions, and new branches and

other expansion activities and may prevent a company from becoming a

financial holding company.

CRA agreements with private parties must be disclosed and annual

CRA reports must be made to a bank’s primary

federal

regulator.

A financial holding company election, and such election and financial holding company

activities are permitted

to be continued, only if any affiliated bank has not received less than a

“satisfactory” CRA rating.

The federal CRA

regulations require that evidence of discriminatory,

illegal or abusive lending practices be considered in the CRA

evaluation.

On December 13, 2019, the FDIC and OCC issued a joint notice of proposed rulemaking

seeking comment on modernizing

the agencies’ CRA regulations. The OCC issued final revised CRA Rules effective

October 1, 2020, which were repealed

in 2021.

The Federal bank regulators are cooperating and working on new CRA regulations,

which are expected to be

proposed around the end of March 2022.

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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 Department of Justice

(the “DOJ”), and the federal bank regulatory agencies have issued an Interagency

Policy Statement on Discrimination in

Lending to provide guidance to financial institutions in determining whether discrimination

exists, how the agencies will

respond to lending discrimination, and what steps lenders might take to prevent

discriminatory lending practices.

The DOJ

has prosecuted what it regards as violations of the ECOA, the Fair Housing Act,

and the fair lending laws, generally.

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

incurred at

automated teller machines and point of sale terminals.

Overdrafts also have been a CFPB concern, and in 2021 began

refocusing on this issue with a view to “insure that banks continue to evolve their

businesses to reduce reliance on overdraft

and not sufficient funds fees.”

Among other things, the federal regulators require banks to monitor accounts and

to limit

the use of overdrafts by customers as a form of short-term, high-cost credit,

including, for example, giving customers who

overdraw their accounts on more than six occasions where a fee is charged

in a rolling 12 month period a reasonable

opportunity to choose a less costly alternative and decide whether to continue

with fee-based overdraft coverage.

It also

encourages placing appropriate daily limits on overdraft fees, and asks banks to

consider eliminating overdraft fees for

transactions that overdraw an account by a

de minimis

amount.

Overdraft

policies, processes, fees and disclosures are

frequently the subject of 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 principals for offering small-dollar

loans in a responsible manner on May 20, 2020.

The CFPB proposed on February 6, 2019 to rescind its mandatory

underwriting standards for loans covered by its 2017 Payday,

Vehicle

Title and Certain High-Cost Installment Loans rule,

and has separately proposed delaying the effectiveness of such 2017

rule.

The CFPB has a broad mandate to regulate consumer financial products and

services, whether or not offered by banks or

their affiliates.

The CFPB has the authority to adopt regulations and enforce various laws,

including fair lending laws, the

Truth in Lending Act, the Electronic Funds Transfer

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

Credit

Reporting Act and Privacy of Consumer Financial Information rules.

Although the CFPB does not examine or supervise

banks with less than $10 billion in assets,

banks of all sizes are affected by the CFPB’s

regulations, and the precedents set

in CFPB enforcement actions and interpretations.

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 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.

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 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.” This relieves smaller institutions from

many of the requirements to satisfy the criteria listed

above for “qualified mortgages.” Mortgages meeting the “qualified

mortgage” safe harbor may not have negative

amortization, must follow prepayment penalty limitations included

in the Truth in Lending Act, and may not have

fees

greater than 3% of the total value of the loan.

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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 a sale of foreclosed property.

The Federal Housing Finance Authority (“FHFA”)

updated, effective January 1, 2016, The Federal National

Mortgage

Association’s (“Fannie Mae’s”)

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

(individually and

collectively, “GSE”) repurchase

rules, including the kinds of loan defects that could lead to a repurchase request to, or

alternative remedies with, the mortgage loan originator or seller.

These rules became effective January 1, 2016.

FHFA also

has updated these GSEs’ representations and warranties framework and

provided an independent dispute resolution

(“IDR”) process to allow a neutral third party to resolve demands after the GSEs’ quality

control and appeal processes have

been exhausted.

The Bank 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. Our residential

mortgage

strategy, product offerings,

and profitability may change as these regulations are interpreted and applied

in practice, and

may also change due to any restructuring of Fannie Mae and Freddie Mac

as part of the resolution of their conservatorships.

The 2018 Growth Act reduced the scope of TRID rules by eliminating the wait time

for a mortgage, if an additional creditor

offers a consumer a second offer with a lower annual percentage

rate. Congress encouraged federal regulators to provide

better guidance on TRID in an effort to provide a clearer understanding

for consumers and bankers alike. The law also

provides partial exemptions from the collection, recording and reporting requirements

under Sections 304(b)(5) and (6) of

the Home Mortgage Disclosure Act (“HMDA”), for those banks with fewer than 500

closed-end mortgages or less than

500 open-end lines of credit in both of the preceding two years, provided

the bank’s rating under the CRA for the previous

two years has been at least “satisfactory.”

On August 31, 2018, the CFPB issued an interpretive and procedural rule to

implement and clarify these requirements under the 2018 Growth

Act.

The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”)

was enacted on March 27, 2020. Section 4013 of

the CARES Act, “Temporary

Relief From Troubled Debt Restructurings,” provides banks

the option to temporarily

suspend certain requirements under ASC 340-10 TDR classifications

for a limited period of time to account for the effects

of COVID-19. On April 7, 2020, the Federal Reserve and the other banking agencies and

regulators issued a statement,

“Interagency Statement on Loan Modifications and Reporting for Financial Institutions

Working With

Customers Affected

by the Coronavirus (Revised)” (the “Interagency Statement on COVID-19

Loan Modifications”), to encourage banks to

work prudently with borrowers and to describe the agencies’ interpretation of

how accounting rules under ASC 310-40,

“Troubled Debt Restructurings by Creditors,”

apply to covered modifications. The Interagency Statement on COVID-19

Loan Modifications was supplemented on June 23, 2020 by the Interagency Examiner

Guidance for Assessing Safety and

Soundness Considering the Effect of the COVID-19 Pandemic on Institutions.

If a loan modification is eligible, a bank may

elect to account for the loan under section 4013 of the CARES Act. If a loan modification is not eligible

under section

4013, or if the bank elects not to account for the loan modification under section 4013,

the Revised Statement includes

criteria when a bank may presume a loan modification is not a TDR in accordance

with ASC 310-40.

Section 4021 of the CARES Act allows borrowers under 1-to-4 family residential

mortgage loans sold to Fannie Mae to

request forbearance to the servicer after affirming that such borrower

is experiencing financial hardships during the

COVID-19 emergency.

Such forbearance will be up to 180 days, subject to up to a 180 day extension. During

forbearance,

no fees, penalties or interest shall be charged beyond those applicable

if all contractual payments were fully and timely

paid. Except for vacant or abandoned properties, Fannie Mae servicers

may not initiate foreclosures on similar procedures

or related evictions or sales until December 31, 2020. On February 9. 2021,

the forbearance period was extended to March

31, 2021 after being extended to February 28, 2021. Borrowers

who are on a COVID-19 forbearance plan as of February

28, 2021 may apply for an additional forbearance extension of up to three additional

months. 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.

FinCEN published a request for information and comment on December 15,

2021 seeking ways to streamline, modernize

the United States AML and countering the financing of terrorists.

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Anti-Money Laundering and Sanctions

The International Money Laundering Abatement and Anti-Terr

orism 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.

Under the Uniting and Strengthening America by Providing Appropriate Tools

Required to Intercept and Obstruct

Terrorism Act of 2001

(the “USA PATRIOT

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

financial transactions and account relationships as well as to enhanced due diligence

and “know your customer” standards

in their dealings with foreign financial institutions and foreign customers.

The USA PATRIOT

Act requires financial institutions to establish anti-money laundering programs,

and sets forth

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

●

the development of internal policies, procedures, and controls;

●

the designation of a compliance officer;

●

an ongoing employee training program;

●

an independent audit function to test the programs; and

●

ongoing customer due diligence and monitoring.

Federal Financial Crimes Enforcement Network (“FinCEN”) rules effective

May 2018 require banks to know the beneficial

owners of customers that are not natural persons, update customer information

in order to develop a customer risk profile,

and generally monitor such matters.

On August 13, 2020, the federal bank regulators issued a joint statement clarifying that

isolated or technical violations or

deficiencies are generally 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 Bank Secrecy

Act and anti-money laundering

(“AML/BSA”) compliance program. It describes how the agencies incorporate

the customer due diligence regulations and

recordkeeping requirements issued by the U.S. Department of the Treasury

(“Treasury”) as part of the internal controls

pillar of a financial institution's AML/BSA compliance program.

On September 16, 2020, FinCEN issued an advanced notice of proposed

rulemaking seeking public comment on a wide

range of potential regulatory amendments under the Bank Secrecy Act. The

proposal seeks comment on incorporating an

“effective and reasonably designed” AML/BSA program component

to empower financial institutions to allocate resources

more effectively.

This component also would seek to implement a common understanding

between supervisory

agencies

and financial institutions regarding the necessary AML/BSA program elements,

and would seek to impose minimal

additional obligations on AML programs that already comply under the existing supervisory

framework.

On October 23, 2020, FinCEN and the Federal Reserve invited comment on a proposed

rule that would amend the

recordkeeping and travel rules under the Bank Secrecy Act, which would lower the applicable

threshold from $3,000 to

$250 for international transactions and apply these to transactions using

convertible virtual currencies and digital assets

with legal tender status.

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

Act of 2020 and the Corporate Transparency Act

(collectively, the “AML

Act”), to strengthen anti-money laundering and countering terrorism

financing programs. Among

other things, the AML Act:

•

specifies uniform disclosure of beneficial ownership information for all U.S. and

foreign entities conducting business

in the U.S.;

•

increases potential fines and penalties for BSA violations and improves

whistleblower incentives;

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•

codifies the risk-based approach to AML compliance;

•

modernizes AML systems;

•

expands the duties and powers FinCEN; and

•

emphasizes coordination and information-sharing among financial institutions, U.S.

financial regulators and foreign

financial regulators.

The United States has imposed various sanctions upon various foreign countries,

such as China, Iran, North Korea, Russia

and Venezuela,

and their certain government officials and persons.

Banks are required to comply with these sanctions,

which require additional customer screening and transaction monitoring.

Other Laws and Regulations

The Company is also required to comply with various corporate governance and

financial reporting requirements under the

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

by the SEC, the Public Company Accounting

Oversight Board and Nasdaq. 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 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 materially adversely affect

its reputation, its ability to obtain the

necessary certifications to its financial statements, its relations

with its regulators and other financial institutions with which

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

and sell Company securities on terms and conditions

acceptable to the Company. The Company’s

assessment of its financial reporting controls as of December 31, 2021 are

included in this report with no material weaknesses reported.

Payment of Dividends and Repurchases of Capital

Instruments

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

primary source of cash is dividends

from the Bank. Prior regulatory approval is required 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 2021,

the Bank paid total cash dividends of

approximately $3.7 million to the Company.

At December 31, 2021, the Bank could have declared and paid additional

dividends of approximately $8.3 million without prior regulatory approval.

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

has indicated that depository institutions and their holding companies should

generally pay dividends only out of current

year’s operating earnings.

Federal Reserve Supervisory Letter SR-09-4 (February 24, 2009),

as revised December 21, 2015, applies to dividend

payments, stock redemptions and stock repurchases.

Prior consultation with the Federal Reserve supervisory staff is

required before:

•

redemptions or repurchases of capital instruments when the bank

holding company is experiencing financial

weakness; and

•

redemptions and purchases of common or perpetual preferred stock

which would reduce such Tier 1 capital at

end of the period compared to the beginning of the period.

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Bank holding company directors must consider different factors

to ensure that its dividend level is prudent relative to

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

scenarios, such as potential events

that could affect its ability to pay,

while still maintaining a strong financial position. 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.

The Basel III Capital Rules further limit permissible dividends, stock repurchases and discretionary

bonuses by the

Company and the Bank, respectively,

unless the Company and the Bank meet capital conservation buffer

requirement

effective January 1, 2019.

See "Basel III Capital Rules."

Under a new provision of the capital rules, effective January 1,

2021, if a bank’s capital ratios are

within its buffer

requirements, the maximum amount of capital distributions it can

make is based on its eligible retained income. 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.

Regulatory Capital Changes

Simplification

The federal bank regulators issued final rules on July 22, 2019 simplifying their capital rules.

The last of these changes

become effective on April 1, 2020.

The principal changes for standardized approaches institutions, such the

Company and

the Bank are:

●

Deductions from capital for certain items, such as temporary difference

DTAs, MSAs and investments

unconsolidated were decreased to those amounts that individually exceed 25%

of CET1;

●

Institutions can elect to deduct investments in unconsolidated subsidiaries or subject

them to capital requirements;

and

●

Minority interests would be includable up to 10% of (i) CET1 capital, (ii) Tier

1 capital and (iii) total capital.

HVCRE

In December 2019, the federal banking regulators published a final rule, effective

April 1, 2020, to implement the “high

volatility commercial real estate,” or “HVCRE” changes in Section 214 of the 2018

Growth Act.

The new rules define

HVCRE loans as loans secured by land or improved real property that:

●

finance or refinance the acquisition, development, or construction of real property;

●

the purpose of such loans must be to acquire, develop, or improve such real property into

income producing

property; and

●

the repayment of the loan must depend on the future income or sales proceeds

from, or refinancing of, such real

property.

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Various

exclusions from HVCRE are specified.

Banking institutions and their holding companies are required to assign

150% risk weight to HVCRE loans.

Community Capital Rule

On October 29, 2019, the federal banking regulators adopted, effective January

1, 2020, an optional community banking

leverage ratio framework applicable to depository institutions and their

holding companies intended to reduce regulatory

burdens for qualifying community banking organizations that do

not use advanced approaches capital measures, and that

have:

●

less than $10 billion of assets;

●

a leverage ratio greater than 9%;

●

off-balance sheet exposures of 25% or less of total consolidated

assets; and

●

trading assets plus trading liabilities of less than 5% of total consolidated assets.

The leverage ratio would be Tier 1 capital

divided by average total consolidated assets, taking into account the capital

simplification discussed above and the CECL related capital transitions.

The community bank leverage ratio will be the sole capital measure, and electing institutions

will not have to calculate or

use any other capital measure.

It is estimated that 85% of depository institutions will be eligible to use this rule.

The

Company expects it would be eligible to make such election, if the Company determined

it desirable.

After preliminary

consideration, the Company believes that it would still need to calculate the regulatory

capital ratios, which investors would

find helpful in comparing the Company to others.

Capital

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

and state member banks, respectively.

These guidelines required at year end 2019 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

of 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.

In addition, the Federal Reserve has established 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.

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 and

depending upon a bank holding company’s

risk profile.

All bank holding companies and banks are expected to hold capital

commensurate with the level and nature of their risks including the volume and severity of

their problem loans.

Lastly, the

Federal Reserve’s guidelines indicate

that the Federal Reserve will continue to consider a “tangible Tier

1 leverage ratio”

(deducting all intangibles) in evaluating proposals for expansion or new activity.

The level of Tier 1 capital to risk-adjusted

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

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. Under Federal Reserve policies, bank holding companies are generally expected

to operate with capital positions well

above the minimum ratios. 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 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, as established by regulation.

See

“Prompt Corrective Action Rules.”

Basel III Capital Rules

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

for bank holding companies and

banks implementing the Basel Committee on Banking Supervision’s

“Basel III: A Global Regulatory Framework for more

Resilient Banks and Banking Systems.”

These new U.S. capital rules are called the “Basel III Capital Rules,” and generally

were fully phased-in on January 1, 2019.

The Basel III Capital Rules limit Tier 1 capital

to common stock and noncumulative perpetual preferred stock, as well as

certain qualifying trust preferred securities and cumulative perpetual preferred

stock issued before May 19, 2010, each of

which were grandfathered in Tier 1 capital

for bank holding companies with less than $15 billion in assets.

The Company

had no qualifying trust preferred securities or cumulative preferred stock outstanding at December

31, 2020.

The Basel III

Capital Rules also introduced a new capital measure, “Common Equity Tier

I Capital” or “CET1.”

CET1 includes 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 made a one-time election in 2015 and, as a result, CET1

will not be adjusted for certain accumulated other

comprehensive income (“AOCI”).

Additional “threshold deductions” of the following that are individually

greater than 10% of CET1 or collectively greater

than 15% of CET1 (after the above deductions are also made):

●

MSAs, net of associated DTLs;

●

DTAs arising from temporary

differences that could not be realized through net operating loss carrybacks,

net of

any valuation allowances and DTLs; and

●

Significant common stock investments in unconsolidated financial institutions,

net of associated DTLs.

As discussed below, recent regulations

change these items to simplify and improve their capital treatment.

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.

In addition to the minimum risk-based capital requirements, a new “capital

conservation buffer” of CET1 capital of at least

2.5% of total risk weighted assets, will be required.

The capital conservation buffer will be calculated as the

lowest

of:

●

the banking organization’s

CET1 capital ratio minus 4.5%;

●

the banking organization’s

tier 1 risk-based capital ratio minus 6.0%; and

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●

the banking organization’s

total risk-based capital ratio minus 8.0%.

Full compliance with the capital conservation buffer was required

by January 1, 2019. At such time, permissible dividends,

stock repurchases and discretionary bonuses will be limited to the following percentages

based on the capital conservation

buffer as calculated above, subject to any further regulatory

limitations, including those based on risk assessments and

enforcement actions:

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 -

Effective March 20, 2020, the Federal Reserve and the other

federal banking regulators adopted an interim final rule that

amended the capital conservation buffer in light of the disruptive

effects of the COVID-19 pandemic. The interim final rule

was adopted as a final rule on August 26, 2020. The new rule revises the definition of

“eligible retained income” for

purposes of the maximum payout ratio 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. The

eligible retained income is now the greater of (i) net income for the four preceding quarters,

net of distributions and

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

of all net income over the preceding four quarters.

The interim final rule only affects the capital buffers, and banking

organizations were encouraged to make prudent capital

distribution decisions.

The various capital elements and total capital under the Basel III Capital Rules, as fully phased

in on January 1, 2019 are:

Fully Phased In

January 1, 2019

Minimum CET1

4.50%

CET1 Conservation Buffer

2.50%

Total CET1

7.0%

Deductions from CET1

100%

Minimum Tier 1 Capital

6.0%

Minimum Tier 1 Capital

plus

conservation buffer

8.5%

Minimum Total Capital

8.0%

Minimum Total Capital

plus

conservation buffer

10.5%

Changes in Risk-Weightings

The Basel III Capital Rules significantly change the risk weightings used to determine risk

weighted capital adequacy.

Among various other changes, the Basel III Capital Rules apply a 250% risk-weighting

to MSRs, DTAs that

cannot be

realized through net operating loss carry-backs and significant (greater

than 10%) investments in other financial

institutions.

A 150% risk-weighted category applies to “high volatility commercial real estate

loans,” or “HVCRE,” which

are credit facilities for the acquisition, construction or development of real property,

excluding one-to-four family

residential properties or commercial real estate projects where: (i) the loan-to-value ratio

is not in excess of interagency real

estate lending standards; and (ii) the borrower has contributed capital

equal to not less than 15% of the real estate’s

“as

completed” value before the loan was made.

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The Basel III Capital Rules also changed some of the risk weightings used to determine

risk-weighted capital adequacy.

Among other things, the Basel III Capital Rules:

●

Assigned a 250% risk weight to MSRs;

●

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

mortgage securities, trust

preferred CDOs and asset backed securities;

●

Retained 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;

●

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

and residential mortgages);

●

Assigned a 250% risk weight to DTAs,

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

●

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

●

Increased the risk weight for exposures to qualifying securities firms from 20% to

100%.

HVCRE loans currently have a risk weight of 150%. Section 214 of the 2018

Growth Act, restricts the federal bank

regulators from applying this risk weight except to certain ADC loans. The federal

bank regulators issued a notice of a

proposed rule on September 18, 2018 to implement Section 214

of the 2018 Growth Act, by revising the definition

HVCRE. If this proposal is adopted, it is expected that this proposal could

reduce the Company’s risk weighted assets

and

thereby may increase the Company’s

risk-weighted capital.

The Financial Accounting Standards Board’s

(the “FASB”) Accounting Standards

Update (“ASU”) No. 2016-13 “Financial

Instruments – Credit Losses (Topic

326): Measurement of Credit Losses on Financial Instruments” on June 16, 2016,

which

changed the loss model to take into account current expected credit losses (“CECL”)

in place of the incurred loss method.

The Federal Reserve and the other federal banking agencies adopted

rules effective on April 1, 2019 that allows banking

organizations to phase in the regulatory capital effect of a reduction

in retained earnings upon adoption of CECL over a

three year period.

On May 8, 2020, the agencies issued a statement describing the measurement of expected

credit losses

using the CECL methodology,

and updated concepts and practices in existing supervisory guidance that

remain applicable.

CECL is effective for the Company beginning January 1, 2023

and has not been adopted early. CECL’s

effects upon the

Company have not yet been determined.

Prompt Corrective Action Rules

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

measures and relevant capital levels that

implement the “prompt corrective action” standards.

The relevant capital measures are the total risk-based capital ratio,

Tier 1 risk-based capital ratio, Common equity tier

1 capital ratio, as well as, the leverage capital ratio.

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% or greater,

a Tier 1 risk-based capital ratio of

6% or greater, a Common Equity Tier

1 capital ratio of 4.5% or greater, and generally has a leverage capital

ratio

of 4% or greater;

●

“undercapitalized” if it has a total risk-based capital ratio of less than 8%, a Tier

1 risk-based capital ratio of less

than 6%, a Common Equity Tier 1 capital ratio of less than 4.5%

or generally has a leverage capital ratio of less

than 4%;

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●

“significantly undercapitalized” if it has a total risk-based capital ratio of less than 6%, a

Tier 1 risk-based capital

ratio of less than 4%, a Common Equity Tier 1 capital ratio

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

3%; or

●

“critically undercapitalized” if its tangible equity is equal to or less than 2% to total assets.

The federal bank regulatory agencies have authority to require additional capital,

and have indicated 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.

Banks that are less than “adequately capitalized” cannot accept

or renew brokered

deposits.

FDICIA generally prohibits a depository institution from making any capital distribution

(including paying

dividends) or paying any management fee to its holding company,

if the depository institution thereafter would be

“undercapitalized”.

Institutions that are “undercapitalized” are subject to growth limitations and are

required to submit a

capital restoration plan for approval.

A depository institution’s parent holding company

must guarantee that the institution will comply with such capital

restoration plan.

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

of 5% of the depository

institution’s total assets at the time it became

undercapitalized and 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 sell sufficient voting stock to become “adequately

capitalized”, requirements to reduce total assets, and

cessation of receipt of deposits from correspondent banks.

“Critically undercapitalized” institutions are subject to the

appointment of a receiver or conservator.

Because the Company and the Bank exceed applicable capital requirements,

Company and Bank management do not believe that the provisions

of FDICIA have had or are expected to have any

material effect on the Company and the Bank or their respective operations.

Section 201 of the 2018 Growth Act provides that banks and bank holding companies

with consolidated assets of less than

$10 billion that meet a “community bank leverage ratio,” established by the federal

bank regulators between 8% and 10%,

are deemed to satisfy applicable risk-based capital requirements necessary to

be considered “well capitalized.” The federal

banking agencies have the discretion to determine that an institution does not qualify

for such treatment due to its risk

profile. An institution’s risk profile

may be assessed by its off-balance sheet exposure, trading of assets and liabilities,

notional derivatives’ exposure, and other methods.

The federal bank regulators implemented a CARES Act provision by replacing

interim final rules adopted in March 2020,

temporarily reducing the community bank leverage ratio threshold. The threshold is 8% through

the end of 2020, 8.5% for

2021, and 9% beginning January 1, 2022. Two

quarter grace periods are allowed to permit banks that temporarily fall

below these thresholds to remain well-capitalized for regulatory purposes.

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.

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Enforcement Policies and Actions

The Federal Reserve and the Alabama Superintendent monitor compliance

with laws and regulations.

The CFPB monitors

compliance with laws and regulations applicable to consumer financial products

and services.

Violations of laws and

regulations, or other unsafe and unsound practices, may result in these agencies 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

a bank or bank holding company, in the

form of fines, penalties, or the recovery,

or claw-back, of compensation.

The

federal prudential banking regulators have been bringing more

enforcement actions recently.

Fiscal and Monetary Policy

Banking is a business that depends on interest rate differentials.

In general, the difference between the interest paid by a

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

securities holdings,

constitutes the major portion of a bank’s earnings.

Thus, 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 open market dealings in United States government securities,

the setting of 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.

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,

which are deposits with

specified maturity dates, will be offered through a Term

Deposit Facility.

Term deposits will be

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 2011, the Federal Reserve repealed its historical Regulation

Q to permit banks to pay interest on demand deposits.

On March 3, 2020, the Federal Reserve reduced the Federal Funds rate target by 50

basis points to 1.00-1.25%. The Federal

Reserve further reduced the Federal Funds Rate target by an additional

100 basis points to 0-0.25% on March 16, 2020. The

Federal Reserve established various liquidity facilities pursuant to section 13(3)

of the Federal Reserve Act to help stabilize

the financial system.

As a result of inflation, the decline in serious COVID-19 cases, and the strengthening of

the economy

following the March 2020 outbreak of the COVID-19 pandemic, the Federal

Reserve is considering increasing the discount

rate and reducing its holdings of securities.

In light of disruptions in economic conditions caused by the outbreak of 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 to minimize

the economic effect of COVID-19.

The CARES Act provided a $2 trillion stimulus package and various

measures to provide relief from the COVID-19

pandemic, including:

●

The Paycheck Protection Program (“PPP”), which expands eligibility for special new SBA

guaranteed loans,

forgivable loans and other relief to small businesses affected

by COVID-19.

●

A new $500 billion federal stimulus program for air carriers and other companies in severely

distressed sectors of

the American economy. The lending

programs impose stock buyback, dividend, executive compensation, and

other restrictions on direct loan recipients.

●

Optional temporary suspension of certain requirements under ASC 340-10 TDR

classifications for a limited period

of time to account for the effects of COVID-19.

●

The creation of rapid tax rebates and expansion of unemployment benefits to

provide relief to individuals.

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●

Substantial federal spending and significant changes for health care companies,

providers, and patients.

Over $525 billion of PPP loans were made in 2020.

On December 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits,

and Venues

Act (the “Economic Aid

Act”) was signed into law. The

Economic Aid Act provides a second $900 billion stimulus package, including

$325 billion

in additional PPP loans, changed the eligibility rules to focus more on smaller business,

further enhances other Small

Business Association programs.

The nature and timing of any changes in monetary policies and their effect

on the Company and the Bank cannot be

predicted. The turnover of a majority of the Federal Reserve Board and

the members of its FOMC and the appointment of a

new Federal Reserve Chairman may result in changes in policy and the timing and amount

of monetary policy

normalization.

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.

Assessments by the FDIC to pay interest on Financing Corporation (“FICO”)

bonds ended in September 2019.

Since 2011, and as discussed above under “Recent Regulatory

Developments”, the FDIC has been calculating assessments

based on an institution’s average consolidated

total assets less its average tangible equity (the

“FDIC Assessment Base”) in

accordance with changes mandated by the Dodd-Frank Act.

The FDIC changed its assessment rates which shifted part of

the burden of deposit insurance premiums toward depository institutions relying on

funding sources other than deposits.

In 2016, the FDIC again changed its deposit insurance pricing and eliminated all risk categories

and now uses “financial

ratios method” based on CAMELS composite ratings to determine assessment

rates for small established institutions with

less than $10 billion in assets (“Small Banks”).

The financial ratios method sets a maximum assessment for CAMELS 1

and 2 rated banks, and set minimum assessments for lower rated institutions.

All basis points are annual amounts.

The following table shows the FDIC assessment schedule for 2020

applicable to Small Banks, such as the Bank.

Established Small Institution

CAMELS Composite

1 or 2

4 or 5

Initial Base Assessment Rule

3 to 16 basis points

6 to 30 basis points

16 to 30 basis points

Unsecured Debt Adjustment

-5 to 0 basis points

Total Base Assessment

Rate

1.5 to 16 basis points

3 to 30 basis points

11 to 30 basis points

On March 15, 2016 the FDIC implemented Dodd-Frank Act provisions by raising the DIF’s

minimum Reserve Ratio from

1.15% to 1.35%.

The FDIC imposed a 4.5 basis point annual surcharge on insured depository

institutions with total

consolidated assets of $10 billion or more (“Large Banks”).

The new rules grant credits to smaller banks for the portion of

their regular assessments that contribute to increasing the reserve ratio from 1.15%

to 1.35%.

The FDIC’s reserve ratio reached 1.36%

on September 30, 2018, exceeding the minimum requirement.

As a result, deposit

insurance surcharges on Large Banks ceased, and smaller

banks will receive credits against their deposit assessments from

the FDIC for their portion of assessments that contributed to the growth in the reserve ratio

from 1.15% to 1.35%.

The

Bank’s credit was $0.2 million, and

was received and applied against the Bank’s deposit

insurance assessments during 2019

and 2020.

Given the extraordinary growth in deposits in the first six months of 2020 due

to the pandemic and government

stimulus, the reserve ratio declined below 1.35% to 1.30%. The FDIC issued a restoration

plan on September 15, 2020

designed to restore the reserve ratio to at least the statutory minimum of 1.35%

within 8 years. Although the FDIC

maintained current assessment rates, the FDIC may increase deposit assessment rates

by up to two basis points without

notice, or more following notice and a comment period, to meet the required reserve

ratio.

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On June 22, 2020, the FDIC issued a final rule designed to mitigate the deposit insurance

assessment effect of the PPP and

the related liquidity programs established by the Federal Reserve. Specifically

the rule removes the effects of participating

in PPP and liquidity facilities from the various risk measures used to calculate

assessment rates and provides an offset to

assessments for the increase in assessment base rates attributed to participation

in the PPP and liquidity facilities.

Prior to June 30, 2016, when the new assessment system became effective,

the Bank’s overall rate for assessment

calculations was 9 basis points or less, which was within the range of assessment

rates for the lowest “risk category” under

the former FDIC assessment rules.

The Company recorded FDIC insurance premiums expenses of $0.3

and $0.1 million in

2021 and 2020, respectively.

Lending Practices

The federal bank regulatory agencies released guidance in 2006

on “Concentrations in Commercial Real Estate Lending”

(the “Guidance”).

The 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 Guidance.

Loans on owner

occupied CRE are generally excluded.

In December 2015, the Federal Reserve and other bank regulators issued an

interagency statement to highlight prudent risk management practices

from existing guidance that regulated financial

institutions and made recommendations regarding maintaining capital levels

commensurate with the level and nature of

their CRE concentration risk.

The Guidance requires that 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

Guidance is triggered when either:

Total reported

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

total capital; or

Total reported

loans secured by multifamily and nonfarm nonresidential properties and

loans for construction, land

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

total risk-based capital.

This Guidance was supplemented by the Interagency Statement on Prudent

Risk Management for Commercial Real Estate

Lending (December 18, 2015).

The 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.

The Guidance did not apply to the Bank’s

CRE lending activities during 2020 or 2021.

At December 31, 2021, the Bank

had outstanding $32.4 million in construction and land development loans and $229.8

million in total CRE loans (excluding

owner occupied), which represent approximately 30.8% and 218.5%,

respectively, of the Bank’s

total risk-based capital at

December 31, 2021.

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 both its retail and commercial 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.

In 2013, the Federal Reserve and other banking regulators issued their “Interagency Guidance

on Leveraged Lending”

highlighting standards for originating leveraged transactions and

managing leveraged portfolios, as well as requiring banks

to identify their highly leveraged transactions, or HLTs.

The Government Accountability Office issued a statement

October 23, 2017 that this guidance constituted a “rule” for purposes of the Congressional

Review Act, which provides

Congress with the right to review the guidance and issue a joint resolution for

signature by the President disapproving it.

No such action was taken, and instead, the federal bank regulators issued a September

11, 2018 “Statement Reaffirming

the

Role of Supervisory Guidance.”

This Statement indicated that guidance does not have the force or effect

of law or provide

the basis for enforcement actions, but this guidance can outline supervisory agencies’

views of supervisory expectations and

priorities, and appropriate practices.

The federal bank regulators continue to identify elevated risks in leveraged loans and

shared national credits.

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The Bank did not have any

loans at year-end 2021 or 2020 that were leveraged loans

subject to the Interagency Guidance

on Leveraged Lending or that were shared national credits.

Other Dodd-Frank Act Provisions

In addition to the capital, liquidity and FDIC deposit insurance changes discussed above,

some of the provisions of the

Dodd-Frank Act we believe may affect us are set forth below.

Executive Compensation

The Dodd-Frank Act provides shareholders of all public companies with a say on executive

compensation.

Under the

Dodd-Frank Act, each company must give its shareholders the opportunity to

vote on the compensation of its executives, on

a non-binding advisory basis, at least once every three years.

The Dodd-Frank Act also adds disclosure and voting

requirements for golden parachute compensation that is payable to

named executive officers in connection with sale

transactions.

The SEC is required under the Dodd-Frank Act to issue rules obligating companies to disclose

in proxy materials for annual

shareholders meetings, information that shows the relationship between executive

compensation actually paid to their

named executive officers and their financial performance,

taking into account any change in the value of the shares of a

company’s stock and dividends or

distributions.

The Dodd-Frank Act also provides that a company’s

compensation

committee may only select a consultant, legal counsel or other advisor on

methods of compensation after taking into

consideration factors to be identified by the SEC that affect the independence

of a compensation consultant, legal counsel

or other advisor.

Section 954 of the Dodd-Frank Act added section 10D to the Exchange Act.

Section 10D directs the SEC to adopt rules

prohibiting a national securities exchange or association from listing a company

unless it develops, implements, and

discloses a policy regarding the recovery or “claw-back” of executive compensation

in certain circumstances.

The policy

must require that, in the event an accounting restatement due to material noncompliance

with a financial reporting

requirement under the federal securities laws, the company will recover

from any current or former executive officer any

incentive-based compensation (including stock options) received

during the three year period preceding the date of the

restatement, which is in excess of what would have been paid based

on the restated financial statements.

There is no

requirement of wrongdoing by the executive, and the claw-back is

mandatory and applies to all executive officers.

Section

954 augments section 304 of the Sarbanes-Oxley Act, which requires the CEO and

CFO to return any bonus or other

incentive or equity-based compensation received during the 12

months following the date of similarly inaccurate financial

statements, as well as any profit received from the sale of employer securities during the period,

if the restatement was due

to misconduct.

Unlike section 304, under which only the SEC may seek recoupment, the Dodd

-Frank Act requires the

Company to seek the return of compensation.

The SEC adopted rules in September 2013 to implement pay ratios pursuant to Section 953

of the Dodd-Frank Act, which

apply to fiscal year 2017 annual reports and proxy statements.

The SEC proposed Rule 10D-1 under Section 954 on July

1, 2015 which would direct Nasdaq and the other national securities exchanges to adopt

listing standards requiring

companies to adopt policies requiring executive officers to pay back erroneously

awarded incentive-based compensation.

In February 2017, the acting SEC Chairman indicated interest in reconsidering

the pay ratio rule.

The Dodd-Frank Act, Section 955, requires the SEC, by rule, to require that each company

disclose in the proxy

materials

for its annual meetings 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.

The SEC proposed implementing rules in February 2015, though the rules

have not been

implemented to date.

Section 956 of the Dodd-Frank Act 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.

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;

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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, the SEC and other regulators proposed regulations implementing

Section 956 in April 2011,

which would have been applicable to, among others, depository institutions and

their holding companies with $1 billion or

more in assets.

An advance notice of a revised proposed joint rulemaking under Section 956

was published by the financial

services regulators in May 2016, but these rules have not been adopted.

Debit Card Interchange

Fees

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

regulations provide that interchanged

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.

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 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.

President Biden has frozen new rulemaking generally,

and has rescinded various of his predecessor’s executive orders,

including the February 3, 2017 executive order containing “Core Principles

for Regulating the United States Financial

System” (“Core Principles”).

The Core Principles directed the Secretary of the Treasury

to consult with the heads of

Financial Stability Oversight Council’s

members and report to the President periodically thereafter on how laws and

government policies promote the Core Principles and to identify laws, regulations,

guidance and reporting that inhibit

financial services regulation.

The President has also issued an Executive Order 14036 on Promoting Competition

in the

American Economy (July 9, 2021), which may affect the federal

bank regulators’ reviews of bank and bank holding

company mergers.

The OCC, the FDIC and the CFPB have made proposals to further scrutinize

mergers, especially where

the confirming institutions have assets greater than $100 million.

The President’s Working

Group and various agencies

have also been working on the regulation of crypto assets, including stable coin, and access

to the payments system.

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The 2018 Growth Act, which, was enacted on May 24, 2018, amends the Dodd

-Frank Act, the BHC Act, the Federal

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

regulatory relief in these areas:

•

consumer credit and mortgage lending;

•

capital requirements;

•

Volcker

Rule compliance;

•

stress testing and enhanced prudential standards;

•

increased the asset threshold under the Federal Reserve’s

Small BHC Policy from $1 billion to $3 billion; and

•

capital formation.

We believe the 2018

Growth Act has positively affected our business.

The following provisions of the 2018 Growth Act

may be especially helpful to banks of our size as regulations adopted in 2019

became effective:

•

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

assets of less than $10 billion, which

meet a “community bank leverage ratio” of 8.00% to 10.00%, 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;

•

“reciprocal deposits” will not be considered “brokered deposits” for

FDIC purposes, provided such deposits

do not

exceed the lesser of $5 billion or 20% of the bank’s total

liabilities; and

The Volcker

Rule change may enable us to invest in certain collateralized loan obligations that are treated

as “covered

funds” prohibited to banking entities by the Volcker

Rule. Reciprocal deposits, such as CDARs, may expand our funding

sources without being subjected to FDIC limitations and potential insurance assessments

increases for brokered deposits.

On July 9, 2019, the federal banking agencies, together with the SEC and the

Commodities Futures Trading Commission

(“CFTC”), issued a final rule excluding qualifying community banking organizations

from the Volcker

Rule pursuant to the

2018 Growth Act. The Volcker

Rule change may enable us to invest in certain collateralized loan obligations that are

treated as “covered funds” and other investments prohibited to banking entities by the Volcker

Rule.

The applicable agencies also issued final rules simplifying the Volcker

Rule 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.

The FDIC announced on December 19, 2018 a final rule allows reciprocal deposits to be

excluded from “brokered

deposits” up to the lesser of $5 billion or 20% of their total liabilities.

Institutions that are not both well capitalized and

well rated are permitted to exclude reciprocal deposits from brokered

deposits in certain circumstances.

The FDIC issued comprehensive changes to its brokered deposit rules effective

April 1, 2021. The revised rules establishes

new standards for determining whether an entity meets the statutory definition of

“deposit broker,” and identifies a number

of business 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 may provide us greater future flexibility,

but we had no brokered deposits at December 31,

2020 or 2021, and historically have not relied on brokered deposits.

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On November 20, 2020, the Federal Reserve and the other federal bank regulators

issued temporary relief for community

banks with less than $10 billion in total assets as of December 31, 2019

related to certain regulations and reporting

requirements that largely result from growth due to the various relief and stimulus

actions in response to the COVID-19

pandemic. In particular, the interim final rule permits these

institutions to use asset data as of December 31, 2019, to

determine the applicability of various regulatory asset thresholds during calendar

years 2020 and 2021. For the same

reasons, the Federal Reserve temporarily revised the instructions to a number of its regulatory

reports to provide that

community banking organizations may use asset data as of December

31, 2019, in order to determine reporting

requirements for reports due in calendar years 2020 or 2021.

On November 30, 2020, the bank regulators issued a statement urging banks

to cease entering into new contracts using U.S.

dollar LIBOR rates as soon as practicable and in any event by December 31, 2021,

to effect orderly, and safe and sound

LIBOR transition. Banks were reminded that operating with insufficient

fallback interest rates could undermine financial

stability and banks’ safety and soundness.

Any alternative reference rate may be used that a bank determines is appropriate

for its funding and customer needs.

Alabama passed the LIBOR Discontinuance and Replacement Act of 2021

in April 202

to deal with the LIBOR transition.

Congress is also considering LIBOR transition legislation.

Certain of these new rules, and proposals, if adopted, these proposals could significantly

change the regulation or

operations of banks and the financial services industry.

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.

ITEM 1A. RISK FACTORS

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 may differ substantially

from those discussed in these forward-looking statements.

Operational Risks

Market conditions and economic cyclicality may adversely affect our industry.

We believe the following,

among other things, may affect us in 2022:

●

The COVID-19 pandemic disrupted the economy beginning late in the first quarter

of 2020, and continues.

Auburn University, government

agencies and businesses were limited to remote work and gatherings

were limited.

Supply chains continue to be disrupted and unemployment spiked and remains

high.

Hotels, motels, restaurants,

retail and shopping centers were especially affected.

●

Extraordinary monetary and fiscal stimulus in 2020 and in early 2021

have offset certain of the pandemic’s

adverse economic effects.

Inflation is running at levels unseen in decades and the Federal Reserve is

contemplating raising target interest rates and reducing its securities

holdings.

The nature and timing of any future

changes in monetary and fiscal policies and their effect on us cannot be

predicted.

●

Market developments, including unemployment, price levels, stock and

bond market volatility, and changes,

including those resulting from COVID-19 and the pace of vaccination and expected

declines in serious COVID-19

cases, and Russia’s invasion of Ukraine affect

consumer confidence levels, economic activity and inflation.

Changes in payment behaviors and payment rates may increase in delinquencies and

default rates, which could

affect our earnings and credit quality.

●

Our ability to assess the creditworthiness of our customers and those we do business

with, and the values of our

assets and loan collateral may be adversely affected and less

predictable as a result of the pandemic and

government responses.

The accounting for loan modifications and deferrals may provide only temporary

relief.

The process we use to estimate losses inherent in our credit exposure or estimate the

value of certain assets

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.

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●

The end of the LIBOR reference rate is currently scheduled for most tenors by June 30, 2023,

although U.S. bank

regulators informed banks November 30, 2020 that they should stop using LIBOR

for new loans and contracts and

derivatives, including hedging, and involves risks of potential marked disruption and costs

of compliance and

conversion.

New hedges may not be as effective as hedges based on LIBOR.

Nonperforming and similar assets take significant time to resolve

and may adversely affect our results of operations

and

financial condition.

Our nonperforming loans were 0.10% of total loans as of December 31,

2021, and we had $0.4 million in other real estate

owned (“OREO”).

Non-performing assets may adversely affect our net income in various

ways.

We do

not record interest

income on nonaccrual loans or OREO and these assets require higher loan administration

and other costs, thereby adversely

affecting our income.

Decreases in the value of these assets, or the underlying collateral, or

in the related borrowers’

performance or financial condition, whether or not due to economic and

market conditions beyond our control, could

adversely affect our business, results of operations and

financial condition.

In addition, the resolution of nonperforming

assets requires commitments of time from management, which can be detrimental

to the performance of their other

responsibilities. Our non-performing assets may be adversely affected

by loan deferrals and modifications made in response

to the pandemic and the moratoria on foreclosures and evictions.

There can be no assurance that we will not experience

increases in nonperforming loans in the future, much of which is affected

by the economy and the levels of interest rates,

generally.

Our allowance for loan losses may prove

inadequate or we may be negatively affected by credit risk exposures.

We periodically review

our allowance for loan losses for adequacy considering economic conditions and

trends, collateral

values and credit quality indicators, including past charge-off experience

and levels of past due loans and nonperforming

assets.

We cannot be

certain that our allowance for loan losses will be adequate over time to

cover credit losses in our

portfolio because of unanticipated adverse changes in the economy,

including the continuing effects of the pandemic and

fiscal and monetary response to COVID-19, loan modifications and deferrals,

market conditions or events adversely

affecting specific customers, industries or markets, including

disruptions of supply chains and war, and changes

borrower behaviors.

Certain borrowers may not recover fully or may fail as a result of COVID

-19 effects.

If the credit

quality of our customer base materially decreases, if the risk profile of the

market, industry or group of customers changes

materially or weaknesses in the real estate markets worsen, borrower payment

behaviors change, or if our allowance for

loan losses is not adequate, our business, financial condition, including our liquidity

and capital, and results of operations

could be materially adversely affected.

CECL, a new accounting standard for estimating loan losses, is effective

for the

Company beginning January 1, 2023, and its effects upon the Company

have not yet been determined.

Changes in the real estate markets, including

the secondary market for residential mortgage loans,

may continue to

adversely affect us.

The CFPB’s mortgage and servicing rules,

including TRID rules for closed end credit transactions, enforcement actions,

reviews and settlements, affect the mortgage markets and our

mortgage operations.

The CFPB requires that lenders

determine whether a consumer has the ability to repay a mortgage loan have limited

the secondary market for and liquidity

of many mortgage loans that are not “qualified mortgages.”

Recently adopted changes to the CFPB’s

qualified mortgage

rules are reportedly being reconsidered.

The Tax Cuts and Jobs

Act’s (the “2017 Tax

Act”) limitations on the deductibility of residential mortgage interest and state

and local property and other taxes and federal moratoria on single-family

foreclosures and rental evictions could adversely

affect consumer behaviors and the volumes of housing sales,

mortgage and home equity loan originations, as well as the

value and liquidity of residential property held as collateral by lenders such as the Bank, and

the secondary markets for

single and multi-family loans.

Acquisition, construction and development loans for residential development

may be

similarly adversely affected.

Fannie Mae and Freddie Mac (“GSEs”), have been in conservatorship since September

2008.

Since Fannie Mae and

Freddie Mac dominate the residential mortgage markets, any changes in their

operations and requirements, as well as their

respective restructurings and capital, could adversely affect the

primary and secondary mortgage markets, and our

residential mortgage businesses, our results of operations and the returns on capital

deployed in these businesses.

The

timing and effects of resolution of these government sponsored

enterprises cannot be predicted.

Weaknesses in real estate

markets the FHFA’s

moratoria on foreclosures and real estate owned evictions may adversely

affect the length of time and costs required to manage and dispose

of, and the values realized from the sale of our OREO.

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We may be contractually

obligated to repurchase

mortgage loans we sold to third parties on terms unfavorable

to us.

As part of its routine business, the Company originates mortgage loans that it subsequently

sells in the secondary market,

including to governmental agencies and GSEs.

In connection with the sale of these loans, the Company makes customary

representations and warranties, the breach of which may result in the Company

being required to repurchase the loan or

loans.

Furthermore, the amount paid may be greater than the fair value of the loan or loans at the time

of the repurchase.

Although mortgage loan repurchase requests made to us have been limited, if these increased,

we may have to establish

reserves for possible repurchases and adversely affect our results of operation

and financial condition.

Mortgage servicing rights requirements

may change and require

us to incur additional costs and risks.

The CFPB’s residential mortgage servicing

standards may adversely affect our costs to service residential

mortgage loans,

and together with the Basel III Rules and the effects of lower interest rates

from COVID-19 stimulus, may decrease the

returns on, and values of, our MSRs.

This could reduce our income from servicing these types of loans and

make it more

difficult and costly to timely realize the value of collateral securing

such loans upon a borrower default.

In contrast, rising

interest rates would be expected to reduce mortgage refinancings and extend the duration

of our MSRs.

The soundness of other financial institutions could adversely affect us.

We routinely execute

transactions with counterparties in the financial services industry,

including brokers and dealers,

central clearinghouses, banks, including our correspondent banks and other

financial institutions.

Our ability to engage in

routine investment and banking transactions, as well as the quality and values of our investments

in holdings of other

obligations of other financial institutions such as the FHLB, could be adversely affected

by the actions, financial condition,

and profitability of such other financial institutions, including the FHLB

and our correspondent banks.

Financial services

institutions are interrelated as a result of shared credits, trading, clearing, counterparty and

other relationships.

Any losses,

defaults by, or failures of, the institutions

we do business with could adversely affect our holdings of the equity in

such

other institutions, our participation interests in loans originated by other institutions,

and our business, including our

liquidity, financial condition and

earnings.

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, or CRE, is cyclical and poses risks of possible loss due to concentration

levels and risks of the

assets being financed, which include loans for the acquisition and development of land and

residential construction.

The

federal bank regulatory agencies released guidance in 2006 on “Concentrations

in Commercial Real Estate Lending.”

The

guidance defines CRE loans as exposures secured by raw land, land development

and construction loans (including 1-4

family residential construction loans), multi-family property,

and non-farm non-residential property,

where the primary or a

significant source of repayment is derived from rental income associated

with the property (that is, loans for which 50% or

more of the source of repayment comes from third party,

non-affiliated, rental income) or the proceeds of the sale,

refinancing, or permanent financing of the property.

Loans to REITs

and unsecured loans to developers that closely

correlate to the inherent risks in CRE markets are also CRE loans.

Loans on owner occupied commercial real estate are

generally excluded from CRE for purposes of this guidance.

Excluding owner occupied commercial real estate, we had

50.0% of our portfolio in CRE loans at year-end 2021 compared to 43.6% at year-end 2020.

The banking regulators

continue to give CRE lending scrutiny and require banks with higher levels

of CRE loans to implement improved

underwriting, internal controls, risk management policies and portfolio

stress testing, as well as higher levels of allowances

for possible losses and capital levels as a result of CRE lending growth and exposures.

Lower demand for CRE, and

reduced availability of, and higher interest rates and costs for,

CRE lending could adversely affect our CRE loans and sales

of our OREO, and therefore our earnings and financial condition, including our capital and

liquidity.

At year-end 2021, 21% of our total loans were CRE loans to

hotels/motels, retail and shopping centers and restaurants,

businesses that were severely affected

by the effects of COVID-19.

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Our future success is dependent on our ability

to compete effectively in highly competitive markets.

The East Alabama banking markets which we operate are

highly competitive and our future growth and success will

depend on our ability to compete effectively in these markets.

We compete for loans, deposits

and other financial services

with other local, regional and national commercial banks, thrifts, credit unions,

mortgage lenders, and securities and

insurance brokerage firms.

Lenders operating nationwide over the internet are growing rapidly.

Many of our competitors

offer products and services different from us, and

have substantially greater resources, name recognition and market

presence than we do, which benefits them in attracting business.

In addition, larger competitors may be able to price loans

and deposits more aggressively than we are able to and have broader and more diverse customer

and geographic bases to

draw upon.

Out of state banks may branch into our markets.

Fintech and other non-bank competitors also complete for our

customers, and may partner with other banks and/or seek to enter the payments system.

Failures of other banks with offices

in our markets could also lead to the entrance of new,

stronger competitors in our markets.

Our success depends on local economic conditions.

Our success depends on the general economic conditions in the geographic

markets we serve in Alabama.

The local

economic conditions in our markets have a significant effect on our

commercial, real estate and construction loans, the

ability of borrowers to repay these loans and the value of the collateral securing these loans.

Adverse changes in the

economic conditions of the Southeastern United States in general, or in one or

more of our local markets, including the

continuous effects from COVID-19 and the timing, strength

and breadth of the recovery from the pandemic, could

negatively affect our results of operations and our profitability.

Our local economy is also affected by the growth of

automobile manufacturing and related suppliers located in our markets and

nearby.

Auto sales are cyclical and are affected

adversely by higher interest rates.

Attractive acquisition opportunities may not be available to us in

the future.

While we seek continued organic growth, we also may consider

the acquisition of other businesses.

We expect that other

banking and financial companies, many of which have significantly

greater resources, will compete with us to acquire

financial services businesses.

This competition could increase prices for potential acquisitions that we believe are

attractive.

Also, acquisitions are subject to various regulatory approvals.

If we fail to receive the appropriate regulatory

approvals, we will not be able to consummate an acquisition that

we believe is in our best interests, and regulatory

approvals could contain conditions that reduce the anticipated benefits of any transaction.

Among other things, our

regulators consider our capital, liquidity,

profitability, regulatory compliance

and levels of goodwill and intangibles when

considering acquisition and expansion proposals.

Any acquisition could be dilutive to our earnings and shareholders’

equity per share of our common stock.

Future acquisitions and expansion activities may

disrupt our business, dilute shareholder

value and adversely affect our

operating results.

We regularly evaluate

potential acquisitions and expansion opportunities, including new branches and

other offices.

To the

extent that we grow through acquisitions, we cannot assure you that

we will be able to adequately or profitably manage this

growth.

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

expansion activities,

involve various risks including:

●

risks of unknown or contingent liabilities, and potential asset quality issues;

●

unanticipated costs and delays;

●

risks that acquired new businesses will not perform consistent with our growth

and profitability expectations;

●

risks of entering new markets or product areas where we have limited experience;

●

risks that growth will strain our infrastructure, staff, internal

controls and management, which may require

additional personnel, time and expenditures;

●

difficulties, expenses and delays of integrating the operations and personnel of

acquired institutions;

●

potential disruptions to our business;

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●

possible loss of key employees and customers of acquired institutions;

●

potential short-term decreases in profitability; and

●

diversion of our management’s

time and attention from our existing operations and business.

Technological

changes affect our business, and we may have fewer resources

than many competitors to invest in

technological improvements.

The financial services industry is undergoing rapid

technological changes with frequent introductions of new technology

driven products and services and growing demands for mobile and user-based

banking applications. In addition to allowing

us to analyze our customers better, the effective

use of technology may increase efficiency and may enable

financial

institutions to reduce costs, risks associated with fraud and compliance

with anti-money laundering and other laws, and

various operational risks. Largely unregulated “fintech” businesses

have increased their participation in the lending and

payments businesses, and have increased competition in these businesses. Our

future success will depend, in part, upon our

ability to use technology to provide products and services that meet our customers’ preferences

and create additional

efficiencies in operations, while avoiding cyber-attacks

and disruptions, data breaches and anti-money laundering

violations. The COVID-19 pandemic and increased remote work has accelerated

electronic banking activity and the need

for increased operational efficiencies.

may need to make significant additional capital investments in technology,

including cyber and data security,

and we may not be able to effectively implement new technology

-driven products and

services, or such technology may prove less effective than anticipated.

Many larger competitors have substantially greater

resources to invest in technological improvements and, increasingly,

non-banking firms are using technology to compete

with traditional lenders for loans and other banking services.

As a result, our competition from service providers not

located in our markets has increased.

Operational risks are inherent

in our businesses.

Operational risks and losses can result from internal and external fraud; gaps or

weaknesses in our risk management or

internal audit procedures; errors by employees or third parties, including our

vendors, failures to document transactions

properly or obtain proper authorizations; failure to comply with applicable regulatory requirements

in the various

jurisdictions where we do business or have customers; failures in our estimates

models that rely on; equipment failures,

including those caused by natural disasters, or by electrical, telecommunications

or other essential utility outages; business

continuity and data security system failures, including those caused by computer

viruses, cyberattacks, unforeseen

problems encountered while implementing major new computer systems or,

failures to timely and properly upgrade and

patch existing systems or inadequate access to data or poor response capabilities in

light of such business continuity and

data security system failures; or the inadequacy or failure of systems and controls,

including those of our vendors or

counterparties.

The COVID-19 pandemic presented operational challenges to

maintaining continuity of operations of

customer services while protecting our employees’ and customers’ safety.

In addition, we face certain risks inherent in the

ownership and operation

of our bank premises and other real-estate, including liability for accidents on our properties.

Although we have implemented risk controls and loss mitigation actions, and substantial

resources are devoted to

developing efficient procedures, identifying and rectifying

weaknesses in existing procedures and training staff and

potential environmental risks, it is not possible to be certain that such actions

have been or will be effective in controlling

these various operational risks that evolve continuously.

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Potential gaps in our risk management policies and internal audit procedures

may leave us exposed unidentified or

unanticipated risk, which could negatively affect our business.

Our enterprise risk management and internal audit program is designed to

mitigate material risks and loss to us. We

have

developed and continue to develop risk management and internal audit policies

and procedures to reflect the ongoing

review of our risks and expect to continue to do so in the future. Nonetheless, our policies

and procedures may not be

comprehensive and may not identify timely every risk to which we are exposed,

and our internal audit process may fail to

detect such weaknesses or deficiencies in our risk management framework.

Many of our risk management models and

estimates use observed historical market behavior to model or project

potential future exposure.

Models used by our

business are based on assumptions and projections. These models

may not operate properly or our inputs and assumptions

may be inaccurate, or changes in economic conditions, customer behaviors

or regulations.

As a result, these methods may

not fully predict future exposures, which can be significantly greater 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 to us. This information may not always be accurate,

complete, up-to-date or properly evaluated.

Furthermore, there can be no assurance that we can effectively review

and monitor all risks or that all of our employees will

closely follow our risk management policies and procedures, nor can there be any assurance

that our risk management

policies and procedures will enable us to accurately identify all risks and limit our exposures

based on our assessments. In

addition, we may have to implement more extensive

and perhaps different risk management policies and procedures

as our

regulation changes.

For example, the Federal Reserve and the OCC are in the initial stages of proposing

climate risk

management criteria and potential climate risk stress tests.

The SEC is expected to require more disclosure on climate

risks, also.

All of these could adversely affect our financial condition and results

of operations.

Any failure to protect

the confidentiality of customer information could adversely affect our reputation

and have a material

adverse effect on our business, financial condition and results

of operations

Various

laws enforced by the bank regulators and other agencies protect the privacy and security of

customers’ non-public

personal information. Many of our employees have access to, and routinely process

personal information of clients through

a variety of media, including information technology systems.

Our internal processes and controls are designed to protect

the confidentiality of client information we hold and that is accessible to us and our employees.

It is possible that an

employee could, intentionally or unintentionally,

disclose or misappropriate confidential client information or our data

could be the subject of a cybersecurity attack.

Such personal data could also be compromised via intrusions into our

systems or those of our service providers or persons we do business with such as credit

bureaus, data processors and

merchants who accept credit or debit cards for payment. If we fail to

maintain adequate internal controls, or if our

employees fail to comply with our policies and procedures, misappropriation

or inappropriate disclosure or misuse of client

information could occur. Such

internal control inadequacies or non-compliance could materially damage our

reputation,

lead to remediation costs and civil or criminal penalties.

These could have a material adverse effect on our business,

financial condition and results of operations.

Our information systems may experience interruptions and

security breaches.

We rely heavily on communications

and information systems, including those provided by third-party service

providers, to

conduct our business.

Any failure, interruption, or security breach of these systems could result in failures

or disruptions

which could affect our customers’ privacy and our customer

relationships, generally.

Our business continuity plans,

including those of our service providers, to provide back-up and restore service

may not be effective in the case of

widespread outages due to severe weather,

natural disasters, pandemics, or power, communications

and other failures.

Our systems and networks, as well as those of our third-party service providers,

are subject to security risks and could be

susceptible to cyber-attacks, such as denial of service attacks,

hacking, terrorist activities or identity theft.

Cybercrime risks

have increased as electronic and mobile banking activities increased as a result

of the COVID-19 pandemic, and may

increase as a result of the Russia invasion of Ukraine.

Other financial service institutions and their service providers have

reported material security breaches in their websites or other systems, some of

which have involved sophisticated and

targeted attacks, including use of stolen access credentials, malware,

ransomware, phishing and distributed denial-of-

service attacks, among other means.

Such cyber-attacks may also seek to disrupt the operations of public companies

their business partners, effect unauthorized fund transfers, obtain unauthorized

access to confidential information, destroy

data, disable or degrade service, or sabotage systems.

Denial of service attacks have been launched against a number of

financial services institutions, and we may be subject to these types of attacks in

the future. Hacking and identity theft risks,

in particular, could cause serious reputational harm.

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Despite our cybersecurity policies and procedures and our Board

of Director’s and Management’s efforts

to monitor and

ensure the integrity of the system we use, we may not be able to anticipate the rapidly evolving

security threats, nor may we

be able to implement preventive measures effective against

all such threats. The techniques used by cyber criminals change

frequently, may not be recognize

until launched and can originate from a wide variety of sources, including outside groups

such as external service providers, organized crime affiliates,

terrorist organizations or hostile foreign governments. These

risks may increase in the future as the use of mobile banking and other internet

electronic banking continues to grow.

Security breaches or failures may have serious adverse financial and other consequences,

including significant legal and

remediation costs, 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. In addition, these events

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

regulatory scrutiny, or expose

to civil litigation and possible financial liability,

any of which could have a material adverse effect on

our financial

condition and results of operations.

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 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.

Effective succession planning is also important to our long-term

success. The unexpected loss of services of one or more of

our key persons and failure to ensure effective transfer of knowledge

and smooth transitions involving such persons could

have a material adverse effect on our business due to loss of their skills,

knowledge of our business, their years of industry

experience and the potential difficulty of promptly finding qualified

replacement employees.

Proposed rules implementing the executive compensation provisions of the

Dodd-Frank Act may limit the type and

structure of compensation arrangements and prohibit the payment of “excessive

compensation” to our executives. These

restrictions could negatively affect our ability to compete with other companies

in recruiting and retaining key personnel.

Severe weather and natural disasters, including

as a result of climate change, pandemics, epidemics,

acts of war or

terrorism or other external events could

have significant effects on our business.

Severe weather and natural disasters, including hurricanes, tornados,

drought and floods, epidemics and pandemics, acts of

war or terrorism or other external events could have a significant effect on our

ability to conduct business.

Such events

could affect the stability of our deposit base, impair the ability of borrowers

to repay outstanding loans, impair the value of

collateral securing loans, cause significant property damage, result in loss of revenue

and/or cause us to incur additional

expenses.

Although management has established disaster recovery and business continuity

policies and procedures, the

occurrence of any such event could have a material adverse effect

on our business, which, in turn, could have a material

adverse effect on our financial condition and results of operations.

The COVID-19 pandemic, trade wars, tariffs, and similar events and

disputes, domestic and international, have adversely

affected, and may continue to adversely affect economic

activity globally,

nationally and locally.

Market interest rates have

declined significantly during 2020, and remain low,

but may begin increasing in early 2022 due to inflation.

Such events

also may adversely affect business and consumer confidence,

generally.

We and our customers,

and our respective

suppliers, vendors and processors may be adversely affected

by rising costs and shortages of needed equipment and

supplies.

Any such adverse changes may adversely affect our profitability,

growth asset quality and financial condition.

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Financial Risks

Our ability to realize our deferred

tax assets may be reduced in the future

if our estimates of future taxable income from

our operations and tax planning strategies do not support this amount, and the amount

of net operating loss carry-forwards

realizable for income tax purposes may be reduced

under Section 382 of the Internal Revenue Code by sales of our capital

securities.

We are

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

As of December 31, 2022, we had a

net deferred tax asset of $0.4 million with gross deferred tax assets of $1.7

million.

These and future deferred tax assets

may be further 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.

The amount of net operating loss carry-forwards realizable

for income tax purposes potentially could be further reduced under Section 382

of the Internal Revenue Code by a

significant offering and/or other sales of our capital securities.

Current bank capital rules also reduce the regulatory capital

benefits of deferred tax assets.

Our cost of funds may increase as a result

of general economic conditions, interest rates, inflation

and competitive

pressures.

The Federal Reserve shifted to a more accommodating monetary policy in

Summer 2019. During 2020, the Federal Reserve

reduced its federal funds target to 0-0.25% and has made significant

monthly purchases of U.S. Treasury and agency

mortgage-backed securities to help stimulate the economy,

market interest rates have increased, possibly as a result of

increased government borrowings to finance rounds of fiscal stimulus and

increased inflation expectations resulting from

such stimulus and expected increases in economic growth from fiscal and

monetary stimulus and COVID-19 vaccinations.

Our costs of funds may increase as a result of general economic conditions, increasing

interest rates and competitive

pressures, and potential inflation resulting from continued government deficit spending

and monetary policies, and

anticipated changes by the Federal Reserve to a less accommodative monetary policy.

Traditionally,

we have obtained

funds principally through local deposits and borrowings from other institutional

lenders, which we believe are a cheaper

and more stable source of funds than borrowings.

Increases in interest rates may cause consumers to shift their funds to

more interest bearing instruments and to increase the competition for and costs of

deposits.

If customers move money out

of bank deposits and into other investment assets or from transaction deposits to higher interest

bearing time deposits, we

could lose a relatively low cost source of funds, increasing our funding costs and reducing our

net interest income and net

income. Additionally, any

such loss of funds could result in lower loan originations and growth, which could

materially and

adversely affect our results of operations and financial condition.

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 depends upon net interest income, which is the difference

between interest earned on interest-earning

assets, such as loans and investments, and interest expense on interest-bearing liabilities,

such as deposits and borrowings.

Net interest income will be adversely affected if market interest

rates on the interest we pay on deposits and borrowings

increases faster than the interest earned on loans and investments.

Interest rates, and consequently our results of operations,

are affected by general economic conditions (national, international and

local) and fiscal and monetary policies, as well as

expectations of interest rate changes, fiscal and monetary policies and the shape of the

yield curve.

Our income is primarily

driven by the spread between these rates. As a result, a steeper yield curve,

meaning long-term interest rates are

significantly higher than short-term interest rates, would

provide the Bank with a better opportunity to increase net interest

income. Conversely, a

flattening yield curve could further pressure our net interest margin

as our cost of funds increases

relative to the spread we can earn on our assets. 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.

The

interest rate reductions by the Federal Reserve and the effects of the

COVID-19 pandemic have reduced market rates,

which adversely affected our net interest income and our results of operations.

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.

Lower interest rates typically increase mortgage originations, decrease MSR

values, and facilitate pandemic-related trends to single family houses.

Increases in market interest rates would tend to

decrease mortgage originations, increase MSR values and potentially increase

net interest spread depending upon the yield

curve and the magnitude and duration of interest rate increase.

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Liquidity risks could affect operations and jeopardize

our financial condition.

Liquidity is essential to our business.

An inability to raise funds through deposits, borrowings, proceeds from loan

repayments or sales proceeds from maturing loans and securities, and other sources

could have a negative effect on our

liquidity.

Our funding sources include federal funds purchased, securities sold under

repurchase agreements, core and non-

core deposits, and short- and long-term debt.

maintain a portfolio of securities that can be used as a source of liquidity.

We are

also members of the FHLB and the Federal Reserve Bank of Atlanta, where we can obtain advances

collateralized

with eligible assets.

There are other sources of liquidity available to the Company or the Bank

should they be needed,

including our ability to acquire additional

non-core deposits.

We may be able, depending

upon market conditions, to

otherwise borrow money or issue and sell debt and preferred or common securities in public

or private transactions.

Our

access to funding sources in amounts adequate to finance or capitalize our activities

on terms which are acceptable to us

could be impaired by factors that affect us specifically,

or the financial services industry or the economy in general.

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

markets or negative views and

expectations about the prospects for the financial services industry could

adversely affect us.

The COVID-19 pandemic generally has increased our deposits and at banks, generally,

while reducing the interest rates

earned on loans and securities.

Such excess liquidity and the resulting balance sheet growth requires capital support

and

may reduce returns on assets and equity.

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 the

preparation of our financial statements.

These changes can be difficult to predict and can materially impact

how we record

and report our financial condition and results of operations.

In some cases, we could be required to apply a new or revised

standard retroactively, resulting

in us restating prior period financial statements

The

FASB’s

guidance under ASU No.

2016-13 includes significant changes to the manner in which banks’ allowance

for loan losses will be effective for us

beginning January 1, 2023.

Instead of using historical losses, the CECL model is forward-looking with respect

to expected

losses over the life of loans and other instruments, and could materially affect our

results of operations and financial

condition, including the variability of our results of operations and our regulatory

capital, notwithstanding a three-year

phase-in of CECL for regulatory capital purposes.

We may need

to raise additional capital in the future, but that capital

may not be available when it is needed or on

favorable terms.

We anticipate that our current

capital resources will satisfy our capital requirements for the foreseeable

future under

currently effective rules.

We may,

however, need to raise additional capital to

support our growth or currently

unanticipated losses, or to meet the needs of our communities, resulting from failures or

cutbacks by our competitors.

Our

ability to raise additional capital, if needed, will depend, among other things,

on conditions in the capital markets at that

time, which are limited by events outside our control, and on our financial performance.

If we cannot raise additional

capital on acceptable terms when needed, our ability to further expand our

operations through internal growth and

acquisitions could be limited.

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

condition and business.

Banks are in the business of accepting certain risks.

Our executive officers and other members of management,

sales

intermediaries, investment professionals, product managers, and

other associates, make decisions and choices that involve

exposing us to risk. We endeavor,

in the design and implementation of our compensation programs and practices, to avoid

giving our associates incentives to take excessive risks; however,

associates may nonetheless take such risks.

Similarly,

although we employ controls and procedures designed to prevent misconduct,

to monitor associates’ business decisions and

prevent them from taking excessive risks, these controls and procedures

may not be effective. If our associates take

excessive risks, risks to our reputation, financial condition and business operations

could be materially and adversely

affected.

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Our ability to continue to pay dividends to shareholders

in the future is subject to our profitability,

capital, liquidity and

regulatory requirements

and these limitations may prevent or limit future

dividends.

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

to the Company by the Bank.

The ability of the Bank to pay dividends, as well as our ability to pay dividends to our shareholders,

will continue to be

subject to and limited by laws limiting dividend payments by the Bank, the results of operations

of our subsidiaries and our

need to maintain appropriate liquidity and capital at all levels of our business consistent

with regulatory requirements and

the needs of our businesses.

See “Supervision and Regulation”.

A limited trading market exists for our common shares,

which could result in price volatility.

Your

ability to sell or purchase common shares depends upon the existence of an active trading

market for our common

stock.

Although our common stock is quoted on the Nasdaq Global Market under the trading

symbol “AUBN,” our historic

trading volume has been limited historically.

As a result, you may be unable to sell or purchase shares of our common

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

Additionally, whether the purchase

or sales prices of our common stock

reflects a reasonable valuation of our common stock also is affected

by limited trading market, and thus the price you

receive for a thinly-traded stock such as our common stock, may not reflect its true or intrinsic

value.

The limited trading

market for our common stock may cause fluctuations in the market value of our common

stock to be exaggerated, leading

to price volatility in excess of that which would occur in a more active trading

market.

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 Sections

23A and 23B of the Federal Reserve Act and Federal Reserve Regulation

We depend upon the Bank’s

earnings and

dividends, which are limited by law and regulatory policies and actions, for cash to pay the

Company’s debt and corporate

obligations, and to pay dividends to our shareholders.

If the Bank’s ability to pay dividends to the Company

was

terminated or limited, the Company’s liquidity

and financial condition could be materially and adversely affected.

Legislative and regulatory changes

The Biden Administration is appointing new members to FDIC and Federal

Reserve Board, and has appointed an acting

Comptroller of the Currency and a new full time CFPB director.

This Administration and its appointees propose changes to

bank regulation and corporate tax changes that could have an adverse effect

on our results of operations and financial

conditions.

We are

subject to extensive regulation that could limit or restrict

our activities and adversely affect our earnings.

We and our subsidiaries are

regulated by several regulators, including the Federal Reserve, the

Alabama Superintendent,

the SEC and the FDIC.

Our success is affected by state and federal laws and regulations affecting

banks and bank holding

companies, and the securities markets, and our costs of compliance could adversely affect

our earnings.

Banking

regulations are primarily intended to protect depositors, and the FDIC Deposit Insurance

Fund (“DIF”), not shareholders.

The financial services industry also is subject to frequent legislative and regulatory

changes and proposed changes.

addition, the interpretations of regulations by regulators may change and statutes

may be enacted with retroactive impact.

From time to time, regulators raise issues during examinations of us which,

if not determined satisfactorily,

could have a

material adverse effect on us. Compliance with applicable

laws and regulations is time consuming and costly and may

affect our profitability. The

position of the President and his administration that took office

in January 2021 with respect to

regulation of banks and bank holding companies is not yet fully known, but

their views and actions could have a material

adverse effect on financial services regulation, generally.

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Litigation and regulatory actions could harm

our reputation and adversely affect our results

of operations and financial

condition.

A substantial legal liability or a significant regulatory action against us, as well as regulatory

inquiries or investigations,

could harm our reputation, result in material fines or penalties, result in significant

legal and other costs, divert management

resources away from our business, and otherwise have a material adverse

effect on our ability to expand on our existing

business, financial condition and results of operations. Even if we ultimately

prevail in litigation, regulatory investigation or

action, our ability to attract new customers, retain our current customers and recruit and

retain employees could be

materially and adversely affected. Regulatory inquiries and litigation

may also adversely affect the prices or volatility of

our securities specifically, or the

securities of our industry,

generally.

We are

required to maintain

capital to meet regulatory requirements,

and if we fail to maintain sufficient capital, our

financial condition, liquidity and results of operations

would be adversely affected.

We and the Bank

must meet regulatory capital requirements and maintain sufficient

liquidity, including liquidity

at the

Company, as well as the Bank.

If we fail to meet these capital and other regulatory requirements, including

more rigorous

requirements arising from our regulators’ implementation of Basel III,

our financial condition, liquidity and results of

operations would be materially and adversely affected.

Our failure to remain “well capitalized” and “well managed”,

including meeting the Basel III capital conservation buffers,

for bank regulatory purposes, could affect customer

confidence, our ability to grow, our

costs of funds and FDIC insurance, our ability to raise brokered deposits,

our ability to

pay dividends on our common stock and our ability to make acquisitions, and

we may no longer meet the requirements for

becoming a financial holding company.

These could also affect our ability to use discretionary bonuses

to attract and retain

quality personnel.

The Basel III Capital Rules include a minimum ratio of common equity

tier 1 capital, or CET1, to risk-

weighted assets of 4.5% and a capital conservation buffer of 2.5% of risk-weighted

assets.

See

“Supervision and

Regulation—Basel III Capital Rules.”

Although we currently have capital ratios that exceed all these minimum levels and

a strategic plan to maintain these levels, we or the Bank may be unable to continue

to satisfy the capital adequacy

requirements for various reasons, which may include:

•

losses and/or increases in the Bank’s credit

risk assets and expected losses resulting from the deterioration in the

creditworthiness of borrowers and the issuers of equity and debt securities;

•

difficulty in refinancing or issuing instruments upon redemption or

at maturity of such instruments to raise capital

under acceptable terms and conditions;

•

declines in the value of our securities portfolios;

•

revisions to the regulations or their application by our regulators that increase our capital requirements;

•

reduced total earnings on our assets will reduce our internal generation of capital

available to support our balance

sheet growth;

•

reductions in the value of our MSRs and DTAs;

and other adverse developments; and

•

unexpected growth and an inability to increase capital timely.

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

meeting the Basel III Capital Rule’s

conservation buffer, could adversely affect

customer confidence, and our:

•

ability to grow;

•

the costs of and availability of funds;

•

FDIC deposit insurance premiums;

•

ability to raise or replace brokered deposits;

•

ability to pay or increase dividends on our capital stock.

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•

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;

•

ability to make payments of principal and interest on our capital instruments; and

The Federal Reserve may require

us to commit capital resources

to support the Bank.

As a matter of policy, the Federal

Reserve expects a bank holding company to act as a source of financial and

managerial

strength to a subsidiary bank and to commit resources to support such subsidiary bank. The

Federal Reserve may require a

bank holding company to make capital injections into a troubled subsidiary bank.

In addition, the Dodd-Frank Act amended

the FDI Act to require that all companies that control a FDIC-insured depository institution

serve as a source of financial

strength to their depository institution subsidiaries. Under these requirements,

we could be required to provide financial

assistance to the Bank should it experience financial distress, even if further investment

was not otherwise warranted. See

“Supervision and Regulation.”

Our operations are subject to risk of loss from

unfavorable fiscal, monetary and political developments in the

U.S.

Our businesses and earnings are affected by the fiscal, monetary and other

policies and actions of various U.S.

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.

Additionally, any prolonged

government shutdown may inhibit

our ability to evaluate the economy,

generally, and affect

government workers who are not paid during such events, and

where the absence of government services and data could adversely affect consumer

and business sentiment, our local

economy and our customers and therefore our business.

Litigation and regulatory investigations are

increasingly common in our businesses and may result

in significant financial

losses and/or harm to our reputation.

We face risks of litigation

and regulatory investigations and actions in the ordinary course of operating

our businesses,

including the risk of class action lawsuits. Plaintiffs in class

action and other lawsuits against us may seek very large and/or

indeterminate amounts, including punitive and treble damages. Due to the vagaries of litigation,

the ultimate outcome of

litigation and the amount or range of potential loss at particular points in time may be difficult

to ascertain. We

do not have

any material pending litigation or regulatory matters affecting

us.

Failures to comply with the fair lending laws, CFPB regulati

ons or the Community Reinvestment Act, or CRA, could

adversely affect us.

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

Act, or ECOA, and the Fair

Housing Act, both of which prohibit discrimination based on race or

color, religion, national origin, sex and familial status

in any aspect of a consumer, commercial credit or

residential real estate transaction. The DOJ and the federal bank

regulatory agencies have issued an Interagency Policy Statement on Discrimination

in Lending have provided guidance to

financial institutions to evaluate whether discrimination exists and how the

agencies will respond to lending discrimination,

and what steps lenders might take to prevent discriminatory lending practices.

Failures to comply with ECOA, the Fair

Housing Act and other fair lending laws and regulations, including CFPB

regulations, could subject us to enforcement

actions or litigation, and could have a material adverse effect

on our business financial condition and results of operations.

Our Bank is also subject to the CRA and periodic CRA examinations. The CRA requires

us to serve our entire

communities, including low-

and moderate-income neighborhoods. Our CRA ratings could

be adversely affected by actual

or alleged violations of the fair lending or consumer financial protection

laws. Even though we have maintained an

“satisfactory” CRA rating since 2000, we cannot predict our future CRA ratings.

Violations of fair lending laws or if our

CRA rating falls to less than “satisfactory” could adversely affect

our business, including expansion through branching or

acquisitions.

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COVID-19 Risks

The COVID-19 pandemic may continue to adversely affect our business, financial

condition and results of operations. The

ultimate effects of the pandemic on us will depend on the severity,

scope and duration of the pandemic, its cumulative

economic effects, governmental actions in response

to the pandemic, and the restoration of a more

normal economy.

The COVID-19 national health emergency has significantly disrupted

the United States and international economies and

financial markets. We

expect that the COVID-19 pandemic and its effects

will continue to adversely affect our business,

financial condition and results of operations in future periods. The spread of COVID-19

has caused illness, quarantines,

cancellation of events and travel, business and school shutdowns, reductions in business

activity and financial transactions,

supply chain interruptions and overall economic and financial market instability.

The State of Alabama and many other

states have taken preventative and protective actions, such as imposing a statewide

mask mandate, restrictions on travel,

business operations, public gatherings, social distancing, advising or requiring

individuals to limit or forego their time

outside of their homes, and ordering temporary closures of non-essential businesses.

Though various of these measures

have been relaxed or eliminated, the pandemic has moved in disruptive and unpredictable

waves.

The travel, hospitality and food and beverage industries, restaurants, retailers and auto

manufacturers, and their suppliers

have been severely affected. A significant number of layoffs,

furloughs of employees, as well as remote work have

occurred in these and other industries, including government offices, schools and

universities. Auburn University held

virtual classes only from March 16, 2020 through the summer session.

The auto industry’s production

and sales continue to

be adversely affected

by supply chain disruptions.

Hyundai and Kia are major direct and indirect employers in our area.

The ultimate effects of the COVID-19 pandemic on the economy,

generally, our markets, and on us cannot

be predicted.

The timing and effects of the COVID-19 pandemic on our business, results

of operations and financial condition may

include, among various other consequences, the following. These effects

depend on the severity, scope

and duration of the

pandemic, its cumulative economic effects, and the effectiveness

of healthcare, business and governmental actions

addressing the pandemic’s effects,

including vaccinations.

•

Employees’ health could be adversely affected, necessitating their recovery

away from work;

•

Unavailability of key personnel necessary to conduct our business activities;

•

Our operating effectiveness may be reduced as our employees

work from home or suffer from the COVID-19

virus;

•

Shelter in place, remote work or other restrictions and interruptions of our business and contact

with our

customers;

•

Sustained closures of our branch lobbies or the offices of our customers;

•

Declines in demand for loans and other banking services and products, and reduced usage

and interchange fees

on our payment cards;

•

Continuing large scale fiscal and monetary stimulus actions

may stabilize the economy, but

may increase

economic and market risks, including valuation “bubbles,” volatility in various assets and

inflation;

•

Inflation and increases in interest rates may result from fiscal stimulus and

monetary stimulus, and the Federal

Reserve has indicated it is willing to permit inflation to run moderately above its 2% target

for some time, but is

considering raising interest rates and reducing its securities holdings as a result of inflation

that is substantially

higher than the Federal

Reserve’s target range;

•

Increased savings and debt reduction by consumers could reduce demand for credit

and our earning assets;

•

Significant volatility in United States financial markets and our investment securities

portfolio, including credit

concerns in municipal securities;

•

Declines in the credit quality of our loan portfolio, owing to the effects

of the COVID-19 pandemic in the

markets we serve, leading to increased provisions for loan losses and increases in our allowance

for possible

credit losses;

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•

Declines in the value of collateral for loans, including real estate collateral, especially in industries

such as

travel, hospitality, restaurants

and retailers;

•

Declines in the net worth and liquidity of borrowers, impairing their ability to pay timely their

loan obligations

to us;

•

Generally low market interest rates that reduce our net interest income and our profitability;

•

Loan deferrals and loan modifications, and mortgage foreclosure

moratoria, including those mandated by law,

which are encouraged by our regulators, may increase our expense and risks of collectability,

reduce our cash

flows and liquidity and adversely affect our results of operations and

financial condition;

•

The end of temporary regulatory accounting and capital relief for banks regarding the effects

of the COVID-19

pandemic, including loan deferrals and modifications, could increase our TDRs and require

additions to our

allowance for loan losses, which may adversely affect our income,

financial condition and capital;

•

Our waiver of various fees and service charges to support our customers

and communities will adversely affect

our results of operation and our liquidity and financial position;

•

The COVID-19 pandemic may change customer financial behaviors and

payment practices. Electronic banking

could become more popular with less customers doing business at our offices;

•

Certain of our assets, including loans and securities, may become impaired,

which would adversely affect our

results of operation and financial condition and mortgage loan foreclosure

moratoria may limit our ability to

timely act to protect our interests in the loan collateral;

•

Reductions in income or losses will adversely affect our capital and growth

of capital, including our capital for

bank regulatory purposes;

•

Losses or reductions in net income may adversely affect the growth or

amount of dividends we can pay on our

common stock;

•

The effects of government fiscal and monetary policies, including

changes in such policies, or the effects of

COVID-19 relief programs are discontinued, on the economy and financial stability,

generally, and on our

business, results of operations and financial condition cannot be predicted;

•

Cybercriminals may increase their attempts to compromise business and consumer

emails, including an increase

in phishing attempts, and fraudulent vendors or other parties may view the pandemic

as an opportunity to prey

upon consumers and businesses during this time.

•

The restoration of financial stability and economic growth may depend

on the health care system developing and

deploying COVID-19 testing and contact tracing, and delivery of COVID-19 vaccines,

which promote consumer

and employee health and confidence in the economy.

These factors, together or in combination with other events or occurrences that are unknown

or anticipated, may materially

and adversely affect our business, financial condition and results of operations.

Our stock price may reflect securities market conditions

The ongoing COVID-19

pandemic has resulted in substantial securities market volatility,

especially for bank stocks and

has, and may continue to, adversely affect the market of our common

stock. The spread, intensification and duration of

COVID-19 pandemic, as well as the effectiveness of governmental,

fiscal and monetary policies, and regulatory responses

to the pandemic, further affect the financial markets and the market prices

for securities generally, and the

market prices for

bank stocks, including our common stock.

The stock market’s gains due to a concentration

of high growth companies has

been adversely affected by inflation and expectation of higher interest rates and

the Russia invasion of Ukraine in February

2022.

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The COVID-19 global pandemic could result in

deterioration of asset quality and an increase in credit

losses.

Many businesses have had, and may continue to have lower revenues and cash

flows and many consumers will have lower

income as a result of COVID-19. These could result in an inability to repay loans timely in

full, reduce our asset quality and

reduce our deposits. Loan modifications and payment deferrals may also increase

our credit risks, especially when

temporary regulatory relief for these actions expires. Our business, results of operations, liquidity

and financial condition

could be adversely affected.

As a participating lender in the PPP,

the Bank is subject to additional risks of litigation from the

Bank’s

customers or other

parties regarding

the Bank’s

processing of loans for the PPP and risks that the SBA may

not fund some or all PPP loan

guaranties.

The CARES Act, Paycheck Protection Program and Healthcare Enhancement

Act and Economic Aid Act appropriated

more than $1 trillion in funding for PPP loans administered through by the SBA and

the U.S. Department of the Treasury.

Under the PPP,

eligible small businesses and other entities and individuals can apply for loans from existing

SBA lenders

and other approved PPP lenders, subject to numerous limitations and eligibility

criteria. The Bank is participating as a

lender in the PPP and made a total of $56.7 million of PPP loans in 2020 and 2021.

The PPP loans charge 1% interest

annually.

Forgiveness of these loans has been slow,

and PPP loans earn less than market rates.

Since the opening of the

PPP,

various banks have been subject to litigation regarding the process and procedures used in processing applications

for

the PPP,

and greater governmental attention is directed at preventing fraud.

We may be exposed

to similar litigation risks,

from both customers and non-customers that approached the Bank regarding PPP

loans we extended. If any such litigation

is filed against the Bank and is not resolved favorably to the Bank, it may result in financial

liability or adversely affect our

reputation. Litigation can be costly, regardless

of outcome. Any financial liability,

litigation costs or reputational damage

caused by PPP related litigation could have a material adverse effect on our

business, financial condition and results of

operations.

The Bank also has credit risk on PPP loans, if the SBA determines deficiencies

in the manner in which PPP loans were

originated, funded or serviced by the Bank, such as an issue with the eligibility of a borrower to

receive a PPP loan, or

obtain forgiveness of a PPP properly,

including those related to the ambiguities in the laws, rules and guidance

regarding

the PPP’s operation. In the event of a loss resulting

from a default on a PPP loan and a determination by the SBA that there

were one or more deficiencies in the manner in which the PPP loan was originated,

funded, or serviced by the Company,

the SBA may deny its liability under the PPP loan guaranty,

reduce the amount of the guaranty, or,

if it has already paid

under the guaranty, seek recovery of any

loss related to the deficiency from the Company.

Similar issues may also result in

the denial of forgiveness of PPP loans, which could expose us to potential borrower

bankruptcies and potential losses and

additional costs.

At December 31, 2021 we had $8.1 million PPP loans outstanding and had not realized

any losses on such loans.

ITEM 1B. UNRESOLVED

STAFF COMMENTS

None.

ITEM 2. DESCRIPTION OF PROPERTY

The Bank conducts its business from its main office and seven full-service

branches.

The Bank also operates loan

production offices in Auburn and Phenix City,

Alabama.

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

over 5 acres and includes the Bank's

temporary main office, operations center,

drive-through facility,

and parking deck.

The operations center, built as a theater

in 1968, and remodeled by the Bank after purchasing it in 1985, has approximately 23,000

square feet of space. All of the

Bank’s loan servicing, data processing activities,

and other operations, are located in the operations building.

Currently,

the

Bank’s temporary main office

is located in the operations center as the Bank completes Phase I of its main campus

redevelopment plan.

The temporary main office branch offers the full line of the Bank’s

services and has one ATM.

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.

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Phase I of the redevelopment plan includes the construction of a new headquarters building,

the AuburnBank Center, and a

parking deck.

Construction activities for Phase I commenced during the second half of 2020

and the parking deck was

completed in April of 2021.

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

hourly, monthly,

and special event rates, and is expected to provide for future parking needs on the Bank’s

main campus,

including the new headquarters building.

The new headquarters building will have approximately 90,000

square feet of

space and is expected to be complete in the second quarter of 2022.

Upon completion of Phase I, the Bank’s main office,

Auburn loan production office, and all of its back-office operations

will be relocated to the new headquarters building.

The

Bank expects to lease approximately 46,000 square feet of office space

and approximately 5,000 square feet of retail space

in the new headquarters building to third party tenants.

In January 2019, the Bank purchased a parcel that adjoins the operations center in order

to improve ingress and egress to

the Bank’s main campus.

The building improvements currently on this adjoining parcel, as

well as the operations building,

will be demolished under Phase II of the Bank's campus redevelopment plan.

In February 2022, the Company entered into

an agreement, subject to a 180 day inspection period and customary closing conditions,

to sell this combined parcel of

approximately 0.85 acres to a hotel developer.

As part of the agreement, the Bank will negotiate a long-term lease with the

hotel developer for 100 to 150 parking spaces in the Bank’s

parking deck.

Upon closing, the Company currently expects

this sale to be accretive to 2022 earnings by approximately $0.70 per share.

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 Bank’s 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 2021,

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.

This

branch offers parking for approximately 11

vehicles, including a handicapped ramp.

In November 2002, the Bank opened a loan production office

in Phenix City, Alabama, about 35

miles south of Auburn,

Alabama. In November 2020,

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 leased office

space for a loan production office in Valley,

Alabama.

The loan production office was originally opened in September 2004.

In February 2015, the Bank relocated its Auburn Kroger branch to a new location within the

Corner Village Shopping

Center, in Auburn, Alabama. In February 2015,

the Bank entered into a new lease agreement for five years with options for

two 5-year extensions. In February 2020, the Bank exercised its option to renew the lease

for another five years. The Bank

leases approximately 1,500 square feet of space for the Corner Village

branch. Prior to relocation, the Bank’s

Auburn

Kroger branch was located in the Kroger supermarket in the same shopping center.

The Auburn Kroger branch was

originally opened in August 1988. The Corner Village

branch offers the full line of the Bank’s

deposit and other services

including an ATM,

except safe deposit boxes.

In September 2015, the Bank relocated its Auburn Wal

-Mart Supercenter branch to a new location the Bank purchased in

December 2014 at the intersection of S. Donahue Avenue

and E. University Drive in Auburn, Alabama.

The South

Donahue branch, built in 2015, has approximately 3,600 square feet of space.

Prior to relocation, the Bank’s Auburn

Wal-

Mart Supercenter branch was located inside the Wal

-Mart shopping center on the south side of Auburn, Alabama.

The

Auburn Wal-Mart Supercenter

branch was originally opened in September 2000. 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.

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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 September 2018, the Bank opened a loan production office on East Samford

Avenue in Auburn,

Alabama.

The location

has approximately 2,500 square feet of space and is leased through 2028.

The loan production office was previously

located in the Center on the Bank’s

main campus. This location offers parking for approximately

16 vehicles.

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

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.

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 7, 2022,

there were approximately 3,516,971 shares of the Company’s

Common Stock issued and outstanding, which were held by

approximately 369 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

2021

First Quarter

48.00

37.55

0.26

Second Quarter

38.90

34.50

0.26

Third Quarter

35.36

33.25

0.26

Fourth Quarter

34.79

31.32

0.26

2020

First Quarter

59.99

24.11

0.255

Second Quarter

63.40

36.81

0.255

Third Quarter

56.80

26.26

0.255

Fourth Quarter

43.00

36.75

0.255

(1)

The price information represents actual transactions.

The Company has paid cash dividends on its capital stock since 1985. Prior to this time, 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 as may be declared by the Company’s

Board of Directors. The amount and frequency of cash

dividends will be determined in the judgment of the Board based upon a number of

factors, including the Company’s

earnings, financial condition, capital requirements and other relevant factors.

The Board currently intends to continue its

present dividend policies.

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Federal Reserve policy could restrict future dividends on our Common Stock, depending

on our earnings and capital

position and likely needs. See “Supervision and Regulation – Payment of Dividends”

and “Management’s Discussion

and

Analysis of Financial Condition and Results of Operations – Capital Adequacy”.

The amount of dividends payable by the Bank is limited by law and regulation.

The need to maintain adequate capital in

the Bank also limits dividends that may be paid to the Company.

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Performance Graph

The following performance graph compares the cumulative, total return on the

Company’s Common Stock

from

December 31, 2016 to December 31, 2021, with that of the Nasdaq Composite Index and

SNL Southeast Bank Index

(assuming a $100 investment on December 31, 2016). Cumulative total return represents

the change in stock price and the

amount of dividends received over the indicated period, assuming the reinvestment of

dividends.

Period Ending

Index

12/31/2016

12/31/2017

12/31/2018

12/31/2019

12/31/2020

12/31/2021

Auburn National Bancorporation, Inc.

100.00

127.56

106.32

182.85

146.96

117.06

NASDAQ Composite Index

100.00

129.64

125.96

172.18

249.51

304.85

S&P U.S. BMI Banks - Southeast Region Index

100.00

123.70

102.20

144.05

129.15

184.47

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Issuer Purchases of Equity Securities

Period

Total Number of

Shares Purchased

Average Price Paid

per Share

Total Number of

Shares Purchased as

Part of Publicly

Announced Plans or

Programs

The Approximate

Dollar Value

of Shares

that May Yet

Be Under

the Plans or

Programs(1)

October 1 – October 31, 2021

1,684

33.85

1,684

3,623,268

November 1 – November 30, 2021

7,169

33.85

7,169

3,380,597

December 1 – December 31, 2021

––

3,380,597

Total

8,853

33.85

8,853

3,380,597

(1) On March 9, 2021 the Company adopted a $5 million stock repurchase program that became effective April 1, 2021.

Securities Authorized for Issuance Under Equity Compensation Plans

See the information included under Part III, Item 12, which is incorporated

in response to this item by reference.

Unregistered Sale of Equity Securities

Not applicable.

ITEM 6.

SELECTED FINANCIAL DATA

See Table 2 “Selected Financial

Data” and general discussion in Item 7, “Management’s

Discussion and Analysis of

Financial Condition and Results of Operations”.

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,

2021 and 2020 and our results of operations for

the years ended December 31, 2021 and 2020. 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”.

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 loan production offices in Auburn and

Phenix City, Alabama.

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Summary of Results of Operations

Year ended December 31

(Dollars in thousands, except per share data)

2021

2020

Net interest income (a)

24,460

24,830

Less: tax-equivalent adjustment

470

492

Net interest income (GAAP)

23,990

24,338

Noninterest income

4,288

5,375

Total revenue

28,278

29,713

Provision for loan losses

(600)

1,100

Noninterest expense

19,433

19,554

Income tax expense

1,406

1,605

Net earnings

8,039

7,454

Basic and diluted net earnings per share

2.27

2.09

(a) Tax-equivalent.

See "Table 1 - Explanation of Non-GAAP Financial Measures".

Financial Summary

The Company’s net earnings were $8.0

million for the full year 2021, compared to $7.5 million for the full year 2020.

Basic and diluted net earnings per share were $2.27 per share for the full year 2021,

compared to $2.09 per share for the full

year 2020.

Net interest income (tax-equivalent) was $24.5

million in 2021, a 1% decrease compared to $24.8 million in 2020. This

decrease was primarily due to net interest margin compression

partially offset by balance sheet growth.

Net interest

margin (tax-equivalent) decreased to 2.55% in 2021,

compared to 2.92% in 2020, primarily due to the lower interest rate

environment and changes in our asset mix resulting from the significant increase

in deposits from government stimulus and

relief programs and customers’ increased savings.

At December 31, 2021, the Company’s allowance

for loan losses was $4.9 million, or 1.08% of total loans, compared to

$5.6 million, or 1.22%

of total loans, at December 31, 2020.

Excluding

Paycheck Protection Program (“PPP”) loans, which

are guaranteed by the SBA,

the Company’s allowance for loan losses

was 1.10% and 1.27% of total loans at December 31,

2021 and 2020, respectively

The Company recorded a negative provision for loan losses of $0.6

million in 2021 compared

to a charge of $1.1 million during 2020.

The negative provision for loan losses was primarily related to improvements in

economic conditions in our primary market area, and related improvements in our

asset quality.

The provision for loan

losses is based upon various estimates and judgements, including the absolute level

of loans, loan growth, credit quality and

the amount of net charge-offs.

Net charge-offs as a percent of average loans were 0.02% in 2021

compared to net

recoveries as a percent of average loans of 0.03% in 2020.

Noninterest income was $4.3 million in 2021 compared to $5.4

million in 2020.

The decrease was primarily due to a $0.8

million decrease in mortgage lending income in 2021 as refinance activity declined

in our primary market area and a $0.3

million non-taxable death benefit from bank-owned life insurance received

in 2020.

Noninterest expense was $19.4

million in 2021 compared to $19.6

million in 2020. The decrease was primarily due to a

reduction of $0.8

million in various expenses related to the redevelopment of the Company’s

headquarters in downtown

Auburn.

This decrease was mostly offset by increases in salaries and benefits expe

nse of $0.4 million and a $0.2 million

increase in FDIC and other regulatory assessments during 2021.

Income tax expense was $1.4

million in 2021 and $1.6 million in 2020 reflecting an effective tax rate of 14.89

and

17.72%, respectively.

This decrease was primarily due to an income tax benefit related to a New Markets Tax

Credit

investment funded in the fourth quarter of 2021.

The Company’s effective income

tax rate is principally impacted by tax-

exempt earnings from the Company’s investments

in municipal securities, bank-owned life insurance, and New Markets

Tax Credits.

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The Company paid cash dividends of $1.04

per share in 2021, an increase of 2% from 2020. At December 31, 2021, 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 17.06%,

a tier 1 leverage ratio of 9.35% and common equity tier

1 (“CET1”) of 16.23% at December 31, 2021.

COVID-19 Impact Assessment

The COVID-19 pandemic has occurred in waves of different

variants since the first quarter of 2020.

Vaccines

to protect

against and/or reduce the severity of COVID-19 were widely introduced at the beginning

of 2021.

At times, the pandemic

has severely restricted the level of economic activity in our markets. In response to the COVID

-19 pandemic, the State of

Alabama, and most other states, have taken preventative or protective actions to prevent the

spread of the virus, including

imposing restrictions on travel and business operations and a statewide mask mandate,

advising or requiring individuals to

limit or forego their time outside of their homes, limitations on gathering of people and social distancing,

and causing

temporary closures of businesses that have been deemed to be non-essential. Though certain

of these measures have been

relaxed or eliminated, especially as vaccination levels increased, such

measures could be reestablished in cases of new

waves, especially a wave of a COVID-19 variant that is more resistant

to existing vaccines.

COVID-19 has significantly affected local state, national and global

health and economic activity and its future effects are

uncertain and will depend on various factors, including, among others, the duration

and scope of the pandemic, especially

new variants of the virus, effective vaccines and drug treatments, together

with governmental, regulatory and private sector

responses. COVID-19 has had continuing significant effects

on the economy, financial

markets and our employees,

customers and vendors. Our business, financial condition and results of operations

��

generally rely upon the ability of our

borrowers to make deposits and repay their loans, the value of collateral underlying our

secured loans, market value,

stability and liquidity and demand for loans and other products and services we offer,

all of which are affected by the

pandemic.

We have implemented

a number of procedures in response to the pandemic to support the safety and well-being of our

employees, customers and shareholders.

•

We believe our business continuity

plan has worked to provide essential banking services to our communities and

customers, while protecting our employees’ health.

As part of our efforts to exercise social distancing in

accordance with the guidelines of the Centers for Disease Control and the Governor

of the State of Alabama,

starting March 23, 2020, we limited branch lobby service to appointment only while continuing

to operate our

branch drive-thru facilities and ATMs.

As permitted by state public health guidelines, on June 1, 2020, we re-

opened some of our branch lobbies.

In 2021, we opened our remaining branch lobbies.

We continue to provide

services through our online and other electronic channels.

In addition, we maintain remote work access to help

employees stay at home while providing continuity of service.

•

We are focused on servicing

the financial needs of our commercial and consumer clients with extensions

and

deferrals to loan customers effected by COVID-19, provided

such customers were not more than 30 days past due

at the time of the request; and

•

were an active PPP lender. PPP loans were forgivable,

in whole or in part, if the proceeds are used for payroll

and other permitted purposes in accordance with the requirements of the PPP.

These loans carry a fixed rate of

1.00% and a term of two years (loans made before June 5, 2020) or five years (loans

made on or after June 5,

2020), if not forgiven, in whole or in part.

Payments are deferred until either the date on which the Small Business

Administration (“SBA”) remits the amount of forgiveness proceeds

to the lender or the date that is 10 months after

the last day of the covered period if the borrower does not apply for forgiveness

within that 10-month period.

believe these loans and our participation in the program helped our customers and the communities

we serve.

COVID-19 has also had various economic effects, generally.

These include supply chain disruptions and manufacturing

delays, shortages of certain goods and services, reduced consumer expenditure on

hospitality and travel, and migration from

larger urban centers to less populated areas and remote work.

The demand for single family housing has exceeded existing

supplies.

When coupled with construction delays attributable to supply chain disruptions

and worker shortages, these

factors have caused housing prices and apartment rents to increase, generally.

Stimulative monetary and fiscal policy,

along with shortages of certain goods and services, and rising petroleum and food prices

have led to the highest inflation in

decades.

Although fiscal stimulus remains under consideration by the President and Congress,

the Federal Reserve is

considering increasing its target interest rates and reducing its holding of

securities to stem inflation.

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A summary of PPP loans extended during 2020 follows:

(Dollars in thousands)

# of SBA

Approved

Mix

$ of SBA

Approved

Mix

SBA Tier:

$2 million to $10 million

—

$350,000 to less than $2 million

14,691

Up to $350,000

400

21,784

Total

423

100

36,475

100

We collected

approximately $1.5 million in fees related to our PPP loans during 2020.

Through December 31, 2021, we

have recognized all of these fees, net of related costs.

As of December 31, 2021, we had received payments and

forgiveness on all PPP loans extended during 2020.

On December 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits,

and Venues

Act (the “Economic Aid

Act”) was signed into law. The

Economic Aid Act provides a second $900 billion stimulus package, including

$325 billion

in additional PPP loans.

The Economic Aid Act also permits the collection of a higher amount of PPP

loan fees by

participating banks.

A summary of PPP loans extended during 2021 under the Economic Aid

Act follows:

(Dollars in thousands)

# of SBA

Approved

Mix

$ of SBA

Approved

Mix

SBA Tier:

$2 million to $10 million

—

$350,000 to less than $2 million

6,494

Up to $350,000

242

13,757

Total

254

100

20,251

100

We collected

approximately $1.0 million in fees related to PPP loans under the Economic Aid Act.

Through December 31,

2021, we have recognized $0.7 million of these fees, net of related costs.

As of December 31, 2021, we have received

payments and forgiveness on 116

PPP loans under the Economic Aid Act, totaling $12.1 million.

The outstanding balance

for the remaining 138 PPP loans under the Economic Aid Act

was approximately $8.1 million at December 31, 2021.

We continue to closely

monitor this pandemic, and are working to continue our services during the pandemic

and to address

developments as those occur.

Our results of operations for year ended December 31, 2021, and our financial condition

that date reflect only the ongoing effects of the pandemic, and

may not be indicative of future results or financial

conditions, including possible changes in monetary or fiscal stimulus, and

the possible effects of the expiration or extension

of temporary accounting and bank regulatory relief measures in response to the

COVID-19 pandemic.

As of December 31, 2021,

all of our capital ratios were in excess of all regulatory requirements to be well capitalized.

The

effects of the COVID-19 pandemic on our borrowers could result in adverse changes

to credit quality and our regulatory

capital ratios.

We continue to

closely monitor this pandemic, and are working to continue our services during the pandemic

and to address developments as those occur.

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 loan losses, our

assessment of other-than-temporary impairment, recurring and

non-recurring fair value measurements, the valuation of

other real estate owned, and the valuation of deferred tax assets, were critical to the determination

of our financial position

and results of operations. Other policies also require subjective judgment and assumptions

and may accordingly impact our

financial position and results of operations.

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Allowance for Loan Losses

The Company assesses the adequacy of its allowance for loan losses prior

to the end of each calendar quarter. The level of

the allowance is based upon management’s

evaluation of the loan portfolio, past loan loss experience, current asset quality

trends, known and inherent risks in the portfolio, adverse situations that may affect

a borrower’s ability to repay (including

the timing of future payment), the estimated value of any underlying collateral,

composition of the loan portfolio, economic

conditions, industry and peer bank loan loss rates and other pertinent factors, including regulatory

recommendations. This

evaluation is inherently subjective as it requires material estimates including the

amounts and timing of future cash flows

expected to be received on impaired loans that may be susceptible to significant change. Loans are

charged off, in whole or

in part, when management believes that the full collectability of the loan is unlikely.

A loan may be partially charged-off

after a “confirming event” has occurred which serves to validate that full repayment pursuant

to the terms of the loan is

unlikely.

The Company deems loans impaired when, based on current information and events, it is

probable that the Company will

be unable to collect all amounts due according to the contractual terms of the loan agreement.

Collection of all amounts due

according to the contractual terms means that both the interest and principal payments of a

loan will be collected as

scheduled in the loan agreement.

An impairment allowance is recognized if the fair value of the loan is less than the recorded

investment in the loan. The

impairment is recognized through the allowance. Loans that are impaired are

recorded at the present value of expected

future cash flows discounted at the loan’s effective

interest rate, or if the loan is collateral dependent, impairment

measurement is based on the fair value of the collateral, less estimated disposal costs.

The level of allowance maintained is believed by management to be adequate

to absorb probable losses inherent in the

portfolio at the balance sheet date. The allowance is increased by provisions charged

to expense and decreased by charge-

offs, net of recoveries of amounts previously charged-off.

In assessing the adequacy of the allowance, the Company also considers the results of its

ongoing internal, independent

loan review process. The Company’s loan

review process assists in determining whether there are loans in the portfolio

whose credit quality has weakened over time and evaluating the risk characteristics of the

entire loan portfolio. The

Company’s loan review process includes the judgment

of management, the input from our independent loan reviewers, and

reviews that may have been conducted by bank regulatory agencies as part of their examination

process. The Company

incorporates loan review results in the determination of whether or not it is probable

that it will be able to collect all

amounts due according to the contractual terms of a loan.

As part of the Company’s quarterly assessment

of the allowance, management divides the loan portfolio into five segments:

commercial and industrial, construction and land development, commercial real estate, residential

real estate, and consumer

installment loans. The Company

analyzes each segment and estimates an allowance allocation for each loan

segment.

The allocation of the allowance for loan losses begins with a process of estimating the

probable losses inherent for these

types of loans. The estimates for these loans are established by category and based

on the Company’s internal system of

credit risk ratings and historical loss data. The estimated loan loss allocation rate for the Company’s

internal system of

credit risk grades is based on its experience with similarly graded loans. For

loan segments where the Company believes it

does not have sufficient historical loss data, the Company may

make adjustments based, in part, on loss rates of peer bank

groups. At December 31, 2021 and 2020, and for the years then ended, the Company adjusted

its historical loss rates for the

commercial real estate portfolio segment based, in part, on loss rates of peer bank groups.

The estimated loan loss allocation for all five loan portfolio segments is then adjusted for management’s

estimate of

probable losses for several “qualitative and environmental” factors.

The allocation for qualitative and environmental

factors is particularly subjective and does not lend itself to exact mathematical calculation.

This amount represents

estimated probable inherent credit losses which exist, but have not yet been identified, as of

the balance sheet date, and are

based upon quarterly trend assessments in delinquent and nonaccrual loans, credit

concentration changes, prevailing

economic conditions, changes in lending personnel experience, changes in lending

policies or procedures and other

influencing factors.

These qualitative and environmental factors are considered for each of the five loan segments

and the

allowance allocation, as determined by the processes noted above, is increased or

decreased based on the incremental

assessment of these factors.

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The Company regularly re-evaluates its practices in determining the allowance

for loan losses. Since the fourth quarter of

2016, the Company has increased its look-back period each quarter to incorporate

the effects of at least one economic

downturn in its loss history. The Company believes

the extension of its look-back period is appropriate due to the risks

inherent in the loan portfolio. Absent this extension, the early cycle periods in

which the Company experienced significant

losses would be excluded from the determination of the allowance for loan losses and its balance

would decrease. For the

year ended December 31, 2021, the Company increased its look-back period to

51 quarters to continue to include losses

incurred by the Company beginning with the first quarter of 2009. The Company

will likely continue to increase its look-

back period to incorporate the effects of at least one economic downturn in

its loss history. During 2020,

the Company

adjusted certain qualitative and economic factors related to changes in economic conditions

driven by the impact of the

COVID-19 pandemic and resulting adverse economic conditions, including

higher unemployment in our primary market

area.

During 2021, the Company adjusted certain qualitative and economic factors to reflect

improvements in economic

conditions in our primary market area.

Further adjustments may be made in the future as a result of the ongoing COVID-19

pandemic.

Assessment for Other-Than-Temporary

Impairment of Securities

On a quarterly basis, management makes an assessment to determine

whether there have been events or economic

circumstances to indicate that a security on which there is an unrealized loss is other-than-temporarily

impaired.

For debt securities with an unrealized loss, an other-than-temporary

impairment write-down is triggered when (1) the

Company has the intent to sell a debt security,

(2) it is more likely than not that the Company will be required to sell the

debt security before recovery of its amortized cost basis, or (3) the Company does not expect

to recover the entire amortized

cost basis of the debt security.

If the Company has the intent to sell a debt security or if it is more likely than not that it

will

be required to sell the debt security before recovery,

the other-than-temporary write-down is equal to the entire difference

between the debt security’s amortized cost

and its fair value.

If the Company does not intend to sell the security or it is not

more likely than not that it will be required to sell the security before recovery,

the other-than-temporary impairment write-

down is separated into the amount that is credit related (credit loss component) and the amount due

to all other factors.

The

credit loss component is recognized in earnings and is the difference between

the security’s amortized cost basis and

the

present value of its expected future cash flows.

The remaining difference between the security’s

fair value and the present

value of future expected cash flows is due to factors that are not credit related and is recognized in other comprehensive

income, net of applicable taxes.

The Company is required to own certain stock as a condition of membership, such as

Federal Home Loan Bank (“FHLB”)

and Federal Reserve Bank (“FRB”).

These non-marketable 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.

The Company records these non-marketable equity securities as a component

of other

assets, which are periodically evaluated for impairment. Management considers

these non-marketable 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.

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 14, Fair Value,

of the consolidated financial statements that accompany this report.

Fair values are based on active market prices of identical assets or liabilities when available.

Comparable assets or

liabilities or a composite of comparable assets in active markets are used when identical assets

or liabilities do not have

readily available active market pricing.

However, some of the Company’s

assets or liabilities lack an available or

comparable trading market characterized by frequent transactions between

willing buyers and sellers. In these cases, fair

value is estimated using pricing models that use discounted cash flows and

other pricing techniques. Pricing models and

their underlying assumptions are based upon management’s

best estimates for appropriate discount rates, default rates,

prepayments, market volatility and other factors, taking into account current observable

market data and experience.

These assumptions may have a significant effect on the reported

fair values of assets and liabilities and the related income

and expense. As such, the use of different models and assumptions, as

well as changes in market conditions, could result in

materially different net earnings and retained earnings results.

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Other Real Estate Owned

Other real estate owned (“OREO”), consists of properties obtained through foreclosure or

in satisfaction of loans and is

reported at the lower of cost or fair value, less estimated costs to sell at the date acquired with any loss

recognized as a

charge-off through the allowance for loan losses. Additional

OREO losses for subsequent valuation adjustments are

determined on a specific property basis and are included as a component of other noninterest

expense along with holding

costs. Any gains or losses on disposal of OREO are also reflected in noninterest expense.

Significant judgments and

complex estimates are required in estimating the fair value of OREO, and the period of time

within which such estimates

can be considered current is significantly shortened during periods of

market volatility. As a result, the net proceeds

realized from sales transactions could differ significantly from

appraisals, comparable sales, and other estimates used to

determine the fair value of OREO.

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. 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, 2021. The amount

of the deferred tax assets considered realizable, however,

could be reduced if estimates of future taxable income are

reduced.

Average Balance

Sheet and Interest Rates

Year ended December 31

2021

2020

Average

Yield/

Average

Yield/

(Dollars in thousands)

Balance

Rate

Balance

Rate

Loans and loans held for sale

459,712

4.45%

465,378

4.74%

Securities - taxable

320,766

1.28%

234,420

1.68%

Securities - tax-exempt (a)

62,736

3.57%

63,029

3.72%

Total securities

383,502

1.66%

297,449

2.11%

Federal funds sold

38,659

0.15%

30,977

0.41%

Interest bearing bank deposits

77,220

0.13%

56,104

0.41%

Total interest-earning assets

959,093

2.81%

849,908

3.38%

Deposits:

NOW

178,197

0.12%

154,431

0.34%

Savings and money market

296,708

0.22%

242,485

0.44%

Certificates of deposits

159,111

1.03%

165,120

1.36%

Total interest-bearing deposits

634,016

0.39%

562,036

0.68%

Short-term borrowings

3,349

0.51%

1,864

0.48%

Total interest-bearing liabilities

637,365

0.39%

563,900

0.68%

Net interest income and margin (a)

24,460

2.55%

24,830

2.92%

(a) Tax-equivalent.

See "Table 1 - Explanation of Non-GAAP

Financial Measures".

RESULTS

OF OPERATIONS

Net Interest Income and Margin

Net interest income (tax-equivalent) was $24.5 million in 2021, compared

to $24.8 million in 2020.

This decrease was due

to a decline in the Company’s net interest

margin (tax-equivalent),

partially offset by balance sheet growth.

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The tax-equivalent yield on total interest-earning assets decreased by 57 basis points

in 2021 from 2020 to 2.81%.

This

decrease was primarily due to the lower rate environment and changes in our asset

mix from the significant increase in

deposits from government stimulus and relief programs and customers’ increased savings.

The cost of total interest-bearing liabilities decreased 29 basis points to 0.39%

in 2021 compared to 0.68 in 2020.

The net

decrease in our funding costs was primarily due to lower prevailing market interest rates.

Our funding costs declined less

than the rates earned on our interest earning assets.

The Company continues to deploy various asset liability management strategies

to manage its risk to interest rate

fluctuations. The Company’s

net interest margin could experience pressure due to reduced earning asset

yields and

increased competition for quality loan opportunities.

Provision for Loan Losses

The provision for loan losses represents a charge to earnings necessary to provide

an allowance for loan losses that

management believes, based on its processes and estimates, should be adequate

to provide for the probable losses on

outstanding loans. The Company recorded a negative provision for loan losses of $0.6

million during 2021, compared to

$1.1 million in provision for loan losses during 2020.

The negative provision for loan losses was primarily related to

improvements in economic conditions in our primary market area.

The provision for loan losses is based upon various

factors, including the absolute level of loans, loan growth, the credit quality,

and the amount of net charge-offs or

recoveries.

Based upon its assessment of the loan portfolio, management adjusts the allowance

for loan losses to an amount it believes

should be appropriate to adequately cover its estimate of probable losses in the loan portfolio.

The Company’s allowance

for loan losses as a percentage of total loans was 1.08% at December 31, 2021, compared

to 1.22% at December 31, 2020.

Excluding PPP loans, which are guaranteed by the SBA, the Company’s

allowance for loan losses was 1.10% and 1.27% of

total loans at December 31, 2021 and 2020, respectively.

While the policies and procedures used to estimate the allowance

for loan losses, as well as the resulting provision for loan losses charged to operations,

are considered adequate by

management and are reviewed from time to time by our regulators, they are based on estimates

and judgments and are

therefore approximate and imprecise. Factors beyond our control (such as conditions

in the local and national economy,

local real estate markets, or industries) may have a material adverse effect

on our asset quality and the adequacy of our

allowance for loan losses resulting in significant increases in the provision

for loan losses.

Noninterest Income

Year ended December 31

(Dollars in thousands)

2021

2020

Service charges on deposit accounts

566

585

Mortgage lending

1,547

2,319

Bank-owned life insurance

403

724

Securities gains, net

103

Other

1,757

1,644

Total noninterest income

4,288

5,375

The decrease in service charges on deposit accounts was primarily driven by a decline

in consumer spending activity as a

result of the COVID-19 pandemic.

The Company’s income from mortgage lending

is primarily attributable to the (1) origination and sale of new mortgage

loans 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 loans, which

are netted against the commission expense associated with these originations. The

Company’s normal practice is to

originate mortgage loans for sale in the secondary market and to either sell or

retain the MSRs when the loan is sold.

MSRs are recognized based on the fair value of the servicing right on the date the corresponding

mortgage loan is sold.

Subsequent to the date of transfer, the Company

has elected to measure its MSRs under the amortization method.

Servicing

fee income is reported net of any related amortization expense.

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The Company evaluates MSRs for impairment on a quarterly basis.

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 2021 and 2020.

Year ended December 31

(Dollars in thousands)

2021

2020

Origination income

1,417

2,300

Servicing fees, net

130

Total mortgage lending income

1,547

2,319

The Company’s income from mortgage lending

typically fluctuates as mortgage interest rates change and is primarily

attributable to the origination and sale of new mortgage loans. Origination income

decreased in 2021 compared to 2020 due

to a decrease in refinance activity in our primary market.

The decrease in origination income was partially offset by an

increase in servicing fees, net of related amortization expense as prepayment

speeds slowed during 2021, resulting in

decreased amortization expense.

Income from bank-owned life insurance decreased primarily due to $0.3

million in non-taxable death benefits received in

2020. The assets that support these policies are administered by the life insurance carriers

and the income we receive (i.e.,

increases or decreases in the cash surrender value of the policies and death benefits received)

on these policies is dependent

upon the returns the insurance carriers are able to earn on the underlying investments that

support these policies. Earnings

on these policies are generally not taxable.

Noninterest Expense

Year ended December 31

(Dollars in thousands)

2021

2020

Salaries and benefits

11,710

11,316

Net occupancy and equipment

1,743

2,511

Professional fees

995

1,052

FDIC and other regulatory assessments

426

256

Other

4,559

4,419

Total noninterest expense

19,433

19,554

The increase in salaries and benefits expense was primarily due to a decrease in deferred

costs related to the PPP loan

program, routine annual wage and benefit increases, and management increasing the

minimum hourly wage for banking

positions to $15.

The decrease in net occupancy and equipment was primarily due to a reduction

of various expenses related to the

redevelopment of the Company’s headquarters

in downtown Auburn.

This amount includes revised depreciation estimates

and other temporary relocation costs. For more information regarding changes

in accounting estimates, please refer to Note

1, Summary of Significant Accounting Policies, of the consolidated financial statements

that accompany this report.

The increase in FDIC and other regulatory assessments was primarily due to the expiration

of FDIC assessment credits

during 2020 and an increased assessment base during 2021.

Income Tax

Expense

Income tax expense was $1.4 million in 2021 and $1.6 million in 2020.

The Company’s effective income

tax rate was

14.89% in 2021, compared to 17.72% in 2020.

This change was primarily due to an income tax benefit related to a New

Markets Tax Credit investment

funded in the fourth quarter of 2021.

The Company’s effective income

tax rate is

principally impacted by tax-exempt earnings from the Company’s

investments in municipal securities, bank-owned life

insurance, and New Markets Tax

Credits.

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BALANCE SHEET ANALYSIS

Securities

Securities available-for-sale were $421.9

million at December 31, 2021, compared to $335.2 million at December 31, 2020.

This increase reflects an increase in the amortized cost basis of securities available-for-sale

of $95.7 million, and a decrease

of $9.0 million in the fair value of securities available-for-sale.

The increase in the amortized cost basis of securities

available-for-sale was primarily attributable to management

allocating more funding to the investment portfolio following

the significant increases in customer deposits. The decrease in the fair value of securities

was primarily due to an increase

in long-term interest rates. The average annualized tax-equivalent

yields earned on total securities were 1.66%

in 2021 and

2.11%

in 2020.

The following table shows the carrying value and weighted average yield of securities available

-for-sale as of December

31, 2021 according to contractual maturity.

Actual maturities may differ from contractual maturities of mortgage-backed

securities (“MBS”) because the mortgages underlying the securities may be called

or prepaid with or without penalty.

December 31, 2021

1 year

1 to 5

5 to 10

After 10

Total

(Dollars in thousands)

or less

years

Fair Value

Agency obligations

5,007

49,604

69,802

—

124,413

Agency MBS

—

680

35,855

186,836

223,371

State and political subdivisions

170

647

15,743

57,547

74,107

Total available-for-sale

5,177

50,931

121,400

244,383

421,891

Weighted average yield (1):

Agency obligations

2.00%

1.36%

1.31%

—

1.36%

Agency MBS

—

3.42%

1.48%

1.34%

1.37%

State and political subdivisions

4.25%

2.85%

2.18%

2.77%

2.64%

Total available-for-sale

2.07%

1.40%

1.47%

1.68%

1.59%

(1) Yields are calculated based on amortized cost.

Loans

December 31

(In thousands)

2021

2020

Commercial and industrial

83,977

82,585

Construction and land development

32,432

33,514

Commercial real estate

258,371

255,136

Residential real estate

77,661

84,154

Consumer installment

6,682

7,099

Total loans

459,123

462,488

Less:

unearned income

(759)

(788)

Loans, net of unearned income

458,364

461,700

Total loans, net of unearned income,

were $458.4 million at December 31, 2021, and $461.7 million at December

31, 2020.

Excluding PPP loans, total loans, net of unearned income, were $450.5

million, an increase of $7.5 million, or 2% from

December 31, 2020.

This increase was primarily due to an increase in commercial and industrial loans

net of PPP,

$12.2 million, partially offset by a decrease in residential real estate loans of

$6.5 million, as lower rates increased refinance

activity and payoffs for consumer mortgage loans.

Four loan categories represented the majority of the loan portfolio at

December 31, 2021: commercial real estate (56%), residential real estate (17%),

commercial and industrial (18%) and

construction and land development (7%).

Approximately 25% of the Company’s commercial

real estate loans were

classified as owner-occupied at December 31, 2021.

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Within the residential real estate portfolio

segment, the Company had junior lien mortgages of approximately $7.2 million,

or 2%, and $8.7 million, or 2%, of total loans, net of unearned income at December 31,

2021 and 2020, respectively.

For

residential real estate mortgage loans with a consumer purpose, the Company

had no loans that required interest only

payments at December 31, 2021 and 2020. The Company’s

residential real estate mortgage portfolio does not include any

option ARM loans, subprime loans, or any material amount of other high-risk consumer

mortgage products.

The average yield earned on loans and loans held for sale was 4.45% in 2021

and 4.74% in 2020.

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 COVID-19 pandemic’s

effects, on our borrowers’ cash flows, real estate market

sales volumes, valuations, availability and cost of financing properties,

real estate industry concentrations, competitive

pressures from a wide range of other lenders, deterioration in certain credits, interest rate

fluctuations, reduced collateral

values or non-existent collateral, title defects, inaccurate appraisals, financial deterioration

of borrowers, fraud, and any

violation of applicable laws and regulations.

The 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,

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 $21.0 million. Furthermore, we have an internal limit

for aggregate credit exposure (loans outstanding plus

unfunded commitments) to a single borrower of $18.9

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, 2021, the Bank had no

relationships exceeding these limits.

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, 2021 (and related balances at December 31,

2020).

December 31

(In thousands)

2021

2020

Lessors of 1-4 family residential properties

47,880

49,127

Hotel/motel

43,856

42,900

Multi-family residential properties

42,587

40,203

Shopping centers

29,574

30,000

In light of disruptions in economic conditions caused by COVID-19, the financial regulators

have issued guidance

encouraging banks to work constructively with borrowers affected

by the virus in our community.

This guidance, including

the Interagency Statement on COVID-19 Loan Modifications and the Interagency Examiner

Guidance for Assessing Safety

and Soundness Considering the Effect of the COVID-19

Pandemic on Institutions, provides that the agencies will not

criticize financial institutions that mitigate credit risk through prudent actions

consistent with safe and sound practices.

Specifically, examiners

will not criticize institutions for working with borrowers as part of a risk

mitigation strategy

intended to improve existing loans, even if the restructured loans have or develop

weaknesses that ultimately result in

adverse credit classification.

Upon demonstrating the need for payment relief, the bank will work with qualified borrowers

that were otherwise current before the pandemic to determine the most appropriate

deferral option.

For residential

mortgage and consumer loans the borrower may elect to defer payments for up to three

months.

Interest continues to

accrue and the amount due at maturity increases.

Commercial real estate, commercial, and small business borrowers may

elect to defer payments for up to three months or pay scheduled interest payments for a

six-month period.

The bank

recognizes that a combination of the payment relief options may be prudent dependent

on a borrower’s business type.

of December 31, 2021, we had one COVID-19 loan deferral totaling $0.1

million, compared to $32.3 million, or 7% of total

loans at December 31, 2020.

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The tables below provide information concerning the composition of these COVID-19

modifications as of December 31,

2021 and 2020.

COVID-19 Modifications

Modification Types

(Dollars in thousands)

# of Loans

Modified

Balance

% of Portfolio

Modified

Interest Only

Payment

P&I

Payments

Deferred

December 31, 2021:

Residential real estate

—

100

Total

—

100

December 31, 2020:

Commercial and industrial

741

—

100

—

Commercial real estate

31,399

100

—

Residential real estate

133

—

100

Total

32,273

COVID-19 Modifications within Commercial Real Estate

Segment

(Dollars in thousands)

# of Loans

Modified

Balance of

Loans Modified

% of Total

Loan Class

December 31, 2020:

Hotel/motel

26,427

Multifamily

3,530

Restaurants

1,442

There were no COVID-19 modifications within the commercial real estate segment at December

31, 2021.

Section 4013 of the CARES Act provides that a qualified loan modification is exempt by law

from classification as a TDR

pursuant to GAAP.

In addition, the Interagency Statement on COVID-19 Loan Modifications provides

circumstances in

which a loan modification is not subject to classification as a TDR if such loan is not eligible

for modification under

Section 4013.

Allowance for Loan Losses

The Company maintains the allowance for loan losses at a level that management believes

appropriate to adequately cover

the Company’s estimate of probable

losses inherent in the loan portfolio. The

allowance for loan losses was $4.9 million at

December 31, 2021 compared to $5.6 million at December 31, 2020,

which management believed to be adequate at each of

the respective dates. The judgments and estimates associated

with the determination of the allowance for loan losses are

described under “Critical Accounting Policies.”

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A summary of the changes in the allowance for loan losses and certain asset quality ratios

for the years ended December 31,

2021 and 2020 are presented below.

Year ended December 31

(Dollars in thousands)

2021

2020

Allowance for loan losses:

Balance at beginning of period

5,618

4,386

Charge-offs:

Commercial and industrial

—

(7)

Commercial real estate

(254)

—

Residential real estate

(3)

—

Consumer installment

(37)

(38)

Total charge

-offs

(294)

(45)

Recoveries:

Commercial and industrial

140

Residential real estate

Consumer installment

Total recoveries

215

177

Net (charge-offs) recoveries

(79)

132

Provision for loan losses

(600)

1,100

Ending balance

4,939

5,618

as a % of loans

1.08

1.22

as a % of nonperforming loans

1,112

1,052

Net charge-offs (recoveries) as a % of average loans

0.02

(0.03)

As described under “Critical Accounting Policies”, management assesses the adequacy

of the allowance prior to the end of

each calendar quarter. The level of the allowance

is based upon management’s evaluation

of the loan portfolios, past loan

loss experience, known and inherent risks in the portfolio, adverse situations that

may affect the borrower’s ability to repay

(including the timing of future payment), the estimated value of any underlying

collateral, composition of the loan

portfolio, economic conditions, industry and peer bank loan loss rates, and other

pertinent factors. This evaluation is

inherently subjective as it requires various material estimates and judgments including

the amounts and timing of future

cash flows expected to be received on impaired loans that may be susceptible to

significant change. The ratio of our

allowance for loan losses to total loans outstanding was 1.08% at December 31,

2021, compared to 1.22% at December 31,

2020.

Excluding PPP loans, which are guaranteed by the SBA, the Company’s

allowance for loan losses was 1.10% and

1.27% of total loans at December 31, 2021 and 2020, respectively.

In the future, the allowance to total loans outstanding

ratio will increase or decrease to the extent the factors that influence our quarterly allowance

assessment, including the

duration and magnitude of COVID-19 effects, in their entirety either improve

or weaken.

In addition our regulators, as an

integral part of their examination process, will periodically review the Company’s

allowance for loan losses, and may

require the Company to make additional provisions to the allowance for loan losses based

on their judgment about

information available to them at the time of their examinations.

Nonperforming Assets

At December 31, 2021 the Company had $0.8

million in nonperforming assets compared to $0.5

million at December 31,

2020.

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The table below provides information concerning total nonperforming assets

and certain asset quality ratios.

December 31

(Dollars in thousands)

2021

2020

Nonperforming assets:

Nonperforming (nonaccrual) loans

444

534

Other real estate owned

374

—

Total nonperforming assets

818

534

as a % of loans and other real estate owned

0.18

0.12

as a % of total assets

0.07

0.06

Nonperforming loans as a % of total loans

0.10

0.12

Accruing loans 90 days or more past due

—

141

The table below provides information concerning the composition of nonaccrual

loans at December 31, 2021 and 2020,

respectively.

December 31

(In thousands)

2021

2020

Nonaccrual loans:

Commercial real estate

187

212

Residential real estate

257

322

Total nonaccrual loans /

nonperforming loans

444

534

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.

At December 31, 2021 and

2020, respectively, the Company

had $0.4

million and $0.5

million in loans on nonaccrual.

At December 31, 2021 there were no loans 90 days past due and still accruing interest, compared

to $0.1 million at

December 31, 2020.

The table below provides information concerning the composition of OREO at December

31, 2021 and 2020, respectively.

December 31

(In thousands)

2021

2020

Other real estate owned:

Commercial real estate

374

—

Total other real estate owned

374

—

Potential Problem Loans

Potential problem loans represent those loans with a well-defined weakness and

where information about possible credit

problems of borrowers has caused management to have serious doubts about the

borrower’s ability to comply with present

repayment terms.

This definition is believed to be substantially consistent with the standards

established by the Federal

Reserve, the Company’s primary regulator,

for loans classified as substandard, excluding nonaccrual loans.

Potential

problem loans, which are not included in nonperforming assets, amounted to $2.4

million, or 0.5% of total loans at

December 31, 2021, compared to $2.9 million, or 1.0% of total loans at December 31, 2020.

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The table below provides information concerning the composition of potential problem

loans at December 31, 2021 and

2020, respectively.

December 31

(In thousands)

2021

2020

Potential problem loans:

Commercial and industrial

226

218

Construction and land development

218

254

Commercial real estate

156

188

Residential real estate

1,748

2,229

Consumer installment

Total potential problem loans

2,360

2,912

At December 31, 2021, approximately $0.3

million or 14.2% of total potential problem loans were past due at least 30 but

less than 90 days.

The following table is a summary of the Company’s

performing loans that were past due at least 30 days but less than

90 days as of December 31, 2021 and 2020, respectively.

December 31

(In thousands)

2021

2020

Performing loans past due 30 to 89 days:

Commercial and industrial

230

Construction and land development

204

Commercial real estate

—

Residential real estate

516

1,509

Consumer installment

Total performing loans past due

30 to 89 days

748

1,858

Deposits

December 31

(In thousands)

2021

2020

Noninterest bearing demand

316,132

245,398

NOW

183,021

155,870

Money market

244,195

199,937

Savings

91,245

78,187

Certificates of deposit under $250,000

101,660

105,357

Certificates of deposit and other time deposits of $250,000 or more

57,990

55,044

Total deposits

994,243

839,793

Total deposits increased

$154.5 million, or 18%, to $994.2 million at December 31, 2021,

compared to $839.8 million at

December 31, 2020. Noninterest-bearing deposits were $316.1

million, or 32% of total deposits, at December 31, 2021,

compared to $245.4 million, or 29% of total deposits at December 31, 2020. These

increases reflect deposits from

customers who received PPP loans, the impact of government stimulus checks, and

reduced customer spending during the

COVID-19 pandemic.

Estimated uninsured deposits totaled $420.8 million and $315.2 million at December 31,

2021 and 2020, respectively.

Uninsured amounts are estimated based on the portion of account balances in excess of FDIC

insurance limits.

The average rates paid on total interest-bearing deposits were 0.39%

in 2021 and 0.68% in 2020.

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Other Borrowings

Other borrowings generally consist of short-term borrowings and long-term debt.

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 fund lines totaling $41.0 million with none outstanding

at December 31, 2021 and 2020,

respectively. Securities sold under

agreements to repurchase totaled $3.4 million and $2.4 million at December 31,

2021

and 2020, respectively.

The average rates paid on short-term borrowings were 0.51% and 0.48%

in 2021 and 2020, respectively.

The Company had no long-term debt outstanding at December 31, 2021 and 2020, respectively.

CAPITAL ADEQUACY

The Company's consolidated stockholders' equity was $103.7 million and $107.7

million as of December 31, 2021 and

2020,

respectively.

The decrease from December 31, 2020 was primarily driven by an other comprehensive

loss due to the

change in unrealized gains on securities available-for-sale, net of tax, of $6.7

million, cash dividends paid of $3.7

million

and stock repurchases of $1.6 million, representing 45,946 shares,

which was partially offset by net earnings of $8.0

million.

On January 1, 2015, the Company and Bank became subject to the rules of the Basel III regulatory

capital framework and

related Dodd-Frank Wall

Street Reform and Consumer Protection Act changes. The rules included

the implementation of a

capital conservation buffer that is added to the minimum requirements

for capital adequacy purposes. The capital

conservation buffer was subject to a three year phase-in period

that began on January 1, 2016 and was fully phased-in on

January 1, 2019 at 2.5%. A banking organization with a conservation buffer

of less than the required amount will be subject

to limitations on capital distributions, including dividend payments and certain discretionary

bonus payments to executive

officers. At December 31, 2021, the Bank’s

ratio was sufficient to meet the fully phased-in conservation

buffer.

Effective March 20, 2020, the Federal Reserve and the other federal

banking regulators adopted an interim final rule that

amended the capital conservation buffer.

The interim final rule was adopted as a final rule on August 26, 2020. The

new

rule revises the definition of “eligible retained income” for purposes of the maximum payout

ratio 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. The

eligible retained income is now the greater of (i) net

income for the four preceding quarters, net of distributions and associated tax effects

not reflected in net income; and (ii)

the average of all net income over the preceding four quarters. The interim

final rule only affects the capital buffers, and

banking organizations were encouraged to make prudent capital

distribution decisions.

The Federal Reserve has treated us as a “small bank holding company’ under the Federal

Reserve’s 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 9.35%, CET1 risk-based capital ratio was 16.23%, tier 1 risk-based

capital ratio was 16.23%, and

total risk-based capital ratio was 17.06%

at December 31, 2021. These ratios exceed the minimum regulatory capital

percentages of 5.0% for tier 1 leverage ratio, 6.5% for CET1 risk-based capital ratio,

8.0% for tier 1 risk-based capital ratio,

and 10.0% for total risk-based capital ratio to be considered “well capitalized.”

The Bank’s capital conservation buffer

was

9.06%

at December 31, 2021.

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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. For example,

if liabilities reprice faster than assets, and

interest rates are generally rising, earnings will initially decline. In addition, assets

and liabilities may reprice at the same

time but by different amounts. For example, when the general level of interest rates is rising,

the Company may increase

rates paid on interest bearing demand deposit accounts and savings deposit

accounts by an amount that is less than the

general increase in market interest rates. Also, short-term and long-term

market interest rates may change by different

amounts. For example, a flattening yield curve may reduce the interest spread

between new loan yields and funding costs.

Further, the remaining maturity of various assets and

liabilities may shorten or lengthen as interest rates change. For

example, if long-term mortgage interest rates decline sharply,

mortgage-backed securities in the securities portfolio may

prepay earlier than anticipated, which could reduce earnings. Interest rates may also

have a direct or indirect effect on loan

demand, loan losses, mortgage origination volume, the fair value of MSRs and other

items affecting earnings.

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, the following 12 month time period is simulated 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

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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, 2021.

Changes in Interest Rates

Net Interest Income % Variance

400 basis points

7.92

300 basis points

5.61

200 basis points

3.59

100 basis points

1.54

(100) basis points

(0.44)

(200) basis points

(300) basis points

(400) basis points

NM=not meaningful

At December 31, 2021, our earnings simulation model indicated that

we were in compliance with the policy guidelines

noted above.

Economic Value

of Equity

Economic value of equity (“EVE”) measures the extent that estimated econom

ic 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 establishes 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:

45% for an instantaneous change of +/- 400 basis points

35% 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, 2021.

Changes in Interest Rates

EVE % Variance

400 basis points

(20.53)

300 basis points

(14.14)

200 basis points

(8.35)

100 basis points

(3.23)

(100) basis points

0.91

(200) basis points

(300) basis points

(400) basis points

NM=not meaningful

At December 31, 2021, our EVE model indicated that we were in compliance

with the policy guidelines noted above.

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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. ALCO reviews each of the

above interest rate sensitivity analyses along with

several different interest rate scenarios in seeking satisfactory,

consistent levels of profitability within the framework of the

Company’s established liquidity,

loan, investment, borrowing, and capital policies.

The Company may also use derivative financial instruments to improve the balance between

interest-sensitive assets and

interest-sensitive liabilities and as one tool to manage interest rate sensitivity

while continuing to meet the credit and

deposit needs of our customers. From time to time, the Company may enter into

interest rate swaps (“swaps”) to facilitate

customer transactions and meet their financing needs. These swaps qualify as derivatives,

but are not designated as hedging

instruments. At December 31, 2021 and 2020, the Company had no derivative

contracts to assist in managing interest rate

sensitivity.

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. If needed, the

Company could also issue common stock or other securities. Primary uses of funds by the

Company include dividends paid

to stockholders and stock repurchases.

Primary sources of funding for the Bank include customer deposits, other borrowings,

repayment and maturity of securities,

and sale and repayment of loans.

The Bank has access to federal funds lines from various banks and borrowings

from the

Federal Reserve discount window.

In addition to these sources, the Bank has participated in the FHLB's advance program

to obtain funding for its growth. Advances include both fixed and variable terms and

are taken out with varying maturities.

As of December 31, 2021, the Bank had a remaining available line of credit with the FHLB

totaling $319.6 million.

As of

December 31, 2021, the Bank also had $41.0 million of federal funds lines, with none outstanding.

Primary uses of funds

include repayment of maturing obligations and growing the loan portfolio.

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The following table presents additional information about our contractual obligations

as of December 31, 2021, which by

their terms had contractual maturity and termination dates subsequent to December

31, 2021:

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)

994,243

948,364

37,905

7,785

189

Operating lease obligations

610

120

239

141

110

Total

994,853

948,484

38,144

7,926

299

(1) Deposits with no stated maturity (demand, NOW, money market, and savings deposits) are

presented in the "1 year or less" column

Management believes that the Company and the Bank have adequate sources of liquidity to

meet all known contractual

obligations and unfunded commitments, including loan commitments and reasonable borrower,

depositor, and creditor

requirements over the next 12 months.

Off-Balance Sheet Arrangements

At December 31, 2021, the Bank had outstanding standby letters of credit of $1.

million and unfunded loan commitments

outstanding of $71.0 million. Because these commitments generally

have fixed expiration dates and many will expire

without being drawn upon, the total commitment level does not necessarily represent future

cash requirements. If needed to

fund these outstanding commitments, the Bank has the ability to liquidate federal funds

sold or securities available-for-sale,

or on a short-term basis to borrow and purchase federal funds from other financial

institutions.

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. 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.

As of December 31, 2021, the unpaid principal balance of residential mortgage loans,

which we have originated and sold,

but retained the servicing rights was $252.7 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.

The Company was not required to repurchase any loans during 2021 and 2020

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, 2021.

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.

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The agreement under which we act as servicer generally specifies a

standard 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

the contract provisions established between Fannie Mae and the Bank.

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, 2021, 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.

Section 4021 of the CARES Act allows borrowers under 1-to-4 family residential

mortgage loans sold to Fannie Mae to

request forbearance to the servicer after affirming that such borrower

is experiencing financial hardships during the

COVID-19 emergency.

Except for vacant or abandoned properties, Fannie Mae servicers may not initiate

foreclosures on

similar procedures or related evictions or sales until December 31, 2020.

The forbearance period was extended, generally,

to March 31, 2021.

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.

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.

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CURRENT ACCOUNTING DEVELOPMENTS

The following ASU has been issued by the FASB

but is not yet effective.

●

ASU 2016-13,

Financial Instruments – Credit Losses (Topic

326):

Measurement of Credit Losses on Financial

Instruments;

Information about this pronouncement is described in more detail below.

ASU 2016-13,

Financial Instruments - Credit Losses (Topic

326): - Measurement of Credit

Losses on Financial

Instruments

, amends guidance on reporting credit losses for assets held at amortized cost basis and

available for sale debt

securities. For assets held at amortized cost basis, the new standard eliminates the probable

initial recognition threshold in

current GAAP and, instead, requires an entity to reflect its current estimate of all expected

credit losses using a broader

range of information regarding past events, current conditions and forecasts assessing the

collectability of cash flows. The

allowance for credit losses is a valuation account that is deducted from the amortized

cost basis of the financial assets to

present the net amount expected to be collected. For available for sale debt securities, credit

losses should be measured in a

manner similar to current GAAP,

however the new standard will require that credit losses be presented as an allowance

rather than as a write-down. The new guidance affects entities holding

financial assets and net investment in leases that are

not accounted for at fair value through net income. The amendments affect

loans, debt securities, trade receivables, net

investments in leases, off-balance sheet credit exposures, reinsurance receivables,

and any other financial assets not

excluded from the scope that have the contractual right to receive cash. For public

business entities, the new guidance was

originally effective for annual and interim periods in fiscal years

beginning after December 15, 2019. The Company has

developed an implementation team that is following a general timeline. The

team has been working with an advisory

consultant, with whom a third-party software license has been purchased.

The Company’s preliminary evaluation

indicates

the provisions of ASU No. 2016-13 are expected to impact the Company’s

consolidated financial statements, in particular

the level of the reserve for credit losses. The Company is continuing to evaluate the

extent of the potential impact and

expects that portfolio composition and economic conditions at the time of adoption

will be a factor. On October 16, 2019,

the FASB approved

a previously issued proposal granting smaller reporting companies a postponement of the required

implementation date for ASU 2016-13. The Company will now be required

to implement the new standard in January 2023,

with early adoption permitted in any period prior to that date.

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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)

2021

2020

2019

2018

2017

Net interest income (GAAP)

23,990

24,338

26,064

25,570

24,526

Tax-equivalent adjustment

470

492

557

613

1,205

Net interest income (Tax-equivalent)

24,460

24,830

26,621

26,183

25,731

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Table 2

- Selected Financial Data

Year ended December 31

(Dollars in thousands, except per share amounts)

2021

2020

2019

2018

2017

Income statement

Tax-equivalent interest income (a)

26,977

28,686

30,804

29,859

29,325

Total interest expense

2,517

3,856

4,183

3,676

3,594

Tax equivalent net interest income (a)

24,460

24,830

26,621

26,183

25,731

Provision for loan losses

(600)

1,100

(250)

—

(300)

Total noninterest income

4,288

5,375

5,494

3,325

3,441

Total noninterest expense

19,433

19,554

19,697

17,874

16,784

Net earnings before income taxes and

tax-equivalent adjustment

9,915

9,551

12,668

11,634

12,688

Tax-equivalent adjustment

470

492

557

613

1,205

Income tax expense

1,406

1,605

2,370

2,187

3,637

Net earnings

8,039

7,454

9,741

8,834

7,846

Per share data:

Basic and diluted net earnings

2.27

2.09

2.72

2.42

2.15

Cash dividends declared

1.04

1.02

1.00

0.96

0.92

Weighted average shares outstanding

Basic and diluted

3,545,310

3,566,207

3,581,476

3,643,780

3,643,616

Shares outstanding

3,520,485

3,566,276

3,566,146

3,643,868

3,643,668

Book value

29.46

30.20

27.57

24.44

23.85

Common stock price

High

48.00

63.40

53.90

53.50

40.25

Low

31.32

24.11

30.61

28.88

30.75

Period-end

32.30

42.29

53.00

31.66

38.90

To earnings ratio

14.23

20.23

19.49

13.08

18.09

To book value

110

140

192

130

163

Performance ratios:

Return on average equity

7.54

7.12

10.35

10.14

9.17

Return on average assets

0.78

0.83

1.18

1.08

0.94

Dividend payout ratio

45.81

48.80

36.76

39.67

42.79

Average equity to average assets

10.39

11.63

11.39

10.63

10.30

Asset Quality:

Allowance for loan losses as a % of:

Loans

1.08

1.22

0.95

1.00

1.05

Nonperforming loans

1,112

1,052

2,345

2,691

160

Nonperforming assets as a % of:

Loans and other real estate owned

0.18

0.12

0.04

0.07

0.66

Total assets

0.07

0.06

0.02

0.04

0.35

Nonperforming loans as % of loans

0.10

0.12

0.04

0.66

Net charge-offs (recoveries) as a % of average loans

0.02

(0.03)

0.03

(0.01)

(0.09)

Capital Adequacy (c):

CET 1 risk-based capital ratio

16.23

17.27

17.28

16.49

16.42

Tier 1 risk-based capital ratio

16.23

17.27

17.28

16.49

16.98

Total risk-based capital ratio

17.06

18.31

18.12

17.38

17.91

Tier 1 leverage ratio

9.35

10.32

11.23

11.33

10.95

Other financial data:

Net interest margin (a)

2.55

2.92

3.43

3.40

3.29

Effective income tax rate

14.89

17.72

19.57

19.84

31.67

Efficiency ratio (b)

67.60

64.74

61.33

60.57

57.53

Selected period end balances:

Securities

421,891

335,177

235,902

239,801

257,697

Loans, net of unearned income

458,364

461,700

460,901

476,908

453,651

Allowance for loan losses

4,939

5,618

4,386

4,790

4,757

Total assets

1,105,150

956,597

828,570

818,077

853,381

Total deposits

994,243

839,792

724,152

724,193

757,659

Long-term debt

—

3,217

Total stockholders’ equity

103,726

107,689

98,328

89,055

86,906

(a) Tax-equivalent.

See "Table 1 - Explanation of Non-GAAP Financial Measures".

(b) Efficiency ratio is the result of noninterest expense divided

by the sum of noninterest income and tax-equivalent net interest

income.

wholly-owned subsidiary, AuburnBank.

Table of Contents

Table 3

- Average Balance

and Net Interest Income Analysis

Year ended December 31

2021

2020

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)

459,712

20,473

4.45%

465,378

22,055

4.74%

Securities - taxable

320,766

4,107

1.28%

234,420

3,932

1.68%

Securities - tax-exempt (2)

62,736

2,242

3.57%

63,029

2,343

3.72%

Total securities

383,502

6,349

1.66%

297,449

6,275

2.11%

Federal funds sold

38,659

0.15%

30,977

125

0.41%

Interest bearing bank deposits

77,220

100

0.13%

56,104

231

0.41%

Total interest-earning assets

959,093

26,977

2.81%

849,908

28,686

3.38%

Cash and due from banks

14,591

13,727

Other assets

51,664

37,010

Total assets

1,025,348

900,645

Interest-bearing liabilities:

Deposits:

NOW

178,197

212

0.12%

154,431

523

0.34%

Savings and money market

296,708

655

0.22%

242,485

1,071

0.44%

Certificates of deposits

159,111

1,633

1.03%

165,120

2,253

1.36%

Total interest-bearing deposits

634,016

2,500

0.39%

562,036

3,847

0.68%

Short-term borrowings

3,349

0.51%

1,864

0.48%

Total interest-bearing liabilities

637,365

2,517

0.39%

563,900

3,856

0.68%

Noninterest-bearing deposits

278,013

227,127

Other liabilities

3,392

4,884

Stockholders' equity

106,578

104,734

Total liabilities and

and stockholders' equity

1,025,348

900,645

Net interest income and margin

24,460

2.55%

24,830

2.92%

(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%.

Table of Contents

Table 4

- Volume and

Rate Variance

Analysis

Years ended December 31, 2021 vs. 2020

Years ended December 31, 2020 vs. 2019

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

(1,582)

(1,333)

(249)

(875)

(455)

(420)

Securities - taxable

175

(933)

1,108

(68)

(1,010)

942

Securities - tax-exempt (1)

(101)

(91)

(10)

(313)

(180)

(133)

Total securities

(1,024)

1,098

(381)

(1,190)

809

Federal funds sold

(70)

(81)

(298)

(342)

Interest bearing bank deposits

(131)

(159)

(564)

(645)

Total interest income

(1,709)

(2,597)

888

(2,118)

(2,632)

514

Interest expense:

Deposits:

NOW

(311)

(340)

(187)

(255)

Savings and money market

(416)

(537)

121

102

(3)

105

Certificates of deposits

(620)

(560)

(60)

(244)

(166)

(78)

Total interest-bearing deposits

(1,347)

(1,437)

(329)

(424)

Short-term borrowings

—

Total interest expense

(1,339)

(1,437)

(327)

(424)

Net interest income

(370)

(1,160)

790

(1,791)

(2,208)

417

(1) Yields on tax-exempt securities have been

computed on a tax-equivalent basis using an income

tax rate of 21%.

(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

2021

2020

Net

charge-off

Net

(recovery)

charge-offs

Average

(recovery)

(recoveries)

Average

charge-off

(Dollars in thousands)

(recoveries)

Loans (2)

ratio

charge-offs

Loans (2)

ratio

Commercial and industrial (1)

(140)

64,618

(0.22)

(87)

56,836

(0.15)

Construction and land development

—

33,945

—

32,721

—

Commercial real estate

254

253,113

0.10

—

256,444

—

Residential real estate

(52)

81,526

(0.06)

(63)

87,888

(0.07)

Consumer installment

6,975

0.24

8,096

0.22

Total

440,177

0.02

(132)

441,985

(0.03)

(1) Excludes PPP loans, which are guaranteed by the SBA.

(2) Gross loan balances.

Table of Contents

Table 6

- Loan Maturities

December 31, 2021

1 year

1 to 5

5 to 15

After 15

(Dollars in thousands)

or less

years

Total

Commercial and industrial

26,593

17,474

38,125

1,785

83,977

Construction and land development

26,346

5,191

849

32,432

Commercial real estate

31,406

85,149

137,411

4,405

258,371

Residential real estate

3,832

21,919

31,227

20,683

77,661

Consumer installment

2,215

4,111

356

—

6,682

Total loans

90,392

133,844

207,968

26,919

459,123

Table of Contents

Table 7

- Sensitivities to Changes in Interest Rates on Loans Maturing in More

Than One Year

December 31, 2021

Variable

Fixed

(Dollars in thousands)

Rate

Total

Commercial and industrial

268

57,116

57,384

Construction and land development

1,934

4,152

6,086

Commercial real estate

8,220

218,745

226,965

Residential real estate

24,058

49,771

73,829

Consumer installment

4,429

4,467

Total loans

34,518

334,213

368,731

Table of Contents

Table 8

- Allocation of Allowance for Loan Losses

2021

2020

(Dollars in thousands)

Amount

Commercial and industrial

857

18.3%

807

17.9%

Construction and land development

518

7.1%

594

7.2%

Commercial real estate

2,739

56.2%

3169

55.2%

Residential real estate

739

16.9%

944

18.2%

Consumer installment

1.5%

104

1.5%

Total allowance for loan losses

4,939

5,618

* Loan balance in each category expressed as a percentage of total loans.

Table of Contents

Table 9

- Estimated Uninsured Time Deposits by Maturity

(Dollars in thousands)

December 31, 2021

Maturity of:

3 months or less

2,079

Over 3 months through 6 months

1,747

Over 6 months through 12 months

31,159

Over 12 months

6,505

Total estimated uninsured

time deposits

41,490

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 Subsidiary

Opinion on the Financial Statements

We have audited the accompanying

consolidated balance sheets of Auburn National Bancorporation, Inc. and

Subsidiary

(the “Company”) as of December 31, 2021 and 2020, the related consolidated

statements of earnings, comprehensive

income, stockholders’ equity and cash flows for the years then ended, and the related notes

to 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, 2021

and 2020, and the results of its operations and its

cash flows for the years then ended, in 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

on the Company’s financial statements

based on our audits. We

are a public accounting firm registered with the Public

Company Accounting Oversight Board (United States) (PCAOB) and are

required to be independent with respect to the

Company in accordance with U.S. federal securities laws and the applicable

rules and regulations of the Securities and

Exchange Commission and the PCAOB.

We conducted

our audits in accordance with the standards of the PCAOB. Those standards require that

we plan and

perform the audits to obtain reasonable assurance about whether the financial statements are

free of material misstatement,

whether due to error or fraud. The Company is not required to have, nor were

we engaged to perform, an audit of 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 of expressing an opinion on the effectiveness

of 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 Matter

The critical audit matter communicated below is a matter arising from the current period

audit of the financial statements

that were communicated or required to be communicated to the audit committee and that: (1)

relate to accounts or

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 we are not, by communicating the critical audit matter below,

providing separate opinions on the

critical audit matter or on the accounts or disclosures to which they relate.

Table of Contents

Allowance for Loan Losses

As described in Note 5 to the Company’s consolidated

financial statements, the Company has a gross loan portfolio of

$460.5 million and related allowance for loan losses of $4.9 million as of December

31, 2021. As described by the

Company in Note 1, the evaluation of the allowance for loan losses is inherently subjective

as it requires estimates that are

susceptible to significant revision as more information becomes available. The allowance

for loan losses is evaluated on a

regular basis and is based upon the Company’s

review of the collectability of the loans in light of historical experience, the

nature and volume of the loan portfolio, adverse situations that may affect the

borrower’s ability to repay,

estimated value

of any underlying collateral, and prevailing economic conditions.

We identified the Company’s

estimate of the allowance for loan losses as a critical audit matter.

The principal

considerations for our determination of the allowance for loan losses as a critical audit

matter related to the high degree of

subjectivity in the Company’s judgments in

determining 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:

●

We evaluated the relevance and

the reasonableness of assumptions related to evaluation of the loan portfolio,

current economic conditions, and other risk factors used in development of the qualitative

factors for collectively

evaluated loans.

●

We evaluated the reasonableness

of assumptions and data used by the Company in developing the qualitative

factors by comparing these data points to internally developed and third-party sources,

and other audit evidence

gathered.

/s/

Elliott Davis, LLC

We have served as the Company's

auditor since 2015.

Greenville, South Carolina

March 8, 2022

Table of Contents

AUBURN NATIONAL

BANCORPORATION,

INC. AND SUBSIDIARIES

Consolidated Balance Sheets

December 31

(Dollars in thousands, except share data)

2021

2020

Assets:

Cash and due from banks

11,210

14,868

Federal funds sold

77,420

28,557

Interest bearing bank deposits

67,629

69,150

Cash and cash equivalents

156,259

112,575

Securities available-for-sale

421,891

335,177

Loans held for sale

1,376

3,418

Loans, net of unearned income

458,364

461,700

Allowance for loan losses

(4,939)

(5,618)

Loans, net

453,425

456,082

Premises and equipment, net

41,724

22,193

Bank-owned life insurance

19,635

19,232

Other assets

10,840

7,920

Total assets

1,105,150

956,597

Liabilities:

Deposits:

Noninterest-bearing

316,132

245,398

Interest-bearing

678,111

594,394

Total deposits

994,243

839,792

Federal funds purchased and securities sold under agreements to repurchase

3,448

2,392

Accrued expenses and other liabilities

3,733

6,723

Total liabilities

1,001,424

848,907

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

3,794

3,789

Retained earnings

109,974

105,617

Accumulated other comprehensive income, net

891

7,599

Less treasury stock, at cost -

436,650

shares and

390,859

at December 31, 2021 and 2020, respectively

(10,972)

(9,354)

Total stockholders’ equity

103,726

107,690

Total liabilities and stockholders’

equity

1,105,150

956,597

See 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)

2021

2020

Interest income:

Loans, including fees

20,473

22,055

Securities:

Taxable

4,107

3,932

Tax-exempt

1,772

1,851

Federal funds sold and interest bearing bank deposits

155

356

Total interest income

26,507

28,194

Interest expense:

Deposits

2,500

3,847

Short-term borrowings

Total interest expense

2,517

3,856

Net interest income

23,990

24,338

Provision for loan losses

(600)

1,100

Net interest income after provision for loan

losses

24,590

23,238

Noninterest income:

Service charges on deposit accounts

566

585

Mortgage lending

1,547

2,319

Bank-owned life insurance

403

724

Other

1,757

1,644

Securities gains, net

103

Total noninterest income

4,288

5,375

Noninterest expense:

Salaries and benefits

11,710

11,316

Net occupancy and equipment

1,743

2,511

Professional fees

995

1,052

FDIC and other regulatory assessments

426

256

Other

4,559

4,419

Total noninterest expense

19,433

19,554

Earnings before income taxes

9,445

9,059

Income tax expense

1,406

1,605

Net earnings

8,039

7,454

Net earnings per share:

Basic and diluted

2.27

2.09

Weighted average shares

outstanding:

Basic and diluted

3,545,310

3,566,207

See 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)

2021

2020

Net earnings

8,039

7,454

Other comprehensive (loss) income, net of tax:

Unrealized net holding (loss) gain on securities

(6,697)

5,617

Reclassification adjustment for net gain on securities

recognized in net earnings

(11)

(77)

Other comprehensive (loss) income

(6,708)

5,540

Comprehensive income

1,331

12,994

See 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, 2019

3,566,146

3,784

101,801

2,059

(9,355)

98,328

Net earnings

—

7,454

Other comprehensive income

—

5,540

Cash dividends paid ($

1.02

per share)

—

(3,638)

Sale of treasury stock

130

Balance, December 31, 2020

3,566,276

3,789

105,617

7,599

(9,354)

107,690

Net earnings

—

8,039

Other comprehensive loss

—

(6,708)

Cash dividends paid ($

1.04

per share)

—

(3,682)

Stock repurchases

(45,946)

(1,619)

Sale of treasury stock

155

Balance, December 31, 2021

3,520,485

3,794

109,974

891

(10,972)

103,726

See accompanying notes to consolidated financial statements

Table of Contents

AUBURN NATIONAL

BANCORPORATION,

INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Year ended December 31

(In thousands)

2021

2020

Cash flows from operating activities:

Net earnings

8,039

7,454

Adjustments to reconcile net earnings to net cash provided by

operating activities:

Provision for loan losses

(600)

1,100

Depreciation and amortization

1,244

1,666

Premium amortization and discount accretion, net

3,979

2,862

Deferred tax expense (benefit)

278

(330)

Net gain on securities available for sale

(15)

(103)

Net gain on sale of loans held for sale

(1,417)

(2,300)

Net gain on other real estate owned

(52)

Loans originated for sale

(47,937)

(82,726)

Proceeds from sale of loans

50,901

83,138

Increase in cash surrender value of bank owned life insurance

(403)

(442)

Income recognized from death benefit on bank-owned life insurance

(282)

Net decrease (increase) in other assets

1,235

(2,656)

Net (decrease) increase in accrued expenses and other liabilities

(2,984)

2,399

Net cash provided by operating activities

12,320

9,728

Cash flows from investing activities:

Proceeds from sales of securities available-for-sale

21,029

Proceeds from maturities of securities available-for-sale

73,607

62,021

Purchase of securities available-for-sale

(173,243)

(177,686)

Decrease (increase) in loans, net

2,883

(766)

Net purchases of premises and equipment

(20,175)

(8,355)

Decrease (increase) in FHLB stock

267

(9)

Purchase of New Markets Tax

Credit investment

(2,181)

Proceeds from bank-owned life insurance death benefit

694

Proceeds from sale of other real estate owned

151

Net cash used in investing activities

(118,842)

(102,921)

Cash flows from financing activities:

Net increase in noninterest-bearing deposits

70,734

49,180

Net increase in interest-bearing deposits

83,717

66,460

Net increase in federal funds purchased and securities sold

under agreements to repurchase

1,056

1,323

Stock repurchases

(1,619)

Dividends paid

(3,682)

(3,638)

Net cash provided by financing activities

150,206

113,325

Net change in cash and cash equivalents

43,684

20,132

Cash and cash equivalents at beginning of period

112,575

92,443

Cash and cash equivalents at end of period

156,259

112,575

Supplemental disclosures of cash flow information:

Cash paid during the period for:

Interest

2,560

4,055

Income taxes

2,760

1,956

Supplemental disclosure of non-cash transactions:

Real estate acquired through foreclosure

374

See accompanying notes to consolidated financial statements

Table of Contents

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. Significant

intercompany transactions and accounts are eliminated in consolidation.

COVID-19 Uncertainty

COVID-19 has adversely affected, and may continue to adversely affect

economic activity globally,

nationally and locally.

Following the COVID-19 outbreak in December 2019 and January 2020,

market interest rates declined significantly. The

federal banking agencies encouraged financial institutions to prudently

work with borrowers and passed legislation to

provide relief from reporting loan classifications due to modifications related to the COVID

-19 outbreak. The spread of

COVID-19 has caused us to modify our business practices, including employee travel,

employee work locations, and

cancellation of physical participation in meetings, events and conferences. The rapid

development and fluidity of this

situation precludes any predication as to the ultimate impact of the COVID-19 outbreak.

Nevertheless, the outbreak

presents uncertainty and risk with respect to the Company,

its performance, and its financial results.

Revenue Recognition

On January 1, 2018, the Company implemented ASU 2014-09,

Revenue from Contracts with Customers

, codified

ASC

606. The Company adopted ASC 606 using the modified retrospective transition

method. The majority of the

Company’s revenue stream is generated from

interest income on loans and deposits which are outside the scope of ASC

606.

The Company’s sources of income that fall

within the scope of ASC 606 include service charges on deposits, investment

services, 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, investment services, 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 loan losses, fair value measurements,

valuation of other real estate owned, and valuation of deferred tax assets.

Table of Contents

Change in Accounting Estimate

During the fourth quarter of 2019, the Company reassessed its estimate of the useful lives

of certain fixed assets. The

Company revised its original useful life estimate for certain land improvements, buildings

and improvements and furniture,

fixtures and equipment, with a carrying value of $

0.5

million at December 31, 2019, to correspond with estimated

demolition dates planned as part of the redevelopment project for its

main campus.

This is considered a change in

accounting estimate, per ASC 250-10, where adjustments should be made prospectively.

The effects of this change in

accounting estimate on the 2021 and 2020 consolidated financial statements, respectively,

was a decrease in net earnings of

thousand, or $

0.01

per share and $

342

thousand, or $

0.10

per share.

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, 2021. The Company does not believe there are

any material subsequent events that would

require further recognition or disclosure.

Accounting Standards Adopted in 2021

In 2021, the Company did not adopt any new accounting guidance.

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, 2021, 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 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.

On a quarterly basis, management makes an assessment to determine

whether there have been events or economic

circumstances to indicate that a security on which there is an unrealized loss is other-than-temporarily

impaired.

For debt securities with an unrealized loss, an other-than-temporary

impairment write-down is triggered when (1) the

Company has the intent to sell a debt security,

(2) it is more likely than not that the Company will be required to sell the

debt security before recovery of its amortized cost basis, or (3) the Company does

not expect to recover the entire amortized

cost basis of the debt security.

If the Company has the intent to sell a debt security or if it is more likely than not that it

will

be required to sell the debt security before recovery,

the other-than-temporary write-down is equal to the entire difference

between the debt security’s amortized cost

and its fair value.

If the Company does not intend to sell the security or it is not

more likely than not that it will be required to sell the security before recovery,

the other-than-temporary impairment write-

down is separated into the amount that is credit related (credit loss component) and the amount due to all other

factors.

The

credit loss component is recognized in earnings, as a realized loss in securities gains (losses),

and is the difference between

the security’s amortized cost basis and the present

value of its expected future cash flows.

The remaining difference

between the security’s fair value and the present

value of future expected cash flows is due to factors that are not credit

related and is recognized in other comprehensive income, net of applicable taxes.

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Loans held for sale

Loans originated and intended for sale in the secondary market 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.

In the course of conducting the Bank’s

mortgage lending activities of originating mortgage loans and selling those loans in

the secondary market, the Bank makes various representations and

warranties to the purchaser of the mortgage loans.

Every loan closed by the Bank’s mortgage

center is run through a government agency 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 such failure cannot be cured by the

Company within the specified period following discovery.

Loans

Loans are reported at their outstanding principal balances, net of any unearned

income, charge-offs, and any deferred fees

or costs on originated loans.

Interest income is accrued based on the principal balance outstanding.

Loan origination fees,

net of certain loan origination costs, are deferred and recognized in interest income over the

contractual life of the loan

using the effective interest method. Loan commitment fees are

generally deferred and amortized on a straight-line basis

over the commitment period, which results in a recorded amount that approximates fair

value.

The accrual of interest on loans is discontinued when there is a significant deterioration

in the financial condition of the

borrower and full repayment of principal and interest is not expected or the principal or

interest is more than 90 days past

due, unless the loan is both well-collateralized and in the process of collection. Generally,

all interest accrued but not

collected for loans that are placed on nonaccrual status is reversed against current

interest income. Interest collections on

nonaccrual loans are generally applied as principal reductions. The Company determines

past due or delinquency status of a

loan based on contractual payment terms.

A loan is considered impaired when it is probable the Company will be unable to collect all

principal and interest payments

due according to the contractual terms of the loan agreement. Individually identified impaired

loans are measured based on

the present value of expected payments using the loan’s

original effective rate as the discount rate, the loan’s

observable

market price, or the fair value of the collateral if the loan is collateral dependent. If the recorded

investment in the impaired

loan exceeds the measure of fair value, a valuation allowance may be established as part of

the allowance for loan losses.

Changes to the valuation allowance are recorded as a component of the provision for loan

losses.

Impaired loans also include troubled debt restructurings (“TDRs”). In the normal

course of business, management may

grant concessions to borrowers who are experiencing financial difficulty.

The concessions granted most frequently for

TDRs involve reductions or delays in required payments of principal and interest

for a specified time, the rescheduling of

payments in accordance with a bankruptcy plan or the charge-off

of a portion of the loan. In most cases, the conditions of

the credit also warrant nonaccrual status, even after the restructuring occurs.

As part of the credit approval process, the

restructured loans are evaluated for adequate collateral protection in determining

the appropriate accrual status at the time

of restructuring. TDR loans may be returned to accrual status if there has been at least a six-month

sustained period of

repayment performance by the borrower.

The Company began offering short-term loan modifications to assist borrowers

during the COVID-19 pandemic.

If the

modification meets certain conditions, the modification does not need to be

accounted for as a TDR.

For more information,

please refer to Note 5, Loans and Allowance for Loan Losses.

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Allowance for Loan Losses

The allowance for loan losses is maintained at a level that management believes

is adequate to absorb probable losses

inherent in the loan portfolio. Loan losses are charged against the allowance

when they are known. Subsequent recoveries

are credited to the allowance. Management’s

determination of the adequacy of the allowance is based on an evaluation

the portfolio, current economic conditions, growth, composition of the loan portfolio,

homogeneous pools of loans, risk

ratings of specific loans, historical loan loss factors, identified impaired loans and

other factors related to the portfolio. This

evaluation is performed quarterly and is inherently subjective, as it requires various

material estimates that are susceptible

to significant change, including the amounts and timing of future cash flows expected

to be received on any impaired loans.

In addition, regulatory agencies, as an integral part of their examination process,

will periodically review the Company’s

allowance for loan losses, and may require the Company to record additions to the allowance

based on their judgment about

information available to them at the time of their examinations.

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

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

with certain regulatory and other

entities in which the Bank has an ongoing business relationship based on the Bank’s

common stock and surplus (with

regard to the relationship with the Federal Reserve Bank) or outstanding borrowings (with

regard to the relationship with

the Federal Home Loan Bank of 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 and only to the respective

issuing government supported institution or to another member

institution. 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.

Mortgage Servicing Rights

The Company recognizes as assets the rights to service mortgage loans for others, known as

MSRs. The Company

determines the fair value of MSRs 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.

Subsequent to the date of transfer, the Company

has elected to measure its MSRs 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.

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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.

Subsequent to the date of transfer, the Company

has elected to measure its MSRs 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.

Securities sold under agreements to repurchase

Securities sold under agreements to repurchase generally mature less than one

year from the transaction date. Securities

sold under agreements to repurchase are reflected as a secured borrowing in the accompanying consolidated

balance sheets

at the amount of cash received in connection with each transaction.

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 a consolidated income tax return

Fair Value Measureme

nts

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.

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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 reflect the potential dilution that could occur upon

exercise of securities or other

rights for, or convertible into, shares of the Company’s

common stock.

As of December 31, 2021 and 2020, respectively,

the Company had no such securities or other rights issued or outstanding, and therefore,

no dilutive effect to consider for

the diluted net earnings per share calculation.

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)

2021

2020

Basic and diluted:

Net earnings

8,039

7,454

Weighted average common

shares outstanding

3,545,310

3,566,207

Net earnings per share

2.27

2.09

NOTE 3: VARIABLE

INTEREST ENTITIES

Generally, a variable interest entity (“VIE”)

is a corporation, partnership, trust or other legal structure that does not have

equity investors with substantive or proportional voting rights or has equity investors

that do not provide sufficient financial

resources for the entity to support its activities.

At December 31, 2021, the Company did not have any consolidated VIEs to

disclose but did have one nonconsolidated

VIE, discussed below.

New Markets Tax

Credit Investment

The New Markets Tax Credit

(“NMTC”) program provides federal tax incentives to investors to make investments in

distressed communities and promotes economic improvement through the development

of successful businesses in these

communities.

The NMTC is available to investors over seven years and is subject to recapture if certain events occur

during such period.

At December 31, 2021, the Company had one such investment in the amount of $2.2 million,

which

was included in other assets in the consolidated balance sheets, compared

to none at December 31, 2020.

The Company’s

equity investment meets the definition of a VIE. While the Company’s

investment exceeds 50% of the outstanding equity

interests, the Company does not consolidate the VIE because it does not

meet the characteristics of a primary beneficiary

since the Company lacks the power to direct the activities of the VIE.

(Dollars in thousands)

Maximum

Loss Exposure

Asset Recognized

Classification

Type:

New Markets Tax Credit investment

2,176

Other assets

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NOTE 4: SECURITIES

At December 31, 2021 and 2020, 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, 2021 and 2020, 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, 2021

Agency obligations (a)

5,007

49,604

69,802

124,413

1,080

2,079

125,412

Agency MBS (a)

680

35,855

186,836

223,371

1,527

2,680

224,524

State and political subdivisions

170

647

15,743

57,547

74,107

3,611

270

70,766

Total available-for-sale

5,177

50,931

121,400

244,383

421,891

6,218

5,029

420,702

December 31, 2020

Agency obligations (a)

5,048

24,834

55,367

12,199

97,448

3,156

94,390

Agency MBS (a)

1,154

20,502

141,814

163,470

3,245

133

160,358

State and political subdivisions

477

632

8,405

64,745

74,259

3,988

70,282

Total available-for-sale

5,525

26,620

84,274

218,758

335,177

10,389

242

325,030

(a) Includes securities issued by U.S. government agencies or government sponsored

entities.

Expected maturities of

these securities may differ from contractual maturities because issues

may have the right to call or repay obligations

with or without prepayment penalties.

Securities with aggregate fair values of $

172.3

million and $

166.9

million at December 31, 2021 and 2020, respectively,

were pledged to secure public deposits, securities sold under agreements to repurchase,

Federal Home Loan Bank

(“FHLB”) advances, and for other purposes required or permitted by law.

Included in other assets on the accompanying consolidated balance sheets are nonmarketable

equity investments.

The

carrying amounts of nonmarketable equity investments were $

1.2

million and $

1.4

million at December 31, 2021 and 2020,

respectively.

Nonmarketable equity investments include FHLB of Atlanta stock,

Federal Reserve Bank (“FRB”) stock, and

stock in a privately held financial institution.

Gross Unrealized Losses and Fair Value

The fair values and gross unrealized losses on securities at December 31,

2021 and 2020, respectively, segregated

by those

securities that have been in an unrealized loss position for less than 12 months and 12

months or more are presented below.

Less than 12 Months

12 Months or Longer

Total

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

(Dollars in thousands)

Value

Losses

Value

Losses

Value

Losses

December 31, 2021:

Agency obligations

49,799

1,025

26,412

1,054

76,211

2,079

Agency MBS

130,110

1,555

38,611

1,125

168,721

2,680

State and political subdivisions

7,960

109

3,114

161

11,074

270

Total

187,869

2,689

68,137

2,340

256,006

5,029

December 31, 2020:

Agency obligations

15,416

Agency MBS

41,488

133

41,488

133

State and political subdivisions

2,945

Total

59,849

242

59,849

242

For the securities in the previous table, the Company does not have the intent to sell and has determined it is

not more likely

than not that the Company will be required to sell the security before recovery of the

amortized cost basis, which may be

maturity. On a quarterly basis,

the Company assesses each security for credit impairment. For debt securities, the

Company

evaluates, where necessary,

whether credit impairment exists by comparing the present value of the expected cash

flows to

the securities’ amortized cost basis.

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In determining whether a loss is temporary,

the Company considers all relevant information including:

●

the length of time and the extent to which the fair value has been less than the amortized

cost basis;

●

adverse conditions specifically related to the security,

an industry, or a geographic area

(for example, changes in

the financial condition of the issuer of the security,

or in the case of an asset-backed debt security,

in the financial

condition of the underlying loan obligors, including changes in technology or the discontinuance of

a segment of

the business that may affect the future earnings potential of the issuer or

underlying loan obligors of the security or

changes in the quality of the credit enhancement);

●

the historical and implied volatility of the fair value of the security;

●

the payment structure of the debt security and the likelihood of the issuer being able to make payments

that

increase in the future;

●

failure of the issuer of the security to make scheduled interest or principal payments;

●

any changes to the rating of the security by a rating agency; and

●

recoveries or additional declines in fair value subsequent to the balance sheet date.

Agency obligations

The unrealized losses associated with agency obligations were primarily driven by changes

in interest rates and not due to

the credit quality of the securities. These securities were issued by U.S. government

agencies or government-sponsored

entities and did not have any credit losses given the explicit government guarantee

or other government support.

Agency mortgage-backed securities (“MBS”)

The unrealized losses associated with agency MBS were primarily driven by changes

in interest rates and not due to the

credit quality of the securities. These securities were issued by U.S. government agencies

or government-sponsored entities

and did not have any credit losses given the explicit government guarantee or other government

support.

Securities of U.S. states and political subdivisions

The unrealized losses associated with securities of U.S. states and political subdivisions

were primarily driven by changes

in interest rates and were not due to the credit quality of the securities. Some of these securities

are guaranteed by a bond

insurer, but management did not rely on the guarantee

in making its investment decision. These securities will continue

be monitored as part of the Company’s quarterly

impairment analysis, but are expected to perform even if the rating

agencies reduce the credit rating of the bond insurers. As a result, the Company expects to

recover the entire amortized cost

basis of these securities.

The carrying values of the Company’s investment

securities could decline in the future if the financial condition of an

issuer deteriorates and the Company determines it is probable that it will not recover the entire

amortized cost basis for the

security. As a result, there is a risk that other-than-temporary

impairment charges may occur in the future.

Other-Than-Temporarily

Impaired Securities

Credit-impaired debt securities are debt securities where the Company

has written down the amortized cost basis of a

security for other-than-temporary impairment and the credit

component of the loss is recognized in earnings. At

December 31, 2021 and 2020, respectively,

the Company had no credit-impaired debt securities and there were no additions

or reductions in the credit loss component of credit-impaired debt securities during the

years ended December 31, 2021 and

2020, respectively.

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Realized Gains and Losses

The following table presents the gross realized gains and losses on sales related to securities.

Year ended December 31

(Dollars in thousands)

2021

2020

Gross realized gains

184

Gross realized losses

(81)

Realized gains, net

103

NOTE 5: LOANS AND ALLOWANCE

FOR LOAN LOSSES

December 31

(In thousands)

2021

2020

Commercial and industrial

83,977

82,585

Construction and land development

32,432

33,514

Commercial real estate:

Owner occupied

63,375

54,033

Hotel/motel

43,856

42,900

Multifamily

42,587

40,203

Other

108,553

118,000

Total commercial real estate

258,371

255,136

Residential real estate:

Consumer mortgage

29,781

35,027

Investment property

47,880

49,127

Total residential real estate

77,661

84,154

Consumer installment

6,682

7,099

Total loans

459,123

462,488

Less: unearned income

(759)

(788)

Loans, net of unearned income

458,364

461,700

Loans secured by real estate were approximately

80.3

% of the total loan portfolio at December 31, 2021.

At December 31,

2021, the Company’s geographic loan

distribution was concentrated primarily in Lee County,

Alabama and surrounding

areas.

In accordance with ASC 310,

Receivables

, a portfolio segment is defined as the level at which an entity develops and

documents a systematic method for determining its allowance for loan losses.

As part of the Company’s quarterly

assessment of the allowance, the loan portfolio is disaggregated into the

following portfolio segments:

commercial and

industrial, construction and land development, commercial real estate, residential real

estate and consumer installment.

Where appropriate, the Company’s loan portfolio

segments are further disaggregated into classes. A class is generally

determined based on the initial measurement attribute, risk characteristics of the loan,

and an entity’s method for

monitoring and determining credit risk.

The following describe the risk characteristics relevant to each of the portfolio segments

and classes.

Commercial and industrial (“C&I”) —

includes loans to finance business operations, equipment purchases, or

other needs

for small and medium-sized commercial customers. Also included

in this category are loans to finance agricultural

production.

Generally, the primary source of repayment

is the cash flow from business operations and activities of the

borrower.

We are a participating lender

in the PPP.

PPP loans are forgivable in whole or in part, if the proceeds are used

for payroll and other permitted purposes in accordance with the requirements of the PPP.

As of December 31, 2021, the

Company has

138

PPP loans with an aggregate outstanding principal balance of $

8.1

million included in this category.

The

Company had

265

PPP loans with an aggregate outstanding principal balance of $

19.0

million included in this category at

December 31, 2020.

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Construction and land development (“C&D”) —

includes both loans and credit lines for the purpose of purchasing,

carrying and developing land into commercial developments or residential subdivisions.

Also included are loans and lines

for construction of residential, multi-family and commercial buildings. Generally the primary

source of repayment is

dependent upon the sale or refinance of the real estate collateral.

Commercial real estate

(“CRE”) —

includes loans disaggregated into three classes: (1) owner occupied (2)

multi-family

and (3) other.

Owner occupied

– includes loans secured by business facilities to finance business operations, equipment and

owner-occupied facilities primarily for small and medium-sized commercial customers.

Generally the primary source

of repayment is the cash flow from business operations and activities of the borrower,

who owns the property.

Hotel/motel

– includes loans for hotels and motels.

Generally, the primary source

of repayment is dependent upon

income generated from the real estate collateral.

The underwriting of these loans takes into consideration the

occupancy and rental rates, as well as the financial health of the borrower.

Multifamily

– primarily includes loans to finance income-producing multi-family properties. Loans in this

class include

loans for 5 or more unit residential property and apartments leased to residents. Generally,

the primary source of

repayment is dependent upon income generated from the real estate collateral.

The underwriting of these loans takes

into consideration the occupancy and rental rates, as well as the financial health of the

borrower.

Other

– primarily includes loans to finance income-producing commercial properties. Loans in this class include

loans

for neighborhood retail centers, hotels, medical and professional offices, single

retail stores, industrial buildings, and

warehouses leased generally to local businesses and residents. Generally,

the primary source of repayment is dependent

upon income generated from the real estate collateral. The underwriting of these loans takes into consideration

the

occupancy and rental rates as well as the financial health of the borrower.

Residential real estate (“RRE”) —

includes loans disaggregated into two classes: (1) consumer mortgage and (2)

investment property.

Consumer mortgage

– primarily includes first or second lien mortgages and home equity lines to consumers

that are

secured by a primary residence or second home. These loans are underwritten in accordance

with the Bank’s general

loan policies and procedures which require, among other things, proper documentation of each borrower’s

financial

condition, satisfactory credit history and property value.

Investment property

– primarily includes loans to finance income-producing 1-4 family residential properties.

Generally,

the primary source of repayment is dependent upon income generated from leasing the property

securing the

loan. The underwriting of these loans takes into consideration the rental rates as

well as the financial health of the

borrower.

Consumer installment —

includes loans to individuals both secured by personal property and unsecured.

Loans include

personal lines of credit, automobile loans, and other retail loans.

These loans are underwritten in accordance with the

Bank’s general loan policies and procedures

which require, among other things, proper documentation of each borrower’s

financial condition, satisfactory credit history,

and if applicable, property value.

Table of Contents

The following is a summary of current, accruing past due and nonaccrual loans by portfolio

class as of December 31, 2021

and 2020.

Accruing

Total

30-89 Days

Greater than

Accruing

Non-

Total

(In thousands)

Current

Past Due

90 days

Loans

Accrual

Loans

December 31, 2021:

Commercial and industrial

83,974

83,977

Construction and land development

32,228

204

32,432

Commercial real estate:

Owner occupied

63,375

Hotel/motel

43,856

Multifamily

42,587

Other

108,366

187

108,553

Total commercial real estate

258,184

187

258,371

Residential real estate:

Consumer mortgage

29,070

516

29,586

195

29,781

Investment property

47,818

47,880

Total residential real estate

76,888

516

77,404

257

77,661

Consumer installment

6,657

6,682

Total

457,931

748

458,679

444

459,123

December 31, 2020:

Commercial and industrial

82,355

230

82,585

Construction and land development

33,453

33,514

Commercial real estate:

Owner occupied

54,033

Hotel/motel

42,900

Multifamily

40,203

Other

117,759

117,788

212

118,000

Total commercial real estate

254,895

254,924

212

255,136

Residential real estate:

Consumer mortgage

33,169

1,503

140

34,812

215

35,027

Investment property

49,014

49,020

107

49,127

Total residential real estate

82,183

1,509

140

83,832

322

84,154

Consumer installment

7,069

7,099

Total

459,955

1,858

141

461,954

534

462,488

The gross interest income which would have been recorded under the original terms of those

nonaccrual loans had they

been accruing interest, amounted to approximately $

thousand and $

thousand for the years ended December 31, 2021

and 2020, respectively.

Table of Contents

Allowance for Loan Losses

The allowance for loan losses as of and for the years ended December 31,

2021 and 2020, is presented below.

Year ended December 31

(In thousands)

2021

2020

Beginning balance

5,618

4,386

Charged-off loans

(294)

(45)

Recovery of previously charged-off loans

215

177

Net (charge-offs) recoveries

(79)

132

Provision for loan losses

(600)

1,100

Ending balance

4,939

5,618

The Company assesses the adequacy of its allowance for loan losses prior

to the end of each calendar quarter. The level of

the allowance is based upon management’s

evaluation of the loan portfolio, past loan loss experience, current asset quality

trends, known and inherent risks in the portfolio, adverse situations that may affect

a borrower’s ability to repay (including

the timing of future payment), the estimated value of any underlying collateral,

composition of the loan portfolio, economic

conditions, industry and peer bank loan loss rates and other pertinent factors, including regulatory

recommendations. This

evaluation is inherently subjective as it requires material estimates including the amounts

and timing of future cash flows

expected to be received on impaired loans that may be susceptible to significant change. Loans are

charged off, in whole or

in part, when management believes that the full collectability of the loan is unlikely.

A loan may be partially charged-off

after a “confirming event” has occurred which serves to validate that full repayment pursuant

to the terms of the loan is

unlikely.

The Company deems loans impaired when, based on current information and events,

it is probable that the Company will

be unable to collect all amounts due according to the contractual terms of the loan agreement.

Collection of all amounts due

according to the contractual terms means that both the interest and principal payments of

a loan will be collected as

scheduled in the loan agreement.

An impairment allowance is recognized if the fair value of the loan is less than the recorded

investment in the loan. The

impairment is recognized through the allowance. Loans that are impaired are

recorded at the present value of expected

future cash flows discounted at the loan’s effective

interest rate, or if the loan is collateral dependent, impairment

measurement is based on the fair value of the collateral, less estimated disposal costs.

The level of allowance maintained is believed by management to be adequate

to absorb probable losses inherent in the

portfolio at the balance sheet date. The allowance is increased by provisions charged

to expense and decreased by charge-

offs, net of recoveries of amounts previously charged-off.

In assessing the adequacy of the allowance, the Company also considers the results of its

ongoing internal, independent

loan review process. The Company’s loan

review process assists in determining whether there are loans in the portfolio

whose credit quality has weakened over time and evaluating the risk characteristics of the

entire loan portfolio. The

Company’s loan review process includes the judgment

of management, the input from our independent loan reviewers, and

reviews that may have been conducted by bank regulatory agencies as part of their examination

process. The Company

incorporates loan review results in the determination of whether or not it is probable

that it will be able to collect all

amounts due

according to the contractual terms of a loan.

As part of the Company’s quarterly assessment

of the allowance, management divides the loan portfolio into five segments:

commercial and industrial, construction and land development, commercial real estate, residential

real estate, and consumer

installment loans. The Company analyzes each segment and estimates an allowance allocation

for each loan segment.

The allocation of the allowance for loan losses begins with a process of estimating the

probable losses inherent for these

types of loans. The estimates for these loans are established by category and based

on the Company’s internal system of

credit risk ratings and historical loss data. The estimated loan loss allocation rate for the Company’s

internal system of

credit risk grades is based on its experience with similarly graded loans. For

loan segments where the Company believes it

does not have sufficient historical loss data, the Company may

make adjustments based, in part, on loss rates of peer bank

groups. At December 31, 2021 and 2020, and for the years then ended, the Company adjusted

its historical loss rates for the

commercial real estate portfolio segment based, in part, on loss rates of peer bank groups.

Table of Contents

The estimated loan loss allocation for all five loan portfolio segments is then adjusted for management’s

estimate of

probable losses for several “qualitative and environmental” factors. The allocation

for qualitative and environmental factors

is particularly subjective and does not lend itself to exact mathematical calculation. This

amount represents estimated

probable inherent credit losses which exist, but have not yet been identified,

as of the balance sheet date, and are based

upon quarterly trend assessments in delinquent and nonaccrual loans, credit concentration

changes, prevailing economic

conditions, changes in lending personnel experience, changes in lending policies or

procedures and other influencing

factors. These qualitative and environmental factors are considered

for each of the five loan segments and the allowance

allocation, as determined by the processes noted above, is increased or decreased

based on the incremental assessment of

these factors.

The Company regularly re-evaluates its practices in determining the allowance

for loan losses. Since the fourth quarter of

2016, the Company has increased its look-back period each quarter to incorporate

the effects of at least one economic

downturn in its loss history. The Company

believes the extension of its look-back period is appropriate due to the risks

inherent in the loan portfolio. Absent this extension, the early cycle periods in

which the Company experienced significant

losses would be excluded from the determination of the allowance for loan losses and its balance

would decrease. For the

year ended December 31, 2021, the Company increased its look-back period

to 51 quarters to continue to include losses

incurred by the Company beginning with the first quarter of 2009. The

Company will likely continue to increase its look-

back period to incorporate the effects of at least one economic

downturn in its loss history.

During 2020, the Company

adjusted certain qualitative and economic factors related to changes in economic conditions

driven by the impact of the

COVID-19 pandemic and resulting adverse economic conditions, including

higher unemployment in our primary market

area.

During 2021, the Company adjusted certain qualitative and economic factors to reflect

improvements in economic

conditions in our primary market area.

Further adjustments may be made in the future as a result of the ongoing COVID-19

pandemic.

The following table details the changes in the allowance for loan losses by portfolio segment

for the years ended December

31, 2021 and 2020.

(in thousands)

Commercial

and industrial

Construction

and land

Development

Commercial

Real Estate

Residential

Real Estate

Consumer

Installment

Total

Balance, December 31, 2019

577

569

2,289

813

138

4,386

Charge-offs

(7)

(38)

(45)

Recoveries

177

Net (charge-offs) recoveries

(18)

132

Provision

143

880

(16)

1,100

Balance, December 31, 2020

807

594

3,169

944

104

5,618

Charge-offs

(254)

(3)

(37)

(294)

Recoveries

140

215

Net recoveries (charge-offs)

140

(254)

(17)

(79)

Provision

(90)

(76)

(176)

(257)

(1)

(600)

Balance, December 31, 2021

857

518

2,739

739

4,939

Table of Contents

The following table presents an analysis of the allowance for loan losses and recorded

investment in loans by portfolio

segment and impairment methodology as of December 31, 2021 and 2020.

Collectively evaluated (1)

Individually evaluated (2)

Total

Allowance

Recorded

Allowance

Recorded

Allowance

Recorded

for loan

investment

for loan

investment

for loan

investment

(In thousands)

losses

in loans

losses

in loans

losses

in loans

December 31, 2021:

Commercial and industrial

857

83,977

857

83,977

Construction and land development

518

32,432

518

32,432

Commercial real estate

2,739

258,184

187

2,739

258,371

Residential real estate

739

77,599

739

77,661

Consumer installment

6,682

Total

4,939

458,874

249

4,939

459,123

December 31, 2020:

Commercial and industrial

807

82,585

807

82,585

Construction and land development

594

33,514

594

33,514

Commercial real estate

3,169

254,924

212

3,169

255,136

Residential real estate

944

84,047

107

944

84,154

Consumer installment

104

7,099

104

7,099

Total

5,618

462,169

319

5,618

462,488

(1) Represents loans collectively evaluated for impairment

in accordance with ASC 450-20,

Loss Contingencies

(formerly FAS 5), and pursuant to amendments by ASU 2010-20 regarding allowance for

unimpaired loans.

(2) Represents loans individually evaluated for impairment

in accordance with ASC 310-30,

Receivables

(formerly

FAS 114), and pursuant to amendments by ASU 2010-20 regarding allowance for impaired loans.

Credit Quality Indicators

The credit quality of the loan portfolio is summarized no less frequently than quarterly using categories

similar to the

standard asset classification system used by the federal banking agencies.

The following table presents credit quality

indicators for the loan portfolio segments and classes. These categories are utilized to develop

the associated allowance for

loan losses using historical losses adjusted for qualitative and environmental factors

and are defined as follows:

●

Pass – loans which are well protected by the current net worth and paying capacity of the

obligor (or guarantors, if

any) or by the fair value, less cost to acquire and sell, of any underlying collateral.

●

Special Mention – loans with potential weakness that may,

if not reversed or corrected, weaken the credit or

inadequately protect the Company’s position

at some future date. These loans are not adversely classified and do

not expose an institution to sufficient risk to warrant an adverse classification.

●

Substandard Accruing – loans that exhibit a well-defined weakness which presently jeopardizes

debt repayment,

even though they are currently performing. These loans are characterized by the distinct possibility

that the

Company may incur a loss in the future if these weaknesses are not corrected.

●

Nonaccrual – includes loans where management has determined that full payment

of principal and interest is in

doubt.

Table of Contents

(In thousands)

Pass

Special

Mention

Substandard

Accruing

Nonaccrual

Total loans

December 31, 2021

Commercial and industrial

83,725

226

—

83,977

Construction and land development

32,212

218

—

32,432

Commercial real estate:

Owner occupied

61,573

1,675

127

—

63,375

Hotel/motel

36,162

7,694

—

43,856

Multifamily

39,093

3,494

—

42,587

Other

107,426

911

187

108,553

Total commercial real estate

244,254

13,774

156

187

258,371

Residential real estate:

Consumer mortgage

27,647

452

1,487

195

29,781

Investment property

47,459

261

47,880

Total residential real estate

75,106

550

1,748

257

77,661

Consumer installment

6,650

—

6,682

Total

441,947

14,372

2,360

444

459,123

December 31, 2020

Commercial and industrial

79,984

2,383

218

82,585

Construction and land development

33,260

254

33,514

Commercial real estate:

Owner occupied

51,265

2,627

141

54,033

Hotel/motel

35,084

7,816

42,900

Multifamily

36,673

3,530

40,203

Other

116,498

1,243

212

118,000

Total commercial real estate

239,520

15,216

188

212

255,136

Residential real estate:

Consumer mortgage

32,518

397

1,897

215

35,027

Investment property

48,501

187

332

107

49,127

Total residential real estate

81,019

584

2,229

322

84,154

Consumer installment

7,069

7,099

Total

440,852

18,190

2,912

534

462,488

Impaired loans

The following table presents details related to the Company’s

impaired loans. Loans which have been fully charged-off do

not appear in the following table. The related allowance generally represents the

following components which correspond

to impaired loans:

●

Individually evaluated impaired loans equal to or greater than $500 thousand secured

by real estate (nonaccrual

construction and land development, commercial real estate, and residential real estate).

●

Individually evaluated impaired loans equal to or greater than $250 thousand not secured

by real estate

(nonaccrual commercial and industrial and consumer loans).

The following table sets forth certain information regarding the Company’s

impaired loans that were individually evaluated

for impairment at December 31, 2021 and 2020.

Table of Contents

December 31, 2021

(In thousands)

Unpaid

principal

balance (1)

Charge-offs

and payments

applied (2)

Recorded

investment (3)

allowance

With no allowance recorded:

Commercial real estate:

Other

205

(18)

187

—

Total commercial real estate

205

(18)

187

—

Residential real estate:

Investment property

(6)

—

Total residential real estate

(6)

—

Total

impaired loans

273

(24)

249

—

(1) Unpaid principal balance represents the contractual obligation

due from the customer.

(2) Charge-offs and payments applied represents cumulative charge-offs taken, as well

as interest payments that have been

applied against the outstanding principal balance.

(3) Recorded investment represents the unpaid principal balance

less charge-offs and payments applied; it is shown before

any related allowance for loan losses.

December 31, 2020

(In thousands)

Unpaid

principal

balance (1)

Charge-offs

and payments

applied (2)

Recorded

investment (3)

allowance

With no allowance recorded:

Other

216

(4)

212

—

Total commercial real estate

216

(4)

212

—

Investment property

109

(2)

107

—

Total residential real estate

109

(2)

107

—

Total

impaired loans

325

(6)

319

—

(1) Unpaid principal balance represents the contractual obligation

due from the customer.

(2) Charge-offs and payments applied represents cumulative charge-offs taken, as well

as interest payments that have been

applied against the outstanding principal balance.

(3) Recorded investment represents the unpaid principal balance

less charge-offs and payments applied; it is shown before

any related allowance for loan losses.

The following table provides the average recorded investment in impaired loans and

the amount of interest income

recognized on impaired loans after impairment by portfolio segment and class.

Year ended December 31, 2021

Year ended December 31, 2020

Average

Total interest

Average

Total interest

recorded

income

recorded

income

(In thousands)

investment

recognized

investment

recognized

Impaired loans:

Commercial real estate:

Other

199

116

Total commercial real estate

199

116

Residential real estate:

Investment property

Total residential real estate

Total

295

175

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100

Troubled Debt

Restructurings

Impaired loans also include troubled debt restructurings (“TDRs”).

Section 4013 of the CARES Act, “Temporary

Relief

From Troubled Debt Restructurings,” provides banks the option

to temporarily suspend certain requirements under ASC

340-10 TDR classifications for a limited period of time to account for the effects

of COVID-19. In addition, the Interagency

Statement on COVID-19 Loan Modifications, encourages banks to

work prudently with borrowers and describes the

agencies’ interpretation of how accounting rules under ASC 310

-40, “Troubled Debt Restructurings by Creditors,” apply

certain COVID-19-related modifications. The Interagency Statement on

COVID-19 Loan Modifications was supplemented

on June 23, 2020 by the Interagency Examiner Guidance for Assessing Safety and

Soundness Considering the Effect of the

COVID-19 Pandemic on Institutions.

If a loan modification is eligible, a bank may elect to account for the loan under

section 4013 of the CARES Act. If a loan modification is not eligible under section 4013,

or if the bank elects not to

account for the loan modification under section 4013, the Revised Statement includes

criteria when a bank may presume a

loan modification is not a TDR in accordance with ASC 310-40.

The Company evaluates loan extensions or modifications not qualified under

Section 4013 of the CARES Act or under the

Interagency Statement on COVID-19 Loan Modifications in accordance

with FASB ASC 340-10 with respect to the

classification of the loan as a TDR.

In the normal course of business, management may grant concessions to borrowers

that

are experiencing financial difficulty.

A concession may include, but is not limited to, delays in required payments of

principal and interest for a specified period, reduction of the stated interest rate of the loan,

reduction of accrued interest,

extension of the maturity date, or reduction of the face amount or maturity amount of the debt.

A concession has been

granted when, as a result of the restructuring, the Bank does not expect to collect,

when due, all amounts owed, including

interest at the original stated rate.

A concession may have also been granted if the debtor is not able to access funds

elsewhere at a market rate for debt with similar risk characteristics as the restructured

debt.

In making the determination of

whether a loan modification is a TDR, the Company considers the individual facts

and circumstances surrounding each

modification.

As part of the credit approval process, the restructured loans are evaluated for

adequate collateral protection

in determining the appropriate accrual status at the time of restructure.

Similar to other impaired loans, TDRs are measured for impairment based on the present value of expected

payments using

the loan’s original effective

interest rate as the discount rate, or the fair value of the collateral, less selling costs if the

loan is

collateral dependent. If the recorded investment in the loan exceeds the measure of

fair value, impairment is recognized by

establishing a valuation allowance as part of the allowance for loan losses or a charge

-off to the allowance for loan losses.

In periods subsequent to the modification, all TDRs are evaluated individually,

including those that have payment defaults,

for possible impairment.

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101

The following is a summary of accruing and nonaccrual TDRs and the related loan losses, by portfolio

segment and class at

December 31, 2021 and 2020.

TDRs

(In thousands)

Accruing

Nonaccrual

Total

Allowance

December 31, 2021

Commercial real estate:

Other

187

Total commercial real estate

187

Investment property

Total residential real estate

Total

249

TDRs

(In thousands)

Accruing

Nonaccrual

Total

Allowance

December 31, 2020

Commercial real estate:

Other

212

Total commercial real estate

212

Investment property

107

Total residential real estate

107

Total

319

At December 31, 2021 there were no significant outstanding commitments to advance

additional funds to customers whose

loans had been restructured.

The following table summarizes loans modified in a TDR during the respective periods

both

before and after modification.

Pre-

Post-

modification

outstanding

Number of

recorded

($ in thousands)

contracts

investment

December 31, 2020

Commercial real estate:

Other

216

Total commercial real estate

216

Investment property

111

Total residential real estate

111

Total

327

There were no loans modified in a TDR in 2021.

Four loans were modified in a TDR during the year ended December 31,

2020 the only concession granted by the Company was related to a delay in the required

payment of principal and/or

interest.

During the years ended December 31, 2021 and 2020, respectively,

the Company had no loans modified in a TDR within

the previous 12 months for which there was a payment default (defined as 90 days or

more past due).

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102

NOTE 6: PREMISES AND EQUIPMENT

Premises and equipment at December 31, 2021 and 2020 is presented below

December 31

(Dollars in thousands)

2021

2020

Land and improvements

9,830

9,829

Buildings and improvements

16,124

7,436

Furniture, fixtures, and equipment

3,096

2,715

Construction in progress

19,277

8,171

Total premises and equipment

48,327

28,151

Less:

accumulated depreciation

(6,603)

(5,958)

Premises and equipment, net

41,724

22,193

Depreciation expense was approximately $

644

thousand and $

905

thousand for the years ended December 31, 2021 and

2020, respectively, and is a component

of net occupancy and equipment expense in the consolidated statements of earnings.

For more information related to depreciation expense, please refer to “Change in

Accounting Estimate” in Note 1,

Summary of Significant Accounting Policies.

NOTE 7: MORTGAGE SERVICING

RIGHTS, NET

MSRs are recognized

based on the

fair value of

the servicing rights

on the date

the corresponding mortgage

loans are sold.

estimate

the

Company’s

MSRs

determined

using

assumptions

that

market

participants

would

use

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.

Subsequent to

the date

of transfer,

the

Company

has

elected

measure

its

MSRs

under

the

amortization

method.

Under

the

amortization

method,

MSRs

are

amortized in proportion

to, and over

the period of,

estimated net servicing

income. Servicing

fee income is

recorded net

related amortization expense and recognized in earnings as part of mortgage lending

income.

The Company has recorded MSRs related to loans sold without recourse to

Fannie Mae.

The Company generally sells

conforming, fixed-rate, closed-end, residential mortgages to Fannie Mae.

MSRs are included in other assets on the

accompanying consolidated balance sheets.

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103

The Company evaluates MSRs for impairment on a quarterly basis.

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.

The valuation allowance is adjusted

as the fair value changes.

Changes in the valuation allowance are recognized in earnings as a component

of mortgage

lending income.

The following table details the changes in amortized MSRs and the related valuation allowance for

the years ended

December 31, 2021 and 2020.

Year ended December 31

(Dollars in thousands)

2021

2020

Beginning balance

1,330

1,299

Additions, net

495

671

Amortization expense

(516)

(640)

Ending balance

1,309

1,330

Valuation

allowance included in MSRs, net:

Beginning of period

End of period

—

Fair value of amortized MSRs:

Beginning of period

1,489

2,111

End of period

1,908

1,489

Data and assumptions used in the fair value calculation related to MSRs at December

31, 2021 and 2020, respectively,

are

presented below.

December 31

(Dollars in thousands)

2021

2020

Unpaid principal balance

255,310

265,964

Weighted average prepayment

speed (CPR)

13.3

20.7

Discount rate (annual percentage)

9.5

10.0

Weighted average coupon

interest rate

3.4

3.6

Weighted average remaining

maturity (months)

260

253

Weighted average servicing

fee (basis points)

25.0

At December 31, 2021, the weighted average amortization period

for MSRs was

5.1

years.

Estimated amortization expense

for each of the next five years is presented below.

(Dollars in thousands)

December 31, 2021

2022

241

2023

194

2024

158

2025

129

2026

106

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104

NOTE 8:

DEPOSITS

At December 31, 2021, the scheduled maturities of certificates of deposit and other time

deposits are presented below.

(Dollars in thousands)

December 31, 2021

2022

113,771

2023

26,196

2024

11,709

2025

3,377

2026

4,408

Thereafter

189

Total certificates of deposit and

other time deposits

159,650

Additionally, at December 31,

2021 and 2020, approximately $

58.0

million and $

55.0

million, respectively, of certificates

of deposit and other time deposits were issued in denominations greater than $250

thousand.

At December 31, 2021 and 2020, the amount of deposit accounts in overdraft status that

were reclassified to loans on the

accompanying consolidated balance sheets was not material.

NOTE 9: LEASE COMMITMENTS

We lease certain office

facilities and equipment under operating leases. Rent expense for all

operating leases totaled $

0.2

million for both years ended December 31, 2021 and 2020.

On January 1, 2019, we adopted a new accounting standard

which required the recognition of certain operating leases on our balance sheet as lease right of

use assets (reported as

component of other assets) and related lease liabilities (reported as a component of accrued

expenses and other liabilities).

Aggregate lease right of use assets were $

687

thousand and $

788

thousand at December 31, 2021 and 2020, respectively.

Aggregate lease liabilities were $

710

thousand and $

811

thousand at December 31, 2021 and 2020, respectively.

Rent

expense includes amounts related to items that are not included in the determination of lease

right of use assets including

expenses related to short-term leases totaling $

0.1

million for the year ended December 31, 2021.

Lease payments under operating leases that were applied to our operating lease liability totaled

120

thousand during the

year ended December 31, 2021. The following table reconciles future undiscounted

lease payments due under non-

cancelable operating leases (those amounts subject to recognition) to the aggregate operating lease

liability as of December

31, 2021.

(Dollars in thousands)

Future lease

payments

2022

120

2023

120

2024

120

2025

111

2026

Thereafter

207

Total undiscounted operating

lease liabilities

771

Imputed interest

Total operating lease liabilities

included in the accompanying consolidated balance sheets

710

Weighted-average lease terms

in years

6.79

Weighted-average discount rate

3.06

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105

NOTE 10:

OTHER COMPREHENSIVE (LOSS) INCOME

Comprehensive income

is defined

as the

change in

equity from

all transactions

other than

those with

stockholders,

and

includes

net

earnings

and

other

comprehensive

(loss)

income.

Other

comprehensive

(loss)

income

for

the

years

ended

December 31, 2021 and 2020, is presented below.

Pre-tax

Tax benefit

Net of

(Dollars in thousands)

amount

(expense)

tax amount

2021:

Unrealized net holding loss on securities

(8,943)

2,246

(6,697)

Reclassification adjustment for net gain on securities recognized in net earnings

(15)

(11)

Other comprehensive loss

(8,958)

2,250

(6,708)

2020:

Unrealized net holding gain on securities

7,501

(1,884)

5,617

Reclassification adjustment for net gain on securities recognized in net earnings

(103)

(77)

Other comprehensive income

7,398

(1,858)

5,540

NOTE 11:

INCOME TAXES

For the years ended December 31, 2021 and 2020 the components of income tax expense

from continuing operations are

presented below.

Year ended December 31

(Dollars in thousands)

2021

2020

Current income tax expense:

Federal

833

1,459

State

295

476

Total current income tax expense

1,128

1,935

Deferred income tax benefit:

Federal

220

(262)

State

(68)

Total deferred

income tax expense (benefit)

278

(330)

Total income tax expense

1,406

1,605

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106

Total income tax expense differs

from the amounts computed by applying the statutory federal income tax rate of 21%

earnings before income taxes.

A reconciliation of the differences for the years ended December 31,

2021 and 2020, is

presented below.

2021

2020

Percent of

pre-tax

(Dollars in thousands)

Amount

earnings

Amount

earnings

Earnings before income taxes

9,445

9,059

Income taxes at statutory rate

1,983

21.0

1,902

21.0

Tax-exempt interest

(514)

(5.4)

(489)

(5.4)

State income taxes, net of

federal tax effect

352

3.7

345

3.8

New Markets Tax Credit

(356)

(3.8)

—

Bank-owned life insurance

(85)

(0.9)

(152)

(1.7)

Other

0.3

(1)

Total income tax expense

1,406

14.9

1,605

17.7

At December 31, 2021, the Company had a net deferred tax asset of $0.4

million included in other assets on the

consolidated balance sheet and at December 31, 2020, a deferred tax liability of $1.5

million included in other liabilities on

the consolidated balance sheet.

The tax effects of temporary differences that give rise to significant

portions of the deferred

tax assets and deferred tax liabilities at December 31, 2021 and 2020 are presented

below.

December 31

(Dollars in thousands)

2021

2020

Deferred tax assets:

Allowance for loan losses

1,240

1,411

Accrued bonus

192

183

Right of use liability

178

204

Other

Total deferred

tax assets

1,687

1,889

Deferred tax liabilities:

Premises and equipment

200

199

Unrealized gain on securities

298

2,548

Originated mortgage servicing rights

329

334

Right of use asset

173

198

New Markets Tax Credit investment

Other

163

147

Total deferred

tax liabilities

1,252

3,426

Net deferred tax asset (liability)

435

(1,537)

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 of 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. Based upon the level of historical

taxable income and

projection for future taxable income over the periods which the temporary differences

resulting in the remaining deferred

tax assets are deductible, management believes it is more-likely-than

-not that the Company will realize the benefits of these

deductible differences at December 31, 2021.

The amount of the deferred tax assets considered realizable, however,

could

be reduced in the near term if estimates of future taxable income are reduced.

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107

The change in the net deferred tax asset for the years ended December 31, 2021

and 2020, is presented

below.

Year ended December 31

(Dollars in thousands)

2021

2020

Net deferred tax asset (liability):

Balance, beginning of year

(1,537)

(9)

Deferred tax (expense) benefit related to continuing operations

(278)

330

Stockholders' equity, for accumulated

other comprehensive loss (income)

2,250

(1,858)

Balance, end of year

435

(1,537)

ASC 740,

Income Taxes,

defines the threshold for recognizing the benefits of tax return positions in the financial statements

as “more-likely-than-not” to be sustained by the taxing authority.

This section also provides guidance on the de-

recognition, measurement, and classification of income tax uncertainties in interim

periods.

As of December 31, 2021, the

Company had no unrecognized tax benefits related to federal or state income tax matters.

The Company does not anticipate

any material increase or decrease in unrecognized tax benefits during 2022

relative to any tax positions taken prior to

December 31, 2021.

As of December 31, 2021, the Company has accrued no interest and no penalties related to uncertain

tax positions.

It is the Company’s policy to recognize interest

and penalties related to income tax matters in income tax

expense.

The Company and its subsidiaries file consolidated U.S. federal and State of Alabama income

tax returns.

The Company is

currently open to audit under the statute of limitations by the Internal Revenue Service and the State of

Alabama for the

years ended December 31, 2018 through 2021.

NOTE 12:

EMPLOYEE BENEFIT PLAN

The Company sponsors a qualified defined contribution retirement plan, the Auburn National

Bancorporation, Inc. 401(k)

Plan (the "Plan").

Eligible employees may contribute up to 100% of eligible compensation, subject to statutory limits

upon

completion of 2 months of service.

Furthermore, the Company allows employer Safe Harbor contributions. Participants

are

immediately vested in employer Safe Harbor contributions. The

Company's matching contributions on behalf of

participants were equal to $1.00 for each $1.00 contributed by participants, up to 3% of the

participants' eligible

compensation, and $0.50 for every $1.00 contributed by participants, above 3% up to 5%

of the participants' eligible

compensation, for a maximum matching contribution of 4% of the participants' eligible

compensation. Company matching

contributions to the Plan were approximately $

0.3

million for the years ended December 31, 2021 and 2020, respectively,

and are included in salaries and benefits expense.

NOTE 13:

COMMITMENTS AND CONTINGENT LIABILITIES

Credit-Related Financial Instruments

The Company is party to credit related financial instruments with off

-balance sheet risk in the normal course of business to

meet the financing needs of its customers.

These financial instruments include commitments to extend credit and standby

letters of credit.

Such commitments involve, to varying degrees, elements of credit and interest rate

risk in excess of the

amount recognized in the consolidated balance sheets.

The Company’s exposure to credit

loss is represented by the contractual amount of these commitments.

The Company

follows the same credit policies in making commitments as it does for on-balance sheet

instruments.

At December 31, 2021 and 2020, the following financial instruments were outstanding

whose contract amount represents

credit risk.

December 31

(Dollars in thousands)

2021

2020

Commitments to extend credit

70,993

74,970

Standby letters of credit

1,455

1,237

Commitments to extend credit are agreements to lend to a customer as long as there is no violation

of any condition

established in the agreement.

Commitments generally have fixed expiration dates or other termination clauses

and may

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108

require payment of a fee.

The commitments for lines of credit may expire without being

drawn upon.

Therefore, total

commitment amounts do not necessarily represent future cash requirements.

The amount of collateral obtained, if it is

deemed necessary by the Company,

is based on management’s credit

evaluation of the customer.

Standby letters of credit are conditional commitments issued by the Company to

guarantee the performance of a customer

to a third party.

The credit risk involved in issuing letters of credit is essentially the same

as that involved in extending loan

facilities to customers.

The Company holds various assets as collateral, including accounts receivable,

inventory,

equipment, marketable securities, and property to support those commitments

for which collateral is deemed necessary.

The Company has recorded a liability for the estimated fair value of these standby letters

of credit in the amount of $

thousand and $

thousand at December 31, 2021 and 2020, respectively.

Other Commitments

At December 31, 2021, the Company has contracts with construction companies

for an aggregate of $

30.5

million to

construct a new headquarters in Auburn, Alabama.

As of December 31, 2021, the Company has paid $

24.1

million under

these contracts with a balance to finish, including retainage, of $

6.4

million.

Contingent Liabilities

The Company and the Bank are involved in various legal proceedings, arising in connection

with their business.

In the

opinion of management, based upon consultation with legal counsel, the ultimate resolution

of these proceeding will not

have a material adverse effect upon the consolidated financial

condition or results of operations of the Company and the

Bank.

NOTE 14: FAIR VALUE

Fair Value

Hierarchy

“Fair value” is defined by ASC 820,

Fair Value

Measurements and Disclosures

, as the price that would be received to sell

an asset or paid to transfer a liability in an orderly transaction occurring in the principal market

(or most advantageous

market in the absence of a principal market) for an asset or liability at the measurement date.

GAAP establishes a fair

value hierarchy for valuation inputs that gives the highest priority to quoted prices

in active markets for identical assets or

liabilities and the lowest priority to unobservable inputs.

The fair value hierarchy is as follows:

Level 1—inputs to the valuation methodology are quoted prices, unadjusted, for identical

assets or liabilities in active

markets.

Level 2—inputs to the valuation methodology include quoted prices for similar assets and

liabilities in active markets,

quoted prices for identical or similar assets or liabilities in markets that are not active, or

inputs that are observable for the

asset or liability, either directly or

indirectly.

Level 3—inputs to the valuation methodology are unobservable and reflect the

Company’s own assumptions about the

inputs market participants would use in pricing the asset or liability.

Level changes in fair value measurements

Transfers between levels of the fair value hierarchy are generally

recognized at the end of the reporting period.

The

Company monitors the valuation techniques utilized for each category of

financial assets and liabilities to ascertain when

transfers between levels have been affected.

The nature of the Company’s financial assets

and liabilities generally is such

that transfers in and out of any level are expected to be infrequent. For the years ended December

31, 2021 and 2020, there

were no transfers between levels and no changes in valuation techniques for the Company’s

financial assets and liabilities.

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109

Assets and liabilities measured at fair value on a recurring

basis

Securities available-for-sale

Fair values of securities available for sale were primarily measured using

Level 2 inputs.

For these securities, the Company

obtains pricing from third party pricing services.

These third party pricing services consider observable data that may

include broker/dealer quotes, market spreads, cash flows, market consensus prepayment

speeds, benchmark yields, reported

trades for similar securities, credit information and the securities’ terms and conditions.

On a quarterly basis, management

reviews the pricing received from the third party pricing services for reasonableness

given current market conditions.

part of its review, management

may obtain non-binding third party broker quotes to validate the fair value measurements.

In addition, management will periodically submit pricing provided by the third party

pricing services to another

independent valuation firm on a sample basis.

This independent valuation firm will compare the price provided

by the

third-party pricing service with its own price and will review the significant assumptions

and valuation methodologies used

with management.

The following table presents the balances of the assets and liabilities measured at fair value

on a recurring as of December

31, 2021 and 2020, respectively,

by caption, on the accompanying consolidated balance sheets by ASC 820

valuation

hierarchy (as described above).

Quoted Prices in

Significant

Active Markets

Other

Significant

for

Observable

Unobservable

Identical Assets

Inputs

(Dollars in thousands)

Amount

(Level 1)

(Level 2)

(Level 3)

December 31, 2021:

Securities available-for-sale:

Agency obligations

124,413

Agency MBS

223,371

State and political subdivisions

74,107

Total securities available-for-sale

421,891

Total

assets at fair value

421,891

December 31, 2020:

Securities available-for-sale:

Agency obligations

97,448

Agency MBS

163,470

State and political subdivisions

74,259

Total securities available-for-sale

335,177

Total

assets at fair value

335,177

Assets and liabilities measured at fair value on a nonrecurring

basis

Loans held for sale

Loans held for sale are carried at the lower of cost or fair value. Fair values of loans held for

sale are determined using

quoted market secondary market prices for similar loans.

Loans held for sale are classified within Level 2 of the fair value

hierarchy.

Impaired Loans

Loans considered impaired under ASC 310-10-35,

Receivables

, are loans for which, based on current information and

events, it is probable that the Company will be unable to collect all principal and interest

payments due in accordance with

the contractual terms of the loan agreement.

Impaired loans can be measured based on the present value of expected

payments using the loan’s original effective

rate as the discount rate, the loan’s observable

market price, or the fair value of

the collateral less selling costs if the loan is collateral dependent.

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110

The fair value of impaired loans were primarily measured based on the value of the collateral

securing these loans.

Impaired loans are classified within Level 3 of the fair value hierarchy.

Collateral may be real estate and/or business assets

including equipment, inventory,

and/or accounts receivable.

The Company determines the value of the collateral based on

independent appraisals performed by qualified licensed appraisers.

These appraisals may utilize a single valuation

approach or a combination of approaches including comparable sales and the income

approach.

Appraised values are

discounted for costs to sell and may be discounted further based on management’s

historical knowledge, changes in market

conditions from the date of the most recent appraisal, and/or management’s

expertise and knowledge of the customer and

the customer’s business.

Such discounts by management are subjective and are typically significant unobservable

inputs

for determining fair value.

Impaired loans are reviewed and evaluated on at least a quarterly basis

for additional

impairment and adjusted accordingly,

based on the same factors discussed above.

Other real estate owned

Other real estate

owned, consisting of properties obtained through foreclosure or in satisfaction

of loans, are initially

recorded at the lower of the loan’s carrying amount or

the fair value less costs to sell upon transfer of the loans to other real

estate. Subsequently, other real

estate is carried at the lower of carrying value or fair value less costs to sell. Fair values are

generally based on third party appraisals of the property and are classified within

Level 3 of the fair value hierarchy.

The

appraisals are sometimes further discounted based on management’s

historical knowledge, and/or changes in market

conditions from the date of the most recent appraisal, and/or management’s

expertise and knowledge of the customer and

the customer’s business. Such discounts are typically significant

unobservable inputs for determining fair value. In cases

where the carrying amount exceeds the fair value, less costs to sell, a loss is recognized

in noninterest expense.

Mortgage servicing rights, net

Mortgage servicing rights, net, included in other assets on the accompanying consolidated

balance sheets, are carried at the

lower of cost or estimated fair value.

MSRs do not trade in an active market with readily observable prices.

To determine

the fair value of MSRs, the Company engages an independent third party.

The independent third party’s

valuation model

calculates the present value of estimated future net servicing income 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.

Periodically, the

Company will review broker surveys and other market research to validate significant

assumptions used in the model.

The

significant unobservable inputs include prepayment speeds or the constant prepayment rate

(“CPR”) and the weighted

average discount rate.

Because the valuation of MSRs requires the use of significant unobservable inputs, all of the

Company’s MSRs are classified

within Level 3 of the valuation hierarchy.

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111

The following table presents the balances of the assets and liabilities measured

at fair value on a nonrecurring basis as of

December 31, 2021 and

2020, respectively, by caption, on the accompanying

consolidated balance sheets and by ASC 820

valuation hierarchy (as described above):

Quoted Prices in

Active Markets

Other

Significant

for

Observable

Unobservable

Identical Assets

Inputs

(Dollars in thousands)

Amount

(Level 1)

(Level 2)

(Level 3)

December 31, 2021:

Loans held for sale

1,376

Loans, net

(1)

249

Other assets

(2)

1,683

Total assets at fair value

3,308

1,376

1,932

December 31, 2020:

Loans held for sale

3,418

Loans, net

(1)

319

Other assets

(2)

1,330

Total assets at fair value

5,067

3,418

1,649

(1)

Loans considered impaired under ASC 310-10-35 Receivables. This amount reflects the recorded

investment in

impaired loans, net of any related allowance for loan losses.

(2)

Represents other real estate owned and MSRs, net both of which are carried at lower of cost or

estimated fair value.

At December 31, 2021 and 2020 and for the years then ended, the Company had no Level

3 assets measured at fair value on

a recurring basis.

For Level 3 assets measured at fair value on a non-recurring basis as of December

31, 2021 and 2020, the

significant unobservable inputs used in the fair value measurements are presented

below.

Weighted

Carrying

Significant

Average

(Dollars in thousands)

Amount

Valuation Technique

Unobservable Input

Range

of Input

December 31, 2021:

Impaired loans

249

Appraisal

Appraisal discounts

10.0

Other real estate owned

374

Appraisal

Appraisal discounts

55.0

Mortgage servicing rights, net

1,309

Discounted cash flow

Prepayment speed or CPR

6.8

16.5

13.3

Discount rate

9.5

11.5

9.5

December 31, 2020:

Impaired loans

319

Appraisal

Appraisal discounts

10.0

Mortgage servicing rights, net

1,330

Discounted cash flow

Prepayment speed or CPR

18.2

36.4

20.7

Discount rate

10.0

12.0

10.0

Fair Value

of Financial Instruments

ASC 825,

Financial Instruments

, requires disclosure of fair value information about financial instruments,

whether or not

recognized on the face of the balance sheet, for which it is practicable to estimate that

value. The assumptions used in the

estimation of the fair value of the Company’s

financial instruments are explained below.

Where quoted market prices are

not available, fair values are based on estimates using discounted cash flow analyses. Discounted

cash flows can be

significantly affected by the assumptions used, including the discount rate

and estimates of future cash flows. The

following fair value estimates cannot be substantiated by comparison to independent

markets and should not be considered

representative of the liquidation value of the Company’s

financial instruments, but rather are a good-faith estimate of the

fair value of financial instruments held by the Company.

ASC 825 excludes certain financial instruments and all

nonfinancial instruments from its disclosure requirements.

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112

The following methods and assumptions were used by the Company in estimating the

fair value of its financial instruments:

Loans, net

Fair values for loans were calculated using discounted cash flows. The discount rates reflected

current rates at which similar

loans would be made for the same remaining maturities. Expected

future cash flows were projected based on contractual

cash flows, adjusted for estimated prepayments.

The fair value of loans was measured using an exit price

notion.

Loans held for sale

Fair values of loans held for sale are determined using quoted market secondary

market prices for similar loans.

Time Deposits

Fair values for time deposits were estimated using discounted

cash flows. The discount rates were based on rates currently

offered for deposits with similar remaining maturities.

Fair Value Hierarchy

Carrying

Estimated

Level 1

Level 2

Level 3

(Dollars in thousands)

amount

fair value

inputs

Inputs

December 31, 2021:

Financial Assets:

Loans, net (1)

453,425

449,105

Loans held for sale

1,376

1,410

Financial Liabilities:

Time Deposits

159,650

160,581

December 31, 2020:

Financial Assets:

Loans, net (1)

456,082

451,816

Loans held for sale

3,418

3,509

Financial Liabilities:

Time Deposits

160,401

162,025

(1) Represents loans, net of unearned income and the allowance

for loan losses.

The fair value of loans was measured using an exit

price notion.

NOTE 15: RELATED PARTY

TRANSACTIONS

The Bank has made, and expects in the future to continue to make in the ordinary course

of business, loans to directors and

executive officers of the Company,

the Bank, and their affiliates. In management’s

opinion, these loans were made in the

ordinary course of business at normal credit terms, including interest rate and collateral

requirements, and do not represent

more than normal credit risk.

An analysis of such outstanding loans is presented below.

(Dollars in thousands)

Amount

Loans outstanding at December 31, 2021

1,236

New loans/advances

844

Repayments

(516)

Loans outstanding at December 31, 2021

1,564

During 2021 and 2020, certain executive officers and directors

of the Company and the Bank, including companies with

which they are affiliated, were deposit customers of the bank.

Total deposits for these persons

at December 31, 2021 and

2020 amounted to $

19.3

million and $

18.7

million, respectively.

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113

NOTE 16: REGULATORY

RESTRICTIONS AND CAPITAL

RATIOS

As required by the Economic Growth, Regulatory Relief, and Consumer Protection

Act in August 2018, the Federal

Reserve Board issued an interim final rule that expanded applicability of the Board’s

small bank holding company policy

statement. The interim final rule raised the policy statement’s

asset threshold from $1 billion to $3 billion in total

consolidated assets for a bank holding company or savings and loan holding company that:

(1) is not engaged in significant

nonbanking activities; (2) does not conduct significant off-balance sheet

activities; and (3) does not have a material amount

of debt or equity securities, other than trust-preferred securities, outstanding. The

interim final rule provides that, if

warranted for supervisory purposes, the Federal Reserve may exclude a company from

the threshold increase. Management

believes the Company meets the conditions of the Federal Reserve’s

small bank holding company policy statement and is

therefore excluded from consolidated capital requirements at December 31,

2021.

The Bank remains subject to regulatory capital requirements administered by the

federal banking agencies. Failure to meet

minimum capital requirements can initiate certain mandatory - and possibly additional

discretionary - actions by regulators

that, if undertaken, could have a direct material effect on the Company’s

financial statements. Under capital adequacy

guidelines and the regulatory framework for prompt corrective action, the Bank

must meet specific capital guidelines that

involve quantitative measures of their assets, liabilities and certain off

-balance sheet items as calculated under regulatory

accounting practices. The capital amounts and classification are also subject

to qualitative judgments by the regulators

about components, risk weightings and other factors.

As of December 31, 2021, the Bank is “well capitalized” under the regulatory framework

for prompt corrective action. To

be categorized as “well capitalized,” the Bank must maintain minimum common equit

Tier 1, total risk-based, Tier

1 risk-

based, and Tier 1 leverage ratios as set forth in the table. Management

has not received any notification from the Bank's

regulators that changes the Bank’s regulatory capital

status.

The actual capital amounts and ratios for the Bank and the aforementioned minimums as

of December 31, 2021 and 2020

are presented below.

Minimum for capital

Minimum to be

Actual

adequacy purposes

well capitalized

(Dollars in thousands)

Amount

Ratio

Amount

Ratio

Amount

Ratio

At December 31, 2021:

Tier 1 Leverage Capital

100,059

9.35

42,808

4.00

53,509

5.00

Common Equity Tier 1 Capital

100,059

16.23

27,742

4.50

40,072

6.50

Tier 1 Risk-Based Capital

100,059

16.23

36,990

6.00

49,320

8.00

Total Risk-Based Capital

105,163

17.06

49,320

8.00

61,649

10.00

At December 31, 2020:

Tier 1 Leverage Capital

96,096

10.32

37,263

4.00

46,579

5.00

Common Equity Tier 1 Capital

96,096

17.27

25,042

4.50

36,171

6.50

Tier 1 Risk-Based Capital

96,096

17.27

33,389

6.00

44,519

8.00

Total Risk-Based Capital

101,906

18.31

44,519

8.00

55,648

10.00

Dividends paid by the Bank are a principal source of funds available to the Company for

payment of dividends to its

stockholders and for other needs. Applicable federal and state statutes and regulations impose

restrictions on the amounts of

dividends that may be declared by the subsidiary bank. State law and Federal Reserve policy

restrict the Bank from

declaring dividends in excess of the sum of the current year’s earnings

plus the retained net earnings from the preceding

two years without prior approval. In addition to the formal statutes and regulations,

regulatory authorities also consider the

adequacy of the Bank’s total capital in relation to its assets,

deposits, and other such items. Capital adequacy considerations

could further limit the availability of dividends from the Bank. At December 31,

2021, the Bank could have declared

additional dividends of approximately $

8.3

million without prior approval of regulatory authorities. As a result of this

limitation, approximately $

92.6

million of the Company’s investment in the Bank

was restricted from transfer in the form

of dividends.

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114

NOTE 17: AUBURN NATIONAL

BANCORPORATION

(PARENT COMPANY)

The Parent Company’s condensed balance sheets

and related condensed statements of earnings and cash flows are as

follows.

CONDENSED BALANCE SHEETS

December 31

(Dollars in thousands)

2021

2020

Assets:

Cash and due from banks

2,705

4,049

Investment in bank subsidiary

100,951

103,695

Other assets

630

631

Total assets

104,286

108,375

Liabilities:

Accrued expenses and other liabilities

560

685

Total liabilities

560

685

Stockholders' equity

103,726

107,690

Total liabilities and stockholders'

equity

104,286

108,375

CONDENSED STATEMENTS

OF EARNINGS

Year ended December 31

(Dollars in thousands)

2021

2020

Income:

Dividends from bank subsidiary

3,682

3,638

Noninterest income

665

862

Total income

4,347

4,500

Expense:

Noninterest expense

189

255

Total expense

189

255

Earnings before income tax expense and equity

in undistributed earnings of bank subsidiary

4,158

4,245

Income tax expense

110

Earnings before equity in undistributed earnings

of bank subsidiary

4,076

4,135

Equity in undistributed earnings of bank subsidiary

3,963

3,319

Net earnings

8,039

7,454

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115

CONDENSED STATEMENTS

OF CASH FLOWS

Year ended December 31

(Dollars in thousands)

2021

2020

Cash flows from operating activities:

Net earnings

8,039

7,454

Adjustments to reconcile net earnings to net cash

provided by operating activities:

Net decrease (increase) in other assets

(6)

Net decrease in other liabilities

(120)

(561)

Equity in undistributed earnings of bank subsidiary

(3,963)

(3,319)

Net cash provided by operating activities

3,957

3,568

Cash flows from financing activities:

Dividends paid

(3,682)

(3,638)

Stock repurchases

(1,619)

Net cash used in financing activities

(5,301)

(3,638)

Net change in cash and cash equivalents

(1,344)

(70)

Cash and cash equivalents at beginning of period

4,049

4,119

Cash and cash equivalents at end of period

2,705

4,049

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116

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS

ON ACCOUNTING AND

FINANCIAL DISCLOSURE

Not applicable.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange

Act”), the Company’s

management, under the supervision and with the participation of its principal executive

and principal financial officer,

conducted an evaluation as of the end of the period covered by this report, of the effectiveness

of the Company’s disclosure

controls and procedures as defined in Rule 13a-15(e) under the Exchange

Act. Based on that evaluation, and the results of

the audit process described below,

the Chief Executive Officer and Chief Financial Officer

concluded that the Company’s

disclosure controls and procedures were effective to ensure that information

required to be disclosed in the Company’s

reports under the Exchange Act is recorded, processed, summarized and reported

within the time periods specified in the

SEC’s rules and regulations, and that such information

is accumulated and communicated to the Company’s

management,

including the Chief Executive Officer and the Chief Financial Officer,

as appropriate, to allow timely decisions regarding

disclosure.

Management’s Report on Internal Control

Over Financial Reporting

The Company’s management is responsible

for establishing and maintaining adequate internal control over financial

reporting. The Company’s internal

control system was designed to provide reasonable assurance to the Company’s

management and board of directors regarding the preparation and fair presentation of published

financial statements. All

internal control systems, no matter how well designed, have inherent limitations.

Therefore, even those systems determined

to be effective can provide only reasonable assurance with respect

to financial statement preparation and presentation.

Under the direction of the Company’s Chief Executive

Officer and Chief Financial Officer,

management has assessed the

effectiveness of the Company’s

internal control over financial reporting as of December 31, 2021 in accordance

with the

criteria set forth by the Committee of Sponsoring Organizations of the Treadway

Commission (“COSO”) in Internal

Control – Integrated Framework (2013). Based on this assessment, management

has concluded that such internal control

over financial reporting was effective as of December 31,

2021.

This annual report does not include an attestation report of the Company’s

independent registered public accounting firm

regarding internal control over financial reporting. Management’s

report was not subject to attestation by the Company’s

registered public accounting firm pursuant to the final rules of the Securities and Exchange

Commission that permit the

Company to provide only a management’s

report in this annual report.

Changes in Internal Control Over Financial Reporting

During the period covered by this report, there has not been any change in the Company’s

internal controls over financial

reporting that has materially affected, or is reasonably likely to

materially affect, the Company’s

internal controls over

financial reporting.

ITEM 9B.

OTHER INFORMATION

None.

ITEM 9C.

DISCLOSURE REGARDING FORGEIN JURISDICTIONS THAT

PREVENT INSPECTION

None.

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117

PART

III

ITEM 10.

DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information required by this item is set forth under the headings “Proposal

One: Election of Directors - Information about

Nominees for Directors,” and “Executive Officers,”

“Additional Information Concerning the Company’s

Board of

Directors and Committees,” “Executive Compensation,” “Audit Committee

Report” and “Compliance with Section 16(a) of

the Securities Exchange Act of 1934” in the Proxy Statement, and is incorporated herein by reference.

The Board of Directors has adopted a Code of Conduct and Ethics applicable to the Company’s

directors, officers and

employees, including the Company’s principal

executive officer,

principal financial and principal accounting officer,

controller and other senior financial officers. The Code of Conduct and Ethics,

as well as the charters for the Audit

Committee, Compensation Committee, and the Nominating and Corporate

Governance Committee, can be found by

hovering over the heading “About Us” on the Company’s

website,

www.auburnbank.com

, and then clicking on “Investor

Relations”, and then clicking on “Governance Documents”.

In addition, this information is available in print to any

shareholder who requests it. Written requests

for a copy of the Company’s Code of Conduct

and Ethics or the Audit

Committee, Compensation Committee, or Nominating and Corporate

Governance Committee Charters may be sent to

Auburn National Bancorporation, Inc., 132 N. Gay Street, Auburn, Alabama 36830,

Attention: Marla Kickliter, Senior Vice

President of Compliance and Internal Audit. Requests may also be made

via telephone by contacting Marla Kickliter,

Senior Vice President of Compliance

and Internal Audit, or Laura Carrington, Vice

President of Human Resources, at

(334) 821-9200.

ITEM 11.

EXECUTIVE COMPENSATION

Information required by this item is set forth under the headings “Additional Information

Concerning the Company’s Board

of Directors and Committees – Board Compensation,” and “Executive Officers”

in the Proxy Statement, and is incorporated

herein by reference.

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN

BENEFICIAL OWNERS AND MANAGEMENT AND

RELATED STOCKHOLDE

MATTERS

Information required by this item is set forth under the headings “Proposal

One: Election of Directors - Information about

Nominees for Directors and Executive Officers” and “Stock

Ownership by Certain Persons” in the Proxy Statement, and is

incorporated herein by reference.

ITEM 13. CERTAIN

RELATIONSHIPS

AND RELATED

TRANSACTIONS AND DIRECTOR INDEPENDENCE

Information required by this item is set forth under the headings “Additional Information

Concerning the Company’s Board

of Directors and Committees – Committees of the Board of Directors – Independent

Directors Committee” and “Certain

Transactions and Business Relationships” in the Proxy Statement,

and is incorporated herein by reference.

ITEM 14.

PRINCIPAL ACCOUNTING FEES

AND SERVICES

Information required by this item is set forth under the heading “Independent Public

Accountants” in the Proxy Statement,

and is incorporated herein by reference.

Table of Contents

118

PART

ITEM 15.

EXHIBITS AND FINANCIAL STATEMENT

SCHEDULES

(a)

List of all Financial Statements

The following consolidated financial statements and report of independent registered

public accounting firm of the

Company are included in this Annual Report on Form 10-K:

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets as of December 31, 2021 and 2020

Consolidated Statements of Earnings for the years ended December 31,

2021 and 2020

Consolidated Statements of Comprehensive Income for the years ended December

31, 2021 and 2020

Consolidated Statements of Stockholders’ Equity for the years ended December

31, 2021 and 2020

Consolidated Statements of Cash Flows for the years ended December 31,

2021 and

2020

Notes to the Consolidated Financial Statements

(b)

Exhibits

3.1.

Certificate of Incorporation of Auburn National Bancorporation, Inc. (incorporated by reference from

Registrant's Form 10-Q dated June 30, 2002 (File No. 000-26486)).

3.2.

Amended and Restated Bylaws of Auburn National Bancorporation, Inc., adopted as of November 13, 2007

(incorporated by reference from Registrant’s Form 10-K dated March 31, 2008 (File No. 000-26486)).

4.1.

Description of the Registrant’s Securities

21.1

Subsidiaries of Registrant

31.1

Certification signed by the Chief Executive Officer pursuant to SEC Rule 13a-14(a).

31.2

Certification signed by the Chief Financial Officer pursuant to SEC Rule 13a-14(a).

32.1

Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of the Sarbanes-Oxley

Act of 2002 by Robert W. Dumas, Chairman, President and Chief Executive Officer *

32.2

Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of the Sarbanes-Oxley

Act of 2002 by David A. Hedges, EVP, Chief Financial Officer.*

101.INS

Inline XBRL Instance Document

101.SCH

Inline XBRL Taxonomy Extension

Schema Document

101.CAL

Inline XBRL Taxonomy Extension

Calculation Linkbase Document

101.LAB

Inline XBRL Taxonomy Extension

Label Linkbase Document

101.PRE

Inline XBRL Taxonomy Extension

Presentation Linkbase Document

101.DEF

Inline XBRL Taxonomy Extension

Definition Linkbase Document

104

Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101

The certifications attached as exhibits 32.1 and 32.2 to this annual report on Form 10-K are

“furnished” to the Securities

and Exchange Commission pursuant to Section 906 of the Sarbanes-Oxley

Act of 2002 and shall not be deemed “filed”

by the Company for purposes of Section 18 of the Securities Exchange Act of 1934,

as amended.

Table of Contents

119

(c)

Financial Statement Schedules

All financial statement schedules required pursuant to this item were either included

in the financial information set

forth in (a) above or are inapplicable and therefore have been omitted.

ITEM 16.

FORM 10-K SUMMARY

None.

Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,

the registrant has duly caused

this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of

Auburn, State of

Alabama, on March 8, 2022.

AUBURN NATIONAL

BANCORPORATION,

INC.

(Registrant)

By:

/S/ ROBERT W.

DUMAS

Robert W.

Dumas

Chairman, President and CEO

Pursuant to the requirements of the Securities Exchange Act of 1934, this report

has been signed below by the following

persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature

Title

Date

/S/ ROBERT W.

DUMAS

Robert W.

Dumas

Chairman of the Board, President and Chief Executive

Officer

(Principal Executive Officer)

March 8, 2022

/S/ DAVID

A. HEDGES

David A. Hedges

EVP,

Chief Financial Officer

(Principal Financial Officer)

March 8, 2022

/S/ C. WAYNE

ALDERMAN

C. Wayne Alderman

Director

March 8, 2022

/S/ TERRY W.

ANDRUS

Terry W.

Andrus

Director

March 8, 2022

/S/ J. TUTT BARRETT

J. Tutt Barrett

Director

March 8, 2022

/S/ LAURA J. COOPER

Laura Cooper

Director

March 8, 2022

/S/ WILLIAM F. HAM,

JR.

William F.

Ham, Jr.

Director

March 8, 2022

/S/ DAVID

E. HOUSEL

David E. Housel

Director

March 8, 2022

/S/ ANNE M. MAY

Anne M. May

Director

March 8, 2022

/S/ EDWARD

LEE SPENCER, III

Edward Lee Spencer, III

Director

March 8, 2022

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