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Item 2. Management’s Discussion and Analysis

2024-05-08 compared with 2023-11-07 · 557 added, 793 removed, 690 unchanged (66% of the section changed)

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OF FINANCIAL CONDITION AND 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

The following discussion and analysis is designed to provide a better

understanding of various factors related to the results

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financial statements and related

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.

notes for the quarters ended March 31, 2024 and 2023, as well as the information

contained in our Annual Report on Form

10-K for the year ended December 31, 2023.

Special Cautionary Notice Regarding Forward-Looking Statements

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Discussion and Analysis of Financial Condition

and Results of Operations”, “Quantitative and Qualitative Disclosures about Market

Risk”, “Risk Factors” “Description of

and Results of Operations”, “Quantitative and Qualitative Disclosures about

Market Risk”, “Risk Factors” “Description of

Property” and elsewhere, are “forward-looking statements” within the

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goals, expectations,

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

known and unknown risks,

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

involve known and unknown risks,

uncertainties and other factors, which may be beyond our control, and

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

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

“view”, and other similar words and expressions of

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

factors, including, without limitation:

“project,” “could,” “intend,” “target” and other similar words

and expressions of the future.

These forward-looking

statements may not be realized due to a variety of factors, including, without limitation:

the effects of future economic, business and market conditions and

changes, foreign, domestic and local, including

inflation, seasonality, natural

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

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

inventory volatility, and

changes in consumer behaviors;

changes, foreign, domestic and locally,

including inflation, seasonality, natural

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

and tornados, COVID-19 or other health crises, epidemics or pandemics including supply

chain disruptions,

inventory volatility, and changes

in consumer behaviors;

the effects of war or other conflicts, acts of terrorism, trade restrictions, sanctions or

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general economic conditions;

governmental monetary and fiscal policies, including the continuing effects

of fiscal and monetary stimuli in

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

March 2022 in response

to inflation, including increases in the Federal Reserve’s

target federal funds rate and reductions in the Federal

Reserve’s holdings of securities;

governmental monetary and fiscal policies, including the amount and costs of borrowing

by the federal

government and its agencies, the continuing effects of COVID-19

fiscal and monetary stimuli, and subsequent

changes in monetary policies in response to inflation, including increases in the Federal

Reserve’s target federal

funds rate and reductions in the Federal Reserve’s

holdings of securities through quantitative tightening;

duration that the Federal Reserve will keep its targeted federal funds rates at or

above current rates to meet its long

term inflation target of 2%;

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

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 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

portfolio reviews;

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

and mortgage loan

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

assets and liabilities,

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

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

losses on our securities

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

tangible stockholders’ equity) for

financial reporting purposes;

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

in the scope and cost

of FDIC insurance;

changes in accounting pronouncements and interpretations, including the required use,

beginning January 1,

2023,of Financial Accounting Standards Board’s

(“FASB”) Accounting

Standards Update (ASU) 2016-13,

“Financial Instruments – Credit Losses (Topic

Measurement of Credit Losses on Financial Instruments,” as

well as the updates issued since June 2016 (collectively,

ASC Topic 326) on Current Expected

Losses(“CECL”), and ASU 2022-02, Troubled

Debt Restructurings and Vintage Disclosures,

which eliminates

troubled debt restructurings (“TDRs”) and related guidance;

the failure of assumptions and estimates, including those used in the Company’s

CECL models to establish our

allowance for credit losses and estimate asset impairments, 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 CECL models and loan portfolio reviews;

the risks of changes in market interest rates and the shape of the yield curve on customer

composition and costs of deposits, loan demand and mortgage loan originations;

values and liquidity of loan

collateral, our securities portfolio and interest-sensitive assets and liabilities;

and the risks and uncertainty of the

amounts realizable on collateral;

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

for sale, which

adversely affect our stockholders’ equity for financial reporting purposes and our

tangible equity;

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

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and other providers of financial,

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,

which are not subject

to federal income taxation;

the failure of assumptions and estimates underlying the establishment of allowances

for credit losses, including

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

investment and insurance services, including the disruptive effects of

financial technology and other competitors

who are not subject to the same regulation, including capital, and supervision and examination,

as the Company

and the Bank and credit unions, which are not subject to federal income taxation;

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

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or less effective than anticipated;

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

vendors’ systems or customers’

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

our vendors’ systems or customers’

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

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

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.

the risks that our dividends, share repurchases and discretionary bonuses are

limited by regulation to the

maintenance of a capital conservation buffer of 2.5% and our future earnings and

“eligible retained earnings” over

rolling four calendar quarter periods;

other factors and risks described under “Risk Factors” herein, in our Annual Report

on Form 10-K as of and for

the year ended December 31, 2024 filed with the United States Securities and Exchange

Commission (the

“Commission” or “SEC”), and in any of our subsequent reports that we make with the SEC

under the Exchange

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

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entirety by this cautionary notice.

We have no obligation and

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

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

such statements otherwise are

have no obligation and do not undertake to update, revise or correct any of the

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

statements otherwise are

Summary of Results of Operations

Quarter ended September 30,

Nine months ended September 30,

(Dollars in thousands, except per share amounts)

Quarter ended March 31,

(Dollars in thousands, except per share data)

Net interest income (a)

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The Company’s net earnings were $1.4

million for the first nine months of 2023,

compared to $5.9 million for the first nine

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

million for the first three months of 2024,

compared to $2.0 million for the first

three months of 2023.

diluted earnings per share were $0.39 per share for the first three months of 2024,

compared to $0.56 per share for the first three months of 2023.

Net interest income (tax-equivalent) was $6.7 million for the first three

months of 2024, a 7% decrease compared to $7.2

million for the first three months of 2023.

This decrease was primarily due to a smaller balance sheet and a decrease in the

Company’s net interest margin.

The Company’s net interest

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

on interest earning assets.

These higher yields on interest earning assets were partially offset

by increased cost of funds.

Average loans for the first nine

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

margin (tax-equivalent) was 3.04% for the first three months

of 2024 compared to 3.17%

for the first three months of 2023.

This decrease was primarily due to increased cost of funds

which was partially offset by a more favorable asset mix and

higher yields on interest earning assets.

Average loans for the

first three months of 2024 were

$560.9 million, a 12% increase from the first three months of 2023.

Average total

securities for the first three months of 2024 were $267.6 million compared to

$402.7 million for the first three months of

The decrease was primarily the result of the Company’s

balance sheet repositioning strategy in the fourth quarter of

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

At March 31, 2024, the Company’s allowance

for credit losses was $7.2 million, or 1.27% of total loans, compared to $6.9

million, or 1.23% of total loans, at December 31, 2023, and $6.8 million, or 1.35%

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

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.

of total loans, at March 31, 2023.

The Company recorded a provision for credit losses during the first three months of

2024 of $0.3 million, compared to $0.1

million during the first three months of 2023.

The provision for credit losses under CECL reflects the Company’s

evaluation of its credit risk profile and its future economic outlook and forecasts.

Our CECL model is largely influenced by

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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 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

and equipment expense of

million related to the Company’s new headquarters,

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

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

The increase in the provision for credit

losses in the first quarter of 2024, as compared to the first quarter of 2023, was related to changes in the

composition of,

and increases in, loans as well as the continued uncertainty in the economic environment

which impacts the projected

macroeconomic factors used in our CECL modeling.

Noninterest income was $0.9 million in the first three months of 2024,

compared to $0.8 million in the first three months of

Noninterest expense was $5.7 million in the first three months of 2024,

compared to $5.6 million for the first three months

The increase in noninterest expense was primarily due to routine increases

in salaries and benefits expense.

Income tax expense was $0.2 million for the first three months of 2024 compared

to $0.3 million for the first three months

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

Company's effective tax rate for the first three months of 2024

was 10.68%, compared to 11.97% in the first three months

The Company’s effective income

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

tax rate is affected principally 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 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.

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 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

The Company paid cash dividends of $0.27 per share in the first three months of 2024 and 2023

At March 31, 2024, 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 15.69%,

a tier 1 leverage ratio of 10.34% and a common equity

tier 1 (“CET1”) ratio of 14.62% at March 31, 2024.

CRITICAL ACCOUNTING POLICIES

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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.

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.

There have been no significant changes to our Critical Accounting Estimates

as described in our Form 10-K.

OF OPERATIONS

Balance Sheet and Interest Rates

Nine months ended September 30,

Average Balance

Sheet and Interest Rates

Quarter ended March 31,

(Dollars in thousands)

Interest-earning assets:

Loans and loans held for sale

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Total interest-earning assets

Interest-bearing liabilities:

Savings and money market

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Net Interest Income and Margin

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

Net interest income (tax-equivalent) was $6.7 million for the first three

months of 2024, a 7% increase compared to $7.2

million for the first three months of 2023.

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

margin (tax-equivalent).

The Company’s net interest

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

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

margin (tax-equivalent) was 3.04% in the first three months of 2024

compared to 3.17% in the first three months of 2023.

This decrease was primarily due to higher market interest rates,

which increased our cost of funds, generally,

and changes in our deposit mix to higher cost interest bearing deposits, which

was partially offset by a more favorable asset mix and higher

yields on interest-earning assets.

The cost of interest-bearing

liabilities increased to 162 basis points, compared to 71 basis points in the first three

months of 2024.

Since March 2022,

the Federal Reserve increased the target federal funds range from 0 –

0.25% to 5.25 – 5.50%.

The tax-equivalent yield on total interest-earning assets increased by 55 basis points

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

higher market interest rates on interest earning assets.

to 4.21% in the first three months of

2024 compared to 3.66% in the first three months of 2023.

This increase was primarily due to the Company’s

sheet repositioning strategy in the fourth quarter of 2023, which improved our asset

mix, and higher market interest rates on

interest earning assets.

The cost of total interest-bearing liabilities increased by 91 basis points to

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.

1.62% in the first three months of 2024

compared to 0.71% in the first three months of 2023.

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

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 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.

reprice and we generate new loans with current market interest rates will be important

to our net interest margin during

Provision for Credit Losses

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.

Accordingly, the provision for credit

losses represents a charge to earnings necessary to establish an allowance

for credit losses that, in management's evaluation,

is adequate to provide coverage for all expected credit losses.

The Company recorded

a negative provision for credit losses

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

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.

On January 1, 2023, we adopted ASC 326 and its CECL methodology,

which requires us to estimate all expected credit

losses over the remaining life of our loans.

the provision for credit losses represents a charge to earnings

necessary to establish an allowance for credit losses that, in management's evaluation,

is adequate to provide coverage for

all expected credit losses.

The Company recorded a provision for credit losses during the

first three months of 2024 of $0.3

million, compared to $0.1 million during the first three months of 2023.

Provision expense is affected by organic loan

growth in our loan portfolio, our internal assessment of the credit quality of the loan portfolio,

our expectations about future

economic conditions and net charge-offs.

Our CECL model is largely influenced by economic factors including,

notably, the anticipated

unemployment rate, which may be affected by

monetary policy.

The increase in the provision for

credit losses in the first quarter of 2024, as compared to the first quarter of 2023,

was related to changes in the composition

of, and increases in, loans as well as the continued uncertainty in the economic environment

which impacts the projected

macroeconomic factors used in our CECL modeling.

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

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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.

At March 31, 2024,

the Company’s allowance for credit

losses was $7.2 million, or 1.27% of total loans, compared to $6.9 million, or 1.23% of

total loans, at December 31, 2023, and $6.8 million, or 1.35% of total loans, at March 31, 2023.

Noninterest Income

Quarter ended September 30,

Nine months ended September 30,

Quarter ended March 31,

(Dollars in thousands)

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Bank-owned life insurance

Securities gains, net

Total noninterest income

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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 September 30,

Nine months ended September 30,

Quarter ended March 31,

(Dollars in thousands)

Origination income

Origination income, net

Servicing fees, net

Total mortgage lending income

The Company’s income from mortgage lending

typically fluctuates as mortgage interest rates change and is primarily

attributable to the origination and sale of mortgage loans.

Origination income decreased

as market interest rates on

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.

Income from bank-owned life insurance was $102 thousand and $156

thousand for the first three months of 2024 and 2023,

respectively.

Excluding a $52 thousand non-taxable death benefit received during the first

three months of 2023, income

from bank-owned life insurance would have been $104 thousand for the first three

months of 2023.

Other noninterest income was $479 thousand for the first three

months of 2024, compared to $389 thousand for the first

three months of 2023.

The increase in other noninterest income was primarily due to increased fee income on one-way

reciprocal deposits sold through the Intrafi network.

Noninterest Expense

Quarter ended September 30,

Nine months ended September 30,

Quarter ended March 31,

(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

expenses related to the Company’s

new headquarters in downtown Auburn.

This amount includes depreciation expense and other costs associated

operating the new headquarters.

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

constructed headquarters during June 2022.

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

FDIC assessments, software costs, ATM

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

remaining tax credit being less

than the Company’s investment,

and a gain on sale of other real estate owned that was realized in the 2022.

Income tax expense was $0.7 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 nine months of 2023 was 12.05%, compared to

15.14% in the

first nine months of 2022.

The increase in salaries and benefits was primarily due to routine annual increases in

salaries and wages.

The decrease in other noninterest expense was primarily due to the Company’s

adoption of FASB

Investments – Equity Method and Joint Ventures

which allows the proportional amortization method for our

NMTC investments on January 1, 2024.

With the adoption of this ASU, amortization of NMTCs

are now included in

income tax expense.

During the first three months of 2023, other noninterest expense included

$105 thousand related to

our equity method investment in NMTCs.

Income tax expense was $0.2 million for the first three months of 2024

compared to $0.3 million for the first three months

This decrease was due to declines in earnings before taxes and the Company’s

effective tax rate.

The Company’s

effective income tax rate for the first three months of 2024 was 10.68

%, compared to 11.97% in the first three months of

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

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

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

ets Tax Credits.

BALANCE SHEET ANALYSIS

Securities available-for-sale were $260.8

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

million at March 31, 2024, compared to $270.9 million at December 31, 2023.

This decrease reflects a $7.2 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 $2.9 million.

The average annualized tax-equivalent yields earned on total

securities were 2.26%

in the first quarter of 2024 and 2.39% in the first quarter of 2023.

(In thousands)

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Consumer installment

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,

were $567.5 million at March 31, 2024, a 2% increase compared to $557.3 million at December 31,

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

commercial real estate (53%), residential

real estate (21%), commercial and industrial (14%) and construction and land development

Approximately 21% of

the Company’s commercial real

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

Within the residential real estate portfolio segment, the Company

had junior lien mortgages of approximately $9.2 million,

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.

or 2% of total loans, and $8.7 million, or 2%, of total loans at March 31, 2024 and

December 31, 2023, respectively.

residential real estate mortgage loans with a consumer purpose, the Company had no loans

that required interest only

payments at March 31, 2024 and December 31, 2023.

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

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

The average yield earned on loans and loans held for sale was 5.01% in the first quarter of

2024 and 4.65% 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

quarter of 2023.

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,

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

volumes and liquidity,

valuations used in

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competitive pressures from a

wide range of other lenders, deterioration in certain credits, interest rate fluctuations, reduced

collateral values or non-

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

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applicable laws and regulations.

projects financed earlier that were based on lower interest rate assumptions than

projects financed earlier that were based on lower interest rate assumptions

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

interest rate currently in effect and currently expected

in the future.

interest rates 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 September 30, 2023, the Bank had one

At March 31, 2024, the Bank had one

loan relationship exceeding our internal limit.

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

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

September 30,

-based capital at March 31, 2024 and December 31, 2023.

(Dollars in thousands)

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Multi-family residential properties

Office Buildings

Allowance for Credit Losses

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

appropriate to adequately cover

the Company’s estimate of expected

losses in the loan portfolio.

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.

Accordingly, beginning in

2023, the allowance for credit losses represents an amount that, in management's evaluation,

is adequate to provide

coverage for all expected future credit losses on outstanding loans.

As of September

30, 2023 and December 31, 2022, our

allowance for credit losses was approximately $6.8 million and $5.8

million, respectively, which our

management believes

to be adequate at each of the respective dates.

Our allowance for credit losses as a percentage of total

loans was 1.24% at

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

326 on January 1, 2023,

which resulted in an adjustment to the opening balance of the allowance for credit losses of

$1.0 million.

Our CECL models

rely largely on projections of macroeconomic conditions to estimate

future credit losses.

Macroeconomic factors used in the

model include the Alabama unemployment rate, the Alabama home price index, the

national commercial real estate price

index and the Alabama gross state product.

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.

On January 1, 2023, we adopted ASC 326 and its CECL methodology,

which requires us to estimate all expected credit

losses over the remaining life of our loan portfolio.

beginning in 2023, the allowance for credit losses

represents an amount that, in management's evaluation, is adequate to provide

coverage for all expected future credit losses

on outstanding loans.

As of March 31, 2024 and December 31, 2023, our allowance

for credit losses was approximately

$7.2 million and

$6.9 million, respectively,

which our management believes to be adequate at each of the respective dates.

Our allowance for credit losses as a percentage of total loans was 1.27%

at March 31, 2024, compared to 1.23% at

December 31, 2023.

Our CECL models rely largely on projections of macroeconomic

conditions to estimate future credit losses.

Macroeconomic factors used in the model include the Alabama unemployment

rate, the Alabama home price index, the

national commercial real estate price index and the Alabama gross state product.

Projections of these macroeconomic

factors, obtained from an independent third party,

are utilized to predict quarterly rates of default.

Under the CECL methodology the allowance for credit losses is measured

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losses are reverted to long term historical averages.

At September 30, 2023, reasonable and supportable periods of 4 quarters

At March 31, 2024, reasonable and supportable periods of 4 quarters

were utilized followed by an 8 quarter straight line

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

quality ratios for the third quarter of 2023 and

quality ratios for the first quarter of 2024 and

the previous four quarters is presented below.

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as a % of nonperforming loans

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

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

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

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

The allowance for credit losses by loan category for the first quarter of 2024 and the previous four quarters

First Quarter

Fourth Quarter

Third Quarter

Second Quarter

First Quarter

(Dollars in thousands)

Commercial and industrial

Construction and land

Commercial real estate

Residential real estate

Consumer installment

Total allowance for credit

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

Nonperforming Assets

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

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

full during the second quarter of

At March 31, 2024 and December 31, 2023, the Company had $0.9 million in nonperforming assets.

The table below provides information concerning total nonperforming assets

and certain asset quality ratios for the third

and certain asset quality ratios for the first

quarter of 2024 and the previous four quarters.

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The table below provides information concerning the composition of nonaccrual

loans for the third quarter of 2023 and the

loans for the first quarter of 2024 and the

previous four quarters.

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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 September 30,

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

2024 and December 31, 2023,

respectively.

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

September 30,

The Company had no OREO at March 31, 2024 or December 31, 2023.

(In thousands)

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Total deposits

were $964.6 million at September 30, 2023,

were $899.7 million at March 31, 2024,

compared to $896.2 million at December 31, 2023.

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 $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

2024, the Company had $48.9 million of reciprocal deposits sold,

compared to $59.0 million at December 31, 2023.

Noninterest-bearing deposits were $263.5 million, or 29% of total deposits, at March

31, 2024, compared to $270.7 million,

or 30% of total deposits at December 31, 2023.

The average rate paid on total interest-bearing deposits was 1.62% in the first quarter of 2024

compared to 0.70% in first

quarter of 2023.

At March 31, 2024, estimated uninsured deposits totaled $351.5 million, or 39%

of total deposits, compared to $356.3

million, or 40% of total deposits at December 31, 2023.

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

billion in uninsured deposits to

the FDIC Deposit Insurance Fund’s costs

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

This proposal will not apply to AuburnBank.

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 improving the FDIC insurance

coverage for our depositors.

The total of reciprocal deposits at March 31, 2024 was $10.6 million, compared

December 31, 2023.

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

insurance limits.

The Bank’s uninsured deposits at

March 31, 2024 and December 31, 2023 include approximately $215.0

million and $206.2 million, respectively,

of deposits of state, county and local governments that are collateralized by

securities having an equal fair value to such deposits.

The estimated uninsured time deposits by maturity as of March 31, 2024

is presented below.

(Dollars in thousands)

March 31, 2024

3 months or less

Over 3 months through 6 months

Over 6 months through 12 months

Over 12 months

Total estimated uninsured

time deposits

The FDIC issued a special assessment of 3.36 basis points for a projected eight quarters on large

banks with more than $5

billion of uninsured deposits as a result of the systemic risk determination to insure all depositors

in connection with the

March 2023 failures of Silicon Valley

Bank and Signature Bank.

These special assessments do not apply to the Bank.

Other Borrowings and Available

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 Company had no long-term debt at March 31, 2024 and December 31, 2023.

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 or

The Bank had available federal

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

at September 30, 2023, and December 31,

at March 31, 2024, and December 31,

2023, respectively.

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.

totaled $1.5 million at March 31, 2024 and December 31, 2023, respectively

At March 31, 2024 and December 31, 2023,

the Bank had no borrowings from the Federal Reserve discount window and

never had any borrowings under the Federal

Reserve’s Bank Term

Facility Program (“BTFP”).

The BTFP ceased making new loans on March 11,

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

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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,

under FHLB of Atlanta’s advance prog

ram at March 31, 2024 and December 31, 2023, respectively.

At those dates, the

Bank had $293.2 million and $309.1 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

include both fixed and variable interest rates and varying maturities may be

The average rate paid on the Bank’s

short-term borrowings was 2.43%

in the first nine months of 2023 compared to 0.50%

in the first nine months of 2022.

short-term borrowings was 0.51% in the first quarter of 2024

compared to 1.11% in the

first quarter of 2023.

CAPITAL ADEQUACY

The Company’s consolidated

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

stockholders’ equity was $74.5 million and $76.5 million as of March 31,

December 31, 2023, respectively.

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net of tax of $2.2 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

period in 2022.

The Company’s share repurchases

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

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

of $0.9 million, and the cumulative effect of adopting NMTC accounting

standard of $0.3

million, partially offset by net

earnings of $1.4 million.

Total unrealized losses,

net of tax, on available-for-sale securities increased from $29.0

on December 31, 2023 to $31.2 million March 31, 2024.

These unrealized losses do not affect the Bank’s

regulatory capital purposes.

The Company paid cash dividends of $0.27 per share for both the first quarter of 2024

and first quarter of 2023.

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 September 30, 2023, the Bank’s ratio

At March 31, 2024, the Bank’s ratio

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

did not limit capital distributions or discretionary bonuses.

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

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capital conservation buffer.

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

of the maximum

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

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This rule only affects the capital

buffers, and banking organizations were encouraged to

make prudent capital distribution decisions.

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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risk-based capital ratio was 14.62%, and total risk-based capital ratio was 15.69%

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

at March 31, 2024.

These ratios exceed

the minimum regulatory capital percentages of 5.0% for tier 1 leverage ratio, 6.5%

for CET1 risk-based capital ratio, 8.0%

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

to be considered “well capitalized.”

The Bank’s capital conservation buffer

at September 30, 2023.

Bank’s capital conservation buffer

at March 31, 2024.

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

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in interest rates.

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

for various types of loans and

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

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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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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

liability sensitive over the forecast period of 12 months.

At March 31, 2024, our earnings simulation model indicated that we were in compliance

with the policy guidelines noted

Economic Value

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Further, EVE is measured using values

as of a point in time and does not reflect any actions that ALCO might take in responding to

or anticipating changes in

as of a point in time and does not reflect any actions that ALCO might take in responding

to or anticipating changes in

interest rates, or market and competitive conditions.

8 unchanged sentences

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

At September 30, 2023, our EVE model indicated that we were in compliance

At March 31, 2024, our EVE model indicated that we were in compliance

with our policy guidelines.

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loan, investment, borrowing, and capital policies.

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

interest-sensitive assets and

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

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

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designated as hedging instruments.

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

At March 31, 2024 and December 31, 2023,

the Company had no derivative contracts

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

Liquidity Risk Management

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separate and distinct legal

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

to regulatory guidelines and requirements.

entities with different funding needs and sources, and each are

subject to regulatory guidelines and requirements.

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

1 unchanged sentence

The Bank’s payment of dividends depends

on its earnings, liquidity, capital

and the absence of regulatory

on its earnings, liquidity,

capital and the absence of regulatory

restrictions on such dividends.

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Primary uses of funds by the Company

include dividends paid to stockholders, Company stock repurchases, and payment of

Company expenses.

include payment of Company expenses, dividends paid to stockholders

and Company stock repurchases.

Primary sources of funding for the Bank include customer deposits, other borrowings,

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from the Federal Reserve discount

window and the Federal Reserve’s recent

BTFP borrowing facility.

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

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

At March 31, 2024, the Bank had no FHLB of Atlanta advances outstanding

and available credit from the FHLB

of $293.2 million.

At March 31, 2024, the Bank also had $61.0 million of available federal

funds lines with no borrowings

Primary uses of funds include repayment of maturing obligations and

growing the loan portfolio.

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

3 unchanged sentences

Off-Balance Sheet Arrangements, Commitments, Contingencies and Contractual

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

million and unfunded loan commitments

outstanding of $60.1

At March 31, 2024, the Bank had outstanding standby letters of credit of $0.6 million and

unfunded loan commitments

outstanding of $69.1 million.

Because these commitments generally have fixed expiration dates and

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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 September 30, 2023,

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

state, and local laws, among other

As of March 31, 2024,

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

which we have originated and

sold, but retained the servicing rights, was $214.0 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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determine if a contractually required repurchase or make whole event has occurred.

We seek to reduce and

manage the risks

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

investors through our underwriting and

We seek to reduce

and manage the risks

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

through our underwriting and

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

market standards.

The Company was not required to repurchase any loans during the first nine 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 quarter of 2024

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 September 30, 2023.

make-whole requests at March 31, 2024.

We service all residential

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

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

mortgage loans;

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

the mortgage loans;

(4) maintain any

required escrow accounts for payment of taxes and insurance and administer

escrow payments;

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

and (5) foreclose on

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as servicer, we may be

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

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

The standards governing

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

our agreements with Fannie Mae and

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

by our agreements with Fannie Mae and

Fannie Mae’s mortgage servicing

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their purchased loans.

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

As of March 31, 2024, we do not believe that this exposure is material due to the historical level

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

mortgage loans serviced for Fannie

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Effects of Inflation and Changing Prices

The consolidated financial statements and related consolidated financial data presented

herein have been prepared in

accordance with GAAP and practices within the banking industry which require

the measurement of financial position and

The consolidated financial statements and related consolidated financial data

presented herein have been prepared in

accordance with GAAP and practices within the banking industry

which require the measurement of financial position and

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

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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.

The yield curve continued to be inverted

on March 31, 2024, which means shorter term interest rates are higher than longer interest

This results in a lower

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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%

Higher market interest rates and reductions in the 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 has been running at levels unseen in decades and, while it has declined

towards the end of 2023, it has been

persistent through March 31, 2024 and remains above the Federal Reserve’s

long term inflation goal of 2.0% annually.

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 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

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

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 goals of (i) 2% target inflation rate over the longer term and (ii)

maximum employment goals.

Following its May

1, 2024 meeting, the Federal Reserve’s Open Market

Committee (“FOMC”) reaffirmed its commitment to the 2% inflation

objective and announced that it “does not expect it will be appropriate to reduce

the target range until it has gained greater

confidence that inflation is moving substantially toward 2%.”

Further, the FOMC reduced its monthly reduction of

Treasury securities from $60 billion to $25 billion,

and was maintaining the monthly reduction on agency debt and agency

mortgage-backed securities at $35 billion.

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

federal funds rate,

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

and customers seek higher

market interest rates on deposits and other alternative investments.

federal funds rate, market interest rates increase,

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

market interest rates on

deposits and other alternative investments.

Monetary efforts to control inflation may also affect

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

allowance for credit losses.

unemployment which is an

important component in our CECL model used to estimate our allowance for credit

CURRENT ACCOUNTING DEVELOPMENTS

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but is not yet effective.

Investments – Equity Method and Joint Ventures

Accounting for Investments in Tax

Credit Structures Using

the Proportional Amortization Method

Improvements to Income Tax

Information about this pronouncement is described in more detail below.

Investments – Equity Method and Joint Ventures

Accounting for Investments in Tax

Structures Using the Proportional

Amortization Method

, 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

received, using the proportional amortization method if certain conditions are

The new standard is effective for fiscal

years, and interim periods within those fiscal years, beginning after December 15,

The Company is currently

evaluating the impact of the new standard on the Company’s

consolidated financial statements.

Improvements to Income Tax

The amendments in this Update

enhance the transparency and decision usefulness of income tax disclosures.

For public business entities, the new standard

is effective for annual periods beginning after December 15, 2024.

The Company does not expect the new standard to have

a material impact on the Company’s consolidated

financial statements.

– Explanation of Non-GAAP Financial Measures

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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

Nine months ended September 30,

(In thousands)

Net interest income (GAAP)

Tax-equivalent adjustment

Net interest income (Tax

- Selected Quarterly Financial Data

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Performance ratios:

Annualized return on average equity

Annualized return on average assets

Dividend payout ratio

Asset Quality:

Allowance for credit losses as a % of:

Nonperforming loans

Nonperforming assets as a % of:

Loans and foreclosed properties

Nonperforming loans as a % of total loans

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

Capital Adequacy:

CET 1 risk-based capital ratio

Tier 1 risk-based capital ratio

Total risk-based capital ratio

Tier 1 leverage ratio

Other financial data:

Net interest margin (a)

Effective income tax rate

Efficiency ratio (b)

Selected average balances:

Loans, net of unearned income

Total deposits

Total stockholders’ equity

Selected period end balances:

Loans, net of unearned income

Allowance for credit losses

Total deposits

Total stockholders’ equity

(a) Tax-equivalent.

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

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

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

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

wholly-owned subsidiary, AuburnBank.

- Selected Financial Data

Nine months ended September 30,

(Dollars in thousands, except per share amounts)

Results of Operations

Net interest income (a)

tax-equivalent adjustment

Net interest income (GAAP)

Noninterest income

Total revenue

Provision for credit losses

Noninterest expense

Income tax expense

Per share data:

Basic and diluted net earnings

Cash dividends declared

Weighted average shares outstanding:

Basic and diluted

Shares outstanding, at period end

Common stock price:

To earnings ratio

To book value

Performance ratios:

Annualized return on average equity

Annualized return on average assets

Return on average equity

Return on average assets

Dividend payout ratio

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Nonperforming loans as a % of total loans

Annualized net recoveries as a % of average loans

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

Capital Adequacy:

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Selected average balances:

Loans, net of unearned income

Securities available-for-sale

Total deposits

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Selected period end balances:

Loans, net of unearned income

Securities available-for-sale

Allowance for credit losses

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

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

See Table 1 - Explanation of Non-GAAP Measures.

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and Net Interest Income Analysis

Quarter ended September 30,

(Dollars in thousands)

Interest-earning assets:

Loans and loans held for sale (1)

Securities - taxable (2)

Securities - tax-exempt (2)(3)

Total securities

Federal funds sold

Interest bearing bank deposits

Total interest-earning assets

Cash and due from banks

Interest-bearing liabilities:

Savings and money market

Time deposits

Total interest-bearing deposits

Short-term borrowings

Total interest-bearing liabilities

Noninterest-bearing deposits

Other liabilities

Stockholders' equity

Total liabilities and stockholders'

Net interest income and margin (tax-equivalent)

(1) Average loan balances are

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

in the computation of average balances.

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

(3) Yields on tax-exempt securities have been

computed on a tax-equivalent basis using a federal income

tax rate of 21%.

- Average Balances

and Net Interest Income Analysis

Nine months ended September 30,

Quarter ended March 31,

(Dollars in thousands)

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Stockholders' equity

Total liabilities and stockholders'

Total liabilities and stockholders' equity

Net interest income and margin (tax-equivalent)

(1) Average loan balances are

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

in the computation of average balances.

(1) Loans on nonaccrual status have been included in the computation of average balances.

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

investment securities available for sale

(3) Yields on tax-exempt securities have been

computed on a tax-equivalent basis using a federal income

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

tax rate of 21%.

- Allocation of Allowance for Credit Losses

Third Quarter

Second Quarter

First Quarter

Fourth Quarter

Third Quarter

(Dollars in thousands)

Commercial and industrial

Construction and land

Commercial real estate

Residential real estate

Consumer installment

Total allowance for

credit losses

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

– Estimated Uninsured Time Deposits by Maturity

(Dollars in thousands)

September 30, 2023

3 months or less

Over 3 months through 6 months

Over 6 months through 12 months

Over 12 months

Total estimated uninsured

time deposits

AND QUALITATIVE

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What changed 10-Q

Item 2. Management’s Discussion and Analysis