10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2014

[   ] 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 July 31, 2014
Common Stock, $0.01 par value per share	3,643,328 shares

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

INDEX

	PAGE
PART I. FINANCIAL INFORMATION
Item 1  Financial Statements
Consolidated Balance Sheets (Unaudited) as of June 30, 2014 and December 31, 2013		3
Consolidated Statements of Earnings (Unaudited) for the quarter and six months ended June  30, 2014 and 2013		4
Consolidated Statements of Comprehensive Income (Unaudited) for the quarter and six months ended June  30, 2014 and 2013		5
Consolidated Statements of Stockholders’ Equity (Unaudited) for the six months ended June  30, 2014 and 2013		6
Consolidated Statements of Cash Flows (Unaudited) for the six months ended June 30, 2014 and 2013		7
Notes to Consolidated Financial Statements (Unaudited)		8
Item 2   Management’s Discussion and Analysis of Financial Condition and Results of Operations		30
Table 1 – Explanation of Non-GAAP Financial Measures		48
Table 2 – Selected Quarterly Financial Data		49
Table 3 – Selected Financial Data		50
Table 4 – Average Balances and Net Interest Income Analysis – for the quarter ended June  30, 2014 and 2013		51
Table 5 – Average Balances and Net Interest Income Analysis – for the six months ended June  30, 2014 and 2013		52
Table 6 – Loan Portfolio Composition		53
Table 7 – Allowance for Loan Losses and Nonperforming Assets		54
Table 8 – Allocation of Allowance for Loan Losses		55
Table 9 – CDs and Other Time Deposits of $100,000 or more		56
Item 3  Quantitative and Qualitative Disclosures About Market Risk		57
Item 4  Controls and Procedures		57
PART II. OTHER INFORMATION
Item 1  Legal Proceedings		57
Item 1A  Risk Factors		57
Item 2  Unregistered Sales of Equity Securities and Use of Proceeds		57
Item 3  Defaults Upon Senior Securities		57
Item 4  Mine Safety Disclosures		57
Item 5  Other Information		58
Item 6  Exhibits		58

PART 1. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Unaudited)

(Dollars in thousands, except share data)	June 30, 2014		December 31, 2013
Assets:
Cash and due from banks	$	14,966	$	13,437
Federal funds sold		43,311		26,965
Interest bearing bank deposits		11,933		13,820
Cash and cash equivalents		70,210		54,222
Securities available-for-sale		276,953		271,219
Loans held for sale		7,200		2,296
Loans, net of unearned income		385,826		383,339
Allowance for loan losses		(4,728)		(5,268)
Loans, net		381,098		378,071
Premises and equipment, net		10,269		10,442
Bank-owned life insurance		17,754		17,503
Other real estate owned		1,584		3,884
Other assets		10,060		13,706
Total assets	$	775,128	$	751,343
Liabilities:
Deposits:
Noninterest-bearing	$	130,355	$	125,740
Interest-bearing		553,826		543,104
Total deposits		684,181		668,844
Federal funds purchased and securities sold under agreements to repurchase		3,316		3,363
Long-term debt		12,217		12,217
Accrued expenses and other liabilities		3,123		2,434
Total liabilities		702,837		686,858
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		3,763		3,759
Retained earnings		73,992		71,879
Accumulated other comprehensive income (loss), net		1,136		(4,552)
Less treasury stock, at cost - 313,807 shares and 314,017 shares at June 30, 2014 and December 31, 2013, respectively		(6,639)		(6,640)
Total stockholders’ equity		72,291		64,485
Total liabilities and stockholders’ equity	$	775,128	$	751,343

See accompanying notes to consolidated financial statements

3

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

Consolidated Statements of Earnings

(Unaudited)

	Quarter ended June 30,				Six Months Ended June 30,
(In thousands, except share and per share data)	2014		2013		2014		2013
Interest income:
Loans, including fees	$	4,766	$	5,224	$	9,556	$	10,552
Securities:
Taxable		1,214		899		2,390		1,773
Tax-exempt		607		708		1,234		1,450
Federal funds sold and interest bearing bank deposits		30		29		72		60
Total interest income		6,617		6,860		13,252		13,835
Interest expense:
Deposits		1,255		1,349		2,512		2,753
Short-term borrowings		5		3		9		7
Long-term debt		104		276		208		702
Total interest expense		1,364		1,628		2,729		3,462
Net interest income		5,253		5,232		10,523		10,373
Provision for loan losses		—		—		(400)		400
Net interest income after provision for loan losses		5,253		5,232		10,923		9,973
Noninterest income:
Service charges on deposit accounts		219		234		432		483
Mortgage lending		348		837		734		1,647
Bank-owned life insurance		125		101		251		196
Other		377		381		715		721
Securities gains, net:
Realized gains, net		12		518		38		679
Total other-than-temporary impairments		—		—		(333)		—
Total securities gains (losses), net		12		518		(295)		679
Total noninterest income		1,081		2,071		1,837		3,726
Noninterest expense:
Salaries and benefits		2,221		2,114		4,502		4,364
Net occupancy and equipment		341		333		693		664
Professional fees		225		209		431		385
FDIC and other regulatory assessments		129		143		274		337
Other real estate owned, net		(62)		20		56		43
Prepayment penalties on long-term debt		—		1,046		—		1,471
Other		938		859		1,784		1,686
Total noninterest expense		3,792		4,724		7,740		8,950
Earnings before income taxes		2,542		2,579		5,020		4,749
Income tax expense		683		672		1,340		1,153
Net earnings	$	1,859	$	1,907	$	3,680	$	3,596
Net earnings per share:
Basic and diluted	$	0.51	$	0.52	$	1.01	$	0.99
Weighted average shares outstanding:
Basic and diluted		3,643,295		3,642,955		3,643,228		3,642,936

See accompanying notes to consolidated financial statements

4

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(Unaudited)

	Quarter ended June 30,				Six Months Ended June 30,
(Dollars in thousands)	2014		2013		2014		2013
Net earnings	$	1,859	$	1,907	$	3,680	$	3,596
Other comprehensive income (loss), net of tax:
Unrealized net holding gain (loss) on securities		2,937		(5,821)		5,502		(6,577)
Reclassification adjustment for net (gain) loss on securities recognized in net earnings		(8)		(327)		186		(428)
Other comprehensive income (loss)		2,929		(6,148)		5,688		(7,005)
Comprehensive income (loss)	$	4,788	$	(4,241)	$	9,368	$	(3,409)

See accompanying notes to consolidated financial statements

5

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

(Unaudited)

									Accumulated
					Additional				other
	Common Stock				paid-in		Retained		comprehensive		Treasury
(Dollars in thousands, except share data)	Shares		Amount		capital		earnings		income (loss)		stock		Total
Balance, December 31, 2012		3,957,135	$	39	$	3,756	$	67,821	$	5,174	$	(6,641)	$	70,149
Net earnings		—		—		—		3,596		—		—		3,596
Other comprehensive loss		—		—		—		—		(7,005)		—		(7,005)
Cash dividends paid ($0.42 per share)		—		—		—		(1,530)		—		—		(1,530)
Sale of treasury stock (90 shares)		—		—		1		—		—		—		1
Balance, June 30, 2013		3,957,135	$	39	$	3,757	$	69,887	$	(1,831)	$	(6,641)	$	65,211
Balance, December 31, 2013		3,957,135	$	39	$	3,759	$	71,879	$	(4,552)	$	(6,640)	$	64,485
Net earnings		—		—		—		3,680		—		—		3,680
Other comprehensive income		—		—		—		—		5,688		—		5,688
Cash dividends paid ($0.43 per share)		—		—		—		(1,567)		—		—		(1,567)
Sale of treasury stock (210 shares)		—		—		4		—		—		1		5
Balance, June 30, 2014		3,957,135	$	39	$	3,763	$	73,992	$	1,136	$	(6,639)	$	72,291

See accompanying notes to consolidated financial statements

6

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

	Six Months Ended June 30,
(In thousands)	2014		2013
Cash flows from operating activities:
Net earnings	$	3,680	$	3,596
Adjustments to reconcile net earnings to net cash provided by operating activities:
Provision for loan losses		(400)		400
Depreciation and amortization		366		448
Premium amortization and discount accretion, net		776		1,143
Net loss (gain) on securities available-for-sale		295		(679)
Net gain on sale of loans held for sale		(494)		(1,258)
Increase (decrease) in MSR valuation allowance		43		(201)
Net loss (gain) on other real estate owned		42		(47)
Loss on prepayment of long-term debt		—		1,471
Loans originated for sale		(29,459)		(61,382)
Proceeds from sale of loans		24,847		60,225
Increase in cash surrender value of bank owned life insurance		(251)		(196)
Net decrease in other assets		71		1,262
Net increase in accrued expenses and other liabilities		694		916
Net cash provided by operating activities		210		5,698
Cash flows from investing activities:
Proceeds from sales of securities available-for-sale		18,354		37,859
Proceeds from maturities of securities available-for-sale		18,127		39,179
Purchase of securities available-for-sale		(34,273)		(99,923)
(Increase) decrease in loans, net		(3,021)		6,159
Net purchases of premises and equipment		(19)		(471)
Decrease in FHLB stock		235		1,153
Proceeds from sale of other real estate owned		2,652		1,999
Net cash provided by (used in) investing activities		2,055		(14,045)
Cash flows from financing activities:
Net increase in noninterest-bearing deposits		4,615		9,175
Net increase in interest-bearing deposits		10,722		20,498
Net (decrease) increase in federal funds purchased and securities sold under agreements to repurchase		(47)		2,264
Repayments or retirement of long-term debt		—		(21,471)
Dividends paid		(1,567)		(1,530)
Net cash provided by financing activities		13,723		8,936
Net change in cash and cash equivalents		15,988		589
Cash and cash equivalents at beginning of period		54,222		61,949
Cash and cash equivalents at end of period	$	70,210	$	62,538
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	2,777	$	3,548
Income taxes		506		254
Supplemental disclosure of non-cash transactions:
Real estate acquired through foreclosure		394		642

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, 2013.

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.

Reclassifications

Certain amounts reported in prior periods have been reclassified to conform to the current-period presentation. These reclassifications had no impact on the Company’s previously reported net earnings or total stockholders’ equity.

Subsequent Events

The Company has evaluated the effects of events and transactions through the date of this filing that have occurred subsequent to June 30, 2014. The Company does not believe there were any material subsequent events during this period that would have required further recognition or disclosure in the unaudited consolidated financial statements included in this report.

Accounting Developments

In the first quarter of 2014, the Company adopted new guidance related to the following Accounting Standards Update (“Update” or “ASU”):

• 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.

8

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. The changes were effective for the Company during the first quarter of 2014. Adoption of this ASU had no impact on the financial statements of the Company.

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 June 30, 2014 and 2013, 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 June 30,				Six Months Ended June 30,
(In thousands, except share and per share data)	2014		2013		2014		2013
Basic and diluted:
Net earnings	$	1,859	$	1,907	$	3,680	$	3,596
Weighted average common shares outstanding		3,643,295		3,642,955		3,643,228		3,642,936
Earnings per share	$	0.51	$	0.52	$	1.01	$	0.99

NOTE 3: VARIABLE INTEREST ENTITIES

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

At June 30, 2014, 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 June 30, 2014.

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

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NOTE 4: SECURITIES

At June 30, 2014 and December 31, 2013, 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 June 30, 2014 and December 31, 2013, respectively, are presented below.

	1 year		1 to 5		5 to 10		After 10		Fair		Gross Unrealized				Amortized
(Dollars in thousands)	or less		years		years		years		Value		Gains		Losses		Cost
June 30, 2014
Agency obligations (a)	$	—		13,306		34,535		22,910		70,751		293		1,914	$	72,372
Agency RMBS (a)		—		—		7,535		133,470		141,005		2,009		1,523		140,519
State and political subdivisions		—		679		17,898		46,620		65,197		2,977		42		62,262
Total available-for-sale	$	—		13,985		59,968		203,000		276,953		5,279		3,479	$	275,153
December 31, 2013
Agency obligations (a)	$	—		—		23,247		21,275		44,522		—		4,557	$	49,079
Agency RMBS (a)		—		—		8,306		154,052		162,358		976		4,733		166,115
State and political subdivisions		—		1,735		21,366		41,238		64,339		1,560		459		63,238
Total available-for-sale	$	—		1,735		52,919		216,565		271,219		2,536		9,749	$	278,432

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

Securities with aggregate fair values of $137.4 million and $120.5 million at June 30, 2014 and December 31, 2013, 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 $1.6 million and $1.8 million at June 30, 2014 and December 31, 2013, respectively. Cost-method investments primarily include non-marketable equity investments, such as FHLB of Atlanta stock and Federal Reserve Bank (“FRB”) stock.

Gross Unrealized Losses and Fair Value

The fair values and gross unrealized losses on securities at June 30, 2014 and December 31, 2013, 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
June 30, 2014:
Agency obligations	$	—		—		42,172		1,914	$	42,172		1,914
Agency RMBS		—		—		67,063		1,523		67,063		1,523
State and political subdivisions		1,892		25		2,290		17		4,182		42
Total	$	1,892		25		111,525		3,454	$	113,417		3,479
December 31, 2013:
Agency obligations	$	35,933		3,182		8,590		1,376	$	44,523		4,558
Agency RMBS		109,774		4,393		7,683		339		117,457		4,732
State and political subdivisions		9,575		459		—		—		9,575		459
Total	$	155,282		8,034		16,273		1,715	$	171,555		9,749

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

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

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

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

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

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

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

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

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

Agency obligations

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

Agency RMBS

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

Securities of U.S. states and political subdivisions

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

Cost-method investments

At June 30, 2014, cost-method investments with an aggregate cost of $1.6 million were not evaluated for impairment because the Company did not identify any events or changes in circumstances that may have a significant adverse effect on the fair value of these cost-method investments.

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

11

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 June 30,				Six Months Ended June 30,
(Dollars in thousands)	2014		2013		2014		2013
Balance, beginning of period	$	—	$	1,257	$	—	$	1,257
Reductions:
Securities fully written down and deemed worthless		—		500		—		500
Balance, end of period	$	—	$	757	$	—	$	757

Other-Than-Temporary Impairment

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

	Quarter ended June 30,				Six Months Ended June 30,
(Dollars in thousands)	2014		2013		2014		2013
Other-than-temporary impairment charges
Debt securities:
Agency RMBS	$	—	$	—	$	333	$	—
Total debt securities		—		—		333		—
Total other-than-temporary impairment charges	$	—	$	—	$	333	$	—
Other-than-temporary impairment on debt securities:
Recorded as part of gross realized losses:
Securities with intent to sell		—		—		333		—
Total other-than-temporary impairment on debt securities	$	—	$	—	$	333	$	—

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 June 30,				Six Months Ended June 30,
(Dollars in thousands)	2014		2013		2014		2013
Gross realized gains	$	12	$	524	$	38	$	685
Gross realized losses		—		(6)		—		(6)
Other-than-temporary impairment charges		—		—		(333)		—
Realized gains (losses), net	$	12	$	518	$	(295)	$	679

12

NOTE 5: LOANS AND ALLOWANCE FOR LOAN LOSSES

	June 30,		December 31,
(In thousands)	2014		2013
Commercial and industrial	$	52,054	$	57,780
Construction and land development		32,461		36,479
Commercial real estate:
Owner occupied		52,571		56,102
Other		134,670		118,818
Total commercial real estate		187,241		174,920
Residential real estate:
Consumer mortgage		59,257		57,871
Investment property		43,664		43,835
Total residential real estate		102,921		101,706
Consumer installment		11,686		12,893
Total loans		386,363		383,778
Less: unearned income		(537)		(439)
Loans, net of unearned income	$	385,826	$	383,339

Loans secured by real estate were approximately 83.5% of the Company’s total loan portfolio at June 30, 2014. At June 30, 2014, 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.

13

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

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

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

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

The following is a summary of current, accruing past due and nonaccrual loans by portfolio segment and class as of June 30, 2014, and December 31, 2013.

			Accruing		Accruing		Total
			30-89 Days		Greater than		Accruing		Non-		Total
(In thousands)	Current		Past Due		90 days		Loans		Accrual		Loans
June 30, 2014:
Commercial and industrial	$	51,725		277		—		52,002		52	$	52,054
Construction and land development		31,306		192		—		31,498		963		32,461
Commercial real estate:
Owner occupied		52,295		—		—		52,295		276		52,571
Other		134,460		—		—		134,460		210		134,670
Total commercial real estate		186,755		—		—		186,755		486		187,241
Residential real estate:
Consumer mortgage		57,582		715		71		58,368		889		59,257
Investment property		43,133		117		—		43,250		414		43,664
Total residential real estate		100,715		832		71		101,618		1,303		102,921
Consumer installment		11,576		110		—		11,686		—		11,686
Total	$	382,077		1,411		71		383,559		2,804	$	386,363
December 31, 2013:
Commercial and industrial	$	57,558		167		—		57,725		55	$	57,780
Construction and land development		34,883		14		—		34,897		1,582		36,479
Commercial real estate:
Owner occupied		54,214		861		—		55,075		1,027		56,102
Other		118,389		—		—		118,389		429		118,818
Total commercial real estate		172,603		861		—		173,464		1,456		174,920
Residential real estate:
Consumer mortgage		56,191		745		69		57,005		866		57,871
Investment property		42,935		598		—		43,533		302		43,835
Total residential real estate		99,126		1,343		69		100,538		1,168		101,706
Consumer installment		12,789		100		4		12,893		—		12,893
Total	$	376,959		2,485		73		379,517		4,261	$	383,778

14

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 June 30, 2014 and December 31, 2013, 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 2014 and 2013, the Company implemented certain refinements to its allowance for loan losses methodology, specifically the way that historical loss factors are calculated. Beginning with the quarter ended June 30, 2014, the Company calculated average losses for all loan segments using a rolling 20 quarter historical period in order to better capture the effects of the most

15

recent economic cycle on the Company’s loan loss experience. Beginning with the quarter ended June 30, 2013, the Company calculated average losses for all loan segments using a rolling 8 quarter historical period (except for the commercial real estate loan segment, which used a 6 quarter historical period) and continued this methodology through March 31, 2014. Prior to June 30, 2013, the Company calculated average losses for all loan segments using a rolling 6 quarter historical period.

If the Company continued to calculate average losses for all loan segments other than commercial real estate using a rolling 8 quarter historical period and for the commercial real estate segment using a rolling 6 quarter historical period, the Company’s calculated allowance for loan loss allocation would have decreased by approximately $1.0 million at June 30, 2014. 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.

	June 30, 2014
(In thousands)	Commercial and industrial		Construction and land development		Commercial real estate		Residential real estate		Consumer installment		Total
Quarter ended:
Beginning balance	$	482		214		2,493		1,256		266	$	4,711
Charge-offs		(46)		—		—		(41)		(8)		(95)
Recoveries		32		1		—		74		5		112
Net (charge-offs) recoveries		(14)		1		—		33		(3)		17
Provision for loan losses		171		692		(580)		(194)		(89)		—
Ending balance	$	639		907		1,913		1,095		174	$	4,728
Six months ended:
Beginning balance	$	386		366		3,186		1,114		216	$	5,268
Charge-offs		(46)		(236)		—		(72)		(44)		(398)
Recoveries		36		3		118		91		10		258
Net (charge-offs) recoveries		(10)		(233)		118		19		(34)		(140)
Provision for loan losses		263		774		(1,391)		(38)		(8)		(400)
Ending balance	$	639		907		1,913		1,095		174	$	4,728
	June 30, 2013
(In thousands)	Commercial and industrial		Construction and land development		Commercial real estate		Residential real estate		Consumer installment		Total
Quarter ended:
Beginning balance	$	569		1,619		3,571		885		125		6,769
Charge-offs		—		—		(118)		(189)		(45)	$	(352)
Recoveries		5		2		—		28		5	$	40
Net recoveries (charge-offs)		5		2		(118)		(161)		(40)		(312)
Provision for loan losses		101		(167)		(342)		401		7	$	—
Ending balance	$	675		1,454		3,111		1,125		92	$	6,457
Six months ended:
Beginning balance	$	812		1,545		3,137		1,126		103	$	6,723
Charge-offs		(68)		(39)		(118)		(455)		(62)		(742)
Recoveries		17		3		4		41		11		76
Net charge-offs		(51)		(36)		(114)		(414)		(51)		(666)
Provision for loan losses		(86)		(55)		88		413		40		400
Ending balance	$	675		1,454		3,111		1,125		92	$	6,457

16

The following table presents an analysis of the allowance for loan losses and recorded investment in loans by portfolio segment and impairment methodology as of June 30, 2014 and 2013.

	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
June 30, 2014:
Commercial and industrial	$	639		51,959		—		95		639		52,054
Construction and land development		907		31,498		—		963		907		32,461
Commercial real estate		1,744		185,302		169		1,939		1,913		187,241
Residential real estate		1,095		102,040		—		881		1,095		102,921
Consumer installment		174		11,686		—		—		174		11,686
Total	$	4,559		382,485		169		3,878		4,728		386,363
June 30, 2013:
Commercial and industrial	$	675		55,882		—		148		675		56,030
Construction and land development		1,347		44,285		107		1,601		1,454		45,886
Commercial real estate		2,991		174,922		120		2,369		3,111		177,291
Residential real estate		1,069		97,732		56		1,289		1,125		99,021
Consumer installment		92		12,747		—		—		92		12,747
Total	$	6,174		385,568		283		5,407		6,457		390,975

(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.

17

Credit Quality Indicators

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

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

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

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

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

(In thousands)	Pass		Special Mention		Substandard Accruing		Nonaccrual		Total loans
June 30, 2014:
Commercial and industrial	$	47,157		4,448		397		52	$	52,054
Construction and land development		30,285		638		575		963		32,461
Commercial real estate:
Owner occupied		50,904		1,206		185		276		52,571
Other		133,581		89		790		210		134,670
Total commercial real estate		184,485		1,295		975		486		187,241
Residential real estate:
Consumer mortgage		51,424		3,426		3,518		889		59,257
Investment property		40,702		1,312		1,236		414		43,664
Total residential real estate		92,126		4,738		4,754		1,303		102,921
Consumer installment		11,547		28		111		—		11,686
Total	$	365,600		11,147		6,812		2,804	$	386,363
December 31, 2013:
Commercial and industrial	$	53,060		4,183		482		55	$	57,780
Construction and land development		33,616		180		1,101		1,582		36,479
Commercial real estate:
Owner occupied		53,430		770		875		1,027		56,102
Other		117,490		91		808		429		118,818
Total commercial real estate		170,920		861		1,683		1,456		174,920
Residential real estate:
Consumer mortgage		50,392		1,137		5,476		866		57,871
Investment property		40,517		1,310		1,706		302		43,835
Total residential real estate		90,909		2,447		7,182		1,168		101,706
Consumer installment		12,713		34		146		—		12,893
Total	$	361,218		7,705		10,594		4,261	$	383,778

18

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 June 30, 2014 and December 31, 2013.

	June 30, 2014
(In thousands)	Unpaid principal balance (1)		Charge-offs and payments applied (2)		Recorded investment (3)		Related allowance
With no allowance recorded:
Commercial and industrial	$	95		—		95
Construction and land development		2,960		(1,997)		963
Commercial real estate:
Owner occupied		337		(61)		276
Other		300		(90)		210
Total commercial real estate		637		(151)		486
Residential real estate:
Consumer mortgages		941		(224)		717
Investment property		206		(42)		164
Total residential real estate		1,147		(266)		881
Total	$	4,839		(2,414)		2,425
With allowance recorded:
Commercial real estate:
Owner occupied		861		—		861		117
Other		592		—		592		52
Total commercial real estate		1,453		—		1,453		169
Total	$	1,453		—		1,453	$	169
Total impaired loans	$	6,292		(2,414)		3,878	$	169

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

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

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

19

	December 31, 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	$	124		—		124
Construction and land development		2,879		(1,682)		1,197
Commercial real estate:
Owner occupied		1,217		(190)		1,027
Other		518		(89)		429
Total commercial real estate		1,735		(279)		1,456
Residential real estate:
Consumer mortgages		952		(198)		754
Investment property		207		(35)		172
Total residential real estate		1,159		(233)		926
Total	$	5,897		(2,194)		3,703
With allowance recorded:
Construction and land development		452		(67)		385		88
Commercial real estate:
Owner occupied		875		—		875		110
Other		602		—		602		62
Total commercial real estate		1,477		—		1,477		172
Total	$	1,929		(67)		1,862	$	260
Total impaired loans	$	7,826		(2,261)		5,565	$	260

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

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

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

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

	Quarter ended June 30, 2014				Six months ended June 30, 2014
(In thousands)	Average recorded investment		Total interest income recognized		Average recorded investment		Total interest income recognized
Impaired loans:
Commercial and industrial	$	103		2		111		4
Construction and land development		1,098		—		1,343		—
Commercial real estate:
Owner occupied		1,142		9		1,468		21
Other		949		8		994		17
Total commercial real estate		2,091		17		2,462		38
Residential real estate:
Consumer mortgages		724		—		736		—
Investment property		165		—		168		—
Total residential real estate		889		—		904		—
Total	$	4,181		19		4,820		42

20

	Quarter ended June 30, 2013				Six months ended June 30, 2013
	Average		Total interest		Average		Total interest
	recorded		income		recorded		income
(In thousands)	investment		recognized		investment		recognized
Impaired loans:
Commercial and industrial	$	150		2		158		5
Construction and land development		1,607		—		1,614		—
Commercial real estate:
Owner occupied		1,984		14		2,019		29
Other		430		—		1,902		—
Total commercial real estate		2,414		14		3,921		29
Residential real estate:
Consumer mortgages		789		—		801		—
Investment property		348		—		323		—
Total residential real estate		1,137		—		1,124		—
Total	$	5,308		16		6,817		34

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 individually evaluated 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 June 30, 2014, and December 31, 2013.

	TDRs
(In thousands)	Accruing		Nonaccrual		Total		Related Allowance
June 30, 2014
Commercial and industrial	$	95		—		95	$	—
Construction and land development		—		963		963		—
Commercial real estate:
Owner occupied		861		276		1,137		117
Other		592		210		802		52
Total commercial real estate		1,453		486		1,939		169
Residential real estate:
Consumer mortgages		—		717		717		—
Investment property		—		164		164		—
Total residential real estate		—		881		881		—
Total	$	1,548		2,330		3,878	$	169
December 31, 2013
Commercial and industrial	$	124		—		124	$	—
Construction and land development		—		1,582		1,582		88
Commercial real estate:
Owner occupied		875		285		1,160		110
Other		602		429		1,031		62
Total commercial real estate		1,477		714		2,191		172
Residential real estate:
Consumer mortgages		—		754		754		—
Investment property		—		172		172		—
Total residential real estate		—		926		926		—
Total	$	1,601		3,222		4,823	$	260

At June 30, 2014, 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 TDR during the respective periods both before and after their modification.

	Quarter ended June 30,						Six months ended June 30,
			Pre-		Post -				Pre-		Post -
			modification		modification				modification		modification
	Number		outstanding		outstanding		Number		outstanding		outstanding
	of		recorded		recorded		of		recorded		recorded
(Dollars in thousands)	contracts		investment		investment		contracts		investment		investment
2013:
Commercial real estate:
Other		—	$	—		—		1	$	431		431
Total commercial real estate		—		—		—		1		431		431
Residential real estate:
Consumer mortgages		—		—		—		1		131		131
Total residential real estate		—		—		—		1		131		131
Total		—	$	—		—		2	$	562		562

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There were no loans modified in a TDR during the six months ended June 30, 2014. The majority of the loans modified in a TDR during the six months ended June 30, 2013 included permitting delays in required payments of principal and/or interest or where the only concession granted by the Company was that the interest rate at renewal was considered to be less than a market rate.

The following table summarizes the recorded investment in loans modified in a TDR within the previous 12 months for which there was a payment default (defined as 90 days or more past due) during the respective periods. There were no loans modified in a TDR which had a payment default during the six months ended June 30, 2014.

	Quarter ended June 30,				Six months Ended June 30,
(Dollars in thousands)	Number of Contracts		Recorded investment(1)		Number of Contracts		Recorded investment(1)
2013:
Construction and land development		—	$	—		1	$	1,197
Total		—	$	—		1	$	1,197

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

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

	Quarter ended June 30,				Six Months Ended June 30,
(Dollars in thousands)	2014		2013		2014		2013
MSRs, net:
Beginning balance	$	2,368	$	1,728	$	2,350	$	1,526
Additions, net		105		218		203		478
Amortization expense		(84)		(102)		(164)		(226)
(Increase) decrease in valuation allowance		(43)		135		(43)		201
Ending balance	$	2,346	$	1,979	$	2,346	$	1,979
Valuation allowance included in MSRs, net:
Beginning of period	$	—	$	320	$	—	$	386
End of period		43		185		43		185
Fair value of amortized MSRs:
Beginning of period	$	3,386	$	1,994	$	3,452	$	1,526
End of period		3,228		2,453		3,228		2,453

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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 June 30, 2014 and December 31, 2013, the Company had no derivative contracts to assist in managing its own 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 June 30, 2014 and December 31, 2013 is presented below.

			Other Assets		Other Liabilities
(Dollars in thousands)	Notional		Estimated Fair Value		Estimated Fair Value
June 30, 2014:
Pay fixed / receive variable	$	4,842		—		756
Pay variable / receive fixed		4,842		756		—
Total interest rate swap agreements	$	9,684		756		756
December 31, 2013:
Pay fixed / receive variable	$	5,017		—		844
Pay variable / receive fixed		5,017		844		—
Total interest rate swap agreements	$	10,034		844		844

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NOTE 8: FAIR VALUE

Fair Value Hierarchy

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

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

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

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

Level changes in fair value measurements

Transfers between levels of the fair value hierarchy are generally recognized at the end of the reporting period. The Company monitors the valuation techniques utilized for each category of financial assets and liabilities to ascertain when transfers between levels have been affected. The nature of the Company’s financial assets and liabilities generally is such that transfers in and out of any level are expected to be infrequent. For the six months ended June 30, 2014, 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 for similar securities, market consensus prepayment speeds, credit information and the securities’ terms and conditions. On a quarterly basis, management reviews the pricing received from the third party pricing services for reasonableness given current market conditions. As part of its review, management may obtain non-binding third party broker quotes to validate the fair value measurements. In addition, management will periodically submit pricing provided by the third party pricing services to another independent valuation firm on a sample basis. This independent valuation firm will compare the price provided by the third party pricing service with its own price and will review the significant assumptions and valuation methodologies used with management.

Interest rate swap agreements

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

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The following table presents the balances of the assets and liabilities measured at fair value on a recurring basis as of June 30, 2014 and December 31, 2013, respectively, by caption, on the accompanying consolidated balance sheets by ASC 820 valuation hierarchy (as described above).

			Quoted Prices in		Significant
			Active Markets		Other		Significant
			for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
(Dollars in thousands)	Amount		(Level 1)		(Level 2)		(Level 3)
June 30, 2014:
Securities available-for-sale:
Agency obligations	$	70,751		—		70,751		—
Agency RMBS		141,005		—		141,005		—
State and political subdivisions		65,197		—		65,197		—
Total securities available-for-sale		276,953		—		276,953		—
Other assets (1)		756		—		756		—
Total assets at fair value	$	277,709		—		277,709		—
Other liabilities(1)	$	756		—		756		—
Total liabilities at fair value	$	756		—		756		—
December 31, 2013:
Securities available-for-sale:
Agency obligations	$	44,522		—		44,522		—
Agency RMBS		162,358		—		162,358		—
State and political subdivisions		64,339		—		64,339		—
Total securities available-for-sale		271,219		—		271,219		—
Other assets (1)		844		—		844		—
Total assets at fair value	$	272,063		—		272,063		—
Other liabilities(1)	$	844		—		844		—
Total liabilities at fair value	$	844		—		844		—

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

Assets and liabilities measured at fair value on a nonrecurring basis

Loans held for sale

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

Impaired Loans

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

The fair value of impaired loans were primarily measured based on the value of the collateral securing these loans. Impaired loans are classified within Level 3 of the fair value hierarchy. Collateral may be real estate and/or business assets including equipment, inventory, and/or accounts receivable. The Company determines the value of the collateral based on independent appraisals performed by qualified licensed appraisers. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Appraised values are discounted for costs to sell and may be discounted further based on management’s historical knowledge, changes in market conditions

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

Other real estate owned

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

Mortgage servicing rights, net

Mortgage servicing rights, net, included in other assets on the accompanying consolidated balance sheets, are carried at the lower of cost or estimated fair value. MSRs do not trade in an active market with readily observable prices. To determine the fair value of MSRs, the Company engages an independent third party. The independent third party’s valuation model calculates the present value of estimated future net servicing income using assumptions that market participants would use in estimating future net servicing income, including estimates of prepayment speeds, discount 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 June 30, 2014 and December 31, 2013, respectively, by caption, on the accompanying consolidated balance sheets and by FASB ASC 820 valuation hierarchy (as described above):

			Quoted Prices in
			Active Markets		Other		Significant
			for		Observable		Unobservable
	Carrying		Identical Assets		Inputs		Inputs
(Dollars in thousands)	Amount		(Level 1)		(Level 2)		(Level 3)
June 30, 2014:
Loans held for sale	$	7,200		—		7,200		—
Loans, net(1)		3,709		—		—		3,709
Other real estate owned		1,584		—		—		1,584
Other assets (2)		2,346		—		—		2,346
Total assets at fair value	$	14,839		—		7,200		7,639
December 31, 2013:
Loans held for sale	$	2,296		—		2,296		—
Loans, net(1)		5,305		—		—		5,305
Other real estate owned		3,884		—		—		3,884
Other assets (2)		2,350		—		—		2,350
Total assets at fair value	$	13,835		—		2,296		11,539

⁽¹⁾  Loans considered impaired under ASC 310-10-35 Receivables. This amount reflects the recorded investment in impaired loans, net of any related allowance for loan losses.

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

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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:

	Six Months Ended June 30,
(Dollars in thousands)	2014		2013
Beginning balance	$	—	$	652
Total realized and unrealized gains and (losses):
Included in other comprehensive income		—		42
Ending balance	$	—	$	694

At June 30, 2014, the Company had no Level 3 assets measured at fair value on a recurring basis. For Level 3 assets measured at fair value on a non-recurring basis at June 30, 2014, the significant unobservable inputs used in the fair value measurements are presented below.

					Weighted
	Carrying				Average
(Dollars in thousands)	Amount		Valuation Technique	Significant Unobservable Input	of Input
Nonrecurring:
Impaired loans	$	3,709	Appraisal	Appraisal discounts (%)		17.7%
Other real estate owned		1,584	Appraisal	Appraisal discounts (%)		13.4%
Mortgage servicing rights, net		2,346	Discounted cash flow	Prepayment speed or CPR (%)		9.6%
				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.

Loans held for sale

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

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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 June 30, 2014 and December 31, 2013 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
June 30, 2014:
Financial Assets:
Loans, net (1)	$	381,098	$	381,014	$	—	$	—	$	381,014
Loans held for sale		7,200		7,340		—		7,340		—
Financial Liabilities:
Time Deposits	$	258,356	$	261,410	$	—	$	261,410	$	—
Long-term debt		12,217		12,615		—		12,615		—
December 31, 2013:
Financial Assets:
Loans, net (1)	$	378,071	$	387,180	$	—	$	—	$	387,180
Loans held for sale		2,296		2,310		—		2,310		—
Financial Liabilities:
Time Deposits	$	261,199	$	263,985	$	—	$	263,985	$	—
Long-term debt		12,217		12,569		—		12,569		—

(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 six months ended June 30, 2014 and 2013, as well as the information contained in our annual report on Form 10-K for the year ended December 31, 2013 and our quarterly report on Form 10-Q for the quarter ended March 31, 2014.

Special Notice Regarding Forward-Looking Statements

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

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

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

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

• governmental monetary and fiscal policies;

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

• changes in accounting policies, rules and practices;

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

30

• 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, 2013 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 offices in Montgomery and Phenix City, Alabama.

Summary of Results of Operations

	Quarter ended June 30,				Six Months Ended June 30,
(Dollars in thousands, except per share amounts)	2014		2013		2014		2013
Net interest income (a)	$	5,565	$	5,597	$	11,159	$	11,120
Less: tax-equivalent adjustment		312		365		636		747
Net interest income (GAAP)		5,253		5,232		10,523		10,373
Noninterest income		1,081		2,071		1,837		3,726
Total revenue		6,334		7,303		12,360		14,099
Provision for loan losses		—		—		(400)		400
Noninterest expense		3,792		4,724		7,740		8,950
Income tax expense		683		672		1,340		1,153
Net earnings	$	1,859	$	1,907	$	3,680	$	3,596
Basic and diluted earnings per share	$	0.51	$	0.52	$	1.01	$	0.99

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

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Financial Summary

The Company’s net earnings were $3.7 million for the first six months of 2014, compared to $3.6 million for the first six months of 2013. Basic and diluted earnings per share were $1.01 per share for the first six months of 2014, compared to $0.99 per share for the first six months of 2013.

Net interest income (tax-equivalent) was $11.2 million for the first six months of 2014, compared to $11.1 million for the first six months of 2013. Despite downward pressure on yields for earning assets, net interest income (tax-equivalent) increased slightly due to continued improvement in the Company’s cost of funds.

The Company recorded a negative provision for loan losses of $0.4 million for the first six months of 2014 compared to a charge of $0.4 million for the first six months of 2013. The decrease in the provision for loan losses was primarily due to improvement in the overall credit quality of the loan portfolio, including declining historical loss rates used in the calculation of our allowance for loan losses, and lower levels of adversely classified and nonperforming loans.

Noninterest income was $1.8 million for the first six months of 2014, compared to $3.7 million in the first six months of 2013. The decrease was primarily due to a decrease in mortgage lending income of $0.9 million as higher interest rates for mortgage loans negatively impacted refinance activity and a decrease in net securities gains (losses) of $1.0 million that was primarily due to a decrease in the volume and price of securities sold.

Noninterest expense was approximately $7.7 million in the first six months of 2014, compared to $9.0 million in the first six months of 2013. The decrease was primarily due to a decrease in prepayment penalties on long-term debt. The Company incurred no prepayment penalties during the first six months of 2014, compared to $1.5 million during the first six months of 2013 when the Company repaid a $20.0 million of FHLB advances with a weighted average interest rate of 3.38%.

Income tax expense was approximately $1.3 million for the first six months of 2014, compared to $1.2 million in the first six months of 2013. The Company’s effective tax rate for the first six months of 2014 was 26.69%, compared to 24.28% in the first six months of 2013. The increase in the Company’s effective tax rate was primarily due to decreases in tax exempt interest income as our holdings of municipal securities have declined. In addition, as earnings before income taxes increases, the impact of tax preference items, such as tax exempt interest income, on the Company’s effective tax rate is reduced.

In the first six months of 2014, the Company paid cash dividends of $1.6 million, or $0.43 per share. The Company’s balance sheet remains “well capitalized” under current regulatory guidelines with a total risk-based capital ratio of 18.53% and a Tier 1 leverage ratio of 10.07% at June 30, 2014.

In the second quarter of 2014, net earnings were $1.9 million, of $0.51 per share, compared to $1.9 million, or $0.52 per share for the second quarter of 2013. Net interest income (tax-equivalent) was $5.6 million for the second quarter of 2014 and 2013. Despite downward pressure on yields for earning assets, net interest income (tax-equivalent) was unchanged due to continued improvement in the Company’s cost of funds. There was no provision for loan losses in the second quarter of 2014 and 2013, primarily due to improvement in the overall credit quality of the loan portfolio, including declining historical loss rates used in the calculation of our allowance for loan losses, and lower levels of adversely classified and nonperforming loans. Noninterest income was $1.1 million in the second quarter of 2014, compared to $2.1 million in the second quarter of 2013. The decrease was primarily due to declines in mortgage lending income of $0.5 million and net securities gains of $0.5 million. Noninterest expense was $3.8 million in the second quarter of 2014, compared to $4.7 million in the second quarter of 2013. The decrease was primarily due to $1.0 million of prepayment penalties on long-term debt incurred during the second quarter of 2013, when the Company repaid $10.0 million of long-term debt with a weighted average interest rate of 3.59%. Income tax expense was approximately $0.7 million for the second quarter of 2014 and 2013. The Company’s effective tax rate for the second quarter of 2014 was 26.87%, compared to 26.06% in the second quarter of 2013. 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 2014.

The Company regularly re-evaluates its practices in determining the allowance for loan losses. During 2014, the Company implemented certain refinements to its allowance for loan losses methodology, specifically the way that historical loss factors are calculated. Beginning with the quarter ended June 30, 2014, the Company calculated average losses for all loan segments using a rolling 20 quarter historical period in order to better capture the effects of the most recent economic cycle on the Company’s loan loss experience. Prior to June 30, 2014 the Company calculated average losses for all loan segments using a rolling 8 quarter historical period (except for the commercial real estate loan segment, which used a 6 quarter historical period).

If the Company continued to calculate average losses for all loan segments other than commercial real estate using a rolling 8 quarter historical period and for the commercial real estate segment using a rolling 6 quarter historical period, the Company’s calculated allowance for loan loss allocation would have decreased by approximately $1.0 million at June 30, 2014. 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 June 30, 2014 and December 31, 2013, 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 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 June 30, 2014. 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

	Six Months Ended June 30,
	2014				2013
(Dollars in thousands)	Average Balance		Yield/     Rate		Average     Balance		Yield/     Rate
Loans and loans held for sale	$	380,449		5.07%	$	396,498		5.37%
Securities - taxable		210,223		2.29%		194,205		1.84%
Securities - tax-exempt		60,954		6.19%		70,369		6.30%
Total securities		271,177		3.17%		264,574		3.03%
Federal funds sold		59,385		0.19%		55,881		0.22%
Interest bearing bank deposits		5,171		0.66%		892		—
Total interest-earning assets		716,182		3.91%		717,845		4.10%
Deposits:
NOW		106,812		0.32%		104,851		0.32%
Savings and money market		189,830		0.51%		168,263		0.52%
Certificates of deposits less than $100,000		104,079		1.20%		105,533		1.42%
Certificates of deposits and other time deposits of $100,000 or more		157,509		1.59%		154,745		1.83%
Total interest-bearing deposits		558,230		0.91%		533,392		1.04%
Short-term borrowings		3,440		0.53%		2,754		0.51%
Long-term debt		12,217		3.43%		39,095		3.62%
Total interest-bearing liabilities		573,887		0.96%		575,241		1.21%
Net interest income and margin (tax-equivalent)	$	11,159		3.14%	$	11,120		3.12%

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Net Interest Income and Margin

Net interest income (tax-equivalent) was $11.2 million for the first six months of 2014, compared to $11.1 million for the first six months of 2013. Despite downward pressure on yields for earning assets, net interest income (tax-equivalent) increased slightly due to continued improvement in the Company’s cost of funds.

The tax-equivalent yield on total interest-earning assets decreased by 19 basis points in the first six months of 2014 from the first six months of 2013 to 3.91%. The decrease was primarily due to a decrease in average loans and loan yields as reduced loan demand and increased pricing competition for quality loan opportunities in our markets has limited the Company’s ability to increase loans generally, as well as a decrease in the yields on new and renewed loans over the last several quarters.

The cost of total interest-bearing liabilities decreased 25 basis points in the first six months of 2014 from the first six months of 2013 to 0.96%. The net decrease was largely a result of the continued shift in our funding mix, as we increased our savings and money market accounts and concurrently reduced balances of higher-cost long-term debt, such as wholesale borrowings.

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 Company recorded a negative provision for loan losses of $0.4 million for the first six months of 2014 compared to a charge of $0.4 million for the first six months of 2013. The decrease in the provision for loan losses was primarily due to improvement in the overall credit quality of the loan portfolio, including declining historical loss rates used in the calculation of our allowance for loan losses, and 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 1.23% at June 30, 2014, compared to 1.37% at December 31, 2013. 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 June 30,				Six Months Ended June 30,
(Dollars in thousands)	2014		2013		2014		2013
Service charges on deposit accounts	$	219	$	234	$	432	$	483
Mortgage lending income		348		837		734		1,647
Bank-owned life insurance		125		101		251		196
Securities gains, net		12		518		(295)		679
Other		377		381		715		721
Total noninterest income	$	1,081	$	2,071	$	1,837	$	3,726

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

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

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

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

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

	Quarter ended June 30,				Six Months Ended June 30,
(Dollars in thousands)	2014		2013		2014		2013
Origination income	$	254	$	591	$	494	$	1,258
Servicing fees, net		137		111		283		188
(Increase) decrease in MSR valuation allowance		(43)		135		(43)		201
Total mortgage lending income	$	348	$	837	$	734	$	1,647

The decrease in mortgage lending income was due to a decline in origination income as refinance activity slowed significantly and changes in the MSR valuation allowance. These decreases were partially offset by an increase in servicing fees, net of related amortization expense. Servicing fees increased due to an increase in the unpaid principal balance of loans serviced and amortization expense decreased as prepayment speeds slowed.

The increase in income from bank-owned life insurance was primarily due to improved policy returns. During the fourth quarter of 2013, the Bank exchanged certain bank-owned life insurance policies with a cash surrender value of approximately $5.9 million. These policies were exchanged for policies from two new carriers with better credit ratings and policy returns. The assets that support these policies are administered by the life insurance carriers and the income we receive (i.e. increases or decreases in the cash surrender value of the policies) on these policies is dependent upon the returns the insurance carriers are able to earn on the underlying investments that support these policies. Earnings on these policies are generally not taxable.

Net securities gains (losses) consist of realized gains and losses on the sale of securities and other-than-temporary impairment charges. Net gains realized on the sale of securities were $12,000 and $38,000, respectively, for the second quarter and first six months of 2014, compared to net gains on the sale of securities of $518,000 and $679,000, respectively, for the second quarter and first six months of 2013. The Company recorded an other-than-temporary impairment charge of $333,000 in the first quarter of 2014 related to securities management intended to sell at March 31, 2014. Subsequent to March 31, 2014, the Company sold available-for-sale Agency RMBS with a fair value of $18.9 million and realized the expected loss of approximately $333,000. The Company incurred no other-than-temporary impairment charges in the first six months of 2013.

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Noninterest Expense

	Quarter ended June 30,				Six Months Ended June 30,
(Dollars in thousands)	2014		2013		2014		2013
Salaries and benefits	$	2,221	$	2,114	$	4,502	$	4,364
Net occupancy and equipment		341		333		693		664
Professional fees		225		209		431		385
FDIC and other regulatory assessments		129		143		274		337
Other real estate owned, net		(62)		20		56		43
Prepayment penalty on long-term debt		—		1,046		—		1,471
Other		938		859		1,784		1,686
Total noninterest expense	$	3,792	$	4,724	$	7,740	$	8,950

The increase in salaries and benefits expense reflected routine annual increases.

The increase in net occupancy and equipment expense was primarily due to a decrease in rental income. During the fourth quarter of 2013, the Company sold an office building in downtown Auburn that was leased to third party tenants.

The decrease in FDIC and other regulatory assessments expense was primarily due to a decrease in the Bank’s quarterly assessment rate as several variables utilized by the FDIC in calculating our deposit insurance assessments improved.

The decrease in OREO expense, net for the second quarter of 2014 compared to the second quarter of 2013 was primarily due to gains realized on the sale of certain OREO properties.

During the second quarter and first six months of 2013, respectively, the Company repaid $10.0 million and $20.0 million of FHLB advances with weighted average interest rates of 3.59% and 3.38% and incurred prepayment penalties of $1.0 million and $1.5 million.

Income Tax Expense

Income tax expense was approximately $1.3 million for the first six months of 2014, compared to $1.2 million in the first six months of 2013. The Company’s effective tax rate for the first six months of 2014 was 26.69%, compared to 24.28% in the first six months of 2013. The increase in the Company’s effective tax rate was primarily due to decreases in tax exempt interest income as our holdings of municipal securities have declined. In addition, as earnings before income taxes increases, the impact of tax preference items, such as tax exempt interest income, on the Company’s effective tax rate is reduced.

BALANCE SHEET ANALYSIS

Securities

Securities available-for-sale were $277.0 million at June 30, 2014, an increase of $5.7 million, or 2%, compared to $271.2 million at December 31, 2013. This increase was primarily due to changes in unrealized gains (losses) on securities available-for-sale of $9.0 million, reflecting price gains as long-term interest rates fell during the first six months of 2014. This increase was partially offset by a decrease in the amortized cost basis of securities available-for-sale of $3.3 million.

The average tax-equivalent yields earned on total securities were 3.17% in the first six months of 2014 and 3.03% in the first six months of 2013.

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Loans
	2014				2013
(In thousands)	Second Quarter		First     Quarter		Fourth     Quarter		Third     Quarter		Second     Quarter
Commercial and industrial	$	52,054		54,632		57,780		58,766		56,030
Construction and land development		32,461		31,275		36,479		37,062		45,886
Commercial real estate		187,241		178,721		174,920		170,520		177,291
Residential real estate		102,921		101,433		101,706		102,565		99,021
Consumer installment		11,686		11,766		12,893		12,170		12,747
Total loans		386,363		377,827		383,778		381,083		390,975
Less: unearned income		(537)		(477)		(439)		(378)		(249)
Loans, net of unearned income	$	385,826		377,350		383,339		380,705		390,726

Total loans, net of unearned income, were $385.8 million at June 30, 2014, compared to $383.3 million at December 31, 2013. The increase was primarily due to growth in commercial real estate loans of $12.3 million. This increase was partially offset by decreases in construction and land development loans and commercial and industrial loans of $4.0 million and $5.7 million, respectively. Four loan categories represented the majority of the loan portfolio at June 30, 2014: commercial real estate (49%), residential real estate (27%), construction and land development (8%) and commercial and industrial (14%). Approximately 28% of the Company’s commercial real estate loans were classified as owner-occupied at June 30, 2014.

Within the residential real estate portfolio segment, the Company had junior lien mortgages of approximately $15.9 million, or 4% of total loans, at June 30, 2014, compared to $15.8 million, or 4% of total loans, at December 31, 2013. For residential real estate mortgage loans with a consumer purpose, approximately $1.8 million and $1.2 million required interest-only payments at June 30, 2014 and December 31, 2013, 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 at both June 30, 2014 and December 31, 2013. 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 5.07% in the first six months of 2014 and 5.37% in the first six months of 2013.

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 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 its 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 $16.3 million. Furthermore, we have an internal limit for aggregate credit exposure (loans outstanding plus unfunded commitments) to a single borrower of $14.7 million. Our loan policy requires that the Loan Committee of the Board of Directors approve any loan relationships that exceed this internal limit. At June 30, 2014, the Bank had no loan relationships exceeding these limits.

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We periodically analyze our commercial loan portfolio to determine if a concentration of credit risk exists in any one or more industries. We use classification systems broadly accepted by the financial services industry in order to categorize our commercial borrowers. Loan concentrations to borrowers in the following classes exceeded 25% of the Bank’s total risk-based capital at June 30, 2014 (and related balances at December 31, 2013).

(In thousands)	June 30, 2014		December 31, 2013
Lessors of 1 to 4 family residential properties	$	43,664	$	43,835
Multi-family residential properties		35,538		27,673
Shopping centers		30,834		29,953

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 June 30, 2014 and December 31, 2013, the allowance for loan losses was $4.7 million and $5.3 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 second quarter of 2014 and the previous four quarters is presented below.

	2014				2013
	Second		First		Fourth		Third		Second
(Dollars in thousands)	Quarter		Quarter		Quarter		Quarter		Quarter
Balance at beginning of period	$	4,711		5,268		5,946		6,457		6,769
Charge-offs:
Commercial and industrial		(46)		—		(269)		(177)		—
Construction and land development		—		(236)		—		—		—
Commercial real estate		—		—		—		(144)		(118)
Residential real estate		(41)		(31)		(250)		(103)		(189)
Consumer installment		(8)		(36)		(198)		(137)		(45)
Total charge-offs		(95)		(303)		(717)		(561)		(352)
Recoveries		112		146		39		50		40
Net recoveries (charge-offs)		17		(157)		(678)		(511)		(312)
Provision for loan losses		—		(400)		—		—		—
Ending balance	$	4,728		4,711		5,268		5,946		6,457
as a % of loans		1.23%		1.25		1.37		1.56		1.65
as a % of nonperforming loans		169%		148		124		134		138
Net (recoveries) charge-offs as % of average loans (a)		(0.02)%		0.17		0.71		0.53		0.32

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

As described under “CRITICAL ACCOUNTING POLICIES,” management assesses the adequacy of the allowance prior to the end of each calendar quarter. The level of the allowance is based upon management’s evaluation of the loan portfolios, past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay (including the timing of future payment), the estimated value of any underlying collateral, composition of the loan portfolio, economic conditions, industry and peer bank loan loss rates and other pertinent factors. This evaluation is inherently subjective as it requires various material estimates and judgments, including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. The ratio of our allowance for loan losses to total loans outstanding was 1.23% at June 30, 2014, compared to 1.37% at December 31, 2013. 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.

40

At June 30, 2014, the ratio of our allowance for loan losses as a percentage of nonperforming loans was 169%, compared to 124% at December 31, 2013. The increase primarily relates to a $1.7 million decrease in the recorded investment of nonperforming loans with a related allowance for loan losses of $0.1 million at December 31, 2013.

At June 30, 2014, the Company’s recorded investment in loans considered impaired was $3.9 million, with a corresponding valuation allowance (included in the allowance for loan losses) of $0.2 million. At December 31, 2013, the Company’s recorded investment in loans considered impaired was $5.6 million, with a corresponding valuation allowance (included in the allowance for loan losses) of $0.3 million.

Nonperforming Assets

At June 30, 2014, the Company had $4.4 million in nonperforming assets, compared to $8.1 million at December 31, 2013. The decrease was primarily due to a decline in nonperforming loans and other real estate owned of $1.4 million and $2.3 million, respectively.

The table below provides information concerning total nonperforming assets and certain asset quality ratios for the second quarter of 2014 and the previous four quarters.

	2014				2013
	Second		First		Fourth		Third		Second
(Dollars in thousands)	Quarter		Quarter		Quarter		Quarter		Quarter
Nonperforming assets:
Nonaccrual loans	$	2,804		3,188		4,261		4,425		4,664
Other real estate owned		1,584		3,111		3,884		4,585		3,609
Total nonperforming assets	$	4,388		6,299		8,145		9,010		8,273
as a % of loans and other real estate owned		1.13%		1.66		2.10		2.34		2.10
as a % of total assets		0.57%		0.81		1.08		1.21		1.08
Nonperforming loans as a % of total loans		0.73%		0.84		1.11		1.16		1.19
Accruing loans 90 days or more past due	$	71		131		73		99		—

The table below provides information concerning the composition of nonaccrual loans for the second quarter of 2014 and the previous four quarters.

	2014				2013
	Second		First		Fourth		Third		Second
(In thousands)	Quarter		Quarter		Quarter		Quarter		Quarter
Nonaccrual loans:
Commercial and industrial	$	52		54		55		56		57
Construction and land development		963		1,371		1,582		1,592		1,601
Commercial real estate		486		710		1,456		1,467		1,484
Residential real estate		1,303		1,046		1,168		1,310		1,520
Consumer installment		—		7		—		—		2
Total nonaccrual loans	$	2,804		3,188		4,261		4,425		4,664

The Company discontinues the accrual of interest income when (1) there is a significant deterioration in the financial condition of the borrower and full repayment of principal and interest is not expected or (2) the principal or interest is 90 days or more past due, unless the loan is both well-secured and in the process of collection. At June 30, 2014, the Company had $2.8 million in loans on nonaccrual, compared to $4.3 million at December 31, 2013.

At June 30, 2014, there were $71,000 in loans 90 days or more past due and still accruing interest compared to $73,000 at December 31, 2013.

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The table below provides information concerning the composition of other real estate owned for the second quarter of 2014 and the previous four quarters.

	2014				2013
	Second		First		Fourth		Third		Second
(In thousands)	Quarter		Quarter		Quarter		Quarter		Quarter
Other real estate owned:
Commercial:
Buildings	$	—		1,515		1,772		1,829		535
Developed lots		1,260		1,260		1,260		1,275		1,275
Residential		324		336		852		1,481		1,799
Total other real estate owned	$	1,584		3,111		3,884		4,585		3,609

At June 30, 2014 and December 31, 2013, respectively, the Company held $1.6 million and $3.9 million in OREO, which we acquired from borrowers. At June 30, 2014, approximately 80% of the total balance in OREO related to properties acquired from one borrower.

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 $6.8 million, or 1.8% of total loans at June 30, 2014, compared to $10.6 million, or 2.7% of total loans at December 31, 2013.

The table below provides information concerning the composition of performing potential problem loans for the second quarter of 2014 and the previous four quarters.

	2014				2013
	Second		First		Fourth		Third		Second
(In thousands)	Quarter		Quarter		Quarter		Quarter		Quarter
Potential problem loans:
Commercial and industrial	$	397		449		482		750		884
Construction and land development		575		678		1,101		1,118		1,201
Commercial real estate		975		1,211		1,683		1,700		1,833
Residential real estate		4,754		5,913		7,182		7,417		7,772
Consumer installment		111		106		146		161		146
Total potential problem loans	$	6,812		8,357		10,594		11,146		11,836

At June 30, 2014, approximately $0.6 million or 8.9% of total potential problem loans were past due at least 30 days but less than 90 days. At June 30, 2014, the remaining balance of potential problem loans were current or past due less than 30 days.

The following table is a summary of the Company’s performing loans that were past due at least 30 days but less than 90 days for the second quarter of 2014 and the previous four quarters.

	2014				2013
	Second		First		Fourth		Third		Second
(In thousands)	Quarter		Quarter		Quarter		Quarter		Quarter
Performing loans past due 30 to 89 days:
Commercial and industrial	$	277		191		167		444		329
Construction and land development		192		157		14		—		—
Commercial real estate		—		461		861		49		1,498
Residential real estate		832		1,834		1,343		489		501
Consumer installment		110		86		100		40		147
Total	$	1,411		2,729		2,485		1,022		2,475

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Deposits

Total deposits were $684.2 million at June 30, 2014, compared to $668.8 million at December 31, 2013. Noninterest bearing deposits were $130.4 million, or 19.1% of total deposits, at June 30, 2014, compared to $125.7 million, or 18.8% of total deposits at December 31, 2013.

The average rate paid on total interest-bearing deposits was 0.91% in the first six months of 2014 and 1.04% in the first six months of 2013.

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 $38.0 million with none outstanding at June 30, 2014, compared to $41.0 million and none outstanding at December 31, 2013. Securities sold under agreements to repurchase totaled $3.3 million and $3.4 million at June 30, 2014 and December 31, 2013, respectively.

The average rate paid on short-term borrowings was 0.53% in the first six months of 2014 and 0.51% in the first six months of 2013.

Long-term debt includes FHLB advances with an original maturity greater than one year and subordinated debentures related to trust preferred securities. The Bank had $5.0 million in long-term FHLB advances at both June 30, 2014 and December 31, 2013. At both June 30, 2014 and December 31, 2013, 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 3.43% in the first six months of 2014 and 3.62% in the first six months of 2013.

CAPITAL ADEQUACY

The Company’s consolidated stockholders’ equity was $72.3 million and $64.5 million as of June 30, 2014 and December 31, 2013, respectively. The change from December 31, 2013 was primarily driven by other comprehensive income due to the change in unrealized gains (losses) on securities available-for-sale, net-of-tax, of $5.7 million and net earnings of $3.7 million, partially offset by cash dividends paid of $1.6 million.

The Company’s tier 1 leverage ratio was 10.07%, tier 1 risk-based capital ratio was 17.45% and total risk-based capital ratio was 18.53% at June 30, 2014. 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.”

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 June 30, 2014.

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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 June 30, 2014.

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 June 30, 2014 and December 31, 2013, 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.

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 June 30, 2014, the Bank had a remaining available line of credit with the FHLB totaling $222.3 million. At June 30, 2014, the Bank also had $38.0 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.

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Off-Balance Sheet Arrangements, Commitments and Contingencies

At June 30, 2014, the Bank had outstanding standby letters of credit of $8.2 million and unfunded loan commitments outstanding of $39.9 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 June 30, 2014, the unpaid principal balance of the residential mortgage loans, which we have originated and sold, but retained the servicing rights was $359.5 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 six months of 2014 or during the full year 2013.

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

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

Although 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 June 30, 2014, 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 99.4% 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.

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

• ASU 2014-01, Accounting for Investments in Qualified Affordable Housing Projects;

• ASU 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure;

• ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity;

• ASU 2014-09, Revenue from Contracts with Customers (Topic 606); and

• ASU 2014-11, Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures.

Information about these pronouncements is described in more detail below.

ASU 2014-01, Accounting for Investments in Qualified Affordable Housing Projects, amends the criteria a company must meet to elect to account for investments in qualified affordable housing projects using a method other than the cost or equity methods. If the criteria are met, a company is permitted to amortize the initial investment cost in proportion to and over the same period as the total tax benefits the company expects to receive. The amortization of the initial investment cost and tax benefits are to be recorded in the income tax expense line. The Update also requires new disclosures about all investments in qualified affordable housing projects regardless of the accounting method used. These changes are effective for the Company in the first quarter of 2015 with retrospective application. Early adoption is permitted. The Company is evaluating the impact this ASU will have on our consolidated financial statements.

ASU 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure, clarifies the timing of when a creditor is considered to have taken physical possession of residential real estate collateral for a consumer mortgage loan, resulting in the reclassification of the loan receivable to real estate owned. A creditor has taken physical possession of the property when either (1) the creditor obtains legal title through foreclosure, or (2) the borrower transfers all interests in the property to the creditor via a deed in lieu of foreclosure or a similar legal agreement. The Update also requires disclosure of the amount of foreclosed residential real estate property held by the creditor and the recorded investment in residential real estate mortgage loans that are in process of foreclosure. These changes are effective for the Company in the first quarter of 2015 with retrospective application. Early adoption is permitted. Adoption of this ASU will not have a significant impact on the consolidated financial statements of the Company.

ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, changes the definition and reporting requirements for discontinued operations. Under the new guidance, an entity’s disposal of a component or group of components must be reported in discontinued operations if the disposal is a strategic shift that has or will have a significant effect on the entity’s operations and financial results. Major strategic shifts include disposals of a major geographic area or line of business. This guidance also requires new disclosures on discontinued operations. These changes are effective for the Company in the first quarter 2015 with prospective application. Early adoption is permitted for disposals that have not been previously reported. Adoption of this ASU will not have a significant impact on the consolidated financial statements of the Company.

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ASU 2014-09, Revenue from Contracts with Customers (Topic 606), provides a comprehensive and converged standard on revenue recognition. The new guidance is intended to improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects consideration to which the entity expects to be entitled in exchange for those goods and services. This guidance also requires new qualitative and quantitative disclosures related to revenue from contracts with customers. These changes are effective for the Company in the first quarter 2017 with retrospective application to each prior reporting period or with the cumulative effect of initially applying this Update recognized at the date of initial application. Early adoption is not permitted. The Company is evaluating the impact this ASU will have on our consolidated financial statements.

ASU 2014-11, Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures, changes current accounting and expands secured borrowing accounting for repurchase-to-maturity transactions and repurchase financings. This guidance requires new disclosures for certain repurchase agreements and similar transactions that identify which items are accounted for as secured borrowings and which items are accounted for as sales. These changes are effective for the Company in the first quarter 2015. The Company will be required to present changes in accounting for transactions outstanding as of January 1, 2015 as a cumulative-effect adjustment to retained earnings at the same date. Early adoption is not 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.

	2014				2013
	Second		First		Fourth		Third		Second
(In thousands)	Quarter		Quarter		Quarter		Quarter		Quarter
Net interest income (GAAP)	$	5,253		5,270		5,279		5,270		5,232
Tax-equivalent adjustment		312		324		342		351		365
Net interest income (Tax-equivalent)	$	5,565		5,594		5,621		5,621		5,597

	Six Months Ended June 30,
(In thousands)	2014		2013
Net interest income (GAAP)	$	10,523		10,373
Tax-equivalent adjustment		636		747
Net interest income (Tax-equivalent)	$	11,159		11,120

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Table 2—Selected Quarterly Financial Data

	2014						2013
	Second			First			Fourth		Third		Second
(Dollars in thousands, except per share amounts)	Quarter			Quarter			Quarter		Quarter		Quarter
Results of Operations
Net interest income (a)	$	5,565			5,594			5,621		5,621		5,597
Less: tax-equivalent adjustment		312			324			342		351		365
Net interest income (GAAP)		5,253			5,270			5,279		5,270		5,232
Noninterest income		1,081			756			2,140		1,432		2,071
Total revenue		6,334			6,026			7,419		6,702		7,303
Provision for loan losses		—			(400	)		—		—		—
Noninterest expense		3,792			3,948			5,188		4,274		4,724
Income tax expense		683			657			501		636		672
Net earnings	$	1,859			1,821			1,730		1,792		1,907
Per share data:
Basic and diluted net earnings	$	0.51			0.50			0.47		0.49		0.52
Cash dividends declared		0.215			0.215			0.210		0.210		0.210
Weighted average shares outstanding:
Basic and diluted		3,643,295			3,643,161			3,643,110		3,643,028		3,642,955
Shares outstanding		3,643,328			3,643,173			3,643,118		3,643,058		3,642,993
Book value	$	19.84			18.74			17.70		18.06		17.90
Common stock price
High	$	25.00			25.80			25.75		24.71		22.33
Low		22.90			23.20			23.93		22.00		21.54
Period end		24.02			23.20			25.00		24.40		22.00
To earnings ratio		12.19x			11.72			12.89		12.64		11.70
To book value		121	%		124			141		135		123
Performance ratios:
Return on average equity		10.72	%		11.11			10.33		10.78		10.74
Return on average assets		0.96	%		0.96			0.92		0.95		1.00
Dividend payout ratio		42.16	%		43.00			44.68		42.86		40.38
Asset Quality:
Allowance for loan losses as a % of:
Loans		1.23	%		1.25			1.37		1.56		1.65
Nonperforming loans		169	%		148			124		134		138
Nonperforming assets as a % of:
Loans and other real estate owned		1.13	%		1.66			2.10		2.34		2.10
Total assets		0.57	%		0.81			1.08		1.21		1.08
Nonperforming loans as a % of total loans		0.73	%		0.84			1.11		1.16		1.19
Net (recoveries) charge-offs as a % of average loans (c)		(0.02	)%		0.17			0.71		0.53		0.32
Capital Adequacy:
Tier 1 risk-based capital ratio		17.45	%		17.55			17.19		17.29		16.45
Total risk-based capital ratio		18.53	%		18.64			18.40		18.55		17.70
Tier 1 Leverage Ratio		10.07	%		10.03			10.10		9.96		9.76
Other financial data:
Net interest margin (a)		3.09	%		3.20			3.20		3.19		3.16
Effective income tax rate		26.87	%		26.51			22.46		26.19		26.06
Efficiency ratio (b)		57.06	%		62.17			66.85		60.60		61.61
Selected average balances:
Securities	$	274,305			268,013			260,091		265,380		266,056
Loans, net of unearned income		378,994			377,322			379,450		383,460		389,402
Total assets		772,326			762,153			748,894		751,311		761,534
Total deposits		684,613			678,324			653,825		651,334		652,952
Long-term debt		12,217			12,217			21,347		26,782		31,613
Total stockholders’ equity		69,367			65,556			67,015		66,485		71,006
Selected period end balances:
Securities	$	276,953			279,989			271,219		259,467		270,794
Loans, net of unearned income		385,826			377,350			383,339		380,705		390,726
Allowance for loan losses		4,728			4,711			5,268		5,946		6,457
Total assets		775,128			773,333			751,343		744,602		767,747
Total deposits		684,181			687,088			668,844		650,421		666,490
Long-term debt		12,217			12,217			12,217		22,217		27,217
Total stockholders’ equity		72,291			68,284			64,485		65,807		65,211

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

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

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

49

Table 3—Selected Financial Data

	Six Months Ended June 30,
(Dollars in thousands, except per share amounts)	2014			2013
Results of Operations
Net interest income (a)	$	11,159			11,120
Less: tax-equivalent adjustment		636			747
Net interest income (GAAP)		10,523			10,373
Noninterest income		1,837			3,726
Total revenue		12,360			14,099
Provision for loan losses		(400	)		400
Noninterest expense		7,740			8,950
Income tax expense		1,340			1,153
Net earnings	$	3,680			3,596
Per share data:
Basic and diluted net earnings	$	1.01			0.99
Cash dividends declared		0.43			0.42
Weighted average shares outstanding:
Basic and diluted		3,643,228			3,642,936
Shares outstanding, at period end		3,643,328			3,642,993
Book value	$	19.84			17.90
Common stock price
High	$	25.80			22.60
Low		22.90			20.80
Period end		24.02			22.00
To earnings ratio		12.19x			11.70
To book value		121	%		123
Performance ratios:
Return on average equity		10.91	%		10.11
Return on average assets		0.96	%		0.93
Dividend payout ratio		42.57	%		42.42
Asset Quality:
Allowance for loan losses as a % of:
Loans		1.23	%		1.65
Nonperforming loans		169	%		138
Nonperforming assets as a % of:
Loans and other real estate owned		1.13	%		2.10
Total assets		0.57	%		1.08
Nonperforming loans as a % of total loans		0.73	%		1.19
Annualized net charge-offs as a % of average loans		0.07	%		0.34
Capital Adequacy:
Tier 1 risk-based capital ratio		17.45	%		16.45
Total risk-based capital ratio		18.53	%		17.70
Tier 1 Leverage Ratio		10.07	%		9.76
Other financial data:
Net interest margin (a)		3.14	%		3.12
Effective income tax rate		26.69	%		24.28
Efficiency ratio (b)		59.56	%		60.29
Selected average balances:
Securities	$	271,177			264,574
Loans, net of unearned income		378,163			392,899
Total assets		767,268			769,602
Total deposits		681,487			653,375
Long-term debt		12,217			39,095
Total stockholders’ equity		67,472			71,162
Selected period end balances:
Securities	$	276,953			270,794
Loans, net of unearned income		385,826			390,726
Allowance for loan losses		4,728			6,457
Total assets		775,128			767,747
Total deposits		684,181			666,490
Long-term debt		12,217			27,217
Total stockholders’ equity		72,291			65,211

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

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

50

Table 4—Average Balances and Net Interest Income Analysis

	Quarter ended June 30,
	2014						2013
			Interest						Interest
	Average		Income/		Yield/		Average		Income/		Yield/
(Dollars in thousands)	Balance		Expense		Rate		Balance		Expense		Rate
Interest-earning assets:
Loans and loans held for sale (1)	$	382,100	$	4,766		5.00%	$	392,973	$	5,224		5.33%
Securities - taxable		213,777		1,214		2.28%		197,165		899		1.83%
Securities - tax-exempt (2)		60,528		919		6.09%		68,891		1,073		6.25%
Total securities		274,305		2,133		3.12%		266,056		1,972		2.97%
Federal funds sold		63,604		30		0.19%		51,004		29		0.23%
Interest bearing bank deposits		2,670		—		—		1,187		—		—
Total interest-earning assets		722,679	$	6,929		3.85%		711,220	$	7,225		4.07%
Cash and due from banks		12,690						13,932
Other assets		36,957						36,382
Total assets	$	772,326					$	761,534
Interest-bearing liabilities:
Deposits:
NOW	$	107,287	$	86		0.32%	$	104,132	$	83		0.32%
Savings and money market		190,057		243		0.51%		168,594		217		0.52%
Certificates of deposits less than $100,000		103,518		305		1.18%		105,613		364		1.38%
Certificates of deposits and other time deposits of $100,000 or more		157,585		622		1.58%		153,644		685		1.79%
Total interest-bearing deposits		558,447		1,256		0.90%		531,983		1,349		1.02%
Short-term borrowings		3,404		4		0.47%		2,647		3		0.45%
Long-term debt		12,217		104		3.41%		31,613		276		3.50%
Total interest-bearing liabilities		574,068	$	1,364		0.95%		566,243	$	1,628		1.15%
Noninterest-bearing deposits		126,166						120,969
Other liabilities		2,725						3,316
Stockholders’ equity		69,367						71,006
Total liabilities and stockholders’ equity	$	772,326					$	761,534
Net interest income and margin (tax-equivalent)			$	5,565		3.09%			$	5,597		3.16%

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

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

51

Table 5—Average Balances and Net Interest Income Analysis

	Six Months Ended June 30,
	2014						2013
			Interest						Interest
	Average		Income/		Yield/		Average		Income/		Yield/
(Dollars in thousands)	Balance		Expense		Rate		Balance		Expense		Rate
Interest-earning assets:
Loans and loans held for sale (1)	$	380,449	$	9,556		5.07%	$	396,498	$	10,552		5.37%
Securities - taxable		210,223		2,390		2.29%		194,205		1,773		1.84%
Securities - tax-exempt (2)		60,954		1,870		6.19%		70,369		2,197		6.30%
Total securities		271,177		4,260		3.17%		264,574		3,970		3.03%
Federal funds sold		59,385		55		0.19%		55,881		60		0.22%
Interest bearing bank deposits		5,171		17		0.66%		892		—		—
Total interest-earning assets		716,182	$	13,888		3.91%		717,845	$	14,582		4.10%
Cash and due from banks		12,762						15,217
Other assets		38,324						36,540
Total assets	$	767,268					$	769,602
Interest-bearing liabilities:
Deposits:
NOW	$	106,812	$	170		0.32%	$	104,851	$	166		0.32%
Savings and money market		189,830		480		0.51%		168,263		434		0.52%
Certificates of deposits less than $100,000		104,079		617		1.20%		105,533		745		1.42%
Certificates of deposits and other time deposits of $100,000 or more		157,509		1,245		1.59%		154,745		1,408		1.83%
Total interest-bearing deposits		558,230		2,512		0.91%		533,392		2,753		1.04%
Short-term borrowings		3,440		9		0.53%		2,754		7		0.51%
Long-term debt		12,217		208		3.43%		39,095		702		3.62%
Total interest-bearing liabilities		573,887	$	2,729		0.96%		575,241	$	3,462		1.21%
Noninterest-bearing deposits		123,257						119,983
Other liabilities		2,652						3,216
Stockholders’ equity		67,472						71,162
Total liabilities and stockholders’ equity	$	767,268					$	769,602
Net interest income and margin (tax-equivalent)			$	11,159		3.14%			$	11,120		3.12%

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

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

52

Table 6—Loan Portfolio Composition

	2014				2013
	Second		First		Fourth		Third		Second
(In thousands)	Quarter		Quarter		Quarter		Quarter		Quarter
Commercial and industrial	$	52,054		54,632		57,780		58,766		56,030
Construction and land development		32,461		31,275		36,479		37,062		45,886
Commercial real estate		187,241		178,721		174,920		170,520		177,291
Residential real estate		102,921		101,433		101,706		102,565		99,021
Consumer installment		11,686		11,766		12,893		12,170		12,747
Total loans		386,363		377,827		383,778		381,083		390,975
Less: unearned income		(537)		(477)		(439)		(378)		(249)
Loans, net of unearned income		385,826		377,350		383,339		380,705		390,726
Less: allowance for loan losses		(4,728)		(4,711)		(5,268)		(5,946)		(6,457)
Loans, net	$	381,098		372,639		378,071		374,759		384,269

53

Table 7—Allowance for Loan Losses and Nonperforming Assets

	2014				2013
	Second		First		Fourth		Third		Second
(Dollars in thousands)	Quarter		Quarter		Quarter		Quarter		Quarter
Allowance for loan losses:
Balance at beginning of period	$	4,711		5,268		5,946		6,457		6,769
Charge-offs:
Commercial and industrial		(46)		—		(269)		(177)		—
Construction and land development		—		(236)		—		—		—
Commercial real estate		—		—		—		(144)		(118)
Residential real estate		(41)		(31)		(250)		(103)		(189)
Consumer installment		(8)		(36)		(198)		(137)		(45)
Total charge-offs		(95)		(303)		(717)		(561)		(352)
Recoveries		112		146		39		50		40
Net recoveries (charge-offs)		17		(157)		(678)		(511)		(312)
Provision for loan losses		—		(400)		—		—		—
Ending balance	$	4,728		4,711		5,268		5,946		6,457
as a % of loans		1.23%		1.25		1.37		1.56		1.65
as a % of nonperforming loans		169%		148		124		134		138
Net (recoveries) charge-offs as % of average loans (a)		(0.02)%		0.17		0.71		0.53		0.32
Nonperforming assets:
Nonaccrual loans	$	2,804		3,188		4,261		4,425		4,664
Other real estate owned		1,584		3,111		3,884		4,585		3,609
Total nonperforming assets	$	4,388		6,299		8,145		9,010		8,273
as a % of loans and other real estate owned		1.13%		1.66		2.10		2.34		2.10
as a % of total assets		0.57%		0.81		1.08		1.21		1.08
Nonperforming loans as a % of total loans		0.73%		0.84		1.11		1.16		1.19
Accruing loans 90 days or more past due	$	71		131		73		99		—

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

54

Table 8—Allocation of Allowance for Loan Losses

	2014								2013
	Second Quarter				First Quarter				Fourth Quarter				Third Quarter				Second Quarter
(Dollars in thousands)	Amount		%*		Amount		%*		Amount		%*		Amount		%*		Amount		%*
Commercial and industrial	$	639		13.5	$	482		14.5	$	386		15.1	$	546		15.4	$	675		14.3
Construction and land development		907		8.4		214		8.3		366		9.5		1,189		9.7		1,454		11.7
Commercial real estate		1,913		48.5		2,493		47.3		3,186		45.6		3,104		44.7		3,111		45.3
Residential real estate		1,095		26.6		1,256		26.8		1,114		26.5		982		26.9		1,125		25.3
Consumer installment		174		3.0		266		3.1		216		3.4		125		3.2		92		3.3
Total allowance for loan losses	$	4,728			$	4,711			$	5,268			$	5,946			$	6,457

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

55

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

(Dollars in thousands)	June 30, 2014
Maturity of:
3 months or less	$	16,475
Over 3 months through 6 months		26,130
Over 6 months through 12 months		31,103
Over 12 months		82,431
Total CDs and other time deposits of $100,000 or more	$	156,139

56

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4. CONTROLS AND PROCEDURES

The Company, with the participation of its management, including its Chief Executive Officer and 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, 2013.

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, 2013, 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
April 1 - April 30	––	––	––	––
May 1 - May 31	––	––	––	––
June 1 - June 30	––	––	––	––
Total	––	––	––	––

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

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

57

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, Senior 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 E.L. Spencer, Jr., President, Chief Executive Officer and Chairman of the Board.***
32.2	Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002, by David A. Hedges, Senior Vice President, Controller and Chief Financial Officer (Principal Financial and Accounting Officer).***
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document

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

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

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

58

SIGNATURES

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

	AUBURN NATIONAL BANCORPORATION, INC.                 (Registrant)
Date: August 1, 2014	By:	/s/ E. L. Spencer, Jr.
		E. L. Spencer, Jr.
		President, Chief Executive Officer and Chairman of the Board

Date: August 1, 2014	By:	/s/ David A. Hedges
		David A. Hedges
		SVP, 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: August 1, 2014

/s/ E.L. Spencer, Jr.

President, Chief Executive Officer

and Chairman of the Board

EX-31.2

AUBURN NATIONAL BANCORPORATION, INC AND SUBSIDIARIES

EXHIBIT 31.2

CERTIFICATION PURSUANT TO

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

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

CERTIFICATION

I, David A. Hedges, certify that:

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

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

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

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

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

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

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

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

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

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

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

Date: August 1, 2014

/s/ David A. Hedges

SVP, 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 June 30, 2014, as filed with the Securities and Exchange Commission as of the date hereof (the “Report”), I, E.L. Spencer, Jr., President, Chief Executive Officer and Chairman of the Board of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

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

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

Date: August 1, 2014

/s/ E.L. Spencer, Jr.

E.L. Spencer, Jr.

President, Chief Executive Officer

and Chairman of the Board

EX-32.2

AUBURN NATIONAL BANCORPORATION, INC AND SUBSIDIARIES

EXHIBIT 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report of Auburn National Bancorporation, Inc. (the “Company”) on Form 10-Q for the period ending June 30, 2014, 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: August 1, 2014

/s/ David A. Hedges

David A. Hedges

SVP, Controller and Chief Financial Officer

XML

Impaired Loans (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013	Dec. 31, 2013
Financing Receivable, Impaired [Line Items]
Impaired Financing Receivable, with No Related Allowance, Unpaid Principal Balance	$ 4,839		$ 4,839		$ 5,897
Impaired Financing Receivable, with No Related Allowance, Charge-off And Payments Applied	(2,414)		(2,414)		(2,194)
Impaired Financing Receivable, with No Related Allowance, Recorded Investment	2,425		2,425		3,703
Impaired Financing Receivable, with Related Allowance, Unpaid Principal Balance	1,453		1,453		1,929
Impaired Financing Receivable, with Related Allowance, Charge-off And Payments Applied	0		0		(67)
Impaired Financing Receivable, with Related Allowance, Recorded Investment	1,453		1,453		1,862
Impaired Financing Receivable, With Related Allowance, Related Allowance	169		169		260
Impaired Financing Receivable, Unpaid Principal Balance	6,292		6,292		7,826
Impaired Financing Receivable, Charge-off And Payments Applied	(2,414)		(2,414)		(2,261)
Impaired Financing Receivable, Recorded Investment	3,878		3,878		5,565
Impaired Financing Receivable, Related Allowance	169		169		260
Impaired Financing Receivable, Average Recorded Investment [Abstract]
Impaired Financing Receivable, Average Recorded Investment	4,181	5,308	4,820	6,817
Impaired Financing Receivable, Interest Income, Accrual Method	19	16	42	34
Commercial and Industrial Loans [Member]
Financing Receivable, Impaired [Line Items]
Impaired Financing Receivable, with No Related Allowance, Unpaid Principal Balance	95		95		124
Impaired Financing Receivable, with No Related Allowance, Charge-off And Payments Applied	0		0		0
Impaired Financing Receivable, with No Related Allowance, Recorded Investment	95		95		124
Impaired Financing Receivable, Average Recorded Investment [Abstract]
Impaired Financing Receivable, Average Recorded Investment	103	150	111	158
Impaired Financing Receivable, Interest Income, Accrual Method	2	2	4	5
Construction And Land Development Loans [Member]
Financing Receivable, Impaired [Line Items]
Impaired Financing Receivable, with No Related Allowance, Unpaid Principal Balance	2,960		2,960		2,879
Impaired Financing Receivable, with No Related Allowance, Charge-off And Payments Applied	(1,997)		(1,997)		(1,682)
Impaired Financing Receivable, with No Related Allowance, Recorded Investment	963		963		1,197
Impaired Financing Receivable, with Related Allowance, Unpaid Principal Balance					452
Impaired Financing Receivable, with Related Allowance, Charge-off And Payments Applied					(67)
Impaired Financing Receivable, with Related Allowance, Recorded Investment					385
Impaired Financing Receivable, Related Allowance					88
Impaired Financing Receivable, Average Recorded Investment [Abstract]
Impaired Financing Receivable, Average Recorded Investment	1,098	1,607	1,343	1,614
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	337		337		1,217
Impaired Financing Receivable, with No Related Allowance, Charge-off And Payments Applied	(61)		(61)		(190)
Impaired Financing Receivable, with No Related Allowance, Recorded Investment	276		276		1,027
Impaired Financing Receivable, with Related Allowance, Unpaid Principal Balance	861		861		875
Impaired Financing Receivable, with Related Allowance, Charge-off And Payments Applied	0		0		0
Impaired Financing Receivable, with Related Allowance, Recorded Investment	861		861		875
Impaired Financing Receivable, Related Allowance	117		117		110
Impaired Financing Receivable, Average Recorded Investment [Abstract]
Impaired Financing Receivable, Average Recorded Investment	1,142	1,984	1,468	2,019
Impaired Financing Receivable, Interest Income, Accrual Method	9	14	21	29
Commercial Real Estate Other Loans [Member]
Financing Receivable, Impaired [Line Items]
Impaired Financing Receivable, with No Related Allowance, Unpaid Principal Balance	300		300		518
Impaired Financing Receivable, with No Related Allowance, Charge-off And Payments Applied	(90)		(90)		(89)
Impaired Financing Receivable, with No Related Allowance, Recorded Investment	210		210		429
Impaired Financing Receivable, with Related Allowance, Unpaid Principal Balance	592		592		602
Impaired Financing Receivable, with Related Allowance, Charge-off And Payments Applied	0		0		0
Impaired Financing Receivable, with Related Allowance, Recorded Investment	592		592		602
Impaired Financing Receivable, Related Allowance	52		52		62
Impaired Financing Receivable, Average Recorded Investment [Abstract]
Impaired Financing Receivable, Average Recorded Investment	949	430	994	1,902
Impaired Financing Receivable, Interest Income, Accrual Method	8	0	17	0
Commercial Real Estate Loans, Total [Member]
Financing Receivable, Impaired [Line Items]
Impaired Financing Receivable, with No Related Allowance, Unpaid Principal Balance	637		637		1,735
Impaired Financing Receivable, with No Related Allowance, Charge-off And Payments Applied	(151)		(151)		(279)
Impaired Financing Receivable, with No Related Allowance, Recorded Investment	486		486		1,456
Impaired Financing Receivable, with Related Allowance, Unpaid Principal Balance	1,453		1,453		1,477
Impaired Financing Receivable, with Related Allowance, Charge-off And Payments Applied	0		0		0
Impaired Financing Receivable, with Related Allowance, Recorded Investment	1,453		1,453		1,477
Impaired Financing Receivable, Related Allowance	169		169		172
Impaired Financing Receivable, Average Recorded Investment [Abstract]
Impaired Financing Receivable, Average Recorded Investment	2,091	2,414	2,462	3,921
Impaired Financing Receivable, Interest Income, Accrual Method	17	14	38	29
Residential Real Estate Consumer Mortgage Loans [Member]
Financing Receivable, Impaired [Line Items]
Impaired Financing Receivable, with No Related Allowance, Unpaid Principal Balance	941		941		952
Impaired Financing Receivable, with No Related Allowance, Charge-off And Payments Applied	(224)		(224)		(198)
Impaired Financing Receivable, with No Related Allowance, Recorded Investment	717		717		754
Impaired Financing Receivable, Average Recorded Investment [Abstract]
Impaired Financing Receivable, Average Recorded Investment	724	789	736	801
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	206		206		207
Impaired Financing Receivable, with No Related Allowance, Charge-off And Payments Applied	(42)		(42)		(35)
Impaired Financing Receivable, with No Related Allowance, Recorded Investment	164		164		172
Impaired Financing Receivable, Average Recorded Investment [Abstract]
Impaired Financing Receivable, Average Recorded Investment	165	348	168	323
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	1,147		1,147		1,159
Impaired Financing Receivable, with No Related Allowance, Charge-off And Payments Applied	(266)		(266)		(233)
Impaired Financing Receivable, with No Related Allowance, Recorded Investment	881		881		926
Impaired Financing Receivable, Average Recorded Investment [Abstract]
Impaired Financing Receivable, Average Recorded Investment	889	1,137	904	1,124
Impaired Financing Receivable, Interest Income, Accrual Method	$ 0	$ 0	$ 0	$ 0

XML

Fair Value Unobservable Inputs (Details) (Fair Value, Measurements, Nonrecurring [Member], USD $) In Thousands, unless otherwise specified	Jun. 30, 2014
Impaired Loans [Member] | Appraisal, Appraisal Discount [Member]
Schedule Of Fair Value Significant Unobservable Inputs Used [Line Items]
Unobservable Input, Weighted Average of Input Percent	17.7
Impaired Loans [Member] | Carrying (Reported) Amount, Fair Value Disclosure [Member]
Schedule Of Fair Value Significant Unobservable Inputs Used [Line Items]
Assets, Fair Value Disclosure	$ 3,709
Other Real Estate Owned [Member] | Appraisal, Appraisal Discount [Member]
Schedule Of Fair Value Significant Unobservable Inputs Used [Line Items]
Unobservable Input, Weighted Average of Input Percent	13.4
Other Real Estate Owned [Member] | Carrying (Reported) Amount, Fair Value Disclosure [Member]
Schedule Of Fair Value Significant Unobservable Inputs Used [Line Items]
Assets, Fair Value Disclosure	1,584
Mortgage Servicing Rights [Member] | Discounted Cash Flow, Prepayment Speed [Member]
Schedule Of Fair Value Significant Unobservable Inputs Used [Line Items]
Unobservable Input, Weighted Average of Input Percent	9.6
Mortgage Servicing Rights [Member] | Discounted Cash Flow, Discount Rate [Member]
Schedule Of Fair Value Significant Unobservable Inputs Used [Line Items]
Unobservable Input, Weighted Average of Input Percent	10
Mortgage Servicing Rights [Member] | Carrying (Reported) Amount, Fair Value Disclosure [Member]
Schedule Of Fair Value Significant Unobservable Inputs Used [Line Items]
Assets, Fair Value Disclosure	$ 2,346

XML

Securities Textuals (Details) (USD $) In Millions, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Securities (Textuals) [Abstract]
Available-for-sale Securities Pledged as Collateral	$ 137.40	$ 120.50
Cost-method Investments, Aggregate Carrying Amount	$ 1.60	$ 1.80

XML

Basic and Diluted Earnings Per Share (Details) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Earnings Per Share Abstract
Net earnings	$ 1,859	$ 1,907	$ 3,680	$ 3,596
Basic and diluted weighted average shares outstanding	3,643,295	3,642,955	3,643,228	3,642,936
Basic and diluted earnings per share	$ 0.51	$ 0.52	$ 1.01	$ 0.99

XML

Mortgage Servicing Rights, Net (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Servicing Asset at Amortized Value, Balance [Roll Forward]
Servicing Asset at Amortized Cost, Beginning	$ 2,368	$ 1,728	$ 2,350	$ 1,526
Servicing Asset at Amortized Value, Additions	105	218	203	478
Servicing Asset at Amortized Value, Amortization	(84)	(102)	(164)	(226)
Servicing Asset at Amortized Value, Change In Valuation Allowance	(43)	135	(43)	201
Servicing Asset at Amortized Cost, Ending	2,346	1,979	2,346	1,979
Valuation Allowance for Impairment of Recognized Servicing Assets, Balance [Abstract]
Valuation Allowance for Impairment of Recognized Servicing Assets, Beginning Balance	0	320	0	386
Valuation Allowance for Impairment of Recognized Servicing Assets, Ending Balance	43	185	43	185
Servicing Asset at Amortized Value, Fair Value [Abstract]
Servicing Asset at Amortized Value, Fair Value, Beginning	3,386	1,994	3,452	1,526
Servicing Asset at Amortized Value, Fair Value, Ending	$ 3,228	$ 2,453	$ 3,228	$ 2,453

XML

Allowance For Loan Loss Additional Information (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013	Jun. 30, 2013
Financing Receivable Allowance For Credit Loss Additional Information [Line Items]
Financing Receivable, Allowance for Credit Losses, Collectively Evaluated for Impairment	$ 4,559		$ 6,174
Financing Receivable, Collectively Evaluated for Impairment	382,485		385,568
Financing Receivable, Allowance for Credit Losses, Individually Evaluated for Impairment	169		283
Financing Receivable, Individually Evaluated for Impairment	3,878		5,407
Allowance for loan losses	4,728	5,268	6,457
Loans and Leases Receivable, Gross, Carrying Amount	386,363	383,778	390,975
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	639		675
Financing Receivable, Collectively Evaluated for Impairment	51,959		55,882
Financing Receivable, Allowance for Credit Losses, Individually Evaluated for Impairment	0		0
Financing Receivable, Individually Evaluated for Impairment	95		148
Allowance for loan losses	639		675
Loans and Leases Receivable, Gross, Carrying Amount	52,054	57,780	56,030
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	907		1,347
Financing Receivable, Collectively Evaluated for Impairment	31,498		44,285
Financing Receivable, Allowance for Credit Losses, Individually Evaluated for Impairment	0		107
Financing Receivable, Individually Evaluated for Impairment	963		1,601
Allowance for loan losses	907		1,454
Loans and Leases Receivable, Gross, Carrying Amount	32,461	36,479	45,886
Commercial Real Estate Loans, Total [Member]
Financing Receivable Allowance For Credit Loss Additional Information [Line Items]
Financing Receivable, Allowance for Credit Losses, Collectively Evaluated for Impairment	1,744		2,991
Financing Receivable, Collectively Evaluated for Impairment	185,302		174,922
Financing Receivable, Allowance for Credit Losses, Individually Evaluated for Impairment	169		120
Financing Receivable, Individually Evaluated for Impairment	1,939		2,369
Allowance for loan losses	1,913		3,111
Loans and Leases Receivable, Gross, Carrying Amount	187,241	174,920	177,291
Residential Real Estate Loans, Total [Member]
Financing Receivable Allowance For Credit Loss Additional Information [Line Items]
Financing Receivable, Allowance for Credit Losses, Collectively Evaluated for Impairment	1,095		1,069
Financing Receivable, Collectively Evaluated for Impairment	102,040		97,732
Financing Receivable, Allowance for Credit Losses, Individually Evaluated for Impairment	0		56
Financing Receivable, Individually Evaluated for Impairment	881		1,289
Allowance for loan losses	1,095		1,125
Loans and Leases Receivable, Gross, Carrying Amount	102,921	101,706	99,021
Consumer Installment and Revolving Loans [Member]
Financing Receivable Allowance For Credit Loss Additional Information [Line Items]
Financing Receivable, Allowance for Credit Losses, Collectively Evaluated for Impairment	174		92
Financing Receivable, Collectively Evaluated for Impairment	11,686		12,747
Financing Receivable, Allowance for Credit Losses, Individually Evaluated for Impairment	0		0
Financing Receivable, Individually Evaluated for Impairment	0		0
Allowance for loan losses	174		92
Loans and Leases Receivable, Gross, Carrying Amount	$ 11,686	$ 12,893	$ 12,747

XML

Fair Value Financial Instruments (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Carrying (Reported) Amount, Fair Value Disclosure [Member]
Fair Value, Financial Assets: [Abstract]
Fair Value, Financial Instruments, Loans, Net	$ 381,098	$ 378,071
Fair Value, Financial Instruments, Loans Held For Sale	7,200	2,296
Fair Value, Financial Liabilities: [Abstract]
Fair Value, Financial Instruments, Time Deposits	258,356	261,199
Fair Value, Financial Instruments, Long-term Debt	12,217	12,217
Estimate of Fair Value, Fair Value Disclosure [Member]
Fair Value, Financial Assets: [Abstract]
Fair Value, Financial Instruments, Loans, Net	381,014	387,180
Fair Value, Financial Instruments, Loans Held For Sale	7,340	2,310
Fair Value, Financial Liabilities: [Abstract]
Fair Value, Financial Instruments, Time Deposits	261,410	263,985
Fair Value, Financial Instruments, Long-term Debt	12,615	12,569
Fair Value, Inputs, Level 1 [Member]
Fair Value, Financial Assets: [Abstract]
Fair Value, Financial Instruments, Loans, Net	0	0
Fair Value, Financial Instruments, Loans Held For Sale	0	0
Fair Value, Financial Liabilities: [Abstract]
Fair Value, Financial Instruments, Time Deposits	0	0
Fair Value, Financial Instruments, Long-term Debt	0	0
Fair Value, Inputs, Level 2 [Member]
Fair Value, Financial Assets: [Abstract]
Fair Value, Financial Instruments, Loans, Net	0	0
Fair Value, Financial Instruments, Loans Held For Sale	7,340	2,310
Fair Value, Financial Liabilities: [Abstract]
Fair Value, Financial Instruments, Time Deposits	261,410	263,985
Fair Value, Financial Instruments, Long-term Debt	12,615	12,569
Fair Value, Inputs, Level 3 [Member]
Fair Value, Financial Assets: [Abstract]
Fair Value, Financial Instruments, Loans, Net	381,014	387,180
Fair Value, Financial Instruments, Loans Held For Sale	0	0
Fair Value, Financial Liabilities: [Abstract]
Fair Value, Financial Instruments, Time Deposits	0	0
Fair Value, Financial Instruments, Long-term Debt	$ 0	$ 0

XML

Summary of Significant Accounting Policies

6 Months Ended

Jun. 30, 2014

Summary of Signficant Accounting Policies

Significant Accounting Policies Text Block

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

General

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

Basis of Presentation and Use of Estimates

The unaudited consolidated financial statements in this report have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information. Accordingly, these financial statements do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited consolidated financial statements include, in the opinion of management, all adjustments necessary to present a fair statement of the financial position and the results of operations for all periods presented. All such adjustments are of a normal recurring nature. The results of operations in the interim statements are not necessarily indicative of the results of operations that the Company and its subsidiaries may achieve for future interim periods or the entire year. For further information, refer to the consolidated financial statements and footnotes included in the Company's annual report on Form 10-K for the year ended December 31,2013.

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.

Reclassifications

Certain amounts reported in prior periods have been reclassified to conform to the current-period presentation. These reclassifications had no impact on the Company’s previously reported net earnings or total stockholders’ equity.

Subsequent Events

The Company has evaluated the effects of events and transactions through the date of this filing that have occurred subsequent to June 30,2014. The Company does not believe there were any material subsequent events during this period that would have required further recognition or disclosure in the unaudited consolidated financial statements included in this report.

Accounting Developments

In the first quarter of 2014, the Company adopted new guidance related to the following Accounting Standards Update (“Update” or “ASU”):

•

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. Thechanges were effective for the Company during the first quarter of 2014. Adoption of this ASU had no impact on the financial statements of the Company.

XML

Derivative Instruments (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Derivative [Line Items]
Derivative, Notional Amount1	$ 9,684	$ 10,034
DerivativeAssetFairValueGrossAsset	756	844
Derivative Asset, Fair Value, Gross Liability	756	844
Derivative, Interest Rate Swap, Pay Fixed, Receive Variable [Member]
Derivative [Line Items]
Derivative, Notional Amount1	4,842	5,017
DerivativeAssetFairValueGrossAsset	0	0
Derivative Asset, Fair Value, Gross Liability	756	844
Derivative, Interest Rate Swap, Pay Variable, Receive Fixed [Member]
Derivative [Line Items]
Derivative, Notional Amount1	4,842	5,017
DerivativeAssetFairValueGrossAsset	756	844
Derivative Asset, Fair Value, Gross Liability	$ 0	$ 0

XML

Securities Continuous Unrealized Loss (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Schedule of Available-for-sale Securities [Line Items]
Available-for-sale Securities, Continuous Unrealized Loss Position, Less than Twelve Months, Fair Value	$ 1,892	$ 155,282
Available-for-sale Securities, Continuous Unrealized Loss Position, Less than 12 Months, Aggregate Losses	25	8,034
Available-for-sale Securities, Continuous Unrealized Loss Position, Twelve Months or Longer, Fair Value	111,525	16,273
Available-for-sale Securities, Continuous Unrealized Loss Position, 12 Months or Longer, Aggregate Losses	3,454	1,715
Available-for-sale Securities, Continuous Unrealized Loss Position, Fair Value	113,417	171,555
Available-for-sale Securities, Continuous Unrealized Loss Position, Aggregate Losses	3,479	9,749
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	0	35,933
Available-for-sale Securities, Continuous Unrealized Loss Position, Less than 12 Months, Aggregate Losses	0	3,182
Available-for-sale Securities, Continuous Unrealized Loss Position, Twelve Months or Longer, Fair Value	42,172	8,590
Available-for-sale Securities, Continuous Unrealized Loss Position, 12 Months or Longer, Aggregate Losses	1,914	1,376
Available-for-sale Securities, Continuous Unrealized Loss Position, Fair Value	42,172	44,523
Available-for-sale Securities, Continuous Unrealized Loss Position, Aggregate Losses	1,914	4,558
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	0	109,774
Available-for-sale Securities, Continuous Unrealized Loss Position, Less than 12 Months, Aggregate Losses	0	4,393
Available-for-sale Securities, Continuous Unrealized Loss Position, Twelve Months or Longer, Fair Value	67,063	7,683
Available-for-sale Securities, Continuous Unrealized Loss Position, 12 Months or Longer, Aggregate Losses	1,523	339
Available-for-sale Securities, Continuous Unrealized Loss Position, Fair Value	67,063	117,457
Available-for-sale Securities, Continuous Unrealized Loss Position, Aggregate Losses	1,523	4,732
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	1,892	9,575
Available-for-sale Securities, Continuous Unrealized Loss Position, Less than 12 Months, Aggregate Losses	25	459
Available-for-sale Securities, Continuous Unrealized Loss Position, Twelve Months or Longer, Fair Value	2,290	0
Available-for-sale Securities, Continuous Unrealized Loss Position, 12 Months or Longer, Aggregate Losses	17	0
Available-for-sale Securities, Continuous Unrealized Loss Position, Fair Value	4,182	9,575
Available-for-sale Securities, Continuous Unrealized Loss Position, Aggregate Losses	$ 42	$ 459

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Security Types (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
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	13,985	1,735
Available-for-sale Securities, Debt Maturities, after Five Through Ten Years, Fair Value	59,968	52,919
Available-for-sale Securities, Debt Maturities, after Ten Years, Fair Value	203,000	216,565
Available-for-sale Securities, Fair Value, Total	276,953	271,219
Available-for-sale Securities, Gross Unrealized Gain	5,279	2,536
Available-for-sale Securities, Gross Unrealized Losses	3,479	9,749
Available-for-sale Securities, Amortized Cost Basis	275,153	278,432
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	13,306	0
Available-for-sale Securities, Debt Maturities, after Five Through Ten Years, Fair Value	34,535	23,247
Available-for-sale Securities, Debt Maturities, after Ten Years, Fair Value	22,910	21,275
Available-for-sale Securities, Fair Value, Total	70,751	44,522
Available-for-sale Securities, Gross Unrealized Gain	293	0
Available-for-sale Securities, Gross Unrealized Losses	1,914	4,557
Available-for-sale Securities, Amortized Cost Basis	72,372	49,079
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	7,535	8,306
Available-for-sale Securities, Debt Maturities, after Ten Years, Fair Value	133,470	154,052
Available-for-sale Securities, Fair Value, Total	141,005	162,358
Available-for-sale Securities, Gross Unrealized Gain	2,009	976
Available-for-sale Securities, Gross Unrealized Losses	1,523	4,733
Available-for-sale Securities, Amortized Cost Basis	140,519	166,115
US States and Political Subdivisions Debt Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Available-for-sale Securities, Debt Maturities, within One Year, Fair Value	0	0
Available-for-sale Securities, Debt Maturities, after One Through Five Years, Fair Value	679	1,735
Available-for-sale Securities, Debt Maturities, after Five Through Ten Years, Fair Value	17,898	21,366
Available-for-sale Securities, Debt Maturities, after Ten Years, Fair Value	46,620	41,238
Available-for-sale Securities, Fair Value, Total	65,197	64,339
Available-for-sale Securities, Gross Unrealized Gain	2,977	1,560
Available-for-sale Securities, Gross Unrealized Losses	42	459
Available-for-sale Securities, Amortized Cost Basis	$ 62,262	$ 63,238

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Fair Value (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Estimate of Fair Value, Fair Value Disclosure [Member]
Fair Value Disclosure, Securities Available-for-Sale [Abstract]
Fair Value Disclosure, Agency Obligations	$ 70,751	$ 44,522
Fair Value Disclosure, Agency RMBS	141,005	162,358
Fair Value Disclosure, State and Political Subdivisions	65,197	64,339
Fair Value Disclosure, Securities Available-for-Sale, Total	276,953	271,219
Other Assets, Fair Value Disclosure	756	844
Assets, Fair Value Disclosure, Recurring	277,709	272,063
Liabilities Fair Value Disclosure [Abstract]
Other Liabilities, Fair Value Disclosure	756	844
Liabilities, Fair Value Disclosure, Recurring, Total	756	844
Fair Value, Assets and Liabilities Measured on Nonrecurring Basis [Abstract]
Loans Held-for-sale, Fair Value Disclosure	7,200	2,296
Impaired Loans, Fair Value Disclosure	3,709	5,305
Other Real Esate Owned, Fair Value Disclosure	1,584	3,884
Servicing Asset at Fair Value, Amount	2,346	2,350
Assets, Fair Value Disclosure, Nonrecurring	14,839	13,835
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
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	70,751	44,522
Fair Value Disclosure, Agency RMBS	141,005	162,358
Fair Value Disclosure, State and Political Subdivisions	65,197	64,339
Fair Value Disclosure, Securities Available-for-Sale, Total	276,953	271,219
Other Assets, Fair Value Disclosure	756	844
Assets, Fair Value Disclosure, Recurring	277,709	272,063
Liabilities Fair Value Disclosure [Abstract]
Other Liabilities, Fair Value Disclosure	756	844
Liabilities, Fair Value Disclosure, Recurring, Total	756	844
Fair Value, Assets and Liabilities Measured on Nonrecurring Basis [Abstract]
Loans Held-for-sale, Fair Value Disclosure	7,200	2,296
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	7,200	2,296
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
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	3,709	5,305
Other Real Esate Owned, Fair Value Disclosure	1,584	3,884
Servicing Asset at Fair Value, Amount	2,346	2,350
Assets, Fair Value Disclosure, Nonrecurring	$ 7,639	$ 11,539

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Securities Credit Impaired Debt Securities (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
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	$ 0	$ 1,257	$ 0	$ 1,257
Other Than Temporary Impairment Credit Losses Recognized In Earnings, Reductions, Securities Fully Written Down And Deemed Worthless	0	500	0	500
Other Than Temporary Impairment Credit Losses Recognized In Earnings Credit Losses On Debt Securities Held	$ 0	$ 757	$ 0	$ 757

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Securities OTTI (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Debt Securties Other Than Temporary Impairment Charges [Abstract]
Other Than Temporary Impairment Charges, Agency RMBS			$ 333
Other Than Temporary Impairment Charges, Debt Securities Total			333
Other-Than-Temporary Impairment Charges included in earnings	0	0	333	0
Other Than Temporary Impairment On Debt Securities [Abstract]
Other Than Temporary Impairment, Securities With Intent To Sell			333
Other Than Temporary Impairment Charges On Debt Securities, Total			$ 333

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Consolidated Statements of Cash Flows (USD $) In Thousands, unless otherwise specified	6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013
Consolidated Statements of Cash Flows:
Net earnings	$ 3,680	$ 3,596
Adjustments to reconcile net earnings to net cash provided by operating activties:
Provision for loan and lease losses	(400)	400
Depreciation and amortization	366	448
Premium amortization and discount accretion, net	776	1,143
Net loss (gain) on securities available-for-sale	295	(679)
Net gain on sale of loans held for sale	(494)	(1,258)
Increase (decrease) in MSR valuation allowance	43	(201)
Net loss (gain) on other real estate owned	42	(47)
Loss on prepayment of long-term debt	0	1,471
Loans originated for sale	(29,459)	(61,382)
Proceeds from sale of loans	24,847	60,225
Increase in cash surrender value of bank owned life insurance	(251)	(196)
Net decrease in other assets	71	1,262
Net increase in accrued expenses and other liabilities	694	916
Net cash provided by operating activities	210	5,698
Cash flows from investing activities:
Proceeds from sales of securities available-for-sale	18,354	37,859
Proceeds from maturities of securities available-for-sale	18,127	39,179
Purchase of securities available-for-sale	(34,273)	(99,923)
(Increase) decrease in loans, net	(3,021)	6,159
Net purchases of premises and equipment	(19)	(471)
Decrease in FHLB stock	235	1,153
Proceeds from sale of other real estate owned	2,652	1,999
Net cash provided by (used in) investing activities	2,055	(14,045)
Cash flows from financing activities:
Net increase in noninterest-bearing deposits	4,615	9,175
Net increase in interest-bearing deposits	10,722	20,498
Net (decrease) increase in federal funds purchased and securities sold under agreements to repurchase	(47)	2,264
Repayments or retirement of long-term debt	0	(21,471)
Dividends paid	(1,567)	(1,530)
Net cash provided by financing activities	13,723	8,936
Net change in cash and cash equivalents	15,988	589
Cash and cash equivalents at beginning of period	54,222	61,949
Cash and cash equivalents at end of period	70,210	62,538
Supplemental disclosures of cash flow information:
Interest	2,777	3,548
Income taxes	506	254
Supplemental disclosure of non-cash transactions:
Real estate acquired through foreclosure	$ 394	$ 642

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Securities Gross Realized Gain Loss (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Available-for-sale Securities, Gross Realized Gain (Loss) [Abstract]
Available-for-sale Securities, Gross Realized Gains	$ 12	$ 524	$ 38	$ 685
Available-for-sale Securities, Gross Realized Losses	0	(6)	0	(6)
Other-Than-Temporary Impairment Charges included in earnings	0	0	(333)	0
Available-for-sale Securities, Gross Realized Gain (Loss), Net	$ 12	$ 518	$ (295)	$ 679

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Troubled Debt Restructuring (Details) (USD $) In Thousands, unless otherwise specified	6 Months Ended
	Jun. 30, 2013	Jun. 30, 2014	Dec. 31, 2013
Impaired Financing Receivable And Troubled Debt Restructing [Line Items]
Impaired Financing Receivable, Troubled Debt Restructuring, Still Accruing		$ 1,548	$ 1,601
Impaired Financing Receivable, Troubled Debt Restructuring, Nonaccrual		2,330	3,222
Impaired Financing Receivable, Trouble Debt Structuring, Total		3,878	4,823
Impaired Financing Receivable, Troubled Debt Restructuring, Allowance for Credit Losses		169	260
Financing Receivable, Modifications [Line Items]
Financing Receivable, Modification, Number of Contracts	2
Financing Receivable, Modification, Pre-Modification Recorded Investment	562
Financing Receivable, Modifications, Post-Modifications Recorded Investment	562
Financing Receivable, Modifications, Subsequent Default [Line Items]
Financing Receivable, Modifications, Subsequent Default, Number of Contracts	1
Financing Receivable, Modifications, Subsequent Default, Recorded Investment	1,197
Commercial and Industrial Loans [Member]
Impaired Financing Receivable And Troubled Debt Restructing [Line Items]
Impaired Financing Receivable, Troubled Debt Restructuring, Still Accruing		95	124
Impaired Financing Receivable, Troubled Debt Restructuring, Nonaccrual		0	0
Impaired Financing Receivable, Trouble Debt Structuring, Total		95	124
Impaired Financing Receivable, Troubled Debt Restructuring, Allowance for Credit Losses		0	0
Construction And Land Development Loans [Member]
Impaired Financing Receivable And Troubled Debt Restructing [Line Items]
Impaired Financing Receivable, Troubled Debt Restructuring, Still Accruing		0	0
Impaired Financing Receivable, Troubled Debt Restructuring, Nonaccrual		963	1,582
Impaired Financing Receivable, Trouble Debt Structuring, Total		963	1,582
Impaired Financing Receivable, Troubled Debt Restructuring, Allowance for Credit Losses		0	88
Financing Receivable, Modifications, Subsequent Default [Line Items]
Financing Receivable, Modifications, Subsequent Default, Number of Contracts	1
Financing Receivable, Modifications, Subsequent Default, Recorded Investment	1,197
Commercial Real Estate Owner Occupied Loans [Member]
Impaired Financing Receivable And Troubled Debt Restructing [Line Items]
Impaired Financing Receivable, Troubled Debt Restructuring, Still Accruing		861	875
Impaired Financing Receivable, Troubled Debt Restructuring, Nonaccrual		276	285
Impaired Financing Receivable, Trouble Debt Structuring, Total		1,137	1,160
Impaired Financing Receivable, Troubled Debt Restructuring, Allowance for Credit Losses		117	110
Commercial Real Estate Other Loans [Member]
Impaired Financing Receivable And Troubled Debt Restructing [Line Items]
Impaired Financing Receivable, Troubled Debt Restructuring, Still Accruing		592	602
Impaired Financing Receivable, Troubled Debt Restructuring, Nonaccrual		210	429
Impaired Financing Receivable, Trouble Debt Structuring, Total		802	1,031
Impaired Financing Receivable, Troubled Debt Restructuring, Allowance for Credit Losses		52	62
Financing Receivable, Modifications [Line Items]
Financing Receivable, Modification, Number of Contracts	1
Financing Receivable, Modification, Pre-Modification Recorded Investment	431
Financing Receivable, Modifications, Post-Modifications Recorded Investment	431
Commercial Real Estate Loans, Total [Member]
Impaired Financing Receivable And Troubled Debt Restructing [Line Items]
Impaired Financing Receivable, Troubled Debt Restructuring, Still Accruing		1,453	1,477
Impaired Financing Receivable, Troubled Debt Restructuring, Nonaccrual		486	714
Impaired Financing Receivable, Trouble Debt Structuring, Total		1,939	2,191
Impaired Financing Receivable, Troubled Debt Restructuring, Allowance for Credit Losses		169	172
Financing Receivable, Modifications [Line Items]
Financing Receivable, Modification, Number of Contracts	1
Financing Receivable, Modification, Pre-Modification Recorded Investment	431
Financing Receivable, Modifications, Post-Modifications Recorded Investment	431
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
Impaired Financing Receivable, Troubled Debt Restructuring, Nonaccrual		717	754
Impaired Financing Receivable, Trouble Debt Structuring, Total		717	754
Impaired Financing Receivable, Troubled Debt Restructuring, Allowance for Credit Losses		0	0
Financing Receivable, Modifications [Line Items]
Financing Receivable, Modification, Number of Contracts	1
Financing Receivable, Modification, Pre-Modification Recorded Investment	131
Financing Receivable, Modifications, Post-Modifications Recorded Investment	131
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
Impaired Financing Receivable, Troubled Debt Restructuring, Nonaccrual		164	172
Impaired Financing Receivable, Trouble Debt Structuring, Total		164	172
Impaired Financing Receivable, Troubled Debt Restructuring, Allowance for Credit Losses		0	0
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
Impaired Financing Receivable, Troubled Debt Restructuring, Nonaccrual		881	926
Impaired Financing Receivable, Trouble Debt Structuring, Total		881	926
Impaired Financing Receivable, Troubled Debt Restructuring, Allowance for Credit Losses		0	0
Financing Receivable, Modifications [Line Items]
Financing Receivable, Modification, Number of Contracts	1
Financing Receivable, Modification, Pre-Modification Recorded Investment	131
Financing Receivable, Modifications, Post-Modifications Recorded Investment	$ 131

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Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Assets:
Cash and due from banks	$ 14,966	$ 13,437
Federal funds sold	43,311	26,965
Interest bearing bank deposits	11,933	13,820
Cash and cash equivalents	70,210	54,222
Securities available-for-sale	276,953	271,219
Loans held for sale	7,200	2,296
Loans, net of unearned income	385,826	383,339
Allowance for loan losses	(4,728)	(5,268)
Loans, net	381,098	378,071
Premises and equipment, net	10,269	10,442
Bank-owned life insurance	17,754	17,503
Other real estate owned	1,584	3,884
Other assets	10,060	13,706
Total assets	775,128	751,343
Deposits:
Noninterest-bearing	130,355	125,740
Interest-bearing	553,826	543,104
Total deposits	684,181	668,844
Federal funds purchased and securities sold under agreements to repurchase	3,316	3,363
Long-term debt	12,217	12,217
Accrued expenses and other liabilities	3,123	2,434
Total liabilities	702,837	686,858
Stockholders' equity:
Preferred stock	0	0
Common stock	39	39
Additional paid-in capital	3,763	3,759
Retained earnings	73,992	71,879
Accumulated other comprehensive income (loss), net	1,136	(4,552)
Less treasury stock, at cost	(6,639)	(6,640)
Total stockholders' equity	72,291	64,485
Total liabilities and stockholders' equity	$ 775,128	$ 751,343

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Fair Value Level 3 Recurring (Details) (USD $) In Thousands, unless otherwise specified	6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013
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	$ 0	$ 652
Fair Value Assets Measured On Recurring Basis Realized And Unrealized Gain Loss [Abstract]
Fair Value, Measurement with Unobservable Inputs Reconciliation, Recurring Basis, Asset, Gain (Loss) Included in Other Comprehensive Income (Loss)	0	42
Fair Value, Measurement with Unobservable Inputs Reconciliation, Recurring Basis, Asset Value, Ending Balance	$ 0	$ 694

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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, 2012	$ 70,149	$ 39	$ 3,756	$ 67,821	$ 5,174	$ (6,641)
Balance, shares at Dec. 31, 2012	3,957,135
Net earnings	3,596			3,596
Other Comprehensive Income (Loss), Net of Tax	(7,005)				(7,005)
Cash dividends paid	(1,530)			(1,530)
Sale of treasury stock	1		1
Balance, End at Jun. 30, 2013	65,211	39	3,757	69,887	(1,831)	(6,641)
Balance, shares at Jun. 30, 2013	3,957,135
Balance, Beg at Dec. 31, 2013	64,485	39	3,759	71,879	(4,552)	(6,640)
Balance, shares at Dec. 31, 2013	3,957,135
Net earnings	3,680			3,680
Other Comprehensive Income (Loss), Net of Tax	5,688				5,688
Cash dividends paid	(1,567)			(1,567)
Sale of treasury stock	5		4			1
Balance, End at Jun. 30, 2014	$ 72,291	$ 39	$ 3,763	$ 73,992	$ 1,136	$ (6,639)
Balance, shares at Jun. 30, 2014	3,957,135

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Loans Past Due Analysis (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013	Jun. 30, 2013
Financing Receivable, Recorded Investment, Past Due [Line Items]
Financing Receivable, Recorded Investment, Current	$ 382,077	$ 376,959
Financing Receivable, Recorded Investment, 30 To 89 Days Past Due	1,411	2,485
Financing Receivable, Recorded Investment, 90 Days Past Due and Still Accruing	71	73
Financing Receivable, Recorded Investment, Total Still Accruing	383,559	379,517
Financing Receivable, Recorded Investment, Nonaccrual Status	2,804	4,261
Loans and Leases Receivable, Gross, Carrying Amount	386,363	383,778	390,975
Commercial and Industrial Loans [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Financing Receivable, Recorded Investment, Current	51,725	57,558
Financing Receivable, Recorded Investment, 30 To 89 Days Past Due	277	167
Financing Receivable, Recorded Investment, 90 Days Past Due and Still Accruing	0	0
Financing Receivable, Recorded Investment, Total Still Accruing	52,002	57,725
Financing Receivable, Recorded Investment, Nonaccrual Status	52	55
Loans and Leases Receivable, Gross, Carrying Amount	52,054	57,780	56,030
Construction And Land Development Loans [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Financing Receivable, Recorded Investment, Current	31,306	34,883
Financing Receivable, Recorded Investment, 30 To 89 Days Past Due	192	14
Financing Receivable, Recorded Investment, 90 Days Past Due and Still Accruing	0	0
Financing Receivable, Recorded Investment, Total Still Accruing	31,498	34,897
Financing Receivable, Recorded Investment, Nonaccrual Status	963	1,582
Loans and Leases Receivable, Gross, Carrying Amount	32,461	36,479	45,886
Commercial Real Estate Owner Occupied Loans [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Financing Receivable, Recorded Investment, Current	52,295	54,214
Financing Receivable, Recorded Investment, 30 To 89 Days Past Due	0	861
Financing Receivable, Recorded Investment, 90 Days Past Due and Still Accruing	0	0
Financing Receivable, Recorded Investment, Total Still Accruing	52,295	55,075
Financing Receivable, Recorded Investment, Nonaccrual Status	276	1,027
Loans and Leases Receivable, Gross, Carrying Amount	52,571	56,102
Commercial Real Estate Other Loans [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Financing Receivable, Recorded Investment, Current	134,460	118,389
Financing Receivable, Recorded Investment, 30 To 89 Days Past Due	0	0
Financing Receivable, Recorded Investment, 90 Days Past Due and Still Accruing	0	0
Financing Receivable, Recorded Investment, Total Still Accruing	134,460	118,389
Financing Receivable, Recorded Investment, Nonaccrual Status	210	429
Loans and Leases Receivable, Gross, Carrying Amount	134,670	118,818
Commercial Real Estate Loans, Total [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Financing Receivable, Recorded Investment, Current	186,755	172,603
Financing Receivable, Recorded Investment, 30 To 89 Days Past Due	0	861
Financing Receivable, Recorded Investment, 90 Days Past Due and Still Accruing	0	0
Financing Receivable, Recorded Investment, Total Still Accruing	186,755	173,464
Financing Receivable, Recorded Investment, Nonaccrual Status	486	1,456
Loans and Leases Receivable, Gross, Carrying Amount	187,241	174,920	177,291
Residential Real Estate Consumer Mortgage Loans [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Financing Receivable, Recorded Investment, Current	57,582	56,191
Financing Receivable, Recorded Investment, 30 To 89 Days Past Due	715	745
Financing Receivable, Recorded Investment, 90 Days Past Due and Still Accruing	71	69
Financing Receivable, Recorded Investment, Total Still Accruing	58,368	57,005
Financing Receivable, Recorded Investment, Nonaccrual Status	889	866
Loans and Leases Receivable, Gross, Carrying Amount	59,257	57,871
Residential Real Estate Investment Property Loans [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Financing Receivable, Recorded Investment, Current	43,133	42,935
Financing Receivable, Recorded Investment, 30 To 89 Days Past Due	117	598
Financing Receivable, Recorded Investment, 90 Days Past Due and Still Accruing	0	0
Financing Receivable, Recorded Investment, Total Still Accruing	43,250	43,533
Financing Receivable, Recorded Investment, Nonaccrual Status	414	302
Loans and Leases Receivable, Gross, Carrying Amount	43,664	43,835
Residential Real Estate Loans, Total [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Financing Receivable, Recorded Investment, Current	100,715	99,126
Financing Receivable, Recorded Investment, 30 To 89 Days Past Due	832	1,343
Financing Receivable, Recorded Investment, 90 Days Past Due and Still Accruing	71	69
Financing Receivable, Recorded Investment, Total Still Accruing	101,618	100,538
Financing Receivable, Recorded Investment, Nonaccrual Status	1,303	1,168
Loans and Leases Receivable, Gross, Carrying Amount	102,921	101,706	99,021
Consumer Installment and Revolving Loans [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Financing Receivable, Recorded Investment, Current	11,576	12,789
Financing Receivable, Recorded Investment, 30 To 89 Days Past Due	110	100
Financing Receivable, Recorded Investment, 90 Days Past Due and Still Accruing	0	4
Financing Receivable, Recorded Investment, Total Still Accruing	11,686	12,893
Financing Receivable, Recorded Investment, Nonaccrual Status	0	0
Loans and Leases Receivable, Gross, Carrying Amount	$ 11,686	$ 12,893	$ 12,747

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Mortgage Servicing Rights, Net(Table)

6 Months Ended

Jun. 30, 2014

Mortgage Servicing [Abstract]

Schedule Of Servicing Assets At Fair Value Text Block

		Quarter ended June 30,				Six Months Ended June 30,
(Dollars in thousands)		2014		2013		2014		2013
MSRs, net:
Beginning balance	$	2,368	$	1,728	$	2,350	$	1,526
Additions, net		105		218		203		478
Amortization expense		(84)		(102)		(164)		(226)
(Increase) decrease in valuation allowance		(43)		135		(43)		201
Ending balance	$	2,346	$	1,979	$	2,346	$	1,979
Valuation allowance included in MSRs, net:
Beginning of period	$	—	$	320	$	—	$	386
End of period		43		185		43		185
Fair value of amortized MSRs:
Beginning of period	$	3,386	$	1,994	$	3,452	$	1,526
End of period		3,228		2,453		3,228		2,453

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Allowance for Loan Loss (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Financing Receivable, Allowance for Credit Losses [Roll Forward]
Financing Receivable, Allowance for Credit Losses	$ 4,711	$ 6,769	$ 5,268	$ 6,723
Financing Receivable, Allowance for Credit Losses, Charge-offs	(95)	(352)	(398)	(742)
Financing Receivable, Allowance for Credit Losses, Recoveries	112	40	258	76
Financing Receivable Allowance For Credit Losses Net Chargeoffs Recoveries	17	(312)	(140)	(666)
Provision for loan losses	0	0	(400)	400
Financing Receivable, Allowance for Credit Losses	4,728	6,457	4,728	6,457
Commercial and Industrial Loans [Member]
Financing Receivable, Allowance for Credit Losses [Roll Forward]
Financing Receivable, Allowance for Credit Losses	482	569	386	812
Financing Receivable, Allowance for Credit Losses, Charge-offs	(46)	0	(46)	(68)
Financing Receivable, Allowance for Credit Losses, Recoveries	32	5	36	17
Financing Receivable Allowance For Credit Losses Net Chargeoffs Recoveries	(14)	5	(10)	(51)
Provision for loan losses	171	101	263	(86)
Financing Receivable, Allowance for Credit Losses	639	675	639	675
Construction And Land Development Loans [Member]
Financing Receivable, Allowance for Credit Losses [Roll Forward]
Financing Receivable, Allowance for Credit Losses	214	1,619	366	1,545
Financing Receivable, Allowance for Credit Losses, Charge-offs	0	0	(236)	(39)
Financing Receivable, Allowance for Credit Losses, Recoveries	1	2	3	3
Financing Receivable Allowance For Credit Losses Net Chargeoffs Recoveries	1	2	(233)	(36)
Provision for loan losses	692	(167)	774	(55)
Financing Receivable, Allowance for Credit Losses	907	1,454	907	1,454
Commercial Real Estate Loans, Total [Member]
Financing Receivable, Allowance for Credit Losses [Roll Forward]
Financing Receivable, Allowance for Credit Losses	2,493	3,571	3,186	3,137
Financing Receivable, Allowance for Credit Losses, Charge-offs	0	(118)	0	(118)
Financing Receivable, Allowance for Credit Losses, Recoveries	0	0	118	4
Financing Receivable Allowance For Credit Losses Net Chargeoffs Recoveries	0	(118)	118	(114)
Provision for loan losses	(580)	(342)	(1,391)	88
Financing Receivable, Allowance for Credit Losses	1,913	3,111	1,913	3,111
Residential Real Estate Loans, Total [Member]
Financing Receivable, Allowance for Credit Losses [Roll Forward]
Financing Receivable, Allowance for Credit Losses	1,256	885	1,114	1,126
Financing Receivable, Allowance for Credit Losses, Charge-offs	(41)	(189)	(72)	(455)
Financing Receivable, Allowance for Credit Losses, Recoveries	74	28	91	41
Financing Receivable Allowance For Credit Losses Net Chargeoffs Recoveries	33	(161)	19	(414)
Provision for loan losses	(194)	401	(38)	413
Financing Receivable, Allowance for Credit Losses	1,095	1,125	1,095	1,125
Consumer Installment and Revolving Loans [Member]
Financing Receivable, Allowance for Credit Losses [Roll Forward]
Financing Receivable, Allowance for Credit Losses	266	125	216	103
Financing Receivable, Allowance for Credit Losses, Charge-offs	(8)	(45)	(44)	(62)
Financing Receivable, Allowance for Credit Losses, Recoveries	5	5	10	11
Financing Receivable Allowance For Credit Losses Net Chargeoffs Recoveries	(3)	(40)	(34)	(51)
Provision for loan losses	(89)	7	(8)	40
Financing Receivable, Allowance for Credit Losses	$ 174	$ 92	$ 174	$ 92

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Fair Value (Tables)

6 Months Ended

Jun. 30, 2014

Fair Value Disclosures [Abstract]

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

					Quoted Prices in	Significant
					Active Markets	Other	Significant
					for	Observable	Unobservable
					Identical Assets	Inputs	Inputs
(Dollars in thousands)				Amount	(Level 1)	(Level 2)	(Level 3)
June 30, 2014:
Securities available-for-sale:
	Agency obligations		$	70,751	—	70,751	—
	Agency RMBS			141,005	—	141,005	—
	State and political subdivisions			65,197	—	65,197	—
Total securities available-for-sale				276,953	—	276,953	—
Other assets (1)				756	—	756	—
		Total assets at fair value	$	277,709	—	277,709	—
Other liabilities(1)			$	756	—	756	—
		Total liabilities at fair value	$	756	—	756	—
December 31, 2013:
Securities available-for-sale:
	Agency obligations		$	44,522	—	44,522	—
	Agency RMBS			162,358	—	162,358	—
	State and political subdivisions			64,339	—	64,339	—
Total securities available-for-sale				271,219	—	271,219	—
Other assets (1)				844	—	844	—
		Total assets at fair value	$	272,063	—	272,063	—
Other liabilities(1)			$	844	—	844	—
		Total liabilities at fair value	$	844	—	844	—
(1)Represents the fair value of interest rate swap agreements.

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

				Quoted Prices in
				Active Markets	Other	Significant
				for	Observable	Unobservable
			Carrying	Identical Assets	Inputs	Inputs
(Dollars in thousands)			Amount	(Level 1)	(Level 2)	(Level 3)
June 30, 2014:
Loans held for sale		$	7,200	—	7,200	—
Loans, net(1)			3,709	—	—	3,709
Other real estate owned			1,584	—	—	1,584
Other assets (2)			2,346	—	—	2,346
	Total assets at fair value	$	14,839	—	7,200	7,639
December 31, 2013:
Loans held for sale		$	2,296	—	2,296	—
Loans, net(1)			5,305	—	—	5,305
Other real estate owned			3,884	—	—	3,884
Other assets (2)			2,350	—	—	2,350
	Total assets at fair value	$	13,835	—	2,296	11,539
(1)Loans considered impaired under ASC 310-10-35 Receivables. This amount reflects the recorded investment in
	impaired loans, net of any related allowance for loan losses.
(2)Represents MSRs, net, carried at lower of cost or estimated fair value.

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

				Six Months Ended June 30,
(Dollars in thousands)				2014		2013
Beginning balance			$	—	$	652
	Total realized and unrealized gains and (losses):
		Included in other comprehensive income		—		42
Ending balance			$	—	$	694

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
Nonrecurring:
Impaired loans	$	3,709	Appraisal	Appraisal discounts (%)	17.7	%
Other real estate owned		1,584	Appraisal	Appraisal discounts (%)	13.4	%
Mortgage servicing rights, net		2,346	Discounted cash flow	Prepayment speed or CPR (%)	9.6	%
				Discount rate (%)	10.0	%

Financial Instruments [Table Text Block]

							Fair Value Hierarchy
			Carrying		Estimated		Level 1		Level 2		Level 3
(Dollars in thousands)			amount		fair value		inputs		inputs		Inputs
June 30, 2014:
Financial Assets:
	Loans, net (1)	$	381,098	$	381,014	$	—	$	—	$	381,014
	Loans held for sale		7,200		7,340		—		7,340		—
Financial Liabilities:
	Time Deposits	$	258,356	$	261,410	$	—	$	261,410	$	—
	Long-term debt		12,217		12,615		—		12,615		—
December 31, 2013:
Financial Assets:
	Loans, net (1)	$	378,071	$	387,180	$	—	$	—	$	387,180
	Loans held for sale		2,296		2,310		—		2,310		—
Financial Liabilities:
	Time Deposits	$	261,199	$	263,985	$	—	$	263,985	$	—
	Long-term debt		12,217		12,569		—		12,569		—
(1) Represents loans, net of unearned income and the allowance for loan losses.

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Consolidated Statements of Stockholders' Equity (Parentheticals) (USD $)	6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013
Statement of Stockholders' Equity (Parentheticals)
Cash dividends paid per share	$ 0.43	$ 0.42
Treasury shares sold	210	90

XML

Consolidated Balance Sheets (Parentheticals) (USD $)	Jun. 30, 2014	Dec. 31, 2013
Statement of Financial Position [Abstract]
Preferred stock par value	$ 0.01	$ 0.01
Authorized shares, preferred	200,000	200,000
Issued shares, preferred	0	0
Common stock par value	$ 0.01	$ 0.01
Authorized shares, common	8,500,000	8,500,000
Issued shares, common	3,957,135	3,957,135
Treasury stock, shares held	313,807	314,017

XML

Summary of Significant Accounting Policies (Policies)

6 Months Ended

Jun. 30, 2014

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 31,2013.

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.

Reclassifications [Text Block]

Reclassifications

Certain amounts reported in prior periods have been reclassified to conform to the current-period presentation. These reclassifications had no impact on the Company’s previously reported net earnings or total stockholders’ equity.

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 June 30,2014. The Company does not believe there were any material subsequent events during this period that would have required further recognition or disclosure in the unaudited consolidated financial statements included in this report.

New Accounting Pronouncements Policy [Policy Text Block]

Accounting Developments

In the first quarter of 2014, the Company adopted new guidance related to the following Accounting Standards Update (“Update” or “ASU”):

•

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. Thechanges were effective for the Company during the first quarter of 2014. Adoption of this ASU had no impact on the financial statements of the Company.

XML

Document and Entity Information	6 Months Ended
	Jun. 30, 2014	Jul. 31, 2014
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		3,643,328
Amendment flag	false
Document Type	10-Q
Document Year Focus	2014
Document Period Focus	Q2
Document Period End Date	Jun. 30, 2014

XML

Basic and Diluted Earnings Per Share (Tables)

6 Months Ended

Jun. 30, 2014

Earnings Per Share Abstract

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

				Quarter ended June 30,				Six Months Ended June 30,
(In thousands, except share and per share data)				2014		2013		2014		2013
Basic and diluted:
	Net earnings		$	1,859	$	1,907	$	3,680	$	3,596
	Weighted average common shares outstanding			3,643,295		3,642,955		3,643,228		3,642,936
		Earnings per share	$	0.51	$	0.52	$	1.01	$	0.99

XML

Consolidated Statements of Earnings (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Interest income:
Loans, including fees	$ 4,766	$ 5,224	$ 9,556	$ 10,552
Securities - Taxable	1,214	899	2,390	1,773
Securities - Tax Exempt	607	708	1,234	1,450
Federal funds sold and interest bearing bank deposits	30	29	72	60
Total interest income	6,617	6,860	13,252	13,835
Interest expense:
Deposits	1,255	1,349	2,512	2,753
Short-term borrowings	5	3	9	7
Long-term debt interest expense	104	276	208	702
Total interest expense	1,364	1,628	2,729	3,462
Net interest income	5,253	5,232	10,523	10,373
Provision for loan losses	0	0	(400)	400
Net interest income after provision for loan losses	5,253	5,232	10,923	9,973
Noninterest income:
Service charges on deposit accounts	219	234	432	483
Mortgage lending	348	837	734	1,647
Bank-owned life insurance gain	125	101	251	196
Other noninterest income	377	381	715	721
Securities (losses) gains, net:
Realized gains, net	12	518	38	679
Total other-than-temporary impairments	0	0	(333)	0
Total securities (losses) gains, net	12	518	(295)	679
Total noninterest income	1,081	2,071	1,837	3,726
Noninterest expense:
Salaries and benefits	2,221	2,114	4,502	4,364
Net occupancy and equipment	341	333	693	664
Professional fees	225	209	431	385
FDIC and other regulatory assessments	129	143	274	337
Other real estate owned, net	(62)	20	56	43
Prepayment penalty on long-term debt	0	1,046	0	1,471
Other noninterest expense	938	859	1,784	1,686
Total noninterest expense	3,792	4,724	7,740	8,950
Earnings before income taxes	2,542	2,579	5,020	4,749
Income tax expense	683	672	1,340	1,153
Net earnings	$ 1,859	$ 1,907	$ 3,680	$ 3,596
Net earnings per share:
Earnings per share basic and diluted	$ 0.51	$ 0.52	$ 1.01	$ 0.99
Weighted average shares outstanding:
Basic and diluted weighted average shares outstanding	3,643,295	3,642,955	3,643,228	3,642,936

XML

Securities

6 Months Ended

Jun. 30, 2014

Investments debt and equity securities [Abstract]

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

NOTE 4: SECURITIES

At June 30,2014 and December 31,2013, 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 June 30,2014 and December 31,2013, respectively, are presented below.

			1 year	1 to 5	5 to 10	After 10	Fair	Gross Unrealized		Amortized
(Dollars in thousands)			or less	years	years	years	Value	Gains	Losses	Cost
June 30, 2014
Agency obligations (a)		$	—	13,306	34,535	22,910	70,751	293	1,914	$	72,372
Agency RMBS (a)			—	—	7,535	133,470	141,005	2,009	1,523		140,519
State and political subdivisions			—	679	17,898	46,620	65,197	2,977	42		62,262
	Total available-for-sale	$	—	13,985	59,968	203,000	276,953	5,279	3,479	$	275,153

December 31, 2013
Agency obligations (a)		$	—	—	23,247	21,275	44,522	—	4,557	$	49,079
Agency RMBS (a)			—	—	8,306	154,052	162,358	976	4,733		166,115
State and political subdivisions			—	1,735	21,366	41,238	64,339	1,560	459		63,238
	Total available-for-sale	$	—	1,735	52,919	216,565	271,219	2,536	9,749	$	278,432
(a) Includes securities issued by U.S. government agencies or government sponsored entities.

Securities with aggregate fair values of $137.4 million and $120.5 million at June 30,2014 and December 31,2013, 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 $1.6 million and $1.8 million at June 30,2014 and December 31,2013, respectively. Cost-method investments primarily include non-marketable equity investments, such as FHLB of Atlanta stock and Federal Reserve Bank (“FRB”) stock.

Gross Unrealized Losses and Fair Value

The fair values and gross unrealized losses on securities at June 30,2014 and December 31,2013, respectively, segregated by those securities that have been in an unrealized loss position for less than 12 months and 12 months or longer, are presented below.

			Less than 12 Months		12 Months or Longer			Total
			Fair	Unrealized	Fair	Unrealized		Fair	Unrealized
(Dollars in thousands)			Value	Losses	Value	Losses		Value	Losses
June 30, 2014:
Agency obligations		$	—	—	42,172	1,914	$	42,172	1,914
Agency RMBS			—	—	67,063	1,523		67,063	1,523
State and political subdivisions			1,892	25	2,290	17		4,182	42
	Total	$	1,892	25	111,525	3,454	$	113,417	3,479

December 31, 2013:
Agency obligations		$	35,933	3,182	8,590	1,376	$	44,523	4,558
Agency RMBS			109,774	4,393	7,683	339		117,457	4,732
State and political subdivisions			9,575	459	—	—		9,575	459
	Total	$	155,282	8,034	16,273	1,715	$	171,555	9,749

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

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

• the length of time and the extent to which the fair value has been less than the amortized cost basis;
• adverse conditions specifically related to the security, an industry, or a geographic area (for example, changes in the financial condition of the issuer of the security, or in the case of an asset-backed debt security, in the financial condition of the underlying loan obligors, including changes in technology or the discontinuance of a segment of the business that may affect the future earnings potential of the issuer or underlying loan obligors of the security or changes in the quality of the credit enhancement);
• the historical and implied volatility of the fair value of the security;
• the payment structure of the debt security and the likelihood of the issuer being able to make payments that increase in the future;
• failure of the issuer of the security to make scheduled interest or principal payments;
• any changes to the rating of the security by a rating agency; and
• recoveries or additional declines in fair value subsequent to the balance sheet date.

Agency obligations

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

Agency RMBS

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

Securities of U.S. states and political subdivisions

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

Cost-method investments

At June 30,2014, cost-method investments with an aggregate cost of $1.6 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.

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 June 30,				Six Months Ended June 30,
(Dollars in thousands)				2014		2013		2014		2013
Balance, beginning of period			$	—	$	1,257	$	—	$	1,257
	Reductions:
		Securities fully written down and deemed worthless		—		500		—		500
Balance, end of period			$	—	$	757	$	—	$	757

Other-Than-Temporary Impairment

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

					Quarter ended June 30,				Six Months Ended June 30,
(Dollars in thousands)					2014		2013		2014		2013
Other-than-temporary impairment charges
	Debt securities:
		Agency RMBS		$	—	$	—	$	333	$	—
			Total debt securities		—		—		333		—
Total other-than-temporary impairment charges				$	—	$	—	$	333	$	—
Other-than-temporary impairment on debt securities:
	Recorded as part of gross realized losses:
		Securities with intent to sell			—		—		333		—
Total other-than-temporary impairment on debt securities				$	—	$	—	$	333	$	—

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 June 30,				Six Months Ended June 30,
(Dollars in thousands)				2014		2013		2014		2013
Gross realized gains			$	12	$	524	$	38	$	685
Gross realized losses				—		(6)		—		(6)
Other-than-temporary impairment charges				—		—		(333)		—
	Realized gains (losses), net		$	12	$	518	$	(295)	$	679

XML

Variable Interest Entities

6 Months Ended

Jun. 30, 2014

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 June 30,2014, 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 June 30,2014.

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

XML

Derivative Instruments (Table)

6 Months Ended

Jun. 30, 2014

Derivative instruments and hedging activities disclosure abstract

Schedule of Derivative Instruments [Table Text Block]

				Other	Other
				Assets	Liabilities
				Estimated	Estimated
(Dollars in thousands)			Notional	Fair Value	Fair Value
June 30, 2014:
Pay fixed / receive variable		$	4,842	—	756
Pay variable / receive fixed			4,842	756	—
	Total interest rate swap agreements	$	9,684	756	756
December 31, 2013:
Pay fixed / receive variable		$	5,017	—	844
Pay variable / receive fixed			5,017	844	—
	Total interest rate swap agreements	$	10,034	844	844

XML

Variable Interest Entities (Tables)

6 Months Ended

Jun. 30, 2014

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

XML

Derivative Instruments

6 Months Ended

Jun. 30, 2014

Derivative instruments and hedging activities disclosure abstract

Derivative Instruments And Hedging Activities Disclosure Text Block

NOTE 7: DERIVATIVE INSTRUMENTS

Financial derivatives are reported at fair value in other assets or other liabilities on the accompanying Consolidated Balance Sheets. The accounting for changes in the fair value of a derivative depends on whether it has been designated and qualifies as part of a hedging relationship. For derivatives not designated as part of a hedging relationship, the gain or loss is recognized in current earnings within other noninterest income on the accompanying Consolidated Statements of Earnings. From time to time, the Company may enter into interest rate swaps (“swaps”) to facilitate customer transactions and meet their financing needs. Upon entering into these swaps, the Company enters into offsetting positions in order to minimize the risk to the Company. These swaps qualify as derivatives, but are not designated as hedging instruments. At June 30,2014 and December 31,2013, the Company had no derivative contracts to assist in managing its own 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 June 30,2014 and December 31,2013 is presented below.

				Other	Other
				Assets	Liabilities
				Estimated	Estimated
(Dollars in thousands)			Notional	Fair Value	Fair Value
June 30, 2014:
Pay fixed / receive variable		$	4,842	—	756
Pay variable / receive fixed			4,842	756	—
	Total interest rate swap agreements	$	9,684	756	756
December 31, 2013:
Pay fixed / receive variable		$	5,017	—	844
Pay variable / receive fixed			5,017	844	—
	Total interest rate swap agreements	$	10,034	844	844

XML

Loan and Allowance for Loan Losses

6 Months Ended

Jun. 30, 2014

Loans And Leases Receivable Disclosure

Loans and leases receivable disclosure [Text Block]

NOTE 5: LOANS AND ALLOWANCE FOR LOAN LOSSES

				June 30,		December 31,
(In thousands)				2014		2013
Commercial and industrial			$	52,054	$	57,780
Construction and land development				32,461		36,479
Commercial real estate:
	Owner occupied			52,571		56,102
	Other			134,670		118,818
		Total commercial real estate		187,241		174,920
Residential real estate:
	Consumer mortgage			59,257		57,871
	Investment property			43,664		43,835
		Total residential real estate		102,921		101,706
Consumer installment				11,686		12,893
		Total loans		386,363		383,778
Less: unearned income				(537)		(439)
		Loans, net of unearned income	$	385,826	$	383,339

Loans secured by real estate were approximately 83.5% of the Company’s total loan portfolio at June 30,2014. At June 30,2014, 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 June 30,2014, and December 31,2013.

					Accruing	Accruing	Total
					30-89 Days	Greater than	Accruing	Non-		Total
(In thousands)			Current		Past Due	90 days	Loans	Accrual		Loans
June 30, 2014:
Commercial and industrial			$	51,725	277	—	52,002	52	$	52,054
Construction and land development				31,306	192	—	31,498	963		32,461
Commercial real estate:
	Owner occupied			52,295	—	—	52,295	276		52,571
	Other			134,460	—	—	134,460	210		134,670
		Total commercial real estate		186,755	—	—	186,755	486		187,241
Residential real estate:
	Consumer mortgage			57,582	715	71	58,368	889		59,257
	Investment property			43,133	117	—	43,250	414		43,664
		Total residential real estate		100,715	832	71	101,618	1,303		102,921
Consumer installment				11,576	110	—	11,686	—		11,686
		Total	$	382,077	1,411	71	383,559	2,804	$	386,363

December 31, 2013:
Commercial and industrial			$	57,558	167	—	57,725	55	$	57,780
Construction and land development				34,883	14	—	34,897	1,582		36,479
Commercial real estate:
	Owner occupied			54,214	861	—	55,075	1,027		56,102
	Other			118,389	—	—	118,389	429		118,818
		Total commercial real estate		172,603	861	—	173,464	1,456		174,920
Residential real estate:
	Consumer mortgage			56,191	745	69	57,005	866		57,871
	Investment property			42,935	598	—	43,533	302		43,835
		Total residential real estate		99,126	1,343	69	100,538	1,168		101,706
Consumer installment				12,789	100	4	12,893	—		12,893
		Total	$	376,959	2,485	73	379,517	4,261	$	383,778

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 June 30,2014 and December 31,2013, 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 2014 and 2013, the Company implemented certain refinements to its allowance for loan losses methodology, specifically the way that historical loss factors are calculated. Beginning with the quarter ended June 30, 2014, the Company calculated average losses for all loan segments using a rolling 20 quarter historical period in order to better capture the effects of the most recent economic cycle on the Company’s loan loss experience. Beginning with the quarter ended June 30, 2013, the Company calculated average losses for all loan segments using a rolling 8 quarter historical period (except for the commercial real estate loan segment, which used a 6 quarter historical period) and continued this methodology through March 31, 2014. Prior to June 30, 2013, the Company calculated average losses for all loan segments using a rolling 6 quarter historical period.

If the Company continued to calculate average losses for all loan segments other than commercial real estate using a rolling 8 quarter historical period and for the commercial real estate segment using a rolling 6 quarter historical period, the Company’s calculated allowance for loan loss allocation would have decreased by approximately $1.0 million at June 30, 2014.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.

			June 30, 2014
(In thousands)		Commercial and industrial		Construction and land development	Commercial real estate	Residential real estate	Consumer installment		Total
Quarter ended:
Beginning balance		$	482	214	2,493	1,256	266	$	4,711
Charge-offs			(46)	—	—	(41)	(8)		(95)
Recoveries			32	1	—	74	5		112
	Net (charge-offs) recoveries		(14)	1	—	33	(3)		17
Provision for loan losses			171	692	(580)	(194)	(89)		—
Ending balance		$	639	907	1,913	1,095	174	$	4,728

Six months ended:
Beginning balance		$	386	366	3,186	1,114	216	$	5,268
Charge-offs			(46)	(236)	—	(72)	(44)		(398)
Recoveries			36	3	118	91	10		258
	Net (charge-offs) recoveries		(10)	(233)	118	19	(34)		(140)
Provision for loan losses			263	774	(1,391)	(38)	(8)		(400)
Ending balance		$	639	907	1,913	1,095	174	$	4,728

			June 30, 2013
(In thousands)		Commercial and industrial		Construction and land development	Commercial real estate	Residential real estate	Consumer installment		Total
Quarter ended:
Beginning balance		$	569	1,619	3,571	885	125		6,769
Charge-offs			—	—	(118)	(189)	(45)	$	(352)
Recoveries			5	2	—	28	5	$	40
	Net recoveries (charge-offs)		5	2	(118)	(161)	(40)		(312)
Provision for loan losses			101	(167)	(342)	401	7	$	—
Ending balance		$	675	1,454	3,111	1,125	92	$	6,457

Six months ended:
Beginning balance		$	812	1,545	3,137	1,126	103	$	6,723
Charge-offs			(68)	(39)	(118)	(455)	(62)		(742)
Recoveries			17	3	4	41	11		76
	Net charge-offs		(51)	(36)	(114)	(414)	(51)		(666)
Provision for loan losses			(86)	(55)	88	413	40		400
Ending balance		$	675	1,454	3,111	1,125	92	$	6,457

The following table presents an analysis of the allowance for loan losses and recorded investment in loans by portfolio segment and impairment methodology as of June 30,2014and 2013.

			Collectively evaluated (1)		Individually evaluated (2)		Total
			Allowance	Recorded	Allowance	Recorded	Allowance	Recorded
			for loan	investment	for loan	investment	for loan	investment
(In thousands)			losses	in loans	losses	in loans	losses	in loans
June 30, 2014:
Commercial and industrial		$	639	51,959	—	95	639	52,054
Construction and land development			907	31,498	—	963	907	32,461
Commercial real estate			1,744	185,302	169	1,939	1,913	187,241
Residential real estate			1,095	102,040	—	881	1,095	102,921
Consumer installment			174	11,686	—	—	174	11,686
	Total	$	4,559	382,485	169	3,878	4,728	386,363

June 30, 2013:
Commercial and industrial		$	675	55,882	—	148	675	56,030
Construction and land development			1,347	44,285	107	1,601	1,454	45,886
Commercial real estate			2,991	174,922	120	2,369	3,111	177,291
Residential real estate			1,069	97,732	56	1,289	1,125	99,021
Consumer installment			92	12,747	—	—	92	12,747
	Total	$	6,174	385,568	283	5,407	6,457	390,975
(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 not expected.

(In thousands)				Pass	Special Mention	Substandard Accruing	Nonaccrual		Total loans
June 30, 2014:
Commercial and industrial			$	47,157	4,448	397	52	$	52,054
Construction and land development				30,285	638	575	963		32,461
Commercial real estate:
	Owner occupied			50,904	1,206	185	276		52,571
	Other			133,581	89	790	210		134,670
		Total commercial real estate		184,485	1,295	975	486		187,241
Residential real estate:
	Consumer mortgage			51,424	3,426	3,518	889		59,257
	Investment property			40,702	1,312	1,236	414		43,664
		Total residential real estate		92,126	4,738	4,754	1,303		102,921
Consumer installment				11,547	28	111	—		11,686
		Total	$	365,600	11,147	6,812	2,804	$	386,363

December 31, 2013:
Commercial and industrial			$	53,060	4,183	482	55	$	57,780
Construction and land development				33,616	180	1,101	1,582		36,479
Commercial real estate:
	Owner occupied			53,430	770	875	1,027		56,102
	Other			117,490	91	808	429		118,818
		Total commercial real estate		170,920	861	1,683	1,456		174,920
Residential real estate:
	Consumer mortgage			50,392	1,137	5,476	866		57,871
	Investment property			40,517	1,310	1,706	302		43,835
		Total residential real estate		90,909	2,447	7,182	1,168		101,706
Consumer installment				12,713	34	146	—		12,893
		Total	$	361,218	7,705	10,594	4,261	$	383,778

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 June 30,2014and December 31,2013.

				June 30, 2014
(In thousands)				Unpaid principal balance (1)	Charge-offs and payments applied (2)	Recorded investment (3)		Related allowance
With no allowance recorded:
Commercial and industrial			$	95	—	95
Construction and land development				2,960	(1,997)	963
Commercial real estate:
	Owner occupied			337	(61)	276
	Other			300	(90)	210
		Total commercial real estate		637	(151)	486
Residential real estate:
	Consumer mortgages			941	(224)	717
	Investment property			206	(42)	164
		Total residential real estate		1,147	(266)	881
		Total	$	4,839	(2,414)	2,425
With allowance recorded:
Commercial real estate:
	Owner occupied			861	—	861		117
	Other			592	—	592		52
		Total commercial real estate		1,453	—	1,453		169
		Total	$	1,453	—	1,453	$	169
		Total impaired loans	$	6,292	(2,414)	3,878	$	169
(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, 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			$	124	—	124
Construction and land development				2,879	(1,682)	1,197
Commercial real estate:
	Owner occupied			1,217	(190)	1,027
	Other			518	(89)	429
		Total commercial real estate		1,735	(279)	1,456
Residential real estate:
	Consumer mortgages			952	(198)	754
	Investment property			207	(35)	172
		Total residential real estate		1,159	(233)	926
		Total	$	5,897	(2,194)	3,703
With allowance recorded:
Construction and land development				452	(67)	385		88
Commercial real estate:
	Owner occupied			875	—	875		110
	Other			602	—	602		62
		Total commercial real estate		1,477	—	1,477		172
		Total	$	1,929	(67)	1,862	$	260
		Total impaired loans	$	7,826	(2,261)	5,565	$	260
(1) Unpaid principal balance represents the contractual obligation due from the customer.
(2) Charge-offs and payments applied represents cumulative charge-offs taken, as well as interest payments that have been
	applied against the outstanding principal balance subsequent to the loans being placed on nonaccrual status.
(3) Recorded investment represents the unpaid principal balance less charge-offs and payments applied; it is shown before
	any related allowance for loan losses.

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

				Quarter ended June 30, 2014		Six months ended June 30, 2014
				Average	Total interest	Average	Total interest
				recorded	income	recorded	income
(In thousands)				investment	recognized	investment	recognized
Impaired loans:
Commercial and industrial			$	103	2	111	4
Construction and land development				1,098	—	1,343	—
Commercial real estate:
	Owner occupied			1,142	9	1,468	21
	Other			949	8	994	17
		Total commercial real estate		2,091	17	2,462	38
Residential real estate:
	Consumer mortgages			724	—	736	—
	Investment property			165	—	168	—
		Total residential real estate		889	—	904	—
		Total	$	4,181	19	4,820	42

				Quarter ended June 30, 2013		Six months ended June 30, 2013
				Average	Total interest	Average	Total interest
				recorded	income	recorded	income
(In thousands)				investment	recognized	investment	recognized
Impaired loans:
Commercial and industrial			$	150	2	158	5
Construction and land development				1,607	—	1,614	—
Commercial real estate:
	Owner occupied			1,984	14	2,019	29
	Other			430	—	1,902	—
		Total commercial real estate		2,414	14	3,921	29
Residential real estate:
	Consumer mortgages			789	—	801	—
	Investment property			348	—	323	—
		Total residential real estate		1,137	—	1,124	—
		Total	$	5,308	16	6,817	34

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 individually evaluated 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 June 30,2014, and December 31,2013.

				TDRs
								Related
(In thousands)				Accruing	Nonaccrual	Total		Allowance
June 30, 2014
Commercial and industrial			$	95	—	95	$	—
Construction and land development				—	963	963		—
Commercial real estate:
	Owner occupied			861	276	1,137		117
	Other			592	210	802		52
		Total commercial real estate		1,453	486	1,939		169
Residential real estate:
	Consumer mortgages			—	717	717		—
	Investment property			—	164	164		—
		Total residential real estate		—	881	881		—
		Total	$	1,548	2,330	3,878	$	169

December 31, 2013
Commercial and industrial			$	124	—	124	$	—
Construction and land development				—	1,582	1,582		88
Commercial real estate:
	Owner occupied			875	285	1,160		110
	Other			602	429	1,031		62
		Total commercial real estate		1,477	714	2,191		172
Residential real estate:
	Consumer mortgages			—	754	754		—
	Investment property			—	172	172		—
		Total residential real estate		—	926	926		—
		Total	$	1,601	3,222	4,823	$	260

At June 30,2014, 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 TDR during the respective periods both before and after their modification.

			Quarter ended June 30,				Six months ended June 30,
					Pre-	Post -			Pre-	Post -
					modification	modification			modification	modification
			Number		outstanding	outstanding	Number		outstanding	outstanding
			of		recorded	recorded	of		recorded	recorded
(Dollars in thousands)			contracts		investment	investment	contracts		investment	investment
2013:
Commercial real estate:
	Other		—	$	—	—	1	$	431	431
		Total commercial real estate	—		—	—	1		431	431
Residential real estate:
	Consumer mortgages		—		—	—	1		131	131
		Total residential real estate	—		—	—	1		131	131
		Total	—	$	—	—	2	$	562	562

There were no loans modified in a TDR during the six months ended June 30, 2014. The majority of the loans modified in a TDR during the six months ended June 30, 2013 included permitting delays in required payments of principal and/or interest or where the only concession granted by the Company was that the interest rate at renewal was considered to be less than a market rate.

The following table summarizes the recorded investment in loans modified in a TDR within the previous 12 months for which there was a payment default (defined as 90 days or more past due) during the respective periods. There were no loans modified in a TDR which had a payment default during the six months ended June 30, 2014.

		Quarter ended June 30,			Six months Ended June 30,
		Number of		Recorded	Number of		Recorded
(Dollars in thousands)		Contracts		investment(1)	Contracts		investment(1)
2013:
Construction and land development		—	$	—	1	$	1,197
	Total	—	$	—	1	$	1,197
(1) Amount as of applicable month end during the respective period for which there was a payment default.

XML

Mortgage Servicing Rights, Net

6 Months Ended

Jun. 30, 2014

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

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

		Quarter ended June 30,				Six Months Ended June 30,
(Dollars in thousands)		2014		2013		2014		2013
MSRs, net:
Beginning balance	$	2,368	$	1,728	$	2,350	$	1,526
Additions, net		105		218		203		478
Amortization expense		(84)		(102)		(164)		(226)
(Increase) decrease in valuation allowance		(43)		135		(43)		201
Ending balance	$	2,346	$	1,979	$	2,346	$	1,979
Valuation allowance included in MSRs, net:
Beginning of period	$	—	$	320	$	—	$	386
End of period		43		185		43		185
Fair value of amortized MSRs:
Beginning of period	$	3,386	$	1,994	$	3,452	$	1,526
End of period		3,228		2,453		3,228		2,453

XML

Fair Value Disclosures

6 Months Ended

Jun. 30, 2014

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 six months endedJune 30,2014, 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 for similar securities, market consensus prepayment speeds, credit information and the securities’ terms and conditions. On a quarterly basis, management reviews the pricing received from the third party pricing services for reasonableness given current market conditions. As part of its review, management may obtain non-binding third party broker quotes to validate the fair value measurements. In addition, management will periodically submit pricing provided by the third party pricing services to another independent valuation firm on a sample basis. This independent valuation firm will compare the price provided by the third party pricing service with its own price and will review the significant assumptions and valuation methodologies used with management.

Interest rate swap agreements

The carrying amount of interest rate swap agreements was included in other assets and accrued expenses and other liabilities on the accompanying consolidated balance sheets. The fair value measurements for our interest rate swap agreements were based on information obtained from a third party bank. This information is periodically tested by the Company and validated against other third party valuations. If needed, other third party market participants may be utilized to corroborate the fair value measurements for our interest rate swap agreements. The Company classified these derivative assets and

					Quoted Prices in	Significant
					Active Markets	Other	Significant
					for	Observable	Unobservable
					Identical Assets	Inputs	Inputs
(Dollars in thousands)				Amount	(Level 1)	(Level 2)	(Level 3)
June 30, 2014:
Securities available-for-sale:
	Agency obligations		$	70,751	—	70,751	—
	Agency RMBS			141,005	—	141,005	—
	State and political subdivisions			65,197	—	65,197	—
Total securities available-for-sale				276,953	—	276,953	—
Other assets (1)				756	—	756	—
		Total assets at fair value	$	277,709	—	277,709	—
Other liabilities(1)			$	756	—	756	—
		Total liabilities at fair value	$	756	—	756	—
December 31, 2013:
Securities available-for-sale:
	Agency obligations		$	44,522	—	44,522	—
	Agency RMBS			162,358	—	162,358	—
	State and political subdivisions			64,339	—	64,339	—
Total securities available-for-sale				271,219	—	271,219	—
Other assets (1)				844	—	844	—
		Total assets at fair value	$	272,063	—	272,063	—
Other liabilities(1)			$	844	—	844	—
		Total liabilities at fair value	$	844	—	844	—
(1)Represents the fair value of interest rate swap agreements.

Assets and liabilities measured at fair value on a nonrecurring basis

Loans held for sale

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

Impaired Loans

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

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

Other real estate owned

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

Mortgage servicing rights, net

Mortgage servicing rights, net, included in other assets on the accompanying consolidated balance sheets, are carried at the lower of cost or estimated fair value. MSRs do not trade in an active market with readily observable prices. To determine the fair value of MSRs, the Company engages an independent third party. The independent third party’s valuation model calculates the present value of estimated future net servicing income using assumptions that market participants would use in estimating future net servicing income, including estimates of prepayment speeds, discount 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 June 30,2014 and December 31,2013, respectively, by caption, on the accompanying consolidated balance sheets and by FASB ASC 820 valuation hierarchy (as described above):

				Quoted Prices in
				Active Markets	Other	Significant
				for	Observable	Unobservable
			Carrying	Identical Assets	Inputs	Inputs
(Dollars in thousands)			Amount	(Level 1)	(Level 2)	(Level 3)
June 30, 2014:
Loans held for sale		$	7,200	—	7,200	—
Loans, net(1)			3,709	—	—	3,709
Other real estate owned			1,584	—	—	1,584
Other assets (2)			2,346	—	—	2,346
	Total assets at fair value	$	14,839	—	7,200	7,639
December 31, 2013:
Loans held for sale		$	2,296	—	2,296	—
Loans, net(1)			5,305	—	—	5,305
Other real estate owned			3,884	—	—	3,884
Other assets (2)			2,350	—	—	2,350
	Total assets at fair value	$	13,835	—	2,296	11,539
(1)Loans considered impaired under ASC 310-10-35 Receivables. This amount reflects the recorded investment in
	impaired loans, net of any related allowance for loan losses.
(2)Represents MSRs, net, carried at lower of cost or estimated fair value.

Quantitative Disclosures for Level 3 Fair Value Measurements

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:

				Six Months Ended June 30,
(Dollars in thousands)				2014		2013
Beginning balance			$	—	$	652
	Total realized and unrealized gains and (losses):
		Included in other comprehensive income		—		42
Ending balance			$	—	$	694

At June 30,2014, the Company had no Level 3 assets measured at fair value on a recurring basis. For Level 3 assets measured at fair value on a non-recurring basis at June 30,2014, the significant unobservable inputs used in the fair value measurements are presented below.

					Weighted
		Carrying			Average
(Dollars in thousands)		Amount	Valuation Technique	Significant Unobservable Input	of Input
Nonrecurring:
Impaired loans	$	3,709	Appraisal	Appraisal discounts (%)	17.7	%
Other real estate owned		1,584	Appraisal	Appraisal discounts (%)	13.4	%
Mortgage servicing rights, net		2,346	Discounted cash flow	Prepayment speed or CPR (%)	9.6	%
				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.

Loans held for sale

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

Time Deposits

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

Long-term debt

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

The carrying value, related estimated fair value, and placement in the fair value hierarchy of the Company’s financial instruments at June 30,2014 and December 31,2013 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

							Fair Value Hierarchy
			Carrying		Estimated		Level 1		Level 2		Level 3
(Dollars in thousands)			amount		fair value		inputs		inputs		Inputs
June 30, 2014:
Financial Assets:
	Loans, net (1)	$	381,098	$	381,014	$	—	$	—	$	381,014
	Loans held for sale		7,200		7,340		—		7,340		—
Financial Liabilities:
	Time Deposits	$	258,356	$	261,410	$	—	$	261,410	$	—
	Long-term debt		12,217		12,615		—		12,615		—
December 31, 2013:
Financial Assets:
	Loans, net (1)	$	378,071	$	387,180	$	—	$	—	$	387,180
	Loans held for sale		2,296		2,310		—		2,310		—
Financial Liabilities:
	Time Deposits	$	261,199	$	263,985	$	—	$	263,985	$	—
	Long-term debt		12,217		12,569		—		12,569		—
(1) Represents loans, net of unearned income and the allowance for loan losses.

XML

Loans (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013	Jun. 30, 2013
Loans And Leases Receivable Disclosure
Loans and Leases Receivable, Gross, Commercial	$ 52,054	$ 57,780
Construction And Land Development Loans	32,461	36,479
Commericial Real Estate Loans [Abstract]
Commercial Real Estate Owner Occupied Loans	52,571	56,102
Commerical Real Estate Other Loans	134,670	118,818
Total Commercial Real Estate Loans	187,241	174,920
Residential Real Estate Loans [Abstract]
Consumer Mortgage Loans	59,257	57,871
Residential Real Estate Investment Property Loans	43,664	43,835
Total Residential Real Estate Loans	102,921	101,706
Consumer Installment And Revolving Loans	11,686	12,893
Loans and Leases Receivable, Gross, Carrying Amount	386,363	383,778	390,975
Loans and Leases Receivable Deferred Income	(537)	(439)
Loans, net of unearned income	$ 385,826	$ 383,339

XML

Loan and Allowance for Loan Loss (Tables)

6 Months Ended

Jun. 30, 2014

Loans And Leases Receivable Disclosure

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

				June 30,		December 31,
(In thousands)				2014		2013
Commercial and industrial			$	52,054	$	57,780
Construction and land development				32,461		36,479
Commercial real estate:
	Owner occupied			52,571		56,102
	Other			134,670		118,818
		Total commercial real estate		187,241		174,920
Residential real estate:
	Consumer mortgage			59,257		57,871
	Investment property			43,664		43,835
		Total residential real estate		102,921		101,706
Consumer installment				11,686		12,893
		Total loans		386,363		383,778
Less: unearned income				(537)		(439)
		Loans, net of unearned income	$	385,826	$	383,339

Past Due Financing Receivables [Table Text Block]

					Accruing	Accruing	Total
					30-89 Days	Greater than	Accruing	Non-		Total
(In thousands)			Current		Past Due	90 days	Loans	Accrual		Loans
June 30, 2014:
Commercial and industrial			$	51,725	277	—	52,002	52	$	52,054
Construction and land development				31,306	192	—	31,498	963		32,461
Commercial real estate:
	Owner occupied			52,295	—	—	52,295	276		52,571
	Other			134,460	—	—	134,460	210		134,670
		Total commercial real estate		186,755	—	—	186,755	486		187,241
Residential real estate:
	Consumer mortgage			57,582	715	71	58,368	889		59,257
	Investment property			43,133	117	—	43,250	414		43,664
		Total residential real estate		100,715	832	71	101,618	1,303		102,921
Consumer installment				11,576	110	—	11,686	—		11,686
		Total	$	382,077	1,411	71	383,559	2,804	$	386,363

December 31, 2013:
Commercial and industrial			$	57,558	167	—	57,725	55	$	57,780
Construction and land development				34,883	14	—	34,897	1,582		36,479
Commercial real estate:
	Owner occupied			54,214	861	—	55,075	1,027		56,102
	Other			118,389	—	—	118,389	429		118,818
		Total commercial real estate		172,603	861	—	173,464	1,456		174,920
Residential real estate:
	Consumer mortgage			56,191	745	69	57,005	866		57,871
	Investment property			42,935	598	—	43,533	302		43,835
		Total residential real estate		99,126	1,343	69	100,538	1,168		101,706
Consumer installment				12,789	100	4	12,893	—		12,893
		Total	$	376,959	2,485	73	379,517	4,261	$	383,778

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

			June 30, 2014
(In thousands)		Commercial and industrial		Construction and land development	Commercial real estate	Residential real estate	Consumer installment		Total
Quarter ended:
Beginning balance		$	482	214	2,493	1,256	266	$	4,711
Charge-offs			(46)	—	—	(41)	(8)		(95)
Recoveries			32	1	—	74	5		112
	Net (charge-offs) recoveries		(14)	1	—	33	(3)		17
Provision for loan losses			171	692	(580)	(194)	(89)		—
Ending balance		$	639	907	1,913	1,095	174	$	4,728

Six months ended:
Beginning balance		$	386	366	3,186	1,114	216	$	5,268
Charge-offs			(46)	(236)	—	(72)	(44)		(398)
Recoveries			36	3	118	91	10		258
	Net (charge-offs) recoveries		(10)	(233)	118	19	(34)		(140)
Provision for loan losses			263	774	(1,391)	(38)	(8)		(400)
Ending balance		$	639	907	1,913	1,095	174	$	4,728

			June 30, 2013
(In thousands)		Commercial and industrial		Construction and land development	Commercial real estate	Residential real estate	Consumer installment		Total
Quarter ended:
Beginning balance		$	569	1,619	3,571	885	125		6,769
Charge-offs			—	—	(118)	(189)	(45)	$	(352)
Recoveries			5	2	—	28	5	$	40
	Net recoveries (charge-offs)		5	2	(118)	(161)	(40)		(312)
Provision for loan losses			101	(167)	(342)	401	7	$	—
Ending balance		$	675	1,454	3,111	1,125	92	$	6,457

Six months ended:
Beginning balance		$	812	1,545	3,137	1,126	103	$	6,723
Charge-offs			(68)	(39)	(118)	(455)	(62)		(742)
Recoveries			17	3	4	41	11		76
	Net charge-offs		(51)	(36)	(114)	(414)	(51)		(666)
Provision for loan losses			(86)	(55)	88	413	40		400
Ending balance		$	675	1,454	3,111	1,125	92	$	6,457

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
June 30, 2014:
Commercial and industrial		$	639	51,959	—	95	639	52,054
Construction and land development			907	31,498	—	963	907	32,461
Commercial real estate			1,744	185,302	169	1,939	1,913	187,241
Residential real estate			1,095	102,040	—	881	1,095	102,921
Consumer installment			174	11,686	—	—	174	11,686
	Total	$	4,559	382,485	169	3,878	4,728	386,363

June 30, 2013:
Commercial and industrial		$	675	55,882	—	148	675	56,030
Construction and land development			1,347	44,285	107	1,601	1,454	45,886
Commercial real estate			2,991	174,922	120	2,369	3,111	177,291
Residential real estate			1,069	97,732	56	1,289	1,125	99,021
Consumer installment			92	12,747	—	—	92	12,747
	Total	$	6,174	385,568	283	5,407	6,457	390,975
(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
June 30, 2014:
Commercial and industrial			$	47,157	4,448	397	52	$	52,054
Construction and land development				30,285	638	575	963		32,461
Commercial real estate:
	Owner occupied			50,904	1,206	185	276		52,571
	Other			133,581	89	790	210		134,670
		Total commercial real estate		184,485	1,295	975	486		187,241
Residential real estate:
	Consumer mortgage			51,424	3,426	3,518	889		59,257
	Investment property			40,702	1,312	1,236	414		43,664
		Total residential real estate		92,126	4,738	4,754	1,303		102,921
Consumer installment				11,547	28	111	—		11,686
		Total	$	365,600	11,147	6,812	2,804	$	386,363

December 31, 2013:
Commercial and industrial			$	53,060	4,183	482	55	$	57,780
Construction and land development				33,616	180	1,101	1,582		36,479
Commercial real estate:
	Owner occupied			53,430	770	875	1,027		56,102
	Other			117,490	91	808	429		118,818
		Total commercial real estate		170,920	861	1,683	1,456		174,920
Residential real estate:
	Consumer mortgage			50,392	1,137	5,476	866		57,871
	Investment property			40,517	1,310	1,706	302		43,835
		Total residential real estate		90,909	2,447	7,182	1,168		101,706
Consumer installment				12,713	34	146	—		12,893
		Total	$	361,218	7,705	10,594	4,261	$	383,778

Impaired Financing Receivables [Table Text Block]

				June 30, 2014
(In thousands)				Unpaid principal balance (1)	Charge-offs and payments applied (2)	Recorded investment (3)		Related allowance
With no allowance recorded:
Commercial and industrial			$	95	—	95
Construction and land development				2,960	(1,997)	963
Commercial real estate:
	Owner occupied			337	(61)	276
	Other			300	(90)	210
		Total commercial real estate		637	(151)	486
Residential real estate:
	Consumer mortgages			941	(224)	717
	Investment property			206	(42)	164
		Total residential real estate		1,147	(266)	881
		Total	$	4,839	(2,414)	2,425
With allowance recorded:
Commercial real estate:
	Owner occupied			861	—	861		117
	Other			592	—	592		52
		Total commercial real estate		1,453	—	1,453		169
		Total	$	1,453	—	1,453	$	169
		Total impaired loans	$	6,292	(2,414)	3,878	$	169
(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, 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			$	124	—	124
Construction and land development				2,879	(1,682)	1,197
Commercial real estate:
	Owner occupied			1,217	(190)	1,027
	Other			518	(89)	429
		Total commercial real estate		1,735	(279)	1,456
Residential real estate:
	Consumer mortgages			952	(198)	754
	Investment property			207	(35)	172
		Total residential real estate		1,159	(233)	926
		Total	$	5,897	(2,194)	3,703
With allowance recorded:
Construction and land development				452	(67)	385		88
Commercial real estate:
	Owner occupied			875	—	875		110
	Other			602	—	602		62
		Total commercial real estate		1,477	—	1,477		172
		Total	$	1,929	(67)	1,862	$	260
		Total impaired loans	$	7,826	(2,261)	5,565	$	260
(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 June 30, 2014		Six months ended June 30, 2014
				Average	Total interest	Average	Total interest
				recorded	income	recorded	income
(In thousands)				investment	recognized	investment	recognized
Impaired loans:
Commercial and industrial			$	103	2	111	4
Construction and land development				1,098	—	1,343	—
Commercial real estate:
	Owner occupied			1,142	9	1,468	21
	Other			949	8	994	17
		Total commercial real estate		2,091	17	2,462	38
Residential real estate:
	Consumer mortgages			724	—	736	—
	Investment property			165	—	168	—
		Total residential real estate		889	—	904	—
		Total	$	4,181	19	4,820	42

				Quarter ended June 30, 2013		Six months ended June 30, 2013
				Average	Total interest	Average	Total interest
				recorded	income	recorded	income
(In thousands)				investment	recognized	investment	recognized
Impaired loans:
Commercial and industrial			$	150	2	158	5
Construction and land development				1,607	—	1,614	—
Commercial real estate:
	Owner occupied			1,984	14	2,019	29
	Other			430	—	1,902	—
		Total commercial real estate		2,414	14	3,921	29
Residential real estate:
	Consumer mortgages			789	—	801	—
	Investment property			348	—	323	—
		Total residential real estate		1,137	—	1,124	—
		Total	$	5,308	16	6,817	34

Troubled Debt Restructurings on Financing Receivables [Table Text Block]

				TDRs
								Related
(In thousands)				Accruing	Nonaccrual	Total		Allowance
June 30, 2014
Commercial and industrial			$	95	—	95	$	—
Construction and land development				—	963	963		—
Commercial real estate:
	Owner occupied			861	276	1,137		117
	Other			592	210	802		52
		Total commercial real estate		1,453	486	1,939		169
Residential real estate:
	Consumer mortgages			—	717	717		—
	Investment property			—	164	164		—
		Total residential real estate		—	881	881		—
		Total	$	1,548	2,330	3,878	$	169

December 31, 2013
Commercial and industrial			$	124	—	124	$	—
Construction and land development				—	1,582	1,582		88
Commercial real estate:
	Owner occupied			875	285	1,160		110
	Other			602	429	1,031		62
		Total commercial real estate		1,477	714	2,191		172
Residential real estate:
	Consumer mortgages			—	754	754		—
	Investment property			—	172	172		—
		Total residential real estate		—	926	926		—
		Total	$	1,601	3,222	4,823	$	260

			Quarter ended June 30,				Six months ended June 30,
					Pre-	Post -			Pre-	Post -
					modification	modification			modification	modification
			Number		outstanding	outstanding	Number		outstanding	outstanding
			of		recorded	recorded	of		recorded	recorded
(Dollars in thousands)			contracts		investment	investment	contracts		investment	investment
2013:
Commercial real estate:
	Other		—	$	—	—	1	$	431	431
		Total commercial real estate	—		—	—	1		431	431
Residential real estate:
	Consumer mortgages		—		—	—	1		131	131
		Total residential real estate	—		—	—	1		131	131
		Total	—	$	—	—	2	$	562	562

		Quarter ended June 30,			Six months Ended June 30,
		Number of		Recorded	Number of		Recorded
(Dollars in thousands)		Contracts		investment(1)	Contracts		investment(1)
2013:
Construction and land development		—	$	—	1	$	1,197
	Total	—	$	—	1	$	1,197
(1) Amount as of applicable month end during the respective period for which there was a payment default.

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Variable Interest Entities (Details) (Liability Recognized [Member], USD $) In Thousands, unless otherwise specified	Jun. 30, 2014
Liability Recognized [Member]
Variable Interest Entities [Line Items]
Trust Preferred Issuance, Liability Recognized	$ 7,217

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Loans Textuals (Details)	Jun. 30, 2014
Loan and Lease Disclosure (Textuals) [Abstract]
Percentage Of Loans Secured By Real Estate	0.835

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Consolidated Statements of Comprehensive Income (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Statements of Comprehensive Income [Abstract]
Net earnings	$ 1,859	$ 1,907	$ 3,680	$ 3,596
Other comprehensive income (loss), net of tax:
Unrealized net holding gain (loss) on securities	2,937	(5,821)	5,502	(6,577)
Reclassification adjustment for net loss (gain) on securities recognized in net earnings	(8)	(327)	186	(428)
Other comprehensive income (loss), net of tax	2,929	(6,148)	5,688	(7,005)
Comprehensive income	$ 4,788	$ (4,241)	$ 9,368	$ (3,409)

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Basic and Diluted Earnings Per Share

6 Months Ended

Jun. 30, 2014

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 June 30,2014 and 2013, 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 June 30,				Six Months Ended June 30,
(In thousands, except share and per share data)				2014		2013		2014		2013
Basic and diluted:
	Net earnings		$	1,859	$	1,907	$	3,680	$	3,596
	Weighted average common shares outstanding			3,643,295		3,642,955		3,643,228		3,642,936
		Earnings per share	$	0.51	$	0.52	$	1.01	$	0.99

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Variable Interest Entities Textuals (Details) (USD $) In Millions, unless otherwise specified	Jun. 30, 2014
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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Loan Credit Quality Analysis (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013	Jun. 30, 2013
Financing Receivable, Recorded Investment [Line Items]
Financing Receivable, Recorded Investment, Pass	$ 365,600	$ 361,218
Financing Receivable, Recorded Investment, Special Mention	11,147	7,705
Financing Receivable Recorded Investment, Substandard Accruing	6,812	10,594
Financing Receivable, Recorded Investment, Nonaccrual Status	2,804	4,261
Loans and Leases Receivable, Gross, Carrying Amount	386,363	383,778	390,975
Commercial and Industrial Loans [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing Receivable, Recorded Investment, Pass	47,157	53,060
Financing Receivable, Recorded Investment, Special Mention	4,448	4,183
Financing Receivable Recorded Investment, Substandard Accruing	397	482
Financing Receivable, Recorded Investment, Nonaccrual Status	52	55
Loans and Leases Receivable, Gross, Carrying Amount	52,054	57,780	56,030
Construction And Land Development Loans [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing Receivable, Recorded Investment, Pass	30,285	33,616
Financing Receivable, Recorded Investment, Special Mention	638	180
Financing Receivable Recorded Investment, Substandard Accruing	575	1,101
Financing Receivable, Recorded Investment, Nonaccrual Status	963	1,582
Loans and Leases Receivable, Gross, Carrying Amount	32,461	36,479	45,886
Commercial Real Estate Owner Occupied Loans [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing Receivable, Recorded Investment, Pass	50,904	53,430
Financing Receivable, Recorded Investment, Special Mention	1,206	770
Financing Receivable Recorded Investment, Substandard Accruing	185	875
Financing Receivable, Recorded Investment, Nonaccrual Status	276	1,027
Loans and Leases Receivable, Gross, Carrying Amount	52,571	56,102
Commercial Real Estate Other Loans [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing Receivable, Recorded Investment, Pass	133,581	117,490
Financing Receivable, Recorded Investment, Special Mention	89	91
Financing Receivable Recorded Investment, Substandard Accruing	790	808
Financing Receivable, Recorded Investment, Nonaccrual Status	210	429
Loans and Leases Receivable, Gross, Carrying Amount	134,670	118,818
Commercial Real Estate Loans, Total [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing Receivable, Recorded Investment, Pass	184,485	170,920
Financing Receivable, Recorded Investment, Special Mention	1,295	861
Financing Receivable Recorded Investment, Substandard Accruing	975	1,683
Financing Receivable, Recorded Investment, Nonaccrual Status	486	1,456
Loans and Leases Receivable, Gross, Carrying Amount	187,241	174,920	177,291
Residential Real Estate Consumer Mortgage Loans [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing Receivable, Recorded Investment, Pass	51,424	50,392
Financing Receivable, Recorded Investment, Special Mention	3,426	1,137
Financing Receivable Recorded Investment, Substandard Accruing	3,518	5,476
Financing Receivable, Recorded Investment, Nonaccrual Status	889	866
Loans and Leases Receivable, Gross, Carrying Amount	59,257	57,871
Residential Real Estate Investment Property Loans [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing Receivable, Recorded Investment, Pass	40,702	40,517
Financing Receivable, Recorded Investment, Special Mention	1,312	1,310
Financing Receivable Recorded Investment, Substandard Accruing	1,236	1,706
Financing Receivable, Recorded Investment, Nonaccrual Status	414	302
Loans and Leases Receivable, Gross, Carrying Amount	43,664	43,835
Residential Real Estate Loans, Total [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing Receivable, Recorded Investment, Pass	92,126	90,909
Financing Receivable, Recorded Investment, Special Mention	4,738	2,447
Financing Receivable Recorded Investment, Substandard Accruing	4,754	7,182
Financing Receivable, Recorded Investment, Nonaccrual Status	1,303	1,168
Loans and Leases Receivable, Gross, Carrying Amount	102,921	101,706	99,021
Consumer Installment and Revolving Loans [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing Receivable, Recorded Investment, Pass	11,547	12,713
Financing Receivable, Recorded Investment, Special Mention	28	34
Financing Receivable Recorded Investment, Substandard Accruing	111	146
Financing Receivable, Recorded Investment, Nonaccrual Status	0	0
Loans and Leases Receivable, Gross, Carrying Amount	$ 11,686	$ 12,893	$ 12,747

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Securities (Tables)

6 Months Ended

Jun. 30, 2014

Investments debt and equity securities [Abstract]

Available-for-sale Securities [Table Text Block]

			1 year	1 to 5	5 to 10	After 10	Fair	Gross Unrealized		Amortized
(Dollars in thousands)			or less	years	years	years	Value	Gains	Losses	Cost
June 30, 2014
Agency obligations (a)		$	—	13,306	34,535	22,910	70,751	293	1,914	$	72,372
Agency RMBS (a)			—	—	7,535	133,470	141,005	2,009	1,523		140,519
State and political subdivisions			—	679	17,898	46,620	65,197	2,977	42		62,262
	Total available-for-sale	$	—	13,985	59,968	203,000	276,953	5,279	3,479	$	275,153

December 31, 2013
Agency obligations (a)		$	—	—	23,247	21,275	44,522	—	4,557	$	49,079
Agency RMBS (a)			—	—	8,306	154,052	162,358	976	4,733		166,115
State and political subdivisions			—	1,735	21,366	41,238	64,339	1,560	459		63,238
	Total available-for-sale	$	—	1,735	52,919	216,565	271,219	2,536	9,749	$	278,432
(a) Includes securities issued by U.S. government agencies or government sponsored entities.

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

			Less than 12 Months		12 Months or Longer			Total
			Fair	Unrealized	Fair	Unrealized		Fair	Unrealized
(Dollars in thousands)			Value	Losses	Value	Losses		Value	Losses
June 30, 2014:
Agency obligations		$	—	—	42,172	1,914	$	42,172	1,914
Agency RMBS			—	—	67,063	1,523		67,063	1,523
State and political subdivisions			1,892	25	2,290	17		4,182	42
	Total	$	1,892	25	111,525	3,454	$	113,417	3,479

December 31, 2013:
Agency obligations		$	35,933	3,182	8,590	1,376	$	44,523	4,558
Agency RMBS			109,774	4,393	7,683	339		117,457	4,732
State and political subdivisions			9,575	459	—	—		9,575	459
	Total	$	155,282	8,034	16,273	1,715	$	171,555	9,749

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

				Quarter ended June 30,				Six Months Ended June 30,
(Dollars in thousands)				2014		2013		2014		2013
Balance, beginning of period			$	—	$	1,257	$	—	$	1,257
	Reductions:
		Securities fully written down and deemed worthless		—		500		—		500
Balance, end of period			$	—	$	757	$	—	$	757

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

					Quarter ended June 30,				Six Months Ended June 30,
(Dollars in thousands)					2014		2013		2014		2013
Other-than-temporary impairment charges
	Debt securities:
		Agency RMBS		$	—	$	—	$	333	$	—
			Total debt securities		—		—		333		—
Total other-than-temporary impairment charges				$	—	$	—	$	333	$	—
Other-than-temporary impairment on debt securities:
	Recorded as part of gross realized losses:
		Securities with intent to sell			—		—		333		—
Total other-than-temporary impairment on debt securities				$	—	$	—	$	333	$	—

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 June 30,				Six Months Ended June 30,
(Dollars in thousands)				2014		2013		2014		2013
Gross realized gains			$	12	$	524	$	38	$	685
Gross realized losses				—		(6)		—		(6)
Other-than-temporary impairment charges				—		—		(333)		—
	Realized gains (losses), net		$	12	$	518	$	(295)	$	679