AUBURN NATIONAL BANCORPORATION, INC [AUBN] Filings

10-Q 1 d859913d10q.htm 10-Q 10-Q

Table of Contents

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

June 30, 2024

☐

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 Fiscal

Year,

if Changed Since Last Report)

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

check

mark

whether

the

registrant

(1) has

filed

all

reports

required

filed

Section 13

15(d)

the

Securities

Exchange Act

of 1934

during the

preceding 12 months

(or for

such shorter

period that

the registrant

was required

to file

such reports),

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

Yes

☒

☐

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

(§232.405 of this chapter)

during the preceding 12 months (or for such shorter period

that the registrant was required to submit such files).

Yes

☒

☐

Indicate by check

mark whether the

registrant is a

large accelerated filer,

an accelerated filer,

a non-accelerated filer,

a smaller reporting

company

emerging

growth

company.

See

the

definitions

“large

accelerated

filer,”

“accelerated

filer,”

“smaller

reporting

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

☐

emerging

growth

company,

indicate

check

mark

the

registrant

has

elected

not

use

the

extended

transition

period

for

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

☐

☒

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

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 August 1, 2024

Common Stock, $0.01 par value per share

3,493,699

Table of Contents

AUBURN NATIONAL BANCORPORATION, INC. AND

SUBSIDIARIES

INDEX

PART I. FINANCIAL INFORMATION

PAGE

Item 1

Financial Statement

Consolidated Balance Sheets (Unaudited) as of June 30, 2024 and December 31, 2023

Consolidated Statements of Earnings (Unaudited) for the quarter and six months ended June 30, 2024

and 2023

Consolidated Statements of Comprehensive Income (Unaudited) for the quarter and six months ended

June 30, 2024 and 2023

Consolidated Statements of Stockholders’ Equity (Unaudited) for the quarter and six months ended

June 30, 2024 and 2023

Consolidated Statements of Cash Flows (Unaudited) for the six months ended June 30, 2024 and 2023

Notes to Consolidated Financial Statements (Unaudited

)

Item 2

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Table 1 – Explanation of Non-GAAP Financial Measures

Table 2 – Selected Quarterly Financial Data

Table 3 – Selected Financial Data

Table 4 – Average Balances and Net Interest Income Analysis – for the quarter ended June 30, 2024

and 2023

Table 5 – Average Balances and Net Interest Income Analysis – for the six months ended June 30, 2024

and 2023

Item 3

Quantitative and Qualitative Disclosures About Market Risk

Item 4

Controls and Procedures

PART II. OTHER INFORMATION

Item 1

Legal Proceedings

Item 1A

Risk Factors

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

Item 3

Defaults Upon Senior Securities

Item 4

Mine Safety Disclosures

Item 5

Other Information

Item 6

Exhibits

Table of Contents

PART

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

AUBURN NATIONAL

BANCORPORATION,

INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Unaudited)

June 30,

December 31,

(Dollars in thousands, except share data)

2024

2023

Assets:

Cash and due from banks

26,334

27,127

Federal funds sold

11,778

31,412

Interest-bearing bank deposits

76,387

12,830

Cash and cash equivalents

114,499

71,369

Securities available-for-sale

254,359

270,910

Loans held for sale

—

Loans

578,068

557,294

Allowance for credit losses

(7,142)

(6,863)

Loans, net

570,926

550,431

Premises and equipment, net

46,618

45,535

Bank-owned life insurance

17,311

17,110

Other assets

21,311

19,900

Total assets

1,025,054

975,255

Liabilities:

Deposits:

Noninterest-bearing

263,105

270,723

Interest-bearing

683,300

625,520

Total deposits

946,405

896,243

Federal funds purchased and securities sold under agreements to repurchase

—

1,486

Accrued expenses and other liabilities

3,440

1,019

Total liabilities

949,845

898,748

Stockholders' equity:

Preferred stock of $

.01

par value; authorized

200,000

shares;

no shares issued

—

Common stock of $

.01

par value; authorized

8,500,000

shares;

issued

3,957,135

Additional paid-in capital

3,802

3,801

Retained earnings

114,353

113,398

Accumulated other comprehensive loss, net

(31,284)

(29,029)

Less treasury stock, at cost -

463,436

shares and

463,521

at June 30, 2024

and December 31, 2023, respectively

(11,701)

(11,702)

Total stockholders’ equity

75,209

76,507

Total liabilities and stockholders’

equity

1,025,054

975,255

See accompanying notes to consolidated financial statements

Table of Contents

AUBURN NATIONAL

BANCORPORATION,

INC. AND SUBSIDIARIES

Consolidated Statements of Earnings

(Unaudited)

Quarter ended June 30,

Six months ended June 30,

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

2024

2023

2024

2023

Interest income:

Loans, including fees

7,451

6,019

14,441

11,773

Securities:

Taxable

1,371

1,826

2,782

3,691

Tax-exempt

404

148

807

Federal funds sold and interest-bearing bank deposits

688

144

1,442

357

Total interest income

9,584

8,393

18,813

16,628

Interest expense:

Deposits

2,874

1,482

5,444

2,600

Short-term borrowings

Total interest expense

2,875

1,505

5,447

2,631

Net interest income

6,709

6,888

13,366

13,997

Provision for (reversal of) credit losses

(123)

(362)

211

(296)

Net interest income after provision for credit

losses

6,832

7,250

13,155

14,293

Noninterest income:

Service charges on deposit accounts

153

154

309

308

Mortgage lending

180

142

330

235

Bank-owned life insurance

201

224

Other

464

427

943

816

Total noninterest income

896

791

1,783

1,583

Noninterest expense:

Salaries and benefits

3,140

3,038

6,211

5,965

Net occupancy and equipment

603

787

1,366

1,586

Professional fees

314

299

640

637

Other

1,462

1,701

2,977

3,241

Total noninterest expense

5,519

5,825

11,194

11,429

Earnings before income taxes

2,209

2,216

3,744

4,447

Income tax expense

475

288

639

555

Net earnings

1,734

1,928

3,105

3,892

Net earnings per share:

Basic and diluted

0.50

0.55

0.89

1.11

Weighted average shares

outstanding:

Basic and diluted

3,493,699

3,500,064

3,493,681

3,501,098

See accompanying notes to consolidated financial statements

Table of Contents

AUBURN NATIONAL

BANCORPORATION,

INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(Unaudited)

Quarter ended June 30,

Six months ended June 30,

(Dollars in thousands)

2024

2023

2024

2023

Net earnings

1,734

1,928

3,105

3,892

Other comprehensive (loss) gain:

Unrealized (loss) gain on securities

(94)

(4,830)

(3,012)

2,467

Related tax benefit (expense)

1,215

757

(619)

Other comprehensive (loss) gain, net of tax

(71)

(3,615)

(2,255)

1,848

Comprehensive income (loss)

1,663

(1,687)

850

5,740

See accompanying notes to consolidated financial statements

Table of Contents

AUBURN NATIONAL

BANCORPORATION,

INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders' Equity

(Unaudited)

Accumulated

Common

Additional

other

Common

paid-in

Retained

comprehensive

Treasury

(Dollars in thousands, except share data)

Outstanding

Stock

capital

earnings

(loss) income

stock

Total

Quarter ended June 30, 2024

Balance, March 31, 2024

3,493,699

3,802

113,563

(31,213)

(11,702)

74,489

Net earnings

—

1,734

—

1,734

Other comprehensive loss

—

(71)

—

(71)

Cash dividends paid ($

.27

per share)

—

(944)

—

(944)

Sale of treasury stock

—

Balance, June 30, 2024

3,493,699

3,802

114,353

(31,284)

(11,701)

75,209

Quarter ended June 30, 2023

Balance, March 31, 2023

3,500,879

3,798

116,798

(35,457)

(11,538)

73,640

Net earnings

—

1,928

—

1,928

Other comprehensive loss

—

(3,615)

—

(3,615)

Cash dividends paid ($

.27

per share)

—

(945)

—

(945)

Stock repurchases

(1,577)

—

(35)

Sale of treasury stock

110

—

Balance, June 30, 2023

3,499,412

3,800

117,781

(39,072)

(11,572)

70,976

Six months ended June 30, 2024

Balance, December 31, 2023

3,493,614

3,801

113,398

(29,029)

(11,702)

76,507

Cumulative effect of change in accounting

standard

—

(263)

—

(263)

Net earnings

—

3,105

—

3,105

Other comprehensive loss

—

(2,255)

—

(2,255)

Cash dividends paid ($

.54

per share)

—

(1,887)

—

(1,887)

Sale of treasury stock

—

Balance, June 30, 2024

3,493,699

3,802

114,353

(31,284)

(11,701)

75,209

Six months ended June 30, 2023

Balance, December 31, 2022

3,503,452

3,797

116,600

(40,920)

(11,475)

68,041

Cumulative effect of change in accounting

standard

—

(821)

—

(821)

Net earnings

—

3,892

—

3,892

Other comprehensive income

—

1,848

—

1,848

Cash dividends paid ($

.54

per share)

—

(1,890)

—

(1,890)

Stock repurchases

(4,225)

—

(99)

Sale of treasury stock

185

—

Balance, June 30, 2023

3,499,412

3,800

117,781

(39,072)

(11,572)

70,976

See accompanying notes to consolidated financial statements

Table of Contents

AUBURN NATIONAL

BANCORPORATION,

INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

Six months ended June 30,

(Dollars in thousands)

2024

2023

Cash flows from operating activities:

Net earnings

3,105

3,892

Adjustments to reconcile net earnings to net cash provided by

operating activities:

Provision for (reversal of) credit losses

221

(291)

Depreciation and amortization

902

858

Premium amortization and discount accretion, net

770

1,223

Net gain on sale of loans held for sale

(142)

(61)

Loans originated for sale

(5,826)

(1,219)

Proceeds from sale of loans

5,911

1,271

Increase in cash surrender value of bank-owned life insurance

(201)

(172)

Income recognized from death benefit on bank-owned life insurance

—

(52)

Net (increase) decrease in other assets

(1,026)

3,332

Net increase (decrease) in accrued expenses and other liabilities

2,412

(1,406)

Net cash provided by operating activities

6,126

7,375

Cash flows from investing activities:

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

12,769

12,470

Increase in loans, net

(20,706)

(15,812)

Net purchases of premises and equipment

(1,880)

(40)

Proceeds from bank-owned life insurance death benefit

—

216

Decrease in FHLB stock

Net cash used in investing activities

(9,785)

(3,125)

Cash flows from financing activities:

Net decrease in noninterest-bearing deposits

(7,618)

(12,892)

Net increase in interest-bearing deposits

57,780

13,297

Net decrease in federal funds purchased and securities sold

under agreements to repurchase

(1,486)

(384)

Stock repurchases

—

(99)

Dividends paid

(1,887)

(1,890)

Net cash provided by (used in) financing activities

46,789

(1,968)

Net change in cash and cash equivalents

43,130

2,282

Cash and cash equivalents at beginning of period

71,369

27,254

Cash and cash equivalents at end of period

114,499

29,536

Supplemental disclosures of cash flow information:

Cash paid during the period for:

Interest

5,383

2,191

Income taxes

460

800

See accompanying notes to consolidated financial statements

Table of Contents

AUBURN NATIONAL

BANCORPORATION,

INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

General

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

to individuals and

commercial customers in Lee County,

Alabama and surrounding areas through its wholly owned subsidiary,

AuburnBank

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

material.

Basis of Presentation and Use of Estimates

The unaudited consolidated financial statements in this report have been prepared

in accordance with U.S. generally

accepted accounting principles (“GAAP”) for interim financial information.

Accordingly, these financial statements

do not

include all of the information and footnotes required by U.S. GAAP for complete financial

statements.

The unaudited

consolidated financial statements include, in the opinion of management, all adjustments

necessary to present a fair

statement of the financial position and the results of operations for all periods

presented. All such adjustments are of a

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

indicative of the results of

operations that the Company and its subsidiaries may achieve for future interim periods

or the entire year. For further

information, refer to the consolidated financial statements and footnotes included in the Company's

Annual Report on Form

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

The unaudited consolidated financial statements include the accounts of the

Company and its wholly-owned subsidiaries.

Significant intercompany transactions and accounts are eliminated in consolidation.

The preparation of financial statements in conformity with U.S. GAAP requires

management to make estimates and

assumptions that affect the reported amounts of assets and liabilities and disclosures

of contingent assets and liabilities as of

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

Actual results could

differ from those estimates.

Material estimates that are particularly susceptible to significant change in the near term

include the determination of allowance for credit losses on loans and investment securities,

fair value of financial

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

Revenue Recognition

The Company’s sources of income that

fall within the scope of ASC 606 include service charges on deposits,

ATM

and

interchange fees and gains and losses on sales of other real estate, all of which are presented

as components of noninterest

income. The following is a summary of the revenue streams that fall within the scope

of ASC 606:

●

Service charges on deposits, investment services, ATM

and interchange fees – Fees from these services are either

(i) transaction-based, for which the performance obligations are satisfied

when the individual transaction is

processed, or (ii) set periodic service charges, for which the performance

obligations are satisfied over the period

the service is provided. Transaction-based

fees are recognized at the time the transaction is processed, and periodic

service charges are recognized over the service period.

●

Gains on sales of OREO

–

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

asset has been transferred to the buyer.

ASC 606 lists several criteria required to conclude that a contract for sale

exists, including a determination that the institution will collect substantially all of the consideration

to which it is

entitled.

In addition to the loan-to-value ratio, where the seller provides

the purchaser with financing, the analysis

is based on various other factors,

including the credit quality of the purchaser,

the structure of the loan, and any

other factors that we believe may affect collectability.

Subsequent Events

The Company has evaluated the effects of events and transactions through

the date of this filing that have occurred

subsequent to June 30, 2024.

The Company does not believe there were any material subsequent events during this

period

that would have required further recognition or disclosure in the unaudited

consolidated financial statements included in

this report.

Table of Contents

Correction of Error

The disclosure of loans by vintage in Note 5 – Loans and Allowance for Credit

Losses in the Company’s Annual Report on

Form 10-K for year ended December 31, 2023 contained incorrect information as it pertains

to loans originated by vintage

and revolving loans.

All current period gross charge-off data, total loans by segment and total loans by credit

quality

indicator were correctly reported.

The loans originated by vintage and revolving loans as of December 31, 2023

have been

corrected in the comparative presentation in Note 5 – Loans and Allowance for Credit Losses

in the Notes herein.

Reclassifications

Certain amounts reported in prior periods have been reclassified to conform to the current

-period presentation. These

reclassifications had no effect on the Company’s

previously reported net earnings or total stockholders’ equity.

Accounting Standards Adopted in 2024

On January 1, 2024, the Company adopted ASU 2023-02,

Investments – Equity Method and Joint Ventures

(Topic 323):

Accounting for Investments in Tax

Credit Structures Using

the Proportional Amortization Method

ASU 2023-02 now

permits reporting entities to elect to account for their equity investments made primarily to

receive income tax credits and

other income tax benefits,

regardless of the program from which the income tax credits or benefits are received,

using the

proportional amortization method if certain conditions are met. The

new standard is effective for fiscal years, and interim

periods within those fiscal years, beginning after December 15,

2023.

The Company adopted ASU 2023-02 effective

January 1, 2024 and recorded a cumulative effect of change in accounting

standard adjustment which reduced beginning

retained earnings by $0.3 million.

The Company, beginning

January 1, 2024, accounts

for its investments in New Markets

Tax Credits (“NMTCs”)

using the proportional amortization method through charges to the

provision for income taxes. See

Note 3, Variable

Interest Entities.

NOTE 2: BASIC AND DILUTED NET EARNINGS PER SHARE

Basic net earnings per share is computed by dividing net earnings by the weighted average

common shares outstanding for

the respective period.

Diluted net earnings per share reflect the potential dilution that could occur

upon exercise of

securities or other rights for, or convertible into, shares of the

Company’s common stock.

At June 30, 2024 and 2023,

respectively, the Company

had no such securities or rights issued or outstanding, and therefore, no dilutive

effect to

consider for the diluted net earnings per share calculation.

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

presented below

Quarter ended June 30,

Six months ended June 30,

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

2024

2023

2024

2023

Basic and diluted:

Net earnings

1,734

1,928

3,105

3,892

Weighted average common

shares outstanding

3,493,699

3,500,064

3,493,681

3,501,098

Net earnings per share

0.50

0.55

0.89

1.11

NOTE 3: VARIABLE

INTEREST ENTITIES

Generally, a variable interest entity (“VIE”)

is a corporation, partnership, trust or other legal structure that does not have

equity investors with substantive or proportional voting rights or has equity investors

that do not provide sufficient financial

resources for the entity to support its activities.

Table of Contents

At June 30, 2024, the Company did not have any consolidated VIEs but did have one nonconsolidated

VIE, discussed

below.

New Markets Tax

Credit Investment

The

NMTC

program

provides

federal

tax

incentives

investors

make

investments

distressed

communities

and

promotes

economic

improvement

through

the

development

successful

businesses

these

communities.

NMTCs

are

available to investors

over seven

years and are

subject to recapture

if certain events

occur during

such period.

At June 30,

2024

and

December

31,

2023,

respectively,

the

Company

had

one

such

investment

$1.1

million

and

$1.7

million,

respectively,

which

was

included

other

assets

the

Company’s

consolidated

balance

sheets

VIE.

While

the

Company’s

investment exceeds

50% of

the outstanding

equity interest

in this

VIE, the

Company does

not consolidate

the

VIE because

the Company

lacks the

power to

direct the

activities of

the VIE,

and therefore

is not a

primary beneficiary

the VIE.

On March 29, 2023, the FASB

issued ASU 2023-02, which was effective beginning in 2024 for

public business entities.

have

adopted

ASU

2023-02

January

2024

with

respect

accounting

for

our

NMTC

investment.

The

proportional amortization

method results in

the tax

credit investment

being amortized

in proportion

to the

allocation of

tax

credits and other tax

benefits in each

period and a

net presentation within

the income tax

line item.

The cumulative effects

of the

change

accounting

standard

resulted

in a

$0.4

million pre-tax

decrease

the

Company’s

NMTC

investment

January 1, 2024.

See Note 1:

Summary of Significant Accounting Policies – Accounting

Standards Adopted in 2024.

(Dollars in thousands)

Maximum

Loss Exposure

Asset Recognized

Classification

Type:

New Markets Tax Credit investment

1,082

Other assets

NOTE 4: SECURITIES

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

all securities within the scope of ASC 320,

Investments – Debt and

Equity Securities,

were classified as available-for-sale.

The fair value and amortized cost for securities available-for-sale

by contractual maturity at June 30, 2024 and December 31, 2023, respectively,

are presented below.

1 year

1 to 5

5 to 10

After 10

Fair

Gross Unrealized

Amortized

(Dollars in thousands)

or less

years

Value

Gains

Losses

Cost

June 30, 2024

Agency obligations (a)

—

17,309

35,407

—

52,716

—

8,501

61,217

Agency MBS (a)

19,849

14,808

149,225

183,941

—

30,314

214,255

State and political subdivisions

—

568

9,037

8,097

17,702

2,961

20,662

Total available-for-sale

37,726

59,252

157,322

254,359

41,776

296,134

December 31, 2023

Agency obligations (a)

331

10,339

43,209

—

53,879

—

8,195

62,074

Agency MBS (a)

15,109

22,090

161,058

198,289

—

27,838

226,127

State and political subdivisions

—

9,691

9,051

18,742

2,731

21,472

Total available-for-sale

363

25,448

74,990

170,109

270,910

38,764

309,673

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

entities.

Expected lives of these

securities may differ from contractual maturities because (i)

issuers may have the right to call or repay such securities

obligations with or without prepayment penalties and (ii) loans incuded in Agency MBS

generally have the right to

prepay such loan in whole or in part at any time.

Securities with aggregate fair values of $

202.5

million and $

211.8

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

were pledged to secure public deposits, securities sold under agreements to repurchase,

Federal Home Loan Bank of

Atlanta (“FHLB of Atlanta”) advances, and for other purposes required or

permitted by law.

Table of Contents

Included in other assets on the accompanying consolidated balance sheets include non-marketable

equity investments.

The

carrying amounts of non-marketable equity investments were $

1.4

million at June 30, 2024 and December 31, 2023,

respectively.

Non-marketable equity investments include FHLB of Atlanta stock,

Federal Reserve Bank of Atlanta

(“FRB”) stock, and stock in a privately held financial institution.

Gross Unrealized Losses and Fair Value

The fair values and gross unrealized losses on securities at June 30, 2024

and December 31, 2023, respectively, segregated

by those securities that have been in an unrealized loss position for less than 12

months and 12 months or longer, are

presented below.

Less than 12 Months

12 Months or Longer

Total

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

(Dollars in thousands)

Value

Losses

Value

Losses

Value

Losses

June 30, 2024:

Agency obligations

—

52,716

8,501

52,716

8,501

Agency MBS

—

183,931

30,314

183,941

30,314

State and political subdivisions

1,817

14,163

2,923

15,980

2,961

Total

1,827

250,810

41,738

252,637

41,776

December 31, 2023:

Agency obligations

—

53,879

8,195

53,879

8,195

Agency MBS

198,223

27,837

198,289

27,838

State and political subdivisions

793

14,408

2,729

15,201

2,731

Total

859

266,510

38,761

267,369

38,764

For the securities in the previous table, the Company considers the severity of the unrealized

loss as well as the Company’s

intent to hold the securities to maturity or the recovery of the cost basis.

Unrealized losses have not been recognized into

income as the decline in fair value is largely due to changes in interest rates and other

market conditions.

For the securities

held as of June 30, 2024 in the table immediately above, management does not intend to sell

and it is likely that

management will not be required to sell the securities prior to their recovery.

Agency Obligations

Investments in agency obligations are guaranteed as to full and timely payment of principal

and interest by the issuing

agency.

Based on management's analysis and judgement, there

were no credit losses attributable to the Company’s

investments in agency obligations at June 30, 2024.

Agency MBS

Investments in agency mortgage-backed securities (“MBS”) are MBS

issued by Ginnie Mae, Fannie Mae, and Freddie

Mac.

Each of these agencies provide a guarantee of full and timely payments of principal and interest

on their respective

MBS by the issuing agency.

Based on management's analysis and judgement, there were no credit

losses attributable to the

Company’s investments in agency MBS at June

30, 2024.

State and Political Subdivisions

Investments in state and political subdivisions are securities issued by various

municipalities in the United States.

The

majority of these securities were rated AA or higher,

with no securities rated below investment grade at June 30, 2024.

Based on management's analysis and judgement, there were no credit losses attributable

to the Company’s investments

state and political subdivisions at June 30, 2024.

Realized Gains and Losses

The Company had no realized gains or losses on sale of securities during the quarters and six

months ended June 30, 2024

and 2023, respectively.

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NOTE 5: LOANS AND ALLOWANCE

FOR CREDIT LOSSES

June 30,

December 31,

(Dollars in thousands)

2024

2023

Commercial and industrial

77,627

73,374

Construction and land development

73,688

68,329

Commercial real estate:

Owner occupied

63,384

66,783

Hotel/motel

38,542

39,131

Multi-family

44,135

45,841

Other

151,171

135,552

Total commercial real estate

297,232

287,307

Residential real estate:

Consumer mortgage

60,957

60,545

Investment property

58,470

56,912

Total residential real estate

119,427

117,457

Consumer installment

10,094

10,827

Total Loans

578,068

557,294

Loans secured by real estate were approximately 84.8% of the Company’s

total loan portfolio at June 30, 2024.

At June 30,

2024, the Company’s geographic

loan distribution was concentrated primarily in Lee County,

Alabama, and surrounding

areas.

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

systematic method for

determining its allowance for credit losses. As part of the Company’s

quarterly assessment of the allowance, the loan

portfolio included the following portfolio segments: commercial and industrial,

construction and land development,

commercial real estate, residential real estate, and consumer installment. Where appropriate,

the Company’s loan portfolio

segments are further disaggregated into classes. A class is generally determined based

on the initial measurement attribute,

risk characteristics of the loan, and an entity’s

method for monitoring and determining credit risk.

The following describes

the risk characteristics relevant to each of the portfolio segments

and classes.

Commercial and industrial (“C&I”) —

includes loans to finance business operations, equipment purchases, or

other needs

for small and medium-sized commercial customers. Also included

in this category are loans to finance agricultural

production.

Generally,

the primary source of repayment is the cash flow from business operations and activities

of the

borrower.

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

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

carrying,

and developing land into commercial developments or residential subdivisions.

Also included are loans and credit

lines for construction of residential, multi-family,

and commercial buildings. Generally,

the primary source of repayment is

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

Commercial real estate

(“CRE”) —

includes loans in these classes:

●

Owner occupied

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

owner-occupied facilities primarily for small and medium-sized

commercial customers.

Generally,

the primary

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

who owns the

property.

●

Hotel/motel

– includes loans for hotels and motels.

Generally, the primary source of repayment

is dependent upon

income generated from the hotel/motel securing the loan.

The underwriting of these loans takes into consideration

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

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●

Multi-family

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

These include loans

for 5 or more unit residential properties and apartments leased to residents. Generally

the primary source of

repayment is dependent upon income generated from the real estate collateral.

The underwriting of these loans

takes into consideration the occupancy and rental rates,

as well as the financial health of the respective borrowers.

●

Other

– primarily includes loans to finance income-producing commercial properties

other than hotels/motels and

multi-family properties, and which

are not owner occupied.

Loans in this class include loans for neighborhood

retail centers, medical and professional offices, single retail stores,

industrial buildings, and warehouses leased to

local and other businesses.

Generally,

the primary source of repayment is dependent upon income generated

from

the real estate collateral. The underwriting of these loans takes into consideration

the occupancy and rental rates,

as well as the financial health of the borrower.

Residential real estate (“RRE”) —

includes loans in these two classes:

●

Consumer mortgage

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

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

accordance

with the Bank’s general loan policies and

procedures which require, among other things, proper documentation of

each borrower’s financial condition, satisfactory credit history

and property value.

●

Investment property

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

Generally,

the primary source of repayment is dependent upon income generated

from leasing the property

securing the loan. The underwriting of these loans takes into consideration the rental rates and

property values, as

well as the financial health of the borrowers.

Consumer installment —

includes loans to individuals,

which may be secured by personal property or are unsecured.

Loans

include personal lines of credit, automobile loans, and other retail loans.

These loans are underwritten in accordance with

the Bank’s general loan policies and procedures

which require, among other things, proper documentation of each

borrower’s financial condition, satisfactory credit history,

and, if applicable, property values.

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The following is a summary of current, accruing past due, and nonaccrual loans by portfolio

segment and class as of June

30, 2024 and December 31, 2023.

Accruing

Total

30-89 Days

Greater than

Accruing

Non-

Total

(Dollars in thousands)

Current

Past Due

90 days

Loans

Accrual

Loans

June 30, 2024:

Commercial and industrial

77,625

—

77,627

—

77,627

Construction and land development

73,284

404

—

73,688

—

73,688

Commercial real estate:

Owner occupied

62,631

—

62,631

753

63,384

Hotel/motel

38,542

—

38,542

—

38,542

Multi-family

44,135

—

44,135

—

44,135

Other

151,171

—

151,171

—

151,171

Total commercial real estate

296,479

—

296,479

753

297,232

Residential real estate:

Consumer mortgage

60,805

111

—

60,916

60,957

Investment property

58,372

—

58,470

—

58,470

Total residential real estate

119,177

209

—

119,386

119,427

Consumer installment

10,071

—

10,094

—

10,094

Total

576,636

638

—

577,274

794

578,068

December 31, 2023:

Commercial and industrial

73,108

266

—

73,374

—

73,374

Construction and land development

68,329

—

68,329

—

68,329

Commercial real estate:

Owner occupied

66,000

—

66,000

783

66,783

Hotel/motel

39,131

—

39,131

—

39,131

Multi-family

45,841

—

45,841

—

45,841

Other

135,552

—

135,552

—

135,552

Total commercial real estate

286,524

—

286,524

783

287,307

Residential real estate:

Consumer mortgage

60,442

—

60,442

103

60,545

Investment property

56,597

290

—

56,887

56,912

Total residential real estate

117,039

290

—

117,329

128

117,457

Consumer installment

10,781

—

10,827

—

10,827

Total

555,781

602

—

556,383

911

557,294

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Credit Quality Indicators

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

similar to the

standard asset classification system used by the federal banking agencies.

These categories are utilized to develop the

associated allowance for credit losses using historical losses adjusted

for qualitative and environmental factors and are

defined as follows:

●

Pass – loans which are well protected by the current net worth and paying capacity

of the obligor (or guarantors, if

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

●

Special Mention – loans with potential weakness that may,

if not reversed or corrected, weaken the credit or

inadequately protect the Company’s position

at some future date. These loans are not adversely classified and do

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

●

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

jeopardizes debt repayment,

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

that the

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

●

Nonaccrual – includes loans where management has determined that

full payment of principal and interest is not

expected.

Substandard accrual and nonaccrual loans are often collectively referred to as “classified.”

Table of Contents

The following tables presents credit quality indicators for the loan portfolio segments and

classes by year of origination as

of June 30, 2024 and December 31, 2023.

The December 31, 2023 table has been revised to correct revolving loans and

properly allocate loans by year of origination.

See Note 1: Summary of Significant Accounting Policies – Correction of

Error.

Year of Origination

2024

2023

2022

2021

2020

Prior to

2020

Revolving

Loans

Total

Loans

(Dollars in thousands)

June 30, 2024:

Commercial and industrial

Pass

5,671

13,080

19,641

13,026

5,350

17,043

3,485

77,296

Special mention

—

Substandard

187

—

257

Nonaccrual

—

Total commercial and industrial

5,725

13,160

19,828

13,036

5,350

17,043

3,485

77,627

Current period gross charge-offs

—

Construction and land development

Pass

17,898

27,794

23,510

1,544

1,823

144

—

72,713

Special mention

332

404

—

736

Substandard

239

—

239

Nonaccrual

—

Total construction and land development

18,469

28,198

23,510

1,544

1,823

144

—

73,688

Current period gross charge-offs

—

Commercial real estate:

Owner occupied

Pass

509

12,454

7,030

17,282

9,469

9,711

4,991

61,446

Special mention

931

254

—

1,185

Substandard

—

Nonaccrual

—

753

—

753

Total owner occupied

1,440

12,708

7,030

17,282

9,469

10,464

4,991

63,384

Current period gross charge-offs

—

Hotel/motel

Pass

245

8,822

9,677

3,142

1,397

14,993

266

38,542

Special mention

—

Substandard

—

Nonaccrual

—

Total hotel/motel

245

8,822

9,677

3,142

1,397

14,993

266

38,542

Current period gross charge-offs

—

Table of Contents

Year of Origination

2024

2023

2022

2021

2020

Prior to

2020

Revolving

Loans

Total

Loans

(Dollars in thousands)

June 30, 2024:

Multi-family

Pass

192

11,710

17,279

1,916

5,967

6,505

566

44,135

Special mention

—

Substandard

—

Nonaccrual

—

Total multi-family

192

11,710

17,279

1,916

5,967

6,505

566

44,135

Current period gross charge-offs

—

Other

Pass

26,641

21,591

26,844

25,885

13,606

18,612

16,961

150,140

Special mention

905

—

905

Substandard

—

126

—

126

Nonaccrual

—

Total other

27,546

21,591

26,844

25,885

13,732

18,612

16,961

151,171

Current period gross charge-offs

—

Residential real estate:

Consumer mortgage

Pass

3,621

18,043

18,685

2,614

2,612

12,084

2,272

59,931

Special mention

—

490

—

490

Substandard

—

495

—

495

Nonaccrual

—

Total consumer mortgage

3,621

18,043

18,685

2,614

2,612

13,110

2,272

60,957

Current period gross charge-offs

—

Investment property

Pass

7,691

12,004

11,111

8,908

12,301

5,773

281

58,069

Special mention

—

Substandard

—

224

—

401

Nonaccrual

—

Total investment property

7,691

12,086

11,206

8,908

12,525

5,773

281

58,470

Current period gross charge-offs

—

Consumer installment

Pass

3,216

3,443

2,098

359

123

191

582

10,012

Special mention

—

Substandard

—