UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,D.C.20549
FORM
10-Q
(Mark One)
☒
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the quarterly period ended
June 30, 2026
☐
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the transition period __________ to __________
Commission File Number:
0-26486
Auburn National Bancorporation, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
63-0885779
(I.R.S. Employer
Identification No.)
100 N. Gay Street
Auburn
,
Alabama
36830
(
334
)
821-9200
(Address and telephone number of principal executive offices)
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.01
AUBN
NASDAQ
Global Market
Indicatebycheckmarkwhethertheregistrant(1) hasfiledallreportsrequiredtobefiledbySection 13or15(d)oftheSecurities
Exchange Actof 1934during thepreceding 12 months(or forsuch shorterperiod thatthe registrantwas requiredto filesuch 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
(§232.405 of this chapter)
during the preceding 12 months (or for such shorter period
that the registrant was required to submit such files).
Yes
☒
No
☐
Indicate by checkmark whether theregistrant is alarge accelerated filer,an accelerated filer,a non-accelerated filer,a smaller reporting
companyoranemerginggrowthcompany.Seethedefinitionsof“largeacceleratedfiler,”“acceleratedfiler,”“smallerreporting
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
☐
Ifanemerginggrowthcompany,indicatebycheckmarkiftheregistranthaselectednottousetheextendedtransitionperiodfor
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:
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class
Outstanding at August 10, 2026
Common Stock, $0.01 par value per share
3,484,292
shares
AUBURN NATIONAL BANCORPORATION, INC. ANDSUBSIDIARIES
INDEX
PAGE
Item 1
3
4
5
6
7
8
Item 2
28
44
45
46
47
48
48
49
50
51
Item 3
52
Item 4
52
Item 1
52
Item 1A
53
Item 2
54
Item 3
54
Item 4
54
Item 5
54
Item 6
55
3
PARTI.FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AUBURN NATIONALBANCORPORATION,INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
June 30,
December 31,
(Dollars in thousands, except share data)
2026
2025
Assets:
Cash and due from banks
$
20,009
$
22,335
Federal funds sold
37,953
21,322
Interest-bearing bank deposits
153,687
104,175
Cash and cash equivalents
211,649
147,832
Securities available-for-sale
220,744
233,259
Loans held for sale
716
172
Loans, net of unearned income
579,589
565,354
Allowance for credit losses
(6,586)
(7,176)
Loans, net
573,003
558,178
Premises and equipment, net
44,856
45,600
Bank-owned life insurance
17,955
17,927
Other assets
16,880
15,829
Total assets
$
1,085,803
$
1,018,797
Liabilities:
Deposits:
Noninterest-bearing
$
258,351
$
268,026
Interest-bearing
729,967
654,900
Total deposits
988,318
922,926
Accrued expenses and other liabilities
3,611
3,818
Total liabilities
991,929
926,744
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
3,959,302
shares at June 30, 2026 and
3,957,135
shares at December 31, 2025, respectively
39
39
Additional paid-in capital
3,871
3,864
Retained earnings
121,852
119,241
Accumulated other comprehensive loss, net
(19,993)
(19,390)
Less treasury stock, at cost -
471,472
shares and
463,436
shares at June 30, 2026
and December 31, 2025, respectively
(11,895)
(11,701)
Total stockholders’equity
93,874
92,053
Total liabilities and stockholders’equity
$
1,085,803
$
1,018,797
S
ee accompanying notes to consolidated financial statements
4
AUBURN NATIONALBANCORPORATION,INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
(Unaudited)
Quarter ended June 30,
Six months ended June 30,
(Dollars in thousands, except share and per share data)
2026
2025
2026
2025
Interest income:
Loans, including fees
$
8,184
$
7,676
$
16,117
$
15,219
Securities
1,202
1,319
2,425
2,668
Federal funds sold and interest-bearing bank deposits
1,194
1,116
2,399
2,085
Total interest income
10,580
10,111
20,941
19,972
Interest expense:
Deposits
2,692
2,766
5,320
5,582
Short-term borrowings
—
1
—
1
Total interest expense
2,692
2,767
5,320
5,583
Net interest income
7,888
7,344
15,621
14,389
Provision for credit losses
(248)
113
(324)
103
Net interest income after provision for creditlosses
8,136
7,231
15,945
14,286
Noninterest income:
Service charges on deposit accounts
153
152
306
307
Mortgage lending
132
131
304
224
Bank-owned life insurance
171
101
279
206
Other
422
405
882
799
Total noninterest income
878
789
1,771
1,536
Noninterest expense:
Salaries and benefits
3,267
3,258
6,637
6,568
Net occupancy and equipment
552
604
1,127
1,318
Professional fees
327
385
776
672
Other
1,959
1,455
3,466
3,024
Total noninterest expense
6,105
5,702
12,006
11,582
Earnings before income taxes
2,909
2,318
5,710
4,240
Income tax expense
611
485
1,214
877
Net earnings
$
2,298
$
1,833
$
4,496
$
3,363
Net earnings per share:
Basic and diluted
$
0.66
$
0.52
$
1.29
$
0.96
Weighted average sharesoutstanding:
Basic
3,492,107
3,493,699
3,493,162
3,493,699
Diluted
3,492,107
3,493,699
3,494,292
3,493,699
S
ee accompanying notes to consolidated financial statements
5
AUBURN NATIONALBANCORPORATION,INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(Unaudited)
Quarter ended June 30,
Six months ended June 30,
(Dollars in thousands)
2026
2025
2026
2025
Net earnings
$
2,298
$
1,833
$
4,496
$
3,363
Other comprehensive (loss) income, net of tax:
Unrealized net holding (loss) gain on securities, net of tax benefit
(expense) of $
118
, $
(693)
, $
202
and $
(2,114)
, respectively
(354)
2,066
(603)
6,302
Other comprehensive (loss) income, net of tax
(354)
2,066
(603)
6,302
Comprehensive income
$
1,944
$
3,899
$
3,893
$
9,665
S
ee accompanying notes to consolidated financial statements
6
AUBURN NATIONALBANCORPORATION,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
income (loss)
stock
Total
Quarter ended June 30, 2026
Balance, March 31, 2026
3,495,866
$
39
$
3,866
$
120,496
$
(19,639)
$
(11,701)
$
93,061
Net earnings
—
—
—
2,298
—
—
2,298
Other comprehensive loss
—
—
—
—
(354)
—
(354)
Cash dividends paid ($
.27
per share)
—
—
—
(942)
—
—
(942)
Stock repurchases
(8,036)
—
—
—
—
(194)
(194)
Stock-based compensation expense
—
—
5
—
—
—
5
Balance, June 30, 2026
3,487,830
$
39
$
3,871
$
121,852
$
(19,993)
$
(11,895)
$
93,874
Quarter ended June 30, 2025
Balance, March 31, 2025
3,493,699
$
39
$
3,802
$
116,346
$
(25,371)
$
(11,701)
$
83,115
Net earnings
—
—
—
1,833
—
—
1,833
Other comprehensive income
—
—
—
—
2,066
—
2,066
Cash dividends paid ($
.27
per share)
—
—
—
(943)
—
—
(943)
Balance, June 30, 2025
3,493,699
$
39
$
3,802
$
117,236
$
(23,305)
$
(11,701)
$
86,071
Six months ended June 30, 2026
Balance, December 31, 2025
3,493,699
$
39
$
3,864
$
119,241
$
(19,390)
$
(11,701)
$
92,053
Net earnings
—
—
—
4,496
—
—
4,496
Other comprehensive loss
—
—
—
—
(603)
—
(603)
Cash dividends paid ($
.54
per share)
—
—
—
(1,885)
—
—
(1,885)
Stock repurchases
(8,036)
—
—
—
—
(194)
(194)
Stock-based compensation expense
—
—
29
—
—
—
29
Common stock issued under equity
compensation plans, net
2,167
—
(22)
—
—
—
(22)
Balance, June 30, 2026
3,487,830
$
39
$
3,871
$
121,852
$
(19,993)
$
(11,895)
$
93,874
Six months ended June 30, 2025
Balance, December 31, 2024
3,493,699
$
39
$
3,802
$
115,759
$
(29,607)
$
(11,701)
$
78,292
Net earnings
—
—
—
3,363
—
—
3,363
Other comprehensive income
—
—
—
—
6,302
—
6,302
Cash dividends paid ($
.54
per share)
—
—
—
(1,886)
—
—
(1,886)
Balance, June 30, 2025
3,493,699
$
39
$
3,802
$
117,236
$
(23,305)
$
(11,701)
$
86,071
S
ee accompanying notes to consolidated financial statements
7
AUBURN NATIONALBANCORPORATION,INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Six months ended June 30,
(Dollars in thousands)
2026
2025
Cash flows from operating activities:
Net earnings
$
4,496
$
3,363
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Provision for credit losses
(324)
103
Depreciation and amortization
1,110
1,033
Premium amortization and discount accretion, net
662
703
Net gain on sale of loans held for sale
(157)
(57)
Loans originated for sale
(5,345)
(3,088)
Proceeds from sale of loans
4,904
2,942
Increase in cash surrender value of bank-owned life insurance
(211)
(206)
Income recognized from death benefit on bank-owned life insurance
(68)
—
Stock-based compensation expense
29
—
Net increase in other assets
(935)
(130)
Net (decrease) increase in accrued expenses and other liabilities
(115)
101
Net cash provided by operating activities
4,046
4,764
Cash flows from investing activities:
Proceeds from prepayments and maturities of securities available-for-sale
11,048
11,043
(Increase) decrease in loans, net
(14,615)
1,287
Net purchases of premises and equipment
(197)
(430)
Proceeds from bank-owned life insurance death benefit
251
—
Increase in FHLB stock
(29)
—
Net cash (used in) provided by investing activities
(3,542)
11,900
Cash flows from financing activities:
Net (decrease) increase in noninterest-bearing deposits
(9,675)
7,594
Net increase in interest-bearing deposits
75,067
36,433
Stock repurchases
(194)
—
Dividends paid
(1,885)
(1,886)
Net cash provided by financing activities
63,313
42,141
Net change in cash and cash equivalents
63,817
58,805
Cash and cash equivalents at beginning of period
147,832
93,354
Cash and cash equivalents at end of period
$
211,649
$
152,159
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest
$
5,324
$
5,673
Income taxes
1,102
1,030
See accompanying notes to consolidated financial statements
8
AUBURN NATIONALBANCORPORATION,INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES
General
Auburn National Bancorporation, Inc. (the “Company”) is a bank holdingcompany 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 servicesin its primary market area, Lee County,which
includes the Auburn-Opelika Metropolitan Statistical Area.
Basis of Presentation and Use of Estimates
The unaudited consolidated financial statements in this report have beenprepared in accordance with U.S. generally
accepted accounting principles (“GAAP”) for interim financial information.Accordingly, these financial statementsdo not
include all of the information and footnotes required by U.S. GAAP for completefinancial 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 notnecessarily indicative of the results of
operations that the Company and its subsidiaries may achieve for future interimperiods or the entire year. For further
information, refer to the consolidated financial statements and footnotes includedin the Company's Annual Report on Form
10-K for the year ended December 31, 2025.
The unaudited consolidated financial statements include the accountsof the Company and its wholly-owned subsidiaries.
Significant intercompany transactions and accounts are eliminated inconsolidation.
The preparation of financial statements in conformity with U.S. GAAP requiresmanagement to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosuresof contingent assets and liabilities as of
the balance sheet date and the reported amounts of revenues and expenses duringthe reporting period.Actual results could
differ from those estimates.Material estimates that are particularly susceptible to significant change inthe near term
include the determination of allowance for credit losses on loans andinvestment securities, the fair value of financial
instruments, and the valuation of deferred tax assets and other real estate owned(“OREO”).
Subsequent Events
The Company has evaluated the effects of events andtransactions through the date of this filing that have occurred
subsequent to June 30, 2026.The Company does not believe there were any material subsequent events duringthis period
that would have required further recognition or disclosure in the unauditedconsolidated financial statements included in
this report.
Reclassifications
Certain amounts reported in prior periods have been reclassified toconform to the current-period presentation.These
reclassifications had no effect on the Company’spreviously reported net earnings or total stockholders’ equity.
Accounting Developments
In the first six months of 2026, the Company did not adopt any new accountingguidance.
9
NOTE 2: BASIC AND DILUTED NET EARNINGS PER SHARE
Basic net earnings per share is computed by dividing net earnings bythe weighted average common shares outstanding for
the respective period.Diluted net earnings per share reflectsthe potential dilution that could occur upon exercise of
securities or other rights for, or convertible into,shares of the Company’s common stock.During 2026, the Company
granted 8,172 restricted stock units (“RSUs”), which represent potentialcommon shares.During 2025, the Company
granted 3,029 RSUs, which vested during the first quarter of 2026.RSUs are included in the computation of diluted net
earnings per share using the treasury stock method.
The basic and diluted net earnings per share computations for the respectiveperiods are presented below:
Quarter ended June 30,
Six months ended June 30,
(Dollars in thousands, except share and per share data)
2026
2025
2026
2025
Basic:
Net earnings
$
2,298
$
1,833
$
4,496
$
3,363
Weighted averagecommon shares outstanding
3,492,107
3,493,699
3,493,162
3,493,699
Net earnings per share
$
0.66
$
0.52
$
1.29
$
0.96
Diluted:
Net earnings
$
2,298
$
1,833
$
4,496
$
3,363
Weighted averagecommon shares outstanding, basic
3,492,107
3,493,699
3,493,162
3,493,699
Dilutive effect of restricted stock units
—
—
1,130
—
Weighted averagecommon shares outstanding, diluted
3,492,107
3,493,699
3,494,292
3,493,699
Net earnings per share
0.66
0.52
1.29
0.96
10
NOTE 3: SECURITIES
At June 30, 2026 and December 31, 2025, respectively,all securities within the scope of ASC 320,
Investments – Debt and
Equity Securities,
were classified as available-for-sale.The fair value and amortized cost for securities available-for-sale
by contractual maturity at June 30, 2026 and December 31, 2025, 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
June 30, 2026
Agency obligations (a)
$
553
39,763
12,120
—
52,436
—
4,978
$
57,414
Agency MBS (a)
—
20,572
22,036
108,488
151,096
—
19,643
170,739
State and political subdivisions
—
3,952
6,947
6,313
17,212
1
2,077
19,288
Total available-for-sale
$
553
64,287
41,103
114,801
220,744
1
26,698
$
247,441
December 31, 2025
Agency obligations (a)
$
—
35,580
18,204
—
53,784
—
4,727
$
58,511
Agency MBS (a)
—
20,112
16,171
125,644
161,927
—
19,063
180,990
State and political subdivisions
—
1,590
9,160
6,798
17,548
1
2,103
19,650
Total available-for-sale
$
—
57,282
43,535
132,442
233,259
1
25,893
$
259,151
(a) Includes securities issued by U.S. government agencies or government-sponsored entities.Expected lives of these
securities may differ from contractual maturities because (i) issuers mayhave the right to call or repay such securities
obligations with or without prepayment penalties and (ii) loans included in AgencyMBS generally have the right to
prepay such loan in whole or in part at any time.
Securities with aggregate fair values of $
199.4
million and $
209.4
million at June 30, 2026 and December 31, 2025,
respectively, werepledged to secure public deposits, securities sold under agreements to repurchase,Federal Home Loan
Bank of Atlanta (“FHLB – Atlanta”) advances, and for other purposes requiredor permitted by law.
Included in other assets on the accompanying consolidated balance sheets arenonmarketable equity investments.The
carrying amounts of nonmarketable equity investments were $
1.4
million at both June 30, 2026 and December 31, 2025,
respectively.Nonmarketable equity investments include FHLB - Atlanta stock, FederalReserve Bank (“FRB”) stock, and
stock in a privately held financial institution.
Gross Unrealized Losses and Fair Value
The fair values and gross unrealized losses on securities at June 30,2026 and December 31, 2025, respectively,segregated
by those securities that have been in an unrealized loss position for less than 12months and 12 months or longer, are
presented below.
Less than 12 Months
12 Months or Longer
Total
Fair
Unrealized
Fair
Unrealized
Fair
Unrealized
(Dollars in thousands)
Value
Losses
Value
Losses
Value
Losses
June 30, 2026:
Agency obligations
$
—
—
52,436
4,978
$
52,436
4,978
Agency MBS
2,562
82
148,534
19,561
151,096
19,643
State and political subdivisions
1,004
5
13,798
2,072
14,802
2,077
Total
$
3,566
87
214,768
26,611
$
218,334
26,698
December 31, 2025:
Agency obligations
$
—
—
53,784
4,727
$
53,784
4,727
Agency MBS
—
—
161,840
19,063
161,840
19,063
State and political subdivisions
—
—
14,827
2,103
14,827
2,103
Total
$
—
—
230,451
25,893
$
230,451
25,893
11
For the securities in the previous table, the Company assesses whether or notit intends to sell the security, or morelikely
than not will be required to sell the security,before recovery of its amortized cost basis. Unrealized losses have not been
recognized into income as the decline in fair value is largelydue to changes in interest rates and not credit quality.
For the securities in the previous table, as of June 30, 2026 the Company does not intendto sell and it is likely that
management will not be required to sell the securities prior to their anticipated recovery.
Agency Obligations
Investments in agency obligations are guaranteed of full and timelypayments by the issuing agency.Based on
management's analysis and judgment, there were no credit losses attributable tothe Company’s investments inagency
obligations at June 30, 2026.
Agency MBS
Investments in agency MBS are issued by Ginnie Mae, Fannie Mae, andFreddie Mac. Each of these agencies providesa
guarantee of full and timely payments of principal and interest by the issuingagency. Based on management's analysisand
judgment, there were no credit losses attributable to the Company’sinvestments in agency MBS at June 30, 2026.
State and Political Subdivisions
Investments in state and political subdivisions are securities issued by variousmunicipalities in the United States. The
majority of the portfolio was rated AA or higher,with no securities rated below investment grade at June 30, 2026.Based
on management's analysis and judgment, there were no credit losses attributable to theCompany’s investments instate and
political subdivisions at June 30, 2026.
Realized Gains and Losses
The Company had no sales of securities during the quarters and six monthsended June 30, 2026 and 2025, respectively.
NOTE 4: LOANS AND ALLOWANCEFOR CREDIT LOSSES
June 30,
December 31,
(Dollars in thousands)
2026
2025
Commercial and industrial
$
27,754
$
33,887
Municipal
35,020
24,513
Construction and land development
58,855
56,436
Commercial real estate:
Owner occupied
56,118
59,568
Hotel/motel
54,455
47,870
Multifamily
61,606
51,516
Other
161,346
166,567
Total commercialreal estate
333,525
325,521
Residential real estate:
Consumer mortgage
61,348
59,781
Investment property
53,460
56,773
Total residential realestate
114,808
116,554
Consumer installment
9,919
8,421
Total loans, net of unearnedincome before basis adjustment
579,881
565,332
Basis adjustment associated with fair value hedge (1)
(292)
22
Total loans, net of unearnedincome
$
579,589
$
565,354
(1) Represents the basis adjustment associated with application ofhedge accounting on certain loans.The basis adjustment
will be allocated to the amortized cost of associated loans within the portfolio ifthe hedge accounting is discontinued.
Refer to Note 7 - Derivative Instruments for additional information.
12
Loans secured by real estate were approximately 87.5% of the Company’stotal loan portfolio at June 30, 2026.At June 30,
2026, the Company’s geographicloan distribution was concentrated primarily in Lee County,Alabama, and surrounding
areas.
The loan portfolio segment is defined as the level at which an entity develops anddocuments a systematic method for
determining its allowance for credit losses. As part of the Company’squarterly assessment of the allowance, the loan
portfolio is disaggregated into the following portfolio segments: commercialand industrial, municipal, construction and
land development, commercial real estate, residential real estate, and consumerinstallment. Where appropriate, the
Company’s loan portfoliosegments are further disaggregated into classes. A class is generally determined based on the
initial measurement attribute, risk characteristics of the loan, andan entity’s method for monitoring and determiningcredit
risk.
During the first quarter of 2026, the Company refined its loan portfoliosegmentation to separately identify municipal loans,
which were previously included within commercial and industrial loans, dueto their recent growth and distinct risk
characteristics.The allowance for credit losses related to municipal loans is determined using a discountedcash flow
methodology incorporating probability of default and loss given default assumptionsderived from external data sources.
As a result of this refinement,the total allowance decreased due to the lower expected credit losses associated withthese
loans.This refinement represents a change in accounting estimate and is accounted forprospectively.Accordingly, the
allowance for credit losses and the provision for credit losses for prior periods havenot been revised.Loan balances in
prior period tables have been reclassified to conform to the current periodpresentation.
The following describesthe risk characteristics relevant to each of the portfolio segments and classes.
Commercial and industrial —
includes loans to finance business operations, equipment purchases, orother needs for small
and medium-sized commercial customers. Also included in this category are loansto finance agricultural production.
Generally,the primary source of repayment is the cash flow from business operations and activities of theborrower.
Municipal —
includes loans to state and local governmental entities and related public-sector organizationsto finance
capital projects, infrastructure improvements, and other governmentalor public service needs. These loans are typically
supported by general tax revenues, utility revenues, special assessments, orother dedicated revenue sources of the
municipality. Repaymentis primarily dependent on the financial capacity and revenue-generatingability of the
governmental entity.
Construction and land development —
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 lines for
construction of residential, multifamily,and commercial buildings. Generally,the primary source of repayment is
dependent upon the sale or refinancing of the real estate collateral.
Commercial real estate—
includes loans disaggregated in these classes:
●
Owner occupied
– includes loans secured by business facilities to finance business operations, equipmentand
owner-occupied facilities primarily for small and medium-sized commercialcustomers.Generally, the primary
source of loan repayment are the cash flows from business operations and activities ofthe borrower, who owns the
property.
●
Hotel/motel
– includes loans for hotels and motels.Generally, the primary sourceof 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.
●
Multifamily
– primarily includes loans to finance income-producing multifamilyproperties.Loans in this class
include loans for 5 or more unit residential propertyand 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 financialhealth of the respective
borrower.
13
●
Other
– primarily includes loans to finance income-producing commercialreal estate. Loans in this class include
loans for neighborhood retail centers, medical and professional offices,single retail stores, industrial buildings,
and warehouses leased generally to local businesses and residents. Generally,the primary source of repayment is
dependent upon income generated from the real estate collateral. Theunderwriting of these loans takes into
consideration the occupancy and rental rates, as well as the financial healthof the borrower.
Residential real estate —
includes loans disaggregated into two classes:
●
Consumer mortgage
– primarily includesfirst or second lien mortgages and home equity lines to consumers that
are secured by a primary residence or second home. These loans are underwrittenin 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 residentialproperties.
Generally,the primary source of repayment is dependent upon income generated fromleasing the property
securing the loan. The underwriting of these loans takes into considerationthe rental rates, as well as the financial
health of the borrowers.
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 procedureswhich require, among other things, proper documentation of each borrower’s
financial condition, satisfactory credit history,and, if applicable, property value.
14
The following is a summary of current, accruing past due, and nonaccrualloans by portfolio segment and class as of June
30, 2026 and December 31, 2025.
Accruing
Accruing
Total
30-89 Days
Greater than
Accruing
Non-
Total
(Dollars in thousands)
Current
Past Due
90 days
Loans
Accrual
Loans
June 30, 2026:
Commercial and industrial
$
27,678
76
—
27,754
—
$
27,754
Municipal
35,020
—
—
35,020
—
35,020
Construction and land development
58,757
98
—
58,855
—
58,855
Commercial real estate:
Owner occupied
56,118
—
—
56,118
—
56,118
Hotel/motel
54,455
—
—
54,455
—
54,455
Multifamily
61,606
—
—
61,606
—
61,606
Other
161,346
—
—
161,346
—
161,346
Total commercialreal estate
333,525
—
—
333,525
—
333,525
Residential real estate:
Consumer mortgage
61,232
52
—
61,284
64
61,348
Investment property
53,225
235
—
53,460
—
53,460
Total residential realestate
114,457
287
—
114,744
64
114,808
Consumer installment
9,881
38
—
9,919
—
9,919
Total
$
579,318
499
—
579,817
64
$
579,881
December 31, 2025:
Commercial and industrial
$
33,881
6
—
33,887
—
$
33,887
Municipal
24,513
—
—
24,513
—
24,513
Construction and land development
56,395
41
—
56,436
—
56,436
Commercial real estate:
Owner occupied
59,085
105
—
59,190
378
59,568
Hotel/motel
47,870
—
—
47,870
—
47,870
Multifamily
51,516
—
—
51,516
—
51,516
Other
166,567
—
—
166,567
—
166,567
Total commercialreal estate
325,038
105
—
325,143
378
325,521
Residential real estate:
Consumer mortgage
58,993
720
—
59,713
68
59,781
Investment property
56,737
—
—
56,737
36
56,773
Total residential realestate
115,730
720
—
116,450
104
116,554
Consumer installment
8,348
73
—
8,421
—
8,421
Total
$
563,905
945
—
564,850
482
$
565,332
15
Credit Quality Indicators
The credit quality of the loan portfolio is summarized no less frequently thanquarterly using categories similar to the
standard asset classification system used by the federal banking agencies.These categories are utilized to develop the
associated allowance for credit losses using historical losses adjusted forqualitative and environmental factors and are
defined as follows:
●
Pass – loans which are well protected by the current net worth and payingcapacity 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’sposition 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 whichpresently jeopardizes debt repayment,
even though they are currently performing. These loans are characterizedby 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 paymentof principal and interest is not
e
xpected.
16
During 2026, the Company established municipal loans as a separate portfoliosegment.Certain prior period amounts have
been reclassified to conform to the current period presentation.The following tables present credit quality indicators for the
loan portfolio segments and classes by year of origination as of June 30, 2026and December 31, 2025.
Year of Origination
2026
2025
2024
2023
2022
Prior to
2022
Revolving
Loans
Total
Loans
(Dollars in thousands)
June 30, 2026:
Commercial and industrial
Pass
$
1,843
6,218
3,830
3,355
1,191
10,304
813
27,554
Special mention
—
—
—
—
—
—
—
—
Substandard accruing
74
—
—
1
125
—
—
200
Nonaccrual
—
—
—
—
—
—
—
—
Total commercial and industrial
1,917
6,218
3,830
3,356
1,316
10,304
813
27,754
Current period gross charge-offs
—
—
—
5
—
—
—
5
Municipal
Pass
$
11,853
—
—
1,157
3,975
16,546
1,489
35,020
Special mention
—
—
—
—
—
—
—
—
Substandard accruing
—
—
—
—
—
—
—
—
Nonaccrual
—
—
—
—
—
—
—
—
Total municipal
11,853
—
—
1,157
3,975
16,546
1,489
35,020
Current period gross charge-offs
—
—
—
—
—
—
—
—
Construction and land development
Pass
18,048
31,551
4,064
1,761
1,974
—
1,418
58,816
Special mention
—
—
—
—
—
—
—
—
Substandard accruing
—
—
—
—
39
—
—
39
Nonaccrual
—
—
—
—
—
—
—
—
Total construction and land development
18,048
31,551
4,064
1,761
2,013
—
1,418
58,855
Current period gross charge-offs
—
—
—
—
—
—
—
—
Commercial real estate:
Owner occupied
Pass
1,058
10,375
1,417
9,141
5,961
26,713
354
55,019
Special mention
—
—
—
—
—
—
608
608
Substandard accruing
—
—
491
—
—
—
—
491
Nonaccrual
—
—
—
—
—
—
—
—
Total owner occupied
1,058
10,375
1,908
9,141
5,961
26,713
962
56,118
Current period gross charge-offs
—
—
—
—
—
378
—
378
Hotel/motel
Pass
11,429
4,896
14,144
5,890
8,739
9,357
—
54,455
Special mention
—
—
—
—
—
—
—
—
Substandard accruing
—
—
—
—
—
—
—
—
Nonaccrual
—
—
—
—
—
—
—
—
Total hotel/motel
11,429
4,896
14,144
5,890
8,739
9,357
—
54,455
Current period gross charge-offs
—
—
—
—
—
—
—
—
17
Year of Origination
2026
2025
2024
2023
2022
Prior to
2022
Revolving
Loans
Total
Loans
(Dollars in thousands)
June 30, 2026:
Multifamily
Pass
3,646
1,146
3,564
20,157
20,224
9,804
116
58,657
Special mention
—
—
—
—
—
—
—
—
Substandard accruing
—
—
—
—
—
2,949
—
2,949
Nonaccrual
—
—
—
—
—
—
—
—
Total multifamily
3,646
1,146
3,564
20,157
20,224
12,753
116
61,606
Current period gross charge-offs
—
—
—
—
—
—
—
—
Other
Pass
25,989
25,461
32,442
16,546
26,592
33,386
930
161,346
Special mention
—
—
—
—
—
—
—
—
Substandard accruing
—
—
—
—
—
—
—
—
Nonaccrual
—
—
—
—
—
—
—
—
Total other
25,989
25,461
32,442
16,546
26,592
33,386
930
161,346
Current period gross charge-offs
—
—
—
—
—
—
—
—
Residential real estate:
Consumer mortgage
Pass
5,102
5,827
3,545
15,502
16,088
12,268
1,972
60,304
Special mention
—
—
—
—
—
226
—
226
Substandard accruing
—
—
—
—
—
754
—
754
Nonaccrual
—
—
—
—
—
—
64
64
Total consumer mortgage
5,102
5,827
3,545
15,502
16,088
13,248
2,036
61,348
Current period gross charge-offs
—
—
—
—
—
—
—
—
Investment property
Pass
4,348
6,868
7,962
8,244
9,170
14,841
1,664
53,097
Special mention
—
—
—
—
—
—
—
—
Substandard accruing
—
234
—
37
90
2
—
363
Nonaccrual
—
—
—
—
—
—
—
—
Total investment property
4,348
7,102
7,962
8,281
9,260
14,843
1,664
53,460
Current period gross charge-offs
—
—
—
—
—
—
—
—
Consumer installment
Pass
3,601
2,983
1,406
607
632
195
481
9,905
Special mention
—
—
5
—
—
—
—
5
Substandard accruing
—
—
5
—
—
—
4
9
Nonaccrual
—
—
—
—
—
—
—
—
Total consumer installment
3,601
2,983
1,416
607
632
195
485
9,919
Current period gross charge-offs
—
22
—
14
—
—
—
36
Total loans
Pass
86,917
95,325
72,374
82,360
94,546
133,414
9,237
574,173
Special mention
—
—
5
—
—
226
608
839
Substandard accruing
74
234
496
38
254
3,705
4
4,805
Nonaccrual
—
—
—
—
—
—
64
64
Total loans
$
86,991
95,559
72,875
82,398
94,800
137,345
9,913
$
579,881
Total current period gross charge-offs
$
—
22
—
19
—
378
—
$
419
18
Year of Origination
2025
2024
2023
2022
2021
Prior to
2021
Revolving
Loans
Total
Loans
(Dollars in thousands)
December 31, 2025:
Commercial and industrial
Pass
$
8,566
5,035
3,970
2,865
4,366
8,074
778
$
33,654
Special mention
74
4
7
—
—
—
—
85
Substandard accruing
—
—
7
139
2
—
—
148
Nonaccrual
—
—
—
—
—
—
—
—
Total commercial and industrial
8,640
5,039
3,984
3,004
4,368
8,074
778
33,887
Current period gross charge-offs
40
—
99
3
—
—
—
142
Municipal
Pass
$
837
—
1,156
4,190
6,013
9,145
3,172
$
24,513
Special mention
—
—
—
—
—
—
—
—
Substandard accruing
—
—
—
—
—
—
—
—
Nonaccrual
—
—
—
—
—
—
—
—
Total municipal
837
—
1,156
4,190
6,013
9,145
3,172
24,513
Current period gross charge-offs
—
—
—
—
—
—
—
—
Construction and land development
Pass
31,315
14,175
7,321
2,080
69
711
765
56,436
Special mention
—
—
—
—
—
—
—
—
Substandard accruing
—
—
—
—
—
—
—
—
Nonaccrual
—
—
—
—
—
—
—
—
Total construction and land development
31,315
14,175
7,321
2,080
69
711
765
56,436
Current period gross charge-offs
—
—
—
—
—
—
—
—
Commercial real estate:
Owner occupied
Pass
9,755
1,312
11,889
6,235
13,830
11,618
2,682
57,321
Special mention
620
—
—
—
—
—
750
1,370
Substandard accruing
—
499
—
—
—
—
—
499
Nonaccrual
—
—
—
—
—
378
—
378
Total owner occupied
10,375
1,811
11,889
6,235
13,830
11,996
3,432
59,568
Current period gross charge-offs
—
—
—
—
—
296
—
296
Hotel/motel
Pass
5,012
14,161
6,143
8,976
2,948
10,630
—
47,870
Special mention
—
—
—
—
—
—
—
—
Substandard accruing
—
—
—
—
—
—
—
—
Nonaccrual
—
—
—
—
—
—
—
—
Total hotel/motel
5,012
14,161
6,143
8,976
2,948
10,630
—
47,870
Current period gross charge-offs
—
—
—
—
—
—
—
—
19
Year of Origination
2025
2024
2023
2022
2021
Prior to
2021
Revolving
Loans
Total
Loans
(Dollars in thousands)
December 31, 2025:
Multifamily
Pass
1,254
3,615
12,550
20,560
1,726
8,652
142
48,499
Special mention
—
—
—
—
—
—
—
—
Substandard accruing
—
—
—
—
—
3,017
—
3,017
Nonaccrual
—
—
—
—
—
—
—
—
Total multifamily
1,254
3,615
12,550
20,560
1,726
11,669
142
51,516
Current period gross charge-offs
—
—
—
—
—
—
—
—
Other
Pass
25,027
41,004
12,501
28,033
17,244
24,310
17,589
165,708
Special mention
—
364
—
—
495
—
—
859
Substandard accruing
—
—
—
—
—
—
—
—
Nonaccrual
—
—
—
—
—
—
—
—
Total other
25,027
41,368
12,501
28,033
17,739
24,310
17,589
166,567
Current period gross charge-offs
—
—
—
—
—
—
—
—
Residential real estate:
Consumer mortgage
Pass
6,413
4,344
16,249
16,527
2,263
10,977
1,692
58,465
Special mention
—
—
—
—
—
184
65
249
Substandard accruing
—
—
—
—
—
754
245
999
Nonaccrual
—
—
68
—
—
—
—
68
Total consumer mortgage
6,413
4,344
16,317
16,527
2,263
11,915
2,002
59,781
Current period gross charge-offs
—
—
4
—
—
1
—
5
Investment property
Pass
9,332
8,045
10,016
9,849
6,790
10,375
1,999
56,406
Special mention
—
—
—
—
—
—
—
—
Substandard accruing
236
—
—
91
4
—
—
331
Nonaccrual
—
—
36
—
—
—
—
36
Total investment property
9,568
8,045
10,052
9,940
6,794
10,375
1,999
56,773
Current period gross charge-offs
—
—
2
—
—
—
—
2
Consumer installment
Pass
4,121
1,981
972
780
137
81
304
8,376
Special mention
—
7
2
—
—
—
—
9
Substandard accruing
8
7
21
—
—
—
—
36
Nonaccrual
—
—
—
—
—
—
—
—
Total consumer installment
4,129
1,995
995
780
137
81
304
8,421
Current period gross charge-offs
42
45
9
—
—
—
—
96
Total loans
Pass
101,632
93,672
82,767
100,095
55,386
94,573
29,123
557,248
Special mention
694
375
9
—
495
184
815
2,572
Substandard accruing
244
506
28
230
6
3,771
245
5,030
Nonaccrual
—
—
104
—
—
378
—
482
Total loans
$
102,570
94,553
82,908
100,325
55,887
98,906
30,183
$
565,332
T
otal current period gross charge-offs
$
82
45
114
3
—
297
—
$
541
20
Allowance for Credit Losses
The allowance for credit losses is estimated under the Current ExpectedCredit Losses (“CECL”) methodology set forth in
FASB ASC 326,
Financial Instruments – Credit Losses
.Under the CECL methodology,the allowance for credit losses is
measured on a collective basis for pools of loans with similar risk characteristics,and for loans that do not share similar risk
characteristics with the collectively evaluated pools, evaluations areperformed on an individual basis.
The composition of the provision for credit losses for the respective periodsis presented below.
Quarter ended June 30,
Six months ended June 30,
(Dollars in thousands)
2026
2025
2026
2025
Provision for credit losses:
Loans
$
(212)
$
166
$
(210)
$
110
Reserve for unfunded commitments
(36)
(53)
(114)
(7)
Total provision for creditlosses
$
(248)
$
113
$
(324)
$
103
The provision for credit losses for the quarter and six months reflects both changesin credit conditions and the impact of
the refinement in portfolio segmentation during the first quarter of 2026, includingthe reclassification of municipal loans
previously included in commercial and industrial loans.The following table details the changes in the allowance for credit
losses for loans, by portfolio segment, for the respective periods.
(Dollars in thousands)
Commercial
and industrial
Municipal
Construction
and land
development
Commercial
real estate
Residential
real estate
Consumer
installment
Total
Quarter ended June 30, 2026:
Beginning balance
$
686
154
694
4,056
1,029
157
$
6,776
Charge-offs
—
—
—
—
—
(3)
(3)
Recoveries
4
—
—
—
7
14
25
Net (charge-offs) recoveries
4
—
—
—
7
11
22
Provision for credit losses
(148)
(4)
(19)
(97)
58
(2)
(212)
Ending balance
$
542
150
675
3,959
1,094
166
$
6,586
Six months ended June 30, 2026:
Beginning balance
$
1,129
—
1,304
3,777
837
129
$
7,176
Charge-offs
(5)
—
—
(378)
—
(36)
(419)
Recoveries
4
—
—
—
9
26
39
Net (charge-offs) recoveries
(1)
—
—
(378)
9
(10)
(380)
Provision for credit losses
(586)
150
(629)
560
248
47
(210)
Ending balance
$
542
150
675
3,959
1,094
166
$
6,586
Quarter ended June 30, 2025:
Beginning balance
$
1,219
n/a
1,401
3,153
861
116
$
6,750
Charge-offs
(3)
n/a
—
—
(6)
(9)
(18)
Recoveries
1
n/a
—
—
61
5
67
Net (charge-offs) recoveries
(2)
n/a
—
—
55
(4)
49
Provision for credit losses
(5)
n/a
212
(2)
(50)
11
166
Ending balance
$
1,212
n/a
1,613
3,151
866
123
$
6,965
Six months ended June 30, 2025:
Beginning balance
$
1,244
n/a
1,059
3,842
588
138
$
6,871
Charge-offs
(103)
n/a
—
—
(7)
(9)
(119)
Recoveries
30
n/a
—
—
63
10
103
Net (charge-offs) recoveries
(73)
n/a
—
—
56
1
(16)
Provision for credit losses
41
n/a
554
(691)
222
(16)
110
Ending balance
$
1,212
n/a
1,613
3,151
866
123
$
6,965
21
During the first quarter of 2026, the Company refined its loan portfoliosegmentation to separately identify municipal loans,
which were previously included within commercial and industrial loans, dueto their recent growth and distinct risk
characteristics.The allowance for credit losses related to municipal loans is determined using a discountedcash flow
methodology incorporating probability of default and loss given default assumptionsderived from external data sources.
As a result of this refinement, the total allowance decreased due to the lowerexpected credit losses associated with these
loans.This refinement represents a change in accounting estimate and is accounted for prospectively.Accordingly, the
allowance for credit losses and the provision for credit losses for prior periods havenot been revised.Loan balances in
prior period tables have been reclassified to present municipal loans as a separatesegment to conform to the current period
presentation.
The Company designates certain individually evaluated loans on nonaccrual status as collateral-dependent loans.
Collateral-dependent loans are loans for which the repayment is expected to be providedsubstantially through the operation
or sale of the collateral and the borrower is experiencing financial difficulty.These loans do not share common risk
characteristics and are not included within the collectively evaluated loansfor determining the allowance for credit losses.
Under CECL, for collateral-dependent loans, the Company has adoptedthe practical expedient to measure the allowance
for credit losses based on the fair value of collateral.The allowance for credit losses is calculated on an individual loan
basis based on the shortfall between the fair value of the loan’scollateral, which is adjusted for liquidation costs/discounts,
and amortized costs.If the fair value of the collateral exceeds the amortized cost, no allowance is required.
The Company had no collateral dependent loans which were individually evaluatedat June 30, 2026.The following table
presents the amortized cost basis of collateral dependent loans, which wereindividually evaluated to determine expected
credit losses at December 31, 2025.
(Dollars in thousands)
Real Estate
Total Loans
December 31, 2025:
Commercial real estate
$
378
$
378
Total
$
378
$
378
At June 30, 2026 and December 31, 2025, the Company had one additionalindividually evaluated commercial real estate
loan in the amount of $
3.0
million that was not considered collateral dependent and was accruingin accordance with its
contractual terms.This loan had an allowance of $
0.5
million at June 30, 2026 and December 31, 2025, respectively.The
allowance for this loan was measured using the present value of expected future cashflows, discounted at the loan’s
effective interest rate.Expected cash flows were developed using probability of default and loss given defaultassumptions
specific to the borrower.
The following table summarizes the Company’snonaccrual loans by major categories for the respective periods.
Nonaccrual Loans
Nonaccrual Loans
Total
(Dollars in thousands)
With No Allowance
With An Allowance
Nonaccrual Loans
June 30, 2026
Residential real estate
$
—
64
$
64
Total
$
—
64
$
64
December 31, 2025
Commercial real estate
$
378
—
$
378
Residential real estate
—
104
104
Total
$
378
104
$
482
The Company did not recognize any interest income on nonaccrual loans duringthe quarter or six months ended June 30,
2026 and 2025.
There were no modifications to borrowers experiencing financial difficultyduring
the quarter or six months ended June 30,
2026 and 2025.
22
NOTE 5:STOCK-BASED COMPENSATION
The Company maintains the 2024 Equity and Incentive CompensationPlan (the “Plan”), which permits the grant of equity-
based awards, including restricted stock units (“RSUs”), to employees of theCompany and its subsidiaries.
On June 5, 2026, the Compensation Committee (the “Committee”) ofthe Board of Directors adopted and approved grants
of
8,172
RSUs pursuant to the Plan and a Notice of Discretionary Equity AwardAgreement and related Termsand
Conditions (together, the “RSU AwardAgreement”).The RSUs vest in installments of 33% in 2027, 33% in 2028, and
34% in 2029, subject to the recipient’scontinued service through each vesting date.The grant-date fair value of the RSUs
was $
25.09
per unit, based on the closing price of the Company’scommon stock on the date of grant, resulting in an
aggregate grant-date fair value of approximately $
205
thousand.The RSUs accrue dividend equivalents on unvested units
equal to cash dividends declared on the Company’scommon stock, which are subject to the same vesting conditions as the
underlying RSUs.Upon vesting, the Company will withhold a portion of the shares otherwise issuable tosatisfy the
recipients’ tax withholding obligations.
The Company recognized approximately $
5
thousand of stock-based compensation expense related to this grant duringthe
quarter and six months ended June 30, 2026.Such expense is included in salaries and benefits expense, with a
corresponding increase to additional paid-in capital.At June 30, 2026, unrecognized compensation expense related to
unvested RSUs was approximately $200 thousand, which is expected to berecognized over the remaining vesting period of
approximately three years.The unvested RSUs had no dilutive effect on weighted average shares outstandingfor the
quarter ended June 30, 2026, as determined under the treasury stock method.
RSUs granted on July 24, 2025 vested during the first quarter of 2026, andno unvested awards remained outstanding at
June 30, 2026 related to that grant.The Company recognized $
24
thousand of stock-based compensation expense during
the first six months of 2026 related to those RSUs.
NOTE 6:COMMITMENTS AND CONTINGENT LIABILITIES
Contingent Liabilities
During the second quarter of 2026, the Company identified a loss contingencyin connection with the release of a mortgage
lien. Based on the facts known to management, the Company determinedthat a loss was probable and reasonably estimable
and recorded a pre-tax accrual of $
390
thousand within other noninterest expense for the quarter and six months ended June
30, 2026, in accordance with applicable accounting guidance forloss contingencies.
The Company has submitted a claim to its insurer for recovery.As of June 30, 2026, the Company has not recorded a
receivable for any potential insurance recovery,as the recognition criteria for a gain contingency under generally accepted
accounting principles have not yet been satisfied. Any recovery received fromthe insurer will be recognized in the period
in which it is realized or realizable.
23
NOTE 7: DERIVATIVEINSTRUMENTS
The Company enters into interest rate swaps to manage exposure to changes in interestrates on certain loans. The Company
does not enter into derivative instruments for speculative or trading purposes.
The Company had two swaps designated as fair value hedges of changesin the fair value of specified loans attributable to
changes in the benchmark interest rate (the SOFR overnight indexswap rate) that qualified for the shortcut method under
ASC 815,
Derivatives and Hedging
at June 30, 2026, compared to one such swap at December 31, 2025.Accrued interest
receivable related to the swaps is included in Other Assets or Other Liabilities, as applicable.
Under the terms of the swaps, the Company pays fixed rates and receives variablerates based on SOFR (daily SOFR
compounded in arrears). Because the hedges qualify for the shortcut method,the hedge relationships are assumed to be
perfectly effective, and therefore no hedge ineffectivenessis recognized.
The following table presents the fair value of derivative instruments designatedas hedging instruments as of June 30, 2026
and December 31, 2025:
Balance Sheet
Notional
Fair Value
Fair Value
(Dollars in thousands)
Location
Amount
Asset
Liability
June 30, 2026:
Interest rate swaps (fair value hedge)
Other Assets
$
21,840
292
$
—
Total interest rate swapagreements
$
21,840
292
$
—
Balance Sheet
Notional
Fair Value
Fair Value
(Dollars in thousands)
Location
Amount
Asset
Liability
December 31, 2025:
Interest rate swap (fair value hedge)
Other Liabilities
$
9,988
—
$
22
Total interest rate swapagreements
$
9,988
—
$
22
The following table presents the carrying amount of hedged loans andthe cumulative amount of fair value hedging
adjustments included in the carrying amount of the hedged loans:
Cumulative Fair
Value Hedging
Carrying Amount
Adjustment Included
(Dollars in thousands)
of Hedged Loans
in Carrying Amount
June 30, 2026:
Loans, net of unearned income
$
21,548
$
(292)
December 31, 2025:
Loans, net of unearned income
$
10,010
$
22
The following table presents the effect of fair value hedge accountingon the Consolidated Statements of Earnings for the
quarters and six months ended June 30, 2026 and 2025.Gains and losses on both the interest rate swaps and the hedged
items attributable to the hedged risk are recognized in interest income (loans):
Quarter ended June 30,
Six months ended June 30,
(Dollars in thousands)
2026
2025
2026
2025
Amount of gain (loss) recognized in income
on derivative
$
271
$
—
$
314
$
—
Amount of gain (loss) recognized in income
on hedged item attributable to hedged risk
(271)
—
(314)
—
Net impact on interest income (loans)
$
—
$
—
$
—
$
—
The Company had no derivatives designated as hedging instruments duringthe quarter and six months ended June 30,
2025.
24
The Company is exposed to credit risk in the event of nonperformance bythe counterparty to the interest rate swaps. The
Company manages this risk by transacting with a counterparty that meets establishedcredit standards. The Company does
not anticipate nonperformance by the counterparty.
These derivativesare subject to a master netting arrangement; however,the Company does not offset derivative assets and
liabilities on the Consolidated Balance Sheets.
NOTE 8: FAIR VALUE
Fair ValueHierarchy
“Fair value” is defined by ASC 820,
Fair ValueMeasurements 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 principalmarket (or most advantageous
market in the absence of a principal market) for an asset or liability at the measurementdate.GAAP establishes a fair value
hierarchy for valuation inputs that gives the highest priority to quoted pricesin 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 andliabilities in active markets,
quoted prices for identical or similar assets or liabilities in markets that are notactive, or inputs that are observable for the
asset or liability, either directlyor indirectly.
Level 3—inputs to the valuation methodology are unobservable and reflectthe Company’s own assumptions aboutthe
inputs market participants would use in pricing the asset or liability.
Level changes in fair value measurements
Transfers between levels of the fair value hierarchyare generally recognized at the end of each reporting period.The
Company monitors the valuation techniques utilized for each categoryof financial assets and liabilities to ascertain when
transfers between levels have been affected.The nature of the Company’s financialassets and liabilities generally is such
that transfers in and out of any level are expected to be infrequent. For thesix months ended June 30, 2026, there were no
transfers between levels and no changes in valuation techniques for theCompany’s financial assets and liabilities.
Assets and liabilities measured at fair value on a recurringbasis
Securities available-for-sale
Fair values of securities available for sale were primarily measuredusing 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 quotes, market spreads, cash flows, marketconsensus prepayment speeds, benchmark yields, reported trades
for similar securities, credit information, and the securities’ terms andconditions.On a quarterly basis, management
reviews the pricing received from the third-party pricing services forreasonableness given current market conditions.As
part of its review, managementmay obtain non-binding third-party broker quotes to validate the fairvalue measurements.
In addition, management will periodically submit pricing provided bythe third-party pricing services to another
independent valuation firm on a sample basis.This independent valuation firm will compare the price provided bythe
third-party pricing service with its own price and will review the significant assumptionsand valuation methodologies used
with management.
Interest Rate Swaps
The fair values of the Company’s interestrate swaps are estimated using a discounted cash flow model.The model
considers the present value of expected future cash flows under the termsof the swap and incorporates observable market
data such as: relevant interest rate swap curves, benchmark yield curves(e.g., SOFR-based or other market-based curves),
and forward interest rate expectations over the contractual term of the instruments.Because the significant inputs used in
valuing the interest rate swaps are observable in active markets, the Companyclassifies these instruments within Level 2 of
the fair value hierarchy.
25
The following table presents the balances of the assets and liabilities measured at fairvalue on a recurring basis as of June
30, 2026 and December 31, 2025, 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)
June 30, 2026:
Securities available-for-sale:
Agency obligations
$
52,436
—
52,436
—
Agency MBS
151,096
—
151,096
—
State and political subdivisions
17,212
—
17,212
—
Total securities available-for-sale
220,744
—
220,744
—
Other assets - interest rate swaps
292
—
292
—
Totalassets at fair value
$
221,036
—
221,036
—
December 31, 2025:
Securities available-for-sale:
Agency obligations
$
53,784
—
53,784
—
Agency MBS
161,927
—
161,927
—
State and political subdivisions
17,548
—
17,548
—
Total securities available-for-sale
233,259
—
233,259
—
Totalassets at fair value
$
233,259
—
233,259
—
Other liabilities - interest rate swap
22
—
22
—
Totalliabilities at fair value
$
22
—
22
—
Assets and liabilities measured at fair value on a nonrecurringbasis
Collateral dependent loans
Collateral dependent loans are measured at the fair value of the collateral securingthe loan less estimated selling costs. The
fair value of real estate collateral is determined based on real estate appraisals whichare generally based on recent sales of
comparable properties which are then adjusted for property specific factors.Non-real estate collateral is valued based on
various sources, including third party asset valuations and internally determinedvalues based on cost adjusted for
depreciation and other judgmentally determined discount factors. Collateral dependentloans are classified within Level 3 of
the hierarchy due to the unobservable inputs used in determining their fairvalue such as collateral values and the borrower's
underlying financial condition.
Mortgage servicing rights, net
MSRs, net, included in other assets on the accompanying consolidated balancesheets, 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 fairvalue of
MSRs, the Company engages an independent third party.The independent third party’s valuationmodel calculates the
present value of estimated future net servicing income using assumptions thatmarket 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.Periodically, the Companywill review
broker surveys and other market research to validate significant assumptionsused in the model.The significant
unobservable inputs include prepayment speeds or the constant prepaymentrate (“CPR”) and the weighted average
discount rate.Because the valuation of MSRs requires the use of significant unobservable inputs, all ofthe 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 fairvalue on a nonrecurring basis as of
June 30, 2026 and December 31, 2025, respectively,by caption, on the accompanying consolidated balance sheets and by
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)
June 30, 2026:
Other assets
(2)
$
741
—
—
741
Total assets at fair value
$
741
—
—
741
December 31, 2025:
Loans, net
(1)
$
378
—
—
378
Other assets
(2)
771
—
—
771
Total assets at fair value
$
1,149
—
—
1,149
(1)
Loans considered collateral dependent under ASC 326
Financial Instruments - Credit Losses
.
(2)
Represents MSRs, net, carried at lower of cost or estimatedfair value.
Quantitative Disclosures for Level 3 Fair ValueMeasurements
At June 30, 2026 and December 31, 2025, the Company had no Level 3assets measured at fair value on a recurring basis.
For Level 3 assets measured at fair value on a non-recurring basis at June 30, 2026and December 31, 2025, the significant
unobservable inputs used in the fair value measurements are presentedbelow.
Range of
Weighted
Carrying
Significant
Unobservable
Average
(Dollars in thousands)
Amount
Valuation Technique
Unobservable Input
Inputs
of Input
June 30, 2026:
Mortgage servicing rights, net
$
741
Discounted cash flow
Prepayment speed or CPR
6.0
-
7.1
%
6.1
%
Discount rate
9.5
-
11.5
9.5
December 31, 2025:
Collateral dependent loans
$
378
Appraisal
Appraisal discounts
10.0
-
10.0
%
10.0
%
Mortgage servicing rights, net
771
Discounted cash flow
Prepayment speed or CPR
6.8
-
8.4
8.2
Discount rate
9.5
-
11.5
9.5
Fair Valueof 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 toestimate that value. The assumptions used in the
estimation of the fair value of the Company’sfinancial instruments are explained below.Where quoted market prices are
not available, fair values are based on estimates using discounted cash flowanalyses. Discounted cash flows can be
significantly affected by the assumptions used, includingthe discount rate and estimates of future cash flows. The
following fair value estimates cannot be substantiated by comparison toindependent markets and should not be considered
representative of the liquidation value of the Company’sfinancial instruments, but rather are good-faith estimates of the fair
value of financial instruments held by the Company.ASC 825 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements.
The following methods and assumptions were used by the Company in estimatingthe fair value of its financial instruments:
Loans, net
Fair values for loans were calculated using discounted cash flows. The discountrates reflected current rates at which similar
loans would be made for the same remaining maturities. Expected futurecash flows were projected based on contractual
cash flows, adjusted for estimated prepayments.The fair value of loans was measured using an exit price notion.
27
Loans held for sale
Loans held for sale are recorded at the lower of cost or fair value.Fair values 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’sfinancial
instruments at June 30, 2026 and December 31, 2025 are presented below.This table excludes financial instruments
recorded at fair value on a recurring basis, and financial instruments forwhich the carrying amount approximates fair value.
Financial assets for which fair value approximates carrying value included cashand 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 theseproducts
having no stated maturity.Additionally, financial liabilities forwhich fair value approximates carrying value included
overnight borrowings such as federal funds purchased and securities sold underagreements to repurchase.
The following table summarizes our fair value estimates:
Fair Value Hierarchy
Carrying
Estimated
Level 1
Level 2
Level 3
(Dollars in thousands)
amount
fair value
inputs
inputs
Inputs
June 30, 2026:
Financial Assets:
Loans, net (1)
$
573,003
$
559,934
—
—
$
559,934
Loans held for sale
716
730
—
730
—
Financial Liabilities:
Time Deposits
$
184,287
$
183,536
—
183,536
$
—
December 31, 2025:
Financial Assets:
Loans, net (1)
$
558,178
$
542,382
—
—
$
542,382
Loans held for sale
172
179
—
179
—
Financial Liabilities:
Time Deposits
$
176,801
$
176,137
—
176,137
$
—
(
1) Represents loans, net of allowance for credit losses.The fair value of loans was measured using anexit price notion.
28
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTSOF
OPERATIONS
General
Auburn National Bancorporation, Inc. (the “Company”) is a bank holdingcompany registered with the Board of Governors
of the Federal Reserve System (the “Federal Reserve”) under the Bank HoldingCompany Act of 1956, as amended (the
“BHC Act”). The Company was incorporated in Delaware in 1990, and in1994 it succeeded its Alabama predecessor as the
bank holding company controlling AuburnBank, an Alabama state memberbank with its principal office in Auburn,
Alabama (the “Bank”). The Company and its predecessor have controlledthe Bank since 1984.As a bank holding
company, the Companymay diversify into a broader range of financial services and other business activities thancurrently
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 businessprimarily 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 theFederal Reserve and the Alabama Superintendent of Banks (the “Alabama
Superintendent”).The Bank has been a member of the FHLB of Atlanta since 1991. Certain of the statementsmade in this
discussion and analysis and elsewhere, including information incorporatedherein by reference to other documents, are
“forward-looking statements” as more fully described under “Special CautionaryNotice Regarding Forward-Looking
Statements” below.
The following discussion and analysis is intended to provide a better understandingof 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 condensedconsolidated financial statements and related
notes for the quarter and six months ended June 30, 2026 and 2025, as well as the informationcontained in our Annual
Report on Form 10-K for the year ended December 31, 2025 and our QuarterlyReports on Form 10-Q.
Special Cautionary Notice Regarding Forward-Looking Statements
Variousof the statements made herein under the captions “Business”, “Properties”,“Risk Factors”, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations”, “Quantitativeand Qualitative Disclosures
about Market Risk”, and elsewhere, are “forward-looking statements” withinthe meaning and protections of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,as amended (the “Exchange Act”).
Forward-looking statements include statements with respect to our beliefs, plans,objectives, goals, expectations,
anticipations, assumptions, estimates, intentions and future performance,and involve known and unknown risks,
uncertainties and other factors, which may be beyond our control,and which may cause the actual results, performance,
achievements or financial condition of the Company to be materially differentfrom future results, performance,
achievements or financial condition expressed or implied by such forward-lookingstatements.Youshould not expect us to
update any forward-looking statements.
All statements,other than statements of historical fact, could be forward-lookingstatements.Youcan identify these
forward-looking statements through our use of words such as “may”,“will”, “anticipate”,“assume”, “should”,“indicate”,
“would”,“believe”,“contemplate”, “expect”,“estimate”, “continue”,“designed”, “plan”, “point to”, “project”, “could”,
“intend”,“target”,“seek”, 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 conditionsand changes, foreign, domestic and locally,
including inflation, seasonality,natural disasters such as hurricanes, tornados,floods and droughts, epidemics or
pandemics, supply chain disruptions and changes in consumer behaviors;
●
the effects of war, other conflicts orattacks, acts of terrorism, trade restrictions, tariffs, sanctions, thevalue of the
U.S. dollar against other currencies, disruptions of supply chains includingenergy supplies, or other events that
may affect general economic conditions, and consumerand business confidence;
29
●
governmental fiscal and monetary policies and changes, includingtaxes, the amount of federal deficit spending
and the debt to fund such spending, changes in monetary policies, includingchanges in the Federal Reserve’s
target federal funds rate and in the Federal Reserve’sholdings of securities through quantitative tightening or
easing; and the duration that the Federal Reserve will keep its targeted federalfunds rates at or above current target
ranges to meet its long term inflation target of 2%;
●
changes in market interest rates and the shape of the yield curve on changes in savings,deposit and payment
behaviors, the levels, composition and costs of deposits, loan demand and mortgageloan originations, and the
values and liquidity of and interest-sensitive assets and liabilities;
●
increases in market interest rates that may result in unrealized losses on our securities portfolio,which adversely
affect our stockholders’ equity for financial reportingpurposes and our tangible equity;
●
the effects of competition from a wide variety of local, regional,national and other providers of financial,
investment and insurance services, including the disruptive effectsof financial technology and products, including
stablecoin and other digital assets businesses, which are not subject to the sameregulation, including capital and
liquidity requirements, internal controls, and supervision and examination,as the Company and the Bank, and
competition from credit unions, which are not subject to federal income taxation;
●
more permissive regulation and/or enforcement of digital assets, such as cybercurrency and stablecoins (including
rewards or other forms of payments functionally similar to interest), thatincreases competition to banks, increases
risks to the payment systems, increases risks of fraud and theft of digital assets and their effectson customers other
financial institutions, including our counterparties, and confidencein the financial system, generally;
●
changes in banking, securities and tax laws, regulations and rules and theirapplication by the regulators, including
capital and liquidity requirements, greater nonbank participation in theFederal Reserve payments system, and in
the coverage and cost of FDIC deposit insurance;
●
legislative, executive branch and regulatory changes, including changesin policy, leadership and personnel,
including reductions in the number and experience of personnel, at the bankand securities regulators and the
CFPB, and the uncertain effects of all these, including the costs andbenefits of such changes;
●
the effects of the potential privatization and changes to Fannie Maeand Freddie Mac and its purchases of
mortgage-backed securities on the mortgage markets and to us as an originator,seller and servicer of residential
mortgage loans;
●
the assumptions, judgments and estimates made by the Company,including those used in the Company’s CECL
models to establish our allowance for credit losses and asset impairments, as well as differencesin, and changes to,
economic, market and credit conditions, including changes in employmentlevels and payment behaviors from
those used in our CECL models and loan portfolio reviews;
●
changes in accounting pronouncements and interpretations;
●
changes in borrower credit risks;
●
changes in the availability and cost of credit and capital in the financial markets, andthe types of instruments that
may be included as capital for regulatory purposes;
●
changes in our technology or products that may be more difficult,costly and risky, or less effectivethan
anticipated;
●
threats of potential cyber-attacks and data breaches, in constantly changingforms and increasing sophistication,
including through the use of artificial intelligence and state sponsorshipof the attacks;
●
the estimates that our future taxable income could be inaccurate, and if lower taxableincome is realized from our
operations, the amount of our deferred tax assets that we anticipate will be reduced;
30
●
our future earnings and “eligible retained earnings” over rolling four calendarquarter periods may limit our
dividends, share repurchases and discretionary bonuses; and
●
other factors and risks described under “Risk Factors” herein and in any of oursubsequent reports that we make
with the Securities and Exchange Commission (the “Commission” or“SEC”) under the Exchange Act.
All written or oral forward-looking statements that we make or are attributableto us are expressly qualified in their entirety
by this cautionary notice.We have no obligationand 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 whichsuch statements otherwise are made.
Summary of Results of Operations
Quarter ended June 30,
Six months ended June 30,
(Dollars in thousands, except per share amounts)
2026
2025
2026
2025
Net interest income (a)
$
7,995
$
7,411
$
15,827
$
14,523
Less: tax-equivalent adjustment
107
67
206
134
Net interest income (GAAP)
7,888
7,344
15,621
14,389
Noninterest income
878
789
1,771
1,536
Total revenue
8,766
8,133
17,392
15,925
Provision for credit losses
(248)
113
(324)
103
Noninterest expense
6,105
5,702
12,006
11,582
Income tax expense
611
485
1,214
877
Net earnings
$
2,298
$
1,833
$
4,496
$
3,363
Basic and diluted earnings per share
$
0.66
$
0.52
$
1.29
$
0.96
(a) Tax-equivalent.See "Table 1 - Explanation of Non-GAAP Financial Measures."
Financial Summary
The Company’s net earnings were $4.5million for the first six months of 2026, a 34% increase compared to $3.4 million
for the first six months of 2025.Basic and diluted earnings per share were $1.29 per share for the first six months of 2026,
compared to $0.96 per share for the first six months of 2025.
Net interest income (tax-equivalent) was $15.8 million for the first six monthsof 2026, a 9% increase compared to $14.5
million for the first six months of 2025.This increase was due to growth in average interest-earning assets and
improvements in our net interest margin.The Company’s net interest margin(tax-equivalent) was 3.31% for the first six
months of 2026 compared to 3.13% for the first six months of 2025.This increase was primarily due to higher yields on
interest-earning assets, a decrease in our cost of interest-bearing deposits, anda more favorable asset mix.Average loans
were approximately $580.2 million in the first six months of 2026, comparedto $563.1 million in the first six months of
2025.
The Company recorded a negative provision for credit losses of $(324) thousandin the first six months of 2026, compared
to a charge to provision for credit losses of $103 thousand in the first sixmonths of 2025.The provision for credit losses is
affected by changes in overall balance and composition of our loanportfolio and unfunded commitments, our internal
assessment of the credit quality of the loan portfolio, our expectations about futureeconomic conditions, and net charge-
offs.
Noninterest income was $1.8 million in the first six months of 2026, comparedto $1.5 million in the first six months of
2025.The increase was primarily due to increased mortgage lending income and bank-ownedlife insurance (“BOLI”)
income related to non-taxable death benefits received during thesecond quarter of 2026.
Noninterest expense was $12.0 million in the first six months of 2026, comparedto $11.6 million in the first six months of
2025.The increase was primarily due to a $0.4 million loss contingency accrual recorded in othernoninterest expense
during the second quarter of 2026, partially offset by a decrease in netoccupancy and equipment expense.See “Note 6 –
Commitments and Contingent Liabilities” to the accompanying consolidatedfinancial statements.
31
The provision for income tax expense was $1.2 million for the first six monthsof 2026 compared to $0.9 million for the
first six months of 2025.The Company’s effective taxrate for the first six months of 2026 was 21.26%, compared to
20.68% in the first six months of 2025.The Company’s effective incometax rate is principally affected by tax-exempt
earnings from the Company’s investmentsin municipal securities and loans, BOLI, and New Markets TaxCredits
(“NMTCs”).
The Company paid cash dividends of $0.54 per share in the first six months of 2026and 2025.At June 30, 2026, the
Bank’s regulatory capital ratios werewell above the minimum amounts required to be “well capitalized” under current
regulatory standards with a total risk-based capital ratio of 17.24%,a tier 1 leverage ratio of 10.65% and a common equity
tier 1 (“CET1”) ratio of 16.26% at June 30, 2026.See “Balance Sheet Analysis – Capital Adequacy.”
For the second quarter of 2026, net earnings were $2.3 million, or $0.66per share, compared to $1.8 million, or $0.52 per
share, for the second quarter of 2025, a 27% increase in earnings per share.Net interest income (tax-equivalent) was $8.0
million for the second quarter of 2026 compared to $7.4 million for thesecond quarter of 2025.The increase was due to
growth in average interest-earning assets and improvements in our net interestmargin.The Company’s net interest margin
(tax-equivalent) was 3.33% in the second quarter of 2026 comparedto 3.18% in the second quarter of 2025.The increase
was primarily due to higher yields on interest-earning assets, a more favorableasset mix, and a decrease in our cost of
interest-bearing deposits.The Company recorded a negative provision for credit losses of $(248) thousandin the second
quarter of 2026, compared to a provision for credit losses of $113thousand in the second quarter of 2025.Noninterest
income was $0.9 million for the second quarter of 2026, comparedto $0.8 million for the second quarter of 2025, primarily
reflecting an increase in BOLI income from non-taxable death benefitsreceived during the second quarter of 2026.
Noninterest expense was $6.1 million in the second quarter of 2026, comparedto $5.7 million in the second quarter of
2025, with the increase primarily due to the $0.4 million loss contingency accrualrecorded in other noninterest expense.
Income tax expense was $0.6 million for the second quarter of 2026 comparedto $0.5 million for the second quarter of
2025.The Company’s effective taxrate for the second quarter of 2026 was 21.00%, compared to 20.92% in the second
quarter of 2025.
CRITICAL ACCOUNTING POLICIES
The accounting principles we follow and our methods of applyingthese principles conform with U.S. GAAP and with
general practices within the banking industry.There have been no significant changes to our Critical AccountingPolicies as
described in our Form 10-K as of and for the year ended December 31, 2025.
RESULTSOF OPERATIONS
Average BalanceSheet and Interest Rates
Six months ended June 30,
2026
2025
Average
Yield/
Average
Yield/
(Dollars in thousands)
Balance
Rate
Balance
Rate
Loans and loans held for sale
$
580,231
5.66%
$
563,086
5.49%
Securities
253,550
1.96%
277,026
1.97%
Federal funds sold
26,925
3.56%
26,282
4.38%
Interest-bearing bank deposits
104,452
3.71%
68,777
4.44%
Total interest-earningassets
965,158
4.42%
935,171
4.34%
Deposits:
NOW
224,944
1.26%
204,069
1.37%
Savings and money market
265,739
0.87%
248,233
0.93%
Time deposits
180,523
3.08%
187,763
3.27%
Total interest-bearingdeposits
671,206
1.60%
640,065
1.76%
Short-term borrowings
—
—
55
3.67%
Total interest-bearingliabilities
671,206
1.60%
640,120
1.76%
Net interest income and margin (tax-equivalent)
$
15,827
3.31%
$
14,523
3.13%
32
Net Interest Income and Margin
Net interest income (tax-equivalent) was $15.8 million for the first six monthsof 2026, a 9% increase compared to $14.5
million for the first six months of 2025.This increase was due to growth in average interest-earning assets and
improvements in our net interest margin.Average interest-earningassets were $965.2 million during the first six months of
2026, a 3% increase compared to $935.2 million during the first six months of 2025.The Company’s net interest margin
(tax-equivalent) was 3.31% for the first six months of 2026 compared to 3.13%for the first six months of 2025.This
increase was primarily due to higher yields on interest-earning assets, a morefavorable asset mix, and a decrease in our cost
of interest-bearing deposits.The Federal Reserve announced a 25-basis point reduction in the targetrange for the federal
funds rate in each of September, Octoberand December 2025.At June 30, 2026, the Federal Reserve’s targetfederal funds
rate range remained at 3.50% to 3.75%, which the Federal Reserve reaffirmedat its July 29, 2026 meeting.
The tax-equivalent yield on total interest-earning assets increased by8 basis points to 4.42% in the first six months of 2026
compared to 4.34% in the first six months of 2025.This increase was primarily due to higher yields on loans and a more
favorable asset mix.
The cost of interest-bearing liabilities decreased 16 basis points in the first six monthsof 2026 to 1.60%, compared to
1.76% in the first six months of 2025, following decreases to the federalfunds rate.
The Company continues to deploy various asset liability managementstrategies to manage its risks from interest rate
fluctuations.Deposit and loan pricing remain competitive in our markets.We believe that interest rates,inflation and
monetary policy may continue to fluctuate in 2026 and may be challengingas a result.Our ability to compete and manage
our deposit costs until our interest-earning assets reprice and we generatenew loans with current market interest rates will
be important to our net interest margin during the remainder of2026.
Provision for Credit Losses
The Company recorded a negative provision for credit losses of $(324) thousandin the first six months of 2026, compared
to a charge to provision for credit losses of $103 thousand in the first sixmonths of 2025.For the second quarter of 2026,
the Company recorded a negative provision for credit losses of $(248) thousand,compared to a charge to provision for
credit losses of $113 thousand in the second quarterof 2025.The provision for credit losses is affected by changes in
overall balance and composition of our loan portfolio and unfunded commitments,our internal assessment of the credit
quality of the loan portfolio, our expectations about future economicconditions, and net charge-offs.
Our allowance for credit losses reflects an amount we believe appropriate, basedon our allowance assessment
methodology, to adequatelycover all expected credit losses as of the date the allowance is determined.At June 30, 2026,
the Company’s allowance for creditlosses was $6.6 million, or 1.14% of total loans, compared to $7.2 million, or 1.27% of
total loans, at December 31, 2025.The decrease from December 31, 2025 was primarily due to refinementsin the
Company’s calculation ofcurrent expected credit losses (“CECL”).During the first quarter of 2026, the Company
established a new loan segment within its CECL calculation for municipal loans, whichreduced the allowance for credit
losses due to lower expected credit losses associated with these loans.Prior to this change, municipal loans were included
in the commercial and industrial loan segment for CECL.
33
Noninterest Income
Quarter ended June 30,
Six months ended June 30,
(Dollars in thousands)
2026
2025
2026
2025
Service charges on deposit accounts
$
153
$
152
$
306
$
307
Mortgage lending income
132
131
304
224
Bank-owned life insurance
171
101
279
206
Other
422
405
882
799
Total noninterest income
$
878
$
789
$
1,771
$
1,536
The Company’s mortgagelending income includes income from the (1) origination and sale of mortgageloans and (2)
servicing of mortgage loans.Origination income, net, is comprised of gains or losses from the sale ofthe mortgage loans
originated, origination fees, underwriting fees, and other fees associated withthe 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 retainthe associated MSRs when the loan is sold.
MSRs are recognized based on the fair value of the servicing right onthe date the corresponding mortgage loan is sold.
The Company has elected to measure its MSRs under the amortizationmethod.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’saggregate 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 ina decrease in the fair value of MSRs.
The following table presents a breakdown of the Company’smortgage lending income.
Quarter ended June 30,
Six months ended June 30,
(Dollars in thousands)
2026
2025
2026
2025
Origination income
$
62
$
49
$
157
$
57
Servicing fees, net
70
82
147
167
Total mortgage lendingincome
$
132
$
131
$
304
$
224
The Company’s mortgagelending income typically fluctuates as mortgage interest rates change.Origination income
increased due to increased mortgage lending demand in our primary marketarea, which was partially offset by a decrease
in servicing fees, net of related amortization expense.
Income from bank-owned life insurance increased due to non-taxabledeath benefits received during the second quarter of
2026.
Noninterest Expense
Quarter ended June 30,
Six months ended June 30,
(Dollars in thousands)
2026
2025
2026
2025
Salaries and benefits
$
3,267
$
3,258
$
6,637
$
6,568
Net occupancy and equipment
552
604
1,127
1,318
Professional fees
327
385
776
672
Other
1,959
1,455
3,466
3,024
Total noninterest expense
$
6,105
$
5,702
$
12,006
$
11,582
The increase in other noninterest expense was primarily due to a $0.4 millionloss contingency accrual recorded during the
second quarter of 2026 related to the release of a mortgage lien in connectionwith a commercial lending relationship.The
Company has submitted a claim to its insurer for recovery,but no insurance recovery has been recognized in the second
quarter 2026 results.See “Note 6 – Commitments and Contingent Liabilities” to the accompanying consolidatedfinancial
statements.
34
The decrease in net occupancy and equipment expense was primarily dueto increased leasing income associated with the
Company’s headquarters.
The increase in professional fees for the first six months of 2026 was primarily dueto an increase in legal expenses.
Income TaxExpense
Income tax expense was $1.2 million for the first six months of 2026, comparedto $0.9 million for the first six months of
2025.The increase was primarily due to the level of pre-tax earnings.The Company’s effective taxrate was 21.26% for
the first six months of 2026, compared to 20.68% for the first six months of 2025.The Company’s effectiveincome tax
rate is affected principally by tax-exempt earnings from the Company’sinvestments in municipal securities and loans,
BOLI, and NMTCs.
BALANCE SHEET ANALYSIS
Securities
Securities available-for-sale were $220.7 million at June 30, 2026,compared to $233.3 million at December 31, 2025.This
decrease reflects a decrease in the amortized cost basis of securities available-for-sale, primarily due to normal paydowns
and maturities, of $11.8 million and a decreasein the fair value of securities available-for-sale of $0.8 million.The average
annualized tax-equivalent yields earned on total securities were 1.96%in the first six months of 2026 compared to 1.97% in
the first six months of 2025.
Loans
2026
2025
Second
First
Fourth
Third
Second
(In thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Commercial and industrial
$
27,754
31,841
33,887
29,647
32,027
Municipal
35,020
35,703
24,513
25,455
27,746
Construction and land development
58,855
60,248
56,436
79,045
93,820
Commercial real estate
333,525
334,602
325,521
298,681
282,868
Residential real estate
114,808
111,143
116,554
116,279
117,160
Consumer installment
9,919
8,524
8,421
8,805
9,093
Total loans
$
579,881
582,061
565,332
557,912
562,714
Total loans were $579.9million at June 30, 2026, compared to $565.3 million at December 31,2025.Three loan categories
represented the majority of the loan portfolio at June 30, 2026: commercialreal estate (58%), residential real estate (20%),
and construction and land development (10%).Approximately 17% of the Company’s commercialreal estate loans were
classified as owner-occupied at June 30, 2026.
During the first quarter of 2026, the Company established a separate municipalloan segment following growth in these
balances.Prior to this change in presentation, municipal loans were included in thecommercial and industrial loan
segment.Prior period amounts have been revised to conform with the current period presentation.
Within the residential real estate portfolio segment,the Company had junior lien mortgages of approximately $11.7million,
or 2% of total loans,and $12.3 million, or 2%, of total loans at June 30, 2026 and December 31, 2025, respectively.For
residential real estate mortgage loans with a consumer purpose, the Companyhad no loans that required interest only
payments at June 30, 2026 and December 31, 2025. The Company’sresidential real estate mortgage portfolio does not
include any option or hybrid ARM loans, subprime loans, or any materialamount of other consumer mortgage products
which are generally viewed as high risk.
The average yield earned on loans and loans held for sale was 5.66% in the first six monthsof 2026 and 5.49% in the first
six months of 2025.
35
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 levels of market interest rates, supplychain disruptions, commercial office
occupancy levels, housing supply shortages, and effects ofinflation on our borrowers’ cash flows, real estate market sales
volumes and liquidity,valuations used in making loans and evaluating collateral, availability andcost of financing
properties, real estate industry concentrations, competitive pressures froma wide range of other lenders, deterioration in
certain credits, interest rate fluctuations, reduced collateral values ornon-existent collateral, title defects, inaccurate
appraisals, financial deterioration of borrowers, fraud, and any violationof applicable laws and regulations. Various
projects financed earlier that were based on lower interest rate assumptions thancurrently in effect may not be as profitable
or successful at the higher interest rates currently in effect and whichmay exist in the future.
The Company attempts to reduce these economic and credit risks through its loan-to-valueguidelines 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’scredit 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 havingsecured loan relationships in excess of
approximately $23.5 million.Furthermore, we have an internal limit for aggregate credit exposure (loansoutstanding plus
unfunded commitments) to a single borrower of $21.2 million. Our loan policyrequires that the Loan Committee of the
Board of Directors approve any loan relationships that exceed this internallimit.At June 30, 2026, the Bank had no loan
relationships exceeding our internal limit.
We periodicallyanalyze our commercial and industrial and commercial real estate loan portfoliosto determine if a
concentration of credit risk exists in any one or more industries. Weuse classification systems broadly accepted by the
financial services industry in order to categorize our commercial borrowers.Loans to borrowers in each of the following
classes exceeded 25% of the Bank’stotal risk-based capital at June 30, 2026 (and related balances at December31, 2025).
June 30,
December 31,
(Dollars in thousands)
2026
2025
Multifamily residential properties
$
61,606
$
51,516
Hotel/motel
54,455
47,870
Lessors of 1-4 family residential properties
53,460
56,773
Shopping centers/strip malls
42,363
42,444
Allowance for Credit Losses
Our allowance for credit losses was approximately $6.6 million and $7.2million at June 30, 2026 and December 31, 2025,
respectively, which ourmanagement believed to be adequate at each of the respective dates.Our allowance for credit
losses as a percentage of total loans was 1.14% at June 30, 2026, comparedto 1.27% at December 31, 2025.
During the first quarter of 2026, the Company refined its loan portfoliosegmentation to separately identify municipal loans,
which were previously included within commercial and industrial loans, dueto their recent growth and distinct risk
characteristics.The allowance for credit losses related to municipal loans is determined using a discountedcash flow
methodology incorporating probability of default and loss given default assumptionsderived from external data sources.
As a result of this refinement, the total allowance decreased due to the lowerexpected credit losses associated with these
loans.This refinement represents a change in accounting estimate and is accounted for prospectively.No adjustments
were made to prior periods.
Our CECL models rely largely on projections of macroeconomicconditions to estimate future credit losses.
Macroeconomic factors used in the model include the Alabama unemploymentrate, the national commercial real estate
price index and the Alabama gross state product. Projections of thesemacroeconomic factors, obtained from an
independent third party,are utilized to predict quarterly rates of default.
Under the CECL methodology the allowance for credit losses is measured ona collective basis for pools of loans with
similar risk characteristics, and on an individual basis for loans that do not sharesimilar risk characteristics with the
collectively evaluated pools.Losses are predicted over a period of time determined to be reasonable andsupportable, and
at the end of the reasonable and supportable period losses are revertedto long term historical averages. At June 30, 2026,
reasonable and supportable periods of 4 quarters were utilizedfollowed by an 8-quarter straight line reversion period to
long term averages.
36
The allowance for credit losses by loan category for the second quarter of 2026 and the previousfour quarters is presented
below.
2026
2025
Second Quarter
First Quarter
Fourth Quarter
Third Quarter
Second Quarter
(Dollars in thousands)
Amount
%*
Amount
%*
Amount
%*
Amount
%*
Amount
%*
Commercial and industrial
$
542
6.0
$
686
5.5
$
1,129
10.3
$
1,126
9.9
$
1,212
10.6
Municipal
150
4.8
154
6.1
n/a
n/a
n/a
n/a
n/a
n/a
Construction and land
development
675
10.1
694
10.4
1,304
10.0
1,445
14.2
1,613
16.7
Commercial real estate
3,959
57.6
4,056
57.4
3,777
57.6
3,145
53.5
3,151
50.3
Residential real estate
1,094
19.8
1,029
19.1
837
20.6
836
20.8
866
20.8
Consumer installment
166
1.7
157
1.5
129
1.5
139
1.6
123
1.6
Total allowance forcredit losses
$
6,586
$
6,776
$
7,176
$
6,691
$
6,965
* Loan balance in each category expressed as a percentage of total loans.
A summary of the changes in the allowance for credit losses and certainasset quality ratios for the second quarter of 2026
and the previous four quarters is presented below.
2026
2025
Second
First
Fourth
Third
Second
(Dollars in thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Balance at beginning of period
$
6,776
7,176
6,691
6,965
6,750
Charge-offs:
Commercial and industrial
—
(5)
(39)
—
(3)
Commercial real estate
—
(378)
(296)
—
—
Residential real estate
—
—
—
—
(6)
Consumer installment
(3)
(33)
—
(87)
(9)
Total charge-offs
(3)
(416)
(335)
(87)
(18)
Recoveries
25
14
30
9
67
Net (charge-offs) recoveries
22
(402)
(305)
(78)
49
Provision for credit losses - Loans
(212)
2
790
(196)
166
Ending balance
$
6,586
6,776
7,176
6,691
6,965
as a % of loans
1.14
%
1.16
1.27
1.20
1.24
as a % of nonperforming loans
10,291
%
6,643
1,489
6,434
2,306
Net charge-offs (recoveries) as % of averageloans (a)
(0.02)
%
0.28
0.22
0.06
(0.03)
(a) Net charge-offs (recoveries) are annualized.
Net charge-offs were $380 thousand for thefirst six months of 2026, compared to net charge-offsof $16 thousand for the
first six months of 2025. Net charge-offs inthe first six months of 2026 were primarily related to one nonperforming
collateral-dependent loan.
Nonperforming Assets
At June 30, 2026 and December 31, 2025, the Company had $0.1 millionand $0.5 million, respectively,in nonperforming
assets.
37
The table below provides information concerning total nonperformingassets and certain asset quality ratios for the second
quarter of 2026 and the previous four quarters.
2026
2025
Second
First
Fourth
Third
Second
(Dollars in thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Nonperforming assets:
Nonaccrual loans
$
64
102
482
104
302
Total nonperformingassets
$
64
102
482
104
302
as a % of loans and other real estate owned
0.01
%
0.02
0.09
0.02
0.05
as a % of total assets
0.01
%
0.01
0.05
0.01
0.03
Nonperforming loans as a % of total loans
0.01
%
0.02
0.09
0.02
0.05
Accruing loans 90 days or more past due
$
—
208
—
77
—
The table below provides information concerning the composition ofnonaccrual loans for the second quarter of 2026 and
the previous four quarters.
2026
2025
Second
First
Fourth
Third
Second
(In thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Nonaccrual loans:
Commercial real estate
—
—
378
—
119
Residential real estate
64
102
104
104
183
Total nonaccrualloans
$
64
102
482
104
302
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 notexpected or (2) the principal or interest is
90 days or more past due, unless the loan is both well-secured and in the process ofcollection.
The Company had no loans 90 days or more past due and still accruing at June 30, 2026 or December31, 2025.
The Company had no other real estate owned at June 30, 2026 or December 31, 2025.
Deposits
(In thousands)
2026
2025
Noninterest-bearing demand
$
258,351
268,026
NOW
219,623
214,827
Money market
234,874
170,352
Savings
91,183
92,920
Certificates of deposit under $250,000
101,932
97,458
Certificates of deposit and other time deposits of $250,000 or more
82,355
79,343
Total deposits
$
988,318
922,926
38
Total deposits were $988.3million at June 30, 2026, compared to $922.9 million at December 31, 2025.The increase was
primarily due to fluctuations in reciprocal customer deposits retained on balancesheet and growth in money market account
balances, partially offset by lower noninterest-bearingdemand deposits.Noninterest-bearing deposits were 26% of total
deposits at June 30, 2026, compared to 29% of total deposits at December 31,2025.The Company had no brokered
deposits at June 30, 2026 and December 31, 2025.
The average rate paid on total interest-bearing deposits was 1.60% in the first six monthsof 2026, compared to 1.76% in
the first six months of 2025.
The Bank participates in the Certificates of Deposit Account Registry Service (the“CDARS”) and the Insured Cash Sweep
product (“ICS”), which provide for reciprocal (“two-way”) transactionsamong banks facilitated by IntraFi for the purpose
of improving the FDIC insurance coverage for our depositors.The Company had reciprocal deposits on its balance sheet of
$82.3 million at June 30, 2026, compared to $9.8 million at December 31,2025.At June 30, 2026, the Company had no
reciprocal deposits sold, compared to $79.7 million at December 31, 2025.
At June 30, 2026, estimated uninsured deposits totaled $380.4 million, or38% of total deposits, compared to $392.9
million, or 43% of total deposits at December 31, 2025.Uninsured amounts are estimated based on the portion of account
balances that exceed FDIC insurance limits.The Bank’s uninsured deposits at June30, 2026 and December 31, 2025
include approximately $217.1 million and $228.7 million, respectively,of deposits of state, county and local governments
that are collateralized by securities.Deposits of state, county and local governments were 57% and 58%of our estimated
uninsured deposits at June 30, 2026 and December 31, 2025, respectively.
The estimated uninsured time deposits by maturity as of June 30,2026 are presented below.
(Dollars in thousands)
June 30, 2026
Maturity of:
3 months or less
$
23,194
Over 3 months through 6 months
44,789
Over 6 months through 12 months
11,319
Over 12 months
3,053
Total estimated uninsuredtime deposits
$
82,355
Other Borrowings and AvailableCredit
The Company had no long-term debt at June 30, 2026 and December 31, 2025.The Bank utilizes short and long-term non-
deposit borrowings from time to time. Short-term borrowings generallyconsist 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 $73.2 million and $65.2 million, with no federal fund borrowingsoutstanding at June 30, 2026, and December
31, 2025, respectively.The Bank is eligible to borrow from the FRB’s discountwindow, but had nosuch borrowings at
June 30, 2026 and December 31, 2025.
The Bank is a member of the FHLB-Atlanta and has borrowed from theFHLB-Atlanta, and in the future may borrow from
time to time under the FHLB-Atlanta’sadvance program.FHLB-Atlanta advances include both fixed and variable terms
and provide various maturities, and generally are secured by eligibleassets.The Bank had no borrowings under FHLB-
Atlanta’s advance programat June 30, 2026 and December 31, 2025.At those dates, the Bank had $307.9 million and
$304.9 million, respectively,of available lines of credit at the FHLB-Atlanta.
CAPITAL ADEQUACY
At June 30, 2026, the Company’s consolidatedstockholders’ equity (book value) was $93.9 million, or $26.91 per share,
compared to $92.1 million, or $26.35 per share, at December 31, 2025.The increase from December 31, 2025 was
primarily driven by net earnings of $4.5 million, which was partially offsetby cash dividends paid of $1.9 million, an other
comprehensive loss of $0.6 million due to an increase in unrealized losses on securitiesavailable-for-sale, net of tax, and
stock repurchases of $0.2 million.Unrealized losses do not affect the Bank’scapital for regulatory capital purposes.The
Company’s equity-to-assets ratiowas 8.65% at June 30, 2026, compared to 9.04% at December 31, 2025.The decrease in
the equity-to-assets ratio was due primarily to balance sheet growthfrom retaining all reciprocal deposits on balance sheet
at June 30, 2026.
39
The Company paid cash dividends of $0.54 per share for both the first six monthsof 2026 and the first six months of 2025.
The Federal Reserve has treated us as a “small bank holding company” under the Federal Reserve’sSmall Bank Holding
Company Policy.Accordingly, our capital adequacyis evaluated at the Bank level, and not for the Company and its
consolidated subsidiaries.The Bank’s tier 1 leverage ratio was 10.65%,CET1 risk-based capital ratio was 16.26%, tier 1
risk-based capital ratio was 16.26%, and total risk-based capital ratio was 17.24%at June 30, 2026.These ratios exceed the
minimum regulatory capital percentages of 5.0% for tier 1 leverageratio, 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 ratioto be considered “well capitalized.”
The Basel III regulatory capital framework applicable to us includes a “capitalconservation buffer” of CET1 capital.A
banking organization with a capital conservation bufferof 2.5% or less is subject to limitations on “distributions” from
“eligible retained earnings”, including dividend payments, share repurchasesand certain discretionary bonus payments.At
June 30, 2026, the Bank had a capital conservation bufferof 9.24%.
MARKET AND LIQUIDITY RISK MANAGEMENT
Management’s objective is to manageassets and liabilities to provide a satisfactory,consistent level of profitability within
the framework of established liquidity,loan, investment, borrowing, and capital policies. The Bank’sAsset Liability
Management Committee (“ALCO”) is charged with theresponsibility of monitoring these policies, which are designed to
ensure an acceptable asset/liability composition. Twocritical areas of focus for ALCO are interest rate risk and liquidity
risk management.
Interest Rate Risk Management
In the normal course of business, the Company is exposed to market risk arising fromfluctuations in interest rates. ALCO
measures and evaluates interest rate risk so that the Bank can meet customer demandsfor various types of loans and
deposits. Measurements used to help manage interest rate sensitivity includean earnings simulation model and an economic
value of equity (“EVE”) model.
Earnings simulation
. Management believes that interest rate risk is best estimated by our earningssimulation modeling.
Forecasted levels of earning assets, interest-bearing liabilities, andoff-balance sheet financial instruments are combined
with ALCO forecasts of market interest rates for the next 12 months and other factorsin order to produce various earnings
simulations and estimates. Tohelp limit interest rate risk, we have guidelines for earnings at risk which seek tolimit 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 incomevariances 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 anestimate of exposure under these
scenarios, our modeling under both a gradual and instantaneous change in interestrates indicates our balance sheet is asset
sensitive over the forecast period of 12 months.
At June 30, 2026, our earnings simulation model indicated that we werein compliance with the policy guidelines noted
above.
40
Economic Valueof Equity
. EVE measures the extent that the estimated economic values of ourassets, liabilities, and off-
balance sheet items will change as a result of interest rate changes. Economic valuesare estimated by discounting expected
cash flows from assets, liabilities, and off-balance sheetitems, which establishes a base case EVE. In contrast with our
earnings simulation model, which evaluates interest rate risk over a 12-monthtimeframe, EVE uses a terminal horizon
which allows for the re-pricing of all assets, liabilities, and off-balancesheet items. Further, EVE is measured using values
as of a point in time and does not reflect any actions that ALCO might take in respondingto or anticipating changes in
interest rates, or market and competitive conditions.To help limit interest rate risk, we havestated policy guidelines for an
instantaneous basis point change in interest rates, such that our EVE should not decreasefrom our base case by more than
the following:
●
35% for an instantaneous change of +/- 400 basis points
●
30% for an instantaneous change of +/- 300 basis points
●
25% for an instantaneous change of +/- 200 basis points
●
15% for an instantaneous change of +/- 100 basis points
At June 30, 2026, our EVE model indicated that we were in compliancewith our policy guidelines.
Each of the above analyses may not, on its own, be an accurate indicator of how ournet interest income will be affected by
changes in interest rates. Income associated with interest-earningassets 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 differentdegrees to changes in market interest rates, and other
economic and market factors, including market perceptions. Interestrates on certain types of assets and liabilities fluctuate
in advance of changes in general market rates, while interest rates on other typesof assets and liabilities may lag behind
changes in general market rates. In addition, certain assets, such as adjustable-ratemortgage loans, have features (generally
referred to as “interest rate caps and floors”) which limit changes in interest rates.Prepaymentsand early withdrawal levels
also could deviate significantly from those assumed in calculating the maturity ofcertain instruments. The ability of many
borrowers to service their debts also may decrease during periods of rising interestrates or economic stress, which may
differ across industries and economic sectors. ALCO reviews eachof the above interest rate sensitivity analyses along with
several different interest rate scenarios in seeking satisfactory,consistent levels of profitability within the framework of the
Company’s established liquidity,loan, investment, borrowing, and capital policies.
The Company may also use derivative financial instruments to improvethe balance between interest-sensitive assets and
interest-sensitive liabilities, and as a tool to manage interest rate sensitivity while continuingto meet the credit and deposit
needs of our customers. From time to time, the Company also mayenter into back-to-back interest rate swaps to facilitate
customer transactions and meet their financing needs. These interest rate swaps qualifyas derivatives, and may be
designated as hedging instruments. At June 30, 2026, the Company hadtwo derivative contracts designated as part of a
hedging relationship to assist in managing its interest rate sensitivity comparedto one such derivative contract at December
31, 2025.
Liquidity Risk Management
Liquidity is the Company’s ability toconvert assets into cash equivalents in order to meet daily cash flow requirements,
primarily for deposit withdrawals, loan demand and maturing obligations.The Company seeks to manage its liquidity to
manage or reduce its costs of funds by maintaining liquidity believedadequate to meet its anticipated funding needs, while
balancing against excessive liquidity that likely would reduce earningsdue to the cost of foregoing alternative higher-
yielding assets.
Liquidity is managed at two levels. The first is the liquidity of the Company.The second is the liquidity of the Bank. The
management of liquidity at both levels is essential, because the Company andthe Bank are separate and distinct legal
entities with different funding needs and sources, and each are subjectto regulatory guidelines and requirements.The
Company depends upon dividends from the Bank for liquidity to pay its operatingexpenses, debt obligations and
dividends,and Federal Reserve Regulation W restricts Company borrowings from, and othertransactions with, the Bank.
The Bank’s payment of dividendsdepends 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 dividendsreceived 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
i
nclude payment of Company expenses, dividends paid to stockholdersand Company stock repurchases.
41
Primary sources of funding for the Bank include customer deposits, other borrowings,interest payments on earning assets,
repaymentsand maturities of securities and loans,sales of securities, and the sale of loans, particularly residential mortgage
loans. The Bank has access to federal funds lines from various banks and borrowingsfrom the Federal Reserve discount
window. In addition tothese sources, the Bank is eligible to participate in the FHLB - Atlanta’sadvance program to obtain
funding for growth and liquidity.Advances include both fixed and variable terms and may be taken out with varying
maturities. At June 30, 2026, the Bank had no FHLB - Atlanta advances outstandingand available credit from the FHLB of
$307.9 million. At June 30, 2026, the Bank also had $73.2 million ofavailable uncommitted federal funds lines with no
borrowings outstanding. Primary uses of funds include repayment of maturingobligations and growing the loan portfolio.
The Company also has access to the FRB discount window.
Management believes that the Company and the Bank have adequatesources of liquidity to meet all their respective known
contractual obligations and unfunded commitments, including loancommitments and reasonablyexpected borrower,
depositor, and creditor requirements overthe next twelve months.
Off-Balance Sheet Arrangements, Commitments, Contingencies and ContractualObligations
At June 30, 2026, the Bank had outstanding standby letters of credit of $2.8million and unfunded loan commitments
outstanding of $47.6 million.Because these commitments generally have fixed expiration dates andmany will expire
without being drawn upon, the total commitment level does not necessarilyrepresent future cash requirements. If needed to
fund these outstanding commitments, the Bank could use its cash andcash equivalents,deposits with other banks, liquidate
federal funds sold or a portion of our securities available-for-sale, ordraw on its available credit facilities or raise deposits.
Mortgage lending activities
We generallysell conforming residential mortgage loans in the secondary market to Fannie Maewhile retaining the
servicing of these loans. The sale agreements for these residential mortgageloans with Fannie Mae and other investors
include various customary representations and warranties regardingthe origination and characteristics of the residential
mortgage loans.Although the representations and warranties vary among investors, they typically coverownership of the
loan, validity of the lien securing the loan, the absence of delinquent taxes or liens againstthe property securing the loan,
compliance with loan criteria set forth in the applicable agreement andcompliance with applicable federal, state, and local
laws, among other matters.
As of June 30, 2026, the aggregate unpaid principal balance of residentialmortgage loans, which we have originated and
sold, but retained the servicing rights, was $183.9 million.Although these loans are generally sold on a non-recourse basis,
we may be obligated to repurchase residential mortgage loans or reimburse investorsfor losses incurred (make whole
requests) if a loan review reveals a potential breach of our seller representationsand warranties.Upon receipt of a
repurchase or make whole request, we work with investors to arrive at a mutuallyagreeable resolution. Repurchase and
make whole requests are typically reviewed on an individual loan by loan basis tovalidate the claims made by the investor
and to determine if a contractually required repurchase or make whole event has occurred.We seek to reduceand manage
the risks of potential repurchases, make whole requests, or other claims by mortgageloan investors through our
underwriting and quality assurance practices and by servicing mortgageloans to meet investor and secondary market
standards.
The Company was not required to repurchase any loans during the first six monthsof 2026 as a result of representation and
warranty provisions contained in the Company’ssale agreements with Fannie Mae, and had no pending repurchase or
make-whole requests at June 30, 2026.
We service all residentialmortgage 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 relatingto the mortgage loans;(4) maintain any
required escrow accounts for payment of taxes and insurance andadminister escrow payments;and (5) foreclose on
defaulted mortgage loans or take other actions to mitigate the potential losses toinvestors consistent with the agreements
governing our rights and duties as servicer.
42
Our mortgage servicing agreementsgenerally specify our standardsof responsibility as servicer and provide protection
against expenses and liabilities incurred by us when acting in compliance with theseservicing 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 ofsuch
standards are determined by our agreementswith Fannie Mae and Fannie Mae’s mortgage servicingguides.Remedies
could include repurchase of an affected loan.
Although repurchase and make whole requests related to representationand warranty provisions and servicing activities
have been limited to date, it is possible that requests to repurchase mortgage loans or reimburseinvestors for losses incurred
(make whole requests) may increase in frequency if investors more aggressivelypursue all means of recovering losses on
their purchased loans.As of June 30, 2026, we do not believe that this exposure is material due to the historical levelof
repurchase requests and loss trends, in addition to the fact that 99% of our residentialmortgage loans serviced for Fannie
Mae were current as of such date.We maintain ongoingcommunications with our mortgage purchasers and will continue
to evaluate this exposure by monitoring the level and number of repurchase requestsas 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 intereston such mortgage loans where the borrower is
entitled to forbearance.
Effects of Inflation and Changing Prices
The consolidated financial statements and related consolidated financialdata presented herein have been prepared in
accordance with GAAP and practices within the banking industry whichrequire the measurement of financial position and
operating results in terms of historical dollars without consideringthe changes in the relative purchasing power of money
over time due to inflation. Unlike most industrial companies, virtually all theassets and liabilities of a financial institution
are monetary in nature. As a result, interest rates have a more significant impacton a financial institution’s performance
than the effects of general levels of inflation.
Inflation can increase our noninterest expenses. It also can affectour customers’ behaviors, the mix of deposits between
interest and noninterest-bearing, the levels of interest rates we have to payon our deposits and other borrowings, and the
interest rates we earn on our earning assets. The difference betweenour interest expense and interest income is also affected
by the shape of the yield curve and the speeds and amounts at which our various assets and liabilities, respectively,reprice
in response to interest rate changes.In addition, net interest income could be affected by asymmetrical changesin the
different interest rate indexes, given that not all of our assetsor liabilities are priced with the same index. Changes in
market interest rates and in the size of the Federal Reserve’ssecurities holdings in response to inflation can affecteconomic
activity, loan demandand growth, and unemployment rates. Although the Federal Reserve reduced its targetfederal funds
rate range in late 2025 and has resumed purchases of Treasurysecurities, inflation remains above the Federal Reserve’s
longer-term 2% goal, and future monetary policy actions are uncertain. Inflationand related changes in market interest rates
also can adversely affect the values and liquidity of ourloans and securities, the value of collateral securing loans to our
borrowers, and the success of our borrowers and such borrowers’ available cashto pay interest on and principal of our loans
to them.See “Item 1A Risk Factors.”
43
CURRENT ACCOUNTING DEVELOPMENTS
The following ASUs have been issued by the FASB,but are not yet effective.
ASU 2025-01,
Income Statement Reporting Comprehensive Income- Expense Disaggregation Disclosures(Subtopic 220-
40): Clarifying the Effective Date,
clarifies the effective date of ASU 2024-03,
Income Statement Reporting Comprehensive
Income - Expense Disaggregation Disclosures(Subtopic 220-40): Disaggregation ofIncome Statement Expenses
to
stipulate that ASU 2024-03 is effective for public business entities forannual reporting periods beginning after December
15, 2026 and interim reporting periods beginning after December 15,2027, with early adoption permitted. ASU 2025-01
will be effective for the Company beginning January 1, 2027for the Company’s annual consolidatedfinancial statements
on Form 10-K and January 1, 2028 for the Company’squarterly consolidated financial statements on Form 10-Qand is not
expected to have a significant impact on the Company’sconsolidated financial statements.
ASU 2025-06,
Intangibles - Goodwill and Other - Internal-Use Software(Subtopic 350-40),
removes all references to
prescriptive and sequential software development stages and clarifies that thethreshold for when an entity is required to
start capitalizing software costs is when (1) management has authorizedand committed to funding the software project and
(2) it is probable that the project will be completed and the software will be used to performthe function intended. ASU
2025-06 will be effective for the Company beginningJanuary 1, 2028, with early adoption permitted, and is not expected to
have a significant impact on the Company’sconsolidated financial statements.
ASU 2025-08,
Financial Instruments – Credit Losses (Topic326): Purchased Loans
, expands the population of acquired
loans accounted for under the “gross-up” approach, previously limitedto purchased financial assets with credit
deterioration, to include acquired non-PCD loans that qualify as purchasedseasoned loans. ASU 2025-08 will be effective
for the Company beginning January 1, 2027, on a prospective basis, with earlyadoption permitted. Because the Company
has not historically acquired or purchased loans, ASU 2025-08 is not expectedto have a significant impact on the
Company’s consolidatedfinancial statements.
ASU 2025-09,
Derivatives and Hedging (Topic815): Hedge Accounting Improvements
, amends Topic 815 toalign hedge
accounting more closely with an entity’srisk management activities, including amendments related to similar risk
assessments for cash flow hedges, hedges of forecasted interest payments on variable-rate debt, and certain other hedging
strategies. ASU 2025-09 will be effective for the Company beginningJanuary 1, 2027, with early adoption permitted, and
is not expected to have a significant impact on the Company’sconsolidated financial statements.
ASU 2025-11,
Interim Reporting (Topic270): Narrow-Scope Improvements,
is intended to provide clarity about the current
interim reporting requirements, provides a list of the interim disclosures requiredby all other Codification topics and
establishes a disclosure principle that requires entities to disclose events since theend of the last annual reporting period
that have a material impact on the entity.ASU 2025-11 will be effectivefor the Company beginning January 1, 2028, with
early adoption permitted, and is not expected to have a significant impact on the Company’sconsolidated financial
statements.
44
Table 1– Explanation of Non-GAAP Financial Measures
In addition to results presented in accordance with U.S. generally acceptedaccounting principles (GAAP), this quarterly
report on Form 10-Q includes certain designated net interest incomeamounts presented on a tax-equivalent basis, a non-
GAAP financial measure, including the presentation and calculationof our net interest margin and efficiency ratio.In the
first quarter of 2026, we changed the presentation of net interest income on a tax-equivalentbasis to account for tax-exempt
interest income on municipal loans.Prior period amounts have been revised herein to conform with the current period
presentation. These changes had no effect on the presentationof GAAP net interest income in current or prior periods.
The Company believes the presentation of net interest income on a tax-equivalentbasis provides comparability of net
interest income from both taxable and tax-exempt sources and facilitates comparabilitywithin the industry. Althoughthe
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 alternativeto GAAP.The reconciliationsof these non-
GAAP financial measures to their most directly comparable GAAP financial measuresare presented below.
2026
2025
Second
First
Fourth
Third
Second
(In thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Net interest income (GAAP)
$
7,888
7,733
7,713
7,572
7,344
Tax-equivalent adjustment
107
99
67
69
67
Net interest income (Tax-equivalent)
$
7,995
7,832
7,780
7,641
7,411
Six months ended June 30,
(In thousands)
2026
2025
Net interest income (GAAP)
$
15,621
14,389
Tax-equivalent adjustment
206
134
N
et interest income (Tax-equivalent)
$
15,827
14,523
45
Table 2– Selected Quarterly Financial Data
2026
2025
Second
First
Fourth
Third
Second
(Dollars in thousands, except per share amounts)
Quarter
Quarter
Quarter
Quarter
Quarter
Results of Operations
Net interest income (a)
$
7,995
7,832
7,780
7,641
7,411
Less: tax-equivalent adjustment
107
99
67
69
67
Net interest income (GAAP)
7,888
7,733
7,713
7,572
7,344
Noninterest income
878
893
754
829
789
Total revenue
8,766
8,626
8,467
8,401
8,133
Provision for credit losses
(248)
(76)
783
(255)
113
Noninterest expense
6,105
5,901
5,563
5,806
5,702
Income tax expense
611
603
456
623
485
Net earnings
$
2,298
2,198
1,665
2,227
1,833
Per share data:
Basic and diluted net earnings
$
0.66
0.63
0.48
0.64
0.52
Cash dividends declared
0.27
0.27
0.27
0.27
0.27
Weighted average shares outstanding:
Basic
3,492,107
3,494,229
3,493,699
3,493,699
3,493,699
Diluted
3,492,107
3,496,518
3,496,729
3,495,972
3,493,699
Shares outstanding, at period end
3,487,830
3,495,866
3,493,699
3,493,699
3,493,699
Book value
$
26.91
26.62
26.35
25.65
24.64
Common stock price
High
$
28.88
26.50
27.98
28.47
25.28
Low
23.03
21.01
24.00
23.13
19.48
Period end
27.04
23.87
26.95
28.44
25.00
To earnings ratio (b)
11.22
x
10.52
12.96
13.87
13.09
To book value
100.48
%
89.67
102.28
110.88
101.46
Performance ratios:
Return on average equity
9.74
%
9.65
7.40
10.65
9.00
Return on average assets
0.90
%
0.86
0.66
0.89
0.74
Dividend payout ratio
40.91
%
42.86
56.25
42.19
51.92
Asset Quality:
Allowance for credit losses as a % of:
Loans
1.14
%
1.16
1.27
1.20
1.24
Nonperforming loans
10,291
%
6,643
1,489
6,434
2,306
Nonperforming assets as a % of:
Loans and other real estate owned
0.01
%
0.02
0.09
0.02
0.05
Total assets
0.01
%
0.01
0.05
0.01
0.03
Nonperforming loans as a % of total loans
0.01
%
0.02
0.09
0.02
0.05
Annualized net charge-offs (recoveries) as a % of average loans
(0.02)
%
0.28
0.22
0.06
(0.03)
Capital Adequacy: (c)
CET 1 risk-based capital ratio
16.26
%
16.12
16.06
15.51
15.32
Tier 1 risk-based capital ratio
16.26
%
16.12
16.06
15.51
15.32
Total risk-based capital ratio
17.24
%
17.13
17.14
16.49
16.35
Tier 1 leverage ratio
10.65
%
10.60
10.71
10.72
10.64
Other financial data:
Net interest margin (a)
3.33
%
3.28
3.24
3.21
3.18
Effective income tax rate
21.00
%
21.53
21.50
21.86
20.92
Efficiency ratio (d)
68.80
%
67.63
65.19
68.55
69.54
Selected average balances:
Loans, net of unearned income
$
582,335
577,489
559,009
556,233
559,770
Total assets
1,021,742
1,026,163
1,009,953
997,892
990,523
Total deposits
925,608
930,474
917,178
909,293
905,227
Total stockholders’ equity
94,340
91,088
90,000
83,642
81,447
Selected period end balances:
Loans, net of unearned income
$
579,589
582,040
565,354
557,912
562,714
Allowance for credit losses
6,586
6,776
7,176
6,691
6,965
Total assets
1,085,803
1,026,946
1,018,797
1,011,184
1,029,224
Total deposits
988,318
931,109
922,926
917,266
939,851
Total stockholders’ equity
93,874
93,061
92,053
89,613
86,071
(a) Tax-equivalent. See "Table 1 - Explanation of Non-GAAP Financial Measures."
(b) Calculated by dividing period end share price byearnings per share for the previous four quarters.
(c) Regulatory capital ratios presented are for the Company'swholly-owned subsidiary, AuburnBank.
(d) Efficiency ratio is the result of noninterest expense divided bythe sum of noninterest income and tax-equivalent net interest income.
See Table 1 - Explanation of Non-GAAP Measures.
46
Table 3- Selected Financial Data
Six months ended June 30,
(Dollars in thousands, except per share amounts)
2026
2025
Results of Operations
Net interest income (a)
$
15,827
14,523
Less: tax-equivalent adjustment
206
134
Net interest income (GAAP)
15,621
14,389
Noninterest income
1,771
1,536
Total revenue
17,392
15,925
Provision for credit losses
(324)
103
Noninterest expense
12,006
11,582
Income tax expense
1,214
877
Net earnings
$
4,496
3,363
Per share data:
Basic and diluted net earnings
$
1.29
0.96
Cash dividends declared
0.54
0.54
Weighted average shares outstanding:
Basic
3,493,162
3,493,699
Diluted
3,494,292
3,493,699
Shares outstanding, at period end
3,487,830
3,493,699
Book value
$
26.91
24.64
Common stock price:
High
$
28.88
25.28
Low
21.01
19.48
Period end
27.04
25.00
To earnings ratio (b)
11.22
x
13.09
To book value
100
%
101
Performance ratios:
Annualized return on average equity
9.70
%
8.43
Annualized return on average assets
0.88
%
0.68
Dividend payout ratio
41.86
%
56.25
Asset Quality:
Allowance for credit losses as a % of:
Loans
1.14
%
1.24
Nonperforming loans
10,291
%
2,306
Nonperforming assets as a % of:
Loans and other real estate owned
0.01
%
0.05
Total assets
0.01
%
0.03
Nonperforming loans as a % of total loans
0.01
%
0.05
Annualized net charge-offs as a % of average loans
0.13
%
0.01
Capital Adequacy: (c)
CET 1 risk-based capital ratio
16.26
%
15.32
Tier 1 risk-based capital ratio
16.26
%
15.32
Total risk-based capital ratio
17.24
%
16.35
Tier 1 leverage ratio
10.65
%
10.64
Other financial data:
Net interest margin (a)
3.31
%
3.13
Effective income tax rate
21.26
%
20.68
Efficiency ratio (d)
68.22
%
72.12
Selected average balances:
Loans, net of unearned income
$
579,925
562,909
Total assets
1,023,940
988,907
Total deposits
928,028
906,011
Total stockholders’ equity
92,723
79,811
Selected period end balances:
Loans, net of unearned income
$
579,589
562,714
Allowance for credit losses
6,586
6,965
Total assets
1,085,803
1,029,224
Total deposits
988,318
939,851
Total stockholders’ equity
93,874
86,071
(a) Tax-equivalent. See "Table 1 - Explanation of Non-GAAP Financial Measures."
(b) Calculated by dividing period end share price byearnings per share for the previous four quarters.
(c) Regulatory capital ratios presented are for the Company'swholly-owned subsidiary, AuburnBank.
(d) Efficiency ratio is the result of noninterest expense divided bythe sum of noninterest income and tax-equivalent net interest income.
See Table 1 - Explanation of Non-GAAP Measures.
47
Table 4- AverageBalances and Net Interest Income Analysis (1)
Quarter ended June 30,
2026
2025
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 (2) (3)
$
582,590
$
8,274
5.70%
$
559,939
$
7,726
5.53%
Securities (3) (4)
250,569
1,219
1.95%
274,026
1,336
1.96%
Federal funds sold
29,471
260
3.54%
25,705
280
4.37%
Interest-bearing bank deposits
100,439
934
3.73%
76,237
836
4.40%
Total interest-earningassets
963,069
$
10,687
4.45%
935,907
$
10,178
4.36%
Cash and due from banks
13,515
15,936
Other assets (5)
45,158
38,680
Total assets
$
1,021,742
$
990,523
Interest-bearing liabilities:
Deposits:
NOW
$
213,794
$
627
1.18%
$
198,973
$
649
1.31%
Savings and money market
274,169
680
0.99%
253,704
646
1.02%
Time deposits
181,093
1,385
3.07%
184,666
1,471
3.20%
Total interest-bearingdeposits
669,056
2,692
1.61%
637,343
2,766
1.74%
Short-term borrowings
—
—
—
110
1
3.65%
Total interest-bearingliabilities
669,056
$
2,692
1.61%
637,453
$
2,767
1.74%
Noninterest-bearing deposits
256,552
267,884
Other liabilities
1,794
3,739
Stockholders' equity
94,340
81,447
Total liabilities and stockholders'equity
$
1,021,742
$
990,523
Net interest income and margin (tax-equivalent)
$
7,995
3.33%
$
7,411
3.18%
(1) In the first quarter of 2026, we changed the presentation of net interest income on a tax-equivalent basis to account for tax-exempt
interest income on municipal loans.Also, we reclassified average net unrealized gains (losses) on available-for-sale securities to
average other assets so that average total securities are presented on an amortized cost basis in our calculation of net interest margin.
Prior period amounts, including the presentation and calculation of our net interest margin, have been revised to conform with the
current period presentation.
(2) Loans on nonaccrual status have been included in the computation of average balances.
(3) Reflects tax-equivalent adjustments, using the statutory federal income tax rate of 21%, in adjusting interest on tax-exempt
municipal loans and securities to a tax-equivalent basis.
(4) Securities are included on an amortized cost basis with yield and net interest margin calculated accordingly.
(5) Includes average net unrealized gains (losses) on securities available-for-sale of $(26.2) and $(33.8) million for the quarters ended
June 30, 2026 and June 30, 2025, respectively.
48
Table 5- AverageBalances and Net Interest Income Analysis (1)
Six months ended June 30,
2026
2025
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 (2) (3)
$
580,231
$
16,288
5.66%
$
563,086
$
15,318
5.49%
Securities (3) (4)
253,550
2,460
1.96%
277,026
2,703
1.97%
Federal funds sold
26,925
475
3.56%
26,282
571
4.38%
Interest-bearing bank deposits
104,452
1,924
3.71%
68,777
1,514
4.44%
Total interest-earningassets
965,158
$
21,147
4.42%
935,171
$
20,106
4.34%
Cash and due from banks
13,832
17,001
Other assets (5)
44,950
36,735
Total assets
$
1,023,940
$
988,907
Interest-bearing liabilities:
Deposits:
NOW
$
224,944
$
1,407
1.26%
$
204,069
$
1,391
1.37%
Savings and money market
265,739
1,152
0.87%
248,233
1,147
0.93%
Time deposits
180,523
2,761
3.08%
187,763
3,044
3.27%
Total interest-bearingdeposits
671,206
5,320
1.60%
640,065
5,582
1.76%
Short-term borrowings
—
—
0.00%
55
1
3.67%
Total interest-bearingliabilities
671,206
$
5,320
1.60%
640,120
$
5,583
1.76%
Noninterest-bearing deposits
256,822
265,946
Other liabilities
3,189
3,030
Stockholders' equity
92,723
79,811
Total liabilities and stockholders'equity
$
1,023,940
$
988,907
Net interest income and margin (tax-equivalent)
$
15,827
3.31%
$
14,523
3.13%
(1) In the first quarter of 2026, we changed the presentation of net interest income on a tax-equivalent basis to account for tax-exempt
interest income on municipal loans.Also, we reclassified average net unrealized gains (losses) on available-for-sale securities to
average other assets so that average total securities are presented on an amortized cost basis in our calculation of net interest margin.
Prior period amounts, including the presentation and calculation of our net interest margin, have been revised to conform with the
current period presentation.
(2) Loans on nonaccrual status have been included in the computation of average balances.
(3) Reflects tax-equivalent adjustments, using the statutory federal income tax rate of 21%, in adjusting interest on tax-exempt
municipal loans and securities to a tax-equivalent basis.
(4) Securities are included on an amortized cost basis with yield and net interest margin calculated accordingly.
(5) Includes average net unrealized gains (losses) on securities available-for-sale of $(26.1) and $(36.6) million for the first six months
ended June 30, 2026 and June 30, 2025, respectively.
49
Table 6– Volumeand Rate VarianceAnalysis
Quarter ended
Six months ended
June 30, 2026 vs. 2025
June 30, 2026 vs. 2025
Net
Due to change in
Net
Due to change in
(Dollars in thousands)
Change
Rate (2)
Volume (2)
Change
Rate (2)
Volume (2)
Interest income:
Loans and loans held for sale (1)
$
548
226
322
$
970
489
481
Securities (1)
(117)
(5)
(112)
(243)
(21)
(222)
Federal funds sold
(20)
(53)
33
(96)
(107)
11
Interest bearing bank deposits
98
(127)
225
410
(247)
657
Total interest income
$
509
41
468
$
1,041
114
927
Interest expense:
Deposits:
NOW
$
(22)
(65)
43
$
16
(115)
131
Savings and money market
34
(17)
51
5
(71)
76
Certificates of deposit
(86)
(59)
(27)
(283)
(172)
(111)
Total interest-bearingdeposits
(74)
(141)
67
(262)
(358)
96
Short-term borrowings
(1)
(1)
—
(1)
(1)
-
Long-term debt
—
—
—
—
—
—
Total interest expense
(75)
(142)
67
(263)
(359)
96
Net interest income
$
584
183
401
$
1,304
473
831
(1) Yields on tax-exempt securities have beencomputed on a tax-equivalent basis using an income
tax rate of 21%.See "Table 1 - Explanationof Non-GAAP Financial Measures."
(
2) Changes that are not solely a result of volume or rate have been allocatedto volume.
50
Table 7– Loan Maturities
June 30, 2026
1 year
1 to 5
5 to 15
After 15
(Dollars in thousands)
or less
years
years
years
Total
Commercial and industrial
$
13,844
13,317
593
—
27,754
Municipal
446
1,200
21,521
11,853
35,020
Construction and land development
38,781
18,676
1,398
—
58,855
Commercial real estate
55,967
181,836
91,315
4,407
333,525
Residential real estate
7,604
34,219
21,196
51,789
114,808
Consumer installment
3,979
5,177
763
—
9,919
Total loans
$
120,621
254,425
136,786
68,049
579,881
51
Table8 –Sensitivities to Changes in Interest Rates on Loans Maturing in MoreThan One Year
June 30, 2026
Variable
Fixed
(Dollars in thousands)
Rate
Rate
Total
Commercial and industrial
$
420
13,490
13,910
Municipal
60
34,514
34,574
Construction and land development
14,227
5,847
20,074
Commercial real estate
12,637
264,921
277,558
Residential real estate
52,663
54,541
107,204
Consumer installment
203
5,737
5,940
Total loans
$
80,210
379,050
459,260
52
ITEM 3.QUANTITATIVEAND QUALITATIVEDISCLOSURES ABOUT MARKET RISK
The information called for by ITEM 3 is set forth in ITEM 2 under thecaption “MARKET AND LIQUIDITY RISK
MANAGEMENT” and is incorporated herein by reference.
ITEM 4. CONTROLS AND PROCEDURES
The Company, with the participationof its management, including its Chief Executive Officer andChief Financial Officer,
carried out an evaluation of the effectiveness of the design andoperation of its disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of1934, 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 coveredby this report, the
Company’s Chief Executive Officerand Chief Financial Officer concluded that the Company’sdisclosure controls and
procedures were effective to allow timely decisions regarding disclosurein its reports that the Company files or submits to
the Securities and Exchange Commission under the Securities ExchangeAct of 1934, as amended. There have been no
changes in the Company’s internalcontrol over financial reporting that occurred during the period covered by this report
that have materially affected, or are reasonably likely tomaterially affect, the Company’sinternal control over financial
reporting.
PARTII. 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’smanagement believe there are no pending or threatened legal, governmental,or regulatory
proceedings that, upon resolution, are expected to have a material adverse effectupon the Company’s or the Bank’s
financial condition or results of operations. See also, Part I, Item 3 of the Company’sAnnual Report on Form 10-K for the
year ended December 31, 2025.
53
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this report, you should carefullyconsider the factors discussed in Part I,
Item 1A. “RISK FACTORS”in the Company’s AnnualReport on Form 10-K for the year ended December 31, 2025,
which could materially affect our business, financial conditionor future results. The risks described in our annual report on
Form 10-K are not the only risks facing our Company.The persistence of inflation above the Federal Reserve’slong term
targets, and the maintenance of or further increases in, tightenedFederal Reserve monetary policy by increased target
interest rates and/or reductions in the Federal Reserve’ssecurities portfolio, have affected and may continue to affectthe
levels of interest rates, mortgage originations and income, the market values ofour securities portfolio and loans and have
resulted in unrealized securities losses that have adversely affectedour stockholders’ equity.Although inflation has
remained above the Federal Reserve’s2% target rate, since December 2025, the Federal Reserve hasmaintained its target
federal funds range from 3.50% to 3.75% and on October 29, 2025 announcedthat it would end the roll-off of maturing
securities it held beginning December 1, 2025 as the Federal Reserve soughtto meet its dual mandate of maximum
employment and 2% inflation over the longer run.Beginning December 11, 2025, the Federal Reserve beganincreasing its
holdings of securities through purchases of Treasurybills and, if needed, other Treasury securities with remaining
maturities of 3 years or less to maintain an ample level of reserves, and reinvested all principalpayments on Treasury
securities and reinvested all principal payment on agency securities into Treasurybills.This policy was continued at the
Federal Reserve’s April 30,2026 meeting.The reductions in the target federal funds rates and Federal Reserve purchases
of additional securities may be viewed as a more accommodative monetary policy,which has affected and may continue to
affect our deposit costs and mixes, and consumer savings and paymentbehaviors.These may also affect our borrowers’
operating costs, expected returns and cash flows available to service our loans.On July 29, 2026, the Federal Reserve
reaffirmed its commitment to price stability and its 2% inflationtarget, and left the target range for the federal funds rate
unchanged at 3.50% to 3.75%.Following this meeting, yields on longer-term U.S.Treasury securities increased, including
the highest 30-year Treasury yields in 19 years andhigher 30-year residential mortgage rates, among increases in other
interest rates.The timing and direction of future monetary policy actions, and the nature andextent of the Federal
Reserve’s public communicationsregarding such actions, are uncertain.These changes and other risks and uncertainties
not currently known to us or that we currently deem to be immaterial also maymaterially adversely affect our business,
financial condition, and/or operating results in the future.
Military hostilities involving the United States, Israel and Iran commenced on February28, 2026 and continue subject to
various temporary cease fire arrangements and pauses. As a result, shipments ofpetroleum products through the Strait of
Hormuz have been limited, reducing the total volumes of oil in the internationalmarkets and causing oil prices to rise
significantly.More recently, attacks havebeen made on petroleum shipments through the Red Sea by forces aligned with
Iran. Supply chains where petroleum is an input have been adverselyaffected, and transportation costs, prices and inflation
in the United States and elsewhere have increased. These pressures may increaseour and our borrowers’ operating costs
and contribute to higher or more volatile interest rates, which could adverselyaffect our net interest margin, the value of
our securities portfolio, and the ability of our borrowers to repay theirloans.The duration of these hostilities and the long-
t
erm effects of the blockage of petroleum shipments and the othercosts and effects of these hostilities cannot be predicted.
54
ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Company’s repurchases of its commonstock during the second quarter of 2026 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
Valueof Shares that
May YetBe
Purchased Under the
Plans or Programs (1)
April 1 - April 30, 2026
—
—
—
$
5,000,000
May 1 - May 31, 2026
7,058
$
24.04
7,058
4,830,339
June 1 - June 30, 2026
978
25.11
978
4,805,778
Total
8,036
$
24.17
8,036
$
4,805,778
(1) On March 17, 2026, the Company announced that its Board of Directors had approved a stock repurchase program authorizing the
repurchase, from time to time, of up to $5.0 million of the Company's issued and outstanding common stock.The program will remain
in effect until the earliest of (i) the expenditure of $5.0 million on share repurchases, (ii) the termination or replacement of the program,
and (iii) February 28, 2027.Repurchases may be made through open-market or private purchases, negotiated transactions, block purchases
or otherwise.The Company is not required to acquire any specific number of shares and may suspend or terminate the program at any
time.
ITEM 3.DEFAULTSUPON SENIOR SECURITIES
Not applicable.
ITEM 4.MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5.OTHER INFORMATION
N
ot applicable.
55
ITEM 6.EXHIBITS
Exhibit
NumberDescription
3.1
3.2
10.1
31.1
31.2
32.1
32.2
101.INS
XBRL Instance Document
101.SCH
XBRL TaxonomyExtension Schema Document
101.CAL
XBRL TaxonomyExtension Calculation Linkbase Document
101.LAB
XBRL TaxonomyExtension Label Linkbase Document
101.PRE
XBRL TaxonomyExtension Presentation Linkbase Document
101.DEF
XBRL TaxonomyExtension Definition Linkbase Document
104
Cover Page Interactive Data File (formatted as inline XBRL and containedin Exhibit 101)
*
Incorporated by reference from Registrant’sForm 10-Q dated June 30, 2002.
**
Incorporated by reference from Registrant’sForm 10-K dated March 31, 2008.
***
Incorporated by reference from Registrant’sForm 8-K dated July 30, 2025.
****
The certifications attached as exhibits 32.1 and 32.2 to this quarterly reporton Form 10-Q are “furnished” to the
Securities and Exchange Commission pursuant to Section 906 of the Sarbanes-OxleyAct of 2002 and shall not be
deemed “filed” by the Company for purposes of Section 18 of the SecuritiesExchange Act of 1934, as amended.
SIGNATURES
Pursuant tothe requirementsof theSecurities ExchangeAct of1934, theregistrant hasduly causedthis reportto
be signed on its behalf by the undersigned thereunto duly authorized.
AUBURN NATIONALBANCORPORATION,INC.
(Registrant)
Date:August 11, 2026
By:/s/ David A. Hedges
David A. Hedges
President and Chief Executive Officer
Date:August 11, 2026
By:/s/
W.
James Walker,IV
W. James Walker,IV
Senior Vice President andChief Financial Officer