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Item 2. Management’s Discussion and Analysis

2021-10-29 compared with 2021-07-30 · 1087 added, 1219 removed, 704 unchanged (77% of the section changed)

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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

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 six months ended June 30, 2021

and 2020, as well as the information contained in our Annual

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

2020 and our Quarterly Reports on Form 10-Q.

highlight information contained in the accompanying unaudited condensed consolidated

financial statements and related

notes for the quarters and nine months ended September 30, 2021 and 2020,

as well as the information contained in our

annual report on Form 10-K for the year ended December 31, 2020 and our

interim reports on Form 10-Q for the quarters

ended March 31, 2021 and June 30, 2021.

Special Notice Regarding Forward-Looking Statements

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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.

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, 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

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,” “expec

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

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

expressions of the future.

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,

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

the effects of future economic, business and market conditions and

changes, foreign, domestic and locally,

including seasonality, natural

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

hurricanes and

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;

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

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

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

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

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

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 Bank;

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;

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

costly, or less effective than

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

our vendor systems

or customers’

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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

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.

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“RISK FACTORS”.

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

are attributable to us are expressly qualified in their

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.

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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

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,

(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 1984.

The Company and its predecessor have controlled the Bank

As a bank holding

company, the Company may diversify

into a broader range of financial services and other business activities

than currently

company, the Company

may diversify into a broader range of financial services and other business activities than currentl

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

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

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 1995.

Bank’s primary regulators are

the Federal Reserve and the Alabama Superintendent of Banks (the

Bank’s primary regulators are the Federal

Reserve and the Alabama Superintendent of Banks (the “Alabama

Superintendent”).

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

Atlanta (the “FHLB”) since 1991.

Certain of the statements made in this discussion and analysis and

elsewhere, including information incorporated

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

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

The Bank has been a member of the Federal Home Loan Bank of Atlanta (the “FHLB”)

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”).

Summary of Results of Operations

Quarter ended June 30,

Six months ended June 30,

Quarter ended September 30,

Nine months ended September 30,

(Dollars in thousands, except per share amounts)

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(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 $6.2

million for the first six months of 2021, compared to $3.5

million for the first six

million for the first nine months of 2021, compared to $5.4 million for the first nine

months of 2020.

Basic and diluted earnings per share were $1.21 per

share for the first six months of 2021, compared to

$0.97 per share for the first six months of 2020.

Total revenue declined

approximately 5% due to reduced net interest margin,

reduced mortgage lending income and

approximately 1% lower outstanding loans compared to

June 30, 2020.

Net interest income (tax-equivalent) was $12.2 million for the

first six months of 2021, a 3% decrease compared to $12.5

million for the first six months of 2020.

This decrease was primarily due to net interest margin

compression resulting from

the Federal Reserve’s interest rate

reductions and bond purchases in response to COVID-19.

Our securities holdings,

which generally yield less than loans, increased as a percentage

of our total assets reflecting deployment of increased

Net interest margin (tax-equivalent) decreased

to 2.63% in the first six months of 2021, compared to

the first six months of 2020,

primarily due to the lower interest rate environment and changes in

our asset mix resulting

from the significant increase in deposits from government stimulus

and relief programs and customers’ increased savings.

Net interest income (tax-equivalent) included $0.5 million in PPP

loan fees, net of related costs for the six months of 2021,

compared to $0.2 million for the six months of 2020.

At June 30, 2021, the Company’s allowance

for loan losses was $5.1 million, or 1.12%

of total loans, compared to $5.6

Basic and diluted earnings per share were $1.74 per share for the first nine

months of 2021, compared to

$1.51 per share for the first nine months of 2020.

Net interest income (tax-equivalent) was $18.3 million for the first nine

months of 2021, a 1% decrease compared to $18.5

million for the first nine months of 2020.

This decrease was primarily due to net interest margin compression

from the Federal Reserve’s interest

rate reductions and bond purchases in response to the COVID-19 pandemic.

securities holdings, which generally yield less than loans, increased as a percentage

of our total assets reflecting deployment

of increased deposits.

Net interest margin (tax-equivalent) de

creased to 2.59% in the first nine months of 2021, compared to

for the first nine months of 2020,

primarily due to the continued lower interest rate environment and changes in our

asset mix resulting from the significant increase in deposits from government

stimulus and relief programs and customers’

increased savings.

Net interest income (tax-equivalent) included $0.8

million in PPP loan fees, net of related costs for the

nine months ended of 2021, compared to $0.5 million for the the nine months ended

At September 30, 2021, the Company’s

allowance for loan losses was $5.1 million, or 1.13% of total loans, compared

$5.6 million, or 1.22%

of total loans, at December 31, 2020, and $5.3 million, or 1.1

4% of total loans, at June 30, 2020.

of total loans, at December 31, 2020, and $5.6 million, or 1.18% of total loans, at September 30,

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

allowance for loan losses was 1.17%

of total loans

at June 30, 2021.

The Company had a negative provision for loan losses of $0.6

million during the first six months of

compared to a provision for loan losses of $0.9

million during the first six months of 2020.

The negative provision

for loan losses was primarily related to improvements in economic conditions

in our primary market area,

improvements in our asset quality.

allowance for loan losses was 1.16% of

total loans at September 30, 2021.

The Company recorded a negative provision for loan losses of $0.6 million during the

first nine months of 2021,

compared to a provision for loan losses of $1.1 million during the first nine months of 2020.

negative provision for loan losses was primarily related to improvements in economic conditions

in our primary market

area, and related improvements in our asset quality.

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 $2.3 million for the first six months

of 2021 compared to $2.6 million for the first six months of

The decrease was primarily due to a $0.3 million non-taxable

death benefit from bank-owned life insurance received

Noninterest expense was $9.6 million for the first six months

of 2021 compared to $9.8 million for the first six months of

The decrease was primarily due to a reduction of $0.7 million in various

expenses related to the redevelopment of

judgements, including the absolute level of loans, loan growth, credit quality and the amount of

net charge-offs.

Noninterest income was $3.2 million for the first nine months of 2021 compared

to $4.0 million for the first nine months of

The decrease was primarily due to a $0.3 million non-taxable death benefit from bank-owned

life insurance received

and a $0.4 million decrease in mortgage lending income in 2021 as refinance activity declined

in our primary

Noninterest expense was $14.3 million for the first nine months of 2021

compared to $14.5 million for the first nine months

The decrease was primarily due to a reduction of $0.7

million in various expenses related to the redevelopment of

the Company’s headquarters in downtown

This decrease was mostly offset by increases in salaries

expense of $0.3 million and other noninterest expense of $0.2

million during the first six months of 2021.

Income tax expense was $0.9 million for the first six months

of 2021 compared to $0.8 million during the first six months

reflecting an increase in earnings before tax and effective

tax rate of 17.76% and 17.86%, respectively.

The Company paid cash dividends of $0.52 per share in the first six months

of 2021, an increase of 2% from the same

This decrease was mostly offset by increases in salaries and benefits

expense of $0.3 million and other noninterest expense of $0.2 million during the

first nine months of 2021.

Income tax expense was $1.3 million for the first nine months of 2021

compared to $1.2 million during the first nine

months of 2020,

reflecting an increase in earnings before taxes and an effective tax rate of 17.

55% and 17.64%,

respectively.

The Company paid cash dividends of $0.78 per share in the first nine months of 2021,

an increase of 2% from the same

period of 2020.

Our $0.8 million of share repurchases since June 30, 2020

resulted in 20,511 fewer outstanding common

shares at June 30, 2021.

At June 30, 2021, the Bank’s regulatory capital

ratios were well above the minimum amounts

required to be “well capitalized” under current regulatory standa

rds with a total risk-based capital ratio of 17.94%, a tier

leverage ratio of 9.81%

The Company’s share repurchases of $1.3

million since December 31, 2020 resulted in 37,093 fewer

outstanding common shares at September 30, 2021.

At September 30, 2021, 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 17.72%, a tier 1 leverage ratio of 9.57%

and a common equity

tier 1 (“CET1”) ratio of 17.03%

at June 30, 2021.

For the second quarter of 2021, net earnings were $2.3

million, or $0.65 per share, compared to $1.7 million, or $0.47

share, for the second quarter of 2020.

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

a 2% decrease compared to $6.2 million for the second quarter

This decrease was primarily due to net interest

margin compression resulting from the Federal Reserve’s

interest rate reductions and bond purchases in response

Our securities holdings, which generally yield less than loans, increased

as a percentage of our total assets

reflecting deployment of increased deposits.

tier 1 (“CET1”) ratio of 16.82% at September

For the third quarter of 2021, net earnings were $1.9 million, or $0.53 per

share, compared to $1.9 million, or $0.54 per

share, for the third quarter of 2020.

Net interest income (tax-equivalent) was $6.2 million for the third quarter of 2021,

3% increase compared to $6.0

million for the third quarter of 2020.

This increase was primarily due to balance sheet

growth, partially offset by a decrease in net interest margin.

The Company’s net interest margin

(tax-equivalent) decreased to 2.60% in the

second quarter of 2021, compared to 2.95% for the second

quarter of 2020 primarily due to the lower rate environment and

changes in our asset mix resulting from the significant increase in deposits

from government stimulus and relief programs

and customers’ increased savings.

(tax-equivalent) decreased

in the third quarter of 2021,

compared to 2.72% for the third quarter of 2020 primarily due to the lower interest

rate environment and changes in our asset mix resulting from the significant increase

in deposits from government stimulus

and relief programs and customers’ increased savings.

Net interest income (tax-equivalent)

included $0.2 million in PPP loan fees, net of

related costs for both the second quarter of 2021 and

The Company recorded a negative provision for loan losses of

$0.6 million during the second quarter of 2021 compared

to $0.5 million in provision for loan losses during the second

quarter 2020.

The negative provision for loan losses was primarily related to

improvements in economic conditions in our

primary market areas, and related improvements in our asset quality.

Noninterest income was $1.1 million in the second

quarter of 2021, compared to $1.4 million in the second quarter

The decrease in noninterest income was primarily

due to a decrease in mortgage lending income of $0.3 million

as refinance activity slowed in our primary market area.

Noninterest expense was $4.9 million in the second quarter of

2021 compared to $5.0 million during the second quarter of

included $0.3 million in PPP

loan fees, net of related costs for both the third quarter of 2021 and 2020.

The Company had no provision for loan losses

during the third quarter of 2021 compared to $0.3 million in provision for loan losses during

the third quarter 2020.

Noninterest income was $1.0 million in the third quarter of 2021, compared to

$1.4 million in the third quarter of 2020.

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

income of $0.4 million as

refinance activity slowed in our primary market area.

Noninterest expense was $4.7 million in the third quarter of 2021,

largely unchanged, compared to the third quarter of 2020.

Income tax expense was $0.4

million for the second quarter of 2021 compared to $0.4 million during second

of 2020 reflecting an increase in earnings before taxes.

The Company's effective tax rate for the second

quarter of 2021

was 18.06%, compared to 17.93% in the second quarter of 2020.

million for the third quarter of

2021 and 2020, respectively.

The Company's effective tax rate for the third quarter of 2021

was 17.07%, compared to

in the third quarter of 2020.

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

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.

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

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, at times, especially in 2020, 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-

Though certain of these measures have been relaxed or

increases in reported cases could cause these measures to be

reestablished.

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

remainder of the 2021 school year, which involves

resumption of full on-site operations as well as other measures.

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

source of economic activity in Lee County,

went to remote

instruction on March 16, 2020.

Auburn University has guidelines for the remainder of the 2021 school year,

involves resumption of full on-site operations as well as other measures.

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.

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

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

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We have implemented

a number of procedures in response to the pandemic to support

the safety and well-being of our

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

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

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.

As permitted by state public health guidelines, on June 1, 2020,

we re-opened some of our branch lobbies.

we opened our remaining branch lobbies.

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.

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

As part of our efforts to exercise social distancing in accordance with

the guidelines of the Centers for Disease Control, starting March 23,

2020, we limited branch lobby service to appointment

only while continuing to operate our branch drive-thru facilities and

As permitted by state public health guidelines,

on June 1, 2020, we re-opened some of our branch lobbies.

In 2021, we opened our remaining branch lobbies.

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

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;

were a participating lender in the PPP.

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

for payroll and other permitted purposes in accordance with

the requirements of the PPP.

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

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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

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

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We believe these loans

participation in the program is good for our customers and the

communities we serve.

participation in the program is good for our customers and the communities we

A summary of PPP loans extended during 2020 follows:

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

Through June 30, 2021, we have

recognized all but $16 thousand of these fees, net of related costs.

On December 27, 2020, the Economic Aid to Hard-Hit Small

Businesses, Nonprofits, and Venues

Through September 30,

have recognized substantially all of these fees, net of related costs.

As of September 30, 2021, we have received payments

and forgiveness on all but one loan with a remaining balance of approximately

$20 thousand.

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

The Economic Aid Act provides a second $900 billion stimulus

package, including $325 billion

in additional PPP loans.

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participating banks.

A summary of PPP loans extended during the six months ended

June 30, 2021 under the Economic Aid Act follows:

A summary of PPP loans extended during the nine months ended September 30,

2021 under the Economic Aid Act follows:

(Dollars in thousands)

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Up to $350,000

As of June 30, 2021, we collected approximately $1.0

million in fees related to PPP loans under the Economic Aid Act.

Through June 30, 2021, we have recognized $0.2 million of these fees, net

of related costs.

approximately $1.0 million in fees related to PPP loans under the Economic Aid Act.

Through September 30,

2021, we have recognized $0.5 million of these fees, net of related costs.

As of September 30, 2021, we have received

payments and forgiveness on 77 PPP loans under the Economic

Aid Act, totaling $7.0 million.

The outstanding balance for

the remaining 177 PPP loans under the Economic Aid Act was approximately

$13.3 million at September 30, 2021.

We continue to closely

monitor this pandemic, and are working to continue our services

during the pandemic and to address

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 six months ended June 30,

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 June 30, 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

Our results of operations for the nine months ended September 30, 2021,

and our financial

condition at that date reflect only the ongoing effects of the pandemic, and

may not be indicative of future results or

financial conditions, including possible changes in 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, 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

We continue to

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

and to address developments as those occur.

CRITICAL ACCOUNTING POLICIES

The accounting and financial reporting policies of the Company conform

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

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.

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 amount of the allowance for loan losses is considered

a critical accounting estimate because the level of the allowance

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.

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 is

based upon management’s evaluation of

the loan portfolio, past loan loss experience, current asset quality trends,

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

“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.

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

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.

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

investment in the loan.

impairment is recognized through the allowance.

Loans that are

impaired are recorded at the present value of expected

future cash flows discounted at the loan’s

effective interest rate, or if the loan is collateral dependen

t, 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

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

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.

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

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

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

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

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.

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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 June 30, 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

credit risk grades is based on its experience with similarly graded loans.

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

At September 30, 2021 and December 31, 2020, and for the periods then ended, the Company adjusted

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 fact

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

The allocation

for qualitative and environmental factors

is particularly subjective and does not lend itself to exact mathematical calculation.

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

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.

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

its look-back period each quarter to incorporate the effects of at least one

downturn in its loss history.

Company believes the extension of its look-back period

is appropriate due to the risks

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.

quarter ended June 30, 2021, the Company increased its look-back

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 September 30, 2021, the Company increased its look-back

period to 50 quarters to continue to include losses

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

incurred by the Company beginning with the first quarter

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.

back period to incorporate the effects of at least one economic downturn in

its loss history.

During 2020, the Company

adjusted certain qualitative and economic factors related to changes in

economic conditions driven by the impact of the

novel strain of coronavirus (“COVID-19 pandemic”) and resulting adverse

economic conditions, including higher

unemployment in our primary market area.

adjusted certain qualitative and economic factors related to changes in economic conditions

driven by the impact of the

COVID-19 pandemic and resulting adverse economic conditions, including

higher unemployment in our primary market

During the second quarter of 2021,

the Company adjusted certain qualitative

and economic factors to reflect improvements in economic conditions

in our primary market area.

Further adjustments may

be made in the future as a result of the continuing COVID-19

the Company adjusted certain qualitative and economic factors to reflect

improvements in economic conditions 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

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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)

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

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

debt security before recovery of its amortized cost basis, or

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

(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

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

be required to sell the debt security before recovery,

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

between the debt security’s amortized

cost and its fair value.

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

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

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.

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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

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”)

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

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

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

no market for these securities.

The Company records these non-marketable equity securities

as a component of other

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

assets, which are periodically evaluated for impairment.

considers these non-marketable equity securities to

Management 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.

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

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.

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.

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

GAAP and expands

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of the consolidated financial statements that accompany this report.

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

liabilities when available.

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

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.

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In these cases, fair

value is estimated using pricing models that use discounted cash

flows and other pricing techniques.

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

other pricing techniques.

Pricing models and

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prepayments, market volatility,

and other factors, taking into account current observable market data

and experience.

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

As such, the use of different models and assumptions,

as well as changes in market conditions, could result in

materially different net earnings and retained earnings results.

Other Real Estate Owned

OREO consists of properties obtained through foreclosure or in satisfaction

of loans and is reported at the lower of cost or

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,

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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.

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

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 June 30, 2021 and December 31, 2020 the Company had no OREO properties.

could differ significantly from appraisals, comparable sales, and

other estimates used to determine the fair value of other

At September 30, 2021 and December 31, 2020 the Company had no OREO properties.

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

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.

realization of deferred tax assets

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

in which those temporary differences become

Management considers the scheduled reversal of deferred

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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 June 30, 2021.

The amount of

the deferred tax assets considered realizable, however,

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

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, 2021.

of the deferred tax assets considered realizable, however,

could be reduced if estimates of future taxable income are

OF OPERATIONS

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Sheet and Interest Rates

Six months ended June 30,

Nine months ended September 30,

(Dollars in thousands)

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Net Interest Income and Margin

Net interest income (tax-equivalent) was $12.2 million for the

first six months of 2021 compared to $12.5 million for the

first six months of 2020.

Net interest income (tax-equivalent) was $18.3 million for the first nine

months of 2021 compared to $18.5 million for the

first nine months 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 67 basis points to 2.91% in the first six months of

2021 compared to 3.58% in the first six months of 2020.

partially offset by balance sheet growth.

The tax-equivalent yield on total interest-earning assets decreased by 58 basis points

to 2.86% in the first nine months of

2021 compared to 3.44% in the first nine months of 2020.

This decrease was primarily due to the lower interest rate

environment and changes in our asset mix resulting from the

significant increase in deposits from government stimulus and

environment and changes in our asset mix resulting from the significant increase

in deposits from government stimulus and

relief programs and customers’ increased savings.

The cost of total interest-bearing liabilities decreased by 33 basis

points to 0.42% in the first six months of 2021 compared

to 0.75% in the first six months of 2020.

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

The cost of total interest-bearing liabilities decreased by 31 basis points to 0.41%

in the first nine months of 2021 compared

to 0.72% in the first nine months of 2020.

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

market interest rates.

Our funding costs declined less than the rates earned on our interest

earning assets.

The Company continues to deploy various asset liability management

strategies to manage its risk to interest rate

Our funding costs declined less than the 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

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

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 Company recorded a negative provision for loan losses of $0.6

million for the first six months of

2021, compared to $0.9 million in provision for loan losses for

the first six months of 2020.

The Company recorded a negative provision for loan losses of $0.6 million for the

first nine months of

2021, compared to $1.1 million in provision for loan losses for the first nine months

The negative provision for

loan losses was primarily related to improvements in economic conditions

in our primary market area.

loan losses was primarily related to improvements in economic conditions in our primary

The provision for

loan losses is based upon various factors, including the absolute level

of loans, loan growth, the credit quality,

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 1.12%

at June 30, 2021, compared to 1.22% at December 31, 2020.

June 30, 2021,

the Company’s allowance for loan losses

was 1.17% of total loans, excluding PPP loans, which are

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 1.13% at September 30,

2021, compared to 1.22% at December 31, 2020.

At September 30, 2021, the Company’s

allowance for loan losses was 1.16% 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

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

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 June 30,

Six months ended June 30,

Quarter ended September 30,

Nine months ended September 30,

(Dollars in thousands)

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Total noninterest income

The Company’s income from mortgage

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

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

MSRs are recognized based on the fair value of the servicing

right on the date the corresponding mortgage loan is sold.

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.

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

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Impairment is determined by grouping MSRs by

common predominant characteristics, such as interest rate and loan

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.

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

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

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

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 June 30,

Six months ended June 30,

Quarter ended September 30,

Nine months ended September 30,

(Dollars in thousands)

2 unchanged sentences

Total mortgage lending income

The Company’s income from mortgage

lending typically fluctuates as mortgage interest rates change and

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.

Origination income decreased in the second quarter of 2021

compared to the second quarter of 2020 due to a decrease in refinance

activity in our primary market area.

Mortgage loan

origination volume also declined for the first six months of 2021

compared to the first six months of 2020, but origination

income increased due to improved pricing margins.

Origination income decreased

in 2021 compared to 2020 due

to a decrease in refinance activity in our primary market area.

Income from bank-owned life insurance decreased primarily due to $0.3

million in non-taxable death benefits received in

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 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.

on these policies are generally not taxable.

Noninterest Expense

Quarter ended June 30,

Six months ended June 30,

Quarter ended September 30,

Nine months ended September 30,

(Dollars in thousands)

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Total noninterest expense

The increase in salaries and benefits was primarily due to a decrease

in deferred costs related to the PPP loan program,

routine annual wage and benefit increases, and management increasing

the minimum hourly wage for banking positions to

The decrease in net occupancy and equipment expense was primarily

due to a reduction of various expenses related to the

The increase in salaries and benefits was primarily due to a decrease in deferred costs related

to the PPP loan program,

routine annual wage and benefit increases, and management increasing the

minimum hourly wage for banking positions to

The decrease in net occupancy and equipment expense was primarily due to

a reduction of various expenses related to the

redevelopment of the Company’s headquarters

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and other temporary relocation costs.

Income tax expense was $0.9

million for the first six months of 2021 compared to $0.8

million for the first six months of

reflecting an increase in earnings before taxes and effective tax

rate of 17.76% and 17.86%, respectively.

BALANCE SHEET ANALYSI

Income tax expense was $1.3 million for the first nine months of 2021

compared to $1.2 million for the first nine months of

reflecting an increase in earnings before taxes and an effective tax rate of 17.55%

and 17.64%, respectively.

BALANCE SHEET ANALYSIS

Securities available-for-sale were $407.5

84.9 million at June 30, 2021 compared to $335.2 million at December

increase reflects an increase in the amortized cost basis of securities

available-for-sale of $54.2 million, and a decrease

$4.5 million in the fair value of securities available-for

million at September 30, 2021 compared to $335.2 million at December 31, 2020.

This increase reflects an increase in the amortized cost basis of securities available-for-sale

of $78.8 million, and a decrease

of $6.5 million in the fair value of securities available-for-sale.

The increase in the amortized cost basis of securities

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the significant increase in customer deposits.

The decrease in the fair value of securities was primarily due

to an increase in

The decrease in the fair value of securities was primarily due to an increase

long-term interest rates.

The average annualized tax-equivalent yields earned on total

securities were 1.72%

in the first six

months of 2021 and 2.45%

in the first six months of 2020.

The average annualized tax-equivalent yields earned on total securities

nine months of 2021 and 2.24% in the first nine months of 2020.

(In thousands)

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Loans, net of unearned income

Total loans, net of unearned

income, were $457.0 million at June 30, 2021, a

decrease of $4.7 million from $461.7 million

at December 31, 2020.

Total loans, net of unearned income,

were $453.2 million at September 30, 2021, a decrease of $8.5 million from $461.7

million at December 31, 2020.

Excluding PPP loans, total loans net of unearned income, were $440.4

35.7 million, a decrease of $6.5

million, or 1% from $442.3 million at December 31, 2020

Four loan categories represented the majority of the loan

portfolio at June 30, 2021:

commercial real estate (53%), residential real

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

construction and land development (8%).

Approximately 21%

of the Company’s commercial

real estate loans were

classified as owner-occupied at June 30, 2021.

Within the residential real estate portfolio

segment, the Company had junior lien mortgages of approximately $8.1

or 2% of total loans, at June 30, 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 June 30, 2021 and December 31, 2020.

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.

million, a decrease

of $1.9 million from $442.3 million at December 31, 2020.

Four loan categories represented approximately 98% of the

loan portfolio at September 30, 2021:

commercial real estate (56%),

residential real estate (18%), commercial and industrial

(17%) and construction and land development (8%).

Approximately 23% of the Company’s commercial

real estate loans

were classified as owner-occupied at September 30, 2021.

Within the residential real estate portfolio segment, the Company

had junior lien mortgages of approximately $8.1 million,

or 2% of total loans, at September 30, 2021, compared to $8.7 million, or 2% of total loans, at December

residential real estate mortgage loans with a consumer purpose, the Company

had no loans that required interest-only

payments at September 30, 2021 and December 31, 2020.

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 4.47%

in the first six months of 2021 and 4.75% in the first

six months of 2020.

The specific economic and credit risks associated with our loan po

rtfolio include, but are not limited to, the effects of

in the first nine months of 2021 and 4.71% in the first

nine months 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

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

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.

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

Also, we have

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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

Banking regulations limit a bank’s

credit exposure by

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

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

Under these regulations, we are prohibited from having secured

loan relationships in excess of

approximately $20.9 million.

Furthermore, we have an internal limit for aggregate credit

exposure (loans outstanding plus

unfunded commitments) to a single borrower of $18.6

Our loan policy requires that the Loan Committee of the

Board of Directors approve any loan relationships that exceed

this internal limit.

At June 30, 2021, the Bank had no

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

unfunded commitments) to a single borrower of $18.8 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, 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

We periodically analyze

our commercial and industrial and commercial real estate loan portfolios to determine if

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.

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 June 30, 2021 (and related

balances at December

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

-based capital at September 30, 2021 and December 31, 2020.

September 30,

(Dollars in thousands)

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COVID-19 Modifications

In light of disruptions in economic conditions caused by COVID

-19, the financial regulators have issued guidance

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

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This guidance, including

the Interagency Statement on COVID-19 Loan Modifications and

the Interagency Examiner Guidance for Assessing Safety

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

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.

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.

mortgage and consumer loans the borrower may elect to defer payments for up to three

Interest continues to

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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 June 30, 2021 and December 31, 2020, we have granted loan

payment deferrals or payments of interest-only primarily

on commercial and industrial and commercial real estate loans totaling

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

$112.7 million, or 24% of total loans at

June 30, 2020, the end of the first quarterly period we began loan

modifications to

assist customers through the COVID-19 pandemic.

Based on discussions with our borrowers, we expect

these to further

decline over the second half of 2021.

The tables below provide information concerning the composition

of these COVID-19 modifications as of June 30, 2021

and December 31, 2020.

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 September 30, 2021, we had no COVID-19 loan deferrals outstanding, compared

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

December 31, 2020.

The tables below provide information concerning the composition of these COVID-19

modifications as of December 31,

Modification Types

2 unchanged sentences

Interest Only

June 30, 2021:

Commercial and industrial

Commercial real estate

Residential real estate

December 31, 2020:

2 unchanged sentences

Residential real estate

COVID-19 Modifications within Commercial Real

Estate Segment

COVID-19 Modifications within Commercial Real Estate

(Dollars in thousands)

Loans Modified

June 30, 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

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

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 maintains the allowance for loan losses at a level that management believes

appropriate to adequately cover

the Company’s estimate of probable

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The allowance for loan losses was $5.1

June 30, 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

September 30, 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 second quarter of 2021

and the previous four quarters is presented below.

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

for the third quarter of 2021 and

the previous four quarters is presented below.

(Dollars in thousands)

3 unchanged sentences

Consumer installment

Net recoveries (charge-offs)

Net recoveries

Provision for loan losses

2 unchanged sentences

as a % of nonperforming loans

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

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

(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

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.

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.

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 1.13%

at June 30, 2021, compared to 1.22% at December 31,

At June 30, 2021, the Company’s allowance

for loan losses was 1.17% of total loans, excluding PPP

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

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.

at September 30, 2021, compared to 1.22% at December 31,

At September 30, 2021, the Company’s allowance

for loan losses was 1.16% of total loans, excluding PPP loans.

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

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

Company’s allowance for loan losses,

and may require the Company to make additional provisions to the allowance

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 $0.5

million in nonperforming assets at June 30, 2021 and December 31,

million in nonperforming assets at September 30, 2021 and December 31,

2020, respectively.

The table below provides information concerning total nonperforming

assets and certain asset quality ratios for the second

The table below provides information concerning total nonperforming assets

and certain asset quality ratios for the third

quarter of 2021 and the previous four quarters.

6 unchanged sentences

Nonperforming loans as a % of total loans

The table below provides information concerning the composition

of nonaccrual loans for the second quarter of 2021

the previous four quarters.

The table below provides information concerning the composition of nonaccrual

loans for the third quarter of 2021 and the

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 June 30, 2021, the

Company had $0.6

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 June 30, 2021 compared to $0.1 million at

December 31, 2020.

The Company had no OREO at June 30, 2021 or December 31,

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

deterioration in the financial

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

(2) the principal or interest is

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

The Company had $0.5

million in loans on nonaccrual status at September 30, 2021 and December 31,

2020, respectively.

The Company had $0.1 million of loans 90 days or more past due and still accruing at September

30, 2021 and December

31, 2020, respectively.

The Company had no OREO at September 30, 2021 or December 31, 2020.

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

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 pri

mary 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 June 30,

2021, and $2.9 million, or 0.6% of total loans at December 31,

The table below provides information concerning the composition

of potential problem loans for the second quarter of 2021

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 $2.5

million, or 0.6% of total loans at

September 30, 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 third quarter of 2021

and the previous four quarters.

7 unchanged sentences

Total potential problem loans

At June 30, 2021 the Company had $0.1 million in potential problem

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

At September 30, 2021 the Company had $0.1 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

1 unchanged sentence

but less than

for the second quarter of 2021 and the previous four quarters

for the third quarter of 2021 and the previous four quarters.

(In thousands)

6 unchanged sentences

Total deposits increased

$83.7 million, or 10% to $923.5 million at June 30, 2021,

compared to $839.8 million at December

Noninterest-bearing deposits were $283.4 million, or 31% of total

deposits, at June 30, 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

and less customer spending during

the COVID-19 pandemic.

The average rate paid on total interest-bearing deposits was 0.42

in the first six months of 2021 compared to 0.75% in the

first six months of 2020.

The decline in average rates paid on total interest-bearing deposits

was largely driven by generally

lower market interest rates.

$115.2 million, or 14% to $955.0 million at September 30,

2021, compared to $839.8 million at

December 31, 2020.

Noninterest-bearing deposits were $299.1 million, or 31% of total deposits, at September

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 and greater savings during the COVID-19 pandemic.

The average rate paid on total interest-bearing deposits was 0.41% in the first nine

months of 2021 compared to 0.72% in

the first nine months of 2020.

The decline in average rates paid on total interest-bearing deposits was largely

generally lower market interest rates.

Other Borrowings

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

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

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 June 30, 2021, and at December 31, 2020,

respectively.

Securities sold

under agreements to repurchase

totaled $3.5 million at June 30, 2021, compared to $2.4

million at December 31, 2020.

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

months of 2021 compared to 0.75% in the first

six months of 2020.

The Company had no long-term debt at June 30, 2021 and

December 31, 2020.

The Bank had available federal funds lines totaling $41.0 million with none

outstanding at September 30, 2021, and at December 31, 2020, respectively.

Securities sold under agreements to repurchase

totaled $3.3 million at September 30, 2021, compared to $2.4 million at December

The average rate paid on short-term borrowings was 0.50% in the first nine months of 2021

and 2020, respectively.

The Company had no long-term debt at September 30, 2021 and December 31, 2020.

CAPITAL ADEQUACY

The Company’s consolidated stockholders’

equity was $106.0 million and $107.7 million as of June 30,

The Company’s consolidated

stockholders’ equity was $104.9 million and $107.7

million as of September 30, 2021 and

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 $3.3 million, cash dividends

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 $4.8 million, cash dividends

paid of $2.8 million, and repurchases of the Company’s

stock of $1.3 million.

During the first six months of 2021, the

Company repurchased 20,511 shares under the

Company’s current stock repurchase program.

During the first nine months of 2021, the

Company repurchased 37,093 shares under the Company’s

current stock repurchase program.

These shares were

repurchased at an average cost per share of $36.56 and

a total cost of $0.8 million.

repurchased at an average cost per share of $34.36 and a total cost of $1.3 million.

These decreases in the Company’s

1 unchanged sentence

by net earnings of $6.2 million.

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

to the rules of the Basel III regulatory capital framework and

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

1 unchanged sentence

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

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-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

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 June 30, 2021,

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

At September 30, 2021, the Bank’s ratio

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

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

federal banking regulators adopted an interim final rule that

amended the capital conservation buffer.

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

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,

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;

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 9.81%, CET1 risk-based capital ratio

was 17.03%, tier 1 risk-based capital ratio was 17.03%, and

total risk-based capital ratio was 17.94%

at June 30, 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 was 9.94%

June 30, 2021.

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.

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

subsidiaries.

tier 1 leverage ratio was 9.57%, CET1 risk-based capital ratio was 16.82%, tier 1 risk-based

capital ratio was 16.82%, and

total risk-based capital ratio was 17.72% at September 30, 2021.

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 September 30, 2021.

MARKET AND LIQUIDITY RISK MANAGEMENT

Management’s objective is to manage

assets and liabilities to provide a satisfactory,

Management’s objective is to manage assets and

liabilities to provide a satisfactory,

consistent level of profitability within

1 unchanged sentence

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

Asset Liability

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

of monitoring these policies, which are designed to

ensure an acceptable asset/liability composition.

2 unchanged sentences

Interest Rate Risk Management

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

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

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

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

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:

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

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

At June 30, 2021, our earnings simulation model indicated that

we were in compliance with the policy guidelines noted

At September 30, 2021, our earnings simulation model indicated

that we were in compliance with the policy guidelines

Economic Value

EVE measures the extent that the estimated economic values of our

assets, liabilities, and off-

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

Economic values are

estimated by discounting expected

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

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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

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

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 June 30, 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

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, 2021, our EVE model indicated that we were in compliance

with our policy guidelines.

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

will be affected by

changes in interest rates.

Income associated with interest-earning assets

and costs associated with interest-bearing liabilities

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

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

For example, although certain

assets and liabilities may have

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

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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

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.

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.

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

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

ALCO reviews each of the

above interest rate sensitivity analyses along with

several different interest rate scenarios in seeking satisfactory,

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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

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

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

These interest rate swaps qualify as derivatives,

but are not designated as

hedging instruments.

At June 30, 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

At September 30, 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,

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.

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

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

The first is the liquidity of the Company.

The second 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.

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

from the Bank.

If needed, the

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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,

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

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

FHLB’s advance program to obtain funding for

Advances include both fixed and variable terms and may be

taken out with varying maturities.

At June 30, 2021, the Bank had

a remaining available line of credit with the FHLB of

$297.9 million.

At June 30, 2021, the Bank also had $41.0

million of available federal funds lines with no borrowings

At September 30, 2021, the Bank had a remaining

available line of credit with the FHLB

of $310.7 million.

At September 30, 2021, 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

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,

creditor requirements over the next twelve months.

Off-Balance Sheet Arrangements, Commitments, Contingencies

and Contractual Obligations

At June 30, 2021, the Bank had outstanding standby letters of credit

Off-Balance Sheet Arrangements, Commitments, Contingencies and Contractual

At September 30, 2021, the Bank had outstanding standby letters of credit of $1.

million and unfunded loan commitments

outstanding of $70.5 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.

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.

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 our securities available-

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

Mortgage lending activities

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 June 30, 2021,

the unpaid principal balance of residential mortgage loans, which we have originated

and sold, but

retained the servicing rights was $260.8 million.

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 September 30, 2021, the unpaid principal balance of residential mortgage loans,

which we have originated and sold,

but retained the servicing rights, was $256.4 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

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

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

six months 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 June 30, 2021.

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 2021 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, 2021.

We service all residential

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

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

relating to the mortgage loans;

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;

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

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

The agreement under which we act as servicer generally specifies standard

of responsibility for actions taken by us in such

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

in compliance with the

respective servicing agreements.

However, if we commit a material breach

of our obligations as servicer,

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

period following notice.

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.

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

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 June 30, 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

As of September 30, 2021, we do not believe that this exposure is material due to the historical

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

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

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.

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

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, 2020.

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an actual/actual basis.

As a result, the Bank is not obligated to

make any advances to Fannie Mae on principal and interest

As a result, the Bank is not obligated to make any advances to Fannie

Mae on principal and interest

on such mortgage loans where the borrower is entitled to forbearance.

Effects of Inflation and Changing Prices

The consolidated financial statements and related consolidated

financial data presented herein have been prepared in

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

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

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

As a result, interest rates have a more significant impact on a financial

institution’s

performance than the effects of general levels of inflation.

As a result of government

monetary policies and fiscal stimulus,

as well as demand for goods ad services and COVID-19 pandemic related supply chain

disruptions, inflation has increased

This may result in increased noninterest operating expenses and building costs.

CURRENT ACCOUNTING DEVELOPMENTS

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Financial Instruments – Credit Losses (Topic

Measurement of Credit Losses on

Information about these pronouncements is described in more

detail below.

Measurement of Credit Losses on Financial

Information about these pronouncements is described in more detail below.

Financial Instruments - Credit Losses (Topic

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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

, 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

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

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

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

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

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.

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

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

The Company’s preliminary evaluation indicates

the provisions of ASU No.

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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.

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

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.

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.

– Explanation of Non-GAAP Financial Measures

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

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,

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

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

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of these non-

GAAP financial measures to their most directly comparable

GAAP financial measures are presented below.

GAAP financial measures to their most directly comparable GAAP financial

measures are presented below.

(in thousands)

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Net interest income (Tax

Six months ended June 30,

Nine months ended September 30,

(In thousands)

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Basic and diluted

Shares outstanding

Shares outstanding, at period end

Common stock price:

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Nonperforming assets as a % of:

Loans and other real estate owned

Loans and foreclosed properties

Nonperforming loans as a % of total loans

Annualized net (recoveries) chargeoffs as a % of average loans

Annualized net recoveries as % of average loans

Capital Adequacy:

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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.

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

by the sum of noninterest income and tax-equivalent net interest

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

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- Selected Financial Data

Six months ended June 30,

Nine months ended September 30,

(Dollars in thousands, except per share amounts)

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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.

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

by the sum of noninterest income and tax-equivalent net interest

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

wholly-owned subsidiary, AuburnBank.

Balances and Net Interest Income Analysis

Quarter ended June 30,

- Average Balances

and Net Interest Income Analysis

Quarter ended September 30,

(Dollars in thousands)

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Stockholders' equity

Total liabilities and

stockholders' equity

Total liabilities and stockholders'

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%.

Balances and Net Interest Income Analysis

Six months ended June 30,

- Average Balances

and Net Interest Income Analysis

Nine months ended September 30,

(Dollars in thousands)

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Stockholders' equity

Total liabilities and

stockholders' equity

Total liabilities and stockholders'

Net interest income and margin (tax-equivalent)

(1) Average loan balances

are shown net of unearned income and loans on nonaccrual stat

us 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%.

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Commercial and industrial

Construction and land development

Commercial real estate

Residential real estate

Consumer installment

Net recoveries (charge-offs)

Net recoveries

Provision for loan losses

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as a % of nonperforming loans

Net (recoveries) charge-offs as % of avg.

Net recoveries as % of avg.

Nonperforming assets:

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Total nonperforming assets

as a % of loans and other real estate owned

as a % of loans and foreclosed properties

as a % of total assets

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Accruing loans 90 days or more past due

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

(a) Net recoveries are annualized.

- Allocation of Allowance for Loan Losses

Third Quarter

Second Quarter

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Third Quarter

Second Quarter

(Dollars in thousands)

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Consumer installment

Total allowance for loan losses

Total allowance for

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

- CDs and Other Time Deposits of $100,000

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

(Dollars in thousands)

June 30, 2021

September 30, 2021

3 months or less

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Over 12 months

Total CDs and other

time deposits of $100,000 or more

Total CDs and other time deposits of $100,000

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

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