Auburn National Bancorporation, Inc: Form 10-K for the period ended Dec 31, 2021

Auburn National Bancorporation, Inc. (the “Company”) is a bank holding company registered with the Board of Governors

of the Federal Reserve System (the “Federal Reserve”) under the Bank Holding Company Act of 1956, as amended (the

“BHC Act”). The Company was incorporated in Delaware in 1990, and in 1994 it succeeded its Alabama predecessor as

the bank holding company controlling AuburnBank, an Alabama state member bank with its principal office in Auburn,

Alabama (the “Bank”). The Company and its predecessor have controlled the Bank since 1984. As a bank holding

company, the Company may diversify into a broader range of financial services and other business activities than currently

are permitted to the Bank under applicable laws and regulations. The holding company structure also provides greater

financial and operating flexibility than is presently permitted to the Bank.

The Bank has operated continuously since 1907 and currently conducts its business primarily in East Alabama, including

Lee County and surrounding areas. The Bank has been a member of the Federal Reserve System since April 1995. The

Bank’s primary regulators are the Federal Reserve and the Alabama Superintendent of Banks (the “Alabama

Superintendent”). The Bank has been a member of the Federal Home Loan Bank of Atlanta (the “FHLB”) since 1991.

General

The Company’s business is conducted primarily through the Bank and its subsidiaries. Although it has no immediate plans

to conduct any other business, the Company may engage directly or indirectly in a number of activities that the Federal

Reserve has determined to be so closely related to banking or managing or controlling banks as to be a proper incident

thereto.

The Company’s principal executive offices are located at 132 N. Gay Street, Auburn, Alabama 36830, and its telephone

number at such address is (334) 821-9200. The Company maintains an Internet website at

www.auburnbank.com (http://www.auburnbank.com)

. The

Company’s website and the information appearing on the website are not included or incorporated in, and are not part of,

this report. The Company files annual, quarterly and current reports, proxy statements, and other information with the

SEC. You may read and copy any document we file with the SEC at the SEC’s public reference room at 100 F Street, N.E.,

Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for more information on the operation of the public

reference rooms. The SEC maintains an Internet site at

www.sec.gov (http://www.sec.gov)

that contains reports, proxy, and other information,

where SEC filings are available to the public free of charge.

Services

The Bank offers checking, savings, transaction deposit accounts and certificates of deposit, and is an active residential

mortgage lender in its primary service area. The Bank’s primary service area includes the cities of Auburn and Opelika,

Alabama and nearby surrounding areas in East Alabama, primarily in Lee County. The Bank also offers commercial,

financial, agricultural, real estate construction and consumer loan products and other financial services. The Bank is one of

the largest providers of automated teller services in East Alabama and operates ATM machines in 13 locations in its

primary service area. The Bank offers Visa

Checkcards, which are debit cards with the Visa logo that work like checks

but can be used anywhere Visa is accepted, including ATM s. The Bank’s Visa Checkcards can be used internationally

through the Plus

network. The Bank offers online banking, bill payment and other electronic services through its Internet

website,

www.auburnbank.com (http://www.auburnbank.com)

. Our online banking services, bill payment and electronic services are subject to certain

cybersecurity risks. See “Risk Factors – Our information systems may experience interruptions and security breaches.”

Competition

The banking business in East Alabama, including Lee County, is highly competitive with respect to loans, deposits, and

other financial services. The area is dominated by a number of regional and national banks and bank holding companies

that have substantially greater resources, and numerous offices and affiliates operating over wide geographic areas. The

Bank competes for deposits, loans and other business with these banks, as well as with credit unions, mortgage companies,

insurance companies, and other local and nonlocal financial institutions, including institutions offering services through the

mail, by telephone and over the Internet. As more and different kinds of businesses enter the market for financial services,

competition from nonbank financial institutions may be expected to intensify further.

Among the advantages that larger financial institutions have over the Bank are their ability to finance extensive advertising

campaigns, to diversify their funding sources, and to allocate and diversify their assets among loans and securities of the

highest yield in locations with the greatest demand. Many of the major commercial banks or their affiliates operating in the

Bank’s service area offer services which are not presently offered directly by the Bank and they typically have substantially

higher lending limits than the Bank.

Banks also have experienced significant competition for deposits from mutual funds, insurance companies and other

investment companies and from money center banks’ offerings of high-yield investments and deposits. Certain of these

competitors are not subject to the same regulatory restrictions as the Bank.

Selected Economic Data

The U.S. Census Bureau estimates Lee County’s population was 174,241 in 2020, and has increased approximately 24.2%

from 2010 to 2020. The largest employers in the area are Auburn University, East Alabama Medical Center, a Wal -Mart

Distribution Center, Mando America Corporation, and Briggs & Stratton. Auto manufacturing and related suppliers are

increasingly important along Interstate Highway 85 to the east and west of Auburn. Kia Motors has a large automobile

factory in nearby West Point, Georgia, and Hyundai Motors has a large automobile factory in Montgomery, Alabama.

Between 2010 and 2022, the Auburn-Opelika MSA grew an estimated 23.9%, the second fastest growing MSA in

Alabama. The Auburn-Opelika MSA population is estimated to grow 6.73% from 2022 to 2027. During the same time,

household income is estimated to increase 13.34%, to $67,593.

Loans and Loan Concentrations

The Bank makes loans for commercial, financial and agricultural purposes, as well as for real estate mortgages, real estate

acquisition, construction and development and consumer purposes. While there are certain risks unique to each type of

lending, management believes that there is more risk associated with commercial, real estate acquisition, construction and

development, agricultural and consumer lending than with residential real estate mortgage loans. To help manage these

risks, the Bank has established underwriting standards used in evaluating each extension of credit on an individual basis,

which are substantially similar for each type of loan. These standards include a review of the economic conditions

affecting the borrower, the borrower’s financial strength and capacity to repay the debt, the underlying collateral and the

borrower’s past credit performance. We apply these standards at the time a loan is made and monitor them periodically

throughout the life of the loan. See “Lending Practices” for a discussion of regulatory guidance on commercial real estate

lending.

The Bank has loans outstanding to borrowers in all industries within our primary service area. Any adverse economic or

other conditions affecting these industries would also likely have an adverse effect on the local workforce, other local

businesses, and individuals in the community that have entered into loans with the Bank. For example, the auto

manufacturing business and its suppliers have positively affected our local economy, but automobile manufacturing is

cyclical and adversely affected by increases in interest rates. Decreases in automobile sales, including adverse changes due

to interest rate increases, and the economic effects of the impact of COVID-19, including continuing supply chain

disruptions, could adversely affect nearby Kia and Hyundai automotive plants and their suppliers' local spending and

employment, and could adversely affect economic conditions in the markets we serve. However, management believes that

due to the diversified mix of industries located within the Bank’s primary service area, adverse changes in one industry may

not necessarily affect other area industries to the same degree or within the same time frame. The Bank’s primary service

area also is subject to both local and national economic conditions and fluctuations. While most loans are made within our

primary service area, some residential mortgage loans are originated outside the primary service area, and the Bank from

time to time has purchased loan participations from outside its primary service area.

Human Capital

At December 31, 2021, the Company and its subsidiaries had 152 full-time equivalent employees, including 39 officers. In

response to the COVID-19 pandemic, our business continuity plan worked to provide essential banking services to our

communities and customers, while protecting our employees’ health. As part of our efforts to exercise social distancing in

accordance with the guidelines of the Centers for Disease Control and the Governor of the State of Alabama, starting March

23, 2020, we limited branch lobby service to appointment only while continuing to operate our branch drive-thru facilities

and ATMs. We continue to provide services through our online and other electronic channels. In addition, we established

remote work access to help employees stay at home where job duties permit.

We experienced little turnover as a result of the COVID-19 pandemic. We also have strong employee retention

historically. Our average term of service is approximately 10 years.

We seek to provide competitive compensation and benefits. We encourage and support the growth and development of our

employees and, wherever possible, seek to fill positions by promotion and transfer from within the organization. Career

development is advanced through ongoing performance and development conversations with employees, internally

developed training programs and other training and development opportunities. Our employees are encouraged to be active

in our communities as part of our commitment to these communities and our employees.

Statistical Information

Certain statistical information is included in response to Item 7 of this Annual Report on Form 10-K. Certain statistical

information is also included in response to Item 6, Item 7A and Item 8 of this Annual Report on Form 10-K.

SUPERVISION AND REGULATION

The Company and the Bank are extensively regulated under federal and state laws applicable to bank holding companies

and banks. The supervision, regulation and examination of the Company and the Bank and their respective subsidiaries by

the bank regulatory agencies are primarily intended to maintain the safety and soundness of depository institutions and the

federal deposit insurance system, as well as the protection of depositors, rather than holders of Company capital stock and

other securities. Any change in applicable law or regulation may have a material effect on the Company’s business. The

following discussion is qualified in its entirety by reference to the particular laws and rules referred to below.

Bank Holding Company Regulation

The Company, as a bank holding company, is subject to supervision, regulation and examination by the Federal Reserve

under the BHC Act. Bank holding companies generally are limited to the business of banking, managing or controlling

banks, and certain related activities. The Company is required to file periodic reports and other information with the

Federal Reserve. The Federal Reserve examines the Company and its subsidiaries. The State of Alabama currently does

not regulate bank holding companies.

The BHC Act requires prior Federal Reserve approval for, among other things, the acquisition by a bank holding company

of direct or indirect ownership or control of more than 5% of the voting shares or substantially all the assets of any bank, or

for a merger or consolidation of a bank holding company with another bank holding company. The BHC Act generally

prohibits a bank holding company from acquiring direct or indirect ownership or control of voting shares of any company

that is not a bank or bank holding company and from engaging directly or indirectly in any activity other than banking or

managing or controlling banks or performing services for its authorized subsidiary. A bank holding company may,

however, engage in or acquire an interest in a company that engages in activities that the Federal Reserve has determined

by regulation or order to be so closely related to banking or managing or controlling banks as to be a proper incident

thereto. On January 30, 2020, the Federal Reserve adopted new rules, effective September 30, 2020 simplifying

determinations of control of banking organizations for BHC Act purposes.

Bank holding companies that are and remain “well-capitalized” and “well-managed,” as defined in Federal Reserve

Regulation

Y,

and whose insured depository institution subsidiaries maintain “satisfactory” or better ratings under the

Community Reinvestment Act of 1977 (the “CRA”), may elect to become “financial holding companies.” Financial holding

companies and their subsidiaries are permitted to acquire or engage in activities such as insurance underwriting, securities

underwriting, travel agency activities, broad insurance agency activities, merchant banking and other activities that the

Federal Reserve determines to be financial in nature or complementary thereto. In addition, under the BHC Act’s merchant

banking authority and Federal Reserve regulations, financial holding companies are authorized to invest in companies that

engage in activities that are not financial in nature, as long as the financial holding company makes its investment, subject

to limitations, including a limited investment term, no day-to-day management, and no cross-marketing with any depositary

institutions controlled by the financial holding company. The Federal Reserve recommended repeal of the merchant

banking powers in its September 16, 2016 study pursuant to Section 620 of the Dodd -Frank Wall Street Reform and

Consumer Protection Act of 2010 (the “Dodd-Frank Act”), but has taken no action. The Company has not elected to

become a financial holding company, but it may elect to do so in the future.

Financial holding companies continue to be subject to Federal Reserve supervision, regulation and examination, but the

Gramm-Leach-Bliley Act of 1999 the “GLB Act”) applies the concept of functional regulation to subsidiary activities. For

example, insurance activities would be subject to supervision and regulation by state insurance authorities.

The BHC Act permits acquisitions of banks by bank holding companies, subject to various restrictions, including that the

acquirer is “well capitalized” and “well managed”. Under the Alabama Banking Code, with the prior approval of the

Alabama Superintendent, an Alabama bank may acquire and operate one or more banks in other states pursuant to a

transaction in which the Alabama bank is the surviving bank. In addition, one or more Alabama banks may enter into a

merger transaction with one or more out-of-state banks, and an out-of-state bank resulting from such transaction may

continue to operate the acquired branches in Alabama. The Dodd-Frank Act permits banks, including Alabama banks, to

branch anywhere in the United States.

The Company is a legal entity separate and distinct from the Bank. Various legal limitations restrict the Bank from lending

or otherwise supplying funds to the Company. The Company and the Bank are subject to Sections 23A and 23B of the

Federal Reserve Act and Federal Reserve Regulation W thereunder. Section 23A defines “covered transactions,” which

include extensions of credit, and limits a bank’s covered transactions with any affiliate to 10% of such bank’s capital and

surplus. All covered and exempt transactions between a bank and its affiliates must be on terms and conditions consistent

with safe and sound banking practices, and banks and their subsidiaries are prohibited from purchasing low-quality assets

from the bank’s affiliates. Finally, Section 23A requires that all of a bank’s extensions of credit to its affiliates be

appropriately secured by permissible collateral, generally United States government or agency securities. Section 23B of

the Federal Reserve Act generally requires covered and other transactions among affiliates to be on terms and under

circumstances, including credit standards, that are substantially the same as or at least as favorable to the bank or its

subsidiary as those prevailing at the time for similar transactions with unaffiliated companies.

Federal Reserve policy and the Federal Deposit Insurance Act, as amended by the Dodd-Frank Act, require a bank holding

company to act as a source of financial and managerial strength to its FDIC-insured subsidiaries and to take measures to

preserve and protect such bank subsidiaries in situations where additional investments in a bank subsidiary may not

otherwise be warranted. In the event an FDIC-insured subsidiary becomes subject to a capital restoration plan with its

regulators, the parent bank holding company is required to guarantee performance of such plan up to 5% of the bank’s

assets, and such guarantee is given priority in bankruptcy of the bank holding company. In addition, where a bank holding

company has more than one bank or thrift subsidiary, each of the bank holding company’s subsidiary depository institutions

may be responsible for any losses to the FDIC’s Deposit Insurance Fund (“DIF”), if an affiliated depository institution fails.

As a result, a bank holding company may be required to loan money to a bank subsidiary in the form of subordinate capital

notes or other instruments which qualify as capital under bank regulatory rules. However, any loans from the holding

company to such subsidiary banks likely will be unsecured and subordinated to such bank’s depositors and to other

creditors of the bank. See “Capital.”

As a result of legislation in 2014 and 2018, the Federal Reserve has revised its Small Bank Holding Company Policy

Statement (the “Small BHC Policy”) to expand it to include thrift holding companies and increase the size of “small” for

qualifying bank and thrift holding companies from $500 million to up to $3 billion of pro forma consolidated assets.

The Federal Reserve confirmed in 2018 that the Company is eligible for treatment as a small banking holding company

under the Small BHC Policy. As a result, unless and until the Company fails to qualify under the Small BHC Policy, the

Company’s capital adequacy will continue to be evaluated on a bank only basis. See “Capital.”

Bank Regulation

The Bank is a state bank that is a member of the Federal Reserve. It is subject to supervision, regulation and examination

by the Federal Reserve and the Alabama Superintendent, which monitor all areas of the Bank’s operations, including loans,

reserves, mortgages, issuances and redemption of capital securities, payment of dividends, establishment of branches,

capital adequacy and compliance with laws. The Bank is a member of the FDIC and, as such, its deposits are insured by

the FDIC to the maximum extent provided by law, and is subject to various FDIC regulations. See “FDIC Insurance

Assessments.”

Alabama law permits statewide branching by banks. The powers granted to Alabama-chartered banks by state law include

certain provisions designed to provide such banks competitive equality with national banks.

The Federal Reserve has adopted the Federal Financial Institutions Examination Council’s (“FFIEC”) rating system, which

assigns each financial institution a confidential composite “CAMELS” rating based on an evaluation and rating of six

essential components of an institution’s financial condition and operations: Capital Adequacy, Asset Quality, Management,

Earnings, Liquidity and Sensitivity to market risk, as well as the quality of risk management practices. For most

institutions, the FFIEC has indicated that market risk primarily reflects exposures to changes in interest rates. When

regulators evaluate this component, consideration is expected to be given to: management’s ability to identify, measure,

monitor and control market risk; the institution’s size; the nature and complexity of its activities and its risk profile; and the

adequacy of its capital and earnings in relation to its level of market risk exposure. Market risk is rated based upon, but not

limited to, an assessment of the sensitivity of the financial institution’s earnings or the economic value of its capital to

adverse changes in interest rates, foreign exchange rates, commodity prices or equity prices; management’s ability to

identify, measure, monitor and control exposure to market risk; and the nature and complexity of interest rate risk exposure

arising from non-trading positions. Composite ratings are based on evaluations of an institution’s managerial, operational,

financial and compliance performance. The composite CAMELS rating is not an arithmetical formula or rigid weighting of

numerical component ratings. Elements of subjectivity and examiner judgment, especially as these relate to qualitative

assessments, are important elements in assigning ratings. The federal bank regulatory agencies are reviewing the CAMELS

rating system and their consistency.

The GLB Act and related regulations require banks and their affiliated companies to adopt and disclose privacy policies,

including policies regarding the sharing of personal information with third parties. The GLB Act also permits bank

subsidiaries to engage in “financial activities” similar to those permitted to financial holding companies. In December 2015,

Congress amended the GLB Act as part of the Fixing America’s Surface Transportation Act. This amendment provided

financial institutions that meet certain conditions an exemption to the requirement to deliver an annual privacy notice. On

August 10, 2018, the federal Consumer Financial Protection Bureau (“CFPB”) announced that it had finalized conforming

amendments to its implementing regulation, Regulation

P.

A variety of federal and state privacy laws govern the collection, safeguarding, sharing and use of customer information,

and require that financial institutions have policies regarding information privacy and security. Some state laws also protect

the privacy of information of state residents and require adequate security of such data, and certain state laws may, in some

circumstances, require us to notify affected individuals of security breaches of computer databases that contain their

personal information. These laws may also require us to notify law enforcement, regulators or consumer reporting agencies

in the event of a data breach, as well as businesses and governmental agencies that own data.

Community Reinvestment Act and Consumer Laws

The Bank is subject to the provisions of the CRA and the Federal Reserve’s regulations thereunder. Under the CRA, all

FDIC-insured institutions have a continuing and affirmative obligation, consistent with their safe and sound operation, to

help meet the credit needs for their entire communities, including low- and moderate-income neighborhoods. The CRA

requires a depository institution’s primary federal regulator to periodically assess the institution’s record of assessing and

meeting the credit needs of the communities served by that institution, including low - and moderate-income neighborhoods.

The bank regulatory agency’s CRA assessment is publicly available. Further, consideration of the CRA is required of any

FDIC-insured institution that has applied to: (i) charter a national bank; (ii) obtain deposit insurance coverage for a newly-

chartered institution; (iii) establish a new branch office that accepts deposits; (iv) relocate an office; or (v) merge or

consolidate with, or acquire the assets or assume the liabilities of, an FDIC-insured financial institution. In the case of bank

holding company applications to acquire a bank or other bank holding company, the Federal Reserve will assess the records

of each subsidiary depository institution of the applicant bank holding company, and such records may be the basis for

denying the application. A less than satisfactory CRA rating will slow, if not preclude, acquisitions, and new branches and

other expansion activities and may prevent a company from becoming a financial holding company.

CRA agreements with private parties must be disclosed and annual CRA reports must be made to a bank’s primary federal

regulator. A financial holding company election, and such election and financial holding company activities are permitted

to be continued, only if any affiliated bank has not received less than a “satisfactory” CRA rating. The federal CRA

regulations require that evidence of discriminatory, illegal or abusive lending practices be considered in the CRA

evaluation.

On December 13, 2019, the FDIC and OCC issued a joint notice of proposed rulemaking seeking comment on modernizing

the agencies’ CRA regulations. The OCC issued final revised CRA Rules effective October 1, 2020, which were repealed

in 2021. The Federal bank regulators are cooperating and working on new CRA regulations, which are expected to be

proposed around the end of March 2022.

The Bank is also subject to, among other things, the Equal Credit Opportunity Act (the “ECOA”) and the Fair Housing Act

and other fair lending laws, which prohibit discrimination based on race or color, religion, national origin, sex and familial

status in any aspect of a consumer or commercial credit or residential real estate transaction. The Department of Justice

(the “DOJ”), and the federal bank regulatory agencies have issued an Interagency Policy Statement on Discrimination in

Lending to provide guidance to financial institutions in determining whether discrimination exists, how the agencies will

respond to lending discrimination, and what steps lenders might take to prevent discriminatory lending practices. The DOJ

has prosecuted what it regards as violations of the ECOA, the Fair Housing Act, and the fair lending laws, generally.

The federal bank regulators have updated their guidance several times on overdrafts, including overdrafts incurred at

automated teller machines and point of sale terminals. Overdrafts also have been a CFPB concern, and in 2021 began

refocusing on this issue with a view to “insure that banks continue to evolve their businesses to reduce reliance on overdraft

and not sufficient funds fees.” Among other things, the federal regulators require banks to monitor accounts and to limit

the use of overdrafts by customers as a form of short-term, high-cost credit, including, for example, giving customers who

overdraw their accounts on more than six occasions where a fee is charged in a rolling 12 month period a reasonable

opportunity to choose a less costly alternative and decide whether to continue with fee-based overdraft coverage. It also

encourages placing appropriate daily limits on overdraft fees, and asks banks to consider eliminating overdraft fees for

transactions that overdraw an account by a

de minimis

amount. Overdraft policies, processes, fees and disclosures are

frequently the subject of litigation against banks in various jurisdictions. The federal bank regulators continue to consider

responsible small dollar lending, including overdrafts and related fee issues and issued principals for offering small-dollar

loans in a responsible manner on May 20, 2020. The CFPB proposed on February 6, 2019 to rescind its mandatory

underwriting standards for loans covered by its 2017 Payday, Vehicle Title and Certain High-Cost Installment Loans rule,

and has separately proposed delaying the effectiveness of such 2017 rule.

The CFPB has a broad mandate to regulate consumer financial products and services, whether or not offered by banks or

their affiliates. The CFPB has the authority to adopt regulations and enforce various laws, including fair lending laws, the

Truth in Lending Act, the Electronic Funds Transfer Act, mortgage lending rules, the Truth in Savings Act, the Fair Credit

Reporting Act and Privacy of Consumer Financial Information rules. Although the CFPB does not examine or supervise

banks with less than $10 billion in assets, banks of all sizes are affected by the CFPB’s regulations, and the precedents set

in CFPB enforcement actions and interpretations.

Residential Mortgages

CFPB regulations require that lenders determine whether a consumer has the ability to repay a mortgage loan. These

regulations establish certain minimum requirements for creditors when making ability to repay determinations, and provide

certain safe harbors from liability for mortgages that are "qualified mortgages" and are not “higher-priced.” Generally,

these CFPB regulations apply to all consumer, closed-end loans secured by a dwelling including home-purchase loans,

refinancing and home equity loans—whether first or subordinate lien. Qualified mortgages must generally satisfy detailed

requirements related to product features, underwriting standards, and requirements where the total points and fees on a

mortgage loan cannot exceed specified amounts or percentages of the total loan amount. Qualified mortgages must have:

(1) a term not exceeding 30 years; (2) regular periodic payments that do not result in negative amortization, deferral of

principal repayment, or a balloon payment; (3) and be supported with documentation of the borrower and its credit. On

December 10, 2020, the CFPB issued final rules related to “qualified mortgage” loans. Lenders are required under the law

to determine that consumers have the ability to repay mortgage loans before lenders make those loans. Loans that meet

standards for QM loans are presumed to be loans for which consumers have the ability to repay.

We focus our residential mortgage origination on qualified mortgages and those that meet our investors’ requirements, but

we may make loans that do not meet the safe harbor requirements for “qualified mortgages.”

The Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 (the “2018 Growth Act”) provides that

certain residential mortgages held in portfolio by banks with less than $10 billion in consolidated assets automatically are

deemed “qualified mortgages.” This relieves smaller institutions from many of the requirements to satisfy the criteria listed

above for “qualified mortgages.” Mortgages meeting the “qualified mortgage” safe harbor may not have negative

amortization, must follow prepayment penalty limitations included in the Truth in Lending Act, and may not have fees

greater than 3% of the total value of the loan.

The Bank generally services the loans it originates, including those it sells. The CFPB’s mortgage servicing standards

include requirements regarding force-placed insurance, certain notices prior to rate adjustments on adjustable rate

mortgages, and periodic disclosures to borrowers. Servicers are prohibited from processing foreclosures when a loan

modification is pending, and must wait until a loan is more than 120 days delinquent before initiating a foreclosure action.

Servicers must provide borrowers with direct and ongoing access to its personnel, and provide prompt review of any loss

mitigation application. Servicers must maintain accurate and accessible mortgage records for the life of a loan and until one

year after the loan is paid off or transferred. These standards increase the cost and compliance risks of servicing mortgage

loans, and the mandatory delays in foreclosures could result in loss of value on collateral or the proceeds we may realize

from a sale of foreclosed property.

The Federal Housing Finance Authority (“FHFA”) updated, effective January 1, 2016, The Federal National Mortgage

Association’s (“Fannie Mae’s”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac’s”) (individually and

collectively, “GSE”) repurchase rules, including the kinds of loan defects that could lead to a repurchase request to, or

alternative remedies with, the mortgage loan originator or seller. These rules became effective January 1, 2016. FHFA also

has updated these GSEs’ representations and warranties framework and provided an independent dispute resolution

(“IDR”) process to allow a neutral third party to resolve demands after the GSEs’ quality control and appeal processes have

been exhausted.

The Bank is subject to the CFPB’s integrated disclosure rules under the Truth in Lending Act and the Real Estate

Settlement Procedures Act, referred to as “TRID”, for credit transactions secured by real property. Our residential mortgage

strategy, product offerings, and profitability may change as these regulations are interpreted and applied in practice, and

may also change due to any restructuring of Fannie Mae and Freddie Mac as part of the resolution of their conservatorships.

The 2018 Growth Act reduced the scope of TRID rules by eliminating the wait time for a mortgage, if an additional creditor

offers a consumer a second offer with a lower annual percentage rate. Congress encouraged federal regulators to provide

better guidance on TRID in an effort to provide a clearer understanding for consumers and bankers alike. The law also

provides partial exemptions from the collection, recording and reporting requirements under Sections 304(b)(5) and (6) of

the Home Mortgage Disclosure Act (“HMDA”), for those banks with fewer than 500 closed-end mortgages or less than

500 open-end lines of credit in both of the preceding two years, provided the bank’s rating under the CRA for the previous

two years has been at least “satisfactory.” On August 31, 2018, the CFPB issued an interpretive and procedural rule to

implement and clarify these requirements under the 2018 Growth Act.

The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted on March 27, 2020. Section 4013 of

the CARES Act, “Temporary Relief From Troubled Debt Restructurings,” provides banks the option to temporarily

suspend certain requirements under ASC 340-10 TDR classifications for a limited period of time to account for the effects

of COVID-19. On April 7, 2020, the Federal Reserve and the other banking agencies and regulators issued a statement,

“Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working With Customers Affected

by the Coronavirus (Revised)” (the “Interagency Statement on COVID-19 Loan Modifications”), to encourage banks to

work prudently with borrowers and to describe the agencies’ interpretation of how accounting rules under ASC 310-40,

“Troubled Debt Restructurings by Creditors,” apply to covered modifications. The Interagency Statement on COVID-19

Loan Modifications was supplemented on June 23, 2020 by the Interagency Examiner Guidance for Assessing Safety and

Soundness Considering the Effect of the COVID-19 Pandemic on Institutions. If a loan modification is eligible, a bank may

elect to account for the loan under section 4013 of the CARES Act. If a loan modification is not eligible under section

4013, or if the bank elects not to account for the loan modification under section 4013, the Revised Statement includes

criteria when a bank may presume a loan modification is not a TDR in accordance with ASC 310-40.

Section 4021 of the CARES Act allows borrowers under 1-to-4 family residential mortgage loans sold to Fannie Mae to

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

COVID-19 emergency. Such forbearance will be up to 180 days, subject to up to a 180 day extension. During forbearance,

no fees, penalties or interest shall be charged beyond those applicable if all contractual payments were fully and timely

paid. Except for vacant or abandoned properties, Fannie Mae servicers may not initiate foreclosures on similar procedures

or related evictions or sales until December 31, 2020. On February 9. 2021, the forbearance period was extended to March

31, 2021 after being extended to February 28, 2021. Borrowers who are on a COVID-19 forbearance plan as of February

28, 2021 may apply for an additional forbearance extension of up to three additional months. The Bank sells mortgage

loans to Fannie Mae and services these on an actual/actual basis. As a result, the Bank is not obligated to make any

advances to Fannie Mae on principal and interest on such mortgage loans where the borrower is entitled to forbearance.

FinCEN published a request for information and comment on December 15, 2021 seeking ways to streamline, modernize

the United States AML and countering the financing of terrorists.

Anti-Money Laundering and Sanctions

The International Money Laundering Abatement and Anti-Terr orism Funding Act of 2001 specifies “know your customer”

requirements that obligate financial institutions to take actions to verify the identity of the account holders in connection

with opening an account at any U.S. financial institution. Bank regulators are required to consider compliance with anti-

money laundering laws in acting upon merger and acquisition and other expansion proposals under the BHC Act and the

Bank Merger Act, and sanctions for violations of this Act can be imposed in an amount equal to twice the sum involved in

the violating transaction, up to $1 million.

Under the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct

Terrorism Act of 2001 (the “USA PATRIOT Act”), financial institutions are subject to prohibitions against specified

financial transactions and account relationships as well as to enhanced due diligence and “know your customer” standards

in their dealings with foreign financial institutions and foreign customers.

The USA PATRIOT Act requires financial institutions to establish anti-money laundering programs, and sets forth

minimum standards, or “pillars” for these programs, including:

the development of internal policies, procedures, and controls;

the designation of a compliance officer;

an ongoing employee training program;

an independent audit function to test the programs; and

ongoing customer due diligence and monitoring.

Federal Financial Crimes Enforcement Network (“FinCEN”) rules effective May 2018 require banks to know the beneficial

owners of customers that are not natural persons, update customer information in order to develop a customer risk profile,

and generally monitor such matters.

On August 13, 2020, the federal bank regulators issued a joint statement clarifying that isolated or technical violations or

deficiencies are generally not considered the kinds of problems that would result in an enforcement action. The statement

addresses how the agencies evaluate violations of individual pillars of the Bank Secrecy Act and anti-money laundering

(“AML/BSA”) compliance program. It describes how the agencies incorporate the customer due diligence regulations and

recordkeeping requirements issued by the U.S. Department of the Treasury (“Treasury”) as part of the internal controls

pillar of a financial institution's AML/BSA compliance program.

On September 16, 2020, FinCEN issued an advanced notice of proposed rulemaking seeking public comment on a wide

range of potential regulatory amendments under the Bank Secrecy Act. The proposal seeks comment on incorporating an

“effective and reasonably designed” AML/BSA program component to empower financial institutions to allocate resources

more effectively. This component also would seek to implement a common understanding between supervisory agencies

and financial institutions regarding the necessary AML/BSA program elements, and would seek to impose minimal

additional obligations on AML programs that already comply under the existing supervisory framework.

On October 23, 2020, FinCEN and the Federal Reserve invited comment on a proposed rule that would amend the

recordkeeping and travel rules under the Bank Secrecy Act, which would lower the applicable threshold from $3,000 to

$250 for international transactions and apply these to transactions using convertible virtual currencies and digital assets

with legal tender status.

On January 1, 2021, Congress enacted the Anti-Money Laundering Act of 2020 and the Corporate Transparency Act

(collectively, the “AML Act”), to strengthen anti-money laundering and countering terrorism financing programs. Among

other things, the AML Act:

• specifies uniform disclosure of beneficial ownership information for all U.S. and foreign entities conducting business

in the U.S.;

• increases potential fines and penalties for BSA violations and improves whistleblower incentives;
• codifies the risk-based approach to AML compliance;
• modernizes AML systems;
• expands the duties and powers FinCEN; and
• emphasizes coordination and information-sharing among financial institutions, U.S. financial regulators and foreign

financial regulators.

The United States has imposed various sanctions upon various foreign countries, such as China, Iran, North Korea, Russia

and Venezuela, and their certain government officials and persons. Banks are required to comply with these sanctions,

which require additional customer screening and transaction monitoring.

Other Laws and Regulations

The Company is also required to comply with various corporate governance and financial reporting requirements under the

Sarbanes-Oxley Act of 2002, as well as related rules and regulations adopted by the SEC, the Public Company Accounting

Oversight Board and Nasdaq. In particular, the Company is required to report annually on internal controls as part of its

annual report pursuant to Section 404 of the Sarbanes-Oxley Act.

The Company has evaluated its controls, including compliance with the SEC rules on internal controls, and expects to

continue to spend significant amounts of time and money on compliance with these rules. If the Company fails to comply

with these internal control rules in the future, it may materially adversely affect its reputation, its ability to obtain the

necessary certifications to its financial statements, its relations with its regulators and other financial institutions with which

it deals, and its ability to access the capital markets and offer and sell Company securities on terms and conditions

acceptable to the Company. The Company’s assessment of its financial reporting controls as of December 31, 2021 are

included in this report with no material weaknesses reported.

Payment of Dividends and Repurchases of Capital Instruments

The Company is a legal entity separate and distinct from the Bank. The Company’s primary source of cash is dividends

from the Bank. Prior regulatory approval is required if the total of all dividends declared by a state member bank (such as

the Bank) in any calendar year will exceed the sum of such bank’s net profits for the year and its retained net profits for the

preceding two calendar years, less any required transfers to surplus. During 2021, the Bank paid total cash dividends of

approximately $3.7 million to the Company. At December 31, 2021, the Bank could have declared and paid additional

dividends of approximately $8.3 million without prior regulatory approval.

In addition, the Company and the Bank are subject to various general regulatory policies and requirements relating to the

payment of dividends, including requirements to maintain capital above regulatory minimums. The appropriate federal and

state regulatory authorities are authorized to determine when the payment of dividends would be an unsafe or unsound

practice, and may prohibit such dividends. The Federal Reserve has indicated that paying dividends that deplete a state

member bank’s capital base to an inadequate level would be an unsafe and unsound banking practice. The Federal Reserve

has indicated that depository institutions and their holding companies should generally pay dividends only out of current

year’s operating earnings.

Federal Reserve Supervisory Letter SR-09-4 (February 24, 2009), as revised December 21, 2015, applies to dividend

payments, stock redemptions and stock repurchases. Prior consultation with the Federal Reserve supervisory staff is

required before:

redemptions or repurchases of capital instruments when the bank holding company is experiencing financial

weakness; and

redemptions and purchases of common or perpetual preferred stock which would reduce such Tier 1 capital at

end of the period compared to the beginning of the period.

Bank holding company directors must consider different factors to ensure that its dividend level is prudent relative to

maintaining a strong financial position, and is not based on overly optimistic earnings scenarios, such as potential events

that could affect its ability to pay, while still maintaining a strong financial position. As a general matter, the Federal

Reserve has indicated that the board of directors of a bank holding company should consult with the Federal Reserve and

eliminate, defer or significantly reduce the bank holding company’s dividends if:

its net income available to shareholders for the past four quarters, net of dividends previously paid during that

period, is not sufficient to fully fund the dividends;

its prospective rate of earnings retention is not consistent with its capital needs and overall current and

prospective financial condition; or

It will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios.

The Basel III Capital Rules further limit permissible dividends, stock repurchases and discretionary bonuses by the

Company and the Bank, respectively, unless the Company and the Bank meet capital conservation buffer requirement

effective January 1, 2019. See "Basel III Capital Rules."

Under a new provision of the capital rules, effective January 1, 2021, if a bank’s capital ratios are within its buffer

requirements, the maximum amount of capital distributions it can make is based on its eligible retained income. Eligible

retained income equals the greater of:

net income for the four preceding calendar quarters, net of any distributions and associated tax effects not

already reflected in net income; or

the average net income over the preceding four quarters.

Regulatory Capital Changes

Simplification

The federal bank regulators issued final rules on July 22, 2019 simplifying their capital rules. The last of these changes

become effective on April 1, 2020. The principal changes for standardized approaches institutions, such the Company and

the Bank are:

Deductions from capital for certain items, such as temporary difference DTAs, MSAs and investments in

unconsolidated were decreased to those amounts that individually exceed 25% of CET1;

Institutions can elect to deduct investments in unconsolidated subsidiaries or subject them to capital requirements;

and

Minority interests would be includable up to 10% of (i) CET1 capital, (ii) Tier 1 capital and (iii) total capital.

HVCRE

In December 2019, the federal banking regulators published a final rule, effective April 1, 2020, to implement the “high

volatility commercial real estate,” or “HVCRE” changes in Section 214 of the 2018 Growth Act. The new rules define

HVCRE loans as loans secured by land or improved real property that:

finance or refinance the acquisition, development, or construction of real property;

the purpose of such loans must be to acquire, develop, or improve such real property into income producing

property; and

the repayment of the loan must depend on the future income or sales proceeds from, or refinancing of, such real

property.

Various exclusions from HVCRE are specified. Banking institutions and their holding companies are required to assign

150% risk weight to HVCRE loans.

Community Capital Rule

On October 29, 2019, the federal banking regulators adopted, effective January 1, 2020, an optional community banking

leverage ratio framework applicable to depository institutions and their holding companies intended to reduce regulatory

burdens for qualifying community banking organizations that do not use advanced approaches capital measures, and that

have:

less than $10 billion of assets;

a leverage ratio greater than 9%;

off-balance sheet exposures of 25% or less of total consolidated assets; and

trading assets plus trading liabilities of less than 5% of total consolidated assets.

The leverage ratio would be Tier 1 capital divided by average total consolidated assets, taking into account the capital

simplification discussed above and the CECL related capital transitions.

The community bank leverage ratio will be the sole capital measure, and electing institutions will not have to calculate or

use any other capital measure. It is estimated that 85% of depository institutions will be eligible to use this rule. The

Company expects it would be eligible to make such election, if the Company determined it desirable. After preliminary

consideration, the Company believes that it would still need to calculate the regulatory capital ratios, which investors would

find helpful in comparing the Company to others.

Capital

The Federal Reserve has risk-based capital guidelines for bank holding companies and state member banks, respectively.

These guidelines required at year end 2019 a minimum ratio of capital to risk-weighted assets (including certain off-balance

sheet activities, such as standby letters of credit) and capital conservation buffer of 10.5%. Tier 1 capital includes common

equity and related retained earnings and a limited amount of qualifying preferred stock, less goodwill and certain core

deposit intangibles. Voting common equity must be the predominant form of capital. Tier 2 capital consists of non–

qualifying preferred stock, qualifying subordinated, perpetual, and/or mandatory convertible debt, term subordinated debt

and intermediate term preferred stock, up to 45% of pretax unrealized holding gains on available for sale equity securities

with readily determinable market values that are prudently valued, and a limited amount of general loan loss allowance.

Tier 1 and Tier 2 capital equals total capital.

In addition, the Federal Reserve has established minimum leverage ratio guidelines for bank holding companies not subject

to the Small BHC Policy, and state member banks, which provide for a minimum leverage ratio of Tier 1 capital to adjusted

average quarterly assets (“leverage ratio”) equal to 4%. However, bank regulators expect banks and bank holding

companies to operate with a higher leverage ratio. The guidelines also provide that institutions experiencing internal

growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum

supervisory levels without significant reliance on intangible assets. Higher capital may be required in individual cases and

depending upon a bank holding company’s risk profile. All bank holding companies and banks are expected to hold capital

commensurate with the level and nature of their risks including the volume and severity of their problem loans. Lastly, the

Federal Reserve’s guidelines indicate that the Federal Reserve will continue to consider a “tangible Tier 1 leverage ratio”

(deducting all intangibles) in evaluating proposals for expansion or new activity. The level of Tier 1 capital to risk-adjusted

assets is becoming more widely used by the bank regulators to measure capital adequacy. The Federal Reserve has not

advised the Company or the Bank of any specific minimum leverage ratio or tangible Tier 1 leverage ratio applicable to

them. Under Federal Reserve policies, bank holding companies are generally expected to operate with capital positions well

above the minimum ratios. The Federal Reserve believes the risk-based ratios do not fully take into account the quality of

capital and interest rate, liquidity, market and operational risks. Accordingly, supervisory assessments of capital adequacy

may differ significantly from conclusions based solely on the level of an organization’s risk -based capital ratio.

The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), among other things, requires the federal

banking agencies to take “prompt corrective action” regarding depository institutions that do not meet minimum capital

requirements. FDICIA establishes five capital tiers: “well capitalized,” “adequately capitalized,” “undercapitalized,”

“significantly undercapitalized” and “critically undercapitalized.” A depository institution’s capital tier will depend upon

how its capital levels compare to various relevant capital measures and certain other factors, as established by regulation.

See

“Prompt Corrective Action Rules.”

Basel III Capital Rules

The Federal Reserve and the other bank regulators adopted in June 2013 final capital rules for bank holding companies and

banks implementing the Basel Committee on Banking Supervision’s “Basel III: A Global Regulatory Framework for more

Resilient Banks and Banking Systems.” These new U.S. capital rules are called the “Basel III Capital Rules,” and generally

were fully phased-in on January 1, 2019.

The Basel III Capital Rules limit Tier 1 capital to common stock and noncumulative perpetual preferred stock, as well as

certain qualifying trust preferred securities and cumulative perpetual preferred stock issued before May 19, 2010, each of

which were grandfathered in Tier 1 capital for bank holding companies with less than $15 billion in assets. The Company

had no qualifying trust preferred securities or cumulative preferred stock outstanding at December 31, 2020. The Basel III

Capital Rules also introduced a new capital measure, “Common Equity Tier I Capital” or “CET1.” CET1 includes common

stock and related surplus, retained earnings and, subject to certain adjustments, minority common equity interests in

subsidiaries. CET1 is reduced by deductions for:

Goodwill and other intangibles, other than mortgage servicing assets (“MSRs”), which are treated separately, net

of associated deferred tax liabilities (“DTLs”);

Deferred tax assets (“DTAs”) arising from operating losses and tax credit carryforwards net of allowances and

DTLs;

Gains on sale from any securitization exposure; and

Defined benefit pension fund net assets (i.e., excess plan assets), net of associated DTLs.

The Company made a one-time election in 2015 and, as a result, CET1 will not be adjusted for certain accumulated other

comprehensive income (“AOCI”).

Additional “threshold deductions” of the following that are individually greater than 10% of CET1 or collectively greater

than 15% of CET1 (after the above deductions are also made):

MSAs, net of associated DTLs;

DTAs arising from temporary differences that could not be realized through net operating loss carrybacks, net of

any valuation allowances and DTLs; and

Significant common stock investments in unconsolidated financial institutions, net of associated DTLs.

As discussed below, recent regulations change these items to simplify and improve their capital treatment.

Noncumulative perpetual preferred stock and Tier 1 minority interest not included in CET1, subject to limits, will qualify as

additional Tier I capital. All other qualifying preferred stock, subordinated debt and qualifying minority interests will be

included in Tier 2 capital.

In addition to the minimum risk-based capital requirements, a new “capital conservation buffer” of CET1 capital of at least

2.5% of total risk weighted assets, will be required. The capital conservation buffer will be calculated as the

lowest

of:

the banking organization’s CET1 capital ratio minus 4.5%;

the banking organization’s tier 1 risk-based capital ratio minus 6.0%; and the banking organization’s total risk-based capital ratio minus 8.0%.

Full compliance with the capital conservation buffer was required by January 1, 2019. At such time, permissible dividends,

stock repurchases and discretionary bonuses will be limited to the following percentages based on the capital conservation

buffer as calculated above, subject to any further regulatory limitations, including those based on risk assessments and

enforcement actions:

Buffer %

Buffer % Limit

More than 2.50%

None

> 1.875% - 2.50%

60.0%

> 1.250% - 1.875%

40.0%

> 0.625% - 1.250%

20.0%

≤ 0.625

- 0 -

Effective March 20, 2020, the Federal Reserve and the other federal banking regulators adopted an interim final rule that

amended the capital conservation buffer in light of the disruptive effects of the COVID-19 pandemic. The interim final rule

was adopted as a final rule on August 26, 2020. The new rule revises the definition of “eligible retained income” for

purposes of the maximum payout ratio to allow banking organizations to more freely use their capital buffers to promote

lending and other financial intermediation activities, by making the limitations on capital distributions more gradual. The

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

associated tax effects not reflected in net income; and (ii) the average of all net income over the preceding four quarters.

The interim final rule only affects the capital buffers, and banking organizations were encouraged to make prudent capital

distribution decisions.

The various capital elements and total capital under the Basel III Capital Rules, as fully phased in on January 1, 2019 are:

Fully Phased In

January 1, 2019

Minimum CET1

4.50%

CET1 Conservation Buffer

2.50%

Total CET1

7.0%

Deductions from CET1

100%

Minimum Tier 1 Capital

6.0%

Minimum Tier 1 Capital

plus

conservation buffer

8.5%

Minimum Total Capital

8.0%

Minimum Total Capital

plus

conservation buffer

10.5%

Changes in Risk-Weightings

The Basel III Capital Rules significantly change the risk weightings used to determine risk weighted capital adequacy.

Among various other changes, the Basel III Capital Rules apply a 250% risk-weighting to MSRs, DTAs that cannot be

realized through net operating loss carry-backs and significant (greater than 10%) investments in other financial

institutions. A 150% risk-weighted category applies to “high volatility commercial real estate loans,” or “HVCRE,” which

are credit facilities for the acquisition, construction or development of real property, excluding one-to-four family

residential properties or commercial real estate projects where: (i) the loan-to-value ratio is not in excess of interagency real

estate lending standards; and (ii) the borrower has contributed capital equal to not less than 15% of the real estate’s “as

completed” value before the loan was made.

The Basel III Capital Rules also changed some of the risk weightings used to determine risk-weighted capital adequacy.

Among other things, the Basel III Capital Rules:

Assigned a 250% risk weight to MSRs;

Assigned up to a 1,250% risk weight to structured securities, including private label mortgage securities, trust

preferred CDOs and asset backed securities;

Retained existing risk weights for residential mortgages, but assign a 100% risk weight to most commercial real

estate loans and a 150% risk-weight for HVCRE;

Assigned a 150% risk weight to past due exposures (other than sovereign exposures and residential mortgages);

Assigned a 250% risk weight to DTAs, to the extent not deducted from capital (subject to certain maximums);

Retained the existing 100% risk weight for corporate and retail loans; and

Increased the risk weight for exposures to qualifying securities firms from 20% to 100%.

HVCRE loans currently have a risk weight of 150%. Section 214 of the 2018 Growth Act, restricts the federal bank

regulators from applying this risk weight except to certain ADC loans. The federal bank regulators issued a notice of a

proposed rule on September 18, 2018 to implement Section 214 of the 2018 Growth Act, by revising the definition

HVCRE. If this proposal is adopted, it is expected that this proposal could reduce the Company’s risk weighted assets and

thereby may increase the Company’s risk-weighted capital.

The Financial Accounting Standards Board’s (the “FASB”) Accounting Standards Update (“ASU”) No. 2016-13 “Financial

Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” on June 16, 2016, which

changed the loss model to take into account current expected credit losses (“CECL”) in place of the incurred loss method.

The Federal Reserve and the other federal banking agencies adopted rules effective on April 1, 2019 that allows banking

organizations to phase in the regulatory capital effect of a reduction in retained earnings upon adoption of CECL over a

three year period. On May 8, 2020, the agencies issued a statement describing the measurement of expected credit losses

using the CECL methodology, and updated concepts and practices in existing supervisory guidance that remain applicable.

CECL is effective for the Company beginning January 1, 2023 and has not been adopted early. CECL’s effects upon the

Company have not yet been determined.

Prompt Corrective Action Rules

All of the federal bank regulatory agencies’ regulations establish risk-adjusted measures and relevant capital levels that

implement the “prompt corrective action” standards. The relevant capital measures are the total risk-based capital ratio,

Tier 1 risk-based capital ratio, Common equity tier 1 capital ratio, as well as, the leverage capital ratio. Under the

regulations, a state member bank will be:

well capitalized if it has a total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 8% or

greater, a Common equity tier 1 capital ratio of 6.5% or greater, a leverage capital ratio of 5% or greater and is not

subject to any written agreement, order, capital directive or prompt corrective action directive by a federal bank

regulatory agency to maintain a specific capital level for any capital measure;

“adequately capitalized” if it has a total risk-based capital ratio of 8% or greater, a Tier 1 risk-based capital ratio of

6% or greater, a Common Equity Tier 1 capital ratio of 4.5% or greater, and generally has a leverage capital ratio

of 4% or greater;

“undercapitalized” if it has a total risk-based capital ratio of less than 8%, a Tier 1 risk-based capital ratio of less

than 6%, a Common Equity Tier 1 capital ratio of less than 4.5% or generally has a leverage capital ratio of less

than 4%;

“significantly undercapitalized” if it has a total risk-based capital ratio of less than 6%, a Tier 1 risk-based capital

ratio of less than 4%, a Common Equity Tier 1 capital ratio of less than 3%, or a leverage capital ratio of less than

3%; or

“critically undercapitalized” if its tangible equity is equal to or less than 2% to total assets.

The federal bank regulatory agencies have authority to require additional capital, and have indicated that higher capital

levels may be required in light of market conditions and risk.

Depository institutions that are “adequately capitalized” for bank regulatory purposes must receive a waiver from the FDIC

prior to accepting or renewing brokered deposits, and cannot pay interest rates or brokered deposits that exceeds market

rates by more than 75 basis points. Banks that are less than “adequately capitalized” cannot accept or renew brokered

deposits. FDICIA generally prohibits a depository institution from making any capital distribution (including paying

dividends) or paying any management fee to its holding company, if the depository institution thereafter would be

“undercapitalized”. Institutions that are “undercapitalized” are subject to growth limitations and are required to submit a

capital restoration plan for approval.

A depository institution’s parent holding company must guarantee that the institution will comply with such capital

restoration plan. The aggregate liability of the parent holding company is limited to the lesser of 5% of the depository

institution’s total assets at the time it became undercapitalized and the amount necessary to bring the institution into

compliance with applicable capital standards. If a depository institution fails to submit an acceptable plan, it is treated as if

it is “significantly undercapitalized”. If the controlling holding company fails to fulfill its obligations under FDICIA and

files (or has filed against it) a petition under the federal Bankruptcy Code, the claim against the holding company’s capital

restoration obligation would be entitled to a priority in such bankruptcy proceeding over third party creditors of the bank

holding company.

Significantly undercapitalized depository institutions may be subject to a number of requirements and restrictions,

including orders to sell sufficient voting stock to become “adequately capitalized”, requirements to reduce total assets, and

cessation of receipt of deposits from correspondent banks. “Critically undercapitalized” institutions are subject to the

appointment of a receiver or conservator. Because the Company and the Bank exceed applicable capital requirements,

Company and Bank management do not believe that the provisions of FDICIA have had or are expected to have any

material effect on the Company and the Bank or their respective operations.

Section 201 of the 2018 Growth Act provides that banks and bank holding companies with consolidated assets of less than

$10 billion that meet a “community bank leverage ratio,” established by the federal bank regulators between 8% and 10%,

are deemed to satisfy applicable risk-based capital requirements necessary to be considered “well capitalized.” The federal

banking agencies have the discretion to determine that an institution does not qualify for such treatment due to its risk

profile. An institution’s risk profile may be assessed by its off-balance sheet exposure, trading of assets and liabilities,

notional derivatives’ exposure, and other methods.

The federal bank regulators implemented a CARES Act provision by replacing interim final rules adopted in March 2020,

temporarily reducing the community bank leverage ratio threshold. The threshold is 8% through the end of 2020, 8.5% for

2021, and 9% beginning January 1, 2022. Two quarter grace periods are allowed to permit banks that temporarily fall

below these thresholds to remain well-capitalized for regulatory purposes.

FDICIA

FDICIA directs that each federal bank regulatory agency prescribe standards for depository institutions and depository

institution holding companies relating to internal controls, information systems, internal audit systems, loan documentation,

credit underwriting, interest rate exposure, asset growth composition, a maximum ratio of classified assets to capital,

minimum earnings sufficient to absorb losses, a minimum ratio of market value to book value for publicly traded shares,

safety and soundness, and such other standards as the federal bank regulatory agencies deem appropriate.

Enforcement Policies and Actions

The Federal Reserve and the Alabama Superintendent monitor compliance with laws and regulations. The CFPB monitors

compliance with laws and regulations applicable to consumer financial products and services. Violations of laws and

regulations, or other unsafe and unsound practices, may result in these agencies imposing fines, penalties and/or restitution,

cease and desist orders, or taking other formal or informal enforcement actions. Under certain circumstances, these

agencies may enforce these remedies directly against officers, directors, employees and others participating in the affairs of

a bank or bank holding company, in the form of fines, penalties, or the recovery, or claw-back, of compensation. The

federal prudential banking regulators have been bringing more enforcement actions recently.

Fiscal and Monetary Policy

Banking is a business that depends on interest rate differentials. In general, the difference between the interest paid by a

bank on its deposits and its other borrowings, and the interest received by a bank on its loans and securities holdings,

constitutes the major portion of a bank’s earnings. Thus, the earnings and growth of the Company and the Bank, as well as

the values of, and earnings on, its assets and the costs of its deposits and other liabilities are subject to the influence of

economic conditions generally, both domestic and foreign, and also to the monetary and fiscal policies of the United States

and its agencies, particularly the Federal Reserve. The Federal Reserve regulates the supply of money through various

means, including open market dealings in United States government securities, the setting of discount rate at which banks

may borrow from the Federal Reserve, and the reserve requirements on deposits.

The Federal Reserve has been paying interest on depository institutions’ required and excess reserve balances since October

2008. The payment of interest on excess reserve balances was expected to give the Federal Reserve greater scope to use its

lending programs to address conditions in credit markets while also maintaining the federal funds rate close to the target

rate established by the Federal Open Market Committee. The Federal Reserve has indicated that it may use this authority to

implement a mandatory policy to reduce excess liquidity, in the event of inflation or the threat of inflation.

In April 2010, the Federal Reserve Board amended Regulation D (Reserve Requirements of Depository Institutions)

authorizing the Reserve Banks to offer term deposits to certain institutions. Term deposits, which are deposits with

specified maturity dates, will be offered through a Term Deposit Facility. Term deposits will be one of several tools that

the Federal Reserve could employ to drain reserves when policymakers judge that it is appropriate to begin moving to a less

accommodative stance of monetary policy.

In 2011, the Federal Reserve repealed its historical Regulation Q to permit banks to pay interest on demand deposits.

On March 3, 2020, the Federal Reserve reduced the Federal Funds rate target by 50 basis points to 1.00-1.25%. The Federal

Reserve further reduced the Federal Funds Rate target by an additional 100 basis points to 0-0.25% on March 16, 2020. The

Federal Reserve established various liquidity facilities pursuant to section 13(3) of the Federal Reserve Act to help stabilize

the financial system. As a result of inflation, the decline in serious COVID-19 cases, and the strengthening of the economy

following the March 2020 outbreak of the COVID-19 pandemic, the Federal Reserve is considering increasing the discount

rate and reducing its holdings of securities.

In light of disruptions in economic conditions caused by the outbreak of COVID-19 and the stress in U.S. financial markets,

the Federal Reserve, Congress and the Department of the Treasury took a host of fiscal and monetary measures to minimize

the economic effect of COVID-19.

The CARES Act provided a $2 trillion stimulus package and various measures to provide relief from the COVID-19

pandemic, including:

The Paycheck Protection Program (“PPP”), which expands eligibility for special new SBA guaranteed loans,

forgivable loans and other relief to small businesses affected by COVID-19.

A new $500 billion federal stimulus program for air carriers and other companies in severely distressed sectors of

the American economy. The lending programs impose stock buyback, dividend, executive compensation, and

other restrictions on direct loan recipients.

Optional temporary suspension of certain requirements under ASC 340-10 TDR classifications for a limited period

of time to account for the effects of COVID-19.

The creation of rapid tax rebates and expansion of unemployment benefits to provide relief to individuals.

Substantial federal spending and significant changes for health care companies, providers, and patients.

Over $525 billion of PPP loans were made in 2020.

On December 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the “Economic Aid

Act”) was signed into law. The Economic Aid Act provides a second $900 billion stimulus package, including $325 billion

in additional PPP loans, changed the eligibility rules to focus more on smaller business, further enhances other Small

Business Association programs.

The nature and timing of any changes in monetary policies and their effect on the Company and the Bank cannot be

predicted. The turnover of a majority of the Federal Reserve Board and the members of its FOMC and the appointment of a

new Federal Reserve Chairman may result in changes in policy and the timing and amount of monetary policy

normalization.

FDIC Insurance Assessments

The Bank’s deposits are insured by the FDIC’s DIF, and the Bank is subject to FDIC assessments for its deposit insurance.

Assessments by the FDIC to pay interest on Financing Corporation (“FICO”) bonds ended in September 2019.

Since 2011, and as discussed above under “Recent Regulatory Developments”, the FDIC has been calculating assessments

based on an institution’s average consolidated total assets less its average tangible equity (the “FDIC Assessment Base”) in

accordance with changes mandated by the Dodd-Frank Act. The FDIC changed its assessment rates which shifted part of

the burden of deposit insurance premiums toward depository institutions relying on funding sources other than deposits.

In 2016, the FDIC again changed its deposit insurance pricing and eliminated all risk categories and now uses “financial

ratios method” based on CAMELS composite ratings to determine assessment rates for small established institutions with

less than $10 billion in assets (“Small Banks”). The financial ratios method sets a maximum assessment for CAMELS 1

and 2 rated banks, and set minimum assessments for lower rated institutions. All basis points are annual amounts.

The following table shows the FDIC assessment schedule for 2020 applicable to Small Banks, such as the Bank.

Established Small Institution

CAMELS Composite

1 or 2

3

4 or 5

Initial Base Assessment Rule

3 to 16 basis points

6 to 30 basis points

16 to 30 basis points

Unsecured Debt Adjustment

-5 to 0 basis points

-5 to 0 basis points

-5 to 0 basis points

Total Base Assessment Rate

1.5 to 16 basis points

3 to 30 basis points

11 to 30 basis points

On March 15, 2016 the FDIC implemented Dodd-Frank Act provisions by raising the DIF’s minimum Reserve Ratio from

1.15% to 1.35%. The FDIC imposed a 4.5 basis point annual surcharge on insured depository institutions with total

consolidated assets of $10 billion or more (“Large Banks”). The new rules grant credits to smaller banks for the portion of

their regular assessments that contribute to increasing the reserve ratio from 1.15% to 1.35%.

The FDIC’s reserve ratio reached 1.36% on September 30, 2018, exceeding the minimum requirement. As a result, deposit

insurance surcharges on Large Banks ceased, and smaller banks will receive credits against their deposit assessments from

the FDIC for their portion of assessments that contributed to the growth in the reserve ratio from 1.15% to 1.35%. The

Bank’s credit was $0.2 million, and was received and applied against the Bank’s deposit insurance assessments during 2019

and 2020. Given the extraordinary growth in deposits in the first six months of 2020 due to the pandemic and government

stimulus, the reserve ratio declined below 1.35% to 1.30%. The FDIC issued a restoration plan on September 15, 2020

designed to restore the reserve ratio to at least the statutory minimum of 1.35% within 8 years. Although the FDIC

maintained current assessment rates, the FDIC may increase deposit assessment rates by up to two basis points without

notice, or more following notice and a comment period, to meet the required reserve ratio.

On June 22, 2020, the FDIC issued a final rule designed to mitigate the deposit insurance assessment effect of the PPP and

the related liquidity programs established by the Federal Reserve. Specifically , the rule removes the effects of participating

in PPP and liquidity facilities from the various risk measures used to calculate assessment rates and provides an offset to

assessments for the increase in assessment base rates attributed to participation in the PPP and liquidity facilities.

Prior to June 30, 2016, when the new assessment system became effective, the Bank’s overall rate for assessment

calculations was 9 basis points or less, which was within the range of assessment rates for the lowest “risk category” under

the former FDIC assessment rules. The Company recorded FDIC insurance premiums expenses of $0.3 and $0.1 million in

2021 and 2020, respectively.

Lending Practices

The federal bank regulatory agencies released guidance in 2006 on “Concentrations in Commercial Real Estate Lending”

(the “Guidance”). The Guidance defines CRE loans as exposures secured by raw land, land development and construction

(including 1-4 family residential construction), multi-family property, and non-farm nonresidential property where the

primary or a significant source of repayment is derived from rental income associated with the property (that is, loans for

which 50% or more of the source of repayment comes from third party, non-affiliated, rental income) or the proceeds of the

sale, refinancing, or permanent financing of this property. Loans to REITs and unsecured loans to developers that closely

correlate to the inherent risks in CRE markets would also be considered CRE loans under the Guidance. Loans on owner

occupied CRE are generally excluded. In December 2015, the Federal Reserve and other bank regulators issued an

interagency statement to highlight prudent risk management practices from existing guidance that regulated financial

institutions and made recommendations regarding maintaining capital levels commensurate with the level and nature of

their CRE concentration risk.

The Guidance requires that appropriate processes be in place to identify, monitor and control risks associated with real

estate lending concentrations. This could include enhanced strategic planning, CRE underwriting policies, risk

management, internal controls, portfolio stress testing and risk exposure limits as well as appropriately designed

compensation and incentive programs. Higher allowances for loan losses and capital levels may also be required. The

Guidance is triggered when either:

Total reported loans for construction, land development, and other land of 100% or more of a bank’s total capital; or

Total reported loans secured by multifamily and nonfarm nonresidential properties and loans for construction, land

development, and other land are 300% or more of a bank’s total risk-based capital.

This Guidance was supplemented by the Interagency Statement on Prudent Risk Management for Commercial Real Estate

Lending (December 18, 2015). The Guidance also applies when a bank has a sharp increase in CRE loans or has significant

concentrations of CRE secured by a particular property type.

The Guidance did not apply to the Bank’s CRE lending activities during 2020 or 2021. At December 31, 2021, the Bank

had outstanding $32.4 million in construction and land development loans and $229.8 million in total CRE loans (excluding

owner occupied), which represent approximately 30.8% and 218.5%, respectively, of the Bank’s total risk-based capital at

December 31, 2021. The Company has always had significant exposures to loans secured by commercial real estate due to

the nature of its markets and the loan needs of both its retail and commercial customers. The Company believes its long

term experience in CRE lending, underwriting policies, internal controls, and other policies currently in place, as well as its

loan and credit monitoring and administration procedures, are generally appropriate to manage its concentrations as

required under the Guidance.

In 2013, the Federal Reserve and other banking regulators issued their “Interagency Guidance on Leveraged Lending”

highlighting standards for originating leveraged transactions and managing leveraged portfolios, as well as requiring banks

to identify their highly leveraged transactions, or HLTs. The Government Accountability Office issued a statement on

October 23, 2017 that this guidance constituted a “rule” for purposes of the Congressional Review Act, which provides

Congress with the right to review the guidance and issue a joint resolution for signature by the President disapproving it.

No such action was taken, and instead, the federal bank regulators issued a September 11, 2018 “Statement Reaffirming the

Role of Supervisory Guidance.” This Statement indicated that guidance does not have the force or effect of law or provide

the basis for enforcement actions, but this guidance can outline supervisory agencies’ views of supervisory expectations and

priorities, and appropriate practices. The federal bank regulators continue to identify elevated risks in leveraged loans and

shared national credits.

The Bank did not have any loans at year-end 2021 or 2020 that were leveraged loans subject to the Interagency Guidance

on Leveraged Lending or that were shared national credits.

Other Dodd-Frank Act Provisions

In addition to the capital, liquidity and FDIC deposit insurance changes discussed above, some of the provisions of the

Dodd-Frank Act we believe may affect us are set forth below.

Executive Compensation

The Dodd-Frank Act provides shareholders of all public companies with a say on executive compensation. Under the

Dodd-Frank Act, each company must give its shareholders the opportunity to vote on the compensation of its executives, on

a non-binding advisory basis, at least once every three years. The Dodd-Frank Act also adds disclosure and voting

requirements for golden parachute compensation that is payable to named executive officers in connection with sale

transactions.

The SEC is required under the Dodd-Frank Act to issue rules obligating companies to disclose in proxy materials for annual

shareholders meetings, information that shows the relationship between executive compensation actually paid to their

named executive officers and their financial performance, taking into account any change in the value of the shares of a

company’s stock and dividends or distributions. The Dodd-Frank Act also provides that a company’s compensation

committee may only select a consultant, legal counsel or other advisor on methods of compensation after taking into

consideration factors to be identified by the SEC that affect the independence of a compensation consultant, legal counsel

or other advisor.

Section 954 of the Dodd-Frank Act added section 10D to the Exchange Act. Section 10D directs the SEC to adopt rules

prohibiting a national securities exchange or association from listing a company unless it develops, implements, and

discloses a policy regarding the recovery or “claw-back” of executive compensation in certain circumstances. The policy

must require that, in the event an accounting restatement due to material noncompliance with a financial reporting

requirement under the federal securities laws, the company will recover from any current or former executive officer any

incentive-based compensation (including stock options) received during the three year period preceding the date of the

restatement, which is in excess of what would have been paid based on the restated financial statements. There is no

requirement of wrongdoing by the executive, and the claw-back is mandatory and applies to all executive officers. Section

954 augments section 304 of the Sarbanes-Oxley Act, which requires the CEO and CFO to return any bonus or other

incentive or equity-based compensation received during the 12 months following the date of similarly inaccurate financial

statements, as well as any profit received from the sale of employer securities during the period, if the restatement was due

to misconduct. Unlike section 304, under which only the SEC may seek recoupment, the Dodd -Frank Act requires the

Company to seek the return of compensation.

The SEC adopted rules in September 2013 to implement pay ratios pursuant to Section 953 of the Dodd-Frank Act, which

apply to fiscal year 2017 annual reports and proxy statements. The SEC proposed Rule 10D-1 under Section 954 on July

1, 2015 which would direct Nasdaq and the other national securities exchanges to adopt listing standards requiring

companies to adopt policies requiring executive officers to pay back erroneously awarded incentive-based compensation.

In February 2017, the acting SEC Chairman indicated interest in reconsidering the pay ratio rule.

The Dodd-Frank Act, Section 955, requires the SEC, by rule, to require that each company disclose in the proxy materials

for its annual meetings whether an employee or board member is permitted to purchase financial instruments designed to

hedge or offset decreases in the market value of equity securities granted as compensation or otherwise held by the

employee or board member. The SEC proposed implementing rules in February 2015, though the rules have not been

implemented to date.

Section 956 of the Dodd-Frank Act prohibits incentive-based compensation arrangements that encourage inappropriate risk

taking by covered financial institutions, are deemed to be excessive, or that may lead to material losses. In June 2010, the

federal bank regulators adopted Guidance on Sound Incentive Compensation Policies, which, although targeted to larger,

more complex organizations than the Company, includes principles that have been applied to smaller organizations similar

to the Company. This Guidance applies to incentive compensation to executives as well as employees, who, “individually

or a part of a group, have the ability to expose the relevant banking organization to material amounts of risk.” Incentive

compensation should:

Provide employees incentives that appropriately balance risk and reward;

Be compatible with effective controls and risk-management; and

Be supported by strong corporate governance, including active and effective oversight by the organization’s board

of directors.

The federal bank regulators, the SEC and other regulators proposed regulations implementing Section 956 in April 2011,

which would have been applicable to, among others, depository institutions and their holding companies with $1 billion or

more in assets. An advance notice of a revised proposed joint rulemaking under Section 956 was published by the financial

services regulators in May 2016, but these rules have not been adopted.

Debit Card Interchange Fees

The “Durbin Amendment” to the Dodd-Frank Act and implementing Federal Reserve regulations provide that interchanged

transaction fees for electronic debit transactions be “reasonable” and proportional to certain costs associated with

processing the transactions. The Durbin Amendment and the Federal Reserve rules thereunder are not applicable to banks

with assets less than $10 billion.

Other Legislative and Regulatory Changes

Various legislative and regulatory proposals, including substantial changes in banking, and the regulation of banks, thrifts

and other financial institutions, compensation, and the regulation of financial markets and their participants and financial

instruments, and the regulators of all of these, as well as the taxation of these entities, are being considered by the executive

branch of the federal government, Congress and various state governments, including Alabama.

President Biden has frozen new rulemaking generally, and has rescinded various of his predecessor’s executive orders,

including the February 3, 2017 executive order containing “Core Principles for Regulating the United States Financial

System” (“Core Principles”). The Core Principles directed the Secretary of the Treasury to consult with the heads of

Financial Stability Oversight Council’s members and report to the President periodically thereafter on how laws and

government policies promote the Core Principles and to identify laws, regulations, guidance and reporting that inhibit

financial services regulation. The President has also issued an Executive Order 14036 on Promoting Competition in the

American Economy (July 9, 2021), which may affect the federal bank regulators’ reviews of bank and bank holding

company mergers. The OCC, the FDIC and the CFPB have made proposals to further scrutinize mergers, especially where

the confirming institutions have assets greater than $100 million. The President’s Working Group and various agencies

have also been working on the regulation of crypto assets, including stable coin, and access to the payments system.

The 2018 Growth Act, which, was enacted on May 24, 2018, amends the Dodd -Frank Act, the BHC Act, the Federal

Deposit Insurance Act and other federal banking and securities laws to provide regulatory relief in these areas:

consumer credit and mortgage lending;

capital requirements;

Volcker Rule compliance;

stress testing and enhanced prudential standards;

increased the asset threshold under the Federal Reserve’s Small BHC Policy from $1 billion to $3 billion; and

capital formation.

We believe the 2018 Growth Act has positively affected our business. The following provisions of the 2018 Growth Act

may be especially helpful to banks of our size as regulations adopted in 2019 became effective:

“qualifying community banks,” defined as institutions with total consolidated assets of less than $10 billion, which

meet a “community bank leverage ratio” of 8.00% to 10.00%, may be deemed to have satisfied applicable risk

based capital requirements as well as the capital ratio requirements;

section 13(h) of the BHC Act, or the “Volcker Rule,” is amended to exempt from the Volcker Rule, banks with

total consolidated assets valued at less than $10 billion (“community banking organizations”), and trading assets

and liabilities comprising not more than 5.00% of total assets;

“reciprocal deposits” will not be considered “brokered deposits” for FDIC purposes, provided such deposits do not

exceed the lesser of $5 billion or 20% of the bank’s total liabilities; and

The Volcker Rule change may enable us to invest in certain collateralized loan obligations that are treated as “covered

funds” prohibited to banking entities by the Volcker Rule. Reciprocal deposits, such as CDARs, may expand our funding

sources without being subjected to FDIC limitations and potential insurance assessments increases for brokered deposits.

On July 9, 2019, the federal banking agencies, together with the SEC and the Commodities Futures Trading Commission

(“CFTC”), issued a final rule excluding qualifying community banking organizations from the Volcker Rule pursuant to the

2018 Growth Act. The Volcker Rule change may enable us to invest in certain collateralized loan obligations that are

treated as “covered funds” and other investments prohibited to banking entities by the Volcker Rule.

The applicable agencies also issued final rules simplifying the Volcker Rule proprietary trading restrictions effective

January 1, 2020. On June 25, 2020, the agencies adopted a final rule simplifying the Volcker Rule’s covered fund

provisions effective October 1, 2020.

The FDIC announced on December 19, 2018 a final rule allows reciprocal deposits to be excluded from “brokered

deposits” up to the lesser of $5 billion or 20% of their total liabilities. Institutions that are not both well capitalized and

well rated are permitted to exclude reciprocal deposits from brokered deposits in certain circumstances.

The FDIC issued comprehensive changes to its brokered deposit rules effective April 1, 2021. The revised rules establishes

new standards for determining whether an entity meets the statutory definition of “deposit broker,” and identifies a number

of business that automatically meet the “primary purpose exception” from a “deposit broker.” The revisions also provide

an application process for entities that seek a “primary purpose exception,” but do not meet one of the designated

exceptions.” The new rules may provide us greater future flexibility, but we had no brokered deposits at December 31,

2020 or 2021, and historically have not relied on brokered deposits.

On November 20, 2020, the Federal Reserve and the other federal bank regulators issued temporary relief for community

banks with less than $10 billion in total assets as of December 31, 2019 related to certain regulations and reporting

requirements that largely result from growth due to the various relief and stimulus actions in response to the COVID-19

pandemic. In particular, the interim final rule permits these institutions to use asset data as of December 31, 2019, to

determine the applicability of various regulatory asset thresholds during calendar years 2020 and 2021. For the same

reasons, the Federal Reserve temporarily revised the instructions to a number of its regulatory reports to provide that

community banking organizations may use asset data as of December 31, 2019, in order to determine reporting

requirements for reports due in calendar years 2020 or 2021.

On November 30, 2020, the bank regulators issued a statement urging banks to cease entering into new contracts using U.S.

dollar LIBOR rates as soon as practicable and in any event by December 31, 2021, to effect orderly, and safe and sound

LIBOR transition. Banks were reminded that operating with insufficient fallback interest rates could undermine financial

stability and banks’ safety and soundness. Any alternative reference rate may be used that a bank determines is appropriate

for its funding and customer needs. Alabama passed the LIBOR Discontinuance and Replacement Act of 2021 in April 202

to deal with the LIBOR transition. Congress is also considering LIBOR transition legislation.

Certain of these new rules, and proposals, if adopted, these proposals could significantly change the regulation or

operations of banks and the financial services industry. New regulations and statutes are regularly proposed that contain

wide-ranging proposals for altering the structures, regulations and competitive relationships of the nation’s financial

institutions.

Any of the following risks could harm our business, results of operations and financial condition and an investment in our

stock. The risks discussed below also include forward-looking statements, and our actual results may differ substantially

from those discussed in these forward-looking statements.

Operational Risks

Market conditions and economic cyclicality may adversely affect our industry.

We believe the following, among other things, may affect us in 2022:

The COVID-19 pandemic disrupted the economy beginning late in the first quarter of 2020, and continues.

Auburn University, government agencies and businesses were limited to remote work and gatherings were limited.

Supply chains continue to be disrupted and unemployment spiked and remains high. Hotels, motels, restaurants,

retail and shopping centers were especially affected.

Extraordinary monetary and fiscal stimulus in 2020 and in early 2021 have offset certain of the pandemic’s

adverse economic effects. Inflation is running at levels unseen in decades and the Federal Reserve is

contemplating raising target interest rates and reducing its securities holdings. The nature and timing of any future

changes in monetary and fiscal policies and their effect on us cannot be predicted.

Market developments, including unemployment, price levels, stock and bond market volatility, and changes,

including those resulting from COVID-19 and the pace of vaccination and expected declines in serious COVID-19

cases, and Russia’s invasion of Ukraine affect consumer confidence levels, economic activity and inflation.

Changes in payment behaviors and payment rates may increase in delinquencies and default rates, which could

affect our earnings and credit quality.

Our ability to assess the creditworthiness of our customers and those we do business with, and the values of our

assets and loan collateral may be adversely affected and less predictable as a result of the pandemic and

government responses. The accounting for loan modifications and deferrals may provide only temporary relief.

The process we use to estimate losses inherent in our credit exposure or estimate the value of certain assets

requires difficult, subjective, and complex judgments, including forecasts of economic conditions and how those

economic predictions might affect the ability of our borrowers to repay their loans or the value of assets.

The end of the LIBOR reference rate is currently scheduled for most tenors by June 30, 2023, although U.S. bank

regulators informed banks November 30, 2020 that they should stop using LIBOR for new loans and contracts and

derivatives, including hedging, and involves risks of potential marked disruption and costs of compliance and

conversion. New hedges may not be as effective as hedges based on LIBOR.

Nonperforming and similar assets take significant time to resolve and may adversely affect our results of operations and

financial condition.

Our nonperforming loans were 0.10% of total loans as of December 31, 2021, and we had $0.4 million in other real estate

owned (“OREO”). Non-performing assets may adversely affect our net income in various ways. We do not record interest

income on nonaccrual loans or OREO and these assets require higher loan administration and other costs, thereby adversely

affecting our income. Decreases in the value of these assets, or the underlying collateral, or in the related borrowers’

performance or financial condition, whether or not due to economic and market conditions beyond our control, could

adversely affect our business, results of operations and financial condition. In addition, the resolution of nonperforming

assets requires commitments of time from management, which can be detrimental to the performance of their other

responsibilities. Our non-performing assets may be adversely affected by loan deferrals and modifications made in response

to the pandemic and the moratoria on foreclosures and evictions. There can be no assurance that we will not experience

increases in nonperforming loans in the future, much of which is affected by the economy and the levels of interest rates,

generally.

Our allowance for loan losses may prove inadequate or we may be negatively affected by credit risk exposures.

We periodically review our allowance for loan losses for adequacy considering economic conditions and trends, collateral

values and credit quality indicators, including past charge-off experience and levels of past due loans and nonperforming

assets. We cannot be certain that our allowance for loan losses will be adequate over time to cover credit losses in our

portfolio because of unanticipated adverse changes in the economy, including the continuing effects of the pandemic and

fiscal and monetary response to COVID-19, loan modifications and deferrals, market conditions or events adversely

affecting specific customers, industries or markets, including disruptions of supply chains and war, and changes in

borrower behaviors. Certain borrowers may not recover fully or may fail as a result of COVID -19 effects. If the credit

quality of our customer base materially decreases, if the risk profile of the market, industry or group of customers changes

materially or weaknesses in the real estate markets worsen, borrower payment behaviors change, or if our allowance for

loan losses is not adequate, our business, financial condition, including our liquidity and capital, and results of operations

could be materially adversely affected. CECL, a new accounting standard for estimating loan losses, is effective for the

Company beginning January 1, 2023, and its effects upon the Company have not yet been determined.

Changes in the real estate markets, including the secondary market for residential mortgage loans, may continue to

adversely affect us.

The CFPB’s mortgage and servicing rules, including TRID rules for closed end credit transactions, enforcement actions,

reviews and settlements, affect the mortgage markets and our mortgage operations. The CFPB requires that lenders

determine whether a consumer has the ability to repay a mortgage loan have limited the secondary market for and liquidity

of many mortgage loans that are not “qualified mortgages.” Recently adopted changes to the CFPB’s qualified mortgage

rules are reportedly being reconsidered.

The Tax Cuts and Jobs Act’s (the “2017 Tax Act”) limitations on the deductibility of residential mortgage interest and state

and local property and other taxes and federal moratoria on single-family foreclosures and rental evictions could adversely

affect consumer behaviors and the volumes of housing sales, mortgage and home equity loan originations, as well as the

value and liquidity of residential property held as collateral by lenders such as the Bank, and the secondary markets for

single and multi-family loans. Acquisition, construction and development loans for residential development may be

similarly adversely affected.

Fannie Mae and Freddie Mac (“GSEs”), have been in conservatorship since September 2008. Since Fannie Mae and

Freddie Mac dominate the residential mortgage markets, any changes in their operations and requirements, as well as their

respective restructurings and capital, could adversely affect the primary and secondary mortgage markets, and our

residential mortgage businesses, our results of operations and the returns on capital deployed in these businesses. The

timing and effects of resolution of these government sponsored enterprises cannot be predicted.

Weaknesses in real estate markets the FHFA’s moratoria on foreclosures and real estate owned evictions may adversely

affect the length of time and costs required to manage and dispose of, and the values realized from the sale of our OREO.

We may be contractually obligated to repurchase mortgage loans we sold to third parties on terms unfavorable to us.

As part of its routine business, the Company originates mortgage loans that it subsequently sells in the secondary market,

including to governmental agencies and GSEs. In connection with the sale of these loans, the Company makes customary

representations and warranties, the breach of which may result in the Company being required to repurchase the loan or

loans. Furthermore, the amount paid may be greater than the fair value of the loan or loans at the time of the repurchase.

Although mortgage loan repurchase requests made to us have been limited, if these increased, we may have to establish

reserves for possible repurchases and adversely affect our results of operation and financial condition.

Mortgage servicing rights requirements may change and require us to incur additional costs and risks.

The CFPB’s residential mortgage servicing standards may adversely affect our costs to service residential mortgage loans,

and together with the Basel III Rules and the effects of lower interest rates from COVID-19 stimulus, may decrease the

returns on, and values of, our MSRs. This could reduce our income from servicing these types of loans and make it more

difficult and costly to timely realize the value of collateral securing such loans upon a borrower default. In contrast, rising

interest rates would be expected to reduce mortgage refinancings and extend the duration of our MSRs.

The soundness of other financial institutions could adversely affect us.

We routinely execute transactions with counterparties in the financial services industry, including brokers and dealers,

central clearinghouses, banks, including our correspondent banks and other financial institutions. Our ability to engage in

routine investment and banking transactions, as well as the quality and values of our investments in holdings of other

obligations of other financial institutions such as the FHLB, could be adversely affected by the actions, financial condition,

and profitability of such other financial institutions, including the FHLB and our correspondent banks. Financial services

institutions are interrelated as a result of shared credits, trading, clearing, counterparty and other relationships. Any losses,

defaults by, or failures of, the institutions we do business with could adversely affect our holdings of the equity in such

other institutions, our participation interests in loans originated by other institutions, and our business, including our

liquidity, financial condition and earnings.

Our concentration of commercial real estate loans could result in further increased loan losses, and adversely affect our

business, earnings, and financial condition.

Commercial real estate, or CRE, is cyclical and poses risks of possible loss due to concentration levels and risks of the

assets being financed, which include loans for the acquisition and development of land and residential construction. The

federal bank regulatory agencies released guidance in 2006 on “Concentrations in Commercial Real Estate Lending.” The

guidance defines CRE loans as exposures secured by raw land, land development and construction loans (including 1-4

family residential construction loans), multi-family property, and non-farm non-residential property, where the primary or a

significant source of repayment is derived from rental income associated with the property (that is, loans for which 50% or

more of the source of repayment comes from third party, non-affiliated, rental income) or the proceeds of the sale,

refinancing, or permanent financing of the property. Loans to REITs and unsecured loans to developers that closely

correlate to the inherent risks in CRE markets are also CRE loans. Loans on owner occupied commercial real estate are

generally excluded from CRE for purposes of this guidance. Excluding owner occupied commercial real estate, we had

50.0% of our portfolio in CRE loans at year-end 2021 compared to 43.6% at year-end 2020. The banking regulators

continue to give CRE lending scrutiny and require banks with higher levels of CRE loans to implement improved

underwriting, internal controls, risk management policies and portfolio stress testing, as well as higher levels of allowances

for possible losses and capital levels as a result of CRE lending growth and exposures. Lower demand for CRE, and

reduced availability of, and higher interest rates and costs for, CRE lending could adversely affect our CRE loans and sales

of our OREO, and therefore our earnings and financial condition, including our capital and liquidity.

At year-end 2021, 21% of our total loans were CRE loans to hotels/motels, retail and shopping centers and restaurants,

businesses that were severely affected by the effects of COVID-19.

Our future success is dependent on our ability to compete effectively in highly competitive markets.

The East Alabama banking markets which we operate are highly competitive and our future growth and success will

depend on our ability to compete effectively in these markets. We compete for loans, deposits and other financial services

with other local, regional and national commercial banks, thrifts, credit unions, mortgage lenders, and securities and

insurance brokerage firms. Lenders operating nationwide over the internet are growing rapidly. Many of our competitors

offer products and services different from us, and have substantially greater resources, name recognition and market

presence than we do, which benefits them in attracting business. In addition, larger competitors may be able to price loans

and deposits more aggressively than we are able to and have broader and more diverse customer and geographic bases to

draw upon. Out of state banks may branch into our markets. Fintech and other non-bank competitors also complete for our

customers, and may partner with other banks and/or seek to enter the payments system. Failures of other banks with offices

in our markets could also lead to the entrance of new, stronger competitors in our markets.

Our success depends on local economic conditions.

Our success depends on the general economic conditions in the geographic markets we serve in Alabama. The local

economic conditions in our markets have a significant effect on our commercial, real estate and construction loans, the

ability of borrowers to repay these loans and the value of the collateral securing these loans. Adverse changes in the

economic conditions of the Southeastern United States in general, or in one or more of our local markets, including the

continuous effects from COVID-19 and the timing, strength and breadth of the recovery from the pandemic, could

negatively affect our results of operations and our profitability. Our local economy is also affected by the growth of

automobile manufacturing and related suppliers located in our markets and nearby. Auto sales are cyclical and are affected

adversely by higher interest rates.

Attractive acquisition opportunities may not be available to us in the future.

While we seek continued organic growth, we also may consider the acquisition of other businesses. We expect that other

banking and financial companies, many of which have significantly greater resources, will compete with us to acquire

financial services businesses. This competition could increase prices for potential acquisitions that we believe are

attractive. Also, acquisitions are subject to various regulatory approvals. If we fail to receive the appropriate regulatory

approvals, we will not be able to consummate an acquisition that we believe is in our best interests, and regulatory

approvals could contain conditions that reduce the anticipated benefits of any transaction. Among other things, our

regulators consider our capital, liquidity, profitability, regulatory compliance and levels of goodwill and intangibles when

considering acquisition and expansion proposals. Any acquisition could be dilutive to our earnings and shareholders’

equity per share of our common stock.

Future acquisitions and expansion activities may disrupt our business, dilute shareholder value and adversely affect our

operating results.

We regularly evaluate potential acquisitions and expansion opportunities, including new branches and other offices. To the

extent that we grow through acquisitions, we cannot assure you that we will be able to adequately or profitably manage this

growth. Acquiring other banks, branches, or businesses, as well as other geographic and product expansion activities,

involve various risks including:

risks of unknown or contingent liabilities, and potential asset quality issues;

unanticipated costs and delays;

risks that acquired new businesses will not perform consistent with our growth and profitability expectations;

risks of entering new markets or product areas where we have limited experience;

risks that growth will strain our infrastructure, staff, internal controls and management, which may require

additional personnel, time and expenditures;

difficulties, expenses and delays of integrating the operations and personnel of acquired institutions;

potential disruptions to our business;

possible loss of key employees and customers of acquired institutions;

potential short-term decreases in profitability; and

diversion of our management’s time and attention from our existing operations and business.

Technological changes affect our business, and we may have fewer resources than many competitors to invest in

technological improvements.

The financial services industry is undergoing rapid technological changes with frequent introductions of new technology

driven products and services and growing demands for mobile and user-based banking applications. In addition to allowing

us to analyze our customers better, the effective use of technology may increase efficiency and may enable financial

institutions to reduce costs, risks associated with fraud and compliance with anti-money laundering and other laws, and

various operational risks. Largely unregulated “fintech” businesses have increased their participation in the lending and

payments businesses, and have increased competition in these businesses. Our future success will depend, in part, upon our

ability to use technology to provide products and services that meet our customers’ preferences and create additional

efficiencies in operations, while avoiding cyber-attacks and disruptions, data breaches and anti-money laundering

violations. The COVID-19 pandemic and increased remote work has accelerated electronic banking activity and the need

for increased operational efficiencies. We may need to make significant additional capital investments in technology,

including cyber and data security, and we may not be able to effectively implement new technology -driven products and

services, or such technology may prove less effective than anticipated. Many larger competitors have substantially greater

resources to invest in technological improvements and, increasingly, non-banking firms are using technology to compete

with traditional lenders for loans and other banking services. As a result, our competition from service providers not

located in our markets has increased.

Operational risks are inherent in our businesses.

Operational risks and losses can result from internal and external fraud; gaps or weaknesses in our risk management or

internal audit procedures; errors by employees or third parties, including our vendors, failures to document transactions

properly or obtain proper authorizations; failure to comply with applicable regulatory requirements in the various

jurisdictions where we do business or have customers; failures in our estimates models that rely on; equipment failures,

including those caused by natural disasters, or by electrical, telecommunications or other essential utility outages; business

continuity and data security system failures, including those caused by computer viruses, cyberattacks, unforeseen

problems encountered while implementing major new computer systems or, failures to timely and properly upgrade and

patch existing systems or inadequate access to data or poor response capabilities in light of such business continuity and

data security system failures; or the inadequacy or failure of systems and controls, including those of our vendors or

counterparties. The COVID-19 pandemic presented operational challenges to maintaining continuity of operations of

customer services while protecting our employees’ and customers’ safety. In addition, we face certain risks inherent in the

ownership and operation of our bank premises and other real-estate, including liability for accidents on our properties.

Although we have implemented risk controls and loss mitigation actions, and substantial resources are devoted to

developing efficient procedures, identifying and rectifying weaknesses in existing procedures and training staff and

potential environmental risks, it is not possible to be certain that such actions have been or will be effective in controlling

these various operational risks that evolve continuously.

Potential gaps in our risk management policies and internal audit procedures may leave us exposed unidentified or

unanticipated risk, which could negatively affect our business.

Our enterprise risk management and internal audit program is designed to mitigate material risks and loss to us. We have

developed and continue to develop risk management and internal audit policies and procedures to reflect the ongoing

review of our risks and expect to continue to do so in the future. Nonetheless, our policies and procedures may not be

comprehensive and may not identify timely every risk to which we are exposed, and our internal audit process may fail to

detect such weaknesses or deficiencies in our risk management framework. Many of our risk management models and

estimates use observed historical market behavior to model or project potential future exposure. Models used by our

business are based on assumptions and projections. These models may not operate properly or our inputs and assumptions

may be inaccurate, or changes in economic conditions, customer behaviors or regulations. As a result, these methods may

not fully predict future exposures, which can be significantly greater than historically. Other risk management methods

depend upon the evaluation of information regarding markets, clients, or other matters that are publicly available or

otherwise accessible to us. This information may not always be accurate, complete, up-to-date or properly evaluated.

Furthermore, there can be no assurance that we can effectively review and monitor all risks or that all of our employees will

closely follow our risk management policies and procedures, nor can there be any assurance that our risk management

policies and procedures will enable us to accurately identify all risks and limit our exposures based on our assessments. In

addition, we may have to implement more extensive and perhaps different risk management policies and procedures as our

regulation changes. For example, the Federal Reserve and the OCC are in the initial stages of proposing climate risk

management criteria and potential climate risk stress tests. The SEC is expected to require more disclosure on climate

risks, also. All of these could adversely affect our financial condition and results of operations.

Any failure to protect the confidentiality of customer information could adversely affect our reputation and have a material

adverse effect on our business, financial condition and results of operations

Various laws enforced by the bank regulators and other agencies protect the privacy and security of customers’ non-public

personal information. Many of our employees have access to, and routinely process personal information of clients through

a variety of media, including information technology systems. Our internal processes and controls are designed to protect

the confidentiality of client information we hold and that is accessible to us and our employees. It is possible that an

employee could, intentionally or unintentionally, disclose or misappropriate confidential client information or our data

could be the subject of a cybersecurity attack. Such personal data could also be compromised via intrusions into our

systems or those of our service providers or persons we do business with such as credit bureaus, data processors and

merchants who accept credit or debit cards for payment. If we fail to maintain adequate internal controls, or if our

employees fail to comply with our policies and procedures, misappropriation or inappropriate disclosure or misuse of client

information could occur. Such internal control inadequacies or non-compliance could materially damage our reputation,

lead to remediation costs and civil or criminal penalties. These could have a material adverse effect on our business,

financial condition and results of operations.

Our information systems may experience interruptions and security breaches.

We rely heavily on communications and information systems, including those provided by third-party service providers, to

conduct our business. Any failure, interruption, or security breach of these systems could result in failures or disruptions

which could affect our customers’ privacy and our customer relationships, generally. Our business continuity plans,

including those of our service providers, to provide back-up and restore service may not be effective in the case of

widespread outages due to severe weather, natural disasters, pandemics, or power, communications and other failures.

Our systems and networks, as well as those of our third-party service providers, are subject to security risks and could be

susceptible to cyber-attacks, such as denial of service attacks, hacking, terrorist activities or identity theft. Cybercrime risks

have increased as electronic and mobile banking activities increased as a result of the COVID-19 pandemic, and may

increase as a result of the Russia invasion of Ukraine. Other financial service institutions and their service providers have

reported material security breaches in their websites or other systems, some of which have involved sophisticated and

targeted attacks, including use of stolen access credentials, malware, ransomware, phishing and distributed denial-of-

service attacks, among other means. Such cyber-attacks may also seek to disrupt the operations of public companies or

their business partners, effect unauthorized fund transfers, obtain unauthorized access to confidential information, destroy

data, disable or degrade service, or sabotage systems. Denial of service attacks have been launched against a number of

financial services institutions, and we may be subject to these types of attacks in the future. Hacking and identity theft risks,

in particular, could cause serious reputational harm.

Despite our cybersecurity policies and procedures and our Board of Director’s and Management’s efforts to monitor and

ensure the integrity of the system we use, we may not be able to anticipate the rapidly evolving security threats, nor may we

be able to implement preventive measures effective against all such threats. The techniques used by cyber criminals change

frequently, may not be recognize d until launched and can originate from a wide variety of sources, including outside groups

such as external service providers, organized crime affiliates, terrorist organizations or hostile foreign governments. These

risks may increase in the future as the use of mobile banking and other internet electronic banking continues to grow.

Security breaches or failures may have serious adverse financial and other consequences, including significant legal and

remediation costs, disruptions to operations, misappropriation of confidential information, damage to systems operated by

us or our third-party service providers, as well as damages to our customers and our counterparties. In addition, these events

could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us

to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial

condition and results of operations.

We may be unable to attract and retain key people to support our business.

Our success depends, in large part, on our ability to attract and retain key people. We compete with other financial services

companies for people primarily on the basis of compensation and benefits, support services and financial position. Intense

competition exists for key employees with demonstrated ability, and we may be unable to hire or retain such employees.

Effective succession planning is also important to our long-term success. The unexpected loss of services of one or more of

our key persons and failure to ensure effective transfer of knowledge and smooth transitions involving such persons could

have a material adverse effect on our business due to loss of their skills, knowledge of our business, their years of industry

experience and the potential difficulty of promptly finding qualified replacement employees.

Proposed rules implementing the executive compensation provisions of the Dodd-Frank Act may limit the type and

structure of compensation arrangements and prohibit the payment of “excessive compensation” to our executives. These

restrictions could negatively affect our ability to compete with other companies in recruiting and retaining key personnel.

Severe weather and natural disasters, including as a result of climate change, pandemics, epidemics, acts of war or

terrorism or other external events could have significant effects on our business.

Severe weather and natural disasters, including hurricanes, tornados, drought and floods, epidemics and pandemics, acts of

war or terrorism or other external events could have a significant effect on our ability to conduct business. Such events

could affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of

collateral securing loans, cause significant property damage, result in loss of revenue and/or cause us to incur additional

expenses. Although management has established disaster recovery and business continuity policies and procedures, the

occurrence of any such event could have a material adverse effect on our business, which, in turn, could have a material

adverse effect on our financial condition and results of operations.

The COVID-19 pandemic, trade wars, tariffs, and similar events and disputes, domestic and international, have adversely

affected, and may continue to adversely affect economic activity globally, nationally and locally. Market interest rates have

declined significantly during 2020, and remain low, but may begin increasing in early 2022 due to inflation. Such events

also may adversely affect business and consumer confidence, generally. We and our customers, and our respective

suppliers, vendors and processors may be adversely affected by rising costs and shortages of needed equipment and

supplies. Any such adverse changes may adversely affect our profitability, growth asset quality and financial condition.

Financial Risks

Our ability to realize our deferred tax assets may be reduced in the future if our estimates of future taxable income from

our operations and tax planning strategies do not support this amount, and the amount of net operating loss carry-forwards

realizable for income tax purposes may be reduced under Section 382 of the Internal Revenue Code by sales of our capital

securities.

We are allowed to carry-back losses for two years for Federal income tax purposes. As of December 31, 2022, we had a

net deferred tax asset of $0.4 million with gross deferred tax assets of $1.7 million. These and future deferred tax assets

may be further reduced in the future if our estimates of future taxable income from our operations and tax planning

strategies do not support the amount of the deferred tax asset. The amount of net operating loss carry-forwards realizable

for income tax purposes potentially could be further reduced under Section 382 of the Internal Revenue Code by a

significant offering and/or other sales of our capital securities. Current bank capital rules also reduce the regulatory capital

benefits of deferred tax assets.

Our cost of funds may increase as a result of general economic conditions, interest rates, inflation and competitive

pressures.

The Federal Reserve shifted to a more accommodating monetary policy in Summer 2019. During 2020, the Federal Reserve

reduced its federal funds target to 0-0.25% and has made significant monthly purchases of U.S. Treasury and agency

mortgage-backed securities to help stimulate the economy, market interest rates have increased, possibly as a result of

increased government borrowings to finance rounds of fiscal stimulus and increased inflation expectations resulting from

such stimulus and expected increases in economic growth from fiscal and monetary stimulus and COVID-19 vaccinations.

Our costs of funds may increase as a result of general economic conditions, increasing interest rates and competitive

pressures, and potential inflation resulting from continued government deficit spending and monetary policies, and

anticipated changes by the Federal Reserve to a less accommodative monetary policy. Traditionally, we have obtained

funds principally through local deposits and borrowings from other institutional lenders, which we believe are a cheaper

and more stable source of funds than borrowings. Increases in interest rates may cause consumers to shift their funds to

more interest bearing instruments and to increase the competition for and costs of deposits. If customers move money out

of bank deposits and into other investment assets or from transaction deposits to higher interest bearing time deposits, we

could lose a relatively low cost source of funds, increasing our funding costs and reducing our net interest income and net

income. Additionally, any such loss of funds could result in lower loan originations and growth, which could materially and

adversely affect our results of operations and financial condition.

Our profitability and liquidity may be affected by changes in interest rates and interest rate levels, the shape of the yield

curve and economic conditions.

Our profitability depends upon net interest income, which is the difference between interest earned on interest-earning

assets, such as loans and investments, and interest expense on interest-bearing liabilities, such as deposits and borrowings.

Net interest income will be adversely affected if market interest rates on the interest we pay on deposits and borrowings

increases faster than the interest earned on loans and investments. Interest rates, and consequently our results of operations,

are affected by general economic conditions (national, international and local) and fiscal and monetary policies, as well as

expectations of interest rate changes, fiscal and monetary policies and the shape of the yield curve. Our income is primarily

driven by the spread between these rates. As a result, a steeper yield curve, meaning long-term interest rates are

significantly higher than short-term interest rates, would provide the Bank with a better opportunity to increase net interest

income. Conversely, a flattening yield curve could further pressure our net interest margin as our cost of funds increases

relative to the spread we can earn on our assets. In 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. The

interest rate reductions by the Federal Reserve and the effects of the COVID-19 pandemic have reduced market rates,

which adversely affected our net interest income and our results of operations.

The production of mortgages and other loans and the value of collateral securing our loans are dependent on demand within

the markets we serve, as well as interest rates. Lower interest rates typically increase mortgage originations, decrease MSR

values, and facilitate pandemic-related trends to single family houses. Increases in market interest rates would tend to

decrease mortgage originations, increase MSR values and potentially increase net interest spread depending upon the yield

curve and the magnitude and duration of interest rate increase.

Liquidity risks could affect operations and jeopardize our financial condition.

Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, proceeds from loan

repayments or sales proceeds from maturing loans and securities, and other sources could have a negative effect on our

liquidity. Our funding sources include federal funds purchased, securities sold under repurchase agreements, core and non-

core deposits, and short- and long-term debt. We maintain a portfolio of securities that can be used as a source of liquidity.

We are also members of the FHLB and the Federal Reserve Bank of Atlanta, where we can obtain advances collateralized

with eligible assets. There are other sources of liquidity available to the Company or the Bank should they be needed,

including our ability to acquire additional non-core deposits. We may be able, depending upon market conditions, to

otherwise borrow money or issue and sell debt and preferred or common securities in public or private transactions. Our

access to funding sources in amounts adequate to finance or capitalize our activities on terms which are acceptable to us

could be impaired by factors that affect us specifically, or the financial services industry or the economy in general.

General conditions that are not specific to us, such as disruptions in the financial markets or negative views and

expectations about the prospects for the financial services industry could adversely affect us.

The COVID-19 pandemic generally has increased our deposits and at banks, generally, while reducing the interest rates

earned on loans and securities. Such excess liquidity and the resulting balance sheet growth requires capital support and

may reduce returns on assets and equity.

Changes in accounting and tax rules applicable to banks could adversely affect our financial conditions and results of

operations.

From time to time, the FASB and the SEC change the financial accounting and reporting standards that govern the

preparation of our financial statements. These changes can be difficult to predict and can materially impact how we record

and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised

standard retroactively, resulting in us restating prior period financial statements

The

FASB’s guidance under ASU No.

2016-13 includes significant changes to the manner in which banks’ allowance for loan losses will be effective for us

beginning January 1, 2023. Instead of using historical losses, the CECL model is forward-looking with respect to expected

losses over the life of loans and other instruments, and could materially affect our results of operations and financial

condition, including the variability of our results of operations and our regulatory capital, notwithstanding a three-year

phase-in of CECL for regulatory capital purposes.

We may need to raise additional capital in the future, but that capital may not be available when it is needed or on

favorable terms.

We anticipate that our current capital resources will satisfy our capital requirements for the foreseeable future under

currently effective rules. We may, however, need to raise additional capital to support our growth or currently

unanticipated losses, or to meet the needs of our communities, resulting from failures or cutbacks by our competitors. Our

ability to raise additional capital, if needed, will depend, among other things, on conditions in the capital markets at that

time, which are limited by events outside our control, and on our financial performance. If we cannot raise additional

capital on acceptable terms when needed, our ability to further expand our operations through internal growth and

acquisitions could be limited.

Our associates may take excessive risks which could negatively affect our financial condition and business.

Banks are in the business of accepting certain risks. Our executive officers and other members of management, sales

intermediaries, investment professionals, product managers, and other associates, make decisions and choices that involve

exposing us to risk. We endeavor, in the design and implementation of our compensation programs and practices, to avoid

giving our associates incentives to take excessive risks; however, associates may nonetheless take such risks. Similarly,

although we employ controls and procedures designed to prevent misconduct, to monitor associates’ business decisions and

prevent them from taking excessive risks, these controls and procedures may not be effective. If our associates take

excessive risks, risks to our reputation, financial condition and business operations could be materially and adversely

affected.

Our ability to continue to pay dividends to shareholders in the future is subject to our profitability, capital, liquidity and

regulatory requirements and these limitations may prevent or limit future dividends.

Cash available to pay dividends to our shareholders is derived primarily from dividends paid to the Company by the Bank.

The ability of the Bank to pay dividends, as well as our ability to pay dividends to our shareholders, will continue to be

subject to and limited by laws limiting dividend payments by the Bank, the results of operations of our subsidiaries and our

need to maintain appropriate liquidity and capital at all levels of our business consistent with regulatory requirements and

the needs of our businesses. See “Supervision and Regulation”.

A limited trading market exists for our common shares, which could result in price volatility.

Your ability to sell or purchase common shares depends upon the existence of an active trading market for our common

stock. Although our common stock is quoted on the Nasdaq Global Market under the trading symbol “AUBN,” our historic

trading volume has been limited historically. As a result, you may be unable to sell or purchase shares of our common

stock at the volume, price and time that you desire. Additionally, whether the purchase or sales prices of our common stock

reflects a reasonable valuation of our common stock also is affected by limited trading market, and thus the price you

receive for a thinly-traded stock such as our common stock, may not reflect its true or intrinsic value. The limited trading

market for our common stock may cause fluctuations in the market value of our common stock to be exaggerated, leading

to price volatility in excess of that which would occur in a more active trading market.

Legal and Regulatory Risks

The Company is an entity separate and distinct from the Bank.

The Company is an entity separate and distinct from the Bank. Company transactions with the Bank are limited by Sections

23A and 23B of the Federal Reserve Act and Federal Reserve Regulation

W.

We depend upon the Bank’s earnings and

dividends, which are limited by law and regulatory policies and actions, for cash to pay the Company’s debt and corporate

obligations, and to pay dividends to our shareholders. If the Bank’s ability to pay dividends to the Company was

terminated or limited, the Company’s liquidity and financial condition could be materially and adversely affected.

Legislative and regulatory changes

The Biden Administration is appointing new members to FDIC and Federal Reserve Board, and has appointed an acting

Comptroller of the Currency and a new full time CFPB director. This Administration and its appointees propose changes to

bank regulation and corporate tax changes that could have an adverse effect on our results of operations and financial

conditions.

We are subject to extensive regulation that could limit or restrict our activities and adversely affect our earnings.

We and our subsidiaries are regulated by several regulators, including the Federal Reserve, the Alabama Superintendent,

the SEC and the FDIC. Our success is affected by state and federal laws and regulations affecting banks and bank holding

companies, and the securities markets, and our costs of compliance could adversely affect our earnings. Banking

regulations are primarily intended to protect depositors, and the FDIC Deposit Insurance Fund (“DIF”), not shareholders.

The financial services industry also is subject to frequent legislative and regulatory changes and proposed changes. In

addition, the interpretations of regulations by regulators may change and statutes may be enacted with retroactive impact.

From time to time, regulators raise issues during examinations of us which, if not determined satisfactorily, could have a

material adverse effect on us. Compliance with applicable laws and regulations is time consuming and costly and may

affect our profitability. The position of the President and his administration that took office in January 2021 with respect to

regulation of banks and bank holding companies is not yet fully known, but their views and actions could have a material

adverse effect on financial services regulation, generally.

Litigation and regulatory actions could harm our reputation and adversely affect our results of operations and financial

condition.

A substantial legal liability or a significant regulatory action against us, as well as regulatory inquiries or investigations,

could harm our reputation, result in material fines or penalties, result in significant legal and other costs, divert management

resources away from our business, and otherwise have a material adverse effect on our ability to expand on our existing

business, financial condition and results of operations. Even if we ultimately prevail in litigation, regulatory investigation or

action, our ability to attract new customers, retain our current customers and recruit and retain employees could be

materially and adversely affected. Regulatory inquiries and litigation may also adversely affect the prices or volatility of

our securities specifically, or the securities of our industry, generally.

We are required to maintain capital to meet regulatory requirements, and if we fail to maintain sufficient capital, our

financial condition, liquidity and results of operations would be adversely affected.

We and the Bank must meet regulatory capital requirements and maintain sufficient liquidity, including liquidity at the

Company, as well as the Bank. If we fail to meet these capital and other regulatory requirements, including more rigorous

requirements arising from our regulators’ implementation of Basel III, our financial condition, liquidity and results of

operations would be materially and adversely affected. Our failure to remain “well capitalized” and “well managed”,

including meeting the Basel III capital conservation buffers, for bank regulatory purposes, could affect customer

confidence, our ability to grow, our costs of funds and FDIC insurance, our ability to raise brokered deposits, our ability to

pay dividends on our common stock and our ability to make acquisitions, and we may no longer meet the requirements for

becoming a financial holding company. These could also affect our ability to use discretionary bonuses to attract and retain

quality personnel. The Basel III Capital Rules include a minimum ratio of common equity tier 1 capital, or CET1, to risk-

weighted assets of 4.5% and a capital conservation buffer of 2.5% of risk-weighted assets.

See

“Supervision and

Regulation—Basel III Capital Rules.” Although we currently have capital ratios that exceed all these minimum levels and

a strategic plan to maintain these levels, we or the Bank may be unable to continue to satisfy the capital adequacy

requirements for various reasons, which may include:

losses and/or increases in the Bank’s credit risk assets and expected losses resulting from the deterioration in the

creditworthiness of borrowers and the issuers of equity and debt securities;

difficulty in refinancing or issuing instruments upon redemption or at maturity of such instruments to raise capital

under acceptable terms and conditions;

declines in the value of our securities portfolios;

revisions to the regulations or their application by our regulators that increase our capital requirements;

reduced total earnings on our assets will reduce our internal generation of capital available to support our balance

sheet growth;

reductions in the value of our MSRs and DTAs; and other adverse developments; and

unexpected growth and an inability to increase capital timely.

A failure to remain “well capitalized,” for bank regulatory purposes, including meeting the Basel III Capital Rule’s

conservation buffer, could adversely affect customer confidence, and our:

ability to grow;

the costs of and availability of funds;

FDIC deposit insurance premiums;

ability to raise or replace brokered deposits;

ability to pay or increase dividends on our capital stock.

ability to make discretionary bonuses to attract and retain quality personnel;

ability to make acquisitions or engage in new activities;

flexibility if we become subject to prompt corrective action restrictions;

ability to make payments of principal and interest on our capital instruments; and

The Federal Reserve may require us to commit capital resources to support the Bank.

As a matter of policy, the Federal Reserve expects a bank holding company to act as a source of financial and managerial

strength to a subsidiary bank and to commit resources to support such subsidiary bank. The Federal Reserve may require a

bank holding company to make capital injections into a troubled subsidiary bank. In addition, the Dodd-Frank Act amended

the FDI Act to require that all companies that control a FDIC-insured depository institution serve as a source of financial

strength to their depository institution subsidiaries. Under these requirements, we could be required to provide financial

assistance to the Bank should it experience financial distress, even if further investment was not otherwise warranted. See

“Supervision and Regulation.”

Our operations are subject to risk of loss from unfavorable fiscal, monetary and political developments in the U.S.

Our businesses and earnings are affected by the fiscal, monetary and other policies and actions of various U.S.

governmental and regulatory authorities. Changes in these are beyond our control and are difficult to predict and,

consequently, changes in these policies could have negative effects on our activities and results of operations. Failures of

the executive and legislative branches to agree on spending plans and budgets previously have led to Federal government

shutdowns, which may adversely affect the U.S. economy. Additionally, any prolonged government shutdown may inhibit

our ability to evaluate the economy, generally, and affect government workers who are not paid during such events, and

where the absence of government services and data could adversely affect consumer and business sentiment, our local

economy and our customers and therefore our business.

Litigation and regulatory investigations are increasingly common in our businesses and may result in significant financial

losses and/or harm to our reputation.

We face risks of litigation and regulatory investigations and actions in the ordinary course of operating our businesses,

including the risk of class action lawsuits. Plaintiffs in class action and other lawsuits against us may seek very large and/or

indeterminate amounts, including punitive and treble damages. Due to the vagaries of litigation, the ultimate outcome of

litigation and the amount or range of potential loss at particular points in time may be difficult to ascertain. We do not have

any material pending litigation or regulatory matters affecting us.

Failures to comply with the fair lending laws, CFPB regulati ons or the Community Reinvestment Act, or CRA, could

adversely affect us.

The Bank is subject to, among other things, the provisions of the Equal Credit Opportunity Act, or ECOA, and the Fair

Housing Act, both of which prohibit discrimination based on race or color, religion, national origin, sex and familial status

in any aspect of a consumer, commercial credit or residential real estate transaction. The DOJ and the federal bank

regulatory agencies have issued an Interagency Policy Statement on Discrimination in Lending have provided guidance to

financial institutions to evaluate whether discrimination exists and how the agencies will respond to lending discrimination,

and what steps lenders might take to prevent discriminatory lending practices. Failures to comply with ECOA, the Fair

Housing Act and other fair lending laws and regulations, including CFPB regulations, could subject us to enforcement

actions or litigation, and could have a material adverse effect on our business financial condition and results of operations.

Our Bank is also subject to the CRA and periodic CRA examinations. The CRA requires us to serve our entire

communities, including low- and moderate-income neighborhoods. Our CRA ratings could be adversely affected by actual

or alleged violations of the fair lending or consumer financial protection laws. Even though we have maintained an

“satisfactory” CRA rating since 2000, we cannot predict our future CRA ratings. Violations of fair lending laws or if our

CRA rating falls to less than “satisfactory” could adversely affect our business, including expansion through branching or

acquisitions.

COVID-19 Risks

The COVID-19 pandemic may continue to adversely affect our business, financial condition and results of operations. The

ultimate effects of the pandemic on us will depend on the severity, scope and duration of the pandemic, its cumulative

economic effects, governmental actions in response to the pandemic, and the restoration of a more normal economy.

The COVID-19 national health emergency has significantly disrupted the United States and international economies and

financial markets. We expect that the COVID-19 pandemic and its effects will continue to adversely affect our business,

financial condition and results of operations in future periods. The spread of COVID-19 has caused illness, quarantines,

cancellation of events and travel, business and school shutdowns, reductions in business activity and financial transactions,

supply chain interruptions and overall economic and financial market instability. The State of Alabama and many other

states have taken preventative and protective actions, such as imposing a statewide mask mandate, restrictions on travel,

business operations, public gatherings, social distancing, advising or requiring individuals to limit or forego their time

outside of their homes, and ordering temporary closures of non-essential businesses. Though various of these measures

have been relaxed or eliminated, the pandemic has moved in disruptive and unpredictable waves.

The travel, hospitality and food and beverage industries, restaurants, retailers and auto manufacturers, and their suppliers

have been severely affected. A significant number of layoffs, furloughs of employees, as well as remote work have

occurred in these and other industries, including government offices, schools and universities. Auburn University held

virtual classes only from March 16, 2020 through the summer session. The auto industry’s production and sales continue to

be adversely affected by supply chain disruptions. Hyundai and Kia are major direct and indirect employers in our area.

The ultimate effects of the COVID-19 pandemic on the economy, generally, our markets, and on us cannot be predicted.

The timing and effects of the COVID-19 pandemic on our business, results of operations and financial condition may

include, among various other consequences, the following. These effects depend on the severity, scope and duration of the

pandemic, its cumulative economic effects, and the effectiveness of healthcare, business and governmental actions

addressing the pandemic’s effects, including vaccinations.

Employees’ health could be adversely affected, necessitating their recovery away from work;

Unavailability of key personnel necessary to conduct our business activities;

Our operating effectiveness may be reduced as our employees work from home or suffer from the COVID-19

virus;

Shelter in place, remote work or other restrictions and interruptions of our business and contact with our

customers;

Sustained closures of our branch lobbies or the offices of our customers;

Declines in demand for loans and other banking services and products, and reduced usage and interchange fees

on our payment cards;

Continuing large scale fiscal and monetary stimulus actions may stabilize the economy, but may increase

economic and market risks, including valuation “bubbles,” volatility in various assets and inflation;

Inflation and increases in interest rates may result from fiscal stimulus and monetary stimulus, and the Federal

Reserve has indicated it is willing to permit inflation to run moderately above its 2% target for some time, but is

considering raising interest rates and reducing its securities holdings as a result of inflation that is substantially

higher than the Federal Reserve’s target range;

Increased savings and debt reduction by consumers could reduce demand for credit and our earning assets;

Significant volatility in United States financial markets and our investment securities portfolio, including credit

concerns in municipal securities;

Declines in the credit quality of our loan portfolio, owing to the effects of the COVID-19 pandemic in the

markets we serve, leading to increased provisions for loan losses and increases in our allowance for possible

credit losses;

Declines in the value of collateral for loans, including real estate collateral, especially in industries such as

travel, hospitality, restaurants and retailers;

Declines in the net worth and liquidity of borrowers, impairing their ability to pay timely their loan obligations

to us;

Generally low market interest rates that reduce our net interest income and our profitability;

Loan deferrals and loan modifications, and mortgage foreclosure moratoria, including those mandated by law, or

which are encouraged by our regulators, may increase our expense and risks of collectability, reduce our cash

flows and liquidity and adversely affect our results of operations and financial condition;

The end of temporary regulatory accounting and capital relief for banks regarding the effects of the COVID-19

pandemic, including loan deferrals and modifications, could increase our TDRs and require additions to our

allowance for loan losses, which may adversely affect our income, financial condition and capital;

Our waiver of various fees and service charges to support our customers and communities will adversely affect

our results of operation and our liquidity and financial position;

The COVID-19 pandemic may change customer financial behaviors and payment practices. Electronic banking

could become more popular with less customers doing business at our offices;

Certain of our assets, including loans and securities, may become impaired, which would adversely affect our

results of operation and financial condition and mortgage loan foreclosure moratoria may limit our ability to

timely act to protect our interests in the loan collateral;

Reductions in income or losses will adversely affect our capital and growth of capital, including our capital for

bank regulatory purposes;

Losses or reductions in net income may adversely affect the growth or amount of dividends we can pay on our

common stock;

The effects of government fiscal and monetary policies, including changes in such policies, or the effects of

COVID-19 relief programs are discontinued, on the economy and financial stability, generally, and on our

business, results of operations and financial condition cannot be predicted;

Cybercriminals may increase their attempts to compromise business and consumer emails, including an increase

in phishing attempts, and fraudulent vendors or other parties may view the pandemic as an opportunity to prey

upon consumers and businesses during this time.

The restoration of financial stability and economic growth may depend on the health care system developing and

deploying COVID-19 testing and contact tracing, and delivery of COVID-19 vaccines, which promote consumer

and employee health and confidence in the economy.

These factors, together or in combination with other events or occurrences that are unknown or anticipated, may materially

and adversely affect our business, financial condition and results of operations.

Our stock price may reflect securities market conditions

The ongoing COVID-19

pandemic has resulted in substantial securities market volatility, especially for bank stocks and

has, and may continue to, adversely affect the market of our common stock. The spread, intensification and duration of

COVID-19 pandemic, as well as the effectiveness of governmental, fiscal and monetary policies, and regulatory responses

to the pandemic, further affect the financial markets and the market prices for securities generally, and the market prices for

bank stocks, including our common stock. The stock market’s gains due to a concentration of high growth companies has

been adversely affected by inflation and expectation of higher interest rates and the Russia invasion of Ukraine in February

The COVID-19 global pandemic could result in deterioration of asset quality and an increase in credit losses.

Many businesses have had, and may continue to have lower revenues and cash flows and many consumers will have lower

income as a result of COVID-19. These could result in an inability to repay loans timely in full, reduce our asset quality and

reduce our deposits. Loan modifications and payment deferrals may also increase our credit risks, especially when

temporary regulatory relief for these actions expires. Our business, results of operations, liquidity and financial condition

could be adversely affected.

As a participating lender in the PPP, the Bank is subject to additional risks of litigation from the Bank’s customers or other

parties regarding the Bank’s processing of loans for the PPP and risks that the SBA may not fund some or all PPP loan

guaranties.

The CARES Act, Paycheck Protection Program and Healthcare Enhancement Act and Economic Aid Act appropriated

more than $1 trillion in funding for PPP loans administered through by the SBA and the U.S. Department of the Treasury.

Under the PPP, eligible small businesses and other entities and individuals can apply for loans from existing SBA lenders

and other approved PPP lenders, subject to numerous limitations and eligibility criteria. The Bank is participating as a

lender in the PPP and made a total of $56.7 million of PPP loans in 2020 and 2021. The PPP loans charge 1% interest

annually. Forgiveness of these loans has been slow, and PPP loans earn less than market rates. Since the opening of the

PPP, various banks have been subject to litigation regarding the process and procedures used in processing applications for

the PPP, and greater governmental attention is directed at preventing fraud. We may be exposed to similar litigation risks,

from both customers and non-customers that approached the Bank regarding PPP loans we extended. If any such litigation

is filed against the Bank and is not resolved favorably to the Bank, it may result in financial liability or adversely affect our

reputation. Litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage

caused by PPP related litigation could have a material adverse effect on our business, financial condition and results of

operations.

The Bank also has credit risk on PPP loans, if the SBA determines deficiencies in the manner in which PPP loans were

originated, funded or serviced by the Bank, such as an issue with the eligibility of a borrower to receive a PPP loan, or

obtain forgiveness of a PPP properly, including those related to the ambiguities in the laws, rules and guidance regarding

the PPP’s operation. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there

were one or more deficiencies in the manner in which the PPP loan was originated, funded, or serviced by the Company,

the SBA may deny its liability under the PPP loan guaranty, reduce the amount of the guaranty, or, if it has already paid

under the guaranty, seek recovery of any loss related to the deficiency from the Company. Similar issues may also result in

the denial of forgiveness of PPP loans, which could expose us to potential borrower bankruptcies and potential losses and

additional costs.

At December 31, 2021 we had $8.1 million PPP loans outstanding and had not realized any losses on such loans.

The Bank conducts its business from its main office and seven full-service branches. The Bank also operates loan

production offices in Auburn and Phenix City, Alabama.

The Bank owns its main campus in downtown Auburn, Alabama, which comprises over 5 acres and includes the Bank's

temporary main office, operations center, drive-through facility, and parking deck. The operations center, built as a theater

in 1968, and remodeled by the Bank after purchasing it in 1985, has approximately 23,000 square feet of space. All of the

Bank’s loan servicing, data processing activities, and other operations, are located in the operations building. Currently, the

Bank’s temporary main office is located in the operations center as the Bank completes Phase I of its main campus

redevelopment plan. The temporary main office branch offers the full line of the Bank’s services and has one ATM. The

Bank’s drive-through facility located on the main office campus was constructed in October 2012. This drive-through

facility has five drive-through lanes, including an ATM, and a walk-up teller window.

Phase I of the redevelopment plan includes the construction of a new headquarters building, the AuburnBank Center, and a

parking deck. Construction activities for Phase I commenced during the second half of 2020 and the parking deck was

completed in April of 2021. The parking deck has approximately 500 parking spaces, is open to the public and charges

hourly, monthly, and special event rates, and is expected to provide for future parking needs on the Bank’s main campus,

including the new headquarters building. The new headquarters building will have approximately 90,000 square feet of

space and is expected to be complete in the second quarter of 2022. Upon completion of Phase I, the Bank’s main office,

Auburn loan production office, and all of its back-office operations will be relocated to the new headquarters building. The

Bank expects to lease approximately 46,000 square feet of office space and approximately 5,000 square feet of retail space

in the new headquarters building to third party tenants.

In January 2019, the Bank purchased a parcel that adjoins the operations center in order to improve ingress and egress to

the Bank’s main campus. The building improvements currently on this adjoining parcel, as well as the operations building,

will be demolished under Phase II of the Bank's campus redevelopment plan. In February 2022, the Company entered into

an agreement, subject to a 180 day inspection period and customary closing conditions, to sell this combined parcel of

approximately 0.85 acres to a hotel developer. As part of the agreement, the Bank will negotiate a long-term lease with the

hotel developer for 100 to 150 parking spaces in the Bank’s parking deck. Upon closing, the Company currently expects

this sale to be accretive to 2022 earnings by approximately $0.70 per share.

The Opelika branch is located in Opelika, Alabama. This branch, built in 1991, is owned by the Bank and has

approximately 4,000 square feet of space. This branch offers the full line of the Bank’s services and has drive-through

windows and an ATM. This branch offers parking for approximately 36 vehicles.

The Bank’s Notasulga branch was opened in August 2001. This branch is located in Notasulga, Alabama, about 15 miles

west of Auburn, Alabama. This branch is owned by the Bank and has approximately 1,344 square feet of space. The Bank

leased the land for this branch from a third party. In May 2021, the Bank’s land lease renewed for another one year term.

This branch offers the full line of the Bank’s services including safe deposit boxes and a drive-through window. This

branch offers parking for approximately 11 vehicles, including a handicapped ramp.

In November 2002, the Bank opened a loan production office in Phenix City, Alabama, about 35 miles south of Auburn,

Alabama. In November 2020, the Bank renewed its lease for another year.

In February 2009, the Bank opened a branch located on Bent Creek Road in Auburn, Alabama. This branch is owned by the

Bank and has approximately 4,000 square feet of space. This branch offers the full line of the Bank’s services and has

drive-through windows and a drive-up ATM. This branch offers parking for approximately 29 vehicles.

In December 2011, the Bank opened a branch located on Fob James Drive in Valley, Alabama, about 30 miles northeast of

Auburn, Alabama. This branch is owned by the Bank and has approximately 5,000 square feet of space. This branch offers

the full line of the Bank’s services and has drive-through windows and a drive-up ATM. This branch offers parking for

approximately 35 vehicles. Prior to December 2011, the Bank leased office space for a loan production office in Valley,

Alabama. The loan production office was originally opened in September 2004.

In February 2015, the Bank relocated its Auburn Kroger branch to a new location within the Corner Village Shopping

Center, in Auburn, Alabama. In February 2015, the Bank entered into a new lease agreement for five years with options for

two 5-year extensions. In February 2020, the Bank exercised its option to renew the lease for another five years. The Bank

leases approximately 1,500 square feet of space for the Corner Village branch. Prior to relocation, the Bank’s Auburn

Kroger branch was located in the Kroger supermarket in the same shopping center. The Auburn Kroger branch was

originally opened in August 1988. The Corner Village branch offers the full line of the Bank’s deposit and other services

including an ATM, except safe deposit boxes.

In September 2015, the Bank relocated its Auburn Wal -Mart Supercenter branch to a new location the Bank purchased in

December 2014 at the intersection of S. Donahue Avenue and E. University Drive in Auburn, Alabama. The South

Donahue branch, built in 2015, has approximately 3,600 square feet of space. Prior to relocation, the Bank’s Auburn Wal-

Mart Supercenter branch was located inside the Wal -Mart shopping center on the south side of Auburn, Alabama. The

Auburn Wal-Mart Supercenter branch was originally opened in September 2000. The South Donahue branch offers the full

line of the Bank’s services and has drive-through windows and an ATM. This branch offers parking for approximately 28

vehicles.

In May 2017, the Bank relocated its Opelika Kroger branch to a new location the Bank purchased in August 2016 near the

Tiger Town Retail Shopping Center and the intersection of U.S. Highway 280 and Frederick Road in Opelika, Alabama.

The Tiger Town branch, built in 2017, has approximately 5,500 square feet of space. Prior to relocation, the Bank’s

Opelika Kroger branch was located inside the Kroger supermarket in the Tiger Town retail center in Opelika, Alabama. The

Opelika Kroger branch was originally opened in July 2007. The Tiger Town branch offers the full line of the Bank’s

services and has drive-through windows and an ATM. This branch offers parking for approximately 36 vehicles.

In September 2018, the Bank opened a loan production office on East Samford Avenue in Auburn, Alabama. The location

has approximately 2,500 square feet of space and is leased through 2028. The loan production office was previously

located in the Center on the Bank’s main campus. This location offers parking for approximately 16 vehicles.

In the normal course of its business, the Company and the Bank from time to time are involved in legal proceedings. The

Company’s management believe there are no pending or threatened legal proceedings that, upon resolution, are expected to

have a material adverse effect upon the Company’s or the Bank’s financial condition or results of operations.

OPERATIONS

The following is a discussion of our financial condition at December 31, 2021 and 2020 and our results of operations for

the years ended December 31, 2021 and 2020. 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. The

following discussion and analysis should be read along with our consolidated financial statements and the related notes

included elsewhere herein. In addition, this discussion and analysis contains forward-looking statements, so you should

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

OVERVIEW

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

continuously since 1907. Both the Company and the Bank are headquartered in Auburn, Alabama. The Bank conducts its

business primarily in East Alabama, including Lee County and surrounding areas. The Bank operates full-service branches

in Auburn, Opelika, Notasulga and Valley, Alabama. The Bank also operates loan production offices in Auburn and

Phenix City, Alabama.

Summary of Results of Operations

Year ended December 31

(Dollars in thousands, except per share data)

2021

2020

Net interest income (a)

24,460

24,830

Less: tax-equivalent adjustment

470

492

Net interest income (GAAP)

23,990

24,338

Noninterest income

4,288

5,375

Total revenue

28,278

29,713

Provision for loan losses

(600)

1,100

Noninterest expense

19,433

19,554

Income tax expense

1,406

1,605

Net earnings

8,039

7,454

Basic and diluted net earnings per share

2.27

2.09

(a) Tax-equivalent. See "Table 1 - Explanation of Non-GAAP Financial Measures".

Financial Summary

The Company’s net earnings were $8.0 million for the full year 2021, compared to $7.5 million for the full year 2020.

Basic and diluted net earnings per share were $2.27 per share for the full year 2021, compared to $2.09 per share for the full

year 2020.

Net interest income (tax-equivalent) was $24.5 million in 2021, a 1% decrease compared to $24.8 million in 2020. This

decrease was primarily due to net interest margin compression , partially offset by balance sheet growth. Net interest

margin (tax-equivalent) decreased to 2.55% in 2021, compared to 2.92% in 2020, primarily due to the lower interest rate

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

relief programs and customers’ increased savings.

At December 31, 2021, the Company’s allowance for loan losses was $4.9 million, or 1.08% of total loans, compared to

$5.6 million, or 1.22% of total loans, at December 31, 2020. Excluding Paycheck Protection Program (“PPP”) loans, which

are guaranteed by the SBA, the Company’s allowance for loan losses was 1.10% and 1.27% of total loans at December 31,

2021 and 2020, respectively

The Company recorded a negative provision for loan losses of $0.6 million in 2021 compared

to a charge of $1.1 million during 2020. The negative provision for loan losses was primarily related to improvements in

economic conditions in our primary market area, and related improvements in our asset quality. The provision for loan

losses is based upon various estimates and judgements, including the absolute level of loans, loan growth, credit quality and

the amount of net charge-offs. Net charge-offs as a percent of average loans were 0.02% in 2021 , compared to net

recoveries as a percent of average loans of 0.03% in 2020.

Noninterest income was $4.3 million in 2021 compared to $5.4 million in 2020. The decrease was primarily due to a $0.8

million decrease in mortgage lending income in 2021 as refinance activity declined in our primary market area and a $0.3

million non-taxable death benefit from bank-owned life insurance received in 2020.

Noninterest expense was $19.4 million in 2021 compared to $19.6 million in 2020. The decrease was primarily due to a

reduction of $0.8 million in various expenses related to the redevelopment of the Company’s headquarters in downtown

Auburn. This decrease was mostly offset by increases in salaries and benefits expe nse of $0.4 million and a $0.2 million

increase in FDIC and other regulatory assessments during 2021.

Income tax expense was $1.4 million in 2021 and $1.6 million in 2020 reflecting an effective tax rate of 14.89 % and

17.72%, respectively. This decrease was primarily due to an income tax benefit related to a New Markets Tax Credit

investment funded in the fourth quarter of 2021. The Company’s effective income tax rate is principally impacted by tax-

exempt earnings from the Company’s investments in municipal securities, bank-owned life insurance, and New Markets

Tax Credits.

The Company paid cash dividends of $1.04 per share in 2021, an increase of 2% from 2020. At December 31, 2021, the

Bank’s regulatory capital ratios were well above the minimum amounts required to be “well capitalized” under current

regulatory standards with a total risk-based capital ratio of 17.06%, a tier 1 leverage ratio of 9.35% and common equity tier

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

COVID-19 Impact Assessment

The COVID-19 pandemic has occurred in waves of different variants since the first quarter of 2020. Vaccines to protect

against and/or reduce the severity of COVID-19 were widely introduced at the beginning of 2021. At times, the pandemic

has severely restricted the level of economic activity in our markets. In response to the COVID -19 pandemic, the State of

Alabama, and most other states, have taken preventative or protective actions to prevent the spread of the virus, including

imposing restrictions on travel and business operations and a statewide mask mandate, advising or requiring individuals to

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

temporary closures of businesses that have been deemed to be non-essential. Though certain of these measures have been

relaxed or eliminated, especially as vaccination levels increased, such measures could be reestablished in cases of new

waves, especially a wave of a COVID-19 variant that is more resistant to existing vaccines.

COVID-19 has significantly affected local state, national and global health and economic activity and its future effects are

uncertain and will depend on various factors, including, among others, the duration and scope of the pandemic, especially

new variants of the virus, effective vaccines and drug treatments, together with governmental, regulatory and private sector

responses. COVID-19 has had continuing significant effects on the economy, financial markets and our employees,

customers and vendors. Our business, financial condition and results of operations generally rely upon the ability of our

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

stability and liquidity and demand for loans and other products and services we offer, all of which are affected by the

pandemic.

We have implemented a number of procedures in response to the pandemic to support the safety and well-being of our

employees, customers and shareholders.

• We believe our business continuity plan has worked to provide essential banking services to our communities and

customers, while protecting our employees’ health. As part of our efforts to exercise social distancing in

accordance with the guidelines of the Centers for Disease Control and the Governor of the State of Alabama,

starting March 23, 2020, we limited branch lobby service to appointment only while continuing to operate our

branch drive-thru facilities and ATMs. As permitted by state public health guidelines, on June 1, 2020, we re-

opened some of our branch lobbies. In 2021, we opened our remaining branch lobbies. We continue to provide

services through our online and other electronic channels. In addition, we maintain remote work access to help

employees stay at home while providing continuity of service.

• We are focused on servicing the financial needs of our commercial and consumer clients with extensions and

deferrals to loan customers effected by COVID-19, provided such customers were not more than 30 days past due

at the time of the request; and

• We were an active PPP lender. PPP loans were forgivable, in whole or in part, if the proceeds are used for payroll

and other permitted purposes in accordance with the requirements of the PPP. These loans carry a fixed rate of

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

2020), if not forgiven, in whole or in part. Payments are deferred until either the date on which the Small Business

Administration (“SBA”) remits the amount of forgiveness proceeds to the lender or the date that is 10 months after

the last day of the covered period if the borrower does not apply for forgiveness within that 10-month period. We

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

COVID-19 has also had various economic effects, generally. These include supply chain disruptions and manufacturing

delays, shortages of certain goods and services, reduced consumer expenditure on hospitality and travel, and migration from

larger urban centers to less populated areas and remote work. The demand for single family housing has exceeded existing

supplies. When coupled with construction delays attributable to supply chain disruptions and worker shortages, these

factors have caused housing prices and apartment rents to increase, generally. Stimulative monetary and fiscal policy,

along with shortages of certain goods and services, and rising petroleum and food prices have led to the highest inflation in

decades. Although fiscal stimulus remains under consideration by the President and Congress, the Federal Reserve is

considering increasing its target interest rates and reducing its holding of securities to stem inflation.

A summary of PPP loans extended during 2020 follows:

(Dollars in thousands)

# of SBA

Approved

Mix

$ of SBA

Approved

Mix

SBA Tier:

$2 million to $10 million

$350,000 to less than $2 million

23

5

14,691

40

Up to $350,000

400

95

21,784

60

Total

423

100

36,475

100

We collected approximately $1.5 million in fees related to our PPP loans during 2020. Through December 31, 2021, we

have recognized all of these fees, net of related costs. As of December 31, 2021, we had received payments and

forgiveness on all PPP loans extended during 2020.

On December 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the “Economic Aid

Act”) was signed into law. The Economic Aid Act provides a second $900 billion stimulus package, including $325 billion

in additional PPP loans. The Economic Aid Act also permits the collection of a higher amount of PPP loan fees by

participating banks.

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

(Dollars in thousands)

# of SBA

Approved

Mix

$ of SBA

Approved

Mix

SBA Tier:

$2 million to $10 million

$350,000 to less than $2 million

12

5

6,494

32

Up to $350,000

242

95

13,757

68

Total

254

100

20,251

100

We collected approximately $1.0 million in fees related to PPP loans under the Economic Aid Act. Through December 31,

2021, we have recognized $0.7 million of these fees, net of related costs. As of December 31, 2021, we have received

payments and forgiveness on 116 PPP loans under the Economic Aid Act, totaling $12.1 million. The outstanding balance

for the remaining 138 PPP loans under the Economic Aid Act was approximately $8.1 million at December 31, 2021.

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

developments as those occur. Our results of operations for year ended December 31, 2021, and our financial condition at

that date reflect only the ongoing effects of the pandemic, and may not be indicative of future results or financial

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

of temporary accounting and bank regulatory relief measures in response to the COVID-19 pandemic.

As of December 31, 2021, all of our capital ratios were in excess of all regulatory requirements to be well capitalized. The

effects of the COVID-19 pandemic on our borrowers could result in adverse changes to credit quality and our regulatory

capital ratios. We continue to closely monitor this pandemic, and are working to continue our services during the pandemic

and to address developments as those occur.

CRITICAL ACCOUNTING POLICIES

The accounting and financial reporting policies of the Company conform with U.S. 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 loan losses, our

assessment of other-than-temporary impairment, recurring and non-recurring fair value measurements, the valuation of

other real estate owned, and the valuation of deferred tax assets, were critical to the determination of our financial position

and results of operations. Other policies also require subjective judgment and assumptions and may accordingly impact our

financial position and results of operations.

Allowance for Loan Losses

The Company assesses the adequacy of its allowance for loan losses prior to the end of each calendar quarter. The level of

the allowance is based upon management’s evaluation of the loan portfolio, past loan loss experience, current asset quality

trends, known and inherent risks in the portfolio, adverse situations that may affect a borrower’s ability to repay (including

the timing of future payment), the estimated value of any underlying collateral, composition of the loan portfolio, economic

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

evaluation is inherently subjective as it requires material estimates including the amounts and timing of future cash flows

expected to be received on impaired loans that may be susceptible to significant change. Loans are charged off, in whole or

in part, when management believes that the full collectability of the loan is unlikely. A loan may be partially charged-off

after a “confirming event” has occurred which serves to validate that full repayment pursuant to the terms of the loan is

unlikely.

The Company deems loans impaired when, based on current information and events, it is probable that the Company will

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

according to the contractual terms means that both the interest and principal payments of a loan will be collected as

scheduled in the loan agreement.

An impairment allowance is recognized if the fair value of the loan is less than the recorded investment in the loan. The

impairment is recognized through the allowance. Loans that are impaired are recorded at the present value of expected

future cash flows discounted at the loan’s effective interest rate, or if the loan is collateral dependent, impairment

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

The level of allowance maintained is believed by management to be adequate to absorb probable losses inherent in the

portfolio at the balance sheet date. The allowance is increased by provisions charged to expense and decreased by charge-

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

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

loan review process. The Company’s loan review process assists in determining whether there are loans in the portfolio

whose credit quality has weakened over time and evaluating the risk characteristics of the entire loan portfolio. The

Company’s loan review process includes the judgment of management, the input from our independent loan reviewers, and

reviews that may have been conducted by bank regulatory agencies as part of their examination process. The Company

incorporates loan review results in the determination of whether or not it is probable that it will be able to collect all

amounts due according to the contractual terms of a loan.

As part of the Company’s quarterly assessment of the allowance, management divides the loan portfolio into five segments:

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

installment loans. The Company analyzes each segment and estimates an allowance allocation for each loan segment.

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

types of loans. The estimates for these loans are established by category and based on the Company’s internal system of

credit risk ratings and historical loss data. The estimated loan loss allocation rate for the Company’s internal system of

credit risk grades is based on its experience with similarly graded loans. For loan segments where the Company believes it

does not have sufficient historical loss data, the Company may make adjustments based, in part, on loss rates of peer bank

groups. At December 31, 2021 and 2020, and for the years then ended, the Company adjusted its historical loss rates for the

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

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

probable losses for several “qualitative and environmental” factors. The allocation for qualitative and environmental

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

estimated probable inherent credit losses which exist, but have not yet been identified, as of the balance sheet date, and are

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

economic conditions, changes in lending personnel experience, changes in lending policies or procedures and other

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

allowance allocation, as determined by the processes noted above, is increased or decreased based on the incremental

assessment of these factors.

The Company regularly re-evaluates its practices in determining the allowance for loan losses. Since the fourth quarter of

2016, the Company has increased its look-back period each quarter to incorporate the effects of at least one economic

downturn in its loss history. The Company believes the extension of its look-back period is appropriate due to the risks

inherent in the loan portfolio. Absent this extension, the early cycle periods in which the Company experienced significant

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

year ended December 31, 2021, the Company increased its look-back period to 51 quarters to continue to include losses

incurred by the Company beginning with the first quarter of 2009. The Company will likely continue to increase its look-

back period to incorporate the effects of at least one economic downturn in its loss history. During 2020, the Company

adjusted certain qualitative and economic factors related to changes in economic conditions driven by the impact of the

COVID-19 pandemic and resulting adverse economic conditions, including higher unemployment in our primary market

area. During 2021, the Company adjusted certain qualitative and economic factors to reflect improvements in economic

conditions in our primary market area. Further adjustments may be made in the future as a result of the ongoing COVID-19

pandemic.

Assessment for Other-Than-Temporary Impairment of Securities

On a quarterly basis, management makes an assessment to determine whether there have been events or economic

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

For debt securities with an unrealized loss, an other-than-temporary impairment write-down is triggered when (1) the

Company has the intent to sell a debt security, (2) it is more likely than not that the Company will be required to sell the

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

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

be required to sell the debt security before recovery, the other-than-temporary write-down is equal to the entire difference

between the debt security’s amortized cost and its fair value. If the Company does not intend to sell the security or it is not

more likely than not that it will be required to sell the security before recovery, the other-than-temporary impairment write-

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

credit loss component is recognized in earnings and is the difference between the security’s amortized cost basis and the

present value of its expected future cash flows. The remaining difference between the security’s fair value and the present

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

income, net of applicable taxes.

The Company is required to own certain stock as a condition of membership, such as Federal Home Loan Bank (“FHLB”)

and Federal Reserve Bank (“FRB”). These non-marketable equity securities are accounted for at cost which equals par or

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

no market for these securities. The Company records these non-marketable equity securities as a component of other

assets, which are periodically evaluated for impairment. Management considers these non-marketable equity securities to

be long-term investments. Accordingly, when evaluating these securities for impairment, management considers the

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

Fair Value Determination

U.S. 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. ASC 820,

Fair Value Measurements and Disclosures

which defines fair value, establishes a framework for measuring fair value in accordance with U.S. GAAP and expands

disclosures about fair value measurements. For more information regarding fair value measurements and disclosures,

please refer to Note 14, Fair Value, of 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

readily available active market pricing. However, some of the Company’s assets or liabilities lack an available or

comparable trading market characterized by frequent transactions between willing buyers and sellers. In these cases, fair

value is estimated using pricing models that use discounted cash flows and other pricing techniques. Pricing models and

their underlying assumptions are based upon management’s best estimates for appropriate discount rates, default rates,

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

and expense. As such, the use of different models and assumptions, as well as changes in market conditions, could result in

materially different net earnings and retained earnings results.

Other Real Estate Owned

Other real estate owned (“OREO”), consists of properties obtained through foreclosure or in satisfaction of loans and is

reported at the lower of cost or fair value, less estimated costs to sell at the date acquired with any loss recognized as a

charge-off through the allowance for loan losses. Additional OREO losses for subsequent valuation adjustments are

determined on a specific property basis and are included as a component of other noninterest expense along with holding

costs. Any gains or losses on disposal of OREO are also reflected in noninterest expense. Significant judgments and

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

can be considered current is significantly shortened during periods of market volatility. As a result, the net proceeds

realized from sales transactions could differ significantly from appraisals, comparable sales, and other estimates used to

determine the fair value of OREO.

Deferred Tax Asset Valuation

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. The ultimate realization of deferred tax assets

is dependent upon the generation of future taxable income during the periods in which those temporary differences become

deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax

planning strategies in making this assessment. Based upon the level of taxable income over the last three years and

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, 2021. The amount

of the deferred tax assets considered realizable, however, could be reduced if estimates of future taxable income are

reduced.

Average Balance Sheet and Interest Rates

Year ended December 31

2021

2020

Average

Yield/

Average

Yield/

(Dollars in thousands)

Balance

Rate

Balance

Rate

Loans and loans held for sale

459,712

4.45%

465,378

4.74%

Securities - taxable

320,766

1.28%

234,420

1.68%

Securities - tax-exempt (a)

62,736

3.57%

63,029

3.72%

Total securities

383,502

1.66%

297,449

2.11%

Federal funds sold

38,659

0.15%

30,977

0.41%

Interest bearing bank deposits

77,220

0.13%

56,104

0.41%

Total interest-earning assets

959,093

2.81%

849,908

3.38%

Deposits:

NOW

178,197

0.12%

154,431

0.34%

Savings and money market

296,708

0.22%

242,485

0.44%

Certificates of deposits

159,111

1.03%

165,120

1.36%

Total interest-bearing deposits

634,016

0.39%

562,036

0.68%

Short-term borrowings

3,349

0.51%

1,864

0.48%

Total interest-bearing liabilities

637,365

0.39%

563,900

0.68%

Net interest income and margin (a)

24,460

2.55%

24,830

2.92%

(a) Tax-equivalent. See "Table 1 - Explanation of Non-GAAP Financial Measures".

RESULTS OF OPERATIONS

Net Interest Income and Margin

Net interest income (tax-equivalent) was $24.5 million in 2021, compared to $24.8 million in 2020. This decrease was due

to a decline in the Company’s net interest margin (tax-equivalent), partially offset by balance sheet growth.

The tax-equivalent yield on total interest-earning assets decreased by 57 basis points in 2021 from 2020 to 2.81%. This

decrease was primarily due to the lower rate environment and changes in our asset mix from the significant increase in

deposits from government stimulus and relief programs and customers’ increased savings.

The cost of total interest-bearing liabilities decreased 29 basis points to 0.39% in 2021 compared to 0.68 in 2020. The net

decrease in our funding costs was primarily due to lower prevailing market interest rates. Our funding costs declined less

than the rates earned on our interest earning assets.

The Company continues to deploy various asset liability management strategies to manage its risk to interest rate

fluctuations. The Company’s net interest margin could experience pressure due to reduced earning asset yields and

increased competition for quality loan opportunities.

Provision for Loan Losses

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

management believes, based on its processes and estimates, should be adequate to provide for the probable losses on

outstanding loans. The Company recorded a negative provision for loan losses of $0.6 million during 2021, compared to

$1.1 million in provision for loan losses during 2020. The negative provision for loan losses was primarily related to

improvements in economic conditions in our primary market area. The provision for loan losses is based upon various

factors, including the absolute level of loans, loan growth, the credit quality, and the amount of net charge-offs or

recoveries.

Based upon its assessment of the loan portfolio, management adjusts the allowance for loan losses to an amount it believes

should be appropriate to adequately cover its estimate of probable losses in the loan portfolio. The Company’s allowance

for loan losses as a percentage of total loans was 1.08% at December 31, 2021, compared to 1.22% at December 31, 2020.

Excluding PPP loans, which are guaranteed by the SBA, the Company’s allowance for loan losses was 1.10% and 1.27% of

total loans at December 31, 2021 and 2020, respectively. While the policies and procedures used to estimate the allowance

for loan losses, as well as the resulting provision for loan losses charged to operations, are considered adequate by

management and are reviewed from time to time by our regulators, they are based on estimates and judgments and are

therefore approximate and imprecise. Factors beyond our control (such as conditions in the local and national economy,

local real estate markets, or industries) may have a material adverse effect on our asset quality and the adequacy of our

allowance for loan losses resulting in significant increases in the provision for loan losses.

Noninterest Income

Year ended December 31

(Dollars in thousands)

2021

2020

Service charges on deposit accounts

566

585

Mortgage lending

1,547

2,319

Bank-owned life insurance

403

724

Securities gains, net

15

103

Other

1,757

1,644

Total noninterest income

4,288

5,375

The decrease in service charges on deposit accounts was primarily driven by a decline in consumer spending activity as a

result of the COVID-19 pandemic.

The Company’s income from mortgage lending is primarily attributable to the (1) origination and sale of new mortgage

loans and (2) servicing of mortgage loans. Origination income, net, is comprised of gains or losses from the sale of the

mortgage loans originated, origination fees, underwriting fees and other fees associated with the origination of loans, which

are netted against the commission expense associated with these originations. The Company’s normal practice is to

originate mortgage loans for sale in the secondary market and to either sell or retain the MSRs when the loan is sold.

MSRs are recognized based on the fair value of the servicing right on the date the corresponding mortgage loan is sold.

Subsequent to the date of transfer, the Company has elected to measure its MSRs under the amortization method. Servicing

fee income is reported net of any related amortization expense.

The Company evaluates MSRs for impairment on a quarterly basis. Impairment is determined by grouping MSRs by

common predominant characteristics, such as interest rate and loan type. If the aggregate carrying amount of a particular

group of MSRs exceeds the group’s aggregate fair value, a valuation allowance for that group is established. The valuation

allowance is adjusted as the fair value changes. 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.

The following table presents a breakdown of the Company’s mortgage lending income for 2021 and 2020.

Year ended December 31

(Dollars in thousands)

2021

2020

Origination income

1,417

2,300

Servicing fees, net

130

19

Total mortgage lending income

1,547

2,319

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 in 2021 compared to 2020 due

to a decrease in refinance activity in our primary market. The decrease in origination income was partially offset by an

increase in servicing fees, net of related amortization expense as prepayment speeds slowed during 2021, resulting in

decreased amortization expense.

Income from bank-owned life insurance decreased primarily due to $0.3 million in non-taxable death benefits received in

2020. The assets that support these policies are administered by the life insurance carriers and the income we receive (i.e.,

increases or decreases in the cash surrender value of the policies and death benefits received) on these policies is dependent

upon the returns the insurance carriers are able to earn on the underlying investments that support these policies. Earnings

on these policies are generally not taxable.

Noninterest Expense

Year ended December 31

(Dollars in thousands)

2021

2020

Salaries and benefits

11,710

11,316

Net occupancy and equipment

1,743

2,511

Professional fees

995

1,052

FDIC and other regulatory assessments

426

256

Other

4,559

4,419

Total noninterest expense

19,433

19,554

The increase in salaries and benefits expense was primarily due to a decrease in deferred costs related to the PPP loan

program, routine annual wage and benefit increases, and management increasing the minimum hourly wage for banking

positions to $15.

The decrease in net occupancy and equipment was primarily due to a reduction of various expenses related to the

redevelopment of the Company’s headquarters in downtown Auburn. This amount includes revised depreciation estimates

and other temporary relocation costs. For more information regarding changes in accounting estimates, please refer to Note

1, Summary of Significant Accounting Policies, of the consolidated financial statements that accompany this report.

The increase in FDIC and other regulatory assessments was primarily due to the expiration of FDIC assessment credits

during 2020 and an increased assessment base during 2021.

Income Tax Expense

Income tax expense was $1.4 million in 2021 and $1.6 million in 2020. The Company’s effective income tax rate was

14.89% in 2021, compared to 17.72% in 2020. This change was primarily due to an income tax benefit related to a New

Markets Tax Credit investment funded in the fourth quarter of 2021. The Company’s effective income tax rate is

principally impacted by tax-exempt earnings from the Company’s investments in municipal securities, bank-owned life

insurance, and New Markets Tax Credits.

BALANCE SHEET ANALYSIS

Securities

Securities available-for-sale were $421.9 million at December 31, 2021, compared to $335.2 million at December 31, 2020.

This increase reflects an increase in the amortized cost basis of securities available-for-sale of $95.7 million, and a decrease

of $9.0 million in the fair value of securities available-for-sale. The increase in the amortized cost basis of securities

available-for-sale was primarily attributable to management allocating more funding to the investment portfolio following

the significant increases in customer deposits. The decrease in the fair value of securities was primarily due to an increase

in long-term interest rates. The average annualized tax-equivalent yields earned on total securities were 1.66% in 2021 and

2.11% in 2020.

The following table shows the carrying value and weighted average yield of securities available -for-sale as of December

31, 2021 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.

December 31, 2021

1 year

1 to 5

5 to 10

After 10

Total

(Dollars in thousands)

or less

years

years

years

Fair Value

Agency obligations

5,007

49,604

69,802

124,413

Agency MBS

680

35,855

186,836

223,371

State and political subdivisions

170

647

15,743

57,547

74,107

Total available-for-sale

5,177

50,931

121,400

244,383

421,891

Weighted average yield (1):

Agency obligations

2.00%

1.36%

1.31%

1.36%

Agency MBS

3.42%

1.48%

1.34%

1.37%

State and political subdivisions

4.25%

2.85%

2.18%

2.77%

2.64%

Total available-for-sale

2.07%

1.40%

1.47%

1.68%

1.59%

(1) Yields are calculated based on amortized cost.

Loans

December 31

(In thousands)

2021

2020

Commercial and industrial

83,977

82,585

Construction and land development

32,432

33,514

Commercial real estate

258,371

255,136

Residential real estate

77,661

84,154

Consumer installment

6,682

7,099

Total loans

459,123

462,488

Less: unearned income

(759)

(788)

Loans, net of unearned income

458,364

461,700

Total loans, net of unearned income, were $458.4 million at December 31, 2021, and $461.7 million at December 31, 2020.

Excluding PPP loans, total loans, net of unearned income, were $450.5 million, an increase of $7.5 million, or 2% from

December 31, 2020. This increase was primarily due to an increase in commercial and industrial loans , net of PPP, of

$12.2 million, partially offset by a decrease in residential real estate loans of $6.5 million, as lower rates increased refinance

activity and payoffs for consumer mortgage loans. Four loan categories represented the majority of the loan portfolio at

December 31, 2021: commercial real estate (56%), residential real estate (17%), commercial and industrial (18%) and

construction and land development (7%). Approximately 25% of the Company’s commercial real estate loans were

classified as owner-occupied at December 31, 2021.

Within the residential real estate portfolio segment, the Company had junior lien mortgages of approximately $7.2 million,

or 2%, and $8.7 million, or 2%, of total loans, net of unearned income at December 31, 2021 and 2020, respectively. For

residential real estate mortgage loans with a consumer purpose, the Company had no loans that required interest only

payments at December 31, 2021 and 2020. The Company’s residential real estate mortgage portfolio does not include any

option ARM loans, subprime loans, or any material amount of other high-risk consumer mortgage products.

The average yield earned on loans and loans held for sale was 4.45% in 2021 and 4.74% in 2020.

The specific economic and credit risks associated with our loan portfolio include, but are not limited to, the effects of

current economic conditions, including the COVID-19 pandemic’s effects, on our borrowers’ cash flows, real estate market

sales volumes, valuations, availability and cost of financing properties, real estate industry concentrations, competitive

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

values or non-existent collateral, title defects, inaccurate appraisals, financial deterioration of borrowers, fraud, and any

violation of applicable laws and regulations.

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 position. Also, we have

established and periodically review, lending policies and procedures. Banking regulations limit a bank’s credit exposure by

prohibiting unsecured loan relationships that exceed 10% of its capital; or 20% of capital, if loans in excess of 10% of

capital are fully secured. Under these regulations, we are prohibited from having secured loan relationships in excess of

approximately $21.0 million. Furthermore, we have an internal limit for aggregate credit exposure (loans outstanding plus

unfunded commitments) to a single borrower of $18.9 million. Our loan policy requires that the Loan Committee of the

Board of Directors approve any loan relationships that exceed this internal limit. At December 31, 2021, the Bank had no

relationships exceeding these limits.

We periodically analyze our commercial loan portfolio to determine if a concentration of credit risk exists in any one or

more industries. We 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-

based capital at December 31, 2021 (and related balances at December 31, 2020).

December 31

(In thousands)

2021

2020

Lessors of 1-4 family residential properties

47,880

49,127

Hotel/motel

43,856

42,900

Multi-family residential properties

42,587

40,203

Shopping centers

29,574

30,000

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

encouraging banks to work constructively with borrowers affected by the virus in our community. This guidance, including

the Interagency Statement on COVID-19 Loan Modifications and the Interagency Examiner Guidance for Assessing Safety

and Soundness Considering the Effect of the COVID-19 Pandemic on Institutions, provides that the agencies will not

criticize financial institutions that mitigate credit risk through prudent actions consistent with safe and sound practices.

Specifically, examiners will not criticize institutions for working with borrowers as part of a risk mitigation strategy

intended to improve existing loans, even if the restructured loans have or develop weaknesses that ultimately result in

adverse credit classification. Upon demonstrating the need for payment relief, the bank will work with qualified borrowers

that were otherwise current before the pandemic to determine the most appropriate deferral option. For residential

mortgage and consumer loans the borrower may elect to defer payments for up to three months. Interest continues to

accrue and the amount due at maturity increases. Commercial real estate, commercial, and small business borrowers may

elect to defer payments for up to three months or pay scheduled interest payments for a six-month period. The bank

recognizes that a combination of the payment relief options may be prudent dependent on a borrower’s business type. As

of December 31, 2021, we had one COVID-19 loan deferral totaling $0.1 million, compared to $32.3 million, or 7% of total

loans at December 31, 2020.

The tables below provide information concerning the composition of these COVID-19 modifications as of December 31,

2021 and 2020.

COVID-19 Modifications

Modification Types

(Dollars in thousands)

# of Loans

Modified

Balance

% of Portfolio

Modified

Interest Only

Payment

P&I Payments

Deferred

December 31, 2021:

Residential real estate

1

59

100

Total

1

59

100

December 31, 2020:

Commercial and industrial

2

741

100

Commercial real estate

12

31,399

7

100

Residential real estate

2

133

100

Total

16

32,273

7

99

1

COVID-19 Modifications within Commercial Real Estate Segment

(Dollars in thousands)

# of Loans

Modified

Balance of

Loans Modified

% of Total

Loan Class

December 31, 2020:

Hotel/motel

10

26,427

49

Multifamily

1

3,530

9

Restaurants

1

1,442

10

There were no COVID-19 modifications within the commercial real estate segment at December 31, 2021.

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

pursuant to GAAP. In addition, the Interagency Statement on COVID-19 Loan Modifications provides circumstances in

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

Section 4013.

Allowance for Loan Losses

The Company maintains the allowance for loan losses at a level that management believes appropriate to adequately cover

the Company’s estimate of probable losses inherent in the loan portfolio. The allowance for loan losses was $4.9 million at

December 31, 2021 compared to $5.6 million at December 31, 2020, which management believed to be adequate at each of

the respective dates. The judgments and estimates associated with the determination of the allowance for loan losses are

described under “Critical Accounting Policies.”

A summary of the changes in the allowance for loan losses and certain asset quality ratios for the years ended December 31,

2021 and 2020 are presented below.

Year ended December 31

(Dollars in thousands)

2021

2020

Allowance for loan losses:

Balance at beginning of period

5,618

4,386

Charge-offs:

Commercial and industrial

(7)

Commercial real estate

(254)

Residential real estate

(3)

Consumer installment

(37)

(38)

Total charge -offs

(294)

(45)

Recoveries:

Commercial and industrial

140

94

Residential real estate

55

63

Consumer installment

20

20

Total recoveries

215

177

Net (charge-offs) recoveries

(79)

132

Provision for loan losses

(600)

1,100

Ending balance

4,939

5,618

as a % of loans

1.08

1.22

as a % of nonperforming loans

1,112

1,052

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

0.02

(0.03)

As described under “Critical Accounting Policies”, management assesses the adequacy of the allowance prior to the end of

each calendar quarter. The level of the allowance is based upon management’s evaluation of the loan portfolios, past loan

loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay

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

portfolio, economic conditions, industry and peer bank loan loss rates, and other pertinent factors. This evaluation is

inherently subjective as it requires various material estimates and judgments including the amounts and timing of future

cash flows expected to be received on impaired loans that may be susceptible to significant change. The ratio of our

allowance for loan losses to total loans outstanding was 1.08% at December 31, 2021, compared to 1.22% at December 31,

2020. Excluding PPP loans, which are guaranteed by the SBA, the Company’s allowance for loan losses was 1.10% and

1.27% of total loans at December 31, 2021 and 2020, respectively. In the future, the allowance to total loans outstanding

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

duration and magnitude of COVID-19 effects, in their entirety either improve or weaken. In addition our regulators, as an

integral part of their examination process, will periodically review the Company’s allowance for loan losses, and may

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

information available to them at the time of their examinations.

Nonperforming Assets

At December 31, 2021 the Company had $0.8 million in nonperforming assets compared to $0.5 million at December 31,

The table below provides information concerning total nonperforming assets and certain asset quality ratios.

December 31

(Dollars in thousands)

2021

2020

Nonperforming assets:

Nonperforming (nonaccrual) loans

444

534

Other real estate owned

374

Total nonperforming assets

818

534

as a % of loans and other real estate owned

0.18

0.12

as a % of total assets

0.07

0.06

Nonperforming loans as a % of total loans

0.10

0.12

Accruing loans 90 days or more past due

141

The table below provides information concerning the composition of nonaccrual loans at December 31, 2021 and 2020,

respectively.

December 31

(In thousands)

2021

2020

Nonaccrual loans:

Commercial real estate

187

212

Residential real estate

257

322

Total nonaccrual loans / nonperforming loans

444

534

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. At December 31, 2021 and

2020, respectively, the Company had $0.4 million and $0.5 million in loans on nonaccrual.

At December 31, 2021 there were no loans 90 days past due and still accruing interest, compared to $0.1 million at

December 31, 2020.

The table below provides information concerning the composition of OREO at December 31, 2021 and 2020, respectively.

December 31

(In thousands)

2021

2020

Other real estate owned:

Commercial real estate

374

Total other real estate owned

374

Potential Problem Loans

Potential problem loans represent those loans with a well-defined weakness and where information about possible credit

problems of borrowers has caused management to have serious doubts about the borrower’s ability to comply with present

repayment terms. This definition is believed to be substantially consistent with the standards established by the Federal

Reserve, the Company’s primary regulator, for loans classified as substandard, excluding nonaccrual loans. Potential

problem loans, which are not included in nonperforming assets, amounted to $2.4 million, or 0.5% of total loans at

December 31, 2021, compared to $2.9 million, or 1.0% of total loans at December 31, 2020.

The table below provides information concerning the composition of potential problem loans at December 31, 2021 and

2020, respectively.

December 31

(In thousands)

2021

2020

Potential problem loans:

Commercial and industrial

226

218

Construction and land development

218

254

Commercial real estate

156

188

Residential real estate

1,748

2,229

Consumer installment

12

23

Total potential problem loans

2,360

2,912

At December 31, 2021, approximately $0.3 million or 14.2% of total potential problem loans were past due at least 30 but

less than 90 days.

The following table is a summary of the Company’s performing loans that were past due at least 30 days but less than

90 days as of December 31, 2021 and 2020, respectively.

December 31

(In thousands)

2021

2020

Performing loans past due 30 to 89 days:

Commercial and industrial

3

230

Construction and land development

204

61

Commercial real estate

29

Residential real estate

516

1,509

Consumer installment

25

29

Total performing loans past due 30 to 89 days

748

1,858

Deposits

December 31

(In thousands)

2021

2020

Noninterest bearing demand

316,132

245,398

NOW

183,021

155,870

Money market

244,195

199,937

Savings

91,245

78,187

Certificates of deposit under $250,000

101,660

105,357

Certificates of deposit and other time deposits of $250,000 or more

57,990

55,044

Total deposits

994,243

839,793

Total deposits increased $154.5 million, or 18%, to $994.2 million at December 31, 2021, compared to $839.8 million at

December 31, 2020. Noninterest-bearing deposits were $316.1 million, or 32% of total deposits, at December 31, 2021,

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

customers who received PPP loans, the impact of government stimulus checks, and reduced customer spending during the

COVID-19 pandemic.

Estimated uninsured deposits totaled $420.8 million and $315.2 million at December 31, 2021 and 2020, respectively.

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

The average rates paid on total interest-bearing deposits were 0.39% in 2021 and 0.68% in 2020.

Other Borrowings

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

of federal funds purchased and securities sold under agreements to repurchase with an original maturity of one year or less.

The Bank had available federal fund lines totaling $41.0 million with none outstanding at December 31, 2021 and 2020,

respectively. Securities sold under agreements to repurchase totaled $3.4 million and $2.4 million at December 31, 2021

and 2020, respectively.

The average rates paid on short-term borrowings were 0.51% and 0.48% in 2021 and 2020, respectively.

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

CAPITAL ADEQUACY

The Company's consolidated stockholders' equity was $103.7 million and $107.7 million as of December 31, 2021 and

2020, respectively. The decrease from December 31, 2020 was primarily driven by an other comprehensive loss due to the

change in unrealized gains on securities available-for-sale, net of tax, of $6.7 million, cash dividends paid of $3.7 million

and stock repurchases of $1.6 million, representing 45,946 shares, which was partially offset by net earnings of $8.0

million.

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

related Dodd-Frank Wall Street Reform and Consumer Protection Act changes. The rules included the implementation of a

capital conservation buffer that is added to the minimum requirements for capital adequacy purposes. The capital

conservation buffer was subject to a three year phase-in period that began on January 1, 2016 and was fully phased-in on

January 1, 2019 at 2.5%. A banking organization with a conservation buffer of less than the required amount will be subject

to limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive

officers. At December 31, 2021, the Bank’s ratio was sufficient to meet the fully phased-in conservation buffer.

Effective March 20, 2020, the Federal Reserve and the other federal banking regulators adopted an interim final rule that

amended the capital conservation buffer. The interim final rule was adopted as a final rule on August 26, 2020. The new

rule revises the definition of “eligible retained income” for purposes of the maximum payout ratio to allow banking

organizations to more freely use their capital buffers to promote lending and other financial intermediation activities, by

making the limitations on capital distributions more gradual. The eligible retained income is now the greater of (i) net

income for the four preceding quarters, net of distributions and associated tax effects not reflected in net income; and (ii)

the average of all net income over the preceding four quarters. The interim final rule only affects the capital buffers, and

banking organizations were encouraged to make prudent capital distribution decisions.

The Federal Reserve has treated us as a “small bank holding company’ under the Federal Reserve’s policy. Accordingly,

our capital adequacy is evaluated at the Bank level, and not for the Company and its consolidated subsidiaries. The Bank’s

tier 1 leverage ratio was 9.35%, CET1 risk-based capital ratio was 16.23%, tier 1 risk-based capital ratio was 16.23%, and

total risk-based capital ratio was 17.06% at December 31, 2021. These ratios exceed the minimum regulatory capital

percentages of 5.0% for tier 1 leverage ratio, 6.5% for CET1 risk-based capital ratio, 8.0% for tier 1 risk-based capital ratio,

and 10.0% for total risk-based capital ratio to be considered “well capitalized.” The Bank’s capital conservation buffer was

9.06% at December 31, 2021.

MARKET AND LIQUIDITY RISK MANAGEMENT

Management’s objective is to manage assets and liabilities to provide a satisfactory, consistent level of profitability within

the framework of established liquidity, loan, investment, borrowing, and capital policies. The Bank’s Asset Liability

Management Committee (“ALCO”) is charged with the responsibility of monitoring these policies, which are designed to

ensure an acceptable asset/liability composition. Two critical areas of focus for ALCO are interest rate risk and liquidity

risk management.

Interest Rate Risk Management

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

assets and liabilities may mature or reprice at different times. 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. 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

amounts. For example, a flattening yield curve may reduce the interest spread between new loan yields and funding costs.

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-backed securities in the securities portfolio may

prepay earlier than anticipated, which could reduce earnings. Interest rates may also have a direct or indirect effect on loan

demand, loan losses, mortgage origination volume, the fair value of MSRs and other items affecting earnings.

ALCO measures and evaluates the interest rate risk so that we can meet customer demands for various types of loans and

deposits. ALCO determines the most appropriate amounts of on-balance sheet and off-balance sheet items. Measurements

used to help manage interest rate sensitivity include an earnings simulation and an economic value of equity model.

Earnings simulation

. Management believes that interest rate risk is best estimated by our earnings simulation modeling.

On at least a quarterly basis, the following 12 month time period is simulated to determine a baseline net interest income

forecast and the sensitivity of this forecast to changes in interest rates. The baseline forecast assumes an unchanged or flat

interest rate environment. Forecasted levels of earning assets, interest-bearing liabilities, and off-balance sheet financial

instruments are combined with ALCO forecasts of market interest rates for the next 12 months and other factors in order to

produce various earnings simulations and estimates.

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. For changes up or down in rates from management’s flat interest rate

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

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

+/- 15% for a gradual change of 300 basis points

+/- 10% for a gradual change of 200 basis points

+/- 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

interest rates up or down when compared to the baseline net interest income forecast at December 31, 2021.

Changes in Interest Rates

Net Interest Income % Variance

400 basis points

7.92

300 basis points

5.61

200 basis points

3.59

100 basis points

1.54

(100) basis points

(0.44)

(200) basis points

NM

(300) basis points

NM

(400) basis points

NM

NM=not meaningful

At December 31, 2021, our earnings simulation model indicated that we were in compliance with the policy guidelines

noted above.

Economic Value of Equity

Economic value of equity (“EVE”) measures the extent that estimated econom ic values of our assets, liabilities and off-

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, which establishes a base case EVE. In contrast with our

earnings simulation model which evaluates interest rate risk over a 12 month timeframe, EVE uses a terminal horizon

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

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,

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

45% for an instantaneous change of +/- 400 basis points

35% for an instantaneous change of +/- 300 basis points

25% for an instantaneous change of +/- 200 basis points

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

compared to the baseline EVE at December 31, 2021.

Changes in Interest Rates

EVE % Variance

400 basis points

(20.53)

300 basis points

(14.14)

200 basis points

(8.35)

100 basis points

(3.23)

(100) basis points

0.91

(200) basis points

NM

(300) basis points

NM

(400) basis points

NM

NM=not meaningful

At December 31, 2021, our EVE model indicated that we were in compliance with the policy guidelines noted above.

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

changes in interest rates. Income associated with interest-earning assets and costs associated with interest-bearing liabilities

may not be affected uniformly by changes in interest rates. 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

similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates, and other

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

changes in general market rates. In addition, certain assets, such as adjustable rate mortgage loans, have features (generally

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

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

borrowers to service their debts also may decrease during periods of rising interest rates or economic stress, which may

differ across industries and economic sectors. ALCO reviews each of the above interest rate sensitivity analyses along with

several different interest rate scenarios in seeking satisfactory, consistent levels of profitability within the framework of the

Company’s established liquidity, 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

deposit needs of our customers. 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

instruments. At December 31, 2021 and 2020, the Company had no derivative contracts to assist in managing interest rate

sensitivity.

Liquidity Risk Management

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. Without proper management of its liquidity, the

Company could experience higher costs of obtaining funds due to insufficient liquidity, while excessive liquidity can lead

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

Liquidity is managed at two levels. The first is the liquidity of the Company. The second is the liquidity of the Bank. The

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. The

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

dividends. 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. If needed, the

Company could also issue common stock or other securities. Primary uses of funds by the Company include dividends paid

to stockholders and stock repurchases.

Primary sources of funding for the Bank include customer deposits, other borrowings, repayment and maturity of securities,

and sale and repayment of loans. The Bank has access to federal funds lines from various banks and borrowings from the

Federal Reserve discount window. In addition to these sources, the Bank has participated in the FHLB's advance program

to obtain funding for its growth. Advances include both fixed and variable terms and are taken out with varying maturities.

As of December 31, 2021, the Bank had a remaining available line of credit with the FHLB totaling $319.6 million. As of

December 31, 2021, the Bank also had $41.0 million of federal funds lines, with none outstanding. Primary uses of funds

include repayment of maturing obligations and growing the loan portfolio.

The following table presents additional information about our contractual obligations as of December 31, 2021, which by

their terms had contractual maturity and termination dates subsequent to December 31, 2021:

Payments due by period

1 year

1 to 3

3 to 5

More than

(Dollars in thousands)

Total

or less

years

years

5 years

Contractual obligations:

Deposit maturities (1)

994,243

948,364

37,905

7,785

189

Operating lease obligations

610

120

239

141

110

Total

994,853

948,484

38,144

7,926

299

(1) Deposits with no stated maturity (demand, NOW, money market, and savings deposits) are presented in the "1 year or less" column

Management believes that the Company and the Bank have adequate sources of liquidity to meet all known contractual

obligations and unfunded commitments, including loan commitments and reasonable borrower, depositor, and creditor

requirements over the next 12 months.

Off-Balance Sheet Arrangements

At December 31, 2021, the Bank had outstanding standby letters of credit of $1. 4 million and unfunded loan commitments

outstanding of $71.0 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 future cash requirements. If needed to

fund these outstanding commitments, the Bank has the ability to liquidate federal funds sold or securities available-for-sale,

or on a short-term basis to borrow and purchase federal funds from other financial institutions.

Residential mortgage lending and servicing activities

We primarily sell conforming residential mortgage loans in the secondary market to Fannie Mae while retaining the

servicing of these loans. The sale agreements for these residential mortgage loans with Fannie Mae and other investors

include various representations and warranties regarding the origination and characteristics of the residential mortgage

loans. Although the representations and warranties vary among investors, they typically cover ownership of the loan,

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

compliance with loan criteria set forth in the applicable agreement, compliance with applicable federal, state, and local

laws, among other matters.

As of December 31, 2021, the unpaid principal balance of residential mortgage loans, which we have originated and sold,

but retained the servicing rights was $252.7 million. Although these loans are generally sold on a non-recourse basis,

except for breaches of customary seller representations and warranties, we may have to repurchase residential mortgage

loans in cases where we breach such representations or warranties or the other terms of the sale, such as where we fail to

deliver required documents or the documents we deliver are defective. Investors also may require the repurchase of a

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

loan basis to validate the claims made by the investor and to determine if a contractually required repurchase event has

occurred. We 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 good communications with our residential

mortgage investors.

The Company was not required to repurchase any loans during 2021 and 2020 as a result of representation and warranty

provisions contained in the Company’s sale agreements with Fannie Mae, and had no pending repurchase or make-whole

requests at December 31, 2021.

We service all residential mortgage loans originated and sold by us to Fannie Mae. As servicer, our primary duties are to:

(1) collect payments due from borrowers; (2) advance certain delinquent payments of principal and interest; (3) maintain

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; and (5) foreclose on

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.

The agreement under which we act as servicer generally specifies a standard 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

respective servicing agreements. However, 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. 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

the contract provisions established between Fannie Mae and the Bank. Remedies could include repurchase of an affected

loan.

Although to date repurchase requests related to representation and warranty provisions, and servicing activities have been

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. As of December 31, 2021, 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. We maintain

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.

Section 4021 of the CARES Act allows borrowers under 1-to-4 family residential mortgage loans sold to Fannie Mae to

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

COVID-19 emergency. Except for vacant or abandoned properties, Fannie Mae servicers may not initiate foreclosures on

similar procedures or related evictions or sales until December 31, 2020. The forbearance period was extended, generally,

to March 31, 2021. The Bank sells mortgage loans to Fannie Mae and services these on an actual/actual basis. As a result,

the Bank is not obligated to make any advances to Fannie Mae on principal and interest on such mortgage loans where the

borrower is entitled to forbearance.

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

over time due to inflation. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution

are monetary in nature. As a result, interest rates have a more significant impact on a financial institution’s performance

than the effects of general levels of inflation.

CURRENT ACCOUNTING DEVELOPMENTS

The following ASU has been issued by the FASB but is not yet effective.

ASU 2016-13,

Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial

Instruments;

Information about this pronouncement is described in more detail below.

ASU 2016-13,

Financial Instruments - Credit Losses (Topic 326): - Measurement of Credit Losses on Financial

Instruments

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

securities. For assets held at amortized cost basis, the new standard eliminates the probable initial recognition threshold in

current GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses using a broader

range of information regarding past events, current conditions and forecasts assessing the collectability of cash flows. The

allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to

present the net amount expected to be collected. For available for sale debt securities, credit losses should be measured in a

manner similar to current GAAP, however the new standard will require that credit losses be presented as an allowance

rather than as a write-down. The new guidance affects entities holding financial assets and net investment in leases that are

not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net

investments in leases, off-balance sheet credit exposures, reinsurance receivables, and any other financial assets not

excluded from the scope that have the contractual right to receive cash. For public business entities, the new guidance was

originally effective for annual and interim periods in fiscal years beginning after December 15, 2019. The Company has

developed an implementation team that is following a general timeline. The team has been working with an advisory

consultant, with whom a third-party software license has been purchased. The Company’s preliminary evaluation indicates

the provisions of ASU No. 2016-13 are expected to impact the Company’s consolidated financial statements, in particular

the level of the reserve for credit losses. The Company is continuing to evaluate the extent of the potential impact and

expects that portfolio composition and economic conditions at the time of adoption will be a factor. On October 16, 2019,

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

implementation date for ASU 2016-13. The Company will now be required to implement the new standard in January 2023,

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

Table 1 – Explanation of Non-GAAP Financial Measures

In addition to results presented in accordance with GAAP, this annual report on Form 10-K includes certain designated net

interest income amounts presented on a tax-equivalent basis, a non-GAAP financial measure, including the presentation of

total revenue and the calculation of the efficiency ratio.

The Company believes the presentation of net interest income on a tax-equivalent basis provides comparability of net

interest income from both taxable and tax-exempt sources and facilitates comparability within the industry. Although the

Company believes these non-GAAP financial measures enhance investors’ understanding of its business and performance,

these non-GAAP financial measures should not be considered an alternative to GAAP. The reconciliation of these non-

GAAP financial measures from GAAP to non-GAAP is presented below.

Year ended December 31

(In thousands)

2021

2020

2019

2018

2017

Net interest income (GAAP)

23,990

24,338

26,064

25,570

24,526

Tax-equivalent adjustment

470

492

557

613

1,205

Net interest income (Tax-equivalent)

24,460

24,830

26,621

26,183

25,731

Table 2 - Selected Financial Data

Year ended December 31

(Dollars in thousands, except per share amounts)

2021

2020

2019

2018

2017

Income statement

Tax-equivalent interest income (a)

26,977

28,686

30,804

29,859

29,325

Total interest expense

2,517

3,856

4,183

3,676

3,594

Tax equivalent net interest income (a)

24,460

24,830

26,621

26,183

25,731

Provision for loan losses

(600)

1,100

(250)

(300)

Total noninterest income

4,288

5,375

5,494

3,325

3,441

Total noninterest expense

19,433

19,554

19,697

17,874

16,784

Net earnings before income taxes and

tax-equivalent adjustment

9,915

9,551

12,668

11,634

12,688

Tax-equivalent adjustment

470

492

557

613

1,205

Income tax expense

1,406

1,605

2,370

2,187

3,637

Net earnings

8,039

7,454

9,741

8,834

7,846

Per share data:

Basic and diluted net earnings

2.27

2.09

2.72

2.42

2.15

Cash dividends declared

1.04

1.02

1.00

0.96

0.92

Weighted average shares outstanding

Basic and diluted

3,545,310

3,566,207

3,581,476

3,643,780

3,643,616

Shares outstanding

3,520,485

3,566,276

3,566,146

3,643,868

3,643,668

Book value

29.46

30.20

27.57

24.44

23.85

Common stock price

High

48.00

63.40

53.90

53.50

40.25

Low

31.32

24.11

30.61

28.88

30.75

Period-end

32.30

42.29

53.00

31.66

38.90

To earnings ratio

14.23

x

20.23

19.49

13.08

18.09

To book value

110

140

192

130

163

Performance ratios:

Return on average equity

7.54

7.12

10.35

10.14

9.17

Return on average assets

0.78

0.83

1.18

1.08

0.94

Dividend payout ratio

45.81

48.80

36.76

39.67

42.79

Average equity to average assets

10.39

11.63

11.39

10.63

10.30

Asset Quality:

Allowance for loan losses as a % of:

Loans

1.08

1.22

0.95

1.00

1.05

Nonperforming loans

1,112

1,052

2,345

2,691

160

Nonperforming assets as a % of:

Loans and other real estate owned

0.18

0.12

0.04

0.07

0.66

Total assets

0.07

0.06

0.02

0.04

0.35

Nonperforming loans as % of loans

0.10

0.12

0.04

0.04

0.66

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

0.02

(0.03)

0.03

(0.01)

(0.09)

Capital Adequacy (c):

CET 1 risk-based capital ratio

16.23

17.27

17.28

16.49

16.42

Tier 1 risk-based capital ratio

16.23

17.27

17.28

16.49

16.98

Total risk-based capital ratio

17.06

18.31

18.12

17.38

17.91

Tier 1 leverage ratio

9.35

10.32

11.23

11.33

10.95

Other financial data:

Net interest margin (a)

2.55

2.92

3.43

3.40

3.29

Effective income tax rate

14.89

17.72

19.57

19.84

31.67

Efficiency ratio (b)

67.60

64.74

61.33

60.57

57.53

Selected period end balances:

Securities

421,891

335,177

235,902

239,801

257,697

Loans, net of unearned income

458,364

461,700

460,901

476,908

453,651

Allowance for loan losses

4,939

5,618

4,386

4,790

4,757

Total assets

1,105,150

956,597

828,570

818,077

853,381

Total deposits

994,243

839,792

724,152

724,193

757,659

Long-term debt

3,217

Total stockholders’ equity

103,726

107,689

98,328

89,055

86,906

(a) Tax-equivalent. See "Table 1 - Explanation of Non-GAAP Financial Measures".

(b) Efficiency ratio is the result of noninterest expense divided by the sum of noninterest income and tax-equivalent net interest income.

(c) Regulatory capital ratios presented are for the Company's wholly-owned subsidiary, AuburnBank.

Table 3 - Average Balance and Net Interest Income Analysis

Year ended December 31

2021

2020

Interest

Interest

Average

Income/

Yield/

Average

Income/

Yield/

(Dollars in thousands)

Balance

Expense

Rate

Balance

Expense

Rate

Interest-earning assets:

Loans and loans held for sale (1)

459,712

20,473

4.45%

465,378

22,055

4.74%

Securities - taxable

320,766

4,107

1.28%

234,420

3,932

1.68%

Securities - tax-exempt (2)

62,736

2,242

3.57%

63,029

2,343

3.72%

Total securities

383,502

6,349

1.66%

297,449

6,275

2.11%

Federal funds sold

38,659

55

0.15%

30,977

125

0.41%

Interest bearing bank deposits

77,220

100

0.13%

56,104

231

0.41%

Total interest-earning assets

959,093

26,977

2.81%

849,908

28,686

3.38%

Cash and due from banks

14,591

13,727

Other assets

51,664

37,010

Total assets

1,025,348

900,645

Interest-bearing liabilities:

Deposits:

NOW

178,197

212

0.12%

154,431

523

0.34%

Savings and money market

296,708

655

0.22%

242,485

1,071

0.44%

Certificates of deposits

159,111

1,633

1.03%

165,120

2,253

1.36%

Total interest-bearing deposits

634,016

2,500

0.39%

562,036

3,847

0.68%

Short-term borrowings

3,349

17

0.51%

1,864

9

0.48%

Total interest-bearing liabilities

637,365

2,517

0.39%

563,900

3,856

0.68%

Noninterest-bearing deposits

278,013

227,127

Other liabilities

3,392

4,884

Stockholders' equity

106,578

104,734

Total liabilities and

and stockholders' equity

1,025,348

900,645

Net interest income and margin

24,460

2.55%

24,830

2.92%

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

in the computation of average balances.

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

of 21%.

Table 4 - Volume and Rate Variance Analysis

Years ended December 31, 2021 vs. 2020

Years ended December 31, 2020 vs. 2019

Net

Due to change in

Net

Due to change in

(Dollars in thousands)

Change

Rate (2)

Volume (2)

Change

Rate (2)

Volume (2)

Interest income:

Loans and loans held for sale

(1,582)

(1,333)

(249)

(875)

(455)

(420)

Securities - taxable

175

(933)

1,108

(68)

(1,010)

942

Securities - tax-exempt (1)

(101)

(91)

(10)

(313)

(180)

(133)

Total securities

74

(1,024)

1,098

(381)

(1,190)

809

Federal funds sold

(70)

(81)

11

(298)

(342)

44

Interest bearing bank deposits

(131)

(159)

28

(564)

(645)

81

Total interest income

(1,709)

(2,597)

888

(2,118)

(2,632)

514

Interest expense:

Deposits:

NOW

(311)

(340)

29

(187)

(255)

68

Savings and money market

(416)

(537)

121

102

(3)

105

Certificates of deposits

(620)

(560)

(60)

(244)

(166)

(78)

Total interest-bearing deposits

(1,347)

(1,437)

90

(329)

(424)

95

Short-term borrowings

8

8

2

2

Total interest expense

(1,339)

(1,437)

98

(327)

(424)

97

Net interest income

(370)

(1,160)

790

(1,791)

(2,208)

417

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

tax rate of 21%.

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

Table 5 - Net Charge-Offs (Recoveries) to Average Loans

2021

2020

Net

Net

Net

charge-off

Net

(recovery)

charge-offs

Average

(recovery)

(recoveries)

Average

charge-off

(Dollars in thousands)

(recoveries)

Loans (2)

ratio

charge-offs

Loans (2)

ratio

Commercial and industrial (1)

(140)

64,618

(0.22)

(87)

56,836

(0.15)

Construction and land development

33,945

32,721

Commercial real estate

254

253,113

0.10

256,444

Residential real estate

(52)

81,526

(0.06)

(63)

87,888

(0.07)

Consumer installment

17

6,975

0.24

18

8,096

0.22

Total

79

440,177

0.02

(132)

441,985

(0.03)

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

(2) Gross loan balances.

Table 6 - Loan Maturities

December 31, 2021

1 year

1 to 5

5 to 15

After 15

(Dollars in thousands)

or less

years

years

years

Total

Commercial and industrial

26,593

17,474

38,125

1,785

83,977

Construction and land development

26,346

5,191

849

46

32,432

Commercial real estate

31,406

85,149

137,411

4,405

258,371

Residential real estate

3,832

21,919

31,227

20,683

77,661

Consumer installment

2,215

4,111

356

6,682

Total loans

90,392

133,844

207,968

26,919

459,123

Table 7 - Sensitivities to Changes in Interest Rates on Loans Maturing in More Than One Year

December 31, 2021

Variable

Fixed

(Dollars in thousands)

Rate

Rate

Total

Commercial and industrial

268

57,116

57,384

Construction and land development

1,934

4,152

6,086

Commercial real estate

8,220

218,745

226,965

Residential real estate

24,058

49,771

73,829

Consumer installment

38

4,429

4,467

Total loans

34,518

334,213

368,731

Table 8 - Allocation of Allowance for Loan Losses

2021

2020

(Dollars in thousands)

Amount

Amount

Commercial and industrial

857

18.3%

807

17.9%

Construction and land development

518

7.1%

594

7.2%

Commercial real estate

2,739

56.2%

3169

55.2%

Residential real estate

739

16.9%

944

18.2%

Consumer installment

86

1.5%

104

1.5%

Total allowance for loan losses

4,939

5,618

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

Table 9 - Estimated Uninsured Time Deposits by Maturity

(Dollars in thousands)

December 31, 2021

Maturity of:

3 months or less

2,079

Over 3 months through 6 months

1,747

Over 6 months through 12 months

31,159

Over 12 months

6,505

Total estimated uninsured time deposits

41,490

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.

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”), the Company’s

management, under the supervision and with the participation of its principal executive and principal financial officer,

conducted an evaluation as of the end of the period covered by this report, of the effectiveness of the Company’s disclosure

controls and procedures as defined in Rule 13a-15(e) under the Exchange Act. Based on that evaluation, and the results of

the audit process described below, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s

disclosure controls and procedures were effective to ensure that information required to be disclosed in the Company’s

reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the

SEC’s rules and regulations, and that such information is accumulated and communicated to the Company’s management,

including the Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow timely decisions regarding

disclosure.

Management’s Report on Internal Control Over Financial Reporting

The Company’s management is responsible for establishing and maintaining adequate internal control over financial

reporting. The Company’s internal control system was designed to provide reasonable assurance to the Company’s

management and board of directors regarding the preparation and fair presentation of published financial statements. All

internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined

to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

Under the direction of the Company’s Chief Executive Officer and Chief Financial Officer, management has assessed the

effectiveness of the Company’s internal control over financial reporting as of December 31, 2021 in accordance with the

criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal

Control – Integrated Framework (2013). Based on this assessment, management has concluded that such internal control

over financial reporting was effective as of December 31, 2021.

This annual report does not include an attestation report of the Company’s independent registered public accounting firm

regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s

registered public accounting firm pursuant to the final rules of the Securities and Exchange Commission that permit the

Company to provide only a management’s report in this annual report.

Changes in Internal Control Over Financial Reporting

During the period covered by this report, there has not been any change in the Company’s internal controls over financial

reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal controls over

financial reporting.