Edgar Filing: FIRST UNITED CORP/MD/

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For quarterly period ended June 30, 2015

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from _______________ to ________________

Commission file number 0-14237

First United Corporation

(Exact name of registrant as specified in its charter)

Maryland		52-1380770
(State or other jurisdiction of		(I. R. S. Employer Identification No.)
incorporation or organization)

19 South Second Street, Oakland, Maryland	21550-0009
(Address of principal executive offices)	(Zip Code)

(800) 470-4356

(Registrant's telephone number, including area code)

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

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

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

Large accelerated filer ¨	Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)	Smaller reporting company þ

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 6,254,620 shares of common stock, par value $.01 per share, as of July 31, 2015.

INDEX TO QUARTERLY REPORT

FIRST UNITED CORPORATION

PART I. FINANCIAL INFORMATION		3

Item 1.	Financial Statements (unaudited)	3

	Consolidated Statement of Financial Condition – June 30, 2015 and December 31, 2014	3

	Consolidated Statement of Operations - for the three and six months ended June 30, 2015 and 2014	4 - 5

	Consolidated Statement of Comprehensive Income – for the three and six months ended June 30, 2015 and 2014	6

	Consolidated Statement of Changes in Shareholders’ Equity - for the six months ended June 30, 2015 and year ended December 31, 2014	7

	Consolidated Statement of Cash Flows - for the six months ended June 30, 2015 and 2014	8

	Notes to Consolidated Financial Statements	9

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	53

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	75

Item 4.	Controls and Procedures	75

PART II. OTHER INFORMATION		76

Item 1.	Legal Proceedings	76

Item 1A.	Risk Factors	76

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	76

Item 3.	Defaults upon Senior Securities	76

Item 4.	Mine Safety Disclosures	76

Item 5.	Other Information	76

Item 6.	Exhibits	76

SIGNATURES		76

EXHIBIT INDEX		77

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

FIRST UNITED CORPORATION

Consolidated Statement of Financial Condition

(In thousands, except per share and percentage data)

	June 30,			December 31,
	2015			2014
	(Unaudited)
Assets
Cash and due from banks	$	54,913		$	27,554
Interest bearing deposits in banks		2,991			7,897
Cash and cash equivalents		57,904			35,451
Investment securities – available-for-sale (at fair value)		205,226			221,117
Investment securities – held to maturity (fair value $108,417 at June 30, 2015 and $110,771 at December 31, 2014)		107,816			109,449
Restricted investment in bank stock, at cost		7,180			7,524
Loans		845,090			839,991
Allowance for loan losses		(11,809	)		(12,065	)
Net loans		833,281			827,926
Premises and equipment, net		25,108			25,629
Goodwill and other intangible assets, net		11,004			11,004
Bank owned life insurance		39,559			33,504
Deferred tax assets		24,006			25,907
Other real estate owned		11,587			12,932
Accrued interest receivable and other assets		20,400			21,853
Total Assets	$	1,343,071		$	1,332,296

Liabilities and Shareholders’ Equity
Liabilities:
Non-interest bearing deposits	$	211,023		$	201,188
Interest bearing deposits		792,072			780,135
Total deposits		1,003,095			981,323

Short-term borrowings		28,252			39,801
Long-term borrowings		177,572			182,606
Accrued interest payable and other liabilities		20,998			19,567
Total Liabilities		1,229,917			1,223,297

Shareholders’ Equity:
Preferred stock – no par value; Authorized 2,000 shares of which 30 shares of Series A, $1,000 per share liquidation preference, 5% cumulative increasing to 9% cumulative on February 15, 2014, were issued and outstanding on June 30, 2015 and December 31, 2014		30,000			30,000
Common Stock – par value $.01 per share; Authorized 25,000 shares; issued and outstanding 6,255 shares at June 30, 2015 and 6,228 at December 31, 2014		63			62
Surplus		21,892			21,795
Retained earnings		78,568			77,375
Accumulated other comprehensive loss		(17,369	)		(20,233	)
Total Shareholders’ Equity		113,154			108,999
Total Liabilities and Shareholders’ Equity	$	1,343,071		$	1,332,296

See accompanying notes to the consolidated financial statements

FIRST UNITED CORPORATION

Consolidated Statement of Operations

(In thousands, except per share data)

	Six Months Ended
	June 30,
	2015			2014
	(Unaudited)
Interest income
Interest and fees on loans	$	18,238		$	18,697
Interest on investment securities
Taxable		3,610			3,744
Exempt from federal income tax		668			804
Total investment income		4,278			4,548
Other		175			176
Total interest income		22,691			23,421
Interest expense
Interest on deposits		2,058			2,335
Interest on short-term borrowings		28			30
Interest on long-term borrowings		2,936			3,197
Total interest expense		5,022			5,562
Net interest income		17,669			17,859
Provision for loan losses		126			941
Net interest income after provision for loan losses		17,543			16,918
Other operating income
Net gains – other		5			961
Total net gains		5			961
Service charges		1,385			1,466
Trust department		2,770			2,568
Debit card income		1,008			987
Bank owned life insurance		555			488
Brokerage commissions		468			406
Other		218			221
Total other income		6,404			6,136
Total other operating income		6,409			7,097
Other operating expenses
Salaries and employee benefits		10,258			9,703
FDIC premiums		930			882
Equipment		1,271			1,306
Occupancy		1,250			1,276
Data processing		1,709			1,576
Professional Services		905			853
Other real estate owned		1,047			1,614
Other		3,282			3,455
Total other operating expenses		20,652			20,665
Income before income tax expense		3,300			3,350
Provision for income tax expense		757			752
Net Income		2,543			2,598
Accumulated preferred stock dividends and discount accretion		(1,350	)		(1,250	)
Net Income Available to Common Shareholders	$	1,193		$	1,348
Basic and diluted net income per common share	$	0.19		$	0.22
Weighted average number of basic and diluted shares outstanding		6,243			6,217

See accompanying notes to the consolidated financial statements

FIRST UNITED CORPORATION

Consolidated Statement of Operations

(In thousands, except per share data)

	Three Months Ended
	June 30,
	2015			2014
	(Unaudited)
Interest income
Interest and fees on loans	$	9,109		$	9,359
Interest on investment securities
Taxable		1,749			1,756
Exempt from federal income tax		323			393
Total investment income		2,072			2,149
Other		87			159
Total interest income		11,268			11,667
Interest expense
Interest on deposits		1,017			1,168
Interest on short-term borrowings		14			16
Interest on long-term borrowings		1,462			1,543
Total interest expense		2,493			2,727
Net interest income		8,775			8,940
Provision for loan losses		52			577
Net interest income after provision for loan losses		8,723			8,363
Other operating income
Net gains– other		102			1,024
Total net gains		102			1,024
Service charges		735			757
Trust department		1,389			1,316
Debit card income		510			530
Bank owned life insurance		288			245
Brokerage commissions		232			201
Other		110			83
Total other income		3,264			3,132
Total other operating income		3,366			4,156
Other operating expenses
Salaries and employee benefits		5,276			5,018
FDIC premiums		471			491
Equipment		653			651
Occupancy		614			621
Data processing		872			794
Professional Services		614			508
Other real estate owned		415			1,157
Other		1,701			1,701
Total other operating expenses		10,616			10,941
Income before income tax expense		1,473			1,578
Provision for income tax expense		298			338
Net Income		1,175			1,240
Accumulated preferred stock dividends and discount accretion		(675	)		(803	)
Net Income Available to Common Shareholders	$	500		$	437
Basic and diluted net income per common share	$	0.08		$	0.07
Weighted average number of basic and diluted shares outstanding		6,249			6,222

See accompanying notes to the consolidated financial statements

FIRST UNITED CORPORATION

Consolidated Statement of Comprehensive Income

(In thousands)

	Six months ended
	June 30,
	2015			2014
Comprehensive Income (in thousands)	(Unaudited)
Net Income	$	2,543		$	2,598

Other comprehensive income/(loss), net of tax and reclassification adjustments:
Net unrealized gains on investments with OTTI		2,816			3,042

Net unrealized gains on all other AFS securities		667			8,342

Net unrealized gains/(losses) on HTM securities		161			(2,372	)

Net unrealized gains on cash flow hedges		35			111

Net unrealized (losses)/gains on pension		(836	)		37

Net unrealized gains on SERP		21			1

Other comprehensive income, net of tax		2,864			9,161

Comprehensive income	$	5,407		$	11,759

See accompanying notes to the consolidated financial statements

FIRST UNITED CORPORATION

Consolidated Statement of Comprehensive Income

(In thousands)

	Three months ended
	June 30,
	2015			2014
Comprehensive Income (in thousands)	(Unaudited)
Net Income	$	1,175		$	1,240

Other comprehensive income/(loss), net of tax and reclassification adjustments:
Net unrealized gains on investments with OTTI		1,246			408

Net unrealized (losses)/gains on all other AFS securities		(12	)		5,306

Net unrealized gains/(losses) on HTM securities		91			(2,372	)

Net unrealized gains on cash flow hedges		14			56

Net unrealized (losses)/gains on pension		(746	)		164

Net unrealized gains on SERP		11			0

Other comprehensive income, net of tax		604			3,562

Comprehensive income	$	1,779		$	4,802

See accompanying notes to the consolidated financial statements

FIRST UNITED CORPORATION

Consolidated Statement of Changes in Shareholders’ Equity

(In thousands)

	Preferred Stock		Common Stock		Surplus		Retained Earnings			Accumulated Other Comprehensive Income/(Loss)			Total Shareholders' Equity
	(Unaudited)
Balance at January 1, 2014	$	29,994	$	62	$	21,661	$	74,379		$	(24,213	)	$	101,883

Net income								5,597						5,597
Other comprehensive income											3,980			3,980
Stock based compensation						134								134
Preferred stock discount accretion		6						(6	)					0
Preferred stock dividends paid								(2,595	)					(2,595	)

Balance at December 31, 2014		30,000		62		21,795		77,375			(20,233	)		108,999

Net income								2,543						2,543
Other comprehensive income											2,864			2,864
Stock based compensation				1		97								98
Preferred stock dividends paid								(1,350	)					(1,350	)

Balance at June 30, 2015	$	30,000	$	63	$	21,892	$	78,568		$	(17,369	)	$	113,154

See accompanying notes to the consolidated financial statements

FIRST UNITED CORPORATION

Consolidated Statement of Cash Flows

(In thousands)

	Six months ended
	June 30,
	2015			2014
	(Unaudited)
Operating activities
Net income	$	2,543		$	2,598
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		126			941
Depreciation		872			994
Stock compensation		97			56
(Gain)/loss on sales of other real estate owned		(78	)		970
Write-downs of other real estate owned		852			443
Gain on loan sales		(24	)		(18	)
Loss on disposal of fixed assets		2			3
Net amortization of investment securities discounts and premiums- AFS		296			64
Loss on sales of investment securities – available-for-sale		17			154
Gain on sales of investment securities – held for trading		0			(1,100	)
Amortization of deferred loan fees		(232	)		(218	)
Decrease in accrued interest receivable and other assets		1,453			1,985
Decrease in deferred tax benefit		268			2
Increase/(decrease) in accrued interest payable and other liabilities		135			(5,354	)
Earnings on bank owned life insurance		(555	)		(488	)
Net cash provided by operating activities		5,772			1,032

Investing activities
Proceeds from maturities/calls of investment securities available-for-sale		34,501			100,719
Proceeds from maturities/calls of investment securities held-to-maturity		3,949			1,509
Proceeds from sales of investment securities available-for-sale		24,667			56,222
Proceeds from sales of investment securities held for trading		0			1,100
Purchases of investment securities available-for-sale		(37,797	)		(114,752	)
Purchases of investment securities held-to-maturity		(2,316	)		(1,256	)
Proceeds from sales of other real estate owned		1,336			4,745
Proceeds from loan sales		2,769			2,104
Proceeds from disposal of fixed assets		6			0
Purchase of BOLI policy		(5,500	)		0
Net decrease in FHLB stock		344			433
Net increase in loans		(8,759	)		(20,253	)
Purchases of premises and equipment		(359	)		(404	)
Net cash provided by investing activities		12,841			30,167

Financing activities
Net increase in deposits		21,772			1,337
Preferred stock dividends paid		(1,350	)		(7,745	)
Common Stock Grants		1			0
Net decrease in short-term borrowings		(11,549	)		(5,763	)
Payments on long-term borrowings		(5,034	)		(32	)
Net cash provided by/(used in) financing activities		3,840			(12,203	)
Increase in cash and cash equivalents		22,453			18,996
Cash and cash equivalents at beginning of the year		35,451			43,063
Cash and cash equivalents at end of period	$	57,904		$	62,059

Supplemental information
Interest paid	$	5,056		$	12,327
Non-cash investing activities:
Transfers from loans to other real estate owned	$	765		$	1,415
Transfers from securities available for sale to held-to-maturity	$	0		$	103,934

See accompanying notes to the consolidated financial statements

FIRST UNITED CORPORATION

NoteS to Consolidated Financial Statements (UNAUDITED)

Note 1 – Basis of Presentation

The accompanying unaudited consolidated financial statements of First United Corporation and its consolidated subsidiaries, including First United Bank & Trust (the “Bank”), have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information, as required by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 270, Interim Reporting, and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all the information and footnotes required for annual financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation, consisting of normal recurring items, have been included. Operating results for the six- and three-month periods ended June 30, 2015 are not necessarily indicative of the results that may be expected for the full year or for any future interim period. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in First United Corporation’s Annual Report on Form 10-K for the year ended December 31, 2014. For purposes of comparability, certain prior period amounts have been reclassified to conform to the 2015 presentation. Such reclassifications had no impact on net income or equity.

First United Corporation has evaluated events and transactions occurring subsequent to the statement of financial condition date of June 30, 2015 for items that should potentially be recognized or disclosed in these financial statements as prescribed by ASC Topic 855, Subsequent Events.

As used in these notes to consolidated financial statements, First United Corporation and its consolidated subsidiaries are sometimes collectively referred to as the “Corporation”.

Note 2 – Earnings Per Common Share

Basic earnings per common share is derived by dividing net income available to common shareholders by the weighted-average number of common shares outstanding during the period and does not include the effect of any potentially dilutive common stock equivalents. Diluted earnings per share is derived by dividing net income available to common shareholders by the weighted-average number of shares outstanding, adjusted for the dilutive effect of outstanding common stock equivalents. There is no dilutive effect on earnings per share during loss periods.

The following tables set forth the calculation of basic and diluted earnings per common share for the six- and three-month periods ended June 30, 2015 and 2014:

	Six months ended June 30,
	2015							2014
				Average		Per Share					Average		Per Share
(in thousands, except for per share amount)	Income			Shares		Amount		Income			Shares		Amount
Basic and Diluted Earnings Per Share:
Net income	$	2,543						$	2,598
Preferred stock dividends		(1,350	)						(1,244	)
Discount accretion on preferred stock		0							(6	)
Net income available to common shareholders	$	1,193			6,243	$	0.19	$	1,348			6,217	$	0.22

	Three months ended June 30,
	2015							2014
				Average		Per Share					Average		Per Share
(in thousands, except for per share amount)	Income			Shares		Amount		Income			Shares		Amount
Basic and Diluted Earnings Per Share:
Net income	$	1,175						$	1,240
Preferred stock dividends deferred		(675	)						(803	)
Discount accretion on preferred stock		0							0
Net income available to common shareholders	$	500			6,249	$	0.08	$	437			6,222	$	0.07

Note 3 – Net Gains

The following table summarizes the gain/(loss) activity for the six- and three-month periods ended June 30, 2015 and 2014:

	Six months ended						Three months ended
	June 30,						June 30,
(in thousands)	2015			2014			2015			2014
Net gains – other:
Available-for-sale securities:
Realized gains	$	156		$	205		$	140		$	110
Realized losses		(173	)		(359	)		(60	)		(196	)
Held-for-trading:
Realized gains		0			1,100			0			1,100
Gain on sale of consumer loans		24			18			22			10
Loss on disposal of fixed assets		(2	)		(3	)		0			0
Net gains – other	$	5		$	961		$	102		$	1,024

Note 4 – Cash and Cash Equivalents

Cash and due from banks, which represents vault cash in the retail offices and invested cash balances at the Federal Reserve and other correspondent banks, is carried at cost which approximates fair value.

	June 30,		December 31,
(in thousands)	2015		2014
Cash and due from banks, weighted average interest rate of 0.09% (at June 30, 2015)	$	54,913	$	27,554

Interest bearing deposits in banks, which represent funds invested at a correspondent bank, are carried at cost which approximates fair value and, as of June 30, 2015 and December 31, 2014, consisted of daily funds invested at the Federal Home Loan Bank (“FHLB”) of Atlanta, First Tennessee Bank (“FTN”), and Merchants and Traders (“M&T”).

	June 30,		December 31,
(in thousands)	2015		2014
FHLB daily investments, interest rate of 0.005% (at June 30, 2015)	$	1,130	$	983
FTN daily investments, interest rate of 0.08% (at June 30, 2015)		850		850
M&T daily investments, interest rate of 0.15% (at June 30, 2015)		1,011		6,064
	$	2,991	$	7,897

Note 5 – Investments

The investment portfolio is classified and accounted for based on the guidance of ASC Topic 320, Investments – Debt and Equity Securities.

The amortized cost of debt securities classified as available-for-sale is adjusted for the amortization of premiums to the first call date, if applicable, or to maturity, and for the accretion of discounts to maturity, or, in the case of mortgage-backed securities, over the estimated life of the security. Such amortization and accretion is included in interest income from investments. Interest and dividends are included in interest income from investments. Gains and losses on the sale of securities are recorded using the specific identification method.

The following table shows a comparison of amortized cost and fair values of investment securities at June 30, 2015 and December 31, 2014:

(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		OTTI in AOCI
June 30, 2015
Available for Sale:
U.S. treasuries	$	10,059	$	16	$	0	$	10,075	$	0
U.S. government agencies		44,056		182		143		44,095		0
Residential mortgage-backed agencies		20,073		158		268		19,963		0
Commercial mortgage-backed agencies		42,795		171		100		42,866		0
Collateralized mortgage obligations		13,170		100		91		13,179		0
Obligations of states and political subdivisions		44,343		1,103		444		45,002		0
Collateralized debt obligations		35,563		3,298		8,815		30,046		1,460
Total available for sale	$	210,059	$	5,028	$	9,861	$	205,226	$	1,460

Held to Maturity:
U.S. government agencies	$	24,611	$	306	$	33	$	24,884	$	0
Residential mortgage-backed agencies		55,616		195		121		55,690		0
Commercial mortgage-backed agencies		18,215		287		0		18,502		0
Collateralized mortgage obligations		6,749		0		140		6,609		0
Obligations of states and political subdivisions		2,625		107		0		2,732		0
Total held to maturity	$	107,816	$	895	$	294	$	108,417	$	0

December 31, 2014
Available for Sale:
U.S. treasuries	$	29,607	$	0	$	11	$	29,596	$	0
U.S. government agencies		39,077		117		253		38,941		0
Residential mortgage-backed agencies		45,175		510		412		45,273		0
Commercial mortgage-backed agencies		26,007		53		103		25,957		0
Collateralized mortgage obligations		8,611		96		0		8,707		0
Obligations of states and political subdivisions		46,151		1,413		260		47,304		0
Collateralized debt obligations		37,117		1,155		12,933		25,339		6,143
Total available for sale	$	231,745	$	3,344	$	13,972	$	221,117	$	6,143
Held to Maturity:
U.S. government agencies	$	24,520	$	514	$	0	$	25,034	$	0
Residential mortgage-backed agencies		58,400		613		5		59,008		0
Commercial mortgage-backed agencies		16,425		312		0		16,737		0
Collateralized mortgage obligations		7,379		5		0		7,384		0
Obligations of states and political subdivisions		2,725		0		117		2,608		0
Total held to maturity	$	109,449	$	1,444	$	122	$	110,771	$	0

Proceeds from sales of available for sale securities and the realized gains and losses are as follows:

	Six months ended				Three months ended
	June 30,				June 30,
(in thousands)	2015		2014		2015		2014
Proceeds	$	24,667	$	56,222	$	9,578	$	47,637
Realized gains		156		1,305		140		1,210
Realized losses		173		359		60		196

The following table shows the Corporation’s investment securities with gross unrealized losses and fair values at June 30, 2015 and December 31, 2014, aggregated by investment category and the length of time that individual securities have been in a continuous unrealized loss position:

	Less than 12 months				12 months or more
(in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
June 30, 2015
Available for Sale:
U.S. treasuries	$	0	$	0	$	0	$	0
U.S. government agencies		13,963		102		9,959		41
Residential mortgage-backed agencies		0		0		8,437		268
Commercial mortgage-backed agencies		23,311		100		0		0
Collateralized mortgage obligations		5,701		91		0		0
Obligations of states and political subdivisions		14,531		290		4,860		154
Collateralized debt obligations		0		0		22,641		8,815
Total available for sale	$	57,506	$	583	$	45,897	$	9,278

Held to Maturity:
U.S. government agencies	$	6,985	$	33	$	0	$	0
Residential mortgage-backed agencies		23,233		121		0		0
Collateralized mortgage obligations		6,609		140		0		0
Total held to maturity	$	36,827	$	294	$	0	$	0

December 31, 2014
Available for Sale:
U.S. treasuries	$	27,096	$	11	$	0	$	0
U.S. government agencies		0	$	0	$	18,819	$	253
Residential mortgage-backed agencies		0		0		17,918		412
Commercial mortgage-backed agencies		12,298		97		973		6
Obligations of states and political subdivisions		0		0		8,981		260
Collateralized debt obligations		0		0		20,290		12,933
Total available for sale	$	39,394	$	108	$	66,981	$	13,864
Held to Maturity:
U.S. government agencies	$	0	$	0	$	0	$	0
Residential mortgage-backed agencies		3,850		5		0		0
Obligations of states and political subdivisions		0		0		2,608		117
Total held to maturity	$	3,850	$	5	$	2,608	$	117

Management systematically evaluates securities for impairment on a quarterly basis. Management assesses whether (a) the Corporation has the intent to sell a security being evaluated and (b) it is more likely than not that the Corporation will be required to sell the security prior to its anticipated recovery. If neither applies, then declines in the fair values of securities below their cost that are considered other-than-temporary declines are split into two components. The first is the loss attributable to declining credit quality. Credit losses are recognized in earnings as realized losses in the period in which the impairment determination is made. The second component consists of all other losses, which are recognized in other comprehensive loss. In estimating other-than-temporary impairment (“OTTI”) losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) adverse conditions specifically related to the security, an industry, or a geographic area, (3) the historic and implied volatility of the fair value of the security, (4) changes in the rating of the security by a rating agency, (5) recoveries or additional declines in fair value subsequent to the balance sheet date, (6) failure of the issuer of the security to make scheduled interest or principal payments, and (7) the payment structure of the debt security and the likelihood of the issuer being able to make payments that increase in the future. Management also monitors cash flow projections for securities that are considered beneficial interests under the guidance of ASC Subtopic 325-40, Investments – Other – Beneficial Interests in Securitized Financial Assets, (ASC Section 325-40-35). Further discussion about the evaluation of securities for impairment can be found in Item 2 of Part I of this report under the heading “Investment Securities”.

Management believes that the valuation of certain securities is a critical accounting policy that requires significant estimates in preparation of the Corporation’s consolidated financial statements. Management utilizes an independent third party to prepare both the impairment valuations and fair value determinations for the Corporation’s collateralized debt obligation (“CDO”) portfolio consisting of pooled trust preferred securities. Based on management’s review of the assumptions and results of the third-party review, it does not believe that there were any material differences in the valuations between December 31, 2014 and June 30, 2015.

U.S. Treasuries – Available for Sale – As of June 30, 2015, there were no securities issued by the U.S. Treasury that were in a loss position.

U.S. Government Agencies – Available for Sale – There were three U.S. government agencies in an unrealized loss position for less than 12 months as of June 30, 2015. There was one U.S. government agency in an unrealized loss position for 12 months or more. The security is of the highest investment grade and the Corporation does not intend to sell it, and it is not more likely than not that the Corporation will be required to sell it before recovery of its amortized cost basis, which may be at maturity. Accordingly, management does not consider this investment to be other-than-temporarily impaired at June 30, 2015.

Residential Mortgage-Backed Agencies – Available for Sale - There were no residential mortgage-backed agencies in an unrealized loss position for less than 12 months as of June 30, 2015. There was one residential mortgage-backed agency security in an unrealized loss position for 12 months or more. The security is of the highest investment grade and the Corporation does not intend to sell it, and it is not more likely than not that the Corporation will be required to sell the security before recovery of its amortized cost basis, which may be at maturity. Accordingly, management does not consider this investment to be other-than-temporarily impaired at June 30, 2015.

Commercial Mortgage-Backed Agencies – Available for Sale – There were five commercial mortgage-backed agencies in an unrealized loss position for less than 12 months as of June 30, 2015. The securities are of the highest investment grade and the Corporation does not intend to sell them, and it is not more likely than not that the Corporation will be required to sell them before recovery of their amortized cost basis, which may be at maturity. Accordingly, management does not consider these investments to be other-than-temporarily impaired at June 30, 2015. There were no commercial mortgage-backed agency securities in an unrealized loss position for 12 months or more.

Collateralized Mortgage Obligations – Available for Sale – There was one collateralized mortgage obligations in an unrealized loss position for less than 12 months as of June 30, 2015. The security is of the highest investment grade and the Corporation does not intend to sell it, and it is not more likely than not that the Corporation will be required to sell it before recovery of their amortized cost basis, which may be at maturity. Accordingly, management does not consider these investments to be other-than-temporarily impaired at June 30, 2015. There were no collateralized mortgage obligations in an unrealized loss position for 12 months or more.

Obligations of State and Political Subdivisions – Available for Sale – There were ten obligations of state and political subdivisions that have been in an unrealized loss position for less than 12 months at June 30, 2015. There was one security that had been in an unrealized loss position for 12 months or more. These investments are of investment grade as determined by the major rating agencies and management reviews the ratings of the underlying issuers and performs an in-depth credit analysis on the securities. Management believes that this portfolio is well-diversified throughout the United States, and all bonds continue to perform according to their contractual terms. The Corporation does not intend to sell these investments and it is not more likely than not that the Corporation will be required to sell the investments before recovery of their amortized cost basis, which may be at maturity. Accordingly, management does not consider these investments to be other-than-temporarily impaired at June 30, 2015.

Collateralized Debt Obligations – Available for Sale - The $8.8 million in unrealized losses greater than 12 months at June 30, 2015 relates to 13 pooled trust preferred securities that are included in the CDO portfolio. See Note 9 for a discussion of the methodology used by management to determine the fair values of these securities. Based upon a review of credit quality and the cash flow tests performed by the independent third party, management determined that there were no securities that had credit-related non-cash OTTI charges during the first six months of 2015. The unrealized losses on the remaining securities in the portfolio are primarily attributable to continued depression in market interest rates, marketability, liquidity and the current economic environment.

U.S. Government Agencies – Held to Maturity – There was one security issued by government agencies in an unrealized loss position for less than 12 months as of June 30, 2015. The Corporation has the intent and ability to hold the investment to maturity. Accordingly, management does not consider this investment to be other-than-temporarily impaired at June 30, 2015. There were no securities issued by government agencies in an unrealized loss position for 12 months or more.

Residential Mortgage-Backed Agencies – Held to Maturity - Twelve residential mortgage-backed agencies have been in an unrealized loss position for less than 12 months as of June 30, 2015. The Corporation has the intent and ability to hold the investments to maturity. Accordingly, management does not consider these investments to be other-than-temporarily impaired at June 30, 2015. There were no residential mortgage-backed agencies in an unrealized loss position for 12 months or more.

Commercial Mortgage-Backed Agencies – Held to Maturity - There were no commercial mortgage-backed agencies in the Held to Maturity portfolio as of June 30, 2015 in a loss position.

Collateralized Mortgage Obligations – Held to Maturity – There was one collateralized mortgage obligations in an unrealized loss position for less than 12 months as of June 30, 2015. The Corporation has the intent and ability to hold the investment to maturity. Accordingly, management does not consider this investment to be other-than-temporarily impaired at June 30, 2015. There were no collateralized mortgage obligations in an unrealized loss position for 12 months or more.

Obligations of State and Political Subdivisions – Held to Maturity – There were no obligations of state and political subdivisions in the Held to Maturity portfolio as of June 30, 2015 in a loss position.

The following tables present a cumulative roll-forward of the amount of non-cash OTTI charges related to credit losses which have been recognized in earnings for the trust preferred securities in the CDO portfolio held and not intended to be sold for the six- and three-month periods ended June 30, 2015 and 2014:

	Six months ended June 30,
(in thousands)	2015			2014
Balance of credit-related OTTI at January 1	$	12,583		$	13,422
Reduction for increases in cash flows expected to be collected		(340	)		(331	)
Balance of credit-related OTTI at June 30	$	12,243		$	13,091

	Three months ended June 30,
(in thousands)	2015			2014
Balance of credit-related OTTI at April 1	$	12,416		$	13,262
Reduction for increases in cash flows expected to be collected		(173	)		(171	)
Balance of credit-related OTTI at June 30	$	12,243		$	13,091

The amortized cost and estimated fair value of securities by contractual maturity at June 30, 2015 are shown in the following table. Actual maturities may differ from contractual maturities because the issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties.

	June 30, 2015
(in thousands)	Amortized Cost		Fair Value
Contractual Maturity
Available for sale:
Due in one year or less	$	0	$	0
Due after one year through five years		53,470		53,689
Due after five years through ten years		20,615		21,236
Due after ten years		59,936		54,293
		134,021		129,218

Residential mortgage-backed agencies		20,073		19,963
Commercial mortgage-backed agencies		42,795		42,866
Collateralized mortgage obligations		13,170		13,179
	$	210,059	$	205,226
Held to Maturity:
Due after five years through ten years	$	15,538	$	15,799
Due after ten years		11,698		11,817
		27,236		27,616

Residential mortgage-backed agencies		55,616		55,690
Commercial mortgage-backed agencies		18,215		18,502
Collateralized mortgage obligations		6,749		6,609
	$	107,816	$	108,417

Note 6 - Restricted Investment in Bank Stock

Restricted stock, which represents required investments in the common stock of the FHLB of Atlanta, Atlantic Community Bankers Bank (“ACBB”) and Community Bankers Bank (“CBB”), is carried at cost and is considered a long-term investment.

Management evaluates the restricted stock for impairment in accordance with ASC Industry Topic 942, Financial Services – Depository and Lending, (ASC Section 942-325-35). Management’s evaluation of potential impairment is based on management’s assessment of the ultimate recoverability of the cost of the restricted stock rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability is influenced by criteria such as (a) the significance of the decline in net assets of the issuing bank as compared to the capital stock amount for that bank and the length of time this situation has persisted, (b) commitments by the issuing bank to make payments required by law or regulation and the level of such payments in relation to the operating performance of that bank, and (c) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the issuing bank. Management has evaluated the restricted stock for impairment and believes that no impairment charge is necessary as of June 30, 2015.

The Corporation recognizes dividends received on its restricted stock investments on a cash basis. For the six months ended June 30, 2015, dividends of $155,668 were recognized in earnings. For the comparable period of 2014, dividends of $144,336 were recognized in earnings. For the three months ended June 30, 2015 and 2014, dividends of $76,511 and $71,338, respectively, were recognized in earnings.

Note 7 – Loans and Related Allowance for Loan Losses

The following table summarizes the primary segments of the loan portfolio as of June 30, 2015 and December 31, 2014:

(in thousands)	Commercial Real Estate		Acquisition and Development		Commercial and Industrial		Residential Mortgage		Consumer		Total
June 30, 2015

Individually evaluated for impairment	$	12,598	$	5,892	$	1,474	$	4,620	$	0	$	24,584
Collectively evaluated for impairment	$	248,577	$	88,981	$	92,057	$	366,335	$	24,556	$	820,506
Total loans	$	261,175	$	94,873	$	93,531	$	370,955	$	24,556	$	845,090

December 31, 2014

Individually evaluated for impairment	$	11,949	$	6,553	$	1,861	$	4,418	$	0	$	24,781
Collectively evaluated for impairment	$	244,115	$	92,748	$	91,394	$	363,223	$	23,730	$	815,210
Total loans	$	256,064	$	99,301	$	93,255	$	367,641	$	23,730	$	839,991

The segments of the Bank’s loan portfolio are disaggregated to a level that allows management to monitor risk and performance. The commercial real estate (“CRE”) loan segment is then segregated into two classes. Non-owner occupied CRE loans, which include loans secured by non-owner occupied, non-farm, and nonresidential properties, generally have a greater risk profile than all other CRE loans, which include loans secured by farmland, multifamily structures and owner-occupied commercial structures. The acquisition and development (“A&D”) loan segment is segregated into two classes. One-to-four family residential construction loans are generally made to individuals for the acquisition of and/or construction on a lot or lots on which a residential dwelling is to be built. All other A&D loans are generally made to developers or investors for the purpose of acquiring, developing and constructing residential or commercial structures. A&D loans have a higher risk profile because the ultimate buyer, once development is completed, is generally not known at the time of the loan is made. The commercial and industrial (“C&I”) loan segment consists of loans made for the purpose of financing the activities of commercial customers. The residential mortgage loan segment is segregated into two classes. Amortizing term loans are primarily first lien loans. Home equity lines of credit are generally second lien loans. The consumer loan segment consists primarily of installment loans (direct and indirect) and overdraft lines of credit connected with customer deposit accounts.

Management uses a 10-point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first six categories are considered not criticized, and are aggregated as “Pass” rated. The criticized rating categories utilized by management generally follow bank regulatory definitions. The Special Mention category includes assets that are currently protected but are potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a Substandard classification. Loans in the Substandard category have well-defined weaknesses that jeopardize the liquidation of the debt, and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected. All loans greater than 90 days past due are considered Substandard. The portion of a specific allocation of the allowance for loan losses that management believes is associated with a pending event that could trigger loss in the short-term will be classified in the Doubtful category. Any portion of a loan that has been charged off is placed in the Loss category.

To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Bank has a structured loan rating process with several layers of internal and external oversight. Generally, consumer and residential mortgage loans are included in the Pass categories unless a specific action, such as bankruptcy, repossession, or death occurs to raise awareness of a possible credit event. The Bank’s Commercial Loan Officers are responsible for the timely and accurate risk rating of the loans in the commercial segments at origination and on an ongoing basis. The Bank’s experienced Credit Quality and Loan Review Department performs an annual review of all commercial relationships of $500,000 or greater. Confirmation of the appropriate risk grade is included as part of the review process on an ongoing basis. The Credit Quality and Loan Review Department continually reviews and assesses loans within the portfolio. In addition, the Bank engages an external consultant to conduct loan reviews on at least an annual basis. Generally, the external consultant reviews commercial relationships greater than $1,000,000 and/or criticized non-consumer loans greater than $500,000. Detailed reviews, including plans for resolution, are performed on loans classified as Substandard on a quarterly basis. Loans in the Special Mention and Substandard categories that are collectively evaluated for impairment are given separate consideration in the determination of the allowance.

The following table presents the classes of the loan portfolio summarized by the aggregate Pass and the criticized categories of Special Mention and Substandard within the internal risk rating system as of June 30, 2015 and December 31, 2014:

(in thousands)	Pass		Special Mention		Substandard		Total
June 30, 2015
Commercial real estate
Non owner-occupied	$	118,276	$	11,754	$	11,002	$	141,032
All other CRE		92,069		9,397		18,677		120,143
Acquisition and development
1-4 family residential construction		15,232		0		700		15,932
All other A&D		72,030		78		6,833		78,941
Commercial and industrial		89,473		688		3,370		93,531
Residential mortgage
Residential mortgage - term		285,546		246		10,378		296,170
Residential mortgage - home equity		73,438		49		1,298		74,785
Consumer		24,519		0		37		24,556
Total	$	770,583	$	22,212	$	52,295	$	845,090

December 31, 2014
Commercial real estate
Non owner-occupied	$	115,276	$	10,884	$	11,273	$	137,433
All other CRE		90,740		8,618		19,273		118,631
Acquisition and development
1-4 family residential construction		12,920		0		790		13,710
All other A&D		72,323		1,356		11,912		85,591
Commercial and industrial		88,579		884		3,792		93,255
Residential mortgage
Residential mortgage - term		280,113		379		10,934		291,426
Residential mortgage - home equity		74,698		90		1,427		76,215
Consumer		23,658		0		72		23,730
Total	$	758,307	$	22,211	$	59,473	$	839,991

Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. A loan is considered to be past due when a payment remains unpaid 30 days past its contractual due date. For all loan segments, the accrual of interest is discontinued when principal or interest is delinquent for 90 days or more unless the loan is well-secured and in the process of collection. All non-accrual loans are considered to be impaired. Interest payments received on non-accrual loans are applied as a reduction of the loan principal balance. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured. The Corporation’s policy for recognizing interest income on impaired loans does not differ from its overall policy for interest recognition.

The following table presents the classes of the loan portfolio summarized by the aging categories of performing loans and non-accrual loans as of June 30, 2015 and December 31, 2014:

(in thousands)	Current		30-59 Days Past Due		60-89 Days Past Due		90 Days+ Past Due		Total Past Due and Accruing		Non-Accrual		Total Loans
June 30, 2015
Commercial real estate
Non owner-occupied	$	136,368	$	199	$	2,820	$	0	$	3,019	$	1,645	$	141,032
All other CRE		115,151		47		0		0		47		4,945		120,143
Acquisition and development
1-4 family residential construction		15,932		0		0		0		0		0		15,932
All other A&D		75,799		0		110		20		130		3,012		78,941
Commercial and industrial		93,242		120		0		0		120		169		93,531
Residential mortgage
Residential mortgage - term		291,279		512		2,240		392		3,144		1,747		296,170
Residential mortgage - home equity		73,855		441		125		0		566		364		74,785
Consumer		24,291		208		54		3		265		0		24,556
Total	$	825,917	$	1,527	$	5,349	$	415	$	7,291	$	11,882	$	845,090

December 31, 2014
Commercial real estate
Non owner-occupied	$	135,994	$	104	$	183	$	0	$	287	$	1,152	$	137,433
All other CRE		112,825		1,196		0		0		1,196		4,610		118,631
Acquisition and development
1-4 family residential construction		13,710		0		0		0		0		0		13,710
All other A&D		81,702		239		40		1		280		3,609		85,591
Commercial and industrial		93,060		0		20		4		24		171		93,255
Residential mortgage
Residential mortgage - term		279,340		8,654		1,350		416		10,420		1,666		291,426
Residential mortgage - home equity		74,913		577		313		69		959		343		76,215
Consumer		23,316		287		88		39		414		0		23,730
Total	$	814,860	$	11,057	$	1,994	$	529	$	13,580	$	11,551	$	839,991

Non-accrual loans which have been subject to a partial charge-off totaled $5.0 million as of June 30, 2015, compared to $4.6 million as of December 31, 2014. Loans secured by 1-4 family residential real estate properties in the process of foreclosure were $2.1 million at June 30, 2015 and $1.9 million at December 31, 2014.

An allowance for loan losses (“ALL”) is maintained to absorb losses from the loan portfolio. The ALL is based on management’s continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience, and the amount of non-performing loans.

The Bank’s methodology for determining the ALL is based on the requirements of ASC Section 310-10-35, Receivables-Overall-Subsequent Measurement, for loans individually evaluated for impairment and ASC Subtopic 450-20, Contingencies-Loss Contingencies, for loans collectively evaluated for impairment, as well as the Interagency Policy Statement on the Allowance for Loan and Lease Losses and other bank regulatory guidance. The total of the two components represents the allocated portion of the Bank’s ALL. In the second quarter of 2015, management determined that it would be prudent to establish an unallocated portion of the ALL to protect the Bank from other risks associated with the loan portfolio that may not be specifically identifiable.

The following table summarizes the primary segments of the ALL, segregated by the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of June 30, 2015 and December 31, 2014:

(in thousands)	Commercial Real Estate		Acquisition and Development		Commercial and Industrial		Residential Mortgage		Consumer		Unallocated		Total
June 30, 2015

Individually evaluated for impairment	$	30	$	1,052	$	0	$	84	$	0	$	0	$	1,166
Collectively evaluated for impairment	$	2,536	$	2,754	$	1,007	$	3,623	$	223	$	500	$	10,643
Total ALL	$	2,566	$	3,806	$	1,007	$	3,707	$	223	$	500	$	11,809

December 31, 2014

Individually evaluated for impairment	$	36	$	1,141	$	0	$	59	$	0	$	0	$	1,236
Collectively evaluated for impairment	$	2,388	$	2,771	$	1,680	$	3,803	$	187	$	0	$	10,829
Total ALL	$	2,424	$	3,912	$	1,680	$	3,862	$	187	$	0	$	12,065

Management evaluates individual loans in all of the commercial segments for possible impairment if the loan (a) is greater than $500,000 or (b) is part of a relationship that is greater than $750,000 and is either (i) in nonaccrual status or (ii) risk-rated Substandard and greater than 60 days past due. Loans are considered to be impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in evaluating impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. The Bank does not separately evaluate individual consumer and residential mortgage loans for impairment, unless such loans are part of a larger relationship that is impaired; otherwise, loans in these segments are considered impaired when they are classified as non-accrual.

Once the determination has been made that a loan is impaired, the determination of whether a specific allocation of the allowance is necessary is measured by comparing the recorded investment in the loan to the fair value of the loan using one of three methods: (a) the present value of expected future cash flows discounted at the loan’s effective interest rate; (b) the loan’s observable market price; or (c) the fair value of the collateral less selling costs. The method is selected on a loan-by-loan basis, with management primarily utilizing the fair value of collateral method. If the fair value of the collateral less selling costs method is utilized for collateral securing loans in the commercial segments, then an updated external appraisal is ordered on the collateral supporting the loan if the loan balance is greater than $500,000 and the existing appraisal is greater than 18 months old. If an updated appraisal has not been received and reviewed in time for the determination of estimated fair value at quarter (or year) end, or if the appraisal is found to be deficient following the Corporation’s internal appraisal review process and re-ordered, then the estimated fair value of the collateral is determined by adjusting the existing appraisal by the appropriate percentage from an internally prepared appraisal discount grid. This grid considers the age of a third party appraisal and the geographic region where the collateral is located. The discount rates in the appraisal discount grid are updated periodically to reflect the most current knowledge that management has available, including the results of current appraisals. A specific allocation of the ALL is recorded if there is any deficiency in collateral value determined by comparing the estimated fair value to the recorded investment of the loan. When updated appraisals are received and reviewed, adjustments are made to the specific allocation as needed.

The evaluation of the need and amount of a specific allocation of the ALL and whether a loan can be removed from impairment status is made on a quarterly basis.

The following table presents impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary as of June 30, 2015 and December 31, 2014:

	Impaired Loans with Specific Allowance				Impaired Loans with No Specific Allowance		Total Impaired Loans
(in thousands)	Recorded Investment		Related Allowances		Recorded Investment		Recorded Investment		Unpaid Principal Balance
June 30, 2015
Commercial real estate
Non owner-occupied	$	138	$	30	$	4,492	$	4,630	$	4,640
All other CRE		0		0		7,968		7,968		8,459
Acquisition and development
1-4 family residential construction		700		68		0		700		746
All other A&D		4,472		984		720		5,192		8,933
Commercial and industrial		0		0		1,474		1,474		2,336
Residential mortgage
Residential mortgage - term		298		84		3,958		4,256		4,622
Residential mortgage – home equity		0		0		364		364		385
Consumer		0		0		0		0		0
Total impaired loans	$	5,608	$	1,166	$	18,976	$	24,584	$	30,121

December 31, 2014
Commercial real estate
Non owner-occupied	$	143	$	35	$	4,353	$	4,496	$	4,543
All other CRE		0		0		7,453		7,453		7,944
Acquisition and development
1-4 family residential construction		790		105		0		790		836
All other A&D		3,615		1,037		2,148		5,763		9,590
Commercial and industrial		0		0		1,861		1,861		2,723
Residential mortgage
Residential mortgage – term		296		59		3,779		4,075		4,485
Residential mortgage – home equity		0		0		343		343		363
Consumer		0		0		0		0		0
Total impaired loans	$	4,844	$	1,236	$	19,937	$	24,781	$	30,484

Loans that are collectively evaluated for impairment are analyzed with general allowances being made as appropriate. For general allowances, historical loss trends are used in the estimation of losses in the current portfolio. These historical loss amounts are modified by other qualitative factors.

The classes described above, which are based on the Federal call code assigned to each loan, provide the starting point for the ALL analysis. Management tracks the historical net charge-off activity (full and partial charge-offs, net of full and partial recoveries) at the call code level. A historical charge-off factor is calculated utilizing a defined number of consecutive historical quarters. Consumer pools currently utilize a rolling 12 quarters, while Commercial pools currently utilize a rolling eight quarters.

“Pass” rated credits are segregated from “Criticized” credits for the application of qualitative factors. “Pass” pools for commercial and residential real estate are further segmented based upon the geographic location of the underlying collateral. There are seven geographic regions utilized – six that represent the Bank’s lending footprint and a seventh for all out-of-market credits. Different economic environments and resultant credit risks exist in each region that are acknowledged in the assignment of qualitative factors. Loans in the criticized pools, which possess certain qualities or characteristics that may lead to collection and loss issues, are closely monitored by management and subject to additional qualitative factors.

Management supplements the historical charge-off factor with a number of additional qualitative factors that are likely to cause estimated credit losses associated with the existing loan pools to differ from historical loss experience. The additional factors, which are evaluated quarterly and updated using information obtained from internal, regulatory, and governmental sources, are: (a) national and local economic trends and conditions; (b) levels of and trends in delinquency rates and non-accrual loans; (c) trends in volumes and terms of loans; (d) effects of changes in lending policies; (e) experience, ability, and depth of lending staff; (f) value of underlying collateral; and (g) concentrations of credit from a loan type, industry and/or geographic standpoint.

Management reviews the loan portfolio on a quarterly basis using a defined, consistently applied process in order to make appropriate and timely adjustments to the ALL. When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ALL. Residential mortgage and consumer loans are charged off after they are 120 days contractually past due. All other loans are charged off based on an evaluation of the facts and circumstances of each individual loan. When the Bank believes that its ability to collect is solely dependent on the liquidation of the collateral, a full or partial charge-off is recorded promptly to bring the recorded investment to an amount that the Bank believes is supported by an ability to collect on the collateral. The circumstances that may impact the Bank’s decision to charge-off all or a portion of a loan include default or non-payment by the borrower, scheduled foreclosure actions, and/or prioritization of the Bank’s claim in bankruptcy. There may be circumstances where, due to pending events, the Bank will place a specific allocation of the ALL on a loan for which a partial charge-off has been previously recognized. This specific allocation may be either charged off or removed depending upon the outcome of the pending event. Full or partial charge-offs are not recovered until full principal and interest on the loan have been collected, even if a subsequent appraisal supports a higher value. Loans with partial charge-offs generally remain in non-accrual status. Both full and partial charge-offs reduce the recorded investment of the loan and the ALL and are considered to be charge-offs for purposes of all credit loss metrics and trends, including the historical rolling charge-off rates used in the determination of the ALL. At June 30, 2015, $.5 million of the ALL was considered to be unallocated.

The following tables present the activity in the ALL for the six- and three-month periods ended June 30, 2015 and 2014:

(in thousands)	Commercial Real Estate			Acquisition and Development			Commercial and Industrial			Residential Mortgage			Consumer			Unallocated		Total
ALL balance at January 1, 2015	$	2,424		$	3,912		$	1,680		$	3,862		$	187		$	0	$	12,065
Charge-offs		(287	)		(256	)		0			(36	)		(174	)		0		(753	)
Recoveries		65			41			20			133			112			0		371
Provision		364			109			(693	)		(252	)		98			500		126
ALL balance at June 30, 2015	$	2,566		$	3,806		$	1,007		$	3,707		$	223		$	500	$	11,809

ALL balance at January 1, 2014	$	4,052		$	4,172		$	766		$	4,320		$	284		$	0	$	13,594
Charge-offs		(21	)		(1,520	)		(208	)		(566	)		(263	)		0		(2,578	)
Recoveries		10			71			7			156			262			0		506
Provision		(1,202	)		919			988			268			(32	)		0		941
ALL balance at June 30, 2014	$	2,839		$	3,642		$	1,553		$	4,178		$	251		$	0	$	12,463

(in thousands)	Commercial Real Estate			Acquisition and Development			Commercial and Industrial			Residential Mortgage			Consumer			Unallocated		Total
ALL balance at April 1, 2015	$	2,576		$	3,692		$	1,477		$	3,790		$	216		$	0	$	11,751
Charge-offs		0			(25	)		0			(73	)		(78	)		0		(176	)
Recoveries		62			26			13			28			53			0		182
Provision		(72	)		113			(483	)		(38	)		32			500		52
ALL balance at June 30, 2015	$	2,566		$	3,806		$	1,007		$	3,707		$	223		$	500	$	11,809

ALL balance at April 1, 2014	$	3,399		$	3,896		$	1,070		$	3,962		$	245		$	0	$	12,572
Charge-offs		0			(701	)		(56	)		(98	)		(84	)		0		(939	)
Recoveries		0			59			4			107			83			0		253
Provision		(560	)		388			535			207			7			0		577
ALL balance at June 30, 2014	$	2,839		$	3,642		$	1,553		$	4,178		$	251		$	0	$	12,463

The ALL is based on estimates, and actual losses may vary from current estimates. Management believes that the granularity of the homogeneous pools and the related historical loss ratios and other qualitative factors, as well as the consistency in the application of assumptions, result in an ALL that is representative of the risk found in the components of the portfolio at any given date.

The following tables present the average recorded investment in impaired loans by class and related interest income recognized for the periods indicated:

	Six Months Ended						Six Months Ended
	June 30, 2015						June 30, 2014
(in thousands)	Average investment		Interest income recognized on an accrual basis		Interest income recognized on a cash basis		Average investment		Interest income recognized on an accrual basis		Interest income recognized on a cash basis
Commercial real estate
Non owner-occupied	$	4,224	$	78	$	0	$	1,105	$	11	$	0
All other CRE		7,533		55		8		9,936		81		44
Acquisition and development
1-4 family residential construction		760		18		0		1,919		25		0
All other A&D		5,417		63		0		8,567		96		0
Commercial and industrial		1,617		47		18		2,126		49		2
Residential mortgage
Residential mortgage - term		4,146		82		2		6,648		107		52
Residential mortgage – home equity		373		0		2		686		4		1
Consumer		7		0		0		11		0		0
Total	$	24,077	$	343	$	30	$	30,998	$	373	$	99

	Three months ended						Three months ended
	June 30, 2015						June 30, 2014
(in thousands)	Average investment		Interest income recognized on an accrual basis		Interest income recognized on a cash basis		Average investment		Interest income recognized on an accrual basis		Interest income recognized on a cash basis
Commercial real estate
Non owner-occupied	$	4,088	$	38	$	0	$	1,068	$	4	$	0
All other CRE		7,574		28		7		9,624		40		43
Acquisition and development
1-4 family residential construction		746		9		0		1,549		11		0
All other A&D		5,245		31		0		8,329		35		0
Commercial and industrial		1,495		24		18		2,040		23		0
Residential mortgage
Residential mortgage - term		4,181		42		2		6,489		53		43
Residential mortgage – home equity		388		0		2		739		1		0
Consumer		7		0		0		0		0		0
Total	$	23,724	$	172	$	29	$	29,838	$	167	$	86

In the normal course of business, the Bank modifies loan terms for various reasons. These reasons may include as a retention strategy, remaining competitive in the current interest rate environment, and re-amortizing or extending a loan term to better match the loan’s payment stream with the borrower’s cash flows. A modified loan is considered to be a troubled debt restructuring (“TDR”) when the Bank has determined that the borrower is troubled (i.e., experiencing financial difficulties). The Bank evaluates the probability that the borrower will be in payment default on any of its debt obligations in the foreseeable future without modification. To make this determination, the Bank performs a global financial review of the borrower and loan guarantors to assess their current ability to meet their financial obligations.

When the Bank restructures a loan to a troubled borrower, the loan terms (i.e., interest rate, payment amount, amortization period, and/or maturity date) are modified in such a way as to enable the borrower to cover the modified debt service payments based on current financials and cash flow adequacy. If a borrower’s hardship is thought to be temporary, then modified terms are only offered for that time period. Where possible, the Bank obtains additional collateral and/or secondary payment sources at the time of the restructure in order to put the Bank in the best possible position if the borrower is not able to meet the modified terms. To date, the Bank has not forgiven any principal as a restructuring concession. The Bank will not offer modified terms if it believes that modifying the loan terms will only delay an inevitable permanent default.

All loans designated as TDRs are considered impaired loans and may be in either accruing or non-accruing status. The Bank’s policy for recognizing interest income on impaired loans does not differ from its overall policy for interest recognition. Accordingly, the accrual of interest is discontinued when principal or interest is delinquent for 90 days or more unless the loan is well-secured and in the process of collection. If the loan was accruing at the time of the modification, then it continues to be in accruing status subsequent to the modification. Non-accrual TDRs may return to accruing status when there has been sufficient payment performance for a period of at least six months. TDRs are considered to be in payment default if, subsequent to modification, the loans are transferred to non-accrual status or to foreclosure. Loans may be removed from being reported as a TDR in the calendar year following the modification if the interest rate at the time of modification was consistent with the interest rate for a loan with comparable credit risk and the loan has performed according to its modified terms for at least six months.

The volume and type of TDR activity is considered in the assessment of the local economic trends’ qualitative factor used in the determination of the ALL for loans that are evaluated collectively for impairment.

The following tables present the volume and recorded investment at the time of modification of TDRs by class and type of modification that occurred during the periods indicated:

	Temporary Rate Modification				Extension of Maturity				Modification of Payment and Other Terms
(in thousands)	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment
Six Months Ended June 30, 2015
Commercial real estate
Non owner-occupied		0	$	0		1	$	3,097		1	$	136
All other CRE		0		0		1		237		5		3,847
Acquisition and development
1-4 family residential construction		0		0		0		0		0		0
All other A&D		0		0		3		372		0		0
Commercial and industrial		0		0		1		930		0		0
Residential mortgage
Residential mortgage – term		0		0		2		599		1		116
Residential mortgage – home equity		0		0		0		0		0		0
Consumer		0		0		0		0		0		0
Total		0	$	0		8	$	5,235		7	$	4,099

	Temporary Rate Modification				Extension of Maturity				Modification of Payment and Other Terms
(in thousands)	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment
Three months ended June 30, 2015
Commercial real estate
Non owner-occupied		0	$	0		0	$	0		0	$	0
All other CRE		0		0		1		237		0		0
Acquisition and development
1-4 family residential construction		0		0		0		0		0		0
All other A&D		0		0		0		0		0		0
Commercial and industrial		0		0		1		930		0		0
Residential mortgage
Residential mortgage – term		0		0		0		0		0		0
Residential mortgage – home equity		0		0		0		0		0		0
Consumer		0		0		0		0		0		0
Total		0	$	0		2	$	1,167		0	$	0

During the six months ended June 30, 2015, there were seven new TDRs. In addition, eight existing TDRs which had reached their original modification maturity were re-modified. A $4,324 reduction of the ALL resulted from a change to the impairment evaluation of one loan from evaluated collectively to being evaluated individually. The remaining six new TDRs were impaired at the time of modification, resulting in no impact to the ALL as a result of the modifications and there was no impact to the recorded investment relating to the transfer of these loans.

During the quarter ended June 30, 2015, one residential mortgage loan totaling $70,000 that was modified as a TDR within the previous 12 months was transferred to non-accrual, and is considered a payment default. There were no payment defaults in the quarter ended March 31, 2015.

	Temporary Rate Modification				Extension of Maturity				Modification of Payment and Other Terms
(in thousands)	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment
Six Months Ended June 30, 2014
Commercial real estate
Non owner-occupied		0	$	0		2	$	277		0	$	0
All other CRE		0		0		0		0		4		2,627
Acquisition and development
1-4 family residential construction		0		0		0		0		0		0
All other A&D		0		0		0		0		0		0
Commercial and industrial		0		0		0		0		0		0
Residential mortgage
Residential mortgage – term		1		90		0		0		0		0
Residential mortgage – home equity		0		0		0		0		0		0
Consumer		0		0		0		0		0		0
Total		1	$	90		2	$	277		4	$	2,627

	Temporary Rate								Modification of Payment
	Modification				Extension of Maturity				and Other Terms
	Number of		Recorded		Number of		Recorded		Number of		Recorded
(in thousands)	Contracts		Investment		Contracts		Investment		Contracts		Investment
Three Months Ended June 30, 2014
Commercial real estate
Non owner-occupied		0	$	0		0	$	0		0	$	0
All other CRE		0		0		0		0		3		2,173
Acquisition and development
1-4 family residential construction		0		0		0		0		0		0
All other A&D		0		0		0		0		0		0
Commercial and industrial		0		0		0		0		0		0
Residential mortgage
Residential mortgage – term		0		0		0		0		0		0
Residential mortgage – home equity		0		0		0		0		0		0
Consumer		0		0		0		0		0		0
Total		0	$	0		0	$	0		3	$	2,173

During the six months ended June 30, 2014, there were two new TDRs. In addition, five existing TDRs which had reached their original modification maturity were re-modified. A $1,055 reduction of the ALL resulted from a change to the impairment evaluation of one loan, from evaluated collectively to being evaluated individually. The remaining new TDR was impaired at the time of modification, resulting in no impact to the ALL as a result of the modifications and there was no impact to the recorded investment relating to the transfer of these loans.

During the quarter ended March 31, 2014, one A&D loan totaling $1.4 million that was modified as a TDR within the previous 12 months was transferred to non-accrual, and is considered a payment default. There were no payment defaults in the quarter ended June 30, 2014.

Note 8 - Other Real Estate Owned

The following table presents the components of Other Real Estate Owned (“OREO”) as of June 30, 2015 and December 31, 2014:

(in thousands)	June 30, 2015		December 31, 2014
Commercial real estate	$	1,957	$	1,772
Acquisition and development		7,792		9,263
Residential mortgage		1,838		1,897
Total OREO	$	11,587	$	12,932

The following table presents the activity in the OREO valuation allowance for the six- and three-month periods ended June 30, 2015 and 2014:

	For the Six Months Ended						For the Three Months Ended
	June 30,						June 30,
(in thousands)	2015			2014			2015			2014
Balance January 1	$	3,440		$	4,047		$	3,765		$	3,670
Fair value write-down		852			443			346			72
Sales of OREO		(449	)		(748	)		(268	)		0
Balance at end of period	$	3,843		$	3,742		$	3,843		$	3,742

The following table presents the components of OREO expenses, net for the six- and three-month periods ended June 30, 2015 and 2014:

	For the Six Months Ended						For the Three Months Ended
	June 30,						June 30,
(in thousands)	2015			2014			2015			2014
Gains on real estate, net	$	(78	)	$	970		$	(51	)	$	995
Fair value write-down, net		852			443			346			72
Expenses, net		456			357			249			169
Rental and other income		(183	)		(156	)		(129	)		(79	)
Total OREO expense, net	$	1,047		$	1,614		$	415		$	1,157

Note 9 – Fair Value of Financial Instruments

The Corporation complies with the guidance of ASC Topic 820, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements required under other accounting pronouncements. The Corporation also follows the guidance on matters relating to all financial instruments found in ASC Subtopic 825-10, Financial Instruments – Overall.

Fair value is defined as the price to sell an asset or to transfer a liability in an orderly transaction between willing market participants as of the measurement date. Fair value is best determined by values quoted through active trading markets. Active trading markets are characterized by numerous transactions of similar financial instruments between willing buyers and willing sellers. Because no active trading market exists for various types of financial instruments, many of the fair values disclosed were derived using present value discounted cash flows or other valuation techniques described below. As a result, the Corporation’s ability to actually realize these derived values cannot be assumed.

The Corporation measures fair values based on the fair value hierarchy established in ASC Paragraph 820-10-35-37. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of inputs that may be used to measure fair value under the hierarchy are as follows:

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets and liabilities. This level is the most reliable source of valuation.

Level 2: Quoted prices that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability. Level 2 inputs include inputs other than quoted prices that are observable for the asset or liability (for example, interest rates and yield curves at commonly quoted intervals, volatilities, prepayment speeds, loss severities, credit risks, and default rates). It also includes inputs that are derived principally from or corroborated by observable market data by correlation or other means (market-corroborated inputs). Several sources are utilized for valuing these assets, including a contracted valuation service, Standard & Poor’s (“S&P”) evaluations and pricing services, and other valuation matrices.

Level 3: Prices or valuation techniques that require inputs that are both significant to the valuation assumptions and not readily observable in the market (i.e. supported with little or no market activity). Level 3 instruments are valued based on the best available data, some of which is internally developed, and consider risk premiums that a market participant would require.

The level established within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Transfers in and out of Level 1, 2 or 3 are recorded at fair value at the beginning of the reporting period.

Management believes that the Corporation’s valuation techniques are appropriate and consistent with the techniques used by other market participants. However, the use of different methodologies and assumptions could result in a different estimate of fair values at the reporting date. The valuation techniques used by the Corporation to measure, on a recurring and non-recurring basis, the fair value of assets as of June 30, 2015 are discussed in the paragraphs that follow.

Investments – The investment portfolio is classified and accounted for based on the guidance of ASC Topic 320, Investments – Debt and Equity Securities.

The fair value of investments is determined using a market approach. As of June 30, 2015, the U.S. Treasuries, U.S. Government agencies, residential and commercial mortgage-backed securities, collateralized mortgage obligations, and state and political subdivisions bonds segments are classified as Level 2 within the valuation hierarchy. Their fair values were determined based upon market-corroborated inputs and valuation matrices, which were obtained through third party data service providers or securities brokers through which the Corporation has historically transacted both purchases and sales of investment securities.

The CDO segment, which consists of pooled trust preferred securities issued by banks, thrifts and insurance companies, is classified as Level 3 within the valuation hierarchy. At June 30, 2015, the Corporation owned 16 pooled trust preferred securities with an amortized cost of $35.6 million and a fair value of $30.0 million. The market for these securities at June 30, 2015 is not active and markets for similar securities are also not active. The inactivity was evidenced first by a significant widening of the bid-ask spread in the brokered markets in which these securities trade and then by a significant decrease in the volume of trades relative to historical levels. The new issue market is also inactive, as few CDOs have been issued since 2007. There are currently very few market participants who are willing to effect transactions in these securities. The market values for these securities or any securities other than those issued or guaranteed by the U.S. Department of the Treasury (the “Treasury”) are depressed relative to historical levels. Therefore, in the current market, a low market price for a particular bond may only provide evidence of stress in the credit markets in general rather than being an indicator of credit problems with a particular issue. Given the conditions in the current debt markets and the absence of observable transactions in the secondary and new issue markets, management has determined that (a) the few observable transactions and market quotations that are available are not reliable for the purpose of obtaining fair value at June 30, 2015, (b) an income valuation approach technique (i.e. present value) that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs will be equally or more representative of fair value than a market approach, and (c) the CDO segment is appropriately classified within Level 3 of the valuation hierarchy because management determined that significant adjustments were required to determine fair value at the measurement date.

Management relies on an independent third party to prepare both the evaluations of OTTI as well as the fair value determinations for its CDO portfolio. Management does not believe that there were any material differences in the OTTI evaluations and pricing between June 30, 2015 and December 31, 2014.

The approach used by the third party to determine fair value involves several steps, including detailed credit and structural evaluation of each piece of collateral in each bond, default, recovery and prepayment/amortization probabilities for each piece of collateral in the bond, and discounted cash flow modeling. The discount rate methodology used by the third party combines a baseline current market yield for comparable corporate and structured credit products with adjustments based on evaluations of the differences found in structure and risks associated with actual and projected credit performance of each CDO being valued. Currently, the only active and liquid trading market that exists is for stand-alone trust preferred securities. Therefore, adjustments to the baseline discount rate are also made to reflect the additional leverage found in structured instruments.

Derivative financial instruments (Cash flow hedge) – The Corporation’s open derivative positions are interest rate swaps that are classified as Level 3 within the valuation hierarchy. Open derivative positions are valued using externally developed pricing models based on observable market inputs provided by a third party and validated by management. The Corporation has considered counterparty credit risk in the valuation of its interest rate swap assets.

Impaired loans – Loans included in the table below are those that are considered impaired with a specific allocation or with a partial charge-off, based upon the guidance of the loan impairment subsection of the Receivables Topic, ASC Section 310-10-35, under which the Corporation has measured impairment generally based on the fair value of the loan’s collateral. Fair value consists of the loan balance less its valuation allowance and is generally determined based on independent third-party appraisals of the collateral or discounted cash flows based upon the expected proceeds. These assets are included as Level 3 fair values based upon the lowest level of input that is significant to the fair value measurements.

Other real estate owned – OREO included in the table below are considered impaired with specific write-downs. Fair value of other real estate owned is based on independent third-party appraisals of the properties. These values were determined based on the sales prices of similar properties in the approximate geographic area. These assets are included as Level 3 fair values based upon the lowest level of input that is significant to the fair value measurements.

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

(in thousands)	Fair Value at June 30, 2015			Valuation Technique	Significant Unobservable Inputs	Significant Unobservable Input Value
Recurring:

Investment Securities – available for sale	$	30,046		Discounted Cash Flow	Discount Rate	Range of Libor+ 5.50% to 9.50%

Cash Flow Hedge	$	(140	)	Discounted Cash Flow	Reuters Third Party Market Quote	99.9% (weighted avg 99.9%)

Non-recurring:

Impaired Loans	$	6,592		Market Comparable Properties	Marketability Discount	3% -15% ⁽¹⁾ (weighted avg 12.0%)

Other Real Estate Owned	$	2,444		Market Comparable Properties	Marketability Discount	6.7% -15.9%⁽¹⁾ (weighted avg 12.9%)

(in thousands)	Fair Value at December 31, 2014			Valuation Technique	Significant Unobservable Inputs	Significant Unobservable Input Value
Recurring:

Investment Securities – available for sale	$	25,339		Discounted Cash Flow	Discount Rate	Range of Libor+ 5% to 12%

Cash Flow Hedge	$	(199	)	Discounted Cash Flow	Reuters Third Party Market Quote	99.9% (weighted avg 99.9%)

Non-recurring:

Impaired Loans	$	9,122		Market Comparable Properties	Marketability Discount	10% ⁽¹⁾(weighted avg 10%)

Other Real Estate Owned	$	2,511		Market Comparable Properties	Marketability Discount	10% -15% ⁽¹⁾ (weighted avg 11%)

NOTE:

(1)

Range would include discounts taken since appraisal and estimated values

For assets measured at fair value on a recurring and non-recurring basis, the fair value measurements by level within the fair value hierarchy used at June 30, 2015 and December 31, 2014 are as follows:

				Fair Value Measurements at June 30, 2015 Using
	Assets Measured at Fair Value			Quoted Prices in Active Markets for Identical Assets	Significant Other Observable Inputs		Significant Unobservable Inputs
(in thousands)	6/30/2015			(Level 1)	(Level 2)		(Level 3)
Recurring:
Investment securities available-for-sale:
U.S. treasuries	$	10,075			$	10,075
U.S. government agencies	$	44,095			$	44,095
Residential mortgage-backed agencies	$	19,963			$	19,963
Commercial mortgage-backed agencies	$	42,866			$	42,866
Collateralized mortgage obligations	$	13,179			$	13,179
Obligations of states and political subdivisions	$	45,002			$	45,002
Collateralized debt obligations	$	30,046					$	30,046
Financial Derivative	$	(140	)				$	(140	)
Non-recurring:
Impaired loans	$	6,592					$	6,592
Other real estate owned	$	2,444					$	2,444

				Fair Value Measurements at December 31, 2014 Using
	Assets Measured at Fair Value			Quoted Prices in Active Markets for Identical Assets	Significant Other Observable Inputs		Significant Unobservable Inputs
(in thousands)	12/31/2014			(Level 1)	(Level 2)		(Level 3)
Recurring:
Investment securities available-for-sale:
U.S. treasuries	$	29,596			$	29,596
U.S. government agencies	$	38,941			$	38,941
Residential mortgage-backed agencies	$	45,273			$	45,273
Commercial mortgage-backed agencies	$	25,957			$	25,957
Collateralized mortgage obligations	$	8,707			$	8,707
Obligations of states and political subdivisions	$	47,304			$	47,304
Collateralized debt obligations	$	25,339					$	25,339
Financial Derivative	$	(199	)				$	(199	)
Non-recurring:
Impaired loans	$	9,122					$	9,122
Other real estate owned	$	2,511					$	2,511

There were no transfers of assets between any of the fair value hierarchy for the six-month periods ended June 30, 2015 and 2014.

The following tables show a reconciliation of the beginning and ending balances for fair valued assets measured on a recurring basis using Level 3 significant unobservable inputs for the six- and three-month periods ended June 30, 2015 and 2014:

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
(In thousands)	Investment Securities Available for Sale		Cash Flow Hedge
Beginning balance January 1, 2015	$	25,339	$	(199	)
Total gains realized/unrealized:
Included in other comprehensive income		4,707		59
Ending balance June 30, 2015	$	30,046	$	(140	)

The amount of total gains or losses for the period included in earnings attributable to the change in realized/unrealized gains or losses related to assets still held at the reporting date	$	0	$	0

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
(in thousands)	Investment Securities Available for Sale		Cash Flow Hedge
Beginning balance January 1, 2014	$	17,538	$	(457	)
Total gains realized/unrealized:
Included in other comprehensive income		6,383		185
Ending balance June 30, 2014	$	23,921	$	(272	)

The amount of total gains or losses for the period included in earnings attributable to the change in realized/unrealized gains or losses related to assets still held at the reporting date	$	0	$	0

	Fair Value Measurement Using Significant Unobservable Inputs (Level 3)
(in thousands)	Investment Securities Available for Sale		Cash Flow Hedge
Beginning balance April 1, 2015	$	28,391	$	(164	)
Total gains realized/unrealized:
Included in other comprehensive income		1,655		24
Ending balance June 30, 2015	$	30,046	$	(140	)

The amount of total gains or losses for the period included in earnings attributable to the change in realized/unrealized gains or losses related to assets still held at the reporting date	$	0	$	0

	Fair Value Measurement Using Significant Unobservable Inputs (Level 3)
(in thousands)	Investment Securities Available for Sale		Cash Flow Hedge
Beginning balance April 1, 2014	$	23,093	$	(365	)
Total gains realized/unrealized:
Included in other comprehensive income		828		93
Ending balance June 30, 2014	$	23,921	$	(272	)

The amount of total gains or losses for the period included in earnings attributable to the change in realized/unrealized gains or losses related to assets still held at the reporting date	$	0	$	0

Gains (realized and unrealized) included in earnings for the periods identified above are reported in the Consolidated Statement of Operations in Other Operating Income.

The disclosed fair values may vary significantly between institutions based on the estimates and assumptions used in the various valuation methodologies. The derived fair values are subjective in nature and involve uncertainties and significant judgment. Therefore, they cannot be determined with precision. Changes in the assumptions could significantly impact the derived estimates of fair value. Disclosure of non-financial assets such as buildings as well as certain financial instruments such as leases is not required. Accordingly, the aggregate fair values presented do not represent the underlying value of the Corporation.

The following methods and assumptions were used by the Corporation to estimate its fair value disclosures for financial instruments:

Cash and due from banks: The carrying amounts as reported in the statement of financial condition for cash and due from banks approximate their fair values.

Interest bearing deposits in banks: The carrying amount of interest bearing deposits approximates their fair values.

Securities held to maturity: Investments in debt securities classified as held to maturity are measured subsequently at amortized cost in the statement of financial position.

Restricted investment in bank stock: The carrying value of stock issued by the FHLB of Atlanta, ACBB and CBB approximates fair value based on the redemption provisions of the stock.

Loans (excluding impaired loans with specific loss allowances): For variable-rate loans that re-price frequently or “in one year or less”, and with no significant change in credit risk, fair values are based on carrying values. Fair values for fixed-rate loans that do not re-price frequently are estimated using a discounted cash flow calculation that applies current market interest rates being offered on the various loan products.

Deposits: The fair values disclosed for demand deposits (e.g., interest and non-interest checking, savings, and certain types of money market accounts, etc.) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on the various certificates of deposit to the cash flow stream.

Borrowed funds: The fair value of the Bank’s FHLB borrowings and junior subordinated debt is calculated based on the discounted value of contractual cash flows, using rates currently existing for borrowings with similar remaining maturities. The carrying amounts of federal funds purchased and securities sold under agreements to repurchase approximate their fair values.

Accrued interest: The carrying amount of accrued interest receivable and payable approximates their fair values.

Off-balance-sheet financial instruments: In the normal course of business, the Bank makes commitments to extend credit and issues standby letters of credit. The Bank expects most of these commitments to expire without being drawn upon; therefore, the commitment amounts do not necessarily represent future cash requirements. Due to the uncertainty of cash flows and difficulty in the predicting the timing of such cash flows, fair values were not estimated for these instruments.

The following tables present fair value information about financial instruments, whether or not recognized in the Consolidated Statement of Financial Condition, for which it is practicable to estimate that value. The actual carrying amounts and estimated fair values of the Corporation’s financial instruments that are included in the Consolidated Statement of Financial Condition are as follows:

	June 30, 2015				Fair Value Measurements
	Carrying		Fair		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(in thousands)	Amount		Value		(Level 1)		(Level 2)		(Level 3)
Financial Assets:
Cash and due from banks	$	54,913	$	54,913	$	54,913
Interest bearing deposits in banks		2,991		2,991		2,991
Investment securities - AFS		205,226		205,226			$	175,180	$	30,046
Investment securities - HTM		107,816		108,417				105,792		2,625
Restricted bank stock		7,180		7,180				7,180
Loans, net		833,281		836,619						836,619
Accrued interest receivable		4,105		4,105				4,105

Financial Liabilities:
Deposits – non-maturity		726,054		726,054				726,054
Deposits – time deposits		277,041		281,345				281,345
Short-term borrowed funds		28,252		28,252				28,252
Long-term borrowed funds		177,572		181,514				181,514
Accrued interest payable		848		848				848
Financial derivative		140		140						140
Off balance sheet financial instruments		0		0		0

	December 31, 2014				Fair Value Measurements
	Carrying		Fair		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(in thousands)	Amount		Value		(Level 1)		(Level 2)		(Level 3)
Financial Assets:
Cash and due from banks	$	27,554	$	27,554	$	27,554
Interest bearing deposits in banks		7,897		7,897		7,897
Investment securities - AFS		221,117		221,117			$	195,778	$	25,339
Investment securities - HTM		109,449		110,771				108,163		2,608
Restricted bank stock		7,524		7,524				7,524
Loans, net		827,926		830,904						830,904
Accrued interest receivable		4,152		4,152				4,152

Financial Liabilities:
Deposits- non-maturity		689,581		689,581				689,581
Deposits- time deposits		291,742		296,713				296,713
Short-term borrowed funds		39,801		39,801				39,801
Long-term borrowed funds		182,606		187,143				187,143
Accrued interest payable		882		882				882
Financial derivative		199		199						199
Off balance sheet financial instruments		0		0		0

Loans are measured using a discounted cash flow method. The significant unobservable inputs used in the Level 3 fair value measurements of the Corporation’s loans included in the tables above are calculated based on the Corporation’s internal new volume rate.

Note 10 – Accumulated Other Comprehensive Loss

The following table presents the changes in each component of accumulated other comprehensive loss for the 12 months ended December 31, 2014 and the three-month periods ended March 31, 2015 and June 30, 2015:

(in thousands)	Investment securities- with OTTI AFS			Investment securities- all other AFS			Investment securities- HTM			Cash Flow Hedge			Pension Plan			SERP			Total
Accumulated OCL, net:
Balance - January 1, 2014	$	(7,623	)	$	(11,292	)	$	0		$	(274	)	$	(5,088	)	$	64		$	(24,213	)
Other comprehensive income/(loss) before reclassifications		4,349			8,712			(2,395	)		155			(6,513	)		(319	)		3,989
Amounts reclassified from accumulated other comprehensive income		(405	)		25			140			0			209			22			(9	)
Balance - December 31, 2014	$	(3,679	)	$	(2,555	)	$