Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.

20549

FORM

10-Q

(Mark One)

☒

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the quarterly period ended

September 30, 2022

☐

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the transition period __________

to __________

Commission File Number:

0-26486

Auburn National Bancorporation, Inc.

(Exact Name of

Registrant as Specified

in Its Charter)

Delaware

(State or other

jurisdiction of

incorporation

or organization)

63-0885779

(I.R.S. Employer

Identification

No.)

100 N. Gay Street

Auburn

Alabama

36830

(

334

)

821-9200

(Address and telephone

number of principal

executive offices)

(Former Name,

Former Address

and Former

Fiscal Year,

if Changed Since

Last Report)

Indicate

check

mark

whether

the

registrant

(1) has

filed

all

reports

required to

filed by

Section 13 or

15(d)

the

Securities

Exchange

Act

1934 during the preceding 12 months (or

for

such

shorter period that

the

registrant was

required to

file such

reports),

and (2) has been subject to such filing requirements for the past 90 days.

Yes

☒

☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and

posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required

to submit such files).

Yes

☒

☐

Indicate by

check

mark whether

the

registrant is a large

accelerated

filer, an accelerated

filer, a non-accelerated filer, a

smaller reporting

company

emerging

growth

company.

See

the

definitions of

“large

accelerated

filer,”

“accelerated

filer,”

“smaller reporting

company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated

filer

☐

Accelerated filer

☐

Non-accelerated filer

☒

Smaller reporting company

☒

Emerging growth company

☐

emerging

growth

company,

indicate

check

mark

the

registrant

has

elected

not

use

the

extended

transition period for

complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes

☐

☒

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on

which registered

Common Stock, par value $0.01

AUBN

NASDAQ

Global Market

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Class

Outstanding at November 8, 2022

Common Stock, $0.01 par value per share

3,504,420

Table of Contents

AUBURN

NATIONAL BANCORPORATION,

INC. AND SUBSIDIARIES

INDEX

PART I. FINANCIAL INFORMATION

PAGE

Item 1

Financial Statement

Consolidated Balance Sheets (Unaudited) as of September 30, 2022 and December 31, 2021

Consolidated Statements of Earnings (Unaudited) for the quarter and nine months ended September 30,

2022 and 2021

Consolidated Statements of Comprehensive Income (Unaudited) for the quarter and nine months ended

September 30, 2022 and 2021

Consolidated Statements of Stockholders’ Equity (Unaudited) for the quarter and nine months ended

September 30, 2022 and 2021

Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2022

and 2021

Notes to Consolidated Financial Statements (Unaudited

)

Item 2

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Table 1 – Explanation of Non-GAAP Financial Measures

Table 2 – Selected Quarterly Financial Data

Table 3 – Selected Financial Data

Table 4 – Average Balances and Net Interest Income Analysis – for the quarter ended September 30,

2022 and 2021

Table 5 – Average Balances and Net Interest Income Analysis – for the nine months ended September

30, 2022 and 2021

Table 6 – Allocation of Allowance for Loan Losses

Table 7 – Estimated Uninsured Time Deposits by Maturity

Item 3

Quantitative and Qualitative Disclosures About Market Risk

Item 4

Controls and Procedures

PART II. OTHER INFORMATION

Item 1

Legal Proceedings

Item 1A

Risk Factors

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

Item 3

Defaults Upon Senior Securities

Item 4

Mine Safety Disclosures

Item 5

Other Information

Item 6

Exhibits

Table of Contents

PART 1.

FINANCIAL INFORMATION

ITEM 1. FINANCIAL

STATEMENTS

AUBURN

NATIONAL BANCORPORATION,

INC. AND

SUBSIDIARIES

Consolidated Balance Sheets

(Unaudited)

September

30,

December 31,

(Dollars

in thousands, except

share data)

2022

2021

Assets:

Cash and due

from banks

20,488

11,210

Federal funds

sold

31,133

77,420

Interest-bearing bank

deposits

18,016

67,629

Cash and cash

equivalents

69,637

156,259

Securities available-for-sale

411,538

421,891

Loans held for sale

—

1,376

Loans, net of unearned

income

474,035

458,364

Allowance

for loan losses

(4,966)

(4,939)

Loans, net

469,069

453,425

Premises and equipment,

net

46,419

41,724

Bank-owned life insurance

19,929

19,635

Other assets

25,967

10,840

Total assets

1,042,559

1,105,150

Liabilities:

Deposits:

Noninterest-bearing

321,702

316,132

Interest-bearing

656,236

678,111

Total deposits

977,938

994,243

Federal funds

purchased and

securities sold under

agreements to repurchase

2,613

3,448

Accrued expenses and

other liabilities

2,215

3,733

Total liabilities

982,766

1,001,424

Stockholders' equity:

Preferred stock of $

.01

par

value;

authorized

200,000

shares;

no shares issued

—

Common stock

of $

.01

par

value; authorized

8,500,000

shares;

issued

3,957,135

Additional

paid-in capital

3,797

3,794

Retained

earnings

113,063

109,974

Accumulated

other comprehensive (loss) income,

net

(45,675)

891

Less treasury stock,

at cost -

451,780

shares and

436,650

at September

30, 2022

and December 31, 2021,

respectively

(11,431)

(10,972)

Total stockholders’ equity

59,793

103,726

Total liabilities and stockholders’

equity

1,042,559

1,105,150

See accompanying notes to

consolidated

financial statements

Table of Contents

AUBURN

NATIONAL BANCORPORATION,

INC. AND SUBSIDIARIES

Consolidated Statements

of Earnings

(Unaudited)

Quarter ended

September

30,

Nine months

ended September

30,

(Dollars

in thousands, except

share and

per share

data)

2022

2021

2022

2021

Interest income:

Loans, including

fees

5,097

5,127

14,638

15,417

Securities:

Taxable

1,808

1,048

4,691

3,006

Tax-exempt

441

1,275

1,337

Federal funds

sold and interest-bearing

bank deposits

426

767

105

Total interest income

7,772

6,665

21,371

19,865

Interest expense:

Deposits

524

620

1,661

1,900

Short-term borrowings

Total interest expense

529

624

1,676

1,912

Net interest income

7,243

6,041

19,695

17,953

Provision for loan losses

250

—

(600)

Net interest income after

provision for

loan losses

6,993

6,041

19,695

18,553

Noninterest income:

Service charges

on deposit accounts

158

149

446

419

Mortgage lending

126

268

566

1,241

Bank-owned life insurance

100

293

302

Other

427

443

1,259

1,311

Securities gains,

net

Total noninterest income

852

975

2,608

3,288

Noninterest expense:

Salaries and

benefits

2,975

2,893

8,901

8,641

Net occupancy

and equipment

794

467

1,955

1,340

Professional fees

235

232

704

814

Other

1,411

1,163

3,814

3,566

Total noninterest expense

5,415

4,755

15,374

14,361

Earnings before income taxes

2,430

2,261

6,929

7,480

Income tax

expense

432

386

1,049

1,313

Net earnings

1,998

1,875

5,880

6,167

Net earnings per share:

Basic and

diluted

0.57

0.53

1.67

1.74

Weight

ed average

shares outstanding:

Basic and

diluted

3,507,318

3,536,320

3,513,068

3,552,387

See accompanying notes to

consolidated

financial statements

Table of Contents

AUBURN

NATIONAL BANCORPORATION,

INC. AND

SUBSIDIARIES

Consolidated Statements

of Comprehensive Income

(Unaudited)

Quarter ended

September

30,

Nine months

ended September

30,

(Dollars

in thousands)

2022

2021

2022

2021

Net earnings

1,998

1,875

5,880

6,167

Other comprehensive loss,

net of

tax:

Unrealized

net loss on securities

(17,223)

(1,493)

(46,533)

(4,837)

Reclassification adjustment

for net gain

on securities

recognized in

net earnings

(33)

(11)

(33)

(11)

Other comprehensive

loss

(17,256)

(1,504)

(46,566)

(4,848)

Comprehensive (loss)

income

(15,258)

371

(40,686)

1,319

See accompanying

notes to consolidated financial statements

Table of Contents

AUBURN

NATIONAL BANCORPORATION,

INC. AND

SUBSIDIARIES

Consolidated Statements

of Stockholders'

Equity

(Unaudited)

Accumulated

Common

Additional

other

Common

paid-in

Retained

comprehensive

Treasury

(Dollars

in thousands, except

share data)

Outstanding

Stock

capital

earnings

(loss) income

stock

Total

Quarter ended

September

30, 2022

Balance, June

30, 2022

3,509,940

3,796

111,994

(28,419)

(11,303)

76,107

Net earnings

—

1,998

—

1,998

Other comprehensive

loss

—

(17,256)

—

(17,256)

Cash dividends

paid ($

.265

per share)

—

(929)

—

(929)

Stock repurchases

(4,640)

—

(128)

Sale of treasury

stock

—

Balance, September

30, 2022

3,505,355

3,797

113,063

(45,675)

(11,431)

59,793

Quarter ended

September

30, 2021

Balance, June

30, 2021

3,545,855

3,792

108,060

4,255

(10,103)

106,043

Net earnings

—

1,875

—

1,875

Other comprehensive

loss

—

(1,504)

—

(1,504)

Cash dividends

paid ($

.26

per share)

—

(917)

—

(917)

Stock repurchases

(16,582)

—

(570)

Sale of treasury

stock

—

Balance, September

30, 2021

3,529,338

3,794

109,018

2,751

(10,673)

104,929

Nine months

ended September

30, 2022

Balance, December

31, 2021

3,520,485

3,794

109,974

891

(10,972)

103,726

Net earnings

—

5,880

—

5,880

Other comprehensive

loss

—

(46,566)

—

(46,566)

Cash dividends

paid ($

.795

per share)

—

(2,791)

—

(2,791)

Stock repurchases

(15,280)

—

(460)

Sale of treasury

stock

150

—

Balance, September

30, 2022

3,505,355

3,797

113,063

(45,675)

(11,431)

59,793

Nine months

ended September

30, 2021

Balance, December

31, 2020

3,566,276

3,789

105,617

7,599

(9,354)

107,690

Net earnings

—

6,167

—

6,167

Other comprehensive

loss

—

(4,848)

—

(4,848)

Cash dividends

paid ($

.78

per share)

—

(2,766)

—

(2,766)

Stock repurchases

(37,093)

—

(1,320)

Sale of treasury

stock

155

—

Balance, September

30, 2021

3,529,338

3,794

109,018

2,751

(10,673)

104,929

See accompanying

notes to consolidated

financial statements

Table of Contents

AUBURN

NATIONAL BANCORPORATION,

INC. AND

SUBSIDIARIES

Consolidated Statements

of Cash

Flows

(Unaudited)

Nine months

ended September

30,

(Dollars

in thousands)

2022

2021

Cash flows from operating

activities:

Net earnings

5,880

6,167

Adjustments

to reconcile net earnings

to net cash

provided by

operating activities:

Provision for loan

losses

—

(600)

Depreciation and

amortization

1,098

967

Premium amortization

and

discount accretion, net

2,450

2,954

Net gain on securities available-for-sale

(44)

(15)

Net gain on sale

of loans held

for sale

(315)

(1,168)

Net gain on other

real estate owned

(162)

—

Loans originated

for sale

(8,711)

(39,632)

Proceeds from sale of loans

10,292

43,234

Increase in cash

surrender value

of bank-owned

life insurance

(294)

(302)

Net increase in

other assets

(15,570)

(216)

Net increase (decrease) in

accrued expenses

and

other liabilities

14,102

(2,430)

Net cash provided

by operating

activities

8,726

8,959

Cash flows from investing activities:

Proceeds from prepayments

and

maturities of securities available-for-sale

38,871

53,724

Purchase of securities available-for-sale

(93,106)

(135,434)

(Increase) decrease in

loans, net

(15,644)

8,569

Net purchases

of premises and

equipment

(5,540)

(13,287)

(Increase) decrease in

FHLB

stock

(74)

267

Proceeds from sale of other

real estate owned

536

—

Net cash used in

investing activities

(74,957)

(86,161)

Cash flows from financing activities:

Net increase in

noninterest-bearing

deposits

5,570

53,752

Net (decrease) increase in

interest-bearing

deposits

(21,875)

61,427

Net (decrease) increase in

federal funds

purchased

and securities sold

under agreements to

repurchase

(835)

918

Stock repurchases

(460)

(1,320)

Dividends paid

(2,791)

(2,766)

Net cash (used

in) provided

by financing

activities

(20,391)

112,011

Net change in cash

and cash equivalents

(86,622)

34,809

Cash and cash

equivalents at beginning

of period

156,259

112,575

Cash and

cash equivalents at end

of period

69,637

147,384

Supplemental disclosures of

cash flow information:

Cash paid

during the period for:

Interest

1,705

1,914

Income taxes

1,031

2,145

See accompanying notes to

consolidated

financial statements

Table of Contents

AUBURN

NATIONAL BANCORPORATION,

INC. AND

SUBSIDIARIES

Notes to Consolidated

Financial Statements

(Unaudited)

NOTE 1:

SUMMARY OF SIGNIFICANT

ACCOUNTING

POLICIES

General

Auburn National

Bancorporation, Inc.

(the “Company”)

provides

a full range of

banking services to individuals

and

commercial customers in

Lee

County, Alabama

and surrounding

areas through its wholly

owned subsidiary,

AuburnBank

(the “Bank”).

The Company

does not have

any segments other than

banking that

are considered material.

Basis of Presentation and

Use of Estimates

The unaudited

consolidated financial

statements in

this report have

been prepared

in accordance with

U.S. generally

accepted accounting

principles (“GAAP”)

for interim financial

information.

Accordingly, these financial

statements do not

include all of

the information and

footnotes required by

U.S. GAAP for complete financial

statements.

The

unaudited

consolidated financial

statements include,

in the

opinion of management,

all adjustments

necessary to present a

fair

statement of the

financial

position and

the results of operations for

all periods presented.

All

such adjustments

are of a

normal recurring

nature. The results of

operations in

the interim statements

are not

necessarily indicative

of the results of

operations that

the Company

and its subsidiaries may

achieve for future

interim periods or the

entire year. For further

information, refer to the consolidated

financial

statements and

footnotes included in

the Company's

Annual Report

on Form

10-K for the year

ended December 31, 2021.

The unaudited

consolidated financial

statements include

the accounts

of the Company

and

its wholly-owned

subsidiaries.

Significant

intercompany

transactions and

accounts are

eliminated in consolidation.

The preparation

of financial statements in

conformity with

U.S. GAAP

requires management

to make estimates and

assumptions that

affect the reported amounts

of assets and

liabilities and

disclosures of contingent assets

and

liabilities as of

the balance sheet date

and the reported amounts

of revenues

and expenses during

the reporting period.

Actual results could

differ from those estimates.

Material estimates

that are

particularly susceptible to

significant

change

in the near term

include other-than-temporary

impairment on

investment

securities, the determination

of the allowance

for loan losses, fair

value of financial

instruments, and

the valuation of

deferred tax assets and

other real estate owned

(“OREO”).

Revenue Recognition

On January 1,

2018, the Company

implemented Accounting

Standards Update

(“ASU”

or “updates”) 2014-09,

Revenue

from Contracts with Customers

, codified

Accounting Standards Codification

(“ASC”)

Company adopted

ASC

606 using

the modified retrospective

transition method.

The majority of

the Company’s

revenue stream is

generated from

interest income on

loans and

securities which

are outside the

scope of ASC

606.

The Company’s sources of income

that

fall within the

scope of ASC 606 include

service charges on

deposits, interchange

fees and gains and

losses on sales of other real

estate, all of which

are presented as

components of noninterest income.

The

following is

a summary of

the revenue

streams that

fall within the

scope of ASC 606:

●

Service charges

on deposits, investment

services, ATM and interchange

fees – Fees from these services

are either

transaction-based, for which

the performance obligations

are satisfied

when

the individual

transaction is processed,

or set periodic service charges,

for which

the performance obligations

are satisfied

over the

period the

service is

provided. Transaction-based

fees are recognized at

the time the transaction

is processed,

and

periodic service

charges are recognized

over the

service period.

●

Gains on sales of

OREO

–

A gain on sale

should be recognized

when

a contract for sale exists and

control of the

asset has been transferred

to the buyer. ASC

606 lists several criteria required

to conclude that

a contract for sale

exists, including

a determination that

the institution will

collect substantially all

of the consideration

to which

it is

entitled.

In addition

to the loan-to-value

ratio, the

analysis is based

on various other factors,

including

the credit

quality of

the borrower, the structure of the

loan,

and any other

factors that we

believe may

affect collectability.

Table of Contents

Subsequent Events

The Company

has evaluated

the effects of events and

transactions through

the date of this

filing that

have occurred

subsequent

to September 30,

2022.

The Company

does not believe

there were any material

subsequent

events

during this period

that would have

required

further recognition or disclosure

in the

unaudited consolidated financial

statements included

in this

report except as

reported in NOTE

8, SUBSEQUENT

EVENTS.

Reclassifications

Certain amounts

reported in prior periods

have

been reclassified to conform

to the current-period

presentation. These

reclassifications had

no material effect on

the Company’s

previously

reported net earnings

or total stockholders’

equity.

Accounting Developments

In the first nine months

of 2022, the Company

did not adopt

any new accounting

guidance.

NOTE 2:

BASIC AND DILUTED

NET EARNINGS

PER SHARE

Basic net earnings

per share is computed

by dividing net

earnings by the

weighted average

common shares outstanding

for

the respective period.

Diluted net

earnings per

share reflect the potential dilution

that

could occur upon

exercise of

securities or other rights for, or

convertible into,

shares of the

Company’s

common stock.

At September

30, 2022 and

2021, respectively, the

Company had

no such securities or rights issued

or outstanding,

and therefore, no

dilutive

effect to

consider for the diluted

net earnings

per share calculation.

The basic

and diluted net earnings

per share computations

for the respective

periods are presented

below

Quarter ended

September

30,

Nine months

ended September

30,

(Dollars

in thousands, except

share and

per share

data)

2022

2021

2022

2021

Basic and diluted:

Net earnings

1,998

1,875

5,880

6,167

Weighted average common

shares outstanding

3,507,318

3,536,320

3,513,068

3,552,387

Net earnings per

0.57

0.53

1.67

1.74

NOTE 3:

VARIABLE INTEREST ENTITIES

Generally, a variable

interest entity (“VIE”)

is a corporation, partnership,

trust or other legal

structure that

does not have

equity investors with

substantive

or proportional voting

rights or has equity

investors that

do not provide

sufficient financial

resources for the entity to

support its activities.

At September 30,

2022, the Company

did not have any

consolidated VIEs

to disclose but did

have one nonconsolidated

VIE, discussed below.

Table of Contents

New Markets Tax Credit Investment

The New Markets

Tax Credit (“NMTC”)

program

provides federal tax

incentives to investors

to make

investments in

distressed communities and

promotes economic improvement

through

the development

of successful businesses in

these

communities.

The

NMTC is

available to investors

over seven

years and

is subject to recapture if certain

events

occur

during such

period.

At September 30,

2022 and

December 31, 2021, respectively,

the Company

had one such

investment

the amounts

of $2.1 million and

$2.2 million, respectively, which

was included

in other assets in

the consolidated balance

sheets.

The

Company’s equity investment

in the NMTC

entity meets the

definition of a

VIE. While the Company’s

investment

exceeds 50% of the

outstanding

equity interests, the Company

does not consolidate the VIE

because it

does not

meet the characteristics of a

primary

beneficiary since the

Company

lacks the power

to direct the activities

of the VIE.

(Dollars

in thousands)

Maximum

Loss Exposure

Asset Recognized

Classification

Type:

New Markets Tax

Credit investment

2,126

Other assets

NOTE 4:

SECURITIES

At September 30,

2022 and

December 31, 2021, respectively,

all securities within

the scope of ASC

320,

Investments –

Debt and Equity Securities,

were classified

as available-for-sale.

The

fair value and

amortized cost for securities

available-

for-sale by contractual

maturity

at September 30,

2022 and

December 31, 2021, respectively,

are presented below.

1 year

1 to 5

5 to 10

After 10

Fair

Gross Unrealized

Amortized

(Dollars

in thousands)

or less

years

Value

Gains

Losses

Cost

September 30, 2022

Agency obligations

(a)

—

50,826

74,490

—

125,316

—

16,305

141,621

Agency MBS

(a)

—

382

34,606

186,320

221,308

—

36,601

257,909

State and political subdivisions

170

924

16,243

47,577

64,914

8,093

73,000

Total available-for-sale

170

52,132

125,339

233,897

411,538

60,999

472,530

December 31, 2021

Agency obligations

(a)

5,007

49,604

69,802

—

124,413

1,080

2,079

125,412

Agency MBS

(a)

—

680

35,855

186,836

223,371

1,527

2,680

224,524

State and political subdivisions

170

647

15,743

57,547

74,107

3,611

270

70,766

Total available-for-sale

5,177

50,931

121,400

244,383

421,891

6,218

5,029

420,702

(a) Includes

securities issued by

U.S. government

agencies or government-sponsored

entities.

Securities with

aggregate fair

values of $

210.7

million

and

172.3

million at

September 30, 2022

and

December 31, 2021,

respectively, were pledged

to secure public

deposits, securities sold

under

agreements to repurchase,

Federal Home

Loan

Bank of Atlanta

(“FHLB

of Atlanta”) advances,

and for other purposes

required or permitted

law.

Included

in other assets on the

accompanying

consolidated balance

sheets are non-marketable

equity

investments.

The

carrying amounts

of non-marketable

equity investments

were $

1.2

million at

September 30, 2022 and

December 31, 2021,

respectively.

Non-marketable equity

investments include

FHLB of Atlanta

Stock, Federal Reserve

Bank of Atlanta

(“FRB”) stock, and

stock in a privately

held financial

institution.

Table of Contents

Gross Unrealized

Losses and

Fair Value

The fair values

and gross unrealized

losses on securities at

September 30, 2022

and

December 31, 2021, respectively,

segregated by

those securities that have

been in an unrealized

loss position for less than

12 months and

12 months or

longer, are presented below.

Less than 12 Months

12 Months

or Longer

Total

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

(Dollars

in thousands)

Value

Losses

Value

Losses

Value

Losses

September 30, 2022:

Agency obligations

64,689

5,097

60,627

11,208

125,316

16,305

Agency MBS

117,411

14,777

103,897

21,824

221,308

36,601

State and political subdivisions

56,132

5,977

7,027

2,116

63,159

8,093

Total

238,232

25,851

171,551

35,148

409,783

60,999

December 31, 2021:

Agency obligations

49,799

1,025

26,412

1,054

76,211

2,079

Agency MBS

130,110

1,555

38,611

1,125

168,721

2,680

State and political subdivisions

7,960

109

3,114

161

11,074

270

Total

187,869

2,689

68,137

2,340

256,006

5,029

For the securities in

the previous

table, the Company

does not have

the intent to sell and

has determined it is

not more likely

than not that

the Company will

be required to sell the

securities before recovery

of the amortized

cost basis, which

may be

maturity.

On a quarterly

basis, the Company

also assesses each security

for credit impairment.

For debt

securities, the

Company evaluates,

where necessary, whether

credit impairment exists by

comparing

the present value

of the expected

cash flows to

the securities’ amortized

cost basis.

In determining

whether a

loss is temporary, the Company

considers all relevant

information including:

●

the length

of time and

the extent to which

the fair value

has been less than

the amortized

cost basis;

●

adverse conditions specifically

related to the

security, an industry, or

a geographic

area (for example,

changes in

the financial

condition of the

issuer of the security, or in

the case of

MBS, in

the financial

condition of the

underlying

obligors on the

assets securing such

MBS, including

changes in technology

or the discontinuance

of a

segment of the

business that may

affect the future earnings

potential of the

issuer or underlying

loan obligors of

the security or changes

in the quality

of the credit enhancement);

●

the historical and

implied volatility

of the security’s fair value;

●

the payment

structure of the debt

security and,

in the case of variable

rate securities, the likelihood

of the issuer

being able to

make payments

that may increase in

the future;

●

failure of the

issuer of the security to

make

scheduled interest or principal

payments;

●

any changes

to the rating of

the security by

a rating agency;

and

●

recoveries or additional

declines in

fair value

subsequent

to the balance sheet

date.

Agency obligations

The unrealized

losses associated with

agency obligations

were primarily

driven by increases in

market interest rates

and

not

due to the credit quality

of the securities. These

securities were

issued by

U.S. government

agencies or government-

of SBA

Approved

Mix

$ of SBA

Approved

Mix

SBA Tier:

$2 million to $10 million

—

$350,000 to less than

$2 million

14,691

Up to $350,000

400

21,784

Total

423

100

36,475

100

We collected approximately $1.5 million

in fees from the

SBA

related to our

PPP loans during

Through

December

31, 2021, we

had

recognized all of these fees, net

of related costs.

of December 31, 2021, we

had received payments

and

forgiveness on all

PPP loans extended

during 2020.

Table of Contents

On December 27, 2020,

the Economic Aid

to Hard-Hit Small Businesses, Nonprofits,

and

Venues Act (the “Economic

Aid

Act”) was

signed into law. The

Economic Aid

Act provides a second

$900 billion stimulus

package,

including $325 billion

in additional

PPP loans. The

Economic Aid

Act also permits the

collection of a

higher

amount of PPP loan

fees by

participating

banks.

A summary

of PPP loans extended

during 2021 under

the Economic Aid

Act follows:

(Dollars

in thousands)

of SBA

Approved

Mix

$ of SBA

Approved

Mix

SBA Tier:

$2 million to $10 million

—

$350,000 to less than

$2 million

6,494

Up to $350,000

242

13,757

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

September 30, 2022, we

have recognized

all of these fees, net

of related costs. As

of September 30, 2022, we

have received

payments and

forgiveness on all but

1 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 more normal

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

nine months

ended September 30,

2022, and

our financial

condition at

that date,

which

reflect only the continuing

direct and

indirect effects of the pandemic,

may not be

indicative

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 September 30,

2022,

all of our

capital ratios were

in excess of all

regulatory requirements to be

well capitalized.

The

continuing

effects

of the COVID-19

pandemic 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, customer behaviors

and

economic activity.

Continuing

supply chain

and supply disruptions

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

employee retention credit

related to COVID-19.

After consultation with

our tax advisors,

we believe

we are eligible, and

have filed amended

payroll

tax returns with

the IRS, of an

estimated employee retention

credit of $1.6 million,

or approximately

$1.2 million, net

estimated income tax

effects, or approximately

$0.33 per share.

IRS

action on

this request, including

its timing and

the

amount of any

credit approved by

the IRS, cannot be

predicted.

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.

Table of Contents

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

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 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

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.

Table of Contents

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

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 September

30, 2022 and

December 31, 2021, and

for the periods 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. The

Company’s look-back

period each

quarter incorporates the effects

of at

least one economic downturn

in its loss history. The

Company believes

this look-back period

is appropriate

due to the risks inherent

in the loan

portfolio. Absent

this look-back period,

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

quarter ended

September 30, 2022, the

Company

increased its look-back period

to 54 quarters

to continue to

include losses

incurred

by the

Company beginning

with the first

quarter of

The Company

will likely continue

to increase its look-back period

to incorporate

the effects of

at least

one

economic downturn

in its loss history.

During

the quarter ended

June 30, 2021, the Company

adjusted certain qualitative

and economic factors,

previously

downgraded

as a result of the

COVID-19 pandemic,

to reflect improvements in

economic

conditions in our

primary market

area.

Further adjustments

may be

made from time to time

in the

future as a result of the

COVID-19 pandemic

and other economic changes.

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

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 the FHLB

of Atlanta

and Federal

Reserve Bank

of Atlanta

(“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

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.

Table of Contents

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 7,

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

comparable trading

market characterized by

frequent transactions between

willing buyers

and sellers. In these cases,

fair

value is estimated using

pricing models

that use discounted

cash flows

and other pricing

techniques. Pricing models

and

their underlying

assumptions are

based upon management’s

best estimates for appropriate

discount

rates, default

rates,

prepayments,

market volatility

and other factors, taking

into account

current observable

market data

and experience.

These assumptions

may have

a significant effect on

the reported fair

values

of assets and

liabilities and the

related income

and expense.

As such, the

use of different models and

assumptions, as

well as changes in

market conditions, could

result in

materially different net earnings

and retained

earnings

results.

Other Real Estate Owned

Other real

estate owned (“OREO”),

consists of properties obtained

through

foreclosure or in satisfaction

of loans and

reported at the

lower of cost or fair value,

less estimated costs to sell

at the

date acquired

with any loss recognized as

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

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

September 30, 2022 we

had total deferred tax

assets of $16.1 million

included as “other

assets”, including

$15.3 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

September 30, 2022.

The

amount of the

deferred tax

assets considered realizable,

however,

could

be reduced if

estimates of future taxable

income are reduced.

Table of Contents

RESULTS OF OPERATIONS

Average Balance Sheet and

Interest Rates

Nine months

ended September

30,

2022

2021

Average

Yield/

Average

Yield/

(Dollars

in thousands)

Balance

Rate

Balance

Rate

Loans and loans

held for sale

442,613

4.42%

460,732

4.47%

Securities - taxable

370,402

1.69%

310,288

1.30%

Securities - tax-exempt

61,227

3.52%

62,915

3.60%

Total securities

431,629

1.95%

373,203

1.68%

Federal funds

sold

54,924

0.76%

36,821

0.14%

Interest bearing

bank deposits

73,630

0.82%

75,170

0.12%

Total interest

-earning

assets

1,002,796

2.89%

945,926

2.86%

Deposits:

NOW

201,792

0.13%

176,242

0.12%

Savings and

money market

335,005

0.20%

289,758

0.23%

Time deposits

155,824

0.84%

159,412

1.05%

Total interest

-bearing

deposits

692,621

0.32%

625,412

0.41%

Short-term borrowings

3,969

0.50%

3,329

0.50%

Total interest

-bearing

liabilities

696,590

0.32%

628,741

0.41%

Net interest income and

margin (tax-equivalent)

20,034

2.67%

18,308

2.59%

Net Interest Income and

Margin

Net interest income (tax-equivalent)

was

$20.0 million for the first nine

months of

2022,

9% increase compared

to $18.3

million for the first nine

months of

2021.

This

increase was due

to balance sheet

growth, and

an increase in

the Company’s

net interest margin (tax-equivalent).

Net interest margin

(tax-equivalent)

increased to 2.67% in

the first nine

months of

2022, compared to 2.59% for

the first nine

months of

2021 due to increases

in the

Federal Reserve’s target

federal funds

rates beginning

March 17, 2022, and

changes in our

asset mix resulting from the

continuing

elevated

levels of customer

deposits.

The

Federal Reserve

increased the target

federal funds

range by 25 basis

points on

March 17, 2022, 50 basis

points on May

5 and 75 basis

points on each of

June 16, July 28,

and September 22.

The

target rate was increased 75

basis

points on November

3, 2022, 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 the

first nine

months of

2022, compared to $0.8 million

for the first nine

months of

2021.

The tax-equivalent yield

on total interest-earning

assets increased by

3 basis points

to 2.89% in the

first nine months

2022 compared to 2.86% in

the first nine

months of

2021.

This

increase was primarily

due to changes in

our asset mix

resulting from the

significant increase in

customer deposits.

The cost of total interest-bearing

liabilities decreased

9 basis points

to 0.32% in the

first nine months

of 2022 compared

to 0.41% in

the first nine months

of 2021, even

as interest bearing

deposits increased.

The

net decrease in

our funding

costs

was primarily

due to a portion of

our time deposits repricing

into lower prevailing

market interest rates through

the first

nine months

of 2022.

Our

deposit costs may

increase as the

Federal Reserve

increases its target federal

funds

rate, market

interest rates increase, and

as customer behaviors

change

as a result of inflation and

higher market

interest rates on deposits

and other alternative

investments.

The Company

continues to deploy

various asset liability

management

strategies to manage

its risk to interest rate

fluctuations. Pricing

remains competitive

in our

markets.

We believe this challenging

competitive environment

will

continue throughout

the remainder

of 2022.

Our

ability to hold our

deposit rates low

until our interest-earning

assets

reprice will be

important in

our ability to maintain

or potentially increase our

net interest margin

during the beginning

the monetary tightening

cycle that we

believe we will

continue to experience in

2022.

Table of Contents

Provision for Loan

Losses

The provision

for loan losses represents a

charge to earnings

necessary to provide

an allowance for loan

losses that

management

believes, based

on its processes and

estimates, should be

adequate to provide

for the probable

losses on

outstanding loans.

The Company

recorded no net

provision for loan

losses during the

first nine months

of 2022 compared

to a negative

provision for loan

losses of $0.6 million during

the first nine months

of 2021.

The

negative

provision for loan

losses during 2021 was

primarily related

to improvements

in economic conditions

in our

primary

market area, and related

improvements in

our asset quality.

The provision

for loan losses is based

upon various

estimates and

judgments, including

the absolute level

of loans,

economic conditions, credit quality

and the

amount of net

charge-offs.

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

1.05%

at September

30, 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, local real

estate markets, or

industries) may

have a material adverse

effect

on our asset quality

and the adequacy

of our allowance

for loan losses resulting

in significant

increases in the

provision for

loan losses.

Noninterest Income

Quarter ended

September

30,

Nine months

ended September

30,

(Dollars

in thousands)

2022

2021

2022

2021

Service charges

on deposit accounts

158

149

446

419

Mortgage lending

income

126

268

566

1,241

Bank-owned life insurance

100

293

302

Securities gains,

net

Other

427

443

1,259

1,311

Total noninterest income

852

975

2,608

3,288

The Company’s income from

mortgage lending

was primarily

attributable to

the (1) origination and

sale of mortgage

loans

and (2) servicing

of mortgage

loans. Origination

income, net,

is comprised of gains

or losses from the sale

of the mortgage

loans originated,

origination fees, underwriting

fees, and other

fees associated with

the origination of 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

associated MSRs

when the

loan is sold.

MSRs are

recognized based

on the fair

value of the servicing

right on the date

the corresponding mortgage

loan is

sold.

Subsequent to

the date of transfer, the

Company

has elected to measure its

MSRs

under the

amortization method.

Servicing

fee income is reported

net of any

related amortization expense.

The Company

evaluates MSRs

for impairment

on a quarterly

basis.

Impairment is

determined by

grouping MSRs

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.

Quarter ended

September

30,

Nine months

ended September

30,

(Dollars

in thousands)

2022

2021

2022

2021

Origination income

233

315

1,168

Servicing fees, net

251

Total mortgage lending income

126

268

566

1,241

Table of Contents

The Company’s income from

mortgage lending

typically

fluctuates as

mortgage interest rates change

and is primarily

attributable to

the origination and

sale of 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

related amortization expense

as prepayment

speeds slowed,

resulting in

decreased amortization expense.

Noninterest Expense

Quarter ended

September

30,

Nine months

ended September

30,

(Dollars

in thousands)

2022

2021

2022

2021

Salaries and

benefits

2,975

2,893

8,901

8,641

Net occupancy

and equipment

794

467

1,955

1,340

Professional fees

235

232

704

814

Other

1,411

1,163

3,814

3,566

Total noninterest expense

5,415

4,755

15,374

14,361

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 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

June 2022.

Income Tax Expense

Income tax expense

was $1.0 million for the

first nine

months of

2022 compared

to $1.3 million

for the first nine

months of

2021.

The

Company’s effective income tax

rate for the

first nine months

of 2022 was 15.14%, compared

to 17.55% in

the

first nine months

of 2021.

The

decrease was primarily

due to an income

tax benefit related

to a

New Markets Tax Credit

investment

funded in the

fourth quarter of 2021.

The

Company’s effective income tax

rate is principally

impacted by

tax-

exempt earnings

from the Company’s

investments in

municipal securities,

bank-owned

life insurance, and

New Markets

Tax Credits.

BALANCE SHEET

ANALYSIS

Securities

Securities available-for-sale

were $411.5 million

at September

30, 2022 compared

to $421.9 million

at December 31,

2021.

This decrease reflects

increase in the amortized

cost basis of securities

available-for-sale

of $51.8 million,

offset by

decrease of $62.2

million in

the fair

value of securities available-for-sale.

The

increase in the

amortized cost basis

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 $15.3 million

of deferred tax

assets included

in our other

assets.

The

average annualized

tax-equivalent

yields earned on total

securities were 1.95%

in the

first nine months

of 2022

and 1.68%

in the first

nine months

of 2021.

Table of Contents

Loans

2022

2021

Third

Second

First

Fourth

Third

(In thousands)

Quarter

Commercial and

industrial

70,685

70,087

73,297

83,977

79,202

Construction and

land development

54,773

38,654

33,058

32,432

34,890

Commercial real estate

250,030

240,296

235,062

258,371

252,798

Residential real estate

91,598

85,224

79,102

77,661

80,205

Consumer installment

7,551

7,122

8,412

6,682

7,060

Total loans

474,637

441,383

428,931

459,123

454,155

Less:

unearned income

(602)

(511)

(514)

(759)

(923)

Loans, net of unearned

income

474,035

440,872

428,417

458,364

453,232

Total loans, net of

unearned income, were

$474.0 million at

September 30, 2022,

and

$458.4 million at

December 31, 2021,

an increase of $15.7 million,

or 3%.

Total loans at December

31, 2021 included

$8.0

million in

PPP loans, all

of which

were repaid

during the first nine

months of

2022.

Excluding

PPP loans, total loans,

net of unearned

income, increased

$23.8 million, or 5%

from December 31,

2021.

Four loan

categories represented

the majority

of the loan

portfolio at

September 30, 2022: commercial

real estate (53%),

residential real

estate (19%),

commercial and

industrial (15%) and

construction and

land development

(12%).

Approximately

23% of the

Company’s commercial real estate

loans were

classified as owner-occupied

at September

30, 2022.

Within the residential real estate portfolio

segment, the

Company

had junior lien

mortgages of approximately

$6.8

million,

or 1%, and $7.2 million,

or 2%, of

total loans,

net of unearned

income at September

30, 2022 and

December 31, 2021,

respectively.

For residential real estate

mortgage loans

with

a consumer purpose, the

Company

had no loans that

required

interest only payments

at September 30,

2022 and

December 31, 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

4.42% in the first nine

months of

2022 and 4.47% in

the first

nine months

of 2021.

The specific economic and

credit risks associated with

our loan portfolio include,

but

are not limited to,

the effects of

current economic

conditions, including

the continuing

effects

from the

COVID-19

pandemic, as

well as high inflation

rates

and the Federal

Reserve’s shift from stimulative

monetary policy

to increases in

the target Federal

Funds rate and

reductions in its

securities holdings, on

our borrowers’

cash flows,

real estate market

sales volumes,

valuations, availability

and cost of financing

properties, real estate industry

concentrations,

competitive pressures

from a

wide range of

other

lenders, deterioration

in certain

credits, interest rate

fluctuations and

increases, reduced collateral values

or non-existent

collateral, title defects, inaccurate

appraisals,

financial

deterioration of borrowers,

fraud,

and any violation

of applicable

laws and regulations.

The Company

attempts to reduce

these economic and

credit risks through

its loan-to-value

guidelines for collateralized

loans, investigating

the creditworthiness of borrowers

and

monitoring borrowers’ financial

position. Also,

we have

established and

periodically review, lending

policies and

procedures. Banking

regulations limit a

bank’s credit exposure by

prohibiting

unsecured loan

relationships that

exceed 10% of its capital;

or 20% of capital,

if loans in excess of 10%

capital are fully

secured. Under

these regulations, we

are prohibited from having

secured loan

relationships in excess of

approximately

$21.7 million.

Furthermore, we

have an internal

limit for aggregate

credit exposure (loans

outstanding

plus

unfunded commitments)

to a

single borrower of

$19.5 million. Our

loan policy

requires that

the Loan Committee of the

Board of Directors approve

any loan relationships that

exceed this internal

limit.

At September

30, 2022, the Bank

had no

relationships exceeding

these limits.

Table of Contents

We periodically analyze

our commercial and

industrial and commercial

real estate loan

portfolios 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 September 30,

2022 and

December 31, 2021.

September

30,

December 31,

(Dollars

in thousands)

2022

2021

Lessors of 1-4 family

residential properties

51,391

47,880

Hotel/motel

33,918

43,856

Multi-family residential properties

29,317

42,587

Shopping centers

27,174

29,574

In light of disruptions

in economic conditions

caused by

COVID-19,

the financial

regulators have issued

guidance

encouraging banks

to work constructively

with

borrowers affected by

the virus in

our community.

This guidance,

including

the Interagency

Statement

on COVID-19

Loan Modifications and

the Interagency Examiner

Guidance for Assessing

Safety

and Soundness

Considering the

Effect of the COVID-19

Pandemic on Institutions,

provides

that the agencies will

not

criticize financial institutions

that

mitigate credit risk through

prudent actions consistent

with

safe and sound

practices.

Specifically, examiners will

not criticize institutions

for working

with borrowers as

part of a risk mitigation

strategy

intended to improve

existing loans, even

if the restructured loans

have or

develop weaknesses

that ultimately

result in

adverse credit classification.

Upon

demonstrating the

need for payment

relief, the bank

will work

with qualified borrowers

that were otherwise current

before the

pandemic

to determine the

most appropriate deferral

option.

For residential

mortgage and

consumer loans the

borrower may

elect to defer payments

for up to

three months.

Interest continues to

accrue and the

amount due at maturity

increases.

Commercial

real estate, commercial,

and

small business borrowers may

elect to defer payments

for up to

three months or

pay scheduled

interest payments

for a

six-month period.

The bank

recognizes that

a combination

of the payment

relief options may

be prudent dependent

on a borrower’s business

type.

of September 30,

2022, we had

no COVID-19

loan deferrals, compared

to one COVID-19

loan deferral totaling

$0.1

million at

December 31, 2021.

Section 4013 of the CARES

Act provides that

a qualified loan

modification is exempt

law from classification as

a TDR

pursuant to GAA

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.

We had no new

TDRs during the

first nine months

of 2022, and

only $170 thousand

of nonaccruing

TDRs

remained at

September 30, 2022 compared

to $249 thousand

at December 31,

2021.

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

$5.0 million at

September 30, 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.”

Table of Contents

A summary

of the changes in

the allowance

for loan losses and

certain asset quality

ratios for the third

quarter of

2022 and

the previous

four quarters is

presented below.

2022

2021

Third

Second

First

Fourth

Third

(Dollars

in thousands)

Quarter

Balance at beginning

of period

4,716

4,658

4,939

5,119

5,107

Charge-offs:

Commercial and

industrial

(13)

(4)

—

Commercial real estate

—

(254)

—

Residential real estate

—

(2)

—

Consumer installment

(3)

(16)

(48)

(32)

—

Total charge-offs

(16)

(20)

(48)

(288)

—

Recoveries

108

Net recoveries (charge-offs)

—

(31)

(180)

Provision for loan

losses

250

—

(250)

—

Ending balance

4,966

4,716

4,658

4,939

5,119

as a % of loans

1.05

1.07

1.09

1.08

1.13

as a % of nonperforming

loans

1,431

1,314

1,256

1,112

1,053

Net (recoveries) charge-offs

as %

of average loans

(a)

—

(0.05)

0.03

0.16

(0.01)

(a) Net (recoveries) charge-offs are annualized.

As described under

“Critical Accounting

Policies,” management

assesses the adequacy

of the allowance prior

to the end

each calendar

quarter. The level of

the allowance is

based upon

management’s evaluation

of the loan portfolios, past loan

loss experience, current asset

quality

trends, 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,

inflation

and

changes in market

interest rates, 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

1.05%

at September

30, 2022, compared to 1.08%

at December

31, 2021.

the future, the

allowance to total

loans

outstanding ratio

will increase or decrease

to the extent

the factors that

influence our quarterly

allowance

assessment,

including the duration

and magnitude

of COVID-19

effects

and

increasing market

interest rates and

expectations regarding

inflation and interest rates as

the Federal

Reserve shifts from stimulus

to fighting

inflation, in

their entirety either improve

or weaken.

In addition, our regulators,

as an

integral part

of their examination

process, will periodically review

the

Company’s allowance

for loan losses, and

may require the

Company to

make additional

provisions to the allowance

for

loan losses based on

their judgment

about information available

to them

at the time of their

examinations.

Nonperforming Assets

At September 30,

2022 the Company

had $0.3 million in

nonperforming assets compared

to $0.8 million

at December 31,

2021.

Table of Contents

The table below

provides information concerning

total nonperforming

assets and

certain asset quality

ratios for the third

quarter of

2022 and the previous

four quarters.

2022

2021

Third

Second

First

Fourth

Third

(Dollars

in thousands)

Quarter

Nonperforming assets:

Nonaccrual loans

347

359

371

444

486

Other real

estate owned

—

374

—

Total nonperforming assets

347

359

745

818

486

as a % of loans

and other real

estate owned

0.07

0.08

0.17

0.18

0.11

as a % of total assets

0.03

0.07

0.05

Nonperforming loans

as a % of

total loans

0.07

0.08

0.09

0.10

0.11

Accruing loans

90 days or more past

due

—

The table below

provides information concerning

the composition of

nonaccrual

loans for the third

quarter of

2022 and the

previous four quarters.

2022

2021

Third

Second

First

Fourth

Third

(In thousands)

Quarter

Nonaccrual loans:

Commercial real estate

170

176

182

187

193

Residential real estate

177

183

189

257

293

Total nonaccrual loans

347

359

371

444

486

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

90 days or more past

due, unless

the loan is both well-secured

and

in the process of collection.

The

Company had

$0.3

million in

loans on nonaccrual

status at September

30, 2022 and

December 31, 2021,

respectively.

The Company

had no loans

90 days or more past

due and still accruing

at September 30,

2022 and

December 31, 2021,

respectively.

The table below

provides information concerning

the composition of OREO

for the third

quarter of 2022 and

the previous

four quarters.

2022

2021

Third

Second

First

Fourth

Third

(In thousands)

Quarter

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 a borrower

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

September 30, 2022, and

$2.4 million, or 0.5%

of total loans

at December 31,

2021.

Table of Contents

The table below

provides information concerning

the composition of

potential

problem loans

for the third

quarter of

2022

and the previous

four quarters.

2022

2021

Third

Second

First

Fourth

Third

(In thousands)

Quarter

Potential problem loans:

Commercial and

industrial

194

225

215

226

274

Construction and

land development

—

218

231

Commercial real estate

191

146

150

156

172

Residential real estate

892

915

1,592

1,748

1,848

Consumer installment

Total potential problem loans

1,306

1,310

1,978

2,360

2,544

At September 30,

2022,

approximately

$46 thousand

or 4% of

total potential problem

loans were

past due at

least 30 days,

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,

for the third

quarter of 2022 and

the previous

four quarters.

2022

2021

Third

Second

First

Fourth

Third

(In thousands)

Quarter

Performing loans past

due 30 to 89 days:

Commercial and

industrial

Construction and

land development

282

—

204

—

Commercial real estate

—

Residential real estate

130

496

516

409

Consumer installment

Total

377

199

519

748

502

Deposits

Total deposits were $978.0 million

at September

30, 2022 compared

to $994.2 million

at December 31,

2021.

The

decrease

in total deposits was

primarily due

to a decrease in rate-sensitive

money market

and savings

accounts of $21.8

million.

Noninterest

-bearing

deposits were $321.7

million, or

32% of total deposits,

at September

30, 2022, compared

$316.1 million, or 32%

of total deposits

at December 31,

2021.

We had no brokered

deposits on September

30, 2022 or at

December 31, 2021.

Estimated uninsured

deposits totaled $393.8

million and

$420.8 million at

September 30, 2022 and

December 31, 2021,

respectively.

Uninsured

amounts

are estimated based

on the portion of

account balances

in excess of FDIC

insurance

limits.

The average

rate paid on total

interest

-bearing

deposits was

0.32% in the first nine

months of

2022 compared to 0.41% in

the first nine months

of 2021.

Other Borrowings

Other borrowings

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

funds

lines totaling $61.0 million

and

$41.0 million with

none outstanding

at September 30,

2022, and

December 31, 2021, respectively.

Securities sold

under

agreements to repurchase totaled

$2.6 million and

$3.4 million at

September 30, 2022 and

December 31, 2021,

respectively.

The average

rate paid on short-term

borrowings

was 0.50% in

the first nine

months of

2022 and 2021,

respectively.

Table of Contents

The Company

had no long-term debt

at September 30,

2022 and

December 31, 2021.

CAPITAL ADEQUACY

The Company’s consolidated stockholders’

equity

was

$59.8 million and

$103.7 million as

of September 30,

2022 and

December 31, 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 $46.6 million.

The

increase in

the unrealized

loss on securities was

primarily due to

increases in market

interest rates.

These

unrealized losses do not

affect the Bank’s capital

for regulatory capital

purposes.

The

Company’s consolidated stockholders’

equity

was

also

decreased by cash

dividends paid

of $2.8 million, and

repurchases of the

Company’s stock of $0.5 million.

These

decreases in the

Company’s consolidated

stockholders’

equity

were partially

offset by net

earnings of $5.9 million.

The Company

paid cash dividends

of $0.795 per share in

the first nine

months of 2022, an

increase of 2% from the

same

period in 2021. The

Company’s share

repurchases of $0.5

million since December

31, 2021 resulted

in 15,280 fewer

outstanding common

shares at

September 30, 2022.

These

shares were

repurchased at

an average cost per

share of $30.06

and a total cost of $0.5 million.

On January 1,

2015, the Company

and Bank became

subject to the

rules of the

Basel III regulatory

capital framework

and

related Dodd-Frank

Wall Street Reform and

Consumer Protection Act

changes.

The rules included

the implementation of

capital conservation buffer

that

is added to

the minimum requirements for

capital adequacy

purposes.

The capital

conservation buffer was

subject to a

three year phase-in

period that began

on January 1,

2016 and was

fully phased-in on

January 1, 2019 at

2.5%.

A banking organization

with a conservation

buffer of less than

the required

amount will

subject to limitations on

capital distributions,

including

dividend

payments and

certain discretionary bonus

payments

executive officers.

September 30, 2022, the

Bank’s ratio

was sufficient to meet the fully

phased-in

conservation buffer.

Effective March

20, 2020, the Federal

Reserve and

the other federal banking

regulators adopted

an interim final

rule that

amended the capital

conservation buffer.

The interim final

rule was adopted

as a final rule

on August 26,

2020.

The

new

rule revises the

definition of “eligible

retained income”

for purposes of the

maximum

payout ratio to allow

banking

organizations to

more freely use their capital

buffers to promote lending

and other financial

intermediation activities,

making the limitations on

capital distributions

more gradual.

The eligible retained

income is now

the greater of (i) net

income for the four

preceding quarters,

net of distributions

and

associated tax

effects

not reflected

in net income;

and (ii)

the average

of all net income over

the preceding

four quarters.

This rule only affects the capital

buffers, and

banking

organizations were

encouraged to make

prudent capital

distribution decisions.

The Federal

Reserve has

treated us as a

“small bank holding

company’ under

the Federal

Reserve’s Small Bank

Holding

Company Policy.

Accordingly, our

capital adequacy

is evaluated

at the Bank

level, and not

for the Company

and its

consolidated subsidiaries.

The

Bank’s tier 1 leverage

ratio was 9.29%, CET1

risk-based capital ratio

was 15.39%, tier 1

risk-based capital

ratio was 15.39%,

and

total risk-based capital

ratio was 16.16% at

September 30, 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

8.16%

at September 30,

2022.

Our

unrealized

losses on securities due

increases in market

interest rates do not

directly affect our

capital for regulatory

purposes,

and

the resulting

deferred tax

assets, including

$15.3 million resulting from

such unrealized

securities losses, was

below the

25% threshold requiring

deduction of

such assets from CET1

capital.

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.

Table of Contents

Interest Rate Risk Management

In the normal

course of business, the

Company

is exposed to

market risk arising

from fluctuations in

interest rates. ALCO

measures and

evaluates interest rate risk so that

the Bank

can meet customer demands

for various

types of loans

and

deposits. Measurements used

to help

manage interest rate sensitivity

include an

earnings simulation

model and

an economic

value of equity

(“EVE”) model.

Earnings simulation

. Management

believes that

interest rate risk is best

estimated by

our earnings

simulation modeling.

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,

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

While a gradual

change in

interest rates was

used in the above

analysis to provide

an estimate of exposure under

these

scenarios, our modeling

under

both a gradual

and instantaneous change

in interest rates indicates

our balance

sheet is asset

sensitive.

At September 30,

2022, our earnings

simulation model

indicated that

we were in

compliance with

the policy

guidelines

noted above.

Economic Value of Equity

. EVE measures the

extent that

the 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, which

establishes a

base case EVE.

In contrast with

our

earnings simulation

model, which

evaluates interest rate risk

over a

12 month

timeframe, EVE uses a

terminal horizon

which allows for the

re-pricing of all

assets, liabilities, and

off-balance sheet items. Further,

EVE

is measured

using values

as of a point

in time and

does not reflect any

actions that ALCO

might take in

responding to or

anticipating changes

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

At September 30,

2022, our EVE

model indicated

that we were

in compliance with

our policy guidelines.

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. Prepayments

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.

Table of Contents

The Company

may also use

derivative financial

instruments to improve

the balance between

interest

-sensitive

assets and

interest

-sensitive

liabilities, and

as a tool to manage

interest rate sensitivity

while continuing

to meet the

credit and

deposit

needs of our customers. From

time to time, the

Company

also may enter into

back-to-back

interest rate swaps

to facilitate

customer transactions and

meet their financing

needs. These

interest rate swaps

qualify as

derivatives, but

are not

designated

as hedging instruments.

At September

30, 2022 and

December 31, 2021, the Company

had no derivative

contracts designated as

part of a

hedging relationship to

assist in managing

its 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

could lead

to lower earnings

due to the cost of foregoing

alternative

higher-yield market

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 regulatory

restrictions on such

dividends.

The primary

source of funding

and liquidity

for the Company has

been dividends

received from the

Bank.

If needed, the

Company could

also borrow

money, or issue common stock or other

securities.

Primary uses of funds

by the Company

include dividends

paid to stockholders,

Company

stock repurchases,

and

payment of Company

expenses.

Primary sources of funding

for the Bank

include customer deposits,

other borrowings,

repayment

and maturity of

securities,

sales of securities, and

the sale and repayment

of loans. The Bank

has access to federal funds

lines from various

banks

and

borrowings

from the Federal

Reserve discount

window. In addition to

these sources, the

Bank

may participate in

the

FHLB’s advance program

to obtain funding

for its growth.

Advances include

both fixed and variable

terms and may be

taken out with

varying maturities. At

September 30, 2022, the

Bank

had a remaining

available line

of credit with

the FHLB

of $325.1 million.

September 30, 2022, the

Bank

also had $61.0 million of available

federal funds

lines with no

borrowings outstanding.

Primary uses of

funds include

repayment of maturing

obligations and growing

the loan portfolio.

The Bank

has no brokered deposits on

September 30, 2022

or at

December 31, 2021

Management

believes that

the Company and

the Bank have

adequate sources of liquidity

to meet all

their respective

known

contractual obligations and

unfunded commitments,

including

loan commitments and

reasonable borrower, depositor, and

creditor requirements over

the next

twelve months.

Off-Balance Sheet Arrangements,

Commitments,

Contingencies and

Contractual Obligations

At September 30,

2022, the Bank

had outstanding

standby letters of credit of

$1.0

million and

unfunded loan

commitments

outstanding of

$88.8 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

fund these outstanding

commitments, the Bank

could liquidate

federal funds

sold or a portion of our

securities available-

for-sale, or draw

on its available

credit facilities.

Mortgage lending activities

We primarily sell residential mortgage

loans in

the secondary

market to Fannie

Mae while retaining

the servicing of

these

loans. The sale

agreements for these residential

mortgage loans

with

Fannie Mae and other investors

include various

representations and

warranties regarding

the origination

and characteristics of

the residential

mortgage loans.

Although

the

representations and

warranties vary among

investors, they

typically cover

ownership of the

loan, validity

of the lien

securing the

loan, the absence

of delinquent

taxes or liens against

the property

securing the

loan, compliance with

loan

criteria set forth in

the applicable

agreement, compliance

with

applicable federal,

state, and local

laws, among

other

matters.

Table of Contents

As of September 30,

2022, the unpaid

principal

balance of residential mortgage

loans, which

we have originated

and sold,

but retained the servicing

rights, was

$238.3 million.

Although

these loans are

generally sold

on a non-recourse basis, we

may be obligated

to repurchase residential mortgage

loans or reimburse

investors for

losses incurred

(make

whole

requests)

if a loan review

reveals a potential

breach of

seller representations and

warranties.

Upon receipt of a

repurchase or make

whole request, we

work with investors

to arrive at

a mutually agreeable

resolution. Repurchase

and

make whole

requests

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 or make

whole

event has occurred. We seek to reduce and

manage the risks of

potential

repurchases, make

whole requests, or other claims

mortgage loan

investors through

our underwriting

and quality

assurance practices and

by servicing

mortgage loans

to meet investor

and secondary

market

standards.

The Company

was not required to

repurchase any

loans during

the first nine

months of 2022 as a

result of representation

and warranty provisions

contained in

the Company’s sale agreements

with Fannie

Mae, and had

no pending repurchase

make-whole

requests at September

30, 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 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 repurchase

and make

whole requests related to

representation

and

warranty provisions

and servicing

activities

have been

limited to date,

it is possible that

requests to repurchase mortgage

loans or reimburse

investors for

losses incurred

(make whole requests) may

increase in

frequency if

investors more aggressively

pursue all

means of recovering

losses on

their purchased

loans.

As of September 30,

2022, we do

not believe that

this exposure is

material due

to the historical level

of repurchase requests and

loss trends, in addition

to 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.

The Bank

sells mortgage loans

to Fannie

Mae and services these on

an actual/actual

basis. As a result, the

Bank is not

obligated to

make any advances

to Fannie Mae

on principal and

interest on such

mortgage loans

where the borrower is

entitled to forbearance.

Effects of

Inflation and

Changing Prices

The consolidated financial

statements and

related consolidated financial

data presented

herein have

been prepared

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.

Inflation,

however, could increase our

noninterest expenses,

and

Federal

Reserve monetary

policy in response to inflation

has

increased market

interest rates and

affected values

of certain of our

assets and

liabilities, including

our securities portfolio and

mortgage servicing

assets.

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

Table of Contents

●

ASU 2022-02,

Financial Instruments

– Credit Losses (Topic 326):

Troubled Debt Restructurings

and Vintage

Disclosures

Information about

these pronouncements is described

in more detail

below.

ASU 2016-13,

Financial Instruments

Credit Losses (Topic 326): -

Measurement of Credit Losses

on Financial

Instruments

, amends

guidance

on reporting credit losses for

assets held

at amortized

cost basis and

available for

sale debt

securities.

For assets held

at amortized

cost basis, the

new standard

eliminates the probable

initial recognition threshold in

current GAAP

and, instead,

requires an

entity to reflect its current estimate

of all expected

credit losses using

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.

October 16, 2019,

the FASB approved a

previously issued

proposal granting

smaller reporting

companies a

postponement of the

required

implementation date

for ASU 2016-13.

The

Company is

required to implement

the new standard

in January 2023, with

early adoption

permitted in

any period prior

to that date.

Institutions are

to apply the changes

through a cumulative-effect

adjustment

to retained earnings

as of the

beginning of the

first reporting period

in which

the standard

is effective.

The

Company is

currently assessing the

impact of

the new guidance

on its consolidated

financial

statements. An

increase in the

overall allowance

for loan losses is likely

upon

adoption in order to provide

for expected credit losses over

the life of the

loan portfolio.

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

tatements.

Table of Contents

Table 1 – Explanation of

Non-GAAP Financial Measures

In addition to

results presented in

accordance with

U.S. generally

accepted accounting

principles (GAAP),

this quarterly

report on Form

10-Q includes certain

designated

net interest income amounts

presented on

a tax-equivalent

basis, a non-

GAAP financial

measure, including

the presentation and

calculation of the

efficiency ratio.

The Company

believes the

presentation of net

interest income on

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 reconciliations

of these non-

GAAP financial

measures to their most directly

comparable GAAP

financial

measures are presented below.

2022

2021

Third

Second

First

Fourth

Third

(in thousands)

Quarter

Net interest income (GAAP)

7,243

6,374

6,078

6,037

6,041

Tax-equivalent adjustment

117

110

112

115

117

Net interest income (Tax-equivalent)

7,360

6,484

6,190

6,152

6,158

Nine months

ended September

30,

(In thousands)

2022

2021

Net interest income (GAAP)

19,695

17,953

Tax-equivalent adjustment

339

355

Net interest income (Tax-equivalent)

20,034

18,308

Table of Contents

Table 2 - Selected Quarterly Financial

Data

2022

2021

Third

Second

First

Fourth

Third

(Dollars

in thousands, except

per share

amounts)

Quarter

Results of Operations

Net interest income

(a)

7,360

6,484

6,190

6,152

6,158

Less: tax-equivalent

adjustment

117

110

112

115

117

Net interest income

(GAAP)

7,243

6,374

6,078

6,037

6,041

Noninterest

income

852

848

908

1,019

975

Total revenue

8,095

7,222

6,986

7,056

7,016

Provision for loan

losses

250

—

(250)

—

Noninterest

expense

5,415

5,058

4,901

5,092

4,755

Income tax expense

432

363

254

386

Net earnings

1,998

1,801

2,081

1,871

1,875

Per share

data:

Basic and

diluted net earnings

0.57

0.51

0.59

0.53

Cash dividends

declared

0.265

0.26

Weighted

average shares

outstanding:

Basic and

diluted

3,507,318

3,513,353

3,518,657

3,524,311

3,536,320

Shares outstanding,

at period end

3,505,355

3,509,940

3,516,971

3,520,485

3,529,338

Book value

17.06

21.68

24.57

29.46

29.73

Common stock price:

High

29.02

33.57

34.49

34.79

35.36

Low

23.02

27.04

31.75

31.32

33.25

Period end:

23.02

27.04

33.21

32.30

33.80

To earnings

ratio

10.46

12.52

14.44

14.23

14.57

To book

value

135

125

135

110

114

Performance ratios:

Return on average

equity

10.35

8.26

7.97

7.07

7.01

Return on average

assets

0.75

0.66

0.75

0.70

0.72

Dividend payout

ratio

46.49

51.96

44.92

49.06

Asset Quality:

Allowance for

loan losses

as a % of:

Loans

1.05

1.07

1.09

1.08

1.13

Nonperforming

loans

1,431

1,314

1,256

1,112

1,053

Nonperforming

assets

as a % of:

Loans and foreclosed

properties

0.07

0.08

0.17

0.18

0.11

Total assets

0.03

0.07

0.05

Nonperforming

loans as a %

of total loans

0.07

0.08

0.09

0.10

0.11

Annualized

net (recoveries) charge

-offs as % of

average loans

—

(0.05)

0.03

0.16

(0.01)

Capital Adequacy:

(c)

CET 1 risk-based

capital ratio

15.39

16.59

17.26

16.23

16.82

Tier 1

risk-based capital ratio

15.39

16.59

17.26

16.23

16.82

Total risk-based

capital ratio

16.16

17.38

18.08

17.06

17.72

Tier 1

leverage ratio

9.29

9.16

9.09

9.35

9.57

Other financial

data:

Net interest margin

(a)

3.00

2.60

2.43

2.45

2.51

Effective income

tax rate

17.78

16.77

10.88

4.74

17.07

Efficiency

ratio (b)

65.94

68.99

69.05

71.01

66.66

Selected average

balances:

Securities

432,393

427,426

435,097

414,061

395,529

Loans, net of unearned

income

457,722

428,612

439,713

455,726

452,668

Total assets

1,069,973

1,092,759

1,114,407

1,073,564

1,040,985

Total deposits

987,614

999,867

1,003,394

961,544

927,368

Total stockholders’

equity

77,191

87,247

104,493

105,925

106,936

Selected period

end balances:

Securities

411,538

429,220

417,459

421,891

407,474

Loans, net of unearned

income

474,035

440,872

428,417

458,364

453,232

Allowance for

loan losses

4,966

4,716

4,658

4,939

5,119

Total assets

1,042,559

1,084,251

1,109,664

1,105,150

1,065,871

Total deposits

977,938

1,002,698

1,017,742

994,243

954,971

Total stockholders’

equity

59,793

76,107

86,411

103,726

104,929

(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.

See

"Table

1 - Explanation

of Non-GAAP

Financial Measures."

capital ratios presented

are for the Company's

wholly-owned subsidiary,

AuburnBank.

Table of Contents

Table 3 - Selected Financial Data

Nine months

ended September

30,

(Dollars

in thousands, except

per share

amounts)

2022

2021

Results of Operations

Net interest income

(a)

20,034

18,308

Less: tax-equivalent

adjustment

339

355

Net interest income

(GAAP)

19,695

17,953

Noninterest

income

2,608

3,288

Total revenue

22,303

21,241

Provision for loan

losses

—

(600)

Noninterest

expense

15,374

14,361

Income tax expense

1,049

1,313

Net earnings

5,880

6,167

Per share

data:

Basic and

diluted net earnings

1.67

1.74

Cash dividends

declared

0.795

0.78

Weighted

average shares

outstanding:

Basic and

diluted

3,513,068

3,552,387

Shares outstanding,

at period end

3,505,355

3,529,338

Book value

17.06

29.73

Common stock price:

High

34.49

48.00

Low

23.02

33.25

Period end

23.02

33.80

To earnings

ratio

10.46

14.57

To book

value

135

114

Performance ratios:

Return on average

equity

8.76

7.70

Return on average

assets

0.72

0.81

Dividend payout

ratio

47.60

44.83

Asset Quality:

Allowance for

loan losses

as a % of:

Loans

1.05

1.13

Nonperforming

loans

1,431

1,053

Nonperforming

assets

as a % of:

Loans and other

real estate

owned

0.07

0.11

Total assets

0.03

0.05

Nonperforming

loans as a %

of total loans

0.07

0.11

Annualized

net recoveries as

a % of average

loans

(0.01)

(0.03)

Capital Adequacy:

(c)

CET 1 risk-based

capital ratio

15.39

16.82

Tier 1

risk-based capital ratio

15.39

16.82

Total risk-based

capital ratio

16.16

17.72

Tier 1

leverage ratio

9.29

9.57

Other financial

data:

Net interest margin

(a)

2.67

2.59

Effective income

tax rate

15.14

17.55

Efficiency

ratio (b)

67.90

66.50

Selected average

balances:

Securities

431,629

373,203

Loans, net of unearned

income

442,081

458,882

Total assets

1,092,216

1,009,131

Total deposits

996,900

895,342

Total stockholders’

equity

89,544

106,798

Selected period

end balances:

Securities

411,538

407,474

Loans, net

of unearned income

474,035

453,232

Allowance for

loan losses

4,966

5,119

Total assets

1,042,559

1,065,871

Total deposits

977,938

954,971

Total stockholders’

equity

59,793

104,929

(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.

See

"Table

1 - Explanation

of Non-GAAP

Financial Measures."

capital ratios presented

are for the Company's

wholly-owned subsidiary,

AuburnBank.

Table of Contents

Table 4 - Average Balances and Net

Interest Income Analysis

Quarter ended

September

30,

2022

2021

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)

457,861

5,097

4.42%

453,649

5,127

4.48%

Securities - taxable

369,202

1,808

1.94%

332,474

1,048

1.25%

Securities - tax-exempt (2)

63,191

558

3.50%

63,055

558

3.51%

Total securities

432,393

2,366

2.17%

395,529

1,606

1.61%

Federal funds

sold

38,994

200

2.03%

40,995

0.15%

Interest bearing

bank deposits

45,343

226

1.98%

82,878

0.16%

Total interest

-earning

assets

974,591

7,889

3.21%

973,051

6,782

2.77%

Cash and due

from banks

14,503

14,326

Other assets

80,879

53,608

Total assets

1,069,973

1,040,985

Interest-bearing liabilities:

Deposits:

NOW

195,655

0.14%

182,417

0.11%

Savings and

money market

328,555

163

0.20%

300,746

167

0.22%

Time deposits

151,785

291

0.76%

159,423

402

1.00%

Total interest

-bearing

deposits

675,995

524

0.31%

642,586

620

0.38%

Short-term borrowings

3,759

0.50%

3,454

0.50%

Total interest

-bearing

liabilities

679,754

529

0.31%

646,040

624

0.38%

Noninterest-bearing deposits

311,619

284,781

Other liabilities

1,409

3,228

Stockholders' equity

77,191

106,936

Total liabilities and stockholders' equity

1,069,973

1,040,985

Net interest income and

margin (tax-equivalent)

7,360

3.00%

6,158

2.51%

(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 a federal income

tax rate of 21%.

Table of Contents

Table 5 - Average Balances and Net

Interest Income Analysis

Nine months

ended September

30,

2022

2021

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)

442,613

14,638

4.42%

460,732

15,417

4.47%

Securities - taxable

370,402

4,691

1.69%

310,288

3,006

1.30%

Securities - tax-exempt (2)

61,227

1,614

3.52%

62,915

1,692

3.60%

Total securities

431,629

6,305

1.95%

373,203

4,698

1.68%

Federal funds

sold

54,924

313

0.76%

36,821

0.14%

Interest bearing

bank deposits

73,630

454

0.82%

75,170

0.12%

Total interest

-earning

assets

1,002,796

21,710

2.89%

945,926

20,220

2.86%

Cash and due

from banks

15,029

14,345

Other assets

74,391

48,860

Total assets

1,092,216

1,009,131

Interest-bearing liabilities:

Deposits:

NOW

201,792

189

0.13%

176,242

161

0.12%

Savings and

money market

335,005

494

0.20%

289,758

488

0.23%

Time deposits

155,824

978

0.84%

159,412

1,251

1.05%

Total interest

-bearing

deposits

692,621

1,661

0.32%

625,412

1,900

0.41%

Short-term borrowings

3,969

0.50%

3,329

0.50%

Total interest

-bearing

liabilities

696,590

1,676

0.32%

628,741

1,912

0.41%

Noninterest-bearing deposits

304,279

269,930

Other liabilities

1,803

3,662

Stockholders' equity

89,544

106,798

Total liabilities and stockholders' equity

1,092,216

1,009,131

Net interest income and

margin (tax-equivalent)

20,034

2.67%

18,308

2.59%

(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 a federal income

tax rate of 21%.

Table of Contents

Table 6 - Allocation of Allowance for

Loan

Losses

2022

2021

Third Quarter

Second Quarter

First Quarter

Fourth Quarter

Third Quarter

(Dollars

in thousands)

Amount

Commercial and

industrial

732

14.9

761

15.9

774

17.1

857

18.3

816

17.4

Construction and

land

development

789

11.5

576

8.8

508

7.7

518

7.1

590

7.7

Commercial real estate

2,561

52.7

2,523

54.4

2,536

54.8

2,739

56.2

2,823

55.6

Residential real estate

783

19.3

753

19.3

737

18.4

739

16.9

799

17.7

Consumer installment

101

1.6

103

1.6

103

2.0

1.5

1.6

Total allowance for

loan losses

4,966

4,716

4,658

4,939

5,119

* Loan balance

in each category expressed

as a

percentage of total

loans.

Table of Contents

Table 7 – Estimated Uninsured Time

Deposits by

Maturity

(Dollars

in thousands)

September

30, 2022

Maturity of:

3 months or less

17,778

Over 3 months

through 6 months

11,792

Over 6 months

through 12 months

4,496

Over 12 months

5,458

Total estimated uninsured

time deposits

39,524

Table of Contents

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES

ABOUT

MARKET

RISK

The information called

for by

ITEM 3 is set forth in

ITEM 2 under the

caption “MARKET

AND LIQUIDITY

RISK

MANAGEMENT”

and is incorporated herein

reference.

ITEM 4. CONTROLS

AND PROCEDURES

The Company, with the

participation of its

management,

including its

Chief Executive

Officer and Chief Financial

Officer,

carried out an

evaluation

of the effectiveness of the design

and

operation of its disclosure controls

and

procedures (as

defined in

Rules 13a-15(e) and

15d-15(e) under the

Securities Exchange

Act of 1934, as

amended)

as of the end of

the

period covered

by this report. Based

upon that

evaluation and

as of the end of

the period

covered by this

report, the

Company’s Chief

Executive Officer and

Chief Financial Officer concluded

that

the Company’s

disclosure controls and

procedures were effective

to allow timely

decisions regarding

disclosure in its

reports that the

Company

files or submits to

the Securities and

Exchange

Commission under

the Securities Exchange

Act of 1934, as

amended. There

have been no

changes in the

Company’s internal

control over financial

reporting that

occurred during the

period covered

by this report

that have materially

affected, or are reasonably

likely to materially

affect, the Company’s

internal control over

financial

reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL

PROCEEDINGS

In the normal

course of its business, the

Company

and the Bank

are, from time to time,

involved

in legal proceedings. The

Company’s and Bank’s management

believe there are

no pending or

threatened legal,

governmental, or

regulatory

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.