FIRST SOUTH BANCORP INC /VA/ - FORM 10-Q

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2015.

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

For the transition period from to .

Commission File Number: 0-22219

FIRST SOUTH BANCORP, INC.

(Exact name of registrant as specified in its charter)

Virginia		56-1999749
(State or other jurisdiction of		(IRS Employer
incorporation or organization)		Identification No.)

1311 Carolina Avenue, Washington, North Carolina 27889

(Address of principal executive offices)

(Zip Code)

(252) 946-4178

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x No ¨

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

Large Accelerated Filer ¨	Accelerated Filer ¨
Non-Accelerated Filer ¨	Smaller Reporting Company x
(Do not check if a Smaller Reporting Company)

Indicate by check mark whether registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).

Yes ¨ No x

Number of shares of common stock outstanding as of August 13, 2015: 9,503,964.

CONTENTS

		PAGE
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Statements of Financial Condition as of June 30, 2015 (unaudited) and December 31, 2014	1

	Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2015 and 2014 (unaudited)	2

	Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2015 and 2014 (unaudited)	3

	Consolidated Statements of Changes in Stockholders' Equity for the Six Months Ended June 30, 2015 and 2014 (unaudited)	4

	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2015 and 2014 (unaudited)	5

	Notes to Consolidated Financial Statements (unaudited)	6

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	28

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	38

Item 4.	Controls and Procedures	38

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	39

Item 1A.	Risk Factors	39

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39

Item 3.	Defaults Upon Senior Securities	39

Item 4.	Mine Safety Disclosures	39

Item 5.	Other Information	39

Item 6.	Exhibits	39

Signatures		40

Exhibits		41

First South Bancorp, Inc. and Subsidiary

Consolidated Statements of Financial Condition

	June 30,			December 31,
	2015			2014
	(unaudited)			*()**

Assets
Cash and due from banks	$	21,097,689		$	23,281,016
Interest-bearing deposits with banks		15,502,764			32,835,661
Investment securities available for sale, at fair value		260,120,058			292,298,910
Investment securities held to maturity		507,881			507,309
Loans held for sale:
Mortgage loans		6,170,548			4,792,943
Total loans held for sale		6,170,548			4,792,943

Loans and leases held for investment		543,636,466			480,436,270
Allowance for loan and lease losses		(7,363,953	)		(7,519,970	)
Net loans and leases held for investment		536,272,513			472,916,300

Premises and equipment, net		15,246,139			15,821,436
Other real estate owned		7,009,371			7,755,541
Federal Home Loan Bank stock, at cost		2,156,800			606,500
Accrued interest receivable		2,921,574			2,851,650
Goodwill		4,218,576			4,218,576
Mortgage servicing rights		1,212,642			1,178,115
Identifiable intangible assets		2,039,212			2,182,909
Income tax receivable		915,935			2,594,376
Bank-owned life insurance		15,379,872			15,125,498
Prepaid expenses and other assets		8,965,479			6,898,192

Total assets	$	899,737,053		$	885,864,932

Liabilities and Stockholders' Equity

Deposits:
Non-interest bearing demand	$	158,929,188		$	147,543,594
Interest bearing demand		239,381,849			268,472,945
Savings		131,078,264			117,932,606
Large denomination certificates of deposit		107,709,106			111,523,043
Other time		135,770,525			142,808,182
Total deposits		772,868,932			788,280,370

Borrowed money		32,000,000			-
Junior subordinated debentures		10,310,000			10,310,000
Other liabilities		4,436,409			6,837,701
Total liabilities		819,615,341			805,428,071


Common stock, $.01 par value, 25,000,000 shares authorized; 9,503,964 and 9,598,007 shares outstanding, respectively		95,040			95,980
Additional paid-in capital		35,903,908			35,869,195
Retained earnings		41,912,214			41,303,204
Accumulated other comprehensive income		2,210,550			3,168,482
Total stockholders' equity		80,121,712			80,436,861

Total liabilities and stockholders' equity	$	899,737,053		$	885,864,932

(*) Derived from audited consolidated financial statements

The accompanying notes are an integral part of these consolidated financial statements.

First South Bancorp, Inc. and Subsidiary

Consolidated Statements of Operations

Three and Six Months Ended June 30, 2015 and 2014

(unaudited)

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2015		2014			2015		2014

Interest income:
Interest and fees on loans	$	6,260,775	$	5,969,398		$	12,195,294	$	11,898,632
Interest on investments and deposits		1,639,763		1,248,271			3,469,740		2,394,082
Total interest income		7,900,538		7,217,669			15,665,034		14,292,714

Interest expense:
Interest on deposits		562,241		526,343			1,131,989		1,086,052
Interest on borrowings		7,421		44,428			7,516		45,112
Interest on junior subordinated notes		141,578		81,359			280,078		161,280
Total interest expense		711,240		652,130			1,419,583		1,292,444

Net interest income		7,189,298		6,565,539			14,245,451		13,000,270
Provision for credit losses		140,000		450,000			140,000		700,000
Net interest income after provision for credit losses		7,049,298		6,115,539			14,105,451		12,300,270

Non-interest income:
Deposit fees and service charges		2,102,664		1,139,262			3,974,859		2,066,209
Loan fees and charges		63,088		41,425			116,236		78,557
Mortgage loan servicing fees		304,705		250,107			543,447		476,428
Gain on sale and other fees on mortgage loans		572,549		362,016			957,533		648,069
Gain on sale of other real estate, net		27,349		33,999			73,216		73,419
Gain on sale of investment securities		201,157		-			451,938		13,509
Other income		344,675		343,775			678,820		732,327
Total non-interest income		3,616,187		2,170,584			6,796,049		4,088,518

Non-interest expense:
Compensation and fringe benefits		4,806,350		3,823,779			9,539,972		7,627,777
Federal deposit insurance premiums		148,639		139,022			281,882		283,620
Premises and equipment		1,290,526		831,016			2,664,453		1,657,161
Advertising		216,967		105,579			379,651		169,012
Data processing		879,576		568,215			1,986,421		1,153,808
Amortization of intangible assets		129,610		(14,592	)		257,069		108,212
Other real estate owned expense		156,849		107,183			363,591		228,488
Other		1,397,461		898,027			2,807,183		1,812,950
Total non-interest expense		9,025,978		6,458,229			18,280,222		13,041,028

Income before income tax expense		1,639,507		1,827,894			2,621,278		3,347,760
Income tax expense		485,609		542,062			742,303		959,925

NET INCOME	$	1,153,898	$	1,285,832		$	1,878,975	$	2,387,835

Per share data:
Basic earnings per share	$	0.12	$	0.13		$	0.20	$	0.25
Diluted earnings per share	$	0.12	$	0.13		$	0.20	$	0.25
Dividends per share	$	0.025	$	0.025		$	0.050	$	0.050
Average basic shares outstanding		9,526,656		9,629,040			9,548,393		9,640,736
Average diluted shares outstanding		9,546,235		9,648,158			9,568,257		9,659,572

The accompanying notes are an integral part of these consolidated financial statements.

First South Bancorp, Inc. and Subsidiary

Consolidated Statements of Comprehensive Income (Loss)

Three and Six Months Ended June 30, 2015 and 2014

(unaudited)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2015			2014			2015			2014

Net income	$	1,153,898		$	1,285,832		$	1,878,975		$	2,387,835

Other comprehensive income (loss):
Increase (decrease) in unrealized holding gains on securities available for sale		(3,135,702	)		2,355,893			(1,081,420	)		4,818,550
Tax effect		1,208,426			(895,239	)		457,516			(1,831,049	)

Unrealized holding gains (losses) on securities available for sale, net of tax		(1,927,276	)		1,460,654			(623,904	)		2,987,501

Unrealized gains (losses) on interest rate hedge position		92,415			(155,526	)		(11,562	)		(265,099	)
Tax effect		(34,471	)		59,100			4,313			100,738
Unrealized gains (losses) on interest rate hedge position, net of tax		57,944			(96,426	)		(7,249	)		(164,361	)

Reclassification adjustment for realized gains included in net income		(201,157	)		-			(451,938	)		(13,509	)
Tax effect		59,580			-			125,159			5,133
Reclassification adjustment for realized gains, net of tax		(141,577	)		-			(326,779	)		(8,376	)

Other comprehensive income (loss), net of tax		(2,010,909	)		1,364,228			(957,932	)		2,814,764

Comprehensive income (loss)	$	(857,011	)	$	2,650,060		$	921,043		$	5,202,599

The accompanying notes are an integral part of these consolidated financial statements.

First South Bancorp, Inc. and Subsidiary

Consolidated Statements of Changes in Stockholders' Equity

Six Months Ended June 30, 2015 and 2014

(unaudited)

										Accumulated
				Additional						other
	Common			paid-in			Retained			comprehensive
Six Months Ended June 30, 2015	stock			capital			earnings			income, net			Total

Balance at December 31, 2014	$	95,980		$	35,869,195		$	41,303,204		$	3,168,482		$	80,436,861

Net income								1,878,975						1,878,975

Other comprehensive loss, net											(957,932	)		(957,932	)

Vesting of restricted stock awards, net		35			(989	)								(954	)

Retirement of common shares		(975	)					(791,787	)					(792,762	)

Stock based compensation expense					35,702									35,702

Dividends								(478,178	)					(478,178	)

Balance at June 30, 2015	$	95,040		$	35,903,908		$	41,912,214		$	2,210,550		$	80,121,712

									Accumulated
				Additional					other
	Common			paid-in		Retained			comprehensive
Six Months Ended June 30, 2014	stock			capital		earnings			income, net		Total

Balance at December 31, 2013	$	96,539		$	35,809,397	$	38,849,326		$	102,881	$	74,858,143

Net income							2,387,835					2,387,835

Other comprehensive income, net										2,814,764		2,814,764

Retirement of common shares		(559	)				(456,515	)				(457,074	)

Stock based compensation expense					28,718							28,718

Dividends							(482,648	)				(482,648	)

Balance at June 30, 2014	$	95,980		$	35,838,115	$	40,297,998		$	2,917,645	$	79,149,738

The accompanying notes are an integral part of these consolidated financial statements.

First South Bancorp, Inc. and Subsidiary

Consolidated Statements of Cash Flows

Six Months Ended June 30, 2015 and 2014

(unaudited)

	Six Months Ended
	June 30,
	2015			2014

Cash flows from operating activities:
Net income	$	1,878,975		$	2,387,835
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses		140,000			700,000
Depreciation		918,237			581,496
Amortization of intangibles		257,069			108,212
Accretion of discounts and premiums on securities, net		1,140,647			487,782
Loss on disposal of premises and equipment		-			1,821
Gain on sale of other real estate owned		(73,216	)		(73,419	)
Gain on sale of loans held for sale		(526,479	)		(282,124	)
Gain on sale of investment securities available for sale		(451,938	)		(13,509	)
Stock based compensation expense		35,702			28,718
Originations of loans held for sale, net		(17,094,334	)		(11,089,816	)
Proceeds from sale of loans held for sale		16,243,208			9,649,145
Other operating activities		(2,346,877	)		830,891
Net cash provided by operating activities		120,994			3,317,032
Cash flows from investing activities:
Proceeds from sale of investment securities available for sale		22,805,370			787,500
Proceeds from principal repayments of mortgage-backed securities available for sale		12,443,417			7,341,801
Originations of loans held for investment, net of principal repayments		(64,225,585	)		(20,630,218	)
Proceeds from disposal of other real estate owned		1,463,100			1,914,917
Purchases of investment securities available for sale		(5,292,574	)		(25,460,229	)
Purchases of bank-owned life insurance		(254,374	)		(3,764,739	)
Purchases of FHLB stock		(1,550,300	)		(905,200	)
Purchase of premises and equipment		(342,940	)		(494,883	)
Net cash used in investing activities		(34,953,886	)		(41,211,051	)
Cash flows from financing activities:
Net (decrease) increase in deposit accounts		(15,411,438	)		6,756,733
Net increase in FHLB borrowings		32,000,000			25,500,000
Cash paid for dividends		(478,178	)		(482,648	)
Retirement of common shares		(792,762	)		(457,074	)
Vesting of restricted stock awards, net		(954	)		-
Net cash provided by financing activities		15,316,668			31,317,011

Decrease in cash and cash equivalents		(19,516,224	)		(6,577,008	)
Cash and cash equivalents, beginning of period		56,116,677			24,235,315
Cash and cash equivalents, end of period	$	36,600,453		$	17,658,307

Supplemental disclosures:
Other real estate acquired in settlement of loans	$	729,372		$	1,205,651
Cash paid for interest	$	1,431,798		$	1,252,498

The accompanying notes are an integral part of these consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. Basis of Presentation. The accompanying unaudited consolidated financial statements are prepared in accordance with the instructions for Form 10-Q. Accordingly, they do not include all of 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 necessary for fair presentation of the financial position and results of operations for the periods presented are included, none of which are other than normal recurring accruals. The financial statements of First South Bancorp, Inc. (the “Company”) and First South Bank (the “Bank”) are presented on a consolidated basis. The results of operations for the three and six months ended June 30, 2015, are not necessarily indicative of the results of operations that may be expected for the year ended December 31, 2015.

2. Earnings Per Share. Basic and diluted earnings per share for the three and six months ended June 30, 2015 and 2014 are based on weighted average shares of common stock outstanding. Diluted earnings per share include the potentially dilutive effects of the Company’s stock-based compensation plans. For the three and six months ended June 30, 2015 and 2014, there were 19,579 and 19,864 stock options and 19,118 and 18,836 stock options, respectively, that were dilutive because their exercise prices were less than the average market price of the Company’s common stock.

3. Comprehensive Income and Accumulated Other Comprehensive Income. Comprehensive income (loss) includes net income and changes in other comprehensive income. The components of other comprehensive income primarily include net changes in unrealized gains and losses on available for sale securities, and the reclassification of net gains and losses on available for sale securities recognized in income during the respective reporting periods. The following table presents changes in accumulated other comprehensive income (AOCI), net of taxes for the six months ended June 30, 2015 and 2014:

	Unrealized Holding Gains on Investment Securities Available-For- Sale			Unrealized Holding Losses on Cash Flow Hedging Activities			Total Accumulated Other Comprehensive Income
	(In Thousands)
Six Months Ended June 30, 2015
Balance at December 31, 2014	$	3,422		$	(254	)	$	3,168
Other comprehensive loss before reclassifications		(623	)		(7	)		(630	)
Amounts reclassified from AOCI		(327	)		-			(327	)
Net current period other comprehensive loss		(950	)		(7	)		(957	)
Balance at June 30, 2015	$	2,472		$	(261	)	$	2,211

Six Months Ended June 30, 2014
Balance at December 31, 2013	$	125		$	(22	)	$	103
Other comprehensive income (loss) before reclassifications		2,987			(164	)		2,823
Amounts reclassified from AOCI		(8	)		-			(8	)
Net current period other comprehensive income (loss)		2,979			(164	)		2,815
Balance at June 30, 2014	$	3,104		$	(186	)	$	2,918

4. Investment Securities. The following is a summary of the securities portfolio by major category. The amortized cost and fair value of each category, with gross unrealized gains and losses at June 30, 2015 and December 31, 2014 are summarized as follows:

	June 30, 2015
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
Securities available for sale:	Cost		Gains		Losses		Value
	(In thousands)
Government agencies	$	30,881	$	359	$	26	$	31,214
Mortgage-backed securities		138,145		3,396		349		141,192
Municipal securities		58,273		1,242		414		59,101
Corporate bonds		28,835		22		244		28,613
Total	$	256,134	$	5,019	$	1,033	$	260,120

4. Investment Securities (Continued)

	December 31, 2014
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
Securities available for sale:	Cost		Gains		Losses		Value
	(In thousands)
Government agencies	$	30,911	$	397	$	76	$	31,232
Mortgage-backed securities		170,443		4,384		547		174,280
Municipal securities		54,014		1,797		109		55,702
Corporate bonds		31,411		36		362		31,085
Total	$	286,779	$	6,614	$	1,094	$	292,299

June 30, 2015

Gross

Amortized

Unrealized

Fair

Securities held to maturity:

Cost

Gains

Losses

Value

(In thousands)

Government agencies

508

513

December 31, 2014

Gross

Amortized

Unrealized

Fair

Securities held to maturity:

Cost

Gains

Losses

Value

(In thousands)

Government agencies

507

512

The following table summarizes investment securities gross unrealized losses, fair value and length of time the securities were in a continuous unrealized loss position at June 30, 2015 and December 31, 2014. The Company deems these unrealized losses to be temporary and recoverable prior to or at maturity. The Company has the ability and intent to hold the investment securities for a reasonable period of time sufficient for a market price recovery or until maturity.

	June 30, 2015
	Less Than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(In thousands)
Government agencies	$	9,814	$	26	$	-	$	-	$	9,814	$	26
Mortgage-backed securities		52,253		340		2,867		9		55,120		349
Municipal securities		20,524		414		-		-		20,524		414
Corporate bonds		17,529		94		5,850		150		23,379		244
Total	$	100,120	$	874	$	8,717	$	159	$	108,837	$	1,033

	December 31, 2014
	Less Than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(In thousands)
Government agencies	$	11,790	$	76	$	-	$	-	$	11,790	$	76
Mortgage-backed securities		61,106		527		3,093		20		64,199		547
Municipal securities		5,469		99		904		10		6,373		109
Corporate bonds		21,670		256		3,894		106		25,564		362
Total	$	100,035	$	958	$	7,891	$	136	$	107,926	$	1,094

4. Investment Securities (Continued)

The following table summarizes the amortized cost and fair values of the investment securities portfolio at June 30, 2015, by expected maturity. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Less Than One Year		One to Five Years		Five to Ten Years		Over Ten Years
	(In thousands)
Securities available for sale:
Government agencies
Amortized cost	$	-	$	9,754	$	21,127	$	-
Fair value		-		9,795		21,419		-
Mortgage-backed securities
Amortized cost		993		69,319		43,748		24,085
Fair value		1,045		70,408		44,051		25,688
Municipal securities
Amortized cost		1,933		22,358		27,886		6,096
Fair value		1,946		22,870		28,205		6,080
Corporate bonds
Amortized cost		-		16,337		12,498		-
Fair value		-		16,290		12,323		-
Total Amortized cost	$	2,926	$	117,768	$	105,259	$	30,181
Total Fair value	$	2,991	$	119,363	$	105,998	$	31,768

	Less Than One Year		One to Five Years		Five to Ten Years		Over Ten Years
	(In thousands)
Securities held to maturity:
Government agencies
Amortized cost	$	-	$	508	$	-	$	-
Fair value		-		513		-		-
Total Amortized cost	$	-	$	508	$	-	$	-
Total Fair value	$	-	$	513	$	-	$	-

FHLB agency bonds with an amortized cost of $11.4 million and $9.7 million were pledged as collateral for public deposits at June 30, 2015 and December 31, 2014, respectively. In addition, a government agency bond with an amortized cost of $508,000 and $507,000 was pledged as collateral on a forward starting interest rate swap transaction at June 30, 2015 and December 31, 2014, respectively.

At June 30, 2015, the investment securities portfolio included 59 taxable and tax-exempt debt instruments issued by various U.S. states, counties, cities, municipalities and school districts. The following table is a summary, by U.S. state, of the Company’s investment in the obligations of state and political subdivisions:

4. Investment Securities (Continued)

	June 30, 2015
	Amortized Cost		Fair Value
	(dollars in thousands)
Obligations of state and political subdivisions:
General obligation bonds:
Texas	$	11,219	$	11,603
Pennsylvania		6,482		6,508
California		3,580		3,539
North Carolina		2,982		2,998
New York		2,564		2,604
South Carolina		3,377		3,404
Other (9 states)		14,137		14,117
Total general obligation bonds		44,341		44,773
Revenue bonds:
North Carolina		4,944		5,122
New York		2,784		2,794
Texas		2,755		2,792
Pennsylvania		1,792		1,891
Florida		1,657		1,729
Total revenue bonds		13,932		14,328
Total obligations of state and political subdivisions	$	58,273	$	59,101

The largest exposure in general obligation bonds was one bond issued by Ambridge Area School District, Pennsylvania, with a total amortized cost basis of $2.4 million and total fair value of $2.3 million at June 30, 2015. Of this total, $2.4 million in amortized cost and $2.3 million in fair value are guaranteed by Assured Guaranty Municipal Corp.

The following table is a summary of the revenue sources related to the Company’s investment in revenue bonds:

	June 30, 2015
	Amortized Cost		Fair Value
	(dollars in thousands)
Revenue bonds by revenue source:
Refunding bonds	$	4,471	$	4,597
University and college		2,754		2,792
Public improvements		2,168		2,227
Pension funding		1,791		1,891
Other		2,747		2,821
Total revenue bonds	$	13,931	$	14,328

The largest single exposure in revenue bonds is an issue from the Philadelphia Authority for Industrial Development in Pennsylvania. The debt is to be repaid by the City of Philadelphia from revenues of pledged assets held and their taxes received. As of June 30, 2015, this issue had an amortized cost of $1.8 million and fair value of $1.9 million.

Prior to purchasing any security, the Bank ensures that the security is “investment grade”. For a security to be investment grade it must: (1) have a low risk of default by the obligor, and (2) expect the full and timely repayment of principal and interest over the expected life. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), certain investments are deemed investment grade. These include: U.S. Treasury securities, Federal Agency securities, Revenue Bonds, and Unlimited-Tax General Obligation Municipals. Other securities undergo a pre-purchase analysis to ensure they are investment grade. To determine if a security is investment grade, if available, management utilizes the ratings of the Nationally Recognized Statistical Rating Organizations (NRSRO). However, they are not the sole basis of determining if a security is investment grade. In addition, on a pre-purchase basis, at least one of the following items pertaining to the obligor is acquired and reviewed as part of the Bank’s internal credit analysis: data from debt offerings (prospectus/offering circular); data from regulatory filings (10-Q, 10-K, 8-K); data available from the obligor’s website (annual reports, press releases); data obtained from a third party (i.e. bond broker, analyst); NRSRO report on the initial offering and/or subsequent reviews of the issuer; or other pertinent available financial information. There have been no instances where the NRSRO’s credit rating has significantly differed from that of the Bank’s credit analysis.

4. Investment Securities (Continued)

In addition to the pre-purchase analysis performed on securities acquired, we perform ongoing monitoring of our corporate and municipal bond holdings. This monitoring includes staying abreast of material events that may impact the Bank’s ability to be repaid all principal and interest from an issuer in a timely manner. Given the recent disruptions to the oil and gas industry and our municipal holdings in Texas, we have expanded the scope of our surveillance to municipalities in Texas. In addition to monitoring for material events, such as changes in NRSRO grades, we track the West Texas Intermediate (WTI) Crude Oil prices, both current and futures. While we will continue to monitor our positions, given the diversified economic landscape of Texas, the strong credit ratings of our holdings, our limited exposure to the more oil sensitive areas of the state (Houston and Harris County, Midland, Odessa) coupled with the insurance backing of our investments in the oil sensitive areas of Texas, we are comfortable holding our positions at the present time. The Bank became less comfortable with our exposure in the state of Illinois and as such sold out of those positions during the second quarter.

5. Loans Held for Sale. The Bank originates residential mortgage loans for sale in the secondary market. Pursuant to ASC 825, Financial Instruments, at June 30, 2015 and December 31, 2014, the Bank marked these mortgage loans to market. Mortgage loans held for sale at June 30, 2015 and December 31, 2014, had estimated fair market values of $6.2 million and $4.8 million, respectively. The Bank originates mortgage loans for sale that are approved by secondary investors. Their terms are set by secondary investors, and they are transferred within 120 days after the Bank funds the loans. The Bank issues rate lock commitments to borrowers, and depending on market conditions, may enter into forward contracts with secondary market investors to minimize interest rate risk related to mortgage loan forward sales commitments. The Bank uses forward contracts to minimize interest rate risk related to mortgage loan forward sales commitments to economically hedge a percentage of the locked-in pipeline. The Bank receives origination fees from borrowers and servicing release premiums from investors that are recognized in income when loans are sold. The Bank had mortgage loan forward sales commitments with notional amounts outstanding of $6.9 million and $4.1 million at June 30, 2015 and December 31, 2014, respectively.

6. Loans Held for Investment. Loans held for investment at June 30, 2015 and December 31, 2014 are listed below:

	June 30, 2015					December 31, 2014
	Amount		Percent of Total			Amount		Percent of Total
	(Dollars in thousands)
Loans Held for Investment
Mortgage loans:
Residential real estate	$	65,518		12.0	%	$	64,647		13.4	%
Residential construction		2,970		0.5			1,382		0.3
Residential lots and raw land		784		0.1			828		0.2
Total mortgage loans		69,272		12.6			66,857		13.9

Commercial loans and leases:
Commercial real estate		305,250		56.1			255,800		53.2
Commercial construction		33,776		6.2			27,646		5.7
Commercial lots and raw land		25,395		4.7			27,502		5.7
Commercial and industrial		35,885		6.6			28,379		5.9
Lease receivables		12,825		2.4			12,392		2.6
Total commercial loans and leases		413,131		76.0			351,719		73.1

Consumer loans:
Consumer real estate		17,423		3.2			18,863		3.9
Consumer construction		321		0.1			1,412		0.3
Consumer lots and raw land		10,295		1.9			10,430		2.2
Home equity lines of credit		28,087		5.1			28,059		5.8
Consumer other		5,999		1.1			3,932		0.8
Total consumer loans		62,125		11.4			62,696		13.0

Gross loans held for investment		544,528		100.0	%		481,272		100.0	%

Less deferred loan origination fees, net		892					836
Less allowance for loan and lease losses		7,364					7,520

Net loans held for investment	$	536,272				$	472,916

The Bank has pledged eligible real estate loans as collateral for potential borrowings from the Federal Home Loan Bank of Atlanta (“FHLB”) in the amount of $195.0 million at June 30, 2015, compared to $137.6 million at December 31, 2014. At June 30, 2015, the Bank has also pledged eligible loans as collateral to the Federal Reserve Bank of Richmond (“FRB”) in the amount of $96.2 million, compared to $81.3 million at December 31, 2014, for potential access to the FRB Discount Window.

6. Loans Held for Investment (Continued)

The following tables detail non-accrual loans held for investment, including troubled debt restructured (“TDR”) loans accounted for on a non-accrual status, segregated by class of loans, at June 30, 2015 and December 31, 2014:

	June 30, 2015			December 31, 2014
	(Dollars in thousands)
Non-accrual loans held for investment:
Non-TDR loans accounted for on a non-accrual status:
Residential real estate	$	813		$	727
Residential lots and raw land		10			11
Commercial real estate		519			554
Commercial lots and raw land		-			32
Lease receivables		95			69
Consumer real estate		285			214
Consumer lots and raw land		26			124
Home equity lines of credit		44			61
Consumer other		4			6
Total Non-TDR loans accounted for on a non-accrual status	$	1,796		$	1,798

TDR loans accounted for on a non-accrual status:
Past Due TDRs:
Commercial real estate	$	1,459		$	1,182
Consumer real estate		-			51
Total Past Due TDRs on a non-accrual status		1,459			1,233

Current TDRs:
Residential real estate		821			834
Commercial real estate		-			127
Commercial construction		244			-
Commercial lots and raw land		-			1,046
Total Current TDRs		1,065			2,007
Total TDR loans accounted for on a non-accrual basis	$	2,524		$	3,240
Total non-accrual loans	$	4,320		$	5,038
Percentage of total loans held for investment, net		0.8	%		1.1	%
Loans over 90 days past due and still accruing		248			389
Other real estate owned	$	7,009		$	7,756
Total non-performing assets	$	11,577		$	13,183

Cumulative interest income not recorded on loans accounted for on a non-accrual status was $120,842 and $109,598 at June 30, 2015 and December 31, 2014, respectively.

6. Loans Held for Investment (Continued)

The following table presents an age analysis of past due loans held for investment, segregated by class of loans as of June 30, 2015 and December 31, 2014:

Past due loans held for investment:	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Financing Receivables		Over 90 Days and Accruing
	(In thousands)
June 30, 2015
Residential real estate	$	-	$	560	$	688	$	1,248	$	64,270	$	65,518	$	248
Residential construction		-		-		-		-		2,970		2,970		-
Residential lots and raw land		-		-		8		8		776		784		-
Commercial real estate		1,747		273		1,339		3,359		301,891		305,250		-
Commercial construction		179		-		-		179		33,597		33,776		-
Commercial lots and raw land		-		10		-		10		25,385		25,395		-
Commercial and industrial		-		11		-		11		35,874		35,885		-
Lease receivables		-		-		95		95		12,730		12,825		-
Consumer real estate		478		241		172		891		16,532		17,423		-
Consumer construction		-		-		-		-		321		321		-
Consumer lots and raw land		196		-		26		222		10,073		10,295		-
Home equity lines of credit		245		34		29		308		27,779		28,087		-
Consumer other		3		7		1		11		5,988		5,999		-
Total	$	2,848	$	1,136	$	2,358	$	6,342	$	538,186	$	544,528	$	248

Past due loans held for investment:	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Financing Receivables		Over 90 Days and Accruing
	(In thousands)
December 31, 2014
Residential real estate	$	1,553	$	361	$	944	$	2,858	$	61,789	$	64,647	$	389
Residential construction		-		-		-		-		1,382		1,382		-
Residential lots and raw land		-		2		9		11		817		828		-
Commercial real estate		1,099		444		1,182		2,725		253,075		255,800		-
Commercial construction		-		-		-		-		27,646		27,646		-
Commercial lots and raw land		307		39		32		378		27,124		27,502		-
Commercial and industrial		63		-		-		63		28,316		28,379		-
Lease receivables		-		-		69		69		12,323		12,392		-
Consumer real estate		501		164		149		814		18,049		18,863		-
Consumer construction		-		-		-		-		1,412		1,412		-
Consumer lots and raw land		-		21		124		145		10,285		10,430		-
Home equity lines of credit		45		30		46		121		27,938		28,059		-
Consumer other		12		-		6		18		3,914		3,932		-
Total	$	3,580	$	1,061	$	2,561	$	7,202	$	474,070	$	481,272	$	389

The following table presents information on loans that were considered impaired as of June 30, 2015 and December 31, 2014. Impaired loans include loans modified as a TDR, whether on accrual or non-accrual status. At June 30, 2015, impaired loans included $3.5 million of TDRs, compared to $4.6 million at December 31, 2014.

6. Loans Held for Investment (Continued)

Impaired Loans-June 30, 2015	Recorded Investment		Contractual Unpaid Principal Balance		Related Allowance		YTD Average Recorded Investment		Interest Income Recognized on Impaired Loans
	(In thousands)
With no related allowance recorded:
Residential real estate	$	1,102	$	1,398	$	-	$	1,239	$	32
Commercial real estate		10,873		10,925		-		11,674		312
Commercial construction		295		295		-		167		5
Commercial lots and raw land		2,752		2,752		-		2,840		71
Commercial and industrial		44		44		-		45		1
Consumer real estate		329		338		-		287		10
Consumer lots and raw land		55		55		-		57		2
Home equity lines of credit		47		48		-		61		1
Consumer other		44		44		-		45		1
Subtotal:		15,541		15,899		-		16,415		435

With an allowance recorded:
Commercial real estate		1,956		2,013		305		1,662		50
Commercial construction		244		244		178		81		12
Commercial and industrial		25		25		25		90		1
Consumer real estate		79		79		17		114		2
Consumer lots and raw land		557		557		94		587		14
Subtotal:		2,861		2,918		619		2,534		79

Totals:
Mortgage		1,102		1,398		-		1,239		32
Commercial		16,189		16,298		508		16,559		452
Consumer		1,111		1,121		111		1,151		30
Grand Total:	$	18,402	$	18,817	$	619	$	18,949	$	514

Impaired Loans-December 31, 2014	Recorded Investment		Contractual Unpaid Principal Balance		Related Allowance		YTD Average Recorded Investment		Interest Income Recognized on Impaired Loans
	(In thousands)
With no related allowance recorded:
Residential real estate	$	1,505	$	1,802	$	-	$	1,268	$	74
Commercial real estate		12,331		12,361		-		13,851		721
Commercial construction		103		103		-		1,793		5
Commercial lots and raw land		2,951		2,958		-		3,623		159
Commercial and industrial		46		46		-		48		2
Consumer real estate		192		192		-		258		6
Consumer lots and raw land		59		59		-		477		4
Home equity lines of credit		58		58		-		46		3
Consumer other		46		46		-		76		2
Subtotal:		17,291		17,625		-		21,440		976

With an allowance recorded:
Residential real estate		235		235		185		47		11
Commercial real estate		1,530		1,569		167		2,638		74
Commercial lots and raw land		416		418		251		152		29
Consumer real estate		132		132		19		139		6
Consumer lots and raw land		643		643		165		584		31
Home equity lines of credit		25		25		5		15		-
Subtotal		2,981		3,022		792		3,575		151

Totals:
Mortgage		1,740		2,037		185		1,315		85
Commercial		17,377		17,455		418		22,105		990
Consumer		1,155		1,155		189		1,595		52
Grand Total	$	20,272	$	20,647	$	792	$	25,015	$	1,127

6. Loans Held for Investment (Continued)

Credit Quality Indicators. The Bank assigns a risk grade to each loan in the portfolio as part of the on-going monitoring of the credit quality of the loan portfolio.

Commercial loans are graded on a scale of 1 to 9 as follows:

Risk Grade 1 (Excellent) - Loans in this category are considered to be of the highest quality. The borrower(s) has significant financial strength, stability, and liquidity. Proven cash flow is significantly more than required to service current and proposed debt with consistently strong earnings. Collateral position is very strong and a secondary source of repayment is self-evident. Guarantors may not be necessary to support the debt.

Risk Grade 2 (Above Average) - Loans are supported by above average financial strength and stability. Cash flow is more than sufficient to meet current demands. Earnings are strong and reliable, but may differ from year to year. Collateral is highly liquid and sufficient to repay the debt in full. Guarantors may qualify for the loan on a direct basis.

Risk Grade 3 (Average) - Credits in this group are supported by upper tier industry-average financial strength and stability. Liquidity levels fluctuate and need for short-term credit is demonstrated. Cash flow is steady and adequate to meet demands but can fluctuate. Earnings should be consistent but operating losses have not occurred recently. Collateral is generally pledged at an acceptable loan to value, but the credit can support some level of unsecured exposure. Guarantors with demonstrable financial strength are typically required on loans to business entities, but may not be on loans to individual borrowers.

Risk Grade 4 (Acceptable) - Credits in this group are supported by lower end industry-average financial strength and stability. Liquidity levels fluctuate but are acceptable and need for short term credit is demonstrated. Cash flow is adequate to meet demands but can fluctuate. Earnings may be inconsistent but operating losses have not occurred recently. Collateral is generally pledged at an acceptable loan to value. Guarantors with demonstrable financial strength are required on loans to business entities, but may not be on loans to individual borrowers.

Risk Grade 5 (Watch) - An asset in this category is one that has been identified by the lender, or credit administration as a loan that has shown some degree of deterioration from its original status. These loans are typically protected by collateral but have potential weaknesses that deserve management’s close attention, but are not yet at a point to become a classified asset. There may be unsecured loans that are included in this category. These are loans that management feels need to be watched more closely than those rated as acceptable and if left uncorrected, these potential weaknesses may result in the deterioration of the repayment prospects for the asset to warrant including them as classified assets.

Risk Grade 6 (Special Mention) - An asset in this category is currently protected by collateral but has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in the deterioration of the repayment prospects for the asset or in the Bank’s credit position at some future date.

Risk Grade 7 (Substandard) - A Substandard loan is inadequately protected by the current sound net worth and paying capacity of the debtor(s) or of the collateral pledged, if any. These credits have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. There is a distinct possibility the Bank will sustain some loss if the deficiencies are not corrected.

Risk Grade 8 (Doubtful) - A loan graded in this category has all the weaknesses inherent in one graded Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values highly questionable and improbable.

Risk Grade 9 (Loss) - A loan graded as Loss is considered uncollectible and of such little value that continuance as a bankable asset is not warranted. This grade does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be affected in the future.

Consumer loans are graded on a scale of 1 to 9 as follows:

Risk Grades 1 - 5 (Pass) - Loans in this category generally show little to no signs of weakness or have adequate mitigating factors that minimize the risk of loss. Some of the characteristics of these loans include, but are not limited to, adequate financial strength and stability, adequate cash flow, collateral with acceptable loan to value, additional repayment sources, and reliable earnings.

6. Loans Held for Investment (Continued)

Mortgage loans are graded on a scale of 1 to 9 as follows:

Risk Grades 1 - 4 (Pass) - Loans in this category generally show little to no signs of weakness or have adequate mitigating factors that minimize the risk of loss. Some of the characteristics of these loans include, but are not limited to, adequate financial strength and stability, acceptable credit history, adequate cash flow, collateral with acceptable loan to value, additional repayment sources, and reliable earnings.

Risk Grade 5 (Pass -Watch) – Watch loans have shown credit quality changes from the original status. These loans are typically protected by collateral but have potential weaknesses that deserve management’s close attention, but are not yet at a point to become a classified asset. These are loans that management feels need to be watched more closely than those rated as Pass and if left uncorrected may result in the deterioration of the repayment prospects for the asset to warrant including them as classified assets.

Risk Grade 6 (Special Mention) – Special Mention loans are currently protected by collateral but have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in the deterioration of the repayment prospects for the asset or in the Bank’s credit position at some future date.

Risk Grade 7 (Substandard) - Substandard loans are inadequately protected by the sound net worth and paying capacity of the borrower(s). Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

Risk Grade 8 (Doubtful) - Loans classified Doubtful have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions, and values, highly questionable and improbable.

Risk Grade 9 (Loss) - Loans classified Loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be affected in the future.

The following table presents information on risk ratings of the commercial, consumer, mortgage and lease receivable portfolios, segregated by loan class as of June 30, 2015 and December 31, 2014:

June 30, 2015
Commercial Credit Exposure by Assigned Risk Grade	Commercial Real Estate		Commercial Construction		Commercial Lots and Raw Land		Commercial and Industrial
	(In thousands)
1-Excellent	$	-	$	-	$	-	$	-
2-Above Average		3,216		953		60		3,759
3-Average		79,909		9,543		1,659		4,311
4-Acceptable		191,741		19,627		15,016		24,774
5-Watch		14,149		1,403		4,057		895
6-Special Mention		6,607		1,711		2,883		2,071
7-Substandard		9,628		539		1,720		75
8-Doubtful		-		-		-		-
9-Loss		-		-		-		-
Total	$	305,250	$	33,776	$	25,395	$	35,885

6. Loans Held for Investment (Continued)

June 30, 2015
Consumer Credit Exposure by Assigned Risk Grade	Consumer Real Estate		Consumer Construction		Consumer Lots and Raw Land		Home Equity Lines of Credit		Consumer Other
	(In thousands)
Pass	$	16,386	$	321	$	9,932	$	27,920	$	5,918
6-Special Mention		589		-		282		56		27
7-Substandard		448		-		81		111		54
8-Doubtful		-		-		-		-		-
9-Loss		-		-		-		-		-
Total	$	17,423	$	321	$	10,295	$	28,087	$	5,999

June 30, 2015
Mortgage and Lease Receivable Credit Exposure by Assigned Risk Grade	Residential Real Estate		Residential Construction		Residential Lots and Raw Land		Lease Receivables
	(In thousands)
Pass	$	63,062	$	2,970	$	775	$	12,730
6-Special Mention		804		-		-		-
7-Substandard		1,652		-		9		95
8-Doubtful		-		-		-		-
9-Loss		-		-		-		-
Total	$	65,518	$	2,970	$	784	$	12,825

December 31, 2014
Commercial Credit Exposure by Assigned Risk Grade	Commercial Real Estate		Commercial Construction		Commercial Lots and Raw Land		Commercial and Industrial
	(In thousands)
1-Excellent	$	-	$	-	$	-	$	-
2-Above Average		2,030		778		24		955
3-Average		53,699		5,681		1,560		5,264
4-Acceptable		166,639		17,701		16,601		19,562
5-Watch		16,117		2,641		3,948		458
6-Special Mention		7,195		515		3,201		2,051
7-Substandard		10,120		330		2,168		89
8-Doubtful		-		-		-		-
9-Loss		-		-		-		-
Total	$	255,800	$	27,646	$	27,502	$	28,379

December 31, 2014
Consumer Credit Exposure by Assigned Risk Grade	Consumer Real Estate		Consumer Construction		Consumer Lots and Raw Land		Home Equity Lines of Credit		Consumer Other
	(In thousands)
Pass	$	17,796	$	1,412	$	9,958	$	27,828	$	3,866
6-Special Mention		636		-		288		60		4
7-Substandard		431		-		184		171		62
8-Doubtful		-		-		-		-		-
9-Loss		-		-		-		-		-
Total	$	18,863	$	1,412	$	10,430	$	28,059	$	3,932

December 31, 2014
Mortgage and Lease Receivable Credit Exposure by Assigned Risk Grade	Residential Real Estate		Residential Construction		Residential Lots and Raw Land		Lease Receivables
	(In thousands)
Pass	$	61,779	$	1,382	$	817	$	12,323
6-Special Mention		684		-		-		-
7-Substandard		2,095		-		11		69
8-Doubtful		89		-		-		-
9-Loss		-		-		-		-
Total	$	64,647	$	1,382	$	828	$	12,392

7. Allowance for Loan and Lease Losses. The following table presents a roll forward summary of activity in the allowance for loan and lease losses (“ALLL”), by loan category, for the six months ended June 30, 2015 and 2014:

	June 30, 2015
	Beginning		Charge-								Ending		Total
	Balance		Offs			Recoveries		Provisions			Balance		Loans
	(In thousands)
Collectively evaluated:
Residential real estate	$	982	$	(94	)	$	-	$	43		$	931	$	64,416
Residential construction		17		-			-		18			35		2,970
Residential lots and raw land		11		-			-		(2	)		9		784
Commercial real estate		3,516		-			16		167			3,699		292,421
Commercial construction		375		-			-		33			408		33,237
Commercial lots and raw land		377		-			-		(65	)		312		22,643
Commercial and industrial		400		-			1		34			435		35,816
Lease receivables		172		-			-		(11	)		161		12,825
Consumer real estate		250		-			12		(61	)		201		17,015
Consumer construction		19		-			-		(15	)		4		321
Consumer lots and raw land		152		-			-		(14	)		138		9,683
Home equity lines of credit		405		-			1		(62	)		344		28,040
Consumer other		52		(4	)		89		(69	)		68		5,955
Total		6,728		(98	)		119		(4	)		6,745		526,126
Individually evaluated:
Residential real estate		185		(185	)		-		-			-		1,102
Commercial real estate		167		(8	)		24		122			305		12,829
Commercial construction		-		-			-		178			178		539
Commercial lots and raw land		251		(33	)		-		(218	)		-		2,752
Commercial and industrial		-		-			-		25			25		69
Consumer real estate		19		(33	)		-		31			17		408
Consumer lots and raw land		165		(85	)		-		14			94		612
Home equity lines of credit		5		-			3		(8	)		-		47
Consumer other		-		-			-		-			-		44
Total		792		(344	)		27		144			619		18,402
Grand Total	$	7,520	$	(442	)	$	146	$	140		$	7,364	$	544,528

7. Allowance for Loan and Lease Losses (Continued)

	June 30, 2014
	Beginning		Charge-								Ending		Total
	Balance		Offs			Recoveries		Provisions			Balance		Loans
	(In thousands)
Collectively evaluated:
Residential real estate	$	903	$	-		$	-	$	(27	)	$	876	$	66,966
Residential construction		17		-			-		(6	)		11		957
Residential lots and raw land		13		-			-		(1	)		12		885
Commercial real estate		3,647		(1	)		19		63			3,728		226,786
Commercial construction		343		-			1		81			425		27,736
Commercial lots and raw land		415		-			-		(65	)		350		20,023
Commercial and Industrial		430		(3	)		9		(48	)		388		25,586
Lease receivables		113		(1	)		-		115			227		11,650
Consumer real estate		316		-			17		(56	)		277		18,447
Consumer construction		23		-			-		1			24		1,694
Consumer lots and raw land		203		(232	)		-		188			159		9,959
Home equity lines of credit		463		(12	)		7		(18	)		440		28,306
Consumer other		60		(5	)		10		(11	)		54		4,540
Total		6,946		(254	)		63		216			6,971		443,535
Individually evaluated:
Residential real estate		-		-			-		-			-		1,131
Commercial real estate		510		(23	)		5		322			814		16,756
Commercial construction		-		-			1		(1	)		-		2,874
Commercial lots and raw land		-		(104	)		-		104			-		3,448
Commercial and Industrial		23		(49	)		-		26			-		48
Consumer real estate		25		(24	)		-		37			38		408
Consumer lots and raw land		105		-			-		(7	)		98		2,550
Home equity lines of credit		-		(1	)		3		3			5		55
Consumer other		-		-			-		-			-		95
Total		663		(201	)		9		484			955		27,364
Grand Total	$	7,609	$	(455	)	$	72	$	700		$	7,926	$	470,900

8. Troubled Debt Restructurings. The following table details performing TDR loans at June 30, 2015 and December 31, 2014, segregated by class of financing receivables:

	June 30, 2015			December 31, 2014
	(Dollars in thousands)
Performing TDR loans accounted for on an accrual basis:
Residential real estate	$	-		$	-
Commercial real estate		785			1,132
Commercial construction		-			-
Commercial lots and raw land		-			-
Commercial and industrial		7			9
Consumer real estate		163			165
Consumer lots and raw land		113			60
Home equity lines of credit		-			-
Consumer other		5			56
Total performing TDR loans accounted for on an accrual basis	$	1,073		$	1,422
Percentage of total loans, net		0.2	%		0.3	%

The following table presents a roll forward of performing and non-performing TDR loans for the six months ended June 30, 2015:

Performing TDRs	Beginning Balance		Additions (1)		Charge- Offs (2)			Other (3)			Ending Balance
June 30, 2015	(In thousands)
Residential mortgage	$	-	$	-	$	-		$	-		$	-
Commercial		1,141		-		(9	)		(340	)		792
Consumer		281		-		-			-			281
Total	$	1,422	$	-	$	(9	)	$	(340	)	$	1,073

8. Troubled Debt Restructurings (Continued)

Non-Performing TDRs	Beginning Balance		Additions (1)		Charge- Offs (2)			Other (4)			Ending Balance
June 30, 2015	(In thousands)
Residential mortgage	$	834	$	-	$	-		$	(13	)	$	821
Commercial		2,355		-		-			(652	)		1,703
Consumer		51		-		(18	)		(33	)		-
Total	$	3,240	$	-	$	(18	)	$	(698	)	$	2,524

Includes new TDRs and increases to existing TDRs.

Post modification charge-offs.

Includes principal payments, paydowns and performing loans previously restructured at market rates that are no longer reported as TDRs.

Includes principal payments, paydowns and loans previously designated as non-performing that are currently performing in compliance with their modified terms.

In determining the allowance for loan and lease losses, the Bank considers TDRs and subsequent defaults in restructuring in its estimate. As a result, the allowance may be increased, adjustments may be made in the allocation of the allowance, or charge-offs may be taken to further write down the carrying value of the loan. The Bank’s primary objective in granting concessions to borrowers having financial difficulties is an attempt to protect as much of its investment as possible. The Bank faces significant challenges when working with borrowers who are experiencing diminished operating cash flows, depreciated collateral values, or prolonged sales and rental absorption periods. While borrowers may experience deterioration in their financial condition, many continue to be creditworthy customers who have the willingness and capacity to repay their debts. In such cases, the Bank finds it mutually beneficial to work constructively with its borrowers, and that prudent restructurings are often in the best interest of the Bank and the borrower. The Bank offers a variety of TDR programs on a loan-by-loan basis in which, for economic or legal reasons related to an individual borrower’s financial condition, it grants a concession to the borrower that would not otherwise be considered. The restructuring of a troubled loan may include, but is not limited to any one or combination of the following: a modification of the loan terms such as a reduction of the contractual interest rate, principal, payment amount or accrued interest; an extension of the maturity date at a stated interest rate lower than the current market rate for a new debt with similar risks; a change in payment type, e.g. from principal and interest, to interest only with all principal and interest due at maturity; a substitution or acceptance of additional collateral; and a substitution or addition of new debtors for the original borrower.

The Bank’s restructuring success includes but is not limited to any one or combination of the following: improves the prospects for repayment of principal and interest; reduces the prospects of further write downs and charge-offs; reduces the prospects of potential additional foreclosures; helps borrowers to maintain a creditworthy status; and ultimately will reduce the volume of classified, criticized and/or non-accrual loans. The Bank identifies loans for potential restructuring on a loan-by-loan basis using a variety of sources which may include, but is not limited to any one or combination of the following: being approached or contacted by the borrower to modify loan terms; review of borrower’s financial statements indicates borrower may be experiencing financial difficulties; past due payment reports; loans extending past their stated maturity date; and non-accrual loan reports.

On a loan-by-loan basis, the Bank restructures loans that were either on non-accrual basis or on accrual basis prior to restructuring. If a loan was on nonaccrual basis prior to restructuring, it remains on nonaccrual basis until the borrower has demonstrated a willingness and ability to meet the terms and conditions of the restructuring and to make the restructured loan payments, generally for a period of at least nine months. The Bank has not immediately placed any restructured loan on accrual status that was on nonaccrual status prior to restructuring. If a restructured loan was on accrual basis prior to restructuring and the Bank expects the borrower to perform to the terms and conditions of the loan after restructuring (i.e. the loan was current, on accrual basis, and the borrower has the ability to make the restructured loan payments), the loan remains on an accrual basis and placement on nonaccrual is not required.

The Bank performs restructurings on certain troubled loan workouts, whereby existing loans are restructured into a multiple note structure (i.e., Note A and Note B structure). The Bank separates a portion of the current outstanding debt into a new legally enforceable note (Note A) that is reasonably assured of repayment and performance according to prudently modified terms. The portion of the debt that is not reasonably assured of repayment (Note B) is adversely classified and charged-off as appropriate. The following table provides information on multiple note restructures for certain commercial real estate loan workouts as of June 30, 2015. There were no multiple note restructures outstanding as of June 30, 2014.

	June 30, 2015		June 30, 2014
	(In thousands)
Note A Structure
Commercial real estate (1)	$	274	$	-
Note B Structure
Commercial real estate (2)	$	174	$	-
Reduction of interest income (3)	$	5	$	-

8. Troubled Debt Restructurings (Continued)

(1)

If Note A was on nonaccrual status, it may be placed back on accrual status based on sustained historical payment performance of generally nine months.

(2)

Note B is immediately charged-off upon restructuring; however, payment in full is due at maturity of the note.

(3)

Reflects amount of interest income reduction during the six months ended June 30, 2015, as a result of multiple note restructures.

The benefit of this workout strategy is for the A note to remain a performing asset for which the borrower has the willingness and ability to meet the restructured payment terms and conditions. In addition, this workout strategy reduces the prospects of further write downs and charge offs, and also reduces the prospects of a potential foreclosure. Following this restructuring, the Note A credit classification generally improves from “substandard” to an unclassified risk grade.

The general terms of the new loans restructured under the Note A and Note B structure differ as follows:

Note A: First lien position; fixed or adjustable current market interest rate; fixed month term to maturity; payments – interest only to maturity, or full principal and interest to maturity. Note A is underwritten in accordance with the Bank’s customary underwriting standards and is on an accrual basis.

Note B: Second lien position; fixed or adjustable below current market interest rate; fixed month term to maturity; payments – due in full at maturity. Note B is underwritten in accordance with the Bank’s customary underwriting standards, except for the below market interest rate and payment terms, and is on a nonaccrual basis.

9. Other Real Estate Owned. The following table reflects the changes in other real estate owned (“OREO”) during the six months ended June 30, 2015 and 2014:

	Beginning							Fair Value			End
	of Period		Additions		Sales, net			Adjustments			of Period
	(In thousands)
June 30, 2015
OREO	$	7,756	$	729	$	(1,390	)	$	(86	)	$	7,009

June 30, 2014
OREO	$	9,354	$	1,206	$	(1,820	)	$	(11	)	$	8,729

Fair value adjustments made are recorded in order to adjust the carrying values of OREO properties to estimated fair market values. In most cases, estimated fair market values are derived from an initial appraisal, an updated appraisal or other forms of internal evaluations. In certain instances when a listing agreement is renewed for a lesser amount, carrying values will be adjusted to the lesser fair value amount. Additionally, in certain instances when an offer to purchase is received near the end of a quarterly accounting period for less than the carrying value, and the sale does not close until the next accounting period, the carrying value will be adjusted to the lesser fair value amount.

10. Fair Value Measurement. Fair value is defined as the price that would be received on the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value hierarchy prioritizes the inputs of valuation techniques used to measure fair value of nonfinancial assets and liabilities. The inputs are evaluated and an overall level for the fair value measurement is determined. This overall level is an indication of the market observability of the fair value measurement. In order to determine the fair value, the Bank must determine the unit of account, highest and best use, principal market, and market participants. These determinations allow the Bank to define the inputs for fair value and level of hierarchy. The Bank groups financial assets at fair value in the three levels listed below based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

Level 1: inputs to the valuation methodology are quoted prices in active markets for identical assets or liabilities that the Bank has the ability to access at the measurement date. A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available. The types of assets carried at Level 1 fair value generally include investments such as U. S. Treasury and U. S. government agency securities.

Level 2: inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets and price quotations can vary substantially either over time or among market makers. The types of assets carried at Level 2 fair value generally include mortgage-backed securities issued by Government Sponsored Enterprises (“GSEs”), municipal bonds, corporate debt securities, mortgage loans held for sale and bank-owned life insurance.

Level 3: inputs to the valuation methodology are unobservable to the extent that observable inputs are not available. Unobservable inputs are developed based on the best information available in the circumstances and might include the Bank’s own assumptions. The Bank shall not ignore information about market participant assumptions that is reasonably available without undue cost and effort. The types of assets carried at Level 3 fair value generally include investments backed by non-traditional mortgage loans or certain state or local housing agency obligations. Level 3 also includes impaired loans and other real estate owned.

10. Fair Value Measurement (Continued)

The following table presents assets measured at fair value on a recurring basis as of June 30, 2015 and December 31, 2014:

	Fair Value			Quoted Prices In Active Markets for Identical Assets		Significant Observable Inputs-Other			Significant Unobservable Inputs
	(In thousands)
Description	6/30/15			Level 1		Level 2			Level 3
Securities available for sale:
Government securities	$	31,214		$	31,214	$	-		$	-
Mortgage-backed securities		141,192			-		141,192			-
Municipal securities		59,101			-		59,101			-
Corporate bonds		28,613			-		28,613			-
Mortgage loans held for sale		6,171			-		6,171			-
Bank-owned life insurance		15,380			-		15,380			-
Interest rate swap		(416	)		-		(416	)		-
Total June 30, 2015	$	281,255		$	31,214	$	250,041		$	-

Description	12/31/14			Level 1		Level 2			Level 3
Securities available for sale:
Government securities	$	31,232		$	31,232	$	-		$	-
Mortgage-backed securities		174,280			-		174,280			-
Municipal securities		55,702			-		55,702			-
Corporate bonds		31,085			-		31,085			-
Mortgage loans held for sale		4,793			-		4,793			-
Bank-owned life insurance		15,125			-		15,125			-
Interest rate swap		(405	)		-		(405	)		-
Total December 31, 2014	$	311,812		$	31,232	$	280,580		$	-

The following table presents assets measured at fair value on a non-recurring basis as of June 30, 2015 and December 31, 2014:

	Fair Value		Quoted Prices In Active Markets for Identical Assets		Significant Observable Inputs-Other		Significant Unobservable Inputs
	(In thousands)
Description	6/30/15		Level 1		Level 2		Level 3
Impaired loans, net	$	17,783	$	-	$	-	$	17,783
Other real estate owned		7,009		-		-		7,009
Total June 30, 2015	$	24,792	$	-	$	-	$	24,792

Description	12/31/14		Level 1		Level 2		Level 3
Impaired loans, net	$	19,480	$	-	$	-	$	19,480
Other real estate owned		7,756		-		-		7,756
Total December 31, 2014	$	27,236	$	-	$	-	$	27,236

Impaired loans at June 30, 2015 and December 31, 2014 includes $15.5 million and $17.3 million, respectively, of loans identified as impaired, even though an impairment analysis calculated pursuant to ASC 310-10-35 resulted in no allowance.

Quoted market price for similar assets in active markets is the valuation technique for determining fair value of securities available for sale and held to maturity. Unrealized gains on available for sale securities are included in the “accumulated other comprehensive income” component of the Stockholders’ Equity section of the Consolidated Statements of Financial Condition. The estimated fair value of loans held for sale is based on commitments from investors within the secondary market for loans with similar characteristics.

The Company does not record loans held for investment at fair value on a recurring basis. However, when a loan is considered impaired an impairment write down is taken based on the loan’s estimated fair value. 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 loans not requiring a write down represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans, and are not included above.

10. Fair Value Measurement (Continued)

Impaired loans where a write down is taken based on 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 records the impaired loan as non-recurring Level 2. 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 classifies the impaired loan as non-recurring Level 3.

OREO is recorded at fair value upon transfer of the loans to foreclosed assets, based on the appraised market value of the property. OREO is reviewed quarterly and values are adjusted as determined appropriate. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When an appraised value is not available or management determines the fair value of the collateral is impaired below the appraised value and there is no observable market price, the Company classifies the foreclosed asset as non-recurring Level 3. Fair value adjustments of $41,430 and $85,658, respectively, were made to OREO during the three and six months ended June 30, 2015, compared to fair value adjustments of $11,200 made to OREO during both the three and six months ended June 30, 2014.

Net gains realized on sales of OREO included in earnings for the three and six months ended June 30, 2015 and 2014, respectively, are reported in other revenues as follows:

		Three Months Ended 6/30/15				Three Months Ended 6/30/14				Six months Ended 6/30/15				Six months Ended 6/30/14
Net gains on sales of OREO		$	27,349			$	33,999			$	73,216			$	73,419

No liabilities were measured at fair value on a recurring or non-recurring basis at June 30, 2015 or December 31, 2014.

11. Fair Value of Financial Instruments. The following table represents the recorded carrying values, estimated fair values and the fair value hierarchy within which the fair value measurements of the Company’s financial instruments are categorized at June 30, 2015 and December 31, 2014:

	Level in	June 30, 2015						December 31, 2014
	Fair Value	Estimated			Carrying			Estimated			Carrying
	Hierarchy	Fair Value			Amount			Fair Value			Amount
		(In thousands)
Financial assets:
Cash and due from banks	Level 1	$	21,098		$	21,098		$	23,281		$	23,281
Interest-bearing deposits in other banks	Level 1		15,503			15,503			32,836			32,836
Securities available for sale	Level 1		31,214			31,214			31,232			31,232
Securities available for sale	Level 2		228,906			228,906			261,067			261,067
Securities held to maturity	Level 2		513			508			512			507
Loans held for sale	Level 2		6,171			6,171			4,793			4,793
Loans and leases HFI, net, less impaired loans	Level 2		522,242			518,490			460,062			453,436
Stock in FHLB of Atlanta	Level 2		2,157			2,157			607			607
Accrued interest receivable	Level 2		2,922			2,922			2,852			2,852
Interest rate swap	Level 2		(416	)		(416	)		(405	)		(405	)
Bank-owned life insurance	Level 2		15,380			15,380			15,125			15,125
Impaired loans HFI, net	Level 3		17,783			17,783			19,480			19,480
Mortgage servicing rights	Level 3		2,338			1,213			2,347			1,178

Financial liabilities:
Deposits	Level 2	$	773,804		$	772,869		$	788,488			788,280
Junior subordinated debentures	Level 2		10,310			10,310			10,310			10,310

Fair values of financial assets and liabilities have been estimated using data which management considers as the best available, and estimation methodologies deemed suitable for the pertinent category of financial instrument. With regard to financial instruments with off-balance sheet risk, it is not practicable to estimate the fair value of future financing commitments. The estimation methodologies used by the Bank are as follows:

Financial assets:

Cash and Due from banks and Interest –Bearing Deposits in Other Banks: The carrying amounts for cash and due from banks and interest bearing deposits in other banks are equal to their fair value. Fair value hierarchy Input level 1.

11. Fair Value of Financial Instruments (Continued)

Investment Securities Available for Sale and Held to Maturity: The estimated fair value of investment securities is provided in Note 4 of the Notes to Consolidated Financial Statements. These are based on quoted market prices, when available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Fair value hierarchy Input levels 1 and 2.

Loans Held for Sale. The estimated fair value of loans held for sale is based on commitments from investors within the secondary market for loans with similar characteristics. Fair value hierarchy Input level 2.

Loans and Leases Held for Investment, net, less Impaired Loans: Fair values are estimated for portfolios of loans and leases held for investment with similar financial characteristics. Loans and leases are segregated by collateral type and by fixed and variable interest rate terms. The fair value of each category is determined by discounting scheduled future cash flows using current interest rates offered on loans or leases with similar characteristics. Fair value hierarchy Input level 2.

Stock in Federal Home Loan Bank of Atlanta: The fair value for FHLB stock approximates carrying value, based on the redemption provisions of the Federal Home Loan Bank. Fair value hierarchy Input level 2.

Accrued Interest Receivable: The carrying amount of accrued interest receivable approximates fair value because of the short maturities of these instruments. Fair value hierarchy Input level 2.

Interest Rate Swap: The Company has entered into a pay-fixed receive-floating swap to hedge our $10.0 million of floating rate Trust Preferred debt. The primary objective of the swap is to minimize future interest rate risk. The effective date of the swap is December 30, 2014. Fair value hierarchy Input level 2.

Bank-Owned Life Insurance: The carrying value of life insurance approximates fair value because this investment is carried at cash surrender value, as determined by the issuer. Fair value hierarchy Input level 2.

Impaired Loans Held for Investment, Net: Fair values for impaired loans and leases are estimated based on discounted cash flows or underlying collateral values, where applicable. Fair value hierarchy Input Level 3.

Mortgage Servicing Rights (“MSRs”): The fair value of MSRs is estimated for those loans sold with servicing retained. The loans are stratified into pools by product type and within product type by interest rate and maturity. The fair value of the MSR is based upon the present value of estimated future cash flows using current market assumptions for prepayments, servicing costs and other factors. Fair value hierarchy Input level 3.

Financial liabilities:

Deposits: The fair value of demand deposits is the amount payable on demand at the reporting date. The fair value of certificates of deposits is estimated using rates currently offered for similar instruments with similar remaining maturities. Fair value hierarchy Input level 2.

Junior Subordinated Debentures: The carrying amount of junior subordinated debentures approximates fair value of similar instruments with similar characteristics and remaining maturities. Fair value hierarchy Input level 2.

12. Deposits. The following table presents the distribution of the Bank’s deposit accounts as of June 30, 2015 and December 31, 2014:

	6/30/15		12/31/14
	(In thousands)
Demand accounts:
Non-interest bearing checking	$	158,929	$	147,544
Interest bearing checking		169,736		180,558
Money market		69,646		87,914
Savings accounts		131,078		117,933
Certificate accounts		243,480		254,331
Total deposits	$	772,869	$	788,280

At June 30, 2015, the scheduled maturities of certificate accounts were as follows:

	Less than $100,000		$100,000 or more		Total
	(In thousands)
Three months or less	$	18,415	$	10,197	$	28,612
Over three months through one year		55,150		43,630		98,780
Over one year through three years		54,431		44,551		98,982
Over three years to five years		7,775		9,331		17,106
Total time deposits	$	135,771	$	107,709	$	243,480

The aggregate amount of time deposits with balances of $100,000 or more was $107,709,106 and $111,523,043 at June 30, 2015 and December 31, 2014, respectively.

13. Stock-Based Compensation. The Company had two stock-based compensation plans at June 30, 2015. The shares outstanding are for grants under the Company’s 1997 Stock Option Plan (the “1997 Plan”) and the 2008 Equity Incentive Plan (the “2008 Plan”). The 1997 Plan matured on April 8, 2008 and no additional options may be granted under the 1997 Plan. At June 30, 2015, the 1997 Plan had 30,750 granted unexercised stock option shares. At June 30, 2015, the 2008 Plan includes 142,250 granted unexercised stock option shares, 10,425 granted nonvested restricted stock award shares and 801,850 shares available to be granted.

Stock Option Grants. Options granted under the 2008 Plan are granted at the closing price of the Company’s common stock on the NASDAQ Stock Market on the date of grant. Stock options expire ten years from the date of grant and vest over service periods ranging from one year to five years. The Company settles stock option exercises with authorized unissued shares. The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option pricing model. The risk-free interest rate is based on the U.S. Treasury rate for the expected life at the time of grant. Volatility is based on the average volatility of the Company based upon previous trading history. The expected life and forfeiture assumptions are based on historical data. Dividend yield is based on the yield at the time of the option grant.

A summary of option activity under the Plans as of June 30, 2015 and 2014, and changes during the six month periods ended June 30, 2015 and 2014 is presented below:

	Options Outstanding			Price		Aggregate Intrinsic Value
Period Ended June 30, 2015:
Outstanding at December 31, 2014		169,500		$	11.38
Granted		14,000			8.01
Forfeited		(3,000	)		7.13
Expired		(7,500	)		17.47
Exercised		-			-
Outstanding at June 30, 2015		173,000			10.92	$	186,775
Vested and Exercisable at June 30, 2015		113,100		$	13.19	$	103,284

Period Ended June 30, 2014:
Outstanding at December 31, 2013		160,375		$	11.84
Granted		19,000			8.34
Forfeited		(2,250	)		6.52
Expired		(1,875	)		19.88
Exercised		-			-
Outstanding at June 30, 2014		175,250			11.44	$	197,365
Vested and Exercisable at June 30, 2014		111,450		$	14.47	$	74,109

The following weighted-average assumptions were used for grants awarded in the six months ended June 30, 2015 and 2014:

	Six Months Ended 6/30/15			Six Months Ended 6/30/14
Dividend growth rate		1.0	%		1.0	%
Expected volatility		96.9	%		52.7	%
Average risk-free interest rate		1.5	%		1.9	%
Expected lives - years		7			6

The following table summarizes additional information about the Company’s outstanding options and exercisable options as of June 30, 2015, including weighted-average remaining contractual term expressed in years ("Life") and weighted average exercise price (“Price”):

	Outstanding						Exercisable
Range of Exercise Price	Shares		Life		Price		Shares		Price
$4.00 – 10.00		104,250		7.35	$	6.20		44,350	$	5.61
$10.01 – 17.00		27,000		4.20		11.01		27,000		11.01
$17.01 – 26.00		32,250		2.54		21.03		32,250		21.03
$26.01 – 34.00		9,500		1.19		28.14		9,500		28.14
		173,000		5.63	$	10.92		113,100	$	13.19

13. Stock-Based Compensation (Continued)

A summary of nonvested option shares as of June 30, 2015 and 2014, and vesting changes during the six months ended June 30, 2015 and 2014, is presented below:

	Shares			Price
Period Ended June 30, 2015:
Nonvested at December 31, 2014		62,700		$	6.14
Granted		14,000			8.01
Forfeited		(2,400	)		7.13
Vested		(14,400	)		5.74
Nonvested at June 30, 2015		59,900		$	6.64

Period Ended June 30, 2014:
Nonvested at December 31, 2013		58,750		$	5.38
Granted		19,000			8.34
Forfeited		(2,250	)		6.52
Vested		(11,700	)		5.73
Nonvested at June 30, 2014		63,800		$	6.16

There were no income tax benefits realized from the exercise of stock options for the three and six months ended June 30, 2015 or 2014. There was no intrinsic value for options exercised during the three and six months ended June 30, 2015 or 2014, as no options were exercised during the respective periods.

Total compensation expense charged to income for stock options was $10,553 and $21,176, respectively, for the three and six months ended June 30, 2015, compared to compensation expense of $8,359 and $16,613, respectively, for the three and six months ended June 30, 2014. As of June 30, 2015, total unrecognized compensation cost on granted unexercised shares was $166,969, and is expected to be recognized during the next 4.75 years.

Restricted Stock Awards. The Company measures the fair value of restricted shares based on the price of its common stock on the grant date and compensation expense is recorded over the vesting period. During the six months ended June 30, 2015 and 2014, none and 13,900 restricted stock awards, respectively, were granted with a four year vesting period. Total compensation expense recognized for restricted stock awards for the three and six months ended June 30, 2015 was $7,263 and $14,526, respectively, compared to $7,263 and $12,105, respectively, for the three and six months ended June 30, 2014. As of June 30, 2015, there was $75,048 of total unrecognized compensation cost related to nonvested restricted stock granted under the 2008 Plan, which will be recognized over a remaining period of 2.75 years. A summary of nonvested restricted stock awards as of June 30, 2015 and 2014, and vesting changes during the respective three month periods is presented below:

	Shares			Price
Period Ended June 30, 2015:
Nonvested at December 31, 2014		13,900		$	8.36
Granted		-			-
Vested		(3,475	)		8.36
Forfeited		-			-
Nonvested at June 30, 2015		10,425		$	8.36

Period Ended June 30, 2014:
Nonvested at December 31, 2013		-		$	-
Granted		13,900			8.36
Vested		-			-
Forfeited		-			-
Nonvested at June 30, 2014		13,900		$	8.36

The following table reflects the combined impact of fair value compensation cost recognition for stock options and restricted stock awards on income before income taxes, net income, basic earnings per share and diluted earnings per share for the three and six month periods ended June 30, 2015 and 2014:

	Three Months Ended 6/30/15		Three Months Ended 6/30/14		Six Months Ended 6/30/15		Six Months Ended 6/30/14
Decrease net income before income taxes	$	17,816	$	15,622	$	35,702	$	28,718
Decrease net income	$	17,816	$	15,622	$	35,702	$	28,718
Decrease basic earnings per share	$	0.00	$	0.00	$	0.00	$	0.00
Decrease diluted earnings per share	$	0.00	$	0.00	$	0.00	$	0.00

14. Goodwill and Other Intangibles

The following table presents activity for goodwill and other intangible assets for the six months ended June 30, 2015 and 2014, respectively:

	Goodwill		Other Intangibles			Total
Six Months Ended June 30, 2015:
Balance at December 31, 2014	$	4,218,576	$	2,182,909		$	6,401,485
Amortization		—		(143,697	)		(143,697	)
Balance at June 30, 2015	$	4,218,576	$	2,039,212		$	6,257,788

Six Months Ended June 30, 2014:
Balance at December 31, 2013	$	4,218,576	$	7,860		$	4,226,436
Amortization		—		(7,860	)		(7,860	)
Balance at June 30, 2014	$	4,218,576	$	—		$	4,218,576

The following table presents a rollforward of the gross carrying amount, new acquisitions, accumulated amortization and net book value for the Company’s core deposit intangible (CDI), which is the only identifiable intangible asset subject to amortization at June 30, 2015 and December 31, 2014:

	Other Intangibles
Gross carrying amount at December 31, 2013 (1)	$	287,832
Accumulated amortization		(279,972	)
Net book value at December 31, 2013		7,860
Amortization		(7,860	)
Acquisitions (2)		2,182,909
Net book value at December 31, 2014		2,182,909
Accumulated amortization		(143,697	)
Net book value at June 30, 2015	$	2,039,212

________________

(1)

CDI related to the acquisition of Green Street Financial Corp on November 30, 1999.

(2)

CDI related to the acquisition of branch offices from Bank of America, N.A. on December 12, 2014.

The following table presents estimated future amortization expense of the CDI. At December 31, 2014, the remaining life of the CDI was 10 years.

2015	$	143,697
2016		284,327
2017		241,678
2018		223,002
2019		223,002
Thereafter		923,506
Total	$	2,039,212

15. Regulatory Capital. The Bank is subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Management believes, as of June 30, 2015, that the Bank meets all capital adequacy requirements to which it is subject. The Company’s most significant asset is its investment in the Bank. Consequently, the information concerning capital ratios is essentially the same for the Company and the Bank. Beginning January 1, 2015, banks became subject to new Basel III Capital Rules. As a result, certain items in the risk-based capital calculation have changed. In addition, a new ratio, Common Equity Tier 1 Risk-Based Capital Ratio, is now measured and monitored. For the Bank and given its capital structure, the Common Equity Tier 1 Risk-Based Capital Ratio and the Tier 1 Risk-Based Capital Ratio are identical. The Bank's actual regulatory capital amounts and ratios as of June 30, 2015, and December 31, 2014, are listed below:

	June 30, 2015					December 31, 2014
Regulatory Capital Ratios	Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
Total Risk-Based Capital Ratio (to Risk Weighted Assets)	$	83,597		13.9	%	$	82,670		14.6	%
Common Equity Tier 1 Risk-Based Capital Ratio (to Risk Weighted Assets)		76,064		12.6			—		—
Tier 1 Risk-Based Capital Ratio (to Risk Weighted Assets)		76,064		12.6			75,568		13.3
Tier 1 Leverage Capital Ratio (to Average Assets)		76,064		8.8			75,568		9.7

16. Junior Subordinated Debentures

The Company has sponsored a trust, First South Preferred Trust I (the Trust), of which 100% of the common equity is owned by the Company. The Trust was formed for the purpose of issuing company-obligated preferred trust securities (the Preferred Trust Securities) to third-party investors and investing the proceeds from the sale of such Preferred Trust Securities solely in junior subordinated debt securities of the Company (the Debentures). The Debentures held by the Trust are the sole assets of the Trust. Distributions on the Preferred Trust Securities issued by the Trust are payable quarterly at a rate equal to the interest rate being earned by the Trust on the Debentures held by that Trust. The Preferred Trust Securities are subject to mandatory redemption, in whole or in part, upon repayment of the Debentures. The Company has entered into an agreement, which fully and unconditionally guarantees the Preferred Trust Securities subject to the terms of the guarantee. The Debentures held by the Trust are first redeemable, in whole or in part, by the Company on or after September 30, 2008. Subject to certain limitations, the Junior Subordinated Debentures qualify as Tier 1 capital for the Company under current Federal Reserve Board guidelines.

In July of 2013, the banking regulators issued the final Basel III capital rules. Under these rules, bank holding companies with less than $15 billion in consolidated total assets as of December 31, 2009, that issued trust preferred securities prior to May 19, 2010, are permanently grandfathered as Tier 1 or Tier 2 capital.

Consolidated debt obligations as of June 30, 2015 related to a subsidiary Trust holding solely Debentures of the Company follows:

LIBOR + 2.95% junior subordinated debentures owed to First South Preferred Trust I due September 26, 2033	$	10,000,000
LIBOR + 2.95% junior subordinated debentures owed to First South Preferred Trust I due September 26, 2033		310,000
Total junior subordinated debentures owed to unconsolidated subsidiary trust	$	10,310,000

The trust preferred securities bear interest at three-month LIBOR plus 2.95% payable quarterly. Effective December 30, 2014, the Company swapped the interest rate on these debentures to a fixed rate of 5.54% for the ensuing five year period. This strategy was executed to provide the Company with protection to a rising rate environment.

17. Interest Rate Hedging. The Company has executed certain strategies targeted at hedging the impact of rising interest rates on its future earnings. The Company has entered into a pay-fixed receive-floating swap to hedge our $10.0 million of floating rate Trust Preferred debt. The primary objective of the swap is to minimize future interest rate risk. The effective date of the swap was December 30, 2014, and it has a five year term.

18. Recent Accounting Pronouncements. The following are Accounting Standards Updates (“ASU”) recently issued by the Financial Accounting Standards Board (“the FASB”) and their expected impact on the Company. Other accounting standards issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s consolidated financial statements.

In January 2015, the FASB issued ASU 2015-01, Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items. The objective of this ASU is to simplify the income statement presentation requirements by eliminating the concept of extraordinary items. Extraordinary items are events and transactions that are distinguished by their unusual nature and by the infrequency of their occurrence. Eliminating the extraordinary classification simplifies income statement presentation by altogether removing the concept of extraordinary items from consideration. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The Company will evaluate the impact this ASU may have on its consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs. The objective of this ASU is to simplify the presentation of debt issuance costs. The amendments in this Update would require that debt issuance costs be presented in the balance sheet as a direct reduction from the carrying amount of debt liability, consistent with debt discounts and premiums. The recognition and measurement guidance for debt issuance costs would not be affected by the amendments in this Update. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The Company will evaluate the impact this ASU may have on its consolidated financial statements.

In June 2015, the FASB issued ASU 2015-10, Technical Corrections and Improvements. The amendments in this Update represent changes in the Codification, correct unintended application of guidance, or make minor improvements to the Codification that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The Company will evaluate the impact this ASU may have on its consolidated financial statements.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

First South Bancorp, Inc. (the "Company") was formed for the purpose of issuing common stock and owning 100% of the stock of First South Bank (the "Bank") and operating through the Bank a commercial banking business. The discussion below focuses primarily on the Bank's results of operations. The Bank has one significant operating segment, providing commercial and retail banking services to its markets located in the state of North Carolina. The Company’s common stock is traded on the NASDAQ Global Select Market under the symbol "FSBK".

Acquisition of Branch Offices. The Company has previously reported that the Bank completed the acquisition of nine branch banking offices in eastern North Carolina (the “acquisition”) from Bank of America, N.A. (“BOA”) on December 12, 2014. The branch offices are located in Elizabethtown, Goldsboro, Kenansville, Kinston, Kitty Hawk, Morehead City, Mount Olive, Wallace and Wilson, North Carolina. Following the purchase of these branches, the Bank expanded its franchise of banking offices and its geographic footprint to become a more prominently positioned community bank in eastern North Carolina. The Bank has a history of serving eastern and central North Carolina and these new markets are located in the center of its franchise. Expansion into these new markets supports a strategy to capitalize on opportunities that leverage capital, create economies of scale, increase operating efficiency and enhance shareholder value.

The acquisition was accounted for using the purchase method of accounting and the Bank assumed the deposits of the nine BOA branches for a premium of approximately 1.35% of the assumed deposits. Initially, the Bank invested the net funds received into a mix of short and intermediate term investment securities until the funds can be converted to higher yielding assets. This Quarterly Report on Form 10-Q includes discussion of how the branch acquisition impacted our results of operations for the quarter ended June 30, 2015.

Comparison of Financial Condition at June 30, 2015, and December 31, 2014. Total assets increased to $899.7 million at June 30, 2015, from $885.9 million at December 31, 2014. Earning assets increased to $825.9 million at June 30, 2015 from $810.9 million at December 31, 2014. The ratio of earning assets to total assets was 91.8% at June 30, 2015, compared to 91.5% at December 31, 2014. The increase results primarily from net growth in the loan and lease receivable portfolio, and partially offset by the sale of investment securities and a reduction in the level of cash on our balance sheet to help fund loan growth.

Interest-bearing deposits with banks declined to $15.5 million at June 30, 2015, from $32.8 million at December 31, 2015. Overnight deposits are available to fund securities purchases, loan originations, deposit withdrawals, liquidity management activities and daily operations of the Bank.

The investment securities portfolio declined to $260.6 million at June 30, 2015, from $292.8 million at December 31, 2014. During the six months ended June 30, 2015, there were $5.3 million of purchases, $22.8 million of sales, $12.4 million of principal repayments, a $1.5 million decline in unrealized holding gains, $452,000 of net realized gains and $1.1 million of net accretion of premiums and discounts. As previously noted, in 2014 the Bank implemented a strategy to pre-invest a large portion of the anticipated BOA transaction proceeds into short and intermediate term investment securities until the funds can be converted to higher yielding assets. During the first six months of 2015, the $22.8 million of investment securities sales was primarily used to fund our loan portfolio growth and time deposit maturities. The Bank may also sell investment securities to manage sensitivity to future interest rate changes and/or to support funding needs. See “Note 4. Investment Securities” of “Notes to Consolidated Financial Statements (Unaudited)” for additional information.

Total loans held for sale increased to $6.2 million at June 30, 2015, from $4.8 million at December 31, 2014, reflecting the net effect of current mortgage lending activity. During the six months ended June 30, 2015, there were $16.2 million of loan sales, $17.1 million of loan originations net of principal payments and $526,000 of net realized gains. Proceeds from mortgage loan sales are primarily used to fund the Bank’s liquidity needs, including loan originations, deposit withdrawals and general bank operations. Loans serviced for others declined to $300.8 million at June 30, 2015, from $306.8 million at December 31, 2014, as principal repayments exceeded the volume of new loan sales. See “Note 5. Loans Held for Sale” of “Notes to Consolidated Financial Statements (Unaudited)” for additional information.

Total loans and leases held for investment grew by $63.2 million during the current six month period. This reflects eight consecutive quarters of net growth in loans and leases held for investment. As a result of this net growth, total loans and leases held for investment increased to $543.6 million at June 30, 2015, from $480.4 million at December 31, 2014. During the six months ended June 30, 2015, there were $64.2 million of originations net of principal payments and $729,000 of transfers to other real estate owned.

Improving asset quality metrics continues as a key component of the Bank’s short-term and long-term performance objectives. Loans held for investment on nonaccrual status, including restructured loans (“TDRs”) on nonaccrual status declined to $4.3 million at June 30, 2015, from $5.0 million at December 31, 2014. The decline in non-accrual loans results primarily from management’s resolution of nonaccrual loan relationships during the current period. The ratio of loans held for investment on nonaccrual status to total loans held for investment was 0.8% at June 30, 2015, compared to 1.1% at December 31, 2014.

Loans are generally placed on nonaccrual status and accrued unpaid interest is reversed when management determines that collectability of interest, but not necessarily principal, is doubtful. This generally occurs when payments are delinquent in excess of 90 days. Consumer loans more than 180 days past due are generally charged off or a specific allowance is provided for any expected loss. All other loans are charged off when management concludes that they are uncollectible. Management has thoroughly evaluated all nonperforming loans and believes they are either well collateralized or adequately reserved. However, there can be no assurance in the future that regulators, increased volume and risks in the loan portfolio, adverse changes in economic conditions or other factors will not require additional adjustments to the allowance for loan and lease losses. Aside from the loans identified on nonaccrual status, there were no loans at June 30, 2015 where known information about possible credit problems of borrowers caused management to have serious concerns as to the ability of the borrowers to comply with their current loan repayment terms.

The Bank maintains the allowance for loan and lease losses (“ALLL”) at levels management believes is adequate to absorb probable losses inherent in the loan and lease portfolio. The Bank has developed policies and procedures for assessing the adequacy of the ALLL that reflect the assessment of credit risk and impairment analysis. This assessment includes a quarterly analysis of qualitative and quantitative trends in the levels of classified loans. In developing this analysis, the Bank relies on historical loss experience, estimates and exercises judgment in assessing credit risk. Future assessments of credit risk may yield different results, depending on changes in the qualitative and quantitative trends, which may require adjustments in the ALLL.

The Bank uses various modeling, calculation methods and estimation tools for measuring credit risk and performing impairment analysis, which is the basis used in developing the ALLL. The factors supporting the ALLL do not diminish the fact that the entire ALLL is available to absorb probable losses in the loan and leases portfolio. The Bank’s principal focus is on the adequacy of the ALLL. Based on the overall credit quality of the loan and lease portfolio, management believes the ALLL is adequate and has been established pursuant to generally accepted accounting principles, and has taken into account the views of its regulators and the current economic environment.

The quarterly assessment of ALLL adequacy includes an analysis of actual historical loss percentages of both classified and pass loans, as well as qualitative risk factors allocated among specific categories of loans. In developing this analysis, the Bank relies on actual loss history for the most recent twelve quarters and uses management’s best judgment in assessing credit risk. The assessment of qualitative factors includes various subjective components assessed in terms of basis points used in determining the ALLL adequacy. The evaluation of qualitative risk factors will result in a positive or negative adjustment to the ALLL methodology. Adjustments for each qualitative risk component may range from +25 basis points to -10 basis points. A component score of 0 basis points indicates no effect on the ALLL. A component rating of +25 basis points indicates the assessed maximum potential of increased risk to the ALLL adequacy. A -10 basis point component rating indicates the most positive effect on the ALLL.

The ALLL was $7.4 million at June 30, 2015, compared to $7.5 million at December 31, 2014. During the six months ended June 30, 2015, there were $140,000 of provisions for credit losses and $296,000 of net charge-offs. The ratio of the ALLL to loans and leases held for investment was 1.35% at June 30, 2015, compared to 1.57% and December 31, 2014. See “Note 7. Allowance for Loan and Lease Losses” of “Notes to Consolidated Financial Statements (Unaudited)”and “Critical Accounting Policies - Loan Impairment and Allowance for Loan and Lease Losses” for additional information.

Based on an impairment analysis of loans held for investment, there were $18.4 million of loans classified as impaired, net of $415,000 in write-downs at June 30, 2015, compared to $20.3 million classified as impaired, net of $375,000 in write-downs at December 31, 2014. At June 30, 2015 and December 31, 2014, the ALLL included $619,000 and $792,000 specifically provided for impaired loans, respectively.

A loan is considered impaired, based on current information and events, if it is probable that the Bank is unable to collect scheduled payments of principal and interest when due according to the contractual terms of the loan arrangement. All collateral-dependent loans are measured for impairment based on the fair value of the collateral, while uncollateralized loans and other loans determined not to be collateral dependent are measured for impairment based on the present value of expected future cash flows discounted at the historical effective interest rate. The Bank uses several factors in determining if a loan is impaired. The internal asset classification procedures include a thorough review of significant loans and lending relationships and include the accumulation of related data. This data includes loan payments status, borrowers’ financial data and borrowers’ operating factors such as cash flows, operating income or loss, and various other matters. See “Note 6. Loans Held for Investment”, “Note 7. Allowance for Loan and Lease Losses” and “Note 8. Troubled Debt Restructurings” of “Notes to Consolidated Financial Statements (Unaudited)” for additional information.

Other real estate owned (“OREO”) acquired from foreclosures declined to $7.0 million at June 30, 2015, from $7.8 million at December 31, 2014. During the six months ended June 30, 2015, there were $1.4 million of disposals, $86,000 of valuation adjustments and $729,000 of additions. OREO consists of residential and commercial properties, developed lots and raw land. The Bank believes the adjusted carrying values of these properties are representative of their fair market values, although there can be no assurances that ultimate sales will be equal to or greater than the carrying values. See “Note 9. Other Real Estate Owned” and “Note 10. Fair Value Measurement” of “Notes to Consolidated Financial Statements (Unaudited)” for additional information.

The Bank’s investment in bank-owned life insurance (“BOLI”) was $15.4 million at June 30, 2015, compared to $15.1 million at December 31, 2014, due to higher policy cash values. The Bank investment returns from the BOLI are used to recover a portion of the cost of providing benefit plans to our employees.

Goodwill related to prior period acquisitions was $4.2 million at June 30, 2015 and December 31, 2014, respectively, and is not being amortized pursuant to provisions of financial accounting standards. The balance of the Company’s goodwill is tested for impairment annually, and the annual impairment testing performed as of December 31, 2014 resulted in no goodwill impairment. Identifiable intangible assets were $2.0 million at June 30, 2015, compared to $2.2 million at December 31, 2014, reflecting the core deposit intangible associated with the BOA transaction, which is being amortized over a ten year period. See “Note 14. Goodwill and Other Intangibles” of “Notes to Consolidated Financial Statements (Unaudited)” for additional information.

Prepaid expenses, other assets and income tax receivable increased by $389,000 during the current six month period to $9.9 million at June 30, 2014, from $9.5 million at December 31, 2014, primarily reflecting changes in our deferred tax assets.

Total deposits declined to $772.9 million at June 30, 2015, from $788.3 million at December 31, 2014. For the current six month period, non-maturity deposits (personal and business checking accounts and money market accounts) and savings accounts declined to $529.4 million at June 30, 2015, from $533.9 million at December 31, 2014. However, during the first half of 2015 our level of non-interest bearing deposits grew by $11.4 million to $158.9 million. Certificates of deposits declined to $243.5 million or 31.5% of total deposits at June 30, 2015, from $254.3 million or 32.3% of total deposits at December 31, 2014.

The Bank strives to manage deposits cost by monitoring the volume and rates paid on maturing CDs in relationship to current funding needs and market interest rates. The Bank did not renew all maturing CDs during the six months ended June 30, 2015, but was able to reprice some of the maturing CDs at lower rates, and a portion migrated internally to non-maturity deposits. See “Note 12. Deposits” of “Notes to Consolidated Financial Statements (Unaudited)” and “Interest Expense” below for additional information.

There were $32.0 million Federal Home Loan Bank (“FHLB”) borrowings outstanding at June 30, 2015, compared to none at December 31, 2014. During 2014, the Bank used FHLB borrowings as a low cost source of funds to support the loan portfolio growth and the net decline in total deposits. The Bank uses FHLB borrowings as a funding source to provide an effective means of managing its overall cost of funds and to manage its exposure to interest rate risk.

There were $10.3 million of junior subordinated debentures outstanding at both June 30, 2015 and December 31, 2014. See “Note 16. Junior Subordinated Debentures” of “Notes to Consolidated Financial Statements (Unaudited)” for additional information.

Stockholders' equity declined to $80.1 million at June 30, 2015, from $80.4 million at December 31, 2014. This decline primarily reflects the $1.9 million of net income earned for six months ended June 30, 2015, net of a $958,000 decline in accumulated other comprehensive income resulting from the mark-to-market adjustment of the available-for-sale securities portfolio, $478,000 of dividends declared, and $793,000 used to acquire shares of the Company’s common stock pursuant to our repurchase program. There were 9,503,964 common shares outstanding at June 30, 2015, compared to 9,598,007 shares outstanding at December 31, 2014, reflecting the net effect of 3,359 shares issued pursuant to the vesting of restricted stock awards and 97,402 shares purchased through the stock repurchase program. See "Consolidated Statements of Changes in Stockholders' Equity" for additional information.

Accumulated other comprehensive income declined to $2.2 million at June 30, 2015, from $3.2 million at December 31, 2014, reflecting a decline in the mark-to-market adjustment in net unrealized gains in the available for sale investment securities portfolio, based on current market prices. See “Consolidated Statements of Comprehensive Income” and “Note 3. Comprehensive Income and Accumulated Other Comprehensive Income” of “Notes to Consolidated Financial Statements (Unaudited)” for additional information.

The tangible equity to assets ratio declined to 8.21% at June 30, 2015, from 8.36% at December 31, 2014. Despite the decline in tangible equity, our tangible book value per common share increased to $7.77 at June 30, 2015, from $7.71 at December 31, 2014 as a result of our share repurchases.

The Bank is subject to various regulatory capital requirements administered by its federal and state banking regulators. As of June 30, 2015, the Bank's regulatory capital ratios were in excess of all regulatory requirements and the Bank’s regulatory capital position is categorized as well capitalized. There are no conditions or events since June 30, 2015 that management believes have changed the Bank's well capitalized category. See “Note 15. Regulatory Capital” of “Notes to Consolidated Financial Statements (Unaudited)” and “Liquidity and Capital Resources” below for additional information.

Comparison of Operating Results – Three and Six Months Ended June 30, 2015 and 2014.

General. For the three months ended June 30, 2015, net income increased 59.1% to $1.2 million, or $0.12 per diluted common share, from net income of $725,000, or $0.08 per diluted common share earned for the linked three month period ended March 31, 2015. The improvement in net income on a linked quarter basis is due to increases in net interest income and non-interest income, as well as a decline in non-interest expenses. The improvement reflects the impact of strong loan growth during the quarter coupled with enhanced fee income from deposit service offerings as the benefits of the branch acquisition transaction (the “acquisition”) with Bank of America (BOA) are being realized.

Net income and earnings per diluted common share for the current three month period declined by $132,000 and $0.01, respectively, when compared with $1.3 million or $0.13 per diluted common share earned for the three months ended June 30, 2014.

Net income for the six months ended June 30, 2015 was $1.9 million, or $0.20 per diluted common share, compared to net income of $2.4 million, or $0.25 per diluted common share earned in the six months ended June 30, 2014. Earnings for the current six month period were positively impacted by increases in net interest income and non-interest income, as well as lower loan loss provisions. During this same period non-interest expenses have increased with growth of our franchise and supporting infrastructure. In addition, during the first six-months of 2015, the Bank incurred $425,000 of one-time transaction expenses associated the nine newly acquired branch offices.

Interest Income. Interest income increased to $7.9 million and $15.7 million for the three and six months ended June 30, 2015, from $7.2 million and $14.3 million for the comparative 2014 periods. The year-over-year growth in interest income is due primarily to changes in the composition and volume of our earning asset base, and partially offset by a decline in yields on earning assets. The tax equivalent yield on average earning assets declined to 4.02% and 4.00% for the three and six months ended June 30, 2015, from 4.56% and 4.61% for the three and six months ended June 30, 2014. Average earning assets increased to $801.4 million for the three months ended June 30, 2015, from $644.1 million for the comparable 2014 three month period. For the six months ended June 30, 2015, average earning assets increased to $801.9 million, from $633.8 million for the comparable 2014 six month period.

Interest Expense. Interest expense increased to $711,000 and $1.4 million for the three and six months ended June 30, 2014, from $652,000 and $1.3 million for the comparative 2014 periods. Interest expense was primarily impacted by increased interest expense on deposits and junior subordinated debentures, while being partially offset by a reduction in interest paid on borrowings between the comparative reporting periods. Effective December 30, 2014, the Company swapped the interest rate on the junior subordinated debentures from three-month LIBOR plus 2.95%, to a fixed rate of 5.54% for the ensuing five year period. This strategy was executed to provide the Company with protection to a rising rate environment.

The cost of average interest-bearing liabilities improved to 0.45% for both the three and six months ended June 30, 2015, from 0.49% and 0.50% for the comparative 2014 three and six month periods. The Bank has managed its cost of interest-bearing liabilities by a combination of growth in lower cost non-maturity deposits, pricing new CDs and repricing maturing CDs in the lower interest rate environment, while being partially offset by additional cost of the junior subordinated debentures hedging strategy noted above. Although a portion of higher priced maturing longer-term CDs left the Bank, the residual renewed into lower priced CDs or migrated to non-maturity deposit products within the Bank.

Average interest-bearing liabilities increased to $636.9 million for the three months ended June 30, 2015, from $527.5 million for the comparable 2014 three month period. Average interest-bearing liabilities for the six months ended June 30, 2015 increased to $641.2 million, from $515.0 million for the comparable 2014 six month period. Average noninterest-bearing demand deposits increased to $154.7 million and $151.1 million for the three and six months ended June 30, 2015, compared to $95.1 million and $95.7 million for the comparable 2014 three and six month periods. These combined increases are primarily related to the impact of the BOA acquisition.

Net Interest Income. Net interest income for the three months ended June 30, 2015 increased to $7.2 million from $6.6 million for the comparative 2014 three month period. Net interest income for the first six months of 2015 increased to $14.2 million, from $13.0 million for the comparative 2014 six month period. The tax equivalent net interest margin fell 49 basis points to 3.67% for the three months ended June 30, 2015, from 4.16% for the comparative June 2014 quarterly period. The tax equivalent net interest margin for the first six months of 2015 declined by 56 basis points to 3.64%, from 4.20% for the comparative 2014 six month period. The declines were primarily the result of investing the acquired deposits in lower earning investment securities.

Net interest margin for the 2015 three-month period declined compared to the three-month period ended June 30, 2014 due to a change in earning asset mix. The percentage of loans to total earning assets declined to 66% for the current period end compared to 72% for the prior year period. Despite the decline in margin, net interest income increased by $624,000 over the comparative prior year three-month period primarily as a result of a $157.3 million increase in average earning assets. The expansion of our net interest income during the first half of 2015 compared to the same six month period of 2014 is due primarily to an increase in the volume of earning assets, which was partially offset by an increase in the volume of interest-bearing liabilities and a reduction in the yield on earning assets. We anticipate level of our current margin remaining somewhat stable over the near-term unless there are dramatic movements in interest rates.

Yield/Cost Analysis. Table 1 below contains comparative information relating to the Company’s average balance sheet and reflects the yield on average earning assets and the average cost of interest-bearing liabilities for the three and six months ended June 30, 2015 and 2014, presented on a tax equivalent yield basis. Tax equivalent yields related to certain investment securities exempt from federal income tax are stated on a fully taxable basis, using a 34% federal statutory tax rate and reduced by a disallowed portion of the tax exempt interest income. Average balances are derived from average daily balances. The interest rate spread represents the difference between the tax equivalent yield on average earning assets and the cost of average interest-bearing liabilities. The tax equivalent net interest margin represents tax adjusted net interest income divided by average earning assets.

Yield/Cost Analysis	Quarter Ended June 30, 2015							Quarter Ended June 30, 2014
					(Dollars in thousands)
					Average							Average
	Average				Yield/			Average				Yield/
	Balance		Interest		Cost			Balance		Interest		Cost
Interest earning assets:
Loans receivable	$	513,326	$	6,261		4.84	%	$	470,710	$	5,970		5.04	%
Investments and deposits (1)		288,070		1,639		2.56	%		173,364		1,248		3.28	%
Total earning assets (1)		801,396		7,900		4.02	%		644,074		7,218		4.56	%
Nonearning assets		76,431							61,319
Total assets	$	877,827						$	705,393
Interest bearing liabilities:
Deposits	$	619,449		562		.36	%	$	494,747		526		.43	%
Borrowings		7,103		7		.41	%		22,430		45		.78	%
Junior subordinated debentures		10,310		142		5.43	%		10,310		81		3.12	%
Total interest-bearing liabilities		636,862		711		.45	%		527,487		652		.49	%
Noninterest bearing demand deposits		154,735		0		.00	%		95,131		0		.00	%
Total sources of funds		791,597		711		.36	%		622,618		652		.42	%
Other liabilities and stockholders’ equity:
Other liabilities		3,997							4,051
Stockholders' equity		82,233							78,724
Total liabilities and stockholders' equity	$	877,827						$	705,393
Net interest income			$	7,189						$	6,566
Interest rate spread (1) (2)						3.58	%						4.07	%
Net interest margin (1) (3)						3.67	%						4.16	%

Ratio of earning assets to interest bearing liabilities						125.84	%						122.10	%

Yield/Cost Analysis	Six Months Ended June 30, 2015							Six Months Ended June 30, 2014
					(Dollars in thousands)
					Average							Average
	Average				Yield/			Average				Yield/
	Balance		Interest		Cost			Balance		Interest		Cost
Interest earning assets:
Loans receivable	$	501,455	$	12,195		4.85	%	$	465,611	$	11,898		5.10	%
Investments and deposits (1)		300,437		3,470		2.58	%		168,234		2,394		3.26	%
Total earning assets (1)		801,892		15,665		4.00	%		633,845		14,292		4.61	%
Nonearning assets		76,804							58,655
Total assets	$	878,696						$	692,500
Interest bearing liabilities:
Deposits	$	627,331		1,132		.36	%	$	492,748		1,086		.44	%
Borrowings		3,578		8		.42	%		11,917		45		.75	%
Junior subordinated debentures		10,310		280		5.40	%		10,310		161		3.11	%
Total interest-bearing liabilities		641,219		1,420		.45	%		514,975		1,292		.50	%
Noninterest bearing demand deposits		151,147		0		.00	%		95,662		0		.00	%
Total sources of funds		792,366		1,420		.36	%		610,637		1,292		.43	%
Other liabilities and stockholders’ equity:
Other liabilities		4,274							4,160
Stockholders' equity		82,056							77,703
Total liabilities and stockholders' equity	$	878,696						$	692,500
Net interest income			$	14,245						$	13,000
Interest rate spread (1) (2)						3.55	%						4.11	%
Net interest margin (1) (3)						3.64	%						4.20	%

Ratio of earning assets to interest bearing liabilities						125.06	%						123.08	%

(1)

Yield shown as a tax-adjusted yield.

(2)

Represents the difference between the average yield on earning assets and the average cost of funds.

(3)

Represents net interest income divided by average earning assets.

Provision for Credit Losses. The Bank's methodology for determining its provision for credit losses includes amounts specifically allocated to credits that are individually determined to be impaired, as well as general provisions allocated to groups of loans that have not been individually assessed for impairment. The Bank recorded $140,000 of provisions for credit losses for both the three and six months ended June 30, 2015, compared to $450,000 and $700,000, respectively, recorded in the three and six months ended June 30, 2014. The reduction in year-to-date provisions for credit losses is primarily attributable to the improvement in asset quality previously discussed. Provisions for credit losses are necessary to maintain the ALLL at a level that management believes is adequate to absorb probable future losses in the loan portfolio. See “Note 7. Allowance for Loan and Lease Losses” of “Notes to Consolidated Financial Statements (Unaudited)” and “Allowance for Loan and Lease Losses” and “Critical Accounting Policies - Loan Impairment and Allowance for Loan and Lease Losses” included herein for additional disclosure information.

Noninterest Income. Total noninterest income increased to $3.6 million and $6.8 million for the three and six months ended June 30, 2015, from $2.2 million and $4.1 million for the three and six months ended June 30, 2014. Noninterest income consists of deposit fees and service charges; loan fees and charges; mortgage loan servicing fees; gain on sale and other fees on mortgage loans, gain on sales of investment securities and OREO; and other miscellaneous income. Fees and service charges on deposits, and fees on loans and loan servicing fees earned during each period are influenced by the volume of deposits and loans outstanding, the volume of the various types of deposit and loan account transactions processed, the volume of loans serviced for others and the collection of related fees and service charges.

Deposit fees and service charges increased significantly to $2.1 million and $4.0 million for the three and six months ended June 30, 2015, from $1.1 million and $2.1 million for the comparative 2014 three and six month periods. Deposit fees and service charges represented 58.1% and 58.5%, respectively, of total non-interest income for the three and six months ended June 30, 2015, compared to 52.5% and 50.5%, respectively, for the three and six months ended June 30, 2014. This increase primarily reflects additional revenue generated from accounts acquired in the acquisition transaction, as well as from the introduction of new products and product enhancements. We anticipate additional service charge revenue from deposits going forward, as we focus on growing our core deposit base through new customer acquisition.

Total non-interest income generated from the sale and servicing of mortgage loans and loan fees increased to $877,000 and $1.5 million for the three and six months ended June 30, 2015, from $612,000 and $1.1 million for the comparative three and six months ended June 30, 2014. An early spring sales season, coupled with the opportunities we are experiencing in the new markets we entered through the branch acquisition resulted in a higher level of activity for the current periods. Due to volatility in interest rates near the end of the second quarter, mortgage originations may decline in the third quarter, as compared to the second quarter. We continue to explore various strategies to enhance our non-interest income, including the purchasing of servicing rights.

The Bank may sell or securitize fixed-rate residential mortgage loans to reduce interest rate and credit risk exposure, and to provide a more balanced sensitivity to future interest rate changes, while retaining certain other held for sale mortgage loans for future securitization into available for sale mortgage-backed securities. Proceeds from mortgage loan sales provide liquidity to support the Bank’s operating, financing and lending activities.

Gains on sales of investment securities available for sale were $201,000 and $452,000 for the three and six months ended June 30, 2015, compared to none and $14,000 for the respective 2014 three and six month periods. During 2014, the Bank pre-invested a large portion of the anticipated BOA transaction proceeds into short and intermediate term investment securities until the funds could be converted to higher yielding assets. During the three and six months ended June 30, 2015, the Bank sold $9.0 million and $22.8, respectively, of investment securities primarily to fund net growth in our loan portfolio and to provide liquidity to support the Bank’s operating and financing activities.

Included in other noninterest income is revenue from Bank-owned life insurance (BOLI) investments. BOLI earnings were $128,000 and $255,000 for the three and six months ended June 30, 2015, compared to $132,000 and $265,000 for the respective 2014 three and six month periods. The Bank utilizes the investment returns from the BOLI to recover a portion of the cost of providing benefit plans to our employees.

Net gains recognized from the sale of OREO were $27,000 and $73,000 for the three and six months ended June 30, 2015, compared to $34,000 and $73,000 for the three and six months ended June 30, 2014, as the Bank continues in its efforts of disposing of these nonperforming assets. See “Note 9. Other Real Estate Owned” of “Notes to Consolidated Financial Statements (Unaudited)” for additional information.

Total core non-interest income, excluding net gains and losses from OREO and securities sales, increased to $3.4 million and $6.3 million for the three and six months ended June 30, 2015, from $2.1 million and $4.0 million for the respective 2014 three and six month periods, primarily due to the increase in deposit fees and service charges.

Noninterest Expense. Total noninterest expense increased to $9.0 million and $18.3 million for the three and six months ended June 30, 2015, from $6.5 million and $13.0 for the comparable 2014 three and six month periods. The year-over-year variation in noninterest expenses is attributable to the impact of $425,000 one-time acquisition transaction expenses, six full months of operating expenses for the nine acquired BOA branch offices, the addition of a new commercial loan production office and a new Customer Care Center.

Compensation and benefit expenses, the largest component of non-interest expenses, increased to $4.8 million for the three months ended June 30, 2015, from $3.8 million for the comparative 2014 three month period. For the first six months of 2015, compensation expense increased to $9.5 million, from $7.6 million for the first six months of 2014. The increase for the 2015 periods is attributable to the expense for the staff in the nine acquired branch offices, as well as staffing for our new Durham, NC commercial loan team and our new Customer Care Center. The Bank will continue to manage overall staffing levels to ensure we meet the ongoing needs of our customers and to support future growth.

FDIC insurance premiums were $149,000 and $282,000 for the three and six months ended June 30, 2015, compared to $139,000 and $284,000 for the 2014 three and six month periods. The increased current quarterly FDIC insurance premium is primarily attributable to growth of the deposit insurance assessment calculation base resulting from the acquisition transaction.

Premises and equipment expense increased to $1.3 million and $2.7 million for the three and six months ended June 30, 2015, from $831,000 and $1.7 million for the 2014 three and six month periods. The six month premises and equipment costs for 2015 include $57,000 of one-time acquisition expenses. While the recent branch acquisition has resulted in a larger infrastructure cost than our historical levels, we continue to pursue opportunities to gain efficiency and performance from our branch network and will make adjustments, such as we have with recent branch consolidations in Kinston, Rocky Mount and Lumberton, North Carolina. As such, given our current branch structure we would anticipate occupancy cost to maintain or improve from their current levels.

Advertising expense increased to $217,000 and $380,000 for the three and six months ended June 30, 2015, from $106,000 and $169,000 for the comparative 2014 three and six month periods. The six month advertising expense includes $15,000 of one-time acquisition expenses. The Bank is investing in building our brand awareness throughout our expanded footprint with additional marketing efforts, and as such, we anticipate that our advertising expenses will be above that of our historical levels.

Data processing costs increased to $880,000 and $2.0 million for the three and six months ended June 30, 2015, from $568,000 and $1.2 million for the comparative 2014 three and six month periods. Data processing expense for the first six months of 2015 includes $173,000 of one-time acquisition expenses. Data processing costs fluctuate in conjunction with changes in the number of customer accounts and transaction activity volumes and therefore, with the addition of accounts and customers from the acquisition, going forward we expect these costs to be above that of prior periods.

Total amortization of intangible assets, including mortgage servicing rights and identifiable intangible assets, was $130,000 and $257,000 for the three and six months ended June 30, 2015, compared to a $15,000 recovery for the 2014 three month period and $100,000 of amortization expense for the 2014 six month period. Amortization of mortgage servicing rights was $58,000 and $113,000 for the three and six months ended June 30, 2015, compared to a $15,000 recovery for the 2014 three month period and $108,000 of amortization expense for the 2014 six month period. Amortization of the Company’s core deposit intangible, which is the only identifiable intangible asset subject to amortization, was $72,000 and $144,000 for the three and six months ended June 30, 2015, compared to none and $8,000 for the 2014 three and six month periods.

Expenses attributable to ongoing maintenance, property taxes and insurance for OREO properties were $116,000 and $278,000 for the three and six months ended June 30, 2015, compared to $107,000 and $228,000 for the 2014 three and six months periods. OREO valuation adjustments were $41,000 and $86,000 for the three and six months ended June 30, 2015 second quarter, compared to none for the respective 2014 periods.

Other non-interest expense was $1.4 million and $2.8 million for the three and six months ended June 30, 2015, compared to $898,000 and $1.8 million for the respective 2014 three and six month periods. Other expense for the first six months of 2015 includes $180,000 of one-time acquisition expenses. The year-over-year increase in operating expenses is primarily due to the branch acquisition.

Income tax expense was $486,000 and $742,000 for the three and six months ended June 30, 2015, compared to $542,000 and $960,000 for the 2014 three and six month periods. The effective income tax rates were 29.62% for the three months ended June 30, 2015 and 29.66% for the comparative 2014 second quarter. The effective income tax rates were 28.32% and 28.67% for the respective 2015 and 2014 six month periods. The Bank’s investment in BOLI and tax-exempt municipal bonds, combined with the income tax benefit related to one-time branch acquisition expenses and a 1% decline in the State of North Carolina corporate income tax rate, have contributed to lowering the Company’s level of income tax expense and its effective income tax rates. See “Critical Accounting Policies” below for additional information.

Key Performance Ratios. Some of our key performance ratios are return on average assets (“ROA”), return on average equity (“ROE”) and efficiency. ROA was 0.53% and 0.43% for the three and six months ended June 30, 2015, compared to 0.73% and 0.70% for the three and six months ended June 30, 2014. ROE was 5.63% and 4.62% for the three and six months ended June 30, 2015, compared to 6.61% and 6.27% for the three and six months ended June 30, 2014. The efficiency ratio (noninterest expenses as a percentage of net interest income plus noninterest income) measures the proportion of net operating revenues that are absorbed by overhead expenses. The efficiency ratio was 83.71% and 87.39% for the three and six months ended June 30, 2015, compared to 72.77% and 75.17% for the three and six months ended June 30, 2014. The efficiency ratio has elevated over the course of the last twelve months due primarily to franchise expansion. We anticipate the efficiency ratio to improve as we continue to execute on the BOA acquisition strategy.

Liquidity and Capital Resources. Liquidity generally refers to the Bank's ability to generate adequate amounts of funds to meet its cash needs. Adequate liquidity guarantees that sufficient funds are available to meet deposit withdrawals, fund future loan commitments, maintain adequate reserve requirements, pay operating expenses, provide funds for debt service, and meet other general commitments. FDIC policy requires banks to maintain an average daily balance of liquid assets in an amount which it deems adequate to protect the safety and soundness of the bank. The FDIC currently has no specific level which it requires.

At June 30, 2015, the Bank had cash, deposits in banks, investment securities and loans held for sale totaling $303.4 million, compared to $353.7 million at December 31, 2014. The Bank calculates its liquidity position under policy guidelines based on liquid assets in relationship to deposits and short-term borrowings. Based on its calculation guidelines, the Bank’s liquidity ratio was 37.25% at June 30, 2015, compared to 44.19% at December 31, 2014, which management believes is adequate.

The Bank believes it can meet future liquidity needs with existing funding sources. The Bank's primary sources of funds are deposits, principal payments on loans and mortgage-backed securities, earnings and funds provided from operations, the ability to borrow from the FHLB of Atlanta and other lines of credit, and the availability of loans and investment securities available for sale. At June 30, 2015, the Bank had $187.7 million remaining credit availability with the FHLB, of which there was lendable collateral value available totaling $110.7 million. Additional collateral would be required in order to access total borrowings up to the credit availability limit. In addition, at June 30, 2015, the Bank had remaining capacity to borrow $63.6 million from the FRB Discount Window and $70.0 million of pre-approved, but unused lines of credit.

The FDIC requires banks to meet a minimum leverage capital requirement of Tier 1 capital (consisting of retained earnings and common stockholders’ equity, less any intangible assets) to average total assets ratio of 4.0%. The FDIC also requires banks to meet a ratio of total capital to risk-weighted assets of 8.0%, of which at least 4.0% must be in the form of Tier 1 capital. The Bank was in compliance with all regulatory capital requirements at June 30, 2015 and December 31, 2014.

The Board of Governors of the Federal Reserve System has approved of a final rule to implement the Basel III regulatory capital reforms, among other changes required by the Dodd-Frank Act. The framework requires banking organizations to hold more and higher quality capital, which acts as a financial cushion to absorb losses, taking into account the impact of risk. The final rule includes a new minimum ratio of common equity Tier 1 capital to risk-weighted assets of 4.5%, as well as a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets. The rule also raises the minimum Tier 1 capital to risk-weighted assets ratio from 4.0% to 6.0% and includes a minimum leverage ratio of 4.0% for all banking institutions. In terms of quality of capital, the final rule emphasizes common equity Tier 1 capital and implements strict eligibility criteria for regulatory capital instruments. It also improves the methodology for calculating risk-weighted assets to enhance risk sensitivity. The phase-in for smaller banking organizations, such as the Company and the Bank, began in January 2015. The Company and the Bank continue to be well-capitalized under the new rules. See “Note 15. Regulatory Capital” of “Notes to Consolidated Financial Statements (Unaudited)” for additional information.

Critical Accounting Policies. The Company has identified the policies below as critical to its business operations and the understanding of its results of operations. The impact and any associated risks related to these policies on the Company’s business operations is discussed throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations where such policies affect reported and expected financial results.

Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. Estimates affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Loan Impairment and Allowance for Loan and Lease Losses. A loan or lease is considered impaired, based on current information and events, if it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan or lease agreement. Uncollateralized loans are measured for impairment based on the present value of expected future cash flows discounted at the historical effective interest rate, while all collateral-dependent loans are measured for impairment based on the fair value of the collateral. The Bank uses several factors in determining if a loan or lease is impaired. The internal asset classification procedures include a thorough review of significant loans, leases and lending relationships and include the accumulation of related data. This data includes loan and lease payment status, borrowers' financial data and borrowers' operating factors such as cash flows, operating income or loss, etc.

The ALLL is increased by charges to income and decreased by charge-offs, net of recoveries. Management's periodic evaluation of the adequacy of the ALLL is based on past loan and lease loss experience, known and inherent risks in loans and leases and unfunded loan commitments, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral, and current economic conditions. While management believes that it has established the ALLL in accordance with accounting principles generally accepted in the United States of America and has taken into account the views of its regulators and the current economic environment, there can be no assurance in the future that regulators or risks in its loans and leases portfolio will not require additional adjustments to the ALLL. There were no changes in accounting policy and methodology used to estimate the ALLL during the six months ended June 30, 2015.

Income Taxes. Deferred tax asset and liability balances are determined by application to temporary differences in the tax rate expected to be in effect when taxes will become payable or receivable. Temporary differences are differences between the tax basis of assets and liabilities and their reported amounts in the financial statements that will result in taxable or deductible amounts in future years. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date.

Off-Balance Sheet Arrangements. The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit and involve elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The Company's exposure to credit loss in the event of non-performance by a party to a financial instrument for commitments to extend credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation of the borrower. Since many of the commitments are expected to expire without being drawn upon, they do not necessarily represent future cash requirements.

Forward Looking Statements. The Private Securities Litigation Reform Act of 1995 states that disclosure of forward looking information is desirable for investors and encourages such disclosure by providing a safe harbor for forward looking statements by corporate management. This Form 10-Q, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains forward looking statements that involve risk and uncertainty. In order to comply with terms of the safe harbor, the Company notes that a variety of risks and uncertainties could cause its actual results and experience to differ materially from anticipated results or other expectations expressed in the Company's forward looking statements. There are risks and uncertainties that may affect the operations, performance, development, growth projections and results of the Company's business. They include, but are not limited to, economic growth, interest rate movements, timely development of technology enhancements for products, services and operating systems, the impact of competitive products, services and pricing, customer requirements, regulatory changes and similar matters. Readers of this report are cautioned not to place undue reliance on forward looking statements that are subject to influence by these risk factors and unanticipated events, as actual results may differ materially from management's expectations.

Item 3. Quantitative and Qualitative Disclosures about Market Risk. Smaller reporting companies are not required to provide information required by this item.

Item 4. Controls and Procedures. As of the end of the period covered by this report, management of the Company carried out an evaluation, under the supervision and with the participation of the Company’s principal executive officer and principal financial officer, of the effectiveness of the Company’s disclosure controls and procedures. Based on this evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective in ensuring that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. It should be noted that the design of the Company’s disclosure controls and procedures is based in part upon certain reasonable assumptions about the likelihood of future events, and there can be no reasonable assurance that any design of disclosure controls and procedures will succeed in achieving its stated goals under all potential future conditions, regardless of how remote, but the Company’s principal executive and financial officers have concluded that the Company’s disclosure controls and procedures are, in fact, effective at a reasonable assurance level.

In addition, there have been no changes in the Company’s internal control over financial reporting (to the extent that elements of internal control over financial reporting are subsumed within disclosure controls and procedures) identified in connection with the evaluation described in the above paragraph that occurred during the Company’s last fiscal quarter, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item l. Legal Proceedings: The Company is currently not engaged in any material legal proceedings. From time to time, the Bank is a party to legal proceedings within the ordinary course of business wherein it enforces its security interest in loans, and other matters of similar nature.

Item 1A. Risk Factors: Smaller reporting companies are not required to provide information required by this item.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds: The following table sets forth information regarding the Company's repurchases of its common stock during the three months ended June 30, 2015:

Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plan		Maximum Number of Shares Yet to Be Purchased Under the Plan

April 2015 Beginning date: April 1 Ending date: April 30		-		-		-		167,548

May 2015 Beginning date: May 1 Ending date: May 31		-		-		-		167,548

June 2015 Beginning date: June 1 Ending date: June 30		25,000	$	8.14		25,000		142,548

Shares may be purchased under a repurchase program announced on January 27, 2015. Under this program, the Company announced that it may purchase up to 2.5% of the outstanding shares of its common stock, or approximately 239,950 shares, over a one year period, effective as of February 1, 2015 and expiring on January 31, 2016.

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 following exhibits are filed herewith:

Number		Title

31.1		Rule 13a-14(a) Certification of Chief Executive Officer

31.2		Rule 13a-14(a) Certification of Chief Financial Officer

32		Section 1350 Certification

101		Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Statements of Financial Condition as of June 30, 2015 (unaudited) and December 31, 2014; (ii) Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2015 and 2014 (unaudited); (iii) Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2015 and 2014 (unaudited); (iv) Consolidated Statements of Changes in Stockholders’ Equity for the Six Months Ended June 30, 2015 and 2014 (unaudited); (v) Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2015 and 2014 (unaudited); and (vi) Notes to Consolidated Financial Statements (unaudited) as of June 30, 2015 and December 31, 2014, and for the Three and Six Months Ended June 30, 2015 and 2014.

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.

FIRST SOUTH BANCORP, INC.

By:	/s/ Scott C. McLean
	Scott C. McLean
	Executive Vice President
	Chief Financial Officer
	(Principal Financial and Accounting Officer)

	Date: August 13, 2015

FIRST SOUTH BANCORP INC /VA/ - FORM 10-Q - August 13, 2015

Attached files

FIRST SOUTH BANCORP INC /VA/ Reports