CAROLINA FINANCIAL CORP - FORM 10-Q

Attached files

file	filename
EX-31.2 - CAROLINA FINANCIAL CORP	e00302_ex31-2.htm
EX-31.1 - CAROLINA FINANCIAL CORP	e00302_ex31-1.htm
EX-32 - CAROLINA FINANCIAL CORP	e00302_ex32.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended June 30, 2015

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

For the Transition Period from to

Commission file number 001-10897

Carolina Financial Corporation

(Exact name of registrant as specified in its charter)

Delaware		57-1039673
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)


288 Meeting Street, Charleston, South Carolina		29401
(Address of principal executive offices)		(Zip Code)

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

Not Applicable
(Former name, former address, and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

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

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 9,763,989 shares of common stock, par value $0.01 per share, were issued and outstanding as of August 10, 2015.

TABLE OF CONTENTS

		Page
PART 1 –	FINANCIAL INFORMATION	3
Item 1.	Financial Statements	3

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	43

Item 3.	Quantitative and Qualitative Disclosure about Market Risks	70

Item 4.	Controls and Procedures	70

PART II -	OTHER INFORMATION	71

Item 1.	Legal Proceedings	71

Item 1A.	Risk Factors	71

Item 2.	Unregistered Sale of Equity Securities and Use of Proceeds	71

Item 3.	Defaults Upon Senior Securities	71

Item 4.	Mine Safety Disclosures	71

Item 5.	Other Information	71
Item 6.	Exhibits	71

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CAROLINA FINANCIAL CORPORATION

CONSOLIDATED BALANCE SHEETS

	June 30, 2015		December 31, 2014
	(Unaudited)		(Audited)
	(In thousands, except share data)
ASSETS
Cash and due from banks	$	13,672		10,453
Interest-bearing cash		15,726		10,694
Cash and cash equivalents		29,398		21,147
Securities available-for-sale (cost of $290,550 at June 30, 2015 and $246,435 at December 31, 2014)		291,062		251,717
Securities held-to-maturity (fair value of $17,900 at June 30, 2015 and $27,385 at December 31, 2014)		17,169		25,544
Federal Home Loan Bank stock, at cost		9,048		5,405
Other investments		3,121		2,309
Derivative assets		2,326		1,689
Loans held for sale		60,727		40,912
Loans receivable, net of allowance for loan losses of $10,017 at June 30,2015 and $9,035 at December 31, 2014		831,045		768,122
Premises and equipment, net		31,641		31,075
Accrued interest receivable		4,086		3,628
Real estate acquired through foreclosure, net		3,271		3,239
Deferred tax assets, net		4,893		4,715
Mortgage servicing rights		10,642		10,181
Cash value life insurance		21,727		21,532
Core deposit intangible		3,132		3,303
Other assets		2,657		4,499
Total assets	$	1,325,945		1,199,017

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Noninterest-bearing deposits	$	185,179		142,900
Interest-bearing deposits		820,669		821,290
Total deposits		1,005,848		964,190
Short-term borrowed funds		147,500		57,800
Long-term debt		55,465		61,740
Derivative liabilities		380		1,036
Drafts outstanding		2,175		3,320
Advances from borrowers for insurance and taxes		1,357		613
Accrued interest payable		327		312
Reserve for mortgage repurchase losses		4,362		4,999
Dividends payable to stockholders		244		243
Accrued expenses and other liabilities		7,943		11,064
Total liabilities		1,225,601		1,105,317
Commitments and contingencies
Stockholders’ equity:
Preferred stock, par value $.01; 1,000,000 shares authorized at June 30, 2015 and December 31, 2014; no shares issued or outstanding		—		—
Common stock, par value $.01; 15,000,000 and 10,000,000 shares authorized at June 30, 2015 and December 31, 2014, respectively; 9,758,879 and 9,717,043 issued and outstanding at June 30, 2015 and December 31, 2014, respectively		98		97
Additional paid-in capital		23,848		23,194
Retained earnings		76,028		69,625
Accumulated other comprehensive income, net of tax		370		784
Total stockholders’ equity		100,344		93,700
Total liabilities and stockholders’ equity	$	1,325,945		1,199,017

See accompanying notes to consolidated financial statements.

CAROLINA FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2015			2014			2015			2014
	(In thousands, except share data)
Interest income
Loans	$	10,465			7,157			19,928			13,990
Investment securities		2,079			1,526			3,973			3,047
Dividends from FHLB		67			35			145			69
Other interest income		22			25			44			49
Total interest income		12,633			8,743			24,090			17,155
Interest expense
Deposits		1,011			898			1,972			1,713
Short-term borrowed funds		76			11			142			16
Long-term debt		492			512			965			1,023
Total interest expense		1,579			1,421			3,079			2,752
Net interest income		11,054			7,322			21,011			14,403
Provision for loan losses		—			—			—			—
Net interest income after provision for loan losses		11,054			7,322			21,011			14,403
Noninterest income
Mortgage banking income		5,104			3,426			9,121			5,880
Deposit service charges		883			517			1,723			948
Net loss on extinguishment of debt		(1,215	)		(31	)		(1,215	)		(31	)
Net gain (loss) on sale of securities		(29	)		164			442			480
Fair value adjustments on interest rate swaps		588			(263	)		(7	)		(518	)
Net gain on sale of servicing assets		—			—			—			775
Net increase in cash value life insurance		180			187			358			373
Mortgage loan servicing income		1,318			1,254			2,626			2,531
Other		435			195			806			380
Total noninterest income		7,264			5,449			13,854			10,818
Noninterest expense
Salaries and employee benefits		7,286			5,515			14,249			10,859
Occupancy and equipment		1,727			1,051			3,511			2,035
Marketing and public relations		367			297			769			571
FDIC insurance		185			136			350			263
Provision for mortgage loan repurchase losses		(250	)		(250	)		(500	)		(250	)
Legal expense		73			191			250			361
Other real estate expense, net		43			60			110			307
Mortgage subservicing expense		423			326			818			689
Amortization of mortgage servicing rights		485			441			945			913
Other		2,068			1,724			4,080			3,350
Total noninterest expense		12,407			9,491			24,582			19,098
Income before income taxes		5,911			3,280			10,283			6,123
Income tax expense		1,994			1,031			3,353			1,930
Net income	$	3,917			2,249			6,930			4,193

Earnings per common share:
Basic	$	0.41			0.24			0.74			0.45
Diluted	$	0.41			0.24			0.73			0.45
Weighted average common shares outstanding:
Basic		9,434,124			9,314,676			9,399,348			9,279,247
Diluted		9,595,716			9,483,547			9,558,189			9,431,875

See accompanying notes to consolidated financial statements.

CAROLINA FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2015			2014			2015			2014
	(In thousands)

Net income	$	3,917			2,249			6,930			4,193

Other comprehensive income (loss), net of tax:
Unrealized (loss) gain on securities		(2,270	)		2,271			(1,984	)		4,663
Tax effect		817			(817	)		714			(1,678	)

Reclassification adjustment for losses (gains) included in earnings		29			(164	)		(442	)		(480	)
Tax effect		(10	)		59			159			173

Transfer from held-to-maturity to available for sale securities		89			—			1,604			—
Tax effect		(32	)		—			(577	)		—

Accretion of unrealized losses on held-to-maturity securities previously recognized in other comprehensive income		111			49			175			98
Tax effect		(40	)		(18	)		(63	)		(36	)

Other comprehensive income (loss), net of tax		(1,306	)		1,380			(414	)		2,740

Comprehensive income	$	2,611			3,629			6,516			6,933

See accompanying notes to consolidated financial statements.

CAROLINA FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2015 AND 2014

(Unaudited)

												Accumulated
						Additional						Other
	Common Stock					Paid-in			Retained			Comprehensive
	Shares			Amount		Capital			Earnings			Income (Loss)			Total
	(In thousands, except share data)

Balance, December 31, 2013		9,636,490		$	96		22,337			62,169			(2,375	)		82,227
Stock awards		52,646			1		(1	)		—			—			—
Stock options exercised		10,368			—		44			—			—			44
Excess tax benefit in connection with equity awards		—			—		126			—			—			126
Stock-based compensation expense, net		—			—		358			—			—			358
Net income		—			—		—			4,193			—			4,193
Dividends declared to stockholders		—			—		—			(411	)		—			(411	)
Other comprehensive income, net of tax		—			—		—			—			2,740			2,740
Balance, June 30, 2014		9,699,504		$	97		22,864			65,951			365			89,277

Balance, December 31, 2014		9,717,043		$	97		23,194			69,625			784			93,700
Stock awards		36,581			1		(1	)		—			—			—
Repurchased shares from vested stock awards		(6,361	)		—		(34	)		(39	)		—			(73	)
Stock options exercised		11,616			—		58			—			—			58
Excess tax benefit in connection with equity awards		—			—		189			—			—			189
Stock-based compensation expense, net		—			—		442			—			—			442
Net income		—			—		—			6,930			—			6,930
Dividends declared to stockholders		—			—		—			(488	)		—			(488	)
Other comprehensive loss, net of tax		—			—		—			—			(414	)		(414	)
Balance, June 30, 2015		9,758,879		$	98		23,848			76,028			370			100,344

See accompanying notes to consolidated financial statements.

CAROLINA FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	For the Six Months
	Ended June 30,
	2015			2014
	(In thousands)
Cash flows from operating activities:
Net income	$	6,930			4,193
Adjustments to reconcile net income to net cash used in operating activities:
Deferred tax benefit		126			224
Amortization of unearned discount/premiums on investments, net		1,510			1,121
Amortization of deferred loan fees		(1,614	)		(1,284	)
Amortization of mortgage servicing rights		945			913
Amortization of core deposit intangibles		171			8
Gain on sale of available-for-sale securities, net		(442	)		(480	)
Mortgage banking income		(9,121	)		(5,880	)
Originations of loans held for sale		(550,244	)		(471,101	)
Proceeds from sale of loans held for sale		538,250			465,333
Loss on extinquishment of debt		1,215			31
Provision for mortgage loan repurchase losses		(500	)		(250	)
Mortgage loan losses paid, net of recoveries		(137	)		(326	)
Fair value adjustments on interest rate swaps		7			518
Stock-based compensation		442			358
Decrease in cash surrender value of bank owned life insurance		12			54
Depreciation		863			558
Loss on disposals of premises and equipment		8			—
Loss (gain) on sale of real estate acquired through foreclosure		27			(92	)
Write-down of real estate acquired through foreclosure		—			289
Gain on sale of servicing assets		—			(775	)
Originations of mortgage servicing assets		(1,406	)		(648	)
Decrease (increase) in:
Accrued interest receivable		(458	)		(257	)
Other assets		1,842			1,679
Increase (decrease) in:
Accrued interest payable		15			14
Dividends payable to stockholders		1			202
Accrued expenses and other liabilities		(3,066	)		(2,689	)
Cash flows used in operating activities		(14,624	)		(8,287	)

Continued

CAROLINA FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED

(Unaudited)

	For the Six Months
	Ended June 30,
	2015			2014
	(In thousands)
Cash flows from investing activities:
Activity in available-for-sale securities:
Purchases	$	(119,316	)		(82,376	)
Maturities, payments and calls		24,911			17,708
Proceeds from sales		61,809			28,561
Activity in held-to-maturity securities:
Purchases		(497	)		—
Maturities, payments and calls		199			316
Increase in other investments		(786	)		(86	)
Increase in Federal Home Loan Bank stock		(3,643	)		(627	)
Increase in loans receivable, net		(62,394	)		(70,022	)
Proceeds from the sale of servicing assets		—			1,575
Purchase of premises and equipment		(1,487	)		(1,640	)
Proceeds from disposals of premises and equipment		34			—
Proceeds from sale of real estate acquired through foreclosure		1,026			1,653
Increase in core deposit intangibles		—			(175	)
Purchase of bank owned life insurance		(382	)		(372	)
Distribution of bank owned life insurance		175			—
Cash flows used in investing activities		(100,351	)		(105,485	)

Cash flows from financing activities:
Net increase in deposit accounts		41,658			81,955
Net increase in Federal Home Loan Bank advances		83,785			19,969
Principal repayment of subordinated debt		(1,575	)		(150	)
Net decrease in drafts outstanding		(1,145	)		(159	)
Net increase in advances from borrowers for insurance and taxes		744			425
Cash dividends paid on common stock		(488	)		(411	)
Net increase in excess tax benefit in connection with equity awards		189			126
Proceeds from exercise of stock options		58			44
Cash flows provided by financing activities		123,226			101,799
Net increase (decrease) in cash and cash equivalents		8,251			(11,973	)
Cash and cash equivalents, beginning of period		21,147			38,665
Cash and cash equivalents, end of period	$	29,398			26,692

Supplemental disclosure:
Cash paid for:
Interest on deposits and borrowed funds	$	3,064			2,738
Income taxes paid, net of refunds		1,608			2,917

Noncash investing and financing activities:
Transfer of loans receivable to real estate acquired through foreclosure	$	1,085			1,232
Transfer of held-to-maturity securities to available-for-sale securities		12,652			—
Change in unrealized gain on available-for-sale securities		(2,426	)		4,183

See accompanying notes to consolidated financial statements.

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

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

At June 30, 2015 and December 31, 2014, statutory business trusts (“Trusts”) created by the Company had outstanding trust preferred securities with an aggregate par value of $15,000,000. The principal assets of the Trusts are $15,465,000 of the Company’s subordinated debentures with identical rates of interest and maturities as the trust preferred securities. The Trusts have issued $465,000 of common securities to the Company and are included in other investments in the accompanying consolidated balance sheets. The Trusts are not consolidated subsidiaries of the Company.

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months and the six months ended June 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 as filed with the Securities and Exchange Commission on March 20, 2015. There have been no significant changes to the accounting policies as disclosed in the Company’s Form 10-K.

Management’s Estimates

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

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

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

Earnings Per Share

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

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

On October 15, 2014, the Board of Directors of the Company declared an additional two-for-one stock split to stockholders of record as of October 31, 2014, issued on November 14, 2014.

On June 22, 2015, the Board of Directors of the Company declared a six-for-five stock split representing a 20% stock dividend to stockholders of record as of July 15, 2015, payable on July 31, 2015.

As such, all share, earnings per share, and per share data have been retroactively adjusted to reflect the stock splits for all periods presented in accordance with GAAP.

Subsequent Events

Subsequent events are material events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. Non-recognized subsequent events are events that provide evidence about conditions that did not exist at the date of the statement of financial condition but arose after that date. Management has reviewed events occurring through the date the financial statements were issued and no subsequent events occurred requiring accrual or disclosure except for the following:

On July 22, 2015, the Company declared a $0.03 per share dividend to stockholders of record on September 18, 2015, payable October 7, 2015.

Reclassification

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

Recently Issued Accounting Pronouncements

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

In May 2014, the FASB issued guidance to change the recognition of revenue from contracts with customers. The core principle of the new guidance is that an entity should recognize revenue to reflect the transfer of goods and services to customers in an amount equal to the consideration the entity receives or expects to receive. The guidance will be effective for the Company for reporting periods beginning after December 15, 2017. The Company will apply the guidance using a modified retrospective approach. The Company does not expect these amendments to have a material effect on its financial statements.

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

In June 2014, the FASB issued guidance which clarifies that performance targets associated with stock compensation should be treated as a performance condition and should not be reflected in the grant date fair value of the stock award. The amendments will be effective for the Company for fiscal years that begin after December 15, 2015. The Company will apply the guidance to stock awards with performance targets that are outstanding at the start of the first fiscal year in the financial statements and to all stock awards that are granted or modified after the effective date. The Company does not expect these amendments to have a material effect on its financial statements.

In January 2015, the FASB issued guidance that eliminated the concept of extraordinary items from GAAP. Existing GAAP required that an entity separately classify, present, and disclose extraordinary events and transactions. The amendments will eliminate the requirements for reporting entities to consider whether an underlying event or transaction is extraordinary, however, the presentation and disclosure guidance for items that are unusual in nature or occur infrequently will be retained and will be expanded to include items that are both unusual in nature and infrequently occurring. The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The amendments may be applied either prospectively or retrospectively to all prior periods presented in the financial statements. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The Company does not expect these amendments to have a material effect on its financial statements.

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

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

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

NOTE 2 - SECURITIES

The amortized cost, gross unrealized gains, gross unrealized losses and fair value of investments securities available-for-sale and held-to-maturity at June 30, 2015 and December 31, 2014 follows:

	June 30, 2015									December 31, 2014
			Gross		Gross							Gross		Gross
	Amortized		Unrealized		Unrealized			Fair		Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value		Cost		Gains		Losses			Value
Securities available-for-sale:	(In thousands)
Municipal securities	$	64,558		1,109		(766	)		64,901		43,119		1,621		(23	)		44,717
US government agencies		—		—		—			—		4,770		—		(22	)		4,748
Collateralized loan obligations		29,996		24		(152	)		29,868		25,883		11		(22	)		25,872
Mortgage-backed securities:
Agency		128,042		2,145		(77	)		130,110		122,727		2,856		(41	)		125,542
Non-agency		56,538		758		(198	)		57,098		49,936		1,065		(163	)		50,838
Total mortgage-backed securities		184,580		2,903		(275	)		187,208		172,663		3,921		(204	)		176,380
Trust preferred securities		11,416		1,337		(3,668	)		9,085		—		—		—			—
Total	$	290,550		5,373		(4,861	)		291,062		246,435		5,553		(271	)		251,717

Securities held-to-maturity:
Municipal securities	$	17,169		741		(10	)		17,900		16,787		882		(17	)		17,652
Trust preferred securities		—		—		—			—		8,757		3,125		(2,149	)		9,733
Total	$	17,169		741		(10	)		17,900		25,544		4,007		(2,166	)		27,385

As of December 31, 2014, the Company had all trust preferred securities classified as held-to-maturity. As a result of the implementation of the regulatory changes in risk weightings and capital deductions dictated by Basel III, the Company transferred all trust preferred securities to available-for-sale during 2015. The transfer was in accordance with ASC 320-10-25-6; therefore, management has determined the transfer out of held-to-maturity is consistent with the original designation and does not taint the remaining portfolio. The amortized cost of the securities reclassified to available-for-sale from held-to-maturity was $11.4 million. The net unrealized gains recorded in other comprehensive income during 2015 as result of this reclassification were approximately $1.0 million.

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

	At December 31, 2014
								Recognized in OCI							Not Recognized in OCI
								Gross Unrealized							Gross Unrealized
	Purchased		Cumulative			Carrying							Amortized							Estimated		Collateralization
	Face Value		OTTI			Value		Gains		Losses			Cost		Gains		Losses			Fair Value		Percentage
Held-to-Maturity:	(In thousands)
Trust Preferred Securities
Total A-Class	$	2,381		—			2,381		—		(558	)		1,823		336		(75	)		2,084		175% - 378%
Total B-Class		11,718		(2,635	)		9,083		—		(2,458	)		6,625		1,788		(2,074	)		6,339		96% - 111%
Total C-Class		2,727		(1,340	)		1,387		—		(1,078	)		309		1,001		—			1,310		92% - 92%
	$	16,826		(3,975	)		12,851		—		(4,094	)		8,757		3,125		(2,149	)		9,733

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

As of June 30, 2015, the Company had one senior trust preferred that was split-rated with an amortized cost of $1.1 million and a fair value of $798,000 and the company had six mezzanine trust preferred securities with an amortized cost of $10.3 million and a fair value of $8.3 million that was below investment grade. As of December 31, 2014, $0.9 million of the pooled trust preferred securities were investment grade, $1.0 million were split-rated, and $6.9 million were below investment grade. In terms of risk-based capital calculation, the Company allocates additional risk-based capital to the below investment grade securities.

The amortized cost and fair value of debt securities by contractual maturity at June 30, 2015 follows:

	At June 30, 2015
	Amortized		Fair
	Cost		Value
	(In thousands)
Securities available-for-sale:
Less than one year	$	14,595		14,779
One to five years		100,633		102,394
Six to ten years		107,779		108,260
After ten years		67,543		65,629
Total	$	290,550		291,062

Securities held-to-maturity:
Less than one year	$	—		—
One to five years		12,536		13,130
Six to ten years		4,633		4,770
After ten years		—		—
Total	$	17,169		17,900

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

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

	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2015			2014			2015			2014
	(In thousands)
Proceeds	$	34,658			18,753			61,809			28,561

Realized gains		105			204			579			520
Realized losses		(134	)		(40	)		(137	)		(40	)
Total investment securities (losses) gains, net	$	(29	)		164			442			480

At June 30, 2015, the Company had pledged $56.7 million of securities for Federal Home Loan Bank (“FHLB”) advances.

The gross unrealized losses and fair value of the Company’s investments available-for-sale with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2015 are as follows:

At June 30, 2015

Less than 12 Months

12 Months or Greater

Total

Amortized

Fair

Unrealized

Amortized

Fair

Unrealized

Amortized

Fair

Unrealized

Cost

Value

Losses

Cost

Value

Losses

Cost

Value

Losses

(In thousands)

Available-for-sale:

Municipal securities

36,783

36,025

(758

)

335

327

)

37,118

36,352

(766

)

Collateralized loan obligations

13,500

13,358

(142

)

4,707

4,697

(10

)

18,207

18,055

(152

)

Mortgage-backed securities:

Agency

24,355

24,278

(77

)

—

24,355

24,278

(77

)

Non-agency

14,558

14,490

(68

)

6,631

6,501

(130

)

21,189

20,991

(198

)

Total mortgage-backed securities

38,913

38,768

(145

)

6,631

6,501

(130

)

45,544

45,269

(275

)

Trust preferred securities

—

8,918

5,250

(3,668

)

8,918

5,250

(3,668

)

Total

89,196

88,151

(1,045

)

20,591

16,775

(3,816

)

109,787

104,926

(4,861

)

Held-to-maturity:

Municipal securities

1,976

1,966

(10

)

—

1,976

1,966

(10

)

	At December 31, 2014
	Less than 12 Months							12 Months or Greater							Total
	Amortized		Fair		Unrealized			Amortized		Fair		Unrealized			Amortized		Fair		Unrealized
	Cost		Value		Losses			Cost		Value		Losses			Cost		Value		Losses
	(In thousands)
Available-for-sale:
Municipal securities	$	2,479		2,475		(4	)		1,504		1,485		(19	)		3,983		3,960		(23	)
US government agencies		4,770		4,748		(22	)		—		—		—			4,770		4,748		(22	)
Collateralized loan obligations		14,708		14,686		(22	)		—		—		—			14,708		14,686		(22	)
Mortgage-backed securities:
Agency		17,541		17,500		(41	)		—		—		—			17,541		17,500		(41	)
Non-agency		14,284		14,138		(146	)		3,114		3,097		(17	)		17,398		17,235		(163	)
Total mortgage-backed securities		31,825		31,638		(187	)		3,114		3,097		(17	)		34,939		34,735		(204	)
Total	$	53,782		53,547		(235	)		4,618		4,582		(36	)		58,400		58,129		(271	)

Held-to-maturity:
Municipal securities	$	—		—		—			2,363		2,346		(17	)		2,363		2,346		(17	)
Trust preferred securities		—		—		—			7,326		5,177		(2,149	)		7,326		5,177		(2,149	)
Total	$	—		—		—			9,689		7,523		(2,166	)		9,689		7,523		(2,166	)

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

As of June 30, 2015, trust preferred securities had an amortized cost of $11.4 million and a fair value of $9.1 million. For each trust preferred security, impairment testing is performed on a quarterly basis using a detailed cash flow analysis. The major assumptions used during the quarterly impairment testing are described in the subsequent paragraph.

In 2009, the Company adopted a four year “burst” scenario for its modeled default rates (2010 - 2013) that replicated the default rates for the banking industry from the four peak years of the savings and loan crisis, which then reduced to 0.25% annually. The elevated default rate ended in 2013, and the constant default rate used by the Company is now 0.25% annually. All issuers that were currently in deferral were presumed to be in default. Additionally, all defaults are assumed to have a 15% recovery after two years and 1% of the pool is presumed to prepay annually. If this analysis results in a present value of expected cash flows that is less than the book value of a security (that is, a credit loss exists), OTTI is considered to have occurred. If there is no credit loss, any impairment is considered temporary. The cash flow analysis we performed used discount rates equal to the credit spread at the time of purchase for each security and then added the current three-month LIBOR forward interest rate curve. Based on the cash flow analysis performed at period end, management believes that there are no additional securities other-than-temporarily impaired at June 30, 2015.

At June 30, 2015 and December 31, 2014, the Company had 70 and 26, respectively, individual investments available-for-sale that were in an unrealized loss position. The unrealized losses on the Company’s investments in US government-sponsored agencies, municipal securities, and mortgage-backed securities (agency and non-agency) summarized above were attributable primarily to changes in interest rates. Management has performed various analyses, including cash flows, and determined that no OTTI expense was necessary for the three months or six months ended June 30, 2015 or 2014.

The Company had two municipal securities and four trust preferred securities within the held-to-maturity portfolio that were in an unrealized loss position at June 30, 2015 and December 31, 2014, respectively.

Management believes that there are no additional securities other-than-temporarily impaired at June 30, 2015. The Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell these securities before recovery of their amortized cost. Management continues to monitor these securities with a high degree of scrutiny. There can be no assurance that the Company will not conclude in future periods that conditions existing at that time indicate some or all of the securities may be sold or are other-than-temporarily impaired, which would require a charge to earnings in such periods.

NOTE 3 – DERIVATIVES

The derivative positions of the Company at June 30, 2015 and December 31, 2014 are as follows:

	At June 30,				At December 31,
	2015				2014
	Fair		Notional		Fair		Notional
	Value		Value		Value		Value
	(In thousands)
Derivative assets:
Mortgage loan interest rate lock commitments	$	1,215		157,644		1,122		106,440
Mortgage loan forward sales commitments		230		37,285		567		27,292
Mortgage-backed securities forward sales commitments		735		126,066		—		—
Interest rate swaps		146		5,000		—		—
	$	2,326		325,995		1,689		133,732
Derivative liabilities:
Mortgage-backed securities forward sales commitments	$	—		—		506		93,000
Interest rate swaps		380		25,000		530		20,000
	$	380		25,000		1,036		113,000

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

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

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

NOTE 4 - LOANS RECEIVABLE, NET

Loans receivable, net at June 30, 2015 and December 31, 2014 are summarized by category as follows:

	At June 30,					At December 31,
	2015					2014
			% of Total					% of Total
	Amount		Loans			Amount		Loans
	(Dollars in thousands)
Loans secured by real estate:
One-to-four family	$	287,342		34.12	%		252,819		32.48	%
Home equity		27,962		3.32	%		27,547		3.54	%
Commercial real estate		324,614		38.55	%		317,912		40.85	%
Construction and development		89,579		10.64	%		92,008		11.82	%
Consumer loans		5,564		0.66	%		5,675		0.73	%
Commercial business loans		107,037		12.71	%		82,305		10.58	%
Total gross loans receivable		842,098		100.00	%		778,266		100.00	%
Less:
Allowance for loan losses		10,017					9,035
Deferred fees, net		1,036					1,109
Total loans receivable, net	$	831,045					768,122

Included in the loan totals were $73.7 and $80.2 million in loans acquired through branch acquisitions at June 30, 2015 and December 31, 2014, respectively. No allowance for loan losses related to the acquired loans is recorded on the acquisition date because the fair value of the loans acquired incorporates assumptions regarding credit risk.

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

	At June 30,				At December 31,
	2015				2014
	(Dollars in thousands)

Variable rate loans	$	367,324	43.62	%		337,802	43.40	%
Fixed rate loans		474,774	56.38	%		440,464	56.60	%
Total loans outstanding	$	842,098	100.00	%		778,266	100.00	%

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

Allowance for loan losses:

For the Three Months Ended June 30, 2015

Loans Secured by Real Estate

One-to-

Commercial

Construction

four

Home

real

and

Commercial

family

equity

estate

development

Consumer

business

Unallocated

Total

(In thousands)

Balance at April 1, 2015

2,884

226

3,291

1,006

1,683

260

9,379

Provision for loan losses

179

(18

)

118

(233

)

(111

)

—

Charge-offs

—

)

—

)

Recoveries

150

—

299

158

—

640

Balance at June 30, 2015

3,213

208

3,434

1,072

1,891

149

10,017

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

Allowance for loan losses:

For the Six Months Ended June 30, 2015

Loans Secured by Real Estate

One-to-

Commercial

Construction

four

Home

real

and

Commercial

family

equity

estate

development

Consumer

business

Unallocated

Total

(In thousands)

Balance at January 1, 2015

2,888

221

3,283

1,069

1,430

114

9,035

Provision for loan losses

—

(13

)

(99

)

(218

)

292

—

Charge-offs

—

(90

)

(41

)

—

(134

)

Recoveries

325

—

250

311

210

—

1,116

Balance at June 30, 2015

3,213

208

3,434

1,072

1,891

149

10,017

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

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

	Loans Secured by Real Estate
	One-to-				Commercial		Construction
	four		Home		real		and				Commercial
	family		equity		estate		development		Consumer		business		Unallocated		Total
	(In thousands)
At June 30, 2015:
Allowance for loan losses ending balances:
Individually evaluated for impairment	$	281		—		343		129		12		3		—		768
Collectively evaluated for impairment		2,932		208		3,091		943		38		1,888		149		9,249
	$	3,213		208		3,434		1,072		50		1,891		149		10,017

Loans receivable ending balances:
Individually evaluated for impairment	$	3,870		—		9,592		618		53		950		—		15,083
Collectively evaluated for impairment		283,472		27,962		315,022		88,961		5,512		106,087		—		827,016
Total loans receivable	$	287,342		27,962		324,614		89,579		5,564		107,037		—		842,098


At December 31, 2014:
Allowance for loan losses ending balances:
Individually evaluated for impairment	$	364		—		30		90		1		—		—		485
Collectively evaluated for impairment		2,524		221		3,253		979		29		1,430		114		8,550
	$	2,888		221		3,283		1,069		30		1,430		114		9,035

Loans receivable ending balances:
Individually evaluated for impairment	$	3,249		63		8,153		267		30		1,730		—		13,492
Collectively evaluated for impairment		249,570		27,484		309,759		91,741		5,645		80,575		—		764,774
Total loans receivable	$	252,819		27,547		317,912		92,008		5,675		82,305		—		778,266

The following table presents impaired loans individually evaluated for impairment in the segmented portfolio categories and the corresponding allowance for loan losses as of June 30, 2015 and December 31, 2014. The recorded investment is defined as the original amount of the loan, net of any deferred costs and fees, less any principal reductions and direct charge-offs. Unpaid principal balance includes amounts previously included in charge-offs.

	At June 30, 2015						At December 31, 2014
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
	Investment		Balance		Allowance		Investment		Balance		Allowance
	(In thousands)
With no related allowance recorded:
Loans secured by real estate:
One-to-four family	$	3,489		5,061		—		2,008		3,731		—
Home equity		—		347		—		63		410		—
Commercial real estate		7,731		8,276		—		7,893		8,439		—
Construction and development		—		1,733		—		—		1,733		—
Consumer loans		41		518		—		29		506		—
Commercial business loans		947		2,116		—		1,730		2,927		—
		12,208		18,051		—		11,723		17,746		—

With an allowance recorded:
Loans secured by real estate:
One-to-four family		381		381		281		1,241		1,241		364
Home equity		—		—		—		—		—		—
Commercial real estate		1,861		1,861		343		260		260		30
Construction and development		618		618		129		267		267		90
Consumer loans		12		12		12		1		1		1
Commercial business loans		3		3		3		—		—		—
		2,875		2,875		768		1,769		1,769		485

Total:
Loans secured by real estate:
One-to-four family		3,870		5,442		281		3,249		4,972		364
Home equity		—		347		—		63		410		—
Commercial real estate		9,592		10,137		343		8,153		8,699		30
Construction and development		618		2,351		129		267		2,000		90
Consumer loans		53		530		12		30		507		1
Commercial business loans		950		2,119		3		1,730		2,927		—
	$	15,083		20,926		768		13,492		19,515		485

The following table presents the average recorded investment and interest income recognized on impaired loans individually evaluated for impairment in the segmented portfolio categories for the three months and six months ended June 30, 2015 and 2014.

	For the Three Months Ended June 30,									For the Six Months Ended June 30,
	2015				2014					2015				2014
	Average		Interest		Average		Interest			Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income			Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized			Investment		Recognized		Investment		Recognized
	(In thousands)
With no related allowance recorded:
Loans secured by real estate:
One-to-four family	$	3,410		51		5,302		(9	)		3,122		120		5,431		44
Home equity		31		2		—		—			47		2		—		—
Commercial real estate		7,778		96		16,000		119			7,817		183		16,423		267
Construction and development		133		—		405		1			190		—		428		3
Consumer loans		35		1		20		(3	)		33		1		22		—
Commercial business loans		1,330		15		2,264		(25	)		1,523		87		2,372		53
		12,717		165		23,991		83			12,732		393		24,676		367

With an allowance recorded:
Loans secured by real estate:
One-to-four family		381		—		841		(3	)		383		—		467		2
Home equity		—		—		—		—			—		—		—		—
Commercial real estate		752		39		266		4			521		42		269		9
Construction and development		154		17		200		1			77		17		100		1
Consumer loans		11		—		5		—			8		—		6		—
Commercial business loans		3		—		4		—			2		—		4		—
		1,301		56		1,316		2			991		59		846		12

Total:
Loans secured by real estate:
One-to-four family		3,791		51		6,143		(12	)		3,505		120		5,898		46
Home equity		31		2		—		—			47		2		—		—
Commercial real estate		8,530		135		16,266		123			8,338		225		16,692		276
Construction and development		287		17		605		2			267		17		528		4
Consumer loans		46		1		25		(3	)		41		1		28		—
Commercial business loans		1,333		15		2,268		(25	)		1,525		87		2,376		53
	$	14,018		221		25,307		85			13,723		452		25,522		379

A loan is considered past due if the required principal and interest payment has not been received as of the due date. The following schedule is an aging of past due loans receivable by portfolio segment as of June 30, 2015 and December 31, 2014.

At June 30, 2015

Real Estate Loans

One-to-

Commercial

Construction

four

Home

real

and

Commercial

family

equity

estate

development

Consumer

business

Total

(In thousands)

30-59 days past due

120

150

—

383

60-89 days past due

120

—

164

90 days or more past due

1,198

—

563

—

1,798

Total past due

1,438

150

640

—

2,345

Current

285,904

27,812

323,974

89,579

5,475

107,009

839,753

Total loans receivable

287,342

27,962

324,614

89,579

5,564

107,037

842,098

	At December 31, 2014
	Real Estate Loans
	One-to-				Commercial		Construction
	four		Home		real		and				Commercial
	family		equity		estate		development		Consumer		business		Total
	(In thousands)
30-59 days past due	$	336		17		260		60		22		27		722
60-89 days past due		188		—		—		—		6		—		194
90 days or more past due		1,589		—		333		267		6		—		2,195
Total past due		2,113		17		593		327		34		27		3,111
Current		250,706		27,530		317,319		91,681		5,641		82,278		775,155
Total loans receivable	$	252,819		27,547		317,912		92,008		5,675		82,305		778,266

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

There were no loans past due 90 days or more and still accruing at June 30, 2015 or December 31, 2014.

The following is a schedule of loans receivable, by portfolio segment, on nonaccrual at June 30, 2015 and December 31, 2014.

	At June 30,		At December 31,
	2015		2014
Loans secured by real estate:	(In thousands)
One-to-four family	$	1,240		1,720
Home equity		—		63
Commercial real estate		2,042		333
Construction and development		618		267
Consumer loans		37		12
Commercial business loans		36		39
	$	3,973		2,434

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

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

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

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

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

The Company uses the following definitions in the tables below:

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

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

The following is a schedule of the credit quality of loans receivable, by portfolio segment, as of June 30, 2015 and December 31, 2014.

At June 30, 2015

Real Estate Loans

One-to-

Commercial

Construction

four

Home

real

and

Commercial

family

equity

estate

development

Consumer

business

Total

(In thousands)

Internal Risk Rating Grades:

Pass

285,019

27,962

315,700

89,223

5,522

106,845

830,271

Special Mention

372

—

8,205

356

—

174

9,107

Substandard

1,951

—

709

—

2,720

Total loans receivable

287,342

27,962

324,614

89,579

5,564

107,037

842,098

Performing

286,102

27,962

322,572

88,961

5,527

107,001

838,125

Nonperforming:

90 days or more and still accruing

—

Nonaccrual

1,240

—

2,042

618

3,973

Total nonperforming

1,240

—

2,042

618

3,973

Total loans receivable

287,342

27,962

324,614

89,579

5,564

107,037

842,098

	At December 31, 2014
	Real Estate Loans
	One-to-				Commercial		Construction
	four		Home		real		and				Commercial
	family		equity		estate		development		Consumer		business		Total
	(In thousands)
Internal Risk Rating Grades:
Pass	$	249,781		27,485		307,283		91,441		5,661		81,499		763,150
Special Mention		1,318		—		10,037		300		1		217		11,873
Substandard		1,720		63		592		267		12		589		3,243
Total loans receivable	$	252,819		27,548		317,912		92,008		5,674		82,305		778,266

Performing	$	251,099		27,485		317,579		91,741		5,662		82,266		775,832
Nonperforming:
90 days or more and still accruing		—		—		—		—		—		—		—
Nonaccrual		1,720		63		333		267		12		39		2,434
Total nonperforming		1,720		63		333		267		12		39		2,434
Total loans receivable	$	252,819		27,548		317,912		92,008		5,674		82,305		778,266

Troubled Debt Restructurings

At June 30, 2015, there were $10.9 million in loans designated as troubled debt restructurings of which $10.8 million were accruing. At December 31, 2014, there were $10.8 million in loans designated as troubled debt restructurings of which $10.7 million were accruing.

There were no loans designated as troubled debt restructuring during the three months ended June 30, 2015 or the three and six months ended June 30, 2014. There was one relationship totaling fourteen loans designated as a troubled debt restructuring during the six months ended June 30, 2015. All loans within this relationship were designated as a troubled debt restructuring due to a change in payment structure. Eleven loans were within the one-to-four family loan segment with a pre-modification and post-modification recorded investment of $749,000. Two loans were within the commercial real estate loan segment with a pre-modification and post-modification recorded investment of $147,000. One loan was within the commercial and industrial loan segment with a pre-modification and post-modification recorded investment of $14,000.

No loans previously restructured in the twelve months prior to June 30, 2015 and 2014 went into default during the period ended June 30, 2015 and 2014.

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

NOTE 5 – REAL ESTATE ACQUIRED THROUGH FORECLOSURE

The following presents summarized activity in other real estate owned for the periods ended June 30, 2015 and December 31, 2014:

	June 30,			December 31,
	2015			2014
	(In thousands)
Balance at beginning of period	$	3,239			6,273
Additions		1,085			1,461
Sales		(1,053	)		(3,969	)
Write downs		—			(526	)
Balance at end of period	$	3,271			3,239

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

	At June 30,		At December 31,
	2015		2014
	(In thousands)
Real estate loans:
One-to-four family	$	789		245
Commercial real estate		472		954
Construction and development		2,010		2,040
	$	3,271		3,239

NOTE 6 - DEPOSITS

Deposits outstanding by type of account at June 30, 2015 and December 31, 2014 are summarized as follows:

	At June 30,		At December 31,
	2015		2014
	(In thousands)
Noninterest-bearing demand accounts	$	185,179		142,900
Interest-bearing demand accounts		158,286		183,550
Savings accounts		38,357		36,630
Money market accounts		232,703		246,116
Certificates of deposit:
Less than $250,000		374,484		335,740
$250,000 or more		16,839		19,254
Total certificates of deposit		391,323		354,994
Total deposits	$	1,005,848		964,190

The aggregate amount of brokered certificates of deposit was $87.8 million and $77.3 million at June 30, 2015 and December 31, 2014, respectively. Brokered certificates of deposit are included in the table above under certificates of deposit less than $250,000. The aggregate amount of institutional certificates of deposit was $51.0 million and $44.8 million at June 30, 2015 and December 31, 2014, respectively.

The Company has pledged $16.2 million of securities as of June 30, 2015 to secure public agency funds.

NOTE 7 – ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

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

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


Level 1	Quoted prices (unadjusted) in active markets for identical assets and liabilities for the instrument or security to be valued. Level 1 assets include marketable equity securities as well as U.S. Treasury securities that are highly liquid and are actively traded in over-the-counter markets.
Level 2	Observable inputs other than Level 1 quoted prices, such as quoted prices for similar assets and liabilities in active markets, quoted prices in markets that are not active, or model-based valuation techniques for which all significant assumptions are derived principally from or corroborated by observable market data. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments and derivative contracts whose value is determined by using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. U.S. Government sponsored agency securities, mortgage-backed securities issued by U.S. Government sponsored enterprises and agencies, obligations of states and municipalities, collateralized mortgage obligations issued by U.S. Government sponsored enterprises, and mortgage loans held-for-sale are generally included in this category. Certain private equity investments that invest in publicly traded companies are also considered Level 2 assets.
Level 3	Unobservable inputs that are supported by little, if any, market activity for the asset or liability. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow models and similar techniques, and may also include the use of market prices of assets or liabilities that are not directly comparable to the subject asset or liability. These methods of valuation may result in a significant portion of the fair value being derived from unobservable assumptions that reflect The Company’s own estimates for assumptions that market participants would use in pricing the asset or liability. This category primarily includes collateral-dependent impaired loans, other real estate, certain equity investments, and certain private equity investments.

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

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

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

FHLB stock and other investments - The carrying amounts of these financial instruments approximate fair value.

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

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

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

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

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

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

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

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

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

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

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

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

At June 30, 2015

Carrying

Fair Value

Amount

Total

Level 1

Level 2

Level 3

Financial assets:

(In thousands)

Cash and due from banks

13,672

—

Interest-bearing cash

15,726

—

Securities available-for-sale

291,062

—

291,062

—

Securities held-to-maturity

17,169

17,900

—

17,900

—

Federal Home Loan Bank stock

9,048

—

9,048

Other investments

3,121

—

3,121

Derivative assets

2,326

146

2,180

—

Loans held for sale

60,727

—

60,727

—

Loans receivable, net

831,045

872,747

—

872,747

Cash value life insurance

21,727

—

21,727

—

Accrued interest receivable

4,086

—

4,086

—

Mortgage servicing rights

10,642

16,301

—

16,301

—

Financial liabilities:

Deposits

1,005,848

1,005,061

—

1,005,061

—

Short-term borrowed funds

147,500

—

147,500

—

Long-term debt

55,465

57,905

—

57,905

—

Derivative liabilities

380

—

Accrued interest payable

327

—

327

—

	At December 31, 2014
	Carrying		Fair Value
	Amount		Total		Level 1		Level 2		Level 3
Financial assets:	(In thousands)
Cash and due from banks	$	10,453		10,453		10,453		—		—
Interest-bearing cash		10,694		10,694		10,694		—		—
Securities available-for-sale		251,717		251,717		—		251,717		—
Securities held-to-maturity		25,544		27,385		—		27,385		—
Federal Home Loan Bank stock		5,405		5,405		—		—		5,405
Other investments		2,309		2,309		—		—		2,309
Derivative assets		1,689		1,689		—		1,689		—
Loans held for sale		40,912		40,912		—		40,912		—
Loans receivable, net		768,122		785,109		—		—		785,109
Cash value life insurance		21,532		21,532		—		21,532		—
Accrued interest receivable		3,628		3,628		—		3,628		—
Mortgage servicing rights		10,181		15,147		—		15,147		—

Financial liabilities:
Deposits		964,190		962,763		—		962,763		—
Short-term borrowed funds		57,800		57,745		—		57,745		—
Long-term debt		61,740		65,516		—		65,516		—
Derivative liabilities		1,036		1,036		530		506		—
Accrued interest payable		312		312		—		312		—

At June 30, 2015

At December 31, 2014

Notional

Estimated

Notional

Estimated

Amount

Fair Value

Amount

Fair Value

Off-Balance Sheet Financial Instruments:

(In thousands)

Commitments to extend credit

64,868

—

68,181

—

Standby letters of credit

897

—

1,982

—

Derivative assets:

Mortgage loan interest rate lock commitments

157,644

1,215

106,440

1,122

Mortgage loan forward sales commitments

37,285

230

27,292

567

Mortgage-backed securities forward sales commitments

126,066

735

—

Interest rate swaps

5,000

146

—

Derivative liabilities:

Mortgage-backed securities forward sales commitments

—

93,000

506

Interest rate swaps

25,000

380

20,000

530

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

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

Investment Securities Available-for-Sale

Measurement is on a recurring basis upon quoted market prices, if available. If quoted market prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for prepayment assumptions, projected credit losses, and liquidity. At June 30, 2015 and December 31, 2014, the Company’s investment securities available-for-sale are recurring Level 2.

Mortgage Loans Held for Sale

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

Derivative Assets and Liabilities

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

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

Impaired Loans

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

Other Real Estate Owned (“OREO”)

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

Assets and liabilities measured at fair value on a recurring basis are as follows as of June 30, 2015 and December 31, 2014:

	Quoted market price		Significant other		Significant other
	in active markets		observable inputs		unobservable inputs
	(Level 1)		(Level 2)		(Level 3)
	(In thousands)
June 30, 2015
Available-for-sale investment securities:
Municipal securities	$	—		64,901		—
US government agencies		—		—		—
Collateralized loan obligations		—		29,868		—
Mortgage-backed securities:
Agency		—		130,110		—
Non-agency		—		57,098		—
Trust Preferred Securities		—		9,085		—
Loans held for sale		—		60,727		—
Derivative assets:
Mortgage loan interest rate lock commitments		—		1,215		—
Mortgage loan forward sales commitments		—		230		—
Mortgage-backed securities forward sales commitments		—		735		—
Interest rate swaps		146				—
Derivative liabilities:
Interest rate swaps		380		—		—
Total	$	526		353,969		—

December 31, 2014
Available-for-sale investment securities:
Municipal securities	$	—		44,717		—
US government agencies		—		4,748		—
Collateralized loan obligations		—		25,872		—
Mortgage-backed securities:
Agency		—		125,542		—
Non-agency		—		50,838		—
Loans held for sale		—		40,912		—
Derivative assets:
Mortgage loan interest rate lock commitments		—		1,122		—
Mortgage loan forward sales commitment		—		567		—
Derivative liabilities:
Mortgage-backed securities forward sales commitments		—		506		—
Interest rate swaps		530		—		—
Total	$	530		294,824		—

Assets measured at fair value on a nonrecurring basis are as follows as of June 30, 2015 and December 31, 2014:

	Quoted market price		Significant other		Significant other
	in active markets		observable inputs		unobservable inputs
	(Level 1)		(Level 2)		(Level 3)
	(In thousands)
June 30, 2015
Impaired loans:
Loans secured by real estate:
One-to-four family	$	—		—		3,589
Home equity		—		—		—
Commercial real estate		—		—		9,249
Construction and development		—		—		489
Consumer loans		—		—		41
Commercial business loans		—		—		947
Real estate owned:
One-to-four family		—		—		789
Commercial real estate		—		—		472
Construction and development		—		—		2,010
Total	$	—		—		17,586

December 31, 2014
Impaired loans:
Loans secured by real estate:
One-to-four family	$	—		—		2,885
Home equity		—		—		63
Commercial real estate		—		—		8,123
Construction and development		—		—		177
Consumer loans		—		—		29
Commercial business loans		—		—		1,730
Real estate owned:
One-to-four family		—		—		2,040
Commercial real estate		—		—		245
Construction and development		—		—		954
Total	$	—		—		16,246

For Level 3 assets and liabilities measured at fair value on a recurring or nonrecurring basis as of June 30, 2015 and December 31, 2014, the significant unobservable inputs used in the fair value measurements were as follows:

	June 30, 2015 and December 31, 2014
		Significant	Significant Unobservable
	Valuation Technique	Observable Inputs	Inputs
Impaired Loans	Appraisal Value	Appraisals and or sales of	Appraisals discounted 10% to 20% for
		comparable properties	sales commissions and other holding costs

Real estate owned	Appraisal Value/	Appraisals and or sales of	Appraisals discounted 10% to 20% for
	Comparison Sales/	comparable properties	sales commissions and other holding costs
	Other estimates

NOTE 8 - EARNINGS PER SHARE

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

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

On October 15, 2014, the Board of Directors of the Company declared an additional two-for-one stock split to stockholders of record as of October 31, 2014, issued on November 14, 2014.

On June 22, 2015, the Board of Directors of the Company declared a six-for-five stock split representing a 20% stock dividend to stockholders of record as of July 15, 2015, payable on July 31, 2015.

All share, earnings per share, and per share data have been retroactively adjusted to reflect the stock splits for all periods presented in accordance with GAAP.

The following is a summary of the reconciliation of weighted average shares outstanding for the three months and six months ended June 30, 2015 and 2014:

For the Three Months Ended June 30,

2015

2014

Basic

Diluted

Basic

Diluted

Weighted average shares outstanding

9,434,124

9,314,676

Effect of dilutive securities

—

161,592

—

168,871

Weighted average shares outstanding

9,434,124

9,595,716

9,314,676

9,483,547

For the Six Months Ended June 30,

2015

2014

Basic

Diluted

Basic

Diluted

Weighted average shares outstanding

9,399,348

9,279,247

Effect of dilutive securities

—

158,841

—

152,628

Weighted average shares outstanding

9,399,348

9,558,189

9,279,247

9,431,875

The following is a summary of the reconciliation of shares issued and outstanding and unvested restricted stock awards as of June 30, 2015 and 2014.

	As of June 30
	2015			2014
Issued and outstanding shares		9,758,879			9,699,504
Less nonvested restricted stock award		(299,806	)		(362,280	)
Period end dilutive shares		9,459,073			9,337,224

NOTE 9 – SUPPLEMENTAL SEGMENT INFORMATION

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

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

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

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

The following tables present selected financial information for the Company’s reportable business segments for the three months and six months ended June 30, 2015 and 2014:

Community

Mortgage

For the Three Months Ended June 30, 2015

Banking

Other

Eliminations

Total

(In thousands)

Interest income

12,146

481

12,633

Interest expense

1,433

146

(40

)

1,579

Net interest income (expense)

10,713

441

(142

)

11,054

Provision for loan losses

(15

)

—

Noninterest income from external customers

1,199

6,064

—

7,264

Intersegment noninterest income

1,768

(1,808

)

—

Noninterest expense

6,239

4,178

1,990

—

12,407

Intersegment noninterest expense

1,528

241

—

(1,769

)

—

Income (loss) before income taxes

4,161

2,110

(363

)

5,911

Income tax expense (benefit)

1,344

787

(139

)

1,994

Net income (loss)

2,817

1,323

(224

)

3,917

	Community			Mortgage
For the Three Months Ended June 30, 2014	Banking			Banking		Other			Eliminations			Total
	(In thousands)
Interest income	$	8,429			274		4			36			8,743
Interest expense		1,286			—		135			—			1,421
Net interest income (expense)		7,143			274		(131	)		36			7,322
Provision for loan losses		(10	)		10		—			—			—
Noninterest income from external customers		958			4,482		9			—			5,449
Intersegment noninterest income		—			23		1,510			(1,533	)		—
Noninterest expense		4,267			3,553		1,671			—			9,491
Intersegment noninterest expense		1,270			240		—			(1,510	)		—
Income (loss) before income taxes		2,574			976		(283	)		13			3,280
Income tax expense (benefit)		766			365		(105	)		5			1,031
Net income (loss)	$	1,808			611		(178	)		8			2,249

The following tables present selected financial information for the Company’s reportable business segments for the six months ended June 30, 2015 and 2014:

Community

Mortgage

For the Six Months Ended June 30, 2015

Banking

Other

Eliminations

Total

(In thousands)

Interest income

23,169

873

24,090

Interest expense

2,788

291

(51

)

3,079

Net interest income (expense)

20,381

822

(283

)

21,011

Provision for loan losses

(52

)

—

Noninterest income from external customers

2,899

10,954

—

13,854

Intersegment noninterest income

3,536

(3,614

)

—

Noninterest expense

12,575

8,088

3,919

—

24,582

Intersegment noninterest expense

3,056

482

—

(3,538

)

—

Income (loss) before income taxes

7,703

3,230

(665

)

10,283

Income tax expense (benefit)

2,413

1,196

(261

)

3,353

Net income (loss)

5,290

2,034

(404

)

6,930

	Community			Mortgage
For the Six Months Ended June 30, 2014	Banking			Banking		Other			Eliminations			Total
	(In thousands)
Interest income	$	16,521			559		8			67			17,155
Interest expense		2,483			—		269			—			2,752
Net interest income (expense)		14,038			559		(261	)		67			14,403
Provision for loan losses		(10	)		10		—			—			—
Noninterest income from external customers		1,873			8,926		19			—			10,818
Intersegment noninterest income		—			95		3,020			(3,115	)		—
Noninterest expense		8,381			7,399		3,318			—			19,098
Intersegment noninterest expense		2,540			480		—			(3,020	)		—
Income (loss) before income taxes		5,000			1,691		(540	)		(28	)		6,123
Income tax expense (benefit)		1,501			639		(199	)		(11	)		1,930
Net income (loss)	$	3,499			1,052		(341	)		(17	)		4,193

The following tables present selected financial information for the Company’s reportable business segments for June 30, 2015 and December 31, 2014:

Community

Mortgage

At June 30, 2015

Banking

Other

Eliminations

Total

(In thousands)

Assets

1,318,083

76,343

116,840

(185,321

)

1,325,945

Loans receivable, net

828,574

16,131

—

(13,660

)

831,045

Loans held for sale

18,721

42,006

—

60,727

Deposits

1,008,045

—

(2,197

)

1,005,848

Borrowed funds

187,500

12,908

15,465

(12,908

)

202,965

	Community		Mortgage
At December 31, 2014	Banking		Banking		Other		Eliminations			Total
	(In thousands)
Assets	$	1,192,419		67,952		111,096		(172,450	)		1,199,017
Loans receivable, net		764,881		10,808		—		(7,567	)		768,122
Loans held for sale		1,547		39,365		—		—			40,912
Deposits		966,309		—		—		(2,119	)		964,190
Borrowed funds		104,076		6,800		15,465		(6,801	)		119,540

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

The following discussion reviews our results of operations for the three months and six months ended June 30, 2015 as compared to the three months and six months ended June 30, 2014 and assesses our financial condition as of June 30, 2015 as compared to December 31, 2014. You should read the following discussion and analysis in conjunction with the accompanying consolidated financial statements and the related notes and the consolidated financial statements and the related notes for the year ended December 31, 2014 included in our Form 10-K for that period. Results for the three months and six months ended June 30, 2015 are not necessarily indicative of the results for the year ending December 31, 2015 or any future period.

Cautionary Warning Regarding Forward-Looking Statements

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

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

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

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

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

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

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

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

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

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

the rate of loan growth in recent or future years;

	·	our ability to attract and retain key personnel;

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

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

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

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

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

inflation;

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

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

changes in deposit flows;

changes in technology;

changes in monetary and tax policies;

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

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

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

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

	·	our anticipated capital expenditures and our estimates regarding our capital requirements and our ability to successfully integrate acquired businesses;

	·	our liquidity and working capital requirements;

competitive pressures among depository and other financial institutions;

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

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

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

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

management compensation and the methodology for its determination;

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

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

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

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

If any of these risks or uncertainties materialize, or if any of the assumptions underlying such forward-looking statements proves to be incorrect, our results could differ materially from those expressed, implied or projected by us in such forward-looking statements. For information with respect to factors that could cause actual results to differ from the expectations stated in the forward-looking statements, see “Risk Factors” under Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2014. We urge investors to consider all of these factors carefully in evaluating the forward-looking statements contained in this Quarterly Report on Form 10-Q and our other reports filed pursuant to the Securities Exchange Act of 1934. We make these forward-looking statements as of the date of this document and we do not intend, and assume no obligation, to update the forward-looking statements or to update the reasons why actual results could differ from those expressed, implied or projected by us in the forward-looking statements.

Company Overview

The Company is a Delaware corporation and bank holding company that was incorporated in 1996 and began operations in 1997. It operates principally through CresCom Bank, a South Carolina state-chartered bank (the “Bank”). Crescent Mortgage Company operates as a wholly-owned subsidiary of CresCom Bank. CresCom Bank provides a full range of commercial and retail banking financial services designed to meet the financial needs of our customers through its branch network in South Carolina and North Carolina. Crescent Mortgage Company, headquartered in Atlanta, Georgia, is a wholesale mortgage company that provides mortgage banking services in 45 states and has partnered with over 2,000 community banks, credit unions and mortgage brokers.

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

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

In addition to earning interest on our loans and investments, we derive a portion of our income from Crescent Mortgage Company through mortgage banking income as well as servicing income. We also earn income through fees that we charge to our customers. Likewise, we incur other operating expenses as well.

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

Executive Summary of Operating Results

At June 30, 2015, our total assets were $1.3 billion, an increase of $126.9 million, from total assets of $1.2 billion at December 31, 2014. The largest components of our total assets are loans receivable and securities which were $831.0 million and $308.2 million, respectively at June 30, 2015. Comparatively, our loans receivable and securities totaled $768.1 million and $277.3 million, respectively, at December 31, 2014. At June 30, 2015 loans held for sale were $60.7 million compared to $40.9 million as of December 31, 2014. Our liabilities and stockholders’ equity at June 30, 2015 totaled $1.2 billion and $100.3 million, respectively, compared to liabilities of $1.1 billion and stockholders’ equity of $93.7 million at December 31, 2014. The principal components of our liabilities are deposits which were $1.0 billion and $964.2 million at June 30, 2015 and December 31, 2014, respectively. The increase in total assets and liabilities during 2015 primarily related to strong loan growth, an increase in securities funded by deposits growth, and an increase in borrowings.

The Company reported net income for the three months ended June 30, 2015 of $3.9 million, or $0.41 per diluted share, as compared to $2.2 million, or $0.24 per diluted share, for the three months ended June 30, 2014. Net income for the six months ended June 30, 2015 totaled $6.9 million, or $0.73 per diluted share, compared to net income of $4.2 million, or $0.45 per diluted share, for the six months ended June 30, 2014.

The increase in net income from period to period is attributable to the significant growth in loans and securities, increased checking fees, and improved results from the Company’s retail mortgage team as well as significantly improved results from Crescent Mortgage Company. In addition, the Bank recovered $460,000 of previously unrecognized interest income from a nonperforming asset that was paid off during June 2015 and recognized a $588,000 gain on interest rate swaps, which were partially offset by a $1.2 million loss on extinguishment of debt arising from the early pay-off of a high rate advance from the Federal Home Loan Bank of Atlanta (the “FHLB”).

The allowance for loan losses was $10.0 million, or 1.19% of total loans at June 30, 2015, compared to $9.0 million, or 1.16% of total loans, at December 31, 2014. The Company experienced net recoveries of $638,000 and $261,000 for the three months ended June 30, 2015 and 2014, respectively, and $982,000 and $571,000 for the six months ended June 30, 2015 and 2014, respectively. Asset quality has remained relatively consistent since year end, with nonperforming assets to total assets slightly increasing to 0.55% as of June 30, 2015 as compared to 0.47% as of December 31, 2014. No provision expense for loan losses was recorded during 2015 or 2014 primarily due to the net recoveries experienced.

At June 30, 2015, the Company’s regulatory capital ratios exceeded the minimum levels currently required. Stockholders’ equity totaled $100.3 million as of June 30, 2015 compared to $93.7 million at December 31, 2014. The implementation of Basel III capital framework did not have a material effect on the Company’s regulatory capital ratios.

Recent Events

On April 29, 2015, the stockholders of the Company approved an increase in the number of authorized common shares from 10,000,000 to 15,000,000.

On June 22, 2015, the Board of Directors of the Company declared a six-for-five stock split representing a 20% stock dividend to stockholders of record as of July 15, 2015, payable on July 31, 2015.

On July 22, 2015 the Company declared a $0.03 per share dividend to stockholders of record on September 18, 2015, payable October 7, 2015.

All share, earnings per share, and per share data have been retroactively adjusted to reflect stock splits for all period presented in accordance with generally accepted accounting principles.

Critical Accounting Policies

We have adopted various accounting policies that govern the application of accounting principles generally accepted in the United States and with general practices within the banking industry in the preparation of our financial statements. Our significant accounting policies are described in the notes to our consolidated financial statements within Item 1 “Financial Statements” elsewhere in this report.

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

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

Other-Than Temporary Impairment. The evaluation and recognition of other-than-temporary impairment, or OTTI, on certain investments including our private label mortgage-backed securities and trust preferred securities requires significant judgment and estimates. Some of the more critical judgments supporting the evaluation of OTTI include projected cash flows including prepayment assumptions, default rates and severities of losses on the underlying collateral within the security. Under different conditions or utilizing different assumptions, the actual OTTI realized by us may be different from the actual amounts recognized in our consolidated financial statements. See notes to our consolidated financial statements in item I “Financial Statements” for the disclosure of certain assumptions used in the determination of OTTI.

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

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

For additional discussion related to the determination of fair value related to derivative instruments, see notes to the financial statements in Item I “Financial Statements.”

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

Business Combinations. The Company accounts for its acquisitions under Accounting Standards Codification (“ASC”) Topic 805, Business Combinations, which requires the use of the acquisition method of accounting. All identifiable assets acquired, including loans, are recorded at fair value. No allowance for loan losses related to the acquired loans is recorded on the acquisition date because the fair value of the loans acquired incorporates assumptions regarding credit risk. As provided for under GAAP, management has up to twelve months following the date of the acquisition to finalize the fair values of acquired assets and assumed liabilities. Once management has finalized the fair values of acquired assets and assumed liabilities within this twelve month period, management considers such values to be the day 1 fair values (“Day 1 Fair Values”).

Results of Operations

Summary

The Bank incurred $1.2 million loss on extinguishment of debt as a result of the prepayment of a Federal Home Loan Bank borrowing.

The Bank collected, and recognized in interest income, previously unrecognized interest totaling $460,000 related to the resolution of a nonperforming asset that paid off during the quarter ended June 30, 2015.

The Bank recognized a $588,000 fair value adjustment gain on interest rate swaps as a result of interest rate movements during the second quarter of 2015. The Bank uses interest rate swaps to help offset fair value volatility in the balance sheet related to interest rate changes.

For additional information regarding the effects of the wholesale mortgage banking subsidiary on net income, refer to Note 9 under Item 1 “Financial Statements.”

Net Interest Income and Margin

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

Net interest income increased to $11.1 million for the three months ended June 30, 2015 from $7.3 million for the three months ended June 30, 2014. During the six months ended June 30, 2015, net interest income increased to $21.0 million from $14.4 million for the six months ended June 30, 2015. The increase in net interest income is a result of the increase in average interest-earning assets balances as well as a decrease in rates paid on interest-bearing liabilities and a shift to lower cost funding sources. Additionally, the Company collected and recognized in interest income, previously unrecognized interest totaling $460,000 related to the resolution of a nonperforming asset that paid off during the quarter ended June 30, 2015.

The increase in average earnings assets for the three months and six months ended June 30, 2015 is primarily the result of increased balances of loans receivable and securities.

The growth in loan balances was primarily the result of the following:

· Residential mortgage –In addition to selling a portion of its production, the Company has retained a portion of the mortgage production. Due to the emphasis to grow the residential mortgage portfolio, loans receivable within the one-to-four family portfolio has increased $78.2 million since June 30, 2014. This growth includes loans acquired in Branch Acquisition during the fourth quarter of 2014, described further below.

· Commercial lending – during 2014 and 2015, the Company expanded its commercial lending team by hiring additional loan officers in its Charleston and Myrtle Beach markets of South Carolina. The Company also has opened a loan production office in the upstate of South Carolina. As a result, loans receivable within the commercial real estate and construction and development portfolios have grown $69.3 million and $23.3 million, respectively, since June 30, 2014. This growth includes loans acquired in the Branch acquisition described further below.

· Syndicated loans – The Charleston and Myrtle Beach markets of South Carolina have provided limited opportunities for the Bank to develop a Commercial and Industrial (“C&I”) loan portfolio. The Company’s primary markets are generally concentrated in real estate lending. However, in order to diversify our lending portfolio, the Company began a syndicated loan program in 2014 to purchase C&I loans to retain in the loan portfolio. These loans typically have terms of seven years and are tied to a floating rate index such as libor or prime. To effectively manage this new line of lending, the Company hired an experienced senior lending executive in 2014 with relevant experience to lead and manage this area of the loan portfolio and retained a consulting firm that specializes in syndicated loans. Syndicated loans have grown $41.3 million since June 30, 2014. As of June 30, 2015, the syndicated loan portfolio outstanding was $70.4 million and is grouped within commercial business loans. As of June 30, 2015, the Moody’s weighted average credit facility rating of the syndicated loan portfolio was Ba2, with no credit rated less than B2.

Acquisition of 13 branches – On December 12, 2014, the Company finalized the acquisition of 13 branches from First Community Bank. Loans acquired totaled $70.0 million after fair value adjustments with approximately $20.7 million in one-to-four family, $18.2 million in commercial real estate and $20.9 million in construction and development with the remaining loans consisting of consumer, home equity, and commercial business loans.

The growth in securities is a result of the Company’s continued effort to deploy capital into earning assets as we grow the balance sheet.

The decrease in rates paid on interest-bearing liabilities is based on the continued historically low interest rates that have positively impacted our ability to reduce funding cost. We have also shifted to lower cost funding sources through the Company’s sustained efforts to grow checking, savings, and money market accounts during 2014 and continuing into 2015. As a result of these efforts, the Company experienced significant growth in checking, savings, and money market accounts which typically yield less than other forms of interest-bearing liabilities. Checking, savings and money market balances increased $150.3 million since June 30, 2014, including deposits assumed in the two branch acquisitions completed in 2014.

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

	For The Three Months Ended June 30,
	2015								2014
	Interest			Average		Interest			Average
	Average			Earned/		Yield/			Average			Earned/		Yield/
	Balance			Paid		Rate			Balance			Paid		Rate

Interest-earning assets:
Loans held for sale	$	49,007			462		3.78	%		28,466			251		3.45	%
Loans receivable, net (1)		813,293			10,003		4.93	%		581,267			6,906		4.71	%
Interest-bearing cash		17,722			11		0.25	%		24,063			14		0.23	%
Securities available for sale		286,592			1,990		2.75	%		199,634			1,352		2.69	%
Securities held to maturity		18,355			89		1.92	%		24,238			174		2.85	%
Federal Home Loan Bank stock		8,212			67		3.27	%		3,625			35		3.86	%
Other investments		2,503			11		1.76	%		1,925			11		2.27	%
Total interest-earning assets		1,195,684			12,633		4.24	%		863,218			8,743		4.02	%
Non-earning assets		101,369								84,949

Total assets	$	1,297,053								948,167

Interest-bearing liabilities:
Demand accounts		179,511			50		0.11	%		104,140			46		0.18	%
Money market accounts		238,441			113		0.19	%		213,576			132		0.25	%
Savings accounts		38,481			12		0.13	%		24,812			11		0.18	%
Certificates of deposit		373,593			836		0.90	%		312,809			709		0.90	%
Short-term borrowed funds		142,800			76		0.21	%		11,523			11		0.38	%
Long-term debt		41,419			492		4.76	%		69,571			512		2.92	%
Total interest-bearing liabilities		1,014,245			1,579		0.62	%		736,431			1,421		0.77	%
Noninterest-bearing deposits		169,463								112,021
Other liabilities		15,698								12,587
Stockholders' equity		97,647								87,128

Total liabilities and
Stockholders' equity	$	1,297,053								948,167

Net interest spread							3.62	%							3.25	%
Net interest margin		3.71	%							3.37	%

Net interest margin (tax equivalent) (2)		3.80	%							3.45	%
Net interest income					11,054								7,322

(1) Average balances of loans include nonaccrual loans.

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

Our net interest margin was 3.71%, or 3.80% on a tax equivalent basis, for the three months ended June 30, 2015 compared to 3.37%, or 3.45% on a tax equivalent basis, for the three months ended June 30, 2014. The increase in our net margin primarily resulted from the recognition of $460,000 of previously uncollected interest income from the resolution of a non performing assets during the second quarter as well as the increase in average noninterest-bearing deposits and a shift to lower cost deposits positively impacting the rate paid on interest-bearing liabilities.

Our net interest spread, which is not on a tax equivalent basis, was 3.62% for the three months ended June 30, 2015 as compared to 3.25% for the same period in 2014. The net interest spread is the difference between the yield we earn on our interest-earning assets and the rate we pay on our interest-bearing liabilities. The 37 basis point increase in net interest spread is a result of the 22 basis point increase in yield on interest-earning assets and a 15 basis point decrease in rate paid on interest-bearing liabilities.

	For The Six Months Ended June 30,
	2015								2014
				Interest		Average						Interest		Average
	Average			Earned/		Yield/			Average			Earned/		Yield/
	Balance			Paid		Rate			Balance			Paid		Rate

Interest-earning assets:
Loans held for sale	$	39,870			750		3.79	%		27,062			517		3.80	%
Loans receivable, net (1)		795,466			19,178		4.86	%		567,379			13,473		4.79	%
Interest-bearing cash		18,105			22		0.25	%		22,536			28		0.25	%
Securities available for sale		273,363			3,680		2.68	%		190,852			2,705		2.86	%
Securities held to maturity		21,906			293		2.66	%		24,282			342		2.84	%
Federal Home Loan Bank stock		7,308			145		4.00	%		3,699			69		7.46	%
Other investments		2,740			22		1.62	%		1,911			21		2.22	%
Total interest-earning assets		1,158,758			24,090		4.19	%		837,721			17,155		4.13	%
Non-earning assets		104,229								83,729

Total assets	$	1,262,987								921,450

Interest-bearing liabilities:
Demand accounts		172,557			106		0.12	%		94,131			86		0.18	%
Money market accounts		241,064			223		0.19	%		215,722			268		0.25	%
Savings accounts		37,697			24		0.13	%		22,784			21		0.19	%
Certificates of deposit		366,970			1,619		0.89	%		302,585			1,338		0.89	%
Short-term borrowed funds		119,930			142		0.24	%		8,086			16		0.40	%
Long-term debt		43,360			965		4.49	%		71,436			1,023		2.89	%
Total interest-bearing liabilities		981,578			3,079		0.63	%		714,744			2,752		0.78	%
Noninterest-bearing deposits		167,047								107,814
Other liabilities		17,914								13,563
Stockholders' equity		96,448								85,329

Total liabilities and
Stockholders' equity	$	1,262,987								921,450

Net interest spread							3.56	%							3.35	%
Net interest margin		3.66	%							3.47	%

Net interest margin (tax equivalent) (2)		3.75	%							3.56	%
Net interest income					21,011								14,403

(1) Average balances of loans include nonaccrual loans.

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

Our net interest margin was 3.66%, or 3.75% on a tax equivalent basis, for the six months ended June 30, 2015 compared to 3.47%, or 3.56% on a tax equivalent basis, for the six months ended June 30, 2014. The increase in our net margin primarily resulted from the increase in average noninterest-bearing deposits and a shift to lower cost deposits positively impacting the rate paid on interest-bearing liabilities.

Our net interest spread, which is not on a tax equivalent basis, was 3.56% for the six months ended June 30, 2015 as compared to 3.35% for the same period in 2014. The net interest spread is the difference between the yield we earn on our interest-earning assets and the rate we pay on our interest-bearing liabilities. The 21 basis point increase in net interest spread is a result of the 6 basis point increase in yield on interest-earning assets and a 15 basis point decrease in rate paid on interest-bearing liabilities.

Provision for Loan Loss

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

Following is a summary of the activity in the allowance for loan losses during the periods ended June 30, 2015 and 2014.

	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2015			2014			2015			2014
	(Dollars in thousands)
Balance, beginning of period	$	9,379			8,401			9,035			8,091
Provision for loan losses		—			—			—			—
Loan charge-offs		(2	)		(36	)		(134	)		(284	)
Loan recoveries		640			297			1,116			855
Balance, end of period	$	10,017			8,662			10,017			8,662

The Company experienced net recoveries of $638,000 and $261,000 during the three months ended June 30, 2015 and 2014, respectively. For the six months ended June 30, 2015, the Company experienced net recoveries of $982,000 compared to $571,000 for the six months ended June 30, 2014. Asset quality has remained relatively consistent since year end, with nonperforming assets to total assets of 0.55% as of June 30, 2015 as compared to 0.47% as of December 31, 2014. No provision expense was recorded during the 2015 or 2014 periods presented primarily due to the net recoveries experienced.

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

Noninterest Income and Expense

Noninterest income provides us with additional revenues that are significant sources of income. The major components of noninterest income for the three and six months ended June 30, 2015 and 2014 are presented below:

	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2015			2014			2015			2014
	(In thousands)
Noninterest income:
Mortgage banking income	$	5,104			3,426			9,121			5,880
Deposit service charges		883			517			1,723			948
Net loss on extinguishment of debt		(1,215	)		(31	)		(1,215	)		(31	)
Net gain (loss) on sale of securities		(29	)		164			442			480
Fair value adjustments on interest rate swaps		588			(263	)		(7	)		(518	)
Net gain on sale of servicing assets		—			—			—			775
Net increase in cash value life insurance		180			187			358			373
Mortgage loan servicing income		1,318			1,254			2,626			2,531
Other		435			195			806			380
Total noninterest income	$	7,264			5,449			13,854			10,818

Noninterest income increased $1.8 million to $7.3 million for the three months ended June 30, 2015 from $5.4 million for the three months ended June 30, 2014. For the six months ended June 30, 2015, noninterest income increased $3.0 million to $13.9 million from $10.8 million for the six months ended June 30, 2014. The increase in noninterest income primarily relates to the increase in mortgage banking income from our retail mortgage team as well as our wholesale mortgage banking subsidiary and an increase in deposit service charges during the period.

The increase in mortgage banking income is attributable to an increase in originations as well as margin expansion experienced during 2015. The following table provides a break out of mortgage banking income from our retail mortgage team “Community banking” and Crescent Mortgage Company “Wholesale mortgage banking”.

	For the Three Months Ended June 30,
	Loan Originations				Mortgage Banking Income				Margin
	2015		2014		2015		2014		2015			2014
	(Dollars in thousands)
Additional segment information:
Community banking	$	21,321		6,353		317		89		1.49	%		1.40	%
Wholesale mortgage banking		287,465		252,202		4,787		3,337		1.67	%		1.32	%
Total mortgage banking income	$	308,786		258,555		5,104		3,426		1.65	%		1.33	%

	For the Six Months Ended June 30,
	Loan Originations				Mortgage Banking Income				Margin
	2015		2014		2015		2014		2015			2014
	(Dollars in thousands)
Additional segment information:
Community banking	$	39,358		12,690		574	$	170		1.46	%		1.34	%
Wholesale mortgage banking		510,886		458,411		8,547		5,710		1.67	%		1.25	%
Total mortgage banking income	$	550,244		471,101		9,121	$	5,880		1.66	%		1.25	%

For the first six months of 2015, 62.0% of originations were from purchase requests while 38.0% were from refinance requests. This compares to 69.7% originations from purchase requests and 30.3% from refinance requests for the first six months of 2014.

The increase in deposit service charge income is a result of the increase in deposits assumed as part of the two branch acquisitions during 2014 as well as the Company’s sustained efforts to grow checking, savings, and money market accounts. As a result of these efforts, the Company experienced significant growth in number of checking accounts. Furthermore, checking, savings and money market balances have increased $150.3 million since June 30, 2014, including the effect of deposits assumed in the two branch acquisitions completed in 2014.

During the second quarter of 2015, the Company incurred a $1.2 million loss on extinguishment of debt as a result of the prepayment of an advance from the FHLB. This compares to a loss on extinguishment of debt of $31,000 for the three and six months ended June 30, 2014.

Partially offsetting the overall increase in noninterest income for the six months ended June 30, 2015 was a decrease in the net gain on sale of servicing assets. During the first quarter of 2014, the Company sold $147.7 million in unpaid principal balance of mortgage servicing rights for a net gain of $776,000. There were no servicing rights sold during 2015.

During the three months ended June 30, 2015, the Company recognized a net loss on sale of available-for-sale securities of $29,000 compared to a net gain on sale of available-for-sale securities of 164,000 for the three months ended June 30, 2014. During the six months ended June 30, 2015 and 2014, the Company recognized net gains on sale of available-for-sale securities of $442,000 and $480,000, respectively.

The fair value adjustment on interest rate swaps increased noninterest income by $588,000 for the three months ended June 30, 2015 compared to a reduction in noninterest income of $263,000 for the three months ended June 30, 2014. Fair value adjustments on interest rate swaps reduced noninterest income by $7,000 and $518,000 for the six months ended June 30, 2015 and 2014, respectively. The change in fair value adjustment on interest rate swaps relates to the change in interest rates from period to period. The bank uses interest rate swaps to help offset fair value volatility in the balance sheet related to interest rate changes.

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

	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2015			2014			2015			2014
	(In thousands)
Noninterest expense:
Salaries and employee benefits	$	7,286			5,515			14,249			10,859
Occupancy and equipment		1,727			1,051			3,511			2,035
Marketing and public relations		367			297			769			571
FDIC insurance		185			136			350			263
Provision for mortgage loan repurchase losses		(250	)		(250	)		(500	)		(250	)
Legal expense		73			191			250			361
Other real estate expense, net		43			60			110			307
Mortgage subservicing expense		423			326			818			689
Amortization of mortgage servicing rights		485			441			945			913
Other		2,068			1,724			4,080			3,350
Total noninterest expense	$	12,407			9,491			24,582			19,098

Noninterest expense represents the largest expense category for the Company. Noninterest expense increased $2.9 million to $12.4 million for the three months ended June 30, 2015 from $9.5 million for the three months ended June 30, 2014. For the six months ended June 30, 2015, noninterest expense increased $5.5 million to $24.6 million compared to $19.1 million for the six months ended June 30, 2014. The increase in noninterest expense for the three and six months ended June 30, 2015 compared to the prior periods is primarily a result of the increase in salaries and employee benefits paid as well as the increase in expenses related to occupancy and equipment.

The increase in salaries and employee benefits as well as occupancy and equipment are primarily a result of the personnel and occupancy costs associated with the two acquisitions of branches completed during 2014. The company added approximately 72 employees and 13 branches during 2014 as a result of these acquisitions. In addition, the Company opened three branches and one loan production office during 2014 which also added to the increase in depreciation and operational expense of the Company.

Income Tax Expense

As a result of increased income reducing the effect of non-taxable municipal interest, our effective tax rate increased to 33.7% for three month period ended June 30, 2015, compared to 31.4% for the three month period ended June 30, 2014. For the six months ended June 30, 2015, our effective tax rate increased to 32.6% compared to 31.5% for the six months ended June 30, 2014.

Balance Sheet Review

Investment Securities

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

At June 30, 2015, our investment securities portfolio, excluding FHLB stock and other investments, was $308.2 million or approximately 23.2% of our assets. Our available-for-sale investment portfolio included US agency securities, municipal securities, collateralized loan obligations, mortgage-backed securities (agency and non-agency), and trust preferred securities with a fair value of $291.1 million and an amortized cost of $290.6 million for a net unrealized gain of $512,000. Our held-to-maturity portfolio include municipal securities with a fair value of $17.9 million and a cost of $17.2 million for a net unrealized gain of $731,000.

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

During 2015, the Company transferred trust preferred securities totaling $11.4 million from available-for-sale to held-to-matuirty as a result of the implementation of the regulatory changes in risk weightings and capital deductions dictated by Basel III. The transfer was in accordance with ASC 320-10-25-6; therefore, management has determined the transfer out of held-to-maturity is consistent with the original designation and does not taint the remaining portfolio.

The following table summarizes issuer concentrations of agency mortgage-backed securities for which aggregate fair values exceed 10% of stockholders’ equity at June 30, 2015:

Aggregate

Fair Value

Amortized

Fair

as a % of

Issuer

Cost

Value

Stockholders' Equity

(Dollars in thousands)

GNMA

68,555

69,486

69.25

FNMA

46,448

47,222

47.06

FHLMC

13,039

13,402

13.36

128,042

130,110

129.67

See Note 2 under Item 1 “Financial Statements” herein for additional disclosures related to the Company’s evaluation of securities for OTTI as well as the transfer of held-to-maturity securities to available-for-sale during the first quarter of 2015.

Loans by Type

Since loans typically provide higher interest yields than other types of interest-earning assets, a substantial percentage of our earning assets are invested in our loan portfolio. Loans outstanding, net of the allowance at June 30, 2015 and December 2014, were $831.0 million and $768.1 million, respectively.

Our loan portfolio consists primarily of loans secured by real estate mortgages. As of June 30, 2015, our loan portfolio included $729.5 million, or 86.6%, of gross loans secured by real estate. As of December 31, 2014, our loan portfolio included $690.3 million, or 88.7%, of gross loans secured by real estate. Substantially all of our real estate loans are secured by residential or commercial property. We obtain a security interest in real estate, in addition to any other available collateral. This collateral is taken to increase the likelihood of the ultimate repayment of the loan. Generally, we limit the loan-to-value ratio on loans to coincide with the appropriate regulatory guidelines. The Bank’s primary markets are generally concentrated in real estate lending. In order to diversify our lending portfolio, the Bank began a syndicated loan program during 2014. As of June 30, 2015, syndicated loans were $70.4 million and are included within commercial business loans in the table below. We attempt to maintain a relatively diversified loan portfolio to help reduce the risk inherent in concentration in certain types of collateral and business types.

As shown in the table below, gross loans receivable increased $63.8 million since December 31, 2014. The increase in loans receivable primarily relates to the Bank’s focus on increasing residential mortgage lending, commercial lending, and syndicated loans.

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

	At June 30,					At December 31,
	2015					2014
			% of Total					% of Total
	Amount		Loans			Amount		Loans
	(Dollars in thousands)
Loans secured by real estate:
One-to-four family	$	287,342		34.12	%		252,819		32.48	%
Home equity		27,962		3.32	%		27,547		3.54	%
Commercial real estate		324,614		38.55	%		317,912		40.85	%
Construction and development		89,579		10.64	%		92,008		11.82	%
Consumer loans		5,564		0.66	%		5,675		0.73	%
Commercial business loans		107,037		12.71	%		82,305		10.58	%
Total gross loans receivable		842,098		100.00	%		778,266		100.00	%
Less:
Allowance for loan losses		10,017					9,035
Deferred fees, net		1,036					1,109
Total loans receivable, net	$	831,045					768,122

Maturities and Sensitivity of Loans to Changes in Interest Rates

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

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

At June 30, 2015

After one

One Year

but within

After five

or Less

five years

years

Total

(In thousands)

Loans secured by real estate:

One-to-four family

8,736

48,720

229,886

287,342

Home equity

4,268

10,246

13,448

27,962

Commercial real estate

28,785

241,120

54,709

324,614

Construction and development

26,351

46,785

16,443

89,579

Consumer loans

1,511

3,246

807

5,564

Commercial business loans

14,322

31,540

61,175

107,037

Total gross loans receivable

83,973

381,657

376,468

842,098

Less:

Deferred fees, net

920

1,036

Total loans receivable

83,896

380,737

376,429

841,062

Loans maturing - after one year

Variable rate loans

321,231

Fixed rate loans

435,935

757,166

Nonperforming and Problem Assets

Nonperforming assets include loans on which interest is not being accrued, accruing loans that are 90 days or more delinquent and foreclosed property. Foreclosed property consists of real estate and other assets acquired as a result of a borrower’s loan default. Generally, a loan is placed on nonaccrual status when it becomes 90 days past due as to principal or interest, or when we believe, after considering economic and business conditions and collection efforts, that the borrower’s financial condition is such that collection of the loan is doubtful. A payment of interest on a loan that is classified as nonaccrual is recognized as a reduction of principal when received. In general, a nonaccrual loan may be placed back onto accruing status once the borrower has made a minimum of six consecutive payments in accordance with the loan terms. Further, the borrower must show capacity to continue performing into the future prior to restoration of accrual status. As of June 30, 2015 and December 31 2014, we had no loans 90 days past due and still accruing.

Troubled Debt Restructurings (“TDRs”)

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

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

	At June 30,		At December 31,
	2015		2014
	(In thousands)
Loans receivable:
Nonaccrual loans-renegotiated loans	$	58		58
Nonaccrual loans-other		3,915		2,376
Accruing loans 90 days or more delinquent		—		—
Real estate acquired through foreclosure, net		3,271		3,239
Total Non-Performing Assets	$	7,244		5,673

Problem Assets not included in Non-Performing Assets-Accruing renegotiated loans outstanding	$	10,801		10,798

At June 30, 2015, nonperforming assets were $7.2 million, or 0.55% of total assets. Comparatively, nonperforming assets were $5.7 million, or 0.47% of total assets, at December 31, 2014. Nonperforming loans were 0.47% and 0.31% of gross loans receivable at June 30, 2015 and December 31, 2014, respectively.

Potential problem loans, which are not included in nonperforming loans, amounted to approximately $10.8 million, or 1.28% of gross loans at June 30, 2015, compared to $10.8 million, or 1.38% of gross loans at December 31, 2014. Potential problem loans represent those loans with a well-defined weakness and where information about possible credit problems of borrowers has caused management to have serious doubts about the borrower’s ability to comply with present repayment terms.

Substantially all of the nonaccrual loans, accruing loans 90 days or more delinquent and accruing renegotiated loans at June 30, 2015 and December 31, 2014 are collateralized by real estate. The Bank utilizes third party appraisers to determine the fair value of collateral dependent loans. Our current loan and appraisal policies require the Bank to obtain updated appraisals on an annual basis, either through a new external appraisal or an internal appraisal evaluation. Impaired loans are individually reviewed on a quarterly basis to determine the level of impairment. We typically charge-off a portion or create a specific reserve for impaired loans when we do not expect repayment to occur as agreed upon under the original terms of the loan agreement. Management believes based on information known and available currently, the probable losses related to problem assets are adequately reserved in the allowance for loan losses.

Credit quality indicators generally showed improvement during 2014 and continuing into 2015 as the Company experienced reduced loan migrations to nonaccrual status, and lower loss severity on individual problem asset. The Company believes this general trend in reduced loans migrating into nonaccrual status is an indication of improving credit quality in the Company’s overall loan portfolio and a leading indicator of reduced credit losses going forward. Nevertheless, the Company can make no assurances that nonperforming assets will continue to improve in future periods. The Company continues to monitor the loan portfolio and foreclosed assets very carefully and is continually working to reduce its problem assets.

Allowance for Loan Losses

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

The general component covers nonimpaired loans and is based on historical loss experience adjusted for current factors. The historical loss experience is determined by major loan category and is based on the actual loss history trends for the previous 16 quarters. The actual loss experience is supplemented with internal and external qualitative factors as considered necessary at each period and given the facts at the time. These qualitative factors adjust the 16 quarter historical loss rate to recognize the most recent loss results and changes in the economic conditions to ensure the estimated losses in the portfolio are recognized in the period incurred and that the allowance at each balance sheet date is adequate and appropriate in accordance with GAAP. Qualitative factors include consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries for the most recent twelve quarters; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations.

The specific component relates to loans that are individually classified as impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. These analyses involve a high degree of judgment in estimating the amount of loss associated with specific loans, including estimating the amount and timing of future cash flows and collateral values. Impaired loans are evaluated for impairment using the discounted cash flow methodology or based on the net realizable value of the underlying collateral. Impaired loans are individually reviewed on a quarterly basis to determine the level of impairment. See additional discussion in section “Nonperforming and Problem Assets” above.

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

At June 30, 2015 and December 31, 2014, the allowance for loan losses was $10.0 million and $9.0 million, respectively, or 1.19% and 1.16% of outstanding loans, respectively. Included in the gross loans were $73.7 million and $80.2 million in loans acquired through branch acquisitions at June 30, 2015 and December 31, 2014, respectively. No allowance for loan losses related to the acquired loans is recorded on the acquisition date because the fair value of the loans acquired incorporates assumptions regarding credit risk.

The Company experienced net recoveries of $638,000 and $261,000 during the three months ended June 30, 2015 and 2014, respectively. For the six months ended June 30, 2015, the company experienced net recoveries of $982,000 compared to $571,000 for the six months ended June 30, 2014. Asset quality has remained relatively consistent since year end, with nonperforming assets to total assets of 0.55% as of June 30, 2015 as compared to 0.47% as of December 31, 2014. No provision expense was recorded during 2015 or 2014 primarily due to the net recoveries experienced.

The following table summarizes the activity related to our allowance for loan losses for the three months and six months ended June 30, 2015 and 2014.

	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2015			2014			2015			2014
	(Dollars in thousands)
Balance, beginning of period	$	9,379			8,401			9,035			8,091
Provision for loan losses		—			—			—			—
Loan charge-offs:
Loans secured by real estate:
One-to-four family		—			(36	)		—			(73	)
Home equity		—			—			—			—
Commercial real estate		—			—			—			(28	)
Construction and development		—			—			(90	)		(170	)
Consumer loans		(2	)		—			(3	)		(13	)
Commercial business loans		—			—			(41	)		—
Total loan charge-offs		(2	)		(36	)		(134	)		(284	)
Loan recoveries:
Loans secured by real estate:
One-to-four family		150			52			325			71
Home equity		—			—			—			—
Commercial real estate		25			—			250			—
Construction and development		299			2			311			329
Consumer loans		8			10			20			50
Commercial business loans		158			233			210			405
Total loan recoveries		640			297			1,116			855
Net loan recoveries		638			261			982			571
Balance, end of period	$	10,017			8,662			10,017			8,662

Allowance for loan losses as a percentage of loans receivable (end of period)		1.19	%		1.41	%		1.19	%		1.41	%
Net charge-offs (recoveries) to average loans receivable (annualized)		(0.31	)%		(0.16	)%		(0.25	)%		(0.20	)%

Mortgage Operations

Mortgage Activities and Servicing

Our wholesale mortgage banking operations are conducted through our mortgage origination subsidiary, Crescent Mortgage Company. Mortgage activities involve the purchase of mortgage loans and table funded originations for the purpose of generating gains on sales of loans and fee income on the origination of loans. While the Company originates residential one-to-four family loans that are held in its loan portfolio, the majority of new loans are generally sold pursuant to secondary market guidelines through Crescent Mortgage Company. Generally, residential mortgage loans are sold and, depending on the pricing in the marketplace, servicing rights are either sold or retained. The level of loan sale activity and its contribution to the Company’s profitability depends on maintaining a sufficient volume of loan originations and margin. Changes in the level of interest rates and the local economy affect the volume of loans originated by the Company and the amount of loan sales and loan fees earned. Discussion related to the impact and changes within the mortgage operations are provided in “Results of Operations”. Additional segment information is provided in Note 9 under Item 1 “Financial Statements”.

Loan Servicing

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

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

The Company was servicing $1.9 billion of loans for others at June 30, 2015 and December 31, 2014. Mortgage servicing rights asset had a balance of $10.6 million and $10.2 million at June 30, 2015 and December 31, 2014, respectively. The economic estimated fair value of the mortgage servicing rights was $16.3 million and $15.1 million at June 30, 2015 and December 31, 2014, respectively. The amortization expense related to the mortgage servicing rights were $485,000 and $441,000 during the three months ended June 30, 2015 and 2014, respectively. Amortization expense related to mortgage servicing rights were 945,000 and 913,000 during the six months ended June 30, 2015 and 2014, respectively.

Below is a roll-forward of activity in the balance of the servicing assets for the three months and six months ended June 30, 2015 and 2014.

	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2015			2014			2015			2014
	(In thousands)
MSR beginning balance	$	10,361			10,003			10,181			10,908
Amount capitalized		766			281			1,406			648
Amount sold		—			—			—			(800	)
Amount amortized		(485	)		(441	)		(945	)		(913	)
MSR ending balance	$	10,642			9,843			10,642			9,843

Reserve For Mortgage Repurchase Losses

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

The following table demonstrates the activity for the reserve for mortgage repurchase losses for the three months ended June 30, 2015 and 2014.

	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2015			2014			2015			2014
	(In thousands)
Beginning Balance	$	4,671			5,871			4,999			6,108
Losses paid		(59	)		(95	)		(137	)		(354	)
Recoveries		—			7			—			29
Provision for mortgage repurchase losses		(250	)		(250	)		(500	)		(250	)
Ending balance	$	4,362			5,533			4,362			5,533

For the three months and six months ended June 30, 2015, the Company recorded a negative provision for mortgage repurchase losses of $250,000 and $500,000, respectively, compared to a negative provision for mortgage repurchase losses of $250,000 for the three and six months ended June 30, 2014. The decline in the provision for mortgage loan repurchase losses is related to several factors. The Company sells mortgage loans to various third parties, including government-sponsored entities (“GSEs”), under contractual provisions that include various representations and warranties as previously stated. The Company establishes the reserve for mortgage loan repurchase losses based on a combination of factors, including estimated levels of defects on internal quality assurance, default expectations, historical investor repurchase demand and appeals success rates, reimbursement by correspondent and other third party originators, and projected loss severity. Prior to 2012, there was no expiration date related to representations and warranties as long as the loan sold to the investor was outstanding. As a result, the Company received loan repurchase requests years after the loan was originated and sold to various third parties. In the latter part of 2012, the regulatory framework for certain GSEs changed where, under certain circumstances, the loan repurchase risk was limited for production beginning in January 2013. In addition, in May 2014, additional regulatory changes further limited loan repurchase risk.

As a result, the Company performed an analysis of its reserve for mortgage loan repurchase losses and, based on management’s judgment and interpretation of such regulatory changes, reduced the reserve accordingly. Management will continue to monitor how the GSEs implement the regulatory changes and trends. If such trends continue to be favorable, there is a possibility that additional reductions in this reserve could occur in future periods.

Deposits

We provide a range of deposit services, including noninterest-bearing demand accounts, interest-bearing demand and savings accounts, money market accounts and time deposits. These accounts generally pay interest at rates established by management based on competitive market factors and management’s desire to increase or decrease certain types or maturities of deposits. Deposits continue to be our primary funding source. At June 30, 2015 deposits totaled $1.0 billion, an increase of $41.7 million from deposits of $964.2 million at December 31, 2014.

Our retail deposits represented $867.0 million, or 86.0% of total deposits at June 30, 2015, while our out-of-market, comprised of our brokered and institutional deposits, represented $138.8 million, or 14.0% of our total deposits. Our retail deposits represented $842.1 million, or 87.3% of total deposits at December 31, 2014, while our out-of-market, comprised of our brokered and institutional deposits, represented $122.1 million, or 12.7% of our total deposits.

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

	For the Six Months
	Ended June 30,
	2015					2014
	Average		Average			Average		Average
	Balance		Rate			Balance		Rate
	(In thousands)

Interest-bearing demand accounts	$	172,557		0.11	%		94,131		0.18	%
Money market accounts		241,064		0.19	%		215,722		0.25	%
Savings accounts		37,697		0.13	%		22,784		0.19	%
Certificates of deposit less than $100,000		221,291		0.87	%		207,069		0.92	%
Certificates of deposit of $100,000 or more		145,679		0.89	%		95,516		0.83	%
Total interest-bearing average deposits		818,288					635,222

Noninterest-bearing deposits		167,047					107,814
Total average deposits	$	985,335					743,036

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

	At June 30,
	2015
	(In thousands)

Three months or less	$	20,588
Over three through six months		17,619
Over six through twelve months		42,180
Over twelve months		77,195
Total certificates of deposits	$	157,582

Liquidity

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

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

Lines of credit with the FHLB of Atlanta are based upon FHLB-approved percentages of Bank assets, but must be supported by appropriate collateral to be available. The Company has pledged first lien residential mortgage, second lien residential mortgage, residential home equity line of credit, commercial mortgage and multifamily mortgage portfolios under blanket lien agreements. At June 30, 2015, the Company had FHLB advances of $187.5 million outstanding with excess collateral pledged to the FHLB during those periods that would support additional borrowings of approximately $55.3 million.

Lines of credit with the FRB are based on collateral pledged. At June 30, 2015, the Company had lines available with the FRB for $92.4 million. At June 30, 2015, the Company had no FRB advances outstanding.

Capital Resources

The Company and the Bank are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings, and other factors, and the regulators can lower classifications in certain cases. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements.

The prompt corrective action regulations provide five categories, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If a bank is only adequately capitalized, regulatory approval is required to, among other things, accept, renew or roll-over brokered deposits. If a bank is undercapitalized, capital distributions and growth and expansion are limited, and plans for capital restoration are required.

In July 2013, the Board of Governors of the Federal Reserve Board and the FDIC approved the final rules implementing the Basel Committee on Banking Supervision's capital guidelines for U.S. banks (commonly known as Basel III). Under the final rules, which began for the Company and the Bank on January 1, 2015 and are subject to a phase-in period through January 1, 2019, minimum requirements will increase for both the quantity and quality of capital held by the Company and the Bank. The rules include a new common equity Tier 1 capital to risk-weighted assets ratio (CET1 ratio) of 4.5% and a capital conservation buffer of 2.5% of risk-weighted assets, which when fully phased-in, results in a minimum CET1 ratio of 7.0%. Basel III raises the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0% (which, with the capital conservation buffer, results in a minimum Tier 1 capital ratio of 8.5% when fully phased-in), results in a minimum total capital to risk-weighted assets ratio of 10.5% (with the capital conservation buffer fully phased-in), and requires a minimum leverage ratio of 4.0%. Basel III also makes changes to risk weights for certain assets and off-balance-sheet exposures. Management expects that the capital ratios for the Company and the Bank under Basel III will continue to exceed the well capitalized minimum capital requirements.

The actual capital amounts and ratios as well as minimum amounts for each regulatory defined category for the Company and the Bank at June 30, 2015 and December 31, 2014 are as follows:

											To Be Well
						Minimum Required					Capitalized Under
						For Capital					Prompt Corrective
	Actual					Adequacy Purposes					Action Regulations
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in thousands)

June 30, 2015
Carolina Financial Corporation
CET1 capital (to risk weighted assets)	$	97,176		10.36	%		42,199		4.50	%		N/A		N/A
Tier 1 capital (to risk weighted assets)		112,176		11.96	%		56,266		6.00	%		N/A		N/A
Total capital (to risk weighted assets)		122,192		13.03	%		75,021		8.00	%		N/A		N/A
Tier 1 capital (to total average assets)		97,176		8.67	%		51,733		4.00	%		N/A		N/A

CresCom Bank
CET1 capital (to risk weighted assets)		111,677		11.93	%		42,127		4.50	%		60,849		6.50	%
Tier 1 capital (to risk weighted assets)		111,677		11.93	%		56,169		6.00	%		74,892		8.00	%
Total capital (to risk weighted assets)		121,693		13.00	%		74,892		8.00	%		93,615		10.00	%
Tier 1 capital (to total average assets)		111,677		8.64	%		51,717		4.00	%		64,647		5.00	%

December 31, 2014
Carolina Financial Corporation
Tier 1 capital (to risk weighted assets)	$	104,613		12.03	%		34,787		4.00	%		N/A		N/A
Total risk based capital (to risk weighted assets)		114,323		13.15	%		69,574		8.00	%		N/A		N/A
Tier 1 capital (to total average assets)		104,613		9.49	%		44,079		4.00	%		N/A		N/A

CresCom Bank
Tier 1 capital (to risk weighted assets)		103,319		11.90	%		34,716		4.00	%		52,074		6.00	%
Total risk based capital (to risk weighted assets)		113,029		13.02	%		69,433		8.00	%		86,791		10.00	%
Tier 1 capital (to total average assets)		103,319		9.40	%		43,985		4.00	%		54,981		5.00	%

Market Risk Management and Interest Rate Risk

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

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

As of June 30, 2015, the following table summarizes the forecasted impact on net interest income using a base case scenario given upward movements in interest rates of 100, 200, and 300 basis points based on forecasted assumptions of prepayment speeds, nominal interest rates and loan and deposit repricing rates. Downward movements do not appear to be applicable due to the low interest rate environment experienced since 2013. Estimates are based on current economic conditions, historical interest rate cycles and other factors deemed to be relevant. However, underlying assumptions may be impacted in future periods which were not known to management at the time of the issuance of the Consolidated Financial Statements. Therefore, management’s assumptions may or may not prove valid. No assurance can be given that changing economic conditions and other relevant factors impacting our net interest income will not cause actual occurrences to differ from underlying assumptions. In addition, this analysis does not consider any strategic changes to our balance sheet which management may consider as a result of changes in market conditions.

Interest Rate Scenario						Annualized Hypothetical Percentage Change in
Change			Prime Rate			Net Interest Income
	0.00	%		3.25	%		0.00	%
	1.00	%		4.25	%		-0.60	%
	2.00	%		5.25	%		-0.50	%
	3.00	%		6.25	%		-0.80	%

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

Accounting, Reporting, and Regulatory Matters

Information regarding recent authoritative pronouncements that could impact the accounting, reporting, and/or disclosure of the financial information by the Company are included in Note 1 under Item 1 “Financial Statements.”

Effect of Inflation and Changing Prices

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

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

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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

Item 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Control over Financial Reporting

There has been no change in the Company’s internal control over financial reporting during the three months ended June 30, 2015, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS.

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

Item 1A RISK FACTORS.

Not applicable

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

Not applicable

Item 3. DEFAULTS UPON SENIOR SECURITIES.

Not applicable

Item 4. MINE SAFETY DISCLOSURES.

Not applicable

Item 5. OTHER INFORMATION.

Not applicable

Item 6. EXHIBITS.

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

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	CAROLINA FINANCIAL CORPORATION
	Registrant


Date: August 10, 2015	/s/ Jerold L. Rexroad
	Jerold L. Rexroad
	President and Chief Executive Officer
	(Principal Executive Officer)

Date: August 10, 2015	/s/ William A. Gehman, III
	William A. Gehman III
	Executive Vice President and Chief Financial Officer
	(Principal Financial and Accounting Officer)

INDEX TO EXHIBITS

Exhibit Number		Description

3.1		Amended and Restated Certificate of Incorporation filed on April 2, 1997. ⁽¹⁾⁽²⁾

3.2		Certificate of Amendment to the Amended and Restated Certificate of Incorporation filed on June 11, 2010. ⁽¹⁾⁽²⁾

3.3		Certificate of Amendment to the Amended and Restated Certificate of Incorporation filed on May 7, 2014. ⁽²⁾⁽³⁾

3.4		Certificate of Amendment to the Amended and Restated Certificate of Incorporation filed on May 4, 2015. ⁽²⁾⁽⁴⁾

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

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

32		Section 1350 Certifications.

101		The following materials from the Quarterly Report on Form 10-Q of Carolina Financial Corporation for the quarter ended June 30, 2015, formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statement of Changes in Stockholders’ Equity, (v) Consolidated Statements of Cash Flows and (vi) Notes to Unaudited Consolidated Financial Statements.

___________

⁽¹⁾

Incorporated by reference from the Company’s Registration Statement on Form 10 filed on February 26, 2014.

⁽²⁾

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

⁽³⁾

Incorporated by reference from the Company’s Quarterly Report on Form 10-Q filed on May 12, 2014.

⁽⁴⁾

Incorporated by reference from the Company’s Current Report on Form 8-K filed on May 5, 2015.

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