Auburn National Bancorporation, Inc: Form 10-Q for the period ended Mar 31, 2024

OPERATIONS

The following discussion and analysis is designed to provide a better understanding of various factors related to the results

of operations and financial condition of the Company and the Bank. This discussion is intended to supplement and

highlight information contained in the accompanying unaudited condensed consolidated financial statements and related

notes for the quarters ended March 31, 2024 and 2023, as well as the information contained in our Annual Report on Form

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

Special Cautionary Notice Regarding Forward-Looking Statements

Various of the statements made herein under the captions “Management’s Discussion and Analysis of Financial Condition

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

Property” and elsewhere, are “forward-looking statements” within the meaning and protections of Section 27A of the

Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

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

anticipations, assumptions, estimates, intentions and future performance, and involve known and unknown risks,

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

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

achievements or financial condition expressed or implied by such forward-looking statements. You should not expect us to

update any forward-looking statements.

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

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,” “target” and other similar words and expressions of the future. These forward-looking

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

the effects of future economic, business and market conditions and changes, foreign, domestic and locally,

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

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

inventory volatility, and changes in consumer behaviors;

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

general economic conditions;

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

government and its agencies, the continuing effects of COVID-19 fiscal and monetary stimuli, and subsequent

changes in monetary policies in response to inflation, including increases in the Federal Reserve’s target federal

funds rate and reductions in the Federal Reserve’s holdings of securities through quantitative tightening; and the

duration that the Federal Reserve will keep its targeted federal funds rates at or above current rates to meet its long

term inflation target of 2%;

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

their application by our regulators, including capital and liquidity requirements, and changes in the scope and cost

of FDIC insurance;

changes in accounting pronouncements and interpretations, including the required use, beginning January 1,

2023,of Financial Accounting Standards Board’s (“FASB”) Accounting Standards Update (ASU) 2016-13,

“Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” as

well as the updates issued since June 2016 (collectively, FASB ASC Topic 326) on Current Expected Credit

Losses(“CECL”), and ASU 2022-02, Troubled Debt Restructurings and Vintage Disclosures, which eliminates

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

the failure of assumptions and estimates, including those used in the Company’s CECL models to establish our

allowance for credit losses and estimate asset impairments, as well as differences in, and changes to, economic,

market and credit conditions, including changes in borrowers’ credit risks and payment behaviors from those used

in our CECL models and loan portfolio reviews;

the risks of changes in market interest rates and the shape of the yield curve on customer behaviors; the levels,

composition and costs of deposits, loan demand and mortgage loan originations; the values and liquidity of loan

collateral, our securities portfolio and interest-sensitive assets and liabilities; and the risks and uncertainty of the

amounts realizable on collateral;

the risks of increases in market interest rates creating unrealized losses on our securities available for sale, which

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

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

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

may be included as capital for regulatory purposes;

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

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

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

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

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

the timing and amount of rental income from third parties following the June 2022 opening 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 and possible 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, our vendors’ 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 future taxable income from our operations and tax planning strategies are less

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

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

the risks that our dividends, share repurchases and discretionary bonuses are limited by regulation to the

maintenance of a capital conservation buffer of 2.5% and our future earnings and “eligible retained earnings” over

rolling four calendar quarter periods;

other factors and risks described under “Risk Factors” herein, in our Annual Report on Form 10-K as of and for

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

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

Act.

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

entirety by this cautionary notice.

We

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

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

made.

Summary of Results of Operations

Quarter ended March 31,

(Dollars in thousands, except per share data)

2024

2023

Net interest income (a)

6,677

7,217

Less: tax-equivalent adjustment

20

108

Net interest income (GAAP)

6,657

7,109

Noninterest income

887

792

Total revenue

7,544

7,901

Provision for credit losses

334

66

Noninterest expense

5,675

5,604

Income tax expense

164

267

Net earnings

1,371

1,964

Basic and diluted earnings per share

0.39

0.56

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

Financial Summary

The Company’s net earnings were $1.4 million for the first three months of 2024, compared to $2.0 million for the first

three months of 2023. Basic and diluted earnings per share were $0.39 per share for the first three months of 2024,

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

Net interest income (tax-equivalent) was $6.7 million for the first three months of 2024, a 7% decrease compared to $7.2

million for the first three months of 2023. This decrease was primarily due to a smaller balance sheet and a decrease in the

Company’s net interest margin. The Company’s net interest margin (tax-equivalent) was 3.04% for the first three months

of 2024 compared to 3.17% for the first three months of 2023. This decrease was primarily due to increased cost of funds

which was partially offset by a more favorable asset mix and higher yields on interest earning assets. Average loans for the

first three months of 2024 were $560.9 million, a 12% increase from the first three months of 2023. Average total

securities for the first three months of 2024 were $267.6 million compared to $402.7 million for the first three months of

2023. The decrease was primarily the result of the Company’s balance sheet repositioning strategy in the fourth quarter of

2024. See “Results of Operations – Average Balance Sheet and Interest Rates” and “Net Interest Income and Margin”

below.

At March 31, 2024, the Company’s allowance for credit losses was $7.2 million, or 1.27% of total loans, compared to $6.9

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

The Company recorded a provision for credit losses during the first three months of 2024 of $0.3 million, compared to $0.1

million during the first three months of 2023. The provision for credit losses under CECL reflects the Company’s

evaluation of its credit risk profile and its future economic outlook and forecasts. Our CECL model is largely influenced by

economic factors including, most notably, the anticipated unemployment rate. The increase in the provision for credit

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

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

macroeconomic factors used in our CECL modeling.

Noninterest income was $0.9 million in the first three months of 2024, compared to $0.8 million in the first three months of

Noninterest expense was $5.7 million in the first three months of 2024, compared to $5.6 million for the first three months

of 2023. The increase in noninterest expense was primarily due to routine increases in salaries and benefits expense.

Income tax expense was $0.2 million for the first three months of 2024 compared to $0.3 million for the first three months

of 2023. This decrease was due to a decline in the level of earnings before taxes and the Company’s effective tax rate. The

Company's effective tax rate for the first three months of 2024 was 10.68%, compared to 11.97% in the first three months

of 2023. The Company’s effective income tax rate is affected principally by tax-exempt earnings from the Company’s

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

The Company paid cash dividends of $0.27 per share in the first three months of 2024 and 2023 . At March 31, 2024, the

Bank’s regulatory capital ratios were well above the minimum amounts required to be “well capitalized” under current

regulatory standards with a total risk-based capital ratio of 15.69%, a tier 1 leverage ratio of 10.34% and a common equity

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

CRITICAL ACCOUNTING POLICIES

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

general practices within the banking industry. There have been no significant changes to our Critical Accounting Estimates

as described in our Form 10-K.

RESULTS OF OPERATIONS

Average Balance Sheet and Interest Rates

Quarter ended March 31,

2024

2023

Average

Yield/

Average

Yield/

(Dollars in thousands)

Balance

Rate

Balance

Rate

Interest-earning assets:

Loans and loans held for sale

560,942

5.01%

502,158

4.65%

Securities - taxable

257,229

2.21%

344,884

2.19%

Securities - tax-exempt

10,377

3.64%

57,800

3.59%

Total securities

267,606

2.26%

402,684

2.38%

Federal funds sold

17,980

5.57%

7,314

4.71%

Interest bearing bank deposits

37,790

5.37%

11,607

4.47%

Total interest-earning assets

884,318

4.21%

923,763

3.66%

Interest-bearing liabilities:

Deposits:

NOW

196,648

1.31%

187,566

0.54%

Savings and money market

241,792

0.57%

300,657

0.39%

Time Deposits

199,562

3.20%

155,676

1.51%

Total interest-bearing deposits

638,002

1.62%

643,899

0.70%

Short-term borrowings

1,592

0.51%

3,046

1.11%

Total interest-bearing liabilities

639,594

1.62%

646,945

0.71%

Net interest income and margin (tax-equivalent)

6,677

3.04%

7,217

3.17%

Net Interest Income and Margin

Net interest income (tax-equivalent) was $6.7 million for the first three months of 2024, a 7% increase compared to $7.2

million for the first three months of 2023. This decrease was primarily due to a decline in the Company’s net interest

margin (tax-equivalent). The Company’s net interest margin (tax-equivalent) was 3.04% in the first three months of 2024

compared to 3.17% in the first three months of 2023. This decrease was primarily due to higher market interest rates,

which increased our cost of funds, generally, and changes in our deposit mix to higher cost interest bearing deposits, which

was partially offset by a more favorable asset mix and higher yields on interest-earning assets. The cost of interest-bearing

liabilities increased to 162 basis points, compared to 71 basis points in the first three months of 2024. Since March 2022,

the Federal Reserve increased the target federal funds range from 0 – 0.25% to 5.25 – 5.50%.

The tax-equivalent yield on total interest-earning assets increased by 55 basis points to 4.21% in the first three months of

2024 compared to 3.66% in the first three months of 2023. This increase was primarily due to the Company’s balance

sheet repositioning strategy in the fourth quarter of 2023, which improved our asset mix, and higher market interest rates on

interest earning assets.

The cost of total interest-bearing liabilities increased by 91 basis points to 1.62% in the first three months of 2024

compared to 0.71% in the first three months of 2023. Our deposit costs may continue to increase as the Federal Reserve

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

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

funds, Treasury securities and other interest bearing alternative investments.

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

fluctuations. Deposit and loan pricing remain competitive in our markets. We believe this challenging rate environment

will continue throughout 2024. Our ability to compete and manage our deposit costs until our interest-earning assets

reprice and we generate new loans with current market interest rates will be important to our net interest margin during

Provision for Credit Losses

On January 1, 2023, we adopted ASC 326 and its CECL methodology, which requires us to estimate all expected credit

losses over the remaining life of our loans. Accordingly, the provision for credit losses represents a charge to earnings

necessary to establish an allowance for credit losses that, in management's evaluation, is adequate to provide coverage for

all expected credit losses. The Company recorded a provision for credit losses during the first three months of 2024 of $0.3

million, compared to $0.1 million during the first three months of 2023. Provision expense is affected by organic loan

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

economic conditions and net charge-offs. Our CECL model is largely influenced by economic factors including, most

notably, the anticipated unemployment rate, which may be affected by monetary policy. The increase in the provision for

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

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

macroeconomic factors used in our CECL modeling.

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

methodology, to adequately cover all expected credit losses as of the date the allowance is determined. At March 31, 2024,

the Company’s allowance for credit losses was $7.2 million, or 1.27% of total loans, compared to $6.9 million, or 1.23% of

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

Noninterest Income

Quarter ended March 31,

(Dollars in thousands)

2024

2023

Service charges on deposit accounts

156

154

Mortgage lending income

150

93

Bank-owned life insurance

102

156

Other

479

389

Total noninterest income

887

792

The Company’s income from mortgage lending is primarily attributable to the (1) origination and sale of mortgage loans

and (2) servicing of mortgage loans. Origination income, net, is comprised of gains or losses from the sale of the mortgage

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

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

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

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

Subsequent to the date of transfer, the Company has 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 fair value, 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 decrease in the fair value of MSRs.

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

Quarter ended March 31,

(Dollars in thousands)

2024

2023

Origination income, net

57

4

Servicing fees, net

93

89

Total mortgage lending income

150

93

Income from bank-owned life insurance was $102 thousand and $156 thousand for the first three months of 2024 and 2023,

respectively. Excluding a $52 thousand non-taxable death benefit received during the first three months of 2023, income

from bank-owned life insurance would have been $104 thousand for the first three months of 2023.

Other noninterest income was $479 thousand for the first three months of 2024, compared to $389 thousand for the first

three months of 2023. The increase in other noninterest income was primarily due to increased fee income on one-way sell

reciprocal deposits sold through the Intrafi network.

Noninterest Expense

Quarter ended March 31,

(Dollars in thousands)

2024

2023

Salaries and benefits

3,071

2,927

Net occupancy and equipment

763

799

Professional fees

326

338

Other

1,515

1,540

Total noninterest expense

5,675

5,604

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

The decrease in other noninterest expense was primarily due to the Company’s adoption of FASB ASU 2023-02

Investments – Equity Method and Joint Ventures (Topic 323) which allows the proportional amortization method for our

NMTC investments on January 1, 2024. With the adoption of this ASU, amortization of NMTCs are now included in

income tax expense. During the first three months of 2023, other noninterest expense included $105 thousand related to

our equity method investment in NMTCs.

Income Tax Expense

Income tax expense was $0.2 million for the first three months of 2024 compared to $0.3 million for the first three months

of 2023. This decrease was due to declines in earnings before taxes and the Company’s effective tax rate. The Company’s

effective income tax rate for the first three months of 2024 was 10.68 %, compared to 11.97% in the first three months of

2023. The Company’s effective income tax rate is principally impacted by tax-exempt earnings from the Company’s

investments in municipal securities, bank-owned life insurance, and New Mark ets Tax Credits.

BALANCE SHEET ANALYSIS

Securities

Securities available-for-sale were $260.8 million at March 31, 2024, compared to $270.9 million at December 31, 2023.

This decrease reflects a $7.2 million decrease in the amortized cost basis of securities available -for-sale and a decrease in

the fair value of securities available-for-sale of $2.9 million. The average annualized tax-equivalent yields earned on total

securities were 2.26% in the first quarter of 2024 and 2.39% in the first quarter of 2023.

Loans

2024

2023

First

Fourth

Third

Second

First

(In thousands)

Quarter

Quarter

Quarter

Quarter

Quarter

Commercial and industrial

78,920

73,374

66,014

61,880

59,602

Construction and land development

58,909

68,329

70,129

63,874

66,500

Commercial real estate

300,484

287,307

281,964

275,801

267,962

Residential real estate

118,240

117,457

117,150

109,834

101,975

Consumer installment

10,967

10,827

10,353

9,022

9,002

Total loans

567,520

557,294

545,610

520,411

505,041

Total loans were $567.5 million at March 31, 2024, a 2% increase compared to $557.3 million at December 31, 2023. Four

loan categories represented the majority of the loan portfolio at March 31, 2024: commercial real estate (53%), residential

real estate (21%), commercial and industrial (14%) and construction and land development (10%). Approximately 21% of

the Company’s commercial real estate loans were classified as owner-occupied at March 31, 2024.

Within the residential real estate portfolio segment, the Company had junior lien mortgages of approximately $9.2 million,

or 2% of total loans, and $8.7 million, or 2%, of total loans at March 31, 2024 and December 31, 2023, respectively. For

residential real estate mortgage loans with a consumer purpose, the Company had no loans that required interest only

payments at March 31, 2024 and December 31, 2023. The Company’s residential real estate mortgage portfolio does not

include any option or hybrid ARM loans, subprime loans, or any material amount of other consumer mortgage products

which are generally viewed as high risk.

The average yield earned on loans and loans held for sale was 5.01% in the first quarter of 2024 and 4.65% in the first

quarter of 2023.

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

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

pandemic effects including supply chain disruptions, reduced commercial office occupancy levels, housing supply

shortages and inflation on our borrowers’ cash flows, real estate market sales volumes and liquidity, 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 dollar volumes 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, reduced collateral values or non-

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

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

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

expected in the future.

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

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

established and periodically review, lending policies and procedures. Banking regulations limit a bank’s credit 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 secured loan relationships in excess of

approximately $22.3 million. Furthermore, we have an internal limit for aggregate credit exposure (loans outstanding plus

unfunded commitments) to a single borrower of $20.1 million. Our loan policy requires that the Loan Committee of the

Board of Directors approve any loan relationships that exceed this internal limit. At March 31, 2024, the Bank had one

loan relationship exceeding our internal limit.

We periodically analyze our commercial and industrial and commercial real estate loan portfolios to determine if a

concentration of credit risk exists in any one or more industries. We use 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 March 31, 2024 and December 31, 2023.

March 31,

December 31,

(Dollars in thousands)

2024

2023

Lessors of 1-4 family residential properties

58,427

56,912

Multi-family residential properties

45,634

45,841

Hotel/motel

38,822

39,131

Office Buildings

27,897

30,871

Allowance for Credit Losses

On January 1, 2023, we adopted ASC 326 and its CECL methodology, which requires us to estimate all expected credit

losses over the remaining life of our loan portfolio. 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 March 31, 2024 and December 31, 2023, our allowance for credit losses was approximately

$7.2 million and $6.9 million, respectively, which our management believes to be adequate at each of the respective dates.

Our allowance for credit losses as a percentage of total loans was 1.27% at March 31, 2024, compared to 1.23% at

December 31, 2023.

Our CECL models rely largely on projections of macroeconomic conditions to estimate future credit losses.

Macroeconomic factors used in the model include the Alabama unemployment rate, the Alabama home price index, the

national commercial real estate price index and the Alabama gross state product. Projections of these macroeconomic

factors, obtained from an independent third party, are utilized to predict quarterly rates of default.

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

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

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

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

At March 31, 2024, reasonable and supportable periods of 4 quarters were utilized followed by an 8 quarter straight line

reversion period to long term averages.

A summary of the changes in the allowance for credit losses and certain asset quality ratios for the first quarter of 2024 and

the previous four quarters is presented below.

2024

2023

First

Fourth

Third

Second

First

(Dollars in thousands)

Quarter

Quarter

Quarter

Quarter

Quarter

Balance at beginning of period

6,863

6,778

6,634

6,821

5,765

Impact of adopting ASC 326

1,019

Charge-offs:

Commercial and industrial

(164)

Consumer installment

(24)

(20)

(18)

(56)

(11)

Total charge -offs

(24)

(184)

(18)

(56)

(11)

Recoveries

91

11

4

200

8

Net recoveries (charge-offs)

67

(173)

(14)

144

(3)

Provision for credit losses

285

258

158

(331)

40

Ending balance

7,215

6,863

6,778

6,634

6,821

as a % of loans

1.27

1.23

1.24

1.27

1.35

as a % of nonperforming loans

822

753

559

577

255

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

(0.05)

0.13

0.01

(0.11)

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

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

below.

2024

2023

First Quarter

Fourth Quarter

Third Quarter

Second Quarter

First Quarter

(Dollars in thousands)

Amount

Amount

Amount

Amount

Amount

Commercial and industrial

1,415

13.9

1,288

13.2

1,215

12.1

1,198

11.9

1,232

11.8

Construction and land

development

840

10.4

960

12.3

1,073

12.9

1,005

12.3

1,021

13.2

Commercial real estate

4,202

53.0

3,921

51.5

3,803

51.6

3,788

53.0

3,966

53.0

Residential real estate

613

20.8

546

21.1

551

21.5

529

21.1

497

20.2

Consumer installment

145

1.9

148

1.9

136

1.9

114

1.7

105

1.8

Total allowance for credit losses

7,215

6,863

6,778

6,634

6,821

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

Nonperforming Assets

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

The table below provides information concerning total nonperforming assets and certain asset quality ratios for the first

quarter of 2024 and the previous four quarters.

2024

2023

First

Fourth

Third

Second

First

(Dollars in thousands)

Quarter

Quarter

Quarter

Quarter

Quarter

Nonperforming assets:

Nonaccrual loans

878

911

1,213

1,149

2,680

Total nonperforming assets

878

911

1,213

1,149

2,680

as a % of loans and other real estate owned

0.15

0.16

0.22

0.22

0.53

as a % of total assets

0.09

0.09

0.12

0.11

0.26

Nonperforming loans as a % of total loans

0.15

0.16

0.22

0.22

0.53

The table below provides information concerning the composition of nonaccrual loans for the first quarter of 2024 and the

previous four quarters.

2024

2023

First

Fourth

Third

Second

First

(In thousands)

Quarter

Quarter

Quarter

Quarter

Quarter

Nonaccrual loans:

Commercial and industrial

162

178

432

Commercial real estate

765

783

801

819

2,103

Residential real estate

97

128

250

152

135

Consumer installment

16

10

Total nonaccrual loans

878

911

1,213

1,149

2,680

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

condition of the borrower and full repayment of principal and interest is not expected or (2) the principal or interest is

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

The Company had no loans 90 days or more past due and still accruing at March 31, 2024 and December 31, 2023,

respectively.

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

Deposits

March 31,

December 31,

(In thousands)

2024

2023

Noninterest bearing demand

263,484

270,723

NOW

197,044

190,724

Money market

160,980

148,040

Savings

87,562

88,541

Certificates of deposit under $250,000

101,186

100,572

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

89,417

97,643

Total deposits

899,673

896,243

Total deposits were $899.7 million at March 31, 2024, compared to $896.2 million at December 31, 2023. At March 31,

2024, the Company had $48.9 million of reciprocal deposits sold, compared to $59.0 million at December 31, 2023.

Noninterest-bearing deposits were $263.5 million, or 29% of total deposits, at March 31, 2024, compared to $270.7 million,

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

The average rate paid on total interest-bearing deposits was 1.62% in the first quarter of 2024 , compared to 0.70% in first

quarter of 2023.

At March 31, 2024, estimated uninsured deposits totaled $351.5 million, or 39% of total deposits, compared to $356.3

million, or 40% of total deposits at December 31, 2023. During 2023, the Bank began participating in the Certificates of

Deposit Account Registry Service (the “CDARS”) and the Insured Cash Sweep product (“ICS”), which provide for

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

coverage for our depositors. The total of reciprocal deposits at March 31, 2024 was $10.6 million, compared to none at

December 31, 2023. Uninsured amounts are estimated based on the portion of account balances in excess of FDIC

insurance limits. The Bank’s uninsured deposits at March 31, 2024 and December 31, 2023 include approximately $215.0

million and $206.2 million, respectively, of deposits of state, county and local governments that are collateralized by

securities having an equal fair value to such deposits.

The estimated uninsured time deposits by maturity as of March 31, 2024 is presented below.

(Dollars in thousands)

March 31, 2024

Maturity of:

3 months or less

15,297

Over 3 months through 6 months

25,558

Over 6 months through 12 months

20,461

Over 12 months

2,598

Total estimated uninsured time deposits

63,914

The FDIC issued a special assessment of 3.36 basis points for a projected eight quarters on large banks with more than $5

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

March 2023 failures of Silicon Valley Bank and Signature Bank. These special assessments do not apply to the Bank.

Other Borrowings and Available Credit

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

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

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

funds lines totaling $61.0 million with no federal funds borrowings outstanding at March 31, 2024, and December 31,

2023, respectively. Securities sold under agreements to repurchase, which were entered into on behalf of certain customers

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

the Bank had no borrowings from the Federal Reserve discount window and never had any borrowings under the Federal

Reserve’s Bank Term Facility Program (“BTFP”). The BTFP ceased making new loans on March 11, 2024.

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

FHLB of Atlanta’s advance program to obtain funding for its growth. FHLB advances include both fixed and variable

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 prog ram at March 31, 2024 and December 31, 2023, respectively. At those dates, the

Bank had $293.2 million and $309.1 million, respectively, of available lines of credit at the FHLB of Atlanta. Advances

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

The average rate paid on the Bank’s short-term borrowings was 0.51% in the first quarter of 2024 compared to 1.11% in the

first quarter of 2023.

CAPITAL ADEQUACY

The Company’s consolidated stockholders’ equity was $74.5 million and $76.5 million as of March 31, 2024 and

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

loss due to the change in unrealized gains/losses on securities available-for-sale, net of tax of $2.2 million, cash dividends

of $0.9 million, and the cumulative effect of adopting NMTC accounting standard of $0.3 million, partially offset by net

earnings of $1.4 million. Total unrealized losses, net of tax, on available-for-sale securities increased from $29.0 million

on December 31, 2023 to $31.2 million March 31, 2024. These unrealized losses do not affect the Bank’s capital for

regulatory capital purposes.

The Company paid cash dividends of $0.27 per share for both the first quarter of 2024 and first quarter of 2023.

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

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

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

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

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

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

executive officers. At March 31, 2024, the Bank’s ratio was sufficient to meet the fully phased-in conservation buffer, and

did not limit capital distributions or discretionary bonuses.

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

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

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

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

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

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 to make prudent capital distribution decisions.

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

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

consolidated subsidiaries. The Bank’s tier 1 leverage ratio was 10.34%, CET1 risk-based capital ratio was 14.62%, tier 1

risk-based capital ratio was 14.62%, and total risk-based capital ratio was 15.69% at March 31, 2024. These ratios exceed

the minimum regulatory capital percentages of 5.0% for tier 1 leverage ratio, 6.5% for CET1 risk-based capital ratio, 8.0%

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

Bank’s capital conservation buffer was 7.69% at March 31, 2024.

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

rulemaking to implement the Basel III endgame components. 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 or failed internal process, people, and

systems, or from external events; and

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

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

MARKET AND LIQUIDITY RISK MANAGEMENT

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

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

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

ensure an acceptable asset/liability composition. Two critical 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 fluctuations in interest rates. ALCO

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

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

value of equity (“EVE”) model.

Earnings simulation

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

Forecasted levels of earning assets, interest-bearing liabilities, and off -balance sheet financial instruments are combined

with ALCO forecasts of market interest rates for the next 12 months and other factors in order to produce various earnings

simulations and estimates. To help 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 income variances 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 estimate of exposure under these

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

liability sensitive over the forecast period of 12 months.

At March 31, 2024, our earnings simulation model indicated that we were in compliance with the policy guidelines noted

above.

Economic Value of 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 are estimated by discounting expected

cash flows from assets, liabilities, and off-balance sheet items, which establishes a base case EVE. In contrast with our

earnings simulation model, which evaluates interest rate risk over a 12-month timeframe, EVE uses a terminal horizon

which allows for the re-pricing of all assets, liabilities, and off-balance sheet items. Further, EVE is measured using values

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

interest rates, or market and competitive conditions. To help limit interest rate risk, we have stated policy guidelines for an

instantaneous basis point change in interest rates, such that our EVE should not decrease from our base case by more than

the following:

35% for an instantaneous change of +/- 400 basis points

30% 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 March 31, 2024, our EVE model indicated that we were in compliance with our policy guidelines.

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

changes in interest rates. Income associated with interest-earning assets and costs associated with 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 certain assets and liabilities may have

similar maturities or periods of repricing, they may react in different degrees 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 assets and liabilities may lag behind

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

referred to as “interest rate caps and floors”) which limit changes in interest rates. Prepayments and 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 or economic stress, which may

differ across industries and economic sectors. ALCO reviews each of the above 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 between interest-sensitive assets and

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

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

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

designated as hedging instruments. At March 31, 2024 and December 31, 2023, the Company had no derivative contracts

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

Liquidity Risk Management

Liquidity is the Company’s ability to convert assets into cash equivalents in order to meet daily cash flow requirements,

primarily for deposit withdrawals, loan demand and maturing obligations. The Company seeks to manage its liquidity to

manage or reduce its costs of funds by maintaining liquidity believed adequate to meet its anticipated funding needs, while

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

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 are separate and distinct legal

entities with different funding needs and sources, and each are subject to 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 depends on its earnings, liquidity, capital and the absence of regulatory

restrictions on such dividends.

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

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

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

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

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

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

window. In addition to these sources, the Bank is eligible to participate in the FHLB of Atlanta’s advance program to obtain

funding for growth and liquidity. Advances include both fixed and variable terms and may be taken out with varying

maturities. At March 31, 2024, the Bank had no FHLB of Atlanta advances outstanding and available credit from the FHLB

of $293.2 million. At March 31, 2024, the Bank also had $61.0 million of available federal funds lines with no borrowings

outstanding. Primary uses of funds include repayment of maturing obligations and growing the loan portfolio.

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

contractual obligations and unfunded commitments, including loan commitments and reasonably expected borrower,

depositor, and creditor requirements over the next twelve months.

Off-Balance Sheet Arrangements, Commitments, Contingencies and Contractual Obligations

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

outstanding of $69.1 million. Because these commitments generally have fixed expiration dates and many will expire

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

fund these outstanding commitments, the Bank could liquidate federal funds sold or a portion of our securities available-

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

Mortgage lending activities

We generally sell residential mortgage 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 Mae and other investors include various

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

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

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

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

matters.

As of March 31, 2024, the aggregate unpaid principal balance of residential mortgage loans, which we have originated and

sold, but retained the servicing rights, was $214.0 million. Although these loans are generally sold on a non-recourse basis,

we may be obligated to repurchase residential mortgage loans or reimburse investors for losses incurred (make whole

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

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

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

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

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

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

The Company was not required to repurchase any loans during the first quarter of 2024 as a result of representation and

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

make-whole requests at March 31, 2024.

We service all residential mortgage 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 the mortgage loans; (4) maintain any

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

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

governing our rights and duties as servicer.

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

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

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

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

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

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

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

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

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

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

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

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

this exposure by monitoring the level and number of repurchase requests as well as the delinquency rates 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 mortgage loans where the borrower is

entitled to forbearance.

Effects of Inflation and Changing Prices

The consolidated financial statements and related consolidated financial data presented herein have been prepared in

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

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

over time due to inflation. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution

are monetary in nature. As a result, interest rates have a more significant impact on a financial institution’s performance

than the effects of general levels of inflation.

Inflation can affect our noninterest expenses. It also can affect our customers’ behaviors, and can affect the interest rates we

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

between our interest expense and interest income is also affected by the shape of the yield curve and the speeds at which

our assets and liabilities, respectively, reprice in response to interest rate changes. The yield curve continued to be inverted

on March 31, 2024, which means shorter term interest rates are higher than longer interest 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 that not all of our assets or liabilities are priced with the

same index. Higher market interest rates and reductions in the securities held by the Federal Reserve to reduce inflation

generally reduce economic activity and may reduce loan demand and growth. Inflation and related changes in market

interest rates, as the Federal Reserve acts to meet its long term inflation goal of 2%, also can adversely affect the values and

liquidity of our loans and securities, the value of collateral for our loans, and the success of our borrowers and such

borrowers’ available cash to pay interest on and principal of our loans to them.

Inflation has been running at levels unseen in decades and, while it has declined towards the end of 2023, it has been

persistent through March 31, 2024 and remains above the Federal Reserve’s long term inflation goal of 2.0% annually.

Beginning in March 2022, the Federal Reserve has been raising target federal funds interest rates and reducing its securities

holdings in an effort to reduce inflation. During 2022, the Federal Reserve increased the target federal funds range from 0 –

0.25% to 4.25 – 4.50%. The target federal funds rate was increased another 25 basis points on each of January 31, March 7,

May 3 and July 26, 2023 to 5.25-5.50%, and further increases in the target federal funds rate may be made if inflation

remains elevated. The Federal Reserve has indicated it will maintain higher target rates and restrictive monetary policy to

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

1, 2024 meeting, the Federal Reserve’s Open Market Committee (“FOMC”) reaffirmed its commitment to the 2% inflation

objective and announced that it “does not expect it will be appropriate to reduce the target range until it has gained greater

confidence that inflation is moving substantially toward 2%.” Further, the FOMC reduced its monthly reduction of

Treasury securities from $60 billion to $25 billion, and was maintaining the monthly reduction on agency debt and agency

mortgage-backed securities at $35 billion.

Our deposit costs may increase as the Federal Reserve increases its target federal funds rate, market interest rates increase,

and as customer savings behaviors change as a result of inflation and customers seek higher market interest rates on

deposits and other alternative investments. Monetary efforts to control inflation may also affect unemployment which is an

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

CURRENT ACCOUNTING DEVELOPMENTS

The following ASU has been issued by the FASB but is not yet effective.

ASU 2023-09,

Income Taxes (Topic 740): Improvements to Income Tax disclosures

Information about this pronouncement is described in more detail below.

ASU 2023-09,

Income Taxes (Topic 740): Improvements to Income Tax Disclosures,

The amendments in this Update

enhance the transparency and decision usefulness of income tax disclosures. For public business entities, the new standard

is effective for annual periods beginning after December 15, 2024. The Company does not expect the new standard to have

a material impact on the Company’s consolidated financial statements.

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

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

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

interest income from both taxable and tax-exempt sources and facilitates comparability within 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 to GAAP. The reconciliations of these non-

GAAP financial measures to their most directly comparable GAAP financial measures are presented below.

2024

2023

First

Fourth

Third

Second

First

(in thousands)

Quarter

Quarter

Quarter

Quarter

Quarter

Net interest income (GAAP)

6,657

6,059

6,272

6,888

7,109

Tax-equivalent adjustment

20

95

108

106

108

Net interest income (Tax -equivalent)

6,677

6,154

6,380

6,994

7,217

Table 2 - Selected Quarterly Financial Data

2024

2023

First

Fourth

Third

Second

First

(Dollars in thousands, except per share amounts)

Quarter

Quarter

Quarter

Quarter

Quarter

Results of Operations

Net interest income (a)

6,677

6,154

6,380

6,994

7,217

Less: tax-equivalent adjustment

20

95

108

106

108

Net interest income (GAAP)

6,657

6,059

6,272

6,888

7,109

Noninterest income

887

(5,429)

865

791

792

Total revenue

7,544

630

7,137

7,679

7,901

Provision for credit losses

334

326

105

(362)

66

Noninterest expense

5,675

5,803

5,362

5,825

5,604

Income tax expense

164

(1,514)

182

288

267

Net earnings

1,371

(3,985)

1,488

1,928

1,964

Per share data:

Basic and diluted net earnings

0.39

(1.14)

0.43

0.55

0.56

Cash dividends declared

0.27

0.27

0.27

0.27

0.27

Weighted average shares outstanding:

Basic and diluted

3,493,663

3,493,614

3,496,411

3,500,064

3,502,143

Shares outstanding, at period end

3,493,699

3,493,614

3,493,614

3,499,412

3,500,879

Book value

21.32

21.90

17.59

20.28

21.03

Common stock price

High

21.55

21.99

22.80

24.32

24.50

Low

18.82

19.72

20.85

18.80

22.55

Period end:

19.27

21.28

21.50

21.26

22.66

To earnings ratio

83.78

53.20

7.65

7.21

7.79

To book value

90

97

122

105

108

Performance ratios:

Return on average equity

7.13

(26.40)

8.59

10.37

11.44

Return on average assets

0.56

(1.56)

0.58

0.75

0.77

Dividend payout ratio

69.23

(23.68)

62.79

49.09

48.21

Asset Quality:

Allowance for credit losses as a % of:

Loans

1.27

1.23

1.24

1.27

1.35

Nonperforming loans

822

753

559

577

255

Nonperforming assets as a % of:

Loans and other real estate owned

0.15

0.16

0.22

0.22

0.53

Total assets

0.09

0.09

0.12

0.11

0.26

Nonperforming loans as a % of total loans

0.15

0.16

0.22

0.22

0.53

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

(0.05)

0.13

0.01

(0.11)

Capital Adequacy: (c)

CET 1 risk-based capital ratio

14.62

14.52

15.01

15.33

15.45

Tier 1 risk-based capital ratio

14.62

14.52

15.01

15.33

15.45

Total risk-based capital ratio

15.69

15.52

15.98

16.31

16.48

Tier 1 leverage ratio

10.34

9.72

10.26

10.23

10.07

Other financial data:

Net interest margin (a)

3.04

2.65

2.73

3.03

3.17

Effective income tax rate

10.68

(27.53)

10.90

13.00

11.97

Efficiency ratio (b)

75.03

800.41

74.01

74.82

69.97

Selected average balances:

Securities available-for-sale

267,606

354,065

390,772

402,929

402,684

Loans

560,757

550,938

529,382

512,066

502,158

Total assets

976,930

1,020,476

1,020,980

1,022,874

1,022,938

Total deposits

897,051

953,674

942,533

942,552

948,393

Total stockholders’ equity

76,948

60,372

69,269

74,404

68,655

Selected period end balances:

Securities available-for-sale

260,770

270,910

373,286

394,079

405,692

Loans

567,520

557,294

545,610

520,411

505,041

Allowance for credit losses

7,215

6,863

6,778

6,634

6,821

Total assets

979,039

975,255

1,030,724

1,026,130

1,017,746

Total deposits

899,673

896,243

964,602

950,742

939,190

Total stockholders’ equity

74,489

76,507

61,451

70,976

73,640

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

(b) Efficiency ratio is the result of noninterest expense divided by the sum of noninterest income and tax-equivalent net interest income.

See Table 1 - Explanation of Non-GAAP Measures.

(c) Regulatory capital ratios presented are for the Company's wholly-owned subsidiary, AuburnBank.

Table 3 - Average Balances and Net Interest Income Analysis

Quarter ended March 31,

2024

2023

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)

560,942

6,990

5.01%

502,158

5,754

4.65%

Securities - taxable (2)

257,229

1,411

2.21%

344,884

1,865

2.19%

Securities - tax-exempt (2)(3)

10,377

94

3.64%

57,800

511

3.59%

Total securities

267,606

1,505

2.26%

402,684

2,366

2.38%

Federal funds sold

17,980

249

5.57%

7,314

85

4.71%

Interest bearing bank deposits

37,790

505

5.37%

11,607

128

4.47%

Total interest-earning assets

884,318

9,249

4.21%

923,763

8,343

3.66%

Cash and due from banks

17,772

15,527

Other assets

74,840

83,648

Total assets

976,930

1,022,938

Interest-bearing liabilities:

Deposits:

NOW

196,648

640

1.31%

187,566

248

0.54%

Savings and money market

241,792

340

0.57%

300,657

290

0.39%

Time deposits

199,562

1,590

3.20%

155,676

580

1.51%

Total interest-bearing deposits

638,002

2,570

1.62%

643,899

1,118

0.70%

Short-term borrowings

1,592

2

0.51%

3,046

8

1.11%

Total interest-bearing liabilities

639,594

2,572

1.62%

646,945

1,126

0.71%

Noninterest-bearing deposits

259,050

304,494

Other liabilities

1,338

2,844

Stockholders' equity

76,948

68,655

Total liabilities and stockholders' equity

976,930

1,022,938

Net interest income and margin (tax-equivalent)

6,677

3.04%

7,217

3.17%

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

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

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

tax rate of 21%.

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.

The Company, with the participation of its management, including its Chief Executive Officer and Chief Financial Officer,

carried out an evaluation of the effectiveness of the design and operation of 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 Officer and Chief Financial Officer concluded that the Company’s disclosure controls and

procedures were effective to allow timely decisions regarding disclosure in 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 control over financial reporting that occurred during the period covered by this report

that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial

reporting.

which could materially affect our business, financial condition or future results. The risks described in our annual report on

Form 10-K are not the only the risks facing our Company. The persistence of inflation above the Federal Reserve’s long

term targets, and the maintenance of or further increases in, tightened Federal Reserve monetary policy by increased target

interest rates and reductions in the Federal Reserve’s securities portfolio, have and are 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 adversely affected our stockholders’ equity. These have affected and are expected to

continue to affect our deposit 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 be immaterial also may materially adversely affect our

business, financial condition, and/or operating results in the future.