NOTE 3 - LOANS

Major classifications of loans at September 30, 2014 and December 31, 2013 are summarized as follows:

	2014		2013
Residential real estate	$	278,586	$	216,081
Multifamily real estate		30,315		38,456
Commercial real estate:
Owner occupied		103,457		90,539
Non owner occupied		212,811		208,756
Commercial and industrial		103,764		85,301
Consumer		34,230		25,113
All other		91,231		76,524
	$	854,394	$	740,770

Activity in the allowance for loan losses by portfolio segment for the nine months ended September 30, 2014 was as follows:

Loan Class	Balance Dec 31, 2013		Provision for loan losses			Loans charged- off		Recoveries		Balance Sept 30, 2014

Residential real estate	$	2,694	$	(419	)	$	308	$	55	$	2,022
Multifamily real estate		417		(137	)		-		-		280
Commercial real estate:
Owner occupied		1,407		112			207		-		1,312
Non owner occupied		2,037		310			323		-		2,024
Commercial and industrial		2,184		(335	)		111		11		1,749
Consumer		297		(12	)		105		45		225
All other		1,991		628			267		216		2,568
Total	$	11,027	$	147		$	1,321	$	327	$	10,180

Activity in the allowance for loan losses by portfolio segment for the nine months ending September 30, 2013 was as follows:

Loan Class	Balance Dec 31, 2012		Provision for loan losses			Loans charged- off		Recoveries		Balance Sept 30, 2013

Residential real estate	$	2,163	$	571		$	191	$	10	$	2,553
Multifamily real estate		331		43			-		-		374
Commercial real estate:
Owner occupied		1,117		96			67		299		1,445
Non owner occupied		1,888		209			-		-		2,097
Commercial and industrial		3,046		215			12		87		3,336
Consumer		244		87			123		47		255
All other		2,699		(671	)		202		286		2,112
Total	$	11,488	$	550		$	595	$	729	$	12,172

Activity in the allowance for loan losses by portfolio segment for the three months ended September 30, 2014 was as follows:

Loan Class	Balance June 30, 2014		Provision for loan losses			Loans charged- off		Recoveries		Balance Sept 30, 2014

Residential real estate	$	2,140	$	(28	)	$	137	$	47	$	2,022
Multifamily real estate		311		(31	)		-		-		280
Commercial real estate:
Owner occupied		1,364		73			125		-		1,312
Non owner occupied		2,270		(246	)		-		-		2,024
Commercial and industrial		1,489		281			27		6		1,749
Consumer		232		21			46		18		225
All other		2,071		466			63		94		2,568
Total	$	9,877	$	536		$	398	$	165	$	10,180

Activity in the allowance for loan losses by portfolio segment for the three months ending September 30, 2013 was as follows:

Loan Class	Balance June 30, 2013		Provision for loan losses			Loans charged- off		Recoveries		Balance Sept 30, 2013

Residential real estate	$	2,371	$	213		$	35	$	4	$	2,553
Multifamily real estate		429		(55	)		-		-		374
Commercial real estate:
Owner occupied		1,094		351			-		-		1,445
Non owner occupied		1,968		129			-		-		2,097
Commercial and industrial		4,073		(772	)		-		35		3,336
Consumer		233		60			60		22		255
All other		2,030		124			108		66		2,112
Total	$	12,198	$	50		$	203	$	127	$	12,172

Purchased Impaired Loans

The Company holds purchased loans for which there was, at their acquisition date, evidence of deterioration of credit quality since their origination and it was probable, at acquisition, that all contractually required payments would not be collected. The carrying amount of those loans is as follows at September 30, 2014 and December 31, 2013.

	2014		2013
Residential real estate	$	-	$	183
Multifamily real estate		515		1,229
Commercial real estate
Owner occupied		245		250
Non owner occupied		5,728		6,782
Commercial and industrial		327		496
All other		5,117		4,623
Total carrying amount	$	11,932	$	13,563

Carrying amount, net of allowance	$	10,937	$	12,931

For those purchased loans disclosed above, the Company increased the allowance for loan losses by $400,000 for the three and nine months ended September 30, 2014. The Company did not increase the allowance for loan losses for purchased impaired loans during the nine months ended September 30, 2013.

For the majority of these loans, the Company cannot reasonably estimate the cash flows expected to be collected on the loans and therefore has continued to account for those loans using the cost recovery method of income recognition. As such, no portion of a purchase discount adjustment has been determined to meet the definition of an accretable yield adjustment on those loans accounted for using the cost recovery method. If, in the future, cash flows from the borrower(s) can be reasonably estimated, a portion of the purchase discount would be allocated to an accretable yield adjustment based upon the present value of the future estimated cash flows versus the current carrying value of the loan and the accretable yield portion would be recognized as interest income over the remaining life of the loan. Until such accretable yield can be calculated, under the cost recovery method of income recognition, all payments will be used to reduce the carrying value of the loan and no income will be recognized on the loan until the carrying value is reduced to zero. Any loan accounted for under the cost recovery method is also still included as a non-accrual loan in the amounts presented in the tables below.

The Company has determined that the cash flows from borrowers on a limited number of purchased loans can be reasonably estimated. As such, a portion of the non-accretable difference was reclassified to accretable yield and is being recognized as interest income over the remaining life of the loan(s).

The accretable yield, or income expected to be collected, on the purchased loans above is as follows at September 30, 2014 and September 30, 2013.

	2014			2013
Balance at January 1	$	217		$	635
New loans purchased		-			-
Accretion of income		(9	)		(22	)
Income recognized upon full loan repayment		-			(415	)
Reclassifications from non-accretable difference		-			23
Disposals		-			-
Balance at September 30	$	208		$	221

Past Due and Non-performing Loans

The following tables present the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of September 30, 2014 and December 31 2013. The recorded investment in non-accrual loans is less than the principal owed on non-accrual loans due to discounts applied to the carrying value of the loan at time of their acquisition and interest payments made by the borrower which have been used to reduce the recorded investment in the loan rather than recognized as interest income.

September 30, 2014	Principal Owed on Non-accrual Loans		Recorded Investment in Non-accrual Loans		Loans Past Due Over 90 Days, still accruing

Residential real estate	$	2,105	$	1,898	$	1,973
Multifamily real estate		1,933		1,176		1,355
Commercial real estate
Owner occupied		2,347		2,073		5
Non owner occupied		2,061		1,887		26
Commercial and industrial		2,574		1,284		106
Consumer		267		232		60
All other		12,596		5,162		481
Total	$	23,883	$	13,712	$	4,006

December 31, 2013	Principal Owed on Non-accrual Loans		Recorded Investment in Non-accrual Loans		Loans Past Due Over 90 Days, still accruing

Residential real estate	$	2,021	$	1,725	$	1,737
Multifamily real estate		3,282		1,889		1,369
Commercial real estate
Owner occupied		1,364		1,147		1,387
Non owner occupied		2,683		1,973		3,739
Commercial and industrial		6,838		4,961		84
Consumer		167		148		16
All other		12,212		4,798		146
Total	$	28,567	$	16,641	$	8,478

Nonaccrual loans and impaired loans are defined differently. Some loans may be included in both categories, and some may only be included in one category. Nonaccrual loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

The following table presents the aging of the recorded investment in past due loans as of September 30, 2014 by class of loans:

Loan Class	Total Loans		30-89 Days Past Due		Greater than 90 days past due		Total Past Due		Loans Not Past Due

Residential real estate	$	278,586	$	6,827	$	3,068	$	9,895	$	268,691
Multifamily real estate		30,315		330		2,016		2,346		27,969
Commercial real estate:
Owner occupied		103,457		543		1,464		2,007		101,450
Non owner occupied		212,811		3,892		1,665		5,557		207,254
Commercial and industrial		103,764		175		1,181		1,356		102,408
Consumer		34,230		530		130		660		33,570
All other		91,231		4,210		5,595		9,805		81,426
Total	$	854,394	$	16,507	$	15,119	$	31,626	$	822,768

The table above includes approximately $2,352,000 of loans 30-89 days past due and $1,003,000 of loans greater than 90 days past due that were acquired via the purchase of the Bank of Gassaway on April 4, 2014. See Note 9 below for additional details on purchase of the Bank of Gassaway.

The following table presents the aging of the recorded investment in past due loans as of December 31, 2013 by class of loans:

Loan Class	Total Loans		30-89 Days Past Due		Greater than 90 days past due		Total Past Due		Loans Not Past Due

Residential real estate	$	216,081	$	4,770	$	2,431	$	7,201	$	208,880
Multifamily real estate		38,456		367		2,688		3,055		35,401
Commercial real estate:
Owner occupied		90,539		516		2,073		2,589		87,950
Non owner occupied		208,756		278		5,478		5,756		203,000
Commercial and industrial		85,301		1,433		1,438		2,871		82,430
Consumer		25,113		421		82		503		24,610
All other		76,524		2,510		4,881		7,391		69,133
Total	$	740,770	$	10,295	$	19,071	$	29,366	$	711,404

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of September 30, 2014:

	Allowance for Loan Losses								Loan Balances
Loan Class	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Acquired with Deteriorated Credit Quality		Total		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Acquired with Deteriorated Credit Quality		Total

Residential real estate	$	-	$	2,022	$	-	$	2,022	$	2,076	$	276,510	$	-	$	278,586
Multifamily real estate		26		254		-		280		1,800		28,000		515		30,315
Commercial real estate:
Owner occupied		125		1,187		-		1,312		2,104		101,108		245		103,457
Non-owner occupied		14		2,010		-		2,024		3,151		203,932		5,728		212,811
Commercial and industrial		368		1,286		95		1,749		1,190		102,247		327		103,764
Consumer		-		225		-		225		-		34,230		-		34,230
All other		-		1,668		900		2,568		2,572		83,542		5,117		91,231
Total	$	533	$	8,652	$	995	$	10,180	$	12,893	$	829,569	$	11,932	$	854,394

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, 2013:

	Allowance for Loan Losses								Loan Balances
Loan Class	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Acquired with Deteriorated Credit Quality		Total		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Acquired with Deteriorated Credit Quality		Total

Residential real estate	$	138	$	2,556	$	-	$	2,694	$	2,787	$	213,111	$	183	$	216,081
Multifamily real estate		-		417		-		417		1,822		35,405		1,229		38,456
Commercial real estate:
Owner occupied		170		1,237		-		1,407		2,386		87,903		250		90,539
Non-owner occupied		362		1,675		-		2,037		1,024		200,950		6,782		208,756
Commercial and industrial		1,088		964		132		2,184		4,270		80,535		496		85,301
Consumer		-		297		-		297		-		25,113		-		25,113
All other		102		1,389		500		1,991		3,279		68,622		4,623		76,524
Total	$	1,860	$	8,535	$	632	$	11,027	$	15,568	$	711,639	$	13,563	$	740,770

As of September 30, 2014, the table above includes approximately $88,167,000 of loans acquired from the purchase of the Bank of Gassaway reported as collectively evaluated for impairment with no loans deemed by management to be reported as individually evaluated for impairment or acquired with deteriorated credit quality.

In the tables below, total individually evaluated impaired loans include certain purchased loans that were acquired with deteriorated credit quality that are still individually evaluated for impairment.

The following table presents loans individually evaluated for impairment by class of loans as of September 30, 2014. The table includes $5,980,000 of loans acquired with deteriorated credit quality that the Company cannot reasonably estimate cash flows such that they are accounted for on the cost recovery method and are still individually evaluated for impairment.

	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With no related allowance recorded:
Residential real estate	$	2,128	$	2,076	$	-
Multifamily real estate		2,715		1,957		-
Commercial real estate
Owner occupied		1,896		1,702		-
Non owner occupied		2,628		2,548		-
Commercial and industrial		1,021		273		-
All other		2,608		2,572		-
		12,996		11,128		-
With an allowance recorded:
Multifamily real estate	$	364	$	358	$	26
Commercial real estate
Owner occupied		515		515		125
Non owner occupied		602		602		14
Commercial and industrial		1,502		1,152		463
All other		12,514		5,118		900
		15,497		7,745		1,528
Total	$	28,493	$	18,873	$	1,528

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2013. The table includes $7,483,000 of loans acquired with deteriorated credit quality that the Company cannot reasonably estimate cash flows such that they are accounted for on the cost recovery method and are still individually evaluated for impairment.

	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With no related allowance recorded:
Residential real estate	$	1,513	$	1,314	$	-
Multifamily real estate		4,449		3,051		-
Commercial real estate
Owner occupied		2,601		1,986		-
Non owner occupied		1,861		1,184		-
Commercial and industrial		809		49		-
All other		3,185		3,167		-
		14,418		10,751		-
With an allowance recorded:
Residential real estate	$	1,668	$	1,656	$	138
Commercial real estate
Owner occupied		515		515		170
Non owner occupied		810		790		362
Commercial and industrial		5,543		4,604		1,220
All other		12,132		4,735		602
		20,668		12,300		2,492
Total	$	35,086	$	23,051	$	2,492

The following table presents the average balance of loans individually evaluated for impairment and interest income recognized on these loans for the nine months ended September 30, 2014 and September 30, 2013. The table includes loans acquired with deteriorated credit quality that are still individually evaluated for impairment.

	Nine months ended Sept. 30, 2014						Nine months ended Sept. 30, 2013
Loan Class	Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized		Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized
Residential real estate	$	2,421	$	209	$	209	$	4,303	$	140	$	140
Multifamily real estate		2,518		746		746		4,247		828		828
Commercial real estate:
Owner occupied		2,171		39		30		2,620		136		119
Non-owner occupied		1,388		644		634		2,603		9		9
Commercial and industrial		2,152		546		546		9,184		44		44
All other		7,624		126		126		8,620		214		214
Total	$	18,274	$	2,310	$	2,291	$	31,577	$	1,371	$	1,354

The following table presents the average balance of loans individually evaluated for impairment and interest income recognized on these loans for the three months ended September 30, 2014 and September 30, 2013. The table includes loans acquired with deteriorated credit quality that are still individually evaluated for impairment.

	Three months ended Sept. 30, 2014						Three months ended Sept. 30, 2013
Loan Class	Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized		Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized

Residential real estate	$	2,166	$	148	$	148	$	3,920	$	42	$	42
Multifamily real estate		2,328		19		19		3,981		32		27
Commercial real estate:
Owner occupied		2,080		10		9		2,544		40		38
Non-owner occupied		1,679		17		7		2,166		-		-
Commercial and industrial		1,337		4		4		7,223		3		3
All other		7,475		45		45		7,900		54		17
Total	$	17,065	$	243	$	232	$	27,734	$	171	$	127

Troubled Debt Restructurings

A loan is classified as a troubled debt restructuring ("TDR") when loan terms are modified due to a borrower's financial difficulties and a concession is granted to a borrower that would not have otherwise been considered. Most of the Company’s loan modifications involve a restructuring of loan terms prior to maturity to temporarily reduce the payment amount and/or to require only interest for a temporary period, usually up to six months. These modifications generally do not meet the definition of a TDR because the modifications are considered to be an insignificant delay in payment. The determination of an insignificant delay in payment is evaluated based on the facts and circumstances of the individual borrower(s).

The following table presents TDR’s as of September 30, 2014 and December 31, 2013:

September 30, 2014	TDR’s on Non-accrual		Other TDR’s		Total TDR’s

Residential real estate	$	15	$	195	$	210
Commercial real estate
Non owner occupied		-		479		479
Commercial and industrial		-		779		779
All other		-		1,838		1,838
Total	$	15	$	3,291	$	3,306

December 31, 2013	TDR’s on Non-accrual		Other TDR’s		Total TDR’s

Residential real estate	$	23	$	296	$	319
Commercial real estate
Non owner occupied		-		506		506
Commercial and industrial		-		831		831
Consumer		-		5		5
All other		-		2,017		2,017
Total	$	23	$	3,655	$	3,678

At September 30, 2014 and December 31, 2013 there were no specific reserves allocated to loans that had restructured terms.

The following table presents TDR’s that occurred during the nine months ended September 30, 2014 and September 30, 2013:

	Nine months ended Sept. 30, 2014						Nine months ended Sept. 30, 2013
Loan Class	Number of Loans		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Number of Loans		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment

All other		-	$	-	$	-		1	$	16	$	16
Total		-	$	-	$	-		1	$	16	$	16

The troubled debt restructurings described above did not increase the allowance for loan losses during the period ended September 30, 2014 and did not increase the allowance for loan losses during the period ended September 30, 2013.

During the three and nine months ended September 30, 2014 and the three and nine months ended September 30, 2013, there were no TDR’s for which there as a payment default within twelve months following the modification.

A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms.

Credit Quality Indicators:

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes non-homogeneous loans, such as commercial, commercial real estate, multifamily residential and commercial purpose loans secured residential real estate, on a monthly basis. For consumer loans, including consumer loans secured by residential real estate, the analysis involves monitoring the performing status of the loan. At the time such loans become past due by 30 days or more, the Company evaluates the loan to determine if a change in risk category is warranted. The Company uses the following definitions for risk ratings:

Special Mention. Loans classified as special mention have a potential weakness that deserves management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution's credit position at some future date.

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

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

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans.

As of September 30, 2014 and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

Loan Class	Pass		Special Mention		Substandard		Doubtful		Total Loans

Residential real estate	$	263,920	$	7,940	$	6,711	$	15	$	278,586
Multifamily real estate		27,106		894		2,315		-		30,315
Commercial real estate:
Owner occupied		94,219		5,770		3,468		-		103,457
Non-owner occupied		201,056		6,739		5,016		-		212,811
Commercial and industrial		99,758		2,224		1,753		29		103,764
Consumer		33,808		315		107		-		34,230
All other		77,313		5,604		8,314		-		91,231
Total	$	797,180	$	29,486	$	27,684	$	44	$	854,394

The table above includes approximately $76,637,000 of loans risk rated as “pass”, $2,653,000 of loans risk rated as “special mention”, $1,957,000 of loans risk rated as “substandard” and no loans risk rated as doubtful that were acquired via the purchase of the Bank of Gassaway on April 4, 2014. See Note 9 below for additional details on purchase of the Bank of Gassaway.

As of December 31, 2013, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

Loan Class	Pass		Special Mention		Substandard		Doubtful		Total Loans

Residential real estate	$	202,789	$	6,204	$	7,065	$	23	$	216,081
Multifamily real estate		34,487		918		3,051		-		38,456
Commercial real estate:
Owner occupied		79,694		7,431		3,348		66		90,539
Non-owner occupied		196,338		8,569		3,849		-		208,756
Commercial and industrial		78,205		2,269		4,753		74		85,301
Consumer		24,772		204		137		-		25,113
All other		62,180		5,947		8,285		112		76,524

Total	$	678,465	$	31,542	$	30,488	$	275	$	740,770