What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-07 compared with 2023-08-08 · 608 added, 842 removed, 875 unchanged (62% 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

Auburn National Bancorporation, Inc.

(the “Company”) is a bank holding company registered

with the Board of Governors

of the Federal Reserve System (the “Federal Reserve”) under the Bank Holding Company

Act of 1956, as amended (the

The Company was incorporated in Delaware in 1990, and in 1994

it succeeded its Alabama predecessor as the

bank holding company controlling AuburnBank, an Alabama state

member bank with its principal office in Auburn,

Alabama (the “Bank”).

The Company and its predecessor have controlled the Bank since

As a bank holding

company, the Company

may diversify into a broader range of financial services and other business activities than currently

are permitted to the Bank under applicable laws and regulations.

The holding company structure also provides greater

financial and operating flexibility than is presently permitted to the Bank.

The Bank has operated continuously since 1907 and currently conducts its business

primarily in East Alabama, including

Lee County and surrounding areas.

The Bank has been a member of the Federal Reserve System since April 1995.

Bank’s primary regulators are the Federal Reserve

and the Alabama Superintendent of Banks (the “Alabama

Superintendent”).

The Bank has been a member of the FHLB of Atlanta since 1991.

Certain of the statements

discussion and analysis and elsewhere, including information incorporated

herein by reference to other documents, are

“forward-looking statements” as more fully described under “Special

Cautionary Notice Regarding Forward-Looking

Statements” below.

The following discussion and analysis is intended 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 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

notes for the quarters and nine months ended September 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

interim reports on Form 10-Q for the quarters

ended March 31, 2023 and June 30, 2023.

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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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,”

“will,” “anticipate,” “assume,”

identify these forward-looking statements through our use of words such as

“may,” “will,” “anticipate,”

“should,” “indicate,” “would,” “believe,” “contemplate,” “expect,”

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regulations and rules and

their application by our regulators, including capital and liquidity requirements, and changes

in the scope and cost

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

failures in California and

March and May 2023;

their application by our regulators, including capital and liquidity requirements, and

changes in the scope and cost

of FDIC insurance, including changes in various capital, liquidity and other rule proposals,

as well as changes in

supervisory and examination focus, in light of three regional bank failures in California and

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

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

those used in our loan

portfolio reviews;

the risks of inflation, changes in market interest rates and the shape of the yield curve on the levels, composition

the risks of inflation, changes in market interest rates and the shape of the yield curve on the levels,

and costs of deposits and borrowings, the values of our securities and loans, loan demand

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and other providers of financial,

investment and insurance services, including the disruptive effects of

financial technology and other competitors

investment and insurance services, including the disruptive effects

of financial technology and other competitors

who are not subject to the same regulations as the Company and the Bank and credit unions,

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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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carry-forwards that we may be able to utilize for income tax purposes;

other factors and risks described under “Risk Factors” herein and in any of our subsequent

reports that we make

with the Securities and Exchange Commission (the “Commission” or “SEC”)

under the Exchange Act.

other factors and risks described herein and under “Risk Factors” in our annual report

on Commission Form 10-K

as of and for the year ended December 31, 2022 or in any of our subsequent reports that

we make with the

Securities and Exchange Commission (the “Commission” or “SEC”) under

the Exchange Act.

All written or oral forward-looking statements that are we make or are

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Summary of Results of Operations

Quarter ended June 30,

Six months ended June 30,

Quarter ended September 30,

Nine months ended September 30,

(Dollars in thousands, except per share amounts)

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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 $5.4

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

million for the first nine months of 2023,

compared to $5.9 million for the first nine

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.

Basic and diluted earnings per share were $1.54 per share for the first nine

months of 2023, compared to

$1.67 per share for the first nine months of 2022.

Net interest income (tax-equivalent) was $20.6 million for the first

nine months of 2023, a 3% increase compared to $20.0

million for the first nine months of 2022.

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

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.

margin (tax-equivalent) was 2.97%

for the first nine months of 2023 compared to

2.67% for the first nine months of 2022.

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

yields on interest

earning assets.

on interest earning assets.

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

Average loans for the first nine

months of 2023 were $514.7 million, a 16% increase from the first nine months of 2022.

See “Results of Operations – Average

Balance Sheet and Interest Rates” and “Net Interest Income and Margin”

At September 30, 2023, the Company’s allowance

for credit losses was $6.8

million, or 1.24% of total loans, compared to

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

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

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

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

$5.8 million, or 1.14% of total loans, at December 31, 2022, and $5.0 million, or

1.05% of total loans, at September 30,

The implementation of CECL required pursuant to Accounting Standards

Codification (“ASC”) 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.

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 Company recorded a negative provision for credit losses during the first

nine months of 2023 of $0.2

compared to none during the first nine 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.

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 nine 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.

This was partially offset by an increase in the calculation of current expected

credit losses due

to loan growth during the first nine months of 2023.

Noninterest income was $2.4 million in the first nine months of 2023,

compared to $2.6 million in the first nine 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

result of higher market interest rates for mortgage loans.

Noninterest expense was $16.8 million in the first nine months of 2023,

compared to $15.4 million for the first nine months

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

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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 $0.54 per share in the first six months of 2023,

million, and other noninterest expense of $0.9

Income tax expense was $0.7

million for the first nine months of 2023 compared to $1.0 million for the first nine months of

This decrease was due to a decline in the level of earnings before taxes and the Company’s

effective tax rate.

Company's effective tax rate for the first nine months of 2023

was 12.05%, compared to 15.14% in the first nine months of

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 Credits

The Company paid cash dividends of $0.81 per share in the first nine 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

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

The Company repurchased 10,108 shares for $0.2 million during the first nine

months of 2023.

September 30, 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 15.98%, a tier 1 leverage ratio of

10.26% and a common equity tier 1 (“CET1”) ratio of 15.01% at September 30,

At September 30,

Company’s equity to total assets ratio

was 5.96%, compared to 6.65% at December 31, 2022, and 5.74% at September 30,

For the third quarter of 2023, net earnings were $1.5 million, or $0.43 per

share, compared to $2.0 million, or $0.57 per

share, for the third quarter of 2022.

Net interest income (tax-equivalent) was $6.4 million for the third quarter of 2023

compared to $7.4 million for the third quarter of 2022.

This decrease was primarily due to decline in the Company’s

interest margin.

The Company’s net interest

margin (tax-equivalent) was 2.73%

in the third quarter of 2023 compared to

in the third quarter of 2022.

The decrease was primarily due to increased cost of funds and changes in our deposit

mix, which was partially offset by a more favorable asset

mix and higher yields on interest earning assets.

recorded a provision for credit losses during the third quarter of 2023

million, compared to $0.3 million for the third

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.

Noninterest income was $0.9 million for both the third quarter of 2023 and 2022.

Noninterest expense was

$5.4 million in the third quarter of 2023 and 2022.

Income tax expense was $0.2

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.

million for the third quarter of 2023,

compared to $0.4 million for the third quarter of 2022.

This decrease was due to a decline in the level of earnings before

taxes and the Company’s effective

The Company's effective tax rate for the third quarter of 2023 was 10.90%,

compared to 17.78% in the third 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

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

The accounting and financial reporting policies of the Company conform with U.S.

generally accepted

principles and with general practices within the banking industry.

In connection with the application of those principles, we

have made judgments and estimates which, in the case of the determination of our allowance

for credit losses for loans, our

determination of credit losses for investment securities,

recurring and non-recurring fair value measurements, the valuation

of other real estate owned, and the valuation of deferred tax assets, were critical to the determination

of our financial

position and results of operations.

Other policies also require subjective judgment and

assumptions and may accordingly

impact our financial position and results of operations.

Accounting Standards Adopted in 2023

On January 1, 2023, the Company adopted ASC 326 as described more fully in our

unaudited financial statements in Part I

of this Quarterly report,

especially Note 1, Accounting Standards Adopted in 2023 and Note 5, Loans and Allowance

Credit Losses.

This standard replaced the incurred loss methodology with an expected loss

methodology that is referred to

as the current expected credit loss (“CECL”) methodology.

CECL requires an estimate of credit losses for the remaining

estimated life of the financial asset using historical experience, current conditions,

and reasonable and supportable forecasts

and generally applies to financial assets measured at amortized cost, including loan

receivables and held-to-maturity debt

securities, and some off-balance sheet credit exposures such as unfunded

commitments to extend credit.

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

One such change is to require

credit losses to be presented as an allowance rather than as a write-down on available for sale debt

securities if management

does not intend to sell and does not believe that it is more likely than not, they will be required

The Company adopted ASC 326 and all related subsequent amendments thereto

effective January 1, 2023 using the

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

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

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

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.

As of December 31, 2022, the Company did not have

any other-than-temporarily impaired investment securities.

upon adoption of ASC 326, the Company determined

that an allowance for credit losses on available for sale securities was not deemed

The Company elected not to measure an allowance for credit losses for accrued interest receivable

and instead elected to

reverse interest income on loans or securities that are placed on nonaccrual status,

which is generally when the instrument is

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

has concluded that

this policy results in the timely reversal of uncollectible interest.

The Company also adopted ASU 2022-02, “Financial Instruments - Credit Losses (Topic

Troubled Debt

Restructurings and Vintage Disclosures”

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

refinancings and restructurings by creditors when a borrower is experiencing

The accounting principles we follow and our methods of applying these principles

conform with U.S.

GAAP and with

general practices within the banking industry.

The accounting policies which we believe to be most critical in preparing our

Consolidated Financial Statements are presented in the section titled

“Critical Accounting Policies” in Management’s

Discussion and Analysis of Financial Condition and Results of Operations included

in the Company’s Annual

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

On January 1, 2023, we adopted FASB

Instruments - Credit Losses

326) which significantly changes our methodology for determining our allowance

credit losses, and ASU 2022-02

, Financial Instruments – Credit Losses (Topic

Debt Restructurings and

Vintage Disclosures

which eliminated the accounting guidance for TDRs, while enhancing disclosure requirements

certain loan refinancings and restructurings by creditors when a borrower is experiencing

financial difficulty.

Specifically, rather than

applying the recognition and measurement guidance for TDRs, an entity

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.

Additionally,

2022-02 requires an entity to disclose current-period gross write-offs

by year of origination for financing receivables within

the scope of Subtopic 326-20, Financial Instruments—Credit Losses—Measured at

Amortized Cost.

ASU 2022-02 did not

have a material impact on the Company’s consolidated

financial statements.

Loans that management has the intent and ability to hold for the foreseeable

future or until maturity or payoff are reported

at amortized cost.

Amortized cost is the principal balance outstanding, net of purchase premiums

and discounts and

deferred fees and costs.

Accrued interest receivable related to loans is recorded

in other assets on the consolidated balance

Interest income is accrued on the unpaid principal balance.

Loan origination

fees, net of certain direct origination

costs, are deferred and recognized in interest income using methods that approximate a

level yield without anticipating

The accrual of interest is generally discontinued when a loan becomes 90 days past due and

is not well collateralized and in

the process of collection, or when management believes, after considering economic and

business conditions and collection

efforts, that the principal or interest will not be collectible in the normal course

Past due status is based on

contractual terms of the loan.

A loan is considered to be past due when a scheduled payment has

not been received 30 days

after the contractual due date.

All accrued interest is reversed against interest income when a loan is placed on nonaccrual

Interest received on such

loans is accounted for using the cost-recovery method, until qualifying for return to accrual.

Under the cost-recovery

method, interest income is not recognized until the loan balance is reduced to zero.

Loans are returned to accrual status

when all the principal and interest amounts contractually due are brought current, there

is a sustained period of repayment

performance, and future payments are reasonably assured.

Allowance for Credit Losses – Loans

The allowance for credit losses is a valuation account that is deducted from the loans' amortized

cost basis to present the net

amount expected to be collected on the loans.

Loans are charged

off against the allowance when management believes the

uncollectibility of a loan balance is confirmed.

Expected recoveries do not exceed the aggregate

of amounts previously

charged-off and expected to be charged-off.

Accrued interest receivable is excluded from the estimate of credit losses.

The allowance for credit losses represents management’s

estimate of lifetime credit losses inherent in loans as of the

balance sheet date.

The allowance for credit losses is estimated by management using relevant

available information, from

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,

residential real estate, and consumer loans).

These segments are further disaggregated into loan classes, the level at which

credit quality is monitored.

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

for each loan segment, except consumer

The weighted average remaining life method is used to estimate credit loss assumptions

for consumer loans.

The DCF model calculates an expected life-of-loan loss percentage by considering the

forecasted probability that a

borrower will default (the “PD”), adjusted for relevant forecasted macroeconomic

factors, and LGD, which is the estimate

of the amount of net loss in the event of default.

This model utilizes historical correlations between default experience and

certain macroeconomic factors as determined through a statistical regression analysis.

The forecasted Alabama

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

construction and land development,

commercial real estate, multifamily,

and residential real estate loans.

In addition, forecasted changes in the Alabama home

price index is considered in the model for construction and land development and residential

real estate loans;

changes in the national commercial real estate (“CRE”) price index is considered in the

model for commercial real estate

and multifamily loans;

and forecasted changes in the Alabama gross state product

is considered in the model for

multifamily loans.

Projections of these macroeconomic factors, obtained from an independent

third party, are utilized to

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

expected prepayments and principal

payments (“curtailments”) when appropriate.

Management's determination of the

contract term excludes expected

extensions, renewals, and modifications unless the extension or

renewal option is included in the contract at the reporting

date and is not unconditionally cancellable by the Company.

To the extent the lives of the

loans in the portfolio extend

beyond the period for which a reasonable and supportable forecast can be

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

The weighted average remaining life method was deemed most appropriate

for the consumer loan segment because

consumer loans contain many different payment structures,

payment streams and collateral.

The weighted average

remaining life method uses an annual charge-off rate over several vintages

to estimate credit losses.

The average annual

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

Additionally, the allowance

for credit losses calculation includes subjective adjustments for qualitative risk

factors that are

believed likely to cause estimated credit losses to differ from historical experience.

These qualitative adjustments may

increase or reduce reserve levels and include adjustments for lending management experience

and risk tolerance, loan

review and audit results, asset quality and portfolio trends, loan portfolio growth, industry concentrations,

underlying collateral, external factors and economic conditions not already captured.

Loans that do not share risk characteristics are evaluated on an individual basis.

management determines that

foreclosure is probable and the borrower is experiencing financial difficulty,

the expected credit losses are based on the

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

Allowance for Credit Losses – Unfunded Commitments

Financial instruments include off-balance sheet credit instruments,

such as commitments to make loans and commercial

letters of credit issued to meet customer financing needs.

The Company’s

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

contractual amount of those instruments.

Such financial instruments are recorded

when they are funded.

The Company records an allowance for credit losses on off-balance

sheet credit exposures, unless the commitments to

extend credit are unconditionally cancelable, through a charge to provision

for credit losses in the Company’s consolidated

statements of earnings.

The allowance for credit losses on off-balance sheet credit

exposures is estimated by loan segment

at each balance sheet date under the current expected credit loss model using the same

methodologies as portfolio loans,

taking into consideration the likelihood that funding will occur as well as any third-party

The allowance for

unfunded commitments is included in other liabilities on the Company’s

consolidated balance sheets.

On January 1, 2023, the Company recorded an adjustment for unfunded commitments of $77

thousand for the adoption of

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

-for-Sale Securities

For any securities classified as available-for-sale that are in an unrealized

loss position at the balance sheet date, the

Company assesses whether or not it intends to sell the security,

or more likely than not will be required to sell the security,

before recovery of its amortized cost basis.

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

FHLB of Atlanta and Federal

Reserve Bank of Atlanta (“FRB”).

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

no market for these securities.

The Company records these non-marketable equity securities as a component

assets, which are periodically evaluated for impairment.

Management considers

these non-marketable equity securities to

be long-term investments.

when evaluating these securities for impairment, management considers

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

Determination

GAAP requires management to value and disclose certain of the Company’s

assets and liabilities at fair value,

including investments classified as available-for-sale and derivatives.

Measurements and Disclosures

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

GAAP and expands

disclosures about fair value measurements.

For more information regarding fair value measurements and disclosures,

please refer to Note 7, Fair Value,

of the unaudited consolidated financial statements that accompany this report.

Fair values are based on active market prices of identical assets or liabilities when available.

Comparable assets or

liabilities or a composite of comparable assets in active markets are used when identical assets

or liabilities do not have

readily available active market pricing.

However, some of the Company’s

assets or liabilities lack an available or

comparable trading market characterized by frequent transactions between

willing buyers and sellers.

In these cases, fair

value is estimated using pricing models that use discounted cash flows and

other pricing techniques.

Pricing models and

their underlying assumptions are based upon management’s

best estimates for appropriate discount rates, default rates,

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

materially different net earnings and retained earnings results.

Other Real Estate Owned

Other real estate owned or OREO, consists of properties obtained through foreclosure or otherwise

in satisfaction of loans

and is reported at the lower of cost or fair value, less estimated costs to sell at the date acquired

with any loss recognized as

a charge-off through the allowance for credit losses.

Additional OREO losses for subsequent valuation adjustments are

determined on a specific property basis and are included as a component of other noninterest

expense along with holding

Any gains or losses on disposal of OREO are also reflected in noninterest expense.

Significant judgments and

complex estimates are required in estimating the fair value of OREO, and the period of time

within which such estimates

can be considered current is significantly shortened during periods of

market volatility.

As a result, the

realized from sales transactions could differ significantly from appraisals,

comparable sales, and other estimates used to

determine the fair value of OREO.

Asset Valuation

A valuation allowance is recognized for a deferred tax asset if, based on the weight of available

evidence, it is more-likely-

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

realization of deferred tax assets

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

in which those temporary differences become

Management considers the scheduled reversal of deferred

tax liabilities, projected future taxable income and tax

planning strategies in making this assessment.

At June 30, 2023

we had total deferred tax assets of $13.4 million included

as “other assets”, including $13.1 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, 2023.

The amount of the deferred tax assets considered

realizable, however, could be reduced if

estimates of future taxable income are reduced.

Summary of Significant Accounting Policies

in the Notes to our Consolidated Financial Statements elsewhere in this Form

10-Q for further information related to these changes.

There have been no other significant

changes to our Critical

Accounting Estimates as described in our Form 10-K.

OF OPERATIONS

Average Balance

Sheet and Interest Rates

Six months ended June 30,

Balance Sheet and Interest Rates

Nine months ended September 30,

(Dollars in thousands)

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Net Interest Income and Margin

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.

Net interest income (tax-equivalent) was $20.6 million for the first nine months

of 2023, a 3% increase compared to $20.0

million for the first nine months of 2022.

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

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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.

margin (tax-equivalent) was 2.97% in the first nine months of 2023

compared to 2.67% in the first nine 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

cost of funds.

The cost of funds increased to 102 basis points, compared to 32 basis points in the first

nine months of 2022.

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.

funds range from 0 – 0.25% to 5.25 – 5.50%.

The tax-equivalent yield on total interest-earning assets increased by 81 basis points

to 3.67% in the first six months of

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

to 3.70% in the first nine months of

2023 compared to 2.89% in the first nine months of 2022.

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

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The cost of total interest-bearing liabilities increased by 70 basis points to

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.

1.02% in the first nine months of 2023 compared

to 0.32% in the first nine months of 2022.

Our deposit costs may continue to increase as the Federal Reserve maintains or

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, and we compete for deposits against other banks,

money market mutual funds,

Treasury securities and other interest bearing alternative investments.

The Company continues to deploy various asset liability management strategies

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Our ability to compete and manage our deposit costs until our interest-earning assets

reprice will be important to maintaining or potentially increasing our net interest

margin during the monetary tightening

cycle that we believe will continue throughout 2023.

reprice and we generate new fixed rate loans with current market interest rates

will be important to our net interest margin

during the monetary tightening cycle that we believe will continue throughout

2023 and into 2024.

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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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,

during the first nine months of 2023 of $0.2

million, compared to none during the first nine months of 2022.

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.

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.

unemployment rate, which may be affected by monetary

The negative provision for credit losses during the first nine 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.

This was partially offset by an increase in the

calculation of current expected credit losses due to loan growth during the first nine

months of 2023.

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

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methodology, to adequately cover

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

The implementation of

CECL, as of 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 to ASC 326.

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

At September 30,

2023, the Company’s allowance

for credit losses was $6.8 million, or 1.24% of total loans, compared to $5.8

1.14% of total loans, at December 31, 2022, and $5.0 million, or 1.05% of total loans, at September

implementation of CECL, as of 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 to ASC 326.

Noninterest Income

Quarter ended June 30,

Six months ended June 30,

Quarter ended September 30,

Nine months ended September 30,

(Dollars in thousands)

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Bank-owned life insurance

Securities gains, net

Total noninterest income

The Company’s income from mortgage lending

was primarily attributable to the (1) origination and sale of mortgage loans

is primarily attributable to the (1) origination and sale of mortgage loans

and (2) servicing of mortgage loans.

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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 June 30,

Six months ended June 30,

Quarter ended September 30,

Nine months ended September 30,

(Dollars in thousands)

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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.

mortgage loans increased and mortgage loan volumes also decreased.

The decrease in origination income was partially

offset by an increase in mortgage servicing fees, net of related

amortization expense as mortgage prepayment speeds

slowed, resulting in decreased amortization expense.

Income from bank-owned life insurance was $311

thousand and $293 thousand for the nine months ended September 30,

2023 and 2022, respectively.

Excluding a $52 thousand non-taxable death benefit received during 2023, income from

bank-owned life insurance would have been $259 thousand and $293

thousand for the nine months ended September 30,

2023 and 2022, respectively.

Noninterest Expense

Quarter ended June 30,

Six months ended June 30,

Quarter ended September 30,

Nine months ended September 30,

(Dollars in thousands)

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Total noninterest expense

Salaries and benefits decreased for both the quarter and nine months ended September

A decrease in the number

of full-time equivalents was partially offset by routine annual

increases in salaries and wages.

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

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operating the new headquarters.

The Company relocated its main office branch and bank operations

into its newly

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

constructed headquarters during June 2022.

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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.

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 $0.7 million for the first nine months of 2023

compared to $1.0 million for the the first nine

months of 2022.

This decrease was due to a decline in the level of earnings before taxes and the Company’s

effective 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

income tax rate for the first nine months of 2023 was 12.05%, compared to

15.14% in the

first nine months of 2022.

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

BALANCE SHEET ANALYSIS

BALANCE SHEET

Securities available-for-sale were $373.3

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

million at September 30, 2023, compared to $405.3 million at December 31,

This decrease reflects a $21.2 million decrease in the amortized cost basis of securities

available-for-sale and a

decrease in the fair value of securities available-for-sale of $10.8 million.

The average annualized tax-equivalent yields

earned on total securities were 2.35%

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

in the first nine months of 2023 and 1.95% in the first nine months of 2022.

(In thousands)

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Consumer installment

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

Approximately 25% of the

Company’s commercial real estate loans

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

were $545.6 million at September 30, 2023, an 8% increase compared to $504.5 million at December 31,

Four loan categories represented the majority of the loan portfolio at September 30,

commercial real estate (52%),

residential real estate (21%), commercial and industrial (12%) and construction and

land development (13%).

Approximately 23% of the Company’s commercial

real estate loans were classified as owner-occupied at September 30,

Within the residential real estate portfolio segment, the Company

had junior lien mortgages of approximately $8.7 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 June 30,

2023 and December 31, 2022.

or 2% of total loans, and $7.4

million, or 1%, of total loans at September 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 September 30, 2023 and December 31, 2022.

The Company’s

residential real estate mortgage portfolio does not include any option or

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

mortgage products which are generally

viewed as high risk.

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

not limited to, the effects of

residential real estate mortgage portfolio does

not include any option or hybrid ARM loans, subprime loans, or any material amount of other

consumer mortgage products

which are generally viewed as high risk.

The average yield earned on loans and loans held for sale was 4.71% in the first nine months of

2023 and 4.42% in the first

nine months of 2022.

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

but are not limited to, the effects of

current economic conditions, including inflation and the continuing increases in

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commercial office occupancy levels, housing supply

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

and liquidity, valuations

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

market sales volumes and liquidity,

valuations used in

making loans and evaluating collateral, reduced credit availability

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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.

Other risks we face include, among other things, 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 the 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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Board of Directors approve any loan relationships that exceed this internal limit.

At June 30, 2023, the Bank had no

relationships exceeding these limits.

At September 30, 2023, the Bank had one

loan relationship exceeding our internal limit.

We periodically analyze

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

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

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

September 30,

(Dollars in thousands)

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losses in the loan portfolio.

The allowance for credit losses was $6.6 million at June

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

which management believed to be adequate at each of the

respective dates.

The judgments and estimates associated with the determination of the

allowance for credit losses are

described under “Critical Accounting Policies.”

On January 1, 2023, we adopted ASC 326,

which introduces the current expected credit losses (CECL) methodology and

The allowance for credit losses was $6.8 million at

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

which management believed to be adequate at each of

the respective dates.

The assumptions, judgments and estimates,

as well as the methodologies and models associated with

the determination of the allowance for credit losses are described under “Critical

Accounting Policies.”

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 loan portfolio.

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coverage for all expected future credit losses on outstanding loans.

As of June 30,

As of September

30, 2023 and December 31, 2022, our

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loans was 1.24% at

June 30, 2023, up from 1.14%

at December 31, 2022.

September 30, 2023, compared to 1.14% at December 31, 2022.

The increase in the allowance for credit losses is largely the result of the implementation

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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

quarterly rates of default.

See Note 1 to our Financial Statements, above.

Under the CECL methodology the allowance for credit losses is measured

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evaluations are performed on an individual basis.

Losses are predicted over

a period of time determined to be reasonable

Losses are predicted

over a period of time determined to be reasonable

and supportable, and at the end of the reasonable and supportable period

losses are reverted to long term historical averages.

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

followed by an 8 quarter straight line

At September 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 second quarter of 2023

and the previous four quarters is presented below.

quality ratios for the third quarter of 2023 and

the previous four quarters is presented below.

(Dollars in thousands)

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as a % of nonperforming loans

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

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

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

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

Nonperforming Assets

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

million at December 31, 2022.

At September 30, 2023 the Company had $1.2 million in nonperforming assets compared

to $2.7 million at December 31,

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

nonperforming loan, with a recorded investment of $1.3 million, that was collected in

full during the second quarter of

The table below provides information concerning total nonperforming assets

and certain asset quality ratios for the second

and certain asset quality ratios for the third

quarter of 2023 and the previous four quarters.

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The table below provides information concerning the composition of nonaccrual

loans for the second quarter of 2023 and

the previous four quarters.

loans for the third 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 no loans 90 days or more past due and still accruing at June 30, 2023

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

2023 and December 31, 2022,

respectively.

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

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

September 30,

(In thousands)

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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,

were $964.6 million at September 30, 2023,

compared to $950.3 million at December 31, 2022.

Company utilizes brokered deposits as an additional funding source.

At September 30, 2023, the Company had $46.6

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,

respectively.

Uninsured amounts are estimated based on the portion of account balances in excess of

FDIC insurance

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.

Excluding brokered deposits, customer deposits

decreased $32.3 million, or 3%, during the first nine months of 2023.

This decrease reflects net outflows to higher yield

investment alternatives in a rising interest rate environment and increased customer spending.

Noninterest-bearing deposits

were $279.5 million, or 29% of total deposits, at September 30, 2023, compared

to $311.4 million, or 33% of total deposits

at December 31, 2022.

The average rate paid on total interest-bearing deposits was 1.02% in the first nine

months of 2023 compared to 0.32% in

the first nine months of 2022.

At September 30, 2023, estimated uninsured deposits totaled $337.4

or 35% of total deposits, compared to $381.7

million, or 40% of total deposits at December 31, 2022.

The decrease in the percentage of the Bank’s deposits

uninsured was in part due to customers’ increased use of the products facilitated by IntraFi

that enable customers to

maximize FDIC deposit insurance coverage for their deposits.

During 2023, the Bank began participating in the

Certificates of Deposit Account Registry Service (the “CDARS”) and the Insured

Cash Sweep product (“ICS”), which

provide for reciprocal (“two-way”) transactions among banks facilitated by IntraFi for the

purpose of maximizing FDIC

The total of reciprocal deposits at September 30, 2023

was $31.6 million, or 3% of total deposits.

amounts are estimated based on the portion of account balances in excess of FDIC insurance

The Bank’s uninsured

deposits at September 30, 2023 and December 31, 2022 include approximately $185.7

million and $155.0 million,

respectively, of deposits of state,

county and local governments that are collateralized by securities having an equal

value to such deposits.

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

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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.

This proposal will not apply to AuburnBank.

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,

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

The Bank utilizes short and long-

term non-deposit borrowings 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

The Bank had available federal

funds lines totaling $61.0 million with no federal funds borrowings outstanding

at September 30, 2023, and December 31,

2022, respectively.

Securities sold

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

sold under agreements to repurchase, which were entered into on behalf of certain customers

totaled $1.7 million and $2.6 million at September 30, 2023 and December

31, 2022, respectively.

At September 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 Bank is a member of the FHLB of Atlanta and has borrowed, and may in the

future 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

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

At those dates,

the Bank had $307.7 million and $312.6 million, respectively,

of available lines of credit at the FHLB of Atlanta.

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

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.

short-term borrowings was 2.43%

in the first nine months of 2023 compared to 0.50%

in the first nine months of 2022.

CAPITAL ADEQUACY

The Company’s consolidated

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,

stockholders’ equity was $61.5 million and $68.0 million as of September 30,

December 31, 2022, respectively.

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

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

net of tax of $8.1 million, cash dividends

of $2.8 million, the cumulative effect of adopting CECL accounting standard

of $0.8 million, and repurchases of the

Company’s stock of $0.2

million, partially offset by net earnings of $5.4 million.

Total unrealized

losses on available-for-

sale securities increased

20% from $54.7 million on December 31, 2022 to $65.5 million September

unrealized losses do not affect the Bank’s

capital for regulatory capital purposes.

The Company paid cash dividends of $0.81 per share in the first nine months of 2023,

an increase of 2% from the same

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million since December 31, 2022 resulted in 10,108 fewer

outstanding common shares at June 30, 2023.

outstanding common shares at September 30, 2023.

These shares were repurchased at an average cost per share of $22.63.

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

capital framework and

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 June 30, 2023, the Bank’s ratio

At September 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

amended the capital conservation buffer.

The interim final rule was adopted as a final rule on August 26, 2020.

rule revises the definition of “eligible retained income” for purposes of the maximum payout

ratio to allow banking

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.

The eligible retained income is now the greater of (i) net

income for the four preceding quarters, net of distributions and associated

tax effects not reflected in net income;

the average of all net income over the preceding four quarters.

This rule only affects the capital buffers, and banking

organizations were encouraged to make prudent capital distribution decisions.

On August 26, 2020, the Federal Reserve and the other federal banking regulators adopted

a final rule that amended the

capital conservation buffer.

The new rule revises the definition of “eligible retained income” for purposes

of the maximum

payout ratio to allow banking 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.

The eligible retained income is

now the greater of (i) net income for the four preceding quarters, net of distributions and associated

tax effects not reflected

in net income;

and (ii) the average of all net income over the preceding four quarters.

This rule only affects the capital

buffers, and banking organizations were encouraged to

make prudent capital distribution decisions.

The Federal Reserve has treated us as a “small bank holding company’ under the Federal

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was 10.26%, CET1 risk-based capital ratio was 15.01%, tier 1

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

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.

risk-based capital ratio was 15.01%, and total risk-based capital ratio was 15.98%

at September 30, 2023.

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 September 30, 2023.

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

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

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

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

failed internal process, people, and

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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.

The Basel III endgame regulatory proposals are not applicable to the Company or the Bank

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.

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

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

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

with the policy guidelines noted

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

our balance sheet is

liability sensitive over the forecast period

of 12 months.

At September 30, 2023, our earnings simulation model indicated

that we were in compliance with the policy guidelines

Economic Value

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

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

income will be affected by

At September 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 income

will be affected by

changes in interest rates.

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designated as hedging instruments.

At June 30, 2023 and December 31, 2022,

the Company had no derivative contracts

designated as part of a hedging relationship to assist in managing its interest rate sensitivity.

At September 30, 2023 and December 31,

2022, the Company had no derivative

contracts designated as part of a hedging relationship to assist in managing its interest rate

Liquidity Risk Management

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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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BTFP borrowing facility.

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

In addition to these sources, the Bank is eligible to

participate in the FHLB of Atlanta’s advance

program to obtain funding for growth and liquidity.

Advances include both

fixed and variable terms and may be taken out with varying maturities.

30, 2023, the Bank had no FHLB of

Atlanta advances outstanding and available credit from the FHLB of $307.7

At September 30, 2023, the Bank also

had $61.0 million of available federal funds lines with no borrowings outstanding.

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

contractual obligations and unfunded commitments, including loan commitments

and reasonably expected borrower,

and reasonably

expected borrower,

depositor, and creditor requirements over the next twelve

Off-Balance Sheet Arrangements, Commitments, Contingencies and Contractual

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

unfunded loan commitments

outstanding of $78.7 million.

At September 30, 2023, the Bank had outstanding standby letters of credit of $0.8

million and unfunded loan commitments

outstanding of $60.1

Because these commitments generally have fixed expiration dates and

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cash requirements.

fund these outstanding commitments,

the Bank could liquidate federal funds sold or a portion of our securities available-

If needed, to

fund these outstanding commitments, the Bank could liquidate federal funds

sold or a portion of our securities available-

for-sale, or draw on its available credit facilities or raise deposits.

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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

investors include various

The sale agreements for these residential mortgage loans with Fannie Mae

and other investors include various

representations and warranties regarding the origination and characteristics of the

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loan, compliance with loan

criteria set forth in the applicable agreement, compliance with applicable federal,

state, and local laws, among other

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

criteria set forth in the applicable agreement, compliance with applicable

federal, state, and local laws, among other

As of September 30, 2023,

the aggregate unpaid principal balance of residential mortgage loans,

which we have originated

and sold, but retained the servicing rights, was $219.3 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

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manage the risks

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

through our underwriting and

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 six months of

2023 as a result of representation and

warranty provisions contained in the Company’s

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

of 2023 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 June 30, 2023.

make-whole requests at September 30, 2023.

We service all residential

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governing our rights and duties as servicer.

The agreement under which we act as servicer generally specifies standard

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

The agreements under which we act as servicer generally specifies standard

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

respective servicing agreements.

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as servicer, we may be

subject to termination if the breach is not cured within a specified period following notice.

subject to termination if the breach is not cured within a specified period following

The standards governing

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

our agreement with Fannie Mae and

our agreements with Fannie Mae and

Fannie Mae’s mortgage servicing

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their purchased loans.

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

As of September 30, 2023, we do not believe that this exposure is material due to the historical

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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It also can affect

the interest rates we have to pay on our deposits and other

borrowings, and the interest rates we earn on our earning assets.

The difference between our interest expense and interest

income is also affected by the shape of the yield curve and the speed

at which our assets and liabilities reprice in response

to interest rate changes.

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

term interest rates are higher

than longer interest rates.

This results in a lower spread between our costs of funds and our interest income.

net interest income could be affected by asymmetrical changes in the different

interest rate indexes, given that not all of our

assets or liabilities are priced with the same index.

Higher market interest rates and sales

of securities held by the Federal

Reserve to reduce inflation generally reduce economic activity and may reduce loan

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

long term inflation goal of 2.0%

our customers’ behaviors, and can affect the interest rates we

have to pay on our deposits and other borrowings, and the interest rates we earn on our earning

The difference

between our interest expense and interest income is also affected by the shape

of the yield curve and the speeds at which

our assets and liabilities,

respectively, reprice

in response to interest rate changes.

The yield curve was inverted on

September 30, 2023, which means shorter term interest rates are higher than longer

interest rates.

This results in a lower

spread between our costs of funds and our interest income.

In addition, net interest income could be affected by

asymmetrical changes in the different interest rate indexes, given that

not all of our assets or liabilities are priced with the

Higher market interest rates and sales of securities held by the Federal Reserve

to reduce inflation generally

reduce economic activity and may reduce loan 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,

the value of collateral for our loans,

and the success of our borrowers and such borrowers’

available cash to pay interest on and principal of our loans to them.

Inflation is running at levels unseen in decades and, while it has declined during 2023,

it remains above the Federal

Reserve’s long term inflation goal of 2.0%

Beginning in March 2022, the Federal Reserve has been raising target

federal funds interest rates and reducing its

securities holdings in an effort to reduce inflation During 2022,

the Federal Reserve increased the target federal funds range

from 0 – 0.25% to 4.25 – 4.50%.

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

federal funds interest rates and reducing its securities holdings in an effort

to reduce inflation.

During 2022, the Federal

Reserve increased the target federal funds range from 0 – 0.25%

to 4.25 – 4.50%.

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 may be made if inflation remains elevated.

The Federal Reserve has indicated it

will maintain higher target rates and restrictive monetary policy to

meet its 2% inflation rate over the longer term and

maximum employment goals.

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

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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

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, 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

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

The reconciliations

of these non-

The reconciliations of these non-

GAAP financial measures to their most directly comparable GAAP financial

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Net interest income (Tax

Six months ended June 30,

Nine months ended September 30,

(In thousands)

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Basic and diluted

Shares outstanding

Shares outstanding, at period end

Common stock price:

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Performance ratios:

Return on average equity

Return on average assets

Annualized return on average equity

Annualized return on average assets

Dividend payout ratio

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Nonperforming assets as a % of:

Loans and other real estate owned

Loans and foreclosed properties

Nonperforming loans as a % of total loans

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

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

Capital Adequacy:

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

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

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- Selected Financial Data

Six months ended June 30,

Nine months ended September 30,

(Dollars in thousands, except per share amounts)

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Performance ratios:

Return on average equity

Return on average assets

Annualized return on average equity

Annualized return on average assets

Dividend payout ratio

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and Net Interest Income Analysis

Quarter ended June 30,

Quarter ended September 30,

(Dollars in thousands)

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and Net Interest Income Analysis

Six months ended June 30,

Nine months ended September 30,

(Dollars in thousands)

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- Allocation of Allowance for Credit Losses

Third Quarter

Second Quarter

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Third Quarter

Second Quarter

(Dollars in thousands)

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Consumer installment

Total allowance for credit

Total allowance for

credit losses

* Loan balance in each category expressed as a percentage of total loans.

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(Dollars in thousands)

June 30, 2023

September 30, 2023

3 months or less

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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