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 ~~March 31,~~September 30, 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 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 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 ~~May 3,~~October 30, 2019
Common Stock, $0.01 par value per share				~~3,580,768~~3,566,146 shares

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

INDEX

PART I. FINANCIAL INFORMATION

PAGE

Item 1

Financial Statements

Consolidated Balance Sheets (Unaudited)

as of ~~March 31,~~September 30, 2019 and December 31, 2018

Consolidated Statements of Earnings (Unaudited)

for the ~~quarters~~quarter and nine months ended ~~March 31,~~September 30, 2019 and 2018

Consolidated Statements of Comprehensive Income ~~(Loss)~~ (Unaudited)

for the ~~quarters~~quarter and nine months ended ~~March 31,~~September 30, 2019 and 2018

Consolidated Statements of Stockholders’ Equity (Unaudited)

for the ~~quarters~~quarter and nine months ended ~~March 31,~~September 30, 2019 and 2018

~~Condensed~~ Consolidated Statements of Cash Flows (Unaudited)

for the ~~quarters~~nine months ended ~~March 31,~~September 30, 2019 and 2018

Notes to Consolidated Financial Statements (Unaudited)

Item 2

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

2627

Table 1 – Explanation ofNon-GAAP Financial Measures

4344

Table 2 – Selected Quarterly Financial Data

~~Table 3 – Average Balances and Net Interest Income Analysis –~~

~~for the quarters ended March 31, 2019 and 2018~~

Table 43 – ~~Loan Portfolio Composition~~Selected Financial Data

Table 54 – ~~Allowance~~Average Balances and Net Interest Income Analysis – for ~~Loan Losses~~the quarter ended September 30, 2019 and ~~Nonperforming Assets~~2018

Table 65 – ~~Allocation of Allowance~~Average Balances and Net Interest Income Analysis – for ~~Loan Losses~~the nine months ended September 30, 2019 and 2018

Table 6 – Loan Portfolio Composition

Table 7 – Allowance for Loan Losses and Nonperforming Assets

Table 8 – Allocation of Allowance for Loan Losses

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

4952

Item 3

Quantitative and Qualitative Disclosures About Market Risk

5053

Item 4

Controls and Procedures

5053

PART II. OTHER INFORMATION

Item 1

Legal Proceedings

5053

Item 1A

Risk Factors

5053

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

5053

Item 3

Defaults Upon Senior Securities

5154

Item 4

Mine Safety Disclosures

5154

Item 5

Other Information

5154

Item 6

Exhibits

5254

PART 1. FINANCIAL INFORMATION

~~ITEM 1.~~

~~FINANCIAL STATEMENTS~~

ITEM 1. FINANCIAL STATEMENTS

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Unaudited)

(Dollars in thousands, except share data)
March 31,
2019
December 31,
2018

Assets:

Cash and due from banks
   $ 17,054 $ 13,043
Federal funds sold
   17,379 26,918
Interest-bearing bank deposits
   49,069 25,115

Cash and cash equivalents
   83,502 65,076

Securitiesavailable-for-sale
   241,287 239,801
Loans held for sale
   1,313 383
Loans, net of unearned income
   472,650 476,908
Allowance for loan losses
   (4,808 ) (4,790)

Loans, net
   467,842 472,118

Premises and equipment, net
   14,928 13,596
Bank-owned life insurance
   18,875 18,765
Other assets
   7,267 8,338

Total assets
   $ 835,014 $ 818,077

Liabilities:

Deposits:

Noninterest-bearing
   $ 212,255 201,648
Interest-bearing
   527,376 522,545

Total deposits
   739,631 724,193
Federal funds purchased and securities sold under agreements to repurchase
   1,633 2,300
Accrued expenses and other liabilities
   2,801 2,529

Total liabilities
   744,065 729,022

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
Additionalpaid-in capital
   3,783 3,779
Retained earnings
   97,280 95,635
Accumulated other comprehensive loss, net
   (1,371 ) (3,763)
Less Treasury stock, at cost - 375,650 shares and 313,267 shares at March 31, 2019 and December 31, 2018, respectively
   (8,782 ) (6,635)

Total stockholders’ equity
   90,949 89,055

Total liabilities and stockholders’ equity
   $         835,014 $         818,077

~~See accompanying notes to consolidated financial statements~~

~~AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES~~

~~Consolidated Statements of Earnings~~

~~(Unaudited)~~

   Quarter ended March 31,
(Dollars in thousands, except share and per share data)    2019    2018

Interest income:

Loans, including fees
   $ 5,727    $ 5,231
Securities

Taxable
   1,015    1,077
Tax-exempt
   549    585
Federal funds sold and interest bearing bank deposits
   352    302

Total interest income
   7,643    7,195

Interest expense:

Deposits
   1,021    872
Short-term borrowings
   2    4
Long-term debt
   —      35

Total interest expense
   1,023    911

Net interest income
   6,620    6,284
Provision for loan losses
   —      —

Net interest income after provision for loan losses
   6,620    6,284

Noninterest income:

Service charges on deposit accounts
   184    179
Mortgage lending
   189    206
Bank-owned life insurance
   110    106
Other
   672    362
Securities gains, net
   5    —

Total noninterest income
   1,160    853

Noninterest expense:

Salaries and benefits
   2,938    2,668
Net occupancy and equipment
   384    370
Professional fees
   228    228
FDIC and other regulatory assessments
   29    89
Other
   1,032    1,047

Total noninterest expense
   4,611    4,402

Earnings before income taxes
   3,169    2,735
Income tax expense
   626    540

Net earnings
   $ 2,543    $ 2,195

Net earnings per share:

Basic and diluted
   $ 0.70    $ 0.60

Weighted average shares outstanding:

Basic and diluted
       3,614,741        3,643,683


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

Assets:
Cash and due from banks	$	16,925		$	13,043
Federal funds sold		7,683			26,918
Interest-bearing bank deposits		47,036			25,115

Cash and cash equivalents		71,644			65,076

Securitiesavailable-for-sale		251,152			239,801
Loans held for sale		1,071			383
Loans, net of unearned income		465,108			476,908
Allowance for loan losses		(4,807	)		(4,790)

Loans, net		460,301			472,118

Premises and equipment, net		14,855			13,596
Bank-owned life insurance		19,091			18,765
Other assets		6,849			8,338

Total assets	$	824,963		$	818,077

Liabilities:
Deposits:
Noninterest-bearing	$	203,278		$	201,648
Interest-bearing		519,793			522,545

Total deposits		723,071			724,193
Federal funds purchased and securities sold under agreements to repurchase		972			2,300
Accrued expenses and other liabilities		4,200			2,529

Total liabilities		728,243			729,022

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
Additionalpaid-in capital		3,784			3,779
Retained earnings		100,009			95,635
Accumulated other comprehensive income (loss), net		2,243			(3,763)
Less treasury stock, at cost—390,989 shares and 313,267 shares at September 30, 2019 and December 31, 2018, respectively		(9,355	)		(6,635)

Total stockholders’ equity		96,720			89,055

Total liabilities and stockholders’ equity	$	824,963		$	818,077

See accompanying notes to consolidated financial statements

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

Consolidated Statements of ~~Comprehensive Income (Loss)~~Earnings

(Unaudited)

   Quarter ended March 31,
(Dollars in thousands)    2019    2018

Net earnings
   $           2,543    $           2,195
Other comprehensive income (loss), net of tax:

Unrealized net holding gain (loss) on securities
   2,396    (3,120)
Reclassification adjustment for net gain on securities recognized in net earnings
   (4)    —

Other comprehensive income (loss)
   2,392    (3,120)

Comprehensive income (loss)
   $ 4,935    $ (925)


	Quarter ended September 30,				Nine months ended September 30,
(In thousands, except share and per share data)	2019		2018		2019		2018

Interest income:
Loans, including fees	$	5,787	$	5,511	$	17,277	$	16,049
Securities:
Taxable		997		974		2,997		3,063
Tax-exempt		526		577		1,619		1,734
Federal funds sold and interest-bearing bank deposits		335		283		998		875

Total interest income		7,645		7,345		22,891		21,721

Interest expense:
Deposits		1,076		920		3,101		2,637
Short-term borrowings		2		3		6		15
Long-term debt		—		—		—		46

Total interest expense		1,078		923		3,107		2,698

Net interest income		6,567		6,422		19,784		19,023
Provision for loan losses		—		—		—		—

Net interest income after provision for loan losses		6,567		6,422		19,784		19,023

Noninterest income:
Service charges on deposit accounts		182		192		542		553
Mortgage lending		263		115		639		487
Bank-owned life insurance		109		110		326		324
Other		393		374		1,472		1,119
Securities gains, net		44		—		57		—

Total noninterest income		991		791		3,036		2,483

Noninterest expense:
Salaries and benefits		2,894		2,673		8,631		7,959
Net occupancy and equipment		387		339		1,152		1,069
Professional fees		195		213		698		707
FDIC and other regulatory assessments		18		70		149		248
Other		1,330		1,455		3,434		3,495

Total noninterest expense		4,824		4,750		14,064		13,478

Earnings before income taxes		2,734		2,463		8,756		8,028

Income tax expense		527		488		1,699		1,594


Net earnings	$	2,207	$	1,975	$	7,057	$	6,434


Net earnings per share:
Basic and diluted	$	0.62	$	0.54	$	1.97	$	1.77


Weighted average shares outstanding:
Basic and diluted		3,568,287		3,643,834		3,586,642		3,643,750

See accompanying notes to consolidated financial statements

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

Consolidated Statements of ~~Stockholders’ Equity~~Comprehensive Income

(Unaudited)

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

Balance, December 31, 2017 3,643,668 $ 39 $           3,771 $           90,299 $           (566 ) $           (6,637) $ 86,906
Net earnings
—   —   —   2,195 —   —             2,195
Other comprehensive loss
—   —   —   —   (3,120 ) —   (3,120)
Cash dividends paid ($0.24 per share)
—   —   —   (874) —   —   (874)
Sale of treasury stock
30           —   —   —   —   1 1

Balance, March 31, 2018
3,643,698 $ 39 $ 3,771 $ 91,620 $ (3,686 ) $ (6,636) $ 85,108

Balance, December 31, 2018
3,643,868 $ 39 $ 3,779 $ 95,635 $ (3,763) $ (6,635) $ 89,055
Net earnings
—   —   —   2,543 —   —   2,543
Other comprehensive income
—   —   —   —   2,392 —   2,392
Cash dividends paid ($0.25 per share)
—   —   —   (898) —   —   (898)
Stock repurchases
(62,518) —   —   —   —   (2,147) (2,147)
Sale of treasury stock
135 —   4 —   —   —   4

Balance, March 31, 2019
3,581,485 $ 39 $ 3,783 $ 97,280 $ (1,371) $ (8,782) $ 90,949


	Quarter ended September 30,				Nine months ended September 30,
(Dollars in thousands)	2019		2018		2019		2018

Net earnings	$	2,207	$	1,975	$	7,057	$	6,434

Other comprehensive income (loss), net of tax:
Unrealized net holding gain (loss) on securities		1,596		(1,393)		6,049		(5,267)
Reclassification adjustment for net gain on securities recognized in net earnings		(33)		—		(43)		—

Other comprehensive income (loss)		1,563		(1,393)		6,006		(5,267)

Comprehensive income	$	3,770	$	582	$	13,063	$	1,167

See accompanying notes to consolidated financial statements

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

Consolidated Statements of ~~Cash Flows~~Stockholders’ Equity

(Unaudited)

       Quarter ended March 31,
(In thousands)    2019 2018

Cash flows from operating activities:

Net earnings
   $ 2,543 $ 2,195
Adjustments to reconcile net earnings to net cash provided by operating activities:

Depreciation and amortization
   212 217
Premium amortization and discount accretion, net
   423 512
Net gain on securitiesavailable-for-sale
   (5 ) —
Net gain on sale of loans held for sale
   (86 ) (106)
Loans originated for sale
   (5,045 ) (6,932)
Proceeds from sale of loans
   4,159 7,990
Increase in cash surrender value of bank-owned life insurance
   (110 ) (106)
Net decrease in other assets
   181 78
Net increase (decrease) in accrued expenses and other liabilities
   276 (747)

Net cash provided by operating activities
   2,548 3,101

Cash flows from investing activities:

Proceeds from prepayments and maturities of securitiesavailable-for-sale
   10,264 9,187
Purchase of securitiesavailable-for-sale
   (8,974 ) (15,346)
Decrease in loans, net
   4,276 9,822
Net purchases of premises and equipment
   (1,446 ) (20)
Decrease (increase) in FHLB stock
   32 (20)

Net cash provided by investing activities
   4,152 3,623

Cash flows from financing activities:

Net increase in noninterest-bearing deposits
   10,607 4,368
Net increase (decrease) in interest-bearing deposits
   4,831 (24,695)
Net (decrease) increase in federal funds purchased and securities sold under agreements to repurchase
   (667 ) 213
Stock repurchases
   (2,147 ) —
Dividends paid
   (898 ) (874)

Net cash provided by (used in) financing activities
   11,726 (20,988)

Net change in cash and cash equivalents
   18,426 (14,264)
Cash and cash equivalents at beginning of period
   65,076 105,528

Cash and cash equivalents at end of period
   $ 83,502 $ 91,264

Supplemental disclosures of cash flow information:

Cash paid during the period for:

Interest
   $ 1,033 $ 933
Income taxes
   —   848
Supplemental disclosure ofnon-cash transactions:

Real estate acquired through foreclosure
   —   —


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

Quarter ended September 30, 2019

Balance, June 30, 2019		3,571,828		$	39	$	3,783	$	98,694	$	680		$	(9,131)		$	94,065
Net earnings		—			—		—		2,207		—			—			2,207
Other comprehensive income		—			—		—		—		1,563			—			1,563
Cash dividends paid ($0.25 per share)		—			—		—		(892)		—			—			(892)
Stock repurchases		(5,702	)		—		—		—		—			(224	)		(224)
Sale of treasury stock		20			—		1		—		—			—			1

Balance, September 30, 2019		3,566,146		$	39	$	3,784	$	100,009	$	2,243		$	(9,355	)	$	96,720



Quarter ended September 30, 2018

Balance, June 30, 2018		3,643,793		$	39	$	3,776	$	93,009	$	(4,440)		$	(6,636	)	$	85,748
Net earnings		—			—		—		1,975		—			—			1,975
Other comprehensive loss		—			—		—		—		(1,393	)		—			(1,393)
Cash dividends paid ($0.24 per share)		—			—		—		(875)		—			—			(875)
Sale of treasury stock		75			—		3		—		—			1			4

Balance, September 30, 2018		3,643,868		$	39	$	3,779	$	94,109	$	(5,833)		$	(6,635	)	$	85,459



Nine months ended September 30, 2019

Balance, December 31, 2018		3,643,868		$	39	$	3,779	$	95,635	$	(3,763)		$	(6,635	)	$	89,055
Net earnings		—			—		—		7,057		—			—			7,057
Other comprehensive income		—			—		—		—		6,006			—			6,006
Cash dividends paid ($0.75 per share)		—			—		—		(2,683)		—			—			(2,683)
Stock repurchases		(77,907	)		—		—		—		—			(2,721	)		(2,721	)
Sale of treasury stock		185			—		5		—		—			1			6

Balance, September 30, 2019		3,566,146		$	39	$	3,784	$	100,009	$	2,243		$	(9,355	)	$	96,720



Nine months ended September 30, 2018

Balance, December 31, 2017		3,643,668		$	39	$	3,771	$	90,299	$	(566)		$	(6,637	)	$	86,906
Net earnings		—			—		—		6,434		—			—			6,434
Other comprehensive loss		—			—		—		—		(5,267	)		—			(5,267)
Cash dividends paid ($0.72 per share)		—			—		—		(2,624)		—			—			(2,624)
Sale of treasury stock		200			—		8		—		—			2			10

Balance, September 30, 2018		3,643,868		$	39	$	3,779	$	94,109	$	(5,833)		$	(6,635	)	$	85,459

See accompanying notes to consolidated financial statements

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

   Nine months ended September 30,
(In thousands)    2019 2018

Cash flows from operating activities:

Net earnings
   $ 7,057 $ 6,434
Adjustments to reconcile net earnings to net cash provided by operating activities:

Depreciation and amortization
   705 712
Premium amortization and discount accretion, net
   1,365 1,572
Net gain on securitiesavailable-for-sale
   (57 ) —
Net gain on sale of loans held for sale
   (382 ) (244)
Net gain on other real estate owned
   (59 ) —
Loans originated for sale
   (22,051 ) (23,946)
Proceeds from sale of loans
   21,585 24,389
Increase in cash surrender value of bank-owned life insurance
   (326 ) (324)
Net increase in other assets
   (1,009 ) (143)
Net increase (decrease) in accrued expenses and other liabilities
   1,677 (633)

Net cash provided by operating activities
   8,505 7,817

Cash flows from investing activities:

Proceeds from sales of securitiesavailable-for-sale
   12,159 —
Proceeds from prepayments and maturities of securitiesavailable-for-sale
   38,413 25,046
Purchase of securitiesavailable-for-sale
   (55,212 ) (19,290)
Decrease (increase) in loans, net
   11,735 (8,138)
Net purchases of premises and equipment
   (1,604 ) (170)
Decrease (increase) in FHLB stock
   32 (20)
Proceeds from sale of other real estate owned
   394 1,353

Net cash provided by (used in) investing activities
   5,917 (1,219)

Cash flows from financing activities:

Net increase in noninterest-bearing deposits
   1,630 5,262
Net decrease in interest-bearing deposits
   (2,752 ) (43,615)
Net decrease in federal funds purchased and securities sold under agreements to repurchase
   (1,328 ) (770)
Repayments or retirement of long-term debt
   — (3,217)
Stock repurchases
   (2,721 ) —
Dividends paid
   (2,683 ) (2,624)

Net cash used in financing activities
   (7,854 ) (44,964)

Net change in cash and cash equivalents
   6,568 (38,366)
Cash and cash equivalents at beginning of period
   65,076 105,528

Cash and cash equivalents at end of period
   $ 71,644 $ 67,162

Supplemental disclosures of cash flow information:

Cash paid during the period for:

Interest
   $ 3,037 $ 2,717
Income taxes
   1,499 2,228
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
   82 1,490

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, 2018.

The unaudited consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Auburn National Bancorporation Capital Trust I was 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. 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 ~~Topic~~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 ~~Topic~~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 –aA gain on sale should be recognized when a contract for sale exists and control of the asset has been transferred to the buyer. ~~Topic~~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 and~~entitled. In addition to theloan-to-value, the analysis is ~~now~~ based on various other 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~~collectability.

Subsequent Events

The Company has evaluated the effects of events and transactions through the date of this filing that have occurred subsequent to ~~March 31,~~September 30, 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 ~~quarter~~nine months of 2019, the Company adopted new guidance related to the following Accounting Standards Updates (“Updates” or “ASUs”):

•

ASU 2016-02,Leases; and

•

ASU2017-12,Targeted Improvements to Accounting for Hedging Activities.

Information about these pronouncements is described in more detail below.

ASU2016-02,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 aright-of-use asset representing its right to use the underlying asset for the lease term. In July 2018, the FASB issued ASU2018-10 and2018-11, which are designed to make targeted improvements to and clarifications regarding ASU2016-02. The Company adopted ASUNo. 2016-02 on January 1, 2019. ASUNo. 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 ~~marked~~material leases.

ASU2017-12,Targeted Improvements to Accounting for Hedging Activities, improves the transparency and understandability of information conveyed 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. The Company adopted ASUNo. 2017-12 on January 1, 2019. ASUNo. 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 ~~quarters ended March 31, 2019 and 2018, respectively.~~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 ~~March 31,~~September 30, 2019 and 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 March 31,				Quarter ended September 30,				Nine months ended September 30,
(Dollars in thousands, except share and per share data)	2019		2018
(In thousands, except share and per share data)					2019		2018		2019		2018

Basic and diluted:
Net earnings	$	2,543	$	2,195	$	2,207	$	1,975	$	7,057	$	6,434
Weighted average common shares outstanding		3,614,741		3,643,683		3,568,287		3,643,834		3,586,642		3,643,750

Net earnings per share	$	0.70	$	0.60	$	0.62	$	0.54	$	1.97	$	1.77

NOTE 3: SECURITIES

At ~~March 31,~~September 30, 2019 and December 31, 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 ~~March 31,~~September 30, 2019 and December 31, 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

March 31, 2019
September 30, 2019
Agency obligations (a)	$	14,468		21,862		14,645		—		50,975		21		763	$	51,717	$	5,001		32,347		18,683		—		56,031		398		21	$	55,654
Agency RMBS (a)		—		—		11,222		109,782		121,004		162		2,143		122,985		—		—		4,978		123,582		128,560		770		451		128,241
State and political subdivisions		—		1,594		6,768		60,946		69,308		1,118		226		68,416		—		1,356		6,081		59,124		66,561		2,304		4		64,261

Totalavailable-for-sale	$	14,468		23,456		32,635		170,728		241,287		1,301		3,132	$	243,118	$	5,001		33,703		29,742		182,706		251,152		3,472		476	$	248,156


December 31, 2018
Agency obligations (a)	$	14,437		19,865		16,869		—		51,171		25		1,200	$	52,346	$	14,437		19,865		16,869		—		51,171		25		1,200	$	52,346
Agency RMBS (a)		—		—		8,368		110,230		118,598		65		3,738		122,271		—		—		8,368		110,230		118,598		65		3,738		122,271
State and political subdivisions		—		3,682		7,726		58,624		70,032		518		692		70,206		—		3,682		7,726		58,624		70,032		518		692		70,206

Totalavailable-for-sale	$	14,437		23,547		32,963		168,854		239,801		608		5,630	$	244,823	$	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 entities.

Securities with aggregate fair values of ~~$166.5~~$145.9 million and $133.1 million at ~~March 31,~~September 30, 2019 and December 31, 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 investments. The carrying amounts ofnon-marketable equity investments were $1.4 million at ~~March 31,~~September 30, 2019 and December 31, 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 ~~March 31,~~September 30, 2019 and December 31, 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

March 31, 2019:
September 30, 2019:
Agency obligations	$	—		—		49,159		763	$	49,159		763	$	4,970		9		4,980		12	$	9,950		21
Agency RMBS		—		—		107,503		2,143		107,503		2,143		16,705		44		40,144		407		56,849		451
State and political subdivisions		—		—		13,273		226		13,273		226		3,438		4		—		—		3,438		4

Total	$	—		—		169,935		3,132	$	169,935		3,132	$	25,113		57		45,124		419	$	70,237		476


December 31, 2018:
Agency obligations	$	4,724		28		44,307		1,172	$	49,031		1,200	$	4,724		28		44,307		1,172	$	49,031		1,200
Agency RMBS		12,325		238		99,184		3,500		111,509		3,738		12,325		238		99,184		3,500		111,509		3,738
State and political subdivisions		14,840		181		14,384		511		29,224		692		14,840		181		14,384		511		29,224		692

Total	$	31,889		447		157,875		5,183	$	189,764		5,630	$	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~~securities 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 ~~March 31,~~September 30, 2019 and December 31, 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 ~~three~~nine months ended ~~March 31,~~September 30, 2019 and 2018, respectively.

Realized Gains and Losses

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


	Quarter ended March 31,				Quarter ended September 30,				Nine months ended September 30,
(Dollars in thousands)	2019		2018		2019		2018		2019			2018

Gross realized gains	$	5	$	—	$	44		—	$	76			—
Gross realized losses						—		—		(19	)		—

Realized gains, net	$	5	$	—	$	44		—	$	57			—

NOTE 4: LOANS AND ALLOWANCE FOR LOAN LOSSES


(In thousands)	March 31, 2019			December 31, 2018		September 30, 2019			December 31, 2018

Commercial and industrial	$	50,898		$	63,467	$	52,288		$	63,467
Construction and land development		44,931			40,222		41,599			40,222
Commercial real estate:
Owner occupied		61,379			56,413		60,977			56,413
Multi-family		40,110			40,455		42,766			40,455
Other		163,660			165,028		163,603			165,028

Total commercial real estate		265,149			261,896		267,346			261,896
Residential real estate:
Consumer mortgage		55,115			56,223		48,348			56,223
Investment property		48,516			46,374		46,867			46,374

Total residential real estate		103,631			102,597		95,215			102,597
Consumer installment		8,564			9,295		9,148			9,295

Total loans		473,173			477,477		465,596			477,477
Less: unearned income		(523	)		(569)		(488	)		(569)

Loans, net of unearned income	$	472,650		$	476,908	$	465,108		$	476,908

Loans secured by real estate were approximately ~~87.4%~~86.8% of the Company’s total loan portfolio at ~~March 31,~~September 30, 2019. At ~~March 31,~~September 30, 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~~describes 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 ~~March 31,~~September 30, 2019 and December 31, 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

March 31, 2019:
September 30, 2019:
Commercial and industrial	$	50,470		428		—		50,898		—	$	50,898	$	52,235		53		—		52,288		—	$	52,288
Construction and land development		44,779		152		—		44,931		—		44,931		41,150		449		—		41,599		—		41,599
Commercial real estate:
Owner occupied		61,379		—		—		61,379		—		61,379		60,977		—		—		60,977		—		60,977
Multi-family		40,110		—		—		40,110		—		40,110		42,766		—		—		42,766		—		42,766
Other		163,660		—		—		163,660		—		163,660		163,603		—		—		163,603		—		163,603

Total commercial real estate		265,149		—		—		265,149		—		265,149		267,346		—		—		267,346		—		267,346
Residential real estate:
Consumer mortgage		54,899		47		—		54,946		169		55,115		47,986		94		94		48,174		174		48,348
Investment property		48,224		292		—		48,516		—		48,516		46,867		—		—		46,867		—		46,867

Total residential real estate		103,123		339		—		103,462		169		103,631		94,853		94		94		95,041		174		95,215
Consumer installment		8,556		8		—		8,564		—		8,564		9,127		21		—		9,148		—		9,148

Total	$	472,077		927		—		473,004		169	$	473,173	$	464,711		617		94		465,422		174	$	465,596


December 31, 2018:
Commercial and industrial	$	63,367		100		—		63,467		—	$	63,467	$	63,367		100		—		63,467		—	$	63,467
Construction and land development		39,997		225		—		40,222		—		40,222		39,997		225		—		40,222		—		40,222
Commercial real estate:
Owner occupied		56,413		—		—		56,413		—		56,413		56,413		—		—		56,413		—		56,413
Multi-family		40,455		—		—		40,455		—		40,455		40,455		—		—		40,455		—		40,455
Other		165,028		—		—		165,028		—		165,028		165,028		—		—		165,028		—		165,028

Total commercial real estate		261,896		—		—		261,896		—		261,896		261,896		—		—		261,896		—		261,896
Residential real estate:
Consumer mortgage		54,446		1,599		—		56,045		178		56,223		54,446		1,599		—		56,045		178		56,223
Investment property		46,233		141		—		46,374		—		46,374		46,233		141		—		46,374		—		46,374

Total residential real estate		100,679		1,740		—		102,419		178		102,597		100,679		1,740		—		102,419		178		102,597
Consumer installment		9,254		41		—		9,295		—		9,295		9,254		41		—		9,295		—		9,295

Total	$	475,193		2,106		—		477,299		178	$	477,477	$	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 ~~March 31,~~September 30, 2019 and December 31, 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 ~~March 31,~~September 30, 2019, the Company increased its look-back period to 4042 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.


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

Quarter ended:
Beginning balance																			$	726			781			2,287			904			153		$	4,851
Charge-offs																				(128	)		—			—			(1	)		(2	)		(131)
Recoveries																				59			—			—			12			16			87

Net (charge-offs) recoveries																				(69	)		—			—			11			14			(44)
Provision for loan losses																				28			(51	)		67			(25	)		(19	)		—

Ending balance																			$	685			730			2,354			890			148		$	4,807

Nine months ended:
Beginning balance																			$	778			700			2,218			946			148		$	4,790
Charge-offs																				(128	)		—			—			(1	)		(18	)		(147)
Recoveries																				83			—			1			59			21			164

Net (charge-offs) recoveries																				(45	)		—			1			58			3			17
Provision for loan losses																				(48	)		30			135			(114	)		(3	)		—

Ending balance																			$	685			730			2,354			890			148		$	4,807


	March 31, 2019																		September 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	$	778			700			2,218			946			148		$	4,790		$	600			787			2,197			1,017			149		$	4,750
Charge-offs		—			—			—			—			(15	)		(15)			—			—			—			(11	)		(7	)		(18)
Recoveries		18			—			—			14			1			33			13			—			—			19			21			53

Net recoveries (charge-offs)		18			—			—			14			(14	)		18			13			—			—			8			14			35
Provision for loan losses		(110	)		73			33			(30	)		34			—			(69	)		49			44			(28	)		4			—

Ending balance	$	686			773			2,251			930			168		$	4,808		$	544			836			2,241			997			167		$	4,785


	March 31, 2018
(In thousands)	Commercial and industrial			Construction and land development			Commercial real estate			Residential real estate			Consumer installment			Total

Quarter ended:
Nine months ended:																		Nine 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	)		—			—			(4	)		(2	)		(58)			(52	)		—			(39	)		(15	)		(9	)		(115)
Recoveries		14			—			—			16			3			33			59			—			—			52			32			143

Net (charge-offs) recoveries		(38	)		—			—			12			1			(25)
Net recoveries (charge-offs)																				7			—			(39	)		37			23			28
Provision for loan losses		109			(64	)		(7	)		(30	)		(8	)		—			(116	)		102			154			(111	)		(29	)		—

Ending balance	$	724			670			2,119			1,053			166		$	4,732		$	544			836			2,241			997			167		$	4,785

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 ~~March 31,~~September 30, 2019 and 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

March 31, 2019:
September 30, 2019:
Commercial and industrial	$	686		50,898		—		—		686		50,898	$	685		52,288		—		—		685		52,288
Construction and land development		773		44,931		—		—		773		44,931		730		41,599		—		—		730		41,599
Commercial real estate		2,251		265,149		—		—		2,251		265,149		2,354		267,346		—		—		2,354		267,346
Residential real estate		930		103,631		—		—		930		103,631		890		95,215		—		—		890		95,215
Consumer installment		168		8,564		—		—		168		8,564		148		9,148		—		—		148		9,148

Total	$	4,808		473,173		—		—		4,808		473,173	$	4,807		465,596		—		—		4,807		465,596


March 31, 2018:
September 30, 2018:
Commercial and industrial	$	694		57,847		30		30		724		57,877	$	544		52,430		—		—		544		52,430
Construction and land development		670		35,910		—		—		670		35,910		836		45,109		—		—		836		45,109
Commercial real estate		2,113		232,014		6		2,331		2,119		234,345		2,241		249,292		—		858		2,241		250,150
Residential real estate		1,053		106,496		—		—		1,053		106,496		997		103,329		—		—		997		103,329
Consumer installment		166		9,685		—		—		166		9,685		167		9,942		—		—		167		9,942

Total	$	4,696		441,952		36		2,361		4,732		444,313	$	4,785		460,102		—		858		4,785		460,960

(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

March 31, 2019:
September 30, 2019:
Commercial and industrial	$	49,507		821			570		—	$	50,898	$	49,369		2,419		500		—	$	52,288
Construction and land development		44,212		—			719		—		44,931		40,792		147		660		—		41,599
Commercial real estate:
Owner occupied		60,913		152			314		—		61,379		59,825		1,072		80		—		60,977
Multi-family		40,110		—			—		—		40,110		42,766		—		—		—		42,766
Other		162,484		1,152			24		—		163,660		162,474		1,107		22		—		163,603

Total commercial real estate		263,507		1,304			338		—		265,149		265,065		2,179		102		—		267,346
Residential real estate:
Consumer mortgage		50,300		1,612			3,034		169		55,115		43,909		1,375		2,890		174		48,348
Investment property		47,657		169			690		—		48,516		46,136		161		570		—		46,867

Total residential real estate		97,957		1,781			3,724		169		103,631		90,045		1,536		3,460		174		95,215
Consumer installment		8,364		70			130		—		8,564		9,016		87		45		—		9,148

Total	$	463,547		3,976			5,481		169	$	473,173	$	454,287		6,368		4,767		174	$	465,596

December 31, 2018:
Commercial and industrial	$	61,568		1,377			522		—	$	63,467	$	61,568		1,377		522		—	$	63,467
Construction and land development		39,481		—			741		—		40,222		39,481		—		741		—		40,222
Commercial real estate:
Owner occupied		55,942		154			317		—		56,413		55,942		154		317		—		56,413
Multi-family		40,455		—			—		—		40,455		40,455		—		—		—		40,455
Other		163,449		1,208	��		371		—		165,028		163,449		1,208		371		—		165,028

Total commercial real estate		259,846		1,362			688		—		261,896		259,846		1,362		688		—		261,896
Residential real estate:
Consumer mortgage		50,903		1,374			3,768		178		56,223		50,903		1,374		3,768		178		56,223
Investment property		45,463		173			738		—		46,374		45,463		173		738		—		46,374

Total residential real estate		96,366		1,547			4,506		178		102,597		96,366		1,547		4,506		178		102,597
Consumer installment		9,149		75			71		—		9,295		9,149		75		71		—		9,295

Total	$	466,410		4,361			6,528		178	$	477,477	$	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 ~~March 31,~~September 30, 2019. The following tables set forth certain information regarding the Company’s impaired loans that were individually evaluated for impairment at December 31, 2018.


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

With no allowance recorded:
Commercial real estate:
Owner occupied	$	157		—		157

Total commercial real estate		157		—		157


Total impaired loans	$	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.

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 September 30, 2019				Nine months ended September 30, 2019
		Quarter ended March 31, 2019				Quarter ended March 31, 2018
		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		$	—	$	—	$	30	$	—
Commercial real estate:
Owner occupied		$	78	$	9	$	172	$	3		$	—		—		31		9
Other			—		—		2,347		—

Total commercial real estate		$	78	$	9	$	2,519	$	3			—		—		31		9

Total		$	78	$	9	$	2,549	$	3		$	—		—		31		9

       Quarter ended September 30, 2018            Nine months ended September 30, 2018
   Average    Total interest    Average    Total interest
   recorded    income    recorded    income
(In thousands)    investment    recognized    investment    recognized

Impaired loans:

Commercial and industrial
   $ —      —      12    —
Commercial real estate:

Owner occupied
   164    2    168    7
Other
   701    —      1,488    —

Total commercial real estate
   865    2    1,656    7

Total
   $ 865    2    1,668    7

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 ~~March 31,~~September 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
	TDRs														Related
(In thousands)	Accruing		Nonaccrual		Total		Related Allowance		Accruing		Nonaccrual		Total		Allowance

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

Total commercial real estate	$	157		—		157	$	—	$	157		—		157	$	—

Total	$	157		—		157	$	—	$	157		—		157	$	—

At ~~March 31,~~September 30, 2019, there were no significant outstanding commitments to advance additional funds to customers whose loans had been restructured.

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


														Quarter ended September 30,						Nine months ended September 30,
	Quarter ended March 31, 2019						Quarter ended March 31, 2018
			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

TDRs:
2018:													2018:
Commercial real estate:
Other		—	$	—		—		1	$	737		737			1	$	710		710		2	$	1,447		1,447

Total commercial real estate		—	$	—		—		1	$	737		737			1		710		710		2		1,447		1,447

Total		—	$	—		—		1	$	737		737			1	$	710		710		2	$	1,447		1,447

There were no loans modified in a TDR during the quarter and nine months ended ~~March 31,~~September 30, 2019. ~~One loan was~~Two loans were modified in a TDR during the ~~quarter~~nine months ended ~~March 31,~~September 30, 2018. The only ~~concession~~concessions granted by the Company ~~was~~were related to either a delay in the required payment of ~~interest.~~interest or the interest rate at renewal was considered to be less than a market rate.

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.~~quarter and nine months ended September 30, 2018. During the quarter and nine months ended ~~March 31,~~September 30, 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 March 31, 2019				Quarter ended March 31, 2018
									Quarter ended September 30,				Nine months ended September 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⁾

TDRs:
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 ~~rate,~~rates, default rates, ~~cost~~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 ~~change~~following table details the changes in amortized MSRs and the related valuation allowance for the ~~quarters ended March 31, 2019 and 2018 are presented below.~~respective periods.


		Quarter ended March 31,							Quarter ended September 30,						Nine months ended September 30,
(Dollars in thousands)		2019			2018				2019			2018			2019			2018

MSRs, net:
Beginning balance		$	1,441		$	1,644			$	1,355		$	1,549		$	1,441		$	1,644
Additions, net			41			53				80			61			160			175
Amortization expense			(72	)		(93	)			(109	)		(115	)		(275	)		(324	)

Ending balance		$	1,410		$	1,604			$	1,326		$	1,495		$	1,326		$	1,495


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


Fair value of amortized MSRs:
Beginning of period		$	2,697		$	2,528			$	2,333		$	2,659		$	2,697		$	2,528
End of period			2,591			2,738				2,068			2,615			2,068			2,615

NOTE 6: 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 ~~three~~nine months ended ~~March 31,~~September 30, 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.

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


			Quoted Prices in		Significant						Quoted Prices in		Significant

			Active Markets		Other		Significant				Active Markets		Other		Significant

			for		Observable		Unobservable				for		Observable		Unobservable

			Identical Assets		Inputs		Inputs				Identical Assets		Inputs		Inputs

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

March 31, 2019:
September 30, 2019:
Securitiesavailable-for-sale:
Agency obligations	$	50,975		—		50,975		—	$	56,031		—		56,031		—
Agency RMBS		121,004		—		121,004		—		128,560		—		128,560		—
State and political subdivisions		69,308		—		69,308		—		66,561		—		66,561		—

Total securitiesavailable-for-sale		241,287		—		241,287		—		251,152		—		251,152		—

Total assets at fair value	$	241,287		—		241,287		—	$	251,152		—		251,152		—


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

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

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

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 ~~March 31,~~September 30, 2019 and December 31, 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)

March 31, 2019:
September 30, 2019:
Loans held for sale	$	1,313		—		1,313		—	$	1,071		—		1,071		—
Other assets (2)		1,582		—		—		1,582		1,326		—		—		1,326

Total assets at fair value	$	2,895		—		1,313		1,582	$	2,397		—		1,071		1,326

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

Total assets at fair value	$	2,153		—		383		1,770	$	2,153		—		383		1,770

⁽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 ~~March 31,~~September 30, 2019, ~~and December 31, 2018 and for the quarter and year then ended,~~ 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 ~~as of March 31,~~at September 30, 2019, ~~and December 31, 2018,~~ the significant unobservable inputs used in the fair value measurements are presented below.

Weighted

Carrying

Significant

Average

(Dollars in thousands)

Carrying

Amount

Valuation Technique

Significant Unobservable Input

Weighted

Average

of Input

Amount

Valuation Technique

Unobservable Input

of Input

March 31, 2019:

Other real estate owned

172

Appraisal

Appraisal discounts (%)

10.0%

September 30, 2019:

Mortgage servicing rights, net

1,410

Discounted cash flow

Prepayment speed or CPR (%)

8.9%

1,326

Discounted
cash flow

Prepayment speed or CPR (%)

11.9%

Discount rate (%)

10.0%

Discount rate (%)

10.0%

December 31, 2018:

Impaired loans

157

Appraisal

Appraisal discounts (%)

10.0%

157

Appraisal

Appraisal discounts (%)

10.0%

Other real estate owned

172

Appraisal

Appraisal discounts (%)

10.0%

172

Appraisal

Appraisal discounts (%)

10.0%

Mortgage servicing rights, net

1,441

Discounted cash flow

Prepayment speed or CPR (%)

8.3%

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. The fair value of loans was measured using an 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.

The carrying value, related estimated fair value, and placement in the fair value hierarchy of the Company’s financial instruments at ~~March 31,~~September 30, 2019 and December 31, 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. Fair value approximates carrying value in these financial liabilities due to these products having no stated maturity. 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
   Carrying    Estimated    Level 1    Level 2    Level 3
(Dollars in thousands)    amount    fair value    inputs    inputs    Inputs

March 31, 2019:

Financial Assets:

    Loans, net (1)
   $ 467,842    $ 461,192    $ —      $ —      $ 461,192
    Loans held for sale
   1,313    1,346    —      1,346    —
Financial Liabilities:

    Time Deposits
   $ 168,857    $ 169,184    $ —      $ 169,184    $ —

December 31, 2018:

Financial Assets:

    Loans, net (1)
   $ 472,118    $ 465,456    $ —      $ —      $           465,456
    Loans held for sale
   383    397    —      397    —
Financial Liabilities:

    Time Deposits
   $             181,237    $             181,168    $               —      $             181,168    $ —

~~(1) Represents loans, net of unearned income and the allowance for loan losses. The fair value of loans was measured using an exit price notion.~~

         Fair Value Hierarchy
   Carrying    Estimated    Level 1    Level 2    Level 3
(Dollars in thousands)    amount    fair value    inputs    inputs    Inputs

September 30, 2019:

Financial Assets:

Loans, net (1)
   $ 460,301    $ 457,163    $ —      $ —      $ 457,163
Loans held for sale
   1,071    1,090    —      1,090    —
Financial Liabilities:

Time Deposits
   $ 168,210    $ 169,781    $ —      $ 169,781    $ —

December 31, 2018:

Financial Assets:

Loans, net (1)
   $ 472,118    $ 465,456    $ —      $ —      $ 465,456
Loans held for sale
   383    397    —      397    —
Financial Liabilities:

Time Deposits
   $             181,237    $             181,168    $             —      $             181,168    $ —

(1)
Represents loans, net of unearned income and the allowance for loan losses. The fair value of loans was measured using an exit 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 nine months ended ~~March 31,~~September 30, 2019 and 2018, as well as the information contained in our ~~Annual Report~~annual report on Form10-K for the year ended December 31, ~~2018.~~2018 and our quarterly reports on Form10-Q for the quarters ended March 31, 2019 and June 30, 2019.

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;~~estimates, including the timing and effect of the implementation of the current expected credit losses model to financial instruments;

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, 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 loan production offices in Auburn and Phenix City, Alabama.

Summary of Results of Operations

   Quarter ended March 31,
(Dollars in thousands, except per share data)    2019    2018

Net interest income (a)
   $           6,766    $           6,440
Less:tax-equivalent adjustment
   146    156

Net interest income (GAAP)
   6,620    6,284
Noninterest income
   1,160    853

Total revenue
   7,780    7,137
Noninterest expense
   4,611    4,402
Income tax expense
   626    540

Net earnings
   $ 2,543    $ 2,195

Basic and diluted earnings per share
   $ 0.70    $ 0.60

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

Net interest income (a)
   $             6,707    $             6,575    $             20,215    $             19,484
Less:tax-equivalent adjustment
   140    153    431    461

Net interest income (GAAP)
   6,567    6,422    19,784    19,023
Noninterest income
   991    791    3,036    2,483

Total revenue
   7,558    7,213    22,820    21,506
Noninterest expense
   4,824    4,750    14,064    13,478
Income tax expense
   527    488    1,699    1,594

Net earnings
   $ 2,207    $ 1,975    $ 7,057    $ 6,434

Basic and diluted earnings per share
   $ 0.62    $ 0.54    $ 1.97    $ 1.77

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

Financial Summary

The Company’s net earnings were ~~$2.5~~$7.1 million for the first ~~quarter~~nine months of 2019, compared to ~~$2.2~~$6.4 million for the first ~~quarter~~nine months of 2018. Basic and diluted earnings per share were ~~$0.70~~$1.97 per share for the first ~~quarter~~nine months of 2019, compared to ~~$0.60~~$1.77 per share for the first ~~quarter~~nine months of 2018.

Net interest income(tax-equivalent) was ~~$6.8~~$20.2 million for the first ~~quarter~~nine months of 2019, a 5%4% increase compared to ~~$6.4~~$19.5 million for the first ~~quarter~~nine months of 2018. This increase was primarily due to loan growth and recent increases in short-term market interest rates. Average loans were up 6%5% to ~~$477.3~~$474.4 million in the first ~~quarter~~nine months of 2019, compared to ~~$451.3~~$452.6 million in the first ~~quarter~~nine months of 2018. The Company’s net interest margin(tax-equivalent) increased to ~~3.54%~~3.48% in the first ~~quarter~~nine months of 2019, compared to ~~3.29%~~3.36% for the first ~~quarter~~nine months of 2018 as yields on earning assets improved.

The Company recorded no provision for loan losses during the first ~~quarter~~nine months of 2019 and 2018, 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 ~~$1.2~~$3.0 million for the first ~~quarter~~nine months of 2019 compared to ~~$0.9~~$2.5 million for the first ~~quarter~~nine months of 2018. The increase was primarily due to a $0.3 millionpre-tax gain from an insurance recovery received in the first ~~quarter~~nine months of 2019 with respect to a $0.4 millionpre-tax loss incurred in the third quarter of 2018. Mortgage lending income also increased $0.2 million in the first nine months of 2019 compared to the first nine months of 2018 ~~related to misappropriation of assets.~~as lower interest rates for mortgage loans positively affected refinance activity and pricing margins improved.

Noninterest expense was ~~$4.6~~$14.1 million for the first ~~quarter~~nine months of 2019 compared to ~~$4.4~~$13.5 million for the first ~~quarter~~nine months of 2018. The increase was primarily due to ~~routine annual~~ increases in salaries and benefits expense.

Income tax expense was ~~$0.6~~$1.7 million and ~~$0.5~~$1.6 million for the first ~~quarter~~nine months of 2019 and 2018, respectively, reflecting an effective tax rate of ~~19.75%~~19.40% and ~~19.74%~~19.86%, respectively.

The Company paid cash dividends of ~~$0.25~~$0.75 per share in the first ~~quarter~~nine months of 2019, an increase of 4.2% from the same period of 2018. At ~~March 31,~~September 30, 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 ~~17.06%~~17.96%, a tier 1 leverage ratio of ~~10.87%~~11.22% and a common equity tier 1 (“CET1”) ratio of ~~16.17%~~17.06% at ~~March 31,~~September 30, 2019.

For the third quarter of 2019, net earnings were $2.2 million, or $0.62 per share, compared to $2.0 million, or $0.54 per share, for the third quarter of 2018. Net interest income(tax-equivalent) was $6.7 million for the third quarter of 2019 compared to $6.6 million for the third quarter of 2018. The Company recorded no provision for loan losses in the third quarter of 2019 or 2018. Noninterest income was $1.0 million in the third quarter of 2019 and $0.8 million in the third quarter of 2018. The increase was primarily due to an increase in mortgage lending income as lower interest rates for mortgage loans positively affected refinance activity and pricing margins improved. Noninterest expense was $4.8 million in the third quarter of 2019 and 2018, respectively. Income tax expense was $0.5 million for the third quarter of 2019 and 2018, respectively. The Company’s effective tax rate for the third quarter of 2019 was 19.28%, compared to 19.81% in the third quarter of 2018.

CRITICAL ACCOUNTING POLICIES

The accounting and financial reporting policies of the Company conform with U.S. 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 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

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 ~~March 31,~~September 30, 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


	Quarter ended March 31,
	2019				2018				Nine months ended September 30,
	Average		Yield/		Average		Yield/		2019					2018
									Average		Yield/			Average		Yield/
(Dollars in thousands)	Balance		Rate		Balance		Rate		Balance		Rate			Balance		Rate

Loans and loans held for sale	$	478,059		4.86%	$	452,496		4.69%	$	475,467		4.86	%	$	453,881		4.73	%
Securities - taxable		171,543		2.40%		193,918		2.25%		175,703		2.28	%		185,448		2.21	%
Securities -tax-exempt		68,481		4.12%		71,708		4.19%		67,964		4.03	%		71,219		4.12	%

Total securities		240,024		2.89%		265,626		2.78%		243,667		2.77	%		256,667		2.74	%
Federal funds sold		21,404		2.37%		27,914		1.54%		19,552		2.32	%		30,092		1.75	%
Interest bearing bank deposits		36,676		2.51%		47,411		1.68%		37,094		2.38	%		35,729		1.80	%

Total interest-earning assets		776,163		4.07%		793,447		3.76%		775,780		4.02	%		776,369		3.82	%

Deposits:
NOW		132,358		0.54%		145,932		0.31%		134,368		0.53	%		129,882		0.32	%
Savings and money market		220,311		0.41%		221,260		0.36%		218,284		0.43	%		222,013		0.38	%
Time Deposits		177,186		1.43%		187,440		1.21%		171,804		1.45	%		184,669		1.23	%

Total interest-bearing deposits		529,855		0.78%		554,632		0.64%		524,456		0.79	%		536,564		0.66	%
Short-term borrowings		1,974		0.49%		2,976		0.55%		1,503		0.50	%		2,805		0.74	%
Long-term debt		—		—		3,217		4.41%		—		—			1,367		4.47	%

Total interest-bearing liabilities		531,829		0.78%		560,825		0.66%		525,959		0.79	%		540,736		0.67	%

Net interest income and margin(tax-equivalent)	$	6,766		3.54%	$	6,440		3.29%	$	20,215		3.48	%	$	19,484		3.36	%

Net Interest Income and Margin

Net interest income(tax-equivalent) was ~~$6.8~~$20.2 million for the first ~~quarter~~nine months of 2019 compared to ~~$6.4~~$19.5 million for the first ~~quarter~~nine months of 2018. This increase was primarily due to ~~improved yields on interest-earning assets and loan growth.~~improvement in the Company’s net interest margin(tax-equivalent).

Expansion of our 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.

The cost of total interest-bearing liabilities was ~~0.78%~~0.79% for the first ~~quarter~~nine months of 2019, an increase of 12 basis points compared to the first ~~quarter~~nine months of 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 interest-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 resumes its gradual increase in interest rates. The Company anticipates~~markets. We anticipate that this challenging ~~and~~ competitive environment will continue ~~throughout~~during the remainder of 2019. ~~However,~~In the ~~Company believes its~~event that short-term interest rates were to be cut further 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 pace with which these cuts would impact our yields on our earning assets. Though we believe our net interest margin may decrease slightly for the remainder of 2019, we believe our net interest income should continue to increase in 2019 compared to 2018 primarily due to ~~an increase in~~increased average loan ~~balances and improvements in~~volumes. We seek to fund these increased loan volumes by growing our core deposits, but will utilize noncore funding ~~mix.~~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 ~~quarter~~nine months of 2019 and ~~2018, respectively.~~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 ~~1.02%~~1.03% at ~~March 31,~~September 30, 2019, compared to 1.00% at December 31, 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 March 31,
(Dollars in thousands)    2019    2018

Service charges on deposit accounts
   $ 184    $ 179
Mortgage lending income
   189    206
Bank-owned life insurance
   110    106
Securities gains, net
   5    —
Other
   672    362

Total noninterest income
   $     1,160    $         853

~~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 misappropriation of assets.~~
   Quarter ended September 30,    Nine months ended September 30,
(Dollars in thousands)    2019    2018    2019    2018

Service charges on deposit accounts
   $ 182    $ 192    $ 542    $ 553
Mortgage lending income
   263    115    639    487
Bank-owned life insurance
   109    110    326    324
Securities gains, net
   44    —      57    —
Other
   393    374    1,472    1,119

Total noninterest income
   $         991    $         791    $       3,036    $       2,483

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 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 March 31,
(Dollars in thousands)    2019    2018

Origination income, net
   $ 86    $ 106
Servicing fees, net
   103    100

Total mortgage lending income
   $ 189    $ 206

   Quarter ended September 30,    Nine months ended September 30,
(Dollars in thousands)    2019    2018    2019    2018

Origination income
   $ 194    $ 46    $ 382    $ 244
Servicing fees, net
   69    69    257    243

Total mortgage lending income
   $ 263    $ 115    $ 639    $ 487

The increase in mortgage lending income was primarily due to an increase in the level of refinance activity and improved pricing margins. The Company’s income from mortgage lending typically fluctuates as mortgage interest rates change and is a primarily attributable to the origination and sale of new mortgage loans.
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.
Noninterest Expense

       Quarter ended March 31,        Quarter ended September 30,        Nine months ended September 30,
(Dollars in thousands)    2019    2018    2019    2018    2019    2018

Salaries and benefits
   $ 2,938    $ 2,668    $ 2,894    $ 2,673    $ 8,631    $ 7,959
Net occupancy and equipment
   384    370    387    339    1,152    1,069
Professional fees
   228    228    195    213    698    707
FDIC and other regulatory assessments
   29    89    18    70    149    248
Other
   1,032    1,047    1,330    1,455    3,434    3,495

Total noninterest expense
   $ 4,611    $ 4,402    $ 4,824    $ 4,750    $ 14,064    $ 13,478

The increase in salaries and benefits expense reflected routine annual increases.
The decrease in FDIC and other regulatory assessments expense was primarily due to the FDIC notifying us that the Bank would receive an assessment credit of approximately $0.2 million to offset future assessments as the FDIC Deposit Insurance Fund had exceeded its target ratio of 1.35% as of September 30, 2018. However, in March 2019, the FDIC provided an update that the Deposit Insurance Fund ratio was 1.36% at December 31, 2018, below the 1.38% threshold required for assessment credits to be applied. The Deposit Insurance Fund ratio was again below 1.38% at the end of the first quarter of 2019. As such, the Bank recognized FDIC assessment expense in the first and second quarters of 2019. The ratio exceeded 1.38% at June 30, 2019, so assessment credits were applied against our assessment due for the third quarter of 2019. Future expense may continue to be reduced by these assessment credits depending on the level of the Deposit Insurance Fund, until they are fully utilized.
The decrease in other noninterest expense was primarily due to ~~routine annual increases~~a $0.4 million loss in ~~salaries and benefits expense.~~the third quarter of 2018, which was partially offset by an increase in marketing expense of $0.2 million in the third quarter of 2019. In March 2019, the Company received a settlement of $0.3 million from its insurance provider related to this claim which was included in other noninterest income.
Income Tax Expense
Income tax expense was ~~$0.6~~$1.7 million and ~~$0.5~~$1.6 million for the first ~~quarter~~nine months of 2019 and 2018 reflecting an effective tax rate of ~~19.75%~~19.40% and ~~19.74%~~19.86%, respectively.
BALANCE SHEET ANALYSIS
Securities
Securitiesavailable-for-sale were ~~$241.3~~$251.2 million at ~~March 31,~~September 30, 2019 compared to $239.8 million at December 31, 2018. This increase was primarily due to an increase in the fair value of securities of $8.0 million as long-term interest rates declined during the first nine months of 2019. The average annualizedtax-equivalent yields earned on total securities were ~~2.89%~~2.77% in 2019 and ~~2.78%~~2.74% in 2018.
Loans

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

Commercial and industrial
   $ 50,898 63,467 52,430 52,921 57,877    $ 52,288 54,307 50,898 63,467 52,430
Construction and land development
   44,931 40,222 45,109 42,675 35,910    41,599 45,395 44,931 40,222 45,109
Commercial real estate
   265,149 261,896 250,150 246,129 234,345    267,346 268,500 265,149 261,896 250,150
Residential real estate
   103,631 102,597 103,329 105,705 106,496    95,215 99,292 103,631 102,597 103,329
Consumer installment
   8,564 9,295 9,942 9,824 9,685    9,148 9,091 8,564 9,295 9,942

Total loans
   473,173 477,477 460,960 457,254 444,313    465,596 476,585 473,173 477,477 460,960
Less: unearned income
   (523 ) (569 ) (633 ) (682 ) (509)    (488 ) (524 ) (523 ) (569 ) (633)

Loans, net of unearned income
   $ 472,650 476,908 460,327 456,572 443,804    $ 465,108 476,061 472,650 476,908 460,327

Total loans, net of unearned income, were ~~$472.7~~$465.1 million at ~~March 31,~~September 30, 2019, compared to $476.9 million at December 31, 2018. The decrease ~~of $4.2 million~~ was primarily due to~~pay-downs~~ a decrease in commercial and industrial ~~loans,~~of $11.2 million and residential of $7.4 million, which was partially offset by ~~increases~~growth in ~~the construction and land development and~~ commercial real estate ~~portfolio segments.~~of $5.5 million. Four loan categories represented the majority of the loan portfolio at ~~March 31,~~September 30, 2019: commercial real estate ~~(56%~~(58%), residential real estate ~~(22%~~(21%), construction and land development ~~(10%~~(9%) and commercial and industrial (11%). Approximately 23% of the Company’s commercial real estate loans were classified as owner-occupied at ~~March 31,~~September 30, 2019.
Within the residential real estate portfolio segment, the Company had junior lien mortgages of approximately ~~$12.0~~$11.5 million, or 3%2% of total loans, at ~~March 31,~~September 30, 2019, compared to $12.3 million, or 3% of total loans, at December 31, 2018. For residential real estate mortgage loans with a consumer purpose, ~~$0.6~~$1.0 million required interest-only payments at ~~March 31,~~September 30, 2019, compared to $0.5 million at December 31, 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 4.86% in the first ~~quarter~~nine months of 2019 and ~~4.69%~~4.73% in the first ~~quarter~~nine months of 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 ~~$19.1~~$19.6 million. Furthermore, we have an internal limit for aggregate credit exposure (loans outstanding plus unfunded commitments) to a single borrower of ~~$17.2~~$17.6 million. Our loan policy requires that the Loan Committee of the Board of Directors approve any loan relationships that exceed this internal limit. At ~~March 31,~~September 30, 2019, the Bank had no 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 ~~March 31,~~September 30, 2019 (and related balances at December 31, 2018).

   March 31,    December 31,    September 30,    December 31,
(In thousands)    2019    2018    2019    2018

Lessors of 1 to 4 family residential properties
   $     46,867    $ 46,374
Hotel/motel
   $ 45,204    $ 47,936      44,222    47,936
Lessors of 1 to 4 family residential properties
   48,516    46,374
Multi-family residential properties
   40,110    40,455      42,766    40,455
Shopping centers
   35,543    25,421
Office buildings
   36,796    35,789      25,661    35,789
Shopping centers
   30,590    25,421

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 at ~~March 31,~~September 30, 2019 and December 31, 2018, respectively, 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 ~~first~~third quarter of 2019 and the previous four quarters is presented below.

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

Balance at beginning of period
   $ 4,790 4,785 4,750 4,732 4,757    $ 4,851 4,808 4,790 4,785 4,750
Charge-offs:

Commercial and industrial
   —   —   —   —   (52)    (128 ) —   —   —   —
Commercial real estate
   —   —   —   (39 ) —
Residential real estate
   —   (11 ) (11 ) —   (4)    (1 ) —   —   (11 ) (11)
Consumer installment
   (15 ) (42 ) (7 ) —   (2)    (2 ) (1 ) (15 ) (42 ) (7)

Total charge-offs
   (15 ) (53 ) (18 ) (39 ) (58)    (131 ) (1 ) (15 ) (53 ) (18)
Recoveries
   33 58 53 57 33    87 44 33 58 53

Net recoveries (charge-offs)
   18 5 35 18 (25)
Net (charge-offs) recoveries
   (44 ) 43 18 5 35

Ending balance
   $     4,808 4,790 4,785 4,750 4,732    $     4,807 4,851 4,808 4,790 4,785

as a % of loans
   1.02 % 1.00 1.04 1.04 1.07    1.03 % 1.02 1.02 1.00 1.04
as a % of nonperforming loans
   2,845 % 2,691 512 430 146    2,763 % 3,703 2,845 2,691 512
Net (recoveries) charge-offs as % of average loans (a)
   (0.02 )% —   (0.03 ) (0.02 ) 0.02
Net charge-offs (recoveries) as % of average loans (a)
   0.04 % (0.04 ) (0.02 ) —   (0.03)

(a) Net charge-offs (recoveries) ~~charge-offs~~ 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 ~~1.02%~~1.03% at ~~March 31,~~September 30, 2019, compared to 1.00% at December 31, 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.
Nonperforming Assets
~~At March 31, 2019, the~~The Company had ~~$0.3~~$0.2 million in nonperforming assets at September 30, 2019 compared to $0.4 million at December 31, ~~2018, respectively.~~2018.
The table below provides information concerning total nonperforming assets and certain asset quality ratios for the ~~first~~third quarter of 2019 and the previous four quarters.

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

Nonperforming assets:

Nonaccrual loans
   $ 169 178    934    1,104    3,239
Other real estate owned
   172 172    137    137    —

Total nonperforming assets
   $ 341 350    1,071    1,241    3,239

as a % of loans and other real estate owned
   0.07 % 0.07    0.23    0.27    0.73
as a % of total assets
   0.04 % 0.04    0.13    0.15    0.39
Nonperforming loans as a % of total loans
   0.04 % 0.04    0.20    0.24    0.73
Accruing loans 90 days or more past due
   $ —   —      —      —      —

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

Nonperforming assets:

Nonaccrual loans
     $ 174    131      169      178      934
Other real estate owned
     —      303      172      172      137

Total nonperforming assets
     $ 174    434      341      350      1,071

as a % of loans and other real estate owned
     0.04 %    0.09      0.07      0.07      0.23
as a % of total assets
     0.02 %    0.05      0.04      0.04      0.13
Nonperforming loans as a % of total loans
             0.04 %    0.03      0.04      0.04      0.20

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

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

Nonaccrual loans:

Commercial and industrial
   $ —      —      —      —      234
Construction and land development
   —      —      36    36    —         —        —        —        —        36
Commercial real estate
   —      —      696    710    2,463      —        —        —        —        696
Residential real estate
   169    178    194    347    530      174      131      169      178      194
Consumer installment
   —      —      8    11    12      —        —        —        —        8

Total nonaccrual loans
   $ 169    178    934    1,104    3,239      $         174              131              169            �� 178              934

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 ~~March 31,~~September 30, 2019 and December 31, 2018, respectively, the Company had $0.2 million, respectively, in loans on nonaccrual status.
At ~~March 31,~~September 30, 2019 ~~and~~there $0.1 million in loans 90 days or more past due still accruing. At December 31, 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 ~~first~~third quarter of 2019 and the previous four quarters.

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

Other real estate owned:

Residential
   $ 172    172    137    137    —        $ —        303      172      172      137

Total other real estate owned
   $ 172    172    137    137    —        $         —                303              172              172              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, 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 ~~$5.5~~$4.8 million, or ~~1.2%~~1.0% of total loans at ~~March 31,~~September 30, 2019, and $6.5 million, or 1.4% of total loans at December 31, 2018.
The table below provides information concerning the composition of potential problem loans for the ~~first~~third quarter of 2019 and the previous four quarters.

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

Potential problem loans:

Commercial and industrial
   $ 570    522    96    218    112
Construction and land development
   719    741    763    657    450
Commercial real estate
   338    688    698    710    725
Residential real estate
           3,724    4,506    4,025    3,929    3,992
Consumer installment
   130    71    69    51    70

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

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

Potential problem loans:

Commercial and industrial
     $ 500      590      570      522      96
Construction and land development
     660      681      719      741      763
Commercial real estate
     102      105      338      688      698
Residential real estate
     3,460      3,621      3,724      4,506      4,025
Consumer installment
     45      51      130      71      69

Total potential problem loans
     $         4,767              5,048              5,481              6,528              5,651

At ~~March 31,~~September 30, 2019, approximately ~~$0.1~~$0.4 million, or 1%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 ~~first~~third quarter of 2019 and the previous four quarters.

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

Performing loans past due 30 to 89 days:

Commercial and industrial
   $         428    100    10    108    3      $ 53      109      428      100      10
Construction and land development
   152    225    241    138    253      449      351      152      225      241
Residential real estate
   339    1,740    186    885    573      94      214      339      1,740      186
Consumer installment
   8    41    17    7    9      21      8      8      41      17

Total
   $ 927    2,106    454    1,138    838      $         617              682              927              2,106      454

Deposits
Total deposits were ~~$739.6~~$723.1 million at ~~March 31,~~September 30, 2019, compared to $724.2 million at December 31, 2018. ~~The increase was due to growth of $4.8 million in interest-bearing deposits and $10.6 million in noninterest-bearing deposits during the first quarter of 2019.~~ Noninterest-bearing deposits were ~~$212.3~~$203.3 million, or ~~28.7%~~28.1% of total deposits, at ~~March 31,~~September 30, 2019, compared to $201.6 million, or 27.8% of total deposits at December 31, 2018.
The average rate paid on total interest-bearing deposits was ~~0.78%~~0.79% in the first ~~quarter~~nine months of 2019 and ~~0.64%~~0.66% in the first ~~quarter~~nine months of 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 ~~March 31,~~September 30, 2019, and at December 31, 2018, respectively. Securities sold under agreements to repurchase totaled ~~$1.6~~$1.0 million at ~~March 31,~~September 30, 2019, compared to $2.3 million at December 31, 2018.
The average rate paid on short-term borrowings was ~~0.49%~~0.50% in the first ~~quarter~~nine months of 2019 compared to ~~0.55%~~0.74% in the first ~~quarter~~nine months of 2018.
The Company had no long-term debt at ~~March 31,~~September 30, 2019 and December 31, 2018.
CAPITAL ADEQUACY
The Company’s consolidated stockholders’ equity was ~~$90.9~~$96.7 million and $89.1 million as of ~~March 31,~~September 30, 2019 and December 31, 2018, respectively. The increase from December 31, 2018 was primarily due to other comprehensive income due to the change in unrealized gains/losses on securitiesavailable-for-sale,net-of-tax, of ~~$2.4~~$6.0 million and net earnings of ~~$2.5~~$7.1 million, which were partially offset by ~~the repurchase~~repurchases of shares in the Company’s stock ~~of $2.1~~totaling $2.7 million and cash dividends ~~paid of $0.9~~totaling $2.7 million. During the first ~~quarter~~nine months of 2019, the Company repurchased ~~62,518~~77,907 shares under the Company’s current stock repurchase program, which ~~was authorized on~~began January 15, 2019. These shares were repurchased at an average cost per share of ~~$34.34~~$34.92 and a total cost of ~~$2.1~~$2.7 million. As of September 30, 2019, the approximate dollar value of shares that may be repurchased under the current repurchase program was $2.7 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 was subject to a three yearphase-in period that began on January 1, 2016 and was fullyphased-in on January 1, 2019 at 2.5%. 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 ~~March 31,~~September 30, 2019, the Bank’s ratio was sufficient to meet the fullyphased-in conservation buffer.
The 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 ~~10.87%~~11.22%, CET1 risk-based capital ratio was ~~16.17%~~17.06%, tier 1 risk-based capital ratio was ~~16.17%~~17.06%, and total risk-based capital ratio was ~~17.06%~~17.96% at ~~March 31,~~September 30, 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 Bank’s capital conservation buffer was ~~9.06%~~9.96% at ~~March 31,~~September 30, 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 ~~March 31,~~September 30, 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 ~~March 31,~~September 30, 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 to facilitate customer transactions and meet their financing needs. These interest rate swaps qualify as derivatives, but are not designated as hedging instruments. At ~~March 31,~~September 30, 2019 and December 31, 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.~~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 ~~March 31,~~September 30, 2019, the Bank had a remaining available line of credit with the FHLB of ~~$239.5~~$251.0 million. At ~~March 31,~~September 30, 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 ~~March 31,~~September 30, 2019, the Bank had outstanding standby letters of credit of ~~$5.9~~$2.2 million and unfunded loan commitments outstanding of ~~$63.2~~$57.8 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 ~~March 31,~~September 30, 2019, the unpaid principal balance of residential mortgage loans, which we have originated and sold, but retained the servicing rights was ~~$288.4~~$278.0 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 any loans during the first ~~quarter~~nine months of 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 ~~March 31,~~September 30, 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 ~~March 31,~~September 30, 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.
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. 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 ASUs have been issued by the FASB but are not yet effective.

•
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

•
ASU2018-15,Intangibles – Goodwill and Other – Internal Use Software (Subtopic350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract.
Information about these pronouncements is described in more detail below.
ASU2016-13,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 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 iswas originally 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 ~~currently evaluating~~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 ~~this ASU will have on its~~the Company’s consolidated financial ~~statements.~~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. In October 2019, the FASB moved to defer the effective date of ASU No. 2016-13 for smaller reporting companies, as defined by the SEC, and other non-SEC reporting entities. The approved proposal delayed the effective date to fiscal years beginning after December 15, 2022, including interim periods within those fiscal periods. As the Company is a smaller reporting company, the delay would be applicable to the Company. The FASB is expected to finalize a revised ASU in mid-November.
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 (Subtopic350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contractaligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop 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 –~~ Intangibles—Goodwill and ~~Other –~~ 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, 2019 and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact this ASU will have on its consolidated financial 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.


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

Net interest income (GAAP)
   $         6,620    6,547    6,422    6,317    6,284    $ 6,567    6,597    6,620    6,547    6,422
Tax-equivalent adjustment
   146    152    153    152    156    140    145    146    152    153

Net interest income(Tax-equivalent)
   $ 6,766    6,699    6,575    6,469    6,440    $ 6,707    6,742    6,766    6,699    6,575

   Nine months ended September 30,
(In thousands)    2019    2018

Net interest income (GAAP)
   $             19,784            19,023
Tax-equivalent adjustment
   431    461

Net interest income(Tax-equivalent)
   $ 20,215    19,484

Table 2 –- Selected Quarterly Financial Data

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

Results of Operations

Net interest income (a)
   $ 6,766 6,699    6,575    6,469    6,440    $ 6,707 6,742 6,766 6,699    6,575
Less:tax-equivalent adjustment
   146 152    153    152    156    140 145 146 152    153

Net interest income (GAAP)
   6,620 6,547    6,422    6,317    6,284    6,567 6,597 6,620 6,547    6,422
Noninterest income
   1,160 842    791    839    853    991 885 1,160 842    791

Total revenue
   7,780 7,389    7,213    7,156    7,137    7,558 7,482 7,780 7,389    7,213
Provision for loan losses
   —   —   —   —      —
Noninterest expense
   4,611 4,396    4,750    4,326    4,402    4,824 4,629 4,611 4,396    4,750
Income tax expense
   626 593    488    566    540    527 546 626 593    488

Net earnings
   $ 2,543 2,400    1,975    2,264    2,195    $ 2,207 2,307 2,543 2,400    1,975

Per share data:

Basic and diluted net earnings
   $ 0.70 0.66    0.54    0.62    0.60    $ 0.62 0.64 0.70 0.66    0.54
Cash dividends declared
   0.25 0.24    0.24    0.24    0.24    0.25 0.25 0.25 0.24    0.24
Weighted average shares outstanding:

Basic and diluted
   3,614,741 3,643,868    3,643,834    3,643,731    3,643,683    3,568,287 3,577,409 3,614,741 3,643,868    3,643,834
Shares outstanding, at period end
   3,581,485 3,643,868    3,643,868    3,643,793    3,643,698          3,566,146 3,571,828 3,581,485 3,643,868    3,643,868
Book value
   $ 25.39 24.44    23.45    23.53    23.36    $ 27.12 26.34 25.39 24.44    23.45
Common stock price

High
   $ 39.43 41.50    53.50    50.99    39.25    $ 47.38 39.55 39.43 41.50    53.50
Low
   30.61 28.88    38.31    37.40    35.50    32.33 31.06 30.61 28.88    38.31
Period end:
   39.43 31.66    38.32    49.61    39.06    47.38 33.50 39.43 31.66    38.32
To earnings ratio
   15.71 13.14    16.96    21.48    17.44    18.08x 13.19 15.71 13.14    16.96
To book value
   155 % 130    163    211    167    175 % 127 155 130    163
Performance ratios:

Return on average equity
   11.31 % 11.05    9.08    10.48    9.95    9.25 % 10.00 11.31 11.05    9.08
Return on average assets
   1.23 % 1.20    0.97    1.10    1.04    1.06 % 1.12 1.23 1.20    0.97
Dividend payout ratio
   35.71 % 36.36    44.44    38.71    40.00    40.32 % 39.06 35.71 36.36    44.44
Asset Quality:

Allowance for loan losses as a % of:

Loans
   1.02 % 1.00    1.04    1.04    1.07    1.03 % 1.02 1.02 1.00    1.04
Nonperforming loans
   2,845 % 2,691    512    430    146    2,763 % 3,703 2,845 2,691    512
Nonperforming assets as a % of:

Loans and other real estate owned
   0.07 % 0.07    0.23    0.27    0.73
Loans and foreclosed properties
   0.04 % 0.09 0.07 0.07    0.23
Total assets
   0.04 % 0.04    0.13    0.15    0.39    0.02 % 0.05 0.04 0.04    0.13
Nonperforming loans as a % of total loans
   0.04 % 0.04    0.20    0.24    0.73    0.04 % 0.03 0.04 0.04    0.20
Annualized net (recoveries) charge-offs as % of average loans
   (0.02 )% —      (0.03)    (0.02)    0.02
Annualized net charge-offs (recoveries) as % of average loans
   0.04 % (0.04 ) (0.02 ) —      (0.03 )
Capital Adequacy: (c)

CET 1 risk-based capital ratio
   16.17 % 16.49    16.31    16.17    17.10    17.06 % 16.26 16.17 16.49    16.31
Tier 1 risk-based capital ratio
   16.17 % 16.49    16.31    16.17    17.10    17.06 % 16.26 16.17 16.49    16.31
Total risk-based capital ratio
   17.06 % 17.38    17.21    17.07    18.03    17.96 % 17.14 17.06 17.38    17.21
Tier 1 leverage ratio
   10.87 % 11.33    11.01    10.80    10.77    11.22 % 11.14 10.87 11.33    11.01
Other financial data:

Net interest margin (a)
   3.54 % 3.54    3.41    3.36    3.29    3.41 % 3.50 3.54 3.54    3.41
Effective income tax rate
   19.75 % 19.81    19.81    20.00    19.74    19.28 % 19.14 19.75 19.81    19.81
Efficiency ratio (b)
   58.18 % 58.29    64.49    59.20    60.36    62.67 % 60.69 58.18 58.29    64.49
Selected average balances:

Securities
   $ 240,024 240,334    248,684    255,877    265,626    $ 247,114 243,784 240,024 240,334    248,684
Loans, net of unearned income
   477,335 467,380    457,969    448,493    451,347    472,747 473,281 477,335 467,380    457,969
Total assets
   827,143 802,555    813,531    820,706    841,820    829,761 821,706 827,143 802,555    813,531
Total deposits
   732,539 711,043    721,566    728,457    744,365    729,608 725,263 732,539 711,043    721,566
Long-term debt
   —   —      —      919    3,217
Total stockholders’ equity
   89,934 86,881    86,958    86,420    88,281    95,400 92,272 89,934 86,881    86,958
Selected period end balances:

Securities
   $ 241,287 239,801    243,336    251,320    259,177    $ 251,152 248,813 241,287 239,801    243,336
Loans, net of unearned income
   472,650 476,908    460,327    456,572    443,804    465,108 476,061 472,650 476,908    460,327
Allowance for loan losses
   4,808 4,790    4,785    4,750    4,732    4,807 4,851 4,808 4,790    4,785
Total assets
   835,014 818,077    808,951    811,791    830,721    824,963 839,178 835,014 818,077    808,951
Total deposits
   739,631 724,193    719,306    721,005    737,332    723,071 740,501 739,631 724,193    719,306
Long-term debt
   —   —      —      —      3,217
Total stockholders’ equity
   90,949 89,055    85,459    85,748    85,108    96,720 94,065 90,949 89,055    85,459

(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
   Nine months ended September 30,
(Dollars in thousands, except per share amounts)
   2019 2018

Results of Operations

Net interest income (a)
   $ 20,215 19,484
Less:tax-equivalent adjustment
   431 461

Net interest income (GAAP)
   19,784 19,023
Noninterest income
   3,036 2,483

Total revenue
   22,820 21,506
Provision for loan losses
   —   —
Noninterest expense
   14,064 13,478
Income tax expense
   1,699 1,594

Net earnings
   $ 7,057 6,434

Per share data:

Basic and diluted net earnings
   $ 1.97 1.77
Cash dividends declared
   0.75 0.72
Weighted average shares outstanding:

Basic and diluted
         3,586,642 3,643,750
Shares outstanding, at period end
   3,566,146 3,643,868
Book value
   $ 27.12 23.45
Common stock price

High
   $ 47.38 53.50
Low
   30.61 35.50
Period end
   47.38 38.32
To earnings ratio
   18.08x 16.96
To book value
   175 % 163
Performance ratios:

Return on average equity
   10.17 % 9.84
Return on average assets
   1.14 % 1.04
Dividend payout ratio
   38.07 % 40.68
Asset Quality:

Allowance for loan losses as a % of:

Loans
   1.03 % 1.04
Nonperforming loans
   2,763 % 512
Nonperforming assets as a % of:

Loans and other real estate owned
   0.04 % 0.23
Total assets
   0.02 % 0.13
Nonperforming loans as a % of total loans
   0.04 % 0.20
Annualized net charge-offs (recoveries) as a % of average loans
   —   % (0.01 )
Capital Adequacy: (c)

CET 1 risk-based capital ratio
   17.06 % 16.31
Tier 1 risk-based capital ratio
   17.06 % 16.31
Total risk-based capital ratio
   17.96 % 17.21
Tier 1 leverage ratio
   11.22 % 11.01
Other financial data:

Net interest margin (a)
   3.48 % 3.36
Effective income tax rate
   19.40 % 19.86
Efficiency ratio (b)
   60.49 % 61.36
Selected average balances:

Securities
   $ 243,666 256,667
Loans, net of unearned income
   474,438 452,627
Total assets
   826,213 825,249
Total deposits
   729,126 731,411
Long-term debt
   —   1,367
Total stockholders’ equity
   92,555 87,183
Selected period end balances:

Securities
   $ 251,152 243,336
Loans, net of unearned income
   465,108 460,327
Allowance for loan losses
   4,807 4,785
Total assets
   824,963 808,951
Total deposits
   723,071 719,306
Total stockholders’ equity
   96,720 85,459

(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 34 - Average Balances and Net Interest Income Analysis

   Quarter ended March 31,    Quarter ended September 30,


2019


2018


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)
$    478,059    $ 5,727    4.86%    $    452,496    $ 5,231    4.69% $    474,293    $ 5,787    4.84 % $    459,423    $ 5,511    4.76 %
Securities - taxable
   171,543        1,015    2.40%       193,918    1,077    2.25%    179,981    997    2.20 %    177,592    974    2.18 %
Securities -tax-exempt (2)
   68,481    695    4.12%       71,708    741    4.19%    67,133    665    3.93 %    71,092    730    4.07 %









Total securities
   240,024    1,710    2.89%       265,626    1,818    2.78%    247,114    1,662    2.67 %    248,684    1,704    2.72 %
Federal funds sold
   21,404    125    2.37%       27,914    106    1.54%    20,250    114    2.23 %    32,374    159    1.95 %
Interest bearing bank deposits
   36,676    227    2.51%       47,411    196    1.68%    37,902    221    2.31 %    23,854    124    2.06 %









Total interest-earning assets
   776,163    $ 7,789        4.07%       793,447    $ 7,351    3.76%    779,559    $     7,784        3.96 %    764,335    $     7,498        3.89 %
Cash and due from banks
   14,622             13,843          13,923          13,422
Other assets
   36,358             34,530          36,279          35,774










Total assets
$    827,143          $    841,820       $    829,761       $    813,531










Interest-bearing liabilities:

Deposits:

NOW
$    132,358    $ 175    0.54%    $    145,932    $ 112    0.31% $    134,615    $ 178    0.52 % $    113,590    $ 101    0.35 %
Savings and money market
   220,311    222    0.41%       221,260    199    0.36%    222,992    265    0.47 %    225,930    232    0.41 %
Time deposits
   177,186    624    1.43%       187,440    561    1.21%    168,619    632    1.49 %    182,860    587    1.27 %





Total interest-bearing deposits
   529,855    1,021    0.78%       554,632    872    0.64%    526,226    1,075    0.81 %    522,380    920    0.70 %
Short-term borrowings
   1,974    2    0.49%       2,976    4    0.55%    1,281    2    �� 0.50 %    2,640    3    0.49 %
Long-term debt
   —      —      —         3,217    35    4.41%









Total interest-bearing liabilities
   531,829    $ 1,023    0.78%       560,825    $ 911        0.66%    527,507    $ 1,077    0.81 %    525,020    $ 923    0.70 %
Noninterest-bearing deposits
   202,684             189,733          203,382          199,186
Other liabilities
   2,696             2,981          3,472          2,367
Stockholders’ equity
   89,934             88,281          95,400          86,958










Total liabilities and stockholders’ equity
$    827,143          $    841,820       $    829,761       $    813,531










Net interest income and margin(tax-equivalent)
      $ 6,766    3.54%          $     6,440    3.29%       $ 6,707    3.41 %       $ 6,575    3.41 %









(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%.
Table 45 - Average Balances and Net Interest Income Analysis
   Nine months ended September 30,


2019


2018

(Dollars in thousands)
Average

Balance

Interest

Income/

Expense

Yield/

Rate

Average

Balance
   Interest
Income/
Expense
Yield/

Rate





Interest-earning assets:

Loans and loans held for sale (1)

$
   475,467    $ 17,277    4.86% $    453,881    $ 16,049    4.73%
Securities - taxable
   175,703    2,997    2.28%    185,448    3,063    2.21%
Securities -tax-exempt (2)
   67,964    2,049    4.03%    71,219    2,195    4.12%





Total securities
   243,667    5,046    2.77%    256,667    5,258    2.74%
Federal funds sold
   19,552    339    2.32%    30,092    395    1.75%
Interest bearing bank deposits
   37,094    659    2.38%    35,729    480    1.80%





Total interest-earning assets
   775,780    $ 23,321    4.02%    776,369    $ 22,182    3.82%
Cash and due from banks
   14,120          13,580
Other assets
   36,313          35,300






Total assets
$    826,213          $ 825,249






Interest-bearing liabilities:

Deposits:

NOW
$    134,368    $ 537    0.53% $    129,882    $ 309    0.32%
Savings and money market
   218,284    705    0.43%    222,013    628    0.38%
Time deposits
   171,804    1,858    1.45%    184,669    1,700    1.23%



Total interest-bearing deposits
   524,456    3,100    0.79%    536,564    2,637    0.66%
Short-term borrowings
   1,503    6    0.50%    2,805    15    0.74%
Long-term debt
   —      —      —      1,367    46    4.47%





Total interest-bearing liabilities
   525,959    $ 3,106    0.79%    540,736    $ 2,698    0.67%
Noninterest-bearing deposits
   204,670          194,847
Other liabilities
   3,029          2,483
Stockholders’ equity
   92,555          87,183






Total liabilities and stockholders’ equity
$    826,213       $    825,249






Net interest income and margin(tax-equivalent)
      $ 20,215    3.48%
$19,484
   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%.
Table 6 - Loan Portfolio Composition

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

Commercial and industrial
   $    50,898 63,467 52,430 52,921 57,877    $    52,288 54,307 50,898 63,467 52,430
Construction and land development
      44,931 40,222 45,109 42,675 35,910       41,599 45,395 44,931 40,222 45,109
Commercial real estate
      265,149 261,896 250,150 246,129 234,345       267,346 268,500 265,149 261,896 250,150
Residential real estate
      103,631 102,597 103,329 105,705 106,496       95,215 99,292 103,631 102,597 103,329
Consumer installment
      8,564 9,295 9,942 9,824 9,685       9,148 9,091 8,564 9,295 9,942

Total loans
      473,173 477,477 460,960 457,254 444,313       465,596 476,585 473,173 477,477 460,960
Less: unearned income
      (523 ) (569 ) (633 ) (682 ) (509)       (488 ) (524 ) (523 ) (569 ) (633 )

Loans, net of unearned income
      472,650 476,908 460,327 456,572 443,804       465,108     476,061     472,650         476,908         460,327
Less: allowance for loan losses
      (4,808 ) (4,790 ) (4,785 ) (4,750 ) (4,732)       (4,807 ) (4,851 ) (4,808 ) (4,790 ) (4,785 )

Loans, net
   $        467,842     472,118         455,542         451,822     439,072    $        460,301 471,210 467,842 472,118 455,542

Table 57 - Allowance for Loan Losses and Nonperforming Assets

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

Allowance for loan losses:

Balance at beginning of period
   $    4,790 4,785 4,750 4,732 4,757    $    4,851 4,808 4,790 4,785 4,750
Charge-offs:

Commercial and industrial
      —   —   —   —   (52)       (128 ) —   —   —   —
Commercial real estate
      —   —   —   (39 ) —
Residential real estate
      —   (11 ) (11 ) —   (4)       (1 ) —   —   (11 ) (11)
Consumer installment
      (15 ) (42 ) (7 ) —   (2)       (2 ) (1 ) (15 ) (42 ) (7)

Total charge-offs
      (15 ) (53 ) (18 ) (39 ) (58)       (131 ) (1 ) (15 ) (53 ) (18)
Recoveries
      33 58 53 57 33       87 44 33 58 53

Net recoveries (charge-offs)
      18 5 35 18 (25)
Net (charge-offs) recoveries
      (44 ) 43 18 5 35
Provision for loan losses
      —   —   —   —   —

Ending balance
   $    4,808     4,790         4,785         4,750         4,732    $    4,807 4,851 4,808 4,790 4,785

as a % of loans
      1.02 % 1.00 1.04 1.04 1.07       1.03 % 1.02 1.02 1.00 1.04
as a % of nonperforming loans
      2,845 % 2,691 512 430 146       2,763 % 3,703         2,845 2,691 512
Net (recoveries) charge-offs as % of avg. loans (a)
      (0.02 )% —   (0.03 ) (0.02 ) 0.02
Net charge-offs (recoveries) as % of avg. loans (a)
      0.04 % (0.04 ) (0.02 ) —   (0.03 )

Nonperforming assets:

Nonaccrual loans
   $    169 178 934 1,104 3,239    $    174 131 169 178 934
Other real estate owned
      172 172 137 137 —         —   303 172 172 137

Total nonperforming assets
   $    341 350 1,071 1,241 3,239    $    174 434 341         350         1,071

as a % of loans and other real estate owned
      0.07 % 0.07 0.23 0.27 0.73
as a % of loans and foreclosed properties
      0.04 %     0.09 0.07 0.07 0.23
as a % of total assets
      0.04 % 0.04 0.13 0.15 0.39       0.02 % 0.05 0.04 0.04 0.13
Nonperforming loans as a % of total loans
      0.04 % 0.04 0.20 0.24 0.73       0.04 % 0.03 0.04 0.04 0.20
Accruing loans 90 days or more past due
   $    —   —   —   —   —      $    94 —   —   —   —

(a) Net charge-offs (recoveries) ~~charge-offs~~ are annualized.
Table 68 - Allocation of Allowance for Loan Losses

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

Commercial and industrial
$ 686    10.8 $ 778    13.3 $ 544    11.4 $ 600 11.6 $ 724    13.0 $    685    11.2 $    726    11.4 $    686    10.8 $    778    13.3 $    544    11.4
Construction and land development
773    9.5 700    8.4 836    9.8 787 9.3 670    8.1    730    8.9    781    9.5    773    9.5    700    8.4    836    9.8
Commercial real estate
2,251    56.0 �� 2,218    54.9 2,241    54.2 2,197 53.9 2,119    52.7    2,354    57.4    2,287    56.4    2,251    56.0    2,218    54.9    2,241    54.2
Residential real estate
930    21.9 946    21.5 997    22.4 1,017 23.1 1,053    24.0    890    20.5    904    20.8    930    21.9    946    21.5    997    22.4
Consumer installment
168    1.8 148    1.9 167    2.2 149 2.1 166    2.2    148    2.0    153    1.9    168    1.8    148    1.9    167    2.2

Total allowance for loan losses
$   4,808    $   4,790    $   4,785    $   4,750 $   4,732    $    4,807    $    4,851    $    4,808    $    4,790    $    4,785

* Loan balance in each category expressed as a percentage of total loans.
Table 79 - CDs and Other Time Deposits of $100,000 or More

(Dollars in thousands)    ~~March 31,~~September 30, 2019

Maturity of:

3 months or less
   $ ~~8,636~~22,037
Over 3 months through 6 months
   ~~20,635~~14,078
Over 6 months through 12 months
   ~~32,891~~24,326
Over 12 months
   ~~45,094~~47,230

Total CDs and other time deposits of $100,000 or more
   $             ~~107,256~~107,671

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, 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, 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
The Company’s ~~repurchases of its~~ common stock repurchases during the ~~first~~third 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)

January 1 - January 31, 2019
           —      $ —      —      $ 5,000,000

February 1 - February 28, 2019
   49,400    34.34    49,400    3,303,702
March 1 - March 31, 2019
   13,118    34.36    13,118    2,852,994
Total
   62,518    34.34    62,518    2,852,994
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⁾

July 1 - July 31, 2019
2,536     $ 40.43 2,536 $ 2,401,005
August 1 - August 31, 2019
3,066     39.70 3,066 2,279,285
September 1 - September 30, 2019
—   —   —   2,279,285
Total
5,602     40.03 5,602 2,279,285
~~(1)~~
These repurchases are part of a $5 million stock repurchase program adopted on January 15, 2019. As of March 31, 2019, the approximate remaining dollar value of shares that may be purchased under the program was $2.9⁽¹⁾ These repurchases are part of a $5 million stock repurchase program adopted on January 15, 2019. As of September 30, 2019, the approximate remaining dollar value of shares that may be purchased under the program was $2.3 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 April 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:            ~~May 6,~~October 31, 2019                             By:          /s/ Robert W. Dumas
Robert W. Dumas

Chairman, President and CEO

Date:            ~~May 6,~~October 31, 2019                             By:          /s/ David A. Hedges
David A. Hedges
EVP and Chief Financial Officer


(Dollars in thousands, except share data)	March 31, 2019			December 31, 2018

Assets:
Cash and due from banks	$	17,054		$	13,043
Federal funds sold		17,379			26,918
Interest-bearing bank deposits		49,069			25,115

Cash and cash equivalents		83,502			65,076

Securitiesavailable-for-sale		241,287			239,801
Loans held for sale		1,313			383
Loans, net of unearned income		472,650			476,908
Allowance for loan losses		(4,808	)		(4,790)

Loans, net		467,842			472,118

Premises and equipment, net		14,928			13,596
Bank-owned life insurance		18,875			18,765
Other assets		7,267			8,338

Total assets	$	835,014		$	818,077

Liabilities:
Deposits:
Noninterest-bearing	$	212,255			201,648
Interest-bearing		527,376			522,545

Total deposits		739,631			724,193
Federal funds purchased and securities sold under agreements to repurchase		1,633			2,300
Accrued expenses and other liabilities		2,801			2,529

Total liabilities		744,065			729,022

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
Additionalpaid-in capital		3,783			3,779
Retained earnings		97,280			95,635
Accumulated other comprehensive loss, net		(1,371	)		(3,763)
Less Treasury stock, at cost - 375,650 shares and 313,267 shares at March 31, 2019 and December 31, 2018, respectively		(8,782	)		(6,635)

Total stockholders’ equity		90,949			89,055

Total liabilities and stockholders’ equity	$	835,014		$	818,077


					Fair Value Hierarchy

	Carrying		Estimated		Level 1		Level 2		Level 3

(Dollars in thousands)	amount		fair value		inputs		inputs		Inputs

March 31, 2019:
Financial Assets:
Loans, net (1)	$	467,842	$	461,192	$	—	$	—	$	461,192
Loans held for sale		1,313		1,346		—		1,346		—
Financial Liabilities:
Time Deposits	$	168,857	$	169,184	$	—	$	169,184	$	—


December 31, 2018:
Financial Assets:
Loans, net (1)	$	472,118	$	465,456	$	—	$	—	$	465,456
Loans held for sale		383		397		—		397		—
Financial Liabilities:
Time Deposits	$	181,237	$	181,168	$	—	$	181,168	$	—


	Quarter ended March 31,
(Dollars in thousands, except per share data)	2019		2018

Net interest income (a)	$	6,766	$	6,440
Less:tax-equivalent adjustment		146		156

Net interest income (GAAP)		6,620		6,284
Noninterest income		1,160		853

Total revenue		7,780		7,137
Noninterest expense		4,611		4,402
Income tax expense		626		540

Net earnings	$	2,543	$	2,195


Basic and diluted earnings per share	$	0.70	$	0.60


	March 31,		December 31,		September 30,		December 31,

(In thousands)	2019		2018		2019		2018

Lessors of 1 to 4 family residential properties					$	46,867	$	46,374
Hotel/motel	$	45,204	$	47,936		44,222		47,936
Lessors of 1 to 4 family residential properties		48,516		46,374
Multi-family residential properties		40,110		40,455		42,766		40,455
Shopping centers						35,543		25,421
Office buildings		36,796		35,789		25,661		35,789
Shopping centers		30,590		25,421


	2019			2018
	First			Fourth		Third		Second		First

(Dollars in thousands)	Quarter			Quarter		Quarter		Quarter		Quarter

Nonperforming assets:
Nonaccrual loans	$	169			178		934		1,104		3,239
Other real estate owned		172			172		137		137		—

Total nonperforming assets	$	341			350		1,071		1,241		3,239

as a % of loans and other real estate owned		0.07	%		0.07		0.23		0.27		0.73
as a % of total assets		0.04	%		0.04		0.13		0.15		0.39
Nonperforming loans as a % of total loans		0.04	%		0.04		0.20		0.24		0.73
Accruing loans 90 days or more past due	$	—			—		—		—		—


	Nine months ended September 30,
(Dollars in thousands, except per share amounts)		*2019*		*2018*

Results of Operations
Net interest income (a)	$	20,215		19,484
Less:tax-equivalent adjustment		431		461

Net interest income (GAAP)		19,784		19,023
Noninterest income		3,036		2,483

Total revenue		22,820		21,506
Provision for loan losses		—		—
Noninterest expense		14,064		13,478
Income tax expense		1,699		1,594

Net earnings	$	7,057		6,434


Per share data:
Basic and diluted net earnings	$	1.97		1.77
Cash dividends declared		0.75		0.72
Weighted average shares outstanding:
Basic and diluted		3,586,642		3,643,750
Shares outstanding, at period end		3,566,146		3,643,868
Book value	$	27.12		23.45
Common stock price
High	$	47.38		53.50
Low		30.61		35.50
Period end		47.38		38.32
To earnings ratio		18.08x		16.96
To book value		175	%	163
Performance ratios:
Return on average equity		10.17	%	9.84
Return on average assets		1.14	%	1.04
Dividend payout ratio		38.07	%	40.68
Asset Quality:
Allowance for loan losses as a % of:
Loans		1.03	%	1.04
Nonperforming loans		2,763	%	512
Nonperforming assets as a % of:
Loans and other real estate owned		0.04	%	0.23
Total assets		0.02	%	0.13
Nonperforming loans as a % of total loans		0.04	%	0.20
Annualized net charge-offs (recoveries) as a % of average loans		—	%	(0.01	)
Capital Adequacy: (c)
CET 1 risk-based capital ratio		17.06	%	16.31
Tier 1 risk-based capital ratio		17.06	%	16.31
Total risk-based capital ratio		17.96	%	17.21
Tier 1 leverage ratio		11.22	%	11.01
Other financial data:
Net interest margin (a)		3.48	%	3.36
Effective income tax rate		19.40	%	19.86
Efficiency ratio (b)		60.49	%	61.36
Selected average balances:
Securities	$	243,666		256,667
Loans, net of unearned income		474,438		452,627
Total assets		826,213		825,249
Total deposits		729,126		731,411
Long-term debt		—		1,367
Total stockholders’ equity		92,555		87,183
Selected period end balances:
Securities	$	251,152		243,336
Loans, net of unearned income		465,108		460,327
Allowance for loan losses		4,807		4,785
Total assets		824,963		808,951
Total deposits		723,071		719,306
Total stockholders’ equity		96,720		85,459


(Dollars in thousands)	~~March 31,~~September 30, 2019

Maturity of:
3 months or less	$	~~8,636~~22,037
Over 3 months through 6 months		~~20,635~~14,078
Over 6 months through 12 months		~~32,891~~24,326
Over 12 months		~~45,094~~47,230

Total CDs and other time deposits of $100,000 or more	$	~~107,256~~107,671


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)
January 1 - January 31, 2019		—	$	—		—	$	5,000,000

February 1 - February 28, 2019		49,400		34.34		49,400		3,303,702
March 1 - March 31, 2019		13,118		34.36		13,118		2,852,994
Total		62,518		34.34		62,518		2,852,994


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


		AUBURN NATIONAL BANCORPORATION, INC.
		(Registrant)

Date: ~~May 6,~~October 31, 2019		By: /s/ Robert W. Dumas
		Robert W. Dumas
		Chairman, President and CEO

Date: ~~May 6,~~October 31, 2019		By: /s/ David A. Hedges
		David A. Hedges
		EVP and Chief Financial Officer