AUBURN NATIONAL BANCORPORATION INC

Notes to Consolidated Financial Statements

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

General

Auburn National Bancorporation, Inc. (the “Company”) provides a full range of banking services

to individuals and

commercial customers in Lee County,

Alabama and surrounding areas through its wholly owned subsidiary,

AuburnBank

(the “Bank”). The Company does not have any segments other than banking that are considered

material.

Basis of Presentation and Use of Estimates

The unaudited consolidated financial statements in this report have been prepared

in accordance with U.S. generally

accepted accounting principles (“GAAP”) for interim financial information.

Accordingly, these financial statements

do not

include all of the information and footnotes required by U.S. GAAP for complete financial

statements.

The unaudited

consolidated financial statements include, in the opinion of management, all adjustments

necessary to present a fair

statement of the financial position and the results of operations for all periods

presented. All such adjustments are of a

normal recurring nature. The results of operations in the interim statements are not necessarily

indicative of the results of

operations that the Company and its subsidiaries may achieve for future interim periods

or the entire year. For further

information, refer to the consolidated financial statements and footnotes included in the Company's

Annual Report on Form

10-K for the year ended December 31, 2023.

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 the determination of allowance for credit losses on loans and investment

securities, fair value of financial

instruments, and the valuation of deferred tax assets and other real estate owned (“OREO”).

Revenue Recognition

The Company’s sources of income that

fall within the scope of ASC 606 include service charges on deposits, interchange

fees and gains and losses on sales of other real estate, all of which are presented as components of

noninterest income. The

following is a summary of the revenue streams that fall within the scope of ASC 606:

●

Service charges on deposits, investment services, ATM

and interchange fees – Fees from these services are either

(i) transaction-based, for which the performance obligations are satisfied

when the individual transaction is

processed, or (ii) set periodic service charges, for which the performance

obligations are satisfied over the period

the service is provided. Transaction-based

fees are recognized at the time the transaction is processed, and periodic

service charges are recognized over the service period.

●

Gains on sales of OREO

–

A gain on sale should be recognized when a contract for sale exists and control of the

asset has been transferred to the buyer.

ASC 606 lists several criteria required to conclude that a contract for sale

exists, including a determination that the institution will collect substantially all of the consideration

to which it is

entitled.

In addition to the loan-to-value ratio, where the seller provides

the purchaser with financing, the analysis

is based on various other factors, including the credit quality of the purchaser,

the structure of the loan, and any

other factors that we believe may affect collectability.

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, 2024.

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.

Correction of Error

The disclosure of loans by vintage in Note 5 – Loans and Allowance for Credit

Losses in the Company’s Annual Report on

Form 10-K for year ended December 31, 2023 contained incorrect information as it pertains

to loans originated by vintage

and revolving loans.

All current period gross charge-off data, total loans by segment and total loans by credit

quality

indicator were correctly reported.

The loans originated by vintage and revolving loans as of December 31, 2023

have been

corrected in the comparative presentation in Note 5 – Loans and Allowance for Credit Losses

in the Notes herein.

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 Standards Adopted in 2024

On January 1, 2024, the Company adopted ASU 2023-02,

Investments – Equity Method and Joint Ventures

(Topic 323):

Accounting for Investments in Tax

Credit Structures Using

the Proportional Amortization Method

.

The amendments in this

Update permit reporting entities to elect to account for their equity investments made primarily

to receive income tax

credits and other income tax benefits,

regardless of the program from which the income tax credits or

benefits are received,

using the proportional amortization method if certain conditions are met. The new standard

is effective for fiscal years, and

interim periods within those fiscal years, beginning after December 15,

The Company adopted ASU 2023-02

effective January 1, 2024 and recorded a cumulative effect of change

in accounting standard adjustment which reduced

beginning retained earnings by $0.3 million.

The Company will prospectively account for its investments in New Market

Tax Credits (“NMTCs”)

using the proportional amortization method through charges to the

provision for income taxes. See

Note 3, Variable

Interest Entities.

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, 2024 and 2023, 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.

At

March 31, 2024 and 2023, 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

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

Basic and diluted:

$

1,371

$

1,964

Weighted average common

shares outstanding

Net earnings per share

$

0.39

$

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, 2024, the Company did not have any consolidated VIEs but did have one nonconsolidated

VIE, discussed

below.

New Markets Tax

Credit Investment

The

NMTC

program

provides

federal

tax

incentives

to

investors

to

make

investments

in

distressed

communities

and

promotes

economic

improvement

through

the

of

successful

businesses

in

these

communities.

NMTCs

are

available to investors over seven years and are subject to

recapture if certain events occur during such period.

At March 31,

and

December

31,

2023,

respectively,

the

Company

had

one

such

investment

of

$1.2

million

and

$1.7

million,

respectively,

which

was

included

in

other

assets

in

the

consolidated

balance

sheets

as

a

VIE.

While

the

investment exceeds

50% of

the outstanding

equity interest

in this

VIE, the

Company does

not consolidate

the

VIE because

the Company

lacks the

power to

direct the

activities of

the VIE,

and therefore

is not a

primary beneficiary

of

the VIE.

On March 29, 2023, the FASB

issued ASU 2023-02, which was effective beginning in 2024 for

public business entities.

We

have

adopted

ASU

2023-02

as

of

January

1,

with

respect

to

accounting

for

our

NMTC

investment.

The

proportional amortization

method results in

the tax

credit investment

being amortized

in proportion

to the

allocation of

tax

credits and other tax

benefits in each

period and a

net presentation within

the income tax

line item.

The cumulative effects

of the

change

in

accounting

resulted

in a

$0.4

million pre-tax

decrease

in

the

NMTC

investment

at

January 1, 2024.

See Note 1:

Summary of Significant Accounting Policies – Accounting

Standards Adopted in 2024.

Maximum

Loss Exposure

Asset Recognized

Classification

Type:

New Markets Tax Credit investment

$

1,175

$

1,175

NOTE 4: SECURITIES

At March 31, 2024 and December 31, 2023, 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, 2024 and December 31, 2023,

respectively, are presented below.

1 year

1 to 5

5 to 10

After 10

Fair

Gross Unrealized

Amortized

or less

years

years

years

Value

Gains

Losses

Cost

Agency obligations (a)

$

—

14,416

38,335

—

52,751

—

8,554

$

61,305

Agency MBS (a)

15,533

20,254

154,380

190,224

—

30,229

220,453

—

9,067

8,159

17,795

—

2,898

20,693

Total available-for-sale

$

30,518

67,656

162,539

260,770

—

41,681

$

302,451

December 31, 2023

Agency obligations (a)

$

10,339

43,209

—

53,879

—

8,195

$

62,074

Agency MBS (a)

15,109

22,090

161,058

198,289

—

27,838

226,127

—

—

9,691

9,051

18,742

2,731

21,472

Total available-for-sale

$

25,448

74,990

170,109

270,910

38,764

$

309,673

(a) Includes securities issued by U.S. government agencies or government-sponsored

entities.

Expected lives of these

securities may differ from contractual maturities because (i)

issuers may have the right to call or repay such securities

obligations with or without prepayment penalties and (ii) loans incuded in Agency MBS

generally have the right to

prepay such loan in whole or in part at any time.

Securities with aggregate fair values of $

204.8

million and $

211.8

at March 31, 2024 and December 31, 2023, respectively,

were pledged to secure public deposits, securities sold under agreements to repurchase,

Federal Home Loan Bank of

Atlanta (“FHLB of Atlanta”) advances, and for other purposes required or

permitted by law.

Included in other assets on the accompanying consolidated balance sheets include non-marketable

equity investments.

The

carrying amounts of non-marketable equity investments were $

1.4

million at March 31, 2024 and December 31, 2023,

Non-marketable equity investments include FHLB of Atlanta stock,

Federal Reserve Bank of Atlanta

(“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, 2024

and December 31, 2023, 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

Fair

Fair

Value

Losses

Value

Losses

Value

Losses

$

—

—

52,751

8,554

$

52,751

8,554

—

190,209

30,229

190,224

30,229

1,459

15,010

2,892

16,469

2,898

Total

$

1,474

257,970

41,675

$

259,444

41,681

$

—

—

53,879

8,195

$

53,879

8,195

198,223

27,837

198,289

27,838

14,408

2,729

15,201

2,731

Total

$

266,510

38,761

$

267,369

38,764

For the securities in the previous table, the Company considers the severity of the unrealized

loss as well the Company’s

intent to hold the securities to maturity or the recovery of the cost basis.

Unrealized losses have not been recognized into

income as the decline in fair value is largely due to changes in interest rates and other

market conditions.

For the securities

in the previous table as of March 31, 2024, management does not intend to sell and it is likely that

management will not be

required to sell the securities prior to their recovery.

Agency Obligations

Investments in agency obligations are guaranteed of full and timely payments

by the issuing agency.

Based on

management's analysis and judgement, there were no credit losses attributable

to the Company’s investments in agency

obligations at March 31, 2024.

Investments in agency mortgage backed securities (“MBS”) are issued by Ginnie Mae,

Fannie Mae, and Freddie Mac.

Each of these agencies provide a guarantee of full and timely payments of principal and

interest by the issuing agency.

Based on management's analysis and judgement, there were no credit losses attributable

to the Company’s investments

in

agency MBS at March 31, 2024.

State and Political Subdivisions

Investments in state and political subdivisions are securities issued by various

municipalities in the United States.

The

majority of the portfolio was rated AA or higher,

with no securities rated below investment grade at March 31, 2024.

Based on management's analysis and judgement, there were no credit losses attributable

to the Company’s investments

in

state and political subdivisions at March 31, 2024.

Realized Gains and Losses

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

March 31, 2024 and 2023,

NOTE 5: LOANS AND ALLOWANCE

FOR CREDIT LOSSES

$

78,920

$

73,374

58,909

68,329

63,826

66,783

38,822

39,131

45,634

45,841

Other

152,202

135,552

300,484

287,307

59,813

60,545

58,427

56,912

118,240

117,457

10,967

10,827

Total Loans

$

567,520

$

557,294

Loans secured by real estate were approximately 84.2% of the Company’s

total loan portfolio at March 31, 2024.

At March

31, 2024, the Company’s geographic

loan distribution was concentrated primarily in Lee County,

Alabama, and

surrounding areas.

The loan portfolio segment is defined as the level at which an entity develops and documents a

systematic method for

determining its allowance for credit 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.

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

of the

borrower.

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.

(“CRE”) —

includes loans in these classes:

●

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

owner-occupied facilities primarily for small and medium-sized

commercial customers.

the primary

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

who owns the

property.

●

– includes loans for hotels and motels.

Generally, the primary source of repayment

is dependent upon

income generated from the hotel/motel securing the loan.

The underwriting of these loans takes into consideration

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

●

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

.

These include loans

for 5 or more unit residential properties 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 respective borrowers.

●

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 and other businesses.

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 in these two classes:

●

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

to

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.

●

– primarily includes loans

to finance income-producing 1-4 family residential properties.

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 values, as

well as the financial health of the borrowers.

Consumer installment —

includes loans to individuals,

which may be secured by personal property or are 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 values.

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

segment and class as of March

31, 2024 and December 31, 2023.

Total

30-89 Days

Greater than

Non-

Total

Current

Past Due

90 days

Loans

Accrual

Loans

$

78,914

—

78,920

—

$

78,920

58,909

—

—

58,909

—

58,909

63,061

—

—

63,061

63,826

38,822

—

—

38,822

—

38,822

45,634

—

—

45,634

—

45,634

Other

152,202

—

—

152,202

—

152,202

299,719

—

—

299,719

300,484

59,656

—

59,716

59,813

58,427

—

—

58,427

—

58,427

118,083

—

118,143

118,240

10,935

—

10,951

10,967

Total

$

566,560

—

566,642

$

567,520

$

73,108

—

73,374

—

$

73,374

68,329

—

—

68,329

—

68,329

66,000

—

—

66,000

66,783

39,131

—

—

39,131

—

39,131

45,841

—

—

45,841

—

45,841

Other

135,552

—

—

135,552

—

135,552

286,524

—

—

286,524

287,307

60,442

—

—

60,442

60,545

56,597

—

56,887

56,912

117,039

—

117,329

117,457

10,781

—

10,827

—

10,827

Total

$

555,781

—

556,383

$

557,294

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.

These categories are utilized to develop the

associated allowance for credit 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.

Substandard accrual and nonaccrual loans are often collectively referred to as “classified.”

The following tables presents credit quality indicators for the loan portfolio segments and

classes by year of origination as

of March 31, 2024 and December 31, 2023.

The December 31, 2023 table has been revised to correct revolving loans and

properly allocate loans by year of origination.

See Note 1: Summary of Significant Accounting Policies – Correction of

Error.

Loans

Total

Loans

Pass

$

6,167

10,960

19,891

13,067

5,429

14,697

8,449

$

78,660

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

Total commercial and industrial

6,221

10,960

20,085

13,079

5,429

14,697

8,449

78,920

—

—

—

—

—

—

—

—

Pass

5,668

26,093

22,446

1,615

1,506

58,433

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

Total construction and land development

5,842

26,395

22,446

1,615

1,506

58,909

—

—

—

—

—

—

—

—

Pass

12,842

7,197

18,076

10,283

10,744

2,583

61,825

—

—

—

—

—

1,188

—

—

—

—

—

—

—

—

—

—

—

—

Total owner occupied

1,031

13,099

7,197

18,076

10,283

11,557

2,583

63,826

—

—

—

—

—

—

—

—

Pass

8,925

9,765

3,174

1,445

15,265

—

38,822

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

Total hotel/motel

8,925

9,765

3,174

1,445

15,265

—

38,822

—

—

—

—

—

—

—

—

Loans

Total

Loans

Pass

12,270

17,834

1,934

6,060

6,682

45,634

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

Total multi-family

12,270

17,834

1,934

6,060

6,682

45,634

—

—

—

—

—

—

—

—

Other

Pass

19,687

24,583

35,601

31,278

14,036

25,552

1,313

152,050

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

Total other

19,687

24,583

35,601

31,278

14,188

25,552

1,313

152,202

—

—

—

—

—

—

—

—

Pass

1,276

19,445

19,230

2,682

2,636

13,106

58,702

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

Total consumer mortgage

1,276

19,445

19,230

2,682

2,636

14,217

59,813

—

—

—

—

—

—

—

—

Pass

5,736

12,255

11,396

9,219

11,829

6,214

1,369

58,018

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

Total investment property

5,736

12,338

11,492

9,219

12,059

6,214

1,369

58,427

—

—

—

—

—

—

—

—

Pass

2,095

5,157

2,690

—

10,882

—

—

—

—

—

—

—

—

—

—

—

—

Total consumer installment

2,105

5,210

2,709

—

10,967

—

—

—

—

Pass

41,090

132,530

146,050

81,615

53,372

92,682

15,687

563,026

—

—

1,995

—

1,621

—

—

—

—

$

42,259

133,225

146,359

81,629

53,755

94,606

15,687

$

567,520

Total current period gross charge-offs

$

—

—

—

—

Loans

Total

Loans

Pass

$

11,571

18,074

13,746

5,602

7,298

7,819

9,003

$

73,113

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

Total commercial and industrial

11,626

18,277

13,746

5,602

7,301

7,819

9,003

73,374

—

—

—

—

—

Pass

38,646

25,382

1,716

1,526

68,329

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

Total construction and land development

38,646

25,382

1,716

1,526

68,329

—

—

—

—

—

—

—

—

Pass

12,966

7,337

18,548

10,458

3,948

9,786

2,647

65,690

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

Total owner occupied

13,226

7,337

18,548

10,458

4,781

9,786

2,647

66,783

—

—

—

—

—

—

—

—

Pass

9,025

9,873

3,205

1,493

3,881

11,654

—

39,131

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

Total hotel/motel

9,025

9,873

3,205

1,493

3,881

11,654

—

39,131

—

—

—

—

—

—

—

—

Loans

Total

Loans

Pass

12,379

17,955

1,953

6,112

3,790

3,043

45,841

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

Total multi-family

12,379

17,955

1,953

6,112

3,790

3,043

45,841

—

—

—

—

—

—

—

—

Other

Pass

25,810

36,076

31,687

14,597

10,736

15,440

1,052

135,398

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

Total other

25,810

36,076

31,687

14,751

10,736

15,440

1,052

135,552

—

—

—

—

—

—

—

—

Pass

20,147

20,177

2,683

2,665

1,281

12,217

59,419

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

Total consumer mortgage

20,147

20,177

2,683

2,665

1,471

13,153

60,545

—

—

—

—

—

—

—

—

Pass

13,398

12,490

9,397

12,209

5,485

1,865

1,478

56,322

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

Total investment property

13,482

12,738

9,397

12,442

5,485

1,890

1,478

56,912

—

—

—

—

—

—

—

—

Pass

5,688

3,837

—

10,718

—

—

—

—

—

—

—

—

—

—

—

—

—

Total consumer installment

5,734

3,873

—

10,827

—

—

—

Pass

149,630

151,201

83,675

54,868

36,645

62,122

15,820

553,961

—

—

1,581

—

—

—

—

—

$

150,075

151,688

83,689

55,268

37,671

63,083

15,820

$

557,294

Total current period gross charge-offs

$

—

—

Allowance for Credit Losses

The Company adopted ASC 326 on January 1, 2023, which introduced the CECL

methodology for estimating all expected

losses over the life of a financial asset. Under the CECL methodology,

the allowance for credit losses is measured on a

collective basis for pools of loans with similar risk characteristics, and for loans that do

not share similar risk characteristics

with the collectively evaluated pools, evaluations are performed on an individual

basis.

The composition of the provision for credit losses for the respective periods

is presented below.

Provision for credit losses:

Loans

$

$

Reserve for unfunded commitments

Total provision for credit

losses

$

$

The following table details the changes in the allowance for credit losses for loans, by portfolio

segment, for the respective

periods.

Commercial and

industrial

Construction

and land

Commercial

real estate

Residential

real estate

Consumer

installment

Total

Quarter ended:

$

1,288

3,921

$

6,863

Charge-offs

—

—

—

—

(24)

(24)

—

—

—

—

(2)

(120)

(1)

$

1,415

4,202

$

7,215

Quarter ended:

March 31, 2023

$

3,109

$

5,765

Impact of adopting ASC 326

(17)

(347)

(22)

1,019

Charge-offs

—

—

—

—

(11)

(11)

—

—

—

—

(10)

(3)

(49)

(16)

$

1,232

1,021

3,966

$

6,821

The following table presents the amortized cost basis of collateral dependent loans, which

are individually evaluated to

determine expected credit losses as of March 31, 2024 and December 31, 2023:

Real Estate

Total Loans

$

$

Total

$

$

$

$

Total

$

$

The following table is a summary of the Company’s

nonaccrual loans by major categories as of March 31, 2024 and

CECL

Total

with no Allowance

with an Allowance

Nonaccrual Loans

$

—

—

Consumer

—

Total

$

December 31, 2023

$

—

—

Total

$

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 reducing 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.

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

ended March 31, 2024 and 2023 are

presented below.

MSRs, net:

$

$

1,151

Additions, net

—

Amortization expense

(39)

(55)

$

$

1,096

Valuation

allowance included in MSRs, net:

Beginning of period

$

—

$

—

End of period

—

—

Fair value of amortized MSRs:

Beginning of period

$

2,382

$

2,369

End of period

2,378

2,419

NOTE 7: FAIR VALUE

Hierarchy

“Fair value” is defined by ASC 820,

Measurements and Disclosures

, and focuses on the exit price, i.e., 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, 2024, there were no

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

financial assets and liabilities.

Assets and liabilities measured at fair value on a recurring

basis

Fair values of securities available for sale were primarily measured using

Level 2 inputs.

For these securities, the Company

obtains pricing data 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 data 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/dealer quotes to validate the fair

value measurements.

In addition, management will periodically submit pricing information

provided by the third party

pricing services to another independent valuation firm on a sample basis.

This independent valuation firm will compare the

prices

provided by the third party pricing service with its own prices

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, 2024 and December 31, 2023, respectively,

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

valuation hierarchy (as described above).

Quoted Prices in

Active Markets

Other

for

Observable

Identical Assets

Inputs

Inputs

Amount

(Level 1)

(Level 2)

(Level 3)

Securities available-for-sale:

$

52,751

—

52,751

—

190,224

—

190,224

—

17,795

—

17,795

—

Total securities available-for-sale

260,770

—

260,770

—

Total

assets at fair value

$

260,770

—

260,770

—

Securities available-for-sale:

$

53,879

—

53,879

—

198,289

—

198,289

—

18,742

—

18,742

—

Total securities available-for-sale

270,910

—

270,910

—

Total

assets at fair value

$

270,910

—

270,910

—

Assets and liabilities measured at fair value on a nonrecurring

basis

Collateral Dependent Loans

Collateral dependent loans are measured at the fair value of the collateral securing the loan

less estimated selling costs. The

fair value of real estate collateral is determined based on real estate appraisals

which are generally based on recent sales of

comparable properties which are then adjusted for property specific factors.

Non-real estate collateral is valued based on

various sources, including third party asset valuations and internally determined

values based on cost adjusted for

depreciation and other judgmentally determined discount factors. Collateral

dependent loans are classified within Level 3 of

the hierarchy due to the unobservable inputs used in determining their fair value such as collateral

values and the borrower's

underlying financial condition.

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 mortgage prepayment speeds,

discount rates, default rates, costs 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 mortgage 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.

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

on a nonrecurring basis as of

March 31, 2024 and December 31, 2023, 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

for

Observable

Identical Assets

Inputs

Inputs

Amount

(Level 1)

(Level 2)

(Level 3)

$

—

—

(1)

—

—

(2)

—

—

Total assets at fair value

$

1,905

—

1,730

(1)

$

—

—

(2)

—

—

Total assets at fair value

$

1,775

—

—

1,775

(1)

Loans considered collateral dependent under ASC 326.

(2)

Represents MSRs, net, carried at lower of cost or

estimated fair value.

Quantitative Disclosures for Level 3 Fair Value

Measurements

At March 31, 2024 and December 31, 2023, 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, 2024

and December 31, 2023, the

significant unobservable inputs used in the fair value measurements and

the range of such inputs with respect to such assets

are presented below.

Range of

Weighted

Average

Amount

Valuation Technique

Unobservable Input

Inputs

of Input

Collateral dependent loans

$

Appraisal

Appraisal discounts

10.0

10.0

%

10.0

%

Discounted cash flow

Prepayment speed or CPR

6.3

11.3

6.6

Discount rate

10.0

12.0

10.0

Collateral dependent loans

$

Appraisal

Appraisal discounts

10.0

10.0

%

10.0

%

Discounted cash flow

Prepayment speed or CPR

5.9

10.6

6.0

Discount rate

10.5

12.5

10.5

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, where 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 good-faith estimates

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.

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

value of its financial instruments:

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.

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

prices for similar loans.

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, 2024 and December 31, 2023 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.

The following table summarizes our fair value estimates:

Fair Value Hierarchy

Estimated

Level 1

Level 2

Level 3

amount

fair value

inputs

inputs

Inputs

Financial Assets:

Loans, net (1)

$

560,305

$

522,379

$

—

$

—

$

522,379

—

—

Financial Liabilities:

$

190,603

$

188,651

$

—

$

188,651

$

—

Financial Assets:

Loans, net (1)

$

550,431

$

526,372

$

—

$

—

$

526,372

Financial Liabilities:

$

198,215

$

195,171

$

—

$

195,171

$

—

(1) Represents loans, net of allowance for credit losses.

The fair value of loans was measured using an

exit price notion.