10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2017

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

For the transition period                      to                     

Commission File Number: 0-26486

Auburn National Bancorporation, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Delaware	63-0885779
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

100 N. Gay Street

Auburn, Alabama 36830

(334) 821-9200

(Address and telephone number of principal executive offices)

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

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

Yes ☒                                             No ☐

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

Yes ☒                                             No ☐

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

Large Accelerated filer ☐	Accelerated filer ☐	Non-accelerated filer ☐	Smaller reporting company ☒
	(Do not check if a smaller reporting company)

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

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

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

Class	Outstanding at April 27, 2017
Common Stock, $0.01 par value per share	3,643,543 shares

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

INDEX

PART I.  FINANCIAL INFORMATION				PAGE
Item 1	Financial Statements
		Consolidated Balance Sheets (Unaudited) as of March 31, 2017 and December 31, 2016		3
		Consolidated Statements of Earnings (Unaudited) for the quarters ended March 31, 2017 and 2016		4
		Consolidated Statements of Comprehensive Income (Unaudited) for the quarters ended March 31, 2017 and 2016		5
		Consolidated Statements of Stockholders’ Equity (Unaudited) for the quarters ended March 31, 2017 and 2016		6
		Condensed Consolidated Statements of Cash Flows (Unaudited) for the quarters ended March 31, 2017 and 2016		7
		Notes to Consolidated Financial Statements (Unaudited)		8
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations			28
		Table 1 –	Explanation of Non-GAAP Financial Measures	47
		Table 2 –	Selected Quarterly Financial Data	48
		Table 3 –	Average Balances and Net Interest Income Analysis – for the quarters ended March 31, 2017 and 2016	49
		Table 4 –	Loan Portfolio Composition	50
		Table 5 –	Allowance for Loan Losses and Nonperforming Assets	51
		Table 6 –	Allocation of Allowance for Loan Losses	52
		Table 7 –	CDs and Other Time Deposits of $100,000 or more	53
Item 3	Quantitative and Qualitative Disclosures About Market Risk			54
Item 4	Controls and Procedures			54
PART II.  OTHER INFORMATION
Item 1	Legal Proceedings			54
Item 1A	Risk Factors			54
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds			54
Item 3	Defaults Upon Senior Securities			54
Item 4	Mine Safety Disclosures			54
Item 5	Other Information			54
Item 6	Exhibits			55

PART 1. FINANCIAL INFORMATION    

ITEM 1. FINANCIAL STATEMENTS

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Unaudited)

(Dollars in thousands, except share data)	March 31, 2017			December 31, 2016
Assets:
Cash and due from banks	$	15,791		$	15,673
Federal funds sold		30,776			42,096
Interest bearing bank deposits		56,858			63,508
Cash and cash equivalents		103,425			121,277
Securities available-for-sale		273,853			243,572
Loans held for sale		1,026			1,497
Loans, net of unearned income		430,553			430,946
Allowance for loan losses		(4,588	)		(4,643)
Loans, net		425,965			426,303
Premises and equipment, net		12,504			12,602
Bank-owned life insurance		17,995			17,888
Other real estate owned		152			152
Other assets		7,861			8,652
Total assets	$	842,781		$	831,943
Liabilities:
Deposits:
Noninterest-bearing	$	191,040		$	181,890
Interest-bearing		559,262			557,253
Total deposits		750,302			739,143
Federal funds purchased and securities sold under agreements to repurchase		3,631			3,366
Long-term debt		3,217			3,217
Accrued expenses and other liabilities		2,265			4,040
Total liabilities		759,415			749,766
Stockholders’ equity:
Preferred stock of $.01 par value; authorized 200,000 shares; no issued shares		—			—
Common stock of $.01 par value; authorized 8,500,000 shares; issued 3,957,135 shares		39			39
Additional paid-in capital		3,767			3,767
Retained earnings		86,768			85,716
Accumulated other comprehensive loss, net		(571	)		(708)
Less treasury stock, at cost - 313,592 shares and 313,612 shares at March 31, 2017 and December 31, 2016, respectively		(6,637	)		(6,637)
Total stockholders’ equity		83,366			82,177
Total liabilities and stockholders’ equity	$	842,781		$	831,943

See accompanying notes to consolidated financial statements    

3

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

Consolidated Statements of Earnings

(Unaudited)

		Quarter ended March 31,
(Dollars in thousands, except share and per share data)		2017			2016
Interest income:
Loans, including fees	$		4,981	$		5,096
Securities
Taxable			1,021			898
Tax-exempt			581			625
Federal funds sold and interest bearing bank deposits			201			126
Total interest income			6,784			6,745
Interest expense:
Deposits			862			981
Short-term borrowings			4			4
Long-term debt			29			63
Total interest expense			895			1,048
Net interest income			5,889			5,697
Provision for loan losses			—			(600)
Net interest income after provision for loan losses			5,889			6,297
Noninterest income:
Service charges on deposit accounts			189			198
Mortgage lending			165			179
Bank-owned life insurance			107			112
Other			373			345
Securities gains, net			2			—
Total noninterest income			836			834
Noninterest expense:
Salaries and benefits			2,381			2,405
Net occupancy and equipment			381			360
Professional fees			230			211
FDIC and other regulatory assessments			89			122
Other real estate owned, net			3			20
Other			1,034			991
Total noninterest expense			4,118			4,109
Earnings before income taxes			2,607			3,022
Income tax expense			717			831
Net earnings	$		1,890	$		2,191
Net earnings per share:
Basic and diluted	$		0.52	$		0.60
Weighted average shares outstanding:
Basic and diluted			3,643,541			3,643,484

See accompanying notes to consolidated financial statements

4

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(Unaudited)

		Quarter ended March 31,
(Dollars in thousands)		2017				2016
Net earnings	$		1,890		$		2,191
Other comprehensive income, net of tax:
Unrealized net holding gain on securities			138				1,566
Reclassification adjustment for net gain on securities recognized in net earnings			(1	)			—
Other comprehensive income			137				1,566
Comprehensive income	$		2,027		$		3,757

See accompanying notes to consolidated financial statements

5

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

(Unaudited)

										Accumulated
					Additional					other
	Common Stock				paid-in		Retained			comprehensive			Treasury
(Dollars in thousands, except share data)	Shares		Amount		capital		earnings			income (loss)			stock			Total
Balance, December 31, 2015		3,957,135	$	39	$	3,766	$	80,845		$	1,937		$	(6,638	)	$	79,949
Net earnings		—		—		—		2,191			—			—			2,191
Other comprehensive income		—		—		—		—			1,566			—			1,566
Cash dividends paid ($0.225 per share)		—		—		—		(820	)		—			—			(820)
Sale of treasury stock (25 shares)		—		—		1		—			—			—			1
Balance, March 31, 2016		3,957,135	$	39	$	3,767	$	82,216		$	3,503		$	(6,638	)	$	82,887
Balance, December 31, 2016		3,957,135	$	39	$	3,767	$	85,716		$	(708	)	$	(6,637	)	$	82,177
Net earnings		—		—		—		1,890			—			—			1,890
Other comprehensive income		—		—		—		—			137			—			137
Cash dividends paid ($0.23 per share)		—		—		—		(838	)		—			—			(838)
Balance, March 31, 2017		3,957,135	$	39	$	3,767	$	86,768		$	(571	)	$	(6,637	)	$	83,366

See accompanying notes to consolidated financial statements

6

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

		Three months ended March 31,
(In thousands)		2017			2016
Cash flows from operating activities:
Net earnings	$		1,890		$	2,191
Adjustments to reconcile net earnings to net cash provided by operating activities:
Provision for loan losses			—			(600)
Depreciation and amortization			284			248
Premium amortization and discount accretion, net			523			335
Net gain on securities available-for-sale			(2	)		—
Net gain on sale of loans held for sale			(99	)		(97)
Decrease in MSR valuation allowance			(1	)		—
Net loss on other real estate owned			—			5
Loans originated for sale			(5,918	)		(7,671)
Proceeds from sale of loans			6,435			6,925
Increase in cash surrender value of bank-owned life insurance			(107	)		(112)
Net decrease in other assets			618			176
Net increase in accrued expenses and other liabilities			(1,774	)		(69)
Net cash provided by operating activities			1,849			1,331
Cash flows from investing activities:
Proceeds from prepayments and maturities of securities available-for-sale			7,973			10,848
Purchase of securities available-for-sale			(38,559	)		(1,123)
Decrease (increase) in loans, net			338			(4,468)
Net purchases of premises and equipment			(26	)		(7)
Increase in FHLB stock			(13	)		(25)
Proceeds from sale of other real estate owned			—			50
Net cash (used in) provided by investing activities			(30,287	)		5,275
Cash flows from financing activities:
Net increase in noninterest-bearing deposits			9,150			15,826
Net increase (decrease) in interest-bearing deposits			2,009			(2,092)
Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase			265			(463)
Dividends paid			(838	)		(820)
Net cash provided by financing activities			10,586			12,451
Net change in cash and cash equivalents			(17,852	)		19,057
Cash and cash equivalents at beginning of period			121,277			113,930
Cash and cash equivalents at end of period	$		103,425		$	132,987
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$		986		$	1,097
Income taxes			717			403
Supplemental disclosure of non-cash transactions:
Real estate acquired through foreclosure			—			200

See accompanying notes to consolidated financial statements

7

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

General

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

Basis of Presentation and Use of Estimates

The unaudited consolidated financial statements in this report have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information. Accordingly, these financial statements do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited consolidated financial statements include, in the opinion of management, all adjustments necessary to present a fair statement of the financial position and the results of operations for all periods presented. All such adjustments are of a normal recurring nature. The results of operations in the interim statements are not necessarily indicative of the results of operations that the Company and its subsidiaries may achieve for future interim periods or the entire year. For further information, refer to the consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

The unaudited consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Auburn National Bancorporation Capital Trust I is an affiliate of the Company and was included in these unaudited consolidated financial statements pursuant to the equity method of accounting. Significant intercompany transactions and accounts are eliminated in consolidation.

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

Subsequent Events

The Company has evaluated the effects of events and transactions through the date of this filing that have occurred subsequent to March 31, 2017. The Company does not believe there were any material subsequent events during this period that would have required further recognition or disclosure in the unaudited consolidated financial statements included in this report.

Accounting Developments

In the first quarter of 2017, the Company adopted no new accounting guidance.

NOTE 2: BASIC AND DILUTED NET EARNINGS PER SHARE

Basic net earnings per share is computed by dividing net earnings by the weighted average common shares outstanding for the quarters ended March 31, 2017 and 2016, respectively. Diluted net earnings per share reflect the potential dilution that could occur upon exercise of securities or other rights for, or convertible into, shares of the Company’s common stock. At March 31, 2017 and 2016, respectively, the Company had no such securities or rights issued or outstanding, and therefore, no dilutive effect to consider for the diluted net earnings per share calculation.

8

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

	Quarter ended March 31,
(Dollars in thousands, except share and per share data)	2017		2016
Basic and diluted:
Net earnings	$	1,890	$	2,191
Weighted average common shares outstanding		3,643,541		3,643,484
Net earnings per share	$	0.52	$	0.60

NOTE 3: VARIABLE INTEREST ENTITIES

Generally, a variable interest entity (“VIE”) is a corporation, partnership, trust, or other legal structure that does not have equity investors with substantive or proportional voting rights or has equity investors that do not provide sufficient financial resources for the entity to support its activities.

At March 31, 2017, the Company did not have any consolidated VIEs to disclose but did have one nonconsolidated VIE, discussed below.

Trust Preferred Securities

The Company owns the common stock of a subsidiary business trust, Auburn National Bancorporation Capital Trust I (the “Trust”), which issued mandatorily redeemable preferred capital securities (“trust preferred securities”) in the aggregate of approximately $7.0 million at the time of issuance. The Trust meets the definition of a VIE of which the Company is not the primary beneficiary; the Trust’s only assets are junior subordinated debentures issued by the Company, which were acquired by the trust using the proceeds from the issuance of the trust preferred securities and common stock.

In October 2016, the Company purchased $4.0 million par amount of outstanding trust preferred securities issued by the Trust. These securities were sold by the FDIC, as receiver of a failed bank that had held the trust preferred securities. The Company used dividends from the Bank to purchase these trust preferred securities and has deemed an equivalent amount of the related junior subordinated debentures issued by the Company as no longer outstanding. The remaining junior subordinated debentures of approximately $3.2 million are included in long-term debt and the Company’s equity interest of $0.2 million in the Trust is included in other assets. Interest expense on the junior subordinated debentures is included in interest expense on long-term debt.

The following table summarizes VIEs that are not consolidated by the Company as of March 31, 2017.

(Dollars in thousands)	Maximum Loss Exposure		Liability Recognized		Classification
Type:
Trust preferred issuances		N/A		$3,217		Long-term debt

9

NOTE 4: SECURITIES

At March 31, 2017 and December 31, 2016, respectively, all securities within the scope of Accounting Standards Codification (“ASC”) 320, Investments – Debt and Equity Securities, were classified as available-for-sale. The fair value and amortized cost for securities available-for-sale by contractual maturity at March 31, 2017 and December 31, 2016, respectively, are presented below.

	1 year		1 to 5		5 to 10		After 10		Fair		Gross Unrealized				Amortized
(Dollars in thousands)	or less		years		years		years		Value		Gains		Losses		Cost
March 31, 2017
Agency obligations (a)	$	3,015		27,536		24,650		—		55,201		302		846	$	55,745
Agency RMBS (a)		—		844		17,943		129,574		148,361		549		1,783		149,595
State and political subdivisions		—		2,122		10,460		57,709		70,291		1,534		662		69,419
Total available-for-sale	$	3,015		30,502		53,053		187,283		273,853		2,385		3,291	$	274,759
December 31, 2016
Agency obligations (a)	$	3,047		22,531		19,893		—		45,471		331		973	$	46,113
Agency RMBS (a)		—		972		16,171		110,644		127,787		551		1,805		129,041
State and political subdivisions		—		2,480		10,210		57,624		70,314		1,509		734		69,539
Total available-for-sale	$	3,047		25,983		46,274		168,268		243,572		2,391		3,512	$	244,693

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

Securities with aggregate fair values of $174.6 million and $137.2 million at March 31, 2017 and December 31, 2016, respectively, were pledged to secure public deposits, securities sold under agreements to repurchase, Federal Home Loan Bank (“FHLB”) advances, and for other purposes required or permitted by law.

Included in other assets are cost-method investments. The carrying amounts of cost-method investments were $1.4 million at March 31, 2017 and December 31, 2016, respectively. Cost-method investments primarily include non-marketable equity investments, such as FHLB of Atlanta stock and Federal Reserve Bank (“FRB”) stock.

Gross Unrealized Losses and Fair Value

The fair values and gross unrealized losses on securities at March 31, 2017 and December 31, 2016, respectively, segregated by those securities that have been in an unrealized loss position for less than 12 months and 12 months or longer, are presented below.

		Less than 12 Months				12 Months or Longer					Total
(Dollars in thousands)		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
March 31, 2017:
Agency obligations	$		20,437		846		—		—	$		20,437		846
Agency RMBS			108,713		1,783		—		—			108,713		1,783
State and political subdivisions			19,410		662		—		—			19,410		662
Total	$		148,560		3,291		—		—	$		148,560		3,291
December 31, 2016:
Agency obligations	$		20,352		973		—		—	$		20,352		973
Agency RMBS			89,062		1,805		—		—			89,062		1,805
State and political subdivisions			20,444		734		—		—			20,444		734
Total	$		129,858		3,512		—		—	$		129,858		3,512

10

For the securities in the previous table, the Company does not have the intent to sell and has determined it is not more likely than not that the Company will be required to sell the security before recovery of the amortized cost basis, which may be maturity. On a quarterly basis, the Company assesses each security for credit impairment. For debt securities, the Company evaluates, where necessary, whether credit impairment exists by comparing the present value of the expected cash flows to the securities’ amortized cost basis. For cost-method investments, the Company evaluates whether an event or change in circumstances has occurred during the reporting period that may have a significant adverse effect on the fair value of the investment.

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

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

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

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

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

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

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

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

Agency obligations

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

Agency RMBS

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

Securities of U.S. states and political subdivisions

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

Cost-method investments

At March 31, 2017, cost-method investments with an aggregate cost of $1.4 million were not evaluated for impairment because the Company did not identify any events or changes in circumstances that may have a significant adverse effect on the fair value of these cost-method investments.

11

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

Other-Than-Temporarily Impaired Securities

Credit-impaired debt securities are debt securities where the Company has written down the amortized cost basis of a security for other-than-temporary impairment and the credit component of the loss is recognized in earnings. At March 31, 2017 and December 31, 2016, the Company had no credit-impaired debt securities and there were no additions or reductions in the credit loss component of credit-impaired debt securities during the quarters ended March 31, 2017 and 2016, respectively.

Realized Gains and Losses

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

		Quarter ended March 31,
(Dollars in thousands)		2017			2016
Gross realized gains	$		2	$		—
Realized gains, net	$		2	$		—

NOTE 5: LOANS AND ALLOWANCE FOR LOAN LOSSES

(In thousands)	March 31, 2017		December 31, 2016
Commercial and industrial	$	50,228	$	49,850
Construction and land development		45,098		41,650
Commercial real estate:
Owner occupied		45,011		49,745
Multi-family		47,147		46,998
Other		126,581		123,696
Total commercial real estate		218,739		220,439
Residential real estate:
Consumer mortgage		63,741		65,564
Investment property		44,355		45,291
Total residential real estate		108,096		110,855
Consumer installment		9,032		8,712
Total loans		431,193		431,506
Less: unearned income		(640)		(560)
Loans, net of unearned income	$	430,553	$	430,946

Loans secured by real estate were approximately 86.3% of the Company’s total loan portfolio at March 31, 2017. At March 31, 2017, the Company’s geographic loan distribution was concentrated primarily in Lee County, Alabama, and surrounding areas.

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

12

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

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

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

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

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

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

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

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

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

• Investment property – primarily includes loans to finance income-producing 1-4 family residential properties. Generally, the primary source of repayment is dependent upon income generated from leasing the property securing the loan. The underwriting of these loans takes into consideration the rental rates and property value, as well as the financial health of the borrower.

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

13

The following is a summary of current, accruing past due, and nonaccrual loans by portfolio segment and class as of March 31, 2017 and December 31, 2016.

(In thousands)	Current		Accruing 30-89 Days Past Due		Accruing Greater than 90 days		Total Accruing Loans		Non- Accrual			Total Loans
March 31, 2017:
Commercial and industrial	$	50,192		1		—		50,193		35	$		50,228
Construction and land development		45,073		3		—		45,076		22			45,098
Commercial real estate:
Owner occupied		45,011		—		—		45,011		—			45,011
Multi-family		47,147		—		—		47,147		—			47,147
Other		124,731		—		—		124,731		1,850			126,581
Total commercial real estate		216,889		—		—		216,889		1,850			218,739
Residential real estate:
Consumer mortgage		62,308		1,068		—		63,376		365			63,741
Investment property		44,211		118		—		44,329		26			44,355
Total residential real estate		106,519		1,186		—		107,705		391			108,096
Consumer installment		8,995		17		—		9,012		20			9,032
Total	$	427,668		1,207		—		428,875		2,318	$		431,193
December 31, 2016:
Commercial and industrial	$	49,747		66		—		49,813		37	$		49,850
Construction and land development		41,223		395		—		41,618		32			41,650
Commercial real estate:
Owner occupied		49,564		43		—		49,607		138			49,745
Multi-family		46,998		—		—		46,998		—			46,998
Other		121,608		199		—		121,807		1,889			123,696
Total commercial real estate		218,170		242		—		218,412		2,027			220,439
Residential real estate:
Consumer mortgage		64,059		1,282		—		65,341		223			65,564
Investment property		45,243		19		—		45,262		29			45,291
Total residential real estate		109,302		1,301		—		110,603		252			110,855
Consumer installment		8,652		38		—		8,690		22			8,712
Total	$	427,094		2,042		—		429,136		2,370	$		431,506

Allowance for Loan Losses

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

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

14

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

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

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

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

The allocation of the allowance for loan losses begins with a process of estimating the probable losses inherent for each loan segment. The estimates for these loans are established by category and based on the Company’s internal system of credit risk ratings and historical loss data. The estimated loan loss allocation rate for the Company’s internal system of credit risk grades is based on its experience with similarly graded loans. For loan segments where the Company believes it does not have sufficient historical loss data, the Company may make adjustments based, in part, on loss rates of peer bank groups. At March 31, 2017 and December 31, 2016, and for the periods then ended, the Company adjusted its historical loss rates for the commercial real estate portfolio segment based, in part, on loss rates of peer bank groups.

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

15

The Company regularly re-evaluates its practices in determining the allowance for loan losses. Beginning with the quarter ended December 31, 2016, the Company implemented certain refinements to its allowance for loan losses methodology in order to better capture the effects of the most recent economic cycle on the Company’s loan loss experience. First, the Company increased its look-back period for calculating average losses for all loan segments to 31 quarters. Prior to December 31, 2016, the Company calculated average losses for all loan segments using a rolling 20 quarter look-back period. For the quarter ended March 31, 2017, the Company increased its look-back period to 32 quarters to continue to include the losses incurred by the Company beginning with the first quarter of 2009. The Company will likely continue to increase its look-back period to incorporate the effects of at least one economic downturn in its loss history. The Company believes the extension of its look-back period is appropriate due to the risks inherent in the loan portfolio. Absent this extension, the early cycle periods in which the Company experienced significant losses would be excluded from the determination of the allowance for loan losses and its balance would decrease. Second, the Company increased the range of basis point adjustments allowed for qualitative and environmental factors to approximately 200 basis points, an increase of 65 basis points, or 48%, compared to the 135 basis point range used prior to December 31, 2016. After performing sensitivity testing of its calculation of the allowance for loan losses, the Company determined that it should increase the range of basis points allowed for qualitative and environmental factors in order to provide sufficient latitude in determining estimated probable credit losses during periods of economic stress. Third, the Company reduced the percentage allocation for qualitative and environmental factors on a weighted average basis to 21% of total basis points allocable at December 31, 2016, compared to 25% of total basis points allocable at September 30, 2016. The Company believes a decrease in the percentage allocation of qualitative environmental factors on a weighted average basis was appropriate due to the extension of its look-back period described above. If the Company did not make the changes described above, the Company’s calculated allowance for loan loss allocation would have decreased by approximately $0.9 million, or 0.21% of total loans, at December 31, 2016. Other than the changes discussed above, the Company has not made any material changes to its methodology that would impact the calculation of the allowance for loan losses or provision for loan losses for the periods included in the accompanying consolidated balance sheets and statements of earnings.

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

	March 31, 2017
(In thousands)	Commercial and industrial			Construction and land development			Commercial real estate			Residential real estate			Consumer    installment			Total
Quarter ended:
Beginning balance	$	540			812			2,071			1,107			113		$	4,643
Charge-offs		—			—			—			(78	)		(1	)		(79)
Recoveries		2			5			—			14			3			24
Net recoveries (charge-offs)		2			5			—			(64	)		2			(55)
Provision for loan losses		(18	)		28			(67	)		21			36			—
Ending balance	$	524			845			2,004			1,064			151		$	4,588
	March 31, 2016
(In thousands)	Commercial and industrial			Construction and land development			Commercial real estate			Residential real estate			Consumer installment			Total
Quarter ended:
Beginning balance	$	523			669			1,879			1,059			159		$	4,289
Charge-offs		—			—			—			(118	)		(26	)		(144)
Recoveries		20			1,198			—			7			4			1,229
Net recoveries (charge-offs)		20			1,198			—			(111	)		(22	)		1,085
Provision for loan losses		(26	)		(1,172	)		524			78			(4	)		(600)
Ending balance	$	517			695			2,403			1,026			133		$	4,774

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The following table presents an analysis of the allowance for loan losses and recorded investment in loans by portfolio segment and impairment methodology as of March 31, 2017 and 2016.

		Collectively evaluated (1)				Individually evaluated (2)				Total
		Allowance		Recorded		Allowance		Recorded		Allowance		Recorded
		for loan		investment		for loan		investment		for loan		investment
(In thousands)		losses		in loans		losses		in loans		losses		in loans
March 31, 2017:
Commercial and industrial	$		524		50,222		—		6		524		50,228
Construction and land development			845		45,076		—		22		845		45,098
Commercial real estate			1,977		216,701		27		2,038		2,004		218,739
Residential real estate			1,064		108,096		—		—		1,064		108,096
Consumer installment			151		9,032		—		—		151		9,032
Total	$		4,561		429,127		27		2,066		4,588		431,193
March 31, 2016:
Commercial and industrial	$		517		50,152		—		40		517		50,192
Construction and land development			695		45,887		—		66		695		45,953
Commercial real estate			2,054		206,572		349		2,748		2,403		209,320
Residential real estate			1,026		117,046		—		—		1,026		117,046
Consumer installment			133		9,769		—		—		133		9,769
Total	$		4,425		429,426		349		2,854		4,774		432,280

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

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

Credit Quality Indicators

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

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

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

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

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

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(In thousands)	Pass		Special         Mention		Substandard Accruing		Nonaccrual		Total loans
March 31, 2017:
Commercial and industrial	$	49,760		223		210		35	$	50,228
Construction and land development		44,463		315		298		22		45,098
Commercial real estate:
Owner occupied		44,247		409		355		—		45,011
Multi-family		47,147		—		—		—		47,147
Other		124,260		31		440		1,850		126,581
Total commercial real estate		215,654		440		795		1,850		218,739
Residential real estate:
Consumer mortgage		57,302		2,818		3,256		365		63,741
Investment property		43,059		241		1,029		26		44,355
Total residential real estate		100,361		3,059		4,285		391		108,096
Consumer installment		8,807		106		99		20		9,032
Total	$	419,045		4,143		5,687		2,318	$	431,193
December 31, 2016:
Commercial and industrial	$	49,558		22		233		37	$	49,850
Construction and land development		41,165		113		340		32		41,650
Commercial real estate:
Owner occupied		48,788		414		405		138		49,745
Multi-family		46,998		—		—		—		46,998
Other		121,326		32		449		1,889		123,696
Total commercial real estate		217,112		446		854		2,027		220,439
Residential real estate:
Consumer mortgage		59,450		2,613		3,278		223		65,564
Investment property		44,109		105		1,048		29		45,291
Total residential real estate		103,559		2,718		4,326		252		110,855
Consumer installment		8,580		20		90		22		8,712
Total	$	419,974		3,319		5,843		2,370	$	431,506

Impaired loans

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

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

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

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The following tables set forth certain information regarding the Company’s impaired loans that were individually evaluated for impairment at March 31, 2017 and December 31, 2016.

		March 31, 2017
(In thousands)		Unpaid principal balance (1)		Charge-offs and payments applied (2)			Recorded investment (3)			Related allowance
With no allowance recorded:
Commercial and industrial	$		6		—			6
Construction and land development			132		(110	)		22
Commercial real estate:
Other			2,861		(1,011	)		1,850
Total commercial real estate			2,861		(1,011	)		1,850
Total	$		2,999		(1,121	)		1,878
With allowance recorded:
Commercial real estate:
Owner occupied	$		188		—			188	$		27
Total commercial real estate			188		—			188			27
Total			188		—			188			27
Total impaired loans	$		3,187		(1,121	)		2,066	$		27

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

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

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

		December 31, 2016
(In thousands)		Unpaid principal balance (1)		Charge-offs and payments applied (2)			Recorded investment (3)			Related allowance
With no allowance recorded:
Commercial and industrial	$		15		—			15
Construction and land development			140		(108	)		32
Commercial real estate:
Other			2,874		(984	)		1,890
Total commercial real estate			2,874		(984	)		1,890
Total	$		3,029		(1,092	)		1,937
With allowance recorded:
Commercial real estate:
Owner occupied	$		193		—			193	$		31
Total commercial real estate			193		—			193			31
Total			193		—			193			31
Total impaired loans	$		3,222		(1,092	)		2,130	$		31

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

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

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

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

	Quarter ended March 31, 2017				Quarter ended March 31, 2016
	Average		Total interest		Average		Total interest
	recorded		income		recorded		income
(In thousands)	investment		recognized		investment		recognized
Impaired loans:
Commercial and industrial	$	10	$	—	$	32	$	1
Construction and land development		28		—		198		—
Commercial real estate:
Owner occupied		191		3		1,020		15
Other		1,870		—		1,742		—
Total commercial real estate		2,061		3		2,762		15
Residential real estate:
Total	$	2,099	$	3	$	2,992	$	16

Troubled Debt Restructurings

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

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

20

The following is a summary of accruing and nonaccrual TDRs, which are included in the impaired loan totals, and the related allowance for loan losses, by portfolio segment and class as of March 31, 2017 and December 31, 2016.

		TDRs
									Related
(In thousands)		Accruing		Nonaccrual		Total			Allowance
March 31, 2017
Commercial and industrial	$		6		—		6	$		—
Construction and land development			—		22		22			—
Commercial real estate:
Owner occupied			188		—		188			27
Other			—		1,784		1,784			—
Total commercial real estate			188		1,784		1,972			27
Total	$		194		1,806		2,000	$		27
December 31, 2016
Commercial and industrial	$		15		—		15	$		—
Construction and land development			—		32		32			—
Commercial real estate:
Owner occupied			193		—		193			31
Other			—		1,818		1,818			—
Total commercial real estate			193		1,818		2,011			31
Total	$		208		1,850		2,058	$		31

At March 31, 2017, there were no significant outstanding commitments to advance additional funds to customers whose loans had been restructured.

During the quarter ended March 31, 2017 and 2016, there were no loans modified in a TDR, and the Company had no loans modified in a TDR within the previous 12 months for which there was a payment default (defined as 90 days or more past due) during the respective periods.

NOTE 6: MORTGAGE SERVICING RIGHTS, NET

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

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

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

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The change in amortized MSRs and the related valuation allowance for the quarters ended March 31, 2017 and 2016 are presented below.

		Quarter ended March 31,
(Dollars in thousands)		2017		2016
MSRs, net:
Beginning balance	$		1,952	$	2,316
Additions, net			53		57
Amortization expense			(144)		(138)
Decrease in MSR valuation allowance			1		—
Ending balance	$		1,862	$	2,235
Valuation allowance included in MSRs, net:
Beginning of period	$		1	$	—
End of period			—		—
Fair value of amortized MSRs:
Beginning of period	$		2,678	$	3,086
End of period			2,689		2,906

NOTE 7: DERIVATIVE INSTRUMENTS

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

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

A summary of the Company’s interest rate swap agreements at March 31, 2017 and December 31, 2016 is presented below.

				Other		Other
				Assets		Liabilities
				Estimated		Estimated
(Dollars in thousands)		Notional		Fair Value		Fair Value
March 31, 2017:
Pay fixed / receive variable	$		3,879		—		185
Pay variable / receive fixed			3,879		185		—
Total interest rate swap agreements	$		7,758		185		185
December 31, 2016:
Pay fixed / receive variable	$		3,967		—		241
Pay variable / receive fixed			3,967		241		—
Total interest rate swap agreements	$		7,934		241		241

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NOTE 8: FAIR VALUE

Fair Value Hierarchy

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

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

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

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

Level changes in fair value measurements

Transfers between levels of the fair value hierarchy are generally recognized at the end of the reporting period. The Company monitors the valuation techniques utilized for each category of financial assets and liabilities to ascertain when transfers between levels have been affected. The nature of the Company’s financial assets and liabilities generally is such that transfers in and out of any level are expected to be infrequent. For the three months ended March 31, 2017, there were no transfers between levels and no changes in valuation techniques for the Company’s financial assets and liabilities.

Assets and liabilities measured at fair value on a recurring basis

Securities available-for-sale

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

Interest rate swap agreements

The carrying amount of interest rate swap agreements was included in other assets and accrued expenses and other liabilities on the accompanying consolidated balance sheets. The fair value measurements for our interest rate swap agreements were based on information obtained from a third party bank. This information is periodically tested by the Company and validated against other third party valuations. If needed, other third party market participants may be utilized to corroborate the fair value measurements for our interest rate swap agreements. The Company classified these derivative assets and liabilities within Level 2 of the valuation hierarchy. These swaps qualify as derivatives, but are not designated as hedging instruments.

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The following table presents the balances of the assets and liabilities measured at fair value on a recurring basis as of March 31, 2017 and December 31, 2016, respectively, by caption, on the accompanying consolidated balance sheets by ASC 820 valuation hierarchy (as described above).

			Quoted Prices in		Significant
			Active Markets		Other		Significant
			for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
(Dollars in thousands)	Amount		(Level 1)		(Level 2)		(Level 3)
March 31, 2017:
Securities available-for-sale:
Agency obligations	$	55,201		—		55,201		—
Agency RMBS		148,361		—		148,361		—
State and political subdivisions		70,291		—		70,291		—
Total securities available-for-sale		273,853		—		273,853		—
Other assets (1)		185		—		185		—
Total assets at fair value	$	274,038		—		274,038		—
Other liabilities(1)	$	185		—		185		—
Total liabilities at fair value	$	185		—		185		—
December 31, 2016:
Securities available-for-sale:
Agency obligations	$	45,471		—		45,471		—
Agency RMBS		127,787		—		127,787		—
State and political subdivisions		70,314		—		70,314		—
Total securities available-for-sale		243,572		—		243,572		—
Other assets (1)		241		—		241		—
Total assets at fair value	$	243,813		—		243,813		—
Other liabilities(1)	$	241		—		241		—
Total liabilities at fair value	$	241		—		241		—

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

Assets and liabilities measured at fair value on a nonrecurring basis

Loans held for sale

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

Impaired Loans

Loans considered impaired under ASC 310-10-35, Receivables, are loans for which, based on current information and events, it is probable that the Company will be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement. Impaired loans can be measured based on the present value of expected payments using the loan’s original effective rate as the discount rate, the loan’s observable market price, or the fair value of the collateral less selling costs if the loan is collateral dependent.

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

Other real estate owned

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

Mortgage servicing rights, net

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

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The following table presents the balances of the assets and liabilities measured at fair value on a nonrecurring basis as of March 31, 2017 and December 31, 2016, respectively, by caption, on the accompanying consolidated balance sheets and by FASB ASC 820 valuation hierarchy (as described above):

			Quoted Prices in
			Active Markets		Other		Significant
			for		Observable		Unobservable
	Carrying		Identical Assets		Inputs		Inputs
(Dollars in thousands)	Amount		(Level 1)		(Level 2)		(Level 3)
March 31, 2017:
Loans held for sale	$	1,026		—		1,026		—
Loans, net(1)		2,039		—		—		2,039
Other real estate owned		152		—		—		152
Other assets (2)		1,862		—		—		1,862
Total assets at fair value	$	5,079		—		1,026		4,053
December 31, 2016:
Loans held for sale	$	1,497		—		1,497		—
Loans, net(1)		2,099		—		—		2,099
Other real estate owned		152		—		—		152
Other assets (2)		1,952		—		—		1,952
Total assets at fair value	$	5,700		—		1,497		4,203

⁽¹⁾Loans considered impaired under ASC 310-10-35, Receivables. This amount reflects the recorded investment in

impaired loans, net of any related allowance for loan losses.

⁽²⁾Represents MSRs, net, carried at lower of cost or estimated fair value.

Quantitative Disclosures for Level 3 Fair Value Measurements

At March 31, 2017, the Company had no Level 3 assets measured at fair value on a recurring basis. For Level 3 assets measured at fair value on a non-recurring basis at March 31, 2017, the significant unobservable inputs used in the fair value measurements are presented below.

					Weighted
		Carrying			Average
(Dollars in thousands)		Amount	Valuation Technique	Significant Unobservable Input	of Input
Nonrecurring:
Impaired loans	$	2,039	Appraisal	Appraisal discounts (%)	45.2%
Other real estate owned		152	Appraisal	Appraisal discounts (%)	10.0%
Mortgage servicing rights, net		1,862	Discounted cash flow	Prepayment speed or CPR (%)	10.5%
				Discount rate (%)	10.0%

Fair Value of Financial Instruments

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

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

Loans, net

Fair values for loans were calculated using discounted cash flows. The discount rates reflected current rates at which similar loans would be made for the same remaining maturities. This method of estimating fair value does not incorporate the exit-price concept of fair value prescribed by ASC 820 and generally produces a higher value than an exit-price approach. Expected future cash flows were projected based on contractual cash flows, adjusted for estimated prepayments. ASU 2016-01 described under “Current Accounting Policies” requires public company use of exit prices when measuring the fair value of financial instruments for disclosure purposes for fiscal years beginning after December 31, 2017. The effects of ASU 2016-01 on the Company’s consolidated financial statements are being evaluated.

Loans held for sale

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

Time Deposits

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

Long-term debt

The fair value of the Company’s fixed rate long-term debt is estimated using discounted cash flows based on estimated current market rates for similar types of borrowing arrangements. The carrying amount of the Company’s variable rate long-term debt approximates its fair value.

The carrying value, related estimated fair value, and placement in the fair value hierarchy of the Company’s financial instruments at March 31, 2017 and December 31, 2016 are presented below. This table excludes financial instruments for which the carrying amount approximates fair value. Financial assets for which fair value approximates carrying value included cash and cash equivalents. Financial liabilities for which fair value approximates carrying value included noninterest-bearing demand deposits, interest-bearing demand deposits, and savings deposits due to these products having no stated maturity. In addition, financial liabilities for which fair value approximates carrying value included overnight borrowings such as federal funds purchased and securities sold under agreements to repurchase.

						Fair Value Hierarchy
	Carrying		Estimated			Level 1		Level 2		Level 3
(Dollars in thousands)	amount		fair value			inputs		inputs		Inputs
March 31, 2017:
Financial Assets:
Loans, net (1)	$	425,965	$	426,253	$		—	$	—	$	426,253
Loans held for sale		1,026		1,036			—		1,036		—
Financial Liabilities:
Time Deposits	$	203,696	$	203,141	$		—	$	203,141	$	—
Long-term debt		3,217		3,217			—		3,217		—
December 31, 2016:
Financial Assets:
Loans, net (1)	$	426,303	$	428,446	$		—	$	—	$	428,446
Loans held for sale		1,497		1,507			—		1,507		—
Financial Liabilities:
Time Deposits	$	208,137	$	207,791	$		—	$	207,791	$	—
Long-term debt		3,217		3,217			—		3,217		—

(1) Represents loans, net of unearned income and the allowance for loan losses.

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

The following discussion and analysis is designed to provide a better understanding of various factors related to the results of operations and financial condition of the Auburn National Bancorporation, Inc. (the “Company”) and its wholly owned subsidiary, AuburnBank (the “Bank”). This discussion is intended to supplement and highlight information contained in the accompanying unaudited condensed consolidated financial statements and related notes for the quarters ended March 31, 2017 and 2016, as well as the information contained in our Annual Report on Form 10-K for the year ended December 31, 2016.

Special Notice Regarding Forward-Looking Statements

Certain of the statements made in this discussion and analysis and elsewhere, including information incorporated herein by reference to other documents, are “forward-looking statements” within the meaning of, and subject to, the protections of Section 27A of the Securities Act of 1933, as amended, (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, anticipations, assumptions, estimates, intentions and future performance, and involve known and unknown risks, uncertainties and other factors, which may be beyond our control, and which may cause the actual results, performance, achievements, or financial condition of the Company to be materially different from future results, performance, achievements, or financial condition expressed or implied by such forward-looking statements. You should not expect us to update any forward-looking statements.

All statements other than statements of historical fact are statements that could be forward-looking statements. You can identify these forward-looking statements through our use of words such as “may,” “will,” “anticipate,” “assume,” “should,” “indicate,” “would,” “believe,” “contemplate,” “expect,” “estimate,” “continue,” “plan,” “point to,” “project,” “could,” “intend,” “target” and other similar words and expressions of the future. These forward-looking statements may not be realized due to a variety of factors, including, without limitation:

• the effects of future economic, business, and market conditions and changes, domestic and foreign, including seasonality;

• governmental monetary and fiscal policies;

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

• changes in accounting policies, rules, and practices;

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

• changes in borrower credit risks and payment behaviors;

• changes in the availability and cost of credit and capital in the financial markets, and the types of instruments that may be included as capital for regulatory purposes;

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

• the effects of competition from a wide variety of local, regional, national, and other providers of financial, investment, and insurance services;

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

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

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

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

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

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

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

• the other factors and information in this report and other filings that we make with the SEC under the Exchange Act, including our Annual Report on Form 10-K for the year ended December 31, 2016 and subsequent quarterly and current reports. See Part II, Item 1A. “RISK FACTORS”.

All written or oral forward-looking statements that are made by or attributable to us are expressly qualified in their entirety by this cautionary notice. We have no obligation and do not undertake to update, revise or correct any of the forward-looking statements after the date of this report, or after the respective dates on which such statements otherwise are made.

Business

The Company was incorporated in 1990 under the laws of the State of Delaware and became a bank holding company after it acquired its Alabama predecessor, which was a bank holding company established in 1984. The Bank, the Company’s principal subsidiary, is an Alabama state-chartered bank that is a member of the Federal Reserve System and has operated continuously since 1907. Both the Company and the Bank are headquartered in Auburn, Alabama. The Bank conducts its business primarily in East Alabama, including Lee County and surrounding areas. The Bank operates full-service branches in Auburn, Opelika, Notasulga, and Valley, Alabama. In-store branches are located in the Kroger and Wal-Mart SuperCenter in Opelika. The Bank also operates a commercial loan production office in Phenix City, Alabama.

Summary of Results of Operations

		Quarter ended March 31,
(Dollars in thousands, except per share data)		2017		2016
Net interest income (a)	$		6,189	$	6,019
Less: tax-equivalent adjustment			300		322
Net interest income (GAAP)			5,889		5,697
Noninterest income			836		834
Total revenue			6,725		6,531
Provision for loan losses			—		(600)
Noninterest expense			4,118		4,109
Income tax expense			717		831
Net earnings	$		1,890	$	2,191
Basic and diluted earnings per share	$		0.52	$	0.60

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

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Financial Summary

The Company’s net earnings were $1.9 million for the first quarter of 2017, compared to $2.2 million for the first quarter of 2016. Basic and diluted earnings per share were $0.52 per share for the first quarter of 2017, compared to $0.60 per share for the first quarter of 2016.

Net interest income (tax-equivalent) was $6.2 million for the first quarter of 2017 compared to $6.0 million for the first quarter of 2016. This increase was primarily due to a reduction in interest expense as the Company lowered its deposit costs and repaid higher-cost wholesale funding sources. Average loans were $429.8 million in the first quarter of 2017, compared to $429.5 million in the first quarter of 2016. Average deposits were $742.0 million in the first quarter of 2017, an increase of $15.6 million or 2%, from the first quarter of 2016.

The Company recorded no provision for loan losses for the first quarter of 2017, compared to a negative provision for loan losses of $0.6 million for the first quarter of 2016. Annualized net charge-offs as a percent of average loans were 0.05% for the first quarter of 2017 compared to annualized net recoveries of 1.01% for the first quarter of 2016. The Company recognized a recovery to the allowance for loan losses of $1.2 million from the payoff of one nonperforming construction and land development loan during the first quarter of 2016.

Noninterest income and expense were $0.8 and $4.1 million, respectively, for the first quarter of 2017, unchanged from the first quarter of 2016. The Company had an improved efficiency ratio of 58.62% for the first quarter of 2017, compared to 59.96% in the first quarter of 2016.

Income tax expense and the effective tax rate were $0.7 million and 27.50%, respectively, for the first quarter of 2017, unchanged from the first quarter of 2016.

The Company paid cash dividends of $0.23 per share in the first quarter of 2017, an increase of 2.2% from the same period of 2016. At March 31, 2017, the Bank’s regulatory capital ratios were well above the minimum amounts required to be “well capitalized” under current regulatory standards.

CRITICAL ACCOUNTING POLICIES

The accounting and financial reporting policies of the Company conform with U.S. generally accepted accounting principles and with general practices within the banking industry. In connection with the application of those principles, we have made judgments and estimates which, in the case of the determination of our allowance for loan losses, our assessment of other-than-temporary impairment, recurring and non-recurring fair value measurements, the valuation of other real estate owned, and the valuation of deferred tax assets, were critical to the determination of our financial position and results of operations. Other policies also require subjective judgment and assumptions and may accordingly impact our financial position and results of operations.

Allowance for Loan Losses

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

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

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

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

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

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

The allocation of the allowance for loan losses begins with a process of estimating the probable losses inherent for each loan segment. The estimates for these loans are established by category and based on the Company’s internal system of credit risk ratings and historical loss data. The estimated loan loss allocation rate for the Company’s internal system of credit risk grades is based on its experience with similarly graded loans. For loan segments where the Company believes it does not have sufficient historical loss data, the Company may make adjustments based, in part, on loss rates of peer bank groups. At March 31, 2017 and December 31, 2016, and for the periods then ended, the Company adjusted its historical loss rates for the commercial real estate portfolio segment based, in part, on loss rates of peer bank groups.

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

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The Company regularly re-evaluates its practices in determining the allowance for loan losses. Beginning with the quarter ended December 31, 2016, the Company implemented certain refinements to its allowance for loan losses methodology in order to better capture the effects of the most recent economic cycle on the Company’s loan loss experience. First, the Company increased its look-back period for calculating average losses for all loan segments to 31 quarters. Prior to December 31, 2016, the Company calculated average losses for all loan segments using a rolling 20 quarter look-back period. For the quarter ended March 31, 2017, the Company increased its look-back period to 32 quarters to continue to include the losses incurred by the Company beginning with the first quarter of 2009. The Company will likely continue to increase its look-back period to incorporate the effects of at least one economic downturn in its loss history. The Company believes the extension of its look-back period is appropriate due to the risks inherent in the loan portfolio. Absent this extension, the early cycle periods in which the Company experienced significant losses would be excluded from the determination of the allowance for loan losses and its balance would decrease. Second, the Company increased the range of basis point adjustments allowed for qualitative and environmental factors to approximately 200 basis points, an increase of 65 basis points, or 48%, compared to the 135 basis point range used prior to December 31, 2016. After performing sensitivity testing of its calculation of the allowance for loan losses, the Company determined that it should increase the range of basis points allowed for qualitative and environmental factors in order to provide sufficient latitude in determining estimated probable credit losses during periods of economic stress. Third, the Company reduced the percentage allocation for qualitative and environmental factors on a weighted average basis to 21% of total basis points allocable at December 31, 2016, compared to 25% of total basis points allocable at September 30, 2016. The Company believes a decrease in the percentage allocation of qualitative environmental factors on a weighted average basis was appropriate due to the extension of its look-back period described above. If the Company did not make the changes described above, the Company’s calculated allowance for loan loss allocation would have decreased by approximately $0.9 million, or 0.21% of total loans, at December 31, 2016. Other than the changes discussed above, the Company has not made any material changes to its methodology that would impact the calculation of the allowance for loan losses or provision for loan losses for the periods included in the accompanying consolidated balance sheets and statements of earnings.

Assessment for Other-Than-Temporary Impairment of Securities

On a quarterly basis, management makes an assessment to determine whether there have been events or economic circumstances to indicate that a security on which there is an unrealized loss is other-than-temporarily impaired. For equity securities with an unrealized loss, the Company considers many factors including the severity and duration of the impairment; the intent and ability of the Company to hold the security for a period of time sufficient for a recovery in value; and recent events specific to the issuer or industry. Equity securities for which there is an unrealized loss that is deemed to be other-than-temporary are written down to fair value with the write-down recorded as a realized loss in securities gains (losses).

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

Fair Value Determination

U.S. GAAP requires management to value and disclose certain of the Company’s assets and liabilities at fair value, including investments classified as available-for-sale and derivatives. ASC 820, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value in accordance with U.S. GAAP and expands disclosures about fair value measurements. For more information regarding fair value measurements and disclosures, please refer to Note 8, Fair Value, of the consolidated financial statements that accompany this report.

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Fair values are based on active market prices of identical assets or liabilities when available. Comparable assets or liabilities or a composite of comparable assets in active markets are used when identical assets or liabilities do not have readily available active market pricing. However, some of the Company’s assets or liabilities lack an available or comparable trading market characterized by frequent transactions between willing buyers and sellers. In these cases, fair value is estimated using pricing models that use discounted cash flows and other pricing techniques. Pricing models and their underlying assumptions are based upon management’s best estimates for appropriate discount rates, default rates, prepayments, market volatility, and other factors, taking into account current observable market data and experience.

These assumptions may have a significant effect on the reported fair values of assets and liabilities and the related income and expense. As such, the use of different models and assumptions, as well as changes in market conditions, could result in materially different net earnings and retained earnings results.

Other Real Estate Owned

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

Deferred Tax Asset Valuation

A valuation allowance is recognized for a deferred tax asset if, based on the weight of available evidence, it is more-likely-than-not that some portion or the entire deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of taxable income over the last three years and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that we will realize the benefits of these deductible differences at March 31, 2017. The amount of the deferred tax assets considered realizable, however, could be reduced if estimates of future taxable income are reduced.

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RESULTS OF OPERATIONS

Average Balance Sheet and Interest Rates

	Quarter ended March 31,
	2017				2016
(Dollars in thousands)	Average Balance		Yield/       Rate		Average Balance		Yield/       Rate
Loans and loans held for sale	$	430,711		4.69%	$	430,545		4.76%
Securities - taxable		189,051		2.19%		170,125		2.12%
Securities - tax-exempt		68,843		5.19%		66,963		5.69%
Total securities		257,894		2.99%		237,088		3.13%
Federal funds sold		40,977		0.75%		58,415		0.49%
Interest bearing bank deposits		58,370		0.87%		49,983		0.44%
Total interest-earning assets		787,952		3.65%		776,031		3.66%
Deposits:
NOW		124,286		0.18%		122,151		0.31%
Savings and money market		234,032		0.36%		229,865		0.38%
Time Deposits		205,942		1.17%		217,426		1.23%
Total interest-bearing deposits		564,260		0.62%		569,442		0.69%
Short-term borrowings		3,554		0.46%		3,155		0.51%
Long-term debt		3,217		3.66%		7,217		3.51%
Total interest-bearing liabilities		571,031		0.64%		579,814		0.73%
Net interest income and margin (tax-equivalent)	$	6,189		3.19%	$	6,019		3.12%

Net Interest Income and Margin

Net interest income (tax-equivalent) was $6.2 million for the first quarter of 2017 compared to $6.0 million for the first quarter of 2016. This increase was primarily due to a reduction in interest expense as the Company lowered its deposit costs and repaid higher-cost wholesale funding sources.

The tax-equivalent yield on total interest-earning assets decreased by 1 basis point in the first quarter of 2017 from the first quarter of 2016. Declining loan yields due to pricing competition for quality loan opportunities in our markets and declining securities yields due to lower reinvestment rates for municipal bonds were largely offset by an increase in yields on short-term assets, such as federal funds sold and interest bearing bank deposits, due to recent increases in the Federal Reserve’s benchmark interest rate.

The cost of total interest-bearing liabilities decreased 9 basis points in the first quarter of 2017 from the first quarter of 2016 to 0.64%. The net decrease was largely a result of the continued shift in our funding mix, as we increased our lower-cost interest bearing demand deposits (NOW accounts) and savings and money market accounts and concurrently reduced balances of higher-cost certificates of deposits and long-term debt.

The Company continues to deploy various asset liability management strategies to manage its risk to interest rate fluctuations. The Company’s net interest margin could experience pressure due to continued pressure on earning asset yields during this extended period of low interest rates, increased competition for quality loan opportunities, and possible increases in our costs of funds and our variable rate assets, if the Federal Reserve continues its gradual increase in interest rates. Despite this challenging environment, we believe our net interest income should increase in 2017 compared to 2016 due to our expected increase in the average volume of total interest earning assets and our belief that interest rates should, depending on competitive pressures, rise faster in our assets than our liabilities.

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Provision for Loan Losses

The provision for loan losses represents a charge to earnings necessary to provide an allowance for loan losses that management believes, based on its processes and estimates, should be adequate to provide for the probable losses on outstanding loans. The Company recorded no provision for loan losses for the first quarter of 2017, compared to $0.6 million negative provision for loan losses for the first quarter of 2016 due to the payoff of the nonperforming loan described below. Annualized net charge-offs as a percent of average loans were 0.05% for the first quarter of 2017 compared to annualized net recoveries as a percent of average loans of 1.01% for the first quarter of 2016. The Company recognized a recovery of $1.2 million from the payoff of one nonperforming construction and land development loan during the first quarter of 2016. Provision expense reflects the absolute level of loans, loan growth, the credit quality of the loan portfolio, and the amount of net charge-offs or recoveries.

Based upon its assessment of the loan portfolio, management adjusts the allowance for loan losses to an amount it believes should be appropriate to adequately cover its estimate of probable losses in the loan portfolio. The Company’s allowance for loan losses as a percentage of total loans was 1.07% at March 31, 2017, compared to 1.08% at December 31, 2016. While the policies and procedures used to estimate the allowance for loan losses, as well as the resulting provision for loan losses charged to operations, are considered adequate by management and are reviewed from time to time by our regulators, they are based on estimates and judgments and are therefore approximate and imprecise. Factors beyond our control (such as conditions in the local and national economy, local real estate markets, or industries) may have a material adverse effect on our asset quality and the adequacy of our allowance for loan losses resulting in significant increases in the provision for loan losses.

Noninterest Income

		Quarter ended March 31,
(Dollars in thousands)		2017		2016
Service charges on deposit accounts	$		189	$	198
Mortgage lending income			165		179
Bank-owned life insurance			107		112
Securities gains, net			2		—
Other			373		345
Total noninterest income	$		836	$	834

Service charges on deposit accounts decreased primarily due to a decline in insufficient funds charges, reflecting changes in customer behavior and spending patterns.

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

MSRs are recognized based on the fair value of the servicing right on the date the corresponding mortgage loan is sold. Subsequent to the date of transfer, the Company has elected to measure its MSRs under the amortization method. Servicing fee income is reported net of any related amortization expense.

MSRs are also evaluated for impairment on a quarterly basis. Impairment is determined by grouping MSRs by common predominant characteristics, such as interest rate and loan type. If the aggregate carrying amount of a particular group of MSRs exceeds the group’s aggregate fair value, a valuation allowance for that group is established. The valuation allowance is adjusted as the fair value changes. An increase in mortgage interest rates typically results in an increase in the fair value of the MSRs while a decrease in mortgage interest rates typically results in a decrease in the fair value of MSRs.

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

		Quarter ended March 31,
(Dollars in thousands)		2017		2016
Origination income, net	$		99	$	97
Servicing fees, net			65		82
Decrease in MSR valuation allowance			1		—
Total mortgage lending income	$		165	$	179

Noninterest Expense

		Quarter ended March 31,
(Dollars in thousands)		2017		2016
Salaries and benefits	$		2,381	$	2,405
Net occupancy and equipment			381		360
Professional fees			230		211
FDIC and other regulatory assessments			89		122
Other real estate owned, net			3		20
Other			1,034		991
Total noninterest expense	$		4,118	$	4,109

Salaries and benefits decreased in the first quarter of 2017, compared to the first quarter of 2016. A decrease in bonus incentive accruals was partially offset by routine annual increases in salaries and wages.

The decrease in FDIC and other regulatory assessments expense was primarily due to a decrease in the Bank’s initial assessment rate during the third quarter of 2016. In addition to changes in the FDIC assessment rate formula for banks with less than $10 billion in assets, the initial assessment rate for all banks decreased effective July 1, 2016 due to the Deposit Insurance Fund’s reserve ratio exceeding 1.15% at June 30, 2016.

Income Tax Expense

Income tax expense was $0.8 million for the first quarter of 2017 and 2016, respectively. The Company’s income tax expense for the first quarter of 2017 and 2016 reflects an effective income tax rate of 27.50%.

BALANCE SHEET ANALYSIS

Securities

Securities available-for-sale were $273.9 million at March 31, 2017, an increase of $30.3 million, or 12%, compared to $243.6 million at December 31, 2016. This increase reflects an increase in the amortized cost basis of securities available-for-sale of $30.5 million, which was partially offset by a decline in the fair value of securities available-for-sale of $0.2 million. The increase in the amortized cost basis of securities available-for-sale was primarily attributable to management allocating more funding to the investment portfolio as market yields improved in 2017. The decrease in the fair value of securities was primarily due to an increase in long-term interest rates. The average tax-equivalent yields earned on total securities were 2.99% in 2017 and 3.13% in 2016.

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Loans

		2017		2016
		First		Fourth		Third		Second		First
(In thousands)		Quarter		Quarter		Quarter		Quarter		Quarter
Commercial and industrial	$		50,228		49,850		50,881		50,190		50,192
Construction and land development			45,098		41,650		44,004		49,346		45,953
Commercial real estate			218,739		220,439		211,558		208,825		209,320
Residential real estate			108,096		110,855		112,303		113,763		117,046
Consumer installment			9,032		8,712		8,996		9,125		9,769
Total loans			431,193		431,506		427,742		431,249		432,280
Less: unearned income			(640)		(560)		(539)		(555)		(517)
Loans, net of unearned income	$		430,553		430,946		427,203		430,694		431,763

Total loans, net of unearned income, were $430.6 million at March 31, 2017, compared to $430.9 million at December 31, 2016. Four loan categories represented the majority of the loan portfolio at March 31, 2017: commercial real estate (51%), residential real estate (25%), construction and land development (10%) and commercial and industrial (12%). Approximately 21% of the Company’s commercial real estate loans were classified as owner-occupied at March 31, 2017.

Within the residential real estate portfolio segment, the Company had junior lien mortgages of approximately $12.9 million, or 3% of total loans, at March 31, 2017, compared to $13.7 million, or 3% of total loans, at December 31, 2016. For residential real estate mortgage loans with a consumer purpose, $0.7 million required interest-only payments at March 31, 2017, compared to $1.4 million at December 31, 2016. The Company’s residential real estate mortgage portfolio does not include any option ARM loans, subprime loans, or any material amount of other high-risk consumer mortgage products.

The average yield earned on loans and loans held for sale was 4.69% in the first quarter of 2017 and 4.76% in the first quarter of 2016.

The specific economic and credit risks associated with our loan portfolio include, but are not limited to, the effects of current economic conditions on our borrowers’ cash flows, real estate market sales volumes, valuations, availability and cost of financing properties, real estate industry concentrations, competitive pressures from a wide range of other lenders, deterioration in certain credits, interest rate fluctuations, reduced collateral values or non-existent collateral, title defects, inaccurate appraisals, financial deterioration of borrowers, fraud, and any violation of applicable laws and regulations.

The Company attempts to reduce these economic and credit risks by adhering to loan to value guidelines for collateralized loans, investigating the creditworthiness of borrowers and monitoring borrowers’ financial position. Also, we have established and periodically review, lending policies and procedures. Banking regulations limit a bank’s credit exposure by prohibiting unsecured loan relationships that exceed 10% of its capital; or 20% of capital, if loans in excess of 10% of capital are fully secured. Under these regulations, we are prohibited from having secured loan relationships in excess of approximately $18.1 million. Furthermore, we have an internal limit for aggregate credit exposure (loans outstanding plus unfunded commitments) to a single borrower of $16.3 million. Our loan policy requires that the Loan Committee of the Board of Directors approve any loan relationships that exceed this internal limit. At March 31, 2017, the Bank had no loan relationships exceeding these limits.

We periodically analyze our commercial loan portfolio to determine if a concentration of credit risk exists in any one or more industries. We use classification systems broadly accepted by the financial services industry in order to categorize our commercial borrowers. Loan concentrations to borrowers in the following classes exceeded 25% of the Bank’s total risk-based capital at March 31, 2017 (and related balances at December 31, 2016).

	March 31,		December 31,
(In thousands)	2017		2016
Multi-family residential properties	$	47,147	$	46,998
Lessors of 1 to 4 family residential properties		44,355		45,290
Shopping centers		40,273		40,925
Office Buildings		22,276		22,366

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Allowance for Loan Losses

The Company maintains the allowance for loan losses at a level that management believes appropriate to adequately cover the Company’s estimate of probable losses inherent in the loan portfolio. The allowance for loan losses was $4.6 million at March 31, 2017 and December 31, 2016, respectively, which management believed to be adequate at each of the respective dates. The judgments and estimates associated with the determination of the allowance for loan losses are described under “Critical Accounting Policies.”

A summary of the changes in the allowance for loan losses and certain asset quality ratios for the first quarter of 2017 and the previous four quarters is presented below.

		2017			2016
		First			Fourth		Third		Second		First
(Dollars in thousands)		Quarter			Quarter		Quarter		Quarter		Quarter
Balance at beginning of period	$		4,643			4,578		4,528		4,774		4,289
Charge-offs:
Commercial and industrial			—			(14)		—		(83)		—
Commercial real estate			—			—		—		(194)		—
Residential real estate			(78)			(20)		(7)		(37)		(118)
Consumer installment			(1)			(38)		(1)		(2)		(26)
Total charge-offs			(79)			(72)		(8)		(316)		(144)
Recoveries			24			22		58		70		1,229
Net (charge-offs) recoveries			(55)			(50)		50		(246)		1,085
Provision for loan losses			—			115		—		—		(600)
Ending balance	$		4,588			4,643		4,578		4,528		4,774
as a % of loans			1.07	%		1.08		1.07		1.05		1.11
as a % of nonperforming loans			198	%		196		284		271		246
Net charge-offs (recoveries) as % of average loans (a)			0.05	%		0.05		(0.05)		0.23		(1.01)

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

As described under “Critical Accounting Policies,” management assesses the adequacy of the allowance prior to the end of each calendar quarter. The level of the allowance is based upon management’s evaluation of the loan portfolios, past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay (including the timing of future payment), the estimated value of any underlying collateral, composition of the loan portfolio, economic conditions, industry and peer bank loan loss rates, and other pertinent factors. This evaluation is inherently subjective as it requires various material estimates and judgments, including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. The ratio of our allowance for loan losses to total loans outstanding was 1.07% at March 31, 2017, compared to 1.08% at December 31, 2016. In the future, the allowance to total loans outstanding ratio will increase or decrease to the extent the factors that influence our quarterly allowance assessment in their entirety either improve or weaken. In addition, our regulators, as an integral part of their examination process, will periodically review the Company’s allowance for loan losses, and may require the Company to make additional provisions to the allowance for loan losses based on their judgment about information available to them at the time of their examinations.

Net charge-offs were $55 thousand, or 0.05% of average loans in the first quarter of 2017, compared to net recoveries of $1.1 million, or 1.01% of average loans in the first quarter of 2016 primarily due to a recovery of $1.2 million from the payoff of one nonperforming construction and land development loan.

At March 31, 2017, the ratio of our allowance for loan losses as a percentage of nonperforming loans was 198%, compared to 196% at December 31, 2016.

The Company’s recorded investment in loans considered impaired was $2.1 million at March 31, 2017 and December 31, 2016, respectively, with corresponding valuation allowances (included in the allowance for loan losses) of $27 thousand and $31 thousand at each respective date.

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Nonperforming Assets

At March 31, 2017 and December 31, 2016, respectively, the Company had $2.5 million in nonperforming assets.

The table below provides information concerning total nonperforming assets and certain asset quality ratios for the first quarter of 2017 and the previous four quarters.

		2017	2016
(Dollars in thousands)		First       Quarter	Fourth       Quarter	Third       Quarter	Second       Quarter	First       Quarter
Nonperforming assets:
Nonaccrual loans	$	2,318	2,370	1,614	1,669	1,938
Other real estate owned		152	152	37	300	397
Total nonperforming assets	$	2,470	2,522	1,651	1,969	2,335
as a % of loans and other real estate owned		0.57 %	0.59	0.39	0.46	0.54
as a % of total assets		0.29 %	0.30	0.19	0.23	0.28
Nonperforming loans as a % of total loans		0.54 %	0.55	0.38	0.39	0.45
Accruing loans 90 days or more past due	$	—	—	211	—	—

The table below provides information concerning the composition of nonaccrual loans for the first quarter of 2017 and the previous four quarters.

		2017	2016
		First	Fourth	Third		Second	First
(In thousands)		Quarter	Quarter	Quarter		Quarter	Quarter
Nonaccrual loans:
Commercial and industrial	$	35	37		38	40	42
Construction and land development		22	32		45	55	66
Commercial real estate		1,850	2,027		1,521	1,564	1,734
Residential real estate		391	252		10	10	96
Consumer installment		20	22		—	—	—
Total nonaccrual loans	$	2,318	2,370		1,614	1,669	1,938

The Company discontinues the accrual of interest income when (1) there is a significant deterioration in the financial condition of the borrower and full repayment of principal and interest is not expected or (2) the principal or interest is 90 days or more past due, unless the loan is both well-secured and in the process of collection. At March 31, 2017 and December 31, 2016, respectively, the Company had $2.3 million and $2.4 million in loans on nonaccrual.

At March 31, 2017 and December 31, 2016, there were no loans 90 days or more past due and still accruing.

The table below provides information concerning the composition of other real estate owned for the first quarter of 2017 and the previous four quarters.

		2017		2016
		First		Fourth		Third		Second		First
(In thousands)		Quarter		Quarter		Quarter		Quarter		Quarter
Other real estate owned:
Commercial:
Developed lots	$		37		37		—		252		252
Residential			115		115		37		48		145
Total other real estate owned	$		152		152		37		300		397

The Company held $0.2 million in OREO at March 31, 2017 and December 31, 2016, respectively, which we acquired from borrowers.

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Potential Problem Loans

Potential problem loans represent those loans with a well-defined weakness and where information about possible credit problems of a borrower has caused management to have serious doubts about the borrower’s ability to comply with present repayment terms. This definition is believed to be substantially consistent with the standards established by the Federal Reserve, the Company’s primary regulator, for loans classified as substandard, excluding nonaccrual loans. Potential problem loans, which are not included in nonperforming assets, amounted to $5.7 million, or 1.3% of total loans at March 31, 2017, compared to $5.8 million, or 1.4% of total loans at December 31, 2016.

The table below provides information concerning the composition of potential problem loans for the first quarter of 2017 and the previous four quarters.

		2017		2016
		First		Fourth		Third		Second		First
(In thousands)		Quarter		Quarter		Quarter		Quarter		Quarter
Potential problem loans:
Commercial and industrial	$		210		233		356		285		309
Construction and land development			298		340		352		365		477
Commercial real estate			795		854		1,184		911		783
Residential real estate			4,285		4,326		4,423		3,855		3,938
Consumer installment			99		90		89		84		110
Total potential problem loans	$		5,687		5,843		6,404		5,500		5,617

At March 31, 2017, approximately $0.8 million, or 14% of total potential problem loans were past due at least 30 days, but less than 90 days.

The following table is a summary of the Company’s performing loans that were past due at least 30 days, but less than 90 days, for the first quarter of 2017 and the previous four quarters.

		2017		2016
		First		Fourth		Third		Second		First
(In thousands)		Quarter		Quarter		Quarter		Quarter		Quarter
Performing loans past due 30 to 89 days:
Commercial and industrial	$		1		66		3		25		14
Construction and land development			3		395		—		—		129
Commercial real estate			—		242		—		—		—
Residential real estate			1,186		1,301		369		645		623
Consumer installment			17		38		40		51		28
Total	$		1,207		2,042		412		721		794

Deposits

Total deposits were $750.3 million at March 31, 2017, compared to $739.1 million at December 31, 2016. Noninterest bearing deposits were $191.0 million, or 25.5% of total deposits, at March 31, 2017, compared to $181.9 million, or 24.6% of total deposits at December 31, 2016.

The average rate paid on total interest-bearing deposits was 0.62% in the first quarter of 2017 and 0.69% in the first quarter of 2016.

Other Borrowings

Other borrowings consist of short-term borrowings and long-term debt. Short-term borrowings generally consist of federal funds purchased and securities sold under agreements to repurchase with an original maturity less than one year. The Bank had available federal funds lines totaling $41.0 million with none outstanding at March 31, 2017, and at December 31, 2016, respectively. Securities sold under agreements to repurchase totaled $3.6 million and $3.4 million at March 31, 2017 and December 31, 2016, respectively.

40

The average rate paid on short-term borrowings was 0.46% in the first quarter of 2017 and 0.54% in the first quarter of 2016.

Long-term debt includes subordinated debentures related to trust preferred securities. The Company had $3.2 million in junior subordinated debentures related to trust preferred securities outstanding at March 31, 2017 compared to $7.2 million at December 31, 2016. The junior subordinated debentures mature on December 31, 2033 and have been redeemable since December 31, 2008.

The average rate paid on long-term debt was 3.66% in the first quarter of 2017 and 3.51% in the first quarter of 2016.

CAPITAL ADEQUACY

The Company’s consolidated stockholders’ equity was $83.4 million and $82.2 million as of March 31, 2017 and December 31, 2016, respectively. The change from December 31, 2016 was primarily driven by net earnings of $1.9 million and other comprehensive income due to the change in unrealized gains (losses) on securities available-for-sale, net-of-tax, of $0.1 million, partially offset by cash dividends paid of $0.8 million.

On January 1, 2015, the Company and Bank became subject to the rules of the Basel III regulatory capital framework and related Dodd-Frank Wall Street Reform and Consumer Protection Act changes. The new rules included the implementation of a new capital conservation buffer that is added to the minimum requirements for capital adequacy purposes. The capital conservation buffer is subject to a three year phase-in period that began on January 1, 2016 and will be fully phased-in on January 1, 2019 at 2.5%. The required phase-in capital conservation buffer during 2017 is 1.25%. A banking organization with a conservation buffer of less than the required amount will be subject to limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers. At March 31, 2017, the ratios for the Company and Bank were sufficient to meet the fully phased-in conservation buffer.

The Company’s tier 1 leverage ratio was 10.40%, common equity tier 1 (“CET1”) risk-based capital ratio was 16.24%, tier 1 risk-based capital ratio was 16.83%, and total risk-based capital ratio was 17.75% at March 31, 2017. These ratios exceed the minimum regulatory capital percentages of 5.0% for tier 1 leverage ratio, 6.5% for CET1 risk-based capital ratio, 8.0% for tier 1 risk-based capital ratio, and 10.00% for total risk-based capital ratio to be considered “well capitalized.” The Company’s capital conservation buffer was 9.75% at March 31, 2017.

MARKET AND LIQUIDITY RISK MANAGEMENT

Management’s objective is to manage assets and liabilities to provide a satisfactory, consistent level of profitability within the framework of established liquidity, loan, investment, borrowing, and capital policies. The Bank’s Asset Liability Management Committee (“ALCO”) is charged with the responsibility of monitoring these policies, which are designed to ensure an acceptable asset/liability composition. Two critical areas of focus for ALCO are interest rate risk and liquidity risk management.

Interest Rate Risk Management

In the normal course of business, the Company is exposed to market risk arising from fluctuations in interest rates. ALCO measures and evaluates interest rate risk so that the Bank can meet customer demands for various types of loans and deposits. Measurements used to help manage interest rate sensitivity include an earnings simulation model and an economic value of equity (“EVE”) model.

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Earnings simulation. Management believes that interest rate risk is best estimated by our earnings simulation modeling. Forecasted levels of earning assets, interest-bearing liabilities, and off-balance sheet financial instruments are combined with ALCO forecasts of market interest rates for the next 12 months and other factors in order to produce various earnings simulations and estimates. To help limit interest rate risk, we have guidelines for earnings at risk which seek to limit the variance of net interest income from gradual changes in interest rates. For changes up or down in rates from management’s flat interest rate forecast over the next 12 months, policy limits for net interest income variances are as follows:

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

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

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

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

At March 31, 2017, our earnings simulation model indicated that we were in compliance with the policy guidelines noted above.

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

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

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

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

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

At March 31, 2017, our EVE model indicated that we were in compliance with the policy guidelines noted above.

Each of the above analyses may not, on its own, be an accurate indicator of how our net interest income will be affected by changes in interest rates. Income associated with interest-earning assets and costs associated with interest-bearing liabilities may not be affected uniformly by changes in interest rates. In addition, the magnitude and duration of changes in interest rates may have a significant impact on net interest income. For example, although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates, and other economic and market factors, including market perceptions. Interest rates on certain types of assets and liabilities fluctuate in advance of changes in general market rates, while interest rates on other types of assets and liabilities may lag behind changes in general market rates. In addition, certain assets, such as adjustable rate mortgage loans, have features (generally referred to as “interest rate caps and floors”) which limit changes in interest rates. Prepayment and early withdrawal levels also could deviate significantly from those assumed in calculating the maturity of certain instruments. The ability of many borrowers to service their debts also may decrease during periods of rising interest rates or economic stress, which may differ across industries and economic sectors. ALCO reviews each of the above interest rate sensitivity analyses along with several different interest rate scenarios in seeking satisfactory, consistent levels of profitability within the framework of the Company’s established liquidity, loan, investment, borrowing, and capital policies.

The Company may also use derivative financial instruments to improve the balance between interest-sensitive assets and interest-sensitive liabilities, and as a tool to manage interest rate sensitivity while continuing to meet the credit and deposit needs of our customers. From time to time, the Company may enter into interest rate swaps (“swaps”) to facilitate customer transactions and meet their financing needs. These swaps qualify as derivatives, but are not designated as hedging instruments. At March 31, 2017 and December 31, 2016, the Company had no derivative contracts designated as part of a hedging relationship to assist in managing its interest rate sensitivity.

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Liquidity Risk Management

Liquidity is the Company’s ability to convert assets into cash equivalents in order to meet daily cash flow requirements, primarily for deposit withdrawals, loan demand and maturing obligations. Without proper management of its liquidity, the Company could experience higher costs of obtaining funds due to insufficient liquidity, while excessive liquidity can lead to a decline in earnings due to the cost of foregoing alternative higher-yielding investment opportunities.

Liquidity is managed at two levels. The first is the liquidity of the Company. The second is the liquidity of the Bank. The management of liquidity at both levels is essential, because the Company and the Bank are separate and distinct legal entities. The Company depends upon dividends from the Bank for liquidity to pay its operating expenses, debt obligations and dividends. The Bank’s payment of dividends depend on its earnings, liquidity, capital and the absence of any regulatory restrictions.

The primary source of funding and the primary source of liquidity for the Company include dividends received from the Bank, and secondarily proceeds from the possible issuance of common stock or other securities. Primary uses of funds by the Company include dividends paid to stockholders, stock repurchases, and interest payments on junior subordinated debentures issued by the Company in connection with trust preferred securities. The junior subordinated debentures are presented as long-term debt in the accompanying consolidated balance sheets and the related trust preferred securities are currently includible in Tier 1 Capital for regulatory capital purposes.

Primary sources of funding for the Bank include customer deposits, other borrowings, repayment and maturity of securities, sales of securities, and the sale and repayment of loans. The Bank has access to federal funds lines from various banks and borrowings from the Federal Reserve discount window. In addition to these sources, the Bank may participate in the FHLB’s advance program to obtain funding for its growth. Advances include both fixed and variable terms and may be taken out with varying maturities. At March 31, 2017, the Bank had a remaining available line of credit with the FHLB of $249.7 million. At March 31, 2017, the Bank also had $41.0 million of available federal funds lines with none outstanding. Primary uses of funds include repayment of maturing obligations and growing the loan portfolio.

Management believes that the Company and the Bank have adequate sources of liquidity to meet all their respective known contractual obligations and unfunded commitments, including loan commitments and reasonable borrower, depositor, and creditor requirements over the next twelve months.

Off-Balance Sheet Arrangements, Commitments and Contingencies

At March 31, 2017, the Bank had outstanding standby letters of credit of $7.2 million and unfunded loan commitments outstanding of $64.5 million. Because these commitments generally have fixed expiration dates and many will expire without being drawn upon, the total commitment level does not necessarily represent future cash requirements. If needed to fund these outstanding commitments, the Bank could liquidate federal funds sold or a portion of securities available-for-sale, or draw on its available credit facilities.

Mortgage lending activities

Since 2009, we have primarily sold residential mortgage loans in the secondary market to Fannie Mae while retaining the servicing of these loans. The sale agreements for these residential mortgage loans with Fannie Mae and other investors include various representations and warranties regarding the origination and characteristics of the residential mortgage loans. Although the representations and warranties vary among investors, they typically cover ownership of the loan, validity of the lien securing the loan, the absence of delinquent taxes or liens against the property securing the loan, compliance with loan criteria set forth in the applicable agreement, compliance with applicable federal, state, and local laws, among other matters.

As of March 31, 2017, the unpaid principal balance of residential mortgage loans, which we have originated and sold, but retained the servicing rights was $330.1 million. Although these loans are generally sold on a non-recourse basis, we may be obligated to repurchase residential mortgage loans or reimburse investors for losses incurred (make whole requests) if a loan review reveals a potential breach of seller representations and warranties. Upon receipt of a repurchase or make whole request, we work with investors to arrive at a mutually agreeable resolution. Repurchase and make whole requests are typically reviewed on an individual loan by loan basis to validate the claims made by the investor and to determine if a contractually required repurchase or make whole event has occurred. We seek to reduce and manage the risks of potential repurchases, make whole requests, or other claims by mortgage loan investors through our underwriting and quality assurance practices and by servicing mortgage loans to meet investor and secondary market standards.

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In the first quarter of 2017, as a result of the representation and warranty provisions contained in the Company’s sale agreements with Fannie Mae, the Company was required to repurchase two loans with an aggregage principal balance of $553 thousand which were current as to principal and interest at the time of repurchase. At March 31, 2017, the Company had no pending repurchase or make whole requests.

We service all residential mortgage loans originated and sold by us to Fannie Mae. As servicer, our primary duties are to: (1) collect payments due from borrowers; (2) advance certain delinquent payments of principal and interest; (3) maintain and administer any hazard, title, or primary mortgage insurance policies relating to the mortgage loans; (4) maintain any required escrow accounts for payment of taxes and insurance and administer escrow payments; and (5) foreclose on defaulted mortgage loans or take other actions to mitigate the potential losses to investors consistent with the agreements governing our rights and duties as servicer.

The agreement under which we act as servicer generally specifies a standard of responsibility for actions taken by us in such capacity and provides protection against expenses and liabilities incurred by us when acting in compliance with the respective servicing agreements. However, if we commit a material breach of our obligations as servicer, we may be subject to termination if the breach is not cured within a specified period following notice. The standards governing servicing and the possible remedies for violations of such standards are determined by servicing guides issued by Fannie Mae as well as the contract provisions established between Fannie Mae and the Bank. Remedies could include repurchase of an affected loan.

Although repurchase and make whole requests related to representation and warranty provisions and servicing activities have been limited to date, it is possible that requests to repurchase mortgage loans or reimburse investors for losses incurred (make whole requests) may increase in frequency if investors more aggressively pursue all means of recovering losses on their purchased loans. As of March 31, 2017, we do not believe that this exposure is material due to the historical level of repurchase requests and loss trends, in addition to the fact that 99% of our residential mortgage loans serviced for Fannie Mae were current as of such date. We maintain ongoing communications with our investors and will continue to evaluate this exposure by monitoring the level and number of repurchase requests as well as the delinquency rates in our investor portfolios.

Effects of Inflation and Changing Prices

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

CURRENT ACCOUNTING DEVELOPMENTS

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

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

• ASU 2015-14, Revenue from Contracts with Customers – Deferral of the Effective Date;

• ASU 2016-01, Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities;

• ASU 2016-02, Leases;

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

• ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.

• ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash

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Information about these pronouncements is described in more detail below.

ASU 2014-09, Revenue from Contracts with Customers, provides a comprehensive and converged standard on revenue recognition. The new guidance is intended to improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets. 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 consideration to which the entity expects to be entitled in exchange for those goods and services. This guidance also requires new qualitative and quantitative disclosures related to revenue from contracts with customers. In August 2015, FASB issued ASU 2015-14, Revenue from Contracts with Customers – Deferral of the Effective Date, which defers the effective date by one year. With the deferral, these changes are effective for the Company in the first quarter of 2018 with retrospective application to each prior reporting period or with the cumulative effect of initially applying this Update at the date of initial application. Early adoption is not permitted. The Company is currently evaluating the impact this ASU will have on its consolidated financial statements.

ASU 2016-01, Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities, enhances the reporting model for financial instruments to provide users of financial statements with more decision-useful information. The ASU addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Some of the amendments include the following: 1) Require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; 2) Simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; 3) Require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; 4) Require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value; among others. For public business entities, the amendments of this ASU are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating the impact this ASU will have on its consolidated financial statements.

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

ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): - Measurement of Credit Losses on Financial Instruments, amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. For assets held at amortized cost basis, the new standard eliminates the probable initial recognition threshold in current GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses using a broader range of information regarding past events, current conditions and forecasts assessing the collectability of cash flows. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. For available for sale debt securities, credit losses should be measured in a manner similar to current GAAP, however the new standard will require that credit losses be presented as an allowance rather than as a write-down. The new guidance affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. For public business entities that are SEC filers, the new guidance is effective for annual and interim periods in fiscal years beginning after December 15, 2019 early adoption is permitted beginning in 2019. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.

ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, provides guidance on eight specific cash flow issues where current GAAP is either unclear or does not include specific guidance on classification in the statement of cash flows. The new guidance is effective for annual and interim reporting periods in fiscal years beginning after December 15, 2017. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.

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ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted cash, amends guidance on how the statement of cash flows presents the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in this Update do not provide a definition of restricted cash or restricted cash equivalents. The new guidance is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The amendments are applied using a retrospective transition method to each period transitioned. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.

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Table 1 – Explanation of Non-GAAP Financial Measures

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

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

		2017		2016
		First		Fourth		Third		Second		First
(in thousands)		Quarter		Quarter		Quarter		Quarter		Quarter
Net interest income (GAAP)	$		5,889		5,735		5,608		5,692		5,697
Tax-equivalent adjustment			300		316		316		322		322
Net interest income (Tax-equivalent)	$		6,189		6,051		5,924		6,014		6,019

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Table 2 - Selected Quarterly Financial Data

	2017			2016
	First			Fourth		Third		Second		First
(Dollars in thousands, except per share amounts)	Quarter			Quarter		Quarter		Quarter		Quarter
Results of Operations
Net interest income (a)	$	6,189			6,051		5,924		6,014		6,019
Less: tax-equivalent adjustment		300			316		316		322		322
Net interest income (GAAP)		5,889			5,735		5,608		5,692		5,697
Noninterest income		836			493		1,063		993		834
Total revenue		6,725			6,228		6,671		6,685		6,531
Provision for loan losses		—			115		—		—		(600)
Noninterest expense		4,118			3,238		3,980		4,021		4,109
Income tax expense		717			798		740		733		831
Net earnings	$	1,890			2,077		1,951		1,931		2,191
Per share data:
Basic and diluted net earnings	$	0.52			0.57		0.54		0.53		0.60
Cash dividends declared		0.23			0.225		0.225		0.225		0.225
Weighted average shares outstanding:
Basic and diluted		3,643,541			3,643,523		3,643,506		3,643,503		3,643,484
Shares outstanding, at period end		3,643,543			3,643,523		3,643,523		3,643,503		3,643,503
Book value	$	22.88			22.55		23.34		23.28		22.75
Common stock price
High	$	33.69			31.31		28.91		29.85		30.49
Low		30.75			27.45		27.45		26.81		24.56
Period end:		33.00			31.31		27.45		28.49		28.25
To earnings ratio		15.28	x		13.98		12.48		13.07		12.61
To book value		144	%		139		118		122		124
Performance ratios:
Return on average equity		9.09	%		9.61		9.06		9.18		10.82
Return on average assets		0.90	%		1.00		0.92		0.93		1.07
Dividend payout ratio		44.23	%		39.47		41.67		42.45		37.50
Asset Quality:
Allowance for loan losses as a % of:
Loans		1.07	%		1.08		1.07		1.05		1.11
Nonperforming loans		198	%		196		284		271		246
Nonperforming assets as a % of:
Loans and other real estate owned		0.57	%		0.59		0.39		0.46		0.54
Total assets		0.29	%		0.30		0.19		0.23		0.28
Nonperforming loans as a % of total loans		0.54	%		0.55		0.38		0.39		0.45
Annualized net charge-offs (recoveries) as % of average loans		0.05	%		0.05		(0.05)		0.23		(1.01)
Capital Adequacy:
CET 1 risk-based capital ratio		16.24	%		16.44		15.74		15.54		15.36
Tier 1 risk-based capital ratio		16.83	%		17.00		17.07		16.87		16.69
Total risk-based capital ratio		17.75	%		17.95		17.97		17.77		17.64
Tier 1 leverage ratio		10.40	%		10.27		10.36		10.56		10.47
Other financial data:
Net interest margin (a)		3.19	%		3.05		2.94		3.10		3.12
Effective income tax rate		27.50	%		27.76		27.50		27.52		27.50
Efficiency ratio (b)		58.62	%		49.48		56.96		57.39		59.96
Selected average balances:
Securities	$	257,894			253,820		227,076		223,414		237,087
Loans, net of unearned income		429,784			429,451		429,201		434,934		429,528
Total assets		835,679			834,291		851,409		828,106		821,382
Total deposits		742,002			735,991		748,229		727,989		726,354
Long-term debt		3,217			4,260		7,217		7,217		7,217
Total stockholders’ equity		83,191			86,493		86,103		84,124		80,965
Selected period end balances:
Securities	$	273,853			243,572		249,556		217,002		234,109
Loans, net of unearned income		430,553			430,946		427,203		430,694		431,763
Allowance for loan losses		4,588			4,643		4,578		4,528		4,774
Total assets		842,781			831,943		851,672		846,056		833,328
Total deposits		750,302			739,143		751,915		747,539		737,361
Long-term debt		3,217			3,217		7,217		7,217		7,217
Total stockholders’ equity		83,366			82,177		85,055		84,808		82,887

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

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

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Table 3 - Average Balances and Net Interest Income Analysis

		Quarter ended March 31,
		2017							2016
				Interest							Interest
		Average		Income/		Yield/			Average		Income/		Yield/
(Dollars in thousands)		Balance		Expense		Rate			Balance		Expense		Rate
Interest-earning assets:
Loans and loans held for sale (1)	$		430,711	$	4,981		4.69%	$		430,545	$	5,096		4.76%
Securities - taxable			189,051		1,021		2.19%			170,125		898		2.12%
Securities - tax-exempt (2)			68,843		881		5.19%			66,963		947		5.69%
Total securities			257,894		1,902		2.99%			237,088		1,845		3.13%
Federal funds sold			40,977		76		0.75%			58,415		71		0.49%
Interest bearing bank deposits			58,370		125		0.87%			49,983		55		0.44%
Total interest-earning assets			787,952	$	7,084		3.65%			776,031	$	7,067		3.66%
Cash and due from banks			13,459							13,120
Other assets			34,268							32,231
Total assets	$		835,679					$		821,382
Interest-bearing liabilities:
Deposits:
NOW	$		124,286	$	56		0.18%	$		122,151	$	95		0.31%
Savings and money market			234,032		210		0.36%			229,865		219		0.38%
Time Deposits			205,942		596		1.17%			217,426		667		1.23%
Total interest-bearing deposits			564,260		862		0.62%			569,442		981		0.69%
Short-term borrowings			3,554		4		0.46%			3,155		4		0.51%
Long-term debt			3,217		29		3.66%			7,217		63		3.51%
Total interest-bearing liabilities			571,031	$	895		0.64%			579,814	$	1,048		0.73%
Noninterest-bearing deposits			177,741							156,912
Other liabilities			3,716							3,691
Stockholders’ equity			83,191							80,965
Total liabilities and stockholders’ equity	$		835,679					$		821,382
Net interest income and margin (tax-equivalent)				$	6,189		3.19%				$	6,019		3.12%

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

(2) Yields on tax-exempt securities have been computed on a tax-equivalent basis using an income tax rate of 34%.

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Table 4 - Loan Portfolio Composition    

		2017		2016
		First		Fourth		Third		Second		First
(In thousands)		Quarter		Quarter		Quarter		Quarter		Quarter
Commercial and industrial	$		50,228		49,850		50,881		50,190		50,192
Construction and land development			45,098		41,650		44,004		49,346		45,953
Commercial real estate			218,739		220,439		211,558		208,825		209,320
Residential real estate			108,096		110,855		112,303		113,763		117,046
Consumer installment			9,032		8,712		8,996		9,125		9,769
Total loans			431,193		431,506		427,742		431,249		432,280
Less: unearned income			(640)		(560)		(539)		(555)		(517)
Loans, net of unearned income			430,553		430,946		427,203		430,694		431,763
Less: allowance for loan losses			(4,588)		(4,643)		(4,578)		(4,528)		(4,774)
Loans, net	$		425,965		426,303		422,625		426,166		426,989

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Table 5 - Allowance for Loan Losses and Nonperforming Assets

		2017			2016
		First			Fourth		Third			Second			First
(Dollars in thousands)		Quarter			Quarter		Quarter			Quarter			Quarter
Allowance for loan losses:
Balance at beginning of period	$		4,643			4,578		4,528			4,774			4,289
Charge-offs:
Commercial and industrial			—			(14)		—			(83	)		—
Commercial real estate			—			—		—			(194	)		—
Residential real estate			(78)			(20)		(7	)		(37	)		(118)
Consumer installment			(1)			(38)		(1	)		(2	)		(26)
Total charge-offs			(79)			(72)		(8	)		(316	)		(144)
Recoveries			24			22		58			70			1,229
Net (charge-offs) recoveries			(55)			(50)		50			(246	)		1,085
Provision for loan losses			—			115		—			—			(600)
Ending balance	$		4,588			4,643		4,578			4,528			4,774
as a % of loans			1.07	%		1.08		1.07			1.05			1.11
as a % of nonperforming loans			198	%		196		284			271			246
Net charge-offs (recoveries) as % of avg. loans (a)			0.05	%		0.05		(0.05	)		0.23			(1.01)
Nonperforming assets:
Nonaccrual loans	$		2,318			2,370		1,614			1,669			1,938
Other real estate owned			152			152		37			300			397
Total nonperforming assets	$		2,470			2,522		1,651			1,969			2,335
as a % of loans and other real estate owned			0.57	%		0.59		0.39			0.46			0.54
as a % of total assets			0.29	%		0.30		0.19			0.23			0.28
Nonperforming loans as a % of total loans			0.54	%		0.55		0.38			0.39			0.45
Accruing loans 90 days or more past due	$		—			—		211			—			—

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

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Table 6 - Allocation of Allowance for Loan Losses

		2017					2016
		First Quarter					Fourth Quarter					Third Quarter					Second Quarter					First Quarter
(Dollars in thousands)		Amount		%*			Amount		%*			Amount		%*			Amount		%*			Amount		%*
Commercial and industrial	$		524		11.6	$		540		11.6	$		515		11.9	$		506		11.6	$		517		11.6
Construction and land development			845		10.5			812		9.7			673		10.3			744		11.4			695		10.6
Commercial real estate			2,004		50.7			2,071		51.0			2,232		49.4			2,092		48.5			2,403		48.4
Residential real estate			1,064		25.1			1,107		25.7			1,020		26.3			1,061		26.4			1,026		27.1
Consumer installment			151		2.1			113		2.0			138		2.1			125		2.1			133		2.3
Total allowance for loan losses	$		4,588			$		4,643			$		4,578			$		4,528			$		4,774

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

52

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

(Dollars in thousands)	March 31, 2017
Maturity of:
3 months or less		$            9,555
Over 3 months through 6 months		27,110
Over 6 months through 12 months		29,540
Over 12 months		62,800
Total CDs and other time deposits of $100,000 or more		$        129,005

53

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4. CONTROLS AND PROCEDURES

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

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

In the normal course of its business, the Company and the Bank are, from time to time, involved in legal proceedings. The Company’s and Bank’s management believe there are no pending or threatened legal, governmental, or regulatory proceedings that, upon resolution, are expected to have a material adverse effect upon the Company’s or the Bank’s financial condition or results of operations. See also, Part I, Item 3 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A. “RISK FACTORS” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, which could materially affect our business, financial condition or future results. The risks described in our annual report on Form 10-K are not the only the risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and/or operating results in the future.

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

Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

54

ITEM 6. EXHIBITS

Exhibit     Number	Description
3.1	Certificate of Incorporation of Auburn National Bancorporation, Inc. and all amendments thereto.*
3.2	Amended and Restated Bylaws of Auburn National Bancorporation, Inc., adopted as of November 13, 2007. **
31.1	Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, As Adopted Pursuant To Section 302 of the Sarbanes-Oxley Act of 2002, by E.L. Spencer, Jr., President, Chief Executive Officer and Chairman of the Board.
31.2	Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, As Adopted Pursuant To Section 302 of the Sarbanes-Oxley Act of 2002, by David A. Hedges, Executive Vice President, Chief Financial Officer.
32.1	Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002, by E.L. Spencer, Jr., President, Chief Executive Officer and Chairman of the Board.***
32.2	Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002, by David A. Hedges, Executive Vice President, Chief Financial Officer.***
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document

* Incorporated by reference from Registrant’s Form 10-Q dated September 30, 2002.

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

*** The certifications attached as exhibits 32.1 and 32.2 to this quarterly report on Form 10-Q are “furnished” to the Securities and Exchange Commission pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed “filed” by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

55

SIGNATURES

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

	AUBURN NATIONAL BANCORPORATION, INC.
	(Registrant)
Date:            April 28, 2017	By:          /s/ E. L. Spencer, Jr.
	E. L. Spencer, Jr.
	President, Chief Executive Officer and
	Chairman of the Board
Date:            April 28, 2017	By:          /s/ David A. Hedges
	David A. Hedges
	EVP, Chief Financial Officer

EX-31.1

AUBURN NATIONAL BANCORPORATION, INC AND SUBSIDIARIES

EXHIBIT 31.1

CERTIFICATION PURSUANT TO

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

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

CERTIFICATION

I, E.L. Spencer, Jr., certify that:

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

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

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

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

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

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

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

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

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

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

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

Date: April 28, 2017

/s/ E.L. Spencer, Jr.

President, Chief Executive Officer

and Chairman of the Board

EX-31.2

AUBURN NATIONAL BANCORPORATION, INC AND SUBSIDIARIES

EXHIBIT 31.2

CERTIFICATION PURSUANT TO

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

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

CERTIFICATION

I, David A. Hedges, certify that:

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

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

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

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

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

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

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

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

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

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

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

Date: April 28, 2017

/s/ David A. Hedges

EVP, Chief Financial Officer

EX-32.1

AUBURN NATIONAL BANCORPORATION, INC AND SUBSIDIARIES

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Auburn National Bancorporation, Inc. (the “Company”) on Form 10-Q for the period ending March 31, 2017, as filed with the Securities and Exchange Commission as of the date hereof (the “Report”), I, E.L. Spencer, Jr., President, Chief Executive Officer and Chairman of the Board of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

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

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

Date: April 28, 2017

/s/ E.L. Spencer, Jr.

E.L. Spencer, Jr.

President, Chief Executive Officer

and Chairman of the Board

EX-32.2

AUBURN NATIONAL BANCORPORATION, INC AND SUBSIDIARIES

EXHIBIT 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Auburn National Bancorporation, Inc. (the “Company”) on Form 10-Q for the period ending March 31, 2017, as filed with the Securities and Exchange Commission as of the date hereof (the “Report”), I, David A. Hedges, Executive Vice President, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

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

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

Date: April 28, 2017

/s/ David A. Hedges

David A. Hedges

EVP, Chief Financial Officer

XML

Document and Entity Information - shares	3 Months Ended
	Mar. 31, 2017	Apr. 27, 2017
Document and entity information [Abstract]
Current fiscal year end date	--12-31
Entity central index key	0000750574
Entity current reporting status	Yes
Entity filer category	Smaller Reporting Company
Entity registrant name	Auburn National Bancorporation, Inc
Trading Symbol	AUBN
Entity voluntary filers	No
Entity well known seasoned issuer	No
Entity common stock shares outstanding		3,643,543
Amendment flag	false
Document Type	10-Q
Document Year Focus	2017
Document Period Focus	Q1
Document Period End Date	Mar. 31, 2017

XML

Consolidated Balance Sheets - USD ($) $ in Thousands	Mar. 31, 2017	Dec. 31, 2016
Assets:
Cash and due from banks	$ 15,791	$ 15,673
Federal funds sold	30,776	42,096
Interest bearing bank deposits	56,858	63,508
Cash and cash equivalents	103,425	121,277
Securities available-for-sale	273,853	243,572
Loans held for sale	1,026	1,497
Loans, net of unearned income	430,553	430,946
Allowance for loan losses	(4,588)	(4,643)
Loans, net	425,965	426,303
Premises and equipment, net	12,504	12,602
Bank-owned life insurance	17,995	17,888
Other real estate owned	152	152
Other assets	7,861	8,652
Total assets	842,781	831,943
Deposits:
Noninterest-bearing	191,040	181,890
Interest-bearing	559,262	557,253
Total deposits	750,302	739,143
Federal funds purchased and securities sold under agreements to repurchase	3,631	3,366
Long-term debt	3,217	3,217
Accrued expenses and other liabilities	2,265	4,040
Total liabilities	759,415	749,766
Stockholders' equity:
Preferred stock	0	0
Common stock	39	39
Additional paid-in capital	3,767	3,767
Retained earnings	86,768	85,716
Accumulated other comprehensive income, net	(571)	(708)
Less treasury stock, at cost	(6,637)	(6,637)
Total stockholders' equity	83,366	82,177
Total liabilities and stockholders' equity	$ 842,781	$ 831,943

XML

Consolidated Balance Sheets (Parentheticals) - $ / shares	Mar. 31, 2017	Dec. 31, 2016
Statement of Financial Position [Abstract]
Preferred stock par value	$ 0.01	$ 0.01
Authorized shares, preferred	200,000	200,000
Issued shares, preferred	0	0
Common stock par value	$ 0.01	$ 0.01
Authorized shares, common	8,500,000	8,500,000
Issued shares, common	3,957,135	3,957,135
Treasury stock, shares held	313,592	313,612

XML

Consolidated Statements of Earnings - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Interest income:
Loans, including fees	$ 4,981	$ 5,096
Securities - Taxable	1,021	898
Securities - Tax-exempt	581	625
Federal funds sold and interest bearing bank deposits	201	126
Total interest income	6,784	6,745
Interest expense:
Deposits	862	981
Short-term borrowings	4	4
Long-term debt interest expense	29	63
Total interest expense	895	1,048
Net interest income	5,889	5,697
Provision for loan losses	0	(600)
Net interest income after provision for loan losses	5,889	6,297
Noninterest income:
Service charges on deposit accounts	189	198
Mortgage lending	165	179
Bank-owned life insurance income	107	112
Other noninterest income	373	345
Securities gains, net	2	0
Total noninterest income	836	834
Noninterest expense:
Salaries and benefits	2,381	2,405
Net occupancy and equipment	381	360
Professional fees	230	211
FDIC and other regulatory assessments	89	122
Other real estate owned, net	3	20
Other noninterest expense	1,034	991
Total noninterest expense	4,118	4,109
Earnings before income taxes	2,607	3,022
Income tax expense	717	831
Net earnings	$ 1,890	$ 2,191
Net earnings per share:
Basic and diluted earnings per share	$ 0.52	$ 0.6
Weighted average shares outstanding:
Basic and diluted weighted average shares outstanding	3,643,541	3,643,484

XML

Consolidated Statements of Comprehensive Income - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Statements of Comprehensive Income [Abstract]
Net earnings	$ 1,890	$ 2,191
Other comprehensive income, net of tax:
Unrealized net holding gain on securities	138	1,566
Reclassification adjustment for net gain on securities recognized in net earnings	(1)	0
Other comprehensive income	137	1,566
Comprehensive income	$ 2,027	$ 3,757

XML

Consolidated Statements of Stockholders' Equity - USD ($) $ in Thousands	Total	Common Stock Member	Additional Paid In Capital Member	Retained Earnings Member	Accumulated Other Comprehensive Income Member	Treasury Stock Member
Balance, shares at Dec. 31, 2015	3,957,135
Balance, Beg at Dec. 31, 2015	$ 79,949	$ 39	$ 3,766	$ 80,845	$ 1,937	$ (6,638)
Net earnings	2,191	0	0	2,191	0	0
Other Comprehensive Income (Loss), Net Of Tax	1,566	0	0	0	1,566	0
Cash dividends paid	(820)	0	0	(820)	0	0
Treasury Stock, acquired	0	0	0	0	0	0
Sale of treasury stock	1	0	1	0	0	0
Balance, End at Mar. 31, 2016	$ 82,887	39	3,767	82,216	3,503	(6,638)
Balance, shares at Mar. 31, 2016	3,957,135
Balance, shares at Dec. 31, 2016	3,957,135
Balance, Beg at Dec. 31, 2016	$ 82,177	39	3,767	85,716	(708)	(6,637)
Net earnings	1,890	0	0	1,890	0	0
Other Comprehensive Income (Loss), Net Of Tax	137	0	0	0	137	0
Cash dividends paid	(838)	0	0	(838)	0	0
Treasury Stock, acquired	0	0	0	0	0	0
Sale of treasury stock	0	0	0	0	0	0
Balance, End at Mar. 31, 2017	$ 83,366	$ 39	$ 3,767	$ 86,768	$ (571)	$ (6,637)
Balance, shares at Mar. 31, 2017	3,957,135

XML

Consolidated Statements of Stockholders' Equity (Parentheticals) - $ / shares	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Statement of Stockholders' Equity (Parentheticals)
Cash dividends paid per share	$ 0.23	$ 0.225
Treasury shares sold	20	25

XML

Consolidated Statements of Cash Flows - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Cash flows from operating activities:
Net earnings	$ 1,890	$ 2,191
Adjustments to reconcile net earnings to net cash provided by operating activties:
Provision for loan losses	0	(600)
Depreciation and amortization	284	248
Premium amortization and discount accretion, net	523	335
Net gain on securities available for sale	(2)	0
Net gain on sale of loans held for sale	(99)	(97)
Decrease in MSR valuation allowance	(1)	0
Net loss on other real estate owned	0	5
Loans originated for sale	(5,918)	(7,671)
Proceeds from sale of loans	6,435	6,925
Increase in cash surrender value of bank owned life insurance	(107)	(112)
Net decrease in other assets	618	176
Net increase in accrued expenses and other liabilities	(1,774)	(69)
Net cash provided by operating activities	1,849	1,331
Cash flows from investing activities:
Proceeds from prepayments and maturities of securities available-for-sale	7,973	10,848
Purchase of securities available-for-sale	(38,559)	(1,123)
Decrease (increase) in loans, net	338	(4,468)
Net purchases of premises and equipment	(26)	(7)
Increase in FHLB stock	(13)	(25)
Proceeds from sale of other real estate owned	0	50
Net cash (used in) provided by investing activities	(30,287)	5,275
Cash flows from financing activities:
Net increase in noninterest-bearing deposits	9,150	15,826
Net increase (decrease) in interest-bearing deposits	2,009	(2,092)
Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase	265	(463)
Dividends paid	(838)	(820)
Net cash provided by financing activities	10,586	12,451
Net change in cash and cash equivalents	(17,852)	19,057
Cash and cash equivalents at beginning of period	121,277	113,930
Cash and cash equivalents at end of period	103,425	132,987
Cash paid during the period for:
Interest	986	1,097
Income taxes	717	403
Supplemental disclosure of non-cash transactions:
Real estate acquired through foreclosure	$ 0	$ 200

XML

Summary of Significant Accounting Policies

3 Months Ended

Mar. 31, 2017

Summary of Signficant Accounting Policies

Summary of Significant Accounting Policies Text Block

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

General

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

Basis of Presentation and Use of Estimates

The unaudited consolidated financial statements in this report have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information. Accordingly, these financial statements do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited consolidated financial statements include, in the opinion of management, all adjustments necessary to present a fair statement of the financial position and the results of operations for all periods presented. All such adjustments are of a normal recurring nature. The results of operations in the interim statements are not necessarily indicative of the results of operations that the Company and its subsidiaries may achieve for future interim periods or the entire year. For further information, refer to the consolidated financial statements and footnotes included in the Company's Annual Report on Form 10-K for the year ended December 31,2016.

The unaudited consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Auburn National Bancorporation Capital Trust I is an affiliate of the Company and was included in these unaudited consolidated financial statements pursuant to the equity method of accounting. Significant intercompany transactions and accounts are eliminated in consolidation.

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

Subsequent Events

The Company has evaluated the effects of events and transactions through the date of this filing that have occurred subsequent to March 31,2017. The Company does not believe there were any material subsequent events during this period that would have required further recognition or disclosure in the unaudited consolidated financial statements included in this report.

Accounting Developments

In the first quarter of 2017, the Company adopted no new accounting guidance.

.

XML

Basic and Diluted Earnings Per Share

3 Months Ended

Mar. 31, 2017

Basic and Diluted Earnings Per Share [Abstract]

Basic and Diluted Earnings Per Share Text Block

NOTE 2: BASIC AND DILUTED NET EARNINGS PER SHARE

Basic net earnings per share is computed by dividing net earnings by the weighted average common shares outstanding for the quarters ended March 31,2017 and 2016, respectively. Diluted net earnings per share reflect the potential dilution that could occur upon exercise of securities or other rights for, or convertible into, shares of the Company’s common stock. At March 31,2017 and 2016, respectively, the Company had no such securities or rights issued or outstanding, and therefore, no dilutive effect to consider for the diluted net earnings per share calculation.

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

				Quarter ended March 31,
(Dollars in thousands, except share and per share data)				2017		2016
Basic and diluted:
	Net earnings		$	1,890	$	2,191
	Weighted average common shares outstanding			3,643,541		3,643,484
		Net earnings per share	$	0.52	$	0.60

XML

Variable Interest Entities

3 Months Ended

Mar. 31, 2017

Variable interest entities [Abstract]

Variable interest entity [Text Block]

NOTE 3: VARIABLE INTEREST ENTITIES

Generally, a variable interest entity (“VIE”) is a corporation, partnership, trust, or other legal structure that does not have equity investors with substantive or proportional voting rights or has equity investors that do not provide sufficient financial resources for the entity to support its activities.

At March 31,2017, the Company did not have any consolidated VIEs to disclose but did have one nonconsolidated VIE, discussed below.

Trust Preferred Securities

The Company owns the common stock of a subsidiary business trust, Auburn National Bancorporation Capital Trust I (the “Trust”), which issued mandatorily redeemable preferred capital securities (“trust preferred securities”) in the aggregate of approximately $7.0 million at the time of issuance. The Trust meets the definition of a VIE of which the Company is not the primary beneficiary; the Trust’s only assets are junior subordinated debentures issued by the Company, which were acquired by the trust using the proceeds from the issuance of the trust preferred securities and common stock.

In October 2016, the Company purchased $4.0 million par amount of outstanding trust preferred securities issued by the Trust. These securities were sold by the FDIC, as receiver of a failed bank that had held the trust preferred securities. The Company used dividends from the Bank to purchase these trust preferred securities and has deemed an equivalent amount of the related junior subordinated debentures issued by the Company as no longer outstanding. The remaining junior subordinated debentures of approximately $3.2 million are included in long-term debt and the Company’s equity interest of $0.2 million in the Trust is included in other assets. Interest expense on the junior subordinated debentures is included in interest expense on long-term debt.

The following table summarizes VIEs that are not consolidated by the Company as of March 31,2017.

	Maximum	Liability
(Dollars in thousands)	Loss Exposure	Recognized	Classification
Type:
Trust preferred issuances	N/A	$3,217	Long-term debt

XML

Securities

3 Months Ended

Mar. 31, 2017

Investments debt and equity securities [Abstract]

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

NOTE 4: SECURITIES

At March 31,2017 and December 31,2016, respectively, all securities within the scope of Accounting Standards Codification (“ASC”) 320, Investments – Debt and Equity Securities, were classified as available-for-sale. The fair value and amortized cost for securities available-for-sale by contractual maturityat March 31,2017 and December 31,2016, respectively, are presented below.

			1 year	1 to 5	5 to 10	After 10	Fair	Gross Unrealized		Amortized
(Dollars in thousands)			or less	years	years	years	Value	Gains	Losses	Cost
March 31, 2017
Agency obligations (a)		$	3,015	27,536	24,650	—	55,201	302	846	$	55,745
Agency RMBS (a)			—	844	17,943	129,574	148,361	549	1,783		149,595
State and political subdivisions			—	2,122	10,460	57,709	70,291	1,534	662		69,419
	Total available-for-sale	$	3,015	30,502	53,053	187,283	273,853	2,385	3,291	$	274,759

December 31, 2016
Agency obligations (a)		$	3,047	22,531	19,893	—	45,471	331	973	$	46,113
Agency RMBS (a)			—	972	16,171	110,644	127,787	551	1,805		129,041
State and political subdivisions			—	2,480	10,210	57,624	70,314	1,509	734		69,539
	Total available-for-sale	$	3,047	25,983	46,274	168,268	243,572	2,391	3,512	$	244,693
(a) Includes securities issued by U.S. government agencies or government sponsored entities.

Securities with aggregate fair values of $174.6 million and $137.2 million at March 31,2017 and December 31,2016, respectively, were pledged to secure public deposits, securities sold under agreements to repurchase, Federal Home Loan Bank (“FHLB”) advances, and for other purposes required or permitted by law.

Included in other assets are cost-method investments. The carrying amounts of cost-method investments were $1.4 million at March 31,2017 and December 31,2016, respectively. Cost-method investments primarily include non-marketable equity investments, such as FHLB of Atlanta stock and Federal Reserve Bank (“FRB”) stock.

Gross Unrealized Losses and Fair Value

The fair values and gross unrealized losses on securities at March 31,2017 and December 31,2016, respectively, segregated by those securities that have been in an unrealized loss position for less than 12 months and 12 months or longer, are presented below.

			Less than 12 Months		12 Months or Longer			Total
			Fair	Unrealized	Fair	Unrealized		Fair	Unrealized
(Dollars in thousands)			Value	Losses	Value	Losses		Value	Losses
March 31, 2017:
Agency obligations		$	20,437	846	—	—	$	20,437	846
Agency RMBS			108,713	1,783	—	—		108,713	1,783
State and political subdivisions			19,410	662	—	—		19,410	662
	Total	$	148,560	3,291	—	—	$	148,560	3,291

December 31, 2016:
Agency obligations		$	20,352	973	—	—	$	20,352	973
Agency RMBS			89,062	1,805	—	—		89,062	1,805
State and political subdivisions			20,444	734	—	—		20,444	734
	Total	$	129,858	3,512	—	—	$	129,858	3,512

For the securities in the previous table, the Company does not have the intent to sell and has determined it is not more likely than not that the Company will be required to sell the security before recovery of the amortized cost basis, which may be maturity. On a quarterly basis, the Company assesses each security for credit impairment. For debt securities, the Company evaluates, where necessary, whether credit impairment exists by comparing the present value of the expected cash flows to the securities’ amortized cost basis. For cost-method investments, the Company evaluates whether an event or change in circumstances has occurred during the reporting period that may have a significant adverse effect on the fair value of the investment.

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

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

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

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

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

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

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

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

Agency obligations

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

Agency RMBS

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

Securities of U.S. states and political subdivisions

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

Cost-method investments

At March 31,2017, cost-method investments with an aggregate cost of $1.4 million were not evaluated for impairment because the Company did not identify any events or changes in circumstances that may have a significant adverse effect on the fair value of these cost-method investments.

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

Other-Than-Temporarily Impaired Securities

Credit-impaired debt securities are debt securities where the Company has written down the amortized cost basis of a security for other-than-temporary impairment and the credit component of the loss is recognized in earnings. At March 31,2017 and December 31,2016, the Company had no credit-impaired debt securities and there were no additions or reductions in the credit loss component of credit-impaired debt securities during the quarters ended March 31, 2017 and 2016, respectively

Realized Gains and Losses
The following table presents the gross realized gains and losses on sales of securities.
			Quarter ended March 31,
(Dollars in thousands)			2017		2016
Gross realized gains		$	2	$	—
	Realized gains, net	$	2	$	—

XML

Loan and Allowance for Loan Losses

3 Months Ended

Mar. 31, 2017

Loans And Leases Receivable Disclosure [Abstract]

Loans and leases receivable disclosure [Text Block]

NOTE 5: LOANS AND ALLOWANCE FOR LOAN LOSSES

				March 31,		December 31,
(In thousands)				2017		2016
Commercial and industrial			$	50,228	$	49,850
Construction and land development				45,098		41,650
Commercial real estate:
	Owner occupied			45,011		49,745
	Multi-family			47,147		46,998
	Other			126,581		123,696
		Total commercial real estate		218,739		220,439
Residential real estate:
	Consumer mortgage			63,741		65,564
	Investment property			44,355		45,291
		Total residential real estate		108,096		110,855
Consumer installment				9,032		8,712
		Total loans		431,193		431,506
Less: unearned income				(640)		(560)
		Loans, net of unearned income	$	430,553	$	430,946

Loans secured by real estate were approximately 86.3% of the Company’s total loan portfolio at March 31,2017. At March 31,2017, the Company’s geographic loan distribution was concentrated primarily in Lee County, Alabama, and surrounding areas.

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

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

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

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

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

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

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

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

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

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

• Investment property – primarily includes loans to finance income-producing 1-4 family residential properties. Generally, the primary source of repayment is dependent upon income generated from leasing the property securing the loan. The underwriting of these loans takes into consideration the rental rates and property value, as well as the financial health of the borrower.

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

The following is a summary of current, accruing past due, and nonaccrual loans by portfolio segment and class as of March 31,2017 and December 31,2016.

					Accruing	Accruing	Total
					30-89 Days	Greater than	Accruing	Non-		Total
(In thousands)			Current		Past Due	90 days	Loans	Accrual		Loans
March 31, 2017:
Commercial and industrial			$	50,192	1	—	50,193	35	$	50,228
Construction and land development				45,073	3	—	45,076	22		45,098
Commercial real estate:
	Owner occupied			45,011	—	—	45,011	—		45,011
	Multi-family			47,147	—	—	47,147	—		47,147
	Other			124,731	—	—	124,731	1,850		126,581
		Total commercial real estate		216,889	—	—	216,889	1,850		218,739
Residential real estate:
	Consumer mortgage			62,308	1,068	—	63,376	365		63,741
	Investment property			44,211	118	—	44,329	26		44,355
		Total residential real estate		106,519	1,186	—	107,705	391		108,096
Consumer installment				8,995	17	—	9,012	20		9,032
		Total	$	427,668	1,207	—	428,875	2,318	$	431,193

December 31, 2016:
Commercial and industrial			$	49,747	66	—	49,813	37	$	49,850
Construction and land development				41,223	395	—	41,618	32		41,650
Commercial real estate:
	Owner occupied			49,564	43	—	49,607	138		49,745
	Multi-family			46,998	—	—	46,998	—		46,998
	Other			121,608	199	—	121,807	1,889		123,696
		Total commercial real estate		218,170	242	—	218,412	2,027		220,439
Residential real estate:
	Consumer mortgage			64,059	1,282	—	65,341	223		65,564
	Investment property			45,243	19	—	45,262	29		45,291
		Total residential real estate		109,302	1,301	—	110,603	252		110,855
Consumer installment				8,652	38	—	8,690	22		8,712
		Total	$	427,094	2,042	—	429,136	2,370	$	431,506

Allowance for Loan Losses

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

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

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

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

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

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

The allocation of the allowance for loan losses begins with a process of estimating the probable losses inherent for each loan segment. The estimates for these loans are established by category and based on the Company’s internal system of credit risk ratings and historical loss data. The estimated loan loss allocation rate for the Company’s internal system of credit risk grades is based on its experience with similarly graded loans. For loan segments where the Company believes it does not have sufficient historical loss data, the Company may make adjustments based, in part, on loss rates of peer bank groups. At March 31,2017 and December 31, 2016, and for the periods then ended, the Company adjusted its historical loss rates for the commercial real estate portfolio segment based, in part, on loss rates of peer bank groups.

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

The Company regularly re-evaluates its practices in determining the allowance for loan losses. Beginning with the quarter ended December 31, 2016, the Company implemented certain refinements to its allowance for loan losses methodology in order to better capture the effects of the most recent economic cycle on the Company’s loan loss experience. First, the Company increased its look-back period for calculating average losses for all loan segments to 31 quarters. Prior to December 31, 2016, the Company calculated average losses for all loan segments using a rolling 20 quarter look-back period. For the quarter ended March 31, 2017, the Company increased its look-back period to 32 quarters to continue to include the losses incurred by the Company beginning with the first quarter of 2009. The Company will likely continue to increase its look-back period to incorporate the effects of at least one economic downturn in its loss history. The Company believes the extension of its look-back period is appropriate due to the risks inherent in the loan portfolio. Absent this extension, the early cycle periods in which the Company experienced significant losses would be excluded from the determination of the allowance for loan losses and its balance would decrease. Second, the Company increased the range of basis point adjustments allowed for qualitative and environmental factors to approximately 200 basis points, an increase of 65 basis points, or 48%, compared to the 135 basis point range used prior to December 31, 2016. After performing sensitivity testing of its calculation of the allowance for loan losses, the Company determined that it should increase the range of basis points allowed for qualitative and environmental factors in order to provide sufficient latitude in determining estimated probable credit losses during periods of economic stress. Third, the Company reduced the percentage allocation for qualitative and environmental factors on a weighted average basis to 21% of total basis points allocable at December 31, 2016, compared to 25% of total basis points allocable at September 30, 2016. The Company believes a decrease in the percentage allocation of qualitative environmental factors on a weighted average basis was appropriate due to the extension of its look-back period described above. If the Company did not make the changes described above, the Company’s calculated allowance for loan loss allocation would have decreased by approximately $0.9 million, or 0.21% of total loans, at December 31, 2016. Other than the changes discussed above, the Company has not made any material changes to its methodology that would impact the calculation of the allowance for loan losses or provision for loan losses for the periods included in the accompanying consolidated balance sheets and statements of earnings.

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

			March 31, 2017
(In thousands)		Commercial and industrial		Construction and land development	Commercial real estate	Residential real estate	Consumer installment		Total
Quarter ended:
Beginning balance		$	540	812	2,071	1,107	113	$	4,643
Charge-offs			—	—	—	(78)	(1)		(79)
Recoveries			2	5	—	14	3		24
	Net recoveries (charge-offs)		2	5	—	(64)	2		(55)
Provision for loan losses			(18)	28	(67)	21	36		—
Ending balance		$	524	845	2,004	1,064	151	$	4,588

			March 31, 2016
(In thousands)		Commercial and industrial		Construction and land development	Commercial real estate	Residential real estate	Consumer installment		Total
Quarter ended:
Beginning balance		$	523	669	1,879	1,059	159	$	4,289
Charge-offs			—	—	—	(118)	(26)		(144)
Recoveries			20	1,198	—	7	4		1,229
	Net recoveries (charge-offs)		20	1,198	—	(111)	(22)		1,085
Provision for loan losses			(26)	(1,172)	524	78	(4)		(600)
Ending balance		$	517	695	2,403	1,026	133	$	4,774

The following table presents an analysis of the allowance for loan losses and recorded investment in loans by portfolio segment and impairment methodology as of March 31,2017and 2016.

			Collectively evaluated (1)		Individually evaluated (2)		Total
			Allowance	Recorded	Allowance	Recorded	Allowance	Recorded
			for loan	investment	for loan	investment	for loan	investment
(In thousands)			losses	in loans	losses	in loans	losses	in loans
March 31, 2017:
Commercial and industrial		$	524	50,222	—	6	524	50,228
Construction and land development			845	45,076	—	22	845	45,098
Commercial real estate			1,977	216,701	27	2,038	2,004	218,739
Residential real estate			1,064	108,096	—	—	1,064	108,096
Consumer installment			151	9,032	—	—	151	9,032
	Total	$	4,561	429,127	27	2,066	4,588	431,193

March 31, 2016:
Commercial and industrial		$	517	50,152	—	40	517	50,192
Construction and land development			695	45,887	—	66	695	45,953
Commercial real estate			2,054	206,572	349	2,748	2,403	209,320
Residential real estate			1,026	117,046	—	—	1,026	117,046
Consumer installment			133	9,769	—	—	133	9,769
	Total	$	4,425	429,426	349	2,854	4,774	432,280
(1)	Represents loans collectively evaluated for impairment in accordance with ASC 450-20, Loss Contingencies (formerly FAS 5), and
	pursuant to amendments by ASU 2010-20 regarding allowance for non-impaired loans.
(2)	Represents loans individually evaluated for impairment in accordance with ASC 310-30, Receivables (formerly FAS 114), and
	pursuant to amendments by ASU 2010-20 regarding allowance for impaired loans.

Credit Quality Indicators

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

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

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

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

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

(In thousands)				Pass	Special Mention	Substandard Accruing	Nonaccrual		Total loans
March 31, 2017:
Commercial and industrial			$	49,760	223	210	35	$	50,228
Construction and land development				44,463	315	298	22		45,098
Commercial real estate:
	Owner occupied			44,247	409	355	—		45,011
	Multi-family			47,147	—	—	—		47,147
	Other			124,260	31	440	1,850		126,581
		Total commercial real estate		215,654	440	795	1,850		218,739
Residential real estate:
	Consumer mortgage			57,302	2,818	3,256	365		63,741
	Investment property			43,059	241	1,029	26		44,355
		Total residential real estate		100,361	3,059	4,285	391		108,096
Consumer installment				8,807	106	99	20		9,032
		Total	$	419,045	4,143	5,687	2,318	$	431,193

December 31, 2016:
Commercial and industrial			$	49,558	22	233	37	$	49,850
Construction and land development				41,165	113	340	32		41,650
Commercial real estate:
	Owner occupied			48,788	414	405	138		49,745
	Multi-family			46,998	—	—	—		46,998
	Other			121,326	32	449	1,889		123,696
		Total commercial real estate		217,112	446	854	2,027		220,439
Residential real estate:
	Consumer mortgage			59,450	2,613	3,278	223		65,564
	Investment property			44,109	105	1,048	29		45,291
		Total residential real estate		103,559	2,718	4,326	252		110,855
Consumer installment				8,580	20	90	22		8,712
		Total	$	419,974	3,319	5,843	2,370	$	431,506

Impaired loans

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

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

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

The following tables set forth certain information regarding the Company’s impaired loans that were individually evaluated for impairment at March 31,2017 and December 31,2016.

				March 31, 2017
(In thousands)				Unpaid principal balance (1)	Charge-offs and payments applied (2)	Recorded investment (3)		Related allowance
With no allowance recorded:
Commercial and industrial			$	6	—	6
Construction and land development				132	(110)	22
Commercial real estate:
	Other			2,861	(1,011)	1,850
		Total commercial real estate		2,861	(1,011)	1,850
		Total	$	2,999	(1,121)	1,878
With allowance recorded:
Commercial real estate:
	Owner occupied		$	188	—	188	$	27
		Total commercial real estate		188	—	188		27
		Total		188	—	188		27
		Total impaired loans	$	3,187	(1,121)	2,066	$	27
(1) Unpaid principal balance represents the contractual obligation due from the customer.
(2) Charge-offs and payments applied represents cumulative charge-offs taken, as well as interest payments that have been
	applied against the outstanding principal balance subsequent to the loans being placed on nonaccrual status.
(3) Recorded investment represents the unpaid principal balance less charge-offs and payments applied; it is shown before
	any related allowance for loan losses.

				December 31, 2016
(In thousands)				Unpaid principal balance (1)	Charge-offs and payments applied (2)	Recorded investment (3)		Related allowance
With no allowance recorded:
Commercial and industrial			$	15	—	15
Construction and land development				140	(108)	32
Commercial real estate:
	Other			2,874	(984)	1,890
		Total commercial real estate		2,874	(984)	1,890
		Total	$	3,029	(1,092)	1,937
With allowance recorded:
Commercial real estate:
	Owner occupied		$	193	—	193	$	31
		Total commercial real estate		193	—	193		31
		Total		193	—	193		31
		Total impaired loans	$	3,222	(1,092)	2,130	$	31
(1) Unpaid principal balance represents the contractual obligation due from the customer.
(2) Charge-offs and payments applied represents cumulative charge-offs taken, as well as interest payments that have been
	applied against the outstanding principal balance subsequent to the loans being placed on nonaccrual status.
(3) Recorded investment represents the unpaid principal balance less charge-offs and payments applied; it is shown before
	any related allowance for loan losses.

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

			Quarter ended March 31, 2017				Quarter ended March 31, 2016
				Average	Total interest			Average	Total interest
				recorded	income			recorded	income
(In thousands)				investment	recognized			investment	recognized
Impaired loans:
Commercial and industrial			$	10	$	—	$	32	$	1
Construction and land development				28		—		198		—
Commercial real estate:
	Owner occupied			191		3		1,020		15
	Other			1,870		—		1,742		—
		Total commercial real estate		2,061		3		2,762		15
Residential real estate:
		Total	$	2,099	$	3	$	2,992	$	16

Troubled Debt Restructurings

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

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

The following is a summary of accruing and nonaccrual TDRs, which are included in the impaired loan totals, and the related allowance for loan losses, by portfolio segment and class as of March 31,2017 and December 31,2016.

				TDRs
								Related
(In thousands)				Accruing	Nonaccrual	Total		Allowance
March 31, 2017
Commercial and industrial			$	6	—	6	$	—
Construction and land development				—	22	22		—
Commercial real estate:
	Owner occupied			188	—	188		27
	Other			—	1,784	1,784		—
		Total commercial real estate		188	1,784	1,972		27
		Total	$	194	1,806	2,000	$	27

December 31, 2016
Commercial and industrial			$	15	—	15	$	—
Construction and land development				—	32	32		—
Commercial real estate:
	Owner occupied			193	—	193		31
	Other			—	1,818	1,818		—
		Total commercial real estate		193	1,818	2,011		31
		Total	$	208	1,850	2,058	$	31

At March 31,2017, there were no significant outstanding commitments to advance additional funds to customers whose loans had been restructured.

During the quarter ended March 31,2017 and 2016, there were no loans modified in a TDR, andthe Company had no loans modified in a TDR within the previous 12 months for which there was a payment default (defined as 90 days or more past due) during the respective periods.

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Mortgage Servicing Rights, Net

3 Months Ended

Mar. 31, 2017

Mortgage Servicing [Abstract]

Transfers and Servicing of Financial Assets [Text Block]

NOTE 6: MORTGAGE SERVICING RIGHTS, NET

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

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

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

The change in amortized MSRs and the related valuation allowance for the quartersended March 31,2017 and 2016 are presented below.

		Quarter ended March 31,
(Dollars in thousands)		2017		2016
MSRs, net:
Beginning balance	$	1,952	$	2,316
Additions, net		53		57
Amortization expense		(144)		(138)
Decrease in MSR valuation allowance		1		—
Ending balance	$	1,862	$	2,235
Valuation allowance included in MSRs, net:
Beginning of period	$	1	$	—
End of period		—		—
Fair value of amortized MSRs:
Beginning of period	$	2,678	$	3,086
End of period		2,689		2,906

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Derivative Instruments

3 Months Ended

Mar. 31, 2017

Derivative instruments and hedging activities disclosure abstract

Derivative Instruments And Hedging Activities Disclosure Text Block

NOTE 7: DERIVATIVE INSTRUMENTS

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

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

A summary of the Company’s interest rate swap agreements at March 31,2017 and December 31,2016 is presented below.

				Other	Other
				Assets	Liabilities
				Estimated	Estimated
(Dollars in thousands)			Notional	Fair Value	Fair Value
March 31, 2017:
Pay fixed / receive variable		$	3,879	—	185
Pay variable / receive fixed			3,879	185	—
	Total interest rate swap agreements	$	7,758	185	185
December 31, 2016:
Pay fixed / receive variable		$	3,967	—	241
Pay variable / receive fixed			3,967	241	—
	Total interest rate swap agreements	$	7,934	241	241

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Fair Value Disclosures

3 Months Ended

Mar. 31, 2017

Fair Value Disclosures [Abstract]

Fair Value Disclosures Text Block

NOTE 8: FAIR VALUE

Fair Value Hierarchy

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

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

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

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

Level changes in fair value measurements

Transfers between levels of the fair value hierarchy are generally recognized at the end of the reporting period. The Company monitors the valuation techniques utilized for each category of financial assets and liabilities to ascertain when transfers between levels have been affected. The nature of the Company’s financial assets and liabilities generally is such that transfers in and out of any level are expected to be infrequent. For the three months endedMarch 31,2017, there were no transfers between levels and no changes in valuation techniques for the Company’s financial assets and liabilities.

Assets and liabilities measured at fair value on a recurring basis

Securities available-for-sale

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

Interest rate swap agreements

The carrying amount of interest rate swap agreements was included in other assets and accrued expenses and other liabilities on the accompanying consolidated balance sheets. The fair value measurements for our interest rate swap agreements were based on information obtained from a third party bank. This information is periodically tested by the Company and validated against other third party valuations. If needed, other third party market participants may be utilized to corroborate the fair value measurements for our interest rate swap agreements. The Company classified these derivative assets and liabilities within Level 2 of the valuation hierarchy. These swaps qualify as derivatives, but are not designated as hedging instruments.

The following table presents the balances of the assets and liabilities measured at fair value on a recurring basis as of March 31,2017 and December 31,2016, respectively, by caption, on the accompanying consolidated balance sheets by ASC 820 valuation hierarchy (as described above).

					Quoted Prices in	Significant
					Active Markets	Other	Significant
					for	Observable	Unobservable
					Identical Assets	Inputs	Inputs
(Dollars in thousands)				Amount	(Level 1)	(Level 2)	(Level 3)
March 31, 2017:
Securities available-for-sale:
	Agency obligations		$	55,201	—	55,201	—
	Agency RMBS			148,361	—	148,361	—
	State and political subdivisions			70,291	—	70,291	—
Total securities available-for-sale				273,853	—	273,853	—
Other assets (1)				185	—	185	—
		Total assets at fair value	$	274,038	—	274,038	—
Other liabilities(1)			$	185	—	185	—
		Total liabilities at fair value	$	185	—	185	—
December 31, 2016:
Securities available-for-sale:
	Agency obligations		$	45,471	—	45,471	—
	Agency RMBS			127,787	—	127,787	—
	State and political subdivisions			70,314	—	70,314	—
Total securities available-for-sale				243,572	—	243,572	—
Other assets (1)				241	—	241	—
		Total assets at fair value	$	243,813	—	243,813	—
Other liabilities(1)			$	241	—	241	—
		Total liabilities at fair value	$	241	—	241	—
(1)Represents the fair value of interest rate swap agreements.

Assets and liabilities measured at fair value on a nonrecurring basis

Loans held for sale

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

Impaired Loans

Loans considered impaired under ASC 310-10-35, Receivables, are loans for which, based on current information and events, it is probable that the Company will be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement. Impaired loans can be measured based on the present value of expected payments using the loan’s original effective rate as the discount rate, the loan’s observable market price, or the fair value of the collateral less selling costs if the loan is collateral dependent.

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

Other real estate owned

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

Mortgage servicing rights, net

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

The following table presents the balances of the assets and liabilities measured at fair value on a nonrecurring basis as of March 31,2017 and December 31,2016, respectively, by caption, on the accompanying consolidated balance sheets and by FASB ASC 820 valuation hierarchy (as described above):

				Quoted Prices in
				Active Markets	Other	Significant
				for	Observable	Unobservable
			Carrying	Identical Assets	Inputs	Inputs
(Dollars in thousands)			Amount	(Level 1)	(Level 2)	(Level 3)
March 31, 2017:
Loans held for sale		$	1,026	—	1,026	—
Loans, net(1)			2,039	—	—	2,039
Other real estate owned			152	—	—	152
Other assets (2)			1,862	—	—	1,862
	Total assets at fair value	$	5,079	—	1,026	4,053
December 31, 2016:
Loans held for sale		$	1,497	—	1,497	—
Loans, net(1)			2,099	—	—	2,099
Other real estate owned			152	—	—	152
Other assets (2)			1,952	—	—	1,952
	Total assets at fair value	$	5,700	—	1,497	4,203
(1)Loans considered impaired under ASC 310-10-35, Receivables. This amount reflects the recorded investment in
	impaired loans, net of any related allowance for loan losses.
(2)Represents MSRs, net, carried at lower of cost or estimated fair value.

Quantitative Disclosures for Level 3 Fair Value Measurements

At March 31,2017, the Company had no Level 3 assets measured at fair value on a recurring basis. For Level 3 assets measured at fair value on a non-recurring basis at March 31,2017, the significant unobservable inputs used in the fair value measurements are presented below.

					Weighted
		Carrying			Average
(Dollars in thousands)		Amount	Valuation Technique	Significant Unobservable Input	of Input
Nonrecurring:
Impaired loans	$	2,039	Appraisal	Appraisal discounts (%)	45.2	%
Other real estate owned		152	Appraisal	Appraisal discounts (%)	10.0	%
Mortgage servicing rights, net		1,862	Discounted cash flow	Prepayment speed or CPR (%)	10.5	%
				Discount rate (%)	10.0	%

Fair Value of Financial Instruments

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

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

Loans, net

Fair values for loans were calculated using discounted cash flows. The discount rates reflected current rates at which similar loans would be made for the same remaining maturities. This method of estimating fair value does not incorporate the exit-price concept of fair value prescribed by ASC 820 and generally produces a higher value than an exit-price approach. Expected future cash flows were projected based on contractual cash flows, adjusted for estimated prepayments. ASU 2016-01 described under “Current Accounting Policies” requires public company use of exit prices when measuring the fair value of financial instruments for disclosure purposes for fiscal years beginning after December 31, 2017. The effects of ASU 2016-01 on the Company’s consolidated financial statements are being evaluated.

Loans held for sale

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

Time Deposits

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

Long-term debt

The fair value of the Company’s fixed rate long-term debt is estimated using discounted cash flows based on estimated current market rates for similar types of borrowing arrangements. The carrying amount of the Company’s variable rate long-term debt approximates its fair value.

The carrying value, related estimated fair value, and placement in the fair value hierarchy of the Company’s financial instruments at March 31,2017 and December 31,2016 are presented below. This table excludes financial instruments for which the carrying amount approximates fair value. Financial assets for which fair value approximates carrying value included cash and cash equivalents. Financial liabilities for which fair value approximates carrying value included noninterest-bearing demand deposits, interest-bearing demand deposits, and savings deposits due to these products having no stated maturity. In addition, financial liabilities for which fair value approximates carrying value included overnight borrowings such as federal funds purchased and securities sold under agreements to repurchase.

							Fair Value Hierarchy
			Carrying		Estimated		Level 1		Level 2		Level 3
(Dollars in thousands)			amount		fair value		inputs		inputs		Inputs
March 31, 2017:
Financial Assets:
	Loans, net (1)	$	425,965	$	426,253	$	—	$	—	$	426,253
	Loans held for sale		1,026		1,036		—		1,036		—
Financial Liabilities:
	Time Deposits	$	203,696	$	203,141	$	—	$	203,141	$	—
	Long-term debt		3,217		3,217		—		3,217		—
December 31, 2016:
Financial Assets:
	Loans, net (1)	$	426,303	$	428,446	$	—	$	—	$	428,446
	Loans held for sale		1,497		1,507		—		1,507		—
Financial Liabilities:
	Time Deposits	$	208,137	$	207,791	$	—	$	207,791	$	—
	Long-term debt		3,217		3,217		—		3,217		—
(1) Represents loans, net of unearned income and the allowance for loan losses.

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Summary of Significant Accounting Policies (Policies)

3 Months Ended

Mar. 31, 2017

Summary of Signficant Accounting Policies

Nature of Business Policy

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

General

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

Basis of Presentation Policy

Basis of Presentation and Use of Estimates

The unaudited consolidated financial statements in this report have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information. Accordingly, these financial statements do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited consolidated financial statements include, in the opinion of management, all adjustments necessary to present a fair statement of the financial position and the results of operations for all periods presented. All such adjustments are of a normal recurring nature. The results of operations in the interim statements are not necessarily indicative of the results of operations that the Company and its subsidiaries may achieve for future interim periods or the entire year. For further information, refer to the consolidated financial statements and footnotes included in the Company's Annual Report on Form 10-K for the year ended December 31,2016.

Consolidation Policy

The unaudited consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Auburn National Bancorporation Capital Trust I is an affiliate of the Company and was included in these unaudited consolidated financial statements pursuant to the equity method of accounting. Significant intercompany transactions and accounts are eliminated in consolidation.

Use of Estimates Policy

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

Subsequent Events Policy

Subsequent Events

The Company has evaluated the effects of events and transactions through the date of this filing that have occurred subsequent to March 31,2017. The Company does not believe there were any material subsequent events during this period that would have required further recognition or disclosure in the unaudited consolidated financial statements included in this report.

Accounting Developments

Accounting Developments

In the first quarter of 2017, the Company adopted no new accounting guidance.

.

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Basic and Diluted Earnings Per Share (Tables)

3 Months Ended

Mar. 31, 2017

Basic and Diluted Earnings Per Share [Abstract]

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

				Quarter ended March 31,
(Dollars in thousands, except share and per share data)				2017		2016
Basic and diluted:
	Net earnings		$	1,890	$	2,191
	Weighted average common shares outstanding			3,643,541		3,643,484
		Net earnings per share	$	0.52	$	0.60

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Variable Interest Entities (Tables)

3 Months Ended

Mar. 31, 2017

Variable interest entities [Abstract]

Variable Interest Entity [Table Text Block]

	Maximum	Liability
(Dollars in thousands)	Loss Exposure	Recognized	Classification
Type:
Trust preferred issuances	N/A	$3,217	Long-term debt

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Securities (Tables)

3 Months Ended

Mar. 31, 2017

Investments debt and equity securities [Abstract]

Available-for-sale Securities [Table Text Block]

			1 year	1 to 5	5 to 10	After 10	Fair	Gross Unrealized		Amortized
(Dollars in thousands)			or less	years	years	years	Value	Gains	Losses	Cost
March 31, 2017
Agency obligations (a)		$	3,015	27,536	24,650	—	55,201	302	846	$	55,745
Agency RMBS (a)			—	844	17,943	129,574	148,361	549	1,783		149,595
State and political subdivisions			—	2,122	10,460	57,709	70,291	1,534	662		69,419
	Total available-for-sale	$	3,015	30,502	53,053	187,283	273,853	2,385	3,291	$	274,759

December 31, 2016
Agency obligations (a)		$	3,047	22,531	19,893	—	45,471	331	973	$	46,113
Agency RMBS (a)			—	972	16,171	110,644	127,787	551	1,805		129,041
State and political subdivisions			—	2,480	10,210	57,624	70,314	1,509	734		69,539
	Total available-for-sale	$	3,047	25,983	46,274	168,268	243,572	2,391	3,512	$	244,693
(a) Includes securities issued by U.S. government agencies or government sponsored entities.

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

			Less than 12 Months		12 Months or Longer			Total
			Fair	Unrealized	Fair	Unrealized		Fair	Unrealized
(Dollars in thousands)			Value	Losses	Value	Losses		Value	Losses
March 31, 2017:
Agency obligations		$	20,437	846	—	—	$	20,437	846
Agency RMBS			108,713	1,783	—	—		108,713	1,783
State and political subdivisions			19,410	662	—	—		19,410	662
	Total	$	148,560	3,291	—	—	$	148,560	3,291

December 31, 2016:
Agency obligations		$	20,352	973	—	—	$	20,352	973
Agency RMBS			89,062	1,805	—	—		89,062	1,805
State and political subdivisions			20,444	734	—	—		20,444	734
	Total	$	129,858	3,512	—	—	$	129,858	3,512

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

Realized Gains and Losses
The following table presents the gross realized gains and losses on sales of securities.
			Quarter ended March 31,
(Dollars in thousands)			2017		2016
Gross realized gains		$	2	$	—
	Realized gains, net	$	2	$	—

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Loan and Allowance for Loan Losses (Tables)

3 Months Ended

Mar. 31, 2017

Loans And Leases Receivable Disclosure [Abstract]

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

				March 31,		December 31,
(In thousands)				2017		2016
Commercial and industrial			$	50,228	$	49,850
Construction and land development				45,098		41,650
Commercial real estate:
	Owner occupied			45,011		49,745
	Multi-family			47,147		46,998
	Other			126,581		123,696
		Total commercial real estate		218,739		220,439
Residential real estate:
	Consumer mortgage			63,741		65,564
	Investment property			44,355		45,291
		Total residential real estate		108,096		110,855
Consumer installment				9,032		8,712
		Total loans		431,193		431,506
Less: unearned income				(640)		(560)
		Loans, net of unearned income	$	430,553	$	430,946

Past Due Financing Receivables [Table Text Block]

					Accruing	Accruing	Total
					30-89 Days	Greater than	Accruing	Non-		Total
(In thousands)			Current		Past Due	90 days	Loans	Accrual		Loans
March 31, 2017:
Commercial and industrial			$	50,192	1	—	50,193	35	$	50,228
Construction and land development				45,073	3	—	45,076	22		45,098
Commercial real estate:
	Owner occupied			45,011	—	—	45,011	—		45,011
	Multi-family			47,147	—	—	47,147	—		47,147
	Other			124,731	—	—	124,731	1,850		126,581
		Total commercial real estate		216,889	—	—	216,889	1,850		218,739
Residential real estate:
	Consumer mortgage			62,308	1,068	—	63,376	365		63,741
	Investment property			44,211	118	—	44,329	26		44,355
		Total residential real estate		106,519	1,186	—	107,705	391		108,096
Consumer installment				8,995	17	—	9,012	20		9,032
		Total	$	427,668	1,207	—	428,875	2,318	$	431,193

December 31, 2016:
Commercial and industrial			$	49,747	66	—	49,813	37	$	49,850
Construction and land development				41,223	395	—	41,618	32		41,650
Commercial real estate:
	Owner occupied			49,564	43	—	49,607	138		49,745
	Multi-family			46,998	—	—	46,998	—		46,998
	Other			121,608	199	—	121,807	1,889		123,696
		Total commercial real estate		218,170	242	—	218,412	2,027		220,439
Residential real estate:
	Consumer mortgage			64,059	1,282	—	65,341	223		65,564
	Investment property			45,243	19	—	45,262	29		45,291
		Total residential real estate		109,302	1,301	—	110,603	252		110,855
Consumer installment				8,652	38	—	8,690	22		8,712
		Total	$	427,094	2,042	—	429,136	2,370	$	431,506

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

			March 31, 2017
(In thousands)		Commercial and industrial		Construction and land development	Commercial real estate	Residential real estate	Consumer installment		Total
Quarter ended:
Beginning balance		$	540	812	2,071	1,107	113	$	4,643
Charge-offs			—	—	—	(78)	(1)		(79)
Recoveries			2	5	—	14	3		24
	Net recoveries (charge-offs)		2	5	—	(64)	2		(55)
Provision for loan losses			(18)	28	(67)	21	36		—
Ending balance		$	524	845	2,004	1,064	151	$	4,588

			March 31, 2016
(In thousands)		Commercial and industrial		Construction and land development	Commercial real estate	Residential real estate	Consumer installment		Total
Quarter ended:
Beginning balance		$	523	669	1,879	1,059	159	$	4,289
Charge-offs			—	—	—	(118)	(26)		(144)
Recoveries			20	1,198	—	7	4		1,229
	Net recoveries (charge-offs)		20	1,198	—	(111)	(22)		1,085
Provision for loan losses			(26)	(1,172)	524	78	(4)		(600)
Ending balance		$	517	695	2,403	1,026	133	$	4,774

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

			Collectively evaluated (1)		Individually evaluated (2)		Total
			Allowance	Recorded	Allowance	Recorded	Allowance	Recorded
			for loan	investment	for loan	investment	for loan	investment
(In thousands)			losses	in loans	losses	in loans	losses	in loans
March 31, 2017:
Commercial and industrial		$	524	50,222	—	6	524	50,228
Construction and land development			845	45,076	—	22	845	45,098
Commercial real estate			1,977	216,701	27	2,038	2,004	218,739
Residential real estate			1,064	108,096	—	—	1,064	108,096
Consumer installment			151	9,032	—	—	151	9,032
	Total	$	4,561	429,127	27	2,066	4,588	431,193

March 31, 2016:
Commercial and industrial		$	517	50,152	—	40	517	50,192
Construction and land development			695	45,887	—	66	695	45,953
Commercial real estate			2,054	206,572	349	2,748	2,403	209,320
Residential real estate			1,026	117,046	—	—	1,026	117,046
Consumer installment			133	9,769	—	—	133	9,769
	Total	$	4,425	429,426	349	2,854	4,774	432,280
(1)	Represents loans collectively evaluated for impairment in accordance with ASC 450-20, Loss Contingencies (formerly FAS 5), and
	pursuant to amendments by ASU 2010-20 regarding allowance for non-impaired loans.
(2)	Represents loans individually evaluated for impairment in accordance with ASC 310-30, Receivables (formerly FAS 114), and
	pursuant to amendments by ASU 2010-20 regarding allowance for impaired loans.

Financing Receivable Credit Quality Indicators [Table Text Block]

(In thousands)				Pass	Special Mention	Substandard Accruing	Nonaccrual		Total loans
March 31, 2017:
Commercial and industrial			$	49,760	223	210	35	$	50,228
Construction and land development				44,463	315	298	22		45,098
Commercial real estate:
	Owner occupied			44,247	409	355	—		45,011
	Multi-family			47,147	—	—	—		47,147
	Other			124,260	31	440	1,850		126,581
		Total commercial real estate		215,654	440	795	1,850		218,739
Residential real estate:
	Consumer mortgage			57,302	2,818	3,256	365		63,741
	Investment property			43,059	241	1,029	26		44,355
		Total residential real estate		100,361	3,059	4,285	391		108,096
Consumer installment				8,807	106	99	20		9,032
		Total	$	419,045	4,143	5,687	2,318	$	431,193

December 31, 2016:
Commercial and industrial			$	49,558	22	233	37	$	49,850
Construction and land development				41,165	113	340	32		41,650
Commercial real estate:
	Owner occupied			48,788	414	405	138		49,745
	Multi-family			46,998	—	—	—		46,998
	Other			121,326	32	449	1,889		123,696
		Total commercial real estate		217,112	446	854	2,027		220,439
Residential real estate:
	Consumer mortgage			59,450	2,613	3,278	223		65,564
	Investment property			44,109	105	1,048	29		45,291
		Total residential real estate		103,559	2,718	4,326	252		110,855
Consumer installment				8,580	20	90	22		8,712
		Total	$	419,974	3,319	5,843	2,370	$	431,506

Impaired Financing Receivables [Table Text Block]

				March 31, 2017
(In thousands)				Unpaid principal balance (1)	Charge-offs and payments applied (2)	Recorded investment (3)		Related allowance
With no allowance recorded:
Commercial and industrial			$	6	—	6
Construction and land development				132	(110)	22
Commercial real estate:
	Other			2,861	(1,011)	1,850
		Total commercial real estate		2,861	(1,011)	1,850
		Total	$	2,999	(1,121)	1,878
With allowance recorded:
Commercial real estate:
	Owner occupied		$	188	—	188	$	27
		Total commercial real estate		188	—	188		27
		Total		188	—	188		27
		Total impaired loans	$	3,187	(1,121)	2,066	$	27
(1) Unpaid principal balance represents the contractual obligation due from the customer.
(2) Charge-offs and payments applied represents cumulative charge-offs taken, as well as interest payments that have been
	applied against the outstanding principal balance subsequent to the loans being placed on nonaccrual status.
(3) Recorded investment represents the unpaid principal balance less charge-offs and payments applied; it is shown before
	any related allowance for loan losses.

				December 31, 2016
(In thousands)				Unpaid principal balance (1)	Charge-offs and payments applied (2)	Recorded investment (3)		Related allowance
With no allowance recorded:
Commercial and industrial			$	15	—	15
Construction and land development				140	(108)	32
Commercial real estate:
	Other			2,874	(984)	1,890
		Total commercial real estate		2,874	(984)	1,890
		Total	$	3,029	(1,092)	1,937
With allowance recorded:
Commercial real estate:
	Owner occupied		$	193	—	193	$	31
		Total commercial real estate		193	—	193		31
		Total		193	—	193		31
		Total impaired loans	$	3,222	(1,092)	2,130	$	31
(1) Unpaid principal balance represents the contractual obligation due from the customer.
(2) Charge-offs and payments applied represents cumulative charge-offs taken, as well as interest payments that have been
	applied against the outstanding principal balance subsequent to the loans being placed on nonaccrual status.
(3) Recorded investment represents the unpaid principal balance less charge-offs and payments applied; it is shown before
	any related allowance for loan losses.

Schedule Of Average Impaired Financing Receivable [Table Text Block]

			Quarter ended March 31, 2017				Quarter ended March 31, 2016
				Average	Total interest			Average	Total interest
				recorded	income			recorded	income
(In thousands)				investment	recognized			investment	recognized
Impaired loans:
Commercial and industrial			$	10	$	—	$	32	$	1
Construction and land development				28		—		198		—
Commercial real estate:
	Owner occupied			191		3		1,020		15
	Other			1,870		—		1,742		—
		Total commercial real estate		2,061		3		2,762		15
Residential real estate:
		Total	$	2,099	$	3	$	2,992	$	16

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

				TDRs
								Related
(In thousands)				Accruing	Nonaccrual	Total		Allowance
March 31, 2017
Commercial and industrial			$	6	—	6	$	—
Construction and land development				—	22	22		—
Commercial real estate:
	Owner occupied			188	—	188		27
	Other			—	1,784	1,784		—
		Total commercial real estate		188	1,784	1,972		27
		Total	$	194	1,806	2,000	$	27

December 31, 2016
Commercial and industrial			$	15	—	15	$	—
Construction and land development				—	32	32		—
Commercial real estate:
	Owner occupied			193	—	193		31
	Other			—	1,818	1,818		—
		Total commercial real estate		193	1,818	2,011		31
		Total	$	208	1,850	2,058	$	31

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Mortgage Servicing Rights, Net (Tables)

3 Months Ended

Mar. 31, 2017

Mortgage Servicing [Abstract]

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

		Quarter ended March 31,
(Dollars in thousands)		2017		2016
MSRs, net:
Beginning balance	$	1,952	$	2,316
Additions, net		53		57
Amortization expense		(144)		(138)
Decrease in MSR valuation allowance		1		—
Ending balance	$	1,862	$	2,235
Valuation allowance included in MSRs, net:
Beginning of period	$	1	$	—
End of period		—		—
Fair value of amortized MSRs:
Beginning of period	$	2,678	$	3,086
End of period		2,689		2,906

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Derivative Instruments (Tables)

3 Months Ended

Mar. 31, 2017

Derivative instruments and hedging activities disclosure abstract

Schedule of Derivative Instruments [Table Text Block]

				Other	Other
				Assets	Liabilities
				Estimated	Estimated
(Dollars in thousands)			Notional	Fair Value	Fair Value
March 31, 2017:
Pay fixed / receive variable		$	3,879	—	185
Pay variable / receive fixed			3,879	185	—
	Total interest rate swap agreements	$	7,758	185	185
December 31, 2016:
Pay fixed / receive variable		$	3,967	—	241
Pay variable / receive fixed			3,967	241	—
	Total interest rate swap agreements	$	7,934	241	241

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Fair Value (Tables)

3 Months Ended

Mar. 31, 2017

Fair Value Disclosures [Abstract]

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

					Quoted Prices in	Significant
					Active Markets	Other	Significant
					for	Observable	Unobservable
					Identical Assets	Inputs	Inputs
(Dollars in thousands)				Amount	(Level 1)	(Level 2)	(Level 3)
March 31, 2017:
Securities available-for-sale:
	Agency obligations		$	55,201	—	55,201	—
	Agency RMBS			148,361	—	148,361	—
	State and political subdivisions			70,291	—	70,291	—
Total securities available-for-sale				273,853	—	273,853	—
Other assets (1)				185	—	185	—
		Total assets at fair value	$	274,038	—	274,038	—
Other liabilities(1)			$	185	—	185	—
		Total liabilities at fair value	$	185	—	185	—
December 31, 2016:
Securities available-for-sale:
	Agency obligations		$	45,471	—	45,471	—
	Agency RMBS			127,787	—	127,787	—
	State and political subdivisions			70,314	—	70,314	—
Total securities available-for-sale				243,572	—	243,572	—
Other assets (1)				241	—	241	—
		Total assets at fair value	$	243,813	—	243,813	—
Other liabilities(1)			$	241	—	241	—
		Total liabilities at fair value	$	241	—	241	—
(1)Represents the fair value of interest rate swap agreements.

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

				Quoted Prices in
				Active Markets	Other	Significant
				for	Observable	Unobservable
			Carrying	Identical Assets	Inputs	Inputs
(Dollars in thousands)			Amount	(Level 1)	(Level 2)	(Level 3)
March 31, 2017:
Loans held for sale		$	1,026	—	1,026	—
Loans, net(1)			2,039	—	—	2,039
Other real estate owned			152	—	—	152
Other assets (2)			1,862	—	—	1,862
	Total assets at fair value	$	5,079	—	1,026	4,053
December 31, 2016:
Loans held for sale		$	1,497	—	1,497	—
Loans, net(1)			2,099	—	—	2,099
Other real estate owned			152	—	—	152
Other assets (2)			1,952	—	—	1,952
	Total assets at fair value	$	5,700	—	1,497	4,203
(1)Loans considered impaired under ASC 310-10-35, Receivables. This amount reflects the recorded investment in
	impaired loans, net of any related allowance for loan losses.
(2)Represents MSRs, net, carried at lower of cost or estimated fair value.

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

					Weighted
		Carrying			Average
(Dollars in thousands)		Amount	Valuation Technique	Significant Unobservable Input	of Input
Nonrecurring:
Impaired loans	$	2,039	Appraisal	Appraisal discounts (%)	45.2	%
Other real estate owned		152	Appraisal	Appraisal discounts (%)	10.0	%
Mortgage servicing rights, net		1,862	Discounted cash flow	Prepayment speed or CPR (%)	10.5	%
				Discount rate (%)	10.0	%

Financial Instruments [Table Text Block]

							Fair Value Hierarchy
			Carrying		Estimated		Level 1		Level 2		Level 3
(Dollars in thousands)			amount		fair value		inputs		inputs		Inputs
March 31, 2017:
Financial Assets:
	Loans, net (1)	$	425,965	$	426,253	$	—	$	—	$	426,253
	Loans held for sale		1,026		1,036		—		1,036		—
Financial Liabilities:
	Time Deposits	$	203,696	$	203,141	$	—	$	203,141	$	—
	Long-term debt		3,217		3,217		—		3,217		—
December 31, 2016:
Financial Assets:
	Loans, net (1)	$	426,303	$	428,446	$	—	$	—	$	428,446
	Loans held for sale		1,497		1,507		—		1,507		—
Financial Liabilities:
	Time Deposits	$	208,137	$	207,791	$	—	$	207,791	$	—
	Long-term debt		3,217		3,217		—		3,217		—
(1) Represents loans, net of unearned income and the allowance for loan losses.

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Basic and Diluted Earnings Per Share (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Basic and Diluted Earnings Per Share [Abstract]
Net earnings	$ 1,890	$ 2,191
Basic and diluted weighted average shares outstanding	3,643,541	3,643,484
Basic and diluted earnings per share	$ 0.52	$ 0.6

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Variable Interest Entities (Details) $ in Thousands	Mar. 31, 2017 USD ($)
Variable Interest Entities [Line Items]
Trust Preferred Issuance, Liability Recognized	$ 3,217
Liability Recognized [Member]
Variable Interest Entities [Line Items]
Trust Preferred Issuance, Liability Recognized	$ 3,217

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Variable Interest Entities Textuals (Details) $ in Millions	Mar. 31, 2017 USD ($)
Variable Interest Entities (Textuals) [Abstract]
Trust Preferred Securities, Issued	$ 7.0
Junior Subordinated, Issued	3.2
Equity Interest, ANB Capital Trust	$ 0.2

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Security Types (Details) - USD ($) $ in Thousands	Mar. 31, 2017	Dec. 31, 2016
Schedule of Available-for-sale Securities [Line Items]
Available-for-sale Securities, Debt Maturities, within One Year, Fair Value	$ 3,015	$ 3,047
Available-for-sale Securities, Debt Maturities, after One Through Five Years, Fair Value	30,502	25,983
Available-for-sale Securities, Debt Maturities, after Five Through Ten Years, Fair Value	53,053	46,274
Available-for-sale Securities, Debt Maturities, after Ten Years, Fair Value	187,283	168,268
Available-for-sale Securities, Fair Value, Total	273,853	243,572
Available For Sale Securities, Gross Unrealized Gains	2,385	2,391
Available For Sale Securities, Gross Unrealized Losses	3,291	3,512
Available-for-sale Securities, Amortized Cost Basis	274,759	244,693
US Government and Government Agencies and Authorities [Member]
Schedule of Available-for-sale Securities [Line Items]
Available-for-sale Securities, Debt Maturities, within One Year, Fair Value	3,015	3,047
Available-for-sale Securities, Debt Maturities, after One Through Five Years, Fair Value	27,536	22,531
Available-for-sale Securities, Debt Maturities, after Five Through Ten Years, Fair Value	24,650	19,893
Available-for-sale Securities, Debt Maturities, after Ten Years, Fair Value	0	0
Available-for-sale Securities, Fair Value, Total	55,201	45,471
Available For Sale Securities, Gross Unrealized Gains	302	331
Available For Sale Securities, Gross Unrealized Losses	846	973
Available-for-sale Securities, Amortized Cost Basis	55,745	46,113
Mortgage-backed Securities, Issued by US Government Sponsored Enterprises [Member]
Schedule of Available-for-sale Securities [Line Items]
Available-for-sale Securities, Debt Maturities, within One Year, Fair Value	0	0
Available-for-sale Securities, Debt Maturities, after One Through Five Years, Fair Value	844	972
Available-for-sale Securities, Debt Maturities, after Five Through Ten Years, Fair Value	17,943	16,171
Available-for-sale Securities, Debt Maturities, after Ten Years, Fair Value	129,574	110,644
Available-for-sale Securities, Fair Value, Total	148,361	127,787
Available For Sale Securities, Gross Unrealized Gains	549	551
Available For Sale Securities, Gross Unrealized Losses	1,783	1,805
Available-for-sale Securities, Amortized Cost Basis	149,595	129,041
US States and Political Subdivisions Debt Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Available-for-sale Securities, Debt Maturities, within One Year, Fair Value	0	0
Available-for-sale Securities, Debt Maturities, after One Through Five Years, Fair Value	2,122	2,480
Available-for-sale Securities, Debt Maturities, after Five Through Ten Years, Fair Value	10,460	10,210
Available-for-sale Securities, Debt Maturities, after Ten Years, Fair Value	57,709	57,624
Available-for-sale Securities, Fair Value, Total	70,291	70,314
Available For Sale Securities, Gross Unrealized Gains	1,534	1,509
Available For Sale Securities, Gross Unrealized Losses	662	734
Available-for-sale Securities, Amortized Cost Basis	$ 69,419	$ 69,539

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Securities Continuous Unrealized Loss (Details) - USD ($) $ in Thousands	Mar. 31, 2017	Dec. 31, 2016
Schedule of Available-for-sale Securities [Line Items]
Available-for-sale Securities, Continuous Unrealized Loss Position, Less than Twelve Months, Fair Value	$ 148,560	$ 129,858
Available-for-sale Securities, Continuous Unrealized Loss Position, Less than 12 Months, Aggregate Losses	3,291	3,512
Available-for-sale Securities, Continuous Unrealized Loss Position, Twelve Months or Longer, Fair Value	0	0
Available-for-sale Securities, Continuous Unrealized Loss Position, 12 Months or Longer, Aggregate Losses	0	0
Available-for-sale Securities, Continuous Unrealized Loss Position, Fair Value	148,560	129,858
Available-for-sale Securities, Continuous Unrealized Loss Position, Aggregate Losses	3,291	3,512
US Government and Government Agencies and Authorities [Member]
Schedule of Available-for-sale Securities [Line Items]
Available-for-sale Securities, Continuous Unrealized Loss Position, Less than Twelve Months, Fair Value	20,437	20,352
Available-for-sale Securities, Continuous Unrealized Loss Position, Less than 12 Months, Aggregate Losses	846	973
Available-for-sale Securities, Continuous Unrealized Loss Position, Twelve Months or Longer, Fair Value	0	0
Available-for-sale Securities, Continuous Unrealized Loss Position, 12 Months or Longer, Aggregate Losses	0	0
Available-for-sale Securities, Continuous Unrealized Loss Position, Fair Value	20,437	20,352
Available-for-sale Securities, Continuous Unrealized Loss Position, Aggregate Losses	846	973
Mortgage-backed Securities, Issued by US Government Sponsored Enterprises [Member]
Schedule of Available-for-sale Securities [Line Items]
Available-for-sale Securities, Continuous Unrealized Loss Position, Less than Twelve Months, Fair Value	108,713	89,062
Available-for-sale Securities, Continuous Unrealized Loss Position, Less than 12 Months, Aggregate Losses	1,783	1,805
Available-for-sale Securities, Continuous Unrealized Loss Position, Twelve Months or Longer, Fair Value	0	0
Available-for-sale Securities, Continuous Unrealized Loss Position, 12 Months or Longer, Aggregate Losses	0	0
Available-for-sale Securities, Continuous Unrealized Loss Position, Fair Value	108,713	89,062
Available-for-sale Securities, Continuous Unrealized Loss Position, Aggregate Losses	1,783	1,805
US States and Political Subdivisions Debt Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Available-for-sale Securities, Continuous Unrealized Loss Position, Less than Twelve Months, Fair Value	19,410	20,444
Available-for-sale Securities, Continuous Unrealized Loss Position, Less than 12 Months, Aggregate Losses	662	734
Available-for-sale Securities, Continuous Unrealized Loss Position, Twelve Months or Longer, Fair Value	0	0
Available-for-sale Securities, Continuous Unrealized Loss Position, 12 Months or Longer, Aggregate Losses	0	0
Available-for-sale Securities, Continuous Unrealized Loss Position, Fair Value	19,410	20,444
Available-for-sale Securities, Continuous Unrealized Loss Position, Aggregate Losses	$ 662	$ 734

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Securities Gross Realized Gain Loss (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Available-for-sale Securities, Gross Realized Gain (Loss) [Abstract]
Available-for-sale Securities, Gross Realized Gains	$ 2	$ 0
Available-for-sale Securities, Gross Realized Losses	0	0
Available-for-sale Securities, Gross Realized Gain (Loss), Net	$ 2	$ 0

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Securities Textuals (Details) - USD ($) $ in Millions	Mar. 31, 2017	Dec. 31, 2016
Securities (Textuals) [Abstract]
Available-for-sale Securities Pledged as Collateral	$ 174.6	$ 137.2
Cost-method Investments, Aggregate Carrying Amount	$ 1.4	$ 1.4

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Loans (Details) - USD ($) $ in Thousands	Mar. 31, 2017	Dec. 31, 2016	Mar. 31, 2016
Loans And Leases Receivable Disclosure [Abstract]
Loans and Leases Receivable, Gross, Commercial	$ 50,228	$ 49,850
Construction And Land Development Loans	45,098	41,650
Commericial Real Estate Loans [Abstract]
Commercial Real Estate Owner Occupied Loans	45,011	49,745
Commercial Real Estate Multifamily	47,147	46,998
Commerical Real Estate Other Loans	126,581	123,696
Total Commercial Real Estate Loans	218,739	220,439
Residential Real Estate Loans [Abstract]
Consumer Mortgage Loans	63,741	65,564
Residential Real Estate Investment Property Loans	44,355	45,291
Total Residential Real Estate Loans	108,096	110,855
Consumer Installment And Revolving Loans	9,032	8,712
Loans and Leases Receivable, Gross, Carrying Amount	431,193	431,506	$ 432,280
Loans and Leases Receivable Deferred Income	(640)	(560)
Loans, net of unearned income	$ 430,553	$ 430,946

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Loans Past Due Analysis (Details) - USD ($) $ in Thousands	Mar. 31, 2017	Dec. 31, 2016	Mar. 31, 2016
Financing Receivable, Recorded Investment, Past Due [Line Items]
Financing Receivable, Recorded Investment, Current	$ 427,668	$ 427,094
Financing Receivable, Recorded Investment, 30 To 89 Days Past Due	1,207	2,042
Financing Receivable, Recorded Investment, 90 Days Past Due and Still Accruing	0	0
Financing Receivable, Recorded Investment, Total Still Accruing	428,875	429,136
Financing Receivable, Recorded Investment, Nonaccrual Status	2,318	2,370
Loans and Leases Receivable, Gross, Carrying Amount	431,193	431,506	$ 432,280
Commercial and Industrial Loans [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Financing Receivable, Recorded Investment, Current	50,192	49,747
Financing Receivable, Recorded Investment, 30 To 89 Days Past Due	1	66
Financing Receivable, Recorded Investment, 90 Days Past Due and Still Accruing	0	0
Financing Receivable, Recorded Investment, Total Still Accruing	50,193	49,813
Financing Receivable, Recorded Investment, Nonaccrual Status	35	37
Loans and Leases Receivable, Gross, Carrying Amount	50,228	49,850	50,192
Construction And Land Development Loans [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Financing Receivable, Recorded Investment, Current	45,073	41,223
Financing Receivable, Recorded Investment, 30 To 89 Days Past Due	3	395
Financing Receivable, Recorded Investment, 90 Days Past Due and Still Accruing	0	0
Financing Receivable, Recorded Investment, Total Still Accruing	45,076	41,618
Financing Receivable, Recorded Investment, Nonaccrual Status	22	32
Loans and Leases Receivable, Gross, Carrying Amount	45,098	41,650	45,953
Commercial Real Estate Owner Occupied Loans [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Financing Receivable, Recorded Investment, Current	45,011	49,564
Financing Receivable, Recorded Investment, 30 To 89 Days Past Due	0	43
Financing Receivable, Recorded Investment, 90 Days Past Due and Still Accruing	0	0
Financing Receivable, Recorded Investment, Total Still Accruing	45,011	49,607
Financing Receivable, Recorded Investment, Nonaccrual Status	0	138
Loans and Leases Receivable, Gross, Carrying Amount	45,011	49,745
Commercial Real Estate Multifamily [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Financing Receivable, Recorded Investment, Current	47,147	46,998
Financing Receivable, Recorded Investment, 30 To 89 Days Past Due	0	0
Financing Receivable, Recorded Investment, 90 Days Past Due and Still Accruing	0	0
Financing Receivable, Recorded Investment, Total Still Accruing	47,147	46,998
Financing Receivable, Recorded Investment, Nonaccrual Status	0	0
Loans and Leases Receivable, Gross, Carrying Amount	47,147	46,998
Commercial Real Estate Other Loans [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Financing Receivable, Recorded Investment, Current	124,731	121,608
Financing Receivable, Recorded Investment, 30 To 89 Days Past Due	0	199
Financing Receivable, Recorded Investment, 90 Days Past Due and Still Accruing	0	0
Financing Receivable, Recorded Investment, Total Still Accruing	124,731	121,807
Financing Receivable, Recorded Investment, Nonaccrual Status	1,850	1,889
Loans and Leases Receivable, Gross, Carrying Amount	126,581	123,696
Commercial Real Estate Loans, Total [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Financing Receivable, Recorded Investment, Current	216,889	218,170
Financing Receivable, Recorded Investment, 30 To 89 Days Past Due	0	242
Financing Receivable, Recorded Investment, 90 Days Past Due and Still Accruing	0	0
Financing Receivable, Recorded Investment, Total Still Accruing	216,889	218,412
Financing Receivable, Recorded Investment, Nonaccrual Status	1,850	2,027
Loans and Leases Receivable, Gross, Carrying Amount	218,739	220,439	209,320
Residential Real Estate Consumer Mortgage Loans [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Financing Receivable, Recorded Investment, Current	62,308	64,059
Financing Receivable, Recorded Investment, 30 To 89 Days Past Due	1,068	1,282
Financing Receivable, Recorded Investment, 90 Days Past Due and Still Accruing	0	0
Financing Receivable, Recorded Investment, Total Still Accruing	63,376	65,341
Financing Receivable, Recorded Investment, Nonaccrual Status	365	223
Loans and Leases Receivable, Gross, Carrying Amount	63,741	65,564
Residential Real Estate Investment Property Loans [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Financing Receivable, Recorded Investment, Current	44,211	45,243
Financing Receivable, Recorded Investment, 30 To 89 Days Past Due	118	19
Financing Receivable, Recorded Investment, 90 Days Past Due and Still Accruing	0	0
Financing Receivable, Recorded Investment, Total Still Accruing	44,329	45,262
Financing Receivable, Recorded Investment, Nonaccrual Status	26	29
Loans and Leases Receivable, Gross, Carrying Amount	44,355	45,291
Residential Real Estate Loans, Total [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Financing Receivable, Recorded Investment, Current	106,519	109,302
Financing Receivable, Recorded Investment, 30 To 89 Days Past Due	1,186	1,301
Financing Receivable, Recorded Investment, 90 Days Past Due and Still Accruing	0	0
Financing Receivable, Recorded Investment, Total Still Accruing	107,705	110,603
Financing Receivable, Recorded Investment, Nonaccrual Status	391	252
Loans and Leases Receivable, Gross, Carrying Amount	108,096	110,855	117,046
Consumer Installment and Revolving Loans [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Financing Receivable, Recorded Investment, Current	8,995	8,652
Financing Receivable, Recorded Investment, 30 To 89 Days Past Due	17	38
Financing Receivable, Recorded Investment, 90 Days Past Due and Still Accruing	0	0
Financing Receivable, Recorded Investment, Total Still Accruing	9,012	8,690
Financing Receivable, Recorded Investment, Nonaccrual Status	20	22
Loans and Leases Receivable, Gross, Carrying Amount	$ 9,032	$ 8,712	$ 9,769

XML

Allowance for Loan Loss (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Financing Receivable, Allowance for Credit Losses [Roll Forward]
Financing Receivable, Allowance for Credit Losses	$ 4,643	$ 4,289
Financing Receivable, Allowance for Credit Losses, Charge-offs	(79)	(144)
Financing Receivable, Allowance for Credit Losses, Recoveries	24	1,229
Financing Receivable Allowance For Credit Losses Net Chargeoffs Recoveries	(55)	1,085
Provision for loan losses	0	(600)
Financing Receivable, Allowance for Credit Losses	4,588	4,774
Commercial and Industrial Loans [Member]
Financing Receivable, Allowance for Credit Losses [Roll Forward]
Financing Receivable, Allowance for Credit Losses	540	523
Financing Receivable, Allowance for Credit Losses, Charge-offs	0	0
Financing Receivable, Allowance for Credit Losses, Recoveries	2	20
Financing Receivable Allowance For Credit Losses Net Chargeoffs Recoveries	2	20
Provision for loan losses	(18)	(26)
Financing Receivable, Allowance for Credit Losses	524	517
Construction And Land Development Loans [Member]
Financing Receivable, Allowance for Credit Losses [Roll Forward]
Financing Receivable, Allowance for Credit Losses	812	669
Financing Receivable, Allowance for Credit Losses, Charge-offs	0	0
Financing Receivable, Allowance for Credit Losses, Recoveries	5	1,198
Financing Receivable Allowance For Credit Losses Net Chargeoffs Recoveries	5	1,198
Provision for loan losses	28	(1,172)
Financing Receivable, Allowance for Credit Losses	845	695
Commercial Real Estate Loans, Total [Member]
Financing Receivable, Allowance for Credit Losses [Roll Forward]
Financing Receivable, Allowance for Credit Losses	2,071	1,879
Financing Receivable, Allowance for Credit Losses, Charge-offs	0	0
Financing Receivable, Allowance for Credit Losses, Recoveries	0	0
Financing Receivable Allowance For Credit Losses Net Chargeoffs Recoveries	0	0
Provision for loan losses	(67)	524
Financing Receivable, Allowance for Credit Losses	2,004	2,403
Residential Real Estate Loans, Total [Member]
Financing Receivable, Allowance for Credit Losses [Roll Forward]
Financing Receivable, Allowance for Credit Losses	1,107	1,059
Financing Receivable, Allowance for Credit Losses, Charge-offs	(78)	(118)
Financing Receivable, Allowance for Credit Losses, Recoveries	14	7
Financing Receivable Allowance For Credit Losses Net Chargeoffs Recoveries	(64)	(111)
Provision for loan losses	21	78
Financing Receivable, Allowance for Credit Losses	1,064	1,026
Consumer Installment and Revolving Loans [Member]
Financing Receivable, Allowance for Credit Losses [Roll Forward]
Financing Receivable, Allowance for Credit Losses	113	159
Financing Receivable, Allowance for Credit Losses, Charge-offs	(1)	(26)
Financing Receivable, Allowance for Credit Losses, Recoveries	3	4
Financing Receivable Allowance For Credit Losses Net Chargeoffs Recoveries	2	(22)
Provision for loan losses	36	(4)
Financing Receivable, Allowance for Credit Losses	$ 151	$ 133

XML

Allowance For Loan Loss Additional Information (Details) - USD ($) $ in Thousands	Mar. 31, 2017	Dec. 31, 2016	Mar. 31, 2016
Financing Receivable Allowance For Credit Loss Additional Information [Line Items]
Financing Receivable, Allowance for Credit Losses, Collectively Evaluated for Impairment	$ 4,561		$ 4,425
Financing Receivable, Collectively Evaluated for Impairment	429,127		429,426
Financing Receivable, Allowance for Credit Losses, Individually Evaluated for Impairment	27		349
Financing Receivable, Individually Evaluated for Impairment	2,066		2,854
Allowance for loan losses	4,588	$ 4,643	4,774
Loans and Leases Receivable, Gross, Carrying Amount	431,193	431,506	432,280
Commercial and Industrial Loans [Member]
Financing Receivable Allowance For Credit Loss Additional Information [Line Items]
Financing Receivable, Allowance for Credit Losses, Collectively Evaluated for Impairment	524		517
Financing Receivable, Collectively Evaluated for Impairment	50,222		50,152
Financing Receivable, Allowance for Credit Losses, Individually Evaluated for Impairment	0		0
Financing Receivable, Individually Evaluated for Impairment	6		40
Allowance for loan losses	524		517
Loans and Leases Receivable, Gross, Carrying Amount	50,228	49,850	50,192
Construction And Land Development Loans [Member]
Financing Receivable Allowance For Credit Loss Additional Information [Line Items]
Financing Receivable, Allowance for Credit Losses, Collectively Evaluated for Impairment	845		695
Financing Receivable, Collectively Evaluated for Impairment	45,076		45,887
Financing Receivable, Allowance for Credit Losses, Individually Evaluated for Impairment	0		0
Financing Receivable, Individually Evaluated for Impairment	22		66
Allowance for loan losses	845		695
Loans and Leases Receivable, Gross, Carrying Amount	45,098	41,650	45,953
Commercial Real Estate Loans, Total [Member]
Financing Receivable Allowance For Credit Loss Additional Information [Line Items]
Financing Receivable, Allowance for Credit Losses, Collectively Evaluated for Impairment	1,977		2,054
Financing Receivable, Collectively Evaluated for Impairment	216,701		206,572
Financing Receivable, Allowance for Credit Losses, Individually Evaluated for Impairment	27		349
Financing Receivable, Individually Evaluated for Impairment	2,038		2,748
Allowance for loan losses	2,004		2,403
Loans and Leases Receivable, Gross, Carrying Amount	218,739	220,439	209,320
Residential Real Estate Loans, Total [Member]
Financing Receivable Allowance For Credit Loss Additional Information [Line Items]
Financing Receivable, Allowance for Credit Losses, Collectively Evaluated for Impairment	1,064		1,026
Financing Receivable, Collectively Evaluated for Impairment	108,096		117,046
Financing Receivable, Allowance for Credit Losses, Individually Evaluated for Impairment	0		0
Financing Receivable, Individually Evaluated for Impairment	0		0
Allowance for loan losses	1,064		1,026
Loans and Leases Receivable, Gross, Carrying Amount	108,096	110,855	117,046
Consumer Installment and Revolving Loans [Member]
Financing Receivable Allowance For Credit Loss Additional Information [Line Items]
Financing Receivable, Allowance for Credit Losses, Collectively Evaluated for Impairment	151		133
Financing Receivable, Collectively Evaluated for Impairment	9,032		9,769
Financing Receivable, Allowance for Credit Losses, Individually Evaluated for Impairment	0		0
Financing Receivable, Individually Evaluated for Impairment	0		0
Allowance for loan losses	151		133
Loans and Leases Receivable, Gross, Carrying Amount	$ 9,032	$ 8,712	$ 9,769

XML

Loan Credit Quality Analysis (Details) - USD ($) $ in Thousands	Mar. 31, 2017	Dec. 31, 2016	Mar. 31, 2016
Financing Receivable, Recorded Investment [Line Items]
Financing Receivable, Recorded Investment, Pass	$ 419,045	$ 419,974
Financing Receivable, Recorded Investment, Special Mention	4,143	3,319
Financing Receivable Recorded Investment, Substandard Accruing	5,687	5,843
Financing Receivable, Recorded Investment, Nonaccrual Status	2,318	2,370
Loans and Leases Receivable, Gross, Carrying Amount	431,193	431,506	$ 432,280
Commercial and Industrial Loans [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing Receivable, Recorded Investment, Pass	49,760	49,558
Financing Receivable, Recorded Investment, Special Mention	223	22
Financing Receivable Recorded Investment, Substandard Accruing	210	233
Financing Receivable, Recorded Investment, Nonaccrual Status	35	37
Loans and Leases Receivable, Gross, Carrying Amount	50,228	49,850	50,192
Construction And Land Development Loans [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing Receivable, Recorded Investment, Pass	44,463	41,165
Financing Receivable, Recorded Investment, Special Mention	315	113
Financing Receivable Recorded Investment, Substandard Accruing	298	340
Financing Receivable, Recorded Investment, Nonaccrual Status	22	32
Loans and Leases Receivable, Gross, Carrying Amount	45,098	41,650	45,953
Commercial Real Estate Owner Occupied Loans [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing Receivable, Recorded Investment, Pass	44,247	48,788
Financing Receivable, Recorded Investment, Special Mention	409	414
Financing Receivable Recorded Investment, Substandard Accruing	355	405
Financing Receivable, Recorded Investment, Nonaccrual Status	0	138
Loans and Leases Receivable, Gross, Carrying Amount	45,011	49,745
Commercial Real Estate Multifamily [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing Receivable, Recorded Investment, Pass	47,147	46,998
Financing Receivable, Recorded Investment, Special Mention	0	0
Financing Receivable Recorded Investment, Substandard Accruing	0	0
Financing Receivable, Recorded Investment, Nonaccrual Status	0	0
Loans and Leases Receivable, Gross, Carrying Amount	47,147	46,998
Commercial Real Estate Other Loans [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing Receivable, Recorded Investment, Pass	124,260	121,326
Financing Receivable, Recorded Investment, Special Mention	31	32
Financing Receivable Recorded Investment, Substandard Accruing	440	449
Financing Receivable, Recorded Investment, Nonaccrual Status	1,850	1,889
Loans and Leases Receivable, Gross, Carrying Amount	126,581	123,696
Commercial Real Estate Loans, Total [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing Receivable, Recorded Investment, Pass	215,654	217,112
Financing Receivable, Recorded Investment, Special Mention	440	446
Financing Receivable Recorded Investment, Substandard Accruing	795	854
Financing Receivable, Recorded Investment, Nonaccrual Status	1,850	2,027
Loans and Leases Receivable, Gross, Carrying Amount	218,739	220,439	209,320
Residential Real Estate Consumer Mortgage Loans [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing Receivable, Recorded Investment, Pass	57,302	59,450
Financing Receivable, Recorded Investment, Special Mention	2,818	2,613
Financing Receivable Recorded Investment, Substandard Accruing	3,256	3,278
Financing Receivable, Recorded Investment, Nonaccrual Status	365	223
Loans and Leases Receivable, Gross, Carrying Amount	63,741	65,564
Residential Real Estate Investment Property Loans [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing Receivable, Recorded Investment, Pass	43,059	44,109
Financing Receivable, Recorded Investment, Special Mention	241	105
Financing Receivable Recorded Investment, Substandard Accruing	1,029	1,048
Financing Receivable, Recorded Investment, Nonaccrual Status	26	29
Loans and Leases Receivable, Gross, Carrying Amount	44,355	45,291
Residential Real Estate Loans, Total [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing Receivable, Recorded Investment, Pass	100,361	103,559
Financing Receivable, Recorded Investment, Special Mention	3,059	2,718
Financing Receivable Recorded Investment, Substandard Accruing	4,285	4,326
Financing Receivable, Recorded Investment, Nonaccrual Status	391	252
Loans and Leases Receivable, Gross, Carrying Amount	108,096	110,855	117,046
Consumer Installment and Revolving Loans [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing Receivable, Recorded Investment, Pass	8,807	8,580
Financing Receivable, Recorded Investment, Special Mention	106	20
Financing Receivable Recorded Investment, Substandard Accruing	99	90
Financing Receivable, Recorded Investment, Nonaccrual Status	20	22
Loans and Leases Receivable, Gross, Carrying Amount	$ 9,032	$ 8,712	$ 9,769

XML

Impaired Loans (Details) - USD ($) $ in Thousands	Mar. 31, 2017	Dec. 31, 2016
Financing Receivable, Impaired [Line Items]
Impaired Financing Receivable, with No Related Allowance, Unpaid Principal Balance	$ 2,999	$ 3,029
Impaired Financing Receivable, with No Related Allowance, Charge-off And Payments Applied	(1,121)	(1,092)
Impaired Financing Receivable, with No Related Allowance, Recorded Investment	1,878	1,937
Impaired Financing Receivable, with Related Allowance, Unpaid Principal Balance	188	193
Impaired Financing Receivable, with Related Allowance, Charge-off And Payments Applied	0	0
Impaired Financing Receivable, with Related Allowance, Recorded Investment	188	193
Impaired Financing Receivable, With Related Allowance, Related Allowance	27	31
Impaired Financing Receivable, Unpaid Principal Balance	3,187	3,222
Impaired Financing Receivable, Charge-off And Payments Applied	(1,121)	(1,092)
Impaired Financing Receivable, Recorded Investment	2,066	2,130
Impaired Financing Receivable, Related Allowance	27	31
Commercial and Industrial Loans [Member]
Financing Receivable, Impaired [Line Items]
Impaired Financing Receivable, with No Related Allowance, Unpaid Principal Balance	6	15
Impaired Financing Receivable, with No Related Allowance, Charge-off And Payments Applied	0	0
Impaired Financing Receivable, with No Related Allowance, Recorded Investment	6	15
Construction And Land Development Loans [Member]
Financing Receivable, Impaired [Line Items]
Impaired Financing Receivable, with No Related Allowance, Unpaid Principal Balance	132	140
Impaired Financing Receivable, with No Related Allowance, Charge-off And Payments Applied	(110)	(108)
Impaired Financing Receivable, with No Related Allowance, Recorded Investment	22	32
Commercial Real Estate Owner Occupied Loans [Member]
Financing Receivable, Impaired [Line Items]
Impaired Financing Receivable, with Related Allowance, Unpaid Principal Balance	188	193
Impaired Financing Receivable, with Related Allowance, Charge-off And Payments Applied	0	0
Impaired Financing Receivable, with Related Allowance, Recorded Investment	188	193
Impaired Financing Receivable, With Related Allowance, Related Allowance	27	31
Commercial Real Estate Other Loans [Member]
Financing Receivable, Impaired [Line Items]
Impaired Financing Receivable, with No Related Allowance, Unpaid Principal Balance	2,861	2,874
Impaired Financing Receivable, with No Related Allowance, Charge-off And Payments Applied	(1,011)	(984)
Impaired Financing Receivable, with No Related Allowance, Recorded Investment	1,850	1,890
Commercial Real Estate Loans, Total [Member]
Financing Receivable, Impaired [Line Items]
Impaired Financing Receivable, with No Related Allowance, Unpaid Principal Balance	2,861	2,874
Impaired Financing Receivable, with No Related Allowance, Charge-off And Payments Applied	(1,011)	(984)
Impaired Financing Receivable, with No Related Allowance, Recorded Investment	1,850	1,890
Impaired Financing Receivable, with Related Allowance, Unpaid Principal Balance	188	193
Impaired Financing Receivable, with Related Allowance, Charge-off And Payments Applied	0	0
Impaired Financing Receivable, with Related Allowance, Recorded Investment	188	193
Impaired Financing Receivable, With Related Allowance, Related Allowance	$ 27	$ 31

XML

Impaired Loans Averages (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Impaired Financing Receivable, Average Recorded Investment [Line Items]
Impaired Financing Receivable, Average Recorded Investment	$ 2,099	$ 2,992
Impaired Financing Receivable, Interest Income, Accrual Method	3	16
Commercial and Industrial Loans [Member]
Impaired Financing Receivable, Average Recorded Investment [Line Items]
Impaired Financing Receivable, Average Recorded Investment	10	32
Impaired Financing Receivable, Interest Income, Accrual Method	0	1
Construction And Land Development Loans [Member]
Impaired Financing Receivable, Average Recorded Investment [Line Items]
Impaired Financing Receivable, Average Recorded Investment	28	198
Impaired Financing Receivable, Interest Income, Accrual Method	0	0
Commercial Real Estate Owner Occupied Loans [Member]
Impaired Financing Receivable, Average Recorded Investment [Line Items]
Impaired Financing Receivable, Average Recorded Investment	191	1,020
Impaired Financing Receivable, Interest Income, Accrual Method	3	15
Commercial Real Estate Other Loans [Member]
Impaired Financing Receivable, Average Recorded Investment [Line Items]
Impaired Financing Receivable, Average Recorded Investment	1,870	1,742
Impaired Financing Receivable, Interest Income, Accrual Method	0	0
Commercial Real Estate Loans, Total [Member]
Impaired Financing Receivable, Average Recorded Investment [Line Items]
Impaired Financing Receivable, Average Recorded Investment	2,061	2,762
Impaired Financing Receivable, Interest Income, Accrual Method	$ 3	$ 15

XML

Troubled Debt Restructuring (Details) - USD ($) $ in Thousands	Mar. 31, 2017	Dec. 31, 2016
Impaired Financing Receivable And Troubled Debt Restructing [Line Items]
Impaired Financing Receivable, Troubled Debt Restructuring, Still Accruing	$ 194	$ 208
Impaired Financing Receivable, Troubled Debt Restructuring, Nonaccrual	1,806	1,850
Impaired Financing Receivable, Trouble Debt Structuring, Total	2,000	2,058
Impaired Financing Receivable, Troubled Debt Restructuring, Allowance for Credit Losses	27	31
Commercial and Industrial Loans [Member]
Impaired Financing Receivable And Troubled Debt Restructing [Line Items]
Impaired Financing Receivable, Troubled Debt Restructuring, Still Accruing	6	15
Impaired Financing Receivable, Troubled Debt Restructuring, Nonaccrual	0	0
Impaired Financing Receivable, Trouble Debt Structuring, Total	6	15
Impaired Financing Receivable, Troubled Debt Restructuring, Allowance for Credit Losses	0	0
Construction And Land Development Loans [Member]
Impaired Financing Receivable And Troubled Debt Restructing [Line Items]
Impaired Financing Receivable, Troubled Debt Restructuring, Still Accruing	0	0
Impaired Financing Receivable, Troubled Debt Restructuring, Nonaccrual	22	32
Impaired Financing Receivable, Trouble Debt Structuring, Total	22	32
Impaired Financing Receivable, Troubled Debt Restructuring, Allowance for Credit Losses	0	0
Commercial Real Estate Owner Occupied Loans [Member]
Impaired Financing Receivable And Troubled Debt Restructing [Line Items]
Impaired Financing Receivable, Troubled Debt Restructuring, Still Accruing	188	193
Impaired Financing Receivable, Troubled Debt Restructuring, Nonaccrual	0	0
Impaired Financing Receivable, Trouble Debt Structuring, Total	188	193
Impaired Financing Receivable, Troubled Debt Restructuring, Allowance for Credit Losses	27	31
Commercial Real Estate Other Loans [Member]
Impaired Financing Receivable And Troubled Debt Restructing [Line Items]
Impaired Financing Receivable, Troubled Debt Restructuring, Still Accruing	0	0
Impaired Financing Receivable, Troubled Debt Restructuring, Nonaccrual	1,784	1,818
Impaired Financing Receivable, Trouble Debt Structuring, Total	1,784	1,818
Impaired Financing Receivable, Troubled Debt Restructuring, Allowance for Credit Losses	0	0
Commercial Real Estate Loans, Total [Member]
Impaired Financing Receivable And Troubled Debt Restructing [Line Items]
Impaired Financing Receivable, Troubled Debt Restructuring, Still Accruing	188	193
Impaired Financing Receivable, Troubled Debt Restructuring, Nonaccrual	1,784	1,818
Impaired Financing Receivable, Trouble Debt Structuring, Total	1,972	2,011
Impaired Financing Receivable, Troubled Debt Restructuring, Allowance for Credit Losses	$ 27	$ 31

XML

Loans Textuals (Details)	Mar. 31, 2017
Loan and Lease Disclosure (Textuals) [Abstract]
Percentage Of Loans Secured By Real Estate	86.30%

XML

Mortgage Servicing Rights, Net (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Servicing Asset at Amortized Value, Balance [Roll Forward]
Servicing Asset at Amortized Cost, Beginning	$ 1,952	$ 2,316
Servicing Asset at Amortized Value, Additions	53	57
Servicing Asset at Amortized Value, Amortization	(144)	(138)
Servicing Asset at Amortized Value, Valuation Allowance	1	0
Servicing Asset at Amortized Cost, Ending	1,862	2,235
Valuation Allowance for Impairment of Recognized Servicing Assets, Balance [Abstract]
Valuation Allowance for Impairment of Recognized Servicing Assets, Beginning Balance	1	0
Valuation Allowance for Impairment of Recognized Servicing Assets, Ending Balance	0	0
Servicing Asset at Amortized Value, Fair Value [Abstract]
Servicing Asset at Amortized Value, Fair Value, Beginning	2,678	3,086
Servicing Asset at Amortized Value, Fair Value, Ending	$ 2,689	$ 2,906

XML

Derivative Instruments (Details) - USD ($) $ in Thousands	Mar. 31, 2017	Dec. 31, 2016
Derivative [Line Items]
Derivative, Notional Amount1	$ 7,758	$ 7,934
DerivativeAssetFairValueGrossAsset	185	241
Derivative Asset, Fair Value, Gross Liability	185	241
Derivative, Interest Rate Swap, Pay Fixed, Receive Variable [Member]
Derivative [Line Items]
Derivative, Notional Amount1	3,879	3,967
DerivativeAssetFairValueGrossAsset	0	0
Derivative Asset, Fair Value, Gross Liability	185	241
Derivative, Interest Rate Swap, Pay Variable, Receive Fixed [Member]
Derivative [Line Items]
Derivative, Notional Amount1	3,879	3,967
DerivativeAssetFairValueGrossAsset	185	241
Derivative Asset, Fair Value, Gross Liability	$ 0	$ 0

XML

Fair Value (Details) - USD ($) $ in Thousands	Mar. 31, 2017	Dec. 31, 2016
Fair Value, Measurements, Recurring [Member]
Fair Value Disclosure, Securities Available-for-Sale [Abstract]
Fair Value Disclosure, Agency RMBS	$ 55,201	$ 45,471
Fair Value Disclosure, State and Political Subdivisions	148,361	127,787
Trust Preferred Securities	70,291	70,314
Fair Value Disclosure, Securities Available-for-Sale, Total	273,853	243,572
Other Assets, Fair Value Disclosure	185	241
Assets, Fair Value Disclosure, Recurring	274,038	243,813
Liabilities Fair Value Disclosure [Abstract]
Other Liabilities, Fair Value Disclosure	185	241
Liabilities, Fair Value Disclosure, Recurring, Total	185	241
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 1 [Member]
Fair Value Disclosure, Securities Available-for-Sale [Abstract]
Fair Value Disclosure, Agency RMBS	0	0
Fair Value Disclosure, State and Political Subdivisions	0	0
Trust Preferred Securities	0	0
Fair Value Disclosure, Securities Available-for-Sale, Total	0	0
Other Assets, Fair Value Disclosure	0	0
Assets, Fair Value Disclosure, Recurring	0	0
Liabilities Fair Value Disclosure [Abstract]
Other Liabilities, Fair Value Disclosure	0	0
Liabilities, Fair Value Disclosure, Recurring, Total	0	0
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 2 [Member]
Fair Value Disclosure, Securities Available-for-Sale [Abstract]
Fair Value Disclosure, Agency RMBS	55,201	45,471
Fair Value Disclosure, State and Political Subdivisions	148,361	127,787
Trust Preferred Securities	70,291	70,314
Fair Value Disclosure, Securities Available-for-Sale, Total	273,853	243,572
Other Assets, Fair Value Disclosure	185	241
Assets, Fair Value Disclosure, Recurring	274,038	243,813
Liabilities Fair Value Disclosure [Abstract]
Other Liabilities, Fair Value Disclosure	185	241
Liabilities, Fair Value Disclosure, Recurring, Total	185	241
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 3 [Member]
Fair Value Disclosure, Securities Available-for-Sale [Abstract]
Fair Value Disclosure, Agency RMBS	0	0
Fair Value Disclosure, State and Political Subdivisions	0	0
Trust Preferred Securities	0	0
Fair Value Disclosure, Securities Available-for-Sale, Total	0	0
Other Assets, Fair Value Disclosure	0	0
Assets, Fair Value Disclosure, Recurring	0	0
Liabilities Fair Value Disclosure [Abstract]
Other Liabilities, Fair Value Disclosure	0	0
Liabilities, Fair Value Disclosure, Recurring, Total	0	0
Fair Value, Measurements, Nonrecurring [Member]
Fair Value, Assets and Liabilities Measured on Nonrecurring Basis [Abstract]
Loans Held-for-sale, Fair Value Disclosure	1,026	1,497
Impaired Loans, Fair Value Disclosure	2,039	2,099
Other Real Esate Owned, Fair Value Disclosure	152	152
Servicing Asset at Fair Value, Amount	1,862	1,952
Assets, Fair Value Disclosure, Nonrecurring	5,079	5,700
Fair Value, Measurements, Nonrecurring [Member] | Fair Value, Inputs, Level 1 [Member]
Fair Value, Assets and Liabilities Measured on Nonrecurring Basis [Abstract]
Loans Held-for-sale, Fair Value Disclosure	0	0
Impaired Loans, Fair Value Disclosure	0	0
Other Real Esate Owned, Fair Value Disclosure	0	0
Servicing Asset at Fair Value, Amount	0	0
Assets, Fair Value Disclosure, Nonrecurring	0	0
Fair Value, Measurements, Nonrecurring [Member] | Fair Value, Inputs, Level 2 [Member]
Fair Value, Assets and Liabilities Measured on Nonrecurring Basis [Abstract]
Loans Held-for-sale, Fair Value Disclosure	1,026	1,497
Impaired Loans, Fair Value Disclosure	0	0
Other Real Esate Owned, Fair Value Disclosure	0	0
Servicing Asset at Fair Value, Amount	0	0
Assets, Fair Value Disclosure, Nonrecurring	1,026	1,497
Fair Value, Measurements, Nonrecurring [Member] | Fair Value, Inputs, Level 3 [Member]
Fair Value, Assets and Liabilities Measured on Nonrecurring Basis [Abstract]
Loans Held-for-sale, Fair Value Disclosure	0	0
Impaired Loans, Fair Value Disclosure	2,039	2,099
Other Real Esate Owned, Fair Value Disclosure	152	152
Servicing Asset at Fair Value, Amount	1,862	1,952
Assets, Fair Value Disclosure, Nonrecurring	$ 4,053	$ 4,203

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Fair Value Unobservable Inputs (Details) - Fair Value, Measurements, Nonrecurring [Member] - Carrying (Reported) Amount, Fair Value Disclosure [Member] $ in Thousands	Mar. 31, 2017 USD ($)
Impaired Loans [Member]
Schedule Of Fair Value Significant Unobservable Inputs Used [Line Items]
Assets, Fair Value Disclosure	$ 2,039
Impaired Loans [Member] | Appraisal, Appraisal Discount [Member]
Schedule Of Fair Value Significant Unobservable Inputs Used [Line Items]
Unobservable Input, Weighted Average of Input Percent	45.20%
Other Real Estate Owned [Member]
Schedule Of Fair Value Significant Unobservable Inputs Used [Line Items]
Assets, Fair Value Disclosure	$ 152
Other Real Estate Owned [Member] | Appraisal, Appraisal Discount [Member]
Schedule Of Fair Value Significant Unobservable Inputs Used [Line Items]
Unobservable Input, Weighted Average of Input Percent	10.00%
Mortgage Servicing Rights [Member]
Schedule Of Fair Value Significant Unobservable Inputs Used [Line Items]
Assets, Fair Value Disclosure	$ 1,862
Mortgage Servicing Rights [Member] | Discounted Cash Flow, Prepayment Speed [Member]
Schedule Of Fair Value Significant Unobservable Inputs Used [Line Items]
Unobservable Input, Weighted Average of Input Percent	10.50%
Mortgage Servicing Rights [Member] | Discounted Cash Flow, Discount Rate [Member]
Schedule Of Fair Value Significant Unobservable Inputs Used [Line Items]
Unobservable Input, Weighted Average of Input Percent	10.00%

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Fair Value Financial Instruments (Details) - USD ($) $ in Thousands	Mar. 31, 2017	Dec. 31, 2016
Carrying (Reported) Amount, Fair Value Disclosure [Member]
Fair Value, Financial Assets: [Abstract]
Fair Value, Financial Instruments, Loans, Net	$ 425,965	$ 426,303
Fair Value, Financial Instruments, Loans Held For Sale	1,026	1,497
Fair Value, Financial Liabilities: [Abstract]
Fair Value, Financial Instruments, Time Deposits	203,696	208,137
Fair Value, Financial Instruments, Long-term Debt	3,217	3,217
Estimate of Fair Value, Fair Value Disclosure [Member]
Fair Value, Financial Assets: [Abstract]
Fair Value, Financial Instruments, Loans, Net	426,253	428,446
Fair Value, Financial Instruments, Loans Held For Sale	1,036	1,507
Fair Value, Financial Liabilities: [Abstract]
Fair Value, Financial Instruments, Time Deposits	203,141	207,791
Fair Value, Financial Instruments, Long-term Debt	3,217	3,217
Estimate of Fair Value, Fair Value Disclosure [Member] | Fair Value, Inputs, Level 1 [Member]
Fair Value, Financial Assets: [Abstract]
Fair Value, Financial Instruments, Loans, Net	0	0
Fair Value, Financial Instruments, Loans Held For Sale	0	0
Fair Value, Financial Liabilities: [Abstract]
Fair Value, Financial Instruments, Time Deposits	0	0
Fair Value, Financial Instruments, Long-term Debt	0	0
Estimate of Fair Value, Fair Value Disclosure [Member] | Fair Value, Inputs, Level 2 [Member]
Fair Value, Financial Assets: [Abstract]
Fair Value, Financial Instruments, Loans, Net	0	0
Fair Value, Financial Instruments, Loans Held For Sale	1,036	1,507
Fair Value, Financial Liabilities: [Abstract]
Fair Value, Financial Instruments, Time Deposits	203,141	207,791
Fair Value, Financial Instruments, Long-term Debt	3,217	3,217
Estimate of Fair Value, Fair Value Disclosure [Member] | Fair Value, Inputs, Level 3 [Member]
Fair Value, Financial Assets: [Abstract]
Fair Value, Financial Instruments, Loans, Net	426,253	428,446
Fair Value, Financial Instruments, Loans Held For Sale	0	0
Fair Value, Financial Liabilities: [Abstract]
Fair Value, Financial Instruments, Time Deposits	0	0
Fair Value, Financial Instruments, Long-term Debt	$ 0	$ 0

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Subsequent Events (Details) $ in Millions	Mar. 31, 2017 USD ($)
Subsequent Event [Abstract]
Junior Subordinated, Issued	$ 3.2