SFST 10-Q Quarter ended June 30, 2013

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended June 30, 2013
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from                      to
Commission file number 000-27719

Southern First Bancshares, Inc.

(Exact name of registrant as specified in its charter)

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

864-679-9000
(Registrant's telephone number, including area code)

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No o

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

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

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

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 4,269,437 shares of common stock, par value $0.01 per share, were issued and outstanding as of July 31, 2013.

SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY
June 30, 2013 Form 10-Q

INDEX

	PART I - CONSOLIDATED FINANCIAL INFORMATION						Page
	Item 1.			Consolidated Financial Statements
				Consolidated Balance Sheets			3
				Consolidated Statements of Income			4
				Consolidated Statements of Comprehensive Income (Loss)			5
				Consolidated Statements of Shareholders' Equity			6
				Consolidated Statements of Cash Flows			7
				Notes to Unaudited Consolidated Financial Statements			8
	Item 2.			Management's Discussion and Analysis of Financial Condition and Results of Operations			26
	Item 3.			Quantitative and Qualitative Disclosures about Market Risk			43
	Item 4.			Controls and Procedures			44
	PART II - OTHER INFORMATION
	Item 1.			Legal Proceedings			44
	Item 1A.			Risk Factors			44
	Item 2.			Unregistered Sales of Equity Securities and Use of Proceeds			44
	Item 3.			Defaults upon Senior Securities			44
	Item 4.			Mine Safety Disclosures			44
	Item 5.			Other Information			44
	Item 6.			Exhibits			44

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

SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

				June 30,						December 31,
	(dollars in thousands, except share data)			2013						2012
				(Unaudited)						(Audited)
	ASSETS
	Cash and cash equivalents:
	Cash and due from banks		$	9,815						13,063
	Interest-bearing deposits with banks			17,029						16,350
	Federal funds sold			8,795						-
	Total cash and cash equivalents			35,639						29,413
	Investment securities:
	Investment securities available for sale			69,483						78,222
	Other investments			6,116						7,794
	Total investment securities			75,599						86,016
	Loans			687,482						645,949
	Less allowance for loan losses			(9,561	)					(9,091	)
	Loans, net			677,921						636,858
	Bank owned life insurance			21,043						18,725
	Property and equipment, net			19,971						18,733
	Deferred income taxes			4,154						3,176
	Other assets			4,680						5,077
	Total assets		$	839,007						797,998
	LIABILITIES AND SHAREHOLDERS' EQUITY
	Deposits		$	632,072						576,299
	Federal funds purchased			-						13,190
	Federal Home Loan Bank advances and other borrowings			124,100						124,100
	Junior subordinated debentures			13,403						13,403
	Other liabilities			5,870						6,881
	Total liabilities			775,445						733,873
	Shareholders' equity:
	Preferred stock, par value $.01 per share, 10,000,000 shares authorized, 15,299 and 16,299 shares issued and outstanding at June 30, 2013 and December 31, 2012, respectively			15,299						16,299
	Common stock, par value $.01 per share, 10,000,000 shares authorized, 4,269,437 and 4,247,404 shares issued and outstanding at June 30, 2013 and December 31, 2012, respectively			43						43
	Nonvested restricted stock			(156	)					(160	)
	Additional paid-in capital			42,751						42,396
	Accumulated other comprehensive income			(623	)					1,178
	Retained earnings			6,248						4,369
	Total shareholders' equity			63,562						64,125
	Total liabilities and shareholders' equity		$	839,007						797,998

See notes to consolidated financial statements that are an integral part of these consolidated statements. Additional paid in capital, retained earnings and common shares outstanding as of December 31, 2012 have been adjusted to reflect the ten percent stock dividend issued in 2013.

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

				For the three months									For the six months
				ended June 30,									ended June 30,
	(dollars in thousands, except share data)			2013			2012						2013			2012
	Interest income
	Loans		$	8,468			8,023						16,733			16,009
	Investment securities			426			490						890			1,047
	Federal funds sold			18			21						32			35
	Total interest income			8,912			8,534						17,655			17,091
	Interest expense
	Deposits			724			1,037						1,530			2,299
	Borrowings			1,058			1,119						2,117			2,284
	Total interest expense			1,782			2,156						3,647			4,583
	Net interest income			7,130			6,378						14,008			12,508
	Provision for loan losses			750			1,275						1,875			2,475
	Net interest income after provision for loan losses			6,380			5,103						12,133			10,033
	Noninterest income
	Loan fee income			267			190						526			389
	Service fees on deposit accounts			204			172						428			353
	Income from bank owned life insurance			158			151						318			310
	Gain (loss) on sale of investment securities			-			(4	)					-			68
	Other income			249			232						488			458
	Total noninterest income			878			741						1,760			1,578
	Noninterest expenses
	Compensation and benefits			3,018			2,348						5,970			4,773
	Occupancy			744			614						1,452			1,197
	Real estate owned activity			(14	)		176						5			453
	Data processing and related costs			594			508						1,170			1,022
	Insurance			201			337						441			689
	Marketing			218			182						404			362
	Professional fees			183			233						364			428
	Other			357			257						725			510
	Total noninterest expenses			5,301			4,655						10,531			9,434
	Income before income tax expense			1,957			1,189						3,362			2,177
	Income tax expense			657			374						1,100			674
	Net income			1,300			815						2,262			1,503
	Preferred stock dividend			191			216						389			432
	Discount accretion			-			106						-			179
	Redemption of preferred stock			-			96						20			96
	Net income available to common shareholders		$	1,109			589						1,893			988
	Earnings per common share
	Basic		$	0.26			0.14						0.44			0.23
	Diluted		$	0.25			0.13						0.43			0.23
	Weighted average common shares outstanding
	Basic			4,269,097			4,225,993						4,265,714			4,224,308
	Diluted			4,423,141			4,436,920						4,397,233			4,352,367

See notes to consolidated financial statements that are an integral part of these consolidated statements. Earnings per share and common shares outstanding for the 2012 period have been adjusted to reflect the ten percent stock dividend issued in 2013.

				For the three months ended June 30,									For the six months ended June 30,
	(dollars in thousands)			2013			2012						2013			2012
	Net income		$	1,300			815						2,262			1,503
	Other comprehensive income (loss):
	Unrealized gain (loss) on securities available for sale:
	Unrealized holding gain (loss) arising during the period, pretax			(2,415	)		585						(2,730	)		446
	Tax (expense) benefit			821			(198	)					929			(152	)
	Reclassification to realized (gain) loss			-			4						-			(68	)
	Tax expense (benefit)			-			(1	)					-			23
	Other comprehensive income (loss)			(1,594	)		390						(1,801	)		249
	Comprehensive income (loss)		$	(294	)		1,205						461			1,752

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

SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2013 AND 2012
(Unaudited)

				Common stock									Preferred stock									Nonvested restricted									Additional paid-in						Accumulated other comprehensive						Retained
	(dollars in thousands, except share data)			Shares			Amount						Shares			Amount						stock									capital						income (loss)						earnings						Total
	December 31, 2011			3,820,830					$    38				17,299						$    16,596							$      (16				)				$    39,546						$    1,041						$    5,334						$    62,539
	Net income			-			-						-			-						-									-						-						1,503						1,503
	Preferred stock transactions:
	Redemption of preferred stock												(1,000	)		(1,000				)																							96						(904				)
	Cash dividends on Series T preferred stock			-			-						-			-						-									-						-						(432				)		(432				)
	Discount accretion			-			-						-			179						-									-						-						(179				)		-
	Proceeds from exercise of stock options			9,075			-						-			-						-									57						-						-						57
	Stock dividend on stock options and restricted stock (10%)			1,907			-						-			-						-									14						-						(14				)		-
	Issuance of restricted stock			10,000			-						-			-						(67							)		67						-						-						-
	Cash in lieu of fractional shares			-			-						-			-						-									-						-						(2				)		(2				)
	Amortization of deferred compensation on restricted stock			-			-						-			-						11									-						-						-						11
	Compensation expense related to stock options, net of tax			-			-						-			-						-									150						-						-						150
	Other comprehensive income			-			-						-			-						-									-						249						-						249
	June 30, 2012			3,841,812			$    38						16,299			$    15,775						$      (72							)		$    39,834						$    1,290						$    6,306						$    63,171
	December 31, 2012			4,247,404			$    43						16,299			$    16,299						$    (160							)		$    42,396						$    1,178						$    4,369						$    64,125
	Net income			-			-						-			-						-									-						-						2,262						2,262
	Preferred stock transactions:
	Redemption of preferred stock			-			-						(1,000	)		(1,000				)		-									-						-						20						(980				)
	Cash dividends on Series T preferred stock			-			-						-			-						-									-						-						(396				)		(396				)
	Proceeds from exercise of stock options			19,533			-						-			-						-									121						-						-						121
	Issuance of restricted stock			2,500			-						-			-						(24							)		24						-						-						-
	Cash in lieu of fractional shares			-			-						-			-						-									-						-						(7				)		(7				)
	Amortization of deferred compensation on restricted stock			-			-						-			-						28									-						-						-						28
	Compensation expense related to stock options, net of tax			-			-						-			-						-									210						-						-						210
	Other comprehensive loss			-			-						-			-						-									-						(1,801				)		-						(1,801				)
	June 30, 2013			4,269,437						$    43			15,299						$    15,299		$							$    (156	)					$    42,751						$       (623	)					$    6,248						$    63,562

See notes to consolidated financial statements that are an integral part of these consolidated statements. Common shares outstanding as of December 31, 2011 and 2012 have been adjusted to reflect the ten percent stock dividends issued in 2012 and 2013.

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

(Unaudited)

				For the six months ended June 30,
	(dollars in thousands)			2013			2012
	Operating activities
	Net income		$	2,262			1,503
	Adjustments to reconcile net income to cash provided by operating activities:
	Provision for loan losses			1,875			2,475
	Depreciation and other amortization			596			494
	Accretion and amortization of securities discounts and premium, net			380			496
	Gain on sale of investment securities			-			(68	)
	(Gain) loss on sale and write-down of real estate owned			(22	)		413
	Compensation expense related to stock options and grants			238			161
	Increase in cash surrender value of bank owned life insurance			(318	)		(310	)
	(Increase) decrease in deferred tax asset			(50	)		9
	(Increase) decrease in other assets, net			(12	)		931
	Decrease in other liabilities, net			(1,010	)		(250	)
	Net cash provided by operating activities			3,939			5,854
	Investing activities
	Increase (decrease) in cash realized from:
	Origination of loans, net			(43,939	)		(23,729	)
	Purchase of property and equipment			(1,834	)		(326	)
	Purchase of investment securities:
	Available for sale			-			(2,591	)
	Other			(675	)		-
	Payments and maturity of investment securities:
	Available for sale			5,429			7,062
	Other			2,353			101
	Purchase of bank owned life insurance			(2,000	)		-
	Proceeds from sale of investment securities			200			29,730
	Proceeds from sale of real estate owned			1,432			1,938
	Net cash provided by (used for) used for investing activities			(39,034	)		12,185
	Financing activities
	Increase (decrease) in cash realized from:
	Increase in deposits, net			55,773			(8,495	)
	Decrease in short-term borrowings			(13,190	)		-
	Cash dividend on preferred stock			(396	)		(432	)
	Cash in lieu of fractional shares			(7	)		(2	)
	Redemption of preferred stock			(980	)		(904	)
	Proceeds from the exercise of stock options and warrants			121			57
	Net cash provided by (used for) financing activities			41,321			(9,776	)
	Net increase in cash and cash equivalents			6,226			8,263
	Cash and cash equivalents at beginning of the period			29,413			23,005
	Cash and cash equivalents at end of the period		$	35,639			31,268
	Supplemental information
	Cash paid for
	Interest		$	4,059			4,949
	Income taxes			1,150			664
	Schedule of non-cash transactions
	Real estate acquired in settlement of loans			1,001			1,220
	Unrealized gain (loss) on securities, net of income taxes			(1,801	)		249

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

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

NOTE 1 - Nature of Business and Basis of Presentation

Business Activity

Southern First Bancshares, Inc. (the "Company") is a South Carolina corporation that owns all of the capital stock of Southern First Bank (the "Bank") and all of the stock of Greenville First Statutory Trust I and II (collectively, the "Trusts"). On April 1, 2013, the Bank converted from a national bank charter to a South Carolina state bank charter and the bank name was changed from Southern First Bank, N.A. to Southern First Bank. As a national bank, the Bank's primary federal regulator was the Office of the Comptroller of the Currency (the "OCC"), and subsequent to the conversion, the Bank's primary federal regulator is the Federal Deposit Insurance corporation (the "FDIC"). The Bank is also regulated and examined by the South Carolina Board of Financial Institutions. The Bank is primarily engaged in the business of accepting demand deposits and savings deposits insured by the FDIC, and providing commercial, consumer and mortgage loans to the general public. The Trusts are special purpose non-consolidated entities organized for the sole purpose of issuing trust preferred securities.

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six month periods ended June 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2012, as filed with the Securities and Exchange Commission (the "SEC") on March 5, 2013 (File No. 000-27719). The consolidated financial statements include the accounts of the Company and the Bank. In accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 810, "Consolidation," the financial statements related to the Trusts have not been consolidated.

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amount of income and expenses during the reporting periods. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, other real estate owned, fair value of financial instruments, evaluating other-than-temporary-impairment of investment securities and valuation of deferred tax assets.

Reclassifications

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

Subsequent Events

Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the

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process of preparing financial statements. Non-recognized subsequent events are events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date. Management performed an evaluation to determine whether there have been any subsequent events since the balance sheet date and determined that no subsequent events occurred requiring accrual or disclosure.

Recently Adopted Accounting Pronouncements

The following is a summary of recently adopted authoritative pronouncements that have impacted the accounting, reporting, and/or disclosure of financial information by the Company.

The Comprehensive Income topic of the ASC was amended in June 2011. The amendment eliminated the option to present other comprehensive income as a part of the statement of changes in stockholders' equity and required consecutive presentation of the statement of net income and other comprehensive income. The amendments were applicable to the Company January 1, 2012 and have been applied retrospectively. In December 2011, the topic was further amended to defer the effective date of presenting reclassification adjustments from other comprehensive income to net income on the face of the financial statements while the FASB redeliberated the presentation requirements for the reclassification adjustments. In February 2013, the FASB further amended the Comprehensive Income topic clarifying the conclusions from such redeliberations. Specifically, the amendments do not change the current requirements for reporting net income or other comprehensive income in financial statements. However, the amendments do require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, in certain circumstances an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income. The amendments were effective for the Company on a prospective basis for reporting periods beginning after December 15, 2012. These amendments did not have a material effect on the Company's financial statements.

NOTE 2 - Preferred Stock Issuance and Partial Redemption

On February 27, 2009, as part of the Capital Purchase Program ("CPP"), the Company entered into a Securities Purchase Agreement with the U.S. Department of the Treasury (the "Treasury"), pursuant to which the Company sold 17,299 shares of its Fixed Rate Cumulative Perpetual Preferred Stock, Series T (the "Series T Preferred Stock") and a warrant to purchase 399,970.34 shares of the Company's common stock (the "Warrant") for an aggregate purchase price of $17.3 million in cash. The Series T Preferred Stock qualified as Tier 1 capital and was entitled to cumulative dividends at a rate of 5% per annum for the first five years and 9% per annum thereafter. The Warrant had a 10-year term and was immediately exercisable upon its issuance, with an exercise price, subject to anti-dilution adjustments equal to $6.487 per share of the common stock.

On June 28, 2012, the Treasury sold its Series T Preferred Stock through a public offering structured as a modified Dutch auction.  The Company bid on a portion of the Series T Preferred Stock in the auction after receiving approval from its regulators to do so.  The clearing price per share for the preferred shares was $904 (compared to a par value of $1,000 per share), and the Company was successful in repurchasing 1,000 shares of the 17,299 shares of Series T Preferred Stock outstanding through the auction process.  The remaining 16,299 shares of Series T Preferred Stock held by the Treasury were sold to unrelated third-parties through the auction process. Included in the September 30, 2012 operating results are approximately $130,000 of costs incurred by the Company related to the offering.  These costs are not tax-deductible.  The net balance sheet impact was a reduction to shareholders' equity of $904,000 which is comprised of a decrease in Series T Preferred Stock of $1.0 million and a $96,000 increase to retained earnings related to the discount on the shares repurchased.  The redemption of the $1.0 million in preferred shares will save the Company $50,000 annually in dividend expenses.

In addition, on July 25, 2012, the Company completed its repurchase of the Warrant from the Treasury for a mutually agreed upon price of $1.1 million. The difference between the fair value of the Warrant, as originally recorded, and the $1.1 million repurchase price was $343,000 which resulted in a decrease to additional paid in capital. The Company also recorded the remaining accretion of $180,000 on the Series T Preferred Stock which brought the Preferred Stock to its par value. Following the settlement of the Warrant on July 25, 2012, the Treasury has completely eliminated its equity stake in the Company through the Capital Purchase Program.

9

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In conjunction with the repurchase of the Warrant, the Company obtained an interest only line of credit for $1.5 million with another financial institution. Interest is payable quarterly at a rate of 5%, and the line of credit matures on February 3, 2014.

On January 3, 2013 and April 1, 2013, the Company redeemed a total of $1.0 million of its outstanding Series T preferred stock from three of its preferred shareholders. Since July of 2012, the Company has redeemed a cumulative $2.0 million of its outstanding Series T preferred stock and reduced the balance to $15.3 million.

NOTE 3 - Investment Securities

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

				June 30, 2013
				Amortized			Gross Unrealized						Fair
	(dollars in thousands)			Cost			Gains			Losses			Value
	Available for sale
	US Government agencies		$	7,782			-			468			7,314
	SBA securities			5,904			-			323			5,581
	State and political subdivisions			23,900			424			526			23,798
	Mortgage-backed securities			32,841			298			349			32,790
	Total investment securities available for sale		$	70,427			722			1,666			69,483
				December 31, 2012
				Amortized			Gross Unrealized						Fair
				Cost			Gains			Losses			Value
	Available for sale
	US Government agencies		$	7,781			14			10			7,785
	SBA securities			6,060			17			5			6,072
	State and political subdivisions			24,167			1,130			48			25,249
	Mortgage-backed securities			38,428			702			14			39,116
	Total investment securities available for sale		$	76,436			1,863			77			78,222

Contractual maturities and yields on our investment securities at June 30, 2013 and December 31, 2012 are shown in the following table. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

																																											June 30, 2013
							Less than one year												One to five years												Five to ten years												Over ten years												Total
	(dollars in thousands)						Amount						Yield						Amount						Yield						Amount						Yield						Amount						Yield						Amount									Yield
	Available for sale
	US Government agencies					$	-						-						-						-						-						-						7,314						2.42				%		7,314									2.42				%
	SBA securities						-						-						-						-						-						-						5,581						1.87				%		5,581									1.87				%
	State and political subdivisions						216						2.40				%		3,639						0.60				%		4,803						3.11				%		15,140						2.97				%		23,798									2.63				%
	Mortgage-backed securities						-						-						-						-						-						-						32,790						2.04				%		32,790									2.04				%
	Total					$	216						2.40				%		3,639						0.60				%		4,803						3.11				%		60,825						2.31				%		69,483									2.27				%
																																											December 31, 2012
							Less than one year												One to five years												Five to ten years												Over ten years												Total
							Amount						Yield						Amount						Yield						Amount						Yield						Amount						Yield						Amount									Yield
	Available for sale
	US Government agencies					$	-						-						-						-						--						-						7,785						2.42				%		7,785									2.42				%
	SBA securities						-						-						-						-						--						-						6,072						1.89				%		6,072									1.89				%
	State and political subdivisions						421						1.43				%		3,671						0.60				%		5,031						3.11				%		16,126						2.96				%		25,249									2.60				%
	Mortgage-backed securities						-						-						-						-						-						-						39,116						2.29				%		39,116									2.29				%
	Total					$	421						1.43				%		3,671						0.60				%		5,031						3.11				%		69,099						2.42				%		78,222									2.37				%

The tables below summarize gross unrealized losses on investment securities and the fair market value of the related securities at June 30, 2013 and December 31, 2012, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position.

																						June 30, 2013
				Less than 12 months									12 months or longer									Total
	(dollars in thousands)			#			Fair value			Unrealized losses			#			Fair value			Unrealized losses			#			Fair value			Unrealized losses
	Available for sale
	US Government agencies			2		$	7,314		$	468			-		$	-		$	-			2		$	7,314		$	468
	SBA securities			2			5,581			323			-			-			-			2			5,581			323
	State and political subdivisions			29			11,810			526			-			-			-			29			11,810			526
	Mortgage-backed securities			8			16,687			349			-			-			-			8			16,687			349
	Total			41		$	41,392		$	1,666			-		$	-		$	-			41		$	41,392		$	1,666
																									December 31, 2012
				Less than 12 months									12 months or longer									Total
				#			Fair value			Unrealized losses			#			Fair value			Unrealized losses			#			Fair value			Unrealized losses
	Available for sale
	US Government agencies			1		$	3,771		$	10			-		$	-		$	-			1		$	3,771		$	10
	SBA securities			1			2,015			5			-			-			-			1			2,015			5
	State and political subdivisions			16			6,608			48			-			-			-			16			6,608			48
	Mortgage-backed securities			2			3,669			14			-			-			-			2			3,669			14
	Total			20		$	16,063		$	77			-		$	-		$	-			20		$	16,063		$	77

At June 30, 2013, the Company had 41 individual investments that were in an unrealized loss position for less than 12 months. The unrealized losses were primarily attributable to changes in interest rates, rather than deterioration in credit quality. The Company considers the length of time and extent to which the fair value of available-for-sale debt securities have been less than cost to conclude that such securities are not other-than-temporarily impaired. We also consider other factors such as the financial condition of the issuer including credit ratings and specific events affecting the operations of the issuer, volatility of the security, underlying assets that collateralize the debt security, and other industry and macroeconomic conditions. As the Company has no intent to sell securities with unrealized losses and it is not more-likely-than-not that the Company will be required to sell

these securities before recovery of amortized cost, we have concluded that the securities are not impaired on an other-than-temporary basis.

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

	(dollars in thousands)			June 30, 2013			December 31, 2012
	Federal Reserve Bank stock		$	-			1,485
	Federal Home Loan Bank stock			5,614			5,807
	Certificates of deposit with other banks			99			99
	Investment in Trust Preferred securities			403			403
	Total other investments		$	6,116			7,794

NOTE 4 - Loans and Allowance for Loan Losses

The following table summarizes the composition of our loan portfolio.

				June 30, 2013									December 31, 2012
	(dollars in thousands)			Amount			% of Total						Amount			% of Total
	Commercial
	Owner occupied RE		$	181,257			26.4	%					158,790			24.6	%
	Non-owner occupied RE			161,086			23.4	%					165,163			25.6	%
	Construction			22,898			3.3	%					20,347			3.1	%
	Business			116,513			17.0	%					114,169			17.7	%
	Total commercial loans			481,754			70.1	%					458,469			71.0	%
	Consumer
	Real estate			97,172			14.1	%					86,559			13.4	%
	Home equity			82,863			12.1	%					77,895			12.1	%
	Construction			14,029			2.0	%					13,749			2.1	%
	Other			11,664			1.7	%					9,277			1.4	%
	Total consumer loans			205,728			29.9	%					187,480			29.0	%
	Total gross loans, net of deferred fees			687,482			100.0	%					645,949			100.0	%
	Less—allowance for loan losses			(9,561	)								(9,091	)
	Total loans, net		$	677,921									636,858

Maturities and Sensitivity of Loans to Changes in Interest Rates

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

													June 30, 2013
	(dollars in thousands)						One year or less						After one but within five years						After five years						Total
	Commercial
	Owner occupied RE					$	26,479						107,023						47,755						181,257
	Non-owner occupied RE						49,855						89,356						21,875						161,086
	Construction						8,227						9,266						5,405						22,898
	Business						61,376						48,121						7,016						116,513
	Total commercial loans						145,937						253,766						82,051						481,754
	Consumer
	Real estate						17,417						30,330						49,425						97,172
	Home equity						4,332						22,453						56,078						82,863
	Construction						8,233						1,422						4,374						14,029
	Other						5,585						4,962						1,117						11,664
	Total consumer loans						35,567						59,167						110,994						205,728
	Total gross loans, net of deferred fees					$	181,504						312,933						193,045						687,482
	Loans maturing after one year with:
	Fixed interest rates																							$	338,246
	Floating interest rates																								167,732
													December 31, 2012
							One year or less						After one but within five years						After five years						Total
	Commercial
	Owner occupied RE					$	23,833						92,681						42,276						158,790
	Non-owner occupied RE						47,252						98,514						19,397						165,163
	Construction						9,206						4,387						6,754						20,347
	Business						57,947						50,084						6,138						114,169
	Total commercial loans						138,238						245,666						74,565						458,469
	Consumer
	Real estate						12,907						27,702						45,950						86,559
	Home equity						7,083						17,832						52,980						77,895
	Construction						6,032						1,530						6,187						13,749
	Other						5,475						2,826						976						9,277
	Total consumer						31,497						49,890						106,093						187,480
	Total gross loan, net of deferred fees					$	169,735						295,556						180,658						645,949
	Loans maturing after one year with:
	Fixed interest rates																							$	314,396
	Floating interest rates																								161,818

Portfolio Segment Methodology

Commercial

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

Consumer

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

Credit Quality Indicators

Commercial

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

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

													June 30, 2013
	(dollars in thousands)			Owner occupied RE			Non-owner occupied RE			Construction			Business			Total
	Pass		$	170,124			137,625			19,836			106,249			433,834
	Special mention			8,698			9,315			1,170			4,030			23,213
	Substandard			2,435			14,146			1,892			6,234			24,707
	Doubtful			-			-			-			-			-
	Loss			-			-			-			-			-
			$	181,257			161,086			22,898			116,513			481,754
													December 31, 2012
				Owner occupied RE			Non-owner occupied RE			Construction			Business			Total
	Pass		$	148,255			141,352			18,265			105,024			412,896
	Special mention			7,446			9,358			-			2,750			19,554
	Substandard			3,089			14,453			2,082			6,395			26,019
	Doubtful			-			-			-			-			-
	Loss			-			-			-			-			-
			$	158,790			165,163			20,347			114,169			458,469

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

													June 30, 2013
	(dollars in thousands)			Owner occupied RE			Non-owner occupied RE			Construction			Business			Total
	Current		$	180,398			160,401			21,960			115,012			477,771
	30-59 days past due			137			141			-			614			892
	60-89 days past due			-			-			-			300			300
	Greater than 90 Days			722			544			938			587			2,791
			$	181,257			161,086			22,898			116,513			481,754