10-Q

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 September 30, 2018

[  ] 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 ☒

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 November 1, 2018
Common Stock, $0.01 par value per share	3,643,868 shares

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

INDEX

PART I.  FINANCIAL INFORMATION			PAGE
Item 1	Financial Statements
		Consolidated Balance Sheets (Unaudited) as of September 30, 2018 and December 31, 2017	3
		Consolidated Statements of Earnings (Unaudited) for the quarter and nine months ended September 30, 2018 and 2017	4
		Consolidated Statements of Comprehensive Income (Unaudited) for the quarter and nine months ended September 30, 2018 and 2017	5
		Consolidated Statements of Stockholders’ Equity (Unaudited) for the nine months ended September 30, 2018 and 2017	6
		Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2018 and 2017	7
		Notes to Consolidated Financial Statements (Unaudited)	8
Item 2		Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
		Table 1 – Explanation of Non-GAAP Financial Measures	47
		Table 2 – Selected Quarterly Financial Data	48
		Table 3 – Selected Financial Data	49
		Table 4 – Average Balances and Net Interest Income Analysis – for the quarter ended September 30, 2018 and 2017	50
		Table 5 – Average Balances and Net Interest Income Analysis – for the nine months ended September 30, 2018 and 2017	51
		Table 6 – Loan Portfolio Composition	52
		Table 7 – Allowance for Loan Losses and Nonperforming Assets	53
		Table 8 – Allocation of Allowance for Loan Losses	54
		Table 9 – CDs and Other Time Deposits of $100,000 or more	55
Item 3		Quantitative and Qualitative Disclosures About Market Risk	56
Item 4		Controls and Procedures	56
PART II.  OTHER INFORMATION
Item 1	Legal Proceedings		56
Item 1A	Risk Factors		56
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds		56
Item 3	Defaults Upon Senior Securities		56
Item 4	Mine Safety Disclosures		56
Item 5	Other Information		56
Item 6	Exhibits		57

PART 1. FINANCIAL INFORMATION    

ITEM 1.  FINANCIAL STATEMENTS

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Unaudited)

(Dollars in thousands, except share data)	September 30, 2018			December 31, 2017
Assets:
Cash and due from banks	$	14,915		$	12,942
Federal funds sold		36,457			41,540
Interest-bearing bank deposits		15,790			51,046
Cash and cash equivalents		67,162			105,528
Securities available-for-sale		243,336			257,697
Loans held for sale		1,548			1,922
Loans, net of unearned income		460,327			453,651
Allowance for loan losses		(4,785	)		(4,757)
Loans, net		455,542			448,894
Premises and equipment, net		13,638			13,791
Bank-owned life insurance		18,654			18,330
Other assets		9,071			7,219
Total assets	$	808,951		$	853,381
Liabilities:
Deposits:
Noninterest-bearing	$	199,179		$	193,917
Interest-bearing		520,127			563,742
Total deposits		719,306			757,659
Federal funds purchased and securities sold under agreements to repurchase		1,888			2,658
Long-term debt		—			3,217
Accrued expenses and other liabilities		2,298			2,941
Total liabilities		723,492			766,475
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		3,779			3,771
Retained earnings		94,109			90,299
Accumulated other comprehensive loss, net		(5,833	)		(566)
Less Treasury stock, at cost - 313,267 shares and 313,467 shares at September 30, 2018 and December 31, 2017, respectively		(6,635	)		(6,637)
Total stockholders’ equity		85,459			86,906
Total liabilities and stockholders’ equity	$	808,951		$	853,381

See accompanying notes to consolidated financial statements    

3

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

Consolidated Statements of Earnings

(Unaudited)

	Quarter ended September 30,				Nine Months ended September 30,
(In thousands, except share and per share data)	2018		2017		2018		2017
Interest income:
Loans, including fees	$	5,511	$	5,296	$	16,049	$	15,398
Securities:
Taxable		974		1,071		3,063		3,204
Tax-exempt		577		590		1,734		1,758
Federal funds sold and interest-bearing bank deposits		283		215		875		598
Total interest income		7,345		7,172		21,721		20,958
Interest expense:
Deposits		920		872		2,637		2,600
Short-term borrowings		3		5		15		14
Long-term debt		—		34		46		93
Total interest expense		923		911		2,698		2,707
Net interest income		6,422		6,261		19,023		18,251
Provision for loan losses		—		—		—		100
Net interest income after provision for loan losses		6,422		6,261		19,023		18,151
Noninterest income:
Service charges on deposit accounts		192		191		553		563
Mortgage lending		115		254		487		558
Bank-owned life insurance		110		112		324		329
Other		374		362		1,119		1,096
Securities gains, net		—		49		—		51
Total noninterest income		791		968		2,483		2,597
Noninterest expense:
Salaries and benefits		2,673		2,516		7,959		7,289
Net occupancy and equipment		339		385		1,069		1,117
Professional fees		213		276		707		760
FDIC and other regulatory assessments		70		79		248		257
Other		1,455		969		3,495		2,935
Total noninterest expense		4,750		4,225		13,478		12,358
Earnings before income taxes		2,463		3,004		8,028		8,390
Income tax expense		488		868		1,594		2,369
Net earnings	$	1,975	$	2,136	$	6,434	$	6,021
Net earnings per share:
Basic and diluted	$	0.54	$	0.59	$	1.77	$	1.65
Weighted average shares outstanding:
Basic and diluted		3,643,834		3,643,659		3,643,750		3,643,598

See accompanying notes to consolidated financial statements

4

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(Unaudited)

	Quarter ended September 30,				Nine Months ended September 30,
(Dollars in thousands)	2018		2017		2018		2017
Net earnings	$	1,975	$	2,136	$	6,434	$	6,021
Other comprehensive (loss) income, net of tax:
Unrealized net holding (loss) gain on securities		(1,393)		171		(5,267)		882
Reclassification adjustment for net gain on securities recognized in net earnings		—		(31)		—		(32)
Other comprehensive (loss) income		(1,393)		140		(5,267)		850
Comprehensive income	$	582	$	2,276	$	1,167	$	6,871

See accompanying notes to consolidated financial statements

5

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

(Unaudited)

										Accumulated
					Additional					other
	Common Stock				paid-in		Retained			comprehensive			Treasury
(Dollars in thousands, except share data)	Shares		Amount		capital		earnings			income (loss)			stock			Total
Balance, December 31, 2016		3,957,135	$	39	$	3,767	$	85,716		$	(708)			$          (6,637)		$	82,177
Net earnings		—		—		—		6,021			—			—			6,021
Other comprehensive income		—		—		—		—			850			—			850
Cash dividends paid ($0.69 per share)		—		—		—		(2,514)			—			—			(2,514)
Sale of treasury stock (145 shares)		—		—		4		—			—			—			4
Balance, September 30, 2017		3,957,135	$	39	$	3,771	$	89,223		$	142		$	(6,637	)	$	86,538
Balance, December 31, 2017		3,957,135	$	39	$	3,771	$	90,299		$	(566	)	$	(6,637	)	$	86,906
Net earnings		—		—		—		6,434			—			—			6,434
Other comprehensive loss		—		—		—		—			(5,267	)		—			(5,267)
Cash dividends paid ($0.72 per share)		—		—		—		(2,624	)		—			—			(2,624)
Sale of treasury stock (200 shares)		—		—		8		—			—			2			10
Balance, September 30, 2018		3,957,135	$	39	$	3,779	$	94,109		$	(5,833	)	$	(6,635	)	$	85,459

See accompanying notes to consolidated financial statements

6

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

	Nine Months ended September 30,
(In thousands)	2018			2017
Cash flows from operating activities:
Net earnings	$	6,434		$	6,021
Adjustments to reconcile net earnings to net cash provided by operating activities:
Provision for loan losses		—			100
Depreciation and amortization		712			772
Premium amortization and discount accretion, net		1,572			1,612
Net gain on securities available-for-sale		—			(51)
Net gain on sale of loans held for sale		(244	)		(366)
Decrease in MSR valuation allowance		—			(1)
Net gain on other real estate owned		—			(11)
Loans originated for sale		(23,946	)		(21,957)
Proceeds from sale of loans		24,389			22,731
Increase in cash surrender value of bank-owned life insurance		(324	)		(329)
Net (increase) decrease in other assets		(143	)		382
Net decrease in accrued expenses and other liabilities		(633	)		(1,466)
Net cash provided by operating activities		7,817			7,437
Cash flows from investing activities:
Proceeds from sales of securities available-for-sale		—			10,374
Proceeds from prepayments and maturities of securities available-for-sale		25,046			25,909
Purchase of securities available-for-sale		(19,290	)		(58,097)
Increase in loans, net		(8,138	)		(18,506)
Net purchases of premises and equipment		(170	)		(1,549)
Increase in FHLB stock		(20	)		(13)
Proceeds from sale of other real estate owned		1,353			60
Net cash used in investing activities		(1,219	)		(41,822)
Cash flows from financing activities:
Net increase in noninterest-bearing deposits		5,262			2,862
Net decrease in interest-bearing deposits		(43,615	)		(9,357)
Net (decrease) increase in federal funds purchased and securities sold under agreements to repurchase		(770	)		207
Repayments or retirement of long-term debt		(3,217	)		—
Dividends paid		(2,624	)		(2,514)
Net cash used in financing activities		(44,964	)		(8,802)
Net change in cash and cash equivalents		(38,366	)		(43,187)
Cash and cash equivalents at beginning of period		105,528			121,277
Cash and cash equivalents at end of period	$	67,162		$	78,090
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	2,717		$	2,791
Income taxes		2,228			2,674
Supplemental disclosure of non-cash transactions:
Real estate acquired through foreclosure		1,490			—

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, 2017.

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.

Subsequent Events

The Company has evaluated the effects of events and transactions through the date of this filing that have occurred subsequent to September 30, 2018. 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 nine months of 2018, the Company adopted new guidance related to the following Accounting Standards Updates (“Updates” or “ASUs”):

• ASU 2014-09, Revenue from Contracts with Customers;

• ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities;

• ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments; and

• ASU 2016-18, Restricted Cash

8

Information about these pronouncements is described in more detail below.

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

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

• Gains on sales of other real estate – ASU 2014-09 creates Topic 610-20, under which a gain on sale should be recognized when a contract for sale exists and control of the asset has been transferred to the buyer. Topic 606 lists several criteria required to conclude that a contract for sale exists, including a determination that the institution will collect substantially all of the consideration to which it is entitled. This presents a key difference between the prior and new guidance related to the recognition of the gain when the institution finances the sale of the property. Rather than basing recognition on the amount of the buyer’s initial investment, which was the primary consideration under prior guidance, the analysis is now based on various factors including not only the loan to value, but also the credit quality of the borrower, the structure of the loan, and any other factors that may affect collectability. While these differences may affect the decision to recognize or defer gains on sales of other real estate in circumstances where the Company has financed the sale, the effects would not be material to its consolidated financial statements.

ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, enhances the reporting model for financial instruments to provide users of financial statements with more decision-useful information. The ASU addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Some of the amendments include the following: (1) Require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; (2) Simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (3) Require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (4) Require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value; among others. For public business entities, the amendments of this ASU are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The adoption of this ASU on January 1, 2018 did not have a material impact on the Company’s Consolidated Financial Statements. In accordance with (3) above, the Company measured the fair value of its loan portfolio as of September 30, 2018 using an exit price notion and will continue to do so going forward (see Note 7).

ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, provides guidance on eight specific cash flow issues where current GAAP is either unclear or does not include specific guidance on classification in the statement of cash flows. The new guidance is effective for annual and interim reporting periods in fiscal years beginning after December 15, 2017. The Company adopted ASU No. 2016-15 on January 1, 2018. ASU No. 2016-15 did not have a material impact on the Company’s Consolidated Financial Statements.

9

ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, amends guidance on how the statement of cash flows presents the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Under the new guidance, amounts generally described as restricted cash and restricted cash equivalents are included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in this Update do not provide a definition of restricted cash or restricted cash equivalents. The new guidance is effective for public business entities for annual and interim reporting periods in fiscal years beginning after December 15, 2017. The Company adopted ASU No. 2016-18 on January 1, 2018. ASU No. 2016-18 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 respective period. Diluted net earnings per share reflect the potential dilution that could occur upon exercise of securities or other rights for, or convertible into, shares of the Company’s common stock. At September 30, 2018 and 2017, 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 September 30,				Nine Months ended September 30,
(In thousands, except share and per share data)	2018		2017		2018		2017
Basic and diluted:
Net earnings	$	1,975	$	2,136	$	6,434	$	6,021
Weighted average common shares outstanding		3,643,834		3,643,659		3,643,750		3,643,598
Net earnings per share	$	0.54	$	0.59	$	1.77	$	1.65

NOTE 3: SECURITIES

At September 30, 2018 and December 31, 2017, 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 September 30, 2018 and December 31, 2017, 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
September 30, 2018
Agency obligations (a)	$	9,453		19,445		21,591		—		50,489		—		1,899	$	52,388
Agency RMBS (a)		—		—		8,893		113,147		122,040		46		5,230		127,224
State and political subdivisions		—		3,391		8,000		59,416		70,807		461		1,166		71,512
Total available-for-sale	$	9,453		22,836		38,484		172,563		243,336		507		8,295	$	251,124
December 31, 2017
Agency obligations (a)	$	—		29,253		23,809		—		53,062		79		904	$	53,887
Agency RMBS (a)		—		—		11,201		121,871		133,072		330		1,639		134,381
State and political subdivisions		—		2,564		9,999		59,000		71,563		1,616		237		70,184
Total available-for-sale	$	—		31,817		45,009		180,871		257,697		2,025		2,780	$	258,452

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

Securities with aggregate fair values of $138.9 million and $149.4 million at September 30, 2018 and December 31, 2017, 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.

10

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 September 30, 2018 and December 31, 2017, 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 September 30, 2018 and December 31, 2017, 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
September 30, 2018:
Agency obligations	$	25,953		418		24,536		1,481	$	50,489		1,899
Agency RMBS		51,338		1,622		65,789		3,608		117,127		5,230
State and political subdivisions		27,714		579		10,558		587		38,272		1,166
Total	$	105,005		2,619		100,883		5,676	$	205,888		8,295
December 31, 2017:
Agency obligations	$	14,381		99		20,353		805	$	34,734		904
Agency RMBS		53,440		363		50,729		1,276		104,169		1,639
State and political subdivisions		2,009		22		10,155		215		12,164		237
Total	$	69,830		484		81,237		2,296	$	151,067		2,780

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.

11

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.

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 September 30, 2018 and December 31, 2017, 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 nine months ended September 30, 2018 and 2017, respectively.

Realized Gains and Losses

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

	Quarter ended September 30,				Nine Months ended September 30,
(Dollars in thousands)	2018		2017		2018		2017
Gross realized gains	$	—		49	$	—		51
Realized gains, net	$	—		49	$	—		51

12

NOTE 4: LOANS AND ALLOWANCE FOR LOAN LOSSES

(In thousands)	September 30, 2018			December 31, 2017
Commercial and industrial	$	52,430		$	59,086
Construction and land development		45,109			39,607
Commercial real estate:
Owner occupied		51,846			44,192
Multi-family		40,753			52,167
Other		157,551			142,674
Total commercial real estate		250,150			239,033
Residential real estate:
Consumer mortgage		57,143			59,540
Investment property		46,186			47,323
Total residential real estate		103,329			106,863
Consumer installment		9,942			9,588
Total loans		460,960			454,177
Less: unearned income		(633	)		(526)
Loans, net of unearned income	$	460,327		$	453,651

Loans secured by real estate were approximately 86.5% of the Company’s total loan portfolio at September 30, 2018. At September 30, 2018, 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.

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.

13

• 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.

14

The following is a summary of current, accruing past due, and nonaccrual loans by portfolio segment and class as of September 30, 2018 and December 31, 2017.

(In thousands)	Current		Accruing 30-89 Days Past Due		Accruing Greater than 90 days		Total Accruing Loans		Non- Accrual		Total Loans
September 30, 2018:
Commercial and industrial	$	52,420		10		—		52,430		—	$	52,430
Construction and land development		44,832		241		—		45,073		36		45,109
Commercial real estate:
Owner occupied		51,846		—		—		51,846		—		51,846
Multi-family		40,753		—		—		40,753		—		40,753
Other		156,855		—		—		156,855		696		157,551
Total commercial real estate		249,454		—		—		249,454		696		250,150
Residential real estate:
Consumer mortgage		56,889		60		—		56,949		194		57,143
Investment property		46,060		126		—		46,186		—		46,186
Total residential real estate		102,949		186		—		103,135		194		103,329
Consumer installment		9,917		17		—		9,934		8		9,942
Total	$	459,572		454		—		460,026		934	$	460,960
December 31, 2017:
Commercial and industrial	$	59,047		8		—		59,055		31	$	59,086
Construction and land development		39,607		—		—		39,607		—		39,607
Commercial real estate:
Owner occupied		44,192		—		—		44,192		—		44,192
Multi-family		52,167		—		—		52,167		—		52,167
Other		140,486		—		—		140,486		2,188		142,674
Total commercial real estate		236,845		—		—		236,845		2,188		239,033
Residential real estate:
Consumer mortgage		58,195		746		—		58,941		599		59,540
Investment property		46,871		312		—		47,183		140		47,323
Total residential real estate		105,066		1,058		—		106,124		739		106,863
Consumer installment		9,517		57		—		9,574		14		9,588
Total	$	450,082		1,123		—		451,205		2,972	$	454,177

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.

15

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 September 30, 2018 and December 31, 2017, 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 September 30, 2018, the Company increased its look-back period to 38 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.

16

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

	September 30, 2018
(In thousands)	Commercial and industrial			Construction and land development			Commercial real estate			Residential real estate			Consumer installment			Total
Quarter ended:
Beginning balance	$	600			787			2,197			1,017			149		$	4,750
Charge-offs		—			—			—			(11	)		(7	)		(18)
Recoveries		13			—			—			19			21			53
Net recoveries		13			—			—			8			14			35
Provision for loan losses		(69	)		49			44			(28	)		4			—
Ending balance	$	544			836			2,241			997			167		$	4,785
Nine months ended:
Beginning balance	$	653			734			2,126			1,071			173		$	4,757
Charge-offs		(52	)		—			(39	)		(15	)		(9	)		(115)
Recoveries		59			—			—			52			32			143
Net recoveries (charge-offs)		7			—			(39	)		37			23			28
Provision for loan losses		(116	)		102			154			(111	)		(29	)		—
Ending balance	$	544			836			2,241			997			167		$	4,785
	September 30, 2017
(In thousands)	Commercial and industrial			Construction and land development			Commercial real estate			Residential real estate			Consumer installment			Total
Quarter ended:
Beginning balance	$	677			874			2,121			1,119			174		$	4,965
Charge-offs		(449	)		—			—			(30	)		(10	)		(489)
Recoveries		39			133			—			20			2			194
Net (charge-offs) recoveries		(410	)		133			—			(10	)		(8	)		(295)
Provision for loan losses		237			(156	)		(60	)		(32	)		11			—
Ending balance	$	504			851			2,061			1,077			177		$	4,670
Nine months ended:
Beginning balance	$	540			812			2,071			1,107			113		$	4,643
Charge-offs		(449	)		—			—			(108	)		(16	)		(573)
Recoveries		45			347			—			97			11			500
Net (charge-offs) recoveries		(404	)		347			—			(11	)		(5	)		(73)
Provision for loan losses		368			(308	)		(10	)		(19	)		69			100
Ending balance	$	504			851			2,061			1,077			177		$	4,670

17

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 September 30, 2018 and 2017.    

	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
September 30, 2018:
Commercial and industrial	$	544		52,430		—		—		544		52,430
Construction and land development		836		45,109		—		—		836		45,109
Commercial real estate		2,241		249,292		—		858		2,241		250,150
Residential real estate		997		103,329		—		—		997		103,329
Consumer installment		167		9,942		—		—		167		9,942
Total	$	4,785		460,102		—		858		4,785		460,960
September 30, 2017:
Commercial and industrial	$	471		50,068		33		33		504		50,101
Construction and land development		851		47,455		—		—		851		47,455
Commercial real estate		2,045		229,700		16		2,680		2,061		232,380
Residential real estate		1,077		110,159		—		—		1,077		110,159
Consumer installment		177		9,877		—		—		177		9,877
Total	$	4,621		447,259		49		2,713		4,670		449,972

(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.

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.

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(In thousands)	Pass		Special Mention		Substandard Accruing		Nonaccrual		Total loans
September 30, 2018:
Commercial and industrial	$	50,137		2,197		96		—	$	52,430
Construction and land development		44,257		53		763		36		45,109
Commercial real estate:
Owner occupied		51,138		387		321		—		51,846
Multi-family		40,753		—		—		—		40,753
Other		155,490		988		377		696		157,551
Total commercial real estate		247,381		1,375		698		696		250,150
Residential real estate:
Consumer mortgage		51,236		2,439		3,274		194		57,143
Investment property		45,231		204		751		—		46,186
Total residential real estate		96,467		2,643		4,025		194		103,329
Consumer installment		9,786		79		69		8		9,942
Total	$	448,028		6,347		5,651		934	$	460,960
December 31, 2017:
Commercial and industrial	$	58,842		94		119		31	$	59,086
Construction and land development		39,049		90		468		—		39,607
Commercial real estate:
Owner occupied		43,615		240		337		—		44,192
Multi-family		52,167		—		—		—		52,167
Other		139,695		395		396		2,188		142,674
Total commercial real estate		235,477		635		733		2,188		239,033
Residential real estate:
Consumer mortgage		54,101		1,254		3,586		599		59,540
Investment property		46,463		53		667		140		47,323
Total residential real estate		100,564		1,307		4,253		739		106,863
Consumer installment		9,430		66		78		14		9,588
Total	$	443,362		2,192		5,651		2,972	$	454,177

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).

19

The following tables set forth certain information regarding the Company’s impaired loans that were individually evaluated for impairment at September 30, 2018 and December 31, 2017.

	September 30, 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	$	162		—			162
Other		753		(57	)		696
Total commercial real estate		915		(57	)		858
Total impaired loans	$	915		(57	)		858	$		—

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

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

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

	December 31, 2017
(In thousands)	Unpaid principal balance (1)		Charge-offs and payments applied (2)			Recorded investment (3)			Related allowance
With no allowance recorded:
Commercial real estate:
Other	$	3,630		(1,094	)		2,536
Total commercial real estate		3,630		(1,094	)		2,536
Total	$	3,630		(1,094	)		2,536
With allowance recorded:
Commercial and industrial	$	52		(21	)		31	$		31
Commercial real estate:
Owner occupied		175		—			175			11
Total commercial real estate		175		—			175			11
Total		227		(21	)		206			42
Total impaired loans	$	3,857		(1,115	)		2,742	$		42

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

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

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

20

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

	Quarter ended September 30, 2018				Nine months ended September 30, 2018
	Average		Total interest		Average		Total interest
	recorded		income		recorded		income
(In thousands)	investment		recognized		investment		recognized
Impaired loans:
Commercial and industrial	$	—		—		12		—
Commercial real estate:
Owner occupied		164		2		168		7
Other		701		—		1,488		—
Total commercial real estate		865		2		1,656		7
Total	$	865		2		1,668		7
	Quarter ended September 30, 2017				Nine months ended September 30, 2017
	Average		Total interest		Average		Total interest
	recorded		income		recorded		income
(In thousands)	investment		recognized		investment		recognized
Impaired loans:
Commercial and industrial	$	126		—		55		—
Construction and land development		—		—		15		—
Commercial real estate:
Owner occupied		182		2		186		8
Other		2,148		—		1,971		—
Total commercial real estate		2,330		2		2,157		8
Total	$	2,456		2		2,227		8

Troubled Debt Restructurings

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

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

21

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 September 30, 2018 and December 31, 2017.

	TDRs
(In thousands)	Accruing		Nonaccrual		Total		Related Allowance
September 30, 2018
Commercial real estate:
Owner occupied	$	162		—		162	$	—
Other		—		696		696		—
Total commercial real estate		162		696		858		—
Total	$	162		696		858	$	—
December 31, 2017
Commercial and industrial	$	—		31		31	$	31
Commercial real estate:
Owner occupied		175		—		175		11
Other		287		1,431		1,718		—
Total commercial real estate		462		1,431		1,893		11
Total	$	462		1,462		1,924	$	42

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

	Quarter ended September 30,						Nine Months ended September 30,
			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
2018:
Commercial real estate:
Other		1	$	710		710		2	$	1,447		1,447
Total commercial real estate		1		710		710		2		1,447		1,447
Total		1	$	710		710		2	$	1,447		1,447
2017:
Commercial and industrial		1	$	34		34		1	$	34		34
Commercial real estate:
Other		—		—		—		1		1,275		1,266
Total commercial real estate		—		—		—		1		1,275		1,266
Total		1	$	34		34		2	$	1,309		1,300

The majority of the loans modified in a TDR during the quarter and nine months ended September 30, 2018 and 2017, included permitting delays in required payments of principal and/or interest or where the only concession granted by the Company was that the interest rate at renewal was considered to be less than a market rate.

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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 and nine months ended September 30, 2017, 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 September 30,				Nine Months ended September 30,
	Number of		Recorded		Number of		Recorded
(Dollars in thousands)	Contracts		investment(1)		Contracts		investment(1)
2018:
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 fair value of the Company’s MSRs is determined using assumptions that market participants would use in estimating future net servicing income, including estimates of prepayment speeds, discount rates, default rates, costs to service, escrow account earnings, contractual servicing fee income, ancillary income, and late fees. Subsequent to the date of transfer, the Company has elected to measure its MSRs under the amortization method. Under the amortization method, MSRs are amortized in proportion to, and over the period of, estimated net servicing income.

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

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

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

	Quarter ended September 30,						Nine Months ended September 30,
(Dollars in thousands)	2018			2017			2018			2017
MSRs, net:
Beginning balance	$	1,549		$	1,762		$	1,644		$	1,952
Additions, net		61			72			175			165
Amortization expense		(115	)		(131	)		(324	)		(415	)
Decrease in valuation allowance		—			—			—			1
Ending balance	$	1,495		$	1,703		$	1,495		$	1,703
Valuation allowance included in MSRs, net:
Beginning of period	$	—		$	—		$	—		$	1
End of period		—			—			—			—
Fair value of amortized MSRs:
Beginning of period	$	2,659		$	2,520		$	2,528		$	2,678
End of period		2,615			2,441			2,615			2,441

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NOTE 6: DERIVATIVE INSTRUMENTS

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

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

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

			Other             Assets		Other             Liabilities
			Estimated		Estimated
(Dollars in thousands)	Notional		Fair Value		Fair Value
December 31, 2017:
Pay fixed / receive variable	$	3,617		—		52
Pay variable / receive fixed		3,617		52		—
Total interest rate swap agreements	$	7,234		52		52

NOTE 7: FAIR VALUE

Fair Value Hierarchy

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

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

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

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

Level changes in fair value measurements

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

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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.

Interest rate swap agreements

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

The following table presents the balances of the assets and liabilities measured at fair value on a recurring basis as of September 30, 2018 and December 31, 2017, 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)
September 30, 2018:
Securities available-for-sale:
Agency obligations	$	50,489		—		50,489		—
Agency RMBS		122,040		—		122,040		—
State and political subdivisions		70,807		—		70,807		—
Total securities available-for-sale		243,336		—		243,336		—
Total assets at fair value	$	243,336		—		243,336		—
December 31, 2017:
Securities available-for-sale:
Agency obligations	$	53,062		—		53,062		—
Agency RMBS		133,072		—		133,072		—
State and political subdivisions		71,563		—		71,563		—
Total securities available-for-sale		257,697		—		257,697		—
Other assets (1)		52		—		52		—
Total assets at fair value	$	257,749		—		257,749		—
Other liabilities(1)	$	52		—		52		—
Total liabilities at fair value	$	52		—		52		—

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

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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.

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.

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The following table presents the balances of the assets and liabilities measured at fair value on a nonrecurring basis as of September 30, 2018 and December 31, 2017, 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)
September 30, 2018:
Loans held for sale	$	1,548		—		1,548		—
Loans, net(1)		858		—		—		858
Other assets (2)		1,632		—		—		1,632
Total assets at fair value	$	4,038		—		1,548		2,490
December 31, 2017:
Loans held for sale	$	1,922		—		1,922		—
Loans, net(1)		2,700		—		—		2,700
Other assets (2)		1,644		—		—		1,644
Total assets at fair value	$	6,266		—		1,922		4,344

⁽¹⁾  Loans considered impaired under 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.

Quantitative Disclosures for Level 3 Fair Value Measurements

At September 30, 2018, 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 at September 30, 2018, the significant unobservable inputs used in the fair value measurements are presented below.

						Weighted
	Carrying					Average
(Dollars in thousands)	Amount		Valuation Technique		Significant Unobservable Input	of Input
Nonrecurring:
Impaired loans	$	858		Appraisal	Appraisal discounts (%)		52.4%
Other real estate owned		137		Appraisal	Appraisal discounts (%)		10.0%
Mortgage servicing rights, net		1,495		Discounted cash flow	Prepayment speed or CPR (%)		9.5%
					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.

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

Loans, net

Fair values for loans were calculated using discounted cash flows. The discount rates reflected current rates at which similar loans would be made for the same remaining maturities. Expected future cash flows were projected based on contractual cash flows, adjusted for estimated prepayments. In accordance with the prospective adoption of ASU No. 2016-01, the fair value of loans as of September 30, 2018 was measured using an exit price notion. The fair value of loans as of December 31, 2017 was measured using an entry price notion.

Loans held for sale

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

Time Deposits

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

Long-term debt

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

The carrying value, related estimated fair value, and placement in the fair value hierarchy of the Company’s financial instruments at September 30, 2018 and December 31, 2017 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
September 30, 2018:
Financial Assets:
Loans, net (1)	$	455,542	$	452,124	$	—	$	—	$	452,124
Loans held for sale		1,548		1,594		—		1,594		—
Financial Liabilities:
Time Deposits	$	182,339	$	182,485	$	—	$	182,485	$	—
December 31, 2017:
Financial Assets:
Loans, net (1)	$	448,894	$	447,468	$	—	$	—	$	447,468
Loans held for sale		1,922		1,950		—		1,950		—
Financial Liabilities:
Time Deposits	$	188,071	$	185,564	$	—	$	185,564	$	—
Long-term debt		3,217		3,217		—		3,217		—

(1) Represents loans, net of unearned income and the allowance for loan losses. In accordance with the prospective adoption of ASU No. 2016-01, the fair value of loans as of September 30, 2018 was measured using an exit price notion. The fair value of loans as of December 31, 2017 was measured using an entry price notion.

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

General

The following discussion and analysis is designed to provide a better understanding of various factors related to the results of operations and financial condition of the Company and the Bank. This discussion is intended to supplement and highlight information contained in the accompanying unaudited condensed consolidated financial statements and related notes for the quarters and nine months ended September 30, 2018 and 2017, as well as the information contained in our annual report on Form 10-K for the year ended December 31, 2017 and our quarterly reports on Form 10-Q for the quarters ended March 31, 2018 and June 30, 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;

29

• 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, 2017 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 September 30,				Nine Months ended September 30,
(Dollars in thousands, except per share amounts)	2018		2017		2018		2017
Net interest income (a)	$	6,575	$	6,565	$	19,484	$	19,156
Less: tax-equivalent adjustment		153		304		461		905
Net interest income (GAAP)		6,422		6,261		19,023		18,251
Noninterest income		791		968		2,483		2,597
Total revenue		7,213		7,229		21,506		20,848
Provision for loan losses		—		—		—		100
Noninterest expense		4,750		4,225		13,478		12,358
Income tax expense		488		868		1,594		2,369
Net earnings	$	1,975	$	2,136	$	6,434	$	6,021
Basic and diluted earnings per share	$	0.54	$	0.59	$	1.77	$	1.65

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

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Financial Summary

The Company’s net earnings were $6.4 million for the first nine months of 2018, compared to $6.0 million for the first nine months of 2017. Basic and diluted earnings per share were $1.77 per share for the first nine months of 2018, compared to $1.65 per share for the first nine months of 2017.

Net interest income (tax-equivalent) was $19.5 million for the first nine months of 2018, a 2% increase compared to $19.2 million for the first nine months of 2017. This increase was primarily due to loan growth and recent increases in short-term market interest rates. Average loans were up 4% to $452.6 million in the first nine months of 2018, compared to $436.7 million in the first nine months of 2017. The Company’s net interest margin (tax-equivalent) increased to 3.36% in the first nine months of 2018, compared to 3.26% for the first nine months of 2017 as yields on earning assets improved.

The Company recorded no provision for loan losses during the first nine months of 2018 and $0.1 million during the first nine months 2017. 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 $2.5 million compared to $2.6 million for the first nine months of 2017. Noninterest expense was $13.5 million compared to $12.4 million for the first nine months of 2017. This increase in noninterest expense was primarily due to increases in salaries and benefits expense of $0.7 million and a $0.4 million loss during the period related to misappropriation of assets, for which we have filed a claim with our insurance provider.

Income tax expense was $1.6 million and $2.4 million for the first nine months of 2018 and 2017 reflecting an effective tax rate of 19.86% and 28.24%, respectively. The decrease in the effective tax rate was primarily due to the Tax Cuts and Jobs Act, signed into law December 22, 2017, which lowered the Company’s statutory federal tax rate from 34% to 21%.

The Company paid cash dividends of $0.72 per share in the first nine months of 2018, an increase of 4.3% from the same period of 2017. At September 30, 2018, 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 17.21%, a tier 1 leverage ratio of 11.01% and common equity tier 1 (“CET1”) of 16.31% at September 30, 2018.

In the third quarter of 2018, net earnings were $2.0 million, or $0.54 per share, compared to $2.1 million, or $0.59 per share, for the third quarter of 2017. Net interest income (tax-equivalent) was $6.6 million for the third quarter of 2018 and 2017. The Company recorded no provision for loan losses in the third quarter of 2018 and 2017. Noninterest income was $0.8 million in the third quarter of 2018 and $1.0 million for the third quarter of 2017. This decrease was primarily due to a decline in mortgage lending income. Noninterest expense was $4.8 million in the third quarter of 2018 compared to $4.2 million in the third quarter of 2017. This increase was mainly due to increases in salaries and benefits expense and a $0.4 million loss during the third quarter related to misappropriation of assets, for which we have filed a claim with our insurance provider. Income tax expense was $0.5 million for the third quarter of 2018, compared to $0.9 million in the third quarter of 2017. The Company’s effective tax rate for the third quarter of 2018 was 19.81%, compared to 28.89% in the third quarter of 2017. This decrease was due to the same factors described above.

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.

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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.

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 September 30, 2018 and December 31, 2017, 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.

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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 September 30, 2018, the Company increased its look-back period to 38 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.

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 7, 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.

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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 September 30, 2018. The amount of the deferred tax assets considered realizable, however, could be reduced if estimates of future taxable income are reduced.

RESULTS OF OPERATIONS

Average Balance Sheet and Interest Rates

	Nine Months ended September 30,
	2018				2017
	Average		Yield/		Average		Yield/
(Dollars in thousands)	Balance		Rate		Balance		Rate
Loans and loans held for sale	$	453,881		4.73%	$	437,707		4.70%
Securities - taxable		185,448		2.21%		198,842		2.15%
Securities - tax-exempt		71,219		4.12%		69,770		5.10%
Total securities		256,667		2.74%		268,612		2.92%
Federal funds sold		30,092		1.75%		33,430		1.00%
Interest bearing bank deposits		35,729		1.80%		45,310		1.03%
Total interest-earning assets		776,369		3.82%		785,059		3.72%
Deposits:
NOW		129,882		0.32%		125,968		0.19%
Savings and money market		222,013		0.38%		232,076		0.37%
Time Deposits		184,669		1.23%		200,690		1.18%
Total interest-bearing deposits		536,564		0.66%		558,734		0.62%
Short-term borrowings		2,805		0.74%		3,626		0.52%
Long-term debt		1,367		4.47%		3,217		3.87%
Total interest-bearing liabilities		540,736		0.67%		565,577		0.64%
Net interest income and margin (tax-equivalent)	$	19,484		3.36%	$	19,156		3.26%

Net Interest Income and Margin

Net interest income (tax-equivalent) was $19.5 million for the first nine months of 2018 compared to $19.2 million for the first nine months of 2017. This increase was primarily due to improved yields on interest-earning assets and loan growth.

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

The cost of total interest-bearing liabilities was largely unchanged in the first nine months of 2018 from the first nine months of 2017.

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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 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 continues its gradual increase in interest rates. The Company anticipates that this challenging, competitive environment will continue throughout 2018 and it is unclear what impact the reduction in corporate tax rates under the Tax Cuts and Jobs Act will have on the interest rates the Company is able to charge for loans or pay on deposits though it is believed it will increase competition.    However, the Company believes our net interest income should continue to increase in 2018 compared to 2017 primarily due to an increase in average loan balances.

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 nine months of 2018 and $0.1 million for the first nine months of 2017. The provision for loan losses is based upon various factors, including the absolute level of loans, loan growth, the credit quality, and the amount of net charge-offs or recoveries.

Based upon its assessment of the loan portfolio, management adjusts the allowance for loan losses to an amount it believes should be appropriate to adequately cover its estimate of probable losses in the loan portfolio. The Company’s allowance for loan losses as a percentage of total loans was 1.04% at September 30, 2018, compared to 1.05% at December 31, 2017. 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 September 30,				Nine Months ended September 30,
(Dollars in thousands)	2018		2017		2018		2017
Service charges on deposit accounts	$	192	$	191	$	553	$	563
Mortgage lending income		115		254		487		558
Bank-owned life insurance		110		112		324		329
Securities gains, net		—		49		—		51
Other		374		362		1,119		1,096
Total noninterest income	$	791	$	968	$	2,483	$	2,597

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.

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

	Quarter ended September 30,				Nine Months ended September 30,
(Dollars in thousands)	2018		2017		2018		2017
Origination income	$	46	$	190	$	244	$	366
Servicing fees, net		69		64		243		191
Decrease in MSR valuation allowance		—		—		—		1
Total mortgage lending income	$	115	$	254	$	487	$	558

The decrease in mortgage lending income was due to a decrease in the volume of mortgage loans originated and sold as refinance activity declined. The decrease in origination income was partially offset by an increase in servicing fees, net as MSR amortization expense decreased.

Noninterest Expense

	Quarter ended September 30,				Nine Months ended September 30,
(Dollars in thousands)	2018		2017		2018		2017
Salaries and benefits	$	2,673	$	2,516	$	7,959	$	7,289
Net occupancy and equipment		339		385		1,069		1,117
Professional fees		213		276		707		760
FDIC and other regulatory assessments		70		79		248		257
Other		1,455		969		3,495		2,935
Total noninterest expense	$	4,750	$	4,225	$	13,478	$	12,358

The increase in noninterest expense was primarily due to routine annual increases in salaries and benefits expense and a $0.4 million loss during the period related to misappropriation of assets, for which we have filed a claim with our insurance provider.

Income Tax Expense

Income tax expense was $1.6 million and $2.4 million for the first nine months of 2018 and 2017 reflecting an effective tax rate of 19.86% and 28.24%, respectively. The decrease in the effective tax rate was primarily due to the Tax Cuts and Jobs Act, signed into law December 22, 2017, which lowered the Company’s statutory federal tax rate from 34% to 21%.

BALANCE SHEET ANALYSIS

Securities

Securities available-for-sale were $243.3 million at September 30, 2018 compared to $257.7 million at December 31, 2017. This decrease reflects a decrease in the fair value of securities available-for-sale of $7.0 million and a decrease in the amortized cost basis of securities available-for-sale of $7.3 million due to pay-downs and maturities. The decrease in the fair value of securities was primarily due to an increase in long-term interest rates. The average annualized tax-equivalent yields earned on total securities were 2.74% in 2018 and 2.92% in 2017.    This decrease in the tax-equivalent yields was primarily due to a decrease in the Company’s statutory federal tax rate from 34% to 21%.

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Loans

	2018									2017
	Third			Second			First			Fourth			Third
(In thousands)	Quarter			Quarter			Quarter			Quarter			Quarter
Commercial and industrial	$	52,430			52,921			57,877			59,086			50,101
Construction and land development		45,109			42,675			35,910			39,607			47,455
Commercial real estate		250,150			246,129			234,345			239,033			232,380
Residential real estate		103,329			105,705			106,496			106,863			110,159
Consumer installment		9,942			9,824			9,685			9,588			9,877
Total loans		460,960			457,254			444,313			454,177			449,972
Less: unearned income		(633	)		(682	)		(509	)		(526	)		(594)
Loans, net of unearned income	$	460,327			456,572			443,804			453,651			449,378

Total loans, net of unearned income, were $460.3 million at September 30, 2018, compared to $453.7 million at December 31, 2017. The increase of $6.7 million was primarily due to increases in the construction and land development and commercial real estate portfolio segments, which was partially offset by pay-downs in the commercial and industrial and residential real estate loan portfolio segments. Four loan categories represented the majority of the loan portfolio at September 30, 2018: commercial real estate (54%), residential real estate (22%), construction and land development (10%) and commercial and industrial (11%). Approximately 21% of the Company’s commercial real estate loans were classified as owner-occupied at September 30, 2018.

Within the residential real estate portfolio segment, the Company had junior lien mortgages of approximately $12.0 million, or 3% of total loans, at September 30, 2018, compared to $12.6 million, or 3% of total loans, at December 31, 2017. For residential real estate mortgage loans with a consumer purpose, $0.6 million required interest-only payments at September 30, 2018, compared to $2.1 million at December 31, 2017. 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 4.73% in the first nine months of 2018 and 4.70% in the first nine months of 2017.

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 $19.0 million. Furthermore, we have an internal limit for aggregate credit exposure (loans outstanding plus unfunded commitments) to a single borrower of $17.1 million. Our loan policy requires that the Loan Committee of the Board of Directors approve any loan relationships that exceed this internal limit. At September 30, 2018, the Bank had no relationships exceeding these limits.

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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 September 30, 2018 (and related balances at December 31, 2017).

	September 30,		December 31,
(In thousands)	2018		2017
Lessors of 1 to 4 family residential properties	$	46,186	$	47,323
Multi-family residential properties		40,753		52,167
Shopping centers		37,926		39,966
Hotel/motel		35,785		22,384
Office buildings		25,268		24,483

Allowance for Loan Losses

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

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

	2018									2017
	Third			Second			First			Fourth			Third
(Dollars in thousands)	Quarter			Quarter			Quarter			Quarter			Quarter
Balance at beginning of period	$	4,750			4,732			4,757			4,670			4,965
Charge-offs:
Commercial and industrial		—			—			(52	)		—			(449)
Commercial real estate		—			(39	)		—			—			—
Residential real estate		(11	)		—			(4	)		—			(30)
Consumer installment		(7	)		—			(2	)		(23	)		(10)
Total charge-offs		(18	)		(39	)		(58	)		(23	)		(489)
Recoveries		53			57			33			510			194
Net recoveries (charge-offs)		35			18			(25	)		487			(295)
Provision for loan losses		—			—			—			(400	)		—
Ending balance	$	4,785			4,750			4,732			4,757			4,670
as a % of loans		1.04	%		1.04			1.07			1.05			1.04
as a % of nonperforming loans		512	%		430			146			160			161
Net (recoveries) charge-offs as % of average loans (a)		(0.03	)%		(0.02	)		0.02			(0.43	)		0.27

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

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As described under “Critical Accounting Policies,” management assesses the adequacy of the allowance prior to the end of each calendar quarter. The level of the allowance is based upon management’s evaluation of the loan portfolios, past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay (including the timing of future payment), the estimated value of any underlying collateral, composition of the loan portfolio, economic conditions, industry and peer bank loan loss rates, and other pertinent factors. This evaluation is inherently subjective as it requires various material estimates and judgments, including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. The ratio of our allowance for loan losses to total loans outstanding was 1.04% at September 30, 2018, compared to 1.05% at December 31, 2017. 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

The Company had $1.1 million in nonperforming assets at September 30, 2018, compared to $3.0 million in nonperforming assets at December 31, 2017. The decrease in nonperforming assets was primarily due to the resolution of one nonperforming commercial real estate loan with a recorded investment of $1.3 million at December 31, 2017.

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

	2018							2017
	Third			Second		First		Fourth		Third
(Dollars in thousands)	Quarter			Quarter		Quarter		Quarter		Quarter
Nonperforming assets:
Nonaccrual loans	$	934			1,104		3,239		2,972		2,902
Other real estate owned		137			137		—		—		103
Total nonperforming assets	$	1,071			1,241		3,239		2,972		3,005
as a % of loans and other real estate owned		0.23	%		0.27		0.73		0.66		0.67
as a % of total assets		0.13	%		0.15		0.39		0.35		0.36
Nonperforming loans as a % of total loans		0.20	%		0.24		0.73		0.66		0.65
Accruing loans 90 days or more past due	$	—			—		—		—		5

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

	2018						2017
	Third		Second		First		Fourth		Third
(In thousands)	Quarter		Quarter		Quarter		Quarter		Quarter
Nonaccrual loans:
Commercial and industrial	$	—		—		234		31		33
Construction and land development		36		36		—		—		—
Commercial real estate		696		710		2,463		2,188		2,500
Residential real estate		194		347		530		739		353
Consumer installment		8		11		12		14		16
Total nonaccrual loans	$	934		1,104		3,239		2,972		2,902

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 September 30, 2018 and December 31, 2017, respectively, the Company had $0.9 million and $3.0 million in loans on nonaccrual status.

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At September 30, 2018 and December 31, 2017 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 third quarter of 2018 and the previous four quarters.

	2018						2017
	Third		Second		First		Fourth		Third
(In thousands)	Quarter		Quarter		Quarter		Quarter		Quarter
Other real estate owned:
Residential	$	137		137		—		—		103
Total other real estate owned	$	137		137		—		—		103

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 FRB, 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 $5.7 million, or 1.2% of total loans at September 30, 2018, and December 31, 2017, respectively.

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

	2018						2017
	Third		Second		First		Fourth		Third
(In thousands)	Quarter		Quarter		Quarter		Quarter		Quarter
Potential problem loans:
Commercial and industrial	$	96		218		112		119		130
Construction and land development		763		657		450		468		273
Commercial real estate		698		710		725		733		767
Residential real estate		4,025		3,929		3,992		4,253		4,524
Consumer installment		69		51		70		78		96
Total potential problem loans	$	5,651		5,565		5,349		5,651		5,790

At September 30, 2018, 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 third quarter of 2018 and the previous four quarters.

	2018						2017
	Third		Second		First		Fourth		Third
(In thousands)	Quarter		Quarter		Quarter		Quarter		Quarter
Performing loans past due 30 to 89 days:
Commercial and industrial	$	10		108		3		8		64
Construction and land development		241		138		253		—		175
Residential real estate		186		885		573		1,058		513
Consumer installment		17		7		9		57		33
Total	$	454		1,138		838		1,123		785

40

Deposits

Total deposits were $719.3 million at September 30, 2018, compared to $757.7 million at December 31, 2017. Decreases of $43.6 million in interest-bearing deposits were partially offset by increases in noninterest-bearing deposits of $5.3 million during the first nine months of 2018. Of the $43.6 million decrease in interest-bearing deposits, $40.9 million was due to fluctuations in public depositor account balances. Noninterest-bearing deposits were $199.2 million, or 27.7% of total deposits, at September 30, 2018, compared to $193.9 million, or 25.6% of total deposits at December 31, 2017.

The average rate paid on total interest-bearing deposits was 0.67% in the first nine months of 2018 and 0.64% in the first nine months of 2017.

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 September 30, 2018, and at December 31, 2017, respectively. Securities sold under agreements to repurchase totaled $1.9 million at September 30, 2018 compared to $2.7 million at December 31, 2017.

The average rate paid on short-term borrowings was 0.74% in the first nine months of 2018 compared to 0.52% in the first nine months of 2017.

Long-term debt includes junior subordinated debentures related to trust preferred securities. The Company had $3.2 million in junior subordinated debentures related to trust preferred securities outstanding at December 31, 2017. On April 27, 2018, the Company formally redeemed all of the issued and outstanding junior subordinated debentures, including accrued and unpaid distributions, and the Trust formally redeemed all of the issued and outstanding trust preferred securities and common securities at par, including accrued and unpaid distributions. The junior subordinated debentures would have matured on December 31, 2033 and were redeemable since December 31, 2008.

The average rate paid on long-term debt was 4.50% in the first nine months of 2018 and 3.87% in the first nine months of 2017.

CAPITAL ADEQUACY

The Company’s consolidated stockholders’ equity was $85.5 million and $86.9 million as of September 30, 2018 and December 31, 2017, respectively. The decrease from December 31, 2017 was primarily driven by an other comprehensive loss due to the change in unrealized losses on securities available-for-sale, net-of-tax, of $5.3 million and cash dividends paid of $2.6 million, which were partially offset by net earnings of $6.4 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 is subject to a three year phase-in period that began on January 1, 2016 and will be fully phased-in on January 1, 2019 at 2.5%. The required phase-in capital conservation buffer during 2018 is 1.875%. A banking organization with a conservation buffer of less than the required amount will be subject to limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers. At September 30, 2018, the Bank’s ratio was sufficient to meet the fully phased-in conservation buffer.

The Bank’s tier 1 leverage ratio was 11.01%, CET1 risk-based capital ratio was 16.31%, tier 1 risk-based capital ratio was 16.31%, and total risk-based capital ratio was 17.21% at September 30, 2018. 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 9.21% at September 30, 2018.

41

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 September 30, 2018, 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 September 30, 2018, our EVE model indicated that we were in compliance with the policy guidelines noted above.

42

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 September 30, 2018 and December 31, 2017, 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. On April 27, 2018, the Trust formally redeemed all of its issued and outstanding trust preferred securities at par, including accrued and unpaid distributions. The additional amount paid on April 27, 2018 for trust preferred securities not previously purchased by the Company was approximately $3.0 million, including accrued and unpaid distributions. All junior subordinated debentures related to the Trust were redeemed, including accrued and unpaid distributions, and retired as a result of the action. The Company now has no outstanding trust preferred securities or junior subordinated debentures, and the Trust has been dissolved.

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 September 30, 2018, the Bank had a remaining available line of credit with the FHLB of $239.5 million. At September 30, 2018, 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.

43

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

At September 30, 2018, the Bank had outstanding standby letters of credit of $7.1 million and unfunded loan commitments outstanding of $61.1 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.

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 September 30, 2018, the unpaid principal balance of residential mortgage loans, which we have originated and sold, but retained the servicing rights was $296.1 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 required to repurchase $53 thousand in loans during the first nine months of 2018 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 September 30, 2018.

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 September 30, 2018, 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.

44

Changes to Contractual Obligations

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

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

Effects of Inflation and Changing Prices

The Consolidated Financial Statements and related consolidated financial data presented herein have been prepared in accordance with U.S. GAAP and practices within the banking industry which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution’s performance than the effects of general levels of inflation.

CURRENT ACCOUNTING DEVELOPMENTS

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

• ASU 2016-02, Leases;

• ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments; 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 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 new guidance is effective for annual and interim reporting periods beginning after December 15, 2018. The amendment should be applied at the beginning of the earliest period presented using a modified retrospective approach with earlier application permitted as of the beginning of an interim or annual reporting period. The Company is currently evaluating the impact this ASU will have on its consolidated financial statements.

ASU 2016-13, Financial Instruments – 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.

45

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. For public entities, the guidance is effective for fiscal years beginning after December 15, 2018, and interim periods therein; however, early adoption by all entities is permitted. The Company is currently evaluating this ASU to determine whether its provisions will enhance the Company’s ability to employ risk management strategies, while improving the transparency and understanding of those strategies for financial statement users.

46

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.

	2018						2017
	Third		Second		First		Fourth		Third
(in thousands)	Quarter		Quarter		Quarter		Quarter		Quarter
Net interest income (GAAP)	$	6,422		6,317		6,284		6,275		6,261
Tax-equivalent adjustment		153		152		156		300		304
Net interest income (Tax-equivalent)	$	6,575		6,469		6,440		6,575		6,565

	Nine Months ended September 30,
(In thousands)	2018		2017
Net interest income (GAAP)	$	19,023		18,251
Tax-equivalent adjustment		461		905
Net interest income (Tax-equivalent)	$	19,484		19,156

47

Table 2 - Selected Quarterly Financial Data

	2018							2017
	Third			Second		First		Fourth		Third
(Dollars in thousands, except per share amounts)	Quarter			Quarter		Quarter		Quarter		Quarter
Results of Operations
Net interest income (a)	$	6,575			6,469		6,440		6,575		6,565
Less: tax-equivalent adjustment		153			152		156		300		304
Net interest income (GAAP)		6,422			6,317		6,284		6,275		6,261
Noninterest income		791			839		853		844		968
Total revenue		7,213			7,156		7,137		7,119		7,229
Provision for loan losses		—			—		—		(400)		—
Noninterest expense		4,750			4,326		4,402		4,426		4,225
Income tax expense		488			566		540		1,268		868
Net earnings	$	1,975			2,264		2,195		1,825		2,136
Per share data:
Basic and diluted net earnings	$	0.54			0.62		0.60		0.50		0.59
Cash dividends declared		0.24			0.24		0.24		0.23		0.23
Weighted average shares outstanding:
Basic and diluted		3,643,834			3,643,731		3,643,683		3,643,668		3,643,659
Shares outstanding, at period end		3,643,868			3,643,793		3,643,698		3,643,668		3,643,668
Book value	$	23.45			23.53		23.36		23.85		23.75
Common stock price
High	$	53.50			50.99		39.25		40.25		37.71
Low		38.31			37.40		35.50		33.25		34.82
Period end:		38.32			49.61		39.06		38.90		35.00
To earnings ratio		16.96	x		21.48		17.44		18.09		15.70
To book value		163	%		211		167		163		147
Performance ratios:
Return on average equity		9.08	%		10.48		9.95		8.31		9.87
Return on average assets		0.97	%		1.10		1.04		0.89		1.03
Dividend payout ratio		44.44	%		38.71		40.00		46.00		38.98
Asset Quality:
Allowance for loan losses as a % of:
Loans		1.04	%		1.04		1.07		1.05		1.04
Nonperforming loans		512	%		430		146		160		161
Nonperforming assets as a % of:
Loans and foreclosed properties		0.23	%		0.27		0.73		0.66		0.67
Total assets		0.13	%		0.15		0.39		0.35		0.36
Nonperforming loans as a % of total loans		0.20	%		0.24		0.73		0.66		0.65
Annualized net (recoveries) charge-offs as a % of average loans		(0.03)	%		(0.02)		0.02		(0.43)		0.27
Capital Adequacy (c):
CET 1 risk-based capital ratio		16.31	%		16.17		17.10		16.74		16.47
Tier 1 risk-based capital ratio		16.31	%		16.17		17.10		16.74		16.47
Total risk-based capital ratio		17.21	%		17.07		18.03		17.66		17.37
Tier 1 leverage ratio		11.01	%		10.80		10.77		10.82		10.61
Other financial data:
Net interest margin (a)		3.41	%		3.36		3.29		3.37		3.32
Effective income tax rate		19.81	%		20.00		19.74		41.00		28.89
Efficiency ratio (b)		64.49	%		59.20		60.36		59.66		56.09
Selected average balances:
Securities	$	248,684			255,877		265,626		262,171		273,280
Loans, net of unearned income		457,969			448,493		451,347		453,744		443,639
Total assets		813,531			820,706		841,820		823,864		831,097
Total deposits		721,566			728,457		744,365		726,945		735,372
Long-term debt		—			919		3,217		3,217		3,217
Total stockholders’ equity		86,958			86,420		88,281		87,800		86,543
Selected period end balances:
Securities	$	243,336			251,320		259,177		257,697		265,171
Loans, net of unearned income		460,327			456,572		443,804		453,651		449,378
Allowance for loan losses		4,785			4,750		4,732		4,757		4,670
Total assets		808,951			811,791		830,721		853,381		828,546
Total deposits		719,306			721,005		737,332		757,659		732,648
Long-term debt		—			—		3,217		3,217		3,217
Total stockholders’ equity		85,459			85,748		85,108		86,906		86,538

(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.

48

Table 3 - Selected Financial Data

	Nine Months ended September 30,
(Dollars in thousands, except per share amounts)	2018			2017
Results of Operations
Net interest income (a)	$	19,484			19,156
Less: tax-equivalent adjustment		461			905
Net interest income (GAAP)		19,023			18,251
Noninterest income		2,483			2,597
Total revenue		21,506			20,848
Provision for loan losses		—			100
Noninterest expense		13,478			12,358
Income tax expense		1,594			2,369
Net earnings	$	6,434			6,021
Per share data:
Basic and diluted net earnings	$	1.77			1.65
Cash dividends declared		0.72			0.69
Weighted average shares outstanding:
Basic and diluted		3,643,750			3,643,598
Shares outstanding, at period end		3,643,868			3,643,668
Book value	$	23.45			23.75
Common stock price
High	$	53.50			37.79
Low		35.50			30.75
Period end		38.32			35.00
To earnings ratio		16.96	x		15.70
To book value		163	%		147
Performance ratios:
Return on average equity		9.84	%		9.47
Return on average assets		1.04	%		0.96
Dividend payout ratio		40.68	%		41.82
Asset Quality:
Allowance for loan losses as a % of:
Loans		1.04	%		1.04
Nonperforming loans		512	%		161
Nonperforming assets as a % of:
Loans and other real estate owned		0.23	%		0.67
Total assets		0.13	%		0.36
Nonperforming loans as a % of total loans		0.20	%		0.65
Annualized net (recoveries) charge-offs as a % of average loans		(0.01	)%		0.02
Capital Adequacy (c):
CET 1 risk-based capital ratio		16.31	%		16.47
Tier 1 risk-based capital ratio		16.31	%		16.47
Total risk-based capital ratio		17.21	%		17.37
Tier 1 leverage ratio		11.01	%		10.61
Other financial data:
Net interest margin (a)		3.36	%		3.26
Effective income tax rate		19.86	%		28.24
Efficiency ratio (b)		61.36	%		56.81
Selected average balances:
Securities	$	256,667			268,612
Loans, net of unearned income		452,627			436,740
Total assets		825,249			832,637
Total deposits		731,411			738,255
Long-term debt		2,483			3,217
Total stockholders’ equity		87,183			84,780
Selected period end balances:
Securities	$	243,336			265,171
Loans, net of unearned income		460,327			449,378
Allowance for loan losses		4,785			4,670
Total assets		808,951			828,546
Total deposits		719,306			732,648
Long-term debt		—			3,217
Total stockholders’ equity		85,459			86,538

(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.

49

Table 4 - Average Balances and Net Interest Income Analysis

		Quarter ended September 30,
		2018							2017
(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)	$		459,423	$	5,511		4.76%	$		444,893	$	5,296		4.72%
Securities - taxable			177,592		974		2.18%			202,690		1,071		2.10%
Securities - tax-exempt (2)			71,092		730		4.07%			70,590		894		5.02%
Total securities			248,684		1,704		2.72%			273,280		1,965		2.85%
Federal funds sold			32,374		159		1.95%			29,937		94		1.25%
Interest bearing bank deposits			23,854		124		2.06%			35,615		121		1.35%
Total interest-earning assets			764,335	$	7,498		3.89%			783,725	$	7,476		3.78%
Cash and due from banks			13,422							13,131
Other assets			35,774							34,241
Total assets	$		813,531					$		831,097
Interest-bearing liabilities:
Deposits:
NOW	$		113,590	$	101		0.35%	$		125,512	$	62		0.20%
Savings and money market			225,930		232		0.41%			233,944		223		0.38%
Time deposits			182,860		587		1.27%			195,773		587		1.19%
Total interest-bearing deposits			522,380		920		0.70%			555,229		872		0.62%
Short-term borrowings			2,640		3		0.49%			3,582		5		0.55%
Long-term debt			—		—		—			3,217		34		4.19%
Total interest-bearing liabilities			525,020	$	923		0.70%			562,028	$	911		0.64%
Noninterest-bearing deposits			199,186							180,144
Other liabilities			2,367							2,382
Stockholders’ equity			86,958							86,543
Total liabilities and stockholders’ equity	$		813,531					$		831,097
Net interest income and margin (tax-equivalent)				$	6,575		3.41%				$	6,565		3.32%

(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% for 2018 and 34% for 2017.

50

Table 5 - Average Balances and Net Interest Income Analysis

		Nine Months ended September 30,
		2018							2017
(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)	$		453,881	$	16,049		4.73%	$		437,707	$	15,398		4.70%
Securities - taxable			185,448		3,063		2.21%			198,842		3,204		2.15%
Securities - tax-exempt (2)			71,219		2,195		4.12%			69,770		2,663		5.10%
Total securities			256,667		5,258		2.74%			268,612		5,867		2.92%
Federal funds sold			30,092		395		1.75%			33,430		250		1.00%
Interest bearing bank deposits			35,729		480		1.80%			45,310		348		1.03%
Total interest-earning assets			776,369	$	22,182		3.82%			785,059	$	21,863		3.72%
Cash and due from banks			13,580							13,399
Other assets			35,300							34,179
Total assets	$		825,249					$		832,637
Interest-bearing liabilities:
Deposits:
NOW	$		129,882	$	309		0.32%	$		125,968	$	179		0.19%
Savings and money market			222,013		628		0.38%			232,076		644		0.37%
Time deposits			184,669		1,700		1.23%			200,690		1,777		1.18%
Total interest-bearing deposits			536,564		2,637		0.66%			558,734		2,600		0.62%
Short-term borrowings			2,805		15		0.74%			3,626		14		0.52%
Long-term debt			1,367		46		4.47%			3,217		93		3.87%
Total interest-bearing liabilities			540,736	$	2,698		0.67%			565,577	$	2,707		0.64%
Noninterest-bearing deposits			194,847							179,521
Other liabilities			2,483							2,759
Stockholders’ equity			87,183							84,780
Total liabilities and stockholders’ equity	$		825,249					$		832,637
Net interest income and margin (tax-equivalent)				$	19,484		3.36%				$	19,156		3.26%

(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% for 2018 and 34% for 2017.

51

Table 6 - Loan Portfolio Composition

		2018						2017
		Third			Second			First			Fourth			Third
(In thousands)		Quarter			Quarter			Quarter			Quarter			Quarter
Commercial and industrial	$		52,430			52,921			57,877			59,086			50,101
Construction and land development			45,109			42,675			35,910			39,607			47,455
Commercial real estate			250,150			246,129			234,345			239,033			232,380
Residential real estate			103,329			105,705			106,496			106,863			110,159
Consumer installment			9,942			9,824			9,685			9,588			9,877
Total loans			460,960			457,254			444,313			454,177			449,972
Less: unearned income			(633	)		(682	)		(509	)		(526	)		(594)
Loans, net of unearned income			460,327			456,572			443,804			453,651			449,378
Less: allowance for loan losses			(4,785	)		(4,750	)		(4,732	)		(4,757	)		(4,670)
Loans, net	$		455,542			451,822			439,072			448,894			444,708

52

Table 7 - Allowance for Loan Losses and Nonperforming Assets

			2018									2017
			Third			Second			First			Fourth			Third
(Dollars in thousands)			Quarter			Quarter			Quarter			Quarter			Quarter
Allowance for loan losses:
Balance at beginning of period	$			4,750			4,732			4,757			4,670			4,965
Charge-offs:
Commercial and industrial				—			—			(52	)		—			(449)
Commercial real estate				—			(39	)		—			—			—
Residential real estate				(11	)		—			(4	)		—			(30)
Consumer installment				(7	)		—			(2	)		(23	)		(10)
Total charge-offs				(18	)		(39	)		(58	)		(23	)		(489)
Recoveries				53			57			33			510			194
Net (charge-offs) recoveries				35			18			(25	)		487			(295)
Provision for loan losses				—			—			—			(400	)		—
Ending balance		$		4,785			4,750			4,732			4,757			4,670
as a % of loans				1.04	%		1.04			1.07			1.05			1.04
as a % of nonperforming loans				512	%		430			146			160			161
Net (recoveries) charge-offs as % of avg. loans (a)				(0.03	)%		(0.02	)		0.02			(0.43	)		0.27
Nonperforming assets:
Nonaccrual loans		$		934			1,104			3,239			2,972			2,902
Other real estate owned				137			137			—			—			103
Total nonperforming assets		$		1,071			1,241			3,239			2,972			3,005
as a % of loans and foreclosed properties				0.23	%		0.27			0.73			0.66			0.67
as a % of total assets				0.13	%		0.15			0.39			0.35			0.36
Nonperforming loans as a % of total loans				0.20	%		0.24			0.73			0.66			0.65
Accruing loans 90 days or more past due		$		—			—			—			—			5

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

53

Table 8 - Allocation of Allowance for Loan Losses

		2018															2017
		Third Quarter					Second Quarter					First Quarter					Fourth Quarter					Third Quarter
(Dollars in thousands)		Amount		%*			Amount		%*			Amount		%*			Amount		%*			Amount		%*
Commercial and industrial	$		544		11.4	$		600		11.6	$		724		13.0	$		653		13.0	$		504		11.1
Construction and land development			836		9.8			787		9.3			670		8.1			734		8.7			851		10.5
Commercial real estate			2,241		54.2			2,197		53.9			2,119		52.7			2,126		52.7			2,061		51.7
Residential real estate			997		22.4			1,017		23.1			1,053		24.0			1,071		23.5			1,077		24.5
Consumer installment			167		2.2			149		2.1			166		2.2			173		2.1			177		2.2
Total allowance for loan losses	$		4,785			$		4,750			$		4,732			$		4,757			$		4,670

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

54

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

(Dollars in thousands)	September 30, 2018
Maturity of:
3 months or less	$	21,776
Over 3 months through 6 months		21,961
Over 6 months through 12 months		27,945
Over 12 months		47,255
Total CDs and other time deposits of $100,000 or more	$	118,937

55

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, 2017.

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, 2017, 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

Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

56

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. **
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.

*** 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.

57

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:            November 2, 2018	By:          /s/ Robert W. Dumas
	Robert W. Dumas
	President and Chief Executive Officer
Date:            November 2, 2018	By:          /s/ David A. Hedges
	David A. Hedges
	EVP and Chief Financial Officer

EX-31.1

AUBURN NATIONAL BANCORPORATION, INC AND SUBSIDIARIES

EXHIBIT 31.1

CERTIFICATION PURSUANT TO

RULE 13a-14 OF THE SECURITIES EXCHANGE ACT OF 1934,

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

CERTIFICATION

I, Robert W. Dumas, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Auburn National Bancorporation, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 2, 2018

/s/ Robert W. Dumas

President and Chief Executive Officer

EX-31.2

AUBURN NATIONAL BANCORPORATION, INC AND SUBSIDIARIES

EXHIBIT 31.2

CERTIFICATION PURSUANT TO

RULE 13a-14 OF THE SECURITIES EXCHANGE ACT OF 1934,

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

CERTIFICATION

I, David A. Hedges, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Auburn National Bancorporation, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 2, 2018

/s/ David A. Hedges

EVP and Chief Financial Officer

EX-32.1

AUBURN NATIONAL BANCORPORATION, INC AND SUBSIDIARIES

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Auburn National Bancorporation, Inc. (the “Company”) on Form 10-Q for the period ending September 30, 2018, as filed with the Securities and Exchange Commission as of the date hereof (the “Report”), I, Robert W. Dumas, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: November 2, 2018

/s/ Robert W. Dumas

Robert W. Dumas

President and Chief Executive Officer

EX-32.2

AUBURN NATIONAL BANCORPORATION, INC AND SUBSIDIARIES

EXHIBIT 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Auburn National Bancorporation, Inc. (the “Company”) on Form 10-Q for the period ending September 30, 2018, as filed with the Securities and Exchange Commission as of the date hereof (the “Report”), I, David A. Hedges, Executive Vice President, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: November 2, 2018

/s/ David A. Hedges

David A. Hedges

EVP and Chief Financial Officer

XML

Document and Entity Information - shares	9 Months Ended
	Sep. 30, 2018	Nov. 01, 2018
Document And Entity Information [Abstract]
Current fiscal year end date	--12-31
Entity central index key	0000750574
Entity current reporting status	Yes
Entity filer category	Accelerated Filer
Entity registrant name	Auburn National Bancorporation, Inc
Trading Symbol	AUBN
Entity voluntary filers	No
Entity well known seasoned issuer	No
Entity common stock shares outstanding		3,643,868
Amendment flag	false
Document Type	10-Q
Document Year Focus	2018
Document Period Focus	Q3
Document Period End Date	Sep. 30, 2018

XML

Consolidated Balance Sheets - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017
Assets:
Cash and due from banks	$ 14,915	$ 12,942
Federal funds sold	36,457	41,540
Interest bearing bank deposits	15,790	51,046
Cash and cash equivalents	67,162	105,528
Securities available-for-sale	243,336	257,697
Loans held for sale	1,548	1,922
Loans, net of unearned income	460,327	453,651
Allowance for loan losses	(4,785)	(4,757)
Loans, net	455,542	448,894
Premises and equipment, net	13,638	13,791
Bank-owned life insurance	18,654	18,330
Other assets	9,071	7,219
Total assets	808,951	853,381
Deposits:
Noninterest-bearing	199,179	193,917
Interest-bearing	520,127	563,742
Total deposits	719,306	757,659
Federal funds purchased and securities sold under agreements to repurchase	1,888	2,658
Long-term debt	0	3,217
Accrued expenses and other liabilities	2,298	2,941
Total liabilities	723,492	766,475
Stockholders' equity:
Preferred stock	0	0
Common stock	39	39
Additional paid-in capital	3,779	3,771
Retained earnings	94,109	90,299
Accumulated other comprehensive income (loss), net	(5,833)	(566)
Less treasury stock, at cost	(6,635)	(6,637)
Total stockholders' equity	85,459	86,906
Total liabilities and stockholders' equity	$ 808,951	$ 853,381

XML

Consolidated Balance Sheets (Parentheticals) - $ / shares	Sep. 30, 2018	Dec. 31, 2017
Statement of Financial Position [Abstract]
Preferred stock par value	$ 0.01	$ 0.01
Authorized shares, preferred	200,000	200,000
Issued shares, preferred	0	0
Common stock par value	$ 0.01	$ 0.01
Authorized shares, common	8,500,000	8,500,000
Issued shares, common	3,957,135	3,957,135
Treasury stock, shares held	313,267	313,467

XML

Consolidated Statements of Earnings - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Interest income:
Loans, including fees	$ 5,511	$ 5,296	$ 16,049	$ 15,398
Securities - Taxable	974	1,071	3,063	3,204
Securities - Tax-exempt	577	590	1,734	1,758
Federal funds sold and interest bearing bank deposits	283	215	875	598
Total interest income	7,345	7,172	21,721	20,958
Interest expense:
Deposits	920	872	2,637	2,600
Short-term borrowings	3	5	15	14
Long-term debt interest expense	0	34	46	93
Total interest expense	923	911	2,698	2,707
Net interest income	6,422	6,261	19,023	18,251
Provision for loan losses	0	0	0	100
Net interest income after provision for loan losses	6,422	6,261	19,023	18,151
Noninterest income:
Service charges on deposit accounts	192	191	553	563
Mortgage lending	115	254	487	558
Bank-owned life insurance income	110	112	324	329
Other noninterest income	374	362	1,119	1,096
Securities gains, net	0	49	0	51
Total noninterest income	791	968	2,483	2,597
Noninterest expense:
Salaries and benefits	2,673	2,516	7,959	7,289
Net occupancy and equipment	339	385	1,069	1,117
Professional fees	213	276	707	760
FDIC and other regulatory assessments	70	79	248	257
Other noninterest expense	1,455	969	3,495	2,935
Total noninterest expense	4,750	4,225	13,478	12,358
Earnings before income taxes	2,463	3,004	8,028	8,390
Income tax expense	488	868	1,594	2,369
Net earnings	$ 1,975	$ 2,136	$ 6,434	$ 6,021
Net earnings per share:
Basic and diluted earnings per share	$ 0.54	$ 0.59	$ 1.77	$ 1.65
Weighted average shares outstanding:
Basic and diluted weighted average shares outstanding	3,643,834	3,643,659	3,643,750	3,643,598

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Consolidated Statements of Comprehensive Income - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Statements of Comprehensive Income [Abstract]
Net earnings	$ 1,975	$ 2,136	$ 6,434	$ 6,021
Other comprehensive (loss) income, net of tax:
Unrealized net holding (loss) gain on securities	(1,393)	171	(5,267)	882
Reclassification adjustment for net gain on securities recognized in net earnings	0	(31)	0	(32)
Other comprehensive (loss) income	(1,393)	140	(5,267)	850
Comprehensive income	$ 582	$ 2,276	$ 1,167	$ 6,871

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Consolidated Statements of Stockholders' Equity - USD ($) $ in Thousands	Total	Common Stock Member	Additional Paid In Capital Member	Retained Earnings Member	Accumulated Other Comprehensive Income Member	Treasury Stock Member
Balance, shares at Dec. 31, 2016	3,957,135
Balance, Beg at Dec. 31, 2016	$ 82,177	$ 39	$ 3,767	$ 85,716	$ (708)	$ (6,637)
Net earnings	6,021	0	0	6,021	0	0
Other Comprehensive Income (Loss), Net Of Tax	850	0	0	0	850	0
Cash dividends paid	(2,514)	0	0	(2,514)	0	0
Sale of treasury stock	4	0	4	0	0	0
Balance, End at Sep. 30, 2017	$ 86,538	39	3,771	89,223	142	(6,637)
Balance, shares at Sep. 30, 2017	3,957,135
Balance, shares at Dec. 31, 2017	3,957,135
Balance, Beg at Dec. 31, 2017	$ 86,906	39	3,771	90,299	(566)	(6,637)
Net earnings	6,434	0	0	6,434	0	0
Other Comprehensive Income (Loss), Net Of Tax	(5,267)	0	0	0	(5,267)	0
Cash dividends paid	(2,624)	0	0	(2,624)	0	0
Sale of treasury stock	10	0	8	0	0	2
Balance, End at Sep. 30, 2018	$ 85,459	$ 39	$ 3,779	$ 94,109	$ (5,833)	$ (6,635)
Balance, shares at Sep. 30, 2018	3,957,135

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Consolidated Statements of Stockholders' Equity (Parentheticals) - $ / shares	9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017
Statement of Stockholders' Equity (Parentheticals)
Cash dividends paid per share	$ 0.72	$ 0.69
Treasury shares sold	200	145

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Consolidated Statements of Cash Flows - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017
Cash flows from operating activities:
Net earnings	$ 6,434	$ 6,021
Adjustments to reconcile net earnings to net cash provided by operating activties:
Provision for loan losses	0	100
Depreciation and amortization	712	772
Premium amortization and discount accretion, net	1,572	1,612
Net gain on securities available for sale	0	(51)
Net gain on sale of loans held for sale	(244)	(366)
Decrease in MSR valuation allowance	0	(1)
Net gain on other real estate owned	0	(11)
Loans originated for sale	(23,946)	(21,957)
Proceeds from sale of loans	24,389	22,731
Increase in cash surrender value of bank owned life insurance	(324)	(329)
Net (increase) decrease in other assets	(143)	382
Net decrease in accrued expenses and other liabilities	(633)	(1,466)
Net cash provided by operating activities	7,817	7,437
Cash flows from investing activities:
Proceeds from sales of securities available-for-sale	0	10,374
Proceeds from prepayments and maturities of securities available-for-sale	25,046	25,909
Purchase of securities available-for-sale	(19,290)	(58,097)
Increase in loans, net	(8,138)	(18,506)
Net purchases of premises and equipment	(170)	(1,549)
Increase in FHLB stock	(20)	(13)
Proceeds from sale of other real estate owned	1,353	60
Net cash used in investing activities	(1,219)	(41,822)
Cash flows from financing activities:
Net increase in noninterest-bearing deposits	5,262	2,862
Net decrease in interest-bearing deposits	(43,615)	(9,357)
Net (decrease) increase in federal funds purchased and securities sold under agreements to repurchase	(770)	207
Repayments or retirement of long-term debt	(3,217)	0
Dividends paid	(2,624)	(2,514)
Net cash used in financing activities	(44,964)	(8,802)
Net change in cash and cash equivalents	(38,366)	(43,187)
Cash and cash equivalents at beginning of period	105,528	121,277
Cash and cash equivalents at end of period	67,162	78,090
Cash paid during the period for:
Interest	2,717	2,791
Income taxes	2,228	2,674
Supplemental disclosure of non-cash transactions:
Real estate acquired through foreclosure	$ 1,490	$ 0

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Summary of Significant Accounting Policies

9 Months Ended

Sep. 30, 2018

Summary of Signficant Accounting Policies

Summary of Significant Accounting Policies Text Block

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 31,2017.

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.

Subsequent Events

The Company has evaluated the effects of events and transactions through the date of this filing that have occurred subsequent to September 30,2018. 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 nine months of 2018, the Company adopted new guidance related to the following Accounting Standards Updates (“Updates” or “ASUs”):

•

ASU 2014-09, Revenue from Contracts with Customers;

•

ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities;

•

ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments; and

•

ASU 2016-18, Restricted Cash

Information about these pronouncements is described in more detail below.

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

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

• Gains on sales of other real estate — ASU 2014-09 creates Topic 610-20, under which a gain on sale should be recognized when a contract for sale exists and control of the asset has been transferred to the buyer. Topic 606 lists several criteria required to conclude that a contract for sale exists, including a determination that the institution will collect substantially all of the consideration to which it is entitled. This presents a key difference between the prior and new guidance related to the recognition of the gain when the institution finances the sale of the property. Rather than basing recognition on the amount of the buyer's initial investment, which was the primary consideration under prior guidance, the analysis is now based on various factors including not only the loan to value, but also the credit quality of the borrower, the structure of the loan, and any other factors that may affect collectability. While these differences may affect the decision to recognize or defer gains on sales of other real estate in circumstances where the Company has financed the sale, the effects would not be material to its consolidated financial statements.

ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, enhances the reporting model for financial instruments to provide users of financial statements with more decision-useful information. The ASU addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Some of the amendments include the following: (1) Require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; (2) Simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (3) Require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (4) Require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value; among others. For public business entities, the amendments of this ASU are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The adoption of this ASU on January 1, 2018 did not have a material impact on the Company’s Consolidated Financial Statements. In accordance with (3) above, the Company measured the fair value of its loan portfolio as of September 30,2018 using an exit price notion and will continue to do so going forward (see Note 7).

ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, provides guidance on eight specific cash flow issues where current GAAP is either unclear or does not include specific guidance on classification in the statement of cash flows. The new guidance is effective for annual and interim reporting periods in fiscal years beginning after December 15, 2017. The Company adopted ASU No. 2016-15 on January 1, 2018. ASU No. 2016-15 did not have a material impact on the Company’s Consolidated Financial Statements.

ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, amends guidance on how the statement of cash flows presents the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Under the new guidance, amounts generally described as restricted cash and restricted cash equivalents are included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in this Update do not provide a definition of restricted cash or restricted cash equivalents. The new guidance is effective for public business entities for annual and interim reporting periods in fiscal years beginning after December 15, 2017. The Company adopted ASU No. 2016-18 on January 1, 2018. ASU No. 2016-18 did not have a material impact on the Company’s Consolidated Financial Statements.

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Basic and Diluted Earnings Per Share

9 Months Ended

Sep. 30, 2018

Basic and Diluted Earnings Per Share [Abstract]

Basic and Diluted Earnings Per Share Text Block

NOTE 2: BASIC AND DILUTED NET EARNINGS PER SHARE

Basic net earnings per share is computed by dividing net earnings by the weighted average common shares outstanding for the respective period. Diluted net earnings per share reflect the potential dilution that could occur upon exercise of securities or other rights for, or convertible into, shares of the Company’s common stock. At September 30,2018 and 2017, 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 September 30,				Nine Months ended September 30,
(In thousands, except share and per share data)				2018		2017		2018		2017
Basic and diluted:
	Net earnings		$	1,975	$	2,136	$	6,434	$	6,021
	Weighted average common shares outstanding			3,643,834		3,643,659		3,643,750		3,643,598
		Net earnings per share	$	0.54	$	0.59	$	1.77	$	1.65

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Securities

9 Months Ended

Sep. 30, 2018

Investments debt and equity securities [Abstract]

Investments In Debt And Marketable Equity Securities And Certain Trading Assets Disclosure Text Block

NOTE 3: SECURITIES

At September 30,2018 and December 31,2017, 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 maturityat September 30,2018 and December 31,2017, 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
September 30, 2018
Agency obligations (a)		$	9,453	19,445	21,591	—	50,489	—	1,899	$	52,388
Agency RMBS (a)			—	—	8,893	113,147	122,040	46	5,230		127,224
State and political subdivisions			—	3,391	8,000	59,416	70,807	461	1,166		71,512
	Total available-for-sale	$	9,453	22,836	38,484	172,563	243,336	507	8,295	$	251,124

December 31, 2017
Agency obligations (a)		$	—	29,253	23,809	—	53,062	79	904	$	53,887
Agency RMBS (a)			—	—	11,201	121,871	133,072	330	1,639		134,381
State and political subdivisions			—	2,564	9,999	59,000	71,563	1,616	237		70,184
	Total available-for-sale	$	—	31,817	45,009	180,871	257,697	2,025	2,780	$	258,452
(a) Includes securities issued by U.S. government agencies or government sponsored entities.

Securities with aggregate fair values of $138.9 million and $149.4 million at September 30,2018 and December 31,2017, 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 September 30, 2018 and December 31, 2017, 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 September 30,2018 and December 31,2017, 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
			Fair	Unrealized	Fair	Unrealized		Fair	Unrealized
(Dollars in thousands)			Value	Losses	Value	Losses		Value	Losses
September 30, 2018:
Agency obligations		$	25,953	418	24,536	1,481	$	50,489	1,899
Agency RMBS			51,338	1,622	65,789	3,608		117,127	5,230
State and political subdivisions			27,714	579	10,558	587		38,272	1,166
	Total	$	105,005	2,619	100,883	5,676	$	205,888	8,295

December 31, 2017:
Agency obligations		$	14,381	99	20,353	805	$	34,734	904
Agency RMBS			53,440	363	50,729	1,276		104,169	1,639
State and political subdivisions			2,009	22	10,155	215		12,164	237
	Total	$	69,830	484	81,237	2,296	$	151,067	2,780

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.

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 September 30,2018 and December 31,2017, 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 nine months endedSeptember 30,2018 and 2017, respectively.

Realized Gains and Losses
The following table presents the gross realized gains and losses on sales of securities.
			Quarter ended September 30,			Nine Months ended September 30,
(Dollars in thousands)			2018	2017		2018	2017
Gross realized gains		$	—	49	$	—	51
	Realized gains, net	$	—	49	$	—	51

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Loan and Allowance for Loan Losses

9 Months Ended

Sep. 30, 2018

Loans And Leases Receivable Disclosure [Abstract]

Loans and leases receivable disclosure [Text Block]

NOTE 4: LOANS AND ALLOWANCE FOR LOAN LOSSES

				September 30,		December 31,
(In thousands)				2018		2017
Commercial and industrial			$	52,430	$	59,086
Construction and land development				45,109		39,607
Commercial real estate:
	Owner occupied			51,846		44,192
	Multi-family			40,753		52,167
	Other			157,551		142,674
		Total commercial real estate		250,150		239,033
Residential real estate:
	Consumer mortgage			57,143		59,540
	Investment property			46,186		47,323
		Total residential real estate		103,329		106,863
Consumer installment				9,942		9,588
		Total loans		460,960		454,177
Less: unearned income				(633)		(526)
		Loans, net of unearned income	$	460,327	$	453,651

Loans secured by real estate were approximately 86.5% of the Company’s total loan portfolio at September 30,2018. At September 30,2018, 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.

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 propertyvalue.

• 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.

The following is a summary of current, accruing past due, and nonaccrual loans by portfolio segment and class as of September 30,2018 and December 31,2017.

					Accruing	Accruing	Total
					30-89 Days	Greater than	Accruing	Non-		Total
(In thousands)			Current		Past Due	90 days	Loans	Accrual		Loans
September 30, 2018:
Commercial and industrial			$	52,420	10	—	52,430	—	$	52,430
Construction and land development				44,832	241	—	45,073	36		45,109
Commercial real estate:
	Owner occupied			51,846	—	—	51,846	—		51,846
	Multi-family			40,753	—	—	40,753	—		40,753
	Other			156,855	—	—	156,855	696		157,551
		Total commercial real estate		249,454	—	—	249,454	696		250,150
Residential real estate:
	Consumer mortgage			56,889	60	—	56,949	194		57,143
	Investment property			46,060	126	—	46,186	-		46,186
		Total residential real estate		102,949	186	—	103,135	194		103,329
Consumer installment				9,917	17	—	9,934	8		9,942
		Total	$	459,572	454	—	460,026	934	$	460,960

December 31, 2017:
Commercial and industrial			$	59,047	8	—	59,055	31	$	59,086
Construction and land development				39,607	—	—	39,607	—		39,607
Commercial real estate:
	Owner occupied			44,192	—	—	44,192	—		44,192
	Multi-family			52,167	—	—	52,167	—		52,167
	Other			140,486	—	—	140,486	2,188		142,674
		Total commercial real estate		236,845	—	—	236,845	2,188		239,033
Residential real estate:
	Consumer mortgage			58,195	746	—	58,941	599		59,540
	Investment property			46,871	312	—	47,183	140		47,323
		Total residential real estate		105,066	1,058	—	106,124	739		106,863
Consumer installment				9,517	57	—	9,574	14		9,588
		Total	$	450,082	1,123	—	451,205	2,972	$	454,177

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.

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 September 30,2018 and December 31, 2017, 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 September 30, 2018, the Company increased its look-back period to 38 quarters to continue to include losses incurred by the Company beginning with the first quarter of 2009. The Company will likely continue to increase its look-back period to incorporate the effects of at least one economic downturn in its loss history. Other than expanding the look-back period each quarter, the Company has not made any material changes to its methodology that would impact the calculation of the allowance for loan losses or provision for loan losses for the periods included in the accompanying consolidated balance sheets and statements of earnings.

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

			September 30, 2018
(In thousands)		Commercial and industrial		Construction and land development	Commercial real estate	Residential real estate	Consumer installment		Total
Quarter ended:
Beginning balance		$	600	787	2,197	1,017	149	$	4,750
Charge-offs			—	—	—	(11)	(7)		(18)
Recoveries			13	—	—	19	21		53
	Net recoveries		13	—	—	8	14		35
Provision for loan losses			(69)	49	44	(28)	4		—
Ending balance		$	544	836	2,241	997	167	$	4,785

Nine months ended:
Beginning balance		$	653	734	2,126	1,071	173	$	4,757
Charge-offs			(52)	—	(39)	(15)	(9)		(115)
Recoveries			59	—	—	52	32		143
	Net recoveries (charge-offs)		7	—	(39)	37	23		28
Provision for loan losses			(116)	102	154	(111)	(29)		—
Ending balance		$	544	836	2,241	997	167	$	4,785

			September 30, 2017
(In thousands)		Commercial and industrial		Construction and land development	Commercial real estate	Residential real estate	Consumer installment		Total
Quarter ended:
Beginning balance		$	677	874	2,121	1,119	174	$	4,965
Charge-offs			(449)	—	—	(30)	(10)		(489)
Recoveries			39	133	—	20	2		194
	Net (charge-offs) recoveries		(410)	133	—	(10)	(8)		(295)
Provision for loan losses			237	(156)	(60)	(32)	11		—
Ending balance		$	504	851	2,061	1,077	177	$	4,670

Nine months ended:
Beginning balance		$	540	812	2,071	1,107	113	$	4,643
Charge-offs			(449)	—	—	(108)	(16)		(573)
Recoveries			45	347	—	97	11		500
	Net (charge-offs) recoveries		(404)	347	—	(11)	(5)		(73)
Provision for loan losses			368	(308)	(10)	(19)	69		100
Ending balance		$	504	851	2,061	1,077	177	$	4,670

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 September 30,2018and 2017.

			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
September 30, 2018:
Commercial and industrial		$	544	52,430	—	—	544	52,430
Construction and land development			836	45,109	—	—	836	45,109
Commercial real estate			2,241	249,292	—	858	2,241	250,150
Residential real estate			997	103,329	—	—	997	103,329
Consumer installment			167	9,942	—	—	167	9,942
	Total	$	4,785	460,102	—	858	4,785	460,960

September 30, 2017:
Commercial and industrial		$	471	50,068	33	33	504	50,101
Construction and land development			851	47,455	—	—	851	47,455
Commercial real estate			2,045	229,700	16	2,680	2,061	232,380
Residential real estate			1,077	110,159	—	—	1,077	110,159
Consumer installment			177	9,877	—	—	177	9,877
	Total	$	4,621	447,259	49	2,713	4,670	449,972
(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.

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
September 30, 2018:
Commercial and industrial			$	50,137	2,197	96	—	$	52,430
Construction and land development				44,257	53	763	36		45,109
Commercial real estate:
	Owner occupied			51,138	387	321	—		51,846
	Multi-family			40,753	—	—	—		40,753
	Other			155,490	988	377	696		157,551
		Total commercial real estate		247,381	1,375	698	696		250,150
Residential real estate:
	Consumer mortgage			51,236	2,439	3,274	194		57,143
	Investment property			45,231	204	751	-		46,186
		Total residential real estate		96,467	2,643	4,025	194		103,329
Consumer installment				9,786	79	69	8		9,942
		Total	$	448,028	6,347	5,651	934	$	460,960

December 31, 2017:
Commercial and industrial			$	58,842	94	119	31	$	59,086
Construction and land development				39,049	90	468	—		39,607
Commercial real estate:
	Owner occupied			43,615	240	337	—		44,192
	Multi-family			52,167	—	—	—		52,167
	Other			139,695	395	396	2,188		142,674
		Total commercial real estate		235,477	635	733	2,188		239,033
Residential real estate:
	Consumer mortgage			54,101	1,254	3,586	599		59,540
	Investment property			46,463	53	667	140		47,323
		Total residential real estate		100,564	1,307	4,253	739		106,863
Consumer installment				9,430	66	78	14		9,588
		Total	$	443,362	2,192	5,651	2,972	$	454,177

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 following tables set forth certain information regarding the Company’s impaired loans that were individually evaluated for impairment at September 30,2018 and December 31,2017.

				September 30, 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		$	162	—	162
	Other			753	(57)	696
		Total commercial real estate		915	(57)	858
		Total impaired loans	$	915	(57)	858	$	—
(1) Unpaid principal balance represents the contractual obligation due from the customer.
(2) Charge-offs and payments applied represents cumulative charge-offs taken, as well as interest payments that have been
	applied against the outstanding principal balance subsequent to the loans being placed on nonaccrual status.
(3) Recorded investment represents the unpaid principal balance less charge-offs and payments applied; it is shown before
	any related allowance for loan losses.

				December 31, 2017
(In thousands)				Unpaid principal balance (1)	Charge-offs and payments applied (2)	Recorded investment (3)		Related allowance
With no allowance recorded:
Commercial real estate:
	Other		$	3,630	(1,094)	2,536
		Total commercial real estate		3,630	(1,094)	2,536
		Total	$	3,630	(1,094)	2,536
With allowance recorded:
Commercial and industrial			$	52	(21)	31	$	31
Commercial real estate:
	Owner occupied			175	—	175		11
		Total commercial real estate		175	—	175		11
		Total		227	(21)	206		42
		Total impaired loans	$	3,857	(1,115)	2,742	$	42
(1) Unpaid principal balance represents the contractual obligation due from the customer.
(2) Charge-offs and payments applied represents cumulative charge-offs taken, as well as interest payments that have been
	applied against the outstanding principal balance subsequent to the loans being placed on nonaccrual status.
(3) Recorded investment represents the unpaid principal balance less charge-offs and payments applied; it is shown before
	any related allowance for loan losses.

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

				Quarter ended September 30, 2018		Nine months ended September 30, 2018
				Average	Total interest	Average	Total interest
				recorded	income	recorded	income
(In thousands)				investment	recognized	investment	recognized
Impaired loans:
Commercial and industrial			$	—	—	12	—
Commercial real estate:
	Owner occupied			164	2	168	7
	Other			701	—	1,488	—
		Total commercial real estate		865	2	1,656	7
		Total	$	865	2	1,668	7

				Quarter ended September 30, 2017		Nine months ended September 30, 2017
				Average	Total interest	Average	Total interest
				recorded	income	recorded	income
(In thousands)				investment	recognized	investment	recognized
Impaired loans:
Commercial and industrial			$	126	—	55	—
Construction and land development				—	—	15	—
Commercial real estate:
	Owner occupied			182	2	186	8
	Other			2,148	—	1,971	—
		Total commercial real estate		2,330	2	2,157	8
		Total	$	2,456	2	2,227	8

Troubled Debt Restructurings

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

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

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 September 30,2018 and December 31,2017.

				TDRs
								Related
(In thousands)				Accruing	Nonaccrual	Total		Allowance
September 30, 2018
Commercial real estate:
	Owner occupied		$	162	—	162	$	—
	Other			—	696	696		—
		Total commercial real estate		162	696	858		—
		Total	$	162	696	858	$	—

December 31, 2017
Commercial and industrial			$	—	31	31	$	31
Commercial real estate:
	Owner occupied			175	—	175		11
	Other			287	1,431	1,718		—
		Total commercial real estate		462	1,431	1,893		11
		Total	$	462	1,462	1,924	$	42

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

			Quarter ended September 30,				Nine Months ended September 30,
					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
2018:
Commercial real estate:
	Other		1	$	710	710	2	$	1,447	1,447
		Total commercial real estate	1		710	710	2		1,447	1,447
		Total	1	$	710	710	2	$	1,447	1,447
2017:
Commercial and industrial			1	$	34	34	1	$	34	34
Commercial real estate:
	Other		—		—	—	1		1,275	1,266
		Total commercial real estate	—		—	—	1		1,275	1,266
		Total	1	$	34	34	2	$	1,309	1,300

The majority of the loans modified in a TDR during the quarter and nine months ended September 30, 2018 and 2017, included permitting delays in required payments of principal and/or interest or where the only concession granted by the Company was that the interest rate at renewal was considered to be less than a market rate.

The following table summarizes the recorded investment in loans modified in a TDR within the previous 12 months for which there was a payment default (defined as 90 days or more past due) during the respective periods. During the quarter and nine months ended September 30,2017, 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 September 30,			Nine Months ended September 30,
			Number of		Recorded	Number of		Recorded
(Dollars in thousands)			Contracts		investment(1)	Contracts		investment(1)
2018:
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.

XML

Mortgage Servicing Rights, Net

9 Months Ended

Sep. 30, 2018

Mortgage Servicing [Abstract]

Transfers and Servicing of Financial Assets [Text Block]

NOTE 5: MORTGAGE SERVICING RIGHTS, NET

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

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

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

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

		Quarter ended September 30,				Nine Months ended September 30,
(Dollars in thousands)		2018		2017		2018		2017
MSRs, net:
Beginning balance	$	1,549	$	1,762	$	1,644	$	1,952
Additions, net		61		72		175		165
Amortization expense		(115)		(131)		(324)		(415)
Decrease in valuation allowance		—		—		—		1
Ending balance	$	1,495	$	1,703	$	1,495	$	1,703
Valuation allowance included in MSRs, net:
Beginning of period	$	—	$	—	$	—	$	1
End of period		—		—		—		—
Fair value of amortized MSRs:
Beginning of period	$	2,659	$	2,520	$	2,528	$	2,678
End of period		2,615		2,441		2,615		2,441

XML

Derivative Instruments

9 Months Ended

Sep. 30, 2018

Derivative instruments and hedging activities disclosure abstract

Derivative Instruments And Hedging Activities Disclosure Text Block

NOTE 6: DERIVATIVE INSTRUMENTS

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

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

The Company had no interest rate swap agreements atSeptember 30,2018. A summary of the Company’s interest rate swap agreements atDecember 31,2017 is presented below.

				Other	Other
				Assets	Liabilities
				Estimated	Estimated
(Dollars in thousands)			Notional	Fair Value	Fair Value
December 31, 2017:
Pay fixed / receive variable		$	3,617	—	52
Pay variable / receive fixed			3,617	52	—
	Total interest rate swap agreements	$	7,234	52	52

XML

Fair Value Disclosures

9 Months Ended

Sep. 30, 2018

Fair Value Disclosures [Abstract]

Fair Value Disclosures Text Block

NOTE 7: FAIR VALUE

Fair Value Hierarchy

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

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

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

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

Level changes in fair value measurements

Transfers between levels of the fair value hierarchy are generally recognized at the end of each reporting period. The Company monitors the valuation techniques utilized for each category of financial assets and liabilities to ascertain when transfers between levels have been affected. The nature of the Company’s financial assets and liabilities generally is such that transfers in and out of any level are expected to be infrequent. For the nine months endedSeptember 30,2018, 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.

Interest rate swap agreements

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

The following table presents the balances of the assets and liabilities measured at fair value on a recurring basis as of September 30,2018 and December 31,2017, 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)
September 30, 2018:
Securities available-for-sale:
	Agency obligations		$	50,489	—	50,489	—
	Agency RMBS			122,040	—	122,040	—
	State and political subdivisions			70,807	—	70,807	—
Total securities available-for-sale				243,336	—	243,336	—
		Total assets at fair value	$	243,336	—	243,336	—
December 31, 2017:
Securities available-for-sale:
	Agency obligations		$	53,062	—	53,062	—
	Agency RMBS			133,072	—	133,072	—
	State and political subdivisions			71,563	—	71,563	—
Total securities available-for-sale				257,697	—	257,697	—
Other assets (1)				52	—	52	—
		Total assets at fair value	$	257,749	—	257,749	—
Other liabilities(1)			$	52	—	52	—
		Total liabilities at fair value	$	52	—	52	—
(1)Represents the fair value of interest rate swap agreements.

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.

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 September 30,2018 and December 31,2017, 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)
September 30, 2018:
Loans held for sale		$	1,548	—	1,548	—
Loans, net(1)			858	—	—	858
Other assets (2)			1,632	—	—	1,632
	Total assets at fair value	$	4,038	—	1,548	2,490
December 31, 2017:
Loans held for sale		$	1,922	—	1,922	—
Loans, net(1)			2,700	—	—	2,700
Other assets (2)			1,644	—	—	1,644
	Total assets at fair value	$	6,266	—	1,922	4,344
(1)Loans considered impaired under 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.

Quantitative Disclosures for Level 3 Fair Value Measurements

At September 30,2018, 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 at September 30,2018, the significant unobservable inputs used in the fair value measurements are presented below.

					Weighted
		Carrying			Average
(Dollars in thousands)		Amount	Valuation Technique	Significant Unobservable Input	of Input
Nonrecurring:
Impaired loans	$	858	Appraisal	Appraisal discounts (%)	52.4	%
Other real estate owned		137	Appraisal	Appraisal discounts (%)	10.0	%
Mortgage servicing rights, net		1,495	Discounted cash flow	Prepayment speed or CPR (%)	9.5	%
				Discount rate (%)	10.0	%

Fair Value of Financial Instruments

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

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

Loans, net

Fair values for loans were calculated using discounted cash flows. The discount rates reflected current rates at which similar loans would be made for the same remaining maturities. Expected future cash flows were projected based on contractual cash flows, adjusted for estimated prepayments. In accordance with the prospective adoption of ASU No. 2016-01, the fair value of loans as of September 30, 2018 was measured using an exit price notion. The fair value of loans as of December 31, 2017 was measured using an entry price notion.

Loans held for sale

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

Time Deposits

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

Long-term debt

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

The carrying value, related estimated fair value, and placement in the fair value hierarchyof the Company’s financial instruments at September 30,2018 and December 31,2017 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
September 30, 2018:
Financial Assets:
	Loans, net (1)	$	455,542	$	452,124	$	—	$	—	$	452,124
	Loans held for sale		1,548		1,594		—		1,594		—
Financial Liabilities:
	Time Deposits	$	182,339	$	182,485	$	—	$	182,485	$	—
December 31, 2017:
Financial Assets:
	Loans, net (1)	$	448,894	$	447,468	$	—	$	—	$	447,468
	Loans held for sale		1,922		1,950		—		1,950		—
Financial Liabilities:
	Time Deposits	$	188,071	$	185,564	$	—	$	185,564	$	—
	Long-term debt		3,217		3,217		—		3,217		—
(1) Represents loans, net of unearned income and the allowance for loan losses. In accordance with the prospective adoption of ASU No. 2016-01, the fair
	value of loans as of September 30, 2018 was measured using an exit price notion. The fair value of loans as of December 31, 2017 was measured using
	an entry price notion.

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Summary of Significant Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2018

Summary of Signficant Accounting Policies

Nature of Business Policy

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 Policy

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 31,2017.

Consolidation Policy

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.

Use of Estimates Policy

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.

Subsequent Events Policy

Subsequent Events

The Company has evaluated the effects of events and transactions through the date of this filing that have occurred subsequent to September 30,2018. 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

Accounting Developments

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

•

ASU 2014-09, Revenue from Contracts with Customers;

•

ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities;

•

ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments; and

•

ASU 2016-18, Restricted Cash

Information about these pronouncements is described in more detail below.

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

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

• Gains on sales of other real estate — ASU 2014-09 creates Topic 610-20, under which a gain on sale should be recognized when a contract for sale exists and control of the asset has been transferred to the buyer. Topic 606 lists several criteria required to conclude that a contract for sale exists, including a determination that the institution will collect substantially all of the consideration to which it is entitled. This presents a key difference between the prior and new guidance related to the recognition of the gain when the institution finances the sale of the property. Rather than basing recognition on the amount of the buyer's initial investment, which was the primary consideration under prior guidance, the analysis is now based on various factors including not only the loan to value, but also the credit quality of the borrower, the structure of the loan, and any other factors that may affect collectability. While these differences may affect the decision to recognize or defer gains on sales of other real estate in circumstances where the Company has financed the sale, the effects would not be material to its consolidated financial statements.

ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, enhances the reporting model for financial instruments to provide users of financial statements with more decision-useful information. The ASU addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Some of the amendments include the following: (1) Require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; (2) Simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (3) Require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (4) Require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value; among others. For public business entities, the amendments of this ASU are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The adoption of this ASU on January 1, 2018 did not have a material impact on the Company’s Consolidated Financial Statements. In accordance with (3) above, the Company measured the fair value of its loan portfolio as of September 30,2018 using an exit price notion and will continue to do so going forward (see Note 7).

ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, provides guidance on eight specific cash flow issues where current GAAP is either unclear or does not include specific guidance on classification in the statement of cash flows. The new guidance is effective for annual and interim reporting periods in fiscal years beginning after December 15, 2017. The Company adopted ASU No. 2016-15 on January 1, 2018. ASU No. 2016-15 did not have a material impact on the Company’s Consolidated Financial Statements.

ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, amends guidance on how the statement of cash flows presents the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Under the new guidance, amounts generally described as restricted cash and restricted cash equivalents are included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in this Update do not provide a definition of restricted cash or restricted cash equivalents. The new guidance is effective for public business entities for annual and interim reporting periods in fiscal years beginning after December 15, 2017. The Company adopted ASU No. 2016-18 on January 1, 2018. ASU No. 2016-18 did not have a material impact on the Company’s Consolidated Financial Statements.

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Basic and Diluted Earnings Per Share (Tables)

9 Months Ended

Sep. 30, 2018

Basic and Diluted Earnings Per Share [Abstract]

Schedule of Earnings Per Share, Basic and Diluted [Table Text Block]

				Quarter ended September 30,				Nine Months ended September 30,
(In thousands, except share and per share data)				2018		2017		2018		2017
Basic and diluted:
	Net earnings		$	1,975	$	2,136	$	6,434	$	6,021
	Weighted average common shares outstanding			3,643,834		3,643,659		3,643,750		3,643,598
		Net earnings per share	$	0.54	$	0.59	$	1.77	$	1.65

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Securities (Tables)

9 Months Ended

Sep. 30, 2018

Investments debt and equity securities [Abstract]

Available-for-sale Securities [Table Text Block]

			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
September 30, 2018
Agency obligations (a)		$	9,453	19,445	21,591	—	50,489	—	1,899	$	52,388
Agency RMBS (a)			—	—	8,893	113,147	122,040	46	5,230		127,224
State and political subdivisions			—	3,391	8,000	59,416	70,807	461	1,166		71,512
	Total available-for-sale	$	9,453	22,836	38,484	172,563	243,336	507	8,295	$	251,124

December 31, 2017
Agency obligations (a)		$	—	29,253	23,809	—	53,062	79	904	$	53,887
Agency RMBS (a)			—	—	11,201	121,871	133,072	330	1,639		134,381
State and political subdivisions			—	2,564	9,999	59,000	71,563	1,616	237		70,184
	Total available-for-sale	$	—	31,817	45,009	180,871	257,697	2,025	2,780	$	258,452
(a) Includes securities issued by U.S. government agencies or government sponsored entities.

Available-for-sale Securities, Continuous Unrealized Loss Position [Table Text Block]

			Less than 12 Months		12 Months or Longer			Total
			Fair	Unrealized	Fair	Unrealized		Fair	Unrealized
(Dollars in thousands)			Value	Losses	Value	Losses		Value	Losses
September 30, 2018:
Agency obligations		$	25,953	418	24,536	1,481	$	50,489	1,899
Agency RMBS			51,338	1,622	65,789	3,608		117,127	5,230
State and political subdivisions			27,714	579	10,558	587		38,272	1,166
	Total	$	105,005	2,619	100,883	5,676	$	205,888	8,295

December 31, 2017:
Agency obligations		$	14,381	99	20,353	805	$	34,734	904
Agency RMBS			53,440	363	50,729	1,276		104,169	1,639
State and political subdivisions			2,009	22	10,155	215		12,164	237
	Total	$	69,830	484	81,237	2,296	$	151,067	2,780

Schedule of Realized Gain (Loss) [Table Text Block]

Realized Gains and Losses
The following table presents the gross realized gains and losses on sales of securities.
			Quarter ended September 30,			Nine Months ended September 30,
(Dollars in thousands)			2018	2017		2018	2017
Gross realized gains		$	—	49	$	—	51
	Realized gains, net	$	—	49	$	—	51

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Loan and Allowance for Loan Losses (Tables)

9 Months Ended

Sep. 30, 2018

Loans And Leases Receivable Disclosure [Abstract]

Schedule of Accounts, Notes, Loans and Financing Receivable [Table Text Block]

				September 30,		December 31,
(In thousands)				2018		2017
Commercial and industrial			$	52,430	$	59,086
Construction and land development				45,109		39,607
Commercial real estate:
	Owner occupied			51,846		44,192
	Multi-family			40,753		52,167
	Other			157,551		142,674
		Total commercial real estate		250,150		239,033
Residential real estate:
	Consumer mortgage			57,143		59,540
	Investment property			46,186		47,323
		Total residential real estate		103,329		106,863
Consumer installment				9,942		9,588
		Total loans		460,960		454,177
Less: unearned income				(633)		(526)
		Loans, net of unearned income	$	460,327	$	453,651

Past Due Financing Receivables [Table Text Block]

					Accruing	Accruing	Total
					30-89 Days	Greater than	Accruing	Non-		Total
(In thousands)			Current		Past Due	90 days	Loans	Accrual		Loans
September 30, 2018:
Commercial and industrial			$	52,420	10	—	52,430	—	$	52,430
Construction and land development				44,832	241	—	45,073	36		45,109
Commercial real estate:
	Owner occupied			51,846	—	—	51,846	—		51,846
	Multi-family			40,753	—	—	40,753	—		40,753
	Other			156,855	—	—	156,855	696		157,551
		Total commercial real estate		249,454	—	—	249,454	696		250,150
Residential real estate:
	Consumer mortgage			56,889	60	—	56,949	194		57,143
	Investment property			46,060	126	—	46,186	-		46,186
		Total residential real estate		102,949	186	—	103,135	194		103,329
Consumer installment				9,917	17	—	9,934	8		9,942
		Total	$	459,572	454	—	460,026	934	$	460,960

December 31, 2017:
Commercial and industrial			$	59,047	8	—	59,055	31	$	59,086
Construction and land development				39,607	—	—	39,607	—		39,607
Commercial real estate:
	Owner occupied			44,192	—	—	44,192	—		44,192
	Multi-family			52,167	—	—	52,167	—		52,167
	Other			140,486	—	—	140,486	2,188		142,674
		Total commercial real estate		236,845	—	—	236,845	2,188		239,033
Residential real estate:
	Consumer mortgage			58,195	746	—	58,941	599		59,540
	Investment property			46,871	312	—	47,183	140		47,323
		Total residential real estate		105,066	1,058	—	106,124	739		106,863
Consumer installment				9,517	57	—	9,574	14		9,588
		Total	$	450,082	1,123	—	451,205	2,972	$	454,177

Allowance for Credit Losses on Financing Receivables [Table Text Block]

			September 30, 2018
(In thousands)		Commercial and industrial		Construction and land development	Commercial real estate	Residential real estate	Consumer installment		Total
Quarter ended:
Beginning balance		$	600	787	2,197	1,017	149	$	4,750
Charge-offs			—	—	—	(11)	(7)		(18)
Recoveries			13	—	—	19	21		53
	Net recoveries		13	—	—	8	14		35
Provision for loan losses			(69)	49	44	(28)	4		—
Ending balance		$	544	836	2,241	997	167	$	4,785

Nine months ended:
Beginning balance		$	653	734	2,126	1,071	173	$	4,757
Charge-offs			(52)	—	(39)	(15)	(9)		(115)
Recoveries			59	—	—	52	32		143
	Net recoveries (charge-offs)		7	—	(39)	37	23		28
Provision for loan losses			(116)	102	154	(111)	(29)		—
Ending balance		$	544	836	2,241	997	167	$	4,785

			September 30, 2017
(In thousands)		Commercial and industrial		Construction and land development	Commercial real estate	Residential real estate	Consumer installment		Total
Quarter ended:
Beginning balance		$	677	874	2,121	1,119	174	$	4,965
Charge-offs			(449)	—	—	(30)	(10)		(489)
Recoveries			39	133	—	20	2		194
	Net (charge-offs) recoveries		(410)	133	—	(10)	(8)		(295)
Provision for loan losses			237	(156)	(60)	(32)	11		—
Ending balance		$	504	851	2,061	1,077	177	$	4,670

Nine months ended:
Beginning balance		$	540	812	2,071	1,107	113	$	4,643
Charge-offs			(449)	—	—	(108)	(16)		(573)
Recoveries			45	347	—	97	11		500
	Net (charge-offs) recoveries		(404)	347	—	(11)	(5)		(73)
Provision for loan losses			368	(308)	(10)	(19)	69		100
Ending balance		$	504	851	2,061	1,077	177	$	4,670

Financing Receivable Allowance for Credit Loss Additional Information [Table Text Block]

			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
September 30, 2018:
Commercial and industrial		$	544	52,430	—	—	544	52,430
Construction and land development			836	45,109	—	—	836	45,109
Commercial real estate			2,241	249,292	—	858	2,241	250,150
Residential real estate			997	103,329	—	—	997	103,329
Consumer installment			167	9,942	—	—	167	9,942
	Total	$	4,785	460,102	—	858	4,785	460,960

September 30, 2017:
Commercial and industrial		$	471	50,068	33	33	504	50,101
Construction and land development			851	47,455	—	—	851	47,455
Commercial real estate			2,045	229,700	16	2,680	2,061	232,380
Residential real estate			1,077	110,159	—	—	1,077	110,159
Consumer installment			177	9,877	—	—	177	9,877
	Total	$	4,621	447,259	49	2,713	4,670	449,972
(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.

Financing Receivable Credit Quality Indicators [Table Text Block]

(In thousands)				Pass	Special Mention	Substandard Accruing	Nonaccrual		Total loans
September 30, 2018:
Commercial and industrial			$	50,137	2,197	96	—	$	52,430
Construction and land development				44,257	53	763	36		45,109
Commercial real estate:
	Owner occupied			51,138	387	321	—		51,846
	Multi-family			40,753	—	—	—		40,753
	Other			155,490	988	377	696		157,551
		Total commercial real estate		247,381	1,375	698	696		250,150
Residential real estate:
	Consumer mortgage			51,236	2,439	3,274	194		57,143
	Investment property			45,231	204	751	-		46,186
		Total residential real estate		96,467	2,643	4,025	194		103,329
Consumer installment				9,786	79	69	8		9,942
		Total	$	448,028	6,347	5,651	934	$	460,960

December 31, 2017:
Commercial and industrial			$	58,842	94	119	31	$	59,086
Construction and land development				39,049	90	468	—		39,607
Commercial real estate:
	Owner occupied			43,615	240	337	—		44,192
	Multi-family			52,167	—	—	—		52,167
	Other			139,695	395	396	2,188		142,674
		Total commercial real estate		235,477	635	733	2,188		239,033
Residential real estate:
	Consumer mortgage			54,101	1,254	3,586	599		59,540
	Investment property			46,463	53	667	140		47,323
		Total residential real estate		100,564	1,307	4,253	739		106,863
Consumer installment				9,430	66	78	14		9,588
		Total	$	443,362	2,192	5,651	2,972	$	454,177

Impaired Financing Receivables [Table Text Block]

				September 30, 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		$	162	—	162
	Other			753	(57)	696
		Total commercial real estate		915	(57)	858
		Total impaired loans	$	915	(57)	858	$	—
(1) Unpaid principal balance represents the contractual obligation due from the customer.
(2) Charge-offs and payments applied represents cumulative charge-offs taken, as well as interest payments that have been
	applied against the outstanding principal balance subsequent to the loans being placed on nonaccrual status.
(3) Recorded investment represents the unpaid principal balance less charge-offs and payments applied; it is shown before
	any related allowance for loan losses.

				December 31, 2017
(In thousands)				Unpaid principal balance (1)	Charge-offs and payments applied (2)	Recorded investment (3)		Related allowance
With no allowance recorded:
Commercial real estate:
	Other		$	3,630	(1,094)	2,536
		Total commercial real estate		3,630	(1,094)	2,536
		Total	$	3,630	(1,094)	2,536
With allowance recorded:
Commercial and industrial			$	52	(21)	31	$	31
Commercial real estate:
	Owner occupied			175	—	175		11
		Total commercial real estate		175	—	175		11
		Total		227	(21)	206		42
		Total impaired loans	$	3,857	(1,115)	2,742	$	42
(1) Unpaid principal balance represents the contractual obligation due from the customer.
(2) Charge-offs and payments applied represents cumulative charge-offs taken, as well as interest payments that have been
	applied against the outstanding principal balance subsequent to the loans being placed on nonaccrual status.
(3) Recorded investment represents the unpaid principal balance less charge-offs and payments applied; it is shown before
	any related allowance for loan losses.

Schedule Of Average Impaired Financing Receivable [Table Text Block]

				Quarter ended September 30, 2018		Nine months ended September 30, 2018
				Average	Total interest	Average	Total interest
				recorded	income	recorded	income
(In thousands)				investment	recognized	investment	recognized
Impaired loans:
Commercial and industrial			$	—	—	12	—
Commercial real estate:
	Owner occupied			164	2	168	7
	Other			701	—	1,488	—
		Total commercial real estate		865	2	1,656	7
		Total	$	865	2	1,668	7

				Quarter ended September 30, 2017		Nine months ended September 30, 2017
				Average	Total interest	Average	Total interest
				recorded	income	recorded	income
(In thousands)				investment	recognized	investment	recognized
Impaired loans:
Commercial and industrial			$	126	—	55	—
Construction and land development				—	—	15	—
Commercial real estate:
	Owner occupied			182	2	186	8
	Other			2,148	—	1,971	—
		Total commercial real estate		2,330	2	2,157	8
		Total	$	2,456	2	2,227	8

Troubled Debt Restructurings on Financing Receivables, Accrual Status [Table Text Block]

				TDRs
								Related
(In thousands)				Accruing	Nonaccrual	Total		Allowance
September 30, 2018
Commercial real estate:
	Owner occupied		$	162	—	162	$	—
	Other			—	696	696		—
		Total commercial real estate		162	696	858		—
		Total	$	162	696	858	$	—

December 31, 2017
Commercial and industrial			$	—	31	31	$	31
Commercial real estate:
	Owner occupied			175	—	175		11
	Other			287	1,431	1,718		—
		Total commercial real estate		462	1,431	1,893		11
		Total	$	462	1,462	1,924	$	42

Troubled Debt Restructuring Modifications [Table Text Block]

			Quarter ended September 30,				Nine Months ended September 30,
					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
2018:
Commercial real estate:
	Other		1	$	710	710	2	$	1,447	1,447
		Total commercial real estate	1		710	710	2		1,447	1,447
		Total	1	$	710	710	2	$	1,447	1,447
2017:
Commercial and industrial			1	$	34	34	1	$	34	34
Commercial real estate:
	Other		—		—	—	1		1,275	1,266
		Total commercial real estate	—		—	—	1		1,275	1,266
		Total	1	$	34	34	2	$	1,309	1,300

Schedule Of Debtor Troubled Debt Restructuring, Subsequent Defaults [Table Text Block]

			Quarter ended September 30,			Nine Months ended September 30,
			Number of		Recorded	Number of		Recorded
(Dollars in thousands)			Contracts		investment(1)	Contracts		investment(1)
2018:
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.

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Mortgage Servicing Rights, Net (Tables)

9 Months Ended

Sep. 30, 2018

Mortgage Servicing [Abstract]

Schedule Of Servicing Assets At Fair Value [Table Text Block]

		Quarter ended September 30,				Nine Months ended September 30,
(Dollars in thousands)		2018		2017		2018		2017
MSRs, net:
Beginning balance	$	1,549	$	1,762	$	1,644	$	1,952
Additions, net		61		72		175		165
Amortization expense		(115)		(131)		(324)		(415)
Decrease in valuation allowance		—		—		—		1
Ending balance	$	1,495	$	1,703	$	1,495	$	1,703
Valuation allowance included in MSRs, net:
Beginning of period	$	—	$	—	$	—	$	1
End of period		—		—		—		—
Fair value of amortized MSRs:
Beginning of period	$	2,659	$	2,520	$	2,528	$	2,678
End of period		2,615		2,441		2,615		2,441

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Derivative Instruments (Tables)

9 Months Ended

Sep. 30, 2018

Derivative instruments and hedging activities disclosure abstract

Schedule of Derivative Instruments [Table Text Block]

				Other	Other
				Assets	Liabilities
				Estimated	Estimated
(Dollars in thousands)			Notional	Fair Value	Fair Value
December 31, 2017:
Pay fixed / receive variable		$	3,617	—	52
Pay variable / receive fixed			3,617	52	—
	Total interest rate swap agreements	$	7,234	52	52

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Fair Value (Tables)

9 Months Ended

Sep. 30, 2018

Fair Value Disclosures [Abstract]

Schedule of Fair Value, Assets and Liabilities Measured on Recurring Basis [Table Text Block]

					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)
September 30, 2018:
Securities available-for-sale:
	Agency obligations		$	50,489	—	50,489	—
	Agency RMBS			122,040	—	122,040	—
	State and political subdivisions			70,807	—	70,807	—
Total securities available-for-sale				243,336	—	243,336	—
		Total assets at fair value	$	243,336	—	243,336	—
December 31, 2017:
Securities available-for-sale:
	Agency obligations		$	53,062	—	53,062	—
	Agency RMBS			133,072	—	133,072	—
	State and political subdivisions			71,563	—	71,563	—
Total securities available-for-sale				257,697	—	257,697	—
Other assets (1)				52	—	52	—
		Total assets at fair value	$	257,749	—	257,749	—
Other liabilities(1)			$	52	—	52	—
		Total liabilities at fair value	$	52	—	52	—
(1)Represents the fair value of interest rate swap agreements.

Fair Value, Assets and Liabilities Measured on Nonrecurring Basis [Table Text Block]

				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)
September 30, 2018:
Loans held for sale		$	1,548	—	1,548	—
Loans, net(1)			858	—	—	858
Other assets (2)			1,632	—	—	1,632
	Total assets at fair value	$	4,038	—	1,548	2,490
December 31, 2017:
Loans held for sale		$	1,922	—	1,922	—
Loans, net(1)			2,700	—	—	2,700
Other assets (2)			1,644	—	—	1,644
	Total assets at fair value	$	6,266	—	1,922	4,344
(1)Loans considered impaired under 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.

Fair Value, Assets and Liabilities Measured on Nonrecurring Basis, Valuation Techniques [Table Text Block]

					Weighted
		Carrying			Average
(Dollars in thousands)		Amount	Valuation Technique	Significant Unobservable Input	of Input
Nonrecurring:
Impaired loans	$	858	Appraisal	Appraisal discounts (%)	52.4	%
Other real estate owned		137	Appraisal	Appraisal discounts (%)	10.0	%
Mortgage servicing rights, net		1,495	Discounted cash flow	Prepayment speed or CPR (%)	9.5	%
				Discount rate (%)	10.0	%

Financial Instruments [Table Text Block]

							Fair Value Hierarchy
			Carrying		Estimated		Level 1		Level 2		Level 3
(Dollars in thousands)			amount		fair value		inputs		inputs		Inputs
September 30, 2018:
Financial Assets:
	Loans, net (1)	$	455,542	$	452,124	$	—	$	—	$	452,124
	Loans held for sale		1,548		1,594		—		1,594		—
Financial Liabilities:
	Time Deposits	$	182,339	$	182,485	$	—	$	182,485	$	—
December 31, 2017:
Financial Assets:
	Loans, net (1)	$	448,894	$	447,468	$	—	$	—	$	447,468
	Loans held for sale		1,922		1,950		—		1,950		—
Financial Liabilities:
	Time Deposits	$	188,071	$	185,564	$	—	$	185,564	$	—
	Long-term debt		3,217		3,217		—		3,217		—
(1) Represents loans, net of unearned income and the allowance for loan losses. In accordance with the prospective adoption of ASU No. 2016-01, the fair
	value of loans as of September 30, 2018 was measured using an exit price notion. The fair value of loans as of December 31, 2017 was measured using
	an entry price notion.

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Basic and Diluted Earnings Per Share (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Basic and Diluted Earnings Per Share [Abstract]
Net earnings	$ 1,975	$ 2,136	$ 6,434	$ 6,021
Basic and diluted weighted average shares outstanding	3,643,834	3,643,659	3,643,750	3,643,598
Basic and diluted earnings per share	$ 0.54	$ 0.59	$ 1.77	$ 1.65

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Security Types (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017
Schedule of Available-for-sale Securities [Line Items]
Available-for-sale Securities, Debt Maturities, within One Year, Fair Value	$ 9,453	$ 0
Available-for-sale Securities, Debt Maturities, after One Through Five Years, Fair Value	22,836	31,817
Available-for-sale Securities, Debt Maturities, after Five Through Ten Years, Fair Value	38,484	45,009
Available-for-sale Securities, Debt Maturities, after Ten Years, Fair Value	172,563	180,871
Available-for-sale Securities, Fair Value, Total	243,336	257,697
Available For Sale Securities, Gross Unrealized Gains	507	2,025
Available For Sale Securities, Gross Unrealized Losses	8,295	2,780
Available-for-sale Securities, Amortized Cost Basis	251,124	258,452
US Government and Government Agencies and Authorities [Member]
Schedule of Available-for-sale Securities [Line Items]
Available-for-sale Securities, Debt Maturities, within One Year, Fair Value	9,453	0
Available-for-sale Securities, Debt Maturities, after One Through Five Years, Fair Value	19,445	29,253
Available-for-sale Securities, Debt Maturities, after Five Through Ten Years, Fair Value	21,591	23,809
Available-for-sale Securities, Debt Maturities, after Ten Years, Fair Value	0	0
Available-for-sale Securities, Fair Value, Total	50,489	53,062
Available For Sale Securities, Gross Unrealized Gains	0	79
Available For Sale Securities, Gross Unrealized Losses	1,899	904
Available-for-sale Securities, Amortized Cost Basis	52,388	53,887
Mortgage-backed Securities, Issued by US Government Sponsored Enterprises [Member]
Schedule of Available-for-sale Securities [Line Items]
Available-for-sale Securities, Debt Maturities, within One Year, Fair Value	0	0
Available-for-sale Securities, Debt Maturities, after One Through Five Years, Fair Value	0	0
Available-for-sale Securities, Debt Maturities, after Five Through Ten Years, Fair Value	8,893	11,201
Available-for-sale Securities, Debt Maturities, after Ten Years, Fair Value	113,147	121,871
Available-for-sale Securities, Fair Value, Total	122,040	133,072
Available For Sale Securities, Gross Unrealized Gains	46	330
Available For Sale Securities, Gross Unrealized Losses	5,230	1,639
Available-for-sale Securities, Amortized Cost Basis	127,224	134,381
US States and Political Subdivisions Debt Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Available-for-sale Securities, Debt Maturities, within One Year, Fair Value	0	0
Available-for-sale Securities, Debt Maturities, after One Through Five Years, Fair Value	3,391	2,564
Available-for-sale Securities, Debt Maturities, after Five Through Ten Years, Fair Value	8,000	9,999
Available-for-sale Securities, Debt Maturities, after Ten Years, Fair Value	59,416	59,000
Available-for-sale Securities, Fair Value, Total	70,807	71,563
Available For Sale Securities, Gross Unrealized Gains	461	1,616
Available For Sale Securities, Gross Unrealized Losses	1,166	237
Available-for-sale Securities, Amortized Cost Basis	$ 71,512	$ 70,184

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Securities Continuous Unrealized Loss (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017
Schedule of Available-for-sale Securities [Line Items]
Available-for-sale Securities, Continuous Unrealized Loss Position, Less than Twelve Months, Fair Value	$ 105,005	$ 69,830
Available-for-sale Securities, Continuous Unrealized Loss Position, Less than 12 Months, Aggregate Losses	2,619	484
Available-for-sale Securities, Continuous Unrealized Loss Position, Twelve Months or Longer, Fair Value	100,883	81,237
Available-for-sale Securities, Continuous Unrealized Loss Position, 12 Months or Longer, Aggregate Losses	5,676	2,296
Available-for-sale Securities, Continuous Unrealized Loss Position, Fair Value	205,888	151,067
Available-for-sale Securities, Continuous Unrealized Loss Position, Aggregate Losses	8,295	2,780
US Government and Government Agencies and Authorities [Member]
Schedule of Available-for-sale Securities [Line Items]
Available-for-sale Securities, Continuous Unrealized Loss Position, Less than Twelve Months, Fair Value	25,953	14,381
Available-for-sale Securities, Continuous Unrealized Loss Position, Less than 12 Months, Aggregate Losses	418	99
Available-for-sale Securities, Continuous Unrealized Loss Position, Twelve Months or Longer, Fair Value	24,536	20,353
Available-for-sale Securities, Continuous Unrealized Loss Position, 12 Months or Longer, Aggregate Losses	1,481	805
Available-for-sale Securities, Continuous Unrealized Loss Position, Fair Value	50,489	34,734
Available-for-sale Securities, Continuous Unrealized Loss Position, Aggregate Losses	1,899	904
Mortgage-backed Securities, Issued by US Government Sponsored Enterprises [Member]
Schedule of Available-for-sale Securities [Line Items]
Available-for-sale Securities, Continuous Unrealized Loss Position, Less than Twelve Months, Fair Value	51,338	53,440
Available-for-sale Securities, Continuous Unrealized Loss Position, Less than 12 Months, Aggregate Losses	1,622	363
Available-for-sale Securities, Continuous Unrealized Loss Position, Twelve Months or Longer, Fair Value	65,789	50,729
Available-for-sale Securities, Continuous Unrealized Loss Position, 12 Months or Longer, Aggregate Losses	3,608	1,276
Available-for-sale Securities, Continuous Unrealized Loss Position, Fair Value	117,127	104,169
Available-for-sale Securities, Continuous Unrealized Loss Position, Aggregate Losses	5,230	1,639
US States and Political Subdivisions Debt Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Available-for-sale Securities, Continuous Unrealized Loss Position, Less than Twelve Months, Fair Value	27,714	2,009
Available-for-sale Securities, Continuous Unrealized Loss Position, Less than 12 Months, Aggregate Losses	579	22
Available-for-sale Securities, Continuous Unrealized Loss Position, Twelve Months or Longer, Fair Value	10,558	10,155
Available-for-sale Securities, Continuous Unrealized Loss Position, 12 Months or Longer, Aggregate Losses	587	215
Available-for-sale Securities, Continuous Unrealized Loss Position, Fair Value	38,272	12,164
Available-for-sale Securities, Continuous Unrealized Loss Position, Aggregate Losses	$ 1,166	$ 237

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Securities Gross Realized Gain Loss (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Available-for-sale Securities, Gross Realized Gain (Loss) [Abstract]
Available-for-sale Securities, Gross Realized Gains	$ 0	$ 49	$ 0	$ 51
Available-for-sale Securities, Gross Realized Losses	0	0	0	0
Available-for-sale Securities, Gross Realized Gain (Loss), Net	$ 0	$ 49	$ 0	$ 51

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Securities Textuals (Details) - USD ($) $ in Millions	Sep. 30, 2018	Dec. 31, 2017
Securities (Textuals) [Abstract]
Available-for-sale Securities Pledged as Collateral	$ 138.9	$ 149.4
Cost-method Investments, Aggregate Carrying Amount	$ 1.4	$ 1.4

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Loans (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017	Sep. 30, 2017
Loans And Leases Receivable Disclosure [Abstract]
Commercial and Industrial Loans	$ 52,430	$ 59,086
Construction And Land Development Loans	45,109	39,607
Commericial Real Estate Loans [Abstract]
Commercial Real Estate Owner Occupied Loans	51,846	44,192
Commercial Real Estate Multifamily	40,753	52,167
Commerical Real Estate Other Loans	157,551	142,674
Total Commercial Real Estate Loans	250,150	239,033
Residential Real Estate Loans [Abstract]
Consumer Mortgage Loans	57,143	59,540
Residential Real Estate Investment Property Loans	46,186	47,323
Total Residential Real Estate Loans	103,329	106,863
Consumer Installment	9,942	9,588
Loans and Leases Receivable, Gross, Carrying Amount	460,960	454,177	$ 449,972
Loans and Leases Receivable Deferred Income	(633)	(526)
Loans, net of unearned income	$ 460,327	$ 453,651

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Loans Past Due Analysis (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017	Sep. 30, 2017
Financing Receivable, Recorded Investment, Past Due [Line Items]
Financing Receivable, Recorded Investment, Current	$ 459,572	$ 450,082
Financing Receivable, Recorded Investment, 30 To 89 Days Past Due	454	1,123
Financing Receivable, Recorded Investment, 90 Days Past Due and Still Accruing	0	0
Financing Receivable, Recorded Investment, Total Still Accruing	460,026	451,205
Financing Receivable, Recorded Investment, Nonaccrual Status	934	2,972
Loans and Leases Receivable, Gross, Carrying Amount	460,960	454,177	$ 449,972
Commercial and Industrial Loans [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Financing Receivable, Recorded Investment, Current	52,420	59,047
Financing Receivable, Recorded Investment, 30 To 89 Days Past Due	10	8
Financing Receivable, Recorded Investment, 90 Days Past Due and Still Accruing	0	0
Financing Receivable, Recorded Investment, Total Still Accruing	52,430	59,055
Financing Receivable, Recorded Investment, Nonaccrual Status	0	31
Loans and Leases Receivable, Gross, Carrying Amount	52,430	59,086	50,101
Construction And Land Development Loans [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Financing Receivable, Recorded Investment, Current	44,832	39,607
Financing Receivable, Recorded Investment, 30 To 89 Days Past Due	241	0
Financing Receivable, Recorded Investment, 90 Days Past Due and Still Accruing	0	0
Financing Receivable, Recorded Investment, Total Still Accruing	45,073	39,607
Financing Receivable, Recorded Investment, Nonaccrual Status	36	0
Loans and Leases Receivable, Gross, Carrying Amount	45,109	39,607	47,455
Commercial Real Estate Owner Occupied Loans [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Financing Receivable, Recorded Investment, Current	51,846	44,192
Financing Receivable, Recorded Investment, 30 To 89 Days Past Due	0	0
Financing Receivable, Recorded Investment, 90 Days Past Due and Still Accruing	0	0
Financing Receivable, Recorded Investment, Total Still Accruing	51,846	44,192
Financing Receivable, Recorded Investment, Nonaccrual Status	0	0
Loans and Leases Receivable, Gross, Carrying Amount	51,846	44,192
Commercial Real Estate Multifamily [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Financing Receivable, Recorded Investment, Current	40,753	52,167
Financing Receivable, Recorded Investment, 30 To 89 Days Past Due	0	0
Financing Receivable, Recorded Investment, 90 Days Past Due and Still Accruing	0	0
Financing Receivable, Recorded Investment, Total Still Accruing	40,753	52,167
Financing Receivable, Recorded Investment, Nonaccrual Status	0	0
Loans and Leases Receivable, Gross, Carrying Amount	40,753	52,167
Commercial Real Estate Other Loans [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Financing Receivable, Recorded Investment, Current	156,855	140,486
Financing Receivable, Recorded Investment, 30 To 89 Days Past Due	0	0
Financing Receivable, Recorded Investment, 90 Days Past Due and Still Accruing	0	0
Financing Receivable, Recorded Investment, Total Still Accruing	156,855	140,486
Financing Receivable, Recorded Investment, Nonaccrual Status	696	2,188
Loans and Leases Receivable, Gross, Carrying Amount	157,551	142,674
Commercial Real Estate Loans, Total [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Financing Receivable, Recorded Investment, Current	249,454	236,845
Financing Receivable, Recorded Investment, 30 To 89 Days Past Due	0	0
Financing Receivable, Recorded Investment, 90 Days Past Due and Still Accruing	0	0
Financing Receivable, Recorded Investment, Total Still Accruing	249,454	236,845
Financing Receivable, Recorded Investment, Nonaccrual Status	696	2,188
Loans and Leases Receivable, Gross, Carrying Amount	250,150	239,033	232,380
Residential Real Estate Consumer Mortgage Loans [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Financing Receivable, Recorded Investment, Current	56,889	58,195
Financing Receivable, Recorded Investment, 30 To 89 Days Past Due	60	746
Financing Receivable, Recorded Investment, 90 Days Past Due and Still Accruing	0	0
Financing Receivable, Recorded Investment, Total Still Accruing	56,949	58,941
Financing Receivable, Recorded Investment, Nonaccrual Status	194	599
Loans and Leases Receivable, Gross, Carrying Amount	57,143	59,540
Residential Real Estate Investment Property Loans [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Financing Receivable, Recorded Investment, Current	46,060	46,871
Financing Receivable, Recorded Investment, 30 To 89 Days Past Due	126	312
Financing Receivable, Recorded Investment, 90 Days Past Due and Still Accruing	0	0
Financing Receivable, Recorded Investment, Total Still Accruing	46,186	47,183
Financing Receivable, Recorded Investment, Nonaccrual Status	0	140
Loans and Leases Receivable, Gross, Carrying Amount	46,186	47,323
Residential Real Estate Loans, Total [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Financing Receivable, Recorded Investment, Current	102,949	105,066
Financing Receivable, Recorded Investment, 30 To 89 Days Past Due	186	1,058
Financing Receivable, Recorded Investment, 90 Days Past Due and Still Accruing	0	0
Financing Receivable, Recorded Investment, Total Still Accruing	103,135	106,124
Financing Receivable, Recorded Investment, Nonaccrual Status	194	739
Loans and Leases Receivable, Gross, Carrying Amount	103,329	106,863	110,159
Consumer Installment and Revolving Loans [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Financing Receivable, Recorded Investment, Current	9,917	9,517
Financing Receivable, Recorded Investment, 30 To 89 Days Past Due	17	57
Financing Receivable, Recorded Investment, 90 Days Past Due and Still Accruing	0	0
Financing Receivable, Recorded Investment, Total Still Accruing	9,934	9,574
Financing Receivable, Recorded Investment, Nonaccrual Status	8	14
Loans and Leases Receivable, Gross, Carrying Amount	$ 9,942	$ 9,588	$ 9,877

XML

Allowance for Loan Loss (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Financing Receivable, Allowance for Credit Losses [Roll Forward]
Financing Receivable, Allowance for Credit Losses	$ 4,750	$ 4,965	$ 4,757	$ 4,643
Financing Receivable, Allowance for Credit Losses, Charge-offs	(18)	(489)	(115)	(573)
Financing Receivable, Allowance for Credit Losses, Recoveries	53	194	143	500
Financing Receivable Allowance For Credit Losses Net Chargeoffs Recoveries	35	(295)	28	(73)
Provision for loan losses	0	0	0	100
Financing Receivable, Allowance for Credit Losses	4,785	4,670	4,785	4,670
Commercial and Industrial Loans [Member]
Financing Receivable, Allowance for Credit Losses [Roll Forward]
Financing Receivable, Allowance for Credit Losses	600	677	653	540
Financing Receivable, Allowance for Credit Losses, Charge-offs	0	(449)	(52)	(449)
Financing Receivable, Allowance for Credit Losses, Recoveries	13	39	59	45
Financing Receivable Allowance For Credit Losses Net Chargeoffs Recoveries	13	(410)	7	(404)
Provision for loan losses	(69)	237	(116)	368
Financing Receivable, Allowance for Credit Losses	544	504	544	504
Construction And Land Development Loans [Member]
Financing Receivable, Allowance for Credit Losses [Roll Forward]
Financing Receivable, Allowance for Credit Losses	787	874	734	812
Financing Receivable, Allowance for Credit Losses, Charge-offs	0	0	0	0
Financing Receivable, Allowance for Credit Losses, Recoveries	0	133	0	347
Financing Receivable Allowance For Credit Losses Net Chargeoffs Recoveries	0	133	0	347
Provision for loan losses	49	(156)	102	(308)
Financing Receivable, Allowance for Credit Losses	836	851	836	851
Commercial Real Estate Loans, Total [Member]
Financing Receivable, Allowance for Credit Losses [Roll Forward]
Financing Receivable, Allowance for Credit Losses	2,197	2,121	2,126	2,071
Financing Receivable, Allowance for Credit Losses, Charge-offs	0	0	(39)	0
Financing Receivable, Allowance for Credit Losses, Recoveries	0	0	0	0
Financing Receivable Allowance For Credit Losses Net Chargeoffs Recoveries	0	0	(39)	0
Provision for loan losses	44	(60)	154	(10)
Financing Receivable, Allowance for Credit Losses	2,241	2,061	2,241	2,061
Residential Real Estate Loans, Total [Member]
Financing Receivable, Allowance for Credit Losses [Roll Forward]
Financing Receivable, Allowance for Credit Losses	1,017	1,119	1,071	1,107
Financing Receivable, Allowance for Credit Losses, Charge-offs	(11)	(30)	(15)	(108)
Financing Receivable, Allowance for Credit Losses, Recoveries	19	20	52	97
Financing Receivable Allowance For Credit Losses Net Chargeoffs Recoveries	8	(10)	37	(11)
Provision for loan losses	(28)	(32)	(111)	(19)
Financing Receivable, Allowance for Credit Losses	997	1,077	997	1,077
Consumer Installment and Revolving Loans [Member]
Financing Receivable, Allowance for Credit Losses [Roll Forward]
Financing Receivable, Allowance for Credit Losses	149	174	173	113
Financing Receivable, Allowance for Credit Losses, Charge-offs	(7)	(10)	(9)	(16)
Financing Receivable, Allowance for Credit Losses, Recoveries	21	2	32	11
Financing Receivable Allowance For Credit Losses Net Chargeoffs Recoveries	14	(8)	23	(5)
Provision for loan losses	4	11	(29)	69
Financing Receivable, Allowance for Credit Losses	$ 167	$ 177	$ 167	$ 177

XML

Allowance For Loan Loss Additional Information (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017	Sep. 30, 2017
Financing Receivable Allowance For Credit Loss Additional Information [Line Items]
Financing Receivable, Allowance for Credit Losses, Collectively Evaluated for Impairment	$ 4,785		$ 4,621
Financing Receivable, Collectively Evaluated for Impairment	460,102		447,259
Financing Receivable, Allowance for Credit Losses, Individually Evaluated for Impairment	0		49
Financing Receivable, Individually Evaluated for Impairment	858		2,713
Allowance for loan losses	4,785	$ 4,757	4,670
Loans and Leases Receivable, Gross, Carrying Amount	460,960	454,177	449,972
Commercial and Industrial Loans [Member]
Financing Receivable Allowance For Credit Loss Additional Information [Line Items]
Financing Receivable, Allowance for Credit Losses, Collectively Evaluated for Impairment	544		471
Financing Receivable, Collectively Evaluated for Impairment	52,430		50,068
Financing Receivable, Allowance for Credit Losses, Individually Evaluated for Impairment	0		33
Financing Receivable, Individually Evaluated for Impairment	0		33
Allowance for loan losses	544		504
Loans and Leases Receivable, Gross, Carrying Amount	52,430	59,086	50,101
Construction And Land Development Loans [Member]
Financing Receivable Allowance For Credit Loss Additional Information [Line Items]
Financing Receivable, Allowance for Credit Losses, Collectively Evaluated for Impairment	836		851
Financing Receivable, Collectively Evaluated for Impairment	45,109		47,455
Financing Receivable, Allowance for Credit Losses, Individually Evaluated for Impairment	0		0
Financing Receivable, Individually Evaluated for Impairment	0		0
Allowance for loan losses	836		851
Loans and Leases Receivable, Gross, Carrying Amount	45,109	39,607	47,455
Commercial Real Estate Loans, Total [Member]
Financing Receivable Allowance For Credit Loss Additional Information [Line Items]
Financing Receivable, Allowance for Credit Losses, Collectively Evaluated for Impairment	2,241		2,045
Financing Receivable, Collectively Evaluated for Impairment	249,292		229,700
Financing Receivable, Allowance for Credit Losses, Individually Evaluated for Impairment	0		16
Financing Receivable, Individually Evaluated for Impairment	858		2,680
Allowance for loan losses	2,241		2,061
Loans and Leases Receivable, Gross, Carrying Amount	250,150	239,033	232,380
Residential Real Estate Loans, Total [Member]
Financing Receivable Allowance For Credit Loss Additional Information [Line Items]
Financing Receivable, Allowance for Credit Losses, Collectively Evaluated for Impairment	997		1,077
Financing Receivable, Collectively Evaluated for Impairment	103,329		110,159
Financing Receivable, Allowance for Credit Losses, Individually Evaluated for Impairment	0		0
Financing Receivable, Individually Evaluated for Impairment	0		0
Allowance for loan losses	997		1,077
Loans and Leases Receivable, Gross, Carrying Amount	103,329	106,863	110,159
Consumer Installment and Revolving Loans [Member]
Financing Receivable Allowance For Credit Loss Additional Information [Line Items]
Financing Receivable, Allowance for Credit Losses, Collectively Evaluated for Impairment	167		177
Financing Receivable, Collectively Evaluated for Impairment	9,942		9,877
Financing Receivable, Allowance for Credit Losses, Individually Evaluated for Impairment	0		0
Financing Receivable, Individually Evaluated for Impairment	0		0
Allowance for loan losses	167		177
Loans and Leases Receivable, Gross, Carrying Amount	$ 9,942	$ 9,588	$ 9,877

XML

Loan Credit Quality Analysis (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017	Sep. 30, 2017
Financing Receivable, Recorded Investment [Line Items]
Financing Receivable, Recorded Investment, Pass	$ 448,028	$ 443,362
Financing Receivable, Recorded Investment, Special Mention	6,347	2,192
Financing Receivable Recorded Investment, Substandard Accruing	5,651	5,651
Financing Receivable, Recorded Investment, Nonaccrual Status	934	2,972
Loans and Leases Receivable, Gross, Carrying Amount	460,960	454,177	$ 449,972
Commercial and Industrial Loans [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing Receivable, Recorded Investment, Pass	50,137	58,842
Financing Receivable, Recorded Investment, Special Mention	2,197	94
Financing Receivable Recorded Investment, Substandard Accruing	96	119
Financing Receivable, Recorded Investment, Nonaccrual Status	0	31
Loans and Leases Receivable, Gross, Carrying Amount	52,430	59,086	50,101
Construction And Land Development Loans [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing Receivable, Recorded Investment, Pass	44,257	39,049
Financing Receivable, Recorded Investment, Special Mention	53	90
Financing Receivable Recorded Investment, Substandard Accruing	763	468
Financing Receivable, Recorded Investment, Nonaccrual Status	36	0
Loans and Leases Receivable, Gross, Carrying Amount	45,109	39,607	47,455
Commercial Real Estate Owner Occupied Loans [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing Receivable, Recorded Investment, Pass	51,138	43,615
Financing Receivable, Recorded Investment, Special Mention	387	240
Financing Receivable Recorded Investment, Substandard Accruing	321	337
Financing Receivable, Recorded Investment, Nonaccrual Status	0	0
Loans and Leases Receivable, Gross, Carrying Amount	51,846	44,192
Commercial Real Estate Multifamily [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing Receivable, Recorded Investment, Pass	40,753	52,167
Financing Receivable, Recorded Investment, Special Mention	0	0
Financing Receivable Recorded Investment, Substandard Accruing	0	0
Financing Receivable, Recorded Investment, Nonaccrual Status	0	0
Loans and Leases Receivable, Gross, Carrying Amount	40,753	52,167
Commercial Real Estate Other Loans [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing Receivable, Recorded Investment, Pass	155,490	139,695
Financing Receivable, Recorded Investment, Special Mention	988	395
Financing Receivable Recorded Investment, Substandard Accruing	377	396
Financing Receivable, Recorded Investment, Nonaccrual Status	696	2,188
Loans and Leases Receivable, Gross, Carrying Amount	157,551	142,674
Commercial Real Estate Loans, Total [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing Receivable, Recorded Investment, Pass	247,381	235,477
Financing Receivable, Recorded Investment, Special Mention	1,375	635
Financing Receivable Recorded Investment, Substandard Accruing	698	733
Financing Receivable, Recorded Investment, Nonaccrual Status	696	2,188
Loans and Leases Receivable, Gross, Carrying Amount	250,150	239,033	232,380
Residential Real Estate Consumer Mortgage Loans [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing Receivable, Recorded Investment, Pass	51,236	54,101
Financing Receivable, Recorded Investment, Special Mention	2,439	1,254
Financing Receivable Recorded Investment, Substandard Accruing	3,274	3,586
Financing Receivable, Recorded Investment, Nonaccrual Status	194	599
Loans and Leases Receivable, Gross, Carrying Amount	57,143	59,540
Residential Real Estate Investment Property Loans [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing Receivable, Recorded Investment, Pass	45,231	46,463
Financing Receivable, Recorded Investment, Special Mention	204	53
Financing Receivable Recorded Investment, Substandard Accruing	751	667
Financing Receivable, Recorded Investment, Nonaccrual Status	0	140
Loans and Leases Receivable, Gross, Carrying Amount	46,186	47,323
Residential Real Estate Loans, Total [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing Receivable, Recorded Investment, Pass	96,467	100,564
Financing Receivable, Recorded Investment, Special Mention	2,643	1,307
Financing Receivable Recorded Investment, Substandard Accruing	4,025	4,253
Financing Receivable, Recorded Investment, Nonaccrual Status	194	739
Loans and Leases Receivable, Gross, Carrying Amount	103,329	106,863	110,159
Consumer Installment and Revolving Loans [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing Receivable, Recorded Investment, Pass	9,786	9,430
Financing Receivable, Recorded Investment, Special Mention	79	66
Financing Receivable Recorded Investment, Substandard Accruing	69	78
Financing Receivable, Recorded Investment, Nonaccrual Status	8	14
Loans and Leases Receivable, Gross, Carrying Amount	$ 9,942	$ 9,588	$ 9,877

XML

Impaired Loans (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017
Financing Receivable, Impaired [Line Items]
Impaired Financing Receivable, with No Related Allowance, Unpaid Principal Balance	$ 915	$ 3,630
Impaired Financing Receivable, with No Related Allowance, Charge-off And Payments Applied	(57)	(1,094)
Impaired Financing Receivable, with No Related Allowance, Recorded Investment	858	2,536
Impaired Financing Receivable, with Related Allowance, Unpaid Principal Balance		227
Impaired Financing Receivable, with Related Allowance, Charge-off And Payments Applied		(21)
Impaired Financing Receivable, with Related Allowance, Recorded Investment		206
Impaired Financing Receivable, With Related Allowance, Related Allowance		42
Impaired Financing Receivable, Unpaid Principal Balance	915	3,857
Impaired Financing Receivable, Charge-off And Payments Applied	(57)	(1,115)
Impaired Financing Receivable, Recorded Investment	858	2,742
Impaired Financing Receivable, Related Allowance	0	42
Commercial and Industrial Loans [Member]
Financing Receivable, Impaired [Line Items]
Impaired Financing Receivable, with Related Allowance, Unpaid Principal Balance		52
Impaired Financing Receivable, with Related Allowance, Charge-off And Payments Applied		(21)
Impaired Financing Receivable, with Related Allowance, Recorded Investment		31
Impaired Financing Receivable, With Related Allowance, Related Allowance		31
Commercial Real Estate Owner Occupied Loans [Member]
Financing Receivable, Impaired [Line Items]
Impaired Financing Receivable, with No Related Allowance, Unpaid Principal Balance	162
Impaired Financing Receivable, with No Related Allowance, Charge-off And Payments Applied	0
Impaired Financing Receivable, with No Related Allowance, Recorded Investment	162
Impaired Financing Receivable, with Related Allowance, Unpaid Principal Balance		175
Impaired Financing Receivable, with Related Allowance, Charge-off And Payments Applied		0
Impaired Financing Receivable, with Related Allowance, Recorded Investment		175
Impaired Financing Receivable, With Related Allowance, Related Allowance		11
Commercial Real Estate Other Loans [Member]
Financing Receivable, Impaired [Line Items]
Impaired Financing Receivable, with No Related Allowance, Unpaid Principal Balance	753	3,630
Impaired Financing Receivable, with No Related Allowance, Charge-off And Payments Applied	(57)	(1,094)
Impaired Financing Receivable, with No Related Allowance, Recorded Investment	696	2,536
Commercial Real Estate Loans, Total [Member]
Financing Receivable, Impaired [Line Items]
Impaired Financing Receivable, with No Related Allowance, Unpaid Principal Balance	915	3,630
Impaired Financing Receivable, with No Related Allowance, Charge-off And Payments Applied	(57)	(1,094)
Impaired Financing Receivable, with No Related Allowance, Recorded Investment	$ 858	2,536
Impaired Financing Receivable, with Related Allowance, Unpaid Principal Balance		175
Impaired Financing Receivable, with Related Allowance, Charge-off And Payments Applied		0
Impaired Financing Receivable, with Related Allowance, Recorded Investment		175
Impaired Financing Receivable, With Related Allowance, Related Allowance		$ 11

XML

Impaired Loans Averages (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Impaired Financing Receivable, Average Recorded Investment [Line Items]
Impaired Financing Receivable, Average Recorded Investment	$ 865	$ 2,456	$ 1,668	$ 2,227
Impaired Financing Receivable, Interest Income, Accrual Method	2	2	7	8
Commercial and Industrial Loans [Member]
Impaired Financing Receivable, Average Recorded Investment [Line Items]
Impaired Financing Receivable, Average Recorded Investment	0	126	12	55
Impaired Financing Receivable, Interest Income, Accrual Method	0	0	0	0
Construction And Land Development Loans [Member]
Impaired Financing Receivable, Average Recorded Investment [Line Items]
Impaired Financing Receivable, Average Recorded Investment		0		15
Impaired Financing Receivable, Interest Income, Accrual Method		0		0
Commercial Real Estate Owner Occupied Loans [Member]
Impaired Financing Receivable, Average Recorded Investment [Line Items]
Impaired Financing Receivable, Average Recorded Investment	164	182	168	186
Impaired Financing Receivable, Interest Income, Accrual Method	2	2	7	8
Commercial Real Estate Other Loans [Member]
Impaired Financing Receivable, Average Recorded Investment [Line Items]
Impaired Financing Receivable, Average Recorded Investment	701	2,148	1,488	1,971
Impaired Financing Receivable, Interest Income, Accrual Method	0	0	0	0
Commercial Real Estate Loans, Total [Member]
Impaired Financing Receivable, Average Recorded Investment [Line Items]
Impaired Financing Receivable, Average Recorded Investment	865	2,330	1,656	2,157
Impaired Financing Receivable, Interest Income, Accrual Method	$ 2	$ 2	$ 7	$ 8

XML

Troubled Debt Restructuring (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017
Impaired Financing Receivable And Troubled Debt Restructing [Line Items]
Impaired Financing Receivable, Troubled Debt Restructuring, Still Accruing	$ 162	$ 462
Impaired Financing Receivable, Troubled Debt Restructuring, Nonaccrual	696	1,462
Impaired Financing Receivable, Trouble Debt Structuring, Total	858	1,924
Impaired Financing Receivable, Troubled Debt Restructuring, Allowance for Credit Losses	0	42
Commercial and Industrial Loans [Member]
Impaired Financing Receivable And Troubled Debt Restructing [Line Items]
Impaired Financing Receivable, Troubled Debt Restructuring, Still Accruing	0	0
Impaired Financing Receivable, Troubled Debt Restructuring, Nonaccrual	0	31
Impaired Financing Receivable, Trouble Debt Structuring, Total	0	31
Impaired Financing Receivable, Troubled Debt Restructuring, Allowance for Credit Losses	0	31
Commercial Real Estate Owner Occupied Loans [Member]
Impaired Financing Receivable And Troubled Debt Restructing [Line Items]
Impaired Financing Receivable, Troubled Debt Restructuring, Still Accruing	162	175
Impaired Financing Receivable, Troubled Debt Restructuring, Nonaccrual	0	0
Impaired Financing Receivable, Trouble Debt Structuring, Total	162	175
Impaired Financing Receivable, Troubled Debt Restructuring, Allowance for Credit Losses	0	11
Commercial Real Estate Other Loans [Member]
Impaired Financing Receivable And Troubled Debt Restructing [Line Items]
Impaired Financing Receivable, Troubled Debt Restructuring, Still Accruing	0	287
Impaired Financing Receivable, Troubled Debt Restructuring, Nonaccrual	696	1,431
Impaired Financing Receivable, Trouble Debt Structuring, Total	696	1,718
Impaired Financing Receivable, Troubled Debt Restructuring, Allowance for Credit Losses	0	0
Commercial Real Estate Loans, Total [Member]
Impaired Financing Receivable And Troubled Debt Restructing [Line Items]
Impaired Financing Receivable, Troubled Debt Restructuring, Still Accruing	162	462
Impaired Financing Receivable, Troubled Debt Restructuring, Nonaccrual	696	1,431
Impaired Financing Receivable, Trouble Debt Structuring, Total	858	1,893
Impaired Financing Receivable, Troubled Debt Restructuring, Allowance for Credit Losses	$ 0	$ 11

XML

Troubled Debt Restructuring Modifications (Details) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2018 USD ($)	Sep. 30, 2017 USD ($)	Sep. 30, 2018 USD ($)	Sep. 30, 2017 USD ($)
Financing Receivable, Modifications [Line Items]
Financing Receivable, Modification, Number of Contracts	1	1	2	2
Financing Receivable, Modification, Pre-Modification Recorded Investment	$ 710	$ 34	$ 1,447	$ 1,309
Financing Receivable, Modifications, Post-Modifications Recorded Investment	$ 710	$ 34	$ 1,447	$ 1,300
Commercial and Industrial Loans [Member]
Financing Receivable, Modifications [Line Items]
Financing Receivable, Modification, Number of Contracts		1		1
Financing Receivable, Modification, Pre-Modification Recorded Investment		$ 34		$ 34
Financing Receivable, Modifications, Post-Modifications Recorded Investment		$ 34		$ 34
Commercial Real Estate Other Loans [Member]
Financing Receivable, Modifications [Line Items]
Financing Receivable, Modification, Number of Contracts	1		2	1
Financing Receivable, Modification, Pre-Modification Recorded Investment	$ 710		$ 1,447	$ 1,275
Financing Receivable, Modifications, Post-Modifications Recorded Investment	$ 710		$ 1,447	$ 1,266
Commercial Real Estate Loans, Total [Member]
Financing Receivable, Modifications [Line Items]
Financing Receivable, Modification, Number of Contracts	1		2	1
Financing Receivable, Modification, Pre-Modification Recorded Investment	$ 710		$ 1,447	$ 1,275
Financing Receivable, Modifications, Post-Modifications Recorded Investment	$ 710		$ 1,447	$ 1,266

XML

Troubled Debt Restructuring Defaults (Details) $ in Thousands	3 Months Ended	9 Months Ended
	Sep. 30, 2018 USD ($)	Sep. 30, 2018 USD ($)
Financing Receivable, Modifications, Subsequent Default [Line Items]
Financing Receivable, Modifications, Subsequent Default, Number of Contracts	0	1
Financing Receivable, Modifications, Subsequent Default, Recorded Investment	$ 0	$ 1,259
Commercial Real Estate Other Loans [Member]
Financing Receivable, Modifications, Subsequent Default [Line Items]
Financing Receivable, Modifications, Subsequent Default, Number of Contracts	0	1
Financing Receivable, Modifications, Subsequent Default, Recorded Investment	$ 0	$ 1,259
Commercial Real Estate Loans, Total [Member]
Financing Receivable, Modifications, Subsequent Default [Line Items]
Financing Receivable, Modifications, Subsequent Default, Number of Contracts	0	1
Financing Receivable, Modifications, Subsequent Default, Recorded Investment	$ 0	$ 1,259

XML

Loans Textuals (Details)	Sep. 30, 2018
Loan and Lease Disclosure (Textuals) [Abstract]
Percentage Of Loans Secured By Real Estate	86.50%

XML

Mortgage Servicing Rights, Net (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Servicing Asset at Amortized Value, Balance [Roll Forward]
Servicing Asset at Amortized Cost, Beginning	$ 1,549	$ 1,762	$ 1,644	$ 1,952
Servicing Asset at Amortized Value, Additions	61	72	175	165
Servicing Asset at Amortized Value, Amortization	115	131	324	415
Servicing Asset at Amortized Value, Valuation Allowance	0	0	0	1
Servicing Asset at Amortized Cost, Ending	1,495	1,703	1,495	1,703
Valuation Allowance for Impairment of Recognized Servicing Assets, Balance [Abstract]
Valuation Allowance for Impairment of Recognized Servicing Assets, Beginning Balance	0	0	0	1
Valuation Allowance for Impairment of Recognized Servicing Assets, Ending Balance	0	0	0	0
Servicing Asset at Amortized Value, Fair Value [Abstract]
Servicing Asset at Amortized Value, Fair Value, Beginning	2,659	2,520	2,528	2,678
Servicing Asset at Amortized Value, Fair Value, Ending	$ 2,615	$ 2,441	$ 2,615	$ 2,441

XML

Derivative Instruments (Details) $ in Thousands	Dec. 31, 2017 USD ($)
Derivative [Line Items]
Derivative, Notional Amount1	$ 7,234
DerivativeAssetFairValueGrossAsset	52
Derivative Asset, Fair Value, Gross Liability	52
Derivative, Interest Rate Swap, Pay Fixed, Receive Variable [Member]
Derivative [Line Items]
Derivative, Notional Amount1	3,617
DerivativeAssetFairValueGrossAsset	0
Derivative Asset, Fair Value, Gross Liability	52
Derivative, Interest Rate Swap, Pay Variable, Receive Fixed [Member]
Derivative [Line Items]
Derivative, Notional Amount1	3,617
DerivativeAssetFairValueGrossAsset	52
Derivative Asset, Fair Value, Gross Liability	$ 0

XML

Fair Value (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017
Fair Value, Measurements, Recurring [Member]
Fair Value Disclosure, Securities Available-for-Sale [Abstract]
Fair Value Disclosure, Agency RMBS	$ 50,489	$ 53,062
Fair Value Disclosure, State and Political Subdivisions	122,040	133,072
Trust Preferred Securities	70,807	71,563
Fair Value Disclosure, Securities Available-for-Sale, Total	243,336	257,697
Other Assets, Fair Value Disclosure		52
Assets, Fair Value Disclosure, Recurring	243,336	257,749
Liabilities Fair Value Disclosure [Abstract]
Other Liabilities, Fair Value Disclosure		52
Liabilities, Fair Value Disclosure, Recurring, Total		52
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 1 [Member]
Fair Value Disclosure, Securities Available-for-Sale [Abstract]
Fair Value Disclosure, Agency RMBS	0	0
Fair Value Disclosure, State and Political Subdivisions	0	0
Trust Preferred Securities	0	0
Fair Value Disclosure, Securities Available-for-Sale, Total	0	0
Other Assets, Fair Value Disclosure		0
Assets, Fair Value Disclosure, Recurring	0	0
Liabilities Fair Value Disclosure [Abstract]
Other Liabilities, Fair Value Disclosure		0
Liabilities, Fair Value Disclosure, Recurring, Total		0
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 2 [Member]
Fair Value Disclosure, Securities Available-for-Sale [Abstract]
Fair Value Disclosure, Agency RMBS	50,489	53,062
Fair Value Disclosure, State and Political Subdivisions	122,040	133,072
Trust Preferred Securities	70,807	71,563
Fair Value Disclosure, Securities Available-for-Sale, Total	243,336	257,697
Other Assets, Fair Value Disclosure		52
Assets, Fair Value Disclosure, Recurring	243,336	257,749
Liabilities Fair Value Disclosure [Abstract]
Other Liabilities, Fair Value Disclosure		52
Liabilities, Fair Value Disclosure, Recurring, Total		52
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 3 [Member]
Fair Value Disclosure, Securities Available-for-Sale [Abstract]
Fair Value Disclosure, Agency RMBS	0	0
Fair Value Disclosure, State and Political Subdivisions	0	0
Trust Preferred Securities	0	0
Fair Value Disclosure, Securities Available-for-Sale, Total	0	0
Other Assets, Fair Value Disclosure		0
Assets, Fair Value Disclosure, Recurring	0	0
Liabilities Fair Value Disclosure [Abstract]
Other Liabilities, Fair Value Disclosure		0
Liabilities, Fair Value Disclosure, Recurring, Total		0
Fair Value, Measurements, Nonrecurring [Member]
Fair Value, Assets and Liabilities Measured on Nonrecurring Basis [Abstract]
Loans Held-for-sale, Fair Value Disclosure	1,548	1,922
Impaired Loans, Fair Value Disclosure	858	2,700
Servicing Asset at Fair Value, Amount	1,632	1,644
Assets, Fair Value Disclosure, Nonrecurring	4,038	6,266
Fair Value, Measurements, Nonrecurring [Member] | Fair Value, Inputs, Level 1 [Member]
Fair Value, Assets and Liabilities Measured on Nonrecurring Basis [Abstract]
Loans Held-for-sale, Fair Value Disclosure	0	0
Impaired Loans, Fair Value Disclosure	0	0
Servicing Asset at Fair Value, Amount	0	0
Assets, Fair Value Disclosure, Nonrecurring	0	0
Fair Value, Measurements, Nonrecurring [Member] | Fair Value, Inputs, Level 2 [Member]
Fair Value, Assets and Liabilities Measured on Nonrecurring Basis [Abstract]
Loans Held-for-sale, Fair Value Disclosure	1,548	1,922
Impaired Loans, Fair Value Disclosure	0	0
Servicing Asset at Fair Value, Amount	0	0
Assets, Fair Value Disclosure, Nonrecurring	1,548	1,922
Fair Value, Measurements, Nonrecurring [Member] | Fair Value, Inputs, Level 3 [Member]
Fair Value, Assets and Liabilities Measured on Nonrecurring Basis [Abstract]
Loans Held-for-sale, Fair Value Disclosure	0	0
Impaired Loans, Fair Value Disclosure	858	2,700
Servicing Asset at Fair Value, Amount	1,632	1,644
Assets, Fair Value Disclosure, Nonrecurring	$ 2,490	$ 4,344

XML

Fair Value Unobservable Inputs (Details) - Fair Value, Measurements, Nonrecurring [Member] $ in Thousands	Sep. 30, 2018 USD ($)
Impaired Loans [Member] | Fair Value, Disclosure Item Amounts [Domain]
Schedule Of Fair Value Significant Unobservable Inputs Used [Line Items]
Assets, Fair Value Disclosure	$ 858
Impaired Loans [Member] | Fair Value, Disclosure Item Amounts [Domain] | Appraisal, Appraisal Discount [Member]
Schedule Of Fair Value Significant Unobservable Inputs Used [Line Items]
Unobservable Input, Weighted Average of Input Percent	52.40%
Other Real Estate Owned [Member]
Schedule Of Fair Value Significant Unobservable Inputs Used [Line Items]
Assets, Fair Value Disclosure	$ 137
Other Real Estate Owned [Member] | Appraisal, Appraisal Discount [Member]
Schedule Of Fair Value Significant Unobservable Inputs Used [Line Items]
Unobservable Input, Weighted Average of Input Percent	10.00%
Mortgage Servicing Rights [Member]
Schedule Of Fair Value Significant Unobservable Inputs Used [Line Items]
Assets, Fair Value Disclosure	$ 1,495
Mortgage Servicing Rights [Member] | Discounted Cash Flow, Prepayment Speed [Member]
Schedule Of Fair Value Significant Unobservable Inputs Used [Line Items]
Unobservable Input, Weighted Average of Input Percent	9.50%
Mortgage Servicing Rights [Member] | Discounted Cash Flow, Discount Rate [Member]
Schedule Of Fair Value Significant Unobservable Inputs Used [Line Items]
Unobservable Input, Weighted Average of Input Percent	10.00%

XML

Fair Value Financial Instruments (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017
Carrying (Reported) Amount, Fair Value Disclosure [Member]
Fair Value, Financial Assets: [Abstract]
Fair Value, Financial Instruments, Loans, Net	$ 455,542	$ 448,894
Fair Value, Financial Instruments, Loans Held For Sale	1,548	1,922
Fair Value, Financial Liabilities: [Abstract]
Fair Value, Financial Instruments, Time Deposits	182,339	188,071
Fair Value, Financial Instruments, Long-term Debt	0	3,217
Estimate of Fair Value, Fair Value Disclosure [Member]
Fair Value, Financial Assets: [Abstract]
Fair Value, Financial Instruments, Loans, Net	452,124	447,468
Fair Value, Financial Instruments, Loans Held For Sale	1,594	1,950
Fair Value, Financial Liabilities: [Abstract]
Fair Value, Financial Instruments, Time Deposits	182,485	185,564
Fair Value, Financial Instruments, Long-term Debt	0	3,217
Estimate of Fair Value, Fair Value Disclosure [Member] | Fair Value, Inputs, Level 1 [Member]
Fair Value, Financial Assets: [Abstract]
Fair Value, Financial Instruments, Loans, Net	0	0
Fair Value, Financial Instruments, Loans Held For Sale	0	0
Fair Value, Financial Liabilities: [Abstract]
Fair Value, Financial Instruments, Time Deposits	0	0
Fair Value, Financial Instruments, Long-term Debt	0	0
Estimate of Fair Value, Fair Value Disclosure [Member] | Fair Value, Inputs, Level 2 [Member]
Fair Value, Financial Assets: [Abstract]
Fair Value, Financial Instruments, Loans, Net	0	0
Fair Value, Financial Instruments, Loans Held For Sale	1,594	1,950
Fair Value, Financial Liabilities: [Abstract]
Fair Value, Financial Instruments, Time Deposits	182,485	185,564
Fair Value, Financial Instruments, Long-term Debt	0	3,217
Estimate of Fair Value, Fair Value Disclosure [Member] | Fair Value, Inputs, Level 3 [Member]
Fair Value, Financial Assets: [Abstract]
Fair Value, Financial Instruments, Loans, Net	452,124	447,468
Fair Value, Financial Instruments, Loans Held For Sale	0	0
Fair Value, Financial Liabilities: [Abstract]
Fair Value, Financial Instruments, Time Deposits	0	0
Fair Value, Financial Instruments, Long-term Debt	$ 0	$ 0