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

March 31, 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

filed

Section 13

15(d)

the

Securities

Exchange Act

of 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

“large

accelerated

filer,”

“accelerated

filer,”

“smaller

reporting

company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

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 May 4, 2022

Common Stock, $0.01 par value per share

3,515,787

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AUBURN NATIONAL BANCORPORATION, INC. AND

SUBSIDIARIES

INDEX

PART I. FINANCIAL INFORMATION

PAGE

Item 1

Financial Statement

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

Consolidated Statements of Earnings (Unaudited) for the quarters ended March 31, 2022 and 2021

Consolidated Statements of Comprehensive Loss (Unaudited) for the quarters ended March 31, 2022

and 2021

Consolidated Statements of Stockholders’ Equity (Unaudited) for the quarters ended March 31, 2022

and 2021

Consolidated Statements of Cash Flows (Unaudited) for the quarters ended March 31, 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 – Average Balances and Net Interest Income Analysis for the quarters ended March 31, 2022

and 2021

Table 4 – Allocation of Allowance for Loan Losses

Table 5 – 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

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

AUBURN NATIONAL

BANCORPORATION,

INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Unaudited)

March 31,

December 31,

(Dollars in thousands, except share data)

2022

2021

Assets:

Cash and due from banks

22,085

11,210

Federal funds sold

71,249

77,420

Interest-bearing bank deposits

96,243

67,629

Cash and cash equivalents

189,577

156,259

Securities available-for-sale

417,459

421,891

Loans held for sale

977

1,376

Loans, net of unearned income

428,417

458,364

Allowance for loan losses

(4,658)

(4,939)

Loans, net

423,759

453,425

Premises and equipment, net

42,123

41,724

Bank-owned life insurance

19,734

19,635

Other assets

16,035

10,840

Total assets

1,109,664

1,105,150

Liabilities:

Deposits:

Noninterest-bearing

308,338

316,132

Interest-bearing

709,404

678,111

Total deposits

1,017,742

994,243

Federal funds purchased and securities sold under agreements to repurchase

3,994

3,448

Accrued expenses and other liabilities

1,517

3,733

Total liabilities

1,023,253

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

3,795

3,794

Retained earnings

111,123

109,974

Accumulated other comprehensive (loss) income, net

(17,455)

891

Less treasury stock, at cost -

440,164

shares and

436,650

at March 31, 2022

and December 31, 2021, respectively

(11,091)

(10,972)

Total stockholders’ equity

86,411

103,726

Total liabilities and stockholders’

equity

1,109,664

1,105,150

See accompanying notes to consolidated financial statements

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AUBURN NATIONAL

BANCORPORATION,

INC. AND SUBSIDIARIES

Consolidated Statements of Earnings

(Unaudited)

Quarter ended March 31,

(Dollars in thousands, except share and per share data)

2022

2021

Interest income:

Loans, including fees

4,850

5,178

Securities

Taxable

1,336

949

Tax-exempt

419

452

Federal funds sold and interest bearing bank deposits

Total interest income

6,668

6,607

Interest expense:

Deposits

585

666

Short-term borrowings

Total interest expense

590

670

Net interest income

6,078

5,937

Provision for loan losses

(250)

—

Net interest income after provision for loan

losses

6,328

5,937

Noninterest income:

Service charges on deposit accounts

142

132

Mortgage lending

253

549

Bank-owned life insurance

103

Other

414

398

Total noninterest income

908

1,182

Noninterest expense:

Salaries and benefits

2,950

2,851

Net occupancy and equipment

434

438

Professional fees

230

256

Other

1,287

1,145

Total noninterest expense

4,901

4,690

Earnings before income taxes

2,335

2,429

Income tax expense

254

423

Net earnings

2,081

2,006

Net earnings per share:

Basic and diluted

0.59

0.56

Weighted average shares

outstanding:

Basic and diluted

3,518,657

3,566,299

See accompanying notes to consolidated financial statements

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AUBURN NATIONAL

BANCORPORATION,

INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Loss

(Unaudited)

Quarter ended March 31,

(Dollars in thousands)

2022

2021

Net earnings

2,081

2,006

Other comprehensive loss, net of tax:

Unrealized net holding loss on securities

(18,346)

(5,132)

Other comprehensive loss

(18,346)

(5,132)

Comprehensive loss

(16,265)

(3,126)

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

income (loss)

stock

Total

Quarter ended March 31, 2022

Balance, December 31, 2021

3,520,485

3,794

109,974

891

(10,972)

103,726

Net earnings

—

2,081

—

2,081

Other comprehensive loss

—

(18,346)

—

(18,346)

Cash dividends paid ($

.265

per share)

—

(932)

—

(932)

Stock repurchases

(3,559)

—

(120)

Sale of treasury stock

—

Balance, March 31, 2022

3,516,971

3,795

111,123

(17,455)

(11,091)

86,411

Quarter ended March 31, 2021

Balance, December 31, 2020

3,566,276

3,789

105,617

7,599

(9,354)

107,690

Net earnings

—

2,006

—

2,006

Other comprehensive loss

—

(5,132)

—

(5,132)

Cash dividends paid ($

.26

per share)

—

(927)

—

(927)

Sale of treasury stock

—

Balance, March 31, 2021

3,566,326

3,791

106,696

2,467

(9,354)

103,639

See accompanying notes to consolidated financial statements

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AUBURN NATIONAL

BANCORPORATION,

INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

Quarter ended March 31,

(Dollars in thousands)

2022

2021

Cash flows from operating activities:

Net earnings

2,081

2,006

Adjustments to reconcile net earnings to net cash provided by

operating activities:

Provision for loan losses

(250)

—

Depreciation and amortization

244

297

Premium amortization and discount accretion, net

909

959

Net gain on sale of loans held for sale

(229)

(537)

Loans originated for sale

(5,792)

(17,503)

Proceeds from sale of loans

6,366

20,036

Increase in cash surrender value of bank-owned life insurance

(99)

(103)

Net (increase) decrease in other assets

(5,161)

Net decrease in accrued expenses and other liabilities

3,938

694

Net cash provided by operating activities

2,007

5,864

Cash flows from investing activities:

Proceeds from prepayments and maturities of securities available-for-sale

19,523

24,145

Purchase of securities available-for-sale

(40,498)

(56,409)

Decrease (increase) in loans, net

29,916

(115)

Net purchases of premises and equipment

(549)

(5,577)

(Increase) decrease in FHLB stock

(74)

267

Net cash provided by (used in) investing activities

8,318

(37,689)

Cash flows from financing activities:

Net (decrease) increase in noninterest-bearing deposits

(7,794)

20,471

Net increase in interest-bearing deposits

31,293

20,327

Net increase in federal funds purchased and securities sold

under agreements to repurchase

546

946

Stock repurchases

(120)

—

Dividends paid

(932)

(927)

Net cash provided by financing activities

22,993

40,817

Net change in cash and cash equivalents

33,318

8,992

Cash and cash equivalents at beginning of period

156,259

112,575

Cash and cash equivalents at end of period

189,577

121,567

Supplemental disclosures of cash flow information:

Cash paid during the period for:

Interest

609

687

Income taxes

—

671

Supplemental disclosure of non-cash transactions:

Real estate acquired through foreclosure

—

See accompanying notes to consolidated financial statements

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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 counties 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 at

Accounting Standards Codification

(“ASC”)

The 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, investment

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

presented as components of

noninterest income. The following is a summary of the revenue streams that fall

within the scope of ASC 606:

●

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, 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 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 March 31, 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.

Reclassifications

Certain amounts reported in prior periods have been reclassified to conform to the current

-period presentation. These

reclassifications had no effect on the Company’s

previously reported net earnings or total stockholders’ equity.

Accounting Developments

In the first quarter 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 quarters ended March 31, 2022 and 2021, respectively.

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.

March 31, 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 March 31,

(Dollars in thousands, except share and per share data)

2022

2021

Basic and diluted:

Net earnings

2,081

2,006

Weighted average common

shares outstanding

3,518,657

3,566,299

Net earnings per share

0.59

0.56

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 March 31, 2022, the Company did not have any consolidated VIEs to disclose but did

have one nonconsolidated VIE,

discussed below.

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 March 31, 2022 and December 31, 2021, respectively,

the Company had one such investment in the

amount of $2.2 million, which was included in other assets in the consolidated

balance sheets.

The Company’s equity

investment meets the definition of a VIE. While the Company’s

investment exceeds 50% of the outstanding equity

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

meet the characteristics of a primary beneficiary

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

Type:

New Markets Tax Credit investment

2,158

Other assets

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NOTE 4: SECURITIES

At March 31, 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 March 31, 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

March 31, 2022

Agency obligations (a)

—

49,185

66,866

—

116,051

—

7,428

123,479

Agency MBS (a)

—

570

34,857

198,400

233,827

14,906

248,671

State and political subdivisions

170

627

14,494

52,290

67,581

902

1,937

68,616

Total available-for-sale

170

50,382

116,217

250,690

417,459

964

24,271

440,766

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 $

189.9

million and $

172.3

million at March 31, 2022 and December 31, 2021,

respectively, were pledged to

secure public deposits, securities sold under agreements to repurchase, Federal Home

Loan

Bank (“FHLB”) advances, and for other purposes required or permitted by 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 March 31, 2022 and December 31, 2021,

respectively.

Non-marketable equity investments include FHLB of Atlanta Stock, Federal

Reserve Bank (“FRB”) stock,

and stock in a privately held financial institution.

Gross Unrealized Losses and Fair Value

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

March 31, 2022:

Agency obligations

78,527

3,404

37,525

4,024

116,052

7,428

Agency MBS

173,957

9,964

52,473

4,942

226,430

14,906

State and political subdivisions

23,712

1,484

3,556

453

27,268

1,937

Total

276,196

14,852

93,554

9,419

369,750

24,271

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

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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 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 an asset-backed debt security,

in the financial

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

a segment of

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

underlying loan obligors of the security or

changes in the quality of the credit enhancement);

●

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

●

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

make payments that

increase in the future;

●

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

●

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

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

or other government support.

Agency mortgage-backed securities (“MBS”)

The unrealized losses associated with agency MBS were primarily driven by 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-sponsored

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

or other government support.

Securities of U.S. states and political subdivisions

The unrealized losses associated with securities of U.S. states and political subdivisions

were primarily driven by increases

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

securities are guaranteed by a

bond insurer, but management did not rely on the guarantee

in making its investment decision.

These securities will

continue to be monitored as part of the Company’s

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

rating agencies reduce the credit rating of the bond insurers. As a result, the Company expects to

recover the entire

amortized cost basis of these securities.

The carrying values of the Company’s investment

securities could decline in the future if market interest rates continue to

increase.

If the financial condition of an issuer (other than the U.S. government or

its agencies) deteriorates and the

Company determines it is probable that it will not recover the entire amortized cost

basis for the security,

there is a risk that

other-than-temporary impairment charges

may occur in the future.

The Company will evaluate whether any loss is

temporary or not.

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Other-Than-Temporarily

Impaired Securities

Credit-impaired debt securities are debt securities where the Company

has written down the amortized cost basis of a

security for other-than-temporary impairment and the credit component of the loss is recognized

in earnings. At March 31,

2022 and December 31, 2021, the Company had no credit-impaired debt securities and there

were no additions or

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

ended March 31, 2022 and

2021, respectively.

Realized Gains and Losses

The Company had no realized gains and losses on sale of securities during the first quarters ended

March 31, 2022 and

2021, respectively.

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NOTE 5: LOANS AND ALLOWANCE

FOR LOAN LOSSES

March 31,

December 31,

(Dollars in thousands)

2022

2021

Commercial and industrial

73,297

83,977

Construction and land development

33,058

32,432

Commercial real estate:

Owner occupied

59,429

63,375

Hotel/motel

37,377

43,856

Multi-family

25,253

42,587

Other

113,003

108,553

Total commercial real estate

235,062

258,371

Residential real estate:

Consumer mortgage

30,182

29,781

Investment property

48,920

47,880

Total residential real estate

79,102

77,661

Consumer installment

8,412

6,682

Total loans

428,931

459,123

Less: unearned income

(514)

(759)

Loans, net of unearned income

428,417

458,364

Loans secured by real estate were approximately

81.0%

of the Company’s total loan portfolio

at March 31, 2022.

At March

31, 2022, the Company’s geographic

loan distribution was concentrated primarily in Lee County,

Alabama, and

surrounding areas.

In accordance with ASC 310, a portfolio segment is defined as the level at which an entity

develops and documents a

systematic method for determining its allowance for loan losses. As part of the

Company’s quarterly assessment

of the

allowance, the loan portfolio included the following portfolio segments: commercial and

industrial, construction and land

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

Where appropriate, the Company’s

loan portfolio segments are further disaggregated into classes. A class is generally determined

based on the initial

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

method for monitoring and determining credit risk.

The following describes

the risk characteristics relevant to each of the portfolio segments

and classes.

Commercial and industrial (“C&I”) —

includes loans to finance business operations, equipment purchases, or

other needs

for small and medium-sized commercial customers. Also included

in this category are loans to finance agricultural

production.

Generally,

the primary source of repayment is the cash flow from business operations and activities

of the

borrower.

As of March 31, 2022, the Company has 82 PPP loans with an aggregate outstanding principal

balance of $4.1

million included in this category.

The Company had 138 PPP loans with an aggregate principal balance of $8.1

million

included in this category at December 31, 2021.

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

includes both loans and credit lines for the purpose of purchasing,

carrying,

and developing land into commercial developments or residential subdivisions.

Also included are loans and credit

lines for construction of residential, multi-family,

and commercial buildings. Generally,

the primary source of repayment is

dependent upon the sale or refinance of the real estate collateral.

Commercial real estate

(“CRE”) —

includes loans disaggregated into four classes: (1) owner occupied, (2)

hotel/motel,

(3) multifamily and (4) other.

●

Owner occupied

– includes loans secured by business facilities to finance business operations, equipment and

owner-occupied facilities primarily for small and

medium-sized commercial customers.

Generally,

the primary

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

who owns the

property.

Table of Contents

●

Hotel/motel

– includes loans for hotels and motels.

Generally, the primary source of repayment

is dependent upon

income generated from the real estate collateral.

The underwriting of these loans takes into consideration the

occupancy and rental rates, as well as the financial health of the borrower.

●

Multi-family

– primarily includes loans to finance income-producing multi-family properties

Loans in this class

include loans for 5 or more unit residential property and apartments leased to residents.

Generally,

the primary

source of repayment is dependent upon income generated from the real estate collateral.

The underwriting of these

loans takes into consideration the occupancy and rental rates, as well as the financial

health of the borrower.

●

Other

– primarily includes loans to finance income-producing commercial properties

other than hotels/motels and

multi-family properties, and which

are not owner occupied.

Loans in this class include loans for neighborhood

retail centers, medical and professional offices, single retail stores,

industrial buildings, and warehouses leased to

local businesses.

Generally,

the primary source of repayment is dependent upon income generated from the real

estate collateral. The underwriting of these loans takes into consideration the occupancy and

rental rates, as well as

the financial health of the borrower.

Residential real estate (“RRE”) —

includes loans disaggregated into two classes: (1) consumer mortgage and (2)

investment property.

●

Consumer mortgage

– primarily includes first or second lien mortgages and home equity lines of credit

consumers that are secured by a primary residence or second home. These loans are underwritten

in accordance

with the Bank’s general loan policies and

procedures which require, among other things, proper documentation of

each borrower’s financial condition, satisfactory credit history

and property value.

●

Investment property

– primarily includes loans to finance income-producing 1-4 family residential properties.

Generally,

the primary source of repayment is dependent upon income generated

from leasing the property

securing the loan. The underwriting of these loans takes into consideration the rental rates and

property value, as

well as the financial health of the borrower.

Consumer installment —

includes loans to individuals both secured by personal property and unsecured.

Loans include

personal lines of credit, automobile loans, and other retail loans.

These loans are underwritten in accordance with the

Bank’s general loan policies and procedures

which require, among other things, proper documentation of each borrower’s

financial condition, satisfactory credit history,

and, if applicable, property value.

Table of Contents

The following is a summary of current, accruing past due, and nonaccrual loans by portfolio

segment and class as of March

31, 2022 and December 31, 2021.

Accruing

Total

30-89 Days

Greater than

Accruing

Non-

Total

(Dollars in thousands)

Current

Past Due

90 days

Loans

Accrual

Loans

March 31, 2022:

Commercial and industrial

73,290

—

73,297

—

73,297

Construction and land development

33,057

—

33,058

—

33,058

Commercial real estate:

Owner occupied

59,429

—

59,429

—

59,429

Hotel/motel

37,377

—

37,377

—

37,377

Multi-family

25,253

—

25,253

—

25,253

Other

112,821

—

112,821

182

113,003

Total commercial real estate

234,880

—

234,880

182

235,062

Residential real estate:

Consumer mortgage

29,600

393

—

29,993

189

30,182

Investment property

48,817

103

—

48,920

—

48,920

Total residential real estate

78,417

496

—

78,913

189

79,102

Consumer installment

8,397

—

8,412

—

8,412

Total

428,041

519

—

428,560

371

428,931

December 31, 2021:

Commercial and industrial

83,974

—

83,977

—

83,977

Construction and land development

32,228

204

—

32,432

—

32,432

Commercial real estate:

Owner occupied

63,375

—

63,375

—

63,375

Hotel/motel

43,856

—

43,856

—

43,856

Multi-family

42,587

—

42,587

—

42,587

Other

108,366

—

108,366

187

108,553

Total commercial real estate

258,184

—

258,184

187

258,371

Residential real estate:

Consumer mortgage

29,070

516

—

29,586

195

29,781

Investment property

47,818

—

47,818

47,880

Total residential real estate

76,888

516

—

77,404

257

77,661

Consumer installment

6,657

—

6,682

—

6,682

Total

457,931

748

—

458,679

444

459,123

Allowance for Loan Losses

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

to the end of each calendar quarter. The level of

the allowance is based upon management’s

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

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

a borrower’s ability to repay (including

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

composition of the loan portfolio, economic

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

recommendations. This

evaluation is inherently subjective as it requires material estimates including the

amounts and timing of future cash flows

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

charged off, in whole or

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

A loan may be partially charged-off

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

to the terms of the loan is

unlikely.

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

probable that the Company will

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

Collection of all amounts due

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

loan will be collected as

scheduled in the loan agreement.

Table of Contents

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, the impairment

measurement is based on the fair value of the collateral, less estimated disposal costs.

The level of allowance maintained is believed by management to be adequate

to absorb probable losses inherent in the

portfolio at the balance sheet date. The allowance is increased by provisions charged

to expense and decreased by charge-

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

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

ongoing internal and independent

loan review processes. 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 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 evaluates the loan portfolio’s

five segments:

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

real estate, and consumer

installment. The Company analyzes each segment and estimates an allowance allocation

for each loan segment.

The allocation of the allowance for loan losses begins with a process of estimating the

probable losses inherent for each

loan segment. The estimates for these loans are established by category and based

on the Company’s internal system of

credit risk ratings and historical loss data.

The estimated loan loss allocation rate for the Company’s

internal system of

credit risk grades is based on its experience with similarly graded

loans. For loan segments where the Company believes it

does not have sufficient historical loss data, the Company may

make adjustments based, in part, on loss rates of peer bank

groups.

At March 31, 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 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 March 31, 2022, the Company increased

its look-back period to 52 quarters to continue to include losses incurred by the Company

beginning with the first quarter of

2009.

The Company will likely continue to increase its look-back period to incorporate

the effects of at least one economic

downturn in its loss history.

During the second quarter of 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 changes in economic conditions.

Table of Contents

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

for the respective periods.

March 31, 2022

(Dollars in thousands)

Commercial and

industrial

Construction

and land

development

Commercial

real estate

Residential

real estate

Consumer

installment

Total

Quarter ended:

Beginning balance

857

518

2,739

739

4,939

Charge-offs

—

(48)

Recoveries

—

Net recoveries (charge-offs)

—

(40)

(31)

Provision for loan losses

(85)

(10)

(203)

(9)

(250)

Ending balance

774

508

2,536

737

103

4,658

March 31, 2021

(Dollars in thousands)

Commercial and

industrial

Construction

and land

development

Commercial

real estate

Residential

real estate

Consumer

installment

Total

Quarter ended:

Beginning balance

807

594

3,169

944

104

5,618

Charge-offs

—

(5)

Recoveries

—

Net recoveries (charge-offs)

—

(1)

Provision for loan losses

(43)

(6)

(10)

—

Ending balance

828

551

3,259

951

5,682

Table of Contents

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

investment in loans by portfolio

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

Collectively evaluated (1)

Individually evaluated (2)

Total

Allowance

Recorded

Allowance

Recorded

Allowance

Recorded

for loan

investment

for loan

investment

for loan

investment

(Dollars in thousands)

losses

in loans

losses

in loans

losses

in loans

March 31, 2022:

Commercial and industrial (3)

774

73,297

—

774

73,297

Construction and land development

508

33,058

—

508

33,058

Commercial real estate

2,536

234,880

—

182

2,536

235,062

Residential real estate

737

79,102

—

737

79,102

Consumer installment

103

8,412

—

103

8,412

Total

4,658

428,749

—

182

4,658

428,931

March 31, 2021:

Commercial and industrial (4)

828

88,687

—

828

88,687

Construction and land development

551

30,332

—

551

30,332

Commercial real estate

3,259

254,525

—

206

3,259

254,731

Residential real estate

951

82,745

—

103

951

82,848

Consumer installment

6,524

—

6,524

Total

5,682

462,813

—

309

5,682

463,122

(1)

Represents loans collectively evaluated for impairment in accordance

with ASC 450-20,

Loss Contingencies

, and

pursuant to amendments by ASU 2010-20 regarding allowance

for non-impaired loans.

(2)

Represents loans individually evaluated for impairment in

accordance with ASC 310-30,

Receivables

, and

pursuant to amendments by ASU 2010-20 regarding allowance

for impaired loans.

(3)

Includes $4.1 million of PPP loans for which no

allowance for loan losses was allocated due to

100% SBA guarantee.

(4)

Includes $28.7 million of PPP loans for which no allowance

for loan losses was allocated due to 100% SBA guarantee.

Credit Quality Indicators

The credit quality of the loan portfolio is summarized no less frequently than quarterly using categories

similar to the

standard asset classification system used by the federal banking agencies.

The following table presents credit quality

indicators for the loan portfolio segments and classes. These categories are utilized to develop

the associated allowance for

loan losses using historical losses adjusted for qualitative and environmental

factors and are defined as follows:

●

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

obligor (or guarantors, if

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

●

Special Mention – loans with potential weakness that may,

if not reversed or corrected, weaken the credit or

inadequately protect the Company’s position

at some future date. These loans are not adversely classified and do

not expose an institution to sufficient risk to warrant an adverse classification.

●

Substandard Accruing – loans that exhibit a well-defined weakness which presently jeopardizes

debt repayment,

even though they are currently performing. These loans are characterized by the distinct possibility

that the

Company may incur a loss in the future if these weaknesses are not corrected

●

Nonaccrual – includes loans where management has determined that full payment

of principal and interest is not

expected.

Table of Contents

(Dollars in thousands)

Pass

Special

Mention

Substandard

Accruing

Nonaccrual

Total loans

March 31, 2022:

Commercial and industrial

73,060

215

—

73,297

Construction and land development

33,044

—

33,058

Commercial real estate:

Owner occupied

59,060

247

122

—

59,429

Hotel/motel

37,377

—

37,377

Multi-family

25,253

—

25,253

Other

111,785

1,008

182

113,003

Total commercial real estate

233,475

1,255

150

182

235,062

Residential real estate:

Consumer mortgage

28,136

449

1,408

189

30,182

Investment property

48,640

184

—

48,920

Total residential real estate

76,776

545

1,592

189

79,102

Consumer installment

8,389

—

8,412

Total

424,744

1,838

1,978

371

428,931

December 31, 2021:

Commercial and industrial

83,725

226

—

83,977

Construction and land development

32,212

218

—

32,432

Commercial real estate:

Owner occupied

61,573

1,675

127

—

63,375

Hotel/motel

36,162

7,694

—

43,856

Multi-family

39,093

3,494

—

42,587

Other

107,426

911

187

108,553

Total commercial real estate

244,254

13,774

156

187

258,371

Residential real estate:

Consumer mortgage

27,647

452

1,487

195

29,781

Investment property

47,459

261

47,880

Total residential real estate

75,106

550

1,748

257

77,661

Consumer installment

6,650

—

6,682

Total

441,947

14,372

2,360

444

459,123

Impaired loans

The following tables present details related to the Company’s

impaired loans. Loans that have been fully charged-off are

not included in the following tables. The related allowance generally represents the following

components that correspond

to impaired loans:

●

Individually evaluated impaired loans equal to or greater than $500 thousand secured

by real estate (nonaccrual

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

loans).

●

Individually evaluated impaired loans equal to or greater than $250 thousand not secured

by real estate

(nonaccrual commercial and industrial and consumer installment loans).

Table of Contents

The following tables set forth certain information regarding the Company’s

impaired loans that were individually evaluated

for impairment at March 31, 2022 and December 31, 2021.

March 31, 2022

(Dollars in thousands)

Unpaid principal

balance (1)

Charge-offs and

payments applied

(2)

Recorded

investment (3)

Related allowance

With no allowance recorded:

Commercial real estate:

Other

202

(20)

182

—

Total commercial real estate

202

(20)

182

—

Total

impaired loans

202

(20)

182

—

(1) Unpaid principal balance represents the contractual obligation

due from the customer.

(2) Charge-offs and payments applied represents cumulative charge-offs taken, as well

as interest payments that have been

applied against the outstanding principal balance subsequent

to the loans being placed on nonaccrual status.

(3) Recorded investment represents the unpaid principal balance

less charge-offs and payments applied; it is shown before

any related allowance for loan losses.

December 31, 2021

(Dollars in thousands)

Unpaid principal

balance (1)

Charge-offs and

payments applied

(2)

Recorded

investment (3)

Related allowance

With no allowance recorded:

Commercial real estate:

Other

205

(18)

187

—

Total commercial real estate

205

(18)

187

—

Residential real estate:

Investment property

(6)

—

Total residential real estate

(6)

—

Total

impaired loans

273

(24)

249

—

(1) Unpaid principal balance represents the contractual obligation

due from the customer.

(2) Charge-offs and payments applied represents cumulative charge-offs taken, as well

as interest payments that have been

applied against the outstanding principal balance subsequent

to the loans being placed on nonaccrual status.

(3) Recorded investment represents the unpaid principal balance

less charge-offs and payments applied; it is shown before

any related allowance for loan losses.

Table of Contents

The following table provides the average recorded investment in impaired loans, if

any, by portfolio

segment, and the

amount of interest income recognized on impaired loans after impairment by portfolio

segment and class during the

respective periods.

Quarter ended March 31, 2022

Quarter ended March 31, 2021

Average

Total interest

Average

Total interest

recorded

income

recorded

income

(Dollars in thousands)

investment

recognized

investment

recognized

Impaired loans:

Commercial real estate:

Other

236

—

208

—

Total commercial real estate

236

—

208

—

Residential real estate:

Investment property

—

104

—

Total residential real estate

—

104

—

Total

251

—

312

—

Troubled Debt

Restructurings

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

Section 4013 of the CARES Act, “Temporary

Relief

From Troubled Debt Restructurings,” provides banks the option

to temporarily suspend certain requirements under ASC

340-10 TDR classifications for a limited period of time to account for the effects

of COVID-19. In addition, the Interagency

Statement on COVID-19 Loan Modifications, encourages banks to

work prudently with borrowers and describes the

agencies’ interpretation of how accounting rules under ASC 310-40,

“Troubled Debt Restructurings by Creditors,” apply to

certain COVID-19-related modifications. The Interagency Statement on

COVID-19 Loan Modifications was supplemented

on June 23, 2020 by the Interagency Examiner Guidance for Assessing Safety and

Soundness Considering the Effect of the

COVID-19 Pandemic on Institutions.

If a loan modification is eligible, a bank may elect to account for the loan under

section 4013 of the CARES Act. If a loan modification is not eligible under section 4013,

or if the bank elects not to

account for the loan modification under section 4013, the Revised Statement includes

criteria when a bank may presume a

loan modification is not a TDR in accordance with ASC 310-40.

The Company evaluates loan extensions or modifications not qualified under

Section 4013 of the CARES Act or under the

Interagency Statement and related regulatory guidance on COVID-19 Loan Modifications

in accordance with FASB

ASC

340-10 with respect to the classification of the loan as a TDR.

In the normal course of business, management may grant

concessions to borrowers that are experiencing financial difficulty.

A concession may include, but is not limited to, delays

in required payments of principal and interest for a specified period, reduction

of the stated interest rate of the loan,

reduction of accrued interest, extension of the maturity date, or reduction

of the face amount or maturity amount of the debt.

A concession has been granted when, as a result of the restructuring, the Bank does

not expect to collect, when due, all

amounts owed, including interest at the original stated rate.

A concession may have also been granted if the debtor is not

able to access funds elsewhere at a market rate for debt with risk characteristics

similar to the restructured debt.

In making

the determination of whether a loan modification is a TDR, the Company considers

the individual facts and circumstances

surrounding each modification.

As part of the credit approval process, the restructured loans are evaluated for adequate

collateral protection in determining the appropriate accrual status at the time of restructure.

Similar to other impaired loans, TDRs are measured for impairment based on the present value of expected

payments using

the loan’s original effective

interest rate as the discount rate, or the fair value of the collateral, less selling costs if the loan is

collateral dependent. If the recorded investment in the loan exceeds the measure of

fair value, impairment is recognized by

establishing a valuation allowance as part of the allowance for loan losses or a charge

-off to the allowance for loan losses.

In periods subsequent to the modification, all TDRs are evaluated individually,

including those that have payment defaults,

for possible impairment.

Table of Contents

The following is a summary of accruing and nonaccrual TDRs, which are included in the impaired

loan totals, and the

related allowance for loan losses, by portfolio segment and class as of March 31, 2022

and December 31, 2021,

respectively.

TDRs

(Dollars in thousands)

Accruing

Nonaccrual

Total

Allowance

March 31, 2022

Commercial real estate:

Other

—

182

—

Total commercial real estate

—

182

—

Total

—

182

—

TDRs

(In thousands)

Accruing

Nonaccrual

Total

Allowance

December 31, 2021

Commercial real estate:

Other

—

187

—

Total commercial real estate

—

187

—

Investment property

—

Total residential real estate

—

Total

—

249

—

At March 31, 2022 there were no significant outstanding commitments to advance additional

funds to customers whose

loans had been restructured.

There were no loans modified in a TDR during the quarters ended March 31,

2022 and 2021, respectively.

For the same

periods, the Company had no loans modified in a TDR within the previous 12

months for which there was a payment

default.

NOTE 6: MORTGAGE SERVICING

RIGHTS, NET

Mortgage servicing rights (“MSRs”) are recognized based on the fair value of the

servicing rights on the date the

corresponding mortgage loans are sold.

An estimate of the Company’s MSRs is determined

using assumptions that market

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

of prepayment speeds, discount rate,

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

fee income, ancillary income, and late fees.

Subsequent to the date of transfer, the Company

has elected to measure its MSRs under the amortization method.

Under

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

of, estimated net servicing income.

Increases in market interest rates generally increase the fair value of MSRs by reducing

prepayments and refinancings and

therefore the prepayment speed.

The Company has recorded MSRs related to loans sold to Fannie Mae.

The Company generally sells conforming, fixed-

rate, closed-end, residential mortgages to Fannie Mae.

MSRs are included in other assets on the accompanying

consolidated balance sheets.

The Company evaluates MSRs for impairment on a quarterly basis.

Impairment is determined by stratifying MSRs into

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

If, by individual stratum, the

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

The valuation allowance is adjusted

as the fair value changes.

Changes in the valuation allowance are recognized in earnings

as a component of mortgage

lending income.

Table of Contents

The change in amortized MSRs and the related valuation allowance for the quarters

ended March 31, 2022 and 2021 are

presented below.

Quarter ended March 31,

(Dollars in thousands)

2022

2021

MSRs, net:

Beginning balance

1,309

1,330

Additions, net

142

Amortization expense

(78)

(150)

Ending balance

1,285

1,322

Valuation

allowance included in MSRs, net:

Beginning of period

—

End of period

—

Fair value of amortized MSRs:

Beginning of period

1,908

1,489

End of period

2,277

1,774

NOTE 7: FAIR VALUE

Fair Value

Hierarchy

“Fair value” is defined by ASC 820,

Fair Value

Measurements and Disclosures

, as the price that would be received to sell

an asset or paid to transfer a liability in an orderly transaction occurring in the principal market

(or most advantageous

market in the absence of a principal market) for an asset or liability at the measurement date.

GAAP establishes a fair

value hierarchy for valuation inputs that gives the highest priority to quoted prices

in active markets for identical assets or

liabilities and the lowest priority to unobservable inputs.

The fair value hierarchy is as follows:

Level 1—inputs to the valuation methodology are quoted prices, unadjusted, for identical

assets or liabilities in active

markets.

Level 2—inputs to the valuation methodology include quoted prices for similar assets and

liabilities in active markets,

quoted prices for identical or similar assets or liabilities in markets that are not active, or

inputs that are observable for the

asset or liability, either directly or

indirectly.

Level 3—inputs to the valuation methodology are unobservable and reflect the

Company’s own assumptions about the

inputs market participants would use in pricing the asset or liability.

Level changes in fair value measurements

Transfers between levels of the fair value hierarchy are generally

recognized at the end of each reporting period.

The

Company monitors the valuation techniques utilized for each category of

financial assets and liabilities to ascertain when

transfers between levels have been affected.

The nature of the Company’s financial assets

and liabilities generally is such

that transfers in and out of any level are expected to be infrequent. For the quarter ended

March 31, 2022, there were no

transfers between levels and no changes in valuation techniques for the Company’s

financial assets and liabilities.

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Assets and liabilities measured at fair value on a recurring

basis

Securities available-for-sale

Fair values of securities available for sale were primarily measured

using Level 2 inputs.

For these securities, the Company

obtains pricing from third party pricing services.

These third party pricing services consider observable data that may

include broker/dealer quotes, market spreads, cash flows, benchmark

yields, reported trades for similar securities, market

consensus prepayment speeds, credit information, and the securities’ terms and

conditions.

On a quarterly basis,

management reviews the pricing received from the third party pricing services for

reasonableness given current market

conditions.

As part of its review, management

may obtain non-binding third party broker quotes to validate the fair value

measurements.

In addition, management will periodically submit pricing provided

by the third party pricing services to

another independent valuation firm on a sample basis.

This independent valuation firm will compare the price provided by

the third party pricing service with its own price and will review the significant assumptions

and valuation methodologies

used with management.

The following table presents the balances of the assets and liabilities measured at fair value

on a recurring basis as of March

31, 2022 and December 31, 2021, respectively,

by caption, on the accompanying consolidated balance sheets by ASC 820

valuation hierarchy (as described above).

Quoted Prices in

Significant

Active Markets

Other

Significant

for

Observable

Unobservable

Identical Assets

Inputs

(Dollars in thousands)

Amount

(Level 1)

(Level 2)

(Level 3)

March 31, 2022:

Securities available-for-sale:

Agency obligations

116,051

—

116,051

—

Agency RMBS

233,827

—

233,827

—

State and political subdivisions

67,581

—

67,581

—

Total securities available-for-sale

417,459

—

417,459

—

Total

assets at fair value

417,459

—

417,459

—

December 31, 2021:

Securities available-for-sale:

Agency obligations

124,413

—

124,413

—

Agency RMBS

223,371

—

223,371

—

State and political subdivisions

74,107

—

74,107

—

Total securities available-for-sale

421,891

—

421,891

—

Total

assets at fair value

421,891

—

421,891

—

Assets and liabilities measured at fair value on a nonrecurring

basis

Loans held for sale

Loans held for sale are carried at the lower of cost or fair value. Fair values of loans held for

sale are determined using

quoted market secondary market prices for similar loans.

Loans held for sale are classified within Level 2 of the fair value

hierarchy.

Impaired Loans

Loans considered impaired under ASC 310-10-35,

Receivables

, are loans for which, based on current information and

events, it is probable that the Company will be unable to collect all principal and interest

payments due in accordance with

the contractual terms of the loan agreement. Impaired loans can be measured based

on the present value of expected

payments using the loan’s original effective

rate as the discount rate, the loan’s observable

market price, or the fair value of

the collateral less selling costs if the loan is collateral dependent.

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The fair value of impaired loans was primarily measured based on the value of the collateral

securing these loans. Impaired

loans are classified within Level 3 of the fair value hierarchy.

Collateral may be real estate and/or business assets including

equipment, inventory, and/or

accounts receivable. The Company determines the value of the collateral based

independent appraisals performed by qualified licensed appraisers. These

appraisals may utilize a single valuation approach

or a combination of approaches including comparable sales and the income approach. Appraised

values are discounted for

costs to sell and may be discounted further based on management’s

historical knowledge, changes in market conditions

from the date of the most recent appraisal, and/or management’s

expertise and knowledge of the customer and the

customer’s business. Such discounts by management are subjective

and are typically significant unobservable inputs for

determining fair value. Impaired loans are reviewed and evaluated on at least a quarterly

basis for additional impairment

and adjusted accordingly, based

on the same factors discussed above.

Other real estate owned

Other real estate

owned, consisting of properties obtained through foreclosure or in satisfaction

of loans, are initially

recorded at the lower of the loan’s carrying amount

or the fair value less costs to sell upon transfer of the loans to other rea.

estate.

Subsequently, other real

estate is carried at the lower of carrying value or fair value less costs to sell. Fair values are

generally based on third party appraisals of the property and are classified

within Level 3 of the fair value hierarchy.

The

appraisals are sometimes further discounted based on management’s

historical knowledge, and/or changes in market

conditions from the date of the most recent appraisal, and/or management’s

expertise and knowledge of the customer and

the customer’s business. Such discounts are typically significant

unobservable inputs for determining fair value. In cases

where the carrying amount exceeds the fair value, less costs to sell, a loss is recognized

in noninterest expense.

Mortgage servicing rights, net

MSRs, net, included in other assets on the accompanying consolidated balance sheets,

are carried at the lower of cost or

estimated fair value.

MSRs do not trade in an active market with readily observable prices.

To determine the fair

value of

MSRs, the Company engages an independent third party.

The independent third party’s

valuation model calculates the

present value of estimated future net servicing income using assumptions that

market participants would use in estimating

future net servicing income, including estimates of prepayment speeds, discount

rates, default rates, cost to service, escrow

account earnings, contractual servicing fee income, ancillary income, and late

fees.

Periodically, the Company

will review

broker surveys and other market research to validate significant assumptions used

in the model.

The significant

unobservable inputs include prepayment speeds or the constant prepayment rate (“CPR”)

and the weighted average

discount rate.

Because the valuation of MSRs requires the use of significant unobservable

inputs, all of the Company’s

MSRs are classified within Level 3 of the valuation hierarchy.

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The following table presents the balances of the assets and liabilities measured

at fair value on a nonrecurring basis as of

March 31, 2022 and December 31, 2021, respectively,

by caption, on the accompanying consolidated balance sheets and by

FASB ASC 820 valuation

hierarchy (as described above):

Quoted Prices in

Active Markets

Other

Significant

for

Observable

Unobservable

Carrying

Identical Assets

Inputs

(Dollars in thousands)

Amount

(Level 1)

(Level 2)

(Level 3)

March 31, 2022:

Loans held for sale

977

—

977

—

Loans, net

(1)

182

—

182

Other assets

(2)

1,659

—

1,659

Total assets at fair value

2,818

—

977

1,841

December 31, 2021:

Loans held for sale

1,376

—

1,376

—

Loans, net

(1)

249

—

249

Other assets

(2)

1,683

—

1,683

Total assets at fair value

3,308

—

1,376

1,932

(1)

Loans considered impaired under ASC 310-10-35

Receivables.

This amount reflects the recorded investment in impaired

loans, net

of any related allowance for loan losses.

(2)

Represents other real estate owned and MSRs, net

both of which are carried at lower of cost or estimated

fair value.

Quantitative Disclosures for Level 3 Fair Value

Measurements

At March 31, 2022 and December 31, 2021, the Company had no Level 3 assets measured

at fair value on a recurring basis.

For Level 3 assets measured at fair value on a non-recurring basis at March 31, 2022

and December 31, 2021, the

significant unobservable inputs used in the fair value measurements are presented

below.

Weighted

Carrying

Significant

Average

(Dollars in thousands)

Amount

Valuation Technique

Unobservable Input

Range

of Input

March 31, 2022:

Impaired loans

182

Appraisal

Appraisal discounts

10.0

Other real estate owned

374

Appraisal

Appraisal discount

55.0

Mortgage servicing rights, net

1,285

Discounted cash flow

Prepayment speed or CPR

7.7

9.4

9.3

Discount rate

9.5

December 31, 2021:

Impaired loans

249

Appraisal

Appraisal discounts

10.0

Other real estate owned

374

Appraisal

Appraisal discounts

55.0

Mortgage servicing rights, net

1,309

Discounted cash flow

Prepayment speed or CPR

6.8

16.5

13.3

Discount rate

9.5

11.5

9.5

Fair Value

of Financial Instruments

ASC 825,

Financial Instruments

, requires disclosure of fair value information about financial instruments,

whether or not

recognized on the face of the balance sheet, for which it is practicable to estimate that value.

The assumptions used in the

estimation of the fair value of the Company’s

financial instruments are explained below.

Where quoted market prices are

not available, fair values are based on estimates using discounted cash flow analyses.

Discounted cash flows can be

significantly affected by the assumptions used, including the discount rate

and estimates of future cash flows. The

following fair value estimates cannot be substantiated by comparison to independent

markets and should not be considered

representative of the liquidation value of the Company’s

financial instruments, but rather are a good-faith estimate of the

fair value of financial instruments held by the Company.

ASC 825 excludes certain financial instruments and all

nonfinancial instruments from its disclosure requirements.

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The following methods and assumptions were used by the Company in estimating the fair

value of its financial instruments:

Loans, net

Fair values for loans were calculated using discounted cash flows. The discount rates reflected

current rates at which similar

loans would be made for the same remaining maturities. Expected

future cash flows were projected based on contractual

cash flows, adjusted for estimated prepayments.

The fair value of loans was measured using an exit price

notion.

Loans held for sale

Fair values of loans held for sale are determined using quoted secondary market

prices for similar loans.

Time Deposits

Fair values for time deposits were estimated using discounted cash flows. The

discount rates were based on rates currently

offered for deposits with similar remaining maturities.

The carrying value,

related estimated fair value, and placement in the fair value hierarchy of the Company’s

financial

instruments at March 31, 2022 and December 31, 2021 are presented below.

This table excludes financial instruments for

which the carrying amount approximates fair value.

Financial assets for which fair value approximates carrying

value

included cash and cash equivalents.

Financial liabilities for which fair value approximates carrying value included

noninterest-bearing demand deposits,

interest-bearing demand deposits, and savings deposits.

Fair value approximates

carrying value in these financial liabilities due to these products having no stated

maturity.

Additionally, financial

liabilities for which fair value approximates carrying value included overnight

borrowings such as federal funds purchased

and securities sold under agreements to repurchase.

Fair Value Hierarchy

Carrying

Estimated

Level 1

Level 2

Level 3

(Dollars in thousands)

amount

fair value

inputs

Inputs

March 31, 2022:

Financial Assets:

Loans, net (1)

423,759

417,024

—

417,024

Loans held for sale

977

979

—

979

—

Financial Liabilities:

Time Deposits

158,797

159,626

—

159,626

—

December 31, 2021:

Financial Assets:

Loans, net (1)

453,425

449,105

—

449,105

Loans held for sale

1,376

1,410

—

1,410

—

Financial Liabilities:

Time Deposits

156,650

160,581

—

160,581

—

(1) Represents loans, net of unearned income and the allowance

for loan losses.

The fair value of loans was measured using an exit price

notion.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS

OPERATIONS

The following discussion and analysis is designed to provide a better understanding of

various factors related to the results

of operations and financial condition of the Company and the Bank.

This discussion is intended to supplement and

highlight information contained in the accompanying unaudited condensed consolidated

financial statements and related

notes for the quarters ended March 31, 2022 and 2021, as well as the information contained

in our Annual Report on Form

10-K for the year ended December 31, 2021.

Special Notice Regarding Forward-Looking Statements

Various

of the statements made herein under the captions “Management’s

Discussion and Analysis of Financial Condition

and Results of Operations”, “Quantitative and Qualitative Disclosures about

Market Risk”, “Risk Factors” and elsewhere,

are “forward-looking statements” within the meaning and protections of Section

27A of the Securities Act of 1933, as

amended (the “Securities Act”) and Section 21E of the Securities Exchange

Act of 1934, as amended (the “Exchange Act”).

Forward-looking statements include statements with respect to our

beliefs, plans, objectives, goals, expectations,

anticipations, assumptions, estimates, intentions and future performance, and

involve known and unknown risks,

uncertainties and other factors, which may be beyond our control, and

which may cause the actual results, performance,

achievements or financial condition of the Company to be materially different

from future results, performance,

achievements or financial condition expressed or implied by such forward-looking

statements.

You

should not expect us to

update any forward-looking statements.

All statements other than statements of historical fact are statements that could be

forward-looking statements.

You

can

identify these forward-looking statements through our use of words such as

“may,” “will,” “anticipate,”

“assume,”

“should,” “indicate,” “would,” “believe,” “contemplate,” “expect,”

“estimate,” “continue,” “plan,” “point to,” “project,”

“could,” “intend,” “target” and other similar words and expressions

of the future.

These forward-looking statements may

not be realized due to a variety of factors, including, without limitation:

●

the effects of future economic, business and market conditions and

changes, foreign, domestic and locally,

including inflation, seasonality,

natural disasters or climate change, such as rising sea and water levels,

hurricanes

and tornados, COVID-19 or other epidemics or pandemics;

●

the effects of war or other conflicts, acts of terrorism, or other events that

may affect general economic conditions;

●

governmental monetary and fiscal policies, including the continuing effects

of COVID-19 fiscal and monetary

stimulus, and changes in monetary policies in response to inflations;

●

legislative and regulatory changes, including changes in banking, securities and

tax laws, regulations and rules and

their application by our regulators, including capital and liquidity requirements,

and changes in the scope and cost

of FDIC insurance;

●

the failure of assumptions and estimates, as well as differences in, and changes to,

economic, market and credit

conditions, including changes in borrowers’ credit risks and payment behaviors

from those used in our loan

portfolio reviews;

●

the risks of changes in interest rates on the levels, composition and costs of deposits, loan

demand and mortgage

loan originations, and the values and liquidity of loan collateral, securities, and interest-sensitive

assets and

liabilities, and the risks and uncertainty of the amounts realizable;

●

changes in borrower credit risks, and savings payment behaviors;

●

changes in the availability and cost of credit and capital in the financial markets, and the types

of instruments that

may be included as capital for regulatory purposes;

●

changes in the prices, values and sales volumes of residential and commercial real estate;

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●

the effects of competition from a wide variety of local, regional, national

and other providers of financial,

investment and insurance services, including the disruption effects of

financial technology and other competitors

who are not subject to the same regulations as the Company and the Bank;

●

the failure of assumptions and estimates underlying the establishment of allowances

for possible loan losses and

other asset impairments, losses valuations of assets and liabilities and other estimates;

●

the costs of redeveloping our headquarters and the timing and amount of rental income

upon completion of the

project;

●

the risks of mergers, acquisitions and divestitures, including,

without limitation, the related time and costs of

implementing such transactions, integrating operations as part of these transactions

and possible failures to achieve

expected gains, revenue growth and/or expense savings from such transactions;

●

changes in technology or products that may be more difficult,

costly, or less effective than

anticipated;

●

cyber-attacks and data breaches that may compromise our systems,

our vendor systems

or customers’

information;

●

the risks that our deferred tax assets (“DTAs”),

if any, could be reduced

if estimates of future taxable income from

our operations and tax planning strategies are less than currently estimated, and sales

of our capital stock could

trigger a reduction in the amount of net operating loss carry-forwards that we

may be able to utilize for income tax

purposes; and

●

other factors and information in this report and other filings that we make with the SEC

under the Exchange Act,

including our Annual Report on Form 10-K for the year ended December 31,

2021 and subsequent quarterly and

current reports. See Part II, Item 1A. “RISK FACTORS”.

All written or oral forward-looking statements that are made by us or are attributable

to us are expressly qualified in their

entirety by this cautionary notice.

We have no obligation and

do not undertake to update, revise or correct any of the

forward-looking statements after the date of this report, or after the respective dates on which

such statements otherwise are

made.

ITEM 1.

BUSINESS

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

with the Board of Governors

of the Federal Reserve System (the “Federal Reserve”) under the Bank Holding

Company Act of 1956, as amended (the

“BHC Act”). The Company was incorporated in Delaware in 1990, and

in 1994 it succeeded its Alabama predecessor as the

bank holding company controlling AuburnBank, an Alabama state

member bank with its principal office in Auburn,

Alabama (the “Bank”). The Company and its predecessor have controlled the Bank

since 1984.

As a bank holding

company, the Company

may diversify into a broader range of financial services and other business activities than currently

are permitted to the Bank under applicable laws and regulations.

The holding company structure also provides greater

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

The Bank has operated continuously since 1907 and currently conducts its business

primarily in East Alabama, including

Lee County and surrounding areas.

The Bank has been a member of the Federal Reserve System since April 1995.

The

Bank’s primary regulators are the Federal

Reserve and the Alabama Superintendent of Banks (the “Alabama

Superintendent”).

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

since 1991.

Certain of the statements made in this discussion and analysis and elsewhere, including information

incorporated herein by

reference to other documents, are “forward-looking statements” within the

meaning of, and subject to, the protections of

Section 27A of the Securities

Act.

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Summary of Results of Operations

Quarter ended March 31,

(Dollars in thousands, except per share data)

2022

2021

Net interest income (a)

6,190

6,057

Less: tax-equivalent adjustment

112

120

Net interest income (GAAP)

6,078

5,937

Noninterest income

908

1,182

Total revenue

6,986

7,119

Provision for loan losses

(250)

—

Noninterest expense

4,901

4,690

Income tax expense

254

423

Net earnings

2,081

2,006

Basic and diluted earnings per share

0.59

0.56

(a) Tax-equivalent.

See "Table 1 - Explanation of Non-GAAP

Financial Measures."

Financial Summary

The Company’s net earnings were $2.1

million for the first quarter of 2022, compared to $2.0 million for the first quarter of

2021.

Basic and diluted earnings per share were $0.59 per share for the first quarter of 2022, compared

to $0.56 per share

for the first quarter of 2021.

Net interest income (tax-equivalent) was $6.2 million for the first quarter of 2022,

a 2% increase compared to $6.1 million

for the first quarter of 2021.

This increase was primarily due to balance sheet growth, partially offset

by a decrease in the

Company’s net interest margin

(tax-equivalent).

Net interest margin (tax-equivalent) declined to 2.43%

in the first quarter

of 2022, compared to 2.66% for the first quarter of 2021 due to the continued lower interest

rate environment and changes

in our asset mix resulting from the continuing elevated levels of customer deposits

Net interest income (tax-equivalent)

included $0.1

million in PPP loan fees, net of related costs for the first quarter of 2022, compared to $0.

million for the

first quarter of 2021.

At March 31, 2022, the Company’s allowance

for loan losses was $4.7 million, or 1.09% of total loans, compared to $4.9

million, or 1.08% of total loans, at December 31, 2021, and $5.7

million, or 1.23% of total loans, at March 31, 2021.

The Company recorded a negative provision for loan losses of $0.3

million during the first quarter of 2022,

compared to no

provision for loan losses during the first quarter of 2021.

The negative provision for loan losses was primarily related to a

decrease in total loans, excluding PPP,

during the first quarter of 2022.

Total loans, excluding PPP,

were $424.3 million at

March 31, 2022, a decrease of $25.9 million, or 6%, compared to

December 31, 2021.

This decline was primarily due to

decreases in multi-family loans of $17.3 million and hotel loans of $6.5

million due to payoffs.

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.

Noninterest income was $0.9 million for the first quarter of 2022 compared to

$1.2 million for the first quarter of

2021.

The decrease in noninterest income was primarily due to a decrease

in mortgage lending income of $0.3 million as

refinance activity slowed in our primary market area, as market interest rates

on mortgage loans increased.

Noninterest expense was $4.9 million for the first quarter of 2022 compared to

$4.7 million for the first quarter of 2021.

The increase in noninterest expense was due to increases in salaries and benefits

expense and other noninterest expense.

Income tax expense was $0.3 million for the first quarter of 2022

compared to $0.4 million during the first quarter of 2021.

The Company’s effective tax

rate for the first quarter of 2022 was 10.88%, compared to 17.41% in the first quarter

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.

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The Company paid cash dividends of $0.265 per share in the first quarter of 2022, an increase of 2% from the same

period

of 2021.

The Company’s share repurchases of $0.1

million since December 31, 2021 resulted in 3,559 fewer outstanding

common shares at March 31, 2022.

At March 31, 2022, the Bank’s regulatory capital ratios

were well above the minimum

amounts required to be “well capitalized” under current regulatory standards

with a total risk-based capital ratio of 18.08%,

a tier 1 leverage ratio of 9.09%

and a common equity tier 1 (“CET1”) ratio of 17.26%

at March 31, 2022.

COVID-19 Impact Assessment

The COVID-19 pandemic has occurred in waves of different

variants since the first quarter of 2020. Vaccines

to protect

against and/or reduce the severity of COVID-19 were widely introduced at the

beginning of 2021. At times, the pandemic

has severely restricted the level of economic activity in our markets. In response to the COVID

-19 pandemic, the State of

Alabama, and most other states, have taken preventative or protective actions to prevent

the spread of the virus, including

imposing restrictions on travel and business operations and a statewide mask mandate,

advising or requiring individuals to

limit or forego their time outside of their homes, limitations on gathering of people and

social distancing, and causing

temporary closures of businesses that have been deemed to be non-essential. Though certain

of these measures have been

relaxed or eliminated, especially as vaccination levels increased, such

measures could be reestablished in cases of new

waves, especially a wave of a COVID-19 variant that is more resistant

to existing vaccines and newly developed

treatments.

COVID-19 has significantly affected local state, national and

global health and economic activity and its future effects are

uncertain and will depend on various factors, including, among others, the duration

and scope of the pandemic, especially

new variants of the virus, effective vaccines and drug treatments, together

with governmental, regulatory and private sector

responses. COVID-19 has had continuing significant effects

on the economy, financial

markets and our employees,

customers and vendors. Our business, financial condition and results of operations

generally rely upon the ability of our

borrowers to make deposits and repay their loans, the value of collateral underlying

our secured loans, market value,

stability and liquidity and demand for loans and other products and services

we offer, all of which are affected

by the

pandemic.

We have implemented

a number of procedures in response to the pandemic to support the safety and

well-being of our

employees, customers and shareholders.

●

We believe our business continuity

plan has worked to provide essential banking services to our

communities and

customers, while protecting our employees’ health. As part of our efforts

to exercise social distancing in

accordance with the guidelines of the Centers for Disease Control and the Governor

of the State of Alabama,

starting March 23, 2020, we limited branch lobby service to appointment only

while continuing to operate our

branch drive-thru facilities and ATMs.

As permitted by state public health guidelines, on June 1, 2020, we re-

opened some of our branch lobbies. In 2021, we opened our remaining branch lobbies.

We continue to

provide

services through our online and other electronic channels. In addition,

we maintain remote work access to help

employees stay at home while providing continuity of service during outbreaks of

COVID-19 variants.

●

We serviced the financial

needs of our commercial and consumer clients with extensions and

deferrals to loan

customers effected by COVID-19, provided such customers

were not more than 30 days past due at the time of the

request; and

●

were an active PPP

lender. PPP loans were forgivable,

in whole or in part, if the proceeds are used for payroll

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

These loans carry a fixed rate of

1.00% and a term of two years (loans made before June 5, 2020) or five years (loans

made on or after June 5,

2020), if not forgiven, in whole or in part. Payments are deferred

until either the date on which the Small Business

Administration (“SBA”) remits the amount of forgiveness proceeds

to the lender or the date that is 10 months after

the last day of the covered period if the borrower does not apply for forgiveness

within that 10-month period. We

believe these loans and our participation in the program helped our customers and the communities

we serve.

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COVID-19 has also had various economic effects, generally.

These include supply chain disruptions and manufacturing

delays, shortages of certain goods and services, reduced consumer expenditure

on hospitality and travel, and migration from

larger urban centers to less populated areas and remote work. The

demand for single family housing has exceeded existing

supplies. When coupled with construction delays attributable to supply chain disrupti

ons and worker shortages, these

factors have caused housing prices and apartment rents to increase, generally.

Stimulative monetary and fiscal policies,

along with shortages of certain goods and services, and rising petroleum and food

prices have led to the highest inflation in

decades. Although fiscal stimulus remains under consideration by the President

and Congress, the Federal Reserve has

begun increasing its target interest rates and is considering reducing its

holdings

of securities to counteract inflation.

A summary of PPP loans extended during 2020 follows:

(Dollars in thousands)

of SBA

Approved

Mix

$ of SBA

Approved

Mix

SBA Tier:

$2 million to $10 million

—

$350,000 to less than $2 million

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 2020.

Through December

31, 2021, we have recognized all of these fees, net of related costs. As of December

31, 2021, we had received payments

and forgiveness on all PPP loans extended during 2020.

On December 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits,

and Venues

Act (the “Economic Aid

Act”) was signed into law. The

Economic Aid Act provides a second $900 billion stimulus package, including

$325 billion

in additional PPP loans. The Economic Aid Act also permits the collection of

a higher amount of PPP loan fees by

participating banks.

A summary of PPP loans extended during 2021 under the Economic Aid

Act follows:

(Dollars in thousands)

of SBA

Approved

Mix

$ of SBA

Approved

Mix

SBA Tier:

$2 million to $10 million

—

$350,000 to less than $2 million

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

March 31, 2022, we have recognized $0.8

million of these fees, net of related costs. As of March 31, 2022, we have

received payments and forgiveness on 172 PPP loans under

the Economic Aid Act, totaling $16.1 million. The outstanding

balance for the remaining 82 PPP loans under the Economic Aid Act was approximately

$4.1 million at March 31, 2022.

We continue to closely

monitor this pandemic, and are working to continue our services and to address

developments as

those occur. Our results of operations for quarter

ended March 31, 2022, and our financial condition at that date reflect only

the ongoing effects of the pandemic, and may not be indicative of

future results or financial conditions, including possible

changes in monetary or fiscal stimulus, and the possible effects of the expiration

or extension of temporary accounting and

bank regulatory relief measures in response to the COVID-19 pandemic.

As of March 31, 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 this pandemic, and are working to continue our services during the pandemic

and to address developments as those occur.

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CRITICAL ACCOUNTING POLICIES

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

accounting

principles and with general practices within the banking industry.

In connection with the application of those principles, we

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

for loan losses, our

assessment of other-than-temporary impairment, recurring and

non-recurring fair value measurements, the valuation of

other real estate owned, and the valuation of deferred tax assets, were critical to the determination

of our financial position

and results of operations. Other policies also require subjective judgment and assumptions

and may accordingly impact our

financial position and results of operations.

Allowance for Loan Losses

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

to the end of each calendar quarter. The

level of

the allowance is based upon management’s

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

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

a borrower’s ability to repay (including

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

composition of the loan portfolio, economic

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

recommendations. This

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

and timing of future cash flows

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

charged off, in whole or

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

A loan may be partially charged-off

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

to the terms of the loan is

unlikely.

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

probable that the Company will

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

Collection of all amounts due

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

loan will be collected as

scheduled in the loan agreement.

An impairment allowance is recognized if the fair value of the loan is less than the recorded

investment in the loan. The

impairment is recognized through the allowance. Loans that are impaired are

recorded at the present value of expected

future cash flows discounted at the loan’s effective

interest rate, or if the loan is collateral dependent, impairment

measurement is based on the fair value of the collateral, less estimated disposal costs.

The level of allowance maintained is believed by management to be adequate

to absorb probable losses inherent in the

portfolio at the balance sheet date. The allowance is increased by provisions charged

to expense and decreased by charge-

offs, net of recoveries of amounts previously charged-off

and by releases from the allowance when determined to be

appropriate to the levels of loans and probable loan losses in such loans..

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

ongoing internal, independent

loan review process. The Company’s loan

review process assists in determining whether there are loans in the portfolio

whose credit quality has weakened over time and evaluating the risk characteristics of the

entire loan portfolio. The

Company’s loan review process includes the judgment

of management, the input from our independent loan reviewers, and

reviews that may have been conducted by bank regulatory agencies as part of their examination

process. The Company

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

that it will be able to collect all

amounts due according to the contractual terms of a loan.

As part of the Company’s quarterly assessment

of the allowance, management divides the loan portfolio into five segments:

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

real estate, and consumer

installment loans. The Company analyzes each segment and estimates an allowance allocation

for each loan segment.

The allocation of the allowance for loan losses begins with a process of estimating the

probable losses inherent for these

types of loans. The estimates for these loans are established by category and based

on the Company’s internal system of

credit risk ratings and historical loss data. The estimated loan loss allocation rate for the Company’s

internal system of

credit risk grades is based on its experience with similarly graded loans. For

loan segments where the Company believes it

does not have sufficient historical loss data, the Company may

make adjustments based, in part, on loss rates of peer bank

groups. At March 31, 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.

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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

March 31, 2022, the Company increased its

look-back period to 52 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 a security on which there is an unrealized loss is other-than-temporarily

impaired.

For debt securities with an unrealized loss, an other-than-temporary

impairment write-down is triggered when (1) the

Company has the intent to sell a debt security,

(2) it is more likely than not that the Company will be required to sell the

debt security before recovery of its amortized cost basis, or (3) the Company does not expect

to recover the entire amortized

cost basis of the debt security.

If the Company has the intent to sell a debt security or if it is more likely than not that it will

be required to sell the debt security before recovery,

the other-than-temporary write-down is equal to the entire difference

between the debt security’s amortized cost

and its fair value.

If the Company does not intend to sell the security or it is not

more likely than not that it will be required to sell the security before recovery,

the other-than-temporary impairment write-

down is separated into the amount that is credit related (credit loss component) and the amount due to

all other factors.

The

credit loss component is recognized in earnings and is the difference between

the security’s amortized cost basis and

the

present value of its expected future cash flows.

The remaining difference between the security’s

fair value and the present

value of future expected cash flows is due to factors that are not credit related and is recognized in other comprehensive

income, net of applicable taxes.

The Company is required to own certain stock as a condition of membership, such as

Federal Home Loan Bank (“FHLB”)

and Federal Reserve Bank (“FRB”).

These non-marketable equity securities are accounted for at cost

which equals par or

redemption value.

These securities do not have a readily determinable fair value as their ownership is restricted and

there is

no market for these securities.

The Company records these non-marketable equity securities as a component

of other

assets, which are periodically evaluated for impairment. Management considers

these non-marketable equity securities to

be long-term investments. Accordingly,

when evaluating these securities for impairment, management considers

the

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

value.

Fair Value

Determination

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

assets and liabilities at fair value,

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

ASC 820,

Fair Value

Measurements and Disclosures

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

with U.S. GAAP and expands

disclosures about fair value measurements.

For more information regarding fair value measurements and disclosures,

please refer to Note 7, Fair Value,

of the consolidated financial statements that accompany this report.

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Fair values are based on active market prices of identical assets or liabilities when available.

Comparable assets or

liabilities or a composite of comparable assets in active markets are used when identical assets

or liabilities do not have

readily available active market pricing.

However, some of the Company’s

assets or liabilities lack an available or

comparable trading market characterized by frequent transactions between

willing buyers and sellers. In these cases, fair

value is estimated using pricing models that use discounted cash flows and

other pricing techniques. Pricing models and

their underlying assumptions are based upon management’s

best estimates for appropriate discount rates, default rates,

prepayments,

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

experience.

These assumptions may have a significant effect on the reported

fair values of assets and liabilities and the related income

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

well as changes in market conditions, could result in

materially different net earnings and retained earnings results.

Other Real Estate Owned

Other real estate owned (“OREO”), consists of properties obtained through foreclosure or

in satisfaction of loans and is

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

recognized as a

charge-off through the allowance for loan losses. Additional

OREO losses for subsequent valuation adjustments are

determined on a specific property basis and are included as a component of other noninterest

expense along with holding

costs. Any gains or losses on disposal of OREO are also reflected in noninterest expense.

Significant judgments and

complex estimates are required in estimating the fair value of OREO, and the period of time

within which such estimates

can be considered current is significantly shortened during periods of

market volatility. As a result, the net proceeds

realized from sales transactions could differ significantly from appraisals,

comparable sales, and other estimates used to

determine the fair value of OREO.

Deferred Tax

Asset Valuation

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

evidence, it is more-likely-

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

ultimate realization of deferred tax assets

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

in which those temporary differences become

deductible. Management considers the scheduled reversal of deferred

tax liabilities, projected future taxable income and tax

planning strategies in making this assessment. Based upon the level of taxable income over

the last three years and

projections for future taxable income over the periods in which the deferred tax assets are

deductible, management believes

it is more likely than not that we will realize the benefits of these deductible differences

at March 31, 2022. The amount of

the deferred tax assets considered realizable, however,

could be reduced if estimates of future taxable income are reduced.

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RESULTS

OF OPERATIONS

Average Balance

Sheet and Interest Rates

Quarter ended March 31,

2022

2021

Average

Yield/

Average

Yield/

(Dollars in thousands)

Balance

Rate

Balance

Rate

Loans and loans held for sale

440,608

4.46%

466,368

4.50%

Securities - taxable

374,825

1.45%

289,981

1.33%

Securities - tax-exempt

60,272

3.57%

63,050

3.68%

Total securities

435,097

1.74%

353,031

1.75%

Federal funds sold

73,575

0.17%

32,809

0.15%

Interest bearing bank deposits

83,161

0.16%

70,350

0.09%

Total interest-earning assets

1,032,441

2.66%

922,558

2.96%

Deposits:

NOW

200,907

0.12%

172,055

0.16%

Savings and money market

345,549

0.20%

281,844

0.25%

Time Deposits

159,785

0.90%

159,466

1.09%

Total interest-bearing deposits

706,241

0.34%

613,365

0.44%

Short-term borrowings

3,943

0.50%

3,161

0.50%

Total interest-bearing liabilities

710,184

0.34%

616,526

0.44%

Net interest income and margin (tax-equivalent)

6,190

2.43%

6,057

2.66%

Net Interest Income and Margin

Net interest income (tax-equivalent) was $6.2 million for the first quarter of 2022

a 2% increase compared to $6.1 million

for the first quarter of 2021.

This increase was primarily due to balance sheet growth, partially offset

by a decrease in the

Company’s net interest margin

(tax-equivalent).

The tax-equivalent yield on total interest-earning assets decreased by 30 basis points

to 2.66% in the first quarter of 2022

compared to 2.96%

in the first quarter of 2021.

This decrease was primarily due to the lower interest environment and

changes in our asset mix resulting from the significant increase in customer deposits.

The cost of total interest-bearing liabilities decreased by 10 basis points to 0.34%

in the first quarter of 2022 compared to

0.44% in the first quarter of 2021, even as interest bearing deposits increased.

The net decrease in our funding costs was

primarily due to lower prevailing market interest rates.

Our funding costs declined less than the rates earned on our interest

earning assets.

The Company continues to deploy various asset liability management strategies

to manage its risk to interest rate

fluctuations. The Company’s

net interest margin could continue to experience pressure due to

reduced earning asset yields

and increased competition for quality loan opportunities.

Provision for Loan Losses

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

an allowance for loan losses that

management believes, based on its processes and estimates, should be adequate

to provide for the probable losses on

outstanding loans.

The Company recorded a negative provision for loan losses of $0.3 million for the

first quarter of 2022,

compared to no charge to provision for loan losses for the first

quarter of 2021.

The negative provision for loan losses was

primarily related to a decrease in total loans, excluding PPP,

during the first quarter of 2022. Total

loans, excluding PPP,

were $424.3 million at March 31, 2022, a decrease of $25.9 million, or 6%,

compared to December 31, 2021.

This decline

was primarily due to decreases in multi-family loans of $17.3 million and hotel loans

of $6.5 million due to payoffs.

The

provision for loan losses is based upon various factors, including the absolute level of loans,

economic conditions, credit

quality, and the amount of net

charge-offs.

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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 1.09% at March 31, 2022, compared to 1.08%

at December 31, 2021.

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

provision for loan

losses charged to operations, are considered adequate by management and are

reviewed from time to time by our regulators,

they are based on estimates and judgments and are therefore approximate and imprecise.

Factors beyond our control (such

as conditions in the local and national economy,

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 March 31,

(Dollars in thousands)

2022

2021

Service charges on deposit accounts

142

132

Mortgage lending income

253

549

Bank-owned life insurance

103

Other

414

398

Total noninterest income

908

1,182

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 by

common predominant characteristics, such as interest rate and loan type.

If the aggregate carrying amount of a particular

group of MSRs exceeds the group’s aggregate fair

value, a valuation allowance for that group is established.

The valuation

allowance is adjusted as the fair value changes.

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

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

in the fair value of MSRs.

The following table presents a breakdown of the Company’s

mortgage lending income.

Quarter ended March 31,

(Dollars in thousands)

2022

2021

Origination income, net

229

537

Servicing fees, net

Total mortgage lending income

253

549

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

in in the first quarter of 2022

compared to the first quarter of 2021 due to a decrease in refinance activity in our primary

market area, as market interest

rates on mortgage loans increased.

The decrease in origination income was partially offset by an increase in servicing

fees,

net of related amortization expense as prepayment speeds slowed during the

first quarter of 2022, resulting in decreased

amortization expense.

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Noninterest Expense

Quarter ended March 31,

(Dollars in thousands)

2022

2021

Salaries and benefits

2,950

2,851

Net occupancy and equipment

434

438

Professional fees

230

256

Other

1,287

1,145

Total noninterest expense

4,901

4,690

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 other noninterest expense was due to a variety of miscellaneous items

including: increased marketing costs,

ATM

and checkcard expenses, and stationary and supplies.

Income Tax

Expense

Income tax expense was $0.3 million for the first quarter of 2022

compared to $0.4 million for the first quarter of 2021.

The Company’s effective income

tax rate for the first quarter of 2022 was 10.88%, compared to 17.41%

in the first quarter

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 $417.5

million at March 31, 2022 compared to $421.9 million at December 31, 2021.

This increase reflects an increase in the amortized cost basis of securities available-for-sale

of $20.1 million, and a decrease

of $24.5 million in the fair value of securities available-for-sale.

The increase in the amortized cost basis of securities

available-for-sale was primarily attributable to management

allocating more funding to the investment portfolio following

the significant increase in customer deposits.

The decrease in the fair value of securities was primarily due to an increase

long-term market interest rates.

The average annualized tax-equivalent yields earned on total securities

were 1.74%

in the

first quarter of 2022 and 1.75%

in the first quarter of 2021.

Loans

2022

2021

First

Fourth

Third

Second

First

(In thousands)

Quarter

Commercial and industrial

73,297

83,977

79,202

87,933

88,687

Construction and land development

33,058

32,432

34,890

37,477

30,332

Commercial real estate

235,062

258,371

252,798

242,845

254,731

Residential real estate

79,102

77,661

80,205

82,164

82,848

Consumer installment

8,412

6,682

7,060

7,762

6,524

Total loans

428,931

459,123

454,155

458,181

463,122

Less:

unearned income

(514)

(759)

(923)

(1,197)

(1,243)

Loans, net of unearned income

428,417

458,364

453,232

456,984

461,879

Total loans, net of unearned income,

were $428.4 million at March 31, 2022, and $458.4 million at December 31,

2021.

Excluding PPP loans, total loans, net of unearned income, were $424.3

million, a decrease of $25.9 million, or 6% from

December 31, 2021.

This decline was primarily due to decreases in multi-family loans of $17.3

million and hotel loans of

$6.5 million.

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

31, 2022: commercial real estate

(55%), residential real estate (18%), commercial and industrial (17%)

and construction and land development (8%).

Approximately 25% of the Company’s commercial

real estate loans were classified as owner-occupied at March 31, 2022.

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Within the residential real estate portfolio segment, the Company

had junior lien mortgages of approximately $7.1 million,

or 2%, and $7.2 million, or 2%, of total loans, net of unearned income at March 31, 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 March 31, 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 high-risk consumer

mortgage products.

The average yield earned on loans and loans held for sale was 4.46% in the first quarter of

2022 and 4.50% in the first

quarter 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, on our borrowers’ cash flows,

real estate market sales volumes, valuations, availability and cost of financing properties,

real estate industry

concentrations, competitive pressures from a wide range of other lenders, deterioration

in certain credits, interest rate

fluctuations, reduced collateral values or non-existent collateral,

title defects, inaccurate appraisals, financial deterioration

of borrowers, fraud, and any violation of applicable laws and regulations.

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

guidelines for collateralized

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

position. Also, we have

established and periodically review,

lending policies and procedures. Banking regulations limit a bank’s

credit exposure by

prohibiting unsecured loan relationships that exceed 10% of its capital; or 20%

of capital, if loans in excess of 10% of

capital are fully secured. Under these regulations, we are prohibited from having secured

loan relationships in excess of

approximately $21.2 million.

Furthermore, we have an internal limit for aggregate credit exposure (loans outstanding

plus

unfunded commitments) to a single borrower of $19.1 million. Our loan policy requires

that the Loan Committee of the

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

At March 31, 2022, the Bank had no

relationships exceeding these limits.

We periodically analyze

our commercial and industrial and commercial real estate loan portfolios to determine if

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 March 31, 2022 and December 31, 2021.

March 31,

December 31,

(Dollars in thousands)

2022

2021

Lessors of 1-4 family residential properties

48,920

47,880

Hotel/motel

37,377

43,856

Shopping centers

29,147

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 March 31, 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 by law

from classification as a TDR

pursuant to GAAP.

In addition, the Interagency Statement on COVID-19 Loan Modifications provides

circumstances in

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

for modification under

Section 4013.

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Allowance for Loan Losses

The Company maintains the allowance for loan losses at a level that

management believes appropriate to adequately cover

the Company’s estimate of probable

losses inherent in the loan portfolio. The allowance for loan losses was $4.7 million at

March 31, 2022 compared to $4.9 million at December 31, 2021,

which management believed to be adequate at each of the

respective dates. The judgments and estimates associated with the determination

of the allowance for loan losses are

described under “Critical Accounting Policies.”

A summary of the changes in the allowance for loan losses and certain asset quality ratios

for the first quarter of 2022 and

the previous four quarters is presented below.

2022

2021

First

Fourth

Third

Second

First

(Dollars in thousands)

Quarter

Balance at beginning of period

4,939

5,119

5,107

5,682

5,618

Charge-offs:

Commercial real estate

—

(254)

—

Residential real estate

—

(2)

—

(1)

—

Consumer installment

(48)

(32)

—

(5)

Total charge

-offs

(48)

(288)

—

(1)

(5)

Recoveries

108

Net (charge-offs) recoveries

(31)

(180)

Provision for loan losses

(250)

—

(600)

—

Ending balance

4,658

4,939

5,119

5,107

5,682

as a % of loans

1.09

1.08

1.13

1.12

1.23

as a % of nonperforming loans

1,256

1,112

1,053

813

726

Net charge-offs (recoveries) as % of average loans (a)

0.03

0.16

(0.01)

(0.02)

(0.06)

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

As described under “Critical Accounting Policies,” management assesses the adequacy

of the allowance prior to the end of

each calendar quarter. The level of the allowance

is based upon management’s evaluation

of the loan portfolios, past loan

loss experience, known and inherent risks in the portfolio, adverse situations that

may affect the borrower’s ability to repay

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

composition of the loan

portfolio, economic conditions, industry and peer bank loan loss rates, and other

pertinent factors. This evaluation is

inherently subjective as it requires various material estimates and judgments, including

the amounts and timing of future

cash flows expected to be received on impaired loans that may be susceptible to

significant change. The ratio of our

allowance for loan losses to total loans outstanding was 1.09%

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

2021.

Excluding PPP loans, which are guaranteed by the SBA,

the Company’s allowance for

loan losses was 1.10% of

total loans at both March 31, 2022 and December 31, 2021. In the future, the allowance to total

loans outstanding ratio will

increase or decrease to the extent the factors that influence our quarterly allowance assessment,

including the duration and

magnitude of COVID-19 effects, in their entirety either improve or weaken.

In addition, our regulators, as an integral part

of their examination process, will periodically review the Company’s

allowance for loan losses, and may require the

Company to make additional provisions to the allowance for loan losses based on their

judgment about information

available to them at the time of their examinations.

Nonperforming Assets

At March 31, 2022

the Company had $0.7 million in nonperforming assets compared to $0.8 million at December 31,

2021.

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The table below provides information concerning total nonperforming assets

and certain asset quality ratios for the first

quarter of 2022 and the previous four quarters.

2022

2021

First

Fourth

Third

Second

First

(Dollars in thousands)

Quarter

Nonperforming assets:

Nonaccrual loans

371

444

486

628

783

Other real estate owned

374

—

Total nonperforming assets

745

818

486

628

783

as a % of loans and other real estate owned

0.17

0.18

0.11

0.14

0.17

as a % of total assets

0.07

0.05

0.06

0.08

Nonperforming loans as a % of total loans

0.09

0.10

0.11

0.14

0.17

Accruing loans 90 days or more past due

—

The table below provides information concerning the composition of nonaccrual

loans for the first quarter of 2022 and the

previous four quarters.

2022

2021

First

Fourth

Third

Second

First

(In thousands)

Quarter

Nonaccrual loans:

Commercial real estate

182

187

193

199

206

Residential real estate

189

257

293

429

577

Total nonaccrual loans

371

444

486

628

783

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 $0.4

million in loans on nonaccrual status at March 31, 2022 and December 31,

2021, respectively.

The Company had no loans 90 days or more past due and still accruing at March 31,

2022 and December 31, 2021,

respectively.

The table below provides information concerning the composition of

OREO for the first quarter of 2022 and the previous

four quarters.

2022

2021

First

Fourth

Third

Second

First

(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 $2.0

million, or 0.5% of total loans at March

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

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The table below provides information concerning the composition of potential problem

loans for the first quarter of 2022

and the previous four quarters.

2022

2021

First

Fourth

Third

Second

First

(In thousands)

Quarter

Potential problem loans:

Commercial and industrial

215

226

274

291

299

Construction and land development

218

231

239

247

Commercial real estate

150

156

172

178

173

Residential real estate

1,592

1,748

1,848

2,096

2,092

Consumer installment

Total potential problem loans

1,978

2,360

2,544

2,811

2,820

At March 31, 2022, approximately $0.2 million or 8% 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 first quarter of 2022 and the previous four quarters.

2022

2021

First

Fourth

Third

Second

First

(In thousands)

Quarter

Performing loans past due 30 to 89 days:

Commercial and industrial

Construction and land development

204

—

204

Commercial real estate

—

205

180

Residential real estate

496

516

409

399

Consumer installment

Total

519

748

502

485

667

Deposits

Total deposits increased

$23.5 million, or 2%, to $1.0 billion at March 31, 2022, compared to $994.2

million at December

31, 2021.

Noninterest-bearing deposits were $308.3 million, or 30% of total deposits, at March 31,

2022, compared to

$316.1 million, or 32% of total deposits at December 31, 2021.

Estimated uninsured deposits totaled $427.3 million and $420.8 million at March 31,

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 0.34% in the first quarter of 2022

compared to 0.44% in the

first quarter 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 $51.0 million and $41.0

million with none outstanding at March 31, 2022, and

December 31, 2021, respectively.

Securities sold under agreements to repurchase totaled $4.0

million and $3.4 million at

March 31, 2022 and December 31, 2021, respectively.

The average rate paid on short-term borrowings was 0.50% in the first quarter of 2022

and 2021,

respectively.

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

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CAPITAL ADEQUACY

The Company’s consolidated

stockholders’ equity was $86.4 million and $103.7 million as of March 31, 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 losses on securities available-for-sale,

net of tax of $18.3 million.

The increase in the

unrealized loss on securities was primarily due to an increase in long-term

market interest rates.

These unrealized losses do

not affect the Bank’s capital

for regulatory capital purposes.

The Company paid cash dividends of $0.265 per share in the first quarter of 2022, an increase of 2% from the same

period

in 2021. The Company’s share repurchases of

$0.1 million since December 31, 2021 resulted in 3,559

fewer outstanding

common shares at March 31, 2022.

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

regulatory capital framework and

related Dodd-Frank Wall

Street Reform and Consumer Protection Act changes.

The rules included the implementation of a

capital conservation buffer that is added to the minimum requirements

for capital adequacy purposes.

The capital

conservation buffer was subject to a three year phase-in period

that began on January 1, 2016 and was fully phased-in on

January 1, 2019 at 2.5%.

A banking organization with a conservation buffer of less than the

required amount will be

subject to limitations on capital distributions, including dividend payments and certain discretionary

bonus payments to

executive officers.

At March 31, 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, by

making the limitations on capital distributions more gradual.

The eligible retained income is now the greater of (i) net

income for the four preceding quarters, net of distributions and associated

tax effects not reflected in net income; and (ii)

the average of all net income over the preceding four quarters.

The interim final rule only affects the capital buffers, and

banking organizations were encouraged to

make prudent capital distribution decisions.

The Federal Reserve has treated us as a “small bank holding company’ under the Federal

Reserve’s policy.

Accordingly,

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

subsidiaries.

The Bank’s

tier 1 leverage ratio was 9.09%, CET1 risk-based capital ratio was 17.26%, tier 1 risk-based

capital ratio was 17.26%, and

total risk-based capital ratio was 18.08%

at March 31, 2022. These ratios exceed the minimum regulatory capital

percentages of 5.0% for tier 1 leverage ratio, 6.5% for CET1 risk-based capital ratio,

8.0% for tier 1 risk-based capital ratio,

and 10.0% for total risk-based capital ratio to be considered “well capitalized.”

The Bank’s capital conservation buffer

was

10.08%

at March 31, 2022.

MARKET AND LIQUIDITY RISK MANAGEMENT

Management’s objective is to manage assets and

liabilities to provide a satisfactory,

consistent level of profitability within

the framework of established liquidity,

loan, investment, borrowing, and capital policies. The Bank’s

Asset Liability

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

of monitoring these policies, which are designed to

ensure an acceptable asset/liability composition. Two

critical areas of focus for ALCO are interest rate risk and liquidity

risk management.

Interest Rate Risk Management

In the normal course of business, the Company is exposed to market risk arising from fluctuations

in interest rates. 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.

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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, we have guidelines for earnings at risk which seek to limit the

variance of net interest income from gradual changes in interest rates.

For changes up or down in rates from management’s

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

as follows:

●

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

●

+/- 15% for a gradual change of 300 basis points

●

+/- 10% for a gradual change of 200 basis points

●

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

At March 31, 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 in

interest rates, or market and competitive conditions.

To help limit interest rate risk,

we have stated policy guidelines for an

instantaneous basis point change in interest rates, such that our EVE should not decrease from our

base case by more than

the following:

●

45% for an instantaneous change of +/- 400 basis points

●

35% for an instantaneous change of +/- 300 basis points

●

25% for an instantaneous change of +/- 200 basis points

●

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

At March 31, 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.

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 March 31, 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.

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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 March 31, 2022, the Bank had a remaining available

line of credit with the FHLB of

$331.4 million. At March 31, 2022, the Bank also had $51.0

million of available federal funds lines with no borrowings

outstanding. Primary uses of funds include repayment of maturing obligations and

growing the loan portfolio.

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 March 31, 2022, the Bank had outstanding standby letters of credit of $1.4

million and unfunded loan commitments

outstanding of $53.7 million.

Because these commitments generally have fixed expiration dates and

many will expire

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

cash requirements. If needed to

fund these outstanding commitments, the Bank 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.

As of March 31, 2022,

the unpaid principal balance of residential mortgage loans, which we have originated

and sold, but

retained the servicing rights, was $250.3 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 by mortgage loan investors

through our underwriting and quality

assurance practices and by servicing mortgage loans to meet investor and secondary

market standards.

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The Company was not required to repurchase any loans during the

first quarter 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 or

make-whole requests at March 31, 2022.

We service all residential

mortgage loans originated and sold by us to Fannie Mae.

As servicer, our primary duties are to:

(1) collect payments due from borrowers;

(2) advance certain delinquent payments of principal and interest;

(3) maintain

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

the mortgage loans;

(4) maintain any

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

and (5) foreclose on

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

consistent with the agreements

governing our rights and duties as servicer.

The agreement under which we act as servicer generally specifies

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 March 31, 2022, we do not believe that this exposure is material due to the historical level

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.

Section 4021 of the CARES Act allows borrowers under 1-to-4 family residential

mortgage loans sold to Fannie Mae to

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

financial hardships during the

COVID-19 emergency.

Except for vacant or abandoned properties, Fannie Mae servicers may not initiate

foreclosures on

similar procedures or related evictions or sales until December 31, 2020. The

forbearance period was extended, generally,

to March 31, 2021. The Bank sells mortgage loans to Fannie Mae and services these on

an actual/actual basis. As a result,

the Bank is not obligated to make any advances to Fannie Mae on principal and interest on

such mortgage loans where the

borrower is entitled to forbearance.

Effects of Inflation and Changing Prices

The consolidated financial statements and related consolidated financial data presented

herein have been prepared in

accordance with GAAP and practices within the banking industry which require

the measurement of financial position and

operating results in terms of historical dollars without considering the changes in

the relative purchasing power of money

over time due to inflation. Unlike most industrial companies, virtually all the assets and

liabilities of a financial institution

are monetary in nature. As a result, interest rates have a more significant impact on a

financial institution’s performance

than the effects of general levels of inflation.

CURRENT ACCOUNTING DEVELOPMENTS

The following 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;

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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 a broader

range of information regarding past events, current conditions and forecasts assessing the

collectability of cash flows. The

allowance for credit losses is a valuation account that is deducted from the amortized

cost basis of the financial assets to

present the net amount expected to be collected.

For available for sale debt securities, credit losses should be measured in a

manner similar to current GAAP,

however the new standard will require that credit losses be presented as an allowance

rather than as a write-down.

The new guidance affects entities holding financial assets and

net investment in leases that are

not accounted for at fair value through net income. The amendments affect

loans, debt securities, trade receivables, net

investments in leases, off-balance sheet credit exposures, reinsurance receivables,

and any other financial assets not

excluded from the scope that have the contractual right to receive cash.

For public business entities, the new guidance was

originally effective for annual and interim periods in fiscal years

beginning after December 15, 2019.

The Company has

developed an implementation team that is following a general timeline.

The team has been working with an advisory

consultant, with whom a third-party software license has been purchased.

The Company’s preliminary evaluation

indicates

the provisions of ASU No. 2016-13 are expected to impact the Company’s

consolidated financial statements, in particular

the level of the reserve for credit losses.

The Company is continuing to evaluate the extent of the potential impact and

expects that portfolio composition and economic conditions at the time of adoption

will be a factor.

On October 16, 2019,

the FASB approved

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

implementation date for ASU 2016-13.

The Company will now be required to implement the new standard in January

2023, with early adoption permitted in any period prior to that date.

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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 a tax-equivalent

basis provides comparability of net

interest income from both taxable and tax-exempt sources and facilitates comparability

within the industry. Although the

Company believes these non-GAAP financial measures enhance investors’

understanding of its business and performance,

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

GAAP.

The reconciliations

of these non-

GAAP financial measures to their most directly comparable GAAP financial measures are

presented below.

2022

2021

First

Fourth

Third

Second

First

(in thousands)

Quarter

Net interest income (GAAP)

6,078

6,037

6,041

5,975

5,937

Tax-equivalent adjustment

112

115

117

118

120

Net interest income (Tax

-equivalent)

6,190

6,152

6,158

6,093

6,057

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Table 2

Selected Quarterly Financial Data

2022

2021

First

Fourth

Third

Second

First

(Dollars in thousands, except per share amounts)

Quarter

Results of Operations

Net interest income (a)

6,190

6,152

6,158

6,093

6,057

Less: tax-equivalent adjustment

112

115

117

118

120

Net interest income (GAAP)

6,078

6,037

6,041

5,975

5,937

Noninterest income

908

1,019

956

1,131

1,182

Total revenue

6,986

7,056

6,997

7,106

7,119

Provision for loan losses

(250)

—

(600)

—

Noninterest expense

4,901

5,092

4,736

4,916

4,690

Income tax expense

254

386

504

423

Net earnings

2,081

1,871

1,875

2,286

2,006

Per share data:

Basic and diluted net earnings

0.59

0.53

0.65

0.56

Cash dividends declared

0.265

0.26

Weighted average shares outstanding:

Basic and diluted

3,518,657

3,524,311

3,536,320

3,554,871

3,566,299

Shares outstanding, at period end

3,516,971

3,520,485

3,529,338

3,545,855

3,566,326

Book value

24.57

29.46

29.73

29.91

29.06

Common stock price

High

34.49

34.79

35.36

38.90

48.00

Low

31.75

31.32

33.25

34.50

37.55

Period end:

33.21

32.30

33.80

35.46

38.37

To earnings ratio

14.44

14.23

14.57

15.22

17.85

To book value

135

110

114

119

132

Performance ratios:

Return on average equity

7.97

7.07

7.01

8.74

7.37

Return on average assets

0.75

0.70

0.72

0.91

0.82

Dividend payout ratio

44.92

49.06

40.00

46.43

Asset Quality:

Allowance for loan losses as a % of:

Loans

1.09

1.08

1.13

1.12

1.23

Nonperforming loans

1,256

1,112

1,053

813

726

Nonperforming assets as a % of:

Loans and other real estate owned

0.17

0.18

0.11

0.14

0.17

Total assets

0.07

0.05

0.06

0.08

Nonperforming loans as a % of total loans

0.09

0.10

0.11

0.14

0.17

Annualized net charge-offs (recoveries) as % of average loans

0.03

0.16

(0.01)

(0.02)

(0.06)

Capital Adequacy: (c)

CET 1 risk-based capital ratio

17.26

16.23

16.82

17.03

17.21

Tier 1 risk-based capital ratio

17.26

16.23

16.82

17.03

17.21

Total risk-based capital ratio

18.08

17.06

17.72

17.94

18.25

Tier 1 leverage ratio

9.09

9.35

9.57

9.81

9.99

Other financial data:

Net interest margin (a)

2.43

2.45

2.51

2.60

2.66

Effective income tax rate

10.88

4.74

17.07

18.06

17.41

Efficiency ratio (b)

69.05

71.01

66.57

68.05

64.79

Selected average balances:

Securities available-for-sale

435,097

414,061

395,529

370,582

353,031

Loans, net of unearned income

439,713

455,726

452,668

460,672

463,424

Total assets

1,114,407

1,073,564

1,040,985

1,005,041

980,884

Total deposits

1,003,394

961,544

927,368

894,757

863,194

Total stockholders’ equity

104,493

105,925

106,936

104,591

108,890

Selected period end balances:

Securities available-for-sale

417,459

421,891

407,474

384,865

359,630

Loans, net of unearned income

428,417

458,364

453,232

456,984

461,879

Allowance for loan losses

4,658

4,939

5,119

5,107

5,682

Total assets

1,109,664

1,105,150

1,065,871

1,036,232

993,263

Total deposits

1,017,742

994,243

954,971

923,462

880,590

Total stockholders’ equity

86,411

103,726

104,929

106,043

103,639

(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.

wholly-owned subsidiary, AuburnBank.

Table of Contents

Table 3

Average Balances

and Net Interest Income Analysis

Quarter ended March 31,

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)

440,608

4,850

4.46%

466,368

5,178

4.50%

Securities - taxable

374,825

1,336

1.45%

289,981

949

1.33%

Securities - tax-exempt (2)

60,272

531

3.57%

63,050

572

3.68%

Total securities

435,097

1,867

1.74%

353,031

1,521

1.75%

Federal funds sold

73,575

0.17%

32,809

0.15%

Interest bearing bank deposits

83,161

0.16%

70,350

0.09%

Total interest-earning assets

1,032,441

6,780

2.66%

922,558

6,727

2.96%

Cash and due from banks

15,105

13,880

Other assets

66,861

44,446

Total assets

1,114,407

980,884

Interest-bearing liabilities:

Deposits:

NOW

200,907

0.12%

172,055

0.16%

Savings and money market

345,549

172

0.20%

281,844

172

0.25%

Time deposits

159,785

356

0.90%

159,466

428

1.09%

Total interest-bearing deposits

706,241

585

0.34%

613,365

666

0.44%

Short-term borrowings

3,943

0.50%

3,161

0.50%

Total interest-bearing liabilities

710,184

590

0.34%

616,526

670

0.44%

Noninterest-bearing deposits

297,153

249,829

Other liabilities

2,577

5,639

Stockholders' equity

104,493

108,890

Total liabilities and stockholders' equity

1,114,407

980,884

Net interest income and margin (tax-equivalent)

6,190

2.43%

6,057

2.66%

(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 4

Allocation of Allowance for Loan Losses

2022

2021

First Quarter

Fourth Quarter

Third Quarter

Second Quarter

First Quarter

(Dollars in thousands)

Amount

Commercial and industrial

774

17.1

857

18.3

816

17.4

829

19.2

828

19.1

Construction and land

development

508

7.7

518

7.1

590

7.7

639

8.2

551

6.5

Commercial real estate

2,536

54.8

2,739

56.2

2,823

55.6

2,704

53.0

3,259

55.1

Residential real estate

737

18.4

739

16.9

799

17.7

838

17.9

951

17.9

Consumer installment

103

2.0

1.5

1.6

1.7

1.4

Total allowance for loan losses

4,658

4,939

5,119

5,107

5,682

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

Table of Contents

Table 5

– Estimated Uninsured Time Deposits by Maturity

(Dollars in thousands)

March 31, 2022

Maturity of:

3 months or less

1,603

Over 3 months through 6 months

17,746

Over 6 months through 12 months

17,917

Over 12 months

4,185

Total estimated uninsured

time deposits

41,451

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 by 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. See also, Part I, Item 3 of the Company’s

Annual Report on Form 10-K for the

year ended December 31, 2021.

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the

factors discussed in Part I,

Item 1A. “RISK FACTORS”

in the Company’s Annual Report

on Form 10-K for the year ended December 31, 2021,

which could materially affect our business, financial condition

or future results. The risks described in our annual report on

Form 10-K are not the only the risks facing our Company.

Increases in inflation and the resulting tightening of Federal

Reserve monetary policy by increased target interest rates, has and is expected

to continue to affect mortgage originations

and income and the market values of our securities portfolio.

These could also affect our deposit, costs and mixes, and

change consumer savings and payment behaviors.

Additional risks and uncertainties not currently known to us or that

currently deem to be immaterial also may materially adversely affect our

business, financial condition, and/or operating

results in the future.

Table of Contents

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The Company’s repurchases of its common stock

during the first quarter of 2022 were as follows:

Period

Total Number of

Shares Purchased

Average Price

Paid per Share

Total Number of

Shares Purchased as

Part of Publicly

Announced Plans or

Programs

Approximate Dollar

Value

of Shares that

May Yet Be

Purchased Under the

Plans or Programs

(1)

January 1 - January 31, 2022

—

3,380,597

February 1 - February 28, 2022

3,559

33.33

3,559

3,261,979

March 1 - March 31, 2022

—

3,261,979

Total

3,559

33.33

3,559

3,261,979

(1)

On March 9, 2021, the Company adopted a $5 million stock repurchase program which the Company had $3.3 remaining

at March 31, 2021 when the program expired.

On April 12, 2022, the Company adopted a new $5 million stock repurchase program that

became effective April 12, 2022.

ITEM 3.

DEFAULTS

UPON SENIOR SECURITIES

Not applicable.

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.

OTHER INFORMATION

Not applicable.

Table of Contents

ITEM 6.

EXHIBITS

Exhibit

Number

Description

3.1

Certificate of Incorporation of Auburn National Bancorporation, Inc. and all amendments thereto.*

3.2

Amended and Restated Bylaws of Auburn National Bancorporation, Inc., adopted as of November 13, 2007. **

31.1

Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, As Adopted Pursuant To

Section 302 of the Sarbanes-Oxley Act of 2002, by Robert W. Dumas, Chairman, President and Chief Executive

Officer.

31.2

Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, As Adopted Pursuant To

Section 302 of the Sarbanes-Oxley Act of 2002, by David A. Hedges, Executive Vice President and Chief

Financial Officer.

32.1

Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of the Sarbanes-Oxley

Act of 2002, by Robert W. Dumas, Chairman, President and Chief Executive Officer.***

32.2

Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of the Sarbanes-Oxley

Act of 2002, by David A. Hedges, Executive Vice President and Chief Financial Officer.***

101.INS

XBRL Instance Document

101.SCH

XBRL Taxonomy Extension

Schema Document

101.CAL

XBRL Taxonomy Extension

Calculation Linkbase Document

101.LAB

XBRL Taxonomy Extension

Label Linkbase Document

101.PRE

XBRL Taxonomy Extension

Presentation Linkbase Document

101.DEF

XBRL Taxonomy Extension

Definition Linkbase Document

104

Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

Incorporated by reference from Registrant’s

Form 10-Q dated June 30, 2002.

Incorporated by reference from Registrant’s

Form 10-K dated March 31, 2008.

***

The certifications attached as exhibits 32.1 and 32.2 to this quarterly report on Form 10-Q

are “furnished” to the

Securities and Exchange Commission pursuant to Section 906 of the Sarbanes-Oxley

Act of 2002 and shall not be

deemed “filed” by the Company for purposes of Section 18 of the Securities Exchange

Act of 1934, as amended.

Table of Contents

SIGNATURES

Pursuant to

the requirements

of the

Securities Exchange

Act of

1934, the

registrant has

duly caused

this report

be signed on its behalf by the undersigned thereunto duly authorized.

AUBURN NATIONAL

BANCORPORATION,

INC.

(Registrant)

Date:

May 5, 2022

By:

/s/ Robert W.

Dumas

Robert W.

Dumas

Chairman, President and CEO

Date:

May 5, 2022

By:

/s/ David A. Hedges

David A. Hedges

Executive Vice President and Chief Financial

Officer

EX-31.1

AUBURN NATIONAL

BANCORPORATION,

INC AND SUBSIDIARIES

EXHIBIT 31.1

CERTIFICATION

PURSUANT TO

RULE 13a-14 OF THE SECURITIES EXCHANGE ACT OF 1934,

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

CERTIFICATION

I, Robert W.

Dumas, certify that:

I have reviewed this Quarterly Report on Form 10-Q of Auburn National Bancorporation,

Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material

fact or omit to state a material

fact necessary to make the statements made, in light of the circumstances under

which such statements were made, not

misleading with respect to the period covered by this report;

Based on my knowledge, the financial statements, and other financial information included

in this report, fairly present in

all material respects the financial condition, results of operations and cash flows of the

registrant as of, and for, the periods

presented in this report;

The registrant’s other certifying officer

and I are responsible for establishing and maintaining disclosure controls and

procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control

over financial reporting (as

defined in Exchange Act Rules

13a-15(f) and 15d-15(f)) for the registrant and have:

Designed such disclosure controls and procedures, or caused such disclosure controls and

procedures to be

designed under our supervision, to ensure that material information relating to the registrant,

including its

consolidated subsidiaries, is made known to us by others within those entities, particularly

during the period in

which this report is being prepared;

Designed such internal control over financial reporting, or caused such internal

control over financial reporting to

be designed under our supervision, to provide reasonable assurance regarding the reliability

of financial reporting

and the preparation of financial statements for external purposes in accordance

with generally accepted

accounting principles;

Evaluated the effectiveness of the registrant’s

disclosure controls and procedures and presented in this report our

conclusions about the effectiveness of the disclosure controls and procedures,

as of the end of the period covered

by this report based on such evaluation;

and

Disclosed in this report any change in the registrant’s

internal control over financial reporting that occurred

during the registrant’s most recent fiscal quarter

(the registrant’s fourth fiscal quarter

in the case of an annual

report) that has materially affected, or is reasonably likely to materially affect,

the registrant’s internal control

over financial reporting; and

The registrant’s other certifying officer

and I have disclosed, based on our most recent evaluation of internal control over

financial reporting, to the registrant’s auditors

and the audit committee of the registrant’s

board of directors (or persons

performing the equivalent functions):

All significant deficiencies and material weaknesses in the design or operation

of internal control over financial

reporting which are reasonably likely to adversely affect the registrant’s

ability to record, process, summarize and

report financial information; and

Any fraud, whether or not material, that involves management or other

employees who have a significant role in

the registrant’s internal control over

financial reporting.

Date: May 5, 2022

/s/ Robert W.

Dumas

Chairman, President and Chief Executive Officer

EX-31.2

AUBURN NATIONAL

BANCORPORATION,

INC AND SUBSIDIARIES

EXHIBIT 31.2

CERTIFICATION

PURSUANT TO

RULE 13a-14 OF THE SECURITIES EXCHANGE ACT OF 1934,

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

CERTIFICATION

I, David A. Hedges, certify that:

I have reviewed this Quarterly Report on Form 10-Q of Auburn National Bancorporation,

Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a

material fact or omit to state a material

fact necessary to make the statements made, in light of the circumstances under

which such statements were made, not

misleading with respect to the period covered by this report;

Based on my knowledge, the financial statements, and other financial information included

in this report, fairly present in

all material respects the financial condition, results of operations and cash flows

of the registrant as of, and for, the periods

presented in this report;

The registrant’s other certifying officer

and I are responsible for establishing and maintaining disclosure controls

and

procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control

over financial reporting (as

defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

Designed such disclosure controls and procedures, or caused such disclosure controls and

procedures to be

designed under our supervision, to ensure that material information relating to the registrant,

including its

consolidated subsidiaries, is made known to us by others within those entities, particularly

during the period in

which this report is being prepared;

Designed such internal control over financial reporting, or caused such internal

control over financial reporting to

be designed under our supervision, to provide reasonable assurance regarding the reliability

of financial reporting

and the preparation of financial statements for external purposes in accordance

with generally accepted

accounting principles;

Evaluated the effectiveness of the registrant’s

disclosure controls and procedures and presented in this report our

conclusions about the effectiveness of the disclosure controls and procedures,

as of the end of the period covered

by this report based on such evaluation; and

Disclosed in this report any change in the registrant’s

internal control over financial reporting that occurred

during the registrant’s most recent fiscal quarter

(the registrant’s fourth fiscal quarter

in the case of an annual

report) that has materially affected, or is reasonably likely to materially affect,

the registrant’s internal control

over financial reporting; and

The registrant’s other certifying officer

and I have disclosed, based on our most recent evaluation of internal control over

financial reporting, to the registrant’s auditors

and the audit committee of the registrant’s

board of directors (or persons

performing the equivalent functions):

All significant deficiencies and material weaknesses in the design or operation

of internal control over financial

reporting which are reasonably likely to adversely affect the registrant’s

ability to record, process, summarize and

report financial information; and

Any fraud, whether or not material, that involves management or

other employees who have a significant role in

the registrant’s internal control over

financial reporting.

Date: May 5, 2022

/s/ David A. Hedges

Executive Vice President and Chief Financial

Officer

EX-32.1

AUBURN NATIONAL

BANCORPORATION,

INC AND SUBSIDIARIES

EXHIBIT 32.1

CERTIFICATION

PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Auburn National Bancorporation,

Inc. (the “Company”) on Form 10-Q for the

period ending March 31, 2022, as filed with the Securities and Exchange Commission

as of the date hereof (the “Report”),

I, Robert W.

Dumas, President and Chief Executive Officer of the Company,

certify, pursuant to 18

U.S.C. § 1350, as

adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1)

The Report fully complies with the requirements of Section 13(a)

or 15(d) of the Securities Exchange Act

of 1934; and

(2)

The information contained in the Report fairly presents, in all material respects, the financial

condition and

results of operations of the Company.

Date: May 5, 2022

/s/ Robert W.

Dumas

Robert W.

Dumas

Chairman, President and Chief Executive Officer

EX-32.2

AUBURN NATIONAL

BANCORPORATION,

INC AND SUBSIDIARIES

EXHIBIT 32.2

CERTIFICATION

PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Auburn National Bancorporation,

Inc. (the “Company”) on

Form 10-Q for the period ending March 31, 2022, as filed with the Securities and Exchange

Commission as

of the date hereof (the “Report”), I, David A. Hedges, Executive Vice

President and Chief Financial Officer

of the Company, certify,

pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley

Act of 2002, that:

(1)

The Report fully complies with the requirements of Section 13(a)

or 15(d) of the Securities

Exchange Act of 1934; and

(2)

The information contained in the Report fairly presents, in all material respects, the financial

condition and results of operations of the Company.

Date:

May 5, 2022

/s/ David A. Hedges

David A. Hedges

Executive Vice President and Chief

Financial Officer