AUBURN NATIONAL BANCORPORATION, INC

Notes to Consolidated Financial Statements

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING

POLICIES

General

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

company whose primary business is conducted

by its wholly-owned subsidiary,

AuburnBank (the “Bank”).

AuburnBank is a commercial bank located in

Auburn, Alabama. The Bank provides a full range of banking services

in its primary market area, Lee County,

which

includes the Auburn-Opelika Metropolitan Statistical Area.

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, 2025.

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, the fair value of financial

instruments, and the valuation of deferred tax assets and other real estate owned

(“OREO”).

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, 2026.

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 2026, 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, 2026 and 2025, 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.

During 2025, the Company granted restricted stock units (“RSUs”), which

vested during the first quarter of 2026.

These

RSUs are included in the computation of diluted net earnings per share using

the treasury stock method during the first

quarter of 2026.

No such securities were outstanding during the first quarter of 2025.

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:

$

2,198

$

1,530

common shares outstanding

Net earnings per share

$

0.63

$

0.44

Diluted:

$

2,198

$

1,530

common shares outstanding, basic

Dilutive effect of restricted stock units

2,289

—

common shares outstanding, diluted

Net earnings per share

$

0.63

$

0.44

NOTE 3: SECURITIES

At March 31, 2026 and December 31, 2025, 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, 2026 and December 31, 2025,

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)

$

34,328

17,761

—

52,641

—

4,862

$

57,503

Agency MBS (a)

—

20,274

18,399

118,069

156,742

—

19,141

175,883

—

2,981

8,250

6,171

17,402

—

2,222

19,624

Total available-for-sale

$

57,583

44,410

124,240

226,785

—

26,225

$

253,010

December 31, 2025

Agency obligations (a)

$

—

35,580

18,204

—

53,784

—

4,727

$

58,511

Agency MBS (a)

—

20,112

16,171

125,644

161,927

—

19,063

180,990

—

1,590

9,160

6,798

17,548

2,103

19,650

Total available-for-sale

$

—

57,282

43,535

132,442

233,259

25,893

$

259,151

(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 included 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 $

203.7

million and $

209.4

million at March 31, 2026 and December 31, 2025,

respectively, were

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

Federal Home Loan

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

or permitted by law.

Included in other assets on the accompanying consolidated balance sheets are

nonmarketable equity investments.

The

carrying amounts of nonmarketable equity investments were $

1.4

million at both March 31, 2026 and December 31, 2025,

respectively.

Nonmarketable equity investments include FHLB - 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, 2026

and December 31, 2025, 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

$

—

—

52,641

4,862

$

52,641

4,862

2,672

154,070

19,081

156,742

19,141

1,627

13,680

2,214

15,307

2,222

Total

$

4,299

220,391

26,157

$

224,690

26,225

$

—

—

53,784

4,727

$

53,784

4,727

—

—

161,840

19,063

161,840

19,063

—

—

14,827

2,103

14,827

2,103

Total

$

—

—

230,451

25,893

$

230,451

25,893

For the securities in the previous table, the Company assesses whether or not

it intends to sell the security, or more

likely

than not will be required to sell the security,

before recovery of its amortized 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 not credit quality.

For the securities in the previous table, as of March 31, 2026 the Company does not intend to sell and

it is likely that

management will not be required to sell the securities prior to their anticipated 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, 2026.

Investments in agency 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, 2026.

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, 2026.

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, 2026.

Realized Gains and Losses

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

the quarters ended March 31, 2026 and 2025,

respectively.

NOTE 4: LOANS AND ALLOWANCE

FOR CREDIT LOSSES

$

31,841

$

33,887

35,703

24,513

60,248

56,436

58,848

59,568

55,005

47,870

53,798

51,516

Other

166,951

166,567

334,602

325,521

57,637

59,781

53,506

56,773

estate

111,143

116,554

8,524

8,421

Total Loans, net of

unearned income before basis adjustment

582,061

565,332

Basis adjustment associated with fair value hedge (1)

(21)

Total Loans, net of

unearned income

$

582,040

$

565,354

(1) Represents the basis adjustment associated with application of hedge

accounting on certain loans.

The basis adjustment

will be allocated to the amortized cost of associated loans within the portfolio if

the hedge accounting is discontinued.

Refer to Note 6 - Derivative Instruments for additional information.

Loans secured by real estate were approximately 86.9% of the Company’s

total loan portfolio at March 31, 2026.

At March

31, 2026, 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 is disaggregated into the following portfolio segments: commercial

and industrial, municipal, 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.

As a result of this refinement,

the total allowance decreased due to the lower expected credit losses associated with

these

loans.

This refinement represents a change in accounting estimate and is accounted for

prospectively.

The following describes

the risk characteristics relevant to each of the portfolio segments and classes.

Commercial and industrial —

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.

Municipal —

includes loans to state and local governmental entities and related public-sector organizations

to finance

capital projects, infrastructure improvements, and other governmental

or public service needs. These loans are typically

supported by general tax revenues, utility revenues, special assessments, or

other dedicated revenue sources of the

municipality. Repayment

is primarily dependent on the financial capacity and revenue-generating

ability of the

governmental entity.

Construction and land development —

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 lines for

construction of residential, multi-family,

and commercial buildings. Generally,

the primary source of repayment is

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

—

includes loans disaggregated 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.

Generally, the primary

source of loan repayment are the cash flows 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 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.

●

– primarily includes loans to finance income-producing multifamily

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 respective

borrower.

●

Other

– primarily includes loans to finance income-producing commercial.

Loans in this class include loans for

neighborhood retail centers, medical and professional offices,

single retail stores, industrial buildings, and

warehouses leased generally to local businesses and residents. Generally

,

the primary source of repayment is

dependent upon income generated from the real estate collateral. The

underwriting of these loans takes into

c

onsideration the occupancy and rental rates, as well as the financial health

of the borrower.

Residential real estate —

includes loans disaggregated into two classes:

●

– primarily includes

first or second lien mortgages and home equity lines 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.

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, as well as the financial

health of the borrowers.

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.

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

loans by portfolio segment and class as of March

31, 2026 and December 31, 2025.

Total

30-89 Days

Greater than

Non-

Total

Current

Past Due

90 days

Loans

Accrual

Loans

$

31,726

—

31,841

—

$

31,841

35,703

—

—

35,703

—

35,703

60,208

—

60,248

—

60,248

58,848

—

—

58,848

—

58,848

53,352

1,653

—

55,005

—

55,005

53,798

—

—

53,798

—

53,798

Other

166,951

—

—

166,951

—

166,951

332,949

1,653

—

334,602

—

334,602

57,185

—

57,569

57,637

53,264

—

53,472

53,506

estate

110,449

111,041

111,143

8,515

—

8,524

—

8,524

Total

$

579,550

2,201

581,959

$

582,061

$

33,881

—

33,887

—

$

33,887

24,513

—

—

24,513

—

24,513

56,395

—

56,436

—

56,436

59,085

—

59,190

59,568

47,870

—

—

47,870

—

47,870

51,516

—

—

51,516

—

51,516

Other

166,567

—

—

166,567

—

166,567

325,038

—

325,143

325,521

58,993

—

59,713

59,781

56,737

—

—

56,737

56,773

estate

115,730

—

116,450

116,554

8,348

—

8,421

—

8,421

Total

$

563,905

—

564,850

$

565,332

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

e

xpected.

The introduction of the municipal portfolio segment in 2026 impacts comparability

of credit quality disclosures to prior

periods.

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

classes by year of

origination as of March 31, 2026 and December 31, 2025.

Loans

Total

Loans

Pass

$

1,711

7,413

4,323

3,662

3,437

10,533

31,628

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

1,785

7,413

4,325

3,666

3,570

10,533

31,841

—

—

—

—

—

—

Pass

$

11,980

—

—

1,156

4,090

16,984

1,493

35,703

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

Total municipal

11,980

—

—

1,156

4,090

16,984

1,493

35,703

—

—

—

—

—

—

—

—

Pass

7,455

31,705

13,306

3,896

1,964

1,525

60,208

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

Total construction and land development

7,455

31,705

13,306

3,896

2,004

1,525

60,248

—

—

—

—

—

—

—

—

Pass

10,670

1,358

11,631

6,101

26,516

57,014

—

—

—

—

—

1,339

—

—

—

—

—

—

—

—

—

—

—

—

—

—

Total owner occupied

11,287

1,853

11,631

6,101

27,238

58,848

—

—

—

—

—

—

Pass

8,731

4,954

14,153

6,084

3,878

12,225

4,980

55,005

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

Total hotel/motel

8,731

4,954

14,153

6,084

3,878

12,225

4,980

55,005

—

—

—

—

—

—

—

—

Loans

Total

Loans

Pass

2,830

1,248

3,590

12,446

20,388

10,314

—

50,816

—

—

—

—

—

—

—

—

—

—

—

—

—

2,982

—

2,982

—

—

—

—

—

—

—

—

Total multi-family

2,830

1,248

3,590

12,446

20,388

13,296

—

53,798

—

—

—

—

—

—

—

—

Other

Pass

3,948

34,963

39,753

16,820

27,873

39,015

4,071

166,443

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

Total other

3,948

34,963

40,115

16,820

27,873

39,161

4,071

166,951

—

—

—

—

—

—

—

—

Pass

5,851

3,245

15,015

15,460

12,841

3,464

56,317

—

—

—

—

—

—

—

—

—

—

—

1,069

—

—

—

—

—

—

Total consumer mortgage

6,095

3,245

15,083

15,460

13,849

3,464

57,637

—

—

—

—

—

—

—

—

Pass

1,953

7,970

8,133

8,743

9,273

16,212

53,143

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

Total investment property

1,953

8,206

8,133

8,777

9,363

16,215

53,506

—

—

—

—

—

—

—

—

Pass

1,182

3,582

1,736

8,504

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

Total consumer installment

1,182

3,582

1,749

8,524

—

—

—

—

—

Pass

40,884

108,356

89,597

80,194

93,159

145,202

17,389

574,781

—

—

1,051

—

2,042

3,810

—

5,136

—

—

—

—

—

—

$

40,958

109,453

90,469

80,307

93,422

150,063

17,389

$

582,061

Total current period gross charge-offs

$

—

—

—

—

$

Loans

Total

Loans

Pass

$

8,566

5,035

3,970

2,865

4,366

8,074

$

33,654

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

8,640

5,039

3,984

3,004

4,368

8,074

33,887

—

—

—

—

Pass

$

—

1,156

4,190

6,013

9,145

3,172

$

24,513

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

1,156

4,190

6,013

9,145

3,172

24,513

—

—

—

—

—

—

—

—

Pass

31,315

14,175

7,321

2,080

56,436

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

Total construction and land development

31,315

14,175

7,321

2,080

56,436

—

—

—

—

—

—

—

—

Pass

9,755

1,312

11,889

6,235

13,830

11,618

2,682

57,321

—

—

—

—

—

1,370

—

—

—

—

—

—

—

—

—

—

—

—

Total owner occupied

10,375

1,811

11,889

6,235

13,830

11,996

3,432

59,568

—

—

—

—

—

—

Pass

5,012

14,161

6,143

8,976

2,948

10,630

—

47,870

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

Total hotel/motel

5,012

14,161

6,143

8,976

2,948

10,630

—

47,870

—

—

—

—

—

—

—

—

Loans

Total

Loans

Pass

1,254

3,615

12,550

20,560

1,726

8,652

48,499

—

—

—

—

—

—

—

—

—

—

—

—

—

3,017

—

3,017

—

—

—

—

—

—

—

—

Total multi-family

1,254

3,615

12,550

20,560

1,726

11,669

51,516

—

—

—

—

—

—

—

—

Other

Pass

25,027

41,004

12,501

28,033

17,244

24,310

17,589

165,708

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

Total other

25,027

41,368

12,501

28,033

17,739

24,310

17,589

166,567

—

—

—

—

—

—

—

—

Pass

6,413

4,344

16,249

16,527

2,263

10,977

1,692

58,465

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

Total consumer mortgage

6,413

4,344

16,317

16,527

2,263

11,915

2,002

59,781

—

—

—

—

—

—

Pass

9,332

8,045

10,016

9,849

6,790

10,375

1,999

56,406

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

Total investment property

9,568

8,045

10,052

9,940

6,794

10,375

1,999

56,773

—

—

—

—

—

—

Pass

4,121

1,981

8,376

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

Total consumer installment

4,129

1,995

8,421

—

—

—

—

Pass

101,632

93,672

82,767

100,095

55,386

94,573

29,123

557,248

—

2,572

3,771

5,030

—

—

—

—

—

$

102,570

94,553

82,908

100,325

55,887

98,906

30,183

$

565,332

T

otal current period gross charge-offs

$

—

—

$

Allowance for Credit Losses

The allowance for credit losses is estimated under the Current Expected

Credit Losses (“CECL”) methodology set forth in

FASB ASC 326,

Financial Instruments – Credit Losses

.

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

$

$

(57)

Reserve for unfunded commitments

(78)

Total provision for credit

losses

$

(76)

$

(10)

The provision for credit losses for the quarter reflects both changes in credit conditions

and the impact of the refinement in

portfolio segmentation, including the reclassification of loans previously

included in commercial and industrial loans.

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

development

Commercial

Residential

Consumer

installment

Total

Quarter ended March 31, 2026

Beginning balance

$

1,129

—

1,304

3,777

$

7,176

Charge-offs

(5)

—

—

(378)

—

(33)

(416)

—

—

—

—

(5)

—

—

(378)

(21)

(402)

(438)

(610)

$

4,056

1,029

$

6,776

Quarter ended March 31, 2025:

Beginning balance

$

1,244

n/a

1,059

3,842

$

6,871

Charge-offs

(99)

n/a

—

—

(1)

—

(100)

n/a

—

—

(71)

n/a

—

—

(64)

n/a

(689)

(28)

(57)

$

1,219

n/a

1,401

3,153

$

6,750

As a result of this refinement, the total allowance decreased due to the lower

expected credit losses associated with these

loans.

This refinement represents a change in accounting estimate and is accounted for prospectively.

The Company designates certain individually evaluated loans on nonaccrual status as collateral

-dependent loans.

Collateral-dependent loans are loans for which the repayment is expected to be provided

substantially through the operation

or sale of the collateral and the borrower is experiencing financial difficulty.

These loans do not share common risk

characteristics and are not included within the collectively evaluated loans

for determining the allowance for credit losses.

Under CECL, for collateral-dependent loans, the Company has adopted

the practical expedient to measure the allowance

for credit losses based on the fair value of collateral.

The allowance for credit losses is calculated on an individual loan

basis based on the shortfall between the fair value of the loan’s

collateral, which is adjusted for liquidation costs/discounts,

and amortized costs.

If the fair value of the collateral exceeds the amortized cost, no allowance is required.

The Company had no collateral dependent loans which were individually evaluated

at March 31, 2026.

The following table

presents the amortized cost basis of collateral dependent loans, which were

individually evaluated to determine expected

credit losses at December 31, 2025.

Real Estate

Total Loans

$

$

Total

$

$

At March 31, 2026 and December 31, 2025, the Company had one additional individually

evaluated commercial real estate

loan in the amount of $3.0 million that was not considered collateral dependent

and was accruing in accordance with its

contractual terms.

This loan had an allowance of $0.5 million at March 31, 2026 and December

31, 2025, respectively.

The allowance for this loan was measured using the present value of expected

future cash flows, discounted at the loan’s

effective interest rate.

Expected cash flows were developed using probability of default and loss given default

assumptions

specific to the borrower.

The following table summarizes the Company’s

nonaccrual loans by major categories for the respective periods.

Total

With No Allowance

With An Allowance

$

—

$

Total

$

—

$

December 31, 2025

$

—

$

—

Total

$

$

The Company did not recognize any interest income on nonaccrual loans during

the quarters ended March 31, 2026 and

There were no modifications to borrowers experiencing financial difficulty

during the quarters ended March 31, 2026 and

NOTE 5:

STOCK-BASED COMPENSATION

Restricted stock units (“RSUs”) granted on July 24, 2025 vested during

the first quarter of 2026, resulting in no unvested

awards outstanding at March 31, 2026.

The Company recognized $

thousand of stock-based compensation expense in

the first quarter of 2026 related to these RSUs.

Such expense is included in salaries and benefits expense, with a

c

orresponding increase to additional paid-in capital.

NOTE 6: DERIVATIVE

INSTRUMENTS

The Company enters into interest rate swaps to manage exposure to changes in interest

rates on certain loans. The Company

does not enter into derivative instruments for speculative or trading purposes.

As of March 31, 2026, the Company had two pay-fixed, receive-variable

interest rate swaps with an aggregate notional

amount of $22.0 million. The swaps are designated as fair value hedges

of changes in the fair value of specified loans

attributable to changes in the benchmark interest rate (SOFR) and qualify

for the shortcut method under ASC 815,

Derivatives and Hedging

.

Under the terms of the swaps, the Company pays fixed rates and receives variable

rates based on SOFR. Because the

hedges qualify for the shortcut method, the hedge relationships are assumed to

be perfectly effective, and therefore no

hedge ineffectiveness is recognized.

Accrued interest receivable related to the swaps is included in Other Assets or Other

Liabilities, as applicable.

The following table presents the fair value of derivative instruments designated

as hedging instruments as of March 31,

2026 and December 31, 2025:

Balance Sheet

Location

Asset

Liability

Interest rate swaps (fair value hedge)

Other Assets

$

$

—

$

$

—

Balance Sheet

Location

Asset

Liability

Interest rate swap (fair value hedge)

Other Liabilities

$

—

$

$

—

$

The following table presents the effect of fair value hedge accounting

on the Consolidated Statements of Earnings for the

quarter ended March 31, 2026:

Amount of Gain

Amount of Gain

Location of Gain

in Income on Hedged

in Income on

Item Attributable

in Income

Derivative

to Hedged Risk

Quarter ended March 31, 2026:

Interest rate swaps (fair value hedge)

Interest Income (Loans)

$

$

(43)

$

$

(43)

The Company is exposed to credit risk in the event of nonperformance by

the counterparty to the interest rate swaps. The

Company manages this risk by transacting with a counterparty that meets established

credit standards. The Company does

not anticipate nonperformance by the counterparty.

These derivatives

are subject to a master netting arrangement; however,

the Company does not offset derivative assets and

liabilities on the Consolidated Balance Sheets.

NOTE 7: FAIR VALUE

Hierarchy

“Fair value” is defined by ASC 820,

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, 2026, 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

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 quotes, market spreads, cash flows, market

consensus prepayment speeds, benchmark yields, reported trades

for similar securities, 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.

Interest Rate Swaps

The fair values of the Company’s interest

rate swaps are estimated using a discounted cash flow model.

The model

considers the present value of expected future cash flows under the terms

of the swap and incorporates observable market

data such as: relevant interest rate swap curves, benchmark yield curves

(e.g., SOFR-based or other market-based curves),

and forward interest rate expectations over the contractual term of the instruments.

Because the significant inputs used in

valuing the interest rate swaps are observable in active markets, the Company

classifies these instruments with Level 2 of

the fair value hierarchy.

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

value on a recurring basis as of March

31, 2026 and December 31, 2025, 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:

$

52,641

—

52,641

—

156,742

—

156,742

—

17,402

—

17,402

—

Total securities available

-for-sale

226,785

—

226,785

—

Other assets - interest rate swaps

—

—

Total

assets at fair value

$

226,806

—

226,806

—

Securities available-for-sale:

$

53,784

—

53,784

—

161,927

—

161,927

—

17,548

—

17,548

—

Total securities available

-for-sale

233,259

—

233,259

—

Total

assets at fair value

$

233,259

—

233,259

—

Other liabilities - interest rate swap

—

—

Total

liabilities at fair value

$

—

—

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 prepayment speeds,

discount rate, 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.

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

value on a nonrecurring basis as of

March 31, 2026 and December 31, 2025, respectively,

by caption, on the accompanying consolidated balance sheets and 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)

(2)

$

—

—

Total assets at fair value

$

—

—

(1)

$

—

—

(2)

—

—

Total assets at fair value

$

1,149

—

—

1,149

(1)

Loans considered collateral dependent under ASC 326

Financial Instruments - Credit Losses

.

(2)

Represents MSRs, net, carried at lower of cost or estimated

fair value.

Quantitative Disclosures for Level 3 Fair Value

Measurements

At March 31, 2026 and December 31, 2025, 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,

2026 and December 31, 2025, the

significant unobservable inputs used in the fair value measurements are

presented below.

Range of

Weighted

Average

Amount

Valuation Technique

Unobservable Input

Inputs

of Input

$

Discounted cash flow

Prepayment speed or CPR

7.0

7.4

%

7.0

%

Discount rate

9.5

11.5

9.5

Collateral dependent loans

$

Appraisal

Appraisal discounts

10.0

10.0

%

10.0

%

Discounted cash flow

Prepayment speed or CPR

6.8

8.4

8.2

Discount rate

9.5

11.5

9.5

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, 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 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.

Loans held for sale are recorded at the lower of cost or fair value.

Fair values 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, 2026 and December 31, 2025 are presented below.

This table excludes financial instruments

recorded at fair value on a recurring basis, and 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)

$

575,264

$

561,030

—

—

$

561,030

Financial Liabilities:

$

180,957

$

180,076

—

180,076

$

—

Financial Assets:

Loans, net (1)

$

558,178

$

542,382

—

—

$

542,382

—

—

Financial Liabilities:

$

176,801

$

176,137

—

176,137

$

—

(

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

The fair value of loans was measured using an

exit price notion.

OF FINANCIAL CONDITION AND RESULTS

OF