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Auburn National Bancorporation Inc.

11/06/2026 | Press release | Distributed by Public on 11/06/2026 12:10

Quarterly Report for Quarter Ending September 30, 2026 (Form 10-Q)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

Auburn National Bancorporation, Inc. (the "Company") is a bank holding company registered with the Board of Governors of the Federal Reserve System (the "Federal Reserve") under the Bank Holding Company Act of 1956, as amended (the "BHC Act"). The Company was incorporated in Delaware in 1990, and in 1994 it succeeded its Alabama predecessor as the bank holding company controlling AuburnBank, an Alabama state member bank with its principal office in Auburn, Alabama (the "Bank"). The Company and its predecessor have controlled the Bank since 1984. As a bank holding company, the Company may diversify into a broader range of financial services and other business activities than currently are permitted to the Bank under applicable laws and regulations. The holding company structure also provides greater financial and operating flexibility than is presently permitted to the Bank.

The Bank has operated continuously since 1907 and currently conducts its business primarily in East Alabama, including Lee County and surrounding areas. The Bank has been a member of the Federal Reserve System since April 1995. The Bank's primary regulators are the Federal Reserve and the Alabama Superintendent of Banks (the "Alabama Superintendent"). The Bank has been a member of the FHLB of Atlanta since 1991. Certain of the statements made in this discussion and analysis and elsewhere, including information incorporated herein by reference to other documents, are "forward-looking statements" as more fully described under "Special Cautionary Notice Regarding Forward-Looking Statements" below.

The following discussion and analysis is intended to provide a better understanding of various factors related to the results of operations and financial condition of the Company and the Bank. This discussion is intended to supplement and highlight information contained in the accompanying unaudited condensed consolidated financial statements and related notes for the quarters and nine months ended September 30, 2026 and 2025, as well as the information contained in our annual report on Form 10-K for the year ended December 31, 2025 and our interim reports on Form 10-Q for the quarters ended March 31, 2026 and June 30, 2026.

Special Cautionary Notice Regarding Forward-Looking Statements

Various of the statements made herein under the captions "Management's Discussion and Analysis of Financial Condition and Results of Operations", "Quantitative and Qualitative Disclosures about Market Risk", and elsewhere, are "forward-looking statements" within the meaning and protections of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act").

Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, anticipations, assumptions, estimates, intentions and future performance, and involve known and unknown risks, uncertainties and other factors, which may be beyond our control, and which may cause the actual results, performance, achievements or financial condition of the Company to be materially different from future results, performance, achievements or financial condition expressed or implied by such forward-looking statements. You should not expect us to update any forward-looking statements.

All statements, other than statements of historical fact, could be forward-looking statements. You can identify these forward-looking statements through our use of words such as "may", "will", "anticipate", "assume", "should", "indicate", "would", "believe", "contemplate", "expect", "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 conditions and 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 or attacks, acts of terrorism, trade restrictions, tariffs, sanctions, the value of the U.S. dollar against other currencies, disruptions of supply chains including energy supplies, or other events that may affect general economic conditions, and consumer and business confidence;

●

governmental fiscal and monetary policies and changes, including taxes, the amount of federal deficit spending and the debt to fund such spending, changes in monetary policies, including changes in the Federal Reserve's target federal funds rate, such as the increase in September 2026 and any further increases if inflation remains above the Federal Reserve's 2% objective, the pace and duration of any such changes, and in the Federal Reserve's holdings of securities through quantitative tightening or easing;

●

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 mortgage loan 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 and derivatives designated as cash flow hedges, which adversely affect our stockholders' equity for financial reporting purposes and our tangible equity;

●

the effectiveness of our interest rate hedging strategies, including the risk that our interest rate swaps and interest rate floor do not perform as intended, that hedge accounting is discontinued, that a counterparty fails to perform, and the effects of the related fair value and cash flow hedge adjustments on our reported net interest income, other comprehensive income and stockholders' 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 effects of financial technology and products, including stablecoin and other digital assets businesses, which are not subject to the same regulation, 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 cyber currency and stablecoins (including rewards or other forms of payments functionally similar to interest), that increases competition to banks, increases risks to the payment systems, increases risks of fraud and theft of digital assets and their effects on customers other financial institutions, including our counterparties, and that may adversely affect confidence in the financial system, generally;

●

changes in banking, securities and tax laws, regulations and rules and their application by the regulators, including capital and liquidity requirements, greater nonbank participation in the Federal Reserve payments system, and in the coverage and cost of FDIC deposit insurance;

●

legislative, executive branch and regulatory changes, including changes in policy, leadership and personnel, including reductions in the number and experience of personnel, at the bank and securities regulators and the CFPB, and the uncertain effects of all these, including the costs and benefits of such changes;

●

the effects of the potential privatization and changes to Fannie Mae and 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 differences in, and changes to, economic, market and credit conditions, including changes in employment levels and payment behaviors from those used in our CECL models and loan portfolio reviews;

●

changes in accounting pronouncements and interpretations;

●

changes in counterparty and borrower credit risks, including the risks resulting from changes in Fannie Mae's mortgage borrower credit score requirements;

●

changes in the availability and cost of credit and capital in the financial markets, and the types of instruments that may be included as capital for regulatory purposes;

●

changes in our technology or products that may be more difficult, costly and risky, or less effective than anticipated;

●

threats of potential cyber-attacks and data breaches, in constantly changing forms and increasing sophistication, including through the use of artificial intelligence and state sponsorship of the attacks;

●

the estimates that our future taxable income could be inaccurate, and if lower taxable income is realized from our operations, the amount of our deferred tax assets that we anticipate will be reduced;

●

our future earnings and "eligible retained earnings" over rolling four calendar quarter periods may limit our dividends, share repurchases and discretionary bonuses; and

●

other factors and risks described under "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2025 and in any of our subsequent 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 attributable to us are expressly qualified in their entirety by this cautionary notice. We have no obligation and do not undertake to update, revise or correct any of the forward-looking statements after the date of this report, or after the respective dates on which such statements otherwise are made.

Summary of Results of Operations

	Quarter ended September 30,						Nine months ended September 30,
(Dollars in thousands, except per share amounts)	2026			2025			2026			2025
Net interest income (a)	$	8,121		$	7,641		$	23,948		$	22,164
Less: tax-equivalent adjustment		107			69			313			203
Net interest income (GAAP)		8,014			7,572			23,635			21,961
Noninterest income		974			829			2,745			2,365
Total revenue		8,988			8,401			26,380			24,326
Provision for credit losses		(50	)		(255	)		(374	)		(152	)
Noninterest expense		5,894			5,806			17,900			17,388
Income tax expense		621			623			1,835			1,500
Net earnings	$	2,523		$	2,227		$	7,019		$	5,590
Basic and diluted earnings per share	$	0.72		$	0.64		$	2.01		$	1.60

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

Financial Summary

The Company's net earnings were $7.0 million for the first nine months of 2026, a 26% increase compared to $5.6 million for the first nine months of 2025. Basic and diluted earnings per share were $2.01 per share for the first nine months of 2026, compared to $1.60 per share for the first nine months of 2025.

The Company recorded a negative provision for credit losses of $374 thousand in the first nine months of 2026, compared to a negative provision for credit losses of $152 thousand in the first nine months of 2025. The provision for credit losses is affected by changes in the 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 economic conditions, and net charge-offs.

Noninterest income was $2.7 million in the first nine months of 2026, compared to $2.4 million in the first nine months of 2025. The increase was primarily due to increased bank-owned life insurance ("BOLI") income related to non-taxable death benefits received during the second and third quarters of 2026 and increased other noninterest income.

Noninterest expense was $17.9 million in the first nine months of 2026, compared to $17.4 million in the first nine months of 2025. The increase was primarily due to a $0.4 million loss contingency accrual recorded in other noninterest expense during the second quarter of 2026. See "Note 6 - Commitments and Contingent Liabilities" to the accompanying consolidated financial statements.

The provision for income tax expense was $1.8 million for the first nine months of 2026 compared to $1.5 million for the first nine months of 2025. The Company's effective tax rate for the first nine months of 2026 was 20.73%, compared to 21.16% in the first nine months of 2025. The Company's effective income tax rate is principally affected by tax-exempt earnings from the Company's investments in municipal securities and loans, BOLI, and New Markets Tax Credits ("NMTCs").

The Company paid cash dividends of $0.81 per share in the first nine months of 2026 and 2025. At September 30, 2026, the Bank's regulatory capital ratios were well above the minimum amounts required to be "well capitalized" under current regulatory standards with a total risk-based capital ratio of 17.30%, a tier 1 leverage ratio of 10.74% and a common equity tier 1 ("CET1") ratio of 16.32% at September 30, 2026. See "Balance Sheet Analysis - Capital Adequacy."

For the third quarter of 2026, net earnings were $2.5 million, or $0.72 per share, compared to $2.2 million, or $0.64 per share, for the third quarter of 2025, a 13% increase in earnings per share. Net interest income (tax-equivalent) was $8.1 million for the third quarter of 2026 compared to $7.6 million for the third quarter of 2025. The 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 3.36% in the third quarter of 2026 compared to 3.21% in the third quarter of 2025. The increase was primarily due to higher yields on interest-earning assets, a more favorable asset mix, including cash that was deployed into higher-yielding securities, and a decrease in our cost of interest-bearing deposits. The Company recorded a negative provision for credit losses of $50 thousand in the third quarter of 2026, compared to a negative provision for credit losses of $255 thousand in the third quarter of 2025. Noninterest income was $1.0 million for the third quarter of 2026, compared to $0.8 million for the third quarter of 2025. The increase was primarily due to an increase in bank-owned life insurance income from a non-taxable death benefit received in the third quarter of 2026. Noninterest expense was $5.9 million in the third quarter of 2026, compared to $5.8 million in the third quarter of 2025. The increase was primarily due to higher salaries and benefits and other noninterest expense, partially offset by lower net occupancy and equipment expense and professional fees. Income tax expense was $0.6 million for the third quarter of 2026, unchanged compared to the third quarter of 2025. The Company's effective tax rate for the third quarter of 2026 was 19.75%, compared to 21.86% in the third quarter of 2025.

During the third quarter of 2026, the Company deployed a portion of its excess cash into higher-yielding securities by purchasing approximately $88.9 million of U.S. Treasury securities and entering into a $90.0 million interest rate swap designated as a fair value hedge that effectively converts the securities to a floating rate. The Company also purchased a $90.0 million interest rate floor, designated as a cash flow hedge, to protect floating-rate interest income against a decline in short-term interest rates. See "Note 7 - Derivative Instruments" and "Interest Rate Risk Management" below.

CRITICAL ACCOUNTING POLICIES

The accounting principles we follow and our methods of applying these principles conform with U.S. GAAP and with general practices within the banking industry. There have been no significant changes to our Critical Accounting Policies as described in our Form 10-K as of and for the year ended December 31, 2025.

RESULTS OF OPERATIONS

Average Balance Sheet and Interest Rates

	Nine months ended September 30,
	2026					2025
	Average		Yield/			Average		Yield/
(Dollars in thousands)	Balance		Rate			Balance		Rate
Loans and loans held for sale	$	580,128		5.69	%	$	560,946		5.52	%
Securities		264,561		2.06	%		274,068		1.96	%
Federal funds sold		26,288		3.60	%		26,717		4.38	%
Interest-bearing bank deposits		92,376		3.72	%		76,254		4.46	%
Total interest-earning assets		963,353		4.44	%		937,985		4.36	%
Deposits:
NOW		219,724		1.22	%		202,381		1.35	%
Savings and money market		267,035		0.95	%		254,095		1.01	%
Time deposits		182,626		3.06	%		185,355		3.22	%
Total interest-bearing deposits		669,385		1.61	%		641,831		1.75	%
Short-term borrowings		44		3.04	%		37		3.61	%
Total interest-bearing liabilities		669,429		1.61	%		641,868		1.75	%
Net interest income and margin (tax-equivalent)	$	23,948		3.32	%	$	22,164		3.16	%

Net Interest Income and Margin

Net interest income (tax-equivalent) was $23.9 million for the first nine months of 2026, an 8% increase compared to $22.2 million for the first nine months of 2025. This increase was due to growth in average interest-earning assets and improvements in our net interest margin. Average interest-earning assets were $963.4 million during the first nine months of 2026, a 3% increase compared to $938.0 million during the first nine months of 2025. The Company's net interest margin (tax-equivalent) was 3.32% for the first nine months of 2026 compared to 3.16% for the first nine months of 2025. This increase was primarily due to higher yields on interest-earning assets, a more favorable asset mix, and a decrease in our cost of interest-bearing deposits. The Federal Reserve announced a 25-basis point reduction in the target range for the federal funds rate in each of September, October and December 2025, and held the target range at 3.50% to 3.75% through the first eight months of 2026 as inflation remained above the Federal Reserve's 2% objective. On September 16, 2026, the Federal Reserve increased the target range for the federal funds rate by 25 basis points to 3.75% to 4.00%, and the Federal Reserve Chair has signaled that additional increases could follow if inflation remains elevated and the labor market remains stable, consistent with the Federal Reserve's dual mandate.

The tax-equivalent yield on total interest-earning assets increased by 8 basis points to 4.44% in the first nine months of 2026 compared to 4.36% in the first nine 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 14 basis points in the first nine months of 2026 to 1.61%, compared to 1.75% in the first nine months of 2025, following the decreases to the federal funds rate in late 2025.

The Company continues to deploy various asset liability management strategies to manage its risks from interest rate fluctuations. Deposit and loan pricing remain competitive in our markets. We believe that interest rates, inflation and monetary policy may continue to fluctuate during the remainder of 2026, and the Federal Reserve's September 2026 rate increase and any further increases may place upward pressure on our deposit costs. Our ability to compete and manage our deposit costs until our interest-earning assets reprice and we generate new loans with current market interest rates will be important to our net interest margin during the remainder of 2026.

Provision for Credit Losses

The Company recorded a negative provision for credit losses of $374 thousand in the first nine months of 2026, compared to a negative provision for credit losses of $152 thousand in the first nine months of 2025. For the third quarter of 2026, the Company recorded a negative provision for credit losses of $50 thousand, compared to a negative provision for credit losses of $255 thousand in the third quarter of 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 economic conditions, and net charge-offs.

Our allowance for credit losses reflects an amount we believe appropriate, based on our allowance assessment methodology, to adequately cover all expected credit losses as of the date the allowance is determined. At September 30, 2026, the Company's allowance for credit losses was $6.5 million, or 1.13% of total loans, compared to $7.2 million, or 1.27% of total loans, at December 31, 2025, and $6.7 million, or 1.20% of total loans, at September 30, 2025. The decrease from December 31, 2025 was primarily due to refinements in the Company's calculation of current expected credit losses ("CECL"). During the first quarter of 2026, the Company established a new loan segment within its CECL calculation for municipal loans, which reduced 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.

Noninterest Income

	Quarter ended September 30,				Nine months ended September 30,
(Dollars in thousands)	2026		2025		2026		2025
Service charges on deposit accounts	$	158	$	154	$	464	$	461
Mortgage lending income		127		167		431		391
Bank-owned life insurance		247		103		526		309
Other		442		405		1,324		1,204
Total noninterest income	$	974	$	829	$	2,745	$	2,365

The Company's mortgage lending income includes income from the (1) origination and sale of mortgage loans and (2) servicing of mortgage loans. Origination income, net, is comprised of gains or losses from the sale of the mortgage loans originated, origination fees, underwriting fees, and other fees associated with the origination of loans, which are netted against the commission expense associated with these originations. The Company's normal practice is to originate mortgage loans for sale in the secondary market and to either sell or retain the associated MSRs when the loan is sold.

MSRs are recognized based on the fair value of the servicing right on the date the corresponding mortgage loan is sold. The Company has elected to measure its MSRs under the amortization method. Servicing fee income is reported net of any related amortization expense.

The Company evaluates MSRs for impairment on a quarterly basis. Impairment is determined by grouping MSRs by common predominant characteristics, such as interest rate and loan type. If the aggregate carrying amount of a particular group of MSRs exceeds the group's aggregate fair value, a valuation allowance for that group is established. The valuation allowance is adjusted as the fair value changes. An increase in mortgage interest rates typically results in an increase in the fair value of the MSRs while a decrease in mortgage interest rates typically results in a decrease in the fair value of MSRs.

The following table presents a breakdown of the Company's mortgage lending income.

	Quarter ended September 30,				Nine months ended September 30,
(Dollars in thousands)	2026		2025		2026		2025
Origination income	$	47	$	93	$	204	$	150
Servicing fees, net		80		74		227		241
Total mortgage lending income	$	127	$	167	$	431	$	391

Income from bank-owned life insurance increased due to non-taxable death benefits received during the second and third quarters of 2026.

Other noninterest income increased primarily due to higher debit card interchange income.

Noninterest Expense

	Quarter ended September 30,				Nine months ended September 30,
(Dollars in thousands)	2026		2025		2026		2025
Salaries and benefits	$	3,416	$	3,375	$	10,053	$	9,943
Net occupancy and equipment		555		598		1,682		1,916
Professional fees		281		312		1,057		984
Other		1,642		1,521		5,108		4,545
Total noninterest expense	$	5,894	$	5,806	$	17,900	$	17,388

The decrease in net occupancy and equipment expense was primarily due to increased leasing income associated with the Company's headquarters.

The increase in professional fees for the first nine months of 2026 was primarily due to an increase in legal expenses.

The increase in other noninterest expense was primarily due to a $390 thousand loss contingency accrual recorded during the second quarter of 2026 related to the release of a mortgage lien in connection with a commercial lending relationship. The Company has submitted a claim to its insurer for recovery, but no insurance recovery has been recognized. See "Note 6 - Commitments and Contingent Liabilities" to the accompanying consolidated financial statements.

Income Tax Expense

Income tax expense was $1.8 million for the first nine months of 2026, compared to $1.5 million for the first nine months of 2025. The increase was primarily due to the level of pre-tax earnings. The Company's effective tax rate was 20.73% for the first nine months of 2026, compared to 21.16% for the first nine months of 2025. The decrease in the effective tax rate was primarily due to a higher level of tax-exempt income, including the non-taxable BOLI death benefits received during the second and third quarters of 2026. The Company's effective income tax rate is affected principally by tax-exempt earnings from the Company's investments in municipal securities and loans, BOLI, and NMTCs.

BALANCE SHEET ANALYSIS

Securities

Securities available-for-sale were $291.8 million at September 30, 2026, compared to $233.3 million at December 31, 2025. This increase reflects a purchase of U.S. Treasury securities at a cost of approximately $88.9 million (an amortized cost basis of $84.5 million at September 30, 2026, which reflects a $4.4 million cumulative fair value hedging adjustment related to the interest rate swap designated as a fair value hedge of these securities; see "Note 7 - Derivative Instruments" to the accompanying consolidated financial statements) partially offset by a decrease in the amortized cost basis of securities available-for-sale in other securities types, primarily due to normal paydowns and maturities, of $18.2 million and a decrease in the fair value of securities available-for-sale of $7.8 million. The average annualized tax-equivalent yields earned on total securities were 2.06% in the first nine months of 2026 compared to 1.96% in the first nine months of 2025.

The maturity distribution of securities available-for-sale at September 30, 2026 is presented in "Note 3 - Securities" to the accompanying consolidated financial statements. Because the composition of the portfolio changed significantly during the third quarter of 2026, the following table presents the weighted average yield of securities available-for-sale by contractual maturity at September 30, 2026. Actual maturities of mortgage-backed securities may differ from contractual maturities because the mortgages underlying the securities may be called or prepaid in whole or in part, with or without penalty.

	1 year			1 to 5			5 to 10			After 10			Total
Weighted Average yield (1)	or less			years			years			years
September 30, 2026
U.S. Treasury		-			-			-			5.18	%		5.18	%
Agency obligations		2.94	%		1.24	%		3.03	%		-			1.50	%
Agency MBS		-			1.23	%		1.72	%		2.27	%		2.04	%
State and political subdivisions		-			1.83	%		2.32	%		2.48	%		2.17	%
Total available-for-sale		2.94	%		1.29	%		2.06	%		3.60	%		2.87	%

(1) Calculated on amortized cost before the fair value hedging adjustment described in Note 3. The total weighted average yield was 1.94% at December 31, 2025.

Loans

	2026						2025
	Third		Second		First		Fourth		Third
(In thousands)	Quarter		Quarter		Quarter		Quarter		Quarter
Commercial and industrial	$	27,061		27,754		31,841		33,887		29,647
Municipal		34,318		35,020		35,703		24,513		25,455
Construction and land development		57,067		58,855		60,248		56,436		79,045
Commercial real estate		326,975		333,525		334,602		325,521		298,681
Residential real estate		118,400		114,808		111,143		116,554		116,279
Consumer installment		8,886		9,919		8,524		8,421		8,805
Total loans	$	572,707		579,881		582,061		565,332		557,912

Total loans were $572.7 million at September 30, 2026, compared to $565.3 million at December 31, 2025. Three loan categories represented the majority of the loan portfolio at September 30, 2026: commercial real estate (57%), residential real estate (21%), and construction and land development (10%). Approximately 16% of the Company's commercial real estate loans were classified as owner-occupied at September 30, 2026. Total loans in the table above and in the discussion that follows exclude the cumulative fair value hedging adjustment of $(860) thousand at September 30, 2026 and $22 thousand at December 31, 2025 related to the Company's interest rate swaps designated as fair value hedges of loans; this adjustment is included in loans, net of unearned income, on the consolidated balance sheets. See "Note 4 - Loans and Allowance for Credit Losses" and "Note 7 - Derivative Instruments" to the accompanying consolidated financial statements.

During the first quarter of 2026, the Company established a separate municipal loan segment following growth in these balances. Prior to this change in presentation, municipal loans were included in the commercial 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 $11.1 million, or 2% of total loans, and $12.3 million, or 2%, of total loans at September 30, 2026 and December 31, 2025, respectively. For residential real estate mortgage loans with a consumer purpose, the Company had no loans that required interest only payments at September 30, 2026 and December 31, 2025. The Company's residential real estate mortgage portfolio does not include any option or hybrid ARM loans, subprime loans, or any material amount of other consumer mortgage products which are generally viewed as high risk.

The average yield earned on loans and loans held for sale was 5.69% in the first nine months of 2026 and 5.52% in the first nine months of 2025.

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, supply chain disruptions, commercial office occupancy levels, housing supply shortages, and effects of inflation on our borrowers' cash flows, real estate market sales volumes and liquidity, valuations used in making loans and evaluating collateral, availability and cost of financing properties, real estate industry concentrations, competitive pressures from a wide range of other lenders, deterioration in certain credits, interest rate fluctuations, reduced collateral values or non-existent collateral, title defects, inaccurate appraisals, financial deterioration of borrowers, fraud, and any violation of applicable laws and regulations. Various projects financed earlier that were based on lower interest rate assumptions than currently in effect may not be as profitable or successful at the higher interest rates currently in effect and which may exist in the future.

The Company attempts to reduce these economic and credit risks through its loan-to-value guidelines for collateralized loans, investigating the creditworthiness of borrowers and monitoring borrowers' financial position. Also, we have established and periodically review lending policies and procedures. Banking regulations limit a bank's credit exposure by prohibiting unsecured loan relationships that exceed 10% of its capital; or 20% of capital, if loans in excess of 10% of capital are fully secured. Under these regulations, we are prohibited from having secured loan relationships in excess of approximately $23.6 million. Furthermore, we have an internal limit for aggregate credit exposure (loans outstanding plus unfunded commitments) to a single borrower of $21.3 million. Our loan policy requires that the Loan Committee of the Board of Directors approve any loan relationships that exceed this internal limit. At September 30, 2026, the Bank had no loan relationships exceeding our internal limit.

We periodically analyze our commercial and industrial and commercial real estate loan portfolios to determine if a concentration of credit risk exists in any one or more industries. We use classification systems broadly accepted by the financial services industry in order to categorize our commercial borrowers. Loans to borrowers in each of the following classes exceeded 25% of the Bank's total risk-based capital at September 30, 2026 (and related balances at December 31, 2025).

	September 30,		December 31,
(Dollars in thousands)	2026		2025
Lessors of 1-4 family residential properties	$	58,304	$	56,773
Multifamily residential properties		56,873		51,516
Hotel/motel		56,292		47,870
Shopping centers/strip malls		41,791		42,444

Allowance for Credit Losses

Our allowance for credit losses was approximately $6.5 million and $7.2 million at September 30, 2026 and December 31, 2025, respectively, which our management believed to be adequate at each of the respective dates. Our allowance for credit losses as a percentage of total loans was 1.13% at September 30, 2026, compared to 1.27% at December 31, 2025.

During the first quarter of 2026, the Company refined its loan portfolio segmentation to separately identify municipal loans, which were previously included within commercial and industrial loans, due to their recent growth and distinct risk characteristics. The allowance for credit losses related to municipal loans is determined using a discounted cash flow methodology incorporating probability of default and loss given default assumptions derived from external data sources. As a result of this refinement, the total allowance decreased due to the lower expected 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 macroeconomic conditions to estimate future credit losses. Macroeconomic factors used in the model include the Alabama unemployment rate, the national commercial real estate price index and the Alabama gross state product. Projections of these macroeconomic factors, obtained from an independent third party, are utilized to predict quarterly rates of default.

Under the CECL methodology the allowance for credit losses is measured on a collective basis for pools of loans with similar risk characteristics, and on an individual basis for loans that do not share similar risk characteristics with the collectively evaluated pools. Losses are predicted over a period of time determined to be reasonable and supportable, and at the end of the reasonable and supportable period losses are reverted to long term historical averages. At September 30, 2026, reasonable and supportable periods of 4 quarters were utilized followed by an 8-quarter straight line reversion period to long term averages.

The allowance for credit losses by loan category for the third quarter of 2026 and the previous four quarters is presented below.

	2026												2025
	Third Quarter				Second Quarter				First Quarter				Fourth Quarter				Third Quarter
(Dollars in thousands)	Amount		%*		Amount		%*		Amount		%*		Amount		%*		Amount		%*
Commercial and industrial	$	530		4.7	$	542		4.8	$	686		5.5	$	1,129		10.3	$	1,126		9.9
Municipal		147		6.0		150		6.0		154		6.1		n/a		n/a		n/a		n/a
Construction and land development		662		10.0		675		10.1		694		10.4		1,304		10.0		1,552		14.2
Commercial real estate		3,871		57.0		3,959		57.6		4,056		57.4		3,777		57.6		3,038		53.5
Residential real estate		1,132		20.7		1,094		19.8		1,029		19.1		837		20.6		836		20.8
Consumer installment		145		1.6		166		1.7		157		1.5		129		1.5		139		1.6
Total allowance for credit losses	$	6,487			$	6,586			$	6,776			$	7,176			$	6,691

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

A summary of the changes in the allowance for credit losses and certain asset quality ratios for the third quarter of 2026 and the previous four quarters is presented below.

	2026									2025
	Third			Second			First			Fourth			Third
(Dollars in thousands)	Quarter			Quarter			Quarter			Quarter			Quarter
Balance at beginning of period	$	6,586			6,776			7,176			6,691			6,965
Charge-offs:
Commercial and industrial		-			-			(5	)		(39	)		-
Commercial real estate		-			-			(378	)		(296	)		-
Consumer installment		(2	)		(3	)		(33	)		-			(87	)
Total charge-offs		(2	)		(3	)		(416	)		(335	)		(87	)
Recoveries		10			25			14			30			9
Net (charge-offs) recoveries		8			22			(402	)		(305	)		(78	)
Provision for credit losses - Loans		(107	)		(212	)		2			790			(196	)
Ending balance	$	6,487			6,586			6,776			7,176			6,691
as a % of loans		1.13	%		1.14			1.16			1.27			1.20
as a % of nonperforming loans		2,976	%		10,291			6,643			1,489			6,434
Net charge-offs (recoveries) as % of average loans (a)		(0.01	)%		(0.02	)		0.28			0.22			0.06

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

Net charge-offs were $372 thousand for the first nine months of 2026, compared to net charge-offs of $93 thousand for the first nine months of 2025. Net charge-offs in the first nine months of 2026 were primarily related to one nonperforming collateral-dependent loan.

Nonperforming Assets

At September 30, 2026 and December 31, 2025, the Company had $0.2 million and $0.5 million, respectively, in nonperforming assets.

The table below provides information concerning total nonperforming assets and certain asset quality ratios for the third quarter of 2026 and the previous four quarters.

	2026							2025
	Third			Second		First		Fourth		Third
(Dollars in thousands)	Quarter			Quarter		Quarter		Quarter		Quarter
Nonperforming assets:
Nonaccrual loans	$	218			64		102		482		104
Total nonperforming assets	$	218			64		102		482		104
as a % of loans and other real estate owned		0.04	%		0.01		0.02		0.09		0.02
as a % of total assets		0.02	%		0.01		0.01		0.05		0.01
Nonperforming loans as a % of total loans		0.04	%		0.01		0.02		0.09		0.02
Accruing loans 90 days or more past due	$	-			-		208		-		77

The table below provides information concerning the composition of nonaccrual loans for the third quarter of 2026 and the previous four quarters.

	2026						2025
	Third		Second		First		Fourth		Third
(In thousands)	Quarter		Quarter		Quarter		Quarter		Quarter
Nonaccrual loans:
Commercial and industrial	$	22		-		-		-		-
Commercial real estate		-		-		-		378		-
Residential real estate		196		64		102		104		104
Total nonaccrual loans	$	218		64		102		482		104

The Company discontinues the accrual of interest income when (1) there is a significant deterioration in the financial condition of the borrower and full repayment of principal and interest is not expected or (2) the principal or interest is 90 days or more past due, unless the loan is both well-secured and in the process of collection.

The Company had no loans 90 days or more past due and still accruing at September 30, 2026 or December 31, 2025.

The Company had no other real estate owned at September 30, 2026 or December 31, 2025.

Deposits

(In thousands)	September 30, 2026		December 31, 2025
Noninterest-bearing demand	$	264,477		268,026
NOW		203,960		214,827
Money market		179,983		170,352
Savings		88,419		92,920
Certificates of deposit under $250,000		101,378		97,458
Certificates of deposit and other time deposits of $250,000 or more		85,121		79,343
Total deposits	$	923,338		922,926

Total deposits were $923.3 million at September 30, 2026, compared to $922.9 million at December 31, 2025. Noninterest-bearing deposits were 29% of total deposits at both September 30, 2026 and December 31, 2025. The Company had no brokered deposits at September 30, 2026 and December 31, 2025.

The average rate paid on total interest-bearing deposits was 1.61% in the first nine months of 2026, compared to 1.75% in the first nine 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") transactions among 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 $29.6 million at September 30, 2026, compared to $9.8 million at December 31, 2025. At September 30, 2026, the Company had $49.9 million reciprocal deposits sold, compared to $79.7 million at December 31, 2025.

At September 30, 2026, estimated uninsured deposits totaled $361.6 million, or 39% 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 September 30, 2026 and December 31, 2025 include approximately $202.5 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 56% and 58% of our estimated uninsured deposits at September 30, 2026 and December 31, 2025, respectively.

The estimated uninsured time deposits by maturity as of September 30, 2026 are presented below.

(Dollars in thousands)	September 30, 2026
Maturity of:
3 months or less	$	45,978
Over 3 months through 6 months		20,721
Over 6 months through 12 months		13,701
Over 12 months		4,721
Total estimated uninsured time deposits	$	85,121

Other Borrowings and Available Credit

The Company had no long-term debt at September 30, 2026 and December 31, 2025. The Bank utilizes short and long-term non-deposit borrowings from time to time. Short-term borrowings generally consist of federal funds purchased and securities sold under agreements to repurchase with an original maturity of one year or less. The Bank had available federal funds lines totaling $73.2 million and $65.2 million, with no federal fund borrowings outstanding at September 30, 2026, and December 31, 2025, respectively. The Bank is eligible to borrow from the FRB's discount window, but had no such borrowings at September 30, 2026 and December 31, 2025.

The Bank is a member of the FHLB-Atlanta and has borrowed from the FHLB-Atlanta, and in the future may borrow from time to time under the FHLB-Atlanta's advance program. FHLB-Atlanta advances include both fixed and variable terms and provide various maturities, and generally are secured by eligible assets. The Bank had no borrowings under FHLB-Atlanta's advance program at September 30, 2026 and December 31, 2025. At those dates, the Bank had $325.5 million and $304.9 million, respectively, of available lines of credit at the FHLB-Atlanta.

CAPITAL ADEQUACY

At September 30, 2026, the Company's consolidated stockholders' equity (book value) was $89.6 million, or $25.74 per share, compared to $92.1 million, or $26.35 per share, at December 31, 2025. The decrease from December 31, 2025 was primarily driven by an other comprehensive loss of $6.3 million due to an increase in unrealized losses on securities available-for-sale and cash flow hedges, net of tax, cash dividends paid of $2.8 million, and stock repurchases of $0.4 million, partially offset by net earnings of $7.0 million. The Company's equity-to-assets ratio was 8.81% at September 30, 2026, compared to 9.04% at December 31, 2025.

All of the Company's marketable securities are classified as available-for-sale. Therefore, any changes in the fair value of the Company's securities portfolio are reflected in accumulated other comprehensive loss within total equity, net of tax, under generally accepted accounting principles, but do not affect our capital for regulatory purposes.

The Company paid cash dividends of $0.81 per share for both the first nine months of 2026 and the first nine months of 2025.

The Federal Reserve has treated us as a "small bank holding company" under the Federal Reserve's Small Bank Holding Company Policy. Accordingly, our capital adequacy is evaluated at the Bank level, and not for the Company and its consolidated subsidiaries. The Bank's tier 1 leverage ratio was 10.74%, CET1 risk-based capital ratio was 16.32%, tier 1 risk-based capital ratio was 16.32%, and total risk-based capital ratio was 17.30% at September 30, 2026. These ratios exceed the minimum regulatory capital percentages of 5.0% for tier 1 leverage ratio, 6.5% for CET1 risk-based capital ratio, 8.0% for tier 1 risk-based capital ratio, and 10.0% for total risk-based capital ratio to be considered "well capitalized."

The Basel III regulatory capital framework applicable to us includes a "capital conservation buffer" of CET1 capital. A banking organization with a capital conservation buffer of 2.5% or less is subject to limitations on "distributions" from "eligible retained earnings", including dividend payments, share repurchases and certain discretionary bonus payments. At September 30, 2026, the Bank had a capital conservation buffer of 9.30%.

MARKET AND LIQUIDITY RISK MANAGEMENT

Management's objective is to manage assets and liabilities to provide a satisfactory, consistent level of profitability within the framework of established liquidity, loan, investment, borrowing, and capital policies. The Bank's Asset Liability Management Committee ("ALCO") is charged with the responsibility of monitoring these policies, which are designed to ensure an acceptable asset/liability composition. Two critical areas of focus for ALCO are interest rate risk and liquidity risk management.

Interest Rate Risk Management

In the normal course of business, the Company is exposed to market risk arising from fluctuations in interest rates. ALCO measures and evaluates interest rate risk so that the Bank can meet customer demands for various types of loans and deposits. Measurements used to help manage interest rate sensitivity include an earnings simulation model and an economic value of equity ("EVE") model.

Earnings simulation. Management believes that interest rate risk is best estimated by our earnings simulation modeling. Forecasted levels of earning assets, interest-bearing liabilities, and off-balance sheet financial instruments are combined with ALCO forecasts of market interest rates for the next 12 months and other factors in order to produce various earnings simulations and estimates. To help limit interest rate risk, we have guidelines for earnings at risk which seek to limit the variance of net interest income from gradual changes in interest rates. For changes up or down in rates from management's flat interest rate forecast over the next 12 months, policy limits for net interest income variances are as follows:

●

+/- 20% for a gradual change of 400 basis points

●

+/- 15% for a gradual change of 300 basis points

●

+/- 10% for a gradual change of 200 basis points

●

+/- 5% for a gradual change of 100 basis points

At September 30, 2026, our earnings simulation model indicated that we were in compliance with the policy guidelines noted above.

Economic Value of Equity. EVE measures the extent that the estimated economic values of our assets, liabilities, and off-balance sheet items will change as a result of interest rate changes. Economic values are estimated by discounting expected cash flows from assets, liabilities, and off-balance sheet items, which establishes a base case EVE. In contrast with our earnings simulation model, which evaluates interest rate risk over a 12-month timeframe, EVE uses a terminal horizon which allows for the re-pricing of all assets, liabilities, and off-balance sheet items. Further, EVE is measured using values as of a point in time and does not reflect any actions that ALCO might take in responding to or anticipating changes in interest rates, or market and competitive conditions. To help limit interest rate risk, we have stated policy guidelines for an instantaneous basis point change in interest rates, such that our EVE should not decrease from our base case by more than the following:

●

35% for an instantaneous change of +/- 400 basis points

●

30% for an instantaneous change of +/- 300 basis points

●

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

●

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

At September 30, 2026, our EVE model indicated that we were in compliance with our policy guidelines.

Each of the above analyses may not, on its own, be an accurate indicator of how our net interest income will be affected by changes in interest rates. Income associated with interest-earning assets and costs associated with interest-bearing liabilities may not be affected uniformly by changes in interest rates. In addition, the magnitude and duration of changes in interest rates may have a significant impact on net interest income. For example, although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates, and other economic and market factors, including market perceptions. Interest rates on certain types of assets and liabilities fluctuate in advance of changes in general market rates, while interest rates on other types of assets and liabilities may lag behind changes in general market rates. In addition, certain assets, such as adjustable-rate mortgage loans, have features (generally referred to as "interest rate caps and floors") which limit changes in interest rates. Prepayments and early withdrawal levels also could deviate significantly from those assumed in calculating the maturity of certain instruments. The ability of many borrowers to service their debts also may decrease during periods of rising interest rates or economic stress, which may differ across industries and economic sectors. ALCO reviews each of the above interest rate sensitivity analyses along with several different interest rate scenarios in seeking satisfactory, consistent levels of profitability within the framework of the Company's established liquidity, loan, investment, borrowing, and capital policies.

The Company also uses derivative financial instruments to manage interest rate sensitivity. See "Note 7 - Derivative Instruments" and "Note 8 - Fair Value" to the accompanying consolidated financial statements.

Liquidity Risk Management

Liquidity is the Company's ability to convert assets into cash equivalents in order to meet daily cash flow requirements, primarily for deposit withdrawals, loan demand and maturing obligations. The Company seeks to manage its liquidity to manage or reduce its costs of funds by maintaining liquidity believed adequate to meet its anticipated funding needs, while balancing against excessive liquidity that likely would reduce earnings due to the cost of foregoing alternative higher-yielding assets.

Liquidity is managed at two levels. The first is the liquidity of the Company. The second is the liquidity of the Bank. The management of liquidity at both levels is essential, because the Company and the Bank are separate and distinct legal entities with different funding needs and sources, and each are subject to regulatory guidelines and requirements. The Company depends upon dividends from the Bank for liquidity to pay its operating expenses, debt obligations and dividends, and Federal Reserve Regulation W restricts Company borrowings from, and other transactions with, the Bank. The Bank's payment of dividends depends on its earnings, liquidity, capital and the absence of regulatory restrictions on such dividends.

The primary source of funding and liquidity for the Company has been dividends received from the Bank. If needed, the Company could also borrow money, or issue common stock or other securities. Primary uses of funds by the Company include payment of Company expenses, dividends paid to stockholders and Company stock repurchases.

Primary sources of funding for the Bank include customer deposits, other borrowings, interest payments on earning assets, repayments and 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 borrowings from the Federal Reserve discount window. In addition to these sources, the Bank is eligible to participate in the FHLB - Atlanta's advance program to obtain funding for growth and liquidity. Advances include both fixed and variable terms and may be taken out with varying maturities. At September 30, 2026, the Bank had no FHLB - Atlanta advances outstanding and available credit from the FHLB of $325.5 million. At September 30, 2026, the Bank also had $73.2 million of available uncommitted federal funds lines with no borrowings outstanding. Primary uses of funds include repayment of maturing obligations and growing the loan portfolio. The Company also has access to the FRB discount window.

The Company's derivative instruments are with a single financial institution counterparty under a master netting agreement that provides for the daily exchange of collateral based on the net fair value of the instruments, with no minimum threshold. A decline in market interest rates would reduce the fair value of the Company's derivative positions and could require the Company to post additional collateral, which the Company would fund from its existing liquidity sources.

Management believes that the Company and the Bank have adequate sources of liquidity to meet all their respective known contractual obligations and unfunded commitments, including loan commitments and reasonably expected borrower, depositor, and creditor requirements over the next twelve months.

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

At September 30, 2026, the Bank had outstanding standby letters of credit of $2.8 million and unfunded loan commitments outstanding of $59.7 million. Because these commitments generally have fixed expiration dates and many will expire without being drawn upon, the total commitment level does not necessarily represent future cash requirements. If needed to fund these outstanding commitments, the Bank could use its cash and cash equivalents, deposits with other banks, liquidate federal funds sold or a portion of our securities available-for-sale, or draw on its available credit facilities or raise deposits.

Mortgage lending activities

We generally sell conforming residential mortgage loans in the secondary market to Fannie Mae while retaining the servicing of these loans. The sale agreements for these residential mortgage loans with Fannie Mae and other investors include various customary representations and warranties regarding the origination and characteristics of the residential mortgage loans. Although the representations and warranties vary among investors, they typically cover ownership of the loan, validity of the lien securing the loan, the absence of delinquent taxes or liens against the property securing the loan, compliance with loan criteria set forth in the applicable agreement and compliance with applicable federal, state, and local laws, among other matters.

As of September 30, 2026, the aggregate unpaid principal balance of residential mortgage loans, which we have originated and sold, but retained the servicing rights, was $179.3 million. Although these loans are generally sold on a non-recourse basis, we may be obligated to repurchase residential mortgage loans or reimburse investors for losses incurred (make whole requests) if a loan review reveals a potential breach of our seller representations and warranties. Upon receipt of a repurchase or make whole request, we work with investors to arrive at a mutually agreeable resolution. Repurchase and make whole requests are typically reviewed on an individual loan by loan basis to validate the claims made by the investor and to determine if a contractually required repurchase or make whole event has occurred. We seek to reduce and manage the risks of potential repurchases, make whole requests, or other claims by mortgage loan investors through our underwriting and quality assurance practices and by servicing mortgage loans to meet investor and secondary market standards.

The Company was not required to repurchase any loans during the first nine months of 2026 as a result of representation and warranty provisions contained in the Company's sale agreements with Fannie Mae, and had no pending repurchase or make-whole requests at September 30, 2026.

We service all residential mortgage loans originated and sold by us to Fannie Mae. As servicer, our primary duties are to: (1) collect payments due from borrowers; (2) advance certain delinquent payments of principal and interest; (3) maintain and administer any hazard, title, or primary mortgage insurance policies relating to the mortgage loans; (4) maintain any required escrow accounts for payment of taxes and insurance and administer escrow payments; and (5) foreclose on defaulted mortgage loans or take other actions to mitigate the potential losses to investors consistent with the agreements governing our rights and duties as servicer.

Our mortgage servicing agreements generally specify our standards of responsibility as servicer and provide protection against expenses and liabilities incurred by us when acting in compliance with these servicing agreements. However, if we commit a material breach of our obligations as servicer, we may be subject to termination if the breach is not cured within a specified period following notice. The standards governing servicing and the possible remedies for violations of such standards are determined by our agreements with Fannie Mae and Fannie Mae's mortgage servicing guides. Remedies could include repurchase of an affected loan.

Although repurchase and make whole requests related to representation and warranty provisions and servicing activities have been limited to date, it is possible that requests to repurchase mortgage loans or reimburse investors for losses incurred (make whole requests) may increase in frequency if investors more aggressively pursue all means of recovering losses on their purchased loans. As of September 30, 2026, we do not believe that this exposure is material due to the historical level of repurchase requests and loss trends, in addition to the fact that 99% of our residential mortgage loans serviced for Fannie Mae were current as of such date. We maintain ongoing communications with our mortgage purchasers and will continue to evaluate this exposure by monitoring the level and number of repurchase requests as well as the delinquency rates in our investor portfolios.

The Bank sells mortgage loans to Fannie Mae and services these on an actual/actual basis. As a result, the Bank is not obligated to make any advances to Fannie Mae on principal and interest on such mortgage loans where the borrower is entitled to forbearance.

Effects of Inflation and Changing Prices

The consolidated financial statements and related consolidated financial data presented herein have been prepared in accordance with GAAP and practices within the banking industry which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution's performance than the effects of general levels of inflation.

Inflation can increase our noninterest expenses. It also can affect our customers' behaviors, the mix of deposits between interest and noninterest-bearing, the levels of interest rates we have to pay on our deposits and other borrowings, and the interest rates we earn on our earning assets. The difference between our interest expense and interest income is also affected by the shape of the yield curve and the speeds 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 changes in the different interest rate indexes, given that not all of our assets or liabilities are priced with the same index. Changes in market interest rates and in the size of the Federal Reserve's securities holdings in response to inflation can affect economic activity, loan demand and growth, and unemployment rates. Although the Federal Reserve reduced its target federal funds rate range in late 2025 and has resumed purchases of Treasury securities, inflation has remained above the Federal Reserve's longer-term 2% goal, and on September 16, 2026 the Federal Reserve increased its target federal funds rate range by 25 basis points to 3.75% to 4.00% and signaled that further increases could follow if inflation remains elevated. The timing and extent of future monetary policy actions are uncertain. Inflation and related changes in market interest rates also can adversely affect the values and liquidity of our loans and securities, the value of collateral securing loans to our borrowers, and the success of our borrowers and such borrowers' available cash to pay interest on and principal of our loans to them. See "Item 1A Risk Factors."

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 of Income Statement Expenses to stipulate that ASU 2024-03 is effective for public business entities for annual 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, 2027 for the Company's annual consolidated financial statements on Form 10-K and January 1, 2028 for the Company's quarterly consolidated financial statements on Form 10-Q and is not expected to have a significant impact on the Company's consolidated 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 the threshold for when an entity is required to start capitalizing software costs is when (1) management has authorized and committed to funding the software project and (2) it is probable that the project will be completed and the software will be used to perform the function intended. ASU 2025-06 will be effective for the Company beginning January 1, 2028, with early adoption permitted, and is not expected to have a significant impact on the Company's consolidated financial statements.

ASU 2025-08, Financial Instruments - Credit Losses (Topic 326): Purchased Loans, expands the population of acquired loans accounted for under the "gross-up" approach, previously limited to purchased financial assets with credit deterioration, to include acquired non-PCD loans that qualify as purchased seasoned loans. ASU 2025-08 will be effective for the Company beginning January 1, 2027, on a prospective basis, with early adoption permitted. Because the Company has not historically acquired or purchased loans, ASU 2025-08 is not expected to have a significant impact on the Company's consolidated financial statements.

ASU 2025-09, Derivatives and Hedging (Topic 815): Hedge Accounting Improvements, amends Topic 815 to align hedge accounting more closely with an entity's risk 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 beginning January 1, 2027, with early adoption permitted, and is not expected to have a significant impact on the Company's consolidated financial statements.

ASU 2025-11, Interim Reporting (Topic 270): Narrow-Scope Improvements, is intended to provide clarity about the current interim reporting requirements, provides a list of the interim disclosures required by all other Codification topics and establishes a disclosure principle that requires entities to disclose events since the end of the last annual reporting period that have a material impact on the entity. ASU 2025-11 will be effective for the Company beginning January 1, 2028, with early adoption permitted, and is not expected to have a significant impact on the Company's consolidated financial statements.

Table 1 - Explanation of Non-GAAP Financial Measures

In addition to results presented in accordance with U.S. generally accepted accounting principles (GAAP), this quarterly report on Form 10-Q includes certain designated net interest income amounts presented on a tax-equivalent basis, a non-GAAP financial measure, including the presentation and calculation of our net interest margin and efficiency ratio. 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. Prior period amounts have been revised herein to conform with the current period presentation. These changes had no effect on the presentation of GAAP net interest income in current or prior periods.

The Company believes the presentation of net interest income on a tax-equivalent basis provides comparability of net interest income from both taxable and tax-exempt sources and facilitates comparability within the industry. Although the Company believes these non-GAAP financial measures enhance investors' understanding of its business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP. The reconciliations of these non-GAAP financial measures to their most directly comparable GAAP financial measures are presented below.

2026

2025

Third

Second

First

Fourth

Third

(in thousands)

Quarter

Net interest income (GAAP)

8,014

7,888

7,733

7,713

7,572

Tax-equivalent adjustment

107

Net interest income (Tax-equivalent)

8,121

7,995

7,832

7,780

7,641

	Nine months ended September 30,
(In thousands)	2026		2025
Net interest income (GAAP)	$	23,635		21,961
Tax-equivalent adjustment		313		203
Net interest income (Tax-equivalent)	$	23,948		22,164

Table 2 - Selected Quarterly Financial Data

	2026									2025
	Third			Second			First			Fourth		Third
(Dollars in thousands, except per share amounts)	Quarter			Quarter			Quarter			Quarter		Quarter
Results of Operations
Net interest income (a)	$	8,121			7,995			7,832			7,780		7,641
Less: tax-equivalent adjustment		107			107			99			67		69
Net interest income (GAAP)		8,014			7,888			7,733			7,713		7,572
Noninterest income		974			878			893			754		829
Total revenue		8,988			8,766			8,626			8,467		8,401
Provision for credit losses		(50	)		(248	)		(76	)		783		(255	)
Noninterest expense		5,894			6,105			5,901			5,563		5,806
Income tax expense		621			611			603			456		623
Net earnings	$	2,523			2,298			2,198			1,665		2,227

Per share data:
Basic and diluted net earnings	$	0.72			0.66			0.63			0.48		0.64
Cash dividends declared		0.27			0.27			0.27			0.27		0.27
Weighted average shares outstanding:
Basic		3,484,168			3,492,107			3,494,229			3,493,699		3,493,699
Diluted		3,485,208			3,492,107			3,496,518			3,496,729		3,495,972
Shares outstanding, at period end		3,480,486			3,487,830			3,495,866			3,493,699		3,493,699
Book value	$	25.74			26.91			26.62			26.35		25.65
Common stock price:
High	$	27.82			28.88			26.50			27.98		28.47
Low		25.01			23.03			21.01			24.00		23.13
Period end:		26.25			27.04			23.87			26.95		28.44
To earnings ratio (b)	10.54		x		11.22			10.52			12.96		13.87
To book value		102	%		100			90			102		111
Performance ratios:
Annualized return on average equity		10.68	%		9.74			9.65			7.40		10.65
Annualized return on average assets		0.99	%		0.90			0.86			0.66		0.89
Dividend payout ratio		37.50	%		40.91			42.86			56.25		42.19
Asset Quality:
Allowance for credit losses as a % of:
Loans		1.13	%		1.14			1.16			1.27		1.20
Nonperforming loans		2,976	%		10,291			6,643			1,489		6,434
Nonperforming assets as a % of:
Loans and other real estate owned		0.04	%		0.01			0.02			0.09		0.02
Total assets		0.02	%		0.01			0.01			0.05		0.01
Nonperforming loans as a % of total loans		0.04	%		0.01			0.02			0.09		0.02
Annualized net charge-offs (recoveries) as % of average loans		(0.01	)%		(0.02	)		0.28			0.22		0.06
Capital Adequacy: (c)
CET 1 risk-based capital ratio		16.32	%		16.26			16.12			16.06		15.51
Tier 1 risk-based capital ratio		16.32	%		16.26			16.12			16.06		15.51
Total risk-based capital ratio		17.30	%		17.24			17.13			17.14		16.49
Tier 1 leverage ratio		10.74	%		10.65			10.60			10.71		10.72
Other financial data:
Net interest margin (a)		3.36	%		3.33			3.28			3.24		3.21
Effective income tax rate		19.75	%		21.00			21.53			21.50		21.86
Efficiency ratio (d)		64.80	%		68.80			67.63			65.19		68.55
Selected average balances:
Loans, net of unearned income	$	579,575			582,335			577,489			559,009		556,233
Total assets		1,018,667			1,021,742			1,026,163			1,009,953		997,892
Total deposits		921,216			925,608			930,474			917,178		909,293
Total stockholders' equity		94,526			94,340			91,088			90,000		83,642
Selected period end balances:
Loans, net of unearned income	$	571,847			579,589			582,040			565,354		557,912
Allowance for credit losses		6,487			6,586			6,776			7,176		6,691
Total assets		1,016,988			1,085,803			1,026,946			1,018,797		1,011,184
Total deposits		923,338			988,318			931,109			922,926		917,266
Total stockholders' equity		89,587			93,874			93,061			92,053		89,613

(a)	Tax-equivalent. See "Table 1 - Explanation of Non-GAAP Financial Measures."
(b)	Calculated by dividing period end share price by earnings per share for the previous four quarters.
(c)	Regulatory capital ratios presented are for the Company's wholly-owned subsidiary, AuburnBank.
(d)	Efficiency ratio is the result of noninterest expense divided by the sum of noninterest income and tax-equivalent net interest income.
	See Table 1 - Explanation of Non-GAAP Measures.

Table 3 - Selected Financial Data

	Nine months ended September 30,
(Dollars in thousands, except per share amounts)	2026			2025
Results of Operations
Net interest income (a)	$	23,948			22,164
Less: tax-equivalent adjustment		313			203
Net interest income (GAAP)		23,635			21,961
Noninterest income		2,745			2,365
Total revenue		26,380			24,326
Provision for credit losses		(374	)		(152	)
Noninterest expense		17,900			17,388
Income tax expense		1,835			1,500
Net earnings	$	7,019			5,590

Per share data:
Basic and diluted net earnings	$	2.01			1.60
Cash dividends declared		0.81			0.81
Weighted average shares outstanding:
Basic		3,490,131			3,493,699
Diluted		3,491,127			3,494,465
Shares outstanding, at period end		3,480,486			3,493,699
Book value	$	25.74			25.65
Common stock price:
High	$	28.88			28.47
Low		21.01			19.48
Period end		26.25			28.44
To earnings ratio (b)	10.54		x		13.87
To book value		102	%		111
Performance ratios:
Annualized return on average equity		10.03	%		9.06
Annualized return on average assets		0.92	%		0.75
Dividend payout ratio		40.30	%		50.63
Asset Quality:
Allowance for credit losses as a % of:
Loans		1.13	%		1.20
Nonperforming loans		2,976	%		6,434
Nonperforming assets as a % of:
Loans and other real estate owned		0.04	%		0.02
Total assets		0.02	%		0.01
Nonperforming loans as a % of total loans		0.04	%		0.02
Annualized net charge-offs as a % of average loans		0.09	%		0.02
Capital Adequacy: (c)
CET 1 risk-based capital ratio		16.32	%		15.51
Tier 1 risk-based capital ratio		16.32	%		15.51
Total risk-based capital ratio		17.30	%		16.49
Tier 1 leverage ratio		10.74	%		10.72
Other financial data:
Net interest margin (a)		3.32	%		3.16
Effective income tax rate		20.73	%		21.16
Efficiency ratio (d)		67.06	%		70.89
Selected average balances:
Loans, net of unearned income	$	579,807			560,659
Total assets		1,022,163			991,935
Total deposits		925,732			907,105
Total stockholders' equity		93,330			82,281
Selected period end balances:
Loans, net of unearned income	$	571,847			557,912
Allowance for credit losses		6,487			6,691
Total assets		1,016,988			1,011,184
Total deposits		923,338			917,266
Total stockholders' equity		89,587			89,613

(a)	Tax-equivalent. See "Table 1 - Explanation of Non-GAAP Financial Measures."
(b)	Calculated by dividing period end share price by earnings per share for the previous four quarters.
(c)	Regulatory capital ratios presented are for the Company's wholly-owned subsidiary, AuburnBank.
(d)	Efficiency ratio is the result of noninterest expense divided by the sum of noninterest income and tax-equivalent net interest income.
	See Table 1 - Explanation of Non-GAAP Measures.

Table 4 - Average Balances and Net Interest Income Analysis (1)

	Quarter ended September 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)	$	579,925	$	8,393		5.74	%	$	556,736	$	7,844		5.59	%
Securities (3) (4)		286,221		1,607		2.23	%		268,248		1,306		1.93	%
Federal funds sold		25,033		233		3.69	%		27,572		304		4.37	%
Interest-bearing bank deposits		68,619		643		3.72	%		90,964		1,027		4.48	%
Total interest-earning assets		959,798	$	10,876		4.50	%		943,520	$	10,481		4.41	%
Cash and due from banks		13,394							13,627
Other assets (5)		45,475							40,745
Total assets	$	1,018,667						$	997,892
Interest-bearing liabilities:
Deposits:
NOW	$	209,454	$	597		1.13	%	$	199,060	$	650		1.30	%
Savings and money market		269,588		743		1.09	%		265,627		763		1.14	%
Time deposits		186,763		1,414		3.00	%		180,618		1,427		3.13	%
Total interest-bearing deposits		665,805		2,754		1.64	%		645,305		2,840		1.75	%
Short-term borrowings		132		1		3.01	%		-		-		0.00	%
Total interest-bearing liabilities		665,937	$	2,755		1.64	%		645,305	$	2,840		1.75	%
Noninterest-bearing deposits		255,411							263,988
Other liabilities		2,793							4,957
Stockholders' equity		94,526							83,642
Total liabilities and stockholders' equity	$	1,018,667						$	997,892

Net interest income and margin (tax-equivalent)			$	8,121		3.36	%			$	7,641		3.21	%

(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 $(27.4) and $(31.0) million for the quarters ended September 30, 2026 and September 30, 2025, respectively.

Table 5 - Average Balances and Net Interest Income Analysis (1)

	Nine months ended September 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)	$	580,128	$	24,681		5.69	%	$	560,946	$	23,161		5.52	%
Securities (3) (4)		264,561		4,067		2.06	%		274,068		4,010		1.96	%
Federal funds sold		26,288		708		3.60	%		26,717		875		4.38	%
Interest-bearing bank deposits		92,376		2,567		3.72	%		76,254		2,541		4.46	%
Total interest-earning assets		963,353	$	32,023		4.44	%		937,985	$	30,587		4.36	%
Cash and due from banks		13,685							15,864
Other assets (5)		45,125							38,086
Total assets	$	1,022,163						$	991,935
Interest-bearing liabilities:
Deposits:
NOW	$	219,724	$	2,004		1.22	%	$	202,381	$	2,042		1.35	%
Savings and money market		267,035		1,895		0.95	%		254,095		1,910		1.01	%
Time deposits		182,626		4,175		3.06	%		185,355		4,470		3.22	%
Total interest-bearing deposits		669,385		8,074		1.61	%		641,831		8,422		1.75	%
Short-term borrowings		44		1		3.04	%		37		1		3.61	%
Total interest-bearing liabilities		669,429	$	8,075		1.61	%		641,868	$	8,423		1.75	%
Noninterest-bearing deposits		256,347							265,274
Other liabilities		3,057							2,512
Stockholders' equity		93,330							82,281
Total liabilities and stockholders' equity	$	1,022,163						$	991,935

Net interest income and margin (tax-equivalent)			$	23,948		3.32	%			$	22,164		3.16	%

(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 $(26.5) and $(34.8) million for the first nine months ended September 30, 2026 and September 30, 2025, respectively.

Table 6 - Volume and Rate Variance Analysis

	Quarter ended									Nine months ended
	September 30, 2026 vs. 2025									September 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)	$	549			213			336		$	1,520			704			816
Securities (1)		301			203			98			57			203			(146	)
Federal funds sold		(71	)		(47	)		(24	)		(167	)		(155	)		(12	)
Interest-bearing bank deposits		(384	)		(175	)		(209	)		26			(422	)		448
Total interest income	$	395			194			201		$	1,436			330			1,106
Interest expense:
Deposits:
NOW	$	(53	)		(83	)		30		$	(38	)		(196	)		158
Savings and money market		(20	)		(31	)		11			(15	)		(107	)		92
Certificates of deposit		(13	)		(60	)		47			(295	)		(233	)		(62	)
Total interest-bearing deposits		(86	)		(174	)		88			(348	)		(536	)		188
Short-term borrowings		1			-			1			-			-			-
Long-term debt		-			-			-			-			-			-
Total interest expense		(85	)		(174	)		89			(348	)		(536	)		188
Net interest income	$	480			368			112		$	1,784			866			918

(1)	Yields on tax-exempt securities have been computed on a tax-equivalent basis using an income tax rate of 21%. See "Table 1 - Explanation of Non-GAAP Financial Measures."
(2)	Changes that are not solely a result of volume or rate have been allocated to volume.

Table 7 - Loan Maturities

	September 30, 2026
	1 year		1 to 5		5 to 15		After 15
(Dollars in thousands)	or less		years		years		years		Total
Commercial and industrial	$	13,442		13,041		578		-		27,061
Municipal		392		1,203		20,954		11,769		34,318
Construction and land development		33,632		22,082		1,353		-		57,067
Commercial real estate		53,585		189,304		79,556		4,530		326,975
Residential real estate		8,048		39,944		19,258		51,150		118,400
Consumer installment		2,905		5,096		885		-		8,886
Total loans	$	112,004		270,670		122,584		67,449		572,707

Table 8 - Sensitivities to Changes in Interest Rates on Loans Maturing in More Than One Year

	September 30, 2026
	Variable		Fixed
(Dollars in thousands)	Rate		Rate		Total
Commercial and industrial	$	413		13,206		13,619
Municipal		60		33,866		33,926
Construction and land development		17,489		5,946		23,435
Commercial real estate		12,365		261,025		273,390
Residential real estate		51,147		59,205		110,352
Consumer installment		239		5,742		5,981
Total loans	$	81,713		378,990		460,703

Auburn National Bancorporation Inc. published this content on November 06, 2026, and is solely responsible for the information contained herein. Distributed via EDGAR on November 06, 2026 at 18:10 UTC. If you believe the information included in the content is inaccurate or outdated and requires editing or removal, please contact us at [email protected]

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Quarterly Report for Quarter Ending September 30, 2026 (Form 10-Q)