What changed in this filing

/stocks — the workspaceLOADING

Item 8. Financial Statements and Supplementary Data

2024-03-14 compared with 2023-03-17 · 1026 added, 1109 removed, 1100 unchanged (66% of the section changed)

13 unchanged sentences

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Auburn National Bancorporation, Inc.

Subsidiary (the “Company”) as of December 31, 2022 and 2021,

the related consolidated statements of earnings,

comprehensive income, stockholders’ equity and cash flows for the years

then ended, and the related notes to

the consolidated financial statements (collectively, the “financial statements”).

In our opinion, the financial

statements present fairly, in all material respects, the financial position of the Company as of December 31,

2022 and 2021, and the results of its operations and its cash flows for the

years then ended, in conformity with

accompanying consolidated

balance sheets

Auburn National

Bancorporation, Inc.

Subsidiary (the “Company”) as of December 31, 2023 and 2022, the related consolidated statements of earnings,

comprehensive income,

stockholders’ equity

related notes

(collectively,

statements”).

2022, and the

results of its

operations and its

cash flows for

the years then

ended, in conformity

accounting principles generally accepted in the United States of America.

Change in Accounting Principle

As discussed in Note 1 to the financial statements, the Company has changed its method of accounting for credit

Standards Codification

Instruments –

new credit loss standard using the modified retrospective method such that prior period amounts are not adjusted

The adoption of the new credit loss

standard and its subsequent applications is also communicated as

a critical audit matter below.

Basis for Opinion

These financial statements are the responsibility of the Company’s management.

Our responsibility is to express

an opinion on the Company’s financial statements based on our audits.

We are a public accounting firm

registered with the Public Company Accounting Oversight

Board (United States) (PCAOB) and are required to

be independent with respect to the Company in accordance with U.S.

federal securities laws and the applicable

responsibility is to express

registered with

the Public Company Accounting

Oversight Board

(United States) (PCAOB) and

are required to

be independent

with respect to

the Company in

accordance with U.S.

federal securities laws

and the applicable

rules and regulations of the Securities and Exchange Commission and

We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan

and perform the audit to obtain reasonable assurance about whether the

financial statements are free of material

misstatement, whether due to error or fraud.

is not required to have, nor were we engaged to

perform, an audit of its internal control over financial reporting.

of our audits we are required to obtain

an understanding of internal control over financial reporting but not for

the purpose of expressing an opinion on

the effectiveness of the Company’s internal control over financial reporting.

Accordingly, we express no such

Our audits included performing procedures to assess the risks of material misstatement

of the financial

statements, whether due to error or fraud, and performing procedures

that respond to those risks.

procedures included examining, on a test basis, evidence regarding the amounts

and disclosures in the financial

Our audits also included evaluating the accounting principles

used and significant estimates made by

management, as well as evaluating the overall presentation of the financial statements.

We believe that our

conducted our audits in accordance

with the standards of

Those standards

require that we plan

and perform the

audit to obtain reasonable

assurance about whether the

financial statements are free

misstatement,

perform, an audit

of its internal

control over financial

of our audits

required to obtain

an understanding of internal control over financial

reporting but not for the

purpose of expressing an opinion on

effectiveness of

internal control

over financial

procedures included examining, on

a test basis,

evidence regarding the

amounts and disclosures

in the financial

Our audits also included evaluating the accounting principles used and significant estimates made by

audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising

from the current period audit of the financial

statements that were communicated or required to be communicated

to the audit committee and that:

to accounts or disclosures that are material to the financial statements

and (2) involved our especially

The critical audit

matters communicated below are

matters arising from the

current period audit

of the financial

statements that

were communicated

communicated to

committee and

challenging, subjective or complex judgments.

The communication of critical

audit matters does not alter in any

way our opinion on the financial statements, taken as a whole, and we are

not, by communicating the critical

audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures

The communication of critical audit

matters does not alter in any

the financial

statements, taken

by communicating

audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to

which they relate.

Allowance for Loan Losses

$504.5 million

allowance for

described by the Company in Note 1, the evaluation of the allowance for loan losses is inherently subjective as

collectability of

of historical

experience, the

portfolio, adverse

prevailing economic conditions.

identified the

Allowance for Credit Losses

portfolio of $557.3

million and related

allowance for credit

losses of $6.9

million as of

December 31, 2023.

described by the Company in Note

1, the allowance for credit

losses is estimated by management using relevant

information, from

external sources,

conditions, and

reasonable and

supportable forecasts.

Company’s credit

loss assumptions

are estimated

("DCF") model

loan segment,

except consumer

weighted average

remaining life

estimate credit loss

assumptions for consumer

calculates an

probability that

relevant forecasted

macroeconomic factors,

given default

(“LGD”), which

macroeconomic

Projections of

macroeconomic factors

quarterly rates

the statistical

weighted average remaining

several vintages

credit losses.

Additionally,

the allowance

estimated credit losses to differ from historical experience.

identified the Company’s

estimate of the

allowance for credit losses

(“ACL”) as a critical

audit matter.

The principal

considerations for our determination of the allowance for loan

losses as a critical audit matter related to

principal considerations for our

determination of the allowance for

credit losses as a

critical audit matter related

subjectivity in

determining the

macroeconomic data

reasonable and

supportable forecasts,

qualitative factors.

Auditing these

complex judgments

and assumptions

Company involves

especially challenging

auditor judgment

specialized skill or knowledge needed.

assumptions by

involves especially

challenging auditor

knowledge needed.

The primary procedures we performed to address this critical audit matter

included the following:

reasonableness

factors for collectively evaluated loans.

reasonableness

qualitative factors

internally developed

and third-party

other audit evidence gathered.

understanding

qualitative factor components of the ACL.

effectiveness

determination of the ACL, including controls over:

factors of the ACL.

Management’s process

to review the

reasonableness of the forecasts

and the qualitative

including any adjustments.

evaluated the

reasonableness of

application of

qualitative factor

adjustments to

ACL, including

the comparison

considered by

management to

as well as evaluated the appropriateness and level of the qualitative factor adjustments.

comparing the overall allowance for credit losses to those recorded by

the Company’s peer institutions.

contradicted the Company’s conclusion.

Elliott Davis, LLC

We have served as the Company's

auditor since 2015.

We have served as the Company's auditor since 2015.

Greenville, South Carolina

10 unchanged sentences

Securities available-for-sale

Loans held for sale

Loans, net of unearned income

Allowance for loan losses

Allowance for credit losses

Premises and equipment, net

12 unchanged sentences

Retained earnings

Accumulated other comprehensive (loss) income, net

Accumulated other comprehensive loss, net

Less treasury stock, at cost -

17 unchanged sentences

Net interest income

Provision for loan losses

Net interest income after provision for loan

Provision for credit losses

Net interest income after provision for credit

Noninterest income:

3 unchanged sentences

Gain on sale of premises and equipment

Securities gains, net

Securities (losses) gains, net

Total noninterest income

7 unchanged sentences

Earnings before income taxes

Income tax expense

Income tax (benefit) expense

Net earnings per share:

9 unchanged sentences

(Dollars in thousands)

Other comprehensive loss, net of tax:

Unrealized net holding loss on securities

Reclassification adjustment for net gain on securities

Other comprehensive gain (loss), net of tax:

Unrealized net holding gain (loss) on securities

Reclassification adjustment for net loss (gain) on securities

recognized in net earnings

Other comprehensive loss

Comprehensive (loss) income

Other comprehensive income (loss)

Comprehensive income (loss)

See accompanying notes to consolidated financial statements

12 unchanged sentences

Balance, December 31, 2022

Other comprehensive loss

Cumulative effect of change in

accounting standard

Other comprehensive income

Cash dividends paid ($

12 unchanged sentences

operating activities:

Provision for loan losses

Provision for credit losses

Depreciation and amortization

Premium amortization and discount accretion, net

Deferred tax expense

Net gain on securities available for sale

Deferred tax (benefit) expense

Net loss (gain) on securities available for sale

Net gain on sale of loans held for sale

2 unchanged sentences

Proceeds from sale of loans

Net gain on disposition of premises and equipment

Increase in cash surrender value of bank owned life insurance

Net (increase) decrease in other assets

Net loss (gain) on disposition of premises and equipment

Decrease (increase) in cash surrender value of bank owned life insurance

Income recognized from death benefit on bank-owned life insurance

Net decrease (increase) in other assets

Net decrease in accrued expenses and other liabilities

4 unchanged sentences

Purchase of securities available-for-sale

(Increase) decrease in loans, net

Increase in loans, net

Net purchases of premises and equipment

(Increase) decrease in FHLB stock

Purchase of New Markets Tax

Credit investment

Increase in FHLB stock

Proceeds from bank-owned life insurance death benefit

Proceeds from surrender of bank-owned like insurance death benefit

Proceeds from sale of premises and equipment

Proceeds from sale of other real estate owned

Net cash used in investing activities

Net cash provided by (used in) investing activities

Cash flows from financing activities:

Net (decrease)increase in noninterest-bearing deposits

Net (decrease) increase in interest-bearing deposits

Net (decrease) increase in federal funds purchased and securities sold

Net decrease in noninterest-bearing deposits

Net decrease in interest-bearing deposits

Net decrease in federal funds purchased and securities sold

under agreements to repurchase

1 unchanged sentence

Dividends paid

Net cash (used in) provided by financing activities

Net cash used in financing activities

Net change in cash and cash equivalents

3 unchanged sentences

Cash paid during the period for:

Supplemental disclosure of non-cash transactions:

Real estate acquired through foreclosure

See accompanying notes to consolidated financial statements

16 unchanged sentences

The consolidated financial statements include the accounts of the Company and

its wholly-owned subsidiaries.

intercompany transactions and accounts are eliminated in consolidation.

its wholly-owned subsidiaries, which are

managed as a single business segment.

Significant intercompany transactions and

accounts are eliminated in consolidation.

Revenue Recognition

On January 1, 2018, the Company implemented ASU 2014-09,

Revenue from Contracts with Customers

The Company adopted ASC 606 using the modified retrospective transition

The majority of the

Company’s revenue stream is generated from

interest income on loans and deposits which are outside the scope of ASC

The Company’s sources of income that fall

within the scope of ASC 606 include service charges on deposits, investment

services, interchange fees and gains and losses on sales of other real estate, all of

which are presented as components of

services, interchange fees and gains and losses on sales of other real estate, all of which are

presented as components of

noninterest income.

The following is a summary of the revenue streams that fall within the

scope of ASC 606:

The following is a summary of the revenue streams that fall

within the scope of ASC 606:

Service charges on deposits, investment services, ATM

10 unchanged sentences

asset has been transferred to the buyer.

lists several criteria required to conclude that a contract for sale exists,

ASC 606 lists several criteria required to conclude that a contract for sale exists,

including a determination that the institution will collect substantially all of the consideration

16 unchanged sentences

significant change in the near term include the determination of the allowance

for loan losses, fair value measurements,

for credit losses, fair value measurements,

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

Change in Accounting Estimate

During the fourth quarter of 2019, the Company reassessed its estimate of the useful

lives of certain fixed assets.

Company revised its original useful life estimate for certain land improvements, buildings

and improvements and furniture,

fixtures and equipment, with a carrying value of $

million at December 31, 2019, to correspond with estimated

demolition dates planned as part of the redevelopment project for its

This is considered a change in

accounting estimate, per ASC 250-10, where adjustments should be made prospectively.

The effects of this change in

accounting estimate for the year ended December 31, 2021 was a decrease in net earnings

thousand, or $

Reclassifications

11 unchanged sentences

Accounting Standards Adopted in 2023

In 2022, the Company did not adopt any new accounting guidance.

Issued not yet effective accounting standards

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

On January 1, 2023, the Company adopted ASU 2016-13 Financial Instruments – Credit

Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments (ASC 326).

This standard

replaced the incurred loss methodology

with an expected loss methodology that is referred to as the current expected credit loss (“CECL”)

requires an estimate of credit losses for the remaining estimated life of the financial asset using

historical experience,

current conditions, and reasonable and supportable forecasts and generally applies to

financial assets measured at amortized

cost, including loan receivables and held-to-maturity debt securities, and some off

-balance sheet credit exposures such as

unfunded commitments to extend credit.

Financial assets measured at amortized

cost will be presented at the net amount

expected to be collected by using an allowance for credit losses.

In addition, CECL made changes to the accounting for available for sale debt

One such change is to require

credit losses to be presented as an allowance rather than as a write-down on available for sale debt

securities if management

does not intend to sell and does not believe that it is more likely than not, they will be required

The Company adopted ASC 326 and all related subsequent amendments thereto

effective January 1, 2023 using the

modified retrospective approach for all financial assets measured at amortized

cost and off-balance sheet credit

exposures.The transition adjustment upon the adoption of CECL on January 1, 2023

included an increase in the allowance

for credit losses on loans of $

million, which is presented as a reduction to net loans outstanding, and an increase in the

allowance for credit losses on unfunded loan commitments of $

million, which is recorded within other liabilities.

Company recorded a net decrease to retained earnings of $

million as of January 1, 2023 for the cumulative effect of

adopting CECL, which reflects the transition adjustments noted above, net of the applicable

deferred tax assets recorded.

Results for reporting periods beginning after January 1, 2023 are presented under CECL

while prior period amounts

continue to be reported in accordance with previously applicable accounting

The Company adopted ASC 326 using the prospective transition approach for debt

securities for which other-than-

temporary impairment had been recognized prior to January 1, 2023.

As of December 31, 2022, the Company did not have

any other-than-temporarily impaired investment securities.

upon adoption of ASC 326, the Company determined

that an allowance for credit losses on available for sale securities was not deemed

The Company elected not to measure an allowance for credit losses for accrued interest recei

vable and instead elected to

reverse interest income on loans or securities that are placed on nonaccrual status,

which is generally when the instrument is

90 days past due, or earlier if the Company believes the collection of interest is doubtful.

has concluded that

this policy results in the timely reversal of uncollectible interest.

The Company also adopted ASU 2022-02, “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 incurrent 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.

The 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

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 team.

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

% as a percentage of total loans at December 31, 2022 to a range between

% of total loans upon adoption of this standard, primarily resulting from the impact of adjusting

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

Restructurings and Vintage Disclosures”

on January 1, 2023, the effective date of the guidance, on a prospective basis.

ASU 2022-02 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.

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

Specifically, rather than

applying the recognition and measurement guidance for TDRs, an entity

must apply the loan refinancing and restructuring

guidance to determine whether a modification results in a new loan or a

continuation of an existing loan.

Additionally,

ASU 2022-02 requires an entity to disclose current-period gross write-offs

by year of origination for financing receivables

within the scope of Subtopic 326-20, Financial Instruments—Credit Losses—Measured

at Amortized Cost.

did not have a material impact on the Company’s

consolidated financial statements.

Issued not yet effective accounting standards

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 consolidated

financial statements.

Cash Equivalents

9 unchanged sentences

used as part of the Company’s

interest rate risk management strategy,

and they may be sold in response to changes in interest rates, changes in prepayment

risks or other factors.

All securities classified as available-for-sale are recorded

at fair value with any unrealized gains and

losses reported in accumulated other comprehensive income (loss), net of the deferred

income tax effects.

dividends on securities, including the amortization of premiums and accretion

of discounts are recognized in interest

income using the effective interest method.

Premiums are amortized to the earliest call date while discounts are accreted

over the estimated life of the security.

Realized gains and losses from the sale of securities are determined using the

specific identification method.

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-tempor

arily impaired.

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 will

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 factors.

credit loss component is recognized in earnings, as a realized loss in securities gains (losses),

and is the difference between

the security’s amortized cost basis and the 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

interest rate risk and liquidity management strategy,

and they may be sold in response to changes in interest rates, changes

in prepayment risks or other factors.

All securities classified as available-for-sale

are recorded at fair value with any

unrealized gains and losses reported in accumulated other comprehensive income (loss),

net of the deferred income tax

Interest and dividends on securities, including the amortization

of premiums and accretion of discounts are

recognized in interest income using the effective interest method.

Premiums are amortized to the earliest call date while

discounts are accreted over the estimated life of the security.

Realized gains and losses from the sale of securities are

determined using the specific identification method.

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 of the 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.

Loans held for sale

Loans originated and intended for sale in the secondary market are carried at the lower of

cost or estimated fair value in the

Loan sales are recognized when the transaction closes, the proceeds are

collected, and ownership is transferred.

Continuing involvement, through the sales agreement, consists of the right to service the loan

for a fee for the life of the

loan, if applicable.

Gains on the sale of loans held for sale are recorded net of related costs, such as commissions, and

reflected as a component of mortgage lending income in the consolidated

The Company originates

residential mortgage loans for sale.

Such loans are carried at the lower of cost or estimated fair

value in the aggregate.

Loan sales are recognized when the transaction closes, the proceeds

are collected, and ownership is

Continuing involvement, through the sales agreement, consists of the right to service the

loan for a fee for the

life of the loan, if applicable.

Gains on the sale of loans held for sale are recorded net of related costs, such as

commissions, and reflected as a component of mortgage lending income in the consolidated

statements of earnings.

In the course of conducting the Bank’s mortgage lending

activities of originating mortgage loans and selling those loans in

the secondary market, the Bank makes various representations and

warranties to the purchaser of the mortgage loans.

Every loan closed by the Bank’s mortgage

center is run through a government agency automated underwriting system.

Any exceptions noted during this process are remedied prior to sale.

These representations and warranties also apply to

underwriting the real estate appraisal opinion of value for the collateral securing these loans.

Failure by the Company to

comply with the underwriting and/or appraisal standards could result in the Company

being required to repurchase the

mortgage loan or to reimburse the investor for losses incurred (make whole requests) if

such failure cannot be cured by the

Company within the specified period following discovery.

Loans are reported at their outstanding principal balances, net of any unearned

income, charge-offs, and any deferred fees

or costs on originated loans.

Interest income is accrued based on the principal balance outstanding.

Loan origination fees,

net of certain loan origination costs, are deferred and recognized in interest income over the

contractual life of the loan

using the effective interest method.

Loan commitment fees are

generally deferred and amortized on a straight-line basis

over the commitment period, which results in a recorded amount that approximates

The accrual of interest on loans is discontinued when there is a significant deterioration in

the financial condition of the

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

or interest is more than 90 days past

due, unless the loan is both well-collateralized and in the process of collection.

all interest accrued but not

collected for loans that are placed on nonaccrual status is reversed against current

interest income.

Interest collections on

nonaccrual loans are generally applied as principal reductions.

The Company determines

past due or delinquency status of a

loan based on contractual payment terms.

A loan is considered impaired when it is probable the Company will be unable to collect all

principal and interest payments

due according to the contractual terms of the loan agreement.

Individually identified

impaired loans are measured based on

the present value of expected payments using the loan’s

original effective rate as the discount rate, the loan’s

market price, or the fair value of the collateral if the loan is collateral dependent.

If the recorded investment in the impaired

loan exceeds the measure of fair value, a valuation allowance may be established as part of

the allowance for loan losses.

Changes to the valuation allowance are recorded as a component of the provision for loan

Impaired loans also include troubled debt restructurings (“TDRs”).

In the normal

course of business, management may

grant concessions to borrowers who are experiencing financial difficulty.

The concessions granted most frequently for

TDRs involve reductions or delays in required payments of principal and interest

for a specified time, the rescheduling of

payments in accordance with a bankruptcy plan or the charge-off

of a portion of the loan.

In most cases, the conditions of

the credit also warrant nonaccrual status, even after the restructuring occurs.

As part of the credit approval process, the

restructured loans are evaluated for adequate collateral protection in determining

the appropriate accrual status at the time

of restructuring.

TDR loans may be returned to accrual status if there has been at least a six-month

sustained period of

repayment performance by the borrower.

The Company offered short-term loan modifications to assist borrowers during

the COVID-19 pandemic.

modification meets certain conditions, the modification does not need to be

accounted for as a TDR.

For more information,

please refer to Note 5, Loans and Allowance for Loan Losses.

Allowance for Loan Losses

The allowance for loan losses is maintained at a level that management believes is adequate

to absorb probable losses

inherent in the loan portfolio.

Loan losses are charged against the allowance

when they are known.

Subsequent recoveries

are credited to the allowance.

determination of the adequacy of the allowance is based on an evaluation of

the portfolio, current economic conditions, growth, composition of the loan portfolio,

homogeneous pools of loans, risk

ratings of specific loans, historical loan loss factors, identified impaired loans and

other factors related to the portfolio.

evaluation is performed quarterly and is inherently subjective, as it requires

various material estimates that are susceptible

to significant change, including the amounts and timing of future cash flows expected

to be received on any impaired loans.

In addition, regulatory agencies, as an integral part of their examination process,

will periodically review the Company’s

allowance for loan losses, and may require the Company to record additions to the allowance

based on their judgment about

information available to them at the time of their examinations.

The Bank makes various representations and warranties to the purchaser of the

residential mortgage loans they originated

and sells, primarily to Fannie Mae.

Every loan closed by the Bank’s mortgage center is run

through Fannie Mea or other

purchasing government sponsored enterprise (“GSE”) automated underwriting

Any exceptions noted during this

process are remedied prior to sale.

These representations and warranties also apply to underwriting the real estate appraisal

opinion of value for the collateral securing these loans.

Failure by the Company to comply with the underwriting and/or

appraisal standards could result in the Company being required to repurchase the

mortgage loan or to reimburse the investor

for losses incurred (make whole requests) if the Company cannot cure such

failure within the specified period following

Loans that management has the intent and ability to hold for the foreseeable

future or until maturity or payoff are reported

at amortized cost.

Amortized cost is the principal balance outstanding, net of purchase premiums

and discounts and

deferred fees and costs.

Accrued interest receivable related to loans is recorded

in other assets on the consolidated balance

Interest income is accrued on the unpaid principal balance.

Loan origination fees, net of certain direct origination

costs, are deferred and recognized in interest income using methods that approximate

a level yield without anticipating

The accrual of interest is generally discontinued when a loan becomes 90 days past due and

is not well collateralized and in

the process of collection, or when management believes, after considering economic and

business conditions and collection

efforts, that the principal or interest will not be collectible in the normal

course of business.

Past due status is based on

contractual terms of the loan.

A loan is considered to be past due when a scheduled payment has

not been received 30 days

after the contractual due date.

All accrued but unpaid interest is reversed against interest income when a loan is placed on nonaccrual

received on such loans is accounted for using the cost-recovery method,

until the loan qualifies for return to accrual.

are returned to accrual status when all the principal and interest amounts contractually due

are brought current, there is a

sustained period of repayment performance, and future payments are reasonably assured.

Otherwise, under the cost

recovery method, interest income is not recognized until the loan balance is reduced

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

loan balance is uncollectible.

Expected recoveries do not exceed the aggregate of amounts previously charged

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

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

commercial real estate,

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 loan

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 loss given default (“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.

forecasted Alabama unemployment rate is considered in the model for commercial

and industrial, construction and land

development, commercial real estate, 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.

Forecasted 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

predict 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 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,

trends in underlying

collateral, external factors and economic conditions not already captured.

Loans secured by real estate with balances equal to or greater than $500 thousand and loans

not secured by real estate with

balances equal to or greater than $250 thousand that do not share risk characteristics are

evaluated on an individual basis.

When management determines that foreclosure is probable and the borrower

is experiencing financial difficulty,

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.

On January 1, 2023, the Company recorded an adjustment for unfunded commitments

of $77 thousand upon the adoption of

At December 31, 2023, the liability for credit losses on off-balance-sheet credit

exposures included in other

liabilities was $

Provision for Credit Losses

The composition of the provision for credit losses for the respective periods

is presented below.

Years ended December 31,

(Dollars in thousands)

Provision for credit losses:

Unfunded commitments (1)

Total provision for credit

Reserve requirements for unfunded commitments were reported

as a component of other noninterest expense prior

to the adoption of ASC 326.

Premises and Equipment

2 unchanged sentences

fixtures, and equipment are carried

at cost, less accumulated depreciation computed on a straight-line method over the

useful lives of the assets or the expected

terms of the leases, if shorter.

Expected terms include

lease option periods to the extent that the exercise of such options is

reasonably assured.

at cost, less accumulated depreciation computed on a straight-line method over the estimated

useful lives of the assets or the

expected terms of the leases, if shorter.

Expected terms include lease option periods to the extent that the exercise of such

options is reasonably assured.

Nonmarketable equity investments

2 unchanged sentences

The Bank is required to maintain certain minimum levels of equity investments

with certain regulatory and other

entities in which the Bank has an ongoing business relationship based on the Bank’s

common stock and surplus (with

regard to the relationship with the Federal Reserve Bank) or outstanding borrowings (with

regard to the relationship with

the Federal Home Loan Bank of Atlanta).

These nonmarketable 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.

These securities can only be redeemed or sold

at their par value and only to the respective

issuing government supported institution or to another member institution.

Company records these nonmarketable

equity securities as a component of other assets, which are periodically evaluated for

Management considers

these nonmarketable equity securities to be long-term investments.

Accordingly, when evaluating these

securities for

impairment, management considers the ultimate recoverability of the par

value rather than by recognizing temporary

declines in value.

Mortgage Servicing Rights

The Company recognizes as assets the rights to service mortgage loans for others, known as

determines the fair value of MSRs at the date the loan is transferred.

An estimate of the Company’s MSRs is determined

using assumptions that market participants would use in estimating future

net servicing income, including estimates of

prepayment speeds, discount rate, default rates, cost to service, escrow account earnings,

contractual servicing fee income,

ancillary income, and late fees.

Subsequent to the date of transfer, the Company

has elected to measure its MSRs under the amortization method.

the amortization method, MSRs are amortized in proportion to, and over the period

of, estimated net servicing income.

amortization of MSRs is analyzed monthly and is adjusted to reflect changes in prepayment

speeds, as well as other factors.

MSRs are evaluated for impairment based on the fair value of those assets.

Impairment is determined by stratifying MSRs

into groupings based on predominant risk characteristics, such as interest rate and loan type.

If, by individual stratum, the

carrying amount of the MSRs exceeds fair value, a valuation allowance is established

through a charge to earnings.

valuation allowance is adjusted as the fair value changes.

MSRs are included in the other assets category in the

accompanying consolidated balance sheets.

in (i) Federal Reserve Bank of

Atlanta based on the Bank’s capital stock and surplus,

and the (ii) Federal Home Bank of Atlanta (“FHLB – Atlanta”)

based on various factors including, the Bank’s

total assets, its borrowings and outstanding letters of credit from the FHLB

Atlanta and its “acquired member asset” sales to FHLB - Atlanta.

These nonmarketable 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.

These securities can only

be redeemed or sold at their par

value by the respective issuer bank or, in the case of FHLB

– Atlanta stock upon FHLB – Atlanta approval sale to another

member of FHLB – Atlanta and law applicable to the member.

The Company records these nonmarketable equity securities

as a component of other assets, which are periodically evaluated for impairment.

considers these

nonmarketable equity securities to be long-term investments.

when evaluating these securities for impairment,

management considers the ultimate recoverability of the par value rather than by recognizing

temporary declines in value.

Transfers of Financial Assets

3 unchanged sentences

financial asset (i.e.

loan participations sold) are accounted for as sales

when control over the assets have been surrendered.

loan participations sold) are accounted for as sales when control

over the assets have been surrendered.

Control over transferred assets is deemed to be surrendered when (1)

5 unchanged sentences

agreement to repurchase them before their maturity.

Subsequent to the date of transfer, the Company

has elected to measure its retained rights to service the sold mortgage

loans, or MSRs, under the amortization method.

Under the amortization method, MSRs are amortized in proportion to, and

Mortgage Servicings Rights

The Company recognizes as assets the rights to service mortgage loans which it originates

and sells to others, principally

These servicing rights are called “MSRs”.

The Company determines the fair value of MSRs on sold loans at

the date the loan is transferred.

An estimate of the Company’s MSRs is determined

using assumptions that market

participants would use in estimating future net servicing income, including estimates

of prepayment speeds, discount rate,

default rates, cost to service, escrow account earnings, contractual servicing

fee income, ancillary income, and late fees.

Subsequent to the date of sale of the residential mortgage loans, the Company has elected

to measure its MSRs on such sold

mortgage loans under the amortization method.

Under the amortization method, MSRs are amortized in proportion

over the period of, estimated net servicing income.

10 unchanged sentences

MSRs are included in the other assets category in the accompanying consolidated

balance sheets.

balance sheets at the lower of

cost or fair value.

See Note 14 “Fair Value”

Securities sold under agreements to repurchase

1 unchanged sentence

year from the transaction date.

sold under agreements to repurchase are reflected as a secured borrowing in the accompanying consolidated

balance sheets

sold under agreements to repurchase are reflected as a secured borrowing in the accompanying

consolidated balance sheets

at the amount of cash received in connection with each transaction.

2 unchanged sentences

amounts and tax bases of assets and liabilities, computed using enacted tax rates.

A valuation allowance, if needed, reduces

valuation allowance, if needed, reduces

deferred tax assets to the amount expected to be realized.

8 unchanged sentences

plus or minus income tax effects of (1) changes in certain

circumstances that cause a change in judgment about

the realization of deferred tax assets in future years, (2) changes in

circumstances that cause a change in judgment about the realization of deferred tax assets in future

years, (2) changes in

income tax laws or rates, and (3) changes in income tax status, subject to certain exceptions.

2 unchanged sentences

that are normally accounted

for in other comprehensive income (loss) such as unrealized gains or losses on available-for

-sale securities.

for in other comprehensive income (loss) such as unrealized gains or losses on available

-for-sale securities.

In accordance with ASC 740,

8 unchanged sentences

its wholly-owned subsidiaries

file a consolidated income tax return

file consolidated Federal and State of Alabama income tax returns.

Fair Value Measurements

17 unchanged sentences

the fair value measurement should be

determined based on the assumptions that market participants would use in pricing

the asset or liability.

determined based on the assumptions that market participants

would use in pricing the asset or liability.

information related to fair value measurements, please refer to Note 14, Fair

10 unchanged sentences

the diluted net earnings per share calculation.

The basic and diluted net earnings per share computations for the respective

years are presented below.

The basic and diluted net earnings per share computations for the respective years are

presented below.

Year ended December 31

10 unchanged sentences

resources for the entity to support its activities.

At December 31, 2022, the Company did not have any consolidated VIEs to

disclose but did have one nonconsolidated

VIE, discussed below.

At December 31, 2023, the Company did not have any consolidated VIEs and

had one nonconsolidated VIE, which is

discussed below.

New Markets Tax

1 unchanged sentence

The New Markets Tax Credit

(“NMTC”) program provides federal tax incentives to investors to make investments

(“NMTC”) program provides federal tax incentives to investors to make investments in

distressed communities and promotes economic improvement through the development

of successful businesses in these

The NMTC is available to investors over seven years and is subject to recapture if certain

The NMTC is available to investors over seven years and is subject to recapture if certain events occur

during such period.

The Company had one investment with a balance of

$2.1 million and $2.2 million at December 31,

2022 and 2021, respectively, and

is included in other assets in the consolidated balance sheets.

The Company’s equity

investment meets the definition of a VIE.

While the Company’s

investment exceeds 50% of the outstanding equity

interests, the Company does not consolidate the VIE because it does not

meet the characteristics of a primary beneficiary

since the Company lacks the power to direct the activities of the VIE.

The Company had one NMTC investment with a balance of

$1.7 million and $

December 31, 2023 and 2022, respectively,

which is included in other assets in the Company’s

consolidated balance sheets

While the Company’s investment

exceeds 50% of the outstanding equity interests in this VIE, the Company does

not consolidate the VIE because the Company lacks the power to direct the activities of the

VIE, and therefore is not a

primary beneficiary of the VIE.

(Dollars in thousands)

25 unchanged sentences

Expected lives of

these securities may differ from contractual maturities because issues

may have the right to call or repay obligations

with or without prepayment penalties.

these securities may differ from contractual maturities because (i)

issuers may have the right to call or repay such securities

obligations with or without prepayment penalties and (ii) loans included in Agency MBS

generally have the right to prepay

such loans in whole or in part at any time.

Securities with aggregate fair values of $

7 unchanged sentences

carrying amounts of nonmarketable equity investments were $

million at December 31, 2022 and 2021, respectively.

Nonmarketable equity investments include FHLB stock, Federal Reserve Bank

stock, and stock in a privately held financial

Gross Unrealized Losses and Fair Value

million and $

million at December 31, 2023 and 2022,

respectively.

Nonmarketable equity investments include FHLB-Atlanta

stock, Federal Reserve Bank stock, and stock in a

privately held financial institution.

and Gross Unrealized Losses

The fair values and gross unrealized losses on securities at December 31,

11 unchanged sentences

State and political subdivisions

For the securities in the previous table, the Company does not have the intent to sell and has determined it is

not more likely

than not that the Company will be required to sell the security before recovery of the

amortized cost basis, which may be

On a quarterly basis,

the Company assesses each security for credit impairment.

For debt securities, the

evaluates, where necessary,

whether credit impairment exists by comparing the present value of the expected cash

the securities’ amortized cost basis.

In determining whether a loss is temporary,

the Company considers all relevant information including:

the length of time and the extent to which the fair value has been less than the amortized

adverse conditions specifically related to the security,

an industry, or a geographic area

(for example, changes in

the financial condition of the issuer of the security,

or in the case of an asset-backed debt security,

in the financial

condition of the underlying loan obligors, including changes in technology or the discontinuance

of a segment of

the business that may affect the future earnings potential of the issuer or

underlying loan obligors of the security or

changes in the quality of the credit enhancement);

the historical and implied volatility of the fair value of the security;

the payment structure of the debt security and the likelihood of the issuer being able to

make payments that

increase in the future;

failure of the issuer of the security to make scheduled interest or principal payments;

any changes to the rating of the security by a rating agency;

recoveries or additional declines in fair value subsequent to the balance sheet date.

For the securities in the

previous table, the Company

considers the severity of

the unrealized loss

as well as the Company’s

securities to

Unrealized losses

been recognized

as the decline in

fair value is largely

due to changes in

interest rates and other

market conditions.

For the securities

previous table,

2023, management

management will

not be required to sell the securities prior to their anticipated recovery.

Agency Obligations

The unrealized losses associated with agency obligations were primarily driven by

changes in market interest rates and not

due to the credit quality of the securities.

These securities were issued by U.S.

agencies or government-

sponsored entities and did not have any credit losses given the explicit government guarantee

or other government support.

Agency mortgage-backed securities (“MBS”)

The unrealized losses associated with agency MBS were primarily driven by changes

in market interest rates and not due to

the credit quality of the securities.

These securities were issued by U.S.

government agencies

or government-sponsored

entities and did not have any credit losses given the explicit government guarantee

or other government support.

Securities of U.S.

states and political subdivisions

The unrealized losses associated with securities of U.S.

states and political subdivisions

were primarily driven by changes

in market interest rates and were not due to the credit quality of the securities.

Some of these

securities are guaranteed by a

bond insurer, but management did not rely on the guarantee

in making its investment decision.

These securities will

continue to be monitored as part of the Company’s

quarterly impairment analysis, but are expected to perform even if the

rating agencies reduce the credit rating of the bond insurers.

As a result, the Company expects to

recover the entire

amortized cost basis of these securities.

The carrying values of the Company’s investment

securities could decline in the future if the financial condition of an

issuer deteriorates and the Company determines it is probable that it will not recover the entire

amortized cost basis for the

As a result, there is a risk that other-than-temporary

impairment charges may occur in the future.

Other-Than-Temporarily

Impaired Securities

Credit-impaired debt securities are debt securities where the Company

has written down the amortized cost basis of a

security for other-than-temporary impairment and the credit

component of the loss is recognized in earnings.

December 31, 2022 and 2021, respectively,

the Company had no credit-impaired debt securities and there were no additions

or reductions in the credit loss component of credit-impaired debt securities during the

years ended December 31, 2022 and

2021, respectively.

losses attributable

agency obligations at December 31, 2023.

Investments in

these agencies

guarantee of full and timely

payments of principal and

interest by the issuing agency.

Based on management's analysis

judgement, there were no credit losses attributable to the Company’s

investments in agency MBS at December 31, 2023.

State and Political Subdivisions

various municipalities

portfolio was

investments in state and political subdivisions at December 31, 2023.

Realized Gains and Losses

The following table presents the gross realized gains and losses on sales related to securities.

Year ended December 31

(Dollars in thousands)

3 unchanged sentences

LOANS AND ALLOWANCE

FOR LOAN LOSSES

FOR CREDIT LOSSES

(In thousands)

9 unchanged sentences

Consumer installment

unearned income

Loans, net of unearned income

Total loans, net of unearned income

Loans secured by real estate were approximately

4 unchanged sentences

Alabama and surrounding

In accordance with ASC 310,

, a portfolio segment is defined as the level at which an entity develops and

documents a systematic method for determining its allowance for loan losses.

As part of the Company’s quarterly

assessment of the allowance, the loan portfolio is disaggregated into the

following portfolio segments:

commercial and

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

estate and consumer installment.

Where appropriate, the Company’s loan portfolio

segments are further disaggregated into classes.

A class is generally

determined based on the initial measurement attribute, risk characteristics of the loan, and

an entity’s method for

monitoring and determining credit risk.

The following describe the risk characteristics relevant to each of the portfolio segments

The loan portfolio segment is defined as the level at which an entity develops and documents

a systematic method for

determining its allowance for credit losses.

As part of the Company’s

quarterly assessment of the allowance, the loan

portfolio is disaggregated into the following portfolio segments:

commercial and industrial, construction and land

development, commercial real estate, residential real estate and consumer installment.

appropriate, the Company’s

loan portfolio segments are further disaggregated into classes.

A class is generally determined

based on the initial

measurement attribute, risk characteristics of the loan, and an entity’s

method for monitoring and determining credit risk.

The following describe the risk characteristics relevant to each of the portfolio

segments and classes.

Commercial and industrial (“C&I”) —

5 unchanged sentences

is the cash flow from business operations and activities of the

were a participating lender in the PPP.

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

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

As of December 31, 2022, the

PPP loan with an aggregate outstanding principal balance of $

million included in this category.

PPP loans with an aggregate outstanding principal balance of $

million included in this category at

December 31, 2021.

Construction and land development (“C&D”) —

7 unchanged sentences

Commercial real estate

includes loans disaggregated into three classes:

(1) owner occupied (2)

and (3) other.

includes loans disaggregated in these classes:

Owner occupied

2 unchanged sentences

Generally the primary source

of repayment is the cash flow from business operations and activities of the borrower,

who owns the property.

of loan repayment are the cash flows from the business operations and activities of the

borrower, who owns the

– includes loans for hotels and motels.

12 unchanged sentences

– primarily includes loans to finance income-producing commercial properties.

Loans in this class

include loans

for neighborhood retail centers, hotels, medical and professional offices, sing

le retail stores, industrial buildings, and

Loans in this class include loans

for neighborhood retail centers, medical and professional offices, single retail

stores, industrial buildings, and

warehouses leased generally to local businesses and residents.

primary source of repayment is dependent

the primary source of repayment is dependent

upon income generated from the real estate collateral.

3 unchanged sentences

includes loans disaggregated into two classes:

(1) consumer mortgage and (2)

investment property.

Consumer mortgage

45 unchanged sentences

Consumer installment

The gross interest income which would have been recorded under the original terms of those

nonaccrual loans had they

been accruing interest, amounted to approximately $

thousand and $

thousand for the years ended December 31, 2022

and 2021, respectively.

Allowance for Loan Losses

The allowance for loan losses as of and for the years ended December 31,

2022 and 2021, is presented below.

Year ended December 31

(In thousands)

Beginning balance

Charged-off loans

Recovery of previously charged-off loans

Net charge-offs

Provision for loan losses

Ending balance

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

to the end of each calendar quarter.

the allowance is based upon management’s

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

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

a borrower’s ability to repay (including

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

composition of the loan portfolio, economic

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

recommendations.

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

and timing of future cash flows

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

charged off, in whole or

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

A loan may be partially charged-off

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

to the terms of the loan is

The Company deems loans impaired when, based on current information and events,

it is probable that the Company will

be unable to collect all amounts due according to the contractual terms of the loan agreement.

Collection of all amounts due

according to the contractual terms means that both the interest and principal payments of

a loan will be collected as

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 allowance maintained is believed by management to be adequate

to absorb probable losses inherent in the

portfolio at the balance sheet date.

The allowance is increased by provisions charged

to expense and decreased by charge-

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

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

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

that it will be able to collect all

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.

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 based on lending personnel experience, changes in lending policies

or procedures and other influencing

These qualitative and environmental factors are considered

for each of the five loan segments and the allowance

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

based on the incremental assessment of

these factors.

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

for loan losses.

Since the fourth quarter of

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

incorporate the effects of at least one 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.

The following table details the changes in the allowance for loan losses by portfolio segment

for the years ended December

31, 2022 and 2021.

(in thousands)

and industrial

Balance, December 31, 2020

Net recoveries (charge-offs)

Balance, December 31, 2021

Net (charge-offs) recoveries

Balance, December 31, 2022

The following table presents an analysis of the allowance for loan losses and recorded

investment in loans by portfolio

segment and impairment methodology as of December 31, 2022 and 2021.

Collectively evaluated (1)

Individually evaluated (2)

(In thousands)

December 31, 2022:

Commercial and industrial

Construction and land development

Commercial real estate

Residential real estate

Consumer installment

December 31, 2021:

Commercial and industrial

Construction and land development

Commercial real estate

Residential real estate

Consumer installment

(1) Represents loans collectively evaluated for impairment

in accordance with ASC 450-20,

Loss Contingencies

(formerly FAS 5), and pursuant to amendments by ASU 2010-20 regarding allowance for

unimpaired loans.

(2) Represents loans individually evaluated for impairment

in accordance with ASC 310-30,

FAS 114), and pursuant to amendments by ASU 2010-20 regarding allowance for impaired loans.

Credit Quality Indicators

3 unchanged sentences

The following table presents credit quality

indicators for the loan portfolio segments and classes.

These categories are utilized to develop

the associated allowance for

loan losses using historical losses adjusted for qualitative and environmental factors

and are defined as follows:

Pass – loans which are well protected by the current net worth and paying capacity

of the obligor (or guarantors, if

indicators for the loan portfolio segments and classes by year of origination as of December

These categories are

utilized to develop the associated allowance for credit losses using historical losses adjusted

for qualitative and

environmental factors and are defined as follows:

Pass – loans which are well protected by the current net worth and paying capacity of the

obligor (or guarantors, if

any) or by the fair value, less cost to acquire and sell, of any underlying collateral.

11 unchanged sentences

Nonaccrual – includes loans where management has determined that full payment

of principal and interest is in

(In thousands)

of principal and interest is not

(Dollars in thousands)

December 31, 2023:

Commercial and industrial

Special mention

Total commercial and industrial