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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

For the Quarterly period ended June 30, 2019

Commission file number 001-35296

FARMERS NATIONAL BANC CORP.

(Exact name of registrant as specified in its charter)

OHIO |  | 34-1371693
(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No)
20 South Broad Street Canfield, OH |  | 44406
(Address of principal executive offices) |  | (Zip Code)

(330) 533-3341

(Registrant’s telephone number, including area code)

Not applicable

(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 pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) 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, 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.

Large accelerated filer |  | ☐ |  | Accelerated filer |  | ☒
Non-accelerated filer |  | ☐ |  | Small 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 Exchange Act). Yes ☐ No ☒

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

Title of each class | Trading Symbol | Name of each exchange on which registered
Common Stock, No Par Value | FMNB | The NASDAQ Stock Market

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

Class |  | Outstanding at July 31, 2019
Common Stock, No Par Value |  | 27,666,986 shares

| Page Number
PART I - FINANCIAL INFORMATION |
Item 1 | Financial Statements (Unaudited) |
| Included in Part I of this report: |
| Farmers National Banc Corp. and Subsidiaries |
| Consolidated Balance Sheets | 2
| Consolidated Statements of Income | 3
| Consolidated Statements of Comprehensive Income | 4
| Consolidated Statement of Stockholders’ Equity | 5
| Consolidated Statements of Cash Flows | 7
| Notes to Unaudited Consolidated Financial Statements | 8
Item 2 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 44
Item 3 | Quantitative and Qualitative Disclosures About Market Risk | 53
Item 4 | Controls and Procedures | 54
PART II - OTHER INFORMATION | 54
Item 1 | Legal Proceedings | 54
Item 1A | Risk Factors | 54
Item 2 | Unregistered Sales of Equity Securities and Use of Proceeds | 55
Item 3 | Defaults Upon Senior Securities | 55
Item 4 | Mine Safety Disclosures | 55
Item 5 | Other Information | 55
Item 6 | Exhibits | 56
SIGNATURES | 57
10-Q Certifications |
Section 906 Certifications |

1

CONSOLIDATED BALANCE SHEETS

FARMERS NATIONAL BANC CORP. AND SUBSIDIARIES

|  | (In Thousands of Dollars) |
(Unaudited) |  | June 30, 2019 |  |  | December 31, 2018 |
ASSETS |  |  |  |  |  |  |  |
Cash and due from banks |  | $ | 21,821 |  |  | $ | 18,042 |
Federal funds sold and other |  |  | 42,186 |  |  |  | 39,884 |
TOTAL CASH AND CASH EQUIVALENTS |  |  | 64,007 |  |  |  | 57,926 |
Securities available for sale |  |  | 424,252 |  |  |  | 402,190 |
Equity securities |  |  | 7,222 |  |  |  | 7,130 |
Loans held for sale |  |  | 1,093 |  |  |  | 1,237 |
Loans |  |  | 1,780,504 |  |  |  | 1,735,840 |
Less allowance for loan losses |  |  | 14,222 |  |  |  | 13,592 |
NET LOANS |  |  | 1,766,282 |  |  |  | 1,722,248 |
Premises and equipment, net |  |  | 24,460 |  |  |  | 21,211 |
Goodwill |  |  | 38,201 |  |  |  | 38,201 |
Other intangibles, net |  |  | 5,097 |  |  |  | 5,751 |
Bank owned life insurance |  |  | 35,180 |  |  |  | 34,758 |
Other assets |  |  | 40,155 |  |  |  | 38,212 |
TOTAL ASSETS |  | $ | 2,405,949 |  |  | $ | 2,328,864 |
LIABILITIES AND STOCKHOLDERS' EQUITY |  |  |  |  |  |  |  |
Deposits: |  |  |  |  |  |  |  |
Noninterest-bearing |  | $ | 415,935 |  |  | $ | 421,950 |
Interest-bearing |  |  | 1,449,684 |  |  |  | 1,352,770 |
Brokered time deposits |  |  | 135,016 |  |  |  | 25,000 |
TOTAL DEPOSITS |  |  | 2,000,635 |  |  |  | 1,799,720 |
Short-term borrowings |  |  | 91,312 |  |  |  | 244,759 |
Long-term borrowings |  |  | 5,666 |  |  |  | 6,033 |
Other liabilities |  |  | 23,511 |  |  |  | 16,032 |
TOTAL LIABILITIES |  |  | 2,121,124 |  |  |  | 2,066,544 |
Commitments and contingent liabilities |  |  |  |  |  |  |  |
Stockholders' Equity: |  |  |  |  |  |  |  |
Common Stock - Authorized 50,000,000 shares; issued 28,179,598 in 2019 and 2018 |  |  | 185,687 |  |  |  | 186,163 |
Retained earnings |  |  | 95,557 |  |  |  | 83,630 |
Accumulated other comprehensive income (loss) |  |  | 7,877 |  |  |  | (4,030 | )
Treasury stock, at cost; 411,915 shares in 2019 and 387,697 in 2018 |  |  | (4,296 | ) |  |  | (3,443 | )
TOTAL STOCKHOLDERS' EQUITY |  |  | 284,825 |  |  |  | 262,320 |
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY |  | $ | 2,405,949 |  |  | $ | 2,328,864 |

See accompanying notes

2

CONSOLIDATED STATEMENTS OF INCOME

FARMERS NATIONAL BANC CORP. AND SUBSIDIARIES

|  | (In Thousands except Per Share Data) |
|  | For the Three Months Ended |  | For the Six Months Ended |
(Unaudited) |  | June 30, 2019 |  |  | June 30, 2018 |  | June 30, 2019 |  |  | June 30, 2018 |
INTEREST AND DIVIDEND INCOME |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Loans, including fees |  | $ | 22,324 |  |  | $ | 19,545 |  | $ | 43,793 |  |  | $ | 37,972 |
Taxable securities |  |  | 1,238 |  |  |  | 1,228 |  |  | 2,482 |  |  |  | 2,461 |
Tax exempt securities |  |  | 1,638 |  |  |  | 1,380 |  |  | 3,233 |  |  |  | 2,711 |
Dividends |  |  | 171 |  |  |  | 154 |  |  | 346 |  |  |  | 300 |
Federal funds sold and other interest income |  |  | 158 |  |  |  | 167 |  |  | 354 |  |  |  | 312 |
TOTAL INTEREST AND DIVIDEND INCOME |  |  | 25,529 |  |  |  | 22,474 |  |  | 50,208 |  |  |  | 43,756 |
INTEREST EXPENSE |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits |  |  | 4,359 |  |  |  | 1,723 |  |  | 7,794 |  |  |  | 3,134 |
Short-term borrowings |  |  | 631 |  |  |  | 1,140 |  |  | 1,862 |  |  |  | 2,021 |
Long-term borrowings |  |  | 48 |  |  |  | 49 |  |  | 96 |  |  |  | 93 |
TOTAL INTEREST EXPENSE |  |  | 5,038 |  |  |  | 2,912 |  |  | 9,752 |  |  |  | 5,248 |
NET INTEREST INCOME |  |  | 20,491 |  |  |  | 19,562 |  |  | 40,456 |  |  |  | 38,508 |
Provision for loan losses |  |  | 750 |  |  |  | 750 |  |  | 1,300 |  |  |  | 1,525 |
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES |  |  | 19,741 |  |  |  | 18,812 |  |  | 39,156 |  |  |  | 36,983 |
NONINTEREST INCOME |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Service charges on deposit accounts |  |  | 1,093 |  |  |  | 985 |  |  | 2,167 |  |  |  | 1,988 |
Bank owned life insurance income |  |  | 208 |  |  |  | 219 |  |  | 422 |  |  |  | 441 |
Trust fees |  |  | 1,821 |  |  |  | 1,740 |  |  | 3,679 |  |  |  | 3,547 |
Insurance agency commissions |  |  | 739 |  |  |  | 713 |  |  | 1,542 |  |  |  | 1,412 |
Security gains (losses), including fair value changes for equity securities |  |  | (18 | ) |  |  | 27 |  |  | (8 | ) |  |  | 45 |
Retirement plan consulting fees |  |  | 450 |  |  |  | 465 |  |  | 808 |  |  |  | 844 |
Investment commissions |  |  | 327 |  |  |  | 315 |  |  | 587 |  |  |  | 571 |
Net gains on sale of loans |  |  | 1,055 |  |  |  | 606 |  |  | 1,726 |  |  |  | 1,093 |
Debit card and EFT fees |  |  | 887 |  |  |  | 870 |  |  | 1,665 |  |  |  | 1,676 |
Other operating income |  |  | 432 |  |  |  | 366 |  |  | 926 |  |  |  | 699 |
TOTAL NONINTEREST INCOME |  |  | 6,994 |  |  |  | 6,306 |  |  | 13,514 |  |  |  | 12,316 |
NONINTEREST EXPENSES |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Salaries and employee benefits |  |  | 9,266 |  |  |  | 8,828 |  |  | 18,622 |  |  |  | 17,566 |
Occupancy and equipment |  |  | 1,650 |  |  |  | 1,611 |  |  | 3,367 |  |  |  | 3,315 |
State and local taxes |  |  | 472 |  |  |  | 479 |  |  | 942 |  |  |  | 938 |
Professional fees |  |  | 887 |  |  |  | 737 |  |  | 1,681 |  |  |  | 1,435 |
Merger related (income) costs |  |  | (19 | ) |  |  | 0 |  |  | (19 | ) |  |  | 25 |
Advertising |  |  | 442 |  |  |  | 379 |  |  | 692 |  |  |  | 654 |
FDIC insurance |  |  | 85 |  |  |  | 225 |  |  | 172 |  |  |  | 447 |
Intangible amortization |  |  | 327 |  |  |  | 355 |  |  | 654 |  |  |  | 709 |
Core processing charges |  |  | 803 |  |  |  | 794 |  |  | 1,594 |  |  |  | 1,533 |
Telephone and data |  |  | 217 |  |  |  | 238 |  |  | 477 |  |  |  | 475 |
Other operating expenses |  |  | 2,574 |  |  |  | 1,812 |  |  | 4,499 |  |  |  | 3,457 |
TOTAL NONINTEREST EXPENSES |  |  | 16,704 |  |  |  | 15,458 |  |  | 32,681 |  |  |  | 30,554 |
INCOME BEFORE INCOME TAXES |  |  | 10,031 |  |  |  | 9,660 |  |  | 19,989 |  |  |  | 18,745 |
INCOME TAXES |  |  | 1,488 |  |  |  | 1,587 |  |  | 3,058 |  |  |  | 2,946 |
NET INCOME |  | $ | 8,543 |  |  | $ | 8,073 |  | $ | 16,931 |  |  | $ | 15,799 |
EARNINGS PER SHARE - basic |  | $ | 0.31 |  |  | $ | 0.29 |  | $ | 0.61 |  |  | $ | 0.57 |
EARNINGS PER SHARE - fully diluted |  | $ | 0.31 |  |  | $ | 0.29 |  | $ | 0.61 |  |  | $ | 0.57 |

See accompanying notes

3

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FARMERS NATIONAL BANC CORP. AND SUBSIDIARIES

|  | (In Thousands of Dollars) |
|  | For the Three Months Ended |  |  | For the Six Months Ended |
(Unaudited) |  | June 30, 2019 |  |  | June 30, 2018 |  |  | June 30, 2019 |  |  | June 30, 2018 |
NET INCOME |  | $ | 8,543 |  |  | $ | 8,073 |  |  | $ | 16,931 |  |  | $ | 15,799 |
Other comprehensive income: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Net unrealized holding gains (losses) on available for sale securities |  |  | 9,203 |  |  |  | (242 | ) |  |  | 15,024 |  |  |  | (9,128 | )
Reclassification adjustment for (gains) losses realized in income |  |  | (1 | ) |  |  | (1 | ) |  |  | 33 |  |  |  | (3 | )
Net unrealized holding gains (losses) |  |  | 9,202 |  |  |  | (243 | ) |  |  | 15,057 |  |  |  | (9,131 | )
Income tax effect |  |  | (1,920 | ) |  |  | 39 |  |  |  | (3,150 | ) |  |  | 1,905 |
Other comprehensive income (loss), net of tax |  |  | 7,282 |  |  |  | (204 | ) |  |  | 11,907 |  |  |  | (7,226 | )
TOTAL COMPREHENSIVE INCOME |  | $ | 15,825 |  |  | $ | 7,869 |  |  | $ | 28,838 |  |  | $ | 8,573 |

See accompanying notes

4

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

FARMERS NATIONAL BANC CORP. AND SUBSIDIARIES

|  | For the Three Months Ended |
(Unaudited) |  | June 30, 2019 |  |  | June 30, 2018 |
COMMON STOCK |  |  |  |  |  |  |  |
Beginning balance |  | $ | 186,483 |  |  | $ | 186,594 |
Issued 76,254 in 2019 and 0 in 2018 treasury shares under the Long Term Incentive Plan |  |  | (1,140 | ) |  |  | 0 |
Stock compensation expense for unvested shares |  |  | 344 |  |  |  | 337 |
Ending balance |  |  | 185,687 |  |  |  | 186,931 |
RETAINED EARNINGS |  |  |  |  |  |  |  |
Beginning balance |  |  | 89,518 |  |  |  | 65,168 |
Cumulative effect adjustment upon adoption of ASU 2016-01 |  |  | 0 |  |  |  | 0 |
Beginning balance adjusted |  |  | 89,518 |  |  |  | 65,168 |
Net income |  |  | 8,543 |  |  |  | 8,073 |
Dividends declared at $0.09 per share in 2019 and $0.07 per share in 2018 |  |  | (2,504 | ) |  |  | (1,936 | )
Ending balance |  |  | 95,557 |  |  |  | 71,305 |
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) |  |  |  |  |  |  |  |
Beginning balance |  |  | 595 |  |  |  | (6,595 | )
Cumulative effect adjustment upon adoption of ASU 2016-01 |  |  | 0 |  |  |  | 0 |
Beginning balance adjusted |  |  | 595 |  |  |  | (6,595 | )
Other comprehensive (income) loss |  |  | 7,282 |  |  |  | (204 | )
Ending balance |  |  | 7,877 |  |  |  | (6,799 | )
TREASURY STOCK, AT COST |  |  |  |  |  |  |  |
Beginning balance |  |  | (3,645 | ) |  |  | (3,927 | )
Purchased 85,479 shares in 2019 and 0 shares in 2018 |  |  | (1,186 | ) |  |  | 0 |
Issued 120,017 shares in 2019 and 0 shares in 2018 under the Long Term Incentive Plan |  |  | 1,140 |  |  |  | 0 |
Retained 43,763 shares in 2019 and 0 shares in 2018 to cover tax withholdings under the Long Term Incentive Plan |  |  | (605 | ) |  |  | 0 |
Ending balance |  |  | (4,296 | ) |  |  | (3,927 | )
TOTAL STOCKHOLDERS' EQUITY |  | $ | 284,825 |  |  | $ | 247,510 |

5

|  | (In Thousands of Dollars) |
|  | For the Six Months Ended |
(Unaudited) |  | June 30, 2019 |  |  | June 30, 2018 |
COMMON STOCK |  |  |  |  |  |  |  |
Beginning balance |  | $ | 186,163 |  |  | $ | 186,903 |
Issued 76,254 in 2019 and 96,873 in 2018 treasury shares under the Long Term Incentive Plan |  |  | (1,140 | ) |  |  | (706 | )
Stock compensation expense for unvested shares |  |  | 664 |  |  |  | 734 |
Ending balance |  |  | 185,687 |  |  |  | 186,931 |
RETAINED EARNINGS |  |  |  |  |  |  |  |
Beginning balance |  |  | 83,630 |  |  |  | 59,208 |
Cumulative effect adjustment upon adoption of ASU 2016-01 |  |  | 0 |  |  |  | 169 |
Beginning balance adjusted |  |  | 83,630 |  |  |  | 59,377 |
Net income |  |  | 16,931 |  |  |  | 15,799 |
Dividends declared at $0.18 per share in 2019 and $0.14 per share in 2018 |  |  | (5,004 | ) |  |  | (3,871 | )
Ending balance |  |  | 95,557 |  |  |  | 71,305 |
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) |  |  |  |  |  |  |  |
Beginning balance |  |  | (4,030 | ) |  |  | 596 |
Cumulative effect adjustment upon adoption of ASU 2016-01 |  |  | 0 |  |  |  | (169 | )
Beginning balance adjusted |  |  | (4,030 | ) |  |  | 427 |
Other comprehensive (income) loss |  |  | 11,907 |  |  |  | (7,226 | )
Ending balance |  |  | 7,877 |  |  |  | (6,799 | )
TREASURY STOCK, AT COST |  |  |  |  |  |  |  |
Beginning balance |  |  | (3,443 | ) |  |  | (4,633 | )
Purchased 100,472 shares in 2019 and 0 shares in 2018 |  |  | (1,388 | ) |  |  | 0 |
Issued 120,017 shares in 2019 and 96,873 shares in 2018 under the Long Term Incentive Plan |  |  | 1,140 |  |  |  | 706 |
Retained 43,763 shares in 2019 and 0 shares in 2018 to cover tax withholdings under the Long Term Incentive Plan |  |  | (605 | ) |  |  | 0 |
Ending balance |  |  | (4,296 | ) |  |  | (3,927 | )
TOTAL STOCKHOLDERS' EQUITY |  | $ | 284,825 |  |  | $ | 247,510 |

See accompanying notes.

6

CONSOLIDATED STATEMENTS OF CASH FLOWS

FARMERS NATIONAL BANC CORP. AND SUBSIDIARIES

|  | (In Thousands of Dollars) |
|  | Six Months Ended |
(Unaudited) |  | June 30, 2019 |  |  | June 30, 2018 |
CASH FLOWS FROM OPERATING ACTIVITIES |  |  |  |  |  |  |  |
Net income |  | $ | 16,931 |  |  | $ | 15,799 |
Adjustments to reconcile net income to net cash from operating activities: |  |  |  |  |  |  |  |
Provision for loan losses |  |  | 1,300 |  |  |  | 1,525 |
Depreciation and amortization |  |  | 1,428 |  |  |  | 1,499 |
Net amortization of securities |  |  | 1,199 |  |  |  | 1,544 |
Available for sale security loss |  |  | 33 |  |  |  | (3 | )
Realized gains on equity securities |  |  | (25 | ) |  |  | (42 | )
Loss on land and building sales, net |  |  | 16 |  |  |  | 0 |
Stock compensation expense |  |  | 664 |  |  |  | 734 |
(Gain) loss on adjustment of other real estate owned |  |  | 59 |  |  |  | (16 | )
Earnings on bank owned life insurance |  |  | (422 | ) |  |  | (441 | )
Origination of loans held for sale |  |  | (23,251 | ) |  |  | (26,026 | )
Proceeds from loans held for sale |  |  | 25,121 |  |  |  | 25,404 |
Net gains on sale of loans |  |  | (1,726 | ) |  |  | (1,093 | )
Net change in other assets and liabilities |  |  | (6,727 | ) |  |  | (2,878 | )
NET CASH FROM OPERATING ACTIVITIES |  |  | 14,600 |  |  |  | 16,006 |
CASH FLOWS FROM INVESTING ACTIVITIES |  |  |  |  |  |  |  |
Proceeds from maturities and repayments of securities available for sale |  |  | 13,746 |  |  |  | 20,727 |
Proceeds from sales of securities available for sale |  |  | 9,646 |  |  |  | 2,355 |
Purchases of securities available for sale |  |  | (26,224 | ) |  |  | (24,509 | )
Proceeds from sales of equity securities |  |  | 672 |  |  |  | 274 |
Purchase of equity securities |  |  | (678 | ) |  |  | 0 |
Proceeds from redemption of restricted stock |  |  | 8 |  |  |  | 0 |
Purchase of restricted stock |  |  | 0 |  |  |  | (735 | )
Loan originations and payments, net |  |  | (45,602 | ) |  |  | (62,908 | )
Proceeds from sale of other real estate owned |  |  | 135 |  |  |  | 209 |
Proceeds from land and building sales |  |  | 62 |  |  |  | 0 |
Additions to premises and equipment |  |  | (969 | ) |  |  | (139 | )
NET CASH FROM INVESTING ACTIVITIES |  |  | (49,204 | ) |  |  | (64,726 | )
CASH FLOWS FROM FINANCING ACTIVITIES |  |  |  |  |  |  |  |
Net change in deposits |  |  | 200,915 |  |  |  | 45,618 |
Net change in short-term borrowings |  |  | (153,447 | ) |  |  | 26,386 |
Repayment of long-term borrowings |  |  | (391 | ) |  |  | (404 | )
Cash dividends paid |  |  | (5,004 | ) |  |  | (3,871 | )
Repurchase of common shares |  |  | (1,388 | ) |  |  | 0 |
NET CASH FROM FINANCING ACTIVITIES |  |  | 40,685 |  |  |  | 67,729 |
NET CHANGE IN CASH AND CASH EQUIVALENTS |  |  | 6,081 |  |  |  | 19,009 |
Beginning cash and cash equivalents |  |  | 57,926 |  |  |  | 57,614 |
Ending cash and cash equivalents |  | $ | 64,007 |  |  | $ | 76,623 |
Supplemental cash flow information: |  |  |  |  |  |  |  |
Interest paid |  | $ | 9,368 |  |  | $ | 5,123 |
Income taxes paid |  | $ | 3,050 |  |  | $ | 4,100 |
Supplemental noncash disclosures: |  |  |  |  |  |  |  |
Transfer of loans to other real estate |  | $ | 268 |  |  | $ | 22 |
Security purchases not settled |  | $ | 5,407 |  |  | $ | 5,481 |
Issuance of stock awards |  | $ | 1,309 |  |  | $ | 706 |

See accompanying notes

7

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Principles of Consolidation:

Farmers National Banc Corp. (“Company”) is a Financial Holding Company registered under the Bank Holding Company Act of 1956, as amended. The Company provides full banking services through its nationally chartered subsidiary, The Farmers National Bank of Canfield (“Bank”). The consolidated financial statements also include the accounts of the Bank’s subsidiaries; Farmers National Insurance, LLC (“Insurance”) and Farmers of Canfield Investment Co. (“Investments”). The Company provides trust services through its subsidiary, Farmers Trust Company (“Trust”), retirement consulting services through National Associates, Inc. (“NAI”) and insurance services through the Bank’s subsidiary, Insurance. Farmers National Captive, Inc. (“Captive”) is a wholly-owned insurance subsidiary of the Company that provides property and casualty insurance coverage to the Company and its subsidiaries. The Captive pools resources with thirteen other similar insurance company subsidiaries of financial institutions to spread a limited amount of risk among themselves and to provide insurance where not currently available or economically feasible in today’s insurance market place. The consolidated financial statements include the accounts of the Company, the Bank and its subsidiaries, along with the Trust, NAI and Captive. All significant intercompany balances and transactions have been eliminated in the consolidation.

Basis of Presentation:

The unaudited condensed consolidated financial statements have been prepared in conformity with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles (“U.S. GAAP”) for complete financial statements. The financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2018 Annual Report to Shareholders included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. The interim consolidated financial statements include all adjustments (consisting of only normal recurring items) that, in the opinion of management, are necessary for a fair presentation of the financial position and results of operations for the periods presented. The results of operations for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year. Certain items included in the prior period financial statements were reclassified to conform to the current period presentation. There was no effect on net income or total stockholders’ equity.

Estimates:

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, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Segments:

The Company provides a broad range of financial services to individuals and companies in northeastern Ohio and western Pennsylvania. Operations are managed and financial performance is primarily aggregated and reported in three lines of business, the Bank segment, the Trust segment and the Retirement Consulting segment.

Equity:

The Company, with the approval of shareholders at the April 2018 annual meeting, increased the authorized shares available for issuance from 35,000,000 to 50,000,000 shares. Outstanding shares at June 30, 2019 were 27,767,683.

Comprehensive Income:

Comprehensive income consists of net income and other comprehensive income. Other comprehensive income consists of unrealized gains and losses on securities available for sale which are recognized as components of stockholders’ equity, net of tax effect.

New Accounting Standards:

In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. This ASU expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The amendments in this ASU are effective for the reporting periods after December 15, 2018. The Company adopted ASU No. 2017-12 effective January 1, 2019. There was no significant impact to the consolidated financial statements as a result of the adoption of ASU 2017-12.

8

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. This ASU better aligns an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designati on and measurement guidance for qualifying hedging relationships and the presentation of hedge results. The amendments in this ASU are effective for the reporting periods after December 1 5, 2018. The Co mpany adopted ASU No. 2017-12 effective January 1, 2019. There was no significant impact to the consolidated financial statements as a result of the adoption of ASU 2017-12.

During April of 2017, the FASB issued ASU 2017-08, Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. Under current U.S. GAAP, a premium is typically amortized to the maturity date when a callable debt security is purchased at a premium, even if the holder is certain the call will be exercised. As a result, upon the exercise of a call on a callable debt security held at a premium, the unamortized premium is recorded as a loss in earnings. The new standard shortens the amortization period for the premium to the earliest call date to more closely align interest income recorded on bonds held at a premium or a discount with the economics of the underlying instrument. The standard takes effect for public business entities for fiscal years and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. The Company early adopted this ASU effective January 1, 2018 and there was no material impact on its Consolidated Financial Statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This ASU eliminates Step 2 from the goodwill impairment test. Instead, under the new guidance, an entity is to perform its annual goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge would be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. The new guidance is effective for annual reporting periods, and interim reporting periods within those annual periods, beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not plan on early adoption of this ASU. The adoption of this guidance is not expected to have an impact on the Company’s Consolidated Financial Statements.

In June 2016, the FASB issued ASU 2016-13: Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (modified by ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments Credit Losses). The ASU requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. Additionally, the ASU amends the accounting for credit losses on available for sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 is effective for public companies for annual periods beginning after December 15, 2019, including interim periods within that fiscal year. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Company has established an internal committee, accumulated historical credit information and validated the installation of the data. The Company is now in the process of running the new system parallel to the current system to ensure all issues have been addressed before full implementation. Adoption of ASU 2016-13 will happen on January 1, 2020. Management has not determined the full impact the new standard will have on the Consolidated Financial Statements.

In February 2016, FASB issued ASU 2016-02 (Topic 842): Leases. The main objective of ASU 2016-02 is to provide users with useful, transparent, and complete information about leasing transactions. ASU 2016-02 requires the rights and obligations associated with leasing arrangements be reflected on the balance sheet in order to increase transparency and comparability among organizations. Under the updated guidance, lessees will be required to recognize a right-to-use asset and a liability to make a lease payment and disclose key information about leasing arrangements. ASU 2016-02 is effective for public companies for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. The Company adopted this ASU on January 1, 2019. As disclosed in the lease footnote, certain leases that the Company has in place required the capitalization of $3.4 million on the balance sheet as an asset and a related liability in the same amount with no income statement effect at January 1, 2019.

9

In January 2016, FASB issued ASU 2016-01: Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The main objective of ASU 2016-01 is to enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful information. ASU 2016-01 addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Some of the amendments in ASU 2016-01 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; and 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. The amendments of ASU 2016-01 are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company adopted this ASU 2016-01 on January 1, 2018 which resulted in a $169 thousand increase to beginning retained earnings and a $169 thousand decrease to accumulated other comprehensive income on the December 31, 2018 Consolidated Financial Statements.

In May 2014, FASB issued ASU 2014-09: Revenue from Contracts with Customers (Topic 606). The ASU creates a new topic, Topic 606, to provide guidance on revenue recognition for entities that enter into contracts with customers to transfer goods or services or enter into contracts for the transfer of nonfinancial assets. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additional disclosures are required to provide quantitative and qualitative information regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new guidance is effective for the Company’s year ending December 31, 2018 and was adopted as of January 1, 2018. Interest income is outside of the scope of the new standard and was not impacted by the adoption of the standard. An evaluation of the Company’s noninterest income streams resulted in no change in revenue recognition at adoption, nor did it change revenue recognition prospectively in a significant way. Refer to the Revenue from Contracts with Customers footnote for further discussion on the Company’s accounting for revenue sources within the scope of ASC 606.

The Company adopted ASC 606 using the modified retrospective method applied to all contracts not completed as of January 1, 2018. The adoption of ASC 606 did not result in a change to the accounting for any of the in-scope revenue streams; as such, no cumulative effect adjustment was recorded.

Securities:

The following table summarizes the amortized cost and fair value of the available for sale investment securities portfolio at June 30, 2019 and December 31, 2018 and the corresponding amounts of unrealized gains and losses recognized in accumulated other comprehensive income:

|  |  |  |  | Gross |  |  | Gross |  |  |  |  |
| Amortized |  |  | Unrealized |  |  | Unrealized |  |  |  |  |
(In Thousands of Dollars) | Cost |  |  | Gains |  |  | Losses |  |  | Fair Value |
June 30, 2019 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury and U.S. government sponsored entities | $ | 5,861 |  |  | $ | 30 |  |  | $ | (9 | ) |  | $ | 5,882 |
State and political subdivisions |  | 222,738 |  |  |  | 8,580 |  |  |  | 0 |  |  |  | 231,318 |
Corporate bonds |  | 1,419 |  |  |  | 14 |  |  |  | (1 | ) |  |  | 1,432 |
Mortgage-backed securities - residential |  | 152,506 |  |  |  | 1,747 |  |  |  | (504 | ) |  |  | 153,749 |
Collateralized mortgage obligations - residential |  | 20,514 |  |  |  | 454 |  |  |  | (319 | ) |  |  | 20,649 |
Small Business Administration |  | 11,243 |  |  |  | 34 |  |  |  | (55 | ) |  |  | 11,222 |
Totals | $ | 414,281 |  |  | $ | 10,859 |  |  | $ | (888 | ) |  | $ | 424,252 |

|  |  |  |  | Gross |  |  | Gross |  |  |  |  |
| Amortized |  |  | Unrealized |  |  | Unrealized |  |  |  |  |
(In Thousands of Dollars) | Cost |  |  | Gains |  |  | Losses |  |  | Fair Value |
December 31, 2018 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury and U.S. government sponsored entities | $ | 6,111 |  |  | $ | 0 |  |  | $ | (102 | ) |  | $ | 6,009 |
State and political subdivisions |  | 211,762 |  |  |  | 2,075 |  |  |  | (1,893 | ) |  |  | 211,944 |
Corporate bonds |  | 1,206 |  |  |  | 0 |  |  |  | (18 | ) |  |  | 1,188 |
Mortgage-backed securities - residential |  | 154,130 |  |  |  | 84 |  |  |  | (4,167 | ) |  |  | 150,047 |
Collateralized mortgage obligations - residential |  | 21,775 |  |  |  | 72 |  |  |  | (775 | ) |  |  | 21,072 |
Small Business Administration |  | 12,292 |  |  |  | 0 |  |  |  | (362 | ) |  |  | 11,930 |
Totals | $ | 407,276 |  |  | $ | 2,231 |  |  | $ | (7,317 | ) |  | $ | 402,190 |

10

Proceeds from the sale of portfolio securities were $500 thousand and $10.3 million during the three and six month periods ended June 30, 2019, respectively. Gross gains of $2 and $24 thousand along with gross losses of $2 and $57 thousand were realized on these sales during the three and six month periods ended June 30, 2019. $19 thousand of unrealized losses during the three month period and $25 thousand of unrealized gains during the six month period were recognized in the income statement for equity securities as a result of adoption of ASU 2016-01. Proceeds from the sale of portfolio securities were $2.3 million during the three month and $2.6 million during the six month periods ended June 30, 2018. Gross gains were $2 and $6 thousand along with gross losses of $1 and $3 thousand during the same three and six month periods ended June 30, 2018. $26 and $42 thousand of unrealized gains during the three and six month periods ended June 30, 2018 were recognized in the income statement for equity securities as a result of adoption of ASU 2016-01.

The amortized cost and fair value of the debt securities portfolio are shown by expected maturity. Expected maturities may differ from contractual maturities if issuers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately.

|  | June 30, 2019 |
(In Thousands of Dollars) |  | Amortized Cost |  |  | Fair Value |
Maturity |  |  |  |  |  |  |  |
Within one year |  | $ | 7,313 |  |  | $ | 7,339 |
One to five years |  |  | 34,464 |  |  |  | 35,152 |
Five to ten years |  |  | 157,554 |  |  |  | 164,479 |
Beyond ten years |  |  | 30,687 |  |  |  | 31,662 |
Mortgage-backed, collateralized mortgage obligations and Small Business Administration securities |  |  | 184,263 |  |  |  | 185,620 |
Total |  | $ | 414,281 |  |  | $ | 424,252 |

The following table summarizes the available for sale investment securities with unrealized losses at June 30, 2019 and December 31, 2018, aggregated by major security type and length of time in a continuous unrealized loss position.

|  | Less than 12 Months |  |  | 12 Months or Longer |  |  | Total |
|  | Fair |  |  | Unrealized |  |  | Fair |  |  | Unrealized |  |  | Fair |  |  | Unrealized |
(In Thousands of Dollars) |  | Value |  |  | Loss |  |  | Value |  |  | Loss |  |  | Value |  |  | Loss |
June 30, 2019 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Available-for-sale |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury and U.S. government sponsored entities |  | $ | 0 |  |  | $ | 0 |  |  | $ | 2,366 |  |  | $ | (9 | ) |  | $ | 2,366 |  |  | $ | (9 | )
State and political subdivisions |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |
Corporate bonds |  |  | 0 |  |  |  | 0 |  |  |  | 479 |  |  |  | (1 | ) |  |  | 479 |  |  |  | (1 | )
Mortgage-backed securities - residential |  |  | 9 |  |  |  | 0 |  |  |  | 47,126 |  |  |  | (504 | ) |  |  | 47,135 |  |  |  | (504 | )
Collateralized mortgage obligations - residential |  |  | 0 |  |  |  | 0 |  |  |  | 13,042 |  |  |  | (319 | ) |  |  | 13,042 |  |  |  | (319 | )
Small Business Administration |  |  | 5 |  |  |  | 0 |  |  |  | 8,909 |  |  |  | (55 | ) |  |  | 8,914 |  |  |  | (55 | )
Total |  | $ | 14 |  |  | $ | 0 |  |  | $ | 71,922 |  |  | $ | (888 | ) |  | $ | 71,936 |  |  | $ | (888 | )

|  | Less than 12 Months |  |  | 12 Months or Longer |  |  | Total |
|  | Fair |  |  | Unrealized |  |  | Fair |  |  | Unrealized |  |  | Fair |  |  | Unrealized |
(In Thousands of Dollars) |  | Value |  |  | Loss |  |  | Value |  |  | Loss |  |  | Value |  |  | Loss |
December 31, 2018 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Available-for-sale |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury and U.S. government sponsored entities |  | $ | 648 |  |  | $ | (2 | ) |  | $ | 5,065 |  |  | $ | (100 | ) |  | $ | 5,713 |  |  | $ | (102 | )
State and political subdivisions |  |  | 23,569 |  |  |  | (201 | ) |  |  | 64,174 |  |  |  | (1,692 | ) |  |  | 87,743 |  |  |  | (1,893 | )
Corporate bonds |  |  | 516 |  |  |  | (4 | ) |  |  | 672 |  |  |  | (14 | ) |  |  | 1,188 |  |  |  | (18 | )
Mortgage-backed securities - residential |  |  | 13,002 |  |  |  | (114 | ) |  |  | 126,200 |  |  |  | (4,053 | ) |  |  | 139,202 |  |  |  | (4,167 | )
Collateralized mortgage obligations - residential |  |  | 20 |  |  |  | (1 | ) |  |  | 14,003 |  |  |  | (774 | ) |  |  | 14,023 |  |  |  | (775 | )
Small Business Administration |  |  | 11 |  |  |  | 0 |  |  |  | 11,919 |  |  |  | (362 | ) |  |  | 11,930 |  |  |  | (362 | )
Total |  | $ | 37,766 |  |  | $ | (322 | ) |  | $ | 222,033 |  |  | $ | (6,995 | ) |  | $ | 259,799 |  |  | $ | (7,317 | )

11

Other-Than-Temporary-Impairment

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. Investment securities are generally evaluated for OTTI under FASB ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, whether the market decline was affected by macroeconomic conditions and whether the Company has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. In analyzing an issuer’s financial condition, the Company may consider whether the securities are issued by the federal government or its agencies, or U.S. government sponsored enterprises, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment, and is based on the information available to management at a point in time.

As of June 30, 2018 and 2019, debt securities had unrealized losses of $10.5 million and $888 thousand, respectively. These unrealized losses are generally due to changes in interest rates or general market conditions. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and industry analysts’ reports. Management concluded that the unrealized losses on debt securities were temporary. Due to potential changes in conditions, it is at least reasonably possible that changes in fair values and management’s assessments will occur in the near term and that such changes could materially affect the amounts reported in the Company’s financial statements.

As of June 30, 2019, the Company’s security portfolio consisted of 588 securities, 83 of which were in an unrealized loss position. The majority of the unrealized losses on the Company’s securities are related to its holdings of mortgage-backed securities, collateralized mortgage obligations, state and political subdivision securities, and Small Business Administration securities as discussed below.

Unrealized losses on debt securities issued by state and political subdivisions have not been recognized into income. These securities have maintained their investment grade ratings and management does not have the intent and does not expect to be required to sell these securities before their anticipated recovery. The fair value is expected to recover as the securities approach their maturity date.

All of the Company’s holdings of collateralized mortgage obligations and residential mortgage-backed securities were issued by U.S. government-sponsored entities. Unrealized losses on these securities have not been recognized into income. Because the decline in fair value is attributable to changes in interest rates and illiquidity, and not credit quality, the issues are guaranteed by the issuing entity which the U.S. government has affirmed its commitment to support, and because the Company does not have the intent to sell these residential mortgage-backed securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be OTTI.

Management does not believe any unrealized losses on Small Business Administration securities represent an OTTI. The securities are issued and backed by the full faith and credit of the U.S. government and the Company does not have the intent and does not anticipate that it will be required to sell these securities before their anticipated recovery. The fair value of these securities is expected to recover as they approach their maturity.

12

Loans:

Loan balances were as follows:

(In Thousands of Dollars) |  | June 30, 2019 |  |  | December 31, 2018 |
Originated loans: |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  |  |  |  |  |  |
Owner occupied |  | $ | 175,891 |  |  | $ | 158,947 |
Non-owner occupied |  |  | 279,798 |  |  |  | 256,124 |
Farmland |  |  | 122,621 |  |  |  | 110,881 |
Other |  |  | 98,015 |  |  |  | 94,527 |
Commercial |  |  |  |  |  |  |  |
Commercial and industrial |  |  | 241,206 |  |  |  | 227,031 |
Agricultural |  |  | 37,144 |  |  |  | 37,623 |
Residential real estate |  |  |  |  |  |  |  |
1-4 family residential |  |  | 315,215 |  |  |  | 307,794 |
Home equity lines of credit |  |  | 84,565 |  |  |  | 82,690 |
Consumer |  |  |  |  |  |  |  |
Indirect |  |  | 161,429 |  |  |  | 164,509 |
Direct |  |  | 27,962 |  |  |  | 30,277 |
Other |  |  | 10,359 |  |  |  | 11,894 |
Total originated loans |  | $ | 1,554,205 |  |  | $ | 1,482,297 |
Acquired loans: |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  |  |  |  |  |  |
Owner occupied |  | $ | 40,787 |  |  | $ | 44,872 |
Non-owner occupied |  |  | 12,886 |  |  |  | 16,920 |
Farmland |  |  | 38,896 |  |  |  | 40,983 |
Other |  |  | 7,076 |  |  |  | 8,091 |
Commercial |  |  |  |  |  |  |  |
Commercial and industrial |  |  | 15,451 |  |  |  | 18,141 |
Agricultural |  |  | 6,882 |  |  |  | 9,526 |
Residential real estate |  |  |  |  |  |  |  |
1-4 family residential |  |  | 72,362 |  |  |  | 78,786 |
Home equity lines of credit |  |  | 21,388 |  |  |  | 23,617 |
Consumer |  |  |  |  |  |  |  |
Direct |  |  | 7,556 |  |  |  | 9,442 |
Other |  |  | 110 |  |  |  | 162 |
Total acquired loans |  | $ | 223,394 |  |  | $ | 250,540 |
Net Deferred loan costs |  |  | 2,905 |  |  |  | 3,003 |
Allowance for loan losses |  |  | (14,222 | ) |  |  | (13,592 | )
Net loans |  | $ | 1,766,282 |  |  | $ | 1,722,248 |

Purchased credit impaired loans

As part of past acquisitions the Company acquired various loans that displayed evidence of deterioration of credit quality since origination and which was probable that all contractually required payments would not be collected. The carrying amounts and contractually required payments of these loans which are included in the loan balances above are summarized in the following tables:

(In Thousands of Dollars) |  | June 30, 2019 |  |  | December 31, 2018 |
Commercial real estate |  |  |  |  |  |  |  |
Non-owner occupied |  | $ | 259 |  |  | $ | 292 |
Commercial |  |  |  |  |  |  |  |
Commercial and industrial |  |  | 812 |  |  |  | 899 |
Total outstanding balance |  | $ | 1,071 |  |  | $ | 1,191 |
Carrying amount, net of allowance of $0 in 2019 and 2018 |  | $ | 797 |  |  | $ | 903 |

13

Accretable yield, or income expected to be collected, is shown in the table below:

|  |  |  | Three Months Ended |  |  | Six Months Ended |
(In Thousands of Dollars) |  |  |  | June 30, 2019 |  |  | June 30, 2018 |  |  | June 30, 2019 |  |  | June 30, 2018 |
Beginning balance |  | $ | 86 |  |  | $ | 151 |  |  | $ | 93 |  |  | $ | 170 |
New loans purchased |  | 0 |  |  | 0 |  |  | 0 |  |  | 0 |
Accretion of income |  |  | (7 | ) |  |  | (19 | ) |  |  | (14 | ) |  |  | (38 | )
Ending balance |  | $ | 79 |  |  | $ | 132 |  |  | $ | 79 |  |  | $ | 132 |

The key assumptions considered include probability of default and the amount of actual prepayments after the acquisition date. Prepayments affect the estimated life of the loans and could change the amount of interest income and principal expected to be collected. In reforecasting future estimated cash flows, credit loss expectations are adjusted as necessary. There were no adjustments to forecasted cash flows that impacted the allowance for loan losses for the three and six month periods ended June 30, 2019.

The following tables present the activity in the allowance for loan losses by portfolio segment for the three and six month periods ended June 30, 2019 and 2018:

Three Months Ended June 30, 2019

(In Thousands of Dollars) |  | Commercial Real Estate |  |  | Commercial |  |  | Residential Real Estate |  |  | Consumer |  |  | Unallocated |  |  | Total |
Allowance for loan losses |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Beginning balance |  | $ | 5,195 |  |  | $ | 2,157 |  |  | $ | 2,813 |  |  | $ | 2,819 |  |  | $ | 793 |  |  | $ | 13,777 |
Provision for loan losses |  |  | 374 |  |  |  | 46 |  |  |  | 211 |  |  |  | 125 |  |  |  | (6 | ) |  |  | 750 |
Loans charged off |  |  | 0 |  |  |  | (14 | ) |  |  | (126 | ) |  |  | (448 | ) |  |  | 0 |  |  |  | (588 | )
Recoveries |  |  | 2 |  |  |  | 10 |  |  |  | 12 |  |  |  | 259 |  |  |  | 0 |  |  |  | 283 |
Total ending allowance balance |  | $ | 5,571 |  |  | $ | 2,199 |  |  | $ | 2,910 |  |  | $ | 2,755 |  |  | $ | 787 |  |  | $ | 14,222 |

Six Months Ended June 30, 2019

(In Thousands of Dollars) |  | Commercial Real Estate |  |  | Commercial |  |  | Residential Real Estate |  |  | Consumer |  |  | Unallocated |  |  | Total |
Allowance for loan losses |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Beginning balance |  | $ | 5,036 |  |  | $ | 2,093 |  |  | $ | 2,837 |  |  | $ | 2,963 |  |  | $ | 663 |  |  | $ | 13,592 |
Provision for loan losses |  |  | 533 |  |  |  | 153 |  |  |  | 183 |  |  |  | 307 |  |  |  | 124 |  |  |  | 1,300 |
Loans charged off |  |  | 0 |  |  |  | (58 | ) |  |  | (147 | ) |  |  | (949 | ) |  |  | 0 |  |  |  | (1,154 | )
Recoveries |  |  | 2 |  |  |  | 11 |  |  |  | 37 |  |  |  | 434 |  |  |  | 0 |  |  |  | 484 |
Total ending allowance balance |  | $ | 5,571 |  |  | $ | 2,199 |  |  | $ | 2,910 |  |  | $ | 2,755 |  |  | $ | 787 |  |  | $ | 14,222 |

Three Months Ended June 30, 2018

(In Thousands of Dollars) |  | Commercial Real Estate |  |  | Commercial |  |  | Residential Real Estate |  |  | Consumer |  |  | Unallocated |  |  | Total |
Allowance for loan losses |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Beginning balance |  | $ | 4,404 |  |  | $ | 2,062 |  |  | $ | 2,601 |  |  | $ | 2,924 |  |  | $ | 559 |  |  | $ | 12,550 |
Provision for loan losses |  |  | (96 | ) |  |  | (61 | ) |  |  | 93 |  |  |  | 586 |  |  |  | 228 |  |  |  | 750 |
Loans charged off |  |  | 0 |  |  |  | (65 | ) |  |  | (68 | ) |  |  | (644 | ) |  |  | 0 |  |  |  | (777 | )
Recoveries |  |  | 31 |  |  |  | 1 |  |  |  | 25 |  |  |  | 184 |  |  |  | 0 |  |  |  | 241 |
Total ending allowance balance |  | $ | 4,339 |  |  | $ | 1,937 |  |  | $ | 2,651 |  |  | $ | 3,050 |  |  | $ | 787 |  |  | $ | 12,764 |

14

Six Months Ended June 30, 2018

(In Thousands of Dollars) |  | Commercial Real Estate |  |  | Commercial |  |  | Residential Real Estate |  |  | Consumer |  |  | Unallocated |  |  | Total |
Allowance for loan losses |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Beginning balance |  | $ | 4,260 |  |  | $ | 2,011 |  |  | $ | 2,521 |  |  | $ | 2,848 |  |  | $ | 675 |  |  | $ | 12,315 |
Provision for loan losses |  |  | 46 |  |  |  | 86 |  |  |  | 168 |  |  |  | 1,113 |  |  |  | 112 |  |  |  | 1,525 |
Loans charged off |  |  | 0 |  |  |  | (162 | ) |  |  | (124 | ) |  |  | (1,273 | ) |  |  | 0 |  |  |  | (1,559 | )
Recoveries |  |  | 33 |  |  |  | 2 |  |  |  | 86 |  |  |  | 362 |  |  |  | 0 |  |  |  | 483 |
Total ending allowance balance |  | $ | 4,339 |  |  | $ | 1,937 |  |  | $ | 2,651 |  |  | $ | 3,050 |  |  | $ | 787 |  |  | $ | 12,764 |

The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment, based on impairment method as of June 30, 2019 and December 31, 2018. The recorded investment in loans includes the unpaid principal balance and unamortized loan origination fees and costs, but excludes accrued interest receivable, which is not considered to be material:

June 30, 2019

(In Thousands of Dollars) |  | Commercial Real Estate |  |  | Commercial |  |  | Residential Real Estate |  |  | Consumer |  |  | Unallocated |  |  | Total |
Allowance for loan losses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Ending allowance balance attributable to loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Individually evaluated for impairment |  | $ | 6 |  |  | $ | 3 |  |  | $ | 262 |  |  | $ | 0 |  |  | $ | 0 |  |  | $ | 271 |
Collectively evaluated for impairment |  |  | 5,506 |  |  |  | 2,182 |  |  |  | 2,602 |  |  |  | 2,752 |  |  |  | 787 |  |  |  | 13,829 |
Acquired loans collectively evaluated for impairment |  |  | 59 |  |  |  | 14 |  |  |  | 46 |  |  |  | 3 |  |  |  | 0 |  |  |  | 122 |
Acquired with deteriorated credit quality |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |
Total ending allowance balance |  | $ | 5,571 |  |  | $ | 2,199 |  |  | $ | 2,910 |  |  | $ | 2,755 |  |  | $ | 787 |  |  | $ | 14,222 |
Loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Loans individually evaluated for impairment |  | $ | 692 |  |  | $ | 210 |  |  | $ | 4,209 |  |  | $ | 145 |  |  | $ | 0 |  |  | $ | 5,256 |
Loans collectively evaluated for impairment |  |  | 674,524 |  |  |  | 277,940 |  |  |  | 395,343 |  |  |  | 205,080 |  |  |  | 0 |  |  |  | 1,552,887 |
Acquired loans |  |  | 99,027 |  |  |  | 21,674 |  |  |  | 93,229 |  |  |  | 7,634 |  |  |  | 0 |  |  |  | 221,564 |
Acquired with deteriorated credit quality |  |  | 229 |  |  |  | 568 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 797 |
Total ending loans balance |  | $ | 774,472 |  |  | $ | 300,392 |  |  | $ | 492,781 |  |  | $ | 212,859 |  |  | $ | 0 |  |  | $ | 1,780,504 |

December 31, 2018

(In Thousands of Dollars) |  | Commercial Real Estate |  |  | Commercial |  |  | Residential Real Estate |  |  | Consumer |  |  | Unallocated |  |  | Total |
Allowance for loan losses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Ending allowance balance attributable to loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Individually evaluated for impairment |  | $ | 6 |  |  | $ | 3 |  |  | $ | 267 |  |  | $ | 0 |  |  | $ | 0 |  |  | $ | 276 |
Collectively evaluated for impairment |  |  | 4,981 |  |  |  | 2,075 |  |  |  | 2,534 |  |  |  | 2,960 |  |  |  | 663 |  |  |  | 13,213 |
Acquired loans collectively evaluated for impairment |  |  | 49 |  |  |  | 15 |  |  |  | 36 |  |  |  | 3 |  |  |  | 0 |  |  |  | 103 |
Acquired with deteriorated credit quality |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |
Total ending allowance balance |  | $ | 5,036 |  |  | $ | 2,093 |  |  | $ | 2,837 |  |  | $ | 2,963 |  |  | $ | 663 |  |  | $ | 13,592 |
Loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Loans individually evaluated for impairment |  | $ | 790 |  |  | $ | 223 |  |  | $ | 4,627 |  |  | $ | 83 |  |  | $ | 0 |  |  | $ | 5,723 |
Loans collectively evaluated for impairment |  |  | 618,729 |  |  |  | 264,208 |  |  |  | 385,702 |  |  |  | 212,130 |  |  |  | 0 |  |  |  | 1,480,769 |
Acquired loans |  |  | 110,143 |  |  |  | 26,916 |  |  |  | 101,804 |  |  |  | 9,582 |  |  |  | 0 |  |  |  | 248,445 |
Acquired with deteriorated credit quality |  |  | 262 |  |  |  | 641 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 903 |
Total ending loans balance |  | $ | 729,924 |  |  | $ | 291,988 |  |  | $ | 492,133 |  |  | $ | 221,795 |  |  | $ | 0 |  |  | $ | 1,735,840 |

15

The following tables present information related to impaired loans by class of loans as of June 30, 2019 and December 31, 2018:

(In Thousands of Dollars) |  | Unpaid Principal Balance |  |  | Recorded Investment |  |  | Allowance for Loan Losses Allocated |
June 30, 2019 |  |  |  |  |  |  |  |  |  |  |  |
With no related allowance recorded: |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  |  |  |  |  |  |  |  |  |  |
Owner occupied |  | $ | 351 |  |  | $ | 312 |  |  | $ | 0 |
Non-owner occupied |  |  | 39 |  |  |  | 37 |  |  |  | 0 |
Farmland |  |  | 86 |  |  |  | 86 |  |  |  | 0 |
Commercial |  |  |  |  |  |  |  |  |  |  |  |
Commercial and industrial |  |  | 174 |  |  |  | 141 |  |  |  | 0 |
Agricultural |  |  | 12 |  |  |  | 12 |  |  |  | 0 |
Residential real estate |  |  |  |  |  |  |  |  |  |  |  |
1-4 family residential |  |  | 3,221 |  |  |  | 2,421 |  |  |  | 0 |
Home equity lines of credit |  |  | 488 |  |  |  | 405 |  |  |  | 0 |
Consumer |  |  | 253 |  |  |  | 122 |  |  |  | 0 |
Subtotal |  |  | 4,624 |  |  |  | 3,536 |  |  |  | 0 |
With an allowance recorded: |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  |  |  |  |  |  |  |  |  |  |
Farmland |  |  | 258 |  |  |  | 257 |  |  |  | 6 |
Commercial |  |  |  |  |  |  |  |  |  |  |  |
Commercial and industrial |  |  | 57 |  |  |  | 57 |  |  |  | 2 |
Residential real estate |  |  |  |  |  |  |  |  |  |  |  |
1-4 family residential |  |  | 1,369 |  |  |  | 1,286 |  |  |  | 252 |
Home equity lines of credit |  |  | 97 |  |  |  | 97 |  |  |  | 11 |
Consumer |  |  | 22 |  |  |  | 23 |  |  |  | 0 |
Subtotal |  |  | 1,803 |  |  |  | 1,720 |  |  |  | 271 |
Total |  | $ | 6,427 |  |  | $ | 5,256 |  |  | $ | 271 |

16

(In Thousands of Dollars) |  | Unpaid Principal Balance |  |  | Recorded Investment |  |  | Allowance for Loan Losses Allocated |
December 31, 2018 |  |  |  |  |  |  |  |  |  |  |  |
With no related allowance recorded: |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  |  |  |  |  |  |  |  |  |  |
Owner occupied |  | $ | 524 |  |  | $ | 494 |  |  | $ | 0 |
Non-owner occupied |  |  | 40 |  |  |  | 38 |  |  |  | 0 |
Commercial |  |  |  |  |  |  |  |  |  |  |  |
Commercial and industrial |  |  | 191 |  |  |  | 162 |  |  |  | 0 |
Residential real estate |  |  |  |  |  |  |  |  |  |  |  |
1-4 family residential |  |  | 3,451 |  |  |  | 2,759 |  |  |  | 0 |
Home equity lines of credit |  |  | 379 |  |  |  | 326 |  |  |  | 0 |
Consumer |  |  | 174 |  |  |  | 83 |  |  |  | 0 |
Subtotal |  |  | 4,759 |  |  |  | 3,862 |  |  |  | 0 |
With an allowance recorded: |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  |  |  |  |  |  |  |  |  |  |
Farmland |  |  | 258 |  |  |  | 258 |  |  |  | 6 |
Commercial |  |  |  |  |  |  |  |  |  |  |  |
Commercial and industrial |  |  | 61 |  |  |  | 61 |  |  |  | 3 |
Residential real estate |  |  |  |  |  |  |  |  |  |  |  |
1-4 family residential |  |  | 1,354 |  |  |  | 1,343 |  |  |  | 188 |
Home equity lines of credit |  |  | 224 |  |  |  | 199 |  |  |  | 79 |
Consumer |  |  | 0 |  |  |  | 0 |  |  |  | 0 |
Subtotal |  |  | 1,897 |  |  |  | 1,861 |  |  |  | 276 |
Total |  | $ | 6,656 |  |  | $ | 5,723 |  |  | $ | 276 |

17

The following tables present the average recorded investment in impaired loans by class and interest income recognized by loan class for the three and six month periods ended June 30, 2019 and 2018:

|  | Average Recorded Investment |  |  | Interest Income Recognized |
|  | For Three Months Ended June 30, |  |  | For Three Months Ended June 30, |
(In Thousands of Dollars) |  | 2019 |  |  | 2018 |  |  | 2019 |  |  | 2018 |
With no related allowance recorded: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Owner occupied |  | $ | 316 |  |  | $ | 527 |  |  | $ | 5 |  |  | $ | 8 |
Non-owner occupied |  |  | 37 |  |  |  | 27 |  |  |  | 0 |  |  |  | 0 |
Farmland |  |  | 29 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |
Commercial |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial and industrial |  |  | 146 |  |  |  | 204 |  |  |  | 3 |  |  |  | 1 |
Agricultural |  |  | 4 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |
Residential real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
1-4 family residential |  |  | 2,552 |  |  |  | 2,677 |  |  |  | 43 |  |  |  | 42 |
Home equity lines of credit |  |  | 360 |  |  |  | 302 |  |  |  | 8 |  |  |  | 4 |
Consumer |  |  | 124 |  |  |  | 77 |  |  |  | 6 |  |  |  | 3 |
Subtotal |  |  | 3,568 |  |  |  | 3,814 |  |  |  | 65 |  |  |  | 58 |
With an allowance recorded: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Owner occupied |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |
Non-owner occupied |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |
Farmland |  |  | 257 |  |  |  | 257 |  |  |  | 0 |  |  |  | 0 |
Commercial |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial and industrial |  |  | 58 |  |  |  | 68 |  |  |  | 1 |  |  |  | 1 |
Residential real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
1-4 family residential |  |  | 1,286 |  |  |  | 1,949 |  |  |  | 8 |  |  |  | 9 |
Home equity lines of credit |  |  | 141 |  |  |  | 157 |  |  |  | 1 |  |  |  | 1 |
Consumer |  |  | 29 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |
Subtotal |  |  | 1,771 |  |  |  | 2,431 |  |  |  | 10 |  |  |  | 11 |
Total |  | $ | 5,339 |  |  | $ | 6,245 |  |  | $ | 75 |  |  | $ | 69 |

18

|  | Average Recorded Investment |  |  | Interest Income Recognized |
|  | For Six Months Ended June 30, |  |  | For Six Months Ended June 30, |
(In Thousands of Dollars) |  | 2019 |  |  | 2018 |  |  | 2019 |  |  | 2018 |
With no related allowance recorded: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Owner occupied |  | $ | 324 |  |  | $ | 474 |  |  | $ | 9 |  |  | $ | 15 |
Non-owner occupied |  |  | 37 |  |  |  | 14 |  |  |  | 0 |  |  |  | 0 |
Farmland |  |  | 14 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |
Commercial |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial and industrial |  |  | 151 |  |  |  | 538 |  |  |  | 5 |  |  |  | 2 |
Agricultural |  |  | 2 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |
Residential real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
1-4 family residential |  |  | 2,623 |  |  |  | 2,657 |  |  |  | 86 |  |  |  | 91 |
Home equity lines of credit |  |  | 354 |  |  |  | 314 |  |  |  | 13 |  |  |  | 8 |
Consumer |  |  | 118 |  |  |  | 70 |  |  |  | 9 |  |  |  | 6 |
Subtotal |  |  | 3,623 |  |  |  | 4,067 |  |  |  | 122 |  |  |  | 122 |
With an allowance recorded: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Owner occupied |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |
Non-owner occupied |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |
Farmland |  |  | 257 |  |  |  | 129 |  |  |  | 0 |  |  |  | 0 |
Commercial |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial and industrial |  |  | 59 |  |  |  | 68 |  |  |  | 2 |  |  |  | 2 |
Agricultural |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |
Residential real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
1-4 family residential |  |  | 1,302 |  |  |  | 1,689 |  |  |  | 16 |  |  |  | 19 |
Home equity lines of credit |  |  | 168 |  |  |  | 156 |  |  |  | 3 |  |  |  | 3 |
Consumer |  |  | 18 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |
Subtotal |  |  | 1,804 |  |  |  | 2,042 |  |  |  | 21 |  |  |  | 24 |
Total |  | $ | 5,427 |  |  | $ | 6,109 |  |  | $ | 143 |  |  | $ | 146 |

Cash basis interest recognized during the three and six month periods ended June 30, 2019 and 2018 was materially equal to interest income recognized.

Nonaccrual loans and loans past due 90 days or more still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

19

The following table presents the recorded investment in nonaccrual and loans past due 90 days or more still on accrual by class of loans as of June 30, 2019 and December 31, 2018:

|  | June 30, 2019 |  |  | December 31, 2018 |
(In Thousands of Dollars) |  | Nonaccrual |  |  | Loans Past Due 90 Days or More Still Accruing |  |  | Nonaccrual |  |  | Loans Past Due 90 Days or More Still Accruing |
Originated loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Owner occupied |  | $ | 313 |  |  | $ | 0 |  |  | $ | 340 |  |  | $ | 0 |
Farmland |  |  | 22 |  |  |  | 0 |  |  |  | 30 |  |  |  | 0 |
Commercial |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial and industrial |  |  | 462 |  |  |  | 0 |  |  |  | 122 |  |  |  | 0 |
Agricultural |  |  | 24 |  |  |  | 0 |  |  |  | 158 |  |  |  | 0 |
Residential real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
1-4 family residential |  |  | 2,141 |  |  |  | 186 |  |  |  | 2,318 |  |  |  | 185 |
Home equity lines of credit |  |  | 727 |  |  |  | 24 |  |  |  | 644 |  |  |  | 31 |
Consumer |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Indirect |  |  | 568 |  |  |  | 53 |  |  |  | 346 |  |  |  | 369 |
Direct |  |  | 123 |  |  |  | 34 |  |  |  | 54 |  |  |  | 200 |
Other |  |  | 0 |  |  |  | 9 |  |  |  | 0 |  |  |  | 2 |
Total originated loans |  | $ | 4,380 |  |  | $ | 306 |  |  | $ | 4,012 |  |  | $ | 787 |
Acquired loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Non-owner occupied |  | $ | 21 |  |  | $ | 0 |  |  | $ | 82 |  |  | $ | 0 |
Farmland |  |  | 463 |  |  |  | 0 |  |  |  | 257 |  |  |  | 0 |
Commercial |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial and industrial |  |  | 669 |  |  |  | 0 |  |  |  | 824 |  |  |  | 0 |
Agricultural |  |  | 12 |  |  |  | 97 |  |  |  | 291 |  |  |  | 0 |
Residential real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
1-4 family residential |  |  | 754 |  |  |  | 137 |  |  |  | 1,001 |  |  |  | 122 |
Home equity lines of credit |  |  | 261 |  |  |  | 0 |  |  |  | 203 |  |  |  | 14 |
Consumer |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Direct |  |  | 135 |  |  |  | 17 |  |  |  | 95 |  |  |  | 43 |
Total acquired loans |  | $ | 2,315 |  |  | $ | 251 |  |  | $ | 2,753 |  |  | $ | 179 |
Total loans |  | $ | 6,695 |  |  | $ | 557 |  |  | $ | 6,765 |  |  | $ | 966 |

20

The following tables present the aging of the recorded investment in past due loans as of June 30, 2019 and December 31, 2018 by class of loans:

(In Thousands of Dollars) |  | 30-59 Days Past Due |  |  | 60-89 Days Past Due |  |  | 90 Days or More Past Due and Nonaccrual |  |  | Total Past Due |  |  | Loans Not Past Due |  |  | Total |
June 30, 2019 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Originated loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Owner occupied |  | $ | 0 |  |  | $ | 0 |  |  | $ | 313 |  |  | $ | 313 |  |  | $ | 175,178 |  |  | $ | 175,491 |
Non-owner occupied |  |  | 5 |  |  |  | 0 |  |  |  | 0 |  |  |  | 5 |  |  |  | 279,111 |  |  |  | 279,116 |
Farmland |  |  | 1,215 |  |  |  | 0 |  |  |  | 22 |  |  |  | 1,237 |  |  |  | 121,243 |  |  |  | 122,480 |
Other |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 97,749 |  |  |  | 97,749 |
Commercial |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial and industrial |  |  | 74 |  |  |  | 0 |  |  |  | 462 |  |  |  | 536 |  |  |  | 240,273 |  |  |  | 240,809 |
Agricultural |  |  | 219 |  |  |  | 0 |  |  |  | 24 |  |  |  | 243 |  |  |  | 37,008 |  |  |  | 37,251 |
Residential real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
1-4 family residential |  |  | 2,940 |  |  |  | 566 |  |  |  | 2,327 |  |  |  | 5,833 |  |  |  | 308,617 |  |  |  | 314,450 |
Home equity lines of credit |  |  | 226 |  |  |  | 0 |  |  |  | 751 |  |  |  | 977 |  |  |  | 83,606 |  |  |  | 84,583 |
Consumer |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Indirect |  |  | 1,743 |  |  |  | 521 |  |  |  | 621 |  |  |  | 2,885 |  |  |  | 163,803 |  |  |  | 166,688 |
Direct |  |  | 796 |  |  |  | 60 |  |  |  | 157 |  |  |  | 1,013 |  |  |  | 27,132 |  |  |  | 28,145 |
Other |  |  | 45 |  |  |  | 16 |  |  |  | 9 |  |  |  | 70 |  |  |  | 10,290 |  |  |  | 10,360 |
Total originated loans: |  | $ | 7,263 |  |  | $ | 1,163 |  |  | $ | 4,686 |  |  | $ | 13,112 |  |  | $ | 1,544,010 |  |  | $ | 1,557,122 |
Acquired loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Owner occupied |  | $ | 40 |  |  | $ | 0 |  |  | $ | 0 |  |  | $ | 40 |  |  | $ | 40,873 |  |  | $ | 40,913 |
Non-owner occupied |  |  | 0 |  |  |  | 0 |  |  |  | 21 |  |  |  | 21 |  |  |  | 12,731 |  |  |  | 12,752 |
Farmland |  |  | 0 |  |  |  | 391 |  |  |  | 463 |  |  |  | 854 |  |  |  | 38,042 |  |  |  | 38,896 |
Other |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 7,075 |  |  |  | 7,075 |
Commercial |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial and industrial |  |  | 33 |  |  |  | 27 |  |  |  | 669 |  |  |  | 729 |  |  |  | 14,722 |  |  |  | 15,451 |
Agricultural |  |  | 0 |  |  |  | 0 |  |  |  | 109 |  |  |  | 109 |  |  |  | 6,772 |  |  |  | 6,881 |
Residential real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
1-4 family residential |  |  | 693 |  |  |  | 209 |  |  |  | 891 |  |  |  | 1,793 |  |  |  | 70,567 |  |  |  | 72,360 |
Home equity lines of credit |  |  | 113 |  |  |  | 9 |  |  |  | 261 |  |  |  | 383 |  |  |  | 21,005 |  |  |  | 21,388 |
Consumer |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Direct |  |  | 233 |  |  |  | 24 |  |  |  | 152 |  |  |  | 409 |  |  |  | 7,147 |  |  |  | 7,556 |
Other |  |  | 5 |  |  |  | 0 |  |  |  | 0 |  |  |  | 5 |  |  |  | 105 |  |  |  | 110 |
Total acquired loans |  | $ | 1,117 |  |  | $ | 660 |  |  | $ | 2,566 |  |  | $ | 4,343 |  |  | $ | 219,039 |  |  | $ | 223,382 |
Total loans |  | $ | 8,380 |  |  | $ | 1,823 |  |  | $ | 7,252 |  |  | $ | 17,455 |  |  | $ | 1,763,049 |  |  | $ | 1,780,504 |

21

(In Thousands of Dollars) |  | 30-59 Days Past Due |  |  | 60-89 Days Past Due |  |  | 90 Days or More Past Due and Nonaccrual |  |  | Total Past Due |  |  | Loans Not Past Due |  |  | Total |
December 31, 2018 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Originated loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Owner occupied |  | $ | 82 |  |  | $ | 0 |  |  | $ | 340 |  |  | $ | 422 |  |  | $ | 158,161 |  |  | $ | 158,583 |
Non-owner occupied |  |  | 22 |  |  |  | 0 |  |  |  | 0 |  |  |  | 22 |  |  |  | 255,458 |  |  |  | 255,480 |
Farmland |  |  | 184 |  |  |  | 0 |  |  |  | 30 |  |  |  | 214 |  |  |  | 110,547 |  |  |  | 110,761 |
Other |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 94,242 |  |  |  | 94,242 |
Commercial |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial and industrial |  |  | 159 |  |  |  | 0 |  |  |  | 122 |  |  |  | 281 |  |  |  | 226,320 |  |  |  | 226,601 |
Agricultural |  |  | 69 |  |  |  | 10 |  |  |  | 158 |  |  |  | 237 |  |  |  | 37,484 |  |  |  | 37,721 |
Residential real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
1-4 family residential |  |  | 1,964 |  |  |  | 424 |  |  |  | 2,503 |  |  |  | 4,891 |  |  |  | 302,131 |  |  |  | 307,022 |
Home equity lines of credit |  |  | 64 |  |  |  | 14 |  |  |  | 675 |  |  |  | 753 |  |  |  | 81,957 |  |  |  | 82,710 |
Consumer |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Indirect |  |  | 1,714 |  |  |  | 755 |  |  |  | 715 |  |  |  | 3,184 |  |  |  | 166,622 |  |  |  | 169,806 |
Direct |  |  | 714 |  |  |  | 340 |  |  |  | 254 |  |  |  | 1,308 |  |  |  | 29,183 |  |  |  | 30,491 |
Other |  |  | 33 |  |  |  | 14 |  |  |  | 2 |  |  |  | 49 |  |  |  | 11,845 |  |  |  | 11,894 |
Total originated loans |  | $ | 5,005 |  |  | $ | 1,557 |  |  | $ | 4,799 |  |  | $ | 11,361 |  |  | $ | 1,473,950 |  |  | $ | 1,485,311 |
Acquired loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Owner occupied |  | $ | 321 |  |  | $ | 0 |  |  | $ | 0 |  |  | $ | 321 |  |  | $ | 44,618 |  |  | $ | 44,939 |
Non-owner occupied |  |  | 0 |  |  |  | 0 |  |  |  | 82 |  |  |  | 82 |  |  |  | 16,764 |  |  |  | 16,846 |
Farmland |  |  | 0 |  |  |  | 102 |  |  |  | 257 |  |  |  | 359 |  |  |  | 40,623 |  |  |  | 40,982 |
Other |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 8,091 |  |  |  | 8,091 |
Commercial |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial and industrial |  |  | 94 |  |  |  | 0 |  |  |  | 824 |  |  |  | 918 |  |  |  | 17,223 |  |  |  | 18,141 |
Agricultural |  |  | 31 |  |  |  | 5 |  |  |  | 291 |  |  |  | 327 |  |  |  | 9,198 |  |  |  | 9,525 |
Residential real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
1-4 family residential |  |  | 750 |  |  |  | 229 |  |  |  | 1,123 |  |  |  | 2,102 |  |  |  | 76,682 |  |  |  | 78,784 |
Home equity lines of credit |  |  | 208 |  |  |  | 0 |  |  |  | 217 |  |  |  | 425 |  |  |  | 23,192 |  |  |  | 23,617 |
Consumer |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Direct |  |  | 318 |  |  |  | 257 |  |  |  | 138 |  |  |  | 713 |  |  |  | 8,729 |  |  |  | 9,442 |
Other |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 162 |  |  |  | 162 |
Total acquired loans |  | $ | 1,722 |  |  | $ | 593 |  |  | $ | 2,932 |  |  | $ | 5,247 |  |  | $ | 245,282 |  |  | $ | 250,529 |
Total loans |  | $ | 6,727 |  |  | $ | 2,150 |  |  | $ | 7,731 |  |  | $ | 16,608 |  |  | $ | 1,719,232 |  |  | $ | 1,735,840 |

Troubled Debt Restructurings:

Total troubled debt restructurings were $5.1 million and $5.5 million at June 30, 2019 and December 31, 2018, respectively. The Company has allocated $67 thousand and $72 thousand of specific reserves to loans whose terms have been modified in troubled debt restructurings at June 30, 2019 and December 31, 2018, respectively. There were no commitments to lend additional amounts to borrowers with loans that were classified as troubled debt restructurings at June 30, 2019 and at December 31, 2018.

22

During the three and six month periods ended June 30, 2019 and 2018, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; a reduction of the contractual monthly payment; a deferral of principal, interest and/or escrow; or a legal concession. During the three month period ended June 30, 2019, the terms of such loans included a reduction of the stated interest rate of the loan of 0.24% and an extension of the maturity date of 124 months. During the same three month period in 2018, the terms of such loans included a reduction of the stated interest rate of the loan in the range of 1.75% to 2.50% and an extension of the maturity date in the range of 5 to 25 months. During the six month period ended June 30, 2019, the terms of such loans included a reduction of the stated interest rate of the loan in the range of 0.24% and 2.74% and extensions of the maturity dates on these and other troubled debt restructurings in the range of 86 to 124 months. During the same six month period in 2018, the terms of such loans included a reduction of the stated interest rate of the loan in the range of 1.75% and 2.50 % and an extension of the maturity date in the range of 5 to 25 months.

The following table presents loans by class modified as troubled debt restructurings that occurred during the three and six month periods ended June 30, 2019 and 2018:

|  |  |  |  |  | Pre-Modification |  |  | Post-Modification |
Three Months Ended June 30, 2019 |  | Number of |  |  | Outstanding Recorded |  |  | Outstanding Recorded |
(In Thousands of Dollars) |  | Loans |  |  | Investment |  |  | Investment |
Originated loans: |  |  |  |  |  |  |  |  |  |  |  |
Commercial |  |  | 1 |  |  | $ | 12 |  |  | $ | 12 |
Residential real estate |  |  |  |  |  |  |  |  |  |  |  |
1-4 family residential |  |  | 2 |  |  |  | 55 |  |  |  | 55 |
Home equity lines of credit |  |  | 1 |  |  |  | 48 |  |  |  | 48 |
Consumer |  |  |  |  |  |  |  |  |  |  |  |
Indirect |  |  | 12 |  |  |  | 85 |  |  |  | 85 |
Other |  |  | 1 |  |  |  | 18 |  |  |  | 18 |
Total originated loans |  |  | 17 |  |  | $ | 218 |  |  | $ | 218 |
Acquired loans: |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  |  |  |  |  |  |  |  |  |  |
Farmland |  |  | 1 |  |  |  | 86 |  |  |  | 86 |
Residential real estate |  |  |  |  |  |  |  |  |  |  |  |
1-4 family residential |  |  | 1 |  |  |  | 24 |  |  |  | 24 |
Consumer |  |  |  |  |  |  |  |  |  |  |  |
Other |  |  | 3 |  |  |  | 14 |  |  |  | 14 |
Total acquired loans |  |  | 5 |  |  | $ | 124 |  |  | $ | 124 |
Total loans |  |  | 22 |  |  | $ | 342 |  |  | $ | 342 |

23

|  |  |  |  |  | Pre-Modification |  |  | Post-Modification |
Six Months Ended June 30, 2019 |  | Number of |  |  | Outstanding Recorded |  |  | Outstanding Recorded |
(In Thousands of Dollars) |  | Loans |  |  | Investment |  |  | Investment |
Originated loans: |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  |  |  |  |  |  |  |  |  |  |
Owner occupied |  |  | 0 |  |  | $ | 0 |  |  | $ | 0 |
Commercial |  |  | 1 |  |  |  | 12 |  |  |  | 12 |
Residential real estate |  |  |  |  |  |  |  |  |  |  |  |
1-4 family residential |  |  | 5 |  |  |  | 128 |  |  |  | 130 |
Home equity lines of credit |  |  | 2 |  |  |  | 88 |  |  |  | 88 |
Consumer |  |  |  |  |  |  |  |  |  |  |  |
Indirect |  |  | 24 |  |  |  | 190 |  |  |  | 190 |
Other |  |  | 1 |  |  |  | 18 |  |  |  | 18 |
Total originated loans |  |  | 33 |  |  | $ | 436 |  |  | $ | 438 |
Acquired loans: |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  |  |  |  |  |  |  |  |  |  |
Farmland |  |  | 1 |  |  |  | 86 |  |  |  | 86 |
Residential real estate |  |  |  |  |  |  |  |  |  |  |  |
1-4 family residential |  |  | 3 |  |  |  | 75 |  |  |  | 79 |
Consumer |  |  |  |  |  |  |  |  |  |  |  |
Other |  |  | 3 |  |  |  | 14 |  |  |  | 14 |
Total acquired loans |  |  | 7 |  |  | $ | 175 |  |  | $ | 179 |
Total loans |  |  | 40 |  |  | $ | 611 |  |  | $ | 617 |

|  |  |  |  |  | Pre-Modification |  |  | Post-Modification |
Three Months Ended June 30, 2018 |  | Number of |  |  | Outstanding Recorded |  |  | Outstanding Recorded |
(In Thousands of Dollars) |  | Loans |  |  | Investment |  |  | Investment |
Originated loans: |  |  |  |  |  |  |  |  |  |  |  |
Residential real estate |  |  |  |  |  |  |  |  |  |  |  |
1-4 family residential |  |  | 1 |  |  | $ | 211 |  |  | $ | 211 |
Indirect |  |  | 9 |  |  |  | 60 |  |  |  | 60 |
Total originated loans |  |  | 10 |  |  | $ | 271 |  |  | $ | 271 |
Acquired loans: |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  |  |  |  |  |  |  |  |  |  |
Non-owner occupied |  |  | 1 |  |  |  | 42 |  |  |  | 42 |
Farmland |  |  | 1 |  |  |  | 258 |  |  |  | 258 |
Commercial |  |  |  |  |  |  |  |  |  |  |  |
Commercial and industrial |  |  | 2 |  |  |  | 31 |  |  |  | 31 |
Residential real estate |  |  |  |  |  |  |  |  |  |  |  |
1-4 family residential |  |  | 1 |  |  |  | 81 |  |  |  | 81 |
Total acquired loans |  |  | 5 |  |  | $ | 412 |  |  | $ | 412 |
Total loans |  |  | 15 |  |  | $ | 683 |  |  | $ | 683 |

24

|  |  |  |  |  | Pre-Modification |  |  | Post-Modification |
Six Months Ended June 30, 2018 |  | Number of |  |  | Outstanding Recorded |  |  | Outstanding Recorded |
(In Thousands of Dollars) |  | Loans |  |  | Investment |  |  | Investment |
Originated loans: |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  |  |  |  |  |  |  |  |  |  |
Owner occupied |  |  | 1 |  |  | $ | 360 |  |  | $ | 360 |
Residential real estate |  |  |  |  |  |  |  |  |  |  |  |
1-4 family residential |  |  | 4 |  |  |  | 254 |  |  |  | 254 |
Home equity lines of credit |  |  | 2 |  |  |  | 14 |  |  |  | 14 |
Indirect |  |  | 14 |  |  |  | 89 |  |  |  | 89 |
Total originated loans |  |  | 21 |  |  | $ | 717 |  |  | $ | 717 |
Acquired loans: |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  |  |  |  |  |  |  |  |  |  |
Non-owner occupied |  |  | 1 |  |  | $ | 42 |  |  | $ | 42 |
Farmland |  |  | 1 |  |  |  | 258 |  |  |  | 258 |
Commercial |  |  |  |  |  |  |  |  |  |  |  |
Commercial and industrial |  |  | 2 |  |  |  | 31 |  |  |  | 31 |
Residential real estate |  |  |  |  |  |  |  |  |  |  |  |
1-4 family residential |  |  | 5 |  |  |  | 189 |  |  |  | 189 |
Total acquired loans |  |  | 9 |  |  | $ | 520 |  |  | $ | 520 |
Total loans |  |  | 30 |  |  | $ | 1,237 |  |  | $ | 1,237 |

There were $44 thousand and $51 thousand in charge offs and a $44 thousand and $51 thousand increase to the provision for loan losses during the three and six month periods ended June 30, 2019, respectively, as a result of outstanding troubled debt restructurings. There were $20 thousand and $39 thousand in charge offs during the three and six month periods ended June 30, 2018, respectively. There was a $20 thousand and a $39 thousand increase to the provision during the three and six month period ended June 30, 2018, respectively, as a result of troubled debt restructurings.

There were four commercial loans, one residential real estate loan, one home equity line of credit and one indirect loan for which there was a payment default within twelve months following the modification of the troubled debt restructuring during the three month and six month period ended June 30, 2019. The one residential real estate loan was past due at June 30, 2019. There was no provision recorded as a result of the defaults during 2019. A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms.

There was one commercial loan, three residential real estate loans and one home equity line of credit for which there was a payment default within twelve months following the modification of the troubled debt restructuring during the three month and six month periods ended June 30, 2018. A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms.

Credit Quality Indicators:

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company establishes a risk rating at origination for all commercial loan and commercial real estate relationships. For relationships over $750 thousand, management monitors the loans on an ongoing basis for any changes in the borrower’s ability to service their debt. Management also affirms the risk ratings for the loans and leases in their respective portfolios on an annual basis. The Company uses the following definitions for risk ratings:

Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date. Special mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.

25

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Substandard loans are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans.

As of June 30, 2019 and December 31, 2018, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

(In Thousands of Dollars) |  | Pass |  |  | Special Mention |  |  | Sub standard |  |  | Total |
June 30, 2019 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Originated loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Owner occupied |  | $ | 172,236 |  |  | $ | 2,554 |  |  | $ | 701 |  |  | $ | 175,491 |
Non-owner occupied |  |  | 275,057 |  |  |  | 3,964 |  |  |  | 95 |  |  |  | 279,116 |
Farmland |  |  | 118,827 |  |  |  | 2,754 |  |  |  | 899 |  |  |  | 122,480 |
Other |  |  | 97,515 |  |  |  | 0 |  |  |  | 234 |  |  |  | 97,749 |
Commercial |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial and industrial |  |  | 237,225 |  |  |  | 1,569 |  |  |  | 2,015 |  |  |  | 240,809 |
Agricultural |  |  | 36,987 |  |  |  | 188 |  |  |  | 76 |  |  |  | 37,251 |
Total originated loans |  | $ | 937,847 |  |  | $ | 11,029 |  |  | $ | 4,020 |  |  | $ | 952,896 |
Acquired loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Owner occupied |  | $ | 40,162 |  |  | $ | 120 |  |  | $ | 631 |  |  | $ | 40,913 |
Non-owner occupied |  |  | 12,656 |  |  |  | 56 |  |  |  | 40 |  |  |  | 12,752 |
Farmland |  |  | 34,668 |  |  |  | 642 |  |  |  | 3,586 |  |  |  | 38,896 |
Other |  |  | 6,526 |  |  |  | 0 |  |  |  | 549 |  |  |  | 7,075 |
Commercial |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial and industrial |  |  | 14,508 |  |  |  | 141 |  |  |  | 802 |  |  |  | 15,451 |
Agricultural |  |  | 6,409 |  |  |  | 259 |  |  |  | 213 |  |  |  | 6,881 |
Total acquired loans |  | $ | 114,929 |  |  | $ | 1,218 |  |  | $ | 5,821 |  |  | $ | 121,968 |
Total loans |  | $ | 1,052,776 |  |  | $ | 12,247 |  |  | $ | 9,841 |  |  | $ | 1,074,864 |

26

(In Thousands of Dollars) |  | Pass |  |  | Special Mention |  |  | Sub standard |  |  | Total |
December 31, 2018 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Originated loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Owner occupied |  | $ | 156,892 |  |  | $ | 945 |  |  | $ | 746 |  |  | $ | 158,583 |
Non-owner occupied |  |  | 251,240 |  |  |  | 4,139 |  |  |  | 101 |  |  |  | 255,480 |
Farmland |  |  | 109,391 |  |  |  | 1,301 |  |  |  | 69 |  |  |  | 110,761 |
Other |  |  | 92,669 |  |  |  | 1,325 |  |  |  | 248 |  |  |  | 94,242 |
Commercial |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial and industrial |  |  | 219,938 |  |  |  | 4,207 |  |  |  | 2,456 |  |  |  | 226,601 |
Agricultural |  |  | 37,158 |  |  |  | 81 |  |  |  | 482 |  |  |  | 37,721 |
Total originated loans |  | $ | 867,288 |  |  | $ | 11,998 |  |  | $ | 4,102 |  |  | $ | 883,388 |
Acquired loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Owner occupied |  | $ | 43,763 |  |  | $ | 430 |  |  | $ | 746 |  |  | $ | 44,939 |
Non-owner occupied |  |  | 16,601 |  |  |  | 58 |  |  |  | 187 |  |  |  | 16,846 |
Farmland |  |  | 36,565 |  |  |  | 668 |  |  |  | 3,749 |  |  |  | 40,982 |
Other |  |  | 7,434 |  |  |  | 0 |  |  |  | 657 |  |  |  | 8,091 |
Commercial |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial and industrial |  |  | 16,407 |  |  |  | 170 |  |  |  | 1,564 |  |  |  | 18,141 |
Agricultural |  |  | 8,612 |  |  |  | 346 |  |  |  | 567 |  |  |  | 9,525 |
Total acquired loans |  | $ | 129,382 |  |  | $ | 1,672 |  |  | $ | 7,470 |  |  | $ | 138,524 |
Total loans |  | $ | 996,670 |  |  | $ | 13,670 |  |  | $ | 11,572 |  |  | $ | 1,021,912 |

The Company considers the performance of the loan portfolio and its impact on the allowance for loan losses. For residential, consumer indirect and direct loan classes, the Company evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. In the 1-4 family residential real estate portfolio at June 30, 2019, other real estate owned and foreclosure properties were $74 thousand and $1.1 million, respectively. There were no other real estate owned properties, and foreclosure properties were $1.2 million at December 31, 2018.

The following tables present the recorded investment in residential, consumer indirect and direct auto loans based on payment activity as of June 30, 2019 and December 31, 2018. Nonperforming loans are loans past due 90 days or more and still accruing interest and nonaccrual loans.

|  | Residential Real Estate |  |  | Consumer |
(In Thousands of Dollars) |  | 1-4 Family Residential |  |  | Home Equity Lines of Credit |  |  | Indirect |  |  | Direct |  |  | Other |
June 30, 2019 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Originated loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Performing |  | $ | 312,123 |  |  | $ | 83,832 |  |  | $ | 166,067 |  |  | $ | 27,988 |  |  | $ | 10,351 |
Nonperforming |  |  | 2,327 |  |  |  | 751 |  |  |  | 621 |  |  |  | 157 |  |  |  | 9 |
Total originated loans |  | $ | 314,450 |  |  | $ | 84,583 |  |  | $ | 166,688 |  |  | $ | 28,145 |  |  | $ | 10,360 |
Acquired loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Performing |  | $ | 71,469 |  |  | $ | 21,127 |  |  | $ | 0 |  |  | $ | 7,404 |  |  | $ | 110 |
Nonperforming |  |  | 891 |  |  |  | 261 |  |  |  | 0 |  |  |  | 152 |  |  |  | 0 |
Total acquired loans |  |  | 72,360 |  |  |  | 21,388 |  |  |  | 0 |  |  |  | 7,556 |  |  |  | 110 |
Total loans |  | $ | 386,810 |  |  | $ | 105,971 |  |  | $ | 166,688 |  |  | $ | 35,701 |  |  | $ | 10,470 |

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|  | Residential Real Estate |  |  | Consumer |
(In Thousands of Dollars) |  | 1-4 Family Residential |  |  | Home Equity Lines of Credit |  |  | Indirect |  |  | Direct |  |  | Other |
December 31, 2018 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Originated loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Performing |  | $ | 304,519 |  |  | $ | 82,035 |  |  | $ | 169,091 |  |  | $ | 30,237 |  |  | $ | 11,892 |
Nonperforming |  |  | 2,503 |  |  |  | 675 |  |  |  | 715 |  |  |  | 254 |  |  |  | 2 |
Total originated loans |  | $ | 307,022 |  |  | $ | 82,710 |  |  | $ | 169,806 |  |  | $ | 30,491 |  |  | $ | 11,894 |
Acquired loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Performing |  | $ | 77,661 |  |  | $ | 23,400 |  |  | $ | 0 |  |  | $ | 9,304 |  |  | $ | 162 |
Nonperforming |  |  | 1,123 |  |  |  | 217 |  |  |  | 0 |  |  |  | 138 |  |  |  | 0 |
Total acquired loans |  |  | 78,784 |  |  |  | 23,617 |  |  |  | 0 |  |  |  | 9,442 |  |  |  | 162 |
Total loans |  | $ | 385,806 |  |  | $ | 106,327 |  |  | $ | 169,806 |  |  | $ | 39,933 |  |  | $ | 12,056 |

Revenue from Contracts with Customers:

All material revenue from contracts with customers in the scope of ASC 606 is recognized within noninterest income. The following table presents the Company’s noninterest income by revenue stream and reportable segment, net of eliminations, for the three and six months ended June 30, 2019 and 2018.

(In Thousands of Dollars) |  | Trust Segment |  |  | Bank Segment |  |  | Retirement Consulting Segment |  |  | Totals |
For Three Months Ended June 30, 2019 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Service charges on deposit accounts |  | $ | 0 |  |  | $ | 1,093 |  |  | $ | 0 |  |  | $ | 1,093 |
Debit card and EFT fees |  |  | 0 |  |  |  | 887 |  |  |  | 0 |  |  |  | 887 |
Trust fees |  |  | 1,821 |  |  |  | 0 |  |  |  | 0 |  |  |  | 1,821 |
Insurance agency commissions |  |  | 0 |  |  |  | 739 |  |  |  | 0 |  |  |  | 739 |
Retirement plan consulting fees |  |  | 0 |  |  |  | 0 |  |  |  | 450 |  |  |  | 450 |
Investment commissions |  |  | 0 |  |  |  | 327 |  |  |  | 0 |  |  |  | 327 |
Other |  |  | 0 |  |  |  | 1,677 |  |  |  | 0 |  |  |  | 1,677 |
Total noninterest income |  | $ | 1,821 |  |  | $ | 4,723 |  |  | $ | 450 |  |  | $ | 6,994 |

(In Thousands of Dollars) |  | Trust Segment |  |  | Bank Segment |  |  | Retirement Consulting Segment |  |  | Totals |
For Three Months Ended June 30, 2018 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Service charges on deposit accounts |  | $ | 0 |  |  | $ | 985 |  |  | $ | 0 |  |  | $ | 985 |
Debit card and EFT fees |  |  | 0 |  |  |  | 870 |  |  |  | 0 |  |  |  | 870 |
Trust fees |  |  | 1,740 |  |  |  | 0 |  |  |  | 0 |  |  |  | 1,740 |
Insurance agency commissions |  |  | 0 |  |  |  | 713 |  |  |  | 0 |  |  |  | 713 |
Retirement plan consulting fees |  |  | 0 |  |  |  | 0 |  |  |  | 465 |  |  |  | 465 |
Investment commissions |  |  | 0 |  |  |  | 315 |  |  |  | 0 |  |  |  | 315 |
Other |  |  | 0 |  |  |  | 1,218 |  |  |  | 0 |  |  |  | 1,218 |
Total noninterest income |  | $ | 1,740 |  |  | $ | 4,101 |  |  | $ | 465 |  |  | $ | 6,306 |

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(In Thousands of Dollars) |  | Trust Segment |  |  | Bank Segment |  |  | Retirement Consulting Segment |  |  | Totals |
For Six Months Ended June 30, 2019 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Service charges on deposit accounts |  | $ | 0 |  |  | $ | 2,167 |  |  | $ | 0 |  |  | $ | 2,167 |
Debit card and EFT fees |  |  | 0 |  |  |  | 1,665 |  |  |  | 0 |  |  |  | 1,665 |
Trust fees |  |  | 3,679 |  |  |  | 0 |  |  |  | 0 |  |  |  | 3,679 |
Insurance agency commissions |  |  | 0 |  |  |  | 1,542 |  |  |  | 0 |  |  |  | 1,542 |
Retirement plan consulting fees |  |  | 0 |  |  |  | 0 |  |  |  | 808 |  |  |  | 808 |
Investment commissions |  |  | 0 |  |  |  | 587 |  |  |  | 0 |  |  |  | 587 |
Other |  |  | 0 |  |  |  | 3,066 |  |  |  | 0 |  |  |  | 3,066 |
Total noninterest income |  | $ | 3,679 |  |  | $ | 9,027 |  |  | $ | 808 |  |  | $ | 13,514 |

(In Thousands of Dollars) |  | Trust Segment |  |  | Bank Segment |  |  | Retirement Consulting Segment |  |  | Totals |
For Six Months Ended June 30, 2018 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Service charges on deposit accounts |  | $ | 0 |  |  | $ | 1,988 |  |  | $ | 0 |  |  | $ | 1,988 |
Debit card and EFT fees |  |  | 0 |  |  |  | 1,676 |  |  |  | 0 |  |  |  | 1,676 |
Trust fees |  |  | 3,547 |  |  |  | 0 |  |  |  | 0 |  |  |  | 3,547 |
Insurance agency commissions |  |  | 0 |  |  |  | 1,412 |  |  |  | 0 |  |  |  | 1,412 |
Retirement plan consulting fees |  |  | 0 |  |  |  | 0 |  |  |  | 844 |  |  |  | 844 |
Investment commissions |  |  | 0 |  |  |  | 571 |  |  |  | 0 |  |  |  | 571 |
Other |  |  | 0 |  |  |  | 2,278 |  |  |  | 0 |  |  |  | 2,278 |
Total noninterest income |  | $ | 3,547 |  |  | $ | 7,925 |  |  | $ | 844 |  |  | $ | 12,316 |

A description of the Company’s revenue streams under ASC 606 follows:

Service charges on deposit accounts – The Company earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Management reviewed the deposit account agreements, and determined that the agreements can be terminated at any time by either the Bank or the account holder. Transaction fees, such as balance transfers, wires and overdraft charges are settled the day the performance obligation is satisfied. The Bank’s monthly service charges and maintenance fees are for services provided to the customer on a monthly basis are considered a series of services that have the same pattern of transfer each month. The review of service charges assessed on deposit accounts, included the amount of variable consideration that is a part of the monthly charges. It was found that the waiver of service charges due to insufficient funds and dormant account fees is immaterial and would not require a change in the accounting treatment for these fees under the new revenue standards.

Debit Card Interchange Fees – Customers and the Bank have an account agreement and maintain deposit balances with the Bank. Customers use a bank issued debit card to purchase goods and services, and the Bank earns interchange fees on those transactions, typically a percentage of the sale amount of the transaction. The Bank records the amount due when it receives the settlement from the payment network. Payments from the payment network are received and recorded into income on a daily basis. There are no contingent debit card interchange fees recorded by the Company that could be subject to a clawback in future periods.

Trust fees – Services provided to Trust customers are a series of distinct services that have the same pattern of transfer each month. Fees for trust accounts are billed and drafted from trust accounts monthly. The Company records these fees on the income statement on a monthly basis. Fees are assessed based on the total investable assets of the customer’s trust account. A signed contract between the Company and the customer is maintained for all customer trust accounts with payment terms identified. It is probable that the fees will be collectible as funds being managed are accessible by the asset manager. Past history of trust fee income recorded by the Company indicates that it is highly unlikely that a significant reversal could occur. There are no contingent incentive fees recorded by the Company that could be subject to a clawback in future periods.

Insurance Agency Commissions – Insurance agency commissions are received from insurance carriers for the agency’s share of commissions from customer premium payments. These commissions are recorded into income when checks are received from the insurance carriers, and there is no contingent portion associated with these commission checks. There may be a short time-lag in recording revenue when cash is received instead of recording the revenue when the policy is signed by the customer, but the time lag is insignificant and does not impact the revenue recognition process.

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Insurance also receives incentive checks from the insurance carriers for achieving specified levels of production with particular carriers. These amounts are recorded into income when a check is received, and there are no contingent amounts associated with these payments that may be clawed back by the carrier in the future. Similar to the monthly commissions explained in the preceding paragraph, there may be a short time-lag in recording incentive revenue on a cash basis as opposed to estimating the amount of incentive revenue expected to be earned, this does not materially impact the recognition of Insurance revenue. If there were any amounts that would need to be refunded for one specific Insurance customer, management believes the reversal would not be significant.

Other potential situations surrounding the recognition of Insurance revenue include the estimating potential refunds due to the likely cancellation of a percentage of customers cancelling their policies and recording revenue at the time of policy renewals. Management concluded that since Insurance agency commissions represent only 2.4% of the Company’s total revenue, adjusting the current practice of recording insurance revenue for these situations would not have a material impact on the reporting of total revenue.

Retirement Plan Consulting Fees – The fees earned from retirement plan consulting is generated by National Associates, Inc. Revenue is recognized based on the level of work performed for the client. Any payments that are received for work to be performed in the future are recorded in a deferred revenue account, and recorded into income when the fees are earned. Retirement plan consulting fees represent only 1.3% of the Company’s total revenue, and therefore management has concluded that any adjustment of revenue for one particular customer for a refund or any other reason would be insignificant and would not materially impact the Company’s total revenue.

Investment Commissions – Investment commissions are earned through the sales of non-deposit investment products to customers of the Company. The sales are conducted through a third-party broker-dealer. When the commissions are received and recorded into income on the Bank’s income statement, there is no contingent portion that may need to be refunded back to Cetera. Investment commissions represent only 1.0% of the Company’s total revenue, and therefore management has concluded that any adjustment of revenue for a particular customer for a refund or any other reason would be insignificant and would not materially impact the Company’s total revenue.

Other – Income items included in “Other” are Bank owned life insurance income, security gains, net gains on the sale of loans and other operating income. Any amounts within the scope of ASC 606 are deemed immaterial.

Fair Value:

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2 – Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3 – Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:

Investment Securities: The Company uses a third party service to estimate fair value on available for sale securities on a monthly basis. ASU 2016-01, which was adopted by the Company as of January 1, 2018, requires the use of exit price notion when measuring the fair value of financial instruments for disclosure purposes. The Company’s service provider is considered a leading evaluation pricing service for U.S. domestic fixed income securities and complies fully with ASU 2016-01’s exit pricing requirements. They subscribe to multiple third-party pricing vendors, and supplement that information with matrix pricing methods. The fair values for investment securities, which consist of equity securities that are recorded at fair market value to comply with ASU 2016-01, are determined by quoted market prices in active markets, if available (Level 1). The equity securities change in fair market value is recorded in the income statements. For securities where quoted prices are not available, fair values are calculated based on quoted prices for similar assets in active markets, quoted prices for similar assets in markets that are not active or inputs other than quoted prices, which provide a reasonable basis for fair value determination. Such inputs may include interest rates and yield curves, volatilities, prepayment speeds, credit risks and default rates. Inputs used are derived principally from observable market data (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using

30

discounted cash flows or other market indicators (Level 3). The fair values of Level 3 investment securities are determined by using unobservable inputs to measure fair value of assets for which there is little, if any market activity at the measurement date, using reasonable inputs and assumptions based on the best information at the time, to the extent that inputs are available without undue cost and effort. For the period ended June 30, 2019 and for the year ended December, the fair value of Level 3 investment securities was immaterial.

Derivative Instruments: The fair values of derivative instruments are based on valuation models using observable market data as of the measurement date (Level 2).

Impaired Loans: At the time loans are considered impaired, collateral dependent impaired loans are valued at the lower of cost or fair value and non-collateral dependent loans are valued based on discounted cash flows. Impaired loans carried at fair value generally receive specific allocations of the allowance for loan losses. For collateral dependent loans fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

Other Real Estate Owned: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair values are commonly based on recent real estate appraisals. These appraisals may use a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

Appraisals for both collateral-dependent impaired loans and other real estate owned are performed by certified general appraisers (for commercial and commercial real estate properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, a member of the Appraisal Department reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics. On an annual basis, the Company compares the actual selling price of collateral that has been sold to the most recent appraised value to determine what adjustments should be made to appraisals to arrive at fair value.

Assets measured at fair value on a recurring basis are summarized below:

|  | Fair Value Measurements at June 30, 2019 Using: |
(In Thousands of Dollars) |  | Carrying Value |  |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |
Financial Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Investment securities available-for sale |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury and U.S. government sponsored entities |  | $ | 5,882 |  |  | $ | 0 |  |  | $ | 5,882 |  |  | $ | 0 |
State and political subdivisions |  |  | 231,318 |  |  |  | 0 |  |  |  | 231,318 |  |  |  | 0 |
Corporate bonds |  |  | 1,432 |  |  |  | 0 |  |  |  | 1,432 |  |  |  | 0 |
Mortgage-backed securities-residential |  |  | 153,749 |  |  |  | 0 |  |  |  | 153,743 |  |  |  | 6 |
Collateralized mortgage obligations |  |  | 20,649 |  |  |  | 0 |  |  |  | 20,649 |  |  |  | 0 |
Small Business Administration |  |  | 11,222 |  |  |  | 0 |  |  |  | 11,222 |  |  |  | 0 |
Equity securities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Equity securities at fair value |  |  | 559 |  |  |  | 559 |  |  |  | 0 |  |  |  | 0 |
Other investments measured at net asset value |  |  | 6,663 |  |  | n/a |  |  | n/a |  |  | n/a |
Total investment securities |  | $ | 431,474 |  |  | $ | 559 |  |  | $ | 424,246 |  |  | $ | 6 |
Loan yield maintenance provisions |  | $ | 1,805 |  |  | $ | 0 |  |  | $ | 1,805 |  |  | $ | 0 |
Financial Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps |  | $ | 1,805 |  |  | $ | 0 |  |  | $ | 1,805 |  |  | $ | 0 |

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|  | Fair Value Measurements at December 31, 2018 Using: |
(In Thousands of Dollars) |  | Carrying Value |  |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |
Financial Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Investment securities available-for sale |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury and U.S. government sponsored entities |  | $ | 6,009 |  |  | $ | 0 |  |  | $ | 6,009 |  |  | $ | 0 |
State and political subdivisions |  |  | 211,944 |  |  |  | 0 |  |  |  | 211,944 |  |  |  | 0 |
Corporate bonds |  |  | 1,188 |  |  |  | 0 |  |  |  | 1,188 |  |  |  | 0 |
Mortgage-backed securities-residential |  |  | 150,047 |  |  |  | 0 |  |  |  | 150,041 |  |  |  | 6 |
Collateralized mortgage obligations |  |  | 21,072 |  |  |  | 0 |  |  |  | 21,072 |  |  |  | 0 |
Small Business Administration |  |  | 11,930 |  |  |  | 0 |  |  |  | 11,930 |  |  |  | 0 |
Equity securities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Equity securities at fair value |  |  | 495 |  |  |  | 495 |  |  |  | 0 |  |  |  | 0 |
Other investments measured at net asset value |  |  | 6,635 |  |  | n/a |  |  | n/a |  |  | n/a |
Total investment securities |  | $ | 409,320 |  |  | $ | 495 |  |  | $ | 402,184 |  |  | $ | 6 |
Loan yield maintenance provisions |  | $ | 767 |  |  | $ | 0 |  |  | $ | 767 |  |  | $ | 0 |
Financial Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps |  | $ | 767 |  |  | $ | 0 |  |  | $ | 767 |  |  | $ | 0 |

There were no significant transfers between Level 1 and Level 2 during the three and six month periods ended June 30, 2019 and 2018. For additional information related to yield maintenance provisions and interest rate swaps see Interest – Rate Swaps note.

The table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3):

|  | Investment Securities Available-for-sale (Level 3) |
|  | Three Months ended June 30, |  |  | Six Months ended June 30, |
(In Thousands of Dollars) |  | 2019 |  |  | 2018 |  |  | 2019 |  |  | 2018 |
Beginning Balance |  | $ | 6 |  |  | $ | 7 |  |  | $ | 6 |  |  | $ | 8 |
Transfers from level 2 |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |
Repayments, calls and maturities |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | (1 | )
Ending Balance |  | $ | 6 |  |  | $ | 7 |  |  | $ | 6 |  |  | $ | 7 |

Assets measured at fair value on a non-recurring basis are summarized below:

|  | Fair Value Measurements at June 30, 2019 Using: |
(In Thousands of Dollars) |  | Carrying Value |  |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |
Financial Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Impaired loans |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Farmland |  | $ | 251 |  |  | $ | 0 |  |  | $ | 0 |  |  | $ | 251 |
1–4 family residential |  |  | 570 |  |  |  | 0 |  |  |  | 0 |  |  |  | 570 |
Consumer |  |  | 23 |  |  |  | 0 |  |  |  | 0 |  |  |  | 23 |
Other real estate owned |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
1–4 family residential |  |  | 74 |  |  |  | 0 |  |  |  | 0 |  |  |  | 74 |

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|  | Fair Value Measurements at December 31, 2018 Using: |
(In Thousands of Dollars) |  | Carrying Value |  |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |
Financial Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Impaired loans |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Farmland |  | $ | 251 |  |  | $ | 0 |  |  | $ | 0 |  |  | $ | 251 |
1–4 family residential |  |  | 640 |  |  |  | 0 |  |  |  | 0 |  |  |  | 640 |
Consumer |  |  | 7 |  |  |  | 0 |  |  |  | 0 |  |  |  | 7 |

Impaired loans that are measured for impairment using the fair value of the collateral for collateral dependent loans, had a principal balance of $1.1 million with a valuation allowance of $229 thousand at June 30, 2019, resulting in $46 thousand in additional provision for loan losses for the three and six months period ending June 30, 2019. At December 31, 2018, impaired loans had a principal balance of $1.1 million, with a valuation allowance of $227 thousand. Loans measured at fair value resulted in an additional provision for loan losses of $60 thousand and $126 thousand for the three and six month period ending June 30, 2018. Excluded from the fair value of impaired loans, at June 30, 2019 and December 31, 2018, discussed above are $606 thousand and $694 thousand of loans classified as troubled debt restructurings and measured using the present value of cash flows, which is not considered an exit price.

Impaired commercial real estate loans, both owner-occupied and non-owner occupied are valued by independent external appraisals. These external appraisals are prepared using the sales comparison approach and income approach valuation techniques. Management makes subsequent unobservable adjustments to the impaired loan appraisals. Impaired loans other than commercial real estate and other real estate owned are not considered material.

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at the periods ended June 30, 2019 and December 31, 2018:

June 30, 2019 | Fair value |  |  | Valuation Technique(s) |  | Unobservable Input(s) |  | Range (Weighted Average)
Impaired loans |  |  |  |  |  |  |  |  |
Commercial real estate | $ | 251 |  |  | Sales Comparison |  | Adjustment for differences between comparable sales |  | (22.70%) - 16.16% 9.39%
Residential |  | 570 |  |  | Sales comparison |  | Adjustment for differences between comparable sales |  | (24.26%) - 23.74% 9.07%
Consumer |  | 23 |  |  | Sales comparison |  | Adjustment for differences between comparable sales |  | (5.26%) - 5.26% 0.00%
Other Real Estate owned residential |  | 74 |  |  | Sales comparison |  | Adjustment for differences between comparable sales |  | (39.77%) - 32.49% 7.30%

December 31, 2018 | Fair value |  |  | Valuation Technique(s) |  | Unobservable Input(s) |  | Range (Weighted Average)
Impaired loans |  |  |  |  |  |  |  |  |
Commercial real estate | $ | 251 |  |  | Sales comparison |  | Adjustment for differences between comparable sales |  | (22.70%) - 16.16% 9.39%
Residential |  | 640 |  |  | Sales comparison |  | Adjustment for differences between comparable sales |  | (49.90%) - 45.99% 6.52%
Consumer |  | 7 |  |  | Sales comparison |  | Adjustment for differences between comparable sales |  | (5.71%) - 5.71% (0.00%)

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The carrying amounts and estimated fair values of financial instruments not previously disclosed at June 30, 2019 and December 31, 2018 are as follows:

|  |  |  |  |  | Fair Value Measurements at June 30, 2019 Using: |
(In Thousands of Dollars) |  | Carrying Amount |  |  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Total |
Financial assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 64,007 |  |  | $ | 21,821 |  |  | $ | 42,186 |  |  | $ | 0 |  |  | $ | 64,007 |
Restricted stock |  |  | 11,729 |  |  | n/a |  |  | n/a |  |  | n/a |  |  | n/a |
Loans held for sale |  |  | 1,093 |  |  |  | 0 |  |  |  | 1,126 |  |  |  | 0 |  |  |  | 1,126 |
Loans, net |  |  | 1,766,282 |  |  |  | 0 |  |  |  | 0 |  |  |  | 1,721,129 |  |  |  | 1,721,129 |
Accrued interest receivable |  |  | 7,979 |  |  |  | 0 |  |  |  | 2,455 |  |  |  | 5,524 |  |  |  | 7,979 |
Financial liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits |  |  | 2,000,635 |  |  |  | 1,451,396 |  |  |  | 548,723 |  |  |  | 0 |  |  |  | 2,000,119 |
Short-term borrowings |  |  | 91,312 |  |  |  | 0 |  |  |  | 91,312 |  |  |  | 0 |  |  |  | 91,312 |
Long-term borrowings |  |  | 5,666 |  |  |  | 0 |  |  |  | 5,636 |  |  |  | 0 |  |  |  | 5,636 |
Accrued interest payable |  |  | 1,375 |  |  |  | 77 |  |  |  | 1,298 |  |  |  | 0 |  |  |  | 1,375 |

|  |  |  |  |  | Fair Value Measurements at December 31, 2018 Using: |
(In Thousands of Dollars) |  | Carrying Amount |  |  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Total |
Financial assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 57,926 |  |  | $ | 18,042 |  |  | $ | 39,884 |  |  | $ | 0 |  |  | $ | 57,926 |
Restricted stock |  |  | 11,737 |  |  | n/a |  |  | n/a |  |  | n/a |  |  | n/a |
Loans held for sale |  |  | 1,237 |  |  |  | 0 |  |  |  | 1,274 |  |  |  | 0 |  |  |  | 1,274 |
Loans, net |  |  | 1,722,248 |  |  |  | 0 |  |  |  | 0 |  |  |  | 1,673,626 |  |  |  | 1,673,626 |
Accrued interest receivable |  |  | 7,114 |  |  |  | 0 |  |  |  | 2,359 |  |  |  | 4,755 |  |  |  | 7,114 |
Financial liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits |  |  | 1,799,720 |  |  |  | 1,427,260 |  |  |  | 367,306 |  |  |  | 0 |  |  |  | 1,794,566 |
Short-term borrowings |  |  | 244,759 |  |  |  | 0 |  |  |  | 244,759 |  |  |  | 0 |  |  |  | 244,759 |
Long-term borrowings |  |  | 6,033 |  |  |  | 0 |  |  |  | 5,847 |  |  |  | 0 |  |  |  | 5,847 |
Accrued interest payable |  |  | 990 |  |  |  | 63 |  |  |  | 927 |  |  |  | 0 |  |  |  | 990 |

The methods and assumptions used to estimate fair value, not previously described, are described as follows:

Cash and Cash Equivalents: The carrying amounts of cash and short-term instruments approximate fair values and are classified as either Level 1 or Level 2. The Company has determined that cash on hand and non-interest bearing due from bank accounts are Level 1 whereas interest bearing federal funds sold and other are Level 2.

Restricted Stock: It is not practical to determine the fair value of restricted stock due to restrictions placed on its transferability.

Loans: Fair values of loans, excluding loans held for sale, are estimated as follows: Beginning January 1, 2018 the Company used a third party firm that uses cash flow analysis and current market interest rates along with adjustments for credit, liquidity and option risk to conform to the ASU 2016-01 exit price requirement. Loans in the tables above consist of impaired credits held for investment. In accordance with the loan impairment guidance, impairment was measured based on the fair value of collateral less estimated selling costs for collateral dependent loans or the cash flow method for noncollateral dependent loans. Fair value for collateral dependent impaired loans is based upon appraised values adjusted for trends observed in the market. A valuation allowance was recorded for the excess of the loan’s recorded investment over the amounts determined by the collateral value method. This valuation is a component of the allowance for loan losses. The Company considers these fair values level 3.

Loans held for sale: The fair value of loans held for sale is estimated based upon binding contracts and quotes from third party investors resulting in a Level 2 classification.

Accrued Interest Receivable/Payable: The carrying amounts of accrued interest receivable and payable approximate fair value resulting in a Level 1, Level 2 or Level 3 classification. The classification is the result of the association with securities, loans and deposits.

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Deposits: The fair values disclosed for demand deposits – interest and non-interest checking, passbook savings, and money market accounts – are, by definition, equal to the amount payable on demand at the reporting date resulting in a Level 1 classification. The carrying amounts of variable rate certificates of deposit approximate their fair values at the reporting date resulting in a Level 2 classification. Fair value for fixed rate certificates of deposit are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

Short-term Borrowings: The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings, generally maturing within ninety days, approximate their fair values resulting in a Level 2 classification.

Long-term Borrowings: The fair values of the Company’s long-term borrowings are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification.

Off-balance Sheet Instruments: The fair value of commitments is not considered material.

Goodwill and Intangible Assets:

Goodwill associated with the Company’s purchase of Monitor in August 2017 and other past acquisitions totaled $38.2 million at June 30, 2019 and December 31, 2018. Impairment exists when a reporting unit’s carrying value of goodwill exceeds its fair value, which is determined through a two-step impairment test. Management performs goodwill impairment testing on an annual basis as of September 30. The fair value of the reporting unit is determined based on a discounted cash flow model.

Acquired Intangible Assets

Acquired intangible assets were as follows:

| June 30, 2019 |  |  | December 31, 2018 |
(In Thousands of Dollars) | Gross Carrying Amount |  |  | Accumulated Amortization |  |  | Gross Carrying Amount |  |  | Accumulated Amortization |
Amortized intangible assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Customer relationship intangibles | $ | 7,210 |  |  | $ | (5,709 | ) |  | $ | 7,210 |  |  | $ | (5,481 | )
Non-compete contracts |  | 430 |  |  |  | (382 | ) |  |  | 430 |  |  |  | (380 | )
Trade name |  | 520 |  |  |  | (253 | ) |  |  | 520 |  |  |  | (229 | )
Core deposit intangible |  | 6,254 |  |  |  | (2,973 | ) |  |  | 6,254 |  |  |  | (2,573 | )
Total | $ | 14,414 |  |  | $ | (9,317 | ) |  | $ | 14,414 |  |  | $ | (8,663 | )

Aggregate amortization expense was $327 thousand and $654 thousand for the three and six month periods ended June 30, 2019. Amortization expense was $355 thousand and $709 thousand for the three and six months ended June 30, 2018.

Estimated amortization expense for each of the next five periods and thereafter:

2019 (6 months) | $ | 653 |
2020 |  | 1,202 |
2021 |  | 1,142 |
2022 |  | 1,025 |
2023 |  | 514 |
Thereafter |  | 561 |
Total | $ | 5,097 |

Leases:

The Company has operating leases for branch office locations, vehicles and certain office equipment such as printers, copiers and faxes. The leases have remaining lease terms of 6 months to 11 years, some of which include options to extend the lease for up to 10 years and some of which include options to terminate the leases within 6 months.

The right of use asset and lease liability as of June 30, 2019 was $3.4 million.

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Lease payments made for the three and six month period ended June 30, 2019 were $146 thousand and $292 thousand, respectively. Interest expense and amortization expense on finance leases for the three month period ended June 30, 2019 was $26 thousand and $89 thousand, and $53 thousand and $177 thousand for the six month period ended June 30, 2019. The weighted-average remaining lease term for all leases was 6.9 years as of June 30, 2019 and the weighted-average discount rate was 3.4%.

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Maturities of lease liabilities are as follows as of June 30, 2019:

2019 (6 months) |  | $ | 292 |
2020 |  |  | 590 |
2021 |  |  | 592 |
2022 |  |  | 474 |
2023 |  |  | 419 |
Thereafter |  |  | 1,664 |
Total Payments |  |  | 4,031 |
Less: Imputed Interest |  |  | (613 | )
Total |  | $ | 3,418 |

Interest-Rate Swaps:

The Company uses a program that utilizes interest-rate swaps as part of its asset/liability management strategy. The interest-rate swaps are used to help manage the Company’s interest rate risk position and not as derivatives for trading purposes. The notional amount of the interest-rate swaps does not represent amounts exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual interest-rate swap agreements.

The objective of the interest-rate swaps is to protect the related fixed rate commercial real estate loans from changes in fair value due to changes in interest rates. The Company has a program whereby it lends to its borrowers at a fixed rate with the loan agreement containing a two-way yield maintenance provision, which will be invoked in the event of prepayment of the loan, and is expected to exactly offset the fair value of unwinding the swap. The yield maintenance provision represents an embedded derivative which is bifurcated from the host loan contract and, as such, the swaps and embedded derivatives are not designated as hedges. Accordingly, both instruments are carried at fair value and changes in fair value are reported in current period earnings.

Summary information about these interest-rate swaps at periods ended June 30, 2019 and December 31, 2018 is as follows:

| June 30, 2019 |  |  | December 31, 2018 |
Notional amounts (In thousands) | $ | 43,357 |  |  | $ | 35,996 |
Weighted average pay rate on interest-rate swaps |  | 4.50 | % |  |  | 4.53 | %
Weighted average receive rate on interest-rate swaps |  | 4.62 | % |  |  | 4.78 | %
Weighted average maturity (years) |  | 4.1 |  |  |  | 4.4 |
Fair value of interest-rate swaps (In thousands) | $ | (1,805 | ) |  | $ | (767 | )
Fair value of loan yield maintenance provisions (In thousands) | $ | 1,805 |  |  | $ | 767 |

The fair value of the yield maintenance provisions and interest-rate swaps is recorded in other assets and other liabilities, respectively, in the consolidated balance sheets. Changes in the fair value of the yield maintenance provisions and interest-rate swaps are reported in earnings, as other noninterest income in the consolidated statements of income. For the three month and six month periods ended June 30, 2019 and 2018 there were no net gains or losses recognized in earnings.

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Earnings Per Share:

The computation of basic and diluted earnings per share is shown in the following table:

| Three Months Ended June 30, |  |  | Six Months Ended June 30, |
| 2019 |  |  | 2018 |  |  | 2019 |  |  | 2018 |
Basic EPS |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Net income (In thousands) | $ | 8,543 |  |  | $ | 8,073 |  |  | $ | 16,931 |  |  | $ | 15,799 |
Weighted average shares outstanding |  | 27,794,821 |  |  |  | 27,640,921 |  |  |  | 27,792,438 |  |  |  | 27,610,061 |
Basic earnings per share | $ | 0.31 |  |  | $ | 0.29 |  |  | $ | 0.61 |  |  | $ | 0.57 |
Diluted EPS |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Net income (In thousands) | $ | 8,543 |  |  | $ | 8,073 |  |  | $ | 16,931 |  |  | $ | 15,799 |
Weighted average shares outstanding for basic earnings per share |  | 27,794,821 |  |  |  | 27,640,921 |  |  |  | 27,792,438 |  |  |  | 27,610,061 |
Dilutive effect of restricted stock awards |  | 136,379 |  |  |  | 338,068 |  |  |  | 157,893 |  |  |  | 339,159 |
Weighted average shares for diluted earnings per share |  | 27,931,200 |  |  |  | 27,978,989 |  |  |  | 27,950,331 |  |  |  | 27,949,220 |
Diluted earnings per share | $ | 0.31 |  |  | $ | 0.29 |  |  | $ | 0.61 |  |  | $ | 0.57 |

There were no restricted stock awards that were considered anti-dilutive for the three and six month periods ended June 30, 2019 and 2018.

Stock Based Compensation:

During 2017, the Company, with the approval of shareholders, created the 2017 Equity Incentive Plan (the “2017 Plan”). The 2017 Plan permits the award of up to 800 thousand shares to the Company’s directors and employees to attract and retain exceptional personnel, motivate performance and most importantly to help align the interests of the Company’s executives with those of the Company’s shareholders. There were 34,413 service time based share awards and 67,651 performance based share awards granted under the 2017 Plan during the six month period ended June 30, 2019, as shown in the table below. The actual number of performance based shares issued will depend on the relative performance of the Company’s average return on equity compared to a group of peer companies over a three year vesting period, ending December 31, 2021.

The restricted stock awards were granted with a fair value price equal to the market price of the Company’s common stock at the date of the grant. Expense recognized was $345 thousand and $664 thousand for the three and six month periods ended June 30, 2019, respectively. During the prior periods, the expense recognized was $337 thousand and $734 thousand for the three and six month periods ended June 30, 2018, respectively. As of June 30, 2019, there was $2.2 million of total unrecognized compensation expense related to the nonvested shares granted under the Plans. The remaining cost is expected to be recognized over 2.92 years.

The following is the activity under the Plans during the six month period ended June 30, 2019.

| Six Months Ended June 30, 2019 |
| Maximum Awarded Service Units |  |  | Weighted Average Grant Date Fair Value |  |  | Maximum Awarded Performance Units |  |  | Weighted Average Grant Date Fair Value |
Beginning balance - non-vested shares |  | 87,955 |  |  | $ | 13.04 |  |  |  | 203,828 |  |  | $ | 11.96 |
Granted |  | 34,413 |  |  |  | 13.88 |  |  |  | 67,651 |  |  |  | 13.50 |
Vested |  | (41,203 | ) |  |  | 11.65 |  |  |  | (78,814 | ) |  |  | 8.98 |
Forfeited |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |
Ending balance - non-vested shares |  | 81,165 |  |  | $ | 14.09 |  |  |  | 192,665 |  |  | $ | 13.72 |

The 120,017 shares that vested during the six month period ended June 30, 2019 had a weighted average fair value of $9.90 per share.

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Other Comprehensive Income (Loss):

The following table represents the details of other comprehensive income for the three and six month periods ended June 30, 2019 and 2018.

| Three Months Ended June 30, 2019 |
(In Thousands of Dollars) | Pre-tax |  |  | Tax |  |  | After-Tax |
Unrealized holding gains (losses) on available-for-sale securities during the period | $ | 9,203 |  |  | $ | (1,920 | ) |  | $ | 7,283 |
Reclassification adjustment for (gains) losses included in net income (1) |  | (1 | ) |  |  | 0 |  |  |  | (1 | )
Net other comprehensive income (loss) | $ | 9,202 |  |  | $ | (1,920 | ) |  | $ | 7,282 |
| Three Months Ended June 30, 2018 |
(In Thousands of Dollars) | Pre-tax |  |  | Tax |  |  | After-Tax |
Unrealized holding gains (losses) on available-for-sale securities during the period | $ | (242 | ) |  | $ | 39 |  |  | $ | (203 | )
Reclassification adjustment for losses included in net income (1) |  | (1 | ) |  |  | 0 |  |  |  | (1 | )
Net other comprehensive income (loss) | $ | (243 | ) |  | $ | 39 |  |  | $ | (204 | )
| Six Months Ended June 30, 2019 |
(In Thousands of Dollars) | Pre-tax |  |  | Tax |  |  | After-Tax |
Unrealized holding gains (losses) on available-for-sale securities during the period | $ | 15,024 |  |  | $ | (3,150 | ) |  | $ | 11,874 |
Reclassification adjustment for (gains) losses included in net income (1) |  | 33 |  |  |  | 0 |  |  |  | 33 |
Net other comprehensive income (loss) | $ | 15,057 |  |  | $ | (3,150 | ) |  | $ | 11,907 |
| Six Months Ended June 30, 2018 |
(In Thousands of Dollars) | Pre-tax |  |  | Tax |  |  | After-Tax |
Unrealized holding gains (losses) on available-for-sale securities during the period | $ | (9,128 | ) |  | $ | 1,904 |  |  | $ | (7,224 | )
Reclassification adjustment for (gains) losses included in net income (1) |  | (3 | ) |  |  | 1 |  |  |  | (2 | )
Net other comprehensive income (loss) | $ | (9,131 | ) |  | $ | 1,905 |  |  | $ | (7,226 | )

(1) | Pre-tax reclassification adjustments relating to available-for-sale securities are reported in security gains and the tax impact is included in income tax expense on the consolidated statements of income.

Regulatory Capital Matters:

Banks and bank holding companies are subject to various regulatory capital requirements administered by the federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. The new minimum capital requirements associated with the Basel Committee on capital and liquidity regulation (Basel III) are being phased in and began on January 1, 2015 and was fully implemented on January 1, 2019. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action by regulators that, if undertaken, could have a direct material effect on the financial statements. Management believes that as of June 30, 2019, the Company and the Bank meet all capital adequacy requirements to which they are subject.

The FDIC and other federal banking regulators revised the risk-based capital requirements applicable to financial holding companies and insured depository institutions, including the Company and the Bank, to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision (“Basel III”).

The common equity tier 1 capital, tier 1 capital and total capital ratios are calculated by dividing the respective capital amounts by risk-weighted assets. The leverage ratio is calculated by dividing tier 1 capital by adjusted average total assets.

Basel III limits capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity tier 1 capital, tier 1 capital and total capital to risk-weighted assets in addition to the amount necessary to meet minimum risk-based capital requirements. The capital conservation buffer phased in beginning January 1, 2016 and increased each year until it was fully implemented at 2.5% on January 1, 2019. The additional capital conservation buffer is 2.5% for the year of 2019 and was 1.875% during 2018. Excluding the additional buffer, Basel III requires the Company and the Bank to maintain (i) a minimum ratio of common equity tier 1 capital to risk-weighted assets of at least 4.5%, (ii) a minimum ratio of tier 1 capital to risk-weighted assets of at least 6.0%, (iii) a minimum ratio of total capital to risk-weighted assets of at least 8.0% and (iv) a minimum leverage ratio of at least 4.0%.

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Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If only adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration p lans are required. At June 30, 2019 and December 31, 2018, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution’s category.

Actual and required capital amounts and ratios, which do not include the capital conservation buffer, are presented below at June 30, 2019 and December 31, 2018:

| Actual |  |  | Requirement For Capital Adequacy Purposes: |  |  | To be Well Capitalized Under Prompt Corrective Action Provisions: |
| Amount |  | Ratio |  |  | Amount |  | Ratio |  |  | Amount |  | Ratio |
June 30, 2019 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Common equity tier 1 capital ratio |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consolidated | $ | 235,252 |  |  | 12.47 | % |  | $ | 84,920 |  |  | 4.5 | % |  | N/A |  | N/A |
Bank |  | 221,877 |  |  | 11.79 | % |  |  | 84,686 |  |  | 4.5 | % |  | $ | 122,325 |  |  | 6.5 | %
Total risk based capital ratio |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consolidated |  | 251,756 |  |  | 13.34 | % |  |  | 150,969 |  |  | 8.0 | % |  | N/A |  | N/A |
Bank |  | 236,099 |  |  | 12.55 | % |  |  | 150,554 |  |  | 8.0 | % |  |  | 188,192 |  |  | 10.0 | %
Tier I risk based capital ratio |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consolidated |  | 237,534 |  |  | 12.59 | % |  |  | 113,227 |  |  | 6.0 | % |  | N/A |  | N/A |
Bank |  | 221,877 |  |  | 11.79 | % |  |  | 112,915 |  |  | 6.0 | % |  |  | 150,554 |  |  | 8.0 | %
Tier I leverage ratio |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consolidated |  | 237,534 |  |  | 10.27 | % |  |  | 92,489 |  |  | 4.0 | % |  | N/A |  | N/A |
Bank |  | 221,877 |  |  | 9.61 | % |  |  | 92,372 |  |  | 4.0 | % |  |  | 115,465 |  |  | 5.0 | %
December 31, 2018 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Common equity tier 1 capital ratio |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consolidated | $ | 222,892 |  |  | 12.16 | % |  | $ | 82,478 |  |  | 4.5 | % |  | N/A |  | N/A |
Bank |  | 210,409 |  |  | 11.51 | % |  |  | 82,242 |  |  | 4.5 | % |  | $ | 118,795 |  |  | 6.5 | %
Total risk based capital ratio |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consolidated |  | 238,742 |  |  | 13.03 | % |  |  | 146,628 |  |  | 8.0 | % |  | N/A |  | N/A |
Bank |  | 224,001 |  |  | 12.26 | % |  |  | 146,209 |  |  | 8.0 | % |  |  | 182,761 |  |  | 10.0 | %
Tier I risk based capital ratio |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consolidated |  | 225,150 |  |  | 12.28 | % |  |  | 109,971 |  |  | 6.0 | % |  | N/A |  | N/A |
Bank |  | 210,409 |  |  | 11.51 | % |  |  | 109,656 |  |  | 6.0 | % |  |  | 146,209 |  |  | 8.0 | %
Tier I leverage ratio |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consolidated |  | 225,150 |  |  | 9.91 | % |  |  | 90,900 |  |  | 4.0 | % |  | N/A |  | N/A |
Bank |  | 210,409 |  |  | 9.32 | % |  |  | 90,324 |  |  | 4.0 | % |  |  | 112,905 |  |  | 5.0 | %

40

Segment Information:

The reportable segments are determined by the products and services offered, primarily distinguished between banking, trust and retirement consulting operations. They are also distinguished by the level of information provided to the chief operating decision makers in the Company, who use such information to review performance of various components of the business, which are then aggregated. Loans, investments, and deposits provide the revenues in the banking operation. All operations are domestic. Significant segment totals are reconciled to the financial statements as follows:

(In Thousands of Dollars) |  | Trust Segment |  |  | Bank Segment |  |  | Retirement Consulting Segment |  |  | Eliminations and Others |  |  | Consolidated Totals |
June 30, 2019 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Goodwill and other intangibles |  | $ | 4,105 |  |  | $ | 37,626 |  |  | $ | 2,389 |  |  | $ | (822 | ) |  | $ | 43,298 |
Total assets |  | $ | 12,554 |  |  | $ | 2,385,763 |  |  | $ | 3,302 |  |  | $ | 4,330 |  |  | $ | 2,405,949 |

(In Thousands of Dollars) |  | Trust Segment |  |  | Bank Segment |  |  | Retirement Consulting Segment |  |  | Eliminations and Others |  |  | Consolidated Totals |
December 31, 2018 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Goodwill and other intangibles |  | $ | 4,199 |  |  | $ | 38,113 |  |  | $ | 2,462 |  |  | $ | (822 | ) |  | $ | 43,952 |
Total assets |  | $ | 11,490 |  |  | $ | 2,309,644 |  |  | $ | 3,060 |  |  | $ | 4,670 |  |  | $ | 2,328,864 |

(In Thousands of Dollars) |  | Trust Segment |  |  | Bank Segment |  |  | Retirement Consulting Segment |  |  | Eliminations and Others |  |  | Consolidated Totals |
For Three Months Ended June 30, 2019 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Net interest income |  | $ | 40 |  |  | $ | 20,474 |  |  | $ | 0 |  |  | $ | (23 | ) |  | $ | 20,491 |
Provision for loan losses |  |  | 0 |  |  |  | 750 |  |  |  | 0 |  |  |  | 0 |  |  |  | 750 |
Service fees, security gains and other noninterest income |  |  | 1,842 |  |  |  | 4,789 |  |  |  | 450 |  |  |  | (87 | ) |  |  | 6,994 |
Noninterest expense |  |  | 1,225 |  |  |  | 14,191 |  |  |  | 295 |  |  |  | 274 |  |  |  | 15,985 |
Amortization and depreciation expense |  |  | 52 |  |  |  | 615 |  |  |  | 40 |  |  |  | 12 |  |  |  | 719 |
Income before taxes |  |  | 605 |  |  |  | 9,707 |  |  |  | 115 |  |  |  | (396 | ) |  |  | 10,031 |
Income taxes |  |  | 128 |  |  |  | 1,474 |  |  |  | 24 |  |  |  | (138 | ) |  |  | 1,488 |
Net income |  | $ | 477 |  |  | $ | 8,233 |  |  | $ | 91 |  |  | $ | (258 | ) |  | $ | 8,543 |

(In Thousands of Dollars) |  | Trust Segment |  |  | Bank Segment |  |  | Retirement Consulting Segment |  |  | Eliminations and Others |  |  | Consolidated Totals |
For Six Months Ended June 30, 2019 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Net interest income |  | $ | 78 |  |  | $ | 40,423 |  |  | $ | 0 |  |  | $ | (45 | ) |  | $ | 40,456 |
Provision for loan losses |  |  | 0 |  |  |  | 1,300 |  |  |  | 0 |  |  |  | 0 |  |  |  | 1,300 |
Service fees, security gains and other noninterest income |  |  | 3,740 |  |  |  | 9,094 |  |  |  | 808 |  |  |  | (128 | ) |  |  | 13,514 |
Noninterest expense |  |  | 2,488 |  |  |  | 27,719 |  |  |  | 633 |  |  |  | 413 |  |  |  | 31,253 |
Amortization and depreciation expense |  |  | 104 |  |  |  | 1,220 |  |  |  | 80 |  |  |  | 24 |  |  |  | 1,428 |
Income before taxes |  |  | 1,226 |  |  |  | 19,278 |  |  |  | 95 |  |  |  | (610 | ) |  |  | 19,989 |
Income taxes |  |  | 258 |  |  |  | 3,030 |  |  |  | 20 |  |  |  | (250 | ) |  |  | 3,058 |
Net income |  | $ | 968 |  |  | $ | 16,248 |  |  | $ | 75 |  |  | $ | (360 | ) |  | $ | 16,931 |

41

(In Thousands of Dollars) |  | Trust Segment |  |  | Bank Segment |  |  | Retirement Consulting Segment |  |  | Eliminations and Others |  |  | Consolidated Totals |
For Three Months Ended June 30, 2018 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Net interest income |  | $ | 34 |  |  | $ | 19,551 |  |  | $ | 0 |  |  | $ | (23 | ) |  | $ | 19,562 |
Provision for loan losses |  |  | 0 |  |  |  | 750 |  |  |  | 0 |  |  |  | 0 |  |  |  | 750 |
Service fees, security gains and other noninterest income |  |  | 1,784 |  |  |  | 4,121 |  |  |  | 465 |  |  |  | (64 | ) |  |  | 6,306 |
Noninterest expense |  |  | 1,155 |  |  |  | 12,884 |  |  |  | 389 |  |  |  | 280 |  |  |  | 14,708 |
Amortization and depreciation expense |  |  | 62 |  |  |  | 625 |  |  |  | 51 |  |  |  | 12 |  |  |  | 750 |
Income before taxes |  |  | 601 |  |  |  | 9,413 |  |  |  | 25 |  |  |  | (379 | ) |  |  | 9,660 |
Income taxes |  |  | 127 |  |  |  | 1,591 |  |  |  | 5 |  |  |  | (136 | ) |  |  | 1,587 |
Net income |  | $ | 474 |  |  | $ | 7,822 |  |  | $ | 20 |  |  | $ | (243 | ) |  | $ | 8,073 |

(In Thousands of Dollars) |  | Trust Segment |  |  | Bank Segment |  |  | Retirement Consulting Segment |  |  | Eliminations and Others |  |  | Consolidated Totals |
For Six Months Ended June 30, 2018 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Net interest income |  | $ | 65 |  |  | $ | 38,484 |  |  | $ | 0 |  |  | $ | (41 | ) |  | $ | 38,508 |
Provision for loan losses |  |  | 0 |  |  |  | 1,525 |  |  |  | 0 |  |  |  | 0 |  |  |  | 1,525 |
Service fees, security gains and other noninterest income |  |  | 3,622 |  |  |  | 7,975 |  |  |  | 844 |  |  |  | (125 | ) |  |  | 12,316 |
Noninterest expense |  |  | 2,432 |  |  |  | 25,436 |  |  |  | 701 |  |  |  | 486 |  |  |  | 29,055 |
Amortization and depreciation expense |  |  | 125 |  |  |  | 1,249 |  |  |  | 101 |  |  |  | 24 |  |  |  | 1,499 |
Income before taxes |  |  | 1,130 |  |  |  | 18,249 |  |  |  | 42 |  |  |  | (676 | ) |  |  | 18,745 |
Income taxes |  |  | 238 |  |  |  | 2,944 |  |  |  | 9 |  |  |  | (245 | ) |  |  | 2,946 |
Net income |  | $ | 892 |  |  | $ | 15,305 |  |  | $ | 33 |  |  | $ | (431 | ) |  | $ | 15,799 |

The Bank segment includes Farmers National Insurance and Farmers of Canfield Investment Co.

Subsequent event:

On July 1, 2019, Trust acquired all shares of NAI from the Company through a corporate reorganization. The Company was the sole shareholder of Trust and NAI before the reorganization. The entities were combined into one reporting unit or segment and will begin reporting as one unit, for both internal and external reports, during the third quarter of 2019. The combination is part of the Company’s plan to increase efficiencies within the different business lines. The financial savings from increased efficiencies will not be material and cannot be estimated at this time. Subsequent events have been evaluated through August 7, 2019, which is the date the consolidated financial statements were issued.

Contingencies:

The Company is a defendant in lawsuits and other adversary proceedings arising in the ordinary course of business. Legal costs incurred in connection with the resolution of claims and lawsuits are generally expensed as incurred, although the Company establishes accruals where losses are deemed probable and reasonably estimable. The Company’s assessment of the current exposure with respect to adverse claims in legal matters could change in the event of the discovery of additional facts in such matters or upon determinations by judges, juries, administrative agencies, or other finds or fact that are inconsistent with the Company’s evaluations of claims. During the fiscal quarter ended June 30, 2019, the Company accrued a charge of $505 thousand relating to a pending settlement of a legal contingency. The Company has insurance coverage for this contingency and expects to recover the amount of this estimated charge. No amount for an expected insurance recovery has been recorded.

42

Short-term borrowings:

There were $88 million in short-term Federal Home Loan Bank Advances at June 30, 2019 with a weighted average interest rate of 2.52%. Short-term Federal Home Loan Bank Advances were $240 million at December 31, 2018. The Company had $3.0 million and $4.4 million in securities sold under repurchase agreements for the periods ended June 30, 2019 and December 31, 2018, respectively. In addition, the Company had no Federal funds purchased and has a $350 thousand balance on business lines of credit with one lending institution at June 30, 2019 and December 31, 2018.

Securities sold under repurchase agreements are secured by the Bank’s holdings of debt securities issued by U.S. Government sponsored entities and agencies. These pledged securities which are 105% of the repurchase agreement balances, had a carrying amount of $3.1 million and $4.6 million at June 30, 2019 and December 31, 2018.

The following table provides a disaggregation of the obligation by the class of collateral pledged for short-term financing obtained through the sales of repurchase agreements:

(In Thousands of Dollars) |  | June 30, 2019 |  |  | December 31, 2018 |
Overnight and continuous repurchase agreements |  |  |  |  |  |  |  |
U.S. Treasury and U.S. government sponsored entities |  | $ | 167 |  |  | $ | 332 |
State and political subdivisions |  |  | 717 |  |  |  | 664 |
Mortgage-backed securities - residential |  |  | 1,829 |  |  |  | 3,094 |
Collateralized mortgage obligations - residential |  |  | 249 |  |  |  | 319 |
Total repurchase agreements |  | $ | 2,962 |  |  | $ | 4,409 |

Management believes the risks associated with the agreements are minimal and, in the case of collateral decline, the Company has additional investment securities available to adequately pledge as guarantees for the repurchase agreements.

43

Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Note Regarding Forward Looking Statements

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements are not statements of historical fact, but rather statements based on the Company’s current expectations, beliefs and assumptions regarding the future of Farmers’ business, future plans and strategies, projections, anticipated events and trends, its intended results and future performance, the economy and other future conditions. Forward-looking statements are preceded by terms such as “will,” “would,” “should,” “could,” “may,” “expect,” “estimate,” “believe,” “anticipate,” “intend,” “plan” “project,” or variations of these words, or similar expressions. Forward-looking statements are not a guarantee of future performance and actual future results could differ materially from those contained in forward-looking information. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Numerous uncertainties, risks, and changes could cause or contribute to Farmers’ actual results, performance, and achievements to be materially different from those expressed or implied by the forward-looking statements.

Factors that could cause or contribute to such differences include, without limitation, risks and uncertainties detailed from time to time in the Company’s filings with the Securities and Exchange Commission (the “Commission”), including without limitation, the risk factors disclosed in Item 1A, “Risk Factors,” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

While the Company believes that the forward-looking statements in this report are reasonable, given these factors, as well as other variables that may affect our operating results, readers should rely on any forward-looking statement. In addition, these statements speak only as of the date made. The Company does not undertake, and expressly disclaims, any obligation to update or alter any statements whether as a result of new information, future events or otherwise, except as may be required by applicable law.

Overview

Net income for the three months ended June 30, 2019 was $8.5 million, or $0.31 per diluted share, which compares to $8.1 million, or $0.29 per diluted share, for the three months ended June 30, 2018. Annualized return on average assets and return on average equity were 1.45% and 12.34%, respectively, for the three month period ending June 30, 2019, compared to 1.47% and 13.28% for the same period in 2018.

Net income for the six months ended June 30, 2019 was $16.9 million, or $0.61 per diluted share, compared to $15.8 million, or $0.57 per diluted share, for the same six month period in 2018. Annualized return on average assets and return on average equity were 1.45% and 12.54%, respectively, for the six month period ending June 30, 2019, compared to 1.46% and 13.13% for the same period in 2018.

Total loans were $1.78 billion at June 30, 2019 compared to $1.74 billion at December 31, 2018, representing an annualized growth rate of 5.1%. The increase in loans is a result of the Company’s focus on loan growth utilizing a talented lending and credit team, while adhering to a sound underwriting discipline. The increase in loans has occurred across each of the major loan categories but mainly in the commercial, commercial real estate, residential real estate and agricultural loan categories. Loans comprise 79.6% of the Bank's second quarter average earning assets at June 30, 2019, an improvement compared to 78.6% for the same period in 2018. This improvement along with the interest rate environment has resulted in a 14.2% increase in tax equated loan interest income from the second quarter of 2019 compared to the same quarter in 2018.

Non-performing assets to total assets remain at a low level, currently at 0.30%. Early stage delinquencies, which are loans 30 - 89 days delinquent, also continue to remain at low levels, at $10.2 million, or 0.57% of total loans, at June 30, 2019. Net charge-offs for the current quarter were $305 thousand, compared to $536 thousand in the same quarter in 2018 and net charge-offs as a percentage of average net loans outstanding is only 0.07% for the quarter ended June 30, 2019, compared to 0.13% in the same quarter in 2018. Lending to the energy sector is insignificant and less than 1% of the loan portfolio.

The net interest margin for the three months ended June 30, 2019 was 3.84%, a 9 basis point decrease from the quarter ended June 30, 2018. In comparing the second quarter of 2019 to the same period in 2018, asset yields increased 25 basis points, while the cost of interest-bearing liabilities increased 47 basis points. Most of this increase was the result of higher rates paid on short-term borrowings and time deposits, consistent with increases in the federal funds sold rate. The net interest margin is impacted by the additional accretion as a result of the discounted loan portfolios acquired in recent mergers, which increased the net interest margin by 5 basis points for the quarters ended June 30, 2019 and 2018, respectively.

The net interest margin for the six months ended June 30, 2019 was 3.83%, a 9 basis point decrease from the six month period ended June 30, 2018. Asset yields increased 27 basis points, while the cost of interest-bearing liabilities increased 50 basis points. The reasons for the increases are similar to those for the second quarter discussed above. The net interest margin is impacted by the additional accretion as a result of the discounted loan portfolios acquired in recent mergers, which increased the net interest margin by 5 and 4 basis points for the six months ended June 30, 2019 and 2018, respectively.

44

The Company made progress in its effort to increase noninterest income, which increased 10.9% to $7.0 million for the quarter ended June 30, 2019 compared to $6.3 million in the same quarter of 2018. Gains on the sales of mortgage loans increased $449 thousand or 74%, oth er operating income increased $66 thousand or 18%, trust fees increased $81 thousand or 5% and service charges on deposit accounts increased $108 thousand or 11% in comparing the second quarter of 2019 to the same quarter in 2018. These increases were offset by a decrease of securities gains of $45 thousand or 166.7% and retirement plan consulting fees of $15 thousand or 3.2%. For the six month period, noninterest income increased 9.7% to $13.5 million during the first six months of 2019 compared to $12.3 million for the same period of 2018. The reasons for the increases are similar to those for the second quarter discussed above.

The Company has remained committed to managing its level of noninterest expenses. Total noninterest expenses for the second quarter of 2019 increased to $16.7 million compared to $15.5 million in the same quarter in 2018. Salaries and employee benefits increased $438 thousand and was offset by a $140 thousand decrease in FDIC insurance expense. Included in the other operating expenses in the second quarter of 2019 were $505 thousand in expenses that management does not expect to occur in future quarters. Annualized noninterest expenses measured as a percentage of quarterly average assets rose slightly from 2.82% in the second quarter of 2018 to 2.83% in the second quarter of 2019. For the six month period ended June 30, 2019 noninterest expenses increased to $32.7 million compared to $30.6 million for the same period in 2018. The reasons for the increases are similar to those for the second quarter discussed above.

The efficiency ratio for the quarter ended June 30, 2019 increased slightly to 58.3% compared to 57.3% for the same quarter in 2018. The improvement in net interest income and noninterest income in the second quarter of 2019 was offset by a higher level of noninterest expenses as explained in the preceding paragraphs.

The Company’s return on average tangible equity (Non-GAAP) was 14.6% and 14.8% for the three and six month periods ended June 30, 2019 compared to 16.2% and 16.0% for the same periods in 2018.

Return on average tangible equity is a non-U.S. GAAP financial measure and should be considered in addition to, not a substitute for or superior to, financial measures determined in accordance with U.S. GAAP. With respect to the calculation of the tangible equity for the three and six month periods ended June 30, 2019 and 2018, reconciliations are displayed in the table below.

Results of Operations The following is a comparison of selected financial ratios and other results at or for the three and six month periods ended June 30, 2019 and 2018:

|  | At or for the Three Months Ended June 30, |  |  | At or for the Six Months Ended June 30, |
(In Thousands, except Per Share Data) |  | 2019 |  |  | 2018 |  |  | 2019 |  |  | 2018 |
Total assets |  | $ | 2,405,949 |  |  | $ | 2,237,939 |  |  | $ | 2,405,949 |  |  | $ | 2,237,939 |
Net income |  | $ | 8,543 |  |  | $ | 8,073 |  |  | $ | 16,931 |  |  | $ | 15,799 |
Diluted earnings per share |  | $ | 0.31 |  |  | $ | 0.29 |  |  | $ | 0.61 |  |  | $ | 0.57 |
Return on average assets (annualized) |  |  | 1.45 | % |  |  | 1.47 | % |  |  | 1.45 | % |  |  | 1.46 | %
Return on average equity (annualized) |  |  | 12.34 | % |  |  | 13.28 | % |  |  | 12.54 | % |  |  | 13.13 | %
Efficiency ratio (tax equivalent basis) (1) |  |  | 58.28 | % |  |  | 57.31 | % |  |  | 58.06 | % |  |  | 57.64 | %
Equity to asset ratio |  |  | 11.84 | % |  |  | 11.06 | % |  |  | 11.84 | % |  |  | 11.06 | %
Tangible common equity ratio (2) |  |  | 10.22 | % |  |  | 9.25 | % |  |  | 10.22 | % |  |  | 9.25 | %
Dividends to net income |  |  | 29.31 | % |  |  | 23.97 | % |  |  | 29.56 | % |  |  | 24.50 | %
Net loans to assets |  |  | 73.41 | % |  |  | 72.68 | % |  |  | 73.41 | % |  |  | 72.68 | %
Loans to deposits |  |  | 89.00 | % |  |  | 99.32 | % |  |  | 89.00 | % |  |  | 99.32 | %

(1) | The ratio is calculated by dividing noninterest expenses by the sum of net interest income and noninterest income. The Company strives for a lower efficiency ratio. This efficiency ratio measure is not required by any regulatory agency but provides meaningful information to management and investors since a lower ratio indicates the Company is using their assets more effectively to generate profits.

(2) | The tangible common equity ratio is calculated by dividing total common stockholders’ equity by total assets, after reducing both amounts by intangible assets. The tangible common equity ratio is not required by U.S. GAAP or by applicable bank regulatory requirements, but is a metric used by management to evaluate the adequacy of the Company’s capital levels. Since there is no authoritative requirement to calculate the tangible common equity ratio, the Company’s tangible common equity ratio is not necessarily comparable to similar capital measures disclosed or used by other companies in the financial services industry. Tangible common equity and tangible assets are non - U.S. GAAP financial measures and should be considered in addition to, not as a substitute for or superior to, financial measures determined in accordance with U.S. GAAP. With respect to the calculation of the actual unaudited tangible common equity ratio as of June 30, 2019 and 2018, reconciliations of tangible common equity (non-GAAP) to U.S. GAAP total common stockholders’ equity and tangible assets (non-GAAP) to U.S. GAAP total assets are set forth below:

45

Reconciliation of Common Stockholders' Equity to Tangible Common Equity

|  | At or for the Three Months Ended |  |  | At or for the Three Months Ended |  |  | At or for the Three Months Ended |
(In Thousands of Dollars) |  | June 30, 2019 |  |  | December 31, 2018 |  |  | June 30, 2018 |
Stockholders' equity |  | $ | 284,825 |  |  | $ | 262,320 |  |  | $ | 247,510 |
Less goodwill and other intangibles |  |  | 43,298 |  |  |  | 43,952 |  |  |  | 44,661 |
Tangible common equity |  |  | 241,527 |  |  |  | 218,368 |  |  |  | 202,849 |
Average stockholders' equity |  |  | 277,746 |  |  |  | 252,449 |  |  |  | 243,792 |
Less average goodwill and other intangibles |  |  | 43,508 |  |  |  | 44,185 |  |  |  | 44,893 |
Average tangible common equity |  | $ | 234,238 |  |  | $ | 208,264 |  |  | $ | 198,899 |

Reconciliation of Total Assets to Tangible Assets

|  | At or for the Three Months Ended |  |  | At or for the Three Months Ended |  |  | At or for the Three Months Ended |
(In Thousands of Dollars) |  | June 30, 2019 |  |  | December 31, 2018 |  |  | June 30, 2018 |
Total assets |  | $ | 2,405,949 |  |  | $ | 2,328,864 |  |  | $ | 2,237,939 |
Less goodwill and other intangibles |  |  | 43,298 |  |  |  | 43,952 |  |  |  | 44,661 |
Tangible assets |  | $ | 2,362,651 |  |  | $ | 2,284,912 |  |  | $ | 2,193,278 |
Average assets |  |  | 2,369,388 |  |  |  | 2,301,847 |  |  |  | 2,199,960 |
Less average goodwill and other intangibles |  |  | 43,508 |  |  |  | 44,185 |  |  |  | 44,893 |
Average tangible assets |  | $ | 2,325,880 |  |  | $ | 2,257,662 |  |  | $ | 2,155,067 |

Net Interest Income. The following schedule details the various components of net interest income for the periods indicated. All asset yields are calculated on a tax-equivalent basis where applicable. Security yields are based on amortized cost.

46

Average Balance Sheets and Related Yields and Rates

(Dollar Amounts in Thousands)

| Three Months Ended |  |  | Three Months Ended |
| June 30, 2019 |  |  | June 30, 2018 |
| AVERAGE |  |  |  |  |  |  |  |  |  |  | AVERAGE |  |  |  |  |  |  |  |  |
| BALANCE |  |  | INTEREST |  |  | RATE (1) |  |  | BALANCE |  |  | INTEREST |  |  | RATE (1) |
EARNING ASSETS |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Loans (3) (5) (6) | $ | 1,749,828 |  |  | $ | 22,431 |  |  |  | 5.14 | % |  | $ | 1,606,993 |  |  | $ | 19,636 |  |  |  | 4.90 | %
Taxable securities (4) |  | 195,934 |  |  |  | 1,238 |  |  |  | 2.53 |  |  |  | 202,588 |  |  |  | 1,228 |  |  |  | 2.43 |
Tax-exempt securities (4) (6) |  | 211,533 |  |  |  | 2,065 |  |  |  | 3.92 |  |  |  | 190,494 |  |  |  | 1,737 |  |  |  | 3.66 |
Equity securities (2) |  | 12,055 |  |  |  | 171 |  |  |  | 5.69 |  |  |  | 11,214 |  |  |  | 154 |  |  |  | 5.51 |
Federal funds sold and other |  | 29,205 |  |  |  | 158 |  |  |  | 2.17 |  |  |  | 33,541 |  |  |  | 167 |  |  |  | 2.00 |
TOTAL EARNING ASSETS |  | 2,198,555 |  |  |  | 26,063 |  |  |  | 4.75 |  |  |  | 2,044,830 |  |  |  | 22,922 |  |  |  | 4.50 |
NONEARNING ASSETS |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and due from banks |  | 34,097 |  |  |  |  |  |  |  |  |  |  |  | 33,554 |  |  |  |  |  |  |  |  |
Premises and equipment |  | 24,543 |  |  |  |  |  |  |  |  |  |  |  | 21,887 |  |  |  |  |  |  |  |  |
Allowance for loan losses |  | (13,908 | ) |  |  |  |  |  |  |  |  |  |  | (12,639 | ) |  |  |  |  |  |  |  |
Unrealized gains (losses) on securities |  | 2,651 |  |  |  |  |  |  |  |  |  |  |  | (9,309 | ) |  |  |  |  |  |  |  |
Other assets (3) |  | 123,450 |  |  |  |  |  |  |  |  |  |  |  | 121,637 |  |  |  |  |  |  |  |  |
TOTAL ASSETS | $ | 2,369,388 |  |  |  |  |  |  |  |  |  |  | $ | 2,199,960 |  |  |  |  |  |  |  |  |
INTEREST-BEARING LIABILITIES |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Time deposits | $ | 401,005 |  |  | $ | 1,984 |  |  |  | 1.98 | % |  | $ | 283,429 |  |  | $ | 957 |  |  |  | 1.35 | %
Brokered time deposits |  | 94,463 |  |  |  | 559 |  |  |  | 2.35 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0.00 |
Savings deposits |  | 416,024 |  |  |  | 340 |  |  |  | 0.33 |  |  |  | 477,365 |  |  |  | 256 |  |  |  | 0.22 |
Demand deposits |  | 631,436 |  |  |  | 1,476 |  |  |  | 0.94 |  |  |  | 469,609 |  |  |  | 510 |  |  |  | 0.44 |
Short term borrowings |  | 100,199 |  |  |  | 631 |  |  |  | 2.53 |  |  |  | 298,802 |  |  |  | 1,140 |  |  |  | 1.53 |
Long term borrowings |  | 5,724 |  |  |  | 48 |  |  |  | 3.36 |  |  |  | 6,674 |  |  |  | 49 |  |  |  | 2.94 |
TOTAL INTEREST-BEARING LIABILITIES |  | 1,648,851 |  |  |  | 5,038 |  |  |  | 1.23 |  |  |  | 1,535,879 |  |  |  | 2,912 |  |  |  | 0.76 |
NONINTEREST-BEARING LIABILITIES AND STOCKHOLDERS' EQUITY |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Demand deposits |  | 425,672 |  |  |  |  |  |  |  |  |  |  |  | 408,567 |  |  |  |  |  |  |  |  |
Other liabilities |  | 17,119 |  |  |  |  |  |  |  |  |  |  |  | 11,722 |  |  |  |  |  |  |  |  |
Stockholders' equity |  | 277,746 |  |  |  |  |  |  |  |  |  |  |  | 243,792 |  |  |  |  |  |  |  |  |
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 2,369,388 |  |  |  |  |  |  |  |  |  |  | $ | 2,199,960 |  |  |  |  |  |  |  |  |
Net interest income and interest rate spread |  |  |  |  | $ | 21,025 |  |  |  | 3.52 | % |  |  |  |  |  | $ | 20,010 |  |  |  | 3.74 | %
Net interest margin |  |  |  |  |  |  |  |  |  | 3.84 | % |  |  |  |  |  |  |  |  |  |  | 3.93 | %

(1) | Rates are calculated on an annualized basis.

(2) | Equity securities include restricted stock, which is included in other assets on the consolidated balance sheets.

(3) | Non-accrual loans and overdraft deposits are included in other assets.

(4) | Includes unamortized discounts and premiums. Average balance and yield are computed using the average historical amortized cost.

(5) | Interest on loans includes fee income of $1.0 million and $1.1 million for 2019 and 2018, respectively, and is reduced by amortization of $680 thousand and $688 thousand for 2019 and 2018, respectively.

(6) | For 2019, adjustments of $107 thousand and $427 thousand, respectively, are made to tax equate income on tax exempt loans and tax exempt securities. For 2018, adjustments of $91 thousand and $357 thousand, respectively, are made to tax equate income on tax exempt loans and tax exempt securities. These adjustments are based on a marginal federal income tax rate of 21%, less disallowances.

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Average Balance Sheets and Related Yields and Rates

(Dollar Amounts in Thousands)

| Six Months Ended June 30, 2019 |  |  | Six Months Ended June 30, 2018 |
| AVERAGE BALANCE |  |  | INTEREST |  |  | RATE (1) |  |  | AVERAGE BALANCE |  |  | INTEREST |  |  | RATE (1) |
EARNING ASSETS |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Loans (3) (5) (6) | $ | 1,738,953 |  |  | $ | 44,002 |  |  |  | 5.10 | % |  | $ | 1,586,140 |  |  | $ | 38,145 |  |  |  | 4.85 | %
Taxable securities (4) |  | 195,871 |  |  |  | 2,482 |  |  |  | 2.56 |  |  |  | 204,455 |  |  |  | 2,461 |  |  |  | 2.43 |
Tax-exempt securities (4) (6) |  | 209,586 |  |  |  | 4,076 |  |  |  | 3.92 |  |  |  | 188,041 |  |  |  | 3,417 |  |  |  | 3.66 |
Equity securities (2) (6) |  | 12,058 |  |  |  | 346 |  |  |  | 5.79 |  |  |  | 11,051 |  |  |  | 300 |  |  |  | 5.47 |
Federal funds sold and other |  | 31,712 |  |  |  | 354 |  |  |  | 2.25 |  |  |  | 34,308 |  |  |  | 312 |  |  |  | 1.83 |
TOTAL EARNING ASSETS |  | 2,188,180 |  |  |  | 51,260 |  |  |  | 4.72 |  |  |  | 2,023,995 |  |  |  | 44,635 |  |  |  | 4.45 |
NONEARNING ASSETS |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and due from banks |  | 34,011 |  |  |  |  |  |  |  |  |  |  |  | 33,608 |  |  |  |  |  |  |  |  |
Premises and equipment |  | 23,486 |  |  |  |  |  |  |  |  |  |  |  | 22,044 |  |  |  |  |  |  |  |  |
Allowance for loan losses |  | (13,818 | ) |  |  |  |  |  |  |  |  |  |  | (12,457 | ) |  |  |  |  |  |  |  |
Unrealized gains (losses) on securities |  | (873 | ) |  |  |  |  |  |  |  |  |  |  | (6,761 | ) |  |  |  |  |  |  |  |
Other assets (3) |  | 123,126 |  |  |  |  |  |  |  |  |  |  |  | 121,002 |  |  |  |  |  |  |  |  |
TOTAL ASSETS | $ | 2,354,112 |  |  |  |  |  |  |  |  |  |  | $ | 2,181,431 |  |  |  |  |  |  |  |  |
INTEREST-BEARING LIABILITIES |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Time deposits | $ | 384,643 |  |  | $ | 3,642 |  |  |  | 1.91 | % |  | $ | 277,408 |  |  | $ | 1,770 |  |  |  | 1.29 | %
Brokered time deposits |  | 70,793 |  |  |  | 825 |  |  |  | 2.33 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0.00 |
Savings deposits |  | 418,306 |  |  |  | 648 |  |  |  | 0.31 |  |  |  | 479,870 |  |  |  | 438 |  |  |  | 0.18 |
Demand deposits |  | 610,631 |  |  |  | 2,679 |  |  |  | 0.88 |  |  |  | 460,503 |  |  |  | 926 |  |  |  | 0.41 |
Short term borrowings |  | 148,723 |  |  |  | 1,862 |  |  |  | 2.52 |  |  |  | 290,617 |  |  |  | 2,021 |  |  |  | 1.40 |
Long term borrowings |  | 5,815 |  |  |  | 96 |  |  |  | 3.33 |  |  |  | 6,768 |  |  |  | 93 |  |  |  | 2.77 |
TOTAL INTEREST-BEARING LIABILITIES |  | 1,638,911 |  |  |  | 9,752 |  |  |  | 1.20 |  |  |  | 1,515,166 |  |  |  | 5,248 |  |  |  | 0.70 |
NONINTEREST-BEARING LIABILITIES AND STOCKHOLDERS' EQUITY |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Demand deposits |  | 427,039 |  |  |  |  |  |  |  |  |  |  |  | 409,705 |  |  |  |  |  |  |  |  |
Other liabilities |  | 15,944 |  |  |  |  |  |  |  |  |  |  |  | 13,878 |  |  |  |  |  |  |  |  |
Stockholders' equity |  | 272,218 |  |  |  |  |  |  |  |  |  |  |  | 242,682 |  |  |  |  |  |  |  |  |
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 2,354,112 |  |  |  |  |  |  |  |  |  |  | $ | 2,181,431 |  |  |  |  |  |  |  |  |
Net interest income and interest rate spread |  |  |  |  | $ | 41,508 |  |  |  | 3.52 | % |  |  |  |  |  | $ | 39,387 |  |  |  | 3.75 | %
Net interest margin |  |  |  |  |  |  |  |  |  | 3.83 | % |  |  |  |  |  |  |  |  |  |  | 3.92 | %

(1) | Rates are calculated on an annualized basis.

(2) | Equity securities include restricted stock, which is included in other assets on the consolidated balance sheets.

(3) | Non-accrual loans and overdraft deposits are included in other assets.

(4) | Includes unamortized discounts and premiums. Average balance and yield are computed using the average historical amortized cost.

(5) | Interest on loans includes fee income of $1.9 million and $2.1 million for 2019 and 2018, respectively, and is reduced by amortization of $1.4 million for 2019 and 2018.

(6) | For 2019, adjustments of $209 thousand and $843 thousand, respectively, are made to tax equate income on tax exempt loans and tax exempt securities. For 2018, adjustments of $173 thousand and $706 thousand, respectively, are made to tax equate income on tax exempt loans and tax exempt securities. These adjustments are based on a marginal federal income tax rate of 21%, less disallowances.

48

Net Interest Income. Net interest income for the three month period ended June 30, 2019 was $20.5 million compared to $19.6 million for the same period in 2018. On a tax equivalent basis net interest income was $21.0 million for the second quarter of 2019 compared to $20.0 million for the same period in 2018. The net interest margin to average earning assets on a fully taxable equivalent basis decreased 9 basis points to 3.84% for the three months ended June 30, 2019, compared to 3.93% for the same three month period in the prior year. In comparing the quarters ended June 30, 2019 and 2018, yields on earning assets increased 25 basis points, while the cost of interest bearing liabilities increased 47 basis points. The decreased margin is mainly due to the pressure on increasing deposit rates to remain competitive within the local markets we serve. Excluding the amortization of premium on time deposits and the accretion of the loan portfolio discount, the net interest margin would have been 5 basis points lower for the quarter ended June 30, 2019.

Net interest income for the six month period ended June 30, 2019 was $40.5 million compared to $38.5 million for the same period in 2018. On a tax equivalent basis net interest income was $41.5 million for the six month period ended June 30, 2019 compared to $39.4 million for the same period in 2018. The net interest margin to average earning assets on a fully taxable equivalent basis decreased 9 basis points to 3.83% for the six months ended June 30, 2019, compared to 3.92% for the same six month period in the prior year. In comparing the six month period ended June 30, 2019 and 2018, yields on earning assets increased 27 basis points, while the cost of interest bearing liabilities increased 50 basis points. The decreased margin is mainly due to the pressure on increasing deposit rates to remain competitive within the local markets we serve. Excluding the amortization of premium on time deposits and the accretion of the loan portfolio discount, the net interest margin would have been 5 basis points lower for the six month period ended June 30, 2019.

Noninterest Income. Noninterest income increased 10.9% to $7.0 million for the quarter ended June 30, 2019 compared to $6.3 million in 2018. Gains on the sales of mortgage loans increased $449 thousand or 74%, other operating income increased $66 thousand or 18%, trust fees increased $81 thousand or 5% and service charges on deposit accounts increased $108 thousand or 11% in comparing the second quarter of 2019 to the same quarter in 2018. These increases were offset by a decrease of securities gains of $45 thousand or 166.7%, and retirement plan consulting fees of $15 thousand or 3.2%.

Noninterest income increased 9.7% to $13.5 million for the six month period ended June 30, 2019 compared to $12.3 million for the same period of 2018. The reasons for the increases are similar to those for the second quarter discussed above.

Noninterest Expense. Total noninterest expenses for the second quarter of 2019 increased to $16.7 million compared to $15.5 million in the same quarter in 2018. Salaries and employee benefits increased $438 thousand and was offset by a $140 thousand decrease in FDIC insurance expense. Included in the other operating expenses in the second quarter of 2019 were $505 thousand in expenses that management does not expect to occur in future quarters. Annualized noninterest expenses measured as a percentage of quarterly average assets rose slightly from 2.82% in the second quarter of 2018 to 2.83% in the second quarter of 2019.

Total noninterest expenses for the six month period ended June 30, 2019 increased to $32.7 million compared to $30.6 million for the same period in 2018. The reasons for the increases are similar to those for the second quarter discussed above.

The Company’s tax equivalent efficiency ratio for the three month period ended June 30, 2019 was 58.3% compared to 57.3% for the same period in 2018. The improvement in net interest income and noninterest income in the second quarter of 2019 was offset by a higher level of noninterest expenses as explained in the preceding paragraphs.

The tax equivalent efficiency ratio for the six month period ended June 30, 2019 was 58.1% compared to 57.6% for the six month period ended June 30, 2018. Management has continued to focus on increasing the levels of noninterest income and reducing the level of noninterest expenses.

Income Taxes. Income tax expense totaled $1.5 million for the quarter ended June 30, 2019 and $1.6 million for the quarter ended June 30, 2018. The effective tax rate for the three month period ended June 30, 2019 was 14.8% compared to the effective tax rate of 16.4% for the same period in 2018.

Income tax expense was $3.1 million for the first six months of 2019 and $3.0 million for the first six months of 2018. The effective tax rate for the six month period ended June 30, 2019 was 15.3%, compared to 15.7% for the same period in 2018.

Other Comprehensive Income. For the quarter ended June 30, 2019, the change in net unrealized gains or losses on securities, net of reclassifications, resulted in an unrealized gain, net of tax, of $7.3 million, compared to an unrealized loss of $204 thousand for the same period in 2018. The positive change in the fair value of securities for the three month period ended June 30, 2019 was the reason for the other comprehensive income increase.

49

For the first six months of 2019, the change in net unrealized gains on securities, net of reclassifications, resulted in an unrea lized gain, net of tax, of $11.9 million, compared to an unrealized loss of $7.2 mil lion for the same period in 2018. The positive change in the fair v alue of securities for the six month period ended June 30, 2019 was the reason for t he other comprehensive income in crease.

Financial Condition

Cash and Cash Equivalents. Cash and cash equivalents increased $6.1 million during the first six months of 2019 from $57.9 million to $64.0 million. The increase in the cash balance is part of normal fluctuations on the Company’s $2.406 billion balance sheet. The Company expects cash and cash equivalents to be reduced to December 31, 2018 levels over the next few months as cash is used for loan growth and security portfolio purchases.

Securities. Securities available-for-sale increased by $22.1 million since December 31, 2018. The Company intends to maintain the securities portfolio’s current level, as a percentage of total assets, during the remaining months of 2019.

Loans. Gross loans increased $44.7 million since December 31, 2018. The increase in loans has occurred across each of the major loan categories but especially the commercial, commercial real estate, residential real estate and agricultural loan portfolios. The Bank utilized a talented lending and credit team while adhering to sound underwriting discipline to increase the loan portfolio. The increase in average loan balances along with an increase in market interest rates help the current quarter’s loan income improve to $22.3 million or 14.2% compared to $19.6 million in the same quarter ended June 30, 2018.

On a tax equated basis loan income improved by $2.8 million compared to the same quarter in 2018. The average tax equivalent interest rate on the loan portfolio was 5.14% for the three month period ended June 30, 2019 compared to 4.90% for the same period in 2018. On a fully tax equivalent basis, loans contributed $44.0 million of total interest income during the six month period ended June 30, 2019 compared to $38.1 million for the same period in 2018.

Allowance for Loan Losses. The following table indicates key asset quality ratios that management evaluates on an ongoing basis. The recorded investment balances were used in the calculations.

Asset Quality History

(In Thousands of Dollars)

| 6/30/2019 |  |  | 3/31/2019 |  |  | 12/31/2018 |  |  | 9/30/2018 |  |  | 6/30/2018 |
Nonperforming loans | $ | 7,252 |  |  | $ | 7,578 |  |  | $ | 7,731 |  |  | $ | 9,222 |  |  | $ | 8,406 |
Nonperforming loans as a % of total loans |  | 0.41 | % |  |  | 0.43 | % |  |  | 0.45 | % |  |  | 0.55 | % |  |  | 0.51 | %
Loans delinquent 30-89 days | $ | 10,203 |  |  | $ | 9,082 |  |  | $ | 8,877 |  |  | $ | 10,626 |  |  | $ | 10,636 |
Loans delinquent 30-89 days as a % of total loans |  | 0.57 | % |  |  | 0.52 | % |  |  | 0.51 | % |  |  | 0.63 | % |  |  | 0.65 | %
Allowance for loan losses | $ | 14,222 |  |  | $ | 13,777 |  |  | $ | 13,592 |  |  | $ | 13,377 |  |  | $ | 12,764 |
Allowance for loan losses as a % of loans |  | 0.80 | % |  |  | 0.79 | % |  |  | 0.78 | % |  |  | 0.79 | % |  |  | 0.78 | %
Allowance for loan losses as a % of non-acquired loans |  | 0.91 | % |  |  | 0.92 | % |  |  | 0.92 | % |  |  | 0.93 | % |  |  | 0.94 | %
Allowance for loan losses as a % of nonperforming loans |  | 196.11 | % |  |  | 181.80 | % |  |  | 175.81 | % |  |  | 145.06 | % |  |  | 151.84 | %
Annualized net charge-offs to average net loans outstanding |  | 0.07 | % |  |  | 0.08 | % |  |  | 0.07 | % |  |  | 0.08 | % |  |  | 0.13 | %
Non-performing assets | $ | 7,326 |  |  | $ | 7,786 |  |  | $ | 7,731 |  |  | $ | 9,222 |  |  | $ | 8,406 |
Non-performing assets as a % of total assets |  | 0.30 | % |  |  | 0.33 | % |  |  | 0.33 | % |  |  | 0.40 | % |  |  | 0.38 | %
Net charge-offs for the quarter | $ | 305 |  |  | $ | 365 |  |  | $ | 310 |  |  | $ | 337 |  |  | $ | 536 |

50

For the three months ended June 30, 2019 and 2018, management recorded a $750 thousand provision for loan losses. For the six month periods ended June 30, 2019 and 2018 the provision recorded was $1.3 million and $1.5 million, respectively. The smaller provision for the current year was mainly a result of higher loan loss quarters rolling off the loss history period used in calculation and lower levels of net charge-offs in the current six month period. In determining the estimate of the allowance for loan losses, management computes the historical loss percentage based upon the loss history of the past 12 quarters. The Company believes that using a loss history of the previous 12 quarters helps mitigate volatility in the timing of charge-offs and better reflects probable incurred losses. Loan growth over the first six months of 2019 was 5.1% on an annualized basis. The allowance for loan losses as a percentage of the total loan portfolio was 0.80% at June 30, 2019 and 0.78% at June 30, 2018. The loan portfolios acquired at fair market value from previous acquisitions were recorded at fair market value and without an associated allowance for loan loss. When the acquired loans are excluded, the ratio of allowance for loan losses to total non-acquired loans is 0.91% at June 30, 2019 compared to 0.94% at June 30, 2018. Early stage delinquencies, which are loans 30 - 89 days delinquent, as a percentage of total loans decreased from 0.65% at June 30, 2018 to 0.57% at June 30, 2019 and non-performing loans as a percentage of total loans decreased from 0.51% at June 30, 2018 to 0.41% at June 30, 2019. The allowance for loan losses to non-performing loans increased from 151.84% at June 30, 2018 to 196.11% at June 30, 2019.

Based on the evaluation of the adequacy of the allowance for loan losses, management believes that the allowance for loan losses at June 30, 2019 is adequate and reflects probable incurred losses in the portfolio. The provision for loan losses is based on management’s judgment after taking into consideration all factors connected with the collectability of the existing loan portfolio. Management evaluates the loan portfolio in light of economic conditions, changes in the nature and volume of the loan portfolio, industry standards and other relevant factors. Specific factors considered by management in determining the amounts charged to operating expenses include previous credit loss experience, the status of past due interest and principal payments, the quality of financial information supplied by loan customers and the general condition of the industries in the community to which loans have been made.

Deposits. Total deposits increased $200.9 million from December 31, 2018 to June 30, 2019, for a balance of $2.00 billion. The increase in deposits is the result of the Company’s efforts to increase deposits without causing a significant negative impact to the net interest margin during the first six months of 2019. Interest bearing accounts and brokered time deposits increased a combined $206.9 million, or 15.0%, during the first six months of 2019. The increase in interest bearing accounts is mostly due to an approximate increase of $46.6 million in public funds deposits and a $110 million increase in brokered time deposits. Money market index accounts decreased as customers moved funds to certificates of deposit during the period. At December 31, 2018 the balance in money market index accounts was $198.1 million and at June 30, 2019 it was $190.5 million, a decrease of 3.7%. The Company’s strategy is to grow deposit balances. While there is growing pressure in the deposit market for increasing deposit rates, management understands the need to protect the net interest margin but also remain competitive within the market to help supply the needs of the growing loan portfolio. At June 30, 2019, core deposits, which include, savings and money market accounts, time deposits less than $250 thousand, demand deposits and interest bearing demand deposits represented approximately 87.6% of total deposits.

Borrowings. Total borrowing balances decreased 61.3% from $250.8 million at December 31, 2018 to $97.0 million at June 30, 2019. During the six month period ended June 30, 2019 the Company was able to repay a net amount of $152 million in short-term FHLB advances as a result of the use of additional brokered time deposits. The use of brokered time deposits also had a positive impact on the overall cost of funds, due to a lower interest rate paid on these deposits compared to advances from Federal Home Loan Bank.

Capital Resources. Total stockholders’ equity increased $22.5 million, or 8.6%, during the six month period ended June 30, 2019. The increase in equity is due primarily to an increase in other comprehensive income as a result of positive changes in the value of available for sale securities and the net income addition to retained earnings less the amount of dividends paid. Shareholders received $0.09 per share in cash dividends in the first and second quarter of 2019. The increased 2019 dividend to $0.09 is a 12.5% increase over the $0.08 paid in the last two quarters of 2018. Book value per share increased from $9.44 per share at December 31, 2018 to $10.26 per share at June 30, 2019. The Company’s tangible book value per share also increased, from $7.86 per share at December 31, 2018 to $8.70 per share at June 30, 2019. The increases in book value and tangible book value per share were also the result of increases to retained earnings from profit retention.

The capital management function is a regular process that consists of providing capital for both the current financial position and the anticipated future growth of the Company. New minimum capital requirements associated with the Basel Committee on capital and liquidity regulation (Basel III) were phased in from January 1, 2016 through January 1, 2019. The Company must hold a capital conservation buffer of 2.5% above adequately capitalized risk-based capital ratios during 2019. At June 30, 2019 the Company is required to maintain 4.5% common equity tier 1 to risk weighted assets excluding the conservation buffer to be adequately capitalized. The Company’s common equity tier 1 to risk weighted assets was 12.5%, total risk-based capital ratio stood at 13.3%, and the Tier I risk-based capital ratio and Tier I leverage ratio were at 12.6% and 10.3%, respectively, at June 30, 2019. Management believes that the Company and the Bank meet all capital adequacy requirements to which they are subject, as of June 30, 2019.

51

Critical Accounting Policies

The Company follows financial accounting and reporting policies that are in accordance with U.S. GAAP. These policies are presented in Note 1 of the consolidated audited financial statements in the Company’s Annual Report to Shareholders included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. Critical accounting policies are those policies that require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The Company has identified three accounting policies that are critical accounting policies and an understanding of these policies is necessary to understand the Company’s financial statements. These policies relate to determining the adequacy of the allowance for loan losses, if there is any impairment of goodwill or other intangible, and estimating the fair value of assets acquired and liabilities assumed in connection with the merger activity. Additional information regarding these policies is included in the notes to the aforementioned 2018 consolidated financial statements, Note 1 (Summary of Significant Accounting Policies), Note 2 (Business Combination), Note 4 (Loans), and the sections captioned “Loan Portfolio.”

U.S. GAAP establishes standards for the amortization of acquired intangible assets and the impairment assessment of goodwill. Goodwill arising from business combinations represents the value attributable to unidentifiable intangible assets in the business acquired. The Company’s goodwill relates to the value inherent in the banking industry and that value is dependent upon the ability of the Company’s subsidiaries to provide quality, cost-effective services in a competitive marketplace. The goodwill value is supported by revenue that is in part driven by the volume of business transacted. A decrease in earnings resulting from a decline in the customer base or the inability to deliver cost-effective services over sustained periods can lead to impairment of goodwill that could adversely impact earnings in future periods. U.S. GAAP requires an annual evaluation of goodwill for impairment, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The fair value of the goodwill is estimated by reviewing the past and projected operating results for the subsidiaries and comparable industry information.

Liquidity

The Company maintains, in the opinion of management, liquidity sufficient to satisfy depositors’ requirements and meet the credit needs of customers. The Company depends on its ability to maintain its market share of deposits as well as acquiring new funds. The Company’s ability to attract deposits and borrow funds depends in large measure on its profitability, capitalization and overall financial condition. The Company’s objective in liquidity management is to maintain the ability to meet loan commitments, purchase securities or to repay deposits and other liabilities in accordance with their terms without an adverse impact on current or future earnings. Principal sources of liquidity for the Company include assets considered relatively liquid, such as federal funds sold, cash and due from banks, as well as cash flows from maturities and repayments of loans, and securities.

Along with its liquid assets, the Bank has additional sources of liquidity available which help to ensure that adequate funds are available as needed. These other sources include, but are not limited to, loan repayments, the ability to obtain deposits through the adjustment of interest rates and the purchasing of federal funds and borrowings on approved lines of credit at major domestic banks. At June 30, 2019, this line of credit totaled $35 million of which the Bank had not borrowed against. In addition, the Company has two revolving lines of credit with correspondent banks totaling $6.2 million. The outstanding balance at June 30, 2019 was $350 thousand. Management feels that its liquidity position is adequate and continues to monitor the position on a monthly basis. As of June 30, 2019, the Bank had outstanding balances with the Federal Home Loan Bank of $91.4 million with additional borrowing capacity of approximately $473.9 million with the FHLB, as well as access to the Federal Reserve Discount Window, which provides an additional source of funds. The Bank views its membership in the FHLB as a solid source of liquidity.

The primary investing activities of the Company are originating loans and purchasing securities. During the first six months of 2019, net cash used by investing activities amounted to $49.2 million, compared to $64.7 million used in the same period in 2018. Loan originations used $45.6 million during the first six months of 2019 compared to the $62.9 million used during the same period in 2018. The reduced amount of cash used in investing activities during this period can be attributed to the decreased lending activity. Proceeds from the maturities and repayments of securities available for sale also decreased to $13.7 million for the quarter ended June 30, 2019 compared to $20.7 million during the first six months of 2018.

The primary financing activities of the Company are obtaining deposits, repurchase agreements and other borrowings. Net cash provided by financing activities amounted to $40.7 million for the period ended June 30, 2019, compared to $67.7 million provided in financing activities for the same period in 2018. There were large swings in two line items during the six month period ended June 30, 2019 compared to the same period last year; changes in short term borrowings used $153.4 million in the six month period ended June 30, 2019, compared to providing $26.4 million during the six month period ended June 30, 2018, and there was also $201.0 million provided by deposits during the six month period ended June 30, 2019 compared to $45.6 million provided during the same period ended June 30, 2018.

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Off-Balance Sheet Arrangements

In the normal course of business, to meet the financial needs of our customers, we are a party to financial instruments with off-balance sheet risk. These financial instruments generally include commitments to originate mortgage, commercial and consumer loans, and involve to varying degrees, elements of credit and interest rate risk in excess of amounts recognized in the Consolidated Balance Sheets. The Bank’s maximum exposure to credit loss in the event of nonperformance by the borrower is represented by the contractual amount of those instruments. Because some commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The same credit policies are used in making commitments as are used for on-balance sheet instruments. Collateral is required in instances where deemed necessary. Undisbursed balances of loans closed include funds not disbursed but committed for construction projects. Unused lines of credit include funds not disbursed, but committed for, home equity, commercial and consumer lines of credit. Financial standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Those guarantees are primarily used to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Total unused commitments were $419.4 million at June 30, 2019 and $339.4 at December 31, 2018. Additionally, the Company has committed up to $8 million in subscriptions in Small Business Investment Company investment funds. At June 30, 2019 the Company had invested $6.7 million in these funds.

Recent Market and Regulatory Developments

Various and significant legislation affecting financial institutions and the financial industry is from time to time introduced in the U.S. Congress and state legislatures, as well as by regulatory agencies. Such initiatives may include proposals to expand or contract the powers of bank holding companies and depository institutions or proposals to substantially change the financial institution regulatory system. It is likely that the Trump Administration and the U.S. Congress will pursue and potentially implement legislative or regulatory changes affecting financial institutions and the financial industry. In 2018, President Trump signed a bill reforming the Dodd-Frank Act and the Trump Administration has indicated its intent to loosen additional regulations. Such legislation could change the operating environment for Farmers and its subsidiaries in unpredictable ways, decrease the costs of doing business, expand permissible activities or affect the competitive balance among financial institutions. With the enactment and the continuing implementation of the Dodd-Frank Act and regulations thereunder, the nature and extent of future legislative and regulatory changes affecting financial institutions remains very unpredictable. Farmers cannot predict the scope and timing of any such future legislation and, if enacted, the effect that it could have on its business, financial condition or results of operations.

Also, such statutes, regulations and policies are continually under review by Congress, state legislatures and federal and state regulatory agencies and are subject to change at any time, particularly in the current economic and regulatory environment. Any such change in statutes, regulations or regulatory policies applicable to the Company could have a material effect on the business of the Company.

Item 3. | Quantitative and Qualitative Disclosures about Market Risk

The Company’s ability to maximize net income is dependent, in part, on management’s ability to plan and control net interest income through management of the pricing and mix of assets and liabilities. Because a large portion of assets and liabilities of the Company are monetary in nature, changes in interest rates and monetary or fiscal policy affect its financial condition and can have significant impact on the net income of the Company. Additionally, the Company’s balance sheet is slightly asset sensitive and in the uncertain interest rate environment that exists today, the Company’s net interest margin could be under additional pressure should interest rates begin to lower in the near future.

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The Company considers the primary market exposure to be interest rate risk. Simulation analysis is used to monitor the Company’s exposure to changes in interest rates, and the effect of the change to net interest income. The following table shows the effect on net interest income and the net present value of equity in the event of a sudden and sustained 300 basis point increase or 100 basis point decrease in market interest rates:

Changes In Interest Rate (basis points) |  | June 30, 2019 Result |  |  | December 31, 2018 Result |  |  | ALCO Guidelines |
Net Interest Income Change |  |  |  |  |  |  |  |  |  |  |  |
+300 |  |  | 2.8 | % |  |  | 1.8 | % |  |  | -15 | %
+200 |  |  | 2.0 | % |  |  | 1.6 | % |  |  | -10 | %
+100 |  |  | 1.1 | % |  |  | 0.9 | % |  |  | -5 | %
-100 |  |  | -3.6 | % |  |  | -3.0 | % |  |  | -5 | %
Net Present Value Of Equity Change |  |  |  |  |  |  |  |  |  |  |  |
+300 |  |  | 32.7 | % |  |  | 15.2 | % |  |  | -20 | %
+200 |  |  | 27.9 | % |  |  | 11.8 | % |  |  | -15 | %
+100 |  |  | 18.4 | % |  |  | 8.2 | % |  |  | -10 | %
-100 |  |  | -27.3 | % |  |  | -16.6 | % |  |  | -10 | %

It should be noted that the change in the net present value of equity exceeded policy when the simulation model assumed a sudden decrease in rates of 100 basis points (1%). This is primarily due to the positive impact on the fair value of assets not being as great as the negative impact on the fair value of certain liabilities. Specifically, because core deposits typically bear relatively low interest rates, their fair value would be negatively impacted as the rates could not be adjusted by the full extent of the sudden decrease in rates. Management will continue to monitor the policy exception and may consider changes to the asset/liability position in the future. The remaining results of the simulations indicate that interest rate change results fall within internal limits established by the Company at June 30, 2019. A report on interest rate risk is presented to the Board of Directors and the Asset/Liability Committee on a quarterly basis. The Company has no market risk sensitive instruments held for trading purposes, nor does it hold derivative financial instruments, and does not plan to purchase these instruments in the near future.

Item 4. | Controls and Procedures

Based on their evaluation, as of the end of the period covered by this Quarterly Report on Form 10-Q, the Company’s Chief Executive Officer and Chief Financial Officer have concluded the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) are effective. There were no changes in the Company’s internal controls over financial reporting (as defined in Rule 13a–15(f) under the Exchange Act) that occurred during the fiscal quarter ended June 30, 2019, 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

The Company is a defendant in lawsuits and other adversary proceedings arising in the ordinary course of business. Legal costs incurred in connection with the resolution of claims and lawsuits are generally expensed as incurred, although the Company establishes accruals where losses are deemed probable and reasonably estimable. The Company’s assessment of the current exposure with respect to adverse claims in legal matters could change in the event of the discovery of additional facts in such matters or upon determinations by judges, juries, administrative agencies or other finders of fact that are inconsistent with the Company’s evaluation of claims. Additional disclosures relating to charges accrued during the fiscal quarter ended June 30, 2019 in connection with certain legal proceedings are included in the “Contingencies” Note to the Company’s Unaudited Consolidated Financial Statements in Part I of this report and are incorporated by reference into Part II of this report.

Item 1A. | Risk Factors

There have been no material changes to the Company’s risk factors from those disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

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Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds

Purchases of equity securities by the issuer.

On September 28, 2012, the Company announced that its Board of Directors approved a stock repurchase program that authorizes the repurchase of up to 920,000 shares of its outstanding common stock in the open market or in privately negotiated transactions.

The following table summarizes the treasury stock activity under the program during the three month period ended June 30, 2019.

Period |  | Total Number of Shares Purchased |  |  | Average Price Paid per Share |  |  | Total Number of Shares Purchased as Part of Publicly Announced Program |  |  | Maximum Number of Shares that May Yet be Purchased Under the Program |
Beginning balance |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 230,873 |
April 1-30 |  |  | 36,049 |  |  | $ | 13.89 |  |  |  | 36,049 |  |  |  | 194,824 |
May 1-31 |  |  | 14,313 |  |  | $ | 13.77 |  |  |  | 14,313 |  |  |  | 180,511 |
June 1-30 |  |  | 35,117 |  |  | $ | 13.92 |  |  |  | 35,117 |  |  |  | 145,394 |
Ending balance |  |  | 85,479 |  |  | $ | 13.88 |  |  |  | 85,479 |  |  |  | 145,394 |

On July 30, 2019, the Company issued a press release announcing that its Board of Directors has authorized the purchase of up to 1,500,000 shares of its common stock in the open market or in privately negotiated transactions, from time to time and subject to market and other conditions. This 2019 Repurchase Program supersedes the Company’s prior share repurchase program initially approved in 2012 authorizing the purchase of up to 920,000 shares of common stock. The 2019 Repurchase Program may be modified, suspended or terminated by the Company at any time.

Ite m 3. | Defaults Upon Senior Securities

Not applicable.

Item 4. | Mine Safety Disclosures

Not applicable.

Item 5. | Other Information

Not applicable.

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Item 6. | Exhibits

The following exhibits are filed or incorporated by reference as part of this report:

3.1 | Articles of Incorporation of Farmers National Banc Corp., as amended (incorporated by reference from Exhibit 4.1 to the Company’s Registration Statement on Form S-3 filed with the Commission on October 3, 2001 (File No. 333-70806)).
3.2 | Amendment to Articles of Incorporation of Farmers National Banc Corp., as amended (incorporated by reference from Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the Commission on April 20, 2018).
3.3 | Amended Code of Regulations of Farmers National Banc Corp. (incorporated by reference from Exhibit 3.2 to the Company’s Current Report on Form 8-K filed with the Commission on April 19, 2019).
31.1 | Rule 13a-14(a)/15d-14(a) Certification of Kevin J. Helmick, President and Chief Executive Officer of the Company (filed herewith).
31.2 | Rule 13a-14(a)/15d-14(a) Certification of Carl D. Culp, Executive Vice President, Chief Financial Officer and Treasurer of the Company (filed herewith).
32.1 | Certification pursuant to 18 U.S.C. Section 1350 of Kevin J. Helmick, President and Chief Executive Officer of the Company (filed herewith).
32.2 | Certification pursuant to 18 U.S.C. Section 1350 of Carl D. Culp, Executive Vice President, Chief Financial Officer and Treasurer of the Company (filed herewith).
101 | The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2019, formatted in iXBRL (Inline Extensible Business Reporting Language), filed herewith: (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Income; (iii) the Consolidated Statements of Comprehensive Income; (iv) the Consolidated Statements of Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows; and (vi) Notes to Unaudited Consolidated Financial Statements.

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SIGN ATURES

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.

FARMERS NATIONAL BANC CORP.

Dated: August 7, 2019

/s/ Kevin J. Helmick
Kevin J. Helmick President and Chief Executive Officer

Dated: August 7, 2019

/s/ Carl D. Culp
Carl D. Culp Senior Executive Vice President and Treasurer

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