What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2022-03-08 compared with 2021-03-09 · 1024 added, 1146 removed, 655 unchanged (77% of the section changed)

4 unchanged sentences

the years ended December 31, 2021 and 2020.

purpose of this discussion is to provide information about our financial

condition and results of operations which is not otherwise apparent

from the consolidated financial statements.

following discussion and analysis should be read along with

our consolidated financial statements and the related notes

The purpose of this discussion is to provide

information about our financial

condition and results of operations which is not otherwise apparent from the

consolidated financial statements.

following discussion and analysis should be read along with our consolidated

financial statements and the related notes

included elsewhere herein.

In addition, this discussion and analysis

contains forward-looking statements, so you should

refer to Item 1A, “Risk Factors” and “Special Cautionary Notice

Regarding Forward-Looking Statements”.

The Company was incorporated in 1990 under the laws of the State of

Delaware and became a bank holding company after

In addition, this discussion and analysis contains forward-looking

statements, so you should

refer to Item 1A, “Risk Factors” and “Special Cautionary Notice Regarding Forward-Looking Statements”.

The Company was incorporated in 1990 under the laws of the State of Delaware and became a bank

holding company after

it acquired its Alabama predecessor,

which was a bank holding company established in 1984.

the Company's

The Bank, the Company's

principal subsidiary, is an Alabama

state-chartered bank that is a member of the Federal Reserve System

and has operated

state-chartered bank that is a member of the Federal Reserve System and has operated

continuously since 1907.

Both the Company and the Bank are

headquartered in Auburn, Alabama.

Both the Company and the Bank are headquartered

in Auburn, Alabama.

The Bank conducts its

business primarily in East Alabama, including Lee County and

surrounding areas.

business primarily in East Alabama, including Lee County and surrounding areas.

The Bank operates full-service branches

in Auburn, Opelika, Notasulga and Valley,

The Bank also operates loan production offices

in Auburn and

The Bank also operates loan production offices in Auburn and

Phenix City, Alabama.

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million for the full year 2021, compared to $7.5 million for the full year 2020.

Basic and diluted net earnings per share were $2.09 per share

for the full year 2020, compared to $2.72 per share for the full

The decrease in full year 2020 net earnings was primarily driven

by the negative impact of the COVID-19

pandemic, which resulted in elevated provision for loan losses,

compared to 2019, in addition to a lower interest rate

Net interest income (tax-equivalent) was $24.8 million in 2020,

a 7% decrease compared to $26.6 million in 2019.

Basic and diluted net earnings per share were $2.27 per share for the full year 2021,

compared to $2.09 per share for the full

Net interest income (tax-equivalent) was $24.5

million in 2021, a 1% decrease compared to $24.8 million in 2020.

decrease was primarily due to net interest margin compression

resulting from the Federal Reserve’s

interest rate reductions

in response to COVID-19.

Net interest margin (tax-equivalent) decreased

to 2.92% in 2020, compared to 3.43% in 2019,

primarily due to the lower interest rate environment and changes

in our asset mix resulting from the significant increase in

customer deposits.

At December 31, 2020, the Company’s

allowance for loan losses was $5.6 million, or 1.22%

of total loans, compared to

$4.4 million, or 0.95% of total loans, at December 31, 2019.

Excluding Paycheck Protection Program (“PPP”) loans, the

Company’s allowance for loan

losses was 1.27% of total loans at December 31, 2020.

The Company recorded a provision

for loan losses of $1.1 million in 2020 compared to a

negative provision for loan losses of $0.3 million during 2019.

increase in the provision for loan losses was related to changes

in economic conditions and portfolio trends driven by the

impact of COVID-19 and resulting adverse economic conditions,

including higher unemployment in our primary market

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

Net recoveries as a percent of average loans were 0.03% in

2020 compared to net charge-offs as a percent

of average loans of 0.03% in 2019.

partially offset by balance sheet growth.

margin (tax-equivalent) decreased to 2.55% in 2021,

compared to 2.92% in 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.

At December 31, 2021, the Company’s allowance

for loan losses was $4.9 million, or 1.08% of total loans, compared to

$5.6 million, or 1.22%

of total loans, at December 31, 2020.

Paycheck Protection Program (“PPP”) loans, which

are guaranteed by the SBA,

the Company’s allowance for loan losses

was 1.10% and 1.27% of total loans at December 31,

2021 and 2020, respectively

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

million in 2021 compared

to a charge of $1.1 million during 2020.

The 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.

Net charge-offs as a percent of average loans were 0.02% in 2021

compared to net

recoveries as a percent of average loans of 0.03% in 2020.

Noninterest income was $4.3 million in 2021 compared to $5.4

million in 2020.

Although total noninterest income was

largely unchanged in 2020, 2019 included a $1.7

million gain that resulted from the termination of a loan guarantee

program operated by the State of Alabama.

This decrease was partially offset by an increase

in mortgage lending income of

$1.5 million during 2020 compared to 2019, as lower interest

rates for mortgage loans increased refinancing activity and

pricing margins improved.

Noninterest expense was $19.6 million in 2020 compared to

The decrease was primarily due to a $0.8

million decrease in mortgage lending income in 2021 as refinance activity declined

in our primary market area and a $0.3

million non-taxable death benefit from bank-owned life insurance received

Noninterest expense was $19.4

million in 2021 compared to $19.6

million in 2020.

The decrease was primarily due to a

reduction of $0.6 million in salaries and benefits expense which was offset

by an increase of $0.6 million in various

expenses related to the planned redevelopment of the Company’s

headquarters in downtown Auburn.

Income tax expense was $1.6 million in 2020 and $2.4

million in 2019 reflecting an effective tax rate of 17.72%

reduction of $0.8

million in various expenses related to the redevelopment of the Company’s

headquarters in downtown

This decrease was mostly offset by increases in salaries and benefits expe

nse of $0.4 million and a $0.2 million

increase in FDIC and other regulatory assessments during 2021.

Income tax expense was $1.4

million in 2021 and $1.6 million in 2020 reflecting an effective tax rate of 14.89

17.72%, respectively.

This change was primarily due to a decrease in the level of

earnings before taxes relative to tax-

exempt sources of income.

The Company’s effective

income tax rate is principally impacted by tax-exempt earnings

the Company’s investments in

municipal securities

and bank-owned life insurance.

The Company paid cash dividends of $1.02 per share in 2020,

an increase of 2% from 2019.

This decrease was primarily due to an income tax benefit related to a New Markets Tax

investment funded in the fourth quarter of 2021.

The Company’s effective income

tax rate is principally impacted by tax-

exempt earnings from the Company’s investments

in municipal securities, bank-owned life insurance, and New Markets

The Company paid cash dividends of $1.04

per share in 2021, an increase of 2% from 2020.

At December 31, 2021, the

Bank’s regulatory capital ratios

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

under current

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

regulatory standards with a total risk-based capital ratio of 17.06%,

18.31%, a tier 1 leverage ratio of 10.32% and common equity

tier 1 (“CET1”) of 17.27% at December 31, 2020.

a tier 1 leverage ratio of 9.35% and common equity tier

1 (“CET1”) of 16.23% at December 31, 2021.

COVID-19 Impact Assessment

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

has since spread to a number of other countries, including

the United States.

In March 2020, the World

Health Organization declared COVID-19 a global

pandemic and the United

States declared a National Public Health Emergency.

The COVID-19 pandemic has severely restricted the level

economic activity in our markets.

The COVID-19 pandemic has occurred in waves of different

variants since the first quarter of 2020.

against and/or reduce the severity of COVID-19 were widely introduced at the beginning

At times, the pandemic

has severely restricted the level of economic activity in our markets.

In response to the COVID

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

have taken preventative or protective actions to prevent the spread

of the virus, including imposing restrictions on travel

and business operations and a statewide mask mandate, advising or

requiring individuals to limit or forego their time

outside of their homes, limitations on gathering of people and

social distancing, and causing temporary closures of

businesses that have been deemed to be non-essential.

Though certain of these measures have been relaxed or

increases in reported cases could cause these measures to be

reestablished.

Auburn University, a major

source of economic

activity in Lee County, went to

remote instruction on March 16, 2020.

Auburn University announced its guidelines for the

remainder of the 2020/2021 school year,

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

distancing measures.

The economic effects of these measures are

not presently known.

COVID-19 has significantly affected local state, national

and global health and economic activity and its future effects

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

the duration and scope of the pandemic, the

development and distribution of COVID-19 testing and contact

tracing, effective drug treatments and vaccines, together

with governmental, regulatory and private sector responses.

COVID-19 has had continuing significant effects on the

economy, financial markets and

our employees, customers and vendors.

Our business, financial condition

and results of

operations generally rely upon the ability of our borrowers to

make deposits and repay their loans, the value of collateral

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

demand for loans and other products and services we

offer, all of which are affected

by the pandemic.

See “Balance Sheet Analysis – Loans” for supplemental COVID

-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,

temporary closures of businesses that have been deemed to be non-essential.

Though certain

of these measures have been

relaxed or eliminated, especially as vaccination levels increased, such

measures could be reestablished in cases of new

waves, especially a wave of a COVID-19 variant that is more resistant

to existing vaccines.

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, especially

new variants of the virus, effective vaccines and drug treatments, together

with governmental, regulatory and private sector

COVID-19 has had continuing significant effects

on the economy, financial

markets and our employees,

customers and vendors.

Our business, financial condition and results of operations

generally rely upon the ability of our

borrowers to make deposits and repay their loans, the value of collateral underlying our

secured loans, market value,

stability and liquidity and demand for loans and other products and services we offer,

all of which are affected by the

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.

We 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 with 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

accordance with the guidelines of the Centers for Disease Control and the Governor

of the State of Alabama,

starting March 23, 2020, we limited branch lobby service to appointment only while continuing

to operate our

branch drive-thru facilities and ATMs.

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

state public health guidelines.

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.

We continue to provide

services through our online and other electronic channels.

In addition, we established remote work access to help employees

stay at home where job duties permit.

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

In addition, we maintain remote work access to help

employees stay at home while providing continuity of service.

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;

a participating lender in the PPP.

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

proceeds are used for

payroll and other permitted purposes in accordance with the requirements

These loans carry a fixed

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

2020) or five years (loans made on or after June

were an active PPP lender.

PPP loans were forgivable,

in whole or in part, if the proceeds are used for payroll

and other permitted purposes in accordance with the requirements of the PPP.

These loans carry a fixed rate of

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

made on or after June 5,

2020), if not forgiven, in whole or in part.

Payments are deferred until either the date on which the Small

Business Administration (“SBA”) remits the amount of forgiveness

proceeds to the lender or the date that is 10

months after the last day of the covered period if the borrower

does not apply for forgiveness within that 10-month

We believe these loans

and our participation in the program is good for our customers

communities we serve.

Payments are deferred until either the date on which the Small Business

Administration (“SBA”) remits the amount of forgiveness proceeds

to the lender or the date that is 10 months after

the last day of the covered period if the borrower does not apply for forgiveness

within that 10-month period.

believe these loans and our participation in the program helped our customers and the communities

COVID-19 has also had various economic effects, generally.

These include supply chain disruptions and manufacturing

delays, shortages of certain goods and services, reduced consumer expenditure on

hospitality and travel, and migration from

larger urban centers to less populated areas and remote work.

The demand for single family housing has exceeded existing

When coupled with construction delays attributable to supply chain disruptions

and worker shortages, these

factors have caused housing prices and apartment rents to increase, generally.

Stimulative monetary and fiscal policy,

along with shortages of certain goods and services, and rising petroleum and food prices

have led to the highest inflation in

Although fiscal stimulus remains under consideration by the President and Congress,

the Federal Reserve is

considering increasing its target interest rates and reducing its holding of

securities to stem inflation.

A summary of PPP loans extended during 2020 follows:

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Up to $350,000

The Company extended $36.5 million in loans to 423 small businesses

under the PPP during 2020.

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

which are being recognized net of related costs, as a yield

adjustment over the life of the underlying PPP loans.

During 2020, we received payments and forgiveness on 158

$17.5 million.

The outstanding balance for the remaining 265 loans as December

31, 2020 was approximately

$19.0 million.

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

Businesses, Nonprofits, and Venues

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

Through December 31, 2021, we

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

As of December 31, 2021, we had received payments and

forgiveness on all PPP loans extended during 2020.

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

Act (the “Economic Aid

Act”) was signed into law.

Economic Aid Act provides a second $900 billion stimulus

package, including $325 billion

Economic Aid Act provides a second $900 billion stimulus package, including

in additional PPP loans.

As of February 28, 2021, the Company has extended $17.4

million in loans to 169 small

businesses under the PPP provided by the Economic Aid Act.

The Economic Aid Act also permits the collection of a higher amount of PPP

participating banks.

A summary of PPP loans extended during 2021 under the Economic Aid

(Dollars in thousands)

$2 million to $10 million

$350,000 to less than $2 million

Up to $350,000

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

Through December 31,

2021, we have recognized $0.7 million of these fees, net of related costs.

As of December 31, 2021, we have received

payments and forgiveness on 116

PPP loans under the Economic Aid Act, totaling $12.1 million.

The outstanding balance

for the remaining 138 PPP loans under the Economic Aid Act

was approximately $8.1 million at December 31, 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 year ended December 31, 2020

and our financial condition

at that date reflect only the initial effects of the pandemic,

and may not be indicative of future results or financial

conditions, including possible additional monetary or fiscal stimulus,

and the possible effects of the expiration or extension

of temporary accounting and bank regulatory relief measures

in response to the COVID-19 pandemic.

Our results of operations for year ended December 31, 2021, and our financial condition

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 December 31, 2021,

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

well capitalized.

effects of the COVID-19 pandemic on our borrowers

could result in adverse changes to credit quality and our regulatory

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.

4 unchanged sentences

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, the valuation of

other real estate owned, and the valuation of deferred tax assets,

were critical to the determination of our financial position

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, the valuation of

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

of our financial position

and results of operations.

Other policies also require subjective

judgment and assumptions and may accordingly impact our

Other policies also require subjective judgment and assumptions

and may accordingly impact our

financial position and results of operations.

Allowance for Loan Losses

The Company assesses the adequacy of its allowance for loan

losses prior to the end of each calendar quarter.

The Company assesses the adequacy of its allowance for loan losses prior

to the end of each calendar quarter.

the allowance is based upon management’s

evaluation of the loan portfolio, past loan loss experience,

current asset quality

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

that may affect a borrower’s ability to

repay (including

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

collateral, composition of the loan portfolio, economic

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

factors, including regulatory recommendations.

evaluation is inherently subjective as it requires material estimates including

the amounts and timing of future cash flows

expected to be received on impaired loans that may be susceptible

to significant change.

Loans are charged off, in whole

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

loan is unlikely.

may be partially charged-off

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

that full repayment pursuant to the terms of the loan is

The Company deems loans impaired when, based on current information

and events, it is probable that the Company will

be unable to collect all amounts due according to the contractual

terms of the loan agreement.

evaluation of the loan portfolio, past loan loss experience, current asset quality

trends, known and inherent risks in the portfolio, adverse situations that may affect

a borrower’s ability to repay (including

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

composition of the loan portfolio, economic

conditions, industry and peer bank loan loss rates and other pertinent factors, including regulatory

recommendations.

evaluation is inherently subjective as it requires material estimates including the

amounts and timing of future cash flows

expected to be received on impaired loans that may be susceptible to significant change.

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

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 dependent,

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

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, 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, 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, independent

loan review process.

The Company’s

loan review process assists in determining whether there are

loans in the portfolio

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

of the entire loan portfolio.

Company’s loan review process includes

the judgment of management, the input from our independent

loan reviewers, and

reviews that may have been conducted by bank regulatory agencies

as part of their examination process.

incorporates loan review results in the determination of whether

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

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

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

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

real estate, and consumer

installment loans.

The Company analyzes each segment and

estimates an allowance allocation for each loan segment.

The allocation of the allowance for loan losses begins with a

process of estimating the probable losses inherent for these

analyzes each segment and estimates an allowance allocation for each loan

The allocation of the allowance for loan losses begins with a process of estimating the

probable losses inherent for these

types of loans.

The estimates for these loans are established by category

and based on the Company’s internal

The estimates for these loans are established by category and based

on the Company’s internal system of

credit risk ratings and historical loss data.

The estimated loan loss allocation

rate for the Company’s internal system

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

the Company adjusted its historical loss rates for the

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

The estimated loan loss allocation for all five loan portfolio segments

is then adjusted for management’s

The estimated loan loss allocation rate for the Company’s

internal system of

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

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 December 31, 2021 and 2020, and for the years then ended, the Company adjusted

its historical loss rates for the

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

The estimated loan loss allocation for all five loan portfolio segments is then adjusted for management’s

probable losses for several “qualitative and environmental” factors.

The allocation for qualitative and environmental

factors is particularly subjective and does not lend itself to exact mathematical

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

This amount represents

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

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

based upon quarterly trend assessments in delinquent and nonaccrual

loans, credit concentration changes, prevailing

economic conditions, changes in lending personnel experience,

changes in lending policies or procedures and other

estimated probable inherent credit losses which exist, but have not yet been identified, as of

the balance sheet date, and are

based upon quarterly trend assessments in delinquent and nonaccrual loans, credit

concentration changes, prevailing

economic conditions, changes in lending personnel experience, changes in lending

policies or procedures and other

influencing factors.

These qualitative and environmental factors are considered

for each of the five loan segments and the

allowance allocation, as determined by the processes noted

above, is increased or decreased based on the incremental

These qualitative and environmental factors are considered for each of the five loan segments

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

decreased based on the incremental

assessment of these factors.

The Company regularly re-evaluates its practices in determining the

allowance for loan losses.

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

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

the effects of at least one economic

downturn in its loss history.

Company believes the extension

of its look-back period is appropriate due to the risks

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.

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

-back period to 47 quarters to continue to include losses

Absent this extension, the early cycle periods in

which the Company experienced significant

losses would be excluded from the determination of the allowance for loan losses and its balance

would decrease.

year ended December 31, 2021, the Company increased its look-back period to

51 quarters to continue to include losses

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

The Company will likely continue to increase its look-

back period to incorporate the effects of at least one

economic downturn in its loss history.

During 2020, the Company

adjusted certain qualitative and economic factors related to changes in

economic conditions driven by the impact of the

COVID-19 pandemic and resulting adverse economic conditions,

including higher unemployment in our primary market

will likely continue to increase its look-

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

its loss history.

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

driven by the impact of the

COVID-19 pandemic and resulting adverse economic conditions, including

higher unemployment in our primary market

During 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 ongoing COVID-19

-19 pandemic.

Assessment for Other-Than-Temporary

2 unchanged sentences

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 factors.

credit loss component is recognized in earnings and is the difference between

the security’s amortized cost basis and

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 and

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.

nagement 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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best estimates for appropriate discount rates, default rates,

prepayments, market volatility and other factors, taking into

account current observable market data and experience.

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

market data and experience.

These assumptions may have a significant effect on the reported

fair values of assets and liabilities and the related income

As such, the use of different models and

assumptions, as well as changes in market conditions, could

materially different net earnings and retained earnings

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

well as changes in market conditions, could result in

materially different net earnings and retained earnings results.

Other Real Estate Owned

Other real estate owned (“OREO”), consists of properties obtained

through foreclosure or in satisfaction of loans and is

reported at the lower of cost or fair value, less estimated costs to

sell at the date acquired with any loss recognized as a

charge-off through the allowance for loan

Additional OREO losses for subsequent valuation adjustments

determined on a specific property basis and are included as a

component of other noninterest expense along with holding

Any gains or losses on disposal of OREO are also reflected

in noninterest expense.

Other real estate owned (“OREO”), consists of properties obtained through foreclosure or

in satisfaction of loans and is

reported at the lower of cost or fair value, less estimated costs to sell at the date acquired with any loss

recognized as a

charge-off through the allowance for loan losses.

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

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

Significant judgments and

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

the period of time within which such estimates

can be considered current is significantly shortened during periods

of market volatility.

result, the net proceeds

realized from sales transactions could differ significantly

from appraisals, comparable sales, and other estimates used

determine the fair value of other OREO.

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

within which such estimates

can be considered current is significantly shortened during periods of

market volatility.

As a result, the net proceeds

realized from sales transactions could differ significantly from

appraisals, comparable sales, and other estimates used to

determine the fair value of OREO.

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.

ultimate 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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planning strategies in making this assessment.

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 December 31,

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 December 31, 2021.

of the deferred tax assets considered realizable, however,

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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".

OF OPERATIONS

Net Interest Income and Margin

Net interest income (tax-equivalent) was $24.8 million in 2020,

compared to $26.6 million in 2019.

Net interest income (tax-equivalent) was $24.5 million in 2021, compared

to $24.8 million in 2020.

This decrease was due

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margin (tax-equivalent),

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

by 59 basis points in 2020 from 2019 to 3.38%.

decrease was primarily due to the lower rate environment, including

a 150 basis point reduction in the federal funds rate

that occurred in March 2020 and changes in our asset mix from the

significant short-term liquidity increase in customer

The cost of total interest-bearing liabilities decreased 12 basis points

partially offset by balance sheet growth.

The tax-equivalent yield on total interest-earning assets decreased by 57 basis points

in 2021 from 2020 to 2.81%.

Such costs declined less

than the declines in rates earned on our interest earning assets.

The Company continues to deploy various asset liability management

strategies to manage its risk to interest rate

decrease was primarily due to the lower rate environment and changes in our asset

mix from the significant increase in

deposits from government stimulus and relief programs and customers’ increased savings.

The cost of total interest-bearing liabilities decreased 29 basis points to 0.39%

in 2021 compared to 0.68 in 2020.

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

fluctuations.

The Company’s net

interest margin could experience pressure due to reduced

earning asset yields and

The Company’s

net interest margin could experience pressure due to reduced earning asset

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 provision for loan losses was $1.1 million

in 2020, compared to a negative provision for loan losses

of $0.3 million in 2019.

The increase in the provision for loan losses

was related to adverse changes in economic conditions

and portfolio trends driven by the impact of COVID-19 pandemic, including

higher unemployment in our primary market

The provision for loan losses is based upon various factors,

including the absolute level of loans, loan growth, the

credit quality, and the amount of

net charge-offs or recoveries.

Based upon its assessment of the loan portfolio, management

adjusts the allowance for loan losses to an amount it believes

should be appropriate to adequately cover its estimate of probable

losses in the loan portfolio.

The Company’s

for loan losses as a percentage of total loans was 1.22% at December

31, 2020, compared to 0.95% at December 31, 2019.

At December 31, 2020, the Company’s

allowance for loan losses was 1.27% of total loans, excluding

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,

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

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

million during 2021, compared to

$1.1 million in provision for loan losses during 2020.

The negative provision for loan losses was primarily related to

improvements in economic conditions in our primary market area.

The provision for loan losses is based upon various

factors, including the absolute level of loans, loan growth, the credit quality,

and the amount of net charge-offs or

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 1.08% at December 31, 2021, compared

to 1.22% at December 31, 2020.

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

allowance for loan losses was 1.10% and 1.27% of

total loans at December 31, 2021 and 2020, respectively.

While the policies and procedures used to estimate the allowance

for loan losses, as well as the resulting provision for loan losses charged to operations,

are considered adequate by

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

and judgments and are

therefore approximate and imprecise.

Factors beyond our control (such as conditions

in the local and national economy,

local real estate markets, or industries) may have a material adverse effect

on our asset quality and the adequacy of our

allowance for loan losses resulting in significant increases in the provision

for loan losses.

Noninterest Income

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Bank-owned life insurance

Gain from loan guarantee program

Securities gains (losses), net

Securities gains, net

Total noninterest income

The decrease in service charges on deposit accounts

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

COVID-19 pandemic.

The Company’s income from mortgage

lending is primarily attributable to the (1) origination and sale

of new mortgage

The decrease in service charges on deposit accounts was primarily driven by a decline

in consumer spending activity as a

result of the COVID-19 pandemic.

The Company’s income from mortgage lending

is 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 MSRs when the loan is sold.

MSRs are recognized based on the fair value of the servicing

right on the date the corresponding mortgage loan is sold.

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 MSRs when the loan is sold.

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

mortgage loan is sold.

Subsequent to the date of transfer, the Company

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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

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Total mortgage lending income

The increase in mortgage lending income was primarily due to

an increase in mortgage refinance activity.

The Company’s

income from mortgage lending typically fluctuates as mortgage

interest rates change and is primarily attributable to the

origination and sale of new mortgage loans.

The increase in mortgage

lending income was partially offset by a decrease in

servicing fees, net of related amortization expense as prepayment

speeds increased during 2020, resulting in increased

amortization expense.

Income from bank-owned life insurance increased primarily due

to $0.3 million in non-taxable death benefits received in

The 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 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 2021 compared to 2020 due

to a decrease in refinance activity in our primary market.

The decrease in origination income was partially offset by an

increase in servicing fees, net of related amortization expense as prepayment

speeds slowed during 2021, resulting in

decreased amortization expense.

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.

on these policies are generally not taxable.

In 2019, the Company recognized a gain of $1.7 million resulting

from the termination of a Loan Guarantee Program (the

"Program") operated by the State of Alabama.

For more information regarding the Program, please refer

to Note 5, Loans

and Allowance for Loan Losses, of the consolidated financial

statements that accompany this report.

The decrease in other noninterest income was primarily due to

a $0.3 million pre-tax gain from an insurance recovery

received in the first quarter of 2019.

Noninterest Expense

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Total noninterest expense

The decrease in salaries and benefits expense was primarily due

to lower full-time equivalent employees, incentive accruals

and an increase in deferred costs related to the PPP

loan program.

The increase in net occupancy and equipment expense was primarily

due to various expenses related to the redevelopment

of the Company’s headquarters in downtown

This amount includes revised depreciation estimates and other

temporary relocation costs.

The increase in salaries and benefits expense 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 $15.

The decrease in net occupancy and equipment was primarily due to a reduction

of various expenses related to the

redevelopment of the Company’s headquarters

in downtown Auburn.

This amount includes revised depreciation estimates

and other temporary relocation costs.

For more information regarding changes

in accounting estimates, please refer to Note

Summary of Significant Accounting Policies, of the consolidated

financial statements that accompany this report.

Income tax expense was $1.6 million in 2020 compared to

$2.4 million in 2019.

The Company’s effective

income tax rate

1, Summary of Significant Accounting Policies, of the consolidated financial statements

that accompany this report.

The increase in FDIC and other regulatory assessments was primarily due to the expiration

of FDIC assessment credits

during 2020 and an increased assessment base during 2021.

Income tax expense was $1.4 million in 2021 and $1.6 million in 2020.

The Company’s effective income

14.89% in 2021, compared to 17.72% in 2020.

This change was primarily due to a decrease in the level of earnings

before taxes relative to tax-exempt sources of income.

The Company’s

effective income tax rate is principally impacted

tax-exempt earnings from the Company’s

investments in municipal securities and bank-owned life insurance.

This change was primarily due to an income tax benefit related to a New

Markets Tax Credit investment

funded in the fourth quarter of 2021.

The Company’s effective income

principally impacted by tax-exempt earnings from the Company’s

investments in municipal securities, bank-owned life

insurance, and New Markets Tax

BALANCE SHEET ANALYSIS

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million at December 31, 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 $91.9 million, and

increase of $7.4 million in the fair value of securities available

The increase in the amortized cost

securities available-for-sale was primarily attributable

to management allocating more funding to the investment portfolio

following the significant increases in customer deposits.

increase in the fair value of securities was primarily due to a

decrease in long-term interest rates.

The average annualized

tax-equivalent yields earned on total securities were 2.11%

2020 and 2.72% in 2019.

The following table shows the carrying value and weighted average

yield of securities available-for-sale as of December

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

of $95.7 million, and a decrease

of $9.0 million in the fair value of securities available-for-sale.

The increase in the amortized cost basis of securities

available-for-sale was primarily attributable to management

allocating more funding to the investment portfolio following

the significant increases in customer deposits.

The decrease in the fair value of securities

was primarily due to an increase

in long-term interest rates.

The average annualized tax-equivalent

yields earned on total securities were 1.66%

The following table shows the carrying value and weighted average yield of securities available

-for-sale as of December

31, 2021 according to contractual maturity.

Actual maturities may differ from contractual maturities of mortgage-backed

securities (“MBS”) because the mortgages underlying the securities

may be called or prepaid with or without penalty.

securities (“MBS”) because the mortgages underlying the securities may be called

or prepaid with or without penalty.

December 31, 2021

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Total available-for-sale

(1) Yields are calculated based on amortized cost.

(In thousands)

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Loans, net of unearned income

Total loans, net of unearned

income, were $461.7 million at December 31, 2020

and $460.9 million at December 31, 2019.

Total loans, net of unearned income,

were $458.4 million at December 31, 2021, and $461.7 million at December

Excluding PPP loans, total loans, net of unearned income, were $450.5

$442.7 million, a decrease of $18.2 million, or 4% from

million, an increase of $7.5 million, or 2% from

December 31, 2020.

This decrease was primarily due to a decrease in commercial

real estate loans and residential real

estate loans of $15.2 million and $8.4 million, respectively,

as lower rates increased refinance activity and payoffs for

multi-family residential and consumer mortgage loans.

Four loan categories represented the majority of the

loan portfolio

at December 31, 2020:

commercial real estate (55%), residential real

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

This increase was primarily due to an increase in commercial and industrial loans

$12.2 million, partially offset by a decrease in residential real estate loans of

$6.5 million, as lower rates increased refinance

activity and payoffs for consumer mortgage loans.

Four loan categories represented the majority of the loan portfolio at

December 31, 2021:

commercial real estate (56%), residential real estate (17%),

commercial and industrial (18%) and

construction and land development (7%).

Approximately 21% of the Company’s

commercial real estate loans were

Approximately 25% of the Company’s commercial

real estate loans were

classified as owner-occupied at December 31, 2021.

Within the residential real estate portfolio

segment, the Company had junior lien mortgages of approximately $8.7

or 2%, and $10.8 million, or 2%, of total loans, net of unearned

income at December 31, 2020 and 2019, respectively.

residential real estate mortgage loans with a consumer purpose,

the Company had no loans that required interest only

payments at December 31, 2020,

compared to approximately $0.8 million at December 31, 2019.

segment, the Company had junior lien mortgages of approximately $7.2 million,

or 2%, and $8.7 million, or 2%, of total loans, net of unearned income at December 31,

2021 and 2020, respectively.

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

had no loans that required interest only

payments at December 31, 2021 and 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 4.74%

in 2020 and 4.83% in 2019.

The specific economic and credit risks associated with our loan portfolio

include, but are not limited to, the effects of

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 4.45% in 2021

and 4.74% in 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 flo

ws, 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 $21.0 million.

Furthermore, we have an internal

limit for aggregate credit exposure (loans outstanding plus

Furthermore, we have an internal limit

for aggregate credit exposure (loans outstanding plus

unfunded commitments) to a single borrower of $18.9

Our loan policy requires that the Loan Committee of the

Board of Directors approve any loan relationships that exceed

this internal limit.

At December 31, 2020,

the Bank had no

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

At December 31, 2021, the Bank had no

relationships exceeding these limits.

We periodically

analyze our commercial loan portfolio to determine if a concentration

of credit risk exists in any one or

We periodically analyze

our commercial loan portfolio to determine if a concentration of credit

risk exists in any one or

more industries.

use classification systems broadly accepted by the financial services

industry in order to categorize our

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

based capital at December 31, 2020 (and related balances

at December 31, 2019).

Loan concentrations to borrowers in the following classes

exceeded 25% of the Bank’s total risk-

based capital at December 31, 2021 (and related balances at December 31,

(In thousands)

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Shopping centers

Supplemental COVID-19 Industry Exposure

We have identified

certain commercial sectors with enhanced risk resulting from

the impact of COVID-19.

these sectors represent 86% of the Company’s

total COVID-19 related modifications at December 31,

below summarizes the loans outstanding for these sectors at December

Portfolio Segment

Commercial and

Construction and

land development

Commercial real

% of Total Loans

December 31, 2020:

Shopping centers

Retail, excluding shopping centers

In light of disruptions in economic conditions caused by COVID

-19, the financial regulators have issued guidance

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 nine-month period.

recognizes that a combination of the payment relief options may be

prudent dependent on a borrower’s business type.

of 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.

This was a decline from $87.1

million, or 18% of total loans at September 30, 2020

and $112.7 million, or 24% of total loans at June 30,

below provide information concerning the composition of these

COVID-19 modifications as of December 31, 2020, all of

which represent second deferral requests.

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 December 31, 2021, we had one COVID-19 loan deferral totaling $0.1

million, 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,

2021 and 2020.

COVID-19 Modifications

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Interest Only

December 31, 2021:

Residential real estate

December 31, 2020:

Commercial and industrial

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Residential real estate

COVID-19 Modifications within Commercial Real Estate Segments

COVID-19 Modifications within Commercial Real Estate

(Dollars in thousands)

Loans Modified

Segment Loans

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

is exempt by law from classification as a TDR

December 31, 2020:

There were no COVID-19 modifications within the commercial real estate segment at December

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

losses inherent in the loan portfolio.

The allowance for loan losses was $5.

allowance for loan losses was $4.9 million at

December 31, 2021 compared to $5.6 million at December 31, 2020,

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described under “Critical Accounting Policies.”

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

asset quality ratios for each of the five years in the

five year period ended December 31, 2020 is presented below.

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

for the years ended December 31,

2021 and 2020 are presented below.

Year ended December 31

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Commercial and industrial

Construction and land development

Commercial real estate

Residential real estate

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Total recoveries

Net recoveries (charge-offs)

Net (charge-offs) recoveries

Provision for loan losses

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as a % of nonperforming loans

Net (recoveries) charge-offs as a % of

average loans

As described under “Critical Accounting Policies”, management assesses

the adequacy of the allowance prior to the end of

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

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 1.22

at December 31,

allowance for loan losses to total loans outstanding was 1.08% at December 31,

2021, compared to 1.22% at December 31,

At December 31, 2020, the Company’s

allowance for loan losses was 1.27% of total loans, excluding PPP

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 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.

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

allowance for loan losses was 1.10% and

1.27% of total loans at December 31, 2021 and 2020, respectively.

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

In addition our regulators, as an

integral part of their examination process, will periodically review the Company’s

allowance for loan losses, and may

require the Company to make additional provisions to the allowance for loan losses based

on their judgment about

information available to them at the time of their examinations.

Nonperforming Assets

At December 31, 2020 the Company had $0.5 million in nonperforming

assets compared

to $0.2 million at December 31,

The table below provides information concerning total nonperforming

assets and certain asset quality ratios.

At December 31, 2021 the Company had $0.8

million in nonperforming assets compared to $0.5

million at December 31,

The table below provides information concerning total nonperforming assets

and certain asset quality ratios.

(Dollars in thousands)

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Other real estate owned

nonperforming assets

Total nonperforming assets

as a % of loans and other real estate owned

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Accruing loans 90 days or more past due

The table below provides information concerning the composition

of nonaccrual loans at December 31, 2020

The table below provides information concerning the composition of nonaccrual

loans at December 31, 2021 and 2020,

respectively.

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Residential real estate

Total nonaccrual loans / nonperforming

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 more

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

and in the process of collection.

At December 31, 2020

Total nonaccrual loans /

nonperforming 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 more

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

At December 31, 2021 and

2020, respectively, the Company

had $0.5 million and $0.2 million in loans on nonaccrual.

At December 31, 2020 there were $0.1 million in loans 90 days

past due and still accruing interest, compared to none at

million and $0.5

million in loans on nonaccrual.

At December 31, 2021 there were no loans 90 days past due and still accruing interest, compared

to $0.1 million at

December 31, 2020.

The table below provides information concerning the composition of OREO at December

31, 2021 and 2020, respectively.

(In thousands)

Other real estate owned:

At December 31, 2020 and 2019, respectively,

the Company held no OREO properties acquired from borrowers.

Commercial real estate

Total other real estate owned

Potential Problem Loans

Potential problem loans represent those loans with a well-defined

weakness and where information about possible credit

problems of borrowers 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 borrowers 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

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 $2.9 million, or 1.0% of total loans at

December 31, 2020, compared to $4.4 million, or 1.0% of

total loans at December 31, 2019.

The table below provides information concerning the composition

of potential problem loans at December 31, 2020

problem loans, which are not included in nonperforming assets, amounted to $2.4

million, or 0.5% of total loans at

December 31, 2021, compared to $2.9 million, or 1.0% of total loans at December 31, 2020.

The table below provides information concerning the composition of potential problem

loans at December 31, 2021 and

2020, respectively.

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Total potential problem loans

At December 31, 2020, approximately $0.9 million or 30.3%

of total potential problem loans were past due at least 30 but

At December 31, 2021, approximately $0.3

million or 14.2% of total potential problem loans were past due at least 30 but

less than 90 days.

The following table is a summary of the Company’s

performing loans that were past due at least 30 days but

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

90 days as of December 31, 2021 and 2020, respectively.

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Certificates of deposit under $250,000

Certificates of deposit and other time deposits of $100,000

Certificates of deposit and other time deposits of $250,000 or more

Total deposits

Total deposits increased

$115.6 million, or 16%, to $839.8

million at December 31, 2020,

$154.5 million, or 18%, to $994.2 million at December 31, 2021,

compared to $839.8 million at

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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 reduced customer

spending during the COVID-19 pandemic.

increases reflect deposits from

customers who received PPP loans, the impact of government stimulus checks, and

reduced customer spending during the

COVID-19 pandemic.

Estimated uninsured deposits totaled $420.8 million and $315.2 million at December 31,

2021 and 2020, respectively.

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

insurance limits.

The average rates paid on total interest-bearing deposits were 0.39%

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Other Borrowings

Other borrowings generally consist of short-term borrowings

and long-term debt.

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

Short-term borrowings generally consist

of federal funds purchased and securities sold under agreements

to repurchase with an original maturity of one year

The Bank had available federal fund lines totaling $41.0 million

with none outstanding at December 31, 2020 and 2019,

of federal funds purchased and securities sold under agreements to repurchase

with an original maturity of one year or less.

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

at December 31, 2021 and 2020,

respectively.

Securities sold

under agreements to repurchase totaled $2.4 million and $1.1

million at December 31, 2020

and 2019, respectively.

The average rates paid on short-term borrowings was 0.48%

and 0.49% in 2020 and 2019, respectively.

concerning the average balances, weighted average rates, and

maximum amounts outstanding for short-term borrowings

during the two-year period ended December 31, 2020 is included

in Note 9 to the accompanying consolidated financial

statements included in this annual report.

The Company had no long-term debt outstanding at December

Securities sold under

agreements to repurchase totaled $3.4 million and $2.4 million at December 31,

and 2020, respectively.

The average rates paid on short-term borrowings were 0.51% and 0.48%

in 2021 and 2020, respectively.

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

CAPITAL ADEQUACY

The Company's consolidated stockholders' equity was $107.7

million and $98.3 million as of December 31, 2020 and

The Company's consolidated stockholders' equity was $103.7 million and $107.7

million as of December 31, 2021 and

respectively.

The increase from December 31, 2019 was primarily driven

by net earnings of $7.5 million and other

comprehensive income due to the change in unrealized gains

on securities available-for-sale, net of tax, of $5.5

which was partially offset by cash dividends paid of $3.6

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

to the rules of the Basel III regulatory capital framework and

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

loss due to the

change in unrealized gains on securities available-for-sale, net of tax, of $6.7

million, cash dividends paid of $3.7

and stock repurchases of $1.6 million, representing 45,946 shares,

which was partially offset by net earnings of $8.0

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

capital framework and

related Dodd-Frank Wall

Street Reform and Consumer Protection Act changes.

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-in on

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-in on

January 1, 2019 at 2.5%.

A banking organization with a

conservation buffer of less than the required

amount will be subject

to limitations on capital distributions, including dividend payments

and certain discretionary bonus payments to executive

At December 31, 2020,

the Bank’s ratio was sufficient

to meet the fully phased-in conservation buffer.

Effective March 20, 2020, the Federal Reserve and

the other federal banking regulators adopted an interim final rule that

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

At December 31, 2021, the Bank’s

ratio was sufficient to meet the fully phased-in conservation

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

banking regulators adopted an interim final rule that

amended the capital conservation buffer.

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

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

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

not reflected in net income;

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

The interim final rule only affects the capital buffers,

banking organizations were encouraged to make prudent

capital distribution decisions.

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

under the Federal Reserve’s policy.

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

the Company and its consolidated subsidiaries.

tier 1 leverage ratio was 10.32%, CET1 risk-based capital ratio

was 17.27%, tier 1 risk-based capital ratio was 17.27%, and

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 9.35%, CET1 risk-based capital ratio was 16.23%, tier 1 risk-based

capital ratio was 16.23%, and

total risk-based capital ratio was 17.06%

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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

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 December 31, 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

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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.

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Interest Rate Risk Management

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

market risk arising from fluctuations in interest rates because

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

fluctuations in interest rates because

assets and liabilities may mature or reprice at different times.

For example, if liabilities reprice faster than assets, and

if liabilities reprice faster than assets, and

interest rates are generally rising, earnings will initially decline.

In addition, assets and liabilities may reprice at the same

In addition, assets

and liabilities may reprice at the same

time but by different amounts.

For example, when the general

level of interest rates is rising, the Company may increase

rates paid on interest bearing demand deposit accounts and savings

deposit accounts by an amount that is less than the

For example, when the general level of interest rates is rising,

the Company may increase

rates paid on interest bearing demand deposit accounts and savings deposit

accounts by an amount that is less than the

general increase in market interest rates.

Also, short-term and

long-term market interest rates may change by different

For example, a flattening yield curve may reduce the

interest spread between new loan yields and funding costs.

Further, the remaining maturity of various assets

and liabilities may shorten or lengthen as interest rates change.

Also, short-term and long-term

market interest rates may change by different

For example, a flattening yield curve may reduce the interest spread

between new loan yields and funding costs.

Further, the remaining maturity of various assets and

liabilities may shorten or lengthen as interest rates change.

example, if long-term mortgage interest rates decline sharply,

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prepay earlier than anticipated, which could reduce earnings.

Interest rates may also have a direct or indirect effect on loan

demand, loan losses, mortgage origination volume, the fair value of

MSRs and other items affecting earnings.

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

demands for various types of loans and

ALCO determines the most appropriate amounts of

on-balance sheet and off-balance sheet items.

used to help manage interest rate sensitivity include an earnings simulation

and an economic value of equity model.

Interest rates may also

have a direct or indirect effect on loan

demand, loan losses, mortgage origination volume, the fair value of MSRs and other

items affecting earnings.

ALCO measures and evaluates the interest rate risk so that we can meet customer demands

for various types of loans and

ALCO determines the most appropriate amounts of on-balance sheet and

off-balance sheet items.

used to help manage interest rate sensitivity include an earnings simulation and an economic

value of equity model.

Earnings simulation

Management believes that interest rate risk is best estimated by our

earnings simulation modeling.

On at least a quarterly basis, the following 12 month time period

is simulated to determine a baseline net interest income

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

On at least a quarterly basis, the following 12 month time period is simulated to determine a

baseline net interest income

forecast and the sensitivity of this forecast to changes in interest rates.

The baseline forecast assumes an unchanged or flat

The baseline forecast

assumes an unchanged or flat

interest rate environment.

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

Forecasted levels of earning assets, interest-bearing liabilities,

and off-balance sheet financial

instruments are combined with ALCO forecasts of market interest rates for

the next 12 months and other factors in order to

produce various earnings simulations and estimates.

To help limit interest rate

risk, we have guidelines for earnings at risk which seek to

limit the variance of net interest

To help limit interest rate risk,

we have guidelines for earnings at risk which seek to limit the variance of net interest

income from gradual changes in interest rates.

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flat interest rate

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

variances are as follows:

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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months assuming a gradual change in

interest rates up or down when compared to the baseline net

interest income forecast at December 31, 2020.

interest rates up or down when compared to the baseline net interest income

forecast at December 31, 2021.

Changes in Interest Rates

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NM=not meaningful

At December 31, 2020, our earnings simulation model indicated

that we were in compliance with the policy guidelines

At December 31, 2021, our earnings simulation model indicated that

we were in compliance with the policy guidelines

Economic Value

Economic value of equity (“EVE”) measures the extent that estimated

economic values of our assets, liabilities and off-

Economic value of equity (“EVE”) measures the extent that estimated econom

ic 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 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

The following table reports the variance of EVE assuming an immediate

change in interest rates up or down when

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

The following table reports the variance of EVE assuming an immediate change in

interest rates up or down when

compared to the baseline EVE at December 31, 2021.

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NM=not meaningful

At December 31, 2020, our EVE model indicated that we were

in compliance with the policy guidelines noted above.

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

indicator of how our net interest income will be affected

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

with the policy guidelines noted above.

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

income will be affected 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 one tool to manage interest rate

sensitivity while continuing to meet the credit and

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

interest-sensitive assets and

interest-sensitive liabilities and as one 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 (“swaps”) to facilitate

From time to time, the Company may enter into

interest rate swaps (“swaps”) to facilitate

customer transactions and meet their financing needs.

swaps qualify as derivatives, but are not designated as hedging

At December 31, 2020 and 2019, the Company had

no derivative contracts to assist in managing interest rate

These swaps qualify as derivatives,

but are not designated as hedging

At December 31, 2021 and 2020, the Company had no derivative

contracts to assist in managing interest rate

Liquidity Risk Management

Liquidity is the Company’s ability

to convert assets into cash equivalents in order

to meet daily cash flow requirements,

for deposit withdrawals, loan demand and maturing obligations.

Without proper management of its liquidity,

Company could experience higher costs of obtaining funds due to

insufficient liquidity, while

excessive liquidity can lead

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

higher-yielding investment opportunities.

Liquidity is 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.

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,

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

Company could also issue common stock or other securities.

of funds by the Company include dividends paid

Primary uses of funds by the

Company include dividends paid

to stockholders and stock repurchases.

Primary sources of funding for the Bank include customer deposits,

other borrowings, repayment and maturity of securities,

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

repayment and maturity of securities,

and sale and repayment of loans.

The Bank has access to federal funds lines from various banks

and borrowings from the

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

Federal Reserve discount window.

In addition to these sources, the Bank has participated

in the FHLB's advance program

In addition to these sources, the Bank has participated in the FHLB's advance program

to obtain funding for its growth.

Advances include both fixed

and variable terms and are taken out with varying maturities.

As of December 31,

2020, the Bank had a remaining available line of credit with the FHLB

Advances include both fixed and variable terms and

are taken out with varying maturities.

As of December 31, 2021, the Bank had a remaining available line of credit with the FHLB

totaling $319.6 million.

December 31, 2020, the Bank also had $41.0 million of federal

funds lines, with none outstanding.

December 31, 2021, the Bank also had $41.0 million of federal funds lines, with none outstanding.

Primary uses of funds

include repayment of maturing obligations and growing the loan

The following table presents additional information about our

contractual obligations as of December 31, 2020, which by

their terms had contractual maturity and termination dates subsequent

to December 31, 2020:

include repayment of maturing obligations and growing the loan portfolio.

The following table presents additional information about our contractual obligations

as of December 31, 2021, which by

their terms had contractual maturity and termination dates subsequent to December

Payments due by period

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Operating lease obligations

(1) Deposits with no stated maturity (demand, NOW, money market, and savings deposits) are presented in the "1

year or less" column

Management believes that the Company and the Bank have adequate

sources of liquidity to meet all known contractual

obligations and unfunded commitments, including loan commitments and

reasonable borrower, depositor,

(1) Deposits with no stated maturity (demand, NOW, money market, and savings deposits) are

presented in the "1 year or less" column

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

meet all known contractual

obligations and unfunded commitments, including loan commitments and reasonable borrower,

depositor, and creditor

requirements over the next 12 months.

Off-Balance Sheet Arrangements

At December 31, 2020, the Bank had outstanding standby letters

of credit of $1.2 million and unfunded loan commitments

At December 31, 2021, the Bank had outstanding standby letters of credit of $1.

million and unfunded loan commitments

outstanding of $71.0 million.

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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 has the ability to

liquidate federal funds sold or securities available-for-sale,

or on a short-term basis to borrow and purchase federal funds

from other financial institutions.

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

cash requirements.

fund these outstanding commitments, the Bank has the ability to liquidate federal funds

sold or securities available-for-sale,

or on a short-term basis to borrow and purchase federal funds from other financial

institutions.

Residential mortgage lending and servicing activities

Since 2009, we have primarily sold residential mortgage loans in

the secondary market to Fannie Mae while retaining the

We primarily sell conforming

residential mortgage loans in the secondary market to Fannie Mae

while retaining the

servicing of these loans.

The sale agreements for these residential mortgage

loans with Fannie Mae and other investors

include various representations and warranties regarding the origination

and characteristics of the residential mortgage

Although the representations and warranties vary among investors,

they typically cover ownership of the loan,

validity of the lien securing the loan, the absence of delinquent taxes

or liens against the property securing the loan,

compliance with loan criteria set forth in the applicable agreement,

compliance with applicable federal, state, and local

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

Although the representations and warranties vary among investors, they typically

cover ownership of the loan,

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

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

federal, state, and local

laws, among other matters.

As of December 31, 2020, the unpaid principal balance of residential

mortgage loans, which we have originated and sold,

As of December 31, 2021, the unpaid principal balance of residential mortgage loans,

which we have originated and sold,

but retained the servicing rights was $252.7 million.

Although these

loans are generally sold on a non-recourse basis,

except for breaches of customary seller representations and

warranties, we may have to repurchase residential mortgage

loans in cases where we breach such representations or warranties or

the other terms of the sale, such as where we fail to

Although these loans are

generally sold on a non-recourse basis,

except for breaches of customary seller representations and warranties,

we may have to repurchase residential mortgage

loans in cases where we breach such representations or warranties or the other terms of

the sale, such as where we fail to

deliver required documents or the documents we deliver are defective.

Investors also may require the repurchase of a

mortgage loan when an early payment default underwriting review reveals

significant underwriting deficiencies, even if the

Investors also

may require the repurchase of a

mortgage loan when an early payment default underwriting review reveals significant

underwriting deficiencies, even if the

mortgage loan has subsequently been brought current.

Repurchase demands

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 event has

seek to reduce and manage the risks of potential repurchases or other claims

by mortgage loan investors

through our underwriting, quality assurance and servicing practices,

including good communications with our residential

Repurchase demands 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 event has

seek to reduce and manage the risks of potential repurchases or other claims by mortgage loan investors

through our underwriting, quality assurance and servicing practices, including

good communications with our residential

mortgage investors.

The Company was not required to repurchase any loans during 2020

and 2019 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

The Company was not required to repurchase any loans during 2021 and 2020

as a result of representation and warranty

provisions contained in the Company’s sale agreements

with Fannie Mae, and had no pending repurchase or make-whole

requests at December 31, 2021.

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(1) collect payments due from borrowers;

(2) advance certain delinquent

payments of principal and interest;

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

relating to the mortgage loans;

(2) advance certain delinquent payments

of principal and interest;

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 a

standard of responsibility for actions taken by us in

such capacity and provides protection against expenses and liabilities incurred by us

when acting in compliance with the

respective servicing agreements.

if we commit a material breach of our obligations as servicer,

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

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

standards governing servicing and

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

guides issued by Fannie Mae as well as

the contract provisions established between Fannie Mae and the Bank.

Remedies could include repurchase of an affected

Although to date repurchase requests related to representation and

warranty provisions, and servicing activities have been

limited, it is possible that requests to repurchase mortgage loans may

increase in frequency if investors more aggressively

Although to date repurchase requests related to representation and warranty provisions,

and servicing activities have been

limited, it is possible that requests to repurchase mortgage loans may increase in frequency

if investors more aggressively

pursue all means of recovering losses on their purchased loans.

As of December 31, 2020, we believe that this exposure is

not material due to the historical level of repurchase requests

and loss trends, the results of our quality control reviews, and

the fact that 99% of our residential mortgage loans serviced for

Fannie Mae were current as of such date.

ongoing communications with our investors and will continue

to evaluate this exposure by monitoring the level and number

of repurchase requests as well as the delinquency rates in our

investor portfolios.

Section 4021 of the CARES Act allows borrowers under 1-to

-4 family residential mortgage loans sold to Fannie Mae to

request forbearance to the servicer after affirming that

such borrower is experiencing financial hardships during the

As of December

31, 2021, we believe that this exposure is

not material due to the historical level of repurchase requests and loss trends, the results of

our quality control reviews, and

the fact that 99% of our residential mortgage loans serviced for Fannie Mae

were current as of such date.

ongoing communications with our investors and will continue to evaluate this exposure

by monitoring the level and number

of repurchase requests as well as the delinquency rates in our investor portfolios.

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

mortgage loans sold to Fannie Mae to

request forbearance to the servicer after affirming that such borrower

is experiencing financial hardships during the

COVID-19 emergency.

Except for vacant or abandoned properties, Fannie Mae servicers

may not initiate foreclosures on

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

foreclosures on

similar procedures or related evictions or sales until December 31, 2020.

The forbearance period has been extended,

generally, to March 31,

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

actual/actual basis.

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

Fannie Mae on principal and interest on such mortgage loans

where the borrower is entitled to forbearance.

The forbearance period was extended, generally,

to March 31, 2021.

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

the Bank is not obligated to make any advances to Fannie Mae on principal and interest on

such mortgage loans where the

borrower is entitled to forbearance.

Effects of Inflation and Changing Prices

The consolidated financial statements and related consolidated

financial data presented herein have been prepared in

accordance with GAAP and practices within the banking industry

which require the measurement of financial position and

operating results in terms of historical dollars without considering

the changes in the relative purchasing power of money

The consolidated financial statements and related consolidated financial data

presented herein have been prepared in

accordance with GAAP and practices within the banking industry which require

the measurement of financial position and

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

the relative purchasing power of money

over time due to inflation.

Unlike most industrial companies,

virtually all the assets and liabilities of a financial institution

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.

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Financial Instruments – Credit Losses (Topic

Measurement of Credit Losses on

Information about this pronouncement is described in more detail

Measurement of Credit Losses on Financial

Information about this pronouncement 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 threshold in

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

credit losses using a broader

range of information regarding past events, current conditions and forecasts assessing the

collectability of cash flows.

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

cost basis of the financial assets to

present the net amount expected to be collected.

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

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

For public business entities, the new guidance was

originally effective for annual and interim periods

in fiscal years beginning after December 15, 2019.

developed an implementation team that is following a general

The team has been working with an advisory

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.

business entities, the new guidance was

originally effective for annual and interim periods in fiscal years

beginning after December 15, 2019.

The Company has

developed an implementation team that is following a general timeline.

team has been working with an advisory

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

4 unchanged sentences

the level of the reserve for credit losses.

The Company is continuin

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.

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 in January 2023,

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.

2 unchanged sentences

this annual report on Form 10-K includes certain designated net

interest income amounts presented on a tax-equivalent basis, a

non-GAAP financial measure, including the presentation of

interest income amounts presented on a tax-equivalent basis, a non-GAAP financial

measure, including the presentation of

total revenue and the calculation of the efficiency ratio.

The Company believes the presentation of net interest income

on a tax-equivalent basis provides comparability of net

interest income from both taxable and tax-exempt sources and

facilitates comparability within the industry.

Company believes these non-GAAP financial measures enhance

investors’ understanding of its business and performance,

these non-GAAP financial measures should not be considered

an alternative to GAAP.

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

basis provides comparability of net

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

within the industry.

Company believes these non-GAAP financial measures enhance investors’

understanding of its business and performance,

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

The reconciliation of these non-

39 unchanged sentences

Nonperforming loans as % of loans

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

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

Capital Adequacy (c):

15 unchanged sentences

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

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

sum of noninterest income and tax-equivalent net interest income.

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

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

wholly-owned subsidiary, AuburnBank.

Balance and Net Interest Income Analysis

- Average Balance

and Net Interest Income Analysis

Year ended December 31

21 unchanged sentences

Net interest income and margin

(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 an income tax

(2) Yields on tax-exempt securities have been

computed on a tax-equivalent basis using an income tax rate

Rate Variance

17 unchanged sentences

Short-term borrowings

Long-term debt

Total interest expense

Net interest income

(1) Yields on tax-exempt securities

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

(1) Yields on tax-exempt securities have been

computed on a tax-equivalent basis using an income

tax rate of 21%.

(2) Changes that are not solely a result of volume or rate have

been allocated to volume.

- Loan Portfolio Composition

(In thousands)

(2) Changes that are not solely a result of volume or rate have been allocated to volume.

- Net Charge-Offs (Recoveries) to Average

(Dollars in thousands)

Commercial and industrial (1)

3 unchanged sentences

Consumer installment

unearned income

Loans, net of unearned income

allowance for loan losses

- Loan Maturities and Sensitivities to Changes in Interest

(1) Excludes PPP loans, which are guaranteed by the SBA.

(2) Gross loan balances.

- Loan Maturities

December 31, 2021

5 unchanged sentences

Consumer installment

- Allowance for Loan Losses and Nonperforming Assets

Year ended December 31

- Sensitivities to Changes in Interest Rates on Loans Maturing in More

Than One Year

December 31, 2021

(Dollars in thousands)

Allowance for loan losses:

Balance at beginning of period

Commercial and industrial

Commercial real estate

Residential real estate

Consumer installment

Commercial and industrial

Construction and land development

2 unchanged sentences

Consumer installment

Total recoveries

Net recoveries (charge-offs)

Provision for loan losses

Ending balance

as a % of loans

as a % of nonperforming loans

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

Nonperforming assets:

Nonaccrual/nonperforming loans

Other real estate owned

Total nonperforming assets

as a % of loans and other real estate owned

as a % total assets

Nonperforming loans as a % of total loans

Accruing loans 90 days or more past due

- Allocation of Allowance for Loan Losses

1 unchanged sentence

Commercial and industrial

Construction and

land development

Construction and land development

Commercial real estate

3 unchanged sentences

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

- CDs and Other Time Deposits of $100,000

- Estimated Uninsured Time Deposits by Maturity

(Dollars in thousands)

4 unchanged sentences

Over 12 months

Total CDs and other

time deposits of $100,000 or more

Total estimated uninsured

time deposits

AND QUALITATIVE

DISCLOSURES ABOUT MARKET RISK

The information called for by ITEM 7A is set forth in ITEM

7 under the caption “Market and Liquidity Risk Management”

The information called for by ITEM 7A is set forth in ITEM 7 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-K

Item 7. Management’s Discussion and Analysis