UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-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, 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 of Regulation 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, a non-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” in Rule 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 in Rule 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, 2019
Common Stock, $0.01 par value per share	3,580,768 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, 2019 and December 31, 2018	3
		Consolidated Statements of Earnings (Unaudited) for the quarters ended March 31, 2019 and 2018	4
		Consolidated Statements of Comprehensive Income (Loss) (Unaudited) for the quarters ended March 31, 2019 and 2018	5
		Consolidated Statements of Stockholders’ Equity (Unaudited) for the quarters ended March 31, 2019 and 2018	6
		Condensed Consolidated Statements of Cash Flows (Unaudited) for the quarters ended March 31, 2019 and 2018	7
		Notes to Consolidated Financial Statements (Unaudited)	8
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations		26
		Table 1 – Explanation of Non-GAAP Financial Measures	43
		Table 2 – Selected Quarterly Financial Data	44
		Table 3 – Average Balances and Net Interest Income Analysis – for the quarters ended March 31, 2019 and 2018	45
		Table 4 – Loan Portfolio Composition	46
		Table 5 – Allowance for Loan Losses and Nonperforming Assets	47
		Table 6 – Allocation of Allowance for Loan Losses	48
		Table 7 – CDs and Other Time Deposits of $100,000 or more	49
Item 3	Quantitative and Qualitative Disclosures About Market Risk		50
Item 4	Controls and Procedures		50
PART II.  OTHER INFORMATION
Item 1	Legal Proceedings		50
Item 1A	Risk Factors		50
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds		50
Item 3	Defaults Upon Senior Securities		51
Item 4	Mine Safety Disclosures		51
Item 5	Other Information		51
Item 6	Exhibits		52

PART 1. FINANCIAL INFORMATION

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
Securities available-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
Additional paid-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    

3

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

See accompanying notes to consolidated financial statements

4

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Loss)

(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)

See accompanying notes to consolidated financial statements

5

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

(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

See accompanying notes to consolidated financial statements

6

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(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 securities available-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 securities available-for-sale		10,264			9,187
Purchase of securities available-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 of non-cash transactions:
Real estate acquired through foreclosure		—			—

See accompanying notes to consolidated financial statements

7

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 Form 10-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 ASU 2014-09, 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 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 606:

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

• Gains on sales of other real estate – a gain on sale should be recognized when a contract for sale exists and control of the asset has been transferred to the buyer. Topic 606 lists several criteria required to conclude that a contract for sale exists, including a determination that the institution will collect substantially all of the consideration to which it is entitled and the analysis is now based on various factors including not only the loan to value, but also the credit quality of the borrower, the structure of the loan, and any other factors that may affect collectability

8

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, 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 of 2019, the Company adopted new guidance related to the following Accounting Standards Updates (“Updates” or “ASUs”):

• ASU 2016-02, Leases; and

• ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities.

Information about these pronouncements is described in more detail below.

ASU 2016-02, Leases, requires lessees to recognize the assets and liabilities that arise from leases on the balance sheet. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. In July 2018, the FASB issued ASU 2018-10 and 2018-11, which are designed to make targeted improvements to and clarifications regarding ASU 2016-02. The Company adopted ASU No. 2016-02 on January 1, 2019. ASU No. 2016-02 did not have a material impact on the Company’s Consolidated Financial Statements due to the fact the Company does not have any marked leases.

ASU 2017-12, 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 ASU No. 2017-12 on January 1, 2019. ASU No. 2017-12 did not have a material impact on the Company’s 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. 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, 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,
(Dollars in thousands, except share and per share data)	2019		2018
Basic and diluted:
Net earnings	$	2,543	$	2,195
Weighted average common shares outstanding		3,614,741		3,643,683
Net earnings per share	$	0.70	$	0.60

9

NOTE 3: SECURITIES

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

	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
March 31, 2019
Agency obligations (a)	$	14,468		21,862		14,645		—		50,975		21		763	$	51,717
Agency RMBS (a)		—		—		11,222		109,782		121,004		162		2,143		122,985
State and political subdivisions		—		1,594		6,768		60,946		69,308		1,118		226		68,416
Total available-for-sale	$	14,468		23,456		32,635		170,728		241,287		1,301		3,132	$	243,118
December 31, 2018
Agency obligations (a)	$	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
State and political subdivisions		—		3,682		7,726		58,624		70,032		518		692		70,206
Total available-for-sale	$	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 million and $133.1 million at March 31, 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 are non-marketable equity investments. The carrying amounts of non-marketable equity investments were $1.4 million at March 31, 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, 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
(Dollars in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
March 31, 2019:
Agency obligations	$	—		—		49,159		763	$	49,159		763
Agency RMBS		—		—		107,503		2,143		107,503		2,143
State and political subdivisions		—		—		13,273		226		13,273		226
Total	$	—		—		169,935		3,132	$	169,935		3,132
December 31, 2018:
Agency obligations	$	4,724		28		44,307		1,172	$	49,031		1,200
Agency RMBS		12,325		238		99,184		3,500		111,509		3,738
State and political subdivisions		14,840		181		14,384		511		29,224		692
Total	$	31,889		447		157,875		5,183	$	189,764		5,630

10

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

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

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

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

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

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

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

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

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

Agency obligations

The unrealized losses associated with agency obligations were primarily driven by changes 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 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 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.

11

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, 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 months ended March 31, 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,
(Dollars in thousands)	2019		2018
Gross realized gains	$	5	$	—
Realized gains, net	$	5	$	—

NOTE 4: LOANS AND ALLOWANCE FOR LOAN LOSSES

(In thousands)	March 31, 2019			December 31, 2018
Commercial and industrial	$	50,898		$	63,467
Construction and land development		44,931			40,222
Commercial real estate:
Owner occupied		61,379			56,413
Multi-family		40,110			40,455
Other		163,660			165,028
Total commercial real estate		265,149			261,896
Residential real estate:
Consumer mortgage		55,115			56,223
Investment property		48,516			46,374
Total residential real estate		103,631			102,597
Consumer installment		8,564			9,295
Total loans		473,173			477,477
Less: unearned income		(523	)		(569)
Loans, net of unearned income	$	472,650		$	476,908

Loans secured by real estate were approximately 87.4% of the Company’s total loan portfolio at March 31, 2019. At March 31, 2019, the Company’s geographic loan distribution was concentrated primarily in Lee County, Alabama, and surrounding areas.

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

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

Commercial and industrial (“C&I”) — includes loans to finance business operations, equipment purchases, or other needs for small and medium-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.

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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 and medium-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-producing 1-4 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.

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The following is a summary of current, accruing past due, and nonaccrual loans by portfolio segment and class as of March 31, 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
March 31, 2019:
Commercial and industrial	$	50,470		428		—		50,898		—	$	50,898
Construction and land development		44,779		152		—		44,931		—		44,931
Commercial real estate:
Owner occupied		61,379		—		—		61,379		—		61,379
Multi-family		40,110		—		—		40,110		—		40,110
Other		163,660		—		—		163,660		—		163,660
Total commercial real estate		265,149		—		—		265,149		—		265,149
Residential real estate:
Consumer mortgage		54,899		47		—		54,946		169		55,115
Investment property		48,224		292		—		48,516		—		48,516
Total residential real estate		103,123		339		—		103,462		169		103,631
Consumer installment		8,556		8		—		8,564		—		8,564
Total	$	472,077		927		—		473,004		169	$	473,173
December 31, 2018:
Commercial and industrial	$	63,367		100		—		63,467		—	$	63,467
Construction and land development		39,997		225		—		40,222		—		40,222
Commercial real estate:
Owner occupied		56,413		—		—		56,413		—		56,413
Multi-family		40,455		—		—		40,455		—		40,455
Other		165,028		—		—		165,028		—		165,028
Total commercial real estate		261,896		—		—		261,896		—		261,896
Residential real estate:
Consumer mortgage		54,446		1,599		—		56,045		178		56,223
Investment property		46,233		141		—		46,374		—		46,374
Total residential real estate		100,679		1,740		—		102,419		178		102,597
Consumer installment		9,254		41		—		9,295		—		9,295
Total	$	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 partially charged-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.

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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 previously charged-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, 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 regularly re-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, 2019, the Company increased its look-back period to 40 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.

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

	March 31, 2019
(In thousands)	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
Charge-offs		—			—			—			—			(15	)		(15)
Recoveries		18			—			—			14			1			33
Net recoveries (charge-offs)		18			—			—			14			(14	)		18
Provision for loan losses		(110	)		73			33			(30	)		34			—
Ending balance	$	686			773			2,251			930			168		$	4,808
	March 31, 2018
(In thousands)	Commercial and industrial			Construction and land development			Commercial real estate			Residential real estate			Consumer installment			Total
Quarter ended:
Beginning balance	$	653			734			2,126			1,071			173		$	4,757
Charge-offs		(52	)		—			—			(4	)		(2	)		(58)
Recoveries		14			—			—			16			3			33
Net (charge-offs) recoveries		(38	)		—			—			12			1			(25)
Provision for loan losses		109			(64	)		(7	)		(30	)		(8	)		—
Ending balance	$	724			670			2,119			1,053			166		$	4,732

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, 2019 and 2018.

	Collectively evaluated (1)				Individually evaluated (2)				Total
	Allowance		Recorded		Allowance		Recorded		Allowance		Recorded
	for loan		investment		for loan		investment		for loan		investment
(In thousands)	losses		in loans		losses		in loans		losses		in loans
March 31, 2019:
Commercial and industrial	$	686		50,898		—		—		686		50,898
Construction and land development		773		44,931		—		—		773		44,931
Commercial real estate		2,251		265,149		—		—		2,251		265,149
Residential real estate		930		103,631		—		—		930		103,631
Consumer installment		168		8,564		—		—		168		8,564
Total	$	4,808		473,173		—		—		4,808		473,173
March 31, 2018:
Commercial and industrial	$	694		57,847		30		30		724		57,877
Construction and land development		670		35,910		—		—		670		35,910
Commercial real estate		2,113		232,014		6		2,331		2,119		234,345
Residential real estate		1,053		106,496		—		—		1,053		106,496
Consumer installment		166		9,685		—		—		166		9,685
Total	$	4,696		441,952		36		2,361		4,732		444,313

(1) Represents loans collectively evaluated for impairment in accordance with ASC 450-20, Loss Contingencies (formerly FAS 5), and pursuant to amendments by ASU 2010-20 regarding allowance for non-impaired loans.

(2) Represents loans individually evaluated for impairment in accordance with ASC 310-30, Receivables (formerly FAS 114), and pursuant to amendments by ASU 2010-20 regarding allowance for impaired loans.

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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
March 31, 2019:
Commercial and industrial	$	49,507		821		570		—	$	50,898
Construction and land development		44,212		—		719		—		44,931
Commercial real estate:
Owner occupied		60,913		152		314		—		61,379
Multi-family		40,110		—		—		—		40,110
Other		162,484		1,152		24		—		163,660
Total commercial real estate		263,507		1,304		338		—		265,149
Residential real estate:
Consumer mortgage		50,300		1,612		3,034		169		55,115
Investment property		47,657		169		690		—		48,516
Total residential real estate		97,957		1,781		3,724		169		103,631
Consumer installment		8,364		70		130		—		8,564
Total	$	463,547		3,976		5,481		169	$	473,173
December 31, 2018:
Commercial and industrial	$	61,568		1,377		522		—	$	63,467
Construction and land development		39,481		—		741		—		40,222
Commercial real estate:
Owner occupied		55,942		154		317		—		56,413
Multi-family		40,455		—		—		—		40,455
Other		163,449		1,208		371		—		165,028
Total commercial real estate		259,846		1,362		688		—		261,896
Residential real estate:
Consumer mortgage		50,903		1,374		3,768		178		56,223
Investment property		45,463		173		738		—		46,374
Total residential real estate		96,366		1,547		4,506		178		102,597
Consumer installment		9,149		75		71		—		9,295
Total	$	466,410		4,361		6,528		178	$	477,477

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Impaired loans

The following tables present details related to the Company’s impaired loans. Loans that have been fully charged-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, 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 March 31, 2019				Quarter ended March 31, 2018
	Average		Total interest		Average		Total interest
	recorded		income		recorded		income
(In thousands)	investment		recognized		investment		recognized
Impaired loans:
Commercial and industrial	$	—	$	—	$	30	$	—
Commercial real estate:
Owner occupied	$	78	$	9	$	172	$	3
Other		—		—		2,347		—
Total commercial real estate	$	78	$	9	$	2,519	$	3
Total	$	78	$	9	$	2,549	$	3

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.

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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 a charge-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, 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
(In thousands)	Accruing		Nonaccrual		Total		Related Allowance
December 31, 2018
Commercial real estate:
Owner occupied	$	157		—		157	$	—
Total commercial real estate	$	157		—		157	$	—
Total	$	157		—		157	$	—

At March 31, 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 both before and after their modification.

	Quarter ended March 31, 2019						Quarter ended March 31, 2018
			Pre-		Post -				Pre-		Post -
			modification		modification				modification		modification
	Number		outstanding		outstanding		Number		outstanding		outstanding
	of		recorded		recorded		of		recorded		recorded
(Dollars in thousands)	contracts		investment		investment		contracts		investment		investment
TDRs:
Commercial real estate:
Other		—	$	—		—		1	$	737		737
Total commercial real estate		—	$	—		—		1	$	737		737
Total		—	$	—		—		1	$	737		737

There were no loans modified in a TDR during the quarter ended March 31, 2019. One loan was modified in a TDR during the quarter ended March 31, 2018. The only concession granted by the Company was a delay in the required payment of interest.

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The following table summarizes the recorded investment in loans modified in a TDR within the previous 12 months for which there was a payment default (defined as 90 days or more past due) during the respective periods. During the quarter ended March 31, 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
	Number of		Recorded		Number of		Recorded
(Dollars in thousands)	Contracts		investment (1)		Contracts		investment (1)
TDRs:
Commercial real estate:
Other		—	$	—		1	$	1,259
Total commercial real estate		—		—		1		1,259
Total		—	$	—		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 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, default rates, cost 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 in amortized MSRs and the related valuation allowance for the quarters ended March 31, 2019 and 2018 are presented below.

	Quarter ended March 31,
(Dollars in thousands)	2019			2018
MSRs, net:
Beginning balance	$	1,441		$	1,644
Additions, net		41			53
Amortization expense		(72	)		(93	)
Ending balance	$	1,410		$	1,604
Valuation allowance included in MSRs, net:
Beginning of period	$	—		$	—
End of period		—			—
Fair value of amortized MSRs:
Beginning of period	$	2,697		$	2,528
End of period		2,591			2,738

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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 months ended March 31, 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

Securities available-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 obtain non-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.

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The following table presents the balances of the assets and liabilities measured at fair value on a recurring basis as of March 31, 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
			Active Markets		Other		Significant
			for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
(Dollars in thousands)	Amount		(Level 1)		(Level 2)		(Level 3)
March 31, 2019:
Securities available-for-sale:
Agency obligations	$	50,975		—		50,975		—
Agency RMBS		121,004		—		121,004		—
State and political subdivisions		69,308		—		69,308		—
Total securities available-for-sale		241,287		—		241,287		—
Total assets at fair value	$	241,287		—		241,287		—
December 31, 2018:
Securities available-for-sale:
Agency obligations	$	51,171		—		51,171		—
Agency RMBS		118,598		—		118,598		—
State and political subdivisions		70,032		—		70,032		—
Total securities available-for-sale		239,801		—		239,801		—
Total assets at fair value	$	239,801		—		239,801		—

Assets and liabilities measured at fair value on a nonrecurring basis

Loans held for sale

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

Impaired Loans

Loans considered impaired under ASC 310-10-35, 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.

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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, 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
			Active Markets		Other		Significant
			for		Observable		Unobservable
	Carrying		Identical Assets		Inputs		Inputs
(Dollars in thousands)	Amount		(Level 1)		(Level 2)		(Level 3)
March 31, 2019:
Loans held for sale	$	1,313		—		1,313		—
Other assets (2)		1,582		—		—		1,582
Total assets at fair value	$	2,895		—		1,313		1,582
December 31, 2018:
Loans held for sale	$	383		—		383		—
Loans, net (1)		157		—		—		157
Other assets (2)		1,613		—		—		1,613
Total assets at fair value	$	2,153		—		383		1,770

(1) Loans considered impaired under ASC 310-10-35, 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.

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Quantitative Disclosures for Level 3 Fair Value Measurements

At March 31, 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 a non-recurring basis as of March 31, 2019 and December 31, 2018, the significant unobservable inputs used in the fair value measurements are presented below.

(Dollars in thousands)	Carrying Amount		Valuation Technique	Significant Unobservable Input	Weighted Average     of Input
March 31, 2019:
Other real estate owned	$	172	Appraisal	Appraisal discounts (%)		10.0%
Mortgage servicing rights, net		1,410	Discounted cash flow	Prepayment speed or CPR (%)		8.9%
				Discount rate (%)		10.0%
December 31, 2018:
Impaired loans	$	157	Appraisal	Appraisal discounts (%)		10.0%
Other real estate owned		172	Appraisal	Appraisal discounts (%)		10.0%
Mortgage servicing rights, net		1,441	Discounted cash flow	Prepayment speed or CPR (%)		8.3%
				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.

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The carrying value, related estimated fair value, and placement in the fair value hierarchy of the Company’s financial instruments at March 31, 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.

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

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 ended March 31, 2019 and 2018, as well as the information contained in our Annual Report on Form 10-K for the year ended December 31, 2018.

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;

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• 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 Form 10-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 - Explanation of Non-GAAP Financial Measures.”

Financial Summary

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

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

The Company recorded no provision for loan losses during the first quarter 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 million for the first quarter of 2019 compared to $0.9 million for the first quarter of 2018. The increase was primarily due to a $0.3 million pre-tax gain from an insurance recovery received in the first quarter of 2019 with respect to a $0.4 million pre-tax loss incurred in the third quarter of 2018 related to misappropriation of assets.

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

Income tax expense was $0.6 million and $0.5 million for the first quarter of 2019 and 2018, respectively, reflecting an effective tax rate of 19.75% and 19.74%, respectively.

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

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 and non-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

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 partially charged-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.

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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 previously charged-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 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.

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, 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 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.

The Company regularly re-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, 2019, the Company increased its look-back period to 40 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.

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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 as available-for-sale and derivatives. ASC 820, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value in accordance with U.S. GAAP and expands disclosures about fair value measurements. For more information regarding fair value measurements and disclosures, please refer to Note 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 a charge-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 is more-likely-than-not that some portion or the entire deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. 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, 2019. The amount of the deferred tax assets considered realizable, however, could be reduced if estimates of future taxable income are reduced.

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RESULTS OF OPERATIONS

Average Balance Sheet and Interest Rates

	Quarter ended March 31,
	2019				2018
	Average		Yield/		Average		Yield/
(Dollars in thousands)	Balance		Rate		Balance		Rate
Loans and loans held for sale	$	478,059		4.86%	$	452,496		4.69%
Securities - taxable		171,543		2.40%		193,918		2.25%
Securities - tax-exempt		68,481		4.12%		71,708		4.19%
Total securities		240,024		2.89%		265,626		2.78%
Federal funds sold		21,404		2.37%		27,914		1.54%
Interest bearing bank deposits		36,676		2.51%		47,411		1.68%
Total interest-earning assets		776,163		4.07%		793,447		3.76%
Deposits:
NOW		132,358		0.54%		145,932		0.31%
Savings and money market		220,311		0.41%		221,260		0.36%
Time Deposits		177,186		1.43%		187,440		1.21%
Total interest-bearing deposits		529,855		0.78%		554,632		0.64%
Short-term borrowings		1,974		0.49%		2,976		0.55%
Long-term debt		—		—		3,217		4.41%
Total interest-bearing liabilities		531,829		0.78%		560,825		0.66%
Net interest income and margin (tax-equivalent)	$	6,766		3.54%	$	6,440		3.29%

Net Interest Income and Margin

Net interest income (tax-equivalent) was $6.8 million for the first quarter of 2019 compared to $6.4 million for the first quarter of 2018. This increase was primarily due to improved yields on interest-earning assets and loan growth.

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% for the first quarter of 2019, an increase of 12 basis points compared to the first quarter of 2018. This increase in our funding costs was primarily due to higher prevailing market interest rates.

The Company continues to deploy various asset liability management strategies to manage its risk to interest rate fluctuations. The Company’s net interest margin could experience pressure due to reduced interest-earning asset yields during the extended period of low interest rates, increased competition for quality loan opportunities, and possible increases in our costs of funds, if the Federal Reserve resumes its gradual increase in interest rates. The Company anticipates that this challenging, and competitive environment will continue throughout 2019. However, the Company believes its net interest income should continue to increase in 2019 compared to 2018 primarily due to an increase in average loan balances and improvements in our funding mix.

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 of 2019 and 2018, respectively. 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% at March 31, 2019, compared to 1.00% at December 31, 2018.

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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 million pre-tax gain from an insurance recovery received in the first quarter of 2019 with respect to a $0.4 million pre-tax loss incurred in the third quarter of 2018 related to misappropriation of assets.

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

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Noninterest Expense

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

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

Income Tax Expense

Income tax expense was $0.6 million and $0.5 million for the first quarter of 2019 and 2018 reflecting an effective tax rate of 19.75% and 19.74%, respectively.

BALANCE SHEET ANALYSIS

Securities

Securities available-for-sale were $241.3 million at March 31, 2019 compared to $239.8 million at December 31, 2018. The average annualized tax-equivalent yields earned on total securities were 2.89% in 2019 and 2.78% in 2018.

Loans

	2019			2018
	First			Fourth			Third			Second			First
(In thousands)	Quarter			Quarter			Quarter			Quarter			Quarter
Commercial and industrial	$	50,898			63,467			52,430			52,921			57,877
Construction and land development		44,931			40,222			45,109			42,675			35,910
Commercial real estate		265,149			261,896			250,150			246,129			234,345
Residential real estate		103,631			102,597			103,329			105,705			106,496
Consumer installment		8,564			9,295			9,942			9,824			9,685
Total loans		473,173			477,477			460,960			457,254			444,313
Less: unearned income		(523	)		(569	)		(633	)		(682	)		(509)
Loans, net of unearned income	$	472,650			476,908			460,327			456,572			443,804

Total loans, net of unearned income, were $472.7 million at March 31, 2019, compared to $476.9 million at December 31, 2018. The decrease of $4.2 million was primarily due to pay-downs in commercial and industrial loans, which was partially offset by increases in the construction and land development and commercial real estate portfolio segments. Four loan categories represented the majority of the loan portfolio at March 31, 2019: commercial real estate (56%), residential real estate (22%), construction and land development (10%) and commercial and industrial (11%). Approximately 23% of the Company’s commercial real estate loans were classified as owner-occupied at March 31, 2019.

Within the residential real estate portfolio segment, the Company had junior lien mortgages of approximately $12.0 million, or 3% of total loans, at March 31, 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 million required interest-only payments at March 31, 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 of 2019 and 4.69% in the first quarter of 2018.

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The specific economic and credit risks associated with our loan portfolio include, but are not limited to, the effects of current economic conditions 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 or non-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 its loan-to-value guidelines for collateralized loans, investigating the creditworthiness of borrowers and monitoring borrowers’ financial position. Also, we have established and periodically review, lending policies and procedures. Banking regulations limit a bank’s credit exposure by prohibiting unsecured loan relationships that exceed 10% of its capital; or 20% of capital, if loans in excess of 10% of capital are fully secured. Under these regulations, we are prohibited from having secured loan relationships in excess of approximately $19.1 million. Furthermore, we have an internal limit for aggregate credit exposure (loans outstanding plus unfunded commitments) to a single borrower of $17.2 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, 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, 2019 (and related balances at December 31, 2018).

	March 31,		December 31,
(In thousands)	2019		2018
Hotel/motel	$	45,204	$	47,936
Lessors of 1 to 4 family residential properties		48,516		46,374
Multi-family residential properties		40,110		40,455
Office buildings		36,796		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, 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.”

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

	2019			2018
	First			Fourth			Third			Second			First
(Dollars in thousands)	Quarter			Quarter			Quarter			Quarter			Quarter
Balance at beginning of period	$	4,790			4,785			4,750			4,732			4,757
Charge-offs:
Commercial and industrial		—			—			—			—			(52)
Commercial real estate		—			—			—			(39	)		—
Residential real estate		—			(11	)		(11	)		—			(4)
Consumer installment		(15	)		(42	)		(7	)		—			(2)
Total charge-offs		(15	)		(53	)		(18	)		(39	)		(58)
Recoveries		33			58			53			57			33
Net recoveries (charge-offs)		18			5			35			18			(25)
Ending balance	$	4,808			4,790			4,785			4,750			4,732
as a % of loans		1.02	%		1.00			1.04			1.04			1.07
as a % of nonperforming loans		2,845	%		2,691			512			430			146
Net (recoveries) charge-offs as % of average loans (a)		(0.02	)%		—			(0.03	)		(0.02	)		0.02

(a) Net (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% at March 31, 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 Company had $0.3 million in nonperforming assets compared to $0.4 million at December 31, 2018, respectively.

The table below provides information concerning total nonperforming assets and certain asset quality ratios for the first 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	$	—			—		—		—		—

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

	2019		2018
	First		Fourth		Third		Second		First
(In thousands)	Quarter		Quarter		Quarter		Quarter		Quarter
Nonaccrual loans:
Commercial and industrial	$	—		—		—		—		234
Construction and land development		—		—		36		36		—
Commercial real estate		—		—		696		710		2,463
Residential real estate		169		178		194		347		530
Consumer installment		—		—		8		11		12
Total nonaccrual loans	$	169		178		934		1,104		3,239

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, 2019 and December 31, 2018, respectively, the Company had $0.2 million in loans on nonaccrual status.

At March 31, 2019 and 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 quarter of 2019 and the previous four quarters.

	2019		2018
	First		Fourth		Third		Second		First
(In thousands)	Quarter		Quarter		Quarter		Quarter		Quarter
Other real estate owned:
Residential	$	172		172		137		137		—
Total other real estate owned	$	172		172		137		137		—

Potential Problem Loans

Potential problem loans represent those loans with a well-defined weakness and where information about possible credit problems of a borrower has caused management to have serious doubts about the borrower’s ability to comply with present repayment terms. This definition is believed to be substantially consistent with the standards established by the Federal Reserve, 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 million, or 1.2% of total loans at March 31, 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 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

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At March 31, 2019, approximately $0.1 million, or 1% 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 quarter of 2019 and the previous four quarters.

	2019		2018
	First		Fourth		Third		Second		First
(In thousands)	Quarter		Quarter		Quarter		Quarter		Quarter
Performing loans past due 30 to 89 days:
Commercial and industrial	$	428		100		10		108		3
Construction and land development		152		225		241		138		253
Residential real estate		339		1,740		186		885		573
Consumer installment		8		41		17		7		9
Total	$	927		2,106		454		1,138		838

Deposits

Total deposits were $739.6 million at March 31, 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 million, or 28.7% of total deposits, at March 31, 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% in the first quarter of 2019 and 0.64% in the first quarter 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, 2019, and at December 31, 2018, respectively. Securities sold under agreements to repurchase totaled $1.6 million at March 31, 2019, compared to $2.3 million at December 31, 2018.

The average rate paid on short-term borrowings was 0.49% in the first quarter of 2019 compared to 0.55% in the first quarter of 2018.

The Company had no long-term debt at March 31, 2019 and December 31, 2018.

CAPITAL ADEQUACY

The Company’s consolidated stockholders’ equity was $90.9 million and $89.1 million as of March 31, 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 losses on securities available-for-sale, net-of-tax, of $2.4 million and net earnings of $2.5 million, which were partially offset by the repurchase of shares in the Company’s stock of $2.1 million and cash dividends paid of $0.9 million. During the first quarter of 2019, the Company repurchased 62,518 shares under the Company’s stock repurchase program, which was authorized on January 15, 2019. These shares were repurchased at an average cost per share of $34.34 and a total cost of $2.1 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 year phase-in period that began on January 1, 2016 and was fully phased-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, 2019, the Bank’s ratio was sufficient to meet the fully phased-in conservation buffer.

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The Bank’s tier 1 leverage ratio was 10.87%, CET1 risk-based capital ratio was 16.17%, tier 1 risk-based capital ratio was 16.17%, and total risk-based capital ratio was 17.06% at March 31, 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% at March 31, 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, and off-balance sheet financial instruments are combined with ALCO forecasts of market interest rates for the next 12 months and other factors in order to produce various earnings simulations and estimates. To help limit interest rate risk, we have guidelines for earnings at risk which seek to limit the variance of net interest income from gradual changes in interest rates. For changes up or down in rates from management’s flat interest rate forecast over the next 12 months, policy limits for net interest income variances are as follows:

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

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

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

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

At March 31, 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, and off-balance sheet items will change as a result of interest rate changes. Economic values are estimated by discounting expected cash flows from assets, liabilities, and off-balance sheet items, which establishes a base case EVE. In contrast with our earnings simulation model, which evaluates interest rate risk over a 12 month timeframe, EVE uses a terminal horizon which allows for the re-pricing of all assets, liabilities, and off-balance sheet items. Further, EVE is measured using values as of a point in time and does not reflect any actions that ALCO might take in responding to or anticipating changes in interest rates, or market and competitive conditions. To help limit interest rate risk, we have stated policy guidelines for an instantaneous basis point change in interest rates, such that our EVE should not decrease from our base case by more than the following:

● 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, 2019, our EVE model indicated that we were in compliance with the policy guidelines noted above.

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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, 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, stock repurchases, and interest payments on junior subordinated debentures issued by the Company in connection with trust preferred securities.

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, 2019, the Bank had a remaining available line of credit with the FHLB of $239.5 million. At March 31, 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, 2019, the Bank had outstanding standby letters of credit of $5.9 million and unfunded loan commitments outstanding of $63.2 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 securities available-for-sale, or draw on its available credit facilities.

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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, 2019, the unpaid principal balance of residential mortgage loans, which we have originated and sold, but retained the servicing rights was $288.4 million. Although these loans are generally sold on a non-recourse basis, we may be obligated to repurchase residential mortgage loans or reimburse investors for losses incurred (make whole requests) if a loan review reveals a potential breach of 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 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, 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, 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 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.

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CURRENT ACCOUNTING DEVELOPMENTS

The following ASUs have been issued by the FASB but are not yet effective.

• ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments;

• ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement; and

• ASU 2018-15, Intangibles – Goodwill and Other – Internal Use Software (Subtopic 350-40): 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.

ASU 2016-13, Financial 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 is effective for annual and interim periods in fiscal years beginning after December 15, 2019, and early adoption is permitted beginning in 2019. The Company is currently evaluating the impact this ASU will have on its consolidated financial statements.

ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, improves the disclosure requirements on fair value measurements by eliminating the requirements to disclose (i) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; (ii) the policy for timing of transfers between levels; and (iii) the valuation processes for Level 3 fair value measurements. This ASU also added specific disclosure requirements for fair value measurements for public entities including the requirement to disclose the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements.

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

ASU 2018- 15, Intangibles – Goodwill and Other – Internal Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract aligns 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 obtain internal-use software (and hosting arrangements that include internal-use software license). This ASU requires entities to use the guidance in FASB ASC 350-40, Intangibles – Goodwill and Other – Internal Use Software, to determine whether to capitalize or expense implementation costs related to the service contract. This ASU also requires entities to (i) expense capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement; (ii) present the expense related to the capitalized implementation costs in the same line item on the income statement as fees associated with the hosting element of the arrangement; (iii) classify payments for capitalized implementation costs in the statement of cash flows in the same manner as payments made for fees associated with the hosting element; and (iv) present the capitalized implementation costs in the same balance sheet line item that a prepayment for the fees associated with the hosting arrangement would be presented.

41

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.

42

Table 1 – Explanation of Non-GAAP Financial Measures

In addition to results presented in accordance with U.S. generally accepted accounting principles (GAAP), this quarterly report on Form 10-Q includes certain designated net interest income amounts presented on a tax-equivalent basis, a non-GAAP financial measure, including the presentation and calculation of the efficiency ratio.

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

	2019		2018
	First		Fourth		Third		Second		First
(in thousands)	Quarter		Quarter		Quarter		Quarter		Quarter
Net interest income (GAAP)	$	6,620		6,547		6,422		6,317		6,284
Tax-equivalent adjustment		146		152		153		152		156
Net interest income (Tax-equivalent)	$	6,766		6,699		6,575		6,469		6,440

43

Table 2 – Selected Quarterly Financial Data

	2019			2018
	First			Fourth		Third		Second		First
(Dollars in thousands, except per share amounts)	Quarter			Quarter		Quarter		Quarter		Quarter
Results of Operations
Net interest income (a)	$	6,766			6,699		6,575		6,469		6,440
Less: tax-equivalent adjustment		146			152		153		152		156
Net interest income (GAAP)		6,620			6,547		6,422		6,317		6,284
Noninterest income		1,160			842		791		839		853
Total revenue		7,780			7,389		7,213		7,156		7,137
Noninterest expense		4,611			4,396		4,750		4,326		4,402
Income tax expense		626			593		488		566		540
Net earnings	$	2,543			2,400		1,975		2,264		2,195
Per share data:
Basic and diluted net earnings	$	0.70			0.66		0.54		0.62		0.60
Cash dividends declared		0.25			0.24		0.24		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
Shares outstanding, at period end		3,581,485			3,643,868		3,643,868		3,643,793		3,643,698
Book value	$	25.39			24.44		23.45		23.53		23.36
Common stock price
High	$	39.43			41.50		53.50		50.99		39.25
Low		30.61			28.88		38.31		37.40		35.50
Period end:		39.43			31.66		38.32		49.61		39.06
To earnings ratio		15.71			13.14		16.96		21.48		17.44
To book value		155	%		130		163		211		167
Performance ratios:
Return on average equity		11.31	%		11.05		9.08		10.48		9.95
Return on average assets		1.23	%		1.20		0.97		1.10		1.04
Dividend payout ratio		35.71	%		36.36		44.44		38.71		40.00
Asset Quality:
Allowance for loan losses as a % of:
Loans		1.02	%		1.00		1.04		1.04		1.07
Nonperforming loans		2,845	%		2,691		512		430		146
Nonperforming assets as a % of:
Loans and other real estate owned		0.07	%		0.07		0.23		0.27		0.73
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
Annualized net (recoveries) charge-offs as % of average loans		(0.02	)%		—		(0.03)		(0.02)		0.02
Capital Adequacy: (c)
CET 1 risk-based capital ratio		16.17	%		16.49		16.31		16.17		17.10
Tier 1 risk-based capital ratio		16.17	%		16.49		16.31		16.17		17.10
Total risk-based capital ratio		17.06	%		17.38		17.21		17.07		18.03
Tier 1 leverage ratio		10.87	%		11.33		11.01		10.80		10.77
Other financial data:
Net interest margin (a)		3.54	%		3.54		3.41		3.36		3.29
Effective income tax rate		19.75	%		19.81		19.81		20.00		19.74
Efficiency ratio (b)		58.18	%		58.29		64.49		59.20		60.36
Selected average balances:
Securities	$	240,024			240,334		248,684		255,877		265,626
Loans, net of unearned income		477,335			467,380		457,969		448,493		451,347
Total assets		827,143			802,555		813,531		820,706		841,820
Total deposits		732,539			711,043		721,566		728,457		744,365
Long-term debt		—			—		—		919		3,217
Total stockholders’ equity		89,934			86,881		86,958		86,420		88,281
Selected period end balances:
Securities	$	241,287			239,801		243,336		251,320		259,177
Loans, net of unearned income		472,650			476,908		460,327		456,572		443,804
Allowance for loan losses		4,808			4,790		4,785		4,750		4,732
Total assets		835,014			818,077		808,951		811,791		830,721
Total deposits		739,631			724,193		719,306		721,005		737,332
Long-term debt		—			—		—		—		3,217
Total stockholders’ equity		90,949			89,055		85,459		85,748		85,108

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

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

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

44

Table 3 - Average Balances and Net Interest Income Analysis

		Quarter ended March 31,
		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)	$		478,059	$	5,727		4.86%	$		452,496	$	5,231		4.69%
Securities - taxable			171,543		1,015		2.40%			193,918		1,077		2.25%
Securities - tax-exempt (2)			68,481		695		4.12%			71,708		741		4.19%
Total securities			240,024		1,710		2.89%			265,626		1,818		2.78%
Federal funds sold			21,404		125		2.37%			27,914		106		1.54%
Interest bearing bank deposits			36,676		227		2.51%			47,411		196		1.68%
Total interest-earning assets			776,163	$	7,789		4.07%			793,447	$	7,351		3.76%
Cash and due from banks			14,622							13,843
Other assets			36,358							34,530
Total assets	$		827,143					$		841,820
Interest-bearing liabilities:
Deposits:
NOW	$		132,358	$	175		0.54%	$		145,932	$	112		0.31%
Savings and money market			220,311		222		0.41%			221,260		199		0.36%
Time deposits			177,186		624		1.43%			187,440		561		1.21%
Total interest-bearing deposits			529,855		1,021		0.78%			554,632		872		0.64%
Short-term borrowings			1,974		2		0.49%			2,976		4		0.55%
Long-term debt			—		—		—			3,217		35		4.41%
Total interest-bearing liabilities			531,829	$	1,023		0.78%			560,825	$	911		0.66%
Noninterest-bearing deposits			202,684							189,733
Other liabilities			2,696							2,981
Stockholders’ equity			89,934							88,281
Total liabilities and stockholders’ equity	$		827,143					$		841,820
Net interest income and margin (tax-equivalent)				$	6,766		3.54%				$	6,440		3.29%

(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 on tax-exempt securities have been computed on a tax-equivalent basis using a federal income tax rate of 21%.

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Table 4 - Loan Portfolio Composition

		2019			2018
		First			Fourth			Third			Second			First
(In thousands)		Quarter			Quarter			Quarter			Quarter			Quarter
Commercial and industrial	$		50,898			63,467			52,430			52,921			57,877
Construction and land development			44,931			40,222			45,109			42,675			35,910
Commercial real estate			265,149			261,896			250,150			246,129			234,345
Residential real estate			103,631			102,597			103,329			105,705			106,496
Consumer installment			8,564			9,295			9,942			9,824			9,685
Total loans			473,173			477,477			460,960			457,254			444,313
Less: unearned income			(523	)		(569	)		(633	)		(682	)		(509)
Loans, net of unearned income			472,650			476,908			460,327			456,572			443,804
Less: allowance for loan losses			(4,808	)		(4,790	)		(4,785	)		(4,750	)		(4,732)
Loans, net	$		467,842			472,118			455,542			451,822			439,072

46

Table 5 - Allowance for Loan Losses and Nonperforming Assets

			2019			2018
			First			Fourth			Third			Second			First
(Dollars in thousands)			Quarter			Quarter			Quarter			Quarter			Quarter
Allowance for loan losses:
Balance at beginning of period	$			4,790			4,785			4,750			4,732			4,757
Charge-offs:
Commercial and industrial				—			—			—			—			(52)
Commercial real estate				—			—			—			(39	)		—
Residential real estate				—			(11	)		(11	)		—			(4)
Consumer installment				(15	)		(42	)		(7	)		—			(2)
Total charge-offs				(15	)		(53	)		(18	)		(39	)		(58)
Recoveries				33			58			53			57			33
Net recoveries (charge-offs)				18			5			35			18			(25)
Ending balance		$		4,808			4,790			4,785			4,750			4,732
as a % of loans				1.02	%		1.00			1.04			1.04			1.07
as a % of nonperforming loans				2,845	%		2,691			512			430			146
Net (recoveries) charge-offs as % of avg. loans (a)				(0.02	)%		—			(0.03	)		(0.02	)		0.02
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		$		—			—			—			—			—

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

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Table 6 - Allocation of Allowance for Loan Losses

		2019					2018
		First Quarter					Fourth Quarter					Third Quarter					Second Quarter					First Quarter
(Dollars in thousands)		Amount		%*			Amount		%*			Amount		%*			Amount		%*			Amount		%*
Commercial and industrial	$		686		10.8	$		778		13.3	$		544		11.4	$		600		11.6	$		724		13.0
Construction and land development			773		9.5			700		8.4			836		9.8			787		9.3			670		8.1
Commercial real estate			2,251		56.0			2,218		54.9			2,241		54.2			2,197		53.9			2,119		52.7
Residential real estate			930		21.9			946		21.5			997		22.4			1,017		23.1			1,053		24.0
Consumer installment			168		1.8			148		1.9			167		2.2			149		2.1			166		2.2
Total allowance for loan losses	$		4,808			$		4,790			$		4,785			$		4,750			$		4,732

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

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Table 7 - CDs and Other Time Deposits of $100,000 or More

(Dollars in thousands)	March 31, 2019
Maturity of:
3 months or less	$	8,636
Over 3 months through 6 months		20,635
Over 6 months through 12 months		32,891
Over 12 months		45,094
Total CDs and other time deposits of $100,000 or more	$	107,256

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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 in Rules 13a-15(e) and 15d-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 Form 10-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 Form 10-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 Form 10-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 during the first 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

(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 million.

50

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

51

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 Rule 13a-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 Rule 13a-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 Form 10-Q dated June 30, 2002.

** Incorporated by reference from Registrant’s Form 10-K dated March 31, 2008.

*** Incorporated by reference from Registrant’s Form 8-K dated April 10, 2019.

**** The certifications attached as exhibits 32.1 and 32.2 to this quarterly report on Form 10-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.

52

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, 2019	By:          /s/ Robert W. Dumas
	Robert W. Dumas
	Chairman, President and CEO
Date:            May 6, 2019	By:          /s/ David A. Hedges
	David A. Hedges
	EVP and Chief Financial Officer