What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2021-03-09 compared with 2020-03-06 · 1936 added, 876 removed, 492 unchanged (85% of the section changed)

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Independent Registered Public Accounting Firm

FINANCIAL STATEMENTS

AND SUPPLEMENTARY

Report of Independent Registered Public Accounting

The Board of Directors and Stockholders

Auburn National

Bancorporation, Inc.

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Auburn National Bancorporation, Inc.

and its subsidiaries (the

Company) as of December 31, 2019 and 2018, the related consolidated statements of earnings, comprehensive income, stockholders equity, and cash flows for the years then ended, and the related notes to the consolidated

financial statements and schedules (collectively, the financial statements).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018,

and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board

(United States) (PCAOB), the Companys internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control Integrated Framework issued by the

Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated March 6, 2020 expressed an unqualified opinion on the effectiveness of the Companys internal control over financial reporting.

Auburn National Bancorporation, Inc.

Opinion on the Financial Statements

audited the accompanying

consolidated balance

sheets of Auburn

National Bancorporation,

subsidiaries (the

consolidated statements

comprehensive income, stockholders’ equity,

and cash flows for the years then ended,

and the related notes to the

consolidated financial

statements and

schedules (collectively,

the “financial

statements”).

the financial

statements present fairly,

in all material

respects, the financial

position of the

Company as of

December 31, 20

and the results of

its operations and its

cash flows for the

years then ended, in

conformity with accounting principles

generally accepted in the United States of America.

Basis for Opinion

financial statements are the responsibility of the Companys management.

Our responsibility is to express an opinion on the Companys consolidated financial statements based on our audits.

We are a public accounting firm registered with

the PCAOB and are required to be independent with respect to the Company in accordance with U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audits to obtain

reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether

due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audits also included evaluating the

accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audits provide a reasonable basis for our opinion.

These financial statements are the

responsibility of the Comp

any’s management.

responsibility is to express an opinion

on the Company’s

consolidated financial

statements based on

accounting firm registered

the Public Company Accounting Oversight Board

(United States) (PCAOB) and are required to be

independent with

in accordance

federal securities

the applicabl

regulations of

Securities and Exchange Commission and the PCAOB.

in accordance

Those standards

perform the audits to

obtain reasonable assurance

about whether the

financial statements are

free of material misstatement,

internal control over financial reporting.

As part of our audits we

are required to obtain an

understanding of internal control

over financial

reporting but

of expressing an

the effectiveness

Company’s internal

control over financial reporting.

we express no such opinion.

Our audits included performing

procedures to assess the

risks of material misstatement

of the financial statements,

due to error or fraud,

and performing procedures that

respond to those risks.

procedures included examining, on

basis, evidence regarding

the amounts and

disclosures in the

financial statements.

audits also included

evaluating the

accounting principles

used and significant estimates

made by management, as well

as evaluating the overall presentation

the financial statements.

believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit

matter communicated below

arising from the

current period audit

of the financial

as communicated

communicated to

committee and

disclosures that

financial statements

involved especially

challenging, subjective,

The communication of the

critical audit matter doe

not alter in any way our opinion

on the financial

statements, taken as a whole, and we are

not, by communicating the critical audit matter

below, providing separate

on the critical audit matters or on the accounts or disclosures to

which they relate.

Allowance for Loan Losses

the Company’s

consolidated financial

statements, the

loan portfolio

$462.5 million

allowance for

Company in Note 1,

the evaluation of the

allowance for loan

losses is inherently

subjective as it requires

estimates that are

susceptible to significant

revision as more

information becomes available.

The allowance for

loan losses is

evaluated on a

regular basis and is based

upon the Company’s

review of the collectability

of the loans in

light of historical experience,

nature and volume

portfolio, adverse situations

that may affect

the borrower’s

ability to repay,

estimated value

of any underlying collateral, and prevailing economic conditions.

We identified

the Company’s

the allowance

for loan losses

as a critical

audit matter.

The principal

considerations for our

determination of the allowance

for loan losses

as a critical

audit matter related

to the high degree

subjectivity in

the Company’s

determining the

qualitative factors.

Auditing these

complex judgments

assumptions by

involves especially

challenging auditor

evidence and effort required to address these matters,

including the extent of specialized skill or knowledge needed.

The primary procedures we performed to address this critical audit

matter included:

the relevance

reasonableness of

assumptions related

to evaluation

loan portfolio,

current economic conditions,

and other risk

factors used in

development of the

qualitative factors

for collectively

evaluated loans.

the reasonableness

of assumptions

in developing

the qualitative

comparing these

to internally

developed and

third-party sources,

audit evidence

/s/ Elliott Davis, LLC

We have served as the Companys

auditor since 2015.

We have served as the

Company's auditor since 2015.

Greenville, South Carolina

March 9, 2021

AUBURN NATIONAL BANCORPORATION, INC.

AUBURN NATIONAL

BANCORPORATION,

AND SUBSIDIARIES

5 unchanged sentences

Cash and cash equivalents

available-for-sale

Securities available-for-sale

Loans held for sale

6 unchanged sentences

Total deposits

Federal funds purchased and securities sold under agreements to repurchase

Federal funds purchased and securities sold under agreements

to repurchase

Accrued expenses and other liabilities

1 unchanged sentence

Stockholders' equity:

Preferred stock of $.01 par value;

authorized 200,000 shares;

Preferred stock of $

issued shares - none

Common stock of $.01 par value;

authorized 8,500,000 shares;

issued 3,957,135 shares

Common stock of $

Additional paid-in capital

Retained earnings

Accumulated other comprehensive income (loss), net

Less treasury stock, at cost - 390,989 shares and 313,267 shares at December 31, 2019 and

2018, respectively

Accumulated other comprehensive income, net

Less treasury stock, at cost -

at December 31, 2020 and 2019, respectively

Total stockholders’ equity

Total liabilities and stockholders equity

Total liabilities and

stockholders’ equity

See accompanying notes to consolidated financial statements

AUBURN NATIONAL BANCORPORATION, INC.

AUBURN NATIONAL

BANCORPORATION,

AND SUBSIDIARIES

8 unchanged sentences

Short-term borrowings

Long-term debt

Total interest expense

1 unchanged sentence

Provision for loan losses

Net interest income after provision for loan losses

Net interest income after provision for

Noninterest income:

3 unchanged sentences

Gain from loan guarantee program

Securities losses, net

Securities gains (losses), net

Total noninterest income

9 unchanged sentences

Basic and diluted

Weighted average shares outstanding:

Weighted average shares

Basic and diluted

See accompanying notes to consolidated financial statements

AUBURN NATIONAL BANCORPORATION, INC.

AUBURN NATIONAL

BANCORPORATION,

AND SUBSIDIARIES

2 unchanged sentences

(Dollars in thousands)

Other comprehensive income (loss), net of tax:

Unrealized net holding gain (loss) on securities

Reclassification adjustment for net loss on securities recognized in net earnings

Other comprehensive income (loss)

Other comprehensive income, net of tax:

Unrealized net holding gain on securities

Reclassification adjustment for net (gain) loss on securities

recognized in net earnings

Other comprehensive income

Comprehensive income

See accompanying notes to consolidated financial statements

AUBURN NATIONAL BANCORPORATION, INC.

AUBURN NATIONAL

BANCORPORATION,

AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

(Dollars in thousands, except share data)

comprehensive

income (loss)

(Dollars in thousands, except share data)

(loss) income

Balance, December 31, 2018

Other comprehensive loss

Cash dividends paid ($0.96 per share)

Other comprehensive income

Cash dividends paid ($

Stock repurchases

Sale of treasury stock

1 unchanged sentence

Other comprehensive income

Cash dividends paid ($1.00 per share)

Stock repurchases

Cash dividends paid ($

Sale of treasury stock

1 unchanged sentence

See accompanying notes to consolidated financial statements

AUBURN NATIONAL BANCORPORATION, INC.

AUBURN NATIONAL

BANCORPORATION,

AND SUBSIDIARIES

3 unchanged sentences

Cash flows from operating activities:

Adjustments to reconcile net earnings to net cash provided by operating activities:

Adjustments to reconcile net earnings to net cash provided

operating activities:

Provision for loan losses

1 unchanged sentence

Premium amortization and discount accretion, net

Deferred tax (benefit) expense

Net loss on securities available for sale

Deferred tax benefit

Net (gain) loss on securities available for sale

Net gain on sale of loans held for sale

3 unchanged sentences

Increase in cash surrender value of bank owned life insurance

Income recognized from death benefit on bank-owned life insurance

Net increase in other assets

Net increase (decrease) in accrued expenses and other liabilities

Net increase in accrued expenses and other liabilities

Net cash provided by operating activities

Cash flows from investing activities:

Proceeds from sales of securities

available-for-sale

Proceeds from sales of securities available-for-sale

Proceeds from maturities of securities available-for-sale

Purchase of securities

available-for-sale

Decrease (increase) in loans, net

Purchase of securities available-for-sale

(Increase) decrease in loans, net

Net purchases of premises and equipment

Decrease (increase) in FHLB stock

(Increase) decrease in FHLB stock

Proceeds from bank-owned life insurance death benefit

Proceeds from sale of other real estate owned

Net cash provided by (used in) investing activities

Net cash (used in) provided by investing activities

Cash flows from financing activities:

Net (decrease) increase in noninterest-bearing deposits

Net increase (decrease) in interest-bearing deposits

Net decrease in federal funds purchased and securities sold under agreements to

Repayments or retirement of long-term debt

Net increase (decrease) in noninterest-bearing deposits

Net increase in interest-bearing deposits

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

under agreements to repurchase

Stock repurchases

Dividends paid

Net cash used in financing activities

Net cash provided by (used in) financing activities

Net change in cash and cash equivalents

1 unchanged sentence

Cash and cash equivalents at end of period

Supplemental disclosures of cash flow information:

Supplemental disclosures of cash flow

Cash paid (received) during the period for:

Gain from loan guarantee program

Supplemental disclosure of non-cash

transactions:

Supplemental disclosure of non-cash transactions:

Initial recognition of operating lease right of use assets

2 unchanged sentences

See accompanying notes to consolidated financial statements

AUBURN NATIONAL BANCORPORATION, INC.

AUBURN NATIONAL

BANCORPORATION,

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

SUMMARY OF SIGNIFICANT ACCOUNTING

Nature of Business

Auburn National Bancorporation, Inc.

(the Company) is a bank holding company whose primary business is conducted by its wholly-owned subsidiary,

(the “Company”) is a bank holding

company whose primary business is conducted

by its wholly-owned subsidiary,

AuburnBank (the “Bank”).

AuburnBank is a commercial bank located in Auburn, Alabama.

The Bank provides a full range of banking services in its primary market area, Lee County, which includes the Auburn-Opelika Metropolitan Statistical

AuburnBank is a commercial bank located

The Bank provides a full range of banking services in its

primary market area, Lee County,

which includes the

Auburn-Opelika Metropolitan Statistical Area.

Basis of Presentation

The consolidated

financial statements include the accounts of the Company and its wholly-owned subsidiaries.

Auburn National Bancorporation Capital Trust I was an affiliate of the Company and was included in these consolidated financial statements pursuant to the

equity method of accounting.

On April 27, 2018, the Trust was dissolved.

Significant intercompany transactions and accounts are eliminated in consolidation.

The consolidated financial statements include the accounts of

the Company and its wholly-owned subsidiaries.

intercompany transactions and accounts are eliminated in consolidation.

COVID-19 Uncertainty

COVID-19 has adversely affected, and may continue to

adversely affect economic activity globally,

nationally and locally.

Following the COVID-19 outbreak in December 2019 and January

2020, market interest rates declined significantly.

federal banking agencies encouraged financial institutions to

prudently work with borrowers and passed legislation to

provide relief from reporting loan classifications due to modifications

related to the COVID-19 outbreak.

COVID-19 has caused us to modify our business practices, including

employee travel, employee work locations, and

cancellation of physical participation in meetings, events and

The rapid development and fluidity of this

situation precludes any predication as to the ultimate impact

of the COVID-19 outbreak.

Nevertheless, the outbreak

presents uncertainty and risk with respect to the Company,

its performance, and its financial results.

Revenue Recognition

On January 1, 2018, the

Company implemented ASU 2014-09, Revenue from Contracts with Customers , codified at ASC 606.

The Company adopted ASC 606 using the modified retrospective transition

The majority of the Companys revenue stream is generated from interest income on loans and deposits which are outside the scope of ASC 606.

The Companys sources of income that fall within the scope of ASC 606 include service charges on deposits, investment services, interchange fees and

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

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

Service charges on deposits, investment services, ATM and interchange fees Fees from these services are

either transaction-based, for which the performance obligations are satisfied when the individual transaction is processed, or set periodic service charges, for which the performance obligations are satisfied over the period the service is provided.

Transaction-based fees are recognized at the time the transaction is processed, and periodic service charges are recognized over the service period.

Gains on sales of other real estate A gain on sale should be recognized when a contract for sale

exists and control of the asset has been transferred to the buyer.

ASC 606 lists several criteria required to conclude that a contract for sale exists, including a determination that the institution will collect substantially all of the

consideration to which it is entitled.

In addition to the loan-to-value, the analysis is based on various other factors, including the credit quality of the borrower,

the structure of the loan, and any other factors that may affect collectability.

On January 1, 2018, the Company implemented ASU 2014

Revenue from Contracts with Customers

The Company adopted ASC 606 using the modified retrospective

The majority of the

Company’s revenue stream is generated

from interest income on loans and deposits which are outside

the scope of ASC

The Company’s sources of income that

fall within the scope of ASC 606 include service charges

on deposits, investment

services, interchange fees and gains and losses on sales of other

real estate, all of which are presented as components of

noninterest income.

The following is a summary of the revenue streams

that fall within the scope of ASC 606:

Service charges on deposits, investment services, ATM

and interchange fees – Fees from these services are either

transaction-based, for which the performance obligations are satisfied

when the individual transaction is processed, or set

periodic service charges, for which the performance obligations

are satisfied over the period the service is provided.

Transaction-based fees are recognized at the time

the transaction is processed, and periodic service charges

are recognized

over the service period.

Gains on sales of other real estate

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

control of the

asset has been transferred to the buyer.

ASC 606 lists several criteria required to conclude that a contract

for sale exists,

including a determination that the institution will collect substantially

all of the consideration to which it is entitled.

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

factors, including the credit quality of the borrower,

structure of the loan, and any other factors that may affect

collectability.

Use of Estimates

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

generally accepted accounting principles requires management to make estimates and assumptions

that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the balance sheet date and the reported amounts of income and expense during the reporting period.

Actual results could differ

from those estimates.

Material estimates that are particularly susceptible to significant change in the near term include the determination of the allowance for loan losses, fair value measurements, valuation of other real estate owned, and

valuation of deferred tax assets.

generally accepted accounting principles requires

management to make estimates and assumptions that affect

the reported amounts of assets and liabilities and the disclosure

of contingent assets and liabilities as of the balance sheet date

and the reported amounts of income and expense during the

reporting period.

Actual results could differ from those

Material estimates that are particularly susceptible to

significant change in the near term include the determination

of the allowance for loan losses, fair value measurements,

valuation of other real estate owned, and valuation of deferred

Change in Accounting Estimate

During the fourth quarter of 2019, the Company reassessed its estimate of the useful lives of certain fixed assets.

The Company revised its original useful

life estimate for certain land improvements, buildings and improvements and furniture, fixtures and equipment, with a carrying value of $0.5 million at December 31, 2019, to correspond with estimated demolition dates planned as part of the

redevelopment project for our main campus.

This is considered a change in accounting estimate, per ASC 250-10, where adjustments should be made prospectively.

The effects of this change in accounting estimate

on the 2019 consolidated financial statements was a decrease in net earnings of $0.2 million, or $0.04 per share.

During the fourth quarter of 2019, the Company reassessed its estimate

of the useful lives of certain fixed assets.

Company revised its original useful life estimate for certain land improvements,

buildings and improvements

and furniture,

fixtures and equipment, with a carrying value of $

million at December 31, 2019, to correspond with estimated

demolition dates planned as part of the redevelopment project

for our main campus.

This is considered a change in

accounting estimate, per ASC 250-10, where adjustments should

be made prospectively.

of this change in

accounting estimate on the 2020 and 2019 consolidated

financial statements, respectively, was

a decrease in net earnings of

thousand, or $

per share and $

thousand, or $

Reclassifications

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

These reclassifications had no impact on

the Companys previously reported net earnings or total stockholders equity.

Certain amounts reported in the prior period have been reclassified

to conform to the current-period presentation.

reclassifications had no impact on the Company’s

previously reported net earnings or total stockholders’ equity.

Subsequent Events

The Company has evaluated the effects of events or transactions through the date of this filing that have occurred subsequent to December 31, 2019.

Company does not believe there are any material subsequent events that would require further recognition or disclosure.

Accounting Standards Adopted

In 2019, the Company adopted new guidance related to the following Accounting Standards Update (Update or ASU):

ASU 2016-02, Leases;

ASU 2017-02, Targeted Improvements to Accounting for Hedging

Information about these pronouncements is described in more detail below.

ASU 2016-02, Leases , requires lessees to recognize the assets and liabilities that arise from leases on the

balance sheet.

A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset

representing its right to use the underlying asset for the lease term.

In July 2018, the FASB issued ASU 2018-10 and 2018-11, which are designed to make targeted

improvements to and clarifications regarding ASU 2016-02.

The Company adopted ASU No.

2016-02 on January 1, 2019.

2016-02 did not have a material impact on the Companys consolidated financial statements due to the fact the Company does not have any material leases.

ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities, improves the transparency and

understandability of information conveyed to financial statement users about an entitys risk management activities by better aligning the entitys financial reporting for hedging relationships with those risk management activities and

reduces the complexity of and simplifies the application of hedge accounting by preparers.

The Company adopted ASU No.

2017-12 on January 1, 2019.

2017-12 did not have a material impact on the Companys consolidated financial statements.

Cash equivalents include cash on hand, cash items in process of collection, amounts due from banks, including interest bearing deposits

with other banks, and federal funds sold.

Securities are classified based on managements intention at the date of purchase.

At December 31, 2019, all of the Companys securities were

classified as available-for-sale.

Securities available-for-sale are used as part of the

Companys interest rate risk management strategy, and they may be sold in response to changes in interest rates, changes in prepayment risks or other factors.

All securities classified as available-for-sale are recorded at fair value with any unrealized gains and losses reported in accumulated other comprehensive income (loss), net of the deferred income tax effects.

Interest and dividends on

securities, including the amortization of premiums and accretion of discounts are recognized in interest income over the estimated life of the security using the effective interest method.

The Company has evaluated the effects of events

or transactions through the date of this filing that ha

subsequent to December 31, 2020.

The Company does not believe

there are any material subsequent events that would

require further recognition or disclosure.

Standards Adopted in 2020

In 2020, the Company adopted new guidance related to the following

Accounting Standards Update (“Update” or “ASU”):

Measurement (Topic

Disclosure Framework – Changes

to the Disclosure

Requirements for Fair Value

Intangibles – Goodwill and Other – Internal Use Software

(Subtopic 350-40):

Accounting for Implementation Costs Incurred

in a Cloud Computing Arrangement that is a Service Contract.

Information about these pronouncements is described in more

detail below.

Measurement (Topic

Disclosure Framework – Changes

to the Disclosure Requirements

improves the disclosure requirements on fair value measurements

by eliminating the

requirements to disclose (i) the amount of and reasons for transfers

between Level 1 and Level 2 of the fair value hierarchy;

(ii) the policy for timing of transfers between levels;

the valuation processes for Level 3 fair value measurements.

This ASU also added specific disclosure requirements for fair

value measurements for public entities including the

requirement to disclose the changes in unrealized gains and

losses for the period included in other comprehensive income

for recurring Level 3 fair value measurements and the range and

weighted average of significant unobservable inputs used

to develop Level 3 fair value measurements.

The amendments in this ASU are effective for all

entities for fiscal years beginning after December 15,

2019, and all

interim periods within those fiscal years.

Early adoption was permitted

upon issuance of the ASU.

Entities are permitted to

early adopt amendments that remove or modify disclosures and

delay the adoption of the additional disclosures until their

effective date.

The Company adopted this ASU on January

Adoption of this guidance did not have a material

impact on the Company’s consolidated

financial statements.

Intangibles – Goodwill and Other – Internal Use Software

(Subtopic 350-40):

Accounting for

Implementation Costs Incurred in

a Cloud Computing Arrangement that is a Service Contract

aligns the requirements for

capitalizing implementation costs incurred in a hosting arrangement that

is a service contract with the requirements for

capitalizing implementation costs incurred to develop or

obtain internal-use software (and hosting arrangements that

include internal-use software license).

This ASU requires entities to

use the guidance in FASB

ASC 350-40, Intangibles -

Goodwill and Other - Internal Use Software, to determine whether

to capitalize or expense implementation costs related to

the service contract.

This ASU also requires entities to (i) expense capitalized

implementation costs of a hosting

arrangement that is a service contract over the term of the hosting

(ii) present the expense related to the

capitalized implementation costs in the same line item on the

income statement as fees associated with the hosting element

of the arrangement;

(iii) classify payments for capitalized implementation

costs in the statement of cash flows in the same

manner as payments made for fees associated with the hosting

and (iv) present the capitalized implementation

costs in the same balance sheet line item that a prepayment for

the fees associated with the hosting arrangement would be

The amendments in this ASU are effective for fiscal years

beginning after December 15, 2019 and interim periods

those fiscal years.

Early adoption was permitted.

The Company adopted

this ASU on January 1, 2020.

Adoption of this

guidance did not have a material impact on the Company’s

consolidated financial statements.

Cash Equivalents

Cash equivalents include cash on hand, cash items in process

of collection, amounts due from banks, including interest

bearing deposits with other banks, and federal funds sold.

Securities are classified based on management’s

intention at the date of purchase.

At December 31, 2020,

Company’s securities were classified

as available-for-sale.

Securities available-for

-sale are used as part of the Company’s

interest rate risk management strategy,

and they may be sold in response to changes in interest rates,

changes in prepayment

risks or other factors.

All securities classified as available-for-sale

are recorded at fair value with any unrealized gains and

losses reported in accumulated other comprehensive income

(loss), net of the deferred income tax effects.

dividends on securities, including the amortization of premiums and

accretion of discounts are recognized in interest

income using the effective interest method.

Premiums are amortized to the earliest call date while discounts are

over the estimated life of the security.

Realized gains and losses from the sale of securities are

determined using the specific identification method.

On a quarterly basis, management makes an assessment to determine whether there have been events or

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

For debt securities with an

unrealized loss, an other-than-temporary impairment write-down is triggered when (1) the Company has the intent to sell a debt security, (2) it is more likely than not that the Company will be required to sell the debt security before

recovery of its amortized cost basis, or (3) the Company does not expect to recover the entire amortized cost basis of the debt security.

If the Company has the intent to sell a debt security or if it is more likely than not that it will be

required to sell the debt security before recovery, the other-than-temporary write-down is equal to the entire difference between the debt securitys amortized cost and its fair value.

If the Company does not intend to sell the security or it

is not more likely than not that it will be required to sell the security before recovery, the other-than-temporary impairment write-down is separated into the amount that is credit related (credit loss component) and the amount due to all other

The credit loss component is recognized in earnings, as a realized loss in securities gains (losses), and is the difference between the securitys amortized cost basis and the present value of its expected future cash flows.

remaining difference between the securitys fair value and the present value of future expected cash flows is due to factors that are not credit related and is recognized in other comprehensive income, net of applicable taxes.

determined using the

specific identification method.

On a quarterly basis, management makes an assessment to determine

whether there have been events or economic

circumstances to indicate that a security on which there is an

unrealized loss is other-than-temporarily impaired.

For debt securities with an unrealized loss, an other-than

-temporary impairment write-down is triggered when (1)

Company has the intent to sell a debt security,

(2) it is more likely than not that the Company will be required

debt security before recovery of its amortized cost basis, or

(3) the Company does not expect to recover the entire amortized

cost basis of the debt security.

If the Company has the intent to sell a debt security or if it is more

likely than not that it will

be required to sell the debt security before recovery,

the other-than-temporary write-down is equal to the entire

between the debt security’s amortized

cost and its fair value.

If the Company does not intend to sell the security or it is not

more likely than not that it will be required to sell the security

before recovery, the other

-than-temporary impairment write-

down is separated into the amount that is credit related (credit loss component)

and the amount due to all other factors.

credit loss component is recognized in earnings, as a realized

loss in securities gains (losses), and is the difference between

the security’s amortized cost basis and

the present value of its expected future cash flows.

The remaining difference

between the security’s fair value and

the present value of future expected cash flows is due to

factors that are not credit

related and is recognized in other comprehensive income, net

of applicable taxes.

Loans held for sale

Loans originated and intended for

sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate.

Loan sales are recognized when the transaction closes, the proceeds are collected, and ownership is transferred.

Continuing involvement, through

the sales agreement, consists of the right to service the loan for a fee for the life of the loan, if applicable.

Gains on the sale of loans held for sale are recorded net of related costs, such as commissions, and reflected as a component of

mortgage lending income in the consolidated statements of earnings.

In the course of conducting the Banks mortgage lending activities of

originating mortgage loans and selling those loans in the secondary market, the Bank makes various representations and warranties to the purchaser of the mortgage loans.

Every loan closed by the Banks mortgage center is run through a

government agency automated underwriting system.

Any exceptions noted during this process are remedied prior to sale.

These representations and warranties also apply to underwriting the real estate appraisal opinion of value for the collateral

securing these loans.

Failure by the Company to comply with the underwriting and/or appraisal standards could result in the Company being required to repurchase the mortgage loan or to reimburse the investor for losses incurred (make whole requests)

if such failure cannot be cured by the Company within the specified period following discovery.

Loans are reported at their outstanding principal balances, net of any unearned income, charge-offs, and any deferred fees or costs on originated loans.

Loans originated and intended for sale in the secondary market are

carried at the lower of cost or estimated fair value in the

Loan sales are recognized when the transaction closes, the proceeds

are collected, and ownership is transferred.

Continuing involvement, through the sales agreement, consists of the

right to service the loan for a fee for the life of the

loan, if applicable.

Gains on the sale of loans held for sale are recorded net of related

costs, such as commissions, and

reflected as a component of mortgage lending income in the consolidated

statements of earnings.

In the course of conducting the Bank’s

mortgage lending activities of originating mortgage loans and selling those

the secondary market, the Bank makes various representations and

warranties to the purchaser of the mortgage loans.

Every loan closed by the Bank’s

mortgage center is run through a government agency automated

underwriting system.

Any exceptions noted during this process are remedied prior to

These representations and warranties also apply to

underwriting the real estate appraisal opinion of value for the

collateral securing these loans.

Failure by the Company to

comply with the underwriting and/or appraisal standards could

result in the Company being required to repurchase the

mortgage loan or to reimburse the investor for losses incurred

(make whole requests) if such failure cannot be cured by the

Company within the specified period following discovery.

Loans are reported at their outstanding principal balances, net

of any unearned income, charge-offs, and any

deferred fees

or costs on originated loans.

Interest income is accrued based on the principal balance outstanding.

Loan origination fees, net of certain loan origination costs, are deferred and recognized in interest income over the contractual life of the loan using the effective interest

Loan commitment fees are generally deferred and amortized on a straight-line basis over the commitment period, which results in a recorded amount that approximates fair value.

The accrual of interest on loans is discontinued when there is a significant deterioration in the financial condition of the borrower and full repayment of

principal and interest is not expected or the principal or interest is more than 90 days past due, unless the loan is both well-collateralized and in the process of collection.

Generally, all interest accrued but not collected for loans that are

placed on nonaccrual status is reversed against current interest income.

Interest collections on nonaccrual loans are generally applied as principal reductions.

The Company determines past due or delinquency status of a loan based on contractual

payment terms.

A loan is considered impaired when it is probable the Company will be unable to collect all principal and

interest payments due according to the contractual terms of the loan agreement.

Individually identified impaired loans are measured based on the present value of expected payments using the loans original effective rate as the discount rate,

the loans observable market price, or the fair value of the collateral if the loan is collateral dependent.

If the recorded investment in the impaired loan exceeds the measure of fair value, a valuation allowance may be established as part of

the allowance for loan losses.

Changes to the valuation allowance are recorded as a component of the provision for loan losses.

Impaired loans also

include troubled debt restructurings (TDRs).

In the normal course of business, management may grant concessions to borrowers who are experiencing financial difficulty.

The concessions granted most frequently for TDRs involve reductions

or delays in required payments of principal and interest for a specified time, the rescheduling of payments in accordance with a bankruptcy plan or the charge-off of a portion of the loan.

In most cases, the

conditions of the credit also warrant nonaccrual status, even after the restructuring occurs.

As part of the credit approval process, the restructured loans are evaluated for adequate collateral protection in determining the appropriate accrual

status at the time of restructuring.

TDR loans may be returned to accrual status if there has been at least a six-month sustained period of repayment performance by the borrower.

Loan origination fees,

net of certain loan origination costs, are deferred and recognized

in interest income over the contractual life of the loan

using the effective interest method.

Loan commitment fees

are generally deferred and amortized on a straight-line basis

over the commitment period, which results in a recorded

amount that approximates fair value.

The accrual of interest on loans is discontinued when there is

a significant deterioration in the financial condition of the

borrower and full repayment of principal and interest is not expected

or the principal or interest is more than 90 days past

due, unless the loan is both well-collateralized and in the process

of collection.

all interest accrued but not

collected for loans that are placed on nonaccrual status is reversed

against current interest income.

Interest collections on

nonaccrual loans are generally applied as principal reductions.

The Company determines past due or delinquency status of

loan based on contractual payment terms.

A loan is considered impaired when it is probable the Company

will be unable to collect all principal and interest payments

due according to the contractual terms of the loan agreement.

Individually identified impaired loans are measured based on

the present value of expected payments using the loan’s

original effective rate as the discount rate, the

loan’s observable

market price, or the fair value of the collateral if the loan is collateral

If the recorded investment in the impaired

loan exceeds the measure of fair value, a valuation allowance may be

established as part of the allowance for loan losses.

Changes to the valuation allowance are recorded as

a component of the provision for loan losses.

Impaired loans also include troubled debt restructurings (“TD

In the normal course of business, management may

grant concessions to borrowers who are experiencing financial

concessions granted most frequently for

TDRs involve reductions or delays in required payments of principal

and interest for a specified time, the rescheduling of

payments in accordance with a bankruptcy plan or the charge

-off of a portion of the loan.

In most cases, the conditions

the credit also warrant nonaccrual status, even after the restructuring

As part of the credit approval process, the

restructured loans are evaluated for adequate collateral

protection in determining the appropriate accrual status at the time

of restructuring.

TDR loans may be returned to accrual status

if there has been at least a six-month sustained period

repayment performance by the borrower.

The Company began offering short-term loan modifications

to assist borrowers during the COVID-19 pandemic.

modification meets certain conditions, the modification does not

need to be accounted for as a TDR.

For more information,

please refer to Note 5, Loans and Allowance for Loan Losses.

Allowance for Loan Losses

The allowance for loan losses

is maintained at a level that management believes is adequate to absorb probable losses inherent in the loan portfolio.

Loan losses are charged against the allowance when they are known.

Subsequent recoveries are credited to the allowance.

Managements determination of the adequacy of the allowance is based on an evaluation of the portfolio, current economic conditions, growth, composition of the loan portfolio, homogeneous pools of loans, risk ratings of specific loans,

historical loan loss factors, identified impaired loans and other factors related to the portfolio.

This evaluation is performed quarterly and is inherently subjective, as it requires various material estimates that are susceptible to significant

change, including the amounts and timing of future cash flows expected to be received on any impaired loans.

In addition, regulatory agencies, as an integral part of their examination process, will periodically review the Companys allowance

for loan losses, and may require the Company to record additions to the allowance based on their judgment about information available to them at the time of their examinations.

The allowance for loan losses is maintained at a level that manage

ment believes is adequate to absorb probable losses

inherent in the loan portfolio.

Loan losses are charged

against the allowance when they are known.

Subsequent recoveries

are credited to the allowance.

determination of the adequacy of the allowance is based on

an evaluation of

the portfolio, current economic conditions, growth, composition

of the loan portfolio, homogeneous pools of loans, risk

ratings of specific loans, historical loan loss factors, identified

impaired loans and other factors

related to the portfolio.

evaluation is performed quarterly and is inherently subjective,

as it requires various material estimates that are susceptible

to significant change, including the amounts and timing of future cash

flows expected to be received on any impaired loans.

In addition, regulatory agencies, as an integral part of their examination

process, will periodically review the Company’s

allowance for loan losses, and may require the Company to record

additions to the allowance based on their judgment about

information available to them at the time of their examinations.

Premises and Equipment

Land is carried at cost.

improvements, buildings and improvements, and furniture, fixtures, and equipment are carried at cost, less accumulated depreciation computed on a straight-line method over the useful lives of the assets or the expected terms of the leases, if

Expected terms include lease option periods to the extent that the exercise of such options is reasonably assured.

Nonmarketable equity

Nonmarketable equity investments include equity securities that are not publicly traded and securities acquired for various purposes.

Bank is required to maintain certain minimum levels of equity investments with certain regulatory and other entities in which the Bank has an ongoing business relationship based on the Banks common stock and surplus (with regard to the

relationship with the Federal Reserve Bank) or outstanding borrowings (with regard to the relationship with the Federal Home Loan Bank of Atlanta).

These nonmarketable equity securities are accounted for at cost which equals par or redemption value.

These securities do not have a readily determinable fair value as their ownership is restricted and there is no market for these securities.

These securities can only be redeemed or sold at their par value and only to the respective issuing

government supported institution or to another member institution.

The Company records these nonmarketable equity securities as a component of other assets, which are periodically evaluated for impairment.

Management considers these nonmarketable

equity securities to be long-term investments.

Accordingly, when evaluating these securities for impairment, management considers the ultimate recoverability of the par value rather than by recognizing temporary declines in value.

Transfers of Financial Assets

Transfers of an entire

Land improvements, buildings and improvements,

and furniture, fixtures, and equipment are carried

at cost, less accumulated depreciation computed on a straight

-line method over the useful lives of the assets or the expected

terms of the leases, if shorter.

terms include lease option periods to the extent that the exercise

of such options is

reasonably assured.

Nonmarketable equity investments

Nonmarketable equity investments include equity securities that are

not publicly traded and securities acquired for various

The Bank is required to maintain certain minimum levels

of equity investments with certain regulatory and other

entities in which the Bank has an ongoing business relationship

based on the Bank’s common stock

and surplus (with

regard to the relationship with the Federal Reserve Bank) or outstanding

borrowings (with regard to the relationship with

the Federal Home Loan Bank of Atlanta).

These nonmarketable

equity securities are accounted for at cost which equals par

or redemption value.

These securities do not have a readily determinable

fair value as their ownership is restricted and there

is no market for these securities.

These securities can only be

redeemed or sold at their par value and only to the respective

issuing government supported institution or to another member

The Company records these nonmarketable

equity securities as a component of other assets, which are periodically

evaluated for impairment.

Management considers

these nonmarketable equity securities to be long-term investments.

Accordingly, when evaluating these

securities for

impairment, management considers the ultimate recoverability

of the par value rather than by recognizing temporary

declines in value.

Transfers of Financial

Transfers of an entire financial asset (i.e.

sales), a group of entire financial assets, or a participating interest

financial asset (i.e.

loan sales), a group of entire financial assets, or a participating interest in an entire financial asset (i.e.

loan participations sold) are accounted for as sales when control over the assets have been surrendered.

over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking that right) to pledge or exchange the

transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

loan participations sold) are accounted for

as sales when control over the assets have been surrendered.

Control over transferred assets is deemed to be surrendered

when (1) the assets have been isolated from the Company,

(2) the transferee obtains the right (free of conditions that constrain

it from taking that right) to pledge or exchange the

transferred assets, and (3) the Company does not maintain effective

control over the transferred assets through an

agreement to repurchase them before their maturity.

Mortgage Servicing Rights

The Company recognizes as assets the rights to service mortgage loans for others, known as MSRs.

The Company determines the fair value of MSRs at the date the

loan is transferred.

An estimate of the Companys MSRs is determined using assumptions that market participants would use in estimating future net servicing income, including estimates of prepayment speeds, discount rate, default rates, cost to

service, escrow account earnings, contractual servicing fee income, ancillary income, and late fees.

Subsequent to the date of transfer, the Company has

elected to measure its MSRs under the amortization method.

Under the amortization method, MSRs are amortized in proportion to, and over the period of, estimated net servicing income.

The amortization of MSRs is analyzed monthly and is adjusted to

reflect changes in prepayment speeds, as well as other factors.

MSRs are evaluated for impairment based on the fair value of those assets.

Impairment is determined by stratifying MSRs into groupings based on predominant risk characteristics, such as

interest rate and loan type.

If, by individual stratum, the carrying amount of the MSRs exceeds fair value, a valuation allowance is established through a charge to earnings.

The valuation allowance is adjusted as the fair value changes.

included in the other assets category in the accompanying consolidated balance sheets.

Securities sold under agreements to repurchase

Securities sold under agreements to repurchase generally mature less than one year from the transaction date.

The Company recognizes as assets the rights to service mortgage loans

for others, known as MSRs.

determines the fair value of MSRs at the date the loan is transferred.

An estimate of the Company’s

MSRs is determined

using assumptions that market participants would use in estimating

future net servicing income, including estimates of

prepayment speeds, discount rate, default rates, cost to service,

escrow account earnings, contractual servicing fee income,

ancillary income, and late fees.

Subsequent to the date of transfer, the Company

has elected to measure its MSRs under the amortization method.

the amortization method, MSRs are amortized in proportion

to, and over the period of, estimated net servicing income.

amortization of MSRs is analyzed monthly and is adjusted to reflect

changes in prepayment speeds, as well as other factors.

MSRs are evaluated for impairment based on the fair value of those

Impairment is determined by stratifying MSRs

into groupings based on predominant risk characteristics, such

as interest rate and loan type.

If, by individual stratum, the

carrying amount of the MSRs exceeds fair value, a valuation

allowance is established through a charge to earnings.

valuation allowance is adjusted as the fair value changes.

MSRs are included in the other assets category in the

accompanying consolidated balance sheets.

Securities sold under agreements to repurchase

are reflected as a secured borrowing in the accompanying consolidated balance sheets at the amount of cash received in connection with each transaction.

Deferred tax assets and liabilities are

the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates.

A valuation allowance, if needed, reduces deferred tax assets to the amount expected to

The net deferred tax asset is reflected as a component of other assets in the accompanying consolidated balance sheets.

Income tax expense

or benefit for the year is allocated among continuing operations and other comprehensive income (loss), as applicable.

The amount allocated to continuing operations is the income tax effect of the pretax income or loss from continuing operations

that occurred during the year, plus or minus income tax effects of (1) changes in certain circumstances that cause a change in judgment about the realization of deferred tax assets in future years, (2) changes in income tax laws or rates,

and (3) changes in income tax status, subject to certain exceptions.

The amount allocated to other comprehensive income (loss) is related solely to changes in the valuation allowance on items that are normally accounted for in other

comprehensive income (loss) such as unrealized gains or losses on available-for-sale securities.

In accordance with ASC 740, Income Taxes , a tax position is recognized as a benefit only if it is more likely than not that the tax

position would be sustained in a tax examination, with a tax examination being presumed to occur.

The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination.

For tax positions not

meeting the more likely than not test, no tax benefit is recorded.

It is the Companys policy to recognize interest and penalties related to income tax matters in income tax expense.

Securities sold under agreements to repurchase generally mature

less than one year from the transaction date.

sold under agreements to repurchase are reflected as a secured

borrowing in the accompanying consolidated balance sheets

at the amount of cash received in connection with each transaction.

Deferred tax assets and liabilities are the expected future tax amounts

for the temporary differences between carrying

amounts and tax bases of assets and liabilities, computed using enacted

A valuation allowance, if needed, reduces

deferred tax assets to the amount expected to be realized.

The net deferred tax asset is reflected as a component of other

assets in the accompanying consolidated balance sheets.

Income tax expense or benefit for the year is allocated among continuing

operations and other comprehensive income

(loss), as applicable.

The amount allocated to continuing operations

is the income tax effect of the pretax income or loss

from continuing operations that occurred during the year,

plus or minus income tax effects of (1) changes

circumstances that cause a change in judgment about the realization

of deferred tax assets in future years, (2) changes in

income tax laws or rates, and (3) changes in income tax status,

subject to certain exceptions.

The amount allocated to other

comprehensive income (loss) is related solely to changes in the valuation

allowance on items that are normally accounted

for in other comprehensive income (loss) such as unrealized

gains or losses on available-for-sale securities.

In accordance with ASC 740,

, a tax position is recognized as a benefit only if it is “more likely than not”

the tax position would be sustained in a tax examination, with a tax examination

being presumed to occur.

recognized is the largest amount of tax benefit that

is greater than 50% likely of being realized on examination.

positions not meeting the “more likely than not” test, no tax benefit

It is the Company’s

policy to recognize

interest and penalties related to income tax matters in income

The Company and its wholly-owned subsidiaries

file a consolidated income tax return.

Measurements,

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

generally accepted accounting principles and expands disclosures about

fair value measurements.

ASC 820, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value in U.S.

generally accepted accounting

principles and expands disclosures about fair value measurements.

ASC 820 applies only to fair-value measurements that are already required or permitted by other accounting standards.

The definition of fair value focuses on

the exit price, i.e., the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, not the entry price, i.e., the price that would be paid to acquire

the asset or received to assume the liability at the measurement date.

The statement emphasizes that fair value is a market-based measurement;

ASC 820 applies only to

fair-value measurements that are already required

or permitted by other accounting standards.

The definition of fair value

focuses on the exit price, i.e., the price

that would be received to sell an asset or paid to transfer a liability in

transaction between market participants at the measurement date,

not the entry price, i.e., the price that would be paid to

acquire the asset or received to assume the liability at the measurement

The statement emphasizes that fair value is a

market-based measurement;

not an entity-specific measurement.

Therefore, the fair value measurement should be determined based on

the assumptions that market participants would use in pricing the asset or liability.

For more information related to fair value measurements, please refer to Note 15, Fair Value.

Therefore, the fair value measurement should be

determined based on the assumptions that market participants

use in pricing the asset or liability.

information related to fair value measurements, please refer

to Note 15, Fair Value.

BASIC AND DILUTED NET EARNINGS PER SHARE

Basic net earnings per share is computed by dividing net earnings by the weighted average common shares outstanding for the year.

Diluted net earnings per

share reflect the potential dilution that could occur upon exercise of securities or other rights for, or convertible into, shares of the Companys common stock.

As of December 31, 2019 and 2018, respectively, the Company had no such

securities or other rights issued or outstanding, and therefore, no dilutive effect to consider for the diluted net earnings per share calculation.

basic and diluted net earnings per share computations for the respective years are presented below.

Basic net earnings per share is computed by dividing net earnings

by the weighted average common shares outstanding for

Diluted net earnings per share reflect the potential dilution that could

occur upon exercise of securities or other

rights for, or convertible into, shares of

the Company’s common stock.

As of December 31, 2020 and 2019, respectively,

the Company had no such securities or other rights issued or

outstanding, and therefore, no dilutive effect to consider

the diluted net earnings per share calculation.

The basic and diluted net earnings per share computations for

the respective years are presented below.

Year ended December 31

1 unchanged sentence

Basic and diluted:

Weighted average common shares outstanding

Weighted average common

shares outstanding

Net earnings per share

RESTRICTED CASH BALANCES

Regulation D of the Federal Reserve Act requires that banks maintain reserve balances with the Federal Reserve Bank based principally on the type and amount

of their deposits.

As of December 31, 2019 and 2018, the Bank did not have a required reserve balance at the Federal Reserve Bank.

At December 31, 2019 and 2018, respectively, all securities within the scope of ASC 320, Investments Debt and Equity

Securities were classified as available-for-sale.

The fair value and amortized cost for securities

available-for-sale by contractual maturity at December 31, 2019 and 2018, respectively, are presented below.

Regulation D of the Federal Reserve Act requires that banks

maintain reserve balances with the Federal Reserve Bank

(“FRB”) based principally on the type and amount of their deposits.

Effective March 26, 2020, the FRB no longer requires

banks to maintain reserve balances on deposit with the FRB.

The Bank did not have a required reserve balance at the FRB

at December 31, 2019.

At December 31, 2020 and 2019, respectively,

all securities within the scope of ASC 320,

Investments – Debt and Equity

were classified as available-for-sale.

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

contractual maturity at December 31, 2020 and 2019, respectively,

are presented below.

Gross Unrealized

2 unchanged sentences

Agency obligations (a)

Agency RMBS (a)

Agency MBS (a)

State and political subdivisions

available-for-sale

Total available-for-sale

December 31, 2019

Agency obligations (a)

Agency RMBS (a)

Agency MBS (a)

State and political subdivisions

available-for-sale

Total available-for-sale

(a) Includes securities issued by U.S.

government agencies or government sponsored entities.

Expected maturities of these securities may differ from contractual maturities because issues may have the right to call or repay obligations with or without prepayment penalties.

Securities with aggregate fair values of $147.8 million and $133.1 million at December 31, 2019 and 2018, respectively, were pledged to secure

public deposits, securities sold under agreements to repurchase, Federal Home Loan Bank (FHLB) advances, and for other purposes required or permitted by law.

Included in other assets on the accompanying consolidated balance sheets are nonmarketable equity investments.

The carrying amounts of nonmarketable equity

investments were $1.4 million at December 31, 2019 and 2018, respectively.

Nonmarketable equity investments include FHLB of Atlanta stock, Federal Reserve Bank (FRB) stock, and stock in a privately held financial institution.

government agencies or

government sponsored entities.

Expected maturities of

these securities may differ from contractual maturities because

issues may have the right to call or repay obligations

with or without prepayment penalties.

Securities with aggregate fair values of $

million and $

million at December 31, 2020 and 2019, respectively,

were pledged to secure public deposits, securities sold under

agreements to repurchase, Federal Home Loan Bank

(“FHLB”) advances, and for other purposes required or permitted

Included in other assets on the accompanying consolidated balance sheets

are nonmarketable equity investments.

carrying amounts of nonmarketable equity investments were

million at December 31, 2020 and 2019, respectively.

Nonmarketable equity investments include FHLB of Atlanta

stock, Federal Reserve Bank (“FRB”) stock, and stock in a

privately held financial institution.

Gross Unrealized Losses and Fair Value

The fair values and gross unrealized losses on securities at December 31, 2019 and 2018, respectively, segregated by those securities that have been in

an unrealized loss position for less than 12 months and 12 months or more are presented below.

The fair values and gross unrealized losses on securities at December

31, 2020 and 2019, respectively,

segregated by those

securities that have been in an unrealized loss position for

less than 12 months and 12 months or more are presented below.

Less than 12 Months

7 unchanged sentences

State and political subdivisions

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

likely than not that the Company will be required to sell the security before recovery of the amortized cost basis, which may be maturity.

On a quarterly basis, the Company assesses each security for credit impairment.

For debt securities, the

Company evaluates, where necessary, whether credit impairment exists by comparing the present value of the expected cash flows to the securities amortized cost basis.

In determining whether a loss is temporary, the Company considers all relevant information including:

the length of time and the extent to which the fair value has been less than the amortized cost basis;

adverse conditions specifically related to the security, an industry, or a geographic area (for example, changes

in the financial condition of the issuer of the security, or in the case of an asset-backed debt security, in the financial condition of the underlying loan obligors, including changes in technology or the discontinuance of a segment of the business

that may affect the future earnings potential of the issuer or underlying loan obligors of the security or changes in the quality of the credit enhancement);

For the securities in the previous table, the Company does not

have the intent to sell and has determined it is not more likely

than not that the Company will be required to sell the security

before recovery of the amortized cost basis, which may be

On a quarterly basis,

the Company assesses each security for credit impairment.

debt securities, the Company

evaluates, where necessary,

whether credit impairment exists by comparing the present value

of the expected cash flows to

the securities’ amortized cost basis.

In determining whether a loss is temporary,

the Company considers all relevant information including:

the length of time and the extent to which the fair value has been

less than the amortized cost basis;

adverse conditions specifically related to the security,

an industry, or a geographic

area (for example, changes in

the financial condition of the issuer of the security,

or in the case of an asset-backed debt security,

in the financial

condition of the underlying loan obligors, including changes in technology

or the discontinuance of a segment of

the business that may affect the future earnings potential of

the issuer or underlying loan obligors of the security or

changes in the quality of the credit enhancement);

the historical and implied volatility of the fair value of the security;

the payment structure of the debt security and the likelihood of the issuer being able to make payments that

the payment structure of the debt security and the likelihood of the issuer

being able to make payments that

increase in the future;

failure of the issuer of the security to make scheduled interest or principal payments;

failure of the issuer of the security to make scheduled interest

or principal payments;

any changes to the rating of the security by a rating agency;

recoveries or additional declines in fair value subsequent to the balance sheet date.

recoveries or additional declines in fair value subsequent to the

balance sheet date.

Agency obligations

The unrealized losses associated

with agency obligations were primarily driven by changes in interest rates and not due to the credit quality of the securities.

These securities were issued by U.S.

government agencies or government-sponsored entities and did not have any credit

losses given the explicit government guarantee or other government support.

Agency residential mortgage-backed securities (RMBS)

The unrealized losses associated with agency RMBS were primarily driven by changes in interest rates and not due to the credit quality of the securities.

The unrealized losses associated with agency obligations were

primarily driven by changes in interest rates and not due to

the credit quality of the securities.

These securities were issued

government agencies or government-sponsored

entities and did not have any credit losses given the explicit government

guarantee or other government support.

Agency mortgage-backed securities (“MBS”)

The unrealized losses associated with agency MBS were primarily

driven by changes in interest rates and not due to the

credit quality of the securities.

These securities were issued by U.S.

government agencies or government-sponsored entities and did not have any credit losses given the explicit government guarantee or other government support.

government agencies or government-sponsored entities

and did not have any credit losses given the explicit government guarantee

or other government support.

Securities of U.S.

1 unchanged sentence

The unrealized losses associated with securities of U.S.

states and political subdivisions were primarily driven by changes in interest rates and were not due

to the credit quality of the securities.

Some of these securities are guaranteed by a bond insurer, but management did not rely on the guarantee in making its investment decision.

These securities will continue to be monitored as part of the

Companys quarterly impairment analysis, but are expected to perform even if the rating agencies reduce the credit rating of the bond insurers.

As a result, the Company expects to recover the entire amortized cost basis of these securities.

The carrying values of the Companys investment securities could decline in the future if the financial condition of an issuer deteriorates and the

Company determines it is probable that it will not recover the entire amortized cost basis for the security.

As a result, there is a risk that other-than-temporary impairment charges may occur in the future.

Other-Than-Temporarily Impaired Securities

Credit-impaired debt securities are debt securities where the Company has written down the amortized cost basis of a security for other-than-temporary

impairment and the credit component of the loss is recognized in earnings.

At December 31, 2019 and 2018, respectively, the Company had no credit-impaired debt securities and there were no additions or reductions in the credit loss component of

credit-impaired debt securities during the years ended December 31, 2019 and 2018, respectively.

political subdivisions were primarily driven by changes

in interest rates and were not due to the credit quality of the securities.

Some of these securities are guaranteed by a bond

insurer, but management did not rely on the

guarantee in making its investment decision.

These securities

will continue to

be monitored as part of the Company’s

quarterly impairment

analysis, but are expected to perform even if the rating

agencies reduce the credit rating of the bond insurers.

As a result, the

Company expects to recover the entire amortized cost

basis of these securities.

The carrying values of the Company’s

investment securities could decline in the future if the financial

condition of an

issuer deteriorates and the Company determines it is probable

that it will not recover the entire amortized cost basis for the

As a result, there is

a risk that other-than-temporary impairment charges

may occur in the future.

Other-Than-Temporarily

Impaired Securities

Credit-impaired debt securities are debt securities where the Company

has written down the amortized cost basis of a

security for other-than-temporary impairment and the credit

component of the loss is recognized in earnings.

2020 and 2019, respectively, the Company

had no credit-impaired debt securities and there were no additions

or reductions in the credit loss component of credit-impaired

debt securities during the years ended December 31, 2020

2019, respectively.

Realized Gains and Losses

The following table presents the gross realized gains and losses on sales related to securities.

The following table presents the gross realized gains and losses on sales

related to securities.

Year ended December 31

2 unchanged sentences

Gross realized losses

Realized losses, net

LOANS AND ALLOWANCE FOR LOAN LOSSES

Realized gains (losses), net

LOANS AND ALLOWANCE

FOR LOAN LOSSES

(In thousands)

11 unchanged sentences

Loans, net of unearned income

Loans secured by real estate were approximately 85.8% of the total loan portfolio at December 31, 2019.

December 31, 2019, the Companys geographic loan distribution was concentrated primarily in Lee County, Alabama and surrounding areas.

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

entity develops and documents a systematic method for determining its allowance for loan losses.

As part of the Companys quarterly assessment of the allowance, the loan portfolio is disaggregated into the following portfolio segments:

commercial and industrial, construction and land development, commercial real estate, residential real estate and consumer installment.

Where appropriate, the Companys loan portfolio segments are further disaggregated into classes.

generally determined based on the initial measurement attribute, risk characteristics of the loan, and an entitys method for monitoring and determining credit risk.

The following describe the risk characteristics relevant to each of the portfolio segments.

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 lines for construction of residential, multi-family and commercial buildings.

Loans secured by real estate were approximately

% of the total loan portfolio at December 31, 2020.

At December 31,

2020, the Company’s geographic

loan distribution was concentrated primarily in Lee County,

Alabama and surrounding

In accordance with ASC 310,

, a portfolio segment is defined as the level at which an entity develops

documents a systematic method for determining its allowance

for loan losses.

As part of the Company’s

assessment of the allowance, the loan portfolio is disaggregated

into the following portfolio segments:

commercial and

industrial, construction and land development, commercial real

estate, residential real estate and consumer installment.

Where appropriate, the Company’s

loan portfolio segments are further disaggregated into classes.

determined based on the initial measurement attribute, risk characteristics

of the loan, and an entity’s method

monitoring and determining credit risk.

The following describe the risk characteristics relevant to each

of the portfolio segments and classes.

Commercial and industrial (“C&I”) —

includes loans to finance business operations, equipment purchases,

or other needs

for small and medium-sized commercial customers.

included in this category are loans to finance agricultural

Generally, the primary source

of repayment is the cash flow from business operations and activities

a participating lender in the PPP.

PPP loans are forgivable in whole or in part, if the proceeds

for payroll and other permitted purposes in accordance with

the requirements of the PPP.

As of December 31, 2020, the

PPP loans with an aggregate outstanding principal balance of $

million included in this category.

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

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

carrying and developing land into commercial developments or

residential subdivisions.

Also included are loans and lines

for construction of residential, multi-family and commercial buildings.

Generally the primary source of repayment is

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

Commercial real estate (CRE) includes loans disaggregated

into three classes:

(1) owner occupied (2) multi-family and (3) other.

Owner occupied includes loans secured by business facilities to finance business operations,

equipment and owner-occupied facilities primarily for small and medium-sized commercial customers.

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

borrower, who owns the property.

Multifamily primarily includes loans to finance income-producing multi-family properties.

this class include loans for 5 or more unit residential property and apartments leased to residents.

Generally, the primary source of repayment is dependent upon income generated from the real estate collateral.

Commercial real estate

includes loans disaggregated into three classes:

(1) owner occupied

(2) multi-family

and (3) other.

Owner occupied

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

equipment and

owner-occupied facilities primarily for small and medium-sized

commercial customers.

Generally the primary source

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

who owns the property.

– includes loans for hotels and motels.

Generally, the primary

source of repayment is dependent upon

income generated from the real estate collateral.

The underwriting of these loans takes into consideration the

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

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

Loans in this class include

loans for 5 or more unit residential property and apartments leased

to residents.

Generally, the primary

repayment is dependent upon income generated from the real

estate collateral.

The underwriting of these loans takes

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

Other primarily includes loans to finance income-producing commercial properties.

Loans in this

class include loans for neighborhood retail centers, hotels, medical and professional offices, single retail stores, industrial buildings, and warehouses leased generally to local businesses and residents.

Generally the primary source of repayment

is dependent upon income generated from the real estate collateral.

The underwriting of these loans takes into consideration the occupancy and rental rates as well as the financial health of the borrower.

Residential real estate (RRE) includes loans disaggregated into two classes:

(1) consumer mortgage and (2) investment

Consumer mortgage primarily includes first or second lien mortgages and home equity lines to

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

These loans are underwritten in accordance with the Banks general loan policies and procedures which require, among other things, proper documentation of each borrowers

financial condition, satisfactory credit history and property value.

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

Generally the primary source of repayment is dependent upon income generated from leasing the property securing the loan.

The underwriting of these loans takes into consideration

the rental rates as well as the financial health of the borrower.

Consumer installment includes loans to individuals both

secured by personal property and unsecured.

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

These loans are underwritten in accordance with the Banks general loan policies and procedures which require, among

other things, proper documentation of each borrowers financial condition, satisfactory credit history, and if applicable, property value.

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

December 31, 2019 and 2018.

into consideration the occupancy and rental rates, as well as the financial

health of the borrower.

– primarily includes loans to finance income-producing commercial properties.

Loans in this class include loans

for neighborhood retail centers, hotels, medical and professional offices,

single retail stores, industrial buildings,

warehouses leased generally to local businesses and residents.

Generally the

primary source of repayment is dependent

upon income generated from the real estate collateral.

The underwriting

of these loans takes into consideration the

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

Residential real estate (“RRE”) —

includes loans disaggregated into two classes:

(1) consumer mortgage

investment property.

Consumer mortgage

– primarily includes first or second lien mortgages and home equity

lines to consumers that are

secured by a primary residence or second home.

These loans are underwritten in

accordance with the Bank’s general

loan policies and procedures which require, among other things, proper

documentation of each borrower’s financial

condition, satisfactory credit history and property value.

Investment property

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

residential properties.

Generally, the primary source

of repayment is dependent upon income generated from leasing the

property securing the

The underwriting of these loans takes into consideration the rental

rates as well as the financial health of the

Consumer installment —

includes loans to individuals both secured by personal property

and unsecured.

Loans include

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

These loans are underwritten in accordance with the

Bank’s general loan policies and

procedures which require, among other things, proper

documentation of each borrower’s

financial condition, satisfactory credit history,

and if applicable, property value.

The following is a summary of current, accruing past due and

nonaccrual loans by portfolio class as of December 31,

(In thousands)

21 unchanged sentences

Consumer installment

The gross interest income which would have been recorded under the original terms of those nonaccrual loans had they been

accruing interest, amounted to approximately $9 thousand and $12 thousand for the years ended December 31, 2019 and 2018, respectively.

The gross interest income which would have been recorded

under the original terms of those nonaccrual loans had they

been accruing interest, amounted to approximately $

thousand and $

thousand for the years ended December 31, 2020

and 2019, respectively.

Allowance for Loan Losses

The allowance for loan losses

as of and for the years ended December 31, 2019 and 2018, is presented below.

The allowance for loan losses as of and for the years ended December

31, 2020 and 2019, is presented below.

Year ended December 31

3 unchanged sentences

Recovery of previously charged-off loans

Net (charge-offs) recoveries

Net recoveries (charge-offs)

Provision for loan losses

Ending balance

The Company assesses the adequacy of its allowance for loan losses prior to the end of each calendar

The level of the allowance is based upon managements evaluation of the loan portfolio, past loan loss experience, current asset quality trends, known and inherent risks in the portfolio, adverse situations that may affect a

borrowers ability to repay (including the timing of future payment), the estimated value of any underlying collateral, composition of the loan portfolio, economic conditions, industry and peer bank loan loss rates and other pertinent factors,

including regulatory recommendations.

This evaluation is inherently subjective as it requires material estimates including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant

Loans are charged off, in whole or in part, when management believes that the full collectability of the loan is unlikely.

A loan may be partially charged-off after a confirming event has

occurred which serves to validate that full repayment pursuant to the terms of the loan is unlikely.

The Company deems loans impaired when, based on

current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement.

Collection of all amounts due according to the contractual terms means that both the

interest and principal payments of a loan will be collected as scheduled in the loan agreement.

An impairment allowance is recognized if the fair value

of the loan is less than the recorded investment in the loan.

The impairment is recognized through the allowance.

Loans that are impaired are recorded at the present value of expected future cash flows discounted at the loans effective

interest rate, or if the loan is collateral dependent, impairment measurement is based on the fair value of the collateral, less estimated disposal costs.

The level of allowance maintained is believed by management to be adequate to absorb probable losses inherent in the portfolio at the balance sheet date.

allowance is increased by provisions charged to expense and decreased by charge-offs, net of recoveries of amounts previously charged-off.

In assessing the adequacy of the allowance, the Company also considers the results of its ongoing internal, independent loan review process.

Companys loan review process assists in determining whether there are loans in the portfolio whose credit quality has weakened over time and evaluating the risk characteristics of the entire loan portfolio.

The Companys loan review

process includes the judgment of management, the input from our independent loan reviewers, and reviews that may have been conducted by bank regulatory agencies as part of their examination process.

The Company incorporates loan review results in

the determination of whether or not it is probable that it will be able to collect all amounts due according to the contractual terms of a loan.

of the Companys quarterly assessment of the allowance, management divides the loan portfolio into five segments:

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

The Company assesses the adequacy of its allowance for loan

losses prior to the end of each calendar quarter.

the allowance is based upon management’s

evaluation of the loan portfolio, past loan loss experience,

current asset quality

trends, known and inherent risks in the portfolio, adverse situations

that may affect a borrower’s ability to

repay (including

the timing of future payment), the estimated value of any underlying

collateral, composition of the loan portfolio, economic

conditions, industry and peer bank loan loss rates and other pertinent

factors, including regulatory recommendations.

evaluation is inherently subjective as it requires material estimates including

the amounts and timing of future cash flows

expected to be received on impaired loans that may be susceptible

to significant change.

Loans are charged off, in whole

in part, when management believes that the full collectability of the

loan is unlikely.

may be partially charged-off

after a “confirming event” has occurred which serves to validate

that full repayment pursuant to the terms of the loan is

The Company deems loans impaired when, based on current information

and events, it is probable that the Company will

be unable to collect all amounts due according to the contractual

terms of the loan agreement.

Collection of all amounts due

according to the contractual terms means that both the interest

and principal payments of a loan will be collected as

scheduled in the loan agreement.

An impairment allowance is recognized if the fair value of the

loan is less than the recorded investment in the loan.

impairment is recognized through the allowance.

Loans that are

impaired are recorded at the present value of expected

future cash flows discounted at the loan’s

effective interest rate, or if the loan is collateral dependent,

measurement is

based on the fair value of the collateral, less estimated disposal

The level of allowance maintained is believed by management to

be adequate to absorb probable losses inherent in the

portfolio at the balance sheet date.

The allowance is increased

by provisions charged to expense and decreased by charge-

offs, net of recoveries of amounts previously charged

In assessing the adequacy of the allowance, the Company also

considers the results of its ongoing internal, independent

loan review process.

The Company’s

loan review process assists in determining whether there are

loans in the portfolio

whose credit quality has weakened over time and evaluating the risk characteristics

of the entire loan portfolio.

Company’s loan review process includes

the judgment of management, the input from our independent

loan reviewers, and

reviews that may have been conducted by bank regulatory agencies

as part of their examination process.

incorporates loan review results in the determination of whether

or not it is probable that it will be able to collect all

amounts due according to the contractual terms of a loan.

As part of the Company’s quarterly assessment

of the allowance, management divides the loan portfolio

into five segments:

commercial and industrial, construction and land development, commercial

real estate, residential real estate, and consumer

installment loans.

The Company analyzes each segment and estimates an allowance allocation for each loan segment.

The allocation of the allowance for

loan losses begins with a process of estimating the probable losses inherent for these types of loans.

The estimates for these loans are established by category and based on the Companys internal system of credit risk ratings and historical

The estimated loan loss allocation rate for the Companys internal system of credit risk grades is based on its experience with similarly graded loans.

For loan segments where the Company believes it does not have sufficient

historical loss data, the Company may make adjustments based, in part, on loss rates of peer bank groups.

At December 31, 2019 and 2018, and for the years then ended, the Company adjusted its historical loss rates for the commercial real estate

portfolio segment based, in part, on loss rates of peer bank groups.

The estimated loan loss allocation for all five loan portfolio segments is then

adjusted for managements estimate of probable losses for several qualitative and environmental factors.

The allocation for qualitative and environmental factors is particularly subjective and does not lend itself to exact

mathematical calculation.

This amount represents estimated probable inherent credit losses which exist, but have not yet been identified, as of the balance sheet date, and are based upon quarterly trend assessments in delinquent and nonaccrual

loans, credit concentration changes, prevailing economic conditions, changes in lending personnel experience, changes in lending policies or procedures and other influencing factors.

These qualitative and environmental factors are considered for

each of the five loan segments and the allowance allocation, as determined by the processes noted above, is increased or decreased based on the incremental assessment of these factors.

The Company analyzes each segment and

estimates an allowance allocation for each loan segment.

The allocation of the allowance for loan losses begins with a

process of estimating the probable losses inherent for these

types of loans.

The estimates for these loans are established by category

and based on the Company’s internal

credit risk ratings and historical loss data.

The estimated loan loss allocation

rate for the Company’s internal system

credit risk grades is based on its experience with similarly graded

For loan segments where the Company believes

does not have sufficient historical loss data, the Company

may make adjustments based, in part, on loss rates of peer

At December 31, 2020 and 2019, and for the years then ended,

the Company adjusted its historical loss rates for the

commercial real estate portfolio segment based, in part, on loss rates of peer

The estimated loan loss allocation for all five loan portfolio segments

is then adjusted for management’s

probable losses for several “qualitative and environmental” factors.

The allocation for qualitative and environmental factors

is particularly subjective and does not lend itself to exact mathematical

This amount represents estimated

probable inherent credit losses which exist, but have not yet been

identified, as of the balance sheet date, and are based

upon quarterly trend assessments in delinquent and nonaccrual

loans, credit concentration changes, prevailing economic

conditions, changes in lending personnel experience, changes

in lending policies or procedures and other influencing

These qualitative and environmental factors are considered

for each of the five loan segments and the allowance

allocation, as determined by the processes noted above, is increased

or decreased based on the incremental assessment of

these factors.

The Company regularly re-evaluates its practices in determining the

allowance for loan losses.

Since the fourth quarter of 2016, the Company has increased its look-back period each quarter to incorporate the effects of at least one economic downturn in its loss history.

The Company believes the extension of its

look-back period is appropriate due to the risks inherent in the loan portfolio.

Absent this extension, the early cycle periods in which the Company experienced significant losses would be excluded from the determination of the allowance for loan

losses and its balance would decrease.

For the year ended December 31, 2019, the Company increased its look-back period to 43 quarters to continue to include losses incurred by the Company beginning with the first quarter of 2009.

will likely continue to increase its look-back period to incorporate the effects of at least one economic downturn in its loss history.

Other than expanding the look-back period each quarter, the Company has not made any material changes to its

methodology that would impact the calculation of the allowance for loan losses or provision for loan losses for the periods included in the accompanying consolidated balance sheets and statements of earnings.

The following table details the changes in the allowance for loan losses by portfolio segment for the years ended December 31, 2019 and 2018.

Since the fourth quarter of

2016, the Company has increased its look-back period each quarter

to incorporate the effects of at least one economic

downturn in its loss history.

Company believes the extension of its look-back period

is appropriate due to the risks

inherent in the loan portfolio.

Absent this extension, the early

cycle periods in which the Company experienced significant

losses would be excluded from the determination of the allowance for

loan losses and its balance would decrease.

year ended December 31, 2020, the Company increased its look

-back period to 47 quarters to continue to include losses

incurred by the Company beginning with the first quarter of 2009.

The Company will likely continue to increase its look-

back period to incorporate the effects of at least one

economic downturn in its loss history.

During 2020, the Company

adjusted certain qualitative and economic factors related to changes in

economic conditions driven by the impact of the

COVID-19 pandemic and resulting adverse economic conditions,

including higher unemployment in our primary market

Further adjustments may be made in the future as a result of the ongoing COVID

-19 pandemic.

The following table details the changes in the allowance for loan

losses by portfolio segment for the years ended December

31, 2020 and 2019.

(in thousands)

1 unchanged sentence

Balance, December 31, 2018

Net recoveries (charge-offs)

Balance, December 31, 2018

Net (charge-offs) recoveries

Balance, December 31, 2019

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

segment and impairment methodology as of December 31, 2019 and 2018.

Net recoveries (charge-offs)

Balance, December 31, 2020

The following table presents an analysis of the allowance for

loan losses and recorded investment in loans by portfolio

segment and impairment methodology as of December 31, 2020

Collectively evaluated (1)

13 unchanged sentences

Consumer installment

Represents loans collectively evaluated for impairment in accordance with ASC

450-20, Loss Contingencies (formerly FAS 5), and pursuant to amendments by ASU 2010-20 regarding allowance for unimpaired loans.

Represents loans individually evaluated for impairment in accordance with ASC

310-30, Receivables (formerly FAS 114), and pursuant to amendments by ASU 2010-20 regarding allowance for impaired loans.

(1) Represents loans collectively evaluated for impairment in accordance

with ASC 450-20,

Loss Contingencies

(formerly FAS 5), and pursuant to amendments by ASU 2010-20 regarding allowance for unimpaired loans.

(2) Represents loans individually evaluated for impairment in accordance

with ASC 310-30,

FAS 114), and pursuant to amendments by ASU 2010-20 regarding allowance for impaired loans.

Credit Quality Indicators

The credit quality of the loan portfolio is summarized no less frequently than quarterly using categories similar to the standard asset classification system

used by the federal banking agencies.

The following table presents credit quality indicators for the loan portfolio segments and classes.

These categories are utilized to develop the associated allowance for loan losses using historical losses

adjusted for qualitative and environmental factors and are defined as follows:

Pass loans which are well protected by the current net worth and paying capacity of the obligor (or

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

Special Mention loans with potential weakness that may, if not reversed or corrected, weaken the credit or

inadequately protect the Companys 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

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.

categories are utilized to develop the associated allowance for

loan losses using historical losses adjusted for qualitative and

environmental factors and are defined as follows:

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

and paying capacity of the obligor (or guarantors, if

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

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

not expose an institution to sufficient risk to warrant an

adverse classification.

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

presently jeopardizes debt repayment,

even though they are currently performing.

These loans are characterized

by the distinct possibility that the

Company may incur a loss in the future if these weaknesses are

not corrected.

Nonaccrual – includes loans where management has determined

that full payment of principal and interest is in

(In thousands)

21 unchanged sentences

Consumer installment

During the fourth quarter of 2019, the Company recognized a gain of $1.7 million resulting from the

termination of a Loan Guarantee Program (the Program) operated by the State of Alabama.

The payment of $1.7 million received by the Company in October 2019 was recorded as a gain and included in noninterest income on the

accompanying consolidated statements of earnings.

The Program required a 1% fee on the commitment balance at origination and in return the Company received a guarantee of up to 50% of losses in the event of the borrowers default.

December 31, 2019, the Company had 5 loans outstanding totaling $10.2 million that were enrolled in the Program prior to its termination by the State of Alabama.

During the fourth quarter of 2019, the Company recognized a

gain of $1.7 million resulting from the termination of a Loan

Guarantee Program (the “Program”) operated by the State of

The payment of $1.7

million received by the

Company in October 2019 was recorded as a gain and included

in noninterest income on the accompanying consolidated

statements of earnings.

The Program required a 1% fee on the commitment balance at

origination and in return the

Company received a guarantee of up to 50% of losses in the

event of the borrower's default.

The Company had

outstanding totaling $

million that were enrolled in the Program prior to its termination by the

State of Alabama.

Despite being enrolled in the Program, these loans would have met the

Companys normal loan underwriting criteria at origination.

At December 31, 2019, all of these loans were categorized as Pass within the Companys credit quality asset classification.

Company's normal loan underwriting criteria at

All of these loans were categorized as Pass within the Company's

credit quality asset classification at the date

of the Program’s termination.

Impaired loans

The following table presents details

related to the Companys impaired loans.

Loans which have been fully charged-off do not appear in the following table.

The related allowance generally represents the following components which correspond

The following table presents details related to the Company’s

impaired loans.

Loans which have been fully charged

not appear in the following table.

The related allowance generally

represents the following components which correspond

to impaired loans:

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

(nonaccrual construction and land development, commercial real estate, and residential real estate).

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

Individually evaluated impaired loans equal to or greater than $500

thousand secured by real estate (nonaccrual

construction and land development, commercial real estate, and

residential real estate).

Individually evaluated impaired loans equal to or greater than $250

thousand not secured by real estate

(nonaccrual commercial and industrial and consumer loans).

The following table sets forth certain information regarding the

Companys impaired loans that were individually evaluated for impairment at December 31, 2019 and 2018.

Company’s impaired loans

that were individually evaluated

for impairment at December 31, 2020 and 2019.

December 31, 2020

2 unchanged sentences

With no allowance recorded:

Commercial and industrial

Total impaired loans

Unpaid principal balance represents the contractual obligation due from the customer.

Charge-offs and payments applied represents cumulative charge-offs taken, as well as interest payments that have

been applied against the outstanding principal balance.

Recorded investment represents the unpaid principal balance less charge-offs and payments applied;

before any related allowance for loan losses.

Commercial real estate:

Total commercial real estate

Residential real estate:

Investment property

Total residential real estate

impaired loans

(1) Unpaid principal balance represents the contractual obligation due

from the customer.

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

that have been

applied against the outstanding principal balance.

(3) Recorded investment represents the unpaid principal balance less

charge-offs and payments applied;

it is shown before

any related allowance for loan losses.

December 31, 2019

2 unchanged sentences

With no allowance recorded:

Commercial real estate:

Owner occupied

Total commercial real estate

Total impaired loans

Unpaid principal balance represents the contractual obligation due from the customer.

Charge-offs and payments applied represents cumulative charge-offs taken, as well as interest payments that have

been applied against the outstanding principal balance.

Recorded investment represents the unpaid principal balance less charge-offs and payments applied;

before any related allowance for loan losses.

The following table provides the average recorded investment in impaired loans and the amount of interest

income recognized on impaired loans after impairment by portfolio segment and class.

Commercial and industrial

impaired loans

(1) Unpaid principal balance represents the contractual obligation due

from the customer.

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

that have been

applied against the outstanding principal balance.

(3) Recorded investment represents the unpaid principal balance less

charge-offs and payments applied;

it is shown before

any related allowance for loan losses.

The following table provides the average recorded investment in impaired

loans and the amount of interest income

recognized on impaired loans after impairment by portfolio segment

Year ended December 31, 2020

8 unchanged sentences

Total commercial real estate

Troubled Debt Restructurings

Residential real estate:

Investment property

Total residential real estate

Troubled Debt

Restructurings

Impaired loans also include troubled debt restructurings (“TDRs”).

In the normal course of business, management may grant concessions to borrowers

who are experiencing financial difficulty.

A concession may include, but is not limited to, delays in required payments of principal and interest for a specified period, reduction of the stated interest rate of the loan, reduction of accrued

interest, extension of the maturity date or reduction of the face amount or maturity amount of the debt.

A concession has been granted when, as a result of the restructuring, the Bank does not expect to collect all amounts due, including interest at

the original stated rate.

A concession may have also been granted if the debtor is not able to access funds elsewhere at a market rate for debt with similar risk characteristics as the restructured debt.

In determining whether a loan modification is

a TDR, the Company considers the individual facts and circumstances surrounding each modification.

In determining the appropriate accrual status at the time of restructure, the Company evaluates whether a restructured loan has adequate collateral

protection, among other factors.

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

the loans original effective interest rate as the discount rate, or the fair value of the collateral, less selling costs if the loan is collateral dependent.

If the recorded investment in the loan exceeds the measure of fair value, impairment

is recognized by establishing a valuation allowance as part of the allowance for loan losses or a charge-off to the allowance for loan losses.

Section 4013 of the CARES Act, “Temporary

From Troubled Debt Restructurings,” provides

banks the option to temporarily suspend certain requirements

340-10 TDR classifications for a limited period of time to account

for the effects of COVID-19.

In addition, the Interagency

Statement on COVID-19 Loan Modifications, encourages banks

to work prudently with borrowers and describes the

agencies’ interpretation of how accounting rules under ASC

310-40, “Troubled Debt Restructurings by Creditors,”

certain COVID-19-related modifications.

The Interagency Statement

on COVID-19 Loan Modifications was supplemented

on June 23, 2020 by the Interagency Examiner Guidance for Assessing

Safety and Soundness Considering the Effect of the

COVID-19 Pandemic on Institutions.

If a loan modification is eligible, a bank may elect to account for

the loan under

section 4013 of the CARES Act.

If a loan modification is not

eligible under section 4013, or if the bank elects not to

account for the loan modification under section 4013, the Revised Statement

includes criteria when a bank may presume a

loan modification is not a TDR in accordance with ASC 310

The Company evaluates loan extensions or modifications not

qualified under Section 4013 of the CARES Act or under the

Interagency Statement on COVID-19 Loan Modifications in accordance

with FASB ASC 340

-10 with respect to the

classification of the loan as a TDR.

In the normal course of business, management may grant concessions

to borrowers that

are experiencing financial difficulty.

A concession may include, but is not limited to, delays in required

principal and interest for a specified period, reduction of the stated

interest rate of the loan, reduction of accrued interest,

extension of the maturity date, or reduction of the face amount or

maturity amount of the debt.

A concession has been

granted when, as a result of the restructuring, the Bank does not expect

to collect, when due, all amounts owed, including

interest at the original stated rate.

A concession may have also been granted if the debtor is not able

to access funds

elsewhere at a market rate for debt with similar risk characteristics

as the restructured debt.

In making the determination of

whether a loan modification is a TDR, the Company considers

the individual facts and circumstances surrounding each

modification.

As part of the credit approval process, the restructured loans are evaluated

for adequate collateral protection

in determining the appropriate accrual status at the time of restructure.

Similar to other impaired loans, TDRs are measured for impairment

based on the present value of expected payments using

the loan’s original effective

interest rate as the discount rate, or the fair value of the collateral,

less selling costs if the loan is

collateral dependent.

If the recorded investment in the loan exceeds

the measure of fair value, impairment is recognized by

establishing a valuation allowance as part of the allowance for

loan losses or a charge-off to the allowance for

In periods subsequent to the modification, all TDRs are evaluated

individually, including those that have payment defaults, for possible impairment.

individually, including

those that have payment defaults,

for possible impairment.

At December 31, 2019 the Company had no TDRs.

The following is a

summary of accruing and nonaccrual TDRs and the related loan losses, by portfolio segment and class at December 31, 2018.

The following is a summary of accruing and nonaccrual TDRs

related loan losses, by portfolio segment and class at December

(In thousands)

1 unchanged sentence

Commercial real estate:

Owner occupied

Total commercial real estate

At December 31, 2019, there were no significant outstanding commitments to advance additional funds to customers whose

Investment property

Total residential real estate

At December 31, 2020, there were no significant outstanding commitments

to advance additional funds to customers whose

loans had been restructured.

There were no loans modified in a TDR during the year ended December 31, 2019.

The following table

summarizes loans modified in a TDR during the year ended December 31, 2018 both before and after modification.

($ in thousands)

There were no loans modified in a TDR during the year ended

December 31, 2019.

Commercial real estate:

Total commercial real estate

Two loans were modified in a TDR during the year ended December 31, 2018.

The only concessions granted by the Company

were related to either a delay in the required payment of principal and/or interest or the interest rate at renewal was considered to be less than a market rate.

During the year ended December 31, 2019, the Company had no loans modified in a TDR within the previous 12 months for which there was a payment default.

The following table summarizes the recorded investment in loans modified in a TDR within the previous twelve months for which there was a payment default (defined as 90 days or more past due) during the year ended December 31, 2018.

The following table summarizes loans

modified in a TDR during the year ended December 31,

2020 both before and after modification.

($ in thousands)

investment (1)

December 31, 2020

1 unchanged sentence

Total commercial real estate

Amount as of applicable month end during the respective year for which there was a payment default.

Investment property

Total residential real estate

Four loans were modified in a TDR during the year ended December

The only concession granted by the

Company was related to a delay in the required payment of principal

and/or interest.

During the years ended December 31, 2020 and 2019,

respectively, the Company had

no loans modified in a TDR within

the previous 12 months for which there was a payment default

(defined as 90 days or more past due).

PREMISES AND EQUIPMENT

Premises and equipment at December 31, 2019 and 2018 is presented below.

Premises and equipment at December 31, 2020

and 2019 is presented below

(Dollars in thousands)

2 unchanged sentences

Furniture, fixtures, and equipment

Construction in progress

Total premises and equipment

1 unchanged sentence

Premises and equipment, net

Depreciation expense was approximately $662 thousand and $435 thousand for the years ended December 31, 2019

and 2018, respectively, and is a component of net occupancy and equipment expense in the consolidated statements of earnings.

SERVICING RIGHTS, NET

MSRs are recognized based on the fair value of the servicing rights on the date the corresponding mortgage loans are sold.

estimate of the Companys 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.

Servicing fee income is recorded net of related amortization expense and recognized in earnings as part of mortgage lending income.

The Company has recorded MSRs related to loans sold without recourse to Fannie Mae.

The Company generally

sells conforming, fixed-rate, closed-end, residential mortgages to Fannie Mae.

MSRs are included in other assets on the accompanying consolidated balance sheets.

Depreciation expense was approximately $

thousand and $

thousand for the years ended December 31, 2020 and

2019, respectively, and is a component

of net occupancy and equipment expense in the consolidated

statements of earnings.

MORTGAGE SERVICING RIGHTS,

MSRs are recognized based

on the fair value

of the servicing rights

on the date the

corresponding mortgage loans

Company’s MSRs

is determined

using assumptions

participants would

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

Subsequent to the

date of transfer,

the amortization

amortization method,

amortized in proportion

to, and over the

period of, estimated

net servicing income.

fee income is recorded

related amortization expense and recognized in earnings as part

of mortgage lending income.

The Company has recorded MSRs related to loans sold without

recourse to Fannie Mae.

The Company generally sells

conforming, fixed-rate, closed-end, residential mortgages to Fannie

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.

Impairment is determined by stratifying MSRs into

groupings based on predominant risk characteristics, such as interest

rate and loan type.

If, by individual stratum, the

carrying amount of the MSRs exceeds fair value, a valuation

allowance is established.

The valuation allowance is adjusted

as the fair value changes.

Changes in the valuation allowance are recognized

in earnings as a component of mortgage

lending income.

The following table details the changes in amortized MSRs and

the related valuation allowance for the years ended December 31, 2019 and 2018.

the related valuation allowance for the years ended

December 31, 2020 and 2019.

Year ended December 31

4 unchanged sentences

Ending balance

Valuation allowance included in MSRs, net:

allowance included in MSRs, net:

Beginning of period

3 unchanged sentences

End of period

Data and assumptions used in the fair value calculation related to MSRs at December 31, 2019 and 2018, respectively, are

Data and assumptions used in the fair value calculation related

to MSRs at December 31,

2020 and 2019, respectively,

presented below.

1 unchanged sentence

Unpaid principal balance

Weighted average prepayment speed (CPR)

Weighted average prepayment

Discount rate (annual percentage)

Weighted average coupon interest rate

Weighted average remaining maturity (months)

Weighted average servicing fee (basis points)

At December 31, 2019, the weighted average amortization period for MSRs was 5.5 years.

Estimated amortization expense for

each of the next five years is presented below.

Weighted average coupon

interest rate

Weighted average remaining

maturity (months)

Weighted average servicing

fee (basis points)

At December 31, 2020, the weighted average amortization period

Estimated amortization expense

for each of the next five years is presented below.

(Dollars in thousands)

December 31, 2020

At December 31, 2019, the scheduled maturities of certificates of deposit and other time deposits are presented below.

At December 31, 2020, the scheduled maturities of certificates

of deposit and other time deposits are presented below.

(Dollars in thousands)

December 31, 2020

Total certificates of deposit and other time deposits

Additionally, at December 31, 2019 and 2018, approximately $57.4 million and $59.4 million, respectively, of

certificates of deposit and other time deposits were issued in denominations greater than $250 thousand.

At December 31, 2019 and 2018, the

amount of deposit accounts in overdraft status that were reclassified to loans on the accompanying consolidated balance sheets was not material.

Total certificates of deposit

and other time deposits

Additionally, at December

31, 2020 and 2019, approximately $

million and $

million, respectively, of certificates

of deposit and other time deposits were issued in denominations

greater than $250 thousand.

At December 31, 2020 and 2019, the amount of deposit accounts in

overdraft status that were reclassified to loans on the

accompanying consolidated balance sheets was not material.

SHORT-TERM BORROWINGS

At December 31, 2019 and 2018, the composition of short-term borrowings is presented below.

At December 31, 2020 and 2019, the composition of short-term borrowings

is presented below.

(Dollars in thousands)

2 unchanged sentences

Average during the year

Maximum outstanding at any month-end

Securities sold under agreements to repurchase:

Maximum outstanding at

any month-end

Securities sold under

agreements to repurchase:

As of December 31

Average during the year

Maximum outstanding at any month-end

Federal funds purchased represent unsecured overnight borrowings from other financial institutions by the Bank.

available federal fund lines totaling $41.0 million with none outstanding at December 31, 2019.

Securities sold under agreements to repurchase

represent short-term borrowings with maturities less than one year collateralized by a portion of the Companys securities portfolio.

Securities with an aggregate carrying value of $2.6 million and $5.6 million at December 31,

2019 and 2018, respectively, were pledged to secure securities sold under agreements to repurchase.

Maximum outstanding at

any month-end

Federal funds purchased represent unsecured overnight borrowings

from other financial institutions by the Bank.

had available federal fund lines totaling $

.0 million with none outstanding at December 31, 2020.

Securities sold under agreements to repurchase represent short

-term borrowings with maturities less than one year

collateralized by a portion of the Company’s

securities portfolio.

Securities with an aggregate carrying value of $

million and $

million at December 31, 2020 and 2019, respectively,

were pledged to secure securities sold under

agreements to repurchase.

LEASE COMMITMENTS

We lease certain office facilities and office equipment under operating leases.

Rent expense for all operating leases totaled $0.2 million for both the

years ended December 31, 2019 and 2018.

On January 1, 2019, we adopted a new accounting standard which required the recognition of certain operating leases on our balance sheet as lease right of use assets (reported as component of other

assets) and related lease liabilities (reported as a component of accrued expenses and other liabilities).

At December 31, 2019, aggregate lease right of use assets and lease liabilities amounted to $785 thousand and $788 thousand,

respectively.

Rent expense includes amounts related to items that are not included in the determination of lease right of use assets including expenses related to short-term leases totaling $0.1 million for the year ended December 31,

Lease payments under operating leases that were applied to our operating lease liability totaled $129

thousand during the year ended December 31, 2019.

The following table reconciles future undiscounted lease payments due under non-cancelable operating leases (those amounts subject to

recognition) to the aggregate operating lease liability as of December 31, 2019:

We lease certain

office facilities and equipment under operating leases.

Rent expense for all operating leases totaled $

million for both the years ended December 31, 2020 and 2019.

On January 1, 2019, we adopted a new accounting standard

which required the recognition of certain operating leases on our

balance sheet as lease right of use assets (reported as

component of other assets) and related lease liabilities (reported

as a component of accrued expenses and other liabilities).

Aggregate lease right of use assets were $

thousand and $

thousand at December 31, 2020 and 2019, respectively.

Aggregate lease liabilities were $

thousand and $

thousand at December 31, 2020 and 2019, respectively.

expense includes amounts related to items that are not included

in the determination of lease right of use assets including

expenses related to short-term leases totaling $

million for the year ended December 31, 2020.

Lease payments under operating leases that were applied to

our operating lease liability totaled $

thousand during the

year ended December 31, 2020.

The following table reconciles

future undiscounted lease payments due under non-

cancelable operating leases (those amounts subject to recognition) to

the aggregate operating lease liability as of December

(Dollars in thousands)

Remaining lease

Total undiscounted operating lease liabilities

Total undiscounted operating

lease liabilities

Imputed interest

Total operating lease liabilities included in the accompanying balance sheet

Weighted-average lease terms in years

Weighted-average discount rate

Total operating lease liabilities

included in the accompanying consolidated balance sheets

Weighted-average

lease terms in years

Weighted-average

discount rate

OTHER COMPREHENSIVE INCOME (LOSS)

Comprehensive income is defined as the change in equity from all transactions other than those with stockholders, and it includes net earnings and other

comprehensive income (loss).

Other comprehensive income (loss) for the years ended December 31, 2019 and 2018, is presented below.

Comprehensive income

is defined as

the change in

equity from all

transactions other

than those with

stockholders, and

other comprehensive

income (loss).

Other comprehensive

income (loss)

December 31, 2020 and 2019, is presented below.

(Dollars in thousands)

Unrealized net holding gain on securities

Reclassification adjustment for net loss on securities recognized in net earnings

Reclassification adjustment for net gain on securities recognized

in net earnings

Other comprehensive income

Unrealized net holding loss on securities

Unrealized net holding gain on securities

Reclassification adjustment for net loss on securities recognized

in net earnings

Other comprehensive loss

For the years ended December 31, 2019 and 2018 the components of income tax expense from continuing operations are presented below.

For the years ended December 31, 2020 and 2019 the components

of income tax expense from continuing operations are

presented below.

Year ended December 31

2 unchanged sentences

Total current income tax expense

Deferred income tax (benefit) expense:

Total deferred income tax (benefit) expense

Deferred income tax benefit:

Total deferred

income tax benefit

Total income tax expense

Total income tax expense differs from the amounts computed by applying the statutory federal income tax rate

of 21% to earnings before income taxes.

A reconciliation of the differences for the years ended December 31, 2019 and 2018, is presented below.

Total income tax expense

differs from the amounts computed by applying the

statutory federal income tax rate of 21% to

earnings before income taxes.

A reconciliation of the differences for the years ended

2020 and 2019, is

presented below.

(Dollars in thousands)

2 unchanged sentences

Tax-exempt interest

State income taxes, net of federal tax effect

State income taxes, net of

federal tax effect

Bank-owned life insurance

Total income tax expense

The Company had a net deferred tax liability of $9 thousand included in other liabilities and a net deferred tax asset of

$1.8 million included in other assets on the consolidated balance sheets at December 31, 2019 and 2018, respectively.

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred

tax liabilities at December 31, 2019 and 2018 are presented below:

The Company had a net deferred tax liability of $1.5

million and $9 thousand included in other liabilities ts on the

consolidated balance sheets at December 31, 2020

and 2019, respectively.

The tax effects of temporary differences

give rise to significant portions of the deferred tax assets and

deferred tax liabilities at December 31,

2020 and 2019 are

presented below.

(Dollars in thousands)

1 unchanged sentence

Allowance for loan losses

Unrealized loss on securities

Accrued bonus

Right of use liability

Total deferred tax assets

Total deferred

Deferred tax liabilities:

3 unchanged sentences

Right of use asset

Total deferred tax liabilities

Net deferred tax (liability) asset

A valuation allowance is recognized for a deferred tax asset if, based on the weight of available evidence, it is more-likely-than-not that some portion of the entire deferred tax asset will not be realized.

The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the

periods in which those temporary differences become deductible.

Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment.

Based upon the level of

historical taxable income and projection for future taxable income over the periods which the temporary differences resulting in the remaining deferred tax assets are deductible, management believes it is

more-likely-than-not that the Company will realize the benefits of these deductible differences at December 31, 2019.

The amount of the deferred tax assets considered realizable, however, could be reduced

in the near term if estimates of future taxable income are reduced.

The change in the net deferred tax asset for the years ended December 31, 2019 and 2018, is presented

Total deferred

tax liabilities

Net deferred tax liability

A valuation allowance is recognized for a deferred tax asset if, based

on the weight of available evidence, it is more-likely-

than-not that some portion of the entire deferred tax asset will not be

The ultimate realization of deferred tax

assets is dependent upon the generation of future taxable income during

the periods in which those temporary differences

become deductible.

Management considers the scheduled reversal of deferred

tax liabilities, projected future taxable

income and tax planning strategies in making this assessment.

Based upon the level of historical taxable income and

projection for future taxable income over the periods which the

temporary differences resulting in the remaining

tax assets are deductible, management believes it is more-likely

-than-not that the Company will realize the benefits of

deductible differences at December 31,

The amount of the deferred tax assets considered realizable,

however, could

be reduced in the near term if estimates of future taxable income are

The change in the net deferred tax asset for the years ended December

31, 2020 and 2019, is presented

Year ended December 31

3 unchanged sentences

Deferred tax benefit (expense) related to continuing operations

Stockholders equity, for accumulated other comprehensive (income) loss

Stockholders' equity, for

accumulated other comprehensive (income) loss

Balance, end of year

ASC 740, Income Taxes, defines the threshold for recognizing the benefits of tax return positions in the financial

statements as more-likely-than-not to be sustained by the taxing authority.

This section also provides guidance on the de-recognition, measurement, and

classification of income tax uncertainties in interim periods.

As of December 31, 2019, the Company had no unrecognized tax benefits related to federal or state income tax matters.

The Company does not anticipate any material increase or

decrease in unrecognized tax benefits during 2020 relative to any tax positions taken prior to December 31, 2019.

As of December 31, 2019, the Company has accrued no interest and no penalties related to uncertain tax positions.

Companys policy to recognize interest and penalties related to income tax matters in income tax expense.

The Company and its subsidiaries file

consolidated U.S.

federal and State of Alabama income tax returns.

The Company is currently open to audit under the statute of limitations by the Internal Revenue Service and the State of Alabama for the years ended December 31, 2016 through

Income Taxes,

defines the threshold for recognizing the benefits of tax return positions in

the financial statements

as “more-likely-than-not” to be sustained by the taxing authority.

This section also provides guidance on the de-

recognition, measurement, and classification of income tax uncertainties

in interim periods.

As of December 31, 2020, the

Company had no unrecognized tax benefits related to federal or

state income tax matters.

The Company does not anticipate

any material increase or decrease in unrecognized tax benefits during

2021 relative to any tax positions taken prior to

December 31, 2020.

As of December 31, 2020, the Company has accrued no interest and no

penalties related to uncertain

tax positions.

It is the Company’s policy to

recognize interest and penalties related to income tax matters

in income tax

The Company and its subsidiaries file consolidated U.S.

and State of Alabama income tax returns.

The Company is

currently open to audit under the statute of limitations by the Internal Revenue

Service and the State of Alabama for the

years ended December 31, 2017 through 2020.

EMPLOYEE BENEFIT PLAN

sponsors a qualified defined contribution retirement plan, the Auburn National Bancorporation, Inc.

401(k) Plan (the Plan).

Effective January 1, 2019, the Plan was amended and restated.

As part of this amendment and restatement,

eligible employees may contribute up to 100% of eligible compensation, subject to statutory limits upon completion of 2 months of service.

Furthermore, the Company now allows employer Safe Harbor contributions.

Participants are immediately vested in

employer Safe Harbor contributions.

Effective January 1, 2019, the Companys matching contributions on behalf of participants were equal to $1.00 for each $1.00 contributed by participants, up to 3% of the participants eligible

compensation, and $0.50 for every $1.00 contributed by participants, up to 5% of the participants eligible compensation, for a maximum matching contribution of 4% of the participants eligible compensation.

Prior to January 1, 2019,

the Company made matching contributions on behalf of participants equal to $0.50 for each $1.00 contributed by participants, up to 6% of the participants eligible compensation, for a maximum matching contribution of 3% of the

participants eligible compensation.

Company matching contributions to the Plan were $264 thousand and $131 thousand for the years ended December 31, 2019 and 2018, respectively, and are included in salaries and benefits expense.

The Company sponsors a qualified defined contribution retirement

plan, the Auburn National Bancorporation, Inc.

Plan (the "Plan").

Eligible employees may contribute up to 100% of eligible compensation,

subject to statutory limits upon

completion of 2 months of service.

Furthermore, the Company allows employer Safe Harbor

contributions.

Participants are

immediately vested in employer Safe Harbor contributions.

he Company's matching contributions on behalf of

participants were equal to $1.00 for each $1.00 contributed

by participants, up to 3% of the participants' eligible

compensation, and $0.50 for every $1.00 contributed by participants,

up to 5% of the participants' eligible compensation,

for a maximum matching contribution of 4% of the participants' eligible

compensation.

Company matching contributions to

the Plan were $

thousand and $

thousand for the years ended December 31, 2020 and 2019,

respectively, and are

included in salaries and benefits expense.

COMMITMENTS AND CONTINGENT LIABILITIES

Credit-Related Financial Instruments

The Company is

party to credit related financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers.

These financial instruments include commitments to

extend credit and standby letters of credit.

Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets.

The Companys exposure to credit loss is represented by the contractual amount of these commitments.

The Company follows the same credit policies in

making commitments as it does for on-balance sheet instruments.

At December 31, 2019 and 2018, the following

financial instruments were outstanding whose contract amount represents credit risk:

The Company is party to credit related financial instruments with

off-balance sheet risk in the normal course of business

meet the financing needs of its customers.

These financial instruments include commitments to extend credit

letters of credit.

Such commitments involve, to varying degrees, elements of credit

and interest rate risk in excess of the

amount recognized in the consolidated balance sheets.

The Company’s exposure to

credit loss is represented by the contractual amount of these commitments.

follows the same credit policies in making commitments as it

does for on-balance sheet instruments.

At December 31, 2020 and 2019, the following financial instruments

were outstanding whose contract amount represents

(Dollars in thousands)

1 unchanged sentence

Standby letters of credit

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any

condition established in the agreement.

Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.

The commitments for lines of credit may expire without being drawn upon.

Commitments to extend credit are agreements to lend to a customer

as long as there is no violation of any condition

established in the agreement.

Commitments generally have fixed expiration dates or other termination

clauses and may

require payment of a fee.

The commitments for lines of credit may expire

without being drawn upon.

Therefore, total

commitment amounts do not necessarily represent future cash requirements.

The amount of collateral obtained, if it is deemed necessary by the Company, is based on managements credit evaluation of the customer.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party.

The credit risk

involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.

The Company holds various assets as collateral, including accounts receivable, inventory, equipment, marketable securities, and

property to support those commitments for which collateral is deemed necessary.

The Company has recorded a liability for the estimated fair value of these standby letters of credit in the amount of $39 thousand and $73 thousand at

December 31, 2019 and 2018, respectively.

commitment amounts do not necessarily represent future cash

requirements.

The amount of collateral obtained, if it is

deemed necessary by the Company,

is based on management’s credit

evaluation of the customer.

Standby letters of credit are conditional commitments issued by

the Company to guarantee the performance of a customer

to a third party.

The credit risk involved in issuing letters of credit

is essentially the same as that involved in extending loan

facilities to customers.

The Company holds various assets as collateral, including

accounts receivable, inventory,

equipment, marketable securities, and property to support

those commitments for which collateral is deemed necessary.

The Company has recorded a liability for the estimated fair

value of these standby letters of credit in the amount of $

thousand and $

thousand at December 31, 2020 and 2019, respectively.

Other Commitments

At December 31, 2020, the Company has a contract with a construction

company for $

million to construct a new bank

headquarters in Auburn, Alabama.

Contingent Liabilities

The Company and the Bank are involved in various legal proceedings, arising in connection with their business.

In the opinion of management, based upon

consultation with legal counsel, the ultimate resolution of these proceeding will not have a material adverse effect upon the consolidated financial condition or results of operations of the Company and the Bank.

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.

The Company and the Bank are involved in various legal proceedings,

arising in connection with their business.

opinion of management, based upon consultation with legal counsel,

the ultimate resolution of these proceeding will not

have a material adverse effect upon the consolidated

financial condition or results of operations of the Company

“Fair value” is defined by ASC 820,

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.

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 1inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets.

Level 2inputs 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 3inputs to the valuation methodology are unobservable and reflect the Companys own assumptions about the inputs market participants would

use in pricing the asset or liability.

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

for identical assets or liabilities in active

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

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

Level changes in fair value measurements

Transfers between levels of the fair value hierarchy are generally recognized at the end of the reporting period.

The Company monitors the valuation

techniques utilized for each category of financial assets and liabilities to ascertain when transfers between levels have been affected.

The nature of the Companys financial assets and liabilities generally is such that transfers in and out of

any level are expected to be infrequent.

For the years ended December 31, 2019 and 2018, there were no transfers between levels and no changes in valuation techniques for the Companys financial assets and liabilities.

Assets and liabilities measured at fair value on a recurring basis

Transfers between levels of the fair value hierarchy

are generally recognized at the end of the reporting period.

Company monitors the valuation techniques utilized for each

category of financial assets and liabilities to ascertain when

transfers between levels have been affected.

The nature of the Company’s financial

assets and liabilities generally is such

that transfers in and out of any level are expected to be infrequent.

For the years ended December 31, 2020 and

were no transfers between levels and no changes in valuation techniques

for the Company’s financial

assets and liabilities.

Assets and liabilities measured at fair value

on a recurring basis

Securities available-for-sale

Fair values of securities available for sale were primarily measured using Level 2 inputs.

For these securities, the Company obtains pricing from third

party pricing services.

These third party pricing services consider observable data that may include broker/dealer quotes, market spreads, cash flows, market consensus prepayment speeds, benchmark yields, reported trades for similar securities,

credit information and the securities terms and conditions.

On a quarterly basis, management reviews the pricing received from the third party pricing services for reasonableness given current market conditions.

As part of its review,

management may obtain non-binding third party broker quotes to validate the fair value measurements.

In addition, management will periodically submit pricing provided by the third party pricing services to

another independent valuation firm on a sample basis.

This independent valuation firm will compare the price provided by the third-party pricing service with its own price and will review the significant assumptions and valuation methodologies used

Fair values of securities available for sale were primarily measured

using Level 2 inputs.

For these securities, the Company

obtains pricing from third party pricing services.

These third party pricing services consider observable data

include broker/dealer quotes, market spreads, cash flows, market consensus

prepayment speeds, benchmark yields, reported

trades for similar securities, credit information and the securities’ terms

and conditions.

On a quarterly basis, management

reviews the pricing received from the third party pricing services

for reasonableness given current market conditions.

part of its review, management

may obtain non-binding third party broker quotes to validate the fair value measurements.

In addition, management will periodically submit pricing provided

by the third party pricing services to another

independent valuation firm on a sample basis.

This independent valuation firm will compare the price

provided by the

third-party pricing service with its own price and will review the significant

assumptions and valuation methodologies used

with management.

The following table presents the balances of the assets and liabilities measured at fair value on a recurring as of December 31,

2019 and 2018, respectively, by caption, on the accompanying consolidated balance sheets by ASC 820 valuation hierarchy (as described above).

The following table presents the balances of the assets and liabilities

measured at fair value on a recurring as of December

31, 2020 and 2019, respectively,

by caption, on the accompanying consolidated balance sheets by ASC

820 valuation

hierarchy (as described above).

Quoted Prices in

3 unchanged sentences

December 31, 2020:

available-for-sale:

Securities available-for-sale:

Agency obligations

State and political subdivisions

Total securities

available-for-sale

Total assets at fair value

Total securities available

assets at fair value

December 31, 2019:

available-for-sale:

Securities available-for-sale:

Agency obligations

State and political subdivisions

Total securities

available-for-sale

Total assets at fair value

Assets and liabilities measured at fair value on a nonrecurring basis

Total securities available

assets at fair value

Assets and liabilities measured at fair value

on a nonrecurring basis

Loans held for sale

Loans held for sale are carried at

the lower of cost or fair value.

Fair values of loans held for sale are determined using quoted market secondary market prices for similar loans.

Loans held for sale are classified within Level 2 of the fair value hierarchy.

Loans held for sale are carried at the lower of cost or fair value.

Fair values of loans held for sale are determined using

quoted market secondary market prices for similar loans.

Loans held for sale are classified within Level 2 of the fair value

Impaired Loans

Loans considered impaired under ASC 310-10-35, Receivables , are loans for which, based on current information and events, it is probable that the Company will be unable to collect all principal and

interest payments due in accordance with the contractual terms of the loan agreement.

Impaired loans can be measured based on the present value of expected payments using the loans original effective rate as the discount rate, the loans

observable market price, or the fair value of the collateral less selling costs if the loan is collateral dependent.

The fair value of impaired loans were primarily measured based on the value of the collateral securing these

Impaired loans are classified within Level 3 of the fair value hierarchy.

Collateral may be real estate and/or business assets including equipment, inventory, and/or accounts receivable.

The Company determines the value of the collateral

based on independent appraisals performed by qualified licensed appraisers.

These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach.

Appraised values are discounted

for costs to sell and may be discounted further based on managements historical knowledge, changes in market conditions from the date of the most recent appraisal, and/or managements expertise and knowledge of the customer and the

customers business.

Such discounts by management are subjective and are typically significant unobservable inputs for determining fair value.

Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and

adjusted accordingly, based on the same factors discussed above.

Other real estate owned

Other real estate owned, consisting of properties obtained through foreclosure or in satisfaction of loans, are initially recorded at the lower of the

loans carrying amount or the fair value less costs to sell upon transfer of the loans to other real estate.

Subsequently, other real estate is carried at the lower of carrying value or fair value less costs to sell.

Fair values are generally

based on third party appraisals of the property and are classified within Level 3 of the fair value hierarchy.

The appraisals are sometimes further discounted based on managements historical knowledge, and/or changes in market conditions

from the date of the most recent appraisal, and/or managements expertise and knowledge of the customer and the customers business.

Such discounts are typically significant unobservable inputs for determining fair value.

In cases where

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

Loans considered impaired under ASC 310-10-35,

, are loans for which, based on current information

events, it is probable that the Company will be unable to collect

all principal and interest payments due in accordance with

the contractual terms of the loan agreement.

Impaired loans can be measured based on the present value

payments using the loan’s original

effective rate as the discount rate, the loan’s

observable market price, or the fair value of

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

The fair value of impaired loans were primarily measured based on

the value of the collateral securing these loans.

Impaired loans are classified within Level 3 of the fair value

Collateral may be

real estate and/or business assets

including equipment, inventory,

and/or accounts receivable.

The Company determines the value of the collateral based on

independent appraisals performed by qualified licensed appraisers.

These appraisals may utilize a single valuation

approach or a combination of approaches including comparable

sales and the income approach.

Appraised values are

discounted for costs to sell and may be discounted further based on

management’s historical knowledge,

changes in market

conditions from the date of the most recent appraisal, and/or

management’s expertise and knowledge of the

the customer’s business.

Such discounts by management are subjective and are typically

significant unobservable inputs

for determining fair value.

Impaired loans are reviewed and evaluated on at least a quarterly

basis for additional

impairment and adjusted accordingly,

based on the same factors discussed above.

Mortgage servicing rights, net

Mortgage servicing rights, net, included in other assets on the accompanying consolidated balance sheets, are carried at the lower of cost or estimated fair

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 partys valuation model calculates the present value of

estimated future net servicing income using assumptions that market participants would use in estimating future net servicing income, including estimates of prepayment speeds, discount rate, default rates, cost to service, escrow account earnings,

contractual servicing fee income, ancillary income, and late fees.

Periodically, the Company will review broker surveys and other market research to validate significant assumptions used in the model.

The significant unobservable inputs include

prepayment speeds or the constant prepayment rate (CPR) and the weighted average discount rate.

Because the valuation of MSRs requires the use of significant unobservable inputs, all of the Companys 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 December 31, 2019 and 2018, respectively, by caption, on the accompanying consolidated balance sheets and by ASC 820 valuation hierarchy (as described above):

Mortgage servicing rights, net, included in other assets on the accompanying

consolidated balance sheets, are carried at the

lower of cost or estimated fair value.

MSRs do not trade in an active market with readily observable

the fair value of MSRs, the Company engages an independent

The independent third party’s

valuation model

calculates the present value of estimated future net servicing

income using assumptions that market participants would use

in estimating future net servicing income, including estimates of prepayment

speeds, discount rate, default rates, cost to

service, escrow account earnings, contractual servicing fee income,

ancillary income, and late fees.

Periodically, the

Company will review broker surveys and other market research

to validate significant assumptions used in the model.

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

December 31, 2020 and

2019, respectively, by caption, on the

accompanying consolidated balance sheets and by ASC 820

valuation hierarchy (as described above):

Quoted Prices in

4 unchanged sentences

Loans held for sale

Loans, net (1)

Other assets (2)

Total assets at fair value

1 unchanged sentence

Loans held for sale

Loans, net (1)

Other real estate owned

Other assets (2)

Total assets at fair value

Loans considered impaired under ASC

310-10-35 Receivables.

This amount reflects the recorded investment in impaired loans, net of any related allowance for loan losses.

Represents other real estate owned and MSRs, net, both of which are carried at lower of cost or estimated fair

At December 31, 2019 and 2018 and for the years then ended, the Company had no Level 3 assets measured at fair value

on a recurring basis.

For Level 3 assets measured at fair value on a non-recurring basis as of December 31, 2019, the significant unobservable inputs used in the fair value measurements are presented

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

This amount reflects the recorded investment in

impaired loans, net of any related allowance for loan losses.

Represents MSRs, net carried at lower of cost or estimated fair value.

At December 31, 2020 and 2019 and for the years then ended,

the Company had no Level 3 assets measured at fair value on

a recurring basis.

For Level 3 assets measured at fair value on a non-recurring basis

as of December 31, 2020 and 2019, the

significant unobservable inputs used in the fair value measurements

are presented below.

(Dollars in thousands)

Valuation Technique

Significant Unobservable Input

Unobservable Input

December 31, 2020:

Nonrecurring:

Impaired loans

5 unchanged sentences

December 31, 2019:

Nonrecurring:

Impaired loans

Appraisal discounts

Other real estate owned

Appraisal discounts (%)

Mortgage servicing rights, net

2 unchanged sentences

Discount rate

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 Companys 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 Companys financial instruments, but rather are a good-faith estimate of the fair value of financial instruments held

by the Company.

ASC 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements.

The following methods

and assumptions were used by the Company in estimating the fair value of its financial instruments:

of Financial Instruments

Financial Instruments

, requires disclosure of fair value information about financial

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.

following fair value estimates cannot be substantiated by comparison

to independent markets and should not be considered

representative of the liquidation value of the Company’s

financial instruments, but rather are a good-faith estimate of the

fair value of financial instruments held by the Company.

ASC 825 excludes certain financial instruments and all

nonfinancial instruments from its disclosure requirements.

The following methods and assumptions were used by the Company in

estimating the fair value of its financial instruments:

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.

discount rates reflected current rates at which similar

loans would be made for the same remaining maturities.

future cash flows were projected based on contractual

cash flows, adjusted for estimated prepayments.

The fair value of loans was measured using an exit

price notion.

Loans held for sale

Fair values of loans held

for sale are determined using quoted market secondary market prices for similar loans.

Fair values of loans held for sale are determined using quoted

market secondary market prices for similar loans.

Time Deposits

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

The discount rates were based on rates currently offered for deposits with similar

remaining maturities.

Fair values for time deposits were estimated using discounted

The discount rates were based on rates currently

offered for deposits with similar remaining maturities.

Fair Value Hierarchy

12 unchanged sentences

Time Deposits

(1) Represents loans, net of unearned income and the allowance for loan losses.

The fair value

of loans was measured using an exit price notion.

RELATED PARTY TRANSACTIONS

The Bank has made, and expects in the future to continue to make in the ordinary course of business, loans to directors and executive officers of the Company,

(1) Represents loans, net of unearned income and the allowance

for loan losses.

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

RELATED PARTY

The Bank has made, and expects in the future to continue to make

in the ordinary course of business, loans to directors

executive officers of the Company,

the Bank, and their affiliates.

In managements opinion, these loans were made in the ordinary course of business at normal credit terms, including interest rate and collateral requirements, and do not represent more than normal credit risk.

analysis of such outstanding loans is presented below.

In management’s

opinion, these loans were made in the

ordinary course of business at normal credit terms, including

interest rate and collateral requirements, and do not represent

more than normal credit risk.

An analysis of such outstanding loans is presented below.

(Dollars in thousands)

1 unchanged sentence

New loans/advances

Changes in directors and executive officers

Loans outstanding at December 31, 2020

During 2019 and 2018, certain executive officers and directors of the Company and the Bank, including companies with which

they are affiliated, were deposit customers of the bank.

Total deposits for these persons at December 31, 2019 and 2018 amounted to $19.1 million and $19.8 million, respectively.

REGULATORY RESTRICTIONS AND CAPITAL RATIOS

required by the Economic Growth, Regulatory Relief, and Consumer Protection Act in August 2018, the Federal Reserve Board issued an interim final rule that expanded applicability of the Boards small bank holding company policy statement.

interim final rule raised the policy statements asset threshold from $1 billion to $3 billion in total consolidated assets for a bank holding company or savings and loan holding company that:

During 2020 and 2019, certain executive officers and

directors of the Company and the Bank, including companies with

which they are affiliated, were deposit customers of

Total deposits for

these persons at December 31, 2020 and

2019 amounted to $

million and $

million, respectively.

RESTRICTIONS AND CAPITAL

As required by the Economic Growth, Regulatory Relief, and Consumer

Protection Act in August 2018, the Federal

Reserve Board issued an interim final rule that expanded applicability

of the Board’s small bank holding

company policy

The interim final rule raised the policy statement’s

asset threshold from $1 billion to $3 billion in total

consolidated assets for a bank holding company or savings and

loan holding company that:

(1) is not engaged in significant

nonbanking activities;

(2) does not conduct significant off-balance sheet activities;

and (3) does not have a material amount of debt or equity securities, other than trust-preferred securities,

The interim final rule provides that, if warranted for supervisory purposes, the Federal Reserve may exclude a company from the threshold increase.

Management believes the Company meets the conditions of the Federal Reserves small

bank holding company policy statement and is therefore excluded from consolidated capital requirements at December 31, 2019.

The Bank remains

subject to regulatory capital requirements administered by the federal banking agencies.

Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken,

could have a direct material effect on the Companys financial statements.

Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative

measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices.

The capital amounts and classification are also subject to qualitative judgments

by the regulators about components, risk weightings and other factors.

As of December 31, 2019, the Bank is well capitalized under the

regulatory framework for prompt corrective action.

To be categorized as well capitalized, the Bank must maintain minimum common equity Tier 1, total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table.

Management has not received any notification from the Banks regulators that changes the Banks regulatory capital status.

The actual capital amounts and ratios and the aforementioned minimums as of December 31, 2019 and 2018

(2) does not conduct significant off

-balance sheet activities;

and (3) does not have a material amount

of debt or equity securities, other than trust-preferred securities,

The interim final rule provides that, if

warranted for supervisory purposes, the Federal Reserve may exclude

a company from the threshold increase.

believes the Company meets the conditions of the Federal Reserve’s

small bank holding company policy statement and is

therefore excluded from consolidated capital requirements at

December 31, 2020.

The Bank remains subject to regulatory capital requirements

administered by the federal banking agencies.

Failure to meet

minimum capital requirements can initiate certain mandatory

- and possibly additional discretionary - actions by regulators

that, if undertaken, could have a direct material effect

on the Company’s financial statements.

Under capital adequacy

guidelines and the regulatory framework for prompt corrective action,

the Bank must meet specific capital guidelines that

involve quantitative measures of their assets, liabilities and certain

off-balance sheet items as calculated under regulatory

accounting practices.

The capital amounts and classification are

also subject to qualitative judgments by the regulators

about components, risk weightings and other factors.

As of December 31, 2020, the Bank is “well capitalized” under

the regulatory framework for prompt corrective action.

be categorized as “well capitalized,” the Bank must maintain minimum

common equity Tier 1, total risk-based,

based, and Tier 1 leverage ratios as set forth

in the table.

Management has not received any notification from the

regulators that changes the Bank’s

regulatory capital status.

The actual capital amounts and ratios for the Bank and the aforementioned

minimums as of December 31, 2020 and 2019

are presented below.

14 unchanged sentences

Total Risk-Based Capital

Dividends paid by the Bank are a principal source of funds available to the Company for payment of dividends to its

Dividends paid by the Bank are a principal source of funds available

to the Company for payment of dividends to its

stockholders and for other needs.

Applicable federal and state statutes and regulations impose restrictions on the amounts of dividends that may be declared by the subsidiary bank.

State law and Federal Reserve policy restrict the Bank from

declaring dividends in excess of the sum of the current years earnings plus the retained net earnings from the preceding two years without prior approval.

In addition to the formal statutes and regulations, regulatory authorities also consider

the adequacy of the Banks total capital in relation to its assets, deposits, and other such items.

Capital adequacy considerations could further limit the availability of dividends from the Bank.

At December 31, 2019, the Bank could have

declared additional dividends of approximately $8.0 million without prior approval of regulatory authorities.

As a result of this limitation, approximately $86.8 million of the Companys investment in the Bank was restricted from

transfer in the form of dividends.

AUBURN NATIONAL BANCORPORATION (PARENT COMPANY)

The Parent Companys condensed balance sheets and related condensed statements of earnings and cash flows are as follows:

Applicable federal and state

statutes and regulations impose restrictions on the amounts

dividends that may be declared by the subsidiary bank.

law and Federal Reserve policy restrict the Bank from

declaring dividends in excess of the sum of the current year’s

earnings plus the retained net earnings from the preceding

two years without prior approval.

In addition to the formal statutes

and regulations, regulatory authorities also consider the

adequacy of the Bank’s total capital

in relation to its assets, deposits, and other such items.

Capital adequacy

considerations

could further limit the availability of dividends from the Bank.

2020, the Bank could have declared

additional dividends of approximately $

million without prior approval of regulatory authorities.

As a result of this

limitation, approximately $

million of the Company’s investment

in the Bank was restricted from transfer in the form

of dividends.

AUBURN NATIONAL

BANCORPORATION

(PARENT COMPANY)

The Parent Company’s condensed

balance sheets and related condensed statements of earnings

and cash flows are as

CONDENSED BALANCE SHEETS

5 unchanged sentences

Stockholders' equity

Total liabilities and stockholders equity

CONDENSED STATEMENTS OF EARNINGS

Total liabilities and

stockholders' equity

CONDENSED STATEMENTS

Year ended December 31

2 unchanged sentences

Noninterest income

Interest expense

Noninterest expense

Total expense

Earnings before income tax expense (benefit) and equity in undistributed earnings of bank

Income tax expense (benefit)

Earnings before equity in undistributed earnings of bank subsidiary

Earnings before income tax expense and equity

in undistributed earnings of bank subsidiary

Income tax expense

Earnings before equity in undistributed earnings

of bank subsidiary

Equity in undistributed earnings of bank subsidiary

CONDENSED STATEMENTS OF CASH FLOWS

CONDENSED STATEMENTS

OF CASH FLOWS

Year ended December 31

1 unchanged sentence

Cash flows from operating activities:

Adjustments to reconcile net earnings to net cash provided by operating activities:

Net decrease in other assets

Adjustments to reconcile net earnings to net cash

provided by operating activities:

Net (increase) decrease in other assets

Net decrease in other liabilities

2 unchanged sentences

Cash flows from financing activities:

Repayments or retirement of long-term debt

Dividends paid

4 unchanged sentences

Cash and cash equivalents at end of period

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND

CHANGES IN AND DISAGREEMENTS WITH

ACCOUNTANTS ON ACCOUNTING

FINANCIAL DISCLOSURE

1 unchanged sentence

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data