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, 2015

[  ] 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, 2015
Common Stock, $0.01 par value per share	3,643,448 shares

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

INDEX

PART I.  FINANCIAL INFORMATION				PAGE
Item 1	Financial Statements
		Consolidated Balance Sheets (Unaudited) as of June 30, 2015 and December 31, 2014		3
		Consolidated Statements of Earnings (Unaudited) for the quarter and six months ended June  30, 2015 and 2014		4
		Consolidated Statements of Comprehensive Income (Unaudited) for the quarter and six months ended June 30, 2015 and 2014		5
		Consolidated Statements of Stockholders’ Equity (Unaudited) for the six months ended June 30, 2015 and 2014		6
		Consolidated Statements of Cash Flows (Unaudited) for the six months ended June  30, 2015 and 2014		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, 2015 and 2014	51
		Table 5 –	Average Balances and Net Interest Income Analysis – for the six months ended June 30, 2015 and 2014	52
		Table 6 –	Loan Portfolio Composition	53
		Table 7 –	Allowance for Loan Losses and Nonperforming Assets	54
		Table 8 –	Allocation of Allowance for Loan Losses	55
		Table 9 –	CDs and Other Time Deposits of $100,000 or more	56
Item 3	Quantitative and Qualitative Disclosures About Market Risk			57
Item 4	Controls and Procedures			57
PART II.  OTHER INFORMATION
Item 1	Legal Proceedings			57
Item 1A	Risk Factors			57
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds			57
Item 3	Defaults Upon Senior Securities			57
Item 4	Mine Safety Disclosures			57
Item 5	Other Information			57
Item 6	Exhibits			58

PART 1.  FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Unaudited)

(Dollars in thousands, except share data)	June 30, 2015		December 31, 2014
Assets:
Cash and due from banks	$	15,914	$	12,856
Federal funds sold		46,050		68,507
Interest bearing bank deposits		46,265		2,140
Cash and cash equivalents		108,229		83,503
Securities available-for-sale		252,906		267,603
Loans held for sale		3,875		1,974
Loans, net of unearned income		408,495		402,954
Allowance for loan losses		(4,886)		(4,836)
Loans, net		403,609		398,118
Premises and equipment, net		11,029		10,807
Bank-owned life insurance		17,198		18,004
Other real estate owned		499		534
Other assets		8,888		8,688
Total assets	$	806,233	$	789,231
Liabilities:
Deposits:
Noninterest-bearing	$	149,736	$	130,160
Interest-bearing		566,258		563,230
Total deposits		715,994		693,390
Federal funds purchased and securities sold under agreements to repurchase		2,912		4,681
Long-term debt		7,217		12,217
Accrued expenses and other liabilities		3,057		3,144
Total liabilities		729,180		713,432
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		3,765		3,763
Retained earnings		78,602		76,193
Accumulated other comprehensive income, net		1,285		2,443
Less treasury stock, at cost - 313,707 shares and 313,807 shares at June 30, 2015 and December 31, 2014, respectively		(6,638)		(6,639)
Total stockholders’ equity		77,053		75,799
Total liabilities and stockholders’ equity	$	806,233	$	789,231

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)		2015			2014			2015			2014
Interest income:
Loans, including fees	$		5,217	$		4,766	$		10,223	$		9,556
Securities:
Taxable			949			1,214			1,989			2,390
Tax-exempt			654			607			1,305			1,234
Federal funds sold and interest bearing bank deposits			51			30			90			72
Total interest income			6,871			6,617			13,607			13,252
Interest expense:
Deposits			1,020			1,255			2,122			2,512
Short-term borrowings			4			5			10			9
Long-term debt			59			104			164			208
Total interest expense			1,083			1,364			2,296			2,729
Net interest income			5,788			5,253			11,311			10,523
Provision for loan losses			—			—			—			(400)
Net interest income after provision for loan losses			5,788			5,253			11,311			10,923
Noninterest income:
Service charges on deposit accounts			209			219			415			432
Mortgage lending			457			348			791			734
Bank-owned life insurance			112			125			513			251
Other			389			377			766			715
Securities gains (losses), net:
Realized gains, net			—			12			3			38
Total other-than-temporary impairments			—			—			—			(333)
Total securities gains (losses), net			—			12			3			(295)
Total noninterest income			1,167			1,081			2,488			1,837
Noninterest expense:
Salaries and benefits			2,291			2,221			4,559			4,502
Net occupancy and equipment			362			341			720			693
Professional fees			218			225			419			431
FDIC and other regulatory assessments			118			129			243			274
Other real estate owned, net			1			(62)			18			56
Prepayment penalties on long-term debt			—			—			362			—
Other			1,039			938			2,022			1,784
Total noninterest expense			4,029			3,792			8,343			7,740
Earnings before income taxes			2,926			2,542			5,456			5,020
Income tax expense			776			683			1,444			1,340
Net earnings	$		2,150	$		1,859	$		4,012	$		3,680
Net earnings per share:
Basic and diluted	$		0.59	$		0.51	$		1.10	$		1.01
Weighted average shares outstanding:
Basic and diluted			3,643,413			3,643,295			3,643,389			3,643,228

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)		2015			2014			2015			2014
Net earnings	$		2,150	$		1,859	$		4,012	$		3,680
Other comprehensive (loss) income, net of tax:
Unrealized net holding (loss) gain on securities			(1,842)			2,937			(1,156)			5,502
Reclassification adjustment for net (gain) loss on securities recognized in net earnings			—			(8)			(2)			186
Other comprehensive (loss) income			(1,842)			2,929			(1,158)			5,688
Comprehensive income	$		308	$		4,788	$		2,854	$		9,368

See accompanying notes to consolidated financial statements

5

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

(Unaudited)

	Common Stock						Additional paid-in			Retained		Accumulated other comprehensive			Treasury
(Dollars in thousands, except share data)	Shares			Amount			capital			earnings		(loss) income			stock			Total
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
Balance, December 31, 2014		3,957,135	$		39	$		3,763	$		76,193	$	2,443	$		(6,639)	$		75,799
Net earnings		—			—			—			4,012		—			—			4,012
Other comprehensive loss		—			—			—			—		(1,158)			—			(1,158)
Cash dividends paid ($0.44 per share)		—			—			—			(1,603)		—			—			(1,603)
Sale of treasury stock (100 shares)		—			—			2			—		—			1			3
Balance, June 30, 2015		3,957,135	$		39	$		3,765	$		78,602	$	1,285	$		(6,638)	$		77,053

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)		2015			2014
Cash flows from operating activities:
Net earnings	$		4,012	$		3,680
Adjustments to reconcile net earnings to net cash provided by operating activities:
Provision for loan losses			—			(400)
Depreciation and amortization			545			366
Premium amortization and discount accretion, net			804			776
Net (gain) loss on securities available-for-sale			(3)			295
Net gain on sale of loans held for sale			(644)			(494)
(Decrease) increase in MSR valuation allowance			(39)			43
Net loss on other real estate owned			5			42
Loss on prepayment of long-term debt			362			—
Loans originated for sale			(38,404)			(29,459)
Proceeds from sale of loans			36,883			24,847
Increase in cash surrender value of bank-owned life insurance			(237)			(251)
Income recognized from death benefit on bank-owned life insurance			(276)			—
Net decrease in other assets			237			71
Net (decrease) increase in accrued expenses and other liabilities			(84)			694
Net cash provided by operating activities			3,161			210
Cash flows from investing activities:
Proceeds from sales of securities available-for-sale			—			18,354
Proceeds from maturities of securities available-for-sale			16,698			18,127
Purchase of securities available-for-sale			(4,637)			(34,273)
Increase in loans, net			(5,491)			(3,021)
Net purchases of premises and equipment			(415)			(19)
Proceeds from bank-owned life insurance death benefit			1,319			—
Decrease in FHLB stock			191			235
Proceeds from sale of other real estate owned			30			2,652
Net cash provided by investing activities			7,695			2,055
Cash flows from financing activities:
Net increase in noninterest-bearing deposits			19,576			4,615
Net increase in interest-bearing deposits			3,028			10,722
Net decrease in federal funds purchased and securities sold under agreements to repurchase			(1,769)			(47)
Repayments or retirement of long-term debt			(5,362)			—
Dividends paid			(1,603)			(1,567)
Net cash provided by financing activities			13,870			13,723
Net change in cash and cash equivalents			24,726			15,988
Cash and cash equivalents at beginning of period			83,503			54,222
Cash and cash equivalents at end of period	$		108,229	$		70,210
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$		2,366	$		2,777
Income taxes			1,241			506
Supplemental disclosure of non-cash transactions:
Real estate acquired through foreclosure			—			394

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, 2014.

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

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

Subsequent Events

The Company has evaluated the effects of events and transactions through the date of this filing that have occurred subsequent to June 30, 2015. 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 2015, the Company adopted new guidance related to the following Accounting Standards Updates (“Updates” or “ASUs”):

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

• ASU 2014-14, Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure.

8

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 were effective for the Company in the first quarter of 2015. Adoption of this ASU did not have a material impact on the consolidated financial statements of the Company.

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 the process of foreclosure. These changes were effective for the Company in the first quarter of 2015. Adoption of this ASU did not have a material 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 were effective for the Company in the first quarter 2015. Adoption of this ASU did not have a material impact on the consolidated financial statements of the Company.

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 were effective for the Company in the first quarter 2015. Adoption of this ASU did not have a material impact on the consolidated financial statements of the Company.

ASU No. 2014-14, Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure, clarifies how creditors classify government-guaranteed mortgage loans, including FHA or VA guaranteed loans, upon foreclosure. Some creditors reclassify those loans to real estate consistent with other foreclosed loans that do not have guarantees; others reclassify the loans to other receivables. The amendments in this guidance require that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the following conditions are met: (1) The loan has a government guarantee that is not separable from the loan before foreclosure; (2) At the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim; and (3) At the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. These changes were effective for the Company in the first quarter of 2015. Adoption of this ASU did not have a material impact on the consolidated financial statements of the Company.

9

NOTE 2: BASIC AND DILUTED EARNINGS PER SHARE

Basic net earnings per share is computed by dividing net earnings by the weighted average common shares outstanding for the respective period. Diluted net earnings per share reflect the potential dilution that could occur upon exercise of securities or other rights for, or convertible into, shares of the Company’s common stock. At June 30, 2015 and 2014, 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)		2015		2014			2015		2014
Basic and diluted:
Net earnings	$		2,150	$	1,859	$		4,012	$	3,680
Weighted average common shares outstanding			3,643,413		3,643,295			3,643,389		3,643,228
Earnings per share	$		0.59	$	0.51	$		1.10	$	1.01

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, 2015, 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, 2015.

(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, 2015 and December 31, 2014, respectively, all securities within the scope of Accounting Standards Codification (“ASC”) 320, Investments – Debt and Equity Securities, were classified as available-for-sale. The fair value and amortized cost for securities available-for-sale by contractual maturity at June 30, 2015 and December 31, 2014, 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, 2015
Agency obligations (a)	$	5,007		26,033		14,870		14,309		60,219		509		869	$		60,579
Agency RMBS (a)		—		1,994		15,340		104,779		122,113		1,156		995			121,952
State and political subdivisions		—		1,055		13,121		56,398		70,574		2,525		290			68,339
Total available-for-sale	$	5,007		29,082		43,331		175,486		252,906		4,190		2,154	$		250,870
December 31, 2014
Agency obligations (a)	$	—		30,947		14,869		14,433		60,249		375		830	$		60,704
Agency RMBS (a)		—		—		14,523		120,520		135,043		1,597		616			134,062
State and political subdivisions		—		502		15,520		56,289		72,311		3,379		34			68,966
Total available-for-sale	$	—		31,449		44,912		191,242		267,603		5,351		1,480	$		263,732

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

Securities with aggregate fair values of $140.3 million and $132.2 million at June 30, 2015 and December 31, 2014, respectively, were pledged to secure public deposits, securities sold under agreements to repurchase, Federal Home Loan Bank (“FHLB”) advances, and for other purposes required or permitted by law.

Included in other assets are cost-method investments. The carrying amounts of cost-method investments were $1.4 million and $1.6 million at June 30, 2015 and December 31, 2014, 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, 2015 and December 31, 2014, 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, 2015:
Agency obligations	$		—		—		24,089		869	$		24,089		869
Agency RMBS			28,866		558		19,464		437			48,330		995
State and political subdivisions			13,050		290		—		—			13,050		290
Total	$		41,916		848		43,553		1,306	$		85,469		2,154
December 31, 2014:
Agency obligations	$		—		—		24,126		830	$		24,126		830
Agency RMBS			9,078		22		42,744		594			51,822		616
State and political subdivisions			4,257		34		—		—			4,257		34
Total	$		13,335		56		66,870		1,424	$		80,205		1,480

11

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

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

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

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

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

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

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

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

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

Agency obligations

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

Agency RMBS

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

Securities of U.S. states and political subdivisions

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

Cost-method investments

At June 30, 2015, cost-method investments with an aggregate cost of $1.4 million were not evaluated for impairment because the Company did not identify any events or changes in circumstances that may have a significant adverse effect on the fair value of these cost-method investments.

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

Other-Than-Temporarily Impaired Securities

Credit-impaired debt securities are debt securities where the Company has written down the amortized cost basis of a security for other-than-temporary impairment and the credit component of the loss is recognized in earnings. At June 30, 2015 and December 31, 2014, the Company had no credit-impaired debt securities and there were no additions or reductions in the credit loss component of credit-impaired debt securities during the six months ended June 30, 2015 and 2014, respectively.

12

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)		2015			2014			2015			2014
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 of securities.

		Quarter ended June 30,					Six Months Ended June 30,
(Dollars in thousands)		2015		2014			2015		2014
Gross realized gains	$		—	$	12	$		3	$	38
Realized gains, net	$		—	$	12	$		3	$	38

13

NOTE 5: LOANS AND ALLOWANCE FOR LOAN LOSSES

(In thousands)	June 30, 2015			December 31, 2014
Commercial and industrial	$	57,310		$	54,329
Construction and land development		38,854			37,298
Commercial real estate:
Owner occupied		42,343			52,296
Other		141,781			139,710
Total commercial real estate		184,124			192,006
Residential real estate:
Consumer mortgage		69,448			66,489
Investment property		45,591			41,152
Total residential real estate		115,039			107,641
Consumer installment		13,632			12,335
Total loans		408,959			403,609
Less: unearned income		(464	)		(655)
Loans, net of unearned income	$	408,495		$	402,954

Loans secured by real estate were approximately 82.7% of the Company’s total loan portfolio at June 30, 2015. At June 30, 2015, the Company’s geographic loan distribution was concentrated primarily in Lee County, Alabama, and surrounding areas.

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

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

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

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

Commercial real estate (“CRE”) — includes loans disaggregated into 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 to local businesses and residents. Generally, the primary source of repayment is dependent upon income generated from the real estate collateral. The underwriting of these loans takes into consideration the occupancy and rental rates, as well as the financial health of the borrower.

14

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

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

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

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

The following is a summary of current, accruing past due, and nonaccrual loans by portfolio segment and class as of June 30, 2015 and December 31, 2014.

(In thousands)	Current		Accruing   30-89 Days   Past Due		Accruing  Greater than  90 days		Total     Accruing     Loans		Non-     Accrual			Total     Loans
June 30, 2015:
Commercial and industrial	$	57,258		6		—		57,264		46	$		57,310
Construction and land development		38,080		12		160		38,252		602			38,854
Commercial real estate:
Owner occupied		41,659		—		—		41,659		684			42,343
Other		141,781		—		—		141,781		—			141,781
Total commercial real estate		183,440		—		—		183,440		684			184,124
Residential real estate:
Consumer mortgage		68,947		246		228		69,421		27			69,448
Investment property		45,368		169		54		45,591		—			45,591
Total residential real estate		114,315		415		282		115,012		27			115,039
Consumer installment		13,609		23		—		13,632		—			13,632
Total	$	406,702		456		442		407,600		1,359	$		408,959
December 31, 2014:
Commercial and industrial	$	54,106		168		—		54,274		55	$		54,329
Construction and land development		36,483		210		—		36,693		605			37,298
Commercial real estate:
Owner occupied		51,832		201		—		52,033		263			52,296
Other		139,710		—		—		139,710		—			139,710
Total commercial real estate		191,542		201		—		191,743		263			192,006
Residential real estate:
Consumer mortgage		64,713		1,736		—		66,449		40			66,489
Investment property		40,503		495		—		40,998		154			41,152
Total residential real estate		105,216		2,231		—		107,447		194			107,641
Consumer installment		12,290		45		—		12,335		—			12,335
Total	$	399,637		2,855		—		402,492		1,117	$		403,609

15

Allowance for Loan Losses

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

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

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

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

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

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

The allocation of the allowance for loan losses begins with a process of estimating the probable losses inherent for each loan segement. 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, 2015 and December 31, 2014, 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, the Company implemented certain refinements to its allowance for loan losses methodology in order to better capture the effects of the most recent economic cycle on the Company’s loan loss experience. Beginning with the quarter ended June 30, 2014, the Company calculated average losses for all loan segments using a rolling 20 quarter historical period and continues to use this methodology.

16

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 material 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, 2015
(In thousands)	Commercial and industrial			Construction and land development			Commercial real estate			Residential  real estate			Consumer    installment			Total
Quarter ended:
Beginning balance	$	644			830			1,888			1,153			207		$	4,722
Charge-offs		—			—			—			—			(5	)		(5)
Recoveries		3			4			—			151			11			169
Net recoveries (charge-offs)		3			4			—			151			6			164
Provision for loan losses		34			(194	)		258			(124	)		26			—
Ending balance	$	681			640			2,146			1,180			239		$	4,886
Six months ended:
Beginning balance	$	639			974			1,928			1,119			176		$	4,836
Charge-offs		(58	)		—			—			(59	)		(23	)		(140)
Recoveries		4			9			—			165			12			190
Net (charge-offs) recoveries		(54	)		9			—			106			(11	)		50
Provision for loan losses		96			(343	)		218			(45	)		74			—
Ending balance	$	681			640			2,146			1,180			239		$	4,886
	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

17

The following table presents an analysis of the allowance for loan losses and recorded investment in loans by portfolio segment and impairment methodology as of June 30, 2015 and 2014.

		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, 2015:
Commercial and industrial	$		681		57,246		—		64		681		57,310
Construction and land development			640		38,252		—		602		640		38,854
Commercial real estate			1,672		182,465		474		1,659		2,146		184,124
Residential real estate			1,180		115,039		—		—		1,180		115,039
Consumer installment			239		13,632		—		—		239		13,632
Total	$		4,412		406,634		474		2,325		4,886		408,959
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

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

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

18

Credit Quality Indicators

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

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

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

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

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

(In thousands)	Pass		Special Mention		Substandard Accruing		Nonaccrual		Total loans
June 30, 2015:
Commercial and industrial	$	52,662		4,219		383		46	$	57,310
Construction and land development		37,495		130		627		602		38,854
Commercial real estate:
Owner occupied		40,323		1,112		224		684		42,343
Other		139,324		2,178		279		—		141,781
Total commercial real estate		179,647		3,290		503		684		184,124
Residential real estate:
Consumer mortgage		63,688		2,001		3,732		27		69,448
Investment property		43,935		490		1,166		—		45,591
Total residential real estate		107,623		2,491		4,898		27		115,039
Consumer installment		13,436		29		167		—		13,632
Total	$	390,863		10,159		6,578		1,359	$	408,959
December 31, 2014:
Commercial and industrial	$	49,550		4,348		376		55	$	54,329
Construction and land development		35,911		226		556		605		37,298
Commercial real estate:
Owner occupied		49,900		1,905		228		263		52,296
Other		136,801		2,253		656		—		139,710
Total commercial real estate		186,701		4,158		884		263		192,006
Residential real estate:
Consumer mortgage		59,646		1,912		4,891		40		66,489
Investment property		39,348		624		1,026		154		41,152
Total residential real estate		98,994		2,536		5,917		194		107,641
Consumer installment		12,200		21		114		—		12,335
Total	$	383,356		11,289		7,847		1,117	$	403,609

19

Impaired loans

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

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

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

The following tables set forth certain information regarding the Company’s impaired loans that were individually evaluated for impairment at June 30, 2015 and December 31, 2014.

		June 30, 2015
(In thousands)		Unpaid principal  balance (1)		Charge-offs and payments applied (2)			Recorded   investment (3)			Related allowance
With no allowance recorded:
Commercial and industrial	$		64		—			64
Construction and land development			2,596		(1,994	)		602
Commercial real estate:
Owner occupied			316		(72	)		244
Total commercial real estate			316		(72	)		244
Total	$		2,976		(2,066	)		910
With allowance recorded:
Commercial real estate:
Owner occupied			1,269		(70	)		1,199			382
Other			216		—			216			92
Total commercial real estate			1,485		(70	)		1,415			474
Total	$		1,485		(70	)		1,415	$		474
Total impaired loans	$		4,461		(2,136	)		2,325	$		474

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

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

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

20

		December 31, 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	$		70		—			70
Construction and land development			2,822		(2,217	)		605
Commercial real estate:
Owner occupied			331		(68	)		263
Total commercial real estate			331		(68	)		263
Residential real estate:
Consumer mortgages			934		(192	)		742
Investment property			180		(26	)		154
Total residential real estate			1,114		(218	)		896
Total	$		4,337		(2,503	)		1,834
With allowance recorded:
Commercial real estate:
Owner occupied			846		—			846			102
Other			591		—			591			92
Total commercial real estate			1,437		—			1,437			194
Total	$		1,437		—			1,437	$		194
Total impaired loans	$		5,774		(2,503	)		3,271	$		194

(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, 2015				Six months ended June 30, 2015
		Average		Total interest		Average		Total interest
		recorded		income		recorded		income
(In thousands)		investment		recognized		investment		recognized
Impaired loans:
Commercial and industrial	$		64		1		66		2
Construction and land development			608		—		613		—
Commercial real estate:
Owner occupied			1,202		9		1,143		21
Other			466		8		538		18
Total commercial real estate			1,668		17		1,681		39
Residential real estate:
Consumer mortgages			512		158		648		173
Investment property			100		76		130		76
Total residential real estate			612		234		778		249
Total	$		2,952		252		3,138		290

21

		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

Troubled Debt Restructurings

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

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

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 The following is a summary of accruing and nonaccrual TDRs, which are included in the impaired loan totals, and the related allowance for loan losses, by portfolio segment and class as of June 30, 2015 and December 31, 2014.

		TDRs
									Related
(In thousands)		Accruing		Nonaccrual		Total			Allowance
June 30, 2015
Commercial and industrial	$		64		—		64	$		—
Construction and land development			—		602		602			—
Commercial real estate:
Owner occupied			828		244		1,072			84
Other			216		—		216			92
Total commercial real estate			1,044		244		1,288			176
Total	$		1,108		846		1,954	$		176
December 31, 2014
Commercial and industrial	$		70		—		70	$		—
Construction and land development			—		605		605			—
Commercial real estate:
Owner occupied			846		263		1,109			102
Other			591		—		591			92
Total commercial real estate			1,437		263		1,700			194
Residential real estate:
Consumer mortgages			742		—		742			—
Investment property			—		154		154			—
Total residential real estate			742		154		896			—
Total	$		2,249		1,022		3,271	$		194

At June 30, 2015, 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
2015:
Commercial and industrial		1	$	61		66		1	$	61		66
Construction and land development		—		—		—		1		116		113
Commercial real estate:
Other		—		—		—		1		592		592
Total commercial real estate		—		—		—		1		592		592
Total		1	$	61		66		3	$	769		771

The majority of the loans modified in a TDR during the quarter and six months ended June 30, 2015, 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. There were no loans modified in a TDR during the six months ended June 30, 2014.

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The following table summarizes the recorded investment in loans modified in a TDR within the previous 12 months for which there was a payment default (defined as 90 days or more past due) during the respective periods. 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)
2015:
Commerical real estate:
Owner occupied		—	$	—		1	$	261
Total commercial real estate		—		—		1		261
Residential real estate:
Investment property		—		—		1		150
Total residential real estate		—		—		1		150
Total		—	$	—		2	$	411

(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 rates, 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)		2015		2014			2015		2014
MSRs, net:
Beginning balance	$		2,355	$	2,368	$		2,388	$	2,350
Additions, net			154		105			265		203
Amortization expense			(199)		(84)			(333)		(164)
Decrease (increase) in valuation allowance			49		(43)			39		(43)
Ending balance	$		2,359	$	2,346	$		2,359	$	2,346
Valuation allowance included in MSRs, net:
Beginning of period	$		63	$	—	$		53	$	—
End of period			14		43			14		43
Fair value of amortized MSRs:
Beginning of period	$		3,066	$	3,386	$		3,238	$	3,452
End of period			3,014		3,228			3,014		3,228

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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.

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, 2015 and December 31, 2014 is presented below.

			Other		Other
			Assets		Liabilities
			Estimated		Estimated
(Dollars in thousands)	Notional		Fair Value		Fair Value
June 30, 2015:
Pay fixed / receive variable	$	4,492		—		552
Pay variable / receive fixed		4,492		552		—
Total interest rate swap agreements	$	8,984		552		552
December 31, 2014:
Pay fixed / receive variable	$	4,667		—		634
Pay variable / receive fixed		4,667		634		—
Total interest rate swap agreements	$	9,334		634		634

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, 2015, there were no transfers between levels and no changes in valuation techniques for the Company’s financial assets and liabilities.

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Assets and liabilities measured at fair value on a recurring basis

Securities available-for-sale

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

Interest rate swap agreements

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

The following table presents the balances of the assets and liabilities measured at fair value on a recurring basis as of June 30, 2015 and December 31, 2014, respectively, by caption, on the accompanying consolidated balance sheets by ASC 820 valuation hierarchy (as described above).

(Dollars in thousands)	Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other       Observable       Inputs (Level 2)		Significant      Unobservable      Inputs (Level 3)
June 30, 2015:
Securities available-for-sale:
Agency obligations	$	60,219		—		60,219		—
Agency RMBS		122,113		—		122,113		—
State and political subdivisions		70,574		—		70,574		—
Total securities available-for-sale		252,906		—		252,906		—
Other assets (1)		552		—		552		—
Total assets at fair value	$	253,458		—		253,458		—
Other liabilities(1)	$	552		—		552		—
Total liabilities at fair value	$	552		—		552		—
December 31, 2014:
Securities available-for-sale:
Agency obligations	$	60,249		—		60,249		—
Agency RMBS		135,043		—		135,043		—
State and political subdivisions		72,311		—		72,311		—
Total securities available-for-sale		267,603		—		267,603		—
Other assets (1)		634		—		634		—
Total assets at fair value	$	268,237		—		268,237		—
Other liabilities(1)	$	634		—		634		—
Total liabilities at fair value	$	634		—		634		—

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

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Assets and liabilities measured at fair value on a nonrecurring basis

Loans held for sale

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

Impaired Loans

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

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

Other real estate owned

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

Mortgage servicing rights, net

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

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The following table presents the balances of the assets and liabilities measured at fair value on a nonrecurring basis as of June 30, 2015 and December 31, 2014, respectively, by caption, on the accompanying consolidated balance sheets and by FASB ASC 820 valuation hierarchy (as described above):

(Dollars in thousands)	Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant     Unobservable     Inputs     (Level 3)
June 30, 2015:
Loans held for sale	$	3,875		—		3,875		—
Loans, net(1)		1,851		—		—		1,851
Other real estate owned		499		—		—		499
Other assets (2)		2,359		—		—		2,359
Total assets at fair value	$	8,584		—		3,875		4,709
December 31, 2014:
Loans held for sale	$	1,974		—		1,974		—
Loans, net(1)		3,077		—		—		3,077
Other real estate owned		534		—		—		534
Other assets (2)		2,388		—		—		2,388
Total assets at fair value	$	7,973		—		1,974		5,999

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

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

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

Quantitative Disclosures for Level 3 Fair Value Measurements

At June 30, 2015, 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, 2015, the significant unobservable inputs used in the fair value measurements are presented below.

(Dollars in thousands)	Carrying         Amount		Valuation Technique	Significant Unobservable Input	Weighted     Average of Input
Nonrecurring:
Impaired loans	$	1,851	Appraisal	Appraisal discounts (%)		22.4%
Other real estate owned		499	Appraisal	Appraisal discounts (%)		26.7%
Mortgage servicing rights, net		2,359	Discounted cash flow	Prepayment speed or CPR (%)		10.3%
				Discount rate (%)		10.0%

Fair Value of Financial Instruments

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

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

Loans, net

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

Loans held for sale

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

Time Deposits

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

Long-term debt

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

The carrying value, related estimated fair value, and placement in the fair value hierarchy of the Company’s financial instruments at June 30, 2015 and December 31, 2014 are presented below. This table excludes financial instruments for which the carrying amount approximates fair value. Financial assets for which fair value approximates carrying value included cash and cash equivalents. Financial liabilities for which fair value approximates carrying value included noninterest-bearing demand deposits, interest-bearing demand deposits, and savings deposits due to these products having no stated maturity. In addition, financial liabilities for which fair value approximates carrying value included overnight borrowings such as federal funds purchased and securities sold under agreements to repurchase.

						Fair Value Hierarchy
(Dollars in thousands)	Carrying amount		Estimated fair value			Level 1 inputs		Level 2 inputs		Level 3 Inputs
June 30, 2015:
Financial Assets:
Loans, net (1)	$	403,609	$	408,327	$		—	$	—	$	408,327
Loans held for sale		3,875		3,897			—		3,897		—
Financial Liabilities:
Time Deposits	$	231,634	$	233,385	$		—	$	233,385	$	—
Long-term debt		7,217		7,217			—		7,217		—
December 31, 2014:
Financial Assets:
Loans, net (1)	$	398,118	$	407,839	$		—	$	—	$	407,839
Loans held for sale		1,974		2,044			—		2,044		—
Financial Liabilities:
Time Deposits	$	249,126	$	251,365	$		—	$	251,365	$	—
Long-term debt		12,217		12,558			—		12,558		—

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

29

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 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, 2015 and 2014, as well as the information contained in our Annual Report on Form 10-K for the year ended December 31, 2014 and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2015.

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;

• 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 risk 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, 2014 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, Hurtsboro, Notasulga, and Valley, Alabama. In-store branches are located in the Kroger in Opelika and Wal-Mart SuperCenter stores in both Auburn and Opelika. The Bank also operates a commercial loan production office in Phenix City, Alabama.

Summary of Results of Operations

		Quarter ended June 30,					Six Months Ended June 30,
(Dollars in thousands, except per share amounts)		2015		2014			2015		2014
Net interest income (a)	$		6,126	$	5,565	$		11,984	$	11,159
Less: tax-equivalent adjustment			338		312			673		636
Net interest income (GAAP)			5,788		5,253			11,311		10,523
Noninterest income			1,167		1,081			2,488		1,837
Total revenue			6,955		6,334			13,799		12,360
Provision for loan losses			—		—			—		(400	)
Noninterest expense			4,029		3,792			8,343		7,740
Income tax expense			776		683			1,444		1,340
Net earnings	$		2,150	$	1,859	$		4,012	$	3,680
Basic and diluted earnings per share	$		0.59	$	0.51	$		1.10	$	1.01

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

31

Financial Summary

The Company’s net earnings were $4.0 million for the first six months of 2015, compared to $3.7 million for the first six months of 2014. Basic and diluted earnings per share were $1.10 per share for the first six months of 2015, compared to $1.01 per share for the first six months of 2014.

Net interest income (tax-equivalent) was $12.0 million for the first six months of 2015, an increase of 7% compared to the first six months of 2014. The increase reflects management’s efforts to increase earnings by shifting the Company’s asset mix through loan growth, focusing on deposit pricing, and repaying higher-cost wholesale funding. Net interest income (tax-equivalent) for the first six months of 2015 included $0.2 million in recoveries of interest related to payoffs received on two loans that were previously impaired. Excluding the impact of these interest recoveries, net interest income (tax-equivalent) would have been $11.8 million for the first six months of 2015, an increase of 5% compared to the first six months of 2014. Average loans were $401.3 million in the first six months of 2015, an increase of $23.1 million or 6%, from the first six months of 2014. Average deposits were $702.6 million in the first six months of 2015, an increase of $21.1 million or 3%, from the first six months of 2014.

The Company recorded no provision for loan losses for the first six months of 2015, compared to a negative provision of $0.4 million for the first six months of 2014. Provision expense reflects the absolute level of loans, loan growth, the credit quality of the loan portfolio, and the amount of net charge-offs.

Noninterest income was $2.5 million for the first six months of 2015, compared to $1.8 million in the first six months of 2014. The increase was primarily due to an increase in income from bank-owned life insurance of $0.3 million related to death benefits recognized in the first six months of 2015 and an increase in net securities gains (losses) of $0.3 million due to other-than-temporary impairment charges recognized in the first quarter of 2014 related to available-for-sale, agency residential mortgage-backed securities the Company intended to sell at March 31, 2014, and subsequently sold in early April 2014.

Noninterest expense was $8.3 million in the first six months of 2015, compared to $7.7 million in the first six months of 2014. The increase was primarily due to prepayment penalties on long-term debt of $0.4 million incurred in the first six months of 2015 when the company repaid $5.0 million of long-term debt with a weighted average interest rate of 3.59% and an increase in other noninterest expense of $0.2 million.

Income tax expense was $1.4 million for the first six months of 2015, compared to $1.3 million for the first six months of 2014. The Company’s income tax expense for the first six months of 2015 reflects an effective income tax rate of 26.47%, compared to 26.69% for the first six months of 2014. The Company’s effective income tax rate is principally impacted by tax-exempt earnings from the Company’s investments in municipal securities and bank-owned life insurance.

In the first six months of 2015, the Company paid cash dividends of $1.6 million, or $0.44 per share. The Company’s balance sheet remains “well capitalized” under current regulatory guidelines with a total risk-based capital ratio of 17.78% and a Tier 1 leverage ratio of 10.39% at June 30, 2015.

In the second quarter of 2015, net earnings were $2.2 million, or $0.59 per share, compared to $1.9 million, or $0.51 per share, for the second quarter of 2014. Net interest income (tax-equivalent) was $6.1 million for the second quarter of 2015, an increase of 10% compared to the second quarter of 2014. Net interest income (tax-equivalent) for the second quarter of 2015 included $0.2 million in recoveries of interest related to payoffs received on two loans that were previously impaired. Excluding the impact of these interest recoveries, net interest income (tax-equivalent) would have been $5.9 million for the second quarter of 2015, an increase of 6% compared to the second quarter of 2014. The Company recorded no provision for loan losses in the second quarter of 2015 and 2014. Noninterest income was $1.2 million in the second quarter of 2015, compared to $1.1 million in the second quarter of 2014. The increase was primarily due to an increase in mortgage lending income of $0.1 million. Noninterest expense was $4.0 million in the second quarter of 2015, compared to $3.8 million in the second quarter of 2014. The increase was primarily due to an increase in net expenses related to OREO of $0.1 million and an increase in other noninterest expense of $0.1 million. Income tax expense was approximately $0.8 million for the second quarter of 2015, compared to $0.7 million for the second quarter of 2014. The Company’s effective tax rate for the second quarter of 2015 was 26.52%, compared to 26.87% in the second quarter of 2014.

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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.

Allowance for Loan Losses

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

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

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

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

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

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

The allocation of the allowance for loan losses begins with a process of estimating the probable losses inherent for each loan segment. The estimates for these loans are established by category and based on the Company’s internal system of credit risk ratings and historical loss data. The estimated loan loss allocation rate for the Company’s internal system of credit risk grades is based on its experience with similarly graded loans. For loan segments where the Company believes it does not have sufficient historical loss data, the Company may make adjustments based, in part, on loss rates of peer bank groups. At June 30, 2015 and December 31, 2014, 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

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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, the Company implemented certain refinements to its allowance for loan losses methodology in order to better capture the effects of the most recent economic cycle on the Company’s loan loss experience. Beginning with the quarter ended June 30, 2014, the Company calculated average losses for all loan segments using a rolling 20 quarter historical period and continues to use this methodology.

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 material 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.

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, 2015. 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,
	2015				2014
(Dollars in thousands)	Average Balance		Yield/ Rate		Average Balance		Yield/ Rate
Loans and loans held for sale	$	404,106		5.10%	$	380,449		5.07%
Securities - taxable		193,694		2.07%		210,223		2.29%
Securities - tax-exempt		68,115		5.86%		60,954		6.19%
Total securities		261,809		3.06%		271,177		3.17%
Federal funds sold		60,789		0.21%		59,385		0.19%
Interest bearing bank deposits		24,449		0.23%		5,171		0.66%
Total interest-earning assets		751,153		3.83%		716,182		3.91%
Deposits:
NOW		114,739		0.31%		106,812		0.32%
Savings and money market		207,027		0.40%		189,830		0.51%
Certificates of deposits less than $100,000		93,933		1.06%		104,079		1.20%
Certificates of deposits and other time deposits of $100,000 or more		145,124		1.45%		157,509		1.59%
Total interest-bearing deposits		560,823		0.76%		558,230		0.91%
Short-term borrowings		4,167		0.48%		3,440		0.53%
Long-term debt		9,372		3.53%		12,217		3.43%
Total interest-bearing liabilities		574,362		0.81%		573,887		0.96%
Net interest income and margin (tax-equivalent)	$	11,984		3.22%	$	11,159		3.14%

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Net Interest Income and Margin

Net interest income (tax-equivalent) was $12.0 million for the first six months of 2015, compared to $11.2 million for the first six months of 2014. This increase reflects management’s efforts to increase earnings by shifting the Company’s asset mix through loan growth, focusing on deposit pricing, and repaying higher-cost wholesale funding. Net interest income (tax-equivalent) for the first six months of 2015 included $0.2 million in recoveries of interest related to payoffs received on two loans that were previously impaired. Excluding the impact of these interest recoveries, net interest income (tax-equivalent) would have been $11.8 million for the first six months of 2015, an increase of 5% compared to the first six months of 2014.

The tax-equivalent yield on total interest-earning assets decreased by 8 basis points in the first six months of 2015 from the first six months of 2014 to 3.83%. This decrease was primarily due to declining yields on securities and increased pricing competition for quality loan opportunities in our markets, which has limited the Company’s ability to increase yields on new and renewed loans.

The cost of total interest-bearing liabilities decreased 15 basis points in the first six months of 2015 from the first six months of 2014 to 0.81%. The net decrease was largely a result of the continued shift in our funding mix, as we increased our lower-cost interest bearing demand deposits (NOW accounts), and savings and money market accounts and concurrently reduced balances of higher-cost certificates of deposits and long-term debt.

The Company continues to deploy various asset liability management strategies to manage its risk to interest rate fluctuations. The Company’s net interest margin could experience pressure due to 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 no provision for loan losses for the first six months of 2015, compared to a negative provision of $0.4 million for the first six months of 2014. Provision expense reflects the absolute level of loans, loan growth, the credit quality of the loan portfolio, and the amount of net charge-offs.

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 1.20% at both June 30, 2015 and 2014. 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) 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)	2015		2014		2015		2014
Service charges on deposit accounts	$	209	$	219	$	415	$	432
Mortgage lending income		457		348		791		734
Bank-owned life insurance		112		125		513		251
Securities gains (losses), net		—		12		3		(295)
Other		389		377		766		715
Total noninterest income	$	1,167	$	1,081	$	2,488	$	1,837

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)	2015		2014		2015		2014
Origination income	$	386	$	254	$	644	$	494
Servicing fees, net		22		137		108		283
Decrease (increase) in MSR valuation allowance		49		(43)		39		(43)
Total mortgage lending income	$	457	$	348	$	791	$	734

The increase in mortgage lending income was primarily due to an increase in origination income and changes in the MSR valuation allowance. These improvements were partially offset by a decrease in servicing fees, net of related amortization expense. Although servicing fees were largely unchanged, amortization expense increased due to faster prepayment speeds.

Income from bank-owned life insurance increased in the first six months of 2015, compared to the first six months of 2014 due to non-taxable death benefits received. Income from bank-owned life insurance decreased in the second quarter of 2015, compared to the second quarter of 2014 due to claims reducing the number of policies outstanding. 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. The Company recorded an other-than-temporary impairment charge of $333,000 in the first quarter of 2014 related to securities that management intended to sell at March 31, 2014. Subsequent to March 31, 2014, the Company sold available-for-sale agency residential mortgage-backed securities (“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 2015.

Noninterest Expense

	Quarter ended June 30,				Six Months Ended June 30,
(Dollars in thousands)	2015		2014		2015		2014
Salaries and benefits	$	2,291	$	2,221	$	4,559	$	4,502
Net occupancy and equipment		362		341		720		693
Professional fees		218		225		419		431
FDIC and other regulatory assessments		118		129		243		274
Other real estate owned, net		1		(62)		18		56
Prepayment penalty on long-term debt		—		—		362		—
Other		1,039		938		2,022		1,784
Total noninterest expense	$	4,029	$	3,792	$	8,343	$	7,740

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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 during the first six months of 2015, compared to the first six months of 2014, was primarily due to a decrease in expenses as the carrying amount and number of properties have declined. The increase in OREO expense, net during the second quarter of 2015, compared to the second quarter of 2014, was primarily due to gains realized on the sale of certain OREO properties in the second quarter of 2014.

During the first six months of 2015, the Company repaid $5.0 million of long-term debt with a weighted average interest rate of 3.59% and incurred prepayment penalties of $0.4 million.

The increase in other noninterest expense was due to various items, including computer software and marketing and business development expenses.

Income Tax Expense

Income tax expense was $1.4 million for the first six months of 2015, compared to $1.3 million for the first six months of 2014. The Company’s income tax expense for the first six months of 2015 reflects an effective income tax rate of 26.47%, compared to 26.69% for the first six months of 2014. The Company’s effective income tax rate is principally impacted by tax-exempt earnings from the Company’s investments in municipal securities and bank-owned life insurance.

BALANCE SHEET ANALYSIS

Securities

Securities available-for-sale were $252.9 million at June 30, 2015, a decrease of $14.7 million, or 5%, compared to $267.6 million at December 31, 2014. This decline was primarily due to a decrease of $12.9 million in the amortized cost basis of securities available-for-sale as proceeds from sales, calls, and maturities were not reinvested and a $1.8 million change in unrealized gains (losses) on securities available-for-sale, reflecting a decrease in prices as long-term interest rates increased during the first six months of 2015.

The average tax-equivalent yields earned on total securities were 3.06% in the first six months of 2015 and 3.17% in the first six months of 2014.

Loans

		2015		2014
(In thousands)		Second Quarter	First Quarter	Fourth Quarter		Third Quarter		Second Quarter
Commercial and industrial	$	57,310	52,536		54,329		52,868		52,054
Construction and land development		38,854	37,925		37,298		34,189		32,461
Commercial real estate		184,124	182,871		192,006		190,077		187,241
Residential real estate		115,039	111,265		107,641		106,555		102,921
Consumer installment		13,632	12,478		12,335		11,535		11,686
Total loans		408,959	397,075		403,609		395,224		386,363
Less:  unearned income		(464)	(462)		(655)		(622)		(537)
Loans, net of unearned income	$	408,495	396,613		402,954		394,602		385,826

Total loans, net of unearned income, were $408.5 million at June 30, 2015, compared to $403.0 million at December 31, 2014. Four loan categories represented the majority of the loan portfolio at June 30, 2015: commercial real estate (45%), residential real estate (28%), construction and land development (9%) and commercial and industrial (14%). Approximately 23% of the Company’s commercial real estate loans were classified as owner-occupied at June 30, 2015.

Within the residential real estate portfolio segment, the Company had junior lien mortgages of approximately $16.3 million, or 4% of total loans, at June 30, 2015, compared to $16.5 million, or 4% of total loans, at December 31, 2014. For

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residential real estate mortgage loans with a consumer purpose, $1.9 million required interest-only payments at June 30, 2015 and December 31, 2014. 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 $1.5 million at June 30, 2015 and December 31, 2014. All purchased loan participations are underwritten by the Company independent of the selling bank. In addition, all loans, including purchased loan 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 5.10% in the first six months of 2015 and 5.07% in the first six months of 2014.

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 have established and periodically review, lending policies and procedures. Banking regulations limit a bank’s credit exposure by prohibiting unsecured loan relationships that exceed 10% of its capital accounts; or 20% of capital accounts, if loans in excess of 10% are fully secured. Under these regulations, we are prohibited from having secured loan relationships in excess of approximately $17.1 million. Furthermore, we have an internal limit for aggregate credit exposure (loans outstanding plus unfunded commitments) to a single borrower of $15.4 million. Our loan policy requires that the Loan Committee of the Board of Directors approve any loan relationships that exceed this internal limit. At June 30, 2015, the Bank had no loan relationships exceeding these limits.

We periodically analyze our commercial loan portfolio to determine if a concentration of credit risk exists in any one or more industries. We use classification systems broadly accepted by the financial services industry in order to categorize our commercial borrowers. Loan concentrations to borrowers in the following classes exceeded 25% of the Bank’s total risk-based capital at June 30, 2015 (and related balances at December 31, 2014).

(In thousands)	June 30,     2015		December 31,  2014
Lessors of 1 to 4 family residential properties	$	45,591	$	41,152
Multi-family residential properties		36,298		35,961
Shopping centers		30,898		30,016

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, 2015 and December 31, 2014, the allowance for loan losses was $4.9 million and $4.8 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.”

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A summary of the changes in the allowance for loan losses and certain asset quality ratios for the second quarter of 2015 and the previous four quarters is presented below.

		2015			2014
(Dollars in thousands)		Second Quarter		First Quarter	Fourth Quarter	Third Quarter	Second Quarter
Balance at beginning of period	$		4,722	4,836	4,754	4,728	4,711
Charge-offs:
Commercial and industrial			—	(58)	—	—	(46)
Construction and land development			—	—	1	—	—
Residential real estate			—	(60)	(79)	(287)	(41)
Consumer installment			(5)	(17)	(6)	(39)	(8)
Total charge-offs			(5)	(135)	(84)	(326)	(95)
Recoveries			169	21	16	52	112
Net recoveries (charge-offs)			164	(114)	(68)	(274)	17
Provision for loan losses			—	—	150	300	—
Ending balance	$		4,886	4,722	4,836	4,754	4,728
as a % of loans			1.20 %	1.19	1.20	1.20	1.23
as a % of nonperforming loans			360 %	377	433	281	169
Net (recoveries) charge-offs as % of average loans (a)			(0.16)%	0.11	0.07	0.28	(0.02)

(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 1.20% at June 30, 2015 and December 31, 2014. In the future, the allowance to total loans outstanding ratio will increase or decrease to the extent the factors that influence our quarterly allowance assessment in their entirety either improve or weaken. In addition, our regulators, as an integral part of their examination process, will periodically review the Company’s allowance for loan losses, and may require the Company to make additional provisions to the allowance for loan losses based on their judgement about information available to them at the time of their examinations.

Net recoveries were $50,000, or 0.02% of average loans in the first six months of 2015, compared to net charge-offs of $140,000, or 0.07% of average loans in the first six months of 2014. In the first six months of 2015, the Company recovered $140,000 related to the full repayment of a B note that was previously charged-off as part of a troubled debt restructuring.

At June 30, 2015, the ratio of our allowance for loan losses as a percentage of nonperforming loans was 360%, compared to 433% at December 31, 2014.

At June 30, 2015 and December 31, 2014, the Company’s recorded investment in loans considered impaired was $2.3 million and $3.3 million, respectively, with corresponding valuation allowances (included in the allowance for loan losses) of $0.5 million and $0.2 million at each respective date.

Nonperforming Assets

At June 30, 2015 and December 31, 2014, respectively, the Company had $1.9 million and $1.7 million in nonperforming assets.

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The table below provides information concerning total nonperforming assets and certain asset quality ratios for the second quarter of 2015 and the previous four quarters.

		2015		2014
(Dollars in thousands)		Second       Quarter	First       Quarter	Fourth     Quarter		Third       Quarter	Second       Quarter
Nonperforming assets:
Nonaccrual loans	$	1,359	1,251		1,117	1,690	2,804
Other real estate owned		499	499		534	1,215	1,584
Total nonperforming assets	$	1,858	1,750		1,651	2,905	4,388
as a % of loans and other real estate owned		0.45 %	0.44		0.41	0.73	1.13
as a % of total assets		0.23 %	0.22		0.21	0.37	0.57
Nonperforming loans as a % of total loans		0.33 %	0.32		0.28	0.43	0.73
Accruing loans 90 days or more past due	$	442	2		—	76	71

The table below provides information concerning the composition of nonaccrual loans for the second quarter of 2015 and the previous four quarters.

		2015		2014
(In thousands)		Second           Quarter	First       Quarter	Fourth       Quarter		Third       Quarter	Second       Quarter
Nonaccrual loans:
Commercial and industrial	$	46	51		55	56	52
Construction and land development		602	618		605	615	963
Commercial real estate		684	405		263	482	486
Residential real estate		27	177		194	533	1,303
Consumer installment		—	—		—	4	—
Total nonaccrual loans	$	1,359	1,251		1,117	1,690	2,804

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, 2015 and December 31, 2014, respectively, the Company had $1.4 million and $1.1 million in loans on nonaccrual.

At June 30, 2015, there were $0.4 million in loans 90 days or more past due and still accruing interest compared to none at December 31, 2014.

The table below provides information concerning the composition of other real estate owned for the second quarter of 2015 and the previous four quarters.

		2015		2014
(In thousands)		Second           Quarter	First       Quarter	Fourth       Quarter		Third       Quarter	Second       Quarter
Other real estate owned:
Commercial:
Developed lots		252	252		252	882	1,260
Residential		247	247		282	333	324
Total other real estate owned	$	499	499		534	1,215	1,584

At June 30, 2015 and December 31, 2014, respectively, the Company held $0.5 million in OREO, which we acquired from borrowers.

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Potential Problem Loans

Potential problem loans represent those loans with a well-defined weakness and where information about possible credit problems of a borrower have 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 $6.6 million, or 1.6% of total loans at June 30, 2015, compared to $7.8 million, or 2.0% of total loans at December 31, 2014.

The table below provides information concerning the composition of potential problem loans for the second quarter of 2015 and the previous four quarters.

		2015		2014
(In thousands)		Second             Quarter	First         Quarter	Fourth         Quarter	Third         Quarter	Second           Quarter
Potential problem loans:
Commercial and industrial	$	383	385	376	429	397
Construction and land development		627	768	556	567	575
Commercial real estate		503	880	884	887	975
Residential real estate		4,898	5,682	5,917	5,898	4,754
Consumer installment		167	112	114	116	111
Total potential problem loans	$	6,578	7,827	7,847	7,897	6,812

At June 30, 2015, approximately $0.3 million, or 4.7%, of total potential problem loans were past due at least 30 days, but less than 90 days. At June 30, 2015, 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 2015 and the previous four quarters.

		2015		2014
(In thousands)		Second             Quarter	First               Quarter	Fourth           Quarter	Third         Quarter	Second           Quarter
Performing loans past due 30 to 89 days:
Commercial and industrial	$	6	82	168	245	277
Construction and land development		12	319	210	190	192
Commercial real estate		—	—	201	203	—
Residential real estate		415	1,417	2,231	221	832
Consumer installment		23	25	45	59	110
Total	$	456	1,843	2,855	918	1,411

Deposits

Total deposits were $716.0 million at June 30, 2015, compared to $693.4 million at December 31, 2014. Noninterest bearing deposits were $149.7 million, or 20.9% of total deposits, at June 30, 2015, compared to $130.2 million, or 18.8% of total deposits at December 31, 2014.

The average rate paid on total interest-bearing deposits was 0.76% in the first six months of 2015 and 0.91% in the first six months of 2014.

Other Borrowings

Other borrowings consist of short-term borrowings and long-term debt. Short-term borrowings consist of federal funds purchased and securities sold under agreements to repurchase with an original maturity less than one year. The Bank had available federal funds lines totaling $41.0 million with none outstanding at June 30, 2015, compared to $38.0 million and none outstanding at December 31, 2014. Securities sold under agreements to repurchase totaled $2.9 million and $4.7 million at June 30, 2015 and December 31, 2014, respectively.

The average rate paid on short-term borrowings was 0.48% in the first six months of 2015 and 0.53% in the first six months of 2014.

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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 no long-term FHLB advances outstanding at June 30, 2015, compared to $5.0 million at December 31, 2014. In March 2015, the Bank repaid a $5.0 million FHLB advance and incurred prepayment penalties of $0.4 million. At both June 30, 2015 and December 31, 2014, the Bank had $7.2 million in junior subordinated debentures related to trust preferred securities outstanding. The debentures mature on December 31, 2033 and have been redeemable since December 31, 2008.

The average rate paid on long-term debt was 3.53% in the first six months of 2015 and 3.43% in the first six months of 2014.

CAPITAL ADEQUACY

The Company’s consolidated stockholders’ equity was $77.1 million and $75.8 million as of June 30, 2015 and December 31, 2014, respectively. The change from December 31, 2014 was primarily driven by net earnings of $4.0 million, partially offset by cash dividends paid of $1.6 million and an other comprehensive loss due to the change in unrealized gains (losses) on securities available-for-sale, net-of-tax, of $1.2 million.

The Company’s tier 1 leverage ratio was 10.39%, common equity tier 1 (“CET1”) risk-based capital ratio was 15.42%, tier 1 risk-based capital ratio was 16.76%, and total risk-based capital ratio was 17.78% at June 30, 2015. These ratios exceed the minimum regulatory capital percentages of 5.0% for tier 1 leverage ratio, 6.5% for CET1 risk-based capital ratio, 8.0% for tier 1 risk-based capital ratio, and 10.0% 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 an acceptable asset/liability composition. Two critical areas of focus for ALCO are interest rate risk and liquidity risk management.

Interest Rate Risk Management

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

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

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

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

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

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

At June 30, 2015, our earnings simulation model indicated that we were in compliance with the policy guidelines noted above.

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

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

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

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

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

At June 30, 2015, our EVE model indicated that we were in compliance with the policy guidelines noted above.

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

The Company may also use derivative financial instruments to improve the balance between interest-sensitive assets and interest-sensitive liabilities, and as a tool to manage interest rate sensitivity while continuing to meet the credit and deposit needs of our customers. From time to time, the Company may enter into interest rate swaps (“swaps”) to facilitate customer transactions and meet their financing needs. These swaps qualify as derivatives, but are not designated as hedging instruments. At June 30, 2015 and December 31, 2014, 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 by the Company include dividends paid to stockholders, stock repurchases, and interest payments on junior subordinated debentures issued by the Company in connection with trust preferred securities. The junior subordinated debentures are presented as long-term debt in the accompanying consolidated balance sheets and the related trust preferred securities are currently includible in Tier 1 Capital for regulatory capital purposes.

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Primary sources of funding for the Bank include customer deposits, other borrowings, repayment and maturity of securities, sales of securities, and the sale and repayment of loans. The Bank has access to federal funds lines from various banks and borrowings from the Federal Reserve discount window. In addition to these sources, the Bank may participate in the FHLB’s advance program to obtain funding for its growth. Advances include both fixed and variable terms and may be taken out with varying maturities. At June 30, 2015, the Bank had a remaining available line of credit with the FHLB of $232.3 million. At June 30, 2015, the Bank also had $41.0 million of available federal funds lines with none outstanding. Primary uses of funds include repayment of maturing obligations and growing the loan portfolio.

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

Off-Balance Sheet Arrangements, Commitments and Contingencies

At June 30, 2015, the Bank had outstanding standby letters of credit of $8.2 million and unfunded loan commitments outstanding of $49.4 million. Because these commitments generally have fixed expiration dates and many will expire without being drawn upon, the total commitment level does not necessarily represent future cash requirements. If needed to fund these outstanding commitments, the Bank could liquidate federal funds sold or a portion of securities available-for-sale, or draw on its available credit facilities.

Mortgage lending activities

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

As of June 30, 2015, the unpaid principal balance of residential mortgage loans, which we have originated and sold, but retained the servicing rights was $357.1 million. Although these loans are generally sold on a non-recourse basis, we may be obligated to repurchase residential mortgage loans or reimburse investors for losses incurred (make whole requests) if a loan review reveals a potential breach of seller representations and warranties. Upon receipt of a repurchase or make whole request, we work with investors to arrive at a mutually agreeable resolution. Repurchase and make whole requests are typically reviewed on an individual loan by loan basis to validate the claims made by the investor and to determine if a contractually required repurchase or make whole event has occurred. We seek to reduce and manage the risks of potential repurchases, make whole requests, or other claims by mortgage loan investors through our underwriting and quality assurance practices and by servicing mortgage loans to meet investor and secondary market standards.

In the first six months of 2015, as a result of the representation and warranty provisions contained in the Company’s sale agreements with Fannie Mae, the Company was required to repurchase one loan with a principal balance of $169,000 that was current as to principal and interest and reimburse Fannie Mae approximately $37,000 related to a make whole request. At June 30, 2015, the Company had no pending repurchase or make whole requests.

Also, in the first quarter of 2015, the Company voluntarily repurchased ten investment property loans with an aggregate principal balance of $4.0 million that were made to the same borrower and were current as to principal and interest. At the date of repurchase, the aggregate fair value of these ten investment property loans was greater than the repurchase price required by Fannie Mae. As part of its quality control review procedures, one of these ten loans was self-reported to Fannie Mae in 2014 for possible breaches related to representation and warranty provisions. After further investigation, the Company identified certain underwriting deficiencies for nine additional investment property loans that were related to the same borrower. All ten loans were originated and sold to Fannie Mae. The Company submitted a voluntary repurchase request to Fannie Mae in January 2015 for all ten investment property loans, which was approved. In response to the quality control review findings related to this one borrower, the Company has put additional controls in place for investment property loans originated for sale, including additional quality control reviews and management approvals. Furthermore, management performed additional reviews of investment property loans originated for sale, including a review of the number of loans to one borrower, and does not believe there is any material exposure related to representation and warranty provisions for these loans.

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

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

Although repurchase and make whole requests related to representation and warranty provisions and servicing activities have been limited to date, it is possible that requests to repurchase mortgage loans or reimburse investors for losses incurred (make whole requests) may increase in frequency if investors more aggressively pursue all means of recovering losses on their purchased loans. As of June 30, 2015, we do not believe that this exposure is material due to the historical level of repurchase requests and loss trends, in addition to the fact that 99% of our residential mortgage loans serviced for Fannie Mae were current as of such date. We maintain ongoing communications with our investors and will continue to evaluate this exposure by monitoring the level and number of repurchase requests as well as the delinquency rates in our investor portfolios.

Effects of Inflation and Changing Prices

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

CURRENT ACCOUNTING DEVELOPMENTS

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

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

• ASU 2015-02, Amendments to the Consolidation Analysis (Topic 810); and

• ASU 2015-05, Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement and Disclosures of Disposals of Components of an Entity.

Information about these pronouncements is described in more detail below.

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 at the date of initial application. Early adoption is not permitted. The Company is currently evaluating the impact this ASU will have on its consolidated financial statements.

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ASU 2015-02, Amendments to the Consolidation Analysis (Topic 810), affects reporting entities that are required to evaluate whether they should consolidate certain legal entities. Specifically, the amendments: (1) Modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (“VIEs”) or voting interest entities; (2) Eliminate the presumption that a general partner should consolidate a limited partnership; (3) Affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships; and (4) Provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. These changes are effective for the Company in the first quarter of 2016. Early adoption is permitted. The Company is currently evaluating the impact this ASU will have on its consolidated financial statements.

ASU 2015-05, Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement, provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The new guidance does not change the accounting for a customer’s accounting for service contracts. These changes are effective for the Company in the first quarter of 2016. Early adoption is permitted. The Company is currently evaluating the impact this ASU will have on its consolidated financial statements.

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Table 1 – Explanation of Non-GAAP Financial Measures

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

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

		2015		2014
(In thousands)		Second         Quarter	First         Quarter	Fourth         Quarter		Third         Quarter	Second         Quarter
Net interest income (GAAP)	$	5,788	5,523	5,482		5,448	5,253
Tax-equivalent adjustment		338	335	331		321	312
Net interest income (Tax-equivalent)	$	6,126	5,858	5,813		5,769	5,565
						Six Months Ended June 30,
(In thousands)						2015	2014
Net interest income (GAAP)					$	11,311	10,523
Tax-equivalent adjustment						673	636
Net interest income (Tax-equivalent)					$	11,984	11,159

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Table 2 - Selected Quarterly Financial Data

	2015		2014
	Second	First	Fourth	Third	Second
(Dollars in thousands, except per share amounts)	Quarter	Quarter	Quarter	Quarter	Quarter
Results of Operations
Net interest income (a)	$         6,126	5,858	5,813	5,769	5,565
Less: tax-equivalent adjustment	338	335	331	321	312
Net interest income (GAAP)	5,788	5,523	5,482	5,448	5,253
Noninterest income	1,167	1,321	1,079	1,017	1,081
Total revenue	6,955	6,844	6,561	6,465	6,334
Provision for loan losses	—	—	150	300	—
Noninterest expense	4,029	4,314	3,780	3,584	3,792
Income tax expense	776	668	735	709	683
Net earnings	$         2,150	1,862	1,896	1,872	1,859
Per share data:
Basic and diluted net earnings	$           0.59	0.51	0.52	0.51	0.51
Cash dividends declared	0.22	0.22	0.215	0.215	0.215
Weighted average shares outstanding:
Basic and diluted	3,643,413	3,643,365	3,643,328	3,643,328	3,643,295
Shares outstanding	3,643,428	3,643,378	3,643,328	3,643,328	3,643,328
Book value	$         21.15	21.28	20.80	20.09	19.84
Common stock price
High	$         25.75	25.25	24.64	24.92	25.00
Low	24.51	23.15	22.10	23.17	22.90
Period end	25.73	24.85	23.64	24.64	24.02
To earnings ratio	12.08x	12.12	11.59	12.38	12.19
To book value	122%	117	114	123	121
Performance ratios:
Return on average equity	10.91%	9.68	10.21	10.19	10.72
Return on average assets	1.09%	0.93	0.98	0.97	0.96
Dividend payout ratio	37.29%	43.14	41.35	42.16	42.16
Asset Quality:
Allowance for loan losses as a % of:
Loans	1.20%	1.19	1.20	1.20	1.23
Nonperforming loans	360%	377	433	281	169
Nonperforming assets as a % of:
Loans and other real estate owned	0.45%	0.44	0.41	0.73	1.13
Total assets	0.23%	0.22	0.21	0.37	0.57
Nonperforming loans as a % of total loans	0.33%	0.32	0.28	0.43	0.73
Net (recoveries) charge-offs as a % of average loans (c)	(0.16)%	0.11	0.07	0.28	(0.02)
Capital Adequacy:
CET 1 risk-based capital ratio	15.42%	15.38	n/a	n/a	n/a
Tier 1 risk-based capital ratio	16.76%	16.83	17.45	17.43	17.45
Total risk-based capital ratio	17.78%	17.84	18.54	18.50	18.53
Tier 1 Leverage Ratio	10.39%	10.13	10.32	10.26	10.07
Other financial data:
Net interest margin (a)	3.29%	3.15	3.14	3.16	3.09
Effective income tax rate	26.52%	26.40	27.94	27.47	26.87
Efficiency ratio (b)	55.24%	60.09	54.85	52.81	57.06
Selected average balances:
Securities	$    259,376	264,268	265,616	274,155	274,305
Loans, net of unearned income	402,482	400,161	397,875	389,392	378,994
Total assets	791,889	802,062	777,548	771,685	772,326
Total deposits	699,453	705,746	682,812	678,738	684,613
Long-term debt	7,217	11,550	12,217	12,217	12,217
Total stockholders’ equity	78,791	76,915	74,307	73,499	69,367
Selected period end balances:
Securities	$    252,906	262,141	267,603	264,827	276,953
Loans, net of unearned income	408,495	396,613	402,954	394,602	385,826
Allowance for loan losses	4,886	4,722	4,836	4,754	4,728
Total assets	806,233	790,224	789,231	781,136	775,128
Total deposits	715,994	698,336	693,390	680,763	684,181
Long-term debt	7,217	7,217	12,217	12,217	12,217
Total stockholders’ equity	77,053	77,544	75,799	73,193	72,291

(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)		2015	2014
Results of Operations
Net interest income (a)	$	11,984	11,159
Less: tax-equivalent adjustment		673	636
Net interest income (GAAP)		11,311	10,523
Noninterest income		2,488	1,837
Total revenue		13,799	12,360
Provision for loan losses		—	(400)
Noninterest expense		8,343	7,740
Income tax expense		1,444	1,340
Net earnings	$	4,012	3,680
Per share data:
Basic and diluted net earnings	$	1.10	1.01
Cash dividends declared		0.44	0.43
Weighted average shares outstanding:
Basic and diluted		3,643,389	3,643,228
Shares outstanding, at period end		3,643,428	3,643,328
Book value	$	21.15	19.84
Common stock price
High	$	25.75	25.80
Low		23.15	22.90
Period end		25.73	24.02
To earnings ratio		12.08x	12.19
To book value		122%	121
Performance ratios:
Return on average equity		10.31%	10.91
Return on average assets		1.01%	0.96
Dividend payout ratio		40.00%	42.57
Asset Quality:
Allowance for loan losses as a % of:
Loans		1.20%	1.23
Nonperforming loans		360%	169
Nonperforming assets as a % of:
Loans and other real estate owned		0.45%	1.13
Total assets		0.23%	0.57
Nonperforming loans as a % of total loans		0.33%	0.73
Annualized net (recoveries) charge-offs as a % of average loans		(0.02)%	0.07
Capital Adequacy:
CET 1 risk-based capital ratio		15.42%	n/a
Tier 1 risk-based capital ratio		16.76%	17.45
Total risk-based capital ratio		17.78%	18.53
Tier 1 Leverage Ratio		10.39%	10.07
Other financial data:
Net interest margin (a)		3.22%	3.14
Effective income tax rate		26.47%	26.69
Efficiency ratio (b)		57.65%	59.56
Selected average balances:
Securities	$	261,809	271,177
Loans, net of unearned income		401,327	378,163
Total assets		796,947	767,268
Total deposits		702,582	681,487
Long-term debt		9,372	12,217
Total stockholders’ equity		77,858	67,472
Selected period end balances:
Securities	$	252,906	276,953
Loans, net of unearned income		408,495	385,826
Allowance for loan losses		4,886	4,728
Total assets		806,233	775,128
Total deposits		715,994	684,181
Long-term debt		7,217	12,217
Total stockholders’ equity		77,053	72,291

(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,
		2015							2014
(Dollars in thousands)		Average     Balance		Interest     Income/     Expense		Yield/   Rate			Average Balance		Interest     Income/     Expense		Yield/   Rate
Interest-earning assets:
Loans and loans held for sale (1)	$		405,093	$	5,217		5.17%	$		382,100	$	4,766		5.00%
Securities - taxable			191,181		949		1.99%			213,777		1,214		2.28%
Securities - tax-exempt (2)			68,195		992		5.83%			60,528		919		6.09%
Total securities			259,376		1,941		3.00%			274,305		2,133		3.12%
Federal funds sold			47,215		28		0.24%			63,604		30		0.19%
Interest bearing bank deposits			35,370		23		0.26%			2,670		—		—
Total interest-earning assets			747,054	$	7,209		3.87%			722,679	$	6,929		3.85%
Cash and due from banks			13,083							12,690
Other assets			31,752							36,957
Total assets	$		791,889					$		772,326
Interest-bearing liabilities:
Deposits:
NOW	$		114,803	$	88		0.31%	$		107,287	$	86		0.32%
Savings and money market			202,309		183		0.36%			190,057		243		0.51%
Certificates of deposits less than $100,000			92,423		238		1.03%			103,518		305		1.18%
Certificates of deposits and other time deposits of $100,000 or more			142,526		511		1.44%			157,585		621		1.58%
Total interest-bearing deposits			552,061		1,020		0.74%			558,447		1,255		0.90%
Short-term borrowings			3,678		4		0.44%			3,404		5		0.59%
Long-term debt			7,217		59		3.28%			12,217		104		3.41%
Total interest-bearing liabilities			562,956	$	1,083		0.77%			574,068	$	1,364		0.95%
Noninterest-bearing deposits			147,392							126,166
Other liabilities			2,750							2,725
Stockholders’ equity			78,791							69,367
Total liabilities and stockholders’ equity	$		791,889					$		772,326
Net interest income and margin (tax-equivalent)				$	6,126		3.29%				$	5,565		3.09%

(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,
		2015							2014
(Dollars in thousands)		Average     Balance		Interest     Income/     Expense		Yield/   Rate			Average Balance		Interest     Income/     Expense		Yield/   Rate
Interest-earning assets:
Loans and loans held for sale (1)	$		404,106	$	10,223		5.10%	$		380,449	$	9,556		5.07%
Securities - taxable			193,694		1,989		2.07%			210,223		2,390		2.29%
Securities - tax-exempt (2)			68,115		1,978		5.86%			60,954		1,870		6.19%
Total securities			261,809		3,967		3.06%			271,177		4,260		3.17%
Federal funds sold			60,789		62		0.21%			59,385		55		0.19%
Interest bearing bank deposits			24,449		28		0.23%			5,171		17		0.66%
Total interest-earning assets			751,153	$	14,280		3.83%			716,182	$	13,888		3.91%
Cash and due from banks			13,439							12,762
Other assets			32,355							38,324
Total assets	$		796,947					$		767,268
Interest-bearing liabilities:
Deposits:
NOW	$		114,739	$	174		0.31%	$		106,812	$	170		0.32%
Savings and money market			207,027		409		0.40%			189,830		480		0.51%
Certificates of deposits less than $100,000			93,933		492		1.06%			104,079		617		1.20%
Certificates of deposits and other time deposits of $100,000 or more			145,124		1,047		1.45%			157,509		1,245		1.59%
Total interest-bearing deposits			560,823		2,122		0.76%			558,230		2,512		0.91%
Short-term borrowings			4,167		10		0.48%			3,440		9		0.53%
Long-term debt			9,372		164		3.53%			12,217		208		3.43%
Total interest-bearing liabilities			574,362	$	2,296		0.81%			573,887	$	2,729		0.96%
Noninterest-bearing deposits			141,759							123,257
Other liabilities			2,968							2,652
Stockholders’ equity			77,858							67,472
Total liabilities and stockholders’ equity	$		796,947					$		767,268
Net interest income and margin (tax-equivalent)				$	11,984		3.22%				$	11,159		3.14%

(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

		2015				2014
(In thousands)		Second Quarter		First Quarter		Fourth Quarter		Third Quarter		Second Quarter
Commercial and industrial	$		57,310		52,536		54,329		52,868		52,054
Construction and land development			38,854		37,925		37,298		34,189		32,461
Commercial real estate			184,124		182,871		192,006		190,077		187,241
Residential real estate			115,039		111,265		107,641		106,555		102,921
Consumer installment			13,632		12,478		12,335		11,535		11,686
Total loans			408,959		397,075		403,609		395,224		386,363
Less:  unearned income			(464)		(462)		(655)		(622)		(537)
Loans, net of unearned income			408,495		396,613		402,954		394,602		385,826
Less: allowance for loan losses			(4,886)		(4,722)		(4,836)		(4,754)		(4,728)
Loans, net	$		403,609		391,891		398,118		389,848		381,098

53

Table 7 - Allowance for Loan Losses and Nonperforming Assets

		2015					2014
(Dollars in thousands)		Second Quarter			First Quarter		Fourth Quarter		Third Quarter		Second   Quarter
Allowance for loan losses:
Balance at beginning of period	$		4,722			4,836		4,754		4,728		4,711
Charge-offs:
Commercial and industrial			—			(58)		—		—		(46)
Construction and land development			—			—		1		—		—
Residential real estate			—			(60)		(79)		(287)		(41)
Consumer installment			(5)			(17)		(6)		(39)		(8)
Total charge-offs			(5)			(135)		(84)		(326)		(95)
Recoveries			169			21		16		52		112
Net recoveries (charge-offs)			164			(114)		(68)		(274)		17
Provision for loan losses			—			—		150		300		—
Ending balance	$		4,886			4,722		4,836		4,754		4,728
as a % of loans			1.20	%		1.19		1.20		1.20		1.23
as a % of nonperforming loans			360	%		377		433		281		169
Net (recoveries) charge-offs as % of avg. loans (a)			(0.16)	%		0.11		0.07		0.28		(0.02)
Nonperforming assets:
Nonaccrual loans	$		1,359			1,251		1,117		1,690		2,804
Other real estate owned			499			499		534		1,215		1,584
Total nonperforming assets	$		1,858			1,750		1,651		2,905		4,388
as a % of loans and other real estate owned			0.45	%		0.44		0.41		0.73		1.13
as a % of total assets			0.23	%		0.22		0.21		0.37		0.57
Nonperforming loans as a % of total loans			0.33	%		0.32		0.28		0.43		0.73
Accruing loans 90 days or more past due	$		442			2		—		76		71

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

54

Table 8 - Allocation of Allowance for Loan Losses

		2015										2014
		Second Quarter					First Quarter					Fourth Quarter					Third Quarter					Second Quarter
(Dollars in thousands)		Amount		%*			Amount		%*			Amount		%*			Amount		%*			Amount		%*
Commercial and industrial	$		681		14.0	$		644		13.2	$		639		13.5	$		669		13.4	$		639		13.5
Construction and land development			640		9.4			830		9.6			974		9.2			895		8.7			907		8.4
Commercial real estate			2,146		45.0			1,888		46.1			1,928		47.6			1,935		48.1			1,913		48.5
Residential real estate			1,180		28.1			1,153		28.0			1,119		26.7			1,083		27.0			1,095		26.6
Consumer installment			239		3.3			207		3.1			176		3.1			172		2.9			174		3.0
Total allowance for loan losses	$		4,886			$		4,722			$		4,836			$		4,754			$		4,728

* 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, 2015
Maturity of:
3 months or less	$	22,150
Over 3 months through 6 months		19,576
Over 6 months through 12 months		19,304
Over 12 months		79,425
Total CDs and other time deposits of $100,000 or more	$	140,455

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 its business, the Company and the Bank are, from time to time, involved in legal proceedings. The Company’s and Bank’s management believe there are no pending or threatened legal, governmental, or regulatory proceedings that, upon resolution, are expected to have a material adverse effect upon the Company’s or the Bank’s financial condition or results of operations. See also, Part I, Item 3 of the Company’s Annual Report on Form 10-K for the year ended December  31, 2014.

ITEM 1A.   RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A. “RISK FACTORS” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, which could materially affect our business, financial condition or future results. The risks described in our annual report on Form 10-K are not the only the risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and/or operating results in the future.

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

Not applicable.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4.  MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.  OTHER INFORMATION

Not applicable.

57

ITEM 6.  EXHIBITS

Exhibit  Number	Description
3.1	Certificate of Incorporation of Auburn National Bancorporation, Inc. and all amendments thereto.*
3.2	Amended and Restated Bylaws of Auburn National Bancorporation, Inc., adopted as of November 13, 2007. **
31.1	Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, As Adopted Pursuant To Section 302 of the Sarbanes-Oxley Act of 2002, by E.L. Spencer, Jr., President, Chief Executive Officer and Chairman of the Board.
31.2	Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, As Adopted Pursuant To Section 302 of the Sarbanes-Oxley Act of 2002, by David A. Hedges, 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:            July 31, 2015	By:           /s/ E. L. Spencer, Jr.
	E. L. Spencer, Jr.
	President, Chief Executive Officer and
	Chairman of the Board
Date:            July 31, 2015	By:          /s/ David A. Hedges
	David A. Hedges
	SVP, Controller and Chief Financial Officer
	(Principal Financial and Accounting Officer)

EX-31.1

EXHIBIT 31.1

AUBURN NATIONAL BANCORPORATION, INC AND SUBSIDIARIES

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: July 31, 2015

/s/ E.L. Spencer, Jr.

President, Chief Executive Officer

and Chairman of the Board

EX-31.2

EXHIBIT 31.2

AUBURN NATIONAL BANCORPORATION, INC AND SUBSIDIARIES

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: July 31, 2015

/s/ David A. Hedges

SVP, Controller and Chief Financial Officer

EX-32.1

EXHIBIT 32.1

AUBURN NATIONAL BANCORPORATION, INC AND SUBSIDIARIES

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, 2015, 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: July 31, 2015

/s/ E.L. Spencer, Jr.

E.L. Spencer, Jr.

President, Chief Executive Officer

and Chairman of the Board

EX-32.2

EXHIBIT 32.2

AUBURN NATIONAL BANCORPORATION, INC AND SUBSIDIARIES

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, 2015, as filed with the Securities and Exchange Commission as of the date hereof (the “Report”), I, David A. Hedges, Senior 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: July 31, 2015

/s/ David A. Hedges

David A. Hedges

SVP, Controller and Chief Financial Officer

XML

Impaired Loan Averages (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014	Jun. 30, 2015	Jun. 30, 2014
Impaired Financing Receivable, Average Recorded Investment [Line Items]
Impaired Financing Receivable, Average Recorded Investment	$ 2,952	$ 4,181	$ 3,138	$ 4,820
Impaired Financing Receivable, Interest Income, Accrual Method	252	19	290	42
Commercial and Industrial Loans [Member]
Impaired Financing Receivable, Average Recorded Investment [Line Items]
Impaired Financing Receivable, Average Recorded Investment	64	103	66	111
Impaired Financing Receivable, Interest Income, Accrual Method	1	2	2	4
Construction And Land Development Loans [Member]
Impaired Financing Receivable, Average Recorded Investment [Line Items]
Impaired Financing Receivable, Average Recorded Investment	608	1,098	613	1,343
Impaired Financing Receivable, Interest Income, Accrual Method	0	0	0	0
Commercial Real Estate Owner Occupied Loans [Member]
Impaired Financing Receivable, Average Recorded Investment [Line Items]
Impaired Financing Receivable, Average Recorded Investment	1,202	1,142	1,143	1,468
Impaired Financing Receivable, Interest Income, Accrual Method	9	9	21	21
Commercial Real Estate Other Loans [Member]
Impaired Financing Receivable, Average Recorded Investment [Line Items]
Impaired Financing Receivable, Average Recorded Investment	466	949	538	994
Impaired Financing Receivable, Interest Income, Accrual Method	8	8	18	17
Commercial Real Estate Loans, Total [Member]
Impaired Financing Receivable, Average Recorded Investment [Line Items]
Impaired Financing Receivable, Average Recorded Investment	1,668	2,091	1,681	2,462
Impaired Financing Receivable, Interest Income, Accrual Method	17	17	39	38
Residential Real Estate Consumer Mortgage Loans [Member]
Impaired Financing Receivable, Average Recorded Investment [Line Items]
Impaired Financing Receivable, Average Recorded Investment	512	724	648	736
Impaired Financing Receivable, Interest Income, Accrual Method	158	0	173	0
Residential Real Estate Investment Property Loans [Member]
Impaired Financing Receivable, Average Recorded Investment [Line Items]
Impaired Financing Receivable, Average Recorded Investment	100	165	130	168
Impaired Financing Receivable, Interest Income, Accrual Method	76	0	76	0
Residential Real Estate Loans, Total [Member]
Impaired Financing Receivable, Average Recorded Investment [Line Items]
Impaired Financing Receivable, Average Recorded Investment	612	889	778	904
Impaired Financing Receivable, Interest Income, Accrual Method	234	0	249	0
Consumer Installment and Revolving Loans [Member]
Impaired Financing Receivable, Average Recorded Investment [Line Items]
Impaired Financing Receivable, Average Recorded Investment	0	0	0	0
Impaired Financing Receivable, Interest Income, Accrual Method	$ 0	$ 0	$ 0	$ 0

XML

Fair Value Financial Instruments (Details) - USD ($) $ in Thousands	Jun. 30, 2015	Dec. 31, 2014
Carrying (Reported) Amount, Fair Value Disclosure [Member]
Fair Value, Financial Assets: [Abstract]
Fair Value, Financial Instruments, Loans, Net	$ 403,609	$ 398,118
Fair Value, Financial Instruments, Loans Held For Sale	3,875	1,974
Fair Value, Financial Liabilities: [Abstract]
Fair Value, Financial Instruments, Time Deposits	231,634	249,126
Fair Value, Financial Instruments, Long-term Debt	7,217	12,217
Estimate of Fair Value, Fair Value Disclosure [Member]
Fair Value, Financial Assets: [Abstract]
Fair Value, Financial Instruments, Loans, Net	408,327	407,839
Fair Value, Financial Instruments, Loans Held For Sale	3,897	2,044
Fair Value, Financial Liabilities: [Abstract]
Fair Value, Financial Instruments, Time Deposits	233,385	251,365
Fair Value, Financial Instruments, Long-term Debt	7,217	12,558
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	3,897	2,044
Fair Value, Financial Liabilities: [Abstract]
Fair Value, Financial Instruments, Time Deposits	233,385	251,365
Fair Value, Financial Instruments, Long-term Debt	7,217	12,558
Fair Value, Inputs, Level 3 [Member]
Fair Value, Financial Assets: [Abstract]
Fair Value, Financial Instruments, Loans, Net	408,327	407,839
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

Fair Value (Details) - USD ($) $ in Thousands	Jun. 30, 2015	Dec. 31, 2014
Estimate of Fair Value, Fair Value Disclosure [Member]
Fair Value Disclosure, Securities Available-for-Sale [Abstract]
Fair Value Disclosure, Agency Obligations	$ 60,219	$ 60,249
Fair Value Disclosure, Agency RMBS	122,113	135,043
Fair Value Disclosure, State and Political Subdivisions	70,574	72,311
Fair Value Disclosure, Securities Available-for-Sale, Total	252,906	267,603
Other Assets, Fair Value Disclosure	552	634
Assets, Fair Value Disclosure, Recurring	253,458	268,237
Liabilities Fair Value Disclosure [Abstract]
Other Liabilities, Fair Value Disclosure	552	634
Liabilities, Fair Value Disclosure, Recurring, Total	552	634
Fair Value, Assets and Liabilities Measured on Nonrecurring Basis [Abstract]
Loans Held-for-sale, Fair Value Disclosure	3,875	1,974
Impaired Loans, Fair Value Disclosure	1,851	3,077
Other Real Esate Owned, Fair Value Disclosure	499	534
Servicing Asset at Fair Value, Amount	2,359	2,388
Assets, Fair Value Disclosure, Nonrecurring	8,584	7,973
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	60,219	60,249
Fair Value Disclosure, Agency RMBS	122,113	135,043
Fair Value Disclosure, State and Political Subdivisions	70,574	72,311
Fair Value Disclosure, Securities Available-for-Sale, Total	252,906	267,603
Other Assets, Fair Value Disclosure	552	634
Assets, Fair Value Disclosure, Recurring	253,458	268,237
Liabilities Fair Value Disclosure [Abstract]
Other Liabilities, Fair Value Disclosure	552	634
Liabilities, Fair Value Disclosure, Recurring, Total	552	634
Fair Value, Assets and Liabilities Measured on Nonrecurring Basis [Abstract]
Loans Held-for-sale, Fair Value Disclosure	3,875	1,974
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	3,875	1,974
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	1,851	3,077
Other Real Esate Owned, Fair Value Disclosure	499	534
Servicing Asset at Fair Value, Amount	2,359	2,388
Assets, Fair Value Disclosure, Nonrecurring	$ 4,709	$ 5,999

XML

Loans (Details) - USD ($) $ in Thousands	Jun. 30, 2015	Dec. 31, 2014	Jun. 30, 2014
Loans And Leases Receivable Disclosure
Loans and Leases Receivable, Gross, Commercial	$ 57,310	$ 54,329
Construction And Land Development Loans	38,854	37,298
Commericial Real Estate Loans [Abstract]
Commercial Real Estate Owner Occupied Loans	42,343	52,296
Commerical Real Estate Other Loans	141,781	139,710
Total Commercial Real Estate Loans	184,124	192,006
Residential Real Estate Loans [Abstract]
Consumer Mortgage Loans	69,448	66,489
Residential Real Estate Investment Property Loans	45,591	41,152
Total Residential Real Estate Loans	115,039	107,641
Consumer Installment And Revolving Loans	13,632	12,335
Loans and Leases Receivable, Gross, Carrying Amount	408,959	403,609	$ 386,363
Loans and Leases Receivable Deferred Income	(464)	(655)
Loans, net of unearned income	$ 408,495	$ 402,954

XML

Basic and Diluted Earnings Per Share (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014	Jun. 30, 2015	Jun. 30, 2014
Earnings Per Share Abstract
Net earnings	$ 2,150	$ 1,859	$ 4,012	$ 3,680
Basic and diluted weighted average shares outstanding	3,643,413	3,643,295	3,643,389	3,643,228
Basic and diluted earnings per share	$ 0.59	$ 0.51	$ 1.1	$ 1.01

XML

Trouble Debt Restructing Defaults (Details) - 6 months ended Jun. 30, 2015 $ in Thousands	USD ($)
Financing Receivable Modifications Subsequent Default [Line Items]
Financing Receivable, Modifications, Subsequent Default, Number of Contracts	2
Financing Receivable, Modifications, Subsequent Default, Recorded Investment	$ 411
Commercial Real Estate Other Loans [Member]
Financing Receivable Modifications Subsequent Default [Line Items]
Financing Receivable, Modifications, Subsequent Default, Number of Contracts	1
Financing Receivable, Modifications, Subsequent Default, Recorded Investment	$ 261
Commercial Real Estate Loans, Total [Member]
Financing Receivable Modifications Subsequent Default [Line Items]
Financing Receivable, Modifications, Subsequent Default, Number of Contracts	1
Financing Receivable, Modifications, Subsequent Default, Recorded Investment	$ 261
Residential Real Estate Investment Property Loans [Member]
Financing Receivable Modifications Subsequent Default [Line Items]
Financing Receivable, Modifications, Subsequent Default, Number of Contracts	1
Financing Receivable, Modifications, Subsequent Default, Recorded Investment	$ 150
Residential Real Estate Loans, Total [Member]
Financing Receivable Modifications Subsequent Default [Line Items]
Financing Receivable, Modifications, Subsequent Default, Number of Contracts	1
Financing Receivable, Modifications, Subsequent Default, Recorded Investment	$ 150

XML

Loan Credit Quality Analysis (Details) - USD ($) $ in Thousands	Jun. 30, 2015	Dec. 31, 2014	Jun. 30, 2014
Financing Receivable, Recorded Investment [Line Items]
Financing Receivable, Recorded Investment, Pass	$ 390,863	$ 383,356
Financing Receivable, Recorded Investment, Special Mention	10,159	11,289
Financing Receivable Recorded Investment, Substandard Accruing	6,578	7,847
Financing Receivable, Recorded Investment, Nonaccrual Status	1,359	1,117
Loans and Leases Receivable, Gross, Carrying Amount	408,959	403,609	$ 386,363
Commercial and Industrial Loans [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing Receivable, Recorded Investment, Pass	52,662	49,550
Financing Receivable, Recorded Investment, Special Mention	4,219	4,348
Financing Receivable Recorded Investment, Substandard Accruing	383	376
Financing Receivable, Recorded Investment, Nonaccrual Status	46	55
Loans and Leases Receivable, Gross, Carrying Amount	57,310	54,329	52,054
Construction And Land Development Loans [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing Receivable, Recorded Investment, Pass	37,495	35,911
Financing Receivable, Recorded Investment, Special Mention	130	226
Financing Receivable Recorded Investment, Substandard Accruing	627	556
Financing Receivable, Recorded Investment, Nonaccrual Status	602	605
Loans and Leases Receivable, Gross, Carrying Amount	38,854	37,298	32,461
Commercial Real Estate Owner Occupied Loans [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing Receivable, Recorded Investment, Pass	40,323	49,900
Financing Receivable, Recorded Investment, Special Mention	1,112	1,905
Financing Receivable Recorded Investment, Substandard Accruing	224	228
Financing Receivable, Recorded Investment, Nonaccrual Status	684	263
Loans and Leases Receivable, Gross, Carrying Amount	42,343	52,296
Commercial Real Estate Other Loans [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing Receivable, Recorded Investment, Pass	139,324	136,801
Financing Receivable, Recorded Investment, Special Mention	2,178	2,253
Financing Receivable Recorded Investment, Substandard Accruing	279	656
Financing Receivable, Recorded Investment, Nonaccrual Status	0	0
Loans and Leases Receivable, Gross, Carrying Amount	141,781	139,710
Commercial Real Estate Loans, Total [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing Receivable, Recorded Investment, Pass	179,647	186,701
Financing Receivable, Recorded Investment, Special Mention	3,290	4,158
Financing Receivable Recorded Investment, Substandard Accruing	503	884
Financing Receivable, Recorded Investment, Nonaccrual Status	684	263
Loans and Leases Receivable, Gross, Carrying Amount	184,124	192,006	187,241
Residential Real Estate Consumer Mortgage Loans [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing Receivable, Recorded Investment, Pass	63,688	59,646
Financing Receivable, Recorded Investment, Special Mention	2,001	1,912
Financing Receivable Recorded Investment, Substandard Accruing	3,732	4,891
Financing Receivable, Recorded Investment, Nonaccrual Status	27	40
Loans and Leases Receivable, Gross, Carrying Amount	69,448	66,489
Residential Real Estate Investment Property Loans [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing Receivable, Recorded Investment, Pass	43,935	39,348
Financing Receivable, Recorded Investment, Special Mention	490	624
Financing Receivable Recorded Investment, Substandard Accruing	1,166	1,026
Financing Receivable, Recorded Investment, Nonaccrual Status	0	154
Loans and Leases Receivable, Gross, Carrying Amount	45,591	41,152
Residential Real Estate Loans, Total [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing Receivable, Recorded Investment, Pass	107,623	98,994
Financing Receivable, Recorded Investment, Special Mention	2,491	2,536
Financing Receivable Recorded Investment, Substandard Accruing	4,898	5,917
Financing Receivable, Recorded Investment, Nonaccrual Status	27	194
Loans and Leases Receivable, Gross, Carrying Amount	115,039	107,641	102,921
Consumer Installment and Revolving Loans [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing Receivable, Recorded Investment, Pass	13,436	12,200
Financing Receivable, Recorded Investment, Special Mention	29	21
Financing Receivable Recorded Investment, Substandard Accruing	167	114
Financing Receivable, Recorded Investment, Nonaccrual Status	0	0
Loans and Leases Receivable, Gross, Carrying Amount	$ 13,632	$ 12,335	$ 11,686

XML

Fair Value Unobservable Inputs (Details) - Jun. 30, 2015 - Fair Value, Measurements, Nonrecurring [Member] - Carrying (Reported) Amount, Fair Value Disclosure [Member] $ in Thousands	USD ($)
Impaired Loans [Member]
Schedule Of Fair Value Significant Unobservable Inputs Used [Line Items]
Assets, Fair Value Disclosure	$ 1,851
Impaired Loans [Member] | Appraisal, Appraisal Discount [Member]
Schedule Of Fair Value Significant Unobservable Inputs Used [Line Items]
Unobservable Input, Weighted Average of Input Percent	0.224
Other Real Estate Owned [Member]
Schedule Of Fair Value Significant Unobservable Inputs Used [Line Items]
Assets, Fair Value Disclosure	$ 499
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	0.267
Mortgage Servicing Rights [Member]
Schedule Of Fair Value Significant Unobservable Inputs Used [Line Items]
Assets, Fair Value Disclosure	$ 2,359
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	0.103
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	0.1

XML

Summary of Significant Accounting Policies

6 Months Ended

Jun. 30, 2015

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 31,2014.

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

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

Subsequent Events

The Company has evaluated the effects of events and transactions through the date of this filing that have occurred subsequent to June 30,2015. 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 2015, the Company adopted new guidance related to the following Accounting Standards Updates (“Updates” or “ASUs”):

•

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 2014-11, Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures; and

•

ASU 2014-14, Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure.

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 were effective for the Company in the first quarter of 2015. Adoption of this ASU did not have a material impact on the consolidated financial statements of the Company.

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 the process of foreclosure. These changes were effective for the Company in the first quarter of 2015. Adoption of this ASU did not have a material 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 were effective for the Company in the first quarter 2015. Adoption of this ASU did not have a material impact on the consolidated financial statements of the Company.

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 were effective for the Company in the first quarter 2015. Adoption of this ASU did not have a material impact on the consolidated financial statements of the Company.

ASU No. 2014-14, Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure, clarifies how creditors classify government-guaranteed mortgage loans, including FHA or VA guaranteed loans, upon foreclosure. Some creditors reclassify those loans to real estate consistent with other foreclosed loans that do not have guarantees; others reclassify the loans to other receivables. The amendments in this guidance require that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the following conditions are met: (1) The loan has a government guarantee that is not separable from the loan before foreclosure; (2) At the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim; and (3) At the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. These changes were effective for the Company in the first quarter of 2015. Adoption of this ASU did not have a material impact on the consolidated financial statements of the Company.

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Loans Textuals (Details)	Jun. 30, 2015
Loan and Lease Disclosure (Textuals) [Abstract]
Percentage Of Loans Secured By Real Estate	0.827

XML

Securities Continuous Unrealized Loss (Details) - USD ($) $ in Thousands	Jun. 30, 2015	Dec. 31, 2014
Schedule of Available-for-sale Securities [Line Items]
Available-for-sale Securities, Continuous Unrealized Loss Position, Less than Twelve Months, Fair Value	$ 41,916	$ 13,335
Available-for-sale Securities, Continuous Unrealized Loss Position, Less than 12 Months, Aggregate Losses	848	56
Available-for-sale Securities, Continuous Unrealized Loss Position, Twelve Months or Longer, Fair Value	43,553	66,870
Available-for-sale Securities, Continuous Unrealized Loss Position, 12 Months or Longer, Aggregate Losses	1,306	1,424
Available-for-sale Securities, Continuous Unrealized Loss Position, Fair Value	85,469	80,205
Available-for-sale Securities, Continuous Unrealized Loss Position, Aggregate Losses	2,154	1,480
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	0
Available-for-sale Securities, Continuous Unrealized Loss Position, Less than 12 Months, Aggregate Losses	0	0
Available-for-sale Securities, Continuous Unrealized Loss Position, Twelve Months or Longer, Fair Value	24,089	24,126
Available-for-sale Securities, Continuous Unrealized Loss Position, 12 Months or Longer, Aggregate Losses	869	830
Available-for-sale Securities, Continuous Unrealized Loss Position, Fair Value	24,089	24,126
Available-for-sale Securities, Continuous Unrealized Loss Position, Aggregate Losses	869	830
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	28,866	9,078
Available-for-sale Securities, Continuous Unrealized Loss Position, Less than 12 Months, Aggregate Losses	558	22
Available-for-sale Securities, Continuous Unrealized Loss Position, Twelve Months or Longer, Fair Value	19,464	42,744
Available-for-sale Securities, Continuous Unrealized Loss Position, 12 Months or Longer, Aggregate Losses	437	594
Available-for-sale Securities, Continuous Unrealized Loss Position, Fair Value	48,330	51,822
Available-for-sale Securities, Continuous Unrealized Loss Position, Aggregate Losses	995	616
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	13,050	4,257
Available-for-sale Securities, Continuous Unrealized Loss Position, Less than 12 Months, Aggregate Losses	290	34
Available-for-sale Securities, Continuous Unrealized Loss Position, Twelve Months or Longer, Fair Value	0	0
Available-for-sale Securities, Continuous Unrealized Loss Position, 12 Months or Longer, Aggregate Losses	0	0
Available-for-sale Securities, Continuous Unrealized Loss Position, Fair Value	13,050	4,257
Available-for-sale Securities, Continuous Unrealized Loss Position, Aggregate Losses	$ 290	$ 34

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Security Types (Details) - USD ($) $ in Thousands	Jun. 30, 2015	Dec. 31, 2014
Schedule of Available-for-sale Securities [Line Items]
Available-for-sale Securities, Debt Maturities, within One Year, Fair Value	$ 5,007	$ 0
Available-for-sale Securities, Debt Maturities, after One Through Five Years, Fair Value	29,082	31,449
Available-for-sale Securities, Debt Maturities, after Five Through Ten Years, Fair Value	43,331	44,912
Available-for-sale Securities, Debt Maturities, after Ten Years, Fair Value	175,486	191,242
Available-for-sale Securities, Fair Value, Total	252,906	267,603
Available-for-sale Securities, Gross Unrealized Gain	4,190	5,351
Available-for-sale Securities, Gross Unrealized Losses	2,154	1,480
Available-for-sale Securities, Amortized Cost Basis	250,870	263,732
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	5,007	0
Available-for-sale Securities, Debt Maturities, after One Through Five Years, Fair Value	26,033	30,947
Available-for-sale Securities, Debt Maturities, after Five Through Ten Years, Fair Value	14,870	14,869
Available-for-sale Securities, Debt Maturities, after Ten Years, Fair Value	14,309	14,433
Available-for-sale Securities, Fair Value, Total	60,219	60,249
Available-for-sale Securities, Gross Unrealized Gain	509	375
Available-for-sale Securities, Gross Unrealized Losses	869	830
Available-for-sale Securities, Amortized Cost Basis	60,579	60,704
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	1,994	0
Available-for-sale Securities, Debt Maturities, after Five Through Ten Years, Fair Value	15,340	14,523
Available-for-sale Securities, Debt Maturities, after Ten Years, Fair Value	104,779	120,520
Available-for-sale Securities, Fair Value, Total	122,113	135,043
Available-for-sale Securities, Gross Unrealized Gain	1,156	1,597
Available-for-sale Securities, Gross Unrealized Losses	995	616
Available-for-sale Securities, Amortized Cost Basis	121,952	134,062
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	1,055	502
Available-for-sale Securities, Debt Maturities, after Five Through Ten Years, Fair Value	13,121	15,520
Available-for-sale Securities, Debt Maturities, after Ten Years, Fair Value	56,398	56,289
Available-for-sale Securities, Fair Value, Total	70,574	72,311
Available-for-sale Securities, Gross Unrealized Gain	2,525	3,379
Available-for-sale Securities, Gross Unrealized Losses	290	34
Available-for-sale Securities, Amortized Cost Basis	$ 68,339	$ 68,966

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Mortgage Servicing Rights, Net (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014	Jun. 30, 2015	Jun. 30, 2014
Servicing Asset at Amortized Value, Balance [Roll Forward]
Servicing Asset at Amortized Cost, Beginning	$ 2,355	$ 2,368	$ 2,388	$ 2,350
Servicing Asset at Amortized Value, Additions	154	105	265	203
Servicing Asset at Amortized Value, Amortization	(199)	(84)	(333)	(164)
Servicing Asset at Amortized Value, Change In Valuation Allowance	49	(43)	39	(43)
Servicing Asset at Amortized Cost, Ending	2,359	2,346	2,359	2,346
Servicing Asset at Amortized Value, Fair Value [Abstract]
Servicing Asset at Amortized Value, Fair Value, Beginning	3,066	3,386	3,238	3,452
Servicing Asset at Amortized Value, Fair Value, Ending	3,014	3,228	3,014	3,228
Valuation Allowance for Impairment of Recognized Servicing Assets, Balance [Abstract]
Valuation Allowance for Impairment of Recognized Servicing Assets, Beginning Balance	63	0	53	0
Valuation Allowance for Impairment of Recognized Servicing Assets, Ending Balance	$ 14	$ 43	$ 14	$ 43

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Securities OTTI (Details) $ in Thousands	6 Months Ended
	Jun. 30, 2014 USD ($)
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	333
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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Securities Gross Realized Gain Loss (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014	Jun. 30, 2015	Jun. 30, 2014
Available-for-sale Securities, Gross Realized Gain (Loss) [Abstract]
Available-for-sale Securities, Gross Realized Gains	$ 0	$ 12	$ 3	$ 38
Available-for-sale Securities, Gross Realized Gain (Loss), Net	$ 0	$ 12	$ 3	$ 38

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Consolidated Statements of Cash Flows - USD ($) $ in Thousands	6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014
Cash flows from operating activities:
Net earnings	$ 4,012	$ 3,680
Adjustments to reconcile net earnings to net cash provided by operating activties:
Provision for loan losses	0	(400)
Depreciation and amortization	545	366
Premium amortization and discount accretion, net	804	776
Net (gain) loss on securities available-for-sale	(3)	295
Net gain on sale of loans held for sale	(644)	(494)
(Decrease) Increase in MSR valuation allowance	(39)	43
Net loss on other real estate owned	5	42
Loss on prepayment of long-term debt	362	0
Loans originated for sale	(38,404)	(29,459)
Proceeds from sale of loans	36,883	24,847
Increase in cash surrender value of bank owned life insurance	(237)	(251)
Income recognized from death benefit on bank-owned life insurance	(276)	0
Net decrease in other assets	237	71
Net (decrease) increase in accrued expenses and other liabilities	(84)	694
Net cash provided by operating activities	3,161	210
Cash flows from investing activities:
Proceeds from sales of securities available-for-sale	0	18,354
Proceeds from maturities of securities available-for-sale	16,698	18,127
Purchase of securities available-for-sale	(4,637)	(34,273)
Increase in loans, net	(5,491)	(3,021)
Net purchases of premises and equipment	(415)	(19)
Proceeds from bank-owned life insurance death benefit	1,319	0
Decrease in FHLB stock	191	235
Proceeds from sale of other real estate owned	30	2,652
Net cash provided by investing activities	7,695	2,055
Cash flows from financing activities:
Net increase in noninterest-bearing deposits	19,576	4,615
Net increase in interest-bearing deposits	3,028	10,722
Net decrease in federal funds purchased and securities sold under agreements to repurchase	(1,769)	(47)
Repayments or retirement of long-term debt	(5,362)	0
Dividends paid	(1,603)	(1,567)
Net cash provided by financing activities	13,870	13,723
Net change in cash and cash equivalents	24,726	15,988
Cash and cash equivalents at beginning of period	83,503	54,222
Cash and cash equivalents at end of period	108,229	70,210
Cash paid during the period for:
Interest	2,366	2,777
Income taxes	1,241	506
Supplemental disclosure of non-cash transactions:
Real estate acquired through foreclosure	$ 0	$ 394

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Securities Textuals (Details) - USD ($) $ in Thousands	Jun. 30, 2015	Dec. 31, 2014
Securities (Textuals) [Abstract]
Available-for-sale Securities Pledged as Collateral	$ 140,300	$ 132,200
Cost-method Investments, Aggregate Carrying Amount	$ 1,400	$ 1,600

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Troubled Debt Restructuring Accrual Status (Details) - USD ($) $ in Thousands	Jun. 30, 2015	Dec. 31, 2014
Financing Receivable Trouble Debt Restructuring Accrual Status [Line Items]
Impaired Financing Receivable, Troubled Debt Restructuring, Still Accruing	$ 1,108	$ 2,249
Impaired Financing Receivable, Troubled Debt Restructuring, Nonaccrual	846	1,022
Impaired Financing Receivable, Trouble Debt Structuring, Total	1,954	3,271
Impaired Financing Receivable, Troubled Debt Restructuring, Allowance for Credit Losses	176	194
Commercial and Industrial Loans [Member]
Financing Receivable Trouble Debt Restructuring Accrual Status [Line Items]
Impaired Financing Receivable, Troubled Debt Restructuring, Still Accruing	64	70
Impaired Financing Receivable, Troubled Debt Restructuring, Nonaccrual	0	0
Impaired Financing Receivable, Trouble Debt Structuring, Total	64	70
Impaired Financing Receivable, Troubled Debt Restructuring, Allowance for Credit Losses	0	0
Construction And Land Development Loans [Member]
Financing Receivable Trouble Debt Restructuring Accrual Status [Line Items]
Impaired Financing Receivable, Troubled Debt Restructuring, Still Accruing	0	0
Impaired Financing Receivable, Troubled Debt Restructuring, Nonaccrual	602	605
Impaired Financing Receivable, Trouble Debt Structuring, Total	602	605
Impaired Financing Receivable, Troubled Debt Restructuring, Allowance for Credit Losses	0	0
Commercial Real Estate Owner Occupied Loans [Member]
Financing Receivable Trouble Debt Restructuring Accrual Status [Line Items]
Impaired Financing Receivable, Troubled Debt Restructuring, Still Accruing	828	846
Impaired Financing Receivable, Troubled Debt Restructuring, Nonaccrual	244	263
Impaired Financing Receivable, Trouble Debt Structuring, Total	1,072	1,109
Impaired Financing Receivable, Troubled Debt Restructuring, Allowance for Credit Losses	84	102
Commercial Real Estate Other Loans [Member]
Financing Receivable Trouble Debt Restructuring Accrual Status [Line Items]
Impaired Financing Receivable, Troubled Debt Restructuring, Still Accruing	216	591
Impaired Financing Receivable, Troubled Debt Restructuring, Nonaccrual	0	0
Impaired Financing Receivable, Trouble Debt Structuring, Total	216	591
Impaired Financing Receivable, Troubled Debt Restructuring, Allowance for Credit Losses	92	92
Commercial Real Estate Loans, Total [Member]
Financing Receivable Trouble Debt Restructuring Accrual Status [Line Items]
Impaired Financing Receivable, Troubled Debt Restructuring, Still Accruing	1,044	1,437
Impaired Financing Receivable, Troubled Debt Restructuring, Nonaccrual	244	263
Impaired Financing Receivable, Trouble Debt Structuring, Total	1,288	1,700
Impaired Financing Receivable, Troubled Debt Restructuring, Allowance for Credit Losses	176	194
Residential Real Estate Consumer Mortgage Loans [Member]
Financing Receivable Trouble Debt Restructuring Accrual Status [Line Items]
Impaired Financing Receivable, Troubled Debt Restructuring, Still Accruing	0	742
Impaired Financing Receivable, Troubled Debt Restructuring, Nonaccrual	0	0
Impaired Financing Receivable, Trouble Debt Structuring, Total	0	742
Impaired Financing Receivable, Troubled Debt Restructuring, Allowance for Credit Losses	0	0
Residential Real Estate Investment Property Loans [Member]
Financing Receivable Trouble Debt Restructuring Accrual Status [Line Items]
Impaired Financing Receivable, Troubled Debt Restructuring, Still Accruing	0	0
Impaired Financing Receivable, Troubled Debt Restructuring, Nonaccrual	0	154
Impaired Financing Receivable, Trouble Debt Structuring, Total	0	154
Impaired Financing Receivable, Troubled Debt Restructuring, Allowance for Credit Losses	0	0
Residential Real Estate Loans, Total [Member]
Financing Receivable Trouble Debt Restructuring Accrual Status [Line Items]
Impaired Financing Receivable, Troubled Debt Restructuring, Still Accruing	0	742
Impaired Financing Receivable, Troubled Debt Restructuring, Nonaccrual	0	154
Impaired Financing Receivable, Trouble Debt Structuring, Total	0	896
Impaired Financing Receivable, Troubled Debt Restructuring, Allowance for Credit Losses	0	0
Consumer Installment and Revolving Loans [Member]
Financing Receivable Trouble Debt Restructuring Accrual Status [Line Items]
Impaired Financing Receivable, Troubled Debt Restructuring, Still Accruing	0	0
Impaired Financing Receivable, Troubled Debt Restructuring, Nonaccrual	0	0
Impaired Financing Receivable, Trouble Debt Structuring, Total	0	0
Impaired Financing Receivable, Troubled Debt Restructuring, Allowance for Credit Losses	$ 0	$ 0

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Consolidated Balance Sheets - USD ($) $ in Thousands	Jun. 30, 2015	Dec. 31, 2014
Assets:
Cash and due from banks	$ 15,914	$ 12,856
Federal funds sold	46,050	68,507
Interest bearing bank deposits	46,265	2,140
Cash and cash equivalents	108,229	83,503
Securities available-for-sale	252,906	267,603
Loans held for sale	3,875	1,974
Loans, net of unearned income	408,495	402,954
Allowance for loan losses	(4,886)	(4,836)
Loans, net	403,609	398,118
Premises and equipment, net	11,029	10,807
Bank-owned life insurance	17,198	18,004
Other real estate owned	499	534
Other assets	8,888	8,688
Total assets	806,233	789,231
Deposits:
Noninterest-bearing	149,736	130,160
Interest-bearing	566,258	563,230
Total deposits	715,994	693,390
Federal funds purchased and securities sold under agreements to repurchase	2,912	4,681
Long-term debt	7,217	12,217
Accrued expenses and other liabilities	3,057	3,144
Total liabilities	729,180	713,432
Stockholders' equity:
Preferred stock	0	0
Common stock	39	39
Additional paid-in capital	3,765	3,763
Retained earnings	78,602	76,193
Accumulated other comprehensive income, net	1,285	2,443
Less treasury stock, at cost	(6,638)	(6,639)
Total stockholders' equity	77,053	75,799
Total liabilities and stockholders' equity	$ 806,233	$ 789,231

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Derivative Instruments (Details) - USD ($) $ in Thousands	Jun. 30, 2015	Dec. 31, 2014
Derivative [Line Items]
Derivative, Notional Amount1	$ 8,984	$ 9,334
DerivativeAssetFairValueGrossAsset	552	634
Derivative Asset, Fair Value, Gross Liability	552	634
Derivative, Interest Rate Swap, Pay Fixed, Receive Variable [Member]
Derivative [Line Items]
Derivative, Notional Amount1	4,492	4,667
DerivativeAssetFairValueGrossAsset	0	0
Derivative Asset, Fair Value, Gross Liability	552	634
Derivative, Interest Rate Swap, Pay Variable, Receive Fixed [Member]
Derivative [Line Items]
Derivative, Notional Amount1	4,492	4,667
DerivativeAssetFairValueGrossAsset	552	634
Derivative Asset, Fair Value, Gross Liability	$ 0	$ 0

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Consolidated Statements of Stockholders' Equity - USD ($) $ in Thousands	Total	Common Stock Member	Additional Paid In Capital Member	Retained Earnings Member	Accumulated Other Comprehensive Income Member	Treasury Stock Member
Balance, shares at Dec. 31, 2013	3,957,135
Balance, Beg at Dec. 31, 2013	$ 64,485	$ 39	$ 3,759	$ 71,879	$ (4,552)	$ (6,640)
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
Balance, shares at Dec. 31, 2014	3,957,135
Balance, Beg at Dec. 31, 2014	$ 75,799	39	3,763	76,193	2,443	(6,639)
Net earnings	4,012			4,012
Other Comprehensive Income (Loss), Net of Tax	(1,158)				(1,158)
Cash dividends paid	(1,603)			(1,603)
Sale of treasury stock	3		2			1
Balance, End at Jun. 30, 2015	$ 77,053	$ 39	$ 3,765	$ 78,602	$ 1,285	$ (6,638)
Balance, shares at Jun. 30, 2015	3,957,135

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Allowance for Loan Loss (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014	Jun. 30, 2015	Jun. 30, 2014
Financing Receivable, Allowance for Credit Losses [Roll Forward]
Financing Receivable, Allowance for Credit Losses	$ 4,722	$ 4,711	$ 4,836	$ 5,268
Financing Receivable, Allowance for Credit Losses, Charge-offs	(5)	(95)	(140)	(398)
Financing Receivable, Allowance for Credit Losses, Recoveries	169	112	190	258
Financing Receivable Allowance For Credit Losses Net Chargeoffs Recoveries	164	17	50	(140)
Provision for loan losses	0	0	0	(400)
Financing Receivable, Allowance for Credit Losses	4,886	4,728	4,886	4,728
Commercial and Industrial Loans [Member]
Financing Receivable, Allowance for Credit Losses [Roll Forward]
Financing Receivable, Allowance for Credit Losses	644	482	639	386
Financing Receivable, Allowance for Credit Losses, Charge-offs	0	(46)	(58)	(46)
Financing Receivable, Allowance for Credit Losses, Recoveries	3	32	4	36
Financing Receivable Allowance For Credit Losses Net Chargeoffs Recoveries	3	(14)	(54)	(10)
Provision for loan losses	34	171	96	263
Financing Receivable, Allowance for Credit Losses	681	639	681	639
Construction And Land Development Loans [Member]
Financing Receivable, Allowance for Credit Losses [Roll Forward]
Financing Receivable, Allowance for Credit Losses	830	214	974	366
Financing Receivable, Allowance for Credit Losses, Charge-offs	0	0	0	(236)
Financing Receivable, Allowance for Credit Losses, Recoveries	4	1	9	3
Financing Receivable Allowance For Credit Losses Net Chargeoffs Recoveries	4	1	9	(233)
Provision for loan losses	(194)	692	(343)	774
Financing Receivable, Allowance for Credit Losses	640	907	640	907
Commercial Real Estate Loans, Total [Member]
Financing Receivable, Allowance for Credit Losses [Roll Forward]
Financing Receivable, Allowance for Credit Losses	1,888	2,493	1,928	3,186
Financing Receivable, Allowance for Credit Losses, Charge-offs	0	0	0	0
Financing Receivable, Allowance for Credit Losses, Recoveries	0	0	0	118
Financing Receivable Allowance For Credit Losses Net Chargeoffs Recoveries	0	0	0	118
Provision for loan losses	258	(580)	218	(1,391)
Financing Receivable, Allowance for Credit Losses	2,146	1,913	2,146	1,913
Residential Real Estate Loans, Total [Member]
Financing Receivable, Allowance for Credit Losses [Roll Forward]
Financing Receivable, Allowance for Credit Losses	1,153	1,256	1,119	1,114
Financing Receivable, Allowance for Credit Losses, Charge-offs	0	(41)	(59)	(72)
Financing Receivable, Allowance for Credit Losses, Recoveries	151	74	165	91
Financing Receivable Allowance For Credit Losses Net Chargeoffs Recoveries	151	33	106	19
Provision for loan losses	(124)	(194)	(45)	(38)
Financing Receivable, Allowance for Credit Losses	1,180	1,095	1,180	1,095
Consumer Installment and Revolving Loans [Member]
Financing Receivable, Allowance for Credit Losses [Roll Forward]
Financing Receivable, Allowance for Credit Losses	207	266	176	216
Financing Receivable, Allowance for Credit Losses, Charge-offs	(5)	(8)	(23)	(44)
Financing Receivable, Allowance for Credit Losses, Recoveries	11	5	12	10
Financing Receivable Allowance For Credit Losses Net Chargeoffs Recoveries	6	(3)	(11)	(34)
Provision for loan losses	26	(89)	74	(8)
Financing Receivable, Allowance for Credit Losses	$ 239	$ 174	$ 239	$ 174

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Mortgage Servicing Rights, Net (Tables)

6 Months Ended

Jun. 30, 2015

Mortgage Servicing [Abstract]

Schedule Of Servicing Assets At Fair Value Text Block

		Quarter ended June 30,				Six Months Ended June 30,
(Dollars in thousands)		2015		2014		2015		2014
MSRs, net:
Beginning balance	$	2,355	$	2,368	$	2,388	$	2,350
Additions, net		154		105		265		203
Amortization expense		(199)		(84)		(333)		(164)
Decrease (increase) in valuation allowance		49		(43)		39		(43)
Ending balance	$	2,359	$	2,346	$	2,359	$	2,346
Valuation allowance included in MSRs, net:
Beginning of period	$	63	$	—	$	53	$	—
End of period		14		43		14		43
Fair value of amortized MSRs:
Beginning of period	$	3,066	$	3,386	$	3,238	$	3,452
End of period		3,014		3,228		3,014		3,228

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Allowance For Loan Loss Additional Information (Details) - USD ($) $ in Thousands	Jun. 30, 2015	Dec. 31, 2014	Jun. 30, 2014
Financing Receivable Allowance For Credit Loss Additional Information [Line Items]
Financing Receivable, Allowance for Credit Losses, Collectively Evaluated for Impairment	$ 4,412		$ 4,559
Financing Receivable, Collectively Evaluated for Impairment	406,634		382,485
Financing Receivable, Allowance for Credit Losses, Individually Evaluated for Impairment	474		169
Financing Receivable, Individually Evaluated for Impairment	2,325		3,878
Allowance for loan losses	4,886	$ 4,836	4,728
Loans and Leases Receivable, Gross, Carrying Amount	408,959	403,609	386,363
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	681		639
Financing Receivable, Collectively Evaluated for Impairment	57,246		51,959
Financing Receivable, Allowance for Credit Losses, Individually Evaluated for Impairment	0		0
Financing Receivable, Individually Evaluated for Impairment	64		95
Allowance for loan losses	681		639
Loans and Leases Receivable, Gross, Carrying Amount	57,310	54,329	52,054
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	640		907
Financing Receivable, Collectively Evaluated for Impairment	38,252		31,498
Financing Receivable, Allowance for Credit Losses, Individually Evaluated for Impairment	0		0
Financing Receivable, Individually Evaluated for Impairment	602		963
Allowance for loan losses	640		907
Loans and Leases Receivable, Gross, Carrying Amount	38,854	37,298	32,461
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	1,672		1,744
Financing Receivable, Collectively Evaluated for Impairment	182,465		185,302
Financing Receivable, Allowance for Credit Losses, Individually Evaluated for Impairment	474		169
Financing Receivable, Individually Evaluated for Impairment	1,659		1,939
Allowance for loan losses	2,146		1,913
Loans and Leases Receivable, Gross, Carrying Amount	184,124	192,006	187,241
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	1,180		1,095
Financing Receivable, Collectively Evaluated for Impairment	115,039		102,040
Financing Receivable, Allowance for Credit Losses, Individually Evaluated for Impairment	0		0
Financing Receivable, Individually Evaluated for Impairment	0		881
Allowance for loan losses	1,180		1,095
Loans and Leases Receivable, Gross, Carrying Amount	115,039	107,641	102,921
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	239		174
Financing Receivable, Collectively Evaluated for Impairment	13,632		11,686
Financing Receivable, Allowance for Credit Losses, Individually Evaluated for Impairment	0		0
Financing Receivable, Individually Evaluated for Impairment	0		0
Allowance for loan losses	239		174
Loans and Leases Receivable, Gross, Carrying Amount	$ 13,632	$ 12,335	$ 11,686

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Fair Value (Tables)

6 Months Ended

Jun. 30, 2015

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, 2015:
Securities available-for-sale:
	Agency obligations		$	60,219	—	60,219	—
	Agency RMBS			122,113	—	122,113	—
	State and political subdivisions			70,574	—	70,574	—
Total securities available-for-sale				252,906	—	252,906	—
Other assets (1)				552	—	552	—
		Total assets at fair value	$	253,458	—	253,458	—
Other liabilities(1)			$	552	—	552	—
		Total liabilities at fair value	$	552	—	552	—
December 31, 2014:
Securities available-for-sale:
	Agency obligations		$	60,249	—	60,249	—
	Agency RMBS			135,043	—	135,043	—
	State and political subdivisions			72,311	—	72,311	—
Total securities available-for-sale				267,603	—	267,603	—
Other assets (1)				634	—	634	—
		Total assets at fair value	$	268,237	—	268,237	—
Other liabilities(1)			$	634	—	634	—
		Total liabilities at fair value	$	634	—	634	—
(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, 2015:
Loans held for sale		$	3,875	—	3,875	—
Loans, net(1)			1,851	—	—	1,851
Other real estate owned			499	—	—	499
Other assets (2)			2,359	—	—	2,359
	Total assets at fair value	$	8,584	—	3,875	4,709
December 31, 2014:
Loans held for sale		$	1,974	—	1,974	—
Loans, net(1)			3,077	—	—	3,077
Other real estate owned			534	—	—	534
Other assets (2)			2,388	—	—	2,388
	Total assets at fair value	$	7,973	—	1,974	5,999
(1)Loans considered impaired under ASC 310-10-35, Receivables. This amount reflects the recorded investment in
	impaired loans, net of any related allowance for loan losses.
(2)Represents MSRs, net, carried at lower of cost or estimated fair value.

Fair Value, Assets and Liabilities Measured on 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	$	1,851	Appraisal	Appraisal discounts (%)	22.4	%
Other real estate owned		499	Appraisal	Appraisal discounts (%)	26.7	%
Mortgage servicing rights, net		2,359	Discounted cash flow	Prepayment speed or CPR (%)	10.3	%
				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, 2015:
Financial Assets:
	Loans, net (1)	$	403,609	$	408,327	$	—	$	—	$	408,327
	Loans held for sale		3,875		3,897		—		3,897		—
Financial Liabilities:
	Time Deposits	$	231,634	$	233,385	$	—	$	233,385	$	—
	Long-term debt		7,217		7,217		—		7,217		—
December 31, 2014:
Financial Assets:
	Loans, net (1)	$	398,118	$	407,839	$	—	$	—	$	407,839
	Loans held for sale		1,974		2,044		—		2,044		—
Financial Liabilities:
	Time Deposits	$	249,126	$	251,365	$	—	$	251,365	$	—
	Long-term debt		12,217		12,558		—		12,558		—
(1) Represents loans, net of unearned income and the allowance for loan losses.

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Consolidated Statements of Stockholders' Equity (Parentheticals) - $ / shares	6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014
Statement of Stockholders' Equity (Parentheticals)
Cash dividends paid per share	$ 0.44	$ 0.43
Treasury shares sold	100	210

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Consolidated Balance Sheets (Parentheticals) - $ / shares	Jun. 30, 2015	Dec. 31, 2014
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	313,707	313,807

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Summary of Significant Accounting Policies (Policies)

6 Months Ended

Jun. 30, 2015

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 31,2014.

Consolidation Policy [TextBlock]

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

Use of Estimates, Policy [Policy Text Block]

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

Subsequent Events, Policy [Policy Text Block]

Subsequent Events

The Company has evaluated the effects of events and transactions through the date of this filing that have occurred subsequent to June 30,2015. 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 2015, the Company adopted new guidance related to the following Accounting Standards Updates (“Updates” or “ASUs”):

•

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 2014-11, Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures; and

•

ASU 2014-14, Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure.

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 were effective for the Company in the first quarter of 2015. Adoption of this ASU did not have a material impact on the consolidated financial statements of the Company.

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 the process of foreclosure. These changes were effective for the Company in the first quarter of 2015. Adoption of this ASU did not have a material 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 were effective for the Company in the first quarter 2015. Adoption of this ASU did not have a material impact on the consolidated financial statements of the Company.

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 were effective for the Company in the first quarter 2015. Adoption of this ASU did not have a material impact on the consolidated financial statements of the Company.

ASU No. 2014-14, Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure, clarifies how creditors classify government-guaranteed mortgage loans, including FHA or VA guaranteed loans, upon foreclosure. Some creditors reclassify those loans to real estate consistent with other foreclosed loans that do not have guarantees; others reclassify the loans to other receivables. The amendments in this guidance require that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the following conditions are met: (1) The loan has a government guarantee that is not separable from the loan before foreclosure; (2) At the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim; and (3) At the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. These changes were effective for the Company in the first quarter of 2015. Adoption of this ASU did not have a material impact on the consolidated financial statements of the Company.

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Document and Entity Information - shares	6 Months Ended
	Jun. 30, 2015	Jul. 31, 2015
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
TradingSymbol	AUBN
Entity voluntary filers	No
Entity well known seasoned issuer	No
Entity common stock shares outstanding		3,643,448
Amendment flag	false
Document Type	10-Q
Document Year Focus	2015
Document Period Focus	Q2
Document Period End Date	Jun. 30, 2015

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Basic and Diluted Earnings Per Share (Tables)

6 Months Ended

Jun. 30, 2015

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)				2015		2014		2015		2014
Basic and diluted:
	Net earnings		$	2,150	$	1,859	$	4,012	$	3,680
	Weighted average common shares outstanding			3,643,413		3,643,295		3,643,389		3,643,228
		Earnings per share	$	0.59	$	0.51	$	1.10	$	1.01

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Consolidated Statements of Earnings - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014	Jun. 30, 2015	Jun. 30, 2014
Interest income:
Loans, including fees	$ 5,217	$ 4,766	$ 10,223	$ 9,556
Securities - Taxable	949	1,214	1,989	2,390
Securities - Tax-exempt	654	607	1,305	1,234
Federal funds sold and interest bearing bank deposits	51	30	90	72
Total interest income	6,871	6,617	13,607	13,252
Interest expense:
Deposits	1,020	1,255	2,122	2,512
Short-term borrowings	4	5	10	9
Long-term debt interest expense	59	104	164	208
Total interest expense	1,083	1,364	2,296	2,729
Net interest income	5,788	5,253	11,311	10,523
Provision for loan losses	0	0	0	(400)
Net interest income after provision for loan losses	5,788	5,253	11,311	10,923
Noninterest income:
Service charges on deposit accounts	209	219	415	432
Mortgage lending	457	348	791	734
Bank-owned life insurance income	112	125	513	251
Other noninterest income	389	377	766	715
Securities gains (losses), net:
Realized gains, net	0	12	3	38
Total other-than-temporary impairments	0	0	0	(333)
Total securities gains (losses), net	0	12	3	(295)
Total noninterest income	1,167	1,081	2,488	1,837
Noninterest expense:
Salaries and benefits	2,291	2,221	4,559	4,502
Net occupancy and equipment	362	341	720	693
Professional fees	218	225	419	431
FDIC and other regulatory assessments	118	129	243	274
Other real estate owned, net	1	(62)	18	56
Prepayment penalties on long-term debt	0	0	362	0
Other noninterest expense	1,039	938	2,022	1,784
Total noninterest expense	4,029	3,792	8,343	7,740
Earnings before income taxes	2,926	2,542	5,456	5,020
Income tax expense	776	683	1,444	1,340
Net earnings	$ 2,150	$ 1,859	$ 4,012	$ 3,680
Net earnings per share:
Basic and diluted earnings per share	$ 0.59	$ 0.51	$ 1.1	$ 1.01
Weighted average shares outstanding:
Basic and diluted weighted average shares outstanding	3,643,413	3,643,295	3,643,389	3,643,228

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Securities

6 Months Ended

Jun. 30, 2015

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 30,2015 and December 31,2014, respectively, all securities within the scope of Accounting Standards Codification (“ASC”) 320, Investments – Debt and Equity Securities, were classified as available-for-sale. The fair value and amortized cost for securities available-for-sale by contractual maturityat June 30,2015 and December 31,2014, 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, 2015
Agency obligations (a)		$	5,007	26,033	14,870	14,309	60,219	509	869	$	60,579
Agency RMBS (a)			—	1,994	15,340	104,779	122,113	1,156	995		121,952
State and political subdivisions			—	1,055	13,121	56,398	70,574	2,525	290		68,339
	Total available-for-sale	$	5,007	29,082	43,331	175,486	252,906	4,190	2,154	$	250,870

December 31, 2014
Agency obligations (a)		$	—	30,947	14,869	14,433	60,249	375	830	$	60,704
Agency RMBS (a)			—	—	14,523	120,520	135,043	1,597	616		134,062
State and political subdivisions			—	502	15,520	56,289	72,311	3,379	34		68,966
	Total available-for-sale	$	—	31,449	44,912	191,242	267,603	5,351	1,480	$	263,732
(a) Includes securities issued by U.S. government agencies or government sponsored entities.

Securities with aggregate fair values of $140.3 million and $132.2 million at June 30,2015 and December 31,2014, respectively, were pledged to secure public deposits, securities sold under agreements to repurchase, Federal Home Loan Bank (“FHLB”) advances, and for other purposes required or permitted by law.

Included in other assets are cost-method investments. The carrying amounts of cost-method investments were $1.4 million and $1.6 million at June 30,2015 and December 31,2014, 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 30,2015 and December 31,2014, 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, 2015:
Agency obligations		$	—	—	24,089	869	$	24,089	869
Agency RMBS			28,866	558	19,464	437		48,330	995
State and political subdivisions			13,050	290	—	—		13,050	290
	Total	$	41,916	848	43,553	1,306	$	85,469	2,154

December 31, 2014:
Agency obligations		$	—	—	24,126	830	$	24,126	830
Agency RMBS			9,078	22	42,744	594		51,822	616
State and political subdivisions			4,257	34	—	—		4,257	34
	Total	$	13,335	56	66,870	1,424	$	80,205	1,480

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

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

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

Agency obligations

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

Agency RMBS

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

Securities of U.S. states and political subdivisions

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

Cost-method investments

At June 30,2015, cost-method investments with an aggregate cost of $1.4 million were not evaluated for impairment because the Company did not identify any events or changes in circumstances that may have a significant adverse effect on the fair value of these cost-method investments.

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

Other-Than-Temporarily Impaired Securities

Credit-impaired debt securities are debt securities where the Company has written down the amortized cost basis of a security for other-than-temporary impairment and the credit component of the loss is recognized in earnings. At June 30, 2015 and December 31, 2014, the Company had no credit-impaired debt securities and there were no additions or reductions in the credit loss component of credit-impaired debt securities during the six months ended June 30, 2015 and 2014, respectively.

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)					2015		2014		2015		2014
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 of securities.
				Quarter ended June 30,				Six Months Ended June 30,
(Dollars in thousands)				2015		2014		2015		2014
Gross realized gains			$	—	$	12	$	3	$	38
	Realized gains, net		$	—	$	12	$	3	$	38

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Variable Interest Entities

6 Months Ended

Jun. 30, 2015

Variable interest entities [Abstract]

Variable interest entities [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 30,2015, 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 30,2015.

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

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Derivative Instruments (Tables)

6 Months Ended

Jun. 30, 2015

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, 2015:
Pay fixed / receive variable		$	4,492	—	552
Pay variable / receive fixed			4,492	552	—
	Total interest rate swap agreements	$	8,984	552	552
December 31, 2014:
Pay fixed / receive variable		$	4,667	—	634
Pay variable / receive fixed			4,667	634	—
	Total interest rate swap agreements	$	9,334	634	634

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Variable Interest Entities (Tables)

6 Months Ended

Jun. 30, 2015

Variable interest entities [Abstract]

Variable Interest Entity [Table Text Block]

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

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Derivative Instruments

6 Months Ended

Jun. 30, 2015

Derivative instruments and hedging activities disclosure abstract

Derivative Instruments And Hedging Activities Disclosure Text Block

NOTE 7: DERIVATIVE INSTRUMENTS

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

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

A summary of the Company’s interest rate swap agreements at June 30,2015 and December 31,2014 is presented below.

				Other	Other
				Assets	Liabilities
				Estimated	Estimated
(Dollars in thousands)			Notional	Fair Value	Fair Value
June 30, 2015:
Pay fixed / receive variable		$	4,492	—	552
Pay variable / receive fixed			4,492	552	—
	Total interest rate swap agreements	$	8,984	552	552
December 31, 2014:
Pay fixed / receive variable		$	4,667	—	634
Pay variable / receive fixed			4,667	634	—
	Total interest rate swap agreements	$	9,334	634	634

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Loan and Allowance for Loan Losses

6 Months Ended

Jun. 30, 2015

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)				2015		2014
Commercial and industrial			$	57,310	$	54,329
Construction and land development				38,854		37,298
Commercial real estate:
	Owner occupied			42,343		52,296
	Other			141,781		139,710
		Total commercial real estate		184,124		192,006
Residential real estate:
	Consumer mortgage			69,448		66,489
	Investment property			45,591		41,152
		Total residential real estate		115,039		107,641
Consumer installment				13,632		12,335
		Total loans		408,959		403,609
Less: unearned income				(464)		(655)
		Loans, net of unearned income	$	408,495	$	402,954

Loans secured by real estate were approximately 82.7% of the Company’s total loan portfolio at June 30,2015. At June 30,2015, the Company’s geographic loan distribution was concentrated primarily in Lee County, Alabama, and surrounding areas.

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

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

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

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

Commercial real estate(“CRE”) — includes loans disaggregated into 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 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 30,2015 and December 31,2014.

					Accruing	Accruing	Total
					30-89 Days	Greater than	Accruing	Non-		Total
(In thousands)			Current		Past Due	90 days	Loans	Accrual		Loans
June 30, 2015:
Commercial and industrial			$	57,258	6	—	57,264	46	$	57,310
Construction and land development				38,080	12	160	38,252	602		38,854
Commercial real estate:
	Owner occupied			41,659	—	—	41,659	684		42,343
	Other			141,781	—	—	141,781	—		141,781
		Total commercial real estate		183,440	—	—	183,440	684		184,124
Residential real estate:
	Consumer mortgage			68,947	246	228	69,421	27		69,448
	Investment property			45,368	169	54	45,591	—		45,591
		Total residential real estate		114,315	415	282	115,012	27		115,039
Consumer installment				13,609	23	—	13,632	—		13,632
		Total	$	406,702	456	442	407,600	1,359	$	408,959

December 31, 2014:
Commercial and industrial			$	54,106	168	—	54,274	55	$	54,329
Construction and land development				36,483	210	—	36,693	605		37,298
Commercial real estate:
	Owner occupied			51,832	201	—	52,033	263		52,296
	Other			139,710	—	—	139,710	—		139,710
		Total commercial real estate		191,542	201	—	191,743	263		192,006
Residential real estate:
	Consumer mortgage			64,713	1,736	—	66,449	40		66,489
	Investment property			40,503	495	—	40,998	154		41,152
		Total residential real estate		105,216	2,231	—	107,447	194		107,641
Consumer installment				12,290	45	—	12,335	—		12,335
		Total	$	399,637	2,855	—	402,492	1,117	$	403,609

Allowance for Loan Losses

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

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

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

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

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

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

The allocation of the allowance for loan losses begins with a process of estimating the probable losses inherent for each loan segement. 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 30,2015 and December 31, 2014, 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, the Company implemented certain refinements to its allowance for loan losses methodology in order to better capture the effects of the most recent economic cycle on the Company’s loan loss experience. Beginning with the quarter ended June 30, 2014, the Company calculated average losses for all loan segments using a rolling 20 quarter historical period and continues to use this methodology.

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 material 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, 2015
(In thousands)		Commercial and industrial		Construction and land development	Commercial real estate	Residential real estate	Consumer installment		Total
Quarter ended:
Beginning balance		$	644	830	1,888	1,153	207	$	4,722
Charge-offs			—	—	—	—	(5)		(5)
Recoveries			3	4	—	151	11		169
	Net recoveries (charge-offs)		3	4	—	151	6		164
Provision for loan losses			34	(194)	258	(124)	26		—
Ending balance		$	681	640	2,146	1,180	239	$	4,886

Six months ended:
Beginning balance		$	639	974	1,928	1,119	176	$	4,836
Charge-offs			(58)	—	—	(59)	(23)		(140)
Recoveries			4	9	—	165	12		190
	Net (charge-offs) recoveries		(54)	9	—	106	(11)		50
Provision for loan losses			96	(343)	218	(45)	74		—
Ending balance		$	681	640	2,146	1,180	239	$	4,886

			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

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 30,2015and 2014.

			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, 2015:
Commercial and industrial		$	681	57,246	—	64	681	57,310
Construction and land development			640	38,252	—	602	640	38,854
Commercial real estate			1,672	182,465	474	1,659	2,146	184,124
Residential real estate			1,180	115,039	—	—	1,180	115,039
Consumer installment			239	13,632	—	—	239	13,632
	Total	$	4,412	406,634	474	2,325	4,886	408,959

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
(1)	Represents loans collectively evaluated for impairment in accordance with ASC 450-20, Loss Contingencies (formerly FAS 5), and
	pursuant to amendments by ASU 2010-20 regarding allowance for non-impaired loans.
(2)	Represents loans individually evaluated for impairment in accordance with ASC 310-30, Receivables (formerly FAS 114), and
	pursuant to amendments by ASU 2010-20 regarding allowance for impaired loans.

Credit Quality Indicators

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

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

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

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

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

(In thousands)				Pass	Special Mention	Substandard Accruing	Nonaccrual		Total loans
June 30, 2015:
Commercial and industrial			$	52,662	4,219	383	46	$	57,310
Construction and land development				37,495	130	627	602		38,854
Commercial real estate:
	Owner occupied			40,323	1,112	224	684		42,343
	Other			139,324	2,178	279	—		141,781
		Total commercial real estate		179,647	3,290	503	684		184,124
Residential real estate:
	Consumer mortgage			63,688	2,001	3,732	27		69,448
	Investment property			43,935	490	1,166	—		45,591
		Total residential real estate		107,623	2,491	4,898	27		115,039
Consumer installment				13,436	29	167	—		13,632
		Total	$	390,863	10,159	6,578	1,359	$	408,959

December 31, 2014:
Commercial and industrial			$	49,550	4,348	376	55	$	54,329
Construction and land development				35,911	226	556	605		37,298
Commercial real estate:
	Owner occupied			49,900	1,905	228	263		52,296
	Other			136,801	2,253	656	—		139,710
		Total commercial real estate		186,701	4,158	884	263		192,006
Residential real estate:
	Consumer mortgage			59,646	1,912	4,891	40		66,489
	Investment property			39,348	624	1,026	154		41,152
		Total residential real estate		98,994	2,536	5,917	194		107,641
Consumer installment				12,200	21	114	—		12,335
		Total	$	383,356	11,289	7,847	1,117	$	403,609

Impaired loans

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

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

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

The following tables set forth certain information regarding the Company’s impaired loans that were individually evaluated for impairment at June 30,2015 and December 31,2014.

				June 30, 2015
(In thousands)				Unpaid principal balance (1)	Charge-offs and payments applied (2)	Recorded investment (3)		Related allowance
With no allowance recorded:
Commercial and industrial			$	64	—	64
Construction and land development				2,596	(1,994)	602
Commercial real estate:
	Owner occupied			316	(72)	244
		Total commercial real estate		316	(72)	244
		Total	$	2,976	(2,066)	910
With allowance recorded:
Commercial real estate:
	Owner occupied			1,269	(70)	1,199		382
	Other			216	—	216		92
		Total commercial real estate		1,485	(70)	1,415		474
		Total	$	1,485	(70)	1,415	$	474
		Total impaired loans	$	4,461	(2,136)	2,325	$	474
(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, 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			$	70	—	70
Construction and land development				2,822	(2,217)	605
Commercial real estate:
	Owner occupied			331	(68)	263
		Total commercial real estate		331	(68)	263
Residential real estate:
	Consumer mortgages			934	(192)	742
	Investment property			180	(26)	154
		Total residential real estate		1,114	(218)	896
		Total	$	4,337	(2,503)	1,834
With allowance recorded:
Commercial real estate:
	Owner occupied			846	—	846		102
	Other			591	—	591		92
		Total commercial real estate		1,437	—	1,437		194
		Total	$	1,437	—	1,437	$	194
		Total impaired loans	$	5,774	(2,503)	3,271	$	194
(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, 2015		Six months ended June 30, 2015
				Average	Total interest	Average	Total interest
				recorded	income	recorded	income
(In thousands)				investment	recognized	investment	recognized
Impaired loans:
Commercial and industrial			$	64	1	66	2
Construction and land development				608	—	613	—
Commercial real estate:
	Owner occupied			1,202	9	1,143	21
	Other			466	8	538	18
		Total commercial real estate		1,668	17	1,681	39
Residential real estate:
	Consumer mortgages			512	158	648	173
	Investment property			100	76	130	76
		Total residential real estate		612	234	778	249
		Total	$	2,952	252	3,138	290

				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

Troubled Debt Restructurings

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

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

The following is a summary of accruing and nonaccrual TDRs, which are included in the impaired loan totals, and the related allowance for loan losses, by portfolio segment and class as of June 30,2015 and December 31,2014.

				TDRs
								Related
(In thousands)				Accruing	Nonaccrual	Total		Allowance
June 30, 2015
Commercial and industrial			$	64	—	64	$	—
Construction and land development				—	602	602		—
Commercial real estate:
	Owner occupied			828	244	1,072		84
	Other			216	—	216		92
		Total commercial real estate		1,044	244	1,288		176
		Total	$	1,108	846	1,954	$	176

December 31, 2014
Commercial and industrial			$	70	—	70	$	—
Construction and land development				—	605	605		—
Commercial real estate:
	Owner occupied			846	263	1,109		102
	Other			591	—	591		92
		Total commercial real estate		1,437	263	1,700		194
Residential real estate:
	Consumer mortgages			742	—	742		—
	Investment property			—	154	154		—
		Total residential real estate		742	154	896		—
		Total	$	2,249	1,022	3,271	$	194

At June 30,2015, 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
2015:
Commercial and industrial			1	$	61	66	1	$	61	66
Construction and land development			—		—	—	1		116	113
Commercial real estate:
	Other		—		—	—	1		592	592
		Total commercial real estate	—		—	—	1		592	592
		Total	1	$	61	66	3	$	769	771

The majority of the loans modified in a TDR during the quarter and six months ended June 30, 2015, 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. There were no loans modified in a TDR during the six months ended June 30, 2014.

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)
2015:
Commerical real estate:
	Owner occupied		—	$	—	1	$	261
		Total commercial real estate	—		—	1		261
Residential real estate:
	Investment property		—	$	—	1		150
		Total residential real estate	—		—	1		150
		Total	—	$	—	2	$	411
(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, 2015

Mortgage Servicing [Abstract]

Transfers and Servicing of Financial Assets [Text Block]

NOTE 6: MORTGAGE SERVICING RIGHTS, NET

Mortgage servicing rights (“MSRs”) are recognized based on the fair value of the servicing rights on the date the corresponding mortgage loans are sold. An estimate of the fair value of the Company’s MSRs is determined using assumptions that market participants would use in estimating future net servicing income, including estimates of prepayment speeds, discount rates, default rates, 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)		2015		2014		2015		2014
MSRs, net:
Beginning balance	$	2,355	$	2,368	$	2,388	$	2,350
Additions, net		154		105		265		203
Amortization expense		(199)		(84)		(333)		(164)
Decrease (increase) in valuation allowance		49		(43)		39		(43)
Ending balance	$	2,359	$	2,346	$	2,359	$	2,346
Valuation allowance included in MSRs, net:
Beginning of period	$	63	$	—	$	53	$	—
End of period		14		43		14		43
Fair value of amortized MSRs:
Beginning of period	$	3,066	$	3,386	$	3,238	$	3,452
End of period		3,014		3,228		3,014		3,228

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Fair Value Disclosures

6 Months Ended

Jun. 30, 2015

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 30,2015, there were no transfers between levels and no changes in valuation techniques for the Company’s financial assets and liabilities.

Assets and liabilities measured at fair value on a recurring basis

Securities available-for-sale

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

Interest rate swap agreements

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

The following table presents the balances of the assets and liabilities measured at fair value on a recurring basis as of June 30,2015 and December 31,2014, 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, 2015:
Securities available-for-sale:
	Agency obligations		$	60,219	—	60,219	—
	Agency RMBS			122,113	—	122,113	—
	State and political subdivisions			70,574	—	70,574	—
Total securities available-for-sale				252,906	—	252,906	—
Other assets (1)				552	—	552	—
		Total assets at fair value	$	253,458	—	253,458	—
Other liabilities(1)			$	552	—	552	—
		Total liabilities at fair value	$	552	—	552	—
December 31, 2014:
Securities available-for-sale:
	Agency obligations		$	60,249	—	60,249	—
	Agency RMBS			135,043	—	135,043	—
	State and political subdivisions			72,311	—	72,311	—
Total securities available-for-sale				267,603	—	267,603	—
Other assets (1)				634	—	634	—
		Total assets at fair value	$	268,237	—	268,237	—
Other liabilities(1)			$	634	—	634	—
		Total liabilities at fair value	$	634	—	634	—
(1)Represents the fair value of interest rate swap agreements.

Assets and liabilities measured at fair value on a nonrecurring basis

Loans held for sale

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

Impaired Loans

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

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

Other real estate owned

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

Mortgage servicing rights, net

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

The following table presents the balances of the assets and liabilities measured at fair value on a nonrecurring basis as of June 30,2015 and December 31,2014, respectively, by caption, on the accompanying consolidated balance sheets and by FASB ASC 820 v

				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, 2015:
Loans held for sale		$	3,875	—	3,875	—
Loans, net(1)			1,851	—	—	1,851
Other real estate owned			499	—	—	499
Other assets (2)			2,359	—	—	2,359
	Total assets at fair value	$	8,584	—	3,875	4,709
December 31, 2014:
Loans held for sale		$	1,974	—	1,974	—
Loans, net(1)			3,077	—	—	3,077
Other real estate owned			534	—	—	534
Other assets (2)			2,388	—	—	2,388
	Total assets at fair value	$	7,973	—	1,974	5,999
(1)Loans considered impaired under ASC 310-10-35, Receivables. This amount reflects the recorded investment in
	impaired loans, net of any related allowance for loan losses.
(2)Represents MSRs, net, carried at lower of cost or estimated fair value.

Quantitative Disclosures for Level 3 Fair Value Measurements

At June 30,2015, 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 30,2015, the significant unobservable inputs used in the fair value measurements are presented below.

					Weighted
		Carrying			Average
(Dollars in thousands)		Amount	Valuation Technique	Significant Unobservable Input	of Input
Nonrecurring:
Impaired loans	$	1,851	Appraisal	Appraisal discounts (%)	22.4	%
Other real estate owned		499	Appraisal	Appraisal discounts (%)	26.7	%
Mortgage servicing rights, net		2,359	Discounted cash flow	Prepayment speed or CPR (%)	10.3	%
				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 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 30,2015 and December 31,2014 are presented below. This table excludes financial instruments for which the carrying amount approximates fair value. Financial assets for which fair value approximates carrying value included cash and cash equivalents. Financial liabilities for which fair value approximates carrying value included noninterest-bearing demand deposits, interest-bearing demand deposits, and savings deposits due to these products having no stated maturity. In addition, financial liabilities for which fair value approximates carrying value included overnight borrowings such as federal funds purchased and securities sold under agreements to repurchase.

							Fair Value Hierarchy
			Carrying		Estimated		Level 1		Level 2		Level 3
(Dollars in thousands)			amount		fair value		inputs		inputs		Inputs
June 30, 2015:
Financial Assets:
	Loans, net (1)	$	403,609	$	408,327	$	—	$	—	$	408,327
	Loans held for sale		3,875		3,897		—		3,897		—
Financial Liabilities:
	Time Deposits	$	231,634	$	233,385	$	—	$	233,385	$	—
	Long-term debt		7,217		7,217		—		7,217		—
December 31, 2014:
Financial Assets:
	Loans, net (1)	$	398,118	$	407,839	$	—	$	—	$	407,839
	Loans held for sale		1,974		2,044		—		2,044		—
Financial Liabilities:
	Time Deposits	$	249,126	$	251,365	$	—	$	251,365	$	—
	Long-term debt		12,217		12,558		—		12,558		—
(1) Represents loans, net of unearned income and the allowance for loan losses.

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Loans Past Due Analysis (Details) - USD ($) $ in Thousands	Jun. 30, 2015	Dec. 31, 2014	Jun. 30, 2014
Financing Receivable, Recorded Investment, Past Due [Line Items]
Financing Receivable, Recorded Investment, Current	$ 406,702	$ 399,637
Financing Receivable, Recorded Investment, 30 To 89 Days Past Due	456	2,855
Financing Receivable, Recorded Investment, 90 Days Past Due and Still Accruing	442	0
Financing Receivable, Recorded Investment, Total Still Accruing	407,600	402,492
Financing Receivable, Recorded Investment, Nonaccrual Status	1,359	1,117
Loans and Leases Receivable, Gross, Carrying Amount	408,959	403,609	$ 386,363
Commercial and Industrial Loans [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Financing Receivable, Recorded Investment, Current	57,258	54,106
Financing Receivable, Recorded Investment, 30 To 89 Days Past Due	6	168
Financing Receivable, Recorded Investment, 90 Days Past Due and Still Accruing	0	0
Financing Receivable, Recorded Investment, Total Still Accruing	57,264	54,274
Financing Receivable, Recorded Investment, Nonaccrual Status	46	55
Loans and Leases Receivable, Gross, Carrying Amount	57,310	54,329	52,054
Construction And Land Development Loans [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Financing Receivable, Recorded Investment, Current	38,080	36,483
Financing Receivable, Recorded Investment, 30 To 89 Days Past Due	12	210
Financing Receivable, Recorded Investment, 90 Days Past Due and Still Accruing	160	0
Financing Receivable, Recorded Investment, Total Still Accruing	38,252	36,693
Financing Receivable, Recorded Investment, Nonaccrual Status	602	605
Loans and Leases Receivable, Gross, Carrying Amount	38,854	37,298	32,461
Commercial Real Estate Owner Occupied Loans [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Financing Receivable, Recorded Investment, Current	41,659	51,832
Financing Receivable, Recorded Investment, 30 To 89 Days Past Due	0	201
Financing Receivable, Recorded Investment, 90 Days Past Due and Still Accruing	0	0
Financing Receivable, Recorded Investment, Total Still Accruing	41,659	52,033
Financing Receivable, Recorded Investment, Nonaccrual Status	684	263
Loans and Leases Receivable, Gross, Carrying Amount	42,343	52,296
Commercial Real Estate Other Loans [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Financing Receivable, Recorded Investment, Current	141,781	139,710
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	141,781	139,710
Financing Receivable, Recorded Investment, Nonaccrual Status	0	0
Loans and Leases Receivable, Gross, Carrying Amount	141,781	139,710
Commercial Real Estate Loans, Total [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Financing Receivable, Recorded Investment, Current	183,440	191,542
Financing Receivable, Recorded Investment, 30 To 89 Days Past Due	0	201
Financing Receivable, Recorded Investment, 90 Days Past Due and Still Accruing	0	0
Financing Receivable, Recorded Investment, Total Still Accruing	183,440	191,743
Financing Receivable, Recorded Investment, Nonaccrual Status	684	263
Loans and Leases Receivable, Gross, Carrying Amount	184,124	192,006	187,241
Residential Real Estate Consumer Mortgage Loans [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Financing Receivable, Recorded Investment, Current	68,947	64,713
Financing Receivable, Recorded Investment, 30 To 89 Days Past Due	246	1,736
Financing Receivable, Recorded Investment, 90 Days Past Due and Still Accruing	228	0
Financing Receivable, Recorded Investment, Total Still Accruing	69,421	66,449
Financing Receivable, Recorded Investment, Nonaccrual Status	27	40
Loans and Leases Receivable, Gross, Carrying Amount	69,448	66,489
Residential Real Estate Investment Property Loans [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Financing Receivable, Recorded Investment, Current	45,368	40,503
Financing Receivable, Recorded Investment, 30 To 89 Days Past Due	169	495
Financing Receivable, Recorded Investment, 90 Days Past Due and Still Accruing	54	0
Financing Receivable, Recorded Investment, Total Still Accruing	45,591	40,998
Financing Receivable, Recorded Investment, Nonaccrual Status	0	154
Loans and Leases Receivable, Gross, Carrying Amount	45,591	41,152
Residential Real Estate Loans, Total [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Financing Receivable, Recorded Investment, Current	114,315	105,216
Financing Receivable, Recorded Investment, 30 To 89 Days Past Due	415	2,231
Financing Receivable, Recorded Investment, 90 Days Past Due and Still Accruing	282	0
Financing Receivable, Recorded Investment, Total Still Accruing	115,012	107,447
Financing Receivable, Recorded Investment, Nonaccrual Status	27	194
Loans and Leases Receivable, Gross, Carrying Amount	115,039	107,641	102,921
Consumer Installment and Revolving Loans [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Financing Receivable, Recorded Investment, Current	13,609	12,290
Financing Receivable, Recorded Investment, 30 To 89 Days Past Due	23	45
Financing Receivable, Recorded Investment, 90 Days Past Due and Still Accruing	0	0
Financing Receivable, Recorded Investment, Total Still Accruing	13,632	12,335
Financing Receivable, Recorded Investment, Nonaccrual Status	0	0
Loans and Leases Receivable, Gross, Carrying Amount	$ 13,632	$ 12,335	$ 11,686

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Loan and Allowance for Loan Loss (Tables)

6 Months Ended

Jun. 30, 2015

Loans And Leases Receivable Disclosure

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

				June 30,		December 31,
(In thousands)				2015		2014
Commercial and industrial			$	57,310	$	54,329
Construction and land development				38,854		37,298
Commercial real estate:
	Owner occupied			42,343		52,296
	Other			141,781		139,710
		Total commercial real estate		184,124		192,006
Residential real estate:
	Consumer mortgage			69,448		66,489
	Investment property			45,591		41,152
		Total residential real estate		115,039		107,641
Consumer installment				13,632		12,335
		Total loans		408,959		403,609
Less: unearned income				(464)		(655)
		Loans, net of unearned income	$	408,495	$	402,954

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, 2015:
Commercial and industrial			$	57,258	6	—	57,264	46	$	57,310
Construction and land development				38,080	12	160	38,252	602		38,854
Commercial real estate:
	Owner occupied			41,659	—	—	41,659	684		42,343
	Other			141,781	—	—	141,781	—		141,781
		Total commercial real estate		183,440	—	—	183,440	684		184,124
Residential real estate:
	Consumer mortgage			68,947	246	228	69,421	27		69,448
	Investment property			45,368	169	54	45,591	—		45,591
		Total residential real estate		114,315	415	282	115,012	27		115,039
Consumer installment				13,609	23	—	13,632	—		13,632
		Total	$	406,702	456	442	407,600	1,359	$	408,959

December 31, 2014:
Commercial and industrial			$	54,106	168	—	54,274	55	$	54,329
Construction and land development				36,483	210	—	36,693	605		37,298
Commercial real estate:
	Owner occupied			51,832	201	—	52,033	263		52,296
	Other			139,710	—	—	139,710	—		139,710
		Total commercial real estate		191,542	201	—	191,743	263		192,006
Residential real estate:
	Consumer mortgage			64,713	1,736	—	66,449	40		66,489
	Investment property			40,503	495	—	40,998	154		41,152
		Total residential real estate		105,216	2,231	—	107,447	194		107,641
Consumer installment				12,290	45	—	12,335	—		12,335
		Total	$	399,637	2,855	—	402,492	1,117	$	403,609

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

			June 30, 2015
(In thousands)		Commercial and industrial		Construction and land development	Commercial real estate	Residential real estate	Consumer installment		Total
Quarter ended:
Beginning balance		$	644	830	1,888	1,153	207	$	4,722
Charge-offs			—	—	—	—	(5)		(5)
Recoveries			3	4	—	151	11		169
	Net recoveries (charge-offs)		3	4	—	151	6		164
Provision for loan losses			34	(194)	258	(124)	26		—
Ending balance		$	681	640	2,146	1,180	239	$	4,886

Six months ended:
Beginning balance		$	639	974	1,928	1,119	176	$	4,836
Charge-offs			(58)	—	—	(59)	(23)		(140)
Recoveries			4	9	—	165	12		190
	Net (charge-offs) recoveries		(54)	9	—	106	(11)		50
Provision for loan losses			96	(343)	218	(45)	74		—
Ending balance		$	681	640	2,146	1,180	239	$	4,886

			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

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, 2015:
Commercial and industrial		$	681	57,246	—	64	681	57,310
Construction and land development			640	38,252	—	602	640	38,854
Commercial real estate			1,672	182,465	474	1,659	2,146	184,124
Residential real estate			1,180	115,039	—	—	1,180	115,039
Consumer installment			239	13,632	—	—	239	13,632
	Total	$	4,412	406,634	474	2,325	4,886	408,959

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
(1)	Represents loans collectively evaluated for impairment in accordance with ASC 450-20, Loss Contingencies (formerly FAS 5), and
	pursuant to amendments by ASU 2010-20 regarding allowance for non-impaired loans.
(2)	Represents loans individually evaluated for impairment in accordance with ASC 310-30, Receivables (formerly FAS 114), and
	pursuant to amendments by ASU 2010-20 regarding allowance for impaired loans.

Financing Receivable Credit Quality Indicators [Table Text Block]

(In thousands)				Pass	Special Mention	Substandard Accruing	Nonaccrual		Total loans
June 30, 2015:
Commercial and industrial			$	52,662	4,219	383	46	$	57,310
Construction and land development				37,495	130	627	602		38,854
Commercial real estate:
	Owner occupied			40,323	1,112	224	684		42,343
	Other			139,324	2,178	279	—		141,781
		Total commercial real estate		179,647	3,290	503	684		184,124
Residential real estate:
	Consumer mortgage			63,688	2,001	3,732	27		69,448
	Investment property			43,935	490	1,166	—		45,591
		Total residential real estate		107,623	2,491	4,898	27		115,039
Consumer installment				13,436	29	167	—		13,632
		Total	$	390,863	10,159	6,578	1,359	$	408,959

December 31, 2014:
Commercial and industrial			$	49,550	4,348	376	55	$	54,329
Construction and land development				35,911	226	556	605		37,298
Commercial real estate:
	Owner occupied			49,900	1,905	228	263		52,296
	Other			136,801	2,253	656	—		139,710
		Total commercial real estate		186,701	4,158	884	263		192,006
Residential real estate:
	Consumer mortgage			59,646	1,912	4,891	40		66,489
	Investment property			39,348	624	1,026	154		41,152
		Total residential real estate		98,994	2,536	5,917	194		107,641
Consumer installment				12,200	21	114	—		12,335
		Total	$	383,356	11,289	7,847	1,117	$	403,609

Impaired Financing Receivables [Table Text Block]

				June 30, 2015
(In thousands)				Unpaid principal balance (1)	Charge-offs and payments applied (2)	Recorded investment (3)		Related allowance
With no allowance recorded:
Commercial and industrial			$	64	—	64
Construction and land development				2,596	(1,994)	602
Commercial real estate:
	Owner occupied			316	(72)	244
		Total commercial real estate		316	(72)	244
		Total	$	2,976	(2,066)	910
With allowance recorded:
Commercial real estate:
	Owner occupied			1,269	(70)	1,199		382
	Other			216	—	216		92
		Total commercial real estate		1,485	(70)	1,415		474
		Total	$	1,485	(70)	1,415	$	474
		Total impaired loans	$	4,461	(2,136)	2,325	$	474
(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, 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			$	70	—	70
Construction and land development				2,822	(2,217)	605
Commercial real estate:
	Owner occupied			331	(68)	263
		Total commercial real estate		331	(68)	263
Residential real estate:
	Consumer mortgages			934	(192)	742
	Investment property			180	(26)	154
		Total residential real estate		1,114	(218)	896
		Total	$	4,337	(2,503)	1,834
With allowance recorded:
Commercial real estate:
	Owner occupied			846	—	846		102
	Other			591	—	591		92
		Total commercial real estate		1,437	—	1,437		194
		Total	$	1,437	—	1,437	$	194
		Total impaired loans	$	5,774	(2,503)	3,271	$	194
(1) Unpaid principal balance represents the contractual obligation due from the customer.
(2) Charge-offs and payments applied represents cumulative charge-offs taken, as well as interest payments that have been
	applied against the outstanding principal balance subsequent to the loans being placed on nonaccrual status.
(3) Recorded investment represents the unpaid principal balance less charge-offs and payments applied; it is shown before
	any related allowance for loan losses.

Schedule Of Average Impaired Financing Receivable [Table Text Block]

				Quarter ended June 30, 2015		Six months ended June 30, 2015
				Average	Total interest	Average	Total interest
				recorded	income	recorded	income
(In thousands)				investment	recognized	investment	recognized
Impaired loans:
Commercial and industrial			$	64	1	66	2
Construction and land development				608	—	613	—
Commercial real estate:
	Owner occupied			1,202	9	1,143	21
	Other			466	8	538	18
		Total commercial real estate		1,668	17	1,681	39
Residential real estate:
	Consumer mortgages			512	158	648	173
	Investment property			100	76	130	76
		Total residential real estate		612	234	778	249
		Total	$	2,952	252	3,138	290

				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

Troubled Debt Restructurings, Accrual Status [Table Text Block]

				TDRs
								Related
(In thousands)				Accruing	Nonaccrual	Total		Allowance
June 30, 2015
Commercial and industrial			$	64	—	64	$	—
Construction and land development				—	602	602		—
Commercial real estate:
	Owner occupied			828	244	1,072		84
	Other			216	—	216		92
		Total commercial real estate		1,044	244	1,288		176
		Total	$	1,108	846	1,954	$	176

December 31, 2014
Commercial and industrial			$	70	—	70	$	—
Construction and land development				—	605	605		—
Commercial real estate:
	Owner occupied			846	263	1,109		102
	Other			591	—	591		92
		Total commercial real estate		1,437	263	1,700		194
Residential real estate:
	Consumer mortgages			742	—	742		—
	Investment property			—	154	154		—
		Total residential real estate		742	154	896		—
		Total	$	2,249	1,022	3,271	$	194

Troubled Debt Restructuring, Modifications [Table Text Block]

			Quarter ended June 30,				Six months ended June 30,
					Pre-	Post -			Pre-	Post -
					modification	modification			modification	modification
			Number		outstanding	outstanding	Number		outstanding	outstanding
			of		recorded	recorded	of		recorded	recorded
(Dollars in thousands)			contracts		investment	investment	contracts		investment	investment
2015:
Commercial and industrial			1	$	61	66	1	$	61	66
Construction and land development			—		—	—	1		116	113
Commercial real estate:
	Other		—		—	—	1		592	592
		Total commercial real estate	—		—	—	1		592	592
		Total	1	$	61	66	3	$	769	771

Schedule Of Debtor, Troubled Debt Restructuring, Subsequent Defaults [Table Text Block]

			Quarter ended June 30,			Six months Ended June 30,
			Number of		Recorded	Number of		Recorded
(Dollars in thousands)			Contracts		investment(1)	Contracts		investment(1)
2015:
Commerical real estate:
	Owner occupied		—	$	—	1	$	261
		Total commercial real estate	—		—	1		261
Residential real estate:
	Investment property		—	$	—	1		150
		Total residential real estate	—		—	1		150
		Total	—	$	—	2	$	411
(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) $ in Thousands	Jun. 30, 2015 USD ($)
Liability Recognized [Member]
Variable Interest Entities [Line Items]
Trust Preferred Issuance, Liability Recognized	$ 7,217

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Trouble Debt Restructing Modified (Details) - Jun. 30, 2015 $ in Thousands	USD ($)	USD ($)
Financing Receivable Trouble Debt Restructing Modifications [Line Items]
Modification number of contracts	1	3
Pre-modification outstanding recorded investment	$ 61	$ 769
Post -modification outstanding recorded investment	$ 66	$ 771
Commercial and Industrial Loans [Member]
Financing Receivable Trouble Debt Restructing Modifications [Line Items]
Modification number of contracts	1	1
Pre-modification outstanding recorded investment	$ 61	$ 61
Post -modification outstanding recorded investment	$ 66	$ 66
Construction And Land Development Loans [Member]
Financing Receivable Trouble Debt Restructing Modifications [Line Items]
Modification number of contracts		1
Pre-modification outstanding recorded investment		$ 116
Post -modification outstanding recorded investment		$ 113
Commercial Real Estate Other Loans [Member]
Financing Receivable Trouble Debt Restructing Modifications [Line Items]
Modification number of contracts		1
Pre-modification outstanding recorded investment		$ 592
Post -modification outstanding recorded investment		$ 592
Commercial Real Estate Loans, Total [Member]
Financing Receivable Trouble Debt Restructing Modifications [Line Items]
Modification number of contracts		1
Pre-modification outstanding recorded investment		$ 592
Post -modification outstanding recorded investment		$ 592

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Consolidated Statements of Comprehensive Income - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014	Jun. 30, 2015	Jun. 30, 2014
Statements of Comprehensive Income [Abstract]
Net earnings	$ 2,150	$ 1,859	$ 4,012	$ 3,680
Other comprehensive (loss) income, net of tax:
Unrealized net holding (loss) gain on securities	(1,842)	2,937	(1,156)	5,502
Reclassification adjustment for net (gain) loss on securities recognized in net earnings	0	(8)	(2)	186
Other comprehensive (loss) income	(1,842)	2,929	(1,158)	5,688
Comprehensive income	$ 308	$ 4,788	$ 2,854	$ 9,368

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Basic and Diluted Earnings Per Share

6 Months Ended

Jun. 30, 2015

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 30,2015 and 2014, 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)				2015		2014		2015		2014
Basic and diluted:
	Net earnings		$	2,150	$	1,859	$	4,012	$	3,680
	Weighted average common shares outstanding			3,643,413		3,643,295		3,643,389		3,643,228
		Earnings per share	$	0.59	$	0.51	$	1.10	$	1.01

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Variable Interest Entities Textuals (Details) $ in Thousands	Jun. 30, 2015 USD ($)
Variable Interest Entities (Textuals) [Abstract]
Trust Preferred Securities, Issued	$ 7,000
Junior Subordinated Debt, Issued	7,200
Equity Interest, ANB Capital Trust	$ 200

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Impaired Loans (Details) - USD ($) $ in Thousands	Jun. 30, 2015	Dec. 31, 2014
Financing Receivable, Impaired [Line Items]
Impaired Financing Receivable, with No Related Allowance, Unpaid Principal Balance	$ 2,976	$ 4,337
Impaired Financing Receivable, with No Related Allowance, Charge-off And Payments Applied	(2,066)	(2,503)
Impaired Financing Receivable, with No Related Allowance, Recorded Investment	910	1,834
Impaired Financing Receivable, with Related Allowance, Unpaid Principal Balance	1,485	1,437
Impaired Financing Receivable, with Related Allowance, Charge-off And Payments Applied	(70)	0
Impaired Financing Receivable, with Related Allowance, Recorded Investment	1,415	1,437
Impaired Financing Receivable, With Related Allowance, Related Allowance	474	194
Impaired Financing Receivable, Unpaid Principal Balance	4,461	5,774
Impaired Financing Receivable, Charge-off And Payments Applied	(2,136)	(2,503)
Impaired Financing Receivable, Recorded Investment	2,325	3,271
Impaired Financing Receivable, Related Allowance	474	194
Commercial and Industrial Loans [Member]
Financing Receivable, Impaired [Line Items]
Impaired Financing Receivable, with No Related Allowance, Unpaid Principal Balance	64	70
Impaired Financing Receivable, with No Related Allowance, Charge-off And Payments Applied	0	0
Impaired Financing Receivable, with No Related Allowance, Recorded Investment	64	70
Construction And Land Development Loans [Member]
Financing Receivable, Impaired [Line Items]
Impaired Financing Receivable, with No Related Allowance, Unpaid Principal Balance	2,596	2,822
Impaired Financing Receivable, with No Related Allowance, Charge-off And Payments Applied	(1,994)	(2,217)
Impaired Financing Receivable, with No Related Allowance, Recorded Investment	602	605
Commercial Real Estate Owner Occupied Loans [Member]
Financing Receivable, Impaired [Line Items]
Impaired Financing Receivable, with No Related Allowance, Unpaid Principal Balance	316	331
Impaired Financing Receivable, with No Related Allowance, Charge-off And Payments Applied	(72)	(68)
Impaired Financing Receivable, with No Related Allowance, Recorded Investment	244	263
Impaired Financing Receivable, with Related Allowance, Unpaid Principal Balance	1,269	846
Impaired Financing Receivable, with Related Allowance, Charge-off And Payments Applied	(70)	0
Impaired Financing Receivable, with Related Allowance, Recorded Investment	1,199	846
Impaired Financing Receivable, With Related Allowance, Related Allowance	382	102
Commercial Real Estate Other Loans [Member]
Financing Receivable, Impaired [Line Items]
Impaired Financing Receivable, with Related Allowance, Unpaid Principal Balance	216	591
Impaired Financing Receivable, with Related Allowance, Charge-off And Payments Applied	0	0
Impaired Financing Receivable, with Related Allowance, Recorded Investment	216	591
Impaired Financing Receivable, With Related Allowance, Related Allowance	92	92
Commercial Real Estate Loans, Total [Member]
Financing Receivable, Impaired [Line Items]
Impaired Financing Receivable, with No Related Allowance, Unpaid Principal Balance	316	331
Impaired Financing Receivable, with No Related Allowance, Charge-off And Payments Applied	(72)	(68)
Impaired Financing Receivable, with No Related Allowance, Recorded Investment	244	263
Impaired Financing Receivable, with Related Allowance, Unpaid Principal Balance	1,485	1,437
Impaired Financing Receivable, with Related Allowance, Charge-off And Payments Applied	(70)	0
Impaired Financing Receivable, with Related Allowance, Recorded Investment	1,415	1,437
Impaired Financing Receivable, With Related Allowance, Related Allowance	474	194
Residential Real Estate Consumer Mortgage Loans [Member]
Financing Receivable, Impaired [Line Items]
Impaired Financing Receivable, with No Related Allowance, Unpaid Principal Balance	0	934
Impaired Financing Receivable, with No Related Allowance, Charge-off And Payments Applied	0	(192)
Impaired Financing Receivable, with No Related Allowance, Recorded Investment	0	742
Residential Real Estate Investment Property Loans [Member]
Financing Receivable, Impaired [Line Items]
Impaired Financing Receivable, with No Related Allowance, Unpaid Principal Balance	0	180
Impaired Financing Receivable, with No Related Allowance, Charge-off And Payments Applied	0	(26)
Impaired Financing Receivable, with No Related Allowance, Recorded Investment	0	154
Residential Real Estate Loans, Total [Member]
Financing Receivable, Impaired [Line Items]
Impaired Financing Receivable, with No Related Allowance, Unpaid Principal Balance	0	1,114
Impaired Financing Receivable, with No Related Allowance, Charge-off And Payments Applied	0	(218)
Impaired Financing Receivable, with No Related Allowance, Recorded Investment	$ 0	$ 896

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Securities (Tables)

6 Months Ended

Jun. 30, 2015

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, 2015
Agency obligations (a)		$	5,007	26,033	14,870	14,309	60,219	509	869	$	60,579
Agency RMBS (a)			—	1,994	15,340	104,779	122,113	1,156	995		121,952
State and political subdivisions			—	1,055	13,121	56,398	70,574	2,525	290		68,339
	Total available-for-sale	$	5,007	29,082	43,331	175,486	252,906	4,190	2,154	$	250,870

December 31, 2014
Agency obligations (a)		$	—	30,947	14,869	14,433	60,249	375	830	$	60,704
Agency RMBS (a)			—	—	14,523	120,520	135,043	1,597	616		134,062
State and political subdivisions			—	502	15,520	56,289	72,311	3,379	34		68,966
	Total available-for-sale	$	—	31,449	44,912	191,242	267,603	5,351	1,480	$	263,732
(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, 2015:
Agency obligations		$	—	—	24,089	869	$	24,089	869
Agency RMBS			28,866	558	19,464	437		48,330	995
State and political subdivisions			13,050	290	—	—		13,050	290
	Total	$	41,916	848	43,553	1,306	$	85,469	2,154

December 31, 2014:
Agency obligations		$	—	—	24,126	830	$	24,126	830
Agency RMBS			9,078	22	42,744	594		51,822	616
State and political subdivisions			4,257	34	—	—		4,257	34
	Total	$	13,335	56	66,870	1,424	$	80,205	1,480

Available For Sale Securiites Detail Of Other Than Temporary Impairment Losses [Table Text Block]

					Quarter ended June 30,				Six Months Ended June 30,
(Dollars in thousands)					2015		2014		2015		2014
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 of securities.
				Quarter ended June 30,				Six Months Ended June 30,
(Dollars in thousands)				2015		2014		2015		2014
Gross realized gains			$	—	$	12	$	3	$	38
	Realized gains, net		$	—	$	12	$	3	$	38