What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-08 compared with 2023-05-05 · 644 added, 475 removed, 1073 unchanged (51% of the section changed)

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financial statements and related

notes for the quarters ended March 31, 2023 and 2022, as well as the information contained

in our Annual Report on Form

10-K for the year ended December 31, 2022.

notes for the quarters and six months ended June 30, 2023 and 2022, as well as the information

contained in our Annual

Report on Form 10-K for the year ended December 31, 2022 and our Quarterly Reports on

Special Cautionary Notice Regarding Forward-Looking Statements

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as amended (the “Exchange Act”).

Forward-looking statements include statements with respect to our beliefs, plans, objectives,

goals, expectations,

Forward-looking statements include statements with respect to our

beliefs, plans, objectives, goals, expectations,

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

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update any forward-looking statements.

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

forward-looking statements.

All statements other than statements of historical fact are statements that could be forward-looking

identify these forward-looking statements through our use of words such as “may,”

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

“project,” “could,” “intend,” “seeks,” “model,” “simulations,” “target” and

other similar words and expressions of the

These forward-looking statements may not be realized due to a variety of factors,

including, without limitation:

“project,” “could,” “intend,” “seeks,” “model,” “simulations,” “target”,

“view”, and other similar words and expressions of

These forward-looking statements may not be realized due to a variety of

factors, including, without limitation:

the effects of future economic, business and market conditions and

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of fiscal and monetary stimuli in

response to the COVID-19 crisis, followed by changes in monetary policies beginning

in March 2022 in response

response to the COVID-19 crisis, followed by changes in monetary policies beginning in

March 2022 in response

to inflation, including increases in the Federal Reserve’s

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in the scope and cost

of FDIC insurance, including changes being considered in light of two regional bank

of FDIC insurance, including changes being considered in light of three regional bank

failures in California and

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

economic, market and credit

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

those used in our loan

March and May 2023;

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

market and credit

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

from those used in our loan

portfolio reviews;

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

the risks of further increases in market interest rates creating unrealized losses on our

securities available for sale,

which adversely affect our stockholders’ equity (including tangible stockholders’

equity) for financial reporting

the risks of further increases in market interest rates creating additional unrealized

losses on our securities

available for sale, which adversely affect our stockholders’ equity (including

tangible stockholders’ equity) for

financial reporting purposes;

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

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for credit losses, including

asset impairments, losses valuations of assets and liabilities and other

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

the timing and amount of rental income from third parties following the June 2022

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or less effective than anticipated;

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

vendors’ systems or customers’

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

our vendors’ systems or customers’

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

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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

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 2023, compared to $2.1 million for the first quarter of

Basic and diluted earnings per share were $0.56 per share for the first quarter of 2023,

compared to $0.59 per share

for the first quarter of 2022.

Net interest income (tax-equivalent) was $7.2 million for the first quarter of 2023,

a 17% increase

compared to $6.2 million

for the first quarter of 2022.

million for the first six months of 2023 and 2022, respectively.

Basic and diluted

earnings per share were $1.11 per share for the first six

months of 2023, compared to $1.10 per share for the first six

months of 2022.

Net interest income (tax-equivalent) was $14.2 million for the first six

months of 2023, a 12% increase compared to $12.7

million for the first six months of 2022.

This increase was primarily due to improvements in the Company’s

net interest margin.

Company’s net interest margin

(tax-equivalent) was 3.17% in the first quarter of 2023 compared to 2.43%

quarter of 2022.

This increase was primarily due to a more favorable asset mix and higher yields on interest

The Company’s net interest

margin (tax-equivalent) was 3.10% in the first six months of 2023

compared to 2.51%

in the first six months of 2022.

This increase was primarily due to a more favorable asset mix and higher

yields on interest

earning assets.

These higher yields on interest earning assets were partially offset by increased

cost of funds.

The cost of funds increased

to 71 basis points, compared to 34 basis points in the first quarter of 2022,

which also reflected higher market interest rates.

Average loans for the first quarter

of 2023 were $502.2 million, a 14% increase from the first quarter of 2022.

At March 31, 2023, the Company’s allowance

for credit losses was $6.8 million, or 1.35% of total loans, compared to $5.8

These higher yields on interest earning assets were partially offset

by increased cost of funds.

funds increased to 82 basis points, compared to 33 basis points in the first six months of 2022,

also reflecting higher market

interest rates in the first six months of both 2022 and 2023.

Average loans for the first six

months of 2023 were $507.2

million, a 17% increase from the first six months of 2022.

At June 30, 2023, the Company’s allowance

for credit losses was $6.6

million, or 1.27% of total loans, compared to $5.8

million, or 1.14% of total loans, at December 31, 2022, and $4.7

million, or 1.09% of total loans, at March 31, 2022.

million, or 1.07% of total loans, at June 30, 2022.

implementation of CECL required pursuant to Accounting Standards (“ASC”)

326, was effective January 1, 2023,

326, which was effective January 1, 2023,

increased our allowance for credit losses by $1.0 million, or 0.20% of total loans, as a day one

transition adjustment.

March 31, 2023 and December 31, 2022, the Company’s

recorded investment in loans individually evaluated was $2.6

million with a corresponding valuation allowance (included in the allowance

for credit losses) of $0.5 million, compared to

a recorded investment in loans individually evaluated of $0.2 million with no corresponding

valuation allowance at March

The Company recorded a provision for credit losses during the first quarter of 2023

of $0.1 million, compared to a negative

provision for credit losses of $0.3 million during the first quarter of 2022.

The provision for credit losses under CECL is

reflective of the Company’s credit risk profile

and the future economic outlook and forecasts.

Our CECL model is largely

influenced by economic factors including, most notably,

the anticipated unemployment rate.

The negative provision for

credit losses during the first quarter of 2022 was primarily related to a decrease in total loans, excluding PPP,

first quarter of 2022.

Noninterest income was $0.8 million in the first quarter of 2023,

compared to $0.9 million in the first quarter of 2022.

decrease in noninterest income was primarily due to a decrease in mortgage lending income

of $0.2 million as a result of

higher mortgage market interest rates.

Noninterest expense was $5.6 million in the first quarter of 2023,

to $4.9 million for the first quarter of 2022.

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

equipment expense of $0.3

The Company recorded a negative provision for credit losses during the first six

months of 2023 of $0.3 million, compared

to a negative provision for credit losses of $0.3 million during the first six months of 2022.

The provision for credit losses

under CECL is reflective of the Company’s credit

risk profile and the future economic outlook and forecasts.

model is largely influenced by economic factors including,

most notably, the anticipated

unemployment rate.

provision for credit losses during the first six months of 2023 was primarily related to the resolution

of a collateral

dependent nonperforming loan, with a recorded investment of $1.3

million and a corresponding allowance of $0.5 million,

that was collected in full during the second quarter of 2023.

Noninterest income was $1.6 million in the first six months of 2023,

compared to $1.8 million in the first six months of

The decrease in noninterest income was primarily due to a decrease in mortgage lending

income of $0.2

result of higher mortgage market interest rates.

Noninterest expense was $11.4 million in the first six

months of 2023,

compared to $10.0 million for the first six months of

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

and equipment expense of

million related to the Company’s new headquarters,

which opened in June 2022, professional fees expense of $0.1 million,

and other noninterest expenses of $0.3 million.

Income tax expense was $0.3 million for the first quarter of 2023 and 2022,

respectively.

The Company's effective tax rate

for the first quarter of 2023 was 11.97%,

compared to 10.88% in the first quarter of 2022.

The Company’s effective

income tax rate is principally affected by tax-exempt earnings from the Company’s

investment in municipal securities,

bank-owned life insurance (“BOLI”), and New Markets Tax

which opened in June 2022, professional fees expense of $0.2

million, and other noninterest expense of $0.8 million.

Income tax expense was $0.6 million for the first six months of 2023

and 2022, respectively.

The Company's effective tax

rate for the first six months of 2023 was 12.48%, compared to 13.71% in the first six months of 2022.

The Company’s

effective income tax rate is principally affected by tax-exempt

earnings from the Company’s investment in

securities, bank-owned life insurance (“BOLI”), and New Markets Tax

Credits (“NMTCs”).

The Company paid cash dividends of $0.27 per share in the first quarter of 2023, an increase of 2%

from the same period of

The Company repurchased

2,648 shares for $0.1

million during the first quarter of 2023.

At March 31, 2023, 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 16.48%,

a tier 1 leverage ratio of 10.07% and a common equity

tier 1 (“CET1”) ratio of 15.45% at March 31, 2023.

The Company paid cash dividends of $0.54 per share in the first six months of 2023,

an increase of 2% from the same

period of 2022.

The Company repurchased 4,225 shares for $0.1

million during the first six months of 2023.

2023, 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 16.31%,

a tier 1 leverage ratio of 10.23% and a common

equity tier 1 (“CET1”) ratio of 15.33% at June 30, 2023.

2023, the Company’s equity to total assets ratio

7.24%, compared to 6.65% at December 31, 2022, and 7.79% at March 31,

6.92%, compared to 6.65% at December 31, 2022, and 7.02% at June 30, 2022

For the second quarter of 2023, net earnings were $1.9 million, or $0.55

per share, compared to $1.8 million, or $0.51 per

share, for the second quarter of 2022.

Net interest income (tax-equivalent) was $7.0 million for the second quarter of 2023,

an increase of 8% compared to $6.5

million for the second quarter of 2022.

This increase was primarily due to

improvements in the Company’s net interest

The Company’s net interest margin

(tax-equivalent) was 3.03% in the

second quarter of 2023 compared to 2.60% in the second quarter of 2022.

The Company recorded a negative provision for

credit losses during the second quarter of 2023 of $0.4 million, compared to no provision for

credit losses during the second

quarter 2022.

The provision for credit losses was primarily related to the resolution of a collateral

nonperforming loan, with a recorded investment of $1.3 million and a corresponding allowance

of $0.5 million, that was

collected in full during the second quarter of 2023.

Noninterest income was $0.8 million in the second quarter of 2023 and

2022, respectively.

Noninterest expense was $5.8 million in the second quarter of 2023,

compared to $5.1 million for the

second quarter of 2022.

The increase in noninterest expense was primarily due to increases in other noninterest expense

$0.4 million.

Income tax expense was $0.3

million for the second quarter of 2023, compared to $0.4 million for the second

quarter of 2022.

The Company's effective tax rate for the second quarter of 2023

was 13.00%, compared to 16.77% in the

second quarter of 2022.

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

CRITICAL ACCOUNTING POLICIES

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Financial assets

measured at amortized cost will be presented at the net amount expected to be collected

by using an allowance for credit

In addition, CECL made changes to the accounting for available for sale

debt securities.

measured at amortized cost will be presented at the net amount expected to be

collected by using an allowance for credit

In addition, CECL made changes to the accounting for available for sale debt

One such change is to require

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effective January 1, 2023 using the

modified retrospective approach for all financial assets measured

at amortized cost and off-balance sheet credit exposures.

modified retrospective approach for all financial assets measured at amortized

cost and off-balance sheet credit exposures.

The transition adjustment upon the adoption of CECL on January 1, 2023 included an increase

in the allowance for credit

losses on loans of $1.0 million, which is presented as a reduction to net loans outstanding,

and an increase in the allowance

losses on loans of $1.0 million, which is presented as a reduction to net loans outstanding, and

an increase in the allowance

for credit losses on unfunded loan commitments of $0.1 million, which is recorded

within other liabilities.

recorded a net decrease to retained earnings of $0.8 million as of January 1, 2023

for the cumulative effect of adopting

recorded a net decrease to retained earnings of $0.8 million as of January 1, 2023 for the cumulative

effect of adopting

CECL, which reflects the transition adjustments noted above, net of the applicable deferred

tax assets recorded.

reporting periods beginning after January 1, 2023 are presented under CECL

while prior period amounts continue to be

reported in accordance with previously applicable accounting standards.

The Company adopted ASC 326 using the prospective transition approach

for debt securities for which other-than-

reporting periods beginning after January 1, 2023 are presented under CECL while prior

period amounts continue to be

in accordance with previously applicable accounting standards.

The Company adopted ASC 326 using the prospective transition approach for debt

securities for which other-than-

temporary impairment had been recognized prior to January 1, 2023.

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90 days past due, or earlier if the Company believes the collection of interest is doubtful.

The Company has concluded that

has concluded that

this policy results in the timely reversal of uncollectible interest.

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on January 1, 2023, the effective date of the guidance, on a prospective basis.

ASU 2022-02 eliminated the accounting guidance for TDRs, while enhancing disclosure

requirements for certain loan

ASU 2022-02 eliminated the accounting guidance for TDRs, while enhancing disclosure requirements

for certain loan

refinancings and restructurings by creditors when a borrower is experiencing

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must apply the loan refinancing and restructuring

guidance to determine whether a modification results in a new loan or a continuation of an

existing loan.

guidance to determine whether a modification results in a new loan or a

continuation of an existing loan.

Additionally,

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available information, from

both internal and external sources, relating to past events, current conditions, and reasonable

and supportable forecasts.

both internal and external sources, relating to past events, current conditions, and reasonable and

supportable forecasts.

The Company’s loan loss estimation process includes

procedures to appropriately consider the unique characteristics of

loan segments (commercial and industrial, construction and land development, commercial

real estate, multifamily,

loan segments (commercial and industrial, construction and land development,

commercial real estate, multifamily,

residential real estate, and consumer loans).

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credit quality is monitored.

See Note 5, Loans and Allowance for Credit Losses for additional information about our loan

See Note 5, Loans and Allowance for Credit Losses, for additional information about our

Credit loss assumptions are estimated using a discounted cash flow ("DCF") model

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The forecasted Alabama

unemployment rate is considered in the model for commercial and industrial, construction

and land development,

unemployment rate is considered in the model for commercial and industrial,

construction and land development,

commercial real estate, multifamily,

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third party, are utilized to

predict quarterly rates of default

based on the statistical PD models.

predict quarterly rates of default based on the statistical PD models.

Expected credit losses are estimated over the contractual term of the loan, adjusted for

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made (which is 4 quarters for the Company), the

Company reverts, on a straight-line basis back to the historical rates over an 8 quarter

reversion period.

Company reverts, on a straight-line basis back to the historical rates over an 8 quarter reversion

The weighted average remaining life method was deemed most appropriate

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The average annual

charge-off rate is applied to the contractual term adjusted for prepayments.

charge-off rate is applied to the contractual term adjusted for

Additionally, the allowance

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the expected credit losses are based on the

estimated fair value of collateral held at the reporting date, adjusted for selling costs as appropriate.

estimated fair value of collateral held at the reporting date, adjusted for selling costs as appro

Allowance for Credit Losses – Unfunded Commitments

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exposure to credit loss in the event of

nonperformance by the other party to the financial instrument for off-balance sheet

loan commitments is represented by the

nonperformance by the other party to the financial instrument for off

-balance sheet loan commitments is represented by the

contractual amount of those instruments.

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thousand for the adoption of

For the three months ended March 31, 2023, the Company recorded a provision

for credit losses for unfunded

commitments of $26 thousand.

At March 31, 2023, the liability for credit losses on off

-balance-sheet credit exposures

included in other liabilities was $0.3 million.

For the six months ended June 30, 2023, the Company recorded

a negative provision for credit losses for

unfunded commitments of $5 thousand.

At June 30, 2023,

the liability for credit losses on off-balance-sheet credit

exposures included in other liabilities was $0.3

Assessment for Allowance for Credit Losses – Available

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before recovery of its amortized cost basis.

If either criteria is met, the security's amortized cost basis is written down to

fair value through net income.

If neither criteria is met, the Company evaluates whether any portion of the decline in

value is the result of credit deterioration.

Such evaluations consider the extent to which the amortized cost of the security

exceeds its fair value, changes in credit ratings and any other known adverse conditions related

to the specific security.

the evaluation indicates that a credit loss exists, an allowance for credit losses is recorded

for the amount by which the

amortized cost basis of the security exceeds the present value of cash flows expected

to be collected, limited by the amount

by which the amortized cost exceeds fair value.

Any impairment not recognized in the allowance for credit losses is

recognized in other comprehensive income.

If either of these criteria are met, the security's amortized cost basis is written

down to fair value through net income.

If neither criterion is met, the Company evaluates whether any portion of the

decline in fair value is the result of credit deterioration.

Such evaluations consider the extent to which the amortized cost of

the security exceeds its fair value, changes in credit ratings and any other known adverse

conditions related to the specific

If the evaluation indicates that a credit loss exists, an allowance for credit

losses is recorded for the amount by

which the amortized cost basis of the security exceeds the present value of cash flows expected

to be collected, limited by

the amount by which the amortized cost exceeds fair value.

Any impairment not recognized in the allowance for credit

losses is recognized in other comprehensive income.

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

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Reserve Bank of Atlanta (“FRB”).

These non-marketable equity securities are accounted for at cost which equals par

These non-marketable equity securities are accounted for at cost which equals par or

redemption value.

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

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

no market for these securities.

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when evaluating these securities for impairment, management considers

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

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

Determination

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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

fair values of assets and liabilities and the related income

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

well as changes in market conditions, could result in

As such, the use of different models and assumptions,

as well as changes in market conditions, could result in

materially different net earnings and retained earnings results.

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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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planning strategies in making this assessment.

At March 31, 2023

At June 30, 2023

we had total deferred tax assets of $13.4 million included

as “other assets”, including $11.9 million resulting from

unrealized losses in our securities portfolio.

as “other assets”, including $13.1 million resulting from unrealized losses in our securities

Based upon the level

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we will realize the benefits of these deductible

differences at March 31, 2023.

differences at June 30, 2023.

The amount of the deferred tax assets considered

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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 $7.2 million for the first quarter of 2023,

a 17% increase compared to $6.2 million

for the first quarter of 2022.

Net interest income (tax-equivalent) was $14.2 million for the first six months of

2023, a 12% increase compared to $12.7

million for the first six months of 2022.

This increase was primarily due to improvements in the Company’s

net interest margin (tax-

margin (tax-equivalent).

The Company’s net interest

margin (tax-equivalent) was 3.17% in the first quarter of 2023

compared to 2.43%

in the first quarter of 2022.

This increase was primarily due to a more favorable asset mix and higher yields on interest

earning assets.

Since March of 2022, the Federal Reserve increased the target

federal funds range from 0 – 0.25% to 4.75 –

The target rate was increased another 25 basis points on May 3, 2023,

and further increases in the target federal

funds rate appear likely if inflation remains elevated.

The tax-equivalent yield on total interest-earning assets increased by 100

basis points to 3.66%

in the first quarter of 2023

compared to 2.66% in the first quarter of 2022.

This increase was primarily due to changes in our asset mix and higher

market interest rates on interest earning assets.

margin (tax-equivalent) was 3.10% in the first six months of 2023

compared to 2.51% in the first six months of 2022.

This increase was primarily due to a more favorable asset mix and

higher yields on interest earning assets.

Since March of 2022, the Federal Reserve increased the target federal

from 0 – 0.25% to 5.00 – 5.25%.

The target rate was increased another 25 basis points on July 26,

2023, and further

increases in the target federal funds rate appear likely if inflation remains elevated.

The tax-equivalent yield on total interest-earning assets increased by 93 basis points

to 3.67% in the first six months of

2023 compared to 2.74% in the first six months of 2022.

This increase was primarily due to changes in our asset mix and

higher market interest rates on interest earning assets.

The cost of total interest-bearing liabilities increased by 49 basis points to

0.71% in the first quarter of 2023 compared to

0.34% in the first quarter of 2022.

Our deposit costs may continue to increase as the Federal Reserve increases its target

federal funds rate, market interest rates increase, and as customer behaviors change

as a result of inflation and higher

0.82% in the first six months of 2023 compared

to 0.33% in the first six months of 2022.

Our deposit costs may continue to increase as the Federal Reserve increases its

target federal funds rate, market interest rates increase, and

as customer behaviors change as a result of inflation and higher

market interest rates on deposits and other alternative investments.

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Provision for Credit Losses

On January 1, 2023, we adopted ASC 326, which introduces the current expected credit

losses (CECL) methodology and

On January 1, 2023, we adopted ASC 326, which introduces the current expected

credit losses (CECL) methodology and

requires us to estimate all expected credit losses over the remaining life of our loans.

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The Company recorded

a provision for credit losses during

the first quarter of 2023 of $0.1 million, compared to a negative provision for credit

losses of $0.3 million during the first

quarter of 2022.

Provision expense is affected by organic loan growth in our loan

portfolio, our internal assessment of the

credit quality of the loan portfolio, our expectations about future economic conditions and

net charge-offs.

model is largely influenced by economic factors including,

most notably, the anticipated

unemployment rate, which may be

affected by monetary policy.

The negative provision for credit losses during the first quarter of 2022

was primarily related

to a decrease in total loans, excluding federally-guaranteed PPP loans,

during the first quarter of 2022.

a negative provision for credit losses

during the first six months of 2023 of $0.3

million, compared to a negative provision for credit losses of $0.3 million during

the first six months of 2022.

Provision expense is affected by organic loan growth in our

loan portfolio, our internal

assessment of the credit quality of the loan portfolio, our expectations about future economic

conditions and net charge-

Our CECL model is largely influenced by economic factors

including, most notably,

the anticipated

rate, which may be affected by monetary policy.

The negative provision for credit losses during the first six months

2023 was primarily related to the resolution of a collateral dependent nonperforming loan,

with a recorded investment of

$1.3 million and a corresponding allowance of $0.5 million, that was collected in full during

the second quarter of 2023.

Our allowance for credit losses reflects an amount we believe appropriate,

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all expected future losses as of the date the allowance is determined.

At June 30, 2023,

the Company’s allowance for credit

losses was $6.6 million, or 1.27% of total loans, compared to $5.8 million, or 1.14% of

total loans, at December 31, 2022, and $4.7 million, or 1.09% of total loans, at March 31, 2022.

total loans, at December 31, 2022, and $4.7 million, or 1.07% of total loans, at June 30, 2022.

The implementation of

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one transition adjustment to ASC 326.

At March 31, 2023 and December 31, 2022, the Company’s

recorded investment in

loans individually evaluated was $2.6 million with a corresponding valuation allowance

(included in the allowance for

credit losses) of $0.5 million, compared to a recorded investment in loans individually

evaluated of $0.2 million with no

corresponding valuation allowance at March 31, 2022.

One of the downgraded loans, with a recorded investment of $1.3

million and a corresponding valuation allowance of $0.5 million at March 31,

2023, was paid in full subsequent to March

Noninterest Income

Quarter ended March 31,

Quarter ended June 30,

Six months ended June 30,

(Dollars in thousands)

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MSRs when the loan is sold.

MSRs are recognized based on the fair value of the servicing right on the date

the corresponding mortgage loan is sold.

MSRs are recognized based on the fair value of the servicing right on the date the corresponding

mortgage loan is sold.

Subsequent to the date of transfer, the Company

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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

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Noninterest Expense

Quarter ended March 31,

Quarter ended June 30,

Six months ended June 30,

(Dollars in thousands)

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Total noninterest expense

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

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

expenses related to the Company’s

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operating the new headquarters.

The Company relocated its main office branch and bank operations into its

The Company relocated its main office branch and bank operations

into its newly

constructed headquarters during June 2022.

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

including increased information

technology and systems expenses, losses on New Markets Tax

Credits investments and other miscellaneous operating

Income tax expense was $0.3 million for the first quarter of 2023

The increase in other noninterest expense was due to various items including

FDIC assessments, software costs, ATM

checkcard expenses, impairment related to a new market tax credit investment, due to the

remaining tax credit being less

than the Company’s investment, and a gain on sale of other

real estate owned that was realized in the 2022.

Income tax expense was $0.6 million for the first six months of 2023

and 2022, respectively.

The Company’s effective income

tax rate for the first quarter of 2023 was 11.97%, compared

to 10.88% in the first quarter of 2022.

The Company’s

effective income tax rate is principally impacted by tax-exempt earnings

from the Company’s investments

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

The Company’s effective

income tax rate for the first six months of 2023 was 12.48%, compared to 13.71%

in the first six months of 2022.

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

BALANCE SHEET ANALYSIS

Securities available-for-sale were $394.1

million at March 31, 2023 compared to $405.3 million at December 31, 2022.

This increase reflects a $7.3 million increase in the fair value of securities available

-for-sale, offset by a decrease in the

amortized cost basis of securities available-for-sale of $6.9 million.

The average annualized tax-equivalent yields earned

on total securities were 2.39%

in the first quarter of 2023 and 1.74% in the first quarter of 2022.

million at June 30, 2023,

3% less than the $405.3 million at December 31, 2022.

This decrease reflects a $13.7 million decrease in the amortized cost basis of securities available

-for-sale, offset by an

increase in the fair value of securities available-for-sale of $2.5

The average annualized tax-equivalent yields

earned on total securities were 2.36%

in the first six months of 2023 and 1.84% in the first six months of 2022.

(In thousands)

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Consumer installment

were $505.0 million at March 31, 2023, compared to $504.5 million at December

categories represented the majority of the loan portfolio at March 31, 2023:

commercial real estate (53%), residential real

were $520.4 million at June 30, 2023, up 3% compared to $504.5 million at December 31,

categories represented the majority of the loan portfolio at June 30, 2023:

commercial real

estate (53%), residential real

estate (21%), commercial and industrial (12%) and construction and land development

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Company’s commercial real estate loans

were classified as owner-occupied at March 31, 2023.

Within the residential real estate portfolio segment, the

Company had junior lien mortgages of approximately $7.6

or 2%, and $7.4 million, or 1%, of total loans at March 31, 2023 and December 31, 2022, respectively.

were classified as owner-occupied at June 30, 2023.

Within the residential real estate portfolio segment, the Company

had junior lien mortgages of approximately $8.1 million,

or 2%, and $7.4 million, or 1%, of total loans at June 30, 2023 and December 31, 2022, respectively.

For residential real

estate mortgage loans with a consumer purpose, the Company had no loans that required

interest only payments at March

interest only payments at June 30,

2023 and December 31, 2022.

The Company’s

residential real estate mortgage portfolio does not include any option

residential real estate mortgage portfolio does not include any option or

hybrid ARM loans, subprime loans, or any material amount of other consumer

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viewed as high risk.

The average yield earned on loans and loans held for sale was 4.65% in the first quarter of

2023 and 4.46% in the first

quarter of 2022.

The average yield earned on loans and loans held for sale was 4.68% in the first six months

of 2023 and 4.42% in the first

six months of 2022.

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

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market interest rates, remaining COVID-19

pandemic effects including supply chain disruptions, commercial

office occupancy levels, housing supply shortages and

inflation, on our borrowers’ cash flows, real estate market sales volumes and liquidity,

valuations used in making loans and

evaluating collateral, 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 deteriora

tion of borrowers, fraud, and any violation of

applicable laws and regulations.

projects financed earlier that were based on lower interest rate assumptions

currently in effect may not be as profitable or successful at higher interest rate

currently in effect and currently expected in

pandemic effects including supply chain disruptions, reduced

commercial office occupancy levels, housing supply

shortages and inflation, on our borrowers’ cash flows, real estate market sales volumes

and liquidity, valuations

making loans and evaluating collateral, reduced credit availability

(especially for commercial real estate) generally and

higher costs of financing properties, which reduce the transaction and dollar

volumes of commercial real estate property

sales, 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.

projects financed

earlier that were based on lower interest rate assumptions than currently in effect

may not be as profitable or successful at

higher interest rate currently in effect and currently expected in the future.

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

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unfunded commitments) to a single borrower of $20.7 million.

Our loan policy requires that

the Loan Committee of the

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, 2023, the Bank had no

At June 30, 2023, the Bank had no

relationships exceeding these limits.

We periodically analyze

our commercial and industrial and commercial real estate loan portfolios to

determine if a

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

concentration of credit risk exists in any one or more industries.

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

-based capital at March 31, 2023 and December 31, 2022.

-based capital at June 30, 2023 and December 31, 2022.

(Dollars in thousands)

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losses in the loan portfolio.

The allowance for credit losses was $6.8 million at March

The allowance for credit losses was $6.6 million at June

30, 2023 compared to $5.8 million at December 31, 2022,

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coverage for all expected future credit losses on outstanding loans.

As of March 31,

As of June 30,

2023 and December 31, 2022, our

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loans was 1.27% at

March 31, 2023, up from 1.14%

June 30, 2023, up from 1.14%

at December 31, 2022.

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index and the Alabama gross state product.

Projections of these

macroeconomic factors, obtained from an independent third

Projections of these macroeconomic factors, obtained from an independent third

party, are utilized to predict

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losses are reverted to long term historical averages.

At March 31, 2023, reasonable and supportable periods of 12 months were utilized

followed by a 24 month straight line

At June 30, 2023, reasonable and supportable periods of 4 quarters were utilized

followed by an 8 quarter straight line

reversion period to long term averages.

A summary of the changes in the allowance for credit losses and certain asset

quality ratios for the first quarter of 2023 and

the previous four quarters is presented below.

quality ratios for the second quarter of 2023

and the previous four quarters is presented below.

(Dollars in thousands)

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Consumer installment

Net (charge-offs) recoveries

Net recoveries (charge-offs)

Provision for credit 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.

Nonperforming Assets

At March 31, 2023 and December 31, 2022 the Company had $2.7 million in nonperforming assets,

respectively.

At June 30, 2023 the Company had $1.1 million in nonperforming assets compared to $2.7

million at December 31, 2022.

The decrease in nonperforming assets was primarily related to the resolution of a collateral

dependent nonperforming loan,

with a recorded investment of $1.3 million, that was collected in full during the second quarter

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 2023 and the previous four quarters.

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Nonaccrual loans

Other real estate owned

Total nonperforming assets

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The table below provides information concerning the composition of nonaccrual

loans for the first quarter of 2023 and the

previous four quarters.

loans for the second quarter of 2023 and

the previous four quarters.

(In thousands)

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90 days or more past due, unless the loan is both well-secured and in the process of collection

The Company had $2.7

million in loans on nonaccrual status at March 31, 2023 and December 31,

2022, 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, 2023

and December 31, 2022,

respectively.

The table below provides information concerning the composition of OREO

for the third quarter of 2023 and the previous

four quarters.

The Company had no OREO at June 30, 2023 or December 31, 2022.

(In thousands)

Other real estate owned:

Commercial real estate

Total other real estate owned

Total deposits decreased

$11.1 million, or 1%, to $939.2 million at March 31, 202

3, compared to $950.3 million at

December 31, 2022.

This decrease reflects net outflows to higher yield investment

alternatives in a rising interest rate

environment and a decline in balances in existing accounts due to increased customer

Noninterest-bearing

deposits were $304.2 million, or 32% of total deposits, at March 31, 2023,

compared to $311.4 million, or 33% of total

deposits at December 31, 2022.

We had no brokered

deposits on March 31, 2023

or at December 31, 2022.

Estimated uninsured deposits totaled $368.6 million and $381.7 million at March 31,

Noninterest bearing demand

Certificates of deposit under $250,000

Certificates of deposit and other time deposits of $250,000 or more

Total deposits

were $950.7 million at June 30, 2023 and $950.3 million at December 31, 2022.

The Company utilizes

brokered deposits as an additional funding source.

At June 30, 2023, the Company had $16.0 million in brokered deposits,

compared to none at December 31, 2022.

Excluding brokered deposits, customer deposits decreased $15.6 million, or 2%,

during the first six months of 2022.

This decrease reflects net outflows to higher yield investment alternatives in a

interest rate environment and a decline in balances in existing accounts due to increased

customer spending.

bearing deposits were $298.5 million, or 31% of total deposits, at June 30,

2023, compared to $311.4 million, or 33% of

total deposits at December 31, 2022.

Estimated uninsured deposits totaled $374.8 million and $381.7 million at June 30,

2023 and December 31, 2022,

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FDIC insurance

The average rate paid on total interest-bearing deposits was 0.70% in the first quarter of 2023

compared to 0.34% in the

first quarter of 2022.

Other Borrowings

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

borrowings generally consist of federal

funds purchased and securities sold under agreements to repurchase

with an original maturity of one year or less.

had available federal funds lines totaling $61.0 million with none outstanding

at March 31, 2023, and December 31, 2022,

The Bank’s uninsured deposits at June 30,

2023 and December 31, 2022 include approximately $166.0 million and

$155.0 million, respectively, of deposits

of state, county and local governments that are collateralized by securities having

an equal fair value to such deposits.

The FDIC has proposed a special assessment on uninsured deposits of banks with over $5

billion in uninsured deposits to

the FDIC Deposit Insurance Fund’s costs

of the systemic risk determination made in connection with two recent bank

The special assessment will not apply to AuburnBank.

The average rate paid on total interest-bearing deposits was 0.81% in the first six

months of 2023 compared to 0.33% in the

first six months of 2022.

Other Borrowings and Available

The Company has no outstanding indebtedness.

The Bank borrows other short-term borrowings and long-term debt from

time to time.

Short-term borrowings generally consist of federal funds purchased

and securities sold under agreements to

repurchase with an original maturity of one year or less.

The Bank had available federal funds lines totaling $61.0 million

with no federal funds borrowings outstanding at June 30, 2023, and December 31,

2022, respectively.

Securities sold

under agreements to repurchase totaled $2.5 million and $2.6 million at March 31,

December 31, 2022, respectively.

At March 31, 2023 and December 31, 2022, the Bank had no borrowings from the

Federal Reserve discount window and no borrowings under the Federal Reserve’s

new Bank Term Facility Program

(“BTFP”), which opened March 12, 2023.

The average rate paid on short-term borrowings was 1.11

in the first quarter of 2023 and 2022,

respectively.

The Company had no long-term debt at March 31, 2023 and December 31, 2022.

agreements to repurchase,

which were entered into on behalf of certain customers totaled $2.1 million and $2.6

June 30, 2023 and December 31, 2022, respectively.

At June 30, 2023 and December 31, 2022, the Bank had no

borrowings from the Federal Reserve discount window and no borrowings under

the Federal Reserve’s new Bank Term

Facility Program (“BTFP”), which opened March 12, 2023.

The Bank is a member of the FHLB of Atlanta and may borrow from time to time

under the FHLB of Atlanta’s advance

program to obtain funding for its growth.

FHLB advances include both fixed and variable terms and are taken out with

varying maturities, and are generally secured by eligible assets.

The Bank had no borrowings under FHLB of Atlanta’s

advance program at June 30, 2023 and December 31, 2022, respectively.

At those dates, the Bank had $305.2 million and

$312.6 million, respectively, of available

lines of credit at the FHLB of Atlanta.

The average rate paid on the Bank’s

short-term borrowings was 1.82% in the first six months of 2023

compared to 0.50%

in the first six months of 2022.

The Company had no long-term debt at June 30, 2023 and December 31, 2022.

CAPITAL ADEQUACY

The Company’s consolidated

stockholders’ equity was $73.6 million and $68.0 million as of March 31,

December 31, 2022, respectively.

The increase from December 31, 2022 was primarily driven by other comprehensive

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

net of tax of $5.5 million.

unrealized losses do not affect the Bank’s

capital for regulatory capital purposes.

The Company’s consolidated

stockholders’ equity was also increased by net earnings of $2.0 million.

These increases in the Company’s consolidated

stockholders’ equity were partially offset by cash dividends

paid of $0.9 million, the cumulative effect of adopting the

CECL accounting standard of $0.8 million, and repurchases of the Company’s

stock of $0.1

The Company paid cash dividends of $0.27 per share in the first quarter of 2023, an increase of 2%

from the same period in

The Company’s share repurchases of $0.

million since December 31, 2022 resulted in 2,648 fewer outstanding

common shares at March 31, 2023.

stockholders’ equity was $71.0 million and $68.0 million as of June 30, 2023

31, 2022, respectively.

from December 31, 2022 was primarily driven by net earnings of $3.9 million and

other comprehensive income due to the change in unrealized gains/losses on securities

available-for-sale, net of tax of $1.8

million, partially offset by cash dividends of $1.9 million, the cumulative effect

of adopting CECL accounting standard of

$0.8 million and repurchases of the Company’s

stock of $0.1 million.

Total unrealized losses

on available-for-sale

securities declined 5% from $54.7 million on December 31, 2022

to $52.2 million June 30, 2023.

These unrealized losses

do not affect the Bank’s capital

for regulatory capital purposes.

The Company paid cash dividends of $0.54 per share in the first six months of 2023,

an increase of 2% from the same

period in 2022.

The Company’s share repurchases

million since December 31, 2022 resulted in 4,225 fewer

outstanding common shares at June 30, 2023.

These shares were repurchased at an average cost per share of $23.28.

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for capital adequacy purposes.

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

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

conservation buffer was subject to a three-year phase-in period that began on January 1,

2016 and was fully phased-in on

January 1, 2019 at 2.5%.

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executive officers.

At March 31, 2023, the Bank’s ratio

At June 30, 2023, the Bank’s ratio

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

Effective March 20, 2020, the Federal Reserve and the other federal

banking regulators adopted an interim final rule that

Effective March 20, 2020, the Federal Reserve and the other

federal banking regulators adopted an interim final rule that

amended the capital conservation buffer.

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ratio to allow banking

organizations to more freely use their capital buffers to promote

lending and other financial intermediation activities, by

organizations to more freely use their capital buffers to

promote lending and other financial intermediation activities, by

making the limitations on capital distributions more gradual.

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risk-based capital ratio was 15.33%, and total risk-based capital ratio was 16.31% at

March 31, 2023.

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.”

Bank’s capital conservation buffer

was 8.48% at March 31, 2023.

June 30, 2023.

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.”

capital conservation buffer was 8.31% at June 30, 2023.

On July 27, 2023, the Federal Reserve, the Comptroller of the Currency and the FDIC issued

a joint notice of proposed

rulemaking to implement the Basel III endgame components.

The proposal which is subject to public comment and change

only applies to banks and holding companies with $100 billion or more of assets.

The proposal includes provisions dealing

Credit risk, which arises from the risk that an obligor fails to perform on an obligation;

Credit risk, which arises from the risk than an obligor fails to perform on an obligation;

Market risk, which results from changes in the value of trading positions;

Operations risk, which is the risk of losses resulting from inadequate or

failed internal process, people, and

systems, or from external events;

Credit valuation adjustment risk, which results from the risk of losses on certain derivative

The proposal would also change the capital requirements for banking organizations

with more than $100 billion of assets.

These regulatory proposals are not applicable to the Company.

MARKET AND LIQUIDITY RISK MANAGEMENT

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Interest Rate Risk Management

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

in interest rates.

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

model and an economic

Measurements used to help manage interest rate sensitivity include an earnings

simulation model and an economic

value of equity (“EVE”) model.

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For changes up or down in rates from management’s

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

variances are as follows:

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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of exposure under these

scenarios, our modeling under both a gradual and instantaneous change in interest rates indicates

our balance sheet is asset

At March 31, 2023, our earnings simulation model indicated that we were in compliance

scenarios, our modeling under both a gradual and instantaneous change in interest rates

indicates our balance sheet is asset

At June 30, 2023, our earnings simulation model indicated that we were in compliance

with the policy guidelines noted

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balance sheet items will change as a result of interest rate changes.

Economic values

are estimated by discounting expected

Economic values are

estimated by discounting expected

cash flows from assets, liabilities, and off-balance sheet items,

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

At March 31, 2023, our EVE model indicated that we were in compliance

with our policy guidelines.

At June 30, 2023, 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

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The ability of many

borrowers to service their debts also may decrease during periods of rising interest rates or economic

stress, which may

borrowers to service their debts also may decrease during periods of rising interest rates or

economic stress, which may

differ across industries and economic sectors.

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loan, investment, borrowing, and capital policies.

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

een 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

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designated as hedging instruments.

At March 31, 2023 and December 31,

At June 30, 2023 and December 31, 2022,

the Company had no derivative contracts

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to meet its anticipated funding needs, while

balancing against excessive liquidity that likely would reduce earnings due to the

cost of foregoing alternative higher-

balancing against excessive liquidity that likely would

reduce earnings due to the cost of foregoing alternative higher-

yielding assets.

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repayment and maturity of securities and loans, sales of securities, and the

sale of loans,

particularly residential mortgage

sale of loans, particularly residential mortgage

The Bank has access to federal funds lines from various banks and borrowings

2 unchanged sentences

BTFP borrowing facility.

In addition to these sources, the Bank may participate in

the FHLB’s advance program

to obtain funding for its growth.

Advances include both fixed and variable terms and

taken out with varying maturities.

At March 31, 2023, the Bank had a remaining available

line of credit with the FHLB of

$307.0 million.

At March 31, 2023, the Bank also had $61.0

million of available federal funds lines with no borrowings

Primary uses of funds include repayment of maturing obligations and

growing the loan portfolio.

has no brokered deposits on March 31, 2023 or at December 31, 2022.

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

to meet all their respective known

In addition to these sources, the Bank is a member of

the FHLB of Atlanta and may participate in the FHLB of Atlanta’s

advance program to obtain funding for its growth.

Advances include both fixed and variable terms and may be taken out with varying

At June 30, 2023, the Bank

had a remaining available line of credit with the FHLB of $305.2

At June 30, 2023, the Bank also had $61.0

million of available federal funds lines with no borrowings outstanding.

uses of funds include repayment of

maturing obligations and growing the loan portfolio.

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

meet all their respective known

contractual obligations and unfunded commitments, including loan commitments

and reasonably

rexpected borrower,

and reasonably expected borrower,

depositor, and creditor requirements over the next twelve

Off-Balance Sheet Arrangements, Commitments, Contingencies and Contractual

At March 31, 2023, the Bank had outstanding standby letters of credit of $0.8 million and

At June 30, 2023, the Bank had outstanding standby letters of credit of $0.8 million and

unfunded loan commitments

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We generally sell residential

mortgage loans in the secondary market to Fannie Mae while retaining the servicing

mortgage loans in the secondary market to Fannie Mae while retaining the servicing of these

The sale agreements for these residential mortgage loans with Fannie Mae and other

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state, and local laws, among other

As of March 31, 2023, the unpaid principal balance of residential mortgage loans,

which we have originated and sold, but

retained the servicing rights, was $226.7 million.

Although these loans are generally sold on a non-recourse basis, we may

be obligated to repurchase residential mortgage loans or reimburse investors

for losses incurred (make whole requests) if a

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

Upon receipt of a repurchase or make whole

request, we work with investors to arrive at a mutually agreeable resolution.

and make whole requests are

typically reviewed on an individual loan by loan basis to validate the claims made by the investor

and to determine if a

contractually required repurchase or make whole event has occurred.

seek to reduce and manage the risks of potential

repurchases, make whole requests, or other claims by mortgage loan investors

through our underwriting and quality

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

As of June 30, 2023,

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

sold, but retained the servicing rights, was $221.6 million.

Although these loans are generally sold on a non-recourse basis,

we may be obligated to repurchase residential mortgage loans or reimburse investors

for losses incurred (make whole

requests) if a loan review reveals a potential breach of seller representations and

Upon receipt of a repurchase

or make whole request, we work with investors to arrive at a mutually agreeable

Repurchase and make whole

requests are typically reviewed on an individual loan by loan basis to validate the claims

made by the investor and to

determine if a contractually required repurchase or make whole event has occurred.

We seek to reduce and

manage the risks

of potential repurchases, make whole requests, or other claims by mortgage loan investors

through our underwriting and

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

market standards.

The Company was not required to repurchase any loans during the first quarter of 2023

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

2023 as a result of representation and

1 unchanged sentence

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

make-whole requests at March 31, 2023.

make-whole requests at June 30, 2023.

We service all residential

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(4) maintain any

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

required escrow accounts for payment of taxes and insurance and administer

escrow payments;

and (5) foreclose on

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The standards governing

servicing and the possible remedies for violations of such standards are determined

by servicing guides issued by Fannie

Mae as well as the contract provisions established between Fannie Mae and the Bank.

Remedies could include repurchase

of an affected loan.

servicing and the possible remedies for violations of such standards are determined by

our agreement with Fannie Mae and

Fannie Mae’s mortgage servicing

Remedies could include repurchase of an affected loan.

Although repurchase and make whole requests related to representation and

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their purchased loans.

As of March 31, 2023, we do not believe that this exposure is material due to the historical level

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

mortgage loans serviced for Fannie

As of June 30, 2023, 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 mortgage loans serviced for Fannie

Mae were current as of such date.

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to interest rate changes.

The yield curve was inverted on March 2023, which means shorter

The yield curve was inverted on June 30, 2023, which means shorter

term interest rates are higher

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demand and growth.

Inflation and

related changes in market interest rates, as the Federal Reserve acts to

meet its long term inflation goal of 2%, also can

adversely affect the values and liquidity of our loans and securities.

Inflation is running at levels unseen in decades and well above the Federal Reserve’s

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from 0 – 0.25% to 4.25 – 4.50%.

The target rate was increased another 25 basis points on each of January 31,

May 3, 2023 to 5.00-5.25%, and further increases in the target federal

funds rate appear likely if inflation remains elevated.

Our deposit costs may increase as the Federal Reserve increases its target

federal funds rate, market interest rates increase,

and as customer savings behaviors change as a result of inflation and seek higher market interest

rates on deposits and other

alternative investments.

The target federal funds rate was increased another 25 basis points on each of January 31,

March 7, May 3 and July 26, 2023 to 5.25-5.50%, and further increases in the target

federal funds rate appear likely if

inflation remains elevated.

Our deposit costs may increase as the Federal Reserve increases its target federal

market interest rates increase, and as customer savings behaviors change as a result of inflation

and customers seek higher

market interest rates on deposits and other alternative investments.

Monetary efforts to control inflation may also affect

unemployment which is an important

component in our CECL model used to estimate our allowance for credit losses.

unemployment which is an important component in our CECL model used to

estimate our allowance for credit losses.

CURRENT ACCOUNTING DEVELOPMENTS

11 unchanged sentences

, The amendments in this Update permit reporting entities to elect

to account for their tax equity investments, regardless of the tax credit program from which

the income tax credits are

to account for their tax equity investments, regardless of the tax credit program from

which the income tax credits are

received, using the proportional amortization method if certain conditions are

26 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

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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 credit 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 credit 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 credit 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

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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:

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Selected average balances:

Securities available-for-sale

Loans, net of unearned income

Total deposits

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Selected period end balances:

Securities available-for-sale

Loans, net of unearned income

Allowance for credit losses

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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

(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)

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Stockholders' equity

Total liabilities and stockholders' equity

Total liabilities and stockholders'

Net interest income and margin (tax-equivalent)

(1) 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

(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) Includes average net unrealized gains (losses) on investment securities available

(3) 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) Includes average net unrealized gains (losses) on

investment securities available for sale

(3) 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 Credit Losses

Second Quarter

First Quarter

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Second Quarter

First Quarter

(Dollars in thousands)

8 unchanged sentences

(Dollars in thousands)

March 31, 2023

June 30, 2023

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