What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-03-14 compared with 2023-03-17 · 795 added, 1037 removed, 807 unchanged (69% of the section changed)

25 unchanged sentences

The Bank conducts its

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

business primarily in East Alabama, including

Lee County and surrounding areas.

The Bank operates full-service branches

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Total revenue

Provision for loan losses

Provision for credit losses

Noninterest expense

Income tax expense

Income tax (benefit) expense

Basic and diluted net earnings per share

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compared to $2.95 per share for the full

Net earnings for 2023 included a loss on sale of securities, while 2022 net earnings included

a gain on sale of land and a

one-time payroll tax credit provided by the CARES Act.

The after-tax impact of the loss on securities reduced 2023

earnings by $4.7 million, while non-routine items in 2022 improved net earnings by $3.6

Excluding non-routine

items, net earnings for the full year 2023 would have been $6.1 million, or $1.75

per share, compared to $6.7 million, or

$1.92 per share for the full year 2022.

Net interest income (tax-equivalent) was $26.7 million in 2023, 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%.

3% decrease compared to $27.6 million in 2022.

decrease was primarily due to a decline in interest earning assets, increased cost

of funds and changes in our deposit mix,

which was partially offset by a more favorable asset mix and higher

yields on interest

earnings assets.

The Company’s net

interest margin (tax-equivalent) was 2.89% in 2023,

compared to 2.81% in 2022.

Average loans for 2023 were $523.8

million, a 15% increase from 2022.

At December 31, 2023, the Company’s allowance

for loan losses was $5.8 million, or 1.14% of total loans, compared to

for credit losses was $6.9 million, or 1.23% of total loans, compared to

$5.8 million, or 1.14% of total loans, at December 31, 2022.

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 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

The implementation of CECL required pursuant to

Accounting Standards Codification (“ASC”) 326, which was effective

January 1, 2023, increased our allowance for credit

losses by $1.0 million, or 0.20% of total loans, as a day one transition adjustment.

For the full year 2023, increases in the

allowance for credit losses due to changes in the composition and balance of loans during 2023

were largely offset by

reductions in the allowance for credit losses due to the resolution of collateral dependent

nonperforming loans.

The Company recorded a provision for credit losses of $0.1 million in 2023 compared

to $1.0 million during 2022.

provision for credit losses under CECL is reflective of the Company’s

credit risk profile and the future economic outlook

and forecasts.

Our CECL model is largely influenced by economic

factors including, most notably,

the anticipated

unemployment rate.

The decrease in provision for credit losses was primarily related

to the downgrade of one borrowing

relationship in the fourth quarter of 2022, where one of these loans was repaid in full during the

second quarter of 2023.

Noninterest income was a loss of $3.0 million in 2023 compared to

income of $6.5 million in 2022.

Excluding the pre-tax

securities loss of $6.3 million related to the balance sheet repositioning strategy in 2023,

noninterest income would have

been $3.3 million for 2023,

compared to noninterest income of $3.3 million in 2022 after excluding the pre-tax gain of $3.2

million on the sale of land.

Noninterest expense was $22.6 million in 2023 compared to $19.

million in 2022.

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

million in 2022 compared to $19.4

Excluding the impact of the one-

time payroll tax credit of $1.6 million, noninterest expense would have been $21.4

million in 2022.

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

tax rate is principally impacted by tax-

exempt earnings from the Company’s investments

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

This increase in

noninterest expense reflects increases in net occupancy and equipment expenses of $0.2

million related to the Company’s

new headquarters, which opened in June 2022, professional fees expense of $0.

million, other real estate owned expense

of $0.1 million, FDIC and other regulatory assessments expenses of $0.2

million and other noninterest expense of $0.5

million, partially offset by decreases in salaries and benefits expense of

$0.2 million.

The provision for income taxes was a benefit of $0.8 million for an effective

tax rate of (125.73)% for 2023, compared to

tax expense of $2.5 million and an effective tax rate of 19.48% for 2022.

This decrease was primarily due to a decrease

in pre-tax earnings in 2023 resulting from the balance sheet repositioning.

Company’s effective income

otherwise is principally affected 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 $1.08 per share in 2023, an increase of 2% from 2022.

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

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

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

tier 1 (“CET1”) of 15.39%

regulatory standards with a total risk-based capital ratio of 15.52%, a

tier 1 leverage ratio of 9.72% and common equity tier

1 (“CET1”) of 14.52%

at December 31, 2023.

COVID-19 Impact Assessment

The COVID-19 pandemic has occurred in waves of different

variants since the first quarter of 2020.

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

At times, the pandemic

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,

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

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,

booster vaccines and newly

developed treatments.

COVID-19 significantly affected local state, national and global

health and economic activity and its future effects are

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

and scope of the pandemic, especially

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

with governmental, regulatory and private sector

COVID-19 has had continuing significant effects

on the economy, financial

markets and our employees,

customers and vendors.

Our business, financial condition and results of operations

generally rely upon the ability of our

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

secured loans, market value,

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

all of which are affected by the

We 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

employees, customers and shareholders.

We believe our business continuity

plan has worked to provide essential banking services to our communities and

customers, while protecting our employees’ health.

As part of our efforts

to exercise social distancing in

accordance with the guidelines of the Centers for Disease Control 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.

continue to provide

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.

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.

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 disruptions

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, 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:

(Dollars in thousands)

$2 million to $10 million

$350,000 to less than $2 million

Up to $350,000

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,

Act (the “Economic Aid

Act”) was signed into law.

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 loan fees by

participating banks.

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

(Dollars in thousands)

$2 million to $10 million

$350,000 to less than $2 million

Up to $350,000

approximately $1.0 million in fees 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 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 the pandemic’s effects,

and are working to continue our services and to address

developments as those occur.

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.

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

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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

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

to the end of each calendar quarter.

the allowance is based upon management’s

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

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

a borrower’s ability to repay (including

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

composition of the loan portfolio, economic

conditions, 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

scheduled in the loan agreement.

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

investment in the loan.

impairment is recognized through the allowance.

Loans that are impaired are

recorded at the present value of expected

future cash flows discounted at the loan’s effective

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

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

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

ongoing internal, independent

loan review process.

The Company’s loan

review process assists in determining whether there are loans in the portfolio

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

entire loan portfolio.

Company’s loan review process includes the judgment

of management, the input from our independent loan reviewers, and

reviews that may have been conducted by bank regulatory agencies as part of their

examination process.

incorporates loan review results in the determination of whether or not it is probable

that it will be able to collect all

amounts due according to the contractual terms of a loan.

As part of the Company’s quarterly assessment

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

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

residential real estate, and consumer

installment loans.

The Company analyzes each segment and estimates an allowance allocation

for each loan segment.

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

probable losses inherent for these

types of loans.

The estimates for these loans are established by category and based

on the Company’s internal system of

credit risk ratings and historical loss data.

The estimated loan loss allocation rate for the Company’s

internal system of

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

loan segments where the Company believes it

does not have sufficient historical loss data, the Company may

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

At December 31, 2022 and 2021, and for the years then ended, the Company adjusted

its historical loss rates for the

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

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

probable losses for several “qualitative and environmental” factors.

The allocation for qualitative and environmental

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

Since the fourth quarter of

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

the effects of at least one economic

downturn in its loss history.

The Company believes

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

inherent in the loan portfolio.

Absent this extension, the early cycle periods in which the

Company experienced significant

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

would decrease.

year ended December 31, 2022, the Company increased its look-back period to

55 quarters to continue to include losses

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

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

Impairment of Securities

On a quarterly basis, management makes an assessment to determine

whether there have been events or economic

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

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

impairment write-down is triggered when (1) the

Company has the intent to sell a debt security,

(2) it is more likely than not that the Company will be required to sell the

debt security before recovery of its amortized cost basis, or (3) the Company does not expect

to recover the entire amortized

cost basis of the debt security.

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

be required to sell the debt security before recovery,

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

between the debt security’s amortized cost

and its fair value.

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

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

the other-than-temporary impairment write-

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

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

the security’s amortized cost basis and

present value of its expected future cash flows.

The remaining difference between the security’s

fair value and the present

value of future expected cash flows is due to factors that are not credit related and is recognized in other comprehensive

income, net of applicable taxes.

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

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

for credit losses, our

determination of credit losses for investment securities, 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.

On January 1, 2023, we adopted FASB

Instruments - Credit Losses

326) which significantly changes our methodology for determining our allowance

credit losses, and ASU 2022-02

, Financial Instruments – Credit Losses (Topic

Debt Restructurings and

Vintage Disclosures

eliminated the accounting guidance for TDRs, while enhancing disclosure

requirements for

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

financial difficulty.

Allowance for Credit Losses – Loans

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

cost basis to present the net

amount expected to be collected on the loans.

Loans are charged

off against the allowance when management believes the

uncollectability of a loan balance is confirmed.

Expected recoveries do not exceed the aggregate of amounts

charged-off and expected to be charged-off.

Accrued interest receivable is excluded from the estimate of credit losses.

The allowance for credit losses represents management’s

estimate of lifetime credit losses inherent in loans as of the

balance sheet date.

The allowance for credit losses is estimated by management using relevant

available information, from

both internal and external sources, relating to past events, current conditions, and reasonable and

supportable forecasts.

The Company’s loan loss estimation process includes

procedures to appropriately consider the unique characteristics of

loan segments (commercial and industrial, construction and land development, commercial

real estate, multifamily,

residential real estate, and consumer loans).

These segments are further disaggregated into loan classes, the level at which

credit quality is monitored.

See Note 5, Loans and Allowance for Credit Losses, for additional information about our

Credit loss assumptions are estimated using a discounted cash flow ("DCF") model

for each loan segment, except consumer

The weighted average remaining life method is used to estimate credit loss assumptions

for consumer loans.

The DCF model calculates an expected life-of-loan loss percentage by considering the

forecasted probability that a

borrower will default (the “PD”), adjusted for relevant forecasted macroeconomic

factors, and LGD, which is the estimate

of the amount of net loss in the event of default.

This model utilizes historical correlations between default experience and

certain macroeconomic factors as determined through a statistical regression analysis.

The forecasted Alabama

unemployment rate is considered in the model for commercial and industrial, construction

and land development,

commercial real estate, multifamily,

and residential real estate loans.

In addition, forecasted changes in the Alabama home

price index is considered in the model for construction and land development and residential

real estate loans;

changes in the national commercial real estate (“CRE”) price index is considered

in the model for commercial real estate

and multifamily loans;

and forecasted changes in the Alabama gross state product

is considered in the model for

multifamily loans.

Projections of these macroeconomic factors, obtained from an independent

third party, are utilized to

forecast quarterly rates of default based on the statistical PD models.

Expected credit losses are estimated over the contractual term of the loan, adjusted

for expected prepayments and principal

payments (“curtailments”) when appropriate.

Management's determination of the

contract term excludes expected

extensions, renewals, and modifications unless the extension or

renewal option is included in the contract at the reporting

date and is not unconditionally cancellable by the Company.

To the extent the lives of the

loans in the portfolio extend

beyond the period for which a reasonable and supportable forecast can be

made (which is 4 quarters for the Company), the

Company reverts, on a straight-line basis back to the historical rates over an 8 quarter reversion

The weighted average remaining life method was deemed most appropriate

for the consumer loan segment because

consumer loans contain many different payment structures,

payment streams and collateral.

The weighted average

remaining life method uses an annual charge-off rate over several vintages

to estimate credit losses.

The average annual

charge-off rate is applied to the contractual term adjusted for

Additionally, the allowance

for credit losses calculation includes subjective adjustments for

qualitative risk factors that are

believed likely to cause estimated credit losses to differ from historical experience.

These qualitative adjustments may

increase or reduce reserve levels and include adjustments for lending management experience

and risk tolerance, loan

review and audit results, asset quality and portfolio trends, loan portfolio growth, industry concentrations,

underlying collateral, external factors and economic conditions not

already captured.

Loans that do not share risk characteristics are evaluated on an individual basis.

management determines that

foreclosure is probable and the borrower is experiencing financial difficulty,

the expected credit losses are based on the

estimated fair value of collateral held at the reporting date, adjusted for selling costs as appropriate.

Allowance for Credit Losses – Unfunded Commitments

Financial instruments include off-balance sheet credit instruments,

such as commitments to make loans and commercial

letters of credit issued to meet customer financing needs.

The Company’s

exposure to credit loss in the event of

nonperformance by the other party to the financial instrument for off-balance sheet

loan commitments is represented by the

contractual amount of those instruments.

Such financial instruments are

recorded when they are funded.

The Company records an allowance for credit losses on off-balance

sheet credit exposures, unless the commitments to

extend credit are unconditionally cancelable, through a charge to provision

for credit losses in the Company’s consolidated

statements of earnings.

The allowance for credit losses on off-balance sheet credit

exposures is estimated by loan segment

at each balance sheet date under the current expected credit loss model using the same

methodologies as portfolio loans,

taking into consideration the likelihood that funding will occur as well as any third-party

The allowance for

unfunded commitments is included in other liabilities on the Company’s

consolidated balance sheets.

Assessment for Allowance for Credit Losses – Available

-for-Sale Securities

For any securities classified as available-for-sale that are in an unrealized

loss position at the balance sheet date, the

Company assesses whether or not it intends to sell the security,

or more likely than not will be required to sell the security,

before recovery of its amortized cost basis.

If either of these criteria are met, the security's amortized cost basis is written

down to fair value through net income.

If neither criterion is met, the Company evaluates whether any portion

decline in fair value is the result of credit deterioration.

Such evaluations consider the extent to which the amortized cost of

the security exceeds its fair value, changes in credit ratings and any other known adverse

conditions related to the specific

If the evaluation indicates that a credit loss exists, an allowance for credit losses is

recorded for the amount by

which the amortized cost basis of the security exceeds the present value of cash flows expected

to be collected, limited by

the amount by which the amortized cost exceeds fair value.

Any impairment not recognized in the allowance for credit

losses is recognized in other comprehensive income.

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

FHLB-Atlanta and Federal

Reserve Bank of Atlanta (“FRB”).

These non-marketable equity securities are accounted for at cost which equals par

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

be long-term investments.

evaluating these securities for impairment, management considers

the ultimate recoverability of the par value rather than by

recognizing temporary declines in value.

when evaluating these securities for impairment, management considers

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

Determination

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Measurements and Disclosures

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

in accordance with U.S.

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

GAAP and expands

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please refer to Note 14, Fair Value,

of the consolidated financial statements that accompany this report.

of the unaudited consolidated financial statements that accompany this report.

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

Comparable assets or

liabilities or a composite of comparable assets in active markets are used

when identical assets or liabilities do not have

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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materially different net earnings and retained earnings results.

Other Real Estate Owned

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

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

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2023 we had total deferred tax assets of $12.5 million

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

in our securities portfolio.

included as “other assets”, including $9.7 million resulting from unrealized losses in our securities

the level of taxable income over the last three years and projections for future taxable

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deductible differences at December 31, 2023.

The amount of the deferred

tax assets considered realizable, however, could

The amount of the deferred tax assets considered realizable, however,

be reduced if estimates of future taxable income are reduced.

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to $27.6 million in 2022.

This increase was due

to improvements in the Company’s net interest

margin (tax-equivalent).

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”.

This decrease was

primarily due to a decline in interest earning assets and higher costs of funds partially offset

by improvements in the

Company’s yield on interest earning assets.

Net interest margin (tax-equivalent) increased

to 2.89% in 2023, compared to

2.81% in 2022.

This increase was

primarily due to a more favorable asset mix and higher yields on interest earning

These higher yields on interest earning assets were partially offset by

increased cost of funds.

During 2023, the cost of

funds increased to 122 basis points, compared to 35 basis points during 2022.

Since March of 2022, the Federal Reserve

increased the target federal funds range from 0 – 0.25% to 5.25

The tax-equivalent yield on total interest-earning assets increased by 71 basis points

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rates on interest earning

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

The cost of total interest-bearing liabilities increased by 87 basis points to

in 2023 compared to 0.35% in 2022.

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.

deposit costs may continue to increase if the Federal Reserve

maintains or increases its target federal funds rate, market

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

market interest rates, and we

compete for deposits against other banks, money market mutual funds

Treasury securities and other interest bearing

alternative investments.

The Company continues to deploy various asset liability management strategies

to manage its risk to interest rate

to manage its risk from interest rate

fluctuations.

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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

The provision for loan losses represents a charge to earnings necessary to provide

an allowance for loan losses that

management believes, based on its processes and estimates, should be adequate

to provide for the probable losses on

outstanding loans.

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.

challenging rate environment

will continue in 2024.

Our ability to compete and manage our deposits costs until our interest-earning assets reprice

generate new fixed rate loans with current market interest rates will be important to our

net interest margin during the

monetary tightening cycle that we believe will continue in 2024.

Provision for Credit Losses

On January 1, 2023, we adopted ASC 326, which introduces the current expected

credit losses (CECL) methodology and

requires us to estimate all expected credit losses over the remaining life of our loans.

Accordingly, the provision for credit

losses represents a charge to earnings necessary to establish an allowance

for credit losses that, in management's evaluation,

is adequate to provide coverage for all expected credit losses.

The Company recorded a provision for credit losses of $0.1

million during 2023, compared to a provision for loan losses of $1.0 million for 2022.

Provision for credit losses expense is

affected by organic loan growth in our loan portfolio,

our internal assessment of the credit quality of the loan portfolio, our

expectations about future economic conditions and net charge-offs.

Our CECL model is largely influenced by economic

factors including, most notably,

the anticipated unemployment rate, which may be affected

by monetary policy.

provision for credit losses during 2023 was primarily related to an increase in the calculation

of current expected credit

losses due to loan growth during 2023.

This was largely offset by the resolution of a collateral dependent

nonperforming

loan, with a recorded investment of $1.3 million and a corresponding allowance of $0.5

million, that was collected in full

during the second quarter of 2023.

Our allowance for credit losses reflects an amount we believe appropriate,

based on our allowance assessment

methodology, to adequately cover

all expected credit losses as of the date the allowance is determined.

At December 31,

2023, the Company’s allowance

for loan losses as a percentage of total loans was 1.14% at December 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,

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.

for credit losses was $6.9

million, or 1.23% of total loans, compared to $5.8 million, or

1.14% of total loans, at December 31, 2022.

The implementation of CECL, as of January 1, 2023, increased our allowance

for credit losses by $1.0 million, or 0.20% of total loans, as a day one transition adjustment

Noninterest Income

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Gain on sale of premises and equipment

Securities gains, net

Securities (losses) gains, net

Total noninterest income

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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

mortgage loans increased and mortgage loan volumes also decreased.

The decrease in origination income was partially

offset by an increase in mortgage servicing fees, net of related

amortization expense as mortgage prepayment speeds

slowed, resulting in decreased amortization expense.

Income from bank-owned life insurance was $411

thousand and $317 thousand for 2023 and 2022, respectively.

a $52 thousand non-taxable death benefit received during 2023, income from bank

-owned life insurance would have been

$359 thousand and $317 thousand for 2023 and 2022, respectively.

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.

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

former main office building.

former main office

In December 2023, the Company announced it had repositioned its balance sheet by selling

approximately $117.6 million,

or 27%, of its available-for-sale securities with a

weighted average book yield of 2.11% and a

weighted average duration of

4.0 years, resulting in net losses on sale of the securities of approximately $6.3

Proceeds of $111.3

million from the

sale of securities were used to repay wholesale funding of $48.0

million with a weighted average cost of 5.38%, while the

remaining amounts were held in cash to fund future loan growth, higher-yielding

securities, and other banking operations.

Other noninterest income was $1.9 million and $1.7 million for 2023

and 2022, respectively.

The increase in other

noninterest income was primarily related to insurance proceeds of $0.2

million received during 2023 related to property

Noninterest Expense

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Total noninterest expense

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

to the PPP loan program, and

routine annual wage and benefit increases.

Salaries and benefits decreased during 2023 compared to 2022.

A decrease in the number of full-time equivalents was

partially offset by routine annual increases in salaries and

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

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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 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

tax rate is principally

impacted by tax-

exempt earnings from the Company’s investments

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

expenses related to the Company’s

new headquarters in downtown Auburn.

This amount includes depreciation expense and costs associated with ope

the new headquarters.

The Company relocated its main office branch and bank operations into

its newly constructed

headquarters during June 2022.

The increase in professional fees expense during 2023 compared to

2022 was primarily related to increased consulting and

audit related fees during 2023.

The increase in FDIC and other regulatory assessments during 2023 compared to

2022 was primarily related to increases in

the FDIC’s initial base deposit insurance assessment

On October 18, 2022, the FDIC adopted an amended restoration

plan to increase the likelihood that the reserve ratio would be restored to at least 1.35%

by September 30, 2028.

FDIC’s amended restoration plan increases the

initial base deposit insurance assessment rate schedules uniformly by 2 basis

points, which began the first quarterly assessment period of 2023.

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

and checkcard

expenses, impairment related to new market tax credit investment due to remaining tax

credit being less than the

Company’s investment, and a gain on sale of other

real estate owned that was realized in 2022.

The provision for income taxes was a benefit of $0.8 million for an effective

tax rate of (125.73)% for 2023, compared to

tax expense of $2.5 million and an effective tax rate of 19.48% for 2022.

This decrease was primarily due to a decrease

in pre-tax earnings in 2023 resulting from the balance sheet repositioning.

The Company’s

effective income tax rate

otherwise is principally affected 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, 2023, compared to $405.3 million at December 31, 2022.

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

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

of $150.3 million, offset by an

increase of $15.9 million in the fair value of securities available-for-sale.

The decrease 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

the sale of $117.6 million securities available-for-sale

the balance sheet repositioning in December 2023 and normal paydowns and maturities on

other securities.

in the fair value of securities was primarily due to a decrease in long-term

market interest rates at the end of 2023.

average annualized tax-equivalent yields earned on total securities were 2.37

in 2023 and 2.06% in 2022.

The following table shows the carrying value and weighted average

yield of securities available-for-sale as of December

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

-for-sale as of December

31, 2023 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, 2023

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Consumer installment

unearned income

Loans, net of unearned income

Total loans, net of unearned income,

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an increase of $52.8 million, or 11%.

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%).

Four loan categories represented the majority of the loan portfolio at December 31,

commercial real estate (52%), residential real estate (21%), construction and land development

commercial and industrial (13%).

Approximately 23% of the Company’s commercial

loans were classified as owner-occupied at December 31,

real estate loans were classified as

owner-occupied at December 31, 2023.

Within the residential real estate portfolio

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,

2022 and 2021, respectively.

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

had no loans that required interest only

payments at December 31, 2022 and 2021.

The Company’s

residential real estate mortgage portfolio does not include any

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

mortgage products which are generally

viewed as high risk.

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

or 2%, and $7.4 million, or 1%, of total loans at December 31, 2023 and 2022, respectively.

For residential real estate

mortgage loans with a consumer purpose, the Company had no loans that required interest only payments

at December 31,

2023 and 2022.

The Company’s residential

real estate mortgage portfolio does not include any 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 4.76% in 2023

and 2021, respectively.

and 4.45% in 2022.

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

but are not limited to, the effects of

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

current economic conditions, including inflation and the continuing higher

levels of 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

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 than currently in effect may not be as profitable or

successful at the higher interest rates currently in effect

and which may exist in the future.

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

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established and periodically review,

lending policies and procedures.

our lending policies and procedures.

Banking regulations limit a bank’s

credit exposure by

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

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

credit exposure

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

or 20% of capital,

if loans in excess of 10% of

capital are fully secured.

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

At December 31, 2022, the Bank had no

relationships exceeding these limits.

At December 31, 2023, the Bank had one

loan relationship exceeding our internal limit.

We periodically analyze

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Loan concentrations to borrowers in the following classes

exceeded 25% of the Bank’s total

exceeded 25% of the Bank’s total risk-

based capital at December 31, 2023 (and related balances at December 31,

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Multi-family residential properties

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.

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

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

from classification as a TDR

pursuant to GAAP.

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

circumstances in

which a loan modification is not subject to classification as a TDR if such loan is not eligible

for modification under

Section 4013.

Allowance for Loan Losses

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

Office buildings

The Company maintains the allowance for credit 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 $5.8 million at

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

which management believed to be adequate at each of

the Company’s estimate of expected

losses in the loan portfolio.

The allowance for credit losses was $6.9 million at

December 31, 2023 compared to $5.8 million at December 31, 2022, 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 years ended December 31,

The assumptions, judgments and estimates, as well as the

methodologies and models associated with

the determination of the allowance for credit losses are described under “Critical Accounting Policies.”

On January 1, 2023, we adopted ASC 326, which introduces the current expected

credit losses (CECL) methodology and

requires us to estimate all expected credit losses over the remaining life of our loan portfolio.

Accordingly, beginning in

2023, the allowance for credit losses represents an amount that, in management's evaluation,

is adequate to provide

coverage for all expected future credit losses on outstanding loans.

As of December

31, 2023 and December 31, 2022, our

allowance for credit losses was approximately $6.9 million and $5.8

million, respectively, which our

management believes

to be adequate at each of the respective dates.

Our allowance for credit losses as a percentage of total

loans was 1.23% at

December 31, 2023, compared to 1.14% at December 31, 2022.

The increase in the allowance for credit losses is largely the result of the implementation

of ASC 326 on January 1, 2023,

which resulted in an adjustment to the opening balance of the allowance for credit losses of

$1.0 million.

Our CECL models

rely largely on projections of macroeconomic conditions to estimate

future credit losses.

Macroeconomic factors used in the

model include the Alabama unemployment rate, the Alabama home price index, the national

commercial real estate price

index and the Alabama gross state product.

Projections of these macroeconomic

factors, obtained from an independent third

party, are utilized to predict

quarterly rates of default.

See Note 5 to our Financial Statements.

Under the CECL methodology the allowance for credit losses is measured

on a collective basis for pools of loans with

similar risk characteristics, and for loans that do not share similar risk characteristics

with the collectively evaluated pools,

evaluations are performed on an individual basis.

Losses are predicted over

a period of time determined to be reasonable

and supportable, and at the end of the reasonable and supportable period

losses are reverted to long term historical averages.

At December 31, 2023, reasonable and supportable periods of 4 quarters were utilized

followed by an 8 quarter straight line

reversion period to long term averages.

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

ratios for the years ended December

31, 2023 and 2022 are presented below.

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(Dollars in thousands)

Allowance for loan losses:

Allowance for credit losses:

Balance at beginning of period

Impact of adopting ASC 326

Commercial and industrial

Construction and land development

Residential real estate

Consumer installment

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Net charge-offs

Provision for loan losses

Provision for credit losses

Ending balance

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as a % of average loans

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

of the allowance prior to the end of

each calendar quarter.

The level of the allowance

is based upon management’s evaluation

of the loan portfolios, past loan

loss experience, known and inherent risks in the portfolio, adverse situations that

may affect the borrower’s ability to repay

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

collateral, composition of the loan

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

This evaluation is

inherently subjective as it requires various material estimates and judgments including

the amounts and timing of future

cash flows expected to be received on impaired loans that may be susceptible to

significant change.

The ratio of our

allowance for loan losses to total loans outstanding was 1.14% at December 31,

2022, compared to 1.08% at December 31,

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, 2023 the Company had $0.9 million in nonperforming assets compared

million at December 31,

to $2.7 million at December 31,

The decrease in nonperforming was primarily related to the resolution of a collateral

dependent nonperforming loan

relationship, with a recorded investment of $1.3 million, that was collected in full during

the second quarter of 2023.

The table below provides information concerning total nonperforming assets

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Nonperforming (nonaccrual) loans

Other real estate owned

Total nonperforming assets

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Total nonaccrual loans

nonperforming loans

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

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

At December 31, 2022 and

2021, respectively, the Company

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, 2023

and 2022, respectively.

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

31, 2022 and 2021, respectively.

(In thousands)

Other real estate owned:

Commercial real estate

Total other real estate owned

Potential Problem Loans

Potential problem loans represent those loans with a well-defined weakness and

where information about possible credit

problems of borrowers has caused management to have serious doubts about the

borrower’s ability to comply with present

repayment terms.

This definition is believed to be substantially consistent with the standards

established by the Federal

Reserve, the Company’s primary regulator,

for loans classified as substandard, excluding nonaccrual loans.

problem loans, which are not included in nonperforming assets, amounted to $1.3

million, or 0.3% of total loans at

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, 2022 and

2021, respectively.

(In thousands)

Potential problem loans:

Commercial and industrial

Construction and land development

Commercial real estate

Residential real estate

Consumer installment

Total potential problem loans

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

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

90 days as of December 31, 2022 and 2021, respectively.

(In thousands)

Performing loans past due 30 to 89 days:

Commercial and industrial

Construction and land development

Commercial real estate

Residential real estate

Consumer installment

Total performing loans past due

30 to 89 days

The Company had no OREO at December 31, 2023 and 2022, respectively.

(In thousands)

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December 31, 2022.

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,

2022 and 2021, respectively.

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

insurance limits.

During 2023, deposit outflows due to the sale of $59.0 million of reciprocal deposits

were partially

offset by net deposit inflows of $4.9 million.

had no brokered deposits at December 31, 2023 and 2022.

Company had no FHLB-Atlanta advances or other wholesale borrowings outstanding

at December 31, 2023 and 2022.

Noninterest-bearing deposits were $270.7 million, or 30% of total deposits, at December

31, 2023, compared to $311.4

million, or 33% of total deposits at December 31, 2022.

The 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

The average rates paid on total interest-bearing deposits were 1.21

in 2023 and 0.34% in 2022.

At December 31, 2023, estimated uninsured deposits totaled $356.3

million, or 40% of total deposits, compared to $381.7

million, or 40% of total deposits at December 2022.

During 2023, the Bank began participating in the Certificates of

Deposit Account Registry Service (the “CDARS”) and the Insured Cash Sweep

product (“ICS”), which provide for

reciprocal (“two-way”) transactions among banks facilitated by IntraFi for the purpose

of maximizing FDIC insurance.

Company had no reciprocal deposits at December 31, 2023.

Uninsured amounts are estimated based on the portion of

account balances that exceed FDIC insurance limits.

The Bank’s uninsured deposits at December

31, 2023 and 2022

include approximately $206.2 million and $155.0 million, respectively,

of deposits of state, county and local governments

that are collateralized by securities having a fair value equal to such deposits.

Deposits of state, county and local

governments were 53% and 41% of our estimated uninsured deposits at December

31, 2023 and 2022, respectively.

The FDIC has proposed a special assessment on uninsured deposits of banks with over $5

billion in uninsured deposits to

the FDIC Deposit Insurance Fund’s costs

of the systemic risk determination made in connection with two recent bank

This proposal will not apply to AuburnBank.

Other Borrowings

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

Short-term borrowings generally consist

of federal funds purchased and securities sold under agreements to repurchase

with an original maturity of one year or less.

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

million with none outstanding at December 31,

The Company had no long-term debt at December 31, 2023 and 2022.

The Bank utilizes short and long-term non-deposit

borrowings from time to time.

Short-term borrowings generally consist of federal

funds purchased and securities sold under

agreements to repurchase with an original maturity of one year or

The Bank had available federal funds lines totaling

$61.0 million with no federal funds borrowed at December 31,

2023 and 2022, respectively.

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

agreements to repurchase, which were entered into on behalf of certain customers

million and $2.6 million at

December 31, 2023 and 2022, respectively.

At December 31, 2023 and 2022, the Bank had no borrowings from the

Federal Reserve discount window.

The Company did not borrow under the Federal Reserve BTFP during 2023.

The Bank is a member of the FHLB-Atlanta and has borrowed, and may in the future borrow

from time to time under the

FHLB-Atlanta’s advance program

to obtain funding for its growth.

FHLB-Atlanta advances include both fixed and

variable terms and are taken out with varying maturities, and

which generally are secured by eligible assets.

no borrowings under FHLB-Atlanta’s advance

program at December 31, 2023 and 2022, respectively.

At those dates, the

Bank had $309.1 million and $312.6 million, respectively,

of available lines of credit at the FHLB-Atlanta.

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

The average rates paid on short-term borrowings were 2.21%

and 0.51% in 2022 and 2021, respectively.

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

in 2023 and 2022, respectively.

CAPITAL ADEQUACY

The Company's consolidated stockholders' equity was $68.0 million and $103.7

million as of December 31, 2022 and 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 $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

$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.

At December 31, 2023, the Company’s cons

olidated stockholders’ equity (book value) was $76.5 million, or $21.90

share, compared to $68.0 million, or $19.42 per share, at December 31, 2022.

from December 31, 2022 was

primarily driven by net earnings of $1.4 million and other comprehensive income

of $11.9 million related to unrealized

gains/losses on securities available-for-sale, net of tax.

increases were partially offset by cash dividends paid of

$3.8 million, a one-time charge of $0.8 million, net of tax, for the cumulative

effect to adopt the CECL accounting standard

on January 1, 2023, and $0.2 million in repurchases of the Company’s

common stock.

Unrealized securities losses do not

affect the Bank’s capital

for regulatory capital purposes.

The Company paid cash dividends of $1.08 per share in 2023, an increase of 2% from the

same period in 2022.

Company’s share repurchases

of $0.2 million since December 31, 2022 resulted in 10,108 fewer outstanding common

shares at December 31, 2023.

These shares were repurchased at an average cost per share of $22.63.

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.

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 exceeded 2.5% and the

capital conservation buffer requirements.

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

banking regulators adopted an interim final rule that

amended the capital conservation buffer.

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

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

ratio to allow banking

organizations to more freely use their capital buffers to promote

lending and other financial intermediation activities, by

making the limitations on capital distributions more gradual.

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

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

not reflected in net income;

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

final rule only affects the capital buffers, and

banking organizations were encouraged to make prudent capital

distribution decisions.

included the implementation of a capital conservation buffer of CET1

capital of 2.5% that is added to the minimum

requirements for capital adequacy purposes.

A banking organization with a capital conservation buffer

of 2.5% or less is

subject to limitations on capital distributions from “eligible retained earnings”,

including dividend payments, share

repurchases and certain discretionary bonus payments.

At December 31,

2023 and 2022, the Bank had a capital

conservation buffer of 7.52% and 8.25%, respectively.

On August 26, 2020, the Federal Reserve and the other federal banking regulators adopted

a final rule that amended the

capital conservation buffer.

The new rule revises the definition of “eligible retained income”

for purposes of the maximum

payout ratio to allow banking organizations to more freely use their capital buffers

to promote lending and other financial

intermediation activities, by making the limitations on capital distributions

more gradual.

The eligible retained income is

now the greater of (i) net income for the four preceding quarters, net of distributions and associated

tax effects not reflected

in net income;

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

This rule only affects the capital

buffers, and banking organizations were encouraged to

make prudent capital distribution decisions.

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

Reserve’s policy.

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

subsidiaries.

tier 1 leverage ratio was 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%

Reserve’s Small Bank Holding

Company Policy.

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

consolidated subsidiaries.

tier 1 leverage ratio was 9.72%, CET1 risk-based capital ratio was 14.52%,

risk-based capital ratio was 14.52%, and total risk-based capital ratio was 15.52%

at December 31, 2023.

These ratios exceed the minimum regulatory capital

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

8.0% for tier 1 risk-based capital ratio,

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

Bank’s capital conservation buffer

exceed the minimum regulatory capital percentages of 5.0% for tier 1 leverage ratio,

6.5% for CET1 risk-based capital

ratio, 8.0% for tier 1 risk-based capital ratio, and 10.0% for total risk-based capital ratio

to be considered “well capitalized.”

The Bank’s capital conservation buffer

at December 31, 2023.

On July 27, 2023, the Federal Reserve, the Comptroller of the Currency and the FDIC issued

a joint notice of proposed

rulemaking to implement the Basel III endgame components.

The proposal which is subject to public comment and change

only applies to banks and holding companies with $100 billion or more of assets.

The proposal includes provisions dealing

Credit risk, which arises from the risk than an obligor fails to perform on an obligation

Market risk, which results from changes in the value of trading positions;

Operational risk, which is the risk of losses resulting from inadequate or failed internal process,

systems, or from external events;

Credit valuation adjustment risk, which results from the risk of losses on certain derivative

The Basel III endgame regulatory proposals are not applicable to the Company or the Bank.

MARKET AND LIQUIDITY RISK MANAGEMENT

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between new loan yields and funding costs.

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

The yield curve has been inverted during 2023 and in the first months of 2024.

An inverted yield curve reduces the net

interest margin expansion that may be expected otherwise as

interest rates rise.

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

assets and liabilities may shorten or lengthen as interest rates change.

For example, if long-term

mortgage interest rates

decline sharply, mortgage-backed

securities in the securities portfolio may prepay earlier than anticipated,

could reduce earnings.

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.

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

122 unchanged sentences

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, 2023 and 2022, the Company had no derivative

24 unchanged sentences

from the Bank.

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

if any, and cash

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

obligations, if any, and cash

dividends on, and repurchases of, Company common stock.

5 unchanged sentences

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

interest payments on earning assets,

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

particularly residential mortgage

Primary uses of funds include repayment of maturing obligations and

growing the loan portfolio.

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

the Federal Reserve discount window,

although it was not used by the Bank, the Federal Reserve’s

BTFP borrowing facility was available to the Bank during

In addition to these sources, the Bank is eligible to participate in the FHLB-Atlanta’s

advance program to obtain

funding for growth and liquidity.

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

At December 31, 2023, the Bank had no FHLB-Atlanta advances outstanding

and available credit from the

FHLB-Atlanta of $312.6 million.

At December 31, 2023, the Bank also had $61.0

million of available federal funds lines

with no borrowings outstanding.

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

(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.

to meet all known contractual

obligations and unfunded commitments, including loan commitments and reasonable

borrower, depositor,

requirements over the next 12 months.

Off-Balance Sheet Arrangements

4 unchanged sentences

have fixed expiration dates and many will expire

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

cash requirements.

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

future cash requirements.

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

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.

obtain FHLB-Atlanta

advances, raise deposits,

sell securities available-for-sale, or 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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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,

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

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

24 unchanged sentences

required repurchase event has

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

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

through our underwriting, quality assurance and servicing practices, including

1 unchanged sentence

mortgage investors.

The Company was not required to repurchase any loans during 2022 and 2021

as a result of representation and warranty

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.

We service all residential

32 unchanged sentences

31, 2023, 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

3 unchanged sentences

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

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

mortgage loans sold to Fannie Mae to

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

financial hardships during the

COVID-19 emergency.

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

foreclosures on

similar procedures or related evictions

or sales generally until June 30, 2021.

The Company was not required to repurchase any loans during 2023 and 2022 as a result of representation

provisions contained in the Company’s sale agreements

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

requests at December 31, 2023.

Effects of Inflation and Changing Prices

1 unchanged sentence

herein have been prepared in

accordance with GAAP and practices within the banking industry

which require the measurement of financial position and

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

the relative purchasing power of money

accordance with GAAP and practices within the banking industry which require

the measurement of financial position and

operating results in terms of historical dollars without considering the changes

in the relative purchasing power of money

over time due to inflation.

Unlike most industrial companies, virtually all the assets and

liabilities of a financial institution

Unlike most industrial companies, virtually all the assets and liabilities

of a financial institution

are monetary in nature.

2 unchanged sentences

than the effects of general levels of inflation.

Inflation can affect our noninterest expenses.

It also can affect

our customers’ behaviors, and can affect the interest rates we

have to pay on our deposits and other borrowings, and the interest rates we earn on our earning

The difference

between our interest expense and interest income is also affected by the shape

of the yield curve and the speeds at which

our assets and liabilities, respectively,

reprice in response to interest rate changes.

The yield curve was inverted on

December 31, 2023, which means shorter term interest rates are higher than longer

interest rates.

This results in a lower

spread between our costs of funds and our interest income.

In addition, net interest income

could be affected by

asymmetrical changes in the different interest rate indexes, given that

not all our assets or liabilities are priced with the

Higher market interest rates and sales or maturities of securities held by the

Federal Reserve to reduce inflation

generally reduce economic activity and may reduce loan demand and growth.

and related changes in market

interest rates, as the Federal Reserve acts to meet its long term inflation goal of 2%, also

can adversely affect the values and

liquidity of our loans and securities, the value of collateral for our loans, and the success of

our borrowers and such

borrowers’ available cash to pay interest on and principal of our loans to them.

Inflation is running at levels unseen in decades and, while it has declined during 2023,

it remains above the Federal

Reserve’s long term inflation goal of 2% annually.

Beginning in March 2022, the Federal Reserve has been raising target

federal funds interest rates and reducing its securities holdings in an effort

to reduce inflation.

During 2022, the Federal

Reserve increased the target federal funds range from 0 – 0.25%

to 4.25 – 4.50%.

The target federal funds rate was

increased another 25 basis points on each of January 31, March 7, May 3 and July 26, 2023

to 5.25-5.50%, and further

increases in the target federal funds rate may be made if inflation remains elevated.

The Federal Reserve has indicated it

will maintain higher target rates and restrictive monetary policy to

meet its 2% inflation rate over the longer term and

maximum employment goals.

Our deposit costs may increase as the Federal

Reserve increases its target federal funds rate,

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

and customers seek higher

market interest rates on deposits and other alternative investments.

Monetary efforts

to control inflation pursuant to the

Federal Act’s mandate to “promote effectively

the goals of maximum employment, stable prices, and moderate long-term

interest rates,” may also affect unemployment which is an important component

in our CECL model used to estimate our

allowance for credit losses.

CURRENT ACCOUNTING DEVELOPMENTS

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

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 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

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

collectability of cash flows.

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

cost basis of the financial assets to

present the net amount expected to be collected.

For available for sale debt securities, credit

losses should be measured in a

manner similar to current GAAP,

however the new standard will require that credit losses be presented as an allowance

rather than as a write-down.

The new guidance affects entities holding

financial assets and net investment in leases that are

not accounted for at fair value through net income.

The amendments affect

loans, debt securities, trade receivables, net

investments in leases, off-balance sheet credit exposures, reinsurance receivables,

and any other financial assets not

excluded from the scope that have the contractual right to receive cash.

business entities, the new guidance was

originally effective for annual and interim periods in fiscal years

beginning after December 15, 2019.

On October 16, 2019,

the FASB approved

a previously issued proposal granting smaller reporting companies a postponement of the required

implementation date for ASU 2016-13.

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

The following ASU has been issued by the FASB

but is not yet effective.

Investments – Equity Method and Joint Ventures

Accounting for Investments in Tax

Credit Structures Using

the Proportional Amortization Method;

Improvements to Income Tax

Information about this pronouncement is described in more detail below.

Investments – Equity Method and Joint Ventures

Accounting for Investments in Tax

Structures Using the Proportional

Amortization Method

, The amendments in this Update permit reporting entities to elect

to account for their tax equity investments, regardless of the tax credit program from

which the income tax credits are

received, using the proportional amortization method if certain conditions are

The new standard is effective for fiscal

years, and interim periods within those fiscal years, beginning after December

The Company does not expect the

new standard to have a material impact on the Company’s

consolidated financial statements.

Improvements to Income Tax

, The amendments in this Update

enhance the transparency and decision usefulness of income tax disclosures.

For public business entities, the new standard

is effective for annual periods beginning after December 15, 2024.

The Company does not expect the new standard to have

a material impact on the Company’s consolid

ated financial statements.

– Explanation of Non-GAAP Financial Measures

25 unchanged sentences

Tax equivalent net interest income (a)

Provision for loan losses

Provision for credit losses

Total noninterest income

10 unchanged sentences

Shares outstanding

Stockholders' equity (book value)

Common stock price

7 unchanged sentences

Asset Quality:

Allowance for loan losses as a % of:

Allowance for credit losses as a % of:

Nonperforming loans

14 unchanged sentences

Loans, net of unearned income

Allowance for loan losses

Allowance for credit losses

Total deposits

87 unchanged sentences

Consumer installment

- Allocation of Allowance for Loan Losses

- Allocation of Allowance for Credit Losses

(Dollars in thousands)

4 unchanged sentences

Consumer installment

Total allowance for loan losses

Total allowance for credit

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

14 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-K

Item 7. Management’s Discussion and Analysis