AUBURN NATIONAL BANCORPORATION, INC 10-K

ITEM 1A. RISK FACTORS Any of the following risks could harm our business, results of operations and financial condition and an investment in our stock. The risks discussed below also include forward-looking statements, and our actual results may differ substantially from those discussed in these forward-looking statements. Operational Risks Market conditions and economic cyclicality may adversely affect our industry. We believe the following, among other things, may affect us in 2022: ● The COVID-19 pandemic disrupted the economy beginning late in the first quarter of 2020, and continues. Auburn University, government agencies and businesses were limited to remote work and gatherings were limited. Supply chains continue to be disrupted and unemployment spiked and remains high. Hotels, motels, restaurants, retail and shopping centers were especially affected. ● Extraordinary monetary and fiscal stimulus in 2020 and in early 2021 have offset certain of the pandemic’s adverse economic effects. Inflation is running at levels unseen in decades and the Federal Reserve is contemplating raising target interest rates and reducing its securities holdings. The nature and timing of any future changes in monetary and fiscal policies and their effect on us cannot be predicted. ● Market developments, including unemployment, price levels, stock and bond market volatility, and changes, including those resulting from COVID-19 and the pace of vaccination and expected declines in serious COVID-19 cases, and Russia’s invasion of Ukraine affect consumer confidence levels, economic activity and inflation. Changes in payment behaviors and payment rates may increase in delinquencies and default rates, which could affect our earnings and credit quality. ● Our ability to assess the creditworthiness of our customers and those we do business with, and the values of our assets and loan collateral may be adversely affected and less predictable as a result of the pandemic and government responses. The accounting for loan modifications and deferrals may provide only temporary relief. The process we use to estimate losses inherent in our credit exposure or estimate the value of certain assets requires difficult, subjective, and complex judgments, including forecasts of economic conditions and how those economic predictions might affect the ability of our borrowers to repay their loans or the value of assets. Table of Contents 27 ● The end of the LIBOR reference rate is currently scheduled for most tenors by June 30, 2023, although U.S. bank regulators informed banks November 30, 2020 that they should stop using LIBOR for new loans and contracts and derivatives, including hedging, and involves risks of potential marked disruption and costs of compliance and conversion. New hedges may not be as effective as hedges based on LIBOR. Nonperforming and similar assets take significant time to resolve and may adversely affect our results of operations and financial condition. Our nonperforming loans were 0.10% of total loans as of December 31, 2021, and we had $0.4 million in other real estate owned (“OREO”). Non-performing assets may adversely affect our net income in various ways. We do not record interest income on nonaccrual loans or OREO and these assets require higher loan administration and other costs, thereby adversely affecting our income. Decreases in the value of these assets, or the underlying collateral, or in the related borrowers’ performance or financial condition, whether or not due to economic and market conditions beyond our control, could adversely affect our business, results of operations and financial condition. In addition, the resolution of nonperforming assets requires commitments of time from management, which can be detrimental to the performance of their other responsibilities. Our non-performing assets may be adversely affected by loan deferrals and modifications made in response to the pandemic and the moratoria on foreclosures and evictions. There can be no assurance that we will not experience increases in nonperforming loans in the future, much of which is affected by the economy and the levels of interest rates, generally. Our allowance for loan losses may prove inadequate or we may be negatively affected by credit risk exposures. We periodically review our allowance for loan losses for adequacy considering economic conditions and trends, collateral values and credit quality indicators, including past charge-off experience and levels of past due loans and nonperforming assets. We cannot be certain that our allowance for loan losses will be adequate over time to cover credit losses in our portfolio because of unanticipated adverse changes in the economy, including the continuing effects of the pandemic and fiscal and monetary response to COVID-19, loan modifications and deferrals, market conditions or events adversely affecting specific customers, industries or markets, including disruptions of supply chains and war, and changes in borrower behaviors. Certain borrowers may not recover fully or may fail as a result of COVID -19 effects. If the credit quality of our customer base materially decreases, if the risk profile of the market, industry or group of customers changes materially or weaknesses in the real estate markets worsen, borrower payment behaviors change, or if our allowance for loan losses is not adequate, our business, financial condition, including our liquidity and capital, and results of operations could be materially adversely affected. CECL, a new accounting standard for estimating loan losses, is effective for the Company beginning January 1, 2023, and its effects upon the Company have not yet been determined. Changes in the real estate markets, including the secondary market for residential mortgage loans, may continue to adversely affect us. The CFPB’s mortgage and servicing rules, including TRID rules for closed end credit transactions, enforcement actions, reviews and settlements, affect the mortgage markets and our mortgage operations. The CFPB requires that lenders determine whether a consumer has the ability to repay a mortgage loan have limited the secondary market for and liquidity of many mortgage loans that are not “qualified mortgages.” Recently adopted changes to the CFPB’s qualified mortgage rules are reportedly being reconsidered. The Tax Cuts and Jobs Act’s (the “2017 Tax Act”) limitations on the deductibility of residential mortgage interest and state and local property and other taxes and federal moratoria on single-family foreclosures and rental evictions could adversely affect consumer behaviors and the volumes of housing sales, mortgage and home equity loan originations, as well as the value and liquidity of residential property held as collateral by lenders such as the Bank, and the secondary markets for single and multi-family loans. Acquisition, construction and development loans for residential development may be similarly adversely affected. Fannie Mae and Freddie Mac (“GSEs”), have been in conservatorship since September 2008. Since Fannie Mae and Freddie Mac dominate the residential mortgage markets, any changes in their operations and requirements, as well as their respective restructurings and capital, could adversely affect the primary and secondary mortgage markets, and our residential mortgage businesses, our results of operations and the returns on capital deployed in these businesses. The timing and effects of resolution of these government sponsored enterprises cannot be predicted. Weaknesses in real estate markets the FHFA’s moratoria on foreclosures and real estate owned evictions may adversely affect the length of time and costs required to manage and dispose of, and the values realized from the sale of our OREO. Table of Contents 28 We may be contractually obligated to repurchase mortgage loans we sold to third parties on terms unfavorable to us. As part of its routine business, the Company originates mortgage loans that it subsequently sells in the secondary market, including to governmental agencies and GSEs. In connection with the sale of these loans, the Company makes customary representations and warranties, the breach of which may result in the Company being required to repurchase the loan or loans. Furthermore, the amount paid may be greater than the fair value of the loan or loans at the time of the repurchase. Although mortgage loan repurchase requests made to us have been limited, if these increased, we may have to establish reserves for possible repurchases and adversely affect our results of operation and financial condition. Mortgage servicing rights requirements may change and require us to incur additional costs and risks. The CFPB’s residential mortgage servicing standards may adversely affect our costs to service residential mortgage loans, and together with the Basel III Rules and the effects of lower interest rates from COVID-19 stimulus, may decrease the returns on, and values of, our MSRs. This could reduce our income from servicing these types of loans and make it more difficult and costly to timely realize the value of collateral securing such loans upon a borrower default. In contrast, rising interest rates would be expected to reduce mortgage refinancings and extend the duration of our MSRs. The soundness of other financial institutions could adversely affect us. We routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, central clearinghouses, banks, including our correspondent banks and other financial institutions. Our ability to engage in routine investment and banking transactions, as well as the quality and values of our investments in holdings of other obligations of other financial institutions such as the FHLB, could be adversely affected by the actions, financial condition, and profitability of such other financial institutions, including the FHLB and our correspondent banks. Financial services institutions are interrelated as a result of shared credits, trading, clearing, counterparty and other relationships. Any losses, defaults by, or failures of, the institutions we do business with could adversely affect our holdings of the equity in such other institutions, our participation interests in loans originated by other institutions, and our business, including our liquidity, financial condition and earnings. Our concentration of commercial real estate loans could result in further increased loan losses, and adversely affect our business, earnings, and financial condition. Commercial real estate, or CRE, is cyclical and poses risks of possible loss due to concentration levels and risks of the assets being financed, which include loans for the acquisition and development of land and residential construction. The federal bank regulatory agencies released guidance in 2006 on “Concentrations in Commercial Real Estate Lending.” The guidance defines CRE loans as exposures secured by raw land, land development and construction loans (including 1-4 family residential construction loans), multi-family property, and non-farm non-residential property, where the primary or a significant source of repayment is derived from rental income associated with the property (that is, loans for which 50% or more of the source of repayment comes from third party, non-affiliated, rental income) or the proceeds of the sale, refinancing, or permanent financing of the property. Loans to REITs and unsecured loans to developers that closely correlate to the inherent risks in CRE markets are also CRE loans. Loans on owner occupied commercial real estate are generally excluded from CRE for purposes of this guidance. Excluding owner occupied commercial real estate, we had 50.0% of our portfolio in CRE loans at year-end 2021 compared to 43.6% at year-end 2020. The banking regulators continue to give CRE lending scrutiny and require banks with higher levels of CRE loans to implement improved underwriting, internal controls, risk management policies and portfolio stress testing, as well as higher levels of allowances for possible losses and capital levels as a result of CRE lending growth and exposures. Lower demand for CRE, and reduced availability of, and higher interest rates and costs for, CRE lending could adversely affect our CRE loans and sales of our OREO, and therefore our earnings and financial condition, including our capital and liquidity. At year-end 2021, 21% of our total loans were CRE loans to hotels/motels, retail and shopping centers and restaurants, businesses that were severely affected by the effects of COVID-19. Table of Contents 29 Our future success is dependent on our ability to compete effectively in highly competitive markets. The East Alabama banking markets which we operate are highly competitive and our future growth and success will depend on our ability to compete effectively in these markets. We compete for loans, deposits and other financial services with other local, regional and national commercial banks, thrifts, credit unions, mortgage lenders, and securities and insurance brokerage firms. Lenders operating nationwide over the internet are growing rapidly. Many of our competitors offer products and services different from us, and have substantially greater resources, name recognition and market presence than we do, which benefits them in attracting business. In addition, larger competitors may be able to price loans and deposits more aggressively than we are able to and have broader and more diverse customer and geographic bases to draw upon. Out of state banks may branch into our markets. Fintech and other non-bank competitors also complete for our customers, and may partner with other banks and/or seek to enter the payments system. Failures of other banks with offices in our markets could also lead to the entrance of new, stronger competitors in our markets. Our success depends on local economic conditions. Our success depends on the general economic conditions in the geographic markets we serve in Alabama. The local economic conditions in our markets have a significant effect on our commercial, real estate and construction loans, the ability of borrowers to repay these loans and the value of the collateral securing these loans. Adverse changes in the economic conditions of the Southeastern United States in general, or in one or more of our local markets, including the continuous effects from COVID-19 and the timing, strength and breadth of the recovery from the pandemic, could negatively affect our results of operations and our profitability. Our local economy is also affected by the growth of automobile manufacturing and related suppliers located in our markets and nearby. Auto sales are cyclical and are affected adversely by higher interest rates. Attractive acquisition opportunities may not be available to us in the future. While we seek continued organic growth, we also may consider the acquisition of other businesses. We expect that other banking and financial companies, many of which have significantly greater resources, will compete with us to acquire financial services businesses. This competition could increase prices for potential acquisitions that we believe are attractive. Also, acquisitions are subject to various regulatory approvals. If we fail to receive the appropriate regulatory approvals, we will not be able to consummate an acquisition that we believe is in our best interests, and regulatory approvals could contain conditions that reduce the anticipated benefits of any transaction. Among other things, our regulators consider our capital, liquidity, profitability, regulatory compliance and levels of goodwill and intangibles when considering acquisition and expansion proposals. Any acquisition could be dilutive to our earnings and shareholders’ equity per share of our common stock. Future acquisitions and expansion activities may disrupt our business, dilute shareholder value and adversely affect our operating results. We regularly evaluate potential acquisitions and expansion opportunities, including new branches and other offices. To the extent that we grow through acquisitions, we cannot assure you that we will be able to adequately or profitably manage this growth. Acquiring other banks, branches, or businesses, as well as other geographic and product expansion activities, involve various risks including: ● risks of unknown or contingent liabilities, and potential asset quality issues; ● unanticipated costs and delays; ● risks that acquired new businesses will not perform consistent with our growth and profitability expectations; ● risks of entering new markets or product areas where we have limited experience; ● risks that growth will strain our infrastructure, staff, internal controls and management, which may require additional personnel, time and expenditures; ● difficulties, expenses and delays of integrating the operations and personnel of acquired institutions; ● potential disruptions to our business; Table of Contents 30 ● possible loss of key employees and customers of acquired institutions; ● potential short-term decreases in profitability; and ● diversion of our management’s time and attention from our existing operations and business. Technological changes affect our business, and we may have fewer resources than many competitors to invest in technological improvements. The financial services industry is undergoing rapid technological changes with frequent introductions of new technology driven products and services and growing demands for mobile and user-based banking applications. In addition to allowing us to analyze our customers better, the effective use of technology may increase efficiency and may enable financial institutions to reduce costs, risks associated with fraud and compliance with anti-money laundering and other laws, and various operational risks. Largely unregulated “fintech” businesses have increased their participation in the lending and payments businesses, and have increased competition in these businesses. Our future success will depend, in part, upon our ability to use technology to provide products and services that meet our customers’ preferences and create additional efficiencies in operations, while avoiding cyber-attacks and disruptions, data breaches and anti-money laundering violations. The COVID-19 pandemic and increased remote work has accelerated electronic banking activity and the need for increased operational efficiencies. We may need to make significant additional capital investments in technology, including cyber and data security, and we may not be able to effectively implement new technology -driven products and services, or such technology may prove less effective than anticipated. Many larger competitors have substantially greater resources to invest in technological improvements and, increasingly, non-banking firms are using technology to compete with traditional lenders for loans and other banking services. As a result, our competition from service providers not located in our markets has increased. Operational risks are inherent in our businesses. Operational risks and losses can result from internal and external fraud; gaps or weaknesses in our risk management or internal audit procedures; errors by employees or third parties, including our vendors, failures to document transactions properly or obtain proper authorizations; failure to comply with applicable regulatory requirements in the various jurisdictions where we do business or have customers; failures in our estimates models that rely on; equipment failures, including those caused by natural disasters, or by electrical, telecommunications or other essential utility outages; business continuity and data security system failures, including those caused by computer viruses, cyberattacks, unforeseen problems encountered while implementing major new computer systems or, failures to timely and properly upgrade and patch existing systems or inadequate access to data or poor response capabilities in light of such business continuity and data security system failures; or the inadequacy or failure of systems and controls, including those of our vendors or counterparties. The COVID-19 pandemic presented operational challenges to maintaining continuity of operations of customer services while protecting our employees’ and customers’ safety. In addition, we face certain risks inherent in the ownership and operation of our bank premises and other real-estate, including liability for accidents on our properties. Although we have implemented risk controls and loss mitigation actions, and substantial resources are devoted to developing efficient procedures, identifying and rectifying weaknesses in existing procedures and training staff and potential environmental risks, it is not possible to be certain that such actions have been or will be effective in controlling these various operational risks that evolve continuously. Table of Contents 31 Potential gaps in our risk management policies and internal audit procedures may leave us exposed unidentified or unanticipated risk, which could negatively affect our business. Our enterprise risk management and internal audit program is designed to mitigate material risks and loss to us. We have developed and continue to develop risk management and internal audit policies and procedures to reflect the ongoing review of our risks and expect to continue to do so in the future. Nonetheless, our policies and procedures may not be comprehensive and may not identify timely every risk to which we are exposed, and our internal audit process may fail to detect such weaknesses or deficiencies in our risk management framework. Many of our risk management models and estimates use observed historical market behavior to model or project potential future exposure. Models used by our business are based on assumptions and projections. These models may not operate properly or our inputs and assumptions may be inaccurate, or changes in economic conditions, customer behaviors or regulations. As a result, these methods may not fully predict future exposures, which can be significantly greater than historically. Other risk management methods depend upon the evaluation of information regarding markets, clients, or other matters that are publicly available or otherwise accessible to us. This information may not always be accurate, complete, up-to-date or properly evaluated. Furthermore, there can be no assurance that we can effectively review and monitor all risks or that all of our employees will closely follow our risk management policies and procedures, nor can there be any assurance that our risk management policies and procedures will enable us to accurately identify all risks and limit our exposures based on our assessments. In addition, we may have to implement more extensive and perhaps different risk management policies and procedures as our regulation changes. For example, the Federal Reserve and the OCC are in the initial stages of proposing climate risk management criteria and potential climate risk stress tests. The SEC is expected to require more disclosure on climate risks, also. All of these could adversely affect our financial condition and results of operations. Any failure to protect the confidentiality of customer information could adversely affect our reputation and have a material adverse effect on our business, financial condition and results of operations . Various laws enforced by the bank regulators and other agencies protect the privacy and security of customers’ non-public personal information. Many of our employees have access to, and routinely process personal information of clients through a variety of media, including information technology systems. Our internal processes and controls are designed to protect the confidentiality of client information we hold and that is accessible to us and our employees. It is possible that an employee could, intentionally or unintentionally, disclose or misappropriate confidential client information or our data could be the subject of a cybersecurity attack. Such personal data could also be compromised via intrusions into our systems or those of our service providers or persons we do business with such as credit bureaus, data processors and merchants who accept credit or debit cards for payment. If we fail to maintain adequate internal controls, or if our employees fail to comply with our policies and procedures, misappropriation or inappropriate disclosure or misuse of client information could occur. Such internal control inadequacies or non-compliance could materially damage our reputation, lead to remediation costs and civil or criminal penalties. These could have a material adverse effect on our business, financial condition and results of operations. Our information systems may experience interruptions and security breaches. We rely heavily on communications and information systems, including those provided by third-party service providers, to conduct our business. Any failure, interruption, or security breach of these systems could result in failures or disruptions which could affect our customers’ privacy and our customer relationships, generally. Our business continuity plans, including those of our service providers, to provide back-up and restore service may not be effective in the case of widespread outages due to severe weather, natural disasters, pandemics, or power, communications and other failures. Our systems and networks, as well as those of our third-party service providers, are subject to security risks and could be susceptible to cyber-attacks, such as denial of service attacks, hacking, terrorist activities or identity theft. Cybercrime risks have increased as electronic and mobile banking activities increased as a result of the COVID-19 pandemic, and may increase as a result of the Russia invasion of Ukraine. Other financial service institutions and their service providers have reported material security breaches in their websites or other systems, some of which have involved sophisticated and targeted attacks, including use of stolen access credentials, malware, ransomware, phishing and distributed denial-of- service attacks, among other means. Such cyber-attacks may also seek to disrupt the operations of public companies or their business partners, effect unauthorized fund transfers, obtain unauthorized access to confidential information, destroy data, disable or degrade service, or sabotage systems. Denial of service attacks have been launched against a number of financial services institutions, and we may be subject to these types of attacks in the future. Hacking and identity theft risks, in particular, could cause serious reputational harm. Table of Contents 32 Despite our cybersecurity policies and procedures and our Board of Director’s and Management’s efforts to monitor and ensure the integrity of the system we use, we may not be able to anticipate the rapidly evolving security threats, nor may we be able to implement preventive measures effective against all such threats. The techniques used by cyber criminals change frequently, may not be recognize d until launched and can originate from a wide variety of sources, including outside groups such as external service providers, organized crime affiliates, terrorist organizations or hostile foreign governments. These risks may increase in the future as the use of mobile banking and other internet electronic banking continues to grow. Security breaches or failures may have serious adverse financial and other consequences, including significant legal and remediation costs, disruptions to operations, misappropriation of confidential information, damage to systems operated by us or our third-party service providers, as well as damages to our customers and our counterparties. In addition, these events could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations. We may be unable to attract and retain key people to support our business. Our success depends, in large part, on our ability to attract and retain key people. We compete with other financial services companies for people primarily on the basis of compensation and benefits, support services and financial position. Intense competition exists for key employees with demonstrated ability, and we may be unable to hire or retain such employees. Effective succession planning is also important to our long-term success. The unexpected loss of services of one or more of our key persons and failure to ensure effective transfer of knowledge and smooth transitions involving such persons could have a material adverse effect on our business due to loss of their skills, knowledge of our business, their years of industry experience and the potential difficulty of promptly finding qualified replacement employees. Proposed rules implementing the executive compensation provisions of the Dodd-Frank Act may limit the type and structure of compensation arrangements and prohibit the payment of “excessive compensation” to our executives. These restrictions could negatively affect our ability to compete with other companies in recruiting and retaining key personnel. Severe weather and natural disasters, including as a result of climate change, pandemics, epidemics, acts of war or terrorism or other external events could have significant effects on our business. Severe weather and natural disasters, including hurricanes, tornados, drought and floods, epidemics and pandemics, acts of war or terrorism or other external events could have a significant effect on our ability to conduct business. Such events could affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue and/or cause us to incur additional expenses. Although management has established disaster recovery and business continuity policies and procedures, the occurrence of any such event could have a material adverse effect on our business, which, in turn, could have a material adverse effect on our financial condition and results of operations. The COVID-19 pandemic, trade wars, tariffs, and similar events and disputes, domestic and international, have adversely affected, and may continue to adversely affect economic activity globally, nationally and locally. Market interest rates have declined significantly during 2020, and remain low, but may begin increasing in early 2022 due to inflation. Such events also may adversely affect business and consumer confidence, generally. We and our customers, and our respective suppliers, vendors and processors may be adversely affected by rising costs and shortages of needed equipment and supplies. Any such adverse changes may adversely affect our profitability, growth asset quality and financial condition. Table of Contents 33 Financial Risks Our ability to realize our deferred tax assets may be reduced in the future if our estimates of future taxable income from our operations and tax planning strategies do not support this amount, and the amount of net operating loss carry-forwards realizable for income tax purposes may be reduced under Section 382 of the Internal Revenue Code by sales of our capital securities. We are allowed to carry-back losses for two years for Federal income tax purposes. As of December 31, 2022, we had a net deferred tax asset of $0.4 million with gross deferred tax assets of $1.7 million. These and future deferred tax assets may be further reduced in the future if our estimates of future taxable income from our operations and tax planning strategies do not support the amount of the deferred tax asset. The amount of net operating loss carry-forwards realizable for income tax purposes potentially could be further reduced under Section 382 of the Internal Revenue Code by a significant offering and/or other sales of our capital securities. Current bank capital rules also reduce the regulatory capital benefits of deferred tax assets. Our cost of funds may increase as a result of general economic conditions, interest rates, inflation and competitive pressures. The Federal Reserve shifted to a more accommodating monetary policy in Summer 2019. During 2020, the Federal Reserve reduced its federal funds target to 0-0.25% and has made significant monthly purchases of U.S. Treasury and agency mortgage-backed securities to help stimulate the economy, market interest rates have increased, possibly as a result of increased government borrowings to finance rounds of fiscal stimulus and increased inflation expectations resulting from such stimulus and expected increases in economic growth from fiscal and monetary stimulus and COVID-19 vaccinations. Our costs of funds may increase as a result of general economic conditions, increasing interest rates and competitive pressures, and potential inflation resulting from continued government deficit spending and monetary policies, and anticipated changes by the Federal Reserve to a less accommodative monetary policy. Traditionally, we have obtained funds principally through local deposits and borrowings from other institutional lenders, which we believe are a cheaper and more stable source of funds than borrowings. Increases in interest rates may cause consumers to shift their funds to more interest bearing instruments and to increase the competition for and costs of deposits. If customers move money out of bank deposits and into other investment assets or from transaction deposits to higher interest bearing time deposits, we could lose a relatively low cost source of funds, increasing our funding costs and reducing our net interest income and net income. Additionally, any such loss of funds could result in lower loan originations and growth, which could materially and adversely affect our results of operations and financial condition. Our profitability and liquidity may be affected by changes in interest rates and interest rate levels, the shape of the yield curve and economic conditions. Our profitability depends upon net interest income, which is the difference between interest earned on interest-earning assets, such as loans and investments, and interest expense on interest-bearing liabilities, such as deposits and borrowings. Net interest income will be adversely affected if market interest rates on the interest we pay on deposits and borrowings increases faster than the interest earned on loans and investments. Interest rates, and consequently our results of operations, are affected by general economic conditions (national, international and local) and fiscal and monetary policies, as well as expectations of interest rate changes, fiscal and monetary policies and the shape of the yield curve. Our income is primarily driven by the spread between these rates. As a result, a steeper yield curve, meaning long-term interest rates are significantly higher than short-term interest rates, would provide the Bank with a better opportunity to increase net interest income. Conversely, a flattening yield curve could further pressure our net interest margin as our cost of funds increases relative to the spread we can earn on our assets. In addition, net interest income could be affected by asymmetrical changes in the different interest rate indexes, given that not all of our assets or liabilities are priced with the same index. The interest rate reductions by the Federal Reserve and the effects of the COVID-19 pandemic have reduced market rates, which adversely affected our net interest income and our results of operations. The production of mortgages and other loans and the value of collateral securing our loans are dependent on demand within the markets we serve, as well as interest rates. Lower interest rates typically increase mortgage originations, decrease MSR values, and facilitate pandemic-related trends to single family houses. Increases in market interest rates would tend to decrease mortgage originations, increase MSR values and potentially increase net interest spread depending upon the yield curve and the magnitude and duration of interest rate increase. Table of Contents 34 Liquidity risks could affect operations and jeopardize our financial condition. Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, proceeds from loan repayments or sales proceeds from maturing loans and securities, and other sources could have a negative effect on our liquidity. Our funding sources include federal funds purchased, securities sold under repurchase agreements, core and non- core deposits, and short- and long-term debt. We maintain a portfolio of securities that can be used as a source of liquidity. We are also members of the FHLB and the Federal Reserve Bank of Atlanta, where we can obtain advances collateralized with eligible assets. There are other sources of liquidity available to the Company or the Bank should they be needed, including our ability to acquire additional non-core deposits. We may be able, depending upon market conditions, to otherwise borrow money or issue and sell debt and preferred or common securities in public or private transactions. Our access to funding sources in amounts adequate to finance or capitalize our activities on terms which are acceptable to us could be impaired by factors that affect us specifically, or the financial services industry or the economy in general. General conditions that are not specific to us, such as disruptions in the financial markets or negative views and expectations about the prospects for the financial services industry could adversely affect us. The COVID-19 pandemic generally has increased our deposits and at banks, generally, while reducing the interest rates earned on loans and securities. Such excess liquidity and the resulting balance sheet growth requires capital support and may reduce returns on assets and equity. Changes in accounting and tax rules applicable to banks could adversely affect our financial conditions and results of operations. From time to time, the FASB and the SEC change the financial accounting and reporting standards that govern the preparation of our financial statements. These changes can be difficult to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in us restating prior period financial statements . The FASB’s guidance under ASU No. 2016-13 includes significant changes to the manner in which banks’ allowance for loan losses will be effective for us beginning January 1, 2023. Instead of using historical losses, the CECL model is forward-looking with respect to expected losses over the life of loans and other instruments, and could materially affect our results of operations and financial condition, including the variability of our results of operations and our regulatory capital, notwithstanding a three-year phase-in of CECL for regulatory capital purposes. We may need to raise additional capital in the future, but that capital may not be available when it is needed or on favorable terms. We anticipate that our current capital resources will satisfy our capital requirements for the foreseeable future under currently effective rules. We may, however, need to raise additional capital to support our growth or currently unanticipated losses, or to meet the needs of our communities, resulting from failures or cutbacks by our competitors. Our ability to raise additional capital, if needed, will depend, among other things, on conditions in the capital markets at that time, which are limited by events outside our control, and on our financial performance. If we cannot raise additional capital on acceptable terms when needed, our ability to further expand our operations through internal growth and acquisitions could be limited. Our associates may take excessive risks which could negatively affect our financial condition and business. Banks are in the business of accepting certain risks. Our executive officers and other members of management, sales intermediaries, investment professionals, product managers, and other associates, make decisions and choices that involve exposing us to risk. We endeavor, in the design and implementation of our compensation programs and practices, to avoid giving our associates incentives to take excessive risks; however, associates may nonetheless take such risks. Similarly, although we employ controls and procedures designed to prevent misconduct, to monitor associates’ business decisions and prevent them from taking excessive risks, these controls and procedures may not be effective. If our associates take excessive risks, risks to our reputation, financial condition and business operations could be materially and adversely affected. Table of Contents 35 Our ability to continue to pay dividends to shareholders in the future is subject to our profitability, capital, liquidity and regulatory requirements and these limitations may prevent or limit future dividends. Cash available to pay dividends to our shareholders is derived primarily from dividends paid to the Company by the Bank. The ability of the Bank to pay dividends, as well as our ability to pay dividends to our shareholders, will continue to be subject to and limited by laws limiting dividend payments by the Bank, the results of operations of our subsidiaries and our need to maintain appropriate liquidity and capital at all levels of our business consistent with regulatory requirements and the needs of our businesses. See “Supervision and Regulation”. A limited trading market exists for our common shares, which could result in price volatility. Your ability to sell or purchase common shares depends upon the existence of an active trading market for our common stock. Although our common stock is quoted on the Nasdaq Global Market under the trading symbol “AUBN,” our historic trading volume has been limited historically. As a result, you may be unable to sell or purchase shares of our common stock at the volume, price and time that you desire. Additionally, whether the purchase or sales prices of our common stock reflects a reasonable valuation of our common stock also is affected by limited trading market, and thus the price you receive for a thinly-traded stock such as our common stock, may not reflect its true or intrinsic value. The limited trading market for our common stock may cause fluctuations in the market value of our common stock to be exaggerated, leading to price volatility in excess of that which would occur in a more active trading market. Legal and Regulatory Risks The Company is an entity separate and distinct from the Bank. The Company is an entity separate and distinct from the Bank. Company transactions with the Bank are limited by Sections 23A and 23B of the Federal Reserve Act and Federal Reserve Regulation W. We depend upon the Bank’s earnings and dividends, which are limited by law and regulatory policies and actions, for cash to pay the Company’s debt and corporate obligations, and to pay dividends to our shareholders. If the Bank’s ability to pay dividends to the Company was terminated or limited, the Company’s liquidity and financial condition could be materially and adversely affected. Legislative and regulatory changes The Biden Administration is appointing new members to FDIC and Federal Reserve Board, and has appointed an acting Comptroller of the Currency and a new full time CFPB director. This Administration and its appointees propose changes to bank regulation and corporate tax changes that could have an adverse effect on our results of operations and financial conditions. We are subject to extensive regulation that could limit or restrict our activities and adversely affect our earnings. We and our subsidiaries are regulated by several regulators, including the Federal Reserve, the Alabama Superintendent, the SEC and the FDIC. Our success is affected by state and federal laws and regulations affecting banks and bank holding companies, and the securities markets, and our costs of compliance could adversely affect our earnings. Banking regulations are primarily intended to protect depositors, and the FDIC Deposit Insurance Fund (“DIF”), not shareholders. The financial services industry also is subject to frequent legislative and regulatory changes and proposed changes. In addition, the interpretations of regulations by regulators may change and statutes may be enacted with retroactive impact. From time to time, regulators raise issues during examinations of us which, if not determined satisfactorily, could have a material adverse effect on us. Compliance with applicable laws and regulations is time consuming and costly and may affect our profitability. The position of the President and his administration that took office in January 2021 with respect to regulation of banks and bank holding companies is not yet fully known, but their views and actions could have a material adverse effect on financial services regulation, generally. Table of Contents 36 Litigation and regulatory actions could harm our reputation and adversely affect our results of operations and financial condition. A substantial legal liability or a significant regulatory action against us, as well as regulatory inquiries or investigations, could harm our reputation, result in material fines or penalties, result in significant legal and other costs, divert management resources away from our business, and otherwise have a material adverse effect on our ability to expand on our existing business, financial condition and results of operations. Even if we ultimately prevail in litigation, regulatory investigation or action, our ability to attract new customers, retain our current customers and recruit and retain employees could be materially and adversely affected. Regulatory inquiries and litigation may also adversely affect the prices or volatility of our securities specifically, or the securities of our industry, generally. We are required to maintain capital to meet regulatory requirements, and if we fail to maintain sufficient capital, our financial condition, liquidity and results of operations would be adversely affected. We and the Bank must meet regulatory capital requirements and maintain sufficient liquidity, including liquidity at the Company, as well as the Bank. If we fail to meet these capital and other regulatory requirements, including more rigorous requirements arising from our regulators’ implementation of Basel III, our financial condition, liquidity and results of operations would be materially and adversely affected. Our failure to remain “well capitalized” and “well managed”, including meeting the Basel III capital conservation buffers, for bank regulatory purposes, could affect customer confidence, our ability to grow, our costs of funds and FDIC insurance, our ability to raise brokered deposits, our ability to pay dividends on our common stock and our ability to make acquisitions, and we may no longer meet the requirements for becoming a financial holding company. These could also affect our ability to use discretionary bonuses to attract and retain quality personnel. The Basel III Capital Rules include a minimum ratio of common equity tier 1 capital, or CET1, to risk- weighted assets of 4.5% and a capital conservation buffer of 2.5% of risk-weighted assets. See “Supervision and Regulation—Basel III Capital Rules.” Although we currently have capital ratios that exceed all these minimum levels and a strategic plan to maintain these levels, we or the Bank may be unable to continue to satisfy the capital adequacy requirements for various reasons, which may include: • losses and/or increases in the Bank’s credit risk assets and expected losses resulting from the deterioration in the creditworthiness of borrowers and the issuers of equity and debt securities; • difficulty in refinancing or issuing instruments upon redemption or at maturity of such instruments to raise capital under acceptable terms and conditions; • declines in the value of our securities portfolios; • revisions to the regulations or their application by our regulators that increase our capital requirements; • reduced total earnings on our assets will reduce our internal generation of capital available to support our balance sheet growth; • reductions in the value of our MSRs and DTAs; and other adverse developments; and • unexpected growth and an inability to increase capital timely. A failure to remain “well capitalized,” for bank regulatory purposes, including meeting the Basel III Capital Rule’s conservation buffer, could adversely affect customer confidence, and our: • ability to grow; • the costs of and availability of funds; • FDIC deposit insurance premiums; • ability to raise or replace brokered deposits; • ability to pay or increase dividends on our capital stock. Table of Contents 37 • ability to make discretionary bonuses to attract and retain quality personnel; • ability to make acquisitions or engage in new activities; • flexibility if we become subject to prompt corrective action restrictions; • ability to make payments of principal and interest on our capital instruments; and The Federal Reserve may require us to commit capital resources to support the Bank. As a matter of policy, the Federal Reserve expects a bank holding company to act as a source of financial and managerial strength to a subsidiary bank and to commit resources to support such subsidiary bank. The Federal Reserve may require a bank holding company to make capital injections into a troubled subsidiary bank. In addition, the Dodd-Frank Act amended the FDI Act to require that all companies that control a FDIC-insured depository institution serve as a source of financial strength to their depository institution subsidiaries. Under these requirements, we could be required to provide financial assistance to the Bank should it experience financial distress, even if further investment was not otherwise warranted. See “Supervision and Regulation.” Our operations are subject to risk of loss from unfavorable fiscal, monetary and political developments in the U.S. Our businesses and earnings are affected by the fiscal, monetary and other policies and actions of various U.S. governmental and regulatory authorities. Changes in these are beyond our control and are difficult to predict and, consequently, changes in these policies could have negative effects on our activities and results of operations. Failures of the executive and legislative branches to agree on spending plans and budgets previously have led to Federal government shutdowns, which may adversely affect the U.S. economy. Additionally, any prolonged government shutdown may inhibit our ability to evaluate the economy, generally, and affect government workers who are not paid during such events, and where the absence of government services and data could adversely affect consumer and business sentiment, our local economy and our customers and therefore our business. Litigation and regulatory investigations are increasingly common in our businesses and may result in significant financial losses and/or harm to our reputation. We face risks of litigation and regulatory investigations and actions in the ordinary course of operating our businesses, including the risk of class action lawsuits. Plaintiffs in class action and other lawsuits against us may seek very large and/or indeterminate amounts, including punitive and treble damages. Due to the vagaries of litigation, the ultimate outcome of litigation and the amount or range of potential loss at particular points in time may be difficult to ascertain. We do not have any material pending litigation or regulatory matters affecting us. Failures to comply with the fair lending laws, CFPB regulati ons or the Community Reinvestment Act, or CRA, could adversely affect us. The Bank is subject to, among other things, the provisions of the Equal Credit Opportunity Act, or ECOA, and the Fair Housing Act, both of which prohibit discrimination based on race or color, religion, national origin, sex and familial status in any aspect of a consumer, commercial credit or residential real estate transaction. The DOJ and the federal bank regulatory agencies have issued an Interagency Policy Statement on Discrimination in Lending have provided guidance to financial institutions to evaluate whether discrimination exists and how the agencies will respond to lending discrimination, and what steps lenders might take to prevent discriminatory lending practices. Failures to comply with ECOA, the Fair Housing Act and other fair lending laws and regulations, including CFPB regulations, could subject us to enforcement actions or litigation, and could have a material adverse effect on our business financial condition and results of operations. Our Bank is also subject to the CRA and periodic CRA examinations. The CRA requires us to serve our entire communities, including low- and moderate-income neighborhoods. Our CRA ratings could be adversely affected by actual or alleged violations of the fair lending or consumer financial protection laws. Even though we have maintained an “satisfactory” CRA rating since 2000, we cannot predict our future CRA ratings. Violations of fair lending laws or if our CRA rating falls to less than “satisfactory” could adversely affect our business, including expansion through branching or acquisitions. Table of Contents 38 COVID-19 Risks The COVID-19 pandemic may continue to adversely affect our business, financial condition and results of operations. The ultimate effects of the pandemic on us will depend on the severity, scope and duration of the pandemic, its cumulative economic effects, governmental actions in response to the pandemic, and the restoration of a more normal economy. The COVID-19 national health emergency has significantly disrupted the United States and international economies and financial markets. We expect that the COVID-19 pandemic and its effects will continue to adversely affect our business, financial condition and results of operations in future periods. The spread of COVID-19 has caused illness, quarantines, cancellation of events and travel, business and school shutdowns, reductions in business activity and financial transactions, supply chain interruptions and overall economic and financial market instability. The State of Alabama and many other states have taken preventative and protective actions, such as imposing a statewide mask mandate, restrictions on travel, business operations, public gatherings, social distancing, advising or requiring individuals to limit or forego their time outside of their homes, and ordering temporary closures of non-essential businesses. Though various of these measures have been relaxed or eliminated, the pandemic has moved in disruptive and unpredictable waves. The travel, hospitality and food and beverage industries, restaurants, retailers and auto manufacturers, and their suppliers have been severely affected. A significant number of layoffs, furloughs of employees, as well as remote work have occurred in these and other industries, including government offices, schools and universities. Auburn University held virtual classes only from March 16, 2020 through the summer session. The auto industry’s production and sales continue to be adversely affected by supply chain disruptions. Hyundai and Kia are major direct and indirect employers in our area. The ultimate effects of the COVID-19 pandemic on the economy, generally, our markets, and on us cannot be predicted. The timing and effects of the COVID-19 pandemic on our business, results of operations and financial condition may include, among various other consequences, the following. These effects depend on the severity, scope and duration of the pandemic, its cumulative economic effects, and the effectiveness of healthcare, business and governmental actions addressing the pandemic’s effects, including vaccinations. • Employees’ health could be adversely affected, necessitating their recovery away from work; • Unavailability of key personnel necessary to conduct our business activities; • Our operating effectiveness may be reduced as our employees work from home or suffer from the COVID-19 virus; • Shelter in place, remote work or other restrictions and interruptions of our business and contact with our customers; • Sustained closures of our branch lobbies or the offices of our customers; • Declines in demand for loans and other banking services and products, and reduced usage and interchange fees on our payment cards; • Continuing large scale fiscal and monetary stimulus actions may stabilize the economy, but may increase economic and market risks, including valuation “bubbles,” volatility in various assets and inflation; • Inflation and increases in interest rates may result from fiscal stimulus and monetary stimulus, and the Federal Reserve has indicated it is willing to permit inflation to run moderately above its 2% target for some time, but is considering raising interest rates and reducing its securities holdings as a result of inflation that is substantially higher than the Federal Reserve’s target range; • Increased savings and debt reduction by consumers could reduce demand for credit and our earning assets; • Significant volatility in United States financial markets and our investment securities portfolio, including credit concerns in municipal securities; • Declines in the credit quality of our loan portfolio, owing to the effects of the COVID-19 pandemic in the markets we serve, leading to increased provisions for loan losses and increases in our allowance for possible credit losses; Table of Contents 39 • Declines in the value of collateral for loans, including real estate collateral, especially in industries such as travel, hospitality, restaurants and retailers; • Declines in the net worth and liquidity of borrowers, impairing their ability to pay timely their loan obligations to us; • Generally low market interest rates that reduce our net interest income and our profitability; • Loan deferrals and loan modifications, and mortgage foreclosure moratoria, including those mandated by law, or which are encouraged by our regulators, may increase our expense and risks of collectability, reduce our cash flows and liquidity and adversely affect our results of operations and financial condition; • The end of temporary regulatory accounting and capital relief for banks regarding the effects of the COVID-19 pandemic, including loan deferrals and modifications, could increase our TDRs and require additions to our allowance for loan losses, which may adversely affect our income, financial condition and capital; • Our waiver of various fees and service charges to support our customers and communities will adversely affect our results of operation and our liquidity and financial position; • The COVID-19 pandemic may change customer financial behaviors and payment practices. Electronic banking could become more popular with less customers doing business at our offices; • Certain of our assets, including loans and securities, may become impaired, which would adversely affect our results of operation and financial condition and mortgage loan foreclosure moratoria may limit our ability to timely act to protect our interests in the loan collateral; • Reductions in income or losses will adversely affect our capital and growth of capital, including our capital for bank regulatory purposes; • Losses or reductions in net income may adversely affect the growth or amount of dividends we can pay on our common stock; • The effects of government fiscal and monetary policies, including changes in such policies, or the effects of COVID-19 relief programs are discontinued, on the economy and financial stability, generally, and on our business, results of operations and financial condition cannot be predicted; • Cybercriminals may increase their attempts to compromise business and consumer emails, including an increase in phishing attempts, and fraudulent vendors or other parties may view the pandemic as an opportunity to prey upon consumers and businesses during this time. • The restoration of financial stability and economic growth may depend on the health care system developing and deploying COVID-19 testing and contact tracing, and delivery of COVID-19 vaccines, which promote consumer and employee health and confidence in the economy. These factors, together or in combination with other events or occurrences that are unknown or anticipated, may materially and adversely affect our business, financial condition and results of operations. Our stock price may reflect securities market conditions The ongoing COVID-19 pandemic has resulted in substantial securities market volatility, especially for bank stocks and has, and may continue to, adversely affect the market of our common stock. The spread, intensification and duration of COVID-19 pandemic, as well as the effectiveness of governmental, fiscal and monetary policies, and regulatory responses to the pandemic, further affect the financial markets and the market prices for securities generally, and the market prices for bank stocks, including our common stock. The stock market’s gains due to a concentration of high growth companies has been adversely affected by inflation and expectation of higher interest rates and the Russia invasion of Ukraine in February 2022. Table of Contents 40 The COVID-19 global pandemic could result in deterioration of asset quality and an increase in credit losses. Many businesses have had, and may continue to have lower revenues and cash flows and many consumers will have lower income as a result of COVID-19. These could result in an inability to repay loans timely in full, reduce our asset quality and reduce our deposits. Loan modifications and payment deferrals may also increase our credit risks, especially when temporary regulatory relief for these actions expires. Our business, results of operations, liquidity and financial condition could be adversely affected. As a participating lender in the PPP, the Bank is subject to additional risks of litigation from the Bank’s customers or other parties regarding the Bank’s processing of loans for the PPP and risks that the SBA may not fund some or all PPP loan guaranties. The CARES Act, Paycheck Protection Program and Healthcare Enhancement Act and Economic Aid Act appropriated more than $1 trillion in funding for PPP loans administered through by the SBA and the U.S. Department of the Treasury. Under the PPP, eligible small businesses and other entities and individuals can apply for loans from existing SBA lenders and other approved PPP lenders, subject to numerous limitations and eligibility criteria. The Bank is participating as a lender in the PPP and made a total of $56.7 million of PPP loans in 2020 and 2021. The PPP loans charge 1% interest annually. Forgiveness of these loans has been slow, and PPP loans earn less than market rates. Since the opening of the PPP, various banks have been subject to litigation regarding the process and procedures used in processing applications for the PPP, and greater governmental attention is directed at preventing fraud. We may be exposed to similar litigation risks, from both customers and non-customers that approached the Bank regarding PPP loans we extended. If any such litigation is filed against the Bank and is not resolved favorably to the Bank, it may result in financial liability or adversely affect our reputation. Litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP related litigation could have a material adverse effect on our business, financial condition and results of operations. The Bank also has credit risk on PPP loans, if the SBA determines deficiencies in the manner in which PPP loans were originated, funded or serviced by the Bank, such as an issue with the eligibility of a borrower to receive a PPP loan, or obtain forgiveness of a PPP properly, including those related to the ambiguities in the laws, rules and guidance regarding the PPP’s operation. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there were one or more deficiencies in the manner in which the PPP loan was originated, funded, or serviced by the Company, the SBA may deny its liability under the PPP loan guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from the Company. Similar issues may also result in the denial of forgiveness of PPP loans, which could expose us to potential borrower bankruptcies and potential losses and additional costs. At December 31, 2021 we had $8.1 million PPP loans outstanding and had not realized any losses on such loans.