Auburn National Bancorporation, Inc: Form 10-K for the period ended Dec 31, 2022

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 Bank of Atlanta (the “Federal

Reserve Bank”) 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 closely related to

banking permitted by the Federal Reserve.

The Company’s principal executive offices are located at 100 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 machine (“ATM”) 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 and can be used anywhere Visa is accepted, including ATMs. The Bank’s Visa Checkcards can be used

internationally through the Plus

network. The Bank offers online banking, bill payment and other electronic banking

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.”

The Bank does not offer any services related to any Bitcoin or other digital or crypto instruments or stablecoins or

businesses.

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, including CDs and

savings accounts. Certain of these competitors are not subject to the same regulatory restrictions as the Bank.

Selected Economic Data

The Auburn-Opelika Metropolitan Statistical Area is Lee County, Alabama, including Auburn, Opelika and part of Phenix

City, Alabama. The U.S. Census Bureau estimates Lee County’s population was 181,881 in 2022, and has increased

approximately 29.7% from 2010 to 2022. The largest employers in the area are Auburn University, East Alabama Medical

Center, Lee County School System, Wal -Mart Distribution Center, Baxter Healthcare, Thermo Fisher Scientific, Mando

America Corporation (automobile brakes and steering), 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.

Various suppliers to the automotive industry have facilities in Lee County. The unemployment rate in Lee County was

2.0% at year end 2022 according to the U.S. Bureau of Labor Statistics.

Between 2010 and 2022, the Auburn-Opelika MSA was the second fastest growing MSA in Alabama. The Auburn-

Opelika MSA population is estimated to grow 6.6% from 2023 to 2028. During the same time, household income is

estimated to increase 14.25%, to $69,213.

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 sales 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 remaining economic effects of the COVID-19 pandemic, including continuing supply

chain disruptions and a tight labor market, 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 our markets, 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. We also may make

loans to other borrowers outside these areas, especially where we have a relationship with the borrower, or its business or

owners.

Human Capital

At December 31, 2022, the Company and its subsidiaries had 150 full-time equivalent employees, including 37 officers.

Our average term of service is approximately 10 years. We successfully implemented plans to protect our employees’

health consistent with CDC and State of Alabama guidelines during the COVID-19 pandemic, while maintaining critical

banking services to our communities. In addition, we developed our remote and electronic banking services, and

established remote work access to help employees stay at home where job duties permitted. This promoted employee

retention, and these efforts will provide us proven experience and flexibility to meet other disruptive events and conditions,

and still provide our customers and communities continuity of service.

We experienced little turnover as a result of the COVID-19 pandemic and made no staff reductions. As a result, we

received a federal employee retention tax credit of approximately $1.6 million in 2022.

We have a talented group of employees, many of which, have a college or associate degree. We believe the Auburn-

Opelika MSA is a desirable place to live and work with excellent schools and quality of life. Our MSA was the second

fastest growing MSA in Alabama from 2010 to 2022. Auburn University is a major employer that attracts talented students

and employee families. Various of our employees have a family member that is employed by or is attending the University.

We were an active PPP lender in our communities during 2020-2021, which required our employees to quickly learn and

apply a new SBA loan program with frequent overnight changes. All our PPP loans were forgiven by the SBA, except one

where the borrower is repaying its PPP loan without government assistance.

We had a successful management transition in 2022 where our CEO became Chairman, and was succeeded by our CFO,

whose role was then filled by our Chief Accounting Officer. Our Chairman has served the Bank his entire 39-year career,

our President and CEO has been with us 16 years and our Chief Accounting Officer has been with us for 7 years. Our new

President and CFO had careers with major national and regional accounting firms and focused on financial services before

joining the Bank.

We seek to provide competitive compensation and benefits. We provide employer matches for employee contributions to

our 401(k) retirement plan. 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. Our Chairman is the current President Pro Tempore of the Auburn University Board of Trustees.

Statistical Information

Certain statistical information is included in responses to Items 6, 7, 7A and 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 subsidiar ies. 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”. Bank mergers are also subject to the approval of the acquiring bank’s

primary federal regulator and the Bank Merger Act. The BHC Act and the Bank Merger Act provide various generally

similar statutory factors. 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.

Bank mergers are also subject to the approval of the acquiring bank’s primary federal regulator. On March 19, 2022, the

FDIC published a “Request for Information and Comment on Rules, Regulations, Guidance, and Statements of Policy

Regarding Bank Merger Transactions” (the “FDIC Notice”). The FDIC solicited comments from interested parties

regarding the application of the laws, practices, rules, regulations, guidance, and statements of policy (together, regulatory

framework) that apply to merger transactions involving one or more insured depository institution, including the merger

between an insured depository institution and a noninsured institution. The FDIC is interested in receiving comments

regarding the effectiveness of the existing framework in meeting the requirements of the Bank Merger Act.

The Request described the consolidation of the banking industry, the increase in the number of large and systemically

important banking organizations and the need to evaluate large mergers’ financial stability and resolution of failing bank

risks consistent with the Dodd-Frank Act changes to the BHC Act and the Bank Merger Act, and the effects of banking

mergers on competition. The FDIC Notice also stated that Executive Order Promoting Competition in the American

Economy (July 9, 2021) (the “Executive Order”), among other things, “instructs U.S. agencies to consider the impact that

consolidation may have on maintaining a fair, open, and competitive marketplace, and on the welfare of workers, farmers,

small businesses, startups, and consumers.” The FDIC requested comment on all aspects of the bank regulatory

framework, including qualitative and quantitative support for such responses. The other Federal bank regulators as well as

the U.S. Department of Justice are also considering the framework for mergers involving banking organizations, including

the competitive effects of such combinations. The federal bank regulators have not announced any conclusions, but these

reviews could result in changes to the frameworks used to evaluate banking combinations which could make such

combinations more difficult, time consuming and expensive.

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 the Bank is subject to various FDIC regulations applicable to FDIC-

insured banks. 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”) Uniform Financial

Institutions Rating System (“UFIRS”), 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:

C

apital

Adequacy,

A

sset Quality,

M

anagement,

E

arnings,

L

iquidity and

S

ensitivity 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.

In addition, and separate from the interagency UFIRS, the Federal Reserve assigns a risk -management rating to all state

member banks. The summary, or composite, rating, as well as each of the assessment areas, including risk management, is

delineated on a numerical scale of 1 to 5, with 1 being the highest or best possible rating. Thus, a bank with a composite

rating of 1 requires the lowest level of supervisory attention while a 5-rated bank has the most critically deficient level of

performance and therefore requires the highest degree of supervisory attention.

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.

H.R. 1165, The Data Privacy Act of 2023, was introduced in Congress on February 24, 2023 by Rep. McHenry, the

Chairman of the House Financial Services Committee, to which the Bill was referred. It amends various sections of the

GLB Act and preempts certain state privacy laws. Its preemption provisions have triggered opposition by the minority in

the House of Representatives.

Community Reinvestment Act and Consumer Laws

The Bank is subject to the provisions of the CRA and the Federal Reserve’s CRA regulations. 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 (“LMI”) 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 and

emphasize CRA records of each subsidiary depository institution of the applicant bank holding company and the target

bank in meeting the needs of their entire communities, including LMI neighborhoods, 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. The Federal Reserve

also considers the effect of a bank acquisition proposal on the convenience and need of the markets served by the

combining organizations.

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

regulator. Community benefit plans have become common in banking mergers, especially larger bank combinations. The

National Community Resolution Coalition reported in February 2023 that it had executed more than 20 community benefit

plans with banking organizations. 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 joint CRA regulations, which were proposed in

May 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 Bank had a “satisfactory” CRA rating in its latest CRA public evaluation dated February 28, 2022, with satisfactory

ratings on both its lending and community development tests.

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 joint CRA regulations, which were proposed by

the Federal Reserve, the FDIC and the Comptroller of the Currency in May and June 2022.

Proposed Revision of CRA Regulations

The federal banking regulators jointly proposed (the “CRA Proposal”) revised CRA regulations on June 3, 2022. It is

currently anticipated that these revised regulations may be adopted in the first half of 2023.

The objectives of the proposed CRA regulations included:

Update CRA regulations to strengthen the achievement of the core purpose of the statute;

Adapt to changes in the banking industry, including the expanded role of mobile and online banking;

Provide greater clarity and consistency in the application of the regulations;

Tailor performance standards to account for differences in bank size and business models and local conditions;

Tailor data collection and reporting requirements and use existing data whenever possible;

Promote transparency and public engagement;

Confirm that CRA and fair lending responsibilities are mutually reinforcing; and

Create a consistent regulatory approach that applies to banks regulated by all three agencies.

The proposed regulations create a new framework for evaluating CRA performance. The new framework would establish

the following four tests for large banks: Retail Lending Test; Retail Services and Products Test; Community Development

Financing Test; and Community Development Services Test. Intermediate banks would be evaluated under the Retail

Lending Test and the

status quo

community development test, unless they choose to opt into the Community Development

Financing Test. Small banks would be evaluated under the

status quo

small bank lending test, unless they choose to opt into

the Retail Lending Test. Wholesale and limited purpose banks would be evaluated under a tailored version of the

Community Development Financing Test.

The bank is currently an “intermediate small bank”. As currently proposed, the Bank would be an “intermediate bank”

until it reached $2.0 billion or more in assets at the date(s) of determination. Intermediate banks would be evaluated

generally under the new Retail Lending Test for intermediate banks and a community development test. The release

proposing the new rules states that the proposed Retail Lending Test represents a significant change from the lending test

applicable to intermediate small banks in the agencies' current regulations, but intermediate banks would not need to

collect, maintain, or report data to facilitate the application of this test. Instead, as under the current CRA regulations,

examiners would continue to use information gathered from individual loan files or maintained on an intermediate bank's

internal operating systems for purposes of the Retail Lending Test. The proposed intermediate bank Community

Development Test evaluates all community development activities, including community development loans, qualified

investments, and community development services. The Retail Lending and Community Development tests will be

weighted equally in determining intermediate banks’ CRA evaluations.

The proposed Retail Lending Test “is intended to make a bank's retail lending evaluation more transparent and predictable

by specifying quantitative standards for lending consistent with achieving, for example, a “Low Satisfactory” or

“Outstanding” conclusion in an assessment area. The proposed rule would limit the evaluation of an intermediate bank's

retail lending performance to areas outside of its facility-based assessment areas only if it does more than 50 percent of its

lending outside of its facility-based assessment areas.” Under the Retail Lending test, an intermediate bank’s lending test

would be based on its major product lines in each assessment area. A major product line would be one or more of the six

retail loan product types: closed-end home mortgage loans; open-end home mortgage loans; multifamily mortgage loans;

small business loans; small farm loans; or automobile loans.

The CRA Proposal states that “the agencies believe retail lending remains a core part of a bank's affirmative obligation

under the CRA to meet the credit needs of their entire communities. At the same time, the agencies recognize that,

compared to large banks, intermediate banks might not offer as wide a range of retail products and services, have a more

limited capacity to conduct community development activities, and may focus on the local communities where their

branches are located.” The CRA Proposal reflects “the agencies’ views that banks of this size should have meaningful

capacity to conduct community development financing, as they do under the current approach.” The CRA Proposal states

that the community development criteria for intermediate banks is unchanged from the current intermediate small bank

community development test.

Intermediate banks would generally be exempt from the data collection, maintenance, and reporting requirements

applicable to large banks under the CRA Proposal.

Banks are currently required to delineate their CRA “assessment areas.” The Bank currently designates two assessment

areas – the Auburn-Opelika MSA (lee County) and the Chambers-Macon-Tallapoosa assessment area – comprised of

Chambers, Macon, and Tallapoosa Counties. The Bank operates two branches in the Chambers, Macon and Tallapoosa

Counties. The CRA Proposal seeks to recognize electronic and remote delivery services. Intermediate banks’ must

designate one or more facilities based CRA assessment areas.

The facilities based CRA assessment area under the CRA Proposal would include a bank’s main office, branches, and

deposit-taking ATMs. An intermediate bank could continue to adjust the boundaries of a facilities based assessment area to

include whole census tracts of a county or statistically equivalent entity that the bank could reasonably be expected to serve.

Facilities based assessment areas could not extend across a state or metropolitan statistical area (MSA) boundary, unless the

facilities were located in a multistate MSA or combined statistical area. Retail lending activities outside an intermediate

bank’s Facilities based assessment area would be considered in aggregate at the bank level if such outside retail lending was

more than 50% of the bank’s total retail lending. Otherwise, outside retail lending would not be considered. Community

development activities outside an intermediate bank’s facilities based assessment area generally would not be considered.

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.

CFPB Consumer Financial Protection Circular 2022-06 (Oct. 26, 2022) concluded that overdraft fee practices must comply

with Regulation Z, Regulation E, and the prohibition against unfair, deceptive, and abusive acts or practices in Section 1036

of the Consumer Financial Protection Act. Further, overdraft fees assessed by financial institutions on transactions that a

consumer would not reasonably anticipate are likely unfair even if these comply with these other consumer laws and

regulations. 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. The forbearance period was extended to February 28, 2021 and then

again to March 31, 2021 after being extended earlier 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-Terrorism 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 Corporate Transparency Act (the”CTA”) was adopted as Title LXIV of the William M. (Mac) Thornberry National

Defense Authorization Act for Fiscal Year 2021. FinCEN adopted a final regulation as 31 C.F.R. 101.380 on September

30, 2022, which is effective on January 1, 2024 to implement the CTA. These regulations require entities to report

information about their beneficial owners and the individuals who created the entity (together, beneficial ownership

information or BOI). FinCEN explained that the proposed rule would help protect the U.S. financial system from illicit use

by making it more difficult for bad actors to conceal their financial activities through entities with opaque ownership

structures. FinCEN also explained that the proposed reporting obligations would provide essential information to law

enforcement and others to help prevent corrupt actors, terrorists, and proliferators from hiding money or other property in

the United States.” The new rules expand financial institutions’ obligations under the Customer Due Diligence Rule

(“CDD Rule”) to collect information and verify the beneficial ownership of legal entities.

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.

Russia’s February 2022 invasion of Ukraine has generated a significant number of new sanctions on Russia, Russian

persons and suppliers of military or dual-purpose products to Russia, The Federal bank regulators have issued alerts that

Russia and others may step up cyber attacks and data intrusions following the invasion. FinCen has issued four alerts on

potential Russian illicit financial activity since February 2022. On January 25, 2023 FinCEN issued an alert to financial

institutions on potential investments in the U.S. commercial real estate sector by sanctioned Russian elites, oligarchs, their

family members, and the entities through which they act. The alert listed potential red flags and typologies involving

attempted sanctions evasion in the commercial real estate sector, and reminds financial institutions of their Bank Secrecy

Act (BSA) reporting obligations.

Bill H.R. 1164, the OFAC Outreach and Engagement Capabilities and Enhancement Act, was introduced in Congress on

February 24, 2023. It would set up a review of and improve OFAC outreach and communications to assist financial

institutions to better understand and comply with OFAC sanctions.

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 and FDIC 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, 2022 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 2022, the Bank paid total cash dividends of

approximately $3.7 million to the Company. At December 31, 2022, the Bank could have declared and paid additional

dividends of approximately $13.9 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 the capital conservation buffer requirement.

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 subsidiaries 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. Any HVCRE exposure

excludes loans made before January 1, 2015. The rules define HVCRE loans as loans secured by land or improved real

property that:

primarily 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. The full value of any borrower contributed land (net of any liens on the

land securing HVCRE exposure) count toward the 15% capital contribution to the appraised as completed value, which is

one of the criteria for exemption form the heightened risk weight. Banking institutions and their holding companies are

required to assign 150% risk weight to HVCRE loans.

Capital

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

These guidelines required, beginning December 31, 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, totaling 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 activities. 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, 2021 or 2022. 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, the Company’s CET1 is not 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 for regulatory

capital purposes.

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 beginning January 1, 2019. Thereafter, 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 -

On 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. This clarifying 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, as used in the Federal Reserve’s

Regulation Q capital rule, as corrected on January 13, 2021, is 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. 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 carrybacks 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%.

In December 2019 the federal bank regulators revised their definition of HVCRE and related capital requirements

consistent with Section 214 of the 2018 Growth Act.

The Financial Accounting Standards Board’s (“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 became effective for the Company beginning January 1, 2023.

The Company is currently finalizing controls, processes, policies and disclosures and has completed full end-to-end parallel

runs. Based on the Company’s portfolio composition as of December 31, 2022, and current expectations of future

economic conditions, the reserve for credit losses is expected to increase from 1.14% as a percentage of total loans at

December 31, 2022 to a range between 1.32% and 1.36% of total loans. These effects result from changing from the

incurred loss model to CECL’s expected loss model, which provides for expected credit losses over the life of the loan

portfolio. The Company does not expect to record an allowance for available-for-sale securities as the investment portfolio

consists primarily of debt securities explicitly or implicitly backed by the U.S. Government for which credit risk is deemed

minimal. ASU 2016-13 is not expected to have a material impact on the allowance for unfunded commitments. The

estimates described herein regarding CECL’s effects are subject to change as key assumptions are refined. These effects in

2023 and later will depend on the future composition, characteristics, and credit quality of the loan and securities portfolios

as well as the economic conditions at future reporting periods that are included in our CECL models.

Federal Reserve Capital Review

The Federal Reserve’s Vice Chair for Supervision is considering a holistic review of regulatory capital requirements, which

are expected to focus on banking organizations larger than the Company. Recently a Federal Reserve.

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 8.0% or greater, a Tier 1 risk-based capital ratio

of 6.0% or greater, a Common Equity Tier 1 capital ratio of 4.5% or greater, and generally has a leverage capital

ratio of 4.0% or greater;

“undercapitalized” if it has a total risk-based capital ratio of less than 8.0%, a Tier 1 risk-based capital ratio of less

than 6.0%, a Common Equity Tier 1 capital ratio of less than 4.5% or generally has a leverage capital ratio of less

than 4.0%;

“significantly undercapitalized” if it has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based

capital ratio of less than 6.0%, a Common Equity Tier 1 capital ratio of less than 3%, or a leverage capital ratio of

less than 3.0%; or

“critically undercapitalized” if its tangible equity is equal to or less than 2.0% to total assets.

The federal bank regulatory agencies have authority to require additional capital where they determine it is necessary,

including where a bank is unsafe or unsound condition or where the bank is determined to have less than a satisfactory

rating on any of its CAMELS ratings. The regulators have confirmed 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 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 prompt corrective action provisions of FDICIA have had or are

expected to have any material effect on the Company and the Bank or their respective operations.

Community Bank Leverage Ratio Framework

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 as part of the

community bank leverage ratio framework (“CBLR”). 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 CBLR framework which became effective January 1, 2020, allows qualifying CBOs to adopt a simple leverage ratio to

measure capital adequacy. The CBLR may be elected by depository institutions and their holding companies and is

intended to reduce regulatory burdens for qualifying community banking organizations that do not use advanced

approaches capital measures, and otherwise qualify. Eligible institutions must 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 CBLR leverage ratio is Tier 1 capital divided by average total consolidated asset for the latest quarter, taking into

account the capital simplification discussed above and the CECL related capital transitions.

A CBLR banking organization with a ratio above the requirement will not be subject to other capital and leverage

requirements. If elected by a banking organization, The CBLR leverage ratio will be the sole capital measure, and electing

institutions will not have to calculate or use any other capital measure for regulatory purposes. The Company has not

adopted the CBLR, although it believes it is eligible to make such election. Management believes that current risk-based

capital measures are useful and reflect the risks of the Company’s earning assets in a manner most comparable to other

banking organizations and which may be useful to investors. It may consider the CBLR in the future.

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 examine and regulate our compliance with laws and regulations,

including the CFPB’s regulations. The CFPB issues regulations, interpretations and enforcement actions under the laws

applicable to consumer financial products and services. Violations of laws and regulations, including those administered by

the CFPB, or other unsafe and unsound practices, may result in the Federal Reserve and the Alabama Superintendent

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.

Fiscal and Monetary Policies

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.

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. 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 and purchased large amounts of government and

mortgaged backed securities.

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 provided 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.

During early 2022, the Federal Reserve described inflation as “transitory,” but as inflation continued at increasing rates the

Federal Reserve’s policy changed. The Federal Reserve increased the target federal funds range by 25 basis points on

March 17, 2022, the first change since March 2020 when the target was set to 0-0.25%. Further increases were made: 50

basis points on May 5, 75 basis points on each of June 16, July 28, September 22, and November 22, and 50 basis points on

December 15, 2022. The target rate was increased 25 basis points on February 2, 2023, and further increases in the target

federal funds rate appear likely if inflation remains elevated. The target fed funds ranges was 4.50-4.75% on March 17,

The Federal Reserve’s securities holdings in its System Open Market Account (“SOMA”) increased from $4.1 trillion on

December 30, 2019 to $9.0 trillion at April 11, 2021, largely as a result of securities purchases as the Federal Reserve

injected liquidity as a result of the COVID-19 pandemic. On May 4, 2022, the Federal Reserve announced its plan to

reduce its securities holdings in an effort to reduce inflation:

Reinvestments of principal of maturing Treasury securities would be reduced by $30 billion per month for three

months and thereafter would be $80 billion per month.

Reinvestments of principal of maturing agency debt and mortgage-backed securities would be reduced by $17.5

billion per month for three months and thereafter would be $35 billion per month.

These declines would slow and then stop when the Federal Reserve’s balance sheet was somewhat above the

balance it deemed ample.

The Federal Reserve’s SOMA was $8.4 trillion on February 13, 2023.

The Federal Reserve seeks to target longer term inflation of 2% based on annual changes in the personal consumption

expenditures. The Federal Reserve stated on February 1, 2023 that its Federal Open Market Committee is highly attentive

to inflation risks and the war in Ukraine is contributing to elevated global uncertainty. Inflation remained above that rate

through February 2023. The Chairman of the Federal Reserve’s testimony to the Senate Banking Committee on March 7,

2023 that inflation remains well above the target, gross domestic product in 2022 was 0.9%, below the trend. Higher rates

have adversely affected the housing sector and combined with slower output growth, “appear to be weighing on business

fixed investment.” The labor market is “extremely tight.” The Chairman concluded:

“We continue to anticipate that ongoing increases in the target range for the federal funds rate will be appropriate in order

to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time. In addition, we are

continuing the process of significantly reducing the size of our balance sheet. Although inflation has been moderating in

recent months, the process of getting inflation back down to 2% has a long way to go and is likely to be bumpy. As I

mentioned, the latest economic data have come in stronger than expected, which suggests that the ultimate level of interest

rates is likely to be higher than previously anticipated. If the totality of the data were to indicate that faster tightening is

warranted, we would be prepared to increase the pace of rate hikes. Restoring price stability will likely require that we

maintain a restrictive stance of monetary policy for some time.”

The nature and timing of these ongoing changes in monetary policies and their effects on the Company and the Bank cannot

be predicted.

On March 12, 2023, as a result of unrealized securities losses resulting from increased market rates, liquidity issues at two

banks with over $100 billion of assets each being closed on March 10 and 12, 2023, the Federal Reserve established a new

Bank Term Funding Program (“BTFP”). The BTFP offers loans of up to one year to banks, savings associations, credit

unions, and other eligible depository institutions pledging U.S. Treasuries, agency debt and mortgage-backed securities,

and other qualifying assets as collateral. These assets will be valued at par. The BTFP will be an additional source of

liquidity against high-quality securities, eliminating an institution's need to quickly sell those securities in times of stress.

Further, the Federal Reserve on March 12, 2023 stated that depository institutions also may obtain liquidity against a wide

range of collateral through the Federal Reserve’s discount window, which remains open and available. In addition, the

discount window will apply the same margins used for the securities eligible for the BTFP, further increasing lendable

value at the window.

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.

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 Small Banks, such as the Bank, for the first assessment period

of 2023 to be billed in June 2023:

Established Small Institution

CAMELS Composite

1 or 2

3

4 or 5

Initial Base Assessment Rule

5 to 32 basis points

6 to 30 basis points

16 to 30 basis points

Unsecured Debt Adjustment.

Cannot exceed the lesser of 5

basis points or 50% of the

bank’s initial FDIC

assessment rate

-5 to 0 basis points

-5 to 0 basis points

-5 to 0 basis points

Brokered Deposit

Adhustment

N/A

Total Base Assessment Rate

2.5 to 32 basis points

3 to 30 basis points

11 to 30 basis points

These assessments are then adjusted based on the bank’s CAMELS rating. For example, Small Banks, with CAMELS

ratings of 1 or 2, have a current total assessment of 2.5 to 15 basis points for the period to be billed in June 2023.

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

stimulus, the DIF’s 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 (the “PPPLF”) 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. This had a limited effect on the Bank since it had only one PPP loan of approximately $0.1 million

outstanding on December 31, 2022, and because the Bank never participated in the PPPLF.

The Company recorded FDIC insurance premiums expenses of $0.3 million in both 2022 and 2021.

Lending Practices

CRE

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

(the “CRE Guidance”). The CRE 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 CRE

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 CRE Guidance requires that banks have 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 CRE 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 CRE Guidance was supplemented by the Interagency Statement on Prudent Risk Management for Commercial Real

Estate Lending (December 18, 2015). The CRE 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 CRE Guidance did not apply to the Bank’s CRE lending activities during 2021 or 2022. At December 31, 2022, the

Bank had outstanding $66.5 million in construction and land development loans and $203.9 million in total CRE loans

(excluding owner occupied), which represent approximately 58.9% and 182.3%, respectively, of the Bank’s total risk-based

capital at December 31, 2022. 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.

The Federal Reserve joined the other depository institution regulators in issuing a Proposed Policy Statement on Prudent

Commercial Real Estate Loan Accommodations and Workouts on September 15, 2022. The proposed statement would

build on existing guidance on the need for financial institutions to work prudently and constructively with creditworthy

borrowers during times of financial stress, update existing interagency guidance on commercial real estate loan workouts,

and adds a new section on short-term loan accommodations. The proposed statement would also address recent accounting

changes on estimating loan losses and provide updated examples of how to classify and account for loans subject to loan

accommodations or loan workout activity. The proposed statement reaffirms two key principles from the 2009 statement:

(1) financial institutions that implement prudent CRE loan accommodation and workout arrangements after performing a

comprehensive review of a borrower's financial condition will not be subject to criticism for engaging in these efforts, even

if these arrangements result in modified loans that have weaknesses that result in adverse credit classification; and (2)

modified loans to borrowers who have the ability to repay their debts according to reasonable terms will not be subject to

adverse classification solely because the value of the underlying collateral has declined to an amount that is less than the

loan balance. This proposal had not been adopted as of March 1, 2023.

Leveraged Lending

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 2022 or 2021 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, etc.

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.

On October 2022, the SEC adopted final Rule 10D-14 instructing national securities exchanges to establish specific listing

standards that require each issuer to adopt and comply with a written executive compensation recovery policy. Under Rule

10D-1, listed companies must recover from current and former executive officers’ incentive-based compensation received

during the three fiscal years preceding the date on which the issuer is required to prepare an accounting restatement to

correct a material error.

On February 23, 2023, Nasdaq proposed to adopt Listing Rule 5608 (the “Nasdaq Rule”).The recovery of erroneously

awarded compensation is required on a “no fault” basis, without regard to whether any misconduct occurred or an executive

officer’s responsibility for the erroneous financial statements. A restatement due to material noncompliance with any

financial reporting requirement under the securities laws triggers application of the recovery policy. The determination

regarding materiality of an error should be based on facts and circumstances and existing judicial and administrative

interpretations. The proposed Nasdaq Rule requires recovery for restatements that correct errors that are material to

previously issued financial statements (commonly referred to as “Big R” restatements), as well as for restatements that

correct errors that are not material to previously issued financial statements but would result in a material misstatement if

the errors were left uncorrected in the current report or the error correction was recognized in the current period (commonly

referred to as “little r” restatement).

Under the proposed Nasdaq Rule, Nasdaq-listed companies, such as the Company, will be required to recover the amount

of incentive-based compensation received by an executive officer that exceeds the amount the executive officer would have

received had the incentive-based compensation been determined based on the accounting restatement. Nasdaq proposes to

define “incentive-based compensation” as any compensation that is granted, earned or vested based wholly or in part upon

the attainment of any financial reporting measure. Incentive-based compensation is deemed received in the fiscal period

during which the financial reporting measure specified in the incentive-based compensation award is attained, even if the

grant or payment of the incentive-based compensation occurs after the end of that period.

The SEC adopted rules in August 2013 to implement pay ratios pursuant to Section 953 of the Dodd-Frank Act comparing

their CEO’s total compensation to the median compensation of all other employees. These rules applied beginning to fiscal

year 2017 annual reports and proxy statements. Smaller reporting companies, such as the Company, are exempted from

this 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 adopted changes to its Reg. S-K Item 407(i) implementing this Section.

The Company’s has had no equity-based compensation plans or arrangements. The Company’s insider trading policy,

which applies to all Company and Bank directors, officers, employees and certain independent contractors and specified

related persons (collectively, “Covered Persons”). This Policy prohibits Covered Persons, from short-selling Company

securities or engaging in transactions involving Company “Derivative Securities.” This prohibition includes, without

limitation, trading in Company-based put option contracts, including straddles, and the like. Derivative Securities include

options, warrants, restricted stock units, stock appreciation rights or similar rights whose value is derived from the value of

an equity or other security, including Company Securities.

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 stated that this Guidance is expected to generally have less effect on smaller banking

organizations, which typically are less complex and make less use of incentive compensation arrangements than larger

banking organizations.

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 securities, 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, which is currently 9.0%, 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; and

“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 .

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.

Reciprocal deposits, such as CDARs, may expand our funding sources without being subjected to FDIC limitations and

potential insurance assessments increases for brokered deposits.

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 establish

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,

2021 or 2022, 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. This temporary relief expired December 31, 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.

The Alabama legislature passed the “LIBOR Discontinuance and Replacement Act of 2021” which became effective on

April 29, 2021. On March 15, 2022, Congress enacted the Adjustable Interest Rate (LIBOR) Act (the “LIBOR Act”) as

part of the Consolidated Appropriations Act, 2022. One purpose of the LIBOR Act was to establish a clear and uniform

process, on a nationwide basis, for replacing LIBOR in existing contracts the terms of which do not provide for the use of a

clearly defined or practicable replacement benchmark rate, without affecting the ability of parties to use any appropriate

benchmark rate in new contracts. The LIBOR Act directed the Federal Reserve to issue regulations implementing the

LIBOR Act. The Federal Reserve adopted final Regulation ZZ on January 26, 2023. These together with Internal Revenue

Service regulation facilitate the conversion of existing LIBOR-based loans when most popular LIBOR rates cease to be

quoted on June 30, 2023. The Bank generally prices its variable rate loans based on the prime rate or the five-year Treasury

note rate and had no loans bearing LIBOR or other IBOR-based rates at December 31, 2022.

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 2023:

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

government agencies and businesses were limited to remote work and gatherings were limited. Supply chains

continue to be disrupted and labor markets remain tight. Hotels, motels, restaurants, retail and shopping centers

were especially affected. COVID-19 continues, but with diminishing direct economic effects due to population

health, generally. President Biden has terminated the COVID-19 national emergencies effective May 11, 2023.

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

economic effects, but together with supply chain disruptions, continued consumer demand, Russia’s invasion of

Ukraine and its effects on energy and food prices, and tight labor markets, have resulted in inflation. Inflation is

running at levels unseen in decades and well above the Federal Reserve’s long term inflation goal of 2.0%

annually. Beginning in March 2022, the Federal Reserve has been raising target federal funds interest rates and

reducing its securities holdings in an effort to reduce inflation. 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 Russia’s invasion of Ukraine affect consumer confidence levels, economic activity

and inflation. Increases in market interest rates, inflation and consumer and business confidence may cause

changes in savings and payment behaviors, including potential increases in loan delinquencies and default rates.

These 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 inflation and higher market

interest rates We adopted CECL on January 1, 2023 as required by generally accepted accounting principles

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

incurred loss method used historically under GAAP. This changes the process we use to estimate losses inherent

in our credit exposures. The process for estimating expected losses 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. Changes in economic conditions and factors

used in our CECL models may increase the variability of our provisions for loan losses and our earnings.

Although we had no assets or liabilities that use LIBOR reference rates at the end of 2022, the end of the LIBOR

reference rate, scheduled for most tenors by June 30, 2023, could adversely affect our counterparties and financial

markets.

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

financial condition.

Our nonperforming loans were 0.54% of total loans as of December 31, 2022, and we had $2.7 million in other real estate

owned as result of foreclosures or otherwise in full or partial payments in respect of loans (“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 and the shift beginning in March 2022 from an extraordinarily expansionary

monetary policies to a tightening monetary policy to fight inflation, loan modifications and deferrals, market conditions or

events adversely affecting specific customers, industries or markets, including disruptions of supply chains and the war in

Ukraine, and changes in borrower behaviors. Certain borrowers and their businesses and real estate and commercial

projects and businesses may be adversely affected by inflation and higher interest rates, and economic slowdowns arising

from tighter monetary policies. Various businesses will be unable to fully pass on increased costs due to inflation, and their

profits may shrink. 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

expected future loan losses, is effective for the Company beginning January 1, 2023, and its effects upon the Company have

not yet been determined. The CECL model incorporates various economic condition elements, where changes in fiscal and

monetary policy, as well as market interest rates, could result in more volatility in our provisions for loan losses under

CECL, which could adversely affect our net income.

Changes in the real estate markets, including the secondary market for residential mortgage loans, may continue to

adversely affect us.

Beginning in March 2022, inflation and the Federal monetary policies to increase interest rates to fight inflation have

caused mortgage rates to increase significantly. Higher interest rates and the increased level of housing costs as a result of

the COVID-19 pandemic, have caused housing starts and sales to slow. House prices have begun to decline in certain

markets from their earlier highs. This adversely affects our mortgage loan productions and the value of residential

mortgage collateral. Commercial real estate projects economic assumptions may be adversely affected, and certain projects

with short term and/or unhedged variable rate debt may be especially affected by increased interest rates and a slower

economy.

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.

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 Fannie Mae, a government sponsored entity (‘GSE”) and other GSEs and government agencies. 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.

The effects of reduced housing starts and mortgage activity due to higher market interest rates, have decreased our

generation of new mortgage loans and related MSRs. This may be offset by decreases in mortgage prepayments and

refinancings, and corresponding increases in the duration of our existing MSRs and their values. This net effect could

reduce our aggregate 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. The Basel III Rules relating to MSRs may also increase the

potential capital required as a result of MSRs, when considered with other capital rule adjustments and deductions.

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. Most

LIBOR reference interest rates used by many financial institutions to price extensions of credit will no longer be quoted

beginning June 30, 2023 and their use has been strongly discouraged by regulatory agencies. Most banks did not adopt

CECL until January 1, 2023. These changes, together with any exposures other institutions may have to crypto or digital

assets, could cause disruption and unexpected changes in the industry. 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 the 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

40.4% of our portfolio in CRE loans at year-end 2022 compared to 42.6% at year-end 2021. 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. Increases in interest rates beginning

in March 2022 may adversely affect the assumptions and performance of CRE, and the ability of borrowers to refinance on

terms that CRE borrowers and their projects can support. Lower demand for CRE, and reduced availability of, and higher

interest rates and costs for, CRE loans could adversely affect our CRE loans and sales of our OREO, and therefore our

earnings and financial condition, including our capital and liquidity.

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

effects of higher market interest rates and inflation, supply chain disruptions, changes in customer behaviors and in the

workforce and demand for space since the COVID-19 pandemic, and the timing and magnitude of future inflation and

interest rates, 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 and housing

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, including loan 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. The regulatory agencies are carefully scrutinizing financial institution mergers, and

the merger application process has lengthened.

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 and other

potential violations of law. 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, payments, 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 and similar situations may occur in the future. 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 timely 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, including the new CECL models, are based on assumptions and projections. These models may not operate

properly or our inputs and assumptions may be inaccurate, or changes in economic and market conditions, customer

behaviors or regulations. As a result, these methods may not fully or timely predict future exposures, which can be

significantly greater and/or faster 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, for back-up and service restoration, 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 disruption through 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 and tensions with mainland China. 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. 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 systems 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 recognized until launched and can originate from a wide variety of sources, including

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, sanctions 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 changed significantly and suddenly. Federal Reserve target federal funds rates declined to 0-0.25% in March

2020, where these remained until March 2022. As of March 7, 2023, this had increased to 4.50-4.75% 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 and tight labor markets. The continuation or worsening of these conditions 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 $13.8 million with gross deferred tax assets of $15.6 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 changes in customer

behaviors 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. Beginning March 2022, as inflation became more persistent, the

Federal Reserve started increasing interest rates and reducing its holdings of U.S government, agency and agency

mortgage-backed securities. Our costs of funds may increase as a result of general economic conditions, increasing interest

rates and competitive pressures, and inflation, and anticipated future changes by the Federal Reserve to reduce inflation.

Traditionally, we have obtained funds principally through local deposits and borrowings from other institutional lenders

such as the FHLB, which we believe are a cheaper and more stable source of funds than borrowings, generally. 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 potentially 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. See “Supervision and Regulation – Fiscal and Monetary Policy.”

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.

Our income is primarily driven by the spread between these rates. Net interest income will be adversely affected if market

interest rates and 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. 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. The yield curve was inverted at the beginning of March 2023,

and this results in a lower spread between our costs of funds and our interest income. In addition, net interest income could

be affected by asymmetrical changes in the different interest rate indexes, given that not all of our assets or liabilities are

priced with the same index. Higher market interest rates and sales of securities held by the Federal Reserve to reduce

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

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 promote economic growth. Increases in market interest rates tend to decrease mortgage originations, increase

MSR values, decrease the value and liquidity of collateral securing loans, and potentially increase net interest spread

depending upon the yield curve and the magnitude and duration of interest rate increase, and constrain economic growth.

Increases in market interest rates have also caused unrealized losses in our securities portfolio as our available for sale

investments are carried at fair value and market prices have declined as market interest rates increase. Although these

unrealized losses do not adversely affect our regulatory capital, these do reduce our reported GAAP tangible stockholders’

equity. Sales of securities with unrealized losses would result in realized losses for GAAP, regulatory capital and tax

purposes. Increases in interest rates may also change depositor behaviors as customers seek higher yielding deposits. This

may adversely affect our net interest income and net income and may also adversely affect our liquidity.

Liquidity risks could affect operations and jeopardize our financial condition.

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

reduced returns on assets and equity. Inflation and tightening monetary policies beginning in early 2022 have increased

interest spreads, but may change the mix and costs of our deposits over time. The growth in deposits exceeded our loan

growth and the difference was invested in high-quality, marketable U.S. government and government agency securities,

including agency mortgage-backed securities.

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 deposits (primarily core deposits), federal funds purchased, securities sold under

repurchase agreements, and short- and long-term debt. We maintain a portfolio of marketable high-quality securities that

can be used as a source of liquidity. As market interest rates have risen, however, we have experienced unrealized losses

on such securities, which would become realized losses upon the sale of such securities, and such sales at a loss would

reduce our net income and our regulatory capital.

We are also members of the FHLB and the Federal Reserve Bank, and we can obtain advances collateralized with eligible

assets, and maintain uncommitted federal funds lines of credit with other banks. On March 12, 2023, the Federal Reserve

established a new Bank Term Funding Program (“BTFP”), which offers loans of up to one year to banks, savings

associations, credit unions, and other eligible depository institutions pledging U.S. Treasuries, agency debt and mortgage-

backed securities, and other qualifying assets as collateral. These assets will be valued at par. The BTFP will be an

additional source of liquidity against high-quality securities, eliminating an institution's need to quickly sell those securities

in times of stress. In addition, the discount window will apply the same margins used for the securities eligible for the

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

Other sources of liquidity available to the Company or the Bank, if needed, include 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, the economy and market interest rates and fiscal and monetary policies.

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.

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 the CECL models include inputs based on economic and market

conditions, all of which 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 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 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 has appointed new members to the FDIC and Federal Reserve boards, and has appointed an

acting Comptroller of the Currency, and a new full time CFPB director and FDIC Chairman, a new Federal Reserve Vice

Chairman for Supervision and will nominate a new Vice Chair to replace Lael Brainard. The 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. Although not regulated or supervised by the CFPB, we are subject to the regulations and

interpretations of the CFPB and the Federal Reserve’s supervision of our compliance with such regulations and

pronouncements. 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’s 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. Our

regulators 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.

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 of potential SBA or bank regulatory claims.

The Bank participated as a lender in the PPP and made a total of $56.7 million of PPP loans in 2020 and 2021, generally to

support existing customers in the Bank’s markets. All PPP loans made by the Bank have been forgiven by the SBA, except

for one credit where the borrower is voluntarily repaying the loan. Since the beginning of the PPP, various banks have

been subject to litigation regarding the processes 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 that we extended.

The SBA, the Department of Justice and the bank regulators are investigating various PPP lenders and borrowers with

respect to potential fraud or improper activities under the PPP loan programs. Although the SBA has not indicated any

issues with the Bank’s participation in the PPP program and honored all PPP forgiveness requests, the Bank could have

potential liability if the SBA later 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 its forgiveness of a PPP

properly, including those related to the ambiguities in the laws, rules and guidance regarding the PPP’s operation.

The Bank is unaware of any such investigation or claims. If any such claims are made against the Bank and are not resolved

favorably to the Bank, it may result in financial liability or adversely affect our reputation. 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. 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.

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.

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 and/or maintain our liquidity 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; and

ability to make payments of principal and interest on any of our capital instruments that may be then outstanding.

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 regulations 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 or interpretations, 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.

The Federal banking regulators jointly proposed comprehensive revisions to their CRA regulations on May 5, 2022, and

which may be adopted in the first half of 2023. These revisions have not been finalized but could have significant effects

on our compliance costs and activities. See “Supervision and Regulation -

Community Reinvestment Act and Consumer

Laws.”

COVID-19 Risks

The national emergencies related to COVID-19 have been terminated by the President effective May 11, 2023. The

medical and direct economic effects of COVID-19 diminished over 2022 and are not directly affecting the Company’s

business. COVID-19 continues to have various indirect effects and risks, the most important of which are described herein,

including continuing inflation and the Federal Reserve’s change from accommodative monetary policy to a tightening

monetary policy to fight inflation following significant fiscal and monetary stimuli provided to reduce the effects of

COVID-19 pandemic on the economy, as well significant changes resulting from the pandemic, including supply chain

disruptions, a tight labor market, remote work away from the office, population and business shifts within regions of the

United States, changes in real estate utilization, and shortages of housing and increases in rents and housing costs in various

areas of the country. These risks are discussed in this report.

The Company’s assessment of risks related to COVID-19 and its effects on the Company applicable during the pandemic

are discussed in the Company‘s Annual Report on Form 10-K filed with the SEC on March 8, 2022 under the caption “Risk

Factors-COVID 19 Risks” and in our Quarterly Reports on Form 10-Qs though September 30, 2022.

The Bank conducts its business from its main office and seven full-service branches. The Bank also operates a loan

production office in Phenix City, Alabama.

The Bank owns its main campus in downtown Auburn, Alabama, which comprises over 4 acres and includes the newly

constructed AuburnBank Center, which was completed in May 2022 and held its grand opening in June 2022. The

AuburnBank Center has approximately 90,000 square feet of space. The AuburnBank Center includes the Bank’s main

office, Auburn loan production office, and all of its back-office operations. The 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. The Bank has approximately 46,000 square feet of office space and approximately 5,000 square feet of

retail space in the new AuburnBank Center building available for lease to third party tenants.

In February 2022, the Company entered into an agreement to sell a parcel of approximately 0.85 acres to a hotel developer.

As part of the agreement, the Bank negotiated a long-term lease with the hotel developer for 100 to 150 parking spaces in

the Bank’s parking deck. In October 2022, the Company closed the sale at the agreed upon price of $4.3 million, and

recognized a $3.2 million gain.

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 2022, 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 and 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 2022, 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 had operated a loan production office in Valley, which 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 since August 1988. The current 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 in south Auburn, which had been opened

in 2004 to a new building, which the Bank built in 2015 at the intersection of S. Donahue Avenue and E. University Drive

in Auburn, Alabama. The South Donahue branch has approximately 3,600 square feet of space. 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 addition to the eight ATMs at various branch locations, mentioned above, the Bank also has five ATMs located at

various locations within our primary service area.

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. This loan production office was relocated to the

newly developed AuburnBank Center in June 2022. The Company has entered into a sublease agreement with a tenant for

three years with an option to renew for three additional years.

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, 2022 and 2021 and our results of operations for

the years ended December 31, 2022 and 2021. 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 a loan production office in Phenix City,

Alabama.

Summary of Results of Operations

Year ended December 31

(Dollars in thousands, except per share data)

2022

2021

Net interest income (a)

27,622

24,460

Less: tax-equivalent adjustment

456

470

Net interest income (GAAP)

27,166

23,990

Noninterest income

6,506

4,288

Total revenue

33,672

28,278

Provision for loan losses

1,000

(600)

Noninterest expense

19,823

19,433

Income tax expense

2,503

1,406

Net earnings

10,346

8,039

Basic and diluted net earnings per share

2.95

2.27

(a) Tax-equivalent. See "Table 1 - Explanation of Non-GAAP Financial Measures".

Financial Summary

The Company’s net earnings were $10.3 million for the full year 2022, compared to $8.0 million for the full year 2021.

Basic and diluted net earnings per share were $2.95 per share for the full year 2022, compared to $2.27 per share for the full

year 2021.

Net interest income (tax-equivalent) was $27.6 million in 2022, a 13% increase compared to $24.5 million in 2021. This

increase was primarily due to improvements in the Company’s net interest margin. The Company’s net interest margin

(tax-equivalent) was 2.81% in 2022, compared to 2.55% in 2021. This increase was primarily due to changes in our asset

mix and higher market interest rates on interest earning assets, while our cost of funds decreased 4 basis points to 0.35%.

At December 31, 2022, the Company’s allowance for loan losses was $5.8 million, or 1.14% of total loans, compared to

$4.9 million, or 1.08% of total loans, at December 31, 2021. At December 31, 2022, the Company’s recorded investment

in loans considered impaired was $2.6 million with a corresponding valuation allowance (included in the allowance for loan

losses) of $0.5 million, compared to a recorded investment in loans considered impaired of $0.2 million with no

corresponding valuation allowance at December 31, 2021. The Company recorded a charge to provision for loan losses of

$1.0 million in 2022 compared to a negative provision for loan losses of $0.6 million during 2021. The provision for loan

losses in 2022 was primarily related to loan growth and the downgrade of one borrowing relationship. The provision for

loan losses is based upon various estimates and judgements, including the absolute level of loans, loan growth, credit

quality and the amount of net charge-offs. Net charge-offs as a percent of average loans were 0.04% in 2022 compared to

0.02% in 2021.

Noninterest income was $6.5 million in 2022 compared to $4.3 million in 2021. The increase was primarily related to a

$3.2 million gain on the sale of land adjacent to the Company’s headquarters. Excluding the impact of this gain,

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

primarily due to a decrease in mortgage lending income of $0.9 million as refinance activity slowed in our primary market

area related to higher market interest rates.

Noninterest expense was $19.8 million in 2022 compared to $19.4 million in 2021. Noninterest expense included a $1.6

million employee retention credit recognized in 2022. Excluding the impact of this payroll tax credit, noninterest expense

was $21.4 million in 2022, a 10% increase compared to 2021. The increase in noninterest expense was primarily due to

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

opened in June 2022, an increase in salaries and benefits expense of $0.6 million, and increases in other noninterest expense

of $0.4 million.

Income tax expense was $2.5 million in 2022, compared to $1.4 million in 2021. The Company’s effective tax rate for

2022 was 19.48%, compared to 14.89% in 2021. This increase in tax expense was primarily due to increased pre-tax

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

bank-owned life insurance contracts in 2022. The Company’s effective income tax rate is principally impacted by tax-

exempt earnings from the Company’s investments in municipal securities, bank-owned life insurance, and New Markets

Tax Credits.

The Company paid cash dividends of $1.06 per share in 2022, an increase of 2% from 2021. At December 31, 2022, 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 16.25 %, a tier 1 leverage ratio of 10.01% and common equity

tier 1 (“CET1”) of 15.39% at December 31, 2022.

COVID-19 Impact Assessment

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

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, booster vaccines and newly

developed treatments.

COVID-19 significantly affected local state, national and global health and economic activity and its future effects are

uncertain and will depend on various factors, including, among others, the duration and scope of the pandemic, especially

new variants of the virus, effective vaccines and drug treatments, together with governmental, regulatory and private sector

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

pandemic and government economic and monetary stimuli to counter the pandemic, continue. These indirect effects

include a tight labor market, supply chain disruptions, consumer demand and the economic effects of these stimulative

government fiscal and monetary policies in response to COVID-19 beginning in early 2020, which have led to inflation and

to the Federal Reserve tightening its monetary policies to fight inflation beginning March 2022.

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 during outbreaks of COVID-19 variants. Bank

employees, generally, are working full time in the office although we have provided scheduling flexibility to our

employees.

We serviced 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 and made an aggregate of 677 PPP loans totaling approximately $56.7 million. 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. As of December 31, 2022, we

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

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 policies,

along with shortages of certain goods and services, and rising petroleum and food prices, reflecting, among other things, the

war in the Ukraine, have led to the highest inflation in decades. The Federal Reserve has begun rapidly increasing its target

federal funds rate from 0 – 0.25% at the beginning of March 2022 to 4.25 – 4.50% at December 31, 2022, and 4.50 – 4.75%

at January 31, 2023. The Federal Reserve also has been reducing its holdings of securities in its SOMA account to reduce

market liquidity and counteract 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 from the SBA related to our PPP loans during 2020. Through December

31, 2021, we had recognized all of these fees, net of related costs. As of December 31, 2021, we had received payments and

forgiveness on all PPP loans extended in 2020.

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

Act”) was signed into law. The Economic Aid Act provided 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 from the SBA related to PPP loans under the Economic Aid Act. Through

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

payments and forgiveness on all but one PPP loan, in the amount of $0.1 million, under the Economic Aid Act.

We believe that the COVID-19 pandemic stimuli and decreased economic activity increased customer liquidity and tier

deposits at the Bank and decreased loan demand, while monetary stimulus reduced interest rates and our costs of funds and

our interest earnings on loans. As a result, our net interest margin was adversely affected. A return to higher interest rates

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

curb inflation. This has resulted in improved net interest margin, but at the same time has reduced the market values of our

securities portfolio and resulted in unrealized securities losses. As a result, we have had losses in our other comprehensive

income and our equity under generally accepted accounting principles has declined. This has not adversely affected our

regulatory capital, however.

We continue to closely monitor the pandemic’s effects, and are working to continue our services and to address

developments as those occur. Our results of operations for the year ended December 31, 2022, and our financial condition

at that date, which reflect only the continuing direct and indirect effects of the pandemic, may not be indicative of future

results or financial conditions, including possible changes in monetary or fiscal stimulus, and the possible effects of the

expiration or extension of temporary accounting and bank regulatory relief measures in response to the COVID-19

pandemic.

As of December 31, 2022, all of our capital ratios were in excess of all regulatory requirements to be well capitalized.

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

policy beginning in March 2022 to fight inflation could result in adverse changes to credit quality and our regulatory capital

ratios, and inflation will affect our costs, interest rates and the values of our assets and liabilities, changes in customer

savings and payment behaviors and economic activity. Continuing supply chain disruptions and tight labor markets also

adversely affect the levels and costs of economic activities. We continue to closely monitor these continuing effects of the

pandemic, and are working to anticipate and address developments.

The CARES Act and the 2020 Consolidated Appropriations Act provide eligible employers an employee retention credit

related to COVID-19. After consultation with our tax advisors, we filed amended payroll tax returns with the IRS, and

received an employee retention credit of approximately $1.6 million.

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

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

effects of the pandemic and government fiscal and monetary policy responses, supply chain disruptions and inflation

continue, however.

CRITICAL ACCOUNTING POLICIES

The accounting and financial reporting policies of the Company conform 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, changes in, and expectations regarding, market interest rates and inflation, industry and peer bank loan loss rates

and other pertinent factors. This evaluation is inherently subjective as it requires material estimates including the amounts

and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change.

Loans are charged off, in whole or in part, when management believes that the full collectability of the loan is unlikely. 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. In addition, our regulators, as an integral part of their examination process,

will periodically review the Company’s loans and allowance for loan losses, and may require the Company to make

additional provisions to the allowance for loan losses based on their judgment about information available to them at the

time of their examinations.

The Company deems loans impaired when, based on current information and events, it is probable that the Company will

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

according to the contractual terms means that both the interest and principal payments of a loan will be collected as

scheduled in the loan agreement.

An impairment allowance is recognized if the fair value of the loan is less than the recorded investment in the loan. 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 the allowance for loan losses maintained is believed by management, based on its processes and estimates, to

be adequate to absorb probable losses inherent in the portfolio at the balance sheet date. The allowance is increased by

provisions charged to expense and decreased by charge-offs, net of recoveries of amounts previously charged-off and by

releases from the allowance when determined to be appropriate to the levels of loans and probable loan losses in such loans.

In assessing the adequacy of the allowance, the Company also considers the results of its ongoing internal, independent

loan review process. The Company’s loan review process assists in determining whether there are loans in the portfolio

whose credit quality has weakened over time and evaluating the risk characteristics of the entire loan portfolio. 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, 2022 and 2021, and for the years then ended, the Company adjusted its historical loss rates for the

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

The estimated loan loss allocation for all five loan portfolio segments is then adjusted for management’s 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, 2022, the Company increased its look-back period to 55 quarters to continue to include losses

incurred by the Company beginning with the first quarter of 2009. During 2021, the Company adjusted certain qualitative

and economic factors to reflect improvements in economic conditions in our primary market area that had previously been

observed as a result of the COVID-19 pandemic. No changes were made to qualitative and economic factors during 2022.

Assessment for Other-Than-Temporary Impairment of Securities

On a quarterly basis, management makes an assessment to determine whether there have been events or economic

circumstances to indicate that a security on which there is an unrealized loss is other-than-temporarily 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 FHLB and 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 or OREO, consists of properties obtained through foreclosure or in satisfaction of loans and is

reported at the lower of cost or fair value, less estimated costs to sell at the date acquired with any loss recognized as a

charge-off through the allowance for loan losses. 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. At December 31, 2022 we had total deferred tax assets of $15.6 million

included as “other assets”, including $13.7 million resulting from unrealized losses in our securities portfolio. 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, 2022. 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

2022

2021

Average

Yield/

Average

Yield/

(Dollars in thousands)

Balance

Rate

Balance

Rate

Loans and loans held for sale

454,604

4.45%

459,712

4.45%

Securities - taxable

364,029

1.81%

320,766

1.28%

Securities - tax-exempt (a)

61,591

3.53%

62,736

3.57%

Total securities

425,620

2.06%

383,502

1.66%

Federal funds sold

43,766

1.00%

38,659

0.15%

Interest bearing bank deposits

58,141

0.99%

77,220

0.13%

Total interest-earning assets

982,131

3.05%

959,093

2.81%

Deposits:

NOW

197,177

0.19%

178,197

0.12%

Savings and money market

327,139

0.20%

296,708

0.22%

Certificates of deposits

154,273

0.84%

159,111

1.03%

Total interest-bearing deposits

678,589

0.34%

634,016

0.39%

Short-term borrowings

4,516

1.33%

3,349

0.51%

Total interest-bearing liabilities

683,105

0.35%

637,365

0.39%

Net interest income and margin (a)

27,622

2.81%

24,460

2.55%

(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 $27.6 million in 2022, compared to $24.5 million in 2021. This increase was due

to improvements in the Company’s net interest margin (tax-equivalent). Net interest margin (tax-equivalent) increased to

2.81% in 2022, compared to 2.55% in 2021 due to increases in the Federal Reserve’s target federal funds rates beginning

March 17, 2022, and changes in our asset mix. During 2022, the Federal Reserve increased the target federal funds range

from 0 – 0.25% to 4.25 – 4.50%. The target rate was increased another 25 basis points on January 31, 2023, and further

increases in the target federal funds rate appear likely if inflation remains elevated. Net interest income (tax-equivalent)

included $0.3 million in PPP loan fees, net of related costs for 2022, compared to $1.0 million for 2021. See “Supervision

and Regulation – Fiscal and Monetary Policies”.

The tax-equivalent yield on total interest-earning assets increased by 24 basis points to 3.05% in 2022 compared to 2.81%

in 2021. This increase was primarily due to changes in our asset mix and higher market interest rates on interest earning

assets.

The cost of total interest-bearing liabilities decreased by 4 basis points to 0.35% in 2022 compared to 0.39% in 2021. The

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

interest rates during 2022. Our deposit costs may increase as the Federal Reserve increases its target federal funds rate,

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

rates on deposits and other alternative investments.

The Company continues to deploy various asset liability management strategies to manage its risk to interest rate

fluctuations. Deposit and loan pricing remains competitive in our markets. We believe this challenging competitive

environment will continue in 2023. Our ability to hold our deposit rates low until our interest-earning assets reprice will be

important to maintaining or potentially increasing our net interest margin during the monetary tightening cycle that we

believe will continue in 2023.

Provision for Loan Losses

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

management believes, based on its processes and estimates, should be adequate to provide for the probable losses on

outstanding loans. At December 31, 2022, the Company’s recorded investment in loans considered impaired was $2.6

million with a corresponding valuation allowance (included in the allowance for loan losses) of $0.5 million, compared to a

recorded investment in loans considered impaired of $0.2 million with no corresponding valuation allowance at December

31, 2021. The Company recorded a charge to provision for loan losses of $1.0 million during 2022, compared to a negative

provision for loan losses of $0.6 million during 2021. The provision for loan losses in 2022 was primarily related to loan

growth and the downgrade of one borrowing relationship. The provision for loan losses is based upon various estimates

and judgments, including the absolute level of loans, loan growth, credit quality and the amount of net charge-offs. Net

charge-offs as a percent of average loans were 0.04% in 2022 compared to 0.02% in 2021.

Based upon its assessment of the loan portfolio, management adjusts the allowance for loan losses to an amount it believes

should be appropriate to adequately cover its estimate of probable losses in the loan portfolio. The Company’s allowance

for loan losses as a percentage of total loans was 1.14% at December 31, 2022, compared to 1.08% at December 31, 2021.

While the policies and procedures used to estimate the allowance for loan losses, as well as the resulting provision for loan

losses charged to operations, are considered adequate by management and are reviewed from time to time by our regulators,

they are based on estimates and judgments and are therefore approximate and imprecise. Factors beyond our control (such

as conditions in the local and national economy, inflation and market interest rates, and local real estate markets and

businesses) may have a material adverse effect on our asset quality and the adequacy of our allowance for loan losses under

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

Noninterest Income

Year ended December 31

(Dollars in thousands)

2022

2021

Service charges on deposit accounts

598

566

Mortgage lending

650

1,547

Bank-owned life insurance

317

403

Gain on sale of premises and equipment

3,234

Securities gains, net

12

15

Other

1,695

1,757

Total noninterest income

6,506

4,288

The Company’s noninterest income from mortgage lending is primarily attributable to the (1) origination and sale of new

mortgage loans and (2) servicing of mortgage loans. Origination income, net, is comprised of gains or losses from the sale

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

mortgage loans, which are netted against the commission expense associated with these originations. The Company’s

normal practice is to originate mortgage loans for sale in the secondary market and to either sell or retain the MSRs when

the loan is sold.

MSRs are recognized based on the fair value of the servicing right on the date the corresponding 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 quarterly. Impairment is determined by grouping MSRs by common

predominant characteristics, such as interest rate and loan type. If the aggregate carrying amount of a particular group of

MSRs exceeds the group’s aggregate fair value, a valuation allowance for that group is established. The valuation

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 2022 and 2021.

Year ended December 31

(Dollars in thousands)

2022

2021

Origination income

309

1,417

Servicing fees, net

341

130

Total mortgage lending income

650

1,547

The Company’s income from mortgage lending typically fluctuates as mortgage interest rates change and is primarily

attributable to the origination and sale of new mortgage loans. Origination income decreased as market interest rates on

mortgage loans increased. The decrease in origination income was partially offset by an increase in servicing fees, net of

related amortization expense as prepayment speeds slowed, resulting in decreased amortization expense.

In October 2022, the Company closed the sale of approximately 0.85 acres of land located next to the Company’s

headquarters in Auburn, Alabama for a purchase price of $4.3 million. The sale resulted in a gain of $3.2 million, net of

prorations, closing costs and costs of demolishing the Bank’s former main office building.

Noninterest Expense

Year ended December 31

(Dollars in thousands)

2022

2021

Salaries and benefits

12,307

11,710

Employee retention credit

(1,569)

Net occupancy and equipment

2,742

1,743

Professional fees

975

995

FDIC and other regulatory assessments

404

426

Other

4,964

4,559

Total noninterest expense

19,823

19,433

The increase in salaries and benefits was primarily due to a decrease in deferred costs related to the PPP loan program, and

routine annual wage and benefit increases.

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

Act and the 2020 Consolidated Appropriations Act.

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

redevelopment of the Company’s headquarters in downtown Auburn. This amount includes depreciation expense and one-

time costs associated with the opening of the Company’s new headquarters. The Company relocated its main office branch

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

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

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

miscellaneous operating expenses.

Income Tax Expense

Income tax expense was $2.5 million in 2022, compared to $1.4 million in 2021. The Company’s effective tax rate for

2022 was 19.48%, compared to 14.89% in 2021. This increase in tax expense was primarily due to increased pre-tax

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

bank-owned life insurance contracts in 2022. The Company’s effective income tax rate is principally impacted by tax-

exempt earnings from the Company’s investments in municipal securities, bank-owned life insurance, and New Markets

Tax Credits.

BALANCE SHEET ANALYSIS

Securities

Securities available-for-sale were $405.3 million at December 31, 2022, compared to $421.9 million at December 31, 2021.

This decrease reflects an increase in the amortized cost basis of securities available-for-sale of $39.2 million, offset by a

decrease of $55.8 million in the fair value of securities available-for-sale. The increase in the amortized cost basis of

securities available-for-sale was primarily attributable to management allocating more funding to the investment portfolio

following the significant increase in customer deposits. The decrease in the fair value of securities was primarily due to an

increase in long-term market interest rates, which resulted in $13.7 million of deferred tax assets included in our other

assets. The average annualized tax-equivalent yields earned on total securities were 2.06% in 2022 and 1.66% in 2021.

The following table shows the carrying value and weighted average yield of securities available-for-sale as of December

31, 2022 according to contractual maturity. Actual maturities may differ from contractual maturities of mortgage-backed

securities (“MBS”) because the mortgages underlying the securities may be called or prepaid with or without penalty.

December 31, 2022

1 year

1 to 5

5 to 10

After 10

Total

(Dollars in thousands)

or less

years

years

years

Fair Value

Agency obligations

4,935

50,746

69,936

125,617

Agency MBS

7,130

27,153

183,877

218,160

State and political subdivisions

300

642

15,130

45,455

61,527

Total available-for-sale

5,235

58,518

112,219

229,332

405,304

Weighted average yield (1):

Agency obligations

1.64%

1.29%

1.83%

1.61%

Agency MBS

1.35%

1.56%

2.14%

2.05%

State and political subdivisions

4.00%

1.83%

2.29%

2.77%

2.65%

Total available-for-sale

1.77%

1.30%

1.83%

2.27%

2.00%

(1) Yields are calculated based on amortized cost.

Loans

December 31

(In thousands)

2022

2021

Commercial and industrial

66,179

83,977

Construction and land development

66,479

32,432

Commercial real estate

265,181

258,371

Residential real estate

97,735

77,661

Consumer installment

9,546

6,682

Total loans

505,120

459,123

Less: unearned income

(662)

(759)

Loans, net of unearned income

504,458

458,364

Total loans, net of unearned income, were $504.5 million at December 31, 2022, and $458.4 million at December 31, 2021,

an increase of $46.1 million, or 10%. Total loans at December 31, 2021 included $8.1 million in PPP loans, all but one of

these PPP loans, totaling $0.1 million, were forgiven during 2022. Excluding PPP loans, total loans, net of unearned

income, increased $54.0 million, or 12% from December 31, 2021. Four loan categories represented the majority of the

loan portfolio at December 31, 2022: commercial real estate (53%), residential real estate (19%), construction and land

development (13%), and commercial and industrial (13%). Approximately 23% of the Company’s commercial real estate

loans were classified as owner-occupied at December 31, 2022.

Within the residential real estate portfolio segment, the Company had junior lien mortgages of approximately $7.4 million,

or 1%, and $7.2 million, or 2%, of total loans, net of unearned income at December 31, 2022 and 2021, respectively. For

residential real estate mortgage loans with a consumer purpose, the Company had no loans that required interest only

payments at December 31, 2022 and 2021. The Company’s residential real estate mortgage portfolio does not include any

option ARM loans, subprime loans, or any material amount of other consumer mortgage products which are generally

viewed as high risk.

The average yield earned on loans and loans held for sale was 4.45% in 2022 and 2021, respectively.

The specific economic and credit risks associated with our loan portfolio include, but are not limited to, the effects of

current economic conditions, including inflation and the continuing increases in market interest rates, remaining COVID-19

pandemic effects including supply chain disruptions, commercial office occupancy levels, housing supply shortages and

inflation, on our borrowers’ cash flows, real estate market sales volumes and liquidity, valuations used in making loans and

evaluating collateral, availability and cost of financing properties, real estate industry concentrations, competitive pressures

from a wide range of other lenders, deterioration in certain credits, interest rate fluctuations, reduced collateral values or

non-existent collateral, title defects, inaccurate appraisals, financial deterioration of borrowers, fraud, and any violation of

applicable laws and regulations. Various projects financed earlier that were based on lower interest rate assumptions than

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

the future.

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 $22.6 million. Furthermore, we have an internal limit for aggregate credit exposure (loans outstanding plus

unfunded commitments) to a single borrower of $20.3 million. Our loan policy requires that the Loan Committee of the

Board of Directors approve any loan relationships that exceed this internal limit. At December 31, 2022, 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, 2022 (and related balances at December 31, 2021).

December 31

(In thousands)

2022

2021

Lessors of 1-4 family residential properties

52,325

47,880

Multi-family residential properties

41,181

42,587

Hotel/motel

33,457

43,856

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

guidance encouraging banks to work constructively with borrowers affected by the virus in our community. This guidance,

including the Interagency Statement on COVID-19 Loan Modifications and the Interagency Examiner Guidance for

Assessing Safety and Soundness Considering the Effect of the COVID-19 Pandemic on Institutions, provides that the

agencies will not criticize financial institutions that mitigate credit risk through prudent actions consistent with safe and

sound practices. Specifically, examiners will not criticize institutions for working with borrowers as part of a risk

mitigation strategy intended to improve existing loans, even if the restructured loans have or develop weaknesses that

ultimately result in adverse credit classification. Upon demonstrating the need for payment relief, the bank will work 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 recognized that a combination of the payment relief options may be prudent dependent on a borrower’s business

type. As of December 31, 2022, we had no COVID-19 loan deferrals, compared to one COVID-19 loan deferral totaling

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

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

pursuant to GAAP. In addition, the Interagency Statement on COVID-19 Loan Modifications provides circumstances in

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

Section 4013.

Allowance for Loan Losses

The Company maintains the allowance for loan losses at a level that management believes appropriate to adequately cover

the Company’s estimate of probable losses inherent in the loan portfolio. The allowance for loan losses was $5.8 million at

December 31, 2022 compared to $4.9 million at December 31, 2021, which management believed to be adequate at each of

the 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,

2022 and 2021 are presented below.

Year ended December 31

(Dollars in thousands)

2022

2021

Allowance for loan losses:

Balance at beginning of period

4,939

5,618

Charge-offs:

Commercial and industrial

(222)

Construction and land development

(254)

Residential real estate

(3)

Consumer installment

(70)

(37)

Total charge -offs

(292)

(294)

Recoveries:

Commercial and industrial

7

140

Commercial real estate

23

Residential real estate

26

55

Consumer installment

62

20

Total recoveries

118

215

Net charge-offs

(174)

(79)

Provision for loan losses

1,000

(600)

Ending balance

5,765

4,939

as a % of loans

1.14

1.08

as a % of nonperforming loans

211

1,112

Net charge-offs as a % of average loans

0.04

0.02

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 1.14% at December 31, 2022, compared to 1.08% at December 31,

2021. In the future, the allowance for loan losses used in the allowance to total loans outstanding ratio will be determined

in accordance with the CECL standard, and may increase or decrease to the extent the factors that influence our quarterly

allowance assessment, including changes in economic conditions that are part of our CECL model, either improve or

weaken. In addition our regulators, as an integral part of their examination process, will periodically review the Company’s

loans and allowance for loan losses, and may require the Company to make additional provisions to the allowance for loan

losses based on their judgment about information available to them at the time of their examinations.

Nonperforming Assets

At December 31, 2022 the Company had $2.7 million in nonperforming assets compared to $0.8 million at December 31,

The table below provides information concerning total nonperforming assets and certain asset quality ratios.

December 31

(Dollars in thousands)

2022

2021

Nonperforming assets:

Nonperforming (nonaccrual) loans

2,731

444

Other real estate owned

374

Total nonperforming assets

2,731

818

as a % of loans and other real estate owned

0.54

0.18

as a % of total assets

0.27

0.07

Nonperforming loans as a % of total loans

0.54

0.10

Accruing loans 90 days or more past due

The table below provides information concerning the composition of nonaccrual loans at December 31, 2022 and 2021,

respectively.

December 31

(In thousands)

2022

2021

Nonaccrual loans:

Commercial and industrial

443

Commercial real estate

2,116

187

Residential real estate

172

257

Total nonaccrual loans / nonperforming loans

2,731

444

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, 2022 and

2021, respectively, the Company had $2.7 million and $0.4 million in nonaccrual loans.

There were no loans 90 days past due and still accruing interest at December 31, 2022 and 2021, respectively.

The table below provides information concerning the composition of OREO at December 31, 2022 and 2021, respectively.

December 31

(In thousands)

2022

2021

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 $1.3 million, or 0.3% of total loans at

December 31, 2022, compared to $2.4 million, or 0.5% of total loans at December 31, 2021.

The table below provides information concerning the composition of potential problem loans at December 31, 2022 and

2021, respectively.

December 31

(In thousands)

2022

2021

Potential problem loans:

Commercial and industrial

212

226

Construction and land development

218

Commercial real estate

161

156

Residential real estate

835

1,748

Consumer installment

47

12

Total potential problem loans

1,255

2,360

At December 31, 2022, there were no potential problem loans past due at least 30 but less than 90 days.

The following table is a summary of the Company’s performing loans that were past due at least 30 days but less than

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

December 31

(In thousands)

2022

2021

Performing loans past due 30 to 89 days:

Commercial and industrial

5

3

Construction and land development

204

Commercial real estate

Residential real estate

38

516

Consumer installment

40

25

Total performing loans past due 30 to 89 days

83

748

Deposits

December 31

(In thousands)

2022

2021

Noninterest bearing demand

311,371

316,132

NOW

178,641

183,021

Money market

214,298

244,195

Savings

95,652

91,245

Certificates of deposit under $250,000

93,017

101,660

Certificates of deposit and other time deposits of $250,000 or more

57,358

57,990

Total deposits

950,337

994,243

Total deposits decreased $43.9 million, or 4%, to $950.3 million at December 31, 2022, compared to $994.2 million at

December 31, 2021. This decrease reflects net outflows to higher yield investment alternatives in a rising interest rate

environment and a decline in balances in existing accounts due to increased customer spending. Noninterest-bearing

deposits were $311.4 million, or 33% of total deposits, at December 31, 2022, compared to $316.1 million, or 32% of total

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

Estimated uninsured deposits totaled $381.7 million and $420.8 million at December 31, 2022 and 2021, respectively.

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

The average rates paid on total interest-bearing deposits were 0.34% in 2022 and 0.39% in 2021.

Other Borrowings

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

of federal funds purchased and securities sold under agreements to repurchase with an original maturity of one year or less.

The Bank had available federal fund lines totaling $61.0 million and $41.0 million with none outstanding at December 31,

2022 and 2021, respectively. Securities sold under agreements to repurchase totaled $2.6 million and $3.4 million at

December 31, 2022 and 2021, respectively.

The average rates paid on short-term borrowings were 1.33% and 0.51% in 2022 and 2021, respectively.

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

CAPITAL ADEQUACY

The Company's consolidated stockholders' equity was $68.0 million and $103.7 million as of December 31, 2022 and 2021,

respectively. The decrease from December 31, 2021 was primarily driven by an other comprehensive loss due to the

change in unrealized gains/losses on securities available-for-sale, net of tax, of $41.8 million, cash dividends paid of $3.7

million and stock repurchases of $0.5 million, representing 17,183 shares, which was partially offset by net earnings of

$10.3 million.

Our unrealized losses on securities and the related decline in our accumulated other comprehensive income (“AOCI”)

resulted from increases in market interest rates in 2022 due to inflation and Federal Reserve monetary policy actions. Our

AOCI declined $41.8 million from $0.9 million at December 31, 2021 to ($40.9) million This is the primary reason both

our shareholders’ equity and book value per share declined 34%, respectively, in 2022. The Bank and the Company, as

permitted by the Federal Reserve and the other Federal bank regulators, made a permanent election in March 2015 to opt

out of the requirement to include most components of AOCI in regulatory capital. Accordingly, AOCI does not affect our

capital for regulatory purposes. If our tangible GAAP equity, however, ever became negative, Federal Housing Finance

Agency rules could prevent us from obtaining new FHLB lines or advances, even though renewals of existing lines and

advance may be permissible. Investors may also view tangible GAAP equity, net of AOCI as important in connection with

capital raising, if any, especially in stressed economic conditions. On a GAAP basis, our returns on equity increased as

result of the negative AOCI’s reduction of stockholders’ equity.

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

Dodd-Frank Wall Street Reform and Consumer Protection Act changes. The rules included the implementation of a capital

conservation buffer that is added to the minimum requirements for capital adequacy purposes. The capital conservation

buffer was fully phased-in on January 1, 2019 at 2.5%. A banking organization with a capital conservation buffer of less

than the required minimum amount will be subject to limitations on capital distributions, including dividend payments and

certain discretionary bonus payments to executive officers. At December 31, 2022, the Bank’s ratio exceeded 2.5% and the

capital conservation buffer requirements.

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

amended the capital conservation buffer. The interim final rule was adopted as a final rule on August 26, 2020. 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 10.01%, CET1 risk-based capital ratio was 15.39%, tier 1 risk-based capital ratio was 15.39%, and

total risk-based capital ratio was 16.25% at December 31, 2022. 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

8.25% at December 31, 2022.

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.

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

the net interest margin expansion that may be expected otherwise as interest rates rise. Further, the remaining maturity of

various assets and liabilities may shorten or lengthen as interest rates change. For example, if long-term mortgage interest

rates decline sharply, mortgage-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, we simulate the following 12-month time period to determine a baseline net interest income forecast and the

sensitivity of this forecast to changes in interest rates. The baseline forecast assumes an unchanged or flat interest rate

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, 2022.

Changes in Interest Rates

Net Interest Income % Variance

400 basis points

(3.81)

300 basis points

(2.62)

200 basis points

(1.50)

100 basis points

(0.58)

(100) basis points

(0.59)

(200) basis points

(1.50)

(300) basis points

(2.29)

(400) basis points

(2.92)

At December 31, 2022, 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 economic 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, to which establish a base case EVE. In contrast with our

earnings simulation model which evaluates interest rate risk over a 12-month timeframe, EVE uses a terminal horizon

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, 2022.

Changes in Interest Rates

EVE % Variance

400 basis points

(3.87)

300 basis points

(1.11)

200 basis points

0.58

100 basis points

1.16

(100) basis points

(5.12)

(200) basis points

(15.06)

(300) basis points

(28.96)

(400) basis points

(31.85)

At December 31, 2022, our EVE model indicated that we were in compliance with the policy guidelines noted above.

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

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, 2022 and 2021, 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. The Company

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

dividends on, and repurchases of, Company common stock. The Bank’s payment of dividends depends on its earnings,

liquidity, capital and the absence of any regulatory restrictions. If needed, the Company could also issue common stock or

other securities.

Primary sources of funding for the Bank include primarily customer deposits, together with other borrowings, repayment

and maturity of securities, and sale and repayment of loans. The Bank has participated in the FHLB’s advance program to

obtain funding for its growth. FHLB advances include both fixed and variable terms and are taken out with varying

maturities. The Bank also has access to federal funds lines from various banks and borrowings from the Federal Reserve

discount window. As of December 31, 2022, the Bank had $312.6 million of borrowing capacity with the FHLB and $61.0

million of federal funds lines, with none outstanding. Primary uses of funds include repayment of maturing obligations and

growing the loan portfolio.

The following table presents additional information about our contractual obligations as of December 31, 2022, which by

their terms had contractual maturity and termination dates subsequent to December 31, 2022:

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)

950,337

894,523

38,266

17,357

191

Operating lease obligations

674

123

237

192

122

Total

951,011

894,646

38,503

17,549

313

(1) Deposits with no stated maturity (demand, NOW, money market, and savings deposits) are presented in the "1 year or less" column

Management believes that the Company and the Bank have adequate sources of liquidity from deposits, FHLB advances,

sales of securities under agreement to repurchase and federal funds lines, as well as possible sales of securities, to meet all

known contractual obligations and unfunded commitments, including loan commitments and reasonable borrower,

depositor, and creditor requirements over the next 12 months.

The Federal Reserve’s new Bank Term Funding Program (“BTFP”) established on March 12, 2023, provides additional

liquidity, if needed without suffering any adverse effects from unrealized losses on securities. BTFP offers loans of up to

one year to banks, savings associations, credit unions, and other eligible depository institutions pledging U.S. Treasuries,

agency debt and mortgage-backed securities, and other qualifying assets as collateral. These assets will be valued at par.

The BTFP will be an additional source of liquidity against high-quality securities, eliminating an institution's need to

quickly sell those securities in times of stress. In addition, the discount window will apply the same margins used for the

securities eligible for the BTFP, further increasing the value of investment securities at the discount window.

Off-Balance Sheet Arrangements

At December 31, 2022, the Bank had outstanding standby letters of credit of $1. 0 million and unfunded loan commitments

outstanding of $87.7 million. Because these commitments generally have fixed expiration dates and many will expire

without being drawn upon, the total commitment level does not necessarily represent future cash requirements. If needed to

fund these outstanding commitments, the Bank has the ability to liquidate federal funds sold, obtain FHLB advances, raise

deposits or sell securities available-for-sale, or to purchase federal funds from other financial institutions on a short-term

basis while it obtains the other longer term funding.

Residential mortgage lending and servicing activities

We primarily sell conforming residential mortgage loans in the secondary market to Fannie Mae while retaining the

servicing of these loans (MSRs). The sale agreements for these residential mortgage loans with Fannie Mae and other

investors include various representations and warranties regarding the origination and characteristics of the residential

mortgage loans. Although the representations and warranties vary among investors, they typically cover ownership of the

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

compliance with loan criteria set forth in the applicable agreement, compliance with applicable federal, state, and local

laws, among other matters.

The Bank sells mortgage loans to Fannie Mae and services these on an actual/actual basis. As a result, the Bank is not

obligated to make any advances to Fannie Mae on principal and interest on such mortgage loans where the borrower is

entitled to forbearance.

As of December 31, 2022, the unpaid principal balance of residential mortgage loans, which we have originated and sold,

but retained the servicing rights (MSRs) totaled $232.7 million. Although these loans are generally sold on a non-recourse

basis, except for breaches of customary seller representations and warranties, we may have to repurchase residential

mortgage loans in cases where we breach such representations or warranties or the other terms of the sale, such as where we

fail to deliver required documents or the documents we deliver are defective. 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 2022 and 2021 as a result of representation and warranty

provisions contained in the Company’s sale agre ements with Fannie Mae, and had no pending repurchase or make-whole

requests at December 31, 2022.

We service all residential 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 our standards of responsibility for actions taken by us in

such capacity and provides protection against expenses and liabilities incurred by us when acting in compliance with the

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, 2022, we believe that this exposure is

not material due to the historical level of repurchase requests and loss trends, the results of our quality control reviews, and

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 from the servicer after affirming that such borrower is experiencing financial hardships during the

COVID-19 emergency. Except for vacant or abandoned properties, Fannie Mae servicers may not initiate foreclosures on

similar procedures or related evictions or sales generally until June 30, 2021.

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 ASUs have been issued by the FASB but are not yet effective.

ASU 2016-13,

Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial

Instruments; and

ASU 2022-02,

Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage

Disclosures.

Information about these pronouncements are 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 previously

provided by GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses using a broader

range of information regarding past events, current conditions and forecasts assessing the collectability of cash flows. 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. On October 16, 2019,

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

implementation date for ASU 2016-13. This standard became effective for the Company on January 1, 2023.

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

effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective.

The Company is finalizing implementation efforts through its implementation team. The team has worked with an advisory

consultant and has finalized and documented the methodologies that will be utilized. The team is currently finalizing

controls, processes, policies and disclosures and has completed full end-to-end parallel runs. Based on the Company’s

portfolio composition as of December 31, 2022, and current expectations of future economic conditions, the reserve for

credit losses is expected to increase from 1.14% as a percentage of total loans at December 31, 2022 to a range between

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

incurred loss model to the expected loss model, which provides for expected credit losses over the life of the loan portfolio.

The Company does not expect to record an allowance for available-for-sale securities as the investment portfolio consists

primarily of debt securities explicitly or implicitly backed by the U.S. Government for which credit risk is deemed minimal.

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

Company continues to finalize its day-one adjustment and will record the after-tax impact as a cumulative-effect adjustment

to retained earnings as of January 1, 2023. This estimate is subject to change as key assumptions are refined. The impact

going forward will depend on the composition, characteristics, and credit quality of the loan and securities portfolios as

well as the economic conditions at future reporting periods.

ASU 2022-02

Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures

eliminates the accounting guidance for troubled debt restructurings (“TDRs”), while enhancing disclosure requirements for

certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. The new

standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. The

new standard is not expected to have a material impact on the Company’s consolidated financial statements.

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)

2022

2021

2020

2019

2018

Net interest income (GAAP)

27,166

23,990

24,338

26,064

25,570

Tax-equivalent adjustment

456

470

492

557

613

Net interest income (Tax-equivalent)

27,622

24,460

24,830

26,621

26,183

Table 2 - Selected Financial Data

Year ended December 31

(Dollars in thousands, except per share amounts)

2022

2021

2020

2019

2018

Income statement

Tax-equivalent interest income (a)

30,001

26,977

28,686

30,804

29,859

Total interest expense

2,379

2,517

3,856

4,183

3,676

Tax equivalent net interest income (a)

27,622

24,460

24,830

26,621

26,183

Provision for loan losses

1,000

(600)

1,100

(250)

Total noninterest income

6,506

4,288

5,375

5,494

3,325

Total noninterest expense

19,823

19,433

19,554

19,697

17,874

Net earnings before income taxes and

tax-equivalent adjustment

13,305

9,915

9,551

12,668

11,634

Tax-equivalent adjustment

456

470

492

557

613

Income tax expense

2,503

1,406

1,605

2,370

2,187

Net earnings

10,346

8,039

7,454

9,741

8,834

Per share data:

Basic and diluted net earnings

2.95

2.27

2.09

2.72

2.42

Cash dividends declared

1.06

1.04

1.02

1.00

0.96

Weighted average shares outstanding

Basic and diluted

3,510,869

3,545,310

3,566,207

3,581,476

3,643,780

Shares outstanding

3,503,452

3,520,485

3,566,276

3,566,146

3,643,868

Book value

19.42

29.46

30.20

27.57

24.44

Common stock price

High

34.49

48.00

63.40

53.90

53.50

Low

22.07

31.32

24.11

30.61

28.88

Period-end

23.00

32.30

42.29

53.00

31.66

To earnings ratio

7.80

x

14.23

20.23

19.49

13.08

To book value

118

110

140

192

130

Performance ratios:

Return on average equity

12.48

7.54

7.12

10.35

10.14

Return on average assets

0.96

0.78

0.83

1.18

1.08

Dividend payout ratio

35.93

45.81

48.80

36.76

39.67

Average equity to average assets

7.72

10.39

11.63

11.39

10.63

Asset Quality:

Allowance for loan losses as a % of:

Loans

1.14

1.08

1.22

0.95

1.00

Nonperforming loans

211

1,112

1,052

2,345

2,691

Nonperforming assets as a % of:

Loans and other real estate owned

0.54

0.18

0.12

0.04

0.07

Total assets

0.27

0.07

0.06

0.02

0.04

Nonperforming loans as % of loans

0.54

0.10

0.12

0.04

0.04

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

0.04

0.02

(0.03)

0.03

(0.01)

Capital Adequacy (c):

CET 1 risk-based capital ratio

15.39

16.23

17.27

17.28

16.49

Tier 1 risk-based capital ratio

15.39

16.23

17.27

17.28

16.49

Total risk-based capital ratio

16.25

17.06

18.31

18.12

17.38

Tier 1 leverage ratio

10.01

9.35

10.32

11.23

11.33

Other financial data:

Net interest margin (a)

2.81

2.55

2.92

3.43

3.40

Effective income tax rate

19.48

14.89

17.72

19.57

19.84

Efficiency ratio (b)

58.08

67.60

64.74

61.33

60.57

Selected period end balances:

Securities

405,304

421,891

335,177

235,902

239,801

Loans, net of unearned income

504,458

458,364

461,700

460,901

476,908

Allowance for loan losses

5,765

4,939

5,618

4,386

4,790

Total assets

1,023,888

1,105,150

956,597

828,570

818,077

Total deposits

950,337

994,243

839,792

724,152

724,193

Total stockholders’ equity

68,041

103,726

107,689

98,328

89,055

(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

2022

2021

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)

454,604

20,241

4.45%

459,712

20,473

4.45%

Securities - taxable

364,029

6,576

1.81%

320,766

4,107

1.28%

Securities - tax-exempt (2)

61,591

2,172

3.53%

62,736

2,242

3.57%

Total securities

425,620

8,748

2.06%

383,502

6,349

1.66%

Federal funds sold

43,766

435

1.00%

38,659

55

0.15%

Interest bearing bank deposits

58,141

577

0.99%

77,220

100

0.13%

Total interest-earning assets

982,131

30,001

3.05%

959,093

26,977

2.81%

Cash and due from banks

15,108

14,591

Other assets

77,496

51,664

Total assets

1,074,735

1,025,348

Interest-bearing liabilities:

Deposits:

NOW

197,177

370

0.19%

178,197

212

0.12%

Savings and money market

327,139

649

0.20%

296,708

655

0.22%

Certificates of deposits

154,273

1,300

0.84%

159,111

1,633

1.03%

Total interest-bearing deposits

678,589

2,319

0.34%

634,016

2,500

0.39%

Short-term borrowings

4,516

60

1.33%

3,349

17

0.51%

Total interest-bearing liabilities

683,105

2,379

0.35%

637,365

2,517

0.39%

Noninterest-bearing deposits

306,772

278,013

Other liabilities

1,933

3,392

Stockholders' equity

82,925

106,578

Total liabilities and

and stockholders' equity

1,074,735

1,025,348

Net interest income and margin

27,622

2.81%

24,460

2.55%

(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

Year ended December 31, 2022 vs. 2021

Year ended December 31, 2021 vs. 2020

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

(232)

(5)

(227)

(1,582)

(1,333)

(249)

Securities - taxable

2,469

1,687

782

175

(933)

1,108

Securities - tax-exempt (1)

(70)

(30)

(40)

(101)

(91)

(10)

Total securities

2,399

1,657

742

74

(1,024)

1,098

Federal funds sold

380

329

51

(70)

(81)

11

Interest bearing bank deposits

477

666

(189)

(131)

(159)

28

Total interest income

3,024

2,647

377

(1,709)

(2,597)

888

Interest expense:

Deposits:

NOW

158

122

36

(311)

(340)

29

Savings and money market

(6)

(66)

60

(416)

(537)

121

Certificates of deposits

(333)

(292)

(41)

(620)

(560)

(60)

Total interest-bearing deposits

(181)

(236)

55

(1,347)

(1,437)

90

Short-term borrowings

43

8

35

8

8

Total interest expense

(138)

(228)

90

(1,339)

(1,437)

98

Net interest income

3,162

2,875

287

(370)

(1,160)

790

(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

2022

2021

Net

Net

Net

charge-off

Net

charge-off

charge-offs

Average

(recovery)

charge-offs

Average

(recovery)

(Dollars in thousands)

(recoveries)

Loans (2)

ratio

(recoveries)

Loans (2)

ratio

Commercial and industrial (1)

215

69,973

0.31

(140)

64,618

(0.22)

Construction and land development

44,177

33,945

Commercial real estate

(3)

247,374

254

253,113

0.10

Residential real estate

(26)

85,223

(0.03)

(52)

81,526

(0.06)

Consumer installment

8

7,915

0.10

17

6,975

0.24

Total

194

454,662

0.04

79

440,177

0.02

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

(2) Gross loan balances.

Table 6 - Loan Maturities

December 31, 2022

1 year

1 to 5

5 to 15

After 15

(Dollars in thousands)

or less

years

years

years

Total

Commercial and industrial

18,643

7,867

37,948

1,721

66,179

Construction and land development

51,560

13,162

1,713

44

66,479

Commercial real estate

19,978

92,259

148,899

4,045

265,181

Residential real estate

4,897

20,988

36,276

35,574

97,735

Consumer installment

3,537

5,337

672

9,546

Total loans

98,615

139,613

225,508

41,384

505,120

Table 7 - Sensitivities to Changes in Interest Rates on Loans Maturing in More Than One Year

December 31, 2022

Variable

Fixed

(Dollars in thousands)

Rate

Rate

Total

Commercial and industrial

141

47,395

47,536

Construction and land development

1,989

12,930

14,919

Commercial real estate

1,937

243,266

245,203

Residential real estate

34,767

58,071

92,838

Consumer installment

21

5,988

6,009

Total loans

38,855

367,650

406,505

Table 8 - Allocation of Allowance for Loan Losses

2022

2021

(Dollars in thousands)

Amount

Amount

Commercial and industrial

747

13.1

857

18.3

Construction and land development

949

13.2

518

7.1

Commercial real estate

3,109

52.5

2739

56.2

Residential real estate

828

19.3

739

16.9

Consumer installment

132

1.9

86

1.5

Total allowance for loan losses

5,765

4,939

* 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, 2022

Maturity of:

3 months or less

774

Over 3 months through 6 months

173

Over 6 months through 12 months

26,220

Over 12 months

14,941

Total estimated uninsured time deposits

42,108

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, 2022 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, 2022.

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.