10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2013

[   ] 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 x                                          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 x                                          No ¨

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

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

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

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 October 31, 2013
Common Stock, $0.01 par value per share	3,643,118 shares

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

INDEX

	PAGE
PART I. FINANCIAL INFORMATION
Item 1  Financial Statements
Consolidated Balance Sheets (Unaudited) as of September 30, 2013 and December 31, 2012		3
Consolidated Statements of Earnings (Unaudited) for the quarter and nine months ended September  30, 2013 and 2012		4
Consolidated Statements of Comprehensive Income (Unaudited) for the quarter and nine months ended September 30, 2013 and 2012		5
Consolidated Statements of Stockholders’ Equity (Unaudited) for the nine months ended September  30, 2013 and 2012		6
Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September  30, 2013 and 2012		7
Notes to Consolidated Financial Statements (Unaudited)		8
Item 2   Management’s Discussion and Analysis of Financial Condition and Results of Operations		32
Table 1 – Explanation of Non-GAAP Financial Measures		49
Table 2 – Selected Quarterly Financial Data		50
Table 3 – Selected Financial Data		51
Table 4 – Average Balances and Net Interest Income Analysis – for the quarter ended September 30, 2013 and 2012		52
Table 5 – Average Balances and Net Interest Income Analysis – for the nine months ended September 30, 2013 and 2012		53
Table 6 – Loan Portfolio Composition		54
Table 7 – Allowance for Loan Losses and Nonperforming Assets		55
Table 8 – Allocation of Allowance for Loan Losses		56
Table 9 – CDs and Other Time Deposits of $100,000 or more		57
Item 3  Quantitative and Qualitative Disclosures About Market Risk		58
Item 4  Controls and Procedures		58
PART II. OTHER INFORMATION
Item 1  Legal Proceedings		58
Item 1A  Risk Factors		58
Item 2  Unregistered Sales of Equity Securities and Use of Proceeds		58
Item 3  Defaults Upon Senior Securities		58
Item 4  Mine Safety Disclosures		59
Item 5  Other Information		59
Item 6  Exhibits		59

2

PART 1. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Unaudited)

(Dollars in thousands, except share data)	September 30, 2013		December 31, 2012
Assets:
Cash and due from banks	$	14,088	$	18,762
Federal funds sold		36,955		42,682
Interest bearing bank deposits		11,211		505
Cash and cash equivalents		62,254		61,949
Securities available-for-sale		259,467		259,475
Loans held for sale		2,367		2,887
Loans, net of unearned income		380,705		398,193
Allowance for loan losses		(5,946)		(6,723)
Loans, net		374,759		391,470
Premises and equipment, net		10,729		10,528
Bank-owned life insurance		17,365		17,076
Other real estate owned		4,585		4,919
Other assets		13,076		11,529
Total assets	$	744,602	$	759,833
Liabilities:
Deposits:
Noninterest-bearing	$	118,965	$	118,014
Interest-bearing		531,456		518,803
Total deposits		650,421		636,817
Federal funds purchased and securities sold under agreements to repurchase		2,743		2,689
Long-term debt		22,217		47,217
Accrued expenses and other liabilities		3,414		2,961
Total liabilities		678,795		689,684
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		3,758		3,756
Retained earnings		70,915		67,821
Accumulated other comprehensive (loss) income, net		(2,264)		5,174
Less treasury stock, at cost—314,077 shares and 314,232 shares at September 30, 2013 and December 31, 2012, respectively		(6,641)		(6,641)
Total stockholders’ equity		65,807		70,149
Total liabilities and stockholders’ equity	$	744,602	$	759,833

See accompanying notes to consolidated financial statements

3

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

Consolidated Statements of Earnings

(Unaudited)

	Quarter ended September 30,				Nine months ended September 30,
(In thousands, except share and per share data)	2013		2012		2013		2012
Interest income:
Loans, including fees	$	5,104	$	5,548	$	15,656	$	16,303
Securities		1,713		1,653		4,936		5,482
Federal funds sold and interest bearing bank deposits		39		11		99		32
Total interest income		6,856		7,212		20,691		21,817
Interest expense:
Deposits		1,344		1,509		4,097		4,839
Short-term borrowings		3		4		10		13
Long-term debt		239		440		941		1,393
Total interest expense		1,586		1,953		5,048		6,245
Net interest income		5,270		5,259		15,643		15,572
Provision for loan losses		—		1,550		400		2,750
Net interest income after provision for loan losses		5,270		3,709		15,243		12,822
Noninterest income:
Service charges on deposit accounts		224		268		707		838
Mortgage lending		750		1,038		2,397		2,492
Bank-owned life insurance		93		120		289		332
Gain on sale of affordable housing investments		—		—		—		3,268
Other		365		413		1,086		1,157
Securities gains, net:
Realized gains, net		—		178		679		738
Total other-than-temporary impairments		—		—		—		(130)
Total securities gains, net		—		178		679		608
Total noninterest income		1,432		2,017		5,158		8,695
Noninterest expense:
Salaries and benefits		2,139		2,209		6,503		6,557
Net occupancy and equipment		346		345		1,010		1,019
Professional fees		197		163		582		538
FDIC and other regulatory assessments		130		153		467		521
Other real estate owned, net		68		119		111		182
Prepayment penalties on long-term debt		541		—		2,012		3,720
Other		853		781		2,539		2,823
Total noninterest expense		4,274		3,770		13,224		15,360
Earnings before income taxes		2,428		1,956		7,177		6,157
Income tax expense		636		347		1,789		1,054
Net earnings	$	1,792	$	1,609	$	5,388	$	5,103
Net earnings per share:
Basic and diluted	$	0.49	$	0.44	$	1.48	$	1.40
Weighted average shares outstanding:
Basic and diluted		3,643,028		3,642,876		3,642,967		3,642,807

See accompanying notes to consolidated financial statements

4

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(Unaudited)

	Quarter ended September 30,						Nine months ended September 30,
(Dollars in thousands)	2013			2012			2013			2012
Net earnings	$	1,792		$	1,609		$	5,388		$	5,103
Other comprehensive (loss) income, net of tax:
Unrealized net holding (loss) gain on securities		(433	)		1,162			(7,010	)		2,307
Reclassification adjustment for net gain on securities recognized in net earnings		—			(113	)		(428	)		(384)
Other comprehensive (loss) income		(433	)		1,049			(7,438	)		1,923
Comprehensive income (loss)	$	1,359		$	2,658		$	(2,050	)	$	7,026

See accompanying notes to consolidated financial statements

5

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

(Unaudited)

	Common Stock				Additional paid-in capital		Retained earnings			Accumulated other comprehensive income (loss)			Treasury stock			Total
(Dollars in thousands, except share data)	Shares		Amount
Balance, December 31, 2011		3,957,135	$	39	$	3,753	$	64,045		$	4,222		$	(6,643	)	$	65,416
Net earnings		—		—		—		5,103			—			—			5,103
Other comprehensive income		—		—		—		—			1,923			—			1,923
Cash dividends paid ($0.615 per share)		—		—		—		(2,240	)		—			—			(2,240)
Sale of treasury stock (165 shares)		—		—		3		—			—			1			4
Balance, September 30, 2012		3,957,135	$	39	$	3,756	$	66,908		$	6,145		$	(6,642	)	$	70,206
Balance, December 31, 2012		3,957,135	$	39	$	3,756	$	67,821		$	5,174		$	(6,641	)	$	70,149
Net earnings		—		—		—		5,388			—			—			5,388
Other comprehensive loss		—		—		—		—			(7,438	)		—			(7,438)
Cash dividends paid ($0.63 per share)		—		—		—		(2,294	)		—			—			(2,294)
Sale of treasury stock (155 shares)		—		—		2		—			—			—			2
Balance, September 30, 2013		3,957,135	$	39	$	3,758	$	70,915		$	(2,264	)	$	(6,641	)	$	65,807

See accompanying notes to consolidated financial statements

6

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

	Nine months ended September 30,
(In thousands)	2013			2012
Cash flows from operating activities:
Net earnings	$	5,388		$	5,103
Adjustments to reconcile net earnings to net cash provided by operating activities:
Provision for loan losses		400			2,750
Depreciation and amortization		639			609
Premium amortization and discount accretion, net		1,620			2,351
Net gain on securities available for sale		(679	)		(608	)
Net gain on sale of loans held for sale		(1,693	)		(2,488	)
Net loss on other real estate owned		13			121
Loss on prepayment of long-term debt		2,012			3,720
Loans originated for sale		(80,169	)		(111,476	)
Proceeds from sale of loans		81,689			110,932
Increase in cash surrender value of bank owned life insurance		(289	)		(332	)
Gain on sale of affordable housing partnership investments		—			(3,268	)
Net decrease in other assets		2,019			687
Net increase in accrued expenses and other liabilities		453			541
Net cash provided by operating activities		11,403			8,642
Cash flows from investing activities:
Proceeds from sales of securities available-for-sale		38,614			49,693
Proceeds from maturities of securities available-for-sale		48,588			93,377
Purchase of securities available-for-sale		(99,923	)		(97,002	)
Decrease (increase) in loans, net		14,033			(31,740	)
Net purchases of premises and equipment		(516	)		(1,128	)
Decrease in FHLB stock		1,153			2,067
Proceeds from sale of affordable housing limited partnerships		—			8,499
Proceeds from sale of other real estate owned		2,599			3,493
Net cash provided by investing activities		4,548			27,259
Cash flows from financing activities:
Net increase in noninterest-bearing deposits		951			9,741
Net increase in interest-bearing deposits		12,653			531
Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase		54			(258	)
Repayments or retirement of long-term debt		(27,012	)		(41,816	)
Proceeds from sale of treasury stock		2			4
Dividends paid		(2,294	)		(2,240	)
Net cash used in financing activities		(15,646	)		(34,038	)
Net change in cash and cash equivalents		305			1,863
Cash and cash equivalents at beginning of period		61,949			55,428
Cash and cash equivalents at end of period	$	62,254		$	57,291
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	5,228		$	6,570
Income taxes		258			818
Supplemental disclosure of non-cash transactions:
Real estate acquired through foreclosure		2,278			641

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, 2012.

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 September 30, 2013. The Company does not believe there were any material subsequent events during this period that would have required recognition or disclosure in the unaudited consolidated financial statements included in this report.

Accounting Developments

In the first quarter of 2013, the Company adopted new guidance related to the following Accounting Standards Updates (“Updates” or “ASUs”):

• ASU 2011-11, Disclosures about Offsetting Assets and Liabilities;

• ASU 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities; and

• ASU 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.

In the third quarter of 2013, the Company adopted new guidance related to the following Update:

• ASU 2013-10, Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes.

Information about these pronouncements is described in more detail below.

8

ASU 2011-11, Disclosures about Offsetting Assets and Liabilities, expands the disclosure requirements for financial instruments and derivatives that may be offset in accordance with enforceable master netting agreements or similar arrangements. The disclosures are required regardless of whether the instruments have been offset (or netted) in the statement of financial position. Under ASU 2011-11, companies must describe the nature of offsetting arrangements and provide quantitative information about those agreements, including the gross and net amounts of financial instruments that are recognized in the statement of financial position. In January 2013, the FASB issued ASU 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities, which clarifies the scope of the offsetting disclosures and addresses any unintended consequences due to feedback from stakeholders that standard commercial provisions of many contracts would equate to a master netting arrangement. These changes were effective for the Company in the first quarter of 2013 with retrospective application. Adoption of this ASU did not have a significant impact on the financial statements of the Company.

ASU 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, seeks to improve the reporting of reclassifications out of accumulated other comprehensive income. The amendments in this Update will require an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. GAAP to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. These changes were effective for the Company in the first quarter of 2013 with retrospective application. This Update did not affect our consolidated financial results as it amends only the presentation of comprehensive income. See Consolidated Statements of Comprehensive Income.

ASU 2013-10, Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes, permits the Fed Funds Effective Swap Rate (Overnight Index Swap Rate) to be used as a U.S. benchmark interest rate for hedge accounting purposes, in addition to LIBOR and U.S. Treasury. The ASU also removes the restriction on using different benchmark rates for similar hedges. These changes are effective for the Company in the third quarter of 2013 with prospective application for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. Adoption of this ASU did not have a significant impact on the financial statements of the Company.

9

NOTE 2: BASIC AND DILUTED EARNINGS PER SHARE

Basic net earnings per share is computed by dividing net earnings by the weighted average common shares outstanding for the respective period. Diluted net earnings per share reflect the potential dilution that could occur upon exercise of securities or other rights for, or convertible into, shares of the Company’s common stock. At September 30, 2013 and 2012, 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 earnings per share computations for the respective periods are presented below.

	Quarter ended September 30,				Nine months ended September 30,
(In thousands, except share and per share data)	2013		2012		2013		2012
Basic and diluted:
Net earnings	$	1,792	$	1,609	$	5,388	$	5,103
Weighted average common shares outstanding		3,643,028		3,642,876		3,642,967		3,642,807
Earnings per share	$	0.49	$	0.44	$	1.48	$	1.40

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 September 30, 2013, 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, which issued mandatorily redeemable preferred capital securities (“trust preferred securities”) in the aggregate of approximately $7.0 million at the time of issuance. This 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. The junior subordinated debentures of approximately $7.2 million are included in long-term debt and the Company’s equity interest of $0.2 million in the business trust is included in other assets. Interest expense on the junior subordinated debentures is included in interest expense on long-term debt.

The following table summarizes VIEs that are not consolidated by the Company as of September 30, 2013.

(Dollars in thousands)	Maximum Loss Exposure		Liability         Recognized		Classification
Type:
Trust preferred issuances		N/A		$     7,217	Long-term debt

10

NOTE 4: SECURITIES

At September 30, 2013 and December 31, 2012, respectively, all securities within the scope of ASC 320, Investments – Debt and Equity Securities, were classified as available-for-sale. The fair value and amortized cost for securities available-for-sale by contractual maturity at September 30, 2013 and December 31, 2012, respectively, are presented below.

	1 year		1 to 5		5 to 10		After 10		Fair		Gross Unrealized				Amortized
(Dollars in thousands)	or less		years		years		years		Value		Gains		Losses		Cost
September 30, 2013
Agency obligations (a)	$	—		—		23,744		22,079		45,823		—		3,253	$	49,076
Agency RMBS (a)		—		—		3,679		142,311		145,990		1,196		3,179		147,973
State and political subdivisions		—		2,096		19,739		45,077		66,912		1,998		399		65,313
Trust preferred securities		—		—		—		742		742		164		115		693
Total available-for-sale	$	—		2,096		47,162		210,209		259,467		3,358		6,946	$	263,055
December 31, 2012
Agency obligations (a)	$	—		—		20,065		19,460		39,525		187		19	$	39,357
Agency RMBS (a)		—		—		4,700		136,760		141,460		3,012		162		138,610
State and political subdivisions		111		1,830		21,006		54,891		77,838		5,222		—		72,616
Trust preferred securities		—		—		—		652		652		113		154		693
Total available-for-sale	$	111		1,830		45,771		211,763		259,475		8,534		335	$	251,276

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

Securities with aggregate fair values of $135.8 million and $134.0 million at September 30, 2013 and December 31, 2012, 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 $1.8 million and $3.0 million at September 30, 2013 and December 31, 2012, 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 September 30, 2013 and December 31, 2012, respectively, segregated by those securities that have been in an unrealized loss position for less than 12 months and 12 months or longer, are presented below.

	Less than 12 Months				12 Months or Longer				Total
(Dollars in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
September 30, 2013:
Agency obligations	$	45,822		3,253		—		—	$	45,822		3,253
Agency RMBS		95,325		3,179		—		—		95,325		3,179
State and political subdivisions		7,751		399		—		—		7,751		399
Trust preferred securities		—		—		385		115	$	385		115
Total	$	148,898		6,831		385		115	$	149,283		6,946
December 31, 2012:
Agency obligations	$	9,966		19		—		—	$	9,966		19
Agency RMBS		25,207		162		—		—		25,207		162
Trust preferred securities		—		—		346		154		346		154
Total	$	35,173		181		346		154	$	35,519		335

11

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 residential mortgage-backed securities (“RMBS”)

The unrealized losses associated with agency 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.

Trust preferred securities

The unrealized losses associated with individual issuer trust preferred securities were primarily driven by wider credit spreads. Management evaluates the financial performance of individual community bank holding companies on a quarterly basis to determine if it is probable that such issuer can make all contractual principal and interest payments. Based upon its evaluation, the Company expects to recover the remaining amortized cost basis of these securities.

Cost-method investments

At September 30, 2013, cost-method investments with an aggregate cost of $1.8 million were not evaluated for impairment because the Company did not identify any events or changes in circumstances that may have a significant adverse effect on the fair value of these cost-method investments.

12

The carrying values of the Company’s investment securities could decline in the future if the financial condition of individual issuers of trust preferred securities, or the credit quality of other securities deteriorate 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 significant other-than-temporary impairment charges may occur in the future.

Other-Than-Temporarily Impaired Securities

The following table presents a roll-forward of the credit loss component of the amortized cost of debt securities that the Company has written down for other-than-temporary impairment and has recognized the credit component of the loss in earnings (referred to as “credit-impaired” debt securities). Other-than-temporary impairments recognized in earnings for credit-impaired debt securities are presented as additions in two components based upon whether the current period is the first time the debt security was credit-impaired (initial credit impairment) or is not the first time the debt security was credit-impaired (subsequent credit impairments). The credit loss component is reduced if the Company sells, intends to sell, or believes it will be required to sell previously credit-impaired debt securities. Additionally, the credit loss component is reduced if the Company receives cash flows in excess of what it expected to receive over the remaining life of the credit-impaired debt security, the security matures or the security is fully written-down and deemed worthless. Changes in the credit loss component of credit-impaired debt securities for the respective periods are presented below.

	Quarter ended September 30,				Nine months ended September 30,
(Dollars in thousands)	2013		2012		2013		2012
Balance, beginning of period	$	757	$	1,257	$	1,257	$	3,276
Additions:
Subsequent credit impairments		—		—		—		130
Reductions:
Securities sold		—		—		—		2,149
Securities fully written down and deemed worthless		—		—		500		—
Balance, end of period	$	757	$	1,257	$	757	$	1,257

Other-Than-Temporary Impairment

The following table presents details of the other-than-temporary impairment related to securities.

	Quarter ended September 30,				Nine months ended September 30,
(Dollars in thousands)	2013		2012		2013		2012
Other-than-temporary impairment charges (included in earnings):
Debt securities:
Individual issuer trust preferred securities	$	—	$	—	$	—	$	130
Total debt securities		—		—		—		130
Total other-than-temporary impairment charges	$	—	$	—	$	—	$	130
Other-than-temporary impairment on debt securities:
Recorded as part of gross realized losses:
Credit-related	$	—	$	—	$	—	$	130
Total other-than-temporary impairment on debt securities	$	—	$	—	$	—	$	130

Realized Gains and Losses

The following table presents the gross realized gains and losses on sales and other-than-temporary impairment charges related to securities.

	Quarter ended September 30,					Nine months ended September 30,
(Dollars in thousands)	2013		2012			2013			2012
Gross realized gains	$	—	$	203		$	685		$	927
Gross realized losses		—		(25	)		(6	)		(189)
Other-than-temporary impairment charges		—		—			—			(130)
Realized gains, net	$	—	$	178		$	679		$	608

13

NOTE 5: LOANS AND ALLOWANCE FOR LOAN LOSSES

	September 30,			December 31,
(In thousands)	2013			2012
Commercial and industrial	$	58,766		$	59,334
Construction and land development		37,062			37,631
Commercial real estate:
Owner occupied		57,082			64,368
Other		113,438			119,243
Total commercial real estate		170,520			183,611
Residential real estate:
Consumer mortgage		57,032			58,087
Investment property		45,533			47,544
Total residential real estate		102,565			105,631
Consumer installment		12,170			12,219
Total loans		381,083			398,426
Less: unearned income		(378	)		(233)
Loans, net of unearned income	$	380,705		$	398,193

Loans secured by real estate were approximately 82.4% of the Company’s total loan portfolio at September 30, 2013. At September 30, 2013, 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 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 two classes: (1) owner occupied and (2) 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.

• Other – primarily includes loans to finance income-producing commercial and multi-family 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, warehouses and apartments leased generally to local businesses and 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.

14

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 September 30, 2013, and December 31, 2012.

			Accruing 30-89 Days		Accruing Greater than		Total Accruing		Non-		Total
(In thousands)	Current		Past Due		90 days		Loans		Accrual		Loans
September 30, 2013:
Commercial and industrial	$	58,260		444		6		58,710		56	$	58,766
Construction and land development		35,470		—		—		35,470		1,592		37,062
Commercial real estate:
Owner occupied		55,992		49		—		56,041		1,041		57,082
Other		113,012		—		—		113,012		426		113,438
Total commercial real estate		169,004		49		—		169,053		1,467		170,520
Residential real estate:
Consumer mortgage		55,814		200		93		56,107		925		57,032
Investment property		44,859		289		—		45,148		385		45,533
Total residential real estate		100,673		489		93		101,255		1,310		102,565
Consumer installment		12,130		40		—		12,170		—		12,170
Total	$	375,537		1,022		99		376,658		4,425	$	381,083
December 31, 2012:
Commercial and industrial	$	59,101		173		—		59,274		60	$	59,334
Construction and land development		35,917		8		—		35,925		1,706		37,631
Commercial real estate:
Owner occupied		63,323		—		—		63,323		1,045		64,368
Other		113,344		230		—		113,574		5,669		119,243
Total commercial real estate		176,667		230		—		176,897		6,714		183,611
Residential real estate:
Consumer mortgage		55,521		1,202		58		56,781		1,306		58,087
Investment property		46,460		335		—		46,795		749		47,544
Total residential real estate		101,981		1,537		58		103,576		2,055		105,631
Consumer installment		12,157		62		—		12,219		—		12,219
Total	$	385,823		2,010		58		387,891		10,535	$	398,426

15

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, 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 loans. 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 these types of loans. The estimates for these loans are established by category and based on the Company’s internal system of credit risk ratings and historical loss data. The estimated loan loss allocation rate for the Company’s internal system of credit risk grades is based on its experience with similarly graded loans. For loan segments where the Company believes it does not have sufficient historical loss data, the Company may make adjustments based, in part, on loss rates of peer bank groups. At September 30, 2013 and December 31, 2012, and for the periods then ended, the Company adjusted its historical loss rates for the commercial real estate portfolio segment based, in part, on loss rates of peer bank groups.

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

16

The Company regularly re-evaluates its practices in determining the allowance for loan losses. During 2013, the Company implemented certain refinements to its allowance for loan losses methodology, specifically the way that historical loss factors are calculated. Prior to June 30, 2013, the Company calculated average losses for all loan segments using a rolling 6 quarter historical period. In order to better capture the effects of the current economic cycle on the Company’s loan loss experience, the Company calculated average losses for all loan segments (except for the commercial real estate loan segment) using a rolling 8 quarter historical period for the quarter ended June 30, 2013. Based upon management’s review of charge-off trends for each loan segment, the Company continued to calculate average losses for the commercial real estate loan segment using a rolling 6 quarter historical period for the quarter ended June 30, 2013. If the Company continued to calculate average losses for all loan segments using a rolling 6 quarter historical period, the Company’s calculated allowance for loan loss allocation would have decreased by approximately $1.1 million at June 30, 2013. Other than the changes discussed above, the Company has not made any changes to its calculation of historical loss periods that would impact the calculation of the allowance for loan losses or provision for loan losses for the periods included in the accompanying consolidated balance sheets and statements of earnings.

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

	September 30, 2013
(In thousands)	Commercial and industrial			Construction and land development			Commercial real estate			Residential real estate			Consumer installment			Total
Quarter ended:
Beginning balance	$	675			1,454			3,111			1,125			92		$	6,457
Charge-offs		(177	)		(137	)		(103	)		(144	)		—			(561	)
Recoveries		23			1			21			—			5			50
Net (charge-offs) recoveries		(154	)		(136	)		(82	)		(144	)		5			(511	)
Provision		25			(129	)		75			1			28			—
Ending balance	$	546			1,189			3,104			982			125		$	5,946
Nine months ended:
Beginning balance	$	812			1,545			3,137			1,126			103		$	6,723
Charge-offs		(245	)		(39	)		(262	)		(558	)		(199	)		(1,303	)
Recoveries		40			5			4			62			15			126
Net charge-offs		(205	)		(34	)		(258	)		(496	)		(184	)		(1,177	)
Provision		(61	)		(322	)		225			352			206			400
Ending balance	$	546			1,189			3,104			982			125		$	5,946
	September 30, 2012
(In thousands)	Commercial and industrial			Construction and land development			Commercial real estate			Residential real estate			Consumer installment			Total
Quarter ended:
Beginning balance	$	731			1,623			2,817			1,278			54			6,503
Charge-offs		(152	)		—			(1,626	)		(324	)		(35	)	$	(2,137	)
Recoveries		20			—			71			35			3		$	129
Net charge-offs		(132	)		—			(1,555	)		(289	)		(32	)		(2,008	)
Provision		155			(14	)		1,396			(42	)		55		$	1,550
Ending balance	$	754			1,609			2,658			947			77		$	6,045
Nine months ended:
Beginning balance	$	948			1,470			3,009			1,363			129		$	6,919
Charge-offs		(246	)		(231	)		(2,844	)		(435	)		(68	)		(3,824	)
Recoveries		28			1			71			85			15			200
Net charge-offs		(218	)		(230	)		(2,773	)		(350	)		(53	)		(3,624	)
Provision		24			369			2,422			(66	)		1			2,750
Ending balance	$	754			1,609			2,658			947			77		$	6,045

17

The following table presents an analysis of the allowance for loan losses and recorded investment in loans by portfolio segment and impairment methodology as of September 30, 2013 and 2012.

	Collectively evaluated (1)				Individually evaluated (2)				Total
(In thousands)	Allowance     for loan     losses		Recorded     investment in     loans		Allowance     for loan     losses		Recorded     investment in     loans		Allowance     for loan     losses		Recorded     investment     in loans
September 30, 2013:
Commercial and industrial	$	546		58,630		—		136		546		58,766
Construction and land development		1,090		35,469		99		1,593		1,189		37,062
Commercial real estate		2,919		167,564		185		2,956		3,104		170,520
Residential real estate		982		101,576		—		989		982		102,565
Consumer installment		125		12,170		—		—		125		12,170
Total	$	5,662		375,409		284		5,674		5,946		381,083
September 30, 2012:
Commercial and industrial	$	754		58,395		—		184		754		58,579
Construction and land development		1,468		36,817		141		3,756		1,609		40,573
Commercial real estate		2,519		175,733		139		8,024		2,658		183,757
Residential real estate		915		101,297		32		2,022		947		103,319
Consumer installment		77		11,747		—		—		77		11,747
Total	$	5,733		383,989		312		13,986		6,045		397,975

(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 unimpaired 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.

18

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 in doubt.

(In thousands)	Pass		Special Mention		Substandard Accruing		Nonaccrual		Total loans
September 30, 2013:
Commercial and industrial	$	53,776		4,184		750		56	$	58,766
Construction and land development		34,175		177		1,118		1,592		37,062
Commercial real estate:
Owner occupied		54,076		1,083		882		1,041		57,082
Other		111,231		963		818		426		113,438
Total commercial real estate		165,307		2,046		1,700		1,467		170,520
Residential real estate:
Consumer mortgage		49,264		1,147		5,696		925		57,032
Investment property		41,808		1,619		1,721		385		45,533
Total residential real estate		91,072		2,766		7,417		1,310		102,565
Consumer installment		11,970		39		161		—		12,170
Total	$	356,300		9,212		11,146		4,425	$	381,083
December 31, 2012:
Commercial and industrial	$	58,487		224		563		60	$	59,334
Construction and land development		34,490		310		1,125		1,706		37,631
Commercial real estate:
Owner occupied		59,270		2,528		1,525		1,045		64,368
Other		111,719		653		1,202		5,669		119,243
Total commercial real estate		170,989		3,181		2,727		6,714		183,611
Residential real estate:
Consumer mortgage		49,462		1,544		5,775		1,306		58,087
Investment property		43,559		1,033		2,203		749		47,544
Total residential real estate		93,021		2,577		7,978		2,055		105,631
Consumer installment		11,850		155		214		—		12,219
Total	$	368,837		6,447		12,607		10,535	$	398,426

19

Impaired loans

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

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

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

The following tables set forth certain information regarding the Company’s impaired loans that were individually evaluated for impairment at September 30, 2013 and December 31, 2012.

		September 30, 2013
(In thousands)		Unpaid principal balance (1)		Charge-offs and payments applied (2)			Recorded investment (3)		Related allowance
With no allowance recorded:
Commercial and industrial	$		136		—			136
Construction and land development			2,879		(1,682	)		1,197
Commercial real estate:
Owner occupied			1,220		(180	)		1,040
Other			516		(90	)		426
Total commercial real estate			1,736		(270	)		1,466
Residential real estate:
Consumer mortgages			958		(186	)		772
Investment property			340		(123	)		217
Total residential real estate			1,298		(309	)		989
Total	$		6,049		(2,261	)		3,788
With allowance recorded:
Construction and land development	$		457		(61	)		396	$	99
Commercial real estate:
Owner occupied			882		—			882		117
Other			608		—			608		68
Total commercial real estate			1,490		—			1,490		185
Total	$		1,947		(61	)		1,886	$	284
Total impaired loans	$		7,996		(2,322	)		5,674	$	284

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

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

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

20

	December 31, 2012
(In thousands)	Unpaid principal balance (1)		Charge-offs and payments applied (2)			Recorded investment (3)		Related allowance
With no allowance recorded:
Commercial and industrial	$	169		—			169
Construction and land development		2,879		(1,682	)		1,197
Commercial real estate:
Owner occupied		787		(212	)		575
Other		7,914		(1,862	)		6,052
Total commercial real estate		8,701		(2,074	)		6,627
Residential real estate:
Consumer mortgages		971		(152	)		819
Investment property		508		(110	)		398
Total residential real estate		1,479		(262	)		1,217
Total	$	13,228		(4,018	)		9,210
With allowance recorded:
Construction and land development	$	471		(45	)		426	$	129
Commercial real estate:
Owner occupied		899		—			899		134
Total commercial real estate		899		—			899		134
Total	$	1,370		(45	)		1,325	$	263
Total impaired loans	$	14,598		(4,063	)		10,535	$	263

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

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

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

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

	Quarter ended September 30, 2013				Nine months ended September 30, 2013
(In thousands)	Average recorded investment		Total interest income recognized		Average recorded investment		Total interest income recognized
Impaired loans:
Commercial and industrial	$	139		2		152		7
Construction and land development		1,596		—		1,608		—
Commercial real estate:
Owner occupied		1,927		13		1,993		42
Other		832		4		1,581		4
Total commercial real estate		2,759		17		3,574		46
Residential real estate:
Consumer mortgages		776		—		801		—
Investment property		231		—		323		—
Total residential real estate		1,007		—		1,124		—
Total	$	5,501		19		6,458		53

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	Quarter ended September 30, 2012				Nine months ended September 30, 2012
(In thousands)	Average recorded investment		Total interest income recognized		Average recorded investment		Total interest income recognized
Impaired loans:
Commercial and industrial	$	189		3		200		11
Construction and land development		3,801		—		4,357		—
Commercial real estate:
Owner occupied		2,468		14		2,537		49
Other		2,211		—		1,713		—
Total commercial real estate		4,679		14		4,250		49
Residential real estate:
Consumer mortgages		846		—		870		—
Investment property		855		—		650		—
Total residential real estate		1,701		—		1,520		—
Total	$	10,370		17		10,327		60

Troubled Debt Restructurings

Impaired loans also include troubled debt restructurings (“TDRs”). In the normal course of business, management may grant concessions to borrowers that are experiencing financial difficulty. A concession may include, but is not limited to, delays in required payments of principal and interest for a specified period, reduction of the stated interest rate of the loan, reduction of accrued interest, extension of the maturity date or reduction of the face amount or maturity amount of the debt. A concession has been granted when, as a result of the restructuring, the Bank does not expect to collect all amounts due, including interest at the original stated rate. A concession may have also been granted if the debtor is not able to access funds elsewhere at a market rate for debt with similar risk characteristics as the restructured debt. The Company’s 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 evaluated, including those that have payment defaults, for possible impairment.

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The following is a summary of accruing and nonaccrual TDRs, which are included in impaired loan totals, and the related allowance for loan losses, by portfolio segment and class as of September 30, 2013, and December 31, 2012.

	TDRs
(In thousands)	Accruing		Nonaccrual		Total		Related Allowance
September 30, 2013
Commercial and industrial	$	136		—		136	$	—
Construction and land development		—		1,593		1,593		99
Commercial real estate:
Owner occupied		882		292		1,174		117
Other		608		426		1,034		68
Total commercial real estate		1,490		718		2,208		185
Residential real estate:
Consumer mortgages		—		772		772		—
Investment property		—		217		217		—
Total residential real estate		—		989		989		—
Total	$	1,626		3,300		4,926	$	284
December 31, 2012
Commercial and industrial	$	169		—		169	$	—
Construction and land development		—		1,623		1,623		129
Commercial real estate:
Owner occupied		899		1,045		1,944		134
Other		—		432		432		—
Total commercial real estate		899		1,477		2,376		134
Residential real estate:
Consumer mortgages		—		819		819		—
Investment property		—		188		188		—
Total residential real estate		—		1,007		1,007		—
Total	$	1,068		4,107		5,175	$	263

At September 30, 2013, there were no significant outstanding commitments to advance additional funds to customers whose loans had been restructured.

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

	Quarter ended September 30,						Nine Months ended September 30,
(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
2013:
Commercial real estate:
Owner occupied		1	$	882		882		1	$	882		882
Other		1		606		610		1		1,037		1,041
Total commercial real estate		2		1,488		1,492		2		1,919		1,923
Residential real estate:
Consumer mortgages		1		678		674		2		808		804
Total residential real estate		1		678		674		2		808		804
Total		3	$	2,166		2,166		4	$	2,727		2,727
2012:
Construction and land development		1	$	2,138		2,119		3	$	4,981		3,873
Commercial real estate:
Owner occupied		—		—		—		4		3,167		2,225
Other		—		—		—		2		1,804		1,657
Total commercial real estate		—		—		—		6		4,971		3,882
Residential real estate:
Consumer mortgages		—		—		—		2		863		857
Investment property		1		375		373		1		375		373
Total residential real estate		1		375		373		3		1,238		1,230
Total		2	$	2,513		2,492		12	$	11,190		8,985

The majority of the loans modified in a TDR during the quarters and nine-month periods ended September 30, 2013 and 2012, respectively, 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.

For the nine months ended September 30, 2012, the decrease in the post modification outstanding recorded investment was primarily due to principal payments made by borrowers at the date of modification for construction and land development loans and A/B note restructurings for two owner occupied commercial real estate loans. Total charge-offs related to B notes were $0.9 million for the nine months ended September 30, 2012.

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The following table summarizes the recorded investment in loans modified in a TDR within the previous 12 months for which there was a payment default (defined as 90 days or more past due) during the respective periods.

	Quarter ended September 30,				Nine months ended September 30,
(Dollars in thousands)	Number of Contracts		Recorded investment(1)		Number of Contracts		Recorded investment(1)
2013:
Construction and land development		—	$	—		1	$	1,197
Commercial real estate:
Other		1		426		1		426
Total commercial real estate		1		426		1		426
Total		1	$	426		2	$	1,623
2012:
Construction and land development		—	$	—		1	$	2,386
Total		—	$	—		1	$	2,386

(1) Amount as of applicable month end during the respective period for which there was a payment default.

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 rate, default rates, cost to service, escrow account earnings, contractual servicing fee income, ancillary income, and late fees. Subsequent to the date of transfer, the Company has elected to measure its MSRs under the amortization method. Under the amortization method, MSRs are amortized in proportion to, and over the period of, estimated net servicing income.

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

The Company periodically evaluates MSRs for impairment. 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 change in amortized MSRs and the related valuation allowance for the respective periods.

	Quarter ended September 30,						Nine months ended September 30,
(Dollars in thousands)	2013			2012			2013			2012
MSRs, net:
Beginning balance	$	1,979		$	1,319		$	1,526		$	1,245
Additions, net		215			330			693			696
Amortization expense		(78	)		(107	)		(304	)		(290)
Change in valuation allowance		172			(101	)		373			(210)
Ending balance	$	2,288		$	1,441		$	2,288		$	1,441
Valuation allowance included in MSRs, net:
Beginning of period	$	185		$	226		$	386		$	117
End of period		13			327			13			327
Fair value of amortized MSRs:
Beginning of period	$	2,453		$	1,319		$	1,526		$	1,245
End of period		3,167			1,476			3,167			1,476

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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. At September 30, 2013 and December 31, 2012, the Company had no derivative contracts designated as part of a hedging relationship to assist in managing its interest rate sensitivity.

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 September 30, 2013 and December 31, 2012 is presented below.

			Other Assets		Other Liabilities
(Dollars in thousands)	Notional		Estimated Fair Value		Estimated Fair Value
September 30, 2013:
Pay fixed / receive variable	$	5,104		—		923
Pay variable / receive fixed		5,104		923		—
Total interest rate swap agreements	$	10,208		923		923
December 31, 2012:
Pay fixed / receive variable	$	5,367		—		1,210
Pay variable / receive fixed		5,367		1,210		—
Total interest rate swap agreements	$	10,734		1,210		1,210

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.

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Level changes in fair value measurements

Transfers between levels of the fair value hierarchy are generally recognized at the end of the reporting period. The Company monitors the valuation techniques utilized for each category of financial assets and liabilities to ascertain when transfers between levels have been affected. The nature of the Company’s financial assets and liabilities generally is such that transfers in and out of any level are expected to be infrequent. For the nine months ended September 30, 2013, 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, market consensus prepayment speeds, benchmark yields, reported trades, 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.

Fair values of individual issuer trust preferred securities were measured using Level 3 inputs. The valuation of individual issuer trust preferred securities requires significant management judgment due to the absence of observable quoted market prices, inherent lack of liquidity, and the long-term nature of such assets. In order to assist management in making its determination of fair value, the Company engages a third party firm who specializes in valuing illiquid securities. The third party firm utilizes a discounted cash flow model to estimate the fair value measurements for these securities. In making its final determination of fair value, management reviews the reasonableness of projected cash flows and the credit spread utilized in the discounted cash flow model after evaluating the financial performance of the individual community bank holding companies. The credit spread that is included in the discount rate applied to the projected future cash flows is an unobservable input that is significant to the overall fair value measurement for these securities. Significant increases (decreases) in the credit spread could result in a lower (higher) fair value measurement. Because these trust preferred securities were issued by individual community banks, the credit spread will generally increase when the financial performance of the issuer deteriorates and decrease as the financial performance of the issuer improves.

Interest rate swap agreements

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

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The following table presents the balances of the assets and liabilities measured at fair value on a recurring basis as of September 30, 2013 and December 31, 2012, 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)
September 30, 2013:
Securities available-for-sale:
Agency obligations	$	45,823		—		45,823		—
Agency RMBS		145,990		—		145,990		—
State and political subdivisions		66,912		—		66,912		—
Trust preferred securities		742		—		—		742
Total securities available-for-sale		259,467		—		258,725		742
Other assets (1)		923		—		923		—
Total assets at fair value	$	260,390		—		259,648		742
Other liabilities(1)	$	923		—		923		—
Total liabilities at fair value	$	923		—		923		—
December 31, 2012:
Securities available-for-sale:
Agency obligations	$	39,525		—		39,525		—
Agency RMBS		141,460		—		141,460		—
State and political subdivisions		77,838		—		77,838		—
Trust preferred securities		652		—		—		652
Total securities available-for-sale		259,475		—		258,823		652
Other assets (1)		1,210		—		1,210		—
Total assets at fair value	$	260,685		—		260,033		652
Other liabilities(1)	$	1,210		—		1,210		—
Total liabilities at fair value	$	1,210		—		1,210		—

⁽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

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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 based on management’s historical knowledge, changes in market conditions from the date of the most recent appraisal, and/or management’s expertise and knowledge of the customer and the customer’s business. Such discounts by management are subjective and are typically significant unobservable inputs for determining fair value. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors discussed above.

Other real estate owned

Other real estate owned, consisting of properties obtained through foreclosure or in satisfaction of loans, are initially recorded at the lower of the loan’s carrying amount or the fair value less costs to sell upon transfer of the loans to other real estate. Subsequently, other real estate is carried at the lower of carrying value or fair value less costs to sell. Fair values are generally based on third party appraisals of the property, resulting in a Level 3 classification. 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 rate, default rates, cost to service, escrow account earnings, contractual servicing fee income, ancillary income, and late fees. Periodically, the Company will review broker surveys and other market research to validate significant assumptions used in the model. The significant unobservable inputs include prepayment speeds or the constant prepayment rate (“CPR”) and the weighted average discount rate. Because the valuation of MSRs requires the use of significant unobservable inputs, all of the Company’s MSRs are classified within Level 3 of the valuation hierarchy.

The following table presents the balances of the assets and liabilities measured at fair value on a nonrecurring basis as of September 30, 2013 and December 31, 2012, respectively, by caption, on the accompanying consolidated balance sheets and by FASB ASC 820 valuation hierarchy (as described above):

(Dollars in thousands)		Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
September 30, 2013:
Loans held for sale	$		2,367		—		2,367		—
Loans, net(1)			5,390		—		—		5,390
Other real estate owned			4,585		—		—		4,585
Other assets (2)			2,288		—		—		2,288
Total assets at fair value	$		14,630		—		2,367		12,263
December 31, 2012:
Loans held for sale	$		2,887		—		2,887		—
Loans, net(1)			10,272		—		—		10,272
Other real estate owned			4,919		—		—		4,919
Other assets (2)			1,526		—		—		1,526
Total assets at fair value	$		19,604		—		2,887		16,717

⁽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 the carrying value of MSRs, net.

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Quantitative Disclosures for Level 3 Fair Value Measurements

The following is a reconciliation of the beginning and ending balances of recurring fair value measurements for trust preferred securities recognized in the accompanying consolidated balance sheets using Level 3 inputs:

		Nine months ended September 30,
(Dollars in thousands)		2013		2012
Beginning balance	$		652	$	1,986
Total realized and unrealized gains and (losses):
Included in net earnings			—		(6	)
Included in other comprehensive income			90		115
Sales			—		(974	)
Settlements			—		(500	)
Ending balance	$		742	$	621

For Level 3 assets measured at fair value on a recurring or non-recurring basis as of September 30, 2013, the significant unobservable inputs used in the fair value measurements are presented below.

(Dollars in thousands)	Carrying Amount		Valuation Technique	Significant Unobservable Input	Weighted Average of Input
Recurring:
Trust preferred securities	$	742	Discounted cash flow	Credit spread (basis points)	529 bp
Nonrecurring:
Impaired loans	$	5,390	Appraisal	Appraisal discounts (%)	15.3 %
Other real estate owned		4,585	Appraisal	Appraisal discounts (%)	8.8 %
Mortgage servicing rights, net		2,288	Discounted cash flow	Prepayment speed or CPR (%)	7.5 %
				Discount rate (%)	10.0 %

Fair Value of Financial Instruments

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

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

Loans, net

Fair values for loans were calculated using discounted cash flows. The discount rates reflected current rates at which similar loans would be made for the same remaining maturities. This method of estimating fair value does not incorporate the exit-price concept of fair value prescribed by ASC 820 and generally produces a higher value than an exit-price approach. Expected future cash flows were projected based on contractual cash flows, adjusted for estimated prepayments.

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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 September 30, 2013 and December 31, 2012 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, interest-bearing demand, 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
(Dollars in thousands)	Carrying amount		Estimated fair value		Level 1 inputs		Level 2 inputs		Level 3 Inputs
September 30, 2013:
Financial Assets:
Loans, net (1)	$	374,759	$	383,699	$	—	$	—	$	383,699
Financial Liabilities:
Time Deposits	$	263,496	$	266,707	$	—	$	266,707	$	—
Long-term debt		22,217		23,505		—		23,505		—
December 31, 2012:
Financial Assets:
Loans, net (1)	$	391,470	$	399,533	$	—	$	—	$	399,533
Financial Liabilities:
Time Deposits	$	263,195	$	267,636	$	—	$	267,636	$	—
Long-term debt		47,217		51,752		—		51,752		—

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

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

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 Auburn National Bancorporation, Inc. (the “Company”) and its wholly owned subsidiary, AuburnBank (the “Bank”). This discussion is intended to supplement and highlight information contained in the accompanying unaudited condensed consolidated financial statements and related notes for the quarters and nine-month periods ended September 30, 2013 and 2012, as well as the information contained in our annual report on Form 10-K for the year ended December 31, 2012 and our quarterly reports on Form 10-Q for the quarters ended March 31, 2013 and June 30, 2013.

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 or achievements of the Company to be materially different from future results, performance or achievements 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,” “further,” “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 and the timing of dispositions of assets by the FDIC where we may have a participation or other interest;

• 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;

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

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

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

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

• 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 risks that our deferred tax assets 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 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, 2012 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, Valley, Hurtsboro, and Notasulga, Alabama. In-store branches are located in the Kroger and Wal-Mart SuperCenter stores in both Auburn and Opelika. The Bank also operates commercial loan production in Montgomery and Phenix City, Alabama.

Summary of Results of Operations

	Quarter ended September 30,				Nine months ended September 30,
(Dollars in thousands, except per share amounts)	2013		2012		2013		2012
Net interest income (a)	$	5,621	$	5,675	$	16,741	$	16,818
Less: tax-equivalent adjustment		351		416		1,098		1,246
Net interest income (GAAP)		5,270		5,259		15,643		15,572
Noninterest income		1,432		2,017		5,158		8,695
Total revenue		6,702		7,276		20,801		24,267
Provision for loan losses		—		1,550		400		2,750
Noninterest expense		4,274		3,770		13,224		15,360
Income tax expense		636		347		1,789		1,054
Net earnings	$	1,792	$	1,609	$	5,388	$	5,103
Basic and diluted earnings per share	$	0.49	$	0.44	$	1.48	$	1.40

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

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Financial Summary

The Company’s net earnings were $5.4 million for the first nine months of 2013, compared to $5.1 million for the first nine months of 2012. Basic and diluted earnings per share were $1.48 per share for the first nine months of 2013, compared to $1.40 per share for the first nine months of 2012.

Net interest income (tax-equivalent) was $16.7 million for the first nine months of 2013, compared to $16.8 million for the first nine months 2012. Net interest income (tax equivalent) declined slightly, despite continued improvement in the Company’s cost of funds, due to downward pressure on yields for earning assets. Average loans were $389.7 million in the first nine months of 2013, unchanged from the first nine months of 2012. Average deposits were $652.7 million in the first nine months of 2013, an increase of $21.5 million, or 3%, from the first nine months of 2012.

The provision for loan losses was $0.4 million and $2.8 million for the first nine months of 2013 and 2012, respectively. The Company’s annualized net charge-off ratio was 0.40% in the first nine months of 2013, compared to 1.24% in the first nine months of 2012. The decrease in the provision for loan losses was primarily due to a decline in net charge-offs and an improvement in the overall credit quality of the loan portfolio, including lower levels of adversely classified and nonperforming loans.

Noninterest income was $5.2 million for the first nine months of 2013, compared to $8.7 million in the first nine months of 2012. The decrease was primarily due to a non-recurring gain of $3.3 million realized in the first nine months of 2012 when the Company sold its interests in three affordable housing limited partnerships.

Noninterest expense was approximately $13.2 million in the first nine months of 2013 compared to $15.4 million in the first nine months of 2012. The decrease was primarily due to a decrease in prepayment penalties on long-term debt. During the first nine months of 2013, the Company repaid $25.0 million of long-term debt with a weighted average interest rate of 3.42% and incurred prepayment penalties of $2.0 million. During the first nine months of 2012, the Company repaid $38.0 million of long-term debt with a weighted average interest rate of 4.26% and incurred prepayment penalties of $3.7 million.

Income tax expense was approximately $2.3 million for the first nine months of 2013, compared to $1.1 million in the first nine months of 2012. The Company’s effective tax rate for the first nine months of 2013 was 24.93%, compared to 17.12% in the first nine months of 2012. The Company’s effective tax rate increased during the first nine months of 2013 when compared to the first nine months of 2012 primarily because the Company’s annualized effective tax rate for 2012 was reduced by the reversal of a deferred tax valuation allowance of $0.5 million related to capital loss carry-forwards.

In the first nine months of 2013, the Company paid cash dividends of $2.3 million, or $0.63 per share. The Company’s balance sheet remains “well capitalized” under current regulatory guidelines with a total risk-based capital ratio of 18.55% and a Tier 1 leverage ratio of 9.96% at September 30, 2013.

In the third quarter of 2013, net earnings were $1.8 million, of $0.49 per share, compared to $1.6 million, or $0.44 per share for the third quarter of 2012. Net interest income (tax-equivalent) was $5.6 million for the third quarter of 2013, compared to $5.7 million for the third quarter of 2012. Net interest income (tax-equivalent) declined slightly, despite improvement in the Company’s funding mix and cost of funds, due to the decline in yields on earning assets and a decrease in average loans. There was no provision for loan losses in the third quarter of 2013, compared to $1.6 million for the third quarter of 2012. The Company’s annualized net charge-off ratio was 0.53% in the third quarter of 2013, compared to 2.00% in the third quarter of 2012. The decrease in the provision for loan losses was due to the same factors described above. Noninterest income was $1.4 million in the third quarter of 2013, compared to 2.0 million in the third quarter of 2012. The decrease was primarily due to declines in mortgage lending income of $0.3 million and net securities gains of $0.2 million. Noninterest expense was $4.3 million in the third quarter of 2013, compared to $3.8 million in the third quarter of 2012. The increase was due to $0.5 million of prepayment penalties on long-term debt incurred during the third quarter of 2013, when the Company repaid $5.0 million of long-term debt with an interest rate of 3.58%. Income tax expense was approximately $0.6 million for the third quarter of 2013, compared to $0.3 million in the third quarter of 2012. The Company’s effective tax rate for the third quarter of 2013 was 26.19%, compared to 17.74% in the third quarter of 2012. The Company’s effective tax rate increased due to the same factors described above.

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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.

Except as discussed below, there have been no material changes to the Company’s critical accounting policies, estimates, and assumptions, or the judgments affecting the application of these estimates and assumptions in 2013.

The Company regularly re-evaluates its practices in determining the allowance for loan losses. During 2013, the Company implemented certain refinements to its allowance for loan losses methodology, specifically the way that historical loss factors are calculated. Prior to June 30, 2013, the Company calculated average losses for all loan segments using a rolling 6 quarter historical period. In order to better capture the effects of the current economic cycle on the Company’s loan loss experience, the Company calculated average losses for all loan segments (except for the commercial real estate loan segment) using a rolling 8 quarter historical period for the quarter ended June 30, 2013. Based upon management’s review of charge-off trends for each loan segment, the Company continued to calculate average losses for the commercial real estate loan segment using a rolling 6 quarter historical period for the quarter ended June 30, 2013. If the Company continued to calculate average losses for all loan segments using a rolling 6 quarter historical period, the Company’s calculated allowance for loan loss allocation would have decreased by approximately $1.1 million at June 30, 2013. Other than the changes discussed above, the Company has not made any changes to its calculation of historical loss periods 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.

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, 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.

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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 loans. 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 these types of loans. The estimates for these loans are established by category and based on the Company’s internal system of credit risk ratings and historical loss data. The estimated loan loss allocation rate for the Company’s internal system of credit risk grades is based on its experience with similarly graded loans. For loan segments where the Company believes it does not have sufficient historical loss data, the Company may make adjustments based, in part, on loss rates of peer bank groups. At September 30, 2013 and December 31, 2012, and for the periods then ended, the Company adjusted its historical loss rates for the commercial real estate portfolio segment based, in part, on loss rates of peer bank groups.

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

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

Fair Value Determination

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

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.

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

Other Real Estate Owned

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

Deferred Tax Asset Valuation

A valuation allowance is recognized for a deferred tax asset if, based on the weight of available evidence, it is more-likely-than-not that some portion or the entire deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based upon the level of taxable income over the last three years and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that we will realize the benefits of these deductible differences at September 30, 2013. The amount of the deferred tax assets considered realizable, however, could be reduced if estimates of future taxable income are reduced.

RESULTS OF OPERATIONS

Average Balance Sheet and Interest Rates

	Nine months ended September 30,
	2013				2012
(Dollars in thousands)	Average Balance		Yield/ Rate		Average Balance		Yield/ Rate
Loans and loans held for sale	$	393,148		5.32%	$	394,359		5.52%
Securities—taxable		195,863		1.91%		206,713		1.98%
Securities—tax-exempt		68,982		6.26%		78,409		6.25%
Total securities		264,845		3.05%		285,122		3.15%
Federal funds sold		50,372		0.21%		20,288		0.21%
Interest bearing bank deposits		3,672		0.62%		880		—
Total interest-earning assets		712,037		4.09%		700,649		4.40%
Deposits:
NOW		102,294		0.32%		100,597		0.36%
Savings and money market		170,086		0.52%		154,076		0.57%
Certificates of deposits less than $100,000		105,627		1.39%		109,383		1.66%
Certificates of deposits and other time deposits of $100,000 or more		155,455		1.80%		161,196		2.11%
Total interest-bearing deposits		533,462		1.03%		525,252		1.23%
Short-term borrowings		2,773		0.48%		3,088		0.56%
Long-term debt		34,946		3.60%		49,752		3.74%
Total interest-bearing liabilities		571,181		1.18%		578,092		1.44%
Net interest income and margin (tax-equivalent)	$	16,741		3.14%	$	16,818		3.21%

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Net Interest Income and Margin

Net interest income (tax-equivalent) was $16.7 million and $16.8 million in the first nine months of 2013 and 2012, respectively, as continued improvement in the Company’s funding mix and cost of funds largely offset declining yields on earning assets. Although net interest income declined slightly, management continues to seek to increase earnings by growing the Company’s loan portfolio (in total and as a percentage of earning assets), focusing on deposit pricing, and repaying higher-cost wholesale funding sources. These efforts to increase earnings were offset by management’s decision to reduce its securities portfolio as a percentage of total interest earning assets and carry higher levels of short-term interest earning assets (e.g. federal funds sold). As a result, the Company’s net interest margin (tax-equivalent) declined to 3.14% in the first nine months of 2013, compared to 3.21% for the first nine months of 2012.

The tax-equivalent yield on total interest-earning assets decreased by 31 basis points in the first nine months of 2013 from the first nine months of 2012 to 4.09%. The decrease was primarily due to the shift in our asset mix described above, lower reinvestment yields in the securities portfolio, and increased pricing competition for quality loan opportunities in our markets, which has limited the Company’s ability to increase loans, generally, as well as the yields on new and renewed loans over the last several quarters.

The cost of total interest-bearing liabilities decreased 26 basis points in the first nine months of 2013 from the first nine months of 2012 to 1.18%. The net decrease was largely a result of the continued shift in our deposit mix, as we increased our lower-cost noninterest-bearing demand deposits, interest bearing demand deposits (NOW accounts), and savings and money market accounts and concurrently reduced balances of higher-cost certificates of deposit and other higher-cost time deposits and long-term debt (i.e. wholesale funding).

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 lower reinvestment yields in the securities portfolio given the current interest rate environment, increased competition for quality loan opportunities, and fewer opportunities to reduce our cost of funds due to the low level of deposit rates currently.

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 provisions for loan losses amounted to $0.4 million and $2.8 million for the nine months ended September 30, 2013 and 2012, respectively. The decrease in the provision for loan losses was primarily due to a decline in net charge-offs and improvement in the overall credit quality of the loan portfolio, including lower levels of adversely classified and nonperforming loans.

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 1.56% at September 30, 2013, compared to 1.69% at December 31, 2012. 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 industry conditions) may have a material adverse effect on our asset quality and the adequacy of our allowance for loan losses resulting in significant increases in the provision for loan losses.

Noninterest Income

	Quarter ended September 30,				Nine months ended September 30,
(Dollars in thousands)	2013		2012		2013		2012
Service charges on deposit accounts	$	224	$	268	$	707	$	838
Mortgage lending income		750		1,038		2,397		2,492
Bank-owned life insurance		93		120		289		332
Gain on sale of affordable housing investments		—		—		—		3,268
Securities gains, net		—		178		679		608
Other		365		413		1,086		1,157
Total noninterest income	$	1,432	$	2,017	$	5,158	$	8,695

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

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

	Quarter ended September 30,					Nine months ended September 30,
(Dollars in thousands)	2013		2012			2013		2012
Origination income	$	435	$	1,072		$	1,693	$	2,488
Servicing fees, net		143		67			331		214
Decrease (increase) in MSR valuation allowance		172		(101	)		373		(210	)
Total mortgage lending income	$	750	$	1,038		$	2,397	$	2,492

The decrease in mortgage lending income was primarily due to a decline in origination income as refinance activity slowed. This decline was partially offset by a decrease in the valuation allowance for amortized MSRs and an increase in net servicing fees. Changes in the valuation allowance for amortized MSRs are recognized in earnings as a component of mortgage lending income. The decrease in the valuation allowance was primarily due to a slowing of prepayment speeds, which increased the value of our amortized MSRs.

The Company realized a gain on sale of $3.3 million during the first nine months of 2012 related to the sale of its interests in three affordable housing limited partnerships in January 2012. There were no such transactions in 2013.

Net securities gains consist of realized gains and losses on the sale of securities and other-than-temporary impairment charges. Net gains on the sale of securities were $679,000 for the first nine months of 2013, compared to net gains on the sale of securities of $738,000 for the first nine months of 2012. The Company incurred no other-than-temporary impairment charges for the first nine months of 2013, compared to $130,000 for the first nine months of 2012, which related to trust preferred securities.

There were no realized gains or losses on the sale of securities for the third quarter of 2013, compared to net gains on the sale of securities of $178,000 for the third quarter of 2012. The Company incurred no other-than-temporary impairment charges for the third quarter of 2013 and 2012.

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Noninterest Expense

	Quarter ended September 30,				Nine months ended September 30,
(Dollars in thousands)	2013		2012		2013		2012
Salaries and benefits	$	2,139	$	2,209	$	6,503	$	6,557
Net occupancy and equipment		346		345		1,010		1,019
Professional fees		197		163		582		538
FDIC and other regulatory assessments		130		153		467		521
Other real estate owned, net		68		119		111		182
Prepayment penalty on long-term debt		541		—		2,012		3,720
Other		853		781		2,539		2,823
Total noninterest expense	$	4,274	$	3,770	$	13,224	$	15,360

Salaries and benefits expense declined due to a reduction in full-time equivalents, lower group health insurance costs and officer bonus accruals. This decrease was partially offset by routine increases in salaries and wages. Beginning in 2013, the Company returned to a fully insured group health plan and was able to lower its benefits costs compared to 2012. Previously, the Company’s group health plan was self insured.

During the first nine months of 2013, the Company repaid $25.0 million of long-term debt with a weighted average interest rate of 3.42% and incurred prepayment penalties of $2.0 million. These prepayments included $5.0 million of long-term debt with an interest rate of 3.58% and prepayment penalties of $0.5 million during the third quarter of 2013. During the first nine months of 2012, the Company repaid $38.0 million of long-term debt with a weighted average interest rate of 4.26% and incurred prepayment penalties of $3.7 million.

Income Tax Expense

Income tax expense was approximately $1.8 million for the first nine months of 2013, compared to $1.1 million in the first nine months of 2012. The Company’s effective tax rate for the first nine months of 2013 was 24.93%, compared to 17.12% in the first nine months of 2012. The Company’s effective tax rate increased during the first nine months of 2013 when compared to the first nine months of 2012 primarily because the Company’s annualized effective tax rate for 2012 was reduced by the reversal of a deferred tax valuation allowance of $0.5 million related to capital loss carry-forwards.

BALANCE SHEET ANALYSIS

Securities

Securities available-for-sale were $259.5 million as of September 30, 2013 and December 31, 2012, respectively. Unrealized net losses on securities available-for-sale were $3.6 million at September 30, 2013 compared to unrealized net gains of $8.2 million at December 31, 2012. The change in unrealized gains (losses) on securities available-for-sale was due to an increase in long-term interest rates during the first nine months of 2013.

The average tax-equivalent yields earned on total securities were 3.05% in the first nine months of 2013 and 3.15% in the first nine months of 2012.

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Loans

	2013									2012
(In thousands)	Third Quarter			Second Quarter			First Quarter			Fourth Quarter			Third Quarter
Commercial and industrial	$	58,766			56,030			55,736			59,334			58,579
Construction and land development		37,062			45,886			41,104			37,631			40,573
Commercial real estate		170,520			177,291			178,993			183,611			183,757
Residential real estate		102,565			99,021			102,978			105,631			103,319
Consumer installment		12,170			12,747			12,026			12,219			11,747
Total loans		381,083			390,975			390,837			398,426			397,975
Less: unearned income		(378	)		(249	)		(267	)		(233	)		(237)
Loans, net of unearned income	$	380,705			390,726			390,570			398,193			397,738

Total loans, net of unearned income, were $380.7 million at September 30, 2013, compared to $398.2 million at December 31, 2012. The decrease in total loans was primarily due to a $13.1 million decline in the commercial real estate portfolio as loan payoffs exceeded new loan originations. Included in these payoffs were three nonaccrual loans that had carrying amounts of $5.9 million at December 31, 2012. Four loan categories represented the majority of the loan portfolio at September 30, 2013: commercial real estate (45%), residential real estate (27%), construction and land development (10%) and commercial and industrial (15%). Approximately 33% of the Company’s commercial real estate loans were classified as owner-occupied at September 30, 2013.

Within the residential real estate portfolio segment, the Company had junior lien mortgages of approximately $16.3 million, or 4% of total loans, at September 30, 2013, compared to $15.8 million, or 4% of total loans, at December 31, 2012. For residential real estate mortgage loans with a consumer purpose, approximately $1.1 million and $1.3 million required interest-only payments at September 30, 2013 and December 31, 2012, respectively. 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.

Purchased loan participations included in the Company’s loan portfolio were approximately $1.4 million and $3.1 million at September 30, 2013 and December 31, 2012, respectively. All purchased loan participations are underwritten by the Company independent of the selling bank. In addition, all loans, including purchased participations, are evaluated for collectability during the course of the Company’s normal loan review procedures. If the Company deems a participation loan impaired, it applies the same accounting policies and procedures described under “CRITICAL ACCOUNTING POLICIES – Allowance for Loan Losses”.

The average yield earned on loans and loans held for sale was 5.32% in the first nine months of 2013 and 5.52% in the first nine months of 2012.

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, deterioration in certain credits, interest rate fluctuations, reduced collateral values or non-existent collateral, title defects, inaccurate appraisals, financial deterioration of borrowers, fraud, and any violation of applicable laws and regulations.

The Company attempts to reduce these economic and credit risks by adhering to loan to value (“LTV”) guidelines for collateralized loans, investigating the creditworthiness of borrowers and monitoring borrowers’ financial position. Also, we establish and periodically review our lending policies and procedures. Banking regulations limit a bank’s credit exposure by prohibiting unsecured loan relationships that exceed 10% of the Bank’s capital accounts; or 20% of capital accounts if loans in excess of 10% are fully secured. Under these regulations, we are prohibited from having unsecured loan relationships in excess of approximately $16.0 million. Furthermore, we have an internal limit for aggregate credit exposure (loans outstanding plus unfunded commitments) to a single borrower of $14.4 million. Our loan policy requires that the Loan Committee of the Board of Directors approve any loan relationships that exceed this internal limit. At September 30, 2013, the Company had no loan relationships exceeding these limits.

We periodically analyze our commercial loan portfolio to determine if a concentration of credit risk exists in any one or more industries. We use classification systems broadly accepted by the financial services industry in order to categorize our commercial borrowers. Loan concentrations to borrowers in the following classes exceeded 25% of the Bank’s total risk-based capital at September 30, 2013 (and related balances at December 31, 2012).

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(In thousands)	September 30, 2013		December 31, 2012
Lessors of 1 to 4 family residential properties	$	45,533	$	47,544
Multi-family residential properties		29,761		30,392
Shopping centers		25,225		20,760
Office buildings		19,445		20,925

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. At September 30, 2013 and December 31, 2012, the allowance for loan losses was $5.9 million and $6.7 million, respectively, which management believed to be adequate at each of the respective dates. The judgments and estimates associated with the determination of the allowance for loan losses are described under “CRITICAL ACCOUNTING POLICIES.”

A summary of the changes in the allowance for loan losses and certain asset quality ratios for the third quarter of 2013 and the previous four quarters is presented below.

	2013									2012
(Dollars in thousands)	Third Quarter			Second Quarter			First Quarter			Fourth Quarter			Third Quarter
Balance at beginning of period	$	6,457			6,769			6,723			6,045			6,503
Charge-offs:
Commercial and industrial		(177	)		—			(68	)		(42	)		(152)
Construction and land development		(137	)		—			(39	)		—			—
Commercial real estate		(103	)		(118	)		—			(340	)		(1,626)
Residential real estate		(144	)		(189	)		(266	)		(110	)		(324)
Consumer installment		—			(45	)		(17	)		(17	)		(35)
Total charge-offs		(561	)		(352	)		(390	)		(509	)		(2,137)
Recoveries		50			40			36			122			129
Net charge-offs		(511	)		(312	)		(354	)		(387	)		(2,008)
Provision for loan losses		—			—			400			1,065			1,550
Ending balance	$	5,946			6,457			6,769			6,723			6,045
as a % of loans		1.56	%		1.65			1.73			1.69			1.52
as a % of nonperforming loans		134	%		138			143			64			44
Annualized net charge-offs as % of average loans		0.53	%		0.32			0.36			0.39			2.00

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 1.56% at September 30, 2013, compared to 1.69% at December 31, 2012. 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 losses based on their judgement about information available to them at the time of their examinations.

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At September 30, 2013, the ratio of our allowance for loan losses as a percentage of nonperforming loans was 134%, compared to 64% at December 31, 2012. The increase was primarily due to payoffs received on three nonperforming commercial real estate loans during the first quarter of 2013 with a total recorded investment of $5.9 million and no related allowance for loan losses at December 31, 2012. Excluding these nonperforming loans, the ratio of our allowance for loan losses as a percentage of nonperforming loans was 144% at December 31, 2012.

At September 30, 2013, the Company’s recorded investment in loans considered impaired was $5.7 million, with a corresponding valuation allowance (included in the allowance for loan losses) of $0.3 million. At December 31, 2012, the Company’s recorded investment in loans considered impaired was $10.5 million, with a corresponding valuation allowance (included in the allowance for loan losses) of $0.3 million.

Nonperforming Assets

At September 30, 2013, the Company had $9.0 million in nonperforming assets, compared to $15.5 million at December 31, 2012. Nonperforming assets decreased primarily due to payoffs received on three nonperforming commercial real estate loans during the first quarter of 2013 with a total recorded investment of $5.9 million at December 31, 2012. The majority of the balance in nonperforming assets at September 30, 2013 related to deterioration in the commercial real estate and construction and land development loan portfolios.

The table below provides information concerning total nonperforming assets and certain asset quality ratios for the third quarter of 2013 and the previous four quarters.

	2013							2012
(Dollars in thousands)	Third Quarter			Second Quarter		First Quarter		Fourth Quarter		Third Quarter
Nonperforming assets:
Nonaccrual loans	$	4,425			4,664		4,748		10,535		13,635
Other real estate owned		4,585			3,609		4,810		4,919		4,925
Total nonperforming assets	$	9,010			8,273		9,558		15,454		18,560
as a % of loans and other real estate owned		2.34	%		2.10		2.42		3.83		4.61
as a % of total assets		1.21	%		1.08		1.24		2.03		2.46
Nonperforming loans as a % of total loans		1.16	%		1.19		1.22		2.65		3.43
Accruing loans 90 days or more past due	$	99			—		—		58		13

The table below provides information concerning the composition of nonaccrual loans for the third quarter of 2013 and the previous four quarters.

	2013						2012
(In thousands)	Third Quarter		Second Quarter		First Quarter		Fourth Quarter		Third Quarter
Nonaccrual loans:
Commercial and industrial	$	56		57		59		60		93
Construction and land development		1,592		1,601		1,615		1,706		3,840
Commercial real estate		1,467		1,484		1,610		6,714		7,207
Residential real estate		1,310		1,520		1,459		2,055		2,495
Consumer installment		—		2		5		—		—
Total nonaccrual loans	$	4,425		4,664		4,748		10,535		13,635

The Company discontinues the accrual of interest income when (1) there is a significant deterioration in the financial condition of the borrower and full repayment of principal and interest is not expected or (2) the principal or interest is 90 days or more past due, unless the loan is both well-secured and in the process of collection. At September 30, 2013, the Company had $4.4 million in loans on nonaccrual, compared to $10.5 million at December 31, 2012.

At September 30, 2013, there were $99,000 in loans 90 days or more past due and still accruing interest compared to $58,000 at December 31, 2012.

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The table below provides information concerning the composition of other real estate owned for the third quarter of 2013 and the previous four quarters.

	2013						2012
(In thousands)	Third Quarter		Second Quarter		First Quarter		Fourth Quarter		Third Quarter
Other real estate owned:
Commercial:
Buildings	$	1,829		535		540		608		707
Developed lots		1,275		1,275		1,275		1,275		1,285
Residential:
Condominiums		—		—		—		425		982
Undeveloped land		242		242		1,464		1,464		1,671
Other		1,239		1,557		1,531		1,147		280
Total other real estate owned	$	4,585		3,609		4,810		4,919		4,925

At September 30, 2013 and December 31, 2012, respectively, the Company held $4.6 million and $4.9 million in OREO, which we acquired from borrowers. At September 30, 2013, approximately 73% of the total balance in OREO related to properties acquired from three borrowers with a total carrying value of $3.3 million.

Potential Problem Loans

Potential problem loans represent those loans with a well-defined weakness and where information about possible credit problems of borrowers has caused management to have serious doubts about the borrower’s ability to comply with present repayment terms. This definition is believed to be substantially consistent with the standards established by the Federal Reserve, the Company’s primary regulator, for loans classified as substandard, excluding nonaccrual loans. Potential problem loans, which are not included in nonperforming assets, amounted to $11.1 million, or 2.9% of total loans at September 30, 2013, compared to $12.6 million, or 3.2% of total loans at December 31, 2012.

The table below provides information concerning the composition of performing potential problem loans for the third quarter of 2013 and the previous four quarters.

	2013						2012
(In thousands)	Third Quarter		Second Quarter		First Quarter		Fourth Quarter		Third Quarter
Potential problem loans:
Commercial and industrial	$	750		884		555		563		503
Construction and land development		1,118		1,201		1,288		1,125		852
Commercial real estate		1,700		1,833		2,843		2,727		2,753
Residential real estate		7,417		7,772		7,939		7,978		8,022
Consumer installment		161		146		197		214		206
Total potential problem loans	$	11,146		11,836		12,822		12,607		12,336

At September 30, 2013, approximately $0.7 million or 6.2% of total potential problem loans were past due at least 30 days but less than 90 days. At September 30, 2013, the remaining balance of potential problem loans were current or past due less than 30 days.

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The following table is a summary of the Company’s performing loans that were past due at least 30 days but less than 90 days for the third quarter of 2013 and the previous four quarters.

	2013						2012
(In thousands)	Third Quarter		Second Quarter		First Quarter		Fourth Quarter		Third Quarter
Performing loans past due 30 to 89 days:
Commercial and industrial	$	444		329		47		173		393
Construction and land development		—		—		135		8		—
Commercial real estate		49		1,498		—		230		—
Residential real estate		489		501		403		1,537		718
Consumer installment		40		147		36		62		27
Total	$	1,022		2,475		621		2,010		1,138

Deposits

Total deposits were $650.4 million at September 30, 2013, compared to $636.8 million at December 31, 2012. Noninterest bearing deposits were $119.0 million, or 18.3% of total deposits, at September 30, 2013, compared to $118.0 million, or 18.5% of total deposits at December 31, 2012. The increase in total deposits of $13.6 million reflects growth and changes in customer preferences for short-term instruments in a low interest rate environment.

The average rate paid on total interest-bearing deposits was 1.03% in the first nine months of 2013 and 1.23% in the first nine months of 2012.

Other Borrowings

Other borrowings consist of short-term borrowings and long-term debt. Short-term borrowings 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 and $40.0 million with none outstanding at September 30, 2013 and December 31, 2012, respectively. Securities sold under agreements to repurchase totaled $2.7 million at September 30, 2013 and December 31, 2012, respectively.

The average rate paid on short-term borrowings was 0.48% in the first nine months of 2013 and 0.56% in the first nine months of 2012.

Long-term debt includes FHLB advances with an original maturity greater than one year, securities sold under agreements to repurchase with an original maturity greater than one year, and subordinated debentures related to trust preferred securities. The Bank had $5.0 million and $25.0 million in long-term FHLB advances at September 30, 2013 and December 31, 2012, respectively. During the first nine months of 2013, the Company repaid $20.0 million of FHLB advances with a weighted average interest rate of 3.38%. In addition, the Bank had $10.0 million and $15.0 million in securities sold under agreements to repurchase with an original maturity greater than one year at September 30, 2013 and December 31, 2012, respectively. During the first nine months of 2013, the Company repaid $5.0 million of its long-term securities sold under agreements to repurchase with an interest rate of 3.58%. At both September 30, 2013 and December 31, 2012, the Bank had $7.2 million in junior subordinated debentures related to trust preferred securities outstanding.

The average rate paid on long-term debt was 3.60% in the first nine months of 2013 and 3.74% in the first nine months of 2012.

CAPITAL ADEQUACY

The Company’s consolidated stockholders’ equity was $65.8 million and $70.1 million as of September 30, 2013 and December 31, 2012, respectively. The change from December 31, 2012 was primarily driven by an other comprehensive loss due to the change in unrealized gains (losses) on securities available-for-sale of $7.4 million and cash dividends paid of $2.3 million, partially offset by net earnings of $5.4 million.

The Company’s tier 1 leverage ratio was 9.96%, tier 1 risk-based capital ratio was 17.29% and total risk-based capital ratio was 18.55% at September 30, 2013. These ratios exceed the minimum regulatory capital percentages of 5.0% for tier 1 leverage ratio, 6.0% for tier 1 risk-based capital ratio and 10.0% for total risk-based capital ratio to be considered “well-capitalized.” Based on current regulatory standards, the Company is classified as “well capitalized.”

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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 acceptable composition of asset/liability mix. Two critical areas of focus for ALCO are interest rate sensitivity and liquidity risk management.

Interest Rate Sensitivity 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 model.

Management uses earnings simulation modeling to estimate and manage interest rate risk. 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 are combined with other factors in order to produce various earnings simulations and estimates. To limit interest rate risk, we have guidelines for earnings at risk which seek to limit the variance of net interest income to less than a 10% decline for a 200 basis point change up or down in rates from management’s flat interest rate forecast over the next twelve months. The results of our current simulation model indicate that we were in compliance with our current guidelines at September 30, 2013.

Economic value of equity measures the extent that 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 economic value of equity. To help limit interest rate risk, we have a guideline stating that for a 200 basis point instantaneous change in interest rates up or down, the economic value of equity should not decrease by more than 25%. The results of our current economic value of equity model indicate that we were in compliance with our guidelines at September 30, 2013.

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

The Company may also use derivative financial instruments to improve the balance between interest-sensitive assets and interest-sensitive liabilities and as one 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 September 30, 2013 and December 31, 2012, 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 legal entities with different funding needs and sources, and each are subject to regulatory guidelines and requirements.

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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 for 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 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 has participated in the FHLB’s advance program to obtain funding for its growth. Advances include both fixed and variable terms and are taken out with varying maturities. At September 30, 2013, the Bank had a remaining available line of credit with the FHLB totaling $219.3 million. At September 30, 2013, 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 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 September 30, 2013, the Bank had outstanding standby letters of credit of $8.8 million and unfunded loan commitments outstanding of $37.5 million. Because these commitments generally have fixed expiration dates and many will expire without being drawn upon, the total commitment level does not necessarily represent future cash requirements. If needed to fund these outstanding commitments, the Bank could liquidate federal funds sold or a portion of securities available-for-sale, or draw on its available credit facilities.

Mortgage lending activities

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

As of September 30, 2013, the unpaid principal balance of the residential mortgage loans, which we have originated and sold, but retained the servicing rights was $356.8 million. Although these loans are generally sold on a non-recourse basis, except for breaches of customary seller representations and warranties, we may have to repurchase residential mortgage loans in cases where we breach such representations or warranties or the other terms of the sale, such as where we fail to deliver required documents or the documents we deliver are defective. Investors also may require the repurchase of a mortgage loan when an early payment default underwriting review reveals significant underwriting deficiencies, even if the mortgage loan has subsequently been brought current. Repurchase demands 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 event has occurred. We seek to reduce and manage the risks of potential repurchases or other claims by mortgage loan investors through our underwriting, quality assurance and servicing practices, including good communications with our residential mortgage investors.

We were not required to repurchase any residential mortgage loans in the first nine months of 2013. During the full year 2012, we repurchased one residential mortgage loan with an unpaid principal balance of $0.3 million. This loan was current as to principal and interest at the time of repurchase, and we incurred no losses upon repurchase.

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.

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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 to date repurchase requests related to representation and warranty provisions, and servicing activities have been limited, it is possible that requests to repurchase mortgage loans may increase in frequency if investors more aggressively pursue all means of recovering losses on their purchased loans. As of September 30, 2013, we believe that this exposure is not material due to the historical level of repurchase requests and loss trends, in addition to the fact that 99.5% 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 Condensed Consolidated Financial Statements and related consolidated financial data presented herein have been prepared in accordance with U.S. generally accepted accounting principles and practices within the banking industry which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution’s performance than the effects of general levels of inflation.

CURRENT ACCOUNTING DEVELOPMENTS

The following Update has been issued by the FASB but is not yet effective:

• ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.

Information about this pronouncement is described in more detail below.

ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, is expected to eliminate diversity in practice as it provides guidance on financial statement presentation of an unrecognized tax benefit when a net operating loss (NOL) carryforward, a similar tax loss, or a tax credit carryforward exists. These changes are effective for the Company in the first quarter of 2014 with prospective application applied to all unrecognized tax benefits that exist at the effective date. Early adoption and retrospective application are permitted. The Company is evaluating the impact this ASU will have on our consolidated financial statements.

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Table 1 – Explanation of Non-GAAP Financial Measures

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

	2013						2012
(in thousands)	Third Quarter		Second Quarter		First Quarter		Fourth Quarter		Third Quarter
Net interest income (GAAP)	$	5,270		5,232		5,141		5,325		5,259
Tax-equivalent adjustment		351		365		382		396		416
Net interest income (Tax-equivalent)	$	5,621		5,597		5,523		5,721		5,675

	Nine months ended September 30,
(In thousands)	2013		2012
Net interest income (GAAP)	$	15,643		15,572
Tax-equivalent adjustment		1,098		1,246
Net interest income (Tax-equivalent)	$	16,741		16,818

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Table 2—Selected Quarterly Financial Data

	2013							2012
(Dollars in thousands, except per share amounts)	Third Quarter			Second Quarter		First Quarter		Fourth Quarter		Third Quarter
Results of Operations
Net interest income (a)	$	5,621			5,597		5,523		5,721		5,675
Less: tax-equivalent adjustment		351			365		382		396		416
Net interest income (GAAP)		5,270			5,232		5,141		5,325		5,259
Noninterest income		1,432			2,071		1,655		1,788		2,017
Total revenue		6,702			7,303		6,796		7,113		7,276
Provision for loan losses		—			—		400		1,065		1,550
Noninterest expense		4,274			4,724		4,226		4,023		3,770
Income tax expense		636			672		481		365		347
Net earnings	$	1,792			1,907		1,689		1,660		1,609
Per share data:
Basic and diluted net earnings	$	0.49			0.52		0.46		0.46		0.44
Cash dividends declared		0.21			0.21		0.21		0.205		0.205
Weighted average shares outstanding:
Basic and diluted		3,643,028			3,642,955		3,642,918		3,642,903		3,642,876
Shares outstanding, at period end		3,643,058			3,642,993		3,642,928		3,642,903		3,642,903
Book value	$	18.06			17.90		19.27		19.26		19.27
Common stock price
High	$	24.71			22.33		22.60		24.87		23.20
Low		22.00			21.54		20.80		20.85		21.00
Period end:		24.40			22.00		22.00		20.85		22.25
To earnings ratio		12.64	x		11.70		11.46		11.21		12.94
To book value		135	%		123		114		108		115
Performance ratios:
Return on average equity		10.78	%		10.74		9.47		9.30		9.22
Return on average assets		0.95	%		1.00		0.87		0.88		0.86
Dividend payout ratio		42.86	%		40.38		45.65		44.57		46.59
Asset Quality:
Allowance for loan losses as a% of:
Loans		1.56	%		1.65		1.73		1.69		1.52
Nonperforming loans		134	%		138		143		64		44
Nonperforming assets as a % of:
Loans and foreclosed properties		2.34	%		2.10		2.42		3.83		4.61
Total assets		1.21	%		1.08		1.24		2.03		2.46
Nonperforming loans as a % of total loans		1.16	%		1.19		1.22		2.65		3.43
Annualized net charge-offs as a % of average loans		0.53	%		0.32		0.36		0.39		2.00
Capital Adequacy:
Tier 1 risk-based capital ratio		17.29	%		16.45		16.32		16.20		15.75
Total risk-based capital ratio		18.55	%		17.70		17.57		17.46		17.00
Tier 1 Leverage Ratio		9.96	%		9.76		9.42		9.58		9.54
Other financial data:
Net interest margin (a)		3.19	%		3.16		3.09		3.22		3.23
Effective income tax rate		26.19	%		26.06		22.17		18.02		17.74
Efficiency ratio (b)		60.60	%		61.61		58.87		53.58		49.01
Selected average balances:
Securities	$	265,380			266,056		263,074		253,765		265,670
Loans, net of unearned income		383,460			389,402		396,436		395,487		401,166
Total assets		751,311			761,534		777,756		755,991		748,055
Total deposits		651,334			652,952		653,802		630,950		624,813
Long-term debt		26,782			31,613		46,661		47,217		47,217
Total stockholders’ equity		66,485			71,006		71,317		71,421		69,826
Selected period end balances:
Securities	$	259,467			270,794		270,219		259,475		254,819
Loans, net of unearned income		380,705			390,726		390,570		398,193		397,738
Allowance for loan losses		5,946			6,457		6,769		6,723		6,045
Total assets		744,602			767,747		772,155		759,833		753,467
Total deposits		650,421			666,490		659,056		636,817		629,824
Long-term debt		22,217			27,217		37,217		47,217		47,217
Total stockholders’ equity		65,807			65,211		70,217		70,149		70,206

(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.

NM - not meaningful

50

Table 3—Selected Financial Data

	Nine months ended September 30,
(Dollars in thousands, except per share amounts)	2013			2012
Results of Operations
Net interest income (a)	$	16,741			16,818
Less: tax-equivalent adjustment		1,098			1,246
Net interest income (GAAP)		15,643			15,572
Noninterest income		5,158			8,695
Total revenue		20,801			24,267
Provision for loan losses		400			2,750
Noninterest expense		13,224			15,360
Income tax expense		1,789			1,054
Net earnings	$	5,388			5,103
Per share data:
Basic and diluted net earnings	$	1.48			1.40
Cash dividends declared		0.63			0.615
Weighted average shares outstanding:
Basic and diluted		3,642,967			3,642,807
Shares outstanding, at period end		3,643,058			3,642,903
Book value	$	18.06			19.27
Common stock price
High	$	24.71			26.65
Low		20.80			18.23
Period end		24.40			22.25
To earnings ratio		12.64	x		12.94
To book value		135	%		115
Performance ratios:
Return on average equity		10.32	%		10.04
Return on average assets		0.94	%		0.90
Dividend payout ratio		42.57	%		43.93
Asset Quality:
Allowance for loan losses as a % of:
Loans		1.56	%		1.52
Nonperforming loans		134	%		44
Nonperforming assets as a % of:
Loans and other real estate owned		2.34	%		4.61
Total assets		1.21	%		2.46
Nonperforming loans as a % of total loans		1.16	%		3.43
Annualized net charge-offs as a % of average loans		0.40	%		1.24
Capital Adequacy:
Tier 1 risk-based capital ratio		17.29	%		15.75
Total risk-based capital ratio		18.55	%		17.00
Tier 1 Leverage Ratio		9.96	%		9.54
Other financial data:
Net interest margin (a)		3.14	%		3.21
Effective income tax rate		24.93	%		17.12
Efficiency ratio (b)		60.39	%		60.20
Selected average balances:
Securities	$	264,845			285,122
Loans, net of unearned income		389,719			389,833
Total assets		763,438			755,075
Total deposits		652,687			631,195
Long-term debt		34,946			49,752
Total stockholders’ equity		69,586			67,754
Selected period end balances:
Securities	$	259,467			254,819
Loans, net of unearned income		380,705			397,738
Allowance for loan losses		5,946			6,045
Total assets		744,602			753,467
Total deposits		650,421			629,824
Long-term debt		22,217			47,217
Total stockholders’ equity		65,807			70,206

(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.

51

Table 4—Average Balances and Net Interest Income Analysis

	Quarter ended September 30,
	2013						2012
(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)	$	386,556	$	5,104		5.24%	$	406,153	$	5,548		5.43%
Securities—taxable		199,125		1,029		2.05%		187,007		843		1.79%
Securities—tax-exempt (2)		66,255		1,037		6.21%		78,663		1,226		6.20%
Total securities		265,380		2,066		3.09%		265,670		2,069		3.10%
Federal funds sold		39,533		20		0.20%		24,426		11		0.18%
Interest bearing bank deposits		8,573		17		0.79%		579		—		—
Total interest-earning assets		700,042	$	7,207		4.08%		696,828	$	7,628		4.35%
Cash and due from banks		12,230						13,067
Other assets		39,039						38,160
Total assets	$	751,311					$	748,055
Interest-bearing liabilities:
Deposits:
NOW	$	97,262	$	77		0.31%	$	98,512	$	77		0.31%
Savings and money market		173,674		226		0.52%		154,169		207		0.53%
Certificates of deposits less than $100,000		105,811		356		1.33%		107,269		428		1.59%
Certificates of deposits and other time deposits of $100,000 or more		156,855		685		1.73%		156,765		797		2.02%
Total interest-bearing deposits		533,602		1,344		1.00%		516,715		1,509		1.16%
Short-term borrowings		2,809		3		0.42%		2,670		4		0.60%
Long-term debt		26,782		239		3.54%		47,217		440		3.71%
Total interest-bearing liabilities		563,193	$	1,586		1.12%		566,602	$	1,953		1.37%
Noninterest-bearing deposits		117,732						108,098
Other liabilities		3,901						3,529
Stockholders’ equity		66,485						69,826
Total liabilities and stockholders’ equity	$	751,311					$	748,055
Net interest income and margin (tax-equivalent)			$	5,621		3.19%			$	5,675		3.23%

(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 5—Average Balances and Net Interest Income Analysis

	Nine months ended September 30,
	2013						2012
(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)	$	393,148	$	15,656		5.32%	$	394,359	$	16,303		5.52%
Securities—taxable		195,863		2,803		1.91%		206,713		3,062		1.98%
Securities—tax-exempt (2)		68,982		3,232		6.26%		78,409		3,666		6.25%
Total securities		264,845		6,035		3.05%		285,122		6,728		3.15%
Federal funds sold		50,372		81		0.21%		20,288		32		0.21%
Interest bearing bank deposits		3,672		17		0.62%		880		—		—
Total interest-earning assets		712,037	$	21,789		4.09%		700,649	$	23,063		4.40%
Cash and due from banks		14,018						13,921
Other assets		37,383						40,505
Total assets	$	763,438					$	755,075
Interest-bearing liabilities:
Deposits:
NOW	$	102,294	$	243		0.32%	$	100,597	$	274		0.36%
Savings and money market		170,086		661		0.52%		154,076		657		0.57%
Certificates of deposits less than $100,000		105,627		1,101		1.39%		109,383		1,356		1.66%
Certificates of deposits and other time deposits of $100,000 or more		155,455		2,092		1.80%		161,196		2,552		2.11%
Total interest-bearing deposits		533,462		4,097		1.03%		525,252		4,839		1.23%
Short-term borrowings		2,773		10		0.48%		3,088		13		0.56%
Long-term debt		34,946		941		3.60%		49,752		1,393		3.74%
Total interest-bearing liabilities		571,181	$	5,048		1.18%		578,092	$	6,245		1.44%
Noninterest-bearing deposits		119,225						105,943
Other liabilities		3,446						3,286
Stockholders’ equity		69,586						67,754
Total liabilities and stockholders’ equity	$	763,438					$	755,075
Net interest income and margin (tax-equivalent)			$	16,741		3.14%			$	16,818		3.21%

(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%.

53

Table 6—Loan Portfolio Composition

	2013									2012
(In thousands)	Third Quarter			Second Quarter			First Quarter			Fourth Quarter			Third Quarter
Commercial and industrial	$	58,766			56,030			55,736			59,334			58,579
Construction and land development		37,062			45,886			41,104			37,631			40,573
Commercial real estate		170,520			177,291			178,993			183,611			183,757
Residential real estate		102,565			99,021			102,978			105,631			103,319
Consumer installment		12,170			12,747			12,026			12,219			11,747
Total loans		381,083			390,975			390,837			398,426			397,975
Less: unearned income		(378	)		(249	)		(267	)		(233	)		(237	)
Loans, net of unearned income		380,705			390,726			390,570			398,193			397,738
Less: allowance for loan losses		(5,946	)		(6,457	)		(6,769	)		(6,723	)		(6,045	)
Loans, net	$	374,759			384,269			383,801			391,470			391,693

54

Table 7—Allowance for Loan Losses and Nonperforming Assets

	2013									2012
(Dollars in thousands)	Third Quarter			Second Quarter			First Quarter			Fourth Quarter			Third Quarter
Allowance for loan losses:
Balance at beginning of period	$	6,457			6,769			6,723			6,045			6,503
Charge-offs:
Commercial and industrial		(177	)		—			(68	)		(42	)		(152)
Construction and land development		(137	)		—			(39	)		—			—
Commercial real estate		(103	)		(118	)		—			(340	)		(1,626)
Residential real estate		(144	)		(189	)		(266	)		(110	)		(324)
Consumer installment		—			(45	)		(17	)		(17	)		(35)
Total charge-offs		(561	)		(352	)		(390	)		(509	)		(2,137)
Recoveries		50			40			36			122			129
Net charge-offs		(511	)		(312	)		(354	)		(387	)		(2,008)
Provision for loan losses		—			—			400			1,065			1,550
Ending balance	$	5,946			6,457			6,769			6,723			6,045
as a % of loans		1.56	%		1.65			1.73			1.69			1.52
as a % of nonperforming loans		134	%		138			143			64			44
Net charge-offs as a % of average loans		0.53	%		0.32			0.36			0.39			2.00
Nonperforming assets:
Nonaccrual loans	$	4,425			4,664			4,748			10,535			13,635
Other real estate owned		4,585			3,609			4,810			4,919			4,925
Total nonperforming assets	$	9,010			8,273			9,558			15,454			18,560
as a % of loans and foreclosed properties		2.34	%		2.10			2.42			3.83			4.61
as a % of total assets		1.21	%		1.08			1.24			2.03			2.46
Nonperforming loans as a % of total loans		1.16	%		1.19			1.22			2.65			3.43
Accruing loans 90 days or more past due	$	99			—			—			58			13

55

Table 8—Allocation of Allowance for Loan Losses

	2013												2012
	Third Quarter				Second Quarter				First Quarter				Fourth Quarter				Third Quarter
(Dollars in thousands)	Amount		%*		Amount		%*		Amount		%*		Amount		%*		Amount		%*
Commercial and industrial	$	546		15.4	$	675		14.3	$	569		14.3	$	812		14.9	$	754		14.7
Construction and land development		1,189		9.7		1,454		11.7		1,619		10.5		1,545		9.4		1,609		10.2
Commercial real estate		3,104		44.7		3,111		45.3		3,571		45.8		3,137		46.1		2,658		46.2
Residential real estate		982		26.9		1,125		25.3		885		26.3		1,126		26.5		947		26.0
Consumer installment		125		3.2		92		3.3		125		3.1		103		3.1		77		3.0
Total allowance for loan losses	$	5,946			$	6,457			$	6,769			$	6,723			$	6,045

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

56

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

(Dollars in thousands)	September 30, 2013
Maturity of:
3 months or less	$	25,786
Over 3 months through 6 months		16,064
Over 6 months through 12 months		31,613
Over 12 months		84,309
Total CDs and other time deposits of $100,000 or more	$	157,772

57

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 Principal Financial and Accounting 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 Principal Financial and Accounting 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 business, the Company and the Bank from time to time are involved in legal proceedings. The Company and Bank 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, 2012.

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 our annual report on Form 10-K for the year ended December 31, 2012, 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

ISSUER PURCHASES OF EQUITY SECURITIES

Period(1)	Total Number of     Shares Purchased	Average Price Paid     per Share	Total Number of Shares     Purchased as Part of     Publicly Announced     Plans or Programs	Maximum Number of      Shares that May Yet Be     Purchased Under the     Plans or Programs
July 1 - July 31	—	—	—	—
August 1 - August 31	—	—	—	—
September 1 - September 30	—	—	—	—
Total	—	—	—	—

(1) Based on trade date, not settlement date.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

58

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

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, Vice President, Controller and Chief Financial Officer (Principal Financial and Accounting 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 David A. Hedges, Vice President, Controller and Chief Financial Officer (Principal Financial and Accounting Officer).***
32.2	Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002, by E.L. Spencer, Jr., President, Chief Executive Officer and Chairman of the Board.***
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.

**** Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

59

SIGNATURES

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

	AUBURN NATIONAL BANCORPORATION, INC.                 (Registrant)
Date: November 1, 2013	By:	/s/ E. L. Spencer, Jr.
		E. L. Spencer, Jr.
		President, Chief Executive Officer and Chairman of the Board

Date: November 1, 2013	By:	/s/ David A. Hedges
		David A. Hedges
		VP, Controller and Chief Financial Officer (Principal Financial and Accounting 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: November 1, 2013

/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: November 1, 2013

/s/ David A. Hedges

VP, Controller and Chief Financial Officer

EX-32.1

AUBURN NATIONAL BANCORPORATION, INC AND SUBSIDIARIES

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report of Auburn National Bancorporation, Inc. (the “Company”) on Form 10-Q for the period ending September 30, 2013, 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: November 1, 2013

/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 September 30, 2013, as filed with the Securities and Exchange Commission as of the date hereof (the “Report”), I, David A. Hedges, Vice President, Controller and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

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

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

Date: November 1, 2013

/s/ David A. Hedges

David A. Hedges

VP, Controller and Chief Financial Officer

XML

Summary of Significant Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2013

Summary of Signficant Accounting Policies

Nature of Operations [Text Block]

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 Accounting [Text Block]

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, 2012.

Consolidation Policy [TextBlock]

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 [Policy Text Block]

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 [Policy Text Block]

Subsequent Events

The Company has evaluated the effects of events and transactions through the date of this filing that have occurred subsequent to September 30, 2013. The Company does not believe there were any material subsequent events during this period that would have required recognition or disclosure in the unaudited consolidated financial statements included in this report.

New Accounting Pronouncements Policy [Policy Text Block]

Accounting Developments

In the first quarter of 2013, the Company adopted new guidance related to the following Accounting Standards Updates (“Updates” or “ASUs”):

• ASU 2011-11, Disclosures about Offsetting Assets and Liabilities;
• ASU 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities; and
• ASU 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.

  In the third quarter of 2013, the Company adopted new guidance related to the following Update:

• ASU 2013-10, Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes.

Information about these pronouncements is described in more detail below.

ASU 2011-11, Disclosures about Offsetting Assets and Liabilities, expands the disclosure requirements for financial instruments and derivatives that may be offset in accordance with enforceable master netting agreements or similar arrangements. The disclosures are required regardless of whether the instruments have been offset (or netted) in the statement of financial position. Under ASU 2011-11, companies must describe the nature of offsetting arrangements and provide quantitative information about those agreements, including the gross and net amounts of financial instruments that are recognized in the statement of financial position. In January 2013, the FASB issued ASU 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities, which clarifies the scope of the offsetting disclosures and addresses any unintended consequences due to feedback from stakeholders that standard commercial provisions of many contracts would equate to a master netting arrangement. These changes were effective for the Company in the first quarter of 2013 with retrospective application. Adoption of this ASU did not have a significant impact on the financial statements of the Company.

ASU 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, seeks to improve the reporting of reclassifications out of accumulated other comprehensive income. The amendments in this Update will require an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. GAAP to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. These changes were effective for the Company in the first quarter of 2013 with retrospective application. This Update did not affect our consolidated financial results as it amends only the presentation of comprehensive income. See Consolidated Statements of Comprehensive Income.

ASU 2013-10,Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes,permits the Fed Funds Effective Swap Rate (Overnight Index Swap Rate) to be used as a U.S. benchmark interest rate for hedge accounting purposes, in addition to LIBOR and U.S. Treasury. The ASU also removes the restriction on using different benchmark rates for similar hedges. These changes are effective for the Company in the third quarter of 2013 with prospective application for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. Adoption of this ASU did not have a significant impact on the financial statements of the Company.

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Consolidated Statements of Earnings (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Interest income:
Loans, including fees	$ 5,104	$ 5,548	$ 15,656	$ 16,303
Securities	1,713	1,653	4,936	5,482
Federal funds sold and interest bearing bank deposits	39	11	99	32
Total interest income	6,856	7,212	20,691	21,817
Interest expense:
Deposits	1,344	1,509	4,097	4,839
Short-term borrowings	3	4	10	13
Long-term debt interest expense	239	440	941	1,393
Total interest expense	1,586	1,953	5,048	6,245
Net interest income	5,270	5,259	15,643	15,572
Provision for loan losses	0	1,550	400	2,750
Net interest income after provision for loan losses	5,270	3,709	15,243	12,822
Noninterest income:
Service charges on deposit accounts	224	268	707	838
Mortgage lending	750	1,038	2,397	2,492
Bank-owned life insurance gain	93	120	289	332
Gain on sale of affordable housing investments	0	0	0	3,268
Other noninterest income	365	413	1,086	1,157
Securities gains, net:
Realized gains, net	0	178	679	738
Total other-than-temporary impairments	0	0	0	(130)
Non-credit portion of other-than-temporary impairments (transferred from) recognized in other comprehensive income	0	0	0	0
Total securities gains (losses), net	0	178	679	608
Total noninterest income	1,432	2,017	5,158	8,695
Noninterest expense:
Salaries and benefits	2,139	2,209	6,503	6,557
Net occupancy and equipment	346	345	1,010	1,019
Professional fees	197	163	582	538
FDIC and other regulatory assessments	130	153	467	521
Other real estate owned, net	68	119	111	182
Prepayment penalty on long-term debt	541	0	2,012	3,720
Other noninterest expense	853	781	2,539	2,823
Total noninterest expense	4,274	3,770	13,224	15,360
Earnings before income taxes	2,428	1,956	7,177	6,157
Income tax expense	636	347	1,789	1,054
Net earnings	$ 1,792	$ 1,609	$ 5,388	$ 5,103
Net earnings per share:
Earnings per share basic and diluted	$ 0.49	$ 0.44	$ 1.48	$ 1.40
Weighted average shares outstanding:
Basic and diluted weighted average shares outstanding	3,643,028	3,642,876	3,642,967	3,642,807

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Basic and Diluted Earnings Per Share

9 Months Ended

Sep. 30, 2013

Earnings Per Share Abstract

Earnings Per Share [Text Block]

NOTE 2: BASIC AND DILUTED EARNINGS PER SHARE

Basic net earnings per share is computed by dividing net earnings by the weighted average common shares outstanding for the respective period. Diluted net earnings per share reflect the potential dilution that could occur upon exercise of securities or other rights for, or convertible into, shares of the Company's common stock. At September 30, 2013 and 2012, 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 earnings per share computationsfor the respective periods are presented below.

				Quarter ended September 30,				Nine months ended September 30,
(In thousands, except share and per share data)				2013		2012		2013		2012
Basic and diluted:
	Net earnings		$	1,792	$	1,609	$	5,388	$	5,103
	Weighted average common shares outstanding			3,643,028		3,642,876		3,642,967		3,642,807
		Earnings per share	$	0.49	$	0.44	$	1.48	$	1.40

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Fair Value (Tables)

9 Months Ended

Sep. 30, 2013

Fair Value Disclosures [Abstract]

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

					Quoted Prices in	Significant
					Active Markets	Other	Significant
					for	Observable	Unobservable
					Identical Assets	Inputs	Inputs
(Dollars in thousands)				Amount	(Level 1)	(Level 2)	(Level 3)
September 30, 2013:
Securities available-for-sale:
	Agency obligations		$	45,823	—	45,823	—
	Agency RMBS			145,990	—	145,990	—
	State and political subdivisions			66,912	—	66,912	—
	Trust preferred securities			742	—	—	742
Total securities available-for-sale				259,467	—	258,725	742
Other assets (1)				923	—	923	—
		Total assets at fair value	$	260,390	—	259,648	742
Other liabilities(1)			$	923	—	923	—
		Total liabilities at fair value	$	923	—	923	—
December 31, 2012:
Securities available-for-sale:
	Agency obligations		$	39,525	—	39,525	—
	Agency RMBS			141,460	—	141,460	—
	State and political subdivisions			77,838	—	77,838	—
	Trust preferred securities			652	—	—	652
Total securities available-for-sale				259,475	—	258,823	652
Other assets (1)				1,210	—	1,210	—
		Total assets at fair value	$	260,685	—	260,033	652
Other liabilities(1)			$	1,210	—	1,210	—
		Total liabilities at fair value	$	1,210	—	1,210	—
(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
				Identical Assets	Inputs	Inputs
(Dollars in thousands)			Amount	(Level 1)	(Level 2)	(Level 3)
September 30, 2013:
Loans held for sale		$	2,367	—	2,367	—
Loans, net(1)			5,390	—	—	5,390
Other real estate owned			4,585	—	—	4,585
Other assets (2)			2,288	—	—	2,288
	Total assets at fair value	$	14,630	—	2,367	12,263
December 31, 2012:
Loans held for sale		$	2,887	—	2,887	—
Loans, net(1)			10,272	—	—	10,272
Other real estate owned			4,919	—	—	4,919
Other assets (2)			1,526	—	—	1,526
	Total assets at fair value	$	19,604	—	2,887	16,717
(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 the carrying value of MSRs, net.

Fair Value, Assets Measured on Recurring Basis, Unobservable Input Reconciliation [Table Text Block]

				Nine months ended September 30,
(Dollars in thousands)				2013		2012
Beginning balance			$	652	$	1,986
	Total realized and unrealized gains and (losses):
		Included in net earnings		—		(6)
		Included in other comprehensive income		90		115
	Sales			—		(974)
	Settlements			—		(500)
Ending balance			$	742	$	621

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

					Weighted
		Carrying			Average
(Dollars in thousands)		Amount	Valuation Technique	Significant Unobservable Input	of Input
Recurring:
Trust preferred securities	$	742	Discounted cash flow	Credit spread (basis points)	529	bp
Nonrecurring:
Impaired loans	$	5,390	Appraisal	Appraisal discounts (%)	15.3	%
Other real estate owned		4,585	Appraisal	Appraisal discounts (%)	8.8	%
Mortgage servicing rights, net		2,288	Discounted cash flow	Prepayment speed or CPR (%)	7.5	%
				Discount rate (%)	10.0	%

Financial Instruments [Table Text Block]

							Fair Value Hierarchy
			Carrying		Estimated		Level 1		Level 2		Level 3
(Dollars in thousands)			amount		fair value		inputs		inputs		Inputs
September 30, 2013:
Financial Assets:
	Loans, net (1)	$	374,759	$	383,699	$	—	$	—	$	383,699
Financial Liabilities:
	Time Deposits	$	263,496	$	266,707	$	—	$	266,707	$	—
	Long-term debt		22,217		23,505		—		23,505		—
December 31, 2012:
Financial Assets:
	Loans, net (1)	$	391,470	$	399,533	$	—	$	—	$	399,533
Financial Liabilities:
	Time Deposits	$	263,195	$	267,636	$	—	$	267,636	$	—
	Long-term debt		47,217		51,752		—		51,752		—
(1) Represents loans, net of unearned income and the allowance for loan losses.

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Basic and Diluted Earnings Per Share (Tables)

9 Months Ended

Sep. 30, 2013

Earnings Per Share Abstract

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

				Quarter ended September 30,				Nine months ended September 30,
(In thousands, except share and per share data)				2013		2012		2013		2012
Basic and diluted:
	Net earnings		$	1,792	$	1,609	$	5,388	$	5,103
	Weighted average common shares outstanding			3,643,028		3,642,876		3,642,967		3,642,807
		Earnings per share	$	0.49	$	0.44	$	1.48	$	1.40

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Loan Credit Quality Analysis (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012	Sep. 30, 2012
Financing Receivable, Recorded Investment [Line Items]
Financing Receivable, Recorded Investment, Pass	$ 356,300	$ 368,837
Financing Receivable, Recorded Investment, Special Mention	9,212	6,447
Financing Receivable Recorded Investment, Substandard Accruing	11,146	12,607
Financing Receivable, Recorded Investment, Nonaccrual Status	4,425	10,535
Loans and Leases Receivable, Gross, Carrying Amount	381,083	398,426	397,975
Commercial and Industrial Loans [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing Receivable, Recorded Investment, Pass	53,776	58,487
Financing Receivable, Recorded Investment, Special Mention	4,184	224
Financing Receivable Recorded Investment, Substandard Accruing	750	563
Financing Receivable, Recorded Investment, Nonaccrual Status	56	60
Loans and Leases Receivable, Gross, Carrying Amount	58,766	59,334	58,579
Construction And Land Development Loans [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing Receivable, Recorded Investment, Pass	34,175	34,490
Financing Receivable, Recorded Investment, Special Mention	177	310
Financing Receivable Recorded Investment, Substandard Accruing	1,118	1,125
Financing Receivable, Recorded Investment, Nonaccrual Status	1,592	1,706
Loans and Leases Receivable, Gross, Carrying Amount	37,062	37,631	40,573
Commercial Real Estate Owner Occupied Loans [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing Receivable, Recorded Investment, Pass	54,076	59,270
Financing Receivable, Recorded Investment, Special Mention	1,083	2,528
Financing Receivable Recorded Investment, Substandard Accruing	882	1,525
Financing Receivable, Recorded Investment, Nonaccrual Status	1,041	1,045
Loans and Leases Receivable, Gross, Carrying Amount	57,082	64,368
Commercial Real Estate Other Loans [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing Receivable, Recorded Investment, Pass	111,231	111,719
Financing Receivable, Recorded Investment, Special Mention	963	653
Financing Receivable Recorded Investment, Substandard Accruing	818	1,202
Financing Receivable, Recorded Investment, Nonaccrual Status	426	5,669
Loans and Leases Receivable, Gross, Carrying Amount	113,438	119,243
Commercial Real Estate Loans, Total [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing Receivable, Recorded Investment, Pass	165,307	170,989
Financing Receivable, Recorded Investment, Special Mention	2,046	3,181
Financing Receivable Recorded Investment, Substandard Accruing	1,700	2,727
Financing Receivable, Recorded Investment, Nonaccrual Status	1,467	6,714
Loans and Leases Receivable, Gross, Carrying Amount	170,520	183,611	183,757
Residential Real Estate Consumer Mortgage Loans [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing Receivable, Recorded Investment, Pass	49,264	49,462
Financing Receivable, Recorded Investment, Special Mention	1,147	1,544
Financing Receivable Recorded Investment, Substandard Accruing	5,696	5,775
Financing Receivable, Recorded Investment, Nonaccrual Status	925	1,306
Loans and Leases Receivable, Gross, Carrying Amount	57,032	58,087
Residential Real Estate Investment Property Loans [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing Receivable, Recorded Investment, Pass	41,808	43,559
Financing Receivable, Recorded Investment, Special Mention	1,619	1,033
Financing Receivable Recorded Investment, Substandard Accruing	1,721	2,203
Financing Receivable, Recorded Investment, Nonaccrual Status	385	749
Loans and Leases Receivable, Gross, Carrying Amount	45,533	47,544
Residential Real Estate Loans, Total [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing Receivable, Recorded Investment, Pass	91,072	93,021
Financing Receivable, Recorded Investment, Special Mention	2,766	2,577
Financing Receivable Recorded Investment, Substandard Accruing	7,417	7,978
Financing Receivable, Recorded Investment, Nonaccrual Status	1,310	2,055
Loans and Leases Receivable, Gross, Carrying Amount	102,565	105,631	103,319
Consumer Installment and Revolving Loans [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing Receivable, Recorded Investment, Pass	11,970	11,850
Financing Receivable, Recorded Investment, Special Mention	39	155
Financing Receivable Recorded Investment, Substandard Accruing	161	214
Financing Receivable, Recorded Investment, Nonaccrual Status	0	0
Loans and Leases Receivable, Gross, Carrying Amount	$ 12,170	$ 12,219	$ 11,747

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Variable Interest Entities Textuals (Details) (USD $) In Millions, unless otherwise specified	3 Months Ended
	Sep. 30, 2013
Variable Interest Entities (Textuals) [Abstract]
Trust Preferred Securities, Issued	$ 7.00
Junior Subordinated Debt, Issued	7.20
Equity Interest, ANB Capital Trust	$ 0.20

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Variable Interest Entities (Details) (Liability Recognized [Member], USD $) In Thousands, unless otherwise specified	Sep. 30, 2013
Liability Recognized [Member]
Variable Interest Entities [Line Items]
Trust Preferred Issuance, Liability Recognized	$ 7,217

XML

Fair Value Unobservable Inputs (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013
Trust Preferred Securities [Member] | Fair Value, Measurements, Recurring [Member] | Discounted Cash Flow, Credit Spread [Member]
Schedule Of Fair Value Significant Unobservable Inputs Used [Line Items]
Unobservable Inputs, Weighted Average Of Input Credit Spreads	529
Trust Preferred Securities [Member] | Fair Value, Measurements, Recurring [Member] | Carrying (Reported) Amount, Fair Value Disclosure [Member]
Schedule Of Fair Value Significant Unobservable Inputs Used [Line Items]
Assets, Fair Value Disclosure	$ 742
Impaired Loans [Member] | Fair Value, Measurements, Nonrecurring [Member] | Appraisal, Appraisal Discount [Member]
Schedule Of Fair Value Significant Unobservable Inputs Used [Line Items]
Unobservable Input, Weighted Average of Input Percent	15.3
Impaired Loans [Member] | Fair Value, Measurements, Nonrecurring [Member] | Carrying (Reported) Amount, Fair Value Disclosure [Member]
Schedule Of Fair Value Significant Unobservable Inputs Used [Line Items]
Assets, Fair Value Disclosure	5,390
Other Real Estate Owned [Member] | Fair Value, Measurements, Nonrecurring [Member] | Appraisal, Appraisal Discount [Member]
Schedule Of Fair Value Significant Unobservable Inputs Used [Line Items]
Unobservable Input, Weighted Average of Input Percent	8.8
Other Real Estate Owned [Member] | Fair Value, Measurements, Nonrecurring [Member] | Carrying (Reported) Amount, Fair Value Disclosure [Member]
Schedule Of Fair Value Significant Unobservable Inputs Used [Line Items]
Assets, Fair Value Disclosure	4,585
Mortgage Servicing Rights [Member] | Fair Value, Measurements, Nonrecurring [Member] | Discounted Cash Flow, Prepayment Speed [Member]
Schedule Of Fair Value Significant Unobservable Inputs Used [Line Items]
Unobservable Input, Weighted Average of Input Percent	7.5
Mortgage Servicing Rights [Member] | Fair Value, Measurements, Nonrecurring [Member] | Discounted Cash Flow, Discount Rate [Member]
Schedule Of Fair Value Significant Unobservable Inputs Used [Line Items]
Unobservable Input, Weighted Average of Input Percent	10.0
Mortgage Servicing Rights [Member] | Fair Value, Measurements, Nonrecurring [Member] | Carrying (Reported) Amount, Fair Value Disclosure [Member]
Schedule Of Fair Value Significant Unobservable Inputs Used [Line Items]
Assets, Fair Value Disclosure	$ 2,288

XML

Loans (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012	Sep. 30, 2012
Loans And Leases Receivable Disclosure
Loans and Leases Receivable, Gross, Commercial	$ 58,766	$ 59,334
Construction And Land Development Loans	37,062	37,631
Commericial Real Estate Loans [Abstract]
Commercial Real Estate Owner Occupied Loans	57,082	64,368
Commerical Real Estate Other Loans	113,438	119,243
Total Commercial Real Estate Loans	170,520	183,611
Residential Real Estate Loans [Abstract]
Consumer Mortgage Loans	57,032	58,087
Residential Real Estate Investment Property Loans	45,533	47,544
Total Residential Real Estate Loans	102,565	105,631
Consumer Installment And Revolving Loans	12,170	12,219
Loans and Leases Receivable, Gross, Carrying Amount	381,083	398,426	397,975
Loans and Leases Receivable Deferred Income	(378)	(233)
Loans, net of unearned income	$ 380,705	$ 398,193

XML

Troubled Debt Restructuring (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012	Dec. 31, 2012
Impaired Financing Receivable And Troubled Debt Restructing [Line Items]
Impaired Financing Receivable, Troubled Debt Restructuring, Still Accruing	$ 1,626		$ 1,626		$ 1,068
Impaired Financing Receivable, Troubled Debt Restructuring, Nonaccrual	3,300		3,300		4,107
Impaired Financing Receivable, Trouble Debt Structuring, Total	4,926		4,926		5,175
Impaired Financing Receivable, Troubled Debt Restructuring, Allowance for Credit Losses	284		284		263
Financing Receivable, Modifications [Line Items]
Financing Receivable, Modification, Number of Contracts	3	2	4	12
Financing Receivable, Modification, Pre-Modification Recorded Investment	2,166	2,513	2,727	11,190
Financing Receivable, Modifications, Post-Modifications Recorded Investment	2,166	2,492	2,727	8,985
Financing Receivable, Modifications, Subsequent Default [Line Items]
Financing Receivable, Modifications, Subsequent Default, Number of Contracts	2	1	2	1
Financing Receivable, Modifications, Subsequent Default, Recorded Investment	1,623	2,386	1,623	2,386
Commercial and Industrial Loans [Member]
Impaired Financing Receivable And Troubled Debt Restructing [Line Items]
Impaired Financing Receivable, Troubled Debt Restructuring, Still Accruing	136		136		169
Impaired Financing Receivable, Troubled Debt Restructuring, Nonaccrual	0		0		0
Impaired Financing Receivable, Trouble Debt Structuring, Total	136		136		169
Impaired Financing Receivable, Troubled Debt Restructuring, Allowance for Credit Losses	0		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		0
Impaired Financing Receivable, Troubled Debt Restructuring, Nonaccrual	1,593		1,593		1,623
Impaired Financing Receivable, Trouble Debt Structuring, Total	1,593		1,593		1,623
Impaired Financing Receivable, Troubled Debt Restructuring, Allowance for Credit Losses	99		99		129
Financing Receivable, Modifications [Line Items]
Financing Receivable, Modification, Number of Contracts		1		3
Financing Receivable, Modification, Pre-Modification Recorded Investment		2,138		4,981
Financing Receivable, Modifications, Post-Modifications Recorded Investment		2,119		3,873
Financing Receivable, Modifications, Subsequent Default [Line Items]
Financing Receivable, Modifications, Subsequent Default, Number of Contracts	1	1	1	1
Financing Receivable, Modifications, Subsequent Default, Recorded Investment	1,197	2,386	1,197	2,386
Commercial Real Estate Owner Occupied Loans [Member]
Impaired Financing Receivable And Troubled Debt Restructing [Line Items]
Impaired Financing Receivable, Troubled Debt Restructuring, Still Accruing	882		882		899
Impaired Financing Receivable, Troubled Debt Restructuring, Nonaccrual	292		292		1,045
Impaired Financing Receivable, Trouble Debt Structuring, Total	1,174		1,174		1,944
Impaired Financing Receivable, Troubled Debt Restructuring, Allowance for Credit Losses	117		117		134
Financing Receivable, Modifications [Line Items]
Financing Receivable, Modification, Number of Contracts	1	0	1	4
Financing Receivable, Modification, Pre-Modification Recorded Investment	882	0	882	3,167
Financing Receivable, Modifications, Post-Modifications Recorded Investment	882	0	882	2,225
Commercial Real Estate Other Loans [Member]
Impaired Financing Receivable And Troubled Debt Restructing [Line Items]
Impaired Financing Receivable, Troubled Debt Restructuring, Still Accruing	608		608		0
Impaired Financing Receivable, Troubled Debt Restructuring, Nonaccrual	426		426		432
Impaired Financing Receivable, Trouble Debt Structuring, Total	1,034		1,034		432
Impaired Financing Receivable, Troubled Debt Restructuring, Allowance for Credit Losses	68		68		0
Financing Receivable, Modifications [Line Items]
Financing Receivable, Modification, Number of Contracts	1	0	1	2
Financing Receivable, Modification, Pre-Modification Recorded Investment	606	0	1,037	1,804
Financing Receivable, Modifications, Post-Modifications Recorded Investment	610	0	1,041	1,657
Commercial Real Estate Loans, Total [Member]
Impaired Financing Receivable And Troubled Debt Restructing [Line Items]
Impaired Financing Receivable, Troubled Debt Restructuring, Still Accruing	1,490		1,490		899
Impaired Financing Receivable, Troubled Debt Restructuring, Nonaccrual	718		718		1,477
Impaired Financing Receivable, Trouble Debt Structuring, Total	2,208		2,208		2,376
Impaired Financing Receivable, Troubled Debt Restructuring, Allowance for Credit Losses	185		185		134
Financing Receivable, Modifications [Line Items]
Financing Receivable, Modification, Number of Contracts	2	0	2	6
Financing Receivable, Modification, Pre-Modification Recorded Investment	1,488	0	1,919	4,971
Financing Receivable, Modifications, Post-Modifications Recorded Investment	1,492	0	1,923	3,882
Residential Real Estate Consumer Mortgage Loans [Member]
Impaired Financing Receivable And Troubled Debt Restructing [Line Items]
Impaired Financing Receivable, Troubled Debt Restructuring, Still Accruing	0		0		0
Impaired Financing Receivable, Troubled Debt Restructuring, Nonaccrual	772		772		819
Impaired Financing Receivable, Trouble Debt Structuring, Total	772		772		819
Impaired Financing Receivable, Troubled Debt Restructuring, Allowance for Credit Losses	0		0		0
Financing Receivable, Modifications [Line Items]
Financing Receivable, Modification, Number of Contracts	1	0	2	2
Financing Receivable, Modification, Pre-Modification Recorded Investment	678	0	808	863
Financing Receivable, Modifications, Post-Modifications Recorded Investment	674	0	804	857
Residential Real Estate Investment Property Loans [Member]
Impaired Financing Receivable And Troubled Debt Restructing [Line Items]
Impaired Financing Receivable, Troubled Debt Restructuring, Still Accruing	0		0		0
Impaired Financing Receivable, Troubled Debt Restructuring, Nonaccrual	217		217		188
Impaired Financing Receivable, Trouble Debt Structuring, Total	217		217		188
Impaired Financing Receivable, Troubled Debt Restructuring, Allowance for Credit Losses	0		0		0
Financing Receivable, Modifications [Line Items]
Financing Receivable, Modification, Number of Contracts		1		1
Financing Receivable, Modification, Pre-Modification Recorded Investment		375		375
Financing Receivable, Modifications, Post-Modifications Recorded Investment		373		373
Residential Real Estate Loans, Total [Member]
Impaired Financing Receivable And Troubled Debt Restructing [Line Items]
Impaired Financing Receivable, Troubled Debt Restructuring, Still Accruing	0		0		0
Impaired Financing Receivable, Troubled Debt Restructuring, Nonaccrual	989		989		1,007
Impaired Financing Receivable, Trouble Debt Structuring, Total	989		989		1,007
Impaired Financing Receivable, Troubled Debt Restructuring, Allowance for Credit Losses	0		0		0
Financing Receivable, Modifications [Line Items]
Financing Receivable, Modification, Number of Contracts	1	1	2	3
Financing Receivable, Modification, Pre-Modification Recorded Investment	678	375	808	1,238
Financing Receivable, Modifications, Post-Modifications Recorded Investment	$ 674	$ 373	$ 804	$ 1,230

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Securities OTTI (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Debt Securties Other Than Temporary Impairment Charges [Abstract]
Other Than Temporary Impairment Charges, Trust preferred securities, Individual Issuers	$ 0	$ 0	$ 0	$ 130
Other Than Temporary Impairment Charges, Debt Securities Total	0	0	0	130
Other-Than-Temporary Impairment Charges included in earnings	0	0	0	130
Other Than Temporary Impairment On Debt Securities [Abstract]
Credit Related Other Than Temporary impairement Charges	0	0	0	130
Non-credit Related Other Than Temporary Impairment Charges	0	0	0	0
Other Than Temporary Impairment Charges On Debt Securities, Total	$ 0	$ 0	$ 0	$ 130

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Derivative Instruments (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Derivative [Line Items]
Derivative, Notional Amount1	$ 10,208	$ 10,734
DerivativeAssetFairValueGrossAsset	923	1,210
Derivative Asset, Fair Value, Gross Liability	923	1,210
Derivative, Interest Rate Swap, Pay Fixed, Receive Variable [Member]
Derivative [Line Items]
Derivative, Notional Amount1	5,104	5,367
DerivativeAssetFairValueGrossAsset	0	0
Derivative Asset, Fair Value, Gross Liability	923	1,210
Derivative, Interest Rate Swap, Pay Variable, Receive Fixed [Member]
Derivative [Line Items]
Derivative, Notional Amount1	5,104	5,367
DerivativeAssetFairValueGrossAsset	923	1,210
Derivative Asset, Fair Value, Gross Liability	$ 0	$ 0

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Basic and Diluted Earnings Per Share (Details) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Earnings Per Share Abstract
Net earnings	$ 1,792	$ 1,609	$ 5,388	$ 5,103
Basic and diluted weighted average shares outstanding	3,643,028	3,642,876	3,642,967	3,642,807
Basic and diluted earnings per share	$ 0.49	$ 0.44	$ 1.48	$ 1.40

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Consolidated Statements of Stockholders' Equity (USD $) In Thousands, except Share data	Total	Common Stock Member	Additional Paid In Capital Member	Retained Earnings Member	Accumulated Other Comprehensive Income Member	Treasury Stock Member
Balance, Beg at Dec. 31, 2011	$ 65,416	$ 39	$ 3,753	$ 64,045	$ 4,222	$ (6,643)
Balance, shares at Dec. 31, 2011	3,957,135
Net earnings	5,103			5,103
Other Comprehensive Income (Loss), Net of Tax	1,923				1,923
Cash dividends paid	(2,240)			(2,240)
Sale of treasury stock	4		3			1
Balance, End at Sep. 30, 2012	70,206	39	3,756	66,908	6,145	(6,642)
Balance, shares at Sep. 30, 2012	3,957,135
Balance, Beg at Dec. 31, 2012	70,149	39	3,756	67,821	5,174	(6,641)
Balance, shares at Dec. 31, 2012	3,957,135
Net earnings	5,388			5,388
Other Comprehensive Income (Loss), Net of Tax	(7,438)				(7,438)
Cash dividends paid	(2,294)			(2,294)
Sale of treasury stock	2		2
Balance, End at Sep. 30, 2013	$ 65,807	$ 39	$ 3,758	$ 70,915	$ (2,264)	$ (6,641)
Balance, shares at Sep. 30, 2013	3,957,135

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Consolidated Statements of Cash Flows (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012
Consolidated Statements of Cash Flows:
Net earnings	$ 5,388	$ 5,103
Adjustments to reconcile net earnings to net cash provided by operating activties:
Provision for loan and lease losses	400	2,750
Depreciation and amortization	639	609
Premium amortization and discount accretion, net	1,620	2,351
Net gain on securities available for sale	(679)	(608)
Net gain on sale of loans held for sale	(1,693)	(2,488)
Net loss on other real estate owned	13	121
Loss on prepayment of long-term debt	2,012	3,720
Loans originated for sale	(80,169)	(111,476)
Proceeds from sale of loans	81,689	110,932
Increase in cash surrender value of bank owned life insurance	(289)	(332)
Gain on sale of affordable housing partnership investments	0	(3,268)
Net decrease in other assets	2,019	687
Net increase in accrued expenses and other liabilities	453	541
Net cash provided by operating activities	11,403	8,642
Cash flows from investing activities:
Proceeds from sales of securities available-for-sale	38,614	49,693
Proceeds from maturities of securities available-for-sale	48,588	93,377
Purchase of securities available-for-sale	(99,923)	(97,002)
Decrease (increase) in loans, net	14,033	(31,740)
Net purchases of premises and equipment	(516)	(1,128)
Decrease in FHLB stock	1,153	2,067
Proceeds from sale of affordable housing limited partnerships	0	8,499
Proceeds from sale of other real estate owned	2,599	3,493
Net cash provided by investing activities	4,548	27,259
Cash flows from financing activities:
Net increase in noninterest-bearing deposits	951	9,741
Net increase in interest-bearing deposits	12,653	531
Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase	54	(258)
Repayments or retirement of long-term debt	(27,012)	(41,816)
Proceeds from sale of treasury stock	2	4
Dividends paid	(2,294)	(2,240)
Net cash used in financing activities	(15,646)	(34,038)
Net change in cash and cash equivalents	305	1,863
Cash and cash equivalents at beginning of period	61,949	55,428
Cash and cash equivalents at end of period	62,254	57,291
Supplemental disclosures of cash flow information:
Interest	5,228	6,570
Income taxes	258	818
Supplemental disclosure of non-cash transactions:
Real estate acquired through foreclosure	$ 2,278	$ 641

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Variable Interest Entities

9 Months Ended

Sep. 30, 2013

Variable interest entity [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 September 30, 2013, 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, which issued mandatorily redeemable preferred capital securities (“trust preferred securities”) in the aggregate of approximately $7.0 million at the time of issuance. This 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. The junior subordinated debentures of approximately $7.2 million are included in long-term debt and the Company's equity interest of $0.2 million in the business trust is included in other assets. Interest expense on the junior subordinated debentures is included in interest expense on long-term debt.

The following table summarizes VIEs that are not consolidated by the Company as of September 30, 2013.

	Maximum	Liability
(Dollars in thousands)	Loss Exposure	Recognized	Classification
Type:
Trust preferred issuances	N/A	$ 7,217	Long-term debt

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Summary of Significant Accounting Policies

9 Months Ended

Sep. 30, 2013

Summary of Signficant Accounting Policies

Significant Accounting Policies Text Block

NOTE1: 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, 2012.

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 September 30, 2013. The Company does not believe there were any material subsequent events during this period that would have required recognition or disclosure in the unaudited consolidated financial statements included in this report.

Accounting Developments

In the first quarter of 2013, the Company adopted new guidance related to the following Accounting Standards Updates (“Updates” or “ASUs”):

• ASU 2011-11, Disclosures about Offsetting Assets and Liabilities;
• ASU 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities; and
• ASU 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.

  In the third quarter of 2013, the Company adopted new guidance related to the following Update:

• ASU 2013-10, Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes.

Information about these pronouncements is described in more detail below.

ASU 2011-11, Disclosures about Offsetting Assets and Liabilities, expands the disclosure requirements for financial instruments and derivatives that may be offset in accordance with enforceable master netting agreements or similar arrangements. The disclosures are required regardless of whether the instruments have been offset (or netted) in the statement of financial position. Under ASU 2011-11, companies must describe the nature of offsetting arrangements and provide quantitative information about those agreements, including the gross and net amounts of financial instruments that are recognized in the statement of financial position. In January 2013, the FASB issued ASU 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities, which clarifies the scope of the offsetting disclosures and addresses any unintended consequences due to feedback from stakeholders that standard commercial provisions of many contracts would equate to a master netting arrangement. These changes were effective for the Company in the first quarter of 2013 with retrospective application. Adoption of this ASU did not have a significant impact on the financial statements of the Company.

ASU 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, seeks to improve the reporting of reclassifications out of accumulated other comprehensive income. The amendments in this Update will require an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. GAAP to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. These changes were effective for the Company in the first quarter of 2013 with retrospective application. This Update did not affect our consolidated financial results as it amends only the presentation of comprehensive income. See Consolidated Statements of Comprehensive Income.

ASU 2013-10,Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes,permits the Fed Funds Effective Swap Rate (Overnight Index Swap Rate) to be used as a U.S. benchmark interest rate for hedge accounting purposes, in addition to LIBOR and U.S. Treasury. The ASU also removes the restriction on using different benchmark rates for similar hedges. These changes are effective for the Company in the third quarter of 2013 with prospective application for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. Adoption of this ASU did not have a significant impact on the financial statements of the Company.

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Loans Textuals (Details) (USD $) In Millions, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Loan and Lease Disclosure (Textuals) [Abstract]
Percentage Of Loans Secured By Real Estate	0.814		0.814
Financing Receivables, Troubled Debt Restructuring, Charge-off Of B Notes	$ 0	$ 0.90	$ 0	$ 0.90

XML

Security Types (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
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	$ 0	$ 0
Available-for-sale Securities, Debt Maturities, after One Through Five Years, Fair Value	0	0
Available-for-sale Securities, Debt Maturities, after Five Through Ten Years, Fair Value	23,744	20,065
Available-for-sale Securities, Debt Maturities, after Ten Years, Fair Value	22,079	19,460
Available-for-sale Securities, Fair Value, Total	45,823	39,525
Available-for-sale Securities, Gross Unrealized Gain	0	187
Available-for-sale Securities, Gross Unrealized Losses	3,253	19
Available-for-sale Securities, Amortized Cost Basis	49,076	39,357
Mortgage-backed Securities, Issued by US Government Sponsored Enterprises [Member]
Schedule of Available-for-sale Securities [Line Items]
Available-for-sale Securities, Debt Maturities, within One Year, Fair Value	0	0
Available-for-sale Securities, Debt Maturities, after One Through Five Years, Fair Value	0	0
Available-for-sale Securities, Debt Maturities, after Five Through Ten Years, Fair Value	3,679	4,700
Available-for-sale Securities, Debt Maturities, after Ten Years, Fair Value	142,311	136,760
Available-for-sale Securities, Fair Value, Total	145,990	141,460
Available-for-sale Securities, Gross Unrealized Gain	1,196	3,012
Available-for-sale Securities, Gross Unrealized Losses	3,179	162
Available-for-sale Securities, Amortized Cost Basis	147,973	138,610
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	111
Available-for-sale Securities, Debt Maturities, after One Through Five Years, Fair Value	2,096	1,830
Available-for-sale Securities, Debt Maturities, after Five Through Ten Years, Fair Value	19,739	21,006
Available-for-sale Securities, Debt Maturities, after Ten Years, Fair Value	45,077	54,891
Available-for-sale Securities, Fair Value, Total	66,912	77,838
Available-for-sale Securities, Gross Unrealized Gain	1,998	5,222
Available-for-sale Securities, Gross Unrealized Losses	399	0
Available-for-sale Securities, Amortized Cost Basis	65,313	72,616
Trust Preferred Securities Individual Issuer [Member]
Schedule of Available-for-sale Securities [Line Items]
Available-for-sale Securities, Debt Maturities, within One Year, Fair Value	0	0
Available-for-sale Securities, Debt Maturities, after One Through Five Years, Fair Value	0	0
Available-for-sale Securities, Debt Maturities, after Five Through Ten Years, Fair Value	0	0
Available-for-sale Securities, Debt Maturities, after Ten Years, Fair Value	742	652
Available-for-sale Securities, Fair Value, Total	742	652
Available-for-sale Securities, Gross Unrealized Gain	164	113
Available-for-sale Securities, Gross Unrealized Losses	115	154
Available-for-sale Securities, Amortized Cost Basis	693	693
Security Maturities, Total [Member]
Schedule of Available-for-sale Securities [Line Items]
Available-for-sale Securities, Debt Maturities, within One Year, Fair Value	0	111
Available-for-sale Securities, Debt Maturities, after One Through Five Years, Fair Value	2,096	1,830
Available-for-sale Securities, Debt Maturities, after Five Through Ten Years, Fair Value	47,162	45,771
Available-for-sale Securities, Debt Maturities, after Ten Years, Fair Value	210,209	211,763
Available-for-sale Securities, Fair Value, Total	259,467	259,475
Available-for-sale Securities, Gross Unrealized Gain	3,358	8,534
Available-for-sale Securities, Gross Unrealized Losses	6,946	335
Available-for-sale Securities, Amortized Cost Basis	$ 263,055	$ 251,276

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Securities Gross Realized Gain Loss (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Available-for-sale Securities, Gross Realized Gain (Loss) [Abstract]
Available-for-sale Securities, Gross Realized Gains	$ 0	$ 203	$ 685	$ 927
Available-for-sale Securities, Gross Realized Losses	0	(25)	(6)	(189)
Other-Than-Temporary Impairment Charges included in earnings	0	0	0	(130)
Available-for-sale Securities, Gross Realized Gain (Loss), Net	$ 0	$ 178	$ 679	$ 608

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Allowance For Loan Loss Additional Information (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012	Sep. 30, 2012
Financing Receivable Allowance For Credit Loss Additional Information [Line Items]
Financing Receivable, Allowance for Credit Losses, Collectively Evaluated for Impairment	$ 5,662		$ 5,733
Financing Receivable, Collectively Evaluated for Impairment	375,409		383,989
Financing Receivable, Allowance for Credit Losses, Individually Evaluated for Impairment	284		312
Financing Receivable, Individually Evaluated for Impairment	5,674		13,986
Allowance for loan losses	5,946	6,723	6,045
Loans and Leases Receivable, Gross, Carrying Amount	381,083	398,426	397,975
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	546		754
Financing Receivable, Collectively Evaluated for Impairment	58,630		58,395
Financing Receivable, Allowance for Credit Losses, Individually Evaluated for Impairment	0		0
Financing Receivable, Individually Evaluated for Impairment	136		184
Allowance for loan losses	546		754
Loans and Leases Receivable, Gross, Carrying Amount	58,766	59,334	58,579
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	1,090		1,468
Financing Receivable, Collectively Evaluated for Impairment	35,469		36,817
Financing Receivable, Allowance for Credit Losses, Individually Evaluated for Impairment	99		141
Financing Receivable, Individually Evaluated for Impairment	1,593		3,756
Allowance for loan losses	1,189		1,609
Loans and Leases Receivable, Gross, Carrying Amount	37,062	37,631	40,573
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	2,919		2,519
Financing Receivable, Collectively Evaluated for Impairment	167,564		175,733
Financing Receivable, Allowance for Credit Losses, Individually Evaluated for Impairment	185		139
Financing Receivable, Individually Evaluated for Impairment	2,956		8,024
Allowance for loan losses	3,104		2,658
Loans and Leases Receivable, Gross, Carrying Amount	170,520	183,611	183,757
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	982		915
Financing Receivable, Collectively Evaluated for Impairment	101,576		101,297
Financing Receivable, Allowance for Credit Losses, Individually Evaluated for Impairment	0		32
Financing Receivable, Individually Evaluated for Impairment	989		2,022
Allowance for loan losses	982		947
Loans and Leases Receivable, Gross, Carrying Amount	102,565	105,631	103,319
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	125		77
Financing Receivable, Collectively Evaluated for Impairment	12,170		11,747
Financing Receivable, Allowance for Credit Losses, Individually Evaluated for Impairment	0		0
Financing Receivable, Individually Evaluated for Impairment	0		0
Allowance for loan losses	125		77
Loans and Leases Receivable, Gross, Carrying Amount	$ 12,170	$ 12,219	$ 11,747

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Fair Value Level 3 Recurring (Details) (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012
Fair Value, Assets Measured on Recurring Basis, Unobservable Input Reconciliation, Calculation [Roll Forward]
Fair Value, Measurement with Unobservable Inputs Reconciliation, Recurring Basis, Asset Value, Beginning Balance	$ 652	$ 1,986
Fair Value, Assets Measured on Recurring Basis, Gain (Loss) Included in Earnings [Abstract]
Fair Value, Measurement with Unobservable Inputs Reconciliation, Recurring Basis, Asset, Gain (Loss) Included in Earnings	0	(6)
Fair Value, Measurement with Unobservable Inputs Reconciliation, Recurring Basis, Asset, Gain (Loss) Included in Other Comprehensive Income (Loss)	90	115
Fair Value, Measurement with Unobservable Inputs Reconciliation, Recurring Basis, Asset, Sales	0	(974)
Fair Value, Measurement with Unobservable Inputs Reconciliation, Settlements	0	(500)
Fair Value, Measurement with Unobservable Inputs Reconciliation, Recurring Basis, Asset Value, Ending Balance	$ 742	$ 621

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Consolidated Balance Sheets (Parentheticals) (USD $)	Sep. 30, 2013	Dec. 31, 2012
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	314,077	314,232

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Mortgage Servicing Rights, Net

9 Months Ended

Sep. 30, 2013

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 rate, default rates, cost to service, escrow account earnings, contractual servicing fee income, ancillary income, and late fees. Subsequent to the date of transfer, the Company has elected to measure its MSRs under the amortization method. Under the amortization method, MSRs are amortized in proportion to, and over the period of, estimated net servicing income.

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

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

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

		Quarter ended September 30,				Nine months ended September 30,
(Dollars in thousands)		2013		2012		2013		2012
MSRs, net:
Beginning balance	$	1,979	$	1,319	$	1,526	$	1,245
Additions, net		215		330		693		696
Amortization expense		(78)		(107)		(304)		(290)
Change in valuation allowance		172		(101)		373		(210)
Ending balance	$	2,288	$	1,441	$	2,288	$	1,441
Valuation allowance included in MSRs, net:
Beginning of period	$	185	$	226	$	386	$	117
End of period		13		327		13		327
Fair value of amortized MSRs:
Beginning of period	$	2,453	$	1,319	$	1,526	$	1,245
End of period		3,167		1,476		3,167		1,476

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Consolidated Statements of Comprehensive Income (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Statements of Comprehensive Income [Abstract]
Net earnings	$ 1,792	$ 1,609	$ 5,388	$ 5,103
Other comprehensive (loss) income, net of tax:
Unrealized net holding (loss) gain on securities	(433)	1,162	(7,010)	2,307
Reclassification adjustment for net (gain) loss on securities recognized in net earnings	0	(113)	(428)	(384)
Other comprehensive income (loss), net of tax	(433)	1,049	(7,438)	1,923
Comprehensive income (loss)	$ 1,359	$ 2,658	$ (2,050)	$ 7,026

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Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Assets:
Cash and due from banks	$ 14,088	$ 18,762
Federal funds sold	36,955	42,682
Interest bearing bank deposits	11,211	505
Cash and cash equivalents	62,254	61,949
Securities available-for-sale	259,467	259,475
Loans held for sale	2,367	2,887
Loans, net of unearned income	380,705	398,193
Allowance for loan losses	(5,946)	(6,723)
Loans, net	374,759	391,470
Premises and equipment, net	10,729	10,528
Bank-owned life insurance	17,365	17,076
Other real estate owned	4,585	4,919
Other assets	13,076	11,529
Total assets	744,602	759,833
Deposits:
Noninterest-bearing	118,965	118,014
Interest-bearing	531,456	518,803
Total deposits	650,421	636,817
Federal funds purchased and securities sold under agreements to repurchase	2,743	2,689
Long-term debt	22,217	47,217
Accrued expenses and other liabilities	3,414	2,961
Total liabilities	678,795	689,684
Stockholders' equity:
Preferred stock	0	0
Common stock	39	39
Additional paid-in capital	3,758	3,756
Retained earnings	70,915	67,821
Accumulated other comprehensive (loss) ncome, net	(2,264)	5,174
Less treasury stock, at cost	(6,641)	(6,641)
Total stockholders' equity	65,807	70,149
Total liabilities and stockholders' equity	$ 744,602	$ 759,833

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Securities Continuous Unrealized Loss (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Schedule of Available-for-sale Securities [Line Items]
Available-for-sale Securities, Continuous Unrealized Loss Position, Less than Twelve Months, Fair Value	$ 148,898	$ 35,173
Available-for-sale Securities, Continuous Unrealized Loss Position, Less than 12 Months, Aggregate Losses	6,831	181
Available-for-sale Securities, Continuous Unrealized Loss Position, Twelve Months or Longer, Fair Value	385	346
Available-for-sale Securities, Continuous Unrealized Loss Position, 12 Months or Longer, Aggregate Losses	115	154
Available-for-sale Securities, Continuous Unrealized Loss Position, Fair Value	149,283	35,519
Available-for-sale Securities, Continuous Unrealized Loss Position, Aggregate Losses	6,946	335
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	45,822	9,966
Available-for-sale Securities, Continuous Unrealized Loss Position, Less than 12 Months, Aggregate Losses	3,253	19
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	45,822	9,966
Available-for-sale Securities, Continuous Unrealized Loss Position, Aggregate Losses	3,253	19
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	95,325	25,207
Available-for-sale Securities, Continuous Unrealized Loss Position, Less than 12 Months, Aggregate Losses	3,179	162
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	95,325	25,207
Available-for-sale Securities, Continuous Unrealized Loss Position, Aggregate Losses	3,179	162
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	7,751
Available-for-sale Securities, Continuous Unrealized Loss Position, Less than 12 Months, Aggregate Losses	399
Available-for-sale Securities, Continuous Unrealized Loss Position, Twelve Months or Longer, Fair Value	0
Available-for-sale Securities, Continuous Unrealized Loss Position, 12 Months or Longer, Aggregate Losses	0
Available-for-sale Securities, Continuous Unrealized Loss Position, Fair Value	7,751
Available-for-sale Securities, Continuous Unrealized Loss Position, Aggregate Losses	399
Trust Preferred Securities Individual Issuer [Member]
Schedule of Available-for-sale Securities [Line Items]
Available-for-sale Securities, Continuous Unrealized Loss Position, Less than Twelve Months, Fair Value	0	0
Available-for-sale Securities, Continuous Unrealized Loss Position, Less than 12 Months, Aggregate Losses	0	0
Available-for-sale Securities, Continuous Unrealized Loss Position, Twelve Months or Longer, Fair Value	385	346
Available-for-sale Securities, Continuous Unrealized Loss Position, 12 Months or Longer, Aggregate Losses	115	154
Available-for-sale Securities, Continuous Unrealized Loss Position, Fair Value	385	346
Available-for-sale Securities, Continuous Unrealized Loss Position, Aggregate Losses	$ 115	$ 154

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Derivative Instruments (Table)

9 Months Ended

Sep. 30, 2013

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
September 30, 2013:
Pay fixed / receive variable		$	5,104	—	923
Pay variable / receive fixed			5,104	923	—
	Total interest rate swap agreements	$	10,208	923	923
December 31, 2012:
Pay fixed / receive variable		$	5,367	—	1,210
Pay variable / receive fixed			5,367	1,210	—
	Total interest rate swap agreements	$	10,734	1,210	1,210

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Fair Value (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Estimate of Fair Value, Fair Value Disclosure [Member]
Fair Value Disclosure, Securities Available-for-Sale [Abstract]
Fair Value Disclosure, Agency Obligations	$ 45,823	$ 39,525
Fair Value Disclosure, Agency RMBS	145,990	141,460
Fair Value Disclosure, State and Political Subdivisions	66,912	77,838
Trust Preferred Securities	742	652
Fair Value Disclosure, Securities Available-for-Sale, Total	259,467	259,475
Other Assets, Fair Value Disclosure	923	1,210
Assets, Fair Value Disclosure, Recurring	260,390	260,685
Liabilities Fair Value Disclosure [Abstract]
Other Liabilities, Fair Value Disclosure	923	1,210
Liabilities, Fair Value Disclosure, Recurring, Total	923	1,210
Fair Value, Assets and Liabilities Measured on Nonrecurring Basis [Abstract]
Loans Held-for-sale, Fair Value Disclosure	2,367	2,887
Impaired Loans, Fair Value Disclosure	5,390	10,272
Other Real Esate Owned, Fair Value Disclosure	4,585	4,919
Servicing Asset at Fair Value, Amount	2,288	1,526
Assets, Fair Value Disclosure, Nonrecurring	14,630	19,604
Fair Value, Inputs, Level 1 [Member]
Fair Value Disclosure, Securities Available-for-Sale [Abstract]
Fair Value Disclosure, Agency Obligations	0	0
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, 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, Inputs, Level 2 [Member]
Fair Value Disclosure, Securities Available-for-Sale [Abstract]
Fair Value Disclosure, Agency Obligations	45,823	39,525
Fair Value Disclosure, Agency RMBS	145,990	141,460
Fair Value Disclosure, State and Political Subdivisions	66,912	77,838
Trust Preferred Securities	0	0
Fair Value Disclosure, Securities Available-for-Sale, Total	258,725	258,823
Other Assets, Fair Value Disclosure	923	1,210
Assets, Fair Value Disclosure, Recurring	259,648	260,033
Liabilities Fair Value Disclosure [Abstract]
Other Liabilities, Fair Value Disclosure	923	1,210
Liabilities, Fair Value Disclosure, Recurring, Total	923	1,210
Fair Value, Assets and Liabilities Measured on Nonrecurring Basis [Abstract]
Loans Held-for-sale, Fair Value Disclosure	2,367	2,887
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	2,367	2,887
Fair Value, Inputs, Level 3 [Member]
Fair Value Disclosure, Securities Available-for-Sale [Abstract]
Fair Value Disclosure, Agency Obligations	0	0
Fair Value Disclosure, Agency RMBS	0	0
Fair Value Disclosure, State and Political Subdivisions	0	0
Trust Preferred Securities	742	652
Fair Value Disclosure, Securities Available-for-Sale, Total	742	652
Other Assets, Fair Value Disclosure	0	0
Assets, Fair Value Disclosure, Recurring	742	652
Liabilities Fair Value Disclosure [Abstract]
Other Liabilities, Fair Value Disclosure	0	0
Liabilities, Fair Value Disclosure, Recurring, Total	0	0
Fair Value, Assets and Liabilities Measured on Nonrecurring Basis [Abstract]
Loans Held-for-sale, Fair Value Disclosure	0	0
Impaired Loans, Fair Value Disclosure	5,390	10,272
Other Real Esate Owned, Fair Value Disclosure	4,585	4,919
Servicing Asset at Fair Value, Amount	2,288	1,526
Assets, Fair Value Disclosure, Nonrecurring	$ 12,263	$ 16,717

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Impaired Loans (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012	Dec. 31, 2012
Financing Receivable, Impaired [Line Items]
Impaired Financing Receivable, with No Related Allowance, Unpaid Principal Balance	$ 6,049		$ 6,049		$ 13,228
Impaired Financing Receivable, with No Related Allowance, Charge-off And Payments Applied	(2,261)		(2,261)		(4,018)
Impaired Financing Receivable, with No Related Allowance, Recorded Investment	3,788		3,788		9,210
Impaired Financing Receivable, with Related Allowance, Unpaid Principal Balance	1,947		1,947		1,370
Impaired Financing Receivable, with Related Allowance, Charge-off And Payments Applied	(61)		(61)		(45)
Impaired Financing Receivable, with Related Allowance, Recorded Investment	1,886		1,886		1,325
Impaired Financing Receivable, With Related Allowance, Related Allowance	284		284		263
Impaired Financing Receivable, Unpaid Principal Balance	7,996		7,996		14,598
Impaired Financing Receivable, Charge-off And Payments Applied	(2,322)		(2,322)		(4,063)
Impaired Financing Receivable, Recorded Investment	5,674		5,674		10,535
Impaired Financing Receivable, Related Allowance	284		284		263
Impaired Financing Receivable, Average Recorded Investment [Abstract]
Impaired Financing Receivable, Average Recorded Investment	5,501	10,370	6,458	10,327
Impaired Financing Receivable, Interest Income, Accrual Method	19	17	53	60
Commercial and Industrial Loans [Member]
Financing Receivable, Impaired [Line Items]
Impaired Financing Receivable, with No Related Allowance, Unpaid Principal Balance	136		136		169
Impaired Financing Receivable, with No Related Allowance, Charge-off And Payments Applied	0		0		0
Impaired Financing Receivable, with No Related Allowance, Recorded Investment	136		136		169
Impaired Financing Receivable, Average Recorded Investment [Abstract]
Impaired Financing Receivable, Average Recorded Investment	139	189	152	200
Impaired Financing Receivable, Interest Income, Accrual Method	2	3	7	11
Construction And Land Development Loans [Member]
Financing Receivable, Impaired [Line Items]
Impaired Financing Receivable, with No Related Allowance, Unpaid Principal Balance	2,879		2,879		2,879
Impaired Financing Receivable, with No Related Allowance, Charge-off And Payments Applied	(1,682)		(1,682)		(1,682)
Impaired Financing Receivable, with No Related Allowance, Recorded Investment	1,197		1,197		1,197
Impaired Financing Receivable, with Related Allowance, Unpaid Principal Balance	457		457		471
Impaired Financing Receivable, with Related Allowance, Charge-off And Payments Applied	(61)		(61)		(45)
Impaired Financing Receivable, with Related Allowance, Recorded Investment	396		396		426
Impaired Financing Receivable, Related Allowance	99		99		129
Impaired Financing Receivable, Average Recorded Investment [Abstract]
Impaired Financing Receivable, Average Recorded Investment	1,596	3,801	1,608	4,357
Impaired Financing Receivable, Interest Income, Accrual Method	0	0	0	0
Commercial Real Estate Owner Occupied Loans [Member]
Financing Receivable, Impaired [Line Items]
Impaired Financing Receivable, with No Related Allowance, Unpaid Principal Balance	1,220		1,220		787
Impaired Financing Receivable, with No Related Allowance, Charge-off And Payments Applied	(180)		(180)		(212)
Impaired Financing Receivable, with No Related Allowance, Recorded Investment	1,040		1,040		575
Impaired Financing Receivable, with Related Allowance, Unpaid Principal Balance	882		882		899
Impaired Financing Receivable, with Related Allowance, Charge-off And Payments Applied	0		0		0
Impaired Financing Receivable, with Related Allowance, Recorded Investment	882		882		899
Impaired Financing Receivable, Related Allowance	117		117		134
Impaired Financing Receivable, Average Recorded Investment [Abstract]
Impaired Financing Receivable, Average Recorded Investment	1,927	2,468	1,993	2,537
Impaired Financing Receivable, Interest Income, Accrual Method	13	14	42	49
Commercial Real Estate Other Loans [Member]
Financing Receivable, Impaired [Line Items]
Impaired Financing Receivable, with No Related Allowance, Unpaid Principal Balance	516		516		7,914
Impaired Financing Receivable, with No Related Allowance, Charge-off And Payments Applied	(90)		(90)		(1,862)
Impaired Financing Receivable, with No Related Allowance, Recorded Investment	426		426		6,052
Impaired Financing Receivable, Average Recorded Investment [Abstract]
Impaired Financing Receivable, Average Recorded Investment	832	2,211	1,581	1,713
Impaired Financing Receivable, Interest Income, Accrual Method	4	0	4	0
Commercial Real Estate Loans, Total [Member]
Financing Receivable, Impaired [Line Items]
Impaired Financing Receivable, with No Related Allowance, Unpaid Principal Balance	1,736		1,736		8,701
Impaired Financing Receivable, with No Related Allowance, Charge-off And Payments Applied	(270)		(270)		(2,074)
Impaired Financing Receivable, with No Related Allowance, Recorded Investment	1,466		1,466		6,627
Impaired Financing Receivable, with Related Allowance, Unpaid Principal Balance	1,490		1,490		899
Impaired Financing Receivable, with Related Allowance, Charge-off And Payments Applied	0		0		0
Impaired Financing Receivable, with Related Allowance, Recorded Investment	1,490		1,490		899
Impaired Financing Receivable, Related Allowance	185		185		134
Impaired Financing Receivable, Average Recorded Investment [Abstract]
Impaired Financing Receivable, Average Recorded Investment	2,759	4,679	3,574	4,250
Impaired Financing Receivable, Interest Income, Accrual Method	17	14	46	49
Residential Real Estate Consumer Mortgage Loans [Member]
Financing Receivable, Impaired [Line Items]
Impaired Financing Receivable, with No Related Allowance, Unpaid Principal Balance	958		958		971
Impaired Financing Receivable, with No Related Allowance, Charge-off And Payments Applied	(186)		(186)		(152)
Impaired Financing Receivable, with No Related Allowance, Recorded Investment	772		772		819
Impaired Financing Receivable, Average Recorded Investment [Abstract]
Impaired Financing Receivable, Average Recorded Investment	776	846	801	870
Impaired Financing Receivable, Interest Income, Accrual Method	0	0	0	0
Residential Real Estate Investment Property Loans [Member]
Financing Receivable, Impaired [Line Items]
Impaired Financing Receivable, with No Related Allowance, Unpaid Principal Balance	340		340		508
Impaired Financing Receivable, with No Related Allowance, Charge-off And Payments Applied	(123)		(123)		(110)
Impaired Financing Receivable, with No Related Allowance, Recorded Investment	217		217		398
Impaired Financing Receivable, with Related Allowance, Unpaid Principal Balance	0		0
Impaired Financing Receivable, with Related Allowance, Charge-off And Payments Applied	0		0
Impaired Financing Receivable, with Related Allowance, Recorded Investment	0		0
Impaired Financing Receivable, Related Allowance	0		0
Impaired Financing Receivable, Average Recorded Investment [Abstract]
Impaired Financing Receivable, Average Recorded Investment	231	855	323	650
Impaired Financing Receivable, Interest Income, Accrual Method	0	0	0	0
Residential Real Estate Loans, Total [Member]
Financing Receivable, Impaired [Line Items]
Impaired Financing Receivable, with No Related Allowance, Unpaid Principal Balance	1,298		1,298		1,479
Impaired Financing Receivable, with No Related Allowance, Charge-off And Payments Applied	(309)		(309)		(262)
Impaired Financing Receivable, with No Related Allowance, Recorded Investment	989		989		1,217
Impaired Financing Receivable, with Related Allowance, Unpaid Principal Balance	0		0
Impaired Financing Receivable, with Related Allowance, Charge-off And Payments Applied	0		0
Impaired Financing Receivable, with Related Allowance, Recorded Investment	0		0
Impaired Financing Receivable, Related Allowance	0		0
Impaired Financing Receivable, Average Recorded Investment [Abstract]
Impaired Financing Receivable, Average Recorded Investment	1,007	1,701	1,124	1,520
Impaired Financing Receivable, Interest Income, Accrual Method	0	0	0	0
Consumer Installment and Revolving Loans [Member]
Impaired Financing Receivable, Average Recorded Investment [Abstract]
Impaired Financing Receivable, Average Recorded Investment	0	0	0	0
Impaired Financing Receivable, Interest Income, Accrual Method	$ 0	$ 0	$ 0	$ 0

XML

Loans Past Due Analysis (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012	Sep. 30, 2012
Financing Receivable, Recorded Investment, Past Due [Line Items]
Financing Receivable, Recorded Investment, Current	$ 375,537	$ 385,823
Financing Receivable, Recorded Investment, 30 To 89 Days Past Due	1,022	2,010
Financing Receivable, Recorded Investment, 90 Days Past Due and Still Accruing	99	58
Financing Receivable, Recorded Investment, Total Still Accruing	376,658	387,891
Financing Receivable, Recorded Investment, Nonaccrual Status	4,425	10,535
Loans and Leases Receivable, Gross, Carrying Amount	381,083	398,426	397,975
Commercial and Industrial Loans [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Financing Receivable, Recorded Investment, Current	58,260	59,101
Financing Receivable, Recorded Investment, 30 To 89 Days Past Due	444	173
Financing Receivable, Recorded Investment, 90 Days Past Due and Still Accruing	6	0
Financing Receivable, Recorded Investment, Total Still Accruing	58,710	59,274
Financing Receivable, Recorded Investment, Nonaccrual Status	56	60
Loans and Leases Receivable, Gross, Carrying Amount	58,766	59,334	58,579
Construction And Land Development Loans [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Financing Receivable, Recorded Investment, Current	35,470	35,917
Financing Receivable, Recorded Investment, 30 To 89 Days Past Due	0	8
Financing Receivable, Recorded Investment, 90 Days Past Due and Still Accruing	0	0
Financing Receivable, Recorded Investment, Total Still Accruing	35,470	35,925
Financing Receivable, Recorded Investment, Nonaccrual Status	1,592	1,706
Loans and Leases Receivable, Gross, Carrying Amount	37,062	37,631	40,573
Commercial Real Estate Owner Occupied Loans [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Financing Receivable, Recorded Investment, Current	55,992	63,323
Financing Receivable, Recorded Investment, 30 To 89 Days Past Due	49	0
Financing Receivable, Recorded Investment, 90 Days Past Due and Still Accruing	0	0
Financing Receivable, Recorded Investment, Total Still Accruing	56,041	63,323
Financing Receivable, Recorded Investment, Nonaccrual Status	1,041	1,045
Loans and Leases Receivable, Gross, Carrying Amount	57,082	64,368
Commercial Real Estate Other Loans [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Financing Receivable, Recorded Investment, Current	113,012	113,344
Financing Receivable, Recorded Investment, 30 To 89 Days Past Due	0	230
Financing Receivable, Recorded Investment, 90 Days Past Due and Still Accruing	0	0
Financing Receivable, Recorded Investment, Total Still Accruing	113,012	113,574
Financing Receivable, Recorded Investment, Nonaccrual Status	426	5,669
Loans and Leases Receivable, Gross, Carrying Amount	113,438	119,243
Commercial Real Estate Loans, Total [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Financing Receivable, Recorded Investment, Current	169,004	176,667
Financing Receivable, Recorded Investment, 30 To 89 Days Past Due	49	230
Financing Receivable, Recorded Investment, 90 Days Past Due and Still Accruing	0	0
Financing Receivable, Recorded Investment, Total Still Accruing	169,053	176,897
Financing Receivable, Recorded Investment, Nonaccrual Status	1,467	6,714
Loans and Leases Receivable, Gross, Carrying Amount	170,520	183,611	183,757
Residential Real Estate Consumer Mortgage Loans [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Financing Receivable, Recorded Investment, Current	55,814	55,521
Financing Receivable, Recorded Investment, 30 To 89 Days Past Due	200	1,202
Financing Receivable, Recorded Investment, 90 Days Past Due and Still Accruing	93	58
Financing Receivable, Recorded Investment, Total Still Accruing	56,107	56,781
Financing Receivable, Recorded Investment, Nonaccrual Status	925	1,306
Loans and Leases Receivable, Gross, Carrying Amount	57,032	58,087
Residential Real Estate Investment Property Loans [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Financing Receivable, Recorded Investment, Current	44,859	46,460
Financing Receivable, Recorded Investment, 30 To 89 Days Past Due	289	335
Financing Receivable, Recorded Investment, 90 Days Past Due and Still Accruing	0	0
Financing Receivable, Recorded Investment, Total Still Accruing	45,148	46,795
Financing Receivable, Recorded Investment, Nonaccrual Status	385	749
Loans and Leases Receivable, Gross, Carrying Amount	45,533	47,544
Residential Real Estate Loans, Total [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Financing Receivable, Recorded Investment, Current	100,673	101,981
Financing Receivable, Recorded Investment, 30 To 89 Days Past Due	489	1,537
Financing Receivable, Recorded Investment, 90 Days Past Due and Still Accruing	93	58
Financing Receivable, Recorded Investment, Total Still Accruing	101,255	103,576
Financing Receivable, Recorded Investment, Nonaccrual Status	1,310	2,055
Loans and Leases Receivable, Gross, Carrying Amount	102,565	105,631	103,319
Consumer Installment and Revolving Loans [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Financing Receivable, Recorded Investment, Current	12,130	12,157
Financing Receivable, Recorded Investment, 30 To 89 Days Past Due	40	62
Financing Receivable, Recorded Investment, 90 Days Past Due and Still Accruing	0	0
Financing Receivable, Recorded Investment, Total Still Accruing	12,170	12,219
Financing Receivable, Recorded Investment, Nonaccrual Status	0	0
Loans and Leases Receivable, Gross, Carrying Amount	$ 12,170	$ 12,219	$ 11,747

XML

Allowance for Loan Loss (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Financing Receivable, Allowance for Credit Losses [Roll Forward]
Financing Receivable, Allowance for Credit Losses	$ 6,457	$ 6,503	$ 6,723	$ 6,919
Financing Receivable, Allowance for Credit Losses, Charge-offs	(561)	(2,137)	(1,303)	(3,824)
Financing Receivable, Allowance for Credit Losses, Recoveries	50	129	126	200
Financing Receivable Allowance For Credit Losses Net Chargeoffs Recoveries	(511)	(2,008)	(1,177)	(3,624)
Provision for loan losses	0	1,550	400	2,750
Financing Receivable, Allowance for Credit Losses	5,946	6,045	5,946	6,045
Commercial and Industrial Loans [Member]
Financing Receivable, Allowance for Credit Losses [Roll Forward]
Financing Receivable, Allowance for Credit Losses	675	731	812	948
Financing Receivable, Allowance for Credit Losses, Charge-offs	(177)	(152)	(245)	(246)
Financing Receivable, Allowance for Credit Losses, Recoveries	23	20	40	28
Financing Receivable Allowance For Credit Losses Net Chargeoffs Recoveries	(154)	(132)	(205)	(218)
Provision for loan losses	25	155	(61)	24
Financing Receivable, Allowance for Credit Losses	546	754	546	754
Construction And Land Development Loans [Member]
Financing Receivable, Allowance for Credit Losses [Roll Forward]
Financing Receivable, Allowance for Credit Losses	1,454	1,623	1,545	1,470
Financing Receivable, Allowance for Credit Losses, Charge-offs	(137)	0	(39)	(231)
Financing Receivable, Allowance for Credit Losses, Recoveries	1	0	5	1
Financing Receivable Allowance For Credit Losses Net Chargeoffs Recoveries	(136)	0	(34)	(230)
Provision for loan losses	(129)	(14)	(322)	369
Financing Receivable, Allowance for Credit Losses	1,189	1,609	1,189	1,609
Commercial Real Estate Loans, Total [Member]
Financing Receivable, Allowance for Credit Losses [Roll Forward]
Financing Receivable, Allowance for Credit Losses	3,111	2,817	3,137	3,009
Financing Receivable, Allowance for Credit Losses, Charge-offs	(103)	(1,626)	(262)	(2,844)
Financing Receivable, Allowance for Credit Losses, Recoveries	21	71	4	71
Financing Receivable Allowance For Credit Losses Net Chargeoffs Recoveries	(82)	(1,555)	(258)	(2,773)
Provision for loan losses	75	1,396	225	2,422
Financing Receivable, Allowance for Credit Losses	3,104	2,658	3,104	2,658
Residential Real Estate Loans, Total [Member]
Financing Receivable, Allowance for Credit Losses [Roll Forward]
Financing Receivable, Allowance for Credit Losses	1,125	1,278	1,126	1,363
Financing Receivable, Allowance for Credit Losses, Charge-offs	(144)	(324)	(558)	(435)
Financing Receivable, Allowance for Credit Losses, Recoveries	0	35	62	85
Financing Receivable Allowance For Credit Losses Net Chargeoffs Recoveries	(144)	(289)	(496)	(350)
Provision for loan losses	1	(42)	352	(66)
Financing Receivable, Allowance for Credit Losses	982	947	982	947
Consumer Installment and Revolving Loans [Member]
Financing Receivable, Allowance for Credit Losses [Roll Forward]
Financing Receivable, Allowance for Credit Losses	92	54	103	129
Financing Receivable, Allowance for Credit Losses, Charge-offs	0	(35)	(199)	(68)
Financing Receivable, Allowance for Credit Losses, Recoveries	5	3	15	15
Financing Receivable Allowance For Credit Losses Net Chargeoffs Recoveries	5	(32)	(184)	(53)
Provision for loan losses	28	55	206	1
Financing Receivable, Allowance for Credit Losses	$ 125	$ 77	$ 125	$ 77

XML

Loan and Allowance for Loan Losses

9 Months Ended

Sep. 30, 2013

Loans And Leases Receivable Disclosure

Loans and leases receivable disclosure [Text Block]

NOTE 5: LOANS AND ALLOWANCE FOR LOAN LOSSES

				September 30,		December 31,
(In thousands)				2013		2012
Commercial and industrial			$	58,766	$	59,334
Construction and land development				37,062		37,631
Commercial real estate:
	Owner occupied			57,082		64,368
	Other			113,438		119,243
		Total commercial real estate		170,520		183,611
Residential real estate:
	Consumer mortgage			57,032		58,087
	Investment property			45,533		47,544
		Total residential real estate		102,565		105,631
Consumer installment				12,170		12,219
		Total loans		381,083		398,426
Less: unearned income				(378)		(233)
		Loans, net of unearned income	$	380,705	$	398,193

Loans secured by real estate were approximately 82.4% of the Company's total loan portfolio at September 30, 2013. At September 30, 2013, 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 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 two classes: (1) owner occupied and (2) 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.
• Other – primarily includes loans to finance income-producing commercial and multi-family 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, warehouses and apartments leased generally to local businesses and 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.

  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 September 30, 2013, and December 31, 2012.

					Accruing	Accruing	Total
					30-89 Days	Greater than	Accruing	Non-		Total
(In thousands)			Current		Past Due	90 days	Loans	Accrual		Loans
September 30, 2013:
Commercial and industrial			$	58,260	444	6	58,710	56	$	58,766
Construction and land development				35,470	—	—	35,470	1,592		37,062
Commercial real estate:
	Owner occupied			55,992	49	—	56,041	1,041		57,082
	Other			113,012	—	—	113,012	426		113,438
		Total commercial real estate		169,004	49	—	169,053	1,467		170,520
Residential real estate:
	Consumer mortgage			55,814	200	93	56,107	925		57,032
	Investment property			44,859	289	—	45,148	385		45,533
		Total residential real estate		100,673	489	93	101,255	1,310		102,565
Consumer installment				12,130	40	—	12,170	—		12,170
		Total	$	375,537	1,022	99	376,658	4,425	$	381,083

December 31, 2012:
Commercial and industrial			$	59,101	173	—	59,274	60	$	59,334
Construction and land development				35,917	8	—	35,925	1,706		37,631
Commercial real estate:
	Owner occupied			63,323	—	—	63,323	1,045		64,368
	Other			113,344	230	—	113,574	5,669		119,243
		Total commercial real estate		176,667	230	—	176,897	6,714		183,611
Residential real estate:
	Consumer mortgage			55,521	1,202	58	56,781	1,306		58,087
	Investment property			46,460	335	—	46,795	749		47,544
		Total residential real estate		101,981	1,537	58	103,576	2,055		105,631
Consumer installment				12,157	62	—	12,219	—		12,219
		Total	$	385,823	2,010	58	387,891	10,535	$	398,426

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, 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 loans. 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 these types of loans. The estimates for these loans are established by category and based on the Company's internal system of credit risk ratings and historical loss data. The estimated loan loss allocation rate for the Company's internal system of credit risk grades is based on its experience with similarly graded loans. For loan segments where the Company believes it does not have sufficient historical loss data, the Company may make adjustments based, in part, on loss rates of peer bank groups. At September 30,2013 and December 31, 2012, and for the periods then ended, the Company adjusted its historical loss rates for the commercial real estate portfolio segment based, in part, on loss rates of peer bank groups.

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

The Company regularly re-evaluates its practices in determining the allowance for loan losses. During 2013, the Company implemented certain refinements to its allowance for loan losses methodology, specifically the way that historical loss factors are calculated. Prior to June 30, 2013, the Company calculated average losses for all loan segments using a rolling 6 quarter historical period. In order to better capture the effects of the current economic cycle on the Company's loan loss experience, the Company calculated average losses for all loan segments (except for the commercial real estate loan segment) using a rolling 8 quarter historical period for the quarter ended June 30, 2013. Based upon management's review of charge-off trends for each loan segment, the Company continued to calculate average losses for the commercial real estate loan segment using a rolling 6 quarter historical period for the quarter ended June 30, 2013. If the Company continued to calculate average losses for all loan segments using a rolling 6 quarter historical period, the Company's calculated allowance for loan loss allocation would have decreased by approximately $1.1 million at June 30, 2013. Other than the changes discussed above, the Company has not made any changes to its calculation of historical loss periods that would impact the calculation of the allowance for loan losses or provision for loan losses for the periods included in the accompanying consolidated balance sheets and statements of earnings.

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

			September 30, 2013
(In thousands)		Commercial and industrial		Construction and land development	Commercial real estate	Residential real estate	Consumer installment		Total
Quarter ended:
Beginning balance		$	675	1,454	3,111	1,125	92	$	6,457
Charge-offs			(177)	(137)	(103)	(144)	—		(561)
Recoveries			23	1	21	—	5		50
	Net (charge-offs) recoveries		(154)	(136)	(82)	(144)	5		(511)
Provision			25	(129)	75	1	28		—
Ending balance		$	546	1,189	3,104	982	125	$	5,946

Nine months ended:
Beginning balance		$	812	1,545	3,137	1,126	103	$	6,723
Charge-offs			(245)	(39)	(262)	(558)	(199)		(1,303)
Recoveries			40	5	4	62	15		126
	Net charge-offs		(205)	(34)	(258)	(496)	(184)		(1,177)
Provision			(61)	(322)	225	352	206		400
Ending balance		$	546	1,189	3,104	982	125	$	5,946

			September 30, 2012
(In thousands)		Commercial and industrial		Construction and land development	Commercial real estate	Residential real estate	Consumer installment		Total
Quarter ended:
Beginning balance		$	731	1,623	2,817	1,278	54		6,503
Charge-offs			(152)	—	(1,626)	(324)	(35)	$	(2,137)
Recoveries			20	—	71	35	3	$	129
	Net charge-offs		(132)	—	(1,555)	(289)	(32)		(2,008)
Provision			155	(14)	1,396	(42)	55	$	1,550
Ending balance		$	754	1,609	2,658	947	77	$	6,045

Nine months ended:
Beginning balance		$	948	1,470	3,009	1,363	129	$	6,919
Charge-offs			(246)	(231)	(2,844)	(435)	(68)		(3,824)
Recoveries			28	1	71	85	15		200
	Net charge-offs		(218)	(230)	(2,773)	(350)	(53)		(3,624)
Provision			24	369	2,422	(66)	1		2,750
Ending balance		$	754	1,609	2,658	947	77	$	6,045

The following table presents an analysis of the allowance for loan losses and recorded investment in loans by portfolio segment and impairment methodology as of September 30, 2013and 2012.

			Collectively evaluated (1)		Individually evaluated (2)		Total
			Allowance	Recorded	Allowance	Recorded	Allowance	Recorded
			for loan	investment	for loan	investment	for loan	investment
(In thousands)			losses	in loans	losses	in loans	losses	in loans
September 30, 2013:
Commercial and industrial		$	546	58,630	—	136	546	58,766
Construction and land development			1,090	35,469	99	1,593	1,189	37,062
Commercial real estate			2,919	167,564	185	2,956	3,104	170,520
Residential real estate			982	101,576	—	989	982	102,565
Consumer installment			125	12,170	—	—	125	12,170
	Total	$	5,662	375,409	284	5,674	5,946	381,083

September 30, 2012:
Commercial and industrial		$	754	58,395	—	184	754	58,579
Construction and land development			1,468	36,817	141	3,756	1,609	40,573
Commercial real estate			2,519	175,733	139	8,024	2,658	183,757
Residential real estate			915	101,297	32	2,022	947	103,319
Consumer installment			77	11,747	—	—	77	11,747
	Total	$	5,733	383,989	312	13,986	6,045	397,975
(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 unimpaired 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 in doubt.

(In thousands)				Pass	Special Mention	Substandard Accruing	Nonaccrual		Total loans
September 30, 2013:
Commercial and industrial			$	53,776	4,184	750	56	$	58,766
Construction and land development				34,175	177	1,118	1,592		37,062
Commercial real estate:
	Owner occupied			54,076	1,083	882	1,041		57,082
	Other			111,231	963	818	426		113,438
		Total commercial real estate		165,307	2,046	1,700	1,467		170,520
Residential real estate:
	Consumer mortgage			49,264	1,147	5,696	925		57,032
	Investment property			41,808	1,619	1,721	385		45,533
		Total residential real estate		91,072	2,766	7,417	1,310		102,565
Consumer installment				11,970	39	161	—		12,170
		Total	$	356,300	9,212	11,146	4,425	$	381,083

December 31, 2012:
Commercial and industrial			$	58,487	224	563	60	$	59,334
Construction and land development				34,490	310	1,125	1,706		37,631
Commercial real estate:
	Owner occupied			59,270	2,528	1,525	1,045		64,368
	Other			111,719	653	1,202	5,669		119,243
		Total commercial real estate		170,989	3,181	2,727	6,714		183,611
Residential real estate:
	Consumer mortgage			49,462	1,544	5,775	1,306		58,087
	Investment property			43,559	1,033	2,203	749		47,544
		Total residential real estate		93,021	2,577	7,978	2,055		105,631
Consumer installment				11,850	155	214	—		12,219
		Total	$	368,837	6,447	12,607	10,535	$	398,426

Impaired loans

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

• Individually evaluated impaired loans equal to or greater than $500,000 secured by real estate (nonaccrual construction and land development, commercial real estate, and residential real estate loans).
• Individually evaluated impaired loans equal to or greater than $250,000 not secured by real estate (nonaccrual commercial and industrial and consumer installment loans).

The following tables set forth certain information regarding the Company's impaired loans that were individually evaluated for impairment at September 30, 2013 andDecember 31, 2012.

				September 30, 2013
(In thousands)				Unpaid principal balance (1)	Charge-offs and payments applied (2)	Recorded investment (3)		Related allowance
With no allowance recorded:
Commercial and industrial			$	136	—	136
Construction and land development				2,879	(1,682)	1,197
Commercial real estate:
	Owner occupied			1,220	(180)	1,040
	Other			516	(90)	426
		Total commercial real estate		1,736	(270)	1,466
Residential real estate:
	Consumer mortgages			958	(186)	772
	Investment property			340	(123)	217
		Total residential real estate		1,298	(309)	989
		Total	$	6,049	(2,261)	3,788
With allowance recorded:
Construction and land development			$	457	(61)	396	$	99
Commercial real estate:
	Owner occupied			882	—	882		117
	Other			608	—	608		68
		Total commercial real estate		1,490	—	1,490		185
		Total	$	1,947	(61)	1,886	$	284
		Total impaired loans	$	7,996	(2,322)	5,674	$	284
(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, 2012
(In thousands)				Unpaid principal balance (1)	Charge-offs and payments applied (2)	Recorded investment (3)		Related allowance
With no allowance recorded:
Commercial and industrial			$	169	—	169
Construction and land development				2,879	(1,682)	1,197
Commercial real estate:
	Owner occupied			787	(212)	575
	Other			7,914	(1,862)	6,052
		Total commercial real estate		8,701	(2,074)	6,627
Residential real estate:
	Consumer mortgages			971	(152)	819
	Investment property			508	(110)	398
		Total residential real estate		1,479	(262)	1,217
		Total	$	13,228	(4,018)	9,210
With allowance recorded:
Construction and land development			$	471	(45)	426	$	129
Commercial real estate:
	Owner occupied			899	—	899		134
		Total commercial real estate		899	—	899		134
		Total	$	1,370	(45)	1,325	$	263
		Total impaired loans	$	14,598	(4,063)	10,535	$	263
(1) Unpaid principal balance represents the contractual obligation due from the customer.
(2) Charge-offs and payments applied represents cumulative charge-offs taken, as well as interest payments that have been
	applied against the outstanding principal balance subsequent to the loans being placed on nonaccrual status.
(3) Recorded investment represents the unpaid principal balance less charge-offs and payments applied; it is shown before
	any related allowance for loan losses.

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

				Quarter ended September 30, 2013		Nine months ended September 30, 2013
				Average	Total interest	Average	Total interest
				recorded	income	recorded	income
(In thousands)				investment	recognized	investment	recognized
Impaired loans:
Commercial and industrial			$	139	2	152	7
Construction and land development				1,596	—	1,608	—
Commercial real estate:
	Owner occupied			1,927	13	1,993	42
	Other			832	4	1,581	4
		Total commercial real estate		2,759	17	3,574	46
Residential real estate:
	Consumer mortgages			776	—	801	—
	Investment property			231	—	323	—
		Total residential real estate		1,007	—	1,124	—
		Total	$	5,501	19	6,458	53

				Quarter ended September 30, 2012		Nine months ended September 30, 2012
				Average	Total interest	Average	Total interest
				recorded	income	recorded	income
(In thousands)				investment	recognized	investment	recognized
Impaired loans:
Commercial and industrial			$	189	3	200	11
Construction and land development				3,801	—	4,357	—
Commercial real estate:
	Owner occupied			2,468	14	2,537	49
	Other			2,211	—	1,713	—
		Total commercial real estate		4,679	14	4,250	49
Residential real estate:
	Consumer mortgages			846	—	870	—
	Investment property			855	—	650	—
		Total residential real estate		1,701	—	1,520	—
		Total	$	10,370	17	10,327	60

Troubled Debt Restructurings

Impaired loans also include troubled debt restructurings (“TDRs”). In the normal course of business, management may grant concessions to borrowers thatare experiencing financial difficulty. A concession may include, but is not limited to,delays in required payments of principal and interest for a specified period, reduction of the stated interest rate of the loan, reduction of accrued interest, extension of the maturity date or reduction of the face amount or maturity amount of the debt. A concession has been granted when, as a result of the restructuring, the Bank does not expect to collect all amounts due, including interest at the original stated rate. A concession may have also been granted if the debtor is not able to access funds elsewhere at a market rate for debt with similar risk characteristics as the restructured debt. The Company's 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 evaluated, including those that have payment defaults, for possible impairment.

The following is a summary of accruing and nonaccrual TDRs, which are included in impaired loan totals, and the related allowance for loan losses, by portfolio segment and class as of September 30, 2013, and December 31, 2012.

				TDRs
								Related
(In thousands)				Accruing	Nonaccrual	Total		Allowance
September 30, 2013
Commercial and industrial			$	136	—	136	$	—
Construction and land development				—	1,593	1,593		99
Commercial real estate:
	Owner occupied			882	292	1,174		117
	Other			608	426	1,034		68
		Total commercial real estate		1,490	718	2,208		185
Residential real estate:
	Consumer mortgages			—	772	772		—
	Investment property			—	217	217		—
		Total residential real estate		—	989	989		—
		Total	$	1,626	3,300	4,926	$	284

December 31, 2012
Commercial and industrial			$	169	—	169	$	—
Construction and land development				—	1,623	1,623		129
Commercial real estate:
	Owner occupied			899	1,045	1,944		134
	Other			—	432	432		—
		Total commercial real estate		899	1,477	2,376		134
Residential real estate:
	Consumer mortgages			—	819	819		—
	Investment property			—	188	188		—
		Total residential real estate		—	1,007	1,007		—
		Total	$	1,068	4,107	5,175	$	263

At September 30, 2013, there were no significant outstanding commitments to advance additional funds to customers whose loans had been restructured.

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

			Quarter ended September 30,				Nine Months ended September 30,
					Pre-	Post -			Pre-	Post -
					modification	modification			modification	modification
			Number		outstanding	outstanding	Number		outstanding	outstanding
			of		recorded	recorded	of		recorded	recorded
(Dollars in thousands)			contracts		investment	investment	contracts		investment	investment
2013:
Commercial real estate:
	Owner occupied		1	$	882	882	1	$	882	882
	Other		1		606	610	1		1,037	1,041
		Total commercial real estate	2		1,488	1,492	2		1,919	1,923
Residential real estate:
	Consumer mortgages		1		678	674	2		808	804
		Total residential real estate	1		678	674	2		808	804
		Total	3	$	2,166	2,166	4	$	2,727	2,727
2012:
Construction and land development			1	$	2,138	2,119	3	$	4,981	3,873
Commercial real estate:
	Owner occupied		—		—	—	4		3,167	2,225
	Other		—		—	—	2		1,804	1,657
		Total commercial real estate	—		—	—	6		4,971	3,882
Residential real estate:
	Consumer mortgages		—		—	—	2		863	857
	Investment property		1		375	373	1		375	373
		Total residential real estate	1		375	373	3		1,238	1,230
		Total	2	$	2,513	2,492	12	$	11,190	8,985

The majority of the loans modified in a TDR during the quarters and nine-month periods ended September 30,2013 and 2012, respectively,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.

For the nine months ended September 30, 2012, the decrease in the post modification outstanding recorded investment was primarily due to principal payments made by borrowers at the date of modification for construction and land development loans and A/B note restructurings for two owner occupied commercial real estate loans. Total charge-offs related to B notes were $0.9 million for the nine months ended September 30, 2012.

The following table summarizes the recorded investment in loans modified in a TDR within the previous 12 months for which there was a payment default (defined as 90 days or more past due) during the respective periods.

			Quarter ended September 30,			Nine months ended September 30,
			Number of		Recorded	Number of		Recorded
(Dollars in thousands)			Contracts		investment(1)	Contracts		investment(1)
2013:
Construction and land development			—	$	—	1	$	1,197
Commercial real estate:
	Other		1		426	1		426
		Total commercial real estate	1		426	1		426
		Total	1	$	426	2	$	1,623
2012:
Construction and land development			—	$	—	1	$	2,386
		Total	—	$	—	1	$	2,386
(1) Amount as of applicable month end during the respective period for which there was a payment default.

XML

Securities Credit Impaired Debt Securities (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Changes in the credit loss component of credit-impaired debt securities
Other Than Temporary Impairment Credit Losses Recognized In Earnings Credit Losses On Debt Securities Held	$ 757	$ 1,257	$ 1,257	$ 3,276
Other than Temporary Impairment, Credit Losses Recognized in Earnings, Additions, Additional Credit Losses	0	0	0	130
Other Than Temporary Impairment Credit Losses Recognized In Earnings, Reductions, Securities Sold	0	0	0	2,149
Other Than Temporary Impairment Credit Losses Recognized In Earnings, Reductions, Securities Fully Written Down And Deemed Worthless	0	0	500	0
Other Than Temporary Impairment Credit Losses Recognized In Earnings Credit Losses On Debt Securities Held	$ 757	$ 1,257	$ 757	$ 1,257

XML

Mortgage Servicing Rights, Net (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Servicing Asset at Amortized Value, Balance [Roll Forward]
Servicing Asset at Amortized Cost, Beginning	$ 1,979	$ 1,319	$ 1,526	$ 1,245
Servicing Asset at Amortized Value, Additions	215	330	693	696
Servicing Asset at Amortized Value, Amortization	(78)	(107)	(304)	(290)
Servicing Asset at Amortized Value, Change In Valuation Allowance	172	(101)	373	(210)
Servicing Asset at Amortized Cost, Ending	2,288	1,441	2,288	1,441
Valuation Allowance for Impairment of Recognized Servicing Assets, Balance [Abstract]
Valuation Allowance for Impairment of Recognized Servicing Assets, Beginning Balance	185	226	386	117
Valuation Allowance for Impairment of Recognized Servicing Assets, Ending Balance	13	327	13	327
Servicing Asset at Amortized Value, Fair Value [Abstract]
Servicing Asset at Amortized Value, Fair Value, Beginning	2,453	1,319	1,526	1,245
Servicing Asset at Amortized Value, Fair Value, Ending	$ 3,167	$ 1,476	$ 3,167	$ 1,476

XML

Fair Value Disclosures

9 Months Ended

Sep. 30, 2013

Fair Value Disclosures [Abstract]

Fair Value Disclosures Text Block

NOTE 8: FAIR VALUE

Fair Value Hierarchy

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

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

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

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

Level changes in fair value measurements

Transfers between levels of the fair value hierarchy are generally recognized at the end of the reporting period. The Company monitors the valuation techniques utilized for each category of financial assets and liabilities to ascertain when transfers between levels have been affected. The nature of the Company's financial assets and liabilities generally is such that transfers in and out of any level are expected to be infrequent. For the nine months endedSeptember 30,2013, 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, market consensus prepayment speeds, benchmark yields, reported trades, 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.

Fair values of individual issuer trust preferred securities were measured using Level 3 inputs. The valuation of individual issuer trust preferred securities requires significant management judgment due to the absence of observable quoted market prices, inherent lack of liquidity, and the long-term nature of such assets. In order to assist management in making its determination of fair value, the Company engages a third party firm who specializes in valuing illiquidsecurities. The third party firm utilizes a discounted cash flow model to estimate the fair value measurements for these securities. In making its final determination of fair value, management reviews the reasonableness of projected cash flows and the credit spread utilized in the discounted cash flow model after evaluating the financial performance of the individual community bank holding companies. The credit spread that is included in the discount rate applied to the projected future cash flows is an unobservable input that is significant to the overall fair value measurement for these securities. Significant increases (decreases) in the credit spread could result in a lower (higher) fair value measurement. Because these trust preferred securities were issued by individual community banks, the credit spread will generally increase when the financial performance of the issuer deteriorates and decrease as the financial performance of the issuer improves.

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 September 30, 2013 and December 31, 2012, respectively, by caption, on the accompanying consolidated balance sheets by ASC 820 valuation hierarchy (as described above).

					Quoted Prices in	Significant
					Active Markets	Other	Significant
					for	Observable	Unobservable
					Identical Assets	Inputs	Inputs
(Dollars in thousands)				Amount	(Level 1)	(Level 2)	(Level 3)
September 30, 2013:
Securities available-for-sale:
	Agency obligations		$	45,823	—	45,823	—
	Agency RMBS			145,990	—	145,990	—
	State and political subdivisions			66,912	—	66,912	—
	Trust preferred securities			742	—	—	742
Total securities available-for-sale				259,467	—	258,725	742
Other assets (1)				923	—	923	—
		Total assets at fair value	$	260,390	—	259,648	742
Other liabilities(1)			$	923	—	923	—
		Total liabilities at fair value	$	923	—	923	—
December 31, 2012:
Securities available-for-sale:
	Agency obligations		$	39,525	—	39,525	—
	Agency RMBS			141,460	—	141,460	—
	State and political subdivisions			77,838	—	77,838	—
	Trust preferred securities			652	—	—	652
Total securities available-for-sale				259,475	—	258,823	652
Other assets (1)				1,210	—	1,210	—
		Total assets at fair value	$	260,685	—	260,033	652
Other liabilities(1)			$	1,210	—	1,210	—
		Total liabilities at fair value	$	1,210	—	1,210	—
(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 canbe 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 based on management's historical knowledge, changes in market conditions from the date of the most recent appraisal, and/or management's expertise and knowledge of the customer and the customer's business. Such discounts by management are subjective and are typically significant unobservable inputs for determining fair value. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors discussed above.

Other real estate owned

Other real estate owned, consisting of properties obtained through foreclosure or in satisfaction of loans, are initially recorded at the lower of the loan's carrying amount or the fair value less costs to sell upon transfer of the loans to other real estate. Subsequently, other real estate is carried at the lower of carrying value or fair value less costs to sell. Fair values are generally based on third party appraisals of the property, resulting in a Level 3 classification. 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 rate, default rates, cost to service, escrow account earnings, contractual servicing fee income, ancillary income, and late fees. Periodically, the Company will review broker surveys and other market research to validate significant assumptions used in the model. The significant unobservable inputs include prepayment speeds or the constant prepayment rate (“CPR”) and the weighted average discount rate. Because the valuation of MSRs requires the use of significant unobservable inputs, all of the Company's MSRs are classified within Level 3 of the valuation hierarchy.

The following table presents the balances of the assets and liabilities measured at fair value on a nonrecurring basis as of September 30, 2013 and December 31, 2012, 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
				Identical Assets	Inputs	Inputs
(Dollars in thousands)			Amount	(Level 1)	(Level 2)	(Level 3)
September 30, 2013:
Loans held for sale		$	2,367	—	2,367	—
Loans, net(1)			5,390	—	—	5,390
Other real estate owned			4,585	—	—	4,585
Other assets (2)			2,288	—	—	2,288
	Total assets at fair value	$	14,630	—	2,367	12,263
December 31, 2012:
Loans held for sale		$	2,887	—	2,887	—
Loans, net(1)			10,272	—	—	10,272
Other real estate owned			4,919	—	—	4,919
Other assets (2)			1,526	—	—	1,526
	Total assets at fair value	$	19,604	—	2,887	16,717
(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 the carrying value of MSRs, net.

Quantitative Disclosures for Level 3 Fair Value Measurements

The following is a reconciliation of the beginning and ending balances of recurring fair value measurements for trust preferred securitiesrecognized in the accompanying consolidated balance sheets using Level 3 inputs:

				Nine months ended September 30,
(Dollars in thousands)				2013		2012
Beginning balance			$	652	$	1,986
	Total realized and unrealized gains and (losses):
		Included in net earnings		—		(6)
		Included in other comprehensive income		90		115
	Sales			—		(974)
	Settlements			—		(500)
Ending balance			$	742	$	621

For Level 3 assets measured at fair value on a recurring or non-recurring basis as of September 30, 2013, 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
Recurring:
Trust preferred securities	$	742	Discounted cash flow	Credit spread (basis points)	529	bp
Nonrecurring:
Impaired loans	$	5,390	Appraisal	Appraisal discounts (%)	15.3	%
Other real estate owned		4,585	Appraisal	Appraisal discounts (%)	8.8	%
Mortgage servicing rights, net		2,288	Discounted cash flow	Prepayment speed or CPR (%)	7.5	%
				Discount rate (%)	10.0	%

Fair Value of Financial Instruments

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

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

Loans, net

Fair values for loans were calculated using discounted cash flows. The discount rates reflected current rates at which similar loans would be made for the same remaining maturities. This method of estimating fair value does not incorporate the exit-price concept of fair value prescribed by ASC 820 and generally produces a higher value than an exit-price approach. Expected future cash flows were projected based on contractual cash flows, adjusted for estimated prepayments.

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 September 30, 2013 and December 31, 2012 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, interest-bearing demand, and savings deposits due to these products having nostated 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
September 30, 2013:
Financial Assets:
	Loans, net (1)	$	374,759	$	383,699	$	—	$	—	$	383,699
Financial Liabilities:
	Time Deposits	$	263,496	$	266,707	$	—	$	266,707	$	—
	Long-term debt		22,217		23,505		—		23,505		—
December 31, 2012:
Financial Assets:
	Loans, net (1)	$	391,470	$	399,533	$	—	$	—	$	399,533
Financial Liabilities:
	Time Deposits	$	263,195	$	267,636	$	—	$	267,636	$	—
	Long-term debt		47,217		51,752		—		51,752		—
(1) Represents loans, net of unearned income and the allowance for loan losses.

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Securities

9 Months Ended

Sep. 30, 2013

Investments debt and equity securities [Abstract]

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

NOTE 4: SECURITIES

At September 30, 2013 and December 31,2012, respectively, all securities within the scope of ASC 320, Investments – Debt and Equity Securities,were classified as available-for-sale. The fair value and amortized cost for securities available-for-sale by contractual maturityat September 30, 2013 and December 31,2012, respectively, are presented below.

			1 year	1 to 5	5 to 10	After 10	Fair	Gross Unrealized		Amortized
(Dollars in thousands)			or less	years	years	years	Value	Gains	Losses	Cost
September 30, 2013
Agency obligations (a)		$	—	—	23,744	22,079	45,823	—	3,253	$	49,076
Agency RMBS (a)			—	—	3,679	142,311	145,990	1,196	3,179		147,973
State and political subdivisions			—	2,096	19,739	45,077	66,912	1,998	399		65,313
Trust preferred securities			—	—	—	742	742	164	115		693
	Total available-for-sale	$	—	2,096	47,162	210,209	259,467	3,358	6,946	$	263,055

December 31, 2012
Agency obligations (a)		$	—	—	20,065	19,460	39,525	187	19	$	39,357
Agency RMBS (a)			—	—	4,700	136,760	141,460	3,012	162		138,610
State and political subdivisions			111	1,830	21,006	54,891	77,838	5,222	—		72,616
Trust preferred securities			—	—	—	652	652	113	154		693
	Total available-for-sale	$	111	1,830	45,771	211,763	259,475	8,534	335	$	251,276
(a) Includes securities issued by U.S. government agencies or government sponsored entities.

Securities with aggregate fair values of $135.8million and $134.0 million at September 30,2013 and December 31, 2012, 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$1.8million and $3.0 million at September 30,2013 and December 31, 2012, 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 September 30,2013 and December 31, 2012, respectively, segregated by those securities that have been in an unrealized loss position for less than 12 months and 12 months or longer, are presented below.

			Less than 12 Months		12 Months or Longer			Total
			Fair	Unrealized	Fair	Unrealized		Fair	Unrealized
(Dollars in thousands)			Value	Losses	Value	Losses		Value	Losses
September 30, 2013:
Agency obligations		$	45,822	3,253	—	—	$	45,822	3,253
Agency RMBS			95,325	3,179	—	—		95,325	3,179
State and political subdivisions			7,751	399	—	—		7,751	399
Trust preferred securities			—	—	385	115	$	385	115
	Total	$	148,898	6,831	385	115	$	149,283	6,946

December 31, 2012:
Agency obligations		$	9,966	19	—	—	$	9,966	19
Agency RMBS			25,207	162	—	—		25,207	162
Trust preferred securities			—	—	346	154		346	154
	Total	$	35,173	181	346	154	$	35,519	335

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 residential mortgage-backed securities (“RMBS”)

The unrealized losses associated with agency 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.

Trust preferred securities

The unrealized losses associated with individual issuer trust preferred securities were primarily driven by wider credit spreads. Management evaluates the financial performance ofindividual community bank holding companies on a quarterly basis to determine if it is probable that such issuer can make all contractual principal and interest payments. Based upon its evaluation, the Company expects to recover the remaining amortized cost basis of these securities.

Cost-method investments

At September 30, 2013, cost-method investments with an aggregate cost of $1.8 million were not evaluated for impairment because the Company did not identify any events or changes in circumstances that may have a significant adverse effect on the fair value of these cost-method investments.

The carrying values of the Company's investment securities could decline in the future if the financial condition of individual issuers of trust preferred securities, or the credit quality of other securities deteriorate 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 significant other-than-temporary impairment charges may occur in the future.

Other-Than-Temporarily Impaired Securities

The following table presents a roll-forward of the credit loss component of the amortized cost of debt securities that the Company has written down for other-than-temporary impairment and has recognized the credit component of the loss in earnings (referred to as “credit-impaired” debt securities). Other-than-temporary impairmentsrecognized in earnings for credit-impaired debt securities are presented as additions in two components based upon whether the current period is the first time the debt security was credit-impaired (initial credit impairment) or is not the first time the debt security was credit-impaired (subsequent credit impairments). The credit loss component is reduced if the Company sells, intends to sell, or believesit will be required to sell previously credit-impaired debt securities. Additionally, the credit loss component is reduced if the Company receives cash flows in excess of what it expected to receive over the remaining life of the credit-impaired debt security, the security matures orthe security is fully written-down and deemed worthless. Changes in the credit loss component of credit-impaired debt securities for the respective periods are presented below.

				Quarter ended September 30,				Nine months ended September 30,
(Dollars in thousands)				2013		2012		2013		2012
Balance, beginning of period			$	757	$	1,257	$	1,257	$	3,276
	Additions:
		Subsequent credit impairments		—		—		—		130
	Reductions:
		Securities sold		—		—		—		2,149
		Securities fully written down and deemed worthless		—		—		500		—
Balance, end of period			$	757	$	1,257	$	757	$	1,257

Other-Than-TemporaryImpairment

The following table presents details of the other-than-temporary impairment related to securities

					Quarter ended September 30,				Nine months ended September 30,
(Dollars in thousands)					2013		2012		2013		2012
Other-than-temporary impairment charges
	(included in earnings):
	Debt securities:
		Individual issuer trust preferred securities		$	—	$	—	$	—	$	130
			Total debt securities		—		—		—		130
Total other-than-temporary impairment charges				$	—	$	—	$	—	$	130
Other-than-temporary impairment on debt securities:
	Recorded as part of gross realized losses:
		Credit-related		$	—	$	—	$	—	$	130
Total other-than-temporary impairment on debt securities				$	—	$	—	$	—	$	130

Realized Gains and Losses
	The following table presents the gross realized gains and losses on sales and other-than-temporary impairment charges
related to securities.
			Quarter ended September 30,				Nine months ended September 30,
(Dollars in thousands)			2013		2012		2013		2012
Gross realized gains		$	—	$	203	$	685	$	927
Gross realized losses			—		(25)		(6)		(189)
Other-than-temporary impairment charges			—		—		—		(130)
	Realized gains, net	$	—	$	178	$	679	$	608

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Consolidated Statements of Stockholders' Equity (Parentheticals) (USD $)	9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012
Statement of Stockholders' Equity (Parentheticals)
Cash dividends paid per share	$ 0.630	$ 0.615
Sales of Treasury Stock	155.00	165.00

XML

Fair Value Financial Instruments (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Carrying (Reported) Amount, Fair Value Disclosure [Member]
Fair Value, Financial Assets: [Abstract]
Fair Value, Financial Instruments, Loans, Net	$ 374,759	$ 391,470
Fair Value, Financial Liabilities: [Abstract]
Fair Value, Financial Instruments, Time Deposits	263,496	263,195
Fair Value, Financial Instruments, Long-term Debt	22,217	47,217
Estimate of Fair Value, Fair Value Disclosure [Member]
Fair Value, Financial Assets: [Abstract]
Fair Value, Financial Instruments, Loans, Net	383,699	399,533
Fair Value, Financial Liabilities: [Abstract]
Fair Value, Financial Instruments, Time Deposits	266,707	267,636
Fair Value, Financial Instruments, Long-term Debt	23,505	51,752
Fair Value, Inputs, Level 1 [Member]
Fair Value, Financial Assets: [Abstract]
Fair Value, Financial Instruments, Loans, Net	0	0
Fair Value, Financial Liabilities: [Abstract]
Fair Value, Financial Instruments, Time Deposits	0	0
Fair Value, Financial Instruments, Long-term Debt	0	0
Fair Value, Inputs, Level 2 [Member]
Fair Value, Financial Assets: [Abstract]
Fair Value, Financial Instruments, Loans, Net	0	0
Fair Value, Financial Liabilities: [Abstract]
Fair Value, Financial Instruments, Time Deposits	266,707	267,636
Fair Value, Financial Instruments, Long-term Debt	23,505	51,752
Fair Value, Inputs, Level 3 [Member]
Fair Value, Financial Assets: [Abstract]
Fair Value, Financial Instruments, Loans, Net	383,699	399,533
Fair Value, Financial Liabilities: [Abstract]
Fair Value, Financial Instruments, Time Deposits	0	0
Fair Value, Financial Instruments, Long-term Debt	$ 0	$ 0

XML

Securities Textuals (Details) (USD $) In Millions, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Securities (Textuals) [Abstract]
Available-for-sale Securities Pledged as Collateral	$ 135.80	$ 134.00
Cost-method Investments, Aggregate Carrying Amount	$ 1.80	$ 3.00

XML

Variable Interest Entities (Tables)

9 Months Ended

Sep. 30, 2013

Variable interest entity [Abstract]

Variable Interest Entity [Table Text Block]

	Maximum	Liability
(Dollars in thousands)	Loss Exposure	Recognized	Classification
Type:
Trust preferred issuances	N/A	$ 7,217	Long-term debt

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Derivative Instruments

9 Months Ended

Sep. 30, 2013

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 theaccompanying 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. At September 30, 2013 and December 31,2012, the Company had no derivative contracts designated as part of a hedging relationship to assist in managing its interest rate sensitivity.

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 agreementsatSeptember 30,2013and December 31,2012is presented below.

				Other	Other
				Assets	Liabilities
				Estimated	Estimated
(Dollars in thousands)			Notional	Fair Value	Fair Value
September 30, 2013:
Pay fixed / receive variable		$	5,104	—	923
Pay variable / receive fixed			5,104	923	—
	Total interest rate swap agreements	$	10,208	923	923
December 31, 2012:
Pay fixed / receive variable		$	5,367	—	1,210
Pay variable / receive fixed			5,367	1,210	—
	Total interest rate swap agreements	$	10,734	1,210	1,210

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Mortgage Servicing Rights, Net(Table)

9 Months Ended

Sep. 30, 2013

Mortgage Servicing [Abstract]

Schedule Of Servicing Assets At Fair Value Text Block

		Quarter ended September 30,				Nine months ended September 30,
(Dollars in thousands)		2013		2012		2013		2012
MSRs, net:
Beginning balance	$	1,979	$	1,319	$	1,526	$	1,245
Additions, net		215		330		693		696
Amortization expense		(78)		(107)		(304)		(290)
Change in valuation allowance		172		(101)		373		(210)
Ending balance	$	2,288	$	1,441	$	2,288	$	1,441
Valuation allowance included in MSRs, net:
Beginning of period	$	185	$	226	$	386	$	117
End of period		13		327		13		327
Fair value of amortized MSRs:
Beginning of period	$	2,453	$	1,319	$	1,526	$	1,245
End of period		3,167		1,476		3,167		1,476

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Securities (Tables)

9 Months Ended

Sep. 30, 2013

Investments debt and equity securities [Abstract]

Available-for-sale Securities [Table Text Block]

			1 year	1 to 5	5 to 10	After 10	Fair	Gross Unrealized		Amortized
(Dollars in thousands)			or less	years	years	years	Value	Gains	Losses	Cost
September 30, 2013
Agency obligations (a)		$	—	—	23,744	22,079	45,823	—	3,253	$	49,076
Agency RMBS (a)			—	—	3,679	142,311	145,990	1,196	3,179		147,973
State and political subdivisions			—	2,096	19,739	45,077	66,912	1,998	399		65,313
Trust preferred securities			—	—	—	742	742	164	115		693
	Total available-for-sale	$	—	2,096	47,162	210,209	259,467	3,358	6,946	$	263,055

December 31, 2012
Agency obligations (a)		$	—	—	20,065	19,460	39,525	187	19	$	39,357
Agency RMBS (a)			—	—	4,700	136,760	141,460	3,012	162		138,610
State and political subdivisions			111	1,830	21,006	54,891	77,838	5,222	—		72,616
Trust preferred securities			—	—	—	652	652	113	154		693
	Total available-for-sale	$	111	1,830	45,771	211,763	259,475	8,534	335	$	251,276
(a) Includes securities issued by U.S. government agencies or government sponsored entities.

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

			Less than 12 Months		12 Months or Longer			Total
			Fair	Unrealized	Fair	Unrealized		Fair	Unrealized
(Dollars in thousands)			Value	Losses	Value	Losses		Value	Losses
September 30, 2013:
Agency obligations		$	45,822	3,253	—	—	$	45,822	3,253
Agency RMBS			95,325	3,179	—	—		95,325	3,179
State and political subdivisions			7,751	399	—	—		7,751	399
Trust preferred securities			—	—	385	115	$	385	115
	Total	$	148,898	6,831	385	115	$	149,283	6,946

December 31, 2012:
Agency obligations		$	9,966	19	—	—	$	9,966	19
Agency RMBS			25,207	162	—	—		25,207	162
Trust preferred securities			—	—	346	154		346	154
	Total	$	35,173	181	346	154	$	35,519	335

Other than Temporary Impairment, Credit Losses Recognized in Earnings [Table Text Block]

				Quarter ended September 30,				Nine months ended September 30,
(Dollars in thousands)				2013		2012		2013		2012
Balance, beginning of period			$	757	$	1,257	$	1,257	$	3,276
	Additions:
		Subsequent credit impairments		—		—		—		130
	Reductions:
		Securities sold		—		—		—		2,149
		Securities fully written down and deemed worthless		—		—		500		—
Balance, end of period			$	757	$	1,257	$	757	$	1,257

Available For Sale Securiites Changes In Other Than Temporary Impairment Losses [Table Text Block]

					Quarter ended September 30,				Nine months ended September 30,
(Dollars in thousands)					2013		2012		2013		2012
Other-than-temporary impairment charges
	(included in earnings):
	Debt securities:
		Individual issuer trust preferred securities		$	—	$	—	$	—	$	130
			Total debt securities		—		—		—		130
Total other-than-temporary impairment charges				$	—	$	—	$	—	$	130
Other-than-temporary impairment on debt securities:
	Recorded as part of gross realized losses:
		Credit-related		$	—	$	—	$	—	$	130
Total other-than-temporary impairment on debt securities				$	—	$	—	$	—	$	130

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

Realized Gains and Losses
	The following table presents the gross realized gains and losses on sales and other-than-temporary impairment charges
related to securities.
			Quarter ended September 30,				Nine months ended September 30,
(Dollars in thousands)			2013		2012		2013		2012
Gross realized gains		$	—	$	203	$	685	$	927
Gross realized losses			—		(25)		(6)		(189)
Other-than-temporary impairment charges			—		—		—		(130)
	Realized gains, net	$	—	$	178	$	679	$	608

XML

Document and Entity Information	9 Months Ended
	Sep. 30, 2013	Oct. 31, 2013
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
Entity voluntary filers	No
Entity well known seasoned issuer	No
Entity common stock shares outstanding		3,643,118
Amendment flag	false
Document Type	10-Q
Document Year Focus	2013
Document Period Focus	Q3
Document Period End Date	Sep. 30, 2013

XML

Loan and Allowance for Loan Loss (Tables)

9 Months Ended

Sep. 30, 2013

Loans And Leases Receivable Disclosure

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

				September 30,		December 31,
(In thousands)				2013		2012
Commercial and industrial			$	58,766	$	59,334
Construction and land development				37,062		37,631
Commercial real estate:
	Owner occupied			57,082		64,368
	Other			113,438		119,243
		Total commercial real estate		170,520		183,611
Residential real estate:
	Consumer mortgage			57,032		58,087
	Investment property			45,533		47,544
		Total residential real estate		102,565		105,631
Consumer installment				12,170		12,219
		Total loans		381,083		398,426
Less: unearned income				(378)		(233)
		Loans, net of unearned income	$	380,705	$	398,193

Past Due Financing Receivables [Table Text Block]

					Accruing	Accruing	Total
					30-89 Days	Greater than	Accruing	Non-		Total
(In thousands)			Current		Past Due	90 days	Loans	Accrual		Loans
September 30, 2013:
Commercial and industrial			$	58,260	444	6	58,710	56	$	58,766
Construction and land development				35,470	—	—	35,470	1,592		37,062
Commercial real estate:
	Owner occupied			55,992	49	—	56,041	1,041		57,082
	Other			113,012	—	—	113,012	426		113,438
		Total commercial real estate		169,004	49	—	169,053	1,467		170,520
Residential real estate:
	Consumer mortgage			55,814	200	93	56,107	925		57,032
	Investment property			44,859	289	—	45,148	385		45,533
		Total residential real estate		100,673	489	93	101,255	1,310		102,565
Consumer installment				12,130	40	—	12,170	—		12,170
		Total	$	375,537	1,022	99	376,658	4,425	$	381,083

December 31, 2012:
Commercial and industrial			$	59,101	173	—	59,274	60	$	59,334
Construction and land development				35,917	8	—	35,925	1,706		37,631
Commercial real estate:
	Owner occupied			63,323	—	—	63,323	1,045		64,368
	Other			113,344	230	—	113,574	5,669		119,243
		Total commercial real estate		176,667	230	—	176,897	6,714		183,611
Residential real estate:
	Consumer mortgage			55,521	1,202	58	56,781	1,306		58,087
	Investment property			46,460	335	—	46,795	749		47,544
		Total residential real estate		101,981	1,537	58	103,576	2,055		105,631
Consumer installment				12,157	62	—	12,219	—		12,219
		Total	$	385,823	2,010	58	387,891	10,535	$	398,426

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

			September 30, 2013
(In thousands)		Commercial and industrial		Construction and land development	Commercial real estate	Residential real estate	Consumer installment		Total
Quarter ended:
Beginning balance		$	675	1,454	3,111	1,125	92	$	6,457
Charge-offs			(177)	(137)	(103)	(144)	—		(561)
Recoveries			23	1	21	—	5		50
	Net (charge-offs) recoveries		(154)	(136)	(82)	(144)	5		(511)
Provision			25	(129)	75	1	28		—
Ending balance		$	546	1,189	3,104	982	125	$	5,946

Nine months ended:
Beginning balance		$	812	1,545	3,137	1,126	103	$	6,723
Charge-offs			(245)	(39)	(262)	(558)	(199)		(1,303)
Recoveries			40	5	4	62	15		126
	Net charge-offs		(205)	(34)	(258)	(496)	(184)		(1,177)
Provision			(61)	(322)	225	352	206		400
Ending balance		$	546	1,189	3,104	982	125	$	5,946

			September 30, 2012
(In thousands)		Commercial and industrial		Construction and land development	Commercial real estate	Residential real estate	Consumer installment		Total
Quarter ended:
Beginning balance		$	731	1,623	2,817	1,278	54		6,503
Charge-offs			(152)	—	(1,626)	(324)	(35)	$	(2,137)
Recoveries			20	—	71	35	3	$	129
	Net charge-offs		(132)	—	(1,555)	(289)	(32)		(2,008)
Provision			155	(14)	1,396	(42)	55	$	1,550
Ending balance		$	754	1,609	2,658	947	77	$	6,045

Nine months ended:
Beginning balance		$	948	1,470	3,009	1,363	129	$	6,919
Charge-offs			(246)	(231)	(2,844)	(435)	(68)		(3,824)
Recoveries			28	1	71	85	15		200
	Net charge-offs		(218)	(230)	(2,773)	(350)	(53)		(3,624)
Provision			24	369	2,422	(66)	1		2,750
Ending balance		$	754	1,609	2,658	947	77	$	6,045

FinancingReceivableAllowanceforCreditLossAdditionalInformationTableTextBlock

			Collectively evaluated (1)		Individually evaluated (2)		Total
			Allowance	Recorded	Allowance	Recorded	Allowance	Recorded
			for loan	investment	for loan	investment	for loan	investment
(In thousands)			losses	in loans	losses	in loans	losses	in loans
September 30, 2013:
Commercial and industrial		$	546	58,630	—	136	546	58,766
Construction and land development			1,090	35,469	99	1,593	1,189	37,062
Commercial real estate			2,919	167,564	185	2,956	3,104	170,520
Residential real estate			982	101,576	—	989	982	102,565
Consumer installment			125	12,170	—	—	125	12,170
	Total	$	5,662	375,409	284	5,674	5,946	381,083

September 30, 2012:
Commercial and industrial		$	754	58,395	—	184	754	58,579
Construction and land development			1,468	36,817	141	3,756	1,609	40,573
Commercial real estate			2,519	175,733	139	8,024	2,658	183,757
Residential real estate			915	101,297	32	2,022	947	103,319
Consumer installment			77	11,747	—	—	77	11,747
	Total	$	5,733	383,989	312	13,986	6,045	397,975
(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 unimpaired loans.
(2)	Represents loans individually evaluated for impairment in accordance with ASC 310-30, Receivables (formerly FAS 114), and
	pursuant to amendments by ASU 2010-20 regarding allowance for impaired loans.

Financing Receivable Credit Quality Indicators [Table Text Block]

(In thousands)				Pass	Special Mention	Substandard Accruing	Nonaccrual		Total loans
September 30, 2013:
Commercial and industrial			$	53,776	4,184	750	56	$	58,766
Construction and land development				34,175	177	1,118	1,592		37,062
Commercial real estate:
	Owner occupied			54,076	1,083	882	1,041		57,082
	Other			111,231	963	818	426		113,438
		Total commercial real estate		165,307	2,046	1,700	1,467		170,520
Residential real estate:
	Consumer mortgage			49,264	1,147	5,696	925		57,032
	Investment property			41,808	1,619	1,721	385		45,533
		Total residential real estate		91,072	2,766	7,417	1,310		102,565
Consumer installment				11,970	39	161	—		12,170
		Total	$	356,300	9,212	11,146	4,425	$	381,083

December 31, 2012:
Commercial and industrial			$	58,487	224	563	60	$	59,334
Construction and land development				34,490	310	1,125	1,706		37,631
Commercial real estate:
	Owner occupied			59,270	2,528	1,525	1,045		64,368
	Other			111,719	653	1,202	5,669		119,243
		Total commercial real estate		170,989	3,181	2,727	6,714		183,611
Residential real estate:
	Consumer mortgage			49,462	1,544	5,775	1,306		58,087
	Investment property			43,559	1,033	2,203	749		47,544
		Total residential real estate		93,021	2,577	7,978	2,055		105,631
Consumer installment				11,850	155	214	—		12,219
		Total	$	368,837	6,447	12,607	10,535	$	398,426

Impaired Financing Receivables [Table Text Block]

				September 30, 2013
(In thousands)				Unpaid principal balance (1)	Charge-offs and payments applied (2)	Recorded investment (3)		Related allowance
With no allowance recorded:
Commercial and industrial			$	136	—	136
Construction and land development				2,879	(1,682)	1,197
Commercial real estate:
	Owner occupied			1,220	(180)	1,040
	Other			516	(90)	426
		Total commercial real estate		1,736	(270)	1,466
Residential real estate:
	Consumer mortgages			958	(186)	772
	Investment property			340	(123)	217
		Total residential real estate		1,298	(309)	989
		Total	$	6,049	(2,261)	3,788
With allowance recorded:
Construction and land development			$	457	(61)	396	$	99
Commercial real estate:
	Owner occupied			882	—	882		117
	Other			608	—	608		68
		Total commercial real estate		1,490	—	1,490		185
		Total	$	1,947	(61)	1,886	$	284
		Total impaired loans	$	7,996	(2,322)	5,674	$	284
(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, 2012
(In thousands)				Unpaid principal balance (1)	Charge-offs and payments applied (2)	Recorded investment (3)		Related allowance
With no allowance recorded:
Commercial and industrial			$	169	—	169
Construction and land development				2,879	(1,682)	1,197
Commercial real estate:
	Owner occupied			787	(212)	575
	Other			7,914	(1,862)	6,052
		Total commercial real estate		8,701	(2,074)	6,627
Residential real estate:
	Consumer mortgages			971	(152)	819
	Investment property			508	(110)	398
		Total residential real estate		1,479	(262)	1,217
		Total	$	13,228	(4,018)	9,210
With allowance recorded:
Construction and land development			$	471	(45)	426	$	129
Commercial real estate:
	Owner occupied			899	—	899		134
		Total commercial real estate		899	—	899		134
		Total	$	1,370	(45)	1,325	$	263
		Total impaired loans	$	14,598	(4,063)	10,535	$	263
(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.

ScheduleOfAverageImpairedFinancingReceivableTableTextBlock

				Quarter ended September 30, 2013		Nine months ended September 30, 2013
				Average	Total interest	Average	Total interest
				recorded	income	recorded	income
(In thousands)				investment	recognized	investment	recognized
Impaired loans:
Commercial and industrial			$	139	2	152	7
Construction and land development				1,596	—	1,608	—
Commercial real estate:
	Owner occupied			1,927	13	1,993	42
	Other			832	4	1,581	4
		Total commercial real estate		2,759	17	3,574	46
Residential real estate:
	Consumer mortgages			776	—	801	—
	Investment property			231	—	323	—
		Total residential real estate		1,007	—	1,124	—
		Total	$	5,501	19	6,458	53

				Quarter ended September 30, 2012		Nine months ended September 30, 2012
				Average	Total interest	Average	Total interest
				recorded	income	recorded	income
(In thousands)				investment	recognized	investment	recognized
Impaired loans:
Commercial and industrial			$	189	3	200	11
Construction and land development				3,801	—	4,357	—
Commercial real estate:
	Owner occupied			2,468	14	2,537	49
	Other			2,211	—	1,713	—
		Total commercial real estate		4,679	14	4,250	49
Residential real estate:
	Consumer mortgages			846	—	870	—
	Investment property			855	—	650	—
		Total residential real estate		1,701	—	1,520	—
		Total	$	10,370	17	10,327	60

Troubled Debt Restructurings on Financing Receivables [Table Text Block]

				TDRs
								Related
(In thousands)				Accruing	Nonaccrual	Total		Allowance
September 30, 2013
Commercial and industrial			$	136	—	136	$	—
Construction and land development				—	1,593	1,593		99
Commercial real estate:
	Owner occupied			882	292	1,174		117
	Other			608	426	1,034		68
		Total commercial real estate		1,490	718	2,208		185
Residential real estate:
	Consumer mortgages			—	772	772		—
	Investment property			—	217	217		—
		Total residential real estate		—	989	989		—
		Total	$	1,626	3,300	4,926	$	284

December 31, 2012
Commercial and industrial			$	169	—	169	$	—
Construction and land development				—	1,623	1,623		129
Commercial real estate:
	Owner occupied			899	1,045	1,944		134
	Other			—	432	432		—
		Total commercial real estate		899	1,477	2,376		134
Residential real estate:
	Consumer mortgages			—	819	819		—
	Investment property			—	188	188		—
		Total residential real estate		—	1,007	1,007		—
		Total	$	1,068	4,107	5,175	$	263

			Quarter ended September 30,				Nine Months ended September 30,
					Pre-	Post -			Pre-	Post -
					modification	modification			modification	modification
			Number		outstanding	outstanding	Number		outstanding	outstanding
			of		recorded	recorded	of		recorded	recorded
(Dollars in thousands)			contracts		investment	investment	contracts		investment	investment
2013:
Commercial real estate:
	Owner occupied		1	$	882	882	1	$	882	882
	Other		1		606	610	1		1,037	1,041
		Total commercial real estate	2		1,488	1,492	2		1,919	1,923
Residential real estate:
	Consumer mortgages		1		678	674	2		808	804
		Total residential real estate	1		678	674	2		808	804
		Total	3	$	2,166	2,166	4	$	2,727	2,727
2012:
Construction and land development			1	$	2,138	2,119	3	$	4,981	3,873
Commercial real estate:
	Owner occupied		—		—	—	4		3,167	2,225
	Other		—		—	—	2		1,804	1,657
		Total commercial real estate	—		—	—	6		4,971	3,882
Residential real estate:
	Consumer mortgages		—		—	—	2		863	857
	Investment property		1		375	373	1		375	373
		Total residential real estate	1		375	373	3		1,238	1,230
		Total	2	$	2,513	2,492	12	$	11,190	8,985

			Quarter ended September 30,			Nine months ended September 30,
			Number of		Recorded	Number of		Recorded
(Dollars in thousands)			Contracts		investment(1)	Contracts		investment(1)
2013:
Construction and land development			—	$	—	1	$	1,197
Commercial real estate:
	Other		1		426	1		426
		Total commercial real estate	1		426	1		426
		Total	1	$	426	2	$	1,623
2012:
Construction and land development			—	$	—	1	$	2,386
		Total	—	$	—	1	$	2,386
(1) Amount as of applicable month end during the respective period for which there was a payment default.