10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2014

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from                      to
Commission file number _________

 

(Exact name of registrant as specified in its charter)

Delaware	57-1039673
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
288 Meeting Street, Charleston, South Carolina	29401
(Address of principal executive offices)	(Zip Code)

843-723-7700
(Registrant’s telephone number, including area code)

Not Applicable
(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 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 o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No o

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 definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 4,048,868 shares of common stock, par value $0.01 per share, were issued and outstanding as of August 11, 2014.

TABLE OF CONTENTS

		Page
PART 1 –	FINANCIAL INFORMATION
Item 1.	Financial statements	3
Item 2.	Management’s Discussion and Analysis of Financial Conditions and Results of Operations	39
Item 3.	Quantitative and Qualitative Disclosure about Market Risks	62
Item 4.	Controls and Procedures	62
PART II -	OTHER INFORMATION	62
Item 1.	Legal Proceedings	62
Item 1A.	Risk Factors	62
Item 2.	Unregistered Sale of Equity Securities and Use of Proceeds	62
Item 3.	Defaults Upon Senior Securities	62
Item 4.	Mine Safety Disclosures	62
Item 5.	Other Information	62
Item 6.	Exhibits	62

2

CONSOLIDATED BALANCE SHEETS

	June 30, 2014 (Unaudited)		December 31, 2013 (Audited)
ASSETS	(In thousands)
Cash and due from banks	$	9,560		4,489
Interest-bearing cash		17,132		34,176
Cash and cash equivalents		26,692		38,665
Securities available-for-sale (cost of $202,570 at June 30, 2014 and $166,997 at December 31, 2013)		207,301		167,535
Securities held-to-maturity (fair value of $25,910 at June 30, 2014 and $23,547 at December 31, 2013)		24,254		24,554
Federal Home Loan Bank stock, at cost		4,730		4,103
Other investments		1,944		1,858
Derivative assets		2,255		1,412
Loans held for sale		47,859		36,897
Loans receivable, net of allowance for loan losses of $8,662 at June 30, 2014 and $8,091 at December 31, 2013		605,295		535,221
Premises and equipment, net		18,667		17,585
Accrued interest receivable		3,059		2,802
Real estate acquired through foreclosure, net		5,655		6,273
Deferred tax assets, net		5,700		7,419
Income taxes receivable		509		—
Mortgage servicing rights		9,843		10,908
Cash value life insurance		21,228		20,910
Other assets		3,421		5,442
Total assets	$	988,412		881,584
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Noninterest-bearing deposits	$	102,376		83,500
Interest-bearing deposits		677,160		614,081
Total deposits		779,536		697,581
Short-term borrowed funds		35,300		10,300
Long-term debt		69,390		74,540
Derivative liabilities		730		55
Drafts outstanding		2,544		2,703
Advances from borrowers for insurance and taxes		709		284
Accrued interest payable		325		311
Income taxes payable		—		749
Reserve for mortgage repurchase losses		5,533		6,109
Dividends payable to stockholders		202		—
Accrued expenses and other liabilities		4,866		6,725
Total liabilities		899,135		799,357
Commitments and contingencies
Stockholders’ equity:
Preferred stock, par value $.01; 1,000,000 and 200,000 shares authorized at June 30, 2014 and December 31, 2013, respectively; no shares issued or outstanding		—		—
Common stock, par value $.01; 10,000,000 and 6,800,000 shares authorized at June 30, 2014 and December 31, 2013, respectively; 4,041,460 and 4,015,204 issued and outstanding at June 30, 2014 and December 31, 2013, respectively		40		40
Additional paid-in capital		22,921		22,393
Retained earnings		65,951		62,169
Accumulated other comprehensive income (loss), net of tax benefit		365		(2,375	)
Total stockholders’ equity		89,277		82,227
Total liabilities and stockholders’ equity	$	988,412		881,584

See accompanying notes to consolidated financial statements.

3

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2014			2013			2014			2013
	(In thousands, except share data)
Interest income
Loans	$	7,157			7,005			13,990			14,084
Debt securities		1,526			1,205			3,047			2,308
Dividends from FHLB		35			31			69			60
Other interest income		25			40			49			58
Total interest income		8,743			8,281			17,155			16,510
Interest expense
Deposits		898			842			1,713			1,708
Short-term borrowed funds		11			80			16			194
Long-term debt		512			546			1,023			1,068
Total interest expense		1,421			1,468			2,752			2,970
Net interest income		7,322			6,813			14,403			13,540
Provision for loan losses		—			(700	)		—			(700	)
Net interest income after provision for loan losses		7,322			7,513			14,403			14,240
Noninterest income
Net gain on sale of loans held for sale		3,426			10,199			5,880			21,549
Deposit service charges		517			371			948			689
Net loss on extinguishment of debt		(31	)		(19	)		(31	)		(19	)
Net gain (loss) on sale of securities		164			(62	)		480			(46	)
Fair value adjustments on interest rate swaps		(263	)		263			(518	)		263
Net gain on sale of servicing assets		—			—			775			—
Net increase in cash value life insurance		187			—			373			1
Mortgage loan servicing income		1,254			1,836			2,531			3,328
Other		195			217			380			423
Total noninterest income		5,449			12,805			10,818			26,188
Noninterest expense
Salaries and employee benefits		5,515			6,248			10,859			12,708
Occupancy and equipment		1,051			847			2,035			1,661
Marketing and public relations		297			263			571			498
FDIC insurance		136			157			263			413
Legal expense		191			290			361			440
Other real estate expense, net		60			335			307			411
Mortgage subservicing expense		326			469			689			935
Amortization of mortgage servicing rights		441			738			913			1,331
Settlement of employment agreements		—			119			—			1,902
Other		1,474			2,139			3,100			4,329
Total noninterest expense		9,491			11,605			19,098			24,628
Income before income taxes		3,280			8,713			6,123			15,800
Income tax expense		1,031			3,180			1,930			5,844
Net income	$	2,249			5,533			4,193			9,956
Earnings per common share:
Basic	$	0.58			1.44			1.08			2.60
Diluted	$	0.57			1.40			1.07			2.53
Weighted average common shares outstanding:
Basic		3,881,115			3,832,043			3,866,353			3,829,130
Diluted		3,951,478			3,935,880			3,929,948			3,925,920

See accompanying notes to consolidated financial statements. 

4

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2014			2013			2014			2013
	(In thousands)
Net income	$	2,249			5,533			4,193			9,956
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on securities		2,271			(4,302	)		4,663			(4,436	)
Tax effect		(817	)		1,549			(1,678	)		1,598
Reclassification adjustment for (gains) losses included in earnings		(164	)		62			(480	)		46
Tax effect		59			(22	)		173			(17	)
Accretion of unrealized losses on held-to-maturity securities previously recognized in other comprehensive income		49			49			98			98
Tax effect		(18	)		(18	)		(36	)		(36	)
Other comprehensive income (loss), net of tax		1,380			(2,682	)		2,740			(2,747	)
Comprehensive income	$	3,629			2,851			6,933			7,209

See accompanying notes to consolidated financial statements.

5

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

											Accumulated
					Additional						Other
	Common Stock				Paid-in			Retained			Comprehensive
	Shares		Amount		Capital			Earnings			Income (Loss)			Total
	(In thousands, except share data)
Balance, December 31, 2012		3,837,984	$	39		22,048			45,752			(325	)		67,514
Stock awards		164,900		1		(1	)		—			—			—
Stock-based compensation expense, net		—		—		97			—			—			97
Net income		—		—		—			9,956			—			9,956
Other comprehensive loss, net of tax		—		—		—			—			(2,747	)		(2,747	)
Balance, June 30, 2013		4,002,884	$	40		22,144			55,708			(3,072	)		74,820
Balance, December 31, 2013		4,015,204	$	40		22,393			62,169			(2,375	)		82,227
Stock awards		21,936		—		132			—			—			132
Stock options exercised		4,320		—		44			—			—			44
Excess tax benefit in connection with equity awards		—		—		126			—			—			126
Stock-based compensation expense, net		—		—		226			—			—			226
Net income		—		—		—			4,193			—			4,193
Dividends declared to stockholders		—		—		—			(411	)		—			(411	)
Other comprehensive income, net of tax		—		—		—			—			2,740			2,740
Balance, June 30, 2014		4,041,460	$	40		22,921			65,951			365			89,277

See accompanying notes to consolidated financial statements.

6

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	For the Six Months Ended June 30,
	2014			2013
	(In thousands)
Cash flows from operating activities:
Net income	$	4,193			9,956
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Provision for loan losses		—			(700	)
Deferred tax expense		224			901
Amortization of unearned discount/premiums on investments, net		1,121			1,283
Amortization of deferred loan fees		(1,284	)		(2,658	)
Amortization of mortgage servicing rights		913			1,331
(Gain) loss on sale of available-for-sale securities, net		(480	)		46
Gain on sale of loans held for sale, net		(5,880	)		(21,549	)
Originations of loans held for sale		(450,444	)		(993,875	)
Proceeds from sale of loans held for sale		444,676			1,069,837
Loss on extinquishment of debt		31			19
Provision for mortgage loan repurchase losses		(250	)		1,152
Mortgage loan losses paid, net of recoveries		(326	)		(341	)
Fair value adjustments on interest rate swaps		518			(263	)
Stock-based compensation		226			97
Decrease in cash surrender value of bank owned life insurance		54			54
Depreciation		558			452
Gain on disposals of premises and equipment		—			(4	)
Gain on sale of real estate acquired through foreclosure		(92	)		(163	)
Write-down of real estate acquired through foreclosure		289			401
Gain on sale of servicing assets		(775	)		—
Proceeds from the sale of servicing assets		1,575			—
Originations of mortgage servicing assets		(648	)		(4,780	)
Decrease (increase) in:
Accrued interest receivable		(257	)		491
Income taxes receivable		(509	)		—
Prepaid FDIC insurance		—			2,035
Other assets		2,021			3,163
Increase (decrease) in:
Accrued interest payable		14			273
Income taxes payable		(698	)		(3,123	)
Dividends payable to stockholders		202			—
Accrued expenses and other liabilities		(1,859	)		1,416
Cash flows (used in) provided by operating activities		(6,887	)		65,451

Continued

7

	For the Six Months
	Ended June 30,
	2014			2013
	(In thousands)
Cash flows from investing activities:
Activity in available-for-sale securities:
Purchases	$	(82,376	)		(96,319	)
Maturities, payments and calls		17,708			29,375
Proceeds from sales		28,561			45,842
Activity in held-to-maturity securities:
Maturities, payments and calls		316			(42	)
Increase in other investments		(86	)		(38	)
(Increase) decrease in Federal Home Loan Bank stock		(627	)		2,760
Increase in loans receivable, net		(70,022	)		(2,035	)
Purchase of premises and equipment		(1,640	)		(219	)
Proceeds from disposals of premises and equipment		—			5
Proceeds from sale of real estate acquired through foreclosure		1,653			1,357
Purchase of bank owned life insurance		(372	)		(20,053	)
Distribution of bank owned life insurance		—			91
Cash flows used in investing activities		(106,885	)		(39,276	)
Cash flows from financing activities:
Net increase in deposit accounts		81,955			38,314
Net increase (decrease) in Federal Home Loan Bank advances		19,969			(56,420	)
Net decrease in other short-term borrowed funds		—			(100	)
Principal repayment of subordinated debt		(150	)		(150	)
Net decrease in drafts outstanding		(159	)		(328	)
Net increase in advances from borrowers for insurance and taxes		425			26
Cash dividends paid on common stock		(411	)		—
Net increase in excess tax benefit in connection with equity awards		126
Proceeds from exercise of stock options		44			—
Cash flows provided by (used in) financing activities		101,799			(18,658	)
Net (decrease) increase in cash and cash equivalents		(11,973	)		7,517
Cash and cash equivalents, beginning of period		38,665			17,839
Cash and cash equivalents, end of period	$	26,692			25,356
Supplemental disclosure:
Cash paid for:
Interest on deposits and borrowed funds	$	2,738			2,697
Income taxes paid, net of (refunds)		2,917			8,250
Noncash investing and financing activities:
Transfer of loans receivable to real estate acquired through foreclosure	$	1,232			3,189

See accompanying notes to consolidated financial statements.

8

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

Carolina Financial Corporation (“Carolina Financial” or the “Company”), incorporated under the laws of the State of Delaware, is a bank holding company with two wholly-owned subsidiaries, CresCom Bank (the “Bank”) and Carolina Services Corporation of Charleston (“Carolina Services”). The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, the Bank and Carolina Services. In consolidation, all material intercompany accounts and transactions have been eliminated. The results of operations of the businesses acquired in transactions accounted for as purchases are included only from the dates of acquisition. All majority-owned subsidiaries are consolidated unless control is temporary or does not rest with the Company.

At June 30, 2014 and December 31, 2013, statutory business trusts (“Trusts”) created by the Company had outstanding trust preferred securities with an aggregate par value of $15,000,000. The principal assets of the Trusts are $15,465,000 of the Company’s subordinated debentures with identical rates of interest and maturities as the trust preferred securities. The Trusts have issued $465,000 of common securities to the Company and are included in other investments in the accompanying consolidated balance sheets. The Trusts are not consolidated subsidiaries of the Company.

Basis of Presentation

The accompanying unaudited consolidated financial statements and notes have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information or footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with GAAP. Because the accompanying unaudited consolidated financial statements do not include all of the information and footnotes required by GAAP, they should be read in conjunction with the Company’s audited consolidated financial statements and accompanying footnotes included in the Company’s Registration Statement on Form 10, as amended (File No. 000-19029) (the “Form 10”) filed with the Securities and Exchange Commission (“SEC”) on April 1, 2014. There have been no significant changes to the accounting policies as disclosed in the Company’s Form 10.

In management’s opinion, the accompanying unaudited consolidated financial statements reflect all normal, recurring adjustments necessary to present fairly the financial position of the Company as of June 30, 2014 and December 31, 2013, and the results of its operations and cash flows for the three-months and six-months ended June 30, 2014 and 2013. Operating results for the three-month and six-month periods ended June 30, 2014 are not necessarily indicative of the results that may be expected for the year or for other interim periods.

Management’s Estimates

The financial statements are prepared in accordance with GAAP in the United States of America, which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, including valuation for impaired loans, the valuation of real estate acquired in connection with foreclosure or in satisfaction of loans, the valuation of securities, the valuation of derivative instruments, the valuation of mortgage servicing rights, the determination of the reserve for mortgage loan repurchase losses, asserted and unasserted legal claims and deferred tax assets or liabilities. In connection with the determination of the allowance for loan losses and foreclosed real estate, management obtains independent appraisals for significant properties. Management must also make estimates in determining the estimated useful lives and methods for depreciating premises and equipment.

Management uses available information to recognize losses on loans and foreclosed real estate. However, future additions to the allowance may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for loan losses and foreclosed real estate. Such agencies may require the Bank to recognize additions to the allowance based on their judgments about information available to them at the time of their examination. Because of these factors, it is reasonably possible that the allowance for loan losses and valuation of foreclosed real estate may change materially in the near term.

9

Earnings Per Share

Basic earnings per share (“EPS”) represents income available to common stockholders divided by the weighted-average number of shares outstanding during the period. Diluted earnings per share reflects additional shares that would have been outstanding if dilutive potential shares had been issued. Potential shares that may be issued by the Company relate solely to outstanding stock options, restricted stock (non-vested shares), and warrants, and are determined using the treasury stock method. Under the treasury stock method, the number of incremental shares is determined by assuming the issuance of stock for the outstanding stock options and warrants, reduced by the number of shares assumed to be repurchased from the issuance proceeds, using the average market price for the period of the Company’s stock. Weighted-average shares for the basic and diluted EPS calculations have been reduced by the average number of unvested restricted shares.

On January 15, 2014, the Board of Directors of the Company declared a two-for-one stock split to stockholders of record dated February 10, 2014, payable on February 28, 2014. As such, all share, earnings per share, and per share data have been retroactively adjusted to reflect this stock split for all periods presented in accordance with GAAP.

Subsequent Events

Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. Non-recognized subsequent events are events that provide evidence about conditions that did not exist at the date of the statement of financial condition but arose after that date. Management has reviewed events occurring through the date the financial statements were issued and no subsequent events occurred requiring accrual or disclosure other than as disclosed in Note 10 regarding the Bank’s entry into an agreement on August 6, 2014 to purchase 13 branches in South Carolina and southeastern North Carolina.

Reclassification

Certain reclassifications of accounts reported for previous periods have been made in these consolidated financial statements. Such reclassifications had no effect on stockholders’ equity or the net income as previously reported.

Recently Issued Accounting Pronouncements

The Balance Sheet topic of the Accounting Standards Codification (the “ASC”) was amended in December 2011 for companies with financial instruments and derivative instruments that offset or are subject to a master netting agreement. The amendments require disclosure of both gross information and net information about instruments and transactions eligible for offset or subject to an agreement similar to a master netting agreement. The amendments were effective for reporting periods beginning on or after January 1, 2013 and required retrospective presentation for all comparative periods presented. Additionally, in January 2013 the Financial Accounting Standards Board (the “FASB”) clarified that the amendments apply only to derivatives, repurchase agreements and reverse purchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with specific criteria contained in GAAP or subject to a master netting arrangement or similar agreement. These amendments did not have a material effect on the Company’s financial statements.

The FASB amended the Comprehensive Income topic of the ASC in February 2013. The amendments address reporting of amounts reclassified out of accumulated other comprehensive income. Specifically, the amendments do not change the current requirements for reporting net income or other comprehensive income in financial statements. However, the amendments do require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, in certain circumstances an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income. The amendments were effective for the Company on a prospective basis for reporting periods beginning after December 15, 2013. These amendments did not have a material effect on the Company’s financial statements.

In February 2013, the FASB also amended the Financial Instruments topic of the ASC to address the scope and applicability of certain disclosures to nonpublic companies. The amendments clarify that the requirement to disclose “the level of the fair value hierarchy within the fair value measurements are categorized in their entirety (Level 1, 2, or 3)” does not apply to nonpublic entities for items that are not measured at fair value in the statement of financial position but for which fair value is disclosed. The Company does not expect these amendments to have a material effect on its financial statements.

10

In April 2013, the FASB issued guidance addressing application of the liquidation basis of accounting. The guidance is intended to clarify when an entity should apply the liquidation basis of accounting. In addition, the guidance provides principles for the recognition and measurement of assets and liabilities and requirements for financial statements prepared using the liquidation basis of accounting. The amendments will be effective for entities that determine liquidation is imminent during annual reporting periods beginning after December 15, 2013, and interim reporting periods therein, and those requirements should be applied prospectively from the day that liquidation becomes imminent. Early adoption is permitted. These amendments did not have any effect on the Company’s financial statements.

In December 2013, the FASB amended the Master Glossary of the FASB Codification to define “Public Business Entity” to minimize the inconsistency and complexity of having multiple definitions of, or a diversity in practice as to what constitutes, a nonpublic entity and public entity within U.S. GAAP. The amendment does not affect existing requirements, however it will be used by the FASB, the Private Company Council (“PCC”), and the Emerging Issues Task Force (“EITF”) in specifying the scope of future financial accounting and reporting guidance. This amendment does not have any effect on the Company’s financial statements.

In January 2014, the FASB amended Receivables topic of the Accounting Standards Codification. The amendments are intended to resolve diversity in practice with respect to when a creditor should reclassify a collateralized consumer mortgage loan to other real estate owned (OREO). In addition, the amendments require a creditor to reclassify a collateralized consumer mortgage loan to OREO upon obtaining legal title to the real estate collateral, or the borrower voluntarily conveying all interest in the real estate property to the lender to satisfy the loan through a deed in lieu of foreclosure or similar legal agreement. The amendments will be effective for the Company for annual periods, and interim periods within those annual periods beginning after December 15, 2014, with early implementation of the guidance permitted. In implementing this guidance, assets that are reclassified from real estate to loans are measured at the carrying value of the real estate at the date of adoption. Assets reclassified from loans to real estate are measured at the lower of the net amount of the loan receivable or the fair value of the real estate less costs to sell at the date of adoption. The Company will apply the amendments prospectively. The Company does not expect these amendments to have a material effect on its financial statements.

In May 2014, the FASB issued guidance to change the recognition of revenue from contracts with customers. The core principle of the new guidance is that an entity should recognize revenue to reflect the transfer of goods and services to customers in an amount equal to the consideration the entity receives or expects to receive. The guidance will be effective for the Company for reporting periods beginning after December 15, 2016. The Company will apply the guidance using a full retrospective approach. The Company does not expect these amendments to have a material effect on its financial statements.

In June 2014, the FASB issued guidance which makes limited amendments to the guidance on accounting for certain repurchase agreements. The new guidance (1) requires entities to account for repurchase-to-maturity transactions as secured borrowings (rather than as sales with forward repurchase agreements), (2) eliminates accounting guidance on linked repurchase financing transactions, and (3) expands disclosure requirements related to certain transfers of financial assets that are accounted for as sales and certain transfers (specifically, repos, securities lending transactions, and repurchase-to-maturity transactions) accounted for as secured borrowings. The amendments will be effective for the Company for the first interim or annual period beginning after December 15, 2014. The Company will apply the guidance by making a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. The Company does not expect these amendments to have a material effect on its financial statements.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

11

NOTE 2 - SECURITIES

The amortized cost, gross unrealized gains, gross unrealized losses and fair value of investments securities available-for-sale and held-to-maturity at June 30, 2014 and December 31, 2013 follows:

	June 30, 2014									December 31, 2013
			Gross		Gross							Gross		Gross
	Amortized		Unrealized		Unrealized			Fair		Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value		Cost		Gains		Losses			Value
	(In thousands)
Securities available-for-sale:
Municipal securities	$	35,256		1,071		(230	)		36,097		39,790		99		(1,390	)		38,499
US government agencies		4,944		—		(23	)		4,921		5,199		—		(24	)		5,175
Collateralized loan obligations		9,708		—		(12	)		9,696		—		—		—			—
Mortgage-backed securities:
Agency		101,080		3,101		(39	)		104,142		68,813		1,433		(317	)		69,929
Non-agency		51,582		1,117		(254	)		52,445		53,195		826		(89	)		53,932
Total mortgage-backed securities		152,662		4,218		(293	)		156,587		122,008		2,259		(406	)		123,861
Total	$	202,570		5,289		(558	)		207,301		166,997		2,358		(1,820	)		167,535
Securities held-to-maturity:
Municipal securities	$	15,395		611		(52	)		15,954		15,488		30		(341	)		15,177
Asset-backed securities		8,859		3,066		(1,969	)		9,956		9,066		2,107		(2,803	)		8,370
Total	$	24,254		3,677		(2,021	)		25,910		24,554		2,137		(3,144	)		23,547

The asset-backed securities portfolio is collateralized with trust preferred securities issued by other financial institutions in pooled issuances.

12

The following table presents unrealized losses related to the trust preferred securities that were recognized within other comprehensive income at the time of transfer to held-to-maturity as well as the unrealized gains and losses that are not presented in other comprehensive income for June 30, 2014 and December 31, 2013.

	At June 30, 2014
								Recognized in OCI							Not Recognized in OCI
								Gross Unrealized							Gross Unrealized
	Purchased Face Value		Cumulative OTTI			Carrying Value		Gains		Losses			Amortized Cost		Gains		Losses			Estimated Fair Value		Collateralization Percentage
Held-to-Maturity:	(In thousands)
Trust Preferred Securities
Total A-Class	$	2,465		—			2,465		—		(572	)		1,893		363		—			2,256		179%-376%
Total B-Class		11,855		(2,635	)		9,221		—		(2,514	)		6,707		1,812		(1,969	)		6,550		94%-105%
Total C-Class		2,708		(1,340	)		1,367		—		(1,108	)		259		891		—			1,150		88%-88%
	$	17,028		(3,975	)		13,053		—		(4,194	)		8,859		3,066		(1,969	)		9,956
	At December 31, 2013
								Recognized in OCI							Not Recognized in OCI
								Gross Unrealized							Gross Unrealized
	Purchased Face Value		Cumulative OTTI			Carrying Value		Gains		Losses			Amortized Cost		Gains		Losses			Estimated Fair Value		Collateralization Percentage
Held-to-Maturity:	(In thousands)
Trust Preferred Securities
Total A-Class	$	2,841		—			2,841		—		(586	)		2,255		354		(99	)		2,510		164% - 324%
Total B-Class		11,804		(2,635	)		9,169		—		(2,569	)		6,600		1,190		(2,704	)		5,086		94% - 98%
Total C-Class		2,688		(1,340	)		1,348		—		(1,137	)		211		563		—			774		83% - 83%
	$	17,333		(3,975	)		13,358		—		(4,292	)		9,066		2,107		(2,803	)		8,370

The pooled trust preferred securities consisted of positions in seven different securities. The underlying issuers in the pools were primarily financial institutions and to a lesser extent, insurance companies and real estate investment trusts. The Company owns both senior and mezzanine tranches in pooled trust preferred securities; however, the Company does not own any income notes. The senior and mezzanine tranches of trust preferred collateralized debt obligations generally have some protection from defaults in the form of over-collateralization and excess spread revenues, along with waterfall structures that redirect cash flows in the event certain coverage test requirements are failed. Generally, senior tranches have the greatest protection, with mezzanine tranches subordinated to the senior tranches, and income notes subordinated to the mezzanine tranches. Unrealized losses recognized in other comprehensive income relate to unrealized losses at the time of transfer from available-for-sale to held-to-maturity and are accreted in accordance with GAAP.

As of June 30, 2014, $1.0 million of the pooled trust preferred securities were investment grade, $1.0 million were split-rated, and $6.9 million were below investment grade. As of December 31, 2013, $1.3 million of the pooled trust preferred securities were investment grade, $1.0 million were split-rated, and $6.8 million were below investment grade. In terms of risk-based capital calculation, the Company allocates additional risk-based capital to the below investment grade securities.

As of June 30, 2014, senior tranches represent $1.9 million of the Company’s pooled securities, while mezzanine tranches represented $7.0 million. All of the $7.0 million in mezzanine tranches are still subordinate to senior tranches as the senior notes have not been paid to a zero balance. As of December 31, 2013, senior tranches represent $2.3 million of the Company’s

pooled securities, while mezzanine tranches represented $6.8 million. All of the $6.8 million in mezzanine tranches are still subordinate to senior tranches as the senior notes have not been paid to a zero balance.

13

The amortized cost and fair value of debt securities by contractual maturity at June 30, 2014 follows:

	At June 30, 2014
	Amortized		Fair
	Cost		Value
	(In thousands)
Securities available-for-sale:
Less than one year	$	—		—
One to five years		—		—
Five to ten years		17,753		17,760
After ten years		184,817		189,541
Total	$	202,570		207,301
Securities held-to-maturity:
Less than one year	$	—		—
One to five years		970		989
Five to ten years		4,480		4,455
After ten years		18,804		20,466
Total	$	24,254		25,910

The contractual maturity dates of the securities were used for mortgage-backed securities and asset-backed securities. No estimates were made to anticipate principal repayments.

The following table summarizes the gross realized gains and losses from sales of investment securities available-for-sale for the periods indicated.

	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2014			2013			2014			2013
	(In thousands)
Proceeds	$	18,753			40,104			28,561			45,842
Realized gains		204			360			520			376
Realized losses		(40	)		(422	)		(40	)		(422	)
Total investment securities gains, net	$	164			(62	)		480			(46	)

At June 30, 2014, the Company had pledged $11.3 million of securities for Federal Home Loan Bank (“FHLB”) advances.

14

The gross unrealized losses and fair value of the Company’s investments available-for-sale with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2014 are as follows:

	At June 30, 2014
	Less than 12 Months							12 Months or Greater							Total
	Amortized		Fair		Unrealized			Amortized		Fair		Unrealized			Amortized		Fair		Unrealized
	Cost		Value		Losses			Cost		Value		Losses			Cost		Value		Losses
	(In thousands)
Available-for-sale:
Municipal securities	$	10,513		10,353		(160	)		4,208		4,138		(70	)		14,721		14,491		(230	)
US government agencies		4,944		4,921		(23	)		—		—		—			4,944		4,921		(23	)
Collateralized loan obligations		4,708		4,696		(12	)		—		—		—			4,708		4,696		(12	)
Mortgage-backed securities:
Agency		3,639		3,600		(39	)		—		—		—			3,639		3,600		(39	)
Non-agency		9,239		8,998		(241	)		1,676		1,663		(13	)		10,915		10,661		(254	)
Total mortgage-backed securities		12,878		12,598		(280	)		1,676		1,663		(13	)		14,554		14,261		(293	)
Total	$	33,043		32,568		(475	)		5,884		5,801		(83	)		38,927		38,369		(558	)
Held-to-maturity:
Municipal securities	$	—		—		—			3,349		3,297		(52	)		3,349		3,297		(52	)
Asset-backed securities		—		—		—			6,481		4,512		(1,969	)		6,481		4,512		(1,969	)
Total	$	—		—		—			9,830		7,809		(2,021	)		9,830		7,809		(2,021	)

The gross unrealized losses and fair value of the Company’s investments available-for-sale with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2013 are as follows:

	At December 31, 2013
	Less than 12 Months							12 Months or Greater							Total
	Amortized		Fair		Unrealized			Amortized		Fair		Unrealized			Amortized		Fair		Unrealized
	Cost		Value		Losses			Cost		Value		Losses			Cost		Value		Losses
	(In thousands)
Available-for-sale:
Municipal securities	$	27,108		25,917		(1,191	)		3,157		2,958		(199	)		30,265		28,875		(1,390	)
US government agencies		5,199		5,175		(24	)		—		—		—			5,199		5,175		(24	)
Mortgage-backed securities:
Agency		27,140		26,823		(317	)		—		—		—			27,140		26,823		(317	)
Non-agency		15,006		14,951		(55	)		3,660		3,626		(34	)		18,666		18,577		(89	)
Total mortgage-backed securities		42,146		41,774		(372	)		3,660		3,626		(34	)		45,806		45,400		(406	)
Total	$	74,453		72,866		(1,587	)		6,817		6,584		(233	)		81,270		79,450		(1,820	)
Held-to-maturity:
Municipal securities	$	11,945		11,734		(211	)		2,177		2,047		(130	)		14,122		13,781		(341	)
Asset-backed  securities		—		—		—			7,398		4,595		(2,803	)		7,398		4,595		(2,803	)
Total	$	11,945		11,734		(211	)		9,575		6,642		(2,933	)		21,520		18,376		(3,144	)

15

The Company reviews its investment securities portfolio at least quarterly and more frequently when economic conditions warrant, assessing whether there is any indication of other-than-temporary impairment (“OTTI”). Factors considered in the review include estimated future cash flows, length of time and extent to which market value has been less than cost, the financial condition and near term prospect of the issuer, and our intent and ability to retain the security to allow for an anticipated recovery in market value. If the review determines that there is OTTI, then an impairment loss is recognized in earnings equal to the difference between the investment’s cost and its fair value at the balance sheet date of the reporting period for which the assessment is made, or a portion may be recognized in other comprehensive income. The fair value of investments on which OTTI is recognized then becomes the new cost basis of the investment.

At June 30, 2014 and December 31, 2013, the Company had 28 and 58, respectively, individual investments available-for-sale that were in an unrealized loss position. The unrealized losses on the Company’s investments in US government-sponsored agencies, municipal securities and mortgage-backed securities (agency and non-agency) summarized above were attributable primarily to changes in interest rates. Management has performed various analyses, including cash flows, and determined that no OTTI expense was necessary for the three months ended June 30, 2014.

At June 30, 2014 and December 31, 2013, the Company had four trust preferred securities within the held-to-maturity portfolio that were in an unrealized loss position. The asset-backed securities portfolio is collateralized with trust preferred securities issued by other financial institutions in pooled issuances.

To determine the fair value, cash flow models for trust preferred securities are provided by a third-party pricing service. Impairment testing is performed on a quarterly basis using a detailed cash flow analysis for each security. The major assumptions used during the impairment test are described in the subsequent paragraph.

In 2009, the Company adopted a four year “burst” scenario for its modeled default rates (2010 - 2013) that replicated the default rates for the banking industry from the four peak years of the savings and loan crisis, which then reduced to 0.25% annually. The elevated default rate ended in 2013, and the constant default rate used by the Company is now 0.25% annually. All issuers that were currently in deferral were presumed to be in default. Additionally, all defaults are assumed to have a 15% recovery after two years and 1% of the pool is presumed to prepay annually. If this analysis results in a present value of expected cash flows that is less than the book value of a security (that is, a credit loss exists), an OTTI is considered to have occurred. If there is no credit loss, any impairment is considered temporary. The cash flow analysis we performed used discount rates equal to the credit spread at the time of purchase for each security and then added the current three-month LIBOR forward interest rate curve. Based on the cash flow analysis performed at period end, management believes that there are no additional securities other-than-temporarily impaired at June 30, 2014.

There was no OTTI recognized for the three or six months ended June 30, 2014 or 2013.

The following table presents the cumulative credit related OTTI related to securities held-to-maturity taken as well as the activity at June 30, 2014 and December 31, 2013 for the trust preferred securities.

	At June 30,		At December 31,
	2014		2013
	(In thousands)
Balance at beginning of year	$	3,975		3,975
Additions for credit losses on securities  for which OTTI was not previously recognized		—		—
Additions for additional credit losses on securities for which OTTI was previously recognized		—		—
Balance at end of year	$	3,975		3,975

Management believes that there are no additional securities other-than-temporarily impaired at June 30, 2014. The Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell these securities before recovery of their amortized cost. Management continues to monitor these securities with a high degree of scrutiny. There can be no assurance that the Company will not conclude in future periods that conditions existing at that time indicate some or all of the securities may be sold or are other-than-temporarily impaired, which would require a charge to earnings in such periods.

16

NOTE 3 – DERIVATIVES

The derivative positions of the Company at June 30, 2014 and December 31, 2013 are as follows:

	At June 30,				At December 31,
	2014				2013
	Fair		Notional		Fair		Notional
	Value		Value		Value		Value
			(In thousands)
Derivative assets:
Mortgage loan interest rate lock commitments	$	1,672		159,113		—		—
Mortgage loan forward sales commitments		583		25,855		106		20,516
Mortgage-backed securities forward sales commitments		—		—		878		88,000
Interest rate swaps		—		—		428		20,000
	$	2,255		184,968		1,412		128,516
Derivative liabilities:
Mortgage-backed securities forward sales commitments	$	709		139,000		—		—
Mortgage loan interest rate lock commitments		—		—		55		103,614
Interest rate swaps		21		10,000		—		—
	$	730		149,000		55		103,614

The primary uses of derivative instruments are related to the mortgage banking activities of the Company. As such, the Company holds derivative instruments, which consist of rate lock agreements related to expected funding of fixed-rate mortgage loans to customers (interest rate lock commitments) and forward commitments to sell mortgage-backed securities and individual fixed-rate mortgage loans. The Company’s objective in obtaining the forward commitments is to mitigate the interest rate risk associated with the interest rate lock commitments and the mortgage loans that are held for sale. Derivatives related to these commitments are recorded as either a derivative asset or a derivative liability in the balance sheet and are measured at fair value. Both the interest rate lock commitments and the forward commitments are reported at fair value, with adjustments recorded in current period earnings in net gain on sale of loans held for sale within noninterest income in the consolidated statements of operations.

Derivative instruments not related to mortgage banking activities, including financial futures commitments and interest rate swap agreements that do not satisfy the hedge accounting requirements are recorded at fair value and are classified with resultant changes in fair value recorded in current period earnings in fair value adjustments on interest rate swaps within noninterest income in the consolidated statement of operations.

When using derivatives to hedge fair value and cash flow risks, the Company exposes itself to potential credit risk from the counterparty to the hedging instrument. This credit risk is normally a small percentage of the notional amount and fluctuates as interest rates change. The Company analyzes and approves credit risk for all potential derivative counterparties prior to execution of any derivative transaction. The Company seeks to minimize credit risk by dealing with highly rated counterparties and by obtaining collateralization for exposures above certain predetermined limits. If significant counterparty risk is determined, the Company would adjust the fair value of the derivative recorded to consider such risk.

17

NOTE 4 - LOANS RECEIVABLE, NET

Loans receivable, net at June 30, 2014 and December 31, 2013 are summarized by category as follows:

	At June 30,					At December 31,
	2014					2013
			% of Total					% of Total
	Amount		Loans			Amount		Loans
	(Dollars in thousands)
Loans secured by real estate:
One-to-four family	$	209,878		32.62	%		184,210		32.60	%
Home equity		23,529		3.66	%		23,661		4.19	%
Commercial real estate		264,911		41.18	%		253,035		44.79	%
Construction and development		77,629		12.07	%		67,056		11.87	%
Consumer loans		3,132		0.49	%		3,060		0.54	%
Commercial business loans		64,187		9.98	%		33,938		6.01	%
Total gross loans receivable		643,266		100.00	%		564,960		100.00	%
Less:
Undisbursed loans in process		29,053					21,550
Allowance for loan losses		8,662					8,091
Deferred fees, net		256					98
Total loans receivable, net	$	605,295					535,221

The composition of gross loans outstanding, net of undisbursed amounts, by rate type is as follows:

	At June 30,				At December 31,
	2014				2013
	(Dollars in thousands)
Variable rate loans	$	252,110	41.05	%		219,589	40.41	%
Fixed rate loans		362,103	58.95	%		323,821	59.59	%
Total loans outstanding	$	614,213	100.00	%		543,410	100.00	%

The following table presents activity in the allowance for loan losses for the period indicated. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

Allowance for loan losses:	For the Three Months Ended June 30, 2014
	Loans Secured by Real Estate
	One-to-						Commercial			Construction
	four			Home			real			and						Commercial
	family			equity			estate			development			Consumer			business		Unallocated		Total
	(In thousands)
Balance at April 1, 2014	$	2,568			234			3,271			1,236			29			626		437		8,401
Provision for loan losses		(80	)		(27	)		(98	)		(13	)		(11	)		88		141		—
Charge-offs		(36	)		—			—			—			—			—		—		(36	)
Recoveries		52			—			—			2			10			233		—		297
Balance at June 30, 2014	$	2,504			207			3,173			1,225			28			947		578		8,662

18

Allowance for loan losses:	For the Three Months Ended June 30, 2013
	Loans Secured by Real Estate
	One-to-						Commercial			Construction
	four			Home			real			and						Commercial
	family			equity			estate			development			Consumer			business			Unallocated			Total
	(In thousands)
Balance at April 1, 2013	$	3,010			229			3,234			1,823			87			835			420			9,638
Provision for loan losses		(706	)		49			(247	)		(342	)		(18	)		25			539			(700	)
Charge-offs		(48	)		(28	)		(110	)		(248	)		(1	)		(336	)		—			(771	)
Recoveries		18			—			21			72			8			117			—			236
Balance at June 30, 2013	$	2,274			250			2,898			1,305			76			641			959			8,403
Allowance for loan losses:	For the Six Months Ended June 30, 2014
	Loans Secured by Real Estate
	One-to-						Commercial			Construction
	four			Home			real			and						Commercial
	family			equity			estate			development			Consumer			business			Unallocated			Total
	(In thousands)
Balance at January 1, 2014	$	2,472			231			2,855			1,418			42			339			734			8,091
Provision for loan losses		34			(24	)		346			(352	)		(51	)		203			(156	)		—
Charge-offs		(73	)		—			(28	)		(170	)		(13	)		—			—			(284	)
Recoveries		71			—			—			329			50			405			—			855
Balance at June 30, 2014	$	2,504			207			3,173			1,225			28			947			578			8,662
	For the Six Months Ended June 30, 2013
	Loans Secured by Real Estate
	One-to-						Commercial			Construction
	four			Home			real			and						Commercial
	family			equity			estate			development			Consumer			business			Unallocated			Total
	(In thousands)
Balance at January 1, 2013	$	3,193			276			3,315			1,792			82			862			—			9,520
Provision for loan losses		(971	)		2			(380	)		(256	)		(4	)		(50	)		959			(700	)
Charge-offs		(81	)		(28	)		(110	)		(310	)		(34	)		(336	)		—			(899	)
Recoveries		133			—			73			79			32			165			—			482
Balance at June 30, 2013	$	2,274			250			2,898			1,305			76			641			959			8,403

19

The following table disaggregates our allowance for loan losses and recorded investment in loans by impairment methodology.

	Loans Secured by Real Estate
	One-to-				Commercial		Construction
	four		Home		real		and				Commercial
	family		equity		estate		development		Consumer		business		Unallocated		Total
	(In thousands)
At June 30, 2014:
Allowance for loan losses ending balances:
Individually evaluated for impairment	$	304		—		30		90		4		3		—		431
Collectively evaluated for impairment		2,200		207		3,143		1,135		24		944		578		8,231
	$	2,504		207		3,173		1,225		28		947		578		8,662
Loans receivable ending balances:
Individually evaluated for impairment	$	6,301		—		16,054		671		24		2,231		—		25,281
Collectively evaluated for impairment		202,878		23,319		239,273		65,596		2,848		55,018		—		588,932
Total loans receivable	$	209,179		23,319		255,327		66,267		2,872		57,249		—		614,213
At December 31, 2013:
Allowance for loan losses ending balances:
Individually evaluated for impairment	$	103		—		55		165		20		6		—		349
Collectively evaluated for impairment		2,369		231		2,800		1,253		22		333		734		7,742
	$	2,472		231		2,855		1,418		42		339		734		8,091
Loans receivable ending balances:
Individually evaluated for impairment	$	6,220		125		17,008		1,493		40		2,560		—		27,446
Collectively evaluated for impairment		177,516		23,217		230,859		58,611		2,775		22,986		—		515,964
Total loans receivable	$	183,736		23,342		247,867		60,104		2,815		25,546		—		543,410

20

The following table presents impaired loans individually evaluated for impairment in the segmented portfolio categories and the corresponding allowance for loan losses as of June 30, 2014 and December 31, 2013. The recorded investment is defined as the original amount of the loan, net of any deferred costs and fees, less any principal reductions and direct charge-offs. Unpaid principal balance includes amounts previously included in charge-offs.

	At June 30, 2014						At December 31, 2013
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
	Investment		Balance		Allowance		Investment		Balance		Allowance
	(In thousands)
With no related allowance recorded:
Loans secured by real estate:
One-to-four family	$	5,162		7,304		—		5,713		7,682		—
Home equity		—		347		—		125		472		—
Commercial real estate		15,789		16,334		—		16,695		17,240		—
Construction and development		404		2,385		—		1,227		3,887		—
Consumer loans		20		546		—		20		404		—
Commercial business loans		2,228		3,804		—		2,554		3,599		—
		23,603		30,720		—		26,334		33,284		—
With an allowance recorded:
Loans secured by real estate:
One-to-four family		1,139		1,139		304		507		607		103
Home equity		—		—		—		—		—		—
Commercial real estate		265		265		30		313		313		55
Construction and development		267		267		90		266		266		165
Consumer loans		4		4		4		20		20		20
Commercial business loans		3		3		3		6		6		6
		1,678		1,678		431		1,112		1,212		349
Total:
Loans secured by real estate:
One-to-four family		6,301		8,443		304		6,220		8,289		103
Home equity		—		347		—		125		472		—
Commercial real estate		16,054		16,599		30		17,008		17,553		55
Construction and development		671		2,652		90		1,493		4,153		165
Consumer loans		24		550		4		40		424		20
Commercial business loans		2,231		3,807		3		2,560		3,605		6
	$	25,281		32,398		431		27,446		34,496		349

21

The following table presents the average recorded investment and interest income recognized on impaired loans individually evaluated for impairment in the segmented portfolio categories for the three and six months ended June 30, 2014 and 2013.

	For the Three Months Ended June 30,									For the Six Months Ended June 30,
	2014					2013				2014				2013
	Average		Interest			Average		Interest		Average		Interest		Average		Interest
	Recorded		Income			Recorded		Income		Recorded		Income		Recorded		Income
	Investment		Recognized			Investment		Recognized		Investment		Recognized		Investment		Recognized
	(In thousands)
With no related allowance recorded:
Loans secured by real estate:
One-to-four family	$	5,302		(9	)		4,724		73		5,431		44		7,253		100
Home equity		—		—			83		1		—		—		83		—
Commercial real estate		16,000		119			15,245		154		16,423		267		19,573		257
Construction and development		405		1			376		1		428		3		2,604		(5	)
Consumer loans		20		(3	)		37		1		22		—		37		—
Commercial business loans		2,264		(25	)		2,238		27		2,372		53		2,810		57
		23,991		83			22,703		257		24,676		367		32,360		409
With an allowance recorded:
Loans secured by real estate:
One-to-four family		841		(3	)		2,590		—		467		2		62		—
Home equity		—		—			—		—		—		—		—		—
Commercial real estate		266		4			4,372		1		269		9		44		—
Construction and development		200		1			2,228		—		100		1		—		—
Consumer loans		5		—			19		—		6		—		19		—
Commercial business loans		4		—			1,248		1		4		—		677		—
		1,316		2			10,457		2		846		12		802		—
Total:
Loans secured by real estate:
One-to-four family		6,143		(12	)		7,314		73		5,898		46		7,315		100
Home equity		—		—			83		1		—		—		83		—
Commercial real estate		16,266		123			19,617		155		16,692		276		19,617		257
Construction and development		605		2			2,604		1		528		4		2,604		(5	)
Consumer loans		25		(3	)		56		1		28		—		56		—
Commercial business loans		2,268		(25	)		3,486		28		2,376		53		3,487		57
	$	25,307		85			33,160		259		25,522		379		33,162		409

The Company was not committed to advance additional funds in connection with impaired loans as of June 30, 2014 and was committed to advance up to $230,000 in additional funds as of December 31, 2013.

22

A loan is considered past due if the required principal and interest payment has not been received as of the due date. The following schedule is an aging of past due loans receivable by portfolio segment as of June 30, 2014 and December 31, 2013.

	At June 30, 2014
	Real estate loans
	One-to-				Commercial		Construction
	four		Home		real		and				Commercial
	family		equity		estate		development		Consumer		business		Total
	(In thousands)
30-59 days past due	$	2,626		207		265		168		—		—		3,266
60-89 days past due		700		—		191		—		5		—		896
90 days or more past due		4,116		—		4,285		660		4		168		9,233
Total past due		7,442		207		4,741		828		9		168		13,395
Current		201,737		23,112		250,586		65,439		2,863		57,081		600,818
Total loans receivable	$	209,179		23,319		255,327		66,267		2,872		57,249		614,213
	At December 31, 2013
	Real estate loans
	One-to-				Commercial		Construction
	four		Home		real		and				Commercial
	family		equity		estate		development		Consumer		business		Total
	(In thousands)
30-59 days past due	$	231		—		273		53		—		—		557
60-89 days past due		1,034		—		—		—		—		—		1,034
90 days or more past due		3,440		125		5,074		1,477		7		431		10,554
Total past due		4,705		125		5,347		1,530		7		431		12,145
Current		179,031		23,217		242,520		58,574		2,808		25,115		531,265
Total loans receivable	$	183,736		23,342		247,867		60,104		2,815		25,546		543,410

Loans are generally placed in nonaccrual status when the collection of principal and interest is 90 days or more past due, unless the obligation is both well-secured and in the process of collection. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest payments received while the loan is on nonaccrual are applied to the principal balance. No interest income was recognized on impaired loans subsequent to the nonaccrual status designation. A loan is returned to accrual status when the borrower makes consistent payments according to contractual terms and future payments are reasonably assured. There were no loans past due 90 days or more and still accruing at June 30, 2014 or December 31, 2013.

23

The following is a schedule of loans receivable, by portfolio segment, on nonaccrual at June 30, 2014 and December 31, 2013.

	At June 30,		At December 31,
	2014		2013
Loans secured by real estate:	(In thousands)
One-to-four family	$	4,270		3,902
Home equity		—		125
Commercial real estate		4,285		5,114
Construction and development		661		1,481
Consumer loans		5		20
Commercial business loans		172		437
	$	9,393		11,079

The Company uses several metrics as credit quality indicators of current or potential risks as part of the ongoing monitoring of credit quality of its loan portfolio. The credit quality indicators are periodically reviewed and updated on a case-by-case basis. The Company uses the following definitions for the internal risk rating grades, listed from the least risk to the highest risk.

Pass: These loans range from minimal credit risk to average, however, still acceptable credit risk.

Special mention: A special mention loan has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or the institution’s credit position at some future date.

Substandard: A substandard loan is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness, or weaknesses, that may jeopardize the liquidation of the debt. A substandard loan is characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

Doubtful: A doubtful loan has all of the weaknesses inherent in one classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of the currently existing facts, conditions and values, highly questionable and improbable.

The Company uses the following definitions in the tables below:

Nonperforming: Loans on nonaccrual status plus loans greater than 90 days past due still accruing interest.

Performing: All current loans plus loans less than 90 days past due.

24

The following is a schedule of the credit quality of loans receivable, by portfolio segment, as of June 30, 2014 and December 31, 2013.

	At June 30, 2014
	Real estate loans
	One-to-				Commercial		Construction
	four		Home		real		and				Commercial
	family		equity		estate		development		Consumer		business		Total
	(In thousands)
Internal Risk Rating Grades:
Pass	$	204,774		23,319		240,146		65,294		2,867		56,177		592,577
Special Mention		1,046		—		10,631		282		—		900		12,859
Substandard		3,359		—		4,550		691		5		172		8,777
Total loans receivable	$	209,179		23,319		255,327		66,267		2,872		57,249		614,213
Performing	$	204,909		23,319		251,042		65,606		2,867		57,077		604,820
Nonperforming:
90 days or more and still accruing		—		—		—		—		—		—		—
Nonaccrual		4,270		—		4,285		661		5		172		9,393
Total nonperforming		4,270		—		4,285		661		5		172		9,393
Total loans receivable	$	209,179		23,319		255,327		66,267		2,872		57,249		614,213
	At December 31, 2013
	Real estate loans
	One-to-				Commercial		Construction
	four		Home		real		and				Commercial
	family		equity		estate		development		Consumer		business		Total
	(In thousands)
Internal Risk Rating Grades:
Pass	$	177,878		23,217		231,269		58,563		2,795		24,823		518,545
Special Mention		1,679		—		10,633		295		—		286		12,893
Substandard		4,179		125		5,965		1,246		20		437		11,972
Total loans receivable	$	183,736		23,342		247,867		60,104		2,815		25,546		543,410
Performing	$	179,834		23,217		242,753		58,623		2,795		25,109		532,331
Nonperforming:
90 days or more and still accruing		—		—		—		—		—		—		—
Nonaccrual		3,902		125		5,114		1,481		20		437		11,079
Total nonperforming		3,902		125		5,114		1,481		20		437		11,079
Total loans receivable	$	183,736		23,342		247,867		60,104		2,815		25,546		543,410

Troubled Debt Restructurings

At June 30, 2014, there were $22.0 million in loans designated as troubled debt restructurings of which $15.5 million were accruing. At December 31, 2013, there were $23.7 million in loans designated as troubled debt restructurings of which $16.4 million were accruing.

There were no loans designated as troubled debt restructings during the three or six months ended June 30, 2014 or 2013. No loans previously restructured in the twelve months prior to June 30, 2014 and 2013 went into default during the period ended June 30, 2014 and 2013.

The Company is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheets.

25

NOTE 5 – REAL ESTATE ACQUIRED THROUGH FORECLOSURE

The following presents summarized activity in other real estate owned for the periods ended June 30, 2014 and December 31, 2013:

	At June 30,			At December 31,
	2014			2013
	(In thousands)
Balance at beginning of period	$	6,273			6,284
Additions		1,232			4,140
Sales		(1,561	)		(3,302	)
Write downs		(289	)		(849	)
Balance at end of period	$	5,655			6,273

A summary of the composition of real estate acquired through foreclosure follows:

	At June 30,		At December 31,
	2014		2013
	(In thousands)
Real estate loans:
One-to-four family	$	521		959
Commercial real estate		1,498		1,781
Construction and development		3,636		3,533
	$	5,655		6,273

26

NOTE 6 - DEPOSITS

Deposits outstanding by type of account at June 30, 2014 and December 31, 2013 are summarized as follows:

	At June 30,		At December 31,
	2014		2013
	(In thousands)
Noninterest-bearing demand accounts	$	102,376		83,500
Interest-bearing demand accounts		128,431		92,067
Savings accounts		24,757		17,816
Money market accounts		208,658		220,915
Certificates of deposit:
Less than $100,000		211,277		195,239
$100,000 or more		104,037		88,044
Total certificates of deposit		315,314		283,283
Total deposits	$	779,536		697,581

The aggregate amount of brokered certificates of deposit was $83.0 million and $61.8 million at June 30, 2014 and December 31, 2013, respectively. Brokered certificates of deposit are included in the table above under certificates of deposit less than $100,000. The aggregate amount of institutional certificates of deposit was $47.0 million and $40.0 million at June 30, 2014 and December 31, 2013, respectively.

The following table summarizes the interest expense recorded on certificate of deposits greater than $100,000 for the periods indicated.

	For the Three Months				For the Six Months
	Ended June 30,				Ended June 30,
	2014		2013		2014		2013
	(In thousands)
Certificates of deposit:
$100,000 or more	$	216		170		395		328

NOTE 7 – ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS

Current accounting literature requires disclosures about the fair value of all financial instruments whether or not recognized in the balance sheet, for which it is practicable to estimate the value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized through immediate settlement of the instrument. Certain items are specifically excluded from disclosure requirements, including the Company’s stock, premises and equipment, accrued interest receivable and payable and other assets and liabilities.

The fair value of a financial instrument is an amount at which the asset or obligation could be exchanged in a current transaction between willing parties, other than in a forced sale. Fair values are estimated at a specific point in time based on relevant market information and information about the financial instruments. Because no market value exists for a significant portion of the financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors.

The Company has used management’s best estimate of fair value based on the above assumptions. Thus the fair values presented may not be the amounts that could be realized in an immediate sale or settlement of the instrument. In addition, any income taxes or other expenses that would be incurred in an actual sale or settlement are not taken into consideration in the fair values presented.

27

The Company determines the fair value of its financial instruments based on the fair value hierarchy established under ASC 820-10, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the financial instrument’s fair value measurement in its entirety. There are three levels of inputs that may be used to measure fair value. The three levels of inputs of the valuation hierarchy are defined below:

Level 1

Quoted prices (unadjusted) in active markets for identical assets and liabilities for the instrument or security to be valued. Level 1 assets include marketable equity securities as well as U.S. Treasury securities that are highly liquid and are actively traded in over-the-counter markets.

Level 2

Observable inputs other than Level 1 quoted prices, such as quoted prices for similar assets and liabilities in active markets, quoted prices in markets that are not active, or model-based valuation techniques for which all significant assumptions are derived principally from or corroborated by observable market data. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments and derivative contracts whose value is determined by using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. U.S. Government sponsored agency securities, mortgage-backed securities issued by U.S. Government sponsored enterprises and agencies, obligations of states and municipalities, collateralized mortgage obligations issued by U.S. Government sponsored enterprises, and mortgage loans held-for-sale are generally included in this category. Certain private equity investments that invest in publicly traded companies are also considered Level 2 assets.

Level 3 Unobservable inputs that are supported by little, if any, market activity for the asset or liability. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow models and similar techniques, and may also include the use of market prices of assets or liabilities that are not directly comparable to the subject asset or liability. These methods of valuation may result in a significant portion of the fair value being derived from unobservable assumptions that reflect The Company’s own estimates for assumptions that market participants would use in pricing the asset or liability. This category primarily includes collateral-dependent impaired loans, other real estate, certain equity investments, and certain private equity investments.

Cash and due from banks - The carrying amounts of these financial instruments approximate fair value. All mature within 90 days and present no anticipated credit concerns.

Interest-bearing cash - The carrying amounts of these financial instruments approximate fair value.

Securities available-for-sale and securities held-to-maturity – Fair values for investment securities available-for-sale and securities held to maturity are based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions.

FHLB stock and other non-marketable equity securities - The carrying amounts of these financial instruments approximate fair value.

Mortgage loans held for sale – Mortgage loans held for sale are recorded at either fair value, if elected, or the lower of cost or fair value on an individual loan basis. Origination fees and costs for loans held for sale recorded at lower of cost or market are capitalized in the basis of the loan and are included in the calculation of realized gains and losses upon sale. Origination fees and costs are recognized in earnings at the time of origination for loans held for sale that are recorded at fair value. Fair value is derived from observable current market prices, when available, and includes loan servicing value. When observable market prices are not available, the Company uses judgment and estimates fair value using internal models, in which the Company uses its best estimates of assumptions it believes would be used by market participants in estimating fair value. Mortgage loans held for sale are classified within Level 2 of the valuation hierarchy.

Loans receivable - For variable rate loans that reprice frequently and have no significant change in credit risk, estimated fair values are based on carrying values and are classified as Level 2. Estimated fair values for certain mortgage loans, credit card loans, and other consumer loans are based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted for differences in loan characteristics and are classified as Level 2. Estimated fair values for commercial real estate and commercial loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality and are classified as Level 2. Estimated fair values on impaired loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable. Impaired loans not requiring a specific charge against the allowance represent loans for which the fair value of the expected repayments or collateral meet or exceed the recorded investment in the loan. Loans which are deemed to be impaired are primarily valued on a nonrecurring basis at the fair value of the underlying real estate collateral. Such fair values are obtained using independent appraisals, which the Company considers to be Level 3 inputs.

28

Mortgage servicing rights - The Company initially measures servicing assets and liabilities retained related to the sale of residential loans held for sale (“mortgage servicing rights”) at fair value, if practicable. For subsequent measurement purposes, the Company measures servicing assets and liabilities based on the lower of cost or market.

Deposits - The estimated fair value of demand deposits, savings accounts, and money market accounts is the amount payable on demand at the reporting date. The estimated fair value of fixed maturity certificates of deposits is estimated by discounting the future cash flows using rates currently offered for deposits of similar remaining maturities.

Bank-owned life insurance - The cash surrender value of bank owned life insurance policies held by the Bank approximates fair values of the policies.

Short-term borrowed funds - The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings maturing within 90 days approximate their fair values. Estimated fair values of other short-term borrowings are estimated using discounted cash flow analyses based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.

Long-term debt - The estimated fair values of the Company’s long-term debt are estimated using discounted cash flow analyses based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.

Derivative asset and liabilities – The primary use of derivative instruments are related to the mortgage banking activities of the Company. The Company’s wholesale mortgage banking subsidiary enters into interest rate lock commitments related to expected funding of residential mortgage loans at specified times in the future. Interest rate lock commitments that relate to the origination of mortgage loans that will be held-for-sale are considered derivative instruments under applicable accounting guidance. As such, the Company records its interest rate lock commitments and forward loan sales commitments at fair value, determined as the amount that would be required to settle each of these derivative financial instruments at the balance sheet date. In the normal course of business, the mortgage subsidiary enters into contractual interest rate lock commitments to extend credit, if approved, at a fixed interest rate and with fixed expiration dates. The commitments become effective when the borrowers “lock-in” a specified interest rate within the time frames established by the mortgage banking subsidiary. Market risk arises if interest rates move adversely between the time of the interest rate lock by the borrower and the sale date of the loan to an investor. To mitigate the effect of the interest rate risk inherent in providing interest rate lock commitments to borrowers, the mortgage banking subsidiary enters into best efforts forward sales contracts with third party investors. The forward sales contracts lock in a price for the sale of loans similar to the specific interest rate lock commitments. Both the interest rate lock commitments to the borrowers and the forward sales contracts to the investors that extend through to the date the loan may close are derivatives, and accordingly, are marked to fair value through earnings. In estimating the fair value of an interest rate lock commitment, the Company assigns a probability to the interest rate lock commitment based on an expectation that it will be exercised and the loan will be funded. The fair value of the interest rate lock commitment is derived from the fair value of related mortgage loans, which is based on observable market data and includes the expected net future cash flows related to servicing of the loans. The fair value of the interest rate lock commitment is also derived from inputs that include guarantee fees negotiated with the agencies and private investors, buy-up and buy-down values provided by the agencies and private investors, and interest rate spreads for the difference between retail and wholesale mortgage rates. Management also applies fall-out ratio assumptions for those interest rate lock commitments for which we do not close a mortgage loan. The fall-out ratio assumptions are based on the mortgage subsidiary’s historical experience, conversion ratios for similar loan commitments, and market conditions. While fall-out tendencies are not exact predictions of which loans will or will not close, historical performance review of loan-level data provides the basis for determining the appropriate fall out ratios. In addition, on a periodic basis, the mortgage banking subsidiary performs analysis of actual rate lock fall-out experience to determine the sensitivity of the mortgage pipeline to interest rate changes from the date of the commitment through loan origination, and then period end, using applicable published mortgage-backed investment security prices. The expected fall-out ratios (or conversely the “pull-through” percentages) are applied to the determined fair value of the unclosed mortgage pipeline in accordance with GAAP. Changes to the fair value of interest rate lock commitments are recognized based on interest rate changes, changes in the probability that the commitment will be exercised, and the passage of time. The fair value of the forward sales contracts to investors considers the market price movement of the same type of security between the trade date and the balance sheet date. These instruments are defined as Level 2 within the valuation hierarchy.

29

Derivative instruments not related to mortgage banking activities, including financial futures commitments and interest rate swap agreements that do not satisfy the hedge accounting requirements are recorded at fair value and are classified with resultant changes in fair value being recognized in noninterest income in the consolidated statement of operations. Fair values for these instruments are based on quoted market prices, when available. As such, the fair value adjustments for derivatives with fair values based on quoted market prices are recurring Level 1.

Commitments to extend credit – The carrying amounts of these commitments are considered to be a reasonable estimate of fair value because the commitments underlying interest rates are based upon current market rates.

Off-balance sheet financial instruments – Contract values and fair values for off-balance sheet, credit-related financial instruments are based on estimated fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and counterparties’ credit standing.

30

The carrying amount and estimated fair value of the Company’s financial instruments at June 30, 2014 and December 31, 2013 are as follows:

	At June 30, 2014
	Carrying		Fair Value
	Amount		Total		Level 1		Level 2		Level 3
Financial assets:	(In thousands)
Cash and due from banks	$	9,560		9,560		9,560		—		—
Interest-bearing cash		17,132		17,132		17,132		—		—
Securities available-for-sale		207,301		207,301		—		207,301		—
Securities held-to-maturity		24,254		25,910		—		15,954		9,956
Federal Home Loan Bank stock		4,730		4,730		—		—		4,730
Other investments		1,944		1,944		—		—		1,944
Derivative assets		2,255		2,255		—		2,255		—
Loans held for sale		47,859		48,442		—		48,442		—
Loans receivable, net		605,295		620,770		—		595,920		24,850
Mortgage servicing rights		9,843		15,238		—		15,238		—
Cash value life insurance		21,228		21,228		—		21,228		—
Financial liabilities:
Deposits		779,536		778,482		—		778,482		—
Short-term borrowed funds		35,300		35,300		—		35,300		—
Long-term debt		69,390		65,549		—		65,549		—
Derivative liabilities		730		730		21		709		—

	At December 31, 2013
	Carrying		Fair Value
	Amount		Total		Level 1		Level 2		Level 3
Financial assets:	(In thousands)
Cash and due from banks	$	4,489		4,489		4,489		—		—
Interest-bearing cash		34,176		34,176		34,176		—		—
Securities available-for-sale		167,535		167,535		—		167,535		—
Securities held-to-maturity		24,554		23,547		—		15,177		8,370
Federal Home Loan Bank stock		4,103		4,103		—		—		4,103
Other investments		1,858		1,858		—		—		1,858
Derivative assets		1,412		1,412		428		984		—
Loans held for sale		36,897		37,041		—		37,041		—
Loans receivable, net		535,221		524,142		—		497,045		27,097
Mortgage servicing rights		10,908		17,718		—		17,718		—
Cash value life insurance		20,910		20,910		—		20,910		—
Financial liabilities:
Deposits		697,581		696,674		—		696,674		—
Short-term borrowed funds		10,300		10,300		—		10,300		—
Long-term debt		74,540		71,462		—		71,462		—
Derivative liabilities		55		55		—		55		—

31

	At June 30, 2014				At December 31, 2013
	Notional		Estimated		Notional		Estimated
	Amount		Fair Value		Amount		Fair Value
Off-Balance Sheet Financial Instruments:	(In thousands)
Commitments to extend credit	$	46,788		—		38,595		—
Standby letters of credit		720		—		526		—
Derivative assets:
Mortgage loan interest rate lock commitments		159,113		1,672		—		—
Mortgage loan forward sales commitments		25,855		583		20,516		106
Mortgage-backed securities forward sales commitments		—		—		88,000		878
Interest rate swaps		—		—		20,000		428
Derivative liabilities:
Mortgage-backed securities forward sales commitments		139,000		709		—		—
Mortgage loan interest rate lock commitments		—		—		103,614		55
Interest rate swaps		10,000		21		—		—

In determining appropriate levels, the Company performs a detailed analysis of the assets and liabilities that are subject to fair value disclosures. At each reporting period, all assets and liabilities for which the fair value measurement is based on significant unobservable inputs are classified as Level 3.

Following is a description of valuation methodologies used for assets recorded at fair value on a recurring and non-recurring basis.

Investment Securities Available-for-Sale

Measurement is on a recurring basis upon quoted market prices, if available. If quoted market prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for prepayment assumptions, projected credit losses, and liquidity. At June 30, 2014 and December 31, 2013, the Company’s investment securities available-for-sale are recurring Level 2.

Mortgage Loans Held for Sale

Mortgage loans held for sale are recorded at either fair value, if elected, or the lower of cost or fair value on an individual loan basis. Origination fees and costs for loans held for sale recorded at lower of cost or market are capitalized in the basis of the loan and are included in the calculation of realized gains and losses upon sale. Origination fees and costs are recognized in earnings at the time of origination for loans held for sale that are recorded at fair value. Fair value is derived from observable current market prices, when available, and includes loan servicing value. When observable market prices are not available, the Company uses judgment and estimates fair value using internal models, in which the Company uses its best estimates of assumptions it believes would be used by market participants in estimating fair value. Mortgage loans held for sale are classified within Level 2 of the valuation hierarchy.

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Derivative Assets and Liabilities

The primary use of derivative instruments is related to the mortgage banking activities of the Company. The Company’s wholesale mortgage banking subsidiary enters into interest rate lock commitments related to expected funding of residential mortgage loans at specified times in the future. Interest rate lock commitments that relate to the origination of mortgage loans that will be held-for-sale are considered derivative instruments under applicable accounting guidance. As such, the Company records its interest rate lock commitments and forward loan sales commitments at fair value, determined as the amount that would be required to settle each of these derivative financial instruments at the balance sheet date. In the normal course of business, the mortgage subsidiary enters into contractual interest rate lock commitments to extend credit, if approved, at a fixed interest rate and with fixed expiration dates. The commitments become effective when the borrowers “lock-in” a specified interest rate within the time frames established by the mortgage banking subsidiary. Market risk arises if interest rates move adversely between the time of the interest rate lock by the borrower and the sale date of the loan to an investor. To mitigate the effect of the interest rate risk inherent in providing interest rate lock commitments to borrowers, the mortgage banking subsidiary enters into best efforts forward sales contracts with third party investors. The forward sales contracts lock in a price for the sale of loans similar to the specific interest rate lock commitments. Both the interest rate lock commitments to the borrowers and the forward sales contracts to the investors that extend through to the date the loan may close are derivatives, and accordingly, are marked to fair value through earnings. In estimating the fair value of an interest rate lock commitment, the Company assigns a probability to the interest rate lock commitment based on an expectation that it will be exercised and the loan will be funded. The fair value of the interest rate lock commitment is derived from the fair value of related mortgage loans, which is based on observable market data and includes the expected net future cash flows related to servicing of the loans. The fair value of the interest rate lock commitment is also derived from inputs that include guarantee fees negotiated with the agencies and private investors, buy-up and buy-down values provided by the agencies and private investors, and interest rate spreads for the difference between retail and wholesale mortgage rates. Management also applies fall-out ratio assumptions for those interest rate lock commitments for which we do not close a mortgage loan. The fall-out ratio assumptions are based on the mortgage subsidiary’s historical experience, conversion ratios for similar loan commitments, and market conditions. While fall-out tendencies are not exact predictions of which loans will or will not close, historical performance review of loan-level data provides the basis for determining the appropriate fall-out ratios. In addition, on a periodic basis, the mortgage banking subsidiary performs analysis of actual rate lock fall-out experience to determine the sensitivity of the mortgage pipeline to interest rate changes from the date of the commitment through loan origination, and then period end, using applicable published mortgage-backed investment security prices. The expected fall-out ratios (or conversely the “pull-through” percentages) are applied to the determined fair value of the unclosed mortgage pipeline in accordance with GAAP. Changes to the fair value of interest rate lock commitments are recognized based on interest rate changes, changes in the probability that the commitment will be exercised, and the passage of time. The fair value of the forward sales contracts to investors considers the market price movement of the same type of security between the trade date and the balance sheet date. These instruments are defined as Level 2 within the valuation hierarchy.

Derivative instruments not related to mortgage banking activities, including financial futures commitments and interest rate swap agreements that do not satisfy the hedge accounting requirements are recorded at fair value and are classified with resultant changes in fair value being recognized in noninterest income in the consolidated statement of operations. Fair values for these instruments are based on quoted market prices, when available. As such, the fair value adjustments for derivatives with fair values based on quoted market prices in an active market are recurring Level 1.

Impaired Loans

Loans that are considered impaired are recorded at fair value on a nonrecurring basis. Once a loan is considered impaired, the fair value is measured using one of several methods, including collateral liquidation value, market value of similar debt and discounted cash flows. Those impaired loans not requiring a specific charge against the allowance represent loans for which the fair value of the expected repayments or collateral meet or exceed the recorded investment in the loan. Loans which are deemed to be impaired are primarily valued on a nonrecurring basis at the fair value of the underlying real estate collateral. Such fair values are obtained using independent appraisals, which the Company considers to be Level 3 inputs.

Other Real Estate Owned (“OREO”)

OREO is carried at the lower of carrying value or fair value on a nonrecurring basis.  Fair value is based upon independent appraisals or management’s estimation of the collateral and is considered a Level 3 measurement.  When the OREO value is based upon a current appraisal or when a current appraisal is not available or there is estimated further impairment, the measurement is considered a Level 3 measurement.

Brokered Deposits

Fair value accounting was elected for a brokered deposit entered into during 2013 as part of the Company’s interest rate risk management. Fair value of the brokered deposit is derived from quoted market prices. If quoted market prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for prepayment assumptions, projected credit losses, and liquidity.

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Assets and liabilities measured at fair value on a recurring basis are as follows as of June 30, 2014 and December 31, 2013:

	Quoted market price		Significant other		Significant other
	in active markets		observable inputs		unobservable inputs
	(Level 1)		(Level 2)		(Level 3)
	(In thousands)
June 30, 2014
Available-for-sale investment securities:
Municipal securities	$	—		36,097		—
US government agencies		—		4,921		—
Collateralized loan obligations		—		9,696		—
Mortgage-backed securities:
Agency		—		104,142		—
Non-agency		—		52,445		—
Loans held for sale		—		48,442		—
Derivative assets:
Mortgage loan interest rate lock commitments		—		1,672		—
Mortgage loan forward sales commitments		—		583		—
Brokered deposits		—		4,957		—
Derivative liabilities:
Mortgage-backed securities forward sales commitments		—		709
Interest rate swaps		21		—		—
Total	$	21		263,664		—
December 31, 2013
Available-for-sale investment securities:
Municipal securities	$	—		38,499		—
US government agencies		—		5,175		—
Mortgage-backed securities:
Agency		—		69,929		—
Non-agency		—		53,932		—
Loans held for sale		—		37,041		—
Derivative assets:
Mortgage loan forward sales commitments		—		106		—
Mortgage-backed securities forward sales commitments		—		878		—
Interest rate swaps		428		—		—
Brokered deposits		—		4,948		—
Derivative liabilities:
Mortgage loan interest rate lock commitments		—		55		—
Total	$	428		210,563		—

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Assets measured at fair value on a nonrecurring basis are as follows as of June 30, 2014 and December 31, 2013:

	Quoted market price		Significant other		Significant other
	in active markets		observable inputs		unobservable inputs
	(Level 1)		(Level 2)		(Level 3)
	(In thousands)
June 30, 2014
Impaired loans:
Loans secured by real estate:
One-to-four family	$	—		—		5,997
Commercial real estate		—		—		16,024
Construction and development		—		—		581
Consumer loans		—		—		20
Commercial business loans		—		—		2,228
Real estate owned:
One-to-four family		—		—		521
Commercial real estate		—		—		1,498
Construction and development		—		—		3,636
Total	$	—		—		30,505
December 31, 2013
Impaired loans:
Loans secured by real estate:
One-to-four family	$	—		—		6,117
Home equity		—		—		125
Commercial real estate		—		—		16,953
Construction and development		—		—		1,328
Consumer loans		—		—		20
Commercial business loans		—		—		2,554
Real estate owned:
One-to-four family		—		—		959
Commercial real estate		—		—		1,781
Construction and development		—		—		3,533
Total	$	—		—		33,370

For Level 3 assets and liabilities measured at fair value on a recurring or nonrecurring basis as of June 30, 2014 and December 31, 2013, the significant unobservable inputs used in the fair value measurements were as follows:

	June 30, 2014 and December 31, 2013
		Significant	Significant Unobservable
	Valuation Technique	Observable Inputs	Inputs
Impaired Loans	Appraisal Value	Appraisals and or sales of	Appraisals discounted 10% to 20% for
		comparable properties	sales commissions and other holding costs
Real estate owned	Appraisal Value/	Appraisals and or sales of	Appraisals discounted 10% to 20% for
	Comparison Sales/	comparable properties	sales commissions and other holding costs
	Other estimates

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NOTE 8 - EARNINGS PER SHARE

Basic earnings per share are calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding plus the weighted average number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued. Diluted earnings per share include the effects of outstanding stock options and restricted stock issued by the Company, if dilutive. The number of additional shares is calculated by assuming that outstanding stock options were exercised and that the proceeds from such exercises and vesting were used to acquire shares of common stock at the average market price during the reporting period.

As stated in Note 1, on January 15, 2014, the Board of Directors of the Company declared a two-for-one stock split to stockholders of record dated February 10, 2014, payable on February 28, 2014. All share, earnings per share, and per share data have been retroactively adjusted to reflect this stock split for all periods presented in accordance with GAAP.

The following is a summary of the reconciliation of weighted average shares outstanding for the three and six months ended June 30, 2014 and 2013:

	For the Three Months Ended June 30,
	2014				2013
	Basic		Diluted		Basic		Diluted
Weighted average shares outstanding		3,881,115		3,881,115		3,832,043		3,832,043
Effect of dilutive securities		—		70,363		—		103,837
Weighted average shares outstanding		3,881,115		3,951,478		3,832,043		3,935,880

	For the Six Months Ended June 30,
	2014				2013
	Basic		Diluted		Basic		Diluted
Weighted average shares outstanding		3,866,353		3,866,353		3,829,130		3,829,130
Effect of dilutive securities		—		63,595		—		96,790
Weighted average shares outstanding		3,866,353		3,929,948		3,829,130		3,925,920

NOTE 9 – SUPPLEMENTAL SEGMENT INFORMATION

The Company has three reportable segments: community banking, wholesale mortgage banking (“mortgage banking”) and other. The community banking segment provides traditional banking services offered through CresCom Bank. The mortgage banking segment provides mortgage loan origination and servicing offered through Crescent Mortgage. The other segment provides managerial and operational support to the other business segments through Carolina Services and Carolina Financial.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on net income.

The Company accounts for intersegment revenues and expenses as if the revenue/expense transactions were generated to third parties, that is, at current market prices.

The Company’s reportable segments are strategic business units that offer different products and services. They are managed separately because each segment has different types and levels of credit and interest rate risk.

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The following tables present selected financial information for the Company’s reportable business segments for the three months and six months ended June 30, 2014 and 2013:

	Community			Mortgage
For the Three Months Ended June 30, 2014	Banking			Banking		Other			Eliminations			Total
	(In thousands)
Interest income	$	8,429			274		4			36			8,743
Interest expense		1,286			—		135			—			1,421
Net interest income (expense)		7,143			274		(131	)		36			7,322
Provision for loan losses		(10	)		10		—			—			—
Noninterest income from external customers		958			4,482		9			—			5,449
Intersegment noninterest income		—			23		1,510			(1,533	)		—
Noninterest expense		4,267			3,553		1,671			—			9,491
Intersegment noninterest expense		1,270			240		—			(1,510	)		—
Income (loss) before income taxes		2,574			976		(283	)		13			3,280
Income tax expense (benefit)		766			365		(105	)		5			1,031
Net income (loss)	$	1,808			611		(178	)		8			2,249
	Community			Mortgage
For the Three Months Ended June 30, 2013	Banking			Banking		Other			Eliminations			Total
	(In thousands)
Interest income	$	7,874			383		5			19			8,281
Interest expense		1,252			33		186			(3	)		1,468
Net interest income (expense)		6,622			350		(181	)		22			6,813
Provision for loan losses		(700	)		—		—			—			(700	)
Noninterest income from external customers		908			11,877		20			—			12,805
Intersegment noninterest income		25			150		1,453			(1,628	)		—
Noninterest expense		4,035			6,131		1,439			—			11,605
Intersegment noninterest expense		1,213			265		—			(1,478	)		—
Income (loss) before income taxes		3,007			5,981		(147	)		(128	)		8,713
Income tax expense (benefit)		1,053			2,232		(61	)		(44	)		3,180
Net income (loss)	$	1,954			3,749		(86	)		(84	)		5,533

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	Community			Mortgage
For the Six Months Ended June 30, 2014	Banking			Banking		Other			Eliminations			Total
	(In thousands)
Interest income	$	16,521			559		8			67			17,155
Interest expense		2,483			—		269			—			2,752
Net interest income (expense)		14,038			559		(261	)		67			14,403
Provision for loan losses		(10	)		10		—			—			—
Noninterest income from external customers		1,873			8,926		19			—			10,818
Intersegment noninterest income		—			95		3,020			(3,115	)		—
Noninterest expense		8,381			7,399		3,318			—			19,098
Intersegment noninterest expense		2,540			480		—			(3,020	)		—
Income (loss) before income taxes		5,000			1,691		(540	)		(28	)		6,123
Income tax expense (benefit)		1,501			639		(199	)		(11	)		1,930
Net income (loss)	$	3,499			1,052		(341	)		(17	)		4,193
	Community			Mortgage
For the Six Months Ended June 30, 2013	Banking			Banking		Other			Eliminations			Total
	(In thousands)
Interest income	$	15,690			776		9			35			16,510
Interest expense		2,527			80		367			(4	)		2,970
Net interest income (expense)		13,163			696		(358	)		39			13,540
Provision for loan losses		(700	)		—		—			—			(700	)
Noninterest income from external customers		1,613			24,532		43			—			26,188
Intersegment noninterest income		67			277		2,906			(3,250	)		—
Noninterest expense		9,428			12,454		2,746			—			24,628
Intersegment noninterest expense		2,426			547		—			(2,973	)		—
Income (loss) before income taxes		3,689			12,504		(155	)		(238	)		15,800
Income tax expense (benefit)		1,329			4,662		(65	)		(82	)		5,844
Net income (loss)	$	2,360			7,842		(90	)		(156	)		9,956

The following tables present selected financial information for the Company’s reportable business segments for June 30, 2014 and December 31, 2013:

	Community		Mortgage
At June 30, 2014	Banking		Banking		Other		Eliminations			Total
	(In thousands)
Assets	$	978,629		66,123		105,836		(162,176	)		988,412
Loans receivable, net		606,732		4,380		—		(5,817	)		605,295
Loans held for sale		3,119		44,740		—		—			47,859
Deposits		780,473		—		—		(937	)		779,536
Borrowed funds		89,226		5,020		15,465		(5,021	)		104,690
	Community		Mortgage
At December 31, 2013	Banking		Banking		Other		Eliminations			Total
	(In thousands)
Assets	$	873,104		61,846		101,497		(154,863	)		881,584
Loans receivable, net		532,616		3,374		—		(769	)		535,221
Loans held for sale		753		36,144		—		—			36,897
Deposits		701,110		—		—		(3,529	)		697,581
Borrowed funds		69,376		—		15,465		(1	)		84,840

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NOTE 10 – SUBSEQUENT EVENT

On August 6, 2014, the Bank entered into a definitive agreement with First Community Bank, Bluefield, Virginia, to acquire 13 branches with total deposits of approximately $230 million and approximately $67 million in loans. Three of the offices are in South Carolina and operate under the name “People’s Community Bank” and 10 are in southeastern North Carolina. The deposit premium will be approximately 3.11% of deposits acquired. The transaction, which is subject to regulatory approval and other customary conditions, is expected to close in late 2014 or early 2015.

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

The following discussion reviews our results of operations for the three and six months ended June 30, 2014 as compared to the three and six months ended June 30, 2013 and assesses our financial condition as of June 30, 2014 as compared to December 31, 2013. You should read the following discussion and analysis in conjunction with the accompanying consolidated financial statements and the related notes and the consolidated financial statements and the related notes for the year ended December 31, 2013 included in our Form 10 for that period. Results for the three and six months ended June 30, 2014 are not necessarily indicative of the results for the year ending December 31, 2014 or any future period.

Cautionary Warning Regarding Forward-Looking Statements

This report, including information included or incorporated by reference in this report, contains statements which constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may relate to our financial condition, results of operation, plans, objectives, or future performance. These statements are based on many assumptions and estimates and are not guarantees of future performance. Our actual results may differ materially from those anticipated in any forward-looking statements, as they will depend on many factors about which we are unsure, including many factors which are beyond our control. The words “may,” “would,” “could,” “should,” “will,” “expect,” “anticipate,” “predict,” “project,” “potential,” “believe,” “continue,” “assume,” “intend,” “plan,” and “estimate,” as well as similar expressions, are meant to identify such forward-looking statements. Potential risks and uncertainties that could cause our actual results to differ from those anticipated in any forward-looking statements include, but are not limited to, the following:

● our ability to maintain appropriate levels of capital and to comply with our capital ratio requirements;

● examinations by our regulatory authorities, including the possibility that the regulatory authorities may, among other things, require us to increase our allowance for loan losses or write-down assets or otherwise impose restrictions or conditions on our operations, including, but not limited to, our ability to acquire or be acquired;

● changes in economic conditions, either nationally or regionally and especially in our primary service areas, resulting in, among other things, a deterioration in credit quality;

● an increase in interest rates, resulting in a decline in our mortgage production and a decrease in the profitability of our mortgage banking operations;

● credit losses as a result of declining real estate values, increasing interest rates, increasing unemployment, changes in payment behavior or other factors;

● credit losses because our loans are concentrated by loan type, industry segment, borrower type, or location of the borrower or collateral;

● changes in the amount of our loan portfolio collateralized by real estate and weaknesses in the South Carolina and national real estate markets;

● the rate of delinquencies and amount of loans charged-off;

● the adequacy of the level of our allowance for loan losses and the amount of loan loss provisions required in future periods;

● the rate of loan growth in recent or future years;

● our ability to attract and retain key personnel;

● our ability to retain our existing customers, including our deposit relationships;

● significant increases in competitive pressure in the banking and financial services industries;

● adverse changes in asset quality and resulting credit risk-related losses and expenses;

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● changes in the interest rate environment which could reduce anticipated or actual margins;

● changes in political conditions or the legislative or regulatory environment, including, but not limited to, the Dodd-Frank Wall Street Reform and Consumer Protection Act and regulations adopted thereunder, changes in federal or state tax laws or interpretations thereof by taxing authorities and other governmental initiatives affecting the banking and financial service industries;

● inflation;

● increased funding costs due to market illiquidity, increased competition for funding, or increased regulatory requirements with regard to funding;

● our business continuity plans or data security systems could prove to be inadequate, resulting in a material interruption in, or disruption to, business and a negative impact on results of operations;

● changes in deposit flows;

● changes in technology;

● changes in monetary and tax policies;

● changes in accounting policies, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board and the Financial Accounting Standards Board;

● loss of consumer confidence and economic disruptions resulting from terrorist activities or other military actions;

● our expectations regarding our operating revenues, expenses, effective tax rates and other results of operations;

● the general decline in the real estate and lending markets;

● our anticipated capital expenditures and our estimates regarding our capital requirements;

● our liquidity and working capital requirements;

● competitive pressures among depository and other financial institutions;

● the growth rates of the markets in which we compete;

● our anticipated strategies for growth and sources of new operating revenues;

● our current and future products, services, applications and functionality and plans to promote them;

● our ability to retain and hire necessary employees and to staff our operations appropriately;

● management compensation and the methodology for its determination;

● our ability to compete in our industry and innovation by our competitors;

● our ability to stay abreast of new or modified laws and regulations that currently apply or become applicable to our business;

● increased cybersecurity risk, including potential business disruptions or financial losses; and

● estimates and estimate methodologies used in preparing our consolidated financial statements and determining option exercise prices.

If any of these risks or uncertainties materialize, or if any of the assumptions underlying such forward-looking statements proves to be incorrect, our results could differ materially from those expressed, implied or projected by us in such forward-looking statements. For information with respect to factors that could cause actual results to differ from the expectations stated in the forward-looking statements, see “Risk Factors” under Part I, Item 1A of the Form 10. We urge investors to consider all of these factors carefully in evaluating the forward-looking statements contained in this Quarterly Report on Form 10-Q. We make these forward-looking statements as of the date of this document and we do not intend, and assume no obligation, to update the forward-looking statements or to update the reasons why actual results could differ from those expressed, implied or projected by us in the forward-looking statements.

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Overview

Carolina Financial Corporation is a Delaware corporation and bank holding company that was incorporated in 1996 and began operations in 1997. It operates principally through CresCom Bank, a South Carolina state-chartered bank. Unless the context indicates otherwise, all references in this report to “we,” “us,” and “our” refer to Carolina Financial Corporation and our wholly owned subsidiary, CresCom Bank, except that in the discussion of our capital stock and related matters, these terms refer solely to Carolina Financial Corporation and not to the Bank. All references to the “Bank” refer to CresCom Bank only.

Our subsidiaries provide a full range of financial services designed to meet the financial needs of our customers, including:

● Commercial and retail banking;

● Mortgage banking; and

● Cash management

Through the Bank, the Company currently conducts business through 13 bank branches located in the following counties in South Carolina: Charleston (4), Dorchester (3), Berkeley (1) Georgetown (1), and Horry (4). Effective July 31, 2011, the Company merged its wholly-owned subsidiary bank, Community FirstBank of Charleston, with and into its other wholly-owned subsidiary bank, Crescent Bank. In conjunction with this internal reorganization, Crescent Bank’s name was changed to CresCom Bank, and Crescent Mortgage Company, formerly a wholly-owned subsidiary of Community FirstBank of Charleston, became a wholly-owned subsidiary of CresCom Bank. Crescent Mortgage Company is located in Atlanta, Georgia, and is qualified to originate loans in 46 states.

At June 30, 2014, we had total assets of $988.4 million, an increase of $106.8 million, from total assets of $881.6 million at December 31, 2013. The largest components of our total assets are loans receivable and securities which were $605.3 million and $231.6 million, respectively at June 30, 2014. Comparatively, our loans receivable and securities totaled $535.2 million and $192.1 million, respectively, at December 31, 2013. At June 30, 2014 loans held for sale were $47.9 million compared to $36.9 million as of December 31, 2013. Our liabilities and stockholders’ equity at June 30, 2014 totaled $899.1 million and $89.3 million, respectively, compared to liabilities of $799.4 million and stockholders’ equity of $82.2 million at December 31, 2013. The principal components of our liabilities are deposits, which were $779.5 million and $697.6 million at June 30, 2014 and December 31, 2013, respectively.

Like most community banks, we derive a significant portion of our income from interest we receive on our loans and investments. Our primary source of funds for making these loans and investments is our deposits, both interest-bearing and noninterest-bearing. Consequently, one of the key measures of our success is our amount of net interest income, or the difference between the income on our interest-earning assets, such as loans and investments, and the expense on our interest-bearing liabilities, such as deposits and borrowed funds. In order to maximize our net interest income, we must not only manage the volume of these balance sheet items, but also the yields that we earn on our interest-earning assets and the rates that we pay on interest-bearing liabilities.

Of course, there are risks inherent in all loans, so we maintain an allowance for loan losses to absorb probable losses on existing loans that may become uncollectible. We establish and maintain this allowance by charging a provision for loan losses against our operating earnings.

In addition to earning interest on our loans and investments, we derive a substantial portion of our income from Crescent Mortgage Company through net gain on sale of loans held for sale as well as servicing income. We also earn income through fees that we charge to our customers. Likewise, we incur other operating expenses as well. We describe the various components of this noninterest income, as well as our noninterest expense, within the “Results of Operations” within the MD&A.

Economic conditions, competition, and the monetary and fiscal policies of the federal government significantly affect most financial institutions, including the Bank. Lending and deposit activities and fee income generation are influenced by levels of business spending and investment, consumer income, consumer spending and savings, capital market activities, and competition among financial institutions as well as client preferences, interest rate conditions and prevailing market rates on competing products in our market areas.

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Recent Events

On January 15, 2014, the Board of Directors of the Company declared a two-for-one stock split to stockholders of record as of February 10, 2014, payable on February 28, 2014. All share, earnings per share, and per share data have been retroactively adjusted in the consolidated balance sheets, earnings per share, and stockholders’ equity disclosures to reflect the stock split for all periods presented in accordance with GAAP.

On June 16, 2014, the Company declared a $0.05 per share dividend to stockholders of record on September 17, 2014, payable October 8, 2014.

On August 6, 2014, the Bank entered into a definitive agreement with First Community Bank, Bluefield, Virginia to acquire 13 branches with total deposits of approximately $230 million and approximately $67 million in loans. Three of the offices are in South Carolina and operate under the name “People’s Community Bank” and 10 are in southeastern North Carolina. The deposit premium will be approximately 3.11% of deposits acquired. The transaction, which is subject to regulatory approval and other customary conditions, is expected to close in late 2014 or early 2015.

Critical Accounting Policies

We have adopted various accounting policies that govern the application of accounting principles generally accepted in the United States and with general practices within the banking industry in the preparation of our financial statements. Our significant accounting policies are described in the notes to our consolidated financial statements in this report.

Certain accounting policies involve significant judgments and assumptions by us that have a material impact on the carrying value of certain assets and liabilities. We consider these accounting policies to be critical accounting policies. The judgment and assumptions we use are based on historical experience and other factors, which we believe to be reasonable under the circumstances. Because of the nature of the judgment and assumptions we make, actual results could differ from these judgments and estimates that could have a material impact on the carrying values of our assets and liabilities and our results of operations.

We believe the allowance for loan losses is the critical accounting policy that requires the most significant judgment and estimates used in preparation of our consolidated financial statements. Some of the more critical judgments supporting the amount of our allowance for loan losses include judgments about the credit worthiness of borrowers, the estimated value of the underlying collateral, the assumptions about cash flow, determination of loss factors for estimating credit losses, the impact of current events, and conditions, and other factors impacting the level of probable inherent losses. Under different conditions or using different assumptions, the actual amount of credit losses incurred by us may be different from management’s estimates provided in our consolidated financial statements. Refer to the portion of this discussion that addresses our allowance for loan losses for a more complete discussion of our processes and methodology for determining our allowance for loan losses.

The evaluation and recognition of other-than-temporary impairment, or OTTI, on certain investments including our private label mortgage-backed securities and trust preferred securities requires significant judgment and estimates. Some of the more critical judgments supporting the evaluation of OTTI include projected cash flows including prepayment assumptions, default rates and severities of losses on the underlying collateral within the security. Under different conditions or utilizing different assumptions, the actual OTTI realized by us may be different from the actual amounts recognized in our consolidated financial statements.

The determination of fair value related to derivatives of the Company requires significant judgment and estimates. The primary uses of derivative instruments are related to the mortgage banking activities of the Company. As such, the Company holds derivative instruments, which consist of rate lock agreements related to expected funding of fixed-rate mortgage loans to customers (“interest rate lock commitments”) and forward commitments to sell mortgage-backed securities and individual fixed-rate mortgage loans (“forward commitments”). The Company’s objective in obtaining the forward commitments is to mitigate the interest rate risk associated with the interest rate lock commitments and the mortgage loans that are held for sale. Derivatives related to these commitments are recorded as either a derivative asset or a derivative liability in the balance sheet and are measured at fair value. Both the interest rate lock commitments and the forward commitments are reported at fair value, with adjustments recorded in current period earnings in net gain on sale of loans held for sale within the noninterest income section of the consolidated statements of operations.

42

Derivative instruments not related to mortgage banking activities, including interest rate swap agreements, that do not satisfy the hedge accounting requirements, are recorded at fair value and changes in fair value are recognized in noninterest income in the consolidated statements of operations.

The establishment of the mortgage repurchases reserves related to various representations and warranties that reflect management’s estimate of losses require significant judgment and estimates. Some of the more critical factors that are incorporated into the estimation of the mortgage repurchase reserve include the defects on internal quality assurance, default expectations, historical investor repurchase demand and appeals success rates, reimbursement by correspondent and other third party originators, changes in regulatory framework regarding representations and warranties and projected loss severity. The Company establishes a reserve at the time loans are sold and continually updates the reserve estimate during the estimated loan life. To the extent that economic conditions and the housing market do not recover or future investor repurchase demand and appeals success rates differ from past experience, the Company could continue to have increased demands and increased loss severities on repurchases, causing future additions to the repurchase reserve. Refer to the “Mortgage Operations” within the MD&A for additional discussion.

Results of Operations

Summary

For the three months ended June 30, 2014, net income available to common stockholders was approximately $2.2 million, or $0.57 per diluted share, compared to net income available to common stockolders of $5.5 million, or $1.40 per diluted share, for the three months ended June 30, 2013. The $3.3 million decrease in net income from quarter to quarter resulted primarily from a $3.2 million decrease in income derived from our wholesale mortgage banking subsidiary.

For the six months ended June 30, 2014, net income available to common stockholders was approximately $4.2 million, or $1.07 per share diluted, compared to net income available to common stockholders of $10.0 million, or $2.53 per share diluted, for the six months ended June 30, 2013. The $5.8 million decrease in net income from period to period resulted primarily from a $6.8 million decrease in income derived from our wholesale mortgage banking subsidiary.

During the third quarter of 2013, mortgage interest rates began to rise and, as a result, mortgage loan production began to slow down. Rising interest rates significantly slowed the mortgage refinance activity in 2013 and has continued into 2014. As the overall mortgage originations volumes declined, there was a corresponding reduction in margins earned due to competitive pressures. For additional information regarding the effects of the wholesale mortgage banking subsidiary on net income, refer to Note 9 under Item 1 “Financial Statements”.

Net Interest Income and Margin

Net interest income is a significant component of our net income. Net interest income is the difference between income earned on interest-earning assets and interest paid on interest-bearing liabilities. Net interest income is determined by the yields earned on interest-earning assets, rates paid on interest-bearing liabilities, the relative balances of interest-earning assets and interest-bearing liabilities, the degree of mismatch, and the maturity and repricing characteristics of interest-earning assets and interest-bearing liabilities.

Net interest income increased to $7.3 million for the three months ended June 30, 2014 from $6.8 million for the three months ended June 30, 2013. During the six months ended June 30, 2014, net interest income increased to $14.4 million compared to $13.5 million for the six months ended June 30, 2013. The increase in net interest income for the three and six months ended June 30, 2014 as compared to the three and six months ended June 30, 2013 is a result of the increase in average earning assets as well as a decrease in rates paid on interest-bearing liabilities and a shift to lower cost funding sources.

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The Company is focused on continuing to improve the utilization of its capital. To accomplish this, the Bank has incorporated various strategies to increase high quality loan portfolios. Accordingly, the increase in average earnings assets for the three and six months ended June 30, 2014 is primarily the result of increased balances of loans receivable. The growth in average loan balances were primarily the result of the following:

● Residential mortgage – during the third quarter of 2013 continuing into 2014, the Company has hired several retail residential mortgage loan officers in its Charleston and Myrtle Beach markets of South Carolina. In addition to selling a portion of its production, the Company has retained a portion of the mortgage production. Due to the emphasis, gross loans receivable within the one-to-four family portfolio have increased $16.7 million, excluding loans acquired in the St. George branch acquisition described below, since December 31, 2013.

● Commercial lending – during 2014, the Company expanded its commercial lending team by hiring additional loan officers in its Charleston and Myrtle Beach markets of South Carolina. As a result, gross loans receivable within the commercial real estate and construction and development portfolios have grown $11.8 million and $10.6 million, respectively, since December 31, 2013.

● Syndicated loans – the Charleston and Myrtle Beach markets of South Carolina have provided limited opportunities for the Bank to develop a Commercial and Industrial (“C&I”) loan portfolio. The Company’s primary markets are generally concentrated in real estate lending. However, in order to diversify our lending portfolio, the Company began a syndicated loan program in 2014 to purchase C&I loans to retain in the loan portfolio. These loans typically have terms of seven years and are tied to a floating rate index such as libor or prime. To effectively manage this new line of lending, the Company hired an experienced senior lending executive with relevant experience to lead and manage this area of the loan portfolio and engaged a consulting firm that specializes in syndicated loans. The Company expects to continue to grow this portion of the loan portfolio throughout 2014. As of June 30, 2014, the syndicated loan portfolio was $29.1 million and is grouped within commercial business loans. As of June 30, 2014, the Moody’s weighted average credit facility rating of the syndicated loan portfolio was Ba3, with no credit rated less than B2.

● Acquisition of St. George branch – The Bank acquired $11.2 million in loans related to this first quarter branch acquisition. Approximately $ 9.2 million of these loans were one-to-four family secured loans with the remaining loans consisting of consumer and commercial real estate loans.

Partially offsetting the increase in average earning assets is the decrease in average balance of loans held for sale as the Company experienced a significant decrease in the level of mortgage originations during the latter half of 2013 continuing into 2014. For the six months ended June 30, 2014, mortgage originations were $449.8 million, a decrease of 54.8%, as compared to originations of $995.8 million for the six months ended June 30, 2013.

The decrease in rates paid on interest-bearing liabilities is based on the continued historically low interest rates that have positively impacted our ability to reduce funding cost while the shift to lower cost funding sources relates to the sustained efforts of the Company to grow checking, savings, and money market accounts. During the first half of 2014, the Company experienced significant growth in checking, savings, and money market accounts which typically yield less than other forms of interest-bearing liabilities. Specifically, checking, savings and money market balances increased $26.6 million during the second quarter of 2014 and $23.3 million during the first quarter of 2014 for year to date growth of $49.9 million. This growth includes $11.3 million of deposits acquired in the St. George branch acquisition during the first quarter of 2014. In addition to the aforementioned growth, the Company established a deposit relationship with its mortgage subservicing provider during the third quarter of 2013 whereby the subservicer deposited impound escrow funds with the Company. The impound escrow funds had average balances of $41.8 million and $38.6 million for the three and six months ended June 30, 2014, respectively, and are included in interest-bearing demand accounts within the yield rate tables below. As this relationship was established during the third quarter of 2013, there were no funds outstanding for the three or six months ended June 30, 2013.

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The following table sets forth information related to our average balance sheet, average yields on assets, and average costs of liabilities for the periods indicated (dollars in thousands). We derived these yields or costs by dividing income or expense by the average balance of the corresponding assets or liabilities. We derived average balances from the daily balances throughout the periods indicated. During the same periods, we had no securities purchased with agreements to resell. All investments were owned at an original maturity of over one year. Nonaccrual loans are included in earning assets in the following tables. Loan yields reflect the negative impact on our earnings of loans on nonaccrual status. The net of capitalized loan costs and fees, which are considered immaterial, are amortized into interest income on loans.

	For The Three Months Ended June 30,
	2014								2013
				Interest		Average						Interest		Average
	Average			Paid/		Yield/			Average			Paid/		Yield/
	Balance			Earned		Rate			Balance			Earned		Rate
Interest-earning assets:
Loans held for sale	$	28,466			251		3.45	%		89,042			754		3.31	%
Loans receivable, net (1)		581,267			6,906		4.71	%		499,181			6,251		4.97	%
Interest-bearing cash		24,063			14		0.23	%		44,289			29		0.26	%
Securities available for sale		199,634			1,352		2.69	%		166,587			1,122		2.67	%
Securities held to maturity		24,238			174		2.85	%		9,169			83		3.59	%
Federal Home Loan Bank stock		3,625			35		3.86	%		4,106			31		3.02	%
Other investments		1,925			11		2.27	%		1,731			11		2.52	%
Total interest-earning assets		863,218			8,743		4.02	%		814,105			8,281		4.04	%
Non-earning assets		84,949								73,932
Total assets	$	948,167								888,037
Interest-bearing liabilities:
Demand accounts		104,140			46		0.18	%		44,525			22		0.20	%
Money market accounts		213,576			132		0.25	%		210,519			231		0.44	%
Savings accounts		24,812			11		0.18	%		13,206			12		0.36	%
Certificates of deposit		312,809			709		0.90	%		315,046			577		0.73	%
Short-term borrowed funds		11,523			11		0.38	%		20,812			80		1.53	%
Long-term debt		69,571			512		2.92	%		79,762			546		2.72	%
Total interest-bearing liabilities		736,431			1,421		0.77	%		683,870			1,468		0.85	%
Noninterest-bearing deposits		112,021								107,475
Other liabilities		12,587								21,781
Stockholders’ equity		87,128								74,911
Total liabilities and
Stockholders’ equity	$	948,167								888,037
Net interest spread							3.25	%							3.19	%
Net interest margin		3.37	%							3.32	%
Net interest margin (tax equivalent) (2)		3.45	%							3.37	%
Net interest income					7,322								6,813

(1) Average balances of loans include nonaccrual loans.

(2) The tax equivalent net interest margin reflects tax-exempt income on a tax-equivalent basis.

Our net interest margin was 3.37%, or 3.45% on a tax equivalent basis, for the three month period ended June 30, 2014 compared to 3.32%, or 3.37% on a tax equivalent basis, for the three month period ended June 30, 2013. The increase in our net margin primarily resulted from a decrease in the rate paid on interest-bearing liabilities, an increase in average non-interest bearing depoists, as well as the shift to lower cost deposits.

Our net interest spread was 3.25% for the three months ended June 30, 2014 as compared to 3.19% for the same period in 2013. The net interest spread is the difference between the yield we earn on our interest-earning assets and the rate we pay on our interest-bearing liabilities. The six basis point increase in net interest spread is a result of the 8 basis point reduction in rate paid on our interest-bearing liabilities offset by a two basis point reduction in yield on interest-earning assets.

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	For The Six Months Ended June,
	2014								2013
				Interest		Average						Interest		Average
	Average			Paid/		Yield/			Average			Paid/		Yield/
	Balance			Earned		Rate			Balance			Earned		Rate
Interest-earning assets:
Loans held for sale	$	27,062			517		3.80	%		97,985			1,672		3.39	%
Loans receivable, net (1)		567,379			13,473		4.79	%		500,940			12,412		5.00	%
Interest-bearing cash		22,536			28		0.25	%		28,775			47		0.33	%
Securities available for sale		190,852			2,705		2.86	%		163,592			2,183		2.69	%
Securities held to maturity		24,282			342		2.84	%		9,120			125		2.76	%
Federal Home Loan Bank stock		3,699			69		7.46	%		4,786			60		5.01	%
Other investments		1,911			21		2.22	%		1,730			11		1.28	%
Total interest-earning assets		837,721			17,155		4.13	%		806,928			16,510		4.13	%
Non-earning assets		83,729								73,997
Total assets	$	921,450								880,925
Interest-bearing liabilities:
Demand accounts		94,131			86		0.18	%		44,137			49		0.22	%
Money market accounts		215,722			268		0.25	%		209,842			500		0.48	%
Savings accounts		22,784			21		0.19	%		12,299			23		0.38	%
Certificates of deposit		302,585			1,338		0.89	%		306,681			1,136		0.75	%
Short-term borrowed funds		8,086			16		0.40	%		26,519			194		1.48	%
Long-term debt		71,436			1,023		2.89	%		87,505			1,068		2.46	%
Total interest-bearing liabilities		714,744			2,752		0.78	%		686,983			2,970		0.87	%
Noninterest-bearing deposits		107,814								99,687
Other liabilities		13,563								20,676
Stockholders’ equity		85,329								73,579
Total liabilities and
Stockholders’ equity	$	921,450								880,925
Net interest spread							3.35	%							3.26	%
Net interest margin		3.47	%							3.38	%
Net interest margin (tax equivalent) (2)		3.56	%							3.42	%
Net interest income					14,403								13,540

(1) Average balances of loans include nonaccrual loans.

(2) The tax equivalent net interest margin reflects tax-exempt income on a tax-equivalent basis.

Our net interest margin was 3.47%, or 3.56% on a tax equivalent basis, for the six months ended June 30, 2014 compared to 3.38%, or 3.42% on a tax equivalent basis, for the six months ended June 30, 2013. The increase in our net margin primarily resulted from a decrease in the rate paid on interest-bearing liabilities, an increase in average non-interest bearing depoists, as well as the shift to lower cost deposits.

Our net interest spread was 3.35% for the six months ended June 30, 2014 as compared to 3.26% for the same period in 2013. The net interest spread is the difference between the yield we earn on our interest-earning assets and the rate we pay on our interest-bearing liabilities. The nine basis point increase in net interest spread is a result of the nine basis point reduction in rate paid on our interest-bearing liabilities.

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Provision for Loan Loss

We have established an allowance for loan losses through a provision for loan losses charged as an expense on our consolidated statements of operations. We review our loan portfolio periodically to evaluate our outstanding loans and to measure both the performance of the portfolio and the adequacy of the allowance for loan losses. Please see the discussion below under “Allowance for Loan Losses” for a description of the factors we consider in determining the amount of the provision we expense each period to maintain this allowance.

Following is a summary of the activity in the allowance for loan losses during the periods ended June 30, 2014 and 2013.

	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2014			2013			2014			2013
	(Dollars in thousands)
Balance, beginning of period	$	8,401			9,638			8,091			9,520
Provision for loan losses		—			(700	)		—			(700	)
Loan charge-offs		(36	)		(771	)		(284	)		(899	)
Loan recoveries		297			236			855			482
Balance, end of period	$	8,662			8,403			8,662			8,403

During the three and six months ended June 30, 2014, there was no provision for loan loss recorded. During the three months and six months ended June 30, 2013, a negative provision of $700,000 was recorded. The negative provision was recorded during 2013 was primarily related to the removal of a specific reserve on an impaired loan relationship. The specific reserve was removed during the quarterly impairment analysis performed where it was determined that the net realizable value of the collateral was greater than the amortized cost of the loan; therefore, no specific reserve was warranted.

Provision expense is recorded based on our assessment of general loan loss risk as well as asset quality and is driven by the determination of the allowance for loan losses. The allowance for loan losses is management’s estimate of probable credit losses inherent in the loan portfolio at the balance sheet date. Management determines the allowance based on an ongoing evaluation. Estimating the amount of the allowance for loan losses requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on non-impaired loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change. For further discussion regarding the calculation of the allowance, see the “Allowance for Loan Losses” discussion below.

Noninterest Income and Expense

Noninterest income provides us with additional revenues that are significant sources of income. The major components of noninterest income for the three and six months ended June 30, 2014 and 2013 are presented below:

	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2014			2013			2014			2013
	(In thousands)
Noninterest income:
Net gain on sale of loans held for sale	$	3,426			10,199			5,880			21,549
Deposit service charges		517			371			948			689
Net loss on extinguishment of debt		(31	)		(19	)		(31	)		(19	)
Net gain (loss) on sale of securities		164			(62	)		480			(46	)
Fair value adjustments on interest rate swaps		(263	)		263			(518	)		263
Net gain on sale of servicing assets		—			—			775			—
Net increase in cash value life insurance		187			—			373			1
Mortgage loan servicing income		1,254			1,836			2,531			3,328
Other		195			217			380			423
Total noninterest income	$	5,449			12,805			10,818			26,188

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Noninterest income decreased $7.4 million to $5.4 million for the three months ended June 30, 2014 from $12.8 million for the three months ended June 30, 2013. For the six months ended June 30, 2014, noninterest income decreased $15.4 million to $10.8 million from $26.2 million for the six months ended June 30, 2013. The decrease in noninterest income for the three and six months ended June 30, 2014 as compared to the three and six months ended June 30, 2013 primarily relates to the decrease in the gain on sale of loans sold from our mortgage banking subsidiary. During the third quarter of 2013, mortgage interest rates began to rise and, as a result, mortgage loan production began to slow down. Rising interest rates significantly slowed the mortgage refinancing activity, and, as the overall mortgage originations volumes declined, there was a corresponding reduction in margins earned due to competitive pressures. Mortgage loan originations decreased 54.8% to $449.8 million for the six months ended June 30, 2014 compared to originations of $995.8 million for the six months ended June 30, 2013.

Partially offsetting the overall decrease in noninterest income was an increase in the net gain on sale of servicing asset. During the first quarter of 2014, the Company sold $147.7 million in unpaid principal balance of mortgage servicing rights for a net gain of $776,000. There were no servicing rights sold during three or six months ended June 30, 2013. The sale of mortgage servicing rights during the first quarter of 2014 as well as a sale of servicing rights during the second half of 2013 of $972.9 million of unpaid principal balance of mortgage servicing rights resulted in a corresponding decrease of mortgage loan servicing income for the three and six months ended June 30, 2014 as compared to the prior periods.

During the three and six months ended June 30, 2014, the Company recognized net gains on sale of available-for-sale securities of $164,000 and $480,000, respectively, compared to losses on sale of securities during the three and six months ended June 30, 2013 of $62,000 and $46,000, respectively. The fair value adjustment on interest rate swaps was a reduction of noninterest income of $263,000 and $518,000 for the three and six months ended, June 30, 2014, respectively, compared to an increase of noninterest income of $263,000 for the three and six months ended June 30, 2013. The change in fair value adjustment on interest rate swaps relate to the change in interest rates from period to period.

Net increase in cash value of life insurance was $187,000 and $0 for the three months ended June 30, 2014 and 2013, respectively. Net increase in the cash value of life insurance was $373,000 and $1,000 for the six months ended June 30, 2014 and 2013, respectively. The increase in cash surrender value relates to the increase of $20.1 million in cash value life insurance that was purchased at the end of the first quarter in 2013 and was outstanding for all of the three and six month periods ended June 30, 2014. During 2013, the Company purchased and invested in bank owned life insurance policies on certain employees with an initial cash surrender value of $20.0 million through two insurance carriers. As of June 30, 2014, cash value of life insurance was $21.2 million compared to $20.9 million at December 31, 2013.

The following table sets forth for the periods indicated the primary components of noninterest expense:

	For the Three Months				For the Six Months
	Ended June 30,				Ended June 30,
	2014		2013		2014		2013
	(In thousands)
Noninterest expense:
Salaries and employee benefits	$	5,515		6,248		10,859		12,708
Occupancy and equipment		1,051		847		2,035		1,661
Marketing and public relations		297		263		571		498
FDIC insurance		136		157		263		413
Legal expense		191		290		361		440
Other real estate expense, net		60		335		307		411
Mortgage subservicing expense		326		469		689		935
Amortization of mortgage servicing rights		441		738		913		1,331
Settlement of employment agreements		—		119		—		1,902
Other		1,474		2,139		3,100		4,329
Total noninterest expense	$	9,491		11,605		19,098		24,628

Noninterest expense represents the largest expense category for the Company. Noninterest expense decreased $2.1 million to $9.5 for the three months ended June 30, 2014 from $11.6 million for the three months ended June 30, 2013. For the six months ended June 30, 2014, noninterest expense decreased $5.5 million to $19.1 million from $24.6 million for the six months ended June 30, 2013. The decrease in noninterest expense for the three and six months ended June 30, 2014 compared to the prior periods are primarily a result of the decrease in salaries and employee benefits, a reduction in mortgage subservicing and amortization expense, the reduction in settlement of employment agreements and other.

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The decrease in salaries and benefits and noninterest expense – other is a result of the reduced mortgage loan originations during the three and six months ended June 30, 2014 as compared to the prior periods, and the related compensation paid on and expenses releated to those originations. As previously discussed, mortgage loan originations decreased 54.8% to $449.8 million for the six months ended June 30, 2014 compared to originations of $995.8 million for the six months ended June 30, 2013.

Mortgage subservicing expense and amortization of mortgage subservicing rights decreased during the three and six months ended June 30, 2014 as compared to the three and six months ended June 30, 2013 due to the sale of $147.7 million in unpaid principal balance of mortgage servicing rights during the first quarter of 2014 and the sale of $972.9 million in unpaid principal balance of mortgage servicing rights during the second half of 2013.

The decrease in expense in settlement of employment agreements related to the Company settling employment agreements with two former retired executive officers during 2013. All amounts related to the settlement of these agreements were expensed during 2013. As such, there were no additional expenses related to these contracts during the three or six months ended June 30, 2014.

Income Tax Expense

Our effective tax rate decreased to 31.4% for three month period ended June 30, 2014, compared to 36.5% for the three month period ended June 30, 2013. For the six months ended June 30, 2014, our effective tax rate decreased to 31.5% compared to 37.0% for the six months ended June 30, 2013. The lower effective tax rate in 2014 is primarily attributable to the increase in balances of tax-exempt municipal securities as well as the increase in average balances of bank-owned life insurance during the second half of 2013 and into 2014.

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Balance Sheet Review

Investment Securities

Our primary objective in managing the investment portfolio is to maintain a portfolio of high quality, highly liquid investments yielding competitive returns. We are required under federal regulations to maintain adequate liquidity to ensure safe and sound operations. We maintain investment balances based on a continuing assessment of cash flows, the level of current and expected loan production, current interest rate risk strategies and the assessment of the potential future direction of market interest rate changes. Investment securities differ in terms of default, interest rate, liquidity and expected rate of return risk.

At June 30, 2014, the $231.5 million in our investment securities portfolio, excluding FHLB stock and other investments, represented approximately 23.4% of our assets. Our available-for-sale investment portfolio included US agency securities, municipal securities, collateralized loan obligations and mortgage-backed securities (agency and non-agency) with a fair value of $207.3 million and an amortized cost of $202.6 million for a net unrealized gain of $4.7 million. Our held-to-maturity portfolio included municipal securities and asset-backed securities, made up of pooled trust preferred securities, with a fair value of $25.9 million and a cost of $24.3 million for a net unrealized gain of $1.6 million.

As securities are purchased, they are designated as held-to-maturity or available-for-sale based upon our intent, which incorporates liquidity needs, interest rate expectations, asset/liability management strategies, and capital requirements. We do not currently hold, nor have we ever held, any securities that are designated as trading securities.

The following table summarizes issuer concentrations of agency mortgage-backed securities for which aggregate fair values exceed 10% of stockholders’ equity at June 30, 2014:

	Aggregate		Aggregate		Fair Value
	Amortized		Fair		as a % of
Issuer	Cost		Value		Stockholders’ Equity
	(Dollars in thousands)
GNMA	$	30,410		31,337		35.10	%
FNMA		45,599		46,841		52.47	%
FHLMC		25,071		25,964		29.08	%
	$	101,080		104,142		116.65	%

See Note 2 “Securities” in the “Notes to Consolidated Financial Statements” herein for additional disclosures related to the Company’s evaluation of securities for OTTI.

Loans by Type

Since loans typically provide higher interest yields than other types of interest-earning assets, a substantial percentage of our earning assets are invested in our loan portfolio. Before allowance for loan losses, loans outstanding at June 30, 2014 and December 2013 were $614.0 million and $543.3 million, respectively.

Our loan portfolio consists primarily of loans secured by real estate mortgages. As of June 30, 2014, our loan portfolio included $554.1 million, or 90.2%, of loans secured by real estate before allowance for loan losses. As of December 31, 2013, our loan portfolio included $515.1 million, or 94.8%, of loans secured by real estate before allowance for loan losses. Most of our real estate loans are secured by residential or commercial property. We obtain a security interest in real estate, in addition to any other available collateral. This collateral is taken to increase the likelihood of the ultimate repayment of the loan. Generally, we limit the loan-to-value ratio on loans to coincide with the appropriate regulatory guidelines. The Bank’s primary markets are generally concentrated in real estate lending. In order to diversify our lending portfolio, the Bank began a syndicated loan program during 2014 with balances of $29.1 million as of June 30, 2014 and are grouped within commercial business loans in the table below. As of June 30, 2014, the Moody’s weighted average credit facility rating of the syndicated loan portfolio was Ba3, with no credit rated less than B2. We attempt to maintain a relatively diversified loan portfolio to help reduce the risk inherent in concentration in certain types of collateral and business types.

50

As shown in the table below, loans prior to the allowance for loan losses increased $70.7 million to $614.0 million at June 30, 2014 from $543.3 million at December 31, 2013. The increase in loans receivable primarily relates to the Bank’s focus on growing residential mortgage, commercial lending, and syndicated loans, as well as $11.2 million of loans acquired related to the acquisition of the St. George branch. See additional discussion in “Results of Operations – Net Interest Income and Margin”.

The following table summarizes loans by type and percent of total at the end of the periods indicated:

	At June 30,					At December 31,
	2014					2013
			% of Total					% of Total
	Amount		Loans			Amount		Loans
	(Dollars in thousands)
Loans secured by real estate:
One-to-four family	$	209,878		32.62	%		184,210		32.60	%
Home equity		23,529		3.66	%		23,661		4.19	%
Commercial real estate		264,911		41.18	%		253,035		44.79	%
Construction and development		77,629		12.07	%		67,056		11.87	%
Consumer loans		3,132		0.49	%		3,060		0.54	%
Commercial business loans		64,187		9.98	%		33,938		6.01	%
Total gross loans receivable		643,266		100.00	%		564,960		100.00	%
Less:
Undisbursed loans in process		29,053					21,550
Allowance for loan losses		8,662					8,091
Deferred fees, net		256					98
Total loans receivable, net	$	605,295					535,221

Maturities and Sensitivity of Loans to Changes in Interest Rates

The information in the following table is based on the contractual maturities of individual loans, including loans which may be subject to renewal at their contractual maturity. Renewal of such loans is subject to review and credit approval, as well as modification of terms upon maturity. Actual repayments of loans may differ from the maturities reflected below because borrowers have the right to prepay obligations with or without prepayment penalties.

The following table summarizes the loan maturity distribution by type and related interest rate characteristics.

	At June 30, 2014
			After one
	One Year		but within		After five
	or Less		five years		years		Total
	(In thousands)
Loans secured by real estate:
One-to-four family	$	41,223		62,698		105,957		209,878
Home equity		6,347		1,222		15,960		23,529
Commercial real estate		32,764		97,537		134,610		264,911
Construction and development		10,795		21,852		44,982		77,629
Consumer loans		549		1,226		1,357		3,132
Commercial business loans		2,779		18,217		43,191		64,187
Total gross loans receivable		94,457		202,752		346,057		643,266
Less:
Undisbursed loans in process		2,210		13,791		13,052		29,053
Deferred fees, net		33		74		149		256
Total loans receivable	$	92,214		188,887		332,856		613,957
Loans maturing - after one year
Variable rate loans							$	310,505
Fixed rate loans								211,238
							$	521,743

51

Nonperforming and Problem Assets

Nonperforming assets include loans on which interest is not being accrued, accruing loans that are 90 days or more delinquent and foreclosed property. Foreclosed property consists of real estate and other assets acquired as a result of a borrower’s loan default. Generally, a loan is placed on nonaccrual status when it becomes 90 days past due as to principal or interest, or when we believe, after considering economic and business conditions and collection efforts, that the borrower’s financial condition is such that collection of the loan is doubtful. A payment of interest on a loan that is classified as nonaccrual is recognized as a reduction of principal when received. In general, a nonaccrual loan may be placed back onto accruing status once the borrower has made a minimum of six consecutive payments in accordance with the loan terms. Further, the borrower must show capacity to continue performing into the future prior to restoration of accrual status. As of June 30, 2014 and December 31 2013, we had no loans 90 days past due and still accruing.

Troubled Debt Restructurings (“TDRs”)

The Company designates loan modifications as TDRs when, for economic or legal reasons related to the borrower’s financial difficulties, it grants a concession to the borrower that it would not otherwise consider. Loans on nonaccrual status at the date of modification are initially classified as nonaccrual TDRs. Loans on accruing status at the date of modification are initially classified as accruing TDRs at the date of modification, if the note is reasonably assured of repayment and performance is in accordance with its modified terms. Such loans may be designated as nonaccrual loans subsequent to the modification date if reasonable doubt exists as to the collection of interest or principal under the restructuring agreement. Nonaccrual TDRs are returned to accrual status when there is economic substance to the restructuring, there is well documented credit evaluation of the borrower’s financial condition, the remaining balance is reasonably assured of repayment in accordance with its modified terms, and the borrower has demonstrated repayment performance in accordance with the modified terms for a reasonable period of time, generally a minimum of six months.

The following table summarizes nonperforming and problem assets at the end of the periods indicated.

	At June 30,		At December 31,
	2014		2013
	(In thousands)
Loans receivable:
Nonaccrual loans-renegotiated loans	$	6,537		7,641
Nonaccrual loans-other		2,856		3,438
Accruing loans 90 days or more delinquent		—		—
Real estate acquired through foreclosure, net		5,655		6,273
Total Non-Performing Assets	$	15,048		17,352
Problem Assets not included in Non-Performing Assets-
Accruing renegotiated loans outstanding	$	15,488		16,367

At June 30, 2014, nonperforming assets were $15.0 million, or 1.52% of total assets. Comparatively, nonperforming assets were $17.4 million, or 2.0% of total assets, at December 31, 2013. Nonperforming loans were 1.53% and 2.0% of loans outstanding at June 30, 2014 and December 31, 2013, respectively. Nonaccrual loans decreased $1.7 million to $9.4 million at June 30, 2014 from $11.1 million at December 31, 2013.

Potential problem loans, which are not included in nonperforming loans, amounted to approximately $15.5 million, or 2.5% of loans outstanding prior to the allowance for loan losses, at June 30, 2014, compared to $16.4 million, or 3.0% of loans outstanding prior to the allowance for loan losses, at December 31, 2013. Potential problem loans represent those loans with a well-defined weakness and where information about possible credit problems of borrowers has caused management to have serious doubts about the borrower’s ability to comply with present repayment terms.

Substantially all of the nonaccrual loans, accruing loans 90 days or more delinquent and accruing renegotiated loans at June 30, 2014 and December 31, 2013 are collateralized by real estate. The Bank utilizes third party appraisers to determine the fair value of collateral dependent loans. Our current loan and appraisal policies require the Bank to obtain updated appraisals on an annual basis, either through a new external appraisal or an internal appraisal evaluation. Impaired loans are individually reviewed on a quarterly basis to determine the level of impairment. We typically charge-off a portion or create a specific reserve for impaired loans when we do not expect repayment to occur as agreed upon under the original terms of the loan agreement. Management believes based on information known and available currently, the probable losses related to problem assets are adequately reserved in the allowance for loan losses.

52

Although nonperforming assets remain at a historically elevated level, credit quality indicators generally showed improvement during 2013 and continuing into 2014 as the Company experienced reduced loan migrations to nonaccrual status, lower loss severity on individual problem assets and a reduction in nonperforming assets. The Company believes this general trend in reduced loans migrating into nonaccrual status is an indication of improving credit quality in the Company’s overall loan portfolio and a leading indicator of reduced credit losses going forward. Nevertheless, the Company can make no assurances that nonperforming assets will continue to improve in future periods. The Company continues to monitor the loan portfolio and foreclosed assets and is continually working to reduce its problem assets.

Allowance for Loan Losses

The allowance for loan losses is management’s estimate of probable credit losses inherent in the loan portfolio at the balance sheet date. Management determines the allowance based on an ongoing evaluation. Estimating the amount of the allowance for loan losses requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on non-impaired loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change. The allowance consists of specific and general components.

The general component covers nonimpaired loans and is based on historical loss experience adjusted for current factors. The historical loss experience is determined by major loan category and is based on the actual loss history trends for the previous 12 quarters. The actual loss experience is supplemented with internal and external qualitative factors as considered necessary at each period and given the facts at the time. These qualitative factors adjust the 12 quarter historical loss rate to recognize the most recent loss results and changes in the economic conditions to ensure the estimated losses in the portfolio are recognized in the period incurred and that the allowance at each balance sheet date is adequate and appropriate in accordance with GAAP. Qualitative factors include consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries for the most recent twelve quarters; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations.

The specific component relates to loans that are individually classified as 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. These analyses involve a high degree of judgment in estimating the amount of loss associated with specific loans, including estimating the amount and timing of future cash flows and collateral values. Impaired loans are evaluated for impairment using the discounted cash flow methodology or based on the net realizable value of the underlying collateral. Impaired loans are individually reviewed on a quarterly basis to determine the level of impairment. See additional discussion in section “Nonperforming and Problem Assets” of the MD&A.

While management uses the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the valuations or, if required by regulators, based upon information available to them at the time of their examinations. Such adjustments to original estimates, as necessary, are made in the period in which these factors and other relevant considerations indicate that loss levels may vary from previous estimates. To the extent actual outcomes differ from management’s estimates, additional provisions for loan losses could be required that could adversely affect the Bank’s earnings or financial position in future periods.

At June 30, 2014 and December 31, 2013, the allowance for loan losses was $8.7 million and $8.1 million, respectively, or 1.41% and 1.49% of outstanding loans, respectively. There was no provision recorded for the three or six months ended June 30, 2014. During the three and six months ended June 30, 2013, the Company recorded a negative provision of $700,000 primarily due to the removal of a specific reserve on an impaired loan relationship. The specific reserve was removed during the quarterly impairment analysis performed where it was determined that the net realizable value of the collateral was greater than the amortized cost of the loan; therefore, management determined the reserve previously placed against this loan relationship should be reversed through a negative provision.

53

The following table summarizes the activity related to our allowance for loan losses for the three and six months ended June 30, 2014 and June 30, 2013.

	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2014			2013			2014			2013
	(Dollars in thousands)
Balance, beginning of period	$	8,401			9,638			8,091			9,520
Provision for loan losses		—			(700	)		—			(700	)
Loan charge-offs:
Loans secured by real estate:
One-to-four family		(36	)		(48	)		(73	)		(81	)
Home equity		—			(28	)		—			(28	)
Commercial real estate		—			(110	)		(28	)		(110	)
Construction and development		—			(248	)		(170	)		(310	)
Consumer loans		—			(1	)		(13	)		(34	)
Commercial business loans		—			(336	)		—			(336	)
Total loan charge-offs		(36	)		(771	)		(284	)		(899	)
Loan recoveries:
Loans secured by real estate:
One-to-four family		52			18			71			133
Home equity		—			—			—			—
Commercial real estate		—			21			—			73
Construction and development		2			72			329			79
Consumer loans		10			8			50			32
Commercial business loans		233			117			405			165
Total loan recoveries		297			236			855			482
Net loan (charge-offs) recoveries		261			(535	)		571			(417	)
Balance, end of period	$	8,662			8,403			8,662			8,403
Allowance for loan losses as a percentage of loans receivable, net (end of period)		1.41	%		1.64	%		1.41	%		1.64	%
Net charge-offs (recoveries) to average loans receivable (annualized)		-0.16	%		0.43	%		-0.20	%		0.17	%

54

Mortgage Operations

Mortgage Activities and Servicing

Our wholesale mortgage banking operations are conducted through our mortgage origination subsidiary, Crescent Mortgage Company. Mortgage activities involve the purchase of mortgage loans and table funded originations for the purpose of generating gains on sales of loans and fee income on the origination of loans. While the Company originates residential one-to-four family loans that are held in its loan portfolio, the majority of new loans are generally sold pursuant to secondary market guidelines through Crescent Mortgage Company. Generally, residential mortgage loans are sold and, depending on the pricing in the marketplace, servicing rights are either sold or retained. The level of loan sale activity and its contribution to the Company’s profitability depends on maintaining a sufficient volume of loan originations and margin. Changes in the level of interest rates and the local economy affect the volume of loans originated by the Company and the amount of loan sales and loan fees earned. Discussion related to the impact and changes within the mortgage operations are provided in “Results of Operations”. Additional segment information is provided in Note 9 “Supplemental Segment Information” to the consolidated financial statements.

Loan Servicing

We retain the rights to service a portion of the loans we sell on the secondary market, as part of our mortgage banking activities, for which we receive service fee income. These rights are known as mortgage servicing rights, or MSRs, where the owner of the MSR acts on behalf of the mortgage loan owner and has the contractual right to receive a stream of cash flows in exchange for performing specified mortgage servicing functions. These duties typically include, but are not limited to, performing loan administration, collection, and default activities, including the collection and remittance of loan payments, responding to customer inquiries, accounting for principal and interest, holding custodial (impound) funds for the payment of property taxes and insurance premiums, counseling delinquent mortgagors, modifying loans and supervising foreclosures and property dispositions. We subservice the duties and responsibilities obligated to the owner of the MSR to a third party provider for which we pay a fee.

At June 30, 2014, the Company was servicing $1.8 billion of loans for others, a decrease of $200 million from $2.0 billion at December 31, 2013. The decrease in loans serviced in the current year primarily relates to principal payments and a loan servicing sale where the Company sold $147.7 million in unpaid principal balance of mortgage servicing rights for a net gain of $775,000.

We recognize the rights to service mortgage loans for others as an asset. We initially record the MSR at fair value and subsequently account for the asset at lower of cost or market using the amortization method. Servicing assets are amortized in proportion to, and over the period of, the estimated net servicing income and are carried at amortized cost. A valuation is performed by an independent third party on a quarterly basis to assess the servicing assets for impairment based on the fair value at each reporting date. The fair value of servicing assets is determined by calculating the present value of the estimated net future cash flows consistent with contractually specified servicing fees. This valuation is performed on a disaggregated basis, based on loan type and year of production. Generally, loan servicing becomes more valuable when interest rates rise (as prepayments typically decrease) and less valuable when interest rates decline (as prepayments typically increase). As discussed in detail in notes to the consolidated financial statements, we use an appropriate weighted average constant prepayment rate, discount rate, and other defined assumptions to model the respective cash flows and determine the fair value of the servicing asset at each reporting date.

In the aggregate, the net servicing asset had a balance of $9.8 million and $10.9 million at June 30, 2014 and December 31, 2013, respectively. The economic estimated fair value of the mortgage servicing rights was $15.2 million and $17.7 million at June 30, 2014 and December 31, 2013, respectively. The amortization expense related to the mortgage servicing rights were $441,000 and $738,000 during the three months ended June 30, 2014 and 2013, respectively. For the six months ended June 30, 2014 and 2013, the amortization expense recorded was $913,000 and $1.3 million, respectively.

55

Below is a roll-forward of activity in the balance of the servicing assets for the three and six months ended June 30, 2014 and June 30, 2013.

	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2014			2013			2014			2013
	(In thousands)
MSR beginning balance	$	10,003			14,564			10,908			12,039
Amount capitalized		281			1,662			648			4,780
Amount sold		—			—			(800	)		—
Amount amortized		(441	)		(738	)		(913	)		(1,331	)
MSR ending balance	$	9,843			15,488			9,843			15,488

Losses on Mortgage Loans Previously Sold

Loans held for sale have primarily been fixed-rate single-family residential mortgage loans under contracts to be sold in the secondary market. In most cases, loans in this category are sold within 30 days of closing. Buyers generally have recourse to return a purchased loan to the Company under limited circumstances. Repurchases and losses on mortgage loans previously sold are recorded when the Company indemnifies or repurchases mortgage loans previously sold.  The representations and warranties in our loan sale agreements provide that we repurchase or indemnify the investors for losses or costs on loans we sell under certain limited conditions.  Some of these conditions include underwriting errors or omissions, fraud or material misstatements by the borrower in the loan application or invalid market value on the collateral property due to deficiencies in the appraisal.  In addition to these representations and warranties, our loan sale contracts define a condition in which the borrower defaults during a short period of time, typically 120 days to one year, as an early payment default, or EPD.  In the event of an EPD, we are required to return the premium paid by the investor for the loan as well as certain administrative fees, and in some cases repurchase the loan or indemnify the investor.  Because the level of mortgage loan repurchase losses depends upon economic factors, investor demand strategies and other external conditions that may change over the life of the underlying loans, the level of the liability for mortgage loan repurchase losses is difficult to estimate and requires considerable management judgment.

The following table demonstrates the activity for the mortgage repurchase reserve for the three and six months ended June 30, 2014 and June 30, 2013.

	For the Three Months						For the Six Months
	Ended June,						Ended June,
	2014			2013			2014			2013
	(In thousands)
Beginning Balance	$	5,871			5,443			6,108			4,882
Losses paid		(95	)		(210	)		(354	)		(341	)
Recoveries		7			—			29			—
Provision for buyback		(250	)		460			(250	)		1,152
Ending balance	$	5,533			5,693			5,533			5,693

For the three and six months ended June 30, 2014, the Company recorded a negative provision for mortgage repurchase reserve of $250,000. This compares to provision expense for mortgage repurchase reserve of $460,000 and $1.1 million for the three and six months ended June 30, 2013, respectively. The decline in the provision for mortgage loan repurchase losses is related to several factors. The Company sells mortgage loans to various third parties, including government-sponsored entities (“GSEs”), under contractual provisions that include various representations and warranties as previously stated. The Company establishes the reserve for mortgage loan repurchase losses based on a combination of factors, including estimated levels of defects on internal quality assurance, default expectations, historical investor repurchase demand and appeals success rates, reimbursement by correspondent and other third party originators, and projected loss severity. Prior to 2012, there was no expiration date related to representations and warranties as long as the loan sold to the investor was outstanding. As a result, the Company received loan repurchase requests years after the loan was originated and sold to various third parties. In the latter part of 2012, the regulatory framework for certain GSEs changed where, under certain circumstances, the loan repurchase risk was limited for production beginning in January 2013. In addition, in May 2014, additional regulatory changes further limited loan repurchase risk. As a result, the Company performed an analysis of its reserve for mortgage loan repurchase losses and, based on management’s judgment and interpretation of such regulatory changes, reduced the reserve by $250,000. Management will continue to monitor how the GSEs implement the regulatory changes and trends. If such trends continue to be favorable, there is a possibility that additional reductions in this reserve could occur in future periods.

56

Deposits

We provide a range of deposit services, including noninterest-bearing demand accounts, interest-bearing demand and savings accounts, money market accounts and time deposits. These accounts generally pay interest at rates established by management based on competitive market factors and management’s desire to increase or decrease certain types or maturities of deposits. Deposits continue to be our primary funding source. At June 30, 2014 deposits totaled $779.5 million, an increase of $82.0 million, or 11.7%, from deposits of $697.6 million at December 31, 2013. The increase in deposits is primarily related to $24.5 million of deposits acquired related to the acquisition of the St. George branch during the first quarter of 2014 as well as an increase in the number of deposit accounts and seasonality of our customer balances during the summer months.

Our retail deposits represented $649.5 million, or 83.3% of total deposits at June 30, 2014, while our out-of-market, or brokered deposits and institutional deposits, represented $130.0 million, or 16.7% of our total deposits. Our retail deposits represented $595.7 million, or 85.4% of total deposits at December 31, 2013, while our out-of-market, or brokered deposits and institutional deposits, represented $101.9 million, or 14.6% of our total deposits.

The following table shows the average balance amounts and the average rates paid on deposits held by us.

	For the Six Months
	Ended June,
	2014					2013
			Average					Average
	Average		Yield/			Average		Yield/
	Balance		Rate			Balance		Rate
	(In thousands)
Interest-bearing demand accounts	$	94,131		0.18	%		44,137		0.22	%
Money market accounts		215,722		0.25	%		209,842		0.48	%
Savings accounts		22,784		0.19	%		12,299		0.38	%
Certificates of deposit less than $100,000		207,069		0.92	%		213,279		0.77	%
Certificates of deposit of $100,000 or more		95,516		0.83	%		93,402		0.70	%
Total interest-bearing average deposits		635,222					572,959
Noninterest-bearing deposits		107,814					99,687
Total average deposits	$	743,036					672,646

The maturity distribution of our time deposits of $100,000 or more is as follows:

	At June 30,
	2014
	(In thousands)
Three months or less	$	20,862
Over three through six months		18,270
Over six through twelve months		5,925
Over twelve months		58,980
Total certificates of deposits	$	104,037

57

Liquidity

Liquidity represents the ability of a company to convert assets into cash or cash equivalents without significant loss, and the ability to raise additional funds by increasing liabilities. Liquidity management involves monitoring our sources and uses of funds in order to meet our day-to-day cash flow requirements while maximizing profits. Liquidity management is made more complicated because different balance sheet components are subject to varying degrees of management control. For example, the timing of maturities of our investment portfolio is fairly predictable and subject to a high degree of control at the time investment decisions are made. However, net deposit inflows and outflows are far less predictable and are not subject to the same degree of control.

The Company utilizes borrowing facilities in order to maintain adequate liquidity including: the FHLB of Atlanta advance window, the Federal Reserve Bank (“FRB”), and federal funds purchased. The Company also uses wholesale deposit products, including brokered deposits as well as national certificate of deposit services. Additionally, the Company has certain investment securities classified as available-for-sale that are carried at market value with changes in market value, net of tax, recorded through stockholders’ equity.

Lines of credit with the FHLB of Atlanta are based upon FHLB-approved percentages of Bank assets, but must be supported by appropriate collateral to be available. The Company has pledged first lien residential mortgage, second lien residential mortgage, residential home equity line of credit, commercial mortgage and multifamily mortgage portfolios under blanket lien agreements. At June 30, 2014, the Company had FHLB advances of $87.5 million outstanding with excess collateral pledged to the FHLB during those periods that would support additional borrowings of approximately $52.0 million.

Lines of credit with the FRB are based on collateral pledged. At June 30, 2014, the Company had lines available with the FRB for $60.3 million. At June 30, 2014, the Company had no FRB advances outstanding.

Capital Resources

The Company and the Bank are subject to numerous regulatory capital requirements administered by federal banking agencies. If these capital requirements are not met, regulators can initiate certain mandatory – and possibly additional discretionary – actions that, if undertaken, could affect operations. Under capital adequacy guidelines and the regulatory framework for corrective action, the Company and the Bank must meet certain capital guidelines, which involve quantitative measures of the Company’s and the Bank’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s and the Bank’s capital amounts and classification are subject to qualitative judgments by the regulators about components, risk weightings and certain other factors.

Quantitative measures set up by regulation to guarantee capital adequacy require the Company and the Bank to sustain minimum amounts and ratios of Tier 1 capital and total risk-based capital to risk-weighted assets and Tier 1 capital to total average assets. The Company and the Bank are required to maintain minimum Tier 1 capital and total risk-based capital to risk-weighted assets, and Tier 1 capital to total average assets of 4%, 8%, and 4%, respectively. To be considered “well capitalized”, the Company and the Bank must maintain at least Tier 1 capital and total risk-based capital to risk-weighted assets, and Tier 1 capital to total average assets of 6%, 10%, and 5%, respectively. As of June 30, 2014, the Company and the Bank are considered “well capitalized” under regulatory capital adequacy guidelines.

58

The actual capital amounts and ratios as well as minimum amounts for each regulatory defined category for the Company and the Bank at June 30, 2014 and December 31, 2013 are as follows:

						Required to be
						Categorized					Required to be
						Adequately					Categorized
	Actual					Capitalized					Well Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
						(Dollars in thousands)
June 30, 2014
Carolina Financial Corporation
Tier 1 capital (to risk weighted assets)	$	103,744		14.80	%		28,045		4.00	%		N/A		N/A
Total risk based capital (to risk weighted assets)		113,231		16.15	%		56,089		8.00	%		N/A		N/A
Tier 1 capital (to total average assets)		103,744		10.92	%		37,995		4.00	%		N/A		N/A
CresCom Bank
Tier 1 capital (to risk weighted assets)		102,168		14.61	%		27,973		4.00	%		41,960		6.00	%
Total risk based capital (to risk weighted assets)		111,655		15.97	%		55,946		8.00	%		69,933		10.00	%
Tier 1 capital (to total average assets)		102,168		10.78	%		37,914		4.00	%		47,392		5.00	%
December 31, 2013
Carolina Financial Corporation
Tier 1 capital (to risk weighted assets)	$	99,602		15.42	%		25,834		4.00	%		N/A		N/A
Total risk based capital (to risk weighted assets)		108,650		16.82	%		51,668		8.00	%		N/A		N/A
Tier 1 capital (to total average assets)		99,602		11.15	%		35,732		4.00	%		N/A		N/A
CresCom Bank
Tier 1 capital (to risk weighted assets)		98,301		15.26	%		25,763		4.00	%		38,645		6.00	%
Total risk based capital (to risk weighted assets)		107,327		16.66	%		51,526		8.00	%		64,408		10.00	%
Tier 1 capital (to total average assets)		98,301		11.01	%		35,706		4.00	%		44,632		5.00	%

In December 2010, the Basel Committee on Banking Supervision, or BCBS, an international forum for cooperation on banking supervisory matters, announced the “Basel III” capital standards, which substantially revised the existing capital requirements for banking organizations. Modest revisions were made in June 2011. The Basel III standards operate in conjunction with portions of standards previously released by the BCBS and commonly known as “Basel II” and “Basel 2.5.” On June 7, 2012, the Federal Reserve, the OCC, and the FDIC requested comment on these proposed rules that, taken together, would implement the Basel regulatory capital reforms through what we refer to herein as the “Basel III capital framework.”

On July 2, 2013, the Federal Reserve adopted a final rule for the Basel III capital framework and, on July 9, 2013, the OCC also adopted a final rule and the FDIC adopted the same provisions in the form of an “interim” final rule. The rule will apply to all national and state banks and savings associations and most bank holding companies and savings and loan holding companies, which we collectively refer to herein as “covered” banking organizations. Bank holding companies with less than $500 million in total consolidated assets are not subject to the final rule, nor are savings and loan holding companies substantially engaged in commercial activities or insurance underwriting. In certain respects, the rule imposes more stringent requirements on “advanced approaches” banking organizations—those organizations with $250 billion or more in total consolidated assets, $10 billion or more in total foreign exposures, or that have opted in to the Basel II capital regime. The requirements in the rule will begin to phase on January 1, 2014, for advanced approaches banking organizations, and on January 1, 2015, for other covered banking organizations. The requirements in the rule will be fully phased in by January 1, 2019. Management expects to comply with the final rules when issued and effective.

59

Market Risk Management and Interest Rate Risk

The effective management of market risk is essential to achieving the Company’s objectives. As a financial institution, the Company’s most significant market risk exposure is interest rate risk. The primary objective of managing interest rate risk is to minimize the effect that changes in interest rates have on net income. This is accomplished through active asset and liability management, which requires the strategic pricing of asset and liability accounts and management of appropriate maturity mixes of assets and liabilities. The expected result of these strategies is the development of appropriate maturity and re-pricing opportunities in those accounts to produce consistent net income during periods of changing interest rates. The Bank’s asset/liability management committee, or ALCO, monitors loan, investment and liability portfolios to ensure comprehensive management of interest rate risk. These portfolios are analyzed for proper fixed-rate and variable-rate mixes under various interest rate scenarios. The asset/liability management process is designed to achieve relatively stable net interest margins and assure liquidity by coordinating the volumes, maturities or re-pricing opportunities of interest-earning assets, deposits and borrowed funds. It is the responsibility of the ALCO to determine and achieve the most appropriate volume and mix of interest-earning assets and interest-bearing liabilities, as well as ensure an adequate level of liquidity and capital, within the context of corporate performance goals. The ALCO meets regularly to review the Company’s interest rate risk and liquidity positions in relation to present and prospective market and business conditions, and adopts funding and balance sheet management strategies that are intended to ensure that the potential impact on earnings and liquidity as a result of fluctuations in interest rates is within acceptable standards. The Board of Directors also sets policy guidelines and establishes long-term strategies with respect to interest rate risk exposure and liquidity.

The Company uses interest rate sensitivity analysis to measure the sensitivity of projected net interest income to changes in interest rates. Management monitors the Company’s interest sensitivity by means of a computer model that incorporates current volumes, average rates earned and paid, and scheduled maturities, payments of asset and liability portfolios, together with multiple scenarios of prepayments, repricing opportunities and anticipated volume growth. Interest rate sensitivity analysis shows the effect that the indicated changes in interest rates would have on net interest income as projected for the next 12 months under the current interest rate environment. The resulting change in net interest income reflects the level of sensitivity that net interest income has in relation to changing interest rates.

As of June 30, 2014, the following table summarizes the forecasted impact on net interest income using a base case scenario given upward movements in interest rates of 100, 200, and 300 basis points based on forecasted assumptions of prepayment speeds, nominal interest rates and loan and deposit repricing rates. Downward movements do not appear to be applicable due to the low interest rate environment experienced since 2013. Estimates are based on current economic conditions, historical interest rate cycles and other factors deemed to be relevant. However, underlying assumptions may be impacted in future periods which were not known to management at the time of the issuance of the Consolidated Financial Statements. Therefore, management’s assumptions may or may not prove valid. No assurance can be given that changing economic conditions and other relevant factors impacting our net interest income will not cause actual occurrences to differ from underlying assumptions. In addition, this analysis does not consider any strategic changes to our balance sheet which management may consider as a result of changes in market conditions.

		Annualized Hypothetical
Interest Rate Scenario		Percentage Change in
Change	PrimeRate	Net Interest Income
0.00%	3.25%	0.00%
1.00%	4.25%	2.10%
2.00%	5.25%	4.00%
3.00%	6.25%	4.80%

The primary uses of derivative instruments are related to the mortgage banking activities of the Company. As such, the Company holds derivative instruments, which consist of rate lock agreements related to expected funding of fixed-rate mortgage loans to customers (interest rate lock commitments) and forward commitments to sell mortgage-backed securities and individual fixed-rate mortgage loans. The Company’s objective in obtaining the forward commitments is to mitigate the interest rate risk associated with the interest rate lock commitments and the mortgage loans that are held for sale. Derivatives related to these commitments are recorded as either a derivative asset or a derivative liability in the balance sheet and are measured at fair value. Both the interest rate lock commitments and the forward commitments are reported at fair value, with adjustments recorded in current period earnings within the noninterest income of the consolidated statements of operations.

60

Derivative instruments not related to mortgage banking activities, including financial futures commitments and interest rate swap agreements that do not satisfy the hedge accounting requirements, are recorded at fair value and are classified with resultant changes in fair value being recognized in noninterest income in the consolidated statement of operations.

When using derivatives to hedge fair value and cash flow risks, the Company exposes itself to potential credit risk from the counterparty to the hedging instrument. This credit risk is normally a small percentage of the notional amount and fluctuates as interest rates change. The Company analyzes and approves credit risk for all potential derivative counterparties prior to execution of any derivative transaction. The Company seeks to minimize credit risk by dealing with highly rated counterparties and by obtaining collateralization for exposures above certain predetermined limits. If significant counterparty risk is determined, the Company would adjust the fair value of the derivative recorded asset balance to consider such risk.

Accounting, Reporting, and Regulatory Matters

Information regarding recent authoritative pronouncements that could impact the accounting, reporting, and/or disclosure of the financial information by the Company are included in Note 1 of the consolidated financial statements.

Effect of Inflation and Changing Prices

The effect of relative purchasing power over time due to inflation has not been taken into account in our consolidated financial statements. Rather, our financial statements have been prepared on an historical cost basis in accordance with GAAP.

Unlike most industrial companies, our assets and liabilities are primarily monetary in nature. Therefore, the effect of changes in interest rates will have a more significant impact on our performance than the effect of changing prices and inflation in general. In addition, interest rates may generally increase as the rate of inflation increases, although not necessarily in the same magnitude. As discussed previously, we seek to manage the relationships between interest sensitive assets and liabilities in order to protect against wide rate fluctuations, including those resulting from inflation.

61

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

See Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Market Risk Management and Interest Rate Risk, and – Liquidity.

Item 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

Management, including our President and Chief Executive Officer and Executive Vice President and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Based upon that evaluation, our President and Chief Executive Officer and Executive Vice President and Chief Financial Officer concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is (i) recorded, processed, summarized and reported as and when required and (ii) accumulated and communicated to our management, including our President and Chief Executive Officer and Executive Vice President and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There has been no change in the Company’s internal control over financial reporting during the three or six months ended June 30, 2014, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS.

We are a party to claims and lawsuits arising in the ordinary course of business. Management is not aware of any material pending legal proceedings against the Company which, if determined adversely, would have a material adverse impact on the Company’s financial position, results of operations or cash flows.

Item 1A RISK FACTORS.

Not applicable

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

(a) (i)

Pursuant to its 2013 Equity Incentive Plan (the “Plan”), the Company issued to certain of its employees, including an employee of Crescent Mortgage Company, 18,723 shares of restricted common stock and granted options to purchase 2,740 shares of common stock, exercise price of $10.00 per share. 8,723 shares of restricted stock were issued as part of Crescent Mortgage Company’s 2013 bonus compensation plan and vested immediately on the grant date, January 9, 2014. 8,000 shares of the restricted stock are subject to incremental vesting over a four-year period (25% of the award to vest annually on the first four anniversaries of the grant date), and 2,000 shares of the restricted stock cliff vests on the fifth anniversary of the grant date. The options to purchase 2,740 shares of common stock vest incrementally over a two-year period (50% of the award to vest annually on the first two anniversaries of the grant date). The shares of restricted stock subject to vesting and the options to purchase common stock were granted on April 23, 2014.

(ii)

Pursuant to the Plan, on July 7, 2014, the Company granted 7,408 shares of common stock to certain of its employees. The grants included 2,908 shares under Crescent Mortgage Company’s 2013 bonus compensation plan that vested immediately on the grant date, 4,000 shares of restricted stock that are subject to incremental vesting over a four-year period (25% of the award to vest annually on the first four anniversaries of the grant date), and 500 shares of restricted stock that cliff vest on the fifth anniversary of the grant date.

The issuance of such securities was exempt from the registration requirements of the Securities Act pursuant to Section 3(b) and Rule 701 promulgated thereunder and the consideration was services rendered.

(b) The following stock repurchases were made during the period covered by this report in connection with the Company’s administration of the 2013 Equity Incentive Plan.

Period		Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
	April 1, 2014 – April 30, 2014		—	$	—		—		—
	May 1, 2014 - May 31, 2014		687	$	20.48		—		—
	June 1, 2014 – June 30, 2014		—	$	—		—		—
			687				—		—

Item 3. DEFAULTS UPON SENIOR SECURITIES.

Not applicable

Item 4. MINE SAFETY DISCLOSURES.

Not applicable

Item 5. OTHER INFORMATION.

Not applicable

Item 6. EXHIBITS.

The exhibits required to be filed as part of this Quarterly Report on Form 10-Q are listed in the Index to Exhibits attached hereto and are incorporated herein by reference.

62

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.

	CAROLINA FINANCIAL CORPORATION
	Registrant
Date: August 11th, 2014	/s/ Jerold L. Rexroad
	Jerold L. Rexroad
	President and Chief Executive Officer
	(Principal Executive Officer)
Date: August 11th, 2014	/s/ William A. Gehman, III
	William A. Gehman III
	Executive Vice President and Chief Financial Officer
	(Principal Financial and Accounting Officer)

63

INDEX TO EXHIBITS

Exhibit Number	Description
3.1	Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Carolina Financial Corporation filed on May 8, 2014.(1)
3.2	Certificate of Amendment to the Amended and Restated Certificate of Incorporation filed on June 11, 2010.(2)
3.3	Amended and Restated Certificate of Incorporation filed on April 2, 1997.(2)
31.1	Rule 13a-14(a) Certification of the Principal Executive Officer.
31.2	Rule 13a-14(a) Certification of the Principal Financial Officer.
32	Section 1350 Certifications.
101	The following materials from the Quarterly Report on Form 10-Q of Carolina Financial Corporation for the quarter ended June 30, 2014, formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statement of Changes in Stockholders’ Equity, (v) Consolidated Statements of Cash Flows and (vi) Notes to Unaudited Consolidated Financial Statements.

(1) Incorporated by reference from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014.

(2) Incorporated by reference from the Company’s Registration on Form 10 filed on February 26, 2014. ¹

¹ When the articles are amended during a quarter, there is a requirement to file the complete articles, as amended. See Item 601(b)(3)(i) of Regulation S-K.

64

EX-31.1

Exhibit 31.1

Rule 13a-14(a) Certification of the Principal Executive Officer.

I, Jerold L. Rexroad, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Carolina Financial Corporation;

2. Based on my knowledge, this quarterly 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 officers 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 controls 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 registrants’ internal control over financial reporting.

Date: August 11th, 2014	By:	/s/ Jerold L. Rexroad
		Jerold L. Rexroad
		President and Chief Executive Officer
		(Principal Executive Officer)

65

EX-31.2

Exhibit 31.2

Rule 13a-14(a) Certification of the Principal Financial Officer.

I, William A. Gehman, III, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Carolina Financial Corporation;

2. Based on my knowledge, this quarterly 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 officers 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 controls 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 registrants’ s internal control over financial reporting.

Date: August 11th, 2014	By:	/s/ William A. Gehman III
		William A. Gehman III
		Executive Vice President and Chief Financial Officer
		(Principal Financial Officer)

66

EX-32

Exhibit 32

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

The undersigned, the President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer, of Carolina Financial Corporation (the “Company”), each certify that, to his knowledge on the date of this certification:

1. The quarterly report of the Company for the period ended June 30, 2014 as filed with the Securities and Exchange Commission on this date (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.

/s/ Jerold L. Rexroad

Jerold L. Rexroad

President and Chief Executive Officer

(Principal Executive Officer)

Date: August 11th, 2014

s/ William A. Gehman III

William A. Gehman III

Executive Vice President and Chief Financial Officer

(Principal Financial Officer)

Date: August 11th, 2014

67

XML

LOANS RECEIVABLE, NET (Details 4) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Allowance for loan losses ending balances:
Loans Individually Evaluated for Impairment	$ 431	$ 349
Loans Collectively Evaluated for Impairment	8,231	7,742
Ending Balance	8,662	8,091
Loans receivable ending balances:
Individually Evaluated for Impairment	25,281	27,446
Collectively Evaluated for Impairment	588,932	515,964
Total	614,213	543,410
Consumer loans [Member]
Allowance for loan losses ending balances:
Loans Individually Evaluated for Impairment	4	20
Loans Collectively Evaluated for Impairment	24	22
Ending Balance	28	42
Loans receivable ending balances:
Individually Evaluated for Impairment	24	40
Collectively Evaluated for Impairment	2,848	2,775
Total	2,872	2,815
Commercial business loans [Member]
Allowance for loan losses ending balances:
Loans Individually Evaluated for Impairment	3	6
Loans Collectively Evaluated for Impairment	944	333
Ending Balance	947	339
Loans receivable ending balances:
Individually Evaluated for Impairment	2,231	2,560
Collectively Evaluated for Impairment	55,018	22,986
Total	57,249	25,546
Unallocated [Member]
Allowance for loan losses ending balances:
Loans Individually Evaluated for Impairment
Loans Collectively Evaluated for Impairment	578	734
Ending Balance	578	734
Loans receivable ending balances:
Individually Evaluated for Impairment
Collectively Evaluated for Impairment
Total
Loans secured by Real Estate [Member] | One-to-four family [Member]
Allowance for loan losses ending balances:
Loans Individually Evaluated for Impairment	304	103
Loans Collectively Evaluated for Impairment	2,200	2,369
Ending Balance	2,504	2,472
Loans receivable ending balances:
Individually Evaluated for Impairment	6,301	6,220
Collectively Evaluated for Impairment	202,878	177,516
Total	209,179	183,736
Loans secured by Real Estate [Member] | Home equity [Member]
Allowance for loan losses ending balances:
Loans Individually Evaluated for Impairment
Loans Collectively Evaluated for Impairment	207	231
Ending Balance	207	231
Loans receivable ending balances:
Individually Evaluated for Impairment		125
Collectively Evaluated for Impairment	23,319	23,217
Total	23,319	23,342
Loans secured by Real Estate [Member] | Commercial real estate [Member]
Allowance for loan losses ending balances:
Loans Individually Evaluated for Impairment	30	55
Loans Collectively Evaluated for Impairment	3,143	2,800
Ending Balance	3,173	2,855
Loans receivable ending balances:
Individually Evaluated for Impairment	16,054	17,008
Collectively Evaluated for Impairment	239,273	230,859
Total	255,327	247,867
Loans secured by Real Estate [Member] | Construction and development [Member]
Allowance for loan losses ending balances:
Loans Individually Evaluated for Impairment	90	165
Loans Collectively Evaluated for Impairment	1,135	1,253
Ending Balance	1,225	1,418
Loans receivable ending balances:
Individually Evaluated for Impairment	671	1,493
Collectively Evaluated for Impairment	65,596	58,611
Total	$ 66,267	$ 60,104

XML

EARNINGS PER SHARE (Details)	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Earnings Per Share Details
Weighted average shares outstanding	3,881,115	3,832,043	3,866,353	3,829,130
Effect of dilutive securities	70,363	103,837	63,595	96,790
Average shares outstanding	3,951,478	3,935,880	3,929,948	3,925,920

XML

DEPOSITS (Details 1) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Certificates of deposit:
$100,000 or More	$ 216	$ 170	$ 395	$ 328

XML

SUPPLEMENTAL SEGMENT INFORMATION (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Interest income	$ 8,743	$ 8,281	$ 17,155	$ 16,510
Interest expense	1,421	1,468	2,752	2,970
Net interest income (expense)	7,322	6,813	14,403	13,540
Provision for loan losses		(700)		(700)
Noninterest income (expense) from external customers	5,449	12,805	10,818	26,188
Intersegment noninterest income
Noninterest expense	9,491	11,605	19,098	24,628
Intersegment noninterest expense
Income (loss) before income taxes	3,280	8,713	6,123	15,800
Income tax expense (benefit)	1,031	3,180	1,930	5,844
Net income (loss)	2,249	5,533	4,193	9,956
Community Banking [Member]
Interest income	8,429	7,874	16,521	15,690
Interest expense	1,286	1,252	2,483	2,527
Net interest income (expense)	7,143	6,622	14,038	13,163
Provision for loan losses	(10)	(700)	(10)	(700)
Noninterest income (expense) from external customers	958	908	1,873	1,613
Intersegment noninterest income		25		67
Noninterest expense	4,267	4,035	8,381	9,428
Intersegment noninterest expense	1,270	1,213	2,540	2,426
Income (loss) before income taxes	2,574	3,007	5,000	3,689
Income tax expense (benefit)	766	1,053	1,501	1,329
Net income (loss)	1,808	1,954	3,499	2,360
Mortgage Banking [Member]
Interest income	274	383	559	776
Interest expense		33		80
Net interest income (expense)	274	350	559	696
Provision for loan losses	10		10
Noninterest income (expense) from external customers	4,482	11,877	8,926	24,532
Intersegment noninterest income	23	150	95	277
Noninterest expense	3,553	6,131	7,399	12,454
Intersegment noninterest expense	240	265	480	547
Income (loss) before income taxes	976	5,981	1,691	12,504
Income tax expense (benefit)	365	2,232	639	4,662
Net income (loss)	611	3,749	1,052	7,842
Other [Member]
Interest income	4	5	8	9
Interest expense	135	186	269	367
Net interest income (expense)	(131)	(181)	(261)	(358)
Provision for loan losses
Noninterest income (expense) from external customers	9	20	19	43
Intersegment noninterest income	1,510	1,453	3,020	2,906
Noninterest expense	1,671	1,439	3,318	2,746
Intersegment noninterest expense
Income (loss) before income taxes	(283)	(147)	(540)	(155)
Income tax expense (benefit)	(105)	(61)	(199)	(65)
Net income (loss)	(178)	(86)	(341)	(90)
Eliminations [Member]
Interest income	36	19	67	35
Interest expense		(3)		(4)
Net interest income (expense)	36	22	67	39
Provision for loan losses
Noninterest income (expense) from external customers
Intersegment noninterest income	(1,533)	(1,628)	(3,115)	(3,250)
Noninterest expense
Intersegment noninterest expense	(1,510)	(1,478)	(3,020)	(2,973)
Income (loss) before income taxes	13	(128)	(28)	(238)
Income tax expense (benefit)	5	(44)	(11)	(82)
Net income (loss)	$ 8	$ (84)	$ (17)	$ (156)

XML

REAL ESTATE ACQUIRED THROUGH FORECLOSURE (Details 2) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013	Dec. 31, 2012
Real Estate Acquired Through Foreclosure	$ 5,655	$ 6,273	$ 6,284
Loans secured by Real Estate [Member] | One-to-four family [Member]
Real Estate Acquired Through Foreclosure	521	959
Loans secured by Real Estate [Member] | Commercial real estate [Member]
Real Estate Acquired Through Foreclosure	1,498	1,781
Loans secured by Real Estate [Member] | Construction and development [Member]
Real Estate Acquired Through Foreclosure	$ 3,636	$ 3,533

XML

SECURITIES (Details 6) (USD $) In Thousands, unless otherwise specified	6 Months Ended	12 Months Ended
	Jun. 30, 2014	Dec. 31, 2013
Investments, Debt and Equity Securities [Abstract]
Balance at beginning of year	$ 3,975	$ 3,975
Additions for credit losses on securities for which OTTI was not previously recognized
Additions for additional credit losses on securities for which OTTI was previously recognized
Balance at end of year	$ 3,975	$ 3,975

XML

SUBSEQUENT EVENT (Details Narrative) (Subseqent event [Member], Definitive agreement - First Community Bank [Member], USD $)
In Thousands, unless otherwise specified

0 Months Ended

Aug. 06, 2014

Item

Subseqent event [Member] | Definitive agreement - First Community Bank [Member]

Number of branches acquired

13

Deposits

$ 230,000

Loans

$ 67,000

Description of branches located

Three of the offices are in South Carolina and operate under the name “People’s Community Bank” and 10 are in southeastern North Carolina.

Percentage of deposit premium acquired

3.11%

XML

EARNINGS PER SHARE (Tables)

6 Months Ended

Jun. 30, 2014

Earnings per common share:

Schedule of reconciliation of average shares outstanding

The following is a summary of the reconciliation of weighted average shares outstanding for the three and six months ended June 30, 2014 and 2013:

	For the Three Months Ended June 30,
	2014				2013
	Basic		Diluted		Basic		Diluted
Weighted average shares outstanding		3,881,115		3,881,115		3,832,043		3,832,043
Effect of dilutive securities		—		70,363		—		103,837
Weighted average shares outstanding		3,881,115		3,951,478		3,832,043		3,935,880

	For the Six Months Ended June 30,
	2014				2013
	Basic		Diluted		Basic		Diluted
Weighted average shares outstanding		3,866,353		3,866,353		3,829,130		3,829,130
Effect of dilutive securities		—		63,595		—		96,790
Weighted average shares outstanding		3,866,353		3,929,948		3,829,130		3,925,920

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ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS (Details 2) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Designated as Hedging Instrument [Member]
Derivative Assets
Asset derivatives, Fair value	$ 2,255	$ 1,412
Notional Value, Assets	184,968	128,516
Derivative Liability
Liability derivatives, Fair value	730	55
Notional Value, Liability	149,000	103,614
Designated as Hedging Instrument [Member] | Mortgage loan interest rate lock commitments [Member]
Derivative Assets
Asset derivatives, Fair value	1,672
Notional Value, Assets	159,113
Derivative Liability
Liability derivatives, Fair value		55
Notional Value, Liability		103,614
Designated as Hedging Instrument [Member] | Mortgage loan forward sales commitments [Member]
Derivative Assets
Asset derivatives, Fair value	583	106
Notional Value, Assets	25,855	20,516
Designated as Hedging Instrument [Member] | Mortgage-backed securities forward sales commitments [Member]
Derivative Assets
Asset derivatives, Fair value		878
Notional Value, Assets		88,000
Derivative Liability
Liability derivatives, Fair value	709
Notional Value, Liability	139,000
Designated as Hedging Instrument [Member] | Interest rate swaps [Member]
Derivative Assets
Asset derivatives, Fair value		428
Notional Value, Assets		20,000
Derivative Liability
Liability derivatives, Fair value	21
Notional Value, Liability	10,000
Commitments to Extend Credit [Member]
Off-Balance Sheet Financial Instruments:
Notional Amount	46,788	38,595
Estimated Fair Value
Standby Letters of Credit [Member]
Off-Balance Sheet Financial Instruments:
Notional Amount	720	526
Estimated Fair Value

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LOANS RECEIVABLE, NET (Details 7) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Total loans receivable	$ 614,213	$ 543,410
Pass [Member]
Total loans receivable	592,577	518,545
Special Mention [Member]
Total loans receivable	12,859	12,893
Substandard [Member]
Total loans receivable	8,777	11,972
Consumer loans [Member]
Total loans receivable	2,872	2,815
Consumer loans [Member] | Pass [Member]
Total loans receivable	2,867	2,795
Consumer loans [Member] | Special Mention [Member]
Total loans receivable
Consumer loans [Member] | Substandard [Member]
Total loans receivable	5	20
Commercial business loans [Member]
Total loans receivable	57,249	25,546
Commercial business loans [Member] | Pass [Member]
Total loans receivable	56,177	24,823
Commercial business loans [Member] | Special Mention [Member]
Total loans receivable	900	286
Commercial business loans [Member] | Substandard [Member]
Total loans receivable	172	437
Loans secured by Real Estate [Member] | One-to-four family [Member]
Total loans receivable	209,179	183,736
Loans secured by Real Estate [Member] | One-to-four family [Member] | Pass [Member]
Total loans receivable	204,774	177,878
Loans secured by Real Estate [Member] | One-to-four family [Member] | Special Mention [Member]
Total loans receivable	1,046	1,679
Loans secured by Real Estate [Member] | One-to-four family [Member] | Substandard [Member]
Total loans receivable	3,359	4,179
Loans secured by Real Estate [Member] | Home equity [Member]
Total loans receivable	23,319	23,342
Loans secured by Real Estate [Member] | Home equity [Member] | Pass [Member]
Total loans receivable	23,319	23,217
Loans secured by Real Estate [Member] | Home equity [Member] | Special Mention [Member]
Total loans receivable
Loans secured by Real Estate [Member] | Home equity [Member] | Substandard [Member]
Total loans receivable		125
Loans secured by Real Estate [Member] | Commercial real estate [Member]
Total loans receivable	255,327	247,867
Loans secured by Real Estate [Member] | Commercial real estate [Member] | Pass [Member]
Total loans receivable	240,146	231,269
Loans secured by Real Estate [Member] | Commercial real estate [Member] | Special Mention [Member]
Total loans receivable	10,631	10,633
Loans secured by Real Estate [Member] | Commercial real estate [Member] | Substandard [Member]
Total loans receivable	4,550	5,965
Loans secured by Real Estate [Member] | Construction and development [Member]
Total loans receivable	66,267	60,104
Loans secured by Real Estate [Member] | Construction and development [Member] | Pass [Member]
Total loans receivable	65,294	58,563
Loans secured by Real Estate [Member] | Construction and development [Member] | Special Mention [Member]
Total loans receivable	282	295
Loans secured by Real Estate [Member] | Construction and development [Member] | Substandard [Member]
Total loans receivable	$ 691	$ 1,246

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LOANS RECEIVABLE, NET (Details 2) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Loans Receivable Net Details 2
Variable rate loans	$ 252,110	$ 219,589
Variable rate loans (as a percentage)	41.05%	40.41%
Fixed rate loans	362,103	323,821
Fixed rate loans (as a percentage)	58.95%	59.59%
Total loans outstanding	$ 614,213	$ 543,410
Total loans outstanding (as a percentage)	100.00%	100.00%

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ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS (Details 4) (Nonrecurring basis [Member], USD $) In Thousands, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Fair Value, Inputs, Level 1 [Member]
Assets measured at fair value on a nonrecurring basis
Fair Value, Inputs, Level 1 [Member] | One-to-four family [Member]
Assets measured at fair value on a nonrecurring basis
Fair Value, Inputs, Level 1 [Member] | Commercial real estate [Member]
Assets measured at fair value on a nonrecurring basis
Fair Value, Inputs, Level 1 [Member] | Construction and development [Member]
Assets measured at fair value on a nonrecurring basis
Fair Value, Inputs, Level 1 [Member] | Consumer loans [Member]
Assets measured at fair value on a nonrecurring basis
Fair Value, Inputs, Level 1 [Member] | Commercial business loans [Member]
Assets measured at fair value on a nonrecurring basis
Fair Value, Inputs, Level 1 [Member] | Loans secured by Real Estate [Member] | One-to-four family [Member]
Assets measured at fair value on a nonrecurring basis
Fair Value, Inputs, Level 1 [Member] | Loans secured by Real Estate [Member] | Home equity [Member]
Assets measured at fair value on a nonrecurring basis
Fair Value, Inputs, Level 1 [Member] | Loans secured by Real Estate [Member] | Commercial real estate [Member]
Assets measured at fair value on a nonrecurring basis
Fair Value, Inputs, Level 1 [Member] | Loans secured by Real Estate [Member] | Construction and development [Member]
Assets measured at fair value on a nonrecurring basis
Fair Value, Inputs, Level 2 [Member]
Assets measured at fair value on a nonrecurring basis
Fair Value, Inputs, Level 2 [Member] | One-to-four family [Member]
Assets measured at fair value on a nonrecurring basis
Fair Value, Inputs, Level 2 [Member] | Commercial real estate [Member]
Assets measured at fair value on a nonrecurring basis
Fair Value, Inputs, Level 2 [Member] | Construction and development [Member]
Assets measured at fair value on a nonrecurring basis
Fair Value, Inputs, Level 2 [Member] | Consumer loans [Member]
Assets measured at fair value on a nonrecurring basis
Fair Value, Inputs, Level 2 [Member] | Commercial business loans [Member]
Assets measured at fair value on a nonrecurring basis
Fair Value, Inputs, Level 2 [Member] | Loans secured by Real Estate [Member] | One-to-four family [Member]
Assets measured at fair value on a nonrecurring basis
Fair Value, Inputs, Level 2 [Member] | Loans secured by Real Estate [Member] | Home equity [Member]
Assets measured at fair value on a nonrecurring basis
Fair Value, Inputs, Level 2 [Member] | Loans secured by Real Estate [Member] | Commercial real estate [Member]
Assets measured at fair value on a nonrecurring basis
Fair Value, Inputs, Level 2 [Member] | Loans secured by Real Estate [Member] | Construction and development [Member]
Assets measured at fair value on a nonrecurring basis
Fair Value, Inputs, Level 3 [Member]
Assets measured at fair value on a nonrecurring basis	30,512	33,370
Fair Value, Inputs, Level 3 [Member] | One-to-four family [Member]
Assets measured at fair value on a nonrecurring basis	122	959
Fair Value, Inputs, Level 3 [Member] | Commercial real estate [Member]
Assets measured at fair value on a nonrecurring basis	1,548	1,781
Fair Value, Inputs, Level 3 [Member] | Construction and development [Member]
Assets measured at fair value on a nonrecurring basis	4,072	3,533
Fair Value, Inputs, Level 3 [Member] | Consumer loans [Member]
Assets measured at fair value on a nonrecurring basis	20	20
Fair Value, Inputs, Level 3 [Member] | Commercial business loans [Member]
Assets measured at fair value on a nonrecurring basis	2,289	2,554
Fair Value, Inputs, Level 3 [Member] | Loans secured by Real Estate [Member] | One-to-four family [Member]
Assets measured at fair value on a nonrecurring basis	5,580	6,117
Fair Value, Inputs, Level 3 [Member] | Loans secured by Real Estate [Member] | Home equity [Member]
Assets measured at fair value on a nonrecurring basis		125
Fair Value, Inputs, Level 3 [Member] | Loans secured by Real Estate [Member] | Commercial real estate [Member]
Assets measured at fair value on a nonrecurring basis	16,474	16,953
Fair Value, Inputs, Level 3 [Member] | Loans secured by Real Estate [Member] | Construction and development [Member]
Assets measured at fair value on a nonrecurring basis	$ 407	$ 1,328

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DEPOSITS (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Deposits Details
Noninterest-bearing demand accounts	$ 102,376	$ 83,500
Interest-bearing demand accounts	128,431	92,067
Savings accounts	24,757	17,816
Money market accounts	208,658	220,915
Certificates of deposit:
Less than $100,000	211,277	195,239
$100,000 or more	104,037	88,044
Total certificates of deposit	315,314	283,283
Total deposits	779,536	697,581
Brokered certificates of deposit	83,000	61,800
Institutional certificates of deposit	$ 47,000	$ 40,000

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SECURITIES

6 Months Ended

Jun. 30, 2014

Investments, Debt and Equity Securities [Abstract]

SECURITIES

NOTE 2 - SECURITIES

The amortized cost, gross unrealized gains, gross unrealized losses and fair value of investments securities available-for-sale and held-to-maturity at June 30, 2014 and December 31, 2013 follows:

	June 30, 2014									December 31, 2013
			Gross		Gross							Gross		Gross
	Amortized		Unrealized		Unrealized			Fair		Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value		Cost		Gains		Losses			Value
	(In thousands)
Securities available-for-sale:
Municipal securities	$	35,256		1,071		(230	)		36,097		39,790		99		(1,390	)		38,499
US government agencies		4,944		—		(23	)		4,921		5,199		—		(24	)		5,175
Collateralized loan obligations		9,708		—		(12	)		9,696		—		—		—			—
Mortgage-backed securities:
Agency		101,080		3,101		(39	)		104,142		68,813		1,433		(317	)		69,929
Non-agency		51,582		1,117		(254	)		52,445		53,195		826		(89	)		53,932
Total mortgage-backed securities		152,662		4,218		(293	)		156,587		122,008		2,259		(406	)		123,861
Total	$	202,570		5,289		(558	)		207,301		166,997		2,358		(1,820	)		167,535
Securities held-to-maturity:
Municipal securities	$	15,395		611		(52	)		15,954		15,488		30		(341	)		15,177
Asset-backed securities		8,859		3,066		(1,969	)		9,956		9,066		2,107		(2,803	)		8,370
Total	$	24,254		3,677		(2,021	)		25,910		24,554		2,137		(3,144	)		23,547

The asset-backed securities portfolio is collateralized with trust preferred securities issued by other financial institutions in pooled issuances.

The following table presents unrealized losses related to the trust preferred securities that were recognized within other comprehensive income at the time of transfer to held-to-maturity as well as the unrealized gains and losses that are not presented in other comprehensive income for June 30, 2014 and December 31, 2013.

	At June 30, 2014
								Recognized in OCI							Not Recognized in OCI
								Gross Unrealized							Gross Unrealized
	Purchased Face Value		Cumulative OTTI			Carrying Value		Gains		Losses			Amortized Cost		Gains		Losses			Estimated Fair Value		Collateralization Percentage
Held-to-Maturity:	(In thousands)
Trust Preferred Securities
Total A-Class	$	2,465		—			2,465		—		(572	)		1,893		363		—			2,256		179%-376%
Total B-Class		11,855		(2,635	)		9,221		—		(2,514	)		6,707		1,812		(1,969	)		6,550		94%-105%
Total C-Class		2,708		(1,340	)		1,367		—		(1,108	)		259		891		—			1,150		88%-88%
	$	17,028		(3,975	)		13,053		—		(4,194	)		8,859		3,066		(1,969	)		9,956
	At December 31, 2013
								Recognized in OCI							Not Recognized in OCI
								Gross Unrealized							Gross Unrealized
	Purchased Face Value		Cumulative OTTI			Carrying Value		Gains		Losses			Amortized Cost		Gains		Losses			Estimated Fair Value		Collateralization Percentage
Held-to-Maturity:	(In thousands)
Trust Preferred Securities
Total A-Class	$	2,841		—			2,841		—		(586	)		2,255		354		(99	)		2,510		164% - 324%
Total B-Class		11,804		(2,635	)		9,169		—		(2,569	)		6,600		1,190		(2,704	)		5,086		94% - 98%
Total C-Class		2,688		(1,340	)		1,348		—		(1,137	)		211		563		—			774		83% - 83%
	$	17,333		(3,975	)		13,358		—		(4,292	)		9,066		2,107		(2,803	)		8,370

The pooled trust preferred securities consisted of positions in seven different securities. The underlying issuers in the pools were primarily financial institutions and to a lesser extent, insurance companies and real estate investment trusts. The Company owns both senior and mezzanine tranches in pooled trust preferred securities; however, the Company does not own any income notes. The senior and mezzanine tranches of trust preferred collateralized debt obligations generally have some protection from defaults in the form of over-collateralization and excess spread revenues, along with waterfall structures that redirect cash flows in the event certain coverage test requirements are failed. Generally, senior tranches have the greatest protection, with mezzanine tranches subordinated to the senior tranches, and income notes subordinated to the mezzanine tranches. Unrealized losses recognized in other comprehensive income relate to unrealized losses at the time of transfer from available-for-sale to held-to-maturity and are accreted in accordance with GAAP.

As of June 30, 2014, $1.0 million of the pooled trust preferred securities were investment grade, $1.0 million were split-rated, and $6.9 million were below investment grade. As of December 31, 2013, $1.3 million of the pooled trust preferred securities were investment grade, $1.0 million were split-rated, and $6.8 million were below investment grade. In terms of risk-based capital calculation, the Company allocates additional risk-based capital to the below investment grade securities.

As of June 30, 2014, senior tranches represent $1.9 million of the Company’s pooled securities, while mezzanine tranches represented $7.0 million. All of the $7.0 million in mezzanine tranches are still subordinate to senior tranches as the senior notes have not been paid to a zero balance. As of December 31, 2013, senior tranches represent $2.3 million of the Company’s

pooled securities, while mezzanine tranches represented $6.8 million. All of the $6.8 million in mezzanine tranches are still subordinate to senior tranches as the senior notes have not been paid to a zero balance.

The amortized cost and fair value of debt securities by contractual maturity at June 30, 2014 follows:

	At June 30, 2014
	Amortized		Fair
	Cost		Value
	(In thousands)
Securities available-for-sale:
Less than one year	$	—		—
One to five years		—		—
Five to ten years		17,753		17,760
After ten years		184,817		189,541
Total	$	202,570		207,301
Securities held-to-maturity:
Less than one year	$	—		—
One to five years		970		989
Five to ten years		4,480		4,455
After ten years		18,804		20,466
Total	$	24,254		25,910

The contractual maturity dates of the securities were used for mortgage-backed securities and asset-backed securities. No estimates were made to anticipate principal repayments.

The following table summarizes the gross realized gains and losses from sales of investment securities available-for-sale for the periods indicated.

	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2014			2013			2014			2013
	(In thousands)
Proceeds	$	18,753			40,104			28,561			45,842
Realized gains		204			360			520			376
Realized losses		(40	)		(422	)		(40	)		(422	)
Total investment securities gains, net	$	164			(62	)		480			(46	)

At June 30, 2014, the Company had pledged $11.3 million of securities for Federal Home Loan Bank (“FHLB”) advances.

The gross unrealized losses and fair value of the Company’s investments available-for-sale with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2014 are as follows:

	At June 30, 2014
	Less than 12 Months							12 Months or Greater							Total
	Amortized		Fair		Unrealized			Amortized		Fair		Unrealized			Amortized		Fair		Unrealized
	Cost		Value		Losses			Cost		Value		Losses			Cost		Value		Losses
	(In thousands)
Available-for-sale:
Municipal securities	$	10,513		10,353		(160	)		4,208		4,138		(70	)		14,721		14,491		(230	)
US government agencies		4,944		4,921		(23	)		—		—		—			4,944		4,921		(23	)
Collateralized loan obligations		4,708		4,696		(12	)		—		—		—			4,708		4,696		(12	)
Mortgage-backed securities:
Agency		3,639		3,600		(39	)		—		—		—			3,639		3,600		(39	)
Non-agency		9,239		8,998		(241	)		1,676		1,663		(13	)		10,915		10,661		(254	)
Total mortgage-backed securities		12,878		12,598		(280	)		1,676		1,663		(13	)		14,554		14,261		(293	)
Total	$	33,043		32,568		(475	)		5,884		5,801		(83	)		38,927		38,369		(558	)
Held-to-maturity:
Municipal securities	$	—		—		—			3,349		3,297		(52	)		3,349		3,297		(52	)
Asset-backed
securities		—		—		—			6,481		4,512		(1,969	)		6,481		4,512		(1,969	)
Total	$	—		—		—			9,830		7,809		(2,021	)		9,830		7,809		(2,021	)

The gross unrealized losses and fair value of the Company’s investments available-for-sale with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2013 are as follows:

	At December 31, 2013
	Less than 12 Months							12 Months or Greater							Total
	Amortized		Fair		Unrealized			Amortized		Fair		Unrealized			Amortized		Fair		Unrealized
	Cost		Value		Losses			Cost		Value		Losses			Cost		Value		Losses
	(In thousands)
Available-for-sale:
Municipal securities	$	27,108		25,917		(1,191	)		3,157		2,958		(199	)		30,265		28,875		(1,390	)
US government agencies		5,199		5,175		(24	)		—		—		—			5,199		5,175		(24	)
Mortgage-backed securities:
Agency		27,140		26,823		(317	)		—		—		—			27,140		26,823		(317	)
Non-agency		15,006		14,951		(55	)		3,660		3,626		(34	)		18,666		18,577		(89	)
Total mortgage-backed securities		42,146		41,774		(372	)		3,660		3,626		(34	)		45,806		45,400		(406	)
Total	$	74,453		72,866		(1,587	)		6,817		6,584		(233	)		81,270		79,450		(1,820	)
Held-to-maturity:
Municipal securities	$	11,945		11,734		(211	)		2,177		2,047		(130	)		14,122		13,781		(341	)
Asset-backed  securities		—		—		—			7,398		4,595		(2,803	)		7,398		4,595		(2,803	)
Total	$	11,945		11,734		(211	)		9,575		6,642		(2,933	)		21,520		18,376		(3,144	)

The Company reviews its investment securities portfolio at least quarterly and more frequently when economic conditions warrant, assessing whether there is any indication of other-than-temporary impairment (“OTTI”). Factors considered in the review include estimated future cash flows, length of time and extent to which market value has been less than cost, the financial condition and near term prospect of the issuer, and our intent and ability to retain the security to allow for an anticipated recovery in market value. If the review determines that there is OTTI, then an impairment loss is recognized in earnings equal to the difference between the investment’s cost and its fair value at the balance sheet date of the reporting period for which the assessment is made, or a portion may be recognized in other comprehensive income. The fair value of investments on which OTTI is recognized then becomes the new cost basis of the investment.

At June 30, 2014 and December 31, 2013, the Company had 28 and 58, respectively, individual investments available-for-sale that were in an unrealized loss position. The unrealized losses on the Company’s investments in US government-sponsored agencies, municipal securities and mortgage-backed securities (agency and non-agency) summarized above were attributable primarily to changes in interest rates. Management has performed various analyses, including cash flows, and determined that no OTTI expense was necessary for the three months ended June 30, 2014.

At June 30, 2014 and December 31, 2013, the Company had four trust preferred securities within the held-to-maturity portfolio that were in an unrealized loss position. The asset-backed securities portfolio is collateralized with trust preferred securities issued by other financial institutions in pooled issuances.

To determine the fair value, cash flow models for trust preferred securities are provided by a third-party pricing service. Impairment testing is performed on a quarterly basis using a detailed cash flow analysis for each security. The major assumptions used during the impairment test are described in the subsequent paragraph.

In 2009, the Company adopted a four year “burst” scenario for its modeled default rates (2010 - 2013) that replicated the default rates for the banking industry from the four peak years of the savings and loan crisis, which then reduced to 0.25% annually. The elevated default rate ended in 2013, and the constant default rate used by the Company is now 0.25% annually. All issuers that were currently in deferral were presumed to be in default. Additionally, all defaults are assumed to have a 15% recovery after two years and 1% of the pool is presumed to prepay annually. If this analysis results in a present value of expected cash flows that is less than the book value of a security (that is, a credit loss exists), an OTTI is considered to have occurred. If there is no credit loss, any impairment is considered temporary. The cash flow analysis we performed used discount rates equal to the credit spread at the time of purchase for each security and then added the current three-month LIBOR forward interest rate curve. Based on the cash flow analysis performed at period end, management believes that there are no additional securities other-than-temporarily impaired at June 30, 2014.

There was no OTTI recognized for the three or six months ended June 30, 2014 or 2013.

The following table presents the cumulative credit related OTTI related to securities held-to-maturity taken as well as the activity at June 30, 2014 and December 31, 2013 for the trust preferred securities.

	At June 30,		At December 31,
	2014		2013
	(In thousands)
Balance at beginning of year	$	3,975		3,975
Additions for credit losses on securities  for which OTTI was not previously recognized		—		—
Additions for additional credit losses on securities for which OTTI was previously recognized		—		—
Balance at end of year	$	3,975		3,975

Management believes that there are no additional securities other-than-temporarily impaired at June 30, 2014. The Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell these securities before recovery of their amortized cost. Management continues to monitor these securities with a high degree of scrutiny. There can be no assurance that the Company will not conclude in future periods that conditions existing at that time indicate some or all of the securities may be sold or are other-than-temporarily impaired, which would require a charge to earnings in such periods.

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LOANS RECEIVABLE, NET (Details 8) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Total loans receivable	$ 614,213	$ 543,410
Nonaccrual	9,393	11,079
Performing Financing Receivable [Member]
Total loans receivable	604,820	532,331
Nonperforming Financing Receivable [Member]
Total loans receivable	9,393	11,079
90 days or more past due
Nonaccrual	9,393	11,079
Consumer loans [Member]
Total loans receivable	2,872	2,815
Nonaccrual	5	20
Consumer loans [Member] | Performing Financing Receivable [Member]
Total loans receivable	2,867	2,795
Consumer loans [Member] | Nonperforming Financing Receivable [Member]
Total loans receivable	5	20
90 days or more past due
Nonaccrual	5	20
Commercial business loans [Member]
Total loans receivable	57,249	25,546
Nonaccrual	172	437
Commercial business loans [Member] | Performing Financing Receivable [Member]
Total loans receivable	57,077	25,109
Commercial business loans [Member] | Nonperforming Financing Receivable [Member]
Total loans receivable	172	437
90 days or more past due
Nonaccrual	172	437
Loans secured by Real Estate [Member] | One-to-four family [Member]
Total loans receivable	209,179	183,736
Nonaccrual	4,270	3,902
Loans secured by Real Estate [Member] | One-to-four family [Member] | Performing Financing Receivable [Member]
Total loans receivable	204,909	179,834
Loans secured by Real Estate [Member] | One-to-four family [Member] | Nonperforming Financing Receivable [Member]
Total loans receivable	4,270	3,902
90 days or more past due
Nonaccrual	4,270	3,902
Loans secured by Real Estate [Member] | Home equity [Member]
Total loans receivable	23,319	23,342
Nonaccrual		125
Loans secured by Real Estate [Member] | Home equity [Member] | Performing Financing Receivable [Member]
Total loans receivable	23,319	23,217
Loans secured by Real Estate [Member] | Home equity [Member] | Nonperforming Financing Receivable [Member]
Total loans receivable		125
90 days or more past due
Nonaccrual		125
Loans secured by Real Estate [Member] | Commercial real estate [Member]
Total loans receivable	255,327	247,867
Nonaccrual	4,285	5,114
Loans secured by Real Estate [Member] | Commercial real estate [Member] | Performing Financing Receivable [Member]
Total loans receivable	251,042	242,753
Loans secured by Real Estate [Member] | Commercial real estate [Member] | Nonperforming Financing Receivable [Member]
Total loans receivable	4,285	5,114
90 days or more past due
Nonaccrual	4,285	5,114
Loans secured by Real Estate [Member] | Construction and development [Member]
Total loans receivable	66,267	60,104
Nonaccrual	661	1,481
Loans secured by Real Estate [Member] | Construction and development [Member] | Performing Financing Receivable [Member]
Total loans receivable	65,606	58,623
Loans secured by Real Estate [Member] | Construction and development [Member] | Nonperforming Financing Receivable [Member]
Total loans receivable	661	1,481
90 days or more past due
Nonaccrual	$ 661	$ 1,481

XML

SECURITIES (Details 2) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Carrying Value	$ 207,301	$ 167,535
Amortizied Cost	202,570	166,997
Held-to-maturity Securities [Member]
Purchased Face Value	17,028	17,333
Cumulative OTTI	(3,975)	(3,975)
Carrying Value	13,053	13,358
Gross Gains Unrealized Recognized in OCI
Gross Loss Unrealized Recognized in OCI	(4,194)	(4,292)
Amortizied Cost	8,859	9,066
Gross Gains Unrealized Not Recognized in OCI	3,066	2,107
Gross Loss Unrealized Not Recognized in OCI	(1,969)	(2,803)
Estimated Fair Value	9,956	8,370
Held-to-maturity Securities [Member] | Total A Class [Member]
Purchased Face Value	2,465	2,841
Cumulative OTTI
Carrying Value	2,465	2,841
Gross Gains Unrealized Recognized in OCI
Gross Loss Unrealized Recognized in OCI	(572)	(586)
Amortizied Cost	1,893	2,255
Gross Gains Unrealized Not Recognized in OCI	363	354
Gross Loss Unrealized Not Recognized in OCI		(99)
Estimated Fair Value	2,256	2,510
Held-to-maturity Securities [Member] | Total A Class [Member] | Minimum [Member]
Collateralization Percentage	179.00%	164.00%
Held-to-maturity Securities [Member] | Total A Class [Member] | Maximum [Member]
Collateralization Percentage	376.00%	324.00%
Held-to-maturity Securities [Member] | Total B Class [Member]
Purchased Face Value	11,855	11,804
Cumulative OTTI	(2,635)	(2,635)
Carrying Value	9,221	9,169
Gross Gains Unrealized Recognized in OCI
Gross Loss Unrealized Recognized in OCI	(2,514)	(2,569)
Amortizied Cost	6,707	6,600
Gross Gains Unrealized Not Recognized in OCI	1,812	1,190
Gross Loss Unrealized Not Recognized in OCI	(1,969)	(2,704)
Estimated Fair Value	6,550	5,086
Held-to-maturity Securities [Member] | Total B Class [Member] | Minimum [Member]
Collateralization Percentage	94.00%	94.00%
Held-to-maturity Securities [Member] | Total B Class [Member] | Maximum [Member]
Collateralization Percentage	105.00%	98.00%
Held-to-maturity Securities [Member] | Total C Class [Member]
Purchased Face Value	2,708	2,688
Cumulative OTTI	(1,340)	(1,340)
Carrying Value	1,367	1,348
Gross Gains Unrealized Recognized in OCI
Gross Loss Unrealized Recognized in OCI	(1,108)	(1,137)
Amortizied Cost	259	211
Gross Gains Unrealized Not Recognized in OCI	891	563
Gross Loss Unrealized Not Recognized in OCI
Estimated Fair Value	$ 1,150	$ 774
Held-to-maturity Securities [Member] | Total C Class [Member] | Minimum [Member]
Collateralization Percentage	88.00%	83.00%
Held-to-maturity Securities [Member] | Total C Class [Member] | Maximum [Member]
Collateralization Percentage	88.00%	83.00%

XML

SECURITIES (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Available For Sale
Amortized Cost	$ 202,570	$ 166,997
Unrealized Gains	5,289	2,358
Unrealized Losses	(558)	(1,820)
Securities available for sale	207,301	167,535
Held-to-maturity Securities
Amortized Cost	24,254	24,554
Unrealized Gains	3,677	2,137
Unrealized Loss	(2,021)	(3,144)
Fair Value	25,910	23,547
Municipal securities [Member]
Available For Sale
Amortized Cost	35,256	39,790
Unrealized Gains	1,071	99
Unrealized Losses	(230)	(1,390)
Securities available for sale	36,097	38,499
Held-to-maturity Securities
Amortized Cost	15,395	15,488
Unrealized Gains	611	30
Unrealized Loss	(52)	(341)
Fair Value	15,954	15,177
US government agencies [Member]
Available For Sale
Amortized Cost	4,944	5,199
Unrealized Gains
Unrealized Losses	(23)	(24)
Securities available for sale	4,921	5,175
Collateralized loan obligations [Member]
Available For Sale
Amortized Cost	9,708
Unrealized Gains
Unrealized Losses	(12)
Securities available for sale	9,696
Mortgage-backed securities Agency [Member]
Available For Sale
Amortized Cost	101,080	68,813
Unrealized Gains	3,101	1,433
Unrealized Losses	(39)	(317)
Securities available for sale	104,142	69,929
Mortgage-backed securities Non-agency [Member]
Available For Sale
Amortized Cost	51,582	53,195
Unrealized Gains	1,117	826
Unrealized Losses	(254)	(89)
Securities available for sale	52,445	53,932
Total mortgage-backed securities [Member]
Available For Sale
Amortized Cost	152,662	122,008
Unrealized Gains	4,218	2,259
Unrealized Losses	(293)	(406)
Securities available for sale	156,587	123,861
Asset-backed securities [Member]
Held-to-maturity Securities
Amortized Cost	8,859	9,066
Unrealized Gains	3,066	2,107
Unrealized Loss	(1,969)	(2,803)
Fair Value	$ 9,956	$ 8,370

XML

SUPPLEMENTAL SEGMENT INFORMATION (Details 2) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Assets	$ 988,412	$ 881,584
Loans receivable, net	605,295	535,221
Loans held for sale	47,859	36,897
Deposits	779,536	697,581
Borrowed funds	104,690	84,840
Community Banking [Member]
Assets	978,629	873,104
Loans receivable, net	606,732	532,616
Loans held for sale	3,119	753
Deposits	780,473	701,110
Borrowed funds	89,226	69,376
Mortgage Banking [Member]
Assets	66,123	61,846
Loans receivable, net	4,380	3,374
Loans held for sale	44,740	36,144
Deposits
Borrowed funds	5,020
Other [Member]
Assets	105,836	101,497
Loans receivable, net
Loans held for sale
Deposits
Borrowed funds	15,465	15,465
Eliminations [Member]
Assets	(162,176)	(154,863)
Loans receivable, net	(5,817)	(769)
Loans held for sale
Deposits	(937)	(3,529)
Borrowed funds	$ (5,021)	$ (1)

XML

LOANS RECEIVABLE, NET (Details Narrative) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Loans Receivable Net Details 2
Committed to advance additional funds in connection with impaired loans		$ 230
Loans designated as troubled debt restructurings	22,000	23,700
Troubled debt restructurings, still accruing	$ 15,500	$ 16,400

XML

SECURITIES (Details 3) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Investment securities, Amortized Cost
Less than one year
One to five years
Five to ten years	17,753
After ten years	184,817
Total	202,570	166,997
Investment securities, Fair Value
Less than one year
One to five years
Five to ten years	17,760
After ten years	189,541
Securities available for sale	207,301	167,535
Amortized Cost
Less than one year		11,945
One to five years	970
Five to ten years	4,480
After ten years	18,804
Total	24,254	24,554
Fair Value
Less than one year
One to five years	989
Five to ten years	4,455
After ten years	20,466
Total	$ 25,910	$ 23,547

XML

SECURITIES (Details 4) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Gross realized gains and losses, Available-for-sale
Proceeds	$ 18,753	$ 40,104	$ 28,561	$ 45,842
Realized gains	204	360	520	376
Realized losses	(40)	(422)	(40)	(422)
Total investment securities gains, net	$ 164	$ (62)	$ 480	$ (46)

XML

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

6 Months Ended

Jun. 30, 2014

Accounting Policies [Abstract]

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

Carolina Financial Corporation (“Carolina Financial” or the “Company”), incorporated under the laws of the State of Delaware, is a bank holding company with two wholly-owned subsidiaries, CresCom Bank (the “Bank”) and Carolina Services Corporation of Charleston (“Carolina Services”). The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, the Bank and Carolina Services. In consolidation, all material intercompany accounts and transactions have been eliminated. The results of operations of the businesses acquired in transactions accounted for as purchases are included only from the dates of acquisition. All majority-owned subsidiaries are consolidated unless control is temporary or does not rest with the Company.

At June 30, 2014 and December 31, 2013, statutory business trusts (“Trusts”) created by the Company had outstanding trust preferred securities with an aggregate par value of $15,000,000. The principal assets of the Trusts are $15,465,000 of the Company’s subordinated debentures with identical rates of interest and maturities as the trust preferred securities. The Trusts have issued $465,000 of common securities to the Company and are included in other investments in the accompanying consolidated balance sheets. The Trusts are not consolidated subsidiaries of the Company.

Basis of Presentation

The accompanying unaudited consolidated financial statements and notes have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information or footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with GAAP. Because the accompanying unaudited consolidated financial statements do not include all of the information and footnotes required by GAAP, they should be read in conjunction with the Company’s audited consolidated financial statements and accompanying footnotes included in the Company’s Registration Statement on Form 10, as amended (File No. 000-19029) (the “Form 10”) filed with the Securities and Exchange Commission (“SEC”) on April 1, 2014. There have been no significant changes to the accounting policies as disclosed in the Company’s Form 10.

In management’s opinion, the accompanying unaudited consolidated financial statements reflect all normal, recurring adjustments necessary to present fairly the financial position of the Company as of June 30, 2014 and December 31, 2013, and the results of its operations and cash flows for the three-months and six-months ended June 30, 2014 and 2013. Operating results for the three-month and six-month periods ended June 30, 2014 are not necessarily indicative of the results that may be expected for the year or for other interim periods.

Management’s Estimates

The financial statements are prepared in accordance with GAAP in the United States of America, which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, including valuation for impaired loans, the valuation of real estate acquired in connection with foreclosure or in satisfaction of loans, the valuation of securities, the valuation of derivative instruments, the valuation of mortgage servicing rights, the determination of the reserve for mortgage loan repurchase losses, asserted and unasserted legal claims and deferred tax assets or liabilities. In connection with the determination of the allowance for loan losses and foreclosed real estate, management obtains independent appraisals for significant properties. Management must also make estimates in determining the estimated useful lives and methods for depreciating premises and equipment.

Management uses available information to recognize losses on loans and foreclosed real estate. However, future additions to the allowance may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for loan losses and foreclosed real estate. Such agencies may require the Bank to recognize additions to the allowance based on their judgments about information available to them at the time of their examination. Because of these factors, it is reasonably possible that the allowance for loan losses and valuation of foreclosed real estate may change materially in the near term.

Earnings Per Share

Basic earnings per share (“EPS”) represents income available to common stockholders divided by the weighted-average number of shares outstanding during the period. Diluted earnings per share reflects additional shares that would have been outstanding if dilutive potential shares had been issued. Potential shares that may be issued by the Company relate solely to outstanding stock options, restricted stock (non-vested shares), and warrants, and are determined using the treasury stock method. Under the treasury stock method, the number of incremental shares is determined by assuming the issuance of stock for the outstanding stock options and warrants, reduced by the number of shares assumed to be repurchased from the issuance proceeds, using the average market price for the period of the Company’s stock. Weighted-average shares for the basic and diluted EPS calculations have been reduced by the average number of unvested restricted shares.

On January 15, 2014, the Board of Directors of the Company declared a two-for-one stock split to stockholders of record dated February 10, 2014, payable on February 28, 2014. As such, all share, earnings per share, and per share data have been retroactively adjusted to reflect this stock split for all periods presented in accordance with GAAP.

Subsequent Events

Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. Non-recognized subsequent events are events that provide evidence about conditions that did not exist at the date of the statement of financial condition but arose after that date. Management has reviewed events occurring through the date the financial statements were issued and no subsequent events occurred requiring accrual or disclosure other than as disclosed in Note 10 regarding the Bank’s entry into an agreement on August 6, 2014 to purchase 13 branches in South Carolina and southeastern North Carolina.

Reclassification

Certain reclassifications of accounts reported for previous periods have been made in these consolidated financial statements. Such reclassifications had no effect on stockholders’ equity or the net income as previously reported.

Recently Issued Accounting Pronouncements

The Balance Sheet topic of the Accounting Standards Codification (the “ASC”) was amended in December 2011 for companies with financial instruments and derivative instruments that offset or are subject to a master netting agreement. The amendments require disclosure of both gross information and net information about instruments and transactions eligible for offset or subject to an agreement similar to a master netting agreement. The amendments were effective for reporting periods beginning on or after January 1, 2013 and required retrospective presentation for all comparative periods presented. Additionally, in January 2013 the Financial Accounting Standards Board (the “FASB”) clarified that the amendments apply only to derivatives, repurchase agreements and reverse purchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with specific criteria contained in GAAP or subject to a master netting arrangement or similar agreement. These amendments did not have a material effect on the Company’s financial statements.

The FASB amended the Comprehensive Income topic of the ASC in February 2013. The amendments address reporting of amounts reclassified out of accumulated other comprehensive income. Specifically, the amendments do not change the current requirements for reporting net income or other comprehensive income in financial statements. However, the amendments do require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, in certain circumstances an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income. The amendments were effective for the Company on a prospective basis for reporting periods beginning after December 15, 2013. These amendments did not have a material effect on the Company’s financial statements.

In February 2013, the FASB also amended the Financial Instruments topic of the ASC to address the scope and applicability of certain disclosures to nonpublic companies. The amendments clarify that the requirement to disclose “the level of the fair value hierarchy within the fair value measurements are categorized in their entirety (Level 1, 2, or 3)” does not apply to nonpublic entities for items that are not measured at fair value in the statement of financial position but for which fair value is disclosed. The Company does not expect these amendments to have a material effect on its financial statements.

In April 2013, the FASB issued guidance addressing application of the liquidation basis of accounting. The guidance is intended to clarify when an entity should apply the liquidation basis of accounting. In addition, the guidance provides principles for the recognition and measurement of assets and liabilities and requirements for financial statements prepared using the liquidation basis of accounting. The amendments will be effective for entities that determine liquidation is imminent during annual reporting periods beginning after December 15, 2013, and interim reporting periods therein, and those requirements should be applied prospectively from the day that liquidation becomes imminent. Early adoption is permitted. These amendments did not have any effect on the Company’s financial statements.

In December 2013, the FASB amended the Master Glossary of the FASB Codification to define “Public Business Entity” to minimize the inconsistency and complexity of having multiple definitions of, or a diversity in practice as to what constitutes, a nonpublic entity and public entity within U.S. GAAP. The amendment does not affect existing requirements, however it will be used by the FASB, the Private Company Council (“PCC”), and the Emerging Issues Task Force (“EITF”) in specifying the scope of future financial accounting and reporting guidance. This amendment does not have any effect on the Company’s financial statements.

In January 2014, the FASB amended Receivables topic of the Accounting Standards Codification. The amendments are intended to resolve diversity in practice with respect to when a creditor should reclassify a collateralized consumer mortgage loan to other real estate owned (OREO). In addition, the amendments require a creditor to reclassify a collateralized consumer mortgage loan to OREO upon obtaining legal title to the real estate collateral, or the borrower voluntarily conveying all interest in the real estate property to the lender to satisfy the loan through a deed in lieu of foreclosure or similar legal agreement. The amendments will be effective for the Company for annual periods, and interim periods within those annual periods beginning after December 15, 2014, with early implementation of the guidance permitted. In implementing this guidance, assets that are reclassified from real estate to loans are measured at the carrying value of the real estate at the date of adoption. Assets reclassified from loans to real estate are measured at the lower of the net amount of the loan receivable or the fair value of the real estate less costs to sell at the date of adoption. The Company will apply the amendments prospectively. The Company does not expect these amendments to have a material effect on its financial statements.

In May 2014, the FASB issued guidance to change the recognition of revenue from contracts with customers. The core principle of the new guidance is that an entity should recognize revenue to reflect the transfer of goods and services to customers in an amount equal to the consideration the entity receives or expects to receive. The guidance will be effective for the Company for reporting periods beginning after December 15, 2016. The Company will apply the guidance using a full retrospective approach. The Company does not expect these amendments to have a material effect on its financial statements.

In June 2014, the FASB issued guidance which makes limited amendments to the guidance on accounting for certain repurchase agreements. The new guidance (1) requires entities to account for repurchase-to-maturity transactions as secured borrowings (rather than as sales with forward repurchase agreements), (2) eliminates accounting guidance on linked repurchase financing transactions, and (3) expands disclosure requirements related to certain transfers of financial assets that are accounted for as sales and certain transfers (specifically, repos, securities lending transactions, and repurchase-to-maturity transactions) accounted for as secured borrowings. The amendments will be effective for the Company for the first interim or annual period beginning after December 15, 2014. The Company will apply the guidance by making a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. The Company does not expect these amendments to have a material effect on its financial statements.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

XML

SECURITIES (Details 5) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Available For Sale Securities
Less than 12 Months, Amortized Cost	$ 33,043	$ 74,453
Less than 12 Months, Fair Value	32,568	72,866
Less than 12 Months, Unrealized Losses	(475)	(1,587)
Greater than 12 Months, Amortized Cost	5,884	6,817
Greater than 12 Months, Fair Value	5,801	6,584
Greater than 12 Months, Unrealized Losses	(83)	(233)
Total, Amortized Cost	38,927	81,270
Total, Fair Value	38,369	79,450
Total, Unrealized Losses	(558)	(1,820)
Held to Maturity
Less than 12 Months, Amortized Cost		11,945
Less than 12 Months, Fair Value		11,734
Less than 12 Months, Unrealized Losses		(211)
Greater than 12 Months, Amortized Cost	9,830	9,575
Greater than 12 Months, Fair Value	7,809	6,642
Greater than 12 Months, Unrealized Losses	(2,021)	(2,933)
Total, Amortized Cost	9,830	21,520
Total, Fair Value	7,809	18,376
Total, Unrealized Losses	(2,021)	(3,144)
Municipal securities [Member]
Available For Sale Securities
Less than 12 Months, Amortized Cost	10,513	27,108
Less than 12 Months, Fair Value	10,353	25,917
Less than 12 Months, Unrealized Losses	(160)	(1,191)
Greater than 12 Months, Amortized Cost	4,208	3,157
Greater than 12 Months, Fair Value	4,138	2,958
Greater than 12 Months, Unrealized Losses	(70)	(199)
Total, Amortized Cost	14,721	30,265
Total, Fair Value	14,491	28,875
Total, Unrealized Losses	(230)	(1,390)
Held to Maturity
Less than 12 Months, Amortized Cost		11,945
Less than 12 Months, Fair Value		11,734
Less than 12 Months, Unrealized Losses		(211)
Greater than 12 Months, Amortized Cost	3,349	2,177
Greater than 12 Months, Fair Value	3,297	2,047
Greater than 12 Months, Unrealized Losses	(52)	(130)
Total, Amortized Cost	3,349	14,122
Total, Fair Value	3,297	13,781
Total, Unrealized Losses	(52)	(341)
US government agencies [Member]
Available For Sale Securities
Less than 12 Months, Amortized Cost	4,944	5,199
Less than 12 Months, Fair Value	4,921	5,175
Less than 12 Months, Unrealized Losses	(23)	(24)
Greater than 12 Months, Amortized Cost
Greater than 12 Months, Fair Value
Greater than 12 Months, Unrealized Losses
Total, Amortized Cost	4,944	5,199
Total, Fair Value	4,921	5,175
Total, Unrealized Losses	(23)	(24)
Collateralized loan obligations [Member]
Available For Sale Securities
Less than 12 Months, Amortized Cost	4,708
Less than 12 Months, Fair Value	4,696
Less than 12 Months, Unrealized Losses	(12)
Greater than 12 Months, Amortized Cost
Greater than 12 Months, Fair Value
Greater than 12 Months, Unrealized Losses
Total, Amortized Cost	4,708
Total, Fair Value	4,696
Total, Unrealized Losses	(12)
Mortgage-backed securities Agency [Member]
Available For Sale Securities
Less than 12 Months, Amortized Cost	3,639	27,140
Less than 12 Months, Fair Value	3,600	26,823
Less than 12 Months, Unrealized Losses	(39)	(317)
Greater than 12 Months, Amortized Cost
Greater than 12 Months, Fair Value
Greater than 12 Months, Unrealized Losses
Total, Amortized Cost	3,639	27,140
Total, Fair Value	3,600	26,823
Total, Unrealized Losses	(39)	(317)
Mortgage-backed securities Non-agency [Member]
Available For Sale Securities
Less than 12 Months, Amortized Cost	9,239	15,006
Less than 12 Months, Fair Value	8,998	14,951
Less than 12 Months, Unrealized Losses	(241)	(55)
Greater than 12 Months, Amortized Cost	1,676	3,660
Greater than 12 Months, Fair Value	1,663	3,626
Greater than 12 Months, Unrealized Losses	(13)	(34)
Total, Amortized Cost	10,915	18,666
Total, Fair Value	10,661	18,577
Total, Unrealized Losses	(254)	(89)
Total mortgage-backed securities [Member]
Available For Sale Securities
Less than 12 Months, Amortized Cost	12,878	42,146
Less than 12 Months, Fair Value	12,598	41,774
Less than 12 Months, Unrealized Losses	(280)	(372)
Greater than 12 Months, Amortized Cost	1,676	3,660
Greater than 12 Months, Fair Value	1,663	3,626
Greater than 12 Months, Unrealized Losses	(13)	(34)
Total, Amortized Cost	14,554	45,806
Total, Fair Value	14,261	45,400
Total, Unrealized Losses	(293)	(406)
Asset-backed securities [Member]
Held to Maturity
Less than 12 Months, Amortized Cost
Less than 12 Months, Fair Value
Less than 12 Months, Unrealized Losses
Greater than 12 Months, Amortized Cost	6,481	7,398
Greater than 12 Months, Fair Value	4,512	4,595
Greater than 12 Months, Unrealized Losses	(1,969)	(2,803)
Total, Amortized Cost	6,481	7,398
Total, Fair Value	4,512	4,595
Total, Unrealized Losses	$ (1,969)	$ (2,803)

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LOANS RECEIVABLE, NET (Details 5) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013	Dec. 31, 2013
Impaired Financing Receivable, Recorded Investment [Abstract]
Impaired Financing Receivable, with No Related Allowance, Recorded Investment	$ 23,603		$ 23,603		$ 26,334
Impaired Financing Receivable, with Related Allowance, Recorded Investment	1,678		1,678		1,112
Impaired Financing Receivable, Recorded Investment	25,281		25,281		27,446
Impaired Financing Receivable, Unpaid Principal Balance [Abstract]
Impaired Financing Receivable, with No Related Allowance, Unpaid Principal Balance	30,720		30,720		33,284
Impaired Financing Receivable, with Related Allowance, Unpaid Principal Balance	1,678		1,678		1,212
Impaired Financing Receivable, Unpaid Principal Balance	32,398		32,398		34,496
Impaired Financing Receivable, Related Allowance	431		431		349
Impaired Financing Receivable, Average Recorded Investment [Abstract]
Impaired Financing Receivable, with No Related Allowance, Average Recorded Investment	23,991	22,703	24,676	32,360
Impaired Financing Receivable, with Related Allowance, Average Recorded Investment	1,316	10,457	846	802
Impaired Financing Receivable, Average Recorded Investment	25,307	33,160	25,522	33,162
Impaired Financing Receivable, Interest Income, Accrual Method [Abstract]
Impaired Financing Receivable, with No Related Allowance, Interest Income, Accrual Method	83	257	367	409
Impaired Financing Receivable, with Related Allowance, Interest Income, Accrual Method	2	2	12
Impaired Financing Receivable, Interest Income, Accrual Method	85	259	379	409
Consumer loans [Member]
Impaired Financing Receivable, Recorded Investment [Abstract]
Impaired Financing Receivable, with No Related Allowance, Recorded Investment	20		20		20
Impaired Financing Receivable, with Related Allowance, Recorded Investment	4		4		20
Impaired Financing Receivable, Recorded Investment	24		24		40
Impaired Financing Receivable, Unpaid Principal Balance [Abstract]
Impaired Financing Receivable, with No Related Allowance, Unpaid Principal Balance	546		546		404
Impaired Financing Receivable, with Related Allowance, Unpaid Principal Balance	4		4		20
Impaired Financing Receivable, Unpaid Principal Balance	550		550		424
Impaired Financing Receivable, Related Allowance	4		4		20
Impaired Financing Receivable, Average Recorded Investment [Abstract]
Impaired Financing Receivable, with No Related Allowance, Average Recorded Investment	20	37	22	37
Impaired Financing Receivable, with Related Allowance, Average Recorded Investment	5	19	6	19
Impaired Financing Receivable, Average Recorded Investment	25	56	28	56
Impaired Financing Receivable, Interest Income, Accrual Method [Abstract]
Impaired Financing Receivable, with No Related Allowance, Interest Income, Accrual Method	(3)	1
Impaired Financing Receivable, with Related Allowance, Interest Income, Accrual Method
Impaired Financing Receivable, Interest Income, Accrual Method	(3)	1
Commercial business loans [Member]
Impaired Financing Receivable, Recorded Investment [Abstract]
Impaired Financing Receivable, with No Related Allowance, Recorded Investment	2,228		2,228		2,554
Impaired Financing Receivable, with Related Allowance, Recorded Investment	3		3		6
Impaired Financing Receivable, Recorded Investment	2,231		2,231		2,560
Impaired Financing Receivable, Unpaid Principal Balance [Abstract]
Impaired Financing Receivable, with No Related Allowance, Unpaid Principal Balance	3,804		3,804		3,599
Impaired Financing Receivable, with Related Allowance, Unpaid Principal Balance	3		3		6
Impaired Financing Receivable, Unpaid Principal Balance	3,807		3,807		3,605
Impaired Financing Receivable, Related Allowance	3		3		6
Impaired Financing Receivable, Average Recorded Investment [Abstract]
Impaired Financing Receivable, with No Related Allowance, Average Recorded Investment	2,264	2,238	2,372	2,810
Impaired Financing Receivable, with Related Allowance, Average Recorded Investment	4	1,248	4	677
Impaired Financing Receivable, Average Recorded Investment	2,268	3,486	2,376	3,487
Impaired Financing Receivable, Interest Income, Accrual Method [Abstract]
Impaired Financing Receivable, with No Related Allowance, Interest Income, Accrual Method	(25)	27	53	57
Impaired Financing Receivable, with Related Allowance, Interest Income, Accrual Method		1
Impaired Financing Receivable, Interest Income, Accrual Method	(25)	28	53	57
Loans secured by Real Estate [Member] | One-to-four family [Member]
Impaired Financing Receivable, Recorded Investment [Abstract]
Impaired Financing Receivable, with No Related Allowance, Recorded Investment	5,162		5,162		5,713
Impaired Financing Receivable, with Related Allowance, Recorded Investment	1,139		1,139		507
Impaired Financing Receivable, Recorded Investment	6,301		6,301		6,220
Impaired Financing Receivable, Unpaid Principal Balance [Abstract]
Impaired Financing Receivable, with No Related Allowance, Unpaid Principal Balance	7,304		7,304		7,682
Impaired Financing Receivable, with Related Allowance, Unpaid Principal Balance	1,139		1,139		607
Impaired Financing Receivable, Unpaid Principal Balance	8,443		8,443		8,289
Impaired Financing Receivable, Related Allowance	304		304		103
Impaired Financing Receivable, Average Recorded Investment [Abstract]
Impaired Financing Receivable, with No Related Allowance, Average Recorded Investment	5,302	4,724	5,431	7,253
Impaired Financing Receivable, with Related Allowance, Average Recorded Investment	841	2,590	467	62
Impaired Financing Receivable, Average Recorded Investment	6,143	7,314	5,898	7,315
Impaired Financing Receivable, Interest Income, Accrual Method [Abstract]
Impaired Financing Receivable, with No Related Allowance, Interest Income, Accrual Method	(9)	73	44	100
Impaired Financing Receivable, with Related Allowance, Interest Income, Accrual Method	(3)		2
Impaired Financing Receivable, Interest Income, Accrual Method	(12)	73	46	100
Loans secured by Real Estate [Member] | Home equity [Member]
Impaired Financing Receivable, Recorded Investment [Abstract]
Impaired Financing Receivable, with No Related Allowance, Recorded Investment					125
Impaired Financing Receivable, with Related Allowance, Recorded Investment
Impaired Financing Receivable, Recorded Investment					125
Impaired Financing Receivable, Unpaid Principal Balance [Abstract]
Impaired Financing Receivable, with No Related Allowance, Unpaid Principal Balance	347		347		472
Impaired Financing Receivable, with Related Allowance, Unpaid Principal Balance
Impaired Financing Receivable, Unpaid Principal Balance	347		347		472
Impaired Financing Receivable, Related Allowance
Impaired Financing Receivable, Average Recorded Investment [Abstract]
Impaired Financing Receivable, with No Related Allowance, Average Recorded Investment		83		83
Impaired Financing Receivable, with Related Allowance, Average Recorded Investment
Impaired Financing Receivable, Average Recorded Investment		83		83
Impaired Financing Receivable, Interest Income, Accrual Method [Abstract]
Impaired Financing Receivable, with No Related Allowance, Interest Income, Accrual Method		1
Impaired Financing Receivable, with Related Allowance, Interest Income, Accrual Method
Impaired Financing Receivable, Interest Income, Accrual Method		1
Loans secured by Real Estate [Member] | Commercial real estate [Member]
Impaired Financing Receivable, Recorded Investment [Abstract]
Impaired Financing Receivable, with No Related Allowance, Recorded Investment	15,789		15,789		16,695
Impaired Financing Receivable, with Related Allowance, Recorded Investment	265		265		313
Impaired Financing Receivable, Recorded Investment	16,054		16,054		17,008
Impaired Financing Receivable, Unpaid Principal Balance [Abstract]
Impaired Financing Receivable, with No Related Allowance, Unpaid Principal Balance	16,334		16,334		17,240
Impaired Financing Receivable, with Related Allowance, Unpaid Principal Balance	265		265		313
Impaired Financing Receivable, Unpaid Principal Balance	16,599		16,599		17,553
Impaired Financing Receivable, Related Allowance	30		30		55
Impaired Financing Receivable, Average Recorded Investment [Abstract]
Impaired Financing Receivable, with No Related Allowance, Average Recorded Investment	16,000	15,245	16,423	19,573
Impaired Financing Receivable, with Related Allowance, Average Recorded Investment	266	4,372	269	44
Impaired Financing Receivable, Average Recorded Investment	16,266	19,617	16,692	19,617
Impaired Financing Receivable, Interest Income, Accrual Method [Abstract]
Impaired Financing Receivable, with No Related Allowance, Interest Income, Accrual Method	119	154	267	257
Impaired Financing Receivable, with Related Allowance, Interest Income, Accrual Method	4	1	9
Impaired Financing Receivable, Interest Income, Accrual Method	123	155	276	257
Loans secured by Real Estate [Member] | Construction and development [Member]
Impaired Financing Receivable, Recorded Investment [Abstract]
Impaired Financing Receivable, with No Related Allowance, Recorded Investment	404		404		1,227
Impaired Financing Receivable, with Related Allowance, Recorded Investment	267		267		266
Impaired Financing Receivable, Recorded Investment	671		671		1,493
Impaired Financing Receivable, Unpaid Principal Balance [Abstract]
Impaired Financing Receivable, with No Related Allowance, Unpaid Principal Balance	2,385		2,385		3,887
Impaired Financing Receivable, with Related Allowance, Unpaid Principal Balance	267		267		266
Impaired Financing Receivable, Unpaid Principal Balance	2,652		2,652		4,153
Impaired Financing Receivable, Related Allowance	90		90		165
Impaired Financing Receivable, Average Recorded Investment [Abstract]
Impaired Financing Receivable, with No Related Allowance, Average Recorded Investment	405	376	428	2,604
Impaired Financing Receivable, with Related Allowance, Average Recorded Investment	200	2,228	100
Impaired Financing Receivable, Average Recorded Investment	605	2,604	528	2,604
Impaired Financing Receivable, Interest Income, Accrual Method [Abstract]
Impaired Financing Receivable, with No Related Allowance, Interest Income, Accrual Method	1	1	3	(5)
Impaired Financing Receivable, with Related Allowance, Interest Income, Accrual Method	1		1
Impaired Financing Receivable, Interest Income, Accrual Method	$ 2	$ 1	$ 4	$ (5)

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ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS (Details 5) (Fair Value, Inputs, Level 3 [Member])	6 Months Ended	12 Months Ended
	Jun. 30, 2014	Dec. 31, 2013
Impaired Loans [Member]
Valuation Techniques	Appraisal Value	Appraisal Value
Significant Unobservable Inputs	Appraisals and or sales of comparable properties	Appraisals and or sales of comparable properties
Impaired Loans [Member] | Minimum [Member]
Significant Unobservable Input Range	10.00%	10.00%
Impaired Loans [Member] | Maximum [Member]
Significant Unobservable Input Range	20.00%	20.00%
Real estate owned [Member]
Valuation Techniques	Appraisal Value/ Comparison Sales/ Other estimates	Appraisal Value/ Comparison Sales/ Other estimates
Significant Unobservable Inputs	Appraisals and or sales of comparable properties	Appraisals and or sales of comparable properties
Real estate owned [Member] | Minimum [Member]
Significant Unobservable Input Range	10.00%	10.00%
Real estate owned [Member] | Maximum [Member]
Significant Unobservable Input Range	20.00%	20.00%

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CONSOLIDATED BALANCE SHEETS (Unaudited) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
ASSETS
Cash and due from banks	$ 9,560	$ 4,489
Interest-bearing cash	17,132	34,176
Cash and cash equivalents	26,692	38,665
Securities available-for-sale (cost of $202,570 at June 30, 2014 and $166,997 at December 31, 2013)	207,301	167,535
Securities held-to-maturity (fair value of $25,910 at June 30, 2014 and $23,547 at December 31, 2013)	24,254	24,554
Federal Home Loan Bank stock, at cost	4,730	4,103
Other investments	1,944	1,858
Derivative assets	2,255	1,412
Loans held for sale	47,859	36,897
Loans receivable, net of allowance for loan losses of $8,662 at June 30, 2014 and $8,091 at December 31, 2013	605,295	535,221
Premises and equipment, net	18,667	17,585
Accrued interest receivable	3,059	2,802
Real estate acquired through foreclosure, net	5,655	6,273
Deferred tax assets, net	5,700	7,419
Income taxes receivable	509
Mortgage servicing rights	9,843	10,908
Cash value life insurance	21,228	20,910
Other assets	3,421	5,442
Total assets	988,412	881,584
Liabilities:
Noninterest-bearing deposits	102,376	83,500
Interest-bearing deposits	677,160	614,081
Total deposits	779,536	697,581
Short-term borrowed funds	35,300	10,300
Long-term debt	69,390	74,540
Derivative liabilities	730	55
Drafts outstanding	2,544	2,703
Advances from borrowers for insurance and taxes	709	284
Accrued interest payable	325	311
Income taxes payable		749
Reserve for mortgage repurchase losses	5,533	6,109
Dividends payable to shareholders	202
Accrued expenses and other liabilities	4,866	6,725
Total liabilities	899,135	799,357
Stockholders' equity:
Preferred stock, par value $.01; 1,000,000 and 200,000 shares authorized at June 30, 2014 and December 31, 2013, respectively; no shares issued or outstanding
Common stock, par value $.01; 10,000,000 and 6,800,000 shares authorized at June 30, 2014 and December 31, 2013, respectively; 4,041,460 and 4,015,204 issued and outstanding at June 30, 2014 and December 31, 2013, respectively	40	40
Additional paid-in capital	22,921	22,393
Retained earnings	65,951	62,169
Accumulated other comprehensive income (loss), net of tax benefit	365	(2,375)
Total stockholders' equity	89,277	82,227
Total liabilities and stockholders' equity	$ 988,412	$ 881,584

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REAL ESTATE ACQUIRED THROUGH FORECLOSURE (Details) (USD $) In Thousands, unless otherwise specified	6 Months Ended	12 Months Ended
	Jun. 30, 2014	Dec. 31, 2013
Real Estate Acquired Through Foreclosure Details
Balance at beginning of period	$ 6,273	$ 6,284
Additions	1,232	4,140
Sales	(1,561)	(3,302)
Write downs	(289)	(849)
Balance at end of period	$ 5,655	$ 6,273

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CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited) (USD $) In Thousands, except Share data	Common Stock	Additional Paid-In Capital	Retained Earnings	Accumulated Other Comprehensive Income (Loss)	Total
Beginning Balance at Dec. 31, 2012	$ 39	$ 22,048	$ 45,752	$ (325)	$ 67,514
Beginning Balance (in shares) at Dec. 31, 2012	3,837,984
Stock awards	1	(1)
Stock awards (in shares)	164,900
Stock-based compensation expense, net		97			97
Net income			9,956		9,956
Other comprehensive income, net of tax				(2,747)	(2,747)
Ending Balance at Jun. 30, 2013	40	22,144	55,708	(3,072)	74,820
Ending Balance (in shares) at Jun. 30, 2013	4,002,884
Beginning Balance at Dec. 31, 2013	40	22,393	62,169	(2,375)	82,227
Beginning Balance (in shares) at Dec. 31, 2013	4,015,204
Stock awards		132			132
Stock awards (in shares)	21,936
Stock options exercised		44			44
Stock options exercised (in shares)	4,320
Stock-based compensation expense, net		226			226
Net income			4,193		4,193
Dividends declared to stockholders			(411)		(411)
Other comprehensive income, net of tax				2,740	2,740
Ending Balance at Jun. 30, 2014	$ 40	$ 22,921	$ 65,951	$ 365	$ 89,277
Ending Balance (in shares) at Jun. 30, 2014	4,041,460

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DERIVATIVES (Details) (Designated as Hedging Instrument [Member], USD $) In Thousands, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Asset derivatives, Fair value	$ 2,255	$ 1,412
Notional Value, Assets	184,968	128,516
Liability derivatives, Fair value	730	55
Notional Value, Liability	149,000	103,614
Mortgage loan interest rate lock commitments [Member]
Asset derivatives, Fair value	1,672
Notional Value, Assets	159,113
Liability derivatives, Fair value		55
Notional Value, Liability		103,614
Mortgage loan forward sales commitments [Member]
Asset derivatives, Fair value	583	106
Notional Value, Assets	25,855	20,516
Mortgage-backed securities forward sales commitments [Member]
Asset derivatives, Fair value		878
Notional Value, Assets		88,000
Liability derivatives, Fair value	709
Notional Value, Liability	139,000
Interest rate swaps [Member]
Asset derivatives, Fair value		428
Notional Value, Assets		20,000
Liability derivatives, Fair value	21
Notional Value, Liability	$ 10,000

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REAL ESTATE ACQUIRED THROUGH FORECLOSURE (Tables)

6 Months Ended

Jun. 30, 2014

Banking and Thrift [Abstract]

Summary of Changes in Other Real Estate Owned

The following presents summarized activity in other real estate owned for the periods ended June 30, 2014 and December 31, 2013:

	At June 30,			At December 31,
	2014			2013
	(In thousands)
Balance at beginning of period	$	6,273			6,284
Additions		1,232			4,140
Sales		(1,561	)		(3,302	)
Write downs		(289	)		(849	)
Balance at end of period	$	5,655			6,273

Schedule of composition of other real estate owned

A summary of the composition of real estate acquired through foreclosure follows:

	At June 30,		At December 31,
	2014		2013
	(In thousands)
Real estate loans:
One-to-four family	$	521		959
Commercial real estate		1,498		1,781
Construction and development		3,636		3,533
	$	5,655		6,273

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LOANS RECEIVABLE, NET (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2014	Mar. 31, 2014	Dec. 31, 2013	Jun. 30, 2013	Mar. 31, 2013	Dec. 31, 2012
Total gross loans receivable	$ 643,266		$ 564,960
Percentage of Total Loan	100.00%		100.00%
Undisbursed loans in process	29,053		21,550
Allowance for loan losses	8,662	8,401	8,091	8,403	9,638	9,520
Deferred fees, net	256		98
Total loans receivable, net	605,295		535,221
Consumer loans [Member]
Total gross loans receivable	3,132		3,060
Percentage of Total Loan	0.49%		0.54%
Allowance for loan losses	28	29	42	76	87	82
Commercial business loans [Member]
Total gross loans receivable	64,187		33,938
Percentage of Total Loan	9.98%		6.01%
Allowance for loan losses	947	626	339	641	835	862
Loans secured by Real Estate [Member] | One-to-four family [Member]
Total gross loans receivable	209,878		184,210
Percentage of Total Loan	32.62%		32.60%
Allowance for loan losses	2,504	2,568	2,472	2,274	3,010	3,193
Loans secured by Real Estate [Member] | Home equity [Member]
Total gross loans receivable	23,529		23,661
Percentage of Total Loan	3.66%		4.19%
Allowance for loan losses	207	234	231	250	229	276
Loans secured by Real Estate [Member] | Commercial real estate [Member]
Total gross loans receivable	264,911		253,035
Percentage of Total Loan	41.18%		44.79%
Allowance for loan losses	3,173	3,271	2,855	2,898	3,234	3,315
Loans secured by Real Estate [Member] | Construction and development [Member]
Total gross loans receivable	77,629		67,056
Percentage of Total Loan	12.07%		11.87%
Allowance for loan losses	$ 1,225	$ 1,236	$ 1,418	$ 1,305	$ 1,823	$ 1,792

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ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS (Tables)

6 Months Ended

Jun. 30, 2014

Fair Value Disclosures [Abstract]

Schedule of carrying amount and estimated fair value of the Company's financial instruments

The carrying amount and estimated fair value of the Company’s financial instruments at June 30, 2014 and December 31, 2013 are as follows:

	At June 30, 2014
	Carrying		Fair Value
	Amount		Total		Level 1		Level 2		Level 3
Financial assets:	(In thousands)
Cash and due from banks	$	9,560		9,560		9,560		—		—
Interest-bearing cash		17,132		17,132		17,132		—		—
Securities available-for-sale		207,301		207,301		—		207,301		—
Securities held-to-maturity		24,254		25,910		—		15,954		9,956
Federal Home Loan Bank stock		4,730		4,730		—		—		4,730
Other investments		1,944		1,944		—		—		1,944
Derivative assets		2,255		2,255		—		2,255		—
Loans held for sale		47,859		48,442		—		48,442		—
Loans receivable, net		605,295		620,770		—		595,920		24,850
Mortgage servicing rights		9,843		15,238		—		15,238		—
Cash value life insurance		21,228		21,228		—		21,228		—
Financial liabilities:
Deposits		779,536		778,482		—		778,482		—
Short-term borrowed funds		35,300		35,300		—		35,300		—
Long-term debt		69,390		65,549		—		65,549		—
Derivative liabilities		730		730		21		709		—

	At December 31, 2013
	Carrying		Fair Value
	Amount		Total		Level 1		Level 2		Level 3
Financial assets:	(In thousands)
Cash and due from banks	$	4,489		4,489		4,489		—		—
Interest-bearing cash		34,176		34,176		34,176		—		—
Securities available-for-sale		167,535		167,535		—		167,535		—
Securities held-to-maturity		24,554		23,547		—		15,177		8,370
Federal Home Loan Bank stock		4,103		4,103		—		—		4,103
Other investments		1,858		1,858		—		—		1,858
Derivative assets		1,412		1,412		428		984		—
Loans held for sale		36,897		37,041		—		37,041		—
Loans receivable, net		535,221		524,142		—		497,045		27,097
Mortgage servicing rights		10,908		17,718		—		17,718		—
Cash value life insurance		20,910		20,910		—		20,910		—
Financial liabilities:
Deposits		697,581		696,674		—		696,674		—
Short-term borrowed funds		10,300		10,300		—		10,300		—
Long-term debt		74,540		71,462		—		71,462		—
Derivative liabilities		55		55		—		55		—

Schedule of notional amount and estimated fair values of off-balance sheet financial instruments

	At June 30, 2014				At December 31, 2013
	Notional		Estimated		Notional		Estimated
	Amount		Fair Value		Amount		Fair Value
Off-Balance Sheet Financial Instruments:	(In thousands)
Commitments to extend credit	$	46,788		—		38,595		—
Standby letters of credit		720		—		526		—
Derivative assets:
Mortgage loan interest rate lock commitments		159,113		1,672		—		—
Mortgage loan forward sales commitments		25,855		583		20,516		106
Mortgage-backed securities forward sales commitments		—		—		88,000		878
Interest rate swaps		—		—		20,000		428
Derivative liabilities:
Mortgage-backed securities forward sales commitments		139,000		709		—		—
Mortgage loan interest rate lock commitments		—		—		103,614		55
Interest rate swaps		10,000		21		—		—

Summary of assets and liabilities measured at fair value on a recurring basis

Assets and liabilities measured at fair value on a recurring basis are as follows as of June 30, 2014 and December 31, 2013:

	Quoted market price		Significant other		Significant other
	in active markets		observable inputs		unobservable inputs
	(Level 1)		(Level 2)		(Level 3)
	(In thousands)
June 30, 2014
Available-for-sale investment securities:
Municipal securities	$	—		36,097		—
US government agencies		—		4,921		—
Collateralized loan obligations		—		9,696		—
Mortgage-backed securities:
Agency		—		104,142		—
Non-agency		—		52,445		—
Loans held for sale		—		48,442		—
Derivative assets:
Mortgage loan interest rate lock commitments		—		1,672		—
Mortgage loan forward sales commitments		—		583		—
Brokered deposits		—		4,957		—
Derivative liabilities:
Mortgage-backed securities forward sales commitments		—		709
Interest rate swaps		21		—		—
Total	$	21		263,664		—
December 31, 2013
Available-for-sale investment securities:
Municipal securities	$	—		38,499		—
US government agencies		—		5,175		—
Mortgage-backed securities:
Agency		—		69,929		—
Non-agency		—		53,932		—
Loans held for sale		—		37,041		—
Derivative assets:
Mortgage loan forward sales commitments		—		106		—
Mortgage-backed securities forward sales commitments		—		878		—
Interest rate swaps		428		—		—
Brokered deposits		—		4,948		—
Derivative liabilities:
Mortgage loan interest rate lock commitments		—		55		—
Total	$	428		210,563		—

Summary of assets and liabilities measured at a fair value on a nonrecurring basis

Assets measured at fair value on a nonrecurring basis are as follows as of June 30, 2014 and December 31, 2013:

	Quoted market price		Significant other		Significant other
	in active markets		observable inputs		unobservable inputs
	(Level 1)		(Level 2)		(Level 3)
	(In thousands)
June 30, 2014
Impaired loans:
Loans secured by real estate:
One-to-four family	$	—		—		5,997
Commercial real estate		—		—		16,024
Construction and development		—		—		581
Consumer loans		—		—		20
Commercial business loans		—		—		2,228
Real estate owned:
One-to-four family		—		—		521
Commercial real estate		—		—		1,498
Construction and development		—		—		3,636
Total	$	—		—		30,505
December 31, 2013
Impaired loans:
Loans secured by real estate:
One-to-four family	$	—		—		6,117
Home equity		—		—		125
Commercial real estate		—		—		16,953
Construction and development		—		—		1,328
Consumer loans		—		—		20
Commercial business loans		—		—		2,554
Real estate owned:
One-to-four family		—		—		959
Commercial real estate		—		—		1,781
Construction and development		—		—		3,533
Total	$	—		—		33,370

Schedule of significant unobservable inputs used in the fair value measurements

For Level 3 assets and liabilities measured at fair value on a recurring or nonrecurring basis as of June 30, 2014 and December 31, 2013, the significant unobservable inputs used in the fair value measurements were as follows:

	June 30, 2014 and December 31, 2013
		Significant	Significant Unobservable
	Valuation Technique	Observable Inputs	Inputs
Impaired Loans	Appraisal Value	Appraisals and or sales of	Appraisals discounted 10% to 20% for
		comparable properties	sales commissions and other holding costs
Real estate owned	Appraisal Value/	Appraisals and or sales of	Appraisals discounted 10% to 20% for
	Comparison Sales/	comparable properties	sales commissions and other holding costs
	Other estimates

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CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (USD $) In Thousands, unless otherwise specified	6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013
Cash flows from operating activities:
Net income	$ 4,193	$ 9,956
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Provision for loan losses		(700)
Deferred tax expense	224	901
Amortization of unearned discount/premiums on investments, net	1,121	1,283
Amortization of deferred loan fees	(1,284)	(2,658)
Amortization of mortgage servicing rights	913	1,331
(Gain) loss on sale of available-for-sale securities, net	(480)	46
Gain on sale of loans held for sale, net	(5,880)	(21,549)
Originations of loans held for sale	(450,444)	(993,875)
Proceeds from sale of loans held for sale	444,676	1,069,837
Loss on extinquishment of debt	31	19
Provision for mortgage loan repurchase losses	(250)	1,152
Mortgage loan losses paid, net of recoveries	(326)	(341)
Fair value adjustments on interest rate swaps	518	(263)
Stock-based compensation	226	97
Decrease in cash surrender value of bank owned life insurance	54	54
Depreciation	558	452
Gain on disposals of premises and equipment		(4)
Gain on sale of real estate acquired through foreclosure	(92)	(163)
Write-down of real estate acquired through foreclosure	289	401
Gain on sale of servicing assets	(775)
Proceeds from the sale of servicing assets	1,575
Originations of mortgage servicing assets	(648)	(4,780)
Decrease (increase) in:
Accrued interest receivable	(257)	491
Income taxes receivable	(509)
Prepaid FDIC insurance		2,035
Other assets	2,021	3,163
Increase (decrease) in:
Accrued interest payable	14	273
Income taxes payable	(698)	(3,123)
Dividends payable to shareholders	202
Accrued expenses and other liabilities	(1,859)	1,416
Cash flows (used in) provided by operating activities	(6,887)	65,451
Activity in available-for-sale securities:
Purchases	(82,376)	(96,319)
Maturities, payments and calls	17,708	29,375
Proceeds from sales	28,561	45,842
Activity in held-to-maturity securities:
Maturities, payments and calls	316	(42)
Increase in other investments	(86)	(38)
(Increase) decrease in Federal Home Loan Bank stock	(627)	2,760
Increase in loans receivable, net	(70,022)	(2,035)
Purchase of premises and equipment	(1,640)	(219)
Proceeds from disposals of premises and equipment		5
Proceeds from sale of real estate acquired through foreclosure	1,653	1,357
Purchase of bank owned life insurance	(372)	(20,053)
Distribution of bank owned life insurance		91
Cash flows used in investing activities	(106,885)	(39,276)
Cash flows from financing activities:
Net increase in deposit accounts	81,955	38,314
Net increase (decrease) in Federal Home Loan Bank advances	19,969	(56,420)
Net increase in other short-term borrowed funds		(100)
Principal repayment of subordinated debt	(150)	(150)
Net decrease in drafts outstanding	(159)	(328)
Net increase in advances from borrowers for insurance and taxes	425	26
Cash dividends paid on common stock	(411)
Net increase in excess tax benefit in connection with equity awards	126
Proceeds from exercise of stock options	44
Cash flows provided by (used in) financing activities	101,799	(18,658)
Net (decrease) increase in cash and cash equivalents	(11,973)	7,517
Cash and cash equivalents, beginning of period	38,665	17,839
Cash and cash equivalents, end of period	26,692	25,356
Supplemental disclosure
Cash paid for Interest on deposits and borrowed funds	2,738	2,697
Cash paid for Income taxes paid, net of (refunds)	2,917	8,250
Noncash investing and financing activities:
Transfer of loans receivable to real estate acquired through foreclosure	$ 1,232	$ 3,189

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CONSOLIDATED BALANCE SHEETS (Unaudited) (Parenthetical) (USD $) In Thousands, except Share data, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Statement of Financial Position [Abstract]
Securities available for sale at cost	$ 202,570	$ 166,997
Securities held-to-maturity at fair value	25,910	23,547
Loans, allowance for loan losses	$ 8,662	$ 8,091
Preferred stock, par value (in dollars per share)	$ 0.01	$ 0.01
Preferred stock, shares authorized	1,000,000	200,000
Preferred stock, shares issued	0	0
Preferred stock, shares outstanding	0	0
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01
Common stock, shares authorized	10,000,000	6,800,000
Common stock, shares issued	4,041,460	4,015,204
Common stock, shares outstanding	4,041,460	4,015,204

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SUBSEQUENT EVENT

6 Months Ended

Jun. 30, 2014

Subsequent Events [Abstract]

SUBSEQUENT EVENT

NOTE 10 – SUBSEQUENT EVENT

On August 6, 2014, the Bank entered into a definitive agreement with First Community Bank, Bluefield, Virginia, to acquire 13 branches with total deposits of approximately $230 million and approximately $67 million in loans. Three of the offices are in South Carolina and operate under the name “People’s Community Bank” and 10 are in southeastern North Carolina. The deposit premium will be approximately 3.11% of deposits acquired. The transaction, which is subject to regulatory approval and other customary conditions, is expected to close in late 2014 or early 2015.

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Document and Entity Information	6 Months Ended
	Jun. 30, 2014	Aug. 11, 2014
Document And Entity Information
Entity Registrant Name	CAROLINA FINANCIAL CORP
Entity Central Index Key	0000870385
Document Type	10-Q
Document Period End Date	Jun. 30, 2014
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Is Entity a Well-known Seasoned Issuer?	No
Is Entity a Voluntary Filer?	No
Is Entity's Reporting Status Current?	No
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		4,048,868
Document Fiscal Period Focus	Q2
Document Fiscal Year Focus	2014

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

6 Months Ended

Jun. 30, 2014

Accounting Policies [Abstract]

Organization

Organization

Carolina Financial Corporation (“Carolina Financial” or the “Company”), incorporated under the laws of the State of Delaware, is a bank holding company with two wholly-owned subsidiaries, CresCom Bank (the “Bank”) and Carolina Services Corporation of Charleston (“Carolina Services”). The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, the Bank and Carolina Services. In consolidation, all material intercompany accounts and transactions have been eliminated. The results of operations of the businesses acquired in transactions accounted for as purchases are included only from the dates of acquisition. All majority-owned subsidiaries are consolidated unless control is temporary or does not rest with the Company.

At June 30, 2014 and December 31, 2013, statutory business trusts (“Trusts”) created by the Company had outstanding trust preferred securities with an aggregate par value of $15,000,000. The principal assets of the Trusts are $15,465,000 of the Company’s subordinated debentures with identical rates of interest and maturities as the trust preferred securities. The Trusts have issued $465,000 of common securities to the Company and are included in other investments in the accompanying consolidated balance sheets. The Trusts are not consolidated subsidiaries of the Company.

Basis of Presentation

Basis of Presentation

The accompanying unaudited consolidated financial statements and notes have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information or footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with GAAP. Because the accompanying unaudited consolidated financial statements do not include all of the information and footnotes required by GAAP, they should be read in conjunction with the Company’s audited consolidated financial statements and accompanying footnotes included in the Company’s Registration Statement on Form 10, as amended (File No. 000-19029) (the “Form 10”) filed with the Securities and Exchange Commission (“SEC”) on April 1, 2014. There have been no significant changes to the accounting policies as disclosed in the Company’s Form 10.

In management’s opinion, the accompanying unaudited consolidated financial statements reflect all normal, recurring adjustments necessary to present fairly the financial position of the Company as of June 30, 2014 and December 31, 2013, and the results of its operations and cash flows for the three-months and six-months ended June 30, 2014 and 2013. Operating results for the three-month and six-month periods ended June 30, 2014 are not necessarily indicative of the results that may be expected for the year or for other interim periods.

Management's Estimates

Management’s Estimates

The financial statements are prepared in accordance with GAAP in the United States of America, which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, including valuation for impaired loans, the valuation of real estate acquired in connection with foreclosure or in satisfaction of loans, the valuation of securities, the valuation of derivative instruments, the valuation of mortgage servicing rights, the determination of the reserve for mortgage loan repurchase losses, asserted and unasserted legal claims and deferred tax assets or liabilities. In connection with the determination of the allowance for loan losses and foreclosed real estate, management obtains independent appraisals for significant properties. Management must also make estimates in determining the estimated useful lives and methods for depreciating premises and equipment.

Management uses available information to recognize losses on loans and foreclosed real estate. However, future additions to the allowance may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for loan losses and foreclosed real estate. Such agencies may require the Bank to recognize additions to the allowance based on their judgments about information available to them at the time of their examination. Because of these factors, it is reasonably possible that the allowance for loan losses and valuation of foreclosed real estate may change materially in the near term.

Earnings Per Share

Earnings Per Share

Basic earnings per share (“EPS”) represents income available to common stockholders divided by the weighted-average number of shares outstanding during the period. Diluted earnings per share reflects additional shares that would have been outstanding if dilutive potential shares had been issued. Potential shares that may be issued by the Company relate solely to outstanding stock options, restricted stock (non-vested shares), and warrants, and are determined using the treasury stock method. Under the treasury stock method, the number of incremental shares is determined by assuming the issuance of stock for the outstanding stock options and warrants, reduced by the number of shares assumed to be repurchased from the issuance proceeds, using the average market price for the period of the Company’s stock. Weighted-average shares for the basic and diluted EPS calculations have been reduced by the average number of unvested restricted shares.

On January 15, 2014, the Board of Directors of the Company declared a two-for-one stock split to stockholders of record dated February 10, 2014, payable on February 28, 2014. As such, all share, earnings per share, and per share data have been retroactively adjusted to reflect this stock split for all periods presented in accordance with GAAP.

Subsequent Events

Subsequent Events

Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. Non-recognized subsequent events are events that provide evidence about conditions that did not exist at the date of the statement of financial condition but arose after that date. Management has reviewed events occurring through the date the financial statements were issued and no subsequent events occurred requiring accrual or disclosure other than as disclosed in Note 10 regarding the Bank’s entry into an agreement on August 6, 2014 to purchase 13 branches in South Carolina and southeastern North Carolina.

Reclassification

Reclassification

Certain reclassifications of accounts reported for previous periods have been made in these consolidated financial statements. Such reclassifications had no effect on stockholders’ equity or the net income as previously reported.

Recently Issued Accounting Pronouncements

Recently Issued Accounting Pronouncements

The Balance Sheet topic of the Accounting Standards Codification (the “ASC”) was amended in December 2011 for companies with financial instruments and derivative instruments that offset or are subject to a master netting agreement. The amendments require disclosure of both gross information and net information about instruments and transactions eligible for offset or subject to an agreement similar to a master netting agreement. The amendments were effective for reporting periods beginning on or after January 1, 2013 and required retrospective presentation for all comparative periods presented. Additionally, in January 2013 the Financial Accounting Standards Board (the “FASB”) clarified that the amendments apply only to derivatives, repurchase agreements and reverse purchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with specific criteria contained in GAAP or subject to a master netting arrangement or similar agreement. These amendments did not have a material effect on the Company’s financial statements.

The FASB amended the Comprehensive Income topic of the ASC in February 2013. The amendments address reporting of amounts reclassified out of accumulated other comprehensive income. Specifically, the amendments do not change the current requirements for reporting net income or other comprehensive income in financial statements. However, the amendments do require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, in certain circumstances an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income. The amendments were effective for the Company on a prospective basis for reporting periods beginning after December 15, 2013. These amendments did not have a material effect on the Company’s financial statements.

In February 2013, the FASB also amended the Financial Instruments topic of the ASC to address the scope and applicability of certain disclosures to nonpublic companies. The amendments clarify that the requirement to disclose “the level of the fair value hierarchy within the fair value measurements are categorized in their entirety (Level 1, 2, or 3)” does not apply to nonpublic entities for items that are not measured at fair value in the statement of financial position but for which fair value is disclosed. The Company does not expect these amendments to have a material effect on its financial statements.

In April 2013, the FASB issued guidance addressing application of the liquidation basis of accounting. The guidance is intended to clarify when an entity should apply the liquidation basis of accounting. In addition, the guidance provides principles for the recognition and measurement of assets and liabilities and requirements for financial statements prepared using the liquidation basis of accounting. The amendments will be effective for entities that determine liquidation is imminent during annual reporting periods beginning after December 15, 2013, and interim reporting periods therein, and those requirements should be applied prospectively from the day that liquidation becomes imminent. Early adoption is permitted. These amendments did not have any effect on the Company’s financial statements.

In December 2013, the FASB amended the Master Glossary of the FASB Codification to define “Public Business Entity” to minimize the inconsistency and complexity of having multiple definitions of, or a diversity in practice as to what constitutes, a nonpublic entity and public entity within U.S. GAAP. The amendment does not affect existing requirements, however it will be used by the FASB, the Private Company Council (“PCC”), and the Emerging Issues Task Force (“EITF”) in specifying the scope of future financial accounting and reporting guidance. This amendment does not have any effect on the Company’s financial statements.

In January 2014, the FASB amended Receivables topic of the Accounting Standards Codification. The amendments are intended to resolve diversity in practice with respect to when a creditor should reclassify a collateralized consumer mortgage loan to other real estate owned (OREO). In addition, the amendments require a creditor to reclassify a collateralized consumer mortgage loan to OREO upon obtaining legal title to the real estate collateral, or the borrower voluntarily conveying all interest in the real estate property to the lender to satisfy the loan through a deed in lieu of foreclosure or similar legal agreement. The amendments will be effective for the Company for annual periods, and interim periods within those annual periods beginning after December 15, 2014, with early implementation of the guidance permitted. In implementing this guidance, assets that are reclassified from real estate to loans are measured at the carrying value of the real estate at the date of adoption. Assets reclassified from loans to real estate are measured at the lower of the net amount of the loan receivable or the fair value of the real estate less costs to sell at the date of adoption. The Company will apply the amendments prospectively. The Company does not expect these amendments to have a material effect on its financial statements.

In May 2014, the FASB issued guidance to change the recognition of revenue from contracts with customers. The core principle of the new guidance is that an entity should recognize revenue to reflect the transfer of goods and services to customers in an amount equal to the consideration the entity receives or expects to receive. The guidance will be effective for the Company for reporting periods beginning after December 15, 2016. The Company will apply the guidance using a full retrospective approach. The Company does not expect these amendments to have a material effect on its financial statements.

In June 2014, the FASB issued guidance which makes limited amendments to the guidance on accounting for certain repurchase agreements. The new guidance (1) requires entities to account for repurchase-to-maturity transactions as secured borrowings (rather than as sales with forward repurchase agreements), (2) eliminates accounting guidance on linked repurchase financing transactions, and (3) expands disclosure requirements related to certain transfers of financial assets that are accounted for as sales and certain transfers (specifically, repos, securities lending transactions, and repurchase-to-maturity transactions) accounted for as secured borrowings. The amendments will be effective for the Company for the first interim or annual period beginning after December 15, 2014. The Company will apply the guidance by making a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. The Company does not expect these amendments to have a material effect on its financial statements.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

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CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Interest income
Loans	$ 7,157	$ 7,005	$ 13,990	$ 14,084
Debt securities	1,526	1,205	3,047	2,308
Dividends from FHLB	35	31	69	60
Other interest income	25	40	49	58
Total interest income	8,743	8,281	17,155	16,510
Interest expense
Deposits	898	842	1,713	1,708
Short-term borrowed funds	11	80	16	194
Long-term debt	512	546	1,023	1,068
Total interest expense	1,421	1,468	2,752	2,970
Net interest income	7,322	6,813	14,403	13,540
Provision for loan losses		(700)		(700)
Net interest income after provision for loan losses	7,322	7,513	14,403	14,240
Noninterest income
Net gain on sale of loans held for sale	3,426	10,199	5,880	21,549
Deposit service charges	517	371	948	689
Net loss on extinguishment of debt	(31)	(19)	(31)	(19)
Net gain (loss) on sale of securities	164	(62)	480	(46)
Fair value adjustments on interest rate swaps	(263)	263	(518)	263
Net gain on sale of servicing assets			775
Net increase in cash value life insurance	187		373	1
Mortgage loan servicing income	1,254	1,836	2,531	3,328
Other	195	217	380	423
Total noninterest income	5,449	12,805	10,818	26,188
Noninterest expense
Salaries and employee benefits	5,515	6,248	10,859	12,708
Occupancy and equipment	1,051	847	2,035	1,661
Marketing and public relations	297	263	571	498
FDIC insurance	136	157	263	413
Legal expense	191	290	361	440
Other real estate expense, net	60	335	307	411
Mortgage subservicing expense	326	469	689	935
Amortization of mortgage servicing rights	441	738	913	1,331
Settlement of employment agreements		119		1,902
Other	1,474	2,139	3,100	4,329
Total noninterest expense	9,491	11,605	19,098	24,628
Income before income taxes	3,280	8,713	6,123	15,800
Income tax expense	1,031	3,180	1,930	5,844
Net income	$ 2,249	$ 5,533	$ 4,193	$ 9,956
Earnings per common share:
Basic (per share)	$ 0.58	$ 1.44	$ 1.08	$ 2.60
Diluted (per share)	$ 0.57	$ 1.40	$ 1.07	$ 2.53
Weighted average common shares outstanding:
Basic (in shares)	3,881,115	3,832,043	3,866,353	3,829,130
Diluted (in shares)	3,951,478	3,935,880	3,929,948	3,925,920

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REAL ESTATE ACQUIRED THROUGH FORECLOSURE

6 Months Ended

Jun. 30, 2014

Banking and Thrift [Abstract]

REAL ESTATE ACQUIRED THROUGH FORECLOSURE

NOTE 5 – REAL ESTATE ACQUIRED THROUGH FORECLOSURE

The following presents summarized activity in other real estate owned for the periods ended June 30, 2014 and December 31, 2013:

	At June 30,			At December 31,
	2014			2013
	(In thousands)
Balance at beginning of period	$	6,273			6,284
Additions		1,232			4,140
Sales		(1,561	)		(3,302	)
Write downs		(289	)		(849	)
Balance at end of period	$	5,655			6,273

A summary of the composition of real estate acquired through foreclosure follows:

	At June 30,		At December 31,
	2014		2013
	(In thousands)
Real estate loans:
One-to-four family	$	521		959
Commercial real estate		1,498		1,781
Construction and development		3,636		3,533
	$	5,655		6,273

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LOANS RECEIVABLE, NET

6 Months Ended

Jun. 30, 2014

Debt Disclosure [Abstract]

LOANS RECEIVABLE, NET

NOTE 4 - LOANS RECEIVABLE, NET

Loans receivable, net at June 30, 2014 and December 31, 2013 are summarized by category as follows:

	At June 30,					At December 31,
	2014					2013
			% of Total					% of Total
	Amount		Loans			Amount		Loans
	(Dollars in thousands)
Loans secured by real estate:
One-to-four family	$	209,878		32.62	%		184,210		32.60	%
Home equity		23,529		3.66	%		23,661		4.19	%
Commercial real estate		264,911		41.18	%		253,035		44.79	%
Construction and development		77,629		12.07	%		67,056		11.87	%
Consumer loans		3,132		0.49	%		3,060		0.54	%
Commercial business loans		64,187		9.98	%		33,938		6.01	%
Total gross loans receivable		643,266		100.00	%		564,960		100.00	%
Less:
Undisbursed loans in process		29,053					21,550
Allowance for loan losses		8,662					8,091
Deferred fees, net		256					98
Total loans receivable, net	$	605,295					535,221

The composition of gross loans outstanding, net of undisbursed amounts, by rate type is as follows:

	At June 30,				At December 31,
	2014				2013
	(Dollars in thousands)
Variable rate loans	$	252,110	41.05	%		219,589	40.41	%
Fixed rate loans		362,103	58.95	%		323,821	59.59	%
Total loans outstanding	$	614,213	100.00	%		543,410	100.00	%

The following table presents activity in the allowance for loan losses for the period indicated. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

Allowance for loan losses:	For the Three Months Ended June 30, 2014
	Loans Secured by Real Estate
	One-to-						Commercial			Construction
	four			Home			real			and						Commercial
	family			equity			estate			development			Consumer			business		Unallocated		Total
	(In thousands)
Balance at April 1, 2014	$	2,568			234			3,271			1,236			29			626		437		8,401
Provision for loan losses		(80	)		(27	)		(98	)		(13	)		(11	)		88		141		—
Charge-offs		(36	)		—			—			—			—			—		—		(36	)
Recoveries		52			—			—			2			10			233		—		297
Balance at June 30, 2014	$	2,504			207			3,173			1,225			28			947		578		8,662

Allowance for loan losses:	For the Three Months Ended June 30, 2013
	Loans Secured by Real Estate
	One-to-						Commercial			Construction
	four			Home			real			and						Commercial
	family			equity			estate			development			Consumer			business			Unallocated		Total
	(In thousands)
Balance at April 1, 2013	$	3,010			229			3,234			1,823			87			835			420		9,638
Provision for loan losses		(706	)		49			(247	)		(342	)		(18	)		25			539		(700	)
Charge-offs		(48	)		(28	)		(110	)		(248	)		(1	)		(336	)		—		(771	)
Recoveries		18			—			21			72			8			117			—		236
Balance at June 30, 2013	$	2,274			250			2,898			1,305			76			641			959		8,403

Allowance for loan losses:	For the Six Months Ended June 30, 2014
	Loans Secured by Real Estate
	One-to-						Commercial			Construction
	four			Home			real			and						Commercial
	family			equity			estate			development			Consumer			business		Unallocated			Total
	(In thousands)
Balance at January 1, 2014	$	2,472			231			2,855			1,418			42			339		734			8,091
Provision for loan losses		34			(24	)		346			(352	)		(51	)		203		(156	)		—
Charge-offs		(73	)		—			(28	)		(170	)		(13	)		—		—			(284	)
Recoveries		71			—			—			329			50			405		—			855
Balance at June 30, 2014	$	2,504			207			3,173			1,225			28			947		578			8,662

	For the Six Months Ended June 30, 2013
	Loans Secured by Real Estate
	One-to-						Commercial			Construction
	four			Home			real			and						Commercial
	family			equity			estate			development			Consumer			business			Unallocated		Total
	(In thousands)
Balance at January 1, 2013	$	3,193			276			3,315			1,792			82			862			—		9,520
Provision for loan losses		(971	)		2			(380	)		(256	)		(4	)		(50	)		959		(700	)
Charge-offs		(81	)		(28	)		(110	)		(310	)		(34	)		(336	)		—		(899	)
Recoveries		133			—			73			79			32			165			—		482
Balance at June 30, 2013	$	2,274			250			2,898			1,305			76			641			959		8,403

The following table disaggregates our allowance for loan losses and recorded investment in loans by impairment methodology.

	Loans Secured by Real Estate
	One-to-				Commercial		Construction
	four		Home		real		and				Commercial
	family		equity		estate		development		Consumer		business		Unallocated		Total
	(In thousands)
At June 30, 2014:
Allowance for loan losses ending balances:
Individually evaluated for impairment	$	304		—		30		90		4		3		—		431
Collectively evaluated for impairment		2,200		207		3,143		1,135		24		944		578		8,231
	$	2,504		207		3,173		1,225		28		947		578		8,662
Loans receivable ending balances:
Individually evaluated for impairment	$	6,301		—		16,054		671		24		2,231		—		25,281
Collectively evaluated for impairment		202,878		23,319		239,273		65,596		2,848		55,018		—		588,932
Total loans receivable	$	209,179		23,319		255,327		66,267		2,872		57,249		—		614,213
At December 31, 2013:
Allowance for loan losses ending balances:
Individually evaluated for impairment	$	103		—		55		165		20		6		—		349
Collectively evaluated for impairment		2,369		231		2,800		1,253		22		333		734		7,742
	$	2,472		231		2,855		1,418		42		339		734		8,091
Loans receivable ending balances:
Individually evaluated for impairment	$	6,220		125		17,008		1,493		40		2,560		—		27,446
Collectively evaluated for impairment		177,516		23,217		230,859		58,611		2,775		22,986		—		515,964
Total loans receivable	$	183,736		23,342		247,867		60,104		2,815		25,546		—		543,410

The following table presents impaired loans individually evaluated for impairment in the segmented portfolio categories and the corresponding allowance for loan losses as of June 30, 2014 and December 31, 2013. The recorded investment is defined as the original amount of the loan, net of any deferred costs and fees, less any principal reductions and direct charge-offs. Unpaid principal balance includes amounts previously included in charge-offs.

	At June 30, 2014						At December 31, 2013
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
	Investment		Balance		Allowance		Investment		Balance		Allowance
	(In thousands)
With no related allowance recorded:
Loans secured by real estate:
One-to-four family	$	5,162		7,304		—		5,713		7,682		—
Home equity		—		347		—		125		472		—
Commercial real estate		15,789		16,334		—		16,695		17,240		—
Construction and development		404		2,385		—		1,227		3,887		—
Consumer loans		20		546		—		20		404		—
Commercial business loans		2,228		3,804		—		2,554		3,599		—
		23,603		30,720		—		26,334		33,284		—
With an allowance recorded:
Loans secured by real estate:
One-to-four family		1,139		1,139		304		507		607		103
Home equity		—		—		—		—		—		—
Commercial real estate		265		265		30		313		313		55
Construction and development		267		267		90		266		266		165
Consumer loans		4		4		4		20		20		20
Commercial business loans		3		3		3		6		6		6
		1,678		1,678		431		1,112		1,212		349
Total:
Loans secured by real estate:
One-to-four family		6,301		8,443		304		6,220		8,289		103
Home equity		—		347		—		125		472		—
Commercial real estate		16,054		16,599		30		17,008		17,553		55
Construction and development		671		2,652		90		1,493		4,153		165
Consumer loans		24		550		4		40		424		20
Commercial business loans		2,231		3,807		3		2,560		3,605		6
	$	25,281		32,398		431		27,446		34,496		349

The following table presents the average recorded investment and interest income recognized on impaired loans individually evaluated for impairment in the segmented portfolio categories for the three and six months ended June 30, 2014 and 2013.

	For the Three Months Ended June 30,									For the Six Months Ended June 30,
	2014					2013				2014				2013
	Average		Interest			Average		Interest		Average		Interest		Average		Interest
	Recorded		Income			Recorded		Income		Recorded		Income		Recorded		Income
	Investment		Recognized			Investment		Recognized		Investment		Recognized		Investment		Recognized
	(In thousands)
With no related allowance recorded:
Loans secured by real estate:
One-to-four family	$	5,302		(9	)		4,724		73		5,431		44		7,253		100
Home equity		—		—			83		1		—		—		83		—
Commercial real estate		16,000		119			15,245		154		16,423		267		19,573		257
Construction and development		405		1			376		1		428		3		2,604		(5	)
Consumer loans		20		(3	)		37		1		22		—		37		—
Commercial business loans		2,264		(25	)		2,238		27		2,372		53		2,810		57
		23,991		83			22,703		257		24,676		367		32,360		409
With an allowance recorded:
Loans secured by real estate:
One-to-four family		841		(3	)		2,590		—		467		2		62		—
Home equity		—		—			—		—		—		—		—		—
Commercial real estate		266		4			4,372		1		269		9		44		—
Construction and development		200		1			2,228		—		100		1		—		—
Consumer loans		5		—			19		—		6		—		19		—
Commercial business loans		4		—			1,248		1		4		—		677		—
		1,316		2			10,457		2		846		12		802		—
Total:
Loans secured by real estate:
One-to-four family		6,143		(12	)		7,314		73		5,898		46		7,315		100
Home equity		—		—			83		1		—		—		83		—
Commercial real estate		16,266		123			19,617		155		16,692		276		19,617		257
Construction and development		605		2			2,604		1		528		4		2,604		(5	)
Consumer loans		25		(3	)		56		1		28		—		56		—
Commercial business loans		2,268		(25	)		3,486		28		2,376		53		3,487		57
	$	25,307		85			33,160		259		25,522		379		33,162		409

The Company was not committed to advance additional funds in connection with impaired loans as of June 30, 2014 and was committed to advance up to $230,000 in additional funds as of December 31, 2013.

A loan is considered past due if the required principal and interest payment has not been received as of the due date. The following schedule is an aging of past due loans receivable by portfolio segment as of June 30, 2014 and December 31, 2013.

	At June 30, 2014
	Real estate loans
	One-to-				Commercial		Construction
	four		Home		real		and				Commercial
	family		equity		estate		development		Consumer		business		Total
	(In thousands)
30-59 days past due	$	2,626		207		265		168		—		—		3,266
60-89 days past due		700		—		191		—		5		—		896
90 days or more past due		4,116		—		4,285		660		4		168		9,233
Total past due		7,442		207		4,741		828		9		168		13,395
Current		201,737		23,112		250,586		65,439		2,863		57,081		600,818
Total loans receivable	$	209,179		23,319		255,327		66,267		2,872		57,249		614,213
	At December 31, 2013
	Real estate loans
	One-to-				Commercial		Construction
	four		Home		real		and				Commercial
	family		equity		estate		development		Consumer		business		Total
	(In thousands)
30-59 days past due	$	231		—		273		53		—		—		557
60-89 days past due		1,034		—		—		—		—		—		1,034
90 days or more past due		3,440		125		5,074		1,477		7		431		10,554
Total past due		4,705		125		5,347		1,530		7		431		12,145
Current		179,031		23,217		242,520		58,574		2,808		25,115		531,265
Total loans receivable	$	183,736		23,342		247,867		60,104		2,815		25,546		543,410

Loans are generally placed in nonaccrual status when the collection of principal and interest is 90 days or more past due, unless the obligation is both well-secured and in the process of collection. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest payments received while the loan is on nonaccrual are applied to the principal balance. No interest income was recognized on impaired loans subsequent to the nonaccrual status designation. A loan is returned to accrual status when the borrower makes consistent payments according to contractual terms and future payments are reasonably assured. There were no loans past due 90 days or more and still accruing at June 30, 2014 or December 31, 2013.

The following is a schedule of loans receivable, by portfolio segment, on nonaccrual at June 30, 2014 and December 31, 2013.

	At June 30,		At December 31,
	2014		2013
Loans secured by real estate:	(In thousands)
One-to-four family	$	4,270		3,902
Home equity		—		125
Commercial real estate		4,285		5,114
Construction and development		661		1,481
Consumer loans		5		20
Commercial business loans		172		437
	$	9,393		11,079

The Company uses several metrics as credit quality indicators of current or potential risks as part of the ongoing monitoring of credit quality of its loan portfolio. The credit quality indicators are periodically reviewed and updated on a case-by-case basis. The Company uses the following definitions for the internal risk rating grades, listed from the least risk to the highest risk.

Pass: These loans range from minimal credit risk to average, however, still acceptable credit risk.

Special mention: A special mention loan has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or the institution’s credit position at some future date.

Substandard: A substandard loan is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness, or weaknesses, that may jeopardize the liquidation of the debt. A substandard loan is characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

Doubtful: A doubtful loan has all of the weaknesses inherent in one classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of the currently existing facts, conditions and values, highly questionable and improbable.

The Company uses the following definitions in the tables below:

Nonperforming: Loans on nonaccrual status plus loans greater than 90 days past due still accruing interest.

Performing: All current loans plus loans less than 90 days past due.

The following is a schedule of the credit quality of loans receivable, by portfolio segment, as of June 30, 2014 and December 31, 2013.

	At June 30, 2014
	Real estate loans
	One-to-				Commercial		Construction
	four		Home		real		and				Commercial
	family		equity		estate		development		Consumer		business		Total
	(In thousands)
Internal Risk Rating Grades:
Pass	$	204,774		23,319		240,146		65,294		2,867		56,177		592,577
Special Mention		1,046		—		10,631		282		—		900		12,859
Substandard		3,359		—		4,550		691		5		172		8,777
Total loans receivable	$	209,179		23,319		255,327		66,267		2,872		57,249		614,213
Performing	$	204,909		23,319		251,042		65,606		2,867		57,077		604,820
Nonperforming:
90 days or more and still accruing		—		—		—		—		—		—		—
Nonaccrual		4,270		—		4,285		661		5		172		9,393
Total nonperforming		4,270		—		4,285		661		5		172		9,393
Total loans receivable	$	209,179		23,319		255,327		66,267		2,872		57,249		614,213
	At December 31, 2013
	Real estate loans
	One-to-				Commercial		Construction
	four		Home		real		and				Commercial
	family		equity		estate		development		Consumer		business		Total
	(In thousands)
Internal Risk Rating Grades:
Pass	$	177,878		23,217		231,269		58,563		2,795		24,823		518,545
Special Mention		1,679		—		10,633		295		—		286		12,893
Substandard		4,179		125		5,965		1,246		20		437		11,972
Total loans receivable	$	183,736		23,342		247,867		60,104		2,815		25,546		543,410
Performing	$	179,834		23,217		242,753		58,623		2,795		25,109		532,331
Nonperforming:
90 days or more and still accruing		—		—		—		—		—		—		—
Nonaccrual		3,902		125		5,114		1,481		20		437		11,079
Total nonperforming		3,902		125		5,114		1,481		20		437		11,079
Total loans receivable	$	183,736		23,342		247,867		60,104		2,815		25,546		543,410

Troubled Debt Restructurings

At June 30, 2014, there were $22.0 million in loans designated as troubled debt restructurings of which $15.5 million were accruing. At December 31, 2013, there were $23.7 million in loans designated as troubled debt restructurings of which $16.4 million were accruing.

There were no loans designated as troubled debt restructings during the three or six months ended June 30, 2014 or 2013.

No loans previously restructured in the twelve months prior to June 30, 2014 and 2013 went into default during the period ended June 30, 2014 and 2013.

The Company is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheets.

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DEPOSITS (Tables)

6 Months Ended

Jun. 30, 2014

Banking and Thrift [Abstract]

Summary of Deposits outstanding

Deposits outstanding by type of account at June 30, 2014 and December 31, 2013 are summarized as follows:

	At June 30,		At December 31,
	2014		2013
	(In thousands)
Noninterest-bearing demand accounts	$	102,376		83,500
Interest-bearing demand accounts		128,431		92,067
Savings accounts		24,757		17,816
Money market accounts		208,658		220,915
Certificates of deposit:
Less than $100,000		211,277		195,239
$100,000 or more		104,037		88,044
Total certificates of deposit		315,314		283,283
Total deposits	$	779,536		697,581

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SECURITIES (Tables)

6 Months Ended

Jun. 30, 2014

Investments, Debt and Equity Securities [Abstract]

Schedule of investment securities available for sale

The amortized cost, gross unrealized gains, gross unrealized losses and fair value of investments securities available-for-sale and held-to-maturity at June 30, 2014 and December 31, 2013 follows:

	June 30, 2014									December 31, 2013
			Gross		Gross							Gross		Gross
	Amortized		Unrealized		Unrealized			Fair		Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value		Cost		Gains		Losses			Value
	(In thousands)
Securities available-for-sale:
Municipal securities	$	35,256		1,071		(230	)		36,097		39,790		99		(1,390	)		38,499
US government agencies		4,944		—		(23	)		4,921		5,199		—		(24	)		5,175
Collateralized loan obligations		9,708		—		(12	)		9,696		—		—		—			—
Mortgage-backed securities:
Agency		101,080		3,101		(39	)		104,142		68,813		1,433		(317	)		69,929
Non-agency		51,582		1,117		(254	)		52,445		53,195		826		(89	)		53,932
Total mortgage-backed securities		152,662		4,218		(293	)		156,587		122,008		2,259		(406	)		123,861
Total	$	202,570		5,289		(558	)		207,301		166,997		2,358		(1,820	)		167,535

Schedule of investment securities held to maturity

The amortized cost, gross unrealized gains, gross unrealized losses and fair value of investments securities available-for-sale and held-to-maturity at June 30, 2014 and December 31, 2013 follows:

	June 30, 2014									December 31, 2013
			Gross		Gross							Gross		Gross
	Amortized		Unrealized		Unrealized			Fair		Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value		Cost		Gains		Losses			Value
	(In thousands)
Securities held-to-maturity:
Municipal securities	$	15,395		611		(52	)		15,954		15,488		30		(341	)		15,177
Asset-backed securities		8,859		3,066		(1,969	)		9,956		9,066		2,107		(2,803	)		8,370
Total	$	24,254		3,677		(2,021	)		25,910		24,554		2,137		(3,144	)		23,547

Schedule of unrealized losses related to the trust preferred securities that were recognized within other comprehensive income at the time of transfer to held-to-maturity

The following table presents unrealized losses related to the trust preferred securities that were recognized within other comprehensive income at the time of transfer to held-to-maturity as well as the unrealized gains and losses that are not presented in other comprehensive income for June 30, 2014 and December 31, 2013.

	At June 30, 2014
								Recognized in OCI							Not Recognized in OCI
								Gross Unrealized							Gross Unrealized
	Purchased Face Value		Cumulative OTTI			Carrying Value		Gains		Losses			Amortized Cost		Gains		Losses			Estimated Fair Value		Collateralization Percentage
Held-to-Maturity:	(In thousands)
Trust Preferred Securities
Total A-Class	$	2,465		—			2,465		—		(572	)		1,893		363		—			2,256		179%-376%
Total B-Class		11,855		(2,635	)		9,221		—		(2,514	)		6,707		1,812		(1,969	)		6,550		94%-105%
Total C-Class		2,708		(1,340	)		1,367		—		(1,108	)		259		891		—			1,150		88%-88%
	$	17,028		(3,975	)		13,053		—		(4,194	)		8,859		3,066		(1,969	)		9,956
	At December 31, 2013
								Recognized in OCI							Not Recognized in OCI
								Gross Unrealized							Gross Unrealized
	Purchased Face Value		Cumulative OTTI			Carrying Value		Gains		Losses			Amortized Cost		Gains		Losses			Estimated Fair Value		Collateralization Percentage
Held-to-Maturity:	(In thousands)
Trust Preferred Securities
Total A-Class	$	2,841		—			2,841		—		(586	)		2,255		354		(99	)		2,510		164% - 324%
Total B-Class		11,804		(2,635	)		9,169		—		(2,569	)		6,600		1,190		(2,704	)		5,086		94% - 98%
Total C-Class		2,688		(1,340	)		1,348		—		(1,137	)		211		563		—			774		83% - 83%
	$	17,333		(3,975	)		13,358		—		(4,292	)		9,066		2,107		(2,803	)		8,370

Schedule of amortized costs and fair values of investment securities, by contractual maturity

The amortized cost and fair value of debt securities by contractual maturity at June 30, 2014 follows:

	At June 30, 2014
	Amortized		Fair
	Cost		Value
	(In thousands)
Securities available-for-sale:
Less than one year	$	—		—
One to five years		—		—
Five to ten years		17,753		17,760
After ten years		184,817		189,541
Total	$	202,570		207,301
Securities held-to-maturity:
Less than one year	$	—		—
One to five years		970		989
Five to ten years		4,480		4,455
After ten years		18,804		20,466
Total	$	24,254		25,910

Schedule of gross realized gains and losses from sales of investment securities available-for-sale

The following table summarizes the gross realized gains and losses from sales of investment securities available-for-sale for the periods indicated.

	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2014			2013			2014			2013
	(In thousands)
Proceeds	$	18,753			40,104			28,561			45,842
Realized gains		204			360			520			376
Realized losses		(40	)		(422	)		(40	)		(422	)
Total investment securities gains, net	$	164			(62	)		480			(46	)

Schedule of securities in a continuous unrealized loss position aggregated by investment category and length of time

The gross unrealized losses and fair value of the Company’s investments available-for-sale with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2014 are as follows:

	At June 30, 2014
	Less than 12 Months							12 Months or Greater							Total
	Amortized		Fair		Unrealized			Amortized		Fair		Unrealized			Amortized		Fair		Unrealized
	Cost		Value		Losses			Cost		Value		Losses			Cost		Value		Losses
	(In thousands)
Available-for-sale:
Municipal securities	$	10,513		10,353		(160	)		4,208		4,138		(70	)		14,721		14,491		(230	)
US government agencies		4,944		4,921		(23	)		—		—		—			4,944		4,921		(23	)
Collateralized loan obligations		4,708		4,696		(12	)		—		—		—			4,708		4,696		(12	)
Mortgage-backed securities:
Agency		3,639		3,600		(39	)		—		—		—			3,639		3,600		(39	)
Non-agency		9,239		8,998		(241	)		1,676		1,663		(13	)		10,915		10,661		(254	)
Total mortgage-backed securities		12,878		12,598		(280	)		1,676		1,663		(13	)		14,554		14,261		(293	)
Total	$	33,043		32,568		(475	)		5,884		5,801		(83	)		38,927		38,369		(558	)
Held-to-maturity:
Municipal securities	$	—		—		—			3,349		3,297		(52	)		3,349		3,297		(52	)
Asset-backed
securities		—		—		—			6,481		4,512		(1,969	)		6,481		4,512		(1,969	)
Total	$	—		—		—			9,830		7,809		(2,021	)		9,830		7,809		(2,021	)

The gross unrealized losses and fair value of the Company’s investments available-for-sale with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2013 are as follows:

	At December 31, 2013
	Less than 12 Months							12 Months or Greater							Total
	Amortized		Fair		Unrealized			Amortized		Fair		Unrealized			Amortized		Fair		Unrealized
	Cost		Value		Losses			Cost		Value		Losses			Cost		Value		Losses
	(In thousands)
Available-for-sale:
Municipal securities	$	27,108		25,917		(1,191	)		3,157		2,958		(199	)		30,265		28,875		(1,390	)
US government agencies		5,199		5,175		(24	)		—		—		—			5,199		5,175		(24	)
Mortgage-backed securities:
Agency		27,140		26,823		(317	)		—		—		—			27,140		26,823		(317	)
Non-agency		15,006		14,951		(55	)		3,660		3,626		(34	)		18,666		18,577		(89	)
Total mortgage-backed securities		42,146		41,774		(372	)		3,660		3,626		(34	)		45,806		45,400		(406	)
Total	$	74,453		72,866		(1,587	)		6,817		6,584		(233	)		81,270		79,450		(1,820	)
Held-to-maturity:
Municipal securities	$	11,945		11,734		(211	)		2,177		2,047		(130	)		14,122		13,781		(341	)
Asset-backed  securities		—		—		—			7,398		4,595		(2,803	)		7,398		4,595		(2,803	)
Total	$	11,945		11,734		(211	)		9,575		6,642		(2,933	)		21,520		18,376		(3,144	)

Schedule of cumulative credit related OTTI related to securities held-to-maturity

The following table presents the cumulative credit related OTTI related to securities held-to-maturity taken as well as the activity at June 30, 2014 and December 31, 2013 for the trust preferred securities.

	At June 30,		At December 31,
	2014		2013
	(In thousands)
Balance at beginning of year	$	3,975		3,975
Additions for credit losses on securities  for which OTTI was not previously recognized		—		—
Additions for additional credit losses on securities for which OTTI was previously recognized		—		—
Balance at end of year	$	3,975		3,975

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EARNINGS PER SHARE

6 Months Ended

Jun. 30, 2014

Earnings per common share:

EARNINGS PER SHARE

NOTE 8 - EARNINGS PER SHARE

Basic earnings per share are calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding plus the weighted average number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued. Diluted earnings per share include the effects of outstanding stock options and restricted stock issued by the Company, if dilutive. The number of additional shares is calculated by assuming that outstanding stock options were exercised and that the proceeds from such exercises and vesting were used to acquire shares of common stock at the average market price during the reporting period.

As stated in Note 1, on January 15, 2014, the Board of Directors of the Company declared a two-for-one stock split to stockholders of record dated February 10, 2014, payable on February 28, 2014. All share, earnings per share, and per share data have been retroactively adjusted to reflect this stock split for all periods presented in accordance with GAAP.

The following is a summary of the reconciliation of weighted average shares outstanding for the three and six months ended June 30, 2014 and 2013:

	For the Three Months Ended June 30,
	2014				2013
	Basic		Diluted		Basic		Diluted
Weighted average shares outstanding		3,881,115		3,881,115		3,832,043		3,832,043
Effect of dilutive securities		—		70,363		—		103,837
Weighted average shares outstanding		3,881,115		3,951,478		3,832,043		3,935,880

	For the Six Months Ended June 30,
	2014				2013
	Basic		Diluted		Basic		Diluted
Weighted average shares outstanding		3,866,353		3,866,353		3,829,130		3,829,130
Effect of dilutive securities		—		63,595		—		96,790
Weighted average shares outstanding		3,866,353		3,929,948		3,829,130		3,925,920

XML

DEPOSITS

6 Months Ended

Jun. 30, 2014

Banking and Thrift [Abstract]

DEPOSITS

NOTE 6 - DEPOSITS

Deposits outstanding by type of account at June 30, 2014 and December 31, 2013 are summarized as follows:

	At June 30,		At December 31,
	2014		2013
	(In thousands)
Noninterest-bearing demand accounts	$	102,376		83,500
Interest-bearing demand accounts		128,431		92,067
Savings accounts		24,757		17,816
Money market accounts		208,658		220,915
Certificates of deposit:
Less than $100,000		211,277		195,239
$100,000 or more		104,037		88,044
Total certificates of deposit		315,314		283,283
Total deposits	$	779,536		697,581

The aggregate amount of brokered certificates of deposit was $83.0 million and $61.8 million at June 30, 2014 and December 31, 2013, respectively. Brokered certificates of deposit are included in the table above under certificates of deposit less than $100,000. The aggregate amount of institutional certificates of deposit was $47.0 million and $40.0 million at June 30, 2014 and December 31, 2013, respectively.

The following table summarizes the interest expense recorded on certificate of deposits greater than $100,000 for the periods indicated.

	For the Three Months				For the Six Months
	Ended June 30,				Ended June 30,
	2014		2013		2014		2013
	(In thousands)
Certificates of deposit:
$100,000 or more	$	216		170		395		328

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ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS

6 Months Ended

Jun. 30, 2014

Fair Value Disclosures [Abstract]

ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS

NOTE 7 – ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS

Current accounting literature requires disclosures about the fair value of all financial instruments whether or not recognized in the balance sheet, for which it is practicable to estimate the value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized through immediate settlement of the instrument. Certain items are specifically excluded from disclosure requirements, including the Company’s stock, premises and equipment, accrued interest receivable and payable and other assets and liabilities.

The fair value of a financial instrument is an amount at which the asset or obligation could be exchanged in a current transaction between willing parties, other than in a forced sale. Fair values are estimated at a specific point in time based on relevant market information and information about the financial instruments. Because no market value exists for a significant portion of the financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors.

The Company has used management’s best estimate of fair value based on the above assumptions. Thus the fair values presented may not be the amounts that could be realized in an immediate sale or settlement of the instrument. In addition, any income taxes or other expenses that would be incurred in an actual sale or settlement are not taken into consideration in the fair values presented.

The Company determines the fair value of its financial instruments based on the fair value hierarchy established under ASC 820-10, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the financial instrument’s fair value measurement in its entirety. There are three levels of inputs that may be used to measure fair value. The three levels of inputs of the valuation hierarchy are defined below:

Level 1

Quoted prices (unadjusted) in active markets for identical assets and liabilities for the instrument or security to be valued. Level 1 assets include marketable equity securities as well as U.S. Treasury securities that are highly liquid and are actively traded in over-the-counter markets.

Level 2

Observable inputs other than Level 1 quoted prices, such as quoted prices for similar assets and liabilities in active markets, quoted prices in markets that are not active, or model-based valuation techniques for which all significant assumptions are derived principally from or corroborated by observable market data. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments and derivative contracts whose value is determined by using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. U.S. Government sponsored agency securities, mortgage-backed securities issued by U.S. Government sponsored enterprises and agencies, obligations of states and municipalities, collateralized mortgage obligations issued by U.S. Government sponsored enterprises, and mortgage loans held-for-sale are generally included in this category. Certain private equity investments that invest in publicly traded companies are also considered Level 2 assets.

Level 3 Unobservable inputs that are supported by little, if any, market activity for the asset or liability. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow models and similar techniques, and may also include the use of market prices of assets or liabilities that are not directly comparable to the subject asset or liability. These methods of valuation may result in a significant portion of the fair value being derived from unobservable assumptions that reflect The Company’s own estimates for assumptions that market participants would use in pricing the asset or liability. This category primarily includes collateral-dependent impaired loans, other real estate, certain equity investments, and certain private equity investments.

Cash and due from banks - The carrying amounts of these financial instruments approximate fair value. All mature within 90 days and present no anticipated credit concerns.

Interest-bearing cash - The carrying amounts of these financial instruments approximate fair value.

Securities available-for-sale and securities held-to-maturity – Fair values for investment securities available-for-sale and securities held to maturity are based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions.

FHLB stock and other non-marketable equity securities - The carrying amounts of these financial instruments approximate fair value.

Mortgage loans held for sale – Mortgage loans held for sale are recorded at either fair value, if elected, or the lower of cost or fair value on an individual loan basis. Origination fees and costs for loans held for sale recorded at lower of cost or market are capitalized in the basis of the loan and are included in the calculation of realized gains and losses upon sale. Origination fees and costs are recognized in earnings at the time of origination for loans held for sale that are recorded at fair value. Fair value is derived from observable current market prices, when available, and includes loan servicing value. When observable market prices are not available, the Company uses judgment and estimates fair value using internal models, in which the Company uses its best estimates of assumptions it believes would be used by market participants in estimating fair value. Mortgage loans held for sale are classified within Level 2 of the valuation hierarchy.

Loans receivable - For variable rate loans that reprice frequently and have no significant change in credit risk, estimated fair values are based on carrying values and are classified as Level 2. Estimated fair values for certain mortgage loans, credit card loans, and other consumer loans are based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted for differences in loan characteristics and are classified as Level 2. Estimated fair values for commercial real estate and commercial loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality and are classified as Level 2. Estimated fair values on impaired loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable. Impaired loans not requiring a specific charge against the allowance represent loans for which the fair value of the expected repayments or collateral meet or exceed the recorded investment in the loan. Loans which are deemed to be impaired are primarily valued on a nonrecurring basis at the fair value of the underlying real estate collateral. Such fair values are obtained using independent appraisals, which the Company considers to be Level 3 inputs.

Mortgage servicing rights - The Company initially measures servicing assets and liabilities retained related to the sale of residential loans held for sale (“mortgage servicing rights”) at fair value, if practicable. For subsequent measurement purposes, the Company measures servicing assets and liabilities based on the lower of cost or market.

Deposits - The estimated fair value of demand deposits, savings accounts, and money market accounts is the amount payable on demand at the reporting date. The estimated fair value of fixed maturity certificates of deposits is estimated by discounting the future cash flows using rates currently offered for deposits of similar remaining maturities.

Bank-owned life insurance - The cash surrender value of bank owned life insurance policies held by the Bank approximates fair values of the policies.

Short-term borrowed funds - The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings maturing within 90 days approximate their fair values. Estimated fair values of other short-term borrowings are estimated using discounted cash flow analyses based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.

Long-term debt - The estimated fair values of the Company’s long-term debt are estimated using discounted cash flow analyses based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.

Derivative asset and liabilities – The primary use of derivative instruments are related to the mortgage banking activities of the Company. The Company’s wholesale mortgage banking subsidiary enters into interest rate lock commitments related to expected funding of residential mortgage loans at specified times in the future. Interest rate lock commitments that relate to the origination of mortgage loans that will be held-for-sale are considered derivative instruments under applicable accounting guidance. As such, the Company records its interest rate lock commitments and forward loan sales commitments at fair value, determined as the amount that would be required to settle each of these derivative financial instruments at the balance sheet date. In the normal course of business, the mortgage subsidiary enters into contractual interest rate lock commitments to extend credit, if approved, at a fixed interest rate and with fixed expiration dates. The commitments become effective when the borrowers “lock-in” a specified interest rate within the time frames established by the mortgage banking subsidiary. Market risk arises if interest rates move adversely between the time of the interest rate lock by the borrower and the sale date of the loan to an investor. To mitigate the effect of the interest rate risk inherent in providing interest rate lock commitments to borrowers, the mortgage banking subsidiary enters into best efforts forward sales contracts with third party investors. The forward sales contracts lock in a price for the sale of loans similar to the specific interest rate lock commitments. Both the interest rate lock commitments to the borrowers and the forward sales contracts to the investors that extend through to the date the loan may close are derivatives, and accordingly, are marked to fair value through earnings. In estimating the fair value of an interest rate lock commitment, the Company assigns a probability to the interest rate lock commitment based on an expectation that it will be exercised and the loan will be funded. The fair value of the interest rate lock commitment is derived from the fair value of related mortgage loans, which is based on observable market data and includes the expected net future cash flows related to servicing of the loans. The fair value of the interest rate lock commitment is also derived from inputs that include guarantee fees negotiated with the agencies and private investors, buy-up and buy-down values provided by the agencies and private investors, and interest rate spreads for the difference between retail and wholesale mortgage rates. Management also applies fall-out ratio assumptions for those interest rate lock commitments for which we do not close a mortgage loan. The fall-out ratio assumptions are based on the mortgage subsidiary’s historical experience, conversion ratios for similar loan commitments, and market conditions. While fall-out tendencies are not exact predictions of which loans will or will not close, historical performance review of loan-level data provides the basis for determining the appropriate fall out ratios. In addition, on a periodic basis, the mortgage banking subsidiary performs analysis of actual rate lock fall-out experience to determine the sensitivity of the mortgage pipeline to interest rate changes from the date of the commitment through loan origination, and then period end, using applicable published mortgage-backed investment security prices. The expected fall-out ratios (or conversely the “pull-through” percentages) are applied to the determined fair value of the unclosed mortgage pipeline in accordance with GAAP. Changes to the fair value of interest rate lock commitments are recognized based on interest rate changes, changes in the probability that the commitment will be exercised, and the passage of time. The fair value of the forward sales contracts to investors considers the market price movement of the same type of security between the trade date and the balance sheet date. These instruments are defined as Level 2 within the valuation hierarchy.

Derivative instruments not related to mortgage banking activities, including financial futures commitments and interest rate swap agreements that do not satisfy the hedge accounting requirements are recorded at fair value and are classified with resultant changes in fair value being recognized in noninterest income in the consolidated statement of operations. Fair values for these instruments are based on quoted market prices, when available. As such, the fair value adjustments for derivatives with fair values based on quoted market prices are recurring Level 1.

Commitments to extend credit – The carrying amounts of these commitments are considered to be a reasonable estimate of fair value because the commitments underlying interest rates are based upon current market rates.

Off-balance sheet financial instruments – Contract values and fair values for off-balance sheet, credit-related financial instruments are based on estimated fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and counterparties’ credit standing.

The carrying amount and estimated fair value of the Company’s financial instruments at June 30, 2014 and December 31, 2013 are as follows:

	At June 30, 2014
	Carrying		Fair Value
	Amount		Total		Level 1		Level 2		Level 3
Financial assets:	(In thousands)
Cash and due from banks	$	9,560		9,560		9,560		—		—
Interest-bearing cash		17,132		17,132		17,132		—		—
Securities available-for-sale		207,301		207,301		—		207,301		—
Securities held-to-maturity		24,254		25,910		—		15,954		9,956
Federal Home Loan Bank stock		4,730		4,730		—		—		4,730
Other investments		1,944		1,944		—		—		1,944
Derivative assets		2,255		2,255		—		2,255		—
Loans held for sale		47,859		48,442		—		48,442		—
Loans receivable, net		605,295		620,770		—		595,920		24,850
Mortgage servicing rights		9,843		15,238		—		15,238		—
Cash value life insurance		21,228		21,228		—		21,228		—
Financial liabilities:
Deposits		779,536		778,482		—		778,482		—
Short-term borrowed funds		35,300		35,300		—		35,300		—
Long-term debt		69,390		65,549		—		65,549		—
Derivative liabilities		730		730		21		709		—

	At December 31, 2013
	Carrying		Fair Value
	Amount		Total		Level 1		Level 2		Level 3
Financial assets:	(In thousands)
Cash and due from banks	$	4,489		4,489		4,489		—		—
Interest-bearing cash		34,176		34,176		34,176		—		—
Securities available-for-sale		167,535		167,535		—		167,535		—
Securities held-to-maturity		24,554		23,547		—		15,177		8,370
Federal Home Loan Bank stock		4,103		4,103		—		—		4,103
Other investments		1,858		1,858		—		—		1,858
Derivative assets		1,412		1,412		428		984		—
Loans held for sale		36,897		37,041		—		37,041		—
Loans receivable, net		535,221		524,142		—		497,045		27,097
Mortgage servicing rights		10,908		17,718		—		17,718		—
Cash value life insurance		20,910		20,910		—		20,910		—
Financial liabilities:
Deposits		697,581		696,674		—		696,674		—
Short-term borrowed funds		10,300		10,300		—		10,300		—
Long-term debt		74,540		71,462		—		71,462		—
Derivative liabilities		55		55		—		55		—

	At June 30, 2014				At December 31, 2013
	Notional		Estimated		Notional		Estimated
	Amount		Fair Value		Amount		Fair Value
Off-Balance Sheet Financial Instruments:	(In thousands)
Commitments to extend credit	$	46,788		—		38,595		—
Standby letters of credit		720		—		526		—
Derivative assets:
Mortgage loan interest rate lock commitments		159,113		1,672		—		—
Mortgage loan forward sales commitments		25,855		583		20,516		106
Mortgage-backed securities forward sales commitments		—		—		88,000		878
Interest rate swaps		—		—		20,000		428
Derivative liabilities:
Mortgage-backed securities forward sales commitments		139,000		709		—		—
Mortgage loan interest rate lock commitments		—		—		103,614		55
Interest rate swaps		10,000		21		—		—

In determining appropriate levels, the Company performs a detailed analysis of the assets and liabilities that are subject to fair value disclosures. At each reporting period, all assets and liabilities for which the fair value measurement is based on significant unobservable inputs are classified as Level 3.

Following is a description of valuation methodologies used for assets recorded at fair value on a recurring and non-recurring basis.

Investment Securities Available-for-Sale

Measurement is on a recurring basis upon quoted market prices, if available. If quoted market prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for prepayment assumptions, projected credit losses, and liquidity. At June 30, 2014 and December 31, 2013, the Company’s investment securities available-for-sale are recurring Level 2.

Mortgage Loans Held for Sale

Mortgage loans held for sale are recorded at either fair value, if elected, or the lower of cost or fair value on an individual loan basis. Origination fees and costs for loans held for sale recorded at lower of cost or market are capitalized in the basis of the loan and are included in the calculation of realized gains and losses upon sale. Origination fees and costs are recognized in earnings at the time of origination for loans held for sale that are recorded at fair value. Fair value is derived from observable current market prices, when available, and includes loan servicing value. When observable market prices are not available, the Company uses judgment and estimates fair value using internal models, in which the Company uses its best estimates of assumptions it believes would be used by market participants in estimating fair value. Mortgage loans held for sale are classified within Level 2 of the valuation hierarchy.

Derivative Assets and Liabilities

The primary use of derivative instruments is related to the mortgage banking activities of the Company. The Company’s wholesale mortgage banking subsidiary enters into interest rate lock commitments related to expected funding of residential mortgage loans at specified times in the future. Interest rate lock commitments that relate to the origination of mortgage loans that will be held-for-sale are considered derivative instruments under applicable accounting guidance. As such, the Company records its interest rate lock commitments and forward loan sales commitments at fair value, determined as the amount that would be required to settle each of these derivative financial instruments at the balance sheet date. In the normal course of business, the mortgage subsidiary enters into contractual interest rate lock commitments to extend credit, if approved, at a fixed interest rate and with fixed expiration dates. The commitments become effective when the borrowers “lock-in” a specified interest rate within the time frames established by the mortgage banking subsidiary. Market risk arises if interest rates move adversely between the time of the interest rate lock by the borrower and the sale date of the loan to an investor. To mitigate the effect of the interest rate risk inherent in providing interest rate lock commitments to borrowers, the mortgage banking subsidiary enters into best efforts forward sales contracts with third party investors. The forward sales contracts lock in a price for the sale of loans similar to the specific interest rate lock commitments. Both the interest rate lock commitments to the borrowers and the forward sales contracts to the investors that extend through to the date the loan may close are derivatives, and accordingly, are marked to fair value through earnings. In estimating the fair value of an interest rate lock commitment, the Company assigns a probability to the interest rate lock commitment based on an expectation that it will be exercised and the loan will be funded. The fair value of the interest rate lock commitment is derived from the fair value of related mortgage loans, which is based on observable market data and includes the expected net future cash flows related to servicing of the loans. The fair value of the interest rate lock commitment is also derived from inputs that include guarantee fees negotiated with the agencies and private investors, buy-up and buy-down values provided by the agencies and private investors, and interest rate spreads for the difference between retail and wholesale mortgage rates. Management also applies fall-out ratio assumptions for those interest rate lock commitments for which we do not close a mortgage loan. The fall-out ratio assumptions are based on the mortgage subsidiary’s historical experience, conversion ratios for similar loan commitments, and market conditions. While fall-out tendencies are not exact predictions of which loans will or will not close, historical performance review of loan-level data provides the basis for determining the appropriate fall-out ratios. In addition, on a periodic basis, the mortgage banking subsidiary performs analysis of actual rate lock fall-out experience to determine the sensitivity of the mortgage pipeline to interest rate changes from the date of the commitment through loan origination, and then period end, using applicable published mortgage-backed investment security prices. The expected fall-out ratios (or conversely the “pull-through” percentages) are applied to the determined fair value of the unclosed mortgage pipeline in accordance with GAAP. Changes to the fair value of interest rate lock commitments are recognized based on interest rate changes, changes in the probability that the commitment will be exercised, and the passage of time. The fair value of the forward sales contracts to investors considers the market price movement of the same type of security between the trade date and the balance sheet date. These instruments are defined as Level 2 within the valuation hierarchy.

Derivative instruments not related to mortgage banking activities, including financial futures commitments and interest rate swap agreements that do not satisfy the hedge accounting requirements are recorded at fair value and are classified with resultant changes in fair value being recognized in noninterest income in the consolidated statement of operations. Fair values for these instruments are based on quoted market prices, when available. As such, the fair value adjustments for derivatives with fair values based on quoted market prices in an active market are recurring Level 1.

Impaired Loans

Loans that are considered impaired are recorded at fair value on a nonrecurring basis. Once a loan is considered impaired, the fair value is measured using one of several methods, including collateral liquidation value, market value of similar debt and discounted cash flows. Those impaired loans not requiring a specific charge against the allowance represent loans for which the fair value of the expected repayments or collateral meet or exceed the recorded investment in the loan. Loans which are deemed to be impaired are primarily valued on a nonrecurring basis at the fair value of the underlying real estate collateral. Such fair values are obtained using independent appraisals, which the Company considers to be Level 3 inputs.

Other Real Estate Owned (“OREO”)

OREO is carried at the lower of carrying value or fair value on a nonrecurring basis.  Fair value is based upon independent appraisals or management’s estimation of the collateral and is considered a Level 3 measurement.  When the OREO value is based upon a current appraisal or when a current appraisal is not available or there is estimated further impairment, the measurement is considered a Level 3 measurement.

Brokered Deposits

Fair value accounting was elected for a brokered deposit entered into during 2013 as part of the Company’s interest rate risk management. Fair value of the brokered deposit is derived from quoted market prices. If quoted market prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for prepayment assumptions, projected credit losses, and liquidity.

Assets and liabilities measured at fair value on a recurring basis are as follows as of June 30, 2014 and December 31, 2013:

	Quoted market price		Significant other		Significant other
	in active markets		observable inputs		unobservable inputs
	(Level 1)		(Level 2)		(Level 3)
	(In thousands)
June 30, 2014
Available-for-sale investment securities:
Municipal securities	$	—		36,097		—
US government agencies		—		4,921		—
Collateralized loan obligations		—		9,696		—
Mortgage-backed securities:
Agency		—		104,142		—
Non-agency		—		52,445		—
Loans held for sale		—		48,442		—
Derivative assets:
Mortgage loan interest rate lock commitments		—		1,672		—
Mortgage loan forward sales commitments		—		583		—
Brokered deposits		—		4,957		—
Derivative liabilities:
Mortgage-backed securities forward sales commitments		—		709
Interest rate swaps		21		—		—
Total	$	21		263,664		—
December 31, 2013
Available-for-sale investment securities:
Municipal securities	$	—		38,499		—
US government agencies		—		5,175		—
Mortgage-backed securities:
Agency		—		69,929		—
Non-agency		—		53,932		—
Loans held for sale		—		37,041		—
Derivative assets:
Mortgage loan forward sales commitments		—		106		—
Mortgage-backed securities forward sales commitments		—		878		—
Interest rate swaps		428		—		—
Brokered deposits		—		4,948		—
Derivative liabilities:
Mortgage loan interest rate lock commitments		—		55		—
Total	$	428		210,563		—

Assets measured at fair value on a nonrecurring basis are as follows as of June 30, 2014 and December 31, 2013:

	Quoted market price		Significant other		Significant other
	in active markets		observable inputs		unobservable inputs
	(Level 1)		(Level 2)		(Level 3)
	(In thousands)
June 30, 2014
Impaired loans:
Loans secured by real estate:
One-to-four family	$	—		—		5,997
Commercial real estate		—		—		16,024
Construction and development		—		—		581
Consumer loans		—		—		20
Commercial business loans		—		—		2,228
Real estate owned:
One-to-four family		—		—		521
Commercial real estate		—		—		1,498
Construction and development		—		—		3,636
Total	$	—		—		30,505
December 31, 2013
Impaired loans:
Loans secured by real estate:
One-to-four family	$	—		—		6,117
Home equity		—		—		125
Commercial real estate		—		—		16,953
Construction and development		—		—		1,328
Consumer loans		—		—		20
Commercial business loans		—		—		2,554
Real estate owned:
One-to-four family		—		—		959
Commercial real estate		—		—		1,781
Construction and development		—		—		3,533
Total	$	—		—		33,370

For Level 3 assets and liabilities measured at fair value on a recurring or nonrecurring basis as of June 30, 2014 and December 31, 2013, the significant unobservable inputs used in the fair value measurements were as follows:

	June 30, 2014 and December 31, 2013
		Significant	Significant Unobservable
	Valuation Technique	Observable Inputs	Inputs
Impaired Loans	Appraisal Value	Appraisals and or sales of	Appraisals discounted 10% to 20% for
		comparable properties	sales commissions and other holding costs
Real estate owned	Appraisal Value/	Appraisals and or sales of	Appraisals discounted 10% to 20% for
	Comparison Sales/	comparable properties	sales commissions and other holding costs
	Other estimates

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SUPPLEMENTAL SEGMENT INFORMATION

6 Months Ended

Jun. 30, 2014

Segment Reporting [Abstract]

SUPPLEMENTAL SEGMENT INFORMATION

NOTE 9 – SUPPLEMENTAL SEGMENT INFORMATION

The Company has three reportable segments: community banking, wholesale mortgage banking (“mortgage banking”) and other. The community banking segment provides traditional banking services offered through CresCom Bank. The mortgage banking segment provides mortgage loan origination and servicing offered through Crescent Mortgage. The other segment provides managerial and operational support to the other business segments through Carolina Services and Carolina Financial.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on net income.

The Company accounts for intersegment revenues and expenses as if the revenue/expense transactions were generated to third parties, that is, at current market prices.

The Company’s reportable segments are strategic business units that offer different products and services. They are managed separately because each segment has different types and levels of credit and interest rate risk.

The following tables present selected financial information for the Company’s reportable business segments for the three months and six months ended June 30, 2014 and 2013:

	Community			Mortgage
For the Three Months Ended June 30, 2014	Banking			Banking		Other			Eliminations			Total
	(In thousands)
Interest income	$	8,429			274		4			36			8,743
Interest expense		1,286			—		135			—			1,421
Net interest income (expense)		7,143			274		(131	)		36			7,322
Provision for loan losses		(10	)		10		—			—			—
Noninterest income from external customers		958			4,482		9			—			5,449
Intersegment noninterest income		—			23		1,510			(1,533	)		—
Noninterest expense		4,267			3,553		1,671			—			9,491
Intersegment noninterest expense		1,270			240		—			(1,510	)		—
Income (loss) before income taxes		2,574			976		(283	)		13			3,280
Income tax expense (benefit)		766			365		(105	)		5			1,031
Net income (loss)	$	1,808			611		(178	)		8			2,249
	Community			Mortgage
For the Three Months Ended June 30, 2013	Banking			Banking		Other			Eliminations			Total
	(In thousands)
Interest income	$	7,874			383		5			19			8,281
Interest expense		1,252			33		186			(3	)		1,468
Net interest income (expense)		6,622			350		(181	)		22			6,813
Provision for loan losses		(700	)		—		—			—			(700	)
Noninterest income from external customers		908			11,877		20			—			12,805
Intersegment noninterest income		25			150		1,453			(1,628	)		—
Noninterest expense		4,035			6,131		1,439			—			11,605
Intersegment noninterest expense		1,213			265		—			(1,478	)		—
Income (loss) before income taxes		3,007			5,981		(147	)		(128	)		8,713
Income tax expense (benefit)		1,053			2,232		(61	)		(44	)		3,180
Net income (loss)	$	1,954			3,749		(86	)		(84	)		5,533

	Community			Mortgage
For the Six Months Ended June 30, 2014	Banking			Banking		Other			Eliminations			Total
	(In thousands)
Interest income	$	16,521			559		8			67			17,155
Interest expense		2,483			—		269			—			2,752
Net interest income (expense)		14,038			559		(261	)		67			14,403
Provision for loan losses		(10	)		10		—			—			—
Noninterest income from external customers		1,873			8,926		19			—			10,818
Intersegment noninterest income		—			95		3,020			(3,115	)		—
Noninterest expense		8,381			7,399		3,318			—			19,098
Intersegment noninterest expense		2,540			480		—			(3,020	)		—
Income (loss) before income taxes		5,000			1,691		(540	)		(28	)		6,123
Income tax expense (benefit)		1,501			639		(199	)		(11	)		1,930
Net income (loss)	$	3,499			1,052		(341	)		(17	)		4,193
	Community			Mortgage
For the Six Months Ended June 30, 2013	Banking			Banking		Other			Eliminations			Total
	(In thousands)
Interest income	$	15,690			776		9			35			16,510
Interest expense		2,527			80		367			(4	)		2,970
Net interest income (expense)		13,163			696		(358	)		39			13,540
Provision for loan losses		(700	)		—		—			—			(700	)
Noninterest income from external customers		1,613			24,532		43			—			26,188
Intersegment noninterest income		67			277		2,906			(3,250	)		—
Noninterest expense		9,428			12,454		2,746			—			24,628
Intersegment noninterest expense		2,426			547		—			(2,973	)		—
Income (loss) before income taxes		3,689			12,504		(155	)		(238	)		15,800
Income tax expense (benefit)		1,329			4,662		(65	)		(82	)		5,844
Net income (loss)	$	2,360			7,842		(90	)		(156	)		9,956

The following tables present selected financial information for the Company’s reportable business segments for June 30, 2014 and December 31, 2013:

	Community		Mortgage
At June 30, 2014	Banking		Banking		Other		Eliminations			Total
	(In thousands)
Assets	$	978,629		66,123		105,836		(162,176	)		988,412
Loans receivable, net		606,732		4,380		—		(5,817	)		605,295
Loans held for sale		3,119		44,740		—		—			47,859
Deposits		780,473		—		—		(937	)		779,536
Borrowed funds		89,226		5,020		15,465		(5,021	)		104,690
	Community		Mortgage
At December 31, 2013	Banking		Banking		Other		Eliminations			Total
	(In thousands)
Assets	$	873,104		61,846		101,497		(154,863	)		881,584
Loans receivable, net		532,616		3,374		—		(769	)		535,221
Loans held for sale		753		36,144		—		—			36,897
Deposits		701,110		—		—		(3,529	)		697,581
Borrowed funds		69,376		—		15,465		(1	)		84,840

XML

SECURITIES (Details Narrative) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2014 Item	Dec. 31, 2013 Item
Securities Details 3
Pooled trust preferred securities in Investment Grade	$ 1,000	$ 1,300
Split-rated security	1,000	1,000
Below investment grade security	6,900	6,800
Senior tranches representing Company's Pooled securities	1,900	2,300
Mezzanine tranches subordinate to senior tranches	7,000	6,800
Available for Sale Securities pledged for FHLB advances	$ 11,300
Available-for-sale, Securities in Unrealized Loss Positions, Number of Positions	28	58

XML

ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS (Details 3) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Securities available for sale	$ 207,301	$ 167,535
Loans held for sale	47,859	36,897
Derivative Asset	2,255	1,412
Brokered deposits	83,000	61,800
Derivative Liability	730	55
Municipal securities [Member]
Securities available for sale	36,097	38,499
US government agencies [Member]
Securities available for sale	4,921	5,175
Mortgage-backed securities Agency [Member]
Securities available for sale	104,142	69,929
Mortgage-backed securities Non-agency [Member]
Securities available for sale	52,445	53,932
Collateralized loan obligations [Member]
Securities available for sale	9,696
Fair Value, Inputs, Level 1 [Member]
Securities available for sale
Loans held for sale
Derivative Asset		428
Derivative Liability	21
Fair Value, Inputs, Level 2 [Member]
Securities available for sale	207,301	167,535
Loans held for sale	48,442	37,041
Derivative Asset	2,255	984
Derivative Liability	709	55
Fair Value, Inputs, Level 3 [Member]
Securities available for sale
Loans held for sale
Derivative Asset
Derivative Liability
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 1 [Member]
Loans held for sale
Brokered deposits
Assets and liabilities measured at fair value	21	128
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 1 [Member] | Mortgage loan interest rate lock commitments [Member]
Derivative Asset
Derivative Liability
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 1 [Member] | Mortgage loan forward sales commitments [Member]
Derivative Asset
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 1 [Member] | Mortgage-backed securities forward sales commitments [Member]
Derivative Asset
Derivative Liability
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 1 [Member] | Interest rate swaps [Member]
Derivative Asset		428
Derivative Liability	21
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 1 [Member] | Municipal securities [Member]
Securities available for sale
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 1 [Member] | US government agencies [Member]
Securities available for sale
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 1 [Member] | Mortgage-backed securities Agency [Member]
Securities available for sale
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 1 [Member] | Mortgage-backed securities Non-agency [Member]
Securities available for sale
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 1 [Member] | Collateralized loan obligations [Member]
Securities available for sale
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 2 [Member]
Loans held for sale	48,442	37,041
Brokered deposits	4,957	4,948
Assets and liabilities measured at fair value	263,664	210,563
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 2 [Member] | Mortgage loan interest rate lock commitments [Member]
Derivative Asset	1,672
Derivative Liability		55
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 2 [Member] | Mortgage loan forward sales commitments [Member]
Derivative Asset	583	106
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 2 [Member] | Mortgage-backed securities forward sales commitments [Member]
Derivative Asset		878
Derivative Liability	709
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 2 [Member] | Interest rate swaps [Member]
Derivative Asset
Derivative Liability
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 2 [Member] | Municipal securities [Member]
Securities available for sale	36,097	38,499
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 2 [Member] | US government agencies [Member]
Securities available for sale	4,921	5,175
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 2 [Member] | Mortgage-backed securities Agency [Member]
Securities available for sale	104,142	69,929
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 2 [Member] | Mortgage-backed securities Non-agency [Member]
Securities available for sale	52,445	53,932
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 2 [Member] | Collateralized loan obligations [Member]
Securities available for sale	9,696
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 3 [Member]
Loans held for sale
Brokered deposits
Assets and liabilities measured at fair value
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 3 [Member] | Mortgage loan interest rate lock commitments [Member]
Derivative Asset
Derivative Liability
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 3 [Member] | Mortgage loan forward sales commitments [Member]
Derivative Asset
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 3 [Member] | Mortgage-backed securities forward sales commitments [Member]
Derivative Asset
Derivative Liability
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 3 [Member] | Interest rate swaps [Member]
Derivative Asset
Derivative Liability
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 3 [Member] | Municipal securities [Member]
Securities available for sale
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 3 [Member] | US government agencies [Member]
Securities available for sale
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 3 [Member] | Mortgage-backed securities Agency [Member]
Securities available for sale
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 3 [Member] | Mortgage-backed securities Non-agency [Member]
Securities available for sale
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 3 [Member] | Collateralized loan obligations [Member]
Securities available for sale

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LOANS RECEIVABLE, NET (Tables)

6 Months Ended

Jun. 30, 2014

Debt Disclosure [Abstract]

Schedule of categories of loans

Loans receivable, net at June 30, 2014 and December 31, 2013 are summarized by category as follows:

	At June 30,					At December 31,
	2014					2013
			% of Total					% of Total
	Amount		Loans			Amount		Loans
	(Dollars in thousands)
Loans secured by real estate:
One-to-four family	$	209,878		32.62	%		184,210		32.60	%
Home equity		23,529		3.66	%		23,661		4.19	%
Commercial real estate		264,911		41.18	%		253,035		44.79	%
Construction and development		77,629		12.07	%		67,056		11.87	%
Consumer loans		3,132		0.49	%		3,060		0.54	%
Commercial business loans		64,187		9.98	%		33,938		6.01	%
Total gross loans receivable		643,266		100.00	%		564,960		100.00	%
Less:
Undisbursed loans in process		29,053					21,550
Allowance for loan losses		8,662					8,091
Deferred fees, net		256					98
Total loans receivable, net	$	605,295					535,221

The composition of gross loans outstanding, net of undisbursed amounts, by rate type is as follows 

	At June 30,				At December 31,
	2014				2013
	(Dollars in thousands)
Variable rate loans	$	252,110	41.05	%		219,589	40.41	%
Fixed rate loans		362,103	58.95	%		323,821	59.59	%
Total loans outstanding	$	614,213	100.00	%		543,410	100.00	%

Schedule of activity in the allowance for loan losses

The following table presents activity in the allowance for loan losses for the period indicated. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

Allowance for loan losses:	For the Three Months Ended June 30, 2014
	Loans Secured by Real Estate
	One-to-						Commercial			Construction
	four			Home			real			and						Commercial
	family			equity			estate			development			Consumer			business		Unallocated		Total
	(In thousands)
Balance at April 1, 2014	$	2,568			234			3,271			1,236			29			626		437		8,401
Provision for loan losses		(80	)		(27	)		(98	)		(13	)		(11	)		88		141		—
Charge-offs		(36	)		—			—			—			—			—		—		(36	)
Recoveries		52			—			—			2			10			233		—		297
Balance at June 30, 2014	$	2,504			207			3,173			1,225			28			947		578		8,662

Allowance for loan losses:	For the Three Months Ended June 30, 2013
	Loans Secured by Real Estate
	One-to-						Commercial			Construction
	four			Home			real			and						Commercial
	family			equity			estate			development			Consumer			business			Unallocated		Total
	(In thousands)
Balance at April 1, 2013	$	3,010			229			3,234			1,823			87			835			420		9,638
Provision for loan losses		(706	)		49			(247	)		(342	)		(18	)		25			539		(700	)
Charge-offs		(48	)		(28	)		(110	)		(248	)		(1	)		(336	)		—		(771	)
Recoveries		18			—			21			72			8			117			—		236
Balance at June 30, 2013	$	2,274			250			2,898			1,305			76			641			959		8,403

Allowance for loan losses:	For the Six Months Ended June 30, 2014
	Loans Secured by Real Estate
	One-to-						Commercial			Construction
	four			Home			real			and						Commercial
	family			equity			estate			development			Consumer			business		Unallocated			Total
	(In thousands)
Balance at January 1, 2014	$	2,472			231			2,855			1,418			42			339		734			8,091
Provision for loan losses		34			(24	)		346			(352	)		(51	)		203		(156	)		—
Charge-offs		(73	)		—			(28	)		(170	)		(13	)		—		—			(284	)
Recoveries		71			—			—			329			50			405		—			855
Balance at June 30, 2014	$	2,504			207			3,173			1,225			28			947		578			8,662

	For the Six Months Ended June 30, 2013
	Loans Secured by Real Estate
	One-to-						Commercial			Construction
	four			Home			real			and						Commercial
	family			equity			estate			development			Consumer			business			Unallocated		Total
	(In thousands)
Balance at January 1, 2013	$	3,193			276			3,315			1,792			82			862			—		9,520
Provision for loan losses		(971	)		2			(380	)		(256	)		(4	)		(50	)		959		(700	)
Charge-offs		(81	)		(28	)		(110	)		(310	)		(34	)		(336	)		—		(899	)
Recoveries		133			—			73			79			32			165			—		482
Balance at June 30, 2013	$	2,274			250			2,898			1,305			76			641			959		8,403

Schedule of allowance for loan losses and recorded investment in loans by impairment methodology

The following table disaggregates our allowance for loan losses and recorded investment in loans by impairment methodology.

	Loans Secured by Real Estate
	One-to-				Commercial		Construction
	four		Home		real		and				Commercial
	family		equity		estate		development		Consumer		business		Unallocated		Total
	(In thousands)
At June 30, 2014:
Allowance for loan losses ending balances:
Individually evaluated for impairment	$	304		—		30		90		4		3		—		431
Collectively evaluated for impairment		2,200		207		3,143		1,135		24		944		578		8,231
	$	2,504		207		3,173		1,225		28		947		578		8,662
Loans receivable ending balances:
Individually evaluated for impairment	$	6,301		—		16,054		671		24		2,231		—		25,281
Collectively evaluated for impairment		202,878		23,319		239,273		65,596		2,848		55,018		—		588,932
Total loans receivable	$	209,179		23,319		255,327		66,267		2,872		57,249		—		614,213
At December 31, 2013:
Allowance for loan losses ending balances:
Individually evaluated for impairment	$	103		—		55		165		20		6		—		349
Collectively evaluated for impairment		2,369		231		2,800		1,253		22		333		734		7,742
	$	2,472		231		2,855		1,418		42		339		734		8,091
Loans receivable ending balances:
Individually evaluated for impairment	$	6,220		125		17,008		1,493		40		2,560		—		27,446
Collectively evaluated for impairment		177,516		23,217		230,859		58,611		2,775		22,986		—		515,964
Total loans receivable	$	183,736		23,342		247,867		60,104		2,815		25,546		—		543,410

Schedule of impaired loans by class of loans

The following table presents impaired loans individually evaluated for impairment in the segmented portfolio categories and the corresponding allowance for loan losses as of June 30, 2014 and December 31, 2013. The recorded investment is defined as the original amount of the loan, net of any deferred costs and fees, less any principal reductions and direct charge-offs. Unpaid principal balance includes amounts previously included in charge-offs.

	At June 30, 2014						At December 31, 2013
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
	Investment		Balance		Allowance		Investment		Balance		Allowance
	(In thousands)
With no related allowance recorded:
Loans secured by real estate:
One-to-four family	$	5,162		7,304		—		5,713		7,682		—
Home equity		—		347		—		125		472		—
Commercial real estate		15,789		16,334		—		16,695		17,240		—
Construction and development		404		2,385		—		1,227		3,887		—
Consumer loans		20		546		—		20		404		—
Commercial business loans		2,228		3,804		—		2,554		3,599		—
		23,603		30,720		—		26,334		33,284		—
With an allowance recorded:
Loans secured by real estate:
One-to-four family		1,139		1,139		304		507		607		103
Home equity		—		—		—		—		—		—
Commercial real estate		265		265		30		313		313		55
Construction and development		267		267		90		266		266		165
Consumer loans		4		4		4		20		20		20
Commercial business loans		3		3		3		6		6		6
		1,678		1,678		431		1,112		1,212		349
Total:
Loans secured by real estate:
One-to-four family		6,301		8,443		304		6,220		8,289		103
Home equity		—		347		—		125		472		—
Commercial real estate		16,054		16,599		30		17,008		17,553		55
Construction and development		671		2,652		90		1,493		4,153		165
Consumer loans		24		550		4		40		424		20
Commercial business loans		2,231		3,807		3		2,560		3,605		6
	$	25,281		32,398		431		27,446		34,496		349

The following table presents the average recorded investment and interest income recognized on impaired loans individually evaluated for impairment in the segmented portfolio categories for the three and six months ended June 30, 2014 and 2013.

	For the Three Months Ended June 30,									For the Six Months Ended June 30,
	2014					2013				2014				2013
	Average		Interest			Average		Interest		Average		Interest		Average		Interest
	Recorded		Income			Recorded		Income		Recorded		Income		Recorded		Income
	Investment		Recognized			Investment		Recognized		Investment		Recognized		Investment		Recognized
	(In thousands)
With no related allowance recorded:
Loans secured by real estate:
One-to-four family	$	5,302		(9	)		4,724		73		5,431		44		7,253		100
Home equity		—		—			83		1		—		—		83		—
Commercial real estate		16,000		119			15,245		154		16,423		267		19,573		257
Construction and development		405		1			376		1		428		3		2,604		(5	)
Consumer loans		20		(3	)		37		1		22		—		37		—
Commercial business loans		2,264		(25	)		2,238		27		2,372		53		2,810		57
		23,991		83			22,703		257		24,676		367		32,360		409
With an allowance recorded:
Loans secured by real estate:
One-to-four family		841		(3	)		2,590		—		467		2		62		—
Home equity		—		—			—		—		—		—		—		—
Commercial real estate		266		4			4,372		1		269		9		44		—
Construction and development		200		1			2,228		—		100		1		—		—
Consumer loans		5		—			19		—		6		—		19		—
Commercial business loans		4		—			1,248		1		4		—		677		—
		1,316		2			10,457		2		846		12		802		—
Total:
Loans secured by real estate:
One-to-four family		6,143		(12	)		7,314		73		5,898		46		7,315		100
Home equity		—		—			83		1		—		—		83		—
Commercial real estate		16,266		123			19,617		155		16,692		276		19,617		257
Construction and development		605		2			2,604		1		528		4		2,604		(5	)
Consumer loans		25		(3	)		56		1		28		—		56		—
Commercial business loans		2,268		(25	)		3,486		28		2,376		53		3,487		57
	$	25,307		85			33,160		259		25,522		379		33,162		409

Schedule of aging of the recorded investment in past due loans by class of loans

A loan is considered past due if the required principal and interest payment has not been received as of the due date. The following schedule is an aging of past due loans receivable by portfolio segment as of June 30, 2014 and December 31, 2013.

	At June 30, 2014
	Real estate loans
	One-to-				Commercial		Construction
	four		Home		real		and				Commercial
	family		equity		estate		development		Consumer		business		Total
	(In thousands)
30-59 days past due	$	2,626		207		265		168		—		—		3,266
60-89 days past due		700		—		191		—		5		—		896
90 days or more past due		4,116		—		4,285		660		4		168		9,233
Total past due		7,442		207		4,741		828		9		168		13,395
Current		201,737		23,112		250,586		65,439		2,863		57,081		600,818
Total loans receivable	$	209,179		23,319		255,327		66,267		2,872		57,249		614,213
	At December 31, 2013
	Real estate loans
	One-to-				Commercial		Construction
	four		Home		real		and				Commercial
	family		equity		estate		development		Consumer		business		Total
	(In thousands)
30-59 days past due	$	231		—		273		53		—		—		557
60-89 days past due		1,034		—		—		—		—		—		1,034
90 days or more past due		3,440		125		5,074		1,477		7		431		10,554
Total past due		4,705		125		5,347		1,530		7		431		12,145
Current		179,031		23,217		242,520		58,574		2,808		25,115		531,265
Total loans receivable	$	183,736		23,342		247,867		60,104		2,815		25,546		543,410

Schedule of analysis of loans receivables on nonaccrual status

The following is a schedule of loans receivable, by portfolio segment, on nonaccrual at June 30, 2014 and December 31, 2013.

	At June 30,		At December 31,
	2014		2013
Loans secured by real estate:	(In thousands)
One-to-four family	$	4,270		3,902
Home equity		—		125
Commercial real estate		4,285		5,114
Construction and development		661		1,481
Consumer loans		5		20
Commercial business loans		172		437
	$	9,393		11,079

Schedule of analysis of loan portfolio by credit quality indicators

The following is a schedule of the credit quality of loans receivable, by portfolio segment, as of June 30, 2014 and December 31, 2013.

	At June 30, 2014
	Real estate loans
	One-to-				Commercial		Construction
	four		Home		real		and				Commercial
	family		equity		estate		development		Consumer		business		Total
	(In thousands)
Internal Risk Rating Grades:
Pass	$	204,774		23,319		240,146		65,294		2,867		56,177		592,577
Special Mention		1,046		—		10,631		282		—		900		12,859
Substandard		3,359		—		4,550		691		5		172		8,777
Total loans receivable	$	209,179		23,319		255,327		66,267		2,872		57,249		614,213
Performing	$	204,909		23,319		251,042		65,606		2,867		57,077		604,820
Nonperforming:
90 days or more and still accruing		—		—		—		—		—		—		—
Nonaccrual		4,270		—		4,285		661		5		172		9,393
Total nonperforming		4,270		—		4,285		661		5		172		9,393
Total loans receivable	$	209,179		23,319		255,327		66,267		2,872		57,249		614,213
	At December 31, 2013
	Real estate loans
	One-to-				Commercial		Construction
	four		Home		real		and				Commercial
	family		equity		estate		development		Consumer		business		Total
	(In thousands)
Internal Risk Rating Grades:
Pass	$	177,878		23,217		231,269		58,563		2,795		24,823		518,545
Special Mention		1,679		—		10,633		295		—		286		12,893
Substandard		4,179		125		5,965		1,246		20		437		11,972
Total loans receivable	$	183,736		23,342		247,867		60,104		2,815		25,546		543,410
Performing	$	179,834		23,217		242,753		58,623		2,795		25,109		532,331
Nonperforming:
90 days or more and still accruing		—		—		—		—		—		—		—
Nonaccrual		3,902		125		5,114		1,481		20		437		11,079
Total nonperforming		3,902		125		5,114		1,481		20		437		11,079
Total loans receivable	$	183,736		23,342		247,867		60,104		2,815		25,546		543,410

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SUPPLEMENTAL SEGMENT INFORMATION (Tables)

6 Months Ended

Jun. 30, 2014

Segment Reporting [Abstract]

Schedule of Selected Financial Information of Company's reportable business segments

The following tables present selected financial information for the Company’s reportable business segments for the three months and six months ended June 30, 2014 and 2013:

	Community			Mortgage
For the Three Months Ended June 30, 2014	Banking			Banking		Other			Eliminations			Total
	(In thousands)
Interest income	$	8,429			274		4			36			8,743
Interest expense		1,286			—		135			—			1,421
Net interest income (expense)		7,143			274		(131	)		36			7,322
Provision for loan losses		(10	)		10		—			—			—
Noninterest income from external customers		958			4,482		9			—			5,449
Intersegment noninterest income		—			23		1,510			(1,533	)		—
Noninterest expense		4,267			3,553		1,671			—			9,491
Intersegment noninterest expense		1,270			240		—			(1,510	)		—
Income (loss) before income taxes		2,574			976		(283	)		13			3,280
Income tax expense (benefit)		766			365		(105	)		5			1,031
Net income (loss)	$	1,808			611		(178	)		8			2,249
	Community			Mortgage
For the Three Months Ended June 30, 2013	Banking			Banking		Other			Eliminations			Total
	(In thousands)
Interest income	$	7,874			383		5			19			8,281
Interest expense		1,252			33		186			(3	)		1,468
Net interest income (expense)		6,622			350		(181	)		22			6,813
Provision for loan losses		(700	)		—		—			—			(700	)
Noninterest income from external customers		908			11,877		20			—			12,805
Intersegment noninterest income		25			150		1,453			(1,628	)		—
Noninterest expense		4,035			6,131		1,439			—			11,605
Intersegment noninterest expense		1,213			265		—			(1,478	)		—
Income (loss) before income taxes		3,007			5,981		(147	)		(128	)		8,713
Income tax expense (benefit)		1,053			2,232		(61	)		(44	)		3,180
Net income (loss)	$	1,954			3,749		(86	)		(84	)		5,533

	Community			Mortgage
For the Six Months Ended June 30, 2014	Banking			Banking		Other			Eliminations			Total
	(In thousands)
Interest income	$	16,521			559		8			67			17,155
Interest expense		2,483			—		269			—			2,752
Net interest income (expense)		14,038			559		(261	)		67			14,403
Provision for loan losses		(10	)		10		—			—			—
Noninterest income from external customers		1,873			8,926		19			—			10,818
Intersegment noninterest income		—			95		3,020			(3,115	)		—
Noninterest expense		8,381			7,399		3,318			—			19,098
Intersegment noninterest expense		2,540			480		—			(3,020	)		—
Income (loss) before income taxes		5,000			1,691		(540	)		(28	)		6,123
Income tax expense (benefit)		1,501			639		(199	)		(11	)		1,930
Net income (loss)	$	3,499			1,052		(341	)		(17	)		4,193
	Community			Mortgage
For the Six Months Ended June 30, 2013	Banking			Banking		Other			Eliminations			Total
	(In thousands)
Interest income	$	15,690			776		9			35			16,510
Interest expense		2,527			80		367			(4	)		2,970
Net interest income (expense)		13,163			696		(358	)		39			13,540
Provision for loan losses		(700	)		—		—			—			(700	)
Noninterest income from external customers		1,613			24,532		43			—			26,188
Intersegment noninterest income		67			277		2,906			(3,250	)		—
Noninterest expense		9,428			12,454		2,746			—			24,628
Intersegment noninterest expense		2,426			547		—			(2,973	)		—
Income (loss) before income taxes		3,689			12,504		(155	)		(238	)		15,800
Income tax expense (benefit)		1,329			4,662		(65	)		(82	)		5,844
Net income (loss)	$	2,360			7,842		(90	)		(156	)		9,956

The following tables present selected financial information for the Company’s reportable business segments for June 30, 2014 and December 31, 2013:

	Community		Mortgage
At June 30, 2014	Banking		Banking		Other		Eliminations			Total
	(In thousands)
Assets	$	978,629		66,123		105,836		(162,176	)		988,412
Loans receivable, net		606,732		4,380		—		(5,817	)		605,295
Loans held for sale		3,119		44,740		—		—			47,859
Deposits		780,473		—		—		(937	)		779,536
Borrowed funds		89,226		5,020		15,465		(5,021	)		104,690
	Community		Mortgage
At December 31, 2013	Banking		Banking		Other		Eliminations			Total
	(In thousands)
Assets	$	873,104		61,846		101,497		(154,863	)		881,584
Loans receivable, net		532,616		3,374		—		(769	)		535,221
Loans held for sale		753		36,144		—		—			36,897
Deposits		701,110		—		—		(3,529	)		697,581
Borrowed funds		69,376		—		15,465		(1	)		84,840

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ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Financial assets:
Cash and due from banks	$ 9,560	$ 4,489
Interest-bearing cash	17,132	34,176
Securities available for sale	207,301	167,535
Securities held to maturity	24,254	24,554
Federal Home Loan Bank stock	4,730	4,103
Other investments	1,944	1,858
Derivative assets	2,255	1,412
Loans held for sale	47,859	36,897
Loans receivable, net	605,295	535,221
Mortgage servicing rights	9,843	10,908
Cash value life insurance	21,228	20,910
Financial liabilities:
Deposits	779,536	697,581
Short-term borrowed funds	35,300	10,300
Long-term debt	69,390	74,540
Derivative liabilities	730	55
Fair Value [Member]
Financial assets:
Cash and due from banks	9,560	4,489
Interest-bearing cash	17,132	34,176
Securities available for sale	207,301	167,535
Securities held to maturity	25,910	23,547
Federal Home Loan Bank stock	4,730	4,103
Other investments	1,944	1,858
Derivative assets	2,255	1,412
Loans held for sale	48,442	37,041
Loans receivable, net	620,770	524,142
Mortgage servicing rights	15,238	17,718
Cash value life insurance	21,228	20,910
Financial liabilities:
Deposits	778,482	696,674
Short-term borrowed funds	35,300	10,300
Long-term debt	65,549	71,462
Derivative liabilities	730	55
Fair Value, Inputs, Level 1 [Member]
Financial assets:
Cash and due from banks	9,560	4,489
Interest-bearing cash	17,132	34,176
Securities available for sale
Securities held to maturity
Federal Home Loan Bank stock
Other investments
Derivative assets		428
Loans held for sale
Loans receivable, net
Mortgage servicing rights
Cash value life insurance
Financial liabilities:
Deposits
Short-term borrowed funds
Long-term debt
Derivative liabilities	21
Fair Value, Inputs, Level 2 [Member]
Financial assets:
Cash and due from banks
Interest-bearing cash
Securities available for sale	207,301	167,535
Securities held to maturity	15,954	15,177
Federal Home Loan Bank stock
Other investments
Derivative assets	2,255	984
Loans held for sale	48,442	37,041
Loans receivable, net	595,920	497,045
Mortgage servicing rights	15,238	17,718
Cash value life insurance	21,228	20,910
Financial liabilities:
Deposits	778,482	696,674
Short-term borrowed funds	35,300	10,300
Long-term debt	65,549	71,462
Derivative liabilities	709	55
Fair Value, Inputs, Level 3 [Member]
Financial assets:
Cash and due from banks
Interest-bearing cash
Securities available for sale
Securities held to maturity	9,956	8,370
Federal Home Loan Bank stock	4,730	4,103
Other investments	1,944	1,858
Derivative assets
Loans held for sale
Loans receivable, net	24,850	27,097
Mortgage servicing rights
Cash value life insurance
Financial liabilities:
Deposits
Short-term borrowed funds
Long-term debt
Derivative liabilities
Carrying Amount [Member]
Financial assets:
Cash and due from banks	9,560	4,489
Interest-bearing cash	17,132	34,176
Securities available for sale	207,301	167,535
Securities held to maturity	24,254	24,554
Federal Home Loan Bank stock	4,730	4,103
Other investments	1,944	1,858
Derivative assets	2,255	1,412
Loans held for sale	47,859	36,897
Loans receivable, net	605,295	535,221
Mortgage servicing rights	9,843	10,908
Cash value life insurance	21,228	20,910
Financial liabilities:
Deposits	779,536	697,581
Short-term borrowed funds	35,300	10,300
Long-term debt	69,390	74,540
Derivative liabilities	$ 730	$ 55

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LOANS RECEIVABLE, NET (Details 6) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Aging of the recorded investment in past due loans by class of loans
30-59 days past due	$ 3,266	$ 557
60-89 days past due	896	1,034
90 days or more past due	9,233	10,554
Total Past Due	13,395	12,145
Current	600,818	531,265
Total loans receivable	614,213	543,410
Nonaccrual	9,393	11,079
Consumer loans [Member]
Aging of the recorded investment in past due loans by class of loans
30-59 days past due
60-89 days past due	5
90 days or more past due	4	7
Total Past Due	9	7
Current	2,863	2,808
Total loans receivable	2,872	2,815
Nonaccrual	5	20
Commercial business loans [Member]
Aging of the recorded investment in past due loans by class of loans
30-59 days past due
60-89 days past due
90 days or more past due	168	431
Total Past Due	168	431
Current	57,081	25,115
Total loans receivable	57,249	25,546
Nonaccrual	172	437
Loans secured by Real Estate [Member] | One-to-four family [Member]
Aging of the recorded investment in past due loans by class of loans
30-59 days past due	2,626	231
60-89 days past due	700	1,034
90 days or more past due	4,116	3,440
Total Past Due	7,442	4,705
Current	201,737	179,031
Total loans receivable	209,179	183,736
Nonaccrual	4,270	3,902
Loans secured by Real Estate [Member] | Home equity [Member]
Aging of the recorded investment in past due loans by class of loans
30-59 days past due	207
60-89 days past due
90 days or more past due		125
Total Past Due	207	125
Current	23,112	23,217
Total loans receivable	23,319	23,342
Nonaccrual		125
Loans secured by Real Estate [Member] | Commercial real estate [Member]
Aging of the recorded investment in past due loans by class of loans
30-59 days past due	265	273
60-89 days past due	191
90 days or more past due	4,285	5,074
Total Past Due	4,741	5,347
Current	250,586	242,520
Total loans receivable	255,327	247,867
Nonaccrual	4,285	5,114
Loans secured by Real Estate [Member] | Construction and development [Member]
Aging of the recorded investment in past due loans by class of loans
30-59 days past due	168	53
60-89 days past due
90 days or more past due	660	1,477
Total Past Due	828	1,530
Current	65,439	58,574
Total loans receivable	66,267	60,104
Nonaccrual	$ 661	$ 1,481

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Consolidated Statements Of Comprehensive Income
Net income	$ 2,249	$ 5,533	$ 4,193	$ 9,956
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on securities	2,271	(4,302)	4,663	(4,436)
Tax effect	(817)	1,549	(1,678)	1,598
Reclassification adjustment for (gains) losses included in earnings	(164)	62	(480)	46
Tax effect	59	(22)	173	(17)
Accretion of unrealized losses on held-to-maturity securities previously recognized in other comprehensive income	49	49	98	98
Tax effect	(18)	(18)	(36)	(36)
Other comprehensive income (loss), net of tax	1,380	(2,682)	2,740	(2,747)
Comprehensive income	$ 3,629	$ 2,851	$ 6,933	$ 7,209

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DERIVATIVES

6 Months Ended

Jun. 30, 2014

Derivative Instruments and Hedging Activities Disclosure [Abstract]

DERIVATIVES

NOTE 3 – DERIVATIVES

The derivative positions of the Company at June 30, 2014 and December 31, 2013 are as follows:

	At June 30,				At December 31,
	2014				2013
	Fair		Notional		Fair		Notional
	Value		Value		Value		Value
			(In thousands)
Derivative assets:
Mortgage loan interest rate lock commitments	$	1,672		159,113		—		—
Mortgage loan forward sales commitments		583		25,855		106		20,516
Mortgage-backed securities forward sales commitments		—		—		878		88,000
Interest rate swaps		—		—		428		20,000
	$	2,255		184,968		1,412		128,516
Derivative liabilities:
Mortgage-backed securities forward sales commitments	$	709		139,000		—		—
Mortgage loan interest rate lock commitments		—		—		55		103,614
Interest rate swaps		21		10,000		—		—
	$	730		149,000		55		103,614

The primary uses of derivative instruments are related to the mortgage banking activities of the Company. As such, the Company holds derivative instruments, which consist of rate lock agreements related to expected funding of fixed-rate mortgage loans to customers (interest rate lock commitments) and forward commitments to sell mortgage-backed securities and individual fixed-rate mortgage loans. The Company’s objective in obtaining the forward commitments is to mitigate the interest rate risk associated with the interest rate lock commitments and the mortgage loans that are held for sale. Derivatives related to these commitments are recorded as either a derivative asset or a derivative liability in the balance sheet and are measured at fair value. Both the interest rate lock commitments and the forward commitments are reported at fair value, with adjustments recorded in current period earnings in net gain on sale of loans held for sale within noninterest income in the consolidated statements of operations.

Derivative instruments not related to mortgage banking activities, including financial futures commitments and interest rate swap agreements that do not satisfy the hedge accounting requirements are recorded at fair value and are classified with resultant changes in fair value recorded in current period earnings in fair value adjustments on interest rate swaps within noninterest income in the consolidated statement of operations.

When using derivatives to hedge fair value and cash flow risks, the Company exposes itself to potential credit risk from the counterparty to the hedging instrument. This credit risk is normally a small percentage of the notional amount and fluctuates as interest rates change. The Company analyzes and approves credit risk for all potential derivative counterparties prior to execution of any derivative transaction. The Company seeks to minimize credit risk by dealing with highly rated counterparties and by obtaining collateralization for exposures above certain predetermined limits. If significant counterparty risk is determined, the Company would adjust the fair value of the derivative recorded to consider such risk.

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details Narrative) (USD $)
In Thousands, unless otherwise specified

6 Months Ended

0 Months Ended

Jun. 30, 2014

Dec. 31, 2013

Aug. 06, 2014

Subseqent event [Member]

Definitive agreement - First Community Bank [Member]

Item

Jun. 30, 2014

Statutory Business Trusts [Member]

Dec. 31, 2013

Statutory Business Trusts [Member]

Principal amount owed

$ 15,000

$ 15,000

Principal assets of the Trusts

15,465

15,465

Value of common stock issued to company

$ 40

$ 40

$ 465

$ 465

Description of stock split

On January 15, 2014, the Board of Directors of the Company declared a two-for-one stock split to stockholders of record dated February 10, 2014, payable on February 28, 2014.

Number of branches acquired

13

Description of branches located

Three of the offices are in South Carolina and operate under the name “People’s Community Bank” and 10 are in southeastern North Carolina.

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LOANS RECEIVABLE, NET (Details 3) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Allowance for Loan and Lease Losses [Roll Forward]
Beginning Balance	$ 8,401	$ 9,638	$ 8,091	$ 9,520
Provision for Loan Losses		(700)		(700)
Charge-Offs	(36)	(771)	(284)	(899)
Recoveries	297	236	855	482
Ending Balance	8,662	8,403	8,662	8,403
Consumer loans [Member]
Allowance for Loan and Lease Losses [Roll Forward]
Beginning Balance	29	87	42	82
Provision for Loan Losses	(11)	(18)	(51)	(4)
Charge-Offs		(1)	(13)	(34)
Recoveries	10	8	50	32
Ending Balance	28	76	28	76
Commercial business loans [Member]
Allowance for Loan and Lease Losses [Roll Forward]
Beginning Balance	626	835	339	862
Provision for Loan Losses	88	25	203	(50)
Charge-Offs		(336)		(336)
Recoveries	233	117	405	165
Ending Balance	947	641	947	641
Unallocated [Member]
Allowance for Loan and Lease Losses [Roll Forward]
Beginning Balance	437	420	734
Provision for Loan Losses	141	539	(156)	959
Charge-Offs
Recoveries
Ending Balance	578	959	578	959
Loans secured by Real Estate [Member] | One-to-four family [Member]
Allowance for Loan and Lease Losses [Roll Forward]
Beginning Balance	2,568	3,010	2,472	3,193
Provision for Loan Losses	(80)	(706)	34	(971)
Charge-Offs	(36)	(48)	(73)	(81)
Recoveries	52	18	71	133
Ending Balance	2,504	2,274	2,504	2,274
Loans secured by Real Estate [Member] | Home equity [Member]
Allowance for Loan and Lease Losses [Roll Forward]
Beginning Balance	234	229	231	276
Provision for Loan Losses	(27)	49	(24)	2
Charge-Offs		(28)		(28)
Recoveries
Ending Balance	207	250	207	250
Loans secured by Real Estate [Member] | Commercial real estate [Member]
Allowance for Loan and Lease Losses [Roll Forward]
Beginning Balance	3,271	3,234	2,855	3,315
Provision for Loan Losses	(98)	(247)	346	(380)
Charge-Offs		(110)	(28)	(110)
Recoveries		21		73
Ending Balance	3,173	2,898	3,173	2,898
Loans secured by Real Estate [Member] | Construction and development [Member]
Allowance for Loan and Lease Losses [Roll Forward]
Beginning Balance	1,236	1,823	1,418	1,792
Provision for Loan Losses	(13)	(342)	(352)	(256)
Charge-Offs		(248)	(170)	(310)
Recoveries	2	72	329	79
Ending Balance	$ 1,225	$ 1,305	$ 1,225	$ 1,305

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DERIVATIVES (Tables)

6 Months Ended

Jun. 30, 2014

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Schedule of derivative positions of Company

The derivative positions of the Company at June 30, 2014 and December 31, 2013 are as follows:

	At June 30,				At December 31,
	2014				2013
	Fair		Notional		Fair		Notional
	Value		Value		Value		Value
			(In thousands)
Derivative assets:
Mortgage loan interest rate lock commitments	$	1,672		159,113		—		—
Mortgage loan forward sales commitments		583		25,855		106		20,516
Mortgage-backed securities forward sales commitments		—		—		878		88,000
Interest rate swaps		—		—		428		20,000
	$	2,255		184,968		1,412		128,516
Derivative liabilities:
Mortgage-backed securities forward sales commitments	$	709		139,000		—		—
Mortgage loan interest rate lock commitments		—		—		55		103,614
Interest rate swaps		21		10,000		—		—
	$	730		149,000		55		103,614