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

September 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

☐

☒

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 October 31, 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 September 30, 2024 and December 31, 2023

Consolidated Statements of Earnings (Unaudited) for the quarter and nine months ended September 30,

2024 and 2023

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

September 30, 2024 and 2023

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

September 30, 2024 and 2023

Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 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 September 30,

2024 and 2023

Table 5 – Average Balances and Net Interest Income Analysis – for the nine months ended September

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)

September 30,

December 31,

(Dollars in thousands, except share data)

2024

2023

Assets:

Cash and due from banks

24,449

27,127

Federal funds sold

10,325

31,412

Interest-bearing bank deposits

55,056

12,830

Cash and cash equivalents

89,830

71,369

Securities available-for-sale

258,285

270,910

Loans held for sale

565

—

Loans

565,699

557,294

Allowance for credit losses

(6,876)

(6,863)

Loans, net

558,823

550,431

Premises and equipment, net

46,236

45,535

Bank-owned life insurance

17,411

17,110

Other assets

18,993

19,900

Total assets

990,143

975,255

Liabilities:

Deposits:

Noninterest-bearing

270,244

270,723

Interest-bearing

631,480

625,520

Total deposits

901,724

896,243

Federal funds purchased and securities sold under agreements to repurchase

—

1,486

Accrued expenses and other liabilities

4,083

1,019

Total liabilities

905,807

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

115,142

113,398

Accumulated other comprehensive loss, net

(22,946)

(29,029)

Less treasury stock, at cost -

463,436

shares and

463,521

at September 30, 2024

and December 31, 2023, respectively

(11,701)

(11,702)

Total stockholders’

equity

84,336

76,507

Total liabilities and stockholders’

equity

990,143

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 September 30,

Nine months ended September 30,

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

2024

2023

2024

2023

Interest income:

Loans, including fees

7,641

6,373

22,082

18,146

Securities:

Taxable

1,327

1,783

4,109

5,474

Tax-exempt

402

225

1,209

Federal funds sold and interest-bearing bank deposits

914

2,356

442

Total interest income

9,959

8,643

28,772

25,271

Interest expense:

Deposits

3,169

2,334

8,613

4,934

Short-term borrowings

—

Total interest expense

3,169

2,371

8,616

5,002

Net interest income

6,790

6,272

20,156

20,269

Provision for (reversal of) credit losses

(127)

105

(191)

Net interest income after provision for credit

losses

6,917

6,167

20,072

20,460

Noninterest income:

Service charges on deposit accounts

154

148

463

456

Mortgage lending

133

110

463

345

Bank-owned life insurance

100

301

311

Other

459

520

1,402

1,336

Total noninterest income

846

865

2,629

2,448

Noninterest expense:

Salaries and benefits

3,148

2,844

9,359

8,809

Net occupancy and equipment

614

755

1,980

2,341

Professional fees

291

261

931

898

Other

1,447

1,502

4,424

4,743

Total noninterest expense

5,500

5,362

16,694

16,791

Earnings before income taxes

2,263

1,670

6,007

6,117

Income tax expense

531

182

1,170

737

Net earnings

1,732

1,488

4,837

5,380

Net earnings per share:

Basic and diluted

0.50

0.43

1.38

1.54

Weighted average shares

outstanding:

Basic and diluted

3,493,699

3,496,411

3,493,687

3,499,518

See accompanying notes to consolidated financial statements

Table of Contents

AUBURN NATIONAL

BANCORPORATION,

INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(Unaudited)

Quarter ended September 30,

Nine months ended September 30,

(Dollars in thousands)

2024

2023

2024

2023

Net earnings

1,732

1,488

4,837

5,380

Other comprehensive income (loss):

Unrealized gain (loss) on securities

11,133

(13,275)

8,121

(10,808)

Related tax (expense) benefit

(2,795)

3,334

(2,038)

2,715

Other comprehensive income (loss), net of tax

8,338

(9,941)

6,083

(8,093)

Comprehensive income (loss)

10,070

(8,453)

10,920

(2,713)

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

income (loss)

stock

Total

Quarter ended September 30, 2024

Balance, June 30, 2024

3,493,699

3,802

114,353

(31,284)

(11,701)

75,209

Net earnings

—

1,732

—

1,732

Other comprehensive income

—

8,338

—

8,338

Cash dividends paid ($

.27

per share)

—

(943)

—

(943)

Balance, September 30, 2024

3,493,699

3,802

115,142

(22,946)

(11,701)

84,336

Quarter ended September 30, 2023

Balance, June 30, 2023

3,499,412

3,800

117,781

(39,072)

(11,572)

70,976

Net earnings

—

1,488

—

1,488

Other comprehensive loss

—

(9,941)

—

(9,941)

Cash dividends paid ($

.27

per share)

—

(943)

—

(943)

Stock repurchases

(5,883)

—

(130)

Sale of treasury stock

—

Balance, September 30, 2023

3,493,614

3,801

118,326

(49,013)

(11,702)

61,451

Nine months ended September 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 ASC 326

—

(263)

—

(263)

Net earnings

—

4,837

—

4,837

Other comprehensive income

—

6,083

—

6,083

Cash dividends paid ($

.81

per share)

—

(2,830)

—

(2,830)

Sale of treasury stock

—

Balance, September 30, 2024

3,493,699

3,802

115,142

(22,946)

(11,701)

84,336

Nine months ended September 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 ASU 2023-12

—

(821)

—

(821)

Net earnings

—

5,380

—

5,380

Other comprehensive loss

—

(8,093)

—

(8,093)

Cash dividends paid ($

.81

per share)

—

(2,833)

—

(2,833)

Stock repurchases

(10,108)

—

(229)

Sale of treasury stock

270

—

Balance, September 30, 2023

3,493,614

3,801

118,326

(49,013)

(11,702)

61,451

See accompanying notes to consolidated financial statements

Table of Contents

AUBURN NATIONAL

BANCORPORATION,

INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

Nine months ended September 30,

(Dollars in thousands)

2024

2023

Cash flows from operating activities:

Net earnings

4,837

5,380

Adjustments to reconcile net earnings to net cash provided by

operating activities:

Provision for (reversal of) credit losses

(191)

Depreciation and amortization

1,402

1,278

Premium amortization and discount accretion, net

1,155

1,834

Net gain on sale of loans held for sale

(194)

(81)

Loans originated for sale

(8,427)

(3,417)

Proceeds from sale of loans

8,002

3,482

Increase in cash surrender value of bank-owned life insurance

(301)

(259)

Income recognized from death benefit on bank-owned life insurance

—

(52)

Net (increase) decrease in other assets

(1,545)

Net increase in accrued expenses and other liabilities

2,996

2,672

Net cash provided by operating activities

8,009

10,693

Cash flows from investing activities:

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

19,592

19,377

Increase in loans, net

(8,407)

(41,025)

Net purchases of premises and equipment

(1,930)

(170)

Proceeds from bank-owned life insurance death benefit

—

216

Proceeds from surrender of bank-owned life insurance

—

3,037

Decrease (increase) in FHLB stock

(164)

Net cash provided by (used in) investing activities

9,287

(18,729)

Cash flows from financing activities:

Net decrease in noninterest-bearing deposits

(479)

(32,717)

Net increase in interest-bearing deposits

5,960

46,982

Net decrease in federal funds purchased and securities sold

under agreements to repurchase

(1,486)

(810)

Stock repurchases

—

(229)

Dividends paid

(2,830)

(2,833)

Net cash provided by financing activities

1,165

10,393

Net change in cash and cash equivalents

18,461

2,357

Cash and cash equivalents at beginning of period

71,369

27,254

Cash and cash equivalents at end of period

89,830

29,611

Supplemental disclosures of cash flow information:

Cash paid during the period for:

Interest

8,433

4,384

Income taxes

589

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 September 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 September 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 September 30,

Nine months ended September 30,

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

2024

2023

2024

2023

Basic and diluted:

Net earnings

1,732

1,488

4,837

5,380

Weighted average

common shares outstanding

3,493,699

3,496,411

3,493,687

3,499,518

Net earnings per share

0.50

0.43

1.38

1.54

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 September 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

investors

over

seven

years

and

are

subject

recapture

certain

events

occur

during

such

period.

September 30,

2024 and December

31, 2023, respectively,

the Company

had one such

investment of $1.0

million and $1.7

million, respectively,

which was included in other assets in the Company’s

consolidated balance sheets as a 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 of

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

the

change

accounting

standard

resulted

$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

990

Other assets

NOTE 4: SECURITIES

At September 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 September 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

September 30, 2024

Agency obligations (a)

—

22,691

31,386

—

54,077

—

6,157

60,234

Agency MBS (a)

20,345

16,191

149,288

185,854

—

22,204

208,058

State and political subdivisions

—

589

9,735

8,030

18,354

2,282

20,635

Total available-for-sale

43,625

57,312

157,318

258,285

30,643

288,927

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 $

235.8

million and $

211.8

at September 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 September 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 September

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

September 30, 2024:

Agency obligations

—

54,077

6,157

54,077

6,157

Agency MBS

—

185,837

22,204

185,837

22,204

State and political subdivisions

621

14,782

2,278

15,403

2,282

Total

621

254,696

30,639

255,317

30,643

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 September 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 September 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 September 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 September 30,

2024.

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

to the Company’s

investments in state and political subdivisions at September 30, 2024.

Realized Gains and Losses

The Company had no realized gains or losses on sale of securities during the nine

months ended September 30, 2024 and

2023, respectively.

Table of Contents

NOTE 5: LOANS AND ALLOWANCE

FOR CREDIT LOSSES

September 30,

December 31,

(Dollars in thousands)

2024

2023

Commercial and industrial

61,510

73,374

Construction and land development

77,956

68,329

Commercial real estate:

Owner occupied

62,029

66,783

Hotel/motel

37,913

39,131

Multi-family

43,789

45,841

Other

154,042

135,552

Total commercial

real estate

297,773

287,307

Residential real estate:

Consumer mortgage

59,265

60,545

Investment property

59,317

56,912

Total residential real

estate

118,582

117,457

Consumer installment

9,878

10,827

Total Loans

565,699

557,294

Loans secured by real estate were approximately 87.4% of the Company’s

total loan portfolio at September 30, 2024.

September 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.

Table of Contents

●

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 to

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.

Table of Contents

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

loans by portfolio segment and class as of

September 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

September 30, 2024:

Commercial and industrial

61,508

—

61,510

—

61,510

Construction and land development

77,956

—

77,956

—

77,956

Commercial real estate:

Owner occupied

61,294

—

61,294

735

62,029

Hotel/motel

37,913

—

37,913

—

37,913

Multi-family

43,789

—

43,789

—

43,789

Other

154,042

—

154,042

—

154,042

Total commercial

real estate

297,038

—

297,038

735

297,773

Residential real estate:

Consumer mortgage

59,225

—

59,225

59,265

Investment property

59,267

—

59,317

—

59,317

Total residential real

estate

118,492

—

118,542

118,582

Consumer installment

9,822

—

9,878

—

9,878

Total

564,816

108

—

564,924

775

565,699

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

Table of Contents

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 September 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)

September 30, 2024:

Commercial and industrial

Pass

7,681

8,962

9,107

12,860

5,011

16,779

691

61,091

Special mention

—

Substandard

105

180

—

345

Nonaccrual

—

Total commercial and industrial

7,733

9,141

9,287

12,868

5,011

16,779

691

61,510

Current period gross charge-offs

—

Construction and land development

Pass

24,407

27,562

16,378

1,430

1,282

105

5,983

77,147

Special mention

340

—

340

Substandard

469

—

469

Nonaccrual

—

Total construction and land development

25,216

27,562

16,378

1,430

1,282

105

5,983

77,956

Current period gross charge-offs

—

Commercial real estate:

Owner occupied

Pass

767

12,556

6,618

13,764

9,855

12,928

4,040

60,528

Special mention

515

251

—

766

Substandard

—

Nonaccrual

—

735

—

735

Total owner occupied

1,282

12,807

6,618

13,764

9,855

13,663

4,040

62,029

Current period gross charge-offs

—

Hotel/motel

Pass

494

8,718

9,547

3,111

1,348

14,695

—

37,913

Special mention

—

Substandard

—

Nonaccrual

—

Total hotel/motel

494

8,718

9,547

3,111

1,348

14,695

—

37,913

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)

September 30, 2024:

Multi-family

Pass

126

12,087

17,148

1,897

5,914

6,056

561

43,789

Special mention

—

Substandard

—

Nonaccrual

—

Total multi-family

126

12,087

17,148

1,897

5,914

6,056

561

43,789

Current period gross charge-offs

—

Other

Pass

36,654

23,388

31,866

30,040

11,507

14,062

5,507

153,024

Special mention

894

—

894

Substandard

—

124

—

124

Nonaccrual

—

Total other

37,548

23,388

31,866

30,040

11,631

14,062

5,507

154,042

Current period gross charge-offs

—

Residential real estate:

Consumer mortgage

Pass

3,620

17,511

17,178

2,419

2,589

11,313

3,514

58,144

Special mention

—

488

—

488

Substandard

—

593

—

593

Nonaccrual

—

Total consumer mortgage

3,620

17,511

17,178

2,419

2,589

12,434

3,514

59,265

Current period gross charge-offs

—

Investment property

Pass

9,911

11,805

10,989

8,739

11,797

5,128

369

58,738

Special mention

—

Substandard

174

—

221

—

569

Nonaccrual

—

Total investment property

10,085

11,885

11,083

8,749

12,018

5,128

369

59,317

Current period gross charge-offs

—

Consumer installment

Pass

4,287

2,765

2,195

330

151

9,846

Special mention

—

Substandard

—

Nonaccrual

—

Total consumer installment

4,296

2,774

2,199

340

151

9,878

Current period gross charge-offs

—

Total loans

Pass

87,947

125,354

121,026

74,590

49,399

81,217

20,687

560,220

Special mention

1,749

334

—

488

—

2,591

Substandard

704

185

278

345

593

—

2,113

Nonaccrual

—

775

—

775

Total loans

90,400

125,873

121,304

74,618

49,744

83,073

20,687

565,699

Total current period gross charge-offs

—

146

Table of Contents

Year of Origination

2023

2022

2021

2020

2019

Prior to

2019

Revolving

Loans

Total

Loans

(Dollars in thousands)

December 31, 2023:

Commercial and industrial

Pass

11,571

18,074

13,746

5,602

7,298

7,819

9,003

73,113

Special mention

—

Substandard

203

—

261

Nonaccrual

—

Total commercial and industrial

11,626

18,277

13,746

5,602

7,301

7,819

9,003

73,374

Current period gross charge-offs

—

151

—

164

Construction and land development

Pass

38,646

25,382

1,716

1,526

120

157

782

68,329

Special mention

—

Substandard

—

Nonaccrual

—

Total construction and land development

38,646

25,382

1,716

1,526

120

157

782

68,329

Current period gross charge-offs

—

Commercial real estate:

Owner occupied

Pass

12,966

7,337

18,548

10,458

3,948

9,786

2,647

65,690

Special mention

260

—

260

Substandard

—

Nonaccrual

—

783

—

783

Total owner occupied

13,226

7,337

18,548

10,458

4,781

9,786

2,647

66,783

Current period gross charge-offs

—

Hotel/motel

Pass

9,025

9,873

3,205

1,493

3,881

11,654

—

39,131

Special mention

—

Substandard

—

Nonaccrual

—

Total hotel/motel

9,025

9,873

3,205

1,493

3,881

11,654

—

39,131

Current period gross charge-offs

—

Table of Contents

Year of Origination

2023

2022

2021

2020

2019

Prior to

2019

Revolving

Loans

Total

Loans

(Dollars in thousands)

December 31, 2023:

Multi-family

Pass

12,379

17,955

1,953

6,112

3,790

3,043

609

45,841

Special mention

—

Substandard

—

Nonaccrual

—

Total multi-family

12,379

17,955

1,953

6,112

3,790

3,043

609

45,841

Current period gross charge-offs

—

Other

Pass

25,810

36,076

31,687

14,597

10,736

15,440

1,052

135,398

Special mention

—

Substandard

—

154

—

154

Nonaccrual

—

Total other

25,810

36,076

31,687

14,751

10,736

15,440

1,052

135,552

Current period gross charge-offs

—

Residential real estate:

Consumer mortgage

Pass

20,147

20,177

2,683

2,665

1,281

12,217

249

59,419

Special mention

—

190

305

—

495

Substandard

—

528

—

528

Nonaccrual

—

103

—

103

Total consumer mortgage

20,147

20,177

2,683

2,665

1,471

13,153

249

60,545

Current period gross charge-offs

—

Investment property

Pass

13,398

12,490

9,397

12,209

5,485

1,865

1,478

56,322

Special mention

—

Substandard

248

—

233

—

524

Nonaccrual

—

Total investment property

13,482

12,738

9,397

12,442

5,485

1,890

1,478

56,912

Current period gross charge-offs

—

Consumer installment

Pass

5,688

3,837

740

206

106

141

—

10,718

Special mention

—

Substandard

—

Nonaccrual

—

Total consumer installment

5,734

3,873

754

219

106

141

—

10,827

Current period gross charge-offs

—

105

Total loans

Pass

149,630

151,201

83,675

54,868

36,645

62,122

15,820

553,961

Special mention

310

190

305

—

841

Substandard

135

462

398

528

—

1,581

Nonaccrual

—

783

128

—

911

Total loans

150,075

151,688

83,689

55,268

37,671

63,083

15,820

557,294

Total current period gross charge-offs

151

—

269

Table of Contents

Allowance for Credit Losses

The Company adopted ASC 326 on January 1, 2023, which introduced

the CECL methodology for estimating all expected

losses over the life of a financial asset. Under the CECL methodology,

the allowance for credit losses is measured on a

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

that do not share similar risk characteristics

with the collectively evaluated pools, evaluations are performed

on an individual basis.

The composition of the provision for (reversal of) credit losses for the respective

periods is presented below.

Quarter ended September 30,

Nine months ended September 30,

(Dollars in thousands)

2024

2023

2024

2023

Provision for credit losses:

Loans

(206)

158

(133)

Reserve for unfunded commitments

(53)

(58)

Total provision for (reversal

of) credit losses

(127)

105

(191)

The following table details the changes in the allowance for credit losses for loans,

by portfolio segment, for the respective

periods.

(Dollars in thousands)

Commercial and

industrial

Construction

and land

development

Commercial

real estate

Residential

real estate

Consumer

installment

Total

Quarter ended:

September 30, 2024

Beginning balance

1,366

942

4,091

603

140

7,142

Charge-offs

—

(54)

(40)

(94)

Recoveries

—

Net (charge-offs) recoveries

—

(52)

(33)

(60)

Provision for (reversal of) credit losses

(231)

(102)

(206)

Ending balance

1,160

985

3,989

595

147

6,876

Nine months ended:

September 30, 2024

Beginning balance

1,288

960

3,921

546

148

6,863

Charge-offs

(9)

—

(54)

(83)

(146)

Recoveries

—

144

Net recoveries (charge-offs)

—

(47)

(45)

(2)

Provision for (reversal of) credit losses

(218)

Ending balance

1,160

985

3,989

595

147

6,876

Table of Contents

(Dollars in thousands)

Commercial and

industrial

Construction

and land

development

Commercial

real estate

Residential

real estate

Consumer

installment

Total

Quarter ended:

September 30, 2023

Beginning balance

1,198

1,005

3,788

529

114

6,634

Charge-offs

—

(18)

Recoveries

—

Net recoveries (charge-offs)

—

(17)

(14)

Provision for (reversal of) credit losses

158

Ending balance

1,215

1,073

3,803

551

136

6,778

Nine months ended:

September 30, 2023

Beginning balance

747

949

3,109

828

132

5,765

Impact of adopting ASC 326

532

(17)

873

(347)

(22)

1,019

Charge-offs

—

(85)

Recoveries

197

—

212

Net recoveries (charge-offs)

197

—

(82)

127

Provision for (reversal of) credit losses

(261)

141

(179)

108

(133)

Ending balance

1,215

1,073

3,803

551

136

6,778

The following table presents the amortized cost basis of collateral dependent loans,

which are individually evaluated to

determine expected credit losses as of September 30, 2024 and December

31, 2023:

(Dollars in thousands)

Real Estate

Total Loans

September 30, 2024:

Commercial real estate

735

Total

735

December 31, 2023:

Commercial real estate

783

Total

783

The following table summarizes the Company’s

nonaccrual loans by major categories as of September 30, 2024 and

December 31, 2023.

CECL

Nonaccrual loans

Total

(Dollars in thousands)

with no Allowance

with an Allowance

Nonaccrual Loans

September 30, 2024

Commercial real estate

735

—

735

Residential real estate

—

Total

735

775

December 31, 2023

Commercial real estate

783

—

783

Residential real estate

—

128

Total

783

128

911

Table of Contents

NOTE 6: MORTGAGE SERVICING

RIGHTS, NET

Mortgage servicing rights (“MSRs”) are recognized based on the fair

value of the servicing rights on the date the

corresponding mortgage loans are sold.

An estimate of the fair value of the Company’s

MSRs is determined using

assumptions that market participants would use in estimating future net

servicing income, including estimates of

prepayment speeds, discount rates, default rates, costs to service, escrow account

earnings, contractual servicing fee

income, ancillary income, and late fees.

Subsequent to the date of transfer, the Company

has elected to measure its MSRs

under the amortization method.

Under the amortization method, MSRs are amortized in proportion to, and over

the period

of, estimated net servicing income.

The Company generally sells, without recourse, conforming, fixed-rate, closed-end,

residential mortgages to Fannie Mae,

where the Company services the mortgages sold and records MSRs.

MSRs are included in other assets on the

accompanying consolidated balance sheets.

The Company evaluates MSRs for impairment on a quarterly basis.

Impairment is determined by stratifying MSRs into

groupings based on predominant risk characteristics, such as interest rate and

loan type.

If, by individual stratum, the

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

The valuation allowance is adjusted

as the fair value changes.

Changes in the valuation allowance are recognized in earnings as a component

of mortgage

lending income.

The following table details the changes in amortized MSRs and the related valuation

allowance for the respective periods.

Quarter ended September 30,

Nine months ended September 30,

(Dollars in thousands)

2024

2023

2024

2023

MSRs, net:

Beginning balance

942

1,050

992

1,151

Additions, net

Amortization expense

(51)

(46)

(127)

(156)

Ending balance

919

1,011

919

1,011

Valuation

allowance included in MSRs, net:

Beginning of period

—

End of period

—

Fair value of amortized MSRs:

Beginning of period

2,346

2,312

2,382

2,369

End of period

2,171

2,351

2,171

2,351

NOTE 7: FAIR VALUE

Fair Value

Hierarchy

“Fair value” is defined by ASC 820,

Fair Value

Measurements and Disclosures

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

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

occurring in the principal

market (or most advantageous market in the absence of a principal market)

for an asset or liability at the measurement date.

GAAP establishes a fair value hierarchy for valuation inputs that gives the highest priority

to quoted prices in active

markets for identical assets or liabilities and the lowest priority to unobservable inputs.

The fair value hierarchy is as

follows:

Level 1—inputs to the valuation methodology are quoted prices, unadjusted,

for identical assets or liabilities in active

markets.

Level 2—inputs to the valuation methodology include quoted prices for similar assets and

liabilities in active markets,

quoted prices for identical or similar assets or liabilities in markets that are not

active, or inputs that are observable for the

asset or liability, either directly

or indirectly.

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Level 3—inputs to the valuation methodology are unobservable and reflect

the Company’s own assumptions about

the

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

Level changes in fair value measurements

Transfers between levels of the fair value hierarchy

are generally recognized at the end of each reporting period.

The

Company monitors the valuation techniques utilized for each category

of financial assets and liabilities to ascertain when

transfers between levels have been affected.

The nature of the Company’s financial

assets and liabilities generally is such

that transfers in and out of any level are expected to be infrequent.

For the nine months ended September 30, 2024, there

were no transfers between levels and no changes in valuation techniques for

the Company’s financial assets and liabilities.

Assets and liabilities measured at fair value on a recurring

basis

Securities available-for-sale

Fair values of securities available for sale were primarily measured

using Level 2 inputs.

For these securities, the Company

obtains pricing data from third party pricing services.

These third party pricing services consider observable data that may

include broker/dealer quotes, market spreads, cash flows, benchmark yields,

reported trades for similar securities, market

consensus prepayment speeds, credit information, and the securities’ terms

and conditions.

On a quarterly basis,

management reviews the pricing data received from the third party pricing

services for reasonableness given current market

conditions.

As part of its review, management may

obtain non-binding third party broker/dealer quotes to validate

the fair

value measurements.

In addition, management will periodically submit pricing information

provided by the third party

pricing services to another independent valuation firm on a sample basis.

This independent valuation firm will compare the

prices

provided by the third party pricing service with its own prices

and will review the significant assumptions and

valuation methodologies used with management.

The following table presents the balances of the assets and liabilities measured at fair

value on a recurring basis as of

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

by caption, on the accompanying consolidated balance sheets by

ASC 820 valuation hierarchy (as described above).

Quoted Prices in

Significant

Active Markets

Other

Significant

for

Observable

Unobservable

Identical Assets

Inputs

(Dollars in thousands)

Amount

(Level 1)

(Level 2)

(Level 3)

September 30, 2024:

Securities available-for-sale:

Agency obligations

54,077

—

54,077

—

Agency MBS

185,854

—

185,854

—

State and political subdivisions

18,354

—

18,354

—

Total securities available

-for-sale

258,285

—

258,285

—

Total

assets at fair value

258,285

—

258,285

—

December 31, 2023:

Securities available-for-sale:

Agency obligations

53,879

—

53,879

—

Agency MBS

198,289

—

198,289

—

State and political subdivisions

18,742

—

18,742

—

Total securities available

-for-sale

270,910

—

270,910

—

Total

assets at fair value

270,910

—

270,910

—

Assets and liabilities measured at fair value on a nonrecurring

basis

Loans held for sale

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Loans held for sale are carried at the lower of cost or fair value. Fair values of loans

held for sale are determined using

quoted secondary market prices for similar loans.

Loans held for sale are classified within Level 2 of the fair value

hierarchy.

Collateral dependent loans

Collateral dependent loans are measured at the fair value of the collateral securing

the loan less estimated selling costs. The

fair value of real estate collateral is determined based on real estate appraisals which

are generally based on recent sales of

comparable properties which are then adjusted for property specific factors.

Non-real estate collateral is valued based on

various sources, including third party asset valuations and internally determined

values based on cost adjusted for

depreciation and other judgmentally determined discount factors. Collateral dependent

loans are classified within Level 3 of

the hierarchy due to the unobservable inputs used in determining their fair

value such as collateral values and the borrower's

underlying financial condition.

Mortgage servicing rights, net

MSRs, net, included in other assets on the accompanying consolidated balance

sheets, are carried at the lower of cost or

estimated fair value.

MSRs do not trade in an active market with readily observable prices.

To determine the fair

value of

MSRs, the Company engages an independent third party.

The independent third party’s valuation

model calculates the

present value of estimated future net servicing income using assumptions that

market participants would use in estimating

future net servicing income, including estimates of mortgage prepayment

speeds, discount rates, default rates, costs to

service, escrow account earnings, contractual servicing fee income,

ancillary income, and late fees.

Periodically, the

Company will review broker surveys and other market research

to validate significant assumptions used in the model.

The

significant unobservable inputs include mortgage prepayment speeds

or the constant prepayment rate (“CPR”) and the

weighted average discount rate.

Because the valuation of MSRs requires the use of significant unobservable inputs,

all of

the Company’s MSRs are classified within

Level 3 of the valuation hierarchy.

The following table presents the balances of the assets and liabilities measured at fair

value on a nonrecurring basis as of

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

by caption, on the accompanying consolidated balance sheets

and by FASB ASC 820

valuation hierarchy (as described above):

Quoted Prices in

Active Markets

Other

Significant

for

Observable

Unobservable

Carrying

Identical Assets

Inputs

(Dollars in thousands)

Amount

(Level 1)

(Level 2)

(Level 3)

September 30, 2024:

Loans held for sale

565

—

565

—

Loans, net

(1)

735

—

735

Other assets

(2)

919

—

919

Total assets at fair value

2,219

—

565

1,654

December 31, 2023:

Loans, net

(1)

783

—

783

Other assets

(2)

992

—

992

Total assets at fair value

1,775

—

1,775

(1)

Loans considered collateral dependent under ASC 326.

(2)

Represents MSRs, net, carried at lower of cost or estimated

fair value.

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Quantitative Disclosures for Level 3 Fair Value

Measurements

At September 30, 2024 and December 31, 2023, the Company had no Level

3 assets measured at fair value on a recurring

basis.

For Level 3 assets measured at fair value on a non-recurring basis at September

30, 2024 and December 31, 2023,

the significant unobservable inputs used in the fair value measurements

and the range of such inputs with respect to such

assets are presented below.

Range of

Weighted

Carrying

Significant

Unobservable

Average

(Dollars in thousands)

Amount

Valuation Technique

Unobservable Input

Inputs

of Input

September 30, 2024:

Collateral dependent loans

735

Appraisal

Appraisal discounts

10.0

Mortgage servicing rights, net

919

Discounted cash flow

Prepayment speed or CPR

7.0

11.1

7.6

Discount rate

10.0

12.0

10.0

December 31, 2023:

Collateral dependent loans

783

Appraisal

Appraisal discounts

10.0

Mortgage servicing rights, net

992

Discounted cash flow

Prepayment speed or CPR

5.9

10.6

6.0

Discount rate

10.5

12.5

10.5

Fair Value

of Financial Instruments

ASC 825,

Financial Instruments

, requires disclosure of fair value information about financial instruments,

whether or not

recognized on the face of the balance sheet, where it is practicable to

estimate that value. The assumptions used in the

estimation of the fair value of the Company’s

financial instruments are explained below.

Where quoted market prices are

not available, fair values are based on estimates using discounted cash flow

analyses. Discounted cash flows can be

significantly affected by the assumptions used, including

the discount rate and estimates of future cash flows. The

following fair value estimates cannot be substantiated by comparison to

independent markets and should not be considered

representative of the liquidation value of the Company’s

financial instruments, but rather are good-faith estimates of the fair

value of financial instruments held by the Company.

ASC 825 excludes certain financial instruments and all nonfinancial

instruments from its disclosure requirements.

The following methods and assumptions were used by the Company in estimating

the fair value of its financial instruments:

Loans, net

Fair values for loans were calculated using discounted cash flows. The discount

rates reflected current rates at which similar

loans would be made for the same remaining maturities. Expected

future cash flows were projected based on contractual

cash flows, adjusted for estimated prepayments.

The fair value of loans was measured using an exit price notion.

Loans held for sale

Fair values of loans held for sale are determined using quoted secondary

market prices for similar loans.

Time Deposits

Fair values for time deposits were estimated using discounted cash

flows.

The discount rates were based on rates currently

offered for deposits with similar remaining maturities.

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The carrying value, related estimated fair value,

and placement in the fair value hierarchy of the Company’s

financial

instruments at September 30, 2024 and December 31, 2023 are presented

below.

This table excludes financial instruments

for which the carrying amount approximates fair value.

Financial assets for which fair value approximates carrying value

included cash and cash equivalents.

Financial liabilities for which fair value approximates carrying value included

noninterest-bearing demand deposits, interest-bearing demand deposits, and

savings deposits.

Fair value approximates

carrying value in these financial liabilities due to these products having

no stated maturity.

Additionally, financial

liabilities for which fair value approximates carrying value included overnight

borrowings such as federal funds purchased

and securities sold under agreements to repurchase.

The following table summarizes our fair value estimates:

Fair Value Hierarchy

Carrying

Estimated

Level 1

Level 2

Level 3

(Dollars in thousands)

amount

fair value

inputs

Inputs

September 30, 2024:

Financial Assets:

Loans, net (1)

558,823

531,005

—

531,005

Loans held for sale

565

580

—

580

—

Financial Liabilities:

Time Deposits

189,451

188,363

—

188,363

—

December 31, 2023:

Financial Assets:

Loans, net (1)

550,431

526,372

—

526,372

Financial Liabilities:

Time Deposits

198,215

195,171

—

195,171

—

(1) Represents loans, net of allowance for credit losses.

The fair value of loans was measured using an

exit price notion.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS

OPERATIONS

General

Auburn National Bancorporation, Inc. (the “Company”) is a bank holding

company registered with the Board of Governors

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

Company Act of 1956, as amended (the

“BHC Act”). The Company was incorporated in Delaware in 1990, and in

1994 it succeeded its Alabama predecessor as the

bank holding company controlling AuburnBank, an Alabama state member

bank with its principal office in Auburn,

Alabama (the “Bank”). The Company and its predecessor have controlled

the Bank since 1984.

As a bank holding

company, the Company

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

currently

are permitted to the Bank under applicable laws and regulations.

The holding company structure also provides greater

financial and operating flexibility than is presently permitted to the

Bank.

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

primarily in East Alabama, including

Lee County and surrounding areas.

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

The

Bank’s primary regulators are the

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

Superintendent”).

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

made in this

discussion and analysis and elsewhere, including information incorporated

herein by reference to other documents, are

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

Notice Regarding Forward-Looking

Statements” below.

The following discussion and analysis is intended to provide a better

understanding of various factors related to the results

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

This discussion is intended to supplement and

highlight information contained in the accompanying unaudited condensed

consolidated financial statements and related

notes for the quarters and nine months ended September 30, 2024

and 2023, as well as the information contained in our

annual report on Form 10-K for the year ended December 31, 2023 and our

interim reports on Form 10-Q for the quarters

ended March 31, 2024 and June 30, 2024.

Special Cautionary Notice Regarding Forward-Looking Statements

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,” “evaluation,” “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

(including tariffs), sanctions or other events

that may affect general economic conditions;

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●

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 changes in

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

target inflation rate of 2% over the

longer term and dual mandate goals of maximum employment and

stable prices, including changes to increase the

Federal Reserve’s reinvestment

of maturing Treasury securities beginning

in June 2024 and mid-September 2024

reduction in the target federal funds rate by 50 basis points

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

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

●

legislative and regulatory changes, including changes in banking,

securities and tax laws, regulations and rules and

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

and changes in the scope and cost

of FDIC insurance;

●

changes in accounting pronouncements and interpretations, including the

required use, beginning January 1, 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 unemployment rates, changes

in borrowers’ credit risks and payment

behaviors from those used in our CECL models and loan portfolio reviews;

●

the risks of changes in market interest rates and the shape of the yield curve on customer

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 or the continuation of restrictive monetary

policies 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;

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●

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, 2023 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 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 September 30,

Nine months ended September 30,

(Dollars in thousands, except per share amounts)

2024

2023

2024

2023

Net interest income (a)

6,811

6,380

20,216

20,591

Less: tax-equivalent adjustment

108

322

Net interest income (GAAP)

6,790

6,272

20,156

20,269

Noninterest income

846

865

2,629

2,448

Total revenue

7,636

7,137

22,785

22,717

Provision for credit losses

(127)

105

(191)

Noninterest expense

5,500

5,362

16,694

16,791

Income tax expense

531

182

1,170

737

Net earnings

1,732

1,488

4,837

5,380

Basic and diluted earnings per share

0.50

0.43

1.38

1.54

(a) Tax-equivalent.

See "Table 1 - Explanation

of Non-GAAP Financial Measures."

Financial Summary

The Company’s net earnings were $4.8

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

months of 2023.

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

of 2024, compared to

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

Net interest

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

of 2024, a 2% decrease compared to $20.6

million for the first nine months of 2023.

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

by an

increase in the Company’s net interest

margin.

The Company’s net interest margin

(tax-equivalent) was 3.05% for the first

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

This increase was primarily due to a more

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

offset by increased cost of interest-

bearing deposits.

Average loans for the first

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

from the first nine

months of 2023.

Average total securities for the

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

for the first nine months of 2023.

The decrease was primarily the result of the Company’s

balance sheet repositioning in

the fourth quarter of 2024.

See “Results of Operations – Average

Balance Sheet and Interest Rates” and “Net Interest

Income and Margin” below.

At September 30, 2024, the Company’s

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

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

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

2023.

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

months of 2024 of $0.1

million, compared to a

negative provision of $0.2 million during the first nine months of 2023.

The provision for credit losses under CECL

reflects the Company’s

evaluation of its credit risk profile and its future economic outlook and forecasts.

Our CECL model

is largely influenced by economic factors including, most notably,

the anticipated unemployment rate.

The increase in the

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

to the first nine months of 2023, was related to

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

the economic forecasts used in our CECL

model.

Noninterest income was $2.6 million in the first nine months of 2024,

compared to $2.4 million in the first nine months of

2023.

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

and other noninterest income.

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

compared to $16.8 million for the first nine months

of 2023.

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

expense and other noninterest

expense.

These decreases were partially offset by an increase in salaries and benefits

expense.

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

compared to $0.7 million for the first nine months of

2023.

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

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

months of 2023.

The Company’s effective

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

the

Company’s investments

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

Credits

(“NMTCs”).

The effective tax rate increased primarily due to a decrease

in the Company’s investment in municipal

securities following the balance sheet restructuring in the fourth quarter

of 2023, and the adoption of FASB

ASU 2023-02

Investments – Equity Method and Joint Ventures

(Topic 323) which

allows the proportional amortization method for our

NMTC investments, on January 1, 2024.

With the adoption of this ASU, amortization

of NMTCs are now included in

income tax expense rather than noninterest expense.

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

2024 and 2023.

At September 30, 2024,

the Bank’s regulatory capital

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

under current

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

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

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

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

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

share, for the third quarter of 2023.

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

of 2024

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

The increase was primarily due a more favorable asset mix and

higher yields on interest earning assets partially offset

by increases in the cost of interest-bearing deposits.

The Company’s

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

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

The Company recorded a negative provision for credit losses during the

third quarter of 2024 of $0.1

million, compared to a

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

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

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

This decrease was primarily due to a decrease in other noninterest

income.

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

million for the third quarter of

2023.

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

expense which was

partially offset by decreases in net occupancy and equipment expense

and FDIC and other regulatory assessments expense.

Income tax expense was $0.5

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

quarter of 2023.

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

Company’s effective

tax rate, which

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

2023.

This increase was related to a

decrease in the Company’s investment

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

above.

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 as of and for the year ended December 31, 2023.

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RESULTS

OF OPERATIONS

Average Balance

Sheet and Interest Rates

Nine months ended September 30,

2024

2023

Average

Yield/

Average

Yield/

(Dollars in thousands)

Balance

Rate

Balance

Rate

Loans and loans held for sale

568,939

5.18%

514,706

4.71%

Securities - taxable

248,923

2.20%

344,136

2.13%

Securities - tax-exempt

10,235

3.71%

54,615

3.75%

Total securities

259,158

2.26%

398,751

2.35%

Federal funds sold

18,014

5.47%

4,372

4.86%

Interest bearing bank deposits

39,530

5.47%

8,118

4.66%

Total interest-earning

assets

885,641

4.35%

925,947

3.70%

Deposits:

NOW

193,428

1.41%

189,586

0.75%

Savings and money market

250,146

0.79%

291,988

0.63%

Time deposits

196,584

3.45%

168,000

1.99%

Total interest-bearing

deposits

640,158

1.80%

649,574

1.02%

Short-term borrowings

838

0.48%

3,748

2.43%

Total interest-bearing

liabilities

640,996

1.80%

653,322

1.02%

Net interest income and margin (tax-equivalent)

20,216

3.05%

20,591

2.97%

Net Interest Income and Margin

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

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

million for the first nine months of 2023.

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

by a

increase in the Company’s net interest

margin.

The Company’s net interest margin

(tax-equivalent) was 3.05% in the first

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

This increase was primarily due a more

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

was partially offset by higher market interest rates,

which increased our cost of funds, generally,

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

The

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

months ended months of 2024, compared to

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

Average interest-bearing

deposits were $640.2 million

during the first nine months of 2024,

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

As of

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

average total deposits compared to 69% on September

30, 2023.

Since March 2022, the Federal Reserve increased the target

federal funds rate by 525 basis points before

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

its first decrease in rates since its March 2020 COVID

rate reduction.

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

- 5.00%.

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

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

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

This increase was primarily due to the Company’s

balance sheet

repositioning strategy in the fourth quarter of 2023, which improved

our asset mix, and loan growth combined with higher

market interest rates on interest earning assets. Average

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

11% increase from the first nine months of

2023.

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

in the first nine months of 2024 compared

to 1.02% in the first nine months of 2023.

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

against other banks, money market mutual funds, Treasury

securities and other interest-bearing alternative investments.

The Company continues to deploy various asset liability management

strategies to manage its risks from interest rate

fluctuations. 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 the

remainder of 2024.

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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 nine months of 2024 of $0.1

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

during the first nine months of 2023.

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.

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 September 30,

2024, the Company’s allowance for

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

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

total loans, at September 30, 2023.

Noninterest Income

Quarter ended September 30,

Nine months ended September 30,

(Dollars in thousands)

2024

2023

2024

2023

Service charges on deposit accounts

154

148

463

456

Mortgage lending income

133

110

463

345

Bank-owned life insurance

100

301

311

Other

459

520

1,402

1,336

Total noninterest income

846

865

2,629

2,448

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 September 30,

Nine months ended September 30,

(Dollars in thousands)

2024

2023

2024

2023

Origination income

194

Servicing fees, net

269

264

Total mortgage lending

income

133

110

463

345

The Company’s income from mortgage

lending typically fluctuates as mortgage interest rates change and is primarily

attributable to the origination and sale of mortgage loans.

The increase in mortgage lending income was primarily related

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

2024 relative to the number of mortgage

loans held for investment during 2023.

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

$311 thousand for the first nine months of 2024,

and 2023

respectively.

Excluding a $52 thousand non-taxable death benefit received during the first

quarter of 2023, income from

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

first nine months of 2023.

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

compared to $1.3 million for the first nine

months of 2023.

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

on one-way sell

reciprocal deposits sold through the Intrafi network.

Noninterest Expense

Quarter ended September 30,

Nine months ended September 30,

(Dollars in thousands)

2024

2023

2024

2023

Salaries and benefits

3,148

2,844

9,359

8,809

Net occupancy and equipment

614

755

1,980

2,341

Professional fees

291

261

931

898

Other

1,447

1,502

4,424

4,743

Total noninterest expense

5,500

5,362

16,694

16,791

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

in salaries and wages.

The decrease in net occupancy and equipment expense was primarily due

to an increase in leasing income.

The decrease in other noninterest expense was primarily

due to the Company’s adoption of ASU 2023-02

which allows the

proportional amortization method for our NMTC investments, on January

1, 2024.

With the adoption of this ASU,

amortization of NMTCs are now included in income tax expense.

During the first nine months of 2023, other noninterest

expense included $303 thousand related to our equity method investment

in NMTCs.

Income Tax

Expense

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

2024 compared to $0.7 million during the first nine

months of 2023.

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

was 19.48%, compared to 12.05% in

the first nine months of 2023.

The Company’s effective

income tax rate is affected principally by tax-exempt earnings

from the Company’s investments in municipal

securities, BOLI, and NMTCs.

The effective tax rate increased primarily

due to a decrease in the Company’s investment

in municipal securities following the balance sheet restructuring in the

fourth quarter of 2023, and the adoption of FASB

ASU 2023-02 Investments – Equity Method and Joint Ventures

(Topic

323) which allows the proportional amortization method for our NMTC investments,

on January 1, 2024.

With the

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

tax expense rather than noninterest expense.

BALANCE SHEET ANALYSIS

Securities

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

compared to $270.9 million at December 31,

2023.

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

securities available-for-sale and an

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

The average annualized tax-equivalent yields

earned on total securities were 2.26%

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

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Loans

2024

2023

Third

Second

First

Fourth

Third

(In thousands)

Quarter

Commercial and industrial

61,510

77,627

78,920

73,374

66,014

Construction and land development

77,956

73,688

58,909

68,329

70,129

Commercial real estate

297,773

297,232

300,484

287,307

281,964

Residential real estate

118,582

119,427

118,240

117,457

117,150

Consumer installment

9,878

10,094

10,967

10,827

10,353

Total loans

565,699

578,068

567,520

557,294

545,610

Total loans were $565.7

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

at December 31, 2023.

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

30, 2024: commercial real estate (53%),

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

and commercial and industrial (11%).

Approximately 21% of the Company’s

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

2024.

Within the residential real estate portfolio segment,

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

or 2% of total loans,

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

respectively.

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

had no loans that required interest only

payments at September 30, 2024 and December 31, 2023. The Company’s

residential real estate mortgage portfolio does

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

amount of other consumer mortgage products

which are generally viewed as high risk.

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

months of 2024 and 4.71% in the first

nine months of 2023.

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

but are not limited to, the effects of

current economic conditions, including inflation and the continuing

increases in market interest rates, remaining COVID-19

pandemic effects including supply chain disruptions, reduced

commercial office occupancy levels, housing supply

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

sales volumes and liquidity,

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 $22.6 million.

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

outstanding plus

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

policy requires that the Loan Committee of the

Board of Directors approve any loan relationships that exceed this internal

limit.

At September 30, 2024, the Bank had one

loan relationship exceeding our internal limit.

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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.

Loans to borrowers in each of the following

classes exceeded 25% of the Bank’s

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

September 30,

December 31,

(Dollars in thousands)

2024

2023

Lessors of 1-4 family residential properties

59,317

56,912

Multi-family residential properties

43,789

45,841

Hotel/motel

37,913

39,131

Shopping centers/strip malls

33,506

27,128

Office Buildings

30,505

30,871

Allowance for Credit Losses

On January

1, 2023, we adopted ASC 326, which introduced the current expected loss (“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.

Our allowance for credit losses was approximately $6.9

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

believed to be adequate at each of the

respective dates. Our allowance for credit losses as a percentage of total

loans was 1.22%

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

quarters were utilized followed by an eight quarter

straight line reversion period to long term averages.

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

asset quality ratios for the third quarter of 2024 and

the previous four quarters is presented below.

2024

2023

Third

Second

First

Fourth

Third

(Dollars in thousands)

Quarter

Balance at beginning of period

7,142

7,215

6,863

6,778

6,634

Charge-offs:

Commercial and industrial

—

(9)

—

(164)

—

Residential real estate

(54)

—

Consumer installment

(40)

(19)

(24)

(20)

(18)

Total charge

-offs

(94)

(28)

(24)

(184)

(18)

Recoveries

Net recoveries (charge-offs)

(60)

(9)

(173)

(14)

Provision for (reversal of) credit losses

(206)

(64)

285

258

158

Ending balance

6,876

7,142

7,215

6,863

6,778

as a % of loans

1.22

1.24

1.27

1.23

1.24

as a % of nonperforming loans

887

900

822

753

559

Net (recoveries) charge-offs as % of average

loans (a)

0.04

0.01

(0.05)

0.13

0.01

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

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

previous four quarters is presented

below.

2024

2023

Third Quarter

Second Quarter

First Quarter

Fourth Quarter

Third Quarter

(Dollars in thousands)

Amount

Commercial and industrial

1,160

10.9

1,366

13.4

1,415

13.9

1,288

13.2

1,215

12.1

Construction and land

development

985

13.8

942

12.7

840

10.4

960

12.3

1,073

12.9

Commercial real estate

3,989

52.6

4,091

51.5

4,202

53.0

3,921

51.5

3,803

51.6

Residential real estate

595

21.0

603

20.7

613

20.8

546

21.1

551

21.5

Consumer installment

147

1.7

140

1.7

145

1.9

148

1.9

136

1.9

Total allowance for

credit losses

6,876

7,142

7,215

6,863

6,778

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

Nonperforming Assets

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

and $0.9 million, respectively,

nonperforming assets.

The table below provides information concerning total nonperforming

assets and certain asset quality ratios for the third

quarter of 2024 and the previous four quarters.

2024

2023

Third

Second

First

Fourth

Third

(Dollars in thousands)

Quarter

Nonperforming assets:

Nonaccrual loans

775

794

878

911

1,213

Total nonperforming

assets

775

794

878

911

1,213

as a % of loans and other real estate owned

0.14

0.15

0.16

0.22

as a % of total assets

0.08

0.09

0.12

Nonperforming loans as a % of total loans

0.14

0.15

0.16

0.22

The table below provides information concerning the composition of

nonaccrual loans for the third quarter of 2024 and the

previous four quarters.

2024

2023

Third

Second

First

Fourth

Third

(In thousands)

Quarter

Nonaccrual loans:

Commercial and industrial

—

162

Commercial real estate

735

753

765

783

801

Residential real estate

128

250

Consumer installment

—

Total nonaccrual

loans

775

794

878

911

1,213

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 September 30, 2024 and December 31, 2023,

respectively.

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

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Deposits

(In thousands)

2024

2023

Noninterest bearing demand

270,244

270,723

NOW

193,751

190,724

Money market

161,789

148,040

Savings

86,489

88,541

Certificates of deposit under $250,000

105,634

100,572

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

83,817

97,643

Total deposits

901,724

896,243

Total deposits were $901.7

million at September 30, 2024, compared

to $896.2 million at December 31, 2023.

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

to $59.0 million at December 31,

2023.

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

to $46.6 million outstanding at September

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

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

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

31, 2023.

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

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

first nine months of 2023.

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

or 39% of total deposits, compared to $356.3

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

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 September 30, 2024 was $16.3 million,

compared to none at

December 31, 2023.

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

FDIC

insurance limits.

The Bank’s uninsured deposits

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

$214.9 million and $206.2 million, respectively,

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

by securities having an equal fair value to such deposits.

The estimated uninsured time deposits by maturity as of September

30, 2024 is presented below.

(Dollars in thousands)

September 30, 2024

Maturity of:

3 months or less

36,447

Over 3 months through 6 months

8,261

Over 6 months through 12 months

9,012

Over 12 months

2,347

Total estimated uninsured

time deposits

56,067

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

on large banks with more than $5

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

systemic risk determination to insure all depositors in

connection with the March 2023 failures of Silicon Valley

Bank and Signature Bank.

These special assessments do not

apply to the Bank.

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Other Borrowings and Available

Credit

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

31, 2023.

The Bank utilizes short and long-

term non-deposit borrowings from time to time. Short-term borrowings

generally consist of federal funds purchased and

securities sold under agreements to repurchase with an original maturity of one

year or less.

The Bank had available federal

funds lines totaling $65.2 million with no federal funds borrowings

outstanding at September 30, 2024, and December 31,

2023, respectively.

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

entered into on behalf

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

at December 31, 2023.

The Bank is eligible to

borrow from the FRB’s discount window,

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

The

bank never borrowed from the Federal Reserve’s

Bank Term Facility Program

(“BTFP”), which ceased making new loans

on March 11, 2024.

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

in the future borrow from time to time under the

FHLB of Atlanta’s advance program

to obtain funding for its growth.

FHLB advances include both fixed and variable rates

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

assets.

The Bank had no borrowings under

FHLB of Atlanta’s advance program

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

At those dates, the Bank

had $307.7

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 Bank also has access to the FRB discount

window.

The average rate paid on the Bank’s

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

compared to 2.43%

in the first nine months of 2023.

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

2024,

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

CAPITAL ADEQUACY

The Company’s consolidated

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

30, 2024 and

December 31, 2023, respectively.

The increase from December 31, 2023 was primarily driven by

net earnings of $4.8

million and other comprehensive income due to the change

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

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

and the cumulative effect of adopting the new NMTC

accounting standard of $0.3 million.

Total unrealized losses, net

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

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

These unrealized losses do not affect the

Bank’s capital for regulatory

capital purposes.

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

nine months of 2024 and first nine months of 2023.

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

Basel III regulatory capital framework and

related Dodd-Frank Wall

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 capital conservation buffer

of less than the required amount will be

subject to limitations on capital distributions, including dividend payments and

certain discretionary bonus payments to

executive officers.

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.

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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.

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

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

at September 30, 2024. 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 7.76% at September 30, 2024 exceeded the fully phased

-in capital conservation

buffer, and such buffer

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

extent of

available earnings.

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

FDIC issued a joint notice of proposed

rulemaking to implement the Basel III endgame components.

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;

●

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.

The Federal Reserve has

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

to larger organizations than the Company.

MARKET AND LIQUIDITY RISK MANAGEMENT

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 September 30, 2024, our earnings simulation model indicated that

we were in compliance with the policy guidelines

noted above.

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

with our policy guidelines.

Each of the above analyses may not, on its own, be an accurate indicator of

how our net interest income will be affected by

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 September 30, 2024 and December

31, 2023, the Company had no derivative

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

its interest rate sensitivity.

Liquidity Risk Management

Liquidity is the Company’s ability to

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

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,

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

transactions with, the Bank.

The Bank’s payment of dividends

depends on its earnings, liquidity,

capital and the absence of regulatory restrictions on

such dividends.

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

received from the Bank.

If needed, the

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.

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

outstanding and available credit from the

FHLB of $307.7 million. At September 30, 2024, the Bank also had $65.2 million

of available federal funds lines with no

borrowings outstanding. Primary uses of funds include repayment of maturing

obligations and growing the loan portfolio.

The Company also has access to the FRB discount window.

Management believes that the Company and the Bank have adequate

sources of liquidity to meet all their respective known

contractual obligations and unfunded commitments, including loan

commitments and reasonably

expected borrower,

depositor, and creditor requirements over

the next twelve months.

Off-Balance Sheet Arrangements, Commitments, Contingencies and Contractual

Obligations

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

of $0.6 million and unfunded loan commitments

outstanding of $77.6 million.

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 use its cash and

cash equivalents,

deposits with other banks, liquidate

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

draw on its available credit facilities or raise deposits.

Mortgage lending activities

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

customary representations and warranties regarding the origination

and characteristics of the residential mortgage loans.

Although the representations and warranties vary among investors, they

typically cover ownership of the loan, validity of

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

securing the loan, compliance with

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

state, and local laws, among other

matters.

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

residential mortgage loans, which we have originated

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

Although these loans are generally sold on a non-recourse

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

reimburse investors for losses incurred (make whole

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

and warranties.

Upon receipt of a repurchase

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 nine months of 2024 as a result of representation

and warranty provisions contained in the Company’s

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

make-whole requests at September 30, 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 standards

of responsibility for actions taken by us in

such capacity and provides protection against expenses and liabilities incurred

by us when acting in compliance with the

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.

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

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

mortgage loans serviced for Fannie

Mae were current as of such date.

We maintain ongoing

communications with our investors and will continue to evaluate

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 increase our noninterest expenses. It also can affect

our customers’ behaviors, the mix of deposits between

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

pay on our deposits and other borrowings, and

the interest rates we earn on our earning assets.

The difference between our interest expense and interest income is also

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

assets and liabilities, respectively,

reprice in response

to interest rate changes.

Although inflation decreased in the most recent quarter,

the yield curve continued to be inverted

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

than longer term 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,

and may adversely affect unemployment

rates.

Inflation and related changes in market interest rates, as the Federal Reserve maintains

interest rates to meet its

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

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

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

such borrowers’ available cash to pay

interest on and principal of our loans to them.

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

its target federal funds range from 0 – 0.25%

to 4.25 – 4.50% to fight inflation.

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

of January

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

The Federal Reserve has indicated it will maintain higher target

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

inflation rate over the longer term and (ii) maximum

employment goals.

The Federal Reserve’s Open Market Committee

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

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

to reduce the target range until it has

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

Further, beginning in June 2024, the FOMC

relaxed its monetary policy by slowing its monthly reduction of

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

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

-backed securities at $35 billion.

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

federal funds rate range by 50 basis

points to 4.75% to 5.00%.

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

the longer run, it indicated it was

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

increasing unemployment, but would act on

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

and unemployment levels.

In the future, the

Federal Reserve could further decrease target interest

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

and

its outlook.

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

funds rate to fight inflation, market interest

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

interest on their funds, and at higher interest

rates.

Monetary policy efforts to control inflation may also affect

unemployment which is an important component in our

CECL model used to estimate our allowance for credit losses.

As inflation and market interest rates and expectations

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

the values of our securities investments held for

sale increased, which increased our stockholders’ equity.

See “Item 1A. Risk Factors” in this Report for additional information about

inflation, interest rates and related risks.

CURRENT ACCOUNTING DEVELOPMENTS

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

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

tax disclosures.

For public business

entities, the new standard is effective for annual periods beginning

after December 15, 2024.

The Company does not

expect the new standard to have a material impact on the Company’s

consolidated financial statements.

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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

Third

Second

First

Fourth

Third

(in thousands)

Quarter

Net interest income (GAAP)

6,790

6,709

6,657

6,059

6,272

Tax-equivalent adjustment

108

Net interest income (Tax

-equivalent)

6,811

6,728

6,677

6,154

6,380

Nine months ended September 30,

(In thousands)

2024

2023

Net interest income (GAAP)

20,156

20,269

Tax-equivalent adjustment

322

Net interest income (Tax

-equivalent)

20,216

20,591

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Table 2

- Selected Quarterly Financial Data

2024

2023

Third

Second

First

Fourth

Third

(Dollars in thousands, except per share amounts)

Quarter

Results of Operations

Net interest income (a)

6,811

6,728

6,677

6,154

6,380

Less: tax-equivalent adjustment

108

Net interest income (GAAP)

6,790

6,709

6,657

6,059

6,272

Noninterest income

846

896

887

(5,429)

865

Total revenue

7,636

7,605

7,544

630

7,137

Provision for credit losses

(127)

(123)

334

326

105

Noninterest expense

5,500

5,519

5,675

5,803

5,362

Income tax expense

531

475

164

(1,514)

182

Net earnings

1,732

1,734

1,371

(3,985)

1,488

Per share data:

Basic and diluted net earnings

0.50

0.39

(1.14)

0.43

Cash dividends declared

0.27

Weighted average shares outstanding:

Basic and diluted

3,493,699

3,493,663

3,493,614

3,496,411

Shares outstanding, at period end

3,493,699

3,493,614

Book value

24.14

21.53

21.32

21.90

17.59

Common stock price:

High

24.35

19.25

21.55

21.99

22.80

Low

17.50

16.63

18.82

19.72

20.85

Period end:

22.90

18.29

19.27

21.28

21.50

To earnings ratio (b)

91.60

101.61

83.78

53.20

7.65

To book value

122

Performance ratios:

Annualized return on average equity

9.10

9.63

7.13

(26.40)

8.59

Annualized return on average assets

0.71

0.56

(1.56)

0.58

Dividend payout ratio

54.00

69.23

(23.68)

62.79

Asset Quality:

Allowance for credit losses as a % of:

Loans

1.22

1.24

1.27

1.23

1.24

Nonperforming loans

887

900

822

753

559

Nonperforming assets as a % of:

Loans and other real estate owned

0.14

0.15

0.16

0.22

Total assets

0.08

0.09

0.12

Nonperforming loans as a % of total loans

0.14

0.15

0.16

0.22

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

0.04

0.01

(0.05)

0.13

0.01

Capital Adequacy: (c)

CET 1 risk-based capital ratio

14.75

14.47

14.62

14.52

15.01

Tier 1 risk-based capital ratio

14.75

14.47

14.62

14.52

15.01

Total risk-based capital ratio

15.76

15.49

15.69

15.52

15.98

Tier 1 leverage ratio

10.43

10.39

10.34

9.72

10.26

Other financial data:

Net interest margin (a)

3.05

3.06

3.04

2.65

2.73

Effective income tax rate

23.46

21.50

10.68

(27.53)

10.90

Efficiency ratio (d)

71.83

72.39

75.03

800.41

74.01

Selected average balances:

Securities

251,723

258,228

267,606

354,065

390,772

Loans, net of unearned income

571,651

573,443

560,757

550,938

529,382

Total assets

982,656

978,107

976,930

1,020,476

1,020,980

Total deposits

904,860

900,673

897,051

953,674

942,533

Total stockholders’ equity

76,113

72,059

76,948

60,372

69,269

Selected period end balances:

Securities

258,285

254,359

260,770

270,910

373,286

Loans, net of unearned income

565,699

578,068

567,520

557,294

545,610

Allowance for credit losses

6,876

7,142

7,215

6,863

6,778

Total assets

990,143

1,025,054

979,039

975,255

1,030,724

Total deposits

901,724

946,405

899,673

896,243

964,602

Total stockholders’ equity

84,336

75,209

74,489

76,507

61,451

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

(b) Calculated by dividing period end share price by

earnings per share for the previous four quarters.

wholly-owned subsidiary, AuburnBank.

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

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

See Table 1 - Explanation of Non-GAAP Measures.

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Table 3

- Selected Financial Data

Nine months ended September 30,

(Dollars in thousands, except per share amounts)

2024

2023

Results of Operations

Net interest income (a)

20,216

20,591

Less: tax-equivalent adjustment

322

Net interest income (GAAP)

20,156

20,269

Noninterest income

2,629

2,448

Total revenue

22,785

22,717

Provision for (reversal of) credit losses

(191)

Noninterest expense

16,694

16,791

Income tax expense

1,170

737

Net earnings

4,837

5,380

Per share data:

Basic and diluted net earnings

1.38

1.54

Cash dividends declared

0.81

Weighted average shares outstanding:

Basic and diluted

3,493,687

3,499,518

Shares outstanding, at period end

3,493,699

3,493,614

Book value

24.14

17.59

Common stock price:

High

24.35

24.50

Low

16.63

18.80

Period end

22.90

21.50

To earnings ratio (b)

91.60

7.65

To book value

122

Performance ratios:

Annualized return on average equity

8.59

10.15

Annualized return on average assets

0.66

0.70

Dividend payout ratio

58.70

52.60

Asset Quality:

Allowance for credit losses as a % of:

Loans

1.22

1.24

Nonperforming loans

887

559

Nonperforming assets as a % of:

Loans and other real estate owned

0.14

0.22

Total assets

0.08

0.12

Nonperforming loans as a % of total loans

0.14

0.22

Annualized net recoveries as a % of average loans

—

(0.03)

Capital Adequacy: (c)

CET 1 risk-based capital ratio

14.75

15.01

Tier 1 risk-based capital ratio

14.75

15.01

Total risk-based capital ratio

15.76

15.98

Tier 1 leverage ratio

10.43

10.26

Other financial data:

Net interest margin (a)

3.05

2.97

Effective income tax rate

19.48

12.05

Efficiency ratio (d)

73.08

72.88

Selected average balances:

Securities

259,158

398,751

Loans, net of unearned income

568,628

514,635

Total assets

979,243

1,022,257

Total deposits

900,876

944,471

Total stockholders’ equity

75,044

70,659

Selected period end balances:

Securities

258,285

373,286

Loans, net of unearned income

565,699

545,610

Allowance for credit losses

6,876

6,778

Total assets

990,143

1,030,724

Total deposits

901,724

964,602

Total stockholders’ equity

84,336

61,451

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

(b) Calculated by dividing period end share price by

earnings per share for the previous four quarters.

wholly-owned subsidiary, AuburnBank.

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

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

See Table 1 - Explanation of Non-GAAP Measures.

Table of Contents

Table 4

- Average

Balances and Net Interest Income Analysis

Quarter ended September 30,

2024

2023

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)

571,917

7,642

5.32%

529,521

6,373

4.77%

Securities - taxable (2)

241,604

1,327

2.19%

336,406

1,783

2.10%

Securities - tax-exempt (2)(3)

10,119

3.81%

54,366

510

3.72%

Total securities

251,723

1,424

2.25%

390,772

2,293

2.33%

Federal funds sold

18,696

255

5.43%

1,918

5.38%

Interest bearing bank deposits

46,174

659

5.68%

4,799

4.88%

Total interest-earning

assets

888,510

9,980

4.47%

927,010

8,751

3.75%

Cash and due from banks

17,909

14,345

Other assets

76,237

79,625

Total assets

982,656

1,020,980

Interest-bearing liabilities:

Deposits:

NOW

192,781

729

1.50%

191,849

534

1.10%

Savings and money market

253,943

614

0.96%

283,152

661

0.93%

Time deposits

198,009

1,826

3.67%

183,539

1,139

2.46%

Total interest-bearing

deposits

644,733

3,169

1.96%

658,540

2,334

1.41%

Short-term borrowings

0.00%

4,347

3.38%

Total interest-bearing

liabilities

644,735

3,169

1.96%

662,887

2,371

1.42%

Noninterest-bearing deposits

260,127

283,993

Other liabilities

1,681

4,831

Stockholders' equity

76,113

69,269

Total liabilities and stockholders'

equity

982,656

1,020,980

Net interest income and margin (tax-equivalent)

6,811

3.05%

6,380

2.73%

(1) Average loan

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

been included

in the computation of average balances.

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

for sale

(3) Yields on tax-exempt securities have been

computed on a tax-equivalent basis using a federal income

tax rate of 21%.

Table of Contents

Table 5

- Average

Balances and Net Interest Income Analysis

Nine months ended September 30,

2024

2023

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)

568,939

22,082

5.18%

514,706

18,146

4.71%

Securities - taxable (2)

248,923

4,109

2.20%

344,136

5,474

2.13%

Securities - tax-exempt (2)(3)

10,235

284

3.71%

54,615

1,531

3.75%

Total securities

259,158

4,393

2.26%

398,751

7,005

2.35%

Federal funds sold

18,014

738

5.47%

4,372

159

4.86%

Interest bearing bank deposits

39,530

1,619

5.47%

8,118

283

4.66%

Total interest-earning

assets

885,641

28,832

4.35%

925,947

25,593

3.70%

Cash and due from banks

17,917

15,160

Other assets

75,685

81,150

Total assets

979,243

1,022,257

Interest-bearing liabilities:

Deposits:

NOW

193,428

2,045

1.41%

189,586

1,067

0.75%

Savings and money market

250,146

1,486

0.79%

291,988

1,368

0.63%

Time deposits

196,584

5,082

3.45%

168,000

2,499

1.99%

Total interest-bearing

deposits

640,158

8,613

1.80%

649,574

4,934

1.02%

Short-term borrowings

838

0.48%

3,748

2.43%

Total interest-bearing

liabilities

640,996

8,616

1.80%

653,322

5,002

1.02%

Noninterest-bearing deposits

260,718

294,897

Other liabilities

2,485

3,379

Stockholders' equity

75,044

70,659

Total liabilities and stockholders'

equity

979,243

1,022,257

Net interest income and margin (tax-equivalent)

20,216

3.05%

20,591

2.97%

(1) Average loan

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

been included

in the computation of average balances.

(2) Includes average net unrealized gains (losses) on

investment securities available for sale

(3) Yields on tax-exempt securities have been

computed on a tax-equivalent basis using a federal income

tax rate of 21%.

Table of Contents

ITEM 3.

QUANTITATIVE

AND QUALITATIVE

DISCLOSURES ABOUT MARKET RISK

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

caption “MARKET AND LIQUIDITY RISK

MANAGEMENT” and is incorporated herein by reference.

ITEM 4. CONTROLS AND PROCEDURES

The Company, with the 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.

PART

II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

In the normal course of its business, the Company and the Bank are, from time to time,

involved in legal proceedings. The

Company’s and Bank’s

management believe there are no pending or threatened legal, governmental,

or regulatory

proceedings that, upon resolution, are expected to have a material adverse effect

upon the Company’s or the Bank’s

financial condition or results of operations. See also, Part I, Item 3 of the Company’s

Annual Report on Form 10-K for the

year ended December 31, 2023.

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider

the factors discussed in Part I,

Item 1A. “RISK FACTORS”

in the Company’s Annual

Report on Form 10-K for the year ended December 31, 2023,

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.

Table of Contents

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The Company did not sell any common stock or other equity securities during

the third quarter of 2024.

ITEM 3.

DEFAULTS

UPON SENIOR SECURITIES

Not applicable.

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.

OTHER INFORMATION

Not applicable.

Table of Contents

ITEM 6.

EXHIBITS

Exhibit

Number

Description

3.1

Certificate of Incorporation of Auburn National Bancorporation, Inc. and all amendments thereto.*

3.2

Amended and Restated Bylaws of Auburn National Bancorporation, Inc., adopted as of November 13, 2007. **

31.1

Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, As Adopted Pursuant to Section

302 of the Sarbanes-Oxley Act of 2002, by David A. Hedges, President and Chief Executive Officer.

31.2

Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, As Adopted Pursuant to Section

302 of the Sarbanes-Oxley Act of 2002, by W. James Walker, IV, Senior Vice President and Chief Financial

Officer.

32.1

Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley

Act of 2002, by David A. Hedges, President and Chief Executive Officer.***

32.2

Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley

Act of 2002, by W. James Walker, IV, Senior Vice President and Chief Financial Officer.***

101.INS

XBRL Instance Document

101.SCH

XBRL Taxonomy

Extension Schema Document

101.CAL

XBRL Taxonomy

Extension Calculation Linkbase Document

101.LAB

XBRL Taxonomy

Extension Label Linkbase Document

101.PRE

XBRL Taxonomy

Extension Presentation Linkbase Document

101.DEF

XBRL Taxonomy

Extension Definition Linkbase Document

104

Cover Page Interactive Data File (formatted as inline XBRL and contained

in Exhibit 101)

Incorporated by reference from Registrant’s

Form 10-Q dated June 30, 2002.

Incorporated by reference from Registrant’s

Form 10-K dated March 31, 2008.

***

The certifications attached as exhibits 32.1 and 32.2 to this quarterly report

on Form 10-Q are “furnished” to the

Securities and Exchange Commission pursuant to Section 906 of the Sarbanes-Oxley

Act of 2002 and shall not be

deemed “filed” by the Company for purposes of Section 18 of the Securities

Exchange Act of 1934, as amended.

Table of Contents

SIGNATURES

Pursuant to

the requirements

of the

Securities Exchange

Act of

1934, the

registrant has

duly caused

this report

be signed on its behalf by the undersigned thereunto duly

authorized.

AUBURN NATIONAL

BANCORPORATION,

INC.

(Registrant)

Date:

November 1, 2024

By:

/s/ David A. Hedges

David A. Hedges

President and CEO

Date:

November 1, 2024

By:

/s/

James Walker,

W. James Walker,

Senior Vice President and

Chief Financial Officer