Auburn National Bancorporation (AUBN) 10-Q 2023 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.20549

FORM

10-Q

(Mark One)

☒

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the quarterly period ended

September 30, 2023

☐

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the transition period __________ to __________

Commission File Number:

0-26486

Auburn National Bancorporation, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Delaware

(State or other jurisdiction of

incorporation or organization)

63-0885779

(I.R.S. Employer

Identification No.)

100 N. Gay Street

Auburn

,

Alabama

36830

(

334

)

821-9200

(Address and telephone number of principal executive offices)

(Former Name, Former Address and Former FiscalYear,if Changed Since Last Report)

Indicatebycheckmarkwhethertheregistrant(1) hasfiledallreportsrequiredtobefiledbySection 13or15(d)oftheSecurities

Exchange Actof 1934during thepreceding 12 months(or forsuch shorterperiod thatthe registrantwas requiredto filesuch reports),

and (2) has been subject to such filing requirements for the past 90 days.

Yes

☒

No

☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and

posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required

to submit such files).

Yes

☒

No

☐

Indicate by checkmark whether theregistrant is alarge accelerated filer,an accelerated filer,a non-accelerated filer,a smaller reporting

companyoranemerginggrowthcompany.Seethedefinitionsof“largeacceleratedfiler,”“acceleratedfiler,”“smallerreporting

company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated filer

☐

Accelerated filer

☐

Non-accelerated filer

☒

Smaller reporting company

☒

Emerging growth company

☐

Ifanemerginggrowthcompany,indicatebycheckmarkiftheregistranthaselectednottousetheextendedtransitionperiodfor

complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes

☐

No

☒

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.01

AUBN

NASDAQ

Global Market

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Class

Outstanding at November 6, 2023

Common Stock, $0.01 par value per share

3,493,614

shares

AUBURN NATIONAL BANCORPORATION, INC. ANDSUBSIDIARIES

INDEX

PAGE

Item 1

3

4

5

6

7

8

Item 2

28

45

46

47

48

49

50

51

Item 3

52

Item 4

52

Item 1

52

Item 1A

52

Item 2

53

Item 3

53

Item 4

53

Item 5

53

Item 6

54

3

PART1.FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

AUBURN NATIONALBANCORPORATION,INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Unaudited)

September 30,

December 31,

(Dollars in thousands, except share data)

2023

2022

Assets:

Cash and due from banks

$

16,350

$

11,608

Federal funds sold

416

9,300

Interest-bearing bank deposits

12,845

6,346

Cash and cash equivalents

29,611

27,254

Securities available-for-sale

373,286

405,304

Loans

545,610

504,458

Allowance for credit losses

(6,778)

(5,765)

Loans, net

538,832

498,693

Premises and equipment, net

45,666

46,575

Bank-owned life insurance

17,010

19,952

Other assets

26,319

26,110

Total assets

$

1,030,724

$

1,023,888

Liabilities:

Deposits:

Noninterest-bearing

$

279,458

$

311,371

Interest-bearing

685,143

638,966

Total deposits

964,601

950,337

Federal funds purchased and securities sold under agreements to repurchase

1,741

2,551

Accrued expenses and other liabilities

2,931

2,959

Total liabilities

969,273

955,847

Stockholders' equity:

Preferred stock of $

.01

par value; authorized

200,000

shares;

no shares issued

—

—

Common stock of $

.01

par value; authorized

8,500,000

shares;

issued

3,957,135

shares

39

39

Additional paid-in capital

3,801

3,797

Retained earnings

118,326

116,600

Accumulated other comprehensive loss, net

(49,013)

(40,920)

Less treasury stock, at cost -

463,521

shares and

453,683

at September 30, 2023

and December 31, 2022, respectively

(11,702)

(11,475)

Total stockholders’ equity

61,451

68,041

Total liabilities and stockholders’equity

$

1,030,724

$

1,023,888

See accompanying notes to consolidated financial statements

4

AUBURN NATIONALBANCORPORATION,INC. AND SUBSIDIARIES

Consolidated Statements of Earnings

(Unaudited)

Quarter ended September 30,

Nine months ended September 30,

(Dollars in thousands, except share and per share data)

2023

2022

2023

2022

Interest income:

Loans, including fees

$

6,373

$

5,097

$

18,146

$

14,638

Securities:

Taxable

1,783

1,808

5,474

4,691

Tax-exempt

402

441

1,209

1,275

Federal funds sold and interest-bearing bank deposits

85

426

442

767

Total interest income

8,643

7,772

25,271

21,371

Interest expense:

Deposits

2,334

524

4,934

1,661

Short-term borrowings

37

5

68

15

Total interest expense

2,371

529

5,002

1,676

Net interest income

6,272

7,243

20,269

19,695

Provision for credit losses

105

250

(191)

—

Net interest income after provision for creditlosses

6,167

6,993

20,460

19,695

Noninterest income:

Service charges on deposit accounts

148

158

456

446

Mortgage lending

110

126

345

566

Bank-owned life insurance

87

97

311

293

Other

520

427

1,336

1,259

Securities gains, net

—

44

—

44

Total noninterest income

865

852

2,448

2,608

Noninterest expense:

Salaries and benefits

2,844

2,975

8,809

8,901

Net occupancy and equipment

755

794

2,341

1,955

Professional fees

261

235

898

704

Other

1,502

1,411

4,743

3,814

Total noninterest expense

5,362

5,415

16,791

15,374

Earnings before income taxes

1,670

2,430

6,117

6,929

Income tax expense

182

432

737

1,049

Net earnings

$

1,488

$

1,998

$

5,380

$

5,880

Net earnings per share:

Basic and diluted

$

0.43

$

0.57

$

1.54

$

1.67

Weighted average sharesoutstanding:

Basic and diluted

3,496,411

3,507,318

3,499,518

3,513,068

See accompanying notes to consolidated financial statements

5

AUBURN NATIONALBANCORPORATION,INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(Unaudited)

Quarter ended September 30,

Nine months ended September 30,

(Dollars in thousands)

2023

2022

2023

2022

Net earnings

$

1,488

$

1,998

$

5,380

$

5,880

Other comprehensive loss, net of tax:

Unrealized net loss on securities

(9,941)

(17,223)

(8,093)

(46,533)

Reclassification adjustment for net gain on securities

recognized in net earnings

—

(33)

—

(33)

Other comprehensive loss

(9,941)

(17,256)

(8,093)

(46,566)

Comprehensive loss

$

(8,453)

$

(15,258)

$

(2,713)

$

(40,686)

See accompanying notes to consolidated financial statements

6

AUBURN NATIONALBANCORPORATION,INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders' Equity

(Unaudited)

Accumulated

Common

Additional

other

Shares

Common

paid-in

Retained

comprehensive

Treasury

(Dollars in thousands, except share data)

Outstanding

Stock

capital

earnings

(loss) income

stock

Total

Quarter ended September 30, 2023

Balance, June 30, 2023

3,499,412

$

39

$

3,800

$

117,781

$

(39,072)

$

(11,572)

$

70,976

Net earnings

—

—

—

1,488

—

—

1,488

Other comprehensive loss

—

—

—

—

(9,941)

—

(9,941)

Cash dividends paid ($

.27

per share)

—

—

—

(943)

—

—

(943)

Stock repurchases

(5,883)

—

—

—

—

(130)

(130)

Sale of treasury stock

85

—

1

—

—

—

1

Balance, September 30, 2023

3,493,614

$

39

$

3,801

$

118,326

$

(49,013)

$

(11,702)

$

61,451

Quarter ended September 30, 2022

Balance, June 30, 2022

3,509,940

$

39

$

3,796

$

111,994

$

(28,419)

$

(11,303)

$

76,107

Net earnings

—

—

—

1,998

—

—

1,998

Other comprehensive loss

—

—

—

—

(17,256)

—

(17,256)

Cash dividends paid ($

.265

per share)

—

—

—

(929)

—

—

(929)

Stock repurchases

(4,640)

—

—

—

—

(128)

(128)

Sale of treasury stock

55

—

1

—

—

—

1

Balance, September 30, 2022

3,505,355

$

39

$

3,797

$

113,063

$

(45,675)

$

(11,431)

$

59,793

Nine months ended September 30, 2023

Balance, December 31, 2022

3,503,452

$

39

$

3,797

$

116,600

$

(40,920)

$

(11,475)

$

68,041

Cumulative effect of change in accounting

standard

—

—

—

(821)

—

—

(821)

Net earnings

—

—

—

5,380

—

—

5,380

Other comprehensive loss

—

—

—

—

(8,093)

—

(8,093)

Cash dividends paid ($

.81

per share)

—

—

—

(2,833)

—

—

(2,833)

Stock repurchases

(10,108)

—

—

—

—

(229)

(229)

Sale of treasury stock

270

—

4

—

—

2

6

Balance, September 30, 2023

3,493,614

$

39

$

3,801

$

118,326

$

(49,013)

$

(11,702)

$

61,451

Nine months ended September 30, 2022

Balance, December 31, 2021

3,520,485

$

39

$

3,794

$

109,974

$

891

$

(10,972)

$

103,726

Net earnings

—

—

—

5,880

—

—

5,880

Other comprehensive loss

—

—

—

—

(46,566)

—

(46,566)

Cash dividends paid ($

.795

per share)

—

—

—

(2,791)

—

—

(2,791)

Stock repurchases

(15,280)

—

—

—

—

(460)

(460)

Sale of treasury stock

150

—

3

—

—

1

4

Balance, September 30, 2022

3,505,355

$

39

$

3,797

$

113,063

$

(45,675)

$

(11,431)

$

59,793

See accompanying notes to consolidated financial statements

7

AUBURN NATIONALBANCORPORATION,INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

Nine months ended September 30,

(Dollars in thousands)

2023

2022

Cash flows from operating activities:

Net earnings

$

5,380

$

5,880

Adjustments to reconcile net earnings to net cash provided by

operating activities:

Provision for credit losses

(191)

—

Depreciation and amortization

1,278

1,098

Premium amortization and discount accretion, net

1,834

2,450

Net gain on securities available-for-sale

—

(44)

Net gain on sale of loans held for sale

(81)

(315)

Net gain on other real estate owned

—

(162)

Loans originated for sale

(3,417)

(8,711)

Proceeds from sale of loans

3,482

10,292

Increase in cash surrender value of bank-owned life insurance

(259)

(294)

Income recognized from death benefit on bank-owned life insurance

(52)

—

Net decrease (increase) in other assets

47

(15,570)

Net increase in accrued expenses and other liabilities

2,672

14,102

Net cash provided by operating activities

10,693

8,726

Cash flows from investing activities:

Proceeds from prepayments and maturities of securities available-for-sale

19,377

38,871

Purchase of securities available-for-sale

—

(93,106)

Increase in loans, net

(41,025)

(15,644)

Net purchases of premises and equipment

(170)

(5,540)

Proceeds from bank-owned life insurance death benefit

216

—

Proceeds from surrender of bank-owned life insurance

3,037

—

Increase in FHLB stock

(164)

(74)

Proceeds from sale of other real estate owned

—

536

Net cash used in investing activities

(18,729)

(74,957)

Cash flows from financing activities:

Net (decrease) increase in noninterest-bearing deposits

(32,717)

5,570

Net increase (decrease) in interest-bearing deposits

46,982

(21,875)

Net decrease in federal funds purchased and securities sold

under agreements to repurchase

(810)

(835)

Stock repurchases

(229)

(460)

Dividends paid

(2,833)

(2,791)

Net cash provided by (used in) financing activities

10,393

(20,391)

Net change in cash and cash equivalents

2,357

(86,622)

Cash and cash equivalents at beginning of period

27,254

156,259

Cash and cash equivalents at end of period

$

29,611

$

69,637

Supplemental disclosures of cash flow information:

Cash paid during the period for:

Interest

$

4,384

$

1,705

Income taxes

800

1,031

See accompanying notes to consolidated financial statements

8

AUBURN NATIONALBANCORPORATION,INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES

General

Auburn National Bancorporation, Inc. (the “Company”) provides a full range of banking servicesto individuals and

commercial customers in Lee County,Alabama and surrounding areas through its wholly owned subsidiary,AuburnBank

(the “Bank”). The Company does not have any segments other than banking that are consideredmaterial.

Basis of Presentation and Use of Estimates

The unaudited consolidated financial statements in this report have been preparedin accordance with U.S. generally

accepted accounting principles (“GAAP”) for interim financial information.Accordingly, these financial statementsdo not

include all of the information and footnotes required by U.S. GAAP for complete financialstatements.The unaudited

consolidated financial statements include, in the opinion of management, all adjustmentsnecessary to present a fair

statement of the financial position and the results of operations for all periodspresented. All such adjustments are of a

normal recurring nature. The results of operations in the interim statements are not necessarilyindicative of the results of

operations that the Company and its subsidiaries may achieve for future interim periodsor the entire year. For further

information, refer to the consolidated financial statements and footnotes included in the Company'sAnnual Report on Form

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

The unaudited consolidated financial statements include the accounts of theCompany and its wholly-owned subsidiaries.

Significant intercompany transactions and accounts are eliminated in consolidation.

The preparation of financial statements in conformity with U.S. GAAP requiresmanagement to make estimates and

assumptions that affect the reported amounts of assets and liabilities and disclosuresof contingent assets and liabilities as of

the balance sheet date and the reported amounts of revenues and expenses during the reporting period.Actual results could

differ from those estimates.Material estimates that are particularly susceptible to significant change in the near term

include the determination of allowance for credit losses on investment securitiesand loans, fair value of financial

instruments, and the valuation of deferred tax assets and other real estate owned (“OREO”).

Revenue Recognition

On January 1, 2018, the Company implemented Accounting Standards Update(“ASU”or “updates”) 2014-09,

Revenue

from Contracts with Customers

, codified at

Accounting Standards Codification(“ASC”)

606. The Company adopted ASC

606 using the modified retrospective transition method.The majority of the Company’s revenue streamis generated from

interest income on loans and securities which are outside the scope of ASC 606.

The Company’s sources of income thatfall within the scope of ASC 606 include service charges on deposits, interchange

fees and gains and losses on sales of other real estate, all of which are presented as components ofnoninterest income. The

following is a summary of the revenue streams that fall within the scope of ASC 606:

●

Service charges on deposits, investment services, ATMand interchange fees – Fees from these services are either

(i) transaction-based, for which the performance obligations are satisfiedwhen the individual transaction is

processed, or (ii) set periodic service charges, for which the performanceobligations are satisfied over the period

the service is provided. Transaction-basedfees are recognized at the time the transaction is processed, and periodic

service charges are recognized over the service period.

●

Gains on sales of OREO

–

A gain on sale should be recognized when a contract for sale exists and control of the

asset has been transferred to the buyer.ASC 606 lists several criteria required to conclude that a contract for sale

exists, including a determination that the institution will collect substantially all of the considerationto which it is

entitled.In addition to the loan-to-value ratio, where the seller providesthe purchaser with financing, the analysis

is based on various other factors,including the credit quality of the purchaser,the structure of the loan, and any

other factors that we believe may affect collectability.

9

Subsequent Events

The Company has evaluated the effects of events and transactions throughthe date of this filing that have occurred

subsequent to September 30, 2023.The Company does not believe there were any material subsequent events duringthis

period that would have required further recognition or disclosure in the unauditedconsolidated financial statements

included in this report.

Reclassifications

Certain amounts reported in prior periods have been reclassified to conform to the current-period presentation. These

reclassifications had no material effect on the Company’spreviously reported net earnings or total stockholders’ equity.

Accounting Standards Adopted in 2023

On January 1, 2023, the Company adopted ASU 2016-13 Financial Instruments – CreditLosses (Topic 326):Measurement

of Credit Losses on Financial Instruments (ASC 326). This standard replacedthe incurred loss methodology with an

expected loss methodology that is referred to as the current expected credit loss (“CECL”)methodology. CECL requiresan

estimate of credit losses for the remaining estimated life of the financial asset usinghistorical experience, current

conditions, and reasonable and supportable forecasts and generally applies tofinancial assets measured at amortized cost,

including loan receivables and held-to-maturity debt securities, and some off-balance sheet credit exposures such as

unfunded commitments to extend credit. Financial assets measured at amortizedcost will be presented at the net amount

expected to be collected by using an allowance for credit losses.

In addition, CECL made changes to the accounting for available for sale debtsecurities. One such change is to require

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

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

The Company adopted ASC 326 and all related subsequent amendments theretoeffective January 1, 2023 using the

modified retrospective approach for all financial assets measured at amortizedcost and off-balance sheet credit exposures.

The transition adjustment upon the adoption of CECL on January 1, 2023 includedan increase in the allowance for credit

losses on loans of $

1.0

million, which is presented as a reduction to net loans outstanding, and an increase in the allowance

for credit losses on unfunded loan commitments of $

0.1

million, which is recorded within other liabilities. The Company

recorded a net decrease to retained earnings of $

0.8

million as of January 1, 2023 for the cumulative effect of adopting

CECL, which reflects the transition adjustments noted above, net of the applicable deferredtax assets recorded. Results for

reporting periods beginning after January 1, 2023 are presented under CECL while priorperiod amounts continue to be

reported in accordance with previously applicable accounting standards.

The Company adopted ASC 326 using the prospective transition approach for debtsecurities for which other-than-

temporary impairment had been recognized prior to January 1, 2023.As of December 31, 2022, the Company did not have

any other-than-temporarily impaired investment securities. Therefore,upon adoption of ASC 326, the Company determined

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

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

reverse interest income on loans or securities that are placed on nonaccrual status,which is generally when the instrument is

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

this policy results in the timely reversal of uncollectible interest.

The Company also adopted ASU 2022-02, “Financial Instruments - Credit Losses (Topic326): Troubled Debt

Restructurings and Vintage Disclosures”on January 1, 2023, the effective date of the guidance, on a prospective basis.

ASU 2022-02 eliminated the accounting guidance for TDRs, while enhancing disclosure requirementsfor certain loan

refinancings and restructurings by creditors when a borrower is experiencingfinancial difficulty.Specifically, rather than

applying the recognition and measurement guidance for TDRs, an entitymust apply the loan refinancing and restructuring

guidance to determine whether a modification results in a new loan or acontinuation of an existing loan. Additionally,ASU

2022-02 requires an entity to disclose current-period gross write-offsby year of origination for financing receivables within

the scope of Subtopic 326-20, Financial Instruments—Credit Losses—Measured atAmortized Cost. ASU 2022-02 did not

have a material impact on the Company’s consolidatedfinancial statements.

10

Loans

Loans that management has the intent and ability to hold for the foreseeablefuture or until maturity or payoff are reported

at amortized cost. Amortized cost is the principal balance outstanding, net of purchase premiumsand discounts and

deferred fees and costs. Accrued interest receivable related to loans is recordedin other assets on the consolidated balance

sheets. Interest income is accrued on the unpaid principal balance. Loan origination fees,net of certain direct origination

costs, are deferred and recognized in interest income using methods that approximate alevel yield without anticipating

prepayments.

The accrual of interest is generally discontinued when a loan becomes 90 days past due andis not well collateralized and in

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

efforts, that the principal or interest will not be collectible in the normalcourse of business. Past due status is based on

contractual terms of the loan. A loan is considered to be past due when a scheduled payment hasnot been received 30 days

after the contractual due date.

All accrued interest is reversed against interest income when a loan is placed on nonaccrualstatus. Interest received on such

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

method, interest income is not recognized until the loan balance is reduced to zero.Loans are returned to accrual status

when all the principal and interest amounts contractually due are brought current, there is asustained period of repayment

performance, and future payments are reasonably assured.

Allowance for Credit Losses – Loans

The allowance for credit losses is a valuation account that is deducted from the loans' amortizedcost basis to present the net

amount expected to be collected on the loans. Loans are charged offagainst the allowance when management believes the

uncollectibility of a loan balance is confirmed. Expected recoveries do not exceed the aggregateof amounts previously

charged-off and expected to be charged-off.Accrued interest receivable is excluded from the estimate of credit losses.

The allowance for credit losses represents management’sestimate of lifetime credit losses inherent in loans as of the

balance sheet date. The allowance for credit losses is estimated by management using relevantavailable information, from

both internal and external sources, relating to past events, current conditions, and reasonable andsupportable forecasts.

The Company’s loan loss estimation processincludes procedures to appropriately consider the unique characteristics ofits

respective loan segments (commercial and industrial, construction and land development,commercial real estate,

residential real estate, and consumer loans).These segments are further disaggregated into loan classes, the level atwhich

credit quality is monitored.See Note 5, Loans and Allowance for Credit Losses, for additional information about ourloan

portfolio.

Credit loss assumptions are estimated using a discounted cash flow ("DCF") modelfor each loan segment,except consumer

loans.The weighted average remaining life method is used to estimate credit loss assumptionsfor consumer loans.

The DCF model calculates an expected life-of-loan loss percentage by considering theforecasted probability that a

borrower will default (the “PD”), adjusted for relevant forecasted macroeconomicfactors, and LGD, which is the estimate

of the amount of net loss in the event of default.This model utilizes historical correlations between default experience and

certain macroeconomic factors as determined through a statistical regression analysis.The forecasted Alabama

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

commercial real estate,and residential real estate loans.In addition, forecasted changes in the Alabama home price index

is considered in the model for construction and land development and residential realestate loans; forecasted changes in the

national commercial real estate (“CRE”) price index is consideredin the model for commercial real estate and multifamily

loans; and forecasted changes in the Alabama gross state product is consideredin the model for multifamily loans.

Projections of these macroeconomic factors, obtained from an independent thirdparty, are utilized to predictquarterly rates

of default based on the statistical PD models.

Expected credit losses are estimated over the contractual term of the loan, adjustedfor expected prepayments and principal

payments (“curtailments”) when appropriate. Management'sdetermination of the contract term excludes expected

extensions, renewals, and modifications unless the extension orrenewal option is included in the contract at the reporting

date and is not unconditionally cancellable by the Company.To the extent the lives of theloans in the portfolio extend

beyond the period for which a reasonable and supportable forecast can bemade (which is 4 quarters for the Company), the

Company reverts, on a straight-line basis back to the historical rates over an 8 quarter reversionperiod.

11

The weighted average remaining life method was deemed most appropriatefor the consumer loan segment because

consumer loans contain many different payment structures,payment streams and collateral.The weighted average

remaining life method uses an annual charge-off rate over several vintagesto estimate credit losses.The average annual

charge-off rate is applied to the contractual term adjusted forprepayments.

Additionally, the allowancefor credit losses calculation includes subjective adjustments for qualitative riskfactors that are

believed likely to cause estimated credit losses to differ fromhistorical experience. These qualitative adjustments may

increase reserve levels and include adjustments for lending management experience andrisk tolerance, loan review and

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

collateral, external factors and economic conditions not already captured.

Loans secured by real estate with balances equal to or greater than $500 thousand and loans not securedby real estate with

balances equal to or greater than $250 thousand that do not share risk characteristicsare evaluated on an individual basis.

When management determines that foreclosure is probable and the borroweris experiencing financial difficulty,the

expected credit losses are based on the estimated fair value of collateral held at the reportingdate, adjusted for selling costs

as appropriate.

Allowance for Credit Losses – Unfunded Commitments

Financial instruments include off-balance sheet credit instruments,such as commitments to make loans and commercial

letters of credit issued to meet customer financing needs. The Company’sexposure to credit loss in the event of

nonperformance by the other party to the financial instrument for off-balance sheetloan commitments is represented by the

contractual amount of those instruments. Such financial instruments arerecorded when they are funded.

The Company records an allowance for credit losses on off-balancesheet credit exposures, unless the commitments to

extend credit are unconditionally cancelable, through a charge to provisionfor credit losses in the Company’s consolidated

statements of earnings.The allowance for credit losses on off-balance sheet credit exposuresis estimated by loan segment

at each balance sheet date under the current expected credit loss model using the samemethodologies as portfolio loans,

taking into consideration the likelihood that funding will occur as well as any third-partyguarantees. The allowance for

unfunded commitments is included in other liabilities on the Company’sconsolidated balance sheets.

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

ASC 326.At September 30, 2023,the liability for credit losses on off-balance-sheet credit exposures included in other

liabilities was $

0.2

million.

Provision for Credit Losses

The composition of the provision for (recoveries of) credit losses for the respective periodsis presented below.

Quarter ended September 30,

Nine months ended September 30,

(Dollars in thousands)

2023

2022

2023

2022

Provision for credit losses:

Loans

$

158

$

250

$

(133)

$

—

Reserve for unfunded commitments (1)

(53)

70

(58)

35

Total provision for creditlosses

$

105

$

320

$

(191)

$

35

(1)

Reserve requirements for unfunded commitments were reported as a component of othernoninterest expense prior

to the adoption of ASC 326.

12

NOTE 2: BASIC AND DILUTED NET EARNINGS PER SHARE

Basic net earnings per share is computed by dividing net earnings by the weighted averagecommon shares outstanding for

the respective period.Diluted net earnings per share reflect the potential dilution that could occurupon exercise of

securities or other rights for, or convertible into, shares of theCompany’s common stock.At September 30, 2023 and

2022, respectively, the Companyhad no such securities or rights issued or outstanding, and therefore, no dilutive effectto

consider for the diluted net earnings per share calculation.

The basic and diluted net earnings per share computations for the respective periods arepresented below

Quarter ended September 30,

Nine months ended September 30,

(Dollars in thousands, except share and per share data)

2023

2022

2023

2022

Basic and diluted:

Net earnings

$

1,488

$

1,998

$

5,380

$

5,880

Weighted average commonshares outstanding

3,496,411

3,507,318

3,499,518

3,513,068

Net earnings per share

$

0.43

$

0.57

$

1.54

$

1.67

NOTE 3: VARIABLEINTEREST ENTITIES

Generally, a variable interest entity (“VIE”)is a corporation, partnership, trust or other legal structure that does not have

equity investors with substantive or proportional voting rights or has equity investorsthat do not provide sufficient financial

resources for the entity to support its activities.

At September 30, 2023, the Company did not have any consolidated VIEs todisclose but did have one nonconsolidated

VIE, discussed below.

New Markets TaxCredit Investment

The New Markets Tax Credit(“NMTC”) program provides federal tax incentives to investors to make investmentsin

distressed communities and promotes economic improvement through the developmentof successful businesses in these

communities.The NMTC is available to investors over seven years and is subject to recapture if certain events occur

during such period.At September 30, 2023 and December 31, 2022, respectively,the Company had one such investment in

the amounts of $1.8 million and $2.1 million, respectively,which was included in other assets in the consolidated balance

sheets.The Company’s equity investment in theNMTC entity meets the definition of a VIE. While the Company’s

investment exceeds 50% of the outstanding equity interests, the Company does not consolidatethe VIE because it does not

meet the characteristics of a primary beneficiary since the Company lacks the power to directthe activities of the VIE.

(Dollars in thousands)

Maximum

Loss Exposure

Asset Recognized

Classification

Type:

New Markets Tax Credit investment

$

1,807

$

1,807

Other assets

13

NOTE 4: SECURITIES

At September 30, 2023 and December 31, 2022, respectively,all securities within the scope of ASC 320,

Investments –

Debt and Equity Securities,

were classified as available-for-sale.The fair value and amortized cost for securities available-

for-sale by contractual maturity at September 30, 2023 and December31, 2022, respectively, arepresented below.

1 year

1 to 5

5 to 10

After 10

Fair

Gross Unrealized

Amortized

(Dollars in thousands)

or less

years

years

years

Value

Gains

Losses

Cost

September 30, 2023

Agency obligations (a)

$

15,063

49,036

58,651

—

122,750

—

17,152

$

139,902

Agency MBS (a)

—

10,095

26,845

155,517

192,457

—

39,581

232,038

State and political subdivisions

300

981

15,488

41,310

58,079

—

8,717

66,796

Total available-for-sale

$

15,363

60,112

100,984

196,827

373,286

—

65,450

$

438,736

December 31, 2022

Agency obligations (a)

$

4,935

50,746

69,936

—

125,617

—

15,826

$

141,443

Agency MBS (a)

—

7,130

27,153

183,877

218,160

—

33,146

251,306

State and political subdivisions

300

642

15,130

45,455

61,527

11

5,681

67,197

Total available-for-sale

$

5,235

58,518

112,219

229,332

405,304

11

54,653

$

459,946

(a) Includes securities issued by U.S. government agencies or government-sponsoredentities.

Securities with aggregate fair values of $

224.6

million and $

208.3

million at September 30, 2023 and December 31, 2022,

respectively, were pledged tosecure public deposits, securities sold under agreements to repurchase, Federal HomeLoan

Bank of Atlanta (“FHLB of Atlanta”) advances, and for other purposes requiredor permitted by law.

Other assets on the accompanying consolidated balance sheets include non-marketableequity investments.The carrying

amounts of non-marketable equity investments were $

1.4

million at September 30, 2023 and $

1.2

million at December 31,

2022.Non-marketable equity investments include FHLB of Atlanta tock, Federal ReserveBank of Atlanta (“FRB”) stock,

and stock in a privately held financial institution.

Gross Unrealized Losses and Fair Value

The fair values and gross unrealized losses on securities at September 30,2023 and December 31, 2022, respectively,

segregated by those securities that have been in an unrealizedloss position for less than 12 months and 12 months or

longer, are presented below.

Less than 12 Months

12 Months or Longer

Total

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

(Dollars in thousands)

Value

Losses

Value

Losses

Value

Losses

September 30, 2023:

Agency obligations

$

—

—

122,750

17,152

$

122,750

17,152

Agency MBS

84

3

192,373

39,578

192,457

39,581

State and political subdivisions

12,726

755

44,313

7,962

57,039

8,717

Total

$

12,810

758

359,436

64,692

$

372,246

65,450

December 31, 2022:

Agency obligations

$

55,931

4,161

69,686

11,665

$

125,617

15,826

Agency MBS

70,293

5,842

147,867

27,304

218,160

33,146

State and political subdivisions

44,777

2,176

13,043

3,505

57,820

5,681

Total

$

171,001

12,179

230,596

42,474

$

401,597

54,653

14

For the securities in the previous table, the Company assesses whether or not it intends tosell or is more likely than not that

the Company will be required to sell the securities before recovery of the amortizedcost basis, which may be maturity.

Because the Company currently does not intend to sell those securities that have anunrealized loss at September 30, 2023

and it is not more-likely-than-not that the Company will be required to sell the security beforerecovery of their amortized

cost bases, which may be maturity,the Company has determined that no provision for credit loss is necessary.In addition,

the Company evaluates whether any portion of the decline in fair value of available-for-salesecurities is the result of credit

deterioration, which would require the recognition of a provision to increasethe allowance for credit losses. Such

evaluations consider the extent to which the amortized cost of the security exceeds itsfair value, changes in credit ratings

and any other known adverse conditions related to the specific security.The unrealized losses associated with available-for-

sale securities at September 30, 2023 are driven by changes in market interest rates andare not due to the credit quality of

the securities, and accordingly,no allowance for credit losses is considered necessary for available-for-salesecurities at

September 30, 2023. These securities will continue to be monitored as a partof the Company's ongoing evaluation of credit

quality. Management evaluatesthe financial performance of the issuers on a quarterly basis to determine if it is probable

that the issuers can make all contractual principal and interest payments.

Realized Gains and Losses

The following table presents the gross realized gains and losses on sales of securities.

Quarter ended September 30,

Nine months ended September 30,

(Dollars in thousands)

2023

2022

2023

2022

Gross realized gains

$

—

44

$

—

44

Realized gains, net

$

—

44

$

—

44

NOTE 5: LOANS AND ALLOWANCEFOR CREDIT LOSSES

September 30,

December 31,

(Dollars in thousands)

2023

2022

Commercial and industrial

$

66,014

$

66,212

Construction and land development

70,129

66,479

Commercial real estate:

Owner occupied

66,237

61,125

Hotel/motel

36,992

33,378

Multi-family

47,634

41,084

Other

131,101

128,986

Total commercial real estate

281,964

264,573

Residential real estate:

Consumer mortgage

60,024

45,370

Investment property

57,126

52,278

Total residential real estate

117,150

97,648

Consumer installment

10,353

9,546

Total Loans

$

545,610

$

504,458

Loans secured by real estate were approximately 86.0% of the Company’stotal loan portfolio at September 30, 2023.At

September 30, 2023, the Company’sgeographic loan distribution was concentrated primarily in Lee County,Alabama, and

surrounding areas.

The loan portfolio segment is defined as the level at which an entity develops and documents asystematic method for

determining its allowance for credit losses. As part of the Company’squarterly assessment of the allowance, the loan

portfolio included the following portfolio segments: commercial and industrial,construction and land development,

commercial real estate, residential real estate, and consumer installment. Where appropriate,the Company’s loan portfolio

segments are further disaggregated into classes. A class is generally determined basedon the initial measurement attribute,

risk characteristics of the loan, and an entity’smethod for monitoring and determining credit risk.

15

The following describesthe risk characteristics relevant to each of the portfolio segmentsand classes.

Commercial and industrial (“C&I”) —

includes loans to finance business operations, equipment purchases, orother needs

for small and medium-sized commercial customers. Also includedin this category are loans to finance agricultural

production.Generally,the primary source of repayment is the cash flow from business operations and activitiesof the

borrower.

Construction and land development (“C&D”) —

includes both loans and credit lines for the purpose of purchasing,

carrying,and developing land into commercial developments or residential subdivisions.Also included are loans and credit

lines for construction of residential, multi-family,and commercial buildings. Generally,the primary source of repayment is

dependent upon the sale or refinance of the real estate collateral.

Commercial real estate(“CRE”) —

includes loans in these classes:

●

Owner occupied

– includes loans secured by business facilities to finance business operations, equipment and

owner-occupied facilities primarily for small and medium-sizedcommercial customers.Generally,the primary

source of repayment is the cash flow from business operations and activities of the borrower,who owns the

property.

●

Hotel/motel

– includes loans for hotels and motels.Generally, the primary source of repaymentis dependent upon

income generated from the hotel/motel securing the loan.The underwriting of these loans takes into consideration

the occupancy and rental rates, as well as the financial health of the borrower.

●

Multi-family

– primarily includes loans to finance income-producing multi-family properties.These include loans

for 5 or more unit residential properties and apartments leased to residents. Generally,the primary source of

repayment is dependent upon income generated from the real estate collateral.The underwriting of these loans

takes into consideration the occupancy and rental rates,as well as the financial health of the respective borrowers.

●

Other

– primarily includes loans to finance income-producing commercial propertiesother than hotels/motels and

multi-family properties, and whichare not owner occupied.Loans in this class include loans for neighborhood

retail centers, medical and professional offices, single retail stores,industrial buildings, and warehouses leased to

local and other businesses.Generally,the primary source of repayment is dependent upon income generatedfrom

the real estate collateral. The underwriting of these loans takes into considerationthe occupancy and rental rates,

as well as the financial health of the borrower.

Residential real estate (“RRE”) —

includes loans in these two classes:

●

Consumer mortgage

– primarily includes first or second lien mortgages and home equity lines of creditto

consumers that are secured by a primary residence or second home. These loans are underwritten inaccordance

with the Bank’s general loan policies andprocedures which require, among other things, proper documentation of

each borrower’s financial condition, satisfactory credit history,and property value.

●

Investment property

– primarily includes loans to finance income-producing 1-4 family residential properties.

Generally,the primary source of repayment is dependent upon income generatedfrom leasing the property

securing the loan. The underwriting of these loans takes into consideration the rental rates andproperty values, as

well as the financial health of the borrowers.

Consumer installment —

includes loans to individuals,which may be secured by personal property or are unsecured.Loans

include personal lines of credit, automobile loans, and other retail loans.These loans are underwritten in accordance with

the Bank’s general loan policies and procedureswhich require, among other things, proper documentation of each

borrower’s financial condition, satisfactory credit history,and, if applicable, property values.

16

The following is a summary of current, accruing past due, and nonaccrual loans by portfoliosegment and class as of

September 30, 2023 and December 31, 2022.

Accruing

Accruing

Total

30-89 Days

Greater than

Accruing

Non-

Total

(Dollars in thousands)

Current

Past Due

90 days

Loans

Accrual

Loans

September 30, 2023:

Commercial and industrial

$

65,813

39

—

65,852

162

$

66,014

Construction and land development

70,129

—

—

70,129

—

70,129

Commercial real estate:

Owner occupied

65,230

206

—

65,436

801

66,237

Hotel/motel

36,992

—

—

36,992

—

36,992

Multi-family

47,634

—

—

47,634

—

47,634

Other

131,101

—

—

131,101

—

131,101

Total commercial real estate

280,957

206

—

281,163

801

281,964

Residential real estate:

Consumer mortgage

59,799

—

—

59,799

225

60,024

Investment property

57,087

14

—

57,101

25

57,126

Total residential real estate

116,886

14

—

116,900

250

117,150

Consumer installment

10,297

56

—

10,353

—

10,353

Total

$

544,082

315

—

544,397

1,213

$

545,610

December 31, 2022:

Commercial and industrial

$

65,764

5

—

65,769

443

$

66,212

Construction and land development

66,479

—

—

66,479

—

66,479

Commercial real estate:

Owner occupied

61,125

—

—

61,125

—

61,125

Hotel/motel

33,378

—

—

33,378

—

33,378

Multi-family

41,084

—

—

41,084

—

41,084

Other

126,870

—

—

126,870

2,116

128,986

Total commercial real estate

262,457

—

—

262,457

2,116

264,573

Residential real estate:

Consumer mortgage

45,160

38

—

45,198

172

45,370

Investment property

52,278

—

—

52,278

—

52,278

Total residential real estate

97,438

38

—

97,476

172

97,648

Consumer installment

9,506

40

—

9,546

—

9,546

Total

$

501,644

83

—

501,727

2,731

$

504,458

17

Credit Quality Indicators

The credit quality of the loan portfolio is summarized no less frequently than quarterly using categoriessimilar to the

standard asset classification system used by the federal banking agencies.The following table presents credit quality

indicators for the loan portfolio segments and classes by year of origination as of September30, 2023.These categories are

utilized to develop the associated allowance for credit losses using historical losses adjustedfor qualitative and

environmental factors and are defined as follows:

●

Pass – loans which are well protected by the current net worth and paying capacity of theobligor (or guarantors, if

any) or by the fair value, less cost to acquire and sell, of any underlying collateral.

●

Special Mention – loans with potential weakness that may,if not reversed or corrected, weaken the credit or

inadequately protect the Company’s positionat some future date. These loans are not adversely classified and do

not expose an institution to sufficient risk to warrant an adverse classification.

●

Substandard Accruing – loans that exhibit a well-defined weakness which presently jeopardizesdebt repayment,

even though they are currently performing. These loans are characterized by the distinct possibilitythat the

Company may incur a loss in the future if these weaknesses are not corrected.

●

Nonaccrual – includes loans where management has determined that full paymentof principal and interest is not

expected.

(Dollars in thousands)

2023

2022

2021

2020

2019

Prior to

2019

Revolving

Loans

Total

Loans

September 30, 2023:

Commercial and industrial

Pass

$

8,403

15,220

14,164

5,760

7,447

8,138

6,283

$

65,415

Special mention

—

—

—

—

—

—

348

348

Substandard

56

—

27

—

6

—

—

89

Nonaccrual

—

—

—

—

162

—

—

162

Total commercial and industrial

8,459

15,220

14,191

5,760

7,615

8,138

6,631

66,014

Current period gross charge-offs

—

—

—

—

—

—

—

—

Construction and land development

Pass

34,977

30,923

1,735

1,562

131

162

639

70,129

Special mention

—

—

—

—

—

—

—

—

Substandard

—

—

—

—

—

—

—

—

Nonaccrual

—

—

—

—

—

—

—

—

Total construction and land development

34,977

30,923

1,735

1,562

131

162

639

70,129

Current period gross charge-offs

—

—

—

—

—

—

—

—

Commercial real estate:

Owner occupied

Pass

10,489

7,476

18,785

10,639

4,359

9,965

3,408

65,121

Special mention

263

—

—

—

—

—

—

263

Substandard

—

—

—

—

52

—

—

52

Nonaccrual

—

—

—

—

801

—

—

801

Total owner occupied

10,752

7,476

18,785

10,639

5,212

9,965

3,408

66,237

Current period gross charge-offs

—

—

—

—

—

—

—

—

Hotel/motel

Pass

6,437

9,981

3,234

1,539

3,952

11,849

—

36,992

Special mention

—

—

—

—

—

—

—

—

Substandard

—

—

—

—

—

—

—

—

Nonaccrual

—

—

—

—

—

—

—

—

Total hotel/motel

6,437

9,981

3,234

1,539

3,952

11,849

—

36,992

Current period gross charge-offs

—

—

—

—

—

—

—

—

18

(Dollars in thousands)

2023

2022

2021

2020

2019

Prior to

2019

Revolving

Loans

Total

Loans

September 30, 2023:

Multi-family

Pass

12,436

18,185

1,972

6,163

3,825

3,126

1,927

47,634

Special mention

—

—

—

—

—

—

—

—

Substandard

—

—

—

—

—

—

—

—

Nonaccrual

—

—

—

—

—

—

—

—

Total multi-family

12,436

18,185

1,972

6,163

3,825

3,126

1,927

47,634

Current period gross charge-offs

—

—

—

—

—

—

—

—

Other

Pass

16,532

36,560

32,107

14,053

10,902

19,004

914

130,072

Special mention

—

—

—

873

—

—

—

873

Substandard

—

—

—

156

—

—

—

156

Nonaccrual

—

—

—

—

—

—

—

—

Total other

16,532

36,560

32,107

15,082

10,902

19,004

914

131,101

Current period gross charge-offs

—

—

—

—

—

—

—

—

Residential real estate:

Consumer mortgage

Pass

18,918

20,284

2,731

2,694

1,492

12,771

79

58,969

Special mention

—

—

—

—

—

250

—

250

Substandard

—

—

—

—

—

580

—

580

Nonaccrual

—

—

—

118

—

107

—

225

Total consumer mortgage

18,918

20,284

2,731

2,812

1,492

13,708

79

60,024

Current period gross charge-offs

—

—

—

—

—

—

—

—

Investment property

Pass

11,594

12,822

9,564

12,984

5,763

2,373

1,473

56,573

Special mention

42

—

—

—

—

—

—

42

Substandard

—

249

—

237

—

—

—

486

Nonaccrual

—

—

—

—

—

25

—

25

Total investment property

11,636

13,071

9,564

13,221

5,763

2,398

1,473

57,126

Current period gross charge-offs

—

—

—

—

—

—

—

—

Consumer installment

Pass

4,699

4,189

861

251

126

167

—

10,293

Special mention

—

—

1

2

—

—

—

3

Substandard

12

24

8

13

—

—

—

57

Nonaccrual

—

—

—

—

—

—

—

—

Total consumer installment

4,711

4,213

870

266

126

167

—

10,353

Current period gross charge-offs

34

37

13

1

—

—

—

85

Total loans

Pass

124,485

155,640

85,153

55,645

37,997

67,555

14,723

541,198

Special mention

305

—

1

875

—

250

348

1,779

Substandard

68

273

35

406

58

580

—

1,420

Nonaccrual

—

—

—

118

963

132

—

1,213

Total loans

$

124,858

155,913

85,189

57,044

39,018

68,517

15,071

$

545,610

Total current period gross charge-offs

$

34

37

13

1

—

—

—

85

19

(Dollars in thousands)

Pass

Special

Mention

Substandard

Accruing

Nonaccrual

Total loans

December 31, 2022:

Commercial and industrial

$

65,550

7

212

443

$

66,212

Construction and land development

66,479

—

—

—

66,479

Commercial real estate:

Owner occupied

60,726

238

161

—

61,125

Hotel/motel

33,378

—

—

—

33,378

Multi-family

41,084

—

—

—

41,084

Other

126,700

170

—

2,116

128,986

Total commercial real estate

261,888

408

161

2,116

264,573

Residential real estate:

Consumer mortgage

44,172

439

587

172

45,370

Investment property

51,987

43

248

—

52,278

Total residential real estate

96,159

482

835

172

97,648

Consumer installment

9,498

1

47

—

9,546

Total

$

499,574

898

1,255

2,731

$

504,458

The following table is a summary of the Company’snonaccrual loans by major categories as of September 30, 2023and

December 31, 2022.

CECL

Incurred Loss

September 30, 2023

December 31, 2022

Nonaccrual

Nonaccrual

Total

Loans with

Loans with an

Nonaccrual

Nonaccrual

(Dollars in thousands)

No Allowance

Allowance

Loans

Loans

Commercial and industrial

$

162

—

162

$

443

Commercial real estate

801

—

801

2,116

Residential real estate

250

—

250

172

Total

$

1,213

—

1,213

$

2,731

The following table presents the amortized cost basis of collateral dependent loans, whichare individually evaluated to

determine expected credit losses:

(Dollars in thousands)

Real Estate

Business Assets

Total Loans

September 30, 2023:

Commercial and industrial

$

—

162

$

162

Commercial real estate

801

—

801

Total

$

801

162

$

963

Allowance for Credit Losses

The Company adopted ASC 326on January 1, 2023, which introduced the CECL methodology for estimating all expected

losses over the life of a financial asset. Under the CECL methodology,the allowance for credit losses is measured on a

collective basis for pools of loans with similar risk characteristics, and for loans that donot share similar risk characteristics

with the collectively evaluated pools, evaluations are performed on an individualbasis.

20

The following table details the changes in the allowance for credit losses by portfolio segment forthe respective periods.

September 30, 2023

(Dollars in thousands)

Commercial and

industrial

Construction

and land

development

Commercial

real estate

Residential

real estate

Consumer

installment

Total

Quarter ended:

Beginning balance

$

1,198

1,005

3,788

529

114

$

6,634

Charge-offs

—

—

—

—

(18)

(18)

Recoveries

1

—

—

2

1

4

Net recoveries (charge-offs)

1

—

—

2

(17)

(14)

Provision for credit losses

16

68

15

20

39

158

Ending balance

$

1,215

1,073

3,803

551

136

$

6,778

Nine months ended:

Beginning balance

$

747

949

3,109

828

132

$

5,765

Impact of adopting ASC 326

532

(17)

873

(347)

(22)

1,019

Charge-offs

—

—

—

—

(85)

(85)

Recoveries

197

—

—

12

3

212

Net recoveries (charge-offs)

197

—

—

12

(82)

127

Provision for credit losses

(261)

141

(179)

58

108

(133)

Ending balance

$

1,215

1,073

3,803

551

136

$

6,778

September 30, 2022

(Dollars in thousands)

Commercial and

industrial

Construction

and land

development

Commercial

real estate

Residential

real estate

Consumer

installment

Total

Quarter ended:

Beginning balance

$

761

576

2,523

753

103

$

4,716

Charge-offs

(13)

—

—

—

(3)

(16)

Recoveries

2

—

—

8

6

16

Net (charge-offs) recoveries

(11)

—

—

8

3

—

Provision for loan losses

(18)

213

38

22

(5)

250

Ending balance

$

732

789

2,561

783

101

$

4,966

Nine months ended:

Beginning balance

$

857

518

2,739

739

86

$

4,939

Charge-offs

(17)

—

—

—

(67)

(84)

Recoveries

6

—

22

22

61

111

Net (charge-offs) recoveries

(11)

—

22

22

(6)

27

Provision for loan losses

(114)

271

(200)

22

21

—

Ending balance

$

732

789

2,561

783

101

$

4,966

21

The following table presents an analysis of the allowance for loan losses and recordedinvestment in loans by portfolio

segment and impairment methodology as of September 30, 2022 as determined, priorto the adoption of ASC 326.

Collectively evaluated (1)

Individually evaluated (2)

Total

Allowance

Recorded

Allowance

Recorded

Allowance

Recorded

for loan

investment

for loan

investment

for loan

investment

(In thousands)

losses

in loans

losses

in loans

losses

in loans

September 30, 2022:

Commercial and industrial

$

732

70,685

—

—

732

70,685

Construction and land development

789

54,773

—

—

789

54,773

Commercial real estate

2,561

249,860

—

170

2,561

250,030

Residential real estate

783

91,598

—

—

783

91,598

Consumer installment

101

7,551

—

—

101

7,551

Total

$

4,966

474,467

—

170

4,966

474,637

(1)

Represents loans collectively evaluated for impairment,prior to the adopton of ASC 326, in accordance with ASC450-20,

Loss

Contingencies, and pursuant to amendments by ASU 2010-20regarding allowance for non-impaired loans.

(2)

Represents loans individually evaluated for impairment, priorto the adoption of ASC 326, in accordance with ASC310-30,

Receivables, and pursuant to amendments by ASU 2010-20 regardingallowance for impaired loans.

22

Impaired loans

The following tables present impaired loans at December 31, 2022 as determined underASC 310 prior to the adoption of

ASC 326.Loans that have been fully charged-off are not included in the followingtables. The related allowance generally

represents the following components that correspond to impaired loans:

●

Individually evaluated impaired loans equal to or greater than $500 thousand securedby real estate (nonaccrual

construction and land development, commercial real estate, and residential real estateloans).

●

Individually evaluated impaired loans equal to or greater than $250 thousand not securedby real estate

(nonaccrual commercial and industrial and consumer installment loans).

The following tables set forth certain information regarding the Company’simpaired loans that were individually evaluated

for impairment at December 31, 2022.

December 31, 2022

(Dollars in thousands)

Unpaid principal

balance (1)

Charge-offs and

payments applied

(2)

Recorded

investment (3)

Related allowance

With no allowance recorded:

Commercial and industrial

$

210

(1)

209

$

—

Commercial real estate:

Owner occupied

858

(3)

855

Total commercial real estate

858

(3)

855

—

Total

1,068

(4)

1,064

—

With allowance recorded:

Commercial and industrial

234

—

234

$

59

Commercial real estate:

Owner occupied

1,261

—

1,261

446

Total commercial real estate

1,261

—

1,261

446

Total

1,495

—

1,495

505

Totalimpaired loans

$

2,563

(4)

2,559

$

505

(1) Unpaid principal balance represents the contractual obligationdue from the customer.

(2) Charge-offs and payments applied represents cumulative charge-offs taken, as wellas interest payments that have been

applied against the outstanding principal balance subsequentto the loans being placed on nonaccrual status.

(3) Recorded investment represents the unpaid principal balanceless charge-offs and payments applied; it is shown before

any related allowance for loan losses.

23

Pursuant to the adoption of ASU 2022-02, effective January 1, 2023,the Company prospectively discontinued the

recognition and measurement guidance previously required fortroubled debt restructurings (TDRs).As of September 30,

2023, the Company had no loans that would have previously requireddisclosure as TDRs.

The following table provides the average recorded investment in impaired loans, ifany, by portfoliosegment, and the

amount of interest income recognized on impaired loans after impairment by portfoliosegment and class during the quarter

and nine months ended September 30, 2022 as determined under ASC 310prior to the adoption of ASC 326.

Quarter ended September 30, 2022

Nine months ended September 30, 2022

Average

Total interest

Average

Total interest

recorded

income

recorded

income

(Dollars in thousands)

investment

recognized

investment

recognized

Impaired loans:

Commercial real estate:

Other

$

173

—

$

199

—

Total commercial real estate

173

—

199

—

Residential real estate:

Investment property

—

—

6

—

Total residential real estate

—

—

6

—

Total

$

173

—

$

205

—

NOTE 6: MORTGAGE SERVICINGRIGHTS, NET

Mortgage servicing rights (“MSRs”) are recognized based on the fair value of theservicing rights on the date the

corresponding mortgage loans are sold.An estimate of the fair value of the Company’s MSRs isdetermined using

assumptions that market participants would use in estimating future net servicingincome, including estimates of

prepayment speeds, discount rates, default rates, costs to service, escrow account earnings,contractual servicing fee

income, ancillary income, and late fees.Subsequent to the date of transfer, the Companyhas elected to measure its MSRs

under the amortization method.Under the amortization method, MSRs are amortized in proportion to, and overthe period

of, estimated net servicing income.

The Company generally sells, without recourse, conforming, fixed-rate, closed-end,residential mortgages to Fannie Mae,

where the Company services the mortgages sold and records MSRs.MSRs are included in other assets on the

accompanying consolidated balance sheets.

The Company evaluates MSRs for impairment on a quarterly basis.Impairment is determined by stratifying MSRs into

groupings based on predominant risk characteristics, such as interest rate and loan type.If, by individual stratum, the

carrying amount of the MSRs exceeds fair value, a valuation allowance is established.The valuation allowance is adjusted

as the fair value changes.Changes in the valuation allowance are recognized in earnings as a componentof mortgage

lending income.

24

The following table details the changes in amortized MSRs and the related valuation allowance forthe respective periods.

Quarter ended September 30,

Nine months ended September 30,

(Dollars in thousands)

2023

2022

2023

2022

MSRs, net:

Beginning balance

$

1,050

$

1,259

$

1,151

$

1,309

Additions, net

7

13

16

110

Amortization expense

(46)

(64)

(156)

(211)

Ending balance

$

1,011

$

1,208

$

1,011

$

1,208

Valuationallowance included in MSRs, net:

Beginning of period

$

—

$

—

$

—

$

—

End of period

—

—

—

—

Fair value of amortized MSRs:

Beginning of period

$

2,312

$

2,547

$

2,369

$

1,908

End of period

2,351

2,478

2,351

2,478

NOTE 7: FAIR VALUE

Fair ValueHierarchy

“Fair value” is defined by ASC 820,

Fair ValueMeasurements and Disclosures

, and focuses on the exit price, i.e., the price

that would be received to sell an asset or paid to transfer a liability in an orderly transaction occurringin the principal

market (or most advantageous market in the absence of a principalmarket) for an asset or liability at the measurement date.

GAAP establishes a fair value hierarchy for valuation inputs that gives the highest priorityto quoted prices in active

markets for identical assets or liabilities and the lowest priority to unobservable inputs.The fair value hierarchy is as

follows:

Level 1—inputs to the valuation methodology are quoted prices, unadjusted, for identicalassets or liabilities in active

markets.

Level 2—inputs to the valuation methodology include quoted prices for similar assets andliabilities in active markets,

quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs thatare observable for the

asset or liability, either directly orindirectly.

Level 3—inputs to the valuation methodology are unobservable and reflect theCompany’s own assumptions about the

inputs market participants would use in pricing the asset or liability.

Level changes in fair value measurements

Transfers between levels of the fair value hierarchy are generallyrecognized at the end of each reporting period.The

Company monitors the valuation techniques utilized for each category offinancial assets and liabilities to ascertain when

transfers between levels have been affected.The nature of the Company’s financial assetsand liabilities generally is such

that transfers in and out of any level are expected to be infrequent. For the ninemonths ended September 30, 2023, there

were no transfers between levels and no changes in valuation techniques for the Company’sfinancial assets and liabilities.

25

Assets and liabilities measured at fair value on a recurringbasis

Securities available-for-sale

Fair values of securities available for sale were primarily measured usingLevel 2 inputs.For these securities, the Company

obtains pricing data from third party pricing services.These third party pricing services consider observable data thatmay

include broker/dealer quotes, market spreads, cash flows, benchmark yields, reportedtrades for similar securities, market

consensus prepayment speeds, credit information, and the securities’ terms andconditions.On a quarterly basis,

management reviews the pricing data received from the third party pricing servicesfor reasonableness given current market

conditions.As part of its review, managementmay obtain non-binding third party broker/dealer quotes to validate the fair

value measurements.In addition, management will periodically submit pricing informationprovided by the third party

pricing services to another independent valuation firm on a sample basis.This independent valuation firm will compare the

pricesprovided by the third party pricing service with its own pricesand will review the significant assumptions and

valuation methodologies used with management.

The following table presents the balances of the assets and liabilities measured at fair valueon a recurring basis as of

September 30, 2023 and December 31, 2022, respectively,by caption, on the accompanying consolidated balance sheets by

ASC 820 valuation hierarchy (as described above).

Quoted Prices in

Significant

Active Markets

Other

Significant

for

Observable

Unobservable

Identical Assets

Inputs

Inputs

(Dollars in thousands)

Amount

(Level 1)

(Level 2)

(Level 3)

September 30, 2023:

Securities available-for-sale:

Agency obligations

$

122,750

—

122,750

—

Agency MBS

192,457

—

192,457

—

State and political subdivisions

58,079

—

58,079

—

Total securities available-for-sale

373,286

—

373,286

—

Totalassets at fair value

$

373,286

—

373,286

—

December 31, 2022:

Securities available-for-sale:

Agency obligations

$

125,617

—

125,617

—

Agency MBS

218,160

—

218,160

—

State and political subdivisions

61,527

—

61,527

—

Total securities available-for-sale

405,304

—

405,304

—

Totalassets at fair value

$

405,304

—

405,304

—

Assets and liabilities measured at fair value on a nonrecurringbasis

Collateral Dependent Loans

Collateral dependent loans are measured at the fair value of the collateral securing the loanless estimated selling costs. The

fair value of real estate collateral is determined based on real estate appraisalswhich are generally based on recent sales of

comparable properties which are then adjusted for property specific factors.Non-real estate collateral is valued based on

various sources, including third party asset valuations and internally determinedvalues based on cost adjusted for

depreciation and other judgmentally determined discount factors. Collateraldependent loans are classified within Level 3 of

the hierarchy due to the unobservable inputs used in determining their fair value such as collateralvalues and the borrower's

underlying financial condition.

26

Mortgage servicing rights, net

MSRs, net, included in other assets on the accompanying consolidated balance sheets,are carried at the lower of cost or

estimated fair value.MSRs do not trade in an active market with readily observable prices.To determine the fairvalue of

MSRs, the Company engages an independent third party.The independent third party’svaluation model calculates the

present value of estimated future net servicing income using assumptions thatmarket participants would use in estimating

future net servicing income, including estimates of mortgage prepayment speeds,discount rates, default rates, costs to

service, escrow account earnings, contractual servicing fee income, ancillaryincome, and late fees.Periodically, the

Company will review broker surveys and other market research tovalidate significant assumptions used in the model.The

significant unobservable inputs include mortgage prepayment speeds orthe constant prepayment rate (“CPR”) and the

weighted average discount rate.Because the valuation of MSRs requires the use of significant unobservable inputs, all of

the Company’s MSRs are classifiedwithin Level 3 of the valuation hierarchy.

The following table presents the balances of the assets and liabilities measured at fair valueon a nonrecurring basis as of

September 30, 2023 and December 31, 2022, respectively,by caption, on the accompanying consolidated balance sheets

and by FASB ASC 820valuation hierarchy (as described above):

Quoted Prices in

Active Markets

Other

Significant

for

Observable

Unobservable

Carrying

Identical Assets

Inputs

Inputs

(Dollars in thousands)

Amount

(Level 1)

(Level 2)

(Level 3)

September 30, 2023:

Loans, net

(1)

963

—

—

963

Other assets

(2)

1,011

—

—

1,011

Total assets at fair value

$

1,974

—

—

1,974

December 31, 2022:

Loans, net

(3)

2,054

—

—

2,054

Other assets

(2)

1,151

—

—

1,151

Total assets at fair value

$

3,205

—

—

3,205

(1)

Loans considered collateral dependent under ASC 326.

(2)

Represents MSRs, net, carried at lower of cost orestimated fair value.

(3)

Loans considered impaired under ASC 310-10-35 Receivables,prior to the adoption of ASC 326.This amount reflects the recorded

investment in impaired loans, net of any related allowancefor loan losses.

Quantitative Disclosures for Level 3 Fair ValueMeasurements

At September 30, 2023 and December 31, 2022, the Company had no Level 3 assetsmeasured at fair value on a recurring

basis.For Level 3 assets measured at fair value on a non-recurring basis at September30, 2023 and and December 31,

2022, the significant unobservable inputs used in the fair value measurements andthe range of such inputs with respect to

such assets are presented below.

Range of

Weighted

Carrying

Significant

Unobservable

Average

(Dollars in thousands)

Amount

Valuation Technique

Unobservable Input

Inputs

of Input

September 30, 2023:

Collateral dependent loans

$

963

Appraisal

Appraisal discounts

10.0

-

10.0

%

10.0

%

Mortgage servicing rights, net

1,011

Discounted cash flow

Prepayment speed or CPR

7.1

-

19.7

7.3

Discount rate

9.5

-

11.5

9.5

December 31, 2022:

Impaired loans

$

2,054

Appraisal

Appraisal discounts

10.0

-

10.0

%

10.0

%

Mortgage servicing rights, net

1,151

Discounted cash flow

Prepayment speed or CPR

5.2

-

18.6

7.5

Discount rate

9.5

-

11.5

9.5

27

Fair Valueof Financial Instruments

ASC 825,

Financial Instruments

, requires disclosure of fair value information about financial instruments,whether or not

recognized on the face of the balance sheet, where it is practicable toestimate that value. The assumptions used in the

estimation of the fair value of the Company’sfinancial instruments are explained below.Where quoted market prices are

not available, fair values are based on estimates using discounted cash flow analyses.Discounted cash flows can be

significantly affected by the assumptions used, including the discount rateand estimates of future cash flows. The

following fair value estimates cannot be substantiated by comparison to independentmarkets and should not be considered

representative of the liquidation value of the Company’sfinancial instruments, but rather are good-faith estimatesof the fair

value of financial instruments held by the Company.ASC 825 excludes certain financial instruments and all nonfinancial

instruments from its disclosure requirements.

The following methods and assumptions were used by the Company in estimating the fairvalue of its financial instruments:

Loans, net

Fair values for loans were calculated using discounted cash flows. The discount rates reflectedcurrent rates at which similar

loans would be made for the same remaining maturities. Expected future cashflows were projected based on contractual

cash flows, adjusted for estimated prepayments.The fair value of loans was measured using an exit price notion.

Time Deposits

Fair values for time deposits were estimated using discounted cash flows. Thediscount rates were based on rates currently

offered for deposits with similar remaining maturities.

The carrying value,related estimated fair value, and placement in the fair value hierarchy of the Company’sfinancial

instruments at September 30, 2023 and December 31, 2022 are presented below.This table excludes financial instruments

for which the carrying amount approximates fair value.Financial assets for which fair value approximates carrying value

included cash and cash equivalents.Financial liabilities for which fair value approximates carrying value included

noninterest-bearing demand deposits,interest-bearing demand deposits, and savings deposits.Fair value approximates

carrying value in these financial liabilities due to these products having no statedmaturity.Additionally, financial

liabilities for which fair value approximates carrying value included overnightborrowings such as federal funds purchased

and securities sold under agreements to repurchase.

The following table summarizes our fair value estimates:

Fair Value Hierarchy

Carrying

Estimated

Level 1

Level 2

Level 3

(Dollars in thousands)

amount

fair value

inputs

inputs

Inputs

September 30, 2023:

Financial Assets:

Loans, net (1)

$

538,832

$

501,725

$

—

$

—

$

501,725

Financial Liabilities:

Time Deposits

$

193,575

$

189,310

$

—

$

189,310

$

—

December 31, 2022:

Financial Assets:

Loans, net (1)

$

498,693

$

484,007

$

—

$

—

$

484,007

Financial Liabilities:

Time Deposits

$

150,375

$

150,146

$

—

$

150,146

$

—

(1) Represents loans, net of allowance for credit losses.The fair value of loans was measured using anexit price notion.

28

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTSOF

OPERATIONS

General

Auburn National Bancorporation, Inc. (the “Company”) is a bank holding company registeredwith the Board of Governors

of the Federal Reserve System (the “Federal Reserve”) under the Bank Holding CompanyAct of 1956, as amended (the

“BHC Act”). The Company was incorporated in Delaware in 1990, and in 1994it succeeded its Alabama predecessor as the

bank holding company controlling AuburnBank, an Alabama statemember bank with its principal office in Auburn,

Alabama (the “Bank”). The Company and its predecessor have controlled the Bank since1984.As a bank holding

company, the Companymay diversify into a broader range of financial services and other business activities than currently

are permitted to the Bank under applicable laws and regulations.The holding company structure also provides greater

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

The Bank has operated continuously since 1907 and currently conducts its businessprimarily in East Alabama, including

Lee County and surrounding areas.The Bank has been a member of the Federal Reserve System since April 1995.The

Bank’s primary regulators are the Federal Reserveand the Alabama Superintendent of Banks (the “Alabama

Superintendent”).The Bank has been a member of the FHLB of Atlanta since 1991. Certain of the statementsmade in this

discussion and analysis and elsewhere, including information incorporatedherein by reference to other documents, are

“forward-looking statements” as more fully described under “SpecialCautionary Notice Regarding Forward-Looking

Statements” below.

The following discussion and analysis is intended to provide a betterunderstanding 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 consolidatedfinancial statements and related

notes for the quarters and nine months ended September 30, 2023 and 2022,as well as the information contained in our

annual report on Form 10-K for the year ended December 31, 2022 and ourinterim reports on Form 10-Q for the quarters

ended March 31, 2023 and June 30, 2023.

Special Cautionary Notice Regarding Forward-Looking Statements

Variousof the statements made herein under the captions “Management’sDiscussion and Analysis of Financial Condition

and Results of Operations”, “Quantitative and Qualitative Disclosures about MarketRisk”, “Risk Factors” “Description of

Property” and elsewhere, are “forward-looking statements” within themeaning 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 involveknown and unknown risks,

uncertainties and other factors, which may be beyond our control, andwhich may cause the actual results, performance,

achievements or financial condition of the Company to be materially differentfrom future results, performance,

achievements or financial condition expressed or implied by such forward-lookingstatements.Youshould not expect us to

update any forward-looking statements.

All statements other than statements of historical fact are statements that could be forward-lookingstatements.Youcan

identify these forward-looking statements through our use of words such as“may,” “will,” “anticipate,”“assume,”

“should,” “indicate,” “would,” “believe,” “contemplate,” “expect,”“estimate,” “continue,” “designed”, “plan,” “point to,”

“project,” “could,” “intend,” “seeks,” “model,” “simulations,” “target”,“view”, and other similar words and expressions of

the future.These forward-looking statements may not be realized due to a variety offactors, including, without limitation:

●

the effects of future economic, business and market conditions andchanges, foreign, domestic and local, including

inflation, seasonality, naturaldisasters or climate change, such as rising sea and water levels, hurricanes and

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

changes in consumer behaviors;

●

the effects of war or other conflicts, acts of terrorism, trade restrictions, sanctions orother events that may affect

general economic conditions;

29

●

governmental monetary and fiscal policies, including the continuing effectsof fiscal and monetary stimuli in

response to the COVID-19 crisis, followed by changes in monetary policies beginning inMarch 2022 in response

to inflation, including increases in the Federal Reserve’starget federal funds rate and reductions in the Federal

Reserve’s holdings of securities;

●

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, andchanges in the scope and cost

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

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

and May 2023;

●

the failure of assumptions and estimates, as well as differences in, and changes to, economic,market and credit

conditions, including changes in borrowers’ credit risks and payment behaviors fromthose used in our loan

portfolio reviews;

●

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

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

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

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

●

the risks of further increases in market interest rates creating additional unrealizedlosses on our securities

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

financial reporting purposes;

●

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 typesof instruments that

may be included as capital for regulatory purposes;

●

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

●

the effects of competition from a wide variety of local, regional, nationaland other providers of financial,

investment and insurance services, including the disruptive effectsof financial technology and other competitors

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

to federal income taxation;

●

the failure of assumptions and estimates underlying the establishment of allowancesfor credit losses, including

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

●

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

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 andpossible failures to achieve

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

●

changes in technology or products that may be more difficult, costly,or less effective than anticipated;

●

cyber-attacks and data breaches that may compromise our systems, ourvendors’ systems or customers’

information;

●

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 futuretaxable 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 ofnet operating loss

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

30

●

other factors and risks described herein and under “Risk Factors” in our annual reporton Commission Form 10-K

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

Securities and Exchange Commission (the “Commission” or “SEC”) underthe Exchange Act.

All written or oral forward-looking statements that are we make or areattributable to us are expressly qualified in their

entirety by this cautionary notice.We have no obligation anddo 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 whichsuch statements otherwise are

made.

Summary of Results of Operations

Quarter ended September 30,

Nine months ended September 30,

(Dollars in thousands, except per share amounts)

2023

2022

2023

2022

Net interest income (a)

$

6,380

$

7,360

$

20,591

$

20,034

Less: tax-equivalent adjustment

108

117

322

339

Net interest income (GAAP)

6,272

7,243

20,269

19,695

Noninterest income

865

852

2,448

2,608

Total revenue

7,137

8,095

22,717

22,303

Provision for credit losses

105

250

(191)

—

Noninterest expense

5,362

5,415

16,791

15,374

Income tax expense

182

432

737

1,049

Net earnings

$

1,488

$

1,998

$

5,380

$

5,880

Basic and diluted earnings per share

$

0.43

$

0.57

$

1.54

$

1.67

(a) Tax-equivalent.See "Table 1 - Explanation of Non-GAAPFinancial Measures."

Financial Summary

The Company’s net earnings were $5.4million for the first nine months of 2023,compared to $5.9 million for the first nine

months of 2022.Basic and diluted earnings per share were $1.54 per share for the first ninemonths of 2023, compared to

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

Net interest income (tax-equivalent) was $20.6 million for the firstnine months of 2023, a 3% increase compared to $20.0

million for the first nine months of 2022.This increase was primarily due to improvements in the Company’snet interest

margin.The Company’s net interestmargin (tax-equivalent) was 2.97%for the first nine months of 2023 compared to

2.67% for the first nine months of 2022.This increase was primarily due to a more favorable asset mix and higheryields

on interest earning assets.These higher yields on interest earning assets were partially offsetby increased cost of funds.

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

See “Results of Operations – AverageBalance Sheet and Interest Rates” and “Net Interest Income and Margin”below.

At September 30, 2023, the Company’s allowancefor credit losses was $6.8million, or 1.24% of total loans, compared to

$5.8 million, or 1.14% of total loans, at December 31, 2022, and $5.0 million, or1.05% of total loans, at September 30,

2022.The implementation of CECL required pursuant to Accounting StandardsCodification (“ASC”) 326, which was

effective January 1, 2023, increased our allowance for credit losses by $1.0million, or 0.20% of total loans, as a day one

transition adjustment.

The Company recorded a negative provision for credit losses during the firstnine months of 2023 of $0.2million,

compared to none during the first nine months of 2022.The provision for credit losses under CECL is reflective of the

Company’s credit risk profile and the future economicoutlook and forecasts.Our CECL model is largely influenced by

economic factors including, most notably,the anticipated unemployment rate.The negative provision for credit losses

during the first nine months of 2023 was primarily related to the resolution of a collateraldependent nonperforming loan,

with a recorded investment of $1.3 million and a corresponding allowance of $0.5million, that was collected in full during

the second quarter of 2023.This was partially offset by an increase in the calculation of current expectedcredit losses due

to loan growth during the first nine months of 2023.

31

Noninterest income was $2.4 million in the first nine months of 2023,compared to $2.6 million in the first nine months of

2022.The decrease in noninterest income was primarily due to a decrease in mortgage lendingincome of $0.2million as a

result of higher market interest rates for mortgage loans.

Noninterest expense was $16.8 million in the first nine months of 2023,compared to $15.4 million for the first nine months

of 2022.The increase in noninterest expense was primarily due to an increase in net occupancyand equipment expense of

$0.4million related to the Company’s new headquarters,which opened in June 2022, professional fees expense of $0.2

million, and other noninterest expense of $0.9million.

Income tax expense was $0.7million for the first nine months of 2023 compared to $1.0 million for the first nine months of

2022.This decrease was due to a decline in the level of earnings before taxes and the Company’seffective tax rate.The

Company's effective tax rate for the first nine months of 2023was 12.05%, compared to 15.14% in the first nine months of

2022.The Company’s effective incometax rate is principally affected by tax-exempt earnings from the Company’s

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

The Company paid cash dividends of $0.81 per share in the first nine months of 2023,an increase of 2% from the same

period of 2022.The Company repurchased 10,108 shares for $0.2 million during the first ninemonths of 2023.At

September 30, 2023, the Bank’s regulatory capital ratioswere well above the minimum amounts required to be “well

capitalized” under current regulatory standards with a total risk-based capitalratio of 15.98%, a tier 1 leverage ratio of

10.26% and a common equity tier 1 (“CET1”) ratio of 15.01% at September 30,2023.At September 30,2023, the

Company’s equity to total assets ratiowas 5.96%, compared to 6.65% at December 31, 2022, and 5.74% at September 30,

2022.

For the third quarter of 2023, net earnings were $1.5 million, or $0.43 pershare, compared to $2.0 million, or $0.57 per

share, for the third quarter of 2022.Net interest income (tax-equivalent) was $6.4 million for the third quarter of 2023

compared to $7.4 million for the third quarter of 2022.This decrease was primarily due to decline in the Company’snet

interest margin.The Company’s net interestmargin (tax-equivalent) was 2.73%in the third quarter of 2023 compared to

3.00%in the third quarter of 2022.The decrease was primarily due to increased cost of funds and changes in our deposit

mix, which was partially offset by a more favorable assetmix and higher yields on interest earning assets.The Company

recorded a provision for credit losses during the third quarter of 2023of $0.1million, compared to $0.3 million for the third

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

$5.4 million in the third quarter of 2023 and 2022.Income tax expense was $0.2million for the third quarter of 2023,

compared to $0.4 million for the third quarter of 2022.This decrease was due to a decline in the level of earnings before

taxes and the Company’s effectivetax rate.The Company's effective tax rate for the third quarter of 2023 was 10.90%,

compared to 17.78% in the third quarter of 2022.The Company’s effective incometax rate is principally impacted by tax-

exempt earnings from the Company’s investmentin municipal securities, bank-owned life insurance, and New Markets Tax

Credits.

CRITICAL ACCOUNTING POLICIES

The accounting principles we follow and our methods of applying these principlesconform with U.S. GAAP and with

general practices within the banking industry.The accounting policies which we believe to be most critical in preparing our

Consolidated Financial Statements are presented in the section titled“Critical Accounting Policies” in Management’s

Discussion and Analysis of Financial Condition and Results of Operations includedin the Company’s AnnualReport on

Form 10-K for the year ended December 31, 2022.On January 1, 2023, we adopted FASBASU 2016-13

Financial

Instruments - Credit Losses

(Topic326) which significantly changes our methodology for determining our allowancefor

credit losses, and ASU 2022-02

, Financial Instruments – Credit Losses (Topic326): TroubledDebt Restructurings and

Vintage Disclosures

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

certain loan refinancings and restructurings by creditors when a borrower is experiencingfinancial difficulty.See

Note 1.

Summary of Significant Accounting Policies

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

10-Q for further information related to these changes. There have been no other significantchanges to our Critical

Accounting Estimates as described in our Form 10-K.

32

RESULTSOF OPERATIONS

AverageBalance Sheet and Interest Rates

Nine months ended September 30,

2023

2022

Average

Yield/

Average

Yield/

(Dollars in thousands)

Balance

Rate

Balance

Rate

Loans and loans held for sale

$

514,706

4.71%

$

442,613

4.42%

Securities - taxable

344,136

2.13%

371,595

1.69%

Securities - tax-exempt

54,615

3.75%

60,034

3.59%

Total securities

398,751

2.35%

431,629

1.95%

Federal funds sold

4,372

4.86%

54,924

0.76%

Interest bearing bank deposits

8,118

4.66%

73,630

0.82%

Total interest-earning assets

925,947

3.70%

1,002,796

2.89%

Deposits:

NOW

189,586

0.75%

201,792

0.13%

Savings and money market

291,988

0.63%

335,005

0.20%

Time deposits

168,000

1.99%

155,824

0.84%

Total interest-bearing deposits

649,574

1.02%

692,621

0.32%

Short-term borrowings

3,748

2.43%

3,969

0.50%

Total interest-bearing liabilities

653,322

1.02%

696,590

0.32%

Net interest income and margin (tax-equivalent)

$

20,591

2.97%

$

20,034

2.67%

Net Interest Income and Margin

Net interest income (tax-equivalent) was $20.6 million for the first nine monthsof 2023, a 3% increase compared to $20.0

million for the first nine months of 2022.This increase was primarily due to improvements in the Company’snet interest

margin (tax-equivalent).The Company’s net interestmargin (tax-equivalent) was 2.97% in the first nine months of 2023

compared to 2.67% in the first nine months of 2022.This increase was primarily due to a more favorable asset mix and

higher yields on interest earning assets.These higher yields on interest earning assets were partially offset byincreased

cost of funds.The cost of funds increased to 102 basis points, compared to 32 basis points in the firstnine months of 2022.

Since March of 2022, the Federal Reserve increased the target federalfunds range from 0 – 0.25% to 5.25 – 5.50%.

The tax-equivalent yield on total interest-earning assets increased by 81 basis pointsto 3.70% in the first nine months of

2023 compared to 2.89% in the first nine months of 2022.This increase was primarily due to changes in our asset mix and

higher market interest rates on interest earning assets.

The cost of total interest-bearing liabilities increased by 70 basis points to1.02% in the first nine months of 2023 compared

to 0.32% in the first nine months of 2022.Our deposit costs may continue to increase as the Federal Reserve maintains or

increases its target federal funds rate, market interest rates increase,and as customer behaviors change as a result of

inflation and higher market interest rates, and we compete for deposits against other banks,money market mutual funds,

Treasury securities and other interest bearing alternative investments.

The Company continues to deploy various asset liability management strategiesto manage its risks from interest rate

fluctuations. Deposit and loan pricing remain competitive in ourmarkets.We believe this challengingrate environment

will continue throughout 2023.Our ability to compete and manage our deposit costs until our interest-earning assets

reprice and we generate new fixed rate loans with current market interest rateswill be important to our net interest margin

during the monetary tightening cycle that we believe will continue throughout2023 and into 2024.

33

Provision for Credit Losses

On January 1, 2023, we adopted ASC 326,which introduces the current expected credit losses (CECL) methodology and

requires us to estimate all expected credit losses over the remaining life of our loans.Accordingly, the provision for credit

losses represents a charge to earnings necessary to establish an allowancefor credit losses that, in management's evaluation,

is adequate to provide coverage for all expected credit losses. The Company recordeda negative provision for credit losses

during the first nine months of 2023 of $0.2million, compared to none during the first nine months of 2022.Provision

expense is affected by organic loan growth in our loan portfolio,our internal assessment of the credit quality of the loan

portfolio, our expectations about future economic conditions and net charge-offs.Our CECL model is largely influenced

by economic factors including, most notably,the anticipatedunemployment rate, which may be affected by monetary

policy.The negative provision for credit losses during the first nine months of 2023was primarily related to the resolution

of a collateral dependent nonperforming loan, with a recorded investment of $1.3million and a corresponding allowance of

$0.5 million, that was collected in full during the second quarter of 2023.This was partially offset by an increase in the

calculation of current expected credit losses due to loan growth during the first ninemonths of 2023.

Our allowance for credit losses reflects an amount we believe appropriate,based on our allowance assessment

methodology, to adequately coverall expected credit losses as of the date the allowance is determined.At September 30,

2023, the Company’s allowancefor credit losses was $6.8 million, or 1.24% of total loans, compared to $5.8million, or

1.14% of total loans, at December 31, 2022, and $5.0 million, or 1.05% of total loans, at September30, 2022.The

implementation of CECL, as of January 1, 2023, increased our allowance for creditlosses by $1.0 million, or 0.20% of total

loans, as a day one transition adjustment to ASC 326.

Noninterest Income

Quarter ended September 30,

Nine months ended September 30,

(Dollars in thousands)

2023

2022

2023

2022

Service charges on deposit accounts

$

148

$

158

$

456

$

446

Mortgage lending income

110

126

345

566

Bank-owned life insurance

87

97

311

293

Securities gains, net

—

44

—

44

Other

520

427

1,336

1,259

Total noninterest income

$

865

$

852

$

2,448

$

2,608

The Company’s income from mortgage lendingis 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 lossesfrom the sale of the mortgage

loans originated, origination fees, underwriting fees, and other fees associatedwith the origination of loans, which are

netted against the commission expense associated with these originations. TheCompany’s normal practice is to originate

mortgage loans for sale in the secondary market and to either sell or retain the associatedMSRs when the loan is sold.

MSRs are recognized based on the fair value of the servicing right on the datethe corresponding mortgage loan is sold.

Subsequent to the date of transfer, the Companyhas elected to measure its MSRs under the amortization method.Servicing

fee income is reported net of any related amortization expense.

The Company evaluates MSRs for impairment on a quarterly basis.Impairment is determined by grouping MSRs by

common predominant characteristics, such as interest rate and loan type.If the aggregate carrying amount of a particular

group of MSRs exceeds the group’s aggregate fairvalue, a valuation allowance for that group is established.The valuation

allowance is adjusted as the fair value changes.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 decreasein the fair value of MSRs.

The following table presents a breakdown of the Company’smortgage lending income.

Quarter ended September 30,

Nine months ended September 30,

(Dollars in thousands)

2023

2022

2023

2022

Origination income

$

20

$

39

$

81

$

315

Servicing fees, net

90

87

264

251

Total mortgage lending income

$

110

$

126

$

345

$

566

34

The Company’s income from mortgage lendingtypically fluctuates as mortgage interest rates change and is primarily

attributable to the origination and sale of mortgage loans. Origination income decreasedas market interest rates on

mortgage loans increased and mortgage loan volumes also decreased.The decrease in origination income was partially

offset by an increase in mortgage servicing fees, net of relatedamortization expense as mortgage prepayment speeds

slowed, resulting in decreased amortization expense.

Income from bank-owned life insurance was $311thousand and $293 thousand for the nine months ended September 30,

2023 and 2022, respectively.Excluding a $52 thousand non-taxable death benefit received during 2023, income from

bank-owned life insurance would have been $259 thousand and $293thousand for the nine months ended September 30,

2023 and 2022, respectively.

Noninterest Expense

Quarter ended September 30,

Nine months ended September 30,

(Dollars in thousands)

2023

2022

2023

2022

Salaries and benefits

$

2,844

$

2,975

$

8,809

$

8,901

Net occupancy and equipment

755

794

2,341

1,955

Professional fees

261

235

898

704

Other

1,502

1,411

4,743

3,814

Total noninterest expense

$

5,362

$

5,415

$

16,791

$

15,374

Salaries and benefits decreased for both the quarter and nine months ended September30, 2023.A decrease in the number

of full-time equivalents was partially offset by routine annualincreases in salaries and wages.

The increase in net occupancy and equipment expenses was primarily due to increasedexpenses related to the Company’s

new headquarters in downtown Auburn.This amount includes depreciation expense and other costs associatedwith

operating the new headquarters.The Company relocated its main office branch and bank operations into itsnewly

constructed headquarters during June 2022.

The increase in other noninterest expense was due to various items includingFDIC assessments, software costs, ATMand

checkcard expenses, impairment related to a new market tax credit investment, due to theremaining tax credit being less

than the Company’s investment,and a gain on sale of other real estate owned that was realized in the 2022.

Income TaxExpense

Income tax expense was $0.7 million for the first nine months of 2023compared to $1.0 million for the the first nine

months of 2022.This decrease was due to a decline in the level of earnings before taxes and the Company’seffective tax

rate.The Company’s effectiveincome tax rate for the first nine months of 2023 was 12.05%, compared to15.14% in the

first nine months of 2022.The Company’s effective incometax rate is principally impacted by tax-exempt earnings from

the Company’s investments inmunicipal securities, bank-owned life insurance, and New Markets TaxCredits.

BALANCE SHEETANALYSIS

Securities

Securities available-for-sale were $373.3million at September 30, 2023, compared to $405.3 million at December 31,

2022.This decrease reflects a $21.2 million decrease in the amortized cost basis of securitiesavailable-for-sale and a

decrease in the fair value of securities available-for-sale of $10.8 million.The average annualized tax-equivalent yields

earned on total securities were 2.35%in the first nine months of 2023 and 1.95% in the first nine months of 2022.

35

Loans

2023

2022

Third

Second

First

Fourth

Third

(In thousands)

Quarter

Quarter

Quarter

Quarter

Quarter

Commercial and industrial

$

66,014

61,880

59,602

66,212

70,715

Construction and land development

70,129

63,874

66,500

66,479

54,773

Commercial real estate

281,964

275,801

267,962

264,573

249,527

Residential real estate

117,150

109,834

101,975

97,648

91,469

Consumer installment

10,353

9,022

9,002

9,546

7,551

Total loans

$

545,610

520,411

505,041

504,458

474,035

Total loanswere $545.6 million at September 30, 2023, an 8% increase compared to $504.5 million at December 31,2022.

Four loan categories represented the majority of the loan portfolio at September 30,2023: commercial real estate (52%),

residential real estate (21%), commercial and industrial (12%) and construction andland development (13%).

Approximately 23% of the Company’s commercialreal estate loans were classified as owner-occupied at September 30,

2023.

Within the residential real estate portfolio segment, the Companyhad junior lien mortgages of approximately $8.7 million,

or 2% of total loans, and $7.4million, or 1%, of total loans at September 30, 2023 and December 31, 2022, respectively.

For residential real estate mortgage loans with a consumer purpose, the Company hadno loans that required interest only

payments at September 30, 2023 and December 31, 2022. The Company’sresidential real estate mortgage portfolio does

not include any option or hybrid ARM loans, subprime loans, or any material amount of otherconsumer mortgage products

which are generally viewed as high risk.

The average yield earned on loans and loans held for sale was 4.71% in the first nine months of2023 and 4.42% in the first

nine months of 2022.

The specific economic and credit risks associated with our loan portfolio include,but are not limited to, the effects of

current economic conditions, including inflation and the continuing increases inmarket interest rates, remaining COVID-19

pandemic effects including supply chain disruptions, reducedcommercial office occupancy levels, housing supply

shortages and inflation on our borrowers’ cash flows, real estatemarket sales volumes and liquidity,valuations used in

making loans and evaluating collateral, reduced credit availability,(especially for commercial real estate) generally and

higher costs of financing properties, which reduce the transaction and dollarvolumes of commercial real estate property

sales.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, reducedcollateral values or non-

existent collateral, title defects, inaccurate appraisals, financial deteriorationof borrowers, fraud, and any violation of

applicable laws and regulations. Variousprojects financed earlier that were based on lower interest rate assumptions than

currently in effect may not be as profitable or successful at the higherinterest rate currently in effect and currently expected

in the future.

The Company attempts to reduce these economic and credit risks through its loan-to-valueguidelines for collateralized

loans, investigating the creditworthiness of borrowers and monitoring borrowers’ financialposition. Also, we have

established and periodically review,lending policies and procedures. Banking regulations limit a bank’scredit exposure by

prohibiting unsecured loan relationships that exceed 10% of its capital; or 20%of capital, if loans in excess of 10% of

capital are fully secured. Under these regulations, we are prohibited from having securedloan relationships in excess of

approximately $23.2 million.Furthermore, we have an internal limit for aggregate credit exposure (loans outstandingplus

unfunded commitments) to a single borrower of $20.8 million. Our loan policy requiresthat the Loan Committee of the

Board of Directors approve any loan relationships that exceed this internal limit.At September 30, 2023, the Bank had one

loan relationship exceeding our internal limit.

36

We periodically analyzeour commercial and industrial and commercial real estate loan portfolios to determine ifa

concentration of credit risk exists in any one or more industries. Weuse classification systems broadly accepted by the

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 September 30, 2023 and December 31, 2022.

September 30,

December 31,

(Dollars in thousands)

2023

2022

Lessors of 1-4 family residential properties

$

57,126

$

52,278

Multi-family residential properties

47,634

41,084

Hotel/motel

36,992

33,378

Allowance for Credit Losses

The Company maintains the allowance for credit losses at a level that management believesappropriate to adequately cover

the Company’s estimate of expectedlosses in the loan portfolio. The allowance for credit losses was $6.8 million at

September 30, 2023 compared to $5.8 million at December 31, 2022,which management believed to be adequate at each of

the respective dates. The assumptions, judgments and estimates,as well as the methodologies and models associated with

the determination of the allowance for credit losses are described under “CriticalAccounting Policies.”

On January 1, 2023, we adopted ASC 326, which introduces the current expected creditlosses (CECL) methodology and

requires us to estimate all expected credit losses over the remaining life of our loan portfolio.Accordingly, beginning in

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

coverage for all expected future credit losses on outstanding loans. As of September30, 2023 and December 31, 2022, our

allowance for credit losses was approximately $6.8 million and $5.8million, respectively, which ourmanagement believes

to be adequate at each of the respective dates. Our allowance for credit losses as a percentage of totalloans was 1.24% at

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

The increase in the allowance for credit losses is largely the result of the implementationof ASC326 on January 1, 2023,

which resulted in an adjustment to the opening balance of the allowance for credit losses of$1.0 million. Our CECL models

rely largely on projections of macroeconomic conditions to estimatefuture credit losses. Macroeconomic factors used in the

model include the Alabama unemployment rate, the Alabama home price index, thenational commercial real estate price

index and the Alabama gross state product. Projections of thesemacroeconomic factors, obtained from an independent third

party, are utilized to predictquarterly rates of default.See Note 1 to our Financial Statements, above.

Under the CECL methodology the allowance for credit losses is measuredon a collective basis for pools of loans with

similar risk characteristics, and for loans that do not share similar risk characteristicswith the collectively evaluated pools,

evaluations are performed on an individual basis. Losses are predictedover a period of time determined to be reasonable

and supportable, and at the end of the reasonable and supportable periodlosses are reverted to long term historical averages.

At September 30, 2023, reasonable and supportable periods of 4 quarterswere utilized followed by an 8 quarter straight line

reversion period to long term averages.

37

A summary of the changes in the allowance for credit losses and certain assetquality ratios for the third quarter of 2023 and

the previous four quarters is presented below.

2023

2022

Third

Second

First

Fourth

Third

(Dollars in thousands)

Quarter

Quarter

Quarter

Quarter

Quarter

Balance at beginning of period

$

6,634

6,821

5,765

4,966

4,716

Impact of adopting ASC 326

—

—

1,019

—

—

Charge-offs:

Commercial and industrial

—

—

—

(205)

(13)

Consumer installment

(18)

(56)

(11)

(3)

(3)

Total charge-offs

(18)

(56)

(11)

(208)

(16)

Recoveries

4

200

8

7

16

Net recoveries (charge-offs)

(14)

144

(3)

(201)

—

Provision for credit losses

158

(331)

40

1,000

250

Ending balance

$

6,778

6,634

6,821

5,765

4,966

as a % of loans

1.24

%

1.27

1.35

1.14

1.05

as a % of nonperforming loans

559

%

577

255

211

1,431

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

0.01

%

(0.06)

—

0.04

—

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

Nonperforming Assets

At September 30, 2023 the Company had $1.2 million in nonperforming assets comparedto $2.7 million at December 31,

2022.The decrease in nonperforming assets was primarily related to the resolution of a collateraldependent

nonperforming loan, with a recorded investment of $1.3 million, that was collected infull during the second quarter of

2023.

The table below provides information concerning total nonperforming assetsand certain asset quality ratios for the third

quarter of 2023 and the previous four quarters.

2023

2022

Third

Second

First

Fourth

Third

(Dollars in thousands)

Quarter

Quarter

Quarter

Quarter

Quarter

Nonperforming assets:

Nonaccrual loans

$

1,213

1,149

2,680

2,731

347

Total nonperforming assets

$

1,213

1,149

2,680

2,731

347

as a % of loans and other real estate owned

0.22

%

0.22

0.53

0.54

0.07

as a % of total assets

0.12

%

0.11

0.26

0.27

0.03

Nonperforming loans as a % of total loans

0.22

%

0.22

0.53

0.54

0.07

38

The table below provides information concerning the composition of nonaccrualloans for the third quarter of 2023 and the

previous four quarters.

2023

2022

Third

Second

First

Fourth

Third

(In thousands)

Quarter

Quarter

Quarter

Quarter

Quarter

Nonaccrual loans:

Commercial and industrial

$

162

178

432

443

—

Commercial real estate

801

819

2,103

2,116

170

Residential real estate

250

152

135

172

177

Consumer installment

—

—

10

—

—

Total nonaccrual loans

$

1,213

1,149

2,680

2,731

347

The Company discontinues the accrual of interest income when (1) there is a significantdeterioration 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 September 30,2023 and December 31, 2022,

respectively.

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

Deposits

September 30,

December 31,

(In thousands)

2023

2022

Noninterest bearing demand

$

279,458

311,371

NOW

212,412

178,641

Money market

190,426

214,298

Savings

88,730

95,652

Certificates of deposit under $250,000

51,092

93,017

Certificates of deposit and other time deposits of $250,000 or more

142,483

57,358

Total deposits

$

964,601

950,337

Total depositswere $964.6 million at September 30, 2023,compared to $950.3 million at December 31, 2022.The

Company utilizes brokered deposits as an additional funding source.At September 30, 2023, the Company had $46.6

million in brokered deposits,compared to none at December 31, 2022.Excluding brokered deposits, customer deposits

decreased $32.3 million, or 3%, during the first nine months of 2023.This decrease reflects net outflows to higher yield

investment alternatives in a rising interest rate environment and increased customer spending.Noninterest-bearing deposits

were $279.5 million, or 29% of total deposits, at September 30, 2023, comparedto $311.4 million, or 33% of total deposits

at December 31, 2022.

The average rate paid on total interest-bearing deposits was 1.02% in the first ninemonths of 2023 compared to 0.32% in

the first nine months of 2022.

At September 30, 2023, estimated uninsured deposits totaled $337.4million,or 35% of total deposits, compared to $381.7

million, or 40% of total deposits at December 31, 2022.The decrease in the percentage of the Bank’s depositsthat are

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

maximize FDIC deposit insurance coverage for their deposits.During 2023, the Bank began participating in the

Certificates of Deposit Account Registry Service (the “CDARS”) and the InsuredCash Sweep product (“ICS”), which

provide for reciprocal (“two-way”) transactions among banks facilitated by IntraFi for thepurpose of maximizing FDIC

insurance.The total of reciprocal deposits at September 30, 2023was $31.6 million, or 3% of total deposits.Uninsured

amounts are estimated based on the portion of account balances in excess of FDIC insurancelimits.The Bank’s uninsured

deposits at September 30, 2023 and December 31, 2022 include approximately $185.7million and $155.0 million,

respectively, of deposits of state,county and local governments that are collateralized by securities having an equalfair

value to such deposits.

39

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

the FDIC Deposit Insurance Fund’s costsof the systemic risk determination made in connection with two recent bank

failures.This proposal will not apply to AuburnBank.

Other Borrowings and AvailableCredit

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

term non-deposit borrowings from time to time. Short-term borrowings generallyconsist of federal funds purchased and

securities sold under agreements to repurchase with an original maturity of one yearor less.The Bank had available federal

funds lines totaling $61.0 million with no federal funds borrowings outstandingat September 30, 2023, and December 31,

2022, respectively. Securitiessold under agreements to repurchase, which were entered into on behalf of certain customers

totaled $1.7 million and $2.6 million at September 30, 2023 and December31, 2022, respectively.At September 30, 2023

and December 31, 2022, the Bank had no borrowings from the Federal Reserve discountwindow and no borrowings under

the Federal Reserve’s new Bank TermFacility Program (“BTFP”), which opened March 12, 2023.

The Bank is a member of the FHLB of Atlanta and has borrowed, and may in thefuture borrow from time to time under the

FHLB of Atlanta’s advance program toobtain 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 atSeptember 30, 2023 and December 31, 2022, respectively.At those dates,

the Bank had $307.7 million and $312.6 million, respectively,of available lines of credit at the FHLB of Atlanta.

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

The average rate paid on the Bank’sshort-term borrowings was 2.43%in the first nine months of 2023 compared to 0.50%

in the first nine months of 2022.

CAPITAL ADEQUACY

The Company’s consolidatedstockholders’ equity was $61.5 million and $68.0 million as of September 30,2023 and

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

loss due to the change in unrealized gains/losses on securities available-for-sale,net of tax of $8.1 million, cash dividends

of $2.8 million, the cumulative effect of adopting CECL accounting standardof $0.8 million, and repurchases of the

Company’s stock of $0.2million, partially offset by net earnings of $5.4 million.Total unrealizedlosses on available-for-

sale securities increased20% from $54.7 million on December 31, 2022 to $65.5 million September30, 2023.These

unrealized losses do not affect the Bank’scapital for regulatory capital purposes.

The Company paid cash dividends of $0.81 per share in the first nine months of 2023,an increase of 2% from the same

period in 2022. The Company’s share repurchasesof $0.2million since December 31, 2022 resulted in 10,108 fewer

outstanding common shares at September 30, 2023.These shares were repurchased at an average cost per share of $22.63.

On January 1, 2015, the Company and Bank became subject to the rules of the Basel IIIregulatory capital framework and

related Dodd-Frank WallStreet Reform and Consumer Protection Act changes.The rules included the implementation of a

capital conservation buffer that is added to the minimum requirementsfor capital adequacy purposes.The capital

conservation buffer was subject to a three-year phase-in period that began on January 1,2016and was fully phased-in on

January 1, 2019 at 2.5%.A banking organization with a conservation buffer of less than therequired amount will be

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

executive officers.At September 30, 2023, the Bank’s ratiowas sufficient to meet the fully phased-in conservation buffer.

On August 26, 2020, the Federal Reserve and the other federal banking regulators adopteda final rule that amended the

capital conservation buffer.The new rule revises the definition of “eligible retained income” for purposesof the maximum

payout ratio to allow banking organizations to more freely use their capital buffersto promote lending and other financial

intermediation activities, by making the limitations on capital distributionsmore gradual.The eligible retained income is

now the greater of (i) net income for the four preceding quarters, net of distributions and associatedtax effects not reflected

in net income; and (ii) the average of all net income over the preceding four quarters.This rule only affects the capital

buffers, and banking organizations were encouraged tomake prudent capital distribution decisions.

40

The Federal Reserve has treated us as a “small bank holding company’ under the FederalReserve’s Small Bank Holding

Company Policy.Accordingly, our capital adequacy is evaluatedat the Bank level, and not for the Company and its

consolidated subsidiaries.The Bank’s tier 1 leverage ratiowas 10.26%, CET1 risk-based capital ratio was 15.01%, tier 1

risk-based capital ratio was 15.01%, and total risk-based capital ratio was 15.98%at September 30, 2023. These ratios

exceed the minimum regulatory capital percentages of 5.0% for tier 1 leverage ratio,6.5% for CET1 risk-based capital

ratio, 8.0% for tier 1 risk-based capital ratio, and 10.0% for total risk-based capital ratioto be considered “well capitalized.”

The Bank’s capital conservation bufferwas 7.98%at September 30, 2023.

On July 27, 2023, the Federal Reserve, the Comptroller of the Currency and the FDIC issueda joint notice of proposed

rulemaking to implement the Basel III endgame components.The proposal which is subject to public comment and change

only applies to banks and holding companies with $100 billion or more of assets.The proposal includes provisions dealing

with:

●

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

●

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

●

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

●

Operational risk, which is the risk of losses resulting from inadequate orfailed internal process, people, and

systems, or from external events; and

●

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

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

MARKET AND LIQUIDITY RISK MANAGEMENT

Management’s objective is to manage assets andliabilities to provide a satisfactory,consistent level of profitability within

the framework of established liquidity,loan, investment, borrowing, and capital policies. The Bank’sAsset Liability

Management Committee (“ALCO”) is charged with the responsibilityof monitoring these policies, which are designed to

ensure an acceptable asset/liability composition. Twocritical areas of focus for ALCO are interest rate risk and liquidity

risk management.

Interest Rate Risk Management

In the normal course of business, the Company is exposed to market risk arising from fluctuationsin interest rates. ALCO

measures and evaluates interest rate risk so that the Bank can meet customer demandsfor various types of loans and

deposits. Measurements used to help manage interest rate sensitivity include an earnings simulationmodel and an economic

value of equity (“EVE”) model.

Earnings simulation

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

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 otherfactors in order to produce various earnings

simulations and estimates. Tohelp limit interest rate risk, we have guidelines for earnings at risk which seek to limit the

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 incomevariances are as follows:

●

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

●

+/- 15% for a gradual change of 300 basis points

●

+/- 10% for a gradual change of 200 basis points

●

+/- 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 estimateof exposure under these

scenarios, our modeling under both a gradual and instantaneous change in interest rates indicatesour balance sheet is

liability sensitive over the forecast periodof 12 months.

At September 30, 2023, our earnings simulation model indicatedthat we were in compliance with the policy guidelines

noted above.

41

Economic Valueof Equity

. 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 areestimated 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 toor 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 ourbase case by more than

the following:

●

45% for an instantaneous change of +/- 400 basis points

●

35% for an instantaneous change of +/- 300 basis points

●

25% for an instantaneous change of +/- 200 basis points

●

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

At September 30, 2023, our EVE model indicated that we were in compliancewith our policy guidelines.

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

changes in interest rates. Income associated with interest-earning assets and costs associatedwith interest-bearing liabilities

may not be affected uniformly by changes in interest rates. In addition,the magnitude and duration of changes in interest

rates may have a significant impact on net interest income. For example, although certainassets and liabilities may have

similar maturities or periods of repricing, they may react in differentdegrees to changes in market interest rates, and other

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 assetsand liabilities may lag behind

changes in general market rates. In addition, certain assets, such as adjustable ratemortgage loans, have features (generally

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

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 oreconomic stress, which may

differ across industries and economic sectors. ALCO reviews each of theabove interest rate sensitivity analyses along with

several different interest rate scenarios in seeking satisfactory,consistent levels of profitability within the framework of the

Company’s established liquidity,loan, investment, borrowing, and capital policies.

The Company may also use derivative financial instruments to improve the balance betweeninterest-sensitive assets and

interest-sensitive liabilities, and as a tool to manage interest rate sensitivitywhile continuing to meet the credit and deposit

needs of our customers. From time to time, the Company also may enter into back-to-backinterest rate swaps to facilitate

customer transactions and meet their financing needs. These interest rate swaps qualifyas derivatives, but are not

designated as hedging instruments. At September 30, 2023 and December 31,2022, the Company had no derivative

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

Liquidity Risk Management

Liquidity is the Company’s ability to convertassets 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 adequateto meet its anticipated funding needs, while

balancing against excessive liquidity that likely would reduce earnings due to thecost of foregoing alternative higher-

yielding assets.

Liquidity is managed at two levels. The first is the liquidity of the Company.The second is the liquidity of the Bank. The

management of liquidity at both levels is essential, because the Company and the Bank areseparate and distinct legal

entities with different funding needs and sources, and each are subjectto regulatory guidelines and requirements.The

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

dividends.The Bank’s payment of dividends dependson its earnings, liquidity, capitaland the absence of regulatory

restrictions on such dividends.

The primary source of funding and liquidity for the Company has been dividends receivedfrom the Bank.If needed, the

Company could also borrow money,or issue common stock or other securities.Primary uses of funds by the Company

include dividends paid to stockholders, Company stock repurchases, and payment ofCompany expenses.

42

Primary sources of funding for the Bank include customer deposits, other borrowings,interest payments on earning assets,

repayment and maturity of securities and loans, sales of securities, and thesale of loans, particularly residential mortgage

loans. The Bank has access to federal funds lines from various banks and borrowingsfrom the Federal Reserve discount

window and the Federal Reserve’s recentBTFP borrowing facility.In addition to these sources, the Bank is eligible to

participate in the FHLB of Atlanta’s advanceprogram to obtain funding for growth and liquidity.Advances include both

fixed and variable terms and may be taken out with varying maturities. At September30, 2023, the Bank had no FHLB of

Atlanta advances outstanding and available credit from the FHLB of $307.7million. At September 30, 2023, the Bank also

had $61.0 million of available federal funds lines with no borrowings outstanding.Primary uses of funds include repayment

of maturing obligationsand growing the loan portfolio.

Management believes that the Company and the Bank have adequate sources of liquidityto meet all their respective known

contractual obligations and unfunded commitments, including loan commitmentsand reasonablyexpected borrower,

depositor, and creditor requirements over the next twelvemonths.

Off-Balance Sheet Arrangements, Commitments, Contingencies and ContractualObligations

At September 30, 2023, the Bank had outstanding standby letters of credit of $0.8million and unfunded loan commitments

outstanding of $60.1million.Because these commitments generally have fixed expiration dates andmany will expire

without being drawn upon, the total commitment level does not necessarily represent futurecash requirements. If needed, to

fund these outstanding commitments, the Bank could liquidate federal fundssold 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 residentialmortgage loans in the secondary market to Fannie Mae while retaining the servicing of these

loans. The sale agreements for these residential mortgage loans with Fannie Maeand other investors include various

representations and warranties regarding the origination and characteristics of theresidential mortgage loans.Although the

representations and warranties vary among investors, they typically cover ownershipof the loan, validity of the lien

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

criteria set forth in the applicable agreement, compliance with applicablefederal, state, and local laws, among other

matters.

As of September 30, 2023,the aggregate unpaid principal balance of residential mortgage loans,which we have originated

and sold, but retained the servicing rights, was $219.3 million.Although these loans are generally sold on a non-recourse

basis, we may be obligated to repurchase residential mortgage loans or reimburseinvestors for losses incurred (make whole

requests) if a loan review reveals a potential breach of seller representations andwarranties.Upon receipt of a repurchase

or make whole request, we work with investors to arrive at a mutually agreeableresolution. Repurchase and make whole

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

determine if a contractually required repurchase or make whole event has occurred.We seek to reduce andmanage the risks

of potential repurchases, make whole requests, or other claims by mortgage loaninvestors through our underwriting and

quality assurance practices and by servicing mortgage loans to meet investor and secondarymarket standards.

The Company was not required to repurchase any loans during the first nine monthsof 2023 as a result of representation

and warranty provisions contained in the Company’ssale agreements with Fannie Mae, and had no pending repurchase or

make-whole requests at September 30, 2023.

We service all residentialmortgage loans originated and sold by us to Fannie Mae.As servicer, our primary duties are to:

(1) collect payments due from borrowers;(2) advance certain delinquent payments of principal and interest;(3) maintain

and administer any hazard, title, or primary mortgage insurance policies relating to themortgage loans;(4) maintain any

required escrow accounts for payment of taxes and insurance and administerescrow payments;and (5) foreclose on

defaulted mortgage loans or take other actions to mitigate the potential losses to investorsconsistent with the agreements

governing our rights and duties as servicer.

The agreements under which we act as servicer generally specifies standardsof responsibility for actions taken by us in

such capacity and provides protection against expenses and liabilities incurred by uswhen acting in compliance with the

respective servicing agreements.However, if we commit a material breach of our obligationsas servicer, we may be

subject to termination if the breach is not cured within a specified period followingnotice.The standards governing

servicing and the possible remedies for violations of such standards are determined byour agreements with Fannie Mae and

Fannie Mae’s mortgage servicingguides.Remedies could include repurchase of an affected loan.

43

Although repurchase and make whole requests related to representation andwarranty provisions and servicing activities

have been limited to date, it is possible that requests to repurchase mortgage loans or reimburseinvestors for losses incurred

(make whole requests) may increase in frequency if investors more aggressivelypursue all means of recovering losses on

their purchased loans.As of September 30, 2023, we do not believe that this exposure is material due to the historicallevel

of repurchase requests and loss trends, in addition to the fact that 99% of our residentialmortgage loans serviced for Fannie

Mae were current as of such date.We maintain ongoing communicationswith our investors and will continue to evaluate

this exposure by monitoring the level and number of repurchase requests as well as the delinquencyrates in our investor

portfolios.

The Bank sells mortgage loans to Fannie Mae and services these on an actual/actual basis.As a result, the Bank is not

obligated to make any advances to Fannie Mae on principal and interest on such mortgageloans where the borrower is

entitled to forbearance.

Effects of Inflation and Changing Prices

The consolidated financial statements and related consolidated financial data presentedherein have been prepared in

accordance with GAAP and practices within the banking industry which requirethe measurement of financial position and

operating results in terms of historical dollars without considering the changes inthe relative purchasing power of money

over time due to inflation. Unlike most industrial companies, virtually all the assets and liabilitiesof a financial institution

are monetary in nature. As a result, interest rates have a more significant impact on afinancial institution’s performance

than the effects of general levels of inflation.

Inflation can affect our noninterest expenses. It also can affectour 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 earningassets.The difference

between our interest expense and interest income is also affected by the shapeof the yield curve and the speeds at which

our assets and liabilities,respectively, repricein response to interest rate changes.The yield curve was inverted on

September 30, 2023, which means shorter term interest rates are higher than longerinterest rates.This results in a lower

spread between our costs of funds and our interest income.In addition, net interest income could be affected by

asymmetrical changes in the different interest rate indexes, given thatnot all of our assets or liabilities are priced with the

same index. Higher market interest rates and sales of securities held by the Federal Reserveto reduce inflation generally

reduce economic activity and may reduce loan demand and growth.Inflation and related changes in market interest rates,

as the Federal Reserve acts to meet its long term inflation goal of 2%, also can adversely affectthe values and liquidity of

our loans and securities,the value of collateral for our loans,and the success of our borrowers and such borrowers’

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

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

Reserve’s long term inflation goal of 2.0%annually.Beginning in March 2022, the Federal Reserve has been raising target

federal funds interest rates and reducing its securities holdings in an effortto reduce inflation.During 2022, the Federal

Reserve increased the target federal funds range from 0 – 0.25%to 4.25 – 4.50%.The target federal funds rate was

increased another 25 basis points on each of January 31, March 7, May 3 and July 26, 2023to 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 tomeet its 2% inflation rate over the longer term and

maximum employment goals.Our deposit costs may increase as the Federal Reserve increases its targetfederal funds rate,

market interest rates increase, and as customer savings behaviors change as a result of inflationand customers seek higher

market interest rates on deposits and other alternative investments.Monetary efforts to control inflation may also affect

unemployment which is an important component in our CECL model used to estimate ourallowance for credit losses.

44

CURRENT ACCOUNTING DEVELOPMENTS

The following ASU has been issued by the FASBbut is not yet effective.

●

ASU 2023-02,

Investments – Equity Method and Joint Ventures(Topic 323):Accounting for Investments in Tax

Credit Structures Usingthe Proportional Amortization Method

Information about this pronouncement is described in more detail below.

ASU 2023-02,

Investments – Equity Method and Joint Ventures(Topic 323):Accounting for Investments in TaxCredit

Structures Using the ProportionalAmortization Method

, The amendments in this Update permit reporting entities to elect

to account for their tax equity investments, regardless of the tax credit program from whichthe income tax credits are

received, using the proportional amortization method if certain conditions aremet. The new standard is effective for fiscal

years, and interim periods within those fiscal years, beginning after December 15,2023.The Company is currently

evaluating the impact of the new standard on the Company’sconsolidated financial statements.

45

Table 1– Explanation of Non-GAAP Financial Measures

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 amountspresented on a tax-equivalent basis, a non-

GAAP financial measure, including the presentation and calculation of the efficiencyratio.

The Company believes the presentation of net interest income on a tax-equivalentbasis provides comparability of net

interest income from both taxable and tax-exempt sources and facilitates comparabilitywithin the industry. Although the

Company believes these non-GAAP financial measures enhance investors’understanding of its business and performance,

these non-GAAP financial measures should not be considered an alternative toGAAP.The reconciliations of these non-

GAAP financial measures to their most directly comparable GAAP financialmeasures are presented below.

2023

2022

Third

Second

First

Fourth

Third

(in thousands)

Quarter

Quarter

Quarter

Quarter

Quarter

Net interest income (GAAP)

$

6,272

6,888

7,109

7,471

7,243

Tax-equivalent adjustment

108

106

108

117

117

Net interest income (Tax-equivalent)

$

6,380

6,994

7,217

7,588

7,360

Nine months ended September 30,

(In thousands)

2023

2022

Net interest income (GAAP)

$

20,269

19,695

Tax-equivalent adjustment

322

339

Net interest income (Tax-equivalent)

$

20,591

20,034

46

Table 2- Selected Quarterly Financial Data

2023

2022

Third

Second

First

Fourth

Third

(Dollars in thousands, except per share amounts)

Quarter

Quarter

Quarter

Quarter

Quarter

Results of Operations

Net interest income (a)

$

6,380

6,994

7,217

7,588

7,360

Less: tax-equivalent adjustment

108

106

108

117

117

Net interest income (GAAP)

6,272

6,888

7,109

7,471

7,243

Noninterest income

865

791

792

3,898

852

Total revenue

7,137

7,679

7,901

11,369

8,095

Provision for credit losses

105

(362)

66

1,000

250

Noninterest expense

5,362

5,825

5,604

4,449

5,415

Income tax expense

182

288

267

1,454

432

Net earnings

$

1,488

1,928

1,964

4,466

1,998

Per share data:

Basic and diluted net earnings

$

0.43

0.55

0.56

1.27

0.57

Cash dividends declared

0.27

0.27

0.27

0.265

0.265

Weighted average shares outstanding:

Basic and diluted

3,496,411

3,500,064

3,502,143

3,504,344

3,507,318

Shares outstanding, at period end

3,493,614

3,499,412

3,500,879

3,503,452

3,505,355

Book value

$

17.59

20.28

21.03

19.42

17.06

Common stock price:

High

$

22.80

24.32

24.50

24.71

29.02

Low

20.85

18.80

22.55

22.07

23.02

Period end:

21.50

21.26

22.66

23.00

23.02

To earnings ratio

7.65

x

7.21

7.79

7.82

10.46

To book value

122

%

105

108

118

135

Performance ratios:

Annualized return on average equity

8.59

%

10.37

11.44

28.23

10.35

Annualized return on average assets

0.58

%

0.75

0.77

1.75

0.75

Dividend payout ratio

62.79

%

49.09

48.21

20.87

46.49

Asset Quality:

Allowance for credit losses as a % of:

Loans

1.24

%

1.27

1.35

1.14

1.05

Nonperforming loans

559

%

577

255

211

1,431

Nonperforming assets as a % of:

Loans and foreclosed properties

0.22

%

0.22

0.53

0.54

0.07

Total assets

0.12

%

0.11

0.26

0.27

0.03

Nonperforming loans as a % of total loans

0.22

%

0.22

0.53

0.54

0.07

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

0.01

%

(0.11)

—

0.16

—

Capital Adequacy: (c)

CET 1 risk-based capital ratio

15.01

%

15.33

15.45

15.39

15.39

Tier 1 risk-based capital ratio

15.01

%

15.33

15.45

15.39

15.39

Total risk-based capital ratio

15.98

%

16.31

16.48

16.25

16.16

Tier 1 leverage ratio

10.26

%

10.23

10.07

10.01

9.29

Other financial data:

Net interest margin (a)

2.73

%

3.03

3.17

3.27

3.00

Effective income tax rate

10.90

%

13.00

11.97

24.56

17.78

Efficiency ratio (b)

74.01

%

74.82

69.97

38.73

65.94

Selected average balances:

Securities

$

390,772

402,929

402,684

407,792

432,393

Loans, net of unearned income

529,382

512,066

502,158

490,163

457,722

Total assets

1,020,980

1,022,874

1,022,938

1,022,863

1,069,973

Total deposits

942,533

942,552

948,393

951,122

987,614

Total stockholders’ equity

69,269

74,404

68,655

63,283

77,191

Selected period end balances:

Securities

$

373,286

394,079

405,692

405,304

411,538

Loans, net of unearned income

545,610

520,411

505,041

504,458

474,035

Allowance for credit losses

6,778

6,634

6,821

5,765

4,966

Total assets

1,030,724

1,026,130

1,017,746

1,023,888

1,042,559

Total deposits

964,602

950,742

939,190

950,337

977,938

Total stockholders’ equity

61,451

70,976

73,640

68,041

59,793

(a) Tax-equivalent. See "Table 1 - Explanation of Non-GAAP Financial Measures."

(b) Efficiency ratio is the result of noninterest expense dividedby the sum of noninterest income and tax-equivalent net interestincome.See

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

(c) Regulatory capital ratios presented are for the Company'swholly-owned subsidiary, AuburnBank.

47

Table 3- Selected Financial Data

Nine months ended September 30,

(Dollars in thousands, except per share amounts)

2023

2022

Results of Operations

Net interest income (a)

$

20,591

20,034

Less: tax-equivalent adjustment

322

339

Net interest income (GAAP)

20,269

19,695

Noninterest income

2,448

2,608

Total revenue

22,717

22,303

Provision for credit losses

(191)

—

Noninterest expense

16,791

15,374

Income tax expense

737

1,049

Net earnings

$

5,380

5,880

Per share data:

Basic and diluted net earnings

$

1.54

1.67

Cash dividends declared

0.81

0.795

Weighted average shares outstanding:

Basic and diluted

3,499,518

3,513,068

Shares outstanding, at period end

3,493,614

3,505,355

Book value

$

17.59

17.06

Common stock price:

High

$

24.50

34.49

Low

18.80

23.02

Period end

21.50

23.02

To earnings ratio

7.65

x

10.46

To book value

122

%

135

Performance ratios:

Annualized return on average equity

10.15

%

8.76

Annualized return on average assets

0.70

%

0.72

Dividend payout ratio

52.60

%

47.60

Asset Quality:

Allowance for credit losses as a % of:

Loans

1.24

%

1.05

Nonperforming loans

559

%

1,431

Nonperforming assets as a % of:

Loans and other real estate owned

0.22

%

0.07

Total assets

0.12

%

0.03

Nonperforming loans as a % of total loans

0.22

%

0.07

Annualized net recoveries as a % of average loans

(0.03)

%

(0.01)

Capital Adequacy: (c)

CET 1 risk-based capital ratio

15.01

%

15.39

Tier 1 risk-based capital ratio

15.01

%

15.39

Total risk-based capital ratio

15.98

%

16.16

Tier 1 leverage ratio

10.26

%

9.29

Other financial data:

Net interest margin (a)

2.97

%

2.67

Effective income tax rate

12.05

%

15.14

Efficiency ratio (b)

72.88

%

67.90

Selected average balances:

Securities

$

398,751

431,629

Loans, net of unearned income

514,635

442,081

Total assets

1,022,257

1,092,216

Total deposits

944,471

996,900

Total stockholders’ equity

70,659

89,544

Selected period end balances:

Securities

$

373,286

411,538

Loans, net of unearned income

545,610

474,035

Allowance for credit losses

6,778

4,966

Total assets

1,030,724

1,042,559

Total deposits

964,602

977,938

Total stockholders’ equity

61,451

59,793

(a) Tax-equivalent. See "Table 1 - Explanation of Non-GAAP Financial Measures."

(b) Efficiency ratio is the result of noninterest expense dividedby the sum of noninterest income and tax-equivalent net interestincome.See

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

(c) Regulatory capital ratios presented are for the Company'swholly-owned subsidiary, AuburnBank.

48

Table 4- Average Balancesand Net Interest Income Analysis

Quarter ended September 30,

2023

2022

Interest

Interest

Average

Income/

Yield/

Average

Income/

Yield/

(Dollars in thousands)

Balance

Expense

Rate

Balance

Expense

Rate

Interest-earning assets:

Loans and loans held for sale (1)

$

529,521

$

6,373

4.77%

$

457,861

$

5,097

4.42%

Securities - taxable (2)

336,406

1,783

2.10%

373,529

1,808

1.92%

Securities - tax-exempt (2)(3)

54,366

510

3.72%

58,864

558

3.76%

Total securities

390,772

2,293

2.33%

432,393

2,366

2.17%

Federal funds sold

1,918

26

5.38%

38,994

200

2.03%

Interest bearing bank deposits

4,799

59

4.88%

45,343

226

1.98%

Total interest-earning assets

927,010

$

8,751

3.75%

974,591

$

7,889

3.21%

Cash and due from banks

14,345

14,503

Other assets

79,625

80,879

Total assets

$

1,020,980

$

1,069,973

Interest-bearing liabilities:

Deposits:

NOW

$

191,849

$

534

1.10%

$

195,655

$

70

0.14%

Savings and money market

283,152

661

0.93%

328,555

163

0.20%

Time deposits

183,539

1,139

2.46%

151,785

291

0.76%

Total interest-bearing deposits

658,540

2,334

1.41%

675,995

524

0.31%

Short-term borrowings

4,347

37

3.38%

3,759

5

0.50%

Total interest-bearing liabilities

662,887

$

2,371

1.42%

679,754

$

529

0.31%

Noninterest-bearing deposits

283,993

311,619

Other liabilities

4,831

1,409

Stockholders' equity

69,269

77,191

Total liabilities and stockholders'equity

$

1,020,980

$

1,069,973

Net interest income and margin (tax-equivalent)

$

6,380

2.73%

$

7,360

3.00%

(1) Average loan balances areshown net of unearned income and loans on nonaccrual status have been included

in the computation of average balances.

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

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

tax rate of 21%.

49

Table 5- Average Balancesand Net Interest Income Analysis

Nine months ended September 30,

2023

2022

Interest

Interest

Average

Income/

Yield/

Average

Income/

Yield/

(Dollars in thousands)

Balance

Expense

Rate

Balance

Expense

Rate

Interest-earning assets:

Loans and loans held for sale (1)

$

514,706

$

18,146

4.71%

$

442,613

$

14,638

4.42%

Securities - taxable (2)

344,136

5,474

2.13%

371,595

4,691

1.69%

Securities - tax-exempt (2)(3)

54,615

1,531

3.75%

60,034

1,614

3.59%

Total securities

398,751

7,005

2.35%

431,629

6,305

1.95%

Federal funds sold

4,372

159

4.86%

54,924

313

0.76%

Interest bearing bank deposits

8,118

283

4.66%

73,630

454

0.82%

Total interest-earning assets

925,947

$

25,593

3.70%

1,002,796

$

21,710

2.89%

Cash and due from banks

15,160

15,029

Other assets

81,150

74,391

Total assets

$

1,022,257

$

1,092,216

Interest-bearing liabilities:

Deposits:

NOW

$

189,586

$

1,067

0.75%

$

201,792

$

189

0.13%

Savings and money market

291,988

1,368

0.63%

335,005

494

0.20%

Time deposits

168,000

2,499

1.99%

155,824

978

0.84%

Total interest-bearing deposits

649,574

4,934

1.02%

692,621

1,661

0.32%

Short-term borrowings

3,748

68

2.43%

3,969

15

0.50%

Total interest-bearing liabilities

653,322

$

5,002

1.02%

696,590

$

1,676

0.32%

Noninterest-bearing deposits

294,897

304,279

Other liabilities

3,379

1,803

Stockholders' equity

70,659

89,544

Total liabilities and stockholders'equity

$

1,022,257

$

1,092,216

Net interest income and margin (tax-equivalent)

$

20,591

2.97%

$

20,034

2.67%

(1) Average loan balances areshown net of unearned income and loans on nonaccrual status have been included

in the computation of average balances.

(2) Includes average net unrealized gains (losses) oninvestment securities available for sale

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

tax rate of 21%.

50

Table 6- Allocation of Allowance for Credit Losses

2023

2022

Third Quarter

Second Quarter

First Quarter

Fourth Quarter

Third Quarter

(Dollars in thousands)

Amount

%*

Amount

%*

Amount

%*

Amount

%*

Amount

%*

Commercial and industrial

$

1,215

12.1

$

1,198

11.9

$

1,232

11.8

$

747

13.1

$

732

14.9

Construction and land

development

1,073

12.9

1,005

12.3

1,021

13.2

949

13.2

789

11.6

Commercial real estate

3,803

51.6

3,788

53.0

3,966

53.0

3,109

52.4

2,561

52.6

Residential real estate

551

21.5

529

21.1

497

20.2

828

19.4

783

19.3

Consumer installment

136

1.9

114

1.7

105

1.8

132

1.9

101

1.6

Total allowance for

credit losses

$

6,778

$

6,634

$

6,821

$

5,765

$

4,966

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

51

Table 7– Estimated Uninsured Time Deposits by Maturity

(Dollars in thousands)

September 30, 2023

Maturity of:

3 months or less

$

17,953

Over 3 months through 6 months

5,154

Over 6 months through 12 months

36,255

Over 12 months

11,099

Total estimated uninsuredtime deposits

$

70,461

52

ITEM 3.QUANTITATIVEAND QUALITATIVEDISCLOSURES ABOUT MARKET 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.

ITEM 4. CONTROLS AND PROCEDURES

The Company, with the participationof its management, including its Chief Executive Officer andChief Financial Officer,

carried out an evaluation of the effectiveness of the design and operationof its disclosure controls and procedures (as

defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended)as of the end of the

period covered by this report. Based upon that evaluation and as of the end of the period covered by this report,the

Company’s Chief Executive Officerand Chief Financial Officer concluded that the Company’sdisclosure controls and

procedures were effective to allow timely decisions regarding disclosurein its reports that the Company files or submits to

the Securities and Exchange Commission under the Securities Exchange Act of 1934,as amended. There have been no

changes in the Company’s internal controlover financial reporting that occurred during the period covered by this report

that have materially affected, or are reasonably likely to materiallyaffect, the Company’sinternal control over financial

reporting.

PARTII. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

In the normal course of its business, the Company and the Bank are, from time to time, involvedin legal proceedings. The

Company’s and Bank’smanagement believe there are no pending or threatened legal, governmental, orregulatory

proceedings that, upon resolution, are expected to have a material adverse effectupon the Company’s or the Bank’s

financial condition or results of operations. See also, Part I, Item 3 of the Company’sAnnual Report on Form 10-K for the

year ended December 31, 2022.

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider thefactors discussed in Part I,

Item 1A. “RISK FACTORS”in the Company’s Annual Reporton Form 10-K for the year ended December 31, 2022,

which could materially affect our business, financial conditionor future results. The risks described in our annual report on

Form 10-K are not the only the risks facing our Company.Increases in inflation and the resulting tightening of Federal

Reserve monetary policy by increased target interest rates andreductions in the Federal Reserve’s securities portfolio,have

and is expected to continue to affect the levels of interest rates,mortgage originations and income, the market values of our

securities portfolio and loans and have resulted in unrealized losses that have adverselyaffected our stockholders’ equity.

These have affected and are expected to continue to affect ourdeposit costs and mixes, and consumer savings and payment

behaviors.These may also affect our borrower’s operating costs,expected returns and cash flows available to service our

loans.Additional risks and uncertainties not currently known to us or that we currently deem to beimmaterial also may

materially adversely affect our business, financial condition,and/or operating results in the future.

53

ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The Company’s repurchases of its common stockduring the third quarter of 2023 were as follows:

Period

Total Number of

Shares Purchased

Average Price

Paid per Share

Total Number of

Shares Purchased as

Part of Publicly

Announced Plans or

Programs

Approximate Dollar

Valueof Shares that

May Yet Be

Purchased Under the

Plans or Programs

July 1 - July 31, 2023

948

21.89

948

4,495,859

August 1 - August 31, 2023

4,935

22.21

4,935

4,386,264

September 1 - September 30, 2023

—

—

—

4,386,264

Total

5,883

22.16

5,883

4,386,264

On April 12, 2022, the Board of Directors of Auburn National Bancorporation, Inc. (the "Company") announced that its Board of Directors

had approved a new stock repurchase program to replace the repurchase program that expired on March 31, 2022. The new program

authorized the repurchase, from time to time, of up to $5 million of the Company’s issued and outstanding common stock through the

earliest of (i) the expenditure of $5 million on Share repurchases, (ii) the termination or replacement of the Repurchase Planand

(iii) April 15, 2024. The stock repurchases may be open-market or private purchases, negotiated transactions, block purchases,

and otherwise.

ITEM 3.DEFAULTSUPON SENIOR SECURITIES

Not applicable.

ITEM 4.MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.OTHER INFORMATION

Not applicable.

54

ITEM 6.EXHIBITS

Exhibit

NumberDescription

3.1

Certificate of Incorporation of Auburn National Bancorporation, Inc. and all amendments thereto.*

3.2

Amended and Restated Bylaws of Auburn National Bancorporation, Inc., adopted as of November 13, 2007. **

31.1

Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, As Adopted Pursuant to Section

302 of the Sarbanes-Oxley Act of 2002, by David A. Hedges, President and Chief Executive Officer.

31.2

Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, As Adopted Pursuant to Section

302 of the Sarbanes-Oxley Act of 2002, by W. James Walker, IV, Senior Vice President and Chief Financial

Officer.

32.1

Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley

Act of 2002, by David A. Hedges, President and Chief Executive Officer.***

32.2

Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley

Act of 2002, by W. James Walker, IV, Senior Vice President and Chief Financial Officer.***

101.INS

XBRL Instance Document

101.SCH

XBRL Taxonomy ExtensionSchema Document

101.CAL

XBRL Taxonomy ExtensionCalculation Linkbase Document

101.LAB

XBRL Taxonomy ExtensionLabel Linkbase Document

101.PRE

XBRL Taxonomy ExtensionPresentation Linkbase Document

101.DEF

XBRL Taxonomy ExtensionDefinition Linkbase Document

104

Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

*

Incorporated by reference from Registrant’sForm 10-Q dated June 30, 2002.

**

Incorporated by reference from Registrant’sForm 10-K dated March 31, 2008.

***

The certifications attached as exhibits 32.1 and 32.2 to this quarterly report on Form 10-Qare “furnished” to the

Securities and Exchange Commission pursuant to Section 906 of the Sarbanes-OxleyAct of 2002 and shall not be

deemed “filed” by the Company for purposes of Section 18 of the Securities ExchangeAct of 1934, as amended.

SIGNATURES

Pursuant tothe requirementsof theSecurities ExchangeAct of1934, theregistrant hasduly causedthis reportto

be signed on its behalf by the undersigned thereunto duly authorized.

AUBURN NATIONALBANCORPORATION,INC.

(Registrant)

Date:November 7, 2023

By:/s/ David A. Hedges

David A. Hedges

President and CEO

Date:November 7, 2023

By:/s/

W.

James Walker,IV

W.James Walker,IV

Senior Vice President and Chief FinancialOfficer