What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-04-30 compared with 2020-10-30 · 1527 added, 574 removed, 259 unchanged (89% of the section changed)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis is designed to provide a better understanding of various factors related to the results of operations and financial condition of the Company and the Bank.

This discussion is intended to supplement and highlight information contained in the accompanying unaudited condensed consolidated financial statements and related notes for the quarters and nine months ended September 30, 2020 and 2019, as well as the information contained in our annual report on Form 10-K for the year ended December 31, 2019 and our interim reports on Form 10-Q for the quarters ended March 31, 2020 and June 30, 2020.

MANAGEMENT'S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS

The following discussion and analysis is designed to provide

a better understanding of various factors related to the results

of operations and financial condition of the Company and the

This discussion is intended to supplement and

highlight information contained in the accompanying unaudited

condensed consolidated financial statements and related

notes for the quarters ended March 31, 2021 and 2020,

as well as the information contained in our Annual Report on Form

10-K for the year ended December 31, 2020.

Special Notice Regarding Forward-Looking Statements

Certain of the statements made in this discussion and analysis and elsewhere, including information incorporated herein by reference to other documents, are “forward-looking statements” within the meaning of, and subject to, the protections of Section 27A of the Securities Act of 1933, as amended, (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, anticipations, assumptions, estimates, intentions and future performance, and involve known and unknown risks, uncertainties and other factors, which may be beyond our control, and which may cause the actual results, performance, achievements, or financial condition of the Company to be materially different from future results, performance, achievements, or financial condition expressed or implied by such forward-looking statements.

You should not expect us to update any forward-looking statements.

All statements other than statements of historical fact are statements that could be forward-looking statements.

You can identify these forward-looking statements through our use of words such as “may,” “will,” “anticipate,” “assume,” “should,” “indicate,” “would,” “believe,” “contemplate,” “expect,” “estimate,” “continue,” “plan,” “point to,” “project,” “could,” “intend,” “target” and other similar words and expressions of the future.

These forward-looking statements may not be realized due to a variety of factors, including, without limitation:

• the effects of future economic, business, and market conditions and changes, domestic and foreign, including seasonality;

• the significant disruptive effects of the COVID-19 pandemic, and local, state, national and international economic activity, including decreases in gross domestic product (“GDP”) and increases in unemployment;

• governmental monetary and fiscal policies, generally, and reductions of market interest rates, injections of liquidity by the Federal Reserve, Federal Reserve lending and market support programs and facilities, government spending and aid to businesses and consumers as a result of the COVID-19 pandemic, and the COVID-19 pandemic’s effects and public health and economic activity;

• the effects of public health, economic activity and measures taken to restore public health in light of the COVID-19 pandemic;

• legislative and regulatory changes, including the CARES Act, changes in banking, securities, and tax laws, regulations and rules and their application by our regulators, including capital and liquidity requirements, and changes in the scope and cost of FDIC insurance, including temporary other changes in accounting and capital requirements to address the effects of the COVID-19 pandemic and stabilize and stimulate the economy and delays in PPP loan forgiveness rules and processing;

• changes in accounting policies, rules, and practices;

• the risks of changes in interest rates on the levels, composition, and costs of deposits, loan demand, and the values and liquidity of loan collateral, securities, and interest sensitive assets and liabilities, and the risks and uncertainty of the amounts realizable;

• changes in borrower credit risks and payment behaviors, especially in light of the economic effects of COVID-19;

• changes in the availability and cost of credit and capital in the financial markets, and the types of instruments that may be included as capital for regulatory purposes;

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

• the effects of competition from a wide variety of local, regional, national, and other providers of financial, investment, and insurance services, including the disruptive effects of financial technology and other competitors who are not subject to the same regulations as the Company and the Bank;

• the failure of assumptions and estimates underlying the establishment of allowances for possible loan and other asset impairments, losses, valuations of assets and liabilities and other estimates, including the timing and effect of the implementation of the current expected credit losses model to financial instruments, and the significant changes in economic conditions, unemployment and GDP resulting from the COVID-19 pandemic, local and state shelter in place orders and other national health initiatives that result in workplace shutdowns, supply chain failures and economic and personal disruption;

• the risks of mergers, acquisitions and divestitures, including, without limitation, the related time and costs of implementing such transactions, integrating operations as part of these transactions and possible failures to achieve expected gains, revenue growth and/or expense savings from such transactions;

• changes in our technology or products that may be more difficult, costly, or less effective than anticipated;

• our business continuity planning, and changes in the ways we communicate with, and provide services to our customers, implemented during the COVID-19 pandemic;

• the effects of war, or other conflicts, acts of terrorism, pandemics or other catastrophic events that may affect general economic conditions;

• cyber attacks and data breaches that may compromise our systems or customers’ information, including increased fraud during the COVID-19 pandemic;

• the failure of assumptions and estimates, as well as differences in, and changes to, economic, market, and credit conditions, including changes in borrowers’ credit risks and payment behaviors from those used in our loan portfolio stress tests and other evaluations, including price and market volatility, deferrals on loans, suspension of residential mortgage foreclosure and liquidity issues resulting from the COVID-19 pandemic;

• the risk that our deferred tax assets, if any, could be reduced if estimates of future taxable income from our operations and tax planning strategies are less than currently estimated, and sales of our capital stock could trigger a reduction in the amount of net operating loss carry-forwards, if any, that we may be able to utilize for income tax purposes;

• other factors and information in this report and other filings that we make with the SEC under the Exchange Act, including our Annual Report on Form 10-K for the year ended December 31, 2019 and subsequent quarterly and current reports.

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

Discussion and Analysis of Financial Condition

and Results of Operations”, “Quantitative and Qualitative Disclosures

about Market Risk”, “Risk Factors” and elsewhere,

are “forward-looking statements” within the meaning and protections

of Section 27A of the Securities Act of 1933 and

Section 21E of the Securities Exchange Act of 1934, as amended

(the “Exchange Act”).

Forward-looking statements include statements with respect to

our beliefs, plans, objectives, goals, expectations,

anticipations, assumptions, estimates, intentions and future performance,

and involve known and unknown risks,

uncertainties and other factors, which may be beyond our

control, and which may cause the actual results, performance,

achievements or financial condition of the Company to be materially

different from future results, performance,

achievements or financial condition expressed or implied by

such forward-looking statements.

should not expect us to

update any forward-looking statements.

All statements other than statements of historical fact are statements

that could be forward-looking statements.

identify these forward-looking statements through our use of

words such as “may,” “will,” “anticipate,”

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

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

“could,” “intend,” “target” and other similar words and

expressions of the future.

These forward-looking statements may

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

the effects of future economic, business and market conditions

and changes, foreign, domestic and locally,

including seasonality, natural

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

hurricanes and

tornados, coronavirus or other epidemics or pandemics;

the effects of war or other conflicts, acts of terrorism, or

other events that may affect general economic conditions;

governmental monetary and fiscal policies;

legislative and regulatory changes, including changes in banking,

securities and tax laws, regulations and rules and

their application by our regulators, including capital and liquidity

requirements, and changes in the scope and cost

of FDIC insurance;

the failure of assumptions and estimates, as well as differences

in, and changes to, economic, market and credit

conditions, including changes in borrowers’ credit risks and

payment behaviors from those used in our loan

portfolio reviews;

the risks of changes in interest rates on the levels, composition

and costs of deposits, loan demand, and the values

and liquidity of loan collateral, securities, and interest-sensitive assets

and liabilities, and the risks and uncertainty

of the amounts realizable;

changes in borrower credit risks and payment behaviors;

changes in the availability and cost of credit and capital in the

financial markets, and the types of instruments that

may be included as capital for regulatory purposes;

changes in the prices, values and sales volumes of residential and

commercial real estate;

the effects of competition from a wide variety of local,

regional, national and other providers of financial,

investment and insurance services, including the disruption effects

of financial technology and other competitors

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

the failure of assumptions and estimates underlying the establishment

of allowances for possible loan losses and

other asset impairments, losses valuations of assets and liabilities and

other estimates;

the costs of redeveloping our headquarters and the timing and

amount of rental income upon completion of the

the risks of mergers, acquisitions and divestitures, including,

without limitation, the related time and costs of

implementing such transactions, integrating operations as part

of these transactions and possible failures to achieve

expected gains, revenue growth and/or expense savings from

such transactions;

changes in technology or products that may be more difficult,

costly, or less effective

than anticipated;

cyber-attacks and data breaches that may compromise our

systems, our vendor systems

or customers’

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

if any, could be reduced

if estimates of future taxable income from

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

and sales of our capital stock could

trigger a reduction in the amount of net operating loss carry-forwards that

we may be able to utilize for income tax

other factors and information in this report and other filings that we

make with the SEC under the Exchange Act,

including our Annual Report on Form 10-K for the year ended

December 31, 2020 and subsequent quarterly and

current reports.

See Part II, Item 1A.

“RISK FACTORS”.

All written or oral forward-looking statements that are made by or attributable to us are expressly qualified in their entirety by this cautionary notice.

We have no obligation and do not undertake to update, revise or correct any of the forward-looking statements after the date of this report, or after the respective dates on which such statements otherwise are made.

The Company was incorporated in 1990 under the laws of the State of Delaware and became a bank holding company after it acquired its Alabama predecessor, which was a bank holding company established in 1984.

The Bank, the Company’s principal subsidiary, is an Alabama state-chartered bank that is a member of the Federal Reserve System and has operated continuously since 1907.

Both the Company and the Bank are headquartered in Auburn, Alabama.

The Bank conducts its business primarily in East Alabama, including Lee County and surrounding areas.

The Bank operates 8 full-service branches in Auburn, Opelika, Notasulga, and Valley, Alabama.

The Bank also operates loan production offices in Auburn and Phenix City, Alabama.

All written or oral forward-looking statements that are made by us or

are attributable to us are expressly qualified in their

entirety by this cautionary notice.

We have no obligation and

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

forward-looking statements after the date of this report, or after

the respective dates on which such statements otherwise are

Auburn National Bancorporation, Inc.

(the “Company”) is a bank holding

company registered with the Board of Governors

of the Federal Reserve System (the “Federal Reserve”) under

the Bank Holding Company Act of 1956, as amended (the

The Company was incorporated in Delaware in 1990, and

in 1994 it succeeded its Alabama predecessor as

the bank holding company controlling AuburnBank, an Alabama state

member bank with its principal office in Auburn,

Alabama (the “Bank”).

The Company and its predecessor have controlled the Bank since

As a bank holding

company, the Company may diversify

into a broader range of financial services and other business activities

than currently

are permitted to the Bank under applicable laws and regulations.

The holding company structure also provides greater

financial and operating flexibility than is presently permitted

The Bank has operated continuously since 1907 and currently conducts

its business primarily in East Alabama, including

Lee County and surrounding areas.

The Bank has been a member of the Federal Reserve System since April

Bank’s primary regulators are

the Federal Reserve and the Alabama Superintendent of Banks (the

Superintendent”).

The Bank has been a member of the Federal Home Loan Bank of

Atlanta (the “FHLB”) since 1991.

Certain of the statements made in this discussion and analysis and

elsewhere, including information incorporated

reference to other documents, are “forward-looking statements”

within the meaning of, and subject to, the protections of

Section 27A of the Securities Act of 1933, as amended,

(the “Securities Act”) and Section 21E of the Securities Exchange

Act of 1934, as amended (the “Exchange Act”).

Summary of Results of Operations

Quarter ended September 30,

Nine months ended September 30,

(Dollars in thousands, except per share amounts)

Quarter ended March 31,

(Dollars in thousands, except per share data)

Net interest income (a)

8 unchanged sentences

(a) Tax-equivalent.

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

See "Table 1 - Explanation

of Non-GAAP Financial Measures."

Financial Summary

The Company’s net earnings were $5.4 million for the first nine months of 2020, compared to $7.1 million for the first nine months of 2019.

Basic and diluted earnings per share were $1.51 per share for the first nine months of 2020, compared to $1.97 per share for the first nine months of 2019.

Net interest income (tax-equivalent) was $18.5 million for the first nine months of 2020, an 8% decrease compared to $20.2 million for the first nine months of 2019.

This decrease was primarily due to the lower interest rate environment, including a 150 basis point reduction in the federal funds rate that occurred late in the first quarter of 2020.

Average loans were also down 3% to $461.2 million in the first nine months of 2020, compared to $474.4 million in the first nine months of 2019.

The Company’s net interest margin (tax-equivalent) decreased to 2.96% in the first nine months of 2020, compared to 3.48% for the first nine months of 2019 primarily due to the lower interest rate environment and changes in our asset mix from the significant short-term liquidity increase in customer deposits.

At September 30, 2020, the Company’s allowance for loan losses was $5.6 million, or 1.18% of total loans, compared to $4.4 million, or 0.95% of total loans, at December 31, 2019, and $4.8 million, or 1.03% of total loans, at September 30, 2019.

At September 30, 2020, the Company’s allowance for loan losses was 1.28% of total loans, excluding PPP loans.

The provision for loan losses was $1.1 million for the first nine months of 2020, compared to no provision for loan losses during the first nine months of 2019.

The increase in the provision for loan losses was related to changes in economic conditions and portfolio trends driven by the impact of COVID-19 and resulting adverse economic conditions, including higher unemployment in our primary market area.

The provision for loan losses is based upon various estimates and judgements, including the absolute level of loans, loan growth, credit quality and the amount of net charge-offs.

Noninterest income was $4.0 million for the first nine months of 2020 compared to $3.0 million for the first nine months of 2019.

The increase was primarily due to an increase in mortgage lending income of $1.0 million during first nine months of 2020 compared to the first nine months of 2019.

The increase was primarily due to an increase in mortgage lending income as lower interest rates for mortgage loans positively affected refinance activity and pricing margins improved.

Noninterest expense was $14.5 million for the first nine months of 2020 compared to $14.1 million for the first nine months of 2019.

The increase was primarily due to $0.8 million of various expenses related to the redevelopment of the Company’s headquarters in downtown Auburn, including revised depreciation estimates and temporary relocation costs.

The Company expects it will incur additional expense in 2020 related to this redevelopment project.

Income tax expense was $1.2 million and $1.7 million for the first nine months of 2020 and 2019, respectively, reflecting an effective tax rate of 17.64% and 19.40%, respectively.

This change was primarily due to a decrease in the level of earnings before taxes relative to tax-exempt sources of income.

The Company’s effective income tax rate is principally impacted by tax-exempt earnings from the Company’s investments in municipal securities and bank-owned life insurance.

The Company paid cash dividends of $0.765 per share in the first nine months of 2020, an increase of 2% from the same period of 2019.

At September 30, 2020, the Bank’s regulatory capital ratios were well above the minimum amounts required to be “well capitalized” under current regulatory standards with a total risk-based capital ratio of 18.77%, a tier 1 leverage ratio of 10.38% and a common equity tier 1 (“CET1”) ratio of 17.70% at September 30, 2020.

For the third quarter of 2020, net earnings were $1.9 million, or $0.54 per share, compared to $2.2 million, or $0.62 per share, for the third quarter of 2019.

Net interest income (tax-equivalent) was $6.0 million for the third quarter of 2020 compared to $6.7 million for the third quarter of 2019.

The Company’s net interest margin (tax-equivalent) decreased to 2.72% in the third quarter of 2020, compared to 3.41% for the third quarter of 2019 primarily due to the lower rate environment and changes in our asset mix from the significant short-term liquidity increase in customer deposits.

The Company recorded a provision for loan losses of $0.3 million during the third quarter of 2020 and no provision during the third quarter 2019.

Noninterest income was $1.4 million in the third quarter of 2020 and $1.0 million in the third quarter of 2019.

The increase was primarily due to an increase in mortgage lending income as lower interest rates for mortgage loans positively affected refinance activity and pricing margins improved.

Noninterest expense was $4.7 million in the third quarter of 2020 compared to $4.8 million during the third quarter of 2019.

Income tax expense was $0.4 million for the third quarter of 2020 compared to $0.5 million during third quarter of 2019.

The Company's effective tax rate for the third quarter of 2020 was 17.23%, compared to 19.28% in the third quarter of 2019.

The Company’s net earnings were $2.0

million for the first quarter of 2021, compared to $1.8 million for the first

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

of 2021, compared to $0.50

for the first quarter of 2020.

Net interest income (tax-equivalent) was $6.1 million for the

first quarter of 2021, a 4% decrease compared to $6.3

for the first quarter of 2020.

This decrease was primarily due to net interest margin compression

resulting from the Federal

Reserve’s interest rate reductions

in response to COVID-19.

Net interest margin (tax-equivalent) decreased

to 2.66% in the

first quarter of 2021, compared to 3.23% for the first quarter of

primarily due to the lower interest rate environment

and changes in our asset mix from the significant increase in

customer deposits.

At March 31, 2021, the Company’s

allowance for loan losses was $5.7 million, or 1.23%

of total loans, compared to $5.6

million, or 1.22%

of total loans, at December 31, 2020, and $4.9

million, or 1.10%

of total loans, at March 31, 2020.

Excluding PPP loans, which are guaranteed by the SBA, the Company’s

allowance for loan losses was 1.31%

of total loans

at March 31, 2021.

The Company had no provision for loan losses during the first quarter

compared to a provision

for loan losses of $0.4 million during the first quarter of 2020.

The provision for loan losses during the first quarter of 2020

was related to changes in economic conditions and portfolio

trends driven by COVID-19 and resulting adverse economic

conditions, including higher unemployment in our primary market area.

The provision for loan losses is based upon

various estimates and judgements, including the absolute level of loans,

loan growth, credit

quality and the amount of net

Noninterest income was $1.2 million for the first quarter of 2021

respectively.

For the first quarter of 2021,

noninterest income included an increase in mortgage lending income

of $0.3 million.

The increase was primarily due to an

increase in mortgage lending income as lower interest rates for

mortgage loans positively affected refinance activity and

pricing margins improved.

For the first quarter of 2020, noninterest income included $0.3

million in non-taxable death

benefits from bank-owned life insurance.

Noninterest expense was $4.7 million for the first quarter of 2021

compared to $4.9 million for the first quarter of 2020.

The decrease was primarily due to a reduction of $0.

million in various expenses related to the redevelopment of the

Company’s headquarters in downtown

Income tax expense was $0.4 million for the first quarter of 2021

respectively, reflecting

an effective tax rate of

17.41% and 17.80%, respectively.

The Company paid cash dividends of $0.26 per share in the first quarter

of 2021, an increase of 2% from the same period of

At March 31, 2021, the Bank’s regulatory

capital ratios were well above the minimum amounts required

capitalized” under current regulatory standards with a total

risk-based capital ratio of 18.25%, a tier 1 leverage ratio

and a common equity tier 1 (“CET1”) ratio of 17.21%

at March 31, 2021.

COVID-19 Impact Assessment

In December 2019, COVID-19 was first reported in China and has since spread to a number of other countries, including the United States.

In March 2020, the World Health Organization declared COVID-19 a global pandemic and the United States declared a National Public Health Emergency.

The COVID-19 pandemic has severely restricted the level of economic activity in our markets.

In response to the COVID-19 pandemic, the State of Alabama, and most other states, have taken preventative or protective actions to prevent the spread of the virus, including imposing restrictions on travel and business operations and a statewide mask mandate, advising or requiring individuals to limit or forego their time outside of their homes, limitations on gathering of people and social distancing, and causing temporary closures of businesses that have been deemed to be non-essential.

Though certain of these measures have been relaxed or eliminated, increases in reported cases could cause these measures to be reestablished.

Auburn University, a major source of economic activity in Lee County, went to remote instruction on March 16, 2020.

Auburn University announced its guidelines for the fall semester of 2020, which involves both remote and in person instruction as well as other social distancing measures.

The economic effects of these measures are not presently known.

COVID-19 has significantly affected local state, national and global health and economic activity and its future effects are uncertain and will depend on various factors, including, among others, the duration and scope of the pandemic, the development and distribution of COVID-19 testing and contact tracing, effective drug treatments and vaccines, together with governmental, regulatory and private sector responses.

COVID-19 has had continuing significant effects on the economy, financial markets and our employees, customers and vendors.

Our business, financial condition and results of operations generally rely upon the ability of our borrowers to make deposits and repay their loans, the value of collateral underlying our secured loans, market value, stability and liquidity and demand for loans and other products and services we offer, all of which are affected by the pandemic.

We have implemented a number of procedures in response to the pandemic to support the safety and well-being of our employees, customers and shareholders.

• We believe our business continuity plan has worked to provide essential banking services to our communities and customers, while protecting our employees’ health.

As part of our efforts to exercise social distancing in accordance with the guidelines of the Centers for Disease Control, starting March 23, we limited branch lobby service to appointment only while continuing to operate our branch drive-thru facilities and automated teller machines (“ATMs”).

On June 1, 2020, we re-opened some of our branch lobbies as permitted by state public health guidelines.

We continue to provide services through our online and other electronic channels.

In addition, we established remote work access to help employees stay at home where job duties permit.

• We are focused on servicing the financial needs of our commercial and consumer clients with extensions and deferrals to loan customers effected by COVID-19, provided such customers were not more than 30 days past due at the time of the request;

• We are a participating lender in the Paycheck Protection Program (“PPP”).

PPP loans are forgivable, in whole or in part, if the proceeds are used for payroll and other permitted purposes in accordance with the requirements of the PPP.

These loans carry a fixed rate of 1.00% and a term of two years (loans made before June 5, 2020) or five years (loans made on or after June 5, 2020), if not forgiven, in whole or in part.

Payments are deferred until either the date on which the Small Business Administration (“SBA”) remits the amount of forgiveness proceeds to the lender or the date that is 10 months after the last day of the covered period if the borrower does not apply for forgiveness within that 10-month period.

We believe these loans and our participation in the program is good for our customers and the communities we serve.

A summary of our PPP loans as of September 30, 2020 follows:

In December 2019, COVID-19 was first reported in China and

has since spread to a number of other countries, including

the United States.

In March 2020, the World

Health Organization declared COVID-19 a global

pandemic and the United

States declared a National Public Health Emergency.

The COVID-19 pandemic has severely restricted the level

economic activity in our markets.

In response to the COVID-19

pandemic, the State of Alabama, and most other states,

have taken preventative or protective actions to prevent the spread

of the virus, including imposing restrictions on travel

and business operations and a statewide mask mandate,

advising or requiring individuals to limit or forego their time

outside of their homes, limitations on gathering of people and

social distancing, and causing temporary closures of

businesses that have been deemed to be non-essential.

Though certain of these measures have been relaxed or

increases in reported cases could cause these measures to be

reestablished.

Auburn University, a major

source of economic

activity in Lee County, went to

remote instruction on March 16, 2020.

Auburn University announced its guidelines for the

remainder of the 2020/2021 school year,

which involves both remote and in person instruction as well as other social

distancing measures.

The economic effects of these measures are

not presently known.

COVID-19 has significantly affected local state, national

and global health and economic activity and its future effects

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

the duration and scope of the pandemic, the

development and distribution of COVID-19 testing and contact

tracing, effective drug treatments and vaccines, together

with governmental, regulatory and private sector responses.

COVID-19 has had continuing significant effects on the

economy, financial markets and

our employees, customers and vendors.

Our business, financial condition

and results of

operations generally rely upon the ability of our borrowers to

make deposits and repay their loans, the value of collateral

underlying our secured loans, market value, stability and liquidity and

demand for loans and other products and services we

offer, all of which are affected

by the pandemic.

See “Balance Sheet Analysis – Loans” for supplemental COVID

We have implemented

a number of procedures in response to the pandemic to support

the safety and well-being of our

employees, customers and shareholders.

believe our business continuity plan has worked to provide

essential banking services to our communities and

customers, while protecting our employees’ health.

As part of our efforts to exercise social distancing in accordance

the guidelines of the Centers for Disease Control and the Governor

of the State of Alabama, starting March 23, 2020, we

limited branch lobby service to appointment only while continuing to

operate our branch drive-thru

facilities and ATMs.

On June 1, 2020, we re-opened some of our branch lobbies as permitted

by state public health guidelines.

We continue to

provide services through our online and other electronic channels.

In addition, we established remote work access to help

employees stay at home where job duties permit.

• Our 2021 Annual Shareholders’ Meeting will, again, be

a virtual meeting.

Shareholders that wish to participate

may access web portals and live streams of the Annual Shareholders’

are focused on servicing the financial needs of our commercial and consumer

clients with extensions and

deferrals to loan customers effected by COVID-19,

provided such customers were not more than 30 days past

time of the request;

are a participating lender in the PPP.

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

proceeds are used for

payroll and other permitted purposes in accordance with the requirements

These loans carry a fixed rate of

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

or five years (loans made on or after June 5, 2020), if not

forgiven, in whole or in part.

Payments are deferred until either the date on which the Small

Business Administration

(“SBA”) remits the amount of forgiveness proceeds

to the lender or the date that is 10 months after the last day of the

covered period if the borrower does not apply for forgiveness

within that 10-month period.

We believe these loans

participation in the program is good for our customers and the

communities we serve.

A summary of PPP loans extended during 2020 follows:

(Dollars in thousands)

# of SBA Approved

$ of SBA Approved

$2 million to $10 million

1 unchanged sentence

Up to $350,000

The PPP closed on August 8, 2020 and the SBA no longer accepts PPP applications from participating lenders.

The Company extended $36.5 million in loans to 422 small businesses under the PPP during the second quarter of 2020.

We collected approximately $1.5 million in fees related to our PPP loans, which will be recognized net of related costs, as a yield adjustment over the life of the underlying PPP loans.

We continue to closely monitor this pandemic, and are working to continue our services during the pandemic and to address developments as those occur.

Our results of operations for the nine months ended September 30, 2020, and our financial condition at that date reflect only the initial effects of the pandemic, and may not be indicative of future results or financial conditions, including possible additional monetary or fiscal stimulus, and the possible effects of the expiration or extension of temporary accounting and bank regulatory relief measures in response to the COVID-19 pandemic.

As of September 30, 2020, all of our capital ratios were in excess of all regulatory requirements to be well capitalized.

The effects of the COVID-19 pandemic on our borrowers could result in adverse changes to credit quality and our regulatory capital ratios.

We continue to closely monitor this pandemic, and are working to continue our services during the pandemic and to address developments as those occur.

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

which will be recognized net of

related costs, as a yield adjustment over the life of the underlying

On December 27,

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

Act (the “Economic Aid

Act”) was signed into law.

The Economic Aid Act provides a second $900

billion stimulus package, including $325 billion

in additional PPP loans.

A summary of PPP loans extended under the Economic Aid Act

(Dollars in thousands)

$2 million to $10 million

$350,000 to less than $2 million

Up to $350,000

As of March 31, 2021, we collected approximately $0.9 million

in fees related to PPP loans under the Economic Aid Act,

which will be recognized net of related costs, as a yield adjustment

over the life of the underlying PPP loans.

amended and extended, is scheduled to stop accepting applications

by May 31, 2021.

We continue to closely

monitor this pandemic, and are working to continue our services

during the pandemic and to address

developments as those occur.

Our results of operations for the quarter ended March 31, 2021

and our financial condition at

that date reflect only the initial effects of the pandemic,

and may not be indicative of future results or financial conditions,

including possible additional monetary or fiscal stimulus, and

the possible effects of the expiration or extension of

temporary accounting and bank regulatory relief measures in response

to the COVID-19 pandemic.

As of March 31, 2021,

all of our capital ratios were in excess of all regulatory requirements

to be well capitalized.

effects of the COVID-19 pandemic on our borrowers

could result in adverse changes to credit quality and our regulatory

capital ratios.

We continue to closely

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

and to address developments as those occur.

CRITICAL ACCOUNTING POLICIES

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

GAAP and with general practices within the banking industry.

In connection with the application of those principles, we have made judgments and estimates which, in the case of the determination of our allowance for loan losses, our assessment of other-than-temporary impairment, recurring and non-recurring fair value measurements and the valuation of OREO and deferred tax assets, were critical to the determination of our financial position and results of operations.

Other policies also require subjective judgment and assumptions and may accordingly impact our financial position and results of operations.

The accounting and financial reporting policies of the Company conform

GAAP and with general practices

within the banking industry.

In connection with the application of those principles, we have

made judgments and estimates

which, in the case of the determination of our allowance for loan

losses, our assessment of other-than-temporary

impairment, recurring and non-recurring fair value measurements and

the valuation of OREO and deferred tax assets, were

critical to the determination of our financial position and results of

Other policies also require subjective

judgment and assumptions and may accordingly impact our financial

position and results of operations.

Allowance for Loan Losses

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

The level of the allowance is based upon management’s evaluation of the loan portfolio, past loan loss experience, current asset quality trends, known and inherent risks in the portfolio, adverse situations that may affect a borrower’s ability to repay (including the timing of future payment), the estimated value of any underlying collateral, composition of the loan portfolio, economic conditions, industry and peer bank loan loss rates, and other pertinent factors, including regulatory recommendations.

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

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

A loan may be partially charged-off after a “confirming event” has occurred, which serves to validate that full repayment pursuant to the terms of the loan is unlikely.

The Company deems loans impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement.

Collection of all amounts due according to the contractual terms means that both the interest and principal payments of a loan will be collected as scheduled in the loan agreement.

An impairment allowance is recognized if the fair value of the loan is less than the recorded investment in the loan.

The impairment is recognized through the allowance.

Loans that are impaired are recorded at the present value of expected future cash flows discounted at the loan’s effective interest rate, or if the loan is collateral dependent, the impairment measurement is based on the fair value of the collateral, less estimated disposal costs.

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

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

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

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

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

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

As part of the Company’s quarterly assessment of the allowance, management divides the loan portfolio into five segments:

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

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 each loan segment.

The estimates for these loans are established by category and based on the Company’s internal system of credit risk ratings and historical loss data.

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

For loan segments where the Company believes it does not have sufficient historical loss data, the Company may make adjustments based, in part, on loss rates of peer bank groups.

At September 30, 2020 and December 31, 2019, and for the periods then ended, the Company adjusted its historical loss rates for the commercial real estate portfolio segment based, in part, on loss rates of peer bank groups.

The estimated loan loss allocation for all five loan portfolio segments is then adjusted for management’s estimate of probable losses for several “qualitative and environmental” factors.

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

This amount represents estimated probable inherent credit losses which exist, but have not yet been identified, as of the balance sheet date, and are based upon quarterly trend assessments in delinquent and nonaccrual loans, credit concentration changes, prevailing economic conditions, changes in lending personnel experience, changes in lending policies or procedures, and other influencing factors.

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

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 quarter ended September 30, 2020, the Company increased its look-back period to 46 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 the first nine months of 2020, the Company adjusted certain qualitative and economic factors related to changes in economic conditions and portfolio trends driven by the impact of the COVID-19 pandemic and resulting adverse economic conditions, including higher unemployment in our primary market area.

Further adjustments may be made in the future as a result of the continuing COVID-19 pandemic.

Assessment for Other-Than-Temporary Impairment of Securities

On a quarterly basis, management makes an assessment to determine whether there have been events or economic circumstances to indicate that a security on which there is an unrealized loss is other-than-temporarily impaired.

For debt securities with an unrealized loss, an other-than-temporary impairment write-down is triggered when (1) the Company has the intent to sell a debt security, (2) it is more likely than not that the Company will be required to sell the debt security before recovery of its amortized cost basis, or (3) the Company does not expect to recover the entire amortized cost basis of the debt security.

If the Company has the intent to sell a debt security or if it is more likely than not that it will be required to sell the debt security before recovery, the other-than-temporary write-down is equal to the entire difference between the debt security’s amortized cost and its fair value.

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

The credit loss component is recognized in earnings and is the difference between the security’s amortized cost basis and the present value of its expected future cash flows.

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

Fair Value Determination

GAAP requires management to value and disclose certain of the Company’s assets and liabilities at fair value, including investments classified as available-for-sale and derivatives.

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

GAAP and expands disclosures about fair value measurements.

For more information regarding fair value measurements and disclosures, please refer to Note 7, Fair Value, of the consolidated financial statements that accompany this report.

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

Comparable assets or liabilities or a composite of comparable assets in active markets are used when identical assets or liabilities do not have readily available active market pricing.

However, some of the Company’s assets or liabilities lack an available or comparable trading market characterized by frequent transactions between willing buyers and sellers.

In these cases, fair value is estimated using pricing models that use discounted cash flows and other pricing techniques.

Pricing models and their underlying assumptions are based upon management’s best estimates for appropriate discount rates, default rates, prepayments, market volatility, and other factors, taking into account current observable market data and experience.

These assumptions may have a significant effect on the reported fair values of assets and liabilities and the related income and expense.

As such, the use of different models and assumptions, as well as changes in market conditions, could result in materially different net earnings and retained earnings results.

The Company assesses the adequacy of its allowance for loan

losses prior to the end of each calendar quarter.

the amount of the allowance for loan losses is considered

a critical accounting estimate because the level of the allowance

based upon management’s evaluati

on of the loan portfolio, past loan loss experience, current

asset quality trends, known

and inherent risks in the portfolio, adverse situations that may

affect a borrower’s ability to repay (including

the timing of

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

composition of the loan portfolio, economic conditions,

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

including regulatory recommendations.

This evaluation

is inherently subjective as it requires material estimates including the

amounts and timing of future cash flows expected to

be received on impaired loans that may be susceptible to significant

Loans are charged off, in whole or

when management believes that the full collectability of the loan

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

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,

the impairment

measurement is based on the fair value of the collateral, less estimated

disposal costs.

The level of allowance maintained is believed by management to

be 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 and independent

loan review processes.

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

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 each

loan segment.

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 of

credit risk grades is based on its experience with similarly graded

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

At March 31, 2021 and December 31, 2020, and for the periods

then ended, the Company adjusted its historical

loss rates for the commercial real estate portfolio segment based,

in part, on loss rates of peer bank groups.

The estimated loan loss allocation for all five loan portfolio segments

is then adjusted for management’s

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.

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.

quarter ended March 31, 2021, the Company increased its look

-back period to 48 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.

adjusted certain qualitative and economic factors related to changes in

economic conditions and portfolio trends driven by

the impact of the COVID-19 pandemic and resulting adverse

economic conditions, including higher unemployment in our

primary market area.

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

COVID-19 pandemic.

Assessment for Other-Than-Temporary

Impairment of Securities

On a quarterly basis, management makes an assessment to determine

whether there have been events or economic

circumstances to indicate that a security on which there is an

unrealized loss is other-than-temporarily impaired.

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

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

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 difference

between the debt security’s amortized

cost and its fair value.

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

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

before recovery, the other

-than-temporary impairment write-

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

and the amount due to all other factors.

credit loss component is recognized in earnings and is the difference

between the security’s

amortized cost basis and the

present value of its expected future cash flows.

The remaining difference between the security’s

fair value and the present

value of future expected cash flows is due to factors that are not credit

related and is recognized in other comprehensive

income, net of applicable taxes.

The Company is required to own certain stock as a condition of

membership, such as Federal Home Loan Bank (“FHLB”)

and Federal Reserve Bank (“FRB”).

These non-marketable equity securities are accounted for at

cost which equals par or

redemption value.

These securities do not have a readily determinable fair value as their

ownership is restricted and there is

no market for these securities.

The Company records these non-marketable equity securities

as a component of other

assets, which are periodically evaluated for impairment.

considers these non-marketable equity securities to

be long-term investments.

when evaluating these securities for impairment, management considers

ultimate recoverability of the par value rather than by recognizing temporary

declines in value.

Determination

GAAP requires management to value and disclose certain of the

Company’s assets and liabilities

at fair value,

including investments classified as available-for-sale

and derivatives.

Measurements and Disclosures

which defines fair value, establishes a framework for measuring fair

value in accordance with U.S.

GAAP and expands

disclosures about fair value measurements.

For more information regarding fair value measurements and disclosures,

please refer to Note 6, Fair Value,

of the consolidated financial statements that accompany this report.

Fair values are based on active market prices of identical assets or

liabilities when available.

Comparable assets or

liabilities or a composite of comparable assets in active markets are

used when identical assets or liabilities do not have

readily available active market pricing.

However, some of the Company’s

assets or liabilities lack an available or

comparable trading market characterized by frequent transactions between

willing buyers and sellers.

In these cases, fair

value is estimated using pricing models that use discounted cash

flows and other pricing techniques.

Pricing models and

their underlying assumptions are based upon management’s

best estimates for appropriate discount rates, default rates,

prepayments, market volatility,

and other factors, taking into account current observable market data

and experience.

These assumptions may have a significant effect on the reported

fair values of assets and liabilities and the related income

As such, the use of different models and

assumptions, as well as changes in market conditions, could

materially different net earnings and retained earnings

Other Real Estate Owned

OREO consists of properties obtained through foreclosure or in satisfaction of loans and is reported at the lower of cost or fair value of collateral, less estimated costs to sell at the date acquired, with any loss recognized as a charge-off through the allowance for loan losses.

Additional OREO losses for subsequent valuation adjustments are determined on a specific property basis and are included as a component of other noninterest expense along with holding costs.

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

Significant judgments and complex estimates are required in estimating the fair value of OREO, and the period of time within which such estimates can be considered current is significantly shortened during periods of market volatility.

As a result, the net proceeds realized from sales transactions could differ significantly from appraisals, comparable sales, and other estimates used to determine the fair value of other OREO.

At September 30, 2020 and December 31, 2019 the Company had no OREO properties.

Deferred Tax Asset Valuation

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

The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.

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

Based upon the level of taxable income over the last three years and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that we will realize the benefits of these deductible differences at September 30, 2020.

The amount of the deferred tax assets considered realizable, however, could be reduced if estimates of future taxable income are reduced.

Under the CARES Act, net operating losses arising in tax years beginning after December 31, 2017, and before January 1, 2021 may be carried back to each of the five tax years preceding the tax year of such loss.

Since the enactment of the Tax Cuts and Jobs Act, net operating losses generally could not be carried back but could be carried forward indefinitely.

Further, the Tax Cuts and Jobs Act limited net operating loss absorption to 80% of taxable income.

The CARES Act temporarily removes the 80% limitation, reinstating it for tax years beginning after 2020.

RESULTS OF OPERATIONS

Average Balance Sheet and Interest Rates

Nine months ended September 30,

OREO consists of properties obtained through foreclosure or in satisfaction

of loans and is reported at the lower of cost or

fair value of collateral, less estimated costs to sell at the date acquired,

with any loss recognized as a charge-off through the

allowance for loan losses.

Additional OREO losses for subsequent

valuation adjustments are determined on a specific

property basis and are included as a component of other noninterest

expense along with holding costs.

Any gains or losses

on disposal of OREO are also reflected in noninterest expense.

Significant judgments and complex estimates are required in

estimating the fair value of OREO, and the period of time within which

such estimates can be considered current is

significantly shortened during periods of market volatility.

As a result, the net proceeds realized from sales transactions

could differ significantly from appraisals, comparable

sales, and other estimates used to determine the fair value of other

At March 31, 2021 and December 31, 2020 the Company had no OREO

Asset Valuation

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

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

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

The ultimate realization of deferred tax assets

is dependent upon the generation of future taxable income during

the periods in which those temporary differences

Management considers the scheduled reversal of deferred

tax liabilities, projected future taxable income, and

tax planning strategies in making this assessment.

Based upon the level

of taxable income over the last three years and

projections for future taxable income over the periods in which

the deferred tax assets are deductible, management believes

it is more likely than not that we will realize the benefits of these

deductible differences at March 31, 2021.

The amount of

the deferred tax assets considered realizable, however,

could be reduced if estimates of future taxable income are reduced.

OF OPERATIONS

Average Balance

Sheet and Interest Rates

Quarter ended March 31,

(Dollars in thousands)

13 unchanged sentences

Net Interest Income and Margin

Net interest income (tax-equivalent) was $18.5 million for the first nine months of 2020 compared to $20.2 million for the first nine months of 2019.

This decrease was due to a decline in the Company’s net interest margin (tax-equivalent).

The tax-equivalent yield on total interest-earning assets decreased by 58 basis points to 3.44% in the first nine months of 2020 compared to 4.02% in the first nine months of 2019.

This decrease was primarily due to the lower rate environment, including a 150 basis point reduction in the federal funds rate that occurred late in the first quarter of 2020 and changes in our asset mix from the significant short-term liquidity increase in customer deposits.

The cost of total interest-bearing liabilities was 0.72% and 0.79%, for the first nine months of 2020 and 2019, respectively.

Such costs declined less than the declines in rates earned on our interest earning assets.

The Company continues to deploy various asset liability management strategies to manage its risk to interest rate fluctuations.

The Company’s net interest margin could continue to experience pressure due to reduced earning asset yields and increased competition for quality loan opportunities.

Management anticipates the Company’s net interest income and margin will likely continue to decrease in 2020 compared to 2019 as the Company’s ability to lower its deposit costs will likely continue to lag the current decrease in earning asset yields.

Net interest income (tax-equivalent) was $6.1 million for the

first quarter of 2021 compared to $6.3 million for the first

quarter of 2020.

This decrease was due to a decline in the Company’s

net interest margin (tax-equivalent).

The tax-equivalent yield on total interest-earning assets decreased

by 80 basis points to 2.96% in the first quarter of 2021

compared to 3.76%

in the first quarter of 2020.

This decrease was primarily due to the lower rate environment,

150 basis point reduction in the federal funds rate that occurred

in March 2020 and changes in our asset mix due to the

significant increase in customer deposits.

The cost of total interest-bearing liabilities decreased 34

basis points in the first quarter of 2021 from the first quarter of

2020 to 0.44%.

The net decrease in our funding costs was primarily due to lower

prevailing market interest rates.

costs declined less than the declines in rates earned on our interest

earning assets.

The Company continues to deploy various asset liability management

strategies to manage its risk to interest rate

fluctuations.

The Company’s net

interest margin could continue to experience pressure due

to reduced earning asset yields

and increased competition for quality loan opportunities.

Provision for Loan Losses

The provision for loan losses represents a charge to earnings necessary to provide an allowance for loan losses that management believes, based on its processes and estimates, should be adequate to provide for the probable losses on outstanding loans.

The provision for loan losses was $1.1 million for the first nine months of 2020, compared to no provision for loan losses for the first nine months of 2019.

The increase in the provision for loan losses was related to adverse changes in economic conditions and portfolio trends driven by the impact of COVID-19 pandemic, including higher unemployment in our primary market area.

The provision for loan losses is based upon various factors, including the absolute level of loans, loan growth, the credit quality, and the amount of net charge-offs or recoveries.

Based upon its assessment of the loan portfolio, management adjusts the allowance for loan losses to an amount it believes should be appropriate to adequately cover its estimate of probable losses in the loan portfolio.

The Company’s allowance for loan losses as a percentage of total loans was 1.18% at September 30, 2020, compared to 0.95% at December 31, 2019.

At September 30, 2020, the Company’s allowance for loan losses was 1.28% of total loans, excluding PPP loans.

While the policies and procedures used to estimate the allowance for loan losses, as well as the resulting provision for loan losses charged to operations, are considered adequate by management and are reviewed from time to time by our regulators, they are based on estimates and judgments and are therefore approximate and imprecise.

Factors beyond our control (such as conditions in the local and national economy, local real estate markets, or industries) may have a material adverse effect on our asset quality and the adequacy of our allowance for loan losses resulting in significant increases in the provision for loan losses.

The provision for loan losses represents a charge to earnings necessary

to provide an allowance for loan losses that

management believes, based on its processes and estimates,

should be adequate to provide for the probable losses on

outstanding loans.

There was no provision for loan losses for the first quarter

of 2021, compared to $0.4 million in

provision for loan losses for the first quarter of 2020.

The provision for loan losses during the first quarter of 2020

related to changes in economic conditions and portfolio trends

driven by the impact of COVID-19 and resulting adverse

economic conditions,

including higher unemployment in our primary market area.

The provision for loan losses is based

upon various factors, including the absolute level of loans, loan

growth, the credit quality,

and the amount of net charge-

offs or recoveries.

Based upon its assessment of the loan portfolio, management

adjusts the allowance for loan losses to an amount it believes

should be appropriate to adequately cover its estimate of probable

losses in the loan portfolio.

The Company’s

for loan losses as a percentage of total loans was 1.23%

at March 31, 2021, compared to 1.22% at December 31,

March 31, 2021,

the Company’s allowance for loan losses was

of total loans, excluding PPP loans, which are

guaranteed by the SBA.

While the policies and procedures used to estimate the allowance

for loan losses, as well as the

resulting provision for loan losses charged to operations,

are considered adequate by management and are reviewed from

time to time by our regulators, they are based on estimates and

judgments and are therefore approximate and imprecise.

Factors beyond our control (such as conditions in the local and

national economy, local

real estate markets, or industries)

may have a material adverse effect on our asset quality and

the adequacy of our allowance for loan losses resulting in

significant increases in the provision for loan losses.

Noninterest Income

Quarter ended September 30,

Nine months ended September 30,

Quarter ended March 31,

(Dollars in thousands)

4 unchanged sentences

Total noninterest income

The decrease in service charges on deposit accounts was driven by a decline in consumer spending activity as a result of the COVID-19 pandemic.

The Company’s income from mortgage lending was primarily attributable to the (1) origination and sale of new mortgage loans and (2) servicing of mortgage loans.

Origination income, net, is comprised of gains or losses from the sale of the mortgage loans originated, origination fees, underwriting fees, and other fees associated with the origination of loans, which are netted against the commission expense associated with these originations.

The Company’s normal practice is to originate mortgage loans for sale in the secondary market and to either sell or retain the associated MSRs when the loan is sold.

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

Subsequent to the date of transfer, the Company has elected to measure its MSRs under the amortization method.

Servicing fee income is reported net of any related amortization expense.

MSRs are also evaluated for impairment on a quarterly basis.

Impairment is determined by grouping MSRs by common predominant characteristics, such as interest rate and loan type.

If the aggregate carrying amount of a particular group of MSRs exceeds the group’s aggregate fair value, a valuation allowance for that group is established.

The valuation allowance is adjusted as the fair value changes.

An increase in mortgage interest rates typically results in an increase in the fair value of the MSRs while a decrease in mortgage interest rates typically results in a decrease in the fair value of MSRs.

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

Quarter ended September 30,

Nine months ended September 30,

The decrease in service charges on deposit accounts

was driven by a decline in consumer spending activity as a result of

COVID-19 pandemic.

The Company’s income from mortgage

lending was primarily attributable to the (1) origination and sale of new

loans and (2) servicing of mortgage loans.

Origination income, net, is

comprised of gains or losses from the sale of the

mortgage loans originated, origination fees, underwriting fees,

and other fees associated with the origination of loans,

which are netted against the commission expense associated with these

originations.

The Company’s normal

practice is to

originate mortgage loans for sale in the secondary market and

to either sell or retain the associated MSRs when the loan is

MSRs are recognized based on the fair value of the servicing

right on the date the corresponding mortgage loan is sold.

Subsequent to the date of transfer, the Company

has elected to measure its MSRs under the amortization method.

fee income is reported net of any related amortization expense.

The Company evaluates MSRs for impairment on a quarterly basis.

Impairment is determined by grouping MSRs by

common predominant characteristics, such as interest rate and loan

If the aggregate carrying amount of a particular

group of MSRs exceeds the group’s aggregate

fair value, a valuation allowance for that group is established.

The valuation

allowance is adjusted as the fair value changes.

An increase in mortgage interest rates typically results in

an increase in the

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

typically results in a decrease in the fair value of MSRs.

The following table presents a breakdown of the Company’s

mortgage lending income.

Quarter ended March 31,

(Dollars in thousands)

Origination income

Origination income, net

Servicing fees, net

Total mortgage lending income

The increase in mortgage lending income was primarily due to an increase in mortgage refinance activity.

The Company’s income from mortgage lending typically fluctuates as mortgage interest rates change and is primarily attributable to the origination and sale of new mortgage loans.

The increase in mortgage lending income was partially offset by a decrease in servicing fees, net of related amortization expense as prepayment speeds increased in the first nine months of 2020, resulting in increased amortization expense.

Income from bank-owned life insurance increased primarily due to $0.3 million in non-taxable death benefits received in the first nine months of 2020.

The assets that support these policies are administered by the life insurance carriers and the income we receive (i.e., increases or decreases in the cash surrender value of the policies and death benefits received) on these policies is dependent upon the returns the insurance carriers are able to earn on the underlying investments that support these policies.

The increase in mortgage lending income was primarily due to

an increase in mortgage refinance activity.

The Company’s

income from mortgage lending typically fluctuates as mortgage

interest rates change and is primarily attributable to the

origination and sale of new mortgage loans.

The increase in mortgage lending income was partially offset

by a decrease in

servicing fees, net of related amortization expense as prepayment

speeds increased in the first quarter of 2021, resulting in

increased amortization expense.

Income from bank-owned life insurance decreased primarily due to

$0.3 million in non-taxable death benefits received in

the first quarter of 2020.

The assets that support these policies

are administered by the life insurance carriers and the income

we receive (i.e., increases or decreases in the cash surrender

value of the policies and death benefits received) on these

policies is dependent upon the returns the insurance carriers are

able to earn on the underlying investments that support

these policies.

Earnings on these policies are generally not taxable.

The decrease in other noninterest income was primarily due to a $0.3 million pre-tax gain from an insurance recovery received in the first quarter of 2019.

Noninterest Expense

Quarter ended September 30,

Nine months ended September 30,

Quarter ended March 31,

(Dollars in thousands)

3 unchanged sentences

Total noninterest expense

The decrease in salaries and benefits expense was primarily due to lower full-time equivalent employees, incentive accruals and an increase in deferred costs related to the PPP loan program.

The increase in net occupancy and equipment expense was primarily due to various expenses related to the redevelopment of the Company’s headquarters in downtown Auburn.

This amount includes revised depreciation estimates and other temporary relocation costs.

The Company expects it will incur additional expense in the fourth quarter of 2020 related to the redevelopment project.

Income Tax Expense

Income tax expense was $1.2 million and $1.7 million for the first nine months of 2020 and 2019 reflecting an effective tax rate of 17.64% and 19.40%, respectively.

This change was primarily due to a decrease in the level of earnings before taxes relative to tax-exempt sources of income.

The Company’s effective income tax rate is principally impacted by tax-exempt earnings from the Company’s investments in municipal securities and bank-owned life insurance.

The decrease in net occupancy and equipment expense was primarily

due to a reduction of $0.2 million in various expenses

related to the redevelopment of the Company’s

headquarters in downtown Auburn.

Income tax expense was $0.4 million for the first quarter of 2021

respectively, reflecting an effective

17.41% and 17.80%, respectively.

BALANCE SHEET ANALYSIS

Securities available-for-sale were $320.9 million at September 30, 2020 compared to $235.9 million at December 31, 2019.

This increase reflects an increase in the amortized cost basis of securities available-for-sale of $77.9 million, and an increase of $7.1 million in the fair value of securities available-for-sale.

The increase in the amortized cost basis of securities available-for-sale was primarily attributable to management allocating more funding to the investment portfolio following the significant increase in customer deposits.

The increase in the fair value of securities was primarily due to a decrease in long-term interest rates.

The average annualized tax-equivalent yields earned on total securities were 2.24% in 2020 and 2.77% in 2019.

Securities available-for-sale were $3

59.6 million at March 31, 2021 compared to $335.2 million at December 31,

This increase reflects an increase in the amortized cost basis

of securities available-for-sale of $31.3 million, and

of $6.9 million in the fair value of securities available-for-sale.

The increase in the amortized cost basis of securities

available-for-sale was primarily attributable to management

allocating more funding to the investment portfolio following

the significant increase in customer deposits.

The decrease in the fair value of securities was primarily due

to an increase in

long-term interest rates.

The average annualized tax-equivalent yields earned on total

securities were 1.75%

(In thousands)

6 unchanged sentences

Loans, net of unearned income

Total loans, net of unearned income, were $472.5 million at September 30, 2020, an increase of $11.6 million, or 3%, from $460.9 million at December 31, 2019.

Excluding PPP loans, total loans net of unearned income, were $436.0 million, a decrease of $24.9 million, or 5% from December 31, 2019.

This decrease was primarily due to a decrease in commercial real estate loans and residential real estate loans of $19.3 million and $7.5 million, respectively, as lower rates increased refinance activity and payoffs for multi-family residential and consumer mortgage loans.

Four loan categories represented the majority of the loan portfolio at September 30, 2020:

commercial real estate (53%), residential real estate (18%), commercial and industrial (21%) and construction and land development (7%).

Approximately 20% of the Company’s commercial real estate loans were classified as owner-occupied at September 30, 2020.

Within the residential real estate portfolio segment, the Company had junior lien mortgages of approximately $9.8 million, or 2% of total loans, at September 30, 2020, compared to $10.8 million, or 2% of total loans, at December 31, 2019.

For residential real estate mortgage loans with a consumer purpose, the Company had no loans that required interest-only payments at September 30, 2020, compared to $0.8 million at December 31, 2019.

The Company’s residential real estate mortgage portfolio does not include any option ARM loans, subprime loans, or any material amount of other high-risk consumer mortgage products.

The average yield earned on loans and loans held for sale was 4.71% in the first nine months of 2020 and 4.86% in the first nine months of 2019.

The specific economic and credit risks associated with our loan portfolio include, but are not limited to, the effects of current economic conditions, including the COVID-19 pandemic’s effects, on our borrowers’ cash flows, real estate market sales volumes, valuations, availability and cost of financing properties, real estate industry concentrations, competitive pressures from a wide range of other lenders, deterioration in certain credits, interest rate fluctuations, reduced collateral values or non-existent collateral, title defects, inaccurate appraisals, financial deterioration of borrowers, fraud, and any violation of applicable laws and regulations.

The Company attempts to reduce these economic and credit risks through its loan-to-value guidelines for collateralized loans, investigating the creditworthiness of borrowers and monitoring borrowers’ financial position.

Also, we have established and periodically review, lending policies and procedures.

Banking regulations limit a bank’s credit exposure by prohibiting unsecured loan relationships that exceed 10% of its capital;

or 20% of capital, if loans in excess of 10% of capital are fully secured.

Under these regulations, we are prohibited from having secured loan relationships in excess of approximately $20.2 million.

Furthermore, we have an internal limit for aggregate credit exposure (loans outstanding plus unfunded commitments) to a single borrower of $18.1 million.

Our loan policy requires that the Loan Committee of the Board of Directors approve any loan relationships that exceed this internal limit.

At September 30, 2020, the Bank had no relationships exceeding these limits.

We periodically analyze our commercial and industrial and commercial real estate loan portfolios to determine if a concentration of credit risk exists in any one or more industries.

We use classification systems broadly accepted by the financial services industry in order to categorize our commercial borrowers.

Loan concentrations to borrowers in the following classes exceeded 25% of the Bank’s total risk-based capital at September 30, 2020 (and related balances at December 31, 2019).

September 30,

Total loans, net of unearned

income, were $461.9 million at March 31, 2021,

an increase of $0.2 million from $461.7

million at December 31, 2020.

Excluding PPP loans, total loans net of unearned income, were

$433.2 million, a decrease

of $9.5 million, or 2% from $442.7 million at December 31, 2020

This decrease was primarily due to a decrease in

commercial and industrial loans, excluding PPP loans, commercial

and land development loans and residential real estate

loans of $3.6 million, $3.2 million and $1.3 million, respectively,

as lower rates increased refinance activity and payoffs

Four loan categories represented the majority of the loan portfolio

at March 31, 2021:

commercial real estate (55%),

residential real estate (18%), commercial and industrial (19%) and

construction and land development (7%).

Approximately 20% of the Company’s

commercial real estate loans were classified as owner

-occupied at March 31, 2021.

Within the residential real estate portfolio

segment, the Company had junior lien mortgages of approximately $8.2

or 2% of total loans, at March 31, 2021, compared to $8.7

million, or 2% of total loans, at December 31, 2020.

residential real estate mortgage loans with a consumer purpose,

the Company had no loans that required interest-only

payments at March 31, 2021 and December 31, 2020.

The Company’s residential real

estate mortgage portfolio does not

include any option ARM loans, subprime loans, or any mater

ial amount of other high-risk consumer mortgage products.

The average yield earned on loans and loans held for sale was 4.50

in the first quarter of 2021 and 4.81% in the first

quarter of 2020.

The specific economic and credit risks associated with our loan portfolio

include, but are not limited to, the effects of

current economic conditions, including the COVID-19 pandemic’s

effects, on our borrowers’ cash flows, real

estate market

sales volumes, valuations, availability and cost of financing properties,

real estate industry concentrations, competitive

pressures from a wide range of other lenders, deterioration in certain

credits, interest rate fluctuations, reduced collateral

values or non-existent collateral, title defects, inaccurate appraisals,

financial deterioration of borrowers, fraud, and any

violation of applicable laws and regulations.

The Company attempts to reduce these economic and credit

risks through its loan-to-value guidelines for collateralized

loans, investigating the creditworthiness of borrowers and monitoring borrowers’

financial position.

Also, we have

established and periodically review,

lending policies and procedures.

Banking regulations limit a

bank’s credit exposure

prohibiting unsecured loan relationships that exceed 10% of its

or 20% of capital, if loans in excess of 10% of

capital are fully secured.

Under these regulations, we are prohibited

from having secured loan relationships in excess of

approximately $20.6 million.

Furthermore, we have an internal limit for aggregate credit

exposure (loans outstanding plus

unfunded commitments) to a single borrower of $18.5

Our loan policy requires that the Loan Committee of the

Board of Directors approve any loan relationships that exceed

this internal limit.

At March 31, 2021, the Bank had no

relationships exceeding these limits.

We periodically

analyze our commercial

and industrial and commercial real estate loan portfolios to

determine if a

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

We use classification

systems broadly accepted by the

financial services industry in order to categorize our

commercial borrowers.

Loan concentrations to borrowers in the

following classes exceeded 25% of the Bank’s

total risk-based capital at March 31, 2021 (and related

balances at December

(Dollars in thousands)

Lessors of 1 to 4 family residential properties

Shopping centers

Lessors of 1-4 family residential properties

Multi-family residential properties

Office buildings

Shopping centers

Supplemental COVID-19 Industry Exposure

We have identified certain commercial sectors with enhanced risk resulting from the impact of COVID-19.

Loans within these sectors represent 49% of the Company’s total COVID-19 related modifications at September 30, 2020.

The table below summarizes the loans outstanding for these sectors at September 30, 2020.

We have identified

certain commercial sectors with enhanced risk resulting from

the impact of COVID-19.

these sectors represent 86% of the Company’s

total COVID-19 related modifications at March 31, 2021

and December 31,

The table below

summarizes the loans outstanding for these sectors at March

31, 2021 and December 31, 2020.

Portfolio Segment

(Dollars in thousands)

Commercial and industrial

Construction and land development

Commercial real estate

Commercial and

Construction and

land development

% of Total Loans

September 30, 2020:

March 31, 2021:

Shopping centers

Retail, excluding shopping centers

In light of disruptions in economic conditions caused by COVID-19, the financial regulators have issued guidance encouraging banks to work constructively with borrowers affected by the virus in our community.

This guidance, including the Interagency Statement on COVID-19 Loan Modifications and the Interagency Examiner Guidance for Assessing Safety and Soundness Considering the Effect of the COVID-19 Pandemic on Institutions, provides that the agencies will not criticize financial institutions that mitigate credit risk through prudent actions consistent with safe and sound practices.

Specifically, examiners will not criticize institutions for working with borrowers as part of a risk mitigation strategy intended to improve existing loans, even if the restructured loans have or develop weaknesses that ultimately result in adverse credit classification.

Upon demonstrating the need for payment relief, the bank will work with qualified borrowers that were otherwise current before the pandemic to determine the most appropriate deferral option.

For residential mortgage and consumer loans the borrower may elect to defer payments for up to three months.

Interest continues to accrue and the amount due at maturity increases.

Commercial real estate, commercial, and small business borrowers may elect to defer payments for up to three months or pay scheduled interest payments for a six-month period.

The bank recognizes that a combination of the payment relief options may be prudent dependent on a borrower’s business type.

As of September 30, 2020 we have granted loan payment deferrals or payments of interest-only primarily on commercial and industrial and commercial real estate loans totaling $87.1 million, or 18% of total loans, compared to $112.7 million, or 24% of total loans at June 30, 2020.

The tables below provide information concerning the composition of these COVID-19 modifications as of September 30, 2020.

Portfolio Segment

Commercial and

Construction and

land development

% of Total Loans

December 31, 2020:

Shopping centers

Retail, excluding shopping centers

In light of disruptions in economic conditions caused by COVID

-19, the financial regulators have issued guidance

encouraging banks to work constructively with borrowers affected

by the virus in our community.

This guidance, including

the Interagency Statement on COVID-19 Loan Modifications and

the Interagency Examiner Guidance for Assessing Safety

and Soundness Considering the Effect of the COVID

-19 Pandemic on Institutions, provides that the agencies will not

criticize financial institutions that mitigate credit risk through

prudent actions consistent with safe and sound practices.

Specifically, examiners will

not criticize institutions for working with borrowers as part

of a risk mitigation strategy

intended to improve existing loans, even if the restructured

loans have or develop weaknesses that ultimately result in

adverse credit classification.

Upon demonstrating the need for payment relief, the bank will work

with qualified borrowers

that were otherwise current before the pandemic to determine

the most appropriate deferral option.

For residential

mortgage and consumer loans the borrower may elect to defer

payments for up to three months.

Interest continues to

accrue and the amount due at maturity increases.

Commercial real estate, commercial, and small business borrowers may

elect to defer payments for up to three months or pay scheduled

interest payments for a six-month period.

recognizes that a combination of the payment relief options may be

prudent dependent on a borrower’s business type.

of March 31, 2021 we have granted loan payment deferrals or

payments of interest-only primarily on commercial and

industrial and commercial real estate loans totaling $32.4

million, or 7% of total loans, compared to $32.3 million, or 7%

total loans at December 31, 2020.

The tables below provide information concerning the composition

of these COVID-19 modifications as of March 31,

and December 31, 2020.

COVID-19 Modifications

1 unchanged sentence

(Dollars in thousands)

% of Portfolio Modified

Interest Only Payment

P&I Payments Deferred

% of Portfolio

Interest Only

March 31, 2021:

Commercial and industrial

Construction and land development

Commercial real estate

Residential real estate

Consumer installment

COVID-19 Modifications within Commercial Real Estate Segments

December 31, 2020:

Commercial and industrial

Commercial real estate

Residential real estate

COVID-19 Modifications within High Exposure Commercial Real Estate Segments

(Dollars in thousands)

Balance of Loans Modified

% of Total Segment Loans

Shopping centers

Retail, excluding shopping centers

Section 4013 of the CARES Act provides that a qualified loan modification is exempt by law from classification as a TDR pursuant to GAAP.

In addition, the Interagency Statement on COVID-19 Loan Modifications provides circumstances in which a loan modification is not subject to classification as a TDR if such loan is not eligible for modification under Section 4013.

Loans Modified

Segment Loans

March 31, 2021:

December 31, 2020:

Section 4013 of the CARES Act provides that a qualified loan modification

is exempt by law from classification as a TDR

pursuant to GAAP.

In addition, the Interagency Statement on COVID-19 Loan Modifications

provides circumstances in

which a loan modification is not subject to classification as a TDR

if such loan is not eligible for modification under

Section 4013.

Allowance for Loan Losses

The Company maintains the allowance for loan losses at a level that management believes appropriate to adequately cover the Company’s estimate of probable losses inherent in the loan portfolio.

The allowance for loan losses was $5.6 million at September 30, 2020 compared to $4.4 million at December 31, 2019, which management believed to be adequate at each of the respective dates.

The judgments and estimates associated with the determination of the allowance for loan losses are described under “Critical Accounting Policies.”

A summary of the changes in the allowance for loan losses and certain asset quality ratios for the third quarter of 2020 and the previous four quarters is presented below.

The Company maintains the allowance for loan losses at a level

that management believes appropriate to adequately cover

the Company’s estimate of probable

losses inherent in the loan portfolio.

The allowance for loan losses was $5.

March 31, 2021 compared to $5.6 million at December 31,

2020, which management believed to be adequate at each of the

respective dates.

The judgments and estimates associated with the determination

of the allowance for loan losses are

described under “Critical Accounting Policies.”

A summary of the changes in the allowance for loan losses and certain

asset quality ratios for the first quarter of 2021 and

the previous four quarters is presented below.

(Dollars in thousands)

1 unchanged sentence

Commercial and industrial

Residential real estate

Consumer installment

Total charge-offs

Net recoveries (charge-offs)

3 unchanged sentences

as a % of nonperforming loans

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

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

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

As described under “Critical Accounting Policies,” management assesses the adequacy of the allowance prior to the end of each calendar quarter.

The level of the allowance is based upon management’s evaluation of the loan portfolios, past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay (including the timing of future payment), the estimated value of any underlying collateral, composition of the loan portfolio, economic conditions, industry and peer bank loan loss rates, and other pertinent factors.

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

The ratio of our allowance for loan losses to total loans outstanding was 1.18% at September 30, 2020, compared to 0.95% at December 31, 2019.

At September 30, 2020, the Company’s allowance for loan losses was 1.28% of total loans, excluding PPP loans.

In the future, the allowance to total loans outstanding ratio will increase or decrease to the extent the factors that influence our quarterly allowance assessment, including the duration and magnitude of COVID-19 effects, in their entirety either improve or weaken.

In addition, our regulators, as an integral part of their examination process, will periodically review the Company’s allowance for loan losses, and may require the Company to make additional provisions to the allowance for loan losses based on their judgment about information available to them at the time of their examinations.

Our allowance for loan losses is expected to increase as the cumulative effects of the COVID-19 pandemic affect our customers for a longer period and are more fully realized as a result.

As described under “Critical Accounting Policies,” management assesses

the adequacy of the allowance prior to the end of

each calendar quarter.

level of the allowance is based upon management’s

evaluation of the loan portfolios, past loan

loss experience, known and inherent risks in the portfolio,

adverse situations that may affect the borrower’s

ability to repay

(including the timing of future payment), the estimated value

of any underlying collateral, composition of the loan

portfolio, economic conditions, industry and peer bank loan loss

rates, and other pertinent factors.

This evaluation is

inherently subjective as it requires various material estimates

and judgments, including the amounts and timing of future

cash flows expected to be received on impaired loans that may

be susceptible to significant change.

The ratio of our

allowance for loan losses to total loans outstanding was 1.23

at March 31, 2021, compared to 1.22% at December 31,

At March 31, 2021, the Company’s allowance

for loan losses was 1.31% of total loans, excluding PPP

future, the allowance to total loans outstanding ratio will increase

or decrease to the extent the factors that influence our

quarterly allowance assessment, including the duration and magnitude

of COVID-19 effects, in their entirety either improve

In addition, our regulators, as an integral part of their examination process,

will periodically review the

Company’s allowance for loan

losses, and may require the Company to make additional provisions

to the allowance for

loan losses based on their judgment about information available

to them at the time of their examinations.

Nonperforming Assets

The Company had $0.5 million and $0.2 million in nonperforming assets at September 30, 2020 and December 31, 2019, respectively.

The table below provides information concerning total nonperforming assets and certain asset quality ratios for the third quarter of 2020 and the previous four quarters.

The Company had $0.8

million and $0.5

million in nonperforming assets at March 31, 2021 and December

respectively.

The table below provides information concerning total nonperforming

assets and certain asset quality ratios for the first

quarter of 2021 and the previous four quarters.

(Dollars in thousands)

6 unchanged sentences

Nonperforming loans as a % of total loans

The table below provides information concerning the composition of nonaccrual loans for the third quarter of 2020 and the previous four quarters.

The table below provides information concerning the composition

of nonaccrual loans for the first quarter of 2021

previous four quarters.

(In thousands)

4 unchanged sentences

Total nonaccrual loans

The Company discontinues the accrual of interest income when (1) there is a significant deterioration in the financial condition of the borrower and full repayment of principal and interest is not expected or (2) the principal or interest is 90 days or more past due, unless the loan is both well-secured and in the process of collection.

At September 30, 2020, the Company had $0.5 million in loans on nonaccrual status compared to $0.2 million at December 31, 2019.

The Company had $71 thousand in loans 90 days or more past due and still accruing at September 30, 2020 compared to no such loans at December 31, 2019.

The table below provides information concerning the composition of OREO for the third quarter of 2020 and the previous four quarters.

The Company discontinues the accrual of interest income when (1)

there is a significant deterioration in the financial

condition of the borrower and full repayment of principal and

interest is not expected or (2) the principal or interest is

90 days or more past due, unless the loan is both well-secured

and in the process of collection.

At March 31, 2021, the

Company had $0.8

million in loans on nonaccrual status compared to $0.5 million at December 31,

The Company had no loans 90 days or more past due and still

accruing at March 31, 2021 compared to $0.1 million at

December 31, 2020.

The table below provides information concerning the composition

of OREO for the first quarter of 2021 and the previous

four quarters.

(In thousands)

Other real estate owned:

Total other real estate owned

Total other real estate

Potential Problem Loans

Potential problem loans represent those loans with a well-defined weakness and where information about possible credit problems of a borrower has caused management to have serious doubts about the borrower’s ability to comply with present repayment terms.

This definition is believed to be substantially consistent with the standards established by the Federal Reserve, the Company’s primary regulator, for loans classified as substandard, excluding nonaccrual loans.

Potential problem loans, which are not included in nonperforming assets, amounted to $3.5 million, or 0.7% of total loans at September 30, 2020, and $4.4 million, or 1.0% of total loans at December 31, 2019.

The table below provides information concerning the composition of potential problem loans for the third quarter of 2020 and the previous four quarters.

Potential problem loans represent those loans with a well-defined

weakness and where information about possible credit

problems of a borrower has caused management to have serious doubts

about the borrower’s ability to comply with present

repayment terms.

This definition is believed to be substantially consistent with the

standards established by the Federal

Reserve, the Company’s primary regulator,

for loans classified as substandard, excluding nonaccrual loans.

problem loans, which are not included in nonperforming assets,

amounted to $2.8 million, or 0.6% of total loans at March

31, 2021, and $2.9 million, or 0.6%

of total loans at December 31, 2020.

The table below provides information concerning the composition

of potential problem loans for the first quarter of 2021

and the previous four quarters.

(In thousands)

6 unchanged sentences

Total potential problem loans

At September 30, 2020 the Company had $101 thousand in potential problem loans that were past due at least 30 days, but less than 90 days.

The following table is a summary of the Company’s performing loans that were past due at least 30 days, but less than 90 days, for the third quarter of 2020 and the previous four quarters.

At March 31, 2021 the Company had $0.2 million in potential

problem loans that were past due at least 30 days, but less

than 90 days.

The following table is a summary of the Company’s

performing loans that were past due at least 30 days,

but less than

for the first quarter of 2021 and the previous four quarters

(In thousands)

5 unchanged sentences

Consumer installment

Total deposits were $824.0 million at September 30, 2020, compared to $724.2 million at December 31, 2019.

Noninterest-bearing deposits were $238.5 million, or 28.9% of total deposits, at September 30, 2020, compared to $196.2 million, or 27.1% of total deposits at December 31, 2019.

These increases reflect deposits from customers who received PPP loans, the impact of government stimulus checks, delayed tax payments and less customer spending during the COVID-19 pandemic.

The average rate paid on total interest-bearing deposits was 0.72% in the first nine months of 2020 compared to 0.79% in the first nine months of 2019.

Total deposits increased

$40.8 million, or 5% to $880.6 million at March 31,

2021, compared to $839.8 million at

December 31, 2020.

Noninterest-bearing deposits were $265.9 million, or 30

of total deposits, at March 31, 2021,

compared to $245.4 million, or 29%

of total deposits at December 31, 2020.

These increases reflect deposits from

customers who received PPP loans, the impact of government stimulus

checks, delayed tax payments

and less customer

spending during the COVID-19 pandemic.

The average rate paid on total interest-bearing deposits was 0.44

in the first quarter of 2021 compared to 0.78% in the

first quarter of 2020.

Other Borrowings

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

Short-term borrowings generally consist of federal funds purchased and agreements with certain customers to sell certain securities under agreements to repurchase with an original maturity less than one year.

The Bank had available federal funds lines totaling $41.0 million with none outstanding at September 30, 2020, and at December 31, 2019, respectively.

Securities sold under agreements to repurchase totaled $2.1 million at September 30, 2020, compared to $1.1 million at December 31, 2019.

The average rate paid on short-term borrowings was 0.50% in the first nine months of 2020 and 2019.

The Company had no long-term debt at September 30, 2020 and December 31, 2019.

Other borrowings consist of short-term borrowings and long-term

Short-term borrowings generally consist of federal

funds purchased and agreements with certain customers to sell certain

securities under agreements to repurchase with an

original maturity less than one year.

The Bank had available federal funds lines totaling $41.0

million with none

outstanding at March 31, 2021, and at December 31,

2020, respectively.

Securities sold under

agreements to repurchase

totaled $3.3 million at March 31, 2021, compared to $2.4

million at December 31, 2020.

The average rate paid on short-term borrowings was 0.50% in the first quarter

of 2021 and 2020.

The Company had no long-term debt at March 31, 2021

and December 31, 2020.

CAPITAL ADEQUACY

The Company’s consolidated stockholders’ equity was $106.3 million and $98.3 million as of September 30, 2020 and December 31, 2019, respectively.

The increase from December 31, 2019 was primarily driven by net earnings of $5.4 million and other comprehensive income due to the change in unrealized gains on securities available-for-sale, net of tax of $5.3 million, partially offset by cash dividends paid of $2.7 million.

On January 1, 2015, the Company and Bank became subject to the rules of the Basel III regulatory capital framework and related Dodd-Frank Wall Street Reform and Consumer Protection Act changes.

The rules included the implementation of a capital conservation buffer that is added to the minimum requirements for capital adequacy purposes.

The capital conservation buffer was subject to a three year phase-in period that began on January 1, 2016 and was fully phased-in on January 1, 2019 at 2.5%.

A banking organization with a conservation buffer of less than the required amount will be subject to limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers.

At September 30, 2020, the Bank’s ratio was sufficient to meet the fully phased-in conservation buffer.

Effective March 20, 2020, the Federal Reserve and the other federal banking regulators adopted an interim final rule that amended the capital conservation buffer.

The Company’s consolidated stockholders’

equity was $103.6 million and $107.7 million as of March 31,

December 31, 2020, respectively.

The decrease from December 31, 2020 was primarily driven by an

other comprehensive

loss due to the change in unrealized gains (losses) on securities

available-for-sale, net of tax of $5.1 million and

dividends paid of $0.9 million, partially offset by net

earnings of $2.0 million.

On January 1, 2015, the Company and Bank became subject

to the rules of the Basel III regulatory capital framework and

related Dodd-Frank Wall

Street Reform and Consumer Protection Act changes.

The rules included the implementation of a

capital conservation buffer that is added

to the minimum requirements for capital adequacy purposes.

conservation buffer was subject to a three year phase

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

January 1, 2019 at 2.5%.

A banking organization with a conservation buffer

of less than the required amount will be

subject to limitations on capital distributions, including dividend

payments and certain discretionary bonus payments to

executive officers.

At March 31, 2021, the Bank’s

ratio was sufficient to meet the fully phased-in conservation

Effective March 20, 2020, the Federal Reserve and

the other federal banking regulators adopted an interim final rule that

amended the capital conservation buffer.

The interim final rule was adopted as a final rule on August

The new rule revises the definition of “eligible retained income” for purposes of the maximum payout ratio to allow banking organizations to more freely use their capital buffers to promote lending and other financial intermediation activities, by making the limitations on capital distributions more gradual.

The eligible retained income is now the greater of (i) net income for the four preceding quarters, net of distributions and associated tax effects not reflected in net income;

and (ii) the average of all net income over the preceding four quarters.

The interim final rule only affects the capital buffers, and banking organizations were encouraged to make prudent capital distribution decisions.

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

Accordingly, our capital adequacy is evaluated at the Bank level, and not for the Company and its consolidated subsidiaries.

The Bank’s tier 1 leverage ratio was 10.62%, CET1 risk-based capital ratio was 17.70%, tier 1 risk-based capital ratio was 17.70%, and total risk-based capital ratio was 18.77% at September 30, 2020.

These ratios exceed the minimum regulatory capital percentages of 5.0% for tier 1 leverage ratio, 6.5% for CET1 risk-based capital ratio, 8.0% for tier 1 risk-based capital ratio, and 10.0% for total risk-based capital ratio to be considered “well capitalized.” The Bank’s capital conservation buffer was 10.38% at September 30, 2020.

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

of the maximum payout ratio to allow banking

organizations to more freely use their capital buffers

to promote lending and other financial intermediation activities,

making the limitations on capital distributions more gradual.

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

income for the four preceding quarters, net of distributions and

associated tax effects not reflected in net income;

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

The interim final rule only affects the capital buffers,

banking organizations were encouraged to make prudent

capital distribution decisions.

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

under the Federal Reserve’s policy.

our capital adequacy is evaluated at the Bank level, and not for

the Company and its consolidated subsidiaries.

tier 1 leverage ratio was 9.99%, CET1 risk-based capital ratio

was 17.21%, tier 1 risk-based capital ratio was 17.21%, and

total risk-based capital ratio was 18.25%

at March 31, 2021.

These ratios exceed the minimum regulatory capital

percentages of 5.0% for tier 1 leverage ratio, 6.5% for CET1

risk-based capital ratio, 8.0% for tier 1 risk-based capital ratio,

and 10.0% for total risk-based capital ratio to be considered

“well capitalized.”

The Bank’s capital conservation buffer

at March 31, 2021.

MARKET AND LIQUIDITY RISK MANAGEMENT

Management’s objective is to manage assets and liabilities to provide a satisfactory, consistent level of profitability within the framework of established liquidity, loan, investment, borrowing, and capital policies.

The Bank’s Asset Liability Management Committee (“ALCO”) is charged with the responsibility of monitoring these policies, which are designed to ensure an acceptable asset/liability composition.

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

Management’s objective is to manage

assets and liabilities to provide a satisfactory,

consistent level of profitability within

the framework of established liquidity,

loan, investment, borrowing, and capital policies.

Bank’s Asset Liability

Management Committee (“ALCO”) is charged with

the responsibility of monitoring these policies, which are designed

ensure an acceptable asset/liability composition.

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

risk management.

Interest Rate Risk Management

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

ALCO measures and evaluates interest rate risk so that the Bank can meet customer demands for various types of loans and deposits.

Measurements used to help manage interest rate sensitivity include an earnings simulation model and an economic value of equity (“EVE”) model.

In the normal course of business, the Company is exposed to

market risk arising from fluctuations in interest rates.

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

demands for various types of loans and

Measurements used to help manage interest rate sensitivity include

an earnings simulation model and an economic

value of equity (“EVE”) model.

Earnings simulation

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

Forecasted levels of earning assets, interest-bearing liabilities, and off-balance sheet financial instruments are combined with ALCO forecasts of market interest rates for the next 12 months and other factors in order to produce various earnings simulations and estimates.

To help limit interest rate risk, we have guidelines for earnings at risk which seek to limit the variance of net interest income from gradual changes in interest rates.

For changes up or down in rates from management’s flat interest rate forecast over the next 12 months, policy limits for net interest income variances are as follows:

Management believes that interest rate risk is best estimated by our

earnings simulation modeling.

Forecasted levels of earning assets, interest-bearing liabilities,

and off-balance sheet financial instruments are combined

with ALCO forecasts of market interest rates for the next 12

months and other factors in order to produce various earnings

simulations and estimates.

help limit interest rate risk, we have guidelines for earnings at

risk which seek to limit the

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

For changes up or down in rates from management’s

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

for net interest income variances are as follows:

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

2 unchanged sentences

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

At September 30, 2020, our earnings simulation model indicated that we were in compliance with the policy guidelines noted above.

Economic Value of Equity .

EVE measures the extent that the estimated economic values of our assets, liabilities, and off-balance sheet items will change as a result of interest rate changes.

Economic values are estimated by discounting expected cash flows from assets, liabilities, and off-balance sheet items, which establishes a base case EVE.

In contrast with our earnings simulation model, which evaluates interest rate risk over a 12 month timeframe, EVE uses a terminal horizon which allows for the re-pricing of all assets, liabilities, and off-balance sheet items.

Further, EVE is measured using values as of a point in time and does not reflect any actions that ALCO might take in responding to or anticipating changes in interest rates, or market and competitive conditions.

To help limit interest rate risk, we have stated policy guidelines for an instantaneous basis point change in interest rates, such that our EVE should not decrease from our base case by more than the following:

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

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

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

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

At September 30, 2020, our EVE model indicated that we were in compliance with the policy guidelines noted above.

Each of the above analyses may not, on its own, be an accurate indicator of how our net interest income will be affected by changes in interest rates.

Income associated with interest-earning assets and costs associated with interest-bearing liabilities may not be affected uniformly by changes in interest rates.

In addition, the magnitude and duration of changes in interest rates may have a significant impact on net interest income.

For example, although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates, and other economic and market factors, including market perceptions.

Interest rates on certain types of assets and liabilities fluctuate in advance of changes in general market rates, while interest rates on other types of assets and liabilities may lag behind changes in general market rates.

In addition, certain assets, such as adjustable rate mortgage loans, have features (generally referred to as “interest rate caps and floors”) which limit changes in interest rates.

Prepayment and early withdrawal levels also could deviate significantly from those assumed in calculating the maturity of certain instruments.

The ability of many borrowers to service their debts also may decrease during periods of rising interest rates or economic stress, which may differ across industries and economic sectors.

ALCO reviews each of the above interest rate sensitivity analyses along with several different interest rate scenarios in seeking satisfactory, consistent levels of profitability within the framework of the Company’s established liquidity, loan, investment, borrowing, and capital policies.

The Company may also use derivative financial instruments to improve the balance between interest-sensitive assets and interest-sensitive liabilities, and as a tool to manage interest rate sensitivity while continuing to meet the credit and deposit needs of our customers.

From time to time, the Company may enter into interest rate swaps to facilitate customer transactions and meet their financing needs.

These interest rate swaps qualify as derivatives, but are not designated as hedging instruments.

At September 30, 2020 and December 31, 2019, the Company had no derivative contracts designated as part of a hedging relationship to assist in managing its interest rate sensitivity.

At March 31, 2021, our earnings simulation model indicated

that we were in compliance with the policy guidelines noted

Economic Value

EVE measures the extent that the estimated economic values of our

assets, liabilities, and off-

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

Economic values are estimated by discounting expected

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

which establishes a base case EVE.

In contrast with our

earnings simulation model, which evaluates interest rate risk over a

12 month timeframe, EVE uses a terminal horizon

which allows for the re-pricing of all assets, liabilities, and off

-balance sheet items.

is measured using values

as of a point in time and does not reflect any actions that ALCO

might take in responding to or anticipating changes in

interest rates, or market and competitive conditions.

To help limit interest rate

risk, we have stated policy guidelines for an

instantaneous basis point change in interest rates, such that our EVE

should not decrease from our base case by more than

the following:

45% for an instantaneous change of +/-

400 basis points

35% for an instantaneous change of +/-

300 basis points

25% for an instantaneous change of +/-

200 basis points

15% for an instantaneous change of +/-

100 basis points

At March 31, 2021, our EVE model indicated that we were in

compliance with the policy guidelines noted above.

Each of the above analyses may not, on its own, be an accurate

indicator of how our net interest income will be affected

changes in interest rates.

Income associated with interest-earning assets

and costs associated with interest-bearing liabilities

may not be affected uniformly by changes in interest rates.

In addition, the magnitude and duration of changes in interest

rates may have a significant impact on net interest income.

example, although certain assets and liabilities may have

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

degrees to changes in market interest rates, and other

economic and market factors, including market perceptions.

rates on certain types of assets and liabilities fluctuate

in advance of changes in general market rates, while interest

rates on other types of assets and liabilities may lag behind

changes in general market rates.

In addition, certain assets, such as

adjustable rate mortgage loans, have features (generally

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

in interest rates.

Prepayment and early withdrawal levels

also could deviate significantly from those assumed in calculating the maturity

of certain instruments.

The ability of many

borrowers to service their debts also may decrease during periods

of rising interest rates or economic stress, which may

differ across industries and economic sectors.

each of the above interest rate sensitivity analyses along with

several different interest rate scenarios in seeking satisfactory

consistent levels of profitability within the framework of the

Company’s established liquidity,

loan, investment, borrowing, and capital policies.

The Company may also use derivative financial instruments

to improve the balance between interest-sensitive assets and

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

sensitivity while continuing to meet the credit and deposit

needs of our customers.

From time to time, the Company may

enter into interest rate swaps to facilitate customer

transactions and meet their financing needs.

These interest rate

swaps qualify as derivatives, but are not designated as

hedging instruments.

At March 31, 2021 and December 31,

2020, the Company had no derivative contracts designated as

part of a hedging relationship to assist in managing its interest

rate sensitivity.

Liquidity Risk Management

Liquidity is the Company’s ability to convert assets into cash equivalents in order to meet daily cash flow requirements, primarily for deposit withdrawals, loan demand and maturing obligations.

Without proper management of its liquidity, the Company could experience higher costs of obtaining funds due to insufficient liquidity, while excessive liquidity can lead to a decline in earnings due to the cost of foregoing alternative higher-yielding investment opportunities.

Liquidity is the Company’s ability

to convert assets into cash equivalents in order

to meet daily cash flow requirements,

primarily for deposit withdrawals, loan demand and maturing obligations.

Without proper management of its liquidity,

Company could experience higher costs of obtaining funds due to

insufficient liquidity, while

excessive liquidity can lead

to a decline in earnings due to the cost of foregoing alternative

higher-yielding investment opportunities.

Liquidity is managed at two levels.

The first is the liquidity of the Company.

The second is the liquidity of the Bank.

The management of liquidity at both levels is essential, because the Company and the Bank are separate and distinct legal entities with different funding needs and sources, and each are subject to regulatory guidelines and requirements.

The Company depends upon dividends from the Bank for liquidity to pay its operating expenses, debt obligations and dividends.

The Bank’s payment of dividends depends on its earnings, liquidity, capital and the absence of any regulatory restrictions.

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

If needed, the Company could also issue common stock or other securities.

Primary uses of funds by the Company include dividends paid to stockholders and stock repurchases.

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

The Bank has access to federal funds lines from various banks and borrowings from the Federal Reserve discount window.

In addition to these sources, the Bank may participate in the FHLB’s advance program to obtain funding for its growth.

Advances include both fixed and variable terms and may be taken out with varying maturities.

At September 30, 2020, the Bank had a remaining available line of credit with the FHLB of $282.9 million.

At September 30, 2020, the Bank also had $41.0 million of available federal funds lines with no borrowings outstanding.

Primary uses of funds include repayment of maturing obligations and growing the loan portfolio.

Management believes that the Company and the Bank have adequate sources of liquidity to meet all their respective known contractual obligations and unfunded commitments, including loan commitments and reasonable borrower, depositor, and creditor requirements over the next twelve months.

Off-Balance Sheet Arrangements, Commitments, Contingencies and Contractual Obligations

At September 30, 2020, the Bank had outstanding standby letters of credit of $1.1 million and unfunded loan commitments outstanding of $75.5 million.

Because these commitments generally have fixed expiration dates and many will expire without being drawn upon, the total commitment level does not necessarily represent future cash requirements.

If needed to fund these outstanding commitments, the Bank could liquidate federal funds sold or a portion of securities available-for-sale, or draw on its available credit facilities.

The first is the liquidity of

is the liquidity of the Bank.

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

and the Bank are separate and distinct legal

entities with different funding needs and sources, and each

are subject to regulatory guidelines and requirements.

Company depends upon dividends from the Bank for liquidity to

pay its operating expenses, debt obligations and

The Bank’s payment of dividends

depends on its earnings, liquidity,

capital and the absence of any regulatory

restrictions.

The primary source of funding and liquidity for the Company has

been dividends received from the Bank.

If needed, the

Company could also issue common stock or other securities.

Primary uses of funds by the Company include dividends paid

to stockholders, Company stock repurchases,

and Company expenses.

Primary sources of funding for the Bank include customer deposits,

other borrowings, repayment and maturity of securities,

sales of securities, and the sale and repayment of loans.

Bank has access to federal funds lines from various banks and

borrowings from the Federal Reserve discount window.

In addition to these sources, the Bank may participate in the

FHLB’s advance program to obtain

funding for its growth.

Advances include both fixed and

variable terms and may be

taken out with varying maturities.

At March 31, 2021,

the Bank had a remaining available line of credit with the FHLB of

$286.9 million.

At March 31, 2021, the Bank also had $41.0

million of available federal funds lines with no borrowings

Primary uses of funds include repayment of maturing obligations

and growing the loan portfolio.

Management believes that the Company and the Bank have adequate

sources of liquidity to meet all their respective known

contractual obligations and unfunded commitments, including

loan commitments and reasonable borrower,

depositor, and

creditor requirements over the next twelve months.

Off-Balance Sheet Arrangements, Commitments, Contingencies

and Contractual Obligations

At March 31, 2021, the Bank had outstanding standby letters of credit

million and unfunded loan commitments

outstanding of $72.1 million.

Because these commitments generally have fixed expiration dates

and many will expire

without being drawn upon, the total commitment level does not

necessarily represent future cash requirements.

fund these outstanding commitments, the Bank could liquidate

federal funds sold or a portion of securities available-for-

sale, or draw on its available credit facilities.

Mortgage lending activities

Since 2009, we have primarily sold residential mortgage loans in the secondary market to Fannie Mae while retaining the servicing of these loans.

The sale agreements for these residential mortgage loans with Fannie Mae and other investors include various representations and warranties regarding the origination and characteristics of the residential mortgage loans.

Although the representations and warranties vary among investors, they typically cover ownership of the loan, validity of the lien securing the loan, the absence of delinquent taxes or liens against the property securing the loan, compliance with loan criteria set forth in the applicable agreement, compliance with applicable federal, state, and local laws, among other matters.

As of September 30, 2020 , the unpaid principal balance of residential mortgage loans, which we have originated and sold, but retained the servicing rights was $266.4 million.

Although these loans are generally sold on a non-recourse basis, we may be obligated to repurchase residential mortgage loans or reimburse investors for losses incurred (make whole requests) if a loan review reveals a potential breach of seller representations and warranties.

Upon receipt of a repurchase or make whole request, we work with investors to arrive at a mutually agreeable resolution.

Repurchase and make whole requests are typically reviewed on an individual loan by loan basis to validate the claims made by the investor and to determine if a contractually required repurchase or make whole event has occurred.

We seek to reduce and manage the risks of potential repurchases, make whole requests, or other claims by mortgage loan investors through our underwriting and quality assurance practices and by servicing mortgage loans to meet investor and secondary market standards.

The Company was not required to repurchase any loans during the first nine months of 2020 as a result of representation and warranty provisions contained in the Company’s sale agreements with Fannie Mae, and had no pending repurchase or make-whole requests at September 30, 2020.

We service all residential mortgage loans originated and sold by us to Fannie Mae.

We primarily sell residential

mortgage loans in the secondary market to Fannie Mae while

retaining the servicing of these

The sale agreements for these residential mortgage loans with

Fannie Mae and other investors include various

representations and warranties regarding the origination and

characteristics of the residential mortgage loans.

representations and warranties vary among investors, they typically

cover ownership of the loan, validity of the lien

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

property securing the loan, compliance with loan

criteria set forth in the applicable agreement, compliance with

applicable federal, state, and local laws, among other

As of March 31, 2021,

the unpaid principal balance of residential mortgage loans, which we

have originated and sold, but

retained the servicing rights was $263.7 million.

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

be obligated to repurchase residential mortgage loans or reimburse

investors for losses incurred (make whole requests) if a

loan review reveals a potential breach of seller representations and

Upon receipt of a repurchase or make whole

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

Repurchase and make whole requests are

typically reviewed on an individual loan by loan basis to validate

the claims made by the investor and to determine if a

contractually required repurchase or make whole event has occurred.

We seek to reduce

and manage the risks of potential

repurchases, make whole requests, or other claims by mortgage

loan investors through our underwriting and quality

assurance practices and by servicing mortgage loans to meet investor

and secondary market standards.

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

quarter of 2021 as a result of representation and

warranty provisions contained in the Company’s

sale agreements with Fannie Mae, and had no pending repurchase

make-whole requests at March 31, 2021.

We service all residential

mortgage loans originated and sold by us to Fannie Mae.

As servicer, our primary duties are to:

1 unchanged sentence

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

(3) maintain and administer any hazard, title, or primary mortgage insurance policies relating to the mortgage loans;

(4) maintain any required escrow accounts for payment of taxes and insurance and administer escrow payments;

and (5) foreclose on defaulted mortgage loans or take other actions to mitigate the potential losses to investors consistent with the agreements governing our rights and duties as servicer.

The agreement under which we act as servicer generally specifies a standard of responsibility for actions taken by us in such capacity and provides protection against expenses and liabilities incurred by us when acting in compliance with the respective servicing agreements.

However, if we commit a material breach of our obligations as servicer, we may be subject to termination if the breach is not cured within a specified period following notice.

The standards governing servicing and the possible remedies for violations of such standards are determined by servicing guides issued by Fannie Mae as well as the contract provisions established between Fannie Mae and the Bank.

Remedies could include repurchase of an affected loan.

Although repurchase and make whole requests related to representation and warranty provisions and servicing activities have been limited to date, it is possible that requests to repurchase mortgage loans or reimburse investors for losses incurred (make whole requests) may increase in frequency if investors more aggressively pursue all means of recovering losses on their purchased loans.

As of September 30, 2020 , we do not believe that this exposure is material due to the historical level of repurchase requests and loss trends, in addition to the fact that 99% of our residential mortgage loans serviced for Fannie Mae were current as of such date.

We maintain ongoing communications with our investors and will continue to evaluate this exposure by monitoring the level and number of repurchase requests as well as the delinquency rates in our investor portfolios.

Section 4021 of the CARES Act allows borrowers under 1-to-4 family residential mortgage loans sold to Fannie Mae to request forbearance to the servicer after affirming that such borrower is experiencing financial hardships during the COVID-19 emergency.

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

During forbearance, no fees, penalties or interest shall be charged beyond those applicable if all contractual payments were fully and timely paid.

Except for vacant or abandoned properties, Fannie Mae servicers may not initiate foreclosures on similar procedures or related evictions or sales until December 31, 2020.

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

As a result, the Bank is not obligated to make any advances to Fannie Mae on principal and interest on such mortgage loans where the borrower is entitled to forbearance.

and administer any hazard, title, or primary mortgage insurance policies

relating to the mortgage loans;

(4) maintain any

required escrow accounts for payment of taxes and insurance

and administer escrow payments;

and (5) foreclose on

defaulted mortgage loans or take other actions to mitigate the

potential losses to investors consistent with the agreements

governing our rights and duties as servicer.

The agreement under which we act as servicer generally specifies

a standard of responsibility for actions taken by us in

such capacity and provides protection against expenses and liabilities incurred

by us when acting in compliance with the

respective servicing agreements.

However, if we commit a material breach

of our obligations as servicer,

subject to termination if the breach is not cured within a specified

period following notice.

The standards governing

servicing and the possible remedies for violations of such standards

are determined by servicing guides issued by Fannie

Mae as well as the contract provisions established between Fannie Mae

and the Bank.

Remedies could include repurchase

of an affected loan.

Although repurchase and make whole requests related to representation

and warranty provisions and servicing activities

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

loans or reimburse investors for losses incurred

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

aggressively pursue all means of recovering losses on

their purchased loans.

As of March 31, 2021,

we do not believe that this exposure is material due to the historical level of

repurchase requests and loss trends, in addition to the fact that

of our residential mortgage loans serviced for Fannie

Mae were current as of such date.

We maintain ongoing

communications with our investors and will continue to evaluate

this exposure by monitoring the level and number of repurchase

requests as well as the delinquency rates in our investor

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

residential mortgage loans sold to Fannie Mae to

request forbearance to the servicer after affirming that

such borrower is experiencing financial hardships during the

COVID-19 emergency.

Such forbearance will be up to 180 days, subject to

up to a 180 day extension.

During forbearance,

no fees, penalties or interest shall be charged beyond

those applicable if all contractual payments were fully and timely

Except for vacant or abandoned properties, Fannie Mae servicers may not

initiate foreclosures on similar procedures

or related evictions or sales until December 31,

The Bank sells mortgage loans to Fannie Mae and services these on

an actual/actual basis.

As a result, the Bank is not obligated to

make any advances to Fannie Mae on principal and interest

on such mortgage loans where the borrower is entitled to forbeara

Effects of Inflation and Changing Prices

The consolidated financial statements and related consolidated financial data presented herein have been prepared in accordance with U.S.

GAAP and practices within the banking industry which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation.

Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature.

As a result, interest rates have a more significant impact on a financial institution’s performance than the effects of general levels of inflation.

The consolidated financial statements and related consolidated

financial data presented herein have been prepared in

accordance with U.S.

GAAP and practices within the banking industry

which require the measurement of financial position

and operating results in terms of historical dollars without considering

the changes in the relative purchasing power of

money over time due to inflation.

Unlike most industrial companies,

virtually all the assets and liabilities of a financial

institution are monetary in nature.

As a result, interest rates have a more significant

impact on a financial institution’s

performance than the effects of general levels of inflation.

CURRENT ACCOUNTING DEVELOPMENTS

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

 ASU 2016-13, Financial Instruments – Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments;

Information about these pronouncements is described in more detail below.

ASU 2016-13, Financial Instruments - Credit Losses (Topic 326):

- Measurement of Credit Losses on Financial Instruments , amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities.

For assets held at amortized cost basis, the new standard eliminates the probable initial recognition threshold in current GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses using a broader range of information regarding past events, current conditions and forecasts assessing the collectability of cash flows.

The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected.

For available for sale debt securities, credit losses should be measured in a manner similar to current GAAP, however the new standard will require that credit losses be presented as an allowance rather than as a write-down.

The new guidance affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income.

The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash.

For public business entities, the new guidance was originally effective for annual and interim periods in fiscal years beginning after December 15, 2019.

The Company has developed an implementation team that is following a general timeline.

The team has been working with an advisory consultant, with whom a third-party software license has been purchased.

The Company’s preliminary evaluation indicates the provisions of ASU No.

2016-13 are expected to impact the Company’s consolidated financial statements, in particular the level of the reserve for credit losses.

The Company is continuing to evaluate the extent of the potential impact and expects that portfolio composition and economic conditions at the time of adoption will be a factor.

On October 16, 2019, the FASB approved a previously issued proposal granting smaller reporting companies a postponement of the required implementation date for ASU 2016-13.

The Company will now be required to implement the new standard in January 2023, with early adoption permitted in any period prior to that date.

Table 1 – Explanation of Non-GAAP Financial Measures

The following ASUs have been issued by the FASB

but are not yet effective.

Financial Instruments – Credit Losses (Topic

Measurement of Credit Losses on

Information about these pronouncements is described in more

detail below.

Financial Instruments - Credit Losses (Topic

- Measurement of Credit

Losses on Financial

, amends guidance on reporting credit losses for assets held at

amortized cost basis and available for sale debt

For assets held at amortized cost basis, the new standard eliminates the

probable initial recognition threshold in

current GAAP and, instead, requires an entity to reflect its current estimate

of all expected credit losses using a broader

range of information regarding past events, current conditions and

forecasts assessing the collectability of cash flows.

allowance for credit losses is a valuation account that is deducted

from the amortized cost basis of the financial assets to

present the net amount expected to be collected.

For available for sale debt securities, credit losses should be measured in

manner similar to current GAAP,

however the new standard will require that credit losses be

presented as an allowance

rather than as a write-down.

The new guidance affects entities holding financial assets

and net investment in leases that are

not accounted for at fair value through net income.

The amendments

affect loans, debt securities, trade receivables, net

investments in leases, off-balance sheet credit exposures,

reinsurance receivables, and any other financial assets not

excluded from the scope that have the contractual right to receive

For public business entities, the new guidance was

originally effective for annual and interim periods

in fiscal years beginning after December 15, 2019.

The Company has

developed an implementation team that is following a gener

The team has been working with an advisory

consultant, with whom a third-party software license has been purchased.

The Company’s preliminary evaluation

the provisions of ASU No.

2016-13 are expected to impact the Company’s

consolidated financial statements, in particular

the level of the reserve for credit losses.

The Company is continuing to evaluate the extent of the potential

expects that portfolio composition and economic conditions at

the time of adoption will be a factor.

On October 16, 2019,

the FASB approved

a previously issued proposal granting smaller reporting companies a postponement

of the required

implementation date for ASU 2016-13.

The Company will now be required to implement the new standard

2023, with early adoption permitted in any period prior

to that date.

– Explanation of Non-GAAP Financial Measures

In addition to results presented in accordance with U.S.

generally accepted accounting principles (GAAP), this quarterly report on Form 10-Q includes certain designated net interest income amounts presented on a tax-equivalent basis, a non-GAAP financial measure, including the presentation and calculation of the efficiency ratio.

The Company believes the presentation of net interest income on a tax-equivalent basis provides comparability of net interest income from both taxable and tax-exempt sources and facilitates comparability within the industry.

Although the Company believes these non-GAAP financial measures enhance investors’ understanding of its business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP.

The reconciliations of these non-GAAP financial measures to their most directly comparable GAAP financial measures are presented below.

(in thousands)

Net interest income (GAAP)

Tax-equivalent adjustment

Net interest income (Tax-equivalent)

Nine months ended September 30,

accepted accounting principles (GAAP), this quarterly

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

amounts presented on a tax-equivalent basis, a non-

GAAP financial measure, including the presentation and calculation of

the efficiency ratio.

The Company believes the presentation of net interest income

on a tax-equivalent basis provides comparability of net

interest income from both taxable and tax-exempt sources and

facilitates comparability within the industry.

Company believes these non-GAAP financial measures enhance

investors’ understanding of its business and performance,

these non-GAAP financial measures should not be considered

an alternative to GAAP.

The reconciliations

of these non-

GAAP financial measures to their most directly comparable

GAAP financial measures are presented below.

(in thousands)

1 unchanged sentence

Tax-equivalent adjustment

Net interest income (Tax-equivalent)

Table 2 - Selected Quarterly Financial Data

(Dollars in thousands, except per share amounts)

Results of Operations

Net interest income (a)

tax-equivalent adjustment

Net interest income (GAAP)

Noninterest income

Total revenue

Provision for loan losses

Noninterest expense

Income tax expense

Per share data:

Basic and diluted net earnings

Cash dividends declared

Weighted average shares outstanding:

Basic and diluted

Shares outstanding, at period end

Common stock price

To earnings ratio

To book value

Performance ratios:

Return on average equity

Return on average assets

Dividend payout ratio

Asset Quality:

Allowance for loan losses as a % of:

Nonperforming loans

Nonperforming assets as a % of:

Loans and foreclosed properties

Nonperforming loans as a % of total loans

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

Capital Adequacy:

CET 1 risk-based capital ratio

Tier 1 risk-based capital ratio

Total risk-based capital ratio

Tier 1 leverage ratio

Other financial data:

Net interest margin (a)

Effective income tax rate

Efficiency ratio (b)

Selected average balances:

Loans, net of unearned income

Total deposits

Total stockholders’ equity

Selected period end balances:

Loans, net of unearned income

Allowance for loan losses

Total deposits

Total stockholders’ equity

(a) Tax-equivalent.

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

(b) Efficiency ratio is the result of noninterest expense divided by the sum of noninterest income and tax-equivalent net interest income.

Table 3 - Selected Financial Data

Nine months ended September 30,

Net interest income (Tax

- Selected Quarterly Financial Data

(Dollars in thousands, except per share amounts)

27 unchanged sentences

Nonperforming loans as a % of total loans

Annualized net recoveries as a % of average loans

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

Capital Adequacy:

18 unchanged sentences

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

(b) Efficiency ratio is the result of noninterest expense divided by the sum of noninterest income and tax-equivalent net interest income.

Table 4 - Average Balances and Net Interest Income Analysis

Quarter ended September 30,

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

noninterest income and tax-equivalent net interest income.

wholly-owned subsidiary, AuburnBank.

Balances and Net Interest Income Analysis

Quarter ended March 31,

(Dollars in thousands)

17 unchanged sentences

Stockholders' equity

Total liabilities and stockholders' equity

Net interest income and margin (tax-equivalent)

(1) Average loan balances are shown net of unearned income and loans on nonaccrual status have been included

in the computation of average balances.

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

tax rate of 21%.

Table 5 - Average Balances and Net Interest Income Analysis

Nine months ended September 30,

(Dollars in thousands)

Interest-earning assets:

Loans and loans held for sale (1)

Securities - taxable

Securities - tax-exempt (2)

Total securities

Federal funds sold

Interest bearing bank deposits

Total interest-earning assets

Cash and due from banks

Interest-bearing liabilities:

Savings and money market

Time deposits

Total interest-bearing deposits

Short-term borrowings

Total interest-bearing liabilities

Noninterest-bearing deposits

Other liabilities

Total liabilities and

stockholders' equity

Total liabilities and stockholders' equity

Net interest income and margin (tax-equivalent)

(1) Average loan balances are shown net of unearned income and loans on nonaccrual status have been included

(1) Average loan balances

are shown net of unearned income and loans on nonaccrual status

have been included

in the computation of average balances.

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

(2) Yields on tax-exempt securities

have been computed on a tax-equivalent basis using a federal income

tax rate of 21%.

Table 6 - Loan Portfolio Composition

- Loan Portfolio Composition

(In thousands)

7 unchanged sentences

allowance for loan losses

Table 7 - Allowance for Loan Losses and Nonperforming Assets

- Allowance for Loan Losses and Nonperforming Assets

(Dollars in thousands)

2 unchanged sentences

Commercial and industrial

Residential real estate

Consumer installment

Total charge-offs

Net recoveries (charge-offs)

2 unchanged sentences

as a % of loans

as a % of loans (excluding PPP loans)

as a % of nonperforming loans

4 unchanged sentences

Total nonperforming assets

as a % of loans and foreclosed properties

as a % of loans and other real estate owned

as a % of total assets

2 unchanged sentences

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

Table 8 - Allocation of Allowance for Loan Losses

Third Quarter

Second Quarter

- Allocation of Allowance for Loan Losses

First Quarter

1 unchanged sentence

Third Quarter

Second Quarter

First Quarter

(Dollars in thousands)

4 unchanged sentences

Consumer installment

Total allowance for

Total allowance for loan losses

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

Table 9 - CDs and Other Time Deposits of $100,000 or More

- CDs and Other Time Deposits of $100,000

(Dollars in thousands)

September 30, 2020

March 31, 2021

3 months or less

2 unchanged sentences

Over 12 months

Total CDs and other time deposits of $100,000 or more

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information called for by ITEM 3 is set forth in ITEM 2 under the caption “MARKET AND LIQUIDITY RISK MANAGEMENT” and is incorporated herein by reference.

Total CDs and other

time deposits of $100,000 or more

AND QUALITATIVE

DISCLOSURES ABOUT MARKET RISK

The information called for by ITEM 3 is set forth in ITEM

2 under the caption “MARKET AND LIQUIDITY RISK

MANAGEMENT” and is incorporated herein by reference.

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-Q

Item 2. Management’s Discussion and Analysis