What changed in this filing

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Item 7. Management’s Discussion and Analysis

2025-03-11 compared with 2024-03-14 · 769 added, 1001 removed, 601 unchanged (75% of the section changed)

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the years ended December 31, 2024 and 2023.

The purpose of this discussion is to provide

information about our financial

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

financial statements.

following discussion and analysis should be read along with our consolidated

financial statements and the related notes

The purpose of this discussion

is to provide information about our financial

condition and results of operations which is not otherwise apparent

from the consolidated financial statements.

following discussion and analysis should be read along with our

consolidated financial statements and the related notes

included elsewhere herein.

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forward-looking statements, so you should

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

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

holding company after

it acquired its Alabama predecessor,

which was a bank holding company established in 1984.

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

Forward-Looking Statements”.

This includes

Table 2 “Selected

Financial Data.”

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

became a bank holding company after

it acquired its Alabama predecessor, which was a bank

holding company established in 1984.

The Bank, the Company's

principal subsidiary, is an Alabama

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

principal subsidiary,

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

continuously since 1907.

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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

The Bank operates full-service branches

in Auburn, Opelika, Notasulga and Valley,

The Bank also operates a loan production office in Phenix

The Bank also operates a loan production office in

Summary of Results of Operations

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Noninterest expense

Income tax (benefit) expense

Income tax expense (benefit)

Basic and diluted net earnings per share

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compared to $0.40 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 earnings for 2023 reflected the sale of $117.6 million

of available-for-sale securities for an after-tax loss of

$(4.7) million, or $(1.35) per share related to the Company’s

balance sheet repositioning strategy in December 2023.

Excluding this non-routine item, net earnings for the full year 2023

would have been $6.1 million, or $1.75 per share.

Net interest income (tax-equivalent) was $27.2 million in 2024, a

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.

2% increase compared to $26.7 million in 2023.

increase was primarily due to improved net interest margin.

The Company’s net interest margin

(tax-equivalent) was

3.06% in 2024, compared to 2.89% in 2023.

The increase in net interest margin (tax-equivalent) was primarily

growth and the December 2023 balance sheet repositioning, which resulted

in a more favorable asset mix and higher yields

on interest-earning assets in 2024.

Average loans for 2024 were $568.7

million, a 9% increase from 2023.

At December 31, 2023, the Company’s allowance

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

At December 31, 2024, the Company’s

allowance for credit losses was $6.9 million, or 1.22% of total loans, compared to

$6.9 million, or 1.23% of total loans, at December 31, 2023.

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.

Although the balance of the allowance for credit losses was

largely unchanged, the decrease in the allowance for credit

losses as a percentage of total loans was primarily due to

improved economic forecasts.

The Company recorded a provision for credit losses of $36 thousand

in 2024 compared to $135 thousand during 2023.

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

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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.

Noninterest income was $3.5 million in 2024 compared to a loss of $3.0

million in 2023.

Excluding the impact of the one-

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

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.

Noninterest expense was $22.2 million in 2024 compared to $22.6

million in 2023.

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.

At December 31, 2023, the

Bank’s regulatory capital ratios

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

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

tier 1 leverage ratio of 9.72% and common equity tier

1 (“CET1”) of 14.52%

at December 31, 2023.

This decrease in noninterest expense

reflects decreases in net occupancy and equipment expenses of $0.4

million, professional fees expense of $0.1

other noninterest expense of $0.2 million.

These decreases were partially offset by increases in salaries and benefits

expense of $0.4

The provision for income taxes expense was $2.0 million for an effective

tax rate of 23.82% for 2024, compared to a tax

benefit of $0.8 million for a negative effective tax rate of (125.73)%

The Company’s effective

income tax rate is

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

investments in municipal securities, bank-owned life

insurance, and New Markets Tax

The effective tax rate increased primarily due to a decrease in the Company’s

investment in municipal securities following the balance sheet restructuring

in the fourth quarter of 2023, and the adoption

of FASB ASU 2023-02

Investments – Equity Method and Joint Ventures

(Topic323) which allows the

amortization method for our NMTC investments, on January 1, 2024.

With the adoption of this ASU, amortization of

NMTCs are now included in income tax expense rather than noninterest

Additionally, the provision

tax expense and the effective tax rates for 2024 included discrete tax

items associated with provision to return adjustments

in conjunction with the final 2023 tax return filing and the resolution of state examination

activities, which resulted in

additional tax expense.

The Company paid cash dividends of $1.08 per share in 2024, unchanged

At December 31, 2024, the Bank’s

regulatory capital ratios were well above the minimum amounts required

to be “well capitalized” under current regulatory

standards with a total risk-based capital ratio of 15.81%, a tier 1 leverage ratio of

10.49% and common equity tier 1 or

(CET1) of 14.80% at December 31, 2024.

CRITICAL ACCOUNTING POLICIES

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

generally accepted

The accounting and financial reporting policies of the Company conform with

generally accepted accounting

principles and with general practices within the banking industry.

In connection with the application of those principles, we

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

for 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.

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

allowance for credit losses, recurring and

non-recurring fair value measurements, and the valuation of deferred tax assets, were critical

to the determination of our

financial position and results of operations.

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 credit losses is estimated under the CECL methodology set forth

in FASB ASC 326.

The allowance

credit losses reflects management’s

estimate of the amount of credit losses expected to be recognized over

the remaining

life of the loans in our portfolio.

This evaluation requires significant management

judgment and is based upon relevant

available information related to historical default and loss experience,

current and projected economic conditions, and other

portfolio-specific and environmental risk factors.

Losses are predicted

over a reasonable and supportable forecast period,

and at the end of the reasonable and supportable period losses revert to long term historical

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.

when evaluating these securities for impairment, management considers

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

credit losses is measured on a collective basis for pools of loans with similar risk characteristics,

and on an individual basis

for loans that do not share similar risk characteristics with the collectively evaluated

There are factors beyond our

control, such as changes in projected economic conditions, real estate markets

or particular industry conditions which may

materially impact asset quality and the adequacy of the allowance for credit

losses and thus the resulting provision for credit

The allowance is adjusted through provision for credit losses and decreased

by charge-offs, net of recoveries of

amounts previously charged-off.

1 - Summary of Significant Accounting Policies and Note 5 - Loans and

Allowance for Credit Losses in the notes to our consolidated financial statements

in this report.

Determination

GAAP requires management to value and disclose certain of the Company’s

assets and liabilities at fair value,

including investments classified as available-for-sale and derivatives.

GAAP requires management to value and disclose certain of

the Company’s assets and liabilities at fair value,

including investments classified as available-for-sale and

Measurements and Disclosures

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

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

in accordance with U.S.

GAAP and expands

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For more information regarding fair value measurements and disclosures,

please refer to Note 14, Fair Value,

of the unaudited consolidated financial statements that accompany this report.

please refer to Note 1 - Summary of Significant Accounting Policies and Note

13, Fair Value

in the notes to the

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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best estimates for appropriate discount rates, default rates,

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

market data and experience.

prepayments, market volatility and other factors, taking into account

current observable market data and experience.

These assumptions may have a significant effect on the reported

fair values of assets and liabilities and the related income

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

well as changes in market conditions, could result in

As such, the use of different models and assumptions,

as well as changes in market conditions, could result in

materially different net earnings and retained earnings results.

Asset Valuation

A valuation allowance is recognized for a deferred tax asset if, based on the weight of available

evidence, it is more-likely-

A valuation allowance is recognized for a deferred tax asset if, based on the weight of

available evidence, it is more-likely-

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

realization of deferred tax assets

The ultimate realization of deferred tax assets

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

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2024 we had total deferred tax assets of $10.2 million

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

income over the periods in which the

deferred tax assets are deductible, management believes it is more likely than

not that we will realize the benefits of these

included as “other assets”, including $9.9 million resulting from unrealized

losses in our securities portfolio.

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

taxable income over the periods in which the

deferred tax assets are deductible, management believes it is more likely

than not that we will realize the benefits of these

deductible differences at December 31, 2024.

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be reduced if estimates of future taxable income are reduced.

See Note 1 - Summary of Significant Accounting Policies

and Note 10 – Income Taxes

in the notes to the consolidated financial statements that accompany this report.

Average Balance

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Interest bearing bank deposits

Total interest-earning assets

Total interest-earning

Savings and money market

Certificates of deposits

Total interest-bearing deposits

Certificates of deposit

Total interest-bearing

Short-term borrowings

Total interest-bearing liabilities

Total interest-bearing

Net interest income and margin (a)

(a) Tax-equivalent.

See "Table 1 - Explanation of Non-GAAP

Financial Measures".

See "Table 1 - Explanation

of Non-GAAP Financial Measures".

OF OPERATIONS

Net Interest Income and Margin

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

to $27.6 million in 2022.

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

to 3.76% in 2023 compared to 3.05%

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

rates on interest earning

Net interest income (tax-equivalent) was $27.2 million in 2024, a

2% increase compared to $26.7 million in 2023.

increase was primarily due to improved net interest margin.

The Company’s net interest margin

(tax-equivalent) was

3.06% in 2024, compared to 2.89% in 2023.

The increase in net interest margin (tax-equivalent) was primarily

growth and the balance sheet repositioning strategy the Company

completed in the fourth quarter of 2023, which resulted in

a more favorable asset mix and higher yields on interest-earning assets in 2024.

This was partially offset by higher market

interest rates, which increased our cost of funds, generally,

and changes in our deposit mix to higher cost interest-bearing

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

60 basis points to 4.36% in 2024 compared to 3.76%

Average loans for 2024

were $568.7 million, a 9% increase from 2023.

The cost of total interest-bearing liabilities increased by 59 basis points to 1.81%

in 2024 compared to 1.22% in 2023.

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 from interest rate

Average interest-bearing

deposits were $639.6 million during 2024, a 3% decrease compared to $657.8 million

As of December 31, 2024, average interest-bearing deposits were 71% of average

total deposits compared to 69% on

December 31, 2023.

Since March 2022, the Federal Reserve increased the target

federal funds rate by 525 basis points

before announcing a 50-basis points rate reduction on September 18, 2024,

its first decrease in rates since its March 2020

COVID rate reduction,

followed by two 25 basis points reduction in October and December 2024.

At year end the target

federal funds rate ranged from 4.25% - 4.50%.

The Company continues to deploy various asset liability management

strategies to manage its risk from interest rate

fluctuations.

Deposit and loan pricing remains competitive in our markets.

We believe this

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.

that interest rates, inflation and

monetary policy may continue to fluctuate in 2025 and may be challenging

Our ability to compete and manage

our deposits costs until our interest-earning assets reprice and we generate

new fixed rate loans with current market interest

rates will be important to our net interest margin during

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,

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

The Company recorded a

provision for credit losses of $36 thousand during 2024, compared to $135

thousand for 2023.

Provision for credit losses

expense is affected by 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.

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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.

the anticipated unemployment rate, which may be affected by monetary

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.

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 credit losses was $6.9

2024, the Company’s allowance for

credit losses was $6.9

million, or 1.22% of total loans, compared to $6.9 million, or

1.23% of total loans, at December 31, 2023.

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

Although the balance of the allowance for credit losses was largely

unchanged, the decrease in the allowance for credit losses as a percentage of total

loans was primarily due to improved

economic forecasts.

Noninterest Income

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Bank-owned life insurance

Gain on sale of premises and equipment

Securities (losses) gains, net

Securities losses, net

Total noninterest income

The Company’s noninterest income from

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

The Company’s noninterest income

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

mortgage loans and (2) servicing of mortgage loans.

Origination income, net, is comprised

of gains or losses from the sale

of the mortgage loans originated, origination fees, underwriting fees and other fees

associated with the origination of

Origination income, net,

is comprised of gains or losses from the sale

of the mortgage loans originated, origination fees, underwriting fees and other

fees associated with the origination of

mortgage loans, which are netted against the commission expense associated

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The Company’s

normal practice is to originate mortgage loans for sale in the secondary

market and to either sell or retain the MSRs when

normal practice is to originate mortgage loans for sale in the secondary market

and to either sell or retain the MSRs when

the loan is sold.

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

mortgage loan is sold.

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

the date the corresponding mortgage loan is sold.

Subsequent to the date of transfer, the Company

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An increase in mortgage interest rates typically results in an increase in the

fair value of the MSRs while a decrease in mortgage interest rates typically results in a decrease

in the fair value of MSRs.

fair value of the MSRs while a decrease in mortgage interest rates typically results in

a decrease in the fair value of MSRs.

The following table presents a breakdown of the Company’s

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Servicing fees, net

Total mortgage lending income

The Company’s income from mortgage lending

typically fluctuates as mortgage interest rates change and is primarily

Total mortgage lending

The Company’s income from mortgage

lending typically fluctuates as mortgage interest rates change and is primarily

attributable to the origination and sale of new mortgage loans.

Origination income decreased as market interest rates on

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.

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

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

former main office

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

The increase in mortgage lending income was primarily

related to the Company increasing the number of mortgage loans originated

for sale during 2024 relative to the number of

mortgage loans originated and held for investment during 2023.

Income from bank-owned life insurance was $403 thousand and

$411 thousand for 2024 and 2023 respectively.

a $52 thousand non-taxable death benefit received during the first quarter of

2023, income from bank-owned life insurance

would have been $359 thousand for 2023.

Securities losses, net for 2023 were related to the Company selling approximately

$117.6 million of its available-for-sale

securities, resulting in a net loss of approximately $6.3 million as part of its balance

sheet repositioning strategy.

Noninterest Expense

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Salaries and benefits

Employee retention credit

Net occupancy and equipment

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Total noninterest expense

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

credit provided by the CARES

Act and the 2020 Consolidated Appropriations Act.

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

expenses related to the 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.

Salaries and benefits increased during 2024 compared to 2023 primarily due

to routine annual increases in salaries and

The decrease in net occupancy and equipment expense was primarily

due to an increase in leasing income.

The decrease in other noninterest expense was primarily due to the Company’s

adoption of ASU 2023-02 which allows the

proportional amortization method for our NMTC investments, on January

With the adoption of this ASU,

amortization of NMTCs are now included in income tax expense.

During 2023 other noninterest expense included $0.4

million related to our equity method investment in NMTCs.

This decrease was partially offset by various increases in other

noninterest expense accounts during 2024.

The provision for income taxes expense was $2.0 million for an effective

tax rate of 23.82% for 2024, compared to a tax

benefit of $0.8 million for a negative effective tax rate of (125.73)%

The Company’s effective

income tax rate is

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

investments in municipal securities, bank-owned life

insurance, and New Markets Tax

The effective tax rate increased primarily due to a decrease in

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

investment in municipal securities following the balance sheet restructuring

in the fourth quarter of 2023, and the adoption

of FASB ASU 2023-02

Investments – Equity Method and Joint Ventures

(Topic323) which allows the

amortization method for our NMTC investments, on January 1, 2024.

With the adoption of this ASU, amortization of

NMTCs are now included in income tax expense rather than noninterest

Additionally, the provision

tax expense and the effective tax rates for 2024 included discrete tax

items associated with provision to return adjustments

in conjunction with the final 2023 tax return filing and the resolution of state examination

activities, which resulted in

additional tax expense.

BALANCE SHEET ANALYSIS

Securities available-for-sale were $270.9

million at December 31, 2023, compared to $405.3 million at December 31, 2022.

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

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

Securities available-for-sale were $243.0 million at December 31, 2024,

compared to $270.9 million at December 31, 2023.

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

-for-sale of $27.1 million, and a decrease

of $0.8 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 normal paydowns and

The average annualized tax-equivalent

yields earned on total securities were 2.25%

in 2024 and 2.37% in 2023.

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, 2024 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 in whole or in part, with or

without penalty.

December 31, 2024

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Consumer installment

Total loans, net of unearned income,

were $557.3 million at December 31, 2023, and $504.5 million at December

Total loans, net of unearned

income, were $564.0 million at December 31, 2024, and $557.3 million

at December 31, 2023,

an increase of $6.7 million, or 1%.

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

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

commercial real estate (51%), residential real estate (21%), construction

and land development (15%), and

commercial and industrial (11%).

Approximately 23% of the Company’s commercial

real estate loans were classified as

Approximately 19% of the Company’s

commercial real estate loans were classified as

owner-occupied at December 31, 2024.

Within the residential real estate portfolio

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.

the Company had junior lien mortgages of approximately $11.2

or 2%, and $8.7 million, or 2%, of total loans at December 31, 2024 and 2023,

respectively.

For residential real estate

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

at December 31,

mortgage loans with a consumer purpose, the Company had no loans

that required interest only payments at December 31,

2024 and 2023.

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 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 5.23% in 2024

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but are not limited to, the effects of

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 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.

current economic conditions, including the levels of market

interest rates, supply chain disruptions, commercial office

occupancy levels, housing supply shortages, and effects of

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 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.

See “Risk Factors.”

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

guidelines for collateralized

loans, investigating the creditworthiness of borrowers and monitoring borrowers’ financial

loans, investigating the creditworthiness of borrowers and monitoring borrowers’

financial position.

Also, we have

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

or 20% of capital,

if loans in excess of 10% of

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

capital are fully secured.

Under these regulations, we are prohibited from having secured

loan relationships in excess of

Under these regulations, we are prohibited from having

secured loan relationships in excess of

approximately $22.7 million.

Furthermore, we have an internal limit

for aggregate credit exposure (loans outstanding plus

Furthermore, we have an internal limit for

aggregate credit exposure (loans outstanding plus

unfunded commitments) to a single borrower of $20.4 million.

Our loan policy requires

that the Loan Committee of the

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

policy requires that the Loan Committee of the

Board of Directors approve any loan relationships that exceed this internal

At December 31, 2024, the Bank had one

loan relationship exceeding our internal limit.

We periodically analyze

our commercial loan portfolio to determine if a concentration of credit

risk exists in any one or

We periodically

analyze our commercial loan portfolio to determine if a concentration of

credit risk exists in any one or

more industries.

use classification systems broadly accepted by the financial services industry in

order to categorize our

use classification systems broadly accepted by the financial services industry

in order to categorize our

commercial borrowers.

Loan concentrations to borrowers in the following classes

exceeded 25% of the Bank’s total risk-

Loan concentrations to borrowers in the following

classes exceeded 25% of the Bank’s

based capital at December 31, 2024 (and related balances at December

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Multi-family residential properties

Shopping centers/strip malls

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 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 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

On January 1, 2023, the Company adopted ASC 326 and its CECL methodology,

which required us to estimate all expected

credit losses over the remaining life of our loan portfolio.

The Company maintains the allowance for credit losses at a level

that management believes appropriate to adequately cover the Company’s

estimate of expected losses in the loan portfolio.

The allowance for credit losses was $6.9 million at December 31, 2024 and 2023,

respectively, which management

to be adequate at each of the respective dates.

Our allowance for credit losses as a percentage of total

loans was 1.23% at

Our allowance for credit losses as a percentage of total loans was 1.22%

December 31, 2024, compared to 1.23% at December 31, 2023.

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.

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

factors, obtained from an independent third party,

are utilized to predict quarterly rates of default.

Under the CECL methodology the allowance for credit losses is measured on

a collective basis for pools of loans with

similar risk characteristics, and on an individual basis for loans that do not share similar

risk characteristics with the

collectively evaluated pools.

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,

2024 and 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.

See Note 5 to our Financial Statements.

A summary of the changes in the allowance for credit losses on loans

and certain asset quality ratios for the years ended

December 31, 2024 and 2023 are presented below.

Year ended December 31

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Commercial and industrial

Residential real estate

Consumer installment

Commercial and industrial

Commercial real estate

Residential real estate

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Total recoveries

Net charge-offs

Provision for credit losses

Net recoveries (charge-offs)

(Reversal of) provision for credit losses

Ending balance

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as a % of nonperforming loans

Net charge-offs

as a % of average loans

Net charge-offs as a % of average loans

Nonperforming Assets

At December 31, 2023 the Company had $0.9 million in nonperforming assets compared

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

and certain asset quality ratios.

At December 31, 2024 the Company had $0.5 million in nonperforming

assets compared to $0.9 million at December 31,

The table below provides information concerning total nonperforming

assets and certain asset quality ratios.

(Dollars in thousands)

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Nonperforming (nonaccrual) loans

Total nonperforming assets

Total nonperforming

as a % of loans and other real estate owned

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Accruing loans 90 days or more past due

The table below provides information concerning the composition of nonaccrual

loans at December 31, 2023 and 2022,

The table below provides information concerning the composition of

nonaccrual loans at December 31, 2024 and 2023,

respectively.

2 unchanged sentences

Commercial and industrial

Construction and land development

Commercial real estate

Residential real estate

Total nonaccrual loans

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

deterioration in the financial

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

(2) the principal or interest is more

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

Total nonaccrual

The Company discontinues the accrual of interest income when (1)

there is a significant deterioration in the financial

condition of the borrower and full repayment of principal and interest is not

expected or (2) the principal or interest is more

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

of collection.

There were no loans 90 days past due and still accruing interest at December 31, 2024

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Total deposits

Total deposits decreased

$54.1 million, or 6%, to $896.2 million at December 31, 2023,

compared to $950.3 million at

December 31, 2022.

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

Total deposits were stable

and decreased only $0.4 million to $895.8 million at December 31, 2024,

compared to $896.2

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

million at December 31, 2023.

Noninterest-bearing deposits were $260.9 million, or 29% of total deposits,

31, 2024, compared to $270.7 million, or 30% of total deposits at December 31,

At December 31, 2024, the

Company had $74.1 million reciprocal deposits sold, compared to $59.0

million at December 31, 2023.

The Company had

no brokered deposits at December 31, 2024 and 2023.

The Company had no FHLB-Atlanta advances or other wholesale

borrowings outstanding at December 31, 2024 and 2023.

The average rates paid on total interest-bearing deposits were 1.81

6 unchanged sentences

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.

reciprocal (“two-way”) transactions among banks facilitated by

IntraFi for the purpose of maximizing FDIC insurance.

Company had reciprocal deposits on balance sheet of $6.9 million at December

31, 2024, compared to none at December

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.

31, 2024 and 2023 include approximately $223.1 million and $206.2 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 62% and 53% of our estimated

uninsured deposits

at December 31, 2024 and 2023, respectively.

The estimated uninsured time deposits by maturity as of December

31, 2024 is presented below.

(Dollars in thousands)

December 31, 2024

3 months or less

Over 3 months through 6 months

Over 6 months through 12 months

Over 12 months

Total estimated uninsured

time deposits

Other Borrowings

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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

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 funds lines totaling

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

2023 and 2022, respectively.

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,

$65.2 million and $61.0 million, respectively,

at December 31, 2024 and 2023 with no federal funds borrowed.

Company had no securities sold under agreements to repurchase, which

are entered into on behalf of certain customers, at

December 31, 2024, compared to $1.5 million at December 31, 2023.

The Bank is eligible to borrow from the FRB’s

discount window, but had

no such borrowings at December 31, 2024 and 2023.

The Bank never borrowed from the Federal

Reserve’s Bank Term

Facility Program (“BTFP”) which ceased making new loans on March 11,

The Bank is a member of the FHLB-Atlanta and has borrowed from the

FHLB-Atlanta, and in the future may borrow from

time to time under the FHLB-Atlanta’s

advance program.

FHLB-Atlanta advances include both fixed and variable terms,

and provide various maturities, and generally are secured by eligible

The Bank had no borrowings under FHLB-

Atlanta’s advance program

at December 31, 2024 and 2023, respectively.

At those dates, the Bank had $296.9 million and

$309.1 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 0.48%

in 2023 and 2022, respectively.

and 2.21% in 2024 and 2023, respectively.

CAPITAL ADEQUACY

At December 31, 2023, the Company’s cons

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

At December 31, 2024, the Company’s

consolidated stockholders’ equity (book value) was $78.3 million, or

share, compared to $76.5 million, or $21.9 per share, at December

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

included the implementation of a capital conservation buffer of CET1

capital of 2.5% that is added to the minimum

The increase from December 31, 2023 was

primarily driven by net earnings of $6.4 million.

The increase were partially

offset by cash dividends paid of $3.8 million,

other comprehensive loss of $0.6 million related to unrealized gains/losses

on securities available-for-sale, net of tax and

a one-time charge of $0.3 million, net of tax, for the cumulative

effect to adopt the NMTC accounting standard on

January 1, 2024.

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 2024, unchanged

from the same period in 2023.

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

capital framework.

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.

1 unchanged sentence

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.

subject to limitations on “distributions”

from “eligible retained earnings”, including dividend payments,

share repurchases

and certain discretionary bonus payments.

At December 31, 2024

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

and 2023, the Bank had a capital conservation buffer of

7.81% and 7.52%, 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 new rule revises the definition of “eligible retained income” for purposes of

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

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

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 Small Bank Holding

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

Small Bank Holding

Company Policy.

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

Accordingly, 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%,

tier 1 leverage ratio was 10.49%, CET1 risk-based capital ratio was 14.80%, tier 1

risk-based capital ratio was 14.80%, and total risk-based capital ratio was 15.81

at December 31, 2024.

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.

exceed the minimum regulatory capital percentages of 5.0% for tier

1 leverage ratio, 6.5% for CET1 risk-based capital

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

capital ratio to be considered “well capitalized.”

The Bank’s capital conservation

buffer was 7.81% at December 31, 2024.

MARKET AND LIQUIDITY RISK MANAGEMENT

Management’s objective is to manage assets and

liabilities to provide a satisfactory,

Management’s objective is to manage

assets and liabilities to provide a satisfactory,

consistent level of profitability within

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Asset Liability

Management Committee (“ALCO”) is charged with the responsibility

of monitoring these policies, which are designed to

Management Committee (“ALCO”) is charged with the

responsibility of monitoring these policies, which are designed to

ensure an acceptable asset/liability composition.

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fluctuations in interest rates because

assets and liabilities may mature or reprice at different times.

if liabilities reprice faster than assets, and

interest rates are generally rising, earnings will initially decline.

In addition, assets

and liabilities may reprice at the same

time but by different amounts.

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

the Company may increase

rates paid on interest bearing demand deposit accounts and savings deposit

accounts by an amount that is less than the

general increase in market interest rates.

Also, short-term and long-term

market interest rates may change by different

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

between new loan yields and funding costs.

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

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

For example, if long-term

mortgage interest rates

decline sharply, mortgage-backed

assets and liabilities may mature or reprice at different times and

at different rates of change.

For example, if liabilities

reprice faster than assets, and interest rates are generally rising, earnings

will initially decline.

In addition, assets and

liabilities may reprice at the same time but by different amounts.

example, when the general level of interest rates is

rising, the Company may increase rates paid on interest bearing demand deposit accounts

and savings deposit accounts by

an amount that is less than the general increase in market interest rates.

-term and long-term market interest rates

may change by different amounts and at different

levels of interest rates and rates of change.

For example, a flattening

yield curve may reduce the interest spread between new loan yields and funding

The yield curve was inverted until it

began to normalize in September 2024.

An inverted yield curve reduces the net interest margin expansion

expected otherwise as interest rates rise.

Further, the remaining maturity of various

assets and liabilities may shorten or

lengthen as interest rates change.

For example, if long-term mortgage

interest rates decline sharply, mortgage

securities in the securities portfolio may prepay earlier than anticipated,

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.

which could reduce earnings.

Interest rates may

also have a direct or indirect effect on loan demand, loan losses, mortgage

origination volume, the fair value of MSRs and

other items affecting earnings.

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

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sheet and off-balance sheet items.

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

value of equity model.

used to help manage interest rate sensitivity include an earnings simulation

and an economic value of equity model.

Earnings simulation

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unchanged or flat interest rate

Forecasted levels of earning assets, interest-bearing liabilities, and

off-balance sheet financial instruments are

combined with ALCO forecasts of market interest rates for the next 12

months and other factors in order to produce various

Forecasted levels of earning assets, interest-bearing

liabilities, and off-balance sheet financial instruments are

combined with ALCO forecasts of market interest rates for the next 12 months

and other factors in order to produce various

earnings simulations and estimates.

To help limit interest rate risk,

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

To help limit interest

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

income from gradual changes in interest rates.

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flat interest rate

forecast over the next 12 months, policy limits for net interest income variances are as follows:

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

are as follows:

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

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

The following table reports the variance of net interest income over the next 12

months assuming a gradual change in

The following table reports the variance of net interest income over the next 12 months

assuming a gradual change in

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

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

Economic values are

estimated by discounting expected

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

which establish

a base case EVE.

values are estimated by discounting expected

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

establish a base case EVE.

In contrast with our

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timeframe, EVE uses a terminal horizon

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

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

Further, EVE is measured using values

as of a point in time and does not reflect any actions that ALCO might take in responding to

or anticipating changes in

as of a point in time and does not reflect any actions that ALCO might take in responding

to or anticipating changes in

interest rates, or market and competitive conditions.

To help limit interest rate risk,

we have stated policy guidelines for an instantaneous basis point change in interest rates,

To help limit interest

rate risk, we have stated policy guidelines for an instantaneous basis point change

in interest rates,

such that our EVE should not decrease from our base case by more than the following:

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

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

interest rates up or down when

The following table reports the variance of EVE assuming an immediate

change in interest rates up or down when

compared to the baseline EVE at December 31, 2024.

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with the policy guidelines noted above.

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

will be affected by

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

net interest income will be affected by

changes in interest rates.

Income associated with interest-earning assets and costs associated

with interest-bearing liabilities

Income associated with interest-earning

assets and costs associated with interest-bearing liabilities

may not be affected uniformly by changes in interest rates.

the magnitude and duration of changes in interest

In addition, the magnitude and duration of changes in interest

rates may have a significant impact on net interest income.

For example, although certain

assets and liabilities may have

although certain assets and liabilities may have

similar maturities or periods of repricing, they may react in different

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economic and market factors, including market perceptions.

Interest rates on certain types of assets and liabilities fluctuate

in advance of changes in general market rates, while interest rates on other types of assets

and liabilities may lag behind

rates on certain types of assets and liabilities fluctuate

in advance of changes in general market rates, while interest rates on other types

of assets and liabilities may lag behind

changes in general market rates.

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Prepayment and early withdrawal levels

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

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

certain instruments.

The ability of many

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

economic stress, which may

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

rates or economic stress, which may

differ across industries and economic sectors.

ALCO reviews each of the

above interest rate sensitivity analyses along with

ALCO reviews each

of the above interest rate sensitivity analyses along with

several different interest rate scenarios in seeking satisfactory,

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loan, investment, borrowing, and capital policies.

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

interest-sensitive assets and

interest-sensitive liabilities and as one tool to manage interest rate sensitivity

while continuing to meet the credit and

The Company may also use derivative financial instruments to improve

the balance between interest-sensitive assets and

interest-sensitive liabilities and as one tool to manage interest rate sensitivity while continuing

to meet the credit and

deposit needs of our customers.

From time to time, the Company may enter into

interest rate swaps (“swaps”) to facilitate

From time to time, the Company may

enter into interest rate swaps (“swaps”) to facilitate

customer transactions and meet their financing needs.

These swaps qualify as derivatives,

but are not designated as hedging

At December 31, 2023 and 2022, the Company had no derivative

contracts to assist in managing interest rate

These swaps qualify

as derivatives, but are not designated as hedging

At December 31, 2024 and 2023, the Company had

no derivative contracts to assist in managing interest rate

Liquidity Risk Management

Liquidity is the Company’s ability to convert

assets into cash equivalents in order to meet daily cash flow requirements,

Liquidity is the Company’s ability to

convert assets into cash equivalents in order to meet daily cash flow

requirements,

primarily for deposit withdrawals, loan demand and maturing obligations.

proper management of its liquidity,

Company could experience higher costs of obtaining funds due to insufficient liquidity,

while excessive liquidity can lead

Without proper management of its liquidity,

Company could experience higher costs of obtaining funds due to insufficient

liquidity, while excessive liquidity

to a decline in earnings due to the cost of foregoing alternative higher-yielding

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The second is the liquidity of the Bank.

management of liquidity at both levels is essential, because the Company and the Bank are

separate and distinct legal

management of liquidity at both levels is essential, because the Company and

the Bank are separate and distinct legal

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

to regulatory guidelines and requirements.

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

debt obligations and

The Bank’s payment of dividends depends

on its earnings, liquidity, capital

and the absence of any regulatory

Company depends upon dividends from the Bank for liquidity to pay its operating

expenses, debt obligations and

The Bank’s payment of

dividends depends on its earnings, liquidity,

capital and the absence of any regulatory

restrictions.

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

from the Bank.

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

obligations, if any, and cash

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

received from the Bank.

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.

The Bank’s payment of dividends depends

on its earnings,

liquidity, capital and the absence

of any regulatory restrictions.

The Bank’s payment of dividends

depends on its earnings,

liquidity, capital and the

absence of any regulatory restrictions.

If needed, the Company could also issue common stock or

other securities.

Primary sources of funding for the Bank include 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

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.

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

as of December 31, 2023, which by

their terms had contractual maturity and termination dates subsequent to December

advance program to obtain funding for growth and liquidity.

Advances include both fixed and variable terms and may

taken out with varying maturities.

At December 31, 2024, the Bank

had no FHLB-Atlanta advances outstanding and

available credit from the FHLB-Atlanta of $296.9 million.

31, 2024, the Bank also had $65.2 million of

available federal funds lines with no borrowings outstanding.

The following table presents additional information about our contractual

obligations as of December 31, 2024, which by

their terms had contractual maturity and termination dates subsequent

to December 31, 2024:

Payments due by period

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Operating lease obligations

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

presented in the "1 year or less" column

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

to meet all known contractual

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

in the "1 year or less" column

Management believes that the Company and the Bank have adequate

sources of liquidity to meet all known contractual

obligations and unfunded commitments, including loan commitments and reasonable

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Off-Balance Sheet Arrangements

At December 31, 2023, the Bank had outstanding standby letters of credit of $0.6

million and unfunded loan commitments

At December 31, 2024, the Bank had outstanding standby letters of credit

of $0.7 million and unfunded loan commitments

outstanding of $84.7 million.

Because these commitments generally

have fixed expiration dates and many will expire

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

have fixed expiration dates and may expire without

being drawn upon, the total commitment level does not necessarily represent

future cash requirements.

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

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.

If needed to fund

these outstanding commitments, the Bank could use its cash and cash

equivalents, deposits with other banks, liquidate

federal funds sold or a portion of its securities available-for-sale, or draw on its available

credit facilities or raise deposits.

Residential mortgage lending and servicing activities

We primarily sell conforming

residential mortgage loans in the secondary market to Fannie Mae

sell conforming residential mortgage loans in the secondary market to Fannie Mae

while retaining the

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loans with Fannie Mae and other

investors include various representations and warranties regarding the origination

and characteristics of the residential

investors include various representations and warranties regarding

the origination and characteristics of the residential

mortgage loans.

Although the representations and warranties vary among investors,

they typically cover ownership of the

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

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

federal, state, and local

Although the representations and warranties vary

among investors, they typically cover ownership of the

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

the property securing the loan,

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

with applicable federal, state, and local

laws, among other matters.

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As a result, the Bank is not

obligated to make any advances to Fannie Mae on principal and interest on such mortgage

loans where the borrower is

obligated to make any advances to Fannie Mae on principal and interest

on such mortgage loans where the borrower is

entitled to forbearance.

As of December 31, 2023, the unpaid principal balance of residential mortgage loans,

which we have originated and sold,

As of December 31, 2024, the unpaid principal balance of residential mortgage

loans, which we have originated and sold,

but retained the servicing rights (MSRs) totaled $204.4 million.

Although these loans

are generally sold on a non-recourse

these loans are generally sold on a non-recourse

basis, except for breaches of customary seller representations and warranties,

we may have to repurchase residential

mortgage loans in cases where we breach such representations or

warranties or the other terms of the sale, such as where we

mortgage loans in cases where we breach such representations or warranties

or the other terms of the sale, such as where we

fail to deliver required documents or the documents we deliver are defective.

also may require the repurchase of a

mortgage loan when an early payment default underwriting review reveals significant

underwriting deficiencies, even if the

Investors also may require the repurchase of a

mortgage loan when an early payment default underwriting review reveals

significant underwriting deficiencies, even if the

mortgage loan has subsequently been brought current.

Repurchase demands are typically reviewed

on an individual loan by

Repurchase demands

are typically reviewed on an individual loan by

loan basis to validate the claims made by the investor and to determine if a contractually

required repurchase event has

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

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

mortgage loan investors

through our underwriting, quality assurance and servicing practices, including

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(1) collect payments due from borrowers;

(2) advance certain delinquent payments

of principal and interest;

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

mortgage loans;

(2) advance certain delinquent

payments of principal and interest;

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

to the mortgage loans;

(4) maintain any

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

required escrow accounts for payment of taxes and insurance and

administer escrow payments;

and (5) foreclose on

defaulted mortgage loans or take other actions to mitigate the potential losses to investors

consistent with the agreements

defaulted mortgage loans or take other actions to mitigate the potential losses to

investors consistent with the agreements

governing our rights and duties as servicer.

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standards of responsibility for actions taken by us in

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

when acting in compliance with the

such capacity and provides protection against expenses and liabilities incurred

by us when acting in compliance with the

respective servicing agreements.

we commit a material breach of our obligations as servicer,

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

we may be subject

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

standards governing servicing and

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

guides issued by Fannie Mae as well as

the contract provisions established between Fannie Mae and the Bank.

The standards governing servicing and

the possible remedies for violations of such standards are determined

by servicing guides issued by Fannie Mae as well as

our contracts with Fannie Mae.

Remedies could include repurchase of an affected

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and servicing activities have been

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

if investors more aggressively

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

in frequency if investors more aggressively

pursue all means of recovering losses on their purchased loans.

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31, 2024, we believe that this exposure is

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

our quality control reviews, and

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

were current as of such date.

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

by monitoring the level and number

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

the results of our quality control reviews, and

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

Mae were current as of such date.

ongoing communications with our investors and will continue to evaluate

this exposure by monitoring the level and number

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

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

The Company was not required to repurchase any loans during 2024 and 2023 as a result

of representation and warranty

provisions contained in the Company’s

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

requests at December 31, 2024.

Effects of Inflation and Changing Prices

The consolidated financial statements and related consolidated financial data presented

herein have been prepared in

accordance with GAAP and practices within the banking industry which require

the measurement of financial position and

operating results in terms of historical dollars without considering the changes

in the relative purchasing power of money

The consolidated financial statements and related consolidated financial

data presented herein have been prepared in

accordance with GAAP and practices within the banking industry which

require the measurement of financial position and

operating results in terms of historical dollars without considering

the changes in the relative purchasing power of money

over time due to inflation.

Unlike most industrial companies, virtually all the assets and liabilities

of a financial institution

Unlike most industrial companies, virtually all the

assets and liabilities of a financial institution

are monetary in nature.

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

financial institution’s performance

As a result, interest rates have a more significant

impact on a financial institution’s performance

than the effects of general levels of inflation.

Inflation can affect our noninterest expenses.

Inflation can increase 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.

our customers’ behaviors, the mix of deposits between

interest and noninterest bearing, the levels of interest rates we have to pay on

our deposits and other borrowings, and the

interest rates we earn on our earning assets.

The difference between

our interest expense and interest income is also affected

by the shape of the yield curve and the speeds and amounts at which our various assets and

liabilities, respectively, reprice

in response to interest rate changes.

The yield curve was inverted during

most of 2024, until September, when it began

An inverted yield curve which means shorter term interest rates are higher than longer

term interest rates.

results in a lower spread between our costs of funds and our interest income.

addition, net interest income could be

affected by asymmetrical changes in the different

interest rate indexes, given that not all of our assets or liabilities are

priced with the same index.

Higher market interest rates and reductions

in the securities held by the Federal Reserve to

reduce inflation generally reduce economic activity and may reduce loan demand

and growth, and may adversely affect

unemployment rates.

Inflation and related changes in market interest rates,

as the Federal Reserve maintains interest rates to

meet its longer-term inflation goal of 2%, also can adversely affect

the values and liquidity of our loans and securities, the

value of collateral securing loans to our borrowers, and the success of our borrowers

and such borrowers’ available cash to

pay interest on and principal of our loans to them.

Beginning in September 2024, in light of inflation moderating, the FOMC had three

reductions in its target federal funds

rate range totaling 100 basis points to 4.25% to 4.50%.

While the FOMC reaffirmed

its target inflation rate of 2% over the

longer run, it indicated it was “recalibrating” its policy based on decreasing

inflation rates and the risks of increasing

unemployment, but would act on incoming data, the evolving outlook

and the balance of the risks of inflation and

unemployment levels.

In the future, the Federal Reserve could further

decrease target interest rates, or could increase such

target rates, depending on the data and its outlook.

See “Supervision and Regulation – Fiscal and Monetary Policies” and

“- Recent Developments – New Administration.”

CURRENT ACCOUNTING DEVELOPMENTS

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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

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The Company does not expect the new standard to have

a material impact on the Company’s consolid

ated financial statements.

a material impact on the Company’s

consolidated financial statements.

– Explanation of Non-GAAP Financial Measures

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understanding of its business and performance,

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

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

The reconciliation of these non-

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Common stock price

To earnings ratio

To earnings ratio (d)

To book value

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

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

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

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

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

wholly-owned subsidiary, AuburnBank.

- Average Balance

and Net Interest Income Analysis

(d) Calculated by dividing period end share price by

earnings per share for the previous four quarters.

Balance and Net Interest Income Analysis

Year ended December 31

7 unchanged sentences

Interest bearing bank deposits

Total interest-earning assets

Total interest-earning

Cash and due from banks

1 unchanged sentence

Savings and money market

Certificates of deposits

Total interest-bearing deposits

Certificates of deposit

Total interest-bearing

Short-term borrowings

Total interest-bearing liabilities

Total interest-bearing

Noninterest-bearing deposits

4 unchanged sentences

Net interest income and margin

(1) Average loan balances are

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

(1) Average loan

balances are shown net of unearned income and loans on nonaccrual status have

been included

in the computation of average balances.

1 unchanged sentence

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

Rate Variance

See Table 1 - Explanation of Non-GAAP

Financial Measures."

and Rate Variance

Year ended December 31, 2024 vs.

13 unchanged sentences

Savings and money market

Certificates of deposits

Total interest-bearing deposits

Certificates of deposit

Total interest-bearing

Short-term borrowings

4 unchanged sentences

tax rate of 21%.

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

See "Table 1 - Explanation

of Non-GAAP Financial Measures."

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

- Net Charge-Offs (Recoveries) to Average

5 unchanged sentences

Consumer installment

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

(2) Gross loan balances.

- Loan Maturities

22 unchanged sentences

Consumer installment

Total allowance for credit

Total allowance for

credit losses

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

- Estimated Uninsured Time Deposits by Maturity

(Dollars in thousands)

December 31, 2023

3 months or less

Over 3 months through 6 months

Over 6 months through 12 months

Over 12 months

Total estimated uninsured

time deposits

AND QUALITATIVE

DISCLOSURES ABOUT MARKET RISK

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

“Market and Liquidity Risk Management”

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

caption “Market and Liquidity Risk Management”

and is incorporated herein by reference.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis