Auburn National Bancorporation (AUBN) 10-Q 2022 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.20549

FORM

10-Q

(Mark One)

☒

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

For the quarterly period ended

June 30, 2022

☐

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

For the transition period __________ to __________

Commission File Number:

0-26486

Auburn National Bancorporation, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Delaware

(State or other jurisdiction of

incorporation or organization)

63-0885779

(I.R.S. Employer

Identification No.)

100 N. Gay Street

Auburn

,

Alabama

36830

(

334

)

821-9200

(Address and telephone number of principal executive offices)

(Former Name, Former Address and Former FiscalYear,if Changed Since Last Report)

Indicatebycheckmarkwhethertheregistrant(1) hasfiledallreportsrequiredtobefiledbySection 13or15(d)oftheSecurities

Exchange Actof 1934during thepreceding 12 months(or forsuch shorterperiod thatthe registrantwas requiredto filesuch reports),

and (2) has been subject to such filing requirements for the past 90 days.

Yes

☒

No

☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and

posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required

to submit such files).

Yes

☒

No

☐

Indicate by checkmark whether theregistrant is alarge accelerated filer,an accelerated filer,a non-accelerated filer,a smaller reporting

companyoranemerginggrowthcompany.Seethedefinitionsof“largeacceleratedfiler,”“acceleratedfiler,”“smallerreporting

company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated filer

☐

Accelerated filer

☐

Non-accelerated filer

☒

Smaller reporting company

☒

Emerging growth company

☐

Ifanemerginggrowthcompany,indicatebycheckmarkiftheregistranthaselectednottousetheextendedtransitionperiodfor

complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes

☐

No

☒

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.01

AUBN

NASDAQ

Global Market

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Class

Outstanding at August 3, 2022

Common Stock, $0.01 par value per share

3,508,582

shares

AUBURN NATIONAL BANCORPORATION, INC. ANDSUBSIDIARIES

INDEX

PAGE

Item 1

3

4

5

6

7

8

Item 2

27

49

50

51

52

53

54

55

Item 3

56

Item 4

56

Item 1

56

Item 1A

56

Item 2

57

Item 3

57

Item 4

57

Item 5

57

Item 6

58

3

PART1.FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

AUBURN NATIONALBANCORPORATION,INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Unaudited)

June 30,

December 31,

(Dollars in thousands, except share data)

2022

2021

Assets:

Cash and due from banks

$

19,701

$

11,210

Federal funds sold

62,313

77,420

Interest-bearing bank deposits

51,100

67,629

Cash and cash equivalents

133,114

156,259

Securities available-for-sale

429,220

421,891

Loans held for sale

989

1,376

Loans, net of unearned income

440,872

458,364

Allowance for loan losses

(4,716)

(4,939)

Loans, net

436,156

453,425

Premises and equipment, net

45,330

41,724

Bank-owned life insurance

19,831

19,635

Other assets

19,611

10,840

Total assets

$

1,084,251

$

1,105,150

Liabilities:

Deposits:

Noninterest-bearing

$

311,208

$

316,132

Interest-bearing

691,490

678,111

Total deposits

1,002,698

994,243

Federal funds purchased and securities sold under agreements to repurchase

4,147

3,448

Accrued expenses and other liabilities

1,299

3,733

Total liabilities

1,008,144

1,001,424

Stockholders' equity:

Preferred stock of $

.01

par value; authorized

200,000

shares;

no shares issued

0

0

Common stock of $

.01

par value; authorized

8,500,000

shares;

issued

3,957,135

shares

39

39

Additional paid-in capital

3,796

3,794

Retained earnings

111,994

109,974

Accumulated other comprehensive (loss) income, net

(28,419)

891

Less treasury stock, at cost -

447,195

shares and

436,650

at June 30, 2022

and December 31, 2021, respectively

(11,303)

(10,972)

Total stockholders’ equity

76,107

103,726

Total liabilities and stockholders’equity

$

1,084,251

$

1,105,150

See accompanying notes to consolidated financial statements

4

AUBURN NATIONALBANCORPORATION,INC. AND SUBSIDIARIES

Consolidated Statements of Earnings

(Unaudited)

Quarter ended June 30,

Six months ended June 30,

(Dollars in thousands, except share and per share data)

2022

2021

2022

2021

Interest income:

Loans, including fees

$

4,691

$

5,112

$

9,541

$

10,290

Securities:

Taxable

1,547

1,009

2,883

1,958

Tax-exempt

415

444

834

896

Federal funds sold and interest-bearing bank deposits

278

28

341

56

Total interest income

6,931

6,593

13,599

13,200

Interest expense:

Deposits

552

614

1,137

1,280

Short-term borrowings

5

4

10

8

Total interest expense

557

618

1,147

1,288

Net interest income

6,374

5,975

12,452

11,912

Provision for loan losses

0

(600)

(250)

(600)

Net interest income after provision for loanlosses

6,374

6,575

12,702

12,512

Noninterest income:

Service charges on deposit accounts

146

138

288

270

Mortgage lending

187

424

440

973

Bank-owned life insurance

97

99

196

202

Other

418

470

832

868

Total noninterest income

848

1,131

1,756

2,313

Noninterest expense:

Salaries and benefits

2,976

2,897

5,926

5,748

Net occupancy and equipment

727

439

1,161

877

Professional fees

239

326

469

582

Other

1,116

1,254

2,403

2,399

Total noninterest expense

5,058

4,916

9,959

9,606

Earnings before income taxes

2,164

2,790

4,499

5,219

Income tax expense

363

504

617

927

Net earnings

$

1,801

$

2,286

$

3,882

$

4,292

Net earnings per share:

Basic and diluted

$

0.51

$

0.65

$

1.10

$

1.21

Weighted average sharesoutstanding:

Basic and diluted

3,513,353

3,554,871

3,515,991

3,560,554

See accompanying notes to consolidated financial statements

5

AUBURN NATIONALBANCORPORATION,INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(Unaudited)

Quarter ended June 30,

Six months ended June 30,

(Dollars in thousands)

2022

2021

2022

2021

Net earnings

$

1,801

$

2,286

$

3,882

$

4,292

Other comprehensive (loss) income, net of tax:

Unrealized net (loss) gain on securities

(10,964)

1,788

(29,310)

(3,344)

Other comprehensive (loss) income

(10,964)

1,788

(29,310)

(3,344)

Comprehensive (loss) income

$

(9,163)

$

4,074

$

(25,428)

$

948

See accompanying notes to consolidated financial statements

6

AUBURN NATIONALBANCORPORATION,INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders' Equity

(Unaudited)

Accumulated

Common

Additional

other

Shares

Common

paid-in

Retained

comprehensive

Treasury

(Dollars in thousands, except share data)

Outstanding

Stock

capital

earnings

(loss) income

stock

Total

Quarter ended June 30, 2022

Balance, March 31, 2022

3,516,971

$

39

$

3,795

$

111,123

$

(17,455)

$

(11,091)

$

86,411

Net earnings

—

0

0

1,801

0

0

1,801

Other comprehensive loss

—

0

0

0

(10,964)

0

(10,964)

Cash dividends paid ($

.265

per share)

—

0

0

(930)

0

0

(930)

Stock repurchases

(7,081)

0

0

0

0

(212)

(212)

Sale of treasury stock

50

0

1

0

0

0

1

Balance, June 30, 2022

3,509,940

$

39

$

3,796

$

111,994

$

(28,419)

$

(11,303)

$

76,107

Quarter ended June 30, 2021

Balance, March 31, 2021

3,566,326

$

39

$

3,791

$

106,696

$

2,467

$

(9,354)

$

103,639

Net earnings

—

0

0

2,286

0

0

2,286

Other comprehensive income

—

0

0

0

1,788

0

1,788

Cash dividends paid ($

.26

per share)

—

0

0

(922)

0

0

(922)

Stock repurchases

(20,511)

0

0

0

0

(750)

(750)

Sale of treasury stock

40

0

1

0

0

1

2

Balance, June 30, 2021

3,545,855

$

39

$

3,792

$

108,060

$

4,255

$

(10,103)

$

106,043

Six months ended June 30, 2022

Balance, December 31, 2021

3,520,485

$

39

$

3,794

$

109,974

$

891

$

(10,972)

$

103,726

Net earnings

—

0

0

3,882

0

0

3,882

Other comprehensive loss

—

0

0

0

(29,310)

0

(29,310)

Cash dividends paid ($

.53

per share)

—

0

0

(1,862)

0

0

(1,862)

Stock repurchases

(10,640)

0

0

0

0

(331)

(331)

Sale of treasury stock

95

0

2

0

0

0

2

Balance, June 30, 2022

3,509,940

$

39

$

3,796

$

111,994

$

(28,419)

$

(11,303)

$

76,107

Six months ended June 30, 2021

Balance, December 31, 2020

3,566,276

$

39

$

3,789

$

105,617

$

7,599

$

(9,354)

$

107,690

Net earnings

—

0

0

4,292

0

0

4,292

Other comprehensive loss

—

0

0

0

(3,344)

0

(3,344)

Cash dividends paid ($

.52

per share)

—

0

0

(1,849)

0

0

(1,849)

Stock repurchases

(20,511)

0

0

0

0

(750)

(750)

Sale of treasury stock

90

0

3

0

0

1

4

Balance, June 30, 2021

3,545,855

$

39

$

3,792

$

108,060

$

4,255

$

(10,103)

$

106,043

See accompanying notes to consolidated financial statements

7

AUBURN NATIONALBANCORPORATION,INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

Six months ended June 30,

(Dollars in thousands)

2022

2021

Cash flows from operating activities:

Net earnings

$

3,882

$

4,292

Adjustments to reconcile net earnings to net cash provided by

operating activities:

Provision for loan losses

(250)

(600)

Depreciation and amortization

631

629

Premium amortization and discount accretion, net

1,738

1,940

Net gain on sale of loans held for sale

(349)

(935)

Net gain on other real estate owned

(162)

0

Loans originated for sale

(8,027)

(32,608)

Proceeds from sale of loans

8,666

35,279

Increase in cash surrender value of bank-owned life insurance

(196)

(202)

Net (increase) decrease in other assets

(9,152)

22

Net increase (decrease) in accrued expenses and other liabilities

7,397

(2,404)

Net cash provided by operating activities

4,178

5,413

Cash flows from investing activities:

Proceeds from prepayments and maturities of securities available-for-sale

29,570

38,204

Purchase of securities available-for-sale

(77,776)

(94,297)

Increase in loans, net

17,519

4,805

Net purchases of premises and equipment

(4,059)

(7,926)

(Increase) decrease in FHLB stock

(74)

267

Proceeds from sale of other real estate owned

536

0

Net cash used in investing activities

(34,284)

(58,947)

Cash flows from financing activities:

Net (decrease) increase in noninterest-bearing deposits

(4,924)

37,958

Net increase in interest-bearing deposits

13,379

45,712

Net increase in federal funds purchased and securities sold

under agreements to repurchase

699

1,141

Stock repurchases

(331)

(750)

Dividends paid

(1,862)

(1,849)

Net cash provided by financing activities

6,961

82,212

Net change in cash and cash equivalents

(23,145)

28,678

Cash and cash equivalents at beginning of period

156,259

112,575

Cash and cash equivalents at end of period

$

133,114

$

141,253

Supplemental disclosures of cash flow information:

Cash paid during the period for:

Interest

$

1,206

$

1,302

Income taxes

731

1,335

See accompanying notes to consolidated financial statements

8

AUBURN NATIONALBANCORPORATION,INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES

General

Auburn National Bancorporation, Inc. (the “Company”) provides a full range of banking servicesto individuals and

commercial customers in Lee County,Alabama and surrounding counties through its wholly owned subsidiary,

AuburnBank (the “Bank”). The Company does not have any segments other thanbanking that are considered material.

Basis of Presentation and Use of Estimates

The unaudited consolidated financial statements in this report have been preparedin accordance with U.S. generally

accepted accounting principles (“GAAP”) for interim financial information.Accordingly, these financial statementsdo not

include all of the information and footnotes required by U.S. GAAP for complete financialstatements.The unaudited

consolidated financial statements include, in the opinion of management, all adjustmentsnecessary to present a fair

statement of the financial position and the results of operations for all periods presented.All such adjustments are of a

normal recurring nature. The results of operations in the interim statements are notnecessarily indicative of the results of

operations that the Company and its subsidiaries may achieve for future interim periodsor the entire year. For further

information, refer to the consolidated financial statements and footnotes included in the Company'sAnnual Report on Form

10-K for the year ended December 31, 2021.

The unaudited consolidated financial statements include the accounts of theCompany and its wholly-owned subsidiaries.

Significant intercompany transactions and accounts are eliminated in consolidation.

The preparation of financial statements in conformity with U.S. GAAP requiresmanagement to make estimates and

assumptions that affect the reported amounts of assets and liabilities and disclosuresof contingent assets and liabilities as of

the balance sheet date and the reported amounts of revenues and expenses 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 other-than-temporary impairment on investment securities,the determination of the allowance for loan losses, fair

value of financial instruments, and the valuation of deferred tax assets and other realestate owned (“OREO”).

Revenue Recognition

On January 1, 2018, the Company implemented Accounting Standards Update(“ASU”or “updates”) 2014-09,

Revenue

from Contracts with Customers

, codified at

Accounting Standards Codification(“ASC”)

606. The Company adopted ASC

606 using the modified retrospective transition method.The majority of the Company’s revenue streamis generated from

interest income on loans and securities which are outside the scope of ASC 606.

The Company’s sources of income thatfall 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 ofwhich are presented as components of

noninterest income. The following is a summary of the revenue streams that fallwithin the scope of ASC 606:

●

Service charges on deposits, investment services, ATMand interchange fees – Fees from these services are either

transaction-based, for which the performance obligations are satisfiedwhen the individual transaction is processed,

or set periodic service charges, for which the performance obligations aresatisfied over the period the service is

provided. Transaction-based fees are recognizedat the time the transaction is processed, and periodic service

charges are recognized over the service period.

●

Gains on sales of OREO

–

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 considerationto which it is

entitled.In addition to the loan-to-value ratio, the analysis is based on various other factors,including the credit

quality of the borrower, the structure of the loan, and any otherfactors that we believe may affect collectability.

9

Subsequent Events

The Company has evaluated the effects of events and transactions throughthe date of this filing that have occurred

subsequent to June 30, 2022. The Company does not believe therewere any material subsequent events during this period

that would have required further recognition or disclosure in the unauditedconsolidated financial statements included in

this report.

Reclassifications

Certain amounts reported in prior periods have been reclassified to conform to the current-period presentation. These

reclassifications had no effect on the Company’spreviously reported net earnings or total stockholders’ equity.

Accounting Developments

In the first six months of 2022, the Company did not adopt any new accounting guidance.

NOTE 2: BASIC AND DILUTED NET EARNINGS PER SHARE

Basic net earnings per share is computed by dividing net earnings by the weighted averagecommon shares outstanding for

the respective period.Diluted net earnings per share reflect the potential dilution that could occurupon exercise of

securities or other rights for, or convertible into, shares of theCompany’s common stock.At June 30, 2022 and 2021,

respectively, the Companyhad no such securities or rights issued or outstanding, and therefore, no dilutive effectto

consider for the diluted net earnings per share calculation.

The basic and diluted net earnings per share computations for the respective periods arepresented below

Quarter ended June 30,

Six months ended June 30,

(Dollars in thousands, except share and per share data)

2022

2021

2022

2021

Basic and diluted:

Net earnings

$

1,801

$

2,286

$

3,882

$

4,292

Weighted average commonshares outstanding

3,513,353

3,554,871

3,515,991

3,560,554

Net earnings per share

$

0.51

$

0.65

$

1.10

$

1.21

NOTE 3: VARIABLEINTEREST 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 investorsthat do not provide sufficient financial

resources for the entity to support its activities.

At June 30, 2022, the Company did not have any consolidated VIEs to disclose but didhave one nonconsolidated VIE,

discussed below.

10

New Markets TaxCredit 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 developmentof 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 June 30, 2022 and December 31, 2021, respectively,the Company had one such investment in the

amounts of $2.1 million and $2.2 million, respectively,which was included in other assets in the consolidated balance

sheets.The Company’s equity investmentmeets the definition of a VIE. While the Company’sinvestment exceeds 50% of

the outstanding equity interests, the Company does not consolidate the VIE becauseit does not meet the characteristics of a

primary beneficiary since the Company lacks the power to direct the activities ofthe VIE.

(Dollars in thousands)

Maximum

Loss Exposure

Asset Recognized

Classification

Type:

New Markets Tax Credit investment

$

2,142

$

2,142

Other assets

NOTE 4: SECURITIES

At June 30, 2022 and December 31, 2021, 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 June 30, 2022 and December 31, 2021, respectively,are presented below.

1 year

1 to 5

5 to 10

After 10

Fair

Gross Unrealized

Amortized

(Dollars in thousands)

or less

years

years

years

Value

Gains

Losses

Cost

June 30, 2022

Agency obligations (a)

$

0

48,476

78,435

0

126,911

29

10,528

$

137,410

Agency MBS (a)

0

470

36,849

197,266

234,585

75

23,260

257,770

State and political subdivisions

170

954

15,828

50,772

67,724

182

4,447

71,989

Total available-for-sale

$

170

49,900

131,112

248,038

429,220

286

38,235

$

467,169

December 31, 2021

Agency obligations (a)

$

5,007

49,604

69,802

0

124,413

1,080

2,079

$

125,412

Agency MBS (a)

0

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

(a) Includes securities issued by U.S. government agencies or government-sponsoredentities.

Securities with aggregate fair values of $

187.5

million and $

172.3

million at June 30, 2022 and December 31, 2021,

respectively, were pledged tosecure public deposits, securities sold under agreements to repurchase, Federal HomeLoan

Bank of Atlanta (“FHLB of Atlanta”) advances, and for other purposes requiredor permitted by law.

Included in other assets on the accompanying consolidated balance sheets are non-marketableequity investments.The

carrying amounts of non-marketable equity investments were $

1.2

million at June 30, 2022 and December 31, 2021,

respectively.Non-marketable equity investments include FHLB of Atlanta Stock, FederalReserve Bank of Atlanta

(“FRB”) stock, and stock in a privately held financial institution.

11

Gross Unrealized Losses and Fair Value

The fair values and gross unrealized losses on securities at June 30, 2022and December 31, 2021, respectively, segregated

by those securities that have been in an unrealized loss position for less than 12months and 12 months or longer, 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

June 30, 2022:

Agency obligations

$

82,207

4,618

40,557

5,910

$

122,764

10,528

Agency MBS

174,783

15,711

53,160

7,549

227,943

23,260

State and political subdivisions

47,577

3,773

3,332

674

50,909

4,447

Total

$

304,567

24,102

97,049

14,133

$

401,616

38,235

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

For the securities in the previous table, the Company does not have the intent to sell and has determined it isnot more likely

than not that the Company will be required to sell the securities before recoveryof 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 expectedcash flows to

the securities’ amortized cost basis.

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 amortizedcost 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 discontinuanceof a segment of

the business that may affect the future earnings potential of the issuer orunderlying loan obligors of the security or

changes in the quality of the credit enhancement);

●

the historical and implied volatility of the security’sfair value;

●

the payment structure of the debt security and the likelihood of the issuer being able tomake 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 byincreases in market interest rates and not

due to the credit quality of the securities. These securities were issued by U.S. governmentagencies or government-

sponsored entities and did not have any credit losses given the explicit government guaranteeor other government support.

��

12

Agency mortgage-backed securities (“MBS”)

The unrealized losses associated with agency MBS were primarily driven by increasesin market interest rates and not due

to the credit quality of the securities. These securities were issued by U.S. government agenciesor government-sponsored

entities and did not have any credit losses given the explicit government guaranteeor other government support.

Securities of U.S. states and political subdivisions

The unrealized losses associated with securities of U.S. states and political subdivisionswere primarily driven by increases

in market interest rates and were not due to the credit quality of the securities. Some of thesesecurities are guaranteed by a

bond insurer, but management did not rely onsuch guarantees in making its investment decision.These securities will

continue to be monitored as part of the Company’squarterly 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 torecover the entire

amortized cost basis of these securities.

The carrying values of the Company’s investmentsecurities could decline in the future if market interest rates continue to

increase.If the financial condition of an issuer (other than the U.S. government orits agencies) deteriorates and the

Company determines it is probable that it will not recover the entire amortizedcost basis for the security,there is a risk that

other-than-temporary impairment chargesmay occur in the future.

The Company will evaluate whether any loss is

temporary or not.

Other-Than-TemporarilyImpaired Securities

Credit-impaired debt securities are debt securities where the Companyhas written down the amortized cost basis of a

security for other-than-temporary impairment and the creditcomponent of the loss is recognized in earnings. At June 30,

2022 and December 31, 2021, the Company had no credit-impaired debt securities and therewere no additions or

reductions in the credit loss component of credit-impaired debt securities duringthe quarters and six months ended June 30,

2022 and 2021, respectively.

Realized Gains and Losses

The Company had no realized gains and losses on sale of securities during the quarters andsix months ended June 30, 2022

and 2021, respectively.

NOTE 5: LOANS AND ALLOWANCEFOR LOAN LOSSES

June 30,

December 31,

(Dollars in thousands)

2022

2021

Commercial and industrial

$

70,087

$

83,977

Construction and land development

38,654

32,432

Commercial real estate:

Owner occupied

58,222

63,375

Hotel/motel

34,365

43,856

Multi-family

29,722

42,587

Other

117,987

108,553

Total commercial real estate

240,296

258,371

Residential real estate:

Consumer mortgage

32,895

29,781

Investment property

52,329

47,880

Total residential real estate

85,224

77,661

Consumer installment

7,122

6,682

Total loans

441,383

459,123

Less: unearned income

(511)

(759)

Loans, net of unearned income

$

440,872

$

458,364

13

Loans secured by real estate were approximately

82.5%

of the Company’s total loan portfolioat June 30, 2022.At June 30,

2022, the Company’s geographic loandistribution was concentrated primarily in Lee County,Alabama, and surrounding

areas.

In accordance with ASC 310, a portfolio segment is defined as the level at which an entitydevelops and documents a

systematic method for determining its allowance for loan losses.As part of the Company’s quarterly assessmentof the

allowance, the loan portfolio included the following portfolio segments: commercial andindustrial, construction and land

development, commercial real estate, residential real estate, and consumer installment. Whereappropriate, the Company’s

loan portfolio segments are further disaggregated into classes. A class is generally determinedbased on the initial

measurement attribute, risk characteristics of the loan, and an entity’smethod for monitoring and determining credit risk.

The following describesthe risk characteristics relevant to each of the portfolio segmentsand classes.

Commercial and industrial (“C&I”) —

includes loans to finance business operations, equipment purchases, orother needs

for small and medium-sized commercial customers. Also includedin this category are loans to finance agricultural

production.Generally,the primary source of repayment is the cash flow from business operations and activitiesof the

borrower.As of June 30, 2022, the Company had

14

PPP loans with an aggregate outstanding principal balance of $

0.6

million included in this category, comparedto

138

PPP loans with an aggregate principal balance of $

8.1

million at

December 31, 2021.

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 credit

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 four classes: (1) owner occupied, (2)hotel/motel,

(3) multifamily and (4) other.

●

Owner occupied

– includes loans secured by business facilities to finance business operations, equipment and

owner-occupied facilities primarily for small and medium-sizedcommercial 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 repaymentis 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.

●

Multi-family

– 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 toresidents. 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 financialhealth of the borrower.

●

Other

– primarily includes loans to finance income-producing commercial propertiesother than hotels/motels and

multi-family properties, and whichare not owner occupied.Loans in this class include loans for neighborhood

retail centers, medical and professional offices, single retail stores,industrial buildings, and warehouses leased to

local businesses.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 andrental 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 of creditto

consumers that are secured by a primary residence or second home. These loans are underwrittenin accordance

with the Bank’s general loan policies andprocedures which require, among other things, proper documentation of

each borrower’s financial condition, satisfactory credit history,and property value.

14

●

Investment property

– primarily includes loans to finance income-producing 1-4 family residential properties.

Generally,the primary source of repayment is dependent upon income generatedfrom leasing the property

securing the loan. The underwriting of these loans takes into consideration the rental rates andproperty value, 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 procedureswhich require, among other things, proper documentation of each borrower’s

financial condition, satisfactory credit history,and, if applicable, property value.

The following is a summary of current, accruing past due, and nonaccrual loans by portfoliosegment and class as of June

30, 2022 and December 31, 2021.

Accruing

Accruing

Total

30-89 Days

Greater than

Accruing

Non-

Total

(Dollars in thousands)

Current

Past Due

90 days

Loans

Accrual

Loans

June 30, 2022:

Commercial and industrial

$

70,053

34

0

70,087

0

$

70,087

Construction and land development

38,654

0

0

38,654

0

38,654

Commercial real estate:

Owner occupied

58,222

0

0

58,222

0

58,222

Hotel/motel

34,365

0

0

34,365

0

34,365

Multi-family

29,722

0

0

29,722

0

29,722

Other

117,783

28

0

117,811

176

117,987

Total commercial real estate

240,092

28

0

240,120

176

240,296

Residential real estate:

Consumer mortgage

32,671

41

0

32,712

183

32,895

Investment property

52,240

89

0

52,329

0

52,329

Total residential real estate

84,911

130

0

85,041

183

85,224

Consumer installment

7,115

7

0

7,122

0

7,122

Total

$

440,825

199

0

441,024

359

$

441,383

December 31, 2021:

Commercial and industrial

$

83,974

3

0

83,977

0

$

83,977

Construction and land development

32,228

204

0

32,432

0

32,432

Commercial real estate:

Owner occupied

63,375

0

0

63,375

0

63,375

Hotel/motel

43,856

0

0

43,856

0

43,856

Multi-family

42,587

0

0

42,587

0

42,587

Other

108,366

0

0

108,366

187

108,553

Total commercial real estate

258,184

0

0

258,184

187

258,371

Residential real estate:

Consumer mortgage

29,070

516

0

29,586

195

29,781

Investment property

47,818

0

0

47,818

62

47,880

Total residential real estate

76,888

516

0

77,404

257

77,661

Consumer installment

6,657

25

0

6,682

0

6,682

Total

$

457,931

748

0

458,679

444

$

459,123

15

Allowance for Loan Losses

The Company assesses the adequacy of its allowance for loan losses priorto the end of each calendar quarter. The level of

the allowance is based upon management’sevaluation of the loan portfolio, past loan loss experience, current asset quality

trends, known and inherent risks in the portfolio, adverse situations that may affecta 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 regulatoryrecommendations. This

evaluation is inherently subjective as it requires material estimates including theamounts and timing of future cash flows

expected to be received on impaired loans that may be susceptible to significant change. Loans arecharged 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 pursuantto the terms of the loan is

unlikely.

The Company deems loans impaired when, based on current information and events, it isprobable 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 aloan 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 recordedinvestment in the loan. The

impairment is recognized through the allowance. Loans that are impaired arerecorded at the present value of expected

future cash flows discounted at the loan’s effectiveinterest rate, or if the loan is collateral dependent, the 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 adequateto absorb probable losses inherent in the

portfolio at the balance sheet date. The allowance is increased by provisions chargedto 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 itsongoing internal and independent

loan review processes. The Company’sloan 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 theentire loan portfolio. The

Company’s loan review process includes the judgmentof management, the input from our independent loan reviewers, and

reviews conducted by bank regulatory agencies as part of their examination process. TheCompany incorporates loan

review results in the determination of whether or not it is probablethat it will be able to collect all amounts due according

to the contractual terms of a loan.

As part of the Company’s quarterly assessmentof the allowance, management evaluates the loan portfolio’sfive segments:

commercial and industrial, construction and land development, commercial real estate, residentialreal estate, and consumer

installment. The Company analyzes each segment and estimates an allowance allocationfor each loan segment.

The allocation of the allowance for loan losses begins with a process of estimating theprobable losses inherent for each

loan segment. The estimates for these loans are established by category and basedon the Company’s internal system of

credit risk ratings and historical loss data.The estimated loan loss allocation rate for the Company’sinternal system of

credit risk grades is based on its experience with similarly gradedloans. For loan segments where the Company believes it

does not have sufficient historical loss data, the Company maymake adjustments based, in part, on loss rates of peer bank

groups.At June 30, 2022 and December 31, 2021, and for the periods then ended, the Company adjustedits historical loss

rates for the commercial real estate portfolio segment based, in part, on loss rates of peer bankgroups.

The estimated loan loss allocation for all five loan portfolio segments is then adjusted for management’sestimate of

probable losses for several “qualitative and environmental” factors. Theallocation for qualitative and environmental factors

is particularly subjective and does not lend itself to exact mathematical calculation. This amountrepresents 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 concentrationchanges, prevailing economic

conditions, changes in lending personnel experience, changes in lending policies orprocedures, and other factors. These

qualitative and environmental factors are considered for each of the five loan segmentsand the allowance allocation, as

determined by the processes noted above, is increased or decreased based on the incrementalassessment of these factors.

16

The Company regularly re-evaluates its practices in determining the allowancefor loan losses. The Company’s look-back

period each quarter incorporates the effects of at least one economicdownturn in its loss history.The Company believes

this look-back period is appropriate due to the risks inherent in the loan portfolio. Absent this look-back period,the early

cycle periods in which the Company experienced significant losses would be excludedfrom the determination of the

allowance for loan losses and its balance would decrease.For the quarter ended June 30, 2022, the Company increased its

look-back period to 53 quarters to continue to include losses incurred by the Company beginningwith the first quarter of

2009.The Company will likely continue to increase its look-back period to incorporatethe effects of at least one economic

downturn in its loss history.During the second quarter of 2021, the Company adjusted certain qualitative andeconomic

factors, previously downgraded as a result of the COVID-19 pandemic, to reflect improvements ineconomic conditions in

our primary market area.Further adjustments may be made from time to time in the future as a result of the COVID-19

pandemic and other changes in economic conditions.

The following table details the changes in the allowance for loan losses by portfolio segmentfor the respective periods.

June 30, 2022

(Dollars in thousands)

Commercial and

industrial

Construction

and land

development

Commercial

real estate

Residential

real estate

Consumer

installment

Total

Quarter ended:

Beginning balance

$

774

508

2,536

737

103

$

4,658

Charge-offs

(4)

0

0

0

(16)

(20)

Recoveries

2

0

22

7

47

78

Net (charge-offs) recoveries

(2)

0

22

7

31

58

Provision for loan losses

(11)

68

(35)

9

(31)

0

Ending balance

$

761

576

2,523

753

103

$

4,716

Six months ended:

Beginning balance

$

857

518

2,739

739

86

$

4,939

Charge-offs

(4)

0

0

0

(64)

(68)

Recoveries

4

0

22

14

55

95

Net recoveries (charge-offs)

0

0

22

14

(9)

27

Provision for loan losses

(96)

58

(238)

0

26

(250)

Ending balance

$

761

576

2,523

753

103

$

4,716

June 30, 2021

(Dollars in thousands)

Commercial and

industrial

Construction

and land

development

Commercial

real estate

Residential

real estate

Consumer

installment

Total

Quarter ended:

Beginning balance

$

828

551

3,302

908

93

$

5,682

Charge-offs

0

0

0

(1)

0

(1)

Recoveries

2

0

0

13

11

26

Net recoveries

2

0

0

12

11

25

Provision for loan losses

(1)

88

(598)

(82)

(7)

(600)

Ending balance

$

829

639

2,704

838

97

$

5,107

Six months ended:

Beginning balance

$

807

594

3,169

944

104

$

5,618

Charge-offs

0

0

0

(1)

(5)

(6)

Recoveries

54

0

0

26

15

95

Net recoveries

54

0

0

25

10

89

Provision for loan losses

(32)

45

(465)

(131)

(17)

(600)

Ending balance

$

829

639

2,704

838

97

$

5,107

17

The following table presents an analysis of the allowance for loan losses and recordedinvestment in loans by portfolio

segment and impairment methodology as of June 30, 2022 and 2021.

Collectively evaluated (1)

Individually evaluated (2)

Total

Allowance

Recorded

Allowance

Recorded

Allowance

Recorded

for loan

investment

for loan

investment

for loan

investment

(Dollars in thousands)

losses

in loans

losses

in loans

losses

in loans

June 30, 2022:

Commercial and industrial (3)

$

761

70,087

0

0

761

70,087

Construction and land development

576

38,654

0

0

576

38,654

Commercial real estate

2,523

240,120

0

176

2,523

240,296

Residential real estate

753

85,224

0

0

753

85,224

Consumer installment

103

7,122

0

0

103

7,122

Total

$

4,716

441,207

0

176

4,716

441,383

June 30, 2021:

Commercial and industrial (4)

$

829

87,933

0

0

829

87,933

Construction and land development

639

37,477

0

0

639

37,477

Commercial real estate

2,704

242,646

0

199

2,704

242,845

Residential real estate

838

82,067

0

97

838

82,164

Consumer installment

97

7,762

0

0

97

7,762

Total

$

5,107

457,885

0

296

5,107

458,181

(1)

Represents loans collectively evaluated for impairment in accordancewith ASC 450-20,

Loss Contingencies

, and

pursuant to amendments by ASU 2010-20 regarding allowancefor non-impaired loans.

(2)

Represents loans individually evaluated for impairment inaccordance with ASC 310-30,

Receivables

, and

pursuant to amendments by ASU 2010-20 regarding allowancefor impaired loans.

(3)

Includes $0.6 million of PPP loans for which noallowance for loan losses was allocated due to 100%SBA guarantee.

(4)

Includes $22.1 million of PPP loans for which no allowancefor loan losses was allocated due to 100% SBA guarantee.

See “Impaired Loans” and “Troubled Debt Restructurings”below for additional information about such loans.

Credit Quality Indicators

The credit quality of the loan portfolio is summarized no less frequently than quarterly using categoriessimilar 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 developthe associated allowance for

loan losses using historical losses adjusted for qualitative and environmental factorsand are defined as follows:

●

Pass – loans which are well protected by the current net worth and paying capacity of theobligor (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 positionat 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 jeopardizesdebt repayment,

even though they are currently performing. These loans are characterized by the distinct possibilitythat the

Company may incur a loss in the future if these weaknesses are not corrected.

●

Nonaccrual – includes loans where management has determined that full paymentof principal and interest is not

expected.

18

(Dollars in thousands)

Pass

Special

Mention

Substandard

Accruing

Nonaccrual

Total loans

June 30, 2022:

Commercial and industrial

$

69,847

15

225

0

$

70,087

Construction and land development

38,654

0

0

0

38,654

Commercial real estate:

Owner occupied

57,755

349

118

0

58,222

Hotel/motel

34,365

0

0

0

34,365

Multi-family

29,722

0

0

0

29,722

Other

116,889

894

28

176

117,987

Total commercial real estate

238,731

1,243

146

176

240,296

Residential real estate:

Consumer mortgage

31,606

446

660

183

32,895

Investment property

52,029

45

255

0

52,329

Total residential real estate

83,635

491

915

183

85,224

Consumer installment

7,084

14

24

0

7,122

Total

$

437,951

1,763

1,310

359

$

441,383

December 31, 2021:

Commercial and industrial

$

83,725

26

226

0

$

83,977

Construction and land development

32,212

2

218

0

32,432

Commercial real estate:

Owner occupied

61,573

1,675

127

0

63,375

Hotel/motel

36,162

7,694

0

0

43,856

Multi-family

39,093

3,494

0

0

42,587

Other

107,426

911

29

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

98

261

62

47,880

Total residential real estate

75,106

550

1,748

257

77,661

Consumer installment

6,650

20

12

0

6,682

Total

$

441,947

14,372

2,360

444

$

459,123

Impaired loans

The following tables present details related to the Company’simpaired loans. Loans that have been fully charged-off are

not included in the following tables. The related allowance generally represents the followingcomponents that correspond

to impaired loans:

●

Individually evaluated impaired loans equal to or greater than $500 thousand securedby real estate (nonaccrual

construction and land development, commercial real estate, and residential real estateloans).

●

Individually evaluated impaired loans equal to or greater than $250 thousand not securedby real estate

(nonaccrual commercial and industrial and consumer installment loans).

19

The following tables set forth certain information regarding the Company’simpaired loans that were individually evaluated

for impairment at June 30, 2022 and December 31, 2021.

June 30, 2022

(Dollars in thousands)

Unpaid principal

balance (1)

Charge-offs and

payments applied

(2)

Recorded

investment (3)

Related allowance

With no allowance recorded:

Commercial real estate:

Other

$

199

(23)

176

$

0

Total commercial real estate

199

(23)

176

0

Totalimpaired loans

$

199

(23)

176

$

0

(1) Unpaid principal balance represents the contractual obligationdue from the customer.

(2) Charge-offs and payments applied represents cumulative charge-offs taken, as wellas interest payments that have been

applied against the outstanding principal balance subsequentto the loans being placed on nonaccrual status.

(3) Recorded investment represents the unpaid principal balanceless charge-offs and payments applied; it is shown before

any related allowance for loan losses.

December 31, 2021

(Dollars in thousands)

Unpaid principal

balance (1)

Charge-offs and

payments applied

(2)

Recorded

investment (3)

Related allowance

With no allowance recorded:

Commercial real estate:

Other

$

205

(18)

187

$

0

Total commercial real estate

205

(18)

187

0

Residential real estate:

Investment property

68

(6)

62

0

Total residential real estate

68

(6)

62

0

Totalimpaired loans

$

273

(24)

249

$

0

(1) Unpaid principal balance represents the contractual obligationdue from the customer.

(2) Charge-offs and payments applied represents cumulative charge-offs taken, as wellas interest payments that have been

applied against the outstanding principal balance subsequentto the loans being placed on nonaccrual status.

(3) Recorded investment represents the unpaid principal balanceless charge-offs and payments applied; it is shown before

any related allowance for loan losses.

20

The following table provides the average recorded investment in impaired loans, ifany, by portfoliosegment, and the

amount of interest income recognized on impaired loans after impairment by portfoliosegment and class during the

respective periods.

Quarter ended June 30, 2022

Six months ended June 30, 2022

Average

Total interest

Average

Total interest

recorded

income

recorded

income

(Dollars in thousands)

investment

recognized

investment

recognized

Impaired loans:

Commercial real estate:

Other

$

180

0

212

0

Total commercial real estate

180

0

212

0

Residential real estate:

Investment property

0

0

9

0

Total residential real estate

0

0

9

0

Total

$

180

0

221

0

Quarter ended June 30, 2021

Six months ended June 30, 2021

Average

Total interest

Average

Total interest

recorded

income

recorded

income

(Dollars in thousands)

investment

recognized

investment

recognized

Impaired loans:

Commercial real estate:

Other

$

202

0

205

0

Total commercial real estate

202

0

205

0

Residential real estate:

Investment property

100

0

102

0

Total residential real estate

100

0

102

0

Total

$

302

0

307

0

Troubled DebtRestructurings

Impaired loans also include troubled debt restructurings (“TDRs”).Section 4013 of the CARES Act, “TemporaryRelief

From Troubled Debt Restructurings,” providedbanks the option to temporarily suspend certain requirements under ASC

340-10 TDR classifications for a limited period of time to account for the effectsof COVID-19. In addition, the Interagency

Statement on COVID-19 Loan Modifications, encouragedbanks to work prudently with borrowers and describes the

agencies’ interpretation of how accounting rules under ASC 310-40,“Troubled Debt Restructurings by Creditors,” apply to

certain COVID-19-related modifications. The Interagency Statement onCOVID-19 Loan Modifications was supplemented

on June 23, 2020 by the Interagency Examiner Guidance for Assessing Safety andSoundness Considering the Effect of the

COVID-19 Pandemic on Institutions.If a loan modification waseligible, a bank could elect to account for the loan under

section 4013 of the CARES Act. If a loan modification wasnot eligible under section 4013, or if the bank elected not to

account for the loan modification under section 4013, the Revised Statement includedcriteria 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 underSection 4013 of the CARES Act or under the

Interagency Statement and related regulatory guidance on COVID-19 Loan Modificationsin accordance with FASBASC

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, reductionof the stated interest rate of the loan,

reduction of accrued interest, extension of the maturity date, or reductionof 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 expectto 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 risk characteristicssimilar to the restructured debt.In making

the determination of whether a loan modification is a TDR, the Company considers theindividual 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.

21

Similar to other impaired loans, TDRs are measured for impairment based on the present value of expectedpayments using

the loan’s original effectiveinterest rate as the discount rate, or the fair value of the collateral, less selling costs ifthe loan is

collateral dependent. If the recorded investment in the loan exceeds the measure offair 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.

The following is a summary of accruing and nonaccrual TDRs, which are included in the impairedloan totals, and the

related allowance for loan losses, by portfolio segment and class as of June 30, 2022and December 31, 2021, respectively.

TDRs

Related

(Dollars in thousands)

Accruing

Nonaccrual

Total

Allowance

June 30, 2022

Commercial real estate:

Other

$

0

176

176

$

—

Total commercial real estate

0

176

176

—

Total

$

0

176

176

$

—

TDRs

Related

(In thousands)

Accruing

Nonaccrual

Total

Allowance

December 31, 2021

Commercial real estate:

Other

$

0

187

187

$

—

Total commercial real estate

0

187

187

—

Investment property

0

62

62

—

Total residential real estate

0

62

62

—

Total

$

0

249

249

$

—

At June 30, 2022 there were no significant outstanding commitments to advance additionalfunds to customers whose loans

had been restructured.

There were no loans modified in a TDR during the quarters and six months endedJune 30, 2022 and 2021,

respectively.For the same periods, the Company had no loans modified in a TDR within theprevious 12 months for which

there was a payment default.

NOTE 6: MORTGAGE SERVICINGRIGHTS, NET

Mortgage servicing rights (“MSRs”) are recognized based on the fair value of theservicing rights on the date the

corresponding mortgage loans are sold.An estimate of the fair value of the Company’s MSRs isdetermined using

assumptions that market participants would use in estimating future netservicing income, including estimates of

prepayment speeds, discount rates, default rates, costs to service, escrow account earnings,contractual servicing fee

income, ancillary income, and late fees.Subsequent to the date of transfer, theCompany 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 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.

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 componentof mortgage

lending income.

22

The following table details the changes in amortized MSRs and the related valuation allowancefor the respective periods.

Quarter ended June 30,

Six months ended June 30,

(Dollars in thousands)

2022

2021

2022

2021

MSRs, net:

Beginning balance

$

1,285

$

1,322

$

1,309

$

1,330

Additions, net

43

172

97

315

Amortization expense

(69)

(134)

(147)

(285)

Ending balance

$

1,259

$

1,360

$

1,259

$

1,360

Valuationallowance included in MSRs, net:

Beginning of period

$

0

$

0

$

0

$

0

End of period

0

0

0

0

Fair value of amortized MSRs:

Beginning of period

$

2,277

$

1,774

$

1,908

$

1,489

End of period

2,547

1,833

2,547

1,833

NOTE 7: FAIR VALUE

Fair ValueHierarchy

“Fair value” is defined by ASC 820,

Fair ValueMeasurements 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 principalmarket (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 pricesin 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 identicalassets or liabilities in active

markets.

Level 2—inputs to the valuation methodology include quoted prices for similar assets andliabilities in active markets,

quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs thatare observable for the

asset or liability, either directly orindirectly.

Level 3—inputs to the valuation methodology are unobservable and reflect theCompany’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 generallyrecognized at the end of each reporting period.The

Company monitors the valuation techniques utilized for each category offinancial assets and liabilities to ascertain when

transfers between levels have been affected.The nature of the Company’s financial assetsand liabilities generally is such

that transfers in and out of any level are expected to be infrequent. For the six monthsended June 30, 2022, there were no

transfers between levels and no changes in valuation techniques for the Company’sfinancial assets and liabilities.

23

Assets and liabilities measured at fair value on a recurringbasis

Securities available-for-sale

Fair values of securities available for sale were primarily measured usingLevel 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, benchmark yields, reportedtrades for similar securities, market

consensus prepayment speeds, credit information, and the securities’ terms andconditions.On a quarterly basis,

management reviews the pricing received from the third party pricing services for reasonablenessgiven current market

conditions.As part of its review, managementmay obtain non-binding third party broker quotes to validate the fair value

measurements.In addition, management will periodically submit pricing provided by thethird party pricing services to

another independent valuation firm on a sample basis.This independent valuation firm will compare the price providedby

the third party pricing service with its own price and will review the significant assumptionsand valuation methodologies

used with management.

The following table presents the balances of the assets and liabilities measured atfair value on a recurring basis as of June

30, 2022 and December 31, 2021, 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

Inputs

(Dollars in thousands)

Amount

(Level 1)

(Level 2)

(Level 3)

June 30, 2022:

Securities available-for-sale:

Agency obligations

$

126,911

0

126,911

0

Agency RMBS

234,585

0

234,585

0

State and political subdivisions

67,724

0

67,724

0

Total securities available-for-sale

429,220

0

429,220

0

Totalassets at fair value

$

429,220

0

429,220

0

December 31, 2021:

Securities available-for-sale:

Agency obligations

$

124,413

0

124,413

0

Agency RMBS

223,371

0

223,371

0

State and political subdivisions

74,107

0

74,107

0

Total securities available-for-sale

421,891

0

421,891

0

Totalassets at fair value

$

421,891

0

421,891

0

Assets and liabilities measured at fair value on a nonrecurringbasis

Loans held for sale

Loans held for sale are carried at the lower of cost or fair value. Fair values of loans held forsale 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 interestpayments due in accordance with

the contractual terms of the loan agreement. Impaired loans can be measured basedon the present value of expected

payments using the loan’s original effectiverate as the discount rate, the loan’s observablemarket price, or the fair value of

the collateral less selling costs if the loan is collateral dependent.

24

The fair value of impaired loans was primarily measured based on the value of the collateralsecuring 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/oraccounts receivable. The Company determines the value of the collateral basedon

independent appraisals performed by qualified licensed appraisers. Theseappraisals may utilize a single valuation approach

or a combination of approaches including comparable sales and the income approach. Appraisedvalues are discounted for

costs to sell and may be discounted further based on management’shistorical knowledge, changes in market conditions

from the date of the most recent appraisal, and/or management’sexpertise and knowledge of the customer and the

customer’s business. Such discounts by management are subjectiveand are typically significant unobservable inputs for

determining fair value. Impaired loans are reviewed and evaluated on at least a quarterly basisfor additional impairment

and adjusted accordingly, basedon the same factors discussed above.

Other real estate owned

Other real estateowned, consisting of properties obtained through foreclosure or in satisfactionof loans, are initially

recorded at the lower of the loan’s carrying amountor the fair value less costs to sell upon transfer of the loans to other real

estate.Subsequently, other realestate 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 classifiedwithin Level 3 of the fair value hierarchy.The

appraisals are sometimes further discounted based on management’shistorical knowledge, and/or changes in market

conditions from the date of the most recent appraisal, and/or management’sexpertise and knowledge of the customer and

the customer’s business. Such discounts are typically significantunobservable inputs for determining fair value. In cases

where the carrying amount exceeds the fair value, less costs to sell, a loss is recognizedin noninterest expense.

Mortgage servicing rights, net

MSRs, 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 fairvalue of

MSRs, the Company engages an independent third party.The independent third party’svaluation model calculates the

present value of estimated future net servicing income using assumptions thatmarket participants would use in estimating

future net servicing income, including estimates of prepayment speeds, discountrates, default rates, cost to service, escrow

account earnings, contractual servicing fee income, ancillary income, and latefees.Periodically, the Companywill review

broker surveys and other market research to validate significant assumptions usedin 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 unobservableinputs, all of the Company’s

MSRs are classified within Level 3 of the valuation hierarchy.

25

The following table presents the balances of the assets and liabilities measuredat fair value on a nonrecurring basis as of

June 30, 2022 and December 31, 2021, respectively,by caption, on the accompanying consolidated balance sheets and by

FASB ASC 820 valuationhierarchy (as described above):

Quoted Prices in

Active Markets

Other

Significant

for

Observable

Unobservable

Carrying

Identical Assets

Inputs

Inputs

(Dollars in thousands)

Amount

(Level 1)

(Level 2)

(Level 3)

June 30, 2022:

Loans held for sale

$

989

0

989

0

Loans, net

(1)

176

0

0

176

Other assets

(2)

1,259

0

0

1,259

Total assets at fair value

$

2,424

0

989

1,435

December 31, 2021:

Loans held for sale

$

1,376

0

1,376

0

Loans, net

(1)

249

0

0

249

Other assets

(2)

1,683

0

0

1,683

Total assets at fair value

$

3,308

0

1,376

1,932

(1)

Loans considered impaired under ASC 310-10-35 Receivables.This amount reflects the recorded investment in impairedloans, net

of any related allowance for loan losses.

(2)

Represents other real estate owned and MSRs, net,carried at lower of cost or estimated fair value.

Quantitative Disclosures for Level 3 Fair ValueMeasurements

At June 30, 2022 and December 31, 2021, the Company had no Level 3 assets measuredat fair value on a recurring basis.

For Level 3 assets measured at fair value on a non-recurring basis at June 30, 2022and December 31, 2021, the significant

unobservable inputs used in the fair value measurements are presentedbelow.

Weighted

Carrying

Significant

Average

(Dollars in thousands)

Amount

Valuation Technique

Unobservable Input

Range

of Input

June 30, 2022:

Impaired loans

$

176

Appraisal

Appraisal discounts

10.0

-

10.0

%

10.0

%

Mortgage servicing rights, net

1,259

Discounted cash flow

Prepayment speed or CPR

7.1

-

18.7

7.4

Discount rate

9.0

-

11.0

9.0

December 31, 2021:

Impaired loans

$

249

Appraisal

Appraisal discounts

10.0

-

10.0

%

10.0

%

Other real estate owned

374

Appraisal

Appraisal discounts

55.0

-

55.0

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

Fair Valueof 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 estimatethat value. The assumptions used in the

estimation of the fair value of the Company’sfinancial 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 rateand estimates of future cash flows. The

following fair value estimates cannot be substantiated by comparison to independentmarkets and should not be considered

representative of the liquidation value of the Company’sfinancial 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.

26

The following methods and assumptions were used by the Company in estimating the fairvalue of its financial instruments:

Loans, net

Fair values for loans were calculated using discounted cash flows. The discount rates reflectedcurrent rates at which similar

loans would be made for the same remaining maturities. Expectedfuture 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 secondary marketprices for similar loans.

Time Deposits

Fair values for time deposits were estimated using discounted cash flows. Thediscount rates were based on rates currently

offered for deposits with similar remaining maturities.

The carrying value,related estimated fair value, and placement in the fair value hierarchy of the Company’sfinancial

instruments at June 30, 2022 and December 31, 2021 are presented below.This table excludes financial instruments for

which the carrying amount approximates fair value.Financial assets for which fair value approximates carryingvalue

included cash and cash equivalents.Financial liabilities for which fair value approximates carrying value included

noninterest-bearing demand deposits,interest-bearing demand deposits, and savings deposits.Fair value approximates

carrying value in these financial liabilities due to these products having no statedmaturity.Additionally, financial

liabilities for which fair value approximates carrying value included overnightborrowings such as federal funds purchased

and securities sold under agreements to repurchase.

Fair Value Hierarchy

Carrying

Estimated

Level 1

Level 2

Level 3

(Dollars in thousands)

amount

fair value

inputs

inputs

Inputs

June 30, 2022:

Financial Assets:

Loans, net (1)

$

436,156

$

429,788

$

0

$

0

$

429,788

Loans held for sale

989

1,003

0

1,003

0

Financial Liabilities:

Time Deposits

$

154,738

$

155,439

$

0

$

155,439

$

0

December 31, 2021:

Financial Assets:

Loans, net (1)

$

453,425

$

449,105

$

0

$

0

$

449,105

Loans held for sale

1,376

1,410

0

1,410

0

Financial Liabilities:

Time Deposits

$

156,650

$

160,581

$

0

$

160,581

$

0

(1) Represents loans, net of unearned income and the allowancefor loan losses.The fair value of loans was measured using an exit pricenotion.

27

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTSOF

OPERATIONS

General

The following discussion and analysis is designed to provide a betterunderstanding of various factors related to the results

of operations and financial condition of the Company and the Bank.This discussion is intended to supplement and

highlight information contained in the accompanying unaudited condensed consolidatedfinancial statements and related

notes for the quarters and six months ended June 30, 2022 and 2021, as well as the informationcontained in our Annual

Report on Form 10-K for the year ended December 31, 2021 and our Quarterly Reports onForm 10-Q.

Special Notice Regarding Forward-Looking Statements

Variousof the statements made herein under the captions “Management’sDiscussion and Analysis of Financial Condition

and Results of Operations”, “Quantitative and Qualitative Disclosures aboutMarket Risk”, “Risk Factors” and elsewhere,

are “forward-looking statements” within the meaning and protections of Section27A of the Securities Act of 1933, as

amended (the “Securities Act”) and Section 21E of the Securities ExchangeAct of 1934, as amended (the “Exchange Act”).

Forward-looking statements include statements with respect to ourbeliefs, plans, objectives, goals, expectations,

anticipations, assumptions, estimates, intentions and future performance, andinvolve known and unknown risks,

uncertainties and other factors, which may be beyond our control, andwhich may cause the actual results, performance,

achievements or financial condition of the Company to be materially differentfrom future results, performance,

achievements or financial condition expressed or implied by such forward-lookingstatements.Youshould not expect us to

update any forward-looking statements.

All statements other than statements of historical fact are statements that could beforward-looking statements.Youcan

identify these forward-looking statements through our use of words such as“may,” “will,” “anticipate,”“assume,”

“should,” “indicate,” “would,” “believe,” “contemplate,” “expect,”“estimate,” “continue,” “plan,” “point to,” “project,”

“could,” “intend,” “target” and other similar words and expressionsof the future.These forward-looking statements may

not be realized due to a variety of factors, including, without limitation:

●

the effects of future economic, business and market conditions andchanges, foreign, domestic and locally,

including inflation, seasonality,natural disasters or climate change, such as rising sea and water levels,hurricanes

and tornados, COVID-19 or other epidemics or pandemics including supply chain disruptions,inventory volatility,

and changes in consumer behaviors;

●

the effects of war or other conflicts, acts of terrorism, or other events thatmay affect general economic conditions;

●

governmental monetary and fiscal policies, including the continuing effectsof COVID-19 fiscal and monetary

stimulus, and changes in monetary policies in response to inflations including increasesin the Federal Reserve’s

target federal funds rate and reductions in the Federal Reserve’sholdings of securities;

●

legislative and regulatory changes, including changes in banking, securities andtax 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 behaviorsfrom those used in our loan

portfolio reviews;

●

the risks of changes in interest rates on the levels, composition and costs of deposits, loandemand and mortgage

loan originations, and the values and liquidity of loan collateral, securities, and interest-sensitiveassets and

liabilities, and the risks and uncertainty of the amounts realizable on collateral;

●

changes in borrower liquidity and credit risks, and savings, deposit and payment behaviors;

●

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

may be included as capital for regulatory purposes;

28

●

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

●

the effects of competition from a wide variety of local, regional, nationaland other providers of financial,

investment and insurance services, including the disruption effects offinancial technology and other competitors

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

●

the failure of assumptions and estimates underlying the establishment of allowancesfor possible loan losses and

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

●

the costs of redeveloping our headquarters, the timing and amount of rental incomefrom third parties following

the June 2022 opening of this building, and the timing and amount of the sale of approximately0.85 acres of land

next to the Company’s headquarters fordevelopment by a third party 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 transactionsand 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 systemsor customers’

information;

●

the risks that our deferred tax assets (“DTAs”),if any, could be reducedif estimates of future taxable income from

our operations and tax planning strategies are less than currently estimated, and salesof our capital stock could

trigger a reduction in the amount of net operating loss carry-forwards that wemay be able to utilize for income tax

purposes;

●

the timing and amount of any credit approved by the Internal Revenue Service (“IRS”)resulting from our planned

filing, seeking an Employee Retention Credit, which we believe we are eligiblefor under the CARES Act and the

2020 Consolidated Appropriations Act; and

●

other factors and information in this report and other filings that we make with the SECunder the Exchange Act,

including our Annual Report on Form 10-K for the year ended December 31,2021 and subsequent quarterly and

current reports. See Part II, Item 1A. “RISK FACTORS”.

All written or oral forward-looking statements that are made by us or are attributableto us are expressly qualified in their

entirety by this cautionary notice.We have no obligation anddo not undertake to update, revise or correct any of the

forward-looking statements after the date of this report, or after the respectivedates on which such statements otherwise are

made.

ITEM 1.BUSINESS

Auburn National Bancorporation, Inc. (the “Company”) is a bank holding company registeredwith the Board of Governors

of the Federal Reserve System (the “Federal Reserve”) under the Bank HoldingCompany Act of 1956, as amended (the

“BHC Act”). The Company was incorporated in Delaware in 1990, andin 1994 it succeeded its Alabama predecessor as the

bank holding company controlling AuburnBank, an Alabama statemember bank with its principal office in Auburn,

Alabama (the “Bank”). The Company and its predecessor have controlled the Banksince 1984.As a bank holding

company, the Companymay diversify into a broader range of financial services and other business activities than currently

are permitted to the Bank under applicable laws and regulations.The holding company structure also provides greater

financial and operating flexibility than is presently permitted to the Bank.

29

The Bank has operated continuously since 1907 and currently conducts its businessprimarily in East Alabama, including

Lee County and surrounding areas.The Bank has been a member of the Federal Reserve System since April 1995.The

Bank’s primary regulators are the FederalReserve 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.

Certain of the statements made in this discussion and analysis and elsewhere, including informationincorporated herein by

reference to other documents, are “forward-looking statements” within themeaning of, and subject to, the protections of

Section 27A of the SecuritiesAct.

Summary of Results of Operations

Quarter ended June 30,

Six months ended June 30,

(Dollars in thousands, except per share amounts)

2022

2021

2022

2021

Net interest income (a)

$

6,484

$

6,093

$

12,674

$

12,150

Less: tax-equivalent adjustment

110

118

222

238

Net interest income (GAAP)

6,374

5,975

12,452

11,912

Noninterest income

848

1,131

1,756

2,313

Total revenue

7,222

7,106

14,208

14,225

Provision for loan losses

—

(600)

(250)

(600)

Noninterest expense

5,058

4,916

9,959

9,606

Income tax expense

363

504

617

927

Net earnings

$

1,801

$

2,286

$

3,882

$

4,292

Basic and diluted earnings per share

$

0.51

$

0.65

$

1.10

$

1.21

(a) Tax-equivalent.See "Table 1 - Explanation of Non-GAAP Financial Measures."

Financial Summary

The Company’s net earnings were $3.9million for the first six months of 2022, compared to $4.3 million for the first six

months of 2021.Basic and diluted earnings per share were $1.10 per share for the first six months of 2022,compared to

$1.21 per share for the first six months of 2021.

Net interest income (tax-equivalent) was $12.7 million for the first sixmonths of 2022, a 4% increase compared to $12.2

million for the first six months of 2021.This increase was primarily due to balance sheet growth, partially offset by a

decrease in the Company’s netinterest margin (tax-equivalent).Net interest margin (tax-equivalent) declined to 2.51%in

the first six months of 2022, compared to 2.63% for the first six months of 2021due to the continued lower interest rate

environment through most of the first quarter followed by increases in the Federal Reserve’starget federal funds rates

beginning March 16, 2022, and changes in our asset mix resulting from the continuingelevated levels of customer deposits.

Net interest income (tax-equivalent) included $0.3 million in PPP loan fees, net of related costs forthe first six months of

2022, compared to $0.4 million for the first six months of 2021.

At June 30, 2022, the Company’s allowancefor loan losses was $4.7 million, or 1.07% of total loans, compared to $4.9

million, or 1.08% of total loans, at December 31, 2021, and $5.7million, or 1.12% of total loans, at June 30, 2021.

The Company recorded a negative provision for loan losses of $0.3million and $0.6 million during the first six months of

2022 and 2021, respectively.The negative provision for loan losses during 2022 was primarily related toa decrease in total

loans, excluding PPP,during the first six months of 2022.The negative provision for loan losses during 2021 was

primarily related to improvements in economic conditions in our primary marketarea, and related improvements in our

asset quality.The provision for loan losses is based upon various estimates and judgments,including the absolute level of

loans, economic conditions, credit quality and the amount of net charge-offs.

Noninterest income was $1.8 million for the first six months of 2022compared to $2.3 million for the first six months of

2021.The decrease in noninterest income was primarily due to a decreasein mortgage lending income of $0.5million as

refinance activity slowed in our primary market area, as market interest rateson mortgage loans increased.

Noninterest expense was $10.0 million for the first six months of 2022 comparedto $9.6 million for the first six months of

2021.The increase in noninterest expense was due to increases in salaries and benefits expenseof $0.2 million and net

occupancy and equipment expense of $0.3 million related to the Company’snew headquarters,partially offsetby a

decrease in professional fees of $0.1 million.

30

Income tax expense was $0.6 million for the first six months of 2022compared to $0.9million during the first six months

of 2021.The Company’s effective taxrate for the first six months of 2022 was 13.71%, compared to 17.76% in the first six

months of 2021.The decrease was primarily due to an income tax benefit related to a New Markets TaxCredit investment

funded in the fourth quarter of 2021.The Company’s effective incometax rate is principally impacted by tax-exempt

earnings from the Company’sinvestments in municipal securities, bank-owned life insurance, and New MarketsTax

Credits.

The Company paid cash dividends of $0.53 per share in the first six months of 2022,an increase of 2% from the same

period of 2021.The Company’s share repurchases of $0.3million since December 31, 2021 resulted in 10,640 fewer

outstanding common shares at June 30, 2022.At June 30, 2022, the Bank’s regulatory capital ratioswere well above the

minimum amounts required to be “well capitalized” under current regulatorystandards with a total risk-based capital ratio

of 17.38%, a tier 1 leverage ratio of 9.16 % and a common equity tier 1 (“CET1”)ratio of 16.59 % at June 30, 2022.

For the second quarter of 2022, net earnings were $1.8 million, or $0.51per share, compared to $2.3 million, or $0.65 per

share, for the second quarter of 2021.Net interest income (tax-equivalent) was $6.5 million for the second quarter of 2022,

a 6% increase compared to $6.1million for the second quarter of 2021.This increase was primarily due to balance sheet

growth, and recent increases in market interest rates.The Federal Reserve increased the target federal funds range by 25

basis points on March 27, 2022, 50 basis points on May 5 and 75 basis points on each of June16 and July 27.Further

increases in the target federal funds rate are possible if inflation remains elevated.The Company’s net interestmargin (tax-

equivalent) was 2.60% in the second quarter of 2022 and 2021. Net interest income(tax-equivalent) included $0.1million

in PPP loan fees, net of related costs for the second quarter of 2022 and$0.2 million in the second quarter of 2021.The

Company had no provision for loan losses during the second quarter of 2022compared to a negative provision for loan

losses of $0.6 million during the second quarter 2021.Noninterest income was $0.8 million in the second quarter of 2022,

compared to $1.1 million in the second quarter of 2021.The decrease in noninterest income was primarily due to a

decrease in mortgage lending income of $0.2million as refinance activity slowed in our primary market area, as market

interest rates on mortgage loans increased.Noninterest expense was $5.1 million in the second quarter of 2022,compared

to $4.9 million for the second quarter of 2021.The increase in noninterest expense was primarily due to an increase in net

occupancy and equipment expense of $0.3 million related to the Company’snew headquarters, which opened in June 2022.

Income tax expense was $0.4million for the second quarter of 2022 compared to $0.5 million for the second quarterof

2021.The Company's effective tax rate for the second quarter of 2022was 16.77%, compared to 18.06% in the second

quarter of 2021.This decrease was primarily due to an income tax benefit related to a New Markets TaxCredit investment

funded in the fourth quarter of 2021.The Company’s effectiveincome tax rate is principally impacted by tax-exempt

earnings from the Company’sinvestment in municipal securities, bank-owned life insurance,and New Markets Tax

Credits.

Other Events

We entered into a contracton February 15, 2022 to sell approximately 0.85 acres of land to a third party,where our former

headquarters building was located. The land, which is adjacent to our newheadquarters, has been cleared and site

improvements, which are a condition to the buyer’s obligation toclose its purchase, are being made.The sale includes all

appurtenances, privileges, development and rights for an aggregate purchaseprice of $4.26 million, net of estimated

prorations and closing costs. The principal owner of the purchaser andhis related interests are Bank customers and are

among the Bank’s largest borrowers.All such loans and deposits are in the ordinary course of the Bank’sbusiness upon

market terms and conditions not more favorable than similarly situated customers. TheBank entered into the agreement on

an arms-length basis in consultation with the Bank’sreal estate developer, and the agreement is onmarket terms and

conditions.

The agreement contains various other terms, representations, warranties, covenantsand closing conditions that are

customary for transactions similar to the sale. The purchaser has a 180 day inspection periodending on August 14, 2022

subject to up to 3 possible extensions, to complete all its due diligence, inspections and reviews,and receive its necessary

approvals. The closing is subject to the completion of such matters satisfactory to thepurchaser, the satisfaction of the

agreement’s other terms, including customaryclosing conditions, and the negotiation and execution of various use and

other ancillary agreements and may be extended. The purchaser’s obligationsto close are not contingent upon the purchaser

obtaining financing. The sale of the property is expected to close 30 days following thelater of (a) the expiration of the

inspection period and (b) the satisfaction of all the closing conditions. Upon closing, theCompany currently expects the

sale to be accretive to earnings by approximately $0.70 per share.Currently, the Bank expects the transactionto close later

this year.

31

We also intend to file a requestwith the IRS for an employee retention credit of $1.6 million, or approximately $1.2million

net of estimated income tax effects, or approximately $0.33 pershare, under the CARES Act and the 2022 Consolidated

Appropriations Act.IRS action on this request, including its timing and the amount of any creditapproved by the IRS,

cannot be predicted. See “COVID-19 Impact Assessment.”

COVID-19 Impact Assessment

The COVID-19 pandemic has occurred in waves of differentvariants since the first quarter of 2020. Vaccinesto protect

against and/or reduce the severity of COVID-19 were widely introduced at thebeginning of 2021.At times, the pandemic

has severely restricted the level of economic activity in our markets. In response to theCOVID-19 pandemic, the State of

Alabama, and most other states, have taken preventative or protective actions to preventthe 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 andsocial distancing, and causing

temporary closures of businesses that have been deemed to be non-essential. Though certainof these measures have been

relaxed or eliminated, especially as vaccination levels increased, suchmeasures could be reestablished in cases of new

waves, especially a wave of a COVID-19 variant that is more resistantto existing vaccines and newly developed

treatments.

COVID-19 has significantly affected local state, national andglobal health and economic activity and its future effects are

uncertain and will depend on various factors, including, among others, the durationand scope of the pandemic, especially

new variants of the virus, effective vaccines and drug treatments, togetherwith governmental, regulatory and private sector

responses. COVID-19 has had continuing significant effectson the economy, financialmarkets 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 underlyingour 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 implementeda number of procedures in response to the pandemic to support the safety andwell-being of our

employees, customers and shareholders.

●

We believe our business continuityplan has worked to provide essential banking services to ourcommunities and

customers, while protecting our employees’ health. As part of our effortsto exercise social distancing in

accordance with the guidelines of the Centers for Disease Control and the Governorof the State of Alabama,

starting March 23, 2020, we limited branch lobby service to appointment onlywhile 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 toprovide

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 during outbreaks ofCOVID-19 variants.

●

We serviced the financialneeds of our commercial and consumer clients with extensions anddeferrals to loan

customers effected by COVID-19, provided such customerswere not more than 30 days past due at the time of the

request; and

●

Wewere 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 deferreduntil either the date on which the Small Business

Administration (“SBA”) remits the amount of forgiveness proceedsto the lender or the date that is 10 months after

the last day of the covered period if the borrower does not apply for forgivenesswithin that 10-month period. We

believe these loans and our participation in the program helped our customers and the communitieswe serve.

32

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 onhospitality and travel, and migration from

larger urban centers to less populated areas and remote work. Thedemand for single family housing has exceeded existing

supplies. When coupled with construction delays attributable to supply chain disruptionsand worker shortages, these

factors have caused housing prices and apartment rents to increase, generally.Stimulative monetary and fiscal policies,

along with shortages of certain goods and services, and rising petroleum and foodprices,reflecting, among other things, the

war in the Ukraine, have led to the highest inflation in decades. Although fiscal stimulus remainsunder consideration by

the President and Congress, the Federal Reserve has begun increasing its targetinterest rates and is considering reducing its

holdingsof securities to counteract inflation.

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

23

5

14,691

40

Up to $350,000

400

95

21,784

60

Total

423

100

%

$

36,475

100

%

We collectedapproximately $1.5 million in fees from the SBA related to our PPP loans during 2020. ThroughDecember

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 VenuesAct (the “Economic Aid

Act”) was signed into law. TheEconomic Aid Act provides a second $900 billion stimulus package, including $325billion

in additional PPP loans. The Economic Aid Act also permits the collection ofa higher amount of PPP loan fees by

participating banks.

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

12

5

6,494

32

Up to $350,000

242

95

13,757

68

Total

254

100

%

$

20,251

100

%

We collectedapproximately $1.0 million in fees from the SBA related to PPP loans under the Economic AidAct. Through

June 30, 2022, we have recognized $0.9million of these fees, net of related costs. As of June 30, 2022, we have received

payments and forgiveness on 240 PPP loans under the EconomicAid Act, totaling $19.6 million. The outstanding balance

for the remaining 14 PPP loans under the Economic Aid Act was approximately $0.6million at June 30, 2022.

We continue to closelymonitor this pandemic, and are working to continue our services and to addressdevelopments as

those occur. Our results of operations for thesix months ended June 30, 2022, and our financial condition at that date

reflect only the ongoing effects of the pandemic, and may notbe indicative of future results or financial conditions,

including possible changes in monetary or fiscal stimulus, and the possible effectsof the expiration or extension of

temporary accounting and bank regulatory relief measures in response to the COVID-19 pandemic.

As of June 30, 2022,all of our capital ratios were in excess of all regulatory requirements to be well capitalized.The

continuing effects of the COVID-19 pandemic could result in adversechanges to credit quality and our regulatory capital

ratios, and inflation will affect our costs, interest rates and the values of our assets andliabilities, customer behaviors and

economic activity.Continuing supply chain and supply disruptions also adversely affect thelevels and costs of economic

activities.We continue to closelymonitor this pandemic, and are working to continue our services during the pandemic

and to address developments as those occur.

33

The CARES Act and the 2020 Consolidated Appropriations Act provide eligibleemployers an employee retention credit

related to COVID-19.After consultation with our tax advisors, we believe we are eligible, subjectto the finalization and

filing of our request with the IRS, and approval of such request by the IRS, of an estimatedemployee retention credit of

$1.6 million, or approximately $1.2 million, net of estimated income tax effects,or approximately $0.33 per share.IRS

action on this request, including its timing and the amount of any credit approvedby the IRS, cannot be predicted.

CRITICAL ACCOUNTING POLICIES

The accounting and financial reporting policies of the Company conform with U.S. generally acceptedaccounting

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 allowancefor loan losses, our

assessment of other-than-temporary impairment, recurring andnon-recurring fair value measurements, the valuation of

other real estate owned, and the valuation of deferred tax assets, were critical to the determinationof our financial position

and results of operations. Other policies also require subjective judgment and assumptionsand may accordingly impact our

financial position and results of operations.

Allowance for Loan Losses

The Company assesses the adequacy of its allowance for loan losses priorto the end of each calendar quarter. The level of

the allowance is based upon management’sevaluation of the loan portfolio, past loan loss experience, current asset quality

trends, known and inherent risks in the portfolio, adverse situations that may affecta 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, includingregulatory recommendations. This

evaluation is inherently subjective as it requires material estimates including the amountsand 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 pursuantto the terms of the loan is

unlikely.

The Company deems loans impaired when, based on current information and events, it isprobable 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 aloan 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 recordedinvestment in the loan. The

impairment is recognized through the allowance. Loans that are impairedare recorded at the present value of expected

future cash flows discounted at the loan’s effectiveinterest 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, based on its processes andestimates, to be adequate to

absorb probable losses inherent in the portfolio at the balance sheet date. Theallowance is increased by provisions charged

to expense and decreased by charge-offs, net of recoveries of amountspreviously charged-off and by releases from the

allowance when determined to be appropriate to the levels of loans and probableloan losses in such loans.

In assessing the adequacy of the allowance, the Company also considers the results of itsongoing internal, independent

loan review process. The Company’s loanreview process assists in determining whether there are loans in the portfolio

whose credit quality has weakened over time and evaluating the risk characteristics of theentire loan portfolio. The

Company’s loan review process includes thejudgment of management, the input from our independent loan reviewers, and

reviews that may have been conducted by bank regulatory agencies as part of their examinationprocess. The Company

incorporates loan review results in the determination of whether ornot 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 assessmentof the allowance, management divides the loan portfolio into five segments:

commercial and industrial, construction and land development, commercial real estate, residentialreal estate, and consumer

installment loans. The Company analyzes each segment and estimates an allowance allocationfor each loan segment.

34

The allocation of the allowance for loan losses begins with a process of estimating theprobable losses inherent for these

types of loans. The estimates for these loans are established by category and basedon the Company’s internal system of

credit risk ratings and historical loss data. The estimated loan loss allocation rate for the Company’sinternal system of

credit risk grades is based on its experience with similarly graded loans. Forloan segments where the Company believes it

does not have sufficient historical loss data, the Company maymake adjustments based, in part, on loss rates of peer bank

groups. At June 30, 2022 and December 31, 2021, and for the periodsthen ended, the Company adjusted its historical loss

rates for the commercial real estate portfolio segment based, in part, on loss rates of peer bankgroups.

The estimated loan loss allocation for all five loan portfolio segments is then adjusted for management’sestimate 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 ofthe balance sheet date, and are

based upon quarterly trend assessments in delinquent and nonaccrual loans, creditconcentration changes, prevailing

economic conditions, changes in lending personnel experience, changes in lendingpolicies or procedures and other

influencing factors.These qualitative and environmental factors are considered for each of the five loan segmentsand the

allowance allocation, as determined by the processes noted above, is increased ordecreased based on the incremental

assessment of these factors.

The Company regularly re-evaluates its practices in determining the allowancefor loan losses. The Company’s look-back

period each quarter incorporates the effects of at least one economic downturnin its loss history.The Company believes

this look-back period is appropriate due to the risks inherent in the loan portfolio. Absent this look-back period,the early

cycle periods in which the Company experienced significant losses would be excludedfrom the determination of the

allowance for loan losses and its balance would decrease. For the quarter endedJune 30, 2022, the Company increased its

look-back period to 53 quarters to continue to include losses incurred by the Company beginningwith the first quarter of

2009. The Company will likely continue to increase its look-back period to incorporatethe effects of at least one economic

downturn in its loss history.During the quarter ended June 30, 2021, the Company adjusted certain qualitativeand

economic factors, previously downgraded as a result of the COVID-19pandemic, to reflect improvements in economic

conditions in our primary market area.Further adjustments may be made from time to time in the future as a result of the

COVID-19 pandemic and other economic changes.

Assessment for Other-Than-TemporaryImpairment of Securities

On a quarterly basis, management makes an assessment to determinewhether there have been events or economic

circumstances to indicate that a security on which there is an unrealized loss is other-than-temporarilyimpaired.

For debt securities with an unrealized loss, an other-than-temporaryimpairment 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 expectto 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 itwill

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 costand 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 otherfactors.The

credit loss component is recognized in earnings and is the difference betweenthe security’s amortized cost basisand the

present value of its expected future cash flows.The remaining difference between the security’sfair 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 asFederal Home Loan Bank (“FHLB”)

and Federal Reserve Bank (“FRB”).These non-marketable equity securities are accounted for at costwhich equals par or

redemption value.These securities do not have a readily determinable fair value as their ownership is restricted andthere is

no market for these securities.The Company records these non-marketable equity securities as a componentof other

assets, which are periodically evaluated for impairment. Management considersthese non-marketable equity securities to

be long-term investments. Accordingly,when evaluating these securities for impairment, management considersthe

ultimate recoverability of the par value rather than by recognizing temporary declines invalue.

35

Fair ValueDetermination

U.S. GAAP requires management to value and disclose certain of the Company’sassets and liabilities at fair value,

including investments classified as available-for-sale and derivatives.ASC 820,

Fair ValueMeasurements and Disclosures

,

which defines fair value, establishes a framework for measuring fair value inaccordance with U.S. GAAP and expands

disclosures about fair value measurements.For more information regarding fair value measurements and disclosures,

please refer to Note 7, 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 assetsor liabilities do not have

readily available active market pricing.However, some of the Company’sassets or liabilities lack an available or

comparable trading market characterized by frequent transactions betweenwilling buyers and sellers. In these cases, fair

value is estimated using pricing models that use discounted cash flows andother pricing techniques. Pricing models and

their underlying assumptions are based upon management’sbest estimates for appropriate discount rates, default rates,

prepayments, market volatility and other factors, taking into account current observablemarket data and experience.

These assumptions may have a significant effect on the reportedfair values of assets and liabilities and the related income

and expense. As such, the use of different models and assumptions, aswell as changes in market conditions, could result in

materially different net earnings and retained earnings results.

Other Real Estate Owned

Other real estate owned (“OREO”), consists of properties obtained through foreclosure orin 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 lossrecognized as a

charge-off through the allowance for loan losses. AdditionalOREO losses for subsequent valuation adjustments are

determined on a specific property basis and are included as a component of other noninterestexpense 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 timewithin which such estimates

can be considered current is significantly shortened during periods ofmarket volatility. As a result, thenet proceeds

realized from sales transactions could differ significantly from appraisals,comparable sales, and other estimates used to

determine the fair value of OREO.

Deferred TaxAsset Valuation

A valuation allowance is recognized for a deferred tax asset if, based on the weight of availableevidence, it is more-likely-

than-not that some portion or the entire deferred tax asset will not be realized. The ultimaterealization of deferred tax assets

is dependent upon the generation of future taxable income during the periodsin which those temporary differences become

deductible. Management considers the scheduled reversal of deferredtax liabilities, projected future taxable income and tax

planning strategies in making this assessment. At June 30, 2022we had total deferred tax assets of $10.3 million included

as “other assets”, including $9.5 million resulting from unrealized losses in our securitiesportfolio.Based upon the level of

taxable income over the last three years and projections for future taxable income over theperiods in which the deferred tax

assets are deductible, management believes it is more likely than not that wewill realize the benefits of these deductible

differences at June 30, 2022. The amount of the deferred tax assets consideredrealizable, however, could be reduced if

estimates of future taxable income are reduced.

36

RESULTSOF OPERATIONS

Average BalanceSheet and Interest Rates

Six months ended June 30,

2022

2021

Average

Yield/

Average

Yield/

(Dollars in thousands)

Balance

Rate

Balance

Rate

Loans and loans held for sale

$

434,863

4.42%

$

464,332

4.47%

Securities - taxable

371,012

1.57%

299,011

1.32%

Securities - tax-exempt

60,228

3.54%

62,844

3.64%

Total securities

431,240

1.84%

361,855

1.72%

Federal funds sold

63,021

0.36%

34,700

0.13%

Interest bearing bank deposits

88,008

0.52%

71,252

0.09%

Total interest-earning assets

1,017,132

2.74%

932,139

2.91%

Deposits:

NOW

204,912

0.12%

173,102

0.13%

Savings and money market

338,283

0.20%

284,174

0.23%

Time Deposits

157,877

0.88%

159,406

1.07%

Total interest-bearing deposits

701,072

0.33%

616,682

0.42%

Short-term borrowings

4,075

0.50%

3,266

0.50%

Total interest-bearing liabilities

705,147

0.33%

619,948

0.42%

Net interest income and margin (tax-equivalent)

$

12,674

2.51%

$

12,150

2.63%

Net Interest Income and Margin

Net interest income (tax-equivalent) was $12.7 million for the first sixmonths of 2022,a 4% increase compared to $12.2

million for the first six months of 2021.This increase was primarily due to balance sheet growth, partially offsetby a

decrease in the Company’s netinterest margin (tax-equivalent).Net interest margin (tax-equivalent) declined to 2.51% in

the first six months of 2022, compared to 2.63% for the first six months of 2021due to the continued lower interest rate

environment and changes in our asset mix resulting from the continuing elevatedlevels of customer deposits.The Federal

Reserve increased the target federal funds range by 25 basis points on March 27,2022, 50 basis points on May 5 and 75

basis points on each of June 16 and July 27.Further increases in the target federal funds rate are possible if inflation

remains elevated.Net interest income (tax-equivalent) included $0.3 million in PPP loan fees, net of relatedcosts for the

first six months of 2022, compared to $0.4 million for the first six months of 2021.

The tax-equivalent yield on total interest-earning assets decreased by 17 basis pointsto 2.74% in the first six months of

2022 compared to 2.91% in the first six months of 2021.This decrease was primarily due to changes in our asset mix

resulting from the significant increase in customer deposits.

The cost of total interest-bearing liabilities decreased by 9 basis points to 0.33%in the first six months of 2022 compared to

0.42% in the first six months of 2021, even as interest bearing deposits increased.The net decrease in our funding costs

was primarily due to lower prevailing market interest rates through most of thefirst quarter of 2022.Our funding costs

declined less than the rates earned on our interest earning assets.Our deposit costs may increase as the Federal Reserve

increases its target federal funds rate and market interest rates increase.

The Company continues to deploy various asset liability management strategiesto manage its risk to interest rate

fluctuations. Pricing remains competitive in our markets.We believe this challengingcompetitive environment will

continue throughout the remainder of 2022.Our ability to hold our deposit rates low until our interest-earning assets

reprice will be important in our ability to maintain or potentially increase our net interestmargin during the beginning of

the monetary tightening cycle that we believe we will continue to experience in2022.

37

Provision for Loan Losses

The provision for loan losses represents a charge to earnings necessary to providean allowance for loan losses that

management believes, based on its processes and estimates, should be adequateto provide for the probable losses on

outstanding loans.The Company recorded a negative provision for loan losses of $0.3million for the first six months of

2022, compared to a negative provision for loan losses of $0.6 million for the first sixmonths of 2021.The negative

provision for loan losses for the first six months of 2022 was primarily relatedto a decrease in total loans, excluding PPP,

during the first six months of 2022.The negative provision for loan losses for the first six months of 2021 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, economic conditions, creditquality, and the amount of net charge-

offs.

Based upon its assessment of the loan portfolio, management adjusts the allowance for loanlosses 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 1.07% at June 30, 2022, compared to1.08% at December 31, 2021.While

the policies and procedures used to estimate the allowance for loan losses, as well as the resultingprovision for loan losses

charged to operations, are considered adequate by management andare reviewed from time to time by our regulators, they

are based on estimates and judgments and are therefore approximate and imprecise. Factorsbeyond our control (such as

conditions in the local and national economy,local real estate markets, or industries) may have a material adverseeffect on

our asset quality and the adequacy of our allowance for loan losses resulting in significantincreases in the provision for

loan losses.

Noninterest Income

Quarter ended June 30,

Six months ended June 30,

(Dollars in thousands)

2022

2021

2022

2021

Service charges on deposit accounts

$

146

$

138

$

288

$

270

Mortgage lending income

187

424

440

973

Bank-owned life insurance

97

99

196

202

Other

418

470

832

868

Total noninterest income

$

848

$

1,131

$

1,756

$

2,313

The Company’s income from mortgage lendingwas primarily attributable to the (1) origination and sale of mortgage loans

and (2) servicing of mortgage loans. Origination income, net, is comprised of gains or lossesfrom the sale of the mortgage

loans originated, origination fees, underwriting fees, and other fees associatedwith the origination of loans, which are

netted against the commission expense associated with these originations. TheCompany’s normal practice is to originate

mortgage loans for sale in the secondary market and to either sell or retain the associatedMSRs when the loan is sold.

MSRs are recognized based on the fair value of the servicing right on the date the correspondingmortgage loan is sold.

Subsequent to the date of transfer, the Companyhas elected to measure its MSRs under the amortization method.Servicing

fee income is reported net of any related amortization expense.

The Company evaluates MSRs for impairment 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 fairvalue, 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 decreasein the fair value of MSRs.

The following table presents a breakdown of the Company’smortgage lending income.

Quarter ended June 30,

Six months ended June 30,

(Dollars in thousands)

2022

2021

2022

2021

Origination income

$

120

$

398

$

349

$

935

Servicing fees, net

67

26

91

38

Total mortgage lending income

$

187

$

424

$

440

$

973

38

The Company’s income from mortgage lendingtypically fluctuates as mortgage interest rates change and is primarily

attributable to the origination and sale of mortgage loans. Origination income decreaseddue to a decrease in refinance

activity in our primary market area, as market interest rates on mortgage loans increased.The decrease in origination

income was partially offset by an increase in servicing fees, net of relatedamortization expense as prepayment speeds

slowed, resulting in decreased amortization expense.

Noninterest Expense

Quarter ended June 30,

Six months ended June 30,

(Dollars in thousands)

2022

2021

2022

2021

Salaries and benefits

$

2,976

$

2,897

$

5,926

$

5,748

Net occupancy and equipment

727

439

1,161

877

Professional fees

239

326

469

582

Other

1,116

1,254

2,403

2,399

Total noninterest expense

$

5,058

$

4,916

$

9,959

$

9,606

The increase in salaries and benefits was primarily due to a decrease in deferred costs relatedto the PPP loan program, and

routine annual wage and benefit increases.

The increase in net occupancy and equipment expense was primarily due to increasedexpenses related to the

redevelopment of the Company’s headquartersin downtown Auburn.This amount includes depreciation expense and one-

time costs associated with the opening of the Company’snew headquarters.The Company relocated its main office branch

and bank operations into its newly constructed headquarters during June of 2022.

The decrease in professional fees expense was primarily due to a decreasein legal fees.

Income TaxExpense

Income tax expense was $0.6million for the first six months of 2022 compared to $0.9 million for the first six months of

2021.The Company’s effective incometax rate for the first six months of 2022 was 13.71%, compared to 17.76%in the

first six months of 2021.The decrease was primarily due to an income tax benefit related to a New Markets TaxCredit

investment funded in the fourth quarter of 2021.The Company’s effectiveincome tax rate is principally impacted by tax-

exempt earnings from the Company’s investmentsin municipal securities, bank-owned life insurance, and New Markets

Tax Credits.

BALANCE SHEET ANALYSIS

Securities

Securities available-for-sale were $429.2million at June 30, 2022 compared to $421.9 million at December 31, 2021.This

increase reflects an increase in the amortized cost basis of securities available-for-saleof $46.5 million, and a decrease of

$39.2 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 managementallocating more funding to the investment portfolio following

the significant increase in customer deposits.The decrease in the fair value of securities was primarily due to an increasein

long-term market interest rates,which resulted in $9.5 million of deferred tax assets included in our other assets.The

average annualized tax-equivalent yields earned on total securities were 1.84%in the first six months of 2022 and 1.72% in

the first six months of 2021.

39

Loans

2022

2021

Second

First

Fourth

Third

Second

(In thousands)

Quarter

Quarter

Quarter

Quarter

Quarter

Commercial and industrial

$

70,087

73,297

83,977

79,202

87,933

Construction and land development

38,654

33,058

32,432

34,890

37,477

Commercial real estate

240,296

235,062

258,371

252,798

242,845

Residential real estate

85,224

79,102

77,661

80,205

82,164

Consumer installment

7,122

8,412

6,682

7,060

7,762

Total loans

441,383

428,931

459,123

454,155

458,181

Less:unearned income

(511)

(514)

(759)

(923)

(1,197)

Loans, net of unearned income

$

440,872

428,417

458,364

453,232

456,984

Total loans, net of unearned income,were $440.9 million at June 30, 2022, and $458.4 million at December 31,2021.

Excluding PPP loans, total loans, net of unearned income, were $440.2million, a decrease of $10.0 million, or 2% from

December 31, 2021.Four loan categories represented the majority of the loan portfolio at June 30, 2022:commercial real

estate (55%), residential real estate (19%), commercial and industrial (16%) andconstruction and land development (9%).

Approximately 24% of the Company’s commercialreal estate loans were classified as owner-occupied at June 30, 2022.

Within the residential real estate portfoliosegment, the Company had junior lien mortgages of approximately $6.9million,

or 2%, and $7.2 million, or 2%, of total loans, net of unearned income at June 30, 2022and December 31, 2021,

respectively.For residential real estate mortgage loans with a consumer purpose, the Companyhad no loans that required

interest only payments at June 30, 2022 and December 31, 2021. The Company’sresidential 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 4.42% in the first six monthsof 2022 and 4.47% in the first

six months of 2021.

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 continuing effects from theCOVID-19 pandemic, as well as high inflation rates

and the Federal Reserve’s shift from stimulativemonetary policy to increases in the target Federal Funds rate and

reductions in its securities holdings,on our borrowers’ cash flows, real estate market sales volumes, valuations,availability

and cost of financing properties, real estate industry concentrations, competitive pressuresfrom a wide range of other

lenders, deterioration in certain credits, interest rate fluctuations and increases,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-valueguidelines for collateralized

loans, investigating the creditworthiness of borrowers and monitoring borrowers’ financialposition. Also, we have

established and periodically review,lending policies and procedures. Banking regulations limit a bank’scredit 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 securedloan relationships in excess of

approximately $21.4million.Furthermore, we have an internal limit for aggregate credit exposure (loans outstandingplus

unfunded commitments) to a single borrower of $19.3million. Our loan policy requires that the Loan Committee of the

Board of Directors approve any loan relationships that exceed this internal limit.At June 30, 2022, the Bank had no

relationships exceeding these limits.

40

We periodically analyzeour commercial and industrial and commercial real estate loan portfolios to determine ifa

concentration of credit risk exists in any one or more industries. Weuse 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 totalrisk-based capital at June 30, 2022 and December 31, 2021.

June 30,

December 31,

(Dollars in thousands)

2022

2021

Lessors of 1-4 family residential properties

$

52,329

$

47,880

Hotel/motel

34,365

43,856

Multi-family residential properties

29,722

42,587

Shopping centers

27,309

29,574

In light of disruptions in economic conditions caused by COVID-19, the financial regulatorshave issued guidance

encouraging banks to work constructively with borrowers affectedby the virus in our community.This guidance, including

the Interagency Statement on COVID-19 Loan Modifications and the Interagency ExaminerGuidance for Assessing Safety

and Soundness Considering the Effect of the COVID-19Pandemic on Institutions, provides that the agencies will not

criticize financial institutions that mitigate credit risk through prudent actionsconsistent with safe and sound practices.

Specifically, examinerswill not criticize institutions for working with borrowers as part of a riskmitigation strategy

intended to improve existing loans, even if the restructured loans have or developweaknesses 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 appropriatedeferral option.For residential

mortgage and consumer loans the borrower may elect to defer payments for up to threemonths.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 asix-month period.The bank

recognizes that a combination of the payment relief options may be prudent dependenton a borrower’s business type.As

of June 30, 2022, we had no COVID-19 loan deferrals, compared to one COVID-19loan deferral totaling $0.1 million at

December 31, 2021.

Section 4013 of the CARES Act providesthat 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 providescircumstances in

which a loan modification is not subject to classification as a TDR if such loan is not eligiblefor modification under

Section 4013.

Allowance for Loan Losses

The Company maintains the allowance for loan losses at a level that management believesappropriate to adequately cover

the Company’s estimate of probablelosses inherent in the loan portfolio. The allowance for loan losses was $4.7 million at

June 30, 2022 compared to $4.9 million at December 31, 2021, whichmanagement believed to be adequate at each of the

respective dates. The judgments and estimates associated with the determinationof the allowance for loan losses are

described under “Critical Accounting Policies.”

41

A summary of the changes in the allowance for loan losses and certain asset quality ratiosfor the second quarter of 2022

and the previous four quarters is presented below.

2022

2021

Second

First

Fourth

Third

Second

(Dollars in thousands)

Quarter

Quarter

Quarter

Quarter

Quarter

Balance at beginning of period

$

4,658

4,939

5,119

5,107

5,682

Charge-offs:

Commercial and industrial

(4)

—

—

—

—

Commercial real estate

—

—

(254)

—

—

Residential real estate

—

—

(2)

—

(1)

Consumer installment

(16)

(48)

(32)

—

—

Total charge-offs

(20)

(48)

(288)

—

(1)

Recoveries

78

17

108

12

26

Net recoveries (charge-offs)

58

(31)

(180)

12

25

Provision for loan losses

—

(250)

—

—

(600)

Ending balance

$

4,716

4,658

4,939

5,119

5,107

as a % of loans

1.07

%

1.09

1.08

1.13

1.12

as a % of nonperforming loans

1,314

%

1,256

1,112

1,053

813

Net (recoveries) charge-offs as % of average loans (a)

(0.05)

%

0.03

0.16

(0.01)

(0.02)

(a) Net (recoveries) charge-offs are annualized.

As described under “Critical Accounting Policies,” management assesses the adequacyof the allowance prior to the end of

each calendar quarter. The level of the allowanceis based upon management’s evaluationof the loan portfolios, past loan

loss experience, known and inherent risks in the portfolio, adverse situations thatmay 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 pertinentfactors. This evaluation is

inherently subjective as it requires various material estimates and judgments, includingthe amounts and timing of future

cash flows expected to be received on impaired loans that may be susceptible tosignificant change. The ratio of our

allowance for loan losses to total loans outstanding was 1.07%at June 30, 2022, compared to 1.08% at December 31, 2021.

In the future, the allowance to total loans outstanding ratio will increase or decreaseto the extent the factors that influence

our quarterly allowance assessment, including the duration and magnitude ofCOVID-19 effects and increasing market

interest rates as the Federal Reserve shifts from stimulus to fighting inflation,in their entirety either improve or weaken.In

addition, our regulators, as an integral part of their examination process, will periodically reviewthe Company’s allowance

for loan losses, and may require the Company to make additional provisions to the allowancefor loan losses based on their

judgment about information available to them at the time of their examinations.

Nonperforming Assets

At June 30, 2022 the Company had $0.4 million in nonperforming assets compared to $0.8million at December 31, 2021.

42

The table below provides information concerning total nonperforming assetsand certain asset quality ratios for the second

quarter of 2022 and the previous four quarters.

2022

2021

Second

First

Fourth

Third

Second

(Dollars in thousands)

Quarter

Quarter

Quarter

Quarter

Quarter

Nonperforming assets:

Nonaccrual loans

$

359

371

444

486

628

Other real estate owned

—

374

374

—

—

Total nonperforming assets

$

359

745

818

486

628

as a % of loans and other real estate owned

0.08

%

0.17

0.18

0.11

0.14

as a % of total assets

0.03

%

0.07

0.07

0.05

0.06

Nonperforming loans as a % of total loans

0.08

%

0.09

0.10

0.11

0.14

Accruing loans 90 days or more past due

$

—

—

—

69

—

The table below provides information concerning the composition of nonaccrualloans for the second quarter of 2022 and

the previous four quarters.

2022

2021

Second

First

Fourth

Third

Second

(In thousands)

Quarter

Quarter

Quarter

Quarter

Quarter

Nonaccrual loans:

Commercial real estate

$

176

182

187

193

199

Residential real estate

183

189

257

293

429

Total nonaccrual loans

$

359

371

444

486

628

The Company discontinues the accrual of interest income when (1) there is a significantdeterioration in the financial

condition of the borrower and full repayment of principal and interest is not expected or(2) the principal or interest is

90 days or more past due, unless the loan is both well-secured and in the process of collection.The Company had $0.4

million in loans on nonaccrual status at June 30, 2022 and December 31,2021, respectively.

The Company had no loans 90 days or more past due and still accruing at June 30, 2022and December 31, 2021,

respectively.

The table below provides information concerning the composition of OREOfor the second quarter of 2022 and the

previous four quarters.

2022

2021

Second

First

Fourth

Third

Second

(In thousands)

Quarter

Quarter

Quarter

Quarter

Quarter

Other real estate owned:

Commercial real estate

$

—

374

374

—

—

Total other real estate owned

$

—

374

374

—

—

Potential Problem Loans

Potential problem loans represent those loans with a well-defined weakness andwhere information about possible credit

problems of a borrower has caused management to have serious doubts about the borrower’sability to comply with present

repayment terms.This definition is believed to be substantially consistent with the standardsestablished 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 $1.3million, or 0.3% of total loans at June 30,

2022, and $2.4 million, or 0.5% of total loans at December 31, 2021.

43

The table below provides information concerning the composition of potential problemloans for the second quarter of 2022

and the previous four quarters.

2022

2021

Second

First

Fourth

Third

Second

(In thousands)

Quarter

Quarter

Quarter

Quarter

Quarter

Potential problem loans:

Commercial and industrial

$

225

215

226

274

291

Construction and land development

—

13

218

231

239

Commercial real estate

146

150

156

172

178

Residential real estate

915

1,592

1,748

1,848

2,096

Consumer installment

24

8

12

19

7

Total potential problem loans

$

1,310

1,978

2,360

2,544

2,811

At June 30, 2022, approximately $0.1 million or 11%of total potential problem loans were past due at least 30 days, but

less than 90 days.

The following table is a summary of the Company’sperforming loans that were past due at least 30 days,but less than

90 days,for the second quarter of 2022 and the previous four quarters.

2022

2021

Second

First

Fourth

Third

Second

(In thousands)

Quarter

Quarter

Quarter

Quarter

Quarter

Performing loans past due 30 to 89 days:

Commercial and industrial

$

34

7

3

68

1

Construction and land development

—

1

204

—

204

Commercial real estate

28

—

—

—

205

Residential real estate

130

496

516

409

68

Consumer installment

7

15

25

25

7

Total

$

199

519

748

502

485

Deposits

Total depositswere $1.0 billion at June 30, 2022 and December 31, 2021.Noninterest-bearing deposits were $311.2

million, or 31% of total deposits, at June 30, 2022, compared to $316.1million, or 32% of total deposits at December 31,

2021.

Estimated uninsured deposits totaled $411.3million and $420.8 million at June 30, 2022 and December 31, 2021,

respectively.Uninsured amounts are estimated based on the portion of account balances in excess ofFDIC insurance

limits.

The average rate paid on total interest-bearing deposits was 0.33% in the first sixmonths of 2022 compared to 0.42% in the

first six months of 2021.

Other Borrowings

Other borrowings consist of short-term borrowings and long-term debt. Short-termborrowings generally consist of federal

funds purchased and securities sold under agreements to repurchasewith an original maturity of one year or less.The Bank

had available federal funds lines totaling $61.0 million and $41.0million with none outstanding at June 30, 2022, and

December 31, 2021, respectively.Securities sold under agreements to repurchase totaled $4.1million and $3.4 million at

June 30, 2022 and December 31, 2021, respectively.

The average rate paid on short-term borrowings was 0.50% in the first six months of 2022and 2021,respectively.

The Company had no long-term debt at June 30, 2022 and December 31, 2021.

44

CAPITAL ADEQUACY

The Company’s consolidatedstockholders’ equity was $76.1 million and $103.7 million as of June 30, 2022and December

31, 2021, respectively. The decreasefrom December 31, 2021 was primarily driven by an other comprehensive loss dueto

the change in unrealized gains/losses on securities available-for-sale,net of tax of $29.3 million.The increase in the

unrealized loss on securities was primarily due to increases in market interest rates.These unrealized losses do not affect

the Bank’s capital for regulatory capital purposes.

The Company paid cash dividends of $0.53 per share in the first six months of 2022,an increase of 2% from the same

period in 2021. The Company’s share repurchasesof $0.3million since December 31, 2021 resulted in 10,640 fewer

outstanding common shares at June 30, 2022.

On January 1, 2015, the Company and Bank became subject to the rules of the Basel III regulatorycapital framework and

related Dodd-Frank WallStreet Reform and Consumer Protection Act changes.The rules included the implementation of a

capital conservation buffer that is added to the minimum requirementsfor capital adequacy purposes.The capital

conservation buffer was subject to a three year phase-in periodthat 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 therequired amount will be

subject to limitations on capital distributions, including dividend payments and certain discretionarybonus payments to

executive officers.At June 30, 2022, the Bank’s ratiowas sufficient to meet the fully phased-in conservation buffer.

Effective March 20, 2020, the Federal Reserve and the otherfederal 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 themaximum payout ratio to allow banking

organizations to more freely use their capital buffers topromote 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 associatedtax 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 tomake prudent capital distribution decisions.

The Federal Reserve has treated us as a “small bank holding company’ under the FederalReserve’s policy.Accordingly,

our capital adequacy is evaluated at the Bank level, and not for the Company and its consolidatedsubsidiaries.The Bank’s

tier 1 leverage ratio was 9.16%, CET1 risk-based capital ratio was 16.59%, tier 1risk-based capital ratio was 16.59%, and

total risk-based capital ratio was 17.38% at June 30, 2022. These ratios exceedthe 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 bufferwas 9.38% at

June 30, 2022.Our unrealized losses on securities due to increases in market interest rates donot directly affect our capital

for regulatory purposes, and the resulting deferred tax assets, including $9.5million resulting from such unrealized

securities losses, was below the 25% threshold requiring deduction of such assetsfrom CET1 capital.

MARKET AND LIQUIDITY RISK MANAGEMENT

Management’s objective is to manage assets andliabilities to provide a satisfactory,consistent level of profitability within

the framework of established liquidity,loan, investment, borrowing, and capital policies. The Bank’sAsset Liability

Management Committee (“ALCO”) is charged with the responsibilityof monitoring these policies, which are designed to

ensure an acceptable asset/liability composition. Twocritical 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 fromfluctuations in interest rates. ALCO

measures and evaluates interest rate risk so that the Bank can meet customer demands forvarious types of loans and

deposits. Measurements used to help manage interest rate sensitivity include an earnings simulationmodel and an economic

value of equity (“EVE”) model.

45

Earnings simulation

. Management believes that interest rate risk is best estimated by our earnings simulationmodeling.

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 otherfactors in order to produce various earnings

simulations and estimates. Tohelp 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 variancesare 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

At June 30, 2022, our earnings simulation model indicated that we were in compliancewith the policy guidelines noted

above.

Economic Valueof Equity

. EVE measures the extent that the estimated economic values of our assets, liabilities, and off-

balance sheet items will change as a result of interest rate changes. Economic values areestimated 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 toor 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 ourbase 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

At June 30, 2022, our EVE model indicated that we were in compliance withour policy guidelines.

Each of the above analyses may not, on its own, be an accurate indicator of how our net interest incomewill be affected by

changes in interest rates. Income associated with interest-earning assets and costs associatedwith 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 certainassets and liabilities may have

similar maturities or periods of repricing, they may react in differentdegrees 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 assetsand liabilities may lag behind

changes in general market rates. In addition, certain assets, such as adjustable ratemortgage loans, have features (generally

referred to as “interest rate caps and floors”) which limit changes in interest rates.Prepaymentsand 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 economicstress, which may

differ across industries and economic sectors. ALCO reviews each of theabove 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 balancebetween interest-sensitive assets and

interest-sensitive liabilities, and as a tool to manage interest rate sensitivitywhile continuing to meet the credit and deposit

needs of our customers. From time to time, the Company also may enter into back-to-backinterest rate swaps to facilitate

customer transactions and meet their financing needs. These interest rate swaps qualifyas derivatives, but are not

designated as hedging instruments. At June 30, 2022 and December 31,2021, the Company had no derivative contracts

designated as part of a hedging relationship to assist in managing its interest rate sensitivity.

46

Liquidity Risk Management

Liquidity is the Company’s ability to convertassets 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 could lead

to lower earnings due to the cost of foregoing alternative higher-yieldmarket 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 areseparate and distinct legal

entities with different funding needs and sources, and each are subjectto regulatory guidelines and requirements.The

Company depends upon dividends from the Bank for liquidity to pay its operatingexpenses, debt obligations and

dividends.The Bank’s payment of dividends dependson its earnings, liquidity, capitaland the absence of regulatory

restrictions on such dividends.

The primary source of funding and liquidity for the Company has been dividends receivedfrom the Bank.If needed, the

Company could also borrow money,or issue common stock or other securities.Primary uses of funds by the Company

include dividends paid to stockholders, Company stock repurchases, and payment ofCompany expenses.

Primary sources of funding for the Bank include customer deposits, other borrowings,repayment and maturity of securities,

sales of securities, and the sale and repayment of loans. The Bank has access to federalfunds lines from various banks and

borrowings from the Federal Reserve discount window.In addition to these sources, the Bank may participate in the

FHLB’s advance program to obtain funding forits growth. Advances include both fixed and variable terms and may be

taken out with varying maturities. At June 30, 2022, the Bank had a remaining availableline of credit with the FHLB of

$332.7 million. At June 30, 2022, the Bank also had $51.0 million of available federalfunds lines with no borrowings

outstanding. Primary uses of funds include repayment of maturing obligations andgrowing the loan portfolio.

Management believes that the Company and the Bank have adequate sources of liquidity tomeet all their respective known

contractual obligations and unfunded commitments, including loan commitmentsand reasonable borrower, depositor,and

creditor requirements over the next twelve months.

Off-Balance Sheet Arrangements, Commitments, Contingencies and ContractualObligations

At June 30, 2022, the Bank had outstanding standby letters of credit of $1.2million and unfunded loan commitments

outstanding of $60.4 million.Because these commitments generally have fixed expiration dates andmany will expire

without being drawn upon, the total commitment level does not necessarily represent futurecash requirements. If needed to

fund these outstanding commitments, the Bank could liquidate federal fundssold or a portion of our securities available-

for-sale, or draw on its available credit facilities.

Mortgage lending activities

We primarily sell residentialmortgage 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 otherinvestors include various

representations and warranties regarding the origination and characteristicsof the residential mortgage loans.Although the

representations and warranties vary among investors, they typically cover ownershipof the loan, validity of the lien

securing the loan, the absence of delinquent taxes or liens against the property securing theloan, compliance with loan

criteria set forth in the applicable agreement, compliance with applicable federal,state, and local laws, among other

matters.

As of June 30, 2022,the unpaid principal balance of residential mortgage loans, which we have originated andsold, but

retained the servicing rights, was $247.1 million.Although these loans are generally sold on a non-recourse basis, we may

be obligated to repurchase residential mortgage loans or reimburse investors forlosses incurred (make whole requests) if a

loan review reveals a potential breach of seller representations andwarranties.Upon receipt of a repurchase or make whole

request, we work with investors to arrive at a mutually agreeable resolution. Repurchase andmake whole requests are

typically reviewed on an individual loan by loan basis to validate the claims made by the investorand to determine if a

contractually required repurchase or make whole event has occurred. Weseek to reduce and manage the risks of potential

repurchases, make whole requests, or other claims by mortgage loan investorsthrough our underwriting and quality

assurance practices and by servicing mortgage loans to meet investor and secondarymarket standards.

47

The Company was not required to repurchase any loans during the first six months of2022 as a result of representation and

warranty provisions contained in the Company’ssale agreements with Fannie Mae, and had no pending repurchase or

make-whole requests at June 30, 2022.

We service all residentialmortgage 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 themortgage 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 investorsconsistent with the agreements

governing our rights and duties as servicer.

The agreement under which we act as servicer generally specifiesstandardsof responsibility for actions taken by us in such

capacity and provides protection against expenses and liabilities incurred by us when actingin compliance with the

respective servicing agreements.However, if we commit a material breach of our obligationsas 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 servicingguides 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 repurchase and make whole requests related to representation andwarranty provisions and servicing activities

have been limited to date, it is possible that requests to repurchase mortgage loans or reimburseinvestors for losses incurred

(make whole requests) may increase in frequency if investors more aggressivelypursue all means of recovering losses on

their purchased loans.As of June 30, 2022, we do not believe that this exposure is material due to the historical level of

repurchase requests and loss trends, in addition to the fact that 99% of our residentialmortgage loans serviced for Fannie

Mae were current as of such date.We maintain ongoing communicationswith our investors and will continue to evaluate

this exposure by monitoring the level and number of repurchase requests as well as the delinquencyrates in our investor

portfolios.

Section 4021 of the CARES Act allows borrowers under 1-to-4 family residentialmortgage loans sold to Fannie Mae to

request forbearance to the servicer after affirming that such borrower is experiencingfinancial hardships during the

COVID-19 emergency.Except for vacant or abandoned properties, Fannie Mae servicers may not initiateforeclosures on

similar procedures or related evictions or sales until December 31, 2020. Theforbearance period was extended, generally,

to March 31, 2021. The Bank sells mortgage loans to Fannie Mae and services these onan actual/actual basis. As a result,

the Bank is not obligated to make any advances to Fannie Mae on principal and interest onsuch mortgage loans where the

borrower is entitled to forbearance.

Effects of Inflation and Changing Prices

The consolidated financial statements and related consolidated financial datapresented herein have been prepared in

accordance with GAAP and practices within the banking industry which require themeasurement of financial position and

operating results in terms of historical dollars without considering the changes inthe relative purchasing power of money

over time due to inflation. Unlikemost 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 afinancial institution’s performance

than the effects of general levels of inflation.Inflation, however, could increase our noninterestexpenses, and Federal

Reserve monetary policy in response to inflation has increased market interest rates andaffected values of certain of our

assets and liabilities, including our securities portfolio and mortgage servicing assets.

CURRENT ACCOUNTING DEVELOPMENTS

The following ASUs have been issued by the FASBbut are not yet effective.

●

ASU 2016-13,

Financial Instruments – Credit Losses (Topic326):Measurement of Credit Losses on Financial

Instruments;

48

Information about these pronouncements is described in more detail below.

ASU 2016-13,

Financial Instruments - Credit Losses (Topic326): - Measurement of CreditLosses on Financial

Instruments

, amends guidance on reporting credit losses for assets held at amortized cost basis andavailable for sale debt

securities.For assets held at amortized cost basis, the new standard eliminates the probable initial recognitionthreshold in

current GAAP and, instead, requires an entity to reflect its current estimate of all expectedcredit losses using a broader

range of information regarding past events, current conditions and forecasts assessing thecollectability of cash flows. The

allowance for credit losses is a valuation account that is deducted from the amortizedcost 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 andnet investment in leases that are

not accounted for at fair value through net income. The amendments affectloans, 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 yearsbeginning 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’sconsolidated 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 adoptionwill be a factor.On October 16, 2019,

the FASB approveda previously issued proposal granting smaller reporting companies a postponement of the required

implementation date for ASU 2016-13.

The Company is required to implement the new standard in January 2023, with early adoptionpermitted in any period prior

to that date.

49

Table 1– Explanation of Non-GAAP Financial Measures

In addition to results presented in accordance with U.S. generally accepted accounting principles(GAAP), this quarterly

report on Form 10-Q includes certain designated net interest income amountspresented on a tax-equivalent basis, a non-

GAAP financial measure, including the presentation and calculation of the efficiencyratio.

The Company believes the presentation of net interest income on a tax-equivalentbasis provides comparability of net

interest income from both taxable and tax-exempt sources and facilitates comparabilitywithin 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 alternativeto GAAP.The reconciliationsof these non-

GAAP financial measures to their most directly comparable GAAP financialmeasures are presented below.

2022

2021

Second

First

Fourth

Third

Second

(In thousands)

Quarter

Quarter

Quarter

Quarter

Quarter

Net interest income (GAAP)

$

6,374

6,078

6,037

6,041

5,975

Tax-equivalent adjustment

110

112

115

117

118

Net interest income (Tax-equivalent)

$

6,484

6,190

6,152

6,158

6,093

Six months ended June 30,

(In thousands)

2022

2021

Net interest income (GAAP)

$

12,452

11,912

Tax-equivalent adjustment

222

238

Net interest income (Tax-equivalent)

$

12,674

12,150

50

Table 2- Selected Quarterly Financial Data

2022

2021

Second

First

Fourth

Third

Second

(Dollars in thousands, except per share amounts)

Quarter

Quarter

Quarter

Quarter

Quarter

Results of Operations

Net interest income (a)

$

6,484

6,190

6,152

6,158

6,093

Less: tax-equivalent adjustment

110

112

115

117

118

Net interest income (GAAP)

6,374

6,078

6,037

6,041

5,975

Noninterest income

848

908

1,019

956

1,131

Total revenue

7,222

6,986

7,056

6,997

7,106

Provision for loan losses

—

(250)

—

—

(600)

Noninterest expense

5,058

4,901

5,092

4,736

4,916

Income tax expense

363

254

93

386

504

Net earnings

$

1,801

2,081

1,871

1,875

2,286

Per share data:

Basic and diluted net earnings

$

0.51

0.59

0.53

0.53

0.65

Cash dividends declared

0.265

0.265

0.26

0.26

0.26

Weighted average shares outstanding:

Basic and diluted

3,513,353

3,518,657

3,524,311

3,536,320

3,554,871

Shares outstanding

3,509,940

3,516,971

3,520,485

3,529,338

3,545,855

Book value

$

21.68

24.57

29.46

29.73

29.91

Common stock price

High

$

33.57

34.49

34.79

35.36

38.90

Low

27.04

31.75

31.32

33.25

34.50

Period end

27.04

33.21

32.30

33.80

35.46

To earnings ratio

12.52

x

14.44

14.23

14.57

15.22

To book value

125

%

135

110

114

119

Performance ratios:

Return on average equity

8.26

%

7.97

7.07

7.01

8.74

Return on average assets

0.66

%

0.75

0.70

0.72

0.91

Dividend payout ratio

51.96

%

44.92

49.06

49.06

40.00

Asset Quality:

Allowance for loan losses as a % of:

Loans

1.07

%

1.09

1.08

1.13

1.12

Nonperforming loans

1,314

%

1,256

1,112

1,053

813

Nonperforming assets as a % of:

Loans and other real estate owned

0.08

%

0.17

0.18

0.11

0.14

Total assets

0.03

%

0.07

0.07

0.05

0.06

Nonperforming loans as a % of total loans

0.08

%

0.09

0.10

0.11

0.14

Annualized net (recoveries) charge-offs as a % of average loans

(0.05)

%

0.03

0.16

(0.01)

(0.02)

Capital Adequacy: (c)

CET 1 risk-based capital ratio

16.59

%

17.26

16.23

16.82

17.03

Tier 1 risk-based capital ratio

16.59

%

17.26

16.23

16.82

17.03

Total risk-based capital ratio

17.38

%

18.08

17.06

17.72

17.94

Tier 1 leverage ratio

9.16

%

9.09

9.35

9.57

9.81

Other financial data:

Net interest margin (a)

2.60

%

2.43

2.45

2.51

2.60

Effective income tax rate

16.77

%

10.88

4.74

17.07

18.06

Efficiency ratio (b)

68.99

%

69.05

71.01

66.57

68.05

Selected average balances:

Securities

$

427,426

435,097

414,061

395,529

370,582

Loans, net of unearned income

428,612

439,713

455,726

452,668

460,672

Total assets

1,092,759

1,114,407

1,073,564

1,040,985

1,005,041

Total deposits

999,867

1,003,394

961,544

927,368

894,757

Total stockholders’ equity

87,247

104,493

105,925

106,936

104,591

Selected period end balances:

Securities

$

429,220

417,459

421,891

407,474

384,865

Loans, net of unearned income

440,872

428,417

458,364

453,232

456,984

Allowance for loan losses

4,716

4,658

4,939

5,119

5,107

Total assets

1,084,251

1,109,664

1,105,150

1,065,871

1,036,232

Total deposits

1,002,698

1,017,742

994,243

954,971

923,462

Total stockholders’ equity

76,107

86,411

103,726

104,929

106,043

(a) Tax-equivalent. See "Table 1 - Explanation of Non-GAAP Financial Measures."

(b) Efficiency ratio is the result of noninterest expense dividedby the sum of noninterest income and tax-equivalent net interestincome.

(c) Regulatory capital ratios presented are for the Company'swholly-owned subsidiary, AuburnBank.

51

Table 3- Selected Financial Data

Six months ended June 30,

(Dollars in thousands, except per share amounts)

2022

2021

Results of Operations

Net interest income (a)

$

12,674

12,150

Less: tax-equivalent adjustment

222

238

Net interest income (GAAP)

12,452

11,912

Noninterest income

1,756

2,313

Total revenue

14,208

14,225

Provision for loan losses

(250)

(600)

Noninterest expense

9,959

9,606

Income tax expense

617

927

Net earnings

$

3,882

4,292

Per share data:

Basic and diluted net earnings

$

1.10

1.21

Cash dividends declared

0.53

0.52

Weighted average shares outstanding:

Basic and diluted

3,515,991

3,560,554

Shares outstanding, at period end

3,509,940

3,545,855

Book value

$

21.68

29.91

Common stock price:

High

$

34.49

48.00

Low

27.04

34.50

Period end

27.04

35.46

To earnings ratio

12.52

x

15.22

To book value

125

%

119

Performance ratios:

Return on average equity

8.10

%

8.04

Return on average assets

0.70

%

0.86

Dividend payout ratio

48.18

%

42.98

Asset Quality:

Allowance for loan losses as a % of:

Loans

1.07

%

1.12

Nonperforming loans

1,314

%

813

Nonperforming assets as a % of:

Loans and other real estate owned

0.08

%

0.14

Total assets

0.03

%

0.06

Nonperforming loans as a % of total loans

0.08

%

0.14

Annualized net recoveries as a % of average loans

(0.01)

%

(0.04)

Capital Adequacy: (c)

CET 1 risk-based capital ratio

16.59

%

17.03

Tier 1 risk-based capital ratio

16.59

%

17.03

Total risk-based capital ratio

17.38

%

17.94

Tier 1 leverage ratio

9.16

%

9.81

Other financial data:

Net interest margin (a)

2.51

%

2.63

Effective income tax rate

13.71

%

17.76

Efficiency ratio (b)

69.02

%

66.42

Selected average balances:

Securities

$

431,240

361,855

Loans, net of unearned income

434,131

462,040

Total assets

1,103,523

992,940

Total deposits

1,001,620

879,063

Total stockholders’ equity

95,822

106,729

Selected period end balances:

Securities

$

429,220

384,865

Loans, net of unearned income

440,872

456,984

Allowance for loan losses

4,716

5,107

Total assets

1,084,251

1,036,232

Total deposits

1,002,698

923,462

Total stockholders’ equity

76,107

106,043

(a) Tax-equivalent. See "Table 1 - Explanation of Non-GAAP Financial Measures."

(b) Efficiency ratio is the result of noninterest expense dividedby the sum of noninterest income and tax-equivalent net interestincome.See

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

(c) Regulatory capital ratios presented are for the Company'swholly-owned subsidiary, AuburnBank.

52

Table 4- Average Balancesand Net Interest Income Analysis

Quarter ended June 30,

2022

2021

Interest

Interest

Average

Income/

Yield/

Average

Income/

Yield/

(Dollars in thousands)

Balance

Expense

Rate

Balance

Expense

Rate

Interest-earning assets:

Loans and loans held for sale (1)

$

429,182

$

4,691

4.38%

$

462,319

$

5,112

4.44%

Securities - taxable

367,241

1,547

1.69%

307,941

1,009

1.31%

Securities - tax-exempt (2)

60,185

525

3.50%

62,641

562

3.60%

Total securities

427,426

2,072

1.94%

370,582

1,571

1.70%

Federal funds sold

52,582

82

0.63%

36,570

11

0.12%

Interest bearing bank deposits

92,802

196

0.85%

72,144

17

0.09%

Total interest-earning assets

1,001,992

$

7,041

2.82%

941,615

$

6,711

2.86%

Cash and due from banks

15,485

14,824

Other assets

75,282

48,602

Total assets

$

1,092,759

$

1,005,041

Interest-bearing liabilities:

Deposits:

NOW

$

208,873

$

62

0.12%

$

174,138

$

45

0.10%

Savings and money market

331,097

159

0.19%

286,477

150

0.21%

Time deposits

155,990

331

0.85%

159,347

419

1.05%

Total interest-bearing deposits

695,960

552

0.32%

619,962

614

0.40%

Short-term borrowings

4,205

5

0.50%

3,370

4

0.50%

Total interest-bearing liabilities

700,165

$

557

0.32%

623,332

$

618

0.40%

Noninterest-bearing deposits

303,907

274,795

Other liabilities

1,440

2,323

Stockholders' equity

87,247

104,591

Total liabilities and stockholders'equity

$

1,092,759

$

1,005,041

Net interest income and margin (tax-equivalent)

$

6,484

2.60%

$

6,093

2.60%

(1) Average loan balances areshown 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 beencomputed on a tax-equivalent basis using a federal income

tax rate of 21%.

53

Table 5- Average Balancesand Net Interest Income Analysis

Six months ended June 30,

2022

2021

Interest

Interest

Average

Income/

Yield/

Average

Income/

Yield/

(Dollars in thousands)

Balance

Expense

Rate

Balance

Expense

Rate

Interest-earning assets:

Loans and loans held for sale (1)

$

434,863

$

9,541

4.42%

$

464,332

$

10,290

4.47%

Securities - taxable

371,012

2,883

1.57%

299,011

1,958

1.32%

Securities - tax-exempt (2)

60,228

1,056

3.54%

62,844

1,134

3.64%

Total securities

431,240

3,939

1.84%

361,855

3,092

1.72%

Federal funds sold

63,021

113

0.36%

34,700

23

0.13%

Interest bearing bank deposits

88,008

228

0.52%

71,252

33

0.09%

Total interest-earning assets

1,017,132

$

13,821

2.74%

932,139

$

13,438

2.91%

Cash and due from banks

15,296

14,355

Other assets

71,095

46,446

Total assets

$

1,103,523

$

992,940

Interest-bearing liabilities:

Deposits:

NOW

$

204,912

$

119

0.12%

$

173,102

$

111

0.13%

Savings and money market

338,283

331

0.20%

284,174

321

0.23%

Time deposits

157,877

687

0.88%

159,406

848

1.07%

Total interest-bearing deposits

701,072

1,137

0.33%

616,682

1,280

0.42%

Short-term borrowings

4,075

10

0.50%

3,266

8

0.50%

Total interest-bearing liabilities

705,147

$

1,147

0.33%

619,948

$

1,288

0.42%

Noninterest-bearing deposits

300,548

262,381

Other liabilities

2,006

3,882

Stockholders' equity

95,822

106,729

Total liabilities and stockholders'equity

$

1,103,523

$

992,940

Net interest income and margin (tax-equivalent)

$

12,674

2.51%

$

12,150

2.63%

(1) Average loan balances areshown 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 beencomputed on a tax-equivalent basis using a federal income

tax rate of 21%.

54

Table 6- Allocation of Allowance for Loan Losses

2022

2021

Second Quarter

First Quarter

Fourth Quarter

Third Quarter

Second Quarter

(Dollars in thousands)

Amount

%*

Amount

%*

Amount

%*

Amount

%*

Amount

%*

Commercial and industrial

$

761

15.9

$

857

18.3

$

816

17.4

$

829

19.2

$

828

19.1

Construction and land

development

576

8.8

518

7.1

590

7.7

639

8.2

551

6.5

Commercial real estate

2,523

54.4

2,739

56.2

2,823

55.6

2,704

53.0

3,259

55.1

Residential real estate

753

19.3

739

16.9

799

17.7

838

17.9

951

17.9

Consumer installment

103

1.6

86

1.5

91

1.6

97

1.7

93

1.4

Total allowance for loan losses

$

4,716

$

4,939

$

5,119

$

5,107

$

5,682

* Loan balance in each category expressed as a percentage of total loans.

55

Table 7– Estimated Uninsured Time Deposits by Maturity

(Dollars in thousands)

June 30, 2022

Maturity of:

3 months or less

$

17,778

Over 3 months through 6 months

11,792

Over 6 months through 12 months

4,496

Over 12 months

5,458

Total estimated uninsuredtime deposits

$

39,524

56

ITEM 3.QUANTITATIVEAND QUALITATIVEDISCLOSURES ABOUT MARKET RISK

The information called for by ITEM 3 is set forth in ITEM 2 under the caption“MARKET AND LIQUIDITY RISK

MANAGEMENT” and is incorporated herein by reference.

ITEM 4. CONTROLS AND PROCEDURES

The Company, with the participationof its management, including its Chief Executive Officer andChief Financial Officer,

carried out an evaluation of the effectiveness of the design and operationof its disclosure controls and procedures (as

defined in Rules 13a-15(e)and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the

period covered by this report. Based upon that evaluation and as of the end of the period covered by this report,the

Company’s Chief Executive Officerand Chief Financial Officer concluded that the Company’sdisclosure controls and

procedures were effective to allow timely decisions regarding disclosurein its reports that the Company files or submits to

the Securities and Exchange Commission under the Securities Exchange Act of 1934,as amended. There have been no

changes in the Company’s internal controlover financial reporting that occurred during the period covered by this report

that have materially affected, or are reasonably likely to materiallyaffect, the Company’sinternal control over financial

reporting.

PARTII. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

In the normal course of its business, the Company and the Bank are, from time to time, involvedin legal proceedings. The

Company’s and Bank’smanagement believe there are no pending or threatened legal, governmental, or regulatory

proceedings that, upon resolution, are expected to have a material adverse effectupon the Company’s or the Bank’s

financial condition or results of operations. See also, Part I, Item 3 of the Company’sAnnual Report on Form 10-K for the

year ended December 31, 2021.

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider thefactors discussed in Part I,

Item 1A. “RISK FACTORS”in the Company’s Annual Reporton Form 10-K for the year ended December 31, 2021,

which could materially affect our business, financial conditionor future results. The risks described in our annual report on

Form 10-K are not the only the risks facing our Company.Increases in inflation and the resulting tightening of Federal

Reserve monetary policy by increased target interest rates, has and is expectedto continue to affect mortgage originations

and income and the market values of our securities portfolio.These could also affect our deposit, costs andmixes, and

change consumer savings and payment behaviors.Additional risks and uncertainties not currently known to us or that we

currently deem to be immaterial also may materially adversely affect ourbusiness, financial condition, and/or operating

results in the future.

57

ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The Company’s repurchases of its common stockduring the second quarter of 2022 were as follows:

Period

Total Number of

Shares Purchased

Average Price

Paid per Share

Total Number of

Shares Purchased as

Part of Publicly

Announced Plans or

Programs

Approximate Dollar

Valueof Shares that

May Yet Be

Purchased Under the

Plans or Programs

(1)

April 1 - April 30, 2022

—

$

—

—

$

5,000,000

May 1 - May 31, 2022

7,081

29.97

7,081

4,787,778

June 1 - June 30, 2022

—

—

—

4,787,778

Total

7,081

29.97

7,081

4,787,778

(1)

On April 12, 2022, the Company adopted a new $5 million stock repurchase program that became effective April 12, 2022.

ITEM 3.DEFAULTSUPON SENIOR SECURITIES

Not applicable.

ITEM 4.MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.OTHER INFORMATION

Not applicable.

58

ITEM 6.EXHIBITS

Exhibit

NumberDescription

3.1

Certificate of Incorporation of Auburn National Bancorporation, Inc. and all amendments thereto.*

3.2

Amended and Restated Bylaws of Auburn National Bancorporation, Inc., adopted as of November 13, 2007. **

31.1

Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, As Adopted Pursuant To

Section 302 of the Sarbanes-Oxley Act of 2002, by Robert W. Dumas, Chairman, President and Chief Executive

Officer.

31.2

Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, As Adopted Pursuant To

Section 302 of the Sarbanes-Oxley Act of 2002, by David A. Hedges, Executive Vice President and Chief

Financial Officer.

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, Executive Vice President and Chief Financial Officer.***

101.INS

XBRL Instance Document

101.SCH

XBRL Taxonomy ExtensionSchema Document

101.CAL

XBRL Taxonomy ExtensionCalculation Linkbase Document

101.LAB

XBRL Taxonomy ExtensionLabel Linkbase Document

101.PRE

XBRL Taxonomy ExtensionPresentation Linkbase Document

101.DEF

XBRL Taxonomy ExtensionDefinition Linkbase Document

104

Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

*

Incorporated by reference from Registrant’sForm 10-Q dated June 30, 2002.

**

Incorporated by reference from Registrant’sForm 10-K dated March 31, 2008.

***

The certifications attached as exhibits 32.1 and 32.2 to this quarterly report on Form 10-Qare “furnished” to the

Securities and Exchange Commission pursuant to Section 906 of the Sarbanes-OxleyAct of 2002 and shall not be

deemed “filed” by the Company for purposes of Section 18 of the Securities ExchangeAct of 1934, as amended.

SIGNATURES

Pursuant tothe requirementsof theSecurities ExchangeAct of1934, theregistrant hasduly causedthis reportto

be signed on its behalf by the undersigned thereunto duly authorized.

AUBURN NATIONALBANCORPORATION,INC.

(Registrant)

Date:August 4, 2022

By:/s/ Robert W.Dumas

Robert W.Dumas

Chairman, President and CEO

Date:August 4, 2022

By:/s/ David A. Hedges

David A. Hedges

Executive Vice President and Chief FinancialOfficer