ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF
OPERATIONS
The following is a discussion of our financial condition at December 31,
2025 and 2024 and our results of operations for
the years ended December 31, 2025 and 2024. The purpose of this discussion
is to provide information about our financial
condition and results of operations which is not otherwise apparent
from the consolidated financial statements. The
following discussion and analysis should be read along with our consolidated
financial statements and the related notes
included elsewhere herein. In addition, this discussion and analysis contains
forward-looking statements, so you should
refer to Item 1A, “Risk Factors” and “Special Cautionary Notice Regarding
Forward-Looking Statements”.
This includes
Table 2 “Selected
Financial Data.”
OVERVIEW
The Company was incorporated in 1990 under the laws of the State of Delaware and
became a bank holding company after
it acquired its Alabama predecessor, which was a bank
holding company established in 1984. The Bank, the Company's
principal subsidiary,
is an Alabama state-chartered bank that is a member of the Federal Reserve System and
has operated
continuously since 1907. Both the Company and the Bank are headquartered
in Auburn, Alabama. The Bank conducts its
business primarily in East Alabama, including Lee County and surrounding
areas. The Bank operates full-service branches
in Auburn, Opelika, Notasulga and Valley,
Alabama.
The Bank also operates a loan production office in
Phenix City,
Alabama.
Summary of Results of Operations
Year ended December 31
(Dollars in thousands, except per share data)
2025
2024
Net interest income (a)
$
29,747
$
27,204
Less: tax-equivalent adjustment
73
79
Net interest income (GAAP)
29,674
27,125
Noninterest income
3,119
3,474
Total revenue
32,793
30,599
Provision for credit losses
631
36
Noninterest expense
22,951
22,166
Income tax expense (benefit)
1,956
2,000
Net earnings
$
7,255
$
6,397
Basic and diluted net earnings per share
$
2.08
$
1.83
(a) Tax-equivalent.
See "Table 1 - Explanation of Non-GAAP Financial Measures".
Financial Summary
The Company’s net earnings were
$7.3 million for the full year 2025, compared to $6.4 million for the full year 2024.
Basic and diluted net earnings per share were $2.08 per share for the full year 2025,
compared to $1.83 per share for the full
year 2024.
Net interest income (tax-equivalent) was $29.7 million in 2025, a
9% increase compared to $27.2 million in 2024. This
increase was primarily due to improved net interest margin
and a 2% increase in our interest-earning assets.
The
Company’s net interest margin
(tax-equivalent) was 3.27% in 2025, compared to 3.06% in 2024.
The increase in net
interest margin (tax-equivalent) was primarily due to improved
yields on interest-earning assets, and a decrease in our cost
of interest-bearing deposits.
At December 31, 2025, the Company’s
allowance for credit losses was $7.2 million, or 1.27% of total loans, compared
to
$6.9 million, or 1.22% of total loans, at December 31, 2024.
The Company recorded a provision for credit losses of $631 thousand
in 2025 compared to $36 thousand during 2024.
The
provision for credit losses in 2025 was primarily due to two loans that were individually
evaluated.
A specific reserve was
established for one loan and the other loan was partially charged
off.
The provision for credit losses under CECL is
reflective of the Company’s credit
risk profile and the future economic outlook and forecasts. Our CECL model is largely
influenced by economic factors including, most notably,
the anticipated unemployment rate.
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43
Noninterest income was $3.1 million in 2025 compared to $3.5
million in 2024.
The decrease was primarily related to a
decrease in mortgage lending income and other noninterest income
.
Noninterest expense was $23.0 million in 2025 compared to $22.2
million in 2024.
The increase was primarily related to
increases in salaries and benefits expense and other noninterest expense.
These increases were partially offset by a decrease
in net occupancy and equipment expense.
The provision for income tax expense was $2.0 million for an effective
tax rate of 21.24% for 2025, compared to
$2.0 million for an effective tax rate of 23.82% for 2024.
The Company’s effective
income tax rate is affected principally
by tax-exempt earnings from the Company’s
investments in municipal securities and loans, bank-owned life insurance,
and
New Markets Tax Credits.
The provision for income tax expense and the effective tax rates for
2024 included discrete tax
items associated with provision to return adjustments in conjunction with
the final 2023 tax return filing and the resolution
of state examination activities, which resulted in additional tax expense.
The Company paid cash dividends of $1.08 per share in 2025 and 2024.
At December 31, 2025,
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 17.14%, a tier 1 leverage ratio of 10.71%
and common equity tier 1 or (CET1) of
16.06%
at December 31, 2025.
CRITICAL ACCOUNTING POLICIES
The accounting and financial reporting policies of the Company conform with
U.S. generally accepted accounting
principles and with general practices within the banking industry.
In connection with the application of those principles, we
have made judgments and estimates which, in the case of the determination of our
allowance for credit losses, recurring and
non-recurring fair value measurements, and the valuation of deferred tax assets, were critical
to the determination of our
financial position and results of operations.
Allowance for Credit Losses – Loans
The allowance for credit losses is estimated under the CECL methodology set forth
in Financial Accounting Standards
Board (“FASB”) Accounting
Standards Codification (“ASC”) 326,
Financial Instruments – Credit Losses
. The allowance
for credit losses reflects management’s
estimate of the amount of credit losses expected to be recognized over the
remaining life of the loans in our portfolio. This evaluation requires significant
management judgment and is based upon
relevant available information related to historical default and loss experience,
current and projected economic conditions,
and other portfolio-specific and environmental risk factors. Losses are predicted
over a reasonable and supportable forecast
period, and at the end of the reasonable and supportable period losses revert
to long term historical averages. 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. There are factors beyond
our control, such as changes in projected economic conditions, real estate markets or
particular industry conditions which
may materially impact asset quality and the adequacy of the allowance for
credit losses and thus the resulting provision for
credit losses. The allowance is adjusted through provision for credit losses and
decreased by charge-offs, net of recoveries
of amounts previously charged-off. See Note 1
- Summary of Significant Accounting Policies and Note 4 - Loans and
Allowance for Credit Losses in the notes to our consolidated financial statements
in this report.
Fair Value
Determination
U.S. GAAP requires management to value and disclose certain of the
Company’s assets and liabilities at fair value,
including investments classified as available-for-sale and
derivatives. ASC 820,
Fair Value
Measurements and Disclosures
,
which defines fair value, establishes a framework for measuring fair value
in accordance with U.S. GAAP and expands
disclosures about fair value measurements.
For more information regarding fair value measurements and disclosures,
please refer to Note 1 - Summary of Significant Accounting Policies and Note
14, Fair Value
in the notes to the
consolidated financial statements that accompany this report.
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44
Fair values are based on active market prices of identical assets or liabilities when available.
Comparable assets or
liabilities or a composite of comparable assets in active markets are used when
identical assets or liabilities do not have
readily available active market pricing.
However, some of the Company’s
assets or liabilities lack an available or
comparable trading market characterized by frequent transactions between
willing buyers and sellers. In these cases, fair
value is estimated using pricing models that use discounted cash flows and
other pricing techniques. Pricing models and
their underlying assumptions are based upon management’s
best estimates for appropriate discount rates, default rates,
prepayments, market volatility and other factors, taking into account
current observable market data and experience.
These assumptions may have a significant effect on the reported
fair values of assets and liabilities and the related income
and expense. As such, the use of different models and assumptions,
as well as changes in market conditions, could result in
materially different net earnings and retained earnings results.
Deferred Tax
Asset Valuation
A valuation allowance is recognized for a deferred tax asset if, based on the weight of
available evidence, it is more-likely-
than-not that some portion or the entire deferred tax asset will not be realized. The ultimate
realization of deferred tax assets
is dependent upon the generation of future taxable income during the periods
in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred
tax liabilities, projected future taxable income and tax
planning strategies in making this assessment. At December 31,
2025 we had net deferred tax assets of $6.9
million
included as “other assets”, including $6.5 million resulting from unrealized
losses in our securities portfolio.
Based upon
the level of taxable income over the last three years and projections for future
taxable income over the periods in which the
deferred tax assets are deductible, management believes it is more likely
than not that we will realize the benefits of these
deductible differences at December 31, 2025.
The amount of the deferred tax assets considered realizable, however,
could
be reduced if estimates of future taxable income are reduced.
See Note 1 - Summary of Significant Accounting Policies
and Note 9 – Income Taxes
in the notes to the consolidated financial statements that accompany this report.
Average Balance
Sheet and Interest Rates
Year ended December 31
2025
2024
Average
Yield/
Average
Yield/
(Dollars in thousands)
Balance
Rate
Balance
Rate
Loans and loans held for sale
$
560,476
5.50%
$
568,733
5.23%
Securities - taxable
228,793
2.16%
248,072
2.19%
Securities - tax-exempt (a)
9,173
3.77%
10,084
3.70%
Total securities
237,966
2.23%
258,156
2.25%
Federal funds sold
26,535
4.25%
17,907
5.24%
Interest bearing bank deposits
83,648
4.28%
44,634
5.23%
Total interest-earning
assets
908,625
4.49%
889,430
4.36%
Deposits:
NOW
205,951
1.33%
192,702
1.39%
Savings and money market
253,668
0.97%
251,778
0.86%
Certificates of deposit
184,047
3.20%
195,097
3.46%
Total interest-bearing
deposits
643,666
1.72%
639,577
1.81%
Short-term borrowings
28
7.14%
628
0.48%
Total interest-bearing
liabilities
643,694
1.72%
640,205
1.81%
Net interest income and margin (a)
$
29,747
3.27%
$
27,204
3.06%
(a) Tax-equivalent.
See "Table 1 - Explanation
of Non-GAAP Financial Measures".
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45
RESULTS
OF OPERATIONS
Net Interest Income and Margin
Net interest income (tax-equivalent) was $29.7 million in 2025, a
9% increase compared to $27.2 million in 2024. This
increase was primarily due to improved net interest margin
and a 2% increase in our interest-earning assets.
The
Company’s net interest margin
(tax-equivalent) was 3.27% in 2025, compared to 3.06% in 2024.
The increase in net
interest margin (tax-equivalent) was primarily due to improved
yields on interest-earning assets, and a decrease in our cost
of interest-bearing deposits.
The Federal Reserve announced a 50-basis points rate reduction on September
18, 2024,
followed by two 25 basis points reduction in October and December 2024
and by three 25 basis points in September,
October and December 2025.
At year end the target federal funds rate ranged from
3.5% - 3.75%.
The tax-equivalent yield on total interest-earning assets increased by
13 basis points to 4.49% in 2025 compared to 4.36%
in 2024.
This increase was primarily due to changes in our asset mix, as cash and cash equivalents increased
and securities
declined.
Average interest-earning
assets were $908.6 million during 2025, a 2% increase compared to $889.4 million
during 2024.
The cost of total interest-bearing liabilities decreased by 9 basis points to 1.72%
in 2025 compared to 1.81% in 2024
following decreases to the federal funds rate.
The Company continues to deploy various asset liability management
strategies to manage its risk from interest rate
fluctuations.
Deposit and loan pricing remains competitive in our markets.
We believe that interest rates,
inflation and
monetary policy may continue to fluctuate in 2026
and may be challenging as a result.
Our ability to compete and manage
our deposits 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 2026.
Provision for Credit Losses
The Company recorded a provision for credit losses of $631 thousand during
2025, compared to $36 thousand for 2024.
Provision expense is affected by organic loan
growth in our loan portfolio, our internal assessment of the credit quality
of
the loan portfolio, our expectations about future economic conditions
and net charge-offs.
Our CECL model is largely
influenced by economic factors including, the anticipated
Alabama unemployment rate, which may be affected by
government policies, including monetary,
fiscal and other policies, including tariffs.
The provision for credit losses in 2025
was primarily due to two loans that were individually evaluated.
A specific reserve was established for one loan and the
other loan was partially charged off.
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 December 31,
2025, the Company’s allowance for
credit losses was $7.2 million, or 1.27% of total loans, compared to $6.9 million,
or
1.22% of total loans, at December 31, 2024.
Noninterest Income
Year ended December 31
(Dollars in thousands)
2025
2024
Service charges on deposit accounts
$
619
$
614
Mortgage lending
474
608
Bank-owned life insurance
414
403
Other
1,612
1,849
Total noninterest income
$
3,119
$
3,474
The Company’s noninterest income
from mortgage lending is primarily attributable to the (1) origination and sale of
new
mortgage loans, including refinancings 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 mortgage loans, which are netted against the commission expense
associated with these originations. The
Company’s customary practice
is to originate mortgage loans for sale in the secondary market and to either sell or retain
the
MSRs when the loan is sold.
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46
MSRs are recognized based on the fair value of the servicing right
on the date the corresponding mortgage loan is sold.
Subsequent to the date of transfer, the Company
has elected to measure its MSRs under the amortization method.
Servicing
fee income is reported net of any related amortization expense.
The Company evaluates MSRs for impairment quarterly.
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 for 2025 and 2024.
Year ended December 31
(Dollars in thousands)
2025
2024
Origination income
$
154
$
261
Servicing fees, net
320
347
Total mortgage lending
income
$
474
$
608
The Company’s income from mortgage
lending typically fluctuates as mortgage interest rates, housing sales and
refinancings change.
Origination income decreased in 2025 compared to 2024 due to a decrease in mortgage
lending
demand as mortgage interest rates remain elevated.
Other noninterest income was $1.6 million in 2025, compared to $1.8 million in
2024.
The decrease in other noninterest
income was primarily due to decreased fee income on reciprocal deposits sold
through the Intrafi network.
Noninterest Expense
Year ended December 31
(Dollars in thousands)
2025
2024
Salaries and benefits
$
13,154
$
12,534
Net occupancy and equipment
2,353
2,508
Professional fees
1,276
1,188
FDIC and other regulatory assessments
569
564
Other
5,599
5,372
Total noninterest expense
$
22,951
$
22,166
Salaries and benefits increased during 2025 compared to 2024 primarily due
to routine annual increases in salaries and
wages.
The decrease in net occupancy and equipment expense was primarily
due to increased
leasing income associated with the
Company’s headquarters, which
totaled $1.4 million in 2025 compared to $1.0 million in 2024.
The increase in other noninterest expense was due to a variety of miscellaneous
items including increased information
technology and systems expenses and loan-related expenses.
Income Tax
Expense
The provision for income taxes expense was $2.0 million for an effective
tax rate of 21.24% for 2025, compared to
$2.0 million for an effective tax rate of 23.82% for 2024.
The Company’s effective
income tax rate is affected principally
by tax-exempt earnings from the Company’s
investments in municipal securities and loans, bank-owned life insurance,
and
New Markets Tax Credits.
The provision for income tax expense and the effective
tax rates for 2024 included discrete tax
items associated with provision to return adjustments in conjunction with
the final 2023 tax return filing and the resolution
o
f state examination activities, which resulted in additional tax expense.
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47
BALANCE SHEET ANALYSIS
Securities
Securities available-for-sale were $233.3 million at December 31, 2025,
compared to $243.0 million at December 31, 2024.
This decrease reflects a decrease in the amortized cost basis of securities available
-for-sale of $23.4 million, partially offset
by an increase of $13.7 million in the fair value of securities available-for
-sale.
The decrease in the amortized cost basis of
securities available-for-sale was primarily attributable to normal paydowns
and maturities.
The average annualized tax-
equivalent yields earned on total securities were 2.23%
in 2025 and 2.25% in 2024.
The following table shows the carrying value and weighted average yield of
securities available-for-sale as of December
31, 2025 according to contractual maturity.
Actual maturities of mortgage-backed securities (“MBS”) may differ from
contractual maturities because the mortgages underlying the MBS may be called
or prepaid in whole or in part, with or
without penalty.
December 31, 2025
1 year
1 to 5
5 to 10
After 10
Total
(Dollars in thousands)
or less
years
years