What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-05-05 compared with 2021-10-29 · 669 added, 830 removed, 961 unchanged (61% of the section changed)

1 unchanged sentence

OF FINANCIAL CONDITION AND RESULTS

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

of various factors related to the results

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

various factors related to the results

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

2 unchanged sentences

financial statements and related

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

as well as the information contained in our

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

interim reports on Form 10-Q for the quarters

ended March 31, 2021 and June 30, 2021.

notes for the quarters ended March 31, 2022 and 2021, as well as the information contained

in our Annual Report on Form

10-K for the year ended December 31, 2021.

Special Notice Regarding Forward-Looking Statements

18 unchanged sentences

update any forward-looking statements.

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

be forward-looking statements.

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

forward-looking statements.

identify these forward-looking statements through our use of words such as

8 unchanged sentences

changes, foreign, domestic and locally,

including seasonality, natural

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

tornados, coronavirus or other epidemics or pandemics;

including inflation, seasonality,

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

and tornados, COVID-19 or other epidemics or pandemics;

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

may affect general economic conditions;

governmental monetary and fiscal policies;

governmental monetary and fiscal policies, including the continuing effects

of COVID-19 fiscal and monetary

stimulus, and changes in monetary policies in response to inflations;

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

9 unchanged sentences

the risks of changes in interest rates on the levels, composition and costs of deposits, loan

demand, and the values

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

the risks and uncertainty

of the amounts realizable;

changes in borrower credit risks and payment behaviors;

demand and mortgage

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

liabilities, and the risks and uncertainty of the amounts realizable;

changes in borrower credit risks, and savings payment behaviors;

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

56 unchanged sentences

company, the Company

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

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

are permitted to the Bank under applicable laws and regulations.

15 unchanged sentences

Summary of Results of Operations

Quarter ended September 30,

Nine months ended September 30,

(Dollars in thousands, except per share amounts)

Quarter ended March 31,

(Dollars in thousands, except per share data)

Net interest income (a)

12 unchanged sentences

The Company’s net earnings were $2.1

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

months of 2020.

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

months of 2021, compared to

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

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

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

million for the first nine months of 2020.

This decrease was primarily due to net interest margin compression

from the Federal Reserve’s interest

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

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

of our total assets reflecting deployment

of increased deposits.

Net interest margin (tax-equivalent) de

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

for the first nine months of 2020,

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

asset mix resulting from the significant increase in deposits from government

stimulus and relief programs and customers’

increased savings.

Net interest income (tax-equivalent) included $0.8

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

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

At September 30, 2021, the Company’s

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

$5.6 million, or 1.22%

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

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

allowance for loan losses was 1.16% of

total loans at September 30, 2021.

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

first nine months of 2021,

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

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

in our primary market

area, and related improvements in our asset quality.

The provision for loan losses is based upon various estimates and

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

net charge-offs.

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

to $4.0 million for the first nine months of

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

life insurance received

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

in our primary

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

compared to $14.5 million for the first nine months

The decrease was primarily due to a reduction of $0.7

million in various expenses related to the redevelopment of

the Company’s headquarters in downtown

This decrease was mostly offset by increases in salaries and benefits

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

first nine months of 2021.

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

compared to $1.2 million during the first nine

months of 2020,

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

55% and 17.64%,

respectively.

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

an increase of 2% from the same

period of 2020.

The Company’s share repurchases of $1.3

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

outstanding common shares at September 30, 2021.

At September 30, 2021, the Bank’s regulatory

capital ratios were well

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

standards with a total risk-based

capital ratio of 17.72%, a tier 1 leverage ratio of 9.57%

and a common equity

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

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

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

share, for the third quarter of 2020.

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

3% increase compared to $6.0

million for the third quarter of 2020.

This increase was primarily due to balance sheet

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

The Company’s net interest margin

(tax-equivalent) decreased

in the third quarter of 2021,

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

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

in deposits from government stimulus

and relief programs and customers’ increased savings.

million for the first quarter of 2022, compared to $2.0 million for the first quarter of

Basic and diluted earnings per share were $0.59 per share for the first quarter of 2022, compared

to $0.56 per share

for the first quarter of 2021.

Net interest income (tax-equivalent) was $6.2 million for the first quarter of 2022,

a 2% increase compared to $6.1 million

for the first quarter of 2021.

This increase was primarily due to balance sheet growth, partially offset

by a decrease in the

Company’s net interest margin

(tax-equivalent).

Net interest margin (tax-equivalent) declined to 2.43%

in the first quarter

of 2022, compared to 2.66% for the first quarter of 2021 due to the continued lower interest

rate environment and changes

in our asset mix resulting from the continuing elevated levels of customer deposits

Net interest income (tax-equivalent)

included $0.3 million in PPP

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

The Company had no provision for loan losses

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

the third quarter 2020.

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

$1.4 million in the third quarter of 2020.

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

income of $0.4 million as

refinance activity slowed in our primary market area.

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

largely unchanged, compared to the third quarter of 2020.

Income tax expense was $0.4

million for the third quarter of

2021 and 2020, respectively.

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

was 17.07%, compared to

in the third quarter of 2020.

included $0.1

million in PPP loan fees, net of related costs for the first quarter of 2022, compared to $0.

million for the

first quarter of 2021.

At March 31, 2022, the Company’s allowance

for loan losses was $4.7 million, or 1.09% of total loans, compared to $4.9

million, or 1.08% of total loans, at December 31, 2021, and $5.7

million, or 1.23% of total loans, at March 31, 2021.

The Company recorded a negative provision for loan losses of $0.3

million during the first quarter of 2022,

compared to no

provision for loan losses during the first quarter of 2021.

The negative provision for loan losses was primarily related to a

decrease in total loans, excluding PPP,

during the first quarter of 2022.

Total loans, excluding PPP,

were $424.3 million at

March 31, 2022, a decrease of $25.9 million, or 6%, compared to

December 31, 2021.

This decline was primarily due to

decreases in multi-family loans of $17.3 million and hotel loans of $6.5

million due to payoffs.

The provision for loan

losses is based upon various estimates and judgments, including the absolute level of loans,

economic conditions, credit

quality and the amount of net charge-offs.

Noninterest income was $0.9 million for the first quarter of 2022 compared to

$1.2 million for the first quarter of

The decrease in noninterest income was primarily due to a decrease

in mortgage lending income of $0.3 million as

refinance activity slowed in our primary market area, as market interest rates

on mortgage loans increased.

Noninterest expense was $4.9 million for the first quarter of 2022 compared to

$4.7 million for the first quarter of 2021.

The increase in noninterest expense was due to increases in salaries and benefits

expense and other noninterest expense.

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

compared to $0.4 million during the first quarter of 2021.

The Company’s effective tax

rate for the first quarter of 2022 was 10.88%, compared to 17.41% in the first quarter

The decrease 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

tax rate is principally impacted by tax-exempt earnings from the

Company’s investments in municipal securities,

bank-owned life insurance, and New Markets Tax

The Company paid cash dividends of $0.265 per share in the first quarter of 2022, an increase of 2% from the same

The Company’s share repurchases of $0.1

million since December 31, 2021 resulted in 3,559 fewer outstanding

common shares at March 31, 2022.

At March 31, 2022, the Bank’s regulatory capital ratios

were well above the minimum

amounts required to be “well capitalized” under current regulatory standards

with a total risk-based capital ratio of 18.08%,

a tier 1 leverage ratio of 9.09%

and a common equity tier 1 (“CET1”) ratio of 17.26%

at March 31, 2022.

COVID-19 Impact Assessment

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

In March 2020,

the World Health

Organization declared COVID-19 a global pandemic and the

United States declared a National Public Health Emergency.

The COVID-19 pandemic has, at times, especially in 2020, severely restricted

the level of economic activity in our markets.

In response to the COVID-19 pandemic, the State of Alabama, and

most other states, have taken preventative or protective

actions to prevent the spread of the virus, including imposing restrictions on travel

and business operations and a statewide

mask mandate, advising or requiring individuals to limit or forego their time outside

of their homes, limitations on

gathering of people and social distancing, and causing temporary closures of businesses

that have been deemed to be non-

Though certain of these measures have been relaxed or

eliminated, increases in reported cases could cause these

measures to be reestablished.

Auburn University, a major

source of economic activity in Lee County,

went to remote

instruction on March 16, 2020.

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

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

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 of 2021.

At times, the pandemic

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

In response to the COVID

-19 pandemic, the State of

Alabama, and most other states, have taken preventative or protective actions to prevent

the spread of the virus, including

imposing restrictions on travel and business operations and a statewide mask mandate,

advising or requiring individuals to

limit or forego their time outside of their homes, limitations on gathering of people and

social distancing, and causing

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

Though certain

of these measures have been

relaxed or eliminated, 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 and newly developed

COVID-19 has significantly affected local state, national and

1 unchanged sentence

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

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

We have implemented

6 unchanged sentences

customers, while protecting our employees’ health.

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

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

2020, we limited branch lobby service to appointment

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

As permitted by state public health guidelines,

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

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

branch drive-thru facilities and ATMs.

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

opened some of our branch lobbies.

In 2021, we opened our remaining branch lobbies.

to provide services through our online and other electronic channels.

In addition, we established remote work access to

help employees stay at home where job duties permit.

We are focused on servicing

the financial needs of our commercial and consumer clients with extensions

deferrals to loan customers effected by COVID-19, provided

such customers were not more than 30 days past due at the

time of the request;

were a participating lender in the PPP.

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

for payroll and other permitted purposes in accordance with the requirements

We continue to

services through our online and other electronic channels.

we maintain remote work access to help

employees stay at home while providing continuity of service during outbreaks of

COVID-19 variants.

We serviced the financial

needs of our commercial and consumer clients with extensions and

deferrals to loan

customers effected by COVID-19, provided such customers

were not more than 30 days past due at the time of the

were an active PPP

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

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

made on or after June 5,

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

Payments are deferred

until either the date on which the Small Business

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

to the lender or the date that is 10 months after

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

within that 10-month period.

We believe these loans

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

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.

demand for single family housing has exceeded existing

When coupled with construction delays attributable to supply chain disrupti

ons and worker shortages, these

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

Stimulative monetary and fiscal policies,

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 has

begun increasing its target interest rates and is considering reducing its

of securities to counteract inflation.

A summary of PPP loans extended during 2020 follows:

3 unchanged sentences

Up to $350,000

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

Through September 30,

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

As of September 30, 2021, we have received payments

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

$20 thousand.

approximately $1.5 million in fees from the SBA 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,

1 unchanged sentence

Act”) was signed into law.

The 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.

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

The Economic Aid Act also permits the collection of

a higher amount of PPP loan fees by

participating banks.

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

2021 under the Economic Aid Act follows:

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

(Dollars in thousands)

2 unchanged sentences

Up to $350,000

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

Through September 30,

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

As of September 30, 2021, we have received

payments and forgiveness on 77 PPP loans under the Economic

Aid Act, totaling $7.0 million.

The outstanding balance for

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

$13.3 million at September 30, 2021.

approximately $1.0 million in fees from the SBA related to PPP loans under the Economic

March 31, 2022, we have recognized $0.8

million of these fees, net of related costs.

As of March 31, 2022, we have

received payments and forgiveness on 172 PPP loans under

the Economic Aid Act, totaling $16.1 million.

The outstanding

balance for the remaining 82 PPP loans under the Economic Aid Act was approximately

$4.1 million at March 31, 2022.

We continue to closely

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

and to address

developments as those occur.

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

and our financial

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

may not be indicative of future results or

financial conditions, including possible changes in monetary or fiscal stimulus, and the

possible effects of the expiration or

extension of temporary accounting and bank regulatory relief measures in response

to the COVID-19 pandemic.

As of September 30, 2021, all of our capital ratios were in excess of all regulatory requirements to be

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

developments as

Our results of operations for quarter

ended March 31, 2022, and our financial condition at that date reflect only

the ongoing effects of the pandemic, and may not be indicative of

future results or financial conditions, including possible

changes in monetary or fiscal stimulus, and the possible effects of the expiration

or extension of temporary accounting and

bank regulatory relief measures in response to the COVID-19 pandemic.

As of March 31, 2022,

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 the pandemic

continuing effects of the COVID-19 pandemic could result in adverse

changes to credit quality and our regulatory capital

ratios, and inflation will affect our costs, interest rates and the values of our assets and

liabilities, customer behaviors and

economic activity.

Continuing supply chain and supply disruptions also adversely affect

the levels and costs of economic

We continue to closely

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

and to address developments as those occur.

1 unchanged sentence

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

GAAP and with general practices

within the banking industry.

In connection

with the application of those principles, we have made judgments and estimates

which, in the case of the determination of our allowance for loan losses, our assessment of other-than-temporary

impairment, recurring and non-recurring fair value measurements and the valuation

of OREO and deferred tax assets, were

critical to the determination of our financial position and results of operations.

Other policies also require subjective

judgment and assumptions and may accordingly impact our financial position and results

of operations.

generally accepted

principles and with general practices within the banking industry.

In connection with the application of those principles, we

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

for 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

financial position and results of operations.

Allowance for Loan Losses

1 unchanged sentence

to the end of each calendar quarter.

the amount of the allowance for loan losses is considered a critical accounting estimate

because the level of the allowance is

based upon management’s evaluation of

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

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

a borrower’s ability to repay (including the timing of

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

loan portfolio, economic conditions,

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

the allowance is based upon management’s

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

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

a borrower’s ability to repay (including

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

composition of the loan portfolio, economic

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

recommendations.

This evaluation

is inherently subjective as it requires material estimates including the amounts and

timing of future cash flows expected to

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

Loans are charged off, in whole or in part,

when management believes that the full collectability of the loan is unlikely.

A loan may be partially charged-off after a

“confirming event” has occurred, which serves to validate that full repayment pursuant

to the terms of the loan is unlikely.

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

8 unchanged sentences

impairment is recognized through the allowance.

Loans that are impaired

are recorded at the present value of expected

Loans that are impaired are

recorded at the present value of expected

future cash flows discounted at the loan’s effective

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

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

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

5 unchanged sentences

offs, net of recoveries of amounts previously charged-off

and by releases from the allowance when determined to be

appropriate to the levels of loans and probable loan losses in such loans..

In assessing the adequacy of the allowance, the Company also considers the results of its

ongoing internal and independent

loan review processes.

ongoing internal, independent

loan review process.

The Company’s loan

12 unchanged sentences

real estate, and consumer

installment loans.

The Company analyzes each segment and estimates an allowance allocation

1 unchanged sentence

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

probable losses inherent for each

loan segment.

probable losses inherent for these

types of loans.

The estimates for these loans are established by category and based

7 unchanged sentences

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

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

historical loss rates for the commercial real estate portfolio segment based, in part, on loss

rates of peer bank groups.

At March 31, 2022 and December 31, 2021, and for the periods then ended, the Company

adjusted its historical

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

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

probable losses for several “qualitative and environmental” factors.

The allocation

for qualitative and environmental factors

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

represents estimated

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

as of the balance sheet date, and are based

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

changes, prevailing economic

conditions, changes in lending personnel experience, changes in lending policies or

procedures, and other influencing

These qualitative and environmental factors are considered

for each of the five loan segments and the allowance

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

based on the incremental assessment of

these factors.

The Company regularly re-evaluates its practices in determining the allowance

for loan losses.

Since the fourth quarter of

2016, the Company has increased

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

The allocation for qualitative and environmental

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

This amount represents

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

the balance sheet date, and are

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

concentration changes, prevailing

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

policies or procedures and other

influencing factors.

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

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

The Company’s look-back

period each quarter incorporates the effects of at least one economic downturn

in its loss history.

Company believes

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

Absent this look-back period,

cycle periods in which the Company experienced significant losses would be excluded

from the determination of the

allowance for loan losses and its balance would decrease.

For the quarter ended

March 31, 2022, the Company increased its

look-back period to 52 quarters to continue to include losses incurred by the Company beginning

with the first quarter of

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.

The Company believes

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

inherent in the loan portfolio.

Absent this extension, the early cycle periods in

which the Company experienced significant

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

balance would decrease.

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

period to 50 quarters to continue to include losses

incurred by the Company beginning with the first quarter

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

During the second quarter of 2021,

the Company adjusted certain qualitative and economic factors to reflect

improvements in economic conditions in our primary market area.

Further adjustments may be made in the future as a

result of the continuing COVID-19 pandemic.

During the quarter ended June 30, 2021, the Company adjusted certain qualitative

economic factors, previously downgraded as a result of the COVID-19

pandemic, to reflect improvements in economic

conditions in our primary market area.

Further adjustments may be made from time to time in the future as a result of the

COVID-19 pandemic and other economic changes.

Assessment for Other-Than-Temporary

10 unchanged sentences

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

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

be required to sell the debt security before recovery,

5 unchanged sentences

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

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

the security’s amortized cost basis and

present value of its expected future cash flows.

1 unchanged sentence

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.

5 unchanged sentences

redemption value.

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

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

no market for these securities.

32 unchanged sentences

best estimates for appropriate discount rates, default rates,

prepayments, market volatility,

and other factors, taking into account current observable market data and experience.

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

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 result in

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

well as changes in market conditions, could result in

materially different net earnings and retained earnings results.

Other Real Estate Owned

OREO consists of properties obtained through foreclosure or in satisfaction of loans and is reported

at the lower of cost or

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

with any loss recognized as a charge-off through the

allowance for loan losses.

Additional OREO losses for subsequent valuation adjustments

are determined on a specific

property basis and are included as a component of other noninterest expense along

with holding costs.

Any gains or losses

on disposal of OREO are also reflected in noninterest expense.

Significant judgments

and complex estimates are required in

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

be considered current is

significantly shortened during periods of market volatility.

As a result, the net proceeds realized from sales transactions

could differ significantly from appraisals, comparable sales, and

other estimates used to determine the fair value of other

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

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.

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

2 unchanged sentences

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

realization of deferred tax assets

ultimate realization of deferred tax assets

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

1 unchanged sentence

Management considers the scheduled reversal of deferred

tax liabilities, projected future taxable income, and

tax planning strategies in making this assessment.

Based upon the level of taxable

income over the last three years and

tax liabilities, projected future taxable income and tax

planning strategies in making this assessment.

Based upon the level of taxable income over

the last three years and

projections for future taxable income over the periods in which the deferred tax assets are

1 unchanged sentence

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

at September 30, 2021.

of the deferred tax assets considered realizable, however,

could be reduced if estimates of future taxable income are

at March 31, 2022.

The amount of

the deferred tax assets considered realizable, however,

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

OF OPERATIONS

1 unchanged sentence

Sheet and Interest Rates

Nine months ended September 30,

Quarter ended March 31,

(Dollars in thousands)

13 unchanged sentences

Net Interest Income and Margin

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

months of 2021 compared to $18.5 million for the

first nine months of 2020.

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

net interest margin (tax-equivalent),

partially offset by balance sheet growth.

Net interest income (tax-equivalent) was $6.2 million for the first quarter of 2022

a 2% increase compared to $6.1 million

for the first quarter of 2021.

This increase was primarily due to balance sheet growth, partially offset

by a decrease in the

Company’s net interest margin

(tax-equivalent).

The tax-equivalent yield on total interest-earning assets decreased by 30 basis points

to 2.86% in the first nine months of

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

This decrease was primarily due to the lower interest rate

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

in deposits from government stimulus and

relief programs and customers’ increased savings.

to 2.66% in the first quarter of 2022

compared to 2.96%

in the first quarter of 2021.

This decrease was primarily due to the lower interest environment and

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

The cost of total interest-bearing liabilities decreased by 10 basis points to 0.34%

in the first nine months of 2021 compared

to 0.72% in the first nine months of 2020.

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

market interest rates.

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

in the first quarter of 2022 compared to

0.44% in the first quarter of 2021, even as interest bearing deposits increased.

The net decrease in our funding costs was

primarily due to lower prevailing market interest rates.

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

earning assets.

The Company continues to deploy various asset liability management strategies

12 unchanged sentences

The Company recorded a negative provision for loan losses of $0.3 million for the

first nine months of

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

The negative provision for

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

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.

first quarter of 2022,

compared to no charge to provision for loan losses for the first

quarter of 2021.

The negative provision for loan losses was

primarily related to a decrease in total loans, excluding PPP,

during the first quarter of 2022.

loans, excluding PPP,

were $424.3 million at March 31, 2022, a decrease of $25.9 million, or 6%,

compared to December 31, 2021.

was primarily due to decreases in multi-family loans of $17.3 million and hotel loans

of $6.5 million due to payoffs.

provision for loan losses is based upon various factors, including the absolute level of loans,

economic conditions, credit

quality, and the amount of net

Based upon its assessment of the loan portfolio, management adjusts the allowance for loan

2 unchanged sentences

The Company’s allowance

for loan losses as a percentage of total loans was 1.13% at September 30,

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

At September 30, 2021, the Company’s

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

loans, which are

guaranteed by the SBA.

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

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.

for loan losses as a percentage of total loans was 1.09% at March 31, 2022, compared to 1.08%

at December 31, 2021.

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

Noninterest Income

Quarter ended September 30,

Nine months ended September 30,

Quarter ended March 31,

(Dollars in thousands)

2 unchanged sentences

Bank-owned life insurance

Securities gains, net

Total noninterest income

The Company’s income from mortgage lending

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

loans and (2) servicing of mortgage loans.

Origination income, net, is comprised of gains

or losses from the sale of the

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

with the origination of loans,

which are netted against the commission expense associated with these originations.

Company’s normal practice is to

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

retain the associated MSRs when the loan is

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

and (2) servicing of mortgage loans.

Origination income, net, is comprised of gains or losses

from the sale of the mortgage

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

with the origination of loans, which are

netted against the commission expense associated with these originations.

Company’s normal practice is to originate

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

MSRs when the loan is sold.

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

16 unchanged sentences

mortgage lending income.

Quarter ended September 30,

Nine months ended September 30,

Quarter ended March 31,

(Dollars in thousands)

Origination income

Origination income, net

Servicing fees, net

2 unchanged sentences

typically fluctuates as mortgage interest rates change and is primarily

attributable to the origination and sale of new mortgage loans.

attributable to the origination and sale of mortgage loans.

Origination income decreased

in 2021 compared to 2020 due

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

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

million in non-taxable death benefits received in

The assets that support these policies are administered by the life insurance carriers

and the income we receive (i.e.,

increases or decreases in the cash surrender value of the policies and death benefits received)

on these policies is dependent

upon the returns the insurance carriers are able to earn on the underlying investments that

support these policies.

on these policies are generally not taxable.

in in the first quarter of 2022

compared to the first quarter of 2021 due to a decrease in refinance activity in our primary

market area, as market interest

rates on mortgage loans increased.

The decrease in origination income was partially offset by an increase in servicing

net of related amortization expense as prepayment speeds slowed during the

first quarter of 2022, resulting in decreased

amortization expense.

Noninterest Expense

Quarter ended September 30,

Nine months ended September 30,

Quarter ended March 31,

(Dollars in thousands)

4 unchanged sentences

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

to the PPP loan program,

routine annual wage and benefit increases, and management increasing the

minimum hourly wage for banking positions to

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

a reduction of various expenses related to the

redevelopment of the Company’s headquarters

in downtown Auburn.

This amount includes revised depreciation estimates

and other temporary relocation costs.

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

compared to $1.2 million for the first nine months of

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

and 17.64%, respectively.

to the PPP loan program, and

routine annual wage and benefit increases.

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

increased marketing costs,

and checkcard expenses, and stationary and supplies.

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

compared to $0.4 million for the first quarter of 2021.

The Company’s effective income

tax rate for the first quarter of 2022 was 10.88%, compared to 17.41%

in the first quarter

The decrease 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 tax rate is principally impacted by tax-exempt earnings

from the Company’s investments in

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

BALANCE SHEET ANALYSIS

Securities available-for-sale were $417.5

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

million at March 31, 2022 compared to $421.9 million at December 31, 2021.

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

6 unchanged sentences

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

long-term interest rates.

long-term market interest rates.

The average annualized tax-equivalent yields earned on total securities

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

first quarter of 2022 and 1.75%

in the first quarter of 2021.

(In thousands)

7 unchanged sentences

Total loans, net of unearned income,

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

million at December 31, 2020.

were $428.4 million at March 31, 2022, and $458.4 million at December 31,

Excluding PPP loans, total loans, net of unearned income, were $424.3

million, a decrease

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

Four loan categories represented approximately 98% of the

loan portfolio at September 30, 2021:

million, a decrease of $25.9 million, or 6% from

December 31, 2021.

This decline was primarily due to decreases in multi-family loans of $17.3

million and hotel loans of

$6.5 million.

Four loan categories represented the majority of the loan portfolio at March

commercial real estate

2 unchanged sentences

Approximately 25% of the Company’s commercial

real estate loans

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

real estate loans were classified as owner-occupied at March 31, 2022.

Within the residential real estate portfolio segment, the Company

had junior lien mortgages of approximately $7.1 million,

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

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

had no loans that required interest-only

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

or 2%, and $7.2 million, or 2%, of total loans, net of unearned income at March 31, 2022 and

December 31, 2021,

respectively.

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

had no loans that required

interest only payments at March 31, 2022 and December 31, 2021.

The Company’s

residential real estate mortgage portfolio does

not include any option ARM loans, subprime loans, or any material amount of other high-risk

consumer mortgage products.

The average yield earned on loans and loans held for sale was 4.47%

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

nine months of 2020.

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 4.46% in the first quarter of

2022 and 4.50% in the first

quarter of 2021.

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

but are not limited to, the effects of

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

effects, on our borrowers’ cash flows, real estate market

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

real estate industry concentrations, competitive

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

fluctuations, reduced collateral

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

of borrowers, fraud, and any

violation of applicable laws and regulations.

current economic conditions, including the continuing effects from the

COVID-19 pandemic, on our borrowers’ cash flows,

real estate market sales volumes, valuations, availability and cost of financing properties,

real estate industry

concentrations, competitive pressures from a wide range of other lenders, deterioration

in certain credits, interest rate

fluctuations, reduced collateral values or non-existent collateral,

title defects, inaccurate appraisals, financial deterioration

of borrowers, fraud, and any violation of applicable laws and regulations.

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

17 unchanged sentences

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

At September 30, 2021, the Bank had no

At March 31, 2022, the Bank had no

relationships exceeding these limits.

6 unchanged sentences

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

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

September 30,

-based capital at March 31, 2022 and December 31, 2021.

(Dollars in thousands)

Lessors of 1-4 family residential properties

Multi-family residential properties

Shopping centers

COVID-19 Modifications

In light of disruptions in economic conditions caused by COVID-19, the financial regulators

7 unchanged sentences

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.

criticize financial institutions that mitigate credit risk through prudent actions

consistent with safe and sound practices.

Specifically, examiners

12 unchanged sentences

Commercial real estate, commercial, and small business borrowers may

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

a six-month period.

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

six-month period.

recognizes that a combination of the payment relief options may be prudent dependent

on a borrower’s business type.

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

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

December 31, 2020.

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

modifications as of December 31,

Modification Types

(Dollars in thousands)

% of Portfolio

Interest Only

December 31, 2020:

Commercial and industrial

Commercial real estate

Residential real estate

COVID-19 Modifications within Commercial Real Estate

(Dollars in thousands)

Loans Modified

of March 31, 2022, we had no COVID-19 loan deferrals, compared to one COVID-19 loan

deferral totaling $0.1 million at

December 31, 2021.

8 unchanged sentences

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 $5.1

September 30, 2021 compared to $5.6 million at December 31, 2020,

which management believed to be adequate at each of

the respective dates.

The judgments and estimates associated

with the determination of the allowance for loan losses are

The allowance for loan losses was $4.7 million at

March 31, 2022 compared to $4.9 million at December 31, 2021,

which management believed to be adequate at each of the

respective dates.

The judgments and estimates associated with the determination

of the allowance for loan losses are

described under “Critical Accounting Policies.”

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

for the third quarter of 2021 and

for the first quarter of 2022 and

the previous four quarters is presented below.

1 unchanged sentence

Balance at beginning of period

Commercial and industrial

Commercial real estate

Residential real estate

Consumer installment

Net recoveries

Net (charge-offs) recoveries

Provision for loan losses

2 unchanged sentences

as a % of nonperforming loans

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

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

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

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

As described under “Critical Accounting Policies,” management assesses the adequacy

17 unchanged sentences

allowance for loan losses to total loans outstanding was 1.09%

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

At September 30, 2021, the Company’s allowance

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

the future, the allowance to total loans outstanding ratio will increase or decrease

to the extent the factors that influence our

quarterly allowance assessment, including the duration and magnitude

of COVID-19 effects, in their entirety either improve

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

Company’s allowance for loan losses,

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

loan losses based on their judgment about information

at March 31, 2022, compared to 1.08% at December 31,

Excluding PPP loans, which are guaranteed by the SBA,

the Company’s allowance for

loan losses was 1.10% of

total loans at both March 31, 2022 and December 31, 2021.

In the future, the allowance to total

loans outstanding ratio will

increase or decrease to the extent the factors that influence our quarterly allowance assessment,

including the duration and

magnitude of COVID-19 effects, in their entirety either improve or weaken.

In addition, our regulators, as an integral part

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

allowance for loan losses, and may require the

Company to make additional provisions to the allowance for loan losses based on their

judgment about information

available to them at the time of their examinations.

Nonperforming Assets

The Company had $0.5

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

2020, respectively.

At March 31, 2022

the Company had $0.7 million in nonperforming assets compared to $0.8 million at December 31,

The table below provides information concerning total nonperforming assets

and certain asset quality ratios for the third

and certain asset quality ratios for the first

quarter of 2022 and the previous four quarters.

2 unchanged sentences

Nonaccrual loans

Other real estate owned

Total nonperforming assets

2 unchanged sentences

Nonperforming loans as a % of total loans

Accruing loans 90 days or more past due

The table below provides information concerning the composition of nonaccrual

loans for the third quarter of 2021 and the

loans for the first quarter of 2022 and the

previous four quarters.

3 unchanged sentences

Residential real estate

Consumer installment

Total nonaccrual loans

5 unchanged sentences

The Company had $0.4

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

million in loans on nonaccrual status at March 31, 2022 and December 31,

2021, respectively.

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

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

2022 and December 31, 2021,

respectively.

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

The table below provides information concerning the composition of

OREO for the first quarter of 2022 and the previous

four quarters.

(In thousands)

Other real estate owned:

Commercial real estate

Total other real estate owned

Potential Problem Loans

9 unchanged sentences

problem loans, which are not included in nonperforming assets, amounted to $2.0

million, or 0.6% of total loans at

September 30, 2021, and $2.9 million, or 0.6% of total loans at December 31, 2020.

million, or 0.5% of total loans at March

31, 2022, and $2.4 million, or 0.5% of total loans at December 31, 2021.

The table below provides information concerning the composition of potential problem

loans for the third quarter of 2021

loans for the first quarter of 2022

and the previous four quarters.

7 unchanged sentences

Total potential problem loans

At September 30, 2021 the Company had $0.1 million in potential problem loans that

At March 31, 2022, approximately $0.2 million or 8% of total potential problem loans

were past due at least 30 days, but

3 unchanged sentences

but less than

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

for the first quarter of 2022 and the previous four quarters.

(In thousands)

6 unchanged sentences

Total deposits increased

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

2021, compared to $839.8 million at

December 31, 2020.

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

compared to $245.4 million, or 29% of total deposits at December 31, 2020.

These increases reflect deposits from

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

delayed tax payments and less customer

spending and greater savings during the COVID-19 pandemic.

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

months of 2021 compared to 0.72% in

the first nine months of 2020.

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

generally lower market interest rates.

$23.5 million, or 2%, to $1.0 billion at March 31, 2022, compared to $994.2

million at December

Noninterest-bearing deposits were $308.3 million, or 30% of total deposits, at March 31,

2022, compared to

$316.1 million, or 32% of total deposits at December 31, 2021.

Estimated uninsured deposits totaled $427.3 million and $420.8 million at March 31,

2022 and December 31, 2021,

respectively.

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

FDIC insurance

The average rate paid on total interest-bearing deposits was 0.34% in the first quarter of 2022

compared to 0.44% in the

first quarter of 2021.

Other Borrowings

1 unchanged sentence

Short-term borrowings generally consist of federal

funds purchased and agreements with certain customers to sell certain securities under

agreements to repurchase with an

original maturity less than one year.

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

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

Securities sold under agreements to repurchase

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

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

and 2020, respectively.

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

funds purchased and securities sold under agreements to repurchase

with an original maturity of one year or less.

had available federal funds lines totaling $51.0 million and $41.0

million with none outstanding at March 31, 2022, and

December 31, 2021, respectively.

Securities sold under agreements to repurchase totaled $4.0

million and $3.4 million at

March 31, 2022 and December 31, 2021, respectively.

The average rate paid on short-term borrowings was 0.50% in the first quarter of 2022

respectively.

The Company had no long-term debt at March 31, 2022 and December 31, 2021.

CAPITAL ADEQUACY

The Company’s consolidated

stockholders’ equity was $104.9 million and $107.7

million as of September 30, 2021 and

stockholders’ equity was $86.4 million and $103.7 million as of March 31, 2022

December 31, 2021, respectively.

The decrease from December 31, 2021 was primarily driven by an other comprehensive

loss due to the change in unrealized gains (losses) on securities available-for-sale,

net of tax of $4.8 million, cash dividends

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

stock of $1.3 million.

During the first nine months of 2021, the

Company repurchased 37,093 shares under the Company’s

current stock repurchase program.

These shares were

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

These decreases in the Company’s

consolidated stockholders’ equity were partially offset

by net earnings of $6.2 million.

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

capital framework and

loss due to the change in unrealized losses on securities available-for-sale,

net of tax of $18.3 million.

The increase in the

unrealized loss on securities was primarily due to an increase in long-term

market interest rates.

These unrealized losses do

not affect the Bank’s capital

for regulatory capital purposes.

The Company paid cash dividends of $0.265 per share in the first quarter of 2022, an increase of 2% from the same

The Company’s share repurchases of

$0.1 million since December 31, 2021 resulted in 3,559

fewer outstanding

common shares at March 31, 2022.

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

11 unchanged sentences

executive officers.

At September 30, 2021, the Bank’s ratio

At March 31, 2022, the Bank’s ratio

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

21 unchanged sentences

capital ratio was 17.26%, and

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

ratios exceed the minimum regulatory capital

total risk-based capital ratio was 18.08%

at March 31, 2022.

These ratios exceed the minimum regulatory capital

percentages of 5.0% for tier 1 leverage ratio, 6.5% for CET1 risk-based capital ratio,

2 unchanged sentences

The Bank’s capital conservation buffer

at September 30, 2021.

at March 31, 2022.

MARKET AND LIQUIDITY RISK MANAGEMENT

11 unchanged sentences

Interest Rate Risk Management

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

fluctuations in interest rates.

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

various types of loans and

Measurements used to help manage interest rate sensitivity include an earnings

simulation model and an economic

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

in interest rates.

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

for various types of loans and

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

model and an economic

value of equity (“EVE”) model.

9 unchanged sentences

For changes up or down in rates from management’s

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

are as follows:

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

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

2 unchanged sentences

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

At September 30, 2021, our earnings simulation model indicated

that we were in compliance with the policy guidelines

At March 31, 2022, our earnings simulation model indicated that we were in compliance

with the policy guidelines noted

Economic Value

8 unchanged sentences

EVE uses a terminal horizon

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

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

Further, EVE is measured using values

11 unchanged sentences

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

At September 30, 2021, our EVE model indicated that we were in compliance

At March 31, 2022, our EVE model indicated that we were in compliance

with our policy guidelines.

19 unchanged sentences

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

Prepayment and early withdrawal levels

and early withdrawal levels

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

The ability of many

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

economic stress, which may

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.

10 unchanged sentences

needs of our customers.

From time to time, the Company may enter into interest rate

swaps to facilitate customer

transactions and meet their financing needs.

These interest rate swaps qualify as derivatives,

but are not designated as

hedging instruments.

At September 30, 2021 and December 31, 2020, the Company

had no derivative contracts designated

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

From time to time, the Company also may enter into back-to-back

interest rate swaps to facilitate

customer transactions and meet their financing needs.

These interest rate swaps qualify

as derivatives, but are not

designated as hedging instruments.

At March 31, 2022 and December 31, 2021,

the Company had no derivative contracts

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

Liquidity Risk Management

4 unchanged sentences

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.

while excessive liquidity could lead

to lower earnings due to the cost of foregoing alternative higher-yield

market investment opportunities.

Liquidity is managed at two levels.

3 unchanged sentences

separate and distinct legal

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

to regulatory guidelines and requirements.

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,

2 unchanged sentences

on its earnings, liquidity, capital

and the absence of any regulatory

restrictions.

and the absence of regulatory

restrictions on such dividends.

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

1 unchanged sentence

If needed, the

Company could also issue common stock or other securities.

Primary uses of funds by the Company include dividends paid

to stockholders, Company stock repurchases, and Company expenses.

Company could also borrow money,

or issue common stock or other securities.

Primary uses of funds by the Company

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

Company expenses.

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

8 unchanged sentences

taken out with varying maturities.

At September 30, 2021, the Bank had a remaining

available line of credit with the FHLB

of $310.7 million.

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

million of available federal funds lines with no

borrowings outstanding.

Primary uses of funds include repayment of maturing obligations

and growing the loan portfolio.

At March 31, 2022, the Bank had a remaining available

line of credit with the FHLB of

$331.4 million.

At March 31, 2022, the Bank also had $51.0

million of available federal funds lines with no borrowings

Primary uses of funds include repayment of maturing obligations and

growing the loan portfolio.

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

4 unchanged sentences

Off-Balance Sheet Arrangements, Commitments, Contingencies and Contractual

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

At March 31, 2022, the Bank had outstanding standby letters of credit of $1.4

million and unfunded loan commitments

10 unchanged sentences

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

The sale agreements for these residential mortgage loans with Fannie Mae

and other investors include various

representations and warranties regarding the origination and characteristics of the

residential mortgage loans.

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

investors include various

representations and warranties regarding the origination and characteristics

of the residential mortgage loans.

representations and warranties vary among investors, they typically cover ownership

4 unchanged sentences

state, and local laws, among other

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

which we have originated and sold,

but retained the servicing rights, was $256.4 million.

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

may be obligated to repurchase residential mortgage loans or reimburse investors for losses

incurred (make whole requests)

if a loan review reveals a potential breach of seller representations and

Upon receipt of a repurchase or make

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

Repurchase and make whole requests

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

investor and to determine if a

As of March 31, 2022,

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

and sold, but

retained the servicing rights, was $250.3 million.

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

be obligated to repurchase residential mortgage loans or reimburse investors for

losses incurred (make whole requests) if a

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

Upon receipt of a repurchase or make whole

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

Repurchase and

make whole requests are

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

and to determine if a

contractually required repurchase or make whole event has occurred.

4 unchanged sentences

market standards.

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

of 2021 as a result of representation

and warranty provisions contained in the Company’s

The Company was not required to repurchase any loans during the

first quarter of 2022 as a result of representation and

warranty provisions contained in the Company’s

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

make-whole requests at September 30, 2021.

make-whole requests at March 31, 2022.

We service all residential

3 unchanged sentences

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

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

mortgage loans;

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

the mortgage loans;

(4) maintain any

required escrow accounts for payment of taxes and insurance and administer

escrow payments;

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

and (5) foreclose on

2 unchanged sentences

governing our rights and duties as servicer.

The agreement under which we act as servicer generally specifies standard

The agreement under which we act as servicer generally specifies

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

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

acting in compliance with the

respective servicing agreements.

3 unchanged sentences

The standards governing

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

servicing guides issued by Fannie

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.

5 unchanged sentences

investors for losses incurred

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

all means of recovering losses on

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

pursue all means of recovering losses on

their purchased loans.

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

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

As of March 31, 2022, we do not believe that this exposure is material due to the historical level

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

mortgage loans serviced for Fannie

4 unchanged sentences

rates in our investor

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

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

request forbearance to the servicer after affirming that such borrower is experiencing

financial hardships during the

COVID-19 emergency.

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

During forbearance,

no fees, penalties or interest shall be charged beyond those applicable

if all contractual payments were fully and timely

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

on similar procedures

or related evictions or sales until December 31, 2020.

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.

forbearance period was extended, generally,

to March 31, 2021.

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 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

1 unchanged sentence

herein have been prepared in

accordance with U.S.

GAAP and practices within the banking industry which require the

measurement of financial position

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

the relative purchasing power of

money over time due to inflation.

Unlike most industrial companies, virtually all the assets

and liabilities of a financial

institution are monetary in nature.

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

institution’s

performance than the effects of general levels of inflation.

As a result of government

monetary policies and fiscal stimulus,

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

disruptions, inflation has increased

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

accordance with GAAP and practices within the banking industry which require

the measurement of financial position and

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

the relative purchasing power of money

over time due to inflation.

Unlike most industrial companies, virtually all the assets and

liabilities of a financial institution

are monetary in nature.

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

financial institution’s performance

than the effects of general levels of inflation.

CURRENT ACCOUNTING DEVELOPMENTS

30 unchanged sentences

For public business entities, the new guidance was

originally effective for annual and interim periods in fiscal years beginning after

December 15, 2019.

originally effective for annual and interim periods in fiscal years

beginning after December 15, 2019.

The Company has

2 unchanged sentences

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

The Company’s preliminary evaluation indicates

The Company’s preliminary evaluation

the provisions of ASU No.

24 unchanged sentences

understanding of its business and performance,

these non-GAAP financial measures should not be considered

an alternative to GAAP.

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

The reconciliations

of these non-

GAAP financial measures to their most directly comparable GAAP financial

measures are presented below.

(in thousands)

Net interest income (GAAP)

Tax-equivalent adjustment

Net interest income (Tax

Nine months ended September 30,

GAAP financial measures to their most directly comparable GAAP financial measures are

presented below.

(in thousands)

30 unchanged sentences

Nonperforming assets as a % of:

Loans and foreclosed properties

Nonperforming loans as a % of total loans

Annualized net recoveries as % of average loans

Capital Adequacy:

CET 1 risk-based capital ratio

Tier 1 risk-based capital ratio

Total risk-based capital ratio

Tier 1 leverage ratio

Other financial data:

Net interest margin (a)

Effective income tax rate

Efficiency ratio (b)

Selected average balances:

Loans, net of unearned income

Total deposits

Total stockholders’ equity

Selected period end balances:

Loans, net of unearned income

Allowance for loan losses

Total deposits

Total stockholders’ equity

(a) Tax-equivalent.

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

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

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

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

wholly-owned subsidiary, AuburnBank.

- Selected Financial Data

Nine months ended September 30,

(Dollars in thousands, except per share amounts)

Results of Operations

Net interest income (a)

tax-equivalent adjustment

Net interest income (GAAP)

Noninterest income

Total revenue

Provision for loan losses

Noninterest expense

Income tax expense

Per share data:

Basic and diluted net earnings

Cash dividends declared

Weighted average shares outstanding:

Basic and diluted

Shares outstanding, at period end

Common stock price:

To earnings ratio

To book value

Performance ratios:

Return on average equity

Return on average assets

Dividend payout ratio

Asset Quality:

Allowance for loan losses as a % of:

Nonperforming loans

Nonperforming assets as a % of:

Loans and other real estate owned

Nonperforming loans as a % of total loans

Annualized net recoveries as a % of average loans

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

Capital Adequacy:

8 unchanged sentences

Selected average balances:

Securities available-for-sale

Loans, net of unearned income

2 unchanged sentences

Selected period end balances:

Securities available-for-sale

Loans, net of unearned income

4 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

"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.

2 unchanged sentences

and Net Interest Income Analysis

Quarter ended September 30,

(Dollars in thousands)

Interest-earning assets:

Loans and loans held for sale (1)

Securities - taxable

Securities - tax-exempt (2)

Total securities

Federal funds sold

Interest bearing bank deposits

Total interest-earning assets

Cash and due from banks

Interest-bearing liabilities:

Savings and money market

Time deposits

Total interest-bearing deposits

Short-term borrowings

Total interest-bearing liabilities

Noninterest-bearing deposits

Other liabilities

Stockholders' equity

Total liabilities and stockholders'

Net interest income and margin (tax-equivalent)

(1) Average loan balances are

shown net of unearned income and loans on nonaccrual status have been included

in the computation of average balances.

(2) Yields on tax-exempt securities have been

computed on a tax-equivalent basis using a federal income

tax rate of 21%.

- Average Balances

and Net Interest Income Analysis

Nine months ended September 30,

Quarter ended March 31,

(Dollars in thousands)

17 unchanged sentences

Stockholders' equity

Total liabilities and stockholders'

Total liabilities and stockholders' equity

Net interest income and margin (tax-equivalent)

(1) Average loan balances are

shown net of unearned income and loans on nonaccrual status have been included

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

in the computation of average balances.

(2) Yields on tax-exempt securities have been

computed on a tax-equivalent basis using a federal income

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

tax rate of 21%.

- Loan Portfolio Composition

(In thousands)

Commercial and industrial

Construction and land development

Commercial real estate

Residential real estate

Consumer installment

unearned income

Loans, net of unearned income

allowance for loan losses

- Allowance for Loan Losses and Nonperforming Assets

(Dollars in thousands)

Allowance for loan losses:

Balance at beginning of period

Commercial and industrial

Construction and land development

Commercial real estate

Residential real estate

Consumer installment

Net recoveries

Provision for loan losses

Ending balance

as a % of loans

as a % of loans (excluding PPP loans)

as a % of nonperforming loans

Net recoveries as % of avg.

Nonperforming assets:

Nonaccrual loans

Total nonperforming assets

as a % of loans and foreclosed properties

as a % of total assets

Nonperforming loans as a % of total loans

Accruing loans 90 days or more past due

(a) Net recoveries are annualized.

- Allocation of Allowance for Loan Losses

Third Quarter

Second Quarter

First Quarter

1 unchanged sentence

Third Quarter

Second Quarter

First Quarter

(Dollars in thousands)

4 unchanged sentences

Consumer installment

Total allowance for

Total allowance for loan losses

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

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

– Estimated Uninsured Time Deposits by Maturity

(Dollars in thousands)

September 30, 2021

March 31, 2022

3 months or less

2 unchanged sentences

Over 12 months

Total CDs and other time deposits of $100,000

Total estimated uninsured

time deposits

AND QUALITATIVE

4 unchanged sentences

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis