What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-11-01 compared with 2024-08-02 · 890 added, 824 removed, 625 unchanged (73% of the section changed)

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Auburn National Bancorporation, Inc.

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

with the Board of Governors

(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

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1994 it succeeded its Alabama predecessor as the

bank holding company controlling AuburnBank, an Alabama state

member bank with its principal office in Auburn,

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.

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

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

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

financial and operating flexibility than is presently permitted to the

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

Bank’s primary regulators are the

Federal Reserve and the Alabama Superintendent of Banks (the “Alabama

Superintendent”).

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herein by reference to other documents, are

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

Cautionary Notice Regarding Forward-Looking

“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

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.

This discussion is intended to supplement and

highlight information contained in the accompanying unaudited condensed consolidated

financial statements and related

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

highlight information contained in the accompanying unaudited condensed

consolidated financial statements and related

notes for the quarters and nine months ended September 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

interim reports on Form 10-Q for the quarters

ended March 31, 2024 and June 30, 2024.

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

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

meaning and protections of Section 27A of the

Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,

as amended (the “Exchange Act”).

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

goals, expectations,

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

known and unknown risks,

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

which may cause the actual results, performance,

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

Market Risk”, “Risk Factors” “Description of

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

and protections of Section 27A of the

Securities Act of 1933 and Section 21E of the Securities Exchange

Act of 1934, as amended (the “Exchange Act”).

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

objectives, goals, expectations,

anticipations, assumptions, estimates, intentions and future performance,

and involve known and unknown risks,

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

and which may cause the actual results, performance,

achievements or financial condition of the Company to be materially different

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update any forward-looking statements.

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

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

“may,” “will,” “anticipate,”

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

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

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

of the future.

These forward-looking

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

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

be forward-looking statements.

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

as “may,” “will,” “anticipate,”

“should,” “indicate,” “would,”

“believe,” “contemplate,” “expect,” “evaluation,” “estimate,” “continue,”

“plan,” “point to,” “project,” “could,” “intend,” “target”

and other similar words and expressions of the future.

forward-looking statements may not be realized due to a variety of factors, including, without

the effects of future economic, business and market conditions and

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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

chain disruptions,

inventory volatility, and changes

in consumer behaviors;

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

tariffs), sanctions or other events

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

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

including supply chain disruptions,

inventory volatility,

and changes in consumer behaviors;

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

(including tariffs), sanctions or other events

that may affect general economic conditions;

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

by the federal

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

borrowing by the federal

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

fiscal and monetary stimuli, and subsequent

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

Reserve’s target federal

funds rate and reductions in the Federal Reserve’s

holdings of securities through quantitative tightening;

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

above current rates to meet its long

term inflation target of 2%;

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

regulations and rules and

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

changes in the scope and cost

fiscal and monetary stimuli, and changes in

monetary policies in response to inflation in light of the Federal Reserve’s

target inflation rate of 2% over the

longer term and dual mandate goals of maximum employment and

stable prices, including changes to increase the

Federal Reserve’s reinvestment

of maturing Treasury securities beginning

in June 2024 and mid-September 2024

reduction in the target federal funds rate by 50 basis points

to a target range of 4.75 – 5.00%, among other things

described more full in “Effects of Inflation and Changing Price”;

legislative and regulatory changes, including changes in banking,

securities and tax laws, regulations and rules and

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

and changes in the scope and cost

of FDIC insurance;

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

(“FASB”) Accounting

Standards Update (ASU) 2016-13,

“Financial Instruments – Credit Losses (Topic

Measurement of Credit Losses on Financial Instruments,” as

well as the updates issued since June 2016 (collectively,

ASC Topic 326) on Current Expected

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

Debt Restructurings and Vintage Disclosures,

which eliminates

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

Standards Update (ASU) 2016-13, “Financial

Instruments – Credit Losses (Topic

Measurement of Credit Losses on Financial Instruments,” as well as the

updates issued since June 2016 (collectively,

FASB ASC Topic

326) on Current Expected Credit Losses

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

Restructurings and Vintage

Disclosures, which eliminates troubled

debt restructurings (“TDRs”) and related guidance;

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

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in, and changes to, economic,

market and credit conditions, including unemployment rates, changes in borrowers’ credit

risks and payment

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;

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

values and liquidity of loan

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

the values and liquidity of loan

collateral, our securities portfolio and interest-sensitive assets and

and the risks and uncertainty of the

amounts realizable on collateral;

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

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

policies creating

unrealized losses on our securities available for sale, which adversely affect

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reporting purposes and our tangible equity;

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

changes in the availability and cost of credit and capital in the financial markets, and the types

of instruments that

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

changes in the availability and cost of credit and capital in the financial markets, and

the types of instruments that

may be included as capital for regulatory purposes;

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

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

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

financial technology and other competitors

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

as the Company

investment and insurance services, including the disruptive effects

of financial technology and other competitors

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

and examination, as the Company

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

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headquarters;

the risks of mergers, acquisitions and divestitures, including,

without limitation, the related time and costs of

implementing such transactions, integrating operations as part of these transactions and

possible failures to achieve

the risks of mergers, acquisitions and divestitures, including, without

limitation, the related time and costs of

implementing such transactions, integrating operations as part of these

transactions and possible failures to achieve

expected gains, revenue growth and/or expense savings from such transactions;

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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”)

included in “other assets” on our consolidated balance sheets, if

any, could be reduced if estimates of future

taxable income from our operations and tax planning strategies are less

than currently estimated, and sales of our capital stock could trigger a reduction in the amount of

net operating loss

any, could be reduced

if estimates of future taxable income from our operations and tax planning strategies

than currently estimated, and sales of our capital stock could trigger a

reduction in the amount of net operating loss

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

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

limited by regulation to the

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

and “eligible retained earnings” over

the risks that our dividends, share repurchases and discretionary

bonuses are limited by regulation to the

maintenance of a capital conservation buffer of 2.5% and

our future earnings and “eligible retained earnings” over

rolling four calendar quarter periods;

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Commission (the

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

under the Exchange

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

attributable to us are expressly qualified in their

entirety by this cautionary notice.

We have no obligation and

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

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

statements otherwise are

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

the SEC under the Exchange

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

to us are expressly qualified in their entirety

by this cautionary notice.

We have no obligation

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

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

such statements otherwise are made.

Summary of Results of Operations

Quarter ended June 30,

Six months ended June 30,

Quarter ended September 30,

Nine months ended September 30,

(Dollars in thousands, except per share amounts)

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Total revenue

Provision for (reversal of) credit losses

Provision for 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 $4.8

million for the first six months of 2024,

compared to $3.9 million for the first six

million for the first nine months of 2024, compared to $5.4 million for the first nine

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 3.05% 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

Basic and diluted earnings per share were $1.38 per share for the first nine months

of 2024, compared to

$1.54 per share for the first nine months of 2023.

income (tax-equivalent) was $20.2 million for the first nine months

of 2024, a 2% decrease compared to $20.6

million for the first nine months of 2023.

This decrease was primarily due to a smaller balance sheet partially offset

increase in the Company’s net interest

The Company’s net interest margin

(tax-equivalent) was 3.05% for the first

nine months of 2024 compared to 2.97% for the first nine months of 2023.

This increase was primarily due to a more

favorable asset mix and higher yields on interest earning assets, which was partially

offset by 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

Average loans for the first

nine months of 2024 were $568.9 million, a 11% increase

from the first nine

months of 2023.

Average total securities for the

first nine months of 2024 were $259.2 million compared to $398.8 million

for the first nine months of 2023.

The decrease was primarily the result of the Company’s

balance sheet repositioning strategy in the fourth

quarter of 2024.

balance sheet repositioning in

the fourth quarter of 2024.

See “Results of Operations – Average

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

Balance Sheet and Interest Rates” and “Net Interest

Income and Margin” below.

At September 30, 2024, the Company’s

allowance for credit losses was $6.9 million, or 1.22% of total loans, compared

$6.9 million, or 1.23% of total loans, at December 31, 2023, and $6.8

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,

million, or 1.24% of total loans, at September 30,

The Company recorded a provision for credit losses during the first nine

months of 2024 of $0.1

million, compared to a

negative provision of $0.2 million during the first nine 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 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

provision for credit losses during the first nine months of 2024, as compared

to the first nine 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 $2.6 million in the first nine months of 2024,

compared to $2.4 million in the first nine months of

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

and other noninterest income.

Noninterest expense was $16.7 million in the first nine months of 2024,

compared to $16.8 million for the first nine months

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

Income tax expense was $1.2 million for the first nine months of 2024

compared to $0.7 million for the first nine months of

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

was 19.48%, compared to 12.05% in the first nine

months of 2023.

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 $0.6 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

were well above the minimum amounts required to be “well capitalized” under current

income tax rate is affected principally by tax-exempt earnings from

Company’s investments

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

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

(Topic 323) 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 rather than noninterest expense.

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

2024 and 2023.

At September 30, 2024,

the Bank’s regulatory capital

ratios were well above the minimum amounts required to be “well capitalized”

under current

regulatory standards with a total risk-based capital ratio of 15.76%,

a tier 1 leverage ratio of 10.43% and a common equity

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

tier 1 (“CET1”) ratio of 14.75% at September 30, 2024.

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

per share, compared to $1.5 million, or $0.43 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

share, for the third quarter of 2023.

Net interest income (tax-equivalent) was $6.8 million for the third quarter

compared to $6.4 million for the third quarter of 2023.

The increase was primarily due a more favorable asset mix and

higher yields on interest earning assets partially offset

by increases in the cost of interest-bearing deposits.

The Company’s

net interest margin (tax-equivalent) was 3.05% in the third

quarter of 2024 compared to 2.73% in the third quarter of 2023.

The Company recorded a negative provision for credit losses during the

third quarter of 2024 of $0.1

million, compared to a

provision of $0.1 million for the third quarter of 2023.

Noninterest income was $0.8 million for the third quarter of 2024

compared to $0.9 million for the third quarter of 2023.

This decrease was primarily due to a decrease in other noninterest

Noninterest expense was $5.5 million in the third quarter of 2024 compared to $5.4

million for the third quarter of

The increase in noninterest expense was primarily due to an increase in salaries and benefits

expense which was

partially offset by decreases in net occupancy and equipment expense

and FDIC and other regulatory assessments expense.

Income tax expense was $0.5

million for the third quarter of 2024, compared to $0.2 million for the third

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

This increase was due to an increase in the level of earnings before taxes and the

Company’s effective

tax rate, which

increased to 23.46% in the third quarter of 2024 from 10.90% in the third quarter of

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

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

conform with U.S.

The accounting principles we follow and our methods of applying

these principles conform with U.S.

GAAP and with

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There have been no significant changes to our Critical Accounting Estimates

as described in our Form 10-K.

as described in our Form 10-K as of and for the year ended December 31, 2023.

OF OPERATIONS

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Sheet and Interest Rates

Six months ended June 30,

Nine months ended September 30,

(Dollars in thousands)

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Interest bearing bank deposits

Total interest-earning assets

Total interest-earning

Savings and money market

Time deposits

Total interest-bearing deposits

Total interest-bearing

Short-term borrowings

Total interest-bearing liabilities

Total interest-bearing

Net interest income and margin (tax-equivalent)

Net Interest Income and Margin

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

net interest margin

(tax-equivalent).

The Company’s net interest

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

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

to 4.29% in the first six months of

2024 compared to 3.67% in the first six months of 2023.

Net interest income (tax-equivalent) was $20.2 million for the first nine

months of 2024, a 2% decrease compared to $20.6

million for the first nine months of 2023.

This decrease was primarily due to a smaller balance sheet partially offset

increase in the Company’s net interest

The Company’s net interest margin

(tax-equivalent) was 3.05% in the first

nine months of 2024 compared to 2.97% in the first nine months of 2023.

This increase was primarily due a more

favorable asset mix and higher yields on interest-earning assets, which

was partially offset by higher market interest rates,

which increased our cost of funds, generally,

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

cost of interest-bearing liabilities increased to 180 basis points in the first nine

months ended months of 2024, compared to

102 basis points in the first nine months ended months of 2023.

Average interest-bearing

deposits were $640.2 million

during the first nine months of 2024,

a 1% decrease compared to $649.6 million during the first nine months of 2023.

September 30, 2024, average interest-bearing deposits were 71% of

average total deposits compared to 69% on September

Since March 2022, the Federal Reserve increased the target

federal funds rate by 525 basis points before

announcing a 50 basis points rate reduction on September 18, 2024,

its first decrease in rates since its March 2020 COVID

rate reduction.

At September 30, 2024, the target federal funds rate ranged from 4.75%

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

65 basis points to 4.35% in the first nine months of

2024 compared to 3.70% in the first nine months of 2023.

This increase was primarily due to the Company’s

balance sheet

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

mix, and higher market interest rates on

interest earning assets.

repositioning strategy in the fourth quarter of 2023, which improved

our asset mix, and loan growth combined with higher

market interest rates on interest earning assets.

loans for the first nine months of 2024 were $568.9 million, an

11% increase from the first nine months of

The cost of total interest-bearing liabilities increased by 78 basis points to 1.80%

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

to manage its risks from interest rate

in the first nine months of 2024 compared

to 1.02% in the first nine months of 2023.

Our deposit costs may continue to increase as we compete for deposit funds

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 to manage its risks from interest rate

fluctuations.

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

to our net interest margin during

to our net interest margin during the

remainder of 2024.

Provision for Credit Losses

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all expected credit losses.

The Company recorded a provision for credit losses during the

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.

The Company recorded a provision for credit losses during

the first nine months of 2024 of $0.1

million, compared to a negative provision for credit losses of $0.2 million

during the first nine 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

Our CECL model is largely influenced

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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,

based on our allowance assessment

methodology, to adequately cover

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

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

methodology, to adequately

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

At September 30,

2024, the Company’s allowance for

credit losses was $6.9 million, or 1.22% of total loans, compared to $6.9 million,

1.23% of total loans, at December 31, 2023, and $6.8 million, or 1.24% of

total loans, at September 30, 2023.

Noninterest Income

Quarter ended June 30,

Six months ended June 30,

Quarter ended September 30,

Nine months ended September 30,

(Dollars in thousands)

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Total noninterest income

The Company’s income from mortgage lending

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

The Company’s income from mortgage

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

and (2) servicing of mortgage loans.

Origination income, net, is comprised of gains or losses

from the sale of the mortgage

Origination income, net, is comprised of gains

or losses from the sale of the mortgage

loans originated, origination fees, underwriting fees, and other fees associated

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netted against the commission expense associated with these originations.

Company’s normal practice is to originate

mortgage loans for sale in the secondary market and to either sell or retain the associated

MSRs when the loan is sold.

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

mortgage loan is sold.

The Company’s normal practice is to originate

mortgage loans for sale in the secondary market and to either sell or retain

the associated MSRs when the loan is sold.

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

the date the corresponding mortgage loan is sold.

Subsequent to the date of transfer, the Company

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If the aggregate carrying amount of a particular

group of MSRs exceeds the group’s aggregate fair

value, a valuation allowance for that group is established.

group of MSRs exceeds the group’s

aggregate fair value, a valuation allowance for that group is established.

The valuation

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An increase in mortgage interest rates typically results in an increase in the

fair value of the MSRs while a decrease in mortgage interest rates typically results in a decrease

in the fair value of MSRs.

fair value of the MSRs while a decrease in mortgage interest rates typically results in

a decrease in the fair value of MSRs.

The following table presents a breakdown of the Company’s

mortgage lending income.

Quarter ended June 30,

Six months ended June 30,

Quarter ended September 30,

Nine months ended September 30,

(Dollars in thousands)

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Servicing fees, net

Total mortgage lending income

The Company’s income from mortgage lending

typically fluctuates as mortgage interest rates change and is primarily

Total mortgage lending

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.

4 unchanged sentences

Income from bank-owned life insurance was $301 thousand and

thousand for the first six months of 2024,

$311 thousand for the first nine months of 2024,

respectively.

1 unchanged sentence

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

bank-owned life insurance would have been $259 thousand for the

first nine months of 2023.

Other noninterest income was $1.4 million for the first nine months of 2024,

compared to $1.3 million for the first nine

months of 2023.

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

The increase in other noninterest income was primarily due to increased fee income

on one-way sell

reciprocal deposits sold through the Intrafi network.

Noninterest Expense

Quarter ended June 30,

Six months ended June 30,

Quarter ended September 30,

Nine months ended September 30,

(Dollars in thousands)

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Total noninterest expense

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

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 ASU 2023-02 which allows the

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

in 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 ASU 2023-02

which allows the

proportional amortization method for our NMTC investments, on January

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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

During the first nine months of 2023, other noninterest

expense included $303 thousand related to our equity method investment

Income tax expense was $1.2 million during the first nine months of

2024 compared to $0.7 million during the first nine

months of 2023.

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

was 19.48%, compared to 12.05% in

the first nine 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

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 rather than noninterest expense.

from the Company’s investments 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

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.

BALANCE SHEET ANALYSIS

Securities available-for-sale were $254.4

million at June 30, 2024,

Securities available-for-sale were $258.3 million at September 30, 2024,

compared to $270.9 million at December 31,

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

This decrease reflects a $20.7 million decrease in the amortized cost basis of

securities available-for-sale and an

increase in the fair value of securities available-for-sale of $8.1 million.

The average annualized tax-equivalent yields

earned on total securities were 2.26%

in the first nine months of 2024 and 2.35% in the first nine months of 2023.

(In thousands)

4 unchanged sentences

Consumer installment

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

real estate (21%), commercial and industrial (13%) and construction and land development

Approximately 21% of

the Company’s commercial real

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 June 30, 2024 and December

Total loans were $565.7

million at September 30, 2024, a 2% increase compared to $557.3 million

at December 31, 2023.

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

commercial real estate (53%),

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

and commercial and industrial (11%).

Approximately 21% of the Company’s

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

Within the residential real estate portfolio segment,

the Company had junior lien mortgages of approximately $10.1 million,

or 2% of total loans,

and $8.7 million, or 2%, of total loans at September 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 June 30, 2024 and December 31, 2023.

For residential real estate mortgage loans with a consumer purpose, the Company

had no loans that required interest only

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

The Company’s

residential real estate mortgage portfolio does not

include any option or hybrid ARM loans, subprime loans, or any material amount

of other consumer mortgage products

residential real estate mortgage portfolio does

not include any option or hybrid ARM loans, subprime loans, or any material

amount of other consumer mortgage products

which are generally viewed as high risk.

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

The average yield earned on loans and loans held for sale was 5.18% in the first nine

months of 2024 and 4.71% in the first

six months of 2023.

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

not limited to, the effects of

current economic conditions, including inflation and the continuing increases in

market interest rates, remaining COVID-19

nine months of 2023.

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

but are not limited to, the effects of

current economic conditions, including inflation and the continuing

increases in market interest rates, remaining COVID-19

pandemic effects including supply chain disruptions, reduced

commercial office occupancy levels, housing supply

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

volumes and liquidity,

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

sales volumes and liquidity,

valuations used in

3 unchanged sentences

volumes of commercial real estate property

Other risks we face include, among other things, real estate industry concentrations,

competitive pressures from a

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

collateral values or non-

Other risks we face include, among other things, real estate industry

concentrations, competitive pressures from a

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

reduced collateral values or non-

existent collateral, title defects, inaccurate appraisals, financial deterioration

2 unchanged sentences

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

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

interest rates currently in effect and currently

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

higher interest rates currently in effect and currently

expected in the future.

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

guidelines for collateralized

loans, investigating the creditworthiness of borrowers and monitoring borrowers’ financial

The Company attempts to reduce these economic and credit risks through

its loan-to-value guidelines for collateralized

loans, investigating the creditworthiness of borrowers and monitoring borrowers’

financial position.

Also, we have

6 unchanged sentences

capital are fully secured.

Under these regulations, we are prohibited from having secured

loan relationships in excess of

Under these regulations, we are prohibited from having

secured loan relationships in excess of

approximately $22.6 million.

Furthermore, we have an internal limit for aggregate credit exposure (loans outstanding

Furthermore, we have an internal limit for aggregate credit exposure (loans

outstanding plus

unfunded commitments) to a single borrower of $20.3 million.

Our loan policy requires that

the Loan Committee of the

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

At June 30, 2024, the Bank had one loan

relationship exceeding our internal limit.

We periodically analyze

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

policy requires that the Loan Committee of the

Board of Directors approve any loan relationships that exceed this internal

At September 30, 2024, the Bank had one

loan relationship exceeding our internal limit.

We periodically

analyze our commercial and industrial and commercial real estate loan

portfolios to determine if a

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

1 unchanged sentence

financial services industry in order to categorize our commercial borrowers.

Loan concentrations to borrowers in the

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

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

Loans to borrowers in each of the following

classes exceeded 25% of the Bank’s

total risk-based capital at September 30, 2024 and December 31, 2023.

September 30,

(Dollars in thousands)

1 unchanged sentence

Multi-family residential properties

Shopping centers/strip malls

Office Buildings

Allowance for Credit Losses

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

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.

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

1 unchanged sentence

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 was approximately $6.9

million at both September 30, 2024 and December 31, 2023, which our management

believed 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.

loans was 1.22%

at September 30, 2024, compared

at December 31, 2023.

Our CECL models rely largely on projections of macroeconomic

6 unchanged sentences

are utilized to predict quarterly rates of default.

Under the CECL methodology the allowance for credit losses is measured

on a collective basis for pools of loans with

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

5 unchanged sentences

losses are reverted to long term historical averages.

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 second quarter of 2024

and the previous four quarters is presented below.

At September 30, 2024, reasonable and supportable periods of four

quarters were utilized followed by an eight 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 third quarter of 2024 and

the previous four quarters is presented below.

(Dollars in thousands)

1 unchanged sentence

Commercial and industrial

Residential real estate

Consumer installment

4 unchanged sentences

as a % of nonperforming loans

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

Net (recoveries) charge-offs as % of average

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

The allowance for credit losses by loan category for the third quarter of 2024 and the

previous four quarters is presented

Third Quarter

Second Quarter

First Quarter

Fourth Quarter

Third Quarter

(Dollars in thousands)

Commercial and industrial

Construction and land

Commercial real estate

Residential real estate

Consumer installment

Total allowance for

credit losses

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

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 second

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

and $0.9 million, respectively,

nonperforming assets.

The table below provides information concerning total nonperforming

assets and certain asset quality ratios for the third

quarter of 2024 and the previous four quarters.

2 unchanged sentences

Nonaccrual loans

Total nonperforming assets

Total nonperforming

as a % of loans and other real estate owned

1 unchanged sentence

Nonperforming loans as a % of total loans

The table below provides information concerning the composition of nonaccrual

loans for the second quarter of 2024 and

the previous four quarters.

The table below provides information concerning the composition of

nonaccrual loans for the third quarter of 2024 and the

previous four quarters.

(In thousands)

4 unchanged sentences

Consumer installment

Total nonaccrual loans

The Company discontinues the accrual of interest income when (1) there is a significant

deterioration in the financial

condition of the borrower and full repayment of principal and interest is not expected or

(2) the principal or interest is

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

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

and December 31, 2023,

Total nonaccrual

The Company discontinues the accrual of interest income when (1)

there is a significant deterioration in the financial

condition of the borrower and full repayment of principal and interest is not

expected or (2) the principal or interest is

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

The Company had no loans 90 days or more past due and still accruing

at September 30, 2024 and December 31, 2023,

respectively.

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

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

(In thousands)

3 unchanged sentences

Total deposits

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

Total deposits were $901.7

million at September 30, 2024, compared

to $896.2 million at December 31, 2023.

September 30, 2024 the Company had $37.8 million reciprocal deposits sold, compared

to $59.0 million at December 31,

The Company had no brokered deposits at September 30, 2024 compared

to $46.6 million outstanding at September

30, 2023, and none at December 31, 2023.

Noninterest-bearing deposits were $270.2 million, or 30% of total deposits, at

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

The average rate paid on total interest-bearing deposits was 1.80% in

the first nine months of 2024, compared to 1.02% in

first nine months of 2023.

At September 30, 2024, estimated uninsured deposits totaled $355.1 million,

or 39% of total deposits, compared to $356.3

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

2 unchanged sentences

product (“ICS”), which provide for

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

of improving the FDIC insurance

reciprocal (“two-way”) transactions among banks

facilitated by IntraFi for the purpose of improving the FDIC insurance

coverage for our depositors.

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

million, compared to none at

The total of reciprocal deposits at September 30, 2024 was $16.3 million,

compared to none at

December 31, 2023.

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

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

insurance limits.

The Bank’s uninsured deposits at

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

The Bank’s uninsured deposits

at September 30, 2024 and December 31, 2023 include approximately

$214.9 million and $206.2 million, respectively,

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

securities having an equal fair value to such deposits.

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

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

by securities having an equal fair value to such deposits.

The estimated uninsured time deposits by maturity as of September

30, 2024 is presented below.

(Dollars in thousands)

June 30, 2024

September 30, 2024

3 months or less

4 unchanged sentences

time deposits

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

banks with more than $5

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

in connection with the

March 2023 failures of Silicon Valley

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

on large banks with more than $5

billion of uninsured deposits to pay for the federal government’s

systemic risk determination to insure all depositors in

connection with the March 2023 failures of Silicon Valley

Bank and Signature Bank.

These special assessments do not apply to the Bank.

These special assessments do not

apply to the Bank.

Other Borrowings and Available

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,

The Company had no long-term debt at September 30, 2024 and December

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 $65.2 million with no federal funds borrowings

outstanding at September 30, 2024, and December 31,

2023, respectively.

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”).

The BTFP ceased making new loans on March 11,

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

future borrow from time to time under the

FHLB of Atlanta’s advance program to

obtain funding for its growth.

FHLB advances include both fixed and variable

terms and are taken out with varying maturities, and are generally secured by eligible assets.

The Bank had no borrowings

under FHLB of Atlanta’s advance program at

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

At those dates, the

Bank had $293.7

The Company had no securities sold under agreements to repurchase, which were

entered into on behalf

of certain customers at September 30, 2024 compared to $1.5 million

at December 31, 2023.

The Bank is eligible to

borrow from the FRB’s discount window,

but had no such borrowings at September 30, 2024 and December 31, 2023.

bank never borrowed from the Federal Reserve’s

Bank Term Facility Program

(“BTFP”), which ceased making new loans

on March 11, 2024.

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

in the future borrow from time to time under the

FHLB of Atlanta’s advance program

to obtain funding for its growth.

FHLB advances include both fixed and variable rates

and are taken out with varying maturities, and are generally secured by eligible

The Bank had no borrowings under

FHLB of Atlanta’s advance program

at September 30, 2024 and December 31, 2023, respectively.

At those dates, the Bank

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

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

Advances include

both fixed and variable interest rates and varying maturities may be used.

The Bank also has access to the FRB discount

The average rate paid on the Bank’s

short-term borrowings was 0.48% in the first nine months of 2024

compared to 2.43%

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.

in the first nine months of 2023.

The Bank had average short term borrowings of $0.8 million in the first nine months of

a 78% decrease compared to $3.7 million during the first nine months of 2023.

CAPITAL ADEQUACY

The Company’s consolidated

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 $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

capital for regulatory

stockholders’ equity was $84.3 million and $76.5 million as of September

December 31, 2023, respectively.

The increase from December 31, 2023 was primarily driven by

net earnings of $4.8

million and other comprehensive income due to the change

in unrealized gains/losses on securities available-for-sale, net of

tax of $6.1 million, partially offset by cash dividends of $2.8 million,

and the cumulative effect of adopting the new NMTC

accounting standard of $0.3 million.

Total unrealized losses, net

of tax, on available-for-sale securities decreased from

$29.0 million on December 31, 2023 to $22.9 million September 30, 2024.

These unrealized losses do not affect the

Bank’s 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

capital framework and

The Company paid cash dividends of $0.81 per share for both the first

nine months of 2024 and first nine months of 2023.

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

Basel III regulatory capital framework and

related Dodd-Frank Wall

1 unchanged sentence

The rules included the implementation of a

capital conservation buffer that is added to the minimum requirements

for capital adequacy purposes.

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

2016 and was fully phased-in on

capital conservation buffer that is added to the minimum

requirements for capital adequacy purposes.

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

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

January 1, 2019 at 2.5%.

A banking organization with a conservation buffer of less than the

required amount will be

subject to limitations on capital distributions, including dividend payments and certain discretionary

bonus payments to

A banking organization with a capital conservation buffer

of less than the required amount will be

subject to limitations on capital distributions, including dividend payments and

certain discretionary bonus payments to

executive officers.

At June 30, 2024, the Bank’s ratio

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

did not limit capital distributions or discretionary bonuses.

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

a final rule that amended the

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

adopted a final rule that amended the

capital conservation buffer.

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

for purposes of the maximum

payout ratio to allow banking organizations to more freely use their capital buffers

to promote lending and other financial

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

payout ratio to allow banking organizations to more freely

use their capital buffers to promote lending and other financial

intermediation activities, by making the limitations on capital distributions

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The eligible retained income is

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

tax effects not reflected

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

and associated tax effects not reflected

in net income;

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

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

This rule only affects the capital

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Company Policy.

Accordingly, our capital adequacy is evaluated

at the Bank level, and not for the Company and its

Accordingly, our capital

adequacy is evaluated at the Bank level, and not for the Company and its

consolidated subsidiaries.

The Bank’s tier 1 leverage ratio

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

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.”

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

a joint notice of proposed

The Bank’s tier 1 leverage ratio was 10.

43%, CET1 risk-based capital ratio was 14.75%, tier 1

risk-based capital ratio was 14.75%, and total risk-based capital ratio was 15.76%

at September 30, 2024.

exceed the minimum regulatory capital percentages of 5.0% for tier

1 leverage ratio, 6.5% for CET1 risk-based capital

ratio, 8.0% for tier 1 risk-based capital ratio, and 10.0% for total risk-based

capital ratio to be considered “well capitalized.”

The Bank’s capital conservation

buffer was 7.76% at September 30, 2024 exceeded the fully phased

-in capital conservation

buffer, and such buffer

did not limit capital distributions, share repurchases or discretionary bonuses to the

available earnings.

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

FDIC issued a joint notice of proposed

rulemaking to implement the Basel III endgame components.

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The proposal includes provisions dealing

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

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

on an obligation;

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

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

failed internal process, people, and

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

process, people, and

systems, or from external events;

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

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

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

certain derivative contracts.

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

The Federal Reserve has

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

organizations than the Company.

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

to larger organizations than the Company.

MARKET AND LIQUIDITY RISK MANAGEMENT

Management’s objective is to manage assets and

liabilities to provide a satisfactory,

Management’s objective is to manage

assets and liabilities to provide a satisfactory,

consistent level of profitability within

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Asset Liability

Management Committee (“ALCO”) is charged with the responsibility

of monitoring these policies, which are designed to

Management Committee (“ALCO”) is charged with the

responsibility of monitoring these policies, which are designed to

ensure an acceptable asset/liability composition.

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Interest Rate Risk Management

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

in interest rates.

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

various types of loans and

Measurements used to help manage interest rate sensitivity include an earnings simulation

model and an economic

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

from fluctuations in interest rates.

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

for various types of loans and

Measurements used to help manage interest rate sensitivity include

an earnings simulation model and an economic

value of equity (“EVE”) model.

Earnings simulation

Management believes that interest rate risk is best estimated by our earnings simulation

Forecasted levels of earning assets, interest-bearing liabilities, and off

-balance sheet financial instruments are combined

with ALCO forecasts of market interest rates for the next 12 months and other

factors in order to produce various earnings

Management believes that interest rate risk is best estimated by our earnings

simulation modeling.

Forecasted levels of earning assets, interest-bearing liabilities, and

off-balance sheet financial instruments are combined

with ALCO forecasts of market interest rates for the next 12 months and other factors

in order to produce various earnings

simulations and estimates.

help limit interest rate risk, we have guidelines for earnings at risk which seek to limit the

help limit interest rate risk, we have guidelines for earnings at risk which seek to

variance of net interest income from gradual changes in interest rates.

For changes up or down in rates from management’s

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

are as follows:

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

variances are as follows:

+/- 20% for a gradual change of 400 basis points

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+/- 5% for a gradual change of 100 basis points

While a gradual change in interest rates was used in the above analysis to provide an estimate

of exposure under these

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

our balance sheet is

While a gradual change in interest rates was used in the above analysis to provide an

estimate of exposure under these

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

rates indicates our balance sheet is

liability sensitive over the forecast period

of 12 months.

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

with the policy guidelines noted

At September 30, 2024, our earnings simulation model indicated that

we were in compliance with the policy guidelines

Economic Value

EVE measures the extent that the estimated economic values of our assets, liabilities, and off-

EVE measures the extent that the estimated economic values of our

assets, liabilities, and off-

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

Economic values are

estimated by discounting expected

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

which establishes a base case EVE.

Economic values

are estimated by discounting expected

cash flows from assets, liabilities, and off-balance

sheet items, which establishes a base case EVE.

In contrast with our

earnings simulation model, which evaluates interest rate risk over a 12-month timeframe,

EVE uses a terminal horizon

which allows for the re-pricing of all assets, liabilities, and off-balance sheet items.

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

earnings simulation model, which evaluates interest rate risk over a 12-month

timeframe, EVE uses a terminal horizon

which allows for the re-pricing of all assets, liabilities, and off-balance

Further, EVE is measured using

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.

To help limit interest rate risk,

we have stated policy guidelines for an

instantaneous basis point change in interest rates, such that our EVE should not decrease from our

base case by more than

To help limit interest rate risk, we have

stated policy guidelines for an

instantaneous basis point change in interest rates, such that our EVE should not decrease

from our base case by more than

the following:

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

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

At September 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.

Income associated with interest-earning assets and costs associated

with interest-bearing liabilities

Income associated with interest-earning

assets and costs associated with interest-bearing liabilities

may not be affected uniformly by changes in interest rates.

the magnitude and duration of changes in interest

In addition, the magnitude and duration of changes in interest

rates may have a significant impact on net interest income.

For example, although certain

assets and liabilities may have

although certain assets and liabilities may have

similar maturities or periods of repricing, they may react in different

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economic and market factors, including market perceptions.

Interest rates on certain types of assets and liabilities fluctuate

in advance of changes in general market rates, while interest rates on other types of assets

and liabilities may lag behind

rates on certain types of assets and liabilities fluctuate

in advance of changes in general market rates, while interest rates on other types

of assets and liabilities may lag behind

changes in general market rates.

In addition, certain assets, such as adjustable rate

mortgage loans, have features (generally

In addition, certain assets, such as adjustable

rate mortgage loans, have features (generally

referred to as “interest rate caps and floors”) which limit changes in interest rates.

and early withdrawal levels

also could deviate significantly from those assumed in calculating the maturity of certain instruments.

also could deviate significantly from those assumed in calculating the maturity of

certain instruments.

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.

ALCO reviews each of the

above interest rate sensitivity analyses along with

ALCO reviews each

of the above interest rate sensitivity analyses along with

several different interest rate scenarios in seeking satisfactory,

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loan, investment, borrowing, and capital policies.

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

interest-sensitive assets and

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

while continuing to meet the credit and deposit

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 while continuing

to meet the credit and deposit

needs of our customers.

From time to time, the Company also may enter into back-to-back

interest rate swaps to facilitate

From time to time, the Company also may

enter into back-to-back interest rate swaps to facilitate

customer transactions and meet their financing needs.

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designated as hedging instruments.

At June 30, 2024 and December 31, 2023,

the Company had no derivative contracts

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

At September 30, 2024 and December

31, 2023, the Company had no derivative

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

its interest rate sensitivity.

Liquidity Risk Management

Liquidity is the Company’s ability to convert

assets into cash equivalents in order to meet daily cash flow requirements,

Liquidity is the Company’s ability to

convert assets into cash equivalents in order to meet daily cash flow requirements,

primarily for deposit withdrawals, loan demand and maturing obligations.

The Company seeks to manage its liquidity to

manage or reduce its costs of funds by maintaining liquidity believed adequate

to meet its anticipated funding needs, while

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

cost of foregoing alternative higher-

manage or reduce its costs of funds by maintaining liquidity believed

adequate to meet its anticipated funding needs, while

balancing against excessive liquidity that likely would reduce earnings

due to the cost of foregoing alternative higher-

yielding assets.

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The second is the liquidity of the Bank.

management of liquidity at both levels is essential, because the Company and the Bank are

separate and distinct legal

entities with different funding needs and sources, and each are

subject to regulatory guidelines and requirements.

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

debt obligations and

The Bank’s payment of dividends depends

on its earnings, liquidity,

capital and the absence of regulatory

restrictions on such dividends.

The primary source of funding and liquidity for the Company has been dividends received

from the Bank.

management of liquidity at both levels is essential, because the Company

and the Bank are separate and distinct legal

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

to regulatory guidelines and requirements.

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

expenses, debt obligations and

and Federal Reserve Regulation W restricts Company borrowings from, and other

transactions with, the Bank.

The Bank’s payment of dividends

depends on its earnings, liquidity,

capital and the absence of regulatory restrictions on

such dividends.

The primary source of funding and liquidity for the Company has been dividends

received from the Bank.

If needed, the

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interest payments on earning assets,

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

sale of loans, particularly residential mortgage

repayment and maturity of securities and loans,

sales of securities, and the sale of loans, particularly residential mortgage

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

from the Federal Reserve discount

In addition to these sources,

the Bank is eligible to participate in the FHLB of Atlanta’s

In addition to

these sources, the Bank is eligible to participate in the FHLB of Atlanta’s

advance program to obtain

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

At June 30, 2024, the Bank had no FHLB of Atlanta advances outstanding

and available credit from the FHLB

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

meet all their respective known

contractual obligations and unfunded commitments, including loan commitments

and reasonably

At September 30, 2024, the Bank had no FHLB of Atlanta advances

outstanding and available credit from the

FHLB of $307.7 million.

At September 30, 2024, the Bank also had $65.2 million

of available federal funds lines with no

borrowings outstanding.

Primary uses of funds include repayment of maturing

obligations and growing the loan portfolio.

The Company also has access to the FRB discount window.

Management believes that the Company and the Bank have adequate

sources of liquidity to meet all their respective known

contractual obligations and unfunded commitments, including loan

commitments and reasonably

expected borrower,

depositor, and creditor requirements over the next twelve

depositor, and creditor requirements over

the next twelve months.

Off-Balance Sheet Arrangements, Commitments, Contingencies and Contractual

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

unfunded loan commitments

At September 30, 2024, the Bank had outstanding standby letters of credit

of $0.6 million and unfunded loan commitments

outstanding of $77.6 million.

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many will expire

without being drawn upon, the total commitment level does not necessarily represent future

cash requirements.

without being drawn upon, the total commitment level does not necessarily

represent future cash requirements.

If needed, to

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

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.

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

We generally sell residential

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

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

investors include various

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

sell residential mortgage loans in the secondary market to Fannie Mae while retaining

the servicing of these

The sale agreements for these residential mortgage loans with Fannie Mae

and other investors include various

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 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.

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

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

for losses incurred (make whole

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

As of September 30, 2024, the aggregate unpaid principal balance of

residential mortgage loans, which we have originated

and sold, but retained the servicing rights, was $207.5 million.

Although these loans are generally sold on a non-recourse

basis, we may be obligated to repurchase residential mortgage loans or

reimburse investors for losses incurred (make whole

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

and warranties.

Upon receipt of a repurchase

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Repurchase and make whole

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

made by the investor and to

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

We seek to reduce and

manage the risks

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

through our underwriting and

quality assurance practices

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

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

2024 as a result of representation and

warranty provisions contained in the Company’s

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

claims made by the investor and to

determine if a contractually required repurchase or make whole event

has occurred.

reduce and manage the risks

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

loan investors through our underwriting and

quality assurance practices and by servicing mortgage loans to meet investor

and secondary market standards.

The Company was not required to repurchase any loans during the

first nine months of 2024 as a result of representation

and warranty provisions contained in the Company’s

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

make-whole requests at June 30, 2024.

make-whole requests at September 30, 2024.

We service all residential

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

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

the mortgage loans;

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

to the mortgage loans;

(4) maintain any

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

required escrow accounts for payment of taxes and insurance and

administer escrow payments;

and (5) foreclose on

defaulted mortgage loans or take other actions to mitigate the potential losses to investors

consistent with the agreements

defaulted mortgage loans or take other actions to mitigate the potential

losses to investors consistent with the agreements

governing our rights and duties as servicer.

The agreements under which we act as servicer generally specifies standard

The agreements

under which we act as servicer generally specifies standards

of responsibility for actions taken by us in

such capacity and provides protection against expenses and liabilities incurred by us

when acting in compliance with the

such capacity and provides protection against expenses and liabilities incurred

by us when acting in compliance with the

respective servicing agreements.

However, if we commit a material breach of our obligations

as servicer, we may be

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

However, if we commit a material breach of

our obligations as servicer, we may be

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

The standards governing

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

by our agreements with Fannie Mae and

by our agreements

with Fannie Mae and

Fannie Mae’s mortgage servicing

Remedies could include repurchase of an affected loan.

Although repurchase and make whole requests related to representation and

warranty provisions and servicing activities

Although repurchase and make whole requests related to representation

and warranty provisions and servicing activities

have been limited to date, it is possible that requests to repurchase mortgage loans or reimburse

investors for losses incurred

(make whole requests) may increase in frequency if investors more aggressively

pursue all means of recovering losses on

(make whole requests) may increase in frequency if investors more aggressively pursue

all means of recovering losses on

their purchased loans.

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

As of September 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

mortgage loans serviced for Fannie

Mae were current as of such date.

We maintain ongoing communications

with our investors and will continue to evaluate

We maintain ongoing

communications with our investors and will continue to evaluate

this exposure by monitoring the level and number of repurchase requests as well as the delinquency

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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

accordance with GAAP and practices within the banking industry

which require the measurement of financial position and

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

the relative purchasing power of money

The consolidated financial statements and related consolidated financial

data presented herein have been prepared in

accordance with GAAP and practices within the banking industry which

require the measurement of financial position and

operating results in terms of historical dollars without considering

the changes in the relative purchasing power of money

over time due to inflation.

Unlike most industrial companies, virtually all the assets and liabilities

of a financial institution

Unlike most industrial companies, virtually all the

assets and liabilities of a financial institution

are monetary in nature.

As a result, interest rates have a more significant impact on a

financial institution’s performance

As a result, interest rates have a more significant

impact on a financial institution’s performance

than the effects of general levels of inflation.

Inflation can affect our noninterest expenses.

Inflation can increase our noninterest expenses.

It also can affect

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

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

The difference

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

of the yield curve and the speeds at which

our assets and liabilities,

respectively, reprice

in response to interest rate changes.

our customers’ behaviors, the mix of deposits between

interest and noninterest bearing, and the levels of interest rates we have to

pay on our deposits and other borrowings, and

the interest rates we earn on our earning assets.

The difference between our interest expense and interest income is also

affected by the shape of the yield curve and the speeds at which our

assets and liabilities, respectively,

reprice in response

to interest rate changes.

Although inflation decreased in the most recent quarter,

the yield curve continued to be inverted

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

This results in a lower

spread between our costs of funds and our interest income.

through September 30, 2024, which means shorter term interest rates are higher

than longer term interest rates.

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

In addition, net interest income could be affected by

asymmetrical changes in the different interest rate indexes, given that

not all of our assets or liabilities are priced with the

Higher market interest rates and reductions in the securities held by the Federal

Reserve to reduce inflation

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

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.

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

funds interest rates and reducing its securities

holdings in an effort to reduce inflation.

During 2022, the Federal Reserve increased the target federal funds

range from 0 –

0.25% to 4.25 – 4.50%.

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

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

federal funds rate may be made if inflation

remains elevated.

The Federal Reserve has indicated it will maintain higher target rates and

restrictive monetary policy to

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

Following its May

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

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

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

range until it has gained greater

confidence that inflation is moving substantially toward 2%.”

Further, the FOMC reduced its monthly reduction of

Treasury securities from $60 billion to $25 billion,

and was maintaining the monthly reduction on agency debt and agency

mortgage-backed securities at $35 billion.

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

federal funds rate, market interest rates increase,

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

market interest rates on

deposits and other alternative investments.

Monetary efforts to control inflation may also affect

unemployment which is an

important component in our CECL model used to estimate our allowance

for credit losses.

asymmetrical changes in the different interest rate indexes,

given that not all of our assets or liabilities are priced with the

Higher market interest rates and reductions in the securities held by the Federal Reserve to reduce

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 maintains

interest rates to meet its

longer term inflation goal of 2%, also can adversely affect

the values and liquidity of our loans and securities, the value of

collateral securing loans to our borrowers, and the success of our borrowers and

such borrowers’ available cash to pay

interest on and principal of our loans to them.

Beginning in March 2022, the Federal Reserve, the Federal Reserve increased

its target federal funds range from 0 – 0.25%

to 4.25 – 4.50% to fight inflation.

The target federal funds rate was increased another 25 basis points on each

31, March 7, May 3 and July 26, 2023 to 5.25 – 5.50%.

The Federal Reserve has indicated it will maintain higher target

rates and restrictive monetary policy to meet its goals of (i) 2% target

inflation rate over the longer term and (ii) maximum

employment goals.

The Federal Reserve’s Open Market Committee

(“FOMC”) reaffirmed its commitment in May 2024 to

the 2% inflation objective and announced that it “does not expect it will be appropriate

to reduce the target range until it has

gained greater confidence that inflation is moving substantially toward 2%.”

Further, beginning in June 2024, the FOMC

relaxed its monetary policy by slowing its monthly reduction of

Treasury securities from $60 billion to $25 billion, while

maintaining the $35 monthly reduction of agency debt and agency mortgage

-backed securities at $35 billion.

On September 18, 2024, in light of inflation moderating, the FOMC reduced its target

federal funds rate range by 50 basis

points to 4.75% to 5.00%.

While the FOMC reaffirmed its target inflation rate of 2% over

the longer run, it indicated it was

“recalibrating” its policy based on decreasing inflation rates and the risks of

increasing unemployment, but would act on

incoming data, the evolving outlook and the balance of the risks of inflation

and unemployment levels.

In the future, the

Federal Reserve could further decrease target interest

rates, or could increase such target rates, depending on the data

Our deposit costs increased as the Federal Reserve increased its target federal

funds rate to fight inflation, market interest

rates increased, and as customers moved to interest bearing deposits to earn

interest on their funds, and at higher interest

Monetary policy efforts to control inflation may also affect

unemployment which is an important component in our

CECL model used to estimate our allowance for credit losses.

As inflation and market interest rates and expectations

regarding these declined in the three months ended September 30, 2024,

the values of our securities investments held for

sale increased, which increased our stockholders’ equity.

See “Item 1A.

Risk Factors” in this Report for additional information about

inflation, interest rates and related risks.

CURRENT ACCOUNTING DEVELOPMENTS

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Improvements to Income Tax

ASU 2023-09 seeks to enhance the transparency and decision usefulness of income tax disclosures.

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.

entities, the new standard is effective for annual periods beginning

after December 15, 2024.

The Company does not

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In addition to results presented in accordance with U.S.

generally accepted accounting principles

(GAAP), this quarterly

report on Form 10-Q includes certain designated net interest income amounts

presented on a tax-equivalent basis, a non-

GAAP financial measure, including the presentation and calculation of the efficiency

generally accepted

accounting principles (GAAP), this quarterly

report on Form 10-Q includes certain designated net interest income

amounts presented on a tax-equivalent basis, a non-

GAAP financial measure, including the presentation and calculation

of the efficiency ratio.

The Company believes the presentation of net interest income on a tax-equivalent

4 unchanged sentences

understanding of its business and performance,

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

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

The reconciliations

of these non-

GAAP financial measures to their most directly comparable GAAP financial

measures are presented below.

GAAP financial measures to their most directly comparable GAAP financial measures

are presented below.

(in thousands)

2 unchanged sentences

Net interest income (Tax

Six months ended June 30,

Nine months ended September 30,

(In thousands)

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Total revenue

Provision for (reversal of) credit losses

Provision for credit losses

Noninterest expense

5 unchanged sentences

Basic and diluted

Shares outstanding

Shares outstanding, at period end

Common stock price:

2 unchanged sentences

Performance ratios:

Return on average equity

Return on average assets

Annualized return on average equity

Annualized return on average assets

Dividend payout ratio

5 unchanged sentences

Nonperforming loans as a % of total loans

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

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

Capital Adequacy:

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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

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

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

See Table 1 - Explanation of Non-GAAP Measures.

- Selected Financial Data

Six months ended June 30,

Nine months ended September 30,

(Dollars in thousands, except per share amounts)

53 unchanged sentences

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

the sum of noninterest income and tax-equivalent net interest

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

See Table 1 - Explanation of Non-GAAP Measures.

- Average Balances

and Net Interest Income Analysis

Quarter ended June 30,

Balances and Net Interest Income Analysis

Quarter ended September 30,

(Dollars in thousands)

6 unchanged sentences

Interest bearing bank deposits

Total interest-earning assets

Total interest-earning

Cash and due from banks

2 unchanged sentences

Time deposits

Total interest-bearing deposits

Total interest-bearing

Short-term borrowings

Total interest-bearing liabilities

Total interest-bearing

Noninterest-bearing deposits

3 unchanged sentences

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

(1) Average loan

balances are shown net of unearned income and loans on nonaccrual status have

been included

in the computation of average balances.

3 unchanged sentences

tax rate of 21%.

- Average Balances

and Net Interest Income Analysis

Six months ended June 30,

Balances and Net Interest Income Analysis

Nine months ended September 30,

(Dollars in thousands)

6 unchanged sentences

Interest bearing bank deposits

Total interest-earning assets

Total interest-earning

Cash and due from banks

2 unchanged sentences

Time deposits

Total interest-bearing deposits

Total interest-bearing

Short-term borrowings

Total interest-bearing liabilities

Total interest-bearing

Noninterest-bearing deposits

3 unchanged sentences

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

(1) Average loan

balances are shown net of unearned income and loans on nonaccrual status have

been included

in the computation of average balances.

6 unchanged sentences

DISCLOSURES ABOUT MARKET RISK

The information called for by ITEM 3 is set forth in ITEM 2 under the caption

“MARKET AND LIQUIDITY RISK

The information called for by ITEM 3 is set forth in ITEM 2 under the

caption “MARKET AND LIQUIDITY RISK

MANAGEMENT” and is incorporated herein by reference.

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