AUBURN NATIONAL BANCORPORATION, INC 10-Q

ITEM 1. FINANCIAL STATEMENTS AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES Consolidated Balance Sheets (Unaudited) March 31, December 31, (Dollars in thousands, except share data) 2024 2023 Assets: Cash and due from banks $ 18,444 $ 27,127 Federal funds sold 17,356 31,412 Interest-bearing bank deposits 36,781 12,830 Cash and cash equivalents 72,581 71,369 Securities available-for-sale 260,770 270,910 Loans held for sale 175 — Loans 567,520 557,294 Allowance for credit losses ( 7,215 ) ( 6,863 ) Loans, net 560,305 550,431 Premises and equipment, net 46,193 45,535 Bank-owned life insurance 17,212 17,110 Other assets 21,803 19,900 Total assets $ 979,039 $ 975,255 Liabilities: Deposits: Noninterest-bearing $ 263,484 $ 270,723 Interest-bearing 636,189 625,520 Total deposits 899,673 896,243 Federal funds purchased and securities sold under agreements to repurchase 1,513 1,486 Accrued expenses and other liabilities 3,364 1,019 Total liabilities 904,550 898,748 Stockholders' equity: Preferred stock of $ .01 par value; authorized 200,000 shares; no shares issued — — Common stock of $ .01 par value; authorized 8,500,000 shares; issued 3,957,135 shares 39 39 Additional paid-in capital 3,802 3,801 Retained earnings 113,563 113,398 Accumulated other comprehensive loss, net ( 31,213 ) ( 29,029 ) Less treasury stock, at cost - 463,436 shares and 463,521 at March 31, 2024 and December 31, 2023, respectively ( 11,702 ) ( 11,702 ) Total stockholders’ equity 74,489 76,507 Total liabilities and stockholders’ equity $ 979,039 $ 975,255 See accompanying notes to consolidated financial statements Table of Contents 4 AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES Consolidated Statements of Earnings (Unaudited) Quarter ended March 31, (Dollars in thousands, except share and per share data) 2024 2023 Interest income: Loans, including fees $ 6,990 $ 5,754 Securities Taxable 1,411 1,865 Tax-exempt 74 403 Federal funds sold and interest bearing bank deposits 754 213 Total interest income 9,229 8,235 Interest expense: Deposits 2,570 1,118 Short-term borrowings 2 8 Total interest expense 2,572 1,126 Net interest income 6,657 7,109 Provision for credit losses 334 66 Net interest income after provision for credit losses 6,323 7,043 Noninterest income: Service charges on deposit accounts 156 154 Mortgage lending 150 93 Bank-owned life insurance 102 156 Other 479 389 Total noninterest income 887 792 Noninterest expense: Salaries and benefits 3,071 2,927 Net occupancy and equipment 763 799 Professional fees 326 338 Other 1,515 1,540 Total noninterest expense 5,675 5,604 Earnings before income taxes 1,535 2,231 Income tax expense 164 267 Net earnings $ 1,371 $ 1,964 Net earnings per share: Basic and diluted $ 0.39 $ 0.56 Weighted average shares outstanding: Basic and diluted 3,493,663 3,502,143 See accompanying notes to consolidated financial statements Table of Contents 5 AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES Consolidated Statements of Comprehensive Income (Unaudited) Quarter ended March 31, (Dollars in thousands) 2024 2023 Net earnings $ 1,371 $ 1,964 Other comprehensive (loss) income, net of tax: Unrealized net holding (loss) gain on securities net of tax benefit of $ 734 and tax expense of $ 1,834 , respectively ( 2,184 ) 5,463 Other comprehensive (loss) income ( 2,184 ) 5,463 Comprehensive (loss) income $ ( 813 ) $ 7,427 See accompanying notes to consolidated financial statements Table of Contents 6 AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity (Unaudited) Accumulated Common Additional other Shares Common paid-in Retained comprehensive Treasury (Dollars in thousands, except share data) Outstanding Stock capital earnings loss stock Total Quarter ended March 31, 2024 Balance, December 31, 2023 3,493,614 $ 39 $ 3,801 $ 113,398 $ ( 29,029 ) $ ( 11,702 ) $ 76,507 Cumulative effect of change in accounting standard — — — ( 263 ) — — ( 263 ) Net earnings — — — 1,371 — — 1,371 Other comprehensive loss — — — — ( 2,184 ) — ( 2,184 ) Cash dividends paid ($ .27 per share) — — — ( 943 ) — — ( 943 ) Sale of treasury stock 85 — 1 — — — 1 Balance, March 31, 2024 3,493,699 $ 39 $ 3,802 $ 113,563 $ ( 31,213 ) $ ( 11,702 ) $ 74,489 Quarter ended March 31, 2023 Balance, December 31, 2022 3,503,452 $ 39 $ 3,797 $ 116,600 $ ( 40,920 ) $ ( 11,475 ) $ 68,041 Cumulative effect of change in accounting standard — — — ( 821 ) — — ( 821 ) Net earnings — — — 1,964 — — 1,964 Other comprehensive income — — — — 5,463 — 5,463 Cash dividends paid ($ .27 per share) — — — ( 945 ) — — ( 945 ) Stock repurchases ( 2,648 ) — — — — ( 64 ) ( 64 ) Sale of treasury stock 75 — 1 — — 1 2 Balance, March 31, 2023 3,500,879 $ 39 $ 3,798 $ 116,798 $ ( 35,457 ) $ ( 11,538 ) $ 73,640 See accompanying notes to consolidated financial statements Table of Contents 7 AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited) Quarter ended March 31, (Dollars in thousands) 2024 2023 Cash flows from operating activities: Net earnings $ 1,371 $ 1,964 Adjustments to reconcile net earnings to net cash provided by operating activities: Provision for credit losses 334 66 Depreciation and amortization 434 423 Premium amortization and discount accretion, net 386 612 Net gain on sale of loans held for sale ( 57 ) ( 4 ) Loans originated for sale ( 3,123 ) — Proceeds from sale of loans 2,993 — Increase in cash surrender value of bank-owned life insurance ( 102 ) ( 104 ) Income recognized from death benefit on bank-owned life insurance — ( 52 ) Net (increase) decrease in other assets ( 1,500 ) 4,420 Net increase (decrease) in accrued expenses and other liabilities 2,345 ( 2,434 ) Net cash provided by operating activities 3,081 4,891 Cash flows from investing activities: Proceeds from prepayments and maturities of securities available-for-sale 6,836 6,296 Increase in loans, net ( 10,208 ) ( 586 ) Net purchases of premises and equipment ( 1,043 ) ( 5 ) Proceeds from bank-owned life insurance death benefit — 215 Decrease in FHLB stock 32 41 Net cash (used in) provided by investing activities ( 4,383 ) 5,961 Cash flows from financing activities: Net decrease in noninterest-bearing deposits ( 7,239 ) ( 7,207 ) Net increase (decrease) in interest-bearing deposits 10,669 ( 3,940 ) Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase 27 ( 94 ) Stock repurchases — ( 64 ) Dividends paid ( 943 ) ( 945 ) Net cash provided by (used in) financing activities 2,514 ( 12,250 ) Net change in cash and cash equivalents 1,212 ( 1,398 ) Cash and cash equivalents at beginning of period 71,369 27,254 Cash and cash equivalents at end of period $ 72,581 $ 25,856 Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 2,442 $ 877 Income taxes — — See accompanying notes to consolidated financial statements Table of Contents 8 AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES General Auburn National Bancorporation, Inc. (the “Company”) provides a full range of banking services to individuals and commercial customers in Lee County, Alabama and surrounding areas through its wholly owned subsidiary, AuburnBank (the “Bank”). The Company does not have any segments other than banking that are considered material. Basis of Presentation and Use of Estimates The unaudited consolidated financial statements in this report have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information. Accordingly, these financial statements do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited consolidated financial statements include, in the opinion of management, all adjustments necessary to present a fair statement of the financial position and the results of operations for all periods presented. All such adjustments are of a normal recurring nature. The results of operations in the interim statements are not necessarily indicative of the results of operations that the Company and its subsidiaries may achieve for future interim periods or the entire year. For further information, refer to the consolidated financial statements and footnotes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2023. The unaudited consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Significant intercompany transactions and accounts are eliminated in consolidation. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term include the determination of allowance for credit losses on loans and investment securities, fair value of financial instruments, and the valuation of deferred tax assets and other real estate owned (“OREO”). Revenue Recognition The Company’s sources of income that fall within the scope of ASC 606 include service charges on deposits, interchange fees and gains and losses on sales of other real estate, all of which are presented as components of noninterest income. The following is a summary of the revenue streams that fall within the scope of ASC 606: ● Service charges on deposits, investment services, ATM and interchange fees – Fees from these services are either (i) transaction-based, for which the performance obligations are satisfied when the individual transaction is processed, or (ii) set periodic service charges, for which the performance obligations are satisfied over the period the service is provided. Transaction-based fees are recognized at the time the transaction is processed, and periodic service charges are recognized over the service period. ● Gains on sales of OREO – A gain on sale should be recognized when a contract for sale exists and control of the asset has been transferred to the buyer. ASC 606 lists several criteria required to conclude that a contract for sale exists, including a determination that the institution will collect substantially all of the consideration to which it is entitled. In addition to the loan-to-value ratio, where the seller provides the purchaser with financing, the analysis is based on various other factors, including the credit quality of the purchaser, the structure of the loan, and any other factors that we believe may affect collectability. Subsequent Events The Company has evaluated the effects of events and transactions through the date of this filing that have occurred subsequent to March 31, 2024. The Company does not believe there were any material subsequent events during this period that would have required further recognition or disclosure in the unaudited consolidated financial statements included in this report. Table of Contents 9 Correction of Error The disclosure of loans by vintage in Note 5 – Loans and Allowance for Credit Losses in the Company’s Annual Report on Form 10-K for year ended December 31, 2023 contained incorrect information as it pertains to loans originated by vintage and revolving loans. All current period gross charge-off data, total loans by segment and total loans by credit quality indicator were correctly reported. The loans originated by vintage and revolving loans as of December 31, 2023 have been corrected in the comparative presentation in Note 5 – Loans and Allowance for Credit Losses in the Notes herein. Reclassifications Certain amounts reported in prior periods have been reclassified to conform to the current -period presentation. These reclassifications had no effect on the Company’s previously reported net earnings or total stockholders’ equity. Accounting Standards Adopted in 2024 On January 1, 2024, the Company adopted ASU 2023-02, Investments – Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method . The amendments in this Update permit reporting entities to elect to account for their equity investments made primarily to receive income tax credits and other income tax benefits, regardless of the program from which the income tax credits or benefits are received, using the proportional amortization method if certain conditions are met. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2023. The Company adopted ASU 2023-02 effective January 1, 2024 and recorded a cumulative effect of change in accounting standard adjustment which reduced beginning retained earnings by $0.3 million. The Company will prospectively account for its investments in New Market Tax Credits (“NMTCs”) using the proportional amortization method through charges to the provision for income taxes. See Note 3, Variable Interest Entities. NOTE 2: BASIC AND DILUTED NET EARNINGS PER SHARE Basic net earnings per share is computed by dividing net earnings by the weighted average common shares outstanding for the quarters ended March 31, 2024 and 2023, respectively. Diluted net earnings per share reflect the potential dilution that could occur upon exercise of securities or other rights for, or convertible into, shares of the Company’s common stock. At March 31, 2024 and 2023, respectively, the Company had no such securities or rights issued or outstanding, and therefore, no dilutive effect to consider for the diluted net earnings per share calculation. The basic and diluted net earnings per share computations for the respective periods are presented below Quarter ended March 31, (Dollars in thousands, except share and per share data) 2024 2023 Basic and diluted: Net earnings $ 1,371 $ 1,964 Weighted average common shares outstanding 3,493,663 3,502,143 Net earnings per share $ 0.39 $ 0.56 NOTE 3: VARIABLE INTEREST ENTITIES Generally, a variable interest entity (“VIE”) is a corporation, partnership, trust or other legal structure that does not have equity investors with substantive or proportional voting rights or has equity investors that do not provide sufficient financial resources for the entity to support its activities. Table of Contents 10 At March 31, 2024, the Company did not have any consolidated VIEs but did have one nonconsolidated VIE, discussed below. New Markets Tax Credit Investment The NMTC program provides federal tax incentives to investors to make investments in distressed communities and promotes economic improvement through the development of successful businesses in these communities. NMTCs are available to investors over seven years and are subject to recapture if certain events occur during such period. At March 31, 2024 and December 31, 2023, respectively, the Company had one such investment of $1.2 million and $1.7 million, respectively, which was included in other assets in the Company’s consolidated balance sheets as a VIE. While the Company’s investment exceeds 50% of the outstanding equity interest in this VIE, the Company does not consolidate the VIE because the Company lacks the power to direct the activities of the VIE, and therefore is not a primary beneficiary of the VIE. On March 29, 2023, the FASB issued ASU 2023-02, which was effective beginning in 2024 for public business entities. We have adopted ASU 2023-02 as of January 1, 2024 with respect to accounting for our NMTC investment. The proportional amortization method results in the tax credit investment being amortized in proportion to the allocation of tax credits and other tax benefits in each period and a net presentation within the income tax line item. The cumulative effects of the change in accounting standard resulted in a $0.4 million pre-tax decrease in the Company’s NMTC investment at January 1, 2024. See Note 1: Summary of Significant Accounting Policies – Accounting Standards Adopted in 2024. (Dollars in thousands) Maximum Loss Exposure Asset Recognized Classification Type: New Markets Tax Credit investment $ 1,175 $ 1,175 Other assets NOTE 4: SECURITIES At March 31, 2024 and December 31, 2023, respectively, all securities within the scope of ASC 320, Investments – Debt and Equity Securities, were classified as available-for-sale. The fair value and amortized cost for securities available-for- sale by contractual maturity at March 31, 2024 and December 31, 2023, respectively, are presented below. 1 year 1 to 5 5 to 10 After 10 Fair Gross Unrealized Amortized (Dollars in thousands) or less years years years Value Gains Losses Cost March 31, 2024 Agency obligations (a) $ — 14,416 38,335 — 52,751 — 8,554 $ 61,305 Agency MBS (a) 57 15,533 20,254 154,380 190,224 — 30,229 220,453 State and political subdivisions — 569 9,067 8,159 17,795 — 2,898 20,693 Total available-for-sale $ 57 30,518 67,656 162,539 260,770 — 41,681 $ 302,451 December 31, 2023 Agency obligations (a) $ 331 10,339 43,209 — 53,879 — 8,195 $ 62,074 Agency MBS (a) 32 15,109 22,090 161,058 198,289 — 27,838 226,127 State and political subdivisions — — 9,691 9,051 18,742 1 2,731 21,472 Total available-for-sale $ 363 25,448 74,990 170,109 270,910 1 38,764 $ 309,673 (a) Includes securities issued by U.S. government agencies or government-sponsored entities. Expected lives of these securities may differ from contractual maturities because (i) issuers may have the right to call or repay such securities obligations with or without prepayment penalties and (ii) loans incuded in Agency MBS generally have the right to prepay such loan in whole or in part at any time. Securities with aggregate fair values of $ 204.8 million and $ 211.8 at March 31, 2024 and December 31, 2023, respectively, were pledged to secure public deposits, securities sold under agreements to repurchase, Federal Home Loan Bank of Atlanta (“FHLB of Atlanta”) advances, and for other purposes required or permitted by law. Table of Contents 11 Included in other assets on the accompanying consolidated balance sheets include non-marketable equity investments. The carrying amounts of non-marketable equity investments were $ 1.4 million at March 31, 2024 and December 31, 2023, respectively. Non-marketable equity investments include FHLB of Atlanta stock, Federal Reserve Bank of Atlanta (“FRB”) stock, and stock in a privately held financial institution. Gross Unrealized Losses and Fair Value The fair values and gross unrealized losses on securities at March 31, 2024 and December 31, 2023, respectively, segregated by those securities that have been in an unrealized loss position for less than 12 months and 12 months or longer, are presented below. Less than 12 Months 12 Months or Longer Total Fair Unrealized Fair Unrealized Fair Unrealized (Dollars in thousands) Value Losses Value Losses Value Losses March 31, 2024: Agency obligations $ — — 52,751 8,554 $ 52,751 8,554 Agency MBS 15 — 190,209 30,229 190,224 30,229 State and political subdivisions 1,459 6 15,010 2,892 16,469 2,898 Total $ 1,474 6 257,970 41,675 $ 259,444 41,681 December 31, 2023: Agency obligations $ — — 53,879 8,195 $ 53,879 8,195 Agency MBS 66 1 198,223 27,837 198,289 27,838 State and political subdivisions 793 2 14,408 2,729 15,201 2,731 Total $ 859 3 266,510 38,761 $ 267,369 38,764 For the securities in the previous table, the Company considers the severity of the unrealized loss as well the Company’s intent to hold the securities to maturity or the recovery of the cost basis. Unrealized losses have not been recognized into income as the decline in fair value is largely due to changes in interest rates and other market conditions. For the securities in the previous table as of March 31, 2024, management does not intend to sell and it is likely that management will not be required to sell the securities prior to their recovery. Agency Obligations Investments in agency obligations are guaranteed of full and timely payments by the issuing agency. Based on management's analysis and judgement, there were no credit losses attributable to the Company’s investments in agency obligations at March 31, 2024. Agency MBS Investments in agency mortgage backed securities (“MBS”) are issued by Ginnie Mae, Fannie Mae, and Freddie Mac. Each of these agencies provide a guarantee of full and timely payments of principal and interest by the issuing agency. Based on management's analysis and judgement, there were no credit losses attributable to the Company’s investments in agency MBS at March 31, 2024. State and Political Subdivisions Investments in state and political subdivisions are securities issued by various municipalities in the United States. The majority of the portfolio was rated AA or higher, with no securities rated below investment grade at March 31, 2024. Based on management's analysis and judgement, there were no credit losses attributable to the Company’s investments in state and political subdivisions at March 31, 2024. Realized Gains and Losses The Company had no realized gains or losses on sale of securities during the quarters ended March 31, 2024 and 2023, respectively. Table of Contents 12 NOTE 5: LOANS AND ALLOWANCE FOR CREDIT LOSSES March 31, December 31, (Dollars in thousands) 2024 2023 Commercial and industrial $ 78,920 $ 73,374 Construction and land development 58,909 68,329 Commercial real estate: Owner occupied 63,826 66,783 Hotel/motel 38,822 39,131 Multi-family 45,634 45,841 Other 152,202 135,552 Total commercial real estate 300,484 287,307 Residential real estate: Consumer mortgage 59,813 60,545 Investment property 58,427 56,912 Total residential real estate 118,240 117,457 Consumer installment 10,967 10,827 Total Loans $ 567,520 $ 557,294 Loans secured by real estate were approximately 84.2% of the Company’s total loan portfolio at March 31, 2024. At March 31, 2024, the Company’s geographic loan distribution was concentrated primarily in Lee County, Alabama, and surrounding areas. The loan portfolio segment is defined as the level at which an entity develops and documents a systematic method for determining its allowance for credit losses. As part of the Company’s quarterly assessment of the allowance, the loan portfolio included the following portfolio segments: commercial and industrial, construction and land development, commercial real estate, residential real estate, and consumer installment. Where appropriate, the Company’s loan portfolio segments are further disaggregated into classes. A class is generally determined based on the initial measurement attribute, risk characteristics of the loan, and an entity’s method for monitoring and determining credit risk. The following describes the risk characteristics relevant to each of the portfolio segments and classes. Commercial and industrial (“C&I”) — includes loans to finance business operations, equipment purchases, or other needs for small and medium-sized commercial customers. Also included in this category are loans to finance agricultural production. Generally, the primary source of repayment is the cash flow from business operations and activities of the borrower. Construction and land development (“C&D”) — includes both loans and credit lines for the purpose of purchasing, carrying, and developing land into commercial developments or residential subdivisions. Also included are loans and credit lines for construction of residential, multi-family, and commercial buildings. Generally, the primary source of repayment is dependent upon the sale or refinance of the real estate collateral. Commercial real estate (“CRE”) — includes loans in these classes: ● Owner occupied – includes loans secured by business facilities to finance business operations, equipment and owner-occupied facilities primarily for small and medium-sized commercial customers. Generally, the primary source of repayment is the cash flow from business operations and activities of the borrower, who owns the property. ● Hotel/motel – includes loans for hotels and motels. Generally, the primary source of repayment is dependent upon income generated from the hotel/motel securing the loan. The underwriting of these loans takes into consideration the occupancy and rental rates, as well as the financial health of the borrower. Table of Contents 13 ● Multi-family – primarily includes loans to finance income-producing multi-family properties . These include loans for 5 or more unit residential properties and apartments leased to residents. Generally , the primary source of repayment is dependent upon income generated from the real estate collateral. The underwriting of these loans takes into consideration the occupancy and rental rates, as well as the financial health of the respective borrowers. ● Other – primarily includes loans to finance income-producing commercial properties other than hotels/motels and multi-family properties, and which are not owner occupied. Loans in this class include loans for neighborhood retail centers, medical and professional offices, single retail stores, industrial buildings, and warehouses leased to local and other businesses. Generally, the primary source of repayment is dependent upon income generated from the real estate collateral. The underwriting of these loans takes into consideration the occupancy and rental rates, as well as the financial health of the borrower. Residential real estate (“RRE”) — includes loans in these two classes: ● Consumer mortgage – primarily includes first or second lien mortgages and home equity lines of credit to consumers that are secured by a primary residence or second home. These loans are underwritten in accordance with the Bank’s general loan policies and procedures which require, among other things, proper documentation of each borrower’s financial condition, satisfactory credit history , and property value. ● Investment property – primarily includes loans to finance income-producing 1-4 family residential properties. Generally, the primary source of repayment is dependent upon income generated from leasing the property securing the loan. The underwriting of these loans takes into consideration the rental rates and property values, as well as the financial health of the borrowers. Consumer installment — includes loans to individuals, which may be secured by personal property or are unsecured. Loans include personal lines of credit, automobile loans, and other retail loans. These loans are underwritten in accordance with the Bank’s general loan policies and procedures which require, among other things, proper documentation of each borrower’s financial condition, satisfactory credit history, and, if applicable, property values. Table of Contents 14 The following is a summary of current, accruing past due, and nonaccrual loans by portfolio segment and class as of March 31, 2024 and December 31, 2023. Accruing Accruing Total 30-89 Days Greater than Accruing Non- Total (Dollars in thousands) Current Past Due 90 days Loans Accrual Loans March 31, 2024: Commercial and industrial $ 78,914 6 — 78,920 — $ 78,920 Construction and land development 58,909 — — 58,909 — 58,909 Commercial real estate: Owner occupied 63,061 — — 63,061 765 63,826 Hotel/motel 38,822 — — 38,822 — 38,822 Multi-family 45,634 — — 45,634 — 45,634 Other 152,202 — — 152,202 — 152,202 Total commercial real estate 299,719 — — 299,719 765 300,484 Residential real estate: Consumer mortgage 59,656 60 — 59,716 97 59,813 Investment property 58,427 — — 58,427 — 58,427 Total residential real estate 118,083 60 — 118,143 97 118,240 Consumer installment 10,935 16 — 10,951 16 10,967 Total $ 566,560 82 — 566,642 878 $ 567,520 December 31, 2023: Commercial and industrial $ 73,108 266 — 73,374 — $ 73,374 Construction and land development 68,329 — — 68,329 — 68,329 Commercial real estate: Owner occupied 66,000 — — 66,000 783 66,783 Hotel/motel 39,131 — — 39,131 — 39,131 Multi-family 45,841 — — 45,841 — 45,841 Other 135,552 — — 135,552 — 135,552 Total commercial real estate 286,524 — — 286,524 783 287,307 Residential real estate: Consumer mortgage 60,442 — — 60,442 103 60,545 Investment property 56,597 290 — 56,887 25 56,912 Total residential real estate 117,039 290 — 117,329 128 117,457 Consumer installment 10,781 46 — 10,827 — 10,827 Total $ 555,781 602 — 556,383 911 $ 557,294 Table of Contents 15 Credit Quality Indicators The credit quality of the loan portfolio is summarized no less frequently than quarterly using categories similar to the standard asset classification system used by the federal banking agencies. These categories are utilized to develop the associated allowance for credit losses using historical losses adjusted for qualitative and environmental factors and are defined as follows: ● Pass – loans which are well protected by the current net worth and paying capacity of the obligor (or guarantors, if any) or by the fair value, less cost to acquire and sell, of any underlying collateral. ● Special Mention – loans with potential weakness that may, if not reversed or corrected, weaken the credit or inadequately protect the Company’s position at some future date. These loans are not adversely classified and do not expose an institution to sufficient risk to warrant an adverse classification. ● Substandard Accruing – loans that exhibit a well-defined weakness which presently jeopardizes debt repayment, even though they are currently performing. These loans are characterized by the distinct possibility that the Company may incur a loss in the future if these weaknesses are not corrected . ● Nonaccrual – includes loans where management has determined that full payment of principal and interest is not expected. Substandard accrual and nonaccrual loans are often collectively referred to as “classified.” The following tables presents credit quality indicators for the loan portfolio segments and classes by year of origination as of March 31, 2024 and December 31, 2023. The December 31, 2023 table has been revised to correct revolving loans and properly allocate loans by year of origination. See Note 1: Summary of Significant Accounting Policies – Correction of Error. Table of Contents 16 Year of Origination 2024 2023 2022 2021 2020 Prior to 2020 Revolving Loans Total Loans (Dollars in thousands) March 31, 2024: Commercial and industrial Pass $ 6,167 10,960 19,891 13,067 5,429 14,697 8,449 $ 78,660 Special mention — — — — — — — — Substandard 54 — 194 12 — — — 260 Nonaccrual — — — — — — — — Total commercial and industrial 6,221 10,960 20,085 13,079 5,429 14,697 8,449 78,920 Current period gross charge-offs — — — — — — — — Construction and land development Pass 5,668 26,093 22,446 1,615 1,506 200 905 58,433 Special mention — 302 — — — — — 302 Substandard 174 — — — — — — 174 Nonaccrual — — — — — — — — Total construction and land development 5,842 26,395 22,446 1,615 1,506 200 905 58,909 Current period gross charge-offs — — — — — — — — Commercial real estate: Owner occupied Pass 100 12,842 7,197 18,076 10,283 10,744 2,583 61,825 Special mention 931 257 — — — — — 1,188 Substandard — — — — — 48 — 48 Nonaccrual — — — — — 765 — 765 Total owner occupied 1,031 13,099 7,197 18,076 10,283 11,557 2,583 63,826 Current period gross charge-offs — — — — — — — — Hotel/motel Pass 248 8,925 9,765 3,174 1,445 15,265 — 38,822 Special mention — — — — — — — — Substandard — — — — — — — — Nonaccrual — — — — — — — — Total hotel/motel 248 8,925 9,765 3,174 1,445 15,265 — 38,822 Current period gross charge-offs — — — — — — — — Table of Contents 17 Year of Origination 2024 2023 2022 2021 2020 Prior to 2020 Revolving Loans Total Loans (Dollars in thousands) March 31, 2024: Multi-family Pass 113 12,270 17,834 1,934 6,060 6,682 741 45,634 Special mention — — — — — — — — Substandard — — — — — — — — Nonaccrual — — — — — — — — Total multi-family 113 12,270 17,834 1,934 6,060 6,682 741 45,634 Current period gross charge-offs — — — — — — — — Other Pass 19,687 24,583 35,601 31,278 14,036 25,552 1,313 152,050 Special mention — — — — — — — — Substandard — — — — 152 — — 152 Nonaccrual — — — — — — — — Total other 19,687 24,583 35,601 31,278 14,188 25,552 1,313 152,202 Current period gross charge-offs — — — — — — — — Residential real estate: Consumer mortgage Pass 1,276 19,445 19,230 2,682 2,636 13,106 327 58,702 Special mention — — — — — 493 — 493 Substandard — — — — — 521 — 521 Nonaccrual — — — — — 97 — 97 Total consumer mortgage 1,276 19,445 19,230 2,682 2,636 14,217 327 59,813 Current period gross charge-offs — — — — — — — — Investment property Pass 5,736 12,255 11,396 9,219 11,829 6,214 1,369 58,018 Special mention — — — — — — — — Substandard — 83 96 — 230 — — 409 Nonaccrual — — — — — — — — Total investment property 5,736 12,338 11,492 9,219 12,059 6,214 1,369 58,427 Current period gross charge-offs — — — — — — — — Consumer installment Pass 2,095 5,157 2,690 570 148 222 — 10,882 Special mention — 10 1 — 1 — — 12 Substandard 10 34 11 2 — — — 57 Nonaccrual — 9 7 — — — — 16 Total consumer installment 2,105 5,210 2,709 572 149 222 — 10,967 Current period gross charge-offs — 6 17 1 — — — 24 Total loans Pass 41,090 132,530 146,050 81,615 53,372 92,682 15,687 563,026 Special mention 931 569 1 — 1 493 — 1,995 Substandard 238 117 301 14 382 569 — 1,621 Nonaccrual — 9 7 — — 862 — 878 Total loans $ 42,259 133,225 146,359 81,629 53,755 94,606 15,687 $ 567,520 Total current period gross charge-offs $ — 6 17 1 — — — 24 Table of Contents 18 Year of Origination 2023 2022 2021 2020 2019 Prior to 2019 Revolving Loans Total Loans (Dollars in thousands) December 31, 2023: Commercial and industrial Pass $ 11,571 18,074 13,746 5,602 7,298 7,819 9,003 $ 73,113 Special mention — — — — — — — — Substandard 55 203 — — 3 — — 261 Nonaccrual — — — — — — — — Total commercial and industrial 11,626 18,277 13,746 5,602 7,301 7,819 9,003 73,374 Current period gross charge-offs — — 13 — 151 — — 164 Construction and land development Pass 38,646 25,382 1,716 1,526 120 157 782 68,329 Special mention — — — — — — — — Substandard — — — — — — — — Nonaccrual — — — — — — — — Total construction and land development 38,646 25,382 1,716 1,526 120 157 782 68,329 Current period gross charge-offs — — — — — — — — Commercial real estate: Owner occupied Pass 12,966 7,337 18,548 10,458 3,948 9,786 2,647 65,690 Special mention 260 — — — — — — 260 Substandard — — — — 50 — — 50 Nonaccrual — — — — 783 — — 783 Total owner occupied 13,226 7,337 18,548 10,458 4,781 9,786 2,647 66,783 Current period gross charge-offs — — — — — — — — Hotel/motel Pass 9,025 9,873 3,205 1,493 3,881 11,654 — 39,131 Special mention — — — — — — — — Substandard — — — — — — — — Nonaccrual — — — — — — — — Total hotel/motel 9,025 9,873 3,205 1,493 3,881 11,654 — 39,131 Current period gross charge-offs — — — — — — — — Table of Contents 19 Year of Origination 2023 2022 2021 2020 2019 Prior to 2019 Revolving Loans Total Loans (Dollars in thousands) December 31, 2023: Multi-family Pass 12,379 17,955 1,953 6,112 3,790 3,043 609 45,841 Special mention — — — — — — — — Substandard — — — — — — — — Nonaccrual — — — — — — — — Total multi-family 12,379 17,955 1,953 6,112 3,790 3,043 609 45,841 Current period gross charge-offs — — — — — — — — Other Pass 25,810 36,076 31,687 14,597 10,736 15,440 1,052 135,398 Special mention — — — — — — — — Substandard — — — 154 — — — 154 Nonaccrual — — — — — — — — Total other 25,810 36,076 31,687 14,751 10,736 15,440 1,052 135,552 Current period gross charge-offs — — — — — — — — Residential real estate: Consumer mortgage Pass 20,147 20,177 2,683 2,665 1,281 12,217 249 59,419 Special mention — — — — 190 305 — 495 Substandard — — — — — 528 — 528 Nonaccrual — — — — — 103 — 103 Total consumer mortgage 20,147 20,177 2,683 2,665 1,471 13,153 249 60,545 Current period gross charge-offs — — — — — — — — Investment property Pass 13,398 12,490 9,397 12,209 5,485 1,865 1,478 56,322 Special mention 41 — — — — — — 41 Substandard 43 248 — 233 — — — 524 Nonaccrual — — — — — 25 — 25 Total investment property 13,482 12,738 9,397 12,442 5,485 1,890 1,478 56,912 Current period gross charge-offs — — — — — — — — Consumer installment Pass 5,688 3,837 740 206 106 141 — 10,718 Special mention 9 25 9 2 — — — 45 Substandard 37 11 5 11 — — — 64 Nonaccrual — — — — — — — - Total consumer installment 5,734 3,873 754 219 106 141 — 10,827 Current period gross charge-offs 34 57 13 1 — — — 105 Total loans Pass 149,630 151,201 83,675 54,868 36,645 62,122 15,820 553,961 Special mention 310 25 9 2 190 305 — 841 Substandard 135 462 5 398 53 528 — 1,581 Nonaccrual — — — — 783 128 — 911 Total loans $ 150,075 151,688 83,689 55,268 37,671 63,083 15,820 $ 557,294 Total current period gross charge-offs $ 34 57 26 1 151 — — 269 Table of Contents 20 Allowance for Credit Losses The Company adopted ASC 326 on January 1, 2023, which introduced the CECL methodology for estimating all expected losses over the life of a financial asset. Under the CECL methodology, the allowance for credit losses is measured on a collective basis for pools of loans with similar risk characteristics, and for loans that do not share similar risk characteristics with the collectively evaluated pools, evaluations are performed on an individual basis. The composition of the provision for credit losses for the respective periods is presented below. Quarter ended March 31, (Dollars in thousands) 2024 2023 Provision for credit losses: Loans $ 285 $ 40 Reserve for unfunded commitments 49 26 Total provision for credit losses $ 334 $ 66 The following table details the changes in the allowance for credit losses for loans, by portfolio segment, for the respective periods. (Dollars in thousands) Commercial and industrial Construction and land development Commercial real estate Residential real estate Consumer installment Total Quarter ended: March 31, 2024 Beginning balance $ 1,288 960 3,921 546 148 $ 6,863 Charge-offs — — — — ( 24 ) ( 24 ) Recoveries 66 — — 3 22 91 Net recoveries (charge-offs) 66 — — 3 ( 2 ) 67 Provision for credit losses 61 ( 120 ) 281 64 ( 1 ) 285 Ending balance $ 1,415 840 4,202 613 145 $ 7,215 Quarter ended: March 31, 2023 Beginning balance $ 747 949 3,109 828 132 $ 5,765 Impact of adopting ASC 326 532 ( 17 ) 873 ( 347 ) ( 22 ) 1,019 Charge-offs — — — — ( 11 ) ( 11 ) Recoveries 2 — — 5 1 8 Net recoveries (charge-offs) 2 — — 5 ( 10 ) ( 3 ) Provision for credit losses ( 49 ) 89 ( 16 ) 11 5 40 Ending balance $ 1,232 1,021 3,966 497 105 $ 6,821 The following table presents the amortized cost basis of collateral dependent loans, which are individually evaluated to determine expected credit losses as of March 31, 2024 and December 31, 2023: (Dollars in thousands) Real Estate Total Loans March 31, 2024: Commercial real estate $ 765 $ 765 Total $ 765 $ 765 December 31, 2023: Commercial real estate $ 783 $ 783 Total $ 783 $ 783 Table of Contents 21 The following table is a summary of the Company’s nonaccrual loans by major categories as of March 31, 2024 and December 31, 2023. CECL Nonaccrual loans Nonaccrual loans Total (Dollars in thousands) with no Allowance with an Allowance Nonaccrual Loans March 31, 2024 Commercial real estate $ 765 — 765 Residential real estate — 97 97 Consumer — 16 16 Total $ 765 113 878 December 31, 2023 Commercial real estate $ 783 — 783 Residential real estate — 128 128 Total $ 783 128 911 NOTE 6: MORTGAGE SERVICING RIGHTS, NET Mortgage servicing rights (“MSRs”) are recognized based on the fair value of the servicing rights on the date the corresponding mortgage loans are sold. An estimate of the Company’s MSRs is determined using assumptions that market participants would use in estimating future net servicing income, including estimates of prepayment speeds, discount rate, default rates, cost to service, escrow account earnings, contractual servicing fee income, ancillary income, and late fees. Subsequent to the date of transfer, the Company has elected to measure its MSRs under the amortization method. Under the amortization method, MSRs are amortized in proportion to, and over the period of, estimated net servicing income. Increases in market interest rates generally increase the fair value of MSRs by reducing prepayments and refinancings and therefore reducing the prepayment speed. The Company has recorded MSRs related to loans sold to Fannie Mae. The Company generally sells conforming, fixed- rate, closed-end, residential mortgages to Fannie Mae. MSRs are included in other assets on the accompanying consolidated balance sheets. The Company evaluates MSRs for impairment on a quarterly basis. Impairment is determined by stratifying MSRs into groupings based on predominant risk characteristics, such as interest rate and loan type. If, by individual stratum, the carrying amount of the MSRs exceeds fair value, a valuation allowance is established. The valuation allowance is adjusted as the fair value changes. Changes in the valuation allowance are recognized in earnings as a component of mortgage lending income. Table of Contents 22 The change in amortized MSRs and the related valuation allowance for the quarters ended March 31, 2024 and 2023 are presented below. Quarter ended March 31, (Dollars in thousands) 2024 2023 MSRs, net: Beginning balance $ 992 $ 1,151 Additions, net 12 — Amortization expense ( 39 ) ( 55 ) Ending balance $ 965 $ 1,096 Valuation allowance included in MSRs, net: Beginning of period $ — $ — End of period — — Fair value of amortized MSRs: Beginning of period $ 2,382 $ 2,369 End of period 2,378 2,419 NOTE 7: FAIR VALUE Fair Value Hierarchy “Fair value” is defined by ASC 820, Fair Value Measurements and Disclosures , and focuses on the exit price, i.e., the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for an asset or liability at the measurement date. GAAP establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows: Level 1—inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets. Level 2—inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs that are observable for the asset or liability, either directly or indirectly. Level 3—inputs to the valuation methodology are unobservable and reflect the Company’s own assumptions about the inputs market participants would use in pricing the asset or liability. Level changes in fair value measurements Transfers between levels of the fair value hierarchy are generally recognized at the end of each reporting period. The Company monitors the valuation techniques utilized for each category of financial assets and liabilities to ascertain when transfers between levels have been affected. The nature of the Company’s financial assets and liabilities generally is such that transfers in and out of any level are expected to be infrequent. For the quarter ended March 31, 2024, there were no transfers between levels and no changes in valuation techniques for the Company’s financial assets and liabilities. Table of Contents 23 Assets and liabilities measured at fair value on a recurring basis Securities available-for-sale Fair values of securities available for sale were primarily measured using Level 2 inputs. For these securities, the Company obtains pricing data from third party pricing services. These third party pricing services consider observable data that may include broker/dealer quotes, market spreads, cash flows, benchmark yields, reported trades for similar securities, market consensus prepayment speeds, credit information, and the securities’ terms and conditions. On a quarterly basis, management reviews the pricing data received from the third party pricing services for reasonableness given current market conditions. As part of its review, management may obtain non-binding third party broker/dealer quotes to validate the fair value measurements. In addition, management will periodically submit pricing information provided by the third party pricing services to another independent valuation firm on a sample basis. This independent valuation firm will compare the prices provided by the third party pricing service with its own prices and will review the significant assumptions and valuation methodologies used with management. The following table presents the balances of the assets and liabilities measured at fair value on a recurring basis as of March 31, 2024 and December 31, 2023, respectively, by caption, on the accompanying consolidated balance sheets by ASC 820 valuation hierarchy (as described above). Quoted Prices in Significant Active Markets Other Significant for Observable Unobservable Identical Assets Inputs Inputs (Dollars in thousands) Amount (Level 1) (Level 2) (Level 3) March 31, 2024: Securities available-for-sale: Agency obligations $ 52,751 — 52,751 — Agency MBS 190,224 — 190,224 — State and political subdivisions 17,795 — 17,795 — Total securities available-for-sale 260,770 — 260,770 — Total assets at fair value $ 260,770 — 260,770 — December 31, 2023: Securities available-for-sale: Agency obligations $ 53,879 — 53,879 — Agency MBS 198,289 — 198,289 — State and political subdivisions 18,742 — 18,742 — Total securities available-for-sale 270,910 — 270,910 — Total assets at fair value $ 270,910 — 270,910 — Assets and liabilities measured at fair value on a nonrecurring basis Collateral Dependent Loans Collateral dependent loans are measured at the fair value of the collateral securing the loan less estimated selling costs. The fair value of real estate collateral is determined based on real estate appraisals which are generally based on recent sales of comparable properties which are then adjusted for property specific factors. Non-real estate collateral is valued based on various sources, including third party asset valuations and internally determined values based on cost adjusted for depreciation and other judgmentally determined discount factors. Collateral dependent loans are classified within Level 3 of the hierarchy due to the unobservable inputs used in determining their fair value such as collateral values and the borrower's underlying financial condition. Table of Contents 24 Mortgage servicing rights, net MSRs, net, included in other assets on the accompanying consolidated balance sheets, are carried at the lower of cost or estimated fair value. MSRs do not trade in an active market with readily observable prices. To determine the fair value of MSRs, the Company engages an independent third party. The independent third party’s valuation model calculates the present value of estimated future net servicing income using assumptions that market participants would use in estimating future net servicing income, including estimates of mortgage prepayment speeds, discount rates, default rates, costs to service, escrow account earnings, contractual servicing fee income, ancillary income, and late fees. Periodically, the Company will review broker surveys and other market research to validate significant assumptions used in the model. The significant unobservable inputs include mortgage prepayment speeds or the constant prepayment rate (“CPR”) and the weighted average discount rate. Because the valuation of MSRs requires the use of significant unobservable inputs, all of the Company’s MSRs are classified within Level 3 of the valuation hierarchy. The following table presents the balances of the assets and liabilities measured at fair value on a nonrecurring basis as of March 31, 2024 and December 31, 2023, respectively, by caption, on the accompanying consolidated balance sheets and by FASB ASC 820 valuation hierarchy (as described above): Quoted Prices in Active Markets Other Significant for Observable Unobservable Carrying Identical Assets Inputs Inputs (Dollars in thousands) Amount (Level 1) (Level 2) (Level 3) March 31, 2024: Loans held for sale $ 175 — 175 — Loans, net (1) 765 — — 765 Other assets (2) 965 — — 965 Total assets at fair value $ 1,905 — 175 1,730 December 31, 2023: Loans, net (1) $ 783 — — 783 Other assets (2) 992 — — 992 Total assets at fair value $ 1,775 — — 1,775 (1) Loans considered collateral dependent under ASC 326. (2) Represents MSRs, net, carried at lower of cost or estimated fair value. Quantitative Disclosures for Level 3 Fair Value Measurements At March 31, 2024 and December 31, 2023, the Company had no Level 3 assets measured at fair value on a recurring basis. For Level 3 assets measured at fair value on a non-recurring basis at March 31, 2024 and December 31, 2023, the significant unobservable inputs used in the fair value measurements and the range of such inputs with respect to such assets are presented below. Range of Weighted Carrying Significant Unobservable Average (Dollars in thousands) Amount Valuation Technique Unobservable Input Inputs of Input March 31, 2024: Collateral dependent loans $ 765 Appraisal Appraisal discounts 10.0 - 10.0 % 10.0 % Mortgage servicing rights, net 965 Discounted cash flow Prepayment speed or CPR 6.3 - 11.3 6.6 Discount rate 10.0 - 12.0 10.0 December 31, 2023: Collateral dependent loans $ 783 Appraisal Appraisal discounts 10.0 - 10.0 % 10.0 % Mortgage servicing rights, net 992 Discounted cash flow Prepayment speed or CPR 5.9 - 10.6 6.0 Discount rate 10.5 - 12.5 10.5 Table of Contents 25 Fair Value of Financial Instruments ASC 825, Financial Instruments , requires disclosure of fair value information about financial instruments, whether or not recognized on the face of the balance sheet, where it is practicable to estimate that value. The assumptions used in the estimation of the fair value of the Company’s financial instruments are explained below. Where quoted market prices are not available, fair values are based on estimates using discounted cash flow analyses. Discounted cash flows can be significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. The following fair value estimates cannot be substantiated by comparison to independent markets and should not be considered representative of the liquidation value of the Company’s financial instruments, but rather are good-faith estimates of the fair value of financial instruments held by the Company. ASC 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments: Loans, net Fair values for loans were calculated using discounted cash flows. The discount rates reflected current rates at which similar loans would be made for the same remaining maturities. Expected future cash flows were projected based on contractual cash flows, adjusted for estimated prepayments. The fair value of loans was measured using an exit price notion. Loans held for sale Fair values of loans held for sale are determined using quoted secondary market prices for similar loans. Time Deposits Fair values for time deposits were estimated using discounted cash flows. The discount rates were based on rates currently offered for deposits with similar remaining maturities. The carrying value, related estimated fair value, and placement in the fair value hierarchy of the Company’s financial instruments at March 31, 2024 and December 31, 2023 are presented below. This table excludes financial instruments for which the carrying amount approximates fair value. Financial assets for which fair value approximates carrying value included cash and cash equivalents. Financial liabilities for which fair value approximates carrying value included noninterest-bearing demand deposits, interest-bearing demand deposits, and savings deposits. Fair value approximates carrying value in these financial liabilities due to these products having no stated maturity. Additionally, financial liabilities for which fair value approximates carrying value included overnight borrowings such as federal funds purchased and securities sold under agreements to repurchase. The following table summarizes our fair value estimates: Fair Value Hierarchy Carrying Estimated Level 1 Level 2 Level 3 (Dollars in thousands) amount fair value inputs inputs Inputs March 31, 2024: Financial Assets: Loans, net (1) $ 560,305 $ 522,379 $ — $ — $ 522,379 Loans held for sale 175 175 — 175 — Financial Liabilities: Time Deposits $ 190,603 $ 188,651 $ — $ 188,651 $ — December 31, 2023: Financial Assets: Loans, net (1) $ 550,431 $ 526,372 $ — $ — $ 526,372 Financial Liabilities: Time Deposits $ 198,215 $ 195,171 $ — $ 195,171 $ — (1) Represents loans, net of allowance for credit losses. The fair value of loans was measured using an exit price notion. Table of Contents 26