Auburn National Bancorporation 10Q 2023 Q1 Quarterly report

Table of Contents

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

March 31, 2023

☐

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

For the transition period __________ to __________

Commission File Number:

0-26486

Auburn National Bancorporation, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Delaware

(State or other jurisdiction of

incorporation or organization)

63-0885779

(I.R.S. Employer

Identification No.)

100 N. Gay Street

Auburn

Alabama

36830

(

334

)

821-9200

(Address and telephone number of principal executive offices)

(Former Name, Former Address and Former Fiscal

Year,

if Changed Since Last Report)

Indicate

check

mark

whether

the

registrant

(1) has

filed

all

reports

required

filed

Section 13

15(d)

the

Securities

Exchange Act

of 1934

during the

preceding 12 months

(or for

such shorter

period that

the registrant

was required

to file

such reports),

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

Yes

☒

☐

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

☒

☐

Indicate by check

mark whether the

registrant is a

large accelerated filer,

an accelerated filer,

a non-accelerated filer,

a smaller reporting

company

emerging

growth

company.

See

the

definitions

“large

accelerated

filer,”

“accelerated

filer,”

“smaller

reporting

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

Large Accelerated filer

☐

Accelerated filer

☐

Non-accelerated filer

☒

Smaller reporting company

☒

Emerging growth company

☐

emerging

growth

company,

indicate

check

mark

the

registrant

has

elected

not

use

the

extended

transition

period

for

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

☐

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

☐

☒

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.01

AUBN

NASDAQ

Global Market

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

Class

Outstanding at May 4, 2023

Common Stock, $0.01 par value per share

3,500,376

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AUBURN NATIONAL BANCORPORATION, INC. AND

SUBSIDIARIES

INDEX

PART I. FINANCIAL INFORMATION

PAGE

Item 1

Financial Statement

Consolidated Balance Sheets (Unaudited) as of March 31, 2023 and December 31, 2022

Consolidated Statements of Earnings (Unaudited) for the quarters ended March 31, 2023 and 2022

Consolidated Statements of Comprehensive Income (Loss) (Unaudited) for the quarters ended March

31, 2023 and 2022

Consolidated Statements of Stockholders’ Equity (Unaudited) for the quarters ended March 31, 2023

and 2022

Consolidated Statements of Cash Flows (Unaudited) for the quarters ended March 31, 2023 and 2022

Notes to Consolidated Financial Statements (Unaudited

)

Item 2

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Table 1 – Explanation of Non -GAAP Financial Measures

Table 2 – Selected Quarterly Financial Data

Table 3 – Average Balances and Net Interest Income Analysis for the quarters ended March 31, 2023

and 2022

Table 4 – Allocation of Allowance for Credit Losses

Table 5 – Estimated Uninsured Time Deposits by Maturity

Item 3

Quantitative and Qualitative Disclosures About Market Risk

Item 4

Controls and Procedures

PART II. OTHER INFORMATION

Item 1

Legal Proceedings

Item 1A

Risk Factors

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

Item 3

Defaults Upon Senior Securities

Item 4

Mine Safety Disclosures

Item 5

Other Information

Item 6

Exhibits

Table of Contents

PART

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

AUBURN NATIONAL

BANCORPORATION,

INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Unaudited)

March 31,

December 31,

(Dollars in thousands, except share data)

2023

2022

Assets:

Cash and due from banks

17,083

11,608

Federal funds sold

1,951

9,300

Interest-bearing bank deposits

6,822

6,346

Cash and cash equivalents

25,856

27,254

Securities available-for-sale

405,692

405,304

Loans

505,041

504,458

Allowance for credit losses

(6,821)

(5,765)

Loans, net

498,220

498,693

Premises and equipment, net

46,222

46,575

Bank-owned life insurance

19,893

19,952

Other assets

21,863

26,110

Total assets

1,017,746

1,023,888

Liabilities:

Deposits:

Noninterest-bearing

304,164

311,371

Interest-bearing

635,026

638,966

Total deposits

939,190

950,337

Federal funds purchased and securities sold under agreements to repurchase

2,457

2,551

Accrued expenses and other liabilities

2,459

2,959

Total liabilities

944,106

955,847

Stockholders' equity:

Preferred stock of $

.01

par value; authorized

200,000

shares;

no shares issued

—

Common stock of $

.01

par value; authorized

8,500,000

shares;

issued

3,957,135

Additional paid-in capital

3,798

3,797

Retained earnings

116,798

116,600

Accumulated other comprehensive loss, net

(35,457)

(40,920)

Less treasury stock, at cost -

456,256

shares and

453,683

at March 31, 2023

and December 31, 2022, respectively

(11,538)

(11,475)

Total stockholders’ equity

73,640

68,041

Total liabilities and stockholders’

equity

1,017,746

1,023,888

See accompanying notes to consolidated financial statements

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AUBURN NATIONAL

BANCORPORATION,

INC. AND SUBSIDIARIES

Consolidated Statements of Earnings

(Unaudited)

Quarter ended March 31,

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

2023

2022

Interest income:

Loans, including fees

5,754

4,850

Securities

Taxable

1,865

1,336

Tax-exempt

403

419

Federal funds sold and interest bearing bank deposits

213

Total interest income

8,235

6,668

Interest expense:

Deposits

1,118

585

Short-term borrowings

Total interest expense

1,126

590

Net interest income

7,109

6,078

Provision for (recoveries of) credit losses

(250)

Net interest income after provision for credit

losses

7,043

6,328

Noninterest income:

Service charges on deposit accounts

154

142

Mortgage lending

253

Bank-owned life insurance

156

Other

389

414

Total noninterest income

792

908

Noninterest expense:

Salaries and benefits

2,927

2,950

Net occupancy and equipment

799

434

Professional fees

338

230

Other

1,540

1,287

Total noninterest expense

5,604

4,901

Earnings before income taxes

2,231

2,335

Income tax expense

267

254

Net earnings

1,964

2,081

Net earnings per share:

Basic and diluted

0.56

0.59

Weighted average shares

outstanding:

Basic and diluted

3,502,143

3,518,657

See accompanying notes to consolidated financial statements

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AUBURN NATIONAL

BANCORPORATION,

INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(Unaudited)

Quarter ended March 31,

(Dollars in thousands)

2023

2022

Net earnings

1,964

2,081

Other comprehensive income (loss), net of tax:

Unrealized net holding gain (loss) on securities

5,463

(18,346)

Other comprehensive income (loss)

5,463

(18,346)

Comprehensive income (loss)

7,427

(16,265)

See accompanying notes to consolidated financial statements

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AUBURN NATIONAL

BANCORPORATION,

INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders' Equity

(Unaudited)

Accumulated

Common

Additional

other

Common

paid-in

Retained

comprehensive

Treasury

(Dollars in thousands, except share data)

Outstanding

Stock

capital

earnings

income (loss)

stock

Total

Quarter ended March 31, 2023

Balance, December 31, 2022

3,503,452

3,797

116,600

(40,920)

(11,475)

68,041

Cumulative effect of change in accounting

standard

—

(821)

—

(821)

Net earnings

—

1,964

—

1,964

Other comprehensive income

—

5,463

—

5,463

Cash dividends paid ($

.27

per share)

—

(945)

—

(945)

Stock repurchases

(2,648)

—

(64)

Sale of treasury stock

—

Balance, March 31, 2023

3,500,879

3,798

116,798

(35,457)

(11,538)

73,640

Quarter ended March 31, 2022

Balance, December 31, 2021

3,520,485

3,794

109,974

891

(10,972)

103,726

Net earnings

—

2,081

—

2,081

Other comprehensive loss

—

(18,346)

—

(18,346)

Cash dividends paid ($

.265

per share)

—

(932)

—

(932)

Stock repurchases

(3,559)

—

(120)

Sale of treasury stock

—

Balance, March 31, 2022

3,516,971

3,795

111,123

(17,455)

(11,091)

86,411

See accompanying notes to consolidated financial statements

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AUBURN NATIONAL

BANCORPORATION,

INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

Three months ended March 31,

(Dollars in thousands)

2023

2022

Cash flows from operating activities:

Net earnings

1,964

2,081

Adjustments to reconcile net earnings to net cash provided by

operating activities:

Provision for (reversal of) credit losses

(250)

Depreciation and amortization

423

244

Premium amortization and discount accretion, net

612

909

Net gain on sale of loans held for sale

(4)

(229)

Loans originated for sale

—

(5,792)

Proceeds from sale of loans

—

6,366

Increase in cash surrender value of bank-owned life insurance

(104)

(99)

Income recognized from death benefit on bank-owned life insurance

(52)

—

Net decrease (increase) in other assets

4,420

(5,161)

Net (decrease) increase in accrued expenses and other liabilities

(2,434)

3,938

Net cash provided by operating activities

4,891

2,007

Cash flows from investing activities:

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

6,296

19,523

Purchase of securities available-for-sale

—

(40,498)

(Increase) decrease in loans, net

(586)

29,916

Net purchases of premises and equipment

(5)

(549)

Proceeds from bank-owned life insurance death benefit

215

—

Decrease (increase) in FHLB stock

(74)

Net cash provided by investing activities

5,961

8,318

Cash flows from financing activities:

Net decrease in noninterest-bearing deposits

(7,207)

(7,794)

Net (decrease) increase in interest-bearing deposits

(3,940)

31,293

Net (decrease) increase in federal funds purchased and securities sold

under agreements to repurchase

(94)

546

Stock repurchases

(64)

(120)

Dividends paid

(945)

(932)

Net cash (used in) provided by financing activities

(12,250)

22,993

Net change in cash and cash equivalents

(1,398)

33,318

Cash and cash equivalents at beginning of period

27,254

156,259

Cash and cash equivalents at end of period

25,856

189,577

Supplemental disclosures of cash flow information:

Cash paid during the period for:

Interest

877

609

Income taxes

—

See accompanying notes to consolidated financial statements

Table of Contents

AUBURN NATIONAL

BANCORPORATION,

INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING

POLICIES

General

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

to individuals and

commercial customers in Lee County,

Alabama and surrounding areas through its wholly owned subsidiary,

AuburnBank

(the “Bank”). The Company does not have any segments other than banking that are considered

material.

Basis of Presentation and Use of Estimates

The unaudited consolidated financial statements in this report have been prepared

in accordance with U.S. generally

accepted accounting principles (“GAAP”) for interim financial information.

Accordingly, these financial statements

do not

include all of the information and footnotes required by U.S. GAAP for complete financial

statements.

The unaudited

consolidated financial statements include, in the opinion of management, all adjustments

necessary to present a fair

statement of the financial position and the results of operations for all periods presented.

All such adjustments are of a

normal recurring nature. The results of operations in the interim statements are not

necessarily indicative of the results of

operations that the Company and its subsidiaries may achieve for future interim periods

or the entire year. For further

information, refer to the consolidated financial statements and footnotes included

in the Company's Annual Report on Form

10-K for the year ended December 31, 2022.

The unaudited consolidated financial statements include the accounts of the

Company and its wholly-owned subsidiaries.

Significant intercompany transactions and accounts are eliminated in consolidation.

The preparation of financial statements in conformity with U.S. GAAP requires

management to make estimates and

assumptions that affect the reported amounts of assets and liabilities and disclosures

of contingent assets and liabilities as of

the balance sheet date and the reported amounts of revenues and expenses during the reporting period.

Actual results could

differ from those estimates.

Material estimates that are particularly susceptible to significant change in the near term

include the determination of allowance for credit losses investment securities, the

determination of the allowance for credit

losses on loans, fair value of financial instruments, and the valuation of deferred

tax assets and other real estate owned

(“OREO”).

Revenue Recognition

On January 1, 2018, the Company implemented Accounting Standards Update

(“ASU”

or “updates”) 2014-09,

Revenue

from Contracts with Customers

, codified at

Accounting Standards Codification

(“ASC”)

606. The Company adopted ASC

606 using the modified retrospective transition method.

The majority of the Company’s revenue stream

is generated from

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

The Company’s sources of income that

fall within the scope of ASC 606 include service charges on deposits, interchange

fees and gains and losses on sales of other real estate, all of which are presented as components of

noninterest income. The

following is a summary of the revenue streams that fall within the scope of ASC 606:

●

Service charges on deposits, investment services, ATM

and interchange fees – Fees from these services are either

transaction-based, for which the performance obligations are satisfied

when the individual transaction is processed,

or set periodic service charges, for which the performance obligations are

satisfied over the period the service is

provided. Transaction-based fees are recognized at the time

the transaction is processed, and periodic service

charges are recognized over the service period.

●

Gains on sales of OREO

–

A gain on sale should be recognized when a contract for sale exists and control of the

asset has been transferred to the buyer.

ASC 606 lists several criteria required to conclude that a contract for sale

exists, including a determination that the institution will collect substantially all of the consideration

to which it is

entitled.

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

including the credit

quality of the borrower, the structure of the loan, and any other

factors that we believe may affect collectability.

Table of Contents

Subsequent Events

The Company has evaluated the effects of events and transactions through

the date of this filing that have occurred

subsequent to March 31, 2023.

The Company does not believe there were any material subsequent events during this

period that would have required

further recognition or disclosure in the unaudited consolidated financial statements

included in this report except as

reported in Note 8, Subsequent Events.

Reclassifications

Certain amounts reported in prior periods have been reclassified to conform to the current

-period presentation. These

reclassifications had no material effect on the Company’s

previously reported net earnings or total stockholders’ equity.

Accounting Standards Adopted in 2023

On January 1, 2023, the Company adopted ASU 2016-13 Financial Instruments – Credit

Losses (Topic 326):

Measurement

of Credit Losses on Financial Instruments (ASC 326). This standard replaced

the incurred loss methodology with an

expected loss methodology that is referred to as the current expected credit loss (“CECL”)

methodology. CECL requires

estimate of credit losses for the remaining estimated life of the financial asset using historical

experience, current

conditions, and reasonable and supportable forecasts and generally applies to

financial assets measured at amortized cost,

including loan receivables and held-to-maturity debt securities, and some off

-balance sheet credit exposures such as

unfunded commitments to extend credit. Financial assets measured at amortized

cost will be presented at the net amount

expected to be collected by using an allowance for credit losses.

In addition, CECL made changes to the accounting for available for sale debt

securities. One such change is to require

credit losses to be presented as an allowance rather than as a write-down on available for sale debt

securities if management

does not intend to sell and does not believe that it is more likely than not, they will be required

to sell.

The Company adopted ASC 326 and all related subsequent amendments thereto

effective January 1, 2023 using the

modified retrospective approach for all financial assets measured at amortized

cost and off-balance sheet credit exposures.

The transition adjustment upon the adoption of CECL on January 1, 2023 included

an increase in the allowance for credit

losses on loans of $

1.0

million, which is presented as a reduction to net loans outstanding, and an increase in the allowance

for credit losses on unfunded loan commitments of $

0.1

million, which is recorded within other liabilities. The Company

recorded a net decrease to retained earnings of $0.8 million as of January 1, 2023

for the cumulative effect of adopting

CECL, which reflects the transition adjustments noted above, net of the applicable deferred

tax assets recorded. Results for

reporting periods beginning after January 1, 2023 are presented under CECL while prior

period amounts continue to be

reported in accordance with previously applicable accounting standards.

The Company adopted ASC 326 using the prospective transition approach for debt

securities for which other-than-

temporary impairment had been recognized prior to January 1, 2023.

As of December 31, 2022, the Company did not have

any other-than-temporarily impaired investment securities. Therefore,

upon adoption of ASC 326, the Company determined

that an allowance for credit losses on available for sale securities was not deemed

material.

The Company elected not to measure an allowance for credit losses for accrued interest receivable

and instead elected to

reverse interest income on loans or securities that are placed on nonaccrual status,

which is generally when the instrument is

90 days past due, or earlier if the Company believes the collection of interest is doubtful. The Company

has concluded that

this policy results in the timely reversal of uncollectible interest.

The Company also adopted ASU 2022-02, “Financial Instruments - Credit Losses (Topic

326): Troubled Debt

Restructurings and Vintage Disclosures”

on January 1, 2023, the effective date of the guidance, on a prospective basis.

ASU 2022-02 eliminated the accounting guidance for TDRs, while enhancing disclosure requirements

for certain loan

refinancings and restructurings by creditors when a borrower is experiencing

financial difficulty.

Specifically, rather than

applying the recognition and measurement guidance for TDRs, an entity

must apply the loan refinancing and restructuring

guidance to determine whether a modification results in a new loan or a continuation of an

existing loan. Additionally,

ASU

2022-02 requires an entity to disclose current-period gross write-offs

by year of origination for financing receivables within

the scope of Subtopic 326-20, Financial Instruments—Credit Losses—Measured at

Amortized Cost. ASU 2022-02 did not

have a material impact on the Company’s consolidated

financial statements.

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Loans

Loans that management has the intent and ability to hold for the foreseeable

future or until maturity or payoff are reported

at amortized cost. Amortized cost is the principal balance outstanding, net of purchase premiums

and discounts and

deferred fees and costs. Accrued interest receivable related to loans is recorded

in other assets on the consolidated balance

sheets. Interest income is accrued on the unpaid principal balance. Loan origination fees,

net of certain direct origination

costs, are deferred and recognized in interest income using methods that approximate a

level yield without anticipating

prepayments.

The accrual of interest is generally discontinued when a loan becomes 90 days past due and

is not well collateralized and in

the process of collection, or when management believes, after considering economic and

business conditions and collection

efforts, that the principal or interest will not be collectible in the normal course

of business. Past due status is based on

contractual terms of the loan. A loan is considered to be past due when a scheduled payment has

not been received 30 days

after the contractual due date.

All accrued interest is reversed against interest income when a loan is placed on nonaccrual

status. Interest received on such

loans is accounted for using the cost-recovery method, until qualifying for return to accrual.

Under the cost-recovery

method, interest income is not recognized until the loan balance is reduced to

zero. Loans are returned to accrual status

when all the principal and interest amounts contractually due are brought current, there is a

sustained period of repayment

performance, and future payments are reasonably assured.

Allowance for Credit Losses – Loans

The allowance for credit losses is a valuation account that is deducted from the loans' amortized

cost basis to present the net

amount expected to be collected on the loans. Loans are charged

off against the allowance when management believes the

uncollectibility of a loan balance is confirmed. Expected recoveries do not exceed the aggregate

of amounts previously

charged-off and expected to be charged-off.

Accrued interest receivable is excluded from the estimate of credit losses.

The allowance for credit losses represents management’s

estimate of lifetime credit losses inherent in loans as of the

balance sheet date. The allowance for credit losses is estimated by management using relevant

available information, from

both internal and external sources, relating to past events, current conditions, and reasonable and

supportable forecasts.

The Company’s loan loss estimation process includes

procedures to appropriately consider the unique characteristics of

its

loan segments (commercial and industrial, construction and land development,

commercial real estate, multifamily,

residential real estate, and consumer loans).

These segments are further disaggregated into loan classes, the level at which

credit quality is monitored.

See Note 5, Loans and Allowance for Credit Losses for additional information about our loan

portfolio.

Credit loss assumptions are estimated using a discounted cash flow ("DCF") model

for each loan segment,

except consumer

loans.

The weighted average remaining life method is used to estimate credit loss assumptions

for consumer loans.

The DCF model calculates an expected life-of-loan loss percentage by considering the

forecasted probability that a

borrower will default (the “PD”), adjusted for relevant forecasted macroeconomic

factors, and LGD, which is the estimate

of the amount of net loss in the event of default.

This model utilizes historical correlations between default experience and

certain macroeconomic factors as determined through a statistical regression analysis.

The forecasted Alabama

unemployment rate is considered in the model for commercial and industrial,

construction and land development,

commercial real estate,

multifamily, and residential real estate

loans.

In addition, forecasted changes in the Alabama home

price index is considered in the model for construction and land development and residential

real estate loans; forecasted

changes in the national commercial real estate (“CRE”) price index is considered in the

model for commercial real estate

and multifamily loans; and forecasted changes in the Alabama gross state product

is considered in the model for

multifamily loans.

Projections of these macroeconomic factors, obtained from an independent

third party, are utilized to

predict quarterly rates of default based on the statistical PD models.

Expected credit losses are estimated over the contractual term of the loan, adjusted for

expected prepayments and principal

payments (“curtailments”) when appropriate. Management's determination

of the contract term excludes expected

extensions, renewals, and modifications unless the extension or

renewal option is included in the contract at the reporting

date and is not unconditionally cancellable by the Company.

To the extent the lives of the

loans in the portfolio extend

beyond the period for which a reasonable and supportable forecast can be

made (which is 4 quarters for the Company), the

Company reverts, on a straight-line basis back to the historical rates over an 8 quarter

reversion period.

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The weighted average remaining life method was deemed most appropriate

for the consumer loan segment because

consumer loans contain many different payment structures,

payment streams and collateral.

The weighted average

remaining life method uses an annual charge-off rate over several vintages

to estimate credit losses.

The average annual

charge-off rate is applied to the contractual term adjusted for prepayments.

Additionally, the allowance

for credit losses calculation includes subjective adjustments for qualitative risk

factors that are

believed likely to cause estimated credit losses to differ from

historical experience. These qualitative adjustments may

increase or reduce reserve levels and include adjustments for lending management experience

and risk tolerance, loan

review and audit results, asset quality and portfolio trends, loan portfolio growth, industry concentrations,

trends in

underlying collateral, external factors and economic conditions not already captured.

Loans that do not share risk characteristics are evaluated on an individual basis. When

management determines that

foreclosure is probable and the borrower is experiencing financial difficulty,

the expected credit losses are based on the

estimated fair value of collateral held at the reporting date, adjusted for selling costs as

appropriate.

Allowance for Credit Losses – Unfunded Commitments

Financial instruments include off-balance sheet credit instruments,

such as commitments to make loans and commercial

letters of credit issued to meet customer financing needs. The Company’s

exposure to credit loss in the event of

nonperformance by the other party to the financial instrument for off-balance sheet

loan commitments is represented by the

contractual amount of those instruments. Such financial instruments are recorded

when they are funded.

The Company records an allowance for credit losses on off-balance

sheet credit exposures, unless the commitments to

extend credit are unconditionally cancelable, through a charge to provision

for credit losses in the Company’s consolidated

statements of earnings.

The allowance for credit losses on off-balance sheet credit exposures

is estimated by loan segment

at each balance sheet date under the current expected credit loss model using the same

methodologies as portfolio loans,

taking into consideration the likelihood that funding will occur as well as any third-party

guarantees. The allowance for

unfunded commitments is included in other liabilities on the Company’s

consolidated balance sheets.

On January 1, 2023, the Company recorded an adjustment for unfunded commitments of $77

thousand for the adoption of

ASC 326. For the quarter ended March 31, 2023, the Company recorded a provision

for credit losses for unfunded

commitments of $

thousand. At March 31, 2023, the liability for credit losses on off-balance-sheet

credit exposures

included in other liabilities was $

0.3

million.

NOTE 2: BASIC AND DILUTED NET EARNINGS PER SHARE

Basic net earnings per share is computed by dividing net earnings by the weighted average

common shares outstanding for

the quarters ended March 31, 2023 and 2022, respectively.

Diluted net earnings per share reflect the potential dilution that

could occur upon exercise of securities or other rights for,

or convertible into, shares of the Company’s common

stock.

March 31, 2023 and 2022, respectively,

the Company had no such securities or rights issued or outstanding, and

therefore,

no dilutive effect to consider for the diluted net earnings per share calculation.

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

are presented below

Quarter ended March 31,

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

2023

2022

Basic and diluted:

Net earnings

1,964

2,081

Weighted average common

shares outstanding

3,502,143

3,518,657

Net earnings per share

0.56

0.59

Table of Contents

NOTE 3: VARIABLE

INTEREST ENTITIES

Generally, a variable interest entity (“VIE”)

is a corporation, partnership, trust or other legal structure that does not have

equity investors with substantive or proportional voting rights or has equity investors

that do not provide sufficient financial

resources for the entity to support its activities.

At March 31, 2023, the Company did not have any consolidated VIEs to disclose but did

have one nonconsolidated VIE,

discussed below.

New Markets Tax

Credit Investment

The New Markets Tax Credit

(“NMTC”) program provides federal tax incentives to investors to make investments in

distressed communities and promotes economic improvement through the development

of successful businesses in these

communities.

The NMTC is available to investors over seven years and is subject to recapture if certain events occur

during such period.

At March 31, 2023 and December 31, 2022, respectively,

the Company had one such investment in the

amounts of $2.0 million and $2.1 million, respectively,

which was included in other assets in the consolidated balance

sheets.

The Company’s equity investment in the

NMTC entity meets the definition of a VIE. While the Company’s

investment exceeds 50% of the outstanding equity interests, the Company does not consolidate

the VIE because it does not

meet the characteristics of a primary beneficiary since the Company lacks the power to direct

the activities of the VIE.

(Dollars in thousands)

Maximum

Loss Exposure

Asset Recognized

Classification

Type:

New Markets Tax Credit investment

2,006

Other assets

NOTE 4: SECURITIES

At March 31, 2023 and December 31, 2022, respectively,

all securities within the scope of ASC 320,

Investments – Debt

and Equity Securities,

were classified as available-for-sale.

The fair value and amortized cost for securities available-for-

sale by contractual maturity at March 31, 2023 and December 31, 2022,

respectively, are presented below.

1 year

1 to 5

5 to 10

After 10

Fair

Gross Unrealized

Amortized

(Dollars in thousands)

or less

years

Value

Gains

Losses

Cost

March 31, 2023

Agency obligations (a)

5,300

59,997

61,883

—

127,180

—

13,574

140,754

Agency MBS (a)

—

6,984

27,601

181,114

215,699

—

29,522

245,221

State and political subdivisions

300

1,032

15,581

45,900

62,813

4,300

67,064

Total available-for-sale

5,600

68,013

105,065

227,014

405,692

47,396

453,039

December 31, 2022

Agency obligations (a)

4,935

50,746

69,936

—

125,617

—

15,826

141,443

Agency MBS (a)

—

7,130

27,153

183,877

218,160

—

33,146

251,306

State and political subdivisions

300

642

15,130

45,455

61,527

5,681

67,197

Total available-for-sale

5,235

58,518

112,219

229,332

405,304

54,653

459,946

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

entities.

Securities with aggregate fair values of $

207.6

million and $

208.3

million at March 31, 2023 and December 31, 2022,

respectively, were pledged to

secure public deposits, securities sold under agreements to repurchase, Federal Home

Loan

Bank of Atlanta (“FHLB of Atlanta”) advances, and for other purposes required

or permitted by law.

Included in other assets on the accompanying consolidated balance sheets are non-marketable

equity investments.

The

carrying amounts of non-marketable equity investments were $

1.2

million at March 31, 2023 and December 31, 2022,

respectively.

Non-marketable equity investments include FHLB of Atlanta Stock, Federal

Reserve Bank of Atlanta

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

Table of Contents

Gross Unrealized Losses and Fair Value

The fair values and gross unrealized losses on securities at March 31, 2023

and December 31, 2022, respectively,

segregated by those securities that have been in an unrealized loss position for

less than 12 months and 12 months or

longer, are presented below.

Less than 12 Months

12 Months or Longer

Total

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

(Dollars in thousands)

Value

Losses

Value

Losses

Value

Losses

March 31, 2023:

Agency obligations

18,263

950

108,917

12,624

127,180

13,574

Agency MBS

23,127

1,047

192,572

28,475

215,699

29,522

State and political subdivisions

19,186

278

35,741

4,022

54,927

4,300

Total

60,576

2,275

337,230

45,121

397,806

47,396

December 31, 2022:

Agency obligations

55,931

4,161

69,686

11,665

125,617

15,826

Agency MBS

70,293

5,842

147,867

27,304

218,160

33,146

State and political subdivisions

44,777

2,176

13,043

3,505

57,820

5,681

Total

171,001

12,179

230,596

42,474

401,597

54,653

For the securities in the previous table, the Company assesses whether or not it intends to

sell or is more likely than not that

the Company will be required to sell the securities before recovery of the amortized

cost basis, which may be maturity.

Because the Company currently does not intend to sell those securities that have an

unrealized loss at March 31, 2023 and it

is not more-likely-than-not that the Company will be required

to sell the security before recovery of their amortized cost

bases, which may be maturity,

the Company has determined that no credit loss is necessary.

In addition, the Company

evaluates whether any portion of the decline in fair value of available-for-sale

securities is the result of credit deterioration,

which would require the recognition of a provision to increase the allowance

for credit losses. Such evaluations consider the

extent to which the amortized cost of the security exceeds its fair value, changes in credit ratings

and any other known

adverse conditions related to the specific security.

The unrealized losses associated with available-for-sale

securities at

March 31, 2023 are driven by changes in market interest rates and are not due to the credit quality of the

securities, and

accordingly, no allowance

for credit losses is considered necessary related to available-for-sale

securities at March 31,

2023. These securities will continue to be monitored as a part of the Company's ongoing

evaluation of credit quality.

Management evaluates the financial performance of the issuers on a quarterly basis to determine

if it is probable that the

issuers can make all contractual principal and interest payments.

Realized Gains and Losses

The Company had no realized gains and losses on sale of securities during the quarters ended

March 31, 2023 and 2022,

respectively.

Table of Contents

NOTE 5: LOANS AND ALLOWANCE

FOR CREDIT LOSSES

March 31,

December 31,

(Dollars in thousands)

2023

2022

Commercial and industrial

59,602

66,212

Construction and land development

66,500

66,479

Commercial real estate:

Owner occupied

67,280

61,125

Hotel/motel

32,959

33,378

Multi-family

40,974

41,084

Other

126,749

128,986

Total commercial real estate

267,962

264,573

Residential real estate:

Consumer mortgage

48,513

45,370

Investment property

53,462

52,278

Total residential real estate

101,975

97,648

Consumer installment

9,002

9,546

Total Loans

505,041

504,458

Loans secured by real estate were approximately

86.4%

of the Company’s total loan portfolio

at March 31, 2023.

At March

31, 2023, the Company’s geographic

loan distribution was concentrated primarily in Lee County,

Alabama, and

surrounding areas.

The loan portfolio segment is defined as the level at which an entity develops and documents a systematic

method for

determining its allowance for credit losses. As part of the Company’s

quarterly assessment of the allowance, the loan

portfolio included the following portfolio segments: commercial and industrial,

construction and land development,

commercial real estate, residential real estate, and consumer installment. Where appropriate,

the Company’s loan portfolio

segments are further disaggregated into classes. A class is generally determined based

on the initial measurement attribute,

risk characteristics of the loan, and an entity’s

method for monitoring and determining credit risk.

The following describes

the risk characteristics relevant to each of the portfolio segments

and classes.

Commercial and industrial (“C&I”) —

includes loans to finance business operations, equipment purchases, or

other needs

for small and medium-sized commercial customers. Also included

in this category are loans to finance agricultural

production.

Generally,

the primary source of repayment is the cash flow from business operations and activities

of the

borrower.

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

includes both loans and credit lines for the purpose of purchasing,

carrying,

and developing land into commercial developments or residential subdivisions.

Also included are loans and credit

lines for construction of residential, multi-family,

and commercial buildings. Generally,

the primary source of repayment is

dependent upon the sale or refinance of the real estate collateral.

Commercial real estate

(“CRE”) —

includes loans in these classes:

●

Owner occupied

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

owner-occupied facilities primarily for small and medium-sized

commercial customers.

Generally,

the primary

source of repayment is the cash flow from business operations and activities of the borrower,

who owns the

property.

●

Hotel/motel

– includes loans for hotels and motels.

Generally, the primary source of repayment

is dependent upon

income generated from the hotel/motel securing the loan.

The underwriting of these loans takes into consideration

the occupancy and rental rates, as well as the financial health of the borrower.

●

Multi-family

– primarily includes loans to finance income-producing multi-family properties

These include loans

for 5 or more unit residential properties and apartments leased to residents. Generally

the primary source of

repayment is dependent upon income generated from the real estate collateral.

The underwriting of these loans

takes into consideration the occupancy and rental rates,

as well as the financial health of the respective borrowers.

Table of Contents

●

Other

– primarily includes loans to finance income-producing commercial properties

other than hotels/motels and

multi-family properties, and which

are not owner occupied.

Loans in this class include loans for neighborhood

retail centers, medical and professional offices, single retail stores,

industrial buildings, and warehouses leased to

local and other businesses.

Generally,

the primary source of repayment is dependent upon income generated

from

the real estate collateral. The underwriting of these loans takes into consideration

the occupancy and rental rates,

as well as the financial health of the borrower.

Residential real estate (“RRE”) —

includes loans in these two classes:

●

Consumer mortgage

– primarily includes first or second lien mortgages and home equity lines of credit

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

in accordance

with the Bank’s general loan policies and

procedures which require, among other things, proper documentation of

each borrower’s financial condition, satisfactory credit history

and property value.

●

Investment property

– primarily includes loans

to finance income-producing 1-4 family residential properties.

Generally,

the primary source of repayment is dependent upon income generated

from leasing the property

securing the loan. The underwriting of these loans takes into consideration the rental rates and

property values, as

well as the financial health of the borrowers.

Consumer installment —

includes loans to individuals,

which may be secured by personal property or are unsecured.

Loans

include personal lines of credit, automobile loans, and other retail loans.

These loans are underwritten in accordance with

the Bank’s general loan policies and procedures

which require, among other things, proper documentation of each

borrower’s financial condition, satisfactory credit history,

and, if applicable, property values.

Table of Contents

The following is a summary of current, accruing past due, and nonaccrual loans by portfolio

segment and class as of March

31, 2023 and December 31, 2022.

Accruing

Total

30-89 Days

Greater than

Accruing

Non-

Total

(Dollars in thousands)

Current

Past Due

90 days

Loans

Accrual

Loans

March 31, 2023:

Commercial and industrial

59,141

—

59,170

432

59,602

Construction and land development

66,500

—

66,500

—

66,500

Commercial real estate:

Owner occupied

65,177

—

65,177

2,103

67,280

Hotel/motel

32,959

—

32,959

—

32,959

Multi-family

40,974

—

40,974

—

40,974

Other

126,749

—

126,749

—

126,749

Total commercial real estate

265,859

—

265,859

2,103

267,962

Residential real estate:

Consumer mortgage

48,162

216

—

48,378

135

48,513

Investment property

53,184

278

—

53,462

—

53,462

Total residential real estate

101,346

494

—

101,840

135

101,975

Consumer installment

8,922

—

8,992

9,002

Total

501,768

593

—

502,361

2,680

505,041

December 31, 2022:

Commercial and industrial

65,764

—

65,769

443

66,212

Construction and land development

66,479

—

66,479

—

66,479

Commercial real estate:

Owner occupied

61,125

—

61,125

—

61,125

Hotel/motel

33,378

—

33,378

—

33,378

Multi-family

41,084

—

41,084

—

41,084

Other

126,870

—

126,870

2,116

128,986

Total commercial real estate

262,457

—

262,457

2,116

264,573

Residential real estate:

Consumer mortgage

45,160

—

45,198

172

45,370

Investment property

52,278

—

52,278

—

52,278

Total residential real estate

97,438

—

97,476

172

97,648

Consumer installment

9,506

—

9,546

—

9,546

Total

501,644

—

501,727

2,731

504,458

Table of Contents

Credit Quality Indicators

The credit quality of the loan portfolio is summarized no less frequently than quarterly using categories

similar to the

standard asset classification system used by the federal banking agencies.

The following table presents credit quality

indicators for the loan portfolio segments and classes by year of origination as of March 31,

2023. These categories are

utilized to develop the associated allowance for credit losses using historical losses adjusted

for qualitative and

environmental factors and are defined as follows:

●

Pass – loans which are well protected by the current net worth and paying capacity

of the obligor (or guarantors, if

any) or by the fair value, less cost to acquire and sell, of any underlying collateral.

●

Special Mention – loans with potential weakness that may,

if not reversed or corrected, weaken the credit or

inadequately protect the Company’s position

at some future date. These loans are not adversely classified and do

not expose an institution to sufficient risk to warrant an adverse classification.

●

Substandard Accruing – loans that exhibit a well-defined weakness which presently jeopardizes

debt repayment,

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

that the

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

●

Nonaccrual – includes loans where management has determined that full

payment of principal and interest is not

expected.

(Dollars in thousands)

2023

2022

2021

2020

2019

Prior to

2019

Revolving

Loans

Total loans

March 31, 2023:

Commercial and industrial

Pass

4,106

10,873

14,985

6,152

7,787

8,630

6,536

59,069

Special mention

—

Substandard

—

101

Nonaccrual

—

432

—

432

Total commercial and industrial

4,165

10,873

15,013

6,155

8,230

8,630

6,536

59,602

Current period gross charge-offs

—

Construction and land development

Pass

9,319

51,422

3,226

1,670

151

234

478

66,500

Special mention

—

Substandard

—

Nonaccrual

—

Total construction and land development

9,319

51,422

3,226

1,670

151

234

478

66,500

Current period gross charge-offs

—

Commercial real estate:

Owner occupied

Pass

4,294

10,250

19,309

11,652

5,194

11,372

2,711

64,782

Special mention

—

235

—

235

Substandard

—

105

—

160

Nonaccrual

—

2,103

—

2,103

Total owner occupied

4,294

10,355

19,544

11,652

7,352

11,372

2,711

67,280

Current period gross charge-offs

—

Hotel/motel

Pass

—

10,191

3,294

1,633

4,090

13,751

—

32,959

Special mention

—

Substandard

—

Nonaccrual

—

Total hotel/motel

—

10,191

3,294

1,633

4,090

13,751

—

32,959

Current period gross charge-offs

—

Table of Contents

(Dollars in thousands)

2023

2022

2021

2020

2019

Prior to

2019

Revolving

Loans

Total loans

March 31, 2023:

Multifamily

Pass

3,666

19,375

2,009

7,158

3,889

3,299

1,578

40,974

Special mention

—

Substandard

—

Nonaccrual

—

Total multifamily

3,666

19,375

2,009

7,158

3,889

3,299

1,578

40,974

Current period gross charge-offs

—

Other

Pass

5,546

38,002

33,006

15,834

11,241

21,706

1,253

126,588

Special mention

—

Substandard

—

161

—

161

Nonaccrual

—

Total other

5,546

38,002

33,006

15,995

11,241

21,706

1,253

126,749

Current period gross charge-offs

—

Residential real estate:

Consumer mortgage

Pass

4,375

22,234

2,783

2,874

1,531

13,584

47,475

Special mention

—

381

—

381

Substandard

—

522

—

522

Nonaccrual

—

135

—

135

Total consumer mortgage

4,375

22,234

2,783

2,874

1,531

14,622

48,513

Current period gross charge-offs

—

Investment property

Pass

2,400

15,316

10,569

14,231

6,221

3,561

877

53,175

Special mention

—

Substandard

—

244

—

244

Nonaccrual

—

Total investment property

2,400

15,316

10,569

14,475

6,221

3,604

877

53,462

Current period gross charge-offs

—

Consumer installment

Pass

1,216

5,565

1,285

440

196

234

—

8,936

Special mention

—

Substandard

—

Nonaccrual

—

Total consumer installment

1,231

5,585

1,307

445

200

234

—

9,002

Current period gross charge-offs

—

Total loans

Pass

34,922

183,228

90,466

61,644

40,300

76,371

13,527

500,458

Special mention

—

235

—

424

—

664

Substandard

125

408

522

—

1,239

Nonaccrual

—

2,535

135

—

2,680

Total loans

34,996

183,353

90,751

62,057

42,905

77,452

13,527

505,041

Total current period gross charge-offs

—

Table of Contents

(Dollars in thousands)

Pass

Special

Mention

Substandard

Accruing

Nonaccrual

Total loans

December 31, 2022:

Commercial and industrial

65,550

212

443

66,212

Construction and land development

66,479

—

66,479

Commercial real estate:

Owner occupied

60,726

238

161

—

61,125

Hotel/motel

33,378

—

33,378

Multi-family

41,084

—

41,084

Other

126,700

170

—

2,116

128,986

Total commercial real estate

261,888

408

161

2,116

264,573

Residential real estate:

Consumer mortgage

44,172

439

587

172

45,370

Investment property

51,987

248

—

52,278

Total residential real estate

96,159

482

835

172

97,648

Consumer installment

9,498

—

9,546

Total

499,574

898

1,255

2,731

504,458

The following table is a summary of the Company’s

nonaccrual loans by major categories for the periods indicated.

CECL

Incurred Loss

March 31, 2023

December 31, 2022

Nonaccrual

Total

Loans with

Loans with an

Nonaccrual

(Dollars in thousands)

No Allowance

Allowance

Loans

Commercial and industrial

194

238

432

443

Commercial real estate

837

1,266

2,103

2,116

Residential real estate

135

—

135

172

Consumer

—

Total

1,176

1,504

2,680

2,731

The following table presents the amortized cost basis of collateral dependent loans,

which are individually evaluated to

determine expected credit losses:

(Dollars in thousands)

Real Estate

Business Assets

Total Loans

March 31, 2023:

Commercial and industrial

—

432

Commercial real estate

2,103

—

2,103

Total

2,103

432

2,535

Allowance for Credit Losses

The Company adopted ASC 326 on January 1, 2023, which introduced

the CECL methodology for estimating all expected

losses over the life of a financial asset. Under the CECL methodology,

the allowance for credit losses is measured on a

collective basis for pools of loans with similar risk characteristics, and for loans that do

not share similar risk characteristics

with the collectively evaluated pools, evaluations are performed on an individual

basis.

Table of Contents

The following table details the changes in the allowance for credit losses by portfolio

segment for the respective periods.

March 31, 2023

(Dollars in thousands)

Commercial and

industrial

Construction

and land

development

Commercial

real estate

Residential

real estate

Consumer

installment

Total

Quarter ended:

Beginning balance, prior to the

adoption of ASC 326

747

949

3,109

828

132

5,765

Impact from the adoption

of ASC 326

532

(17)

873

(347)

(22)

1,019

Charge-offs

—

(11)

Recoveries

—

Net recoveries (charge-offs)

—

(10)

(3)

Provision for credit losses

(49)

(16)

Ending balance

1,232

1,021

3,966

497

105

6,821

March 31, 2022

(Dollars in thousands)

Commercial and

industrial

Construction

and land

development

Commercial

real estate

Residential

real estate

Consumer

installment

Total

Quarter ended:

Beginning balance

857

518

2,739

739

4,939

Charge-offs

—

(48)

Recoveries

—

Net (charge-offs) recoveries

—

(40)

(31)

Provision for loan losses

(85)

(10)

(203)

(9)

(250)

Ending balance

774

508

2,536

737

103

4,658

The following table presents an analysis of the allowance for loan losses and recorded

investment in loans by portfolio

segment and impairment methodology as of March 31, 2022 as determined, prior

to the adoption of ASC 326.

Collectively evaluated (1)

Individually evaluated (2)

Total

Allowance

Recorded

Allowance

Recorded

Allowance

Recorded

for loan

investment

for loan

investment

for loan

investment

(In thousands)

losses

in loans

losses

in loans

losses

in loans

March 31, 2022:

Commercial and industrial (3)

774

73,297

—

774

73,297

Construction and land development

508

33,058

—

508

33,058

Commercial real estate

2,536

234,880

—

182

2,536

235,062

Residential real estate

737

79,102

—

737

79,102

Consumer installment

103

8,412

—

103

8,412

Total

4,658

428,749

—

182

4,658

428,931

(1)

Represents loans collectively evaluated for impairment,

prior to the adopton of ASC 326, in accordance with ASC

450-20,

Loss

Contingencies, and pursuant to amendments by ASU 2010-20

regarding allowance for non-impaired loans.

(2)

Represents loans individually evaluated for impairment, prior

to the adoption of ASC 326, in accordance with ASC

310-30,

Receivables, and pursuant to amendments by ASU 2010-20 regarding

allowance for impaired loans.

Impaired loans

The following tables present impaired loans at December 31, 2022 as determined under

ASC 310 prior to the adoption of

ASC 326.

Loans that have been fully charged-off are not included in the following

tables. The related allowance generally

represents the following components that correspond to impaired loans:

Table of Contents

●

Individually evaluated impaired loans equal to or greater than $500 thousand secured

by real estate (nonaccrual

construction and land development, commercial real estate, and residential real estate

loans).

●

Individually evaluated impaired loans equal to or greater than $250 thousand not secured

by real estate

(nonaccrual commercial and industrial and consumer installment loans).

The following tables set forth certain information regarding the Company’s

impaired loans that were individually evaluated

for impairment at December 31, 2022.

December 31, 2022

(Dollars in thousands)

Unpaid principal

balance (1)

Charge-offs and

payments applied

(2)

Recorded

investment (3)

Related allowance

With no allowance recorded:

Commercial and industrial

210

(1)

209

—

Commercial real estate:

Owner occupied

858

(3)

855

Total commercial real estate

858

(3)

855

—

Total

1,068

(4)

1,064

—

With allowance recorded:

Commercial and industrial

234

—

234

Owner occupied

1,261

—

1,261

446

Total commercial real estate

1,261

—

1,261

446

Total

1,495

—

1,495

505

Total

impaired loans

2,563

(4)

2,559

505

(1) Unpaid principal balance represents the contractual obligation

due from the customer.

(2) Charge-offs and payments applied represents cumulative charge-offs taken, as well

as interest payments that have been

applied against the outstanding principal balance subsequent

to the loans being placed on nonaccrual status.

(3) Recorded investment represents the unpaid principal balance

less charge-offs and payments applied; it is shown before

any related allowance for loan losses.

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Pursuant to the adoption of ASU 2022-02, effective January 1, 2023,

the Company prospectively discontinued the

recognition and measurement guidance previously required for

troubled debt restructures.

As of March 31, 2023, the

Company had no loans that would have previously required disclosure as troubled debt

restructures.

The following table provides the average recorded investment in impaired loans, if

any, by portfolio

segment, and the

amount of interest income recognized on impaired loans after impairment by portfolio

segment and class during the quarter

ended March 31, 2022 as determined under ASC 310 prior to the adoption of ASC 326.

Quarter ended March 31, 2022

Average

Total interest

recorded

income

(Dollars in thousands)

investment

recognized

Impaired loans:

Commercial real estate:

Other

236

—

Total commercial real estate

236

—

Residential real estate:

Investment property

—

Total residential real estate

—

Total

251

—

NOTE 6: MORTGAGE SERVICING

RIGHTS, NET

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

servicing rights on the date the

corresponding mortgage loans are sold.

An estimate of the Company’s MSRs is determined

using assumptions that market

participants would use in estimating future net servicing income, including estimates

of prepayment speeds, discount rate,

default rates, cost to service, escrow account earnings, contractual servicing

fee income, ancillary income, and late fees.

Subsequent to the date of transfer, the Company

has elected to measure its MSRs under the amortization method.

Under

the amortization method, MSRs are amortized in proportion to, and over the period

of, estimated net servicing income.

Increases in market interest rates generally increase the fair value of MSRs by reducing

prepayments and refinancings and

therefore reducing the prepayment speed.

The Company has recorded MSRs related to loans sold to Fannie Mae.

The Company generally sells conforming, fixed-

rate, closed-end, residential mortgages to Fannie Mae.

MSRs are included in other assets on the accompanying

consolidated balance sheets.

The Company evaluates MSRs for impairment on a quarterly basis.

Impairment is determined by stratifying MSRs into

groupings based on predominant risk characteristics, such as interest rate and loan type.

If, by individual stratum, the

carrying amount of the MSRs exceeds fair value, a valuation allowance is established.

The valuation allowance is adjusted

as the fair value changes.

Changes in the valuation allowance are recognized in earnings

as a component of mortgage

lending income.

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The change in amortized MSRs and the related valuation allowance for the quarters

ended March 31, 2023 and 2022 are

presented below.

Quarter ended March 31,

(Dollars in thousands)

2023

2022

MSRs, net:

Beginning balance

1,151

1,309

Additions, net

—

Amortization expense

(55)

(78)

Ending balance

1,096

1,285

Valuation

allowance included in MSRs, net:

Beginning of period

—

End of period

—

Fair value of amortized MSRs:

Beginning of period

2,369

1,908

End of period

2,419

2,277

NOTE 7: FAIR VALUE

Fair Value

Hierarchy

“Fair value” is defined by ASC 820,

Fair Value

Measurements and Disclosures

, as the price that would be received to sell

an asset or paid to transfer a liability in an orderly transaction occurring in the principal market

(or most advantageous

market in the absence of a principal market) for an asset or liability at the measurement date.

GAAP establishes a fair

value hierarchy for valuation inputs that gives the highest priority to quoted prices

in active markets for identical assets or

liabilities and the lowest priority to unobservable inputs.

The fair value hierarchy is as follows:

Level 1—inputs to the valuation methodology are quoted prices, unadjusted, for identical

assets or liabilities in active

markets.

Level 2—inputs to the valuation methodology include quoted prices for similar assets and

liabilities in active markets,

quoted prices for identical or similar assets or liabilities in markets that are not active, or

inputs that are observable for the

asset or liability, either directly or

indirectly.

Level 3—inputs to the valuation methodology are unobservable and reflect the

Company’s own assumptions about the

inputs market participants would use in pricing the asset or liability.

Level changes in fair value measurements

Transfers between levels of the fair value hierarchy are generally

recognized at the end of each reporting period.

The

Company monitors the valuation techniques utilized for each category of

financial assets and liabilities to ascertain when

transfers between levels have been affected.

The nature of the Company’s financial assets

and liabilities generally is such

that transfers in and out of any level are expected to be infrequent. For the three months ended

March 31, 2023, there were

no transfers between levels and no changes in valuation techniques for the Company’s

financial assets and liabilities.

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Assets and liabilities measured at fair value on a recurring

basis

Securities available-for-sale

Fair values of securities available for sale were primarily measured using

Level 2 inputs.

For these securities, the Company

obtains pricing data from third party pricing services.

These third party pricing services consider observable data that

may

include broker/dealer quotes, market spreads, cash flows, benchmark yields, reported

trades for similar securities, market

consensus prepayment speeds, credit information, and the securities’ terms and

conditions.

On a quarterly basis,

management reviews the pricing data received from the third party pricing services

for reasonableness given current market

conditions.

As part of its review, management

may obtain non-binding third party broker/dealer quotes to validate the fair

value measurements.

In addition, management will periodically submit pricing information

provided by the third party

pricing services to another independent valuation firm on a sample basis.

This independent valuation firm will compare the

prices

provided by the third party pricing service with its own prices

and will review the significant assumptions and

valuation methodologies used with management.

The following table presents the balances of the assets and liabilities measured at fair value

on a recurring basis as of March

31, 2023 and December 31, 2022, respectively,

by caption, on the accompanying consolidated balance sheets by

ASC 820

valuation hierarchy (as described above).

Quoted Prices in

Significant

Active Markets

Other

Significant

for

Observable

Unobservable

Identical Assets

Inputs

(Dollars in thousands)

Amount

(Level 1)

(Level 2)

(Level 3)

March 31, 2023:

Securities available-for-sale:

Agency obligations

127,180

—

127,180

—

Agency MBS

215,699

—

215,699

—

State and political subdivisions

62,813

—

62,813

—

Total securities available-for-sale

405,692

—

405,692

—

Total

assets at fair value

405,692

—

405,692

—

December 31, 2022:

Securities available-for-sale:

Agency obligations

125,617

—

125,617

—

Agency MBS

218,160

—

218,160

—

State and political subdivisions

61,527

—

61,527

—

Total securities available-for-sale

405,304

—

405,304

—

Total

assets at fair value

405,304

—

405,304

—

Assets and liabilities measured at fair value on a nonrecurring

basis

Collateral Dependent Loans

Collateral dependent loans are measured at the fair value of the collateral securing the loan

less estimated selling costs. The

fair value of real estate collateral is determined based on real estate appraisals

which are generally based on recent sales of

comparable properties which are then adjusted for property specific factors.

Non real estate collateral is valued based on

various sources, including third party asset valuations and internally determined

values based on cost adjusted for

depreciation and other judgmentally determined discount factors. Collateral dependent

loans are classified within Level 3 of

the hierarchy due to the unobservable inputs used in determining their fair value such as collateral

values and the borrower's

underlying financial condition.

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Mortgage servicing rights, net

MSRs, net, included in other assets on the accompanying consolidated balance

sheets, are carried at the lower of cost or

estimated fair value.

MSRs do not trade in an active market with readily observable prices.

To determine the fair

value of

MSRs, the Company engages an independent third party.

The independent third party’s

valuation model calculates the

present value of estimated future net servicing income using assumptions that

market participants would use in estimating

future net servicing income, including estimates of prepayment speeds, discount

rates, default rates, cost to service, escrow

account earnings, contractual servicing fee income, ancillary income, and late

fees.

Periodically, the Company

will review

broker surveys and other market research to validate significant assumptions used

in the model.

The significant

unobservable inputs include prepayment speeds or the constant prepayment rate (“CPR”)

and the weighted average

discount rate.

Because the valuation of MSRs requires the use of significant unobservable

inputs, all of the Company’s

MSRs are classified within Level 3 of the valuation hierarchy.

The following table presents the balances of the assets and liabilities measured at fair value

on a nonrecurring basis as of

March 31, 2023 and December 31, 2022, respectively,

by caption, on the accompanying consolidated balance sheets and by

FASB ASC 820 valuation

hierarchy (as described above):

Quoted Prices in

Active Markets

Other

Significant

for

Observable

Unobservable

Carrying

Identical Assets

Inputs

(Dollars in thousands)

Amount

(Level 1)

(Level 2)

(Level 3)

March 31, 2023:

Loans, net

(1)

2,021

—

2,021

Other assets

(2)

1,096

—

1,096

Total assets at fair value

3,117

—

3,117

December 31, 2022:

Loans, net

(3)

2,054

—

2,054

Other assets

(2)

1,151

—

1,151

Total assets at fair value

3,205

—

3,205

(1)

Loans considered collateral dependent under ASC 326.

(2)

Represents MSRs, net, carried at lower of cost or

estimated fair value.

(3)

Loans considered impaired under ASC 310-10-35 Receivables,

prior to the adoption of ASC 326.

This amount reflects the recorded

investment in impaired loans, net of any related allowance

for loan losses.

Quantitative Disclosures for Level 3 Fair Value

Measurements

At March 31, 2023 and December 31, 2022, the Company had no Level 3 assets measured

at fair value on a recurring basis.

For Level 3 assets measured at fair value on a non-recurring basis at March 31, 2023

and and December 31, 2022, the

significant unobservable inputs used in the fair value measurements and

the range of such inputs with respect to such assets

are presented below.

Range of

Weighted

Carrying

Significant

Unobservable

Average

(Dollars in thousands)

Amount

Valuation Technique

Unobservable Input

Inputs

of Input

March 31, 2023:

Collateral dependent loans

2,021

Appraisal

Appraisal discounts

10.0

Mortgage servicing rights, net

1,096

Discounted cash flow

Prepayment speed or CPR

7.2

30.1

7.6

Discount rate

9.5

11.5

9.5

December 31, 2022:

Impaired loans

2,054

Appraisal

Appraisal discounts

10.0

Mortgage servicing rights, net

1,151

Discounted cash flow

Prepayment speed or CPR

5.2

18.6

7.5

Discount rate

9.5

11.5

9.5

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Fair Value

of Financial Instruments

ASC 825,

Financial Instruments

, requires disclosure of fair value information about financial instruments,

whether or not

recognized on the face of the balance sheet, for which it is practicable to estimate that

value. The assumptions used in the

estimation of the fair value of the Company’s

financial instruments are explained below.

Where quoted market prices are

not available, fair values are based on estimates using discounted cash flow analyses.

Discounted cash flows can be

significantly affected by the assumptions used, including the discount rate

and estimates of future cash flows. The

following fair value estimates cannot be substantiated by comparison to independent

markets and should not be considered

representative of the liquidation value of the Company’s

financial instruments, but rather are good-faith estimates

of the fair

value of financial instruments held by the Company.

ASC 825 excludes certain financial instruments and all nonfinancial

instruments from its disclosure requirements.

The following methods and assumptions were used by the Company in estimating the fair

value of its financial instruments:

Loans, net

Fair values for loans were calculated using discounted cash flows. The discount rates reflected

current rates at which similar

loans would be made for the same remaining maturities. Expected

future cash flows were projected based on contractual

cash flows, adjusted for estimated prepayments.

The fair value of loans was measured using an exit price notion.

Time Deposits

Fair values for time deposits were estimated using discounted cash flows. The

discount rates were based on rates currently

offered for deposits with similar remaining maturities.

The carrying value,

related estimated fair value, and placement in the fair value hierarchy of the Company’s

financial

instruments at March 31, 2023 and December 31, 2022 are presented below.

This table excludes financial instruments for

which the carrying amount approximates fair value.

Financial assets for which fair value approximates carrying

value

included cash and cash equivalents.

Financial liabilities for which fair value approximates carrying value

included

noninterest-bearing demand deposits,

interest-bearing demand deposits, and savings deposits.

Fair value approximates

carrying value in these financial liabilities due to these products having no stated

maturity.

Additionally, financial

liabilities for which fair value approximates carrying value included overnight

borrowings such as federal funds purchased

and securities sold under agreements to repurchase.

Fair Value Hierarchy

Carrying

Estimated

Level 1

Level 2

Level 3

(Dollars in thousands)

amount

fair value

inputs

Inputs

March 31, 2023:

Financial Assets:

Loans, net (1)

498,220

482,454

—

482,454

Financial Liabilities:

Time Deposits

161,104

157,919

—

157,919

—

December 31, 2022:

Financial Assets:

Loans, net (1)

498,693

484,007

—

484,007

Financial Liabilities:

Time Deposits

150,375

150,146

—

150,146

—

(1) Represents loans, net of allowance for credit losses.

The fair value of loans was measured using an

exit price notion.

NOTE 8: SUBSEQUENT EVENTS

Subsequent to March 31, 2023, one of the Company’s

collateral dependent loans, with a recorded investment of $

1.3

million and a corresponding valuation allowance of $

0.5

million, at March 31, 2023, was paid in full

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS

OPERATIONS

The following discussion and analysis is designed to provide a better understanding of

various factors related to the results

of operations and financial condition of the Company and the Bank.

This discussion is intended to supplement and

highlight information contained in the accompanying unaudited condensed consolidated

financial statements and related

notes for the quarters ended March 31, 2023 and 2022, as well as the information contained

in our Annual Report on Form

10-K for the year ended December 31, 2022.

Special Cautionary Notice Regarding Forward-Looking Statements

Various

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

Discussion and Analysis of Financial Condition

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

Risk”, “Risk Factors” “Description of

Property” and elsewhere, are “forward-looking statements” within the

meaning and protections of Section 27A of the

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

as amended (the “Exchange Act”).

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

goals, expectations,

anticipations, assumptions, estimates, intentions and future performance, and involve

known and unknown risks,

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

which may cause the actual results, performance,

achievements or financial condition of the Company to be materially different

from future results, performance,

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

statements.

You

should not expect us to

update any forward-looking statements.

All statements other than statements of historical fact are statements that could be

forward-looking statements.

You

can

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

“will,” “anticipate,” “assume,”

“should,” “indicate,” “would,” “believe,” “contemplate,” “expect,”

“estimate,” “continue,” “designed”, “plan,” “point to,”

“project,” “could,” “intend,” “seeks,” “model,” “simulations,” “target” and

other similar words and expressions of the

future.

These forward-looking statements may not be realized due to a variety of factors,

including, without limitation:

●

the effects of future economic, business and market conditions and

changes, foreign, domestic and local, including

inflation, seasonality, natural

disasters or climate change, such as rising sea and water levels, hurricanes and

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

inventory volatility, and

changes in consumer behaviors;

●

the effects of war or other conflicts, acts of terrorism, trade restrictions, sanctions or

other events that may affect

general economic conditions;

●

governmental monetary and fiscal policies, including the continuing effects

of fiscal and monetary stimuli in

response to the COVID-19 crisis, followed by changes in monetary policies beginning

in March 2022 in response

to inflation, including increases in the Federal Reserve’s

target federal funds rate and reductions in the Federal

Reserve’s holdings of securities;

●

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

regulations and rules and

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

in the scope and cost

of FDIC insurance, including changes being considered in light of two regional bank

failures in California and

New York in

March 2023;

●

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

economic, market and credit

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

those used in our loan

portfolio reviews;

●

the risks of inflation, changes in market interest rates and the shape of the yield curve on the levels, composition

and costs of deposits and borrowings, the values of our securities and loans, loan demand

and mortgage loan

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

assets and liabilities,

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

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●

the risks of further increases in market interest rates creating unrealized losses on our

securities available for sale,

which adversely affect our stockholders’ equity (including tangible stockholders’

equity) for financial reporting

purposes;

●

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

●

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

of instruments that

may be included as capital for regulatory purposes;

●

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

●

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

and other providers of financial,

investment and insurance services, including the disruptive effects of

financial technology and other competitors

who are not subject to the same regulations as the Company and the Bank and credit unions,

which are not subject

to federal income taxation;

●

the failure of assumptions and estimates underlying the establishment of allowances

for credit losses, including

asset impairments, losses valuations of assets and liabilities and other

estimates;

●

the timing and amount of rental income from third parties following the June 2022

opening of our new

headquarters;

●

the risks of mergers, acquisitions and divestitures, including,

without limitation, the related time and costs of

implementing such transactions, integrating operations as part of these transactions and

possible failures to achieve

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

●

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

or less effective than anticipated;

●

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

vendors’ systems or customers’

information;

●

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

included in “other assets” on our consolidated balance sheets, if

any, could be reduced if estimates of future

taxable income from our operations and tax planning strategies are less

than currently estimated, and sales of our capital stock could trigger a reduction in the amount of

net operating loss

carry-forwards that we may be able to utilize for income tax purposes; and

●

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

reports that we make

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

under the Exchange Act.

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

attributable to us are expressly qualified in their

entirety by this cautionary notice.

We have no obligation and

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

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

statements otherwise are

made.

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Summary of Results of Operations

Quarter ended March 31,

(Dollars in thousands, except per share data)

2023

2022

Net interest income (a)

7,217

6,190

Less: tax-equivalent adjustment

108

112

Net interest income (GAAP)

7,109

6,078

Noninterest income

792

908

Total revenue

7,901

6,986

Provision for credit losses

(250)

Noninterest expense

5,604

4,901

Income tax expense

267

254

Net earnings

1,964

2,081

Basic and diluted earnings per share

0.56

0.59

(a) Tax-equivalent.

See "Table 1 - Explanation of Non-GAAP

Financial Measures."

Financial Summary

The Company’s net earnings were $2.0

million for the first quarter of 2023, compared to $2.1 million for the first quarter of

2022.

Basic and diluted earnings per share were $0.56 per share for the first quarter of 2023,

compared to $0.59 per share

for the first quarter of 2022.

Net interest income (tax-equivalent) was $7.2 million for the first quarter of 2023,

a 17% increase

compared to $6.2 million

for the first quarter of 2022.

This increase was primarily due to improvements in the Company’s

net interest margin.

The

Company’s net interest margin

(tax-equivalent) was 3.17% in the first quarter of 2023 compared to 2.43%

in the first

quarter of 2022.

This increase was primarily due to a more favorable asset mix and higher yields on interest

earning assets.

These higher yields on interest earning assets were partially offset by increased

cost of funds.

The cost of funds increased

to 71 basis points, compared to 34 basis points in the first quarter of 2022,

which also reflected higher market interest rates.

Average loans for the first quarter

of 2023 were $502.2 million, a 14% increase from the first quarter of 2022.

At March 31, 2023, the Company’s allowance

for credit losses was $6.8 million, or 1.35% of total loans, compared to $5.8

million, or 1.14% of total loans, at December 31, 2022, and $4.7

million, or 1.09% of total loans, at March 31, 2022.

The

implementation of CECL required pursuant to Accounting Standards (“ASC”)

326, was effective January 1, 2023,

increased our allowance for credit losses by $1.0 million, or 0.20% of total loans, as a day one

transition adjustment.

March 31, 2023 and December 31, 2022, the Company’s

recorded investment in loans individually evaluated was $2.6

million with a corresponding valuation allowance (included in the allowance

for credit losses) of $0.5 million, compared to

a recorded investment in loans individually evaluated of $0.2 million with no corresponding

valuation allowance at March

31, 2022.

The Company recorded a provision for credit losses during the first quarter of 2023

of $0.1 million, compared to a negative

provision for credit losses of $0.3 million during the first quarter of 2022.

The provision for credit losses under CECL is

reflective of the Company’s credit risk profile

and the future economic outlook and forecasts.

Our CECL model is largely

influenced by economic factors including, most notably,

the anticipated unemployment rate.

The negative provision for

credit losses during the first quarter of 2022 was primarily related to a decrease in total loans, excluding PPP,

during the

first quarter of 2022.

Noninterest income was $0.8 million in the first quarter of 2023,

compared to $0.9 million in the first quarter of 2022.

The

decrease in noninterest income was primarily due to a decrease in mortgage lending income

of $0.2 million as a result of

higher mortgage market interest rates.

Noninterest expense was $5.6 million in the first quarter of 2023,

compared

to $4.9 million for the first quarter of 2022.

The increase in noninterest expense was primarily due to an increase in net occupancy and

equipment expense of $0.3

million related to the Company’s new headquarters,

which opened in June 2022, professional fees expense of $0.1 million,

and other noninterest expenses of $0.3 million.

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Income tax expense was $0.3 million for the first quarter of 2023 and 2022,

respectively.

The Company's effective tax rate

for the first quarter of 2023 was 11.97%,

compared to 10.88% in the first quarter of 2022.

The Company’s effective

income tax rate is principally affected by tax-exempt earnings from the Company’s

investment in municipal securities,

bank-owned life insurance (“BOLI”), and New Markets Tax

Credits (“NMTCs”).

The Company paid cash dividends of $0.27 per share in the first quarter of 2023, an increase of 2%

from the same period of

2022.

The Company repurchased

2,648 shares for $0.1

million during the first quarter of 2023.

At March 31, 2023, the

Bank’s regulatory capital ratios

were well above the minimum amounts required to be “well capitalized” under current

regulatory standards with a total risk-based capital ratio of 16.48%,

a tier 1 leverage ratio of 10.07% and a common equity

tier 1 (“CET1”) ratio of 15.45% at March 31, 2023.

At March 31,

2023, the Company’s equity to total assets ratio

was

7.24%, compared to 6.65% at December 31, 2022, and 7.79% at March 31,

2022.

CRITICAL ACCOUNTING POLICIES

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

accounting

principles and with general practices within the banking industry.

In connection with the application of those principles, we

have made judgments and estimates which, in the case of the determination of our allowance

for credit losses for loans, our

determination of credit losses for investment securities,

recurring and non-recurring fair value measurements, the valuation

of other real estate owned, and the valuation of deferred tax assets, were critical to the determination

of our financial

position and results of operations. Other policies also require subjective judgment and

assumptions and may accordingly

impact our financial position and results of operations.

Accounting Standards Adopted in 2023

On January 1, 2023, the Company adopted ASC 326 as described more fully in our

unaudited financial statements in Part I

of this Quarterly report,

especially Note 1, Accounting Standards Adopted in 2023 and Note 5, Loans and Allowance

for

Credit Losses.

This standard replaced the incurred loss methodology with an expected loss

methodology that is referred to

as the current expected credit loss (“CECL”) methodology.

CECL requires an estimate of credit losses for the remaining

estimated life of the financial asset using historical experience, current conditions,

and reasonable and supportable forecasts

and generally applies to financial assets measured at amortized cost, including loan

receivables and held-to-maturity debt

securities, and some off-balance sheet credit exposures such as unfunded

commitments to extend credit. Financial assets

measured at amortized cost will be presented at the net amount expected to be collected

by using an allowance for credit

losses.

In addition, CECL made changes to the accounting for available for sale

debt securities. One such change is to require

credit losses to be presented as an allowance rather than as a write-down on available for sale debt

securities if management

does not intend to sell and does not believe that it is more likely than not, they will be required

to sell.

The Company adopted ASC 326 and all related subsequent amendments thereto

effective January 1, 2023 using the

modified retrospective approach for all financial assets measured

at amortized cost and off-balance sheet credit exposures.

The transition adjustment upon the adoption of CECL on January 1, 2023 included an increase

in the allowance for credit

losses on loans of $1.0 million, which is presented as a reduction to net loans outstanding,

and an increase in the allowance

for credit losses on unfunded loan commitments of $0.1 million, which is recorded

within other liabilities. The Company

recorded a net decrease to retained earnings of $0.8 million as of January 1, 2023

for the cumulative effect of adopting

CECL, which reflects the transition adjustments noted above, net of the applicable deferred

tax assets recorded. Results for

reporting periods beginning after January 1, 2023 are presented under CECL

while prior period amounts continue to be

reported in accordance with previously applicable accounting standards.

The Company adopted ASC 326 using the prospective transition approach

for debt securities for which other-than-

temporary impairment had been recognized prior to January 1, 2023.

As of December 31, 2022, the Company did not have

any other-than-temporarily impaired investment securities. Therefore,

upon adoption of ASC 326, the Company determined

that an allowance for credit losses on available for sale securities was not deemed

material.

The Company elected not to measure an allowance for credit losses for accrued interest receivable

and instead elected to

reverse interest income on loans or securities that are placed on nonaccrual status,

which is generally when the instrument is

90 days past due, or earlier if the Company believes the collection of interest is doubtful.

The Company has concluded that

this policy results in the timely reversal of uncollectible interest.

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The Company also adopted ASU 2022-02, “Financial Instruments - Credit Losses (Topic

326): Troubled Debt

Restructurings and Vintage Disclosures”

on January 1, 2023, the effective date of the guidance, on a prospective basis.

ASU 2022-02 eliminated the accounting guidance for TDRs, while enhancing disclosure

requirements for certain loan

refinancings and restructurings by creditors when a borrower is experiencing

financial difficulty.

Specifically, rather than

applying the recognition and measurement guidance for TDRs, an entity

must apply the loan refinancing and restructuring

guidance to determine whether a modification results in a new loan or a continuation of an

existing loan. Additionally,

ASU

2022-02 requires an entity to disclose current-period gross write-offs

by year of origination for financing receivables within

the scope of Subtopic 326-20, Financial Instruments—Credit Losses—Measured at

Amortized Cost. ASU 2022-02 did not

have a material impact on the Company’s consolidated

financial statements.

Loans

Loans that management has the intent and ability to hold for the foreseeable

future or until maturity or payoff are reported

at amortized cost. Amortized cost is the principal balance outstanding, net of purchase premiums

and discounts and

deferred fees and costs. Accrued interest receivable related to loans is recorded

in other assets on the consolidated balance

sheets. Interest income is accrued on the unpaid principal balance. Loan origination

fees, net of certain direct origination

costs, are deferred and recognized in interest income using methods that approximate a

level yield without anticipating

prepayments.

The accrual of interest is generally discontinued when a loan becomes 90 days past due and

is not well collateralized and in

the process of collection, or when management believes, after considering economic and

business conditions and collection

efforts, that the principal or interest will not be collectible in the normal course

of business. Past due status is based on

contractual terms of the loan. A loan is considered to be past due when a scheduled payment has

not been received 30 days

after the contractual due date.

All accrued interest is reversed against interest income when a loan is placed on nonaccrual

status. Interest received on such

loans is accounted for using the cost-recovery method, until qualifying for return to accrual.

Under the cost-recovery

method, interest income is not recognized until the loan balance is reduced to zero.

Loans are returned to accrual status

when all the principal and interest amounts contractually due are brought current, there

is a sustained period of repayment

performance, and future payments are reasonably assured.

Allowance for Credit Losses – Loans

The allowance for credit losses is a valuation account that is deducted from the loans' amortized

cost basis to present the net

amount expected to be collected on the loans. Loans are charged

off against the allowance when management believes the

uncollectibility of a loan balance is confirmed. Expected recoveries do not exceed the aggregate

of amounts previously

charged-off and expected to be charged-off

Accrued interest receivable is excluded from the estimate of credit losses.

The allowance for credit losses represents management’s

estimate of lifetime credit losses inherent in loans as of the

balance sheet date. The allowance for credit losses is estimated by management using relevant

available information, from

both internal and external sources, relating to past events, current conditions, and reasonable

and supportable forecasts.

The Company’s loan loss estimation process includes

procedures to appropriately consider the unique characteristics of

its

loan segments (commercial and industrial, construction and land development, commercial

real estate, multifamily,

residential real estate, and consumer loans).

These segments are further disaggregated into loan classes, the level at which

credit quality is monitored.

See Note 5, Loans and Allowance for Credit Losses for additional information about our loan

portfolio.

Credit loss assumptions are estimated using a discounted cash flow ("DCF") model

for each loan segment, except consumer

loans.

The weighted average remaining life method is used to estimate credit loss assumptions

for consumer loans.

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The DCF model calculates an expected life-of-loan loss percentage by considering the

forecasted probability that a

borrower will default (the “PD”), adjusted for relevant forecasted macroeconomic

factors, and LGD, which is the estimate

of the amount of net loss in the event of default.

This model utilizes historical correlations between default experience and

certain macroeconomic factors as determined through a statistical regression analysis.

The forecasted Alabama

unemployment rate is considered in the model for commercial and industrial, construction

and land development,

commercial real estate, multifamily,

and residential real estate loans.

In addition, forecasted changes in the Alabama home

price index is considered in the model for construction and land development and residential

real estate loans; forecasted

changes in the national commercial real estate (“CRE”) price index is considered in the

model for commercial real estate

and multifamily loans; and forecasted changes in the Alabama gross state product

is considered in the model for

multifamily loans.

Projections of these macroeconomic factors, obtained from an independent

third party, are utilized to

predict quarterly rates of default

based on the statistical PD models.

Expected credit losses are estimated over the contractual term of the loan, adjusted for

expected prepayments and principal

payments (“curtailments”) when appropriate. Management's determination of the

contract term excludes expected

extensions, renewals, and modifications unless the extension or

renewal option is included in the contract at the reporting

date and is not unconditionally cancellable by the Company.

To the extent the lives of the

loans in the portfolio extend

beyond the period for which a reasonable and supportable forecast can be

made (which is 4 quarters for the Company), the

Company reverts, on a straight-line basis back to the historical rates over an 8 quarter

reversion period.

The weighted average remaining life method was deemed most appropriate

for the consumer loan segment because

consumer loans contain many different payment structures,

payment streams and collateral.

The weighted average

remaining life method uses an annual charge-off rate over several vintages

to estimate credit losses.

The average annual

charge-off rate is applied to the contractual term adjusted for prepayments.

Additionally, the allowance

for credit losses calculation includes subjective adjustments for qualitative risk

factors that are

believed likely to cause estimated credit losses to differ from historical experience.

These qualitative adjustments may

increase or reduce reserve levels and include adjustments for lending management experience

and risk tolerance, loan

review and audit results, asset quality and portfolio trends, loan portfolio growth, industry concentrations,

trends in

underlying collateral, external factors and economic conditions not already captured.

Loans that do not share risk characteristics are evaluated on an individual basis. When

management determines that

foreclosure is probable and the borrower is experiencing financial difficulty,

the expected credit losses are based on the

estimated fair value of collateral held at the reporting date, adjusted for selling costs as appropriate.

Allowance for Credit Losses – Unfunded Commitments

Financial instruments include off-balance sheet credit instruments,

such as commitments to make loans and commercial

letters of credit issued to meet customer financing needs. The Company’s

exposure to credit loss in the event of

nonperformance by the other party to the financial instrument for off-balance sheet

loan commitments is represented by the

contractual amount of those instruments. Such financial instruments are recorded

when they are funded.

The Company records an allowance for credit losses on off-balance

sheet credit exposures, unless the commitments to

extend credit are unconditionally cancelable, through a charge to provision

for credit losses in the Company’s consolidated

statements of earnings. The allowance for credit losses on off-balance sheet credit

exposures is estimated by loan segment

at each balance sheet date under the current expected credit loss model using the same

methodologies as portfolio loans,

taking into consideration the likelihood that funding will occur as well as any third-party

guarantees. The allowance for

unfunded commitments is included in other liabilities on the Company’s

consolidated balance sheets.

On January 1, 2023, the Company recorded an adjustment for unfunded commitments of $77

thousand for the adoption of

ASC 326. For the three months ended March 31, 2023, the Company recorded a provision

for credit losses for unfunded

commitments of $26 thousand. At March 31, 2023, the liability for credit losses on off

-balance-sheet credit exposures

included in other liabilities was $0.3 million.

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Assessment for Allowance for Credit Losses – Available

-for-Sale Securities

For any securities classified as available-for-sale that are in an unrealized

loss position at the balance sheet date, the

Company assesses whether or not it intends to sell the security,

or more likely than not will be required to sell the security,

before recovery of its amortized cost basis.

If either criteria is met, the security's amortized cost basis is written down to

fair value through net income.

If neither criteria is met, the Company evaluates whether any portion of the decline in

fair

value is the result of credit deterioration.

Such evaluations consider the extent to which the amortized cost of the security

exceeds its fair value, changes in credit ratings and any other known adverse conditions related

to the specific security.

the evaluation indicates that a credit loss exists, an allowance for credit losses is recorded

for the amount by which the

amortized cost basis of the security exceeds the present value of cash flows expected

to be collected, limited by the amount

by which the amortized cost exceeds fair value.

Any impairment not recognized in the allowance for credit losses is

recognized in other comprehensive income.

The Company is required to own certain stock as a condition of membership, such as the

FHLB of Atlanta and Federal

Reserve Bank of Atlanta (“FRB”).

These non-marketable equity securities are accounted for at cost which equals par

redemption value.

These securities do not have a readily determinable fair value as their ownership is restricted and

there is

no market for these securities.

The Company records these non-marketable equity securities as a component

of other

assets, which are periodically evaluated for impairment. Management considers

these non-marketable equity securities to

be long-term investments. Accordingly,

when evaluating these securities for impairment, management considers

the

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

Fair Value

Determination

U.S. GAAP requires management to value and disclose certain of the Company’s

assets and liabilities at fair value,

including investments classified as available-for-sale and derivatives.

ASC 820,

Fair Value

Measurements and Disclosures

which defines fair value, establishes a framework for measuring fair value in accordance

with U.S. GAAP and expands

disclosures about fair value measurements.

For more information regarding fair value measurements and disclosures,

please refer to Note 7, Fair Value,

of the unaudited consolidated financial statements that accompany this report.

Fair values are based on active market prices of identical assets or liabilities when available.

Comparable assets or

liabilities or a composite of comparable assets in active markets are used when identical assets

or liabilities do not have

readily available active market pricing.

However, some of the Company’s

assets or liabilities lack an available or

comparable trading market characterized by frequent transactions between

willing buyers and sellers. In these cases, fair

value is estimated using pricing models that use discounted cash flows and

other pricing techniques. Pricing models and

their underlying assumptions are based upon management’s

best estimates for appropriate discount rates, default rates,

prepayments,

market volatility and other factors, taking into account current observable market data and

experience.

These assumptions may have a significant effect on the reported

fair values of assets and liabilities and the related income

and expense. As such, the use of different models and assumptions, as

well as changes in market conditions, could result in

materially different net earnings and retained earnings results.

Other Real Estate Owned

Other real estate owned or OREO, consists of properties obtained through foreclosure or otherwise

in satisfaction of loans

and is reported at the lower of cost or fair value, less estimated costs to sell at the date acquired

with any loss recognized as

a charge-off through the allowance for credit losses.

Additional OREO losses for subsequent valuation adjustments are

determined on a specific property basis and are included as a component of other noninterest

expense along with holding

costs. Any gains or losses on disposal of OREO are also reflected in noninterest expense.

Significant judgments and

complex estimates are required in estimating the fair value of OREO, and the period of time

within which such estimates

can be considered current is significantly shortened during periods of

market volatility. As a result, the net proceeds

realized from sales transactions could differ significantly from appraisals,

comparable sales, and other estimates used to

determine the fair value of OREO.

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Deferred Tax

Asset Valuation

A valuation allowance is recognized for a deferred tax asset if, based on the weight of available

evidence, it is more-likely-

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

realization of deferred tax assets

is dependent upon the generation of future taxable income during the periods

in which those temporary differences become

deductible. Management considers the scheduled reversal of deferred

tax liabilities, projected future taxable income and tax

planning strategies in making this assessment. At March 31, 2023

we had total deferred tax assets of $12.2 million included

as “other assets”, including $11.9 million resulting from

unrealized losses in our securities portfolio.

Based upon the level

of taxable income over the last three years and projections for future taxable income over

the periods in which the deferred

tax assets are deductible, management believes it is more likely than not that

we will realize the benefits of these deductible

differences at March 31, 2023. The amount of the deferred tax assets considered

realizable, however, could be reduced if

estimates of future taxable income are reduced.

RESULTS

OF OPERATIONS

Average Balance

Sheet and Interest Rates

Quarter ended March 31,

2023

2022

Average

Yield/

Average

Yield/

(Dollars in thousands)

Balance

Rate

Balance

Rate

Loans and loans held for sale

502,158

4.65%

440,608

4.46%

Securities - taxable

344,884

2.19%

374,825

1.45%

Securities - tax-exempt

57,800

3.59%

60,272

3.57%

Total securities

402,684

2.39%

435,097

1.74%

Federal funds sold

7,314

4.71%

73,575

0.17%

Interest bearing bank deposits

11,607

4.47%

83,161

0.16%

Total interest-earning assets

923,763

3.66%

1,032,441

2.66%

Deposits:

NOW

187,566

0.54%

200,907

0.12%

Savings and money market

300,657

0.39%

345,549

0.20%

Time Deposits

155,676

1.51%

159,785

0.90%

Total interest-bearing deposits

643,899

0.70%

706,241

0.34%

Short-term borrowings

3,046

1.11%

3,943

0.50%

Total interest-bearing liabilities

646,945

0.71%

710,184

0.34%

Net interest income and margin (tax-equivalent)

7,217

3.17%

6,190

2.43%

Net Interest Income and Margin

Net interest income (tax-equivalent) was $7.2 million for the first quarter of 2023,

a 17% increase compared to $6.2 million

for the first quarter of 2022.

This increase was primarily due to improvements in the Company’s

net interest margin (tax-

equivalent).

The Company’s net interest

margin (tax-equivalent) was 3.17% in the first quarter of 2023

compared to 2.43%

in the first quarter of 2022.

This increase was primarily due to a more favorable asset mix and higher yields on interest

earning assets.

Since March of 2022, the Federal Reserve increased the target

federal funds range from 0 – 0.25% to 4.75 –

5.00%.

The target rate was increased another 25 basis points on May 3, 2023,

and further increases in the target federal

funds rate appear likely if inflation remains elevated.

The tax-equivalent yield on total interest-earning assets increased by 100

basis points to 3.66%

in the first quarter of 2023

compared to 2.66% in the first quarter of 2022.

This increase was primarily due to changes in our asset mix and higher

market interest rates on interest earning assets.

The cost of total interest-bearing liabilities increased by 37 basis points to

0.71% in the first quarter of 2023 compared to

0.34% in the first quarter of 2022.

Our deposit costs may continue to increase as the Federal Reserve increases its target

federal funds rate, market interest rates increase, and as customer behaviors change

as a result of inflation and higher

market interest rates on deposits and other alternative investments.

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The Company continues to deploy various asset liability management strategies

to manage its risks from interest rate

fluctuations. Deposit and loan pricing remain competitive in our

markets.

We believe this challenging

rate environment

will continue throughout 2023.

Our ability to compete and manage our deposit costs until our interest-earning assets

reprice will be important to maintaining or potentially increasing our net interest

margin during the monetary tightening

cycle that we believe will continue throughout 2023.

Provision for Credit Losses

On January 1, 2023, we adopted ASC 326, which introduces the current expected credit

losses (CECL) methodology and

requires us to estimate all expected credit losses over the remaining life of our loans.

Accordingly, the provision for credit

losses represents a charge to earnings necessary to establish an allowance

for credit losses that, in management's evaluation,

is adequate to provide coverage for all expected credit losses. The Company recorded

a provision for credit losses during

the first quarter of 2023 of $0.1 million, compared to a negative provision for credit

losses of $0.3 million during the first

quarter of 2022.

Provision expense is affected by organic loan growth in our loan

portfolio, our internal assessment of the

credit quality of the loan portfolio, our expectations about future economic conditions and

net charge-offs.

Our CECL

model is largely influenced by economic factors including,

most notably, the anticipated

unemployment rate, which may be

affected by monetary policy.

The negative provision for credit losses during the first quarter of 2022

was primarily related

to a decrease in total loans, excluding federally-guaranteed PPP loans,

during the first quarter of 2022.

Our allowance for credit losses reflects an amount we believe appropriate,

based on our allowance assessment

methodology, to adequately cover

all expected future losses as of the date the allowance is determined. At March 31,

2023,

the Company’s allowance for credit

losses was $6.8 million, or 1.35% of total loans, compared to $5.8 million, or 1.14% of

total loans, at December 31, 2022, and $4.7 million, or 1.09% of total loans, at March 31, 2022.

The implementation of

CECL, as of January 1, 2023, increased our allowance for credit losses by $1.0

million, or 0.20% of total loans, as a day

one transition adjustment to ASC 326.

At March 31, 2023 and December 31, 2022, the Company’s

recorded investment in

loans individually evaluated was $2.6 million with a corresponding valuation allowance

(included in the allowance for

credit losses) of $0.5 million, compared to a recorded investment in loans individually

evaluated of $0.2 million with no

corresponding valuation allowance at March 31, 2022.

One of the downgraded loans, with a recorded investment of $1.3

million and a corresponding valuation allowance of $0.5 million at March 31,

2023, was paid in full subsequent to March

31, 2023.

Noninterest Income

Quarter ended March 31,

(Dollars in thousands)

2023

2022

Service charges on deposit accounts

154

142

Mortgage lending income

253

Bank-owned life insurance

156

Other

389

414

Total noninterest income

792

908

The Company’s income from mortgage lending

was primarily attributable to the (1) origination and sale of mortgage loans

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

from the sale of the mortgage

loans originated, origination fees, underwriting fees, and other fees associated

with the origination of loans, which are

netted against the commission expense associated with these originations. The

Company’s normal practice is to originate

mortgage loans for sale in the secondary market and to either sell or retain the associated

MSRs when the loan is sold.

MSRs are recognized based on the fair value of the servicing right on the date

the corresponding mortgage loan is sold.

Subsequent to the date of transfer, the Company

has elected to measure its MSRs under the amortization method.

Servicing

fee income is reported net of any related amortization expense.

The Company evaluates MSRs for impairment on a quarterly basis.

Impairment is determined by grouping MSRs by

common predominant characteristics, such as interest rate and loan type.

If the aggregate carrying amount of a particular

group of MSRs exceeds the group’s aggregate fair

value, a valuation allowance for that group is established.

The valuation

allowance is adjusted as the fair value changes.

An increase in mortgage interest rates typically results in an increase in the

fair value of the MSRs while a decrease in mortgage interest rates typically results in a decrease

in the fair value of MSRs.

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The following table presents a breakdown of the Company’s

mortgage lending income.

Quarter ended March 31,

(Dollars in thousands)

2023

2022

Origination income, net

229

Servicing fees, net

Total mortgage lending income

253

The Company’s income from mortgage lending

typically fluctuates as mortgage interest rates change and is primarily

attributable to the origination and sale of mortgage loans. Origination income decreased

as market interest rates on

mortgage loans increased.

The decrease in origination income was partially offset by an increase

in servicing fees, net of

related amortization expense as prepayment speeds slowed, resulting in decreased

amortization expense.

Noninterest Expense

Quarter ended March 31,

(Dollars in thousands)

2023

2022

Salaries and benefits

2,927

2,950

Net occupancy and equipment

799

434

Professional fees

338

230

Other

1,540

1,287

Total noninterest expense

5,604

4,901

The increase in net occupancy and equipment expense was primarily due to increased

expenses related to the Company’s

new headquarters in downtown Auburn.

This amount includes depreciation expense and other costs associated

with

operating the new headquarters.

The Company relocated its main office branch and bank operations into its

newly

constructed headquarters during June 2022.

The increase in other noninterest expense was due to a variety of miscellaneous items

including increased information

technology and systems expenses, losses on New Markets Tax

Credits investments and other miscellaneous operating

expenses.

Income Tax

Expense

Income tax expense was $0.3 million for the first quarter of 2023

and 2022, respectively.

The Company’s effective income

tax rate for the first quarter of 2023 was 11.97%, compared

to 10.88% in the first quarter of 2022.

The Company’s

effective income tax rate is principally impacted by tax-exempt earnings

from the Company’s investments

in municipal

securities, bank-owned life insurance, and New Markets Tax

Credits.

BALANCE SHEET ANALYSIS

Securities

Securities available-for-sale were $405.7

million at March 31, 2023 compared to $405.3 million at December 31, 2022.

This increase reflects a $7.3 million increase in the fair value of securities available

-for-sale, offset by a decrease in the

amortized cost basis of securities available-for-sale of $6.9 million.

The average annualized tax-equivalent yields earned

on total securities were 2.39%

in the first quarter of 2023 and 1.74% in the first quarter of 2022.

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Loans

2023

2022

First

Fourth

Third

Second

First

(In thousands)

Quarter

Commercial and industrial

59,602

66,212

70,715

70,117

73,327

Construction and land development

66,500

66,479

54,773

38,654

33,058

Commercial real estate

267,962

264,576

249,527

239,873

234,637

Residential real estate

101,975

97,648

91,469

85,106

78,983

Consumer installment

9,002

9,546

7,551

7,122

8,412

Total loans

505,041

504,461

474,035

440,872

428,417

Total loans

were $505.0 million at March 31, 2023, compared to $504.5 million at December

31, 2022.

Four loan

categories represented the majority of the loan portfolio at March 31, 2023:

commercial real estate (53%), residential real

estate (20%), commercial and industrial (12%) and construction and land development

(13%).

Approximately 25% of the

Company’s commercial real estate loans

were classified as owner-occupied at March 31, 2023.

Within the residential real estate portfolio segment, the

Company had junior lien mortgages of approximately $7.6

million,

or 2%, and $7.4 million, or 1%, of total loans at March 31, 2023 and December 31, 2022, respectively.

For residential real

estate mortgage loans with a consumer purpose, the Company had no loans that required

interest only payments at March

31, 2023 and December 31, 2022. The Company’s

residential real estate mortgage portfolio does not include any option

hybrid ARM loans, subprime loans, or any material amount of other consumer

mortgage products which are generally

viewed as high risk.

The average yield earned on loans and loans held for sale was 4.65% in the first quarter of

2023 and 4.46% in the first

quarter of 2022.

The specific economic and credit risks associated with our loan portfolio include, but are

not limited to, the effects of

current economic conditions, including inflation and the continuing increases in

market interest rates, remaining COVID-19

pandemic effects including supply chain disruptions, commercial

office occupancy levels, housing supply shortages and

inflation, on our borrowers’ cash flows, real estate market sales volumes and liquidity,

valuations used in making loans and

evaluating collateral, availability and cost of financing properties, real

estate industry concentrations, competitive pressures

from a wide range of other lenders, deterioration in certain credits, interest rate fluctuations,

reduced collateral values or

non-existent collateral, title defects, inaccurate appraisals, financial deteriora

tion of borrowers, fraud, and any violation of

applicable laws and regulations. Various

projects financed earlier that were based on lower interest rate assumptions

than

currently in effect may not be as profitable or successful at higher interest rate

currently in effect and currently expected in

the future.

The Company attempts to reduce these economic and credit risks through its loan-to-value

guidelines for collateralized

loans, investigating the creditworthiness of borrowers and monitoring borrowers’ financial

position. Also, we have

established and periodically review,

lending policies and procedures. Banking regulations limit a bank’s

credit exposure by

prohibiting unsecured loan relationships that exceed 10% of its capital; or 20%

of capital, if loans in excess of 10% of

capital are fully secured. Under these regulations, we are prohibited from having secured

loan relationships in excess of

approximately $22.8 million.

Furthermore, we have an internal limit for aggregate credit exposure (loans outstanding

plus

unfunded commitments) to a single borrower of $20.6 million. Our loan policy requires that

the Loan Committee of the

Board of Directors approve any loan relationships that exceed this internal limit.

At March 31, 2023, the Bank had no

relationships exceeding these limits.

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We periodically analyze

our commercial and industrial and commercial real estate loan portfolios to

determine if a

concentration of credit risk exists in any one or more industries. We

use classification systems broadly accepted by the

financial services industry in order to categorize our commercial borrowers.

Loan concentrations to borrowers in the

following classes exceeded 25% of the Bank’s total risk

-based capital at March 31, 2023 and December 31, 2022.

March 31,

December 31,

(Dollars in thousands)

2023

2022

Lessors of 1-4 family residential properties

53,467

52,278

Multi-family residential properties

40,974

41,084

Hotel/motel

32,959

33,378

Allowance for Credit Losses

The Company maintains the allowance for credit losses at a level that management believes

appropriate to adequately cover

the Company’s estimate of expected

losses in the loan portfolio. The allowance for credit losses was $6.8 million at March

31, 2023 compared to $5.8 million at December 31, 2022,

which management believed to be adequate at each of the

respective dates. The judgments and estimates associated with the determination of the

allowance for credit losses are

described under “Critical Accounting Policies.”

On January 1, 2023, we adopted ASC 326,

which introduces the current expected credit losses (CECL) methodology and

requires us to estimate all expected credit losses over the remaining life of our loan portfolio.

Accordingly, beginning in

2023, the allowance for credit losses represents an amount that, in management's evaluation,

is adequate to provide

coverage for all expected future credit losses on outstanding loans. As of March 31,

2023 and December 31, 2022, our

allowance for credit losses was approximately $6.8 million and $5.8

million, respectively, which our

management believes

to be adequate at each of the respective dates. Our allowance for credit losses as a percentage of total

loans was 1.35% at

March 31, 2023, up from 1.14%

at December 31, 2022.

The increase in the allowance for credit losses is largely the result of the implementation

of ASC

326 on January 1, 2023,

which resulted in an adjustment to the opening balance of the allowance for credit losses of

$1.0 million. Our CECL models

rely largely on projections of macroeconomic conditions to estimate

future credit losses. Macroeconomic factors used in the

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

national commercial real estate price

index and the Alabama gross state product. Projections of these

macroeconomic factors, obtained from an independent third

party, are utilized to predict

quarterly rates of default.

Under the CECL methodology the allowance for credit losses is measured

on a collective basis for pools of loans with

similar risk characteristics, and for loans that do not share similar risk characteristics

with the collectively evaluated pools,

evaluations are performed on an individual basis. Losses are predicted over

a period of time determined to be reasonable

and supportable, and at the end of the reasonable and supportable period

losses are reverted to long term historical averages.

At March 31, 2023, reasonable and supportable periods of 12 months were utilized

followed by a 24 month straight line

reversion period to long term averages.

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A summary of the changes in the allowance for credit losses and certain asset

quality ratios for the first quarter of 2023 and

the previous four quarters is presented below.

2023

2022

First

Fourth

Third

Second

First

(Dollars in thousands)

Quarter

Balance at beginning of period

5,765

4,966

4,716

4,658

4,939

Impact of adopting ASC 326

1,019

Charge-offs:

Commercial and industrial

—

(205)

(13)

(4)

—

Consumer installment

(11)

(3)

(16)

(48)

Total charge

-offs

(11)

(208)

(16)

(20)

(48)

Recoveries

Net (charge-offs) recoveries

(3)

(201)

—

(31)

Provision for credit losses

1,000

250

—

(250)

Ending balance

6,821

5,765

4,966

4,716

4,658

as a % of loans

1.35

1.14

1.05

1.07

1.09

as a % of nonperforming loans

255

211

1,431

1,314

1,256

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

—

0.04

—

(0.05)

0.03

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

Nonperforming Assets

At March 31, 2023 and December 31, 2022 the Company had $2.7 million in nonperforming assets,

respectively.

The table below provides information concerning total nonperforming assets

and certain asset quality ratios for the first

quarter of 2023 and the previous four quarters.

2023

2022

First

Fourth

Third

Second

First

(Dollars in thousands)

Quarter

Nonperforming assets:

Nonaccrual loans

2,680

2,731

347

359

371

Other real estate owned

—

374

Total nonperforming assets

2,680

2,731

347

359

745

as a % of loans and other real estate owned

0.53

0.54

0.07

0.08

0.17

as a % of total assets

0.26

0.27

0.03

0.07

Nonperforming loans as a % of total loans

0.53

0.54

0.07

0.08

0.09

The table below provides information concerning the composition of nonaccrual

loans for the first quarter of 2023 and the

previous four quarters.

2023

2022

First

Fourth

Third

Second

First

(In thousands)

Quarter

Nonaccrual loans:

Commercial and industrial

432

443

—

Commercial real estate

2,103

2,116

170

176

182

Residential real estate

136

172

177

183

189

Consumer installment

—

Total nonaccrual loans

2,681

2,731

347

359

371

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The Company discontinues the accrual of interest income when (1) there is a significant

deterioration in the financial

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

(2) the principal or interest is

90 days or more past due, unless the loan is both well-secured and in the process of collection

The Company had $2.7

million in loans on nonaccrual status at March 31, 2023 and December 31,

2022, respectively.

The Company had no loans 90 days or more past due and still accruing at March 31,

2023 and December 31, 2022,

respectively.

The table below provides information concerning the composition of OREO

for the third quarter of 2023 and the previous

four quarters.

2023

2022

First

Fourth

Third

Second

First

(In thousands)

Quarter

Other real estate owned:

Commercial real estate

—

374

Total other real estate owned

—

374

Deposits

Total deposits decreased

$11.1 million, or 1%, to $939.2 million at March 31, 202

3, compared to $950.3 million at

December 31, 2022. This decrease reflects net outflows to higher yield investment

alternatives in a rising interest rate

environment and a decline in balances in existing accounts due to increased customer

spending.

Noninterest-bearing

deposits were $304.2 million, or 32% of total deposits, at March 31, 2023,

compared to $311.4 million, or 33% of total

deposits at December 31, 2022.

We had no brokered

deposits on March 31, 2023

or at December 31, 2022.

Estimated uninsured deposits totaled $368.6 million and $381.7 million at March 31,

2023 and December 31, 2022,

respectively.

Uninsured amounts are estimated based on the portion of account balances in excess of

FDIC insurance

limits.

The average rate paid on total interest-bearing deposits was 0.70% in the first quarter of 2023

compared to 0.34% in the

first quarter of 2022.

Other Borrowings

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

borrowings generally consist of federal

funds purchased and securities sold under agreements to repurchase

with an original maturity of one year or less.

The Bank

had available federal funds lines totaling $61.0 million with none outstanding

at March 31, 2023, and December 31, 2022,

respectively. Securities sold

under agreements to repurchase totaled $2.5 million and $2.6 million at March 31,

2023 and

December 31, 2022, respectively.

At March 31, 2023 and December 31, 2022, the Bank had no borrowings from the

Federal Reserve discount window and no borrowings under the Federal Reserve’s

new Bank Term Facility Program

(“BTFP”), which opened March 12, 2023.

The average rate paid on short-term borrowings was 1.11

in the first quarter of 2023 and 2022,

respectively.

The Company had no long-term debt at March 31, 2023 and December 31, 2022.

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CAPITAL ADEQUACY

The Company’s consolidated

stockholders’ equity was $73.6 million and $68.0 million as of March 31,

2023 and

December 31, 2022, respectively.

The increase from December 31, 2022 was primarily driven by other comprehensive

income due to the change in unrealized gains/losses on securities available-for-sale,

net of tax of $5.5 million.

These

unrealized losses do not affect the Bank’s

capital for regulatory capital purposes.

The Company’s consolidated

stockholders’ equity was also increased by net earnings of $2.0 million.

These increases in the Company’s consolidated

stockholders’ equity were partially offset by cash dividends

paid of $0.9 million, the cumulative effect of adopting the

CECL accounting standard of $0.8 million, and repurchases of the Company’s

stock of $0.1

million.

The Company paid cash dividends of $0.27 per share in the first quarter of 2023, an increase of 2%

from the same period in

2022. The Company’s share repurchases of $0.

million since December 31, 2022 resulted in 2,648 fewer outstanding

common shares at March 31, 2023.

These shares were repurchased at an average cost per share of $24.11

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

capital framework and

related Dodd-Frank Wall

Street Reform and Consumer Protection Act changes.

The rules included the implementation of a

capital conservation buffer that is added to the minimum requirements

for capital adequacy purposes.

The capital

conservation buffer was subject to a three year phase-in period

that began on January 1, 2016 and was fully phased-in on

January 1, 2019 at 2.5%.

A banking organization with a conservation buffer of less than the

required amount will be

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

bonus payments to

executive officers.

At March 31, 2023, the Bank’s ratio

was sufficient to meet the fully phased-in conservation buffer.

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

banking regulators adopted an interim final rule that

amended the capital conservation buffer.

The interim final rule was adopted as a final rule on August 26, 2020.

The new

rule revises the definition of “eligible retained income” for purposes of the maximum payout

ratio to allow banking

organizations to more freely use their capital buffers to promote

lending and other financial intermediation activities, by

making the limitations on capital distributions more gradual.

The eligible retained income is now the greater of (i) net

income for the four preceding quarters, net of distributions and associated

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

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

This rule only affects the capital buffers, and banking

organizations were encouraged to make prudent capital distribution decisions.

The Federal Reserve has treated us as a “small bank holding company’ under the Federal

Reserve’s Small Bank Holding

Company Policy.

Accordingly, our capital adequacy is evaluated

at the Bank level, and not for the Company and its

consolidated subsidiaries.

The Bank’s tier 1 leverage ratio

was 10.07%, CET1 risk-based capital ratio was 15.45%, tier 1

risk-based capital ratio was 15.45%, and total risk-based capital ratio was 16.48% at

March 31, 2023. These ratios exceed

the minimum regulatory capital percentages of 5.0% for tier 1 leverage ratio, 6.5%

for CET1 risk-based capital ratio, 8.0%

for tier 1 risk-based capital ratio, and 10.0% for total risk-based capital ratio

to be considered “well capitalized.”

The

Bank’s capital conservation buffer

was 8.48% at March 31, 2023.

MARKET AND LIQUIDITY RISK MANAGEMENT

Management’s objective is to manage assets and

liabilities to provide a satisfactory,

consistent level of profitability within

the framework of established liquidity,

loan, investment, borrowing, and capital policies. The Bank’s

Asset Liability

Management Committee (“ALCO”) is charged with the responsibility

of monitoring these policies, which are designed to

ensure an acceptable asset/liability composition. Two

critical areas of focus for ALCO are interest rate risk and liquidity

risk management.

Interest Rate Risk Management

In the normal course of business, the Company is exposed to market risk arising from fluctuations

in interest rates. ALCO

measures and evaluates interest rate risk so that the Bank can meet customer demands for

various types of loans and

deposits. Measurements used to help manage interest rate sensitivity include an earnings simulation

model and an economic

value of equity (“EVE”) model.

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Earnings simulation

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

modeling.

Forecasted levels of earning assets, interest-bearing liabilities, and off

-balance sheet financial instruments are combined

with ALCO forecasts of market interest rates for the next 12 months and other

factors in order to produce various earnings

simulations and estimates. To

help limit interest rate risk, we have guidelines for earnings at risk which seek to limit the

variance of net interest income from gradual changes in interest rates.

For changes up or down in rates from management’s

flat interest rate forecast over the next 12 months, policy limits for net interest income

variances are as follows:

●

+/- 20% for a gradual change of 400 basis points

●

+/- 15% for a gradual change of 300 basis points

●

+/- 10% for a gradual change of 200 basis points

●

+/- 5% for a gradual change of 100 basis points

While a gradual change in interest rates was used in the above analysis to provide an estimate

of exposure under these

scenarios, our modeling under both a gradual and instantaneous change in interest rates indicates

our balance sheet is asset

sensitive.

At March 31, 2023, our earnings simulation model indicated that we were in compliance

with the policy guidelines noted

above.

Economic Value

of Equity

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

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

are estimated by discounting expected

cash flows from assets, liabilities, and off-balance sheet items,

which establishes a base case EVE. In contrast with our

earnings simulation model, which evaluates interest rate risk over a 12 month timeframe,

EVE uses a terminal horizon

which allows for the re-pricing of all assets, liabilities, and off-balance sheet items.

Further, EVE is measured using values

as of a point in time and does not reflect any actions that ALCO might take in responding to

or anticipating changes in

interest rates, or market and competitive conditions.

To help limit interest rate risk,

we have stated policy guidelines for an

instantaneous basis point change in interest rates, such that our EVE should not decrease from our

base case by more than

the following:

●

45% for an instantaneous change of +/- 400 basis points

●

35% for an instantaneous change of +/- 300 basis points

●

25% for an instantaneous change of +/- 200 basis points

●

15% for an instantaneous change of +/- 100 basis points

At March 31, 2023, our EVE model indicated that we were in compliance

with our policy guidelines.

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

income will be affected by

changes in interest rates. Income associated with interest-earning assets and costs associated

with interest-bearing liabilities

may not be affected uniformly by changes in interest rates. In addition,

the magnitude and duration of changes in interest

rates may have a significant impact on net interest income. For example, although certain

assets and liabilities may have

similar maturities or periods of repricing, they may react in different

degrees to changes in market interest rates, and other

economic and market factors, including market perceptions.

Interest rates on certain types of assets and liabilities fluctuate

in advance of changes in general market rates, while interest rates on other types of assets

and liabilities may lag behind

changes in general market rates. In addition, certain assets, such as adjustable rate

mortgage loans, have features (generally

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

Prepayments

and early withdrawal levels

also could deviate significantly from those assumed in calculating the maturity of certain instruments.

The ability of many

borrowers to service their debts also may decrease during periods of rising interest rates or economic

stress, which may

differ across industries and economic sectors. ALCO reviews each of the

above interest rate sensitivity analyses along with

several different interest rate scenarios in seeking satisfactory,

consistent levels of profitability within the framework of the

Company’s established liquidity,

loan, investment, borrowing, and capital policies.

The Company may also use derivative financial instruments to improve the balance betw

een interest-sensitive assets and

interest-sensitive liabilities, and as a tool to manage interest rate sensitivity

while continuing to meet the credit and deposit

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

interest rate swaps to facilitate

customer transactions and meet their financing needs. These interest rate swaps qualify

as derivatives, but are not

designated as hedging instruments. At March 31, 2023 and December 31,

2022, the Company had no derivative contracts

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

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Liquidity Risk Management

Liquidity is the Company’s ability to convert

assets into cash equivalents in order to meet daily cash flow requirements,

primarily for deposit withdrawals, loan demand and maturing obligations.

The Company seeks to manage its liquidity to

manage or reduce its costs of funds by maintaining liquidity believed adequate

to meet its anticipated funding needs, while

balancing against excessive liquidity that likely would reduce earnings due to the

cost of foregoing alternative higher-

yielding assets.

Liquidity is managed at two levels. The first is the liquidity of the Company.

The second is the liquidity of the Bank. The

management of liquidity at both levels is essential, because the Company and the Bank are

separate and distinct legal

entities with different funding needs and sources, and each are subject

to regulatory guidelines and requirements.

The

Company depends upon dividends from the Bank for liquidity to pay its operating expenses,

debt obligations and

dividends.

The Bank’s payment of dividends depends

on its earnings, liquidity, capital

and the absence of regulatory

restrictions on such dividends.

The primary source of funding and liquidity for the Company has been dividends received

from the Bank.

If needed, the

Company could also borrow money,

or issue common stock or other securities.

Primary uses of funds by the Company

include dividends paid to stockholders, Company stock repurchases, and payment of

Company expenses.

Primary sources of funding for the Bank include customer deposits, other borrowings,

interest payments on earning assets,

repayment and maturity of securities and loans, sales of securities, and the

sale of loans,

particularly residential mortgage

loans. The Bank has access to federal funds lines from various banks and borrowings

from the Federal Reserve discount

window and the Federal Reserve’s recent

BTFP borrowing facility.

In addition to these sources, the Bank may participate in

the FHLB’s advance program

to obtain funding for its growth. Advances include both fixed and variable terms and

may be

taken out with varying maturities. At March 31, 2023, the Bank had a remaining available

line of credit with the FHLB of

$307.0 million. At March 31, 2023, the Bank also had $61.0

million of available federal funds lines with no borrowings

outstanding. Primary uses of funds include repayment of maturing obligations and

growing the loan portfolio.

The Bank

has no brokered deposits on March 31, 2023 or at December 31, 2022.

Management believes that the Company and the Bank have adequate sources of liquidity

to meet all their respective known

contractual obligations and unfunded commitments, including loan commitments

and reasonably

rexpected borrower,

depositor, and creditor requirements over the next twelve

months.

Off-Balance Sheet Arrangements, Commitments, Contingencies and Contractual

Obligations

At March 31, 2023, the Bank had outstanding standby letters of credit of $0.8 million and

unfunded loan commitments

outstanding of $91.1 million.

Because these commitments generally have fixed expiration dates and

many will expire

without being drawn upon, the total commitment level does not necessarily represent future

cash requirements. If needed to

fund these outstanding commitments,

the Bank could liquidate federal funds sold or a portion of our securities available-

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

Mortgage lending activities

We generally sell residential

mortgage loans in the secondary market to Fannie Mae while retaining the servicing

of these

loans. The sale agreements for these residential mortgage loans with Fannie Mae and other

investors include various

representations and warranties regarding the origination and characteristics of the

residential mortgage loans.

Although the

representations and warranties vary among investors, they typically cover ownership

of the loan, validity of the lien

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

loan, compliance with loan

criteria set forth in the applicable agreement, compliance with applicable federal,

state, and local laws, among other

matters.

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As of March 31, 2023, the unpaid principal balance of residential mortgage loans,

which we have originated and sold, but

retained the servicing rights, was $226.7 million.

Although these loans are generally sold on a non-recourse basis, we may

be obligated to repurchase residential mortgage loans or reimburse investors

for losses incurred (make whole requests) if a

loan review reveals a potential breach of seller representations and warranties.

Upon receipt of a repurchase or make whole

request, we work with investors to arrive at a mutually agreeable resolution. Repurchase

and make whole requests are

typically reviewed on an individual loan by loan basis to validate the claims made by the investor

and to determine if a

contractually required repurchase or make whole event has occurred. We

seek to reduce and manage the risks of potential

repurchases, make whole requests, or other claims by mortgage loan investors

through our underwriting and quality

assurance practices and by servicing mortgage loans to meet investor and secondary

market standards.

The Company was not required to repurchase any loans during the first quarter of 2023

as a result of representation and

warranty provisions contained in the Company’s

sale agreements with Fannie Mae, and had no pending repurchase or

make-whole requests at March 31, 2023.

We service all residential

mortgage loans originated and sold by us to Fannie Mae.

As servicer, our primary duties are to:

(1) collect payments due from borrowers;

(2) advance certain delinquent payments of principal and interest;

(3) maintain

and administer any hazard, title, or primary mortgage insurance policies relating to the

mortgage loans;

(4) maintain any

required escrow accounts for payment of taxes and insurance and administer escrow payments;

and (5) foreclose on

defaulted mortgage loans or take other actions to mitigate the potential losses to investors

consistent with the agreements

governing our rights and duties as servicer.

The agreement under which we act as servicer generally specifies standard

of responsibility for actions taken by us in such

capacity and provides protection against expenses and liabilities incurred by us when acting

in compliance with the

respective servicing agreements.

However, if we commit a material breach of our obligations

as servicer, we may be

subject to termination if the breach is not cured within a specified period following notice.

The standards governing

servicing and the possible remedies for violations of such standards are determined

by servicing guides issued by Fannie

Mae as well as the contract provisions established between Fannie Mae and the Bank.

Remedies could include repurchase

of an affected loan.

Although repurchase and make whole requests related to representation and

warranty provisions and servicing activities

have been limited to date, it is possible that requests to repurchase mortgage loans or reimburse

investors for losses incurred

(make whole requests) may increase in frequency if investors more aggressively

pursue all means of recovering losses on

their purchased loans.

As of March 31, 2023, we do not believe that this exposure is material due to the historical level

repurchase requests and loss trends, in addition to the fact that 99% of our residential

mortgage loans serviced for Fannie

Mae were current as of such date.

We maintain ongoing communications

with our investors and will continue to evaluate

this exposure by monitoring the level and number of repurchase requests as well as the delinquency

rates in our investor

portfolios.

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

As a result, the Bank is not

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

loans where the borrower is

entitled to forbearance.

Effects of Inflation and Changing Prices

The consolidated financial statements and related consolidated financial data presented

herein have been prepared in

accordance with GAAP and practices within the banking industry which require

the measurement of financial position and

operating results in terms of historical dollars without considering the changes in

the relative purchasing power of money

over time due to inflation. Unlike most industrial companies, virtually all the assets and liabilities

of a financial institution

are monetary in nature. As a result, interest rates have a more significant impact on a

financial institution’s performance

than the effects of general levels of inflation.

Inflation can affect our noninterest expenses. It also can affect

the interest rates we have to pay on our deposits and other

borrowings, and the interest rates we earn on our earning assets.

The difference between our interest expense and interest

income is also affected by the shape of the yield curve and the speed

at which our assets and liabilities reprice in response

to interest rate changes.

The yield curve was inverted on March 2023, which means shorter

term interest rates are higher

than longer interest rates.

This results in a lower spread between our costs of funds and our interest income.

In addition,

net interest income could be affected by asymmetrical changes in the different

interest rate indexes, given that not all of our

assets or liabilities are priced with the same index. Higher market interest rates and sales

of securities held by the Federal

Reserve to reduce inflation generally reduce economic activity and may reduce loan

demand and growth.

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Inflation is running at levels unseen in decades and well above the Federal Reserve’s

long term inflation goal of 2.0%

annually.

Beginning in March 2022, the Federal Reserve has been raising target

federal funds interest rates and reducing its

securities holdings in an effort to reduce inflation During 2022,

the Federal Reserve increased the target federal funds range

from 0 – 0.25% to 4.25 – 4.50%.

The target rate was increased another 25 basis points on each of January 31,

March 7 and

May 3, 2023 to 5.00-5.25%, and further increases in the target federal

funds rate appear likely if inflation remains elevated.

Our deposit costs may increase as the Federal Reserve increases its target

federal funds rate, market interest rates increase,

and as customer savings behaviors change as a result of inflation and seek higher market interest

rates on deposits and other

alternative investments.

Monetary efforts to control inflation may also affect

unemployment which is an important

component in our CECL model used to estimate our allowance for credit losses.

CURRENT ACCOUNTING DEVELOPMENTS

The following ASU has been issued by the FASB

but is not yet effective.

●

ASU 2023-02,

Investments – Equity Method and Joint Ventures

(Topic 323):

Accounting for Investments in Tax

Credit Structures Using

the Proportional Amortization Method

Information about this pronouncement is described in more detail below.

ASU 2023-02,

Investments – Equity Method and Joint Ventures

(Topic 323):

Accounting for Investments in Tax

Credit

Structures Using the Proportional

Amortization Method

, The amendments in this Update permit reporting entities to elect

to account for their tax equity investments, regardless of the tax credit program from which

the income tax credits are

received, using the proportional amortization method if certain conditions are

met. The new standard is effective for fiscal

years, and interim periods within those fiscal years, beginning after December 15,

2023.

The Company is currently

evaluating the impact of the new standard on the Company’s

consolidated financial statements.

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Table 1

– Explanation of Non-GAAP Financial Measures

In addition to results presented in accordance with U.S. generally accepted accounting principles

(GAAP), this quarterly

report on Form 10-Q includes certain designated net interest income amounts

presented on a tax-equivalent basis, a non-

GAAP financial measure, including the presentation and calculation of the efficiency

ratio.

The Company believes the presentation of net interest income on a tax-equivalent

basis provides comparability of net

interest income from both taxable and tax-exempt sources and facilitates comparability

within the industry. Although the

Company believes these non-GAAP financial measures enhance investors’

understanding of its business and performance,

these non-GAAP financial measures should not be considered an alternative to

GAAP.

The reconciliations

of these non-

GAAP financial measures to their most directly comparable GAAP financial

measures are presented below.

2023

2022

First

Fourth

Third

Second

First

(in thousands)

Quarter

Net interest income (GAAP)

7,109

7,471

7,243

6,374

6,078

Tax-equivalent adjustment

108

117

110

112

Net interest income (Tax

-equivalent)

7,217

7,588

7,360

6,484

6,190

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Table 2

- Selected Quarterly Financial Data

2023

2022

First

Fourth

Third

Second

First

(Dollars in thousands, except per share amounts)

Quarter

Results of Operations

Net interest income (a)

7,217

7,588

7,360

6,484

6,190

Less: tax-equivalent adjustment

108

117

110

112

Net interest income (GAAP)

7,109

7,471

7,243

6,374

6,078

Noninterest income

792

3,898

852

848

908

Total revenue

7,901

11,369

8,095

7,222

6,986

Provision for credit losses

1,000

250

—

(250)

Noninterest expense

5,604

4,449

5,415

5,058

4,901

Income tax expense

267

1,454

432

363

254

Net earnings

1,964

4,466

1,998

1,801

2,081

Per share data:

Basic and diluted net earnings

0.56

1.27

0.57

0.51

0.59

Cash dividends declared

0.27

0.265

Weighted average shares outstanding:

Basic and diluted

3,502,143

3,504,344

3,507,318

3,513,353

3,518,657

Shares outstanding, at period end

3,500,879

3,503,452

3,505,355

3,509,940

3,516,971

Book value

21.03

19.42

17.06

21.68

24.57

Common stock price

High

24.50

24.71

29.02

33.57

34.49

Low

22.55

22.07

23.02

27.04

31.75

Period end:

22.66

23.00

23.02

27.04

33.21

To earnings ratio

7.79

7.82

10.46

12.52

14.44

To book value

108

118

135

125

135

Performance ratios:

Return on average equity

11.44

28.23

10.35

8.26

7.97

Return on average assets

0.77

1.75

0.75

0.66

0.75

Dividend payout ratio

48.21

20.87

46.49

51.96

44.92

Asset Quality:

Allowance for credit losses as a % of:

Loans

1.35

1.14

1.05

1.07

1.09

Nonperforming loans

255

211

1,431

1,314

1,256

Nonperforming assets as a % of:

Loans and other real estate owned

0.53

0.54

0.07

0.08

0.17

Total assets

0.26

0.27

0.03

0.07

Nonperforming loans as a % of total loans

0.53

0.54

0.07

0.08

0.09

Annualized net charge-offs (recoveries) as % of average loans

0.16

(0.05)

0.03

Capital Adequacy: (c)

CET 1 risk-based capital ratio

15.45

15.39

16.59

17.26

Tier 1 risk-based capital ratio

15.45

15.39

16.59

17.26

Total risk-based capital ratio

16.48

16.25

16.16

17.38

18.08

Tier 1 leverage ratio

10.07

10.01

9.29

9.16

9.09

Other financial data:

Net interest margin (a)

3.17

3.27

3.00

2.60

2.43

Effective income tax rate

11.97

24.56

17.78

16.77

10.88

Efficiency ratio (b)

69.97

38.73

65.94

68.99

69.05

Selected average balances:

Securities available-for-sale

402,684

407,792

432,393

427,426

435,097

Loans

502,158

490,163

457,722

428,612

439,713

Total assets

1,022,938

1,022,863

1,069,973

1,092,759

1,114,407

Total deposits

948,393

951,122

987,614

999,867

1,003,394

Total stockholders’ equity

68,655

63,283

77,191

87,247

104,493

Selected period end balances:

Securities available-for-sale

405,692

405,304

411,538

429,220

417,459

Loans

505,041

504,458

474,035

440,872

428,417

Allowance for credit losses

6,821

5,765

4,966

4,716

4,658

Total assets

1,017,746

1,023,888

1,042,559

1,084,251

1,109,664

Total deposits

939,190

950,337

977,938

1,002,698

1,017,742

Total stockholders’ equity

73,640

68,041

59,793

76,107

86,411

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

(b) Efficiency ratio is the result of noninterest expense divided by

the sum of noninterest income and tax-equivalent net interest

income.

wholly-owned subsidiary, AuburnBank.

Table of Contents

Table 3

- Average Balances

and Net Interest Income Analysis

Quarter ended March 31,

2023

2022

Interest

Average

Income/

Yield/

Average

Income/

Yield/

(Dollars in thousands)

Balance

Expense

Rate

Balance

Expense

Rate

Interest-earning assets:

Loans and loans held for sale (1)

502,158

5,754

4.65%

440,608

4,850

4.46%

Securities - taxable

344,884

1,865

2.19%

374,825

1,336

1.45%

Securities - tax-exempt (2)

57,800

511

3.59%

60,272

531

3.57%

Total securities

402,684

2,376

2.39%

435,097

1,867

1.74%

Federal funds sold

7,314

4.71%

73,575

0.17%

Interest bearing bank deposits

11,607

128

4.47%

83,161

0.16%

Total interest-earning assets

923,763

8,343

3.66%

1,032,441

6,780

2.66%

Cash and due from banks

15,527

15,105

Other assets

83,648

66,861

Total assets

1,022,938

1,114,407

Interest-bearing liabilities:

Deposits:

NOW

187,566

248

0.54%

200,907

0.12%

Savings and money market

300,657

290

0.39%

345,549

172

0.20%

Time deposits

155,676

580

1.51%

159,785

356

0.90%

Total interest-bearing deposits

643,899

1,118

0.70%

706,241

585

0.34%

Short-term borrowings

3,046

1.11%

3,943

0.50%

Total interest-bearing liabilities

646,945

1,126

0.71%

710,184

590

0.34%

Noninterest-bearing deposits

304,494

297,153

Other liabilities

2,844

2,577

Stockholders' equity

68,655

104,493

Total liabilities and stockholders' equity

1,022,938

1,114,407

Net interest income and margin (tax-equivalent)

7,217

3.17%

6,190

2.43%

(1) Loans on nonaccrual status have been included in the computation of average balances.

(2) Yields on tax-exempt securities have been computed on a tax-equivalent basis using a federal income

tax rate of 21%.

Table of Contents

Table 4

- Allocation of Allowance for Credit Losses

2023

2022

First Quarter

Fourth Quarter

Third Quarter

Second Quarter

First Quarter

(Dollars in thousands)

Amount

Commercial and industrial

1,232

11.8

747

13.1

732

14.9

761

15.9

774

17.1

Construction and land

development

1,021

13.2

949

13.2

789

11.6

576

8.8

508

7.7

Commercial real estate

3,966

53.0

3,109

52.4

2,561

52.6

2,523

54.4

2,536

54.8

Residential real estate

497

20.2

828

19.4

783

19.3

753

19.3

737

18.4

Consumer installment

105

1.8

132

1.9

101

1.6

103

1.6

103

2.0

Total allowance for credit

losses

6,821

5,765

4,966

4,716

4,658

* Loan balance in each category expressed as a percentage of total loans.

Table of Contents

Table 5

– Estimated Uninsured Time Deposits by Maturity

(Dollars in thousands)

March 31, 2023

Maturity of:

3 months or less

175

Over 3 months through 6 months

12,975

Over 6 months through 12 months

16,969

Over 12 months

14,321

Total estimated uninsured

time deposits

44,440

Table of Contents

ITEM 3.

QUANTITATIVE

AND QUALITATIVE

DISCLOSURES ABOUT MARKET RISK

The information called for by ITEM 3 is set forth in ITEM 2 under the caption

“MARKET AND LIQUIDITY RISK

MANAGEMENT” and is incorporated herein by reference.

ITEM 4. CONTROLS AND PROCEDURES

The Company, with the participation

of its management, including its Chief Executive Officer and

Chief Financial Officer,

carried out an evaluation of the effectiveness of the design and operation

of its disclosure controls and procedures (as

defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended)

as of the end of the

period covered by this report. Based upon that evaluation and as of the end of the period covered by this report,

the

Company’s Chief Executive Officer

and Chief Financial Officer concluded that the Company’s

disclosure controls and

procedures were effective to allow timely decisions regarding disclosure

in its reports that the Company files or submits to

the Securities and Exchange Commission under the Securities Exchange Act of 1934,

as amended. There have been no

changes in the Company’s internal control

over financial reporting that occurred during the period covered by this report

that have materially affected, or are reasonably likely to materially

affect, the Company’s

internal control over financial

reporting.

PART

II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

in legal proceedings. The

Company’s and Bank’s

management believe there are no pending or threatened legal, governmental, or regulatory

proceedings that, upon resolution, are expected to have a material adverse effect

upon the Company’s or the Bank’s

financial condition or results of operations. See also, Part I, Item 3 of the Company’s

Annual Report on Form 10-K for the

year ended December 31, 2022.

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the

factors discussed in Part I,

Item 1A. “RISK FACTORS”

in the Company’s Annual Report

on Form 10-K for the year ended December 31, 2022,

which could materially affect our business, financial condition

or future results. The risks described in our annual report on

Form 10-K are not the only the risks facing our Company.

Increases in inflation and the resulting tightening of Federal

Reserve monetary policy by increased target interest rates and

reductions in the Federal Reserve’s securities portfolio,

have

and is expected to continue to affect mortgage originations and income and

the market values of our securities and loans

available for sale portfolio.

These could also affect our deposit, costs and mixes, and change consumer savings

and

payment behaviors.

Additional risks and uncertainties not currently known to us or that we currently deem

to be immaterial

also may materially adversely affect our business, financial condition,

and/or operating results in the future.

Table of Contents

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The Company’s repurchases of its common stock

during the first quarter of 2023 were as follows:

Period

Total Number of

Shares Purchased

Average Price

Paid per Share

Total Number of

Shares Purchased as

Part of Publicly

Announced Plans or

Programs

Approximate Dollar

Value

of Shares that

May Yet Be

Purchased Under the

Plans or Programs

January 1 - January 31, 2023

—

4,614,989

February 1 - February 28, 2023

2,648

24.11

2,648

4,551,116

March 1 - March 31, 2023

—

4,551,116

Total

2,648

24.11

2,648

4,551,116

On April 12, 2022, the Board of Directors of Auburn National Bancorporation, Inc. (the "Company") announced that its Board of Directors

had approved a new stock repurchase program to replace the repurchase program that expired on March 31, 2022. The new program

authorized the repurchase, from time to time, of up to $5 million of the Company’s issued and outstanding common stock through the

earliest of (i) the expenditure of $5 million on Share repurchases, (ii) the termination or replacement of the Repurchase Plan

and

(iii) April 15, 2024. The stock repurchases may be open-market or private purchases, negotiated transactions, block purchases,

and otherwise.

ITEM 3.

DEFAULTS

UPON SENIOR SECURITIES

Not applicable.

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.

OTHER INFORMATION

Not applicable.

Table of Contents

ITEM 6.

EXHIBITS

Exhibit

Number

Description

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 David A. Hedges, 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 W. James Walker, IV, Senior 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 David A. Hedges, 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 W. James Walker, IV, Senior Vice President and Chief Financial Officer.***

101.INS

XBRL Instance Document

101.SCH

XBRL Taxonomy Extension

Schema Document

101.CAL

XBRL Taxonomy Extension

Calculation Linkbase Document

101.LAB

XBRL Taxonomy Extension

Label Linkbase Document

101.PRE

XBRL Taxonomy Extension

Presentation Linkbase Document

101.DEF

XBRL Taxonomy Extension

Definition Linkbase Document

104

Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

Incorporated by reference from Registrant’s

Form 10-Q dated June 30, 2002.

Incorporated by reference from Registrant’s

Form 10-K dated March 31, 2008.

***

The certifications attached as exhibits 32.1 and 32.2 to this quarterly report on Form 10-Q

are “furnished” to the

Securities and Exchange Commission pursuant to Section 906 of the Sarbanes-Oxley

Act of 2002 and shall not be

deemed “filed” by the Company for purposes of Section 18 of the Securities Exchange

Act of 1934, as amended.

Table of Contents

SIGNATURES

Pursuant to

the requirements

of the

Securities Exchange

Act of

1934, the

registrant has

duly caused

this report

be signed on its behalf by the undersigned thereunto duly authorized.

AUBURN NATIONAL

BANCORPORATION,

INC.

(Registrant)

Date:

May 5, 2023

By:

/s/ David A. Hedges

David A. Hedges

President and CEO

Date:

May 5, 2023

By:

/s/

James Walker,

Senior Vice President and Chief Financial

Officer

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Auburn National Bancorporation (AUBN) 10-Q2023 Q1 Quarterly report

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