What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-03-17 compared with 2022-03-08 · 764 added, 599 removed, 1080 unchanged (56% of the section changed)

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information about our financial

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

consolidated financial statements.

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

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included elsewhere herein.

In addition, this discussion and analysis contains forward-looking

statements, so you should

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”.

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in Auburn, Opelika, Notasulga and Valley,

The Bank also operates loan production offices in Auburn and

Phenix City, Alabama.

The Bank also operates a loan production office in Phenix

Summary of Results of Operations

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compared to $2.27 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

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.

Net interest income (tax-equivalent) was $27.6 million in 2022, a

13% increase compared to $24.5 million in 2021.

increase was primarily due to improvements in the Company’s

net interest margin.

The Company’s net interest margin

(tax-equivalent) was 2.81% in 2022, compared to 2.55% in 2021.

This increase was primarily due to changes in our asset

mix and higher market interest rates on interest earning assets,

while our cost of funds decreased 4 basis points to 0.35%.

At December 31, 2022, the Company’s allowance

for loan losses was $5.8 million, or 1.14% 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.

$4.9 million, or 1.08% of total loans, at December 31, 2021.

At December 31, 2022, the Company’s recorded

in loans considered impaired was $2.6 million with a corresponding valuation allowance

(included in the allowance for loan

losses) of $0.5 million, compared to a recorded investment in loans considered impaired

of $0.2 million with no

corresponding valuation allowance at December 31, 2021.

The Company recorded a charge to provision for loan losses of

$1.0 million in 2022 compared to a negative provision for loan losses of $0.6

million during 2021.

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.

losses in 2022 was primarily related to loan growth and the downgrade of one borrowing

relationship.

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 0.04%

in 2022 compared to

0.02% in 2021.

Noninterest income was $6.5 million in 2022 compared to $4.3

million in 2021.

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

The increase was primarily related to a

$3.2 million gain on the sale of land adjacent to the Company’s

headquarters.

Excluding the impact of this gain,

noninterest income was $3.3 million in 2022, a 24% decrease compared to 2021.

This decrease in noninterest income was

primarily due to a decrease in mortgage lending income

of $0.9 million as refinance activity slowed in our primary market

area related to higher market interest rates.

Noninterest expense was $19.8

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million in 2021.

The decrease was primarily due to a

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

investment funded in the fourth quarter of 2021.

Noninterest expense included a $1.6

million employee retention credit recognized in 2022.

Excluding the impact of this payroll tax credit, noninterest expense

was $21.4 million in 2022, a 10% increase compared to 2021.

The increase in noninterest expense was primarily due to

increases in net occupancy and equipment expense of $1.0 million related to the Company’s

new headquarters, which

opened in June 2022,

an increase in salaries and benefits expense of $0.6 million, and increases in other noninterest expense

Income tax expense was $2.5 million in 2022,

compared to $1.4 million in 2021.

The Company’s effective tax

2022 was 19.48%, compared to 14.89% in 2021.

This increase in tax expense was primarily due to increased pre-tax

earnings in 2022 and additional income tax expense of $0.2 million related to the Company’s

decision to surrender certain

bank-owned life insurance contracts in 2022.

The Company’s effective income

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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.

The Company paid cash dividends of $1.06 per share in 2022, an increase of 2% from 2021.

At December 31, 2022, the

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regulatory standards with a total risk-based capital ratio of 16.25

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

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

%, a tier 1 leverage ratio of 10.01% and common equity

tier 1 (“CET1”) of 15.39%

at December 31, 2022.

COVID-19 Impact Assessment

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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

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

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

Though certain

of these measures have been

certain of these measures have been

relaxed or eliminated, especially as vaccination levels increased, such

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to existing vaccines,

COVID-19 has significantly affected local state, national and global

booster vaccines and newly

developed treatments.

COVID-19 significantly affected local state, national and global

health and economic activity and its future effects are

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all of which are affected by the

We believe that the

direct economic effects of COVID-19 are diminishing, but that indirect effects

pandemic and government economic and monetary stimuli to counter the pandemic,

These indirect effects

include a tight labor market, supply chain disruptions, consumer demand and the economic

effects of these stimulative

government fiscal and monetary policies in response to COVID-19 beginning in early

2020, which have led to inflation and

to the Federal Reserve tightening its monetary policies to fight inflation beginning March

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

employees, customers and shareholders.

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customers, while protecting our employees’ health.

As part of our efforts to exercise social distancing in

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

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

while continuing to operate our

branch drive-thru facilities and ATMs.

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In 2021, we opened our remaining branch lobbies.

We continue to provide

continue to provide

services through our online and other electronic channels.

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;

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 period.

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

we maintain remote work access to help

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

COVID-19 variants.

employees, generally, are

working full time in the office although we have provided scheduling

flexibility to our

We serviced the financial

needs of our commercial and consumer clients with extensions and deferrals

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 lender and made an aggregate of 677 PPP loans totaling approximately $56.7

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

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

believe these loans and our

participation in the program helped our customers and the communities

As of December 31, 2022, we

had only one outstanding PPP loan since all but one such loan had been forgiven by the

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

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larger urban centers to less populated areas and remote work.

The demand for single family housing has exceeded existing

demand for single family housing has exceeded existing

When coupled with construction delays attributable to supply chain disruptions

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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.

Stimulative monetary and fiscal policies,

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

prices, reflecting, among other things, the

war in the Ukraine, have led to the highest inflation in decades.

The Federal Reserve has begun rapidly increasing its target

federal funds rate from 0 – 0.25% at the beginning of March 2022 to 4.25 – 4.50%

at December 31, 2022, and 4.50 – 4.75%

at January 31, 2023.

The Federal Reserve also has been reducing its holdings of securities in its SOMA account

market liquidity and counteract inflation.

A summary of PPP loans extended during 2020 follows:

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Up to $350,000

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.

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

31, 2021, we had 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 in 2020.

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

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Act”) was signed into law.

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

Economic Aid Act provided 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 2021 under the Economic Aid

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

(Dollars in thousands)

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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.

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

December 31, 2022, we have recognized all of these fees, net of related costs.

As of December 31, 2022, 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.

payments and forgiveness on all but one PPP loan, in the amount of $0.1

million, under the Economic Aid Act.

We believe that the COVID-19

pandemic stimuli and decreased economic activity increased customer liquidity and

deposits at the Bank and decreased loan demand, while monetary stimulus reduced

interest rates and our costs of funds and

our interest earnings on loans.

As a result, our net interest margin was adversely affected.

A return to higher interest rates

appears underway, beginning in

March 2022, and has accelerated in recent months as a result of Federal Reserve efforts

curb inflation.

This has resulted in improved net interest margin, but at the same time

has reduced the market values of our

securities portfolio and resulted in unrealized securities losses.

As a result, we have had losses in our other comprehensive

income and our equity under generally accepted accounting principles has declined.

This has not adversely affected our

regulatory capital, however.

We continue to closely

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

and to address

monitor the pandemic’s effects,

and are working to continue our services and to address

developments as those occur.

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.

Our results of operations

for the year ended December 31, 2022, and our financial condition

at that date, which reflect only the continuing direct and indirect effects of the

pandemic, 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

As of December 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

and to address developments as those occur.

Inflation and the shift from stimulative monetary policy in response to the COVID-19

pandemic to tightening monetary

policy beginning in March 2022 to fight inflation 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, changes in customer

savings and payment behaviors and economic activity.

Continuing supply chain disruptions and tight labor markets also

adversely affect the levels and costs of economic activities.

We continue to closely

monitor these continuing effects of the

pandemic, and are working to anticipate and

address developments.

The CARES Act and the 2020 Consolidated Appropriations Act provide eligible

employers an employee retention credit

related to COVID-19.

After consultation with our tax advisors, we filed amended payroll tax returns

with the IRS, and

received an employee retention credit of approximately $1.6 million.

The direct health issues related to COVID-19 appear to be waning as a result of vaccinations,

new medications and

increased resistance to the virus as a result of prior infections, although new strains continue

effects of the pandemic and government fiscal and monetary policy responses,

supply chain disruptions and inflation

continue, however.

CRITICAL ACCOUNTING POLICIES

The accounting and financial reporting policies of the Company conform

generally accepted accounting

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

generally accepted

principles and with general practices within the banking industry.

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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

conditions, changes in, and expectations regarding, market interest rates and inflation,

industry and peer bank loan loss rates

and other pertinent factors.

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.

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.

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

will periodically review the Company’s loans and

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.

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.

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

The level of allowance maintained is believed by management to be adequate

to absorb probable losses inherent in the

portfolio at the balance sheet date.

The allowance is increased by provisions charged

to expense and decreased by charge-

offs, net of recoveries of amounts previously charged-off.

The level of the allowance for loan losses maintained is believed by

management, based on its processes and estimates, to

be adequate to absorb probable losses inherent in the portfolio at the balance sheet date.

The allowance is increased by

provisions charged to expense and decreased by charge-offs,

net of recoveries of amounts previously charged-off 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

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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

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

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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

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

residential real estate, and consumer

installment loans.

analyzes each segment and estimates an allowance allocation for each loan

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

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inherent in the loan portfolio.

Absent this extension, the early cycle periods in

which the Company experienced significant

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

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

will likely continue to increase its look-

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

its loss history.

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

During 2021, the Company adjusted certain qualitative

and economic factors to reflect improvements in economic conditions in our primary

market area that had previously been

observed as a result of the COVID-19 pandemic.

No changes were made to qualitative and economic factors during 2022.

Assessment for Other-Than-Temporary

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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.

down is separated into the amount that is credit related (credit loss component) and the amount due to all other

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

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

Federal Home Loan Bank (“FHLB”)

and Federal Reserve Bank (“FRB”).

These non-marketable equity securities are accounted for at cost

which equals par or

redemption value.

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

no market for these securities.

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

assets, which are periodically evaluated for impairment.

Management considers

these non-marketable equity securities to

FHLB and FRB.

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

These securities do not have a

readily determinable fair value as their ownership is restricted and there is no market

for these securities.

records these non-marketable equity securities as a component of other assets,

which are periodically evaluated for

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

evaluating these securities for impairment, management considers

the ultimate recoverability of the par value rather than by

recognizing temporary declines in value.

Determination

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Measurements and Disclosures

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

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

in accordance with U.S.

GAAP and expands

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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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Other Real Estate Owned

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

Other real estate owned or 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

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.

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Significant judgments and

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

within which such estimates

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

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As a result, the net proceeds

realized from sales transactions could differ significantly from

appraisals, comparable sales, and other estimates used to

realized from sales transactions could differ significantly from appraisals,

comparable sales, and other estimates used to

determine the fair value of OREO.

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

ultimate realization of deferred tax assets

realization of deferred tax assets

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

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planning strategies in making this assessment.

Based upon the level of taxable income over

the last three years and

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

deductible, management believes

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

At December 31,

of the deferred tax assets considered realizable, however,

could be reduced if estimates of future taxable income are

2022 we had total deferred tax assets of $15.6 million

included as “other assets”, including $13.7 million resulting from unrealized losses

in our securities portfolio.

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, 2022.

The amount of the deferred

tax assets considered realizable, however, could

be reduced if estimates of future taxable income are reduced.

Average Balance

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to $24.5 million in 2021.

This decrease was due

to a decline in the Company’s net interest

This increase was due

to improvements in the Company’s net interest

margin (tax-equivalent).

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%.

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%

Net interest margin (tax-equivalent) increased to

2.81% in 2022, compared to 2.55% in 2021 due to increases in the Federal

Reserve’s target federal

funds rates beginning

March 17, 2022, and changes in our asset mix.

During 2022, the Federal Reserve increased the target federal funds range

from 0 – 0.25% to 4.25 – 4.50%.

target rate was increased another 25 basis points on January 31, 2023,

increases in the target federal funds rate appear likely if inflation remains elevated.

Net interest income (tax-equivalent)

included $0.3 million in PPP loan fees, net of related costs for 2022,

compared to $1.0 million for 2021.

See “Supervision

and Regulation – Fiscal and Monetary Policies”.

The tax-equivalent yield on total interest-earning assets increased by 24 basis points

to 3.05% in 2022 compared to 2.81%

This increase was primarily due to changes in our asset mix and higher market interest

rates on interest earning

The cost of total interest-bearing liabilities decreased by 4 basis points to 0.35%

in 2022 compared to 0.39% in 2021.

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.

net decrease in our funding costs was primarily due to a portion of our time deposits repricing into

lower prevailing market

interest rates during 2022.

Our deposit costs may increase as the Federal Reserve increases its target federal

market interest rates increase, and as customer savings behaviors change as a result of inflation

and higher market interest

rates on deposits and other alternative investments.

The Company continues to deploy various asset liability management strategies

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fluctuations.

The Company’s

net interest margin could experience pressure due to reduced earning asset

increased competition for quality loan opportunities.

Deposit and loan pricing remains competitive in our markets.

We believe this

challenging competitive

environment will continue in 2023.

Our ability to hold our deposit rates low until our interest-earning assets reprice

important to maintaining or potentially increasing our net interest

margin during the monetary tightening cycle that we

believe will continue in 2023.

Provision for Loan Losses

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outstanding loans.

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

At December 31, 2022, the Company’s

recorded investment in loans considered impaired was $2.6

million with a corresponding valuation allowance (included in the allowance

for loan losses) of $0.5 million, compared to a

recorded investment in loans considered impaired of $0.2 million with no corresponding

valuation allowance at December

The Company recorded a charge to provision for loan losses of $1.0

million during 2022, compared to a negative

provision for loan losses of $0.6 million during 2021.

The provision for loan losses in 2022 was primarily related to loan

growth and the downgrade of one borrowing relationship.

The provision for loan losses is based upon various estimates

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

net charge-offs.

charge-offs as a percent of average loans were 0.04% in 2022

compared to 0.02% in 2021.

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.

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to 1.08% at December 31, 2021.

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.

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,

inflation and market interest rates, and local real estate markets and

businesses) may have a material adverse effect on our asset

quality and the adequacy of our allowance for loan losses under

CECL resulting in significant increases in the provision for credit losses.

Noninterest Income

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Bank-owned life insurance

Gain on sale of premises and equipment

Securities gains, net

Total noninterest income

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.

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.

The Company’s noninterest 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

mortgage 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

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fee income is reported net of any related amortization expense.

The Company evaluates MSRs for impairment on a quarterly basis.

Impairment is determined by grouping MSRs by

common predominant characteristics, such as interest rate and loan type.

If the aggregate carrying amount of a particular

group of MSRs exceeds the group’s aggregate fair

value, a valuation allowance for that group is established.

The Company evaluates MSRs for impairment quarterly.

Impairment is determined by grouping MSRs by common

predominant characteristics, such as interest rate and loan type.

If the aggregate carrying amount of a particular group of

MSRs exceeds the group’s aggregate

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

The valuation

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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.

Origination income decreased as market interest rates on

mortgage loans increased.

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

servicing fees, net of

related amortization expense as prepayment speeds slowed, resulting in decreased

amortization expense.

In October 2022, the Company closed the sale of approximately 0.85 acres of

land located next to the Company’s

headquarters in Auburn, Alabama for a purchase price of $4.3 million.

The sale resulted in a gain of $3.2 million, net of

prorations, closing costs and costs of demolishing the Bank’s

former main office building.

Noninterest Expense

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Salaries and benefits

Employee retention credit

Net occupancy and equipment

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Total noninterest expense

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

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

to the PPP loan program, and

routine annual wage and benefit increases.

The employee retention tax credit of $1.6 million in 2022 relates to a one-time payroll tax

credit provided by the CARES

Act and the 2020 Consolidated Appropriations Act.

The increase in net occupancy and equipment expense was primarily due to increased

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

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 an income tax benefit related to a New

Markets Tax Credit investment

funded in the fourth quarter of 2021.

This amount includes depreciation expense and one-

time costs associated with the opening of the Company’s

new headquarters.

The Company relocated its main office branch

and bank operations into its newly constructed headquarters during May 2022.

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

increased information

technology and systems expenses, loan related expenses, losses on New Markets Tax

Credits investments and other

miscellaneous operating expenses.

Income tax expense was $2.5 million in 2022, compared to $1.4

million in 2021.

The Company’s effective tax

2022 was 19.48%, compared to 14.89% in 2021.

This increase in tax expense was primarily due to increased pre-tax

earnings in 2022 and additional income tax expense of $0.2 million related to the Company’s

decision to surrender certain

bank-owned life insurance contracts in 2022.

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

tax rate is principally

impacted by tax-

exempt earnings from the Company’s investments

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

BALANCE SHEET ANALYSIS

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million at December 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

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

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

of $39.2 million, offset by a

decrease of $55.8 million in the fair value of securities available-for-sale.

The increase in the amortized cost basis of

securities available-for-sale was primarily attributable to

management allocating more funding to the investment portfolio

following the significant increase in customer deposits.

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

increase in long-term market interest rates, which resulted in $13.7

million of deferred tax assets included in our other

The average annualized tax-equivalent yields earned on total securities

in 2022 and 1.66% in 2021.

The following table shows the carrying value and weighted average

yield of securities available-for-sale as of December

31, 2022 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, 2022

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were $504.5 million at December 31, 2022, and $458.4 million at December

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

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

December 31, 2020.

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%).

an increase of $46.1 million, or 10%.

Total loans at December

31, 2021 included $8.1 million in PPP loans, all but one of

these PPP loans, totaling $0.1 million, were forgiven during

Excluding PPP loans, total loans, net of unearned

income, increased $54.0 million, or 12% from December 31, 2021.

Four loan categories represented the majority of the

loan portfolio at December 31, 2022:

commercial real estate (53%),

residential real estate (19%), construction and land

development (13%), and commercial and industrial (13%).

Approximately 23% of the Company’s commercial

real estate loans were

classified as owner-occupied at December 31, 2021.

loans were classified as owner-occupied at December 31,

Within the residential real estate portfolio

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

segment, the Company had junior lien mortgages of approximately $7.4

or 1%, and $7.2 million, or 2%, of total loans, net of unearned income at December 31,

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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.

option ARM loans, subprime loans, or any material amount of other consumer

mortgage products which are generally

viewed as high risk.

The average yield earned on loans and loans held for sale was 4.45% in 2022

and 4.74% in 2020.

and 2021, respectively.

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 inflation and the continuing increases in

market interest rates, remaining COVID-19

pandemic effects including supply chain disruptions, commercial

office occupancy levels, housing supply shortages and

inflation, on our borrowers’ cash flows, real estate market sales volumes

and liquidity,

valuations used in making loans and

evaluating collateral, 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.

projects financed earlier that were based on lower interest rate assumptions

currently in effect may not be as profitable or successful at higher interest rate currently

in effect and currently expected in

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

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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

unfunded commitments) to a single borrower of $20.3 million.

Our loan policy requires

that the Loan Committee of the

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

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Loan concentrations to borrowers in the following classes

exceeded 25% of the Bank’s total risk-

exceeded 25% of the Bank’s total

based capital at December 31, 2022 (and related balances at December 31,

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Multi-family residential properties

Shopping centers

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

have issued guidance

encouraging banks to work constructively with borrowers affected

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

regulators have issued

guidance encouraging banks to work constructively with borrowers affected

by the virus in our community.

This guidance, including

the Interagency Statement on COVID-19 Loan Modifications and the Interagency Examiner

Guidance for Assessing Safety

and Soundness Considering the Effect of the COVID-19

Pandemic on Institutions, provides that the agencies will not

criticize financial institutions that mitigate credit risk through prudent actions

consistent with safe and sound practices.

This guidance,

including the Interagency Statement on COVID-19 Loan Modifications and the Interagency

Examiner Guidance for

Assessing Safety and Soundness Considering the Effect of the COVID-19

Pandemic on Institutions, provides that the

agencies will not criticize financial institutions that mitigate credit

risk through prudent actions consistent with safe and

sound practices.

Specifically, examiners

will not criticize institutions for working with borrowers as part of a risk

mitigation strategy

intended to improve existing loans, even if the restructured loans have or develop

weaknesses that ultimately result in

adverse credit classification.

Upon demonstrating the need for payment relief, the bank will work with qualified borrowers

that were otherwise current before the pandemic to determine the most appropriate

deferral option.

For residential

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

Interest continues to

accrue and the amount due at maturity increases.

Commercial real estate, commercial, and small business borrowers may

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

six-month period.

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

on a borrower’s business type.

of 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

Modification Types

(Dollars in thousands)

% of Portfolio

Interest Only

December 31, 2021:

Residential real estate

December 31, 2020:

Commercial and industrial

Commercial real estate

Residential real estate

COVID-19 Modifications within Commercial Real Estate

(Dollars in thousands)

Loans Modified

December 31, 2020:

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

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

qualified borrowers that were otherwise current before the pandemic to determine

the most appropriate deferral option.

residential mortgage and consumer loans the borrower may elect to defer payments

for up to three months.

continues to accrue and the amount due at maturity increases.

Commercial real estate, commercial, and small business

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

for a six-month period.

The bank recognized that a combination of the payment relief options may be prudent dependent

on a borrower’s business

As of December 31, 2022, we had no COVID-19 loan deferrals, compared to

one COVID-19 loan deferral totaling

$0.1 million at December 31, 2021, down from $32.3 million of deferrals at the end of 2020.

Section 4013 of the CARES Act provides that a qualified loan modification is exempt by law

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losses inherent in the loan portfolio.

allowance for loan losses was $4.9 million at

The allowance for loan losses was $5.8 million at

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

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Commercial and industrial

Commercial real estate

Construction and land development

Residential real estate

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Commercial and industrial

Commercial real estate

Residential real estate

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Total recoveries

Net (charge-offs) recoveries

Net charge-offs

Provision for loan losses

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as a % of nonperforming loans

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

Net charge-offs

as a % of average loans

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

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collateral, composition of the loan

portfolio, economic conditions, industry and peer bank loan loss rates, and other

pertinent factors.

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

This evaluation is

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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% 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.

In the future, the allowance for loan losses used in the allowance to total loans outstanding ratio

will be determined

in accordance with the CECL standard, and may increase or decrease

to the extent the factors that influence our quarterly

allowance assessment,

including changes in economic conditions that are part of our CECL model, either

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

will periodically review the Company’s

loans and 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, 2021 the Company had $0.8

million in nonperforming assets compared to $0.5

At December 31, 2022 the Company had $2.7 million in nonperforming assets compared

million at December 31,

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Nonaccrual loans:

Commercial and industrial

Commercial real estate

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2021, respectively, the Company

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.

had $2.7 million and $0.4

million in nonaccrual loans.

There were no loans 90 days past due and still accruing interest at December 31, 2022

and 2021, respectively.

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

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December 31, 2022, compared to $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 at December 31, 2021 and

The table below provides information concerning the composition of potential

problem loans at December 31, 2022 and

2021, respectively.

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Total potential problem loans

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.

At December 31, 2022, there were no potential problem loans past due at least 30

but less than 90 days.

The following table is a summary of the Company’s

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Total deposits

Total deposits increased

Total deposits decreased

$43.9 million, or 4%, to $950.3 million at December 31, 2022,

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December 31, 2021.

Noninterest-bearing deposits were $316.1

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

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

increases reflect deposits from

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

reduced customer spending during the

COVID-19 pandemic.

This decrease reflects net outflows to higher yield investment alternatives in

a rising interest rate

environment and a decline in balances in existing accounts due to increased customer

Noninterest-bearing

deposits were $311.4 million, or 33% of total

deposits, at December 31, 2022, compared to $316.1 million, or 32% of total

deposits at December 31, 2021.

had no brokered deposits at December 31, 2022 or at December 31, 2021.

Estimated uninsured deposits totaled $381.7 million and $420.8 million at December 31,

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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 $3.4 million and $2.4 million at December 31,

The Bank had available federal fund lines totaling $61.0 million and $41.0

million with none outstanding at December 31,

2022 and 2021, respectively.

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

in 2021 and 2020, respectively.

sold under agreements to repurchase totaled $2.6 million and $3.4

December 31, 2022 and 2021, respectively.

The average rates paid on short-term borrowings were 1.33%

and 0.51% in 2022 and 2021, respectively.

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

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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,

change in unrealized gains/losses on securities available-for-sale,

net of tax, of $41.8 million, cash dividends paid of $3.7

million and stock repurchases of $0.5 million, representing 17,183 shares,

which was partially offset by net earnings of

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

capital framework and

related Dodd-Frank Wall

Street Reform and Consumer Protection Act changes.

The rules included

the implementation of a

capital conservation buffer that is added to the minimum requirements

$10.3 million.

Our unrealized losses on securities and the related decline in our accumulated other comprehensive

income (“AOCI”)

resulted from increases in market interest rates in 2022 due to inflation and Federal Reserve

monetary policy actions.

AOCI declined $41.8 million from $0.9 million at December 31, 2021

to ($40.9) million

This is the primary reason both

our shareholders’ equity and book value per share declined 34%, respectively,

The Bank and the Company, as

permitted by the Federal Reserve and the other Federal bank regulators, made a

permanent election in March 2015 to opt

out of the requirement to include most components of AOCI in regulatory capital.

Accordingly, AOCI does not affect

capital for regulatory purposes.

If our tangible GAAP equity, however,

ever became negative, Federal Housing Finance

Agency rules could prevent us from obtaining new FHLB lines or advances, even though

renewals of existing lines and

advance may be permissible.

Investors may also view tangible GAAP equity,

net of AOCI as important in connection with

capital raising, if any, especially

in stressed economic conditions.

On a GAAP basis, our returns on equity increased as

result of the negative AOCI’s

reduction of stockholders’ equity.

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

framework and related

Dodd-Frank Wall Street

Reform and Consumer Protection Act changes.

The rules included the implementation

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

The capital conservation

buffer was fully phased-in on January 1, 2019 at 2.5%.

A banking organization

with a capital conservation buffer of less

than the required minimum amount will be subject to limitations on capital distributions,

including dividend payments and

certain discretionary bonus payments to executive officers.

At December 31, 2022, the Bank’s

ratio was sufficient to meet the fully phased-in conservation

ratio exceeded 2.5% and the

capital conservation buffer requirements.

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

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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

tier 1 leverage ratio was 10.01%, CET1 risk-based capital ratio

was 15.39%, tier 1 risk-based capital ratio was 15.39%, and

total risk-based capital ratio was 16.25%

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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

and 10.0% for total risk-based capital ratio to be considered “well capitalized.” The

Bank’s capital conservation buffer

at December 31, 2022.

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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,

mortgage-backed securities in the securities portfolio may

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.

The yield curve has been inverted at various times in 2022 and in the first months of 2023.

An inverted yield curve reduces

the net interest margin expansion that may be expected otherwise as interest

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, mortgage-backed

securities in the securities portfolio may prepay earlier than anticipated,

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.

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

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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

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

produce various earnings simulations and estimates.

On at least a quarterly

basis, we simulate the following 12-month time period 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 interest rate

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,

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(400) basis points

NM=not meaningful

At December 31, 2022, our earnings simulation model indicated that

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Economic Value

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

ic values of our assets, liabilities and off-

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

values of our assets, liabilities and off-

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

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estimated by discounting expected

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

which establishes a base case EVE.

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

which establish

a base case EVE.

In contrast with our

earnings simulation model which evaluates interest rate risk over a 12

month timeframe, EVE uses a terminal horizon

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.

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(400) basis points

NM=not meaningful

At December 31, 2022, 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

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.

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customer transactions and meet their financing needs.

These swaps qualify as derivatives,

but are not designated as hedging

These swaps qualify as

derivatives, but are not designated as hedging

At December 31, 2022 and 2021, the Company had no derivative

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The Bank’s payment of dividends depends

on its earnings, liquidity,

capital and the absence of any regulatory

on its earnings, liquidity, capital

and the absence of any regulatory

restrictions.

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from the Bank.

If needed, the

Company could also issue common stock or other securities.

Primary uses of funds by the

Company include dividends paid

to stockholders and stock repurchases.

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

repayment and maturity of securities,

and sale and repayment of loans.

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

to obtain funding for its growth.

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, 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 portfolio.

depends upon dividends from the Bank for liquidity to pay its operating expense, debt obligations,

if any, and cash

dividends on, and repurchases of, Company common stock.

The Bank’s payment of dividends depends

on its earnings,

liquidity, capital and the absence

of any regulatory restrictions.

If needed, the Company could also issue common stock or

other securities.

Primary sources of funding for the Bank include primarily customer deposits,

together with other borrowings, repayment

and maturity of securities, and sale and repayment of loans.

The Bank has participated in the FHLB’s

advance program to

obtain funding for its growth.

FHLB advances include both fixed and variable terms and are taken out with varying

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

from the Federal Reserve

discount window.

As of December 31, 2022, the Bank had $312.6 million of borrowing capacity

with the FHLB and $61.0

million of federal funds lines, with none outstanding.

Primary uses of funds include repayment of maturing obligations and

growing the loan portfolio.

The following table presents additional information about our contractual obligations

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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, and creditor

requirements over the next 12 months.

(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

from deposits, FHLB advances,

sales of securities under agreement to repurchase and federal funds lines, as

well as possible sales of securities, to meet all

known contractual obligations and unfunded commitments, including loan commitments

and reasonable borrower,

depositor, and creditor requirements over the next 12

The Federal Reserve’s new Bank Term

Funding Program (“BTFP”) established on March 12, 2023, provides additional

liquidity, if needed

without suffering any adverse effects from unrealized losses on securities.

BTFP offers loans of up to

one year to banks, savings associations, credit unions, and other eligible depository institutions

pledging U.S.

agency debt and mortgage-backed securities, and other qualifying assets as collateral.

assets will be valued at par.

The BTFP will be an additional source of liquidity against high-quality securities, eliminating

an institution's need to

quickly sell those securities in times of stress.

In addition, the discount window will apply the same margins used

securities eligible for the BTFP,

further increasing the value of investment securities at the discount window.

Off-Balance Sheet Arrangements

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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.

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

obtain FHLB advances, raise

deposits or sell securities available-for-sale, or to purchase federal

funds from other financial institutions on a short-term

basis while it obtains the other longer term funding.

Residential mortgage lending and servicing activities

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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

servicing of these loans (MSRs).

The sale agreements for these residential mortgage

loans with Fannie Mae and other

investors include various representations and warranties regarding the origination

and characteristics of the residential

mortgage loans.

Although the representations and warranties vary among investors,

they typically cover ownership of the

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

securing the loan,

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

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laws, among other matters.

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.

As of December 31, 2022, 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

deliver required documents or the documents we deliver are defective.

Investors also

may require the repurchase of a

but retained the servicing rights (MSRs) totaled $232.7 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 deliver required documents or the documents we deliver are defective.

also may require the repurchase of a

mortgage loan when an early payment default underwriting review reveals significant

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mortgage loan has subsequently been brought current.

Repurchase demands are typically

reviewed on an individual loan by

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

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

through our underwriting, quality assurance and servicing practices, including

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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

provisions contained in the Company’s sale agre

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

requests at December 31, 2022.

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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

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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

The agreement under which we act as servicer generally specifies our

standards of responsibility for actions taken by us in

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

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31, 2022, 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

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

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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 from the servicer after affirming that such borrower is experiencing

financial hardships during the

COVID-19 emergency.

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foreclosures on

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

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.

similar procedures or related evictions

or sales generally until June 30, 2021.

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

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

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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.

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CURRENT ACCOUNTING DEVELOPMENTS

The following ASU has been issued by the FASB

but is not yet effective.

The following ASUs have been issued by the FASB

but are not yet effective.

Financial Instruments – Credit Losses (Topic

Measurement of Credit Losses on Financial

Information about this pronouncement is described in more detail below.

Financial Instruments – Credit Losses (Topic

Troubled Debt

Restructurings and Vintage

Information about these pronouncements are described in more detail below.

Financial Instruments - Credit Losses (Topic

Measurement of Credit

Losses on Financial

, amends guidance on reporting credit losses for assets held at amortized cost basis and

available for sale debt

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

initial recognition threshold in

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

Losses on Financial Instruments

amends guidance on reporting credit losses for assets held at amortized cost basis and available

for sale debt securities.

assets held at amortized cost basis, the new standard eliminates the probable initial recognition

threshold previously

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

credit losses using a broader

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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.

The Company’s preliminary evaluation

the provisions of ASU No.

2016-13 are expected to impact the Company’s

consolidated financial statements, in particular

the level of the reserve for credit losses.

The Company is continuing to evaluate the

extent of the potential impact and

expects that portfolio composition and economic conditions at the time of adoption

will be a factor.

On October 16, 2019,

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implementation date for ASU 2016-13.

The Company will now be required

to implement the new standard in January 2023,

with early adoption permitted in any period prior to that date.

This standard became effective

for the Company on January 1, 2023.

The Company adopted ASU 2016-13 in the first quarter of 2023 and will apply the standard’s

provisions as a cumulative-

effect adjustment to retained earnings as of the beginning of the first reporting

period in which the guidance is effective.

The Company is finalizing implementation efforts through its implementation

The team has worked with an advisory

consultant and has finalized and documented the methodologies that will be utilized.

The team is currently finalizing

controls, processes, policies and disclosures and has completed full end-to-end

parallel runs.

Based on the Company’s

portfolio composition as of December 31, 2022, and current expectations of future economic

conditions, the reserve for

credit losses is expected to increase from 1.14% as a percentage of total loans at December

31, 2022 to a range between

1.32% and 1.36% of total loans upon adoption of this standard, primarily resulting from

the impact of adjusting from the

incurred loss model to the expected loss model, which provides for

expected credit losses over the life of the loan portfolio.

The Company does not expect to record an allowance for available-for-sale

securities as the investment portfolio consists

primarily of debt securities explicitly or implicitly backed by the U.S.

for which credit risk is deemed minimal.

The impact of ASU 2016-13 is not expected to have a material impact on the allowance

for unfunded commitments.

Company continues to finalize its day-one adjustment and

will record the after-tax impact as a cumulative-effect adjustment

to retained earnings as of January 1, 2023.

This estimate is subject to change as key assumptions are refined.

going forward will depend on the composition, characteristics, and credit

quality of the loan and securities portfolios as

well as the economic conditions at future reporting periods.

Financial Instruments - Credit Losses (Topic

Debt Restructurings and Vintage

eliminates the accounting guidance for troubled debt restructurings (“TDRs”),

while enhancing disclosure requirements for

certain loan refinancings and restructurings by creditors when a borrower is experiencing

financial difficulty.

standard is effective for fiscal years, and interim periods

within those fiscal years, beginning after December 15, 2022.

new standard is not expected to have a material impact on the Company’s

consolidated financial statements.

– Explanation of Non-GAAP Financial Measures

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Total deposits

Long-term debt

Total stockholders’ equity

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Rate Variance

Years ended December 31, 2021 vs.

Years ended December 31, 2020 vs.

Year ended December 31, 2022 vs.

Year ended December 31, 2021 vs.

Due to change in

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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