What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-04 compared with 2022-05-05 · 678 added, 425 removed, 1205 unchanged (48% of the section changed)

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OF FINANCIAL CONDITION AND RESULTS

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

various factors related to the results

The following discussion and analysis is designed to provide a better

understanding of various factors related to the results

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

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financial statements and related

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

in our Annual Report on Form

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

notes for the quarters and six months ended June 30, 2022 and 2021, as well as the information

contained in our Annual

Report on Form 10-K for the year ended December 31, 2021 and our Quarterly Reports on

Special Notice Regarding Forward-Looking Statements

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

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

and tornados, COVID-19 or other epidemics or pandemics including supply chain disruptions,

inventory volatility,

and changes in consumer behaviors;

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

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of COVID-19 fiscal and monetary

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

stimulus, and changes in monetary policies in response to inflations including increases

in the Federal Reserve’s

target federal funds rate and reductions in the Federal Reserve’s

holdings of securities;

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

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

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

changes in borrower credit risks, and savings payment behaviors;

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

changes in borrower liquidity and credit risks, and savings, deposit and payment behaviors;

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

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

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

upon completion of the

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

from third parties following

the June 2022 opening of this building, and the timing and amount of the sale of approximately

0.85 acres of land

next to the Company’s headquarters for

development by a third party as a hotel;

the risks of mergers, acquisitions and divestitures, including,

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

changes in technology or products that may be more difficult,

costly, or less effective than

changes in technology or products that may be more difficult, costly,

or less effective than anticipated;

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

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may be able to utilize for income tax

the timing and amount of any credit approved by the Internal Revenue Service (“IRS”)

resulting from our planned

filing, seeking an Employee Retention Credit, which we believe we are eligible

for under the CARES Act and the

2020 Consolidated Appropriations Act;

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

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

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

such statements otherwise are

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

dates on which such statements otherwise are

Auburn National Bancorporation, Inc.

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Summary of Results of Operations

Quarter ended March 31,

(Dollars in thousands, except per share data)

Quarter ended June 30,

Six months ended June 30,

(Dollars in thousands, except per share amounts)

Net interest income (a)

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(a) Tax-equivalent.

See "Table 1 - Explanation of Non-GAAP

Financial Measures."

See "Table 1 - Explanation of Non-GAAP Financial Measures."

Financial Summary

The Company’s net earnings were $3.9

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

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

to $0.56 per share

for the first quarter of 2021.

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

a 2% increase compared to $6.1 million

for the first quarter of 2021.

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

by a decrease in the

Company’s net interest margin

(tax-equivalent).

million for the first six months of 2022, compared to $4.3 million for the first six

months of 2021.

Basic and diluted earnings per share were $1.10 per share for the first six months of 2022,

$1.21 per share for the first six months of 2021.

Net interest income (tax-equivalent) was $12.7 million for the first six

months of 2022, a 4% increase compared to $12.2

million for the first six months of 2021.

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

decrease in the Company’s net

interest margin (tax-equivalent).

Net interest margin (tax-equivalent) declined to 2.51%

in the first quarter

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

rate environment and changes

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

Net interest income (tax-equivalent)

included $0.1

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

million for the

first quarter of 2021.

At March 31, 2022, the Company’s allowance

the first six months of 2022, compared to 2.63% for the first six months of 2021

due to the continued lower interest rate

environment through most of the first quarter followed by increases in the Federal Reserve’s

target federal funds rates

beginning March 16, 2022, and changes in our asset mix resulting from the continuing

elevated levels of customer deposits.

Net interest income (tax-equivalent) included $0.3 million in PPP loan fees, net of related costs for

the first six months of

2022, compared to $0.4 million for the first six months of 2021.

At June 30, 2022, the Company’s allowance

for loan losses was $4.7 million, or 1.07% of total loans, compared to $4.9

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

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

million, or 1.12% of total loans, at June 30, 2021.

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

million during the first quarter of 2022,

compared to no

provision for loan losses during the first quarter of 2021.

The negative provision for loan losses was primarily related to a

decrease in total loans, excluding PPP,

during the first quarter of 2022.

Total loans, excluding PPP,

were $424.3 million at

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

December 31, 2021.

This decline was primarily due to

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

million due to payoffs.

The provision for loan

losses is based upon various estimates and judgments, including the absolute level of loans,

economic conditions, credit

quality and the amount of net charge-offs.

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

$1.2 million for the first quarter of

million and $0.6 million during the first six months of

2022 and 2021, respectively.

The negative provision for loan losses during 2022 was primarily related to

a decrease in total

loans, excluding PPP,

during the first six months of 2022.

The negative provision for loan losses during 2021 was

primarily related to improvements in economic conditions in our primary market

area, and related improvements in our

asset quality.

The provision for loan losses is based upon various estimates and judgments,

including the absolute level of

loans, economic conditions, credit quality and the amount of net charge

Noninterest income was $1.8 million for the first six months of 2022

compared to $2.3 million for the first six months of

The decrease in noninterest income was primarily due to a decrease

in mortgage lending income of $0.3 million as

in mortgage lending income of $0.5

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

on mortgage loans increased.

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

$4.7 million for the first quarter of 2021.

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

expense and other noninterest expense.

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

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

Noninterest expense was $10.0 million for the first six months of 2022 compared

to $9.6 million for the first six months of

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

of $0.2 million and net

occupancy and equipment expense of $0.3 million related to the Company’s

new headquarters,

partially offset

decrease in professional fees of $0.1 million.

Income tax expense was $0.6 million for the first six months of 2022

compared to $0.9

million during the first six months

The Company’s effective tax

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

rate for the first six months of 2022 was 13.71%, compared to 17.76% in the first six

months of 2021.

The decrease was primarily due to an income tax benefit related to a New Markets Tax

Credit investment funded in the

fourth quarter of 2021.

Credit investment

funded in the fourth quarter of 2021.

The Company’s effective income

tax rate is principally impacted by tax-exempt earnings from the

Company’s investments in municipal securities,

bank-owned life insurance, and New Markets Tax

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

tax rate is principally impacted by tax-exempt

earnings from the Company’s

investments in municipal securities, bank-owned life insurance, and New Markets

The Company paid cash dividends of $0.53 per share in the first six months of 2022,

an increase of 2% from the same

period of 2021.

The Company’s share repurchases of $0.

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

common shares at March 31, 2022.

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

were well above the minimum

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

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

a tier 1 leverage ratio of 9.09%

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

at March 31, 2022.

million since December 31, 2021 resulted in 10,640 fewer

outstanding common shares at June 30, 2022.

At June 30, 2022, the Bank’s regulatory capital ratios

were well above the

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

standards with a total risk-based capital ratio

of 17.38%, a tier 1 leverage ratio of 9.16 % and a common equity tier 1 (“CET1”)

ratio of 16.59 % at June 30, 2022.

For the second quarter of 2022, net earnings were $1.8 million, or $0.51

per share, compared to $2.3 million, or $0.65 per

share, for the second quarter of 2021.

Net interest income (tax-equivalent) was $6.5 million for the second quarter of 2022,

a 6% increase compared to $6.1

million for the second quarter of 2021.

This increase was primarily due to balance sheet

growth, and recent increases in market interest rates.

The Federal Reserve increased the target federal funds range by 25

basis points on March 27, 2022, 50 basis points on May 5 and 75 basis points on each of June

16 and July 27.

increases in the target federal funds rate are possible if inflation remains elevated.

The Company’s net interest

equivalent) was 2.60% in the second quarter of 2022 and 2021.

Net interest income

(tax-equivalent) included $0.1

in PPP loan fees, net of related costs for the second quarter of 2022 and

$0.2 million in the second quarter of 2021.

Company had no provision for loan losses during the second quarter of 2022

compared to a negative provision for loan

losses of $0.6 million during the second quarter 2021.

Noninterest income was $0.8 million in the second quarter of 2022,

compared to $1.1 million in the second quarter of 2021.

The decrease in noninterest income was primarily due to a

decrease in mortgage lending income of $0.2

million as refinance activity slowed in our primary market area, as market

interest rates on mortgage loans increased.

Noninterest expense was $5.1 million in the second quarter of 2022,

to $4.9 million for the second quarter of 2021.

The increase in noninterest expense was primarily due to an increase in net

occupancy and equipment expense of $0.3 million related to the Company’s

new headquarters, which opened in June 2022.

Income tax expense was $0.4

million for the second quarter of 2022 compared to $0.5 million for the second quarter

The Company's effective tax rate for the second quarter of 2022

was 16.77%, compared to 18.06% in the second

quarter of 2021.

This decrease was primarily due to an income tax benefit related to a New Markets Tax

Credit investment

funded in the fourth quarter of 2021.

The Company’s effective

income tax rate is principally impacted by tax-exempt

earnings from the Company’s

investment in municipal securities, bank-owned life insurance,

and New Markets Tax

We entered into a contract

on February 15, 2022 to sell approximately 0.85 acres of land to a third party,

where our former

headquarters building was located.

The land, which is adjacent to our new

headquarters, has been cleared and site

improvements, which are a condition to the buyer’s obligation to

close its purchase, are being made.

The sale includes all

appurtenances, privileges, development and rights for an aggregate purchase

price of $4.26 million, net of estimated

prorations and closing costs.

The principal owner of the purchaser and

his related interests are Bank customers and are

among the Bank’s largest borrowers.

All such loans and deposits are in the ordinary course of the Bank’s

business upon

market terms and conditions not more favorable than similarly situated customers.

Bank entered into the agreement on

an arms-length basis in consultation with the Bank’s

real estate developer, and the agreement is on

market terms and

The agreement contains various other terms, representations, warranties, covenants

and closing conditions that are

customary for transactions similar to the sale.

The purchaser has a 180 day inspection period

ending on August 14, 2022

subject to up to 3 possible extensions, to complete all its due diligence, inspections and reviews,

and receive its necessary

The closing is subject to the completion of such matters satisfactory to the

purchaser, the satisfaction of the

agreement’s other terms, including customary

closing conditions, and the negotiation and execution of various use and

other ancillary agreements and may be extended.

The purchaser’s obligations

to close are not contingent upon the purchaser

obtaining financing.

The sale of the property is expected to close 30 days following the

later of (a) the expiration of the

inspection period and (b) the satisfaction of all the closing conditions.

Upon closing, the

Company currently expects the

sale to be accretive to earnings by approximately $0.70 per share.

Currently, the Bank expects the transaction

to close later

We also intend to file a request

with the IRS for an employee retention credit of $1.6 million, or approximately $1.2

net of estimated income tax effects, or approximately $0.33 per

share, under the CARES Act and the 2022 Consolidated

Appropriations Act.

IRS action on this request, including its timing and the amount of any credit

approved by the IRS,

cannot be predicted.

See “COVID-19 Impact Assessment.”

COVID-19 Impact Assessment

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has severely restricted the level of economic activity in our markets.

In response to the COVID

-19 pandemic, the State of

In response to the

COVID-19 pandemic, the State of

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

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customers and vendors.

Our business, financial condition and results of operations

generally rely upon the ability of our

Our business, financial condition and results of oper

ations generally rely upon the ability of our

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

our secured loans, market value,

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

we offer, all of which are affected

stability and liquidity and demand for loans and other products and services we offer,

all of which are affected by the

We have implemented

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

were an active PPP

PPP loans were forgivable,

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

were an active PPP lender.

PPP loans were forgiva

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

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

These loans carry a fixed rate of

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

made on or after June 5,

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

or five years (loans made on or after June 5,

2020), if not forgiven, in whole or in part.

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These include supply chain disruptions and manufacturing

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

on hospitality and travel, and migration from

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

hospitality and travel, and migration from

larger urban centers to less populated areas and remote work.

demand for single family housing has exceeded existing

When coupled with construction delays attributable to supply chain disrupti

ons and worker shortages, these

When coupled with construction delays attributable to supply chain disruptions

and worker shortages, these

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

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

prices have led to the highest inflation in

Although fiscal stimulus remains under consideration by the President

and Congress, the Federal Reserve has

begun increasing its target interest rates and is considering reducing its

reflecting, among other things, the

war in the Ukraine, have led to the highest inflation in decades.

Although fiscal stimulus remains

under consideration by

the President and Congress, the Federal Reserve has begun increasing its target

interest rates and is considering reducing its

of securities to counteract inflation.

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approximately $1.5 million in fees from the SBA related to our PPP loans during 2020.

Through December

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

As of December

31, 2021, we had received payments

As of December 31, 2021, we had received payments

and forgiveness on all PPP loans extended during 2020.

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Up to $350,000

approximately $1.0 million in fees from the SBA related to PPP loans under the Economic

March 31, 2022, we have recognized $0.8

approximately $1.0 million in fees from the SBA related to PPP loans under the Economic Aid

June 30, 2022, we have recognized $0.9

million of these fees, net of related costs.

As of March 31, 2022, we have

received payments and forgiveness on 172 PPP loans under

the Economic Aid Act, totaling $16.1 million.

The outstanding

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

$4.1 million at March 31, 2022.

As of June 30, 2022, we have received

payments and forgiveness on 240 PPP loans under the Economic

Aid Act, totaling $19.6 million.

The outstanding balance

for the remaining 14 PPP loans under the Economic Aid Act was approximately $0.6

million at June 30, 2022.

We continue to closely

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developments as

Our results of operations for quarter

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

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

future results or financial conditions, including possible

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

or extension of temporary accounting and

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

As of March 31, 2022,

all of our capital ratios were in excess of all regulatory requirements to be

well capitalized.

Our results of operations for the

six months ended June 30, 2022, and our financial condition at that date

reflect only the ongoing effects of the pandemic, and may not

be indicative of future results or financial conditions,

including possible changes in monetary or fiscal stimulus, and the possible effects

of the expiration or extension of

temporary accounting and bank regulatory relief measures in response to the COVID

-19 pandemic.

As of June 30, 2022,

all of our capital ratios were in excess of all regulatory requirements to be well capitalized.

continuing effects of the COVID-19 pandemic could result in adverse

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economic activity.

Continuing supply chain and supply disruptions also adversely affect

the levels and costs of economic

Continuing supply chain and supply disruptions also adversely affect the

levels and costs of economic

We continue to closely

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and to address developments as those occur.

The CARES Act and the 2020 Consolidated Appropriations Act provide eligible

employers an employee retention credit

related to COVID-19.

After consultation with our tax advisors, we believe we are eligible, subject

to the finalization and

filing of our request with the IRS, and approval of such request by the IRS, of an estimated

employee retention credit of

$1.6 million, or approximately $1.2 million, net of estimated income tax effects,

or approximately $0.33 per share.

action on this request, including its timing and the amount of any credit approved

by the IRS, cannot be predicted.

CRITICAL ACCOUNTING POLICIES

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composition of the loan portfolio, economic

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

recommendations.

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

regulatory recommendations.

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

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

charged off, in whole or

Loans are charged off, in whole or

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

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impairment is recognized through the allowance.

Loans that are impaired are

recorded at the present value of expected

Loans that are impaired

are recorded at the present value of expected

future cash flows discounted at the loan’s effective

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

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

to absorb probable losses inherent in the

portfolio at the balance sheet date.

The allowance is increased by provisions charged

to expense and decreased by charge-

offs, net of recoveries of amounts previously charged-off

and by releases from the allowance when determined to be

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

The level of allowance maintained is believed by management, based on its processes and

estimates, to be adequate to

absorb probable losses inherent in the portfolio at the balance sheet date.

allowance is increased by provisions charged

to expense and decreased by charge-offs, net of recoveries of amounts

previously charged-off and by releases from the

allowance when determined to be appropriate to the levels of loans and probable

loan losses in such loans.

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

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entire loan portfolio.

Company’s loan review process includes the judgment

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

Company’s loan review process includes the

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

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

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

that it will be able to collect all

incorporates loan review results in the determination of whether or

not it is probable that it will be able to collect all

amounts due according to the contractual terms of a loan.

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

At March 31, 2022 and December 31, 2021, and for the periods then ended, the Company

adjusted its historical

loss rates for the commercial real estate portfolio segment based, in part, on loss rates of peer bank groups.

At June 30, 2022 and December 31, 2021, and for the periods

then ended, the Company adjusted its historical loss

rates for the commercial real estate portfolio segment based, in part, on loss rates of peer bank

The estimated loan loss allocation for all five loan portfolio segments is then adjusted for management’s

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assessment of these factors.

The Company regularly re-evaluates its practices in determining the allowance for

The Company regularly re-evaluates its practices in determining the allowance

for loan losses.

The Company’s look-back

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in its loss history.

Company believes

The Company believes

this look-back period is appropriate due to the risks inherent in the loan portfolio.

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For the quarter ended

March 31, 2022, the Company increased its

June 30, 2022, the Company increased its

look-back period to 53 quarters to continue to include losses incurred by the Company beginning

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cost basis of the debt security.

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

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

be required to sell the debt security before recovery,

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the other-than-temporary impairment write-

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

all other factors.

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

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

the security’s amortized cost basis and

the security’s amortized cost basis

present value of its expected future cash flows.

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Measurements and Disclosures

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

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

accordance with U.S.

GAAP and expands

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best estimates for appropriate discount rates, default rates,

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

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

market data and experience.

These assumptions may have a significant effect on the reported

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market volatility.

As a result, the net proceeds

As a result, the

realized from sales transactions could differ significantly from appraisals,

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

ultimate realization of deferred tax assets

realization of deferred tax assets

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

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planning strategies in making this assessment.

Based upon the level of taxable income over

the last three years and

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

deductible, management believes

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

at March 31, 2022.

The amount of

the deferred tax assets considered realizable, however,

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

At June 30, 2022

we had total deferred tax assets of $10.3 million included

as “other assets”, including $9.5 million resulting from unrealized losses in our securities

Based upon the level of

taxable income over the last three years and projections for future taxable income over the

periods in which the deferred tax

assets are deductible, management believes it is more likely than not that we

will realize the benefits of these deductible

differences at June 30, 2022.

The amount of the deferred tax assets considered

realizable, however, could be reduced if

estimates of future taxable income are reduced.

OF OPERATIONS

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Sheet and Interest Rates

Quarter ended March 31,

Six months ended June 30,

(Dollars in thousands)

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Net Interest Income and Margin

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

a 2% increase compared to $6.1 million

for the first quarter of 2021.

Net interest income (tax-equivalent) was $12.7 million for the first six

months of 2022,

a 4% increase compared to $12.2

million for the first six months of 2021.

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

by a decrease in the

Company’s net interest margin

(tax-equivalent).

decrease in the Company’s net

interest margin (tax-equivalent).

Net interest margin (tax-equivalent) declined to 2.51% in

the first six months of 2022, compared to 2.63% for the first six months of 2021

due to the continued lower interest rate

environment and changes in our asset mix resulting from the continuing elevated

levels of customer deposits.

Reserve increased the target federal funds range by 25 basis points on March 27,

2022, 50 basis points on May 5 and 75

basis points on each of June 16 and July 27.

Further increases in the target federal funds rate are possible if inflation

remains elevated.

Net interest income (tax-equivalent) included $0.3 million in PPP loan fees, net of related

costs for the

first six months of 2022, compared to $0.4 million for the first six months of 2021.

The tax-equivalent yield on total interest-earning assets decreased by 17 basis points

to 2.66% in the first quarter of 2022

compared to 2.96%

in the first quarter of 2021.

This decrease was primarily due to the lower interest environment and

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

to 2.74% in the first six months of

2022 compared to 2.91% in the first six months of 2021.

This decrease was primarily due to changes in our asset mix

resulting from the significant increase in customer deposits.

The cost of total interest-bearing liabilities decreased by 9 basis points to 0.33%

in the first quarter of 2022 compared to

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

The net decrease in our funding costs was

primarily due to lower prevailing market interest rates.

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

earning assets.

in the first six months of 2022 compared to

0.42% in the first six months of 2021, even as interest bearing deposits increased.

The net decrease in our funding costs

was primarily due to lower prevailing market interest rates through most of the

first quarter of 2022.

Our funding costs

declined less than the rates earned on our interest earning assets.

Our deposit costs may increase as the Federal Reserve

increases its target federal funds rate and market interest rates increase.

The Company continues to deploy various asset liability management strategies

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fluctuations.

The Company’s

net interest margin could continue to experience pressure due to

reduced earning asset yields

and increased competition for quality loan opportunities.

Pricing remains competitive in our markets.

We believe this challenging

competitive environment will

continue throughout the remainder of 2022.

Our ability to hold our deposit rates low until our interest-earning assets

reprice will be important in our ability to maintain or potentially increase our net interest

margin during the beginning of

the monetary tightening cycle that we believe we will continue to experience in

Provision for Loan Losses

4 unchanged sentences

outstanding loans.

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

first quarter of 2022,

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

quarter of 2021.

The negative provision for loan losses was

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

during the first quarter of 2022.

loans, excluding PPP,

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

compared to December 31, 2021.

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

of $6.5 million due to payoffs.

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

economic conditions, credit

quality, and the amount of net

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

million for the first six months of

2022, compared to a negative provision for loan losses of $0.6 million for the first six

months of 2021.

provision for loan losses for the first six months of 2022 was primarily related

to a decrease in total loans, excluding PPP,

during the first six months of 2022.

The negative provision for loan losses for the first six months of 2021 was primarily

related to improvements in economic conditions in our primary market area.

The provision for loan losses is based upon

various factors, including the absolute level of loans, economic conditions, credit

quality, and the amount of net charge-

Based upon its assessment of the loan portfolio, management adjusts the allowance for loan

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The Company’s allowance

for loan losses as a percentage of total loans was 1.09% at March 31, 2022, compared to 1.08%

for loan losses as a percentage of total loans was 1.07% at June 30, 2022, compared to

1.08% at December 31, 2021.

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

provision for loan

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

reviewed from time to time by our regulators,

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

Factors beyond our control (such

as conditions in the local and national economy,

local real estate markets, or industries) may have a material adverse effect

on our asset quality and the adequacy of our allowance for loan losses resulting in significant

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

provision for loan losses

charged to operations, are considered adequate by management and

are reviewed from time to time by our regulators, they

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

beyond our control (such as

conditions in the local and national economy,

local real estate markets, or industries) may have a material adverse

our asset quality and the adequacy of our allowance for loan losses resulting in significant

increases in the provision for

Noninterest Income

Quarter ended March 31,

Quarter ended June 30,

Six months ended June 30,

(Dollars in thousands)

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mortgage lending income.

Quarter ended March 31,

Quarter ended June 30,

Six months ended June 30,

(Dollars in thousands)

Origination income, net

Origination income

Servicing fees, net

4 unchanged sentences

Origination income decreased

in in the first quarter of 2022

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

market area, as market interest

rates on mortgage loans increased.

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

net of related amortization expense as prepayment speeds slowed during the

first quarter of 2022, resulting in decreased

amortization expense.

due to a decrease in refinance

activity in our primary market area, as market interest rates on mortgage loans increased.

The decrease in origination

income was partially offset by an increase in servicing fees, net of related

amortization expense as prepayment speeds

slowed, resulting in decreased amortization expense.

Noninterest Expense

Quarter ended March 31,

Quarter ended June 30,

Six months ended June 30,

(Dollars in thousands)

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routine annual wage and benefit increases.

The increase in other noninterest expense was due to a variety of miscellaneous items

increased marketing costs,

and checkcard expenses, and stationary and supplies.

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

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

The increase in net occupancy and equipment expense was primarily due to increased

expenses related to the

redevelopment of the Company’s headquarters

in downtown Auburn.

This amount includes depreciation expense and one-

time costs associated with the opening of the Company’s

new headquarters.

The Company relocated its main office branch

and bank operations into its newly constructed headquarters during June of 2022.

The decrease in professional fees expense was primarily due to a decrease

in legal fees.

Income tax expense was $0.6

million for the first six months of 2022 compared to $0.9 million for the first six months of

The Company’s effective income

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

in the first quarter

tax rate for the first six months of 2022 was 13.71%, compared to 17.76%

first six months of 2021.

The decrease was primarily due to an income tax benefit related to a New Markets Tax

Credit investment funded

in the fourth quarter of 2021.

investment funded in the fourth quarter of 2021.

The Company’s effective

income tax rate is principally impacted by tax-exempt earnings

from the Company’s investments in

municipal securities, bank-owned life insurance, and New Markets Tax

income tax rate is principally impacted by tax-

exempt earnings from the Company’s investments

in municipal securities, bank-owned life insurance, and New Markets

BALANCE SHEET ANALYSIS

Securities available-for-sale were $429.2

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

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

of $20.1 million, and a decrease

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

million at June 30, 2022 compared to $421.9 million at December 31, 2021.

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

of $46.5 million, and a decrease of

$39.2 million in the fair value of securities available-for-sale.

The increase in the amortized cost basis of securities

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long-term market interest rates,

The average annualized tax-equivalent yields earned on total securities

first quarter of 2022 and 1.75%

in the first quarter of 2021.

which resulted in $9.5 million of deferred tax assets included in our other assets.

average annualized tax-equivalent yields earned on total securities were 1.84

in the first six months of 2022 and 1.72% in

the first six months of 2021.

(In thousands)

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Total loans, net of unearned income,

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

were $440.9 million at June 30, 2022, and $458.4 million at December 31,

Excluding PPP loans, total loans, net of unearned income, were $440.2

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December 31, 2021.

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

million and hotel loans of

$6.5 million.

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

commercial real estate

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

and construction and land development (8%).

Four loan categories represented the majority of the loan portfolio at June 30, 2022:

commercial real

estate (55%), residential real estate (19%), commercial and industrial (16%) and

construction and land development (9%).

Approximately 24% of the Company’s commercial

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

Within the residential real estate portfolio segment, the Company

had junior lien mortgages of approximately $7.1 million,

or 2%, and $7.2 million, or 2%, of total loans, net of unearned income at March 31, 2022 and

December 31, 2021,

real estate loans were classified as owner-occupied at June 30, 2022.

Within the residential real estate portfolio

segment, the Company had junior lien mortgages of approximately $6.9

or 2%, and $7.2 million, or 2%, of total loans, net of unearned income at June 30, 2022

and December 31, 2021,

respectively.

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had no loans that required

interest only payments at March 31, 2022 and December 31, 2021.

interest only payments at June 30, 2022 and December 31, 2021.

The Company’s

residential real estate mortgage

portfolio does not include any option ARM loans, subprime loans, or any material amount

of other high-risk consumer

mortgage products.

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

2022 and 4.50% in the first

quarter of 2021.

residential real estate mortgage portfolio

does not include any option ARM loans, subprime loans,

or any material amount of other high-risk consumer mortgage

The average yield earned on loans and loans held for sale was 4.42% in the first six months

of 2022 and 4.47% in the first

six months of 2021.

The specific economic and credit risks associated with our loan portfolio include,

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current economic conditions, including the continuing effects from the

COVID-19 pandemic, on our borrowers’ cash flows,

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

real estate industry

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

in certain credits, interest rate

fluctuations, reduced collateral values or non-existent collateral,

title defects, inaccurate appraisals, financial deterioration

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

COVID-19 pandemic, as well as high inflation rates

and the Federal Reserve’s shift from stimulative

monetary policy to increases in the target Federal Funds rate and

reductions in its securities holdings,

on our borrowers’ cash flows, real estate market sales volumes, valuations,

and cost of financing properties, real estate industry concentrations, competitive pressures

from a wide range of other

lenders, deterioration in certain credits, interest rate fluctuations and increases,

reduced collateral values or non-existent

collateral, title defects, inaccurate appraisals, financial deterioration of borrowers,

fraud, and any violation of applicable

laws and regulations.

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

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loan relationships in excess of

approximately $21.2 million.

approximately $21.4

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

unfunded commitments) to a single borrower of $19.1 million.

Our loan policy requires

that the Loan Committee of the

unfunded commitments) to a single borrower of $19.3

Our loan policy requires that the Loan Committee of the

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

At March 31, 2022, the Bank had no

At June 30, 2022, the Bank had no

relationships exceeding these limits.

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Loan concentrations to borrowers in the

following classes exceeded 25% of the Bank’s total risk

-based capital at March 31, 2022 and December 31, 2021.

following classes exceeded 25% of the Bank’s total

risk-based capital at June 30, 2022 and December 31, 2021.

(Dollars in thousands)

Lessors of 1-4 family residential properties

Multi-family residential properties

Shopping centers

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on a borrower’s business type.

of March 31, 2022, we had no COVID-19 loan deferrals, compared to one COVID-19 loan

deferral totaling $0.1 million at

of June 30, 2022, we had no COVID-19 loan deferrals, compared to one COVID-19

loan deferral totaling $0.1 million at

December 31, 2021.

Section 4013 of the CARES Act provides that a qualified loan modification is exempt by law

from classification as a TDR

Section 4013 of the CARES Act provides

that a qualified loan modification is exempt by law from classification as a TDR

pursuant to GAAP.

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Allowance for Loan Losses

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

management believes appropriate to adequately cover

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

appropriate to adequately cover

the Company’s estimate of probable

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The allowance for loan losses was $4.7 million at

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

which management believed to be adequate at each of the

June 30, 2022 compared to $4.9 million at December 31, 2021, which

management believed to be adequate at each of the

respective dates.

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

for the first quarter of 2022 and

the previous four quarters is presented below.

for the second quarter of 2022

and the previous four quarters is presented below.

(Dollars in thousands)

Balance at beginning of period

Commercial and industrial

Commercial real estate

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Consumer installment

Net (charge-offs) recoveries

Net recoveries (charge-offs)

Provision for loan losses

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as a % of nonperforming loans

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

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

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

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

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

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composition of the loan

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

pertinent factors.

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

This evaluation is

5 unchanged sentences

allowance for loan losses to total loans outstanding was 1.07%

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

Excluding PPP loans, which are guaranteed by the SBA,

the Company’s allowance for

loan losses was 1.10% of

total loans at both March 31, 2022 and December 31, 2021.

In the future, the allowance to total

loans outstanding ratio will

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

including the duration and

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

In addition, our regulators, as an integral part

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

allowance for loan losses, and may require the

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

judgment about information

available to them at the time of their examinations.

at June 30, 2022, compared to 1.08% at December 31, 2021.

In the future, the allowance to total loans outstanding ratio will increase or decrease

to the extent the factors that influence

our quarterly allowance assessment, including the duration and magnitude of

COVID-19 effects and increasing market

interest rates as the Federal Reserve shifts from stimulus to fighting inflation,

in their entirety either improve or weaken.

addition, our regulators, as an integral part of their examination process, will periodically review

the Company’s allowance

for loan losses, and may require the Company to make additional provisions to the allowance

for loan losses based on their

judgment about information available to them at the time of their examinations.

Nonperforming Assets

At March 31, 2022

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

At June 30, 2022 the Company had $0.4 million in nonperforming assets compared to $0.8

million at December 31, 2021.

The table below provides information concerning total nonperforming assets

and certain asset quality ratios for the first

and certain asset quality ratios for the second

quarter of 2022 and the previous four quarters.

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The table below provides information concerning the composition of nonaccrual

loans for the first quarter of 2022 and the

previous four quarters.

loans for the second quarter of 2022 and

the previous four quarters.

(In thousands)

9 unchanged sentences

The Company had $0.4

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

million in loans on nonaccrual status at June 30, 2022 and December 31,

2021, respectively.

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

The Company had no loans 90 days or more past due and still accruing at June 30, 2022

and December 31, 2021,

respectively.

The table below provides information concerning the composition of

OREO for the first quarter of 2022 and the previous

four quarters.

The table below provides information concerning the composition of OREO

for the second quarter of 2022 and the

previous four quarters.

(In thousands)

13 unchanged sentences

problem loans, which are not included in nonperforming assets, amounted to $1.3

million, or 0.5% of total loans at March

million, or 0.3% of total loans at June 30,

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

The table below provides information concerning the composition of potential problem

loans for the first quarter of 2022

loans for the second quarter of 2022

and the previous four quarters.

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Total potential problem loans

At March 31, 2022, approximately $0.2 million or 8% of total potential problem loans

were past due at least 30 days, but

At June 30, 2022, approximately $0.1 million or 11

of total potential problem loans were past due at least 30 days, but

less than 90 days.

2 unchanged sentences

but less than

for the first quarter of 2022 and the previous four quarters.

for the second quarter of 2022 and the previous four quarters.

(In thousands)

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Consumer installment

Total deposits increased

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

million at December

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

2022, compared to

Total deposits

were $1.0 billion at June 30, 2022 and December 31, 2021.

Noninterest-bearing deposits were $311.2

million, or 31% of total deposits, at June 30, 2022, compared to $316.1

million, or 32% of total deposits at December 31,

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

2022 and December 31, 2021,

Estimated uninsured deposits totaled $411.3

million and $420.8 million at June 30, 2022 and December 31, 2021,

respectively.

1 unchanged sentence

FDIC insurance

The average rate paid on total interest-bearing deposits was 0.34% in the first quarter of 2022

compared to 0.44% in the

first quarter of 2021.

The average rate paid on total interest-bearing deposits was 0.33% in the first six

months of 2022 compared to 0.42% in the

first six months of 2021.

Other Borrowings

Other borrowings consist of short-term borrowings and long-term debt.

Short-term borrowings generally consist of federal

borrowings generally consist of federal

funds purchased and securities sold under agreements to repurchase

1 unchanged sentence

had available federal funds lines totaling $61.0 million and $41.0

million with none outstanding at March 31, 2022, and

million with none outstanding at June 30, 2022, and

December 31, 2021, respectively.

1 unchanged sentence

million and $3.4 million at

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

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

June 30, 2022 and December 31, 2021, respectively.

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

respectively.

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

The Company had no long-term debt at June 30, 2022 and December 31, 2021.

CAPITAL ADEQUACY

The Company’s consolidated

stockholders’ equity was $86.4 million and $103.7 million as of March 31, 2022

December 31, 2021, respectively.

The decrease from December 31, 2021 was primarily driven by an other comprehensive

loss due to the change in unrealized losses on securities available-for-sale,

stockholders’ equity was $76.1 million and $103.7 million as of June 30, 2022

31, 2021, respectively.

from December 31, 2021 was primarily driven by an other comprehensive loss due

the change in unrealized gains/losses on securities available-for-sale,

net of tax of $29.3 million.

The increase in the

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

market interest rates.

These unrealized losses do

not affect the Bank’s capital

for regulatory capital purposes.

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

The Company’s share repurchases of

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

fewer outstanding

common shares at March 31, 2022.

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

regulatory capital framework and

unrealized loss on securities was primarily due to increases in market interest rates.

These unrealized losses do not affect

the Bank’s capital for regulatory capital purposes.

The Company paid cash dividends of $0.53 per share in the first six months of 2022,

an increase of 2% from the same

period in 2021.

The Company’s share repurchases

million since December 31, 2021 resulted in 10,640 fewer

outstanding common shares at June 30, 2022.

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

capital framework and

related Dodd-Frank Wall

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executive officers.

At March 31, 2022, the Bank’s ratio

At June 30, 2022, the Bank’s ratio

was sufficient to meet the fully phased-in conservation buffer.

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subsidiaries.

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

capital ratio was 17.26%, and

total risk-based capital ratio was 18.08%

at March 31, 2022.

These ratios exceed the minimum regulatory capital

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

8.0% for tier 1 risk-based capital ratio,

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

The Bank’s capital conservation buffer

at March 31, 2022.

tier 1 leverage ratio was 9.16%, CET1 risk-based capital ratio was 16.59%, tier 1

risk-based capital ratio was 16.59%, and

total risk-based capital ratio was 17.38% at June 30, 2022.

These ratios exceed

the minimum regulatory capital percentages

of 5.0% for tier 1 leverage ratio, 6.5% for CET1 risk-based capital ratio, 8.0%

for tier 1 risk-based capital ratio, and 10.0%

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

The Bank’s capital conservation buffe

June 30, 2022.

Our unrealized losses on securities due to increases in market interest rates do

not directly affect our capital

for regulatory purposes, and the resulting deferred tax assets, including $9.5

million resulting from such unrealized

securities losses, was below the 25% threshold requiring deduction of such assets

from CET1 capital.

MARKET AND LIQUIDITY RISK MANAGEMENT

11 unchanged sentences

Interest Rate Risk Management

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

in interest rates.

measures and evaluates interest rate risk so that the Bank can meet customer demands

for various types of loans and

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

fluctuations in interest rates.

measures and evaluates interest rate risk so that the Bank can meet customer demands for

various types of loans and

Measurements used to help manage interest rate sensitivity include an earnings simulation

11 unchanged sentences

For changes up or down in rates from management’s

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

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

are as follows:

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

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

At March 31, 2022, our earnings simulation model indicated that we were in compliance

At June 30, 2022, our earnings simulation model indicated that we were in compliance

with the policy guidelines noted

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EVE uses a terminal horizon

which allows for the re-pricing of all assets, liabilities, and off-balance

which allows for the re-pricing of all assets, liabilities, and off-balance sheet items.

Further, EVE is measured using values

11 unchanged sentences

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

At March 31, 2022, our EVE model indicated that we were in compliance

with our policy guidelines.

At June 30, 2022, our EVE model indicated that we were in compliance with

our policy guidelines.

Each of the above analyses may not, on its own, be an accurate indicator of how our net interest income

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loan, investment, borrowing, and capital policies.

The Company may also use derivative financial instruments to improve the balance between

interest-sensitive assets and

The Company may also use derivative financial instruments to improve the balance

between interest-sensitive assets and

interest-sensitive liabilities, and as a tool to manage interest rate sensitivity

7 unchanged sentences

designated as hedging instruments.

At March 31, 2022 and December 31, 2021,

At June 30, 2022 and December 31,

2021, the Company had no derivative contracts

4 unchanged sentences

primarily for deposit withdrawals, loan demand and maturing obligations.

proper management of its liquidity,

Without proper management of its liquidity,

Company could experience higher costs of obtaining funds due to insufficient liquidity,

7 unchanged sentences

separate and distinct legal

entities with different funding needs and sources, and each are

subject to regulatory guidelines and requirements.

Company depends upon dividends from the Bank for liquidity to pay its operating expenses,

debt obligations and

entities with different funding needs and sources, and each are subject

to regulatory guidelines and requirements.

Company depends upon dividends from the Bank for liquidity to pay its operating

expenses, debt obligations and

The Bank’s payment of dividends depends

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taken out with varying maturities.

At March 31, 2022, the Bank had a remaining available

At June 30, 2022, the Bank had a remaining available

line of credit with the FHLB of

$332.7 million.

At March 31, 2022, the Bank also had $51.0

million of available federal funds lines with no borrowings

At June 30, 2022, the Bank also had $51.0 million of available federal

funds lines with no borrowings

Primary uses of funds include repayment of maturing obligations and

growing the loan portfolio.

Management believes that the Company and the Bank have adequate sources of liquidity

to meet all their respective known

Management believes that the Company and the Bank have adequate sources of liquidity to

meet all their respective known

contractual obligations and unfunded commitments, including loan commitments

2 unchanged sentences

Off-Balance Sheet Arrangements, Commitments, Contingencies and Contractual

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

At June 30, 2022, the Bank had outstanding standby letters of credit of $1.2

million and unfunded loan commitments

20 unchanged sentences

state, and local laws, among other

As of March 31, 2022,

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

and sold, but

As of June 30, 2022,

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

retained the servicing rights, was $247.1 million.

2 unchanged sentences

losses incurred (make whole requests) if a

loan review reveals a potential breach of seller representations and warranties.

loan review reveals a potential breach of seller representations and

Upon receipt of a repurchase or make whole

10 unchanged sentences

market standards.

The Company was not required to repurchase any loans during the

first quarter of 2022 as a result of representation and

The Company was not required to repurchase any loans during the first six months of

2022 as a result of representation and

warranty provisions contained in the Company’s

sale agreements with Fannie Mae, and had no pending repurchase or

make-whole requests at March 31, 2022.

make-whole requests at June 30, 2022.

We service all residential

3 unchanged sentences

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

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

the mortgage loans;

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

mortgage loans;

(4) maintain any

6 unchanged sentences

of responsibility for actions taken by us in such

capacity and provides protection against expenses and liabilities incurred by us when

acting in compliance with the

capacity and provides protection against expenses and liabilities incurred by us when acting

in compliance with the

respective servicing agreements.

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their purchased loans.

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

As of June 30, 2022, we do not believe that this exposure is material due to the historical level of

repurchase requests and loss trends, in addition to the fact that 99% of our residential

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Effects of Inflation and Changing Prices

The consolidated financial statements and related consolidated financial data presented

herein have been prepared in

accordance with GAAP and practices within the banking industry which require

the measurement of financial position and

The consolidated financial statements and related consolidated financial data

presented herein have been prepared in

accordance with GAAP and practices within the banking industry which require the

measurement of financial position and

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

1 unchanged sentence

over time due to inflation.

Unlike most industrial companies, virtually all the assets and

liabilities of a financial institution

most industrial companies, virtually all the assets and liabilities of a financial institution

are monetary in nature.

2 unchanged sentences

than the effects of general levels of inflation.

Inflation, however, could increase our noninterest

expenses, and Federal

Reserve monetary policy in response to inflation has increased market interest rates and

affected values of certain of our

assets and liabilities, including our securities portfolio and mortgage servicing assets.

CURRENT ACCOUNTING DEVELOPMENTS

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

The Company’s preliminary evaluation

The Company’s preliminary evaluation indicates

the provisions of ASU No.

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implementation date for ASU 2016-13.

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

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

The Company is required to implement the new standard in January 2023, with early adoption

permitted in any period prior

to that date.

– Explanation of Non-GAAP Financial Measures

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understanding of its business and performance,

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

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

The reconciliations

of these non-

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

presented below.

GAAP financial measures to their most directly comparable GAAP financial

measures are presented below.

(In thousands)

2 unchanged sentences

Net interest income (Tax

Six months ended June 30,

(In thousands)

Net interest income (GAAP)

Tax-equivalent adjustment

Net interest income (Tax

- Selected Quarterly Financial Data

14 unchanged sentences

Basic and diluted

Shares outstanding

Common stock price

To earnings ratio

To book value

Performance ratios:

Return on average equity

Return on average assets

Dividend payout ratio

Asset Quality:

Allowance for loan losses as a % of:

Nonperforming loans

Nonperforming assets as a % of:

Loans and other real estate owned

Nonperforming loans as a % of total loans

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

Capital Adequacy:

CET 1 risk-based capital ratio

Tier 1 risk-based capital ratio

Total risk-based capital ratio

Tier 1 leverage ratio

Other financial data:

Net interest margin (a)

Effective income tax rate

Efficiency ratio (b)

Selected average balances:

Loans, net of unearned income

Total deposits

Total stockholders’ equity

Selected period end balances:

Loans, net of unearned income

Allowance for loan losses

Total deposits

Total stockholders’ equity

(a) Tax-equivalent.

See "Table 1 - Explanation of Non-GAAP Financial Measures."

(b) Efficiency ratio is the result of noninterest expense divided

by the sum of noninterest income and tax-equivalent net interest

wholly-owned subsidiary, AuburnBank.

- Selected Financial Data

Six months ended June 30,

(Dollars in thousands, except per share amounts)

Results of Operations

Net interest income (a)

tax-equivalent adjustment

Net interest income (GAAP)

Noninterest income

Total revenue

Provision for loan losses

Noninterest expense

Income tax expense

Per share data:

Basic and diluted net earnings

Cash dividends declared

Weighted average shares outstanding:

Basic and diluted

Shares outstanding, at period end

12 unchanged sentences

Nonperforming loans as a % of total loans

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

Annualized net recoveries as a % of average loans

Capital Adequacy:

8 unchanged sentences

Selected average balances:

Securities available-for-sale

Loans, net of unearned income

2 unchanged sentences

Selected period end balances:

Securities available-for-sale

Loans, net of unearned income

4 unchanged sentences

See "Table 1 - Explanation of Non-GAAP Financial Measures."

(b) Efficiency ratio is the result of noninterest expense divided by

the sum of noninterest income and tax-equivalent net interest income.

(b) Efficiency ratio is the result of noninterest expense divided

by the sum of noninterest income and tax-equivalent net interest

"Table 1 - Explanation of Non-GAAP Financial Measures."

2 unchanged sentences

and Net Interest Income Analysis

Quarter ended March 31,

Quarter ended June 30,

(Dollars in thousands)

17 unchanged sentences

Stockholders' equity

Total liabilities and stockholders' equity

Total liabilities and stockholders'

Net interest income and margin (tax-equivalent)

(1) Average loan balances are shown net of unearned income and loans on nonaccrual status have been included

(1) Average loan balances are

shown net of unearned income and loans on nonaccrual status have been included

in the computation of average balances.

(2) Yields on tax-exempt securities have been computed on a tax-equivalent basis using a federal income

(2) Yields on tax-exempt securities have been

computed on a tax-equivalent basis using a federal income

tax rate of 21%.

- Average Balances

and Net Interest Income Analysis

Six months ended June 30,

(Dollars in thousands)

Interest-earning assets:

Loans and loans held for sale (1)

Securities - taxable

Securities - tax-exempt (2)

Total securities

Federal funds sold

Interest bearing bank deposits

Total interest-earning assets

Cash and due from banks

Interest-bearing liabilities:

Savings and money market

Time deposits

Total interest-bearing deposits

Short-term borrowings

Total interest-bearing liabilities

Noninterest-bearing deposits

Other liabilities

Stockholders' equity

Total liabilities and stockholders'

Net interest income and margin (tax-equivalent)

(1) Average loan balances are

shown net of unearned income and loans on nonaccrual status have been included

in the computation of average balances.

(2) Yields on tax-exempt securities have been

computed on a tax-equivalent basis using a federal income

tax rate of 21%.

- Allocation of Allowance for Loan Losses

Second Quarter

First Quarter

2 unchanged sentences

Second Quarter

First Quarter

(Dollars in thousands)

8 unchanged sentences

(Dollars in thousands)

March 31, 2022

June 30, 2022

3 months or less

10 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis