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Item 2. Management’s Discussion and Analysis

2024-08-02 compared with 2024-05-08 · 578 added, 376 removed, 871 unchanged (52% of the section changed)

1 unchanged sentence

OF FINANCIAL CONDITION AND RESULTS

The following discussion and analysis is designed to provide a better

understanding of various factors related to the results

Auburn National Bancorporation, Inc.

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

with the Board of Governors

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

Company Act of 1956, as amended (the

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

it succeeded its Alabama predecessor as the

bank holding company controlling AuburnBank, an Alabama state

member bank with its principal office in Auburn,

Alabama (the “Bank”).

The Company and its predecessor have controlled the Bank since 1984.

As a bank holding

company, the Company

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

are permitted to the Bank under applicable laws and regulations.

The holding company structure also provides greater

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

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

in East Alabama, including

Lee County and surrounding areas.

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

Bank’s primary regulators are the Federal

Reserve and the Alabama Superintendent of Banks (the “Alabama

Superintendent”).

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

Certain of the statements

discussion and analysis and elsewhere, including information incorporated

herein by reference to other documents, are

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

Cautionary Notice Regarding Forward-Looking

Statements” below.

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

various factors related to the results

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

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financial statements and related

notes for the quarters 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.

notes for the quarters and six months ended June 30, 2024 and 2023, as well as the information

contained in our Annual

Report on Form 10-K for the year ended December 31, 2023 and our Quarterly Reports on

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,” “target” and other similar words

and expressions of the future.

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

of the future.

These forward-looking

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changes, foreign, domestic and locally,

including inflation, seasonality, natural

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

including inflation, seasonality,

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

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

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in consumer behaviors;

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

other events that may affect

general economic conditions;

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

tariffs), sanctions or other events

that may affect general economic conditions;

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

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regulations and rules and

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

in the scope and cost

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,

changes in accounting pronouncements and interpretations, including the required

use, beginning January 1,

2023,of Financial Accounting Standards Board’s

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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;

market and credit conditions, including unemployment rates, 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

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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;

the risks of increases in market interest rates or the continuation of restrictive monetary policies

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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changes in the prices, values and sales volumes of residential and commercial real estate;

the effects of competition from a wide variety of local, regional, national

and other providers of financial,

the effects of competition from a wide variety of local, regional,

national and other providers of financial,

investment and insurance services, including the disruptive effects of

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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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limited by regulation to the

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

“eligible retained earnings” over

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

and “eligible retained earnings” over

rolling four calendar quarter periods;

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entirety by this cautionary notice.

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

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

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Summary of Results of Operations

Quarter ended March 31,

(Dollars in thousands, except per share data)

Quarter ended June 30,

Six months ended June 30,

(Dollars in thousands, except per share amounts)

Net interest income (a)

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Total revenue

Provision for credit losses

Provision for (reversal of) credit losses

Noninterest expense

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(a) Tax-equivalent.

See "Table 1 - Explanation of Non-GAAP

Financial Measures."

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

Financial Summary

The Company’s net earnings were $3.1

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

million for the first six months of 2024,

compared to $3.9 million for the first six

months of 2023.

Basic and diluted earnings per share were $0.89 per share for the first six months of 2024,

$1.11 per share for the first six months of 2023.

Net interest income (tax-equivalent) was $13.4

million for the first six months of 2024, a 6% decrease compared to $14.2

million for the first six months of 2023.

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

Company’s net interest margin.

The Company’s net interest

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

margin (tax-equivalent) was 3.05% for the first six months of

2024 compared to 3.10% for the first six months of 2023.

This decrease was primarily due to increased cost of interest

bearing deposits,

which was partially offset by a more favorable asset mix and higher yields

on interest earning assets.

Average loans for the first six

months of 2024 were $567.4 million, a 12% increase from the first six months of 2023

Average total securities for the

first six months of 2024 were $262.9 million compared to $402.8

million for the first six

months of 2023.

The decrease was primarily the result of the Company’s

balance sheet repositioning strategy in the fourth quarter of

balance sheet repositioning strategy in the fourth

quarter of 2024.

See “Results of Operations – Average

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

At March 31, 2024, the Company’s allowance

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

Margin” below.

At June 30, 2024, the Company’s allowance

for credit losses was $7.1 million, or 1.24% 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.

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

economic factors including, most notably,

million, or 1.23% of total loans, at December 31, 2023, and $6.6

million, or 1.27% of total loans, at June 30, 2023.

The Company recorded a provision for credit losses during the first six months of 2024

of $0.2 million, compared to a

negative provision of $0.3

million during the first six 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 economic factors including, most notably,

the anticipated unemployment rate.

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

The increase in the

provision for credit losses during the first six months of 2024,

as compared to the first six months of 2023, was related to

changes in the composition of, and increases in, loans as well as changes in the economic

forecasts used in our CECL

Noninterest income was $1.8 million in the first six months of 2024,

compared to $1.6 million in the first six months of

The increase was primarily related to an increase in mortgage lending income and other

noninterest income.

Noninterest expense was $11.2 million in the first six

months of 2024,

compared to $11.4 million for the first six months of

The decrease was primarily related to decreases in net occupancy and equipment expense

and other noninterest

These decreases were partially offset by an increase

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 three months of 2024

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

The Company’s effective income

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 $0.27 per share in the first three months of 2024 and 2023

At March 31, 2024, the

Income tax expense was $0.6 million for both the first six months of 2024

The Company's effective tax rate for

the first six months of 2024 was 17.07%, compared to 12.48% in the first six months of 2023.

The Company’s effective

income 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 (“NMTCs”).

The effective tax rate increased primarily

due to a decrease in the Company’s investment in

municipal securities following the balance sheet restructuring in the

fourth quarter of 2023, and the adoption of FASB

ASU 2023-02 Investments – Equity Method and Joint Ventures

323) which allows the proportional amortization method for our NMTC

investments, on January 1, 2024.

adoption of this ASU, amortization of NMTCs are now included in income tax expense

rather than noninterest expense.

The Company paid cash dividends of $0.27 per share in the first six months of 2024

At June 30, 2024, the

Bank’s regulatory capital ratios

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a tier 1 leverage ratio of 10.39% and a common equity

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

tier 1 (“CET1”) ratio of 14.47% at June 30, 2024.

For the second quarter of 2024, net earnings were $1.7 million, or $0.50

per share, compared to $1.9 million, or $0.55 per

share, for the second quarter of 2023.

Net interest income (tax-equivalent) was $6.7 million for the second quarter of 2024

compared to $7.0 million for the second quarter of 2023.

This decrease was primarily due to increases in the cost of

interest bearing deposits.

The Company’s net interest

margin (tax-equivalent) was 3.06% in the second quarter of 2024

compared to 3.03% in the second quarter of 2023.

The increase was primarily due a more favorable asset mix and higher

yields on interest earning assets.

The Company recorded a negative provision for credit losses during the second quarter

million, compared to a negative provision of $0.4

million for the second quarter of 2023.

Noninterest income

was $0.9 million for the second quarter of 2024 compared to $0.8 million for the second

quarter of 2023.

expense was $5.5 million in the second quarter of 2024 compared to $5.8 million for

the second quarter of 2023.

tax expense was $0.5

million for the second quarter of 2024,

compared to $0.3 million for the second quarter of 2023.

increase was primarily due to an increase in the Company’s

effective tax rate, which increased to 21.50% in the second

quarter of 2024 from 13.00% in the second quarter of 2023.

This increase was related to a decrease in the Company’s

investment in municipal securities, and the adoption of ASU 2023-02, as described

CRITICAL ACCOUNTING POLICIES

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Sheet and Interest Rates

Quarter ended March 31,

Six months ended June 30,

(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 $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.

Net interest income (tax-equivalent) was $13.4 million for the first six months of

2024, a 6% decrease compared to $14.2

million for the first six months of 2023.

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

margin (tax-equivalent).

net interest margin

(tax-equivalent).

The Company’s net interest

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.

margin (tax-equivalent) was 3.05% in the first six months of 2024

to 3.10% in the first six 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

The cost of interest-bearing liabilities

increased to 171 basis points in the first six months ended months of 2024,

compared to 82 basis points in the first six

months ended months of 2023.

Average interest bearing deposits

were $637.5 million during the six months ended June

30, 2024, a 1% decrease compared to $7.2 million during the first six months of 2023.

As of June 30, 2024, interest

bearing deposits were 72% of total deposits compared to 70% on June 30, 2023.

Since March 2022,

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

0.25% to 5.25 – 5.50%.

the Federal Reserve

increased the target federal funds range from 0 – 0.25% to 5.25

The tax-equivalent yield on total interest-earning assets increased by 62 basis points

to 4.21% in the first three months of

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

to 4.29% in the first six months of

2024 compared to 3.67% in the first six 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

balance sheet

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

mix, and higher market interest rates on

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The cost of total interest-bearing liabilities increased by 89 basis points to

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

1.71% in the first six months of 2024 compared

to 0.82% in the first six 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 investments.

The Company continues to deploy various asset liability management strategies

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will continue throughout 2024.

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

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

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

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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.

first six months of 2024 of $0.2

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

first six months of 2023.

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 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 changes in the economic

forecasts used in

our CECL model.

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 March 31, 2024,

At June 30, 2024,

the Company’s allowance for credit

losses was $7.1 million, or 1.24% 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.

total loans, at December 31, 2023, and $6.6 million, or 1.27% of total loans, at June 30, 2023.

Noninterest Income

Quarter ended March 31,

Quarter ended June 30,

Six months ended June 30,

(Dollars in thousands)

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mortgage lending income.

Quarter ended March 31,

Quarter ended June 30,

Six months ended June 30,

(Dollars in thousands)

Origination income, net

Origination income

Servicing fees, net

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.

The increase in mortgage lending income was primarily related

to the Company increasing the number of mortgage loans held for sale during 2024

relative to the number of mortgage

loans held for investment during 2023.

Income from bank-owned life insurance was $201 thousand and $224

thousand for the first three months of 2024 and 2023,

thousand for the first six months of 2024,

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

quarter of 2023, income from

bank-owned life insurance would have been $172 thousand for

the first six months of 2023.

Other noninterest income was $943 thousand for the first six months of 2024,

compared to $816 thousand for the first six

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

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Noninterest Expense

Quarter ended March 31,

Quarter ended June 30,

Six months ended June 30,

(Dollars in thousands)

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salaries and wages.

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

in leasing income.

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

adoption of FASB

adoption of ASU 2023-02 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 six months of 2023, other noninterest

expense included $204 thousand related to our equity method investment in NMTCs.

Income tax expense was $0.6 million for both the first six months of both 2024

The Company's effective tax rate

for the first six months of 2024 was 17.07%, compared to 12.48% in the first six

months of 2023.

The Company’s effective

income tax rate is affected principally by tax-exempt earnings

from the Company’s investment in

municipal securities,

BOLI, and NMTCs.

The effective tax rate increased primarily due to a decrease in the Company’s

investment in municipal

securities following the balance sheet restructuring in the fourth quarter of 2023,

and the adoption of FASB

Investments – Equity Method and Joint Ventures

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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 Mark

ets Tax Credits.

income tax expense rather than noninterest expense.

BALANCE SHEET ANALYSIS

Securities available-for-sale were $254.4

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.

million at June 30, 2024,

compared to $270.9 million at December 31, 2023.

decrease reflects a $13.5 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 $3.0 million.

The average annualized tax-equivalent yields earned on total

securities were 2.27%

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

in the first six months of 2024 and 2.36% in the first six months of 2023.

(In thousands)

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Consumer installment

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,

were $578.1 million at June 30, 2024, a 4% increase compared to $557.3 million at December 31,

loan categories represented the majority of the loan portfolio at June 30, 2024:

commercial real estate (51%), residential

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the Company’s commercial real

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

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

Within the residential real estate portfolio segment, the Company

had junior lien mortgages of approximately $10.1 million,

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

December 31, 2023, respectively.

or 2% of total loans, and $8.7 million, or 2%, of total loans at June 30, 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.

payments at June 30, 2024 and December 31, 2023.

The Company’s

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which are generally viewed as high risk.

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

quarter of 2023.

The average yield earned on loans and loans held for sale was 5.12% in the first six

months of 2024 and 4.68% in the first

six months of 2023.

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

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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

1 unchanged sentence

applicable laws and regulations.

projects financed earlier that were based on lower interest rate assumptions

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

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

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unfunded commitments) to a single borrower of $20.2 million.

Our loan policy requires

that the Loan Committee of the

Our loan policy requires that

the Loan Committee of the

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

At March 31, 2024, the Bank had one

loan relationship exceeding our internal limit.

At June 30, 2024, the Bank had one loan

relationship exceeding our internal limit.

We periodically analyze

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

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

-based capital at June 30, 2024 and December 31, 2023.

(Dollars in thousands)

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Allowance for Credit Losses

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.

On January 1, 2023, we adopted ASC 326,

which introduced the current expected loss (“CECL”) methodology,

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 June 30,

2024 and December 31, 2023, our

allowance for credit losses was approximately $7.1 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

June 30, 2024, compared to 1.23% at December 31, 2023.

Our CECL models rely largely on projections of macroeconomic

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evaluations are performed on an individual basis.

Losses are predicted

over a period of time determined to be reasonable

Losses are predicted over

a period of time determined to be reasonable

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

losses are reverted to long term historical averages.

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

were utilized followed by an 8 quarter straight line

At June 30, 2024, reasonable and supportable periods of 4 quarters were utilized

followed by an 8 quarter straight line

reversion period to long term averages.

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

quality ratios for the first quarter of 2024 and

the previous four quarters is presented below.

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

ratios for the second quarter of 2024

and the previous four quarters is presented below.

(Dollars in thousands)

Balance at beginning of period

Impact of adopting ASC 326

Commercial and industrial

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Net recoveries (charge-offs)

Provision for credit losses

Provision for (reversal of) credit losses

Ending balance

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

At June 30, 2024 and December 31, 2023, the Company had $0.8 million and $0.9

million, respectively, in nonperforming

The table below provides information concerning total nonperforming assets

and certain asset quality ratios for the first

and certain asset quality ratios for the second

quarter of 2024 and the previous four quarters.

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The table below provides information concerning the composition of nonaccrual

loans for the first quarter of 2024 and the

previous four quarters.

loans for the second quarter of 2024 and

the previous four quarters.

(In thousands)

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

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

The Company had no loans 90 days or more past due and still accruing at June 30, 2024

and December 31, 2023,

respectively.

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

The Company had no OREO at June 30, 2024 or December 31, 2023.

(In thousands)

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Total deposits

were $899.7 million at March 31, 2024,

compared to $896.2 million at December 31, 2023.

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%

were $946.4 million at June 30, 2024, compared to $896.2 million at December 31, 2023.

The increase in

deposits compared to December 31, 2023 was primarily related to a decrease

in reciprocal customer deposits in the one-way

sell program through the Intrafi network.

At June 30, 2024 the Company had no reciprocal deposits sold, compared to

$59.0 million at December 31, 2023.

The Company had no brokered deposits at June 30, 2024 or December 31,

compared to $16.0 million one year earlier.

Noninterest-bearing deposits were $263.1

million, or 28% of total deposits, at

June 30, 2024, compared to $270.7 million, or 30% of total deposits at December 31,

The average rate paid on total interest-bearing deposits was 1.72% in the first six

months of 2024,

compared to 0.81% in

first six months of 2023.

At June 30, 2024, estimated uninsured deposits totaled $364.9 million, or 39%

of total deposits, compared to $356.3

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coverage for our depositors.

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

The total of reciprocal deposits at June 30, 2024 was $55.6

million, compared to none at

December 31, 2023.

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The Bank’s uninsured deposits at

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

June 30, 2024 and December 31, 2023 include approximately $222.1

million and $206.2 million, respectively,

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securities having an equal fair value to such deposits.

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

The estimated uninsured time deposits by maturity as of June 30,

2024 is presented below.

(Dollars in thousands)

March 31, 2024

June 30, 2024

3 months or less

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Other Borrowings and Available

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 March 31, 2024, and December 31,

The Company had no long-term debt at June 30, 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 less.

The Bank had available federal funds

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

30, 2024, and December 31, 2023,

respectively.

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

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

The Company had

no securities sold under agreements to repurchase, which were entered

into on behalf of

certain customers at June 30, 2024 compared to $1.5 million at December 31, 2023.

At June 30, 2024 and December 31,

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”).

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The Bank had no borrowings

under FHLB of Atlanta’s advance prog

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

under FHLB of Atlanta’s advance program at

June 30, 2024 and December 31, 2023, respectively.

At those dates, the

Bank had $293.2 million and $309.1 million, respectively,

Bank had $293.7

million and $309.1 million, respectively,

of available lines of credit at the FHLB of Atlanta.

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

The average rate paid on the Bank’s

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

compared to 1.11% in the

first quarter of 2023.

include both fixed and variable interest rates and varying maturities

The Bank also has access to the FRB

discount window.

The average rate paid on the Bank’s short-term

borrowings was 0.48% in the first six months of 2024

compared to 1.82%

in the first six months of 2023.

The Bank had average short term borrowings of $1.3 million in the first six months of

2024, a 62% decrease compared to $2.1 million during the first six months of 2023.

CAPITAL ADEQUACY

The Company’s consolidated

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

December 31, 2023, respectively.

The decrease from December 31, 2023 was primarily driven by an other comprehensive

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

net of tax of $2.2 million, cash dividends

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

stockholders’ equity was $75.2 million and $76.5 million as of June 30, 2024

31, 2023, respectively.

from December 31, 2023 was primarily driven by an other comprehensive loss due

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

net of tax of $2.2 million, cash dividends of $1.9

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.

million, partially offset by net earnings

of $3.1 million.

Total unrealized losses, net of tax,

on available-for-sale securities increased

from $29.0 million on

December 31, 2023 to $31.2 million June 30, 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.

capital for regulatory

capital purposes.

The Company paid cash dividends of $0.54 per share for both the first six months

of 2024 and first six months of 2023.

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

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executive officers.

At March 31, 2024, the Bank’s ratio

At June 30, 2024, the Bank’s ratio

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

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was 10.39%, CET1 risk-based capital ratio was 14.47%, tier 1

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

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

risk-based capital ratio was 14.47%, and total risk-based capital ratio

was 15.49% at June 30, 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.”

Bank’s capital conservation buffer

at March 31, 2024.

capital conservation buffer was 7.49% at June 30, 2024.

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

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

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

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

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

The Federal Reserve has

indicated that it is revising and expects to re-propose these rules applicable to larger

organizations than the Company.

MARKET AND LIQUIDITY RISK MANAGEMENT

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our balance sheet is

liability sensitive over the forecast period of 12 months.

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

liability sensitive over the forecast period

of 12 months.

At June 30, 2024, our earnings simulation model indicated that we were in compliance

with the policy guidelines noted

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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.

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

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

At June 30, 2024, our EVE model indicated that we were in compliance

with our policy guidelines.

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

will be affected by

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

income will be affected by

changes in interest rates.

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The ability of many

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

economic stress, which may

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

stress, which may

differ across industries and economic sectors.

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loan, investment, borrowing, and capital policies.

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

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

interest-sensitive assets and

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

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designated as hedging instruments.

At March 31, 2024 and December 31, 2023,

At June 30, 2024 and December 31, 2023,

the Company had no derivative contracts

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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

At June 30, 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

At June 30, 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.

Company also has access to the FRB discount window.

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

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Off-Balance Sheet Arrangements, Commitments, Contingencies and Contractual

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

At June 30, 2024, the Bank had outstanding standby letters of credit of $0.5 million and

unfunded loan commitments

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If needed, to

fund these outstanding commitments, the Bank could liquidate federal funds

sold or a portion of our securities available-

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

fund these outstanding commitments, the Bank could use its cash and cash equivalents

deposits with other banks, liquidate

federal funds sold or a portion of our securities available-for-sale, or draw on its

available credit facilities or raise deposits.

Mortgage lending activities

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investors include various

representations and warranties regarding the origination and characteristics of the

residential mortgage loans.

representations and warranties vary among investors, they typically cover ownership

of the loan, validity of the lien

securing the loan, the absence of delinquent taxes or liens against the property securing the

loan, compliance with loan

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

customary representations and warranties regarding the origination and characteristics

of the residential mortgage loans.

Although the representations and warranties vary among investors, they typically

cover ownership of the loan, validity of

the lien securing the loan, the absence of delinquent taxes or liens against the property securing the

loan, compliance with

loan 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

As of June 30, 2024,

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

sold, but retained the servicing rights, was $212.1 million.

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

We seek to reduce

and manage the risks

We seek to reduce and

manage the risks

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

through our underwriting and

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

market standards.

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

quality assurance practices

and by servicing mortgage loans to meet investor and secondary market standards.

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

2024 as a result of representation and

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

make-whole requests at March 31, 2024.

make-whole requests at June 30, 2024.

We service all residential

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their purchased loans.

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

As of June 30, 2024, we do not believe that this exposure is material due to the historical level of

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

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As a result, the Bank is not

obligated to make any advances to Fannie Mae on principal and interest on such mortgage

loans where the borrower is

obligated to make any advances to Fannie Mae on principal and interest on such

mortgage loans where the borrower is

entitled to forbearance.

Effects of Inflation and Changing Prices

The consolidated financial statements and related consolidated financial data

presented herein have been prepared in

The consolidated financial statements and related consolidated financial data presented

herein have been prepared in

accordance with GAAP and practices within the banking industry

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The yield curve continued to be inverted

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

on June 30, 2024, which means shorter term interest rates are higher than longer term interest

This results in a lower

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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.

generally reduce economic activity and may reduce loan demand and growth, and

may adversely affect unemployment

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

beginning in the latter part of 2023, it has

been persistent through June 30, 2024 and remains above the Federal Reserve’s

long term inflation goal of 2.0% annually.

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restrictive monetary policy to

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

maximum employment goals.

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

Following its May

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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

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%.”

5 unchanged sentences

federal funds rate, market interest rates increase,

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

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

market interest rates on

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unemployment which is an

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

important component in our CECL model used to estimate our allowance

for credit losses.

CURRENT ACCOUNTING DEVELOPMENTS

2 unchanged sentences

Improvements to Income Tax

Information about this pronouncement is described in more detail below.

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.

ASU 2023-09 seeks to 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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Net interest income (Tax

Six months ended June 30,

(In thousands)

Net interest income (GAAP)

Tax-equivalent adjustment

Net interest income (Tax

- Selected Quarterly Financial Data

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Total revenue

Provision for credit losses

Provision for (reversal of) credit losses

Noninterest expense

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Basic and diluted

Shares outstanding, at period end

Shares outstanding

Common stock price

To earnings ratio

To earnings ratio (b)

To book value

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Nonperforming loans as a % of total loans

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

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

Capital Adequacy:

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Effective income tax rate

Efficiency ratio (b)

Efficiency ratio (d)

Selected average balances:

Securities available-for-sale

Loans, net of unearned income

Total deposits

1 unchanged sentence

Selected period end balances:

Securities available-for-sale

Loans, net of unearned income

Allowance for credit losses

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

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

(b) Calculated by dividing period end share price by

earnings per share for the previous four quarters.

wholly-owned subsidiary, AuburnBank.

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

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

See Table 1 - Explanation of Non-GAAP Measures.

- Selected Financial Data

Six months ended June 30,

(Dollars in thousands, except per share amounts)

Results of Operations

Net interest income (a)

tax-equivalent adjustment

Net interest income (GAAP)

Noninterest income

Total revenue

Provision for (reversal of) 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 (b)

To book value

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 other real estate owned

Nonperforming loans as a % of total loans

Annualized net recoveries as a % of average loans

Capital Adequacy:

CET 1 risk-based capital ratio

Tier 1 risk-based capital ratio

Total risk-based capital ratio

Tier 1 leverage ratio

Other financial data:

Net interest margin (a)

Effective income tax rate

Efficiency ratio (d)

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) Calculated by dividing period end share price by

earnings per share for the previous four quarters.

wholly-owned subsidiary, AuburnBank.

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

the sum of noninterest income and tax-equivalent net interest

See Table 1 - Explanation of Non-GAAP Measures.

- Average Balances

and Net Interest Income Analysis

Quarter ended March 31,

Quarter ended June 30,

(Dollars in thousands)

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Stockholders' equity

Total liabilities and stockholders' equity

Total liabilities and stockholders'

Net interest income and margin (tax-equivalent)

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

(1) Average loan balances are

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

in the computation of average balances.

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

(3) Yields on tax-exempt securities have been

computed on a tax-equivalent basis using a federal income

tax rate of 21%.

- Average Balances

and Net Interest Income Analysis

Six months ended June 30,

(Dollars in thousands)

Interest-earning assets:

Loans and loans held for sale (1)

Securities - taxable (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 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%.

5 unchanged sentences

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis