UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM10-Q

(Mark One)

[X]	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the quarterly period ended June 30, ~~2018~~2019

[ ]	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the transition period to

Commission File Number:0-26486

Auburn National Bancorporation, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Delaware

63-0885779

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

100 N. Gay Street

Auburn, Alabama 36830

(334)821-9200

(Address and telephone number of principal executive offices)

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate website, if any,~~ every Interactive Data File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files).

Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” inRule 12b-2 of the Exchange Act. (Check one):


Large Accelerated filer ☐		Accelerated filer ☒		Non-accelerated filer ☐		Smaller reporting company ☐	��	Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Act). Yes ☐ No ☒

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.01	AUBN	Nasdaq Global Market

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Class				Outstanding at ~~August 1, 2018~~July 31, 2019
Common Stock, $0.01 par value per share				~~3,643,813~~3,569,192 shares

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

INDEX

PART I. FINANCIAL INFORMATION

PAGE

Item 1

Financial Statements

Consolidated Balance Sheets (Unaudited)
as of June 30, ~~2018~~2019 and December 31, ~~2017~~2018

Consolidated Statements of Earnings (Unaudited)
for the quarter and six months ended June 30, ~~2018~~2019 and ~~2017~~2018

Consolidated Statements of Comprehensive Income (Unaudited)
for the quarter and six months ended June 30, ~~2018~~2019 and ~~2017~~2018

Consolidated Statements of Stockholders’ Equity (Unaudited)
for the quarter and six months ended June 30, ~~2018~~2019 and ~~2017~~2018

Consolidated Statements of Cash Flows (Unaudited)
for the six months ended June 30, ~~2018~~2019 and ~~2017~~2018

Notes to Consolidated Financial Statements (Unaudited)

Item 2

Management’s Discussion and Analysis of Financial Condition and Results of Operations

2927

Table 1 – Explanation ofNon-GAAP Financial Measures

4644

Table 2 – Selected Quarterly Financial Data

4745

Table 3 – Selected Financial Data

4846

Table 4 – Average Balances and Net Interest Income Analysis –
for the quarter ended June 30, ~~2018~~2019 and ~~2017~~2018

4947

Table 5 – Average Balances and Net Interest Income Analysis –
for the six months ended June 30, ~~2018~~2019 and ~~2017~~2018

5048

Table 6 – Loan Portfolio Composition

5149

Table 7 – Allowance for Loan Losses and Nonperforming Assets

5250

Table 8 – Allocation of Allowance for Loan Losses

5351

Table 9 – CDs and Other Time Deposits of $100,000 or more

5452

Item 3

Quantitative and Qualitative Disclosures About Market Risk

5553

Item 4

Controls and Procedures

5553

PART II. OTHER INFORMATION

Item 1

Legal Proceedings

5553

Item 1A

Risk Factors

5553

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

5553

Item 3

Defaults Upon Senior Securities

5554

Item 4

Mine Safety Disclosures

5554

Item 5

Other Information

5554

Item 6

Exhibits

5654

PART 1. FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Unaudited)


(Dollars in thousands, except share data)		June 30, 2018			December 31, 2017			June 30, 2019			December 31, 2018

Assets:
Cash and due from banks		$	16,297		$	12,942		$	16,497		$	13,043
Federal funds sold			37,576			41,540			25,395			26,918
Interest bearing bank deposits			12,072			51,046
Interest-bearing bank deposits									33,776			25,115

Cash and cash equivalents			65,945			105,528			75,668			65,076

Securitiesavailable-for-sale			251,320			257,697			248,813			239,801
Loans held for sale			1,943			1,922			2,016			383
Loans, net of unearned income			456,572			453,651			476,061			476,908
Allowance for loan losses			(4,750	)		(4,757)			(4,851	)		(4,790)

Loans, net			451,822			448,894			471,210			472,118

Premises and equipment, net			13,613			13,791			14,825			13,596
Bank-owned life insurance			18,543			18,330			18,982			18,765
Other assets			8,605			7,219			7,664			8,338

Total assets		$	811,791		$	853,381		$	839,178		$	818,077

Liabilities:	Liabilities:						Liabilities:
Deposits:
Noninterest-bearing		$	199,469		$	193,917		$	206,871			201,648
Interest-bearing			521,536			563,742			533,630			522,545

Total deposits			721,005			757,659			740,501			724,193
Federal funds purchased and securities sold under agreements to repurchase			2,732			2,658			1,100			2,300
Long-term debt			—			3,217
Accrued expenses and other liabilities			2,306			2,941			3,512			2,529

Total liabilities			726,043			766,475			745,113			729,022

Stockholders’ equity:	Stockholders’ equity:						Stockholders’ equity:
Preferred stock of $.01 par value; authorized 200,000 shares; no issued shares			—			—			—			—
Common stock of $.01 par value; authorized 8,500,000 shares; issued 3,957,135 shares			39			39			39			39
Additionalpaid-in capital			3,776			3,771			3,783			3,779
Retained earnings			93,009			90,299			98,694			95,635
Accumulated other comprehensive loss, net			(4,440	)		(566)
Less treasury stock, at cost - 313,342 shares and 313,467 shares at June 30, 2018 and December 31, 2017, respectively			(6,636	)		(6,637)
Accumulated other comprehensive income (loss), net									680			(3,763)
Less treasury stock, at cost—385,307 shares and 313,267 shares at June 30, 2019 and December 31, 2018, respectively									(9,131	)		(6,635)

Total stockholders’ equity			85,748			86,906			94,065			89,055

Total liabilities and stockholders’ equity		$	811,791		$	853,381		$	839,178		$	818,077

See accompanying notes to consolidated financial statements

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

Consolidated Statements of Earnings

(Unaudited)


	Quarter ended June 30,				Six Months ended June 30,				Quarter ended June 30,				Six months ended June 30,
(In thousands, except share and per share data)	2018		2017		2018		2017		2019		2018		2019		2018

Interest income:
Loans, including fees	$	5,307	$	5,121	$	10,538	$	10,102	$	5,763	$	5,307	$	11,490	$	10,538
Securities:
Taxable		1,012		1,112		2,089		2,133		985		1,012		2,000		2,089
Tax-exempt		572		587		1,157		1,168		544		572		1,093		1,157
Federal funds sold and interest bearing bank deposits		290		182		592		383
Federal funds sold and interest-bearing bank deposits										311		290		663		592

Total interest income		7,181		7,002		14,376		13,786		7,603		7,181		15,246		14,376

Interest expense:
Deposits		845		866		1,717		1,728		1,004		845		2,025		1,717
Short-term borrowings		8		5		12		9		2		8		4		12
Long-term debt		11		30		46		59		—		11		—		46

Total interest expense		864		901		1,775		1,796		1,006		864		2,029		1,775

Net interest income		6,317		6,101		12,601		11,990		6,597		6,317		13,217		12,601
Provision for loan losses		—		100		—		100		—		—		—		—

Net interest income after provision for loan losses		6,317		6,001		12,601		11,890		6,597		6,317		13,217		12,601

Noninterest income:
Service charges on deposit accounts		182		183		361		372		176		182		360		361
Mortgage lending		166		139		372		304		187		166		376		372
Bank-owned life insurance		108		110		214		217		107		108		217		214
Other		383		361		745		734		407		383		1,079		745
Securities gains, net		—		—		—		2		8		—		13		—

Total noninterest income		839		793		1,692		1,629		885		839		2,045		1,692

Noninterest expense:
Salaries and benefits		2,618		2,392		5,286		4,773		2,799		2,618		5,737		5,286
Net occupancy and equipment		360		351		730		732		381		360		765		730
Professional fees		266		254		494		484		275		266		503		494
FDIC and other regulatory assessments		89		89		178		178		102		89		131		178
Other		993		929		2,040		1,966		1,072		993		2,104		2,040

Total noninterest expense		4,326		4,015		8,728		8,133		4,629		4,326		9,240		8,728

Earnings before income taxes		2,830		2,779		5,565		5,386		2,853		2,830		6,022		5,565

Income tax expense		566		784		1,106		1,501		546		566		1,172		1,106


Net earnings	$	2,264	$	1,995	$	4,459	$	3,885	$	2,307	$	2,264	$	4,850	$	4,459


Net earnings per share:
Basic and diluted	$	0.62	$	0.55	$	1.22	$	1.07	$	0.64	$	0.62	$	1.35	$	1.22


Weighted average shares outstanding:
Basic and diluted		3,643,731		3,643,593		3,643,707		3,643,567		3,577,409		3,643,731		3,595,972		3,643,707

See accompanying notes to consolidated financial statements

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(Unaudited)


	Quarter ended June 30,				Six Months ended June 30,				Quarter ended June 30,				Six months ended June 30,
(Dollars in thousands)	2018		2017		2018		2017		2019		2018		2019		2018

Net earnings	$	2,264	$	1,995	$	4,459	$	3,885	$	2,307	$	2,264	$	4,850	$	4,459

Other comprehensive (loss) income, net of tax:
Unrealized net holding (loss) gain on securities		(754)		573		(3,874)		711
Other comprehensive income (loss), net of tax:
Unrealized net holding gain (loss) on securities										2,057		(754)		4,453		(3,874)
Reclassification adjustment for net gain on securities recognized in net earnings		—		—		—		(1)		(6)		—		(10)		—

Other comprehensive (loss) income		(754)		573		(3,874)		710
Other comprehensive income (loss)										2,051		(754)		4,443		(3,874)

Comprehensive income	$	1,510	$	2,568	$	585	$	4,595	$	4,358	$	1,510	$	9,293	$	585

See accompanying notes to consolidated financial statements

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

(Unaudited)


										Accumulated																		Accumulated
					Additional					other									Common					Additional				other
	Common Stock				paid-in		Retained			comprehensive			Treasury						Shares			Common		paid-in		Retained		comprehensive			Treasury
(Dollars in thousands, except share data)	Shares		Amount		capital		earnings			income (loss)			stock			Total			Outstanding			Stock		capital		earnings		(loss) income			stock			Total

Balance, December 31, 2016		3,957,135	$	39	$	3,767	$	85,716		$	(708)			$ (6,637	)	$	82,177
Quarter ended June 30, 2019																		Quarter ended June 30, 2019

Balance, March 31, 2019																				3,581,485		$	39	$	3,783	$	97,280	$	(1,371	)	$	(8,782	)	$	90,949
Net earnings		—		—		—		3,885			—			—			3,885			—			—		—		2,307		—			—			2,307
Other comprehensive income		—		—		—		—			710			—			710			—			—		—		—		2,051			—			2,051
Cash dividends paid ($0.46 per share)		—		—		—		(1,676)			—			—			(1,676)
Sale of treasury stock (120 shares)		—		—		3		—			—			—			3
Cash dividends paid ($0.25 per share)																				—			—		—		(893)		—			—			(893)
Stock repurchases																				(9,687	)		—		—		—		—			(350	)		(350)
Sale of treasury stock																				30			—		—		—		—			1			1

Balance, June 30, 2017		3,957,135	$	39	$	3,770	$	87,925		$	2		$	(6,637	)	$	85,099
Balance, June 30, 2019																				3,571,828		$	39	$	3,783	$	98,694	$	680		$	(9,131	)	$	94,065



Quarter ended June 30, 2018																		Quarter ended June 30, 2018

Balance, March 31, 2018																				3,643,698		$	39	$	3,771	$	91,620	$	(3,686	)	$	(6,636	)	$	85,108
Net earnings																				—			—		—		2,264		—			—			2,264
Other comprehensive loss																				—			—		—		—		(754	)		—			(754)
Cash dividends paid ($0.24 per share)																				—			—		—		(875)		—			—��			(875)
Sale of treasury stock																				95			—		5		—		—			—			5

Balance, June 30, 2018																				3,643,793		$	39	$	3,776	$	93,009	$	(4,440	)	$	(6,636	)	$	85,748



Six months ended June 30, 2019																		Six months ended June 30, 2019

Balance, December 31, 2018																				3,643,868		$	39	$	3,779	$	95,635	$	(3,763	)	$	(6,635	)	$	89,055
Net earnings																				—			—		—		4,850		—			—			4,850
Other comprehensive income																				—			—		—		—		4,443			—			4,443
Cash dividends paid ($0.50 per share)																				—			—		—		(1,791)		—			—			(1,791)
Stock repurchases																				(72,205	)		—		—		—		—			(2,497	)		(2,497	)
Sale of treasury stock																				165			—		4		—		—			1			5

Balance, June 30, 2019																				3,571,828		$	39	$	3,783	$	98,694	$	680		$	(9,131	)	$	94,065



Six months ended June 30, 2018																		Six months ended June 30, 2018

Balance, December 31, 2017		3,957,135	$	39	$	3,771	$	90,299		$	(566	)	$	(6,637	)	$	86,906			3,643,668		$	39	$	3,771	$	90,299	$	(566	)	$	(6,637	)	$	86,906
Net earnings		—		—		—		4,459			—			—			4,459			—			—		—		4,459		—			—			4,459
Other comprehensive loss		—		—		—		—			(3,874	)		—			(3,874)			—			—		—		—		(3,874	)		—			(3,874)
Cash dividends paid ($0.48 per share)		—		—		—		(1,749	)		—			—			(1,749)			—			—		—		(1,749)		—			—			(1,749)
Sale of treasury stock (125 shares)		—		—		5		—			—			1			6
Sale of treasury stock																				125			—		5		—		—			1			6

Balance, June 30, 2018		3,957,135	$	39	$	3,776	$	93,009		$	(4,440	)	$	(6,636	)	$	85,748			3,643,793		$	39	$	3,776	$	93,009	$	(4,440	)	$	(6,636	)	$	85,748

See accompanying notes to consolidated financial statements

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)


	Six Months ended June 30,					Six months ended June 30,
(In thousands)	2018			2017		2019			2018

Cash flows from operating activities:
Net earnings	$	4,459		$	3,885	$	4,850		$	4,459
Adjustments to reconcile net earnings to net cash provided by operating activities:
Provision for loan losses		—			100
Depreciation and amortization		467			536
Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization							448			467
Premium amortization and discount accretion, net		1,053			1,058		886			1,053
Net gain on securitiesavailable-for-sale		—			(2)		(13	)		—
Net gain on sale of loans held for sale		(198	)		(176)		(188	)		(198)
Decrease in MSR valuation allowance		—			(1)
Net gain on other real estate owned		—			(11)
Loans originated for sale		(17,282	)		(11,945)		(11,312	)		(17,282)
Proceeds from sale of loans		17,344			12,089		9,786			17,344
Increase in cash surrender value of bank-owned life insurance		(213	)		(217)		(217	)		(213)
Net (increase) decrease in other assets		(68	)		343
Net decrease in accrued expenses and other liabilities		(629	)		(1,967)
Net increase in other assets							(900	)		(68)
Net increase (decrease) in accrued expenses and other liabilities							983			(635)

Net cash provided by operating activities		4,933			3,692		4,323			4,927


Cash flows from investing activities:
Proceeds from sales of securitiesavailable-for-sale							7,662			—
Proceeds from prepayments and maturities of securitiesavailable-for-sale		17,275			17,611		22,222			17,275
Purchase of securitiesavailable-for-sale		(17,124	)		(51,334)		(33,839	)		(17,124)
Increase in loans, net		(4,288	)		(6,119)
Decrease (increase) in loans, net							826			(4,288)
Net purchases of premises and equipment		(36	)		(615)		(1,459	)		(36)
Increase in FHLB stock		(20	)		(13)
Decrease (increase) in FHLB stock							32			(20)
Proceeds from sale of other real estate owned		1,223			60		—			1,223

Net cash used in investing activities		(2,970	)		(40,410)		(4,556	)		(2,970)


Cash flows from financing activities:
Net increase in noninterest-bearing deposits		5,552			421		5,223			5,552
Net (decrease) increase in interest-bearing deposits		(42,206	)		2,892
Net increase in federal funds purchased and securities sold under agreements to repurchase		74			103
Net increase (decrease) in interest-bearing deposits							11,085			(42,206)
Net (decrease) increase in federal funds purchased and securities sold under agreements to repurchase							(1,200	)		74
Repayments or retirement of long-term debt		(3,217	)		—		—			(3,217)
Stock repurchases							(2,497	)		—
Proceeds from sale of treasury stock							5			6
Dividends paid		(1,749	)		(1,676)		(1,791	)		(1,749)

Net cash (used in) provided by financing activities		(41,546	)		1,740
Net cash provided by (used in) financing activities							10,825			(41,540)


Net change in cash and cash equivalents		(39,583	)		(34,978)		10,592			(39,583)
Cash and cash equivalents at beginning of period		105,528			121,277		65,076			105,528

Cash and cash equivalents at end of period	$	65,945		$	86,299	$	75,668		$	65,945



Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	1,770		$	1,858	$	2,029		$	1,770
Income taxes		1,678			2,007		1,499			1,678
Supplemental disclosure ofnon-cash transactions:
Initial recognition of operating lease right of use assets							891			—
Initial recognition of operating lease liabilities							889			—
Real estate acquired through foreclosure		1,360			—		82			1,360

See accompanying notes to consolidated financial statements

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

General

Auburn National Bancorporation, Inc. (the “Company”) provides a full range of banking services to individual and corporate customers in Lee County, Alabama and surrounding counties through its wholly owned subsidiary, AuburnBank (the “Bank”). The Company does not have any segments other than banking that are considered material.

Basis of Presentation and Use of Estimates

The unaudited consolidated financial statements in this report have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information. Accordingly, these financial statements do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited consolidated financial statements include, in the opinion of management, all adjustments necessary to present a fair statement of the financial position and the results of operations for all periods presented. All such adjustments are of a normal recurring nature. The results of operations in the interim statements are not necessarily indicative of the results of operations that the Company and its subsidiaries may achieve for future interim periods or the entire year. For further information, refer to the consolidated financial statements and footnotes included in the Company’s Annual Report on Form10-K for the year ended December 31, ~~2017.~~2018.

The unaudited consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Auburn National Bancorporation Capital Trust I iswas an affiliate of the Company and was included in these unaudited consolidated financial statements pursuant to the equity method of accounting. On April 27, 2018, the Trust was dissolved, upon the redemption of all related junior subordinated debentures and Trust securities. Significant intercompany transactions and accounts are eliminated in consolidation.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term include other-than-temporary impairment on investment securities, the determination of the allowance for loan losses, fair value of financial instruments, and the valuation of deferred tax assets and other real estate owned.

Revenue Recognition

On January 1, 2018, the Company implemented ASU2014-09, Revenue from Contracts with Customers, codified at ASC 606. The Company adopted ASC 606 using the modified retrospective transition method. The majority of the Company’s revenue stream is generated from interest income on loans and deposits which are outside the scope of ASC 606.

The Company’s sources of income that fall within the scope of ASC 606 include service charges on deposits, investment services, interchange fees and gains and losses on sales of other real estate, all of which are presented as components of noninterest income. The following is a summary of the revenue streams that fall within the scope of ASC 606:

Service charges on deposits, investment services, ATM and interchange fees – Fees from these services are either transaction-based, for which the performance obligations are satisfied when the individual transaction is processed, or set periodic service charges, for which the performance obligations are satisfied over the period the service is provided. Transaction-based fees are recognized at the time the transaction is processed, and periodic service charges are recognized over the service period.

•

Gains on sales of other real estate –A gain on sale should be recognized when a contract for sale exists and control of the asset has been transferred to the buyer. ASC 606 lists several criteria required to conclude that a contract for sale exists, including a determination that the institution will collect substantially all of the consideration to which it is entitled. In addition to theloan-to-value, the analysis is based on various other factors, including the credit quality of the borrower, the structure of the loan, and any other factors that may affect collectability.

Subsequent Events

The Company has evaluated the effects of events and transactions through the date of this filing that have occurred subsequent to June 30, ~~2018.~~2019. The Company does not believe there were any material subsequent events during this period that would have required further recognition or disclosure in the unaudited consolidated financial statements included in this report.

Accounting Developments

In the first six months of ~~2018,~~2019, the Company adopted new guidance related to the following Accounting Standards Updates (“Updates” or “ASUs”):

•

ASU ~~2014-09,~~2016-02,~~Revenue from Contracts with Customers~~;

•

~~ASU2016-01,~~~~Recognition and Measurement of Financial Assets and Financial Liabilities;~~

•

~~ASU2016-15,~~~~Classification of Certain Cash Receipts and Cash Payments;~~Leases; and

•

ASU~~2016-18,~~2017-12,~~Restricted Cash~~Targeted Improvements to Accounting for Hedging Activities.

Information about these pronouncements is described in more detail below.

ASU~~2014-09,~~2016-02,~~Revenue from Contracts with Customers (Topic 606)~~Leases, ~~was developed as a joint project with~~requires lessees to recognize the ~~International Accounting Standards Board to remove inconsistencies in revenue requirements~~assets and ~~provide a more robust framework for addressing revenue issues. The ASU’s core principle is~~liabilities that ~~an entity~~arise from leases on the balance sheet. A lessee should recognize ~~revenue when it transfers promised goods or services~~in the statement of financial position a liability to ~~customers in an amount that reflects~~make lease payments (the lease liability) and aright-of-use asset representing its right to use the ~~consideration to which an entity expects to be entitled in exchange~~underlying asset for ~~those goods or services.~~the lease term. In ~~August 2015,~~July 2018, the FASB issued ASU~~2015-14,~~2018-10 and2018-11, which ~~deferred the effective date by one year (i.e., interim~~are designed to make targeted improvements to and annual reporting periods beginning after December 15, 2017). Early adoption is permitted, but not before the original effective date (i.e., interim and annual reporting periods beginning after December 15, 2016). Theclarifications regarding ASU may be adopted using either a modified retrospective method or a full retrospective method. The Company adopted the ASU during the first quarter of 2018, as required, using a modified retrospective approach. The majority of the Company’s revenue stream is generated from interest income on loans and deposits, which are outside the scope of Topic 606. The Company’s sources of income that fall within the scope of Topic 606 include service charges on deposits, investment services, interchange fees and gains and losses on sales of other real estate, all of which are presented as components of noninterest income. The Company has evaluated the effect of Topic 606 on these~~fee-based~~2016-02. income streams and concluded that adoption of the standard did not materially impact its financial statements. The following is a summary of the implementation considerations for the revenue streams that fall within the scope of Topic 606:

•

~~Service charges on deposits, investment services, ATM and interchange fees –~~Fees from these services are either transaction-based, for which the performance obligations are satisfied when the individual transaction is processed, or set periodic service charges, for which the performance obligations are satisfied over the period the service is provided. Transaction-based fees are recognized at the time the transaction is processed, and periodic service charges are recognized over the service period. The adoption of Topic 606 had no impact on the Company’s revenue recognition practice for these services.

•

~~Gains on sales of other real estate –~~~~ASU2014-09~~ ~~creates Topic610-20,~~ under which a gain on sale should be recognized when a contract for sale exists and control of the asset has been transferred to the buyer. Topic 606 lists several criteria required to conclude that a contract for sale exists, including a determination that the institution will collect substantially all of the consideration to which it is entitled. This presents a key difference between the prior and new guidance related to the recognition of the gain when the institution finances the sale of the property. Rather than basing recognition on the amount of the buyer’s initial investment, which was the primary consideration under prior guidance, the analysis is now based on various factors including not only the loan to value, but also the credit quality of the borrower, the structure of the loan, and any other factors that may affect collectability. While these differences may affect the decision to recognize or defer gains on sales of other real estate in circumstances where the Company has financed the sale, the effects would not be material to its consolidated financial statements.

~~ASU2016-01,~~~~Financial Instruments – Overall (Subtopic825-10):~~ ~~Recognition and Measurement of Financial Assets and Financial Liabilities~~, enhances the reporting model for financial instruments to provide users of financial statements with more decision-useful information. The ASU addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Some of the amendments include the following: (1) Require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; (2) Simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (3) Require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (4) Require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value; among others. For public business entities, the amendments of this ASU are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The adoption of this ASU on January 1, 2018 did not have a material impact on the Company’s Consolidated Financial Statements. In accordance with (3) above, the Company measured the fair value of its loan portfolio as of June 30, 2018 using an exit price notion and will continue to do so going forward (see Note 7).

~~ASU2016-15,~~~~Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments~~, provides guidance on eight specific cash flow issues where current GAAP is either unclear or does not include specific guidance on classification in the statement of cash flows. The new guidance is effective for annual and interim reporting periods in fiscal years beginning after December 15, 2017. The Company adopted ASUNo. ~~2016-15~~2016-02 on January 1, ~~2018.~~2019. ASUNo. ~~2016-15~~2016-02 did not have a material impact on the Company’s ~~Consolidated Financial Statements.~~consolidated financial statements due to the fact the Company does not have any material leases.

ASU~~2016-18,~~2017-12,~~Statement~~Targeted Improvements to Accounting for Hedging Activities, improves the transparency and understandability of ~~Cash Flows (Topic 230): Restricted Cash,~~ ~~amends guidance on how~~information conveyed to financial statement users about an entity’s risk management activities by better aligning the ~~statement~~entity’s financial reporting for hedging relationships with those risk management activities and reduces the complexity of ~~cash flows presents~~and simplifies the ~~change during the period in the total~~application of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Under the new guidance, amounts generally described as restricted cash and restricted cash equivalents are included with cash and cash equivalents when reconciling the~~beginning-of-period~~ ~~andend-of-period~~ total amounts shown on the statement of cash flows. The amendments in this Update do not provide a definition of restricted cash or restricted cash equivalents. The new guidance is effective for public business entities for annual and interim reporting periods in fiscal years beginning after December 15, 2017.hedge accounting by preparers. The Company adopted ASUNo. ~~2016-18~~2017-12 on January 1, ~~2018.~~2019. ASUNo. ~~2016-18~~2017-12 did not have a material impact on the Company’s ~~Consolidated Financial Statements.~~consolidated financial statements.

NOTE 2: BASIC AND DILUTED NET EARNINGS PER SHARE

Basic net earnings per share is computed by dividing net earnings by the weighted average common shares outstanding for the respective period. Diluted net earnings per share reflect the potential dilution that could occur upon exercise of securities or other rights for, or convertible into, shares of the Company’s common stock. At June 30, ~~2018~~2019 and ~~2017,~~2018, respectively, the Company had no such securities or rights issued or outstanding, and therefore, no dilutive effect to consider for the diluted net earnings per share calculation.

The basic and diluted net earnings per share computations for the respective periods are presented below.


	Quarter ended June 30,				Six Months ended June 30,				Quarter ended June 30,				Six months ended June 30,
(In thousands, except share and per share data)	2018		2017		2018		2017		2019		2018		2019		2018

Basic and diluted:
Net earnings	$	2,264	$	1,995	$	4,459	$	3,885	$	2,307	$	2,264	$	4,850	$	4,459
Weighted average common shares outstanding		3,643,731		3,643,593		3,643,707		3,643,567		3,577,409		3,643,731		3,595,972		3,643,707

Net earnings per share	$	0.62	$	0.55	$	1.22	$	1.07	$	0.64	$	0.62	$	1.35	$	1.22

NOTE 3: SECURITIES

At June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively, all securities within the scope of Accounting Standards Codification (“ASC”) 320,Investments – Debt and Equity Securities,were classified asavailable-for-sale. The fair value and amortized cost for securitiesavailable-for-sale by contractual maturity at June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively, are presented below.


	1 year		1 to 5		5 to 10		After 10		Fair		Gross Unrealized				Amortized		1 year		1 to 5		5 to 10		After 10		Fair		Gross Unrealized				Amortized
(Dollars in thousands)	or less		years		years		years		Value		Gains		Losses		Cost		or less		years		years		years		Value		Gains		Losses		Cost

June 30, 2018
June 30, 2019
Agency obligations (a)	$	4,474		24,482		22,405		—		51,361		—		1,672	$	53,033	$	9,997		22,173		24,990		—		57,160		149		217	$	57,228
Agency RMBS (a)		—		—		9,617		119,389		129,006		80		4,337		133,263		—		—		5,305		117,350		122,655		358		968		123,265
State and political subdivisions		—		3,406		8,338		59,209		70,953		754		754		70,953		—		1,356		5,198		62,444		68,998		1,654		68		67,412

Total available-for-sale	$	4,474		27,888		40,360		178,598		251,320		834		6,763	$	257,249	$	9,997		23,529		35,493		179,794		248,813		2,161		1,253	$	247,905


December 31, 2017
December 31, 2018
Agency obligations (a)	$	—		29,253		23,809		—		53,062		79		904	$	53,887	$	14,437		19,865		16,869		—		51,171		25		1,200	$	52,346
Agency RMBS (a)		—		—		11,201		121,871		133,072		330		1,639		134,381		—		—		8,368		110,230		118,598		65		3,738		122,271
State and political subdivisions		—		2,564		9,999		59,000		71,563		1,616		237		70,184		—		3,682		7,726		58,624		70,032		518		692		70,206

Totalavailable-for-sale	$	—		31,817		45,009		180,871		257,697		2,025		2,780	$	258,452	$	14,437		23,547		32,963		168,854		239,801		608		5,630	$	244,823

(a) Includes securities issued by U.S. government agencies or ~~government sponsored~~government-sponsored entities.

Securities with aggregate fair values of ~~$144.5~~$157.1 million and ~~$149.4~~$133.1 million at June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively, were pledged to secure public deposits, securities sold under agreements to repurchase, Federal Home Loan Bank (“FHLB”) advances, and for other purposes required or permitted by law.

Included in other assets on the accompanying consolidated balance sheets arenon-marketable equity ~~securities, such as FHLB of Atlanta stock and Federal Reserve Bank (“FRB”) stock.~~investments. The carrying amounts ofnon-marketable equity ~~securities~~investments were $1.4 million at June 30, ~~2018~~2019 and December 31, ~~2017,~~ 2018,respectively. Non-marketable equity investments include FHLB of Atlanta Stock, Federal Reserve Bank (“FRB”) stock, and stock in a privately held financial institution.

Gross Unrealized Losses and Fair Value

The fair values and gross unrealized losses on securities at June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively, segregated by those securities that have been in an unrealized loss position for less than 12 months and 12 months or longer, are presented below.


	Less than 12 Months				12 Months or Longer				Total				Less than 12 Months				12 Months or Longer				Total
(Dollars in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses

June 30, 2018:
June 30, 2019:
Agency obligations	$	31,523		437		19,838		1,235	$	51,361		1,672	$	—		—		35,676		217	$	35,676		217
Agency RMBS		55,415		1,360		65,608		2,977		121,023		4,337		—		—		79,546		968		79,546		968
State and political subdivisions		14,879		302		9,867		452		24,746		754		—		—		8,633		68		8,633		68

Total	$	101,817		2,099		95,313		4,664	$	197,130		6,763	$	—		—		123,855		1,253	$	123,855		1,253


December 31, 2017:
December 31, 2018:
Agency obligations	$	14,381		99		20,353		805	$	34,734		904	$	4,724		28		44,307		1,172	$	49,031		1,200
Agency RMBS		53,440		363		50,729		1,276		104,169		1,639		12,325		238		99,184		3,500		111,509		3,738
State and political subdivisions		2,009		22		10,155		215		12,164		237		14,840		181		14,384		511		29,224		692

Total	$	69,830		484		81,237		2,296	$	151,067		2,780	$	31,889		447		157,875		5,183	$	189,764		5,630

For the securities in the previous table, the Company does not have the intent to sell and has determined it is not more likely than not that the Company will be required to sell the security before recovery of the amortized cost basis, which may be maturity. On a quarterly basis, the Company assesses each security for credit impairment. For debt securities, the Company evaluates, where necessary, whether credit impairment exists by comparing the present value of the expected cash flows to the securities’ amortized cost basis.

In determining whether a loss is temporary, the Company considers all relevant information including:

the length of time and the extent to which the fair value has been less than the amortized cost basis;

adverse conditions specifically related to the security, an industry, or a geographic area (for example, changes in the financial condition of the issuer of the security, or in the case of an asset-backed debt security, in the financial condition of the underlying loan obligors, including changes in technology or the discontinuance of a segment of the business that may affect the future earnings potential of the issuer or underlying loan obligors of the security or changes in the quality of the credit enhancement);

the historical and implied volatility of the fair value of the security;

the payment structure of the debt security and the likelihood of the issuer being able to make payments that increase in the future;

failure of the issuer of the security to make scheduled interest or principal payments;

any changes to the rating of the security by a rating agency; and

recoveries or additional declines in fair value subsequent to the balance sheet date.

Agency obligations

The unrealized losses associated with agency obligations were primarily driven by ~~changes~~increases in interest rates and not due to the credit quality of the securities. These securities were issued by U.S. government agencies or government-sponsored entities and did not have any credit losses given the explicit government guarantee or other government support.

Agency RMBS

The unrealized losses associated with agency residential mortgage-backed securities (“RMBS”) were primarily driven by ~~changes~~increases in interest rates and not due to the credit quality of the securities. These securities were issued by U.S. government agencies or government-sponsored entities and did not have any credit losses given the explicit government guarantee or other government support.

Securities of U.S. states and political subdivisions

The unrealized losses associated with securities of U.S. states and political subdivisions were primarily driven by ~~changes~~increases in interest rates and were not due to the credit quality of the securities. Some of these securities are guaranteed by a bond insurer, but management did not rely on the guarantee in making its investment decision. These securities will continue to be monitored as part of the Company’s quarterly impairment analysis, but are expected to perform even if the rating agencies reduce the credit rating of the bond insurers. As a result, the Company expects to recover the entire amortized cost basis of these securities.

The carrying values of the Company’s investment securities could decline in the future if the financial condition of an issuer deteriorates and the Company determines it is probable that it will not recover the entire amortized cost basis for the security. As a result, there is a risk that other-than-temporary impairment charges may occur in the future.

Other-Than-Temporarily Impaired Securities

Credit-impaired debt securities are debt securities where the Company has written down the amortized cost basis of a security for other-than-temporary impairment and the credit component of the loss is recognized in earnings. At June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, the Company had no credit-impaired debt securities and there were no additions or reductions in the credit loss component of credit-impaired debt securities during the six months ended June 30, ~~2018~~2019 and ~~2017,~~2018, respectively.

Realized Gains and Losses

The following table presents the gross realized gains and losses on sales of securities.


	Quarter ended June 30,				Six Months ended June 30,				Quarter ended June 30,					Six months ended June 30,
(Dollars in thousands)	2018		2017		2018		2017		2019			2018		2019			2018

Gross realized gains	$	—		—	$	—		2	$	27			—	$	32			—
Gross realized losses										(19	)		—		(19	)		—

Realized gains, net	$	—		—	$	—		2	$	8			—	$	13			—

NOTE 4: LOANS AND ALLOWANCE FOR LOAN LOSSES


(In thousands)	June 30, 2018			December 31, 2017		June 30, 2019			December 31, 2018

Commercial and industrial	$	52,921		$	59,086	$	54,307		$	63,467
Construction and land development		42,675			39,607		45,395			40,222
Commercial real estate:
Owner occupied		45,266			44,192		61,187			56,413
Multi-family		40,497			52,167		44,022			40,455
Other		160,366			142,674		163,291			165,028

Total commercial real estate		246,129			239,033		268,500			261,896
Residential real estate:
Consumer mortgage		58,676			59,540		53,680			56,223
Investment property		47,029			47,323		45,612			46,374

Total residential real estate		105,705			106,863		99,292			102,597
Consumer installment		9,824			9,588		9,091			9,295

Total loans		457,254			454,177		476,585			477,477
Less: unearned income		(682	)		(526)		(524	)		(569)

Loans, net of unearned income	$	456,572		$	453,651	$	476,061		$	476,908

Loans secured by real estate were approximately ~~86.3%~~86.7% of the Company’s total loan portfolio at June 30, ~~2018.~~2019. At June 30, ~~2018,~~2019, the Company’s geographic loan distribution was concentrated primarily in Lee County, Alabama, and surrounding areas.

In accordance with ASC 310, a portfolio segment is defined as the level at which an entity develops and documents a systematic method for determining its allowance for loan losses. As part of the Company’s quarterly assessment of the allowance, the loan portfolio is disaggregated into the following portfolio segments: commercial and industrial, construction and land development, commercial real estate, residential real estate, and consumer installment. Where appropriate, the Company’s loan portfolio segments are further disaggregated into classes. A class is generally determined based on the initial measurement attribute, risk characteristics of the loan, and an entity’s method for monitoring and determining credit risk.

The following describe the risk characteristics relevant to each of the portfolio segments and classes.

Commercial and industrial (“C&I”) —includes loans to finance business operations, equipment purchases, or other needs for small andmedium-sized commercial customers. Also included in this category are loans to finance agricultural production. Generally, the primary source of repayment is the cash flow from business operations and activities of the borrower.

Construction and land development (“C&D”) —includes both loans and credit lines for the purpose of purchasing, carrying, and developing land into commercial developments or residential subdivisions. Also included are loans and credit lines for construction of residential, multi-family, and commercial buildings. Generally, the primary source of repayment is dependent upon the sale or refinance of the real estate collateral.

Commercial real estate (“CRE”) —includes loans disaggregated into three classes: (1) owner occupied, (2) multifamily and (3) other.

•

Owner occupied – includes loans secured by business facilities to finance business operations, equipment and owner-occupied facilities primarily for small andmedium-sized commercial customers. Generally, the primary source of repayment is the cash flow from business operations and activities of the borrower, who owns the property.

•

Multi-family – primarily includes loans to finance income-producing multi-family properties. Loans in this class include loans for 5 or more unit residential property and apartments leased to residents. Generally, the primary source of repayment is dependent upon income generated from the real estate collateral. The underwriting of these loans takes into consideration the occupancy and rental rates, as well as the financial health of the borrower.

•

Other – primarily includes loans to finance income-producing commercial properties that are not owner occupied. Loans in this class include loans for neighborhood retail centers, hotels, medical and professional offices, single retail stores, industrial buildings, and warehouses leased to local businesses. Generally, the primary source of repayment is dependent upon income generated from the real estate collateral. The underwriting of these loans takes into consideration the occupancy and rental rates, as well as the financial health of the borrower.

Residential real estate (“RRE”) —includes loans disaggregated into two classes: (1) consumer mortgage and (2) investment property.

•

Consumer mortgage – primarily includes first or second lien mortgages and home equity lines of credit to consumers that are secured by a primary residence or second home. These loans are underwritten in accordance with the Bank’s general loan policies and procedures which require, among other things, proper documentation of each borrower’s financial condition, satisfactory credit history, and property value.

•

Investment property – primarily includes loans to finance income-producing1-4 family residential properties. Generally, the primary source of repayment is dependent upon income generated from leasing the property securing the loan. The underwriting of these loans takes into consideration the rental rates and property value, as well as the financial health of the borrower.

Consumer installment —includes loans to individuals both secured by personal property and unsecured. Loans include personal lines of credit, automobile loans, and other retail loans. These loans are underwritten in accordance with the Bank’s general loan policies and procedures which require, among other things, proper documentation of each borrower’s financial condition, satisfactory credit history, and, if applicable, property value.

The following is a summary of current, accruing past due, and nonaccrual loans by portfolio segment and class as of June 30, ~~2018~~2019 and

December 31, ~~2017.~~2018.


(In thousands)	Current		Accruing 30-89 Days Past Due		Accruing Greater than 90 days		Total Accruing Loans		Non- Accrual		Total Loans		Current		Accruing 30-89 Days Past Due		Accruing Greater than 90 days		Total Accruing Loans		Non- Accrual		Total Loans

June 30, 2018:
June 30, 2019:
Commercial and industrial	$	52,813		108		—		52,921		—	$	52,921	$	54,198		109		—		54,307		—	$	54,307
Construction and land development		42,501		138		—		42,639		36		42,675		45,044		351		—		45,395		—		45,395
Commercial real estate:
Owner occupied		45,266		—		—		45,266		—		45,266		61,187		—		—		61,187		—		61,187
Multi-family		40,497		—		—		40,497		—		40,497		44,022		—		—		44,022		—		44,022
Other		159,656		—		—		159,656		710		160,366		163,291		—		—		163,291		—		163,291

Total commercial real estate		245,419		—		—		245,419		710		246,129		268,500		—		—		268,500		—		268,500
Residential real estate:
Consumer mortgage		57,740		589		—		58,329		347		58,676		53,335		214		—		53,549		131		53,680
Investment property		46,733		296		—		47,029		—		47,029		45,612		—		—		45,612		—		45,612

Total residential real estate		104,473		885		—		105,358		347		105,705		98,947		214		—		99,161		131		99,292
Consumer installment		9,806		7		—		9,813		11		9,824		9,083		8		—		9,091		—		9,091

Total	$	455,012		1,138		—		456,150		1,104	$	457,254	$	475,772		682		—		476,454		131	$	476,585


December 31, 2017:
December 31, 2018:
Commercial and industrial	$	59,047		8		—		59,055		31	$	59,086	$	63,367		100		—		63,467		—	$	63,467
Construction and land development		39,607		—		—		39,607		—		39,607		39,997		225		—		40,222		—		40,222
Commercial real estate:
Owner occupied		44,192		—		—		44,192		—		44,192		56,413		—		—		56,413		—		56,413
Multi-family		52,167		—		—		52,167		—		52,167		40,455		—		—		40,455		—		40,455
Other		140,486		—		—		140,486		2,188		142,674		165,028		—		—		165,028		—		165,028

Total commercial real estate		236,845		—		—		236,845		2,188		239,033		261,896		—		—		261,896		—		261,896
Residential real estate:
Consumer mortgage		58,195		746		—		58,941		599		59,540		54,446		1,599		—		56,045		178		56,223
Investment property		46,871		312		—		47,183		140		47,323		46,233		141		—		46,374		—		46,374

Total residential real estate		105,066		1,058		—		106,124		739		106,863		100,679		1,740		—		102,419		178		102,597
Consumer installment		9,517		57		—		9,574		14		9,588		9,254		41		—		9,295		—		9,295

Total	$	450,082		1,123		—		451,205		2,972	$	454,177	$	475,193		2,106		—		477,299		178	$	477,477

Allowance for Loan Losses

The Company assesses the adequacy of its allowance for loan losses prior to the end of each calendar quarter. The level of the allowance is based upon management’s evaluation of the loan portfolio, past loan loss experience, current asset quality trends, known and inherent risks in the portfolio, adverse situations that may affect a borrower’s ability to repay (including the timing of future payment), the estimated value of any underlying collateral, composition of the loan portfolio, economic conditions, industry and peer bank loan loss rates, and other pertinent factors, including regulatory recommendations. This evaluation is inherently subjective as it requires material estimates including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. Loans are charged off, in whole or in part, when management believes that the full collectability of the loan is unlikely. A loan may be partiallycharged-off after a “confirming event” has occurred, which serves to validate that full repayment pursuant to the terms of the loan is unlikely.

The Company deems loans impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Collection of all amounts due according to the contractual terms means that both the interest and principal payments of a loan will be collected as scheduled in the loan agreement.

An impairment allowance is recognized if the fair value of the loan is less than the recorded investment in the loan. The impairment is recognized through the allowance. Loans that are impaired are recorded at the present value of expected future cash flows discounted at the loan’s effective interest rate, or if the loan is collateral dependent, the impairment measurement is based on the fair value of the collateral, less estimated disposal costs.

The level of allowance maintained is believed by management to be adequate to absorb probable losses inherent in the portfolio at the balance sheet date. The allowance is increased by provisions charged to expense and decreased by charge-offs, net of recoveries of amounts previouslycharged-off.

In assessing the adequacy of the allowance, the Company also considers the results of its ongoing internal and independent loan review processes. The Company’s loan review process assists in determining whether there are loans in the portfolio whose credit quality has weakened over time and evaluating the risk characteristics of the entire loan portfolio. The Company’s loan review process includes the judgment of management, the input from our independent loan reviewers, and reviews conducted by bank regulatory agencies as part of their examination process. The Company incorporates loan review results in the determination of whether or not it is probable that it will be able to collect all amounts due according to the contractual terms of a loan.

As part of the Company’s quarterly assessment of the allowance, management divides the loan portfolio into five segments: commercial and industrial, construction and land development, commercial real estate, residential real estate, and consumer installment. The Company analyzes each segment and estimates an allowance allocation for each loan segment.

The allocation of the allowance for loan losses begins with a process of estimating the probable losses inherent for each loan segment. The estimates for these loans are established by category and based on the Company’s internal system of credit risk ratings and historical loss data. The estimated loan loss allocation rate for the Company’s internal system of credit risk grades is based on its experience with similarly graded loans. For loan segments where the Company believes it does not have sufficient historical loss data, the Company may make adjustments based, in part, on loss rates of peer bank groups. At June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, and for the periods then ended, the Company adjusted its historical loss rates for the commercial real estate portfolio segment based, in part, on loss rates of peer bank groups.

The estimated loan loss allocation for all five loan portfolio segments is then adjusted for management’s estimate of probable losses for several “qualitative and environmental” factors. The allocation for qualitative and environmental factors is particularly subjective and does not lend itself to exact mathematical calculation. This amount represents estimated probable inherent credit losses which exist, but have not yet been identified, as of the balance sheet date, and are based upon quarterly trend assessments in delinquent and nonaccrual loans, credit concentration changes, prevailing economic conditions, changes in lending personnel experience, changes in lending policies or procedures, and other factors. These qualitative and environmental factors are considered for each of the five loan segments and the allowance allocation, as determined by the processes noted above, is increased or decreased based on the incremental assessment of these factors.

The Company regularlyre-evaluates its practices in determining the allowance for loan losses. Since the fourth quarter of 2016, the Company has increased its look-back period each quarter to incorporate the effects of at least one economic downturn in its loss history. The Company believes the extension of its look-back period is appropriate due to the risks inherent in the loan portfolio. Absent this extension, the early cycle periods in which the Company experienced significant losses would be excluded from the determination of the allowance for loan losses and its balance would decrease. For the quarter ended June 30, ~~2018,~~2019, the Company increased its look-back period to 3741 quarters to continue to include losses incurred by the Company beginning with the first quarter of 2009. The Company will likely continue to increase its look-back period to incorporate the effects of at least one economic downturn in its loss history. Other than expanding the look-back period each quarter, the Company has not made any material changes to its methodology that would impact the calculation of the allowance for loan losses or provision for loan losses for the periods included in the accompanying consolidated balance sheets and statements of earnings.

The following table details the changes in the allowance for loan losses by portfolio segment for the respective periods.


																			June 30, 2019
(In thousands)																			Commercial and industrial			Construction and land development		Commercial real estate			Residential real estate			Consumer installment			Total

Quarter ended:
Beginning balance																			$	686			773		2,251			930			168		$	4,808
Charge-offs																				—			—		—			—			(1	)		(1)
Recoveries																				6			—		1			33			4			44

Net recoveries																				6			—		1			33			3			43
Provision for loan losses																				34			8		35			(59	)		(18	)		—

Ending balance																			$	726			781		2,287			904			153		$	4,851

Six months ended:
Beginning balance																			$	778			700		2,218			946			148		$	4,790
Charge-offs																				—			—		—			—			(16	)		(16)
Recoveries																				24			—		1			47			5			77

Net recoveries (charge-offs)																				24			—		1			47			(11	)		61
Provision for loan losses																				(76	)		81		68			(89	)		16			—

Ending balance																			$	726			781		2,287			904			153		$	4,851


	June 30, 2018																		June 30, 2018
(In thousands)	Commercial and industrial			Construction and land development			Commercial real estate			Residential real estate			Consumer installment			Total			Commercial and industrial			Construction and land development		Commercial real estate			Residential real estate			Consumer installment			Total

Quarter ended:
Beginning balance	$	724			670			2,119			1,053			166		$	4,732		$	724			670		2,119			1,053			166		$	4,732
Charge-offs		—			—			(39	)		—			—			(39)			—			—		(39	)		—			—			(39)
Recoveries		32			—			—			17			8			57			32			—		—			17			8			57

Net recoveries (charge-offs)		32			—			(39	)		17			8			18			32			—		(39	)		17			8			18
Provision for loan losses		(156	)		117			117			(53	)		(25	)		—			(156	)		117		117			(53	)		(25	)		—

Ending balance	$	600			787			2,197			1,017			149		$	4,750		$	600			787		2,197			1,017			149		$	4,750

Six months ended:																		Six months ended:
Beginning balance	$	653			734			2,126			1,071			173		$	4,757		$	653			734		2,126			1,071			173		$	4,757
Charge-offs		(52	)		—			(39	)		(4	)		(2	)		(97)			(52	)		—		(39	)		(4	)		(2	)		(97)
Recoveries		46			—			—			33			11			90			46			—		—			33			11			90

Net (charge-offs) recoveries		(6	)		—			(39	)		29			9			(7)			(6	)		—		(39	)		29			9			(7)
Provision for loan losses		(47	)		53			110			(83	)		(33	)		—			(47	)		53		110			(83	)		(33	)		—

Ending balance	$	600			787			2,197			1,017			149		$	4,750		$	600			787		2,197			1,017			149		$	4,750


	June 30, 2017
(In thousands)	Commercial and industrial			Construction and land development			Commercial real estate			Residential real estate			Consumer installment			Total

Quarter ended:
Beginning balance	$	524			845			2,004			1,064			151		$	4,588
Charge-offs		—			—			—			—			(5	)		(5)
Recoveries		4			209			—			63			6			282

Net recoveries (charge-offs)		4			209			—			63			1			277
Provision for loan losses		149			(180	)		117			(8	)		22			100

Ending balance	$	677			874			2,121			1,119			174		$	4,965

Six months ended:
Beginning balance	$	540			812			2,071			1,107			113		$	4,643
Charge-offs		—			—			—			(78	)		(6	)		(84)
Recoveries		6			214			—			77			9			306

Net recoveries (charge-offs)		6			214			—			(1	)		3			222
Provision for loan losses		131			(152	)		50			13			58			100

Ending balance	$	677			874			2,121			1,119			174		$	4,965

The following table presents an analysis of the allowance for loan losses and recorded investment in loans by portfolio segment and impairment methodology as of June 30, ~~2018~~2019 and ~~2017.~~2018.


													Collectively evaluated (1)				Individually evaluated (2)				Total
	Collectively evaluated (1)				Individually evaluated (2)				Total
	Allowance		Recorded		Allowance		Recorded		Allowance		Recorded		Allowance		Recorded		Allowance		Recorded		Allowance		Recorded

	for loan		investment		for loan		investment		for loan		investment		for loan		investment		for loan		investment		for loan		investment

(In thousands)	losses		in loans		losses		in loans		losses		in loans		losses		in loans		losses		in loans		losses		in loans

June 30, 2019:
Commercial and industrial													$	726		54,307		—		—		726		54,307
Construction and land development														781		45,395		—		—		781		45,395
Commercial real estate														2,287		268,500		—		—		2,287		268,500
Residential real estate														904		99,292		—		—		904		99,292
Consumer installment														153		9,091		—		—		153		9,091

Total													$	4,851		476,585		—		—		4,851		476,585


June 30, 2018:
Commercial and industrial	$	600		52,921		—		—		600		52,921	$	600		52,921		—		—		600		52,921
Construction and land development		787		42,675		—		—		787		42,675		787		42,675		—		—		787		42,675
Commercial real estate		2,194		245,252		3		877		2,197		246,129		2,194		245,252		3		877		2,197		246,129
Residential real estate		1,017		105,705		—		—		1,017		105,705		1,017		105,705		—		—		1,017		105,705
Consumer installment		149		9,824		—		—		149		9,824		149		9,824		—		—		149		9,824

Total	$	4,747		456,377		3		877		4,750		457,254	$	4,747		456,377		3		877		4,750		457,254


June 30, 2017:
Commercial and industrial	$	677		50,974		—		—		677		50,974
Construction and land development		874		46,386		—		—		874		46,386
Commercial real estate		2,099		218,882		22		1,981		2,121		220,863
Residential real estate		1,119		110,288		—		—		1,119		110,288
Consumer installment		174		9,409		—		—		174		9,409

Total	$	4,943		435,939		22		1,981		4,965		437,920

(1)	Represents loans collectively evaluated for impairment in accordance with ASC450-20,Loss Contingencies (formerly FAS 5), and pursuant to amendments by ASU2010-20 regarding allowance fornon-impaired loans.

(2)	Represents loans individually evaluated for impairment in accordance with ASC310-30,Receivables (formerly FAS 114), and pursuant to amendments by ASU2010-20 regarding allowance for impaired loans.

Credit Quality Indicators

The credit quality of the loan portfolio is summarized no less frequently than quarterly using categories similar to the standard asset classification system used by the federal banking agencies. The following table presents credit quality indicators for the loan portfolio segments and classes. These categories are utilized to develop the associated allowance for loan losses using historical losses adjusted for qualitative and environmental factors and are defined as follows:

Pass – loans which are well protected by the current net worth and paying capacity of the obligor (or guarantors, if any) or by the fair value, less cost to acquire and sell, of any underlying collateral.

Special Mention – loans with potential weakness that may, if not reversed or corrected, weaken the credit or inadequately protect the Company’s position at some future date. These loans are not adversely classified and do not expose an institution to sufficient risk to warrant an adverse classification.

Substandard Accruing – loans that exhibit a well-defined weakness which presently jeopardizes debt repayment, even though they are currently performing. These loans are characterized by the distinct possibility that the Company may incur a loss in the future if these weaknesses are not corrected.

Nonaccrual – includes loans where management has determined that full payment of principal and interest is not expected.


(In thousands)	Pass		Special Mention		Substandard Accruing		Nonaccrual		Total loans		Pass		Special Mention		Substandard Accruing		Nonaccrual		Total loans

June 30, 2018:
June 30, 2019:
Commercial and industrial	$	52,197		506		218		—	$	52,921	$	50,485		3,232		590		—	$	54,307
Construction and land development		41,892		90		657		36		42,675		44,566		148		681		—		45,395
Commercial real estate:
Owner occupied		44,548		391		327		—		45,266		60,325		781		81		—		61,187
Multi-family		40,497		—		—		—		40,497		44,022		—		—		—		44,022
Other		158,644		629		383		710		160,366		162,149		1,118		24		—		163,291

Total commercial real estate		243,689		1,020		710		710		246,129		266,496		1,899		105		—		268,500
Residential real estate:
Consumer mortgage		52,988		2,051		3,290		347		58,676		49,036		1,527		2,986		131		53,680
Investment property		46,082		308		639		—		47,029		44,812		165		635		—		45,612

Total residential real estate		99,070		2,359		3,929		347		105,705		93,848		1,692		3,621		131		99,292
Consumer installment		9,709		53		51		11		9,824		8,934		106		51		—		9,091

Total	$	446,557		4,028		5,565		1,104	$	457,254	$	464,329		7,077		5,048		131	$	476,585

December 31, 2017:
December 31, 2018:
Commercial and industrial	$	58,842		94		119		31	$	59,086	$	61,568		1,377		522		—	$	63,467
Construction and land development		39,049		90		468		—		39,607		39,481		—		741		—		40,222
Commercial real estate:
Owner occupied		43,615		240		337		—		44,192		55,942		154		317		—		56,413
Multi-family		52,167		—		—		—		52,167		40,455		—		—		—		40,455
Other		139,695		395		396		2,188		142,674		163,449		1,208		371		—		165,028

Total commercial real estate		235,477		635		733		2,188		239,033		259,846		1,362		688		—		261,896
Residential real estate:
Consumer mortgage		54,101		1,254		3,586		599		59,540		50,903		1,374		3,768		178		56,223
Investment property		46,463		53		667		140		47,323		45,463		173		738		—		46,374

Total residential real estate		100,564		1,307		4,253		739		106,863		96,366		1,547		4,506		178		102,597
Consumer installment		9,430		66		78		14		9,588		9,149		75		71		—		9,295

Total	$	443,362		2,192		5,651		2,972	$	454,177	$	466,410		4,361		6,528		178	$	477,477

Impaired loans

The following tables present details related to the Company’s impaired loans. Loans that have been fullycharged-off are not included in the following tables. The related allowance generally represents the following components that correspond to impaired loans:

Individually evaluated impaired loans equal to or greater than $500,000 secured by real estate (nonaccrual construction and land development, commercial real estate, and residential real estate loans).

Individually evaluated impaired loans equal to or greater than $250,000 not secured by real estate (nonaccrual commercial and industrial and consumer installment loans).

The Company had no impaired loans at June 30, 2019. The following tables set forth certain information regarding the Company’s impaired loans that were individually evaluated for impairment at ~~June 30, 2018 and~~ December 31, ~~2017.~~2018.


		June 30, 2018											December 31, 2018
(In thousands)		Unpaid principal balance (1)		Charge-offs and payments applied (2)			Recorded investment (3)			Related allowance			Unpaid principal balance (1)		Charge-offs and payments applied (2)		Recorded investment (3)			Related allowance

With no allowance recorded:	With no allowance recorded:											With no allowance recorded:
Commercial real estate:
Other		$	759		(49	)		710

Total commercial real estate			759		(49	)		710

Total		$	759		(49	)		710

With allowance recorded:
Commercial real estate:
Owner occupied			167		—			167			3		$	157		—		157

Total commercial real estate			167		—			167			3			157		—		157

Total			167		—			167			3

Total impaired loans		$	926		(49	)		877	$		3		$	157		—		157	$		—

(1)	Unpaid principal balance represents the contractual obligation due from the customer.

(2)	Charge-offs and payments applied represents cumulative charge-offs taken, as well as interest payments that have been applied against the outstanding principal balance subsequent to the loans being placed on nonaccrual status.

(3)	Recorded investment represents the unpaid principal balance less charge-offs and payments applied; it is shown before any related allowance for loan losses.

   December 31, 2017
(In thousands)
Unpaid principal
balance (1)

Charge-offs and
payments applied
(2)

Recorded
investment (3)
   Related allowance



With no allowance recorded:

Commercial real estate:

Other
   3,630    (1,094 )    2,536


Total commercial real estate
   3,630    (1,094 )    2,536


Total
   $ 3,630    (1,094 )    2,536


With allowance recorded:

Commercial and industrial
   52    (21 )    31    31
Commercial real estate:

Owner occupied
   $ 175    —       175 $    11



Total commercial real estate
   175    —       175    11



Total
   227    (21 )    206    42



Total impaired loans
   $ 3,857    (1,115 )    2,742 $    42

~~(1)~~

~~Unpaid principal balance represents the contractual obligation due from the customer.~~

~~(2)~~

Charge-offs and payments applied represents cumulative charge-offs taken, as well as interest payments that have been applied against the outstanding principal balance subsequent to the loans being placed on nonaccrual status.

~~(3)~~

~~Recorded investment represents the unpaid principal balance less charge-offs and payments applied; it is shown before any related allowance for loan losses.~~

The following table provides the average recorded investment in impaired loans and the amount of interest income recognized on impaired loans after impairment by portfolio segment and class during the respective periods.


		Quarter ended June 30, 2018				Six months ended June 30, 2018
		Average		Total interest		Average		Total interest

		recorded		income		recorded		income

(In thousands)		investment		recognized		investment		recognized

Impaired loans:
Commercial and industrial		$	7		—		17		—
Commercial real estate:
Owner occupied			168		2		170		5
Other			1,392		—		1,827		—

Total commercial real estate			1,560		2		1,997		5

Total		$	1,567		2		2,014		5

											Quarter ended June 30, 2019				Six months ended June 30, 2019
		Quarter ended June 30, 2017				Six months ended June 30, 2017
		Average		Total interest		Average		Total interest			Average		Total interest		Average		Total interest

		recorded		income		recorded		income			recorded		income		recorded		income

(In thousands)		investment		recognized		investment		recognized			investment		recognized		investment		recognized

Impaired loans:	Impaired loans:									Impaired loans:
Commercial and industrial		$	2		—		6		—
Construction and land development			15		—		21		—
Commercial real estate:
Owner occupied			186		2		189		5		$	—		—		45		9
Other			1,821		—		1,845		—

Total commercial real estate			2,007		2		2,034		5			—		—		45		9

Total		$	2,024		2		2,061		5		$	—		—		45		9


	Quarter ended June 30, 2018				Six months ended June 30, 2018

	Average		Total interest		Average		Total interest

	recorded		income		recorded		income

(In thousands)	investment		recognized		investment		recognized

Impaired loans:
Commercial and industrial	$	7		—		17		—
Commercial real estate:
Owner occupied		168		2		170		5
Other		1,392		—		1,827		—

Total commercial real estate		1,560		2		1,997		5

Total	$	1,567		2		2,014		5

Troubled Debt Restructurings

Impaired loans also include troubled debt restructurings (“TDRs”). In the normal course of business, management may grant concessions to borrowers that are experiencing financial difficulty. A concession may include, but is not limited to, delays in required payments of principal and interest for a specified period, reduction of the stated interest rate of the loan, reduction of accrued interest, extension of the maturity date, or reduction of the face amount or maturity amount of the debt. A concession has been granted when, as a result of the restructuring, the Bank does not expect to collect, where due, all amounts owed, including interest at the original stated rate. A concession may have also been granted if the debtor is not able to access funds elsewhere at a market rate for debt with similar risk characteristics as the restructured debt. In making the determination of whether a loan modification is a TDR, the Company considers the individual facts and circumstances surrounding each modification. As part of the credit approval process, the restructured loans are evaluated for adequate collateral protection in determining the appropriate accrual status at the time of restructure.

Similar to other impaired loans, TDRs are measured for impairment based on the present value of expected payments using the loan’s original effective interest rate as the discount rate, or the fair value of the collateral, less selling costs if the loan is collateral dependent. If the recorded investment in the loan exceeds the measure of fair value, impairment is recognized by establishing a valuation allowance as part of the allowance for loan losses or acharge-off to the allowance for loan losses. In periods subsequent to the modification, all TDRs are individually evaluated for possible impairment.

The Company had no TDRs as of June 30, 2019. The following is a summary of accruing and nonaccrual TDRs, which are included in the impaired loan totals, and the related allowance for loan losses, by portfolio segment and class as of December 31, 2018.


	TDRs
							Related
(In thousands)	Accruing		Nonaccrual		Total		Allowance

December 31, 2018
Commercial real estate:
Owner occupied	$	157		—		157	$	—

Total commercial real estate	$	157		—		157	$	—

Total	$	157		�� —		157	$	—

At June 30, ~~2018 and December 31, 2017.~~2019, there were no significant outstanding commitments to advance additional funds to customers whose loans had been restructured.

   TDRs
(In thousands)    Accruing    Nonaccrual    Total       Related
Allowance



June 30, 2018

Commercial real estate:

Owner occupied
   $ 167    —      167         $ 3
Other
   —      710    710         —



Total commercial real estate
   167    710    877         3



Total
   $ 167    710    877         $ 3



December 31, 2017

Commercial and industrial
   $ —      31    31         $ 31
Commercial real estate:

Owner occupied
   175    —      175         11
Other
   287    1,431    1,718         —



Total commercial real estate
   462    1,431    1,893         11



Total
   $               462                  1,462                  1,924         $                 42

The following table summarizes loans modified in a TDR during the respective periods both before and after their modification.


															Quarter ended June 30,						Six months ended June 30,
		Quarter ended June 30,						Six Months ended June 30,
				Pre-		Post -				Pre-		Post -					Pre-		Post -				Pre-		Post -

				modification		modification				modification		modification					modification		modification				modification		modification

		Number		outstanding		outstanding		Number		outstanding		outstanding			Number		outstanding		outstanding		Number		outstanding		outstanding

		of		recorded		recorded		of		recorded		recorded			of		recorded		recorded		of		recorded		recorded

(Dollars in thousands)		contracts		investment		investment		contracts		investment		investment			contracts		investment		investment		contracts		investment		investment

2018:	2018:													2018:
Commercial real estate:
Other			—	$	—		—		1	$	737		737			—	$	—		—		1	$	737		737

Total commercial real estate			—		—		—		1		737		737			—		—		—		1		737		737

Total			—	$	—		—		1	$	737		737			—	$	—		—		1	$	737		737

2017:
Other			1	$	1,275		1,266		1	$	1,275		1,266

Total commercial real estate			1		1,275		1,266		1		1,275		1,266

Total			1	$	1,275		1,266		1	$	1,275		1,266

There were no loans modified in a TDR during the quarter and six months ended June 30, 2019. One loan was modified in a TDR during the six months ended June 30, ~~2018 and 2017.~~2018. The only concession granted by the Company ~~in each instance~~ was a delay in the required payment of interest.

The following table summarizes the recorded investment in loans modified in a TDR within the previous 12 months for which there was a payment default (defined as 90 days or more past due) during the respective periods. During the quarter and six months ended June 30, ~~2017,~~2019, there were no loans modified in a TDR within the previous 12 months for which there was a payment default (defined as 90 days or more past due).


	Quarter ended June 30,				Six Months ended June 30,
									Quarter ended June 30,				Six months ended June 30,
	Number of		Recorded		Number of		Recorded		Number of		Recorded		Number of		Recorded
(Dollars in thousands)	Contracts		investment⁽¹⁾		Contracts		investment⁽¹⁾		Contracts		investment⁽¹⁾		Contracts		investment⁽¹⁾

2018:
Commercial real estate:
Other		—	$	—		1	$	1,259		—	$	—		1	$	1,259

Total commercial real estate		—		—		1		1,259		—		—		1		1,259

Total		—	$	—		1	$	1,259		—	$	—		1	$	1,259


(1) Amount as of applicable month end during the respective period for which there was a payment default.

NOTE 5: MORTGAGE SERVICING RIGHTS, NET

Mortgage servicing rights (“MSRs”) are recognized based on the fair value of the servicing rights on the date the corresponding mortgage loans are sold. An estimate of the fair value of the Company’s MSRs is determined using assumptions that market participants would use in estimating future net servicing income, including estimates of prepayment speeds, discount rates, default rates, costs to service, escrow account earnings, contractual servicing fee income, ancillary income, and late fees. Subsequent to the date of transfer, the Company has elected to measure its MSRs under the amortization method. Under the amortization method, MSRs are amortized in proportion to, and over the period of, estimated net servicing income.

The Company has recorded MSRs related to loans sold without recourse to Fannie Mae. The Company generally sells conforming, fixed-rate,closed-end, residential mortgages to Fannie Mae. MSRs are included in other assets on the accompanying consolidated balance sheets.

The Company evaluates MSRs for impairment on a quarterly basis. Impairment is determined by stratifying MSRs into groupings based on predominant risk characteristics, such as interest rate and loan type. If, by individual stratum, the carrying amount of the MSRs exceeds fair value, a valuation allowance is established. The valuation allowance is adjusted as the fair value changes. Changes in the valuation allowance are recognized in earnings as a component of mortgage lending income.

The following table details the changes in amortized MSRs and the related valuation allowance for the respective periods.


		Quarter ended June 30,						Six Months ended June 30,							Quarter ended June 30,						Six months ended June 30,
(Dollars in thousands)		2018			2017			2018			2017				2019			2018			2019			2018

MSRs, net:
Beginning balance		$	1,604		$	1,862		$	1,644		$	1,952			$	1,410		$	1,604		$	1,441		$	1,644
Additions, net			62			40			115			93				39			62			80			115
Amortization expense			(117	)		(140	)		(210	)		(284	)			(94	)		(117	)		(166	)		(210	)
Decrease in valuation allowance			—			—			—			1

Ending balance		$	1,549		$	1,762		$	1,549		$	1,762			$	1,355		$	1,549		$	1,355		$	1,549


Valuation allowance included in MSRs, net:	Valuation allowance included in MSRs, net:													Valuation allowance included in MSRs, net:
Beginning of period		$	—		$	—		$	—		$	1			$	—		$	—		$	—		$	—
End of period			—			—			—			—				—			—			—			—


Fair value of amortized MSRs:
Beginning of period		$	2,738		$	2,689		$	2,528		$	2,678			$	2,591		$	2,738		$	2,697		$	2,528
End of period			2,659			2,520			2,659			2,520				2,333			2,659			2,333			2,659

NOTE 6: ~~DERIVATIVE INSTRUMENTS~~

Financial derivatives are reported at fair value in other assets or other liabilities on the accompanying consolidated balance sheets. The accounting for changes in the fair value of a derivative depends on whether it has been designated and qualifies as part of a hedging relationship. For derivatives not designated as part of a hedging relationship, the gain or loss is recognized in current earnings within other noninterest income on the accompanying consolidated statements of earnings. From time to time, the Company may enter into interest rate swaps (“swaps”) to facilitate customer transactions and meet their financing needs. Upon entering into these swaps, the Company enters into offsetting positions in order to minimize the risk to the Company. These swaps qualify as derivatives, but are not designated as hedging instruments.

Interest rate swap agreements involve the risk of dealing with counterparties and their ability to meet contractual terms. When the fair value of a derivative instrument is positive, this generally indicates that the counterparty or customer owes the Company, and results in credit risk to the Company. When the fair value of a derivative instrument is negative, the Company owes the customer or counterparty and therefore, has no credit risk.

~~The Company had no interest rate swap agreements at June 30, 2018. A summary of the Company’s interest rate swap agreements at December 31, 2017 is presented below.~~

          Other
        Assets               Other
        Liabilities
          Estimated            Estimated
(Dollars in thousands)    Notional            Fair Value                    Fair Value

December 31, 2017:

Pay fixed / receive variable
   $ 3,617    —      52
Pay variable / receive fixed
   3,617    52    —

Total interest rate swap agreements
   $             7,234            52            52

~~NOTE 7:~~ FAIR VALUE

Fair Value Hierarchy

“Fair value” is defined by ASC 820,Fair Value Measurements and Disclosures, as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for an asset or liability at the measurement date. GAAP establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

Level 1—inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets.

Level 2—inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs that are observable for the asset or liability, either directly or indirectly.

Level 3—inputs to the valuation methodology are unobservable and reflect the Company’s own assumptions about the inputs market participants would use in pricing the asset or liability.

Level changes in fair value measurements

Transfers between levels of the fair value hierarchy are generally recognized at the end of each reporting period. The Company monitors the valuation techniques utilized for each category of financial assets and liabilities to ascertain when transfers between levels have been affected. The nature of the Company’s financial assets and liabilities generally is such that transfers in and out of any level are expected to be infrequent. For the six months ended June 30, ~~2018,~~2019, there were no transfers between levels and no changes in valuation techniques for the Company’s financial assets and liabilities.

Assets and liabilities measured at fair value on a recurring basis

Securitiesavailable-for-sale

Fair values of securities available for sale were primarily measured using Level 2 inputs. For these securities, the Company obtains pricing from third party pricing services. These third party pricing services consider observable data that may include broker/dealer quotes, market spreads, cash flows, benchmark yields, reported trades for similar securities, market consensus prepayment speeds, credit information, and the securities’ terms and conditions. On a quarterly basis, management reviews the pricing received from the third party pricing services for reasonableness given current market conditions. As part of its review, management may obtainnon-binding third party broker quotes to validate the fair value measurements. In addition, management will periodically submit pricing provided by the third party pricing services to another independent valuation firm on a sample basis. This independent valuation firm will compare the price provided by the third party pricing service with its own price and will review the significant assumptions and valuation methodologies used with management.

~~Interest rate swap agreements~~

The carrying amount of interest rate swap agreements was included in other assets and accrued expenses and other liabilities on the accompanying consolidated balance sheets. The Company had no interest rate swap agreements at June 30, 2018. The fair value measurements for our interest rate swap agreements were based on information obtained from a third party bank. This information is periodically tested by the Company and validated against other third party valuations. If needed, other third party market participants may be utilized to corroborate the fair value measurements for our interest rate swap agreements. The Company classified these derivative assets and liabilities within Level 2 of the valuation hierarchy. These swaps qualify as derivatives, but are not designated as hedging instruments.

The following table presents the balances of the assets and liabilities measured at fair value on a recurring basis as of June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively, by caption, on the accompanying consolidated balance sheets by ASC 820 valuation hierarchy (as described above).

      Quoted Prices in    Significant
      Active Markets    Other    Significant
      for    Observable    Unobservable
      Identical Assets    Inputs    Inputs
(Dollars in thousands)    Amount    (Level 1)    (Level 2)    (Level 3)

June 30, 2018:

Securitiesavailable-for-sale:

Agency obligations
   $ 51,361    —      51,361    —
Agency RMBS
   129,006    —      129,006    —
State and political subdivisions
   70,953    —      70,953    —

Total securitiesavailable-for-sale
   251,320    —      251,320    —

Total assets at fair value
   $ 251,320    —      251,320    —

December 31, 2017:

Securitiesavailable-for-sale:

Agency obligations
   $ 53,062    —      53,062    —
Agency RMBS
   133,072    —      133,072    —
State and political subdivisions
   71,563    —      71,563    —

Total securitiesavailable-for-sale
   257,697    —      257,697    —
Other assets⁽¹⁾
   52    —      52                    —

Total assets at fair value
   $         257,749    —                      257,749    —

Other liabilities⁽¹⁾
   $ 52    —      52    —

Total liabilities at fair value
   $ 52                    —      52    —

⁽¹⁾ ~~Represents the fair value of interest rate swap agreements.~~



			Quoted Prices in		Significant

			Active Markets		Other		Significant

			for		Observable		Unobservable

			Identical Assets		Inputs		Inputs

(Dollars in thousands)	Amount		(Level 1)		(Level 2)		(Level 3)

June 30, 2019:
Securitiesavailable-for-sale:
Agency obligations	$	57,160		—		57,160		—
Agency RMBS		122,655		—		122,655		—
State and political subdivisions		68,998		—		68,998		—

Total securitiesavailable-for-sale		248,813		—		248,813		—

Total assets at fair value	$	248,813		—		248,813		—


December 31, 2018:
Securitiesavailable-for-sale:
Agency obligations	$	51,171		—		51,171		—
Agency RMBS		118,598		—		118,598		—
State and political subdivisions		70,032		—		70,032		—

Total securitiesavailable-for-sale		239,801		—		239,801		—

Total assets at fair value	$	239,801		—		239,801		—

Assets and liabilities measured at fair value on a nonrecurring basis

Loans held for sale

Loans held for sale are carried at the lower of cost or fair value. Fair values of loans held for sale are determined using quoted market secondary market prices for similar loans. Loans held for sale are classified within Level 2 of the fair value hierarchy.

Impaired Loans

Loans considered impaired under ASC310-10-35,Receivables, are loans for which, based on current information and events, it is probable that the Company will be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement. Impaired loans can be measured based on the present value of expected payments using the loan’s original effective rate as the discount rate, the loan’s observable market price, or the fair value of the collateral less selling costs if the loan is collateral dependent.

The fair value of impaired loans ~~were~~was primarily measured based on the value of the collateral securing these loans. Impaired loans are classified within Level 3 of the fair value hierarchy. Collateral may be real estate and/or business assets including equipment, inventory, and/or accounts receivable. The Company determines the value of the collateral based on independent appraisals performed by qualified licensed appraisers. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Appraised values are discounted for costs to sell and may be discounted further based on management’s historical knowledge, changes in market conditions from the date of the most recent appraisal, and/or management’s expertise and knowledge of the customer and the customer’s business. Such discounts by management are subjective and are typically significant unobservable inputs for determining fair value. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors discussed above.

Other real estate owned

Other real estate owned (“OREO”), consisting of properties obtained through foreclosure or in satisfaction of loans, are initially recorded at the lower of the loan’s carrying amount or the fair value of collateral less costs to sell upon transfer of the loans to other real estate. Subsequently, other real estate is carried at the lower of carrying value or fair value less costs to sell. Fair values are generally based on third party appraisals of the property and are classified within Level 3 of the fair value hierarchy. The appraisals are sometimes further discounted based on management’s historical knowledge, and/or changes in market conditions from the date of the most recent appraisal, and/or management’s expertise and knowledge of the customer and the customer’s business. Such discounts are typically significant unobservable inputs for determining fair value. In cases where the carrying amount exceeds the fair value, less costs to sell, a loss is recognized in noninterest expense.

Mortgage servicing rights, net

~~Mortgage servicing rights,~~MSRs, net, included in other assets on the accompanying consolidated balance sheets, are carried at the lower of cost or estimated fair value. MSRs do not trade in an active market with readily observable prices. To determine the fair value of MSRs, the Company engages an independent third party. The independent third party’s valuation model calculates the present value of estimated future net servicing income using assumptions that market participants would use in estimating future net servicing income, including estimates of prepayment speeds, discount rates, default rates, cost to service, escrow account earnings, contractual servicing fee income, ancillary income, and late fees. Periodically, the Company will review broker surveys and other market research to validate significant assumptions used in the model. The significant unobservable inputs include prepayment speeds or the constant prepayment rate (“CPR”) and the weighted average discount rate. Because the valuation of MSRs requires the use of significant unobservable inputs, all of the Company’s MSRs are classified within Level 3 of the valuation hierarchy.

The following table presents the balances of the assets and liabilities measured at fair value on a nonrecurring basis as of June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively, by caption, on the accompanying consolidated balance sheets and by FASB ASC 820 valuation hierarchy (as described above):


			Quoted Prices in								Quoted Prices in

			Active Markets		Other		Significant				Active Markets		Other		Significant

			for		Observable		Unobservable				for		Observable		Unobservable

	Carrying		Identical Assets		Inputs		Inputs		Carrying		Identical Assets		Inputs		Inputs

(Dollars in thousands)	Amount		(Level 1)		(Level 2)		(Level 3)		Amount		(Level 1)		(Level 2)		(Level 3)

June 30, 2018:
June 30, 2019:
Loans held for sale									$	2,016		—		2,016		—
Other assets⁽²⁾										1,658		—		—		1,658

Total assets at fair value									$	3,674		—		2,016		1,658

December 31, 2018:
Loans held for sale	$	1,943		—		1,943		—	$	383		—		383		—
Loans, net⁽¹⁾		874		—		—		874		157		—		—		157
Other assets⁽²⁾		1,686		—		—		1,686		1,613		—		—		1,613

Total assets at fair value	$	4,503		—		1,943		2,560	$	2,153		—		383		1,770

December 31, 2017:
Loans held for sale	$	1,922		—		1,922		—
Loans, net⁽¹⁾		2,700		—		—		2,700
Other assets⁽²⁾		1,644		—		—		1,644

Total assets at fair value	$	6,266		—		1,922		4,344

⁽¹⁾	Loans considered impaired under ASC310-10-35,Receivables. This amount reflects the recorded investment in impaired loans, net of any related allowance for loan losses.

⁽²⁾	Represents MSRs, net and other real estate owned, both of which are carried at lower of cost or estimated fair value.

Quantitative Disclosures for Level 3 Fair Value Measurements

At June 30, ~~2018,~~2019, the Company had no Level 3 assets measured at fair value on a recurring basis. For Level 3 assets measured at fair value on anon-recurring basis at June 30, ~~2018,~~2019, the significant unobservable inputs used in the fair value measurements are presented below.

Weighted

Carrying

Average

Carrying

Significant

Average

(Dollars in thousands)

Amount

Valuation Technique

Significant Unobservable Input

of Input

Amount

Valuation Technique

Unobservable Input

of Input

Nonrecurring:

June 30, 2019:

Other real estate owned

303

Appraisal

Appraisal discounts (%)

10.0%

Mortgage servicing rights, net

1,355

Discounted cash flow

Prepayment speed or CPR (%)

10.1%

Discount rate (%)

10.0%

December 31, 2018:

Impaired loans

874

Appraisal

Appraisal discounts (%)

52.4%

157

Appraisal

Appraisal discounts (%)

10.0%

Other real estate owned

137

Appraisal

Appraisal discounts (%)

10.0%

172

Appraisal

Appraisal discounts (%)

10.0%

Mortgage servicing rights, net

1,549

Discounted cash flow

Prepayment speed or CPR (%)

9.4%

1,441

Discounted cash flow

Prepayment speed or CPR (%)

8.3%

Discount rate (%)

10.0%

Discount rate (%)

10.0%

Fair Value of Financial Instruments

ASC 825,Financial Instruments, requires disclosure of fair value information about financial instruments, whether or not recognized on the face of the balance sheet, for which it is practicable to estimate that value. The assumptions used in the estimation of the fair value of the Company’s financial instruments are explained below. Where quoted market prices are not available, fair values are based on estimates using discounted cash flow analyses. Discounted cash flows can be significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. The following fair value estimates cannot be substantiated by comparison to independent markets and should not be considered representative of the liquidation value of the Company’s financial instruments, but rather are a good-faith estimate of the fair value of financial instruments held by the Company. ASC 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements.

The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments:

Loans, net

Fair values for loans were calculated using discounted cash flows. The discount rates reflected current rates at which similar loans would be made for the same remaining maturities. Expected future cash flows were projected based on contractual cash flows, adjusted for estimated prepayments. ~~In accordance with the prospective adoption of ASUNo. 2016-01,~~ ~~the fair value of loans as of June 30, 2018 was measured using an exit price notion.~~ The fair value of loans ~~as of December 31, 2017~~ was measured using an ~~entry~~exit price notion.

Loans held for sale

Fair values of loans held for sale are determined using quoted secondary market prices for similar loans.

Time Deposits

Fair values for time deposits were estimated using discounted cash flows. The discount rates were based on rates currently offered for deposits with similar remaining maturities.

~~Long-term debt~~

~~The carrying amount of the Company’s variable rate long-term debt approximates its fair value.~~

The carrying value, related estimated fair value, and placement in the fair value hierarchy of the Company’s financial instruments at June 30, ~~2018~~2019 and December 31, ~~2017~~2018 are presented below. This table excludes financial instruments for which the carrying amount approximates fair value. Financial assets for which fair value approximates carrying value included cash and cash equivalents. Financial liabilities for which fair value approximates carrying value included noninterest-bearing demand deposits, interest-bearing demand deposits, and savings ~~deposits~~deposits. Fair value approximates carrying value in these financial liabilities due to these products having no stated maturity. ~~In addition,~~Additionally, financial liabilities for which fair value approximates carrying value included overnight borrowings such as federal funds purchased and securities sold under agreements to repurchase.


					Fair Value Hierarchy										Fair Value Hierarchy

	Carrying		Estimated		Level 1		Level 2		Level 3		Carrying		Estimated		Level 1		Level 2		Level 3

(Dollars in thousands)	amount		fair value		inputs		inputs		Inputs		amount		fair value		inputs		inputs		Inputs

June 30, 2018:
June 30, 2019:
Financial Assets:
Loans, net (1)	$	451,822	$	449,078	$	—	$	—	$	449,078	$	471,210	$	465,846	$	—	$	—	$	465,846
Loans held for sale		1,943		1,976		—		1,976		—		2,016		2,063		—		2,063		—
Financial Liabilities:
Time Deposits	$	183,001	$	183,631	$	—	$	183,631	$	—	$	170,067	$	170,542	$	—	$	170,542	$	—


December 31, 2017:
December 31, 2018:
Financial Assets:
Loans, net (1)	$	448,894	$	447,468	$	—	$	—	$	447,468	$	472,118	$	465,456	$	—	$	—	$	465,456
Loans held for sale		1,922		1,950		—		1,950		—		383		397		—		397		—
Financial Liabilities:
Time Deposits	$	188,071	$	185,564	$	—	$	185,564	$	—	$	181,237	$	181,168	$	—	$	181,168	$	—
Long-term debt		3,217		3,217		—		3,217		—


(1) Represents loans, net of unearned income and ~~the allowance for loan losses. In accordance with the prospective adoption of ASUNo. 2016-01,~~ the allowance for loan losses. The fair value of loans ~~as of June 30, 2018~~ was measured using an exit ~~price notion. The fair value of loans as of December 31, 2017 was measured using an entry~~ price notion.

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

General

The following discussion and analysis is designed 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 six months ended June 30, ~~2018~~2019 and ~~2017,~~2018, as well as the information contained in our Annual Report on Form10-K for the year ended December 31, ~~2017~~2018 and our ~~subsequent~~ Quarterly Reports on Form10-Q.

Special Notice Regarding Forward-Looking Statements

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” within the meaning of, and subject to, the protections of Section 27A of the Securities Act of 1933, as amended, (the “Securities Act”) 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 are statements that 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,” “plan,” “point to,” “project,” “could,” “intend,” “target” 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, domestic and foreign, including seasonality;

governmental monetary and fiscal policies;

legislative and regulatory changes, including changes in banking, securities, and tax laws, regulations and rules and their application by our regulators, including capital and liquidity requirements, and changes in the scope and cost of FDIC insurance;

changes in accounting policies, rules, and practices;

the risks of changes in interest rates on the levels, composition, and costs of deposits, loan demand, and the values and liquidity of loan collateral, securities, and interest sensitive assets and liabilities, and the risks and uncertainty of the amounts realizable;

changes in borrower credit risks and payment behaviors;

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 the prices, values, and sales volumes of residential and commercial real estate;

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 other competitors who are not subject to the same regulations as the Company and the Bank;

the failure of assumptions and estimates underlying the establishment of allowances for possible loan and other asset impairments, losses, valuations of assets and liabilities and other estimates;

the risks of mergers, acquisitions and divestitures, including, without limitation, the related time and costs of implementing such transactions, integrating operations as part of these transactions and possible failures to achieve expected gains, revenue growth and/or expense savings from such transactions;

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

the effects of war, or other conflicts, acts of terrorism, or other catastrophic events that may affect general economic conditions;

cyber attacks and data breaches that may compromise our systems or customers’ information;

the failure of assumptions and estimates, as well as differences in, and changes to, economic, market, and credit conditions, including changes in borrowers’ credit risks and payment behaviors from those used in our loan portfolio stress tests and other evaluations;

the risk that our deferred tax assets, if any, could be reduced if estimates of future taxable income from our operations and tax planning strategies are less than currently estimated, and sales of our capital stock could trigger a reduction in the amount of net operating loss carry-forwards, if any, that we may be able to utilize for income tax purposes; and

other factors and information in this report and other filings that we make with the SEC under the Exchange Act, including our Annual Report on Form10-K for the year ended December 31, ~~2017~~2018 and subsequent quarterly and current reports. See Part II, Item 1A. “RISK FACTORS”.

All written or oral forward-looking statements that are made by or 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.

Business

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 8 full-service branches in Auburn, Opelika, Notasulga, and Valley, Alabama. The Bank also operates a loan production ~~office~~offices in Auburn and Phenix City, Alabama.

Summary of Results of Operations

   Quarter ended June 30,    Six Months ended June 30,
(Dollars in thousands, except per share amounts)    2018    2017    2018    2017

Net interest income (a)
   $           6,469    $           6,402    $           12,909    $           12,591
Less:tax-equivalent adjustment
   152    301    308    601

Net interest income (GAAP)
   6,317    6,101    12,601    11,990
Noninterest income
   839    793    1,692    1,629

Total revenue
   7,156    6,894    14,293    13,619
Provision for loan losses
   —      100    —      100
Noninterest expense
   4,326    4,015    8,728    8,133
Income tax expense
   566    784    1,106    1,501

Net earnings
   $ 2,264    $ 1,995    $ 4,459    $ 3,885

Basic and diluted earnings per share
   $ 0.62    $ 0.55    $ 1.22    $ 1.07

~~(a)Tax-equivalent.~~ ~~See “Table 1 -~~
   Quarter ended June 30,    Six months ended June 30,
(Dollars in thousands, except per share amounts)    2019    2018    2019    2018

Net interest income (a)
   $             6,742    $             6,469    $             13,508    $             12,909
Less:tax-equivalent adjustment
   145    152    291    308

Net interest income (GAAP)
   6,597    6,317    13,217    12,601
Noninterest income
   885    839    2,045    1,692

Total revenue
   7,482    7,156    15,262    14,293
Noninterest expense
   4,629    4,326    9,240    8,728
Income tax expense
   546    566    1,172    1,106

Net earnings
   $ 2,307    $ 2,264    $ 4,850    $ 4,459

Basic and diluted earnings per share
   $ 0.64    $ 0.62    $ 1.35    $ 1.22

(a)
Tax-equivalent. See “Table 1—Explanation ofNon-GAAP Financial Measures.”

Financial Summary

The Company’s net earnings were $4.9 million for the first six months of 2019, compared to $4.5 million for the first six months of ~~2018, compared to $3.9 million~~2018. Basic and diluted earnings per share were $1.35 per share for the first six months of ~~2017. Basic and diluted earnings per share were~~2019, compared to $1.22 per share for the first six months of ~~2018, compared to $1.07 per share~~2018.

Net interest income(tax-equivalent) was $13.5 million for the first six months of ~~2017.~~

~~Net interest income(tax-equivalent)~~ ~~was~~2019, a 5% increase compared to $12.9 million for the first six months of ~~2018, a 3% increase compared to $12.6 million for the first six months of 2017.~~2018. This increase was primarily due to loan growth and recent increases in short-term market interest rates. Average loans were up 4%6% to $475.3 million in the first six months of 2019, compared to $449.9 million in the first six months of ~~2018, compared to $433.2 million in the first six months of 2017.~~2018. The Company’s net interest margin(tax-equivalent) increased to ~~3.33%~~3.52% in the first six months of ~~2018,~~2019, compared to ~~3.23%~~3.33% for the first six months of ~~2017~~2018 as yields on earning assets improved.

The Company recorded no provision for loan losses during the first six months of 2019 and 2018, ~~and $0.1 million during the first six months 2017.~~respectively. The provision for loan losses is based upon various estimates and judgements, including the absolute level of loans, loan growth, credit quality and the amount of net charge-offs.

Noninterest income was ~~$1.7 million compared to $1.6~~$2.0 million for the first six months of ~~2017. Noninterest expense was $8.7 million~~2019 compared to ~~$8.1~~$1.7 million for the first six months of ~~2017. This~~2018. The increase was primarily due to a $0.3 millionpre-tax gain from an insurance recovery received in ~~noninterest~~the first six months of 2019 with respect to a $0.4 millionpre-tax loss incurred in the third quarter of 2018 related to a misappropriation of assets.

Noninterest expense was $9.2 million for the first six months of 2019 compared to $8.7 million for the first six months of 2018. The increase was primarily due to increases in salaries and benefits ~~expense of $0.5 million.~~expense.

Income tax expense was ~~$1.1~~$1.2 million and ~~$1.5~~$1.1 million for the first six months of 2019 and 2018, ~~and 2017~~respectively, reflecting an effective tax rate of ~~19.87~~19.46% and ~~27.87%~~19.87%, respectively. ~~The decrease in the effective tax rate was primarily due to the Tax Cuts and Jobs Act, signed into law December 22, 2017, which lowered the Company’s statutory federal tax rate from 34% to 21%.~~

The Company paid cash dividends of ~~$0.48~~$0.50 per share in the first six months of ~~2018,~~2019, an increase of ~~4.3%~~4.2% from the same period of ~~2017.~~2018. At June 30, ~~2018,~~2019, 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 ~~17.29%~~17.14%, a tier 1 leverage ratio of ~~10.93%~~11.14% and a common equity tier 1 (“CET1”) ratio of ~~16.40%~~16.26% at June 30, ~~2018.~~2019.

InFor the second quarter of ~~2018,~~2019, net earnings were $2.3 million, or ~~$0.62~~$0.64 per share, compared to ~~$2.0~~$2.3 million, or ~~$0.55~~$0.62 per share, for the second quarter of ~~2017.~~2018. Net interest income(tax-equivalent) was $6.7 million for the second quarter of 2019 compared to $6.5 million for the second quarter of ~~2018, compared to $6.4 million for the second quarter of 2017. This increase was due to the same factors as described above.~~2018. The Company recorded no provision for loan losses in the second quarter of ~~2018 and $0.1~~2019 or 2018. Noninterest income was $0.9 million in the second quarter of ~~2017. Noninterest income was~~2019 and $0.8 million in the second quarter of ~~2018 and 2017.~~2018. Noninterest expense was $4.6 million in the second quarter of 2019 compared to $4.3 million in the second quarter of ~~2018 compared to $4.0 million in the second quarter of 2017.~~2018. This increase was ~~mainly~~ due to increases in salaries and benefits expense. Income tax expense was ~~$0.6~~$0.5 million for the second quarter of ~~2018,~~2019, compared to ~~$0.8~~$0.6 million in the second quarter of ~~2017.~~2018. The Company’s effective tax rate for the second quarter of ~~2018~~2019 was ~~20.00%~~19.14%, compared to ~~28.21%~~20.00% in the second quarter of ~~2017. This decrease was due to the same factors described above.~~2018.

CRITICAL ACCOUNTING POLICIES

The accounting and financial reporting policies of the Company conform with U.S. ~~generally accepted accounting principles~~GAAP 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 loan losses, our assessment of other-than-temporary impairment, recurring andnon-recurring fair value measurements, the valuation of other real estate owned, and the valuation of deferred tax assets, were critical to the determination of our financial position and results of operations. Other policies also require subjective judgment and assumptions and may accordingly impact our financial position and results of operations.

Allowance for Loan Losses

In assessing the adequacy of the allowance, the Company also considers the results of its ongoing internal and independent loan review processes. The Company’s loan review process assists in determining whether there are loans in the portfolio whose credit quality has weakened over time and evaluating the risk characteristics of the entire loan portfolio. The Company’s loan review process includes the judgment of management, the input from our independent loan reviewers, and reviews that may have been conducted by bank regulatory agencies as part of their examination process. The Company incorporates loan review results in the determination of whether or not it is probable that it will be able to collect all amounts due according to the contractual terms of a loan.

The estimated loan loss allocation for all five loan portfolio segments is then adjusted for management’s estimate of probable losses for several “qualitative and environmental” factors. The allocation for qualitative and environmental factors is particularly subjective and does not lend itself to exact mathematical calculation. This amount represents estimated probable inherent credit losses which exist, but have not yet been identified, as of the balance sheet date, and are based upon quarterly trend assessments in delinquent and nonaccrual loans, credit concentration changes, prevailing economic conditions, changes in lending personnel experience, changes in lending policies or procedures, and other influencing factors. These qualitative and environmental factors are considered for each of the five loan segments and the allowance allocation, as determined by the processes noted above, is increased or decreased based on the incremental assessment of these factors.

Assessment for Other-Than-Temporary Impairment of Securities

On a quarterly basis, management makes an assessment to determine whether there have been events or economic circumstances to indicate that a security on which there is an unrealized loss is other-than-temporarily impaired. For debt securities with an unrealized loss, an other-than-temporary impairment write-down is triggered when (1) the Company has the intent to sell a debt security, (2) it is more likely than not that the Company will be required to sell the debt security before recovery of its amortized cost basis, or (3) the Company does not expect to recover the entire amortized cost basis of the debt security. If the Company has the intent to sell a debt security or if it is more likely than not that it will be required to sell the debt security before recovery, the other-than-temporary write-down is equal to the entire difference between the debt security’s amortized cost and its fair value. If the Company does not intend to sell the security or it is not more likely than not that it will be required to sell the security before recovery, the other-than-temporary impairment write-down is separated into the amount that is credit related (credit loss component) and the amount due to all other factors. The credit loss component is recognized in earnings and is the difference between the security’s amortized cost basis and the present value of its expected future cash flows. The remaining difference between the security’s fair value and the present value of future expected cash flows is due to factors that are not credit related and is recognized in other comprehensive income, net of applicable taxes.

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 asavailable-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 7,6, Fair Value, of the consolidated financial statements that accompany this report.

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.

Other Real Estate Owned

~~Other real estate owned (“OREO”),~~OREO consists of properties obtained through foreclosure or in satisfaction of loans and is reported at the lower of cost or fair value of collateral, less estimated costs to sell at the date acquired, with any loss recognized as acharge-off through the allowance for loan losses. Additional OREO losses for subsequent valuation adjustments are determined on a specific property basis and are included as a component of other noninterest expense along with holding costs. Any gains or losses on disposal of OREO are also reflected in noninterest expense. Significant judgments and complex estimates are required in estimating the fair value of OREO, and the period of time within which such estimates can be considered current is significantly shortened during periods of market volatility. As a result, the net proceeds realized from sales transactions could differ significantly from appraisals, comparable sales, and other estimates used to determine the fair value of other OREO.

Deferred Tax Asset Valuation

A valuation allowance is recognized for a deferred tax asset if, based on the weight of available evidence, it ismore-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. 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 June 30, ~~2018.~~2019. The amount of the deferred tax assets considered realizable, however, could be reduced if estimates of future taxable income are reduced.

RESULTS OF OPERATIONS

Average Balance Sheet and Interest Rates


	Six Months ended June 30,								Six months ended June 30,
	2018				2017				2019				2018
	Average		Yield/		Average		Yield/		Average		Yield/		Average		Yield/

(Dollars in thousands)	Balance		Rate		Balance		Rate		Balance		Rate		Balance		Rate

Loans and loans held for sale	$	451,063		4.71%	$	434,054		4.69%	$	476,063		4.87%	$	451,063		4.71%
Securities - taxable		189,442		2.22%		196,886		2.18%		173,528		2.32%		189,442		2.22%
Securities -tax-exempt		71,283		4.14%		69,353		5.14%		68,386		4.08%		71,283		4.14%

Total securities		260,725		2.75%		266,239		2.96%		241,914		2.82%		260,725		2.75%
Federal funds sold		28,932		1.64%		35,206		0.89%		19,198		2.36%		28,932		1.64%
Interest bearing bank deposits		41,765		1.72%		50,238		0.91%		36,683		2.41%		41,765		1.72%

Total interest-earning assets		782,485		3.78%		785,737		3.69%		773,858		4.05%		782,485		3.78%

Deposits:
NOW		138,163		0.30%		126,200		0.19%		134,242		0.54%		138,163		0.30%
Savings and money market		220,022		0.36%		231,127		0.37%		215,892		0.41%		220,022		0.36%
Time Deposits		185,588		1.21%		203,189		1.18%		173,423		1.43%		185,588		1.21%

Total interest-bearing deposits		543,773		0.64%		560,516		0.62%		523,557		0.78%		543,773		0.64%
Short-term borrowings		2,888		0.84%		3,649		0.50%		1,615		0.74%		2,888		0.84%
Long-term debt		2,062		4.50%		3,217		3.70%		—		—		2,062		4.50%

Total interest-bearing liabilities		548,723		0.65%		567,382		0.64%		525,172		0.78%		548,723		0.65%

Net interest income and margin(tax-equivalent)	$	12,909		3.33%	$	12,591		3.23%	$	13,508		3.52%	$	12,909		3.33%

Net Interest Income and Margin

Net interest income(tax-equivalent) was $13.5 million for the first six months of 2019 compared to $12.9 million for the first six months of ~~2018 compared to $12.6 million for the first six months of 2017.~~2018. This increase was primarily due to ~~improved yields on interest-earning assets.~~improvement in the Company’s net interest margin(tax-equivalent).

Expansion of our ~~earning~~interest-earning asset yields was primarily driven by loan growth and recent increases in short-term market interest rates, which positively impacted the yields on our short-term assets, including federal funds sold and interest bearing bank deposits. ~~This expansion was partially offset by a decrease in thetax-equivalent~~ ~~yield ontax-exemptavailable-for-sale~~ ~~securities due to a reduction in the Company’s statutory federal tax rate from 34% to 21%.~~

The cost of total interest-bearing liabilities was ~~largely unchanged in~~0.78% for the first six months of ~~2018 from~~2019, an increase of 14 basis points compared to the first six months of ~~2017.~~2018. This increase in our funding costs was primarily due to higher prevailing market interest rates.

~~The Company continues~~We continue to deploy various asset liability management strategies to manage ~~its~~our risk to interest rate fluctuations. ~~The Company’s net interest margin could experience pressure due to reduced earning asset yields during~~Although the ~~extended period of low~~rise in interest rates ~~increased competition~~over the last two years has lifted the yields we receive on earning assets, pricing for ~~quality loan opportunities,~~creditworthy borrowers and ~~possible increases~~meaningful depositors is very competitive in our ~~costs of funds, if the Federal Reserve continues its gradual increase in interest rates. The Company anticipates~~markets. We anticipate that this challenging competitive environment will continue ~~throughout 2018 and it is unclear what impact~~during the ~~reduction in corporate tax rates under~~remainder of 2019. In the ~~Tax Cuts and Jobs Act will have on the~~event that short-term interest rates were to be cut in 2019 or beyond our net interest margin would likely be negatively impacted as our ability to lower our funding cost on our deposit products would likely lag the ~~Company is able to charge~~pace with which these cuts would impact our yields on our earning assets. Though we believe our net interest margin may decrease slightly for ~~loans or pay on deposits though it is believed it will increase competition. However,~~ the ~~Company believes~~remainder of 2019, we believe our net interest income should continue to increase in ~~2018~~2019 compared to ~~2017~~2018 primarily due to ~~an increase in~~increased average ~~earning asset~~loan volumes. We seek to fund these increased loan volumes ~~primarily loans.~~by growing our core deposits, but will utilize noncore funding to fund shortfalls, if any.

Provision for Loan Losses

The provision for loan losses represents a charge to earnings necessary to provide an allowance for loan losses that management believes, based on its processes and estimates, should be adequate to provide for the probable losses on outstanding loans. The Company recorded no provision for loan losses for the first six months of ~~2018~~2019 and ~~$0.1 million for the first six months of 2017.~~2018. The provision for loan losses is based upon various factors, including the absolute level of loans, loan growth, the credit quality, and the amount of net charge-offs or recoveries.

Based upon its assessment of the loan portfolio, management adjusts the allowance for loan losses to an amount it believes should be appropriate to adequately cover its estimate of probable losses in the loan portfolio. The Company’s allowance for loan losses as a percentage of total loans was ~~1.04%~~1.02% at June 30, ~~2018,~~2019, compared to ~~1.05%~~1.00% at December 31, ~~2017.~~2018. While the policies and procedures used to estimate the allowance for loan losses, as well as the resulting provision for loan losses charged to operations, are considered adequate by management and are reviewed from time to time by our regulators, they are based on estimates and judgments and are therefore approximate and imprecise. Factors beyond our control (such as conditions in the local and national economy, local real estate markets, or industries) may have a material adverse effect on our asset quality and the adequacy of our allowance for loan losses resulting in significant increases in the provision for loan losses.

Noninterest Income


	Quarter ended June 30,				Six Months ended June 30,				Quarter ended June 30,				Six months ended June 30,
(Dollars in thousands)	2018		2017		2018		2017		2019		2018		2019		2018

Service charges on deposit accounts	$	182	$	183	$	361	$	372	$	176	$	182	$	360	$	361
Mortgage lending income		166		139		372		304		187		166		376		372
Bank-owned life insurance		108		110		214		217		107		108		217		214
Securities gains, net		—		—		—		2		8		—		13		—
Other		383		361		745		734		407		383		1,079		745

Total noninterest income	$	839	$	793	$	1,692	$	1,629	$	885	$	839	$	2,045	$	1,692

The increase in other noninterest income was primarily due to a $0.3 millionpre-tax gain from an insurance recovery received in the first quarter of 2019 with respect to a $0.4 millionpre-tax loss incurred in the third quarter of 2018 related to a misappropriation of assets.

The Company’s income from mortgage lending was primarily attributable to the (1) origination and sale of new 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 ~~mortgage servicing rights (“MSRs”)~~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. 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.

MSRs are also evaluated 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 June 30,    Six Months ended June 30,
(Dollars in thousands)    2018    2017    2018    2017

Origination income
   $ 92    $ 77    $ 198    $ 176
Servicing fees, net
   74    62    174    127
Decrease in MSR valuation allowance
   —      —      —      1

Total mortgage lending income
   $ 166    $ 139    $ 372    $ 304

~~The increase in mortgage lending income was due to an increase in the volume of mortgage loans originated and sold and a decrease in MSR amortization expense as prepayment speeds have slowed.~~


	Quarter ended June 30,				Six months ended June 30,
(Dollars in thousands)	2019		2018		2019		2018

Origination income	$	102	$	92	$	188	$	198
Servicing fees, net		85		74		188		174

Total mortgage lending income	$	187	$	166	$	376	$	372

Noninterest Expense


	Quarter ended June 30,				Six Months ended June 30,				Quarter ended June 30,				Six months ended June 30,
(Dollars in thousands)	2018		2017		2018		2017		2019		2018		2019		2018

Salaries and benefits	$	2,618	$	2,392	$	5,286	$	4,773	$	2,799	$	2,618	$	5,737	$	5,286
Net occupancy and equipment		360		351		730		732		381		360		765		730
Professional fees		266		254		494		484		275		266		503		494
FDIC and other regulatory assessments		89		89		178		178		102		89		131		178
Other		993		929		2,040		1,966		1,072		993		2,104		2,040

Total noninterest expense	$	4,326	$	4,015	$	8,728	$	8,133	$	4,629	$	4,326	$	9,240	$	8,728

The increase in noninterest expense was primarily due to ~~routine annual~~ increases in salaries and benefits expense.

Income Tax Expense

Income tax expense was ~~$1.1~~$1.2 million and ~~$1.5~~$1.1 million for the first six months of ~~2018~~2019 and ~~2017~~2018 reflecting an effective tax rate of ~~19.87%~~19.46% and ~~27.87%~~19.87%, respectively. ~~The decrease in the effective tax rate was primarily due to the Tax Cuts and Jobs Act, signed into law December 22, 2017, which lowered the Company’s statutory federal tax rate from 34% to 21%.~~

BALANCE SHEET ANALYSIS

Securities

Securitiesavailable-for-sale were ~~$251.3~~$248.8 million at June 30, ~~2018~~2019 compared to ~~$257.7~~$239.8 million at December 31, ~~2017.~~2018. This ~~decrease reflects a decrease in the fair value of securitiesavailable-for-sale~~ ~~of $5.2 million and a decrease in the amortized cost basis of securitiesavailable-for-sale~~ ~~of $1.2 million. The decrease in the fair value of securities~~increase was primarily due to an increase in the fair value of securities as long-term interest ~~rates.~~rates declined during the first six months of 2019. The average annualizedtax-equivalent yields earned on total securities were 2.82% in 2019 and 2.75% in ~~2018 and 2.96% in 2017. This decrease in thetax-equivalent~~ ~~yields was primarily due to a decrease in the Company’s statutory federal tax rate from 34% to 21%.~~2018.

Loans


	2018						2017								2019						2018
	Second			First			Fourth			Third			Second		Second			First			Fourth			Third			Second

(In thousands)	Quarter			Quarter			Quarter			Quarter			Quarter		Quarter			Quarter			Quarter			Quarter			Quarter

Commercial and industrial	$	52,921			57,877			59,086			50,101			50,974	$	54,307			50,898			63,467			52,430			52,921
Construction and land development		42,675			35,910			39,607			47,455			46,386		45,395			44,931			40,222			45,109			42,675
Commercial real estate		246,129			234,345			239,033			232,380			220,863		268,500			265,149			261,896			250,150			246,129
Residential real estate		105,705			106,496			106,863			110,159			110,288		99,292			103,631			102,597			103,329			105,705
Consumer installment		9,824			9,685			9,588			9,877			9,409		9,091			8,564			9,295			9,942			9,824

Total loans		457,254			444,313			454,177			449,972			437,920		476,585			473,173			477,477			460,960			457,254
Less: unearned income		(682	)		(509	)		(526	)		(594	)		(633)		(524	)		(523	)		(569	)		(633	)		(682)

Loans, net of unearned income	$	456,572			443,804			453,651			449,378			437,287	$	476,061			472,650			476,908			460,327			456,572

Total loans, net of unearned income, were ~~$456.6~~$476.1 million at June 30, ~~2018,~~2019, compared to ~~$453.7~~$476.9 million at December 31, ~~2017. The increase of $2.9 million was primarily due to increases in the construction and land development and commercial real estate portfolio segments, which was partially offset bypay-downs~~ ~~in the commercial and industrial loan portfolio segment.~~2018. Four loan categories represented the majority of the loan portfolio at June 30, ~~2018:~~2019: commercial real estate ~~(54%~~(56%), residential real estate ~~(23%~~(21%), construction and land development ~~(9%~~(10%) and commercial and industrial ~~(12%~~(11%). Approximately ~~18%~~23% of the Company’s commercial real estate loans were classified as owner-occupied at June 30, ~~2018.~~2019.

Within the residential real estate portfolio segment, the Company had junior lien mortgages of approximately ~~$12.3~~$11.8 million, or 3%2% of total loans, at June 30, ~~2018,~~2019, compared to ~~$12.6~~$12.3 million, or 3% of total loans, at December 31, ~~2017.~~2018. For residential real estate mortgage loans with a consumer purpose, ~~$1.4~~$1.6 million required interest-only payments at June 30, ~~2018,~~2019, compared to ~~$2.1~~$0.5 million at December 31, ~~2017.~~2018. The Company’s residential real estate mortgage portfolio does not include any option ARM loans, subprime loans, or any material amount of other high-risk consumer mortgage products.

The average yield earned on loans and loans held for sale was 4.87% in the first six months of 2019 and 4.71% in the first six months of ~~2018 and 4.69% in the first six months of 2017.~~2018.

The specific economic and credit risks associated with our loan portfolio include, but are not limited to, the effects of current economic conditions on our borrowers’ cash flows, real estate market sales volumes, valuations, 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 ornon-existent collateral, title defects, inaccurate appraisals, financial deterioration of borrowers, fraud, and any violation of applicable laws and regulations.

The Company attempts to reduce these economic and credit risks through itsloan-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 ~~$18.8~~$19.4 million. Furthermore, we have an internal limit for aggregate credit exposure (loans outstanding plus unfunded commitments) to a single borrower of ~~$16.9~~$17.4 million. Our loan policy requires that the Loan Committee of the Board of Directors approve any loan relationships that exceed this internal limit. At June 30, ~~2018,~~2019, the Bank had no ~~loan~~ relationships exceeding these limits.

We periodically analyze our commercial loan portfolio 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. Loan concentrations to borrowers in the following classes exceeded 25% of the Bank’s total risk-based capital at June 30, ~~2018~~2019 (and related balances at December 31, ~~2017)~~2018).


	June 30,		December 31,		June 30,		December 31,

(In thousands)	2018		2017		2019		2018

Lessors of 1 to 4 family residential properties	$	47,029	$	47,323	$	45,612	$	46,374
Hotel/motel						44,664		47,936
Multi-family residential properties		40,497		52,167		44,022		40,455
Shopping centers		38,446		39,966		37,153		25,421
Hotel/motel		33,491		22,384
Office buildings		25,450		24,483		26,836		35,789

Allowance for Loan Losses

The Company maintains the allowance for loan losses at a level that management believes appropriate to adequately cover the Company’s estimate of probable losses inherent in the loan portfolio. The allowance for loan losses was ~~$4.8 million and $4.7~~$4.9 million at June 30, ~~2018 and~~2019 compared to $4.8 million at December 31, ~~2017, respectively,~~2018 which management believed to be adequate at each of the respective dates. The judgments and estimates associated with the determination of the allowance for loan losses are described under “Critical Accounting Policies.”

A summary of the changes in the allowance for loan losses and certain asset quality ratios for the second quarter of ~~2018~~2019 and the previous four quarters is presented below.


	2018						2017								2019						2018
	Second			First			Fourth			Third			Second		Second			First			Fourth			Third			Second

(Dollars in thousands)	Quarter			Quarter			Quarter			Quarter			Quarter		Quarter			Quarter			Quarter			Quarter			Quarter

Balance at beginning of period	$	4,732			4,757			4,670			4,965			4,588	$	4,808			4,790			4,785			4,750			4,732
Charge-offs:
Commercial and industrial		—			(52	)		—			(449	)		—
Commercial real estate		(39	)		—			—			—			—		—			—			—			—			(39)
Residential real estate		—			(4	)		—			(30	)		—		—			—			(11	)		(11	)		—
Consumer installment		—			(2	)		(23	)		(10	)		(5)		(1	)		(15	)		(42	)		(7	)		—

Total charge-offs		(39	)		(58	)		(23	)		(489	)		(5)		(1	)		(15	)		(53	)		(18	)		(39)
Recoveries		57			33			510			194			282		44			33			58			53			57

Net recoveries (charge-offs)		18			(25	)		487			(295	)		277
Provision for loan losses		—			—			(400	)		—			100
Net recoveries																43			18			5			35			18

Ending balance	$	4,750			4,732			4,757			4,670			4,965	$	4,851			4,808			4,790			4,785			4,750

as a % of loans		1.04	%		1.07			1.05			1.04			1.14		1.02	%		1.02			1.00			1.04			1.04
as a % of nonperforming loans		430	%		146			160			161			220		3,703	%		2,845			2,691			512			430
Net (recoveries) charge-offs as % of average loans (a)		(0.02	)%		0.02			(0.43	)		0.27			(0.25)
Net recoveries as % of average loans (a)																(0.04	)%		(0.02	)		—			(0.03	)		(0.02)

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

As described under “Critical Accounting Policies,” management assesses the adequacy of the allowance prior to the end of each calendar quarter. The level of the allowance is based upon management’s evaluation of the loan portfolios, past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay (including the timing of future payment), the estimated value of any underlying collateral, composition of the loan portfolio, economic conditions, industry and peer bank loan loss rates, and other pertinent factors. This evaluation is inherently subjective as it requires various material estimates and judgments, including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. The ratio of our allowance for loan losses to total loans outstanding was ~~1.04%~~1.02% at June 30, ~~2018,~~2019, compared to ~~1.05%~~1.00% at December 31, ~~2017.~~2018. In the future, the allowance to total loans outstanding ratio will increase or decrease to the extent the factors that influence our quarterly allowance assessment in their entirety either improve or weaken. In addition, our regulators, as an integral part of their examination process, will periodically review the Company’s allowance for loan losses, and may require the Company to make additional provisions to the allowance for loan losses based on their judgment about information available to them at the time of their examinations.

The Company’s recorded investment in loans considered impaired was $0.9 million at June 30, 2018 and $2.7 million at December 31, 2017, respectively, with corresponding valuation allowances (included in the allowance for loan losses) of $3 thousand and $42 thousand at each respective date.

Nonperforming Assets

The Company had ~~$1.2~~$0.4 million in nonperforming assets at June 30, ~~2018, compared to $3.0 million in nonperforming assets at~~2019 and December 31, ~~2017. The decrease in nonperforming assets was primarily due to the resolution of one nonperforming commercial real estate loan with a recorded investment of $1.3 million at December 31, 2017.~~2018.

The table below provides information concerning total nonperforming assets and certain asset quality ratios for the second quarter of ~~2018~~2019 and the previous four quarters.


	2018					2017						2019					2018
	Second			First		Fourth		Third		Second		Second			First		Fourth		Third		Second

(Dollars in thousands)	Quarter			Quarter		Quarter		Quarter		Quarter		Quarter			Quarter		Quarter		Quarter		Quarter

Nonperforming assets:
Nonaccrual loans	$	1,104			3,239		2,972		2,902		2,255	$	131			169		178		934		1,104
Other real estate owned		137			—		—		103		103		303			172		172		137		137

Total nonperforming assets	$	1,241			3,239		2,972		3,005		2,358	$	434			341		350		1,071		1,241

as a % of loans and other real estate owned		0.27	%		0.73		0.66		0.67		0.54		0.09	%		0.07		0.07		0.23		0.27
as a % of total assets		0.15	%		0.39		0.35		0.36		0.28		0.05	%		0.04		0.04		0.13		0.15
Nonperforming loans as a % of total loans		0.24	%		0.73		0.66		0.65		0.52		0.03	%		0.04		0.04		0.20		0.24
Accruing loans 90 days or more past due	$	—			—		—		5		42

The table below provides information concerning the composition of nonaccrual loans for the second quarter of ~~2018~~2019 and the previous four quarters.

								��
	2018				2017						2019				2018
	Second		First		Fourth		Third		Second		Second		First		Fourth		Third		Second

(In thousands)	Quarter		Quarter		Quarter		Quarter		Quarter		Quarter		Quarter		Quarter		Quarter		Quarter

Nonaccrual loans:
Commercial and industrial	$	—		234		31		33		34
Construction and land development		36		—		—		—		—		—		—		—		36		36
Commercial real estate		710		2,463		2,188		2,500		1,797		—		—		—		696		710
Residential real estate		347		530		739		353		406		131		169		178		194		347
Consumer installment		11		12		14		16		18		—		—		—		8		11

Total nonaccrual loans	$	1,104		3,239		2,972		2,902		2,255	$	131		169		178		934		1,104

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. At June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively, the Company had ~~$1.1~~$0.1 million and ~~$3.0~~$0.2 million, respectively, in loans on ~~nonaccrual.~~nonaccrual status.

At June 30, ~~2018~~2019 and December 31, ~~2017~~2018 there were no loans 90 days or more past due and still accruing.

The table below provides information concerning the composition of other real estate owned for the second quarter of ~~2018~~2019 and the previous four quarters.


	2018				2017						2019				2018
	Second		First		Fourth		Third		Second		Second		First		Fourth		Third		Second

(In thousands)	Quarter		Quarter		Quarter		Quarter		Quarter		Quarter		Quarter		Quarter		Quarter		Quarter

Other real estate owned:
Residential	$	137		—		—		103		103	$	303		172		172		137		137

Total other real estate owned	$	137		—		—		103		103	$	303		172		172		137		137

Potential Problem Loans

Potential problem loans represent those loans with a well-defined weakness and where information about possible credit problems of a borrower has caused management to have serious doubts about the borrower’s ability to comply with present repayment terms. This definition is believed to be substantially consistent with the standards established by the Federal Reserve, ~~Bank,~~ the Company’s primary regulator, for loans classified as substandard, excluding nonaccrual loans. Potential problem loans, which are not included in nonperforming assets, amounted to ~~$5.6~~$5.0 million, or ~~1.2%~~1.1% of total loans at June 30, ~~2018, compared to $5.7~~2019, and $6.5 million, or ~~1.2%~~1.4% of total loans at December 31, ~~2017.~~2018.

The table below provides information concerning the composition of potential problem loans for the second quarter of ~~2018~~2019 and the previous four quarters.


	2018				2017						2019				2018
	Second		First		Fourth		Third		Second		Second		First		Fourth		Third		Second

(In thousands)	Quarter		Quarter		Quarter		Quarter		Quarter		Quarter		Quarter		Quarter		Quarter		Quarter

Potential problem loans:
Commercial and industrial	$	218		112		119		130		609	$	590		570		522		96		218
Construction and land development		657		450		468		273		286		681		719		741		763		657
Commercial real estate		710		725		733		767		1,528		105		338		688		698		710
Residential real estate		3,929		3,992		4,253		4,524		4,416		3,621		3,724		4,506		4,025		3,929
Consumer installment		51		70		78		96		97		51		130		71		69		51

Total potential problem loans	$	5,565		5,349		5,651		5,790		6,936	$	5,048		5,481		6,528		5,651		5,565

At June 30, ~~2018,~~2019, approximately ~~$0.6~~$0.4 million, or ~~11%~~8% of total potential problem loans were past due at least 30 days, but less than 90 days.

The following table is a summary of the Company’s performing loans that were past due at least 30 days, but less than 90 days, for the second quarter of ~~2018~~2019 and the previous four quarters.


	2018				2017						2019				2018
	Second		First		Fourth		Third		Second		Second		First		Fourth		Third		Second

(In thousands)	Quarter		Quarter		Quarter		Quarter		Quarter		Quarter		Quarter		Quarter		Quarter		Quarter

Performing loans past due 30 to 89 days:
Commercial and industrial	$	108		3		8		64		195	$	109		428		100		10		108
Construction and land development		138		253		—		175		2		351		152		225		241		138
Commercial real estate		—		—		—		—		748
Residential real estate		885		573		1,058		513		496		214		339		1,740		186		885
Consumer installment		7		9		57		33		25		8		8		41		17		7

Total	$	1,138		838		1,123		785		1,466	$	682		927		2,106		454		1,138

Deposits

Total deposits were ~~$721.0~~$740.5 million at June 30, ~~2018,~~2019, compared to ~~$757.7~~$724.2 million at December 31, ~~2017. Decreases~~2018. The increase was due to growth of ~~$42.2~~$11.1 million in ~~interest bearing~~interest-bearing deposits ~~were partially offset by increases~~and $5.2 million in ~~noninterest bearing~~noninterest-bearing deposits ~~of $5.6 million~~ during the first six months of ~~2018. Of the $42.2 million decrease in interest bearing deposits, $39.0 million was due to fluctuations in public depositor account balances. Noninterest bearing~~2019. Noninterest-bearing deposits were ~~$199.5~~$206.9 million, or ~~27.7%~~27.9% of total deposits, at June 30, ~~2018,~~2019, compared to ~~$193.9~~$201.6 million, or ~~25.6%~~27.8% of total deposits at December 31, ~~2017.~~2018.

The average rate paid on total interest-bearing deposits was 0.78% in the first six months of 2019 and 0.64% in the first six months of ~~2018 and 0.62% in the first six months of 2017.~~2018.

Other Borrowings

Other borrowings consist of short-term borrowings and long-term debt. Short-term borrowings generally consist of federal funds purchased and securities sold under agreements to repurchase with an original maturity less than one year. The Bank had available federal funds lines totaling $41.0 million with none outstanding at June 30, ~~2018,~~2019, and at December 31, ~~2017,~~2018, respectively. Securities sold under agreements to repurchase totaled ~~$2.7~~$1.1 million at June 30, ~~2018 and~~2019, compared to $2.3 million at December 31, ~~2017.~~2018.

The average rate paid on short-term borrowings was 0.74% in the first six months of 2019 compared to 0.84% in the first six months of ~~2018 compared to 0.50% in the first six months of 2017.~~

2018.

~~Long-term debt includes junior subordinated debentures related to trust preferred securities.~~ The Company had ~~$3.2 million in junior subordinated debentures related to trust preferred securities outstanding~~no long-term debt at June 30, 2019 and December 31, 2017. On April 27, 2018, the Company formally redeemed all of the issued and outstanding junior subordinated debentures, including accrued and unpaid distributions, and the Trust formally redeemed all of the issued and outstanding trust preferred securities and common securities at par, including accrued and unpaid distributions. The junior subordinated debentures would have matured on December 31, 2033 and were redeemable since December 31, 2008.

~~The average rate paid on long-term debt was 4.50% in the first six months of 2018 and 3.70% in the first six months of 2017.~~2018.

CAPITAL ADEQUACY

The Company’s consolidated stockholders’ equity was ~~$85.7~~$94.1 million and ~~$86.9~~$89.1 million as of June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively. The ~~decrease~~increase from December 31, ~~2017~~2018 was primarily ~~driven by an~~due to other comprehensive ~~loss~~income due to the change in unrealized gains/losses on securitiesavailable-for-sale,net-of-tax, of ~~$3.9~~$4.4 million and net earnings of $4.9 million, which were partially offset by the repurchase of shares in the Company’s stock of $2.5 million and cash dividends paid of $1.8 ~~million,~~million. During the first six months of 2019, the Company repurchased 72,205 shares under the Company’s current stock repurchase program, which began January 15, 2019. These shares were ~~partially offset by net earnings~~repurchased at an average cost per share of ~~$4.5~~$34.57 and a total cost of $2.5 million. As of June 30, 2019, the approximate dollar value of shares that may be repurchased under the current repurchase program was $2.5 million.

On January 1, 2015, the Company and Bank became subject to the rules of the Basel III regulatory capital framework and related Dodd-Frank Wall Street Reform and Consumer Protection Act changes. The new rules included the implementation of a new capital conservation buffer that is added to the minimum requirements for capital adequacy purposes. The capital conservation buffer iswas subject to a three yearphase-in period that began on January 1, 2016 and ~~will be~~was fullyphased-in on January 1, 2019 at 2.5%~~. The requiredphase-in~~ ~~capital conservation buffer during 2018 is 1.875%~~. A banking organization with a conservation buffer of less than the required amount will be subject to limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers. At June 30, ~~2018,~~2019, the ~~ratios for the Company and Bank were~~Bank’s ratio was sufficient to meet the fullyphased-in conservation buffer.

The ~~Company’s~~Federal Reserve has treated us as a “small bank holding company’ under the Federal Reserve’s 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 ~~10.93%~~11.14%, ~~common equity tier 1 (“CET1”)~~CET1 risk-based capital ratio was ~~16.40%~~16.26%, tier 1 risk-based capital ratio was ~~16.40%~~16.26%, and total risk-based capital ratio was ~~17.29%~~17.14% at June 30, ~~2018.~~2019. 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 ~~Company’s~~Bank’s capital conservation buffer was ~~9.29%~~9.14% at June 30, ~~2018.~~2019.

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, andoff-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 June 30, ~~2018,~~2019, 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, andoff-balance sheet items will change as a result of interest rate changes. Economic values are estimated by discounting expected cash flows from assets, liabilities, andoff-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 there-pricing of all assets, liabilities, andoff-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:

●

45% for an instantaneous change of +/- 400 basis points

●

35% for an instantaneous change of +/- 300 basis points

●

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

●

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

At June 30, ~~2018,~~2019, our EVE model indicated that we were in compliance with the policy guidelines noted above.

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. Prepayment 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 may also use derivative financial instruments to improve the balance between interest-sensitive assets and interest-sensitive liabilities, and as a tool to manage interest rate sensitivity while continuing to meet the credit and deposit needs of our customers. From time to time, the Company may enter into interest rate swaps ~~(“swaps”)~~ to facilitate customer transactions and meet their financing needs. These interest rate swaps qualify as derivatives, but are not designated as hedging instruments. At June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, the Company had no derivative contracts designated as part of a hedging relationship to assist in managing its interest rate sensitivity.

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. Without proper management of its liquidity, the Company could experience higher costs of obtaining funds due to insufficient liquidity, while excessive liquidity can lead to a decline in earnings due to the cost of foregoing alternative higher-yielding investment opportunities.

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. The Bank’s payment of dividends depends on its earnings, liquidity, capital and the absence of any regulatory restrictions.

The primary source of funding and liquidity for the Company has been dividends received from the Bank. If needed, the Company could also issue common stock or other securities. Primary uses of funds by the Company include dividends paid to stockholders and stock repurchases, and interest payments on junior subordinated debentures issued by the Company in connection with trust preferred securities. On April 27, 2018, the Trust formally redeemed all of its issued and outstanding trust preferred securities at par, including accrued and unpaid distributions. The additional amount paid on April 27, 2018 for trust preferred securities not previously purchased by the Company was approximately $3.0 million, including accrued and unpaid distributions. All junior subordinated debentures related to the Trust were redeemed, including accrued and unpaid distributions, and retired as a result of the action. The Company now has no outstanding trust preferred securities or junior subordinated debentures, and the Trust has been dissolved.repurchases.

Primary sources of funding for the Bank include customer deposits, other borrowings, repayment and maturity of securities, sales of securities, and the sale and repayment of 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 may participate in the FHLB’s advance program to obtain funding for its growth. Advances include both fixed and variable terms and may be taken out with varying maturities. At June 30, ~~2018,~~2019, the Bank had a remaining available line of credit with the FHLB of ~~$248.7~~$246.7 million. At June 30, ~~2018,~~2019, the Bank also had $41.0 million of available federal funds lines with none outstanding. Primary uses of funds include repayment of maturing obligations and growing the loan portfolio.

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 reasonable borrower, depositor, and creditor requirements over the next twelve months.

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

At June 30, ~~2018,~~2019, the Bank had outstanding standby letters of credit of ~~$6.7~~$5.6 million and unfunded loan commitments outstanding of ~~$65.1~~$59.6 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 liquidate federal funds sold or a portion of securitiesavailable-for-sale, or draw on its available credit facilities.

Mortgage lending activities

Since 2009, we have primarily sold 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 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, compliance with applicable federal, state, and local laws, among other matters.

As of June 30, ~~2018,~~2019, the unpaid principal balance of residential mortgage loans, which we have originated and sold, but retained the servicing rights was ~~$302.5~~$281.9 million. Although these loans are generally sold on anon-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 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 ~~$53 thousand in~~any loans during the first six months of ~~2018~~2019 as a result of representation and warranty provisions contained in the Company’s sale agreements with Fannie Mae, and had no pending repurchase requests at June 30, ~~2018.~~2019.

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.

The agreement under which we act as servicer generally specifies a standard of responsibility for actions taken by us in such capacity and provides protection against expenses and liabilities incurred by us when acting in compliance with the respective 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 servicing guides issued by Fannie Mae as well as the contract provisions established between Fannie Mae and the Bank. 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 June 30, ~~2018,~~2019, 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 investors 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.

~~Changes to Contractual Obligations~~

On April 27, 2018, the Trust formally redeemed all of its issued and outstanding trust preferred securities at par. The additional amount paid on April 27, 2018 for trust preferred securities not previously purchased by the Company was approximately $3.0 million, including accrued and unpaid distributions. All junior subordinated debentures related to the Trust were redeemed, including accrued and unpaid distributions, and retired as a result of the action.

~~The Company now has no outstanding trust preferred securities or junior subordinated debentures, and the Trust has been dissolved.~~

Effects of Inflation and Changing Prices

The ~~Consolidated Financial Statements~~consolidated financial statements and related consolidated financial data presented herein have been prepared in accordance with U.S. ~~generally accepted accounting principles~~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.

CURRENT ACCOUNTING DEVELOPMENTS

The following ~~Accounting Standards Updates (“Updates” or “ASUs”)~~ASUs have been issued by the FASB but are not yet effective.

•

~~ASU2016-02,~~~~Leases;~~

•

ASU2016-13,Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments;

•

ASU2018-13,Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement; and

•

ASU~~2017-12,~~2018-15,~~Targeted Improvements to~~Intangibles – Goodwill and Other – Internal Use Software (Subtopic350-40): Customer’s Accounting for ~~Hedging Activities.~~Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract.

Information about these pronouncements is described in more detail below.

ASU~~2016-02,~~~~Leases,~~ requires lessees to recognize the assets and liabilities that arise from leases on the balance sheet. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a~~right-of-use~~ asset representing its right to use the underlying asset for lease term. The new guidance is effective for annual and interim reporting periods beginning after December 15, 2018. The amendment should be applied at the beginning of the earliest period presented using a modified retrospective approach with earlier application permitted as of the beginning of an interim or annual reporting period. The Company is currently evaluating the impact this ASU will have on its consolidated financial statements.

~~ASU~~2016-13,Financial ~~Instruments –~~ Instruments—Credit Losses (Topic 326): – —Measurement of Credit Losses on Financial Instruments, amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. For assets held at amortized cost basis, the new standard eliminates the probable initial recognition threshold in current GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses using a broader range of information regarding past events, current conditions and forecasts assessing the collectability of cash flows. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. For available for sale debt securities, credit losses should be measured in a manner similar to current GAAP, however the new standard will require that credit losses be presented as an allowance rather than as a write-down. The new guidance affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, ~~off balance~~off-balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. For public business entities that are SEC filers, the new guidance is effective for annual and interim periods in fiscal years beginning after December 15, 2019, and early adoption is permitted beginning in 2019. The Company has developed an implementation team that is following a general timeline. The team has been working with an advisory consultant, with whom a third-party software license has been purchased. The Company’s preliminary evaluation indicates the provisions of ASUNo. 2016-13 are expected to impact the Company’s consolidated financial statements, in particular the level of the reserve for credit losses. The Company is continuing to evaluate the extent of the potential impact and expects that portfolio composition and economic conditions at the time of adoption will be a factor. On July 17, 2019, the FASB voted to issue a proposal for public comment that would potentially result in a postponement of the required implementation date for ASU2016-13. Management will continue to monitor any new developments regarding this possible delay.

ASU2018-13,Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement,improves the disclosure requirements on fair value measurements by eliminating the requirements to disclose (i) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; (ii) the policy for timing of transfers between levels; and (iii) the valuation processes for Level 3 fair value measurements. This ASU also added specific disclosure requirements for fair value measurements for public entities including the requirement to disclose the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements.

The amendments in this ASU are effective for all entities for fiscal years beginning after December 15, 2019, and all interim periods within those fiscal years. Early adoption is permitted upon issuance of the ASU. Entities are permitted to early adopt amendments that remove or modify disclosures and delay the adoption of the additional disclosures until their effective date. The Company is currently evaluating the impact this ASU will have on its consolidated financial statements.

ASU 2018-15,Intangibles – Goodwill and Other – Internal Use Software (Subtopic~~2017-12,~~350-40):~~Targeted Improvements to~~ Customer’s Accounting for ~~Hedging Activities~~Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract~~, improves~~aligns the ~~transparency and understandability of information conveyed~~requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to financial statement users about an entity’s risk management activities by better aligning the entity’s financial reporting for hedging relationships with those risk management activities and reduces the complexity of and simplifies the application of hedge accounting by preparers. For publicdevelop or obtaininternal-use software (and hosting arrangements that includeinternal-use software license). This ASU requires entities to use the guidance in FASB ASC350-40, Intangibles—Goodwill and Other—Internal Use Software, to determine whether to capitalize or expense implementation costs related to the service contract. This ASU also requires entities to (i) expense capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement; (ii) present the expense related to the capitalized implementation costs in the same line item on the income statement as fees associated with the hosting element of the arrangement; (iii) classify payments for capitalized implementation costs in the statement of cash flows in the same manner as payments made for fees associated with the hosting element; and (iv) present the capitalized implementation costs in the same balance sheet line item that a prepayment for the fees associated with the hosting arrangement would be presented.

The amendments in this ASU are effective for fiscal years beginning after December 15, ~~2018,~~2019 and interim periods ~~therein; however, early~~within those fiscal years. Early adoption ~~by all entities~~ is permitted. The Company is currently evaluating the impact this ASU ~~to determine whether~~will have on its ~~provisions will enhance the Company’s ability to employ risk management strategies, while improving the transparency and understanding of those strategies for~~consolidated financial ~~statement users.~~statements.

Table 1 – Explanation ofNon-GAAP Financial Measures

In addition to results presented in accordance with U.S. generally accepted accounting principles (GAAP), this quarterly report on Form10-Q includes certain designated net interest income amounts presented on atax-equivalent basis, anon-GAAP financial measure, including the presentation and calculation of the efficiency ratio.

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

   2018    2017
   Second    First    Fourth    Third    Second
(In thousands)    Quarter    Quarter    Quarter    Quarter    Quarter

Net interest income (GAAP)
   $ 6,317    6,284    6,275    6,261    6,101
Tax-equivalent adjustment (a)
   152    156    300    304    301

Net interest income(Tax-equivalent)
   $ 6,469    6,440    6,575    6,565    6,402

~~(a) Using federal income tax rates of 21% and 34% for 2018 and 2017, respectively.~~

   2019    2018
   Second    First    Fourth    Third    Second
(in thousands)    Quarter    Quarter    Quarter    Quarter    Quarter

Net interest income (GAAP)
   $ 6,597    6,620    6,547    6,422    6,317
Tax-equivalent adjustment
   145    146    152    153    152

Net interest income(Tax-equivalent)
   $ 6,742    6,766    6,699    6,575    6,469

   Six Months ended June 30,
(In thousands)    2018    2017

Net interest income (GAAP)
   $             12,601            11,990
Tax-equivalent adjustment (a)
   308    601

Net interest income(Tax-equivalent)
   $ 12,909    12,591

~~(a) Using federal income tax rates of 21% and 34% for 2018 and 2017, respectively.~~
   Six months ended June 30,
(In thousands)    2019    2018

Net interest income (GAAP)
   $             13,217            12,601
Tax-equivalent adjustment
   291    308

Net interest income(Tax-equivalent)
   $ 13,508    12,909

Table 2 - Selected Quarterly Financial Data


	2018					2017						2019						2018
	Second			First		Fourth		Third		Second		Second			First			Fourth		Third			Second
(Dollars in thousands, except per share amounts)	Quarter			Quarter		Quarter		Quarter		Quarter		Quarter			Quarter			Quarter		Quarter			Quarter

Results of Operations
Net interest income (a)	$	6,469			6,440		6,575		6,565		6,402	$	6,742			6,766			6,699		6,575			6,469
Less:tax-equivalent adjustment		152			156		300		304		301		145			146			152		153			152

Net interest income (GAAP)		6,317			6,284		6,275		6,261		6,101		6,597			6,620			6,547		6,422			6,317
Noninterest income		839			853		844		968		793		885			1,160			842		791			839

Total revenue		7,156			7,137		7,119		7,229		6,894		7,482			7,780			7,389		7,213			7,156
Provision for loan losses		—			—		(400)		—		100
Noninterest expense		4,326			4,402		4,426		4,225		4,015		4,629			4,611			4,396		4,750			4,326
Income tax expense		566			540		1,268		868		784		546			626			593		488			566

Net earnings	$	2,264			2,195		1,825		2,136		1,995	$	2,307			2,543			2,400		1,975			2,264


Per share data:
Basic and diluted net earnings	$	0.62			0.60		0.50		0.59		0.55	$	0.64			0.70			0.66		0.54			0.62
Cash dividends declared		0.24			0.24		0.23		0.23		0.23		0.25			0.25			0.24		0.24			0.24
Weighted average shares outstanding:
Basic and diluted		3,643,731			3,643,683		3,643,668		3,643,659		3,643,593		3,577,409			3,614,741			3,643,868		3,643,834			3,643,731
Shares outstanding		3,643,793			3,643,698		3,643,668		3,643,668		3,643,643		3,571,828			3,581,485			3,643,868		3,643,868			3,643,793
Book value	$	23.53			23.36		23.85		23.75		23.36	$	26.34			25.39			24.44		23.45			23.53
Common stock price
High	$	50.99			39.25		40.25		37.71		37.79	$	39.55			39.43			41.50		53.50			50.99
Low		37.40			35.50		33.25		34.82		32.65		31.06			30.61			28.88		38.31			37.40
Period end		49.61			39.06		38.90		35.00		36.94		33.50			39.43			31.66		38.32			49.61
To earnings ratio		21.48	x		17.44		18.09		15.70		16.94		13.19	x		15.71			13.14		16.96			21.48
To book value		211	%		167		163		147		158		127	%		155			130		163			211
Performance ratios:
Return on average equity		10.48	%		9.95		8.31		9.87		9.44		10.00	%		11.31			11.05		9.08			10.48
Return on average assets		1.10	%		1.04		0.89		1.03		0.96		1.12	%		1.23			1.20		0.97			1.10
Dividend payout ratio		38.71	%		40.00		46.00		38.98		41.82		39.06	%		35.71			36.36		44.44			38.71
Asset Quality:
Allowance for loan losses as a % of:
Loans		1.04	%		1.07		1.05		1.04		1.14		1.02	%		1.02			1.00		1.04			1.04
Nonperforming loans		430	%		146		160		161		220		3,703	%		2,845			2,691		512			430
Nonperforming assets as a % of:
Loans and other real estate owned		0.27	%		0.73		0.66		0.67		0.54		0.09	%		0.07			0.07		0.23			0.27
Total assets		0.15	%		0.39		0.35		0.36		0.28		0.05	%		0.04			0.04		0.13			0.15
Nonperforming loans as a % of total loans		0.24	%		0.73		0.66		0.65		0.52		0.03	%		0.04			0.04		0.20			0.24
Annualized net (recoveries) charge-offs as a % of average loans		(0.02)	%		0.02		(0.43)		0.27		(0.25)
Capital Adequacy:
Annualized net recoveries as a % of average loans													(0.04	)%		(0.02	)		—		(0.03	)		(0.02	)
Capital Adequacy: (c)
CET 1 risk-based capital ratio		16.40	%		16.89		16.42		16.15		16.22		16.26	%		16.17			16.49		16.31			16.17
Tier 1 risk-based capital ratio		16.40	%		17.46		16.98		16.71		16.79		16.26	%		16.17			16.49		16.31			16.17
Total risk-based capital ratio		17.29	%		18.39		17.91		17.62		17.77		17.14	%		17.06			17.38		17.21			17.07
Tier 1 leverage ratio		10.93	%		10.90		10.95		10.70		10.56		11.14	%		10.87			11.33		11.01			10.80
Other financial data:
Net interest margin (a)		3.36	%		3.29		3.37		3.32		3.28		3.50	%		3.54			3.54		3.41			3.36
Effective income tax rate		20.00	%		19.74		41.00		28.89		28.21		19.14	%		19.75			19.81		19.81			20.00
Efficiency ratio (b)		59.20	%		60.36		59.66		56.09		55.80		60.69	%		58.18			58.29		64.49			59.20
Selected average balances:
Securities	$	255,877			265,626		262,171		273,280		274,493	$	243,784			240,024			240,334		248,684			255,877
Loans, net of unearned income		448,493			451,347		453,744		443,639		436,645		473,281			477,335			467,380		457,969			448,493
Total assets		820,706			841,820		823,864		831,097		831,187		821,706			827,143			802,555		813,531			820,706
Total deposits		728,457			744,365		726,945		735,372		737,464		725,263			732,539			711,043		721,566			728,457
Long-term debt		919			3,217		3,217		3,217		3,217		—			—			—		—			919
Total stockholders’ equity		86,420			88,281		87,800		86,543		84,569		92,272			89,934			86,881		86,958			86,420
Selected period end balances:
Securities	$	251,320			259,177		257,697		265,171		277,363	$	248,813			241,287			239,801		243,336			251,320
Loans, net of unearned income		456,572			443,804		453,651		449,378		437,287		476,061			472,650			476,908		460,327			456,572
Allowance for loan losses		4,750			4,732		4,757		4,670		4,965		4,851			4,808			4,790		4,785			4,750
Total assets		811,791			830,721		853,381		828,546		836,311		839,178			835,014			818,077		808,951			811,791
Total deposits		721,005			737,332		757,659		732,648		742,456		740,501			739,631			724,193		719,306			721,005
Long-term debt		—			3,217		3,217		3,217		3,217
Total stockholders’ equity		85,748			85,108		86,906		86,538		85,099		94,065			90,949			89,055		85,459			85,748

(a)Tax-equivalent. See “Table 1 - Explanation ofNon-GAAP Financial Measures.”

(b) Efficiency ratio is the result of noninterest expense divided by the sum of noninterest income andtax-equivalent net interest income.

(c) Regulatory capital ratios presented are for the Company’s wholly-owned subsidary, AuburnBank.

Table 3 - Selected Financial Data


	Six Months ended June 30,					Six months ended June 30,
(Dollars in thousands, except per share amounts)	2018			2017		2019			2018

Results of Operations
Net interest income (a)	$	12,909			12,591	$	13,508			12,909
Less:tax-equivalent adjustment		308			601		291			308

Net interest income (GAAP)		12,601			11,990		13,217			12,601
Noninterest income		1,692			1,629		2,045			1,692

Total revenue		14,293			13,619		15,262			14,293
Provision for loan losses		—			100
Noninterest expense		8,728			8,133		9,240			8,728
Income tax expense		1,106			1,501		1,172			1,106

Net earnings	$	4,459			3,885	$	4,850			4,459


Per share data:
Basic and diluted net earnings	$	1.22			1.07	$	1.35			1.22
Cash dividends declared		0.48			0.46		0.50			0.48
Weighted average shares outstanding:
Basic and diluted		3,643,707			3,643,567		3,595,972			3,643,707
Shares outstanding, at period end		3,643,793			3,643,643		3,571,828			3,643,793
Book value	$	23.53			23.36	$	26.34			23.53
Common stock price
High	$	50.99			37.79	$	39.55			50.99
Low		35.50			30.75		30.61			35.50
Period end		49.61			36.94		33.50			49.61
To earnings ratio		21.48	x		16.94		13.19	x		21.48
To book value		211	%		158		127	%		211
Performance ratios:
Return on average equity		10.22	%		9.26		10.65	%		10.22
Return on average assets		1.07	%		0.93		1.18	%		1.07
Dividend payout ratio		39.34	%		42.99		37.04	%		39.34
Asset Quality:
Allowance for loan losses as a % of:
Loans		1.04	%		1.14		1.02	%		1.04
Nonperforming loans		430	%		220		3,703	%		430
Nonperforming assets as a % of:
Loans and other real estate owned		0.27	%		0.54		0.09	%		0.27
Total assets		0.15	%		0.28		0.05	%		0.15
Nonperforming loans as a % of total loans		0.24	%		0.52		0.03	%		0.24
Annualized net charge-offs (recoveries) as a % of average loans		—	%		(0.10)
Capital Adequacy:
Annualized net (recoveries) charge-offs as a % of average loans							(0.03	)%		—
Capital Adequacy: (c)
CET 1 risk-based capital ratio		16.40	%		16.22		16.26	%		16.17
Tier 1 risk-based capital ratio		16.40	%		16.79		16.26	%		16.17
Total risk-based capital ratio		17.29	%		17.77		17.14	%		17.07
Tier 1 leverage ratio		10.93	%		10.56		11.14	%		10.80
Other financial data:
Net interest margin (a)		3.33	%		3.23		3.52	%		3.33
Effective income tax rate		19.87	%		27.87		19.46	%		19.87
Efficiency ratio (b)		59.78	%		57.19		59.41	%		59.78
Selected average balances:
Securities	$	260,725			266,239	$	241,914			260,725
Loans, net of unearned income		449,911			433,233		475,297			449,911
Total assets		831,205			833,421		824,409			831,205
Total deposits		736,415			739,720		728,881			736,415
Long-term debt		2,062			3,217		—			2,062
Total stockholders’ equity		87,297			83,884		91,110			87,297
Selected period end balances:
Securities	$	251,320			277,363	$	248,813			251,320
Loans, net of unearned income		456,572			437,287		476,061			456,572
Allowance for loan losses		4,750			4,965		4,851			4,750
Total assets		811,791			836,311		839,178			811,791
Total deposits		721,005			742,456		740,501			721,005
Long-term debt		—			3,217
Total stockholders’ equity		85,748			85,099		94,065			85,748

(a)Tax-equivalent. See “Table 1 - Explanation ofNon-GAAP Financial Measures.”

(b) Efficiency ratio is the result of noninterest expense divided by the sum of noninterest income andtax-equivalent net interest income.

(c) Regulatory capital ratios presented are for the Company’s wholly-owned subsidiary, AuburnBank.

Table 4 - Average Balances and Net Interest Income Analysis


		Quarter ended June 30,														Quarter ended June 30,
		2018							2017							2019							2018
(Dollars in thousands)		Average Balance		Interest Income/ Expense		Yield/ Rate			Average Balance		Interest Income/ Expense		Yield/ Rate			Average Balance		Interest Income/ Expense		Yield/ Rate			Average Balance		Interest Income/ Expense		Yield/ Rate

Interest-earning assets:
Loans and loans held for sale (1)	$		449,650	$	5,307		4.73%	$		437,361	$	5,121		4.70%	$		474,089	$	5,763		4.88%	$		449,650	$	5,307		4.73%
Securities - taxable			185,013		1,012		2.19%			204,635		1,112		2.18%			175,492		985		2.25%			185,013		1,012		2.19%
Securities -tax-exempt (2)			70,864		724		4.10%			69,858		888		5.10%			68,292		689		4.05%			70,864		724		4.10%

Total securities			255,877		1,736		2.72%			274,493		2,000		2.92%			243,784		1,674		2.75%			255,877		1,736		2.72%
Federal funds sold			29,938		130		1.74%			29,498		79		1.07%			17,016		99		2.33%			29,938		130		1.74%
Interest bearing bank deposits			36,181		160		1.77%			42,196		103		0.98%			36,691		212		2.32%			36,181		160		1.77%

Total interest-earning assets			771,646	$	7,333		3.81%			783,548	$	7,303		3.74%			771,580	$	7,748		4.03%			771,646	$	7,333		3.81%
Cash and due from banks			13,480							13,610							13,822							13,480
Other assets			35,580							34,029							36,304							35,580

Total assets	$		820,706					$		831,187					$		821,706					$		820,706

Interest-bearing liabilities:
Deposits:
NOW	$		130,480	$	97		0.30%	$		128,092	$	64		0.20%	$		136,105	$	184		0.54%	$		130,480	$	97		0.30%
Savings and money market			218,798		197		0.36%			228,254		209		0.37%			211,521		217		0.41%			218,798		197		0.36%
Time deposits			183,757		551		1.20%			200,466		593		1.19%			169,702		603		1.43%			183,757		551		1.20%

Total interest-bearing deposits			533,035		845		0.64%			556,812		866		0.62%			517,328		1,004		0.78%			533,035		845		0.64%
Short-term borrowings			2,801		8		1.15%			3,743		5		0.54%			1,260		2		0.49%			2,801		8		1.15%
Long-term debt			919		11		4.80%			3,217		30		3.74%			—		—		—			919		11		4.80%

Total interest-bearing liabilities			536,755	$	864		0.65%			563,772	$	901		0.64%			518,588	$	1,006		0.78%			536,755	$	864		0.65%
Noninterest-bearing deposits			195,422							180,652							207,935							195,422
Other liabilities			2,109							2,194							2,911							2,109
Stockholders’ equity			86,420							84,569							92,272							86,420

Total liabilities and stockholders’ equity	$		820,706					$		831,187					$		821,706					$		820,706


Net interest income and margin(tax-equivalent)				$	6,469		3.36%				$	6,402		3.28%				$	6,742		3.50%				$	6,469		3.36%

(1) Average loan balances are shown net of unearned income and loans on nonaccrual status have been included in the computation of average balances.

(2) Yields ontax-exempt securities have been computed on atax-equivalent basis using a federal income tax rate of 21% ~~for 2018 and 34% for 2017.~~.

Table 5 - Average Balances and Net Interest Income Analysis


		Six Months ended June 30,														Six months ended June 30,
		2018							2017							2019							2018
(Dollars in thousands)		Average Balance		Interest Income/ Expense		Yield/ Rate			Average Balance		Interest Income/ Expense		Yield/ Rate			Average Balance		Interest Income/ Expense		Yield/ Rate			Average Balance		Interest Income/ Expense		Yield/ Rate

Interest-earning assets:
Loans and loans held for sale (1)	$		451,063	$	10,538		4.71%	$		434,054	$	10,102		4.69%	$		476,063	$	11,490		4.87%	$		451,063	$	10,538		4.71%
Securities - taxable			189,442		2,089		2.22%			196,886		2,133		2.18%			173,528		2,000		2.32%			189,442		2,089		2.22%
Securities -tax-exempt (2)			71,283		1,465		4.14%			69,353		1,769		5.14%			68,386		1,384		4.08%			71,283		1,465		4.14%

Total securities			260,725		3,554		2.75%			266,239		3,902		2.96%			241,914		3,384		2.82%			260,725		3,554		2.75%
Federal funds sold			28,932		236		1.64%			35,206		156		0.89%			19,198		225		2.36%			28,932		236		1.64%
Interest bearing bank deposits			41,765		356		1.72%			50,238		227		0.91%			36,683		438		2.41%			41,765		356		1.72%

Total interest-earning assets			782,485	$	14,684		3.78%			785,737	$	14,387		3.69%			773,858	$	15,537		4.05%			782,485	$	14,684		3.78%
Cash and due from banks			13,661							13,535							14,220							13,661
Other assets			35,059							34,149							36,331							35,059

Total assets	$		831,205					$		833,421					$		824,409					$		831,205

Interest-bearing liabilities:
Deposits:
NOW	$		138,163	$	208		0.30%	$		126,200	$	118		0.19%	$		134,242	$	359		0.54%	$		138,163	$	208		0.30%
Savings and money market			220,022		396		0.36%			231,127		421		0.37%			215,892		440		0.41%			220,022		396		0.36%
Time deposits			185,588		1,113		1.21%			203,189		1,189		1.18%			173,423		1,226		1.43%			185,588		1,113		1.21%

Total interest-bearing deposits			543,773		1,717		0.64%			560,516		1,728		0.62%			523,557		2,025		0.78%			543,773		1,717		0.64%
Short-term borrowings			2,888		12		0.84%			3,649		9		0.50%			1,615		4		0.74%			2,888		12		0.84%
Long-term debt			2,062		46		4.50%			3,217		59		3.70%			—		—		—			2,062		46		4.50%

Total interest-bearing liabilities			548,723	$	1,775		0.65%			567,382	$	1,796		0.64%			525,172	$	2,029		0.78%			548,723	$	1,775		0.65%
Noninterest-bearing deposits			192,642							179,204							205,324							192,642
Other liabilities			2,543							2,951							2,803							2,543
Stockholders’ equity			87,297							83,884							91,110							87,297

Total liabilities and stockholders’ equity	$		831,205					$		833,421					$		824,409					$		831,205


Net interest income and margin(tax-equivalent)				$	12,909		3.33%				$	12,591		3.23%				$	13,508		3.52%					$12,909		3.33%

(1) Average loan balances are shown net of unearned income and loans on nonaccrual status have been included in the computation of average balances.

(2) Yields ontax-exempt securities have been computed on atax-equivalent basis using a federal income tax rate of 21% ~~for 2018 and 34% for 2017.~~.

Table 6 - Loan Portfolio Composition


		2018						2017									2019						2018
		Second			First			Fourth			Third			Second			Second			First			Fourth			Third			Second

(In thousands)		Quarter			Quarter			Quarter			Quarter			Quarter			Quarter			Quarter			Quarter			Quarter			Quarter

Commercial and industrial	$		52,921			57,877			59,086			50,101			50,974	$		54,307			50,898			63,467			52,430			52,921
Construction and land development			42,675			35,910			39,607			47,455			46,386			45,395			44,931			40,222			45,109			42,675
Commercial real estate			246,129			234,345			239,033			232,380			220,863			268,500			265,149			261,896			250,150			246,129
Residential real estate			105,705			106,496			106,863			110,159			110,288			99,292			103,631			102,597			103,329			105,705
Consumer installment			9,824			9,685			9,588			9,877			9,409			9,091			8,564			9,295			9,942			9,824

Total loans			457,254			444,313			454,177			449,972			437,920			476,585			473,173			477,477			460,960			457,254
Less: unearned income			(682	)		(509	)		(526	)		(594	)		(633)			(524	)		(523	)		(569	)		(633	)		(682)

Loans, net of unearned income			456,572			443,804			453,651			449,378			437,287			476,061			472,650			476,908			460,327			456,572
Less: allowance for loan losses			(4,750	)		(4,732	)		(4,757	)		(4,670	)		(4,965)			(4,851	)		(4,808	)		(4,790	)		(4,785	)		(4,750)

Loans, net	$		451,822			439,072			448,894			444,708			432,322	$		471,210			467,842			472,118			455,542			451,822

Table 7 - Allowance for Loan Losses and Nonperforming Assets


			2018						2017										2019						2018
			Second			First			Fourth			Third			Second				Second			First			Fourth			Third			Second

(Dollars in thousands)			Quarter			Quarter			Quarter			Quarter			Quarter				Quarter			Quarter			Quarter			Quarter			Quarter

Allowance for loan losses:
Balance at beginning of period	$			4,732			4,757			4,670			4,965			4,588	$			4,808			4,790			4,785			4,750			4,732
Charge-offs:
Commercial and industrial				—			(52	)		—			(449	)		—
Commercial real estate				(39	)		—			—			—			—				—			—			—			—			(39)
Residential real estate				—			(4	)		—			(30	)		—				—			—			(11	)		(11	)		—
Consumer installment				—			(2	)		(23	)		(10	)		(5)				(1	)		(15	)		(42	)		(7	)		—

Total charge-offs				(39	)		(58	)		(23	)		(489	)		(5)				(1	)		(15	)		(53	)		(18	)		(39)
Recoveries				57			33			510			194			282				44			33			58			53			57

Net recoveries (charge-offs)				18			(25	)		487			(295	)		277
Provision for loan losses				—			—			(400	)		—			100
Net recoveries																				43			18			5			35			18

Ending balance		$		4,750			4,732			4,757			4,670			4,965			$	4,851			4,808			4,790			4,785			4,750

as a % of loans				1.04	%		1.07			1.05			1.04			1.14				1.02	%		1.02			1.00			1.04			1.04
as a % of nonperforming loans				430	%		146			160			161			220				3,703	%		2,845			2,691			512			430
Net (recoveries) charge-offs as % of avg. loans (a)				(0.02	)%		0.02			(0.43	)		0.27			(0.25)
Net recoveries as % of avg. loans (a)																				(0.04	)%		(0.02	)		—			(0.03	)		(0.02)


Nonperforming assets:
Nonaccrual loans		$		1,104			3,239			2,972			2,902			2,255		$		131			169			178			934			1,104
Other real estate owned				137			—			—			103			103				303			172			172			137			137

Total nonperforming assets		$		1,241			3,239			2,972			3,005			2,358		$		434			341			350			1,071			1,241

as a % of loans and other real estate owned				0.27	%		0.73			0.66			0.67			0.54				0.09	%		0.07			0.07			0.23			0.27
as a % of total assets				0.15	%		0.39			0.35			0.36			0.28				0.05	%		0.04			0.04			0.13			0.15
Nonperforming loans as a % of total loans				0.24	%		0.73			0.66			0.65			0.52				0.03	%		0.04			0.04			0.20			0.24
Accruing loans 90 days or more past due		$		—			—			—			5			42

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

Table 8 - Allocation of Allowance for Loan Losses


		2018										2017															2019										2018
		Second Quarter					First Quarter					Fourth Quarter					Third Quarter					Second Quarter					Second Quarter					First Quarter					Fourth Quarter					Third Quarter					Second Quarter
(Dollars in thousands)		Amount		%*			Amount		%*			Amount		%*			Amount		%*			Amount		%*			Amount		%*			Amount		%*			Amount		%*			Amount		%*			Amount		%*

Commercial and industrial	$		600		11.6	$		724		13.0	$		653		13.0	$		504		11.1	$		677		11.6	$		726		11.4	$		686		10.8	$		778		13.3	$		544		11.4	$		600		11.6
Construction and land development			787		9.3			670		8.1			734		8.7			851		10.5			874		10.6			781		9.5			773		9.5			700		8.4			836		9.8			787		9.3
Commercial real estate			2,197		53.9			2,119		52.7			2,126		52.7			2,061		51.7			2,121		50.5			2,287		56.4			2,251		56.0			2,218		54.9			2,241		54.2			2,197		53.9
Residential real estate			1,017		23.1			1,053		24.0			1,071		23.5			1,077		24.5			1,119		25.2			904		20.8			930		21.9			946		21.5			997		22.4			1,017		23.1
Consumer installment			149		2.1			166		2.2			173		2.1			177		2.2			174		2.1			153		1.9			168		1.8			148		1.9			167		2.2			149		2.1

Total allowance for loan losses	$		4,750			$		4,732			$		4,757			$		4,670			$		4,965			$		4,851			$		4,808			$		4,790			$		4,785			$		4,750

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

Table 9 - CDs and Other Time Deposits of $100,000 or More


(Dollars in thousands)	June 30, ~~2018~~2019

Maturity of:
3 months or less	$	~~14,918~~20,069
Over 3 months through 6 months		~~21,917~~22,807
Over 6 months through 12 months		~~31,381~~21,211
Over 12 months		~~50,688~~43,091

Total CDs and other time deposits of $100,000 or more	$	~~118,904~~107,178

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information called for by ITEM 3 is set forth in ITEM 2 under the caption “MARKET AND LIQUIDITY RISK MANAGEMENT” and is incorporated herein by reference.

ITEM 4. CONTROLS AND PROCEDURES

The Company, with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures (as defined inRules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based upon that evaluation and as of the end of the period covered by this report, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective to allow timely decisions regarding disclosure in its reports that the Company files or submits to the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended. There have been no changes in the Company’s internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

In the normal course of its business, the Company and the Bank are, from time to time, involved in legal proceedings. The Company’s and Bank’s management believe there are no pending or threatened legal, governmental, or regulatory proceedings that, upon resolution, are expected to have a material adverse effect upon the Company’s or the Bank’s financial condition or results of operations. See also, Part I, Item 3 of the Company’s Annual Report on Form10-K for the year ended December 31, ~~2017.~~2018.

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A. “RISK FACTORS” in the Company’s Annual Report on Form10-K for the year ended December 31, ~~2017,~~2018, which could materially affect our business, financial condition or future results. The risks described in our annual report on Form10-K are not the only the risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and/or operating results in the future.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

~~Not applicable.~~The Company’s repurchases of its common stock during the second quarter of 2019 were as follows:

Period
Total Number of
Shares Purchased

Average Price
  Paid per Share

Total Number of
  Shares Purchased as
Part of Publicly
Announced Plans or
Programs


Approximate Dollar
Value of Shares that
May Yet Be
  Purchased Under the
Plans or Programs ⁽¹⁾

April 1 - April 30, 2019
   717        $ 35.62    717    $ 2,827,454
May 1 - May 31, 2019
   6,277        37.00    6,277    2,595,205
June 1 - June 30, 2019
   2,693        34.04    2,693    2,503,535
Total
   9,687        36.08    9,687    2,503,535
⁽¹⁾ These repurchases are part of a $5 million stock repurchase program adopted on January 15, 2019. As of June 30, 2019, the approximate remaining dollar value of shares that may be purchased under the program was $2.5 million.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

ITEM 6. EXHIBITS


Exhibit Number		Description

3.1		Certificate of Incorporation of Auburn National Bancorporation, Inc. and all amendments thereto.*

3.2		Amended and Restated Bylaws of Auburn National Bancorporation, Inc., adopted as of November 13, 2007. **

10.1		Agreement dated July 24, 2017, by and between J. Michael King and AuburnBank. ***

31.1		Certification Pursuant to Rule13a-14(a) of the Securities Exchange Act of 1934, As Adopted Pursuant To Section 302 of the Sarbanes-Oxley Act of 2002, by Robert W. Dumas, President and Chief Executive Officer.

31.2		Certification Pursuant to Rule13a-14(a) of the Securities Exchange Act of 1934, As Adopted Pursuant To Section 302 of the Sarbanes-Oxley Act of 2002, by David A. Hedges, Executive Vice President and Chief Financial Officer.

32.1		Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002, by Robert W. Dumas, President and Chief Executive Officer.****

32.2		Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002, by David A. Hedges, Executive Vice President and Chief Financial Officer.****

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

*	Incorporated by reference from Registrant’s Form10-Q dated June 30, 2002.

**	Incorporated by reference from Registrant’s Form10-K dated March 31, 2008.

***	Incorporated by reference from Registrant’s Form8-K dated March 10, 2019.

****

The certifications attached as exhibits 32.1 and 32.2 to this quarterly report on Form10-Q are “furnished” to the Securities and Exchange Commission pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed “filed” by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		AUBURN NATIONAL BANCORPORATION, INC.
		(Registrant)

Date: August ~~2, 2018~~1, 2019		By: /s/ Robert W. Dumas
		Robert W. Dumas
		Chairman, President and ~~Chief Executive Officer~~CEO

Date: August ~~2, 2018~~1, 2019		By: /s/ David A. Hedges
		David A. Hedges
		EVP and Chief Financial Officer


			Other Assets		Other Liabilities
			Estimated		Estimated
(Dollars in thousands)	Notional		Fair Value		Fair Value

December 31, 2017:
Pay fixed / receive variable	$	3,617		—		52
Pay variable / receive fixed		3,617		52		—

Total interest rate swap agreements	$	7,234		52		52


Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs ⁽¹⁾
April 1 - April 30, 2019		717	$	35.62		717	$	2,827,454
May 1 - May 31, 2019		6,277		37.00		6,277		2,595,205
June 1 - June 30, 2019		2,693		34.04		2,693		2,503,535
Total		9,687		36.08		9,687		2,503,535