UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

Southern First Bancshares, Inc.
(Exact name of registrant as specified in its charter)

South Carolina		58-2459561
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
100 Verdae Boulevard, Suite 100
Greenville, S.C.		29606
(Address of principal executive offices)		(Zip Code)

864-679-9000
(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 ☒  No

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 ☒  No

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 6,236,144 shares of common stock, par value $0.01 per share, were issued and outstanding as of July 28, 2015.

---

SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY
June 30, 2015 Form 10-Q

INDEX

PART I – CONSOLIDATED FINANCIAL INFORMATION				Page
Item 1.		Consolidated Financial Statements
		Consolidated Balance Sheets		3
		Consolidated Statements of Income		4
		Consolidated Statements of Comprehensive Income		5
		Consolidated Statements of Shareholders’ Equity		6
		Consolidated Statements of Cash Flows		7
		Notes to Unaudited Consolidated Financial Statements		8
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		25
Item 3.		Quantitative and Qualitative Disclosures about Market Risk		42
Item 4.		Controls and Procedures		43
PART II – OTHER INFORMATION
Item 1.		Legal Proceedings		43
Item 1A.		Risk Factors		43
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		43
Item 3.		Defaults upon Senior Securities		43
Item 4.		Mine Safety Disclosures		43
Item 5.		Other Information		43
Item 6.		Exhibits		43

2

---

PART I. CONSOLIDATED FINANCIAL INFORMATION
Item 1. CONSOLIDATED FINANCIAL STATEMENTS

SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS

		June 30,				December 31,
(dollars in thousands, except share data)		2015				2014
		(Unaudited)				(Audited)
ASSETS
Cash and cash equivalents:
Cash and due from banks		$	12,085			9,862
Interest-bearing deposits with banks			5,219			25,849
Federal funds sold			24,106			5,553
Total cash and cash equivalents			41,410			41,264
Investment securities:
Investment securities available for sale			51,465			55,024
Other investments			5,532			6,522
Total investment securities			56,997			61,546
Loans held for sale			12,402			11,765
Loans			963,496			871,446
Less allowance for loan losses			(12,927	)		(11,752	)
Loans, net			950,569			859,694
Bank owned life insurance			22,382			22,050
Property and equipment, net			22,704			20,845
Deferred income taxes			5,929			5,509
Other assets			6,607			7,192
Total assets		$	1,119,000			1,029,865
LIABILITIES
Deposits		$	894,524			788,907
Federal Home Loan Bank advances and other borrowings			115,200			135,200
Junior subordinated debentures			13,403			13,403
Other liabilities			8,206			9,363
Total liabilities			1,031,333			946,873
SHAREHOLDERS’ EQUITY
Preferred stock, par value $.01 per share, 10,000,000 shares authorized, no
shares issued and outstanding			-			-
Common stock, par value $.01 per share, 10,000,000 shares authorized,
6,236,144 and 6,219,002 shares issued and outstanding at June 30, 2015
and December 31, 2014, respectively			62			62
Nonvested restricted stock			(400	)		(494	)
Additional paid-in capital			69,192			68,785
Accumulated other comprehensive income (loss)			(112	)		302
Retained earnings			18,925			14,337
Total shareholders’ equity			87,667			82,992
Total liabilities and shareholders’ equity		$	1,119,000			1,029,865

See notes to consolidated financial statements that are an integral part of these consolidated statements.

3

---

SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

		For the three months					For the six months
		ended June 30,					ended June 30,
(dollars in thousands, except share data)		2015			2014		2015		2014
Interest income
Loans		$	10,941		9,309		21,341		18,127
Investment securities			356		465		731		977
Federal funds sold			19		16		45		30
Total interest income			11,316		9,790		22,117		19,134
Interest expense
Deposits			854		696		1,621		1,376
Borrowings			971		1,024		1,935		2,044
Total interest expense			1,825		1,720		3,556		3,420
Net interest income			9,491		8,070		18,561		15,714
Provision for loan losses			1,000		950		1,625		1,950
Net interest income after provision for loan losses			8,491		7,120		16,936		13,764
Noninterest income
Loan and mortgage fee income			1,409		613		2,605		955
Service fees on deposit accounts			219		231		445		445
Income from bank owned life insurance			165		167		331		329
Gain on sale of investment securities			36		230		295		230
Other income			286		277		580		529
Total noninterest income			2,115		1,518		4,256		2,488
Noninterest expenses
Compensation and benefits			4,106		3,514		8,382		6,925
Occupancy			842		730		1,579		1,457
Real estate owned expenses			93		12		855		25
Data processing and related costs			573		622		1,158		1,216
Insurance			213		203		415		395
Professional fees			233		294		466		517
Marketing			222		197		460		398
Other			364		743		791		1,152
Total noninterest expenses			6,646		6,315		14,106		12,085
Income before income tax expense			3,960		2,323		7,086		4,167
Income tax expense			1,400		757		2,498		1,351
Net income			2,560		1,566		4,588		2,816
Preferred stock dividend			-		253		-		445
Net income available to common shareholders		$	2,560		1,313		4,588		2,371
Earnings per common share
Basic		$	0.41		0.28		0.74		0.51
Diluted			0.39		0.26		0.70		0.48
Weighted average common shares outstanding
Basic			6,233,745		4,763,407		6,229,522		4,686,748
Diluted			6,533,658		5,036,553		6,524,317		4,957,000

See notes to consolidated financial statements that are an integral part of these consolidated statements.

4

---

SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

		For the three months							For the six months
		ended June 30,							ended June 30,
(dollars in thousands)		2015				2014			2015			2014
Net income		$	2,560			1,566			4,588			2,816
Other comprehensive income (loss):
Unrealized gain (loss) on securities available for sale:
Unrealized holding gain (loss) arising during the period, pretax			(689	)		1,093			(332	)		2,259
Tax (expense) benefit			234			(371	)		113			(768	)
Reclassification of realized gain			(36	)		(230	)		(295	)		(230	)
Tax expense			12			78			100			78
Other comprehensive income (loss)			(479	)		570			(414	)		1,339
Comprehensive income		$	2,081			2,136			4,174			4,155

See notes to consolidated financial statements that are an integral part of these consolidated statements.

5

---

SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2015 AND 2014
(Unaudited)

																				Accumulated
													Nonvested				Additional			other
	Common stock					Preferred stock							restricted				paid-in			comprehensive				Retained
(dollars in thousands, except share data)	Shares		Amount			Shares			Amount				stock				capital			income (loss)				earnings				Total
December 31, 2013	4,319,750		$	43		15,299			$	15,299			$	(636	)		$	43,585		$	(1,348	)		$	8,722			$	65,665
Net income	-			-		-				-				-				-			-				2,816				2,816
Preferred stock transactions:
Redemption of preferred stock	-			-		(4,057	)			(4,057	)			-				-			-				-				(4,057	)
Cash dividends on Series T preferred stock	-			-		-				-				-				-			-				(434	)			(434	)
Issuance of common stock	475,000			5		-				-				-				5,945			-				-				5,950
Proceeds from exercise of stock options	32,764			-		-				-				-				287			-				-				287
Issuance of restricted stock	2,000			-		-				-				(27	)			27			-				-				-
Amortization of deferred compensation on restricted stock	-			-		-				-				98				-			-				-				98
Compensation expense related to stock options, net of tax	-			-		-				-				-				222			-				-				222
Other comprehensive income	-			-		-				-				-				-			1,339				-				1,339
June 30, 2014	4,829,514			48		11,242				11,242				(565	)			50,066			(9	)			11,104				71,886
December 31, 2014	6,219,002			62		-				-				(494	)			68,785			302				14,337				82,992
Net income	-			-		-				-				-				-			-				4,588				4,588
Proceeds from exercise of stock options	17,142			-		-				-				-				117			-				-				117
Amortization of deferred compensation on restricted stock	-			-		-				-				94				-			-				-				94
Compensation expense related to stock options, net of tax	-			-		-				-				-				290			-				-				290
Other comprehensive loss	-			-		-				-				-				-			(414	)			-				(414	)
June 30, 2015	6,236,144		$	62		-			$	-			$	(400	)		$	69,192		$	(112	)		$	18,925			$	87,667

See notes to consolidated financial statements that are an integral part of these consolidated statements.

6

---

SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

	For the six months ended June 30,
(dollars in thousands)		2015				2014
Operating activities
Net income		$	4,588			2,816
Adjustments to reconcile net income to cash provided by operating activities:
Provision for loan losses			1,625			1,950
Depreciation and other amortization			688			591
Accretion and amortization of securities discounts and premium, net			148			200
Gain on sale of investment securities available for sale			(295	)		(230	)
Gain on sale of real estate owned			(74	)		-
Write-down of real estate owned			737			-
Compensation expense related to stock options and grants			384			320
Gain on sale of loans held for sale			(2,484	)		(880	)
Loans originated and held for sale			(106,754	)		(37,555	)
Proceeds from sale of loans held for sale			108,601			34,857
Increase in cash surrender value of bank owned life insurance			(332	)		(329	)
Increase in deferred tax asset			(207	)		(856	)
Decrease in other assets, net			165			90
Decrease in other liabilities			(1,157	)		(13	)
Net cash provided by operating activities			5,633			961
Investing activities
Increase (decrease) in cash realized from:
Origination of loans, net			(92,843	)		(80,392	)
Purchase of property and equipment			(2,547	)		(1,456	)
Purchase of investment securities:
Available for sale			(9,352	)		(2,073	)
Other			(149	)		-
Payments and maturity of investment securities:
Available for sale			2,359			2,427
Other			1,140			157
Proceeds from sale of investment securities available for sale			10,071			10,427
Proceeds from sale of real estate owned			100			75
Net cash used for investing activities			(91,221	)		(70,835	)
Financing activities
Increase (decrease) in cash realized from:
Increase in deposits, net			105,617			67,050
Increase in other borrowings			-			3,000
Decrease in Federal Home Loan Bank advances and other borrowings			(20,000	)		-
Cash dividend on preferred stock			-			(434	)
Redemption of preferred stock			-			(4,057	)
Issuance of common stock			-			5,950
Proceeds from the exercise of stock options and warrants			117			287
Net cash provided by financing activities			85,734			71,796
Net increase in cash and cash equivalents			146			1,922
Cash and cash equivalents at beginning of the period			41,264			39,203
Cash and cash equivalents at end of the period		$	41,410			41,125
Supplemental information
Cash paid for
Interest		$	3,634			3,320
Income taxes			2,705			2,207
Schedule of non-cash transactions
Real estate acquired in settlement of loans			343			154
Unrealized gain (loss) on securities, net of income taxes			(219	)		1,491

See notes to consolidated financial statements that are an integral part of these consolidated statements.

7

---

SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – Nature of Business and Basis of Presentation

Business Activity
Southern First Bancshares, Inc. (the "Company") is a South Carolina corporation that owns all of the capital stock of Southern First Bank (the "Bank") and all of the stock of Greenville First Statutory Trust I and II (collectively, the "Trusts"). The Trusts are special purpose non-consolidated entities organized for the sole purpose of issuing trust preferred securities. The Bank's primary federal regulator is the Federal Deposit Insurance Corporation (the "FDIC"). The Bank is also regulated and examined by the South Carolina Board of Financial Institutions. The Bank is primarily engaged in the business of accepting demand deposits and savings deposits insured by the FDIC, and providing commercial, consumer and mortgage loans to the general public.

Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six month periods ended June 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 as filed with the Securities and Exchange Commission on March 3, 2015. The consolidated financial statements include the accounts of the Company and the Bank. In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, “Consolidation,” the financial statements related to the Trusts have not been consolidated.

Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires 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 consolidated financial statements and the reported amount of income 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, real estate acquired in the settlement of loans, fair value of financial instruments, evaluating other-than-temporary-impairment of investment securities and valuation of deferred tax assets.

Reclassifications
Certain amounts, previously reported, have been reclassified to state all periods on a comparable basis and had no effect on shareholders’ equity or net income.

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 balance sheet but arose after that date. Management performed an evaluation to determine whether there have been any subsequent events since the balance sheet date and determined that no subsequent events occurred requiring accrual or disclosure.

NOTE 2 – Preferred and Common Stock

On November 12, 2014, the Company issued 1,380,000 shares of its common stock in a public offering at $14.40 per share, including 180,000 shares which were sold to the underwriter pursuant to an option to purchase additional shares to cover any over-allotments. The net proceeds from the offering totaled approximately $18.4 million, after deducting the underwriting discount as well as estimated offering expenses. 

8

---

Using proceeds from the public offering, on December 12, 2014, the Company completed the repurchase of the remaining 11,242 shares of Series T preferred stock outstanding at $1,000 par value from third party investors who purchased the shares in July 2012 through a Dutch auction conducted by the U.S. Treasury. As of December 31, 2014, the Company has no shares of preferred stock outstanding.

NOTE 3 – Investment Securities

The amortized costs and fair value of investment securities are as follows:

		June 30, 2015
		Amortized			Gross Unrealized				Fair
(dollars in thousands)		Cost			Gains		Losses		Value
Available for sale
US government agencies		$	9,133		18		307		8,844
SBA securities			5,072		-		169		4,903
State and political subdivisions			16,148		325		127		16,346
Mortgage-backed securities			21,281		250		159		21,372
Total investment securities available for sale		$	51,634		593		762		51,465
		December 31, 2014
		Amortized			Gross Unrealized				Fair
		Cost			Gains		Losses		Value
Available for sale
US government agencies		$	8,763		9		215		8,557
SBA securities			5,336		-		182		5,154
State and political subdivisions			16,253		598		51		16,800
Mortgage-backed securities			24,214		341		42		24,513
Total investment securities available for sale		$	54,566		948		490		55,024

During the first quarter of 2015, the Company developed a need for additional liquidity as it experienced increased loan demand and, as a result, sold $5.8 million of its mortgage-backed securities and state and municipal obligations and recorded a net gain on sale of investment securities of $259,000. During the second quarter of 2015, we sold and subsequently reinvested $4.3 million of investment securities, recording a gain of $36,000 from the transaction.

Contractual maturities and yields on the Company’s investment securities at June 30, 2015 and December 31, 2014 are shown in the following table. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

	June 30, 2015
	Less than one year						One to five years				Five to ten years				Over ten years						Total
(dollars in thousands)		Amount			Yield		Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield
Available for sale
US government agencies		$	-		-		-		-		1,316		2.19%		7,528		2.42%		8,844		2.39%
SBA securities			-		-		-		-		-		-		4,903		1.88%		4,903		1.88%
State and political subdivisions			2,063		0.84%		-		-		7,529		3.07%		6,754		2.92%		16,346		2.72%
Mortgage-backed securities			-		-		-		-		1,155		1.77%		20,217		2.12%		21,372		2.10%
Total		$	2,063		0.84%		-		-		10,000		2.79%		39,402		2.28%		51,465		2.32%

9

---

		December 31, 2014
		Less than one year					One to five years				Five to ten years				Over ten years				Total
		Amount			Yield		Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield
Available for sale
US government agencies		$	-		-		988		2.12%		-		-		7,569		2.43%		8,557		2.39%
SBA securities			-		-		-		-		-		-		5,154		1.88%		5,154		1.88%
State and political subdivisions			2,082		0.68%		399		3.14%		8,465		3.23%		5,854		3.00%		16,800		2.82%
Mortgage-backed securities			-		-		-		-		2,118		1.66%		22,395		2.62%		24,513		2.54%
Total		$	2,082		0.68%		1,387		2.41%		10,583		2.91%		40,972		2.54%		55,024		2.54%

The tables below summarize gross unrealized losses on investment securities and the fair market value of the related securities at June 30, 2015 and December 31, 2014, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position.

		June 30, 2015
		Less than 12 months								12 months or longer								Total
				Fair			Unrealized					Fair			Unrealized					Fair			Unrealized
(dollars in thousands)		#		value			losses			#		value			losses			#		value			losses
Available for sale
US government agencies		3		$	8,826		$	307		-		$	-		$	-		3		$	8,826		$	307
SBA securities		-			-			-		2			4,903			169		2			4,903			169
State and political subdivisions		6			2,422			69		4			2,226			58		10			4,648			127
Mortgage-backed securities		8			11,592			159		-			-			-		8			11,592			159
Total		17		$	22,840		$	535		6		$	7,129		$	227		23		$	29,969		$	762
		December 31, 2014
		Less than 12 months										12 months or longer								Total
				Fair			Unrealized					Fair			Unrealized					Fair			Unrealized
		#		value			losses			#		value			losses			#		value			losses
Available for sale
US government agencies		-		$	-		$	-		2		$	7,569		$	215		2		$	7,569		$	215
SBA securities		-			-			-		2			5,154			182		2			5,154			182
State and political subdivisions		-			-			-		7			3,488			51		7			3,488			51
Mortgage-backed securities		3			4,407			11		2			4,756			31		5			9,163			42
Total		3		$	4,407		$	11		13		$	20,967		$	479		16		$	25,374		$	490

At June 30, 2015, the Company had 17 individual investments with a fair market value of $22.8 million that were in an unrealized loss position for less than 12 months and six individual investments with a fair market value of $7.1 million that were in an unrealized loss position for 12 months or longer. The unrealized losses were primarily attributable to changes in interest rates, rather than deterioration in credit quality. The individual securities are each investment grade securities. The Company considers the length of time and extent to which the fair value of available-for-sale debt securities have been less than cost to conclude that such securities are not other-than-temporarily impaired. We also consider other factors such as the financial condition of the issuer including credit ratings and specific events affecting the operations of the issuer, volatility of the security, underlying assets that collateralize the debt security, and other industry and macroeconomic conditions. As the Company has no intent to sell securities with unrealized losses and it is not more-likely-than-not that the Company will be required to sell these securities before recovery of amortized cost, we have concluded that these securities are not impaired on an other-than-temporary basis.

10

---

Other investments are comprised of the following and are recorded at cost which approximates fair value.

(dollars in thousands)		June 30, 2015			December 31, 2014
Federal Home Loan Bank stock		$	5,005		6,020
Investment in Trust Preferred securities			403		403
Other investments			124		99
Total other investments		$	5,532		6,522

The Company has evaluated the Federal Home Loan Bank (“FHLB”) stock for impairment and determined that the investment in the FHLB stock is not other than temporarily impaired as of June 30, 2015 and ultimate recoverability of the par value of this investment is probable. All of the FHLB stock is used to collateralize advances with the FHLB.

At June 30, 2015, $21.3 million of securities were pledged as collateral for repurchase agreements from brokers, and approximately $12.2 million of securities were pledged to secure client deposits. At December 31, 2014, $21.8 million of securities were pledged as collateral for repurchase agreements from brokers, and approximately $12.9 million of securities were pledged to secure client deposits.

NOTE 4 – Loans and Allowance for Loan Losses

The following table summarizes the composition of our loan portfolio. Total gross loans are recorded net of deferred loan fees and costs, which totaled $1.9 million and $1.8 million as of June 30, 2015 and December 31, 2014, respectively.

		June 30, 2015							December 31, 2014
(dollars in thousands)		Amount				% of Total			Amount				% of Total
Commercial
Owner occupied RE		$	232,997			24.2%			$	191,061			21.9%
Non-owner occupied RE			207,623			21.6%				183,440			21.1%
Construction			33,570			3.5%				50,995			5.8%
Business			162,017			16.8%				149,986			17.2%
Total commercial loans			636,207			66.1%				575,482			66.0%
Consumer
Real estate			166,404			17.3%				146,859			16.9%
Home equity			105,241			10.9%				95,629			11.0%
Construction			40,957			4.2%				39,226			4.5%
Other			14,687			1.5%				14,250			1.6%
Total consumer loans			327,289			33.9%				295,964			34.0%
Total gross loans, net of deferred fees			963,496			100.0%				871,446			100.0%
Less—allowance for loan losses			(12,927	)						(11,752	)
Total loans, net		$	950,569						$	859,694

Maturities and Sensitivity of Loans to Changes in Interest Rates

The information in the following tables summarizes the loan maturity distribution by type and related interest rate characteristics 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.

11

---

		June 30, 2015
					After one
		One year			but within		After five
(dollars in thousands)		or less			five years		years		Total
Commercial
Owner occupied RE		$	22,954		125,545		84,498		232,997
Non-owner occupied RE			38,321		132,549		36,753		207,623
Construction			13,429		15,467		4,674		33,570
Business			72,776		76,802		12,439		162,017
Total commercial loans			147,480		350,363		138,364		636,207
Consumer
Real estate			25,794		42,669		97,941		166,404
Home equity			6,151		31,292		67,798		105,241
Construction			17,578		2,623		20,756		40,957
Other			7,409		5,787		1,491		14,687
Total consumer loans			56,932		82,371		187,986		327,289
Total gross loans, net of deferred fees		$	204,412		432,734		326,350		963,496
Loans maturing after one year with:
Fixed interest rates								$	560,046
Floating interest rates									199,038
		December 31, 2014
					After one
		One year			but within		After five
		or less			five years		years		Total
Commercial
Owner occupied RE		$	20,737		98,110		72,214		191,061
Non-owner occupied RE			46,718		104,402		32,320		183,440
Construction			11,923		25,145		13,927		50,995
Business			75,718		65,899		8,369		149,986
Total commercial loans			155,096		293,556		126,830		575,482
Consumer
Real estate			21,571		41,549		83,739		146,859
Home equity			5,645		28,394		61,590		95,629
Construction			13,531		2,073		23,622		39,226
Other			7,278		5,637		1,335		14,250
Total consumer			48,025		77,653		170,286		295,964
Total gross loan, net of deferred fees		$	203,121		371,209		297,116		871,446
Loans maturing after one year with :
Fixed interest rates									494,058
Floating interest rates									174,267

Portfolio Segment Methodology

Commercial
Commercial loans are assessed for estimated losses by grading each loan using various risk factors identified through periodic reviews. We apply historic grade-specific loss factors to each loan class. In the development of our statistically derived loan grade loss factors, we observe historical losses over 12 quarters for each loan grade. These loss estimates are adjusted as appropriate based on additional analysis of external loss data or other risks identified from current economic conditions and credit quality trends. The allowance also includes an amount for the estimated impairment on nonaccrual commercial loans and commercial loans modified in a troubled debt restructuring (“TDR”), whether on accrual or nonaccrual status.

12

---

Consumer
For consumer loans, we determine the allowance on a collective basis utilizing historical losses over 12 quarters to represent our best estimate of inherent loss. We pool loans, generally by loan class with similar risk characteristics. The allowance also includes an amount for the estimated impairment on nonaccrual consumer loans and consumer loans modified in a TDR, whether on accrual or nonaccrual status.

Credit Quality Indicators

Commercial
We manage a consistent process for assessing commercial loan credit quality by monitoring our loan grading trends and past due statistics. All loans are subject to individual risk assessment. Our risk categories include Pass, Special Mention, Substandard, and Doubtful, each of which is defined by banking regulatory agencies. Delinquency statistics are also an important indicator of credit quality in the establishment of our allowance for credit losses.

We categorize our loans into risk categories based on relevant information about the ability of the borrower to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. A description of the general characteristics of the risk grades is as follows:

●	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 tables below provide a breakdown of outstanding commercial loans by risk category.

		June 30, 2015
		Owner			Non-owner
(dollars in thousands)		occupied RE			occupied RE		Construction		Business		Total
Pass		$	227,441		197,847		31,639		152,923		609,850
Special mention			3,774		3,326		-		4,935		12,035
Substandard			1,782		6,450		1,931		4,159		14,322
Doubtful			-		-		-		-		-
		$	232,997		207,623		33,570		162,017		636,207

13

---

		December 31, 2014
		Owner			Non-owner
		occupied RE			occupied RE		Construction		Business		Total
Pass		$	184,158		173,711		48,140		140,432		546,441
Special mention			5,035		3,376		129		4,715		13,255
Substandard			1,868		6,353		2,726		4,839		15,786
Doubtful			-		-		-		-		-
		$	191,061		183,440		50,995		149,986		575,482

The following tables provide past due information for outstanding commercial loans and include loans on nonaccrual status as well as accruing TDRs.

		June 30, 2015
		Owner			Non-owner
(dollars in thousands)		occupied RE			occupied RE		Construction		Business		Total
Current		$	232,277		202,967		33,038		160,363		628,645
30-59 days past due			-		1,452		-		252		1,704
60-89 days past due			-		-		-		14		14
Greater than 90 Days			720		3,204		532		1,388		5,844
		$	232,997		207,623		33,570		162,017		636,207
		December 31, 2014
		Owner			Non-owner
		occupied RE			occupied RE		Construction		Business		Total
Current		$	190,801		180,577		50,212		148,317		569,907
30-59 days past due			-		49		-		35		84
60-89 days past due			-		246		-		155		401
Greater than 90 Days			260		2,568		783		1,479		5,090
		$	191,061		183,440		50,995		149,986		575,482

As of June 30, 2015 and December 31, 2014, loans 30 days or more past due represented 0.97% and 0.73% of our total loan portfolio, respectively. Commercial loans 30 days or more past due were 0.78% and 0.64% of our total loan portfolio as of June 30, 2015 and December 31, 2014, respectively.

Consumer
We manage a consistent process for assessing consumer loan credit quality by monitoring our loan grading trends and past due statistics. All loans are subject to individual risk assessment. Our categories include Pass, Special Mention, Substandard, and Doubtful, which are defined above. Delinquency statistics are also an important indicator of credit quality in the establishment of our allowance for loan losses.

The tables below provide a breakdown of outstanding consumer loans by risk category.

		June 30, 2015
(dollars in thousands)		Real estate			Home equity		Construction		Other		Total
Pass		$	163,612		101,210		40,957		14,523		320,302
Special mention			790		2,976		-		135		3,901
Substandard			2,002		1,055		-		29		3,086
Doubtful			-		-		-		-		-
		$	166,404		105,241		40,957		14,687		327,289

14

---

		December 31, 2014
		Real estate			Home equity		Construction		Other		Total
Pass		$	144,070		91,084		39,226		14,013		288,393
Special mention			953		3,268		-		139		4,360
Substandard			1,836		1,277		-		98		3,211
Doubtful			-		-		-		-		-
		$	146,859		95,629		39,226		14,250		295,964

The following tables provide past due information for outstanding consumer loans and include loans on nonaccrual status as well as accruing TDRs.

		June 30, 2015
(dollars in thousands)		Real estate			Home equity		Construction		Other		Total
Current		$	165,065		104,846		40,957		14,632		325,500
30-59 days past due			455		145		-		51		651
60-89 days past due			465		130		-		4		599
Greater than 90 Days			419		120		-		-		539
		$	166,404		105,241		40,957		14,687		327,289
		December 31, 2014
		Real estate			Home equity		Construction		Other		Total
Current		$	146,362		95,311		39,226		14,247		294,146
30-59 days past due			40		-		-		-		40
60-89 days past due			-		130		-		3		133
Greater than 90 Days			457		188		-		-		645
		$	146,859		95,629		39,226		14,250		295,964

As of June 30, 2015 and December 31, 2014, consumer loans 30 days or more past due were 0.19% and 0.09%, respectively, of total loans.

Nonperforming assets

The following table shows the nonperforming assets and the related percentage of nonperforming assets to total assets and gross loans. 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 contractual principal or interest on the loan is doubtful. A payment of interest on a loan that is classified as nonaccrual is recognized as a reduction in principal when received.

15

---

Following is a summary of our nonperforming assets, including nonaccruing TDRs.

(dollars in thousands)		June 30, 2015			December 31, 2014
Commercial
Owner occupied RE		$	720		322
Non-owner occupied RE			3,018		2,344
Construction			-		783
Business			1,178		1,408
Consumer
Real estate			419		457
Home equity			250		188
Construction			-		-
Other			1		1
Nonaccruing troubled debt restructurings			1,087		1,147
Total nonaccrual loans, including nonaccruing TDRs			6,673		6,650
Other real estate owned			2,887		3,307
Total nonperforming assets		$	9,560		9,957
Nonperforming assets as a percentage of:
Total assets			0.85%		0.97%
Gross loans			0.99%		1.14%
Total loans over 90 days past due			6,383		5,735
Loans over 90 days past due and still accruing			-		-
Accruing troubled debt restructurings		$	8,173		8,562

Impaired Loans

The table below summarizes key information for impaired loans. Our impaired loans include loans on nonaccrual status and loans modified in a TDR, whether on accrual or nonaccrual status. These impaired loans may have estimated impairment which is included in the allowance for loan losses. Our commercial and consumer impaired loans are evaluated individually to determine the related allowance for loan losses.

					June 30, 2015
					Recorded investment
							Impaired loans
		Unpaid					with related		Related
		Principal			Impaired		allowance for		allowance for
(dollars in thousands)		Balance			loans		loan losses		loan losses
Commercial
Owner occupied RE		$	1,531		1,506		1,506		490
Non-owner occupied RE			8,342		4,997		3,091		778
Construction			1,931		1,931		532		166
Business			4,591		4,126		2,946		2,266
Total commercial			16,395		12,560		8,075		3,700
Consumer
Real estate			1,702		1,664		1,346		631
Home equity			406		406		157		157
Construction			-		-		-		-
Other			216		216		216		216
Total consumer			2,324		2,286		1,719		1,004
Total		$	18,719		14,846		9,794		4,704

16

---

					December 31, 2014
					Recorded investment
							Impaired loans
		Unpaid					with related		Related
		Principal			Impaired		allowance for		allowance for
		Balance			loans		loan losses		loan losses
Commercial
Owner occupied RE		$	1,122		1,122		1,060		371
Non-owner occupied RE			5,813		4,522		2,777		801
Construction			5,268		2,726		1,315		324
Business			5,385		4,565		3,528		2,464
Total commercial			17,588		12,935		8,680		3,960
Consumer
Real estate			1,620		1,620		1,299		585
Home equity			347		347		347		191
Construction			-		-		-		-
Other			310		310		310		310
Total consumer			2,277		2,277		1,956		1,086
Total		$	19,865		15,212		10,636		5,046

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

		Three months ended					Three months ended
		June 30, 2015					June 30, 2014
			Average		Recognized		Average		Average
		recorded			interest		recorded		recorded
(dollars in thousands)		investment			ncome		investment		investment
Commercial
Owner occupied RE		$	1,292		10		1,662		2
Non-owner occupied RE			5,153		24		6,646		22
Construction			1,935		23		1,768		-
Business			4,194		33		4,713		42
Total commercial			12,574		90		14,789		66
Consumer
Real estate			1,685		12		2,355		12
Home equity			376		8		161		2
Construction			-		-		-		-
Other			219		2		277		3
Total consumer			2,280		22		2,793		17
Total		$	14,854		112		17,582		83

17

---

		Six months ended					Six months ended				Year ended
		June 30, 2015					June 30, 2014				December 31, 2014
		Average			Recognized		Average		Recognized		Average		Recognized
		recorded			interest		recorded		interest		recorded		interest
(dollars in thousands)		investment			income		investment		income		investment		income
Commercial
Owner occupied RE		$	1,236		31		1,753		3		1,568		47
Non-owner occupied RE			4,942		47		6,305		53		5,693		104
Construction			2,198		41		1,802		14		1,977		75
Business			4,318		70		4,703		83		4,522		154
Total commercial			12,694		189		14,563		153		13,760		380
Consumer
Real estate			1,664		24		2,172		25		2,094		53
Home equity			366		9		187		4		251		10
Construction			-		-		-		-		-		-
Other			249		4		260		5		282		13
Total consumer			2,279		37		2,619		34		2,627		76
Total		$	14,973		226		17,182		187		16,387		456

Allowance for Loan Losses

The allowance for loan loss is management’s estimate of credit losses inherent in the loan portfolio. The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

We have an established process to determine the adequacy of the allowance for loan losses that assesses the losses inherent in our portfolio. While we attribute portions of the allowance to specific portfolio segments, the entire allowance is available to absorb credit losses inherent in the total loan portfolio. Our process involves procedures to appropriately consider the unique risk characteristics of our commercial and consumer loan portfolio segments. For each portfolio segment, impairment is measured individually for each impaired loan. Our allowance levels are influenced by loan volume, loan grade or delinquency status, historic loss experience and other economic conditions.

The following table summarizes the activity related to our allowance for loan losses by commercial and consumer portfolio segments:

		Six months ended June 30, 2015
		Commercial												Consumer
		Owner				Non-owner
		occupied				occupied								Real			Home
(dollars in thousands)		RE				RE			Construction		Business			Estate			equity			Construction		Other			Total
Balance, beginning of period		$	1,645			2,332			614		3,625			1,714			1,162			236		424			11,752
Provision for loan losses			643			574			(216	)	272			263			131			36		(78	)		1,625
Loan charge-offs			(24	)		(204	)		-		(218	)		(39	)		(13	)		-		(1	)		(499	)
Loan recoveries			-			6			-		42			-			1			-		-			49
Net loan charge-offs			(24	)		(198	)		-		(176	)		(39	)		(12	)		-		(1	)		(450	)
Balance, end of period		$	2,264			2,708			398		3,721			1,938			1,281			272		345			12,927
Net charge-offs to average loans (annualized)																									0.10%
Allowance for loan losses to gross loans																									1.34%
Allowance for loan losses to nonperforming loans																									193.73%

---

		Six months ended June 30, 2014
		Commercial											Consumer
		Owner				Non-owner
		occupied				occupied							Real		Home
(dollars in thousands)		RE				RE			Construction		Business		Estate		equity			Construction		Other			Total
Balance, beginning of period		$	1,880			2,633			397		3,329		1,091		644			99		140			10,213
Provision for loan losses			(299	)		1,661			29		207		178		100			36		38			1,950
Loan charge-offs			-			(1,084	)		-		-		-		(76	)		-		(4	)		(1,164	)
Loan recoveries			-			-			-		103		-		1			-		-			104
Net loan charge-offs			-			(1,084	)		-		103		-		(75	)		-		(4	)		(1,060	)
Balance, end of period		$	1,581			3,210			426		3,639		1,269		669			135		174			11,103
Net charge-offs to average loans (annualized)																							0.28%
Allowance for loan losses to gross loans																							1.37%
Allowance for loan losses to nonperforming loans																							90.30%

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

		June 30, 2015
		Allowance for loan losses							Recorded investment in loans
(dollars in thousands)		Commercial			Consumer		Total		Commercial		Consumer		Total
Individually evaluated		$	3,700		1,004		4,704		12,560		2,286		14,846
Collectively evaluated			5,391		2,832		8,223		623,647		325,003		948,650
Total		$	9,091		3,836		12,927		636,207		327,289		963,496
		December 31, 2014
		Allowance for loan losses							Recorded investment in loans
		Commercial			Consumer		Total		Commercial		Consumer		Total
Individually evaluated		$	3,960		1,086		5,046		12,935		2,277		15,212
Collectively evaluated			4,256		2,450		6,706		562,547		293,687		856,234
Total		$	8,216		3,536		11,752		575,482		295,964		871,446

NOTE 5 – Troubled Debt Restructurings

At June 30, 2015, we had 37 loans totaling $9.3 million and at December 31, 2014 we had 37 loans totaling $9.7 million, which we considered as TDRs. The Company considers a loan to be a TDR when the debtor experiences financial difficulties and the Company grants a concession to the debtor that it would not normally consider. Concessions can relate to the contractual interest rate, maturity date, or payment structure of the note. As part of our workout plan for individual loan relationships, we may restructure loan terms to assist borrowers facing financial challenges in the current economic environment. To date, we have restored three commercial loans previously classified as TDRs to accrual status.

The following table summarizes the concession at the time of modification and the recorded investment in our TDRs before and after their modification during the six months ended June 30, 2015 and 2014, respectively.

19

---

		For the six months ended June 30, 2015
												Pre-			Post-
												modification			modification
		Renewals		Reduced		Converted		Maturity		Total		outstanding			outstanding
		deemed a		or deferred		to interest		date		Number		recorded			recorded
(dollars in thousands)		concession		payments		only		extensions		of loans		investment			investment
Commercial
Owner occupied RE		-		-		-		-		-		$	-		$	-
Non-owner occupied RE		1		-		-		1		2			112			112
Construction		-		-		-		-		-			-			-
Business		-		-		-		1		1			21			21
Consumer
Real estate		-		-		-		-		-			-			-
Home equity		-		-		-		-		-			-			-
Construction		-		-		-		-		-			-			-
Other		-		-		-		-		-			-			-
Total loans		1		-		-		2		3		$	133		$	133

		For the six months ended June 30, 2014
												Pre-			Post-
												modification			modification
		Renewals		Reduced		Converted		Maturity		Total		outstanding			outstanding
		deemed a		or deferred		to interest		date		Number		recorded			recorded
(dollars in thousands)		concession		payments		only		extensions		of loans		investment			investment
Commercial
Owner occupied RE		-		-		-		-		-		$	-		$	-
Non-owner occupied RE		-		-		-		1		1			49			49
Construction		-		-		-		-		-			-			-
Business		1		-		-		2		3			371			372
Consumer
Real estate		-		-		1		-		1			116			116
Home equity		-		-		-		-		-			-			-
Construction		-		-		-		-		-			-			-
Other		2		-		-		-		2			126			126
Total loans		3		-		1		3		7		$	662		$	663

The following table summarizes loans modified as TDRs at June 30, 2015 and 2014 for which there was a payment default (60 days past due) within 12 months of the restructuring date.

		For the six months ended June 30,
		2015					2014
		Number of		Recorded			Number of		Recorded
(dollars in thousands)		Loans		Investment			Loans		Investment
Commercial
Owner occupied RE		-		$	-		-		$	-
Non-owner occupied RE		-			-		2			3,357
Construction		-			-		-			-
Business		-			-		1			98
Consumer
Real estate		-			-		-			-
Home equity		-			-		-			-
Construction		-			-		-			-
Other		-			-		-			-
Total loans		-		$	-		3		$	3,455

20

---

NOTE 6 – Fair Value Accounting

FASB ASC 820, “Fair Value Measurement and Disclosures,” defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. FASB ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Following is a description of valuation methodologies used for assets recorded at fair value.

Investment Securities
Securities available for sale are valued on a recurring basis at quoted market prices where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable securities. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange or U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities and debentures issued by government sponsored entities, municipal bonds and corporate debt securities. In certain cases where there is limited activity or less transparency around inputs to valuations, securities are classified as Level 3 within the valuation hierarchy. Securities held to maturity are valued at quoted market prices or dealer quotes similar to securities available for sale. The carrying value of Other Investments, such as Federal Reserve Bank and FHLB stock, approximates fair value based on their redemption provisions.

Loans Held for Sale
Loans held for sale include mortgage loans and are carried at the lower of cost or market value. The fair values of mortgage loans held for sale are based on current market rates from investors within the secondary market for loans with similar characteristics. Carrying value approximates fair value.

Loans
The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan may be considered impaired and an allowance for loan losses may be established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures the impairment in accordance with FASB ASC 310, “Receivables.” The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value, and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At June 30, 2015, a significant portion of the impaired loans were evaluated based on the fair value of the collateral. In accordance with FASB ASC 820, “Fair Value Measurement and Disclosures,” impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company considers the impaired loan as nonrecurring Level 2. The Company’s current loan and appraisal policies require the Bank to obtain updated appraisals on an “as is” basis at renewal, or in the case of an impaired loan, on an annual basis, either through a new external appraisal or an appraisal evaluation. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company considers the impaired loan as nonrecurring Level 3. The fair value of impaired loans may also be estimated using the present value of expected future cash flows to be realized on the loan, which is also considered a Level 3 valuation. These fair value estimates are subject to fluctuations in assumptions about the amount and timing of expected cash flows as well as the choice of discount rate used in the present value calculation. 

21

---

Other Real Estate Owned (“OREO”)

OREO, consisting of properties obtained through foreclosure or in satisfaction of loans, is reported at the lower of cost or fair value, determined on the basis of current appraisals, comparable sales, and other estimates of value obtained principally from independent sources, adjusted for estimated selling costs (Level 2). At the time of foreclosure, any excess of the loan balance over the fair value of the real estate held as collateral is treated as a charge against the allowance for loan losses. Gains or losses on sale and generally any subsequent adjustments to the value are recorded as a component of real estate owned activity. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company considers the OREO as nonrecurring Level 3.

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

The tables below present the recorded amount of assets and liabilities measured at fair value on a recurring basis as of June 30, 2015 and December 31, 2014.

		June 30, 2015
(dollars in thousands)		Level 1			Level 2		Level 3		Total
Assets
Securities available for sale
US government agencies		$	-		8,844		-		8,844
SBA securities			-		4,903		-		4,903
State and political subdivisions			-		16,346		-		16,346
Mortgage-backed securities			-		21,372		-		21,372
Total assets measured at fair value on a recurring basis		$	-		51,465		-		51,465

		December 31, 2014
		Level 1			Level 2		Level 3		Total
Assets
Securities available for sale
US government agencies		$	-		8,557		-		8,557
SBA securities			-		5,154		-		5,154
State and political subdivisions			-		16,800		-		16,800
Mortgage-backed securities			-		24,513		-		24,513
Total assets measured at fair value on a recurring basis		$	-		55,024		-		55,024

The Company has no liabilities carried at fair value or measured at fair value on a recurring basis as of June 30, 2015 and December 31, 2014.

22

---

Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

The Company is predominantly an asset based lender with real estate serving as collateral on more than 80% of loans as of June 30, 2015. Loans which are deemed to be impaired are valued net of the allowance for loan losses, and other real estate owned is valued at the lower of cost or net realizable value of the underlying real estate collateral. Such market values are generally obtained using independent appraisals, which the Company considers to be level 2 inputs. The tables below present the recorded amount of assets and liabilities measured at fair value on a nonrecurring basis as of June 30, 2015 and December 31, 2014.

		As of June 30, 2015
(dollars in thousands)		Level 1			Level 2		Level 3		Total
Assets
Impaired loans		$	-		9,678		464		10,142
Other real estate owned			-		2,458		429		2,887
Total assets measured at fair value on a nonrecurring basis		$	-		12,136		893		13,029

		As of December 31, 2014
		Level 1			Level 2		Level 3		Total
Assets
Impaired loans		$	-		9,461		705		10,166
Other real estate owned			-		3,040		267		3,307
Total assets measured at fair value on a nonrecurring basis		$	-		12,501		972		13,473

The Company has no liabilities carried at fair value or measured at fair value on a nonrecurring basis as of June 30, 2015 and December 31, 2014.

For Level 3 assets and liabilities measured at fair value on a recurring or nonrecurring basis as of June 30, 2015, the significant unobservable inputs used in the fair value measurements were as follows:

		Valuation Technique		Significant Unobservable Inputs		Range of Inputs
Impaired loans		Appraised Value/		Discounts to appraisals or cash		0-25%
		Discounted Cash Flows		flows for estimated holding and/or
				selling costs or age of appraisal
Other real estate owned		Appraised Value/		Discounts to appraisals for		0-25%
		Comparable Sales		estimated holding or selling costs

Fair Value of Financial Instruments

Financial instruments require disclosure of fair value information, whether or not recognized in the consolidated balance sheets, when it is practical to estimate the fair value. A financial instrument is defined as cash, evidence of an ownership interest in an entity or a contractual obligation which requires the exchange of cash. Certain items are specifically excluded from the disclosure requirements, including the Company’s common stock, premises and equipment and other assets and liabilities.

The following is a description of valuation methodologies used to estimate fair value for certain other financial instruments.

Fair value approximates carrying value for the following financial instruments due to the short-term nature of the instrument: cash and due from banks, federal funds sold, federal funds purchased, and securities sold under agreement to repurchase.

Deposits – Fair value for demand deposit accounts and interest-bearing accounts with no fixed maturity date is equal to the carrying value. The fair value of certificate of deposit accounts are estimated by discounting cash flows from expected maturities using current interest rates on similar instruments.

FHLB Advances and Other Borrowings – Fair value for FHLB advances and other borrowings are estimated by discounting cash flows from expected maturities using current interest rates on similar instruments.

23

---

Junior subordinated debentures – Fair value for junior subordinated debentures are estimated by discounting cash flows from expected maturities using current interest rates on similar instruments.

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, which would be incurred in an actual sale or settlement, are not taken into consideration in the fair value presented.

The estimated fair values of the Company’s financial instruments at June 30, 2015 and December 31, 2014 are as follows:

		June 30, 2015
		Carrying			Fair
(dollars in thousands)		Amount			Value		Level 1		Level 2		Level 3
Financial Assets:
Cash and cash equivalents		$	41,410		41,410		41,410		-		-
Other investments, at cost			5,532		5,532		-		-		5,532
Loans held for sale			12,402		12,402		-		12,402		-
Loans, net			950,569		952,186		-		9,678		942,508
Financial Liabilities:
Deposits			894,524		846,216		-		846,216		-
FHLB and other borrowings			115,200		122,866		-		122,866		-
Junior subordinated debentures			13,403		12,251		-		12,251		-
		December 31, 2014
		Carrying			Fair
		Amount			Value		Level 1		Level 2		Level 3
Financial Assets:
Cash and cash equivalents		$	41,264		41,264		41,264		-		-
Other investments, at cost			6,522		6,522		-		-		6,522
Loans held for sale			11,765		11,765		-		11,765		-
Loans, net			859,694		860,215		-		9,461		850,754
Financial Liabilities:
Deposits			788,907		748,497		-		748,497		-
FHLB and other borrowings			135,200		144,156		-		144,156		-
Junior subordinated debentures			13,403		6,823		-		6,823		-

NOTE 7 – Earnings Per Common Share

The following schedule reconciles the numerators and denominators of the basic and diluted earnings per share computations for the three and six month periods ended June 30, 2015 and 2014. Dilutive common shares arise from the potentially dilutive effect of the Company’s stock options that were outstanding at June 30, 2015. The assumed conversion of stock options can create a difference between basic and dilutive net income per common share. At June 30, 2015 and 2014, there were 170,875 and 114,124 options, respectively, that were not considered in computing diluted earnings per common share because they were anti-dilutive.

24

---

		Three months ended June 30,					Six months ended June 30,
(dollars in thousands, except share data)		2015			2014		2015		2014
Numerator:
Net income		$	2,560		1,566		4,588		2,816
Less: Preferred stock dividend			-		253		-		445
Net income available to common shareholders		$	2,560		1,313		4,588		2,371
Denominator:
Weighted-average common shares outstanding – basic			6,233,745		4,763,407		6,229,522		4,686,748
Common stock equivalents			299,913		273,146		294,795		270,252
Weighted-average common shares outstanding – diluted			6,533,658		5,036,553		6,524,317		4,957,000
Earnings per common share:
Basic		$	0.41		0.28		0.74		0.51
Diluted		$	0.39		0.26		0.70		0.48

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 month periods ended June 30, 2015 as compared to the three and six month periods ended June 30, 2014 and assesses our financial condition as of June 30, 2015 as compared to December 31, 2014. 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, 2014 included in our Annual Report on Form 10-K for that period. Results for the three and six month periods ended June 30, 2015 are not necessarily indicative of the results for the year ending December 31, 2015 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 operations, 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, those described under Item 1A- Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2014, as well as the following:

●	Restrictions or conditions imposed by our regulators on our operations;
●	Increases in competitive pressure in the banking and financial services industries;
●	Changes in access to funding or increased regulatory requirements with regard to funding;
●	Changes in deposit flows;
●	Credit losses as a result of declining real estate values, increasing interest rates, increasing unemployment, changes in payment behavior or other factors;
●	Credit losses due to loan concentration;
●	Changes in the amount of our loan portfolio collateralized by real estate and weaknesses in the real estate market;
●	Our ability to attract and retain key personnel;

25

---

●	Changes in the interest rate environment which could reduce anticipated or actual margins;
●	Changes in political conditions or the legislative or regulatory environment, including governmental initiatives affecting the financial services industry;
●	Changes in economic conditions resulting in, among other things, a deterioration in credit quality;
●	Changes occurring in business conditions and inflation;
●	Cybersecurity breaches, including potential business disruptions or financial losses;
●	Changes in technology;
●	The adequacy of the level of our allowance for loan losses and the amount of loan loss provisions required in future periods;
●	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;
●	Changes in monetary and tax policies;
●	The rate of delinquencies and amounts of loans charged-off;
●	The rate of loan growth in recent years and the lack of seasoning of a portion of our loan portfolio;
●	Our ability to maintain appropriate levels of capital and to comply with our capital ratio requirements;
●	Adverse changes in asset quality and resulting credit risk-related losses and expenses;
●	Changes in accounting policies and practices; and
●	Other risks and uncertainties detailed in this Quarterly Report on Form 10-Q and, from time to time, in our other filings with the Securities and Exchange Commission (the “SEC”).

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 in, implied or projected by, 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 our Annual Report on Form 10-K for the year ended December 31, 2014. 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 in, or implied or projected by, the forward-looking statements.

OVERVIEW

Our business model continues to be client-focused, utilizing relationship teams to provide our clients with a specific banker contact and support team responsible for all of their banking needs. The purpose of this structure is to provide a consistent and superior level of professional service, and we believe it provides us with a distinct competitive advantage. We consider exceptional client service to be a critical part of our culture, which we refer to as "ClientFIRST."

At June 30, 2015, we had total assets of $1.1 billion, an 8.7% increase from total assets of $1.0 billion at December 31, 2014. The largest components of our total assets are net loans and securities which were $950.6 million and $57.0 million, respectively, at June 30, 2015. Comparatively, our net loans and securities totaled $859.7 million and $61.5 million, respectively, at December 31, 2014. Our liabilities and shareholders’ equity at June 30, 2015 totaled $1.0 billion and $87.7 million, respectively, compared to liabilities of $946.9 million and shareholders’ equity of $83.0 million at December 31, 2014. The principal component of our liabilities is deposits which were $894.5 million and $788.9 million at June 30, 2015 and December 31, 2014, respectively.

Like most community banks, we derive the majority of our income from interest received on our loans and investments. Our primary source of funds for making these loans and investments is our deposits, on which we pay interest. 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 borrowings. Another key measure is the spread between the yield we earn on these interest-earning assets and the rate we pay on our interest-bearing liabilities, which is called our net interest spread. In addition to earning interest on our loans and investments, we earn income through fees and other charges to our clients.

26

---

Our net income to common shareholders was $2.6 million and $1.3 million for the three months ended June 30, 2015 and 2014, respectively, an increase of $1.2 million, or 95.0%. Diluted earnings per share (“EPS”) was $0.39, for the second quarter of 2015 as compared to $0.26 for the same period in 2014. The increase in net income resulted primarily from increases in net interest income and noninterest income, partially offset by an increase in noninterest expense.

Our net income to common shareholders was $4.6 million and $2.4 million for the six months ended June 30, 2015 and 2014, respectively, an increase of $2.2 million, or 93.5%. Diluted EPS was $0.70 for the six months ended June 30, 2015 as compared to $0.48 for the same period in 2014. The increase in net income resulted primarily from increases in net interest income and noninterest income, partially offset by an increase in noninterest expense.

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 customer preferences, interest rate conditions and prevailing market rates on competing products in our market areas.

Effect of Economic Trends

Markets in the United States and elsewhere have experienced extreme volatility and disruption since the latter half of 2007. While the economy as a whole has steadily improved since 2009, the weaker economic conditions are expected to continue through 2015. Financial institutions recently experienced credit losses above historical levels and elevated levels of non-performing assets, charge-offs and foreclosures. In light of these conditions, financial institutions continue to face heightened levels of scrutiny from federal and state regulators. These factors negatively influenced, and likely will continue to negatively influence, earning asset yields at a time when the market for deposits is intensely competitive. As a result, financial institutions experienced, and may continue to experience, pressure on loan yields, deposit and other borrowing costs, liquidity, and capital.

RESULTS OF OPERATIONS

Net Interest Income and Margin
Our level of net interest income is determined by the level of earning assets and the management of our net interest margin. Our net interest income was $9.5 million for the three month period ended June 30, 2015, a 17.6% increase over net interest income of $8.1 million for the same period in 2014. In comparison, our average earning assets increased 15.0%, or $134.2 million, during the second quarter of 2015 compared to the second quarter of 2014, while our interest bearing liabilities increased by $89.1 million during the same period. The increase in average earning assets is primarily related to an increase in average loans, while the increase in average interest-bearing liabilities is primarily a result of an increase in interest bearing deposits.

We have included a number of tables to assist in our description of various measures of our financial performance. For example, the “Average Balances, Income and Expenses, Yields and Rates” table reflects the average balance of each category of our assets and liabilities as well as the yield we earned or the rate we paid with respect to each category during the three and six month periods ended June 30, 2015 and 2014. A review of this table shows that our loans typically provide higher interest yields than do other types of interest-earning assets, which is why we direct a substantial percentage of our earning assets into our loan portfolio. Similarly, the “Rate/Volume Analysis” table demonstrates the effect of changing interest rates and changing volume of assets and liabilities on our financial condition during the periods shown. We also track the sensitivity of our various categories of assets and liabilities to changes in interest rates, and we have included tables to illustrate our interest rate sensitivity with respect to interest-earning accounts and interest-bearing accounts.

27

---

The following tables set forth information related to our average balance sheets, average yields on assets, and average costs of liabilities. We derived these yields 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 owned have an original maturity of over one year. Nonaccrual loans are included in the following tables. Loan yields have been reduced to reflect the negative impact on our earnings of loans on nonaccrual status. The net of capitalized loan costs and fees are amortized into interest income on loans.

Average Balances, Income and Expenses, Yields and Rates

		For the Three Months Ended June 30,
		2015								2014
		Average			Income/			Yield/		Average			Income/			Yield/
(dollars in thousands)		Balance			Expense			Rate(1)		Balance			Expense			Rate(1)
Interest-earning assets
Federal funds sold		$	24,461		$	19		0.31%		$	23,367		$	16		0.27%
Investment securities, taxable			41,719			254		2.44%			49,519			324		2.62%
Investment securities, nontaxable (2)			14,679			165		4.50%			22,019			227		4.14%
Loans (3)			946,670			10,941		4.64%			798,410			9,309		4.68%
Total interest-earning assets			1,027,529			11,379		4.44%			893,315			9,876		4.43%
Noninterest-earning assets			53,282								49,062
Total assets		$	1,080,811							$	942,377
Interest-bearing liabilities
NOW accounts		$	175,304			77		0.18%		$	143,972			52		0.14%
Savings & money market			243,326			245		0.40%			186,409			146		0.31%
Time deposits			283,259			532		0.75%			272,178			498		0.73%
Total interest-bearing deposits			701,889			854		0.49%			602,559			696		0.46%
FHLB advances and other borrowings			115,248			890		3.10%			125,434			944		3.02%
Junior subordinated debentures			13,403			81		2.42%			13,403			80		2.39%
Total interest-bearing liabilities			830,540			1,825		0.88%			741,396			1,720		0.93%
Noninterest-bearing liabilities			162,888								129,572
Shareholders’ equity			87,383								71,409
Total liabilities and shareholders’ equity		$	1,080,811							$	942,377
Net interest spread								3.56%								3.50%
Net interest income (tax equivalent) / margin					$	9,554		3.73%					$	8,156		3.66%
Less: tax-equivalent adjustment (2)						63								86
Net interest income					$	9,491							$	8,070

(1)	Annualized for the three month period.
(2)	The tax-equivalent adjustment to net interest income adjusts the yield for assets earning tax-exempt income to a comparable yield on a taxable basis.
(3)	Includes loans held for sale.

Our net interest margin, on a tax-equivalent basis, was 3.73% for the three months ended June 30, 2015 compared to 3.66% for the second quarter of 2014. The increase in net interest margin as compared to the same period in 2014, was driven primarily by a five basis point reduction in the cost of our interest-bearing liabilities, assisted by a one basis point increase in the yield on our interest-earning assets.

Our average interest-earning assets increased by $134.2 million as compared to the same quarter in 2014, while the yield on these assets increased by one basis point. The increase in average interest-earning assets was driven by a $148.3 million increase in our average loan balances for the second quarter of 2015, compared to the same period in 2014; however, our loan yield decreased by four basis points during the same period. The decline in yield on our loan portfolio was driven primarily by loans being originated or renewed at market rates which are lower than those in the past.

In addition, our average interest-bearing liabilities increased by $89.1 million during the second quarter of 2015 as compared to the first quarter of 2014, while the cost of our interest-bearing liabilities declined by five basis points during the same period. The reduction in cost during the 2015 period resulted primarily from a $99.3 million increase in our interest-bearing deposits which have a lower cost than our other interest-bearing liabilities. We do not anticipate further significant reductions in the rates on our interest-bearing deposits or FHLB advances and other borrowings in the future as these rates are currently at historically low rates.

28

---

Our net interest spread was 3.56% for the three months ended June 30, 2015 compared to 3.50% for the same period in 2014. 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 five basis point reduction in rate on our interest-bearing liabilities, assisted by the one basis point increase in yield on our interest-earning assets, resulted in a six basis point increase in our net interest spread for the 2015 period.

		For the Six Months Ended June 30,
		2015								2014
		Average			Income/			Yield/		Average			Income/			Yield/
(dollars in thousands)		Balance			Expense			Rate(1)		Balance			Expense			Rate(1)
Interest-earning assets
Federal funds sold		$	29,392		$	45		0.31%		$	24,184		$	30		0.25%
Investment securities, taxable			42,097			526		2.52%			50,001			682		2.75%
Investment securities, nontaxable (2)			15,042			331		4.43%			22,928			477		4.20%
Loans			924,869			21,341		4.65%			776,144			18,126		4.71%
Total interest-earning assets			1,011,400			22,243		4.43%			873,257			19,315		4.46%
Noninterest-earning assets			53,618								48,865
Total assets		$	1,065,018							$	922,122
Interest-bearing liabilities
NOW accounts		$	169,102			150		0.18%		$	147,435			111		0.15%
Savings & money market			240,222			447		0.38%			174,694			266		0.31%
Time deposits			280,091			1,024		0.74%			272,710			999		0.74%
Total interest-bearing deposits			689,415			1,621		0.47%			594,839			1,376		0.47%
Note payable and other borrowings			119,987			1,774		2.98%			124,784			1,884		3.04%
Junior subordinated debentures			13,403			161		2.42%			13,403			160		2.41%
Total interest-bearing liabilities			822,805			3,556		0.87%			733,026			3,420		0.94%
Noninterest-bearing liabilities			155,971								118,883
Shareholders’ equity			86,242								70,213
Total liabilities and shareholders’ equity		$	1,065,018							$	922,122
Net interest spread								3.56%								3.52%
Net interest income (tax equivalent) / margin					$	18,687		3.73%					$	15,895		3.67%
Less: tax-equivalent adjustment (2)						126								181
Net interest income					$	18,561							$	15,714

(1)	Annualized for the six month period.
(2)	The tax-equivalent adjustment to net interest income adjusts the yield for assets earning tax-exempt income to a comparable yield on a taxable basis.
(3)	Includes loans held for sale.

Our net interest margin, on a tax-equivalent basis, was 3.73% for the six months ended June 30, 2015 compared to 3.67% for the six months ended June 30, 2014. The six basis point increase in net interest margin during the six months ended June 30, 2015 was driven primarily by a seven basis point reduction in the cost of our interest bearing liabilities, partially offset by a three basis point reduction in the yield on our interest-earning assets compared to the same period in 2014.

During the first six months of 2015, our average interest-earning assets increased by $138.1 million as compared to the same period in 2014; however, the yield on our interest-earning assets declined by three basis points during 2015. The increase in interest-earning assets was driven by a $148.7 million increase in average loans, partially offset by a $15.8 million decrease in average investment securities, while the decline in yield on interest earning assets was driven primarily by a six basis point reduction in yield on our loan portfolio.

In addition, our average interest-bearing liabilities increased by $89.8 million during the six month period ended June 30, 2015 as compared to the same period in 2014, while the cost of our interest-bearing liabilities declined by seven basis points. The reduction in cost of our interest-bearing liabilities is a result of the $94.6 million increase in interest-bearing deposits which are at lower rates than our other interest-bearing liabilities.

29

---

Our net interest spread was 3.56% for the six months ended June 30, 2015 compared to 3.52% for the same period in 2014. The seven basis point reduction in cost on our interest-bearing liabilities, partially offset by a three basis point decline in yield on our earning assets, resulted in the four basis point increase in our net interest spread for the 2015 period.

Rate/Volume Analysis
Net interest income can be analyzed in terms of the impact of changing interest rates and changing volume. The following table sets forth the effect which the varying levels of interest-earning assets and interest-bearing liabilities and the applicable rates have had on changes in net interest income for the periods presented.

		Three Months Ended
		June 30, 2015 vs. 2014													June 30, 2014 vs. 2013
		Increase (Decrease) Due to													Increase (Decrease) Due to
									Rate/												Rate/
(dollars in thousands)		Volume				Rate			Volume			Total			Volume			Rate			Volume			Total
Interest income
Loans		$	1,729			(82	)		(15	)		1,632			1,553			(601	)		(111	)		841
Investment securities			(99	)		(13	)		3			(109	)		(45	)		94			(10	)		39
Federal funds sold			1			2			-			3			(3	)		1			-			(2	)
Total interest income			1,631			(93	)		(12	)		1,526			1,505			(506	)		(121	)		878
Interest expense
Deposits			126			27			5			158			243			(230	)		(41	)		(28	)
FHLB advances and other borrowings			(77	)		25			(2	)		(54	)		(38	)		11			-			(27	)
Junior subordinated debt			-			1			-			1			-			(7	)		-			(7	)
Total interest expense			49			53			3			105			205			(226	)		(41	)		(62	)
Net interest income		$	1,582			(146	)		(15	)		1,421			1,300			(280	)		(80	)		940

Net interest income, the largest component of our income, was $9.5 million for the three month period ended June 30, 2015 and $8.1 million for the three months ended June 30, 2014, a $1.4 million, or 17.6% increase during the second quarter of 2015. The increase in net interest income is due to a $1.5 million increase in interest income, partially offset by a $105,000 increase in interest expense. During the second quarter of 2015, the primary driver of the increase in net interest income was the $134.2 million increase in our average interest-earning assets as compared to the second quarter of 2014.

		Six Months Ended
		June 30, 2015 vs. 2014													June 30, 2014 vs. 2013
		Increase (Decrease) Due to																Increase (Decrease) Due to
									Rate/												Rate/
(dollars in thousands)		Volume				Rate			Volume			Total			Volume			Rate			Volume			Total
Interest income
Loans		$	3,473			(217	)		(42	)		3,214			2,773			(1,182	)		(197	)		1,394
Investment securities			(211	)		(45	)		10			(246	)		(112	)		226			(27	)		87
Federal funds sold			6			7			2			15			(2	)		-			-			(2	)
Total interest income			3,268			(255	)		(30	)		2,983			2,659			(956	)		(224	)		1,479
Interest expense
Deposits			254			(8	)		(1	)		245			274			(364	)		(64	)		(154	)
Note payable and other			(72	)		(39	)		1			(110	)		(128	)		74			(6	)		(60	)
Junior subordinated debt			-			1			-			1			-			(13	)		-			(13	)
Total interest expense			182			(46	)		-			136			146			(303	)		(70	)		(227	)
Net interest income		$	3,086			(209	)		(30	)		2,847			2,513			(653	)		(154	)		1,706

Net interest income for the six months ended June 30, 2015 was $18.6 million compared to $15.7 million for the first six months ended June 30, 2014, a $2.8 million, or 18.1% increase during the first six months of 2015 compared to the same period in 2014. The increase in net interest income is due to a $3.0 million increase in interest income, offset in part by a $136,000 increase in interest expense. The $138.1 million increase in average earning assets during the six months ended June 30, 2015 as compared to six months ended June 30, 2014 was the primary driver of the increase in net interest income during the 2015 period.

30

---

Provision for Loan Losses
We have established an allowance for loan losses through a provision for loan losses charged as an expense on our consolidated statements of income. 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 “Balance Sheet Review – 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.

For the three months ended June 30, 2015 and 2014, we incurred a noncash expense related to the provision for loan losses of $1.0 million and $950,000, respectively, resulting in an allowance for loan losses of $12.9 million and $11.1 million for the 2015 and 2014 periods, respectively. For the six months ended June 30, 2015 and 2014 our provision for loan losses was $1.6 million and $2.0 million, respectively. The $12.9 million allowance represented 1.34% of gross loans at June 30, 2015 while the $11.1 million allowance was 1.37% of gross loans at June 30, 2014. During the past 12 months, our loan balances increased by $150.7 million, while the amount of our nonperforming loans and classified loans declined. Factors such as these are also considered in determining the amount of loan loss provision necessary to maintain our allowance for loan losses at an adequate level.

Noninterest Income
The following table sets forth information related to our noninterest income.

		Three months ended					Six months ended
		June 30,					June 30,
(dollars in thousands)		2015			2014		2015		2014
Loan and mortgage fee income		$	1,409		613		2,605		955
Service fees on deposit accounts			219		231		445		445
Income from bank owned life insurance			165		167		331		329
Gain on sale of investment securities			36		230		295		230
Other income			286		277		580		529
Total noninterest income		$	2,115		1,518		4,256		2,488

Noninterest income increased $597,000, or 39.3%, for the second quarter of 2015 as compared to the same period in 2014. Excluding the gain on sale of investment securities in both the 2015 and 2014 periods, noninterest income increased $791,000, or 61.4%, during the 2015 period. The increase in total noninterest income during this 2015 period resulted primarily from the following:

●

Loan and mortgage fee income increased $796,000, or 129.9%, resulting primarily from an increase in mortgage fee income which was driven by an expansion of our mortgage operations. Mortgage origination fee income increased from $576,000 for the three months ended June 30, 2014 to $1.3 million for the three months ended June 30, 2015.

Partially offsetting the increase was a $12,000, or 5.2%, decrease in service fees on deposit accounts which was primarily related to an $11,000 decrease in non-sufficient funds (“NSF”) fee income.

Noninterest income increased $1.8 million, or 71.1%, during the six months ended June 30, 2015 as compared to the same period in 2014. Excluding the gain on sale of investment securities, noninterest income increased $1.7 million, or 75.4%, from the 2014 period. The increase in total noninterest income during the six months ended June 30, 2015 resulted primarily from a $1.7 million increase in loan fee income, a $65,000 increase in gain on sale of investment securities, and a $51,000 increase in other income which consists primarily of income from ATM and debit card transactions, wire transfer fees and rent income from tenants at our Columbia, South Carolina office.

In accordance with the requirement set forth under the Dodd-Frank Act, in June 2011, the Federal Reserve approved a final rule which caps an issuer's base interchange fee at 21 cents per transaction and allows an additional 5 basis point charge per transaction to help cover fraud losses. Although the rule does not apply to institutions with less than $10 billion in assets, such as our Bank, there is concern that the price controls may harm community banks, which could be pressured by the marketplace to lower their own interchange rates. Our ATM/Debit card fee income is included in other noninterest income and was $196,000 and $169,000 for the three months ended June 30, 2015 and 2014, respectively, and $372,000 and $311,000 for the six months ended June 30, 2015 and 2014, respectively, the majority of which related to interchange fee income.

31

---

Noninterest expenses
The following table sets forth information related to our noninterest expenses.

		Three months ended					Six months ended
		June 30,					June 30,
(dollars in thousands)		2015			2014		2015		2014
Compensation and benefits		$	4,106		3,514		8,382		6,925
Occupancy			842		730		1,579		1,457
Real estate owned expenses			93		12		855		25
Data processing and related costs			573		622		1,158		1,216
Insurance			213		203		415		395
Professional fees			233		294		466		517
Marketing			222		197		460		398
Other			364		743		791		1,152
Total noninterest expense		$	6,646		6,315		14,106		12,085

Noninterest expense was $6.7 million for the three months ended June 30, 2015, a $331,000, or 5.2%, increase from noninterest expense of $6.3 million for the three months ended June 30, 2014. The increase in total noninterest expenses resulted primarily from the following:

●	Compensation and benefits expense increased $592,000, or 16.8%, relating primarily to increases in base compensation and benefits expenses. Base compensation increased by $587,000 driven by the cost of 18 additional employees, five of which were hired to support our Mount Pleasant, South Carolina office, two of which were hired in relation to the expansion of our mortgage operations, and the remainder of which were hired to support our loan and deposit growth, combined with annual company-wide salary increases.
●	Occupancy expenses increased by $112,000, or 15.3%, driven by increased depreciation and maintenance costs on the properties we own.
●	Real estate owned expenses increased $81,000, due primarily to expenses associated with one commercial property.

Partially offsetting these increases in noninterest expenses were decreases in data processing and related costs, professional fees, and other noninterest expense. The $61,000 decrease in professional fees and the $379,000 decrease in other noninterest expense related primarily to costs associated with a specific litigation issue during the second quarter of 2014. In addition, our collection costs, which are included in other noninterest expense, decreased by $106,000 during the three months ended June 30, 2015.

Our efficiency ratio was 57.3% for the second quarter of 2015 compared to 65.9% for the same period in 2014. The efficiency ratio represents the percentage of one dollar of expense required to be incurred to earn a full dollar of revenue and is computed by dividing noninterest expense by the sum of net interest income and noninterest income. The improved efficiency ratio for 2015 was driven primarily by an increase in net interest income and noninterest income during the three months ended June 30, 2015, as compared to the same period in 2014.

Noninterest expense for the six months ended June 30, 2015 increased 16.7%, or $2.0 million, as compared to the six months ended June 30, 2014. The increase relates primarily to the $1.5 million increase in compensation and benefits expense, $122,000 in occupancy expense, $830,000 in real estate owned expenses and $62,000 in marketing expenses. Partially offsetting the increases in noninterest expense was a decrease of $58,000 in data processing and related costs, $51,000 in professional fees, and $361,000 in other noninterest expenses.

32

---

We incurred income tax expense of $1.4 million for the three months ended June 30, 2015 as compared to $757,000 during the same period in 2014. Income tax expense for the six months ended June 30, 2015 was $2.5 million as compared to $1.4 million for the same period of 2014. Our effective tax rate was 35.3% and 32.4% for the six months ended June 30, 2015 and 2014, respectively. The increase in the effective tax rate during the 2015 period is primarily a result of the lesser impact of tax-exempt income.

BALANCE SHEET REVIEW

Investment Securities
At June 30, 2015, the $57.0 million in our investment securities portfolio represented approximately 5.1% of our total assets. Our available for sale investment portfolio included US government agency securities, SBA securities, state and political subdivisions, and mortgage-backed securities with a fair value of $51.5 million and an amortized cost of $51.6 million resulting in an unrealized loss of $169,000. At December 31, 2014, the $61.5 million in our investment securities portfolio represented approximately 6.0% of our total assets. At December 31, 2014, we held investment securities available for sale with a fair value of $55.0 million and an amortized cost of $54.6 million for an unrealized gain of $458,000.

Loans
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. Average loans, excluding loans held for sale, for the six months ended June 30, 2015 and 2014 were $912.8 million and $773.1 million, respectively. Before the allowance for loan losses, total loans outstanding at June 30, 2015 and December 31, 2014 were $963.5 million and $871.4 million, respectively.

The principal component of our loan portfolio is loans secured by real estate mortgages. As of June 30, 2015, our loan portfolio included $786.8 million, or 81.7%, of real estate loans. As of December 31, 2014, real estate loans made up 81.2% of our loan portfolio and totaled $707.2 million. 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. 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. We do not generally originate traditional long term residential mortgages to hold in our loan portfolio, but we do issue traditional second mortgage residential real estate loans and home equity lines of credit. Home equity lines of credit totaled $105.2 million as of June 30, 2015, of which approximately 32% were in a first lien position, while the remaining balance was second liens, compared to $95.6 million as of December 31, 2014, with approximately 35% in first lien positions and the remaining balance was in second liens. The average loan had a balance of approximately $88,000 and a loan to value of 72% as of June 30, 2015, compared to an average loan balance of $87,000 and a loan to value of approximately 72% as of December 31, 2014. Further, 0.4% and 0.3% of our total home equity lines of credit were over 30 days past due as of June 30, 2015 and December 31, 2014, respectively.

Following is a summary of our loan composition at June 30, 2015 and December 31, 2014. Of the $92.1 million in loan growth during the first half of 2015, $31.4 million was originated in the Greenville market, $24.8 million was originated in the Columbia market, and $35.9 million was originated in the Charleston market. In addition, $79.6 million of the increase was in loans secured by real estate, and $12.0 million in commercial business loans. The $19.5 million increase in consumer real estate loans is related to our focus to continue to originate high quality 1-4 family consumer real estate loans. Our average consumer real estate loan currently has a principal balance of $299,000, a term of eight years, and an average rate of 4.46%.

33

---

		June 30, 2015						December 31, 2014
(dollars in thousands)		Amount				% of Total		Amount				% of Total
Commercial
Owner occupied RE		$	232,997			24.2%		$	191,061			21.9%
Non-owner occupied RE			207,623			21.6%			183,440			21.1%
Construction			33,570			3.5%			50,995			5.8%
Business			162,017			16.8%			149,986			17.2%
Total commercial loans			636,207			66.1%			575,482			66.0%
Consumer
Real estate			166,404			17.3%			146,859			16.9%
Home equity			105,241			10.9%			95,629			11.0%
Construction			40,957			4.2%			39,226			4.5%
Other			14,687			1.5%			14,250			1.6%
Total consumer loans			327,289			33.9%			295,964			34.0%
Total gross loans, net of deferred fees			963,496			100.0%			871,446			100.0%
Less—allowance for loan losses			(12,927	)					(11,752	)
Total loans, net		$	950,569					$	859,694

Nonperforming assets

Nonperforming assets include real estate acquired through foreclosure or deed taken in lieu of foreclosure and loans on nonaccrual status. 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 contractual principal or interest on the loan is doubtful. A payment of interest on a loan that is classified as nonaccrual is recognized as a reduction in principal when received. Our policy with respect to nonperforming loans requires the borrower to make a minimum of six consecutive payments in accordance with the loan terms and to show capacity to continue performing into the future before that loan can be placed back on accrual status. As of June 30, 2015 and December 31, 2014, we had no loans 90 days past due and still accruing.

Following is a summary of our nonperforming assets, including nonaccruing TDRs.

(dollars in thousands)		June 30, 2015			December 31, 2014
Commercial		$	4,916		4,857
Consumer			670		646
Nonaccruing troubled debt restructurings			1,087		1,147
Total nonaccrual loans			6,673		6,650
Other real estate owned			2,887		3,307
Total nonperforming assets		$	9,560		9,957

At June 30, 2015, nonperforming assets were $9.6 million, or 0.85% of total assets and 0.99% of gross loans. Comparatively, nonperforming assets were $10.0 million, or 0.97% of total assets and 1.14% of gross loans at December 31, 2014. Nonaccrual loans were $6.7 million at June 30, 2015, nearly unchanged from December 31, 2014. Nonaccrual loans at June 30, 2015 include seven loans which were put on nonaccrual status during the first six months of 2015. In addition, during the first six months of 2015, one nonaccrual loan was returned to accrual status, two loans were transferred to other real estate owned and two nonaccrual loans were either paid or charged-off. The amount of foregone interest income on the nonaccrual loans in the first six months of 2015 and 2014 was approximately $346,000 and $314,000, respectively.

Nonperforming assets include other real estate owned which decreased by $420,000 from December 31, 2014 due primarily to a write-down on one commercial property. The balance at June 30, 2015 includes seven commercial properties totaling $2.1 million and four residential properties totaling $770,000. All of these properties are located in the Upstate of South Carolina. We believe that these properties are appropriately valued at the lower of cost or market as of June 30, 2015. 

34

---

At June 30, 2015 and 2014, the allowance for loan losses represented 193.7% and 90.3% of the total amount of nonperforming loans, respectively. A significant portion, or 95%, of nonperforming loans at June 30, 2015 is secured by real estate. Our nonperforming loans have been written down to approximately 63% of their original nonperforming balance. We have evaluated the underlying collateral on these loans and believe that the collateral on these loans is sufficient to minimize future losses. Based on the level of coverage on nonperforming loans and analysis of our loan portfolio, we believe the allowance for loan losses of $12.9 million as of June 30, 2015 to be adequate.

As a general practice, most of our loans are originated with relatively short maturities of less than 10 years. As a result, when a loan reaches its maturity we frequently renew the loan and thus extend its maturity using the same credit standards as those used when the loan was first originated. Due to these loan practices, we may, at times, renew loans which are classified as nonperforming after evaluating the loan’s collateral value and financial strength of its guarantors. Nonperforming loans are renewed at terms generally consistent with the ultimate source of repayment and rarely at reduced rates. In these cases the Company will seek additional credit enhancements, such as additional collateral or additional guarantees to further protect the loan. When a loan is no longer performing in accordance with its stated terms, the Company will typically seek performance under the guarantee.

In addition, at June 30, 2015, 81.7% of our loans are collateralized by real estate and 86.9% of our impaired loans are secured by real estate. The Company utilizes third party appraisers to determine the fair value of collateral dependent loans. Our current loan and appraisal policies require the Company to obtain updated appraisals on an annual basis, either through a new external appraisal or an appraisal evaluation. Impaired loans are individually reviewed on a quarterly basis to determine the level of impairment. As of June 30, 2015, we do not have any impaired real estate loans carried at a value in excess of the appraised value. 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.

At June 30, 2015, impaired loans totaled $14.8 million for which $9.8 million of these loans have a reserve of approximately $4.7 million allocated in the allowance. During the first six months of 2015, the average recorded investment in impaired loans was approximately $15.0 million. Comparatively, impaired loans totaled $15.2 million at December 31, 2014, and $10.6 million of these loans had a reserve of approximately $5.0 million allocated in the allowance. During 2014, the average recorded investment in impaired loans was approximately $16.4 million.

We consider a loan to be a TDR when the debtor experiences financial difficulties and we provide concessions such that we will not collect all principal and interest in accordance with the original terms of the loan agreement. Concessions can relate to the contractual interest rate, maturity date, or payment structure of the note. As part of our workout plan for individual loan relationships, we may restructure loan terms to assist borrowers facing challenges in the current economic environment. As of June 30, 2015, we determined that we had loans totaling $9.3 million, that we considered TDRs. As of December 31, 2014, we had loans totaling $9.7 million, that we considered TDRs.

Allowance for Loan Losses
The allowance for loan losses was $12.9 million and $11.1 million at June 30, 2015 and 2014, respectively, or 1.34% and 1.37% of outstanding loans, respectively. At December 31, 2014, our allowance for loan losses was $11.8 million, or 1.35% of outstanding loans, and we had net loans charged-off of $2.6 million for the year ended December 31, 2014.

During the six months ended June 30, 2015, we charged-off $499,000 of loans and recorded $49,000 of recoveries on loans previously charged-off, for net charge-offs of $450,000, or 0.10% of average loans, annualized. Comparatively, we charged-off $1.2 million of loans and recorded $104,000 of recoveries on loans previously charged-off, resulting in net charge-offs of $1.1 million, or 0.28% of average loans, annualized, for the first six months of 2014. 

35

---

Following is a summary of the activity in the allowance for loan losses.

		Six months ended
		June 30,							Year ended
(dollars in thousands)		2015				2014			December 31, 2014
Balance, beginning of period		$	11,752			10,213			10,213
Provision			1,625			1,950			4,175
Loan charge-offs			(499	)		(1,164	)		(2,887	)
Loan recoveries			49			104			251
Net loan charge-offs			(450	)		(1,060	)		(2,636	)
Balance, end of period		$	12,927			11,103			11,752

Deposits and Other Interest-Bearing Liabilities
Our primary source of funds for loans and investments is our deposits, advances from the FHLB, and structured repurchase agreements. In the past, we have chosen to obtain a portion of our certificates of deposits from areas outside of our market in order to obtain longer term deposits than are readily available in our local market. We have adopted guidelines regarding our use of brokered CDs that limit our brokered CDs to 25% of total deposits and dictate that our current interest rate risk profile determines the terms. In addition, we do not obtain time deposits of $100,000 or more through the Internet. These guidelines allow us to take advantage of the attractive terms that wholesale funding can offer while mitigating the related inherent risk.

Our retail deposits represented $815.5 million, or 91.2% of total deposits at June 30, 2015, while our out-of-market, or brokered, deposits represented $79.1 million, or 8.8% of our total deposits at June 30, 2015. At December 31, 2014, retail deposits represented 729.0 million, or 92.4% of our total deposits, and brokered CDs were $60.0 million, representing 7.6% of our total deposits. Of the $86.5 million increase in retail deposits during the first half of 2015, $29.4 million is related to the Greenville market, $31.1 million is related to the Columbia market, and $26.0 million is related to the Charleston market. Our loan-to-deposit ratio was 108% at June 30, 2015 and 110% at December 31, 2014.

The following is a detail of our deposit accounts:

		June 30,			December 31,
(dollars in thousands)		2015			2014
Non-interest bearing		$	162,845		139,902
Interest bearing:
NOW accounts			177,700		149,137
Money market accounts			252,066		224,733
Savings			8,661		8,664
Time, less than $100,000			60,240		62,646
Time and out-of-market deposits, $100,000 and over			233,012		203,825
Total deposits		$	894,524		788,907

36

---

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

		Six months ended
		June 30,
		2015						2014
(dollars in thousands)		Amount			Rate			Amount		Rate
Noninterest bearing demand deposits		$	148,039		-	%		112,178		-	%
Interest bearing demand deposits			169,102		0.18	%		147,435		0.15	%
Money market accounts			231,495		0.39	%		167,251		0.32	%
Savings accounts			8,727		0.07	%		7,443		0.09	%
Time deposits less than $100,000			61,966		0.74	%		68,445		0.72	%
Time deposits greater than $100,000			218,125		0.74	%		204,265		0.75	%
Total deposits		$	837,454		0.39	%		707,017		0.39	%

During the twelve months ended June 30, 2015, our average transaction account balances increased by $123.1 million, or 28.3%, from the six months ended June 30, 2014, while our average time deposit balances increased by $7.4 million during the 2015 period. In addition, during the past 12 months, we have continued to reduce the rates we pay on our interest-bearing deposits, as these deposits repriced; however, we do not anticipate a significant reduction in our deposit costs in the future.

During the past 12 months, we continued our focus on increasing core deposits, which exclude out-of-market deposits and time deposits of $100,000 or more, in order to provide a relatively stable funding source for our loan portfolio and other earning assets. Our core deposits were $661.5 million and $585.1 million at June 30, 2015 and December 31, 2014, respectively. In addition, included in time deposits of $100,000 or more at June 30, 2015 is $54.9 million of wholesale CDs scheduled to mature within the next 12 months at a weighted average rate of 0.59%.

All of our time deposits are certificates of deposits. The maturity distribution of our time deposits of $100,000 or more at June 30, 2015 was as follows:

(dollars in thousands)		June 30, 2015
Three months or less		$	32,642
Over three through six months			33,272
Over six through twelve months			73,420
Over twelve months			93,678
Total		$	233,012

Time deposits that meet or exceed the FDIC insurance limit of $250,000 at June 30, 2015 and December 31, 2014 were $152.9 million and $121.8 million, respectively.

Liquidity and Capital Resources

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.

At June 30, 2015 and December 31, 2014, our liquid assets, consisting of cash and due from banks and federal funds sold, amounted to $41.4 million and $41.3 million, or 3.7% and 4.0% of total assets, respectively. Our investment securities at June 30, 2015 and December 31, 2014 amounted to $57.0 million and $61.5 million, or 5.1% and 6.0% of total assets, respectively. Investment securities traditionally provide a secondary source of liquidity since they can be converted into cash in a timely manner. However, approximately 41% of these securities are pledged against outstanding debt. Therefore, the related debt would need to be repaid prior to the securities being sold in order for these securities to be converted to cash. In addition, approximately 24% of our investment securities are pledged to secure client deposits.

37

---

Our ability to maintain and expand our deposit base and borrowing capabilities serves as our primary source of liquidity. We plan to meet our future cash needs through the liquidation of temporary investments, the generation of deposits, loan payoffs, and from additional borrowings. In addition, we will receive cash upon the maturity and sale of loans and the maturity of investment securities. We maintain three federal funds purchased lines of credit with correspondent banks totaling $45.0 million for which there were no borrowings against the lines of credit at June 30, 2015.

We are also a member of the FHLB, from which applications for borrowings can be made. The FHLB requires that securities, qualifying mortgage loans, and stock of the FHLB owned by the Bank be pledged to secure any advances from the FHLB. The unused borrowing capacity currently available from the FHLB at June 30, 2015 was $115.4 million, based on the Bank’s $5.0 million investment in FHLB stock, as well as qualifying mortgages available to secure any future borrowings. However, we are able to pledge additional securities to the FHLB in order to increase our available borrowing capacity. In addition, at June 30, 2015 we had $55.4 million of letters of credit outstanding with the FHLB to secure client deposits.

We also have a line of credit with another financial institution for $10 million, which was unused at June 30, 2015. The line of credit bears interest at LIBOR plus 2.90% with a floor of 3.25% and a ceiling of 5.15%, and matures on June 6, 2017.

We believe that our existing stable base of core deposits, borrowings from the FHLB, and short-term repurchase agreements will enable us to successfully meet our long-term liquidity needs. However, as short-term liquidity needs arise, we have the ability to sell a portion of our investment securities portfolio to meet those needs.

Total shareholders’ equity at June 30, 2015 was $87.7 million. At December 31, 2014, total shareholders’ equity was $83.0 million. The $4.7 million increase from December 31, 2014 is primarily related to net income of $4.6 million during the first six months of 2015.

The following table shows the return on average assets (net income divided by average total assets), return on average equity (net income divided by average equity), and equity to assets ratio (average equity divided by average assets) annualized for the six months ended June 30, 2015 and the year ended December 31, 2014. Since our inception, we have not paid cash dividends.

		June 30, 2015		December 31, 2014
Return on average assets		0.87%		0.69%
Return on average equity		10.73%		8.92%
Return on average common equity		10.73%		12.03%
Average equity to average assets ratio		8.10%		7.76%
Tangible common equity to assets ratio		7.83%		8.06%

At both the holding company and Bank level, we are subject to various regulatory capital requirements administered by the federal banking agencies. Under the capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Our capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors, and the regulators can lower classifications in certain cases. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements.

38

---

In July 2013, the Federal Reserve and the FDIC approved the final rules to implement the Basel III regulatory capital reforms among other changes required by the Dodd-Frank Act. Under the final rules, which began to take effect for us in January 2015 and are subject to a phase-in period through January 1, 2019, minimum requirements will increase for both the quantity and quality of capital held by the Company and the Bank, which acts as a financial cushion to absorb losses, taking into account the impact of risk. The approved rule includes a new minimum ratio of common equity Tier 1 capital to risk-weighted assets (“CET1”) of 4.5% and a capital conservation buffer of 2.5% of risk-weighted assets, which when fully phased-in, effectively results in a minimum CET1 ratio of 7.0%. Additionally, CET1 includes accumulated other comprehensive income (which includes all unrealized gains and losses on available for sale debt and equity securities), subject to a transition period and a one-time opt-out election. The Company and the Bank elected to opt-out of this provision. As such, accumulated comprehensive income is not included in our Tier 1 capital. Basel III also raises the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0% (which, with the capital conservation buffer, effectively results in a minimum Tier 1 capital ratio of 8.5% when fully phased-in), effectively results in a minimum total capital to risk-weighted assets ratio of 10.5% (with the capital conservation buffer fully phased-in), and requires a minimum leverage ratio of 4.0%. Basel III also makes changes to the risk weights for certain assets and off-balance sheet exposures. Management expects that the capital ratios for the Company and Bank under Basel III will continue to exceed the well-capitalized minimum capital requirements.

The following table summarizes the capital amounts and ratios of the Bank and the regulatory minimum requirements.

		June 30, 2015
											To be well capitalized
											under prompt
							For capital						corrective
							adequacy purposes				action provisions
					Actual				minimum				minimum
(dollars in thousands)		Amount			Ratio		Amount		Ratio		Amount		Ratio
Total Capital (to risk weighted assets)		$	109,211		11.54%		75,704		8.00%		94,630		10.00%
Tier 1 Capital (to risk weighted assets)			97,369		10.29%		56,778		6.00%		75,704		8.00%
Common Equity Tier 1 Capital (to risk weighted assets)			97,369		10.29%		42,583		4.50%		61,509		6.50%
Tier 1 Capital (to average assets)			97,369		9.03%		43,150		4.00%		53,937		5.00%

The following table summarizes the capital amounts and ratios of the Company and the minimum regulatory requirements.

June 30, 2015

To be well capitalized

under prompt

For capital

corrective

adequacy purposes

action provisions

Actual

minimum

minimum

(dollars in thousands)

Amount

Ratio

Amount

Ratio

Amount

Ratio

Total Capital (to risk weighted assets)

112,621

11.90%

75,704

8.00%

N/A

N/A

Tier 1 Capital (to risk weighted assets)

100,779

10.65%

56,778

6.00%

N/A

N/A

Common Equity Tier 1 Capital (to risk weighted assets)

87,779

9.28%

42,583

4.50%

N/A

N/A

Tier 1 Capital (to average assets)

100,779

9.32%

43,234

4.00%

N/A

N/A

The ability of the Company to pay cash dividends is dependent upon receiving cash in the form of dividends from the Bank. The dividends that may be paid by the Bank to the Company are subject to legal limitations and regulatory capital requirements.

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 generally accepted accounting principles.

39

---

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 will 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.

Off-Balance Sheet Risk

Commitments to extend credit are agreements to lend money to a client as long as the client has not violated any material condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. At June 30, 2015, unfunded commitments to extend credit were $181.4 million, of which $60.0 million was at fixed rates and $121.5 million was at variable rates. At December 31, 2014, unfunded commitments to extend credit were $167.3 million, of which approximately $52.2 million was at fixed rates and $115.0 million was at variable rates. A significant portion of the unfunded commitments related to consumer equity lines of credit. Based on historical experience, we anticipate that a significant portion of these lines of credit will not be funded. We evaluate each client’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by us upon extension of credit, is based on our credit evaluation of the borrower. The type of collateral varies but may include accounts receivable, inventory, property, plant and equipment, and commercial and residential real estate.

At June 30, 2015 and December 31, 2014, there were commitments under letters of credit for $3.9 million and $2.6 million, respectively. The credit risk and collateral involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Since most of the letters of credit are expected to expire without being drawn upon, they do not necessarily represent future cash requirements.

A portion of our business is to originate mortgage loans that will be sold in the secondary market to investors. Loan types that we originate include conventional loans, jumbo loans and other governmental agency loan products. We adhere to the legal lending limits and guidelines as set forth by the various governmental agencies and investors to whom we sell loans. Under a “best efforts” selling procedure, we make our best effort to process, fund, and deliver the loan to a particular investor. If the loan fails to fund, there is no immediate cost to us, as the market risk has been transferred to the investor. In the event of a customer loan default, we may be required to reimburse the investor.

Except as disclosed in this report, we are not involved in off-balance sheet contractual relationships, unconsolidated related entities that have off-balance sheet arrangements or transactions that could result in liquidity needs or other commitments that significantly impact earnings.

Market Risk and Interest Rate Sensitivity

Market risk is the risk of loss from adverse changes in market prices and rates, which principally arises from interest rate risk inherent in our lending, investing, deposit gathering, and borrowing activities. Other types of market risks, such as foreign currency exchange rate risk and commodity price risk, do not generally arise in the normal course of our business.

We actively monitor and manage our interest rate risk exposure in order to control the mix and maturities of our assets and liabilities utilizing a process we call asset/liability management. The essential purposes of asset/liability management are to ensure adequate liquidity and to maintain an appropriate balance between interest sensitive assets and liabilities in order to minimize potentially adverse impacts on earnings from changes in market interest rates. Our asset/liability management committee (“ALCO”) monitors and considers methods of managing exposure to interest rate risk. We have both an internal ALCO consisting of senior management that meets at various times during each month and a board ALCO that meets monthly. The ALCOs are responsible for maintaining the level of interest rate sensitivity of our interest sensitive assets and liabilities within board-approved limits.

40

---

As of June 30, 2015, the following table summarizes the forecasted impact on net interest income using a base case scenario given upward and downward 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. 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.

		Change in net interest
Interest rate scenario		income from base
Up 300 basis points		15.89%
Up 200 basis points		9.57%
Up 100 basis points		4.26%
Base		-
Down 100 basis points		(5.09)%
Down 200 basis points		(9.96)%
Down 300 basis points		(13.47)%

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 footnotes to our audited consolidated financial statements as of December 31, 2014, as filed in our Annual Report on Form 10-K.

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. Our Critical Accounting Policies are the allowance for loan losses, fair value of financial instruments, other-than-temporary impairment analysis, other real estate owned, and income taxes. 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.

Accounting, Reporting, and Regulatory Matters

Recently Issued Accounting Standards
The following is a summary of recent authoritative pronouncements that could affect accounting, reporting, and disclosure of financial information by us:

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. 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 and does not expect these amendments to have a material effect on its financial statements.

41

---

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, 2017. 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 does not expect these amendments to have a material effect on its financial statements.

In January 2015, the FASB issued guidance to eliminate from U.S. GAAP the concept of an extraordinary item, which is an event or transaction that is both (1) unusual in nature and (2) infrequently occurring. Under the new guidance, an entity will no longer (1) segregate an extraordinary item from the results of ordinary operations; (2) separately present an extraordinary item on its income statement, net of tax, after income from continuing operations; or (3) disclose income taxes and earnings-per-share data applicable to an extraordinary item. The amendments will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The Company does not expect these amendments to have a material effect on its financial statements.

In February 2015, the FASB issued guidance which amends the consolidation requirements and significantly changes the consolidation analysis required under U.S. GAAP. Although the amendments are expected to result in the deconsolidation of many entities, the Company will need to reevaluate all its previous consolidation conclusions. The amendments will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted (including during an interim period), provided that the guidance is applied as of the beginning of the annual period containing the adoption date. The Company does not expect these amendments to have a material effect on its financial statements.

In June 2015, the FASB issued amendments to clarify the Accounting Standards Codification (ASC), correct unintended application of guidance, and make minor improvements to the ASC that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. The amendments were effective upon issuance (June 12, 2015) for amendments that do not have transition guidance. Amendments that are subject to transition guidance will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. 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 that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.

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 and Interest Rate Sensitivity and – Liquidity Risk.

42

---

Item 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

Management, including our Chief Executive Officer 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 Chief Executive Officer 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 Chief Executive Officer and the 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 months ended June 30, 2015, 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 course of normal business activities. 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.
Not applicable

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.

43

---

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.

		SOUTHERN FIRST BANCSHARES, INC.
		Registrant
Date: August 4, 2015		/s/R. Arthur Seaver, Jr.
		R. Arthur Seaver, Jr.
		Chief Executive Officer (Principal Executive Officer)
Date: August 4, 2015		/s/Michael D. Dowling
		Michael D. Dowling
		Chief Financial Officer (Principal Financial and Accounting Officer)

44

---

INDEX TO EXHIBITS

Exhibit
Number				Description
	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 Southern First Bancshares, Inc. for the quarter ended June 30, 2015, 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 Shareholders’ Equity, (v) Consolidated Statements of Cash Flows and (vi) Notes to Unaudited Consolidated Financial Statements.

45

---