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, 2022

☐

 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)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of 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

☒

 No

☐

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

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

to submit such files). 

Yes

☒

 No

☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting

company or an emerging growth company. See the definitions of “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

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to 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

☐

 No

☒

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.01

AUBN

NASDAQ

 Global Market

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

Class

Outstanding at November 8, 2022

Common Stock, $0.01 par value per share

3,504,420

 shares

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

INDEX

PAGE

Item 1

3 

4

5

6

7

8

Item 2 

28

50

51

52

53

54

55

56

Item 3

57

Item 4

57

Item 1

57

Item 1A

57

Item 2

58

Item 3

58

Item 4

58

Item 5

58

Item 6

59

3

PART 1. 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)

2022

2021

Assets:

Cash and due from banks

$

20,488

$

11,210

Federal funds sold

31,133

77,420

Interest-bearing bank deposits

18,016

67,629

Cash and cash equivalents

69,637

156,259

Securities available-for-sale 

411,538

421,891

Loans held for sale

—

1,376

Loans, net of unearned income

474,035

458,364

Allowance for loan losses

(4,966)

(4,939)

Loans, net

469,069

453,425

Premises and equipment, net

46,419

41,724

Bank-owned life insurance

19,929

19,635

Other assets

25,967

10,840

Total assets

$

1,042,559

$

1,105,150

Liabilities:

Deposits:

Noninterest-bearing 

$

321,702

$

316,132

Interest-bearing

656,236

678,111

Total deposits

977,938

994,243

Federal funds purchased and securities sold under agreements to repurchase

2,613

3,448

Accrued expenses and other liabilities

2,215

3,733

Total liabilities

982,766

1,001,424

Stockholders' equity:

Preferred stock of $

.01

 par value; authorized

200,000

 shares;

no shares issued

—

—

Common stock of $

.01

 par value; authorized

8,500,000

 shares;

issued

3,957,135

 shares

39

39

Additional paid-in capital

3,797

3,794

Retained earnings

113,063

109,974

Accumulated other comprehensive (loss) income, net

(45,675)

891

Less treasury stock, at cost -

451,780

 shares and

436,650

 at September 30, 2022

and December 31, 2021, respectively

(11,431)

(10,972)

Total stockholders’ equity

59,793

103,726

Total liabilities and stockholders’ equity

$

1,042,559

$

1,105,150

See accompanying notes to consolidated financial statements

4

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)

2022

2021

2022

2021

Interest income:

Loans, including fees

$

5,097

$

5,127

$

14,638

$

15,417

Securities:

Taxable

1,808

1,048

4,691

3,006

Tax-exempt

441

441

1,275

1,337

Federal funds sold and interest-bearing bank deposits

426

49

767

105

Total interest income

7,772

6,665

21,371

19,865

Interest expense:

Deposits

524

620

1,661

1,900

Short-term borrowings

5

4

15

12

Total interest expense

529

624

1,676

1,912

Net interest income

7,243

6,041

19,695

17,953

Provision for loan losses

250

—

—

(600)

Net interest income after provision for loan losses

6,993

6,041

19,695

18,553

Noninterest income:

Service charges on deposit accounts

158

149

446

419

Mortgage lending

126

268

566

1,241

Bank-owned life insurance

97

100

293

302

Other

427

443

1,259

1,311

Securities gains, net

44

15

44

15

Total noninterest income

852

975

2,608

3,288

Noninterest expense:

Salaries and benefits

2,975

2,893

8,901

8,641

Net occupancy and equipment

794

467

1,955

1,340

Professional fees

235

232

704

814

Other

1,411

1,163

3,814

3,566

Total noninterest expense

5,415

4,755

15,374

14,361

Earnings before income taxes

2,430

2,261

6,929

7,480

Income tax expense

432

386

1,049

1,313

Net earnings

$

1,998

$

1,875

$

5,880

$

6,167

Net earnings per share:

Basic and diluted

$

0.57

$

0.53

$

1.67

$

1.74

Weight ed average shares outstanding:

Basic and diluted

3,507,318

3,536,320

3,513,068

3,552,387

See accompanying notes to consolidated financial statements

5

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(Unaudited)

Quarter ended September 30,

Nine months ended September 30, 

(Dollars in thousands)

2022

2021

2022

2021

Net earnings

$

1,998

$

1,875

$

5,880

$

6,167

Other comprehensive loss, net of tax:

Unrealized net loss on securities

(17,223)

(1,493)

(46,533)

(4,837)

Reclassification adjustment for net gain on securities 

recognized in net earnings

(33)

(11)

(33)

(11)

Other comprehensive loss

(17,256)

(1,504)

(46,566)

(4,848)

Comprehensive (loss) income

$

(15,258)

$

371

$

(40,686)

$

1,319

See accompanying notes to consolidated financial statements

6

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders' Equity

(Unaudited)

Accumulated

Common

Additional

other

Shares

Common

paid-in

Retained 

comprehensive

Treasury

(Dollars in thousands, except share data)

Outstanding

Stock

capital

earnings

(loss) income

stock

Total

Quarter ended September 30, 2022

Balance, June 30, 2022

3,509,940

$

39

$

3,796

$

111,994

$

(28,419)

$

(11,303)

$

76,107

Net earnings

—

—

—

1,998

—

—

1,998

Other comprehensive loss

—

—

—

—

(17,256)

—

(17,256)

Cash dividends paid ($

.265

 per share)

—

—

—

(929)

—

—

(929)

Stock repurchases

(4,640)

—

—

—

—

(128)

(128)

Sale of treasury stock

55

—

1

—

—

—

1

Balance, September 30, 2022

3,505,355

$

39

$

3,797

$

113,063

$

(45,675)

$

(11,431)

$

59,793

Quarter ended September 30, 2021

Balance, June 30, 2021

3,545,855

$

39

$

3,792

$

108,060

$

4,255

$

(10,103)

$

106,043

Net earnings

—

—

—

1,875

—

—

1,875

Other comprehensive loss

—

—

—

—

(1,504)

—

(1,504)

Cash dividends paid ($

.26

 per share)

—

—

—

(917)

—

—

(917)

Stock repurchases

(16,582)

—

—

—

—

(570)

(570)

Sale of treasury stock

65

—

2

—

—

—

2

Balance, September 30, 2021

3,529,338

$

39

$

3,794

$

109,018

$

2,751

$

(10,673)

$

104,929

Nine months ended September 30, 2022

Balance, December 31, 2021

3,520,485

$

39

$

3,794

$

109,974

$

891

$

(10,972)

$

103,726

Net earnings

—

—

—

5,880

—

—

5,880

Other comprehensive loss

—

—

—

—

(46,566)

—

(46,566)

Cash dividends paid ($

.795

 per share)

—

—

—

(2,791)

—

—

(2,791)

Stock repurchases

(15,280)

—

—

—

—

(460)

(460)

Sale of treasury stock

150

—

3

—

—

1

4

Balance, September 30, 2022

3,505,355

$

39

$

3,797

$

113,063

$

(45,675)

$

(11,431)

$

59,793

Nine months ended September 30, 2021

Balance, December 31, 2020

3,566,276

$

39

$

3,789

$

105,617

$

7,599

$

(9,354)

$

107,690

Net earnings

—

—

—

6,167

—

—

6,167

Other comprehensive loss

—

—

—

—

(4,848)

—

(4,848)

Cash dividends paid ($

.78

 per share)

—

—

—

(2,766)

—

—

(2,766)

Stock repurchases

(37,093)

—

—

—

—

(1,320)

(1,320)

Sale of treasury stock

155

—

5

—

—

1

6

Balance, September 30, 2021

3,529,338

$

39

$

3,794

$

109,018

$

2,751

$

(10,673)

$

104,929

See accompanying notes to consolidated financial statements

7

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

Nine months ended September 30, 

(Dollars in thousands)

2022

2021

Cash flows from operating activities:

Net earnings

$

5,880

$

6,167

Adjustments to reconcile net earnings to net cash provided by

operating activities:

Provision for loan losses

—

(600)

Depreciation and amortization

1,098

967

Premium amortization and discount accretion, net

2,450

2,954

Net gain on securities available-for-sale

(44)

(15)

Net gain on sale of loans held for sale

(315)

(1,168)

Net gain on other real estate owned

(162)

—

Loans originated for sale

(8,711)

(39,632)

Proceeds from sale of loans

10,292

43,234

Increase in cash surrender value of bank-owned life insurance

(294)

(302)

Net increase in other assets

(15,570)

(216)

Net increase (decrease) in accrued expenses and other liabilities

14,102

(2,430)

Net cash provided by operating activities

8,726

8,959

Cash flows from investing activities:

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

38,871

53,724

Purchase of securities available-for-sale

(93,106)

(135,434)

(Increase) decrease in loans, net

(15,644)

8,569

Net purchases of premises and equipment

(5,540)

(13,287)

(Increase) decrease in FHLB stock

(74)

267

Proceeds from sale of other real estate owned

536

—

Net cash used in investing activities

(74,957)

(86,161)

Cash flows from financing activities:

Net increase in noninterest-bearing deposits

5,570

53,752

Net (decrease) increase in interest-bearing deposits

(21,875)

61,427

Net (decrease) increase in federal funds purchased and securities sold 

under agreements to repurchase

(835)

918

Stock repurchases

(460)

(1,320)

Dividends paid

(2,791)

(2,766)

Net cash (used in) provided by financing activities

(20,391)

112,011

Net change in cash and cash equivalents

(86,622)

34,809

Cash and cash equivalents at beginning of period

156,259

112,575

Cash and cash equivalents at end of period

$

69,637

$

147,384

Supplemental disclosures of cash flow information:

Cash paid during the period for:

Interest

$

1,705

$

1,914

Income taxes

1,031

2,145

See accompanying notes to consolidated financial statements

8

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, 2021.

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 other-than-temporary impairment on investment securities, the determination of the allowance for loan losses, fair

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

Revenue Recognition

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

 Revenue

from Contracts with Customers

, codified at

 Accounting Standards Codification (“ASC”)

606. The Company adopted ASC

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

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

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

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

transaction-based, for which the performance obligations are satisfied when the individual transaction is processed,

or 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, the analysis is based on various other factors, including the credit

quality of the borrower, the structure of the loan, and any other factors that we believe may affect collectability.

9

Subsequent Events 

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

subsequent to September 30, 2022. 

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 except as

reported in NOTE 8, SUBSEQUENT EVENTS.

Reclassifications

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

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

Accounting Developments

In the first nine months of 2022, the Company did not adopt any new accounting guidance.

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, 2022 and

2021, 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)

2022

2021

2022

2021

Basic and diluted:

Net earnings

$

1,998

$

1,875

$

5,880

$

6,167

Weighted average common shares outstanding

3,507,318

3,536,320

3,513,068

3,552,387

Net earnings per share

$

0.57

$

0.53

$

1.67

$

1.74

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. 

At September 30, 2022, the Company did not have any consolidated VIEs to disclose but did have one nonconsolidated

VIE, discussed below.

10

New Markets Tax Credit Investment

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

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

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

during such period. At September 30, 2022 and December 31, 2021, respectively, the Company had one such investment in

the amounts of $2.1 million and $2.2 million, respectively, which was included in other assets in the consolidated balance

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

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

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

(Dollars in thousands)

Maximum

Loss Exposure

Asset Recognized

Classification

Type:

New Markets Tax Credit investment

$

2,126

$

2,126

Other assets

NOTE 4: SECURITIES

At September 30, 2022 and December 31, 2021, 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, 2022 and December 31, 2021, respectively, are presented below.

1 year

1 to 5

5 to 10

After 10

Fair

Gross Unrealized 

Amortized

(Dollars in thousands)

or less

years

years

years

Value

Gains

Losses

Cost

September 30, 2022

Agency obligations (a)

$

—

50,826

74,490

—

125,316

—

16,305

$

141,621

Agency MBS (a)

—

382

34,606

186,320

221,308

—

36,601

257,909

State and political subdivisions

170

924

16,243

47,577

64,914

7

8,093

73,000

Total available-for-sale

$

170

52,132

125,339

233,897

411,538

7

60,999

$

472,530

December 31, 2021

Agency obligations (a)

$

5,007

49,604

69,802

—

124,413

1,080

2,079

$

125,412

Agency MBS (a)

—

680

35,855

186,836

223,371

1,527

2,680

224,524

State and political subdivisions

170

647

15,743

57,547

74,107

3,611

270

70,766

Total available-for-sale

$

5,177

50,931

121,400

244,383

421,891

6,218

5,029

$

420,702

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

Securities with aggregate fair values of $

210.7

 million and $

172.3

 million at September 30, 2022 and December 31, 2021,

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. 

Included in other assets on the accompanying consolidated balance sheets are non-marketable equity investments. The

carrying amounts of non-marketable equity investments were $

1.2

 million at September 30, 2022 and December 31, 2021,

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.

11

Gross Unrealized Losses and Fair Value

The fair values and gross unrealized losses on securities at September 30, 2022 and December 31, 2021, 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, 2022:

Agency obligations 

$

64,689

5,097

60,627

11,208

$

125,316

16,305

Agency MBS

117,411

14,777

103,897

21,824

221,308

36,601

State and political subdivisions

56,132

5,977

7,027

2,116

63,159

8,093

Total 

$

238,232

25,851

171,551

35,148

$

409,783

60,999

December 31, 2021:

Agency obligations 

$

49,799

1,025

26,412

1,054

$

76,211

2,079

Agency MBS

130,110

1,555

38,611

1,125

168,721

2,680

State and political subdivisions

7,960

109

3,114

161

11,074

270

Total 

$

187,869

2,689

68,137

2,340

$

256,006

5,029

For the securities in the previous table, the Company does not have the intent to sell and has determined it is not more likely

than not that the Company will be required to sell the securities before recovery of the amortized cost basis, which may be

maturity. On a quarterly basis, the Company also assesses each security for credit impairment. For debt securities, the

Company evaluates, where necessary, whether credit impairment exists by comparing the present value of the expected

cash flows to the securities’ amortized cost basis.

In determining whether a loss is temporary, the Company considers all relevant information including:

●

the length of time and the extent to which the fair value has been less than the amortized cost basis;

●

adverse conditions specifically related to the security, an industry, or a geographic area (for example, changes in

the financial condition of the issuer of the security, or in the case of MBS, in the financial condition of the

underlying obligors on the assets securing such MBS, including changes in technology or the discontinuance of a

segment of the business that may affect the future earnings potential of the issuer or underlying loan obligors of

the security or changes in the quality of the credit enhancement);

●

the historical and implied volatility of the security’s fair value;

●

the payment structure of the debt security and, in the case of variable rate securities, the likelihood of the issuer

being able to make payments that may increase in the future;

●

failure of the issuer of the security to make scheduled interest or principal payments;

●

any changes to the rating of the security by a rating agency; and

●

recoveries or additional declines in fair value subsequent to the balance sheet date.

Agency obligations

The unrealized losses associated with agency obligations were primarily driven by increases in market interest rates and not

due to the credit quality of the securities. These securities were issued by U.S. government agencies or government-

sponsored entities and did not have any credit losses given the explicit government guarantee or other government support. 

12

Agency mortgage-backed securities (“MBS”)

The unrealized losses associated with agency MBS were primarily driven by increases in market interest rates and not due

to the credit quality of the securities. These securities were issued by U.S. government agencies or government-sponsored

entities and did not have any credit losses given the explicit government guarantee or other government support. 

Securities of U.S. states and political subdivisions

The unrealized losses associated with securities of U.S. states and political subdivisions were primarily driven by increases

in market interest rates and were not due to the credit quality of the securities. Some of these securities are guaranteed by a

bond insurer, but management did not rely on such guarantees in making its investment decision. These securities will

continue to be monitored as part of the Company’s quarterly impairment analysis, but are expected to perform even if the

rating agencies reduce the credit rating of the bond insurers. As a result, the Company expects to recover the entire

amortized cost basis of these securities.

The carrying values of the Company’s investment securities could decline in the future if market interest rates continue to

increase. If the financial condition of an issuer (other than the U.S. government or its agencies’ obligations) deteriorates

and the Company determines it is probable that it will not recover the entire amortized cost basis for the security, there is a

risk that other-than-temporary impairment charges may occur in the future. The Company will evaluate whether any loss is

temporary or not.

Other-Than-Temporarily Impaired Securities

Credit-impaired debt securities are debt securities where the Company has written down the amortized cost basis of a

security for other-than-temporary impairment and the credit component of the loss is recognized in earnings. At September

30, 2022 and December 31, 2021, the Company had no credit-impaired debt securities and there were no additions or

reductions in the credit loss component of credit-impaired debt securities during the quarters and nine months ended

September 30, 2022 and 2021, respectively.

Realized Gains and Losses

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

Quarter ended September 30,

Nine months ended September 30, 

(Dollars in thousands)

2022

2021

2022

2021

Gross realized gains

$

44

15

$

44

15

Realized gains, net

$

44

15

$

44

15

13

NOTE 5: LOANS AND ALLOWANCE FOR LOAN LOSSES

.

September 30,

December 31,

(Dollars in thousands)

2022

2021

Commercial and industrial

$

70,685

$

83,977

Construction and land development

54,773

32,432

Commercial real estate:

Owner occupied

57,828

63,375

Hotel/motel

33,918

43,856

Multi-family

29,317

42,587

Other

128,967

108,553

Total commercial real estate

250,030

258,371

Residential real estate:

Consumer mortgage

40,207

29,781

Investment property

51,391

47,880

Total residential real estate

91,598

77,661

Consumer installment

7,551

6,682

Total loans

474,637

459,123

Less: unearned income

(602)

(759)

Loans, net of unearned income

$

474,035

$

458,364

Loans secured by real estate were approximately

83.5%

 of the Company’s total loan portfolio at September 30, 2022. At

September 30, 2022, the Company’s geographic loan distribution was concentrated primarily in Lee County, Alabama, and

surrounding areas.

In accordance with ASC 310, a portfolio segment is defined as the level at which an entity develops and documents a

systematic method for determining its allowance for loan 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. As of September 30, 2022, the Company had

1

 remaining PPP loan outstanding in the amount of $

0.1

 million,

compared to

138

 PPP loans with an aggregate principal balance of $

8.1

 million at December 31, 2021. 

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 disaggregated into four classes: (1) owner occupied, (2) hotel/motel, 

(3) multifamily and (4) other. 

●

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 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.

14

●

Multi-family

 – primarily includes loans to finance income-producing multi-family properties. Loans in this class

include loans for 5 or more unit residential property 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 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 disaggregated into two classes: (1) consumer mortgage and (2)

investment property.

●

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 value, as

well as the financial health of the borrower. 

Consumer installment —

includes loans to individuals both secured by personal property and 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 value.

15

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

September 30, 2022 and December 31, 2021.

Accruing

Accruing

Total

30-89 Days

Greater than

Accruing

Non-

Total 

(Dollars in thousands)

Current

Past Due

90 days

Loans

Accrual

Loans

September 30, 2022:

Commercial and industrial

$

70,684

1

—

70,685

—

$

70,685

Construction and land development

54,491

282

—

54,773

—

54,773

Commercial real estate:

Owner occupied

57,828

—

—

57,828

—

57,828

Hotel/motel

33,918

—

—

33,918

—

33,918

Multi-family

29,317

—

—

29,317

—

29,317

Other

128,797

—

—

128,797

170

128,967

Total commercial real estate

249,860

—

—

249,860

170

250,030

Residential real estate:

Consumer mortgage

39,984

46

—

40,030

177

40,207

Investment property

51,351

40

—

51,391

—

51,391

Total residential real estate

91,335

86

—

91,421

177

91,598

Consumer installment

7,543

8

—

7,551

—

7,551

Total

$

473,913

377

—

474,290

347

$

474,637

December 31, 2021:

Commercial and industrial

$

83,974

3

—

83,977

—

$

83,977

Construction and land development

32,228

204

—

32,432

—

32,432

Commercial real estate:

Owner occupied

63,375

—

—

63,375

—

63,375

Hotel/motel

43,856

—

—

43,856

—

43,856

Multi-family

42,587

—

—

42,587

—

42,587

Other

108,366

—

—

108,366

187

108,553

Total commercial real estate

258,184

—

—

258,184

187

258,371

Residential real estate:

Consumer mortgage

29,070

516

—

29,586

195

29,781

Investment property

47,818

—

—

47,818

62

47,880

Total residential real estate

76,888

516

—

77,404

257

77,661

Consumer installment

6,657

25

—

6,682

—

6,682

Total

$

457,931

748

—

458,679

444

$

459,123

Allowance for Loan Losses

The Company assesses the adequacy of its allowance for loan losses prior to the end of each calendar quarter. The level of

the allowance is based upon management’s evaluation of the loan portfolio, past loan loss experience, current asset quality

trends, known and inherent risks in the portfolio, adverse situations that may affect a borrower’s ability to repay (including

the timing of future payment), the estimated value of any underlying collateral, composition of the loan portfolio, economic

conditions, market interest rates, inflation and related expectations, industry and peer bank loan loss rates, and other

pertinent factors, including regulatory recommendations. This evaluation is inherently subjective as it requires material

estimates including the amounts and timing of future cash flows expected to be received on impaired loans that may be

susceptible to significant change. Loans are charged off, in whole or in part, when management believes that the full

collectability of the loan is unlikely. A loan may be partially charged-off after a “confirming event” has occurred, which

serves to validate that full repayment pursuant to the terms of the loan is unlikely.

16

The Company deems loans impaired when, based on current information and events, it is probable that the Company will

be unable to collect all amounts due according to the contractual terms of the loan agreement. Collection of all amounts due

according to the contractual terms means that both the interest and principal payments of a loan will be collected as

scheduled in the loan agreement. 

An impairment allowance is recognized if the fair value of the loan is less than the recorded investment in the loan. The

impairment is recognized through the allowance. Loans that are impaired are recorded at the present value of expected

future cash flows discounted at the loan’s effective interest rate, or if the loan is collateral dependent, the impairment

measurement is based on the fair value of the collateral, less estimated disposal costs. 

The level of allowance maintained is believed by management to be adequate to absorb probable losses inherent in the

portfolio at the balance sheet date. The allowance is increased by provisions charged to expense and decreased by charge-

offs, net of recoveries of amounts previously charged-off. 

In assessing the adequacy of the allowance, the Company also considers the results of its ongoing internal and independent

loan review processes. The Company’s loan review process assists in determining whether there are loans in the portfolio

whose credit quality has weakened over time and evaluating the risk characteristics of the entire loan portfolio. The

Company’s loan review process includes the judgment of management, the input from our independent loan reviewers, and

reviews conducted by bank regulatory agencies as part of their examination process. The Company incorporates loan

review results in the determination of whether or not it is probable that it will be able to collect all amounts due according

to the contractual terms of a loan. 

As part of the Company’s quarterly assessment of the allowance, management evaluates the loan portfolio’s five segments:

commercial and industrial, construction and land development, commercial real estate, residential real estate, and consumer

installment. The Company analyzes each segment and estimates an allowance allocation for each loan segment. 

The allocation of the allowance for loan losses begins with a process of estimating the probable losses inherent for each

loan segment. The estimates for these loans are established by category and based on the Company’s internal system of

credit risk ratings and historical loss data. The estimated loan loss allocation rate for the Company’s internal system of

credit risk grades is based on its experience with similarly graded loans. For loan segments where the Company believes it

does not have sufficient historical loss data, the Company may make adjustments based, in part, on loss rates of peer bank

groups. At September 30, 2022 and December 31, 2021, and for the periods then ended, the Company adjusted its

historical loss rates for the commercial real estate portfolio segment based, in part, on loss rates of peer bank groups. 

The estimated loan loss allocation for all five loan portfolio segments is then adjusted for management’s estimate of

probable losses for several “qualitative and environmental” factors. The allocation for qualitative and environmental factors

is particularly subjective and does not lend itself to exact mathematical calculation. This amount represents estimated

probable inherent credit losses which exist, but have not yet been identified, as of the balance sheet date, and are based

upon quarterly trend assessments in delinquent and nonaccrual loans, credit concentration changes, prevailing economic

conditions, changes in lending personnel experience, changes in lending policies or procedures, and other factors. These

qualitative and environmental factors are considered for each of the five loan segments and the allowance allocation, as

determined by the processes noted above, is increased or decreased based on the incremental assessment of these factors. 

The Company regularly re-evaluates its practices in determining the allowance for loan losses. The Company’s look-back

period each quarter incorporates the effects of at least one economic downturn in its loss history. The Company believes

this look-back period is appropriate due to the risks inherent in the loan portfolio. Absent this look-back period, the early

cycle periods in which the Company experienced significant losses would be excluded from the determination of the

allowance for loan losses and its balance would decrease. For the quarter ended September 30, 2022, the Company

increased its look-back period to 54 quarters to continue to include losses incurred by the Company beginning with the first

quarter of 2009. The Company will likely continue to increase its look-back period to incorporate the effects of at least one

economic downturn in its loss history. During the second quarter of 2021, the Company adjusted certain qualitative and

economic factors, previously downgraded as a result of the COVID-19 pandemic, to reflect improvements in economic

conditions in our primary market area. Further adjustments may be made from time to time in the future as a result of the

waning of COVID-19 as a pandemic and other changes in economic conditions.

17

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

September 30, 2022

(Dollars in thousands)

Commercial and

industrial

Construction

and land

development

Commercial

real estate

Residential

real estate

Consumer

installment

Total

Quarter ended:

Beginning balance

$

761

576

2,523

753

103

$

4,716

Charge-offs

(13)

—

—

—

(3)

(16)

Recoveries

2

—

—

8

6

16

Net (charge-offs) recoveries

(11)

—

—

8

3

—

Provision for loan losses

(18)

213

38

22

(5)

250

Ending balance

$

732

789

2,561

783

101

$

4,966

Nine months ended:

Beginning balance

$

857

518

2,739

739

86

$

4,939

Charge-offs

(17)

—

—

—

(67)

(84)

Recoveries

6

—

22

22

61

111

Net (charge-offs) recoveries

(11)

—

22

22

(6)

27

Provision for loan losses

(114)

271

(200)

22

21

—

Ending balance

$

732

789

2,561

783

101

$

4,966

September 30, 2021

(Dollars in thousands)

Commercial and

industrial

Construction

and land

development

Commercial

real estate

Residential

real estate

Consumer

installment

Total

Quarter ended:

Beginning balance

$

829

639

2,704

838

97

$

5,107

Recoveries

1

—

—

7

4

12

Net recoveries

1

—

—

7

4

12

Provision for loan losses

(14)

(49)

119

(46)

(10)

—

Ending balance

$

816

590

2,823

799

91

$

5,119

Nine months ended:

Beginning balance

$

807

594

3,169

944

104

$

5,618

Charge-offs

—

—

—

(1)

(5)

(6)

Recoveries

55

—

—

33

19

107

Net recoveries

55

—

—

32

14

101

Provision for loan losses

(46)

(4)

(346)

(177)

(27)

(600)

Ending balance

$

816

590

2,823

799

91

$

5,119

18

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

segment and impairment methodology as of September 30, 2022 and 2021.

Collectively evaluated (1)

Individually evaluated (2)

Total

Allowance

Recorded

Allowance

Recorded

Allowance

Recorded

for loan

investment

for loan

investment

for loan

investment

(Dollars in thousands)

losses

in loans

losses

in loans

losses

in loans

September 30, 2022:

Commercial and industrial

$

732

70,685

—

—

732

70,685

Construction and land development

789

54,773

—

—

789

54,773

Commercial real estate

2,561

249,860

—

170

2,561

250,030

Residential real estate

783

91,598

—

—

783

91,598

Consumer installment

101

7,551

—

—

101

7,551

Total

$

4,966

474,467

—

170

4,966

474,637

September 30, 2021:

Commercial and industrial (3)

$

816

79,202

—

—

816

79,202

Construction and land development

590

34,890

—

—

590

34,890

Commercial real estate

2,823

252,605

—

193

2,823

252,798

Residential real estate

799

80,112

—

93

799

80,205

Consumer installment

91

7,060

—

—

91

7,060

Total

$

5,119

453,869

—

286

5,119

454,155

(1)

Represents loans collectively evaluated for impairment in accordance with ASC 450-20,

Loss Contingencies

, and 

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

(2)

Represents loans individually evaluated for impairment in accordance with ASC 310-30,

Receivables

, and 

pursuant to amendments by ASU 2010-20 regarding allowance for impaired loans.

(3)

Includes $13.3 million of PPP loans for which no allowance for loan losses was allocated due to 100% SBA guarantee.

See “Impaired Loans” and “Troubled Debt Restructurings” below for additional information about such loans.

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. The following table presents credit quality

indicators for the loan portfolio segments and classes. These categories are utilized to develop the associated allowance for

loan 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.

19

(Dollars in thousands)

 Pass

 Special

Mention

Substandard

Accruing

Nonaccrual

Total loans

September 30, 2022: 

Commercial and industrial

$

70,480

11

194

—

$

70,685

Construction and land development

54,773

—

—

—

54,773

Commercial real estate:

Owner occupied

57,424

241

163

—

57,828

Hotel/motel

33,918

—

—

—

33,918

Multi-family

29,317

—

—

—

29,317

Other

128,591

178

28

170

128,967

Total commercial real estate

249,250

419

191

170

250,030

Residential real estate:

Consumer mortgage

38,946

443

641

177

40,207

Investment property

51,096

44

251

—

51,391

Total residential real estate

90,042

487

892

177

91,598

Consumer installment

7,522

—

29

—

7,551

Total

$

472,067

917

1,306

347

$

474,637

December 31, 2021:

Commercial and industrial

$

83,725

26

226

—

$

83,977

Construction and land development

32,212

2

218

—

32,432

Commercial real estate:

Owner occupied

61,573

1,675

127

—

63,375

Hotel/motel

36,162

7,694

—

—

43,856

Multi-family

39,093

3,494

—

—

42,587

Other

107,426

911

29

187

108,553

Total commercial real estate

244,254

13,774

156

187

258,371

Residential real estate:

Consumer mortgage

27,647

452

1,487

195

29,781

Investment property

47,459

98

261

62

47,880

Total residential real estate

75,106

550

1,748

257

77,661

Consumer installment

6,650

20

12

—

6,682

Total

$

441,947

14,372

2,360

444

$

459,123

Impaired loans

The following tables present details related to the Company’s impaired loans. Loans that have been fully charged-off are

not included in the following tables. The related allowance generally represents the following components that correspond

to impaired loans:

●

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

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

●

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

(nonaccrual commercial and industrial and consumer installment loans).

20

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

for impairment at September 30, 2022 and December 31, 2021.

September 30, 2022

(Dollars in thousands)

Unpaid principal

balance (1)

Charge-offs and

payments applied

(2)

Recorded

investment (3)

Related allowance

With no allowance recorded:

Commercial real estate:

Other

$

197

(27)

170

$

—

Total commercial real estate

197

(27)

170

—

Total impaired loans

$

197

(27)

170

$

—

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

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

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

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

 any related allowance for loan losses.

December 31, 2021

(Dollars in thousands)

Unpaid principal

balance (1)

Charge-offs and

payments applied

(2)

Recorded

investment (3)

Related allowance

With no allowance recorded:

Commercial real estate:

Other

$

205

(18)

187

$

—

Total commercial real estate

205

(18)

187

—

Residential real estate:

Investment property

68

(6)

62

—

Total residential real estate

68

(6)

62

—

Total impaired loans

$

273

(24)

249

$

—

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

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

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

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

 any related allowance for loan losses.

21

The following table provides the average recorded investment in impaired loans, if any, by portfolio segment, and the

amount of interest income recognized on impaired loans after impairment by portfolio segment and class during the

respective periods.

Quarter ended September 30, 2022

Nine months ended September 30, 2022

Average

Total interest

Average

Total interest

recorded

income

recorded

income

(Dollars in thousands)

investment

recognized

investment

recognized

Impaired loans:

Commercial real estate:

Other

$

173

—

199

—

Total commercial real estate

173

—

199

—

Residential real estate:

Investment property

—

—

6

—

Total residential real estate

—

—

6

—

Total 

$

173

—

205

—

Quarter ended September 30, 2021

Nine months ended September 30, 2021

Average

Total interest

Average

Total interest

recorded

income

recorded

income

(Dollars in thousands)

investment

recognized

investment

recognized

Impaired loans:

Commercial real estate:

Other

$

196

—

202

—

Total commercial real estate

196

—

202

—

Residential real estate:

Investment property

95

—

100

—

Total residential real estate

95

—

100

—

Total 

$

291

—

302

—

Troubled Debt Restructurings 

Impaired loans also include troubled debt restructurings (“TDRs”). Section 4013 of the CARES Act, “Temporary Relief

From Troubled Debt Restructurings,” provided banks the option to temporarily suspend certain requirements under ASC

340-10 TDR classifications for a limited period of time to account for the effects of COVID-19. In addition, the Interagency

Statement on COVID-19 Loan Modifications, encouraged banks to work prudently with borrowers and describes the

agencies’ interpretation of how accounting rules under ASC 310-40, “Troubled Debt Restructurings by Creditors,” apply to

certain COVID-19-related modifications. The Interagency Statement on COVID-19 Loan Modifications was supplemented

on June 23, 2020 by the Interagency Examiner Guidance for Assessing Safety and Soundness Considering the Effect of the

COVID-19 Pandemic on Institutions. If a loan modification was eligible, a bank could elect to account for the loan under

section 4013 of the CARES Act. If a loan modification was not eligible under section 4013, or if the bank elected not to

account for the loan modification under section 4013, the Revised Statement included criteria when a bank may presume a

loan modification is not a TDR in accordance with ASC 310-40.

The Company evaluates loan extensions or modifications not qualified under Section 4013 of the CARES Act or under the

Interagency Statement and related regulatory guidance on COVID-19 Loan Modifications in accordance with FASB ASC

340-10 with respect to the classification of the loan as a TDR. In the normal course of business, management may grant

concessions to borrowers that are experiencing financial difficulty. A concession may include, but is not limited to, delays

in required payments of principal and interest for a specified period, reduction of the stated interest rate of the loan,

reduction of accrued interest, extension of the maturity date, or reduction of the face amount or maturity amount of the debt. 

A concession has been granted when, as a result of the restructuring, the Bank does not expect to collect, when due, all

amounts owed, including interest at the original stated rate. A concession may have also been granted if the debtor is not

able to access funds elsewhere at a market rate for debt with risk characteristics similar to the restructured debt. In making

the determination of whether a loan modification is a TDR, the Company considers the individual facts and circumstances

surrounding each modification. As part of the credit approval process, the restructured loans are evaluated for adequate

collateral protection in determining the appropriate accrual status at the time of restructure. 

22

Similar to other impaired loans, TDRs are measured for impairment based on the present value of expected payments using

the loan’s original effective interest rate as the discount rate, or the fair value of the collateral, less selling costs if the loan is

collateral dependent. If the recorded investment in the loan exceeds the measure of fair value, impairment is recognized by

establishing a valuation allowance as part of the allowance for loan losses or a charge-off to the allowance for loan losses. 

In periods subsequent to the modification, all TDRs are evaluated individually, including those that have payment defaults,

for possible impairment.

The following is a summary of accruing and nonaccrual TDRs, which are included in the impaired loan totals, and the

related allowance for loan losses, by portfolio segment and class as of September 30, 2022 and December 31, 2021,

respectively.

TDRs

Related

(Dollars in thousands)

Accruing

Nonaccrual

Total

Allowance

September 30, 2022

Commercial real estate:

Other

$

—

170

170

$

—

Total commercial real estate

—

170

170

—

Total 

$

—

170

170

$

—

TDRs

Related

(In thousands)

Accruing

Nonaccrual

Total

Allowance

December 31, 2021

Commercial real estate:

Other

$

—

187

187

$

—

Total commercial real estate

—

187

187

—

Investment property

—

62

62

—

Total residential real estate

—

62

62

—

Total 

$

—

249

249

$

—

At September 30, 2022 there were no significant outstanding commitments to advance additional funds to customers whose

loans had been restructured. 

There were no loans modified in a TDR during the quarters and nine months ended September 30, 2022 and 2021,

respectively. For the same periods, the Company had no loans modified in a TDR within the previous 12 months for which

there was a payment default.

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 has recorded MSRs related to loans sold without recourse to Fannie Mae. The Company generally sells

conforming, fixed-rate, closed-end, residential mortgages to Fannie Mae. 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. 

23

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)

2022

2021

2022

2021

MSRs, net:

Beginning balance

$

1,259

$

1,360

$

1,309

$

1,330

Additions, net

13

93

110

407

Amortization expense

(64)

(127)

(211)

(411)

Ending balance

$

1,208

$

1,326

$

1,208

$

1,326

Valuation allowance included in MSRs, net:

Beginning of period

$

—

$

—

$

—

$

—

End of period

—

—

—

—

Fair value of amortized MSRs:

Beginning of period

$

2,547

$

1,833

$

1,908

$

1,489

End of period

2,478

1,776

2,478

1,776

NOTE 7: FAIR VALUE 

Fair Value Hierarchy

 “Fair value” is defined by ASC 820,

Fair Value Measurements and Disclosures

, as 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. 

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, 2022, there

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

24

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 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 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 provided by the third party pricing services

to another independent valuation firm on a sample basis. This independent valuation firm will compare the price provided

by the third party pricing service with its own price 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, 2022 and December 31, 2021, respectively, by caption, on the accompanying consolidated balance sheets by

ASC 820 valuation hierarchy (as described above).

Quoted Prices in

Significant

Active Markets

Other

Significant

for

Observable

Unobservable

Identical Assets

Inputs

Inputs

(Dollars in thousands)

Amount

(Level 1)

(Level 2)

(Level 3)

September 30, 2022:

Securities available-for-sale:

Agency obligations 

$

125,316

—

125,316

—

Agency RMBS

221,308

—

221,308

—

State and political subdivisions

64,914

—

64,914

—

Total securities available-for-sale

411,538

—

411,538

—

Total assets at fair value

$

411,538

—

411,538

—

December 31, 2021:

Securities available-for-sale:

Agency obligations 

$

124,413

—

124,413

—

Agency RMBS

223,371

—

223,371

—

State and political subdivisions

74,107

—

74,107

—

Total securities available-for-sale

421,891

—

421,891

—

Total assets at fair value

$

421,891

—

421,891

—

Assets and liabilities measured at fair value on a nonrecurring basis

Loans held for sale

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 market secondary market prices for similar loans. Loans held for sale are classified within Level 2 of the fair value

hierarchy.

Impaired Loans

Loans considered impaired under ASC 310-10-35,

Receivables

, are loans for which, based on current information and

events, it is probable that the Company will be unable to collect all principal and interest payments due in accordance with

the contractual terms of the loan agreement. Impaired loans can be measured based on the present value of expected

payments using the loan’s original effective rate as the discount rate, the loan’s observable market price, or the fair value of

the collateral less selling costs if the loan is collateral dependent. 

25

The fair value of impaired loans was primarily measured based on the value of the collateral securing these loans. Impaired

loans are classified within Level 3 of the fair value hierarchy. Collateral may be real estate and/or business assets including

equipment, inventory, and/or accounts receivable. The Company determines the value of the collateral based on

independent appraisals performed by qualified licensed appraisers. These appraisals may utilize a single valuation approach

or a combination of approaches including comparable sales and the income approach. Appraised values are discounted for

estimated costs to sell and may be discounted further based on management’s historical knowledge, changes in market

conditions from the date of the most recent appraisal, and/or management’s expertise and knowledge of the customer and

the customer’s business. Such discounts by management are subjective and are typically significant unobservable inputs for

determining fair value. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment

and adjusted accordingly, based on the same factors discussed above. 

Other real estate owned

Other real estate owned, consisting of properties obtained through foreclosure or in satisfaction of loans, are initially

recorded at the lower of the loan’s carrying amount or the fair value less the estimated costs to sell upon transfer of the

loans to other real estate. Subsequently, other real estate is carried at the lower of carrying value or fair value less costs to

sell. Fair values are generally based on third party appraisals of the property and are classified within Level 3 of the fair

value hierarchy. The appraisals are sometimes further discounted based on management’s historical knowledge, and/or

changes in market conditions from the date of the most recent appraisal, and/or management’s expertise and knowledge of

the customer and the customer’s business. Such discounts are typically significant unobservable inputs for determining fair

value. In cases where the carrying amount exceeds the fair value, less costs to sell, a loss is recognized in noninterest

expense.

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 prepayment speeds, discount rates, default rates, cost 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 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.

26

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

September 30, 2022 and December 31, 2021, 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

Inputs

(Dollars in thousands)

Amount

(Level 1)

(Level 2)

(Level 3)

September 30, 2022:

Loans, net

(1)

170

—

—

170

Other assets

(2)

1,208

—

—

1,208

Total assets at fair value

$

1,378

—

—

1,378

December 31, 2021:

Loans held for sale

$

1,376

—

1,376

—

Loans, net

(1)

249

—

—

249

Other assets

(2)

1,683

—

—

1,683

Total assets at fair value

$

3,308

—

1,376

1,932

(1)

Loans considered impaired under ASC 310-10-35 Receivables. This amount reflects the recorded investment in impaired loans, net

of any related allowance for loan losses.

(2)

Represents other real estate owned and MSRs, net, carried at lower of cost or estimated fair value.

Quantitative Disclosures for Level 3 Fair Value Measurements

At September 30, 2022 and December 31, 2021, 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, 2022 and December 31, 2021,

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, 2022:

Impaired loans

$

170

Appraisal

Appraisal discounts

10.0

-

10.0

%

10.0

%

Mortgage servicing rights, net

1,208

Discounted cash flow

Prepayment speed or CPR

7.1

-

20.6

7.4

Discount rate

9.5

-

11.5

9.5

December 31, 2021:

Impaired loans

$

249

Appraisal

Appraisal discounts

10.0

-

10.0

%

10.0

%

Other real estate owned

374

Appraisal

Appraisal discounts

55.0

-

55.0

55.0

Mortgage servicing rights, net

1,309

Discounted cash flow

Prepayment speed or CPR

6.8

-

16.5

13.3

Discount rate

9.5

-

11.5

9.5

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, for which 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 a good-faith estimate 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.

27

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. 

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

instruments at September 30, 2022 and December 31, 2021 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.

Fair Value Hierarchy

Carrying

Estimated

Level 1

Level 2

Level 3

(Dollars in thousands)

amount

fair value

inputs

inputs

Inputs

September 30, 2022:

Financial Assets:

Loans, net (1)

$

469,069

$

454,105

$

—

$

—

$

454,105

Financial Liabilities:

Time Deposits

$

146,508

$

144,702

$

—

$

144,702

$

—

December 31, 2021:

Financial Assets:

Loans, net (1)

$

453,425

$

449,105

$

—

$

—

$

449,105

Loans held for sale

1,376

1,410

—

1,410

—

Financial Liabilities:

Time Deposits

$

156,650

$

160,581

$

—

$

160,581

$

—

(1) Represents loans, net of unearned income and the allowance for loan losses. The fair value of loans was measured using an exit price notion.

NOTE 8: SUBSEQUENT EVENTS

On October 13, 2022, the Company closed the sale of approximately 0.85 acres of land located next to the Company’s

headquarters in Auburn, Alabama at a purchase price of $

4.26

 million. Although not all invoices have been received, after

prorations, closing costs and costs of demolishing the Bank’s former main office building, the Company estimates that the

sale will result in a pre-tax gain of $

3.2

 million.

28

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

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 Federal Home Loan Bank of Atlanta (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 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, 2022 and 2021, as well as the information contained in our

annual report on Form 10-K for the year ended December 31, 2021 and our interim reports on Form 10-Q for the quarters

ended March 31, 2022 and June 30, 2022. 

Special 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” and elsewhere,

are “forward-looking statements” within the meaning and protections of Section 27A of the Securities Act of 1933, as

amended (the “Securities Act”) 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,”

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

“project,” “could,” “intend,” “target,” “view,” 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 epidemics or pandemics including supply chain disruptions, inventory volatility,

and changes in consumer behaviors;

●

the effects of war or other conflicts, acts of terrorism, or other events that may affect general economic conditions;

●

governmental monetary and fiscal policies, including the continuing effects of COVID-19 fiscal and monetary

stimulus, and changes in monetary policies in response to inflations including increases in the Federal Reserve’s

target federal funds rate and reductions in the Federal Reserve’s holdings of securities;

29

●

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 implementation 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, as well as differences in, and changes to, economic, market and credit

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

portfolio reviews;

●

the risks of changes in interest rates on the levels, composition and costs of deposits, loan demand and mortgage

loan originations, and the values and liquidity of loan collateral, securities, and interest -sensitive assets and

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

●

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 disruption effects of financial technology and other competitors

who are not subject to the same regulations as the Company and the Bank;

●

the failure of assumptions and estimates underlying the establishment of allowances for possible loan losses and

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

●

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 vendor systems or customers’

information;

●

the risks that our deferred tax assets (“DTAs”) included in “other assets” on our consolidated balance sheets, if

any, could be reduced if estimates of future taxable income from our operations and tax planning strategies are less

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

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

●

the timing and amount of any credit approved by the Internal Revenue Service (“IRS”) resulting from our filing,

seeking an Employee Retention Credit, which we believe we are eligible for under the CARES Act and the 2020

Consolidated Appropriations Act; and

●

other factors and information in this report and other filings that we make with the SEC under the Exchange Act,

including our Annual Report on Form 10-K for the year ended December 31, 2021 and subsequent quarterly and

current reports. See Part II, Item 1A. “RISK FACTORS”.

30

All written or oral forward-looking statements that are made by us 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)

2022

2021

2022

2021

Net interest income (a)

$

7,360

$

6,158

$

20,034

$

18,308

Less: tax-equivalent adjustment

117

117

339

355

Net interest income (GAAP)

7,243

6,041

19,695

17,953

Noninterest income 

852

975

2,608

3,288

Total revenue 

8,095

7,016

22,303

21,241

Provision for loan losses

250

— 

— 

(600)

Noninterest expense

5,415

4,755

15,374

14,361

Income tax expense 

432

386

1,049

1,313

Net earnings

$

1,998

$

1,875

$

5,880

$

6,167

Basic and diluted earnings per share

$

0.57

$

0.53

$

1.67

$

1.74

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

Financial Summary

The Company’s net earnings were $5.9 million for the first nine months of 2022, down 5% compared to $6.2 million for the

first nine months of 2021. Basic and diluted earnings per share were $1.67 per share for the first nine months of 2022,

down 4% from the $1.74 per share for the first nine months of 2021. 

Net interest income (tax-equivalent) was $20.0 million for the first nine months of 2022, a 9% increase compared to $18.3

million for the first nine months of 2021. This increase was due to balance sheet growth, and an increase in the Company’s

net interest margin (tax-equivalent). Net interest margin (tax-equivalent) increased to 2.67% in the first nine months of

2022, compared to 2.59% for the first nine months of 2021 due to increases in the Federal Reserve’s target federal funds

rates, and changes in our asset mix resulting from the continuing elevated levels of customer deposits. Beginning in March

2022 through September 30, 2022, the Federal Reserve increased the target federal funds range from 0 – 0.25% to 3.00 –

3.25%. On November 3, the Federal Reserve increased its target federal funds rate by a further 0.75%. The Federal

Reserve has indicated that additional increases in the target federal funds rate are possible if inflation remains elevated. Net

interest income (tax-equivalent) included $0.3 million in PPP loan fees, net of related costs for the first nine months of

2022, compared to $0.8 million for the first nine months of 2021. 

At September 30, 2022, the Company’s allowance for loan losses was $5.0 million, or 1.05

%

of total loans, compared to

$4.9 million, or 1.08% of total loans, at December 31, 2021, and $5.1 million, or 1.13% of total loans, at September 30,

2021. 

The Company recorded no net provision for loan losses during the first nine months of 2022 compared to a negative

provision for loan losses of $0.6 million during the first nine months of 2021. The negative provision for loan losses during

2021 was primarily related to improvements in economic conditions in our primary market area, and related improvements

in our asset quality. The provision for loan losses is based upon various estimates and judgments, including the absolute

level of loans, economic conditions, credit quality and the amount of net charge-offs.

Noninterest income was $2.6 million for the first nine months of 2022, 21% less than the $3.3 million earned in the first

nine months of 2021. The decrease in noninterest income was primarily due to a decrease in mortgage lending income of

$0.7 million as market interest rates on mortgage loans increased.

31

Noninterest expense was $15.4 million for the first nine months of 2022, up 7% compared to $14.4 million for the first nine

months of 2021. The increase in noninterest expense was due to increases in salaries and benefits expense of $0.3 million,

net occupancy and equipment expense of $0.6 million related to the Company’s new headquarters, and other noninterest

expense of $0.2 million. Inflation may also have affected our costs adversely. These increases were partially offset by a

decrease in professional fees of $0.1 million.

Income tax expense was $1.0 million for the first nine months of 2022 compared to $1.3 million during the first nine

months of 2021. The Company’s effective tax rate for the first nine months of 2022 was 15.14%, compared to 17.55% in

the first nine months of 2021. The decrease was primarily due to an income tax benefit related to a New Markets Tax

Credit investment funded in the fourth quarter of 2021. The Company’s effective income tax rate is principally impacted

by tax-exempt earnings from the Company’s investments in municipal securities, bank-owned life insurance, and New

Markets Tax Credits. 

The Company paid cash dividends of $0.765 per share in the first nine months of 2022, an increase of 2% from the same

period of 2021. The Company has repurchased 15,280 shares for $0.5 million since December 31, 2021. At September 30,

2022, 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 16.16%, a tier 1 leverage ratio of 9.29% and a common

equity tier 1 (“CET1”) ratio of 15.39% at September 30, 2022. At September 30, 2022, the Company’s equity to total

assets ratio was 5.74%, compared to 9.39% at December 31, 2021, and 9.84% at September 30, 2021.

For the third quarter of 2022, net earnings were $2.0 million, or $0.57 per share, compared to $1.9 million, or $0.53 per

share, for the third quarter of 2021. Net interest income (tax-equivalent) was $7.4 million for the third quarter of 2022, a

20% increase compared to $6.2 million for the third quarter of 2021. This increase was primarily due to recent increases in

market interest rates. Since March 2022, the Federal Reserve has increased the target federal funds range by 300 basis

points. Further increases in the target federal funds rate are possible if inflation remains elevated. The Company’s net

interest margin (tax-equivalent) was 3.00% in the third quarter of 2022 compared to 2.51% in the third quarter of 2021. Net

interest income (tax-equivalent) included $26 thousand in PPP loan fees, net of related costs for the third quarter of 2022

and $0.3 million in the third quarter of 2021. The Company recorded a provision for loan losses during the third quarter of

2022 of $0.3 million, compared to no provision for loan losses during the third quarter 2021. The provision for loan losses

was primarily related to loan growth during the third quarter of 2022. Noninterest income was $0.9 million in the third

quarter of 2022, compared to $1.0 million in the third quarter of 2021. The decrease in noninterest income was primarily

due to a decrease in mortgage lending income of $0.1 million as market interest rates on mortgage loans increased. 

Noninterest expense was $5.4 million in the third quarter of 2022, compared to $4.8 million for the third quarter of 2021. 

The increase in noninterest expense was primarily due to an increase in net occupancy and equipment expense of $0.3

million related to the Company’s new headquarters, which opened in June 2022, and other noninterest expenses of $0.2

million. Income tax expense was $0.4 million for the third quarter of 2022 and 2021, respectively. The Company's

effective tax rate for the third quarter of 2022 was 17.79%, compared to 17.07% in the third quarter of 2021. The

Company’s effective income tax rate is principally impacted by tax-exempt earnings from the Company’s investment in

municipal securities, bank-owned life insurance, and New Markets Tax Credits.

COVID-19 Impact Assessment

The COVID-19 pandemic has occurred in waves of different variants since the first quarter of 2020. Vaccines to protect

against and/or reduce the severity of COVID-19 were widely introduced at the beginning of 2021. At times, the pandemic

has severely restricted the level of economic activity in our markets. In response to the COVID-19 pandemic, the State of

Alabama, and most other states, have taken preventative or protective actions to prevent the spread of the virus, including

imposing restrictions on travel and business operations and a statewide mask mandate, advising or requiring individuals to

limit or forego their time outside of their homes, limitations on gathering of people and social distancing, and causing

temporary closures of businesses that have been deemed to be non-essential. Though certain of these measures have been

relaxed or eliminated, especially as vaccination levels increased, such measures could be reestablished in cases of new

waves, especially a wave of a COVID-19 variant that is more resistant to existing vaccines and newly developed

treatments. 

32

COVID-19 has significantly affected local state, national and global health and economic activity and its future effects are

uncertain and will depend on various factors, including, among others, the duration and scope of the pandemic, especially

new variants of the virus, effective vaccines and drug treatments, together with governmental, regulatory and private sector

responses. COVID-19 has had continuing significant effects on the economy, financial markets and our employees,

customers and vendors. Our business, financial condition and results of operations generally rely upon the ability of our

borrowers to make deposits and repay their loans, the value of collateral underlying our secured loans, market value,

stability and liquidity and demand for loans and other products and services we offer, all of which are affected by the

pandemic. 

We have implemented a number of procedures in response to the pandemic to support the safety and well-being of our

employees, customers and shareholders.

●

We believe our business continuity plan has worked to provide essential banking services to our communities and

customers, while protecting our employees’ health. As part of our efforts to exercise social distancing in

accordance with the guidelines of the Centers for Disease Control and the Governor of the State of Alabama,

starting March 23, 2020, we limited branch lobby service to appointment only while continuing to operate our

branch drive-thru facilities and ATMs. As permitted by state public health guidelines, on June 1, 2020, we re-

opened some of our branch lobbies. In 2021, we opened our remaining branch lobbies. We continue to provide

services through our online and other electronic channels. In addition, we maintain remote work access to help

employees stay at home while providing continuity of service during outbreaks of COVID-19 variants.

●

We serviced the financial needs of our commercial and consumer clients with extensions and deferrals to loan

customers effected by COVID-19, provided such customers were not more than 30 days past due at the time of the

request; and

●

We were an active PPP lender. PPP loans were forgivable, in whole or in part, if the proceeds are used for payroll

and other permitted purposes in accordance with the requirements of the PPP. These loans carry a fixed rate of

1.00% and a term of two years (loans made before June 5, 2020) or five years (loans made on or after June 5,

2020), if not forgiven, in whole or in part. Payments are deferred until either the date on which the Small Business

Administration (“SBA”) remits the amount of forgiveness proceeds to the lender or the date that is 10 months after

the last day of the covered period if the borrower does not apply for forgiveness within that 10-month period. We

believe these loans and our participation in the program helped our customers and the communities we serve.

COVID-19 has also had various economic effects, generally. These include supply chain disruptions and manufacturing

delays, shortages of certain goods and services, reduced consumer expenditure on hospitality and travel, and migration from

larger urban centers to less populated areas and remote work. The demand for single family housing has exceeded existing

supplies. When coupled with construction delays attributable to supply chain disruptions and worker shortages, these

factors have caused housing prices and apartment rents to increase, generally. Stimulative monetary and fiscal policies,

along with shortages of certain goods and services, and rising petroleum and food prices, reflecting, among other things, the

war in the Ukraine, have led to the highest inflation in decades. The Federal Reserve has begun rapidly increasing its target

federal funds rate from 0 – 0.25% at the beginning of March 2022 to 3.00 – 3.25% at September 30, 2022 and 3.75 – 4.00%

as of November 30. The Federal Reserve also has been reducing its holdings of securities to counteract inflation. 

A summary of PPP loans extended during 2020 follows:

(Dollars in thousands)

# of SBA

Approved

Mix

$ of SBA

Approved

Mix

SBA Tier:

$2 million to $10 million

—

—

%

$

—

—

%

$350,000 to less than $2 million

23

5

14,691

40

Up to $350,000

400

95

21,784

60

Total

423

100

%

$

36,475

100

%

We collected approximately $1.5 million in fees from the SBA related to our PPP loans during 2020. Through December

31, 2021, we had recognized all of these fees, net of related costs. As of December 31, 2021, we had received payments and

forgiveness on all PPP loans extended during 2020.

33

On December 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the “Economic Aid

Act”) was signed into law. The Economic Aid Act provides a second $900 billion stimulus package, including $325 billion

in additional PPP loans. The Economic Aid Act also permits the collection of a higher amount of PPP loan fees by

participating banks.

A summary of PPP loans extended during 2021 under the Economic Aid Act follows:

(Dollars in thousands)

# of SBA

Approved

Mix

$ of SBA

Approved

Mix

SBA Tier:

$2 million to $10 million

—

—

%

$

—

—

%

$350,000 to less than $2 million

12

5

6,494

32

Up to $350,000

242

95

13,757

68

Total

254

100

%

$

20,251

100

%

We collected approximately $1.0 million in fees from the SBA related to PPP loans under the Economic Aid Act. Through

September 30, 2022, we have recognized all of these fees, net of related costs. As of September 30, 2022, we have received

payments and forgiveness on all but 1 PPP loan, in the amount of $0.1 million, under the Economic Aid Act.

We believe that the COVID-19 pandemic stimuli and decreased economic activity increased customer liquidity and tier

deposits at the Bank and decreased loan demand, while monetary stimulus reduced interest rates and our costs of funds and

our interest earnings on loans. As a result, our net interest margin was adversely affected. A return to more normal interest

rates appears underway, beginning in March 2022, and has accelerated in recent months as a result of Federal Reserve

efforts to curb inflation. This has resulted in improved net interest margin, but at the same time has reduced the market

values of our securities portfolio and resulted in unrealized securities losses. As a result, we have had losses in our other

comprehensive income and our equity under generally accepted accounting principles has declined. This has not adversely

affected our regulatory capital, however. 

We continue to closely monitor the pandemic’s effects , and are working to continue our services and to address

developments as those occur. Our results of operations for the nine months ended September 30, 2022, and our financial

condition at that date, which reflect only the continuing direct and indirect effects of the pandemic, may not be indicative of

future results or financial conditions, including possible changes in monetary or fiscal stimulus, and the possible effects of

the expiration or extension of temporary accounting and bank regulatory relief measures in response to the COVID-19

pandemic. 

As of September 30, 2022, all of our capital ratios were in excess of all regulatory requirements to be well capitalized. The

continuing effects of the COVID-19 pandemic could result in adverse changes to credit quality and our regulatory capital

ratios, and inflation will affect our costs, interest rates and the values of our assets and liabilities, customer behaviors and

economic activity. Continuing supply chain and supply disruptions also adversely affect the levels and costs of economic

activities. We continue to closely monitor these continuing effects of the pandemic, and are working to anticipate and 

address developments.

The CARES Act and the 2020 Consolidated Appropriations Act provide eligible employers an employee retention credit

related to COVID-19. After consultation with our tax advisors, we believe we are eligible, and have filed amended payroll

tax returns with the IRS, of an estimated employee retention credit of $1.6 million, or approximately $1.2 million, net of

estimated income tax effects, or approximately $0.33 per share. IRS action on this request, including its timing and the

amount of any credit approved by the IRS, cannot be predicted.

The direct health issues related to COVID-19 appear to be waning as a result of vaccinations, new medications and

increased resistance to the virus as a result of prior infections, although new strains continue to appear. The economic

effects of the pandemic and government fiscal and monetary policy responses, supply chain disruptions and inflation

continue, however.

34

CRITICAL ACCOUNTING POLICIES

The accounting and financial reporting policies of the Company conform with U.S. generally accepted accounting

principles and with general practices within the banking industry. In connection with the application of those principles, we

have made judgments and estimates which, in the case of the determination of our allowance for loan losses, our

assessment of other-than-temporary impairment, recurring and non-recurring fair value measurements, the valuation of

other real estate owned, and the valuation of deferred tax assets, were critical to the determination of our financial position

and results of operations. Other policies also require subjective judgment and assumptions and may accordingly impact our

financial position and results of operations. 

Allowance for Loan Losses

The Company assesses the adequacy of its allowance for loan losses prior to the end of each calendar quarter. The level of

the allowance is based upon management’s evaluation of the loan portfolio, past loan loss experience, current asset quality

trends, known and inherent risks in the portfolio, adverse situations that may affect a borrower’s ability to repay (including

the timing of future payment), the estimated value of any underlying collateral, composition of the loan portfolio, economic

conditions, changes in, and expectations regarding, market interest rates and inflation, industry and peer bank loan loss rates

and other pertinent factors. This evaluation is inherently subjective as it requires material estimates including the amounts

and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change.

Loans are charged off, in whole or in part, when management believes that the full collectability of the loan is unlikely. A

loan may be partially charged-off after a “confirming event” has occurred which serves to validate that full repayment

pursuant to the terms of the loan is unlikely. In addition, our regulators, as an integral part of their examination process,

will periodically review the Company’s allowance for loan losses, and may require the Company to make additional

provisions to the allowance for loan losses based on their judgment about information available to them at the time of their

examinations.

The Company deems loans impaired when, based on current information and events, it is probable that the Company will

be unable to collect all amounts due according to the contractual terms of the loan agreement. Collection of all amounts due

according to the contractual terms means that both the interest and principal payments of a loan will be collected as

scheduled in the loan agreement.

An impairment allowance is recognized if the fair value of the loan is less than the recorded investment in the loan. The

impairment is recognized through the allowance. Loans that are impaired are recorded at the present value of expected

future cash flows discounted at the loan’s effective interest rate, or if the loan is collateral dependent, impairment

measurement is based on the fair value of the collateral, less estimated disposal costs.

The level of the allowance for loan losses maintained is believed by management, based on its processes and estimates, to

be adequate to absorb probable losses inherent in the portfolio at the balance sheet date. The allowance is increased by

provisions charged to expense and decreased by charge-offs, net of recoveries of amounts previously charged-off and by

releases from the allowance when determined to be appropriate to the levels of loans and probable loan losses in such loans.

In assessing the adequacy of the allowance, the Company also considers the results of its ongoing internal, independent

loan review process. The Company’s loan review process assists in determining whether there are loans in the portfolio

whose credit quality has weakened over time and evaluating the risk characteristics of the entire loan portfolio. The

Company’s loan review process includes the judgment of management, the input from our independent loan reviewers, and

reviews that may have been conducted by bank regulatory agencies as part of their examination process. The Company

incorporates loan review results in the determination of whether or not it is probable that it will be able to collect all

amounts due according to the contractual terms of a loan.

As part of the Company’s quarterly assessment of the allowance, management divides the loan portfolio into five segments:

commercial and industrial, construction and land development, commercial real estate, residential real estate, and consumer

installment loans. The Company analyzes each segment and estimates an allowance allocation for each loan segment.

35

The allocation of the allowance for loan losses begins with a process of estimating the probable losses inherent for these

types of loans. The estimates for these loans are established by category and based on the Company’s internal system of

credit risk ratings and historical loss data. The estimated loan loss allocation rate for the Company’s internal system of

credit risk grades is based on its experience with similarly graded loans. For loan segments where the Company believes it

does not have sufficient historical loss data, the Company may make adjustments based, in part, on loss rates of peer bank

groups. At September 30, 2022 and December 31, 2021, and for the periods then ended, the Company adjusted its historical

loss rates for the commercial real estate portfolio segment based, in part, on loss rates of peer bank groups.

The estimated loan loss allocation for all five loan portfolio segments is then adjusted for management’s estimate of

probable losses for several “qualitative and environmental” factors. The allocation for qualitative and environmental

factors is particularly subjective and does not lend itself to exact mathematical calculation. This amount represents

estimated probable inherent credit losses which exist, but have not yet been identified, as of the balance sheet date, and are

based upon quarterly trend assessments in delinquent and nonaccrual loans, credit concentration changes, prevailing

economic conditions, changes in lending personnel experience, changes in lending policies or procedures and other

influencing factors. These qualitative and environmental factors are considered for each of the five loan segments and the

allowance allocation, as determined by the processes noted above, is increased or decreased based on the incremental

assessment of these factors.

The Company regularly re-evaluates its practices in determining the allowance for loan losses. The Company’s look-back

period each quarter incorporates the effects of at least one economic downturn in its loss history. The Company believes

this look-back period is appropriate due to the risks inherent in the loan portfolio. Absent this look-back period, the early

cycle periods in which the Company experienced significant losses would be excluded from the determination of the

allowance for loan losses and its balance would decrease. For the quarter ended September 30, 2022, the Company

increased its look-back period to 54 quarters to continue to include losses incurred by the Company beginning with the first

quarter of 2009. The Company will likely continue to increase its look-back period to incorporate the effects of at least one

economic downturn in its loss history. During the quarter ended June 30, 2021, the Company adjusted certain qualitative

and economic factors, previously downgraded as a result of the COVID-19 pandemic, to reflect improvements in economic

conditions in our primary market area. Further adjustments may be made from time to time in the future as a result of the

COVID-19 pandemic and other economic changes.

Assessment for Other-Than-Temporary Impairment of Securities

On a quarterly basis, management makes an assessment to determine whether there have been events or economic

circumstances to indicate that a security on which there is an unrealized loss is other-than-temporarily impaired. 

For debt securities with an unrealized loss, an other-than-temporary impairment write-down is triggered when (1) the

Company has the intent to sell a debt security, (2) it is more likely than not that the Company will be required to sell the

debt security before recovery of its amortized cost basis, or (3) the Company does not expect to recover the entire amortized

cost basis of the debt security. If the Company has the intent to sell a debt security or if it is more likely than not that it will

be required to sell the debt security before recovery, the other-than-temporary write-down is equal to the entire difference

between the debt security’s amortized cost and its fair value. If the Company does not intend to sell the security or it is not

more likely than not that it will be required to sell the security before recovery, the other-than-temporary impairment write-

down is separated into the amount that is credit related (credit loss component) and the amount due to all other factors. The

credit loss component is recognized in earnings and is the difference between the security’s amortized cost basis and the

present value of its expected future cash flows. The remaining difference between the security’s fair value and the present

value of future expected cash flows is due to factors that are not credit related and is recognized in other comprehensive

income, net of applicable taxes.

The Company is required to own certain stock as a condition of membership, such as the FHLB of Atlanta and Federal

Reserve Bank of Atlanta (“FRB”). These non-marketable equity securities are accounted for at cost which equals par or

redemption value. These securities do not have a readily determinable fair value as their ownership is restricted and there is

no market for these securities. The Company records these non-marketable equity securities as a component of other

assets, which are periodically evaluated for impairment. Management considers these non-marketable equity securities to

be long-term investments. Accordingly, when evaluating these securities for impairment, management considers the

ultimate recoverability of the par value rather than by recognizing temporary declines in value.

36

Fair Value Determination

U.S. GAAP requires management to value and disclose certain of the Company’s assets and liabilities at fair value,

including investments classified as available-for-sale and derivatives. ASC 820,

Fair Value Measurements and Disclosures

,

which defines fair value, establishes a framework for measuring fair value in accordance with U.S. GAAP and expands

disclosures about fair value measurements. For more information regarding fair value measurements and disclosures,

please refer to Note 7, Fair Value, of the consolidated financial statements that accompany this report.

Fair values are based on active market prices of identical assets or liabilities when available. Comparable assets or

liabilities or a composite of comparable assets in active markets are used when identical assets or liabilities do not have

readily available active market pricing. However, some of the Company’s assets or liabilities lack an available or

comparable trading market characterized by frequent transactions between willing buyers and sellers. In these cases, fair

value is estimated using pricing models that use discounted cash flows and other pricing techniques. Pricing models and

their underlying assumptions are based upon management’s best estimates for appropriate discount rates, default rates,

prepayments, market volatility and other factors, taking into account current observable market data and experience.

These assumptions may have a significant effect on the reported fair values of assets and liabilities and the related income

and expense. As such, the use of different models and assumptions, as well as changes in market conditions, could result in

materially different net earnings and retained earnings results. 

Other Real Estate Owned

Other real estate owned (“OREO”), consists of properties obtained through foreclosure or in satisfaction of loans and is

reported at the lower of cost or fair value, less estimated costs to sell at the date acquired with any loss recognized as a

charge-off through the allowance for loan losses. Additional OREO losses for subsequent valuation adjustments are

determined on a specific property basis and are included as a component of other noninterest expense along with holding

costs. Any gains or losses on disposal of OREO are also reflected in noninterest expense. Significant judgments and

complex estimates are required in estimating the fair value of OREO, and the period of time within which such estimates

can be considered current is significantly shortened during periods of market volatility. As a result, the net proceeds

realized from sales transactions could differ significantly from appraisals, comparable sales, and other estimates used to

determine the fair value of OREO.

Deferred Tax Asset Valuation

A valuation allowance is recognized for a deferred tax asset if, based on the weight of available evidence, it is more-likely-

than-not that some portion or the entire deferred tax asset will not be realized. The ultimate realization of deferred tax assets

is dependent upon the generation of future taxable income during the periods in which those temporary differences become

deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax

planning strategies in making this assessment. At September 30, 2022 we had total deferred tax assets of $16.1 million

included as “other assets”, including $15.3 million resulting from unrealized losses in our securities portfolio. Based upon

the level of taxable income over the last three years and projections for future taxable income over the periods in which the

deferred tax assets are deductible, management believes it is more likely than not that we will realize the benefits of these

deductible differences at September 30, 2022. The amount of the deferred tax assets considered realizable, however, could

be reduced if estimates of future taxable income are reduced.

37

RESULTS OF OPERATIONS

Average Balance Sheet and Interest Rates

Nine months ended September 30, 

2022

2021

Average

Yield/

Average

Yield/

(Dollars in thousands)

Balance

Rate

Balance

Rate

Loans and loans held for sale 

$

442,613

4.42%

$

460,732

4.47%

Securities - taxable

370,402

1.69%

310,288

1.30%

Securities - tax-exempt 

61,227

3.52%

62,915

3.60%

Total securities 

431,629

1.95%

373,203

1.68%

Federal funds sold

54,924

0.76%

36,821

0.14%

Interest bearing bank deposits

73,630

0.82%

75,170

0.12%

Total interest -earning assets

1,002,796

2.89%

945,926

2.86%

Deposits:

NOW

201,792

0.13%

176,242

0.12%

Savings and money market

335,005

0.20%

289,758

0.23%

Time deposits

155,824

0.84%

159,412

1.05%

Total interest -bearing deposits

692,621

0.32%

625,412

0.41%

Short-term borrowings

3,969

0.50%

3,329

0.50%

Total interest -bearing liabilities

696,590

0.32%

628,741

0.41%

Net interest income and margin (tax-equivalent)

$

20,034

2.67%

$

18,308

2.59%

Net Interest Income and Margin

Net interest income (tax-equivalent) was $20.0 million for the first nine months of 2022, a 9% increase compared to $18.3

million for the first nine months of 2021. This increase was due to balance sheet growth, and an increase in the Company’s

net interest margin (tax-equivalent). Net interest margin (tax-equivalent) increased to 2.67% in the first nine months of

2022, compared to 2.59% for the first nine months of 2021 due to increases in the Federal Reserve’s target federal funds

rates beginning March 17, 2022, and changes in our asset mix resulting from the continuing elevated levels of customer

deposits. The Federal Reserve increased the target federal funds range by 25 basis points on March 17, 2022, 50 basis

points on May 5 and 75 basis points on each of June 16, July 28, and September 22. The target rate was increased 75 basis

points on November 3, 2022, and further increases in the target federal funds rate appear likely if inflation remains

elevated. Net interest income (tax-equivalent) included $0.3 million in PPP loan fees, net of related costs for the first nine

months of 2022, compared to $0.8 million for the first nine months of 2021.

The tax-equivalent yield on total interest-earning assets increased by 3 basis points to 2.89% in the first nine months of

2022 compared to 2.86% in the first nine months of 2021. This increase was primarily due to changes in our asset mix

resulting from the significant increase in customer deposits.

The cost of total interest-bearing liabilities decreased by 9 basis points to 0.32% in the first nine months of 2022 compared

to 0.41% in the first nine months of 2021, even as interest bearing deposits increased. The net decrease in our funding costs

was primarily due to a portion of our time deposits repricing into lower prevailing market interest rates through the first

nine months of 2022. Our deposit costs may increase as the Federal Reserve increases its target federal funds rate, market

interest rates increase, and as customer behaviors change as a result of inflation and higher market interest rates on deposits

and other alternative investments.

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

fluctuations. Pricing remains competitive in our markets. We believe this challenging competitive environment will

continue throughout the remainder of 2022. Our ability to hold our deposit rates low until our interest-earning assets

reprice will be important in our ability to maintain or potentially increase our net interest margin during the beginning of

the monetary tightening cycle that we believe we will continue to experience in 2022.

38

Provision for Loan Losses

The provision for loan losses represents a charge to earnings necessary to provide an allowance for loan losses that

management believes, based on its processes and estimates, should be adequate to provide for the probable losses on

outstanding loans. The Company recorded no net provision for loan losses during the first nine months of 2022 compared

to a negative provision for loan losses of $0.6 million during the first nine months of 2021. The negative provision for loan

losses during 2021 was primarily related to improvements in economic conditions in our primary market area, and related

improvements in our asset quality. The provision for loan losses is based upon various estimates and judgments, including

the absolute level of loans, economic conditions, credit quality and the amount of net charge-offs.

Based upon its assessment of the loan portfolio, management adjusts the allowance for loan losses to an amount it believes

should be appropriate to adequately cover its estimate of probable losses in the loan portfolio. The Company’s allowance

for loan losses as a percentage of total loans was 1.05% at September 30, 2022, compared to 1.08% at December 31, 2021. 

While the policies and procedures used to estimate the allowance for loan losses, as well as the resulting provision for loan

losses charged to operations, are considered adequate by management and are reviewed from time to time by our regulators,

they are based on estimates and judgments and are therefore approximate and imprecise. Factors beyond our control (such

as conditions in the local and national economy, local real estate markets, or industries) may have a material adverse effect

on our asset quality and the adequacy of our allowance for loan losses resulting in significant increases in the provision for

loan losses.

Noninterest Income

Quarter ended September 30,

Nine months ended September 30, 

(Dollars in thousands)

2022

2021

2022

2021

Service charges on deposit accounts

$

158

$

149

$

446

$

419

Mortgage lending income

126

268

566

1,241

Bank-owned life insurance

97

100

293

302

Securities gains, net

44

15

44

15

Other

427

443

1,259

1,311

Total noninterest income

$

852

$

975

$

2,608

$

3,288

The Company’s income from mortgage lending was 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)

2022

2021

2022

2021

Origination income

$

39

$

233

$

315

$

1,168

Servicing fees, net

87

35

251

73

Total mortgage lending income

$

126

$

268

$

566

$

1,241

39

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. Origination income decreased as market interest rates on

mortgage loans increased. The decrease in origination income was partially offset by an increase in servicing fees, net of

related amortization expense as prepayment speeds slowed, resulting in decreased amortization expense. 

Noninterest Expense

Quarter ended September 30,

Nine months ended September 30, 

(Dollars in thousands)

2022

2021

2022

2021

Salaries and benefits

$

2,975

$

2,893

$

8,901

$

8,641

Net occupancy and equipment

794

467

1,955

1,340

Professional fees

235

232

704

814

Other

1,411

1,163

3,814

3,566

Total noninterest expense

$

5,415

$

4,755

$

15,374

$

14,361

The increase in salaries and benefits was primarily due to a decrease in deferred costs related to the PPP loan program, and

routine annual wage and benefit increases.

The increase in net occupancy and equipment expense was primarily due to increased expenses related to the

redevelopment of the Company’s headquarters in downtown Auburn. This amount includes depreciation expense and one-

time costs associated with the opening of the Company’s new headquarters. The Company relocated its main office branch

and bank operations into its newly constructed headquarters during June 2022.

Income Tax Expense

Income tax expense was $1.0 million for the first nine months of 2022 compared to $1.3 million for the first nine months of

2021. The Company’s effective income tax rate for the first nine months of 2022 was 15.14%, compared to 17.55% in the

first nine months of 2021. The decrease was primarily due to an income tax benefit related to a New Markets Tax Credit

investment funded in the fourth quarter of 2021. The Company’s effective income tax rate is principally impacted by tax-

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

Tax Credits. 

BALANCE SHEET ANALYSIS

Securities 

Securities available-for-sale were $411.5 million at September 30, 2022 compared to $421.9 million at December 31, 2021. 

This decrease reflects an increase in the amortized cost basis of securities available-for-sale of $51.8 million, offset by a

decrease of $62.2 million in the fair value of securities available-for-sale. The increase in the amortized cost basis of

securities available-for-sale was primarily attributable to management allocating more funding to the investment portfolio

following the significant increase in customer deposits. The decrease in the fair value of securities was primarily due to an

increase in long-term market interest rates, which resulted in $15.3 million of deferred tax assets included in our other

assets. The average annualized tax-equivalent yields earned on total securities were 1.95% in the first nine months of 2022

and 1.68% in the first nine months of 2021.

40

Loans

2022

2021

Third

Second

First

Fourth

Third

(In thousands)

Quarter

Quarter

Quarter

Quarter

Quarter

Commercial and industrial

$

70,685

70,087

73,297

83,977

79,202

Construction and land development

54,773

38,654

33,058

32,432

34,890

Commercial real estate

250,030

240,296

235,062

258,371

252,798

Residential real estate

91,598

85,224

79,102

77,661

80,205

Consumer installment

7,551

7,122

8,412

6,682

7,060

Total loans

474,637

441,383

428,931

459,123

454,155

Less: unearned income

(602)

(511)

(514)

(759)

(923)

Loans, net of unearned income

$

474,035

440,872

428,417

458,364

453,232

Total loans, net of unearned income, were $474.0 million at September 30, 2022, and $458.4 million at December 31, 2021,

an increase of $15.7 million, or 3%. Total loans at December 31, 2021 included $8.0 million in PPP loans, all of which

were repaid during the first nine months of 2022. Excluding PPP loans, total loans, net of unearned income, increased

$23.8 million, or 5% from December 31, 2021. Four loan categories represented the majority of the loan portfolio at

September 30, 2022: commercial real estate (53%), residential real estate (19%), commercial and industrial (15%) and

construction and land development (12%). Approximately 23% of the Company’s commercial real estate loans were

classified as owner-occupied at September 30, 2022.

Within the residential real estate portfolio segment, the Company had junior lien mortgages of approximately $6.8 million,

or 1%, and $7.2 million, or 2%, of total loans, net of unearned income at September 30, 2022 and December 31, 2021,

respectively. For residential real estate mortgage loans with a consumer purpose, the Company had no loans that required

interest only payments at September 30, 2022 and December 31, 2021. The Company’s residential real estate mortgage

portfolio does not include any option 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 4.42% in the first nine months of 2022 and 4.47% in the first

nine months of 2021. 

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

current economic conditions, including the continuing effects from the COVID-19 pandemic, as well as high inflation rates

and the Federal Reserve’s shift from stimulative monetary policy to increases in the target Federal Funds rate and

reductions in its securities holdings, on our borrowers’ cash flows, real estate market sales volumes, valuations, availability

and cost of financing properties, real estate industry concentrations, competitive pressures from a wide range of other

lenders, deterioration in certain credits, interest rate fluctuations and increases, reduced collateral values or non-existent

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

laws and regulations.

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 $21.7 million. Furthermore, we have an internal limit for aggregate credit exposure (loans outstanding plus

unfunded commitments) to a single borrower of $19.5 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, 2022, the Bank had no

relationships exceeding these limits.

41

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

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

financial services industry in order to categorize our commercial borrowers. Loan concentrations to borrowers in the

following classes exceeded 25% of the Bank’s total risk-based capital at September 30, 2022 and December 31, 2021.

September 30,

December 31,

(Dollars in thousands)

2022

2021

Lessors of 1-4 family residential properties

$

51,391

$

47,880

Hotel/motel

33,918

43,856

Multi-family residential properties

29,317

42,587

Shopping centers

27,174

29,574

In light of disruptions in economic conditions caused by COVID-19, the financial regulators have issued guidance

encouraging banks to work constructively with borrowers affected by the virus in our community. This guidance, including

the Interagency Statement on COVID-19 Loan Modifications and the Interagency Examiner Guidance for Assessing Safety

and Soundness Considering the Effect of the COVID-19 Pandemic on Institutions, provides that the agencies will not

criticize financial institutions that mitigate credit risk through prudent actions consistent with safe and sound practices. 

Specifically, examiners will not criticize institutions for working with borrowers as part of a risk mitigation strategy

intended to improve existing loans, even if the restructured loans have or develop weaknesses that ultimately result in

adverse credit classification. Upon demonstrating the need for payment relief, the bank will work with qualified borrowers

that were otherwise current before the pandemic to determine the most appropriate deferral option. For residential

mortgage and consumer loans the borrower may elect to defer payments for up to three months. Interest continues to

accrue and the amount due at maturity increases. Commercial real estate, commercial, and small business borrowers may

elect to defer payments for up to three months or pay scheduled interest payments for a six-month period. The bank

recognizes that a combination of the payment relief options may be prudent dependent on a borrower’s business type. As

of September 30, 2022, we had no COVID-19 loan deferrals, compared to one COVID-19 loan deferral totaling $0.1

million at December 31, 2021.

Section 4013 of the CARES Act provides that a qualified loan modification is exempt by law from classification as a TDR

pursuant to GAA

P. 

In addition, the Interagency Statement on COVID-19 Loan Modifications provides circumstances in

which a loan modification is not subject to classification as a TDR if such loan is not eligible for modification under

Section 4013. We had no new TDRs during the first nine months of 2022, and only $170 thousand of nonaccruing TDRs

remained at September 30, 2022 compared to $249 thousand at December 31, 2021. 

Allowance for Loan Losses 

The Company maintains the allowance for loan losses at a level that management believes appropriate to adequately cover

the Company’s estimate of probable losses inherent in the loan portfolio. The allowance for loan losses was $5.0 million at

September 30, 2022 compared to $4.9 million at December 31, 2021, which management believed to be adequate at each of

the respective dates. The judgments and estimates associated with the determination of the allowance for loan losses are

described under “Critical Accounting Policies.”

42

A summary of the changes in the allowance for loan losses and certain asset quality ratios for the third quarter of 2022 and

the previous four quarters is presented below.

2022

2021

Third

Second

First

Fourth

Third

(Dollars in thousands)

Quarter

Quarter

Quarter

Quarter

Quarter

Balance at beginning of period

$

4,716

4,658

4,939

5,119

5,107

Charge-offs:

Commercial and industrial

(13)

(4)

—

—

—

Commercial real estate

—

—

—

(254)

—

Residential real estate

—

—

—

(2)

—

Consumer installment

(3)

(16)

(48)

(32)

—

Total charge-offs

(16)

(20)

(48)

(288)

—

Recoveries

16

78

17

108

12

Net recoveries (charge-offs)

—

58

(31)

(180)

12

Provision for loan losses

250

—

(250)

—

—

Ending balance

$

4,966

4,716

4,658

4,939

5,119

as a % of loans

1.05

%

1.07

1.09

1.08

1.13

as a % of nonperforming loans

1,431

%

1,314

1,256

1,112

1,053

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

—

%

(0.05)

0.03

0.16

(0.01)

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

As described under “Critical Accounting Policies,” management assesses the adequacy of the allowance prior to the end of

each calendar quarter. The level of the allowance is based upon management’s evaluation of the loan portfolios, past loan

loss experience, current asset quality trends, known and inherent risks in the portfolio, adverse situations that may affect the

borrower’s ability to repay (including the timing of future payment), the estimated value of any underlying collateral,

composition of the loan portfolio, economic conditions, inflation and changes in market interest rates, industry and peer

bank loan loss rates, and other pertinent factors. This evaluation is inherently subjective as it requires various material

estimates and judgments, including the amounts and timing of future cash flows expected to be received on impaired loans

that may be susceptible to significant change. The ratio of our allowance for loan losses to total loans outstanding was

1.05% at September 30, 2022, compared to 1.08% at December 31, 2021. In the future, the allowance to total loans

outstanding ratio will increase or decrease to the extent the factors that influence our quarterly allowance assessment,

including the duration and magnitude of COVID-19 effects and increasing market interest rates and expectations regarding

inflation and interest rates as the Federal Reserve shifts from stimulus to fighting inflation, in their entirety either improve

or weaken. In addition, our regulators, as an integral part of their examination process, will periodically review the

Company’s allowance for loan losses, and may require the Company to make additional provisions to the allowance for

loan losses based on their judgment about information available to them at the time of their examinations. 

Nonperforming Assets

At September 30, 2022 the Company had $0.3 million in nonperforming assets compared to $0.8 million at December 31,

2021. 

43

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

quarter of 2022 and the previous four quarters.

2022

2021

Third

Second

First

Fourth

Third

(Dollars in thousands)

Quarter

Quarter

Quarter

Quarter

Quarter

Nonperforming assets:

Nonaccrual loans

$

347

359

371

444

486

Other real estate owned

—

—

374

374

—

Total nonperforming assets

$

347

359

745

818

486

as a % of loans and other real estate owned

0.07

%

0.08

0.17

0.18

0.11

as a % of total assets

0.03

%

0.03

0.07

0.07

0.05

Nonperforming loans as a % of total loans

0.07

%

0.08

0.09

0.10

0.11

Accruing loans 90 days or more past due

$

—

—

—

—

69

The table below provides information concerning the composition of nonaccrual loans for the third quarter of 2022 and the

previous four quarters.

2022

2021

Third

Second

First

Fourth

Third

(In thousands)

Quarter

Quarter

Quarter

Quarter

Quarter

Nonaccrual loans:

Commercial real estate

$

170

176

182

187

193

Residential real estate

177

183

189

257

293

Total nonaccrual loans

$

347

359

371

444

486

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 $0.3

million in loans on nonaccrual status at September 30, 2022 and December 31, 2021, respectively. 

The Company had no loans 90 days or more past due and still accruing at September 30, 2022 and December 31, 2021,

respectively.

The table below provides information concerning the composition of OREO for the third quarter of 2022 and the previous

four quarters.

2022

2021

Third

Second

First

Fourth

Third

(In thousands)

Quarter

Quarter

Quarter

Quarter

Quarter

Other real estate owned:

Commercial real estate

$

—

—

374

374

—

Total other real estate owned

$

—

—

374

374

—

Potential Problem Loans

Potential problem loans represent those loans with a well-defined weakness and where information about possible credit

problems of a borrower has caused management to have serious doubts about the borrower’s ability to comply with present

repayment terms. This definition is believed to be substantially consistent with the standards established by the Federal

Reserve, the Company’s primary regulator, for loans classified as substandard, excluding nonaccrual loans. Potential

problem loans, which are not included in nonperforming assets, amounted to $1.3 million, or 0.3% of total loans at

September 30, 2022, and $2.4 million, or 0.5% of total loans at December 31, 2021. 

44

The table below provides information concerning the composition of potential problem loans for the third quarter of 2022

and the previous four quarters.

2022

2021

Third

Second

First

Fourth

Third

(In thousands)

Quarter

Quarter

Quarter

Quarter

Quarter

Potential problem loans:

Commercial and industrial

$

194

225

215

226

274

Construction and land development

—

—

13

218

231

Commercial real estate

191

146

150

156

172

Residential real estate

892

915

1,592

1,748

1,848

Consumer installment

29

24

8

12

19

Total potential problem loans

$

1,306

1,310

1,978

2,360

2,544

At September 30, 2022, approximately $46 thousand or 4% of total potential problem loans were past due at least 30 days,

but less than 90 days.

The following table is a summary of the Company’s performing loans that were past due at least 30 days, but less than

90 days, for the third quarter of 2022 and the previous four quarters.

2022

2021

Third

Second

First

Fourth

Third

(In thousands)

Quarter

Quarter

Quarter

Quarter

Quarter

Performing loans past due 30 to 89 days:

Commercial and industrial

$

1

34

7

3

68

Construction and land development

282

—

1

204

—

Commercial real estate

—

28

—

—

—

Residential real estate

86

130

496

516

409

Consumer installment

8

7

15

25

25

Total 

$

377

199

519

748

502

Deposits

Total deposits were $978.0 million at September 30, 2022 compared to $994.2 million at December 31, 2021. The decrease

in total deposits was primarily due to a decrease in rate-sensitive money market and savings accounts of $21.8

million. Noninterest -bearing deposits were $321.7 million, or 32% of total deposits, at September 30, 2022, compared to

$316.1 million, or 32% of total deposits at December 31, 2021. We had no brokered deposits on September 30, 2022 or at

December 31, 2021. 

Estimated uninsured deposits totaled $393.8 million and $420.8 million at September 30, 2022 and December 31, 2021,

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

limits.

The average rate paid on total interest -bearing deposits was 0.32% in the first nine months of 2022 compared to 0.41% in

the first nine months of 2021. 

Other Borrowings

Other borrowings consist of short-term borrowings and long-term debt. Short-term borrowings generally consist of federal

funds purchased and securities sold under agreements to repurchase with an original maturity of one year or less. The Bank

had available federal funds lines totaling $61.0 million and $41.0 million with none outstanding at September 30, 2022, and

December 31, 2021, respectively. Securities sold under agreements to repurchase totaled $2.6 million and $3.4 million at

September 30, 2022 and December 31, 2021, respectively. 

The average rate paid on short-term borrowings was 0.50% in the first nine months of 2022 and 2021, respectively.

45

The Company had no long-term debt at September 30, 2022 and December 31, 2021.

CAPITAL ADEQUACY 

The Company’s consolidated stockholders’ equity was $59.8 million and $103.7 million as of September 30, 2022 and

December 31, 2021, respectively. The decrease from December 31, 2021 was primarily driven by an other comprehensive

loss due to the change in unrealized gains/losses on securities available-for-sale, net of tax of $46.6 million. The increase in

the unrealized loss on securities was primarily due to increases in market interest rates. These unrealized losses do not

affect the Bank’s capital for regulatory capital purposes. The Company’s consolidated stockholders’ equity was also

decreased by cash dividends paid of $2.8 million, and repurchases of the Company’s stock of $0.5 million. These

decreases in the Company’s consolidated stockholders’ equity were partially offset by net earnings of $5.9 million. 

The Company paid cash dividends of $0.795 per share in the first nine months of 2022, an increase of 2% from the same

period in 2021. The Company’s share repurchases of $0.5 million since December 31, 2021 resulted in 15,280 fewer

outstanding common shares at September 30, 2022. These shares were repurchased at an average cost per share of $30.06

and a total cost of $0.5 million.

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

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

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

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

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

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

executive officers. At September 30, 2022, the Bank’s ratio was sufficient to meet the fully phased-in conservation buffer.

Effective March 20, 2020, the Federal Reserve and the other federal banking regulators adopted an interim final rule that

amended the capital conservation buffer. The interim final rule was adopted as a final rule on August 26, 2020. The new

rule revises the definition of “eligible retained income” for purposes of the maximum payout ratio to allow banking

organizations to more freely use their capital buffers to promote lending and other financial intermediation activities, by

making the limitations on capital distributions more gradual. The eligible retained income is now the greater of (i) net

income for the four preceding quarters, net of distributions and associated tax effects not reflected in net income; and (ii)

the average of all net income over the preceding four quarters. This rule only affects the capital buffers, and banking

organizations were encouraged to make prudent capital distribution decisions.

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

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

consolidated subsidiaries. The Bank’s tier 1 leverage ratio was 9.29%, CET1 risk-based capital ratio was 15.39%, tier 1

risk-based capital ratio was 15.39%, and total risk-based capital ratio was 16.16% at September 30, 2022. 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 8.16% at September 30, 2022. Our unrealized losses on securities due to

increases in market interest rates do not directly affect our capital for regulatory purposes, and the resulting deferred tax

assets, including $15.3 million resulting from such unrealized securities losses, was below the 25% threshold requiring

deduction of such assets from CET1 capital.

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. 

46

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 asset

sensitive.

At September 30, 2022, our earnings simulation model indicated that we were in compliance with the policy guidelines

noted above. 

Economic Value of Equity

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

balance sheet items will change as a result of interest rate changes. Economic values are estimated by discounting expected

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

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

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

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

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

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

the following:

●

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

●

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

●

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

●

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

At September 30, 2022, 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. 

47

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, 2022 and December 31, 2021, 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. Without proper management of its liquidity, the

Company could experience higher costs of obtaining funds due to insufficient liquidity, while excessive liquidity could lead

to lower earnings due to the cost of foregoing alternative higher-yield market investment opportunities. 

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

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

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

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

dividends. The Bank’s payment of dividends depends on its earnings, liquidity, capital and the absence of regulatory

restrictions on such dividends. 

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

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

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

Primary sources of funding for the Bank include customer deposits, other borrowings, repayment and maturity of securities,

sales of securities, and the sale and repayment of 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 may participate in the

FHLB’s advance program to obtain funding for its growth. Advances include both fixed and variable terms and may be

taken out with varying maturities. At September 30, 2022, the Bank had a remaining available line of credit with the FHLB

of $325.1 million. At September 30, 2022, the Bank also had $61.0 million of available federal funds lines with no

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

The Bank has no brokered deposits on September 30, 2022 or at December 31, 2021 

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 reasonable borrower, depositor, and

creditor requirements over the next twelve months. 

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

At September 30, 2022, the Bank had outstanding standby letters of credit of $1.0 million and unfunded loan commitments

outstanding of $88.8 million. Because these commitments generally have fixed expiration dates and many will expire

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

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

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

Mortgage lending activities

We primarily sell residential mortgage loans in the secondary market to Fannie Mae while retaining the servicing of these

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

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

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

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

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

matters.

48

As of September 30, 2022, the unpaid principal balance of residential mortgage loans, which we have originated and sold,

but retained the servicing rights, was $238.3 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 2022 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, 2022.

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 agreement 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 servicing guides issued by Fannie

Mae as well as the contract provisions established between Fannie Mae and the Bank. Remedies could include repurchase

of an affected loan.

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

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

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

their purchased loans. As of September 30, 2022, 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, however, could increase our noninterest expenses, and Federal

Reserve monetary policy in response to inflation has increased market interest rates and affected values of certain of our

assets and liabilities, including our securities portfolio and mortgage servicing assets.

CURRENT ACCOUNTING DEVELOPMENTS

The following ASUs have been issued by the FASB but are not yet effective. 

●

ASU 2016-13,

Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial

Instruments; and

49

●

ASU 2022-02,

Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage

Disclosures

Information about these pronouncements is described in more detail below.

ASU 2016-13,

Financial Instruments - Credit Losses (Topic 326): - Measurement of Credit Losses on Financial

Instruments

, amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt

securities. For assets held at amortized cost basis, the new standard eliminates the probable initial recognition threshold in

current GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses using a broader

range of information regarding past events, current conditions and forecasts assessing the collectability of cash flows. The

allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to

present the net amount expected to be collected. For available for sale debt securities, credit losses should be measured in a

manner similar to current GAAP, however the new standard will require that credit losses be presented as an allowance

rather than as a write-down. The new guidance affects entities holding financial assets and net investment in leases that are

not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net

investments in leases, off-balance sheet credit exposures, reinsurance receivables, and any other financial assets not

excluded from the scope that have the contractual right to receive cash. For public business entities, the new guidance was

originally effective for annual and interim periods in fiscal years beginning after December 15, 2019. On October 16, 2019,

the FASB approved a previously issued proposal granting smaller reporting companies a postponement of the required

implementation date for ASU 2016-13. The Company is required to implement the new standard in January 2023, with

early adoption permitted in any period prior to that date. Institutions are to apply the changes through a cumulative-effect

adjustment to retained earnings as of the beginning of the first reporting period in which the standard is effective. The

Company is currently assessing the impact of the new guidance on its consolidated financial statements. An increase in the

overall allowance for loan losses is likely upon adoption in order to provide for expected credit losses over the life of the

loan portfolio.

ASU 2022-02,

Financial Instruments - Credit Losses (Topic 326): - Troubled Debt Restructurings and Vintage

Disclosures,

 eliminates the accounting guidance for troubled debt restructurings (“TDRs”), while enhancing disclosure

requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial

difficulty. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after

December 15, 2022. The new standard is not expected to have a material impact on the Company’s consolidated financial

tatements. 

50

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.

2022

2021

Third

Second

First

Fourth

Third

(in thousands)

Quarter

Quarter

Quarter

Quarter

Quarter

Net interest income (GAAP)

$

7,243

6,374

6,078

6,037

6,041

Tax-equivalent adjustment

117

110

112

115

117

Net interest income (Tax-equivalent)

$

7,360

6,484

6,190

6,152

6,158

Nine months ended September 30, 

(In thousands)

2022

2021

Net interest income (GAAP)

$

19,695

17,953

Tax-equivalent adjustment

339

355

Net interest income (Tax-equivalent)

$

20,034

18,308

51

Table 2 - Selected Quarterly Financial Data

2022

2021

Third

Second

First

Fourth

Third

(Dollars in thousands, except per share amounts)

Quarter

Quarter

Quarter

Quarter

Quarter

Results of Operations

Net interest income (a)

$

7,360

6,484

6,190

6,152

6,158

Less: tax-equivalent adjustment

117

110

112

115

117

Net interest income (GAAP)

7,243

6,374

6,078

6,037

6,041

Noninterest income

852

848

908

1,019

975

Total revenue

8,095

7,222

6,986

7,056

7,016

Provision for loan losses

250

—

(250)

—

—

Noninterest expense

5,415

5,058

4,901

5,092

4,755

Income tax expense 

432

363

254

93

386

Net earnings

$

1,998

1,801

2,081

1,871

1,875

Per share data:

Basic and diluted net earnings 

$

0.57

0.51

0.59

0.53

0.53

Cash dividends declared

0.265

0.265

0.265

0.26

0.26

Weighted average shares outstanding:

Basic and diluted

3,507,318

3,513,353

3,518,657

3,524,311

3,536,320

Shares outstanding, at period end

3,505,355

3,509,940

3,516,971

3,520,485

3,529,338

Book value

$

17.06

21.68

24.57

29.46

29.73

Common stock price:

High

$

29.02

33.57

34.49

34.79

35.36

Low 

23.02

27.04

31.75

31.32

33.25

Period end:

23.02

27.04

33.21

32.30

33.80

To earnings ratio

10.46

x

12.52

14.44

14.23

14.57

To book value

135

%

125

135

110

114

Performance ratios:

Return on average equity 

10.35

%

8.26

7.97

7.07

7.01

Return on average assets 

0.75

%

0.66

0.75

0.70

0.72

Dividend payout ratio

46.49

%

51.96

44.92

49.06

49.06

Asset Quality:

Allowance for loan losses as a % of:

Loans

1.05

%

1.07

1.09

1.08

1.13

Nonperforming loans

1,431

%

1,314

1,256

1,112

1,053

Nonperforming assets as a % of:

Loans and foreclosed properties

0.07

%

0.08

0.17

0.18

0.11

Total assets 

0.03

%

0.03

0.07

0.07

0.05

Nonperforming loans as a % of total loans

0.07

%

0.08

0.09

0.10

0.11

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

—

%

(0.05)

0.03

0.16

(0.01)

Capital Adequacy: (c)

CET 1 risk-based capital ratio

15.39

%

16.59

17.26

16.23

16.82

Tier 1 risk-based capital ratio

15.39

%

16.59

17.26

16.23

16.82

Total risk-based capital ratio

16.16

%

17.38

18.08

17.06

17.72

Tier 1 leverage ratio

9.29

%

9.16

9.09

9.35

9.57

Other financial data:

Net interest margin (a)

3.00

%

2.60

2.43

2.45

2.51

Effective income tax rate

17.78

%

16.77

10.88

4.74

17.07

Efficiency ratio (b)

65.94

%

68.99

69.05

71.01

66.66

Selected average balances:

Securities

$

432,393

427,426

435,097

414,061

395,529

Loans, net of unearned income

457,722

428,612

439,713

455,726

452,668

Total assets

1,069,973

1,092,759

1,114,407

1,073,564

1,040,985

Total deposits

987,614

999,867

1,003,394

961,544

927,368

Total stockholders’ equity

77,191

87,247

104,493

105,925

106,936

Selected period end balances: 

Securities

$

411,538

429,220

417,459

421,891

407,474

Loans, net of unearned income

474,035

440,872

428,417

458,364

453,232

Allowance for loan losses

4,966

4,716

4,658

4,939

5,119

Total assets

1,042,559

1,084,251

1,109,664

1,105,150

1,065,871

Total deposits

977,938

1,002,698

1,017,742

994,243

954,971

Total stockholders’ equity

59,793

76,107

86,411

103,726

104,929

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

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

"Table 1 - Explanation of Non-GAAP Financial Measures."

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

52

Table 3 - Selected Financial Data

Nine months ended September 30, 

(Dollars in thousands, except per share amounts)

2022

2021

Results of Operations

Net interest income (a)

$

20,034

18,308

Less: tax-equivalent adjustment

339

355

Net interest income (GAAP)

19,695

17,953

Noninterest income

2,608

3,288

Total revenue

22,303

21,241

Provision for loan losses

— 

(600) 

Noninterest expense

15,374

14,361

Income tax expense

1,049

1,313

Net earnings

$

5,880

6,167

Per share data:

Basic and diluted net earnings 

$

1.67

1.74

Cash dividends declared

0.795

0.78

Weighted average shares outstanding:

Basic and diluted

3,513,068

3,552,387

Shares outstanding, at period end

3,505,355

3,529,338

Book value

$

17.06

29.73

Common stock price:

High

$

34.49

48.00

Low 

23.02

33.25

Period end

23.02

33.80

To earnings ratio

10.46

x

14.57

To book value

135

%

114

Performance ratios:

Return on average equity 

8.76

%

7.70

Return on average assets 

0.72

%

0.81

Dividend payout ratio

47.60

%

44.83

Asset Quality:

Allowance for loan losses as a % of:

Loans

1.05

%

1.13

Nonperforming loans

1,431

%

1,053

Nonperforming assets as a % of:

Loans and other real estate owned

0.07

%

0.11

Total assets 

0.03

%

0.05

Nonperforming loans as a % of total loans

0.07

%

0.11

Annualized net recoveries as a % of average loans

(0.01)

%

(0.03) 

Capital Adequacy: (c)

CET 1 risk-based capital ratio

15.39

%

16.82

Tier 1 risk-based capital ratio

15.39

%

16.82

Total risk-based capital ratio

16.16

%

17.72

Tier 1 leverage ratio

9.29

%

9.57

Other financial data:

Net interest margin (a)

2.67

%

2.59

Effective income tax rate

15.14

%

17.55

Efficiency ratio (b)

67.90

%

66.50

Selected average balances:

Securities

$

431,629

373,203

Loans, net of unearned income

442,081

458,882

Total assets

1,092,216

1,009,131

Total deposits

996,900

895,342

Total stockholders’ equity

89,544

106,798

Selected period end balances: 

Securities

$

411,538

407,474

Loans, net of unearned income

474,035

453,232

Allowance for loan losses

4,966

5,119

Total assets

1,042,559

1,065,871

Total deposits

977,938

954,971

Total stockholders’ equity

59,793

104,929

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

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

"Table 1 - Explanation of Non-GAAP Financial Measures."

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

53

Table 4 - Average Balances and Net Interest Income Analysis

Quarter ended September 30,

2022

2021

Interest

Interest

Average

Income/

Yield/

Average

Income/

Yield/

(Dollars in thousands)

Balance

Expense

Rate

Balance

Expense

Rate

Interest-earning assets:

Loans and loans held for sale (1)

$

457,861

$

5,097

4.42%

$

453,649

$

5,127

4.48%

Securities - taxable

369,202

1,808

1.94%

332,474

1,048

1.25%

Securities - tax-exempt (2)

63,191

558

3.50%

63,055

558

3.51%

Total securities 

432,393

2,366

2.17%

395,529

1,606

1.61%

Federal funds sold

38,994

200

2.03%

40,995

16

0.15%

Interest bearing bank deposits

45,343

226

1.98%

82,878

33

0.16%

Total interest -earning assets

974,591

$

7,889

3.21%

973,051

$

6,782

2.77%

Cash and due from banks

14,503

14,326

Other assets

80,879

53,608

Total assets

$

1,069,973

$

1,040,985

Interest-bearing liabilities:

Deposits:

NOW

$

195,655

$

70

0.14%

$

182,417

$

51

0.11%

Savings and money market

328,555

163

0.20%

300,746

167

0.22%

Time deposits

151,785

291

0.76%

159,423

402

1.00%

Total interest -bearing deposits

675,995

524

0.31%

642,586

620

0.38%

Short-term borrowings

3,759

5

0.50%

3,454

4

0.50%

Total interest -bearing liabilities

679,754

$

529

0.31%

646,040

$

624

0.38%

Noninterest-bearing deposits

311,619

284,781

Other liabilities

1,409

3,228

Stockholders' equity

77,191

106,936

Total liabilities and stockholders' equity

$

1,069,973

$

1,040,985

Net interest income and margin (tax-equivalent)

$

7,360

3.00%

$

6,158

2.51%

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

tax rate of 21%.

54

Table 5 - Average Balances and Net Interest Income Analysis

Nine months ended September 30, 

2022

2021

Interest

Interest

Average

Income/

Yield/

Average

Income/

Yield/

(Dollars in thousands)

Balance

Expense

Rate

Balance

Expense

Rate

Interest-earning assets:

Loans and loans held for sale (1)

$

442,613

$

14,638

4.42%

$

460,732

$

15,417

4.47%

Securities - taxable

370,402

4,691

1.69%

310,288

3,006

1.30%

Securities - tax-exempt (2)

61,227

1,614

3.52%

62,915

1,692

3.60%

Total securities 

431,629

6,305

1.95%

373,203

4,698

1.68%

Federal funds sold

54,924

313

0.76%

36,821

39

0.14%

Interest bearing bank deposits

73,630

454

0.82%

75,170

66

0.12%

Total interest -earning assets

1,002,796

$

21,710

2.89%

945,926

$

20,220

2.86%

Cash and due from banks

15,029

14,345

Other assets

74,391

48,860

Total assets

$

1,092,216

$

1,009,131

Interest-bearing liabilities:

Deposits:

NOW

$

201,792

$

189

0.13%

$

176,242

$

161

0.12%

Savings and money market

335,005

494

0.20%

289,758

488

0.23%

Time deposits

155,824

978

0.84%

159,412

1,251

1.05%

Total interest -bearing deposits

692,621

1,661

0.32%

625,412

1,900

0.41%

Short-term borrowings

3,969

15

0.50%

3,329

12

0.50%

Total interest -bearing liabilities

696,590

$

1,676

0.32%

628,741

$

1,912

0.41%

Noninterest-bearing deposits

304,279

269,930

Other liabilities

1,803

3,662

Stockholders' equity

89,544

106,798

Total liabilities and stockholders' equity

$

1,092,216

$

1,009,131

Net interest income and margin (tax-equivalent)

$

20,034

2.67%

$

18,308

2.59%

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

tax rate of 21%.

55

Table 6 - Allocation of Allowance for Loan Losses

2022

2021

Third Quarter

Second Quarter

First Quarter

Fourth Quarter

Third Quarter

(Dollars in thousands)

Amount

%*

Amount

%*

Amount

%*

Amount

%*

Amount

%*

Commercial and industrial

$

732

14.9

$

761

15.9

$

774

17.1

$

857

18.3

$

816

17.4

Construction and land 

development

789

11.5

576

8.8

508

7.7

518

7.1

590

7.7

Commercial real estate

2,561

52.7

2,523

54.4

2,536

54.8

2,739

56.2

2,823

55.6

Residential real estate

783

19.3

753

19.3

737

18.4

739

16.9

799

17.7

Consumer installment

101

1.6

103

1.6

103

2.0

86

1.5

91

1.6

Total allowance for 

loan losses

$

4,966

$

4,716

$

4,658

$

4,939

$

5,119

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

56

Table 7 – Estimated Uninsured Time Deposits by Maturity

(Dollars in thousands)

September 30, 2022

Maturity of:

3 months or less

$

17,778

Over 3 months through 6 months

11,792

Over 6 months through 12 months

4,496

Over 12 months

5,458

Total estimated uninsured time deposits

$

39,524

57

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, 2021. 

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, 2021,

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. Increases in inflation and the resulting tightening of Federal

Reserve monetary policy by increased target interest rates, has and is expected to continue to affect mortgage originations

and income and the market values of our securities portfolio. These could also affect our deposit, costs and mixes, and

change consumer savings and payment behaviors. 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. 

58

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The Company’s repurchases of its common stock during the third quarter of 2022 were as follows:

Period

Total Number of

Shares Purchased

Average Price

Paid per Share

Total Number of

Shares Purchased as

Part of Publicly

Announced Plans or

Programs

Approximate Dollar

Value of Shares that

May Yet Be

Purchased Under the

Plans or Programs

(1)

July 1 - July 31, 2022

658

27.53

658

4,769,664

August 1 - August 31, 2022

3,982

27.72

3,982

4,659,289

September 1 - September 30, 2022

—

—

—

4,659,289

Total

4,640

27.69

4,640

4,659,289

(1)

 On April 12, 2022, the Company adopted a new $5 million stock repurchase program that became effective April 12, 2022.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

59

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 Robert W. Dumas, Chairman, 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 David A. Hedges, Executive 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 Robert W. Dumas, Chairman, 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 David A. Hedges, Executive 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. 

60

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to

be signed on its behalf by the undersigned thereunto duly authorized.

AUBURN NATIONAL BANCORPORATION, INC.

 (Registrant)

Date: November 9, 2022 

By: /s/ Robert W. Dumas 

Robert W. Dumas

Chairman, President and CEO

Date: November 9, 2022 

By: /s/ David A. Hedges 

David A. Hedges

Executive Vice President and Chief Financial Officer