AUBURN NATIONAL BANCORPORATION, INC

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Discussion and Analysis of Financial Condition and Results of Operations”, “Quantitative

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

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Auburn National Bancorporation, Inc. (the “Company”) is a bank holding

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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.

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The Bank has operated continuously since 1907 and currently conducts its business

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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.

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The following discussion and analysis is intended to provide a better understanding

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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.

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of the statements made herein under the captions “Business”, “Properties”,

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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”).

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Forward-looking statements include statements with respect to our beliefs, plans,

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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.

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other than statements of historical fact, could be forward-looking

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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:

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All written or oral forward-looking statements that we make or are attributable

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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.

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– Explanation of Non-GAAP Financial Measures

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

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Basic and diluted earnings per share

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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.

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This increase was due to growth in average interest-earning assets and

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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. 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 decrease in our cost of interest-bearing deposits, and a more favorable asset mix. Average loans were approximately $580.1 million in the first nine months of 2026, compared to $560.9 million in the first nine months of 2025.

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The provision for credit losses is

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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.

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income related to non-taxable death benefits received during the

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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.

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The increase was primarily due to a $0.4 million loss contingency accrual recorded in other

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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.

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tax rate is principally affected by tax-exempt

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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”).

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The Company paid cash dividends of $0.54 per share in the first six months of 2026

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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.”

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was primarily due to higher yields on interest-earning assets, a more favorable

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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.

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The accounting principles we follow and our methods of applying

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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.

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Sheet and Interest Rates

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Average Balance Sheet and Interest Rates

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asset mix, and a decrease in our cost of

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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.

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The tax-equivalent yield on total interest-earning assets increased by

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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.

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The cost of interest-bearing liabilities decreased 16 basis points in the first six months

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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.

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The Company continues to deploy various asset liability management

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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.

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affected by changes in overall balance and composition of our loan

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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.

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Our allowance for credit losses reflects an amount we believe appropriate, based

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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.

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lending income includes income from the (1) origination and sale of mortgage

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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.

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MSRs are recognized based on the fair value of the servicing right on

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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.

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The Company evaluates MSRs for impairment on a quarterly basis.

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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.

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The following table presents a breakdown of the Company’s

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

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Income from bank-owned life insurance increased due to non-taxable

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

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The decrease in net occupancy and equipment expense was primarily due

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

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The increase in professional fees for the first six months of 2026 was primarily due

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

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The increase in other noninterest expense was primarily due to a $0.4 million

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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.

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The increase was primarily due to the level of pre-tax earnings.

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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.

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during the second quarter of 2026, partially offset by a decrease in net

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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.

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million at June 30, 2026, compared to $565.3 million at December 31,

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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.

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During the first quarter of 2026, the Company established a separate municipal

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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.

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Within the residential real estate portfolio segment,

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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.

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The average yield earned on loans and loans held for sale was 5.66% in the first six months

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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.

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The specific economic and credit risks associated with our loan portfolio include,

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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.