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 June 30, 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, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated filer ☐	Accelerated filer ☐	Non-accelerated filer ☐	Smaller reporting company ☒	Emerging growth company ☐
(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 July 31, 2017
Common Stock, $0.01 par value per share	3,643,643 shares

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

INDEX

PART I. FINANCIAL INFORMATION			PAGE
Item 1	Financial Statements
		Consolidated Balance Sheets (Unaudited) as of June 30, 2017 and December 31, 2016	3
		Consolidated Statements of Earnings (Unaudited) for the quarter and six months ended June 30, 2017 and 2016	4
		Consolidated Statements of Comprehensive Income (Unaudited) for the quarter and six months ended June 30, 2017 and 2016	5
		Consolidated Statements of Stockholders’ Equity (Unaudited) for the six months ended June 30, 2017 and 2016	6
		Consolidated Statements of Cash Flows (Unaudited) for the six months ended June 30, 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		29
		Table 1 – Explanation of Non-GAAP Financial Measures	48
		Table 2 – Selected Quarterly Financial Data	49
		Table 3 – Selected Financial Data	50
		Table 4 – Average Balances and Net Interest Income Analysis – for the quarter ended June 30, 2017 and 2016	51
		Table 5 – Average Balances and Net Interest Income Analysis – for the six months ended June 30, 2017 and 2016	52
		Table 6 – Loan Portfolio Composition	53
		Table 7 – Allowance for Loan Losses and Nonperforming Assets	54
		Table 8 – Allocation of Allowance for Loan Losses	55
		Table 9 – CDs and Other Time Deposits of $100,000 or more	56
Item 3	Quantitative and Qualitative Disclosures About Market Risk		57
Item 4	Controls and Procedures		57
PART II. OTHER INFORMATION
Item 1	Legal Proceedings		57
Item 1A	Risk Factors		57
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds		57
Item 3	Defaults Upon Senior Securities		57
Item 4	Mine Safety Disclosures		57
Item 5	Other Information		57
Item 6	Exhibits		58

PART 1. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Unaudited)

(Dollars in thousands, except share data)	June 30,       2017			December 31, 2016
Assets:
Cash and due from banks	$	14,287		$	15,673
Federal funds sold		23,915			42,096
Interest bearing bank deposits		48,097			63,508
Cash and cash equivalents		86,299			121,277
Securities available-for-sale		277,363			243,572
Loans held for sale		1,436			1,497
Loans, net of unearned income		437,287			430,946
Allowance for loan losses		(4,965	)		(4,643	)
Loans, net		432,322			426,303
Premises and equipment, net		12,995			12,602
Bank-owned life insurance		18,105			17,888
Other real estate owned		103			152
Other assets		7,688			8,652
Total assets	$	836,311		$	831,943
Liabilities:
Deposits:
Noninterest-bearing	$	182,311		$	181,890
Interest-bearing		560,145			557,253
Total deposits		742,456			739,143
Federal funds purchased and securities sold under agreements to repurchase		3,469			3,366
Long-term debt		3,217			3,217
Accrued expenses and other liabilities		2,070			4,040
Total liabilities		751,212			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		3,770			3,767
Retained earnings		87,925			85,716
Accumulated other comprehensive income (loss), net		2			(708	)
Less treasury stock, at cost - 313,492 shares and 313,612 shares at June 30, 2017 and December 31, 2016, respectively		(6,637	)		(6,637	)
Total stockholders’ equity		85,099			82,177
Total liabilities and stockholders’ equity	$	836,311		$	831,943

See accompanying notes to consolidated financial statements

3

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

Consolidated Statements of Earnings

(Unaudited)

	Quarter ended June 30,				Six months ended June 30,
(In thousands, except share and per share data)	2017		2016		2017		2016
Interest income:
Loans, including fees	$	5,121	$	5,172	$	10,102	$	10,268
Securities:
Taxable		1,112		775		2,133		1,673
Tax-exempt		587		623		1,168		1,248
Federal funds sold and interest bearing bank deposits		182		156		383		282
Total interest income		7,002		6,726		13,786		13,471
Interest expense:
Deposits		866		967		1,728		1,948
Short-term borrowings		5		3		9		7
Long-term debt		30		64		59		127
Total interest expense		901		1,034		1,796		2,082
Net interest income		6,101		5,692		11,990		11,389
Provision for loan losses		100		—		100		(600	)
Net interest income after provision for loan losses		6,001		5,692		11,890		11,989
Noninterest income:
Service charges on deposit accounts		183		193		372		391
Mortgage lending		139		315		304		494
Bank-owned life insurance		110		113		217		225
Other		361		372		734		717
Securities gains, net		—		—		2		—
Total noninterest income		793		993		1,629		1,827
Noninterest expense:
Salaries and benefits		2,392		2,446		4,773		4,851
Net occupancy and equipment		351		358		732		718
Professional fees		254		194		484		405
FDIC and other regulatory assessments		89		122		178		244
Other		929		901		1,966		1,912
Total noninterest expense		4,015		4,021		8,133		8,130
Earnings before income taxes		2,779		2,664		5,386		5,686
Income tax expense		784		733		1,501		1,564
Net earnings	$	1,995	$	1,931	$	3,885	$	4,122
Net earnings per share:
Basic and diluted	$	0.55	$	0.53	$	1.07	$	1.13
Weighted average shares outstanding:
Basic and diluted		3,643,593		3,643,503		3,643,567		3,643,493

See accompanying notes to consolidated financial statements

4

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(Unaudited)

	Quarter ended June 30,				Six months ended June 30,
(Dollars in thousands)	2017		2016		2017			2016
Net earnings	$	1,995	$	1,931	$	3,885		$	4,122
Other comprehensive income, net of tax:
Unrealized net holding gain on securities		573		810		711			2,376
Reclassification adjustment for net gain on securities recognized in net earnings		—		—		(1	)		—
Other comprehensive income		573		810		710			2,376
Comprehensive income	$	2,568	$	2,741	$	4,595		$	6,498

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		—		—		—		4,122			—			—			4,122
Other comprehensive income		—		—		—		—			2,376			—			2,376
Cash dividends paid ($0.45 per share)		—		—		—		(1,640	)		—			—			(1,640	)
Sale of treasury stock (25 shares)		—		—		1		—			—			—			1
Balance, June 30, 2016		3,957,135	$	39	$	3,767	$	83,327		$	4,313		$	(6,638	)	$	84,808
Balance, December 31, 2016		3,957,135	$	39	$	3,767	$	85,716		$	(708	)	$	(6,637	)	$	82,177
Net earnings		—		—		—		3,885			—			—			3,885
Other comprehensive income		—		—		—		—			710			—			710
Cash dividends paid ($0.46 per share)		—		—		—		(1,676	)		—			—			(1,676	)
Sale of treasury stock (120 shares)		—		—		3		—			—			—			3
Balance, June 30, 2017		3,957,135	$	39	$	3,770	$	87,925		$	2		$	(6,637	)	$	85,099

See accompanying notes to consolidated financial statements

6

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

		Six months ended June 30,
(In thousands)		2017			2016
Cash flows from operating activities:
Net earnings	$		3,885		$	4,122
Adjustments to reconcile net earnings to net cash provided by operating activities:
Provision for loan losses			100			(600	)
Depreciation and amortization			536			544
Premium amortization and discount accretion, net			1,058			692
Net gain on securities available-for-sale			(2	)		—
Net gain on sale of loans held for sale			(176	)		(367	)
(Decrease) increase in MSR valuation allowance			(1	)		1
Net gain on other real estate owned			(11	)		(43	)
Loans originated for sale			(11,945	)		(20,327	)
Proceeds from sale of loans			12,089			20,523
Increase in cash surrender value of bank-owned life insurance			(217	)		(225	)
Net decrease (increase) in other assets			343			(425	)
Net (decrease) increase in accrued expenses and other liabilities			(1,967	)		510
Net cash provided by operating activities			3,692			4,405
Cash flows from investing activities:
Proceeds from prepayments and maturities of securities available-for-sale			17,611			30,922
Purchase of securities available-for-sale			(51,334	)		(3,164	)
Increase in loans, net			(6,119	)		(3,693	)
Net purchases of premises and equipment			(615	)		(57	)
Increase in FHLB stock			(13	)		(25	)
Proceeds from sale of other real estate owned			60			203
Net cash (used in) provided by investing activities			(40,410	)		24,186
Cash flows from financing activities:
Net increase in noninterest-bearing deposits			421			10,924
Net increase in interest-bearing deposits			2,892			12,988
Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase			103			(373	)
Dividends paid			(1,676	)		(1,640	)
Net cash provided by financing activities			1,740			21,899
Net change in cash and cash equivalents			(34,978	)		50,490
Cash and cash equivalents at beginning of period			121,277			113,930
Cash and cash equivalents at end of period	$		86,299		$	164,420
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$		1,858		$	2,062
Income taxes			2,007			1,403
Supplemental disclosure of non-cash transactions:
Real estate acquired through foreclosure			—			248

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 June 30, 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 six months of 2017, the Company adopted no new accounting guidance.

8

NOTE 2: BASIC AND DILUTED NET EARNINGS PER SHARE

Basic net earnings per share is computed by dividing net earnings by the weighted average common shares outstanding for the respective period. Diluted net earnings per share reflect the potential dilution that could occur upon exercise of securities or other rights for, or convertible into, shares of the Company’s common stock. At June 30, 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 earnings per share calculation.

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

	Quarter ended June 30,				Six months ended June 30,
(In thousands, except share and per share data)	2017		2016		2017		2016
Basic and diluted:
Net earnings	$	1,995	$	1,931	$	3,885	$	4,122
Weighted average common shares outstanding		3,643,593		3,643,503		3,643,567		3,643,493
Net earnings per share	$	0.55	$	0.53	$	1.07	$	1.13

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 June 30, 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 to us 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 that remain outstanding is included in interest expense on long-term debt.

The following table summarizes VIEs that are not consolidated by the Company as of June 30, 2017.

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

9

NOTE 4: SECURITIES

At June 30, 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 June 30, 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
June 30, 2017
Agency obligations (a)	$	2,990		29,535		24,769		—		57,294		298		675	$	57,671
Agency RMBS (a)		—		704		19,825		127,599		148,128		556		1,458		149,030
State and political subdivisions		—		2,110		10,771		59,060		71,941		1,699		418		70,660
Total available-for-sale	$	2,990		32,349		55,365		186,659		277,363		2,553		2,551	$	277,361
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 $166.6 million and $137.2 million at June 30, 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 June 30, 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 June 30, 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
June 30, 2017:
Agency obligations	$	25,546		675		—		—	$	25,546		675
Agency RMBS		94,239		1,358		4,501		100		98,740		1,458
State and political subdivisions		15,669		418		—		—		15,669		418
Total	$	135,454		2,451		4,501		100	$	139,955		2,551
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.

11

Cost-method investments

At June 30, 2017, cost-method investments with an aggregate cost of $1.4 million were not evaluated for impairment because the Company had not identified 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 June 30, 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 six months ended June 30, 2017 and 2016, respectively.

Realized Gains and Losses

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

	Quarter ended June 30,				Six months ended June 30,
(Dollars in thousands)	2017		2016		2017		2016
Gross realized gains	$	—		—	$	2		—
Realized gains, net	$	—		—	$	2		—

NOTE 5: LOANS AND ALLOWANCE FOR LOAN LOSSES

	June 30,			December 31,
(In thousands)	2017			2016
Commercial and industrial	$	50,974		$	49,850
Construction and land development		46,386			41,650
Commercial real estate:
Owner occupied		38,940			49,745
Multi-family		47,206			46,998
Other		134,717			123,696
Total commercial real estate		220,863			220,439
Residential real estate:
Consumer mortgage		64,362			65,564
Investment property		45,926			45,291
Total residential real estate		110,288			110,855
Consumer installment		9,409			8,712
Total loans		437,920			431,506
Less: unearned income		(633	)		(560)
Loans, net of unearned income	$	437,287		$	430,946

Loans secured by real estate were approximately 86.2% of the Company’s total loan portfolio at June 30, 2017. At June 30, 2017, the Company’s geographic loan distribution was concentrated primarily in Lee County, Alabama, and surrounding areas.

12

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.

13

The following is a summary of current, accruing past due, and nonaccrual loans by portfolio segment and class as of June 30, 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
June 30, 2017:
Commercial and industrial	$	50,745		195		—		50,940		34	$	50,974
Construction and land development		46,384		2		—		46,386		—		46,386
Commercial real estate:
Owner occupied		38,940		—		—		38,940		—		38,940
Multi-family		47,206		—		—		47,206		—		47,206
Other		132,172		748		—		132,920		1,797		134,717
Total commercial real estate		218,318		748		—		219,066		1,797		220,863
Residential real estate:
Consumer mortgage		63,550		364		42		63,956		406		64,362
Investment property		45,794		132		—		45,926		—		45,926
Total residential real estate		109,344		496		42		109,882		406		110,288
Consumer installment		9,366		25		—		9,391		18		9,409
Total	$	434,157		1,466		42		435,665		2,255	$	437,920
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 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 June 30, 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 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 June 30, 2017, the Company increased its look-back period to 33 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.

	June 30, 2017
(In thousands)	Commercial and industrial		Construction and land development			Commercial real estate		Residential real estate			Consumer installment			Total
Quarter ended:
Beginning balance	$	524		845			2,004		1,064			151		$	4,588
Charge-offs		—		—			—		—			(5	)		(5)
Recoveries		4		209			—		63			6			282
Net recoveries		4		209			—		63			1			277
Provision for loan losses		149		(180	)		117		(8	)		22			100
Ending balance	$	677		874			2,121		1,119			174		$	4,965
Six months ended:
Beginning balance	$	540		812			2,071		1,107			113		$	4,643
Charge-offs		—		—			—		(78	)		(6	)		(84)
Recoveries		6		214			—		77			9			306
Net recoveries (charge-offs)		6		214			—		(1	)		3			222
Provision for loan losses		131		(152	)		50		13			58			100
Ending balance	$	677		874			2,121		1,119			174		$	4,965

16

	June 30, 2016
(In thousands)	Commercial and industrial			Construction and land development			Commercial real estate			Residential real estate			Consumer installment			Total
Quarter ended:
Beginning balance	$	517			695			2,403			1,026			133		$	4,774
Charge-offs		(83	)		—			(194	)		(37	)		(2	)		(316)
Recoveries		3			5			—			58			4			70
Net (charge-offs) recoveries		(80	)		5			(194	)		21			2			(246)
Provision for loan losses		69			44			(117	)		14			(10	)		—
Ending balance	$	506			744			2,092			1,061			125		$	4,528
Six months ended:
Beginning balance	$	523			669			1,879			1,059			159		$	4,289
Charge-offs		(83	)		—			(194	)		(155	)		(28	)		(460)
Recoveries		23			1,203			—			65			8			1,299
Net (charge-offs) recoveries		(60	)		1,203			(194	)		(90	)		(20	)		839
Provision for loan losses		43			(1,128	)		407			92			(14	)		(600)
Ending balance	$	506			744			2,092			1,061			125		$	4,528

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 June 30, 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
June 30, 2017:
Commercial and industrial	$	677		50,974		—		—		677		50,974
Construction and land development		874		46,386		—		—		874		46,386
Commercial real estate		2,099		218,882		22		1,981		2,121		220,863
Residential real estate		1,119		110,288		—		—		1,119		110,288
Consumer installment		174		9,409		—		—		174		9,409
Total	$	4,943		435,939		22		1,981		4,965		437,920
June 30, 2016:
Commercial and industrial	$	506		50,159		—		31		506		50,190
Construction and land development		744		49,291		—		55		744		49,346
Commercial real estate		1,995		206,258		97		2,567		2,092		208,825
Residential real estate		1,061		113,763		—		—		1,061		113,763
Consumer installment		125		9,125		—		—		125		9,125
Total	$	4,431		428,596		97		2,653		4,528		431,249

(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.

17

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
June 30, 2017:
Commercial and industrial	$	50,148		183		609		34	$	50,974
Construction and land development		45,912		188		286		—		46,386
Commercial real estate:
Owner occupied		38,191		402		347		—		38,940
Multi-family		47,206		—		—		—		47,206
Other		131,739		—		1,181		1,797		134,717
Total commercial real estate		217,136		402		1,528		1,797		220,863
Residential real estate:
Consumer mortgage		57,975		2,576		3,405		406		64,362
Investment property		44,812		103		1,011		—		45,926
Total residential real estate		102,787		2,679		4,416		406		110,288
Consumer installment		9,240		54		97		18		9,409
Total	$	425,223		3,506		6,936		2,255	$	437,920
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

18

Impaired loans

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

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

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

The following tables set forth certain information regarding the Company’s impaired loans that were individually evaluated for impairment at June 30, 2017 and December 31, 2016.

	June 30, 2017
(In thousands)	Unpaid principal balance (1)		Charge-offs and payments applied (2)			Recorded investment (3)		Related allowance
With no allowance recorded:
Commercial real estate:
Other	$	2,852		(1,055	)		1,797
Total commercial real estate		2,852		(1,055	)		1,797
Total	$	2,852		(1,055	)		1,797
With allowance recorded:
Commercial real estate:
Owner occupied	$	184		—			184	$	22
Total commercial real estate		184		—			184		22
Total		184		—			184		22
Total impaired loans	$	3,036		(1,055	)		1,981	$	22

(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.

19

	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 June 30, 2017				Six months ended June 30, 2017
(In thousands)	Average recorded investment		Total interest income recognized		Average recorded investment		Total interest income recognized
Impaired loans:
Commercial and industrial	$	2		—		6		—
Construction and land development		15		—		21		—
Commercial real estate:
Owner occupied		186		2		189		5
Other		1,821		—		1,845		—
Total commercial real estate		2,007		2		2,034		5
Total	$	2,024		2		2,061		5

	Quarter ended June 30, 2016				Six months ended June 30, 2016
(In thousands)	Average recorded investment		Total interest income recognized		Average recorded investment		Total interest income recognized
Impaired loans:
Commercial and industrial	$	36		1		40		2
Construction and land development		60		—		138		—
Commercial real estate:
Owner occupied		1,009		11		1,015		26
Other		1,699		—		1,718		—
Total commercial real estate		2,708		11		2,733		26
Residential real estate:
Total	$	2,804		12		2,911		28

20

Troubled Debt Restructurings

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

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

The following is a summary of accruing and nonaccrual TDRs, which are included in the impaired loan totals, and the related allowance for loan losses, by portfolio segment and class as of June 30, 2017 and December 31, 2016.

	TDRs
(In thousands)	Accruing		Nonaccrual		Total		Related       Allowance
June 30, 2017
Commercial real estate:
Owner occupied	$	184		—		184	$	2
Other		—		1,735		1,735		—
Total commercial real estate		184		1,735		1,919		22
Total	$	184		1,735		1,919	$	22
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

21

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

	Quarter ended June 30,						Six months ended June 30,
(Dollars in thousands)	Number of contracts		Pre- modification outstanding recorded investment		Post - modification outstanding recorded investment		Number of contracts		Pre- modification outstanding recorded investment		Post - modification outstanding recorded investment
2017:
Commercial real estate:
Other		1	$	1,275		1,266		1	$	1,275		1,266
Total commercial real estate		1		1,275		1,266		1		1,275		1,266
Total		1	$	1,275		1,266		1	$	1,275		1,266
2016:
Commercial real estate:
Other		1	$	1,509		1,509		1	$	1,509		1,509
Total commercial real estate		1		1,509		1,509		1		1,509		1,509
Total		1	$	1,509		1,509		1	$	1,509		1,509

The majority of the loans modified in a TDR during the quarter and six months ended June 30, 2017 and 2016, included permitting delays in required payments of principal and/or interest or where the only concession granted by the Company was that the interest rate at renewal was considered to be less than a market rate.

During the quarter and six months ended June 30, 2017 and 2016, there were no loans modified in a TDR within the previous 12 months for which there was a payment default (defined as 90 days or more past due).

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

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

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

22

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

	Quarter ended June 30,						Six months ended June 30,
(Dollars in thousands)	2017			2016			2017			2016
MSRs, net:
Beginning balance	$	1,862		$	2,235		$	1,952		$	2,316
Additions, net		40			88			93			145
Amortization expense		(140	)		(176	)		(284	)		(314)
(Increase) decrease in valuation allowance		—			(1	)		1			(1)
Ending balance	$	1,762		$	2,146		$	1,762		$	2,146
Valuation allowance included in MSRs, net:
Beginning of period	$	—		$	—		$	1		$	—
End of period		—			1			—			1
Fair value of amortized MSRs:
Beginning of period	$	2,689		$	2,906		$	2,678		$	3,086
End of period		2,520			2,539			2,520			2,539

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 June 30, 2017 and December 31, 2016 is presented below.

			Other		Other
			Assets		Liabilities
(Dollars in thousands)	Notional		Estimated Fair Value		Estimated Fair Value
June 30, 2017:
Pay fixed / receive variable	$	3,792		—		138
Pay variable / receive fixed		3,792		138		—
Total interest rate swap agreements	$	7,584		138		138
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

23

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 each reporting period. The Company monitors the valuation techniques utilized for each category of financial assets and liabilities to ascertain when transfers between levels have been affected. The nature of the Company’s financial assets and liabilities generally is such that transfers in and out of any level are expected to be infrequent. For the six months ended June 30, 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.

24

The following table presents the balances of the assets and liabilities measured at fair value on a recurring basis as of June 30, 2017 and December 31, 2016, respectively, by caption, on the accompanying consolidated balance sheets by ASC 820 valuation hierarchy (as described above).

(Dollars in thousands)	Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
June 30, 2017:
Securities available-for-sale:
Agency obligations	$	57,294		—		57,294		—
Agency RMBS		148,128		—		148,128		—
State and political subdivisions		71,941		—		71,941		—
Total securities available-for-sale		277,363		—		277,363		—
Other assets (1)		138		—		138		—
Total assets at fair value	$	277,501		—		277,501		—
Other liabilities(1)	$	138		—		138		—
Total liabilities at fair value	$	138		—		138		—
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.

25

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

Mortgage servicing rights, net

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.

26

The following table presents the balances of the assets and liabilities measured at fair value on a nonrecurring basis as of June 30, 2017 and December 31, 2016, respectively, by caption, on the accompanying consolidated balance sheets and by FASB ASC 820 valuation hierarchy (as described above):

(Dollars in thousands)	Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
June 30, 2017:
Loans held for sale	$	1,436		—		1,436		—
Loans, net(1)		1,959		—		—		1,959
Other real estate owned		103		—		—		103
Other assets (2)		1,762		—		—		1,762
Total assets at fair value	$	5,260		—		1,436		3,824
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 June 30, 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 June 30, 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	$	1,959		Appraisal		Appraisal discounts (%)		20.3%
Other real estate owned		103		Appraisal		Appraisal discounts (%)		18.9%
Mortgage servicing rights, net		1,762		Discounted cash flow		Prepayment speed or CPR (%)		11.0%
						Discount rate (%)		10.0%

Fair Value of Financial Instruments

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

27

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 Developments” 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 June 30, 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
June 30, 2017:
Financial Assets:
Loans, net (1)	$	432,322	$	433,987	$		—	$	—	$	433,987
Loans held for sale		1,436		1,460			—		1,460		—
Financial Liabilities:
Time Deposits	$	197,520	$	196,455	$		—	$	196,455	$	—
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.

28

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

General

The following discussion and analysis is designed to provide a better understanding of various factors related to the results of operations and financial condition of the Company and the Bank. This discussion is intended to supplement and highlight information contained in the accompanying unaudited condensed consolidated financial statements and related notes for the quarters and six months ended June 30, 2017 and 2016, as well as the information contained in our Annual Report on Form 10-K for the year ended December 31, 2016 and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2017.

Special Notice Regarding Forward-Looking Statements

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

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

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

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

• governmental monetary and fiscal policies;

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

• changes in accounting policies, rules, and practices;

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

• changes in borrower credit risks and payment behaviors;

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

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

• the effects of competition from a wide variety of local, regional, national, and other providers of financial, investment, and insurance services, including the disruptive effects of financial technology and other competitors who are not subject to the same regulations as the Company and the Bank;

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

29

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

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

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

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

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

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

• 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. An in-store branch is located in the Kroger in Opelika. The Bank also operates a commercial loan production office in Phenix City, Alabama.

Summary of Results of Operations

	Quarter ended June 30,				Six months ended June 30,
(Dollars in thousands, except per share amounts)	2017		2016		2017		2016
Net interest income (a)	$	6,402	$	6,014	$	12,591	$	12,033
Less: tax-equivalent adjustment		301		322		601		644
Net interest income (GAAP)		6,101		5,692		11,990		11,389
Noninterest income		793		993		1,629		1,827
Total revenue		6,894		6,685		13,619		13,216
Provision for loan losses		100		—		100		(600	)
Noninterest expense		4,015		4,021		8,133		8,130
Income tax expense		784		733		1,501		1,564
Net earnings	$	1,995	$	1,931	$	3,885	$	4,122
Basic and diluted earnings per share	$	0.55	$	0.53	$	1.07	$	1.13

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

30

Financial Summary

The Company’s net earnings were $3.9 million for the first six months of 2017, compared to $4.1 million for the first six months of 2016. Basic and diluted earnings per share were $1.07 per share for the first six months of 2017, compared to $1.13 per share for the first six months of 2016.

Net interest income (tax-equivalent) was $12.6 million for the first six months of 2017 compared to $12.0 million for the first six months of 2016. This increase was primarily due an increase in interest income from securities available-for-sale as management reduced its investment in federal funds sold and interest-bearing bank deposits and increased its investment securities as market yields improved. The Company also lowered its deposit costs and repaid higher-cost wholesale funding sources. Average loans were $433.2 million in the first six months of 2017, compared to $432.2 million in the first six months of 2016. Average deposits were $739.7 million in the first six months of 2017, an increase of $12.5 million or 2%, from the first six months of 2016.

The Company recorded a $0.1 million provision for loan losses for the first six months of 2017, compared to a negative provison of $0.6 million for the first six months of 2016. Annualized net recoveries as a percent of average loans were 0.10% for the first six months of 2017 compared to 0.39% for the first six months 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 six months of 2016. The provision for loan losses is based upon various factors, including the absolute level of loans, loan growth, credit quality and the amount of net charge-offs.

Noninterest income was $1.6 for the first six months of 2017, compared to $1.8 million for the first six months of 2016. The decrease was primarily due to a $0.2 million decrease in mortgage lending income as mortgage loan production declined.

Noninterest expense was $8.1 million for the first six months of 2017 and 2016. The Company had an improved efficiency ratio of 57.19% for the first six months of 2017, compared to 58.66% in the first six months of 2016.

Income tax expense and the effective tax rate were $1.5 million and 27.87%, respectively, for the first six months of 2017, compared to $1.6 million and 27.51%, respectively, for the first six months of 2016. The increase in the effective tax rate was primarily due to a decrease in tax preference items such as investments in municipal securities and bank owned life insurance.

The Company paid cash dividends of $0.46 per share in the first six months of 2017, an increase of 2.2% from the same period of 2016. At June 30, 2017, the Bank’s regulatory capital ratios were well above the minimum amounts required to be “well capitalized” under current regulatory standards.

In the second quarter of 2017, net earnings were $2.0 million, or $0.55 per share, compared to $1.9 million, or $0.53 per share, for the second quarter of 2016. Net interest income (tax-equivalent) was $6.4 million for the second quarter of 2017, compared to $6.0 million for the second quarter of 2016. This increase was due to the same factors as described above. The Company’s net interest margin (tax-equivalent) increased to 3.28% in the second quarter of 2017, compared to 3.10% for the second quarter of 2016. The Company recorded a $0.1 million provision for loan losses in the second quarter of 2017, compared to no provision for loan losses in the second quarter of 2016. Noninterest income was $0.8 million in the second quarter of 2017, compared to $1.0 million in the second quarter of 2016. The decrease was due to a $0.2 million decline in mortgage lending income. Noninterest expense was $4.0 million in the second quarter of 2017 and 2016. Income tax expense was $0.8 million for the second quarter of 2017, compared to $0.7 million in the second quarter of 2016. The Company’s effective tax rate for the second quarter of 2017 was 28.21%, compared to 27.52% in the second quarter of 2016.

31

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.

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 June 30, 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.

32

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 June 30, 2017, the Company increased its look-back period to 33 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.

33

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.

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

Deferred Tax Asset Valuation

A valuation allowance is recognized for a deferred tax asset if, based on the weight of available evidence, it is more-likely-than-not that some portion or the entire deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of taxable income over the last three years and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that we will realize the benefits of these deductible differences at June 30, 2017. The amount of the deferred tax assets considered realizable, however, could be reduced if estimates of future taxable income are reduced.

34

RESULTS OF OPERATIONS Average Balance Sheet and Interest Rates
	Six months ended June 30,
	2017				2016
			Average	Yield/			Average	Yield/
(Dollars in thousands)			Balance	Rate			Balance	Rate
Loans and loans held for sale		$	434,054	4.69%		$	433,504	4.76%
Securities - taxable			196,886	2.18%			162,980	2.06%
Securities - tax-exempt			69,353	5.14%			67,271	5.66%
Total securities			266,239	2.96%			230,251	3.11%
Federal funds sold			35,206	0.89%			57,702	0.50%
Interest bearing bank deposits			50,238	0.91%			57,023	0.49%
Total interest-earning assets			785,737	3.69%			778,480	3.65%
Deposits:
NOW			126,200	0.19%			123,831	0.31%
Savings and money market			231,127	0.37%			227,772	0.38%
Time Deposits			203,189	1.18%			215,130	1.24%
Total interest-bearing deposits			560,516	0.62%			566,733	0.69%
Short-term borrowings			3,649	0.50%			2,836	0.50%
Long-term debt			3,217	3.70%			7,217	3.54%
Total interest-bearing liabilities			567,382	0.64%			576,786	0.73%
Net interest income and margin (tax-equivalent)		$	12,591	3.23%		$	12,033	3.11%

Net Interest Income and Margin

Net interest income (tax-equivalent) was $12.6 million for the first six months of 2017 compared to $12.0 million for the first six months of 2016. This increase was primarily due an increase in interest income from securities available-for-sale as management reduced its investment in federal funds sold and interest bearing bank deposits and increased its investment securities as market yields improved. The Company also lowered its deposit costs and repaid higher-cost wholesale funding sources.

The tax-equivalent yield on total interest-earning assets increased by 4 basis points in the first six months of 2017 from the first six months of 2016. Increases in yields on short-term assets, including federal funds sold and interest bearing bank deposits, due to recent increases in the Federal Reserve’s federal funds rate target were largely offset by declining loan yields resulting from pricing competition for quality loan opportunities in our markets and declining securities yields due to lower reinvestment rates for municipal bonds.

The cost of total interest-bearing liabilities decreased 9 basis points in the first six months of 2017 from the first six months of 2016 to 0.62%. 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 our 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 declining 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, shifts in our asset mix, and our belief that interest rates should, depending on competitive pressures, rise faster in our assets than our liabilities.

35

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 a provision for loan losses of $0.1 million for the first six months of 2017, compared to a negative $0.6 million provision for loan losses for the first six months of 2016 due to the payoff of the nonperforming loan described below. Annualized net recoveries as a percent of average loans were 0.10% and 0.39% for the first six months of 2017 and 2016, respectively. The Company recognized a recovery of $1.2 million from the payoff of one nonperforming construction and land development loan during the first six months of 2016. The provision for loan losses is based upon various factors, including the absolute level of loans, loan growth, the credit quality, and the amount of net charge-offs or recoveries.

Based upon its assessment of the loan portfolio, management adjusts the allowance for loan losses to an amount it believes should be appropriate to adequately cover its estimate of probable losses in the loan portfolio. The Company’s allowance for loan losses as a percentage of total loans was 1.14% at June 30, 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 June 30,				Six months ended June 30,
(Dollars in thousands)		2017		2016		2017		2016
Service charges on deposit accounts	$	183	$	193	$	372	$	391
Mortgage lending income		139		315		304		494
Bank-owned life insurance		110		113		217		225
Securities gains, net		—		—		2		—
Other		361		372		734		717
Total noninterest income	$	793	$	993	$	1,629	$	1,827

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.

36

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

	Quarter ended June 30,					Six months ended June 30,
(Dollars in thousands)	2017		2016			2017		2016
Origination income	$	77	$	270		$	176	$	367
Servicing fees, net		62		46			127		128
(Increase) decrease in MSR valuation allowance		—		(1	)		1		(1)
Total mortgage lending income	$	139	$	315		$	304	$	494

The decrease in mortgage lending income was primarily due to a decrease in the volume of mortgage loans originated and sold. The Company is evaluating plans to increase its production capabilities; however, until such plans have been implemented, management expects mortgage lending income and volume will decrease compared to prior periods.

Noninterest Expense

	Quarter ended June 30,						Six months ended June 30,
(Dollars in thousands)	2017			2016			2017			2016
Salaries and benefits	$	2,392		$	2,446		$	4,773		$	4,851
Net occupancy and equipment		351			358			732			718
Professional fees		254			194			484			405
FDIC and other regulatory assessments		89			122			178			244
Other real estate owned, net		(12	)		(43	)		(9	)		(23)
Other		941			944			1,975			1,935
Total noninterest expense	$	4,015		$	4,021		$	8,133		$	8,130

Salaries and benefits decreased in the first six months of 2017, compared to the first six months 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 $1.5 million for the first six months of 2017 and $1.6 million for the first six months of 2016. The Company’s income tax expense for the first six months of 2017 and 2016 reflects an effective income tax rate of 27.87% and 27.51%, respectively.

37

BALANCE SHEET ANALYSIS

Securities

Securities available-for-sale were $277.4 million at June 30, 2017, an increase of $33.8 million, or 14%, 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 $32.7 million and an increase in the fair value of securities available-for-sale of $1.0 million. The increase in the amortized cost basis of securities available-for-sale was primarily attributable to management increasing the Company’s investment securities as market yields improved in 2017. The increase in the fair value of securities was primarily due to a decrease in long-term interest rates. The average tax-equivalent yields earned on total securities were 2.96% in 2017 and 3.11% in 2016.

Loans

	2017						2016
	Second			First			Fourth			Third			Second
(In thousands)	Quarter			Quarter			Quarter			Quarter			Quarter
Commercial and industrial	$	50,974			50,228			49,850			50,881			50,190
Construction and land development		46,386			45,098			41,650			44,004			49,346
Commercial real estate		220,863			218,739			220,439			211,558			208,825
Residential real estate		110,288			108,096			110,855			112,303			113,763
Consumer installment		9,409			9,032			8,712			8,996			9,125
Total loans		437,920			431,193			431,506			427,742			431,249
Less: unearned income		(633	)		(640	)		(560	)		(539	)		(555	)
Loans, net of unearned income	$	437,287			430,553			430,946			427,203			430,694

Total loans, net of unearned income, were $437.3 million at June 30, 2017, compared to $430.9 million at December 31, 2016. The increase of $6.4 million, or 1% was primarily due to growth in construction and land development loans. Four loan categories represented the majority of the loan portfolio at June 30, 2017: commercial real estate (51%), residential real estate (25%), construction and land development (11%) and commercial and industrial (12%). Approximately 18% of the Company’s commercial real estate loans were classified as owner-occupied at June 30, 2017.

Within the residential real estate portfolio segment, the Company had junior lien mortgages of approximately $12.8 million, or 3% of total loans, at June 30, 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, $1.8 million required interest-only payments at June 30, 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 six months of 2017 and 4.76% in the first six months 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 through its loan to value guidelines for collateralized loans, investigating the creditworthiness of borrowers and monitoring borrowers’ financial position. Also, we have established and periodically review, lending policies and procedures. Banking regulations limit a bank’s credit exposure by prohibiting unsecured loan relationships that exceed 10% of its capital; or 20% of capital, if loans in excess of 10% of capital are fully secured. Under these regulations, we are prohibited from having secured loan relationships in excess of approximately $18.4 million. Furthermore, we have an internal limit for aggregate credit exposure (loans outstanding plus unfunded commitments) to a single borrower of $16.6 million. Our loan policy requires that the Loan Committee of the Board of Directors approve any loan relationships that exceed this internal limit. At June 30, 2017, the Bank had no loan relationships exceeding these limits.

38

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 June 30, 2017 (and related balances at December 31, 2016).

	June 30,		December 31,
(In thousands)	2017		2016
Multi-family residential properties	$	47,206	$	46,998
Lessors of 1 to 4 family residential properties		45,926		45,291
Shopping centers		34,592		40,925
Office Buildings		27,048		22,366

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 $5.0 million at June 30, 2017 compared to $4.6 million at December 31, 2016, 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 second quarter of 2017 and the previous four quarters is presented below.

	2017					2016
	Second		First			Fourth			Third			Second
(Dollars in thousands)	Quarter		Quarter			Quarter			Quarter			Quarter
Balance at beginning of period	$	4,588		4,643			4,578			4,528			4,774
Charge-offs:
Commercial and industrial		—		—			(14	)		—			(83)
Commercial real estate		—		—			—			—			(194)
Residential real estate		—		(78	)		(20	)		(7	)		(37)
Consumer installment		(5)		(1	)		(38	)		(1	)		(2)
Total charge-offs		(5)		(79	)		(72	)		(8	)		(316)
Recoveries		282		24			22			58			70
Net recoveries (charge-offs)		277		(55	)		(50	)		50			(246)
Provision for loan losses		100		—			115			—			—
Ending balance	$	4,965		4,588			4,643			4,578			4,528
as a % of loans		1.14 %		1.07			1.08			1.07			1.05
as a % of nonperforming loans		220 %		198			196			284			271
Net (recoveries) charge-offs as % of average loans (a)		(0.25)%		0.05			0.05			(0.05	)		0.23

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

As described under “Critical Accounting Policies,” management assesses the adequacy of the allowance prior to the end of each calendar quarter. The level of the allowance is based upon management’s evaluation of the loan portfolios, past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay (including the timing of future payment), the estimated value of any underlying collateral, composition of the loan portfolio, economic conditions, industry and peer bank loan loss rates, and other pertinent factors. This evaluation is inherently subjective as it requires various material estimates and judgments, including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. The ratio of our allowance for loan losses to total loans outstanding was 1.14% at June 30, 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.

39

Net recoveries were $0.2 million, or 0.10% of average loans in the first six months of 2017, compared to net recoveries of $0.8 million, or 0.39% of average loans in the first six months of 2016 primarily due to a recovery of $1.2 million from the payoff of one nonperforming construction and land development loan.

The Company’s recorded investment in loans considered impaired was $2.0 million at June 30, 2017 and $2.1 million at December 31, 2016, respectively, with corresponding valuation allowances (included in the allowance for loan losses) of $22 thousand and $31 thousand at each respective date.

Nonperforming Assets

The Company had $2.4 million in nonperforming assets at June 30, 2017, compared to $2.5 million in nonperforming assets at December 31, 2016.

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

	2017					2016
	Second			First		Fourth		Third		Second
(Dollars in thousands)	Quarter			Quarter		Quarter		Quarter		Quarter
Nonperforming assets:
Nonaccrual loans	$	2,255			2,318		2,370		1,614		1,669
Other real estate owned		103			152		152		37		300
Total nonperforming assets	$	2,358			2,470		2,522		1,651		1,969
as a % of loans and other real estate owned		0.54	%		0.57		0.59		0.39		0.46
as a % of total assets		0.28	%		0.29		0.30		0.19		0.23
Nonperforming loans as a % of total loans		0.52	%		0.54		0.55		0.38		0.39
Accruing loans 90 days or more past due	$	42			—		—		211		—

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

	2017				2016
	Second		First		Fourth		Third		Second
(In thousands)	Quarter		Quarter		Quarter		Quarter		Quarter
Nonaccrual loans:
Commercial and industrial	$	34		35		37		38		40
Construction and land development		—		22		32		45		55
Commercial real estate		1,797		1,850		2,027		1,521		1,564
Residential real estate		406		391		252		10		10
Consumer installment		18		20		22		—		—
Total nonaccrual loans	$	2,255		2,318		2,370		1,614		1,669

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 June 30, 2017 and December 31, 2016, respectively, the Company had $2.3 million and $2.4 million in loans on nonaccrual.

At June 30, 2017 there were $42 thousand in loans 90 days or more past due and still accruing compared to none at December 31, 2016.

40

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

	2017				2016
	Second		First		Fourth		Third		Second
(In thousands)	Quarter		Quarter		Quarter		Quarter		Quarter
Other real estate owned:
Commercial:
Developed lots	$	—		37		37		—		252
Residential		103		115		115		37		48
Total other real estate owned	$	103		152		152		37		300

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 Bank of Atlanta, 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 $6.9 million, or 1.6% of total loans at June 30, 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 second quarter of 2017 and the previous four quarters.

	2017				2016
	Second		First		Fourth		Third		Second
(In thousands)	Quarter		Quarter		Quarter		Quarter		Quarter
Potential problem loans:
Commercial and industrial	$	609		210		233		356		285
Construction and land development		286		298		340		352		365
Commercial real estate		1,528		795		854		1,184		911
Residential real estate		4,416		4,285		4,326		4,423		3,855
Consumer installment		97		99		90		89		84
Total potential problem loans	$	6,936		5,687		5,843		6,404		5,500

At June 30, 2017, approximately $1.4 million, or 21% 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 second quarter of 2017 and the previous four quarters.

	2017				2016
	Second		First		Fourth		Third		Second
(In thousands)	Quarter		Quarter		Quarter		Quarter		Quarter
Performing loans past due 30 to 89 days:
Commercial and industrial	$	195		1		66		3		25
Construction and land development		2		3		395		—		—
Commercial real estate		748		—		242		—		—
Residential real estate		496		1,186		1,301		369		645
Consumer installment		25		17		38		40		51
Total	$	1,466		1,207		2,042		412		721

41

Deposits

Total deposits were $742.5 million at June 30, 2017, compared to $739.1 million at December 31, 2016. Noninterest bearing deposits were $182.3 million, or 24.6% of total deposits, at June 30, 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 six months of 2017 and 0.69% in the first six months 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 June 30, 2017, and at December 31, 2016, respectively. Securities sold under agreements to repurchase totaled $3.5 million and $3.4 million at June 30, 2017 and December 31, 2016, respectively.

The average rate paid on short-term borrowings was 0.50% in the first six months of 2017 and first six months of 2016, respectively.

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 June 30, 2017 and 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 3.70% in the first six months of 2017 and 3.54% in the first six months of 2016.

CAPITAL ADEQUACY

The Company’s consolidated stockholders’ equity was $85.1 million and $82.2 million as of June 30, 2017 and December 31, 2016, respectively. The increase from December 31, 2016 was primarily driven by net earnings of $3.9 million and other comprehensive income due to the change in unrealized gains (losses) on securities available-for-sale, net-of-tax, of $0.7 million, which was partially offset by cash dividends paid of $1.7 million.

On January 1, 2015, the Company and Bank became subject to the rules of the Basel III regulatory capital framework and related Dodd-Frank Wall Street Reform and Consumer Protection Act changes. The new rules included the implementation of a new capital conservation buffer that is added to the minimum requirements for capital adequacy purposes. The capital conservation buffer 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 June 30, 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 10.56%, common equity tier 1 (“CET1”) risk-based capital ratio was 16.22%, tier 1 risk-based capital ratio was 16.79%, and total risk-based capital ratio was 17.77% at June 30, 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 June 30, 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.

42

Interest Rate Risk Management

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

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

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

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

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

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

At June 30, 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 June 30, 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.

43

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 June 30, 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.

Liquidity Risk Management

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

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

The primary source of funding and 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 June 30, 2017, the Bank had a remaining available line of credit with the FHLB of $249.7 million. At June 30, 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 June 30, 2017, the Bank had outstanding standby letters of credit of $7.4 million and unfunded loan commitments outstanding of $65.4 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.

44

As of June 30, 2017, the unpaid principal balance of residential mortgage loans, which we have originated and sold, but retained the servicing rights was $321.3 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.

In the first six months 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 three loans with an aggregate principal balance of $0.6 million, which were current as to principal and interest at the time of repurchase. At June 30, 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 June 30, 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.

45

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;

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

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

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 the consideration 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.

46

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

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.

47

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
(In thousands)	Second Quarter		First Quarter		Fourth Quarter		Third Quarter		Second Quarter
Net interest income (GAAP)	$	6,101		5,889		5,735		5,608		5,692
Tax-equivalent adjustment		301		300		316		316		322
Net interest income (Tax-equivalent)	$	6,402		6,189		6,051		5,924		6,014
							Six months ended June 30,
(In thousands)							2017		2016
Net interest income (GAAP)							$	11,990		11,389
Tax-equivalent adjustment								601		644
Net interest income (Tax-equivalent)							$	12,591		12,033

48

Table 2 – Selected Quarterly Financial Data

	2017					2016
(Dollars in thousands, except per share amounts)	Second Quarter			First Quarter		Fourth Quarter		Third Quarter			Second Quarter
Results of Operations
Net interest income (a)	$	6,402			6,189		6,051		5,924			6,014
Less: tax-equivalent adjustment		301			300		316		316			322
Net interest income (GAAP)		6,101			5,889		5,735		5,608			5,692
Noninterest income		793			836		493		1,063			993
Total revenue		6,894			6,725		6,228		6,671			6,685
Provision for loan losses		100			—		115		—			—
Noninterest expense		4,015			4,118		3,238		3,980			4,021
Income tax expense		784			717		798		740			733
Net earnings	$	1,995			1,890		2,077		1,951			1,931
Per share data:
Basic and diluted net earnings	$	0.55			0.52		0.57		0.54			0.53
Cash dividends declared		0.23			0.23		0.225		0.225			0.225
Weighted average shares outstanding:
Basic and diluted		3,643,593			3,643,541		3,643,523		3,643,506			3,643,503
Shares outstanding		3,643,643			3,643,543		3,643,523		3,643,523			3,643,503
Book value	$	23.36			22.88		22.55		23.34			23.28
Common stock price
High	$	37.79			33.69		31.31		28.91			29.85
Low		32.65			30.75		27.45		27.45			26.81
Period end		36.94			33.00		31.31		27.45			28.49
To earnings ratio		16.94	x		15.28		13.98		12.48			13.07
To book value		158	%		144		139		118			122
Performance ratios:
Return on average equity		9.44	%		9.09		9.61		9.06			9.18
Return on average assets		0.96	%		0.90		1.00		0.92			0.93
Dividend payout ratio		41.82	%		44.23		39.47		41.67			42.45
Asset Quality:
Allowance for loan losses as a % of:
Loans		1.14	%		1.07		1.08		1.07			1.05
Nonperforming loans		220	%		198		196		284			271
Nonperforming assets as a % of:
Loans and other real estate owned		0.54	%		0.57		0.59		0.39			0.46
Total assets		0.28	%		0.29		0.30		0.19			0.23
Nonperforming loans as a % of total loans		0.52	%		0.54		0.55		0.38			0.39
Annualized net (recoveries) charge-offs as a % of average loans		(0.25	)%		0.05		0.05		(0.05	)		0.23
Capital Adequacy:
CET 1 risk-based capital ratio		16.22	%		16.24		16.44		15.74			15.54
Tier 1 risk-based capital ratio		16.79	%		16.83		17.00		17.07			16.87
Total risk-based capital ratio		17.77	%		17.75		17.95		17.97			17.77
Tier 1 leverage ratio		10.56	%		10.40		10.27		10.36			10.56
Other financial data:
Net interest margin (a)		3.28	%		3.19		3.05		2.94			3.10
Effective income tax rate		28.21	%		27.50		27.76		27.50			27.52
Efficiency ratio (b)		55.80	%		58.62		49.48		56.96			57.39
Selected average balances:
Securities	$	274,493			257,894		253,820		227,076			223,414
Loans, net of unearned income		436,645			429,784		429,451		429,201			434,934
Total assets		831,187			835,679		834,291		851,409			828,106
Total deposits		737,464			742,002		735,991		748,229			727,989
Long-term debt		3,217			3,217		4,260		7,217			7,217
Total stockholders’ equity		84,569			83,191		86,493		86,103			84,124
Selected period end balances:
Securities	$	277,363			273,853		243,572		249,556			217,002
Loans, net of unearned income		437,287			430,553		430,946		427,203			430,694
Allowance for loan losses		4,965			4,588		4,643		4,578			4,528
Total assets		836,311			842,781		831,943		851,672			846,056
Total deposits		742,456			750,302		739,143		751,915			747,539
Long-term debt		3,217			3,217		3,217		7,217			7,217
Total stockholders’ equity		85,099			83,366		82,177		85,055			84,808

(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.

49

Table 3 - Selected Financial Data

	Six months ended June 30,
(Dollars in thousands, except per share amounts)	2017			2016
Results of Operations
Net interest income (a)	$	12,591			12,033
Less: tax-equivalent adjustment		601			644
Net interest income (GAAP)		11,990			11,389
Noninterest income		1,629			1,827
Total revenue		13,619			13,216
Provision for loan losses		100			(600	)
Noninterest expense		8,133			8,130
Income tax expense		1,501			1,564
Net earnings	$	3,885			4,122
Per share data:
Basic and diluted net earnings	$	1.07			1.13
Cash dividends declared		0.46			0.45
Weighted average shares outstanding:
Basic and diluted		3,643,567			3,643,493
Shares outstanding, at period end		3,643,643			3,643,503
Book value	$	23.36			23.28
Common stock price
High	$	37.79			30.49
Low		30.75			24.56
Period end		36.94			28.49
To earnings ratio		16.94	x		13.07
To book value		158	%		122
Performance ratios:
Return on average equity		9.26	%		9.99
Return on average assets		0.93	%		1.00
Dividend payout ratio		42.99	%		39.82
Asset Quality:
Allowance for loan losses as a % of:
Loans		1.14	%		1.05
Nonperforming loans		220	%		271
Nonperforming assets as a % of:
Loans and other real estate owned		0.54	%		0.46
Total assets		0.28	%		0.23
Nonperforming loans as a % of total loans		0.52	%		0.39
Annualized net recoveries as a % of average loans		(0.10	)%		(0.39	)
Capital Adequacy:
CET 1 risk-based capital ratio		16.22	%		15.54
Tier 1 risk-based capital ratio		16.79	%		16.87
Total risk-based capital ratio		17.77	%		17.77
Tier 1 leverage ratio		10.56	%		10.56
Other financial data:
Net interest margin (a)		3.23	%		3.11
Effective income tax rate		27.87	%		27.51
Efficiency ratio (b)		57.19	%		58.66
Selected average balances:
Securities	$	266,239			230,251
Loans, net of unearned income		433,233			432,231
Total assets		833,421			823,054
Total deposits		739,720			727,171
Long-term debt		3,217			7,217
Total stockholders’ equity		83,884			82,545
Selected period end balances:
Securities	$	277,363			217,002
Loans, net of unearned income		437,287			430,694
Allowance for loan losses		4,965			4,528
Total assets		836,311			846,056
Total deposits		742,456			747,539
Long-term debt		3,217			7,217
Total stockholders’ equity		85,099			84,808

(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.

50

Table 4 - Average Balances and Net Interest Income Analysis

		Quarter ended June 30,
		2017								2016
(Dollars in thousands)		Average Balance		Interest Income/ Expense		Yield/ Rate				Average Balance		Interest Income/ Expense		Yield/ Rate
Interest-earning assets:
Loans and loans held for sale (1)	$		437,361	$	5,121		4.70%		$		436,462	$	5,172		4.77%
Securities - taxable			204,635		1,112		2.18%				155,835		775		2.00%
Securities - tax-exempt (2)			69,858		888		5.10%				67,580		945		5.62%
Total securities			274,493		2,000		2.92	%			223,415		1,720		3.10%
Federal funds sold			29,498		79		1.07%				56,989		72		0.51%
Interest bearing bank deposits			42,196		103		0.98%				64,062		84		0.53%
Total interest-earning assets			783,548	$	7,303		3.74	%			780,928	$	7,048		3.63%
Cash and due from banks			13,610								12,614
Other assets			34,029								34,564
Total assets	$		831,187						$		828,106
Interest-bearing liabilities:
Deposits:
NOW	$		128,092	$	64		0.20	%	$		125,512	$	97		0.31%
Savings and money market			228,254		209		0.37	%			225,678		212		0.38%
Time deposits			200,466		593		1.19	%			212,834		658		1.24%
Total interest-bearing deposits			556,812		866		0.62	%			564,024		967		0.69%
Short-term borrowings			3,743		5		0.54%				2,517		3		0.48%
Long-term debt			3,217		30		3.74%				7,217		64		3.57%
Total interest-bearing liabilities			563,772	$	901		0.64	%			573,758	$	1,034		0.72%
Noninterest-bearing deposits			180,652								163,965
Other liabilities			2,194								6,259
Stockholders’ equity			84,569								84,124
Total liabilities and stockholders’ equity	$		831,187						$		828,106
Net interest income and margin (tax-equivalent)				$	6,402		3.28%					$	6,014		3.10%

(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%.

51

Table 5 - Average Balances and Net Interest Income Analysis

		Six months ended June 30,
		2017							2016
(Dollars in thousands)		Average Balance		Interest Income/ Expense		Yield/ Rate			Average Balance		Interest Income/ Expense		Yield/ Rate
Interest-earning assets:
Loans and loans held for sale (1)	$		434,054	$	10,102		4.69%	$		433,504	$	10,268		4.76%
Securities - taxable			196,886		2,133		2.18%			162,980		1,673		2.06%
Securities - tax-exempt (2)			69,353		1,769		5.14%			67,271		1,892		5.66%
Total securities			266,239		3,902		2.96%			230,251		3,565		3.11%
Federal funds sold			35,206		156		0.89%			57,702		143		0.50%
Interest bearing bank deposits			50,238		227		0.91%			57,023		139		0.49%
Total interest-earning assets			785,737	$	14,387		3.69%			778,480	$	14,115		3.65%
Cash and due from banks			13,535							12,867
Other assets			34,149							31,707
Total assets	$		833,421					$		823,054
Interest-bearing liabilities:
Deposits:
NOW		$	126,200	$	118		0.19%	$		123,831	$	191		0.31%
Savings and money market			231,127		421		0.37%			227,772		431		0.38%
Time deposits			203,189		1,189		1.18%			215,130		1,326		1.24%
Total interest-bearing deposits			560,516		1,728		0.62%			566,733		1,948		0.69%
Short-term borrowings			3,649		9		0.50%			2,836		7		0.50%
Long-term debt			3,217		59		3.70%			7,217		127		3.54%
Total interest-bearing liabilities			567,382	$	1,796		0.64%			576,786	$	2,082		0.73%
Noninterest-bearing deposits			179,204							160,438
Other liabilities			2,951							3,285
Stockholders’ equity			83,884							82,545
Total liabilities and stockholders’ equity	$		833,421					$		823,054
Net interest income and margin (tax-equivalent)				$	12,591		3.23%				$	12,033		3.11%

(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%.

52

Table 6 – Loan Portfolio Composition

	2017						2016
(In thousands)	Second Quarter			First Quarter			Fourth Quarter			Third Quarter			Second Quarter
Commercial and industrial	$	50,974			50,228			49,850			50,881			50,190
Construction and land development		46,386			45,098			41,650			44,004			49,346
Commercial real estate		220,863			218,739			220,439			211,558			208,825
Residential real estate		110,288			108,096			110,855			112,303			113,763
Consumer installment		9,409			9,032			8,712			8,996			9,125
Total loans		437,920			431,193			431,506			427,742			431,249
Less: unearned income		(633	)		(640	)		(560	)		(539	)		(555	)
Loans, net of unearned income		437,287			430,553			430,946			427,203			430,694
Less: allowance for loan losses		(4,965	)		(4,523	)		(4,643	)		(4,578	)		(4,528	)
Loans, net	$	432,322			426,030			426,303			422,625			426,166

53

Table 7 - Allowance for Loan Losses and Nonperforming Assets

	2017				2016
(Dollars in thousands)	Second Quarter		First Quarter		Fourth Quarter		Third Quarter		Second Quarter
Allowance for loan losses:
Balance at beginning of period		$4,588		4,643		4,578		4,528		4,774
Charge-offs:
Commercial and industrial		—		—		(14)		—		(83)
Commercial real estate		—		—		—		—		(194)
Residential real estate		—		(78)		(20)		(7)		(37)
Consumer installment		(5)		(1)		(38)		(1)		(2)
Total charge-offs		(5)		(79)		(72)		(8)		(316)
Recoveries		282		24		22		58		70
Net recoveries (charge-offs)		277		(55)		(50)		50		(246)
Provision for loan losses		100		—		115		—		—
Ending balance	$	4,965		4,588		4,643		4,578		4,528
as a % of loans		1.14 %		1.07		1.08		1.07		1.05
as a % of nonperforming loans		220 %		198		196		284		271
Net (recoveries) charge-offs as % of avg. loans (a)		(0.25)%		0.05		0.05		(0.05)		0.23
Nonperforming assets:
Nonaccrual loans	$	2,255		2,318		2,370		1,614		1,669
Other real estate owned		103		152		152		37		300
Total nonperforming assets	$	2,358		2,470		2,522		1,651		1,969
as a % of loans and other real estate owned		0.54 %		0.57		0.59		0.39		0.46
as a % of total assets		0.28 %		0.29		0.30		0.19		0.23
Nonperforming loans as a % of total loans		0.52 %		0.54		0.55		0.38		0.39
Accruing loans 90 days or more past due	$	42		—		—		211		—

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

54

Table 8 - Allocation of Allowance for Loan Losses

	2017								2016
	Second Quarter				First Quarter				Fourth Quarter				Third Quarter				Second Quarter
(Dollars in thousands)	Amount		%*		Amount		%*		Amount		%*		Amount		%*		Amount		%*
Commercial and industrial	$	677		11.6	$	524		11.6	$	540		11.6	$	515		11.9	$	506		11.6
Construction and land development		874		10.6		845		10.5		812		9.7		673		10.3		744		11.4
Commercial real estate		2,121		50.5		2,004		50.7		2,071		51.0		2,232		49.4		2,092		48.5
Residential real estate		1,119		25.2		1,064		25.1		1,107		25.7		1,020		26.3		1,061		26.4
Consumer installment		174		2.1		151		2.1		113		2.0		138		2.1		125		2.1
Total allowance for loan losses	$	4,965			$	4,588			$	4,643			$	4,578			$	4,528

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

55

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

(Dollars in thousands)	June 30, 2017
Maturity of:
3 months or less	$	27,074
Over 3 months through 6 months		22,078
Over 6 months through 12 months		15,527
Over 12 months		60,256
Total CDs and other time deposits of $100,000 or more	$	124,935

56

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.

57

  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.

58

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:            August 1, 2017	By:        /s/ E. L. Spencer, Jr.
	E. L. Spencer, Jr.
	President, Chief Executive Officer and
	Chairman of the Board
Date:            August 1, 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: August 1, 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: August 1, 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 June 30, 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: August 1, 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 June 30, 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: August 1, 2017

/s/ David A. Hedges

David A. Hedges

EVP, Chief Financial Officer

XML

Document and Entity Information - shares	6 Months Ended
	Jun. 30, 2017	Jul. 31, 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		3,643,643
Amendment flag	false
Document Type	10-Q
Document Year Focus	2017
Document Period Focus	Q2
Document Period End Date	Jun. 30, 2017

XML

Consolidated Balance Sheets - USD ($) $ in Thousands	Jun. 30, 2017	Dec. 31, 2016
Assets:
Cash and due from banks	$ 14,287	$ 15,673
Federal funds sold	23,915	42,096
Interest bearing bank deposits	48,097	63,508
Cash and cash equivalents	86,299	121,277
Securities available-for-sale	277,363	243,572
Loans held for sale	1,436	1,497
Loans, net of unearned income	437,287	430,946
Allowance for loan losses	(4,965)	(4,643)
Loans, net	432,322	426,303
Premises and equipment, net	12,995	12,602
Bank-owned life insurance	18,105	17,888
Other real estate owned	103	152
Other assets	7,688	8,652
Total assets	836,311	831,943
Deposits:
Noninterest-bearing	182,311	181,890
Interest-bearing	560,145	557,253
Total deposits	742,456	739,143
Federal funds purchased and securities sold under agreements to repurchase	3,469	3,366
Long-term debt	3,217	3,217
Accrued expenses and other liabilities	2,070	4,040
Total liabilities	751,212	749,766
Stockholders' equity:
Preferred stock	0	0
Common stock	39	39
Additional paid-in capital	3,770	3,767
Retained earnings	87,925	85,716
Accumulated other comprehensive income (loss), net	2	(708)
Less treasury stock, at cost	(6,637)	(6,637)
Total stockholders' equity	85,099	82,177
Total liabilities and stockholders' equity	$ 836,311	$ 831,943

XML

Consolidated Balance Sheets (Parentheticals) - $ / shares	Jun. 30, 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	313,492	313,612

XML

Consolidated Statements of Earnings - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016
Interest income:
Loans, including fees	$ 5,121	$ 5,172	$ 10,102	$ 10,268
Securities - Taxable	1,112	775	2,133	1,673
Securities - Tax-exempt	587	623	1,168	1,248
Federal funds sold and interest bearing bank deposits	182	156	383	282
Total interest income	7,002	6,726	13,786	13,471
Interest expense:
Deposits	866	967	1,728	1,948
Short-term borrowings	5	3	9	7
Long-term debt interest expense	30	64	59	127
Total interest expense	901	1,034	1,796	2,082
Net interest income	6,101	5,692	11,990	11,389
Provision for loan losses	100	0	100	(600)
Net interest income after provision for loan losses	6,001	5,692	11,890	11,989
Noninterest income:
Service charges on deposit accounts	183	193	372	391
Mortgage lending	139	315	304	494
Bank-owned life insurance income	110	113	217	225
Other noninterest income	361	372	734	717
Securities gains, net	0	0	2	0
Total noninterest income	793	993	1,629	1,827
Noninterest expense:
Salaries and benefits	2,392	2,446	4,773	4,851
Net occupancy and equipment	351	358	732	718
Professional fees	254	194	484	405
FDIC and other regulatory assessments	89	122	178	244
Other noninterest expense	929	901	1,966	1,912
Total noninterest expense	4,015	4,021	8,133	8,130
Earnings before income taxes	2,779	2,664	5,386	5,686
Income tax expense	784	733	1,501	1,564
Net earnings	$ 1,995	$ 1,931	$ 3,885	$ 4,122
Net earnings per share:
Basic and diluted earnings per share	$ 0.55	$ 0.53	$ 1.07	$ 1.13
Weighted average shares outstanding:
Basic and diluted weighted average shares outstanding	3,643,593	3,643,503	3,643,567	3,643,493

XML

Consolidated Statements of Comprehensive Income - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016
Statements of Comprehensive Income [Abstract]
Net earnings	$ 1,995	$ 1,931	$ 3,885	$ 4,122
Other comprehensive income, net of tax:
Unrealized net holding gain on securities	573	810	711	2,376
Reclassification adjustment for net gain on securities recognized in net earnings	0	0	(1)	0
Other comprehensive income	573	810	710	2,376
Comprehensive income	$ 2,568	$ 2,741	$ 4,595	$ 6,498

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	4,122	0	0	4,122	0	0
Other Comprehensive Income (Loss), Net Of Tax	2,376	0	0	0	2,376	0
Cash dividends paid	(1,640)	0	0	(1,640)	0	0
Treasury Stock, acquired	0	0	0	0	0	0
Sale of treasury stock	1	0	1	0	0	0
Balance, End at Jun. 30, 2016	$ 84,808	39	3,767	83,327	4,313	(6,638)
Balance, shares at Jun. 30, 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	3,885	0	0	3,885	0	0
Other Comprehensive Income (Loss), Net Of Tax	710	0	0	0	710	0
Cash dividends paid	(1,676)	0	0	(1,676)	0	0
Treasury Stock, acquired	0	0	0	0	0	0
Sale of treasury stock	3	0	3	0	0	0
Balance, End at Jun. 30, 2017	$ 85,099	$ 39	$ 3,770	$ 87,925	$ 2	$ (6,637)
Balance, shares at Jun. 30, 2017	3,957,135

XML

Consolidated Statements of Stockholders' Equity (Parentheticals) - $ / shares	6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016
Statement of Stockholders' Equity (Parentheticals)
Cash dividends paid per share	$ 0.46	$ 0.45
Treasury shares sold	120	25

XML

Consolidated Statements of Cash Flows - USD ($) $ in Thousands	6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016
Cash flows from operating activities:
Net earnings	$ 3,885	$ 4,122
Adjustments to reconcile net earnings to net cash provided by operating activties:
Provision for loan losses	100	(600)
Depreciation and amortization	536	544
Premium amortization and discount accretion, net	1,058	692
Net gain on securities available for sale	(2)	0
Net gain on sale of loans held for sale	(176)	(367)
(Decrease) increase in MSR valuation allowance	(1)	1
Net gain on other real estate owned	(11)	(43)
Loans originated for sale	(11,945)	(20,327)
Proceeds from sale of loans	12,089	20,523
Increase in cash surrender value of bank owned life insurance	(217)	(225)
Net decrease (increase) in other assets	343	(425)
Net (decrease) increase in accrued expenses and other liabilities	(1,967)	510
Net cash provided by operating activities	3,692	4,405
Cash flows from investing activities:
Proceeds from prepayments and maturities of securities available-for-sale	17,611	30,922
Purchase of securities available-for-sale	(51,334)	(3,164)
Increase in loans, net	(6,119)	(3,693)
Net purchases of premises and equipment	(615)	(57)
Increase in FHLB stock	(13)	(25)
Proceeds from sale of other real estate owned	60	203
Net cash (used in) provided by investing activities	(40,410)	24,186
Cash flows from financing activities:
Net increase in noninterest-bearing deposits	421	10,924
Net increase (decrease) in interest-bearing deposits	2,892	12,988
Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase	103	(373)
Dividends paid	(1,676)	(1,640)
Net cash provided by financing activities	1,740	21,899
Net change in cash and cash equivalents	(34,978)	50,490
Cash and cash equivalents at beginning of period	121,277	113,930
Cash and cash equivalents at end of period	86,299	164,420
Cash paid during the period for:
Interest	1,858	2,062
Income taxes	2,007	1,403
Supplemental disclosure of non-cash transactions:
Real estate acquired through foreclosure	$ 0	$ 248

XML

Summary of Significant Accounting Policies

6 Months Ended

Jun. 30, 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 June 30,2017. 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 six months of 2017, the Company adopted no new accounting guidance.

XML

Basic and Diluted Earnings Per Share

6 Months Ended

Jun. 30, 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 respective period. Diluted net earnings per share reflect the potential dilution that could occur upon exercise of securities or other rights for, or convertible into, shares of the Company’s common stock. At June 30,2017 and 2016, respectively, the Company had no such securities or rights issued or outstanding, and therefore, no dilutive effect to consider for the diluted earnings per share calculation.

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

				Quarter ended June 30,				Six months ended June 30,
(In thousands, except share and per share data)				2017		2016		2017		2016
Basic and diluted:
	Net earnings		$	1,995	$	1,931	$	3,885	$	4,122
	Weighted average common shares outstanding			3,643,593		3,643,503		3,643,567		3,643,493
		Net earnings per share	$	0.55	$	0.53	$	1.07	$	1.13

XML

Variable Interest Entities

6 Months Ended

Jun. 30, 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 June 30,2017, 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 to us 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 that remain outstanding is included in interest expense on long-term debt.

The following table summarizes VIEs that are not consolidated by the Company as of June 30,2017.

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

XML

Securities

6 Months Ended

Jun. 30, 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 June 30,2017 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 June 30,2017 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
June 30, 2017
Agency obligations (a)		$	2,990	29,535	24,769	—	57,294	298	675	$	57,671
Agency RMBS (a)			—	704	19,825	127,599	148,128	556	1,458		149,030
State and political subdivisions			—	2,110	10,771	59,060	71,941	1,699	418		70,660
	Total available-for-sale	$	2,990	32,349	55,365	186,659	277,363	2,553	2,551	$	277,361

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 $166.6 million and $137.2 million at June 30,2017 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 June 30,2017 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 June 30,2017 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
June 30, 2017:
Agency obligations		$	25,546	675	—	—	$	25,546	675
Agency RMBS			94,239	1,358	4,501	100		98,740	1,458
State and political subdivisions			15,669	418	—	—		15,669	418
	Total	$	135,454	2,451	4,501	100	$	139,955	2,551

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 June 30,2017, cost-method investments with an aggregate cost of $1.4 million were not evaluated for impairment because the Company had not identified 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 June 30,2017 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 six months endedJune 30,2017 and 2016, respectively.

Realized Gains and Losses
The following table presents the gross realized gains and losses on calls of securities.
			Quarter ended June 30,			Six months ended June 30,
(Dollars in thousands)			2017	2016		2017	2016
Gross realized gains		$	—	—	$	2	—
	Realized gains, net	$	—	—	$	2	—

XML

Loan and Allowance for Loan Losses

6 Months Ended

Jun. 30, 2017

Loans And Leases Receivable Disclosure [Abstract]

Loans and leases receivable disclosure [Text Block]

NOTE 5: LOANS AND ALLOWANCE FOR LOAN LOSSES

				June 30,		December 31,
(In thousands)				2017		2016
Commercial and industrial			$	50,974	$	49,850
Construction and land development				46,386		41,650
Commercial real estate:
	Owner occupied			38,940		49,745
	Multi-family			47,206		46,998
	Other			134,717		123,696
		Total commercial real estate		220,863		220,439
Residential real estate:
	Consumer mortgage			64,362		65,564
	Investment property			45,926		45,291
		Total residential real estate		110,288		110,855
Consumer installment				9,409		8,712
		Total loans		437,920		431,506
Less: unearned income				(633)		(560)
		Loans, net of unearned income	$	437,287	$	430,946

Loans secured by real estate were approximately 86.2% of the Company’s total loan portfolio at June 30,2017. At June 30,2017, 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 June 30,2017 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
June 30, 2017:
Commercial and industrial			$	50,745	195	—	50,940	34	$	50,974
Construction and land development				46,384	2	—	46,386	—		46,386
Commercial real estate:
	Owner occupied			38,940	—	—	38,940	—		38,940
	Multi-family			47,206	—	—	47,206	—		47,206
	Other			132,172	748	—	132,920	1,797		134,717
		Total commercial real estate		218,318	748	—	219,066	1,797		220,863
Residential real estate:
	Consumer mortgage			63,550	364	42	63,956	406		64,362
	Investment property			45,794	132	—	45,926	—		45,926
		Total residential real estate		109,344	496	42	109,882	406		110,288
Consumer installment				9,366	25	—	9,391	18		9,409
		Total	$	434,157	1,466	42	435,665	2,255	$	437,920

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 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 June 30,2017 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 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 June 30,2017, the Company increased its look-back period to 33quarters 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.

			June 30, 2017
(In thousands)		Commercial and industrial		Construction and land development	Commercial real estate	Residential real estate	Consumer installment		Total
Quarter ended:
Beginning balance		$	524	845	2,004	1,064	151	$	4,588
Charge-offs			—	—	—	—	(5)		(5)
Recoveries			4	209	—	63	6		282
	Net recoveries		4	209	—	63	1		277
Provision for loan losses			149	(180)	117	(8)	22		100
Ending balance		$	677	874	2,121	1,119	174	$	4,965

Six months ended:
Beginning balance		$	540	812	2,071	1,107	113	$	4,643
Charge-offs			—	—	—	(78)	(6)		(84)
Recoveries			6	214	—	77	9		306
	Net recoveries (charge-offs)		6	214	—	(1)	3		222
Provision for loan losses			131	(152)	50	13	58		100
Ending balance		$	677	874	2,121	1,119	174	$	4,965

			June 30, 2016
(In thousands)		Commercial and industrial		Construction and land development	Commercial real estate	Residential real estate	Consumer installment		Total
Quarter ended:
Beginning balance		$	517	695	2,403	1,026	133	$	4,774
Charge-offs			(83)	—	(194)	(37)	(2)		(316)
Recoveries			3	5	—	58	4		70
	Net (charge-offs) recoveries		(80)	5	(194)	21	2		(246)
Provision for loan losses			69	44	(117)	14	(10)		—
Ending balance		$	506	744	2,092	1,061	125	$	4,528

Six months ended:
Beginning balance		$	523	669	1,879	1,059	159	$	4,289
Charge-offs			(83)	—	(194)	(155)	(28)		(460)
Recoveries			23	1,203	—	65	8		1,299
	Net (charge-offs) recoveries		(60)	1,203	(194)	(90)	(20)		839
Provision for loan losses			43	(1,128)	407	92	(14)		(600)
Ending balance		$	506	744	2,092	1,061	125	$	4,528

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 June 30,2017and 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
June 30, 2017:
Commercial and industrial		$	677	50,974	—	—	677	50,974
Construction and land development			874	46,386	—	—	874	46,386
Commercial real estate			2,099	218,882	22	1,981	2,121	220,863
Residential real estate			1,119	110,288	—	—	1,119	110,288
Consumer installment			174	9,409	—	—	174	9,409
	Total	$	4,943	435,939	22	1,981	4,965	437,920

June 30, 2016:
Commercial and industrial		$	506	50,159	—	31	506	50,190
Construction and land development			744	49,291	—	55	744	49,346
Commercial real estate			1,995	206,258	97	2,567	2,092	208,825
Residential real estate			1,061	113,763	—	—	1,061	113,763
Consumer installment			125	9,125	—	—	125	9,125
	Total	$	4,431	428,596	97	2,653	4,528	431,249
(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
June 30, 2017:
Commercial and industrial			$	50,148	183	609	34	$	50,974
Construction and land development				45,912	188	286	—		46,386
Commercial real estate:
	Owner occupied			38,191	402	347	—		38,940
	Multi-family			47,206	—	—	—		47,206
	Other			131,739	—	1,181	1,797		134,717
		Total commercial real estate		217,136	402	1,528	1,797		220,863
Residential real estate:
	Consumer mortgage			57,975	2,576	3,405	406		64,362
	Investment property			44,812	103	1,011	—		45,926
		Total residential real estate		102,787	2,679	4,416	406		110,288
Consumer installment				9,240	54	97	18		9,409
		Total	$	425,223	3,506	6,936	2,255	$	437,920

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 are not included in the following tables. The related allowance generally represents the following components that correspond to impaired loans:

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

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

The following tables set forth certain information regarding the Company’s impaired loans that were individually evaluated for impairment at June 30,2017 and December 31,2016.

				June 30, 2017
(In thousands)				Unpaid principal balance (1)	Charge-offs and payments applied (2)	Recorded investment (3)		Related allowance
With no allowance recorded:
Commercial real estate:
	Other			2,852	(1,055)	1,797
		Total commercial real estate		2,852	(1,055)	1,797
		Total	$	2,852	(1,055)	1,797
With allowance recorded:
Commercial real estate:
	Owner occupied		$	184	—	184	$	22
		Total commercial real estate		184	—	184		22
		Total		184	—	184		22
		Total impaired loans	$	3,036	(1,055)	1,981	$	22
(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 June 30, 2017		Six months ended June 30, 2017
				Average	Total interest	Average	Total interest
				recorded	income	recorded	income
(In thousands)				investment	recognized	investment	recognized
Impaired loans:
Commercial and industrial			$	2	—	6	—
Construction and land development				15	—	21	—
Commercial real estate:
	Owner occupied			186	2	189	5
	Other			1,821	—	1,845	—
		Total commercial real estate		2,007	2	2,034	5
		Total	$	2,024	2	2,061	5

				Quarter ended June 30, 2016		Six months ended June 30, 2016
				Average	Total interest	Average	Total interest
				recorded	income	recorded	income
(In thousands)				investment	recognized	investment	recognized
Impaired loans:
Commercial and industrial			$	36	1	40	2
Construction and land development				60	—	138	—
Commercial real estate:
	Owner occupied			1,009	11	1,015	26
	Other			1,699	—	1,718	—
		Total commercial real estate		2,708	11	2,733	26
Residential real estate:
		Total	$	2,804	12	2,911	28

Troubled Debt Restructurings

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

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

The following is a summary of accruing and nonaccrual TDRs, which are included in the impaired loan totals, and the related allowance for loan losses, by portfolio segment and class as of June 30,2017 and December 31,2016.

				TDRs
								Related
(In thousands)				Accruing	Nonaccrual	Total		Allowance
June 30, 2017
Commercial real estate:
	Owner occupied			184	—	184		22
	Other			—	1,735	1,735		—
		Total commercial real estate		184	1,735	1,919		22
		Total	$	184	1,735	1,919	$	22

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

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

			Quarter ended June 30,				Six months ended June 30,
					Pre-	Post -			Pre-	Post -
					modification	modification			modification	modification
			Number		outstanding	outstanding	Number		outstanding	outstanding
			of		recorded	recorded	of		recorded	recorded
(Dollars in thousands)			contracts		investment	investment	contracts		investment	investment
2017:
Commercial real estate:
	Other		1	$	1,275	1,266	1	$	1,275	1,266
		Total commercial real estate	1		1,275	1,266	1		1,275	1,266
		Total	1	$	1,275	1,266	1	$	1,275	1,266
2016:
Commercial real estate:
	Other		1		1,509	1,509	1		1,509	1,509
		Total commercial real estate	1		1,509	1,509	1		1,509	1,509
		Total	1	$	1,509	1,509	1	$	1,509	1,509

The majority of the loans modified in a TDR during the quarter andsix months ended June 30,2017 and 2016, included permitting delays in required payments of principal and/or interest or where the only concession granted by the Company was that the interest rate at renewal was considered to be less than a market rate.

During the quarter and six months ended June 30,2017 and 2016, there were no loans modified in a TDR within the previous 12 months for which there was a payment default (defined as 90 days or more past due).

XML

Mortgage Servicing Rights, Net

6 Months Ended

Jun. 30, 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 fair value of the Company’s MSRs is determined using assumptions that market participants would use in estimating future net servicing income, including estimates of prepayment speeds, discount rates, default rates, costs to service, escrow account earnings, contractual servicing fee income, ancillary income, and late fees. Subsequent to the date of transfer, the Company has elected to measure its MSRs under the amortization method. Under the amortization method, MSRs are amortized in proportion to, and over the period of, estimated net servicing income.

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

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

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

		Quarter ended June 30,				Six months ended June 30,
(Dollars in thousands)		2017		2016		2017		2016
MSRs, net:
Beginning balance	$	1,862	$	2,235	$	1,952	$	2,316
Additions, net		40		88		93		145
Amortization expense		(140)		(176)		(284)		(314)
(Increase) decrease in valuation allowance		—		(1)		1		(1)
Ending balance	$	1,762	$	2,146	$	1,762	$	2,146
Valuation allowance included in MSRs, net:
Beginning of period	$	—	$	—	$	1	$	—
End of period		—		1		—		1
Fair value of amortized MSRs:
Beginning of period	$	2,689	$	2,906	$	2,678	$	3,086
End of period		2,520		2,539		2,520		2,539

XML

Derivative Instruments

6 Months Ended

Jun. 30, 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 June 30,2017 and December 31,2016 is presented below.

				Other	Other
				Assets	Liabilities
				Estimated	Estimated
(Dollars in thousands)			Notional	Fair Value	Fair Value
June 30, 2017:
Pay fixed / receive variable		$	3,792	—	138
Pay variable / receive fixed			3,792	138	—
	Total interest rate swap agreements	$	7,584	138	138
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

XML

Fair Value Disclosures

6 Months Ended

Jun. 30, 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 each reporting period. The Company monitors the valuation techniques utilized for each category of financial assets and liabilities to ascertain when transfers between levels have been affected. The nature of the Company’s financial assets and liabilities generally is such that transfers in and out of any level are expected to be infrequent. For the six months endedJune 30,2017, 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 June 30,2017 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)
June 30, 2017:
Securities available-for-sale:
	Agency obligations		$	57,294	—	57,294	—
	Agency RMBS			148,128	—	148,128	—
	State and political subdivisions			71,941	—	71,941	—
Total securities available-for-sale				277,363	—	277,363	—
Other assets (1)				138	—	138	—
		Total assets at fair value	$	277,501	—	277,501	—
Other liabilities(1)			$	138	—	138	—
		Total liabilities at fair value	$	138	—	138	—
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 of collateral less costs to sell upon transfer of the loans to other real estate. Subsequently, other real estate is carried at the lower of carrying value or fair value less costs to sell. Fair values are generally based on third party appraisals of the property and are classified within Level 3 of the fair value hierarchy. The appraisals are sometimes further discounted based on management’s historical knowledge, and/or changes in market conditions from the date of the most recent appraisal, and/or management’s expertise and knowledge of the customer and the customer’s business. Such discounts are typically significant unobservable inputs for determining fair value. In cases where the carrying amount exceeds the fair value, less costs to sell, a loss is recognized in noninterest expense.

Mortgage servicing rights, net

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 June 30,2017 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)
June 30, 2017:
Loans held for sale		$	1,436	—	1,436	—
Loans, net(1)			1,959	—	—	1,959
Other real estate owned			103	—	—	103
Other assets (2)			1,762	—	—	1,762
	Total assets at fair value	$	5,260	—	1,436	3,824
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 June 30,2017, 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 June 30,2017, 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	$	1,959	Appraisal	Appraisal discounts (%)	20.3	%
Other real estate owned		103	Appraisal	Appraisal discounts (%)	18.9	%
Mortgage servicing rights, net		1,762	Discounted cash flow	Prepayment speed or CPR (%)	11.0	%
				Discount rate (%)	10.0	%

Fair Value of Financial Instruments

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

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

Loans, net

Fair values for loans were calculated using discounted cash flows. The discount rates reflected current rates at which similar loans would be made for the same remaining maturities. 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 Developments” 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 June 30,2017 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
June 30, 2017:
Financial Assets:
	Loans, net (1)	$	432,322	$	433,987	$	—	$	—	$	433,987
	Loans held for sale		1,436		1,460		—		1,460		—
Financial Liabilities:
	Time Deposits	$	197,520	$	196,455	$	—	$	196,455	$	—
	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.

XML

Summary of Significant Accounting Policies (Policies)

6 Months Ended

Jun. 30, 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 June 30,2017. 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 six months of 2017, the Company adopted no new accounting guidance.

XML

Basic and Diluted Earnings Per Share (Tables)

6 Months Ended

Jun. 30, 2017

Basic and Diluted Earnings Per Share [Abstract]

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

				Quarter ended June 30,				Six months ended June 30,
(In thousands, except share and per share data)				2017		2016		2017		2016
Basic and diluted:
	Net earnings		$	1,995	$	1,931	$	3,885	$	4,122
	Weighted average common shares outstanding			3,643,593		3,643,503		3,643,567		3,643,493
		Net earnings per share	$	0.55	$	0.53	$	1.07	$	1.13

XML

Variable Interest Entities (Tables)

6 Months Ended

Jun. 30, 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

XML

Securities (Tables)

6 Months Ended

Jun. 30, 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
June 30, 2017
Agency obligations (a)		$	2,990	29,535	24,769	—	57,294	298	675	$	57,671
Agency RMBS (a)			—	704	19,825	127,599	148,128	556	1,458		149,030
State and political subdivisions			—	2,110	10,771	59,060	71,941	1,699	418		70,660
	Total available-for-sale	$	2,990	32,349	55,365	186,659	277,363	2,553	2,551	$	277,361

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
June 30, 2017:
Agency obligations		$	25,546	675	—	—	$	25,546	675
Agency RMBS			94,239	1,358	4,501	100		98,740	1,458
State and political subdivisions			15,669	418	—	—		15,669	418
	Total	$	135,454	2,451	4,501	100	$	139,955	2,551

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 calls of securities.
			Quarter ended June 30,			Six months ended June 30,
(Dollars in thousands)			2017	2016		2017	2016
Gross realized gains		$	—	—	$	2	—
	Realized gains, net	$	—	—	$	2	—

XML

Loan and Allowance for Loan Losses (Tables)

6 Months Ended

Jun. 30, 2017

Loans And Leases Receivable Disclosure [Abstract]

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

				June 30,		December 31,
(In thousands)				2017		2016
Commercial and industrial			$	50,974	$	49,850
Construction and land development				46,386		41,650
Commercial real estate:
	Owner occupied			38,940		49,745
	Multi-family			47,206		46,998
	Other			134,717		123,696
		Total commercial real estate		220,863		220,439
Residential real estate:
	Consumer mortgage			64,362		65,564
	Investment property			45,926		45,291
		Total residential real estate		110,288		110,855
Consumer installment				9,409		8,712
		Total loans		437,920		431,506
Less: unearned income				(633)		(560)
		Loans, net of unearned income	$	437,287	$	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
June 30, 2017:
Commercial and industrial			$	50,745	195	—	50,940	34	$	50,974
Construction and land development				46,384	2	—	46,386	—		46,386
Commercial real estate:
	Owner occupied			38,940	—	—	38,940	—		38,940
	Multi-family			47,206	—	—	47,206	—		47,206
	Other			132,172	748	—	132,920	1,797		134,717
		Total commercial real estate		218,318	748	—	219,066	1,797		220,863
Residential real estate:
	Consumer mortgage			63,550	364	42	63,956	406		64,362
	Investment property			45,794	132	—	45,926	—		45,926
		Total residential real estate		109,344	496	42	109,882	406		110,288
Consumer installment				9,366	25	—	9,391	18		9,409
		Total	$	434,157	1,466	42	435,665	2,255	$	437,920

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]

			June 30, 2017
(In thousands)		Commercial and industrial		Construction and land development	Commercial real estate	Residential real estate	Consumer installment		Total
Quarter ended:
Beginning balance		$	524	845	2,004	1,064	151	$	4,588
Charge-offs			—	—	—	—	(5)		(5)
Recoveries			4	209	—	63	6		282
	Net recoveries		4	209	—	63	1		277
Provision for loan losses			149	(180)	117	(8)	22		100
Ending balance		$	677	874	2,121	1,119	174	$	4,965

Six months ended:
Beginning balance		$	540	812	2,071	1,107	113	$	4,643
Charge-offs			—	—	—	(78)	(6)		(84)
Recoveries			6	214	—	77	9		306
	Net recoveries (charge-offs)		6	214	—	(1)	3		222
Provision for loan losses			131	(152)	50	13	58		100
Ending balance		$	677	874	2,121	1,119	174	$	4,965

			June 30, 2016
(In thousands)		Commercial and industrial		Construction and land development	Commercial real estate	Residential real estate	Consumer installment		Total
Quarter ended:
Beginning balance		$	517	695	2,403	1,026	133	$	4,774
Charge-offs			(83)	—	(194)	(37)	(2)		(316)
Recoveries			3	5	—	58	4		70
	Net (charge-offs) recoveries		(80)	5	(194)	21	2		(246)
Provision for loan losses			69	44	(117)	14	(10)		—
Ending balance		$	506	744	2,092	1,061	125	$	4,528

Six months ended:
Beginning balance		$	523	669	1,879	1,059	159	$	4,289
Charge-offs			(83)	—	(194)	(155)	(28)		(460)
Recoveries			23	1,203	—	65	8		1,299
	Net (charge-offs) recoveries		(60)	1,203	(194)	(90)	(20)		839
Provision for loan losses			43	(1,128)	407	92	(14)		(600)
Ending balance		$	506	744	2,092	1,061	125	$	4,528

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
June 30, 2017:
Commercial and industrial		$	677	50,974	—	—	677	50,974
Construction and land development			874	46,386	—	—	874	46,386
Commercial real estate			2,099	218,882	22	1,981	2,121	220,863
Residential real estate			1,119	110,288	—	—	1,119	110,288
Consumer installment			174	9,409	—	—	174	9,409
	Total	$	4,943	435,939	22	1,981	4,965	437,920

June 30, 2016:
Commercial and industrial		$	506	50,159	—	31	506	50,190
Construction and land development			744	49,291	—	55	744	49,346
Commercial real estate			1,995	206,258	97	2,567	2,092	208,825
Residential real estate			1,061	113,763	—	—	1,061	113,763
Consumer installment			125	9,125	—	—	125	9,125
	Total	$	4,431	428,596	97	2,653	4,528	431,249
(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
June 30, 2017:
Commercial and industrial			$	50,148	183	609	34	$	50,974
Construction and land development				45,912	188	286	—		46,386
Commercial real estate:
	Owner occupied			38,191	402	347	—		38,940
	Multi-family			47,206	—	—	—		47,206
	Other			131,739	—	1,181	1,797		134,717
		Total commercial real estate		217,136	402	1,528	1,797		220,863
Residential real estate:
	Consumer mortgage			57,975	2,576	3,405	406		64,362
	Investment property			44,812	103	1,011	—		45,926
		Total residential real estate		102,787	2,679	4,416	406		110,288
Consumer installment				9,240	54	97	18		9,409
		Total	$	425,223	3,506	6,936	2,255	$	437,920

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]

				June 30, 2017
(In thousands)				Unpaid principal balance (1)	Charge-offs and payments applied (2)	Recorded investment (3)		Related allowance
With no allowance recorded:
Commercial real estate:
	Other			2,852	(1,055)	1,797
		Total commercial real estate		2,852	(1,055)	1,797
		Total	$	2,852	(1,055)	1,797
With allowance recorded:
Commercial real estate:
	Owner occupied		$	184	—	184	$	22
		Total commercial real estate		184	—	184		22
		Total		184	—	184		22
		Total impaired loans	$	3,036	(1,055)	1,981	$	22
(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 June 30, 2017		Six months ended June 30, 2017
				Average	Total interest	Average	Total interest
				recorded	income	recorded	income
(In thousands)				investment	recognized	investment	recognized
Impaired loans:
Commercial and industrial			$	2	—	6	—
Construction and land development				15	—	21	—
Commercial real estate:
	Owner occupied			186	2	189	5
	Other			1,821	—	1,845	—
		Total commercial real estate		2,007	2	2,034	5
		Total	$	2,024	2	2,061	5

				Quarter ended June 30, 2016		Six months ended June 30, 2016
				Average	Total interest	Average	Total interest
				recorded	income	recorded	income
(In thousands)				investment	recognized	investment	recognized
Impaired loans:
Commercial and industrial			$	36	1	40	2
Construction and land development				60	—	138	—
Commercial real estate:
	Owner occupied			1,009	11	1,015	26
	Other			1,699	—	1,718	—
		Total commercial real estate		2,708	11	2,733	26
Residential real estate:
		Total	$	2,804	12	2,911	28

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

				TDRs
								Related
(In thousands)				Accruing	Nonaccrual	Total		Allowance
June 30, 2017
Commercial real estate:
	Owner occupied			184	—	184		22
	Other			—	1,735	1,735		—
		Total commercial real estate		184	1,735	1,919		22
		Total	$	184	1,735	1,919	$	22

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

Troubled Debt Restructuring Modifications [Table Text Block]

			Quarter ended June 30,				Six months ended June 30,
					Pre-	Post -			Pre-	Post -
					modification	modification			modification	modification
			Number		outstanding	outstanding	Number		outstanding	outstanding
			of		recorded	recorded	of		recorded	recorded
(Dollars in thousands)			contracts		investment	investment	contracts		investment	investment
2017:
Commercial real estate:
	Other		1	$	1,275	1,266	1	$	1,275	1,266
		Total commercial real estate	1		1,275	1,266	1		1,275	1,266
		Total	1	$	1,275	1,266	1	$	1,275	1,266
2016:
Commercial real estate:
	Other		1		1,509	1,509	1		1,509	1,509
		Total commercial real estate	1		1,509	1,509	1		1,509	1,509
		Total	1	$	1,509	1,509	1	$	1,509	1,509

XML

Mortgage Servicing Rights, Net (Tables)

6 Months Ended

Jun. 30, 2017

Mortgage Servicing [Abstract]

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

		Quarter ended June 30,				Six months ended June 30,
(Dollars in thousands)		2017		2016		2017		2016
MSRs, net:
Beginning balance	$	1,862	$	2,235	$	1,952	$	2,316
Additions, net		40		88		93		145
Amortization expense		(140)		(176)		(284)		(314)
(Increase) decrease in valuation allowance		—		(1)		1		(1)
Ending balance	$	1,762	$	2,146	$	1,762	$	2,146
Valuation allowance included in MSRs, net:
Beginning of period	$	—	$	—	$	1	$	—
End of period		—		1		—		1
Fair value of amortized MSRs:
Beginning of period	$	2,689	$	2,906	$	2,678	$	3,086
End of period		2,520		2,539		2,520		2,539

XML

Derivative Instruments (Tables)

6 Months Ended

Jun. 30, 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
June 30, 2017:
Pay fixed / receive variable		$	3,792	—	138
Pay variable / receive fixed			3,792	138	—
	Total interest rate swap agreements	$	7,584	138	138
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

XML

Fair Value (Tables)

6 Months Ended

Jun. 30, 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)
June 30, 2017:
Securities available-for-sale:
	Agency obligations		$	57,294	—	57,294	—
	Agency RMBS			148,128	—	148,128	—
	State and political subdivisions			71,941	—	71,941	—
Total securities available-for-sale				277,363	—	277,363	—
Other assets (1)				138	—	138	—
		Total assets at fair value	$	277,501	—	277,501	—
Other liabilities(1)			$	138	—	138	—
		Total liabilities at fair value	$	138	—	138	—
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)
June 30, 2017:
Loans held for sale		$	1,436	—	1,436	—
Loans, net(1)			1,959	—	—	1,959
Other real estate owned			103	—	—	103
Other assets (2)			1,762	—	—	1,762
	Total assets at fair value	$	5,260	—	1,436	3,824
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	$	1,959	Appraisal	Appraisal discounts (%)	20.3	%
Other real estate owned		103	Appraisal	Appraisal discounts (%)	18.9	%
Mortgage servicing rights, net		1,762	Discounted cash flow	Prepayment speed or CPR (%)	11.0	%
				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
June 30, 2017:
Financial Assets:
	Loans, net (1)	$	432,322	$	433,987	$	—	$	—	$	433,987
	Loans held for sale		1,436		1,460		—		1,460		—
Financial Liabilities:
	Time Deposits	$	197,520	$	196,455	$	—	$	196,455	$	—
	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.

XML

Basic and Diluted Earnings Per Share (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016
Basic and Diluted Earnings Per Share [Abstract]
Net earnings	$ 1,995	$ 1,931	$ 3,885	$ 4,122
Basic and diluted weighted average shares outstanding	3,643,593	3,643,503	3,643,567	3,643,493
Basic and diluted earnings per share	$ 0.55	$ 0.53	$ 1.07	$ 1.13

XML

Variable Interest Entities (Details) $ in Thousands	Jun. 30, 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

XML

Variable Interest Entities Textuals (Details) $ in Millions	Jun. 30, 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

XML

Security Types (Details) - USD ($) $ in Thousands	Jun. 30, 2017	Dec. 31, 2016
Schedule of Available-for-sale Securities [Line Items]
Available-for-sale Securities, Debt Maturities, within One Year, Fair Value	$ 2,990	$ 3,047
Available-for-sale Securities, Debt Maturities, after One Through Five Years, Fair Value	32,349	25,983
Available-for-sale Securities, Debt Maturities, after Five Through Ten Years, Fair Value	55,365	46,274
Available-for-sale Securities, Debt Maturities, after Ten Years, Fair Value	186,659	168,268
Available-for-sale Securities, Fair Value, Total	277,363	243,572
Available For Sale Securities, Gross Unrealized Gains	2,553	2,391
Available For Sale Securities, Gross Unrealized Losses	2,551	3,512
Available-for-sale Securities, Amortized Cost Basis	277,361	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	2,990	3,047
Available-for-sale Securities, Debt Maturities, after One Through Five Years, Fair Value	29,535	22,531
Available-for-sale Securities, Debt Maturities, after Five Through Ten Years, Fair Value	24,769	19,893
Available-for-sale Securities, Debt Maturities, after Ten Years, Fair Value	0	0
Available-for-sale Securities, Fair Value, Total	57,294	45,471
Available For Sale Securities, Gross Unrealized Gains	298	331
Available For Sale Securities, Gross Unrealized Losses	675	973
Available-for-sale Securities, Amortized Cost Basis	57,671	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	704	972
Available-for-sale Securities, Debt Maturities, after Five Through Ten Years, Fair Value	19,825	16,171
Available-for-sale Securities, Debt Maturities, after Ten Years, Fair Value	127,599	110,644
Available-for-sale Securities, Fair Value, Total	148,128	127,787
Available For Sale Securities, Gross Unrealized Gains	556	551
Available For Sale Securities, Gross Unrealized Losses	1,458	1,805
Available-for-sale Securities, Amortized Cost Basis	149,030	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	2,110	2,480
Available-for-sale Securities, Debt Maturities, after Five Through Ten Years, Fair Value	10,771	10,210
Available-for-sale Securities, Debt Maturities, after Ten Years, Fair Value	59,060	57,624
Available-for-sale Securities, Fair Value, Total	71,941	70,314
Available For Sale Securities, Gross Unrealized Gains	1,699	1,509
Available For Sale Securities, Gross Unrealized Losses	418	734
Available-for-sale Securities, Amortized Cost Basis	$ 70,660	$ 69,539

XML

Securities Continuous Unrealized Loss (Details) - USD ($) $ in Thousands	Jun. 30, 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	$ 135,454	$ 129,858
Available-for-sale Securities, Continuous Unrealized Loss Position, Less than 12 Months, Aggregate Losses	2,451	3,512
Available-for-sale Securities, Continuous Unrealized Loss Position, Twelve Months or Longer, Fair Value	4,501	0
Available-for-sale Securities, Continuous Unrealized Loss Position, 12 Months or Longer, Aggregate Losses	100	0
Available-for-sale Securities, Continuous Unrealized Loss Position, Fair Value	139,955	129,858
Available-for-sale Securities, Continuous Unrealized Loss Position, Aggregate Losses	2,551	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	25,546	20,352
Available-for-sale Securities, Continuous Unrealized Loss Position, Less than 12 Months, Aggregate Losses	675	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	25,546	20,352
Available-for-sale Securities, Continuous Unrealized Loss Position, Aggregate Losses	675	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	94,239	89,062
Available-for-sale Securities, Continuous Unrealized Loss Position, Less than 12 Months, Aggregate Losses	1,358	1,805
Available-for-sale Securities, Continuous Unrealized Loss Position, Twelve Months or Longer, Fair Value	4,501	0
Available-for-sale Securities, Continuous Unrealized Loss Position, 12 Months or Longer, Aggregate Losses	100	0
Available-for-sale Securities, Continuous Unrealized Loss Position, Fair Value	98,740	89,062
Available-for-sale Securities, Continuous Unrealized Loss Position, Aggregate Losses	1,458	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	15,669	20,444
Available-for-sale Securities, Continuous Unrealized Loss Position, Less than 12 Months, Aggregate Losses	418	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	15,669	20,444
Available-for-sale Securities, Continuous Unrealized Loss Position, Aggregate Losses	$ 418	$ 734

XML

Securities Gross Realized Gain Loss (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016
Available-for-sale Securities, Gross Realized Gain (Loss) [Abstract]
Available-for-sale Securities, Gross Realized Gains	$ 0	$ 0	$ 2	$ 0
Available-for-sale Securities, Gross Realized Losses	0	0	0	0
Available-for-sale Securities, Gross Realized Gain (Loss), Net	$ 0	$ 0	$ 2	$ 0

XML

Securities Textuals (Details) - USD ($) $ in Millions	Jun. 30, 2017	Dec. 31, 2016
Securities (Textuals) [Abstract]
Available-for-sale Securities Pledged as Collateral	$ 166.6	$ 137.2
Cost-method Investments, Aggregate Carrying Amount	$ 1.4	$ 1.4

XML

Loans (Details) - USD ($) $ in Thousands	Jun. 30, 2017	Dec. 31, 2016	Jun. 30, 2016
Loans And Leases Receivable Disclosure [Abstract]
Commercial and Industrial Loans	$ 50,974	$ 49,850
Construction And Land Development Loans	46,386	41,650
Commericial Real Estate Loans [Abstract]
Commercial Real Estate Owner Occupied Loans	38,940	49,745
Commercial Real Estate Multifamily	47,206	46,998
Commerical Real Estate Other Loans	134,717	123,696
Total Commercial Real Estate Loans	220,863	220,439
Residential Real Estate Loans [Abstract]
Consumer Mortgage Loans	64,362	65,564
Residential Real Estate Investment Property Loans	45,926	45,291
Total Residential Real Estate Loans	110,288	110,855
Consumer Installment	9,409	8,712
Loans and Leases Receivable, Gross, Carrying Amount	437,920	431,506	$ 431,249
Loans and Leases Receivable Deferred Income	(633)	(560)
Loans, net of unearned income	$ 437,287	$ 430,946

XML

Loans Past Due Analysis (Details) - USD ($) $ in Thousands	Jun. 30, 2017	Dec. 31, 2016	Jun. 30, 2016
Financing Receivable, Recorded Investment, Past Due [Line Items]
Financing Receivable, Recorded Investment, Current	$ 434,157	$ 427,094
Financing Receivable, Recorded Investment, 30 To 89 Days Past Due	1,466	2,042
Financing Receivable, Recorded Investment, 90 Days Past Due and Still Accruing	42	0
Financing Receivable, Recorded Investment, Total Still Accruing	435,665	429,136
Financing Receivable, Recorded Investment, Nonaccrual Status	2,255	2,370
Loans and Leases Receivable, Gross, Carrying Amount	437,920	431,506	$ 431,249
Commercial and Industrial Loans [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Financing Receivable, Recorded Investment, Current	50,745	49,747
Financing Receivable, Recorded Investment, 30 To 89 Days Past Due	195	66
Financing Receivable, Recorded Investment, 90 Days Past Due and Still Accruing	0	0
Financing Receivable, Recorded Investment, Total Still Accruing	50,940	49,813
Financing Receivable, Recorded Investment, Nonaccrual Status	34	37
Loans and Leases Receivable, Gross, Carrying Amount	50,974	49,850	50,190
Construction And Land Development Loans [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Financing Receivable, Recorded Investment, Current	46,384	41,223
Financing Receivable, Recorded Investment, 30 To 89 Days Past Due	2	395
Financing Receivable, Recorded Investment, 90 Days Past Due and Still Accruing	0	0
Financing Receivable, Recorded Investment, Total Still Accruing	46,386	41,618
Financing Receivable, Recorded Investment, Nonaccrual Status	0	32
Loans and Leases Receivable, Gross, Carrying Amount	46,386	41,650	49,346
Commercial Real Estate Owner Occupied Loans [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Financing Receivable, Recorded Investment, Current	38,940	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	38,940	49,607
Financing Receivable, Recorded Investment, Nonaccrual Status	0	138
Loans and Leases Receivable, Gross, Carrying Amount	38,940	49,745
Commercial Real Estate Multifamily [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Financing Receivable, Recorded Investment, Current	47,206	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	47,206	46,998
Financing Receivable, Recorded Investment, Nonaccrual Status	0	0
Loans and Leases Receivable, Gross, Carrying Amount	47,206	46,998
Commercial Real Estate Other Loans [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Financing Receivable, Recorded Investment, Current	132,172	121,608
Financing Receivable, Recorded Investment, 30 To 89 Days Past Due	748	199
Financing Receivable, Recorded Investment, 90 Days Past Due and Still Accruing	0	0
Financing Receivable, Recorded Investment, Total Still Accruing	132,920	121,807
Financing Receivable, Recorded Investment, Nonaccrual Status	1,797	1,889
Loans and Leases Receivable, Gross, Carrying Amount	134,717	123,696
Commercial Real Estate Loans, Total [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Financing Receivable, Recorded Investment, Current	218,318	218,170
Financing Receivable, Recorded Investment, 30 To 89 Days Past Due	748	242
Financing Receivable, Recorded Investment, 90 Days Past Due and Still Accruing	0	0
Financing Receivable, Recorded Investment, Total Still Accruing	219,066	218,412
Financing Receivable, Recorded Investment, Nonaccrual Status	1,797	2,027
Loans and Leases Receivable, Gross, Carrying Amount	220,863	220,439	208,825
Residential Real Estate Consumer Mortgage Loans [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Financing Receivable, Recorded Investment, Current	63,550	64,059
Financing Receivable, Recorded Investment, 30 To 89 Days Past Due	364	1,282
Financing Receivable, Recorded Investment, 90 Days Past Due and Still Accruing	42	0
Financing Receivable, Recorded Investment, Total Still Accruing	63,956	65,341
Financing Receivable, Recorded Investment, Nonaccrual Status	406	223
Loans and Leases Receivable, Gross, Carrying Amount	64,362	65,564
Residential Real Estate Investment Property Loans [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Financing Receivable, Recorded Investment, Current	45,794	45,243
Financing Receivable, Recorded Investment, 30 To 89 Days Past Due	132	19
Financing Receivable, Recorded Investment, 90 Days Past Due and Still Accruing	0	0
Financing Receivable, Recorded Investment, Total Still Accruing	45,926	45,262
Financing Receivable, Recorded Investment, Nonaccrual Status	0	29
Loans and Leases Receivable, Gross, Carrying Amount	45,926	45,291
Residential Real Estate Loans, Total [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Financing Receivable, Recorded Investment, Current	109,344	109,302
Financing Receivable, Recorded Investment, 30 To 89 Days Past Due	496	1,301
Financing Receivable, Recorded Investment, 90 Days Past Due and Still Accruing	42	0
Financing Receivable, Recorded Investment, Total Still Accruing	109,882	110,603
Financing Receivable, Recorded Investment, Nonaccrual Status	406	252
Loans and Leases Receivable, Gross, Carrying Amount	110,288	110,855	113,763
Consumer Installment and Revolving Loans [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Financing Receivable, Recorded Investment, Current	9,366	8,652
Financing Receivable, Recorded Investment, 30 To 89 Days Past Due	25	38
Financing Receivable, Recorded Investment, 90 Days Past Due and Still Accruing	0	0
Financing Receivable, Recorded Investment, Total Still Accruing	9,391	8,690
Financing Receivable, Recorded Investment, Nonaccrual Status	18	22
Loans and Leases Receivable, Gross, Carrying Amount	$ 9,409	$ 8,712	$ 9,125

XML

Allowance for Loan Loss (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016
Financing Receivable, Allowance for Credit Losses [Roll Forward]
Financing Receivable, Allowance for Credit Losses	$ 4,588	$ 4,774	$ 4,643	$ 4,289
Financing Receivable, Allowance for Credit Losses, Charge-offs	(5)	(316)	(84)	(460)
Financing Receivable, Allowance for Credit Losses, Recoveries	282	70	306	1,299
Financing Receivable Allowance For Credit Losses Net Chargeoffs Recoveries	277	(246)	222	839
Provision for loan losses	100	0	100	(600)
Financing Receivable, Allowance for Credit Losses	4,965	4,528	4,965	4,528
Commercial and Industrial Loans [Member]
Financing Receivable, Allowance for Credit Losses [Roll Forward]
Financing Receivable, Allowance for Credit Losses	524	517	540	523
Financing Receivable, Allowance for Credit Losses, Charge-offs	0	(83)	0	(83)
Financing Receivable, Allowance for Credit Losses, Recoveries	4	3	6	23
Financing Receivable Allowance For Credit Losses Net Chargeoffs Recoveries	4	(80)	6	(60)
Provision for loan losses	149	69	131	43
Financing Receivable, Allowance for Credit Losses	677	506	677	506
Construction And Land Development Loans [Member]
Financing Receivable, Allowance for Credit Losses [Roll Forward]
Financing Receivable, Allowance for Credit Losses	845	695	812	669
Financing Receivable, Allowance for Credit Losses, Charge-offs	0	0	0	0
Financing Receivable, Allowance for Credit Losses, Recoveries	209	5	214	1,203
Financing Receivable Allowance For Credit Losses Net Chargeoffs Recoveries	209	5	214	1,203
Provision for loan losses	(180)	44	(152)	(1,128)
Financing Receivable, Allowance for Credit Losses	874	744	874	744
Commercial Real Estate Loans, Total [Member]
Financing Receivable, Allowance for Credit Losses [Roll Forward]
Financing Receivable, Allowance for Credit Losses	2,004	2,403	2,071	1,879
Financing Receivable, Allowance for Credit Losses, Charge-offs	0	(194)	0	(194)
Financing Receivable, Allowance for Credit Losses, Recoveries	0	0	0	0
Financing Receivable Allowance For Credit Losses Net Chargeoffs Recoveries	0	(194)	0	(194)
Provision for loan losses	117	(117)	50	407
Financing Receivable, Allowance for Credit Losses	2,121	2,092	2,121	2,092
Residential Real Estate Loans, Total [Member]
Financing Receivable, Allowance for Credit Losses [Roll Forward]
Financing Receivable, Allowance for Credit Losses	1,064	1,026	1,107	1,059
Financing Receivable, Allowance for Credit Losses, Charge-offs	0	(37)	(78)	(155)
Financing Receivable, Allowance for Credit Losses, Recoveries	63	58	77	65
Financing Receivable Allowance For Credit Losses Net Chargeoffs Recoveries	63	21	(1)	(90)
Provision for loan losses	(8)	14	13	92
Financing Receivable, Allowance for Credit Losses	1,119	1,061	1,119	1,061
Consumer Installment and Revolving Loans [Member]
Financing Receivable, Allowance for Credit Losses [Roll Forward]
Financing Receivable, Allowance for Credit Losses	151	133	113	159
Financing Receivable, Allowance for Credit Losses, Charge-offs	(5)	(2)	(6)	(28)
Financing Receivable, Allowance for Credit Losses, Recoveries	6	4	9	8
Financing Receivable Allowance For Credit Losses Net Chargeoffs Recoveries	1	2	3	(20)
Provision for loan losses	22	(10)	58	(14)
Financing Receivable, Allowance for Credit Losses	$ 174	$ 125	$ 174	$ 125

XML

Allowance For Loan Loss Additional Information (Details) - USD ($) $ in Thousands	Jun. 30, 2017	Dec. 31, 2016	Jun. 30, 2016
Financing Receivable Allowance For Credit Loss Additional Information [Line Items]
Financing Receivable, Allowance for Credit Losses, Collectively Evaluated for Impairment	$ 4,943		$ 4,431
Financing Receivable, Collectively Evaluated for Impairment	435,939		428,596
Financing Receivable, Allowance for Credit Losses, Individually Evaluated for Impairment	22		97
Financing Receivable, Individually Evaluated for Impairment	1,981		2,653
Allowance for loan losses	4,965	$ 4,643	4,528
Loans and Leases Receivable, Gross, Carrying Amount	437,920	431,506	431,249
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	677		506
Financing Receivable, Collectively Evaluated for Impairment	50,974		50,159
Financing Receivable, Allowance for Credit Losses, Individually Evaluated for Impairment	0		0
Financing Receivable, Individually Evaluated for Impairment	0		31
Allowance for loan losses	677		506
Loans and Leases Receivable, Gross, Carrying Amount	50,974	49,850	50,190
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	874		744
Financing Receivable, Collectively Evaluated for Impairment	46,386		49,291
Financing Receivable, Allowance for Credit Losses, Individually Evaluated for Impairment	0		0
Financing Receivable, Individually Evaluated for Impairment	0		55
Allowance for loan losses	874		744
Loans and Leases Receivable, Gross, Carrying Amount	46,386	41,650	49,346
Commercial Real Estate Loans, Total [Member]
Financing Receivable Allowance For Credit Loss Additional Information [Line Items]
Financing Receivable, Allowance for Credit Losses, Collectively Evaluated for Impairment	2,099		1,995
Financing Receivable, Collectively Evaluated for Impairment	218,882		206,258
Financing Receivable, Allowance for Credit Losses, Individually Evaluated for Impairment	22		97
Financing Receivable, Individually Evaluated for Impairment	1,981		2,567
Allowance for loan losses	2,121		2,092
Loans and Leases Receivable, Gross, Carrying Amount	220,863	220,439	208,825
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	1,119		1,061
Financing Receivable, Collectively Evaluated for Impairment	110,288		113,763
Financing Receivable, Allowance for Credit Losses, Individually Evaluated for Impairment	0		0
Financing Receivable, Individually Evaluated for Impairment	0		0
Allowance for loan losses	1,119		1,061
Loans and Leases Receivable, Gross, Carrying Amount	110,288	110,855	113,763
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	174		125
Financing Receivable, Collectively Evaluated for Impairment	9,409		9,125
Financing Receivable, Allowance for Credit Losses, Individually Evaluated for Impairment	0		0
Financing Receivable, Individually Evaluated for Impairment	0		0
Allowance for loan losses	174		125
Loans and Leases Receivable, Gross, Carrying Amount	$ 9,409	$ 8,712	$ 9,125

XML

Loan Credit Quality Analysis (Details) - USD ($) $ in Thousands	Jun. 30, 2017	Dec. 31, 2016	Jun. 30, 2016
Financing Receivable, Recorded Investment [Line Items]
Financing Receivable, Recorded Investment, Pass	$ 425,223	$ 419,974
Financing Receivable, Recorded Investment, Special Mention	3,506	3,319
Financing Receivable Recorded Investment, Substandard Accruing	6,936	5,843
Financing Receivable, Recorded Investment, Nonaccrual Status	2,255	2,370
Loans and Leases Receivable, Gross, Carrying Amount	437,920	431,506	$ 431,249
Commercial and Industrial Loans [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing Receivable, Recorded Investment, Pass	50,148	49,558
Financing Receivable, Recorded Investment, Special Mention	183	22
Financing Receivable Recorded Investment, Substandard Accruing	609	233
Financing Receivable, Recorded Investment, Nonaccrual Status	34	37
Loans and Leases Receivable, Gross, Carrying Amount	50,974	49,850	50,190
Construction And Land Development Loans [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing Receivable, Recorded Investment, Pass	45,912	41,165
Financing Receivable, Recorded Investment, Special Mention	188	113
Financing Receivable Recorded Investment, Substandard Accruing	286	340
Financing Receivable, Recorded Investment, Nonaccrual Status	0	32
Loans and Leases Receivable, Gross, Carrying Amount	46,386	41,650	49,346
Commercial Real Estate Owner Occupied Loans [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing Receivable, Recorded Investment, Pass	38,191	48,788
Financing Receivable, Recorded Investment, Special Mention	402	414
Financing Receivable Recorded Investment, Substandard Accruing	347	405
Financing Receivable, Recorded Investment, Nonaccrual Status	0	138
Loans and Leases Receivable, Gross, Carrying Amount	38,940	49,745
Commercial Real Estate Multifamily [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing Receivable, Recorded Investment, Pass	47,206	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	47,206	46,998
Commercial Real Estate Other Loans [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing Receivable, Recorded Investment, Pass	131,739	121,326
Financing Receivable, Recorded Investment, Special Mention	0	32
Financing Receivable Recorded Investment, Substandard Accruing	1,181	449
Financing Receivable, Recorded Investment, Nonaccrual Status	1,797	1,889
Loans and Leases Receivable, Gross, Carrying Amount	134,717	123,696
Commercial Real Estate Loans, Total [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing Receivable, Recorded Investment, Pass	217,136	217,112
Financing Receivable, Recorded Investment, Special Mention	402	446
Financing Receivable Recorded Investment, Substandard Accruing	1,528	854
Financing Receivable, Recorded Investment, Nonaccrual Status	1,797	2,027
Loans and Leases Receivable, Gross, Carrying Amount	220,863	220,439	208,825
Residential Real Estate Consumer Mortgage Loans [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing Receivable, Recorded Investment, Pass	57,975	59,450
Financing Receivable, Recorded Investment, Special Mention	2,576	2,613
Financing Receivable Recorded Investment, Substandard Accruing	3,405	3,278
Financing Receivable, Recorded Investment, Nonaccrual Status	406	223
Loans and Leases Receivable, Gross, Carrying Amount	64,362	65,564
Residential Real Estate Investment Property Loans [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing Receivable, Recorded Investment, Pass	44,812	44,109
Financing Receivable, Recorded Investment, Special Mention	103	105
Financing Receivable Recorded Investment, Substandard Accruing	1,011	1,048
Financing Receivable, Recorded Investment, Nonaccrual Status	0	29
Loans and Leases Receivable, Gross, Carrying Amount	45,926	45,291
Residential Real Estate Loans, Total [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing Receivable, Recorded Investment, Pass	102,787	103,559
Financing Receivable, Recorded Investment, Special Mention	2,679	2,718
Financing Receivable Recorded Investment, Substandard Accruing	4,416	4,326
Financing Receivable, Recorded Investment, Nonaccrual Status	406	252
Loans and Leases Receivable, Gross, Carrying Amount	110,288	110,855	113,763
Consumer Installment and Revolving Loans [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing Receivable, Recorded Investment, Pass	9,240	8,580
Financing Receivable, Recorded Investment, Special Mention	54	20
Financing Receivable Recorded Investment, Substandard Accruing	97	90
Financing Receivable, Recorded Investment, Nonaccrual Status	18	22
Loans and Leases Receivable, Gross, Carrying Amount	$ 9,409	$ 8,712	$ 9,125

XML

Impaired Loans (Details) - USD ($) $ in Thousands	Jun. 30, 2017	Dec. 31, 2016
Financing Receivable, Impaired [Line Items]
Impaired Financing Receivable, with No Related Allowance, Unpaid Principal Balance	$ 2,852	$ 3,029
Impaired Financing Receivable, with No Related Allowance, Charge-off And Payments Applied	(1,055)	(1,092)
Impaired Financing Receivable, with No Related Allowance, Recorded Investment	1,797	1,937
Impaired Financing Receivable, with Related Allowance, Unpaid Principal Balance	184	193
Impaired Financing Receivable, with Related Allowance, Charge-off And Payments Applied	0	0
Impaired Financing Receivable, with Related Allowance, Recorded Investment	184	193
Impaired Financing Receivable, With Related Allowance, Related Allowance	22	31
Impaired Financing Receivable, Unpaid Principal Balance	3,036	3,222
Impaired Financing Receivable, Charge-off And Payments Applied	(1,055)	(1,092)
Impaired Financing Receivable, Recorded Investment	1,981	2,130
Impaired Financing Receivable, Related Allowance	22	31
Commercial and Industrial Loans [Member]
Financing Receivable, Impaired [Line Items]
Impaired Financing Receivable, with No Related Allowance, Unpaid Principal Balance	0	15
Impaired Financing Receivable, with No Related Allowance, Charge-off And Payments Applied	0	0
Impaired Financing Receivable, with No Related Allowance, Recorded Investment	0	15
Construction And Land Development Loans [Member]
Financing Receivable, Impaired [Line Items]
Impaired Financing Receivable, with No Related Allowance, Unpaid Principal Balance	0	140
Impaired Financing Receivable, with No Related Allowance, Charge-off And Payments Applied	0	(108)
Impaired Financing Receivable, with No Related Allowance, Recorded Investment	0	32
Commercial Real Estate Owner Occupied Loans [Member]
Financing Receivable, Impaired [Line Items]
Impaired Financing Receivable, with Related Allowance, Unpaid Principal Balance	184	193
Impaired Financing Receivable, with Related Allowance, Charge-off And Payments Applied	0	0
Impaired Financing Receivable, with Related Allowance, Recorded Investment	184	193
Impaired Financing Receivable, With Related Allowance, Related Allowance	22	31
Commercial Real Estate Other Loans [Member]
Financing Receivable, Impaired [Line Items]
Impaired Financing Receivable, with No Related Allowance, Unpaid Principal Balance	2,852	2,874
Impaired Financing Receivable, with No Related Allowance, Charge-off And Payments Applied	(1,055)	(984)
Impaired Financing Receivable, with No Related Allowance, Recorded Investment	1,797	1,890
Commercial Real Estate Loans, Total [Member]
Financing Receivable, Impaired [Line Items]
Impaired Financing Receivable, with No Related Allowance, Unpaid Principal Balance	2,852	2,874
Impaired Financing Receivable, with No Related Allowance, Charge-off And Payments Applied	(1,055)	(984)
Impaired Financing Receivable, with No Related Allowance, Recorded Investment	1,797	1,890
Impaired Financing Receivable, with Related Allowance, Unpaid Principal Balance	184	193
Impaired Financing Receivable, with Related Allowance, Charge-off And Payments Applied	0	0
Impaired Financing Receivable, with Related Allowance, Recorded Investment	184	193
Impaired Financing Receivable, With Related Allowance, Related Allowance	$ 22	$ 31

XML

Impaired Loans Averages (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016
Impaired Financing Receivable, Average Recorded Investment [Line Items]
Impaired Financing Receivable, Average Recorded Investment	$ 2,024	$ 2,804	$ 2,061	$ 2,911
Impaired Financing Receivable, Interest Income, Accrual Method	2	12	5	28
Commercial and Industrial Loans [Member]
Impaired Financing Receivable, Average Recorded Investment [Line Items]
Impaired Financing Receivable, Average Recorded Investment	2	36	6	40
Impaired Financing Receivable, Interest Income, Accrual Method	0	1	0	2
Construction And Land Development Loans [Member]
Impaired Financing Receivable, Average Recorded Investment [Line Items]
Impaired Financing Receivable, Average Recorded Investment	15	60	21	138
Impaired Financing Receivable, Interest Income, Accrual Method	0	0	0	0
Commercial Real Estate Owner Occupied Loans [Member]
Impaired Financing Receivable, Average Recorded Investment [Line Items]
Impaired Financing Receivable, Average Recorded Investment	186	1,009	189	1,015
Impaired Financing Receivable, Interest Income, Accrual Method	2	11	5	26
Commercial Real Estate Other Loans [Member]
Impaired Financing Receivable, Average Recorded Investment [Line Items]
Impaired Financing Receivable, Average Recorded Investment	1,821	1,699	1,845	1,718
Impaired Financing Receivable, Interest Income, Accrual Method	0	0	0	0
Commercial Real Estate Loans, Total [Member]
Impaired Financing Receivable, Average Recorded Investment [Line Items]
Impaired Financing Receivable, Average Recorded Investment	2,007	2,708	2,034	2,733
Impaired Financing Receivable, Interest Income, Accrual Method	$ 2	$ 11	$ 5	$ 26

XML

Troubled Debt Restructuring (Details) - USD ($) $ in Thousands	Jun. 30, 2017	Dec. 31, 2016
Impaired Financing Receivable And Troubled Debt Restructing [Line Items]
Impaired Financing Receivable, Troubled Debt Restructuring, Still Accruing	$ 184	$ 208
Impaired Financing Receivable, Troubled Debt Restructuring, Nonaccrual	1,735	1,850
Impaired Financing Receivable, Trouble Debt Structuring, Total	1,919	2,058
Impaired Financing Receivable, Troubled Debt Restructuring, Allowance for Credit Losses	22	31
Commercial and Industrial Loans [Member]
Impaired Financing Receivable And Troubled Debt Restructing [Line Items]
Impaired Financing Receivable, Troubled Debt Restructuring, Still Accruing	0	15
Impaired Financing Receivable, Troubled Debt Restructuring, Nonaccrual	0	0
Impaired Financing Receivable, Trouble Debt Structuring, Total	0	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	0	32
Impaired Financing Receivable, Trouble Debt Structuring, Total	0	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	184	193
Impaired Financing Receivable, Troubled Debt Restructuring, Nonaccrual	0	0
Impaired Financing Receivable, Trouble Debt Structuring, Total	184	193
Impaired Financing Receivable, Troubled Debt Restructuring, Allowance for Credit Losses	22	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	1,735	1,818
Impaired Financing Receivable, Trouble Debt Structuring, Total	1,735	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	184	193
Impaired Financing Receivable, Troubled Debt Restructuring, Nonaccrual	1,735	1,818
Impaired Financing Receivable, Trouble Debt Structuring, Total	1,919	2,011
Impaired Financing Receivable, Troubled Debt Restructuring, Allowance for Credit Losses	$ 22	$ 31

XML

Troubled Debt Restructuring Modifications (Details) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2017 USD ($)	Jun. 30, 2016 USD ($)	Jun. 30, 2017 USD ($)	Jun. 30, 2016 USD ($)
Financing Receivable, Modifications [Line Items]
Financing Receivable, Modification, Number of Contracts	1	1	1	1
Financing Receivable, Modification, Pre-Modification Recorded Investment	$ 1,275	$ 1,509	$ 1,275	$ 1,509
Financing Receivable, Modifications, Post-Modifications Recorded Investment	$ 1,266	$ 1,509	$ 1,266	$ 1,509
Commercial Real Estate Other Loans [Member]
Financing Receivable, Modifications [Line Items]
Financing Receivable, Modification, Number of Contracts	1	1	1	1
Financing Receivable, Modification, Pre-Modification Recorded Investment	$ 1,275	$ 1,509	$ 1,275	$ 1,509
Financing Receivable, Modifications, Post-Modifications Recorded Investment	$ 1,266	$ 1,509	$ 1,266	$ 1,509
Commercial Real Estate Loans, Total [Member]
Financing Receivable, Modifications [Line Items]
Financing Receivable, Modification, Number of Contracts	1	1	1	1
Financing Receivable, Modification, Pre-Modification Recorded Investment	$ 1,275	$ 1,509	$ 1,275	$ 1,509
Financing Receivable, Modifications, Post-Modifications Recorded Investment	$ 1,266	$ 1,509	$ 1,266	$ 1,509

XML

Loans Textuals (Details)	Jun. 30, 2017
Loan and Lease Disclosure (Textuals) [Abstract]
Percentage Of Loans Secured By Real Estate	86.20%

XML

Mortgage Servicing Rights, Net (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016
Servicing Asset at Amortized Value, Balance [Roll Forward]
Servicing Asset at Amortized Cost, Beginning	$ 1,862	$ 2,235	$ 1,952	$ 2,316
Servicing Asset at Amortized Value, Additions	40	88	93	145
Servicing Asset at Amortized Value, Amortization	(140)	(176)	(284)	(314)
Servicing Asset at Amortized Value, Valuation Allowance	0	(1)	1	(1)
Servicing Asset at Amortized Cost, Ending	1,762	2,146	1,762	2,146
Valuation Allowance for Impairment of Recognized Servicing Assets, Balance [Abstract]
Valuation Allowance for Impairment of Recognized Servicing Assets, Beginning Balance	0	0	1	0
Valuation Allowance for Impairment of Recognized Servicing Assets, Ending Balance	0	1	0	1
Servicing Asset at Amortized Value, Fair Value [Abstract]
Servicing Asset at Amortized Value, Fair Value, Beginning	2,689	2,906	2,678	3,086
Servicing Asset at Amortized Value, Fair Value, Ending	$ 2,520	$ 2,539	$ 2,520	$ 2,539

XML

Derivative Instruments (Details) - USD ($) $ in Thousands	Jun. 30, 2017	Dec. 31, 2016
Derivative [Line Items]
Derivative, Notional Amount1	$ 7,584	$ 7,934
DerivativeAssetFairValueGrossAsset	138	241
Derivative Asset, Fair Value, Gross Liability	138	241
Derivative, Interest Rate Swap, Pay Fixed, Receive Variable [Member]
Derivative [Line Items]
Derivative, Notional Amount1	3,792	3,967
DerivativeAssetFairValueGrossAsset	0	0
Derivative Asset, Fair Value, Gross Liability	138	241
Derivative, Interest Rate Swap, Pay Variable, Receive Fixed [Member]
Derivative [Line Items]
Derivative, Notional Amount1	3,792	3,967
DerivativeAssetFairValueGrossAsset	138	241
Derivative Asset, Fair Value, Gross Liability	$ 0	$ 0

XML

Fair Value (Details) - USD ($) $ in Thousands	Jun. 30, 2017	Dec. 31, 2016
Fair Value, Measurements, Recurring [Member]
Fair Value Disclosure, Securities Available-for-Sale [Abstract]
Fair Value Disclosure, Agency RMBS	$ 57,294	$ 45,471
Fair Value Disclosure, State and Political Subdivisions	148,128	127,787
Trust Preferred Securities	71,941	70,314
Fair Value Disclosure, Securities Available-for-Sale, Total	277,363	243,572
Other Assets, Fair Value Disclosure	138	241
Assets, Fair Value Disclosure, Recurring	277,501	243,813
Liabilities Fair Value Disclosure [Abstract]
Other Liabilities, Fair Value Disclosure	138	241
Liabilities, Fair Value Disclosure, Recurring, Total	138	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	57,294	45,471
Fair Value Disclosure, State and Political Subdivisions	148,128	127,787
Trust Preferred Securities	71,941	70,314
Fair Value Disclosure, Securities Available-for-Sale, Total	277,363	243,572
Other Assets, Fair Value Disclosure	138	241
Assets, Fair Value Disclosure, Recurring	277,501	243,813
Liabilities Fair Value Disclosure [Abstract]
Other Liabilities, Fair Value Disclosure	138	241
Liabilities, Fair Value Disclosure, Recurring, Total	138	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	1,436	1,497
Impaired Loans, Fair Value Disclosure	1,959	2,099
Other Real Esate Owned, Fair Value Disclosure	103	152
Servicing Asset at Fair Value, Amount	1,762	1,952
Assets, Fair Value Disclosure, Nonrecurring	5,260	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	1,436	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	1,436	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	1,959	2,099
Other Real Esate Owned, Fair Value Disclosure	103	152
Servicing Asset at Fair Value, Amount	1,762	1,952
Assets, Fair Value Disclosure, Nonrecurring	$ 3,824	$ 4,203

XML

Fair Value Unobservable Inputs (Details) - Fair Value, Measurements, Nonrecurring [Member] - Carrying (Reported) Amount, Fair Value Disclosure [Member] $ in Thousands	Jun. 30, 2017 USD ($)
Impaired Loans [Member]
Schedule Of Fair Value Significant Unobservable Inputs Used [Line Items]
Assets, Fair Value Disclosure	$ 1,959
Impaired Loans [Member] | Appraisal, Appraisal Discount [Member]
Schedule Of Fair Value Significant Unobservable Inputs Used [Line Items]
Unobservable Input, Weighted Average of Input Percent	20.30%
Other Real Estate Owned [Member]
Schedule Of Fair Value Significant Unobservable Inputs Used [Line Items]
Assets, Fair Value Disclosure	$ 103
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	18.90%
Mortgage Servicing Rights [Member]
Schedule Of Fair Value Significant Unobservable Inputs Used [Line Items]
Assets, Fair Value Disclosure	$ 1,762
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	11.00%
Mortgage Servicing Rights [Member] | Discounted Cash Flow, Discount Rate [Member]
Schedule Of Fair Value Significant Unobservable Inputs Used [Line Items]
Unobservable Input, Weighted Average of Input Percent	10.00%

XML

Fair Value Financial Instruments (Details) - USD ($) $ in Thousands	Jun. 30, 2017	Dec. 31, 2016
Carrying (Reported) Amount, Fair Value Disclosure [Member]
Fair Value, Financial Assets: [Abstract]
Fair Value, Financial Instruments, Loans, Net	$ 432,322	$ 426,303
Fair Value, Financial Instruments, Loans Held For Sale	1,436	1,497
Fair Value, Financial Liabilities: [Abstract]
Fair Value, Financial Instruments, Time Deposits	197,520	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	433,987	428,446
Fair Value, Financial Instruments, Loans Held For Sale	1,460	1,507
Fair Value, Financial Liabilities: [Abstract]
Fair Value, Financial Instruments, Time Deposits	196,455	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	1,460	1,507
Fair Value, Financial Liabilities: [Abstract]
Fair Value, Financial Instruments, Time Deposits	196,455	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	433,987	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