Summary of Significant Accounting Policies (Policies)

12 Months Ended

Dec. 31, 2024

Summary of Signficant Accounting Policies

Nature of Business Policy

Nature of Business

Auburn National Bancorporation, Inc. (the “Company”) is a bank holding company whose primary business is conducted

by its wholly-owned subsidiary, AuburnBank (the “Bank”). AuburnBank is a commercial bank located in Auburn,

Alabama. The Bank provides a full range of banking services in its primary market area, Lee County, which includes the

Auburn-Opelika Metropolitan Statistical Area.

Basis of Presentation Policy

Basis of Presentation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, which are

managed as a single business segment. Significant intercompany transactions and accounts are eliminated in consolidation.

Revenue Recognition Policy

Revenue Recognition 

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

services, 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 other real estate

 –

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, 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 may affect collectability.

Use of Estimates Policy

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires

management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure

of contingent assets and liabilities as of the balance sheet date and the reported amounts of income and expense during the

reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to

significant change in the near term include the determination of the allowance for credit losses, fair value measurements,

valuation of other real estate owned, and valuation of deferred tax assets.

Reclassifications Policy

Reclassifications 

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

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

Subsequent Events Policy

Subsequent Events 

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

subsequent to December 31, 2024. The Company does not believe there are any material subsequent events that would

require further recognition or disclosure.

Error Correction Policy

Correction of Error

The disclosure of loans by vintage in Note 5 – Loans and Allowance for Credit Losses in the Company’s Annual Report on

Form 10-K for year ended December 31, 2023 contained incorrect information as it pertains to loans originated by vintage

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

indicator were correctly reported. The loans originated by vintage and revolving loans as of December 31, 2023 have been

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

Accounting Standards Adopted

Accounting Standards Adopted in 2024

ASU 2023-02,

Investments – Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit

Structures Using the Proportional Amortization Method

. ASU 2023-02 now permits reporting entities to elect to account

for their equity investments made primarily to receive income tax credits and other income tax benefits, regardless of the

program from which the income tax credits or benefits are received, using the proportional amortization method if certain

conditions are met. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning

after December 15, 2023. The Company adopted ASU 2023-02 effective January 1, 2024 and recorded a cumulative effect

of change in accounting standard adjustment which reduced beginning retained earnings by $0.3 million and reduced our

investment in New Markets Tax Credits (“NMTCs”) by $0.4 million. The Company, beginning January 1, 2024, accounts

for its investments in NMTCs using the proportional amortization method through charges to the provision for income

taxes. See Note 3, Variable Interest Entities.

ASU 2023-07,

Segment Reporting (Topic 280) - Improvement to Reportable Segment Disclosures. 

The amendments in

ASU 2023-07 improve financial reporting by requiring disclosure of incremental segment information on an annual basis to

enable investors to develop more decisions-useful financial analyses. ASU 2023-07 is effective for fiscal years beginning

after December 31, 2023. The Company has adopted ASU 2023-07 as of January 1, 2024 and has determined that its

banking services and branch locations meet the aggregation criteria of ASC 280,

Segment Reporting

, since each of its

banking services and branch locations offer similar products and services, operate in a similar manner, have similar

customers and report to the same regulatory authority, and therefore operate one line of business located in a single

geographic area. The Company's Chief Executive Officer has been identified as the chief operating decision maker

(“CODM”).

The CODM regularly assesses performance of the aggregated single operating and reporting segment and decides how to

allocate resources based on the net income calculated on the same basis as the net income reported in the Company's

consolidated statements of earnings and other comprehensive earnings and total assets calculated on the same basis as the

total assets reported in the Company’s consolidated balance sheets. The CODM is also regularly provided with expense

information at a level that is consistent with that disclosed in the Company's consolidated statements of earnings and other

comprehensive earnings. 

Issued not yet effective accounting standards

ASU 2023-09,

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

 The amendments in this Update

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

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

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

Cash Equivalents Policy

Cash Equivalents

Cash equivalents include cash on hand, cash items in process of collection, amounts due from banks, including interest

bearing deposits with other banks, and federal funds sold.

Securities Policy

Securities

Securities are classified based on management’s intention at the date of purchase. At December 31, 2024, all of the

Company’s securities were classified as available-for-sale. Securities available-for-sale are used as part of the Company’s

interest rate risk and liquidity management strategy, and they may be sold in response to changes in interest rates, changes

in prepayment risks or other factors. All securities classified as available-for-sale are recorded at fair value with any

unrealized gains and losses reported in accumulated other comprehensive income (loss), net of the deferred income tax

effects. Interest and dividends on securities, including the amortization of premiums and accretion of discounts are

recognized in interest income using the effective interest method. Premiums are amortized to the earliest call date while

discounts are accreted over the estimated life of the security. Realized gains and losses from the sale of securities are

determined using the specific identification method. 

For any securities classified as available-for-sale that are in an unrealized loss position at the balance sheet date, the

Company assesses whether or not it intends to sell the security, or more likely than not will be required to sell the security,

before recovery of its amortized cost basis. If either of these criteria are met, the security's amortized cost basis is written

down to fair value through net income. If neither criterion is met, the Company evaluates whether any portion of the decline

in fair value is the result of credit deterioration. Such evaluations consider the extent to which the amortized cost of the

security exceeds its fair value, changes in credit ratings and any other known adverse conditions related to the specific

security. If the evaluation indicates that a credit loss exists, an allowance for credit losses is recorded for the amount by

which the amortized cost basis of the security exceeds the present value of cash flows expected to be collected, limited by

the amount by which the amortized cost exceeds fair value. Any impairment not recognized in the allowance for credit

losses is recognized in other comprehensive income.

Loans Held for Sale Policy

Loans held for sale

The Company originates residential mortgage loans for sale. Such loans are carried at the lower of cost or estimated fair

value in the aggregate. Loan sales are recognized when the transaction closes, the proceeds are collected, and ownership is

transferred. Continuing involvement, through the sales agreement, consists of the right to service the loan for a fee for the

life of the loan, if applicable. Gains on the sale of loans held for sale are recorded net of related costs, such as

commissions, and reflected as a component of mortgage lending income in the consolidated statements of earnings. 

The Bank makes various representations and warranties to the purchaser of the residential mortgage loans they originated

and sells, primarily to Fannie Mae. Every loan closed by the Bank’s mortgage center is run through Fannie Mae or other

purchasing government sponsored enterprise (“GSE”) automated underwriting system. Any exceptions noted during this

process are remedied prior to sale. These representations and warranties also apply to underwriting the real estate appraisal

opinion of value for the collateral securing these loans. Failure by the Company to comply with the underwriting and/or

appraisal standards could result in the Company being required to repurchase the mortgage loan or to reimburse the investor

for losses incurred (make whole requests) if the Company cannot cure such failure within the specified period following

discovery.

Loans Policy

Loans

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

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

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

sheets. Interest income is accrued on the unpaid principal balance.

Loan origination fees, net of certain direct origination

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

prepayments.

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

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

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

contractual terms of the loan. A loan is considered to be past due when a scheduled payment has not been received 30 days

after the contractual due date.

All accrued but unpaid interest is reversed against interest income when a loan is placed on nonaccrual status. Interest

received on such loans is accounted for using the cost-recovery method, until the loan qualifies for return to accrual. Loans

are returned to accrual status when all the principal and interest amounts contractually due are brought current, there is a

sustained period of repayment performance, and future payments are reasonably assured. Otherwise, under the cost

recovery method, interest income is not recognized until the loan balance is reduced to zero.

Loans, Origination Fees Policy

Loan origination fees, net of certain direct origination

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

prepayments.

Loans, Nonacrrual Policy

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

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

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

contractual terms of the loan. A loan is considered to be past due when a scheduled payment has not been received 30 days

after the contractual due date.

All accrued but unpaid interest is reversed against interest income when a loan is placed on nonaccrual status. Interest

received on such loans is accounted for using the cost-recovery method, until the loan qualifies for return to accrual. Loans

are returned to accrual status when all the principal and interest amounts contractually due are brought current, there is a

sustained period of repayment performance, and future payments are reasonably assured. Otherwise, under the cost

recovery method, interest income is not recognized until the loan balance is reduced to zero.

Allowance for Loan Losses Policy

Allowance for Credit Losses – Loans

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

amount expected to be collected on the loans. Loans are charged off against the allowance when management confirms the

loan balance is uncollectible. Expected recoveries do not exceed the aggregate of amounts previously charged -off and

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

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

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

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

The Company’s loan loss estimation process includes procedures to appropriately consider the unique characteristics of its

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

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

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

portfolio.

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

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

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

borrower will default (the “PD”), adjusted for relevant forecasted macroeconomic factors, and loss given default (“LGD”),

which is the estimate of the amount of net loss in the event of default. This model utilizes historical correlations between

default experience and certain macroeconomic factors as determined through a statistical regression analysis. The

forecasted Alabama unemployment rate is considered in the model for commercial and industrial, construction and land

development, commercial real estate, and residential real estate loans. In addition, forecasted changes in the Alabama

home price index is considered in the model for construction and land development and residential real estate loans. 

Forecasted changes in the national commercial real estate (“CRE”) price index is considered in the model for commercial

real estate and multifamily loans; and forecasted changes in the Alabama gross state product is considered in the model for

multifamily loans. Projections of these macroeconomic factors, obtained from an independent third party, are utilized to

predict quarterly rates of default based on the statistical PD models. 

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

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

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

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

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

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

During the first quarter of 2024, as part of the Company’s ongoing model monitoring procedures, the annual loss driver

analysis and prepayment, curtailment and funding studies were performed. The analysis and studies resulted in changes for

all DCF models. The changes were a result of updating the Company’s peer group and incorporating data through 2022.

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

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

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

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

Additionally, the allowance for credit losses calculation includes subjective adjustments for qualitative risk factors that are

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

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

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

collateral, external factors and economic conditions not already captured.

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

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

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

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

as appropriate. 

Allowance for Credit Losses – Unfunded Commitments

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

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

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

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

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

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

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

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

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

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

Premises and Equipment Policy

Premises and Equipment

Land is carried at cost. Land improvements, buildings and improvements, and furniture, fixtures, and equipment are carried

at cost, less accumulated depreciation computed on a straight-line metho d over the estimated useful lives of the assets or the

expected terms of the leases, if shorter. Expected terms include lease option periods to the extent that the exercise of such

options is reasonably assured.

Nonmarketable Equity Investments Policy

Nonmarketable equity investments

Nonmarketable equity investments include equity securities that are not publicly traded and securities acquired for various

purposes. The Bank is required to maintain certain minimum levels of equity investments in (i) Federal Reserve Bank of

Atlanta based on the Bank’s capital stock and surplus, and the (ii) Federal Home Bank of Atlanta (“FHLB – Atlanta”)

based on various factors including, the Bank’s total assets, its borrowings and outstanding letters of credit from the FHLB -

Atlanta and its “acquired member asset” sales to FHLB - Atlanta. These nonmarketable 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. These securities can only be redeemed or sold at their par

value by the respective issuer bank or, in the case of FHLB – Atlanta stock upon FHLB – Atlanta approval sale to another

member of FHLB – Atlanta and law applicable to the member. The Company records these nonmarketable equity securities

as a component of other assets, which are periodically evaluated for impairment. Management considers these

nonmarketable 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.

Transfers and Servicing of Financial Assets, Policy

Transfers of Financial Assets

Transfers of an entire financial asset (i.e. loan sales), a group of entire financial assets, or a participating interest in an entire

financial asset (i.e. loan participations sold) are accounted for as sales when control over the assets have been surrendered.

Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company,

(2) the transferee obtains the right (free of conditions that constrain it from taking that right) to pledge or exchange the

transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an

agreement to repurchase them before their maturity.

Mortgage Servicing Rights Policy

Mortgage Servicing Rights

The Company recognizes as assets the rights to service mortgage loans which it originates and sells to others, principally

Fannie Mae. These servicing rights are called “MSRs”. The Company determines the fair value of MSRs on sold loans at

the date the loan is transferred. An estimate 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 rate,

default rates, cost to service, escrow account earnings, contractual servicing fee income, ancillary income, and late fees.

Subsequent to the date of sale of the residential mortgage loans, the Company has elected to measure its MSRs on such sold

mortgage loans under the amortization method. Under the amortization method, MSRs are amortized in proportion to, and

over the period of, estimated net servicing income. The amortization of MSRs is analyzed monthly and is adjusted to

reflect changes in prepayment speeds, as well as other factors. MSRs are evaluated for impairment based on the fair value

of those assets. 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 through a charge to earnings. The valuation allowance is adjusted as the fair value

changes. MSRs are included in the other assets category in the accompanying consolidated balance sheets at the lower of

cost or fair value. See Note 13 “Fair Value”

Securities Sold Under Agreements to Repurchase Policy

Securities sold under agreements to repurchase 

Securities sold under agreements to repurchase generally mature less than one year from the transaction date. Securities

sold under agreements to repurchase are reflected as a secured borrowing in the accompanying consolidated balance sheets

at the amount of cash received in connection with each transaction.

Income Taxes Policy

Income Taxes 

Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying

amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces

deferred tax assets to the amount expected to be realized. The net deferred tax asset is reflected as a component of other

assets in the accompanying consolidated balance sheets.

Income tax expense or benefit for the year is allocated among continuing operations and other comprehensive income

(loss), as applicable. The amount allocated to continuing operations is the income tax effect of the pretax income or loss

from continuing operations that occurred during the year, plus or minus income tax effects of (1) changes in certain

circumstances that cause a change in judgment about the realization of deferred tax assets in future years, (2) changes in

income tax laws or rates, and (3) changes in income tax status, subject to certain exceptions. The amount allocated to other

comprehensive income (loss) is related solely to changes in the valuation allowance on items that are normally accounted

for in other comprehensive income (loss) such as unrealized gains or losses on available-for-sale securities.

In accordance with ASC 740,

Income Taxes

, a tax position is recognized as a benefit only if it is “more likely than not” that

the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount

recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax

positions not meeting the “more likely than not” test, no tax benefit is recorded. It is the Company’s policy to recognize

interest and penalties related to income tax matters in income tax expense. The Company and its wholly-owned subsidiaries

file consolidated Federal and State of Alabama income tax returns.

Income Taxes, Uncertainties Policy

In accordance with ASC 740,

Income Taxes

, a tax position is recognized as a benefit only if it is “more likely than not” that

the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount

recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax

positions not meeting the “more likely than not” test, no tax benefit is recorded. It is the Company’s policy to recognize

interest and penalties related to income tax matters in income tax expense. The Company and its wholly-owned subsidiaries

file consolidated Federal and State of Alabama income tax returns.

Fair Value Measurements Policy

Fair Value Measurements 

ASC 820,

Fair Value Measurements,

which defines fair value, establishes a framework for measuring fair value in U.S.

generally accepted accounting principles and expands disclosures about fair value measurements. ASC 820 applies only to

fair-value measurements that are already required or permitted by other accounting standards. The definition of fair value

focuses on the exit price, i.e., the price that would be received to sell an asset or paid to transfer a liability in an orderly

transaction between market participants at the measurement date, not the entry price, i.e., the price that would be paid to

acquire the asset or received to assume the liability at the measurement date. The statement emphasizes that fair value is a

market-based measurement; not an entity-specific measurement. Therefore, the fair value measurement should be

determined based on the assumptions that market participants would use in pricing the asset or liability. For more

information related to fair value measurements, please refer to Note 13, Fair Value.