Auburn National Bancorporation (AUBN) 10-Q 2022 Q3 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

September 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 ofRegistrant as Specifiedin Its Charter)

Delaware

(State or otherjurisdiction of

incorporationor organization)

63-0885779

(I.R.S. Employer

IdentificationNo.)

100 N. Gay Street

Auburn

,

Alabama

36830

(

334

)

821-9200

(Address and telephonenumber of principalexecutive offices)

(Former Name,Former Addressand FormerFiscal Year,if Changed SinceLast Report)

Indicatebycheckmarkwhethertheregistrant(1) hasfiledallreportsrequired tobefiled bySection 13 or15(d)oftheSecurities

ExchangeActof1934 during the preceding 12 months (orforsuchshorter period thattheregistrant wasrequired tofile suchreports),

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 bycheckmark whethertheregistrant is a largeacceleratedfiler, an acceleratedfiler, a non-accelerated filer, asmaller reporting

companyoranemerginggrowthcompany.Seethedefinitions of“largeacceleratedfiler,”“acceleratedfiler,”“smaller reporting

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

Large Acceleratedfiler

☐

Accelerated filer

☐

Non-accelerated filer

☒

Smaller reporting company

☒

Emerging growth company

☐

Ifanemerginggrowthcompany,indicatebycheckmarkiftheregistranthaselectednottousetheextendedtransition period for

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

☐

Indicate by check mark whether the registrant 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 onwhich 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 November 8, 2022

Common Stock, $0.01 par value per share

3,504,420

shares

AUBURNNATIONAL BANCORPORATION,INC. AND SUBSIDIARIES

INDEX

PAGE

Item 1

3

4

5

6

7

8

Item 2

28

50

51

52

53

54

55

56

Item 3

57

Item 4

57

Item 1

57

Item 1A

57

Item 2

58

Item 3

58

Item 4

58

Item 5

58

Item 6

59

3

PART 1.FINANCIAL INFORMATION

ITEM 1. FINANCIALSTATEMENTS

AUBURNNATIONAL BANCORPORATION,INC. ANDSUBSIDIARIES

Consolidated Balance Sheets

(Unaudited)

September30,

December 31,

(Dollarsin thousands, exceptshare data)

2022

2021

Assets:

Cash and duefrom banks

$

20,488

$

11,210

Federal fundssold

31,133

77,420

Interest-bearing bankdeposits

18,016

67,629

Cash and cashequivalents

69,637

156,259

Securities available-for-sale

411,538

421,891

Loans held for sale

—

1,376

Loans, net of unearnedincome

474,035

458,364

Allowancefor loan losses

(4,966)

(4,939)

Loans, net

469,069

453,425

Premises and equipment,net

46,419

41,724

Bank-owned life insurance

19,929

19,635

Other assets

25,967

10,840

Total assets

$

1,042,559

$

1,105,150

Liabilities:

Deposits:

Noninterest-bearing

$

321,702

$

316,132

Interest-bearing

656,236

678,111

Total deposits

977,938

994,243

Federal fundspurchased andsecurities sold underagreements to repurchase

2,613

3,448

Accrued expenses andother liabilities

2,215

3,733

Total liabilities

982,766

1,001,424

Stockholders' equity:

Preferred stock of $

.01

parvalue;authorized

200,000

shares;

no shares issued

—

—

Common stockof $

.01

parvalue; authorized

8,500,000

shares;

issued

3,957,135

shares

39

39

Additionalpaid-in capital

3,797

3,794

Retainedearnings

113,063

109,974

Accumulatedother comprehensive (loss) income,net

(45,675)

891

Less treasury stock,at cost -

451,780

shares and

436,650

at September30, 2022

and December 31, 2021,respectively

(11,431)

(10,972)

Total stockholders’ equity

59,793

103,726

Total liabilities and stockholders’equity

$

1,042,559

$

1,105,150

See accompanying notes toconsolidatedfinancial statements

4

AUBURNNATIONAL BANCORPORATION,INC. AND SUBSIDIARIES

Consolidated Statementsof Earnings

(Unaudited)

Quarter endedSeptember30,

Nine monthsended September30,

(Dollarsin thousands, exceptshare andper sharedata)

2022

2021

2022

2021

Interest income:

Loans, includingfees

$

5,097

$

5,127

$

14,638

$

15,417

Securities:

Taxable

1,808

1,048

4,691

3,006

Tax-exempt

441

441

1,275

1,337

Federal fundssold and interest-bearingbank deposits

426

49

767

105

Total interest income

7,772

6,665

21,371

19,865

Interest expense:

Deposits

524

620

1,661

1,900

Short-term borrowings

5

4

15

12

Total interest expense

529

624

1,676

1,912

Net interest income

7,243

6,041

19,695

17,953

Provision for loan losses

250

—

—

(600)

Net interest income afterprovision forloan losses

6,993

6,041

19,695

18,553

Noninterest income:

Service chargeson deposit accounts

158

149

446

419

Mortgage lending

126

268

566

1,241

Bank-owned life insurance

97

100

293

302

Other

427

443

1,259

1,311

Securities gains,net

44

15

44

15

Total noninterest income

852

975

2,608

3,288

Noninterest expense:

Salaries andbenefits

2,975

2,893

8,901

8,641

Net occupancyand equipment

794

467

1,955

1,340

Professional fees

235

232

704

814

Other

1,411

1,163

3,814

3,566

Total noninterest expense

5,415

4,755

15,374

14,361

Earnings before income taxes

2,430

2,261

6,929

7,480

Income taxexpense

432

386

1,049

1,313

Net earnings

$

1,998

$

1,875

$

5,880

$

6,167

Net earnings per share:

Basic anddiluted

$

0.57

$

0.53

$

1.67

$

1.74

Weighted averageshares outstanding:

Basic anddiluted

3,507,318

3,536,320

3,513,068

3,552,387

See accompanying notes toconsolidatedfinancial statements

5

AUBURNNATIONAL BANCORPORATION,INC. ANDSUBSIDIARIES

Consolidated Statementsof Comprehensive Income

(Unaudited)

Quarter endedSeptember30,

Nine monthsended September30,

(Dollarsin thousands)

2022

2021

2022

2021

Net earnings

$

1,998

$

1,875

$

5,880

$

6,167

Other comprehensive loss,net oftax:

Unrealizednet loss on securities

(17,223)

(1,493)

(46,533)

(4,837)

Reclassification adjustmentfor net gainon securities

recognized innet earnings

(33)

(11)

(33)

(11)

Other comprehensiveloss

(17,256)

(1,504)

(46,566)

(4,848)

Comprehensive (loss)income

$

(15,258)

$

371

$

(40,686)

$

1,319

See accompanyingnotes to consolidated financial statements

6

AUBURNNATIONAL BANCORPORATION,INC. ANDSUBSIDIARIES

Consolidated Statementsof Stockholders'Equity

(Unaudited)

Accumulated

Common

Additional

other

Shares

Common

paid-in

Retained

comprehensive

Treasury

(Dollarsin thousands, exceptshare data)

Outstanding

Stock

capital

earnings

(loss) income

stock

Total

Quarter endedSeptember30, 2022

Balance, June30, 2022

3,509,940

$

39

$

3,796

$

111,994

$

(28,419)

$

(11,303)

$

76,107

Net earnings

—

—

—

1,998

—

—

1,998

Other comprehensiveloss

—

—

—

—

(17,256)

—

(17,256)

Cash dividendspaid ($

.265

per share)

—

—

—

(929)

—

—

(929)

Stock repurchases

(4,640)

—

—

—

—

(128)

(128)

Sale of treasurystock

55

—

1

—

—

—

1

Balance, September30, 2022

3,505,355

$

39

$

3,797

$

113,063

$

(45,675)

$

(11,431)

$

59,793

Quarter endedSeptember30, 2021

Balance, June30, 2021

3,545,855

$

39

$

3,792

$

108,060

$

4,255

$

(10,103)

$

106,043

Net earnings

—

—

—

1,875

—

—

1,875

Other comprehensiveloss

—

—

—

—

(1,504)

—

(1,504)

Cash dividendspaid ($

.26

per share)

—

—

—

(917)

—

—

(917)

Stock repurchases

(16,582)

—

—

—

—

(570)

(570)

Sale of treasurystock

65

—

2

—

—

—

2

Balance, September30, 2021

3,529,338

$

39

$

3,794

$

109,018

$

2,751

$

(10,673)

$

104,929

Nine monthsended September30, 2022

Balance, December31, 2021

3,520,485

$

39

$

3,794

$

109,974

$

891

$

(10,972)

$

103,726

Net earnings

—

—

—

5,880

—

—

5,880

Other comprehensiveloss

—

—

—

—

(46,566)

—

(46,566)

Cash dividendspaid ($

.795

per share)

—

—

—

(2,791)

—

—

(2,791)

Stock repurchases

(15,280)

—

—

—

—

(460)

(460)

Sale of treasurystock

150

—

3

—

—

1

4

Balance, September30, 2022

3,505,355

$

39

$

3,797

$

113,063

$

(45,675)

$

(11,431)

$

59,793

Nine monthsended September30, 2021

Balance, December31, 2020

3,566,276

$

39

$

3,789

$

105,617

$

7,599

$

(9,354)

$

107,690

Net earnings

—

—

—

6,167

—

—

6,167

Other comprehensiveloss

—

—

—

—

(4,848)

—

(4,848)

Cash dividendspaid ($

.78

per share)

—

—

—

(2,766)

—

—

(2,766)

Stock repurchases

(37,093)

—

—

—

—

(1,320)

(1,320)

Sale of treasurystock

155

—

5

—

—

1

6

Balance, September30, 2021

3,529,338

$

39

$

3,794

$

109,018

$

2,751

$

(10,673)

$

104,929

See accompanyingnotes to consolidatedfinancial statements

7

AUBURNNATIONAL BANCORPORATION,INC. ANDSUBSIDIARIES

Consolidated Statementsof CashFlows

(Unaudited)

Nine monthsended September30,

(Dollarsin thousands)

2022

2021

Cash flows from operatingactivities:

Net earnings

$

5,880

$

6,167

Adjustmentsto reconcile net earningsto net cashprovided by

operating activities:

Provision for loanlosses

—

(600)

Depreciation andamortization

1,098

967

Premium amortizationanddiscount accretion, net

2,450

2,954

Net gain on securities available-for-sale

(44)

(15)

Net gain on saleof loans heldfor sale

(315)

(1,168)

Net gain on otherreal estate owned

(162)

—

Loans originatedfor sale

(8,711)

(39,632)

Proceeds from sale of loans

10,292

43,234

Increase in cashsurrender valueof bank-ownedlife insurance

(294)

(302)

Net increase inother assets

(15,570)

(216)

Net increase (decrease) inaccrued expensesandother liabilities

14,102

(2,430)

Net cash providedby operatingactivities

8,726

8,959

Cash flows from investing activities:

Proceeds from prepaymentsandmaturities of securities available-for-sale

38,871

53,724

Purchase of securities available-for-sale

(93,106)

(135,434)

(Increase) decrease inloans, net

(15,644)

8,569

Net purchasesof premises andequipment

(5,540)

(13,287)

(Increase) decrease inFHLBstock

(74)

267

Proceeds from sale of otherreal estate owned

536

—

Net cash used ininvesting activities

(74,957)

(86,161)

Cash flows from financing activities:

Net increase innoninterest-bearingdeposits

5,570

53,752

Net (decrease) increase ininterest-bearingdeposits

(21,875)

61,427

Net (decrease) increase infederal fundspurchasedand securities sold

under agreements torepurchase

(835)

918

Stock repurchases

(460)

(1,320)

Dividends paid

(2,791)

(2,766)

Net cash (usedin) providedby financingactivities

(20,391)

112,011

Net change in cashand cash equivalents

(86,622)

34,809

Cash and cashequivalents at beginningof period

156,259

112,575

Cash andcash equivalents at endof period

$

69,637

$

147,384

Supplemental disclosures ofcash flow information:

Cash paidduring the period for:

Interest

$

1,705

$

1,914

Income taxes

1,031

2,145

See accompanying notes toconsolidatedfinancial statements

8

AUBURNNATIONAL BANCORPORATION,INC. ANDSUBSIDIARIES

Notes to ConsolidatedFinancial Statements

(Unaudited)

NOTE 1:SUMMARY OF SIGNIFICANTACCOUNTINGPOLICIES

General

Auburn NationalBancorporation, Inc.(the “Company”)providesa full range ofbanking services to individualsand

commercial customers inLeeCounty, Alabamaand surroundingareas through its whollyowned subsidiary,AuburnBank

(the “Bank”).The Companydoes not haveany segments other thanbanking thatare considered material.

Basis of Presentation andUse of Estimates

The unauditedconsolidated financialstatements inthis report havebeen preparedin accordance withU.S. generally

accepted accountingprinciples (“GAAP”)for interim financialinformation.Accordingly, these financialstatements do not

include all ofthe information andfootnotes required byU.S. GAAP for complete financialstatements.Theunaudited

consolidated financialstatements include,in theopinion of management,all adjustmentsnecessary to present afair

statement of thefinancialposition andthe results of operations forall periods presented.Allsuch adjustmentsare of a

normal recurringnature. The results ofoperations inthe interim statementsare notnecessarily indicativeof the results of

operations thatthe Companyand its subsidiaries mayachieve for futureinterim periods or theentire year. For further

information, refer to the consolidatedfinancialstatements andfootnotes included inthe Company'sAnnual Reporton Form

10-K for the yearended December 31, 2021.

The unauditedconsolidated financialstatements includethe accountsof the Companyandits wholly-ownedsubsidiaries.

Significantintercompanytransactions andaccounts areeliminated in consolidation.

The preparationof financial statements inconformity withU.S. GAAPrequires managementto make estimates and

assumptions thataffect the reported amountsof assets andliabilities anddisclosures of contingent assetsandliabilities as of

the balance sheet dateand the reported amountsof revenuesand expenses duringthe reporting period.Actual results could

differ from those estimates.Material estimatesthat areparticularly susceptible tosignificantchangein the near term

include other-than-temporaryimpairment oninvestmentsecurities, the determinationof the allowancefor loan losses, fair

value of financialinstruments, andthe valuation ofdeferred tax assets andother real estate owned(“OREO”).

Revenue Recognition

On January 1,2018, the Companyimplemented AccountingStandards Update(“ASU”or “updates”) 2014-09,

Revenue

from Contracts with Customers

, codifiedat

Accounting Standards Codification(“ASC”)

606. TheCompany adoptedASC

606 usingthe modified retrospectivetransition method.The majority ofthe Company’srevenue stream isgenerated from

interest income onloans andsecurities whichare outside thescope of ASC606.

The Company’s sources of incomethatfall within thescope of ASC 606 includeservice charges ondeposits, interchange

fees and gains andlosses on sales of other realestate, all of whichare presented ascomponents of noninterest income.The

following isa summary ofthe revenuestreams thatfall within thescope of ASC 606:

●

Service chargeson deposits, investmentservices, ATM and interchangefees – Fees from these servicesare either

transaction-based, for whichthe performance obligationsare satisfiedwhenthe individualtransaction is processed,

or set periodic service charges,for whichthe performance obligationsare satisfiedover theperiod theservice is

provided. Transaction-basedfees are recognized atthe time the transactionis processed,andperiodic service

charges are recognizedover theservice period.

●

Gains on sales ofOREO

–

A gain on saleshould be recognizedwhena contract for sale exists andcontrol of the

asset has been transferredto the buyer. ASC606 lists several criteria requiredto conclude thata contract for sale

exists, includinga determination thatthe institution willcollect substantially allof the considerationto whichit is

entitled.In additionto the loan-to-valueratio, theanalysis is basedon various other factors,includingthe credit

quality ofthe borrower, the structure of theloan,and any otherfactors that webelieve mayaffect collectability.

9

Subsequent Events

The Companyhas evaluatedthe effects of events andtransactions throughthe date of thisfiling thathave occurred

subsequentto September 30,2022.

The Companydoes not believethere were any materialsubsequenteventsduring this periodthat would haverequired

further recognition or disclosurein theunaudited consolidated financialstatements includedin thisreport except as

reported in NOTE8, SUBSEQUENTEVENTS.

Reclassifications

Certain amountsreported in prior periodshavebeen reclassified to conformto the current-periodpresentation. These

reclassifications hadno material effect onthe Company’spreviouslyreported net earningsor total stockholders’equity.

Accounting Developments

In the first nine monthsof 2022, the Companydid not adoptany new accountingguidance.

NOTE 2:BASIC AND DILUTEDNET EARNINGSPER SHARE

Basic net earningsper share is computedby dividing netearnings by theweighted averagecommon shares outstandingfor

the respective period.Diluted netearnings pershare reflect the potential dilutionthatcould occur uponexercise of

securities or other rights for, orconvertible into,shares of theCompany’scommon stock.At September30, 2022 and

2021, respectively, theCompany hadno such securities or rights issuedor outstanding,and therefore, nodilutiveeffect to

consider for the dilutednet earningsper share calculation.

The basicand diluted net earningsper share computationsfor the respectiveperiods are presentedbelow

Quarter endedSeptember30,

Nine monthsended September30,

(Dollarsin thousands, exceptshare andper sharedata)

2022

2021

2022

2021

Basic and diluted:

Net earnings

$

1,998

$

1,875

$

5,880

$

6,167

Weighted average commonshares outstanding

3,507,318

3,536,320

3,513,068

3,552,387

Net earnings pershare

$

0.57

$

0.53

$

1.67

$

1.74

NOTE 3:VARIABLE INTEREST ENTITIES

Generally, a variableinterest entity (“VIE”)is a corporation, partnership,trust or other legalstructure thatdoes not have

equity investors withsubstantiveor proportional votingrights or has equityinvestors thatdo not providesufficient financial

resources for the entity tosupport its activities.

At September 30,2022, the Companydid not have anyconsolidated VIEsto disclose but didhave one nonconsolidated

VIE, discussed below.

10

New Markets Tax Credit Investment

The New MarketsTax Credit (“NMTC”)programprovides federal taxincentives to investorsto makeinvestments in

distressed communities andpromotes economic improvementthroughthe developmentof successful businesses inthese

communities.TheNMTC isavailable to investorsover sevenyears andis subject to recapture if certaineventsoccur

during suchperiod.At September 30,2022 andDecember 31, 2021, respectively,the Companyhad one suchinvestmentin

the amountsof $2.1 million and$2.2 million, respectively, whichwas includedin other assets inthe consolidated balance

sheets.TheCompany’s equity investmentin the NMTCentity meets thedefinition of aVIE. While the Company’s

investmentexceeds 50% of theoutstandingequity interests, the Companydoes not consolidate the VIEbecause itdoes not

meet the characteristics of aprimarybeneficiary since theCompanylacks the powerto direct the activitiesof the VIE.

(Dollarsin thousands)

Maximum

Loss Exposure

Asset Recognized

Classification

Type:

New Markets TaxCredit investment

$

2,126

$

2,126

Other assets

NOTE 4:SECURITIES

At September 30,2022 andDecember 31, 2021, respectively,all securities withinthe scope of ASC320,

Investments –

Debt and Equity Securities,

were classifiedas available-for-sale.Thefair value andamortized cost for securitiesavailable-

for-sale by contractualmaturityat September 30,2022 andDecember 31, 2021, respectively,are presented below.

1 year

1 to 5

5 to 10

After 10

Fair

Gross Unrealized

Amortized

(Dollarsin thousands)

or less

years

years

years

Value

Gains

Losses

Cost

September 30, 2022

Agency obligations(a)

$

—

50,826

74,490

—

125,316

—

16,305

$

141,621

Agency MBS(a)

—

382

34,606

186,320

221,308

—

36,601

257,909

State and political subdivisions

170

924

16,243

47,577

64,914

7

8,093

73,000

Total available-for-sale

$

170

52,132

125,339

233,897

411,538

7

60,999

$

472,530

December 31, 2021

Agency obligations(a)

$

5,007

49,604

69,802

—

124,413

1,080

2,079

$

125,412

Agency MBS(a)

—

680

35,855

186,836

223,371

1,527

2,680

224,524

State and political subdivisions

170

647

15,743

57,547

74,107

3,611

270

70,766

Total available-for-sale

$

5,177

50,931

121,400

244,383

421,891

6,218

5,029

$

420,702

(a) Includessecurities issued byU.S. governmentagencies or government-sponsoredentities.

Securities withaggregate fairvalues of $

210.7

millionand$

172.3

million atSeptember 30, 2022andDecember 31, 2021,

respectively, were pledgedto secure publicdeposits, securities soldunderagreements to repurchase,Federal HomeLoan

Bank of Atlanta(“FHLBof Atlanta”) advances,and for other purposesrequired or permittedbylaw.

Includedin other assets on theaccompanyingconsolidated balancesheets are non-marketableequityinvestments.The

carrying amountsof non-marketableequity investmentswere $

1.2

million atSeptember 30, 2022 andDecember 31, 2021,

respectively.Non-marketable equityinvestments includeFHLB of AtlantaStock, Federal ReserveBank of Atlanta

(“FRB”) stock, andstock in a privatelyheld financialinstitution.

11

Gross UnrealizedLosses andFair Value

The fair valuesand gross unrealizedlosses on securities atSeptember 30, 2022andDecember 31, 2021, respectively,

segregated bythose securities that havebeen in an unrealizedloss position for less than12 months and12 months or

longer, are presented below.

Less than 12 Months

12 Monthsor Longer

Total

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

(Dollarsin thousands)

Value

Losses

Value

Losses

Value

Losses

September 30, 2022:

Agency obligations

$

64,689

5,097

60,627

11,208

$

125,316

16,305

Agency MBS

117,411

14,777

103,897

21,824

221,308

36,601

State and political subdivisions

56,132

5,977

7,027

2,116

63,159

8,093

Total

$

238,232

25,851

171,551

35,148

$

409,783

60,999

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 inthe previoustable, the Companydoes not havethe intent to sell andhas determined it isnot more likely

than not thatthe Company willbe required to sell thesecurities before recoveryof the amortizedcost basis, whichmay be

maturity.On a quarterlybasis, the Companyalso assesses each securityfor credit impairment.For debtsecurities, the

Company evaluates,where necessary, whethercredit impairment exists bycomparingthe present valueof the expected

cash flows tothe securities’ amortizedcost basis.

In determiningwhether aloss is temporary, the Companyconsiders all relevantinformation including:

●

the lengthof time andthe extent to whichthe fair valuehas been less thanthe amortizedcost basis;

●

adverse conditions specificallyrelated to thesecurity, an industry, ora geographicarea (for example,changes in

the financialcondition of theissuer of the security, or inthe case ofMBS, inthe financialcondition of the

underlyingobligors on theassets securing suchMBS, includingchanges in technologyor the discontinuanceof a

segment of thebusiness that mayaffect the future earningspotential of theissuer or underlyingloan obligors of

the security or changesin the qualityof the credit enhancement);

●

the historical andimplied volatilityof the security’s fair value;

●

the paymentstructure of the debtsecurity and,in the case of variablerate securities, the likelihoodof the issuer

being able tomake paymentsthat may increase inthe future;

●

failure of theissuer of the security tomakescheduled interest or principalpayments;

●

any changesto the rating ofthe security bya rating agency;and

●

recoveries or additionaldeclines infair valuesubsequentto the balance sheetdate.

Agency obligations

The unrealizedlosses associated withagency obligationswere primarilydriven by increases inmarket interest ratesandnot

due to the credit qualityof the securities. Thesesecurities wereissued byU.S. governmentagencies or government-

sponsored entities anddid not have anycredit losses giventhe explicit governmentguarantee orother governmentsupport.

12

Agency mortgage-backed securities(“MBS”)

The unrealizedlosses associated withagency MBS wereprimarily drivenby increases in marketinterest rates andnot due

to the credit qualityof the securities. Thesesecurities were issuedbyU.S. governmentagencies or government-sponsored

entities and didnot have anycredit losses giventhe explicit governmentguarantee or other governmentsupport.

Securities of U.S. states andpolitical subdivisions

The unrealizedlosses associated withsecurities of U.S.states andpolitical subdivisions wereprimarily drivenby increases

in market interest rates andwere not dueto the credit qualityof the securities. Someof these securitiesare guaranteedby a

bond insurer, but managementdid not rely onsuch guaranteesin makingits investmentdecision.These securities will

continue to be monitoredas partof the Company’s quarterlyimpairment analysis,but are expected toperform evenif the

rating agenciesreduce the credit ratingof the bondinsurers. As aresult, the Companyexpects to recover theentire

amortized cost basisof these securities.

The carrying valuesof the Company’s investmentsecurities could decline inthe futureif market interest rates continueto

increase.If the financialcondition of anissuer (other thanthe U.S. governmentor its agencies’obligations) deteriorates

and the Companydetermines it is probablethatit will not recover theentire amortized cost basisfor the security,there is a

risk that other-than-temporaryimpairment chargesmay occur inthe future.The Companywill evaluate whetherany loss is

temporary or not.

Other-Than-Temporarily ImpairedSecurities

Credit-impaired debtsecurities are debtsecurities where theCompanyhas written downthe amortized cost basis ofa

security for other-than-temporaryimpairment andthe credit component of theloss is recognizedin earnings.At September

30, 2022 and December 31,2021, the Companyhad no credit-impaired debtsecurities andthere were noadditions or

reductions inthe credit loss componentof credit-impaireddebt securitiesduringthe quarters and ninemonths ended

September 30, 2022 and2021, respectively.

Realized Gains andLosses

The followingtable presents the gross realizedgainsand losses on sales of securities.

Quarter endedSeptember30,

Nine monthsended September30,

(Dollarsin thousands)

2022

2021

2022

2021

Gross realized gains

$

44

15

$

44

15

Realizedgains, net

$

44

15

$

44

15

13

NOTE 5:LOANS ANDALLOWANCE FOR LOANLOSSES

.

September30,

December 31,

(Dollarsin thousands)

2022

2021

Commercial andindustrial

$

70,685

$

83,977

Construction andland development

54,773

32,432

Commercial real estate:

Owner occupied

57,828

63,375

Hotel/motel

33,918

43,856

Multi-family

29,317

42,587

Other

128,967

108,553

Total commercial real estate

250,030

258,371

Residential real estate:

Consumer mortgage

40,207

29,781

Investmentproperty

51,391

47,880

Total residential real estate

91,598

77,661

Consumer installment

7,551

6,682

Total loans

474,637

459,123

Less: unearned income

(602)

(759)

Loans, net of unearnedincome

$

474,035

$

458,364

Loans secured byreal estate wereapproximately

83.5%

of the Company’stotal loanportfolio at September 30,2022.At

September 30, 2022, theCompany’sgeographicloan distribution wasconcentrated primarilyin LeeCounty, Alabama, and

surrounding areas.

In accordance withASC 310, aportfolio segment is definedas thelevel at which anentity developsand documents a

systematic method for determiningits allowancefor loan losses. Aspart of theCompany’s quarterly assessment of the

allowance, theloan portfolio included thefollowingportfolio segments: commercialandindustrial,construction andland

development,commercial real estate, residentialreal estate,andconsumer installment. Whereappropriate,the Company’s

loan portfolio segmentsare further disaggregatedinto classes. Aclass is generallydetermined basedon the initial

measurement attribute,risk characteristicsof the loan,and an entity’s methodfor monitoring anddetermining credit risk.

The followingdescribesthe riskcharacteristics relevantto each of theportfolio segments andclasses.

Commercial and industrial (“C&I”)—

includes loansto financebusiness operations, equipmentpurchases, orother needs

for small andmedium-sized commercialcustomers. Alsoincludedin this categoryare loansto financeagricultural

production.Generally,the primarysource of repaymentis the cashflow from business operationsandactivities of the

borrower.As of September30, 2022, the Companyhad

1

remainingPPP loan outstandingin the amountof $

0.1

million,

compared to

138

PPP loans withan aggregate principalbalance of $

8.1

million atDecember 31, 2021.

Construction and land development(“C&D”)—

includes both loansand credit lines for thepurpose of purchasing,

carrying, anddevelopingland into commercial developmentsor residentialsubdivisions.Also includedare loans andcredit

lines for constructionof residential,multi-family,andcommercial buildings.Generally,the primarysource of repaymentis

dependent uponthe sale or refinance ofthe realestate collateral.

Commercial real estate (“CRE”)—

includes loansdisaggregatedinto four classes: (1) owneroccupied, (2) hotel/motel,

(3) multifamily and(4)other.

●

Owner occupied

– includes loanssecured bybusiness facilities to financebusiness operations,equipmentand

owner-occupied facilitiesprimarily for smallandmedium-sized commercialcustomers.Generally,the primary

source of repaymentis the cashflow frombusiness operations andactivities of theborrower, who ownsthe

property.

●

Hotel/motel

– includes loansfor hotels andmotels.Generally, the primarysource of repaymentis dependentupon

income generated fromthe realestate collateral.Theunderwritingof these loanstakes intoconsideration the

occupancyand rental rates, aswell asthe financialhealth of the borrower.

14

●

Multi-family

– primarilyincludes loansto financeincome-producingmulti-family properties.Loansin thisclass

include loans for 5or more unitresidential property andapartmentsleased to residents. Generally,the primary

source of repaymentis dependentupon income generated fromthe realestate collateral.Theunderwriting of these

loans takes intoconsideration theoccupancyand rentalrates,as well as thefinancial healthof the respective

borrowers.

●

Other

– primarilyincludes loansto financeincome-producingcommercial properties otherthanhotels/motels and

multi-family properties,andwhichare not owneroccupied.Loans in thisclass include loansfor neighborhood

retail centers,medical andprofessional offices, single retailstores,industrial buildings,and warehousesleased to

local businesses.Generally,the primarysource of repaymentis dependentupon income generatedfrom the real

estate collateral. Theunderwriting of these loanstakes intoconsideration theoccupancyand rentalrates,as well as

the financialhealth of theborrower.

Residential real estate (“RRE”)—

includes loansdisaggregated intotwo classes: (1) consumer mortgageand(2)

investmentproperty.

●

Consumer mortgage

– primarilyincludesfirst or secondlien mortgagesandhome equitylines of credit to

consumers thatare secured bya primaryresidence or second home.Theseloans are underwrittenin accordance

with the Bank’s generalloan policies andprocedures whichrequire, amongother things, properdocumentation of

each borrower’s financialcondition, satisfactorycredit history,andproperty value.

●

Investment property

– primarilyincludes loansto financeincome-producing1-4 family residential properties.

Generally,the primarysource of repaymentis dependentupon income generatedfrom leasingthe property

securing theloan. The underwritingof these loanstakes into considerationthe rentalrates and propertyvalue, as

well as thefinancial health ofthe borrower.

Consumer installment —

includes loansto individualsboth secured bypersonal propertyandunsecured.Loans include

personal lines of credit,automobile loans,andother retail loans.These loansare underwrittenin accordance withthe

Bank’s general loanpolicies and procedures whichrequire, amongother things,proper documentationof eachborrower’s

financialcondition, satisfactory credit history, and,if applicable,property value.

15

The followingis a summaryof current, accruingpast due,and nonaccrual loansby portfolio segment andclass as of

September 30, 2022 andDecember 31, 2021.

Accruing

Accruing

Total

30-89 Days

Greater than

Accruing

Non-

Total

(Dollarsin thousands)

Current

Past Due

90 days

Loans

Accrual

Loans

September 30, 2022:

Commercial andindustrial

$

70,684

1

—

70,685

—

$

70,685

Construction andland development

54,491

282

—

54,773

—

54,773

Commercial real estate:

Owner occupied

57,828

—

—

57,828

—

57,828

Hotel/motel

33,918

—

—

33,918

—

33,918

Multi-family

29,317

—

—

29,317

—

29,317

Other

128,797

—

—

128,797

170

128,967

Total commercial real estate

249,860

—

—

249,860

170

250,030

Residential real estate:

Consumer mortgage

39,984

46

—

40,030

177

40,207

Investmentproperty

51,351

40

—

51,391

—

51,391

Total residential real estate

91,335

86

—

91,421

177

91,598

Consumer installment

7,543

8

—

7,551

—

7,551

Total

$

473,913

377

—

474,290

347

$

474,637

December 31, 2021:

Commercial andindustrial

$

83,974

3

—

83,977

—

$

83,977

Construction andland development

32,228

204

—

32,432

—

32,432

Commercial real estate:

Owner occupied

63,375

—

—

63,375

—

63,375

Hotel/motel

43,856

—

—

43,856

—

43,856

Multi-family

42,587

—

—

42,587

—

42,587

Other

108,366

—

—

108,366

187

108,553

Total commercial real estate

258,184

—

—

258,184

187

258,371

Residential real estate:

Consumer mortgage

29,070

516

—

29,586

195

29,781

Investmentproperty

47,818

—

—

47,818

62

47,880

Total residential real estate

76,888

516

—

77,404

257

77,661

Consumer installment

6,657

25

—

6,682

—

6,682

Total

$

457,931

748

—

458,679

444

$

459,123

Allowance for LoanLosses

The Companyassesses the adequacyof its allowancefor loan losses prior to theendof each calendarquarter. The level of

the allowanceis based uponmanagement’s evaluationof the loanportfolio, past loanloss experience, current assetquality

trends, known andinherent risks inthe portfolio, adversesituations thatmay affect aborrower’s abilityto repay (including

the timing offuture payment),the estimated valueof any underlyingcollateral, compositionof the loanportfolio, economic

conditions, marketinterest rates, inflationandrelated expectations, industryandpeer bankloan loss rates, andother

pertinent factors, includingregulatory recommendations.Thisevaluation is inherentlysubjective as itrequires material

estimates includingthe amountsand timing offuture cash flowsexpected to be receivedon impairedloans that may be

susceptible to significantchange.Loans are charged off, inwhole or in part, whenmanagementbelieves thatthe full

collectability of the loanis unlikely. A loanmay be partiallycharged-off after a “confirmingevent” has occurred, which

serves to validatethat full repaymentpursuantto the terms of theloan is unlikely.

16

The Companydeems loansimpairedwhen, based on currentinformation andevents, it is probablethat the Companywill

be unableto collect all amountsdue accordingto the contractualterms of the loanagreement. Collection ofall amountsdue

according tothe contractualterms meansthat boththe interest andprincipal paymentsof a loanwill be collected as

scheduled inthe loan agreement.

An impairment allowanceis recognized ifthe fair valueof the loanis less than therecorded investment inthe loan. The

impairment isrecognized throughthe allowance. Loansthat areimpaired arerecorded at the presentvalue of expected

future cash flowsdiscounted atthe loan’s effective interest rate, orif the loanis collateral dependent,the impairment

measurement is basedon the fair valueof the collateral, less estimateddisposal costs.

The level of allowancemaintained is believedby management tobe adequateto absorb probablelosses inherent in the

portfolio at thebalance sheet date.The allowanceis increased by provisionscharged toexpense anddecreased by charge-

offs, net of recoveries of amountspreviouslycharged-off.

In assessing theadequacy ofthe allowance,the Company alsoconsiders the results of its ongoinginternal andindependent

loan reviewprocesses. The Company’sloan reviewprocess assists in determiningwhetherthere are loansin the portfolio

whose credit qualityhas weakenedover time andevaluating therisk characteristics of the entireloan portfolio. The

Company’s loan reviewprocess includes the judgmentof management,the input from ourindependent loanreviewers, and

reviews conductedby bank regulatoryagencies aspart of their examinationprocess. The Companyincorporates loan

review results inthe determination of whetheror not itis probable thatit will be ableto collect all amountsdue according

to the contractual terms ofaloan.

As part of theCompany’s quarterly assessment of theallowance,managementevaluates the loanportfolio’s five segments:

commercial andindustrial,construction andland development,commercial real estate, residentialreal estate,andconsumer

installment. TheCompany analyzeseach segment andestimates an allowanceallocation for eachloan segment.

The allocation of theallowancefor loan losses begins witha process of estimating theprobablelosses inherent for each

loan segment.The estimates for these loansare establishedby categoryand basedon the Company’sinternal system of

credit risk ratingsand historical loss data.The estimated loan loss allocationrate for theCompany’sinternal system of

credit risk gradesis based onits experience withsimilarly gradedloans. For loansegments wherethe Companybelieves it

does not havesufficient historical loss data,the Company maymake adjustments based,in part, on loss ratesof peer bank

groups.At September 30,2022 andDecember 31, 2021, andfor the periods thenended, the Companyadjusted its

historical loss rates for thecommercial real estateportfoliosegment based,in part, on loss ratesof peer bankgroups.

The estimated loanloss allocation for allfiveloan portfolio segments is thenadjustedfor management’s estimate of

probablelosses for several “qualitativeand environmental”factors. The allocationfor qualitativeand environmentalfactors

is particularlysubjective anddoes not lenditself to exact mathematicalcalculation. Thisamount represents estimated

probableinherent credit losses whichexist, but havenot yet been identified,as ofthe balancesheet date, andare based

upon quarterlytrend assessments indelinquentand nonaccrualloans, credit concentrationchanges,prevailingeconomic

conditions, changesin lending personnelexperience, changesin lendingpolicies or procedures, andother factors. These

qualitativeand environmentalfactors are considered for eachof the fiveloan segments andthe allowanceallocation, as

determined bythe processes noted above,is increased or decreasedbasedon the incrementalassessment of these factors.

The Companyregularly re-evaluatesits practices in determiningthe allowancefor loan losses. TheCompany’s look-back

period eachquarter incorporates theeffects of atleast one economic downturnin its loss history. TheCompany believes

this look-back periodis appropriatedue to the risks inherentin the loan portfolio. Absentthis look-back period,the early

cycle periods inwhich theCompany experiencedsignificant losseswouldbe excludedfrom the determinationof the

allowance for loanlosses and itsbalance woulddecrease.For thequarter endedSeptember 30, 2022, theCompany

increased its look-back periodto 54 quarters tocontinue to includelosses incurredby theCompany beginningwith the first

quarter of2009.TheCompany willlikely continueto increase its look-back periodto incorporatethe effects ofat leastone

economic downturnin its loss history.Duringthe second quarterof 2021, the Companyadjustedcertain qualitativeand

economic factors, previouslydowngradedas a result of theCOVID-19 pandemic,to reflect improvements ineconomic

conditions in ourprimary marketarea.Further adjustmentsmay bemade from time to timein thefuture as a result of the

waning ofCOVID-19 asa pandemic andother changesin economic conditions.

17

The followingtable details thechanges in theallowance for loanlosses by portfolio segment for therespectiveperiods.

September30, 2022

(Dollarsin thousands)

Commercialand

industrial

Construction

and land

development

Commercial

real estate

Residential

real estate

Consumer

installment

Total

Quarter ended:

Beginning balance

$

761

576

2,523

753

103

$

4,716

Charge-offs

(13)

—

—

—

(3)

(16)

Recoveries

2

—

—

8

6

16

Net (charge-offs) recoveries

(11)

—

—

8

3

—

Provision for loanlosses

(18)

213

38

22

(5)

250

Ending balance

$

732

789

2,561

783

101

$

4,966

Nine months ended:

Beginning balance

$

857

518

2,739

739

86

$

4,939

Charge-offs

(17)

—

—

—

(67)

(84)

Recoveries

6

—

22

22

61

111

Net (charge-offs) recoveries

(11)

—

22

22

(6)

27

Provision for loanlosses

(114)

271

(200)

22

21

—

Ending balance

$

732

789

2,561

783

101

$

4,966

September30, 2021

(Dollarsin thousands)

Commercialand

industrial

Construction

and land

development

Commercial

real estate

Residential

real estate

Consumer

installment

Total

Quarter ended:

Beginning balance

$

829

639

2,704

838

97

$

5,107

Recoveries

1

—

—

7

4

12

Net recoveries

1

—

—

7

4

12

Provision for loanlosses

(14)

(49)

119

(46)

(10)

—

Ending balance

$

816

590

2,823

799

91

$

5,119

Nine months ended:

Beginning balance

$

807

594

3,169

944

104

$

5,618

Charge-offs

—

—

—

(1)

(5)

(6)

Recoveries

55

—

—

33

19

107

Net recoveries

55

—

—

32

14

101

Provision for loanlosses

(46)

(4)

(346)

(177)

(27)

(600)

Ending balance

$

816

590

2,823

799

91

$

5,119

18

The followingtable presents ananalysis of the allowancefor loan losses andrecorded investment inloans by portfolio

segment andimpairment methodologyas ofSeptember 30, 2022 and2021.

Collectivelyevaluated (1)

Individuallyevaluated (2)

Total

Allowance

Recorded

Allowance

Recorded

Allowance

Recorded

for loan

investment

for loan

investment

for loan

investment

(Dollarsin thousands)

losses

in loans

losses

in loans

losses

in loans

September 30, 2022:

Commercial andindustrial

$

732

70,685

—

—

732

70,685

Construction andland development

789

54,773

—

—

789

54,773

Commercial real estate

2,561

249,860

—

170

2,561

250,030

Residential real estate

783

91,598

—

—

783

91,598

Consumer installment

101

7,551

—

—

101

7,551

Total

$

4,966

474,467

—

170

4,966

474,637

September 30, 2021:

Commercial andindustrial (3)

$

816

79,202

—

—

816

79,202

Construction andland development

590

34,890

—

—

590

34,890

Commercial real estate

2,823

252,605

—

193

2,823

252,798

Residential real estate

799

80,112

—

93

799

80,205

Consumer installment

91

7,060

—

—

91

7,060

Total

$

5,119

453,869

—

286

5,119

454,155

(1)

Representsloans collectivelyevaluated for impairmentin accordancewith ASC 450-20,

Loss Contingencies

, and

pursuantto amendmentsby ASU 2010-20regarding allowancefor non-impairedloans.

(2)

Representsloans individuallyevaluated for impairmentin accordancewith ASC 310-30,

Receivables

, and

pursuantto amendmentsby ASU 2010-20regarding allowancefor impaired loans.

(3)

Includes $13.3million of PPPloans for whichno allowancefor loan losseswas allocated due to100% SBAguarantee.

See “ImpairedLoans” and“Troubled Debt Restructurings”belowfor additionalinformation aboutsuch loans.

Credit Quality Indicators

The credit qualityof the loanportfolio is summarizedno less frequentlythan quarterlyusing categories similarto the

standard asset classificationsystem usedbythe federal bankingagencies.The followingtable presents credit quality

indicators for the loanportfolio segments andclasses. These categoriesare utilizedto developthe associated allowancefor

loan losses using historicallosses adjustedfor qualitativeand environmentalfactors andare defined as follows:

●

Pass – loans whichare well protected bythe current networth andpaying capacity ofthe obligor (or guarantors,if

any) or by thefair value, less cost to acquireandsell, of anyunderlying collateral.

●

Special Mention– loans withpotential weaknessthat may, if not reversedor corrected, weakenthe credit or

inadequatelyprotect the Company’sposition at somefuture date. Theseloans arenot adversely classifiedanddo

not expose aninstitution to sufficient riskto warrantan adverse classification.

●

Substandard Accruing– loans that exhibita well-defined weaknesswhich presently jeopardizesdebt repayment,

even thoughthey are currentlyperforming. Theseloans are characterizedby thedistinct possibility thatthe

Company mayincur a loss inthe futureif these weaknesses arenot corrected.

●

Nonaccrual –includes loanswhere managementhas determined thatfull payment ofprincipaland interest is not

expected.

19

(Dollarsin thousands)

Pass

Special

Mention

Substandard

Accruing

Nonaccrual

Totalloans

September 30, 2022:

Commercial andindustrial

$

70,480

11

194

—

$

70,685

Construction andland development

54,773

—

—

—

54,773

Commercial real estate:

Owner occupied

57,424

241

163

—

57,828

Hotel/motel

33,918

—

—

—

33,918

Multi-family

29,317

—

—

—

29,317

Other

128,591

178

28

170

128,967

Total commercial real estate

249,250

419

191

170

250,030

Residential real estate:

Consumer mortgage

38,946

443

641

177

40,207

Investmentproperty

51,096

44

251

—

51,391

Total residential real estate

90,042

487

892

177

91,598

Consumer installment

7,522

—

29

—

7,551

Total

$

472,067

917

1,306

347

$

474,637

December 31, 2021:

Commercial andindustrial

$

83,725

26

226

—

$

83,977

Construction andland development

32,212

2

218

—

32,432

Commercial real estate:

Owner occupied

61,573

1,675

127

—

63,375

Hotel/motel

36,162

7,694

—

—

43,856

Multi-family

39,093

3,494

—

—

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

Investmentproperty

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

—

6,682

Total

$

441,947

14,372

2,360

444

$

459,123

Impaired loans

The followingtables present detailsrelated to theCompany’simpairedloans. Loans thathave beenfully charged-off are

not includedin the followingtables. Therelated allowancegenerally represents thefollowingcomponents thatcorrespond

to impaired loans:

●

Individually evaluatedimpairedloans equal toor greater than$500 thousandsecured by realestate (nonaccrual

construction andland development,commercial real estate, andresidential real estate loans).

●

Individually evaluatedimpairedloans equal toor greater than$250 thousandnot secured byreal estate

(nonaccrual commercialandindustrial andconsumer installment loans).

20

The followingtables set forth certaininformation regardingthe Company’simpairedloans that wereindividually evaluated

for impairmentat September 30,2022 andDecember 31, 2021.

September30, 2022

(Dollarsin thousands)

Unpaid principal

balance (1)

Charge-offsand

payments applied

(2)

Recorded

investment(3)

Related allowance

With no allowance recorded:

Commercial real estate:

Other

$

197

(27)

170

$

—

Total commercial real estate

197

(27)

170

—

Total impaired loans

$

197

(27)

170

$

—

(1) Unpaid principalbalance representsthe contractualobligation duefrom the customer.

(2) Charge-offsand paymentsapplied representscumulative charge-offs taken,as well as interestpayments that havebeen

applied againstthe outstandingprincipal balance subsequentto the loans being placed onnonaccrual status.

(3) Recorded investmentrepresentsthe unpaid principalbalance lesscharge-offsand paymentsapplied; it is shownbefore

any related allowancefor loan losses.

December 31,2021

(Dollarsin thousands)

Unpaid principal

balance (1)

Charge-offsand

payments applied

(2)

Recorded

investment(3)

Related allowance

With no allowance recorded:

Commercial real estate:

Other

$

205

(18)

187

$

—

Total commercial real estate

205

(18)

187

—

Residential real estate:

Investmentproperty

68

(6)

62

—

Total residential real estate

68

(6)

62

—

Total impaired loans

$

273

(24)

249

$

—

(1) Unpaid principalbalance representsthe contractualobligation duefrom the customer.

(2) Charge-offsand paymentsapplied representscumulative charge-offs taken,as well as interestpayments that havebeen

applied againstthe outstandingprincipal balance subsequentto the loans being placed onnonaccrual status.

(3) Recorded investmentrepresentsthe unpaid principalbalance lesscharge-offsand paymentsapplied; it is shownbefore

any related allowancefor loan losses.

21

The followingtable providesthe average recorded investmentin impairedloans,if any, by portfolio segment, andthe

amount of interest income recognizedon impairedloans after impairmentby portfolio segment andclass during the

respective periods.

Quarter endedSeptember30, 2022

Nine monthsended September30, 2022

Average

Totalinterest

Average

Totalinterest

recorded

income

recorded

income

(Dollarsin thousands)

investment

recognized

investment

recognized

Impaired loans:

Commercial real estate:

Other

$

173

—

199

—

Total commercial real estate

173

—

199

—

Residential real estate:

Investmentproperty

—

—

6

—

Total residential real estate

—

—

6

—

Total

$

173

—

205

—

Quarter endedSeptember30, 2021

Nine monthsended September30, 2021

Average

Totalinterest

Average

Totalinterest

recorded

income

recorded

income

(Dollarsin thousands)

investment

recognized

investment

recognized

Impaired loans:

Commercial real estate:

Other

$

196

—

202

—

Total commercial real estate

196

—

202

—

Residential real estate:

Investmentproperty

95

—

100

—

Total residential real estate

95

—

100

—

Total

$

291

—

302

—

Troubled Debt Restructurings

Impaired loansalso includetroubled debtrestructurings (“TDRs”).Section 4013 of the CARESAct, “Temporary Relief

From Troubled DebtRestructurings,” providedbanks the option totemporarily suspendcertain requirements underASC

340-10 TDRclassifications for alimited period of timeto account for theeffects of COVID-19.In addition, theInteragency

Statement on COVID-19Loan Modifications, encouragedbanksto work prudentlywith borrowers anddescribes the

agencies’ interpretationof howaccountingrules under ASC310-40, “TroubledDebt RestructuringsbyCreditors,” applyto

certain COVID-19-relatedmodifications.TheInteragency Statementon COVID-19Loan Modifications wassupplemented

on June 23, 2020 bythe InteragencyExaminer Guidancefor Assessing Safetyand SoundnessConsidering theEffect of the

COVID-19 Pandemicon Institutions.If a loanmodification waseligible, a bank couldelect to account for theloan under

section 4013 of the CARESAct. If a loanmodification wasnot eligible undersection 4013, or if thebank elected notto

account for theloan modification undersection 4013, theRevisedStatementincludedcriteria when abank may presume a

loan modification is notaTDR in accordance withASC 310-40.

The Companyevaluates loanextensions or modificationsnot qualifiedunderSection 4013 of the CARESAct or under the

Interagency Statementand related regulatoryguidanceon COVID-19Loan Modifications inaccordance withFASB ASC

340-10 withrespect to the classificationof the loanas a TDR.In the normalcourse of business, managementmay grant

concessions to borrowers thatare experiencingfinancialdifficulty.A concessionmay include,but is not limitedto, delays

in required paymentsof principaland interest for aspecified period, reductionof the statedinterest rate of theloan,

reduction of accruedinterest, extensionof the maturitydate, or reductionof the faceamountor maturity amountof the debt.

A concession hasbeen granted when,as a result of the restructuring,the Bankdoes not expectto collect, whendue, all

amounts owed,including interest atthe originalstated rate.A concession mayhave alsobeen granted if thedebtor is not

able to access fundselsewhere ata market ratefor debt withrisk characteristics similar tothe restructureddebt.In making

the determination of whethera loanmodification is a TDR,the Company considers theindividualfacts and circumstances

surrounding eachmodification.As partof the credit approvalprocess, the restructuredloans areevaluatedfor adequate

collateral protection indetermining theappropriate accrualstatus at the timeof restructure.

22

Similar toother impairedloans, TDRs aremeasured for impairmentbased on thepresent value ofexpected paymentsusing

the loan’s originaleffective interest rate asthe discountrate, or thefair value of thecollateral, less sellingcosts if the loanis

collateral dependent.If the recorded investmentin theloan exceeds the measureof fair value,impairment isrecognized by

establishing avaluation allowanceas part of the allowancefor loan losses or acharge-off to the allowancefor loan losses.

In periods subsequentto the modification,all TDRsare evaluated individually,including those thathave paymentdefaults,

for possible impairment.

The followingis a summaryof accruing andnonaccrualTDRs, whichare includedin the impairedloan totals, and the

related allowancefor loan losses, byportfolio segment andclass as of September30, 2022 andDecember 31, 2021,

respectively.

TDRs

Related

(Dollarsin thousands)

Accruing

Nonaccrual

Total

Allowance

September 30, 2022

Commercial real estate:

Other

$

—

170

170

$

—

Total commercial real estate

—

170

170

—

Total

$

—

170

170

$

—

TDRs

Related

(In thousands)

Accruing

Nonaccrual

Total

Allowance

December 31, 2021

Commercial real estate:

Other

$

—

187

187

$

—

Total commercial real estate

—

187

187

—

Investmentproperty

—

62

62

—

Total residential real estate

—

62

62

—

Total

$

—

249

249

$

—

At September 30,2022 there were nosignificant outstandingcommitments to advanceadditionalfunds to customers whose

loans had beenrestructured.

There were noloansmodified ina TDR during thequarters andnine monthsendedSeptember 30, 2022and2021,

respectively.For thesame periods,the Companyhad no loansmodified in aTDR within theprevious 12 monthsfor which

there was apayment default.

NOTE 6:MORTGAGE SERVICINGRIGHTS, NET

Mortgage servicingrights (“MSRs”)are recognized basedon the fair valueof the servicingrights onthe date the

corresponding mortgageloans aresold.An estimate of thefair valueof the Company’sMSRs is determined using

assumptions thatmarket participantswould use inestimating futurenet servicing income,includingestimates of

prepayment speeds,discount rates, defaultrates, costs to service,escrowaccount earnings,contractual servicingfee

income, ancillaryincome, andlate fees.Subsequentto the dateof transfer, the Companyhas elected to measure itsMSRs

under the amortizationmethod.Underthe amortization method,MSRsare amortized inproportion to, andover the period

of, estimated netservicing income.

The Companyhas recorded MSRsrelated to loanssold withoutrecourse to FannieMae.The Companygenerally sells

conforming, fixed-rate, closed-end,residential mortgagesto FannieMae.MSRs are includedin other assets onthe

accompanyingconsolidated balancesheets.

The Companyevaluates MSRsfor impairmenton a quarterlybasis.Impairment isdetermined bystratifying MSRsinto

groupings basedon predominantrisk characteristics, suchas interest rate andloan type.If, by individualstratum, the

carrying amountof the MSRsexceeds fair value,a valuation allowanceis established. Thevaluation allowanceis adjusted

as the fair valuechanges.Changes in the valuationallowanceare recognized inearnings as a component of mortgage

lending income.

23

The followingtable details thechanges in amortizedMSRsand the related valuationallowancefor the respective periods.

Quarter endedSeptember30,

Nine monthsended September30,

(Dollarsin thousands)

2022

2021

2022

2021

MSRs, net:

Beginning balance

$

1,259

$

1,360

$

1,309

$

1,330

Additions, net

13

93

110

407

Amortizationexpense

(64)

(127)

(211)

(411)

Ending balance

$

1,208

$

1,326

$

1,208

$

1,326

Valuation allowance included in MSRs,net:

Beginning of period

$

—

$

—

$

—

$

—

End of period

—

—

—

—

Fair value ofamortized MSRs:

Beginning of period

$

2,547

$

1,833

$

1,908

$

1,489

End of period

2,478

1,776

2,478

1,776

NOTE 7:FAIR VALUE

Fair Value Hierarchy

“Fair value”is defined byASC 820,

Fair Value Measurements and Disclosures

, asthe price thatwould bereceived to sell

an asset or paidto transfer a liabilityin an orderly transactionoccurring inthe principalmarket (or mostadvantageous

market in theabsence of a principalmarket) for anasset or liabilityat the measurement date.GAAP establishes afair

value hierarchyfor valuation inputsthat givesthe highest priority toquoted prices inactive marketsfor identical assets or

liabilities andthe lowest priority to unobservableinputs.The fair value hierarchyis as follows:

Level 1—inputsto the valuationmethodology arequoted prices, unadjusted,for identical assets or liabilitiesin active

markets.

Level 2—inputsto the valuationmethodology includequoted prices for similarassets andliabilities in activemarkets,

quoted prices for identicalor similar assetsor liabilitiesin marketsthatare not active, or inputsthat are observablefor the

asset or liability, either directlyor indirectly.

Level 3—inputsto the valuationmethodology areunobservableand reflect the Company’sown assumptionsaboutthe

inputs marketparticipants woulduse in pricingthe asset orliability.

Level changes in fairvalue measurements

Transfers betweenlevels of thefair value hierarchyare generally recognizedat the endof each reportingperiod.The

Company monitors thevaluationtechniques utilizedfor each categoryof financialassets andliabilities to ascertain when

transfers between levelshave beenaffected.The natureof the Company’s financialassets and liabilities generallyis such

that transfers inand outof any level are expectedto beinfrequent. Forthe nine monthsended September30, 2022, there

were no transfers betweenlevels andno changesin valuation techniquesfor the Company’sfinancial assets andliabilities.

24

Assets and liabilities measuredat fairvalue ona recurring basis

Securities available-for-sale

Fair values ofsecurities availablefor sale wereprimarily measuredusing Level 2inputs.For these securities,the Company

obtains pricingfrom third partypricing services.Thesethird party pricingservices consider observabledata thatmay

include broker/dealer quotes,market spreads,cash flows,benchmarkyields, reported tradesfor similar securities,market

consensus prepaymentspeeds, credit information,andthe securities’ terms andconditions.On aquarterly basis,

managementreviews the pricingreceived from thethird party pricingservices for reasonableness givencurrent market

conditions.As partof its review, managementmay obtainnon-binding thirdparty broker/dealer quotesto validatethe fair

value measurements.In addition,managementwill periodically submitpricing providedby the third party pricingservices

to anotherindependent valuationfirm on a samplebasis.This independentvaluation firmwill compare theprice provided

by the third partypricing service withits own price andwill review thesignificant assumptionsand valuation

methodologies usedwith management.

The followingtable presents the balancesof the assets andliabilities measured atfair valueon a recurring basisas of

September 30, 2022 andDecember 31, 2021, respectively,by caption,on the accompanyingconsolidated balancesheets by

ASC 820 valuationhierarchy (as describedabove).

Quoted Pricesin

Significant

Active Markets

Other

Significant

for

Observable

Unobservable

Identical Assets

Inputs

Inputs

(Dollarsin thousands)

Amount

(Level 1)

(Level 2)

(Level 3)

September 30, 2022:

Securities available-for-sale:

Agency obligations

$

125,316

—

125,316

—

Agency RMBS

221,308

—

221,308

—

State and political subdivisions

64,914

—

64,914

—

Total securities available-for-sale

411,538

—

411,538

—

Total assets at fair value

$

411,538

—

411,538

—

December 31, 2021:

Securities available-for-sale:

Agency obligations

$

124,413

—

124,413

—

Agency RMBS

223,371

—

223,371

—

State and political subdivisions

74,107

—

74,107

—

Total securities available-for-sale

421,891

—

421,891

—

Total assets at fair value

$

421,891

—

421,891

—

Assets and liabilities measuredat fairvalue ona nonrecurring basis

Loans held for sale

Loans held for saleare carried atthe lower of cost or fairvalue. Fairvaluesof loans heldforsale are determinedusing

quoted marketsecondary marketprices for similar loans.Loansheld for saleare classified withinLevel 2 of the fairvalue

hierarchy.

Impaired Loans

Loans considered impairedunderASC 310-10-35,

Receivables

, areloans for which,based on current informationand

events, it is probablethat the Companywill be unableto collect all principalandinterest paymentsdue in accordancewith

the contractual terms of theloan agreement.Impairedloans can be measuredbased on thepresent value ofexpected

payments usingthe loan’s original effective rateas the discountrate, theloan’s observablemarket price, or thefair value of

the collateral less sellingcosts if theloan iscollateral dependent.

25

The fair value ofimpairedloans was primarilymeasured basedon the valueof the collateral securingthese loans. Impaired

loans are classified withinLevel 3of the fair valuehierarchy. Collateral maybe real estate and/orbusiness assets including

equipment, inventory,and/or accounts receivable.The Companydetermines the valueof the collateral basedon

independent appraisalsperformed by qualifiedlicensed appraisers. Theseappraisalsmay utilize a singlevaluation approach

or a combination ofapproachesincludingcomparable salesand theincome approach.Appraised valuesare discounted for

estimated costs to sell andmay be discountedfurther basedon management’shistorical knowledge,changesin market

conditions from the dateof the mostrecent appraisal,and/or management’sexpertise and knowledgeof the customer and

the customer’s business.Suchdiscounts bymanagementare subjective andare typicallysignificant unobservableinputs for

determining fairvalue. Impairedloans arereviewed and evaluatedon at least aquarterly basisfor additionalimpairment

and adjusted accordingly,based on thesame factors discussed above.

Other real estate owned

Other realestateowned,consisting of properties obtainedthroughforeclosure or insatisfaction of loans,are initially

recorded at thelower of the loan’s carryingamount or the fairvalue less the estimated costs tosell upontransfer of the

loans to otherrealestate.Subsequently, other realestate is carriedat the lowerof carryingvalue or fair valueless costs to

sell. Fairvalues are generallybased on thirdparty appraisals of theproperty and areclassified withinLevel 3 of thefair

value hierarchy.The appraisalsare sometimes further discountedbasedon management’shistorical knowledge,and/or

changes in marketconditions from the dateof the mostrecent appraisal,and/or management’s expertise andknowledgeof

the customer andthe customer’s business.Suchdiscounts are typicallysignificant unobservableinputsfor determining fair

value. Incases where thecarrying amountexceeds the fairvalue, less costs to sell, aloss is recognized innoninterest

expense.

Mortgage servicing rights,net

MSRs, net, includedin other assets onthe accompanyingconsolidated balancesheets, are carried atthe lower of cost or

estimated fair value.MSRs do nottrade in anactive market withreadily observableprices.To determine the fairvalue of

MSRs, the Companyengages an independentthird party.The independentthird party’s valuationmodel calculates the

present value ofestimated future netservicing incomeusingassumptions thatmarket participantswould use inestimating

future netservicing income, includingestimates of prepaymentspeeds, discountrates, defaultrates, cost to service,escrow

account earnings,contractual servicingfeeincome, ancillaryincome, andlate fees.Periodically, the Companywill review

broker surveysand other marketresearch to validatesignificant assumptionsused inthe model.The significant

unobservableinputs includeprepayment speedsor the constantprepayment rate(“CPR”)and the weightedaverage

discount rate.Because thevaluation ofMSRs requires the useof significant unobservableinputs, allof the Company’s

MSRs areclassified withinLevel 3 of thevaluation hierarchy.

26

The followingtable presents the balancesof the assets andliabilities measured atfair valueon a nonrecurringbasis as of

September 30, 2022 andDecember 31, 2021, respectively,by caption,on the accompanyingconsolidated balance sheets

and by FASB ASC820 valuation hierarchy(as described above):

Quoted Pricesin

Active Markets

Other

Significant

for

Observable

Unobservable

Carrying

Identical Assets

Inputs

Inputs

(Dollarsin thousands)

Amount

(Level 1)

(Level 2)

(Level 3)

September 30, 2022:

Loans, net

(1)

170

—

—

170

Other assets

(2)

1,208

—

—

1,208

Total assets at fair value

$

1,378

—

—

1,378

December 31, 2021:

Loans held for sale

$

1,376

—

1,376

—

Loans, net

(1)

249

—

—

249

Other assets

(2)

1,683

—

—

1,683

Total assets at fair value

$

3,308

—

1,376

1,932

(1)

Loans consideredimpaired underASC 310-10-35Receivables.This amount reflectsthe recordedinvestmentin impaired loans,net

of any relatedallowance for loanlosses.

(2)

Representsother real estateowned and MSRs,net, carried at lowerof cost or estimatedfair value.

Quantitative Disclosures forLevel 3 FairValue Measurements

At September 30,2022 andDecember 31, 2021, theCompanyhad no Level3 assets measuredat fair valueon a recurring

basis.For Level3 assets measured atfair valueon a non-recurring basisat September30, 2022 andDecember 31, 2021,

the significant unobservableinputs used inthe fair valuemeasurements andthe range of suchinputs with respect to such

assets are presented below.

Range of

Weighted

Carrying

Significant

Unobservable

Average

(Dollarsin thousands)

Amount

ValuationTechnique

UnobservableInput

Inputs

of Input

September 30, 2022:

Impaired loans

$

170

Appraisal

Appraisal discounts

10.0

-

10.0

%

10.0

%

Mortgage servicingrights, net

1,208

Discounted cashflow

Prepayment speedor CPR

7.1

-

20.6

7.4

Discount rate

9.5

-

11.5

9.5

December 31, 2021:

Impaired loans

$

249

Appraisal

Appraisal discounts

10.0

-

10.0

%

10.0

%

Other realestate owned

374

Appraisal

Appraisal discounts

55.0

-

55.0

55.0

Mortgage servicingrights, net

1,309

Discounted cashflow

Prepayment speedor CPR

6.8

-

16.5

13.3

Discount rate

9.5

-

11.5

9.5

Fair Value of Financial Instruments

ASC 825,

Financial Instruments

, requiresdisclosureof fair valueinformation aboutfinancialinstruments, whetheror not

recognized onthe face of thebalance sheet, for whichit is practicable to estimate thatvalue.The assumptionsused in the

estimation of the fairvalue of theCompany’s financial instrumentsare explainedbelow. Where quotedmarket prices are

not available,fair values arebased on estimates usingdiscounted cashflow analyses.Discounted cashflows can be

significantly affected bythe assumptions used,including the discountrate and estimates of futurecash flows.The

following fairvalue estimates cannotbe substantiatedby comparison to independentmarkets andshould not beconsidered

representative of theliquidationvalue of theCompany’s financial instruments,butrather are a good-faith estimate ofthe

fair value of financialinstruments held bythe Company.ASC 825 excludes certain financialinstruments andall

nonfinancialinstruments from its disclosure requirements.

27

The followingmethods and assumptionswere usedby the Companyin estimating thefair value of its financialinstruments:

Loans, net

Fair values for loanswere calculatedusing discountedcash flows.The discount rates reflectedcurrent ratesat whichsimilar

loans wouldbe made for thesame remainingmaturities. Expectedfuture cashflows were projected basedon contractual

cash flows,adjusted for estimated prepayments.Thefair value of loanswas measuredusing an exitprice notion.

Loans held forsale

Fair values ofloans held forsale aredetermined usingquoted secondarymarket prices for similarloans.

Time Deposits

Fair values for timedeposits wereestimated usingdiscounted cashflows. Thediscount rates werebased on rates currently

offered for deposits withsimilar remainingmaturities.

The carrying value,related estimated fairvalue,and placement inthe fair valuehierarchy of the Company’sfinancial

instruments atSeptember 30, 2022 andDecember 31, 2021 arepresentedbelow.This tableexcludes financialinstruments

for whichthe carrying amountapproximatesfair value.Financial assets for whichfair value approximatescarryingvalue

included cashand cash equivalents.Financial liabilities for whichfair valueapproximatescarrying valueincluded

noninterest-bearingdemanddeposits,interest-bearingdemanddeposits, andsavings deposits.Fair valueapproximates

carrying valuein these financialliabilities due to these productshavingno stated maturity.Additionally, financial

liabilities for whichfair valueapproximatescarrying valueincluded overnightborrowingssuch asfederal funds purchased

and securities sold underagreements to repurchase.

Fair ValueHierarchy

Carrying

Estimated

Level 1

Level 2

Level 3

(Dollarsin thousands)

amount

fair value

inputs

inputs

Inputs

September 30, 2022:

Financial Assets:

Loans, net (1)

$

469,069

$

454,105

$

—

$

—

$

454,105

Financial Liabilities:

Time Deposits

$

146,508

$

144,702

$

—

$

144,702

$

—

December 31, 2021:

Financial Assets:

Loans, net (1)

$

453,425

$

449,105

$

—

$

—

$

449,105

Loans held for sale

1,376

1,410

—

1,410

—

Financial Liabilities:

Time Deposits

$

156,650

$

160,581

$

—

$

160,581

$

—

(1) Representsloans, net ofunearned income andthe allowancefor loan losses.The fair valueof loans wasmeasured usingan exitprice notion.

NOTE 8:SUBSEQUENT EVENTS

On October 13, 2022, theCompanyclosed the sale ofapproximately0.85 acres of landlocated nextto the Company’s

headquartersin Auburn, Alabamaat a purchaseprice of $

4.26

million.Althoughnot all invoiceshave beenreceived, after

prorations, closingcosts andcosts of demolishingthe Bank’s former mainoffice building,the Companyestimates that the

sale will result ina pre-tax gain of$

3.2

million.

28

ITEM 2. MANAGEMENT'SDISCUSSIONAND ANALYSIS OF FINANCIALCONDITIONAND RESULTS OF

OPERATIONS

General

Auburn NationalBancorporation, Inc.(the “Company”)is a bankholding companyregistered withthe Boardof Governors

of the Federal ReserveSystem (the“FederalReserve”) underthe Bank HoldingCompany Actof 1956, as amended(the

“BHC Act”).The Companywas incorporated inDelaware in1990, and in1994 it succeeded its Alabamapredecessor asthe

bank holding companycontrolling AuburnBank,an Alabamastate member bankwith itsprincipal office in Auburn,

Alabama (the“Bank”). TheCompany andits predecessor havecontrolled the Banksince 1984.Asa bank holding

company, the Companymay diversifyinto a broader rangeof financialservices andother business activities thancurrently

are permitted to theBankunder applicablelaws and regulations.The holding companystructure also providesgreater

financialand operating flexibility thanis presently permitted tothe Bank.

The Bankhas operated continuouslysince 1907 andcurrently conducts its businessprimarily inEast Alabama,including

Lee Countyand surroundingareas.The Bankhas been a memberof the FederalReserve Systemsince April 1995.The

Bank’s primary regulatorsare theFederal Reserveand the AlabamaSuperintendent ofBanks (the “Alabama

Superintendent”).The Bank hasbeen a memberof the Federal HomeLoan Bankof Atlanta (the “FHLBof Atlanta”)since

1991. Certain of thestatements madein this discussion andanalysis andelsewhere, includinginformation incorporated

herein by reference to otherdocuments,are “forward-lookingstatements” asmore fully describedunder“Special Notice

Regarding Forward-LookingStatements” below.

The followingdiscussion andanalysis is intendedto provide a better understandingof variousfactors related to the results

of operations andfinancialcondition of theCompany andthe Bank.This discussion is intendedto supplement and

highlight informationcontained inthe accompanyingunaudited condensedconsolidated financialstatements andrelated

notes for the quartersandnine months endedSeptember 30, 2022and2021, as wellas the information containedin our

annual report on Form10-K for theyear endedDecember 31, 2021 andour interim reports onForm 10-Qfor the quarters

ended March 31,2022 andJune 30, 2022.

Special Notice Regarding Forward-LookingStatements

Various of the statements madeherein underthe captions “Management’sDiscussion andAnalysis of FinancialCondition

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

are “forward-lookingstatements” withinthe meaningand protections of Section27A ofthe Securities Actof 1933, as

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

Forward-lookingstatements include statementswithrespect to our beliefs, plans,objectives, goals,expectations,

anticipations, assumptions,estimates, intentionsandfuture performance, andinvolve knownand unknownrisks,

uncertainties andother factors, whichmay be beyondour control, andwhich may causethe actual results, performance,

achievementsor financialcondition of the Companyto be materiallydifferent from future results,performance,

achievementsor financialcondition expressed or impliedbysuch forward-looking statements.You should notexpect us to

update any forward-lookingstatements.

All statements other thanstatements of historical fact arestatements thatcould beforward-looking statements.You can

identify these forward-lookingstatements throughour useof words such as“may,” “will,” “anticipate,”“assume,”

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

“project,”“could,” “intend,”“target,” “view,” and other similarwordsand expressions of thefuture.Theseforward-

looking statements maynot be realized dueto a varietyof factors, including,without limitation:

●

the effects of future economic,business andmarket conditions andchanges, foreign,domestic andlocally,

including inflation,seasonality, natural disasters or climatechange,such as risingsea andwater levels, hurricanes

and tornados,COVID-19 orother epidemics or pandemicsincludingsupply chain disruptions,inventoryvolatility,

and changesin consumer behaviors;

●

the effects of waror other conflicts, acts ofterrorism, or othereventsthatmay affect general economicconditions;

●

governmentalmonetary andfiscal policies, includingthe continuingeffectsof COVID-19fiscal andmonetary

stimulus, andchanges in monetarypolicies in response to inflationsincludingincreases in theFederal Reserve’s

target federal fundsrate and reductions inthe FederalReserve’s holdings of securities;

29

●

legislative andregulatory changes,including changesin banking, securities andtax laws,regulations and rulesand

their applicationby our regulators, includingcapital and liquidityrequirements, andchanges in the scope andcost

of FDIC insurance;

●

changes in accountingpronouncements andinterpretations, includingthe requiredimplementation of Financial

Accounting StandardsBoard’s (“FASB”) AccountingStandards Update(ASU) 2016-13, “FinancialInstruments –

Credit Losses (Topic 326): Measurementof Credit Losseson FinancialInstruments,” aswell as theupdates issued

since June 2016 (collectively,FASB ASC Topic 326) on CurrentExpected CreditLosses (“CECL”),and ASU

2022-02, Troubled DebtRestructurings andVintage Disclosures, whicheliminates troubled debtrestructurings

(“TDRs”) andrelated guidance;

●

the failure of assumptionsandestimates, as wellas differences in, andchanges to,economic, market andcredit

conditions, includingchanges in borrowers’credit risks andpayment behaviorsfrom those usedin our loan

portfolio reviews;

●

the risks of changesin interest rates on thelevels, composition andcosts of deposits, loandemandand mortgage

loan originations, andthe valuesand liquidity ofloan collateral, securities,andinterest-sensitiveassets and

liabilities, and therisks and uncertaintyof the amountsrealizable on collateral;

●

changes in borrowerliquidityand credit risks, andsavings, depositand paymentbehaviors;

●

changes in theavailability and cost of credit andcapital in thefinancial markets,and the typesof instruments that

may be includedas capital for regulatorypurposes;

●

changes in theprices, valuesand sales volumesof residential andcommercial real estate;

●

the effects of competitionfrom awide varietyof local, regional,nationaland other providers offinancial,

investmentand insuranceservices, includingthe disruptioneffects of financial technologyandother competitors

who are not subjectto the sameregulations asthe Company andthe Bank;

●

the failure of assumptionsandestimates underlyingthe establishmentof allowancesfor possible loanlosses and

other asset impairments,losses valuationsof assets andliabilities and other estimates;

●

the timing andamount of rental incomefrom third partiesfollowingthe June 2022 openingof our new

headquarters;

●

the risks of mergers, acquisitionsanddivestitures, including,without limitation,the related timeandcosts of

implementingsuch transactions,integratingoperations as partof these transactions andpossible failures to achieve

expected gains,revenue growthand/or expensesavings from suchtransactions;

●

changes in technologyor products thatmay be more difficult, costly,or less effective thananticipated;

●

cyber-attacks anddata breaches thatmay compromise oursystems, ourvendorsystemsor customers’

information;

●

the risks thatour deferred taxassets (“DTAs”) includedin “other assets” onour consolidated balancesheets, if

any, could be reducedif estimates of future taxableincome from our operationsandtax planningstrategies are less

than currently estimated,andsales of our capitalstock could triggera reduction inthe amount ofnet operatingloss

carry-forwards thatwe may be able toutilize for income taxpurposes;

●

the timing andamount of any credit approvedby the InternalRevenue Service(“IRS”) resultingfrom our filing,

seeking an EmployeeRetention Credit, whichwe believe we areeligible for underthe CARES Actand the 2020

Consolidated AppropriationsAct; and

●

other factors andinformation inthis report andother filings that wemake with the SECunder theExchange Act,

including ourAnnual Report onForm 10-Kfor the year endedDecember 31, 2021 andsubsequentquarterly and

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

30

All written ororal forward-lookingstatements thatare madeby us orare attributable tous are expressly qualifiedin their

entirety by thiscautionary notice.We have no obligationanddo not undertake toupdate,revise or correct anyof the

forward-looking statements after thedate ofthis report, or afterthe respectivedates onwhich such statements otherwise are

made.

Summary of Results ofOperations

Quarter endedSeptember30,

Nine monthsended September30,

(Dollarsin thousands, exceptper shareamounts)

2022

2021

2022

2021

Net interest income (a)

$

7,360

$

6,158

$

20,034

$

18,308

Less: tax-equivalentadjustment

117

117

339

355

Net interest income (GAAP)

7,243

6,041

19,695

17,953

Noninterest income

852

975

2,608

3,288

Total revenue

8,095

7,016

22,303

21,241

Provision for loanlosses

250

—

—

(600)

Noninterest expense

5,415

4,755

15,374

14,361

Income tax expense

432

386

1,049

1,313

Net earnings

$

1,998

$

1,875

$

5,880

$

6,167

Basic anddiluted earningsper share

$

0.57

$

0.53

$

1.67

$

1.74

(a) Tax-equivalent.See "Table 1 - Explanationof Non-GAAP FinancialMeasures."

Financial Summary

The Company’s net earningswere $5.9 million for the firstnine monthsof 2022, down5% compared to $6.2 millionfor the

first nine monthsof 2021.Basic anddiluted earningsper share were $1.67 pershare for thefirst nine monthsof 2022,

down 4% from the$1.74 per sharefor the first ninemonths of2021.

Net interestincome (tax-equivalent)was $20.0 million for thefirst ninemonths of2022, a 9%increase compared to $18.3

million for the first ninemonths of2021.Thisincrease was dueto balance sheet growth,and an increase inthe Company’s

net interest margin (tax-equivalent).Net interest margin(tax-equivalent)increased to 2.67%in thefirst nine monthsof

2022, compared to 2.59%for thefirst nine monthsof 2021 due to increasesin theFederal Reserve’s targetfederal funds

rates, and changesin our assetmix resulting from thecontinuingelevated levelsof customer deposits.Beginningin March

2022 through September30, 2022, theFederal Reserveincreased thetarget federal fundsrangefrom 0 – 0.25% to 3.00 –

3.25%.On November3, the FederalReserve increased itstarget federal fundsrate bya further 0.75%.TheFederal

Reserve hasindicated that additionalincreases in thetarget federal fundsrate are possible if inflationremains elevated.Net

interest income (tax-equivalent)included$0.3 million inPPP loan fees, netof related costs forthe first ninemonths of

2022, compared to $0.8 millionfor the first ninemonths of 2021.

At September 30,2022, the Company’sallowance for loanlosses was $5.0 million,or 1.05

%

of totalloans, comparedto

$4.9 million, or 1.08%of total loans,at December 31,2021, and$5.1 million, or 1.13%of total loans,at September30,

2021.

The Companyrecorded no netprovision for loanlosses duringthe first ninemonths of 2022 comparedto a negative

provision for loanlosses of $0.6 million duringthe first ninemonths of 2021.Thenegative provisionfor loan losses during

2021 was primarilyrelated to improvementsin economic conditionsin ourprimary marketarea, and related improvements

in our asset quality.The provisionfor loan losses is basedupon variousestimates and judgments,including theabsolute

level of loans,economic conditions, credit qualityandthe amount ofnet charge-offs.

Noninterest income was$2.6 million for thefirst nine monthsof 2022,21% less thanthe $3.3 million earnedin the first

nine monthsof 2021.Thedecrease in noninterest incomewasprimarily dueto a decrease in mortgagelending income of

$0.7 million asmarket interest rates onmortgage loansincreased.

31

Noninterest expense was$15.4 million for thefirst nine monthsof 2022,up7% comparedto $14.4 million for thefirst nine

months of2021.Theincrease in noninterest expensewasdue to increases insalaries andbenefits expense of $0.3million,

net occupancyand equipment expenseof $0.6million relatedto the Company’snew headquarters,and other noninterest

expense of $0.2million.Inflationmay alsohave affected our costs adversely.These increases were partiallyoffset bya

decrease in professional feesof $0.1 million.

Income tax expensewas $1.0 million for thefirst ninemonths of2022 compared to$1.3 million duringthe first nine

months of 2021.TheCompany’s effective taxrate for the first ninemonths of2022 was 15.14%, comparedto 17.55% in

the first nine monthsof 2021.Thedecrease wasprimarily dueto an income taxbenefit related to aNew MarketsTax

Credit investmentfunded in thefourth quarterof 2021.TheCompany’s effective income taxrate is principallyimpacted

by tax-exempt earningsfrom the Company’sinvestments inmunicipal securities, bank-ownedlife insurance, andNew

Markets Tax Credits.

The Companypaid cash dividendsof $0.765 per share inthe first ninemonths of2022, an increase of 2%from the same

period of 2021.TheCompany hasrepurchased 15,280 sharesfor $0.5 millionsince December 31,2021.AtSeptember 30,

2022, the Bank’s regulatorycapital ratios werewell abovethe minimum amountsrequired to be “wellcapitalized” under

current regulatory standardswith a total risk-basedcapital ratioof 16.16%, atier 1 leverage ratioof 9.29% anda common

equity tier 1 (“CET1”)ratio of 15.39% atSeptember 30, 2022.AtSeptember 30, 2022, theCompany’sequityto total

assets ratio was5.74%, comparedto 9.39% atDecember 31, 2021,and9.84% atSeptember 30, 2021.

For the thirdquarter of 2022, net earningswere $2.0 million, or$0.57 per share, comparedto $1.9 million,or $0.53 per

share, for the thirdquarter of 2021.Net interest income(tax-equivalent)was$7.4 million for the thirdquarter of2022, a

20%increase compared to$6.2million for thethird quarterof 2021.This increase wasprimarily dueto recent increases in

market interest rates.Since March2022, the FederalReserve hasincreased the targetfederal fundsrange by 300 basis

points.Further increases inthe target federalfunds rateare possible if inflation remainselevated.TheCompany’s net

interest margin (tax-equivalent)was 3.00%in the thirdquarter of2022 compared to 2.51% inthe thirdquarter of 2021.Net

interest income (tax-equivalent)included$26 thousandin PPP loan fees, netof related costs for thethird quarterof 2022

and $0.3million inthe third quarterof 2021.TheCompany recorded aprovision for loanlosses during thethird quarterof

2022 of $0.3 million, comparedto noprovision for loanlosses during thethird quarter2021.Theprovision for loanlosses

was primarilyrelated to loan growthduring the thirdquarter of2022.Noninterest incomewas$0.9 million in thethird

quarter of2022, compared to $1.0 millionin thethird quarterof 2021.The decrease innoninterest income wasprimarily

due to a decrease inmortgage lendingincome of $0.1million asmarket interest rates onmortgage loansincreased.

Noninterest expense was$5.4million inthe third quarterof 2022,compared to$4.8 millionfor the thirdquarter of2021.

The increase innoninterest expense wasprimarily dueto an increase innet occupancyand equipment expenseof $0.3

million related to theCompany’snew headquarters,which openedin June 2022, andother noninterest expenses of$0.2

million.Income taxexpense was$0.4million for the thirdquarter of 2022 and2021, respectively.TheCompany's

effective tax ratefor the third quarterof 2022 was 17.79%, comparedto 17.07%in thethird quarterof 2021.The

Company’s effective income taxrate is principallyimpacted bytax-exempt earningsfrom the Company’sinvestmentin

municipal securities, bank-ownedlife insurance, andNew Markets Tax Credits.

COVID-19 ImpactAssessment

The COVID-19pandemic hasoccurred in wavesof different variantssince the first quarterof 2020. Vaccines to protect

against and/orreduce the severityof COVID-19were widelyintroduced at thebeginning of 2021. Attimes, the pandemic

has severelyrestricted the levelof economic activityin our markets.In response to the COVID-19pandemic, the Stateof

Alabama,and most other states, havetaken preventativeor protective actions to preventthe spread ofthe virus, including

imposing restrictions ontraveland business operations anda statewide maskmandate, advisingor requiring individualsto

limit or forego their time outsideof their homes,limitations ongatheringof people andsocial distancing,and causing

temporary closures of businessesthathave beendeemed to be non-essential. Thoughcertain of these measures havebeen

relaxed oreliminated, especially asvaccination levelsincreased, suchmeasures could bereestablished incases of new

waves, especially awave of a COVID-19variant that ismore resistant to existingvaccines andnewly developed

treatments.

32

COVID-19 has significantlyaffected local state, nationalandglobal health andeconomic activity andits future effects are

uncertain andwill depend on variousfactors, including,among others, thedurationand scope of the pandemic,especially

new variants ofthe virus, effective vaccinesanddrug treatments, together withgovernmental,regulatory andprivate sector

responses. COVID-19has hadcontinuingsignificant effects on theeconomy, financial marketsand ouremployees,

customers andvendors. Ourbusiness, financialcondition and results of operationsgenerally relyuponthe abilityof our

borrowers to makedeposits andrepay their loans,the value of collateral underlyingour secured loans,market value,

stability andliquidity and demandfor loans andother products andservices we offer, all of whichare affected bythe

pandemic.

We have implemented a numberof procedures inresponse to the pandemicto supportthe safetyand well-beingof our

employees, customers andshareholders.

●

We believe our business continuityplan hasworked to provideessential bankingservices to our communities and

customers, while protectingour employees’health.As part of oureffortsto exercise socialdistancingin

accordance withthe guidelinesof the Centers for DiseaseControl andthe Governor ofthe State ofAlabama,

starting March23, 2020, welimited branch lobbyservice to appointmentonly while continuingto operate our

branch drive-thrufacilities and ATMs. As permitted bystate public healthguidelines, onJune 1, 2020, were-

opened some ofour branch lobbies.In 2021, weopened our remainingbranch lobbies. We continueto provide

services throughour online andother electronic channels.In addition,we maintainremote work access tohelp

employees stay athome whileproviding continuityof service duringoutbreaks ofCOVID-19 variants.

●

We serviced the financialneeds of ourcommercial andconsumer clients withextensions anddeferrals to loan

customers effected byCOVID-19, providedsuch customers werenot more than30 days pastdue at the timeof the

request; and

●

We were an active PPP lender. PPP loanswere forgivable,in whole orin part, if theproceeds are usedfor payroll

and other permitted purposesin accordancewiththe requirements of the PPP. Theseloans carrya fixed rateof

1.00% anda term of two years(loans madebefore June 5,2020) or five years(loans madeon or after June5,

2020), if not forgiven,in whole orin part. Paymentsare deferred until either thedate onwhich the SmallBusiness

Administration(“SBA”) remits the amountof forgiveness proceeds to thelender or thedate thatis 10 months after

the last dayof the covered periodif the borrowerdoes not applyfor forgiveness withinthat 10-month period.We

believe these loansand our participationin the programhelped our customers andthe communities weserve.

COVID-19 has alsohad variouseconomic effects, generally. Theseinclude supplychain disruptionsandmanufacturing

delays, shortages ofcertain goods andservices, reduced consumer expenditureon hospitalityandtravel, andmigration from

larger urban centers to less populatedareas andremote work.The demandfor single familyhousing has exceeded existing

supplies. Whencoupled with constructiondelaysattributable tosupply chaindisruptions andworker shortages, these

factors havecaused housing prices andapartmentrents to increase, generally. Stimulativemonetary and fiscal policies,

along with shortagesof certain goodsandservices, andrising petroleum andfood prices,reflecting, amongother things, the

war in the Ukraine,have led tothe highest inflationin decades.The FederalReserve hasbegun rapidlyincreasing its target

federal funds ratefrom 0 – 0.25%at the beginningof March 2022 to 3.00 – 3.25%at September30, 2022 and3.75 – 4.00%

as of November30.The FederalReserve also hasbeen reducingits holdingsof securities to counteractinflation.

A summaryof PPP loans extendedduring 2020 follows:

(Dollarsin 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 collected approximately $1.5 millionin fees from theSBArelated to ourPPP loans during2020. ThroughDecember

31, 2021, wehadrecognized all of these fees, netof related costs.Asof December 31, 2021, wehad received paymentsand

forgiveness on allPPP loans extendedduring 2020.

33

On December 27, 2020,the Economic Aidto Hard-Hit Small Businesses, Nonprofits,andVenues Act (the “EconomicAid

Act”) wassigned into law. TheEconomic AidAct provides a second$900 billion stimuluspackage,including $325 billion

in additionalPPP loans. TheEconomic AidAct also permits thecollection of ahigheramount of PPP loanfees by

participatingbanks.

A summaryof PPP loans extendedduring 2021 underthe Economic AidAct follows:

(Dollarsin 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 collected approximately $1.0 millionin fees from theSBArelated to PPP loansunderthe Economic AidAct. Through

September 30, 2022, wehave recognizedall of these fees, netof related costs. Asof September 30, 2022, wehave received

payments andforgiveness on all but1 PPP loan,in the amountof $0.1 million, underthe Economic AidAct.

We believe that the COVID-19pandemic stimuliand decreased economic activityincreased customerliquidityandtier

deposits at theBank and decreased loandemand, whilemonetary stimulusreduced interest ratesandour costs of fundsand

our interest earningson loans.As a result, ournet interest marginwas adverselyaffected.A returnto more normalinterest

rates appears underway,beginningin March 2022, andhas accelerated inrecent months asa result of FederalReserve

effortsto curbinflation.Thishas resulted in improvednet interest margin,but at the sametime has reduced themarket

values of oursecurities portfolio andresulted in unrealizedsecurities losses.As aresult, we havehad losses in ourother

comprehensive income andour equity under generallyaccepted accountingprinciples hasdeclined.This has notadversely

affected our regulatorycapital,however.

We continue to closely monitor thepandemic’seffects,andare workingto continue ourservices andto address

developmentsas those occur. Our results of operationsfor thenine monthsended September 30,2022, andour financial

condition atthat date,whichreflect only the continuingdirect andindirect effects of the pandemic,may not beindicativeof

future results or financialconditions, includingpossible changesin monetaryor fiscal stimulus, andthe possible effects of

the expiration or extensionof temporaryaccountingandbank regulatory relief measuresin response tothe COVID-19

pandemic.

As of September 30,2022,all of ourcapital ratios werein excess of allregulatory requirements to bewell capitalized.The

continuingeffectsof the COVID-19pandemic couldresult in adversechanges to credit qualityand ourregulatory capital

ratios, and inflationwillaffect our costs, interest rates andthe values of ourassets andliabilities, customer behaviorsand

economic activity.Continuingsupply chainand supply disruptionsalso adverselyaffect the levels andcosts of economic

activities.We continue to closely monitor thesecontinuingeffects of the pandemic,and are workingto anticipate and

address developments.

The CARESAct and the 2020 ConsolidatedAppropriationsActprovide eligible employersanemployee retention credit

related to COVID-19.After consultation withour tax advisors,we believewe are eligible, andhave filed amendedpayroll

tax returns withthe IRS, of anestimated employee retentioncredit of $1.6 million,or approximately$1.2 million, netof

estimated income taxeffects, or approximately$0.33 per share.IRSaction onthis request, includingits timing andthe

amount of anycredit approved bythe IRS, cannot bepredicted.

The direct healthissues related to COVID-19appear tobe waning as aresult of vaccinations,new medications and

increased resistance to thevirusas a result of prior infections,althoughnew strains continueto appear.The economic

effectsof the pandemicandgovernment fiscal andmonetary policy responses,supplychain disruptionsand inflation

continue, however.

34

CRITICALACCOUNTINGPOLICIES

The accountingand financial reportingpolicies of the Companyconform withU.S. generallyaccepted accounting

principles andwith generalpractices withinthe banking industry.In connection withthe applicationof those principles, we

have made judgmentsand estimates which,in the case of thedetermination of ourallowancefor loan losses, our

assessment of other-than-temporaryimpairment,recurring andnon-recurring fair valuemeasurements, thevaluationof

other real estate owned,and the valuationof deferred taxassets, were critical to thedetermination ofour financialposition

and results of operations.Other policies alsorequire subjectivejudgmentand assumptionsand may accordinglyimpact our

financialposition and results of operations.

Allowance for LoanLosses

The Companyassesses the adequacyof its allowancefor loan losses prior to theendof each calendarquarter. The level of

the allowanceis based uponmanagement’s evaluationof the loanportfolio, past loanloss experience, current assetquality

trends, known andinherent risks inthe portfolio, adversesituations thatmay affect aborrower’s ability torepay (including

the timing offuture payment),the estimated valueof any underlyingcollateral, compositionof the loanportfolio, economic

conditions, changesin, and expectationsregarding,market interest rates andinflation, industry andpeer bankloan loss rates

and other pertinent factors.Thisevaluation is inherentlysubjective as itrequires material estimates includingthe amounts

and timing offuture cash flowsexpected to bereceived on impairedloans thatmay be susceptible to significantchange.

Loans arecharged off, in wholeor in part,when managementbelieves thatthe full collectabilityof the loanis unlikely. A

loan may be partiallycharged-off after a“confirming event”has occurred whichserves to validatethat full repayment

pursuant to theterms of the loanis unlikely.In addition, ourregulators, asan integral partof their examinationprocess,

will periodically reviewthe Company’s allowancefor loan losses, andmay require theCompany tomake additional

provisions to theallowance for loanlosses based ontheir judgmentabout information availableto them at the timeof their

examinations.

The Companydeems loansimpairedwhen, based on current informationandevents, it is probablethat the Companywill

be unableto collect all amountsdue accordingto the contractualterms of the loanagreement. Collection ofall amountsdue

according tothe contractualterms meansthat boththe interest andprincipal paymentsof a loanwill be collected as

scheduled inthe loan agreement.

An impairment allowanceis recognized ifthe fair valueof the loanis less than therecorded investment inthe loan. The

impairment isrecognized throughthe allowance. Loansthat areimpaired arerecorded at thepresent value ofexpected

future cash flowsdiscounted atthe loan’s effective interest rate, orif the loanis collateral dependent,impairment

measurement is basedon the fair valueof the collateral, less estimateddisposal costs.

The level of theallowance for loanlosses maintained isbelievedby management, basedon its processes andestimates, to

be adequateto absorb probablelosses inherent in theportfolio at thebalance sheet date.The allowanceis increased by

provisions chargedto expense and decreased bycharge-offs, net of recoveries of amountspreviouslycharged-off andby

releases from the allowancewhen determinedto beappropriate tothe levels of loansand probable loanlosses in suchloans.

In assessing theadequacy ofthe allowance,the Company alsoconsiders the results of itsongoinginternal, independent

loan reviewprocess. The Company’sloan reviewprocess assists in determiningwhetherthere are loansin the portfolio

whose credit qualityhas weakenedover time andevaluating therisk characteristics of the entireloan portfolio. The

Company’s loan reviewprocess includes the judgmentof management,the input from ourindependent loanreviewers, and

reviews thatmay have beenconducted by bankregulatory agenciesas part oftheir examinationprocess. TheCompany

incorporates loanreview results inthe determinationof whetheror not it isprobablethat it will be ableto collect all

amounts due accordingto the contractualterms of aloan.

As part of theCompany’s quarterly assessment of theallowance,managementdivides the loanportfolio into five segments:

commercial andindustrial,construction andland development,commercial real estate, residentialreal estate,andconsumer

installment loans.The Companyanalyzeseach segment andestimates anallowance allocation for eachloan segment.

35

The allocation of theallowancefor loan losses begins witha process of estimating theprobablelosses inherent for these

types of loans.The estimates for these loansare establishedbycategory and basedon the Company’sinternal system of

credit risk ratingsand historical loss data.The estimated loanloss allocation rate for the Company’sinternal system of

credit risk gradesis based onits experience withsimilarly gradedloans. For loansegments wherethe Companybelieves it

does not havesufficient historical loss data,the Company maymake adjustments based,in part, on loss rates of peerbank

groups. At September30, 2022 andDecember 31, 2021, andfor the periods thenended, the Companyadjusted its historical

loss rates for the commercialreal estate portfoliosegment based,in part, onloss rates of peer bankgroups.

The estimated loanloss allocation for allfiveloan portfolio segments is thenadjustedfor management’s estimate of

probablelosses for several “qualitativeand environmental”factors.Theallocation for qualitativeand environmental

factors is particularlysubjective anddoes not lenditself to exact mathematicalcalculation.This amountrepresents

estimated probableinherent credit losseswhichexist, but havenot yet been identified, asof the balancesheet date, andare

based upon quarterlytrend assessments indelinquentand nonaccrualloans, credit concentrationchanges,prevailing

economic conditions, changesin lendingpersonnel experience, changesin lendingpolicies or procedures andother

influencingfactors.Thesequalitativeand environmentalfactors are considered for eachof the fiveloan segments andthe

allowance allocation,as determinedby theprocesses noted above,is increased or decreasedbasedon the incremental

assessment of these factors.

The Companyregularly re-evaluatesits practices in determiningthe allowancefor loan losses. TheCompany’s look-back

period eachquarter incorporates the effectsof atleast one economic downturnin its loss history. TheCompany believes

this look-back periodis appropriatedue to the risks inherentin the loanportfolio. Absentthis look-back period,the early

cycle periods inwhich theCompany experienced significantlosses wouldbe excludedfrom the determinationof the

allowance for loanlosses and itsbalance woulddecrease. For thequarter endedSeptember 30, 2022, theCompany

increased its look-back periodto 54 quartersto continue toinclude lossesincurredby theCompany beginningwith the first

quarter of2009. The Companywill likely continueto increase its look-back periodto incorporatethe effects ofat leastone

economic downturnin its loss history.Duringthe quarter endedJune 30, 2021, the Companyadjusted certain qualitative

and economic factors,previouslydowngradedas a result of theCOVID-19 pandemic,to reflect improvements ineconomic

conditions in ourprimary marketarea.Further adjustmentsmay bemade from time to timein thefuture as a result of the

COVID-19 pandemicand other economic changes.

Assessment for Other-Than-TemporaryImpairment ofSecurities

On a quarterlybasis, managementmakes an assessment to determinewhether therehavebeen eventsor economic

circumstances to indicate thatasecurity on whichthere is anunrealized loss is other-than-temporarilyimpaired.

For debt securities withan unrealizedloss, an other-than-temporaryimpairment write-downis triggered when(1) the

Company hasthe intent to sell adebt security, (2) it is more likelythannot that the Companywill be requiredto sell the

debt security before recoveryof its amortized cost basis,or (3) the Companydoes not expect to recoverthe entire amortized

cost basis of thedebt security.If the Companyhas the intentto sell a debt securityor if itis more likelythan notthat it will

be required to sell thedebt security before recovery,the other-than-temporarywrite-downis equal tothe entire difference

between thedebt security’s amortized cost andits fair value.If the Companydoes not intendto sell the security or it is not

more likely thannot that it willbe required to sell thesecurity before recovery, theother-than-temporaryimpairment write-

down is separatedinto theamount thatis credit related (credit loss component)andthe amount dueto all other factors.The

credit loss component isrecognizedin earningsand is the difference betweenthe security’s amortized costbasis andthe

present value ofits expected futurecash flows.The remainingdifference between thesecurity’s fair valueand the present

value of futureexpected cashflows is due tofactors that arenot credit related andis recognized inother comprehensive

income, net ofapplicable taxes.

The Companyis required toown certain stock asa condition ofmembership, suchas the FHLBof Atlantaand Federal

Reserve Bankof Atlanta(“FRB”).These non-marketableequity securities are accountedfor at cost whichequalspar or

redemption value.These securities do nothave areadily determinable fairvalueas their ownershipis restricted andthere is

no marketfor these securities.TheCompany records thesenon-marketable equitysecurities asacomponent of other

assets, whichare periodically evaluatedfor impairment.Managementconsiders these non-marketableequitysecurities to

be long-term investments.Accordingly, whenevaluatingthese securities for impairment,managementconsiders the

ultimate recoverability ofthe parvalue rather than byrecognizing temporarydeclines in value.

36

Fair Value Determination

U.S. GAAPrequires managementto value and disclose certainof the Company’sassets andliabilities at fairvalue,

including investmentsclassified asavailable-for-saleandderivatives.ASC 820,

Fair Value Measurements and Disclosures

,

which defines fairvalue, establishes aframeworkfor measuringfair value in accordancewith U.S.GAAP and expands

disclosures aboutfair valuemeasurements.For more informationregardingfair valuemeasurements anddisclosures,

please refer to Note 7,Fair Value, of theconsolidated financialstatements thataccompanythis report.

Fair values arebased on activemarket prices of identical assetsor liabilitieswhen available.Comparable assets or

liabilities or acomposite of comparableassets inactivemarkets are used whenidentical assets or liabilities donot have

readily availableactive marketpricing.However, some ofthe Company’sassets or liabilities lackan availableor

comparable tradingmarket characterized byfrequent transactions betweenwilling buyersand sellers. In these cases,fair

value is estimated usingpricing modelsthat use discountedcash flowsand other pricingtechniques. Pricing modelsand

their underlyingassumptions arebased upon management’sbest estimates for appropriatediscountrates, defaultrates,

prepayments,market volatilityand other factors, takinginto accountcurrent observablemarket dataand experience.

These assumptionsmay havea significant effect onthe reported fairvaluesof assets andliabilities and therelated income

and expense.As such, theuse of different models andassumptions, aswell as changes inmarket conditions, couldresult in

materially different net earningsand retainedearningsresults.

Other Real Estate Owned

Other realestate owned (“OREO”),consists of properties obtainedthroughforeclosure or in satisfactionof loans andis

reported at thelower of cost or fair value,less estimated costs to sellat thedate acquiredwith any loss recognized asa

charge-off throughthe allowancefor loan losses. AdditionalOREO losses for subsequentvaluationadjustments are

determined ona specific property basisandare includedas a componentof other noninterest expensealongwith holding

costs. Any gainsor losses on disposal ofOREOare also reflected innoninterest expense. Significantjudgmentsand

complex estimates are requiredin estimatingthe fairvalue of OREO,and the period oftime withinwhich such estimates

can be considered current issignificantlyshortened duringperiods of marketvolatility. As a result, thenet proceeds

realized from sales transactionscoulddiffer significantlyfrom appraisals,comparable sales,andother estimates usedto

determine the fairvalue of OREO.

Deferred Tax Asset Valuation

A valuationallowance isrecognized for adeferred taxasset if, basedon the weight ofavailable evidence,it is more-likely-

than-not that some portion orthe entire deferredtaxasset will notbe realized. Theultimate realizationof deferred taxassets

is dependentupon the generationof future taxableincome duringthe periods inwhich those temporarydifferences become

deductible. Managementconsiders the scheduledreversal of deferredtaxliabilities, projected futuretaxableincome andtax

planningstrategies in makingthis assessment. AtSeptember 30, 2022 wehad total deferred taxassets of $16.1 million

included as “otherassets”, including$15.3 million resulting fromunrealizedlosses in oursecurities portfolio.Basedupon

the level oftaxable income overthe last three yearsand projections for future taxableincome over theperiods inwhich the

deferred taxassets are deductible,managementbelieves it ismore likely than notthat we will realizethe benefits of these

deductible differences atSeptember 30, 2022.Theamount of thedeferred taxassets considered realizable,however,could

be reduced ifestimates of future taxableincome are reduced.

37

RESULTS OF OPERATIONS

Average Balance Sheet andInterest Rates

Nine monthsended September30,

2022

2021

Average

Yield/

Average

Yield/

(Dollarsin thousands)

Balance

Rate

Balance

Rate

Loans and loansheld for sale

$

442,613

4.42%

$

460,732

4.47%

Securities - taxable

370,402

1.69%

310,288

1.30%

Securities - tax-exempt

61,227

3.52%

62,915

3.60%

Total securities

431,629

1.95%

373,203

1.68%

Federal fundssold

54,924

0.76%

36,821

0.14%

Interest bearingbank deposits

73,630

0.82%

75,170

0.12%

Total interest-earningassets

1,002,796

2.89%

945,926

2.86%

Deposits:

NOW

201,792

0.13%

176,242

0.12%

Savings andmoney market

335,005

0.20%

289,758

0.23%

Time deposits

155,824

0.84%

159,412

1.05%

Total interest-bearingdeposits

692,621

0.32%

625,412

0.41%

Short-term borrowings

3,969

0.50%

3,329

0.50%

Total interest-bearingliabilities

696,590

0.32%

628,741

0.41%

Net interest income andmargin (tax-equivalent)

$

20,034

2.67%

$

18,308

2.59%

Net Interest Income andMargin

Net interest income (tax-equivalent)was$20.0 million for the first ninemonths of2022,a9% increase comparedto $18.3

million for the first ninemonths of2021.Thisincrease was dueto balance sheetgrowth, andan increase inthe Company’s

net interest margin (tax-equivalent).Net interest margin(tax-equivalent)increased to 2.67% inthe first ninemonths of

2022, compared to 2.59% forthe first ninemonths of2021 due to increasesin theFederal Reserve’s targetfederal funds

rates beginningMarch 17, 2022, andchanges in ourasset mix resulting from thecontinuingelevatedlevels of customer

deposits.TheFederal Reserveincreased the targetfederal fundsrange by 25 basispoints onMarch 17, 2022, 50 basis

points on May5 and 75 basispoints on each ofJune 16, July 28,and September 22.Thetarget rate was increased 75basis

points on November3, 2022, and furtherincreases inthe target federalfunds rateappear likely ifinflation remains

elevated.Net interest income (tax-equivalent)included$0.3 million inPPP loan fees, netof related costs for thefirst nine

months of2022, compared to $0.8 millionfor the first ninemonths of2021.

The tax-equivalent yieldon total interest-earningassets increased by3 basis pointsto 2.89% in thefirst nine monthsof

2022 compared to 2.86% inthe first ninemonths of2021.Thisincrease was primarilydue to changes inour asset mix

resulting from thesignificant increase incustomer deposits.

The cost of total interest-bearingliabilities decreasedby9 basis pointsto 0.32% in thefirst nine monthsof 2022 compared

to 0.41% inthe first nine monthsof 2021, evenas interest bearingdeposits increased.Thenet decrease inour fundingcosts

was primarilydue to a portion ofour time deposits repricinginto lower prevailingmarket interest rates throughthe first

nine monthsof 2022.Ourdeposit costs mayincrease as theFederal Reserveincreases its target federalfundsrate, market

interest rates increase, andas customer behaviorschangeas a result of inflation andhigher marketinterest rates on deposits

and other alternativeinvestments.

The Companycontinues to deployvarious asset liabilitymanagementstrategies to manageits risk to interest rate

fluctuations. Pricingremains competitivein ourmarkets.We believe this challengingcompetitive environmentwill

continue throughoutthe remainderof 2022.Ourability to hold ourdeposit rates lowuntil our interest-earningassets

reprice will beimportant inour ability to maintainor potentially increase ournet interest marginduring the beginningof

the monetary tighteningcycle that webelieve we willcontinue to experience in2022.

38

Provision for LoanLosses

The provisionfor loan losses represents acharge to earningsnecessary to providean allowance for loanlosses that

managementbelieves, basedon its processes andestimates, should beadequate to providefor the probablelosses on

outstanding loans.The Companyrecorded no netprovision for loanlosses during thefirst nine monthsof 2022 compared

to a negativeprovision for loanlosses of $0.6 million duringthe first nine monthsof 2021.Thenegativeprovision for loan

losses during 2021 wasprimarily relatedto improvementsin economic conditionsin ourprimarymarket area, and related

improvements inour asset quality.The provisionfor loan losses is basedupon variousestimates andjudgments, including

the absolute levelof loans,economic conditions, credit qualityand theamount of netcharge-offs.

Based uponits assessment of the loanportfolio, managementadjusts the allowancefor loan losses to anamount itbelieves

should beappropriate to adequatelycover its estimate of probablelosses in theloan portfolio. TheCompany’s allowance

for loan losses asa percentage oftotal loans was1.05%at September30, 2022, comparedto 1.08% atDecember 31, 2021.

While thepolicies and procedures usedto estimate theallowancefor loan losses, aswell asthe resulting provisionfor loan

losses charged to operations,are consideredadequateby managementand are reviewedfrom time to time byour regulators,

they are basedon estimates and judgmentsand are therefore approximateandimprecise. Factors beyondour control (such

as conditions inthe local andnational economy, local realestate markets, orindustries) mayhave a material adverseeffect

on our asset qualityand the adequacyof our allowancefor loan losses resultingin significantincreases in theprovision for

loan losses.

Noninterest Income

Quarter endedSeptember30,

Nine monthsended September30,

(Dollarsin thousands)

2022

2021

2022

2021

Service chargeson deposit accounts

$

158

$

149

$

446

$

419

Mortgage lendingincome

126

268

566

1,241

Bank-owned life insurance

97

100

293

302

Securities gains,net

44

15

44

15

Other

427

443

1,259

1,311

Total noninterest income

$

852

$

975

$

2,608

$

3,288

The Company’s income frommortgage lendingwas primarilyattributable tothe (1) origination andsale of mortgageloans

and (2) servicingof mortgageloans. Originationincome, net,is comprised of gainsor losses from the saleof the mortgage

loans originated,origination fees, underwritingfees, and otherfees associated withthe origination of loans,whichare

netted againstthe commission expense associatedwith these originations.TheCompany’s normalpractice is to originate

mortgage loansfor sale in the secondarymarket andto either sell or retain theassociated MSRswhen theloan is sold.

MSRs arerecognized basedon the fairvalue of the servicingright on the datethe corresponding mortgageloan issold.

Subsequent tothe date of transfer, theCompanyhas elected to measure itsMSRsunder theamortization method.Servicing

fee income is reportednet of anyrelated amortization expense.

The Companyevaluates MSRsfor impairmenton a quarterlybasis.Impairment isdetermined bygrouping MSRsby

common predominantcharacteristics, suchas interest rate andloan type.If the aggregatecarrying amountof a particular

group of MSRsexceeds the group’saggregate fair value,a valuation allowancefor that groupis established.The valuation

allowance isadjusted as thefair value changes.An increase inmortgage interest rates typicallyresults inan increase inthe

fair value of theMSRs whilea decrease in mortgageinterest rates typicallyresults ina decrease inthe fairvalue of MSRs.

The followingtable presents abreakdownof the Company’s mortgagelending income.

Quarter endedSeptember30,

Nine monthsended September30,

(Dollarsin thousands)

2022

2021

2022

2021

Origination income

$

39

$

233

$

315

$

1,168

Servicing fees, net

87

35

251

73

Total mortgage lending income

$

126

$

268

$

566

$

1,241

39

The Company’s income frommortgage lendingtypicallyfluctuates asmortgage interest rates changeand is primarily

attributable tothe origination andsale of mortgageloans. Originationincome decreased asmarket interest rates on

mortgage loansincreased.The decrease inorigination income waspartially offset by an increase inservicing fees, netof

related amortization expenseas prepaymentspeeds slowed,resulting indecreased amortization expense.

Noninterest Expense

Quarter endedSeptember30,

Nine monthsended September30,

(Dollarsin thousands)

2022

2021

2022

2021

Salaries andbenefits

$

2,975

$

2,893

$

8,901

$

8,641

Net occupancyand equipment

794

467

1,955

1,340

Professional fees

235

232

704

814

Other

1,411

1,163

3,814

3,566

Total noninterest expense

$

5,415

$

4,755

$

15,374

$

14,361

The increase insalaries andbenefits wasprimarily due toa decrease indeferred costs related tothe PPP loanprogram, and

routine annualwage andbenefit increases.

The increase innet occupancyand equipmentexpense wasprimarily due toincreased expenses relatedto the

redevelopment ofthe Company’sheadquartersin downtown Auburn.This amountincludes depreciation expenseandone-

time costs associatedwith theopening of the Company’snew headquarters.The Companyrelocated its mainoffice branch

and bank operations intoits newlyconstructed headquartersduringJune 2022.

Income Tax Expense

Income tax expensewas $1.0 million for thefirst ninemonths of2022 comparedto $1.3 millionfor the first ninemonths of

2021.TheCompany’s effective income taxrate for thefirst nine monthsof 2022 was 15.14%, comparedto 17.55% inthe

first nine monthsof 2021.Thedecrease was primarilydue to an incometax benefit relatedto aNew Markets Tax Credit

investmentfunded in thefourth quarter of 2021.TheCompany’s effective income taxrate is principallyimpacted bytax-

exempt earningsfrom the Company’sinvestments inmunicipal securities,bank-ownedlife insurance, andNew Markets

Tax Credits.

BALANCE SHEETANALYSIS

Securities

Securities available-for-salewere $411.5 millionat September30, 2022 comparedto $421.9 millionat December 31,2021.

This decrease reflectsanincrease in the amortizedcost basis of securitiesavailable-for-saleof $51.8 million,offset bya

decrease of $62.2million inthe fairvalue of securities available-for-sale.Theincrease in theamortized cost basisof

securities available-for-salewasprimarily attributableto managementallocating more fundingto the investmentportfolio

following thesignificant increase incustomer deposits.Thedecrease inthe fair valueof securities wasprimarily dueto an

increase in long-term marketinterest rates, whichresulted in $15.3 millionof deferred taxassets includedin our other

assets.Theaverage annualizedtax-equivalentyields earned on totalsecurities were 1.95%in thefirst nine monthsof 2022

and 1.68%in the firstnine monthsof 2021.

40

Loans

2022

2021

Third

Second

First

Fourth

Third

(In thousands)

Quarter

Quarter

Quarter

Quarter

Quarter

Commercial andindustrial

$

70,685

70,087

73,297

83,977

79,202

Construction andland development

54,773

38,654

33,058

32,432

34,890

Commercial real estate

250,030

240,296

235,062

258,371

252,798

Residential real estate

91,598

85,224

79,102

77,661

80,205

Consumer installment

7,551

7,122

8,412

6,682

7,060

Total loans

474,637

441,383

428,931

459,123

454,155

Less:unearned income

(602)

(511)

(514)

(759)

(923)

Loans, net of unearnedincome

$

474,035

440,872

428,417

458,364

453,232

Total loans, net ofunearned income, were$474.0 million atSeptember 30, 2022,and$458.4 million atDecember 31, 2021,

an increase of $15.7 million,or 3%.Total loans at December31, 2021 included$8.0million inPPP loans, allof which

were repaidduring the first ninemonths of2022.ExcludingPPP loans, total loans,net of unearnedincome, increased

$23.8 million, or 5%from December 31,2021.Four loancategories representedthe majorityof the loanportfolio at

September 30, 2022: commercialreal estate (53%),residential realestate (19%),commercial andindustrial (15%) and

construction andland development(12%).Approximately23% of theCompany’s commercial real estateloans were

classified as owner-occupiedat September30, 2022.

Within the residential real estate portfoliosegment, theCompanyhad junior lienmortgages of approximately$6.8million,

or 1%, and $7.2 million,or 2%, oftotal loans,net of unearnedincome at September30, 2022 andDecember 31, 2021,

respectively.For residential real estatemortgage loanswitha consumer purpose, theCompanyhad no loans thatrequired

interest only paymentsat September 30,2022 andDecember 31, 2021. TheCompany’s residential real estatemortgage

portfolio does not includeanyoption ARMloans, subprimeloans, or anymaterial amountof other consumer mortgage

products whichare generally viewedas high risk.

The averageyield earnedon loans andloans held for sale was4.42% in the first ninemonths of2022 and 4.47% inthe first

nine monthsof 2021.

The specific economic andcredit risks associated withour loan portfolio include,butare not limited to,the effects of

current economicconditions, includingthe continuingeffectsfrom theCOVID-19pandemic, aswell as high inflationrates

and the FederalReserve’s shift from stimulativemonetary policyto increases inthe target FederalFunds rate and

reductions in itssecurities holdings, onour borrowers’cash flows,real estate marketsales volumes,valuations, availability

and cost of financingproperties, real estate industryconcentrations,competitive pressuresfrom awide range ofother

lenders, deteriorationin certaincredits, interest ratefluctuations andincreases, reduced collateral valuesor non-existent

collateral, title defects, inaccurateappraisals,financialdeterioration of borrowers,fraud,and any violationof applicable

laws and regulations.

The Companyattempts to reducethese economic andcredit risks throughits loan-to-valueguidelines for collateralized

loans, investigatingthe creditworthiness of borrowersandmonitoring borrowers’ financialposition. Also,we have

established andperiodically review, lendingpolicies andprocedures. Bankingregulations limit abank’s credit exposure by

prohibitingunsecured loanrelationships thatexceed 10% of its capital;or 20% of capital,if loans in excess of 10%of

capital are fullysecured. Underthese regulations, weare prohibited from havingsecured loanrelationships in excess of

approximately$21.7 million.Furthermore, wehave an internallimit for aggregatecredit exposure (loansoutstandingplus

unfunded commitments)to asingle borrower of$19.5 million. Ourloan policyrequires thatthe Loan Committee of the

Board of Directors approveany loan relationships thatexceed this internallimit.At September30, 2022, the Bankhad no

relationships exceedingthese limits.

41

We periodically analyzeour commercial andindustrial and commercialreal estate loanportfolios to determineif a

concentration of credit riskexists inany one ormore industries. We use classificationsystems broadlyaccepted bythe

financialservices industryin order to categorize ourcommercial borrowers.Loanconcentrations to borrowersin the

following classes exceeded25% of theBank’s totalrisk-based capitalat September 30,2022 andDecember 31, 2021.

September30,

December 31,

(Dollarsin thousands)

2022

2021

Lessors of 1-4 familyresidential properties

$

51,391

$

47,880

Hotel/motel

33,918

43,856

Multi-family residential properties

29,317

42,587

Shopping centers

27,174

29,574

In light of disruptionsin economic conditionscaused byCOVID-19,the financialregulators have issuedguidance

encouraging banksto work constructivelywithborrowers affected bythe virus inour community.This guidance,including

the InteragencyStatementon COVID-19Loan Modifications andthe Interagency ExaminerGuidance for AssessingSafety

and SoundnessConsidering theEffect of the COVID-19Pandemic on Institutions,providesthat the agencies willnot

criticize financial institutionsthatmitigate credit risk throughprudent actions consistentwithsafe and soundpractices.

Specifically, examiners willnot criticize institutionsfor workingwith borrowers aspart of a risk mitigationstrategy

intended to improveexisting loans, evenif the restructured loanshave ordevelop weaknessesthat ultimatelyresult in

adverse credit classification.Upondemonstrating theneed for paymentrelief, the bankwill workwith qualified borrowers

that were otherwise currentbefore thepandemicto determine themost appropriate deferraloption.For residential

mortgage andconsumer loans theborrower mayelect to defer paymentsfor up tothree months.Interest continues to

accrue and theamount due at maturityincreases.Commercialreal estate, commercial,andsmall business borrowers may

elect to defer paymentsfor up tothree months orpay scheduledinterest paymentsfor asix-month period.The bank

recognizes thata combinationof the paymentrelief options maybe prudent dependenton a borrower’s businesstype.As

of September 30,2022, we hadno COVID-19loan deferrals, comparedto one COVID-19loan deferral totaling$0.1

million atDecember 31, 2021.

Section 4013 of the CARESAct provides thata qualified loanmodification is exemptbylaw from classification asa TDR

pursuant to GAA

P.

In addition,the Interagency Statementon COVID-19Loan Modifications providescircumstances in

which a loanmodification is notsubject to classificationas aTDR if such loanis not eligible for modificationunder

Section 4013.We had no newTDRs during thefirst nine monthsof 2022, andonly $170 thousandof nonaccruingTDRs

remained atSeptember 30, 2022 comparedto $249 thousandat December 31,2021.

Allowance for LoanLosses

The Companymaintains theallowance for loanlosses at alevel that managementbelieves appropriateto adequately cover

the Company’s estimate of probablelosses inherentin theloan portfolio. Theallowancefor loan losses was$5.0 million at

September 30, 2022 comparedto $4.9 millionat December 31,2021,whichmanagementbelieved to be adequateat each of

the respective dates.The judgmentsand estimates associated withthe determination of theallowance for loanlosses are

described under“Critical AccountingPolicies.”

42

A summaryof the changes inthe allowancefor loan losses andcertain asset qualityratios for the thirdquarter of2022 and

the previousfour quarters ispresented below.

2022

2021

Third

Second

First

Fourth

Third

(Dollarsin thousands)

Quarter

Quarter

Quarter

Quarter

Quarter

Balance at beginningof period

$

4,716

4,658

4,939

5,119

5,107

Charge-offs:

Commercial andindustrial

(13)

(4)

—

—

—

Commercial real estate

—

—

—

(254)

—

Residential real estate

—

—

—

(2)

—

Consumer installment

(3)

(16)

(48)

(32)

—

Total charge-offs

(16)

(20)

(48)

(288)

—

Recoveries

16

78

17

108

12

Net recoveries (charge-offs)

—

58

(31)

(180)

12

Provision for loanlosses

250

—

(250)

—

—

Ending balance

$

4,966

4,716

4,658

4,939

5,119

as a % of loans

1.05

%

1.07

1.09

1.08

1.13

as a % of nonperformingloans

1,431

%

1,314

1,256

1,112

1,053

Net (recoveries) charge-offsas %of average loans(a)

—

%

(0.05)

0.03

0.16

(0.01)

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

As described under“Critical AccountingPolicies,” managementassesses the adequacyof the allowance priorto the endof

each calendarquarter. The level ofthe allowance isbased uponmanagement’s evaluationof the loan portfolios, past loan

loss experience, current assetqualitytrends, knownand inherent risks inthe portfolio, adversesituations thatmay affect the

borrower’s abilityto repay (includingthe timing offuture payment),the estimated valueof any underlyingcollateral,

composition of theloan portfolio, economicconditions,inflationandchanges in marketinterest rates, industry andpeer

bank loanloss rates, andother pertinent factors. Thisevaluationis inherently subjectiveas itrequires variousmaterial

estimates andjudgments,including the amountsand timing offuture cash flowsexpected to be receivedon impairedloans

that may be susceptible tosignificantchange.The ratio of ourallowance for loanlosses to total loansoutstandingwas

1.05%at September30, 2022, compared to 1.08%at December31, 2021.Inthe future, theallowance to totalloans

outstanding ratiowill increase or decreaseto the extentthe factors thatinfluence our quarterlyallowanceassessment,

including the durationand magnitudeof COVID-19effectsandincreasing marketinterest rates andexpectations regarding

inflation and interest rates asthe FederalReserve shifts from stimulusto fightinginflation, intheir entirety either improve

or weaken.In addition, our regulators,as anintegral partof their examinationprocess, will periodically reviewthe

Company’s allowancefor loan losses, andmay require theCompany tomake additionalprovisions to the allowancefor

loan losses based ontheir judgmentabout information availableto themat the time of theirexaminations.

Nonperforming Assets

At September 30,2022 the Companyhad $0.3 million innonperforming assets comparedto $0.8 millionat December 31,

2021.

43

The table belowprovides information concerningtotal nonperformingassets andcertain asset qualityratios for the third

quarter of2022 and the previousfour quarters.

2022

2021

Third

Second

First

Fourth

Third

(Dollarsin thousands)

Quarter

Quarter

Quarter

Quarter

Quarter

Nonperforming assets:

Nonaccrual loans

$

347

359

371

444

486

Other realestate owned

—

—

374

374

—

Total nonperforming assets

$

347

359

745

818

486

as a % of loansand other realestate owned

0.07

%

0.08

0.17

0.18

0.11

as a % of total assets

0.03

%

0.03

0.07

0.07

0.05

Nonperforming loansas a % oftotal loans

0.07

%

0.08

0.09

0.10

0.11

Accruing loans90 days or more pastdue

$

—

—

—

—

69

The table belowprovides information concerningthe composition ofnonaccrualloans for the thirdquarter of2022 and the

previous four quarters.

2022

2021

Third

Second

First

Fourth

Third

(In thousands)

Quarter

Quarter

Quarter

Quarter

Quarter

Nonaccrual loans:

Commercial real estate

$

170

176

182

187

193

Residential real estate

177

183

189

257

293

Total nonaccrual loans

$

347

359

371

444

486

The Companydiscontinues the accrualof interest income when(1) there is a significantdeterioration inthe financial

condition of theborrower andfull repaymentof principaland interest is not expectedor (2) the principalor interest is

90 days or more pastdue, unlessthe loan is both well-securedandin the process of collection.TheCompany had$0.3

million inloans on nonaccrualstatus at September30, 2022 andDecember 31, 2021,respectively.

The Companyhad no loans90 days or more pastdue and still accruingat September 30,2022 andDecember 31, 2021,

respectively.

The table belowprovides information concerningthe composition of OREOfor the thirdquarter of 2022 andthe previous

four quarters.

2022

2021

Third

Second

First

Fourth

Third

(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 loansrepresent thoseloans witha well-defined weaknessand where informationaboutpossible credit

problems of a borrowerhascaused managementto have serious doubtsaboutthe borrower’s abilityto complywith present

repaymentterms.This definition is believedto be substantiallyconsistent withthe standardsestablished bythe Federal

Reserve, the Company’sprimary regulator, for loansclassified assubstandard,excluding nonaccrualloans.Potential

problem loans,which are notincluded in nonperformingassets, amountedto $1.3 million, or0.3% of total loansat

September 30, 2022, and$2.4 million, or 0.5%of total loansat December 31,2021.

44

The table belowprovides information concerningthe composition ofpotentialproblem loansfor the thirdquarter of2022

and the previousfour quarters.

2022

2021

Third

Second

First

Fourth

Third

(In thousands)

Quarter

Quarter

Quarter

Quarter

Quarter

Potential problem loans:

Commercial andindustrial

$

194

225

215

226

274

Construction andland development

—

—

13

218

231

Commercial real estate

191

146

150

156

172

Residential real estate

892

915

1,592

1,748

1,848

Consumer installment

29

24

8

12

19

Total potential problem loans

$

1,306

1,310

1,978

2,360

2,544

At September 30,2022,approximately$46 thousandor 4% oftotal potential problemloans werepast due atleast 30 days,

but less than90 days.

The followingtable is a summaryof the Company’sperforming loansthat werepast due at least 30 days,but less than

90 days,for the thirdquarter of 2022 andthe previousfour quarters.

2022

2021

Third

Second

First

Fourth

Third

(In thousands)

Quarter

Quarter

Quarter

Quarter

Quarter

Performing loans pastdue 30 to 89 days:

Commercial andindustrial

$

1

34

7

3

68

Construction andland development

282

—

1

204

—

Commercial real estate

—

28

—

—

—

Residential real estate

86

130

496

516

409

Consumer installment

8

7

15

25

25

Total

$

377

199

519

748

502

Deposits

Total deposits were $978.0 millionat September30, 2022 comparedto $994.2 millionat December 31,2021.Thedecrease

in total deposits wasprimarily dueto a decrease in rate-sensitivemoney marketand savingsaccounts of $21.8

million.Noninterest-bearingdeposits were $321.7million, or32% of total deposits,at September30, 2022, comparedto

$316.1 million, or 32%of total depositsat December 31,2021.We had no brokereddeposits on September30, 2022 or at

December 31, 2021.

Estimated uninsureddeposits totaled $393.8million and$420.8 million atSeptember 30, 2022 andDecember 31, 2021,

respectively.Uninsuredamountsare estimated basedon the portion ofaccount balancesin excess of FDICinsurance

limits.

The averagerate paid on totalinterest-bearingdeposits was0.32% in the first ninemonths of2022 compared to 0.41% in

the first nine monthsof 2021.

Other Borrowings

Other borrowingsconsist of short-term borrowingsandlong-term debt. Short-term borrowingsgenerally consistof federal

funds purchasedand securities sold underagreements to repurchasewithan originalmaturity of oneyear or less.The Bank

had available federalfundslines totaling $61.0 millionand$41.0 million withnone outstandingat September 30,2022, and

December 31, 2021, respectively.Securities soldunderagreements to repurchase totaled$2.6 million and$3.4 million at

September 30, 2022 andDecember 31, 2021,respectively.

The averagerate paid on short-termborrowingswas 0.50% inthe first ninemonths of2022 and 2021,respectively.

45

The Companyhad no long-term debtat September 30,2022 andDecember 31, 2021.

CAPITAL ADEQUACY

The Company’s consolidated stockholders’equitywas$59.8 million and$103.7 million asof September 30,2022 and

December 31, 2021, respectively.The decrease fromDecember 31,2021 wasprimarily drivenby an other comprehensive

loss due tothe change inunrealized gains/losses on securitiesavailable-for-sale,net of taxof $46.6 million.Theincrease in

the unrealizedloss on securities wasprimarily due toincreases in marketinterest rates.Theseunrealized losses do not

affect the Bank’s capitalfor regulatory capitalpurposes.TheCompany’s consolidated stockholders’equitywasalso

decreased by cashdividends paidof $2.8 million, andrepurchases of theCompany’s stock of $0.5 million.These

decreases in theCompany’s consolidatedstockholders’equitywere partiallyoffset by netearnings of $5.9 million.

The Companypaid cash dividendsof $0.795 per share inthe first ninemonths of 2022, anincrease of 2% from thesame

period in 2021. TheCompany’s sharerepurchases of $0.5million since December31, 2021 resultedin 15,280 fewer

outstanding commonshares atSeptember 30, 2022.Theseshares wererepurchased atan average cost pershare of $30.06

and a total cost of $0.5 million.

On January 1,2015, the Companyand Bank becamesubject to therules of theBasel III regulatorycapital frameworkand

related Dodd-FrankWall Street Reform andConsumer Protection Actchanges.The rules includedthe implementation ofa

capital conservation bufferthatis added tothe minimum requirements forcapital adequacypurposes.The capital

conservation buffer wassubject to athree year phase-inperiod that beganon January 1,2016 and wasfully phased-in on

January 1, 2019 at2.5%.A banking organizationwith a conservationbuffer of less thanthe requiredamount willbe

subject to limitations oncapital distributions,includingdividendpayments andcertain discretionary bonuspaymentsto

executive officers.AtSeptember 30, 2022, theBank’s ratiowas sufficient to meet the fullyphased-inconservation buffer.

Effective March20, 2020, the FederalReserve andthe other federal bankingregulators adoptedan interim finalrule that

amended the capitalconservation buffer.The interim finalrule was adoptedas a final ruleon August 26,2020.Thenew

rule revises thedefinition of “eligibleretained income”for purposes of themaximumpayout ratio to allowbanking

organizations tomore freely use their capitalbuffers to promote lendingand other financialintermediation activities,by

making the limitations oncapital distributionsmore gradual.The eligible retainedincome is nowthe greater of (i) net

income for the fourpreceding quarters,net of distributionsandassociated taxeffectsnot reflectedin net income;and (ii)

the averageof all net income overthe precedingfour quarters.This rule only affects the capitalbuffers, andbanking

organizations wereencouraged to makeprudent capitaldistribution decisions.

The FederalReserve hastreated us as a“small bank holdingcompany’ underthe FederalReserve’s Small BankHolding

Company Policy.Accordingly, ourcapital adequacyis evaluatedat the Banklevel, and notfor the Companyand its

consolidated subsidiaries.TheBank’s tier 1 leverageratio was 9.29%, CET1risk-based capital ratiowas 15.39%, tier 1

risk-based capitalratio was 15.39%,andtotal risk-based capitalratio was 16.16% atSeptember 30, 2022.Theseratios

exceed the minimumregulatory capitalpercentages of 5.0% for tier 1leverageratio, 6.5% for CET1risk-based capital

ratio, 8.0% for tier 1risk-based capitalratio, and10.0% for total risk-based capitalratio to beconsidered “wellcapitalized.”

The Bank’s capitalconservation buffer was8.16%at September 30,2022.Ourunrealizedlosses on securities dueto

increases in marketinterest rates do notdirectly affect ourcapital for regulatorypurposes,andthe resultingdeferred tax

assets, including$15.3 million resulting fromsuch unrealizedsecurities losses, wasbelow the25% threshold requiring

deduction ofsuch assets from CET1capital.

MARKETAND LIQUIDITYRISK MANAGEMENT

Management’s objectiveis to manageassets andliabilities to providea satisfactory, consistent level ofprofitability within

the frameworkof established liquidity,loan, investment,borrowing, andcapital policies. TheBank’s Asset Liability

ManagementCommittee (“ALCO”)is charged withthe responsibility of monitoringthese policies, whichare designed to

ensure an acceptableasset/liabilitycomposition. Twocritical areas of focus for ALCOare interest rate riskandliquidity

risk management.

46

Interest Rate Risk Management

In the normalcourse of business, theCompanyis exposed tomarket risk arisingfrom fluctuations ininterest rates. ALCO

measures andevaluates interest rate risk so thatthe Bankcan meet customer demandsfor varioustypes of loansand

deposits. Measurements usedto helpmanage interest rate sensitivityinclude anearnings simulationmodel andan economic

value of equity(“EVE”) model.

Earnings simulation

. Managementbelieves thatinterest rate risk is bestestimated byour earningssimulation modeling.

Forecasted levels of earningassets, interest-bearingliabilities,andoff-balance sheet financialinstruments are combined

with ALCOforecasts of market interestrates for the next12 months andother factors in order toproduce variousearnings

simulations andestimates. To help limit interest rate risk,wehave guidelines for earningsat risk whichseek to limit the

variance of netinterest income from gradualchanges in interest rates.For changesup or downin rates from management’s

flat interest rate forecast overthe next12 months,policy limits for netinterest income variancesare as follows:

●

+/-20% for a gradualchange of400 basis points

●

+/-15% for a gradualchange of300 basis points

●

+/-10% for a gradualchange of200 basis points

●

+/-5% for agradual change of100 basis points

While a gradualchange ininterest rates wasused in the aboveanalysis to providean estimate of exposure underthese

scenarios, our modelingunderboth a gradualand instantaneous changein interest rates indicatesour balancesheet is asset

sensitive.

At September 30,2022, our earningssimulation modelindicated thatwe were incompliance withthe policyguidelines

noted above.

Economic Value of Equity

. EVE measures theextent thatthe estimated economic valuesof our assets, liabilities,andoff-

balance sheet items willchange asa result of interest rate changes.Economic valuesare estimated bydiscounting expected

cash flows fromassets, liabilities, andoff-balance sheet items, whichestablishes abase case EVE.In contrast withour

earnings simulationmodel, whichevaluates interest rate riskover a12 monthtimeframe, EVE uses aterminal horizon

which allows for there-pricing of allassets, liabilities, andoff-balance sheet items. Further,EVEis measuredusing values

as of a pointin time anddoes not reflect anyactions that ALCOmight take inresponding to oranticipating changesin

interest rates, or marketandcompetitive conditions.To help limitinterest rate risk, wehave statedpolicy guidelinesfor an

instantaneousbasis point changein interest rates, suchthatour EVE shouldnot decrease from ourbase case bymore than

the following:

●

45% for aninstantaneouschange of+/-400 basis points

●

35% for aninstantaneouschange of+/-300 basis points

●

25% for aninstantaneouschange of+/-200 basis points

●

15% for aninstantaneouschange of+/-100 basis points

At September 30,2022, our EVEmodel indicatedthat we werein compliance withour policy guidelines.

Each of the aboveanalyses maynot, on its own, bean accurate indicatorof howour net interest income willbe affected by

changes in interest rates. Incomeassociatedwithinterest-earningassets andcosts associated withinterest-bearingliabilities

may not beaffected uniformly bychangesin interest rates. In addition,the magnitudeand durationof changes ininterest

rates mayhave a significant impacton net interest income.For example,althoughcertain assets andliabilities mayhave

similar maturities or periodsof repricing,they mayreact indifferent degrees to changesin marketinterest rates, andother

economic andmarket factors, includingmarket perceptions. Interestrates on certaintypes of assets andliabilities fluctuate

in advance ofchanges in generalmarket rates,while interest rates onother types ofassets andliabilities maylag behind

changes in generalmarket rates. Inaddition, certainassets, such asadjustablerate mortgage loans,have features (generally

referred to as“interest rate capsand floors”) whichlimit changesin interest rates. Prepaymentsandearly withdrawallevels

also could deviatesignificantly from those assumedin calculatingthe maturityof certain instruments.Theability of many

borrowers to service their debtsalso maydecrease duringperiods of risinginterest rates or economicstress, whichmay

differ across industries andeconomic sectors. ALCOreviews each ofthe aboveinterest rate sensitivityanalysesalong with

several different interest ratescenarios inseeking satisfactory, consistentlevels of profitabilitywithinthe frameworkof the

Company’s establishedliquidity, loan,investment,borrowing, andcapital policies.

47

The Companymay also usederivative financialinstruments to improvethe balance betweeninterest-sensitiveassets and

interest-sensitiveliabilities, andas a tool to manageinterest rate sensitivitywhile continuingto meet thecredit anddeposit

needs of our customers. Fromtime to time, theCompanyalso may enter intoback-to-backinterest rate swapsto facilitate

customer transactions andmeet their financingneeds. Theseinterest rate swapsqualify asderivatives, butare not

designatedas hedging instruments.At September30, 2022 andDecember 31, 2021, the Companyhad no derivative

contracts designated aspart of ahedging relationship toassist in managingits interest rate sensitivity.

Liquidity Risk Management

Liquidity isthe Company’s ability toconvert assets intocash equivalentsin order to meet dailycash flow requirements,

primarily for depositwithdrawals,loan demand andmaturing obligations.Without proper managementof its liquidity, the

Company couldexperience higher costs of obtainingfundsdue to insufficient liquidity, whileexcessive liquiditycould lead

to lower earningsdue to the cost of foregoingalternativehigher-yield marketinvestmentopportunities.

Liquidity ismanaged at twolevels. Thefirst is the liquidityof the Company.The second is theliquidityof the Bank.The

managementof liquidity atboth levels isessential, because theCompanyand the Bank are separateand distinct legal

entities withdifferent funding needsand sources, andeach are subject to regulatoryguidelines andrequirements.The

Company dependsupon dividendsfrom the Bank for liquidityto pay its operatingexpenses, debtobligations and

dividends.The Bank’s paymentof dividendsdepends on its earnings,liquidity, capital and the absenceof regulatory

restrictions on suchdividends.

The primarysource of fundingand liquidityfor the Company hasbeen dividendsreceived from theBank.If needed, the

Company couldalso borrowmoney, or issue common stock or othersecurities.Primary uses of fundsby the Company

include dividendspaid to stockholders,Companystock repurchases,andpayment of Companyexpenses.

Primary sources of fundingfor the Bankinclude customer deposits,other borrowings,repaymentand maturity ofsecurities,

sales of securities, andthe sale and repaymentof loans. The Bankhas access to federal fundslines from variousbanksand

borrowingsfrom the FederalReserve discountwindow. In addition tothese sources, theBankmay participate inthe

FHLB’s advance programto obtain fundingfor its growth.Advances includeboth fixed and variableterms and may be

taken out withvarying maturities. AtSeptember 30, 2022, theBankhad a remainingavailable lineof credit withthe FHLB

of $325.1 million.AtSeptember 30, 2022, theBankalso had $61.0 million of availablefederal fundslines with no

borrowings outstanding.Primary uses offunds includerepayment of maturingobligations and growingthe loan portfolio.

The Bankhas no brokered deposits onSeptember 30, 2022or atDecember 31, 2021

Managementbelieves thatthe Company andthe Bank haveadequate sources of liquidityto meet alltheir respectiveknown

contractual obligations andunfunded commitments,includingloan commitments andreasonable borrower, depositor, and

creditor requirements overthe nexttwelve months.

Off-Balance Sheet Arrangements,Commitments,Contingencies andContractual Obligations

At September 30,2022, the Bankhad outstandingstandby letters of credit of$1.0million andunfunded loancommitments

outstanding of$88.8 million.Because these commitmentsgenerally havefixed expirationdates and manywill expire

without beingdrawn upon, thetotal commitment leveldoes not necessarilyrepresent futurecash requirements.If neededto

fund these outstandingcommitments, the Bankcould liquidatefederal fundssold or a portion of oursecurities available-

for-sale, or drawon its availablecredit facilities.

Mortgage lending activities

We primarily sell residential mortgageloans inthe secondarymarket to FannieMae while retainingthe servicing ofthese

loans. The saleagreements for these residentialmortgage loanswithFannie Mae and other investorsinclude various

representations andwarranties regardingthe originationand characteristics ofthe residentialmortgage loans.Althoughthe

representations andwarranties vary amonginvestors, theytypically coverownership of theloan, validityof the lien

securing theloan, the absenceof delinquenttaxes or liens againstthe propertysecuring theloan, compliance withloan

criteria set forth inthe applicableagreement, compliancewithapplicable federal,state, and locallaws, amongother

matters.

48

As of September 30,2022, the unpaidprincipalbalance of residential mortgageloans, whichwe have originatedand sold,

but retained the servicingrights, was$238.3 million.Althoughthese loans aregenerally soldon a non-recourse basis, we

may be obligatedto repurchase residential mortgageloans or reimburseinvestors forlosses incurred(makewholerequests)

if a loan reviewreveals a potentialbreach ofseller representations andwarranties.Upon receipt of arepurchase or make

whole request, wework with investorsto arrive ata mutually agreeableresolution. Repurchaseandmake wholerequests

are typicallyreviewed onan individual loanby loan basis to validatethe claims madeby the investorand to determine if a

contractually requiredrepurchase or makewholeevent has occurred. We seek to reduce andmanage the risks ofpotential

repurchases, makewhole requests, or other claimsbymortgage loaninvestors throughour underwritingand quality

assurance practices andby servicingmortgage loansto meet investorand secondarymarketstandards.

The Companywas not required torepurchase anyloans duringthe first ninemonths of 2022 as aresult of representation

and warranty provisionscontained inthe Company’s sale agreementswith FannieMae, and hadno pending repurchaseor

make-wholerequests at September30, 2022.

We service all residential mortgageloans originatedandsold by us toFannie Mae.As servicer, our primaryduties areto:

(1) collect paymentsduefrom borrowers;(2) advancecertain delinquentpayments ofprincipaland interest;(3) maintain

and administerany hazard, title, orprimarymortgage insurancepolicies relating tothe mortgageloans;(4) maintainany

required escrow accountsfor paymentof taxes andinsurance andadminister escrow payments;and (5) foreclose on

defaulted mortgageloans or take other actionsto mitigate thepotential losses toinvestors consistentwiththe agreements

governing ourrights andduties as servicer.

The agreementunder whichwe act as servicer generallyspecifies standardsof responsibility for actionstakenby us insuch

capacity andprovidesprotection against expensesandliabilities incurred byus when actingin compliance withthe

respective servicingagreements.However,if we commit amaterial breach ofour obligationsas servicer, wemay be

subject to termination ifthe breachis not cured withina specified period followingnotice.Thestandards governing

servicing andthe possible remedies for violationsof suchstandardsare determinedby servicingguides issued byFannie

Mae as well asthe contract provisionsestablishedbetweenFannie Maeand theBank.Remedies could includerepurchase

of an affected loan.

Although repurchaseand makewhole requests related torepresentationandwarranty provisionsand servicingactivities

have beenlimited to date,it is possible thatrequests to repurchase mortgageloans or reimburseinvestors forlosses incurred

(make whole requests) mayincrease infrequency ifinvestors more aggressivelypursue allmeans of recoveringlosses on

their purchasedloans.As of September 30,2022, we donot believe thatthis exposure ismaterial dueto the historical level

of repurchase requests andloss trends, in additionto the fact that99%of our residential mortgageloans servicedfor Fannie

Mae werecurrent as of suchdate.We maintain ongoingcommunications withour investors andwill continue toevaluate

this exposure bymonitoring thelevel and numberof repurchase requests aswell asthe delinquencyrates in ourinvestor

portfolios.

The Banksells mortgage loansto FannieMae and services these onan actual/actualbasis. As a result, theBank is not

obligated tomake any advancesto Fannie Maeon principal andinterest on suchmortgage loanswhere the borrower is

entitled to forbearance.

Effects ofInflation andChanging Prices

The consolidated financialstatements andrelated consolidated financialdata presentedherein havebeen preparedin

accordance withGAAP and practices withinthe bankingindustry whichrequire the measurementof financialposition and

operating results interms of historical dollars withoutconsidering thechangesin the relativepurchasingpower of money

over time dueto inflation. Unlikemost industrialcompanies, virtuallyall the assets andliabilities of afinancialinstitution

are monetary innature. Asa result, interest rates havea more significantimpact ona financial institution’s performance

than the effects of general levelsof inflation.Inflation,however, could increase ournoninterest expenses,andFederal

Reserve monetarypolicy in response to inflationhasincreased marketinterest rates andaffected valuesof certain of our

assets andliabilities, includingour securities portfolio andmortgage servicingassets.

CURRENT ACCOUNTINGDEVELOPMENTS

The followingASUs have beenissued by theFASB but are not yet effective.

●

ASU 2016-13,

Financial Instruments– Credit Losses (Topic 326):Measurement of CreditLosses onFinancial

Instruments; and

49

●

ASU 2022-02,

Financial Instruments– Credit Losses (Topic 326):Troubled Debt Restructuringsand Vintage

Disclosures

Information aboutthese pronouncements is describedin more detailbelow.

ASU 2016-13,

Financial Instruments- Credit Losses (Topic 326): -Measurement of Credit Losseson Financial

Instruments

, amendsguidanceon reporting credit losses forassets heldat amortizedcost basis andavailable forsale debt

securities.For assets heldat amortizedcost basis, thenew standardeliminates the probableinitial recognition threshold in

current GAAPand, instead,requires anentity to reflect its current estimateof all expectedcredit losses usingabroader

range of informationregardingpast events, currentconditions andforecasts assessing thecollectability of cashflows. The

allowance for credit lossesis avaluation accountthat is deductedfrom the amortizedcost basis of thefinancialassets to

present the netamount expectedto be collected.For availablefor sale debt securities,credit losses shouldbe measuredin a

manner similarto current GAAP, howeverthe new standardwill require thatcredit losses be presentedas anallowance

rather than asa write-down.The new guidanceaffects entities holdingfinancialassets andnet investmentin leases that are

not accountedfor at fair valuethrough net income.Theamendments affect loans,debt securities, tradereceivables,net

investments inleases, off-balance sheetcredit exposures,reinsurance receivables,andany other financialassets not

excluded fromthe scope thathave the contractualright toreceive cash.For public businessentities, the newguidance was

originally effectivefor annual andinterim periods infiscal years beginningafter December 15, 2019.OnOctober 16, 2019,

the FASB approved apreviously issuedproposal grantingsmaller reportingcompanies apostponement of therequired

implementation datefor ASU 2016-13.TheCompany isrequired to implementthe new standardin January 2023, with

early adoptionpermitted inany period priorto that date.Institutions areto apply the changesthrough a cumulative-effect

adjustmentto retained earningsas of thebeginning of thefirst reporting periodin whichthe standardis effective.The

Company iscurrently assessing theimpact ofthe new guidanceon its consolidatedfinancialstatements. Anincrease in the

overall allowancefor loan losses is likelyuponadoption in order to providefor expected credit losses overthe life of the

loan portfolio.

ASU 2022-02,

Financial Instruments- Credit Losses (Topic 326): -Troubled Debt Restructuringsand Vintage

Disclosures,

eliminates theaccountingguidancefor troubled debtrestructurings (“TDRs”),while enhancingdisclosure

requirements for certain loanrefinancings andrestructurings bycreditors whena borrower is experiencingfinancial

difficulty.The newstandard is effective for fiscalyears, andinterim periods withinthose fiscal years, beginningafter

December 15, 2022.Thenew standard isnot expected to havea materialimpact onthe Company’s consolidated financial

tatements.

50

Table 1 – Explanation ofNon-GAAP Financial Measures

In addition toresults presented inaccordance withU.S. generallyaccepted accountingprinciples (GAAP),this quarterly

report on Form10-Q includes certaindesignatednet interest income amountspresented ona tax-equivalentbasis, a non-

GAAP financialmeasure, includingthe presentation andcalculation of theefficiency ratio.

The Companybelieves thepresentation of netinterest income onatax-equivalent basisprovides comparabilityof net

interest income from bothtaxableand tax-exemptsources and facilitates comparabilitywithinthe industry. Although the

Company believesthese non-GAAPfinancial measures enhanceinvestors’ understandingof its business andperformance,

these non-GAAPfinancial measures shouldnot be considered analternative to GAAP. The reconciliationsof these non-

GAAP financialmeasures to their most directlycomparable GAAPfinancialmeasures are presented below.

2022

2021

Third

Second

First

Fourth

Third

(in thousands)

Quarter

Quarter

Quarter

Quarter

Quarter

Net interest income (GAAP)

$

7,243

6,374

6,078

6,037

6,041

Tax-equivalent adjustment

117

110

112

115

117

Net interest income (Tax-equivalent)

$

7,360

6,484

6,190

6,152

6,158

Nine monthsended September30,

(In thousands)

2022

2021

Net interest income (GAAP)

$

19,695

17,953

Tax-equivalent adjustment

339

355

Net interest income (Tax-equivalent)

$

20,034

18,308

51

Table 2 - Selected Quarterly FinancialData

2022

2021

Third

Second

First

Fourth

Third

(Dollarsin thousands, exceptper shareamounts)

Quarter

Quarter

Quarter

Quarter

Quarter

Results of Operations

Net interest income(a)

$

7,360

6,484

6,190

6,152

6,158

Less: tax-equivalentadjustment

117

110

112

115

117

Net interest income(GAAP)

7,243

6,374

6,078

6,037

6,041

Noninterestincome

852

848

908

1,019

975

Total revenue

8,095

7,222

6,986

7,056

7,016

Provision for loanlosses

250

—

(250)

—

—

Noninterestexpense

5,415

5,058

4,901

5,092

4,755

Income tax expense

432

363

254

93

386

Net earnings

$

1,998

1,801

2,081

1,871

1,875

Per sharedata:

Basic anddiluted net earnings

$

0.57

0.51

0.59

0.53

0.53

Cash dividendsdeclared

0.265

0.265

0.265

0.26

0.26

Weightedaverage sharesoutstanding:

Basic anddiluted

3,507,318

3,513,353

3,518,657

3,524,311

3,536,320

Shares outstanding,at period end

3,505,355

3,509,940

3,516,971

3,520,485

3,529,338

Book value

$

17.06

21.68

24.57

29.46

29.73

Common stock price:

High

$

29.02

33.57

34.49

34.79

35.36

Low

23.02

27.04

31.75

31.32

33.25

Period end:

23.02

27.04

33.21

32.30

33.80

To earningsratio

10.46

x

12.52

14.44

14.23

14.57

To bookvalue

135

%

125

135

110

114

Performance ratios:

Return on averageequity

10.35

%

8.26

7.97

7.07

7.01

Return on averageassets

0.75

%

0.66

0.75

0.70

0.72

Dividend payoutratio

46.49

%

51.96

44.92

49.06

49.06

Asset Quality:

Allowance forloan lossesas a % of:

Loans

1.05

%

1.07

1.09

1.08

1.13

Nonperformingloans

1,431

%

1,314

1,256

1,112

1,053

Nonperformingassetsas a % of:

Loans and foreclosedproperties

0.07

%

0.08

0.17

0.18

0.11

Total assets

0.03

%

0.03

0.07

0.07

0.05

Nonperformingloans as a %of total loans

0.07

%

0.08

0.09

0.10

0.11

Annualizednet (recoveries) charge-offs as % ofaverage loans

—

%

(0.05)

0.03

0.16

(0.01)

Capital Adequacy:(c)

CET 1 risk-basedcapital ratio

15.39

%

16.59

17.26

16.23

16.82

Tier 1risk-based capital ratio

15.39

%

16.59

17.26

16.23

16.82

Total risk-basedcapital ratio

16.16

%

17.38

18.08

17.06

17.72

Tier 1leverage ratio

9.29

%

9.16

9.09

9.35

9.57

Other financialdata:

Net interest margin(a)

3.00

%

2.60

2.43

2.45

2.51

Effective incometax rate

17.78

%

16.77

10.88

4.74

17.07

Efficiencyratio (b)

65.94

%

68.99

69.05

71.01

66.66

Selected averagebalances:

Securities

$

432,393

427,426

435,097

414,061

395,529

Loans, net of unearnedincome

457,722

428,612

439,713

455,726

452,668

Total assets

1,069,973

1,092,759

1,114,407

1,073,564

1,040,985

Total deposits

987,614

999,867

1,003,394

961,544

927,368

Total stockholders’equity

77,191

87,247

104,493

105,925

106,936

Selected periodend balances:

Securities

$

411,538

429,220

417,459

421,891

407,474

Loans, net of unearnedincome

474,035

440,872

428,417

458,364

453,232

Allowance forloan losses

4,966

4,716

4,658

4,939

5,119

Total assets

1,042,559

1,084,251

1,109,664

1,105,150

1,065,871

Total deposits

977,938

1,002,698

1,017,742

994,243

954,971

Total stockholders’equity

59,793

76,107

86,411

103,726

104,929

(a) Tax-equivalent.See "Table1 - Explanationof Non-GAAP FinancialMeasures."

(b) Efficiencyratio is the resultof noninterestexpense divided by thesum of noninterestincome and tax-equivalentnet interest income.See

"Table1 - Explanationof Non-GAAPFinancial Measures."

(c) Regulatorycapital ratios presentedare for the Company'swholly-owned subsidiary,AuburnBank.

52

Table 3 - Selected Financial Data

Nine monthsended September30,

(Dollarsin thousands, exceptper shareamounts)

2022

2021

Results of Operations

Net interest income(a)

$

20,034

18,308

Less: tax-equivalentadjustment

339

355

Net interest income(GAAP)

19,695

17,953

Noninterestincome

2,608

3,288

Total revenue

22,303

21,241

Provision for loanlosses

—

(600)

Noninterestexpense

15,374

14,361

Income tax expense

1,049

1,313

Net earnings

$

5,880

6,167

Per sharedata:

Basic anddiluted net earnings

$

1.67

1.74

Cash dividendsdeclared

0.795

0.78

Weightedaverage sharesoutstanding:

Basic anddiluted

3,513,068

3,552,387

Shares outstanding,at period end

3,505,355

3,529,338

Book value

$

17.06

29.73

Common stock price:

High

$

34.49

48.00

Low

23.02

33.25

Period end

23.02

33.80

To earningsratio

10.46

x

14.57

To bookvalue

135

%

114

Performance ratios:

Return on averageequity

8.76

%

7.70

Return on averageassets

0.72

%

0.81

Dividend payoutratio

47.60

%

44.83

Asset Quality:

Allowance forloan lossesas a % of:

Loans

1.05

%

1.13

Nonperformingloans

1,431

%

1,053

Nonperformingassetsas a % of:

Loans and otherreal estateowned

0.07

%

0.11

Total assets

0.03

%

0.05

Nonperformingloans as a %of total loans

0.07

%

0.11

Annualizednet recoveries asa % of averageloans

(0.01)

%

(0.03)

Capital Adequacy:(c)

CET 1 risk-basedcapital ratio

15.39

%

16.82

Tier 1risk-based capital ratio

15.39

%

16.82

Total risk-basedcapital ratio

16.16

%

17.72

Tier 1leverage ratio

9.29

%

9.57

Other financialdata:

Net interest margin(a)

2.67

%

2.59

Effective incometax rate

15.14

%

17.55

Efficiencyratio (b)

67.90

%

66.50

Selected averagebalances:

Securities

$

431,629

373,203

Loans, net of unearnedincome

442,081

458,882

Total assets

1,092,216

1,009,131

Total deposits

996,900

895,342

Total stockholders’equity

89,544

106,798

Selected periodend balances:

Securities

$

411,538

407,474

Loans, netof unearned income

474,035

453,232

Allowance forloan losses

4,966

5,119

Total assets

1,042,559

1,065,871

Total deposits

977,938

954,971

Total stockholders’equity

59,793

104,929

(a) Tax-equivalent.See "Table1 - Explanationof Non-GAAP FinancialMeasures."

(b) Efficiencyratio is the resultof noninterestexpense divided by thesum of noninterestincome and tax-equivalentnet interest income.See

"Table1 - Explanationof Non-GAAPFinancial Measures."

(c) Regulatorycapital ratios presentedare for the Company'swholly-owned subsidiary,AuburnBank.

53

Table 4 - Average Balances and NetInterest Income Analysis

Quarter endedSeptember30,

2022

2021

Interest

Interest

Average

Income/

Yield/

Average

Income/

Yield/

(Dollarsin thousands)

Balance

Expense

Rate

Balance

Expense

Rate

Interest-earning assets:

Loans and loansheld for sale (1)

$

457,861

$

5,097

4.42%

$

453,649

$

5,127

4.48%

Securities - taxable

369,202

1,808

1.94%

332,474

1,048

1.25%

Securities - tax-exempt (2)

63,191

558

3.50%

63,055

558

3.51%

Total securities

432,393

2,366

2.17%

395,529

1,606

1.61%

Federal fundssold

38,994

200

2.03%

40,995

16

0.15%

Interest bearingbank deposits

45,343

226

1.98%

82,878

33

0.16%

Total interest-earningassets

974,591

$

7,889

3.21%

973,051

$

6,782

2.77%

Cash and duefrom banks

14,503

14,326

Other assets

80,879

53,608

Total assets

$

1,069,973

$

1,040,985

Interest-bearing liabilities:

Deposits:

NOW

$

195,655

$

70

0.14%

$

182,417

$

51

0.11%

Savings andmoney market

328,555

163

0.20%

300,746

167

0.22%

Time deposits

151,785

291

0.76%

159,423

402

1.00%

Total interest-bearingdeposits

675,995

524

0.31%

642,586

620

0.38%

Short-term borrowings

3,759

5

0.50%

3,454

4

0.50%

Total interest-bearingliabilities

679,754

$

529

0.31%

646,040

$

624

0.38%

Noninterest-bearing deposits

311,619

284,781

Other liabilities

1,409

3,228

Stockholders' equity

77,191

106,936

Total liabilities and stockholders' equity

$

1,069,973

$

1,040,985

Net interest income andmargin (tax-equivalent)

$

7,360

3.00%

$

6,158

2.51%

(1) Average loan balancesare shown netof unearnedincome and loanson nonaccrualstatus have been included

in the computationof averagebalances.

(2) Yields on tax-exemptsecurities havebeen computedon a tax-equivalentbasis using a federal income

tax rate of 21%.

54

Table 5 - Average Balances and NetInterest Income Analysis

Nine monthsended September30,

2022

2021

Interest

Interest

Average

Income/

Yield/

Average

Income/

Yield/

(Dollarsin thousands)

Balance

Expense

Rate

Balance

Expense

Rate

Interest-earning assets:

Loans and loansheld for sale (1)

$

442,613

$

14,638

4.42%

$

460,732

$

15,417

4.47%

Securities - taxable

370,402

4,691

1.69%

310,288

3,006

1.30%

Securities - tax-exempt (2)

61,227

1,614

3.52%

62,915

1,692

3.60%

Total securities

431,629

6,305

1.95%

373,203

4,698

1.68%

Federal fundssold

54,924

313

0.76%

36,821

39

0.14%

Interest bearingbank deposits

73,630

454

0.82%

75,170

66

0.12%

Total interest-earningassets

1,002,796

$

21,710

2.89%

945,926

$

20,220

2.86%

Cash and duefrom banks

15,029

14,345

Other assets

74,391

48,860

Total assets

$

1,092,216

$

1,009,131

Interest-bearing liabilities:

Deposits:

NOW

$

201,792

$

189

0.13%

$

176,242

$

161

0.12%

Savings andmoney market

335,005

494

0.20%

289,758

488

0.23%

Time deposits

155,824

978

0.84%

159,412

1,251

1.05%

Total interest-bearingdeposits

692,621

1,661

0.32%

625,412

1,900

0.41%

Short-term borrowings

3,969

15

0.50%

3,329

12

0.50%

Total interest-bearingliabilities

696,590

$

1,676

0.32%

628,741

$

1,912

0.41%

Noninterest-bearing deposits

304,279

269,930

Other liabilities

1,803

3,662

Stockholders' equity

89,544

106,798

Total liabilities and stockholders' equity

$

1,092,216

$

1,009,131

Net interest income andmargin (tax-equivalent)

$

20,034

2.67%

$

18,308

2.59%

(1) Average loan balancesare shown netof unearnedincome and loanson nonaccrual statushave been included

in the computationof averagebalances.

(2) Yields on tax-exemptsecurities havebeen computedon a tax-equivalentbasis using a federal income

tax rate of 21%.

55

Table 6 - Allocation of Allowance forLoanLosses

2022

2021

Third Quarter

Second Quarter

First Quarter

Fourth Quarter

Third Quarter

(Dollarsin thousands)

Amount

%*

Amount

%*

Amount

%*

Amount

%*

Amount

%*

Commercial andindustrial

$

732

14.9

$

761

15.9

$

774

17.1

$

857

18.3

$

816

17.4

Construction andland

development

789

11.5

576

8.8

508

7.7

518

7.1

590

7.7

Commercial real estate

2,561

52.7

2,523

54.4

2,536

54.8

2,739

56.2

2,823

55.6

Residential real estate

783

19.3

753

19.3

737

18.4

739

16.9

799

17.7

Consumer installment

101

1.6

103

1.6

103

2.0

86

1.5

91

1.6

Total allowance for

loan losses

$

4,966

$

4,716

$

4,658

$

4,939

$

5,119

* Loan balancein each category expressedas apercentage of totalloans.

56

Table 7 – Estimated Uninsured TimeDeposits byMaturity

(Dollarsin thousands)

September30, 2022

Maturity of:

3 months or less

$

17,778

Over 3 monthsthrough 6 months

11,792

Over 6 monthsthrough 12 months

4,496

Over 12 months

5,458

Total estimated uninsuredtime deposits

$

39,524

57

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUTMARKETRISK

The information calledfor byITEM 3 is set forth inITEM 2 under thecaption “MARKETAND LIQUIDITYRISK

MANAGEMENT”and is incorporated hereinbyreference.

ITEM 4. CONTROLSAND PROCEDURES

The Company, with theparticipation of itsmanagement,including itsChief ExecutiveOfficer and Chief FinancialOfficer,

carried out anevaluationof the effectiveness of the designandoperation of its disclosure controlsandprocedures (as

defined inRules 13a-15(e) and15d-15(e) under theSecurities ExchangeAct of 1934, asamended)as of the end ofthe

period coveredby this report. Basedupon thatevaluation andas of the end ofthe periodcovered by thisreport, the

Company’s ChiefExecutive Officer andChief Financial Officer concludedthatthe Company’sdisclosure controls and

procedures were effectiveto allow timelydecisions regardingdisclosure in itsreports that theCompanyfiles or submits to

the Securities andExchangeCommission underthe Securities ExchangeAct of 1934, asamended. Therehave been no

changes in theCompany’s internalcontrol over financialreporting thatoccurred during theperiod coveredby this report

that have materiallyaffected, or are reasonablylikely to materiallyaffect, the Company’sinternal control overfinancial

reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGALPROCEEDINGS

In the normalcourse of its business, theCompanyand the Bankare, from time to time,involvedin legal proceedings. The

Company’s and Bank’s managementbelieve there areno pending orthreatened legal,governmental, orregulatory

proceedings that,upon resolution, areexpected to havea material adverseeffect upon theCompany’s or the Bank’s

financialcondition or results of operations.See also,Part I,Item 3 of the Company’sAnnual Reporton Form 10-Kfor the

year ended December 31,2021.

ITEM 1A.RISK FACTORS

In addition tothe other informationset forth inthis report, you shouldcarefully consider the factorsdiscussed inPart I,

Item 1A. “RISKFACTORS” in the Company’sAnnual Reporton Form 10-Kfor the yearended December 31, 2021,

which couldmaterially affect our business,financialcondition or futureresults. Therisks described inour annual report on

Form 10-Kare not theonly the risksfacing our Company.Increases in inflationandthe resulting tighteningof Federal

Reserve monetarypolicy by increased targetinterest rates,hasand is expected to continueto affect mortgageoriginations

and income andthe market valuesof our securities portfolio.Thesecould also affect ourdeposit, costs andmixes, and

change consumersavingsand payment behaviors.Additional risks anduncertainties not currentlyknownto us or that we

currently deemto be immaterial alsomay materiallyadverselyaffect our business, financialcondition, and/oroperating

results in thefuture.

58

ITEM 2.UNREGISTEREDSALES OFEQUITY SECURITIESAND USE OFPROCEEDS

The Company’s repurchasesof its common stockduringthe third quarterof 2022 were asfollows:

Period

Total Number of

Shares Purchased

Average Price

Paid per Share

Total Number of

Shares Purchasedas

Part of Publicly

Announced Plansor

Programs

ApproximateDollar

Value of Shares that

May Yet Be

Purchased Underthe

Plans or Programs

(1)

July 1 - July 31, 2022

658

27.53

658

4,769,664

August 1 - August 31, 2022

3,982

27.72

3,982

4,659,289

September 1 - September 30, 2022

—

—

—

4,659,289

Total

4,640

27.69

4,640

4,659,289

(1)

On April 12, 2022, the Company adopted a new $5 million stock repurchase program that became effective April 12, 2022.

ITEM 3.DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4.MINE SAFETYDISCLOSURES

Not applicable.

ITEM 5.OTHER INFORMATION

Not applicable.

59

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 InstanceDocument

101.SCH

XBRL Taxonomy ExtensionSchema Document

101.CAL

XBRL Taxonomy ExtensionCalculation LinkbaseDocument

101.LAB

XBRL Taxonomy ExtensionLabel LinkbaseDocument

101.PRE

XBRL Taxonomy ExtensionPresentation LinkbaseDocument

101.DEF

XBRL Taxonomy ExtensionDefinition LinkbaseDocument

104

Cover PageInteractive DataFile (formatted asinline XBRL andcontained inExhibit 101)

*

Incorporated byreference from Registrant’s Form10-Q datedJune 30,2002.

**

Incorporated byreference from Registrant’s Form10-K datedMarch 31,2008.

***

The certifications attachedas exhibits32.1 and32.2 to this quarterlyreport on Form10-Q are“furnished” tothe

Securities andExchange Commission pursuantto Section 906 of the Sarbanes-OxleyAct of 2002 andshall not be

deemed “filed”by the Company forpurposes of Section18 of theSecurities ExchangeAct of 1934, asamended.

60

SIGNATURES

Pursuantto the requirements of theSecurities ExchangeAct of 1934, theregistrant hasduly causedthisreportto

be signed onits behalf by theundersigned thereuntoduly authorized.

AUBURN NATIONAL BANCORPORATION,INC.

(Registrant)

Date:November 9,2022

By:/s/ Robert W. Dumas

Robert W. Dumas

Chairman, President andCEO

Date:November 9,2022

By:/s/ David A.Hedges

David A. Hedges

Executive Vice President andChief FinancialOfficer