Fraternity Community Bancorp (FRTR) 10-Q 2014 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

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

For the quarter ended June 30, 2014

OR

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

For the transition period from                    to                    

Commission file number:0-54271

FRATERNITY COMMUNITY BANCORP, INC.

(Exact name of registrant as specified in its charter)

Maryland	27-3683448
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

764 Washington Boulevard, Baltimore, Maryland	21230
(Address of principal executive offices)	(Zip Code)

Issuer’s telephone number, including area code:(410) 539-1313

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 Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

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

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

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	¨  (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  ¨    No  x

As of August 8, 2014, the registrant had 1,392,923 shares of common stock issued and outstanding.

INDEX

		PAGE
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements		1
	Consolidated Statements of Financial Condition as of June 30, 2014 and December 31, 2013 (unaudited)		1
	Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2014 and 2013 (unaudited)		2
	Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June  30, 2014 and 2013 (unaudited)		3
	Consolidated Statements of Changes in Stockholders’ Equity for the Three and Six Months Ended June  30, 2014 and 2013 (unaudited)		4
	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2014 and 2013 (unaudited)		5
	Notes to Consolidated Financial Statements (unaudited)		7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		40
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		50
Item 4.	Controls and Procedures		50
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings		51
Item 1A.	Risk Factors		51
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		51
Item 3.	Defaults Upon Senior Securities		51
Item 4.	Mine Safety Disclosures		51
Item 5.	Other Information		51
Item 6.	Exhibits		52
SIGNATURES

i

PART 1. FINANCIAL INFORMATION

Item 1. Financial Statements

FRATERNITY COMMUNITY BANCORP, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)

	June 30, 2014			December 31, 2013
ASSETS
Cash and cash equivalents:
Cash and due from banks	$	837,148		$	973,466
Interest-bearing deposits in other banks		13,337,233			14,378,207
Total cash and cash equivalents		14,174,381			15,351,673
Investment securities:
Available-for-sale - at fair value		16,390,483			16,354,661
Held-to-maturity - at amortized cost (fair value approximates $7,937,908 and $8,101,210, respectively)		7,760,823			8,069,424
Loans - net of allowance for loan losses of $1,528,000 (2014 and 2013)		117,093,177			114,577,707
Other real estate owned		22,500			1,921,706
Property and equipment, net		884,615			948,907
Federal Home Loan Bank stock - at cost - restricted		1,049,800			1,103,700
Ground rents - net of valuation allowance of $44,703 (2014 and 2013)		825,743			829,243
Accrued interest receivable		552,935			504,599
Investment in bank-owned life insurance		4,772,603			4,692,872
Deferred income taxes		1,142,104			1,384,832
Other assets		750,556			630,864
TOTAL ASSETS	$	165,419,720		$	166,370,188
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits	$	115,617,931		$	118,100,920
Advances from the Federal Home Loan Bank		20,000,000			20,000,000
Advances by borrowers for taxes and insurance		1,521,829			658,173
Other liabilities		851,828			806,844
Total liabilities		137,991,588			139,565,937
Stockholders’ Equity:
Preferred stock, $0.01 par value; authorized 1,000,000; none issued		0			0
Common stock, $0.01 par value; authorized 15,000,000; issued and outstanding, 1,392,923 shares at June 30, 2014 and December 31, 2013		13,929			13,929
Additional paid in capital		12,350,313			12,236,878
Retained earnings - substantially restricted		16,237,465			16,175,369
Unearned ESOP shares		(899,300	)		(952,200	)
Accumulated other comprehensive loss		(274,275	)		(669,725	)
Total stockholders’ equity		27,428,132			26,804,251
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	165,419,720		$	166,370,188

See accompanying notes.

1

FRATERNITY COMMUNITY BANCORP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
INTEREST INCOME:
Interest and fees on loans:
Real estate loans	$	1,366,842		$	1,399,264		$	2,740,578		$	2,807,026
Other loans		1,191			1,292			2,436			2,557
Interest and dividends on investments and bank deposits		181,057			168,907			363,984			347,939
Income from ground rents owned		9,729			12,808			20,118			24,303
Total interest income		1,558,819			1,582,271			3,127,116			3,181,825
INTEREST EXPENSE:
Interest on deposits		287,480			347,826			576,753			722,346
Interest on borrowings - short term		7,106			5,930			14,133			9,105
Interest on borrowings - long term		146,547			146,548			291,485			291,486
Total interest expense		441,133			500,304			882,371			1,022,937
NET INTEREST INCOME		1,117,686			1,081,967			2,244,745			2,158,888
RECOVERY OF LOAN LOSSES		(91,404	)		(32,836	)		(94,431	)		(11,892	)
NET INTEREST INCOME AFTER RECOVERY OF LOAN LOSSES		1,209,090			1,114,803			2,339,176			2,170,780
NON-INTEREST INCOME:
Gain on sale of investment securities		—			—			—			43,335
Income on bank-owned life insurance		40,277			41,715			79,731			81,523
Gain on sale of loans		8,506			14,347			8,506			50,126
Other income		76,321			4,399			75,798			10,194
Total non-interest income		125,104			60,461			164,035			185,178
NON-INTEREST EXPENSES:
Salaries and employee benefits		615,729			517,326			1,247,224			1,088,854
Occupancy expenses		143,660			133,327			290,726			269,892
Legal fees		84,871			46,502			114,658			72,316
Federal Deposit Insurance premiums		29,049			34,947			60,951			70,381
Accounting and auditing expense		44,276			40,828			85,813			85,195
Data processing expense		117,498			104,296			233,072			212,911
Directors fees		36,306			23,154			72,612			47,809
Other general and administrative expenses		129,504			139,170			359,303			296,876
Total non-interest expenses		1,200,893			1,039,550			2,464,359			2,144,234
INCOME BEFORE INCOME TAX EXPENSE (BENEFIT)		133,301			135,714			38,852			211,724
INCOME TAX EXPENSE (BENEFIT)		23,511			32,973			(23,244	)		43,753
NET INCOME	$	109,790		$	102,741		$	62,096		$	167,971
EARNINGS PER COMMON SHARE - BASIC	$	0.09		$	0.08		$	0.05		$	0.12
EARNINGS PER COMMON SHARE - DILUTED	$	0.08		$	0.08		$	0.05		$	0.12

See accompanying notes.

2

FRATERNITY COMMUNITY BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
NET INCOME	$	109,790		$	102,741		$	62,096		$	167,971
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Unrealized gains on available-for-sale securities:
Unrealized holding gains (losses) arising during the period		255,529			(776,175	)		659,083			(843,238	)
Less: income taxes on unrealized gains (losses) arising during the period		(102,212	)		310,470			(263,633	)		337,295
		153,317			(465,705	)		395,450			(505,943	)
Less: Reclassification adjustment for realized gains		—			—			—			(43,335	)
Income taxes on reclassification adjustment		—			—			—			17,334
		—			—			—			(26,001	)
OTHER COMPREHENSIVE INCOME (LOSS)		153,317			(465,705	)		395,450			(531,944	)
COMPREHENSIVE INCOME (LOSS)	$	263,107		$	(362,964	)	$	457,546		$	(363,973	)

See accompanying notes.

3

Fraternity Community Bancorp, Inc.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2014 AND 2013

(UNAUDITED)

	Common Stock			Additional Paid In Capital			Retained Earnings		Unearned ESOP Shares			Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity
Balance, January 1, 2013	$	15,061		$	13,965,375		$	16,285,930	$	(1,058,000	)	$	74,301		$	29,282,667
Net Income		0			0			167,971		0			0			167,971
Other Comprehensive Loss		0			0			0		0			(531,944	)		(531,944	)
Common stock repurchased		(778	)		(1,060,987	)		0		0			0			(1,061,765	)
ESOP shares released or committed for release		0			19,546			0		52,900			0			72,446
Balance, June 30, 2013	$	14,283		$	12,923,934		$	16,453,901	$	(1,005,100	)	$	(457,643	)	$	27,929,375
Balance, January 1, 2014	$	13,929		$	12,236,878		$	16,175,369	$	(952,200	)	$	(669,725	)	$	26,804,251
Net Income		0			0			62,096		0			0			62,096
Other Comprehensive Income		0			0			0		0			395,450			395,450
Restricted Stock Awards, net of repurchases $0		0			52,606			0		0			0			52,606
Stock Options		0			36,627			0		0			0			36,627
ESOP shares released or committed for release		0			24,202			0		52,900			0			77,102
Balance, June 30, 2014	$	13,929		$	12,350,313		$	16,237,465	$	(899,300	)	$	(274,275	)	$	27,428,132

See accompanying notes.

4

FRATERNITY COMMUNITY BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	Six Months Ended June 30,
	2014			2013
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	62,096		$	167,971
Adjustments to reconcile net income provided by operating activities:
Depreciation		58,515			49,075
Gain on sale of available-for-sale securities		—			(43,335	)
Gain on sale of other real estate owned		(41,638	)		—
Gain on sale of loans		(8,506	)		(50,126	)
Origination of loans held for sale		(528,000	)		(2,277,084	)
Proceeds from sale of loans held for sale		536,506			2,327,210
Amortization/accretion of premium/discount		90,054			(148,991	)
Increase in value of bank-owned life insurance		(79,731	)		(81,523	)
Stock based compensation		89,233			—
Stock based compensation (ESOP)		77,102			72,446
Recovery of loan losses		(94,431	)		(11,892	)
Changes in operating assets and liabilities:
Accrued interest receivable and other assets		(150,620	)		115,648
Other liabilities		44,984			33,122
Net cash provided by operating activities		55,564			152,521
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in loans		(2,831,438	)		(1,788,864	)
Redemption of ground rents		3,500			7,500
Acquisition of property and equipment		(11,631	)		(200,670	)
Decrease (increase) in value of other real estate owned		100,000			(94,798	)
Purchase of:
Investment securities available-for-sale		—			(6,503,793	)
Proceeds from:
Sales and maturities of investment securities available-for-sale		—			5,222,742
Principal paydowns on investment securities available-for-sale		561,073			1,558,477
Principal paydowns on investment securities held-to-maturity		259,830			258,619
Sale of Federal Home Loan Bank stock		53,900			59,300
Sale of other real estate owned		2,251,243			0
Net cash provided by (used in) investing activities		386,477			(1,481,487	)

5

Fraternity Community Bancorp, Inc.

Consolidated Statements of Cash Flows (Continued)

	Six Months Ended June 30,
	2014			2013
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in deposits		(2,482,989	)		(3,431,830	)
Borrowings from the Federal Home Loan Bank		—			5,000,000
Repayments of Federal Home Loan Bank borrowings		—			(5,000,000	)
Repurchase of common stock		—			(1,061,765	)
Increase in advances by borrowers for taxes and insurance		863,656			911,261
Net cash used in financing activities		(1,619,333	)		(3,582,334	)
NET DECREASE IN CASH AND CASH EQUIVALENTS		(1,177,292	)		(4,911,300	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR		15,351,673			18,178,281
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	14,174,381		$	13,266,981
Cash paid for interest	$	883,159		$	1,023,363
Cash paid for taxes	$	0		$	0
Transfer of loans to other real estate owned	$	410,399		$	0

See accompanying notes.

6

FRATERNITY COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTH PERIODS

ENDED JUNE 30, 2014 AND 2013

(UNAUDITED)

1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

Fraternity Community Bancorp, Inc. (the “Company”) was incorporated on October 12, 2010 to serve as the holding company for Fraternity Federal Savings & Loan Association (the “Bank”), a federally chartered savings bank. On March 31, 2011, in accordance with a Plan of Conversion adopted by its Board of Directors and approved by its members, the Bank converted from a federal mutual savings bank to a federal stock savings bank and became the wholly owned subsidiary of the Company. The conversion was accomplished through the sale and issuance of 1,587,000 shares of common stock at a price of $10.00 per share, through which the Company received proceeds of approximately $14,968,600, net of offering expenses of approximately $901,400. In connection with the conversion, the Bank’s Board of Directors adopted an employee stock ownership plan (the “ESOP”) which subscribed for 8% of the sum of the number of shares, or 126,960 shares of common stock sold in the offering. All material intercompany accounts and transactions have been eliminated in consolidation.

In accordance with the Office of the Comptroller of the Currency (the “OCC”) regulations, upon the completion of the conversion, the Bank restricted retained earnings by establishing a liquidation account. The liquidation account will be maintained for the benefit of eligible account holders who continue to maintain their accounts at the Bank after conversion. The liquidation account will be reduced annually to the extent that eligible account holders have reduced their qualifying deposits. Subsequent increases will not restore an eligible account holder’s interest in the liquidation account. In the event of a complete liquidation of the Bank, and only in such event, each account holder will be entitled to receive a distribution from the liquidation account in an amount proportionate to the adjusted qualifying account balances then held. The Bank may not pay dividends if those dividends would reduce equity capital below the required liquidation account amount.

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X as promulgated by the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. Operating results for the six months ended June 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014, or any other period. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. Certain amounts from prior period financial statements may have been reclassified to conform to the current period’s presentation.

Nature of Operations

Fraternity Federal Savings and Loan (the “Bank”) provides a full range of banking services to individuals and businesses through its main office and three branches in the Baltimore metropolitan area. Its primary deposit products are certificates of deposit and demand, savings, NOW, and money market accounts. Its primary lending products are consumer loans and real estate mortgages.

7

Use of Estimates

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

Earnings per Common Share

Basic earnings per common share is net income available to common shareholders divided by the weighted average number of common shares outstanding during the period, excluding unallocated ESOP shares. Diluted earnings per share includes the dilutive effect of additional potential common shares issuable under stock options and restricted stock grants.

Stock-Based Compensation

Compensation cost is recognized for stock options and restricted stock awards issued to employees and directors, based on the fair value of these awards at the date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options, while the market price of the Company’s common stock at the date of grant is used for restricted stock awards. Compensation cost is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award.

Comprehensive Income

Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available for sale, net of related taxes, which are also recognized as separate components of shareholders’ equity.

2. INVESTMENT SECURITIES

The amortized cost and fair values of investment securities are as follows:

	June 30, 2014
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Available-for-sale:
Bank Notes and Corporate Bonds	$	1,500,000	$	8,910	$	0	$	1,508,910
Obligations of U.S. Government Agencies		5,997,802		0		402,837		5,594,965
Municipal Bonds		1,000,000		6,580		0		1,006,580
Mortgage-backed securities:
FNMA		5,605,283		30,971		89,671		5,546,583
GNMA		1,103,519		25,443		5		1,128,957
FHLMC		556,980		4,669		0		561,649
Federal Agency CMO		827,902		0		41,644		786,258
Private Label CMO		251,933		4,648		0		256,581
	$	16,843,419	$	81,221	$	534,157	$	16,390,483

8

	June 30, 2014
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Held-to-maturity:
Municipal Bonds	$	2,110,276	$	76,728	$	19,350	$	2,167,654
SBA Pools		951,819		0		58,117		893,702
Mortgage-backed securities:
FNMA		4,698,728		177,824		0		4,876,552
	$	7,760,823	$	254,552	$	77,467	$	7,937,908

	December 31, 2013
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Available-for-sale:
Bank Notes and Corporate Bonds	$	1,500,000	$	0	$	1,845	$	1,498,155
Obligations of U.S. Government Agencies		5,997,686		0		759,026		5,238,660
Municipal Bonds		1,000,000		0		88,700		911,300
Mortgage-backed securities:
FNMA		5,945,252		24,257		191,649		5,777,860
GNMA		1,186,994		7,640		21,492		1,173,142
FHLMC		623,033		4,343		911		626,465
Federal Agency CMO		909,604		0		68,664		840,940
Private Label CMO		283,206		4,933		0		288,139
	$	17,445,775	$	41,173	$	1,132,287	$	16,354,661

	December 31, 2013
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Held-to-maturity:
Municipal Bonds	$	2,123,116	$	3,863	$	52,573	$	2,074,406
SBA Pools		1,197,400		0		54,447		1,142,953
Mortgage-backed securities:
FNMA		4,748,908		137,053		2,110		4,883,851
	$	8,069,424	$	140,916	$	109,130	$	8,101,210

9

The amortized cost and fair value of debt securities at June 30, 2014 and December 31, 2013 by contractual maturities are shown below. Expected maturities may differ from contractual maturities because borrowers may have to call or repay obligations with or without call or prepayment penalties.

	June 30, 2014
	Available-for-Sale
	Amortized Cost		Fair Value
Due in less than one year	$	1,500,129	$	1,509,037
Due in one year through five years		5,272		5,310
Due in five years through ten years		664,362		677,412
Due after ten years		14,673,656		14,198,724
	$	16,843,419	$	16,390,483

	June 30, 2014
	Held-to-Maturity
	Amortized Cost		Fair Value
Due in one year through five years	$	3,317,052	$	3,422,315
Due in five years through ten years		2,583,152		2,630,776
Due after ten years		1,860,619		1,884,817
	$	7,760,823	$	7,937,908

	December 31, 2013
	Available-for-Sale
	Amortized Cost		Fair Value
Due in less than one year	$	1,500,000	$	1,498,155
Due in one year through five years		7,415		7,364
Due in five years through ten years		778,271		786,833
Due after ten years		15,160,089		14,062,309
	$	17,445,775	$	16,354,661

	December 31, 2013
	Held-to-Maturity
	Amortized Cost		Fair Value
Due in one year through five years	$	3,541,943	$	3,649,827
Due in five years through ten years		2,072,862		2,036,709
Due after ten years		2,454,619		2,414,674
	$	8,069,424	$	8,101,210

The Bank recognized gross gains on sales of available-for-sale securities of $0 and $43,335 for the six months ended June 30, 2014 and 2013, respectively. The Bank recognized gross losses on sales of available-for-sale securities of $0 for the six months ended June 30, 2014 and 2013, respectively.

10

Securities with unrealized losses, segregated by length of impairment, as of June 30, 2014 and December 31, 2013 were as follows:

	Less than 12 Months				More than 12 Months				Total
	Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses
June 30, 2014
Available-for-sale:
Obligations of U.S. Government Agencies	$	0	$	0	$	5,594,965	$	402,837	$	5,594,965	$	402,837
Mortgage-backed securities:
FNMA		10,319		137		3,905,825		89,534		3,916,144		89,671
GNMA		4,838		5		0		0		4,838		5
Federal Agency CMO		0		0		786,258		41,644		786,258		41,644
	$	15,157	$	142	$	10,287,048	$	534,015	$	10,302,205	$	534,157
Held-to-Maturity:
Municipal Bonds	$	0	$	0	$	486,008	$	19,350	$	486,008	$	19,350
SBA Pools		0		0		893,702		58,117		893,702		58,117
	$	0	$	0	$	1,379,710	$	77,467	$	1,379,710	$	77,467

	Less than 12 Months				More than 12 Months				Total
	Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses
December 31, 2013
Available-for-sale:
Bank Notes and Corporate Bonds	$	0	$	0	$	1,498,155	$	1,845	$	1,498,155	$	1,845
Obligations of U.S. Government Agencies		3,944,880		552,806		1,293,780		206,220		5,238,660		759,026
Municipal Bonds		911,300		88,700		0		0		911,300		88,700
Mortgage-backed securities:
FNMA		3,949,576		191,457		21,661		192		3,971,237		191,649
GNMA		1,109,080		21,492		0		0		1,109,080		21,492
FHLMC		414,957		911		0		0		414,957		911
Federal Agency CMO		0		0		840,940		68,664		840,940		68,664
	$	10,329,793	$	855,366	$	3,654,536	$	276,921	$	13,984,329	$	1,132,287
Held-to-Maturity:
Municipal Bonds	$	1,058,760	$	18,530	$	474,706	$	34,043	$	1,533,466	$	52,573
SBA Pools		814,974		25,278		327,979		29,169		1,142,953		54,447
Mortgage-backed securities:
FNMA		1,562,003		2,110		0		0		1,562,003		2,110
	$	3,435,737	$	45,918	$	802,685	$	63,212	$	4,238,422	$	109,130

11

Declines in the fair value of investment securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of the impairment related to other factors is recognized in other comprehensive income. In estimating other-than-temporary impairment losses, management considers, among other things, (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer, and (iii) the intent and ability of the Bank to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in cost.

Furthermore, as of June 30, 2014, management does not have the intent to sell any of the securities classified as available-for-sale in the table above and believes that it is more likely than not that the Bank will not have to sell any such securities before a recovery of cost. The unrealized losses are largely due to increases in market interest rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover as the securities approach their maturity date or repricing date or if market yields for such investments decline. Management does not believe any of the securities are impaired due to reasons of credit quality. Accordingly, as of June 30, 2014, management believes the impairments detailed in the table above are temporary and no impairment loss has been realized in the Bank’s consolidated income statement.

3. LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans and allowance for loan losses consisted of the following:

	June 30, 2014			December 31, 2013
Real Estate Loans:
Owner Occupied One- to- four family	$	79,938,961		$	79,190,821
Non Owner Occupied One- to- four family		12,502,417			12,405,389
Home Equity Lines of Credit		7,320,494			8,129,950
Commercial Real Estate		15,767,551			13,164,122
Residential Construction		2,353,152			2,463,458
Land		679,602			685,464
Total Real Estate Loans		118,562,177			116,039,204
Consumer Loans		59,000			66,503
Commercial Loans		0			0
Total Loans		118,621,177			116,105,707
Less:
Allowance for loan losses		(1,528,000	)		(1,528,000	)
Total loans and allowance for loan losses	$	117,093,177		$	114,577,707

Management segregates its loan portfolio into portfolio segments which is defined as the level at which the Company develops and documents a systematic method for determining its allowance for loan losses. The portfolio segments are segregated based on loan types and the underlying risk factors present in each loan type. These risk factors are periodically reviewed by management and revised as deemed appropriate. The Company’s loan portfolio is segregated into the following portfolio segments:

Owner Occupied One- To- Four Family Residential Loans. This portfolio segment consists of the origination of first mortgage loans and closed end home equity second mortgage loans secured by one- to- four family residential properties located in our market area. The Company offers both fixed and adjustable rate products on properties located in the Company’s primary market area. These loans are generally for terms of

12

15, 20 and 30 years amortized on a monthly basis. The Company generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas, such as employment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

Non Owner Occupied One- To-Four Family Real Estate Loans. Loans secured by investment properties represent a unique credit risk to us and, as a result, we adhere to special underwriting guidelines. Of primary concern in non-owner occupied real estate lending is the consistency of rental income of the property. Payments on loans secured by rental properties often depend on the maintenance of the property and the payment of rent by its tenants. Payments on loans secured by rental properties often depend on successful operation and management of the properties. As a result, repayment of such loans may be subject to adverse conditions in the real estate market or the economy. We generally require collateral on these loans to be a first mortgage along with an assignment of rents and leases, although we might accept a second mortgage where the combined loan-to-value ratio is low.

Home Equity Lines of Credit. This portfolio segment consists primarily of open end, second mortgage loans secured by one–to-four family residential properties. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas, such as employment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

Commercial Real Estate Loans. This portfolio segment consists primarily of loans secured by commercial real estate. Loans secured by commercial real estate generally may have larger balances and more risk of default than one-to-four family mortgage loans. The increased risk is the result of several factors, including the concentration of principal in a limited number of loans and borrowers, the impact of local and general economic conditions on the borrower’s ability to repay the loan, and the increased difficulty of evaluating and monitoring these types of loans.

Residential Construction Loans. This portfolio includes construction loans to individuals and builders, primarily for the construction of residential properties. Construction financing generally involves greater risk than long-term financing on improved, owner-occupied real estate. Our portfolio consists of both construction/permanent loans to individuals for their principal residence as well as speculative construction loans to builders. Construction loans are underwritten on the basis of the estimated value of the property as completed. For our construction/permanent loans to individuals for their principal residence, repayment is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas, such as employment levels. Repayment can also be impacted by changes in property values on residential properties. For our speculative construction loans to builders, repayment is primarily dependent on the cashflows of the builder and the success of the project. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long term financing.

Land. This portfolio consists primarily of first mortgage loans on developed residential land. Land loans have a higher level of risk than loans for the purchase of existing homes since collateral values can only be estimated at the time the loan is approved.

Consumer Loans. This portfolio segment includes small balance unsecured loans to individuals, automobile loans and deposit account loans. Consumer loans are generally originated at higher interest rates than residential mortgage loans because of their higher risk. Collections are highly dependent on the borrower’s continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. In the case where collateral may be present, repossessed collateral for a defaulted loan may not provide an adequate source of repayment as a result of damage, loss or depreciation.

13

Commercial Loans. This portfolio segment consists of unsecured lines of credit and closed end loans to business owners that have personal guarantees. These loans generally have higher interest rates and shorter terms than one- to- four family residential loans. These loans have a higher level of risk than one- to- four family residential loans. The increased risk is due to the increased difficulty of monitoring and higher risk of default since their repayment generally depends on the successful operation of the borrower’s business.

The balance of impaired loans was $4,231,656 and $4,575,824 as of June 30, 2014 and December 31, 2013, respectively. A loan is impaired when it is not likely the lender will collect the full value of the loan because the creditworthiness of a borrower has fallen. All of our impaired loans are either a troubled debt restructuring or are on nonaccrual status.

Nonperforming/Past Due Loans - Loans are placed on non-accrual status when, in management’s opinion, the borrower may be unable to meet payment obligations, which typically occurs when principal or interest payments are more than 90 days past due. Non-accrual loans totaled $758,873 and $1,080,286 at June 30, 2014 and December 31, 2013, respectively. There were no accruing loans that were more than 90 days past due at June 30, 2014 and December 31, 2013.

Management has an established methodology to determine the adequacy of the allowance for loan losses that assesses the risks and losses inherent in the loan portfolio. For purposes of determining the allowance for loan losses, we have segmented our loan portfolio by product type. Our loan segments are owner occupied one-to-four family residential, non owner occupied one-to-four family residential, home equity lines of credit (“HELOC”), commercial real estate, residential construction, land, consumer and commercial.

To establish the allowance for loan losses, loans are pooled by portfolio class and an historical loss percentage is applied to each class. The historical loss percentage is based upon the previous eight quarters history. This rolling history is utilized so that we have the most current and relevant charge-off trend data. These charge-offs are segregated by loan segment and compared to their respective loan segment average balances for the same period in order to calculate the charge-off percentage. That calculation determines the required allowance for loan loss level. The Company then applies additional loss multipliers to the different segments of loans to reflect various environmental factors. For individually evaluated loans (impaired loans), we do additional analyses to determine the impairment. Management applies judgment to develop its own view of loss probability within that range, using external and internal parameters with the objective of establishing an allowance for losses inherent within these portfolios as of the reporting date.

The Bank’s policies, consistent with regulatory guidelines, provide for the classification of loans and other assets that are considered to be of lesser quality as substandard, doubtful, or loss assets. An asset is considered substandard if it is inadequately protected by the net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those assets characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all of the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Assets (or portions of assets) classified as loss are those considered uncollectible and of such little value that their continuance as assets is not warranted. Assets that do not expose us to risk sufficient enough to warrant classification in one of the aforementioned categories, but which possess potential weaknesses that deserve close attention, are required to be designated as special mention.

Modifications of terms for our loans and their inclusion as troubled debt restructurings are based on individual facts and circumstances. Loan modifications that are included as troubled debt restructurings may involve either an increase or reduction of the interest rate, extension of the term of the loan, or deferral or forgiveness of principal or interest payments. As of June 30, 2014, there are five loans totaling $3,472,783 classified as troubled debt restructurings. As of December 31, 2013 there are six loans totaling $3,881,957 classified as troubled debt restructurings.

14

The credit quality of the loan portfolio is summarized quarterly using categories similar to the standard asset classification system used by the federal banking agencies. The following table presents credit quality indicators for the loan loss portfolio segments and classes. These categories are utilized to develop the associated allowance for loan losses using historical losses adjusted for current economic conditions defined as follows:

• Pass – loans which are well protected by the current net worth and paying capacity of the obligor(s) or by the fair value, less cost to acquire and sell, of any underlying collateral.

• Special Mention – loans with well-defined risk issues which creates a high level of uncertainty regarding the long term viability of the business. These loans exhibit material negative financial trends due to company specific or economic conditions. If these potential weaknesses are not mitigated, they threaten the borrower’s capacity to meet its debt obligations.

• Substandard – loans in which the primary source of repayment is gone and causing us to rely upon a secondary source of repayment or in which the collateral has deteriorated or must be liquidated for repayment of the loan. These loans are characterized by the distinct possibility that the institution will sustain some loss if the weaknesses are not corrected.

15

The following tables show credit quality indicators, the aging of receivables, and disaggregated balances of loans receivable and the allowance for loan losses as of June 30, 2014 and December 31, 2013:

Credit Risk Analysis of Loans Receivable

As of June 30, 2014

	Owner Occupied 1-4 Family Residential		Non Owner Occupied 1-4 Family Residential		Home Equity Lines of Credit		Commercial Real Estate		Construction		Land		Consumer		Commercial		Total
Pass	$	79,296,101	$	10,698,347	$	7,000,959	$	14,612,511	$	2,353,152	$	679,602	$	59,000	$	0	$	114,699,672
Special Mention		452,967		1,554,625		0		0		0		0		0		0		2,007,592
Substandard		189,893		249,445		319,535		1,155,040		0		0		0		0		1,913,913
Total	$	79,938,961	$	12,502,417	$	7,320,494	$	15,767,551	$	2,353,152	$	679,602	$	59,000	$	0	$	118,621,177
Credit risk profile based on payment activity:
Performing	$	79,749,068	$	12,252,972	$	7,000,959	$	15,767,551	$	2,353,152	$	679,602	$	59,000	$	0	$	117,862,304
Nonperforming		189,893		249,445		319,535		0		0		0		0		0		758,873
Total	$	79,938,961	$	12,502,417	$	7,320,494	$	15,767,551	$	2,353,152	$	679,602	$	59,000	$	0	$	118,621,177

16

Credit Risk Analysis of Loans Receivable

As of December 31, 2013

	Owner Occupied 1-4 Family Residential		Non Owner Occupied 1-4 Family Residential		Home Equity Lines of Credit		Commercial Real Estate		Construction		Land		Consumer		Commercial		Total
Pass	$	78,205,713	$	10,065,786	$	7,840,054	$	11,996,653	$	2,463,458	$	685,464	$	66,503	$	0	$	111,323,631
Special Mention		457,008		2,077,313		0		0		0		0		0		0		2,534,321
Substandard		528,100		262,290		289,896		1,167,469		0		0		0		0		2,247,755
Total	$	79,190,821	$	12,405,389	$	8,129,950	$	13,164,122	$	2,463,458	$	685,464	$	66,503	$	0	$	116,105,707
Credit risk profile based on payment activity:
Performing	$	78,662,721	$	12,143,099	$	7,840,054	$	13,164,122	$	2,463,458	$	685,464	$	66,503	$	0	$	115,025,421
Nonperforming		528,100		262,290		289,896		0		0		0		0		0		1,080,286
Total	$	79,190,821	$	12,405,389	$	8,129,950	$	13,164,122	$	2,463,458	$	685,464	$	66,503	$	0	$	116,105,707

17

Aged Analysis of Past Due Loans Receivable

As of June 30, 2014

	Owner Occupied 1-4 Family Residential		Non Owner Occupied 1-4 Family Residential		Home Equity Lines of Credit		Commercial Real Estate		Construction		Land		Consumer		Commercial		Total
30-59 Days Past Due	$	12,586	$	0	$	15,385	$	0	$	0	$	0	$	0	$	0	$	27,971
60-89 Days Past Due		11,697		1,548,967		90,192		0		0		0		0		0		1,650,856
Greater Than 90 Days Past Due		157,597		250,562		29,649		0		0		0		0		0		437,808
Total Past Due		181,880		1,799,529		135,226		0		0		0		0		0		2,116,635
Current		79,757,081		10,702,888		7,185,268		15,767,551		2,353,152		679,602		59,000		0		116,504,542
Total Loans Receivable	$	79,938,961	$	12,502,417	$	7,320,494	$	15,767,551	$	2,353,152	$	679,602	$	59,000	$	0	$	118,621,177
Recorded Investment
> 90 Days and Accruing	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0

18

Aged Analysis of Past Due Loans Receivable

As of December 31, 2013

	Owner Occupied 1-4 Family Residential		Non Owner Occupied 1-4 Family Residential		Home Equity Lines of Credit		Commercial Real Estate		Construction		Land		Consumer		Commercial		Total
30-59 Days Past Due	$	224,165	$	0	$	24,493	$	0	$	0	$	0	$	0	$	0	$	248,658
60-89 Days Past Due		3,001		0		0		0		0		0		0		0		3,001
Greater Than 90 Days Past Due		450,480		263,486		90,192		0		0		0		0		0		804,158
Total Past Due		677,646		263,486		114,685		0		0		0		0		0		1,055,817
Current		78,513,175		12,141,903		8,015,265		13,164,122		2,463,458		685,464		66,503		0		115,049,890
Total Loans Receivable	$	79,190,821	$	12,405,389	$	8,129,950	$	13,164,122	$	2,463,458	$	685,464	$	66,503	$	0	$	116,105,707
Recorded Investment > 90 Days and Accruing	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0

19

The following tables detail activity in the allowance for loan losses for the three and six months ended June 30, 2014 and 2013. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

	Owner Occupied 1-4 Family Residential			Non Owner Occupied 1-4 Family Residential		Home Equity Lines of Credit			Commercial Real Estate			Construction		Land			Consumer			Commercial			Unallocated			Total
Three months ended:
June 30, 2014:
Beginning Balance	$	855,360		$	339,673	$	97,586		$	158,365		$	23,032	$	8,532		$	914		$	231		$	44,307		$	1,528,000
(Recovery of) provision for loan losses		(161,415	)		253		(1,331	)		(689	)		500		(37	)		(94	)		(231	)		71,640			(91,404	)
Charge-offs		0			0		0			0			0		0			0			0			0			0
Recoveries		90,395			0		1,009			0			0		0			0			0			0			91,404
Net recoveries		90,395			0		1,009			0			0		0			0			0			0			91,404
Ending Balance	$	784,340		$	339,926	$	97,264		$	157,676		$	23,532	$	8,495		$	820		$	0		$	115,947		$	1,528,000
Three months ended:
June 30, 2013:
Beginning Balance	$	763,128		$	254,641	$	66,635		$	193,280		$	7,399	$	35,181		$	905		$	213		$	28,618		$	1,350,000
Provision for (recovery of) loan losses		56,406			11,827		(5,669	)		(22,790	)		11,531		(75,208	)		(53	)		37			(8,917	)		(32,836	)
Charge-offs		(23,413	)		0		0			0			0		0			0			0			0			(23,413	)
Recoveries		1,000			0		999			0			0		54,250			0			0			0			56,249
Net (charge-offs) recoveries		(22,413	)		0		999			0			0		54,250			0			0			0			32,836
Ending Balance	$	797,121		$	266,468	$	61,965		$	170,490		$	18,930	$	14,223		$	852		$	250		$	19,701		$	1,350,000

20

	Owner Occupied 1-4 Family Residential			Non Owner Occupied 1-4 Family Residential			Home Equity Lines of Credit			Commercial Real Estate			Construction			Land			Consumer			Commercial		Unallocated			Total
Six months ended:
June 30, 2014:
Beginning Balance	$	901,766		$	353,240		$	106,851		$	131,641		$	24,635		$	8,568		$	924		$	0	$	375		$	1,528,000
(Recovery of) provision for loan losses		(209,849	)		(13,314	)		(11,595	)		26,035			(1,103	)		(73	)		(104	)		0		115,572			(94,431	)
Charge-offs		0			0			0			0			0			0			0			0		0			0
Recoveries		92,423			0			2,008			0			0			0			0			0		0			94,431
Net recoveries		92,423			0			2,008			0			0			0			0			0		0			94,431
Ending Balance	$	784,340		$	339,926		$	97,264		$	157,676		$	23,532		$	8,495		$	820		$	0	$	115,947		$	1,528,000
Six months ended:
June 30, 2013:
Beginning Balance	$	810,892		$	206,099		$	74,807		$	191,357		$	36,945		$	32,217		$	868		$	240	$	41,575		$	1,395,000
Provision for (recovery of) loan losses		9,506			126,448			(14,840	)		(20,867	)		(18,015	)		(72,244	)		(16	)		10		(21,874	)		(11,892	)
Charge-offs		(25,777	)		(66,079	)		0			0			0			0			0			0		0			(91,856	)
Recoveries		2,500			0			1,998			0			0			54,250			0			0		0			58,748
Net (charge-offs) recoveries		(23,277	)		(66,079	)		1,998			0			0			54,250			0			0		0			(33,108	)
Ending Balance	$	797,121		$	266,468		$	61,965		$	170,490		$	18,930		$	14,223		$	852		$	250	$	19,701		$	1,350,000

21

The following table details the amounts evaluated for impairment collectively and individually allocated to each portfolio segment as of June 30, 2014, December 31, 2013 and June 30, 2013, detailed on the basis of the impairment methodology used by the Company.

	Owner Occupied 1-4 Family Residential		Non Owner Occupied 1-4 Family Residential		Home Equity Lines of Credit		Commercial Real Estate		Construction		Land		Consumer		Commercial		Total
June 30, 2014:
Loans individually evaluated for impairment	$	3,463,421	$	249,445	$	518,790	$	0	$	0	$	0	$	0	$	0	$	4,231,656
Loans collectively evaluated for impairment	$	76,475,540	$	12,252,972	$	6,801,704	$	15,767,551	$	2,353,152	$	679,602	$	59,000	$	0	$	114,389,521
Balance at June 30, 2014	$	79,938,961	$	12,502,417	$	7,320,494	$	15,767,551	$	2,353,152	$	679,602	$	59,000	$	0	$	118,621,177
December 31, 2013:
Loans individually evaluated for impairment	$	3,815,829	$	262,289	$	497,706	$	0	$	0	$	0	$	0	$	0	$	4,575,824
Loans collectively evaluated for impairment	$	75,374,992	$	12,143,100	$	7,632,244	$	13,164,122	$	2,463,458	$	685,464	$	66,503	$	0	$	111,529,883
Balance at December 31, 2013	$	79,190,821	$	12,405,389	$	8,129,950	$	13,164,122	$	2,463,458	$	685,464	$	66,503	$	0	$	116,105,707
June 30, 2013:
Loans individually evaluated for impairment	$	4,964,997	$	284,289	$	507,959	$	0	$	0	$	0	$	0	$	0	$	5,757,245
Loans collectively evaluated for impairment	$	74,272,107	$	11,790,609	$	8,262,038	$	14,207,477	$	1,892,975	$	1,137,871	$	60,860	$	17,411	$	111,641,348
Balance at June 30, 2013	$	79,237,104	$	12,074,898	$	8,769,997	$	14,207,477	$	1,892,975	$	1,137,871	$	60,860	$	17,411	$	117,398,593

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Management reviews and identifies loans and investments that require designation as nonperforming assets and troubled debt restructurings. Nonperforming assets include loans accounted for on a non-accrual basis, loans past due by 90 days or more but still accruing, and other real estate owned. Troubled debt restructurings include loans in which the borrower was having financial difficulty, and we agreed to modify the loan. Information with respect to nonperforming assets and troubled debt restructurings at June 30, 2014 and December 31, 2013 is as follows:

	June 30, 2014			December 31, 2013
Non-Accrual Loans:
Owner-occupied one- to- four family	$	189,893		$	528,100
Non owner-occupied one- to- four family		249,445			262,290
Home Equity Lines of credit		319,535			289,896
Total Non-Accrual Loans		758,873			1,080,286
Other Real Estate Owned, net		22,500			1,921,706
Loans 90 days or more past due and still accruing		0			0
Total Nonperforming Assets		781,373			3,001,992
Troubled Debt Restructurings		3,472,783			3,881,957
Troubled Debt Restructurings included In Non-Accrual Loans		(0	)		(386,419	)
Troubled Debt Restructurings and Total Nonperforming Assets	$	4,254,156		$	6,497,530

At June 30, 2014 and December 31, 2013, there were no loans 90 days past due or more and still accruing interest. At June 30, 2014, the Company had twenty one loans on non-accrual status with foregone interest in the amount of $62,286. At December 31, 2013, the Company had twenty one loans on non-accrual status with foregone interest in the amount of $129,519.

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The following table presents loans individually evaluated for impairment by class of loan as of June 30, 2014 and December 31, 2013:

	As of June 30, 2014						As of December 31, 2013
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
With no allowance recorded:
Owner Occupied one- to- four family residential	$	441,402	$	452,298	$	0	$	782,371	$	810,780	$	0
Non Owner Occupied one- to- four family residential		16,751		82,830		0		16,751		82,830		0
Home Equity Lines of Credit		518,790		518,790		0		497,706		567,234		0
Total with no allowance	$	976,943	$	1,053,918	$	0	$	1,296,828	$	1,460,844	$	0
With an allowance recorded:
Owner Occupied one- to- four family residential	$	3,022,019	$	3,022,019	$	210,773	$	3,033,457	$	3,033,457	$	210,773
Non Owner Occupied one- to- four family residential		232,694		260,425		64,234		245,539		273,270		64,234
Total with an allowance	$	3,254,713	$	3,282,444	$	275,007	$	3,278,996	$	3,306,727	$	275,007
Grand total:
Owner Occupied one- to- four family residential	$	3,463,421	$	3,474,317	$	210,773	$	3,815,828	$	3,844,237	$	210,773
Non Owner Occupied one- to- four family residential		249,445		343,255		64,234		262,290		356,100		64,234
Home Equity Lines of Credit		518,790		518,790		0		497,706		567,234		0
Grand total	$	4,231,656	$	4,336,362	$	275,007	$	4,575,824	$	4,767,571	$	275,007

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Information on impaired loans for the three and six months ended June 30, 2014 is as follows:

	For the Three Months Ended				For the Six Months Ended
	June 30, 2014				June 30, 2014
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no allowance recorded:
Owner Occupied one- to- four family residential	$	443,637	$	2,876	$	556,549	$	7,155
Non Owner Occupied one- to- four family residential		16,751		0		16,751		0
Home Equity Lines of Credit		506,070		6,232		503,282		12,173
Land		0		0		0		0
Total with no allowance	$	966,458	$	9,108	$	1,076,582	$	19,328
With an allowance recorded:
Owner Occupied one- to- four family residential	$	2,814,172	$	24,145	$	2,817,009	$	48,923
Non Owner Occupied one- to- four family residential		170,633		0		174,190		0
Total with an allowance	$	2,984,805	$	24,145	$	2,991,199	$	48,923
Grand total:
Owner Occupied one- to- four family residential	$	3,257,809	$	27,021	$	3,373,558	$	56,078
Non Owner Occupied one- to- four family residential		187,384		0		190,941		0
Home Equity Lines of Credit		506,070		6,232		503,282		12,173
Land		0		0		0		0
Grand total	$	3,951,263	$	33,253	$	4,067,781	$	68,251

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Information on impaired loans for the three and six months ended June 30, 2013 is as follows:

	For the Three Months Ended				For the Six Months Ended
	June 30, 2013				June 30, 2013
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no allowance recorded:
Owner Occupied one- to- four family residential	$	2,296,082	$	14,891	$	2,209,309	$	30,339
Non Owner Occupied one- to- four family residential		290,248		0		316,080		0
Home Equity Lines of Credit		410,541		6,367		379,743		9,823
Land		46,500		0		62,500		0
Total with no allowance	$	3,043,371	$	21,258	$	2,967,632	$	40,162
With an allowance recorded:
Owner Occupied one- to- four family residential	$	2,670,309	$	43,772	$	2,545,577	$	68,257
Total with an allowance	$	2,670,309	$	43,772	$	2,545,577	$	68,257
Grand total:
Owner Occupied one- to- four family residential	$	4,966,391	$	58,663	$	4,754,886	$	98,596
Non Owner Occupied one- to- four family residential		290,248		0		316,080		0
Home Equity Lines of Credit		410,541		6,367		379,743		9,823
Land		46,500		0		62,500		0
Grand total	$	5,713,680	$	65,030	$	5,513,209	$	108,419

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The following table reflects impaired loans as of June 30, 2014 and December 31, 2013. A loan is impaired when it is not likely the lender will collect the full value of the loan because the creditworthiness of a borrower has fallen.

	June 30, 2014		December 31, 2013
Impaired performing loans:
Owner occupied one- to- four family	$	0	$	0
Non owner occupied one- to- four family		0		0
Home equity lines of credit		0		0
Commercial		0		0
Construction		0		0
Land		0		0
Troubled debt restructurings:
Owner occupied one- to- four family		3,273,528		3,287,728
Non owner occupied one- to- four family		0		0
Home equity lines of credit		199,255		207,810
Commercial		0		0
Construction		0		0
Land		0		0
Total impaired performing loans		3,472,783		3,495,538
Impaired nonperforming loans (nonaccrual):
Owner occupied one- to- four family		189,893		141,681
Non owner occupied one- to- four family		249,445		262,290
Home equity lines of credit		319,535		289,896
Commercial		0		0
Construction		0		0
Land		0		0
Troubled debt restructurings:
Owner occupied one- to- four family		0		386,419
Non owner occupied one- to- four family		0		0
Home equity lines of credit		0		0
Commercial		0		0
Construction		0		0
Land		0		0
Total impaired nonperforming loans (nonaccrual)		758,873		1,080,286
Total impaired loans	$	4,231,656	$	4,575,824

Loans may be periodically modified in a troubled debt restructuring (TDR), where the Company will make concessions to a borrower having financial difficulty to help the borrower remain current on the loan and/or to avoid foreclosure. When we modify loans in a TDR, we evaluate any possible impairment similar to other impaired loans. If we determine that the value of the modified loan is less than the recorded investment in the loan, impairment is generally recognized through a charge-off through the allowance, however, if a specific reserve has been established, impairment is recognized through the provision for loan losses. At June 30, 2014, we had five loans that were restructured totaling $3,472,783. Four loans, totaling $3,273,528 were

27

secured by owner-occupied one- to- four family residential properties and one loan totaling $199,255 is a home equity line of credit. At December 31, 2013, we had six loans that were restructured totaling $3,881,957. Five loans, totaling $3,674,147 were secured by owner-occupied one- to- four family residential properties and one loan totaling $207,810 is a home equity line of credit.

The following table is a summary of impaired loans that were modified due to a TDR by class for the three and six months ended June 30, 2014 and 2013. The pre-modification and post-modification outstanding recorded investments disclosed in the table below represent the loan carrying amounts immediately prior to the modification and the carrying amounts immediately after the modification:

Modifications for the Six Months Ended June 30, 2014

	Number of Contracts		Pre-Modification Outstanding Recorded Investments		Post-Modification Outstanding Recorded Investments
Troubled Debt Restructuring:
Owner occupied one- to- four family residential		0	$	0	$	0

Modifications for the Six Months Ended June 30, 2013

	Number of Contracts		Pre-Modification Outstanding Recorded Investments		Post-Modification Outstanding Recorded Investments
Troubled Debt Restructuring:
Owner occupied one- to- four family residential		1	$	769,303	$	769,303

Modifications for the Three Months Ended June 30, 2014

	Number of Contracts		Pre-Modification Outstanding Recorded Investments		Post-Modification Outstanding Recorded Investments
Troubled Debt Restructuring:
Owner occupied one- to- four family residential		0	$	0	$	0

Modifications for the Three Months Ended June 30, 2013

	Number of Contracts		Pre-Modification Outstanding Recorded Investments		Post-Modification Outstanding Recorded Investments
Troubled Debt Restructuring:
Owner occupied one- to- four family residential		1	$	769,303	$	769,303

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The following table presents loans by loan class modified as TDR’s within the previous twelve months from, and for which there was a payment default (90 days or more past due) during the three and six months ended June 30, 2014 and 2013:

Three Months Ended June 30, 2014				Six Months Ended June 30, 2014
Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment
	0	$	0		0	$	0

Three Months Ended June 30, 2013				Six Months Ended June 30, 2013
Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment
	0	$	0		0	$	0

4. EMPLOYEE RETIREMENT PLANS

The Bank sponsors an employee 401(k) savings and investment plan. The plan covers substantially all employees meeting age and service requirements and provides for both employee and employer matching contributions under Safe Harbor provisions. Expenses related to this plan for the six months ended June 30, 2014 and 2013 were $31,383 and $31,901, respectively.

In connection with the conversion to stock form, the Company established an Employee Stock Ownership Plan (ESOP) for the exclusive benefit of eligible employees. The ESOP borrowed funds from the Company in an amount sufficient to purchase 126,960 shares, or 8% of the Common Stock issued in the offering. The shares were acquired at a price of $10.00 per share.

The loan is secured by the shares purchased and will be repaid by the ESOP with funds from contributions made by the Bank and dividends received by the ESOP, with funds from any contributions on ESOP assets. Contributions will be applied to repay interest on the loan first and the remainder will be applied to principal. The loan is expected to be repaid over a period of 12 years.

Shares purchased with the loan proceeds are held in a suspense account for allocation among participants as the loan is repaid. Contributions to the ESOP and shares released from the suspense account are allocated among participants in proportion to their compensation, relative to total compensation, of all active participants. Participants will vest their accrued benefits under the employee stock ownership plan at the rate of 33.33% per year beginning in year two. Vesting is accelerated upon retirement, death or disability of the participant, or a change in control of the Bank. Forfeitures will be reallocated to remaining plan participants. Benefits may be payable upon retirement, death, disability, separation of service, or termination of the ESOP.

The debt of the ESOP, in accordance with generally accepted accounting principles, is eliminated in consolidation and the shares pledged as collateral are reported as unearned ESOP shares in the consolidated balance sheet. Contributions to the ESOP shall be sufficient to pay principal and interest currently due under the loan agreement. As shares are committed to be released from collateral, the Company reports compensation expense equal to the average market price of the shares for the respective period, and the shares become

29

outstanding for earnings per share computations. Dividends on allocated ESOP shares are recorded as a reduction of debt and accrued interest. ESOP compensation expense for the six months ended June 30, 2014 and 2013 was $77,102 and $72,446, respectively.

A summary of ESOP shares at June 30, 2014 and 2013 is as follows:

	2014		2013
Shares committed for release		37,030		26,450
Unearned shares		89,930		100,510
Total ESOP shares		126,960		126,960
Fair Value of unearned shares	$	1,379,526	$	1,364,926

5. STOCK-BASED COMPENSATION

In May 2012, the Company’s shareholders approved a new Equity Incentive Plan (the “2012 Equity Incentive Plan”). The 2012 Equity Incentive Plan allows for up to 63,480 shares to be issued to employees, executive officers or Directors in the form of restricted stock, and up to 158,700 shares to be issued to employees, executive officers or Directors in the form of stock options. At June 30, 2014 and December 31, 2013, there were 33,000 restricted stock awards issued and outstanding and 69,600 stock option awards granted under the 2012 Incentive Plan.

Under the above plan, the exercise price is the market price at date of grant. The maximum option term is ten years and the vesting period is 25% immediately, 25% after one year, 25% after two years and 25% after three years. The Company issues new shares to satisfy share option exercises. Total compensation costs that have been charged against income for the stock option plan was $36,627 and $0, respectively, for the six months ended June 30, 2014 and 2013.

The fair value of each option award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model that uses the assumptions noted in the table below. Expected volatilities are based on historical data. The Company uses historical data to estimate option exercise and post-vesting termination behavior. The expected term of options granted represents the period of time that options granted are expected to be outstanding, which takes into account that the options are not transferable. The risk-free interest rate for the expected term of the option is based on the Federal Funds rate in effect at the time of the grant.

The fair value of options granted during 2013 was determined using the following weighted-average assumptions as of grant date.

	2013
Risk-free interest rate		0.25	%
Expected term		10.0 years
Expected stock price volatility		24.36	%
Dividend yield		0.0	%

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A summary of stock option activity for the six months ended June 30, 2014 and twelve months ended December 31, 2013 is as follows:

	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
June 30, 2014:
Outstanding at beginning of year		69,600		$	13.65		10.0 years	$	38,280
Granted		0			0.00				0
Exercised		0			0.00				0
Forfeited, exchanged or expired		(0	)		0.00				0
Outstanding at end of period		69,600		$	13.65		9.3 years	$	38,280
Exercisable at end of period		17,400		$	13.65		9.3 years	$	9,570

	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
December 31, 2013:
Outstanding at beginning of year		0		$	0.00			$	0
Granted		69,600			13.65		10.0 years		38,280
Exercised		0			0.00				0
Forfeited, exchanged or expired		(0	)		0.00				0
Outstanding at end of year		69,600		$	13.65		9.8 years	$	38,280
Exercisable at end of year		17,400		$	13.65		9.8 years	$	9,570

As of June 30, 2014 and 2013, there was $170,926 and $0, respectively, of total unrecognized compensation cost related to non-vested stock options granted under the Plan. The cost is expected to be recognized over a weighted-average period of 2.33 years.

Restricted Stock: The specific terms of each restricted stock award are determined by the Compensation Committee at the date of the grant. Compensation expense is recognized over the vesting period of the awards based on the fair value of the stock at the issue date. The fair value of the stock was determined using the total number of restricted stock awards granted multiplied by the fair market value of a share of Company stock at the grant date. Restricted stock awards are vested 25% immediately, 25% after one year, 25% after two years and 25% after three years.

A summary of changes in the Company’s nonvested shares for the six months ended June 30, 2014 and twelve months ended December 31, 2013 is as follows:

	Shares			Weighted-Average Grant-Date Fair Value
Nonvested at January 1, 2014		24,748		$	12.75
Granted		0			0.00
Vested		0			0.00
Forfeited		(0	)		0.00
Nonvested at June 30, 2014		24,748		$	12.75

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	Shares			Weighted-Average Grant-Date Fair Value
Nonvested at January 1, 2013		0		$	0.00
Granted		33,000			12.75
Vested		(8,252	)		12.75
Forfeited		(0	)		0.00
Nonvested at December 31, 2013		24,748		$	12.75

As of June 30, 2014 and 2013, the Company recorded restricted stock awards expense of $52,607 and $0. As of June 30, 2014 and 2013, there was $227,859 and $0 of total unrecognized compensation cost related to nonvested shares granted under the 2012 stock incentive plan. The cost is expected to be recognized over a weighted-average period of 2.17 years.

6. REGULATORY MATTERS

The Bank is subject to various regulatory capital requirements administered by its primary federal regulator, the Office of the Comptroller of the Currency (OCC). Failure to meet the minimum regulatory capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that if undertaken, could have a direct material effect on the Bank and the consolidated financial statements. Under the regulatory capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines involving quantitative measures of the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification under the prompt corrective action guidelines are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of: total risk-based capital and Tier I capital to risk-weighted assets (as defined in the regulations), Tier I capital to adjusted total assets (as defined), and tangible capital to adjusted total assets (as defined).

As of June 30, 2014 and December 31, 2013 (the most recent notification from the OCC), the Bank was categorized as well capitalized under the regulatory framework for prompt corrective action. Nothing has come to management’s attention since the institution’s most recent notification of being classified as “well capitalized” that would cause such classification to change. The following table details the Bank’s capital position:

	Actual					For Capital Adequacy Purposes and to be Well Capitalized Under the Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio
	(dollars in thousands)					(dollars in thousands)
As of June 30, 2014:
Total Risk-Based Capital (to risk-weighted assets)	$	24,943		27.00	%	$	9,238		10.0	%
Tier I Capital (to risk-weighted assets)	$	23,784		25.75	%	$	5,542		6.0	%
Tier I Capital (to adjusted total assets)	$	23,784		14.38	%	$	8,270		5.0	%

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	Actual					For Capital Adequacy Purposes and to be Well Capitalized Under the Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio
	(dollars in thousands)					(dollars in thousands)
As of December 31, 2013:
Total Risk-Based Capital (to risk-weighted assets)	$	24,857		26.96	%	$	9,220		10.0	%
Tier I Capital (to risk-weighted assets)	$	23,700		25.71	%	$	5,531		6.0	%
Tier I Capital (to adjusted total assets)	$	23,700		14.19	%	$	8,351		5.0	%

On July 25, 2013, the Company authorized the repurchase of up to 142,830 shares of its common stock. Repurchases, if any, by the Company pursuant to this authorization are expected to enable the Company to repurchase its shares at an attractive price and to provide a source of liquidity for the Company’s shares. As of June 30, 2014, there have been 65,700 shares repurchased by the Company, for an aggregate expenditure totaling $898,387, at an average price of $13.67.

7. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table presents the changes in each component of accumulated other comprehensive income (loss), net of tax, for the three and six months ended June 30, 2014 and 2013:

	For the Three Months Ended						For the Six Months Ended
	June 30, 2014 Net Unrealized Gain and Losses on Investment Securities			June 30, 2013 Net Unrealized Gain and Losses on Investment Securities			June 30, 2014 Net Unrealized Gain and Losses on Investment Securities			June 30, 2013 Net Unrealized Gain and Losses on Investment Securities
Beginning Balance	$	(427,592	)	$	8,062		$	(669,725	)	$	74,301
Other comprehensive income (loss) before reclassifications		153,317			(465,705	)		395,450			(505,943	)
Amounts reclassified from accumulated other comprehensive loss		0			0			0			(26,001	)
Net current period other comprehensive income (loss)		153,317			(465,705	)		395,450			(531,944	)
Ending Balance	$	(274,275	)	$	(457,643	)	$	(274,275	)	$	(457,643	)

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The following table presents the amounts reclassified out of each component of accumulated other comprehensive income (loss) for the six months ended June 30, 2014 and 2013:

	June 30, 2014		June 30, 2013
	Amount Reclassified from Accumulated Other Comprehensive Income		Amount Reclassified from Accumulated Other Comprehensive Income			Affected Line Item in the Statement Where Net Income Is Presented
Reclassification adjustment for realized gains	$	0	$	(43,335	)	Non-Interest Income
		0		17,334		Income Tax Expense
Total Reclassification for the Period	$	0	$	(26,001	)	Net of Tax

8. FAIR VALUE MEASUREMENTS

Measurement of fair value under U.S. GAAP establishes a hierarchy that prioritizes observable and unobservable inputs used to measure fair value, as of the measurement date, into three broad levels, which are described as follows:

Level 1 Inputs - Unadjusted quoted prices in active markets for identical assets or liabilities that the entity has the ability to access at the measurement date.

Level 2 Inputs - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3 Inputs- Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

The following table presents the Bank’s assets measured at fair value on a recurring basis:

	Fair Value at     June 30, 2014		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available-for-sale securities:
Bank Notes and Corporate Bonds	$	1,508,910	$	0	$	1,508,910	$	0
Obligations of U.S. Government agencies		5,594,965		0		5,594,965		0
Municipal Bonds		1,006,580		0		1,006,580		0
FNMA		5,546,583		0		5,546,583		0
GNMA		1,128,957		0		1,128,957		0
FHLMC		561,649		0		561,649		0
Federal Agency CMO		786,258		0		786,258		0
Private label CMO		256,581		0		256,581		0
	$	16,390,483	$	0	$	16,390,483	$	0
Total assets measured at fair value	$	16,390,483	$	0	$	16,390,483	$	0

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	Fair Value at December 31, 2013		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available-for-sale securities:
Bank Notes and Corporate Bonds	$	1,498,155	$	0	$	1,498,155	$	0
Obligations of U.S. Government agencies		5,238,660		0		5,238,660		0
Municipal Bonds		911,300		0		911,300		0
FNMA		5,777,860		0		5,777,860		0
GNMA		1,173,142		0		1,173,142		0
FHLMC		626,465		0		626,465		0
Federal Agency CMO		840,940		0		840,940		0
Private label CMO		288,139		0		288,139		0
	$	16,354,661	$	0	$	16,354,661	$	0
Total assets measured at fair value	$	16,354,661	$	0	$	16,354,661	$	0

Available-for-sale Securities

Securities classified as available-for-sale are reported at fair value utilizing Level 2 Inputs. For these securities, the Bank obtains fair values from an external pricing service or bid quotations received from securities dealers. The observable data may include dealer quotes, cash flows, U.S. Treasury yield curve, trading levels, credit information, and the terms and conditions of the security, among other things.

Financial Instruments Measured on a Nonrecurring Basis

The Bank may be required, from time to time, to measure certain other financial assets and liabilities at fair value on a nonrecurring basis. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets.

For assets measured at fair value on a nonrecurring basis as of June 30, 2014 and December 31, 2013, the following table provides the level of valuation assumptions used to determine each adjustment and the carrying value of the assets:

	Fair Value at     June 30, 2014		Quoted Prices (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired Loans:
Owner occupied one- to- four family	$	3,252,648	$	0	$	3,252,648	$	0
Non owner occupied one- to- four family		185,211		0		185,211		0
Home Equity Lines of Credit		518,790		0		518,790		0
	$	3,956,649	$	0	$	3,956,649	$	0
Other real estate owned	$	22,500	$	0	$	22,500	$	0

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	Fair Value at December 31, 2013		Quoted Prices (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired Loans:
Owner occupied one- to- four family	$	3,605,055	$	0	$	3,605,055	$	0
Non owner occupied one- to- four family		198,056		0		198,056		0
Home Equity Lines of Credit		497,706		0		497,706		0
	$	4,300,817	$	0	$	4,300,817	$	0
Other real estate owned	$	1,921,706	$	0	$	1,921,706	$	0

Impaired Loans

Loans for which it is probable that the Bank will not collect all principal and interest due according to contractual terms are measured for impairment in accordance with FASB guidance. Allowable methods for estimating fair value include using the fair value of the collateral for collateral dependent loans or, where a loan is determined not to be collateral dependent, using the discounted cash flow method. In our determination of fair value, we have categorized both methods of valuation as estimates based on Level 2 inputs.

If the impaired loan is identified as collateral dependent, then the fair value method measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal or utilizing some other method of valuation for the collateral and applying a discount factor to the value based on our loan review policy and procedures.

If the impaired loan is determined not to be collateral dependent, then the discounted cash flow method is used. This method requires the impaired loan to be recorded at the present value of expected future cash flows discounted at the loan’s effective interest rate. The effective interest rate of a loan is the contractual interest rate adjusted for any net deferred loan fees or costs, premiums, or discounts existing at origination or acquisition of the loan.

Other Real Estate Owned

We record our other real estate owned at the lower of cost or estimated fair value less estimated selling costs. Estimated fair value is generally based upon an independent appraisal of the collateral. We consider these collateral values to be estimated using Level 2 inputs.

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9. FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value estimates, methods, and assumptions are set forth below for the Bank’s financial instruments as of June 30, 2014 and December 31, 2013.

	June 30, 2014
	Carrying Value		Estimated Fair Value
			Level One		Level Two		Level Three		Total
Assets:
Securities - available-for-sale	$	16,390,483	$	0	$	16,390,483	$	0	$	16,390,483
Securities - held-to-maturity		7,760,823		0		7,937,908		0		7,937,908
Loans, net of allowance		117,093,177		0		3,956,649		115,218,667		119,175,316
Federal Home Loan Bank stock		1,049,800		0		1,049,800		0		1,049,800
Liabilities:
Deposit accounts and advances by borrowers		117,139,760		0		117,172,580		0		117,172,580
Advances from the FHLB		20,000,000		0		20,494,683		0		20,494,683

	December 31, 2013
	Carrying Value		Estimated Fair Value
			Level One		Level Two		Level Three		Total
Assets:
Securities - available-for-sale	$	16,354,661	$	0	$	16,354,661	$	0	$	16,354,661
Securities - held-to-maturity		8,069,424		0		8,101,210		0		8,101,210
Loans, net of allowance		114,577,707		0		4,300,817		112,002,812		116,303,629
Federal Home Loan Bank stock		1,103,700		0		1,103,700		0		1,103,700
Liabilities:
Deposit accounts and advances by borrowers		118,759,093		0		119,172,829		0		119,172,829
Advances from the FHLB		20,000,000		0		20,590,659		0		20,590,659

(a)Securities- The fair value of securities excluding Federal Home Loan Bank stock, is based on bid prices received from an external pricing service or bid quotations received from securities dealers.

(b)Loans- Loans were segmented into portfolios with similar financial characteristics. Loans were also segmented by loan category. Each loan category was further segmented by fixed and adjustable rate interest terms and performing and nonperforming categories. The fair value of residential loans was calculated by discounting anticipated cash flows based on weighted-average contractual maturity, weighted-average coupon, and discount rate.

The fair value for nonperforming loans was determined by reducing the carrying value of nonperforming loans by the Company’s historical loss percentage for each specific loan category.

37

(c)Federal Home Loan Bank Stock - The fair value of Federal Home Loan Bank stock approximates its carrying value based on the redemption provisions of the Federal Home Loan Bank.

(d)Deposits and Advances by Borrowers - The fair value of deposits with no stated maturity, such as noninterest bearing deposits, interest-bearing NOW accounts, money market and statement savings accounts, is deemed to be equal to the carrying amounts. The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate for certificates of deposit was estimated using the rate currently offered for deposits of similar remaining maturities.

(e)Advances from the FHLB - Fair values are estimated by discounting carrying values using a cash flow approach based on market rates as of June 30, 2014 and December 31, 2013.

(f)Off-Balance Sheet Financial Instruments - The Company’s adjustable rate commitments to extend credit move with market rates and are not subject to interest rate risk. The rates and terms of the Company’s fixed rate commitments to extend credit are competitive with others in the various markets in which the Company operates. The fair values of these instruments are immaterial.

(g)Limitations - Fair value estimates are made at a specific point in time, based on relevant market information and information about financial instruments. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect estimates.

10. EARNINGS PER SHARE

The factors used in the earnings per share computation are as follows:

	For the Three Months Ended				For the Six Months Ended
	June 30, 2014		June 30, 2013		June 30, 2014		June 30, 2013
Basic
Net Income	$	109,790	$	102,741	$	62,096	$	167,971
Weighted average common shares outstanding		1,275,629		1,340,645		1,274,314		1,360,370
Basic earnings per common share	$	.09	$	.08	$	.05	$	.12
Diluted
Net Income	$	109,790	$	102,741	$	62,096	$	167,971
Weighted average common shares outstanding for basic earnings per common share		1,275,629		1,340,645		1,274,314		1,360,370
Add: Dilutive effects of common stock equivalents		32,416		0		32,416		0
Average shares and dilutive potential common shares		1,308,045		1,340,645		1,306,730		1,360,370
Diluted earnings per common share	$	.08	$	.08	$	.05	$	.12

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11. RECENT ACCOUNTING PRONOUNCEMENTS

In July 2013, the FASB issued ASU No. 2013-11,Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, which provides that an unrecognized tax benefit, or a portion thereof, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except to the extent that a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date to settle any additional income taxes that would result from disallowance of a tax position, or the tax law does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, then the unrecognized tax benefit should be presented as a liability. Early adoption and retrospective application is permitted. ASU 2013-11 became effective for the Company on January 1, 2014 and did not have a significant impact on its financial position or results of operations.

In January 2014, the FASB issued ASU No. 2014-4,Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (a consensus of the FASB Emerging Issues Task Force). The guidance clarifies when an “in substance repossession or foreclosure” occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, such that all or a portion of the loan should be derecognized and the real estate property recognized. ASU 2014-04 states that a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure, or the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. The amendments of ASU 2014-04 also require interim and annual disclosure of both the amount of foreclosed residential real estate property held by the creditor and the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure. The amendments of ASU 2014-04 are effective for the Company on January 1, 2015, and may be applied using either a modified retrospective transition method or a prospective transition method as described in ASU 2014-04. The Company will evaluate these amendments but does not believe they will have an impact on its financial position or results of operations.

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

Forward-Looking Statements

When used in this Report, the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties including changes in economic conditions in the Company’s market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in the Company’s market area, competition and information provided by third-party vendors and the matters described under “Part I, Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company wishes to advise readers that the factors listed above could affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements.

The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

General

Fraternity Community Bancorp, Inc. (the “Company”) is a Maryland corporation incorporated on October 12, 2010 by Fraternity Federal Savings and Loan Association (the “Bank”) to be its holding company following the Bank’s conversion from the mutual to the stock form of organization (the “Conversion”). The Conversion was completed on March 31, 2011 and also on that date, the Company completed its public stock offering and issued 1,587,000 shares of its common stock for aggregate proceeds of $15,870,000, and net proceeds of $14,968,610. The Company’s business is the ownership of the outstanding capital stock of the Bank. The Company does not own or lease any property but instead uses the premises, equipment and other property of the Bank with payment of appropriate rental fees as required by applicable law and regulations, under the terms of an expense allocation agreement between the Company and the Bank.

Founded in 1913, the Bank is a community-oriented financial institution, dedicated to serving the financial service needs of customers and businesses within its market area, which consists of Baltimore City and Baltimore, Carroll and Howard Counties in Maryland. We offer a variety of deposit products and provide loans secured by real estate located in our market area. Our real estate loans consist primarily of one- to- four family mortgage loans, as well as commercial real estate loans, land loans, home equity lines of credit and residential construction loans. We also offer consumer loans and, to a limited extent, commercial business loans. We currently operate out of our corporate headquarters and main office in Baltimore and full-service branch offices located in Cockeysville, Ellicott City and Hampstead, Maryland. We are subject to extensive regulation, examination and supervision by the Office of the Comptroller of the Currency, our primary federal regulator, and the Federal Deposit Insurance Corporation, our deposit insurer.

The Company and the Bank maintain an Internet website athttp://www.fraternityfed.com. Information on our website should not be considered a part of this Quarterly Report on Form 10-Q.

Critical Accounting Policies

We consider accounting policies involving significant judgments and assumptions by management that have, or could have, a material impact on the carrying value of certain assets or on income to be critical accounting policies. The following represent our critical accounting policies:

Allowance for Loan Losses. The allowance for loan losses is the amount estimated by management as necessary to cover losses inherent in the loan portfolio at the balance sheet date. The allowance is established

40

through the provision for loan losses, which is charged to income. Determining the amount of the allowance for loan losses necessarily involves a high degree of judgment. Among the material estimates required to establish the allowance are: loss exposure at default; the amount and timing of future cash flows on impaired loans; value of collateral; and determination of loss factors to be applied to the various elements of the portfolio. All of these estimates are susceptible to significant change. Management reviews the level of the allowance monthly and establishes the provision for loan losses based upon an evaluation of the portfolio, past loss experience, current economic conditions and other factors related to the collectability of the loan portfolio. Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic or other conditions differ substantially from the assumptions used in making the evaluation. In addition, the Office of the Comptroller of the Currency, as an integral part of its examination process, periodically reviews our allowance for loan losses and may require us to recognize adjustments to the allowance based on its judgments about information available to it at the time of its examination. A large loss could deplete the allowance and require increased provisions to replenish the allowance, which would adversely affect earnings.

Comparison of Financial Condition at June 30, 2014 and December 31, 2013

Assets. At June 30, 2014, total assets decreased by $950,500 to $165.4 million at June 30, 2014 from $166.4 million at December 31, 2013. The decrease in assets for the six months ended June 30, 2014 was due mainly to a $1.9 million decrease in other real estate owned from $1.9 million at December 31, 2013 to $22,500 at June 30, 2014. Additionally, there was a decrease in cash and cash equivalents of $1.2 million, from $15.4 million at December 31, 2013, to $14.2 million as of June 30, 2014. Offsetting this was an increase of $2.5 million in loans receivable, net, from $114.6 million at December 31, 2013 to $117.1 million at June 30, 2014.

Loans. Net loans receivable increased by $2.5 million, or 2.2%, from $114.6 million at December 31, 2013 to $117.1 million at June 30, 2014, primarily as a result of increased demand. Commercial real estate loans increased by $2.6 million, or 19.8%, from $13.2 million at December 31, 2013 to $15.8 million at June 30, 2014.

Cash and Cash Equivalents. Cash and cash equivalents decreased by $1.2 million, or 7.7%, from $15.4 million at December 31, 2013 to $14.2 million at June 30, 2014 primarily as a result of a decrease in our deposits of $2.5 million, an increase in loans receivable, net, of $2.5 million, and a decrease of $1.9 million in other real estate owned.

Securities. Our available-for-sale securities remained stable at $16.4 million as of June 30, 2014, a small increase of $35,800 from December 31, 2013. Our held-to-maturity securities decreased by $308,600, or 3.8%, from $8.1 million at December 31, 2013 to $7.8 million at June 30, 2014.

Deposits. Total deposits decreased by $2.5 million, or 2.1%, from $118.1 million at December 31, 2013, to $115.6 million at June 30, 2014, primarily as a result of certificates of deposits maturing that had carried much higher interest rates, and depositors looking for a higher yield elsewhere than the current low interest rates we are offering on those products currently. It is our strategy to not compete for these higher yield certificates of deposit at this time.

Borrowings. Total borrowings remained stable at $20.0 million at June 30, 2014 and December 31, 2013.

Stockholders’ Equity. Stockholders’ equity increased by $623,900, or 2.3%, from $26.8 million at December 31, 2013 to $27.4 million at June 30, 2014 due primarily to a reduction in accumulated other comprehensive loss of $395,400. As of December 31, 2013, we had an accumulated loss of $669,700, compared to $274,300 as of June 30, 2014.

Results of Operations for the Three Months Ended June 30, 2014 and 2013 (unaudited)

Overview. We had net income of $109,800 for the three months ended June 30, 2014, as compared to net income of $102,700 for the three months ended June 30, 2013. Net interest income increased for the three months

41

ended June 30, 2014 by $35,700 or 3.3%, from $1,082,000 for the three months ended June 30, 2013 to $1,117,700 for the three months ended June 30, 2014. We had a negative provision for loan losses of $91,400 for the three months ended June 30, 2014, as compared to a negative provision for loan losses of $32,800 for the three months ended June 30, 2013. Non-interest income increased $64,600, or 106.9%, for the three months ended June 30, 2014, from $60,500 for the three months ended June 30, 2013 to $125,100 for the three months ended June 30, 2014. Non-interest expense increased by $161,300, or 15.5%, for the three months ended June 30, 2014, from $1,039,600 for the three months ended June 30, 2013 to $1,200,900 for the three months ended June 30, 2014. Income tax expense decreased by $9,500, from $33,000 for the three months ended June 30, 2013 to $23,500 for the three months ended June 30, 2014.

Net Interest Income. Net interest income increased by $35,700, or 3.3%, from $1,082,000 for the three months ended June 30, 2013 to $1,117,700 for the three months ended June 30, 2014. The increase in net interest income is primarily attributable to a lower cost of funds. Our interest rate spread has improved from 2.54% for the three months ended June 30, 2013 to 2.67% for the three months ended June 30, 2014, primarily due to a 28 basis point decrease in the average cost of time deposits.

Interest on loans receivable, net decreased by $32,600, or 2.3%, from $1,400,600 for the three months ended June 30, 2013 to $1,368,000 for the three months ended June 30, 2014, due to a 20 basis point decrease in the average yield. The decrease in the average yield on loans was attributable to market rates remaining at an historically low level. The average balance of loans receivable, net increased by $2.0 million, or 1.7%, from $114.9 million at June 30, 2013 to $116.9 million at June 30, 2014.

Interest on investment securities available-for-sale increased by $8,900, or 9.1%, for the three months ended June 30, 2014 as compared to the three months ended June 30, 2013, as the result of a 51 basis point increase in the average yield, offset in part by a $2.3 million, or 12.2%, decrease in the average balance of investment securities available-for-sale. Interest on investment securities held-to-maturity decreased by $2,900, or 5.2%, for the three months ended June 30, 2014 as compared to the three months ended June 30, 2013, as the result of a 31 basis point decrease in the average yield, offset in part by a $426,100, or 5.8%, increase in the average balance of investment securities held-to-maturity.

Interest on cash and cash equivalents remained low during the three months ended June 30, 2014 and 2013 due to the historically low prevailing market rates during those periods.

During the three months ended June 30, 2014, we were able to reduce interest paid on deposits primarily as the result of time deposits being rolled over at lower rates in response to general declines in market interest rates. Interest on time deposits decreased by $54,200, or 16.2%, from $334,100 for the three months ended June 30, 2013, to $279,900 for the three months ended June 30, 2014, due to a 28 basis point decrease in the average cost of time deposits. The average balance of time deposits increased by $3.3 million, or 3.7%, from $91.5 million at June 30, 2013 to $94.8 million at June 30, 2014. Interest on brokered deposits decreased by $3,800, or 100.0%, from $3,800 for the three months ended June 30, 2013, to $0 for the three months ended June 30, 2014, as those deposits matured and were not replaced. Interest on NOW and money market accounts increased by $300, or 13.2%, from $1,900 for the three months ended June 30, 2013, to $2,200 for the three months ended June 30, 2014, due to a $781,300, or 12.0%, increase in the average balance of NOW and money market accounts. Interest on passbook accounts decreased by $2,600, or 32.4%, from $8,000 for the three months ended June 30, 2013 to $5,400 for the three months ended June 30, 2014, due primarily to a $2.7 million, or 17.0%, decrease in the average balance of passbook accounts. The average balance of passbook accounts decreased during the three months ended June 30, 2014, from $16.1 million as of June 30, 2013 to $13.4 million as of June 30, 2014.

Interest on other interest-bearing liabilities, which consist of Federal Home Loan Bank advances, increased by $1,200, or 0.8%, from $152,500 for three months ended June 30, 2013 to $153,700 for the three months ended June 30, 2014, due to an increase of 2 basis points in the average cost of these other interest-bearing liabilities. At June 30, 2014 and December 31, 2013, we had $20.0 million of Federal Home Loan Bank advances, of which $15.0 million are long-term advances that carry large prepayment penalties.

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Average Balances and Yields. The following table presents information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting annualized average yields and costs. The yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented. Average balances have been calculated using monthly balances, and non-accrual loans are included in average balances only. Amortization of net deferred loan fees are included in interest income on loans and are insignificant. No tax-equivalent adjustments were made. Nonaccruing loans have been included in the table as loans carrying a zero yield.

	Three Months Ended June 30,
	2014							2013
	Average Balance		Interest and Dividends		Yield/ Cost			Average Balance		Interest and Dividends		Yield/ Cost
Assets:
Interest-bearing deposits in other banks	$	13,956,200	$	9,768		.28	%	$	13,886,611	$	9,242		.27	%
Loans receivable, net (3)		116,913,617		1,368,033		4.68			114,916,452		1,400,556		4.88
Investment securities available-for-sale (1)		16,453,342		106,898		2.60			18,746,402		97,965		2.09
Investment securities held-to-maturity (2)		7,830,971		53,598		2.74			7,404,889		56,511		3.05
Other interest-earning assets		1,937,309		20,522		4.24			2,004,026		17,997		3.59
Total interest-earning assets		157,091,439		1,558,819		3.97			156,958,380		1,582,271		4.03
Noninterest-earning assets		9,037,682							9,346,681
Total assets	$	166,129,121						$	166,305,061
Liabilities and equity:
Time deposits	$	94,837,016	$	279,862		1.18	%	$	91,467,199	$	334,113		1.46	%
NOW and money market		7,283,450		2,192		.12			6,502,117		1,937		.12
Passbook		13,366,024		5,426		.16			16,107,455		8,025		.20
Brokered deposits		0		0		.00			333,904		3,751		4.49
Federal Home Loan Bank advances		20,000,000		153,653		3.07			20,000,000		152,478		3.05
Total interest-bearing liabilities		135,486,490		441,133		1.30			134,410,675		500,304		1.49
Noninterest-bearing liabilities		3,362,011							3,601,419
Total liabilities		138,848,501							138,012,094
Total equity		27,280,620							28,292,967
Total liabilities and equity	$	166,129,121						$	166,305,061
Net interest income			$	1,117,686						$	1,081,967
Interest rate spread						2.67	%						2.54	%
Net interest margin						2.85	%						2.76	%
Ratio of average interest-earning assets to average interest-bearing liabilities						115.95	%						116.78	%

(1) Investment securities available-for-sale are presented at fair market value.

(2) Investment securities held-to-maturity are presented at amortized cost.

(3) Loans placed on nonaccrual status are included in average assets.

Provision and Allowance for Loan Losses. We maintain an allowance at a level necessary to absorb management’s best estimate of probable loan losses in the portfolio. Management considers, among other factors, historical loss experience, type and amount of loans, borrower concentrations and current conditions of the economy. In addition, the allowance considers the level of loans which management monitors as a result of inconsistent repayment patterns. Management has identified commercial real estate loans as an area for expected increased lending. Such loans carry a higher degree of credit risk than our historical single-family lending.

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We had a negative provision for loan losses of $91,400 for the three months ended June 30, 2014, as compared to a negative provision for loan losses of $32,800 for the three months ended June 30, 2013. At June 30, 2014, the allowance for loan losses was $1.5 million, or 1.29%, of the total loan portfolio, as compared to $1.5 million, or 1.32%, of the total loan portfolio at December 31, 2013.

Non-accrual loans totaled $758,900 at June 30, 2014 compared to $1.1 million at December 31, 2013. Net loan recoveries amounted to $91,400 during the three months ended June 30, 2014, compared to net loan recoveries of $32,800 during the three months ended June 30, 2013. As of June 30, 2014, non-accrual loans included thirteen owner occupied one- to- four family residential loans totaling $189,900, five non-owner occupied one-to-four family residential loans totaling $249,500 and three home equity lines of credit totaling $319,500. As of December 31, 2013, non-accrual loans included one troubled debt restructured loan totaling $386,400, eighteen one-to- four family residential loans totaling $404,000 and two home equity lines of credit totaling $289,900. The total decrease of $321,400 in non-accrual loans is primarily due to one troubled debt restructured loan that had previously been on non-accrual status but is now included in other real estate owned.

Impaired loans totaled $4.2 million at June 30, 2014 compared to $4.6 million at December 31, 2013. As of June 30, 2014, impaired loans included seventeen one-to-four family owner-occupied residential loans totaling $3.5 million, five non-owner-occupied one-to-four family residential loans totaling $249,500 and four home equity line of credit loans totaling $518,800. Included in these are five troubled debt restructured loans totaling $3.5 million, all of which are on accrual status. As of December 31, 2013, impaired loans included eighteen one- to- four family owner-occupied residential loans totaling $3.8 million, five non-owner-occupied one-to-four family residential loans totaling $262,900 and three home equity line of credit loans totaling $497,700. Included in these are six troubled debt restructured loans totaling $3.9 million. Of these six troubled debt restructured loans, five loans totaling $3.5 million are on accrual status, and one loan totaling $386,400 is on non-accrual status.

Other real estate owned totaled $22,500 at June 30, 2014 compared to $1.9 million at December 31, 2013. Other real estate owned at June 30, 2014 consisted of one non-owner occupied property. Other real estate owned at December 31, 2013 consisted of one luxury residential property that was a speculative construction loan (totaling $1.7 million), one owner occupied property and one non-owner occupied property.

Management also reviews individual loans for which full collectability may not be reasonably assured and considers, among other matters, the estimated fair value of the underlying collateral. This evaluation is ongoing and results in variations in our provision for loan losses.

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The following table provides information with respect to our nonperforming assets at the dates indicated:

	At
	June 30, 2014			December 31, 2013
	(unaudited)
Nonaccrual loans:
Real estate loans:
One- to- four family	$	439,338		$	790,390
Lines of credit		319,535			289,896
Consumer		0			0
Total	$	758,873		$	1,080,286
Accruing loans past due 90 days or more	$	0		$	0
Total of nonaccrual loans and accruing loans 90 days Or more past due	$	758,873		$	1,080,286
Other real estate owned		22,500			1,921,706
Total nonperforming assets	$	781,373		$	3,001,992
Troubled debt restructurings	$	3,472,784		$	3,881,957
Troubled debt restructurings included in non-accrual loans		(0	)		(386,419	)
Troubled debt restructurings and total nonperforming assets	$	4,254,157		$	6,497,530
Total of nonaccrual loans and accruing loans past due 90 days or more to total loans		.64	%		.93	%
Total of nonaccrual loans and accruing loans past due 90 days or more to total assets		.46	%		.65	%
Total nonperforming assets to total assets		0.47	%		1.80	%

Analysis of Loan Loss Experience. The following table sets forth an analysis of the allowance for loan losses for the periods indicated.

	Three Months Ended June 30,
	2014			2013
Allowance for loan losses at beginning of period	$	1,528,000		$	1,350,000
Charge-offs:
Real estate loans:
Owner occupied one- to- four family		0			23,413
Non-owner occupied one- to- four family		0			0
Lines of credit		0			0
Commercial		0			0
Residential construction		0			0
Land		0			0
Commercial		0			0
Consumer		0			0
Total charge-offs		0			23,413
Recoveries		91,404			56,249
Net charge-offs		(91,404	)		(32,836	)
Recovery of loan losses		(91,404	)		(32,836	)
Allowance at end of period	$	1,528,000		$	1,350,000
Allowance for loan losses to total loans at the end of the period		1.29	%		1.15	%
Net charge-offs to average loans outstanding during the period		.08	%		.03	%

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Noninterest Income. Total noninterest income increased by $64,600, or 106.9%, from $60,500 for the three months ended June 30, 2013 to $125,100 for the three months ended June 30, 2014. The increase was primarily attributable to an increase in other income of $71,900. The increase in other income was primarily due to $26,700 in proceeds received from a private mortgage insurance company for two REO properties previously sold and a $44,800 gain on the sale of an REO property.

Noninterest Expenses. Total noninterest expenses increased by $161,300, or 15.5%, from $1,039,600 for the three months ended June 30, 2013 to $1,200,900 for the three months ended June 30, 2014. The increase primarily was attributable to an increase in salaries and employee benefits of $98,400, or 19.0%, an increase in directors fees of $13,200, or 56.8%, and an increase in legal fees of $38,400, or 82.5%.

Income Tax Expense. We recognized an income tax expense of $23,500 during the three months ended June 30, 2014, as compared to an income tax expense of $33,000 for the three months ended June 30, 2013.

Results of Operations for the Six Months Ended June 30, 2014 and 2013 (unaudited)

Overview. We had net income of $62,100 for the six months ended June 30, 2014, as compared to net income of $168,000 for the six months ended June 30, 2013. Net interest income increased for the six months ended June 30, 2014 by $85,800 or 4.0%, from $2,158,900 for the six months ended June 30, 2013 to $2,244,700 for the six months ended June 30, 2014. We had a negative provision for loan losses of $94,400 for the six months ended June 30, 2014, as compared to a negative provision for loan losses of $11,900 for the six months ended June 30, 2013. Non-interest income decreased $21,200, or 11.4%, for the six months ended June 30, 2014, from $185,200 for the six months ended June 30, 2013 to $164,000 for the six months ended June 30, 2014. Non-interest expense increased by $320,200, or 14.9%, for the six months ended June 30, 2014, from $2,144,200 for the six months ended June 30, 2013 to $2,464,400 for the six months ended June 30, 2014. Income tax expense decreased by $66,900, from $43,700 for the six months ended June 30, 2013 to an income tax benefit of $23,200 for the six months ended June 30, 2014.

Net Interest Income. Net interest income increased by $85,800, or 4.0%, from $2,158,900 for the six months ended June 30, 2013 to $2,244,700 for the six months ended June 30, 2014. The increase in net interest income is primarily attributable to a lower cost of funds. Our interest rate spread has improved from 2.52% for the six months ended June 30, 2013 to 2.70% for the six months ended June 30, 2014, primarily due to a 31 basis point decrease in the average cost of time deposits.

Interest on loans receivable, net decreased by $66,600, or 2.4%, from $2.8 million for the six months ended June 30, 2013 to $2.7 million for the six months ended June 30, 2014, due to a 24 basis point decrease in the average yield. The decrease in the average yield on loans was attributable to market rates remaining at an historically low level. The average balance of loans receivable, net increased by $2.9 million, or 2.6%, from $114.0 million at June 30, 2013 to $116.9 million at June 30, 2014.

Interest on investment securities available-for-sale increased by $7,100, or 3.5%, for the six months ended June 30, 2014 as compared to the six months ended June 30, 2013, as the result of a 40 basis point increase in the average yield, offset in part by a $2.4 million, or 12.5%, decrease in the average balance of investment securities available-for-sale. Interest on investment securities held-to-maturity increased by $1,300, or 1.2%, for the six months ended June 30, 2014 as compared to the six months ended June 30, 2013, as the result of a $431,600, or 5.8%, increase in the average balance of investment securities held-to-maturity, offset in part by a 13 basis point decrease in the average yield.

Interest on cash and cash equivalents remained low during the six months ended June 30, 2014 and 2013 due to the historically low prevailing market rates during those periods.

During the six months ended June 30, 2014, we were able to reduce interest paid on deposits primarily as the result of time deposits being rolled over at lower rates in response to general declines in market interest rates.

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Interest on time deposits decreased by $130,400, or 18.8%, from $692,000 for the six months ended June 30, 2013, to $561,600 for the six months ended June 30, 2014, due to a 31 basis point decrease in the average cost of time deposits. The average balance of time deposits increased by $2.4 million, or 2.6%, from $92.3 million at June 30, 2013 to $94.7 million at June 30, 2014. Interest on brokered deposits decreased by $7,400, or 100.0%, from $7,400 for the six months ended June 30, 2013, to $0 for the six months ended June 30, 2014, as those deposits matured and were not replaced. Interest on passbook accounts decreased by $7,600, or 40.8%, from $18,700 for the six months ended June 30, 2013 to $11,100 for the six months ended June 30, 2014, due primarily to a 7 basis point decrease in the average cost of passbook accounts. The average balance of passbook accounts decreased by $2.6 million, or 16.3%, during the six months ended June 30, 2014, from $16.3 million as of June 30, 2013 to $13.7 million as of June 30, 2014.

Interest on other interest-bearing liabilities, which consist of Federal Home Loan Bank advances, increased by $5,000, or 1.7%, from $300,600 for six months ended June 30, 2013 to $305,600 for the six months ended June 30, 2014, due to an increase of 5 basis points in the average cost of these other interest-bearing liabilities. At June 30, 2014 and December 31, 2013, we had $20.0 million of Federal Home Loan Bank advances, of which $15.0 million are long-term advances that carry large prepayment penalties.

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Average Balances and Yields. The following table presents information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting annualized average yields and costs. The yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented. Average balances have been calculated using monthly balances, and non-accrual loans are included in average balances only. Amortization of net deferred loan fees are included in interest income on loans and are insignificant. No tax-equivalent adjustments were made. Nonaccruing loans have been included in the table as loans carrying a zero yield.

	Six Months Ended June 30,
	2014							2013
	Average Balance		Interest and Dividends		Yield/ Cost			Average Balance		Interest and Dividends		Yield/ Cost
Assets:
Interest-bearing deposits in other banks	$	13,091,108	$	18,861		.29	%	$	15,482,676	$	18,999		.25	%
Loans receivable, net (3)		116,919,653		2,743,014		4.69			113,972,393		2,809,583		4.93
Investment securities available-for-sale (1)		16,477,852		210,051		2.55			18,836,331		202,909		2.15
Investment securities held-to-maturity (2)		7,902,131		112,375		2.84			7,470,555		111,095		2.97
Other interest-earning assets		1,956,443		42,815		4.38			2,026,286		39,239		3.87
Total interest-earning assets		156,347,187		3,127,116		4.00			157,788,241		3,181,825		4.03
Noninterest-earning assets		9,455,753							9,261,819
Total assets	$	165,802,940						$	167,050,060
Liabilities and equity:
Time deposits	$	94,654,238	$	561,597		1.19	%	$	92,279,552	$	691,954		1.50	%
NOW and money market		7,236,368		4,056		.11			6,153,850		4,212		.14
Passbook		13,670,808		11,100		.16			16,325,132		18,747		.23
Brokered deposits		0		0		.00			332,999		7,433		4.46
Federal Home Loan Bank advances		20,000,000		305,618		3.06			20,000,000		300,591		3.01
Total interest-bearing liabilities		135,561,414		882,371		1.30			135,091,533		1,022,937		1.51
Noninterest-bearing liabilities		3,071,519							3,315,336
Total liabilities		138,632,933							138,406,869
Total equity		27,170,007							28,643,191
Total liabilities and equity	$	165,802,940						$	167,050,060
Net interest income			$	2,244,745						$	2,158,888
Interest rate spread						2.70	%						2.52	%
Net interest margin						2.87	%						2.74	%
Ratio of average interest-earning assets to average interest-bearing liabilities						115.33	%						116.80	%

(1) Investment securities available-for-sale are presented at fair market value.

(2) Investment securities held-to-maturity are presented at amortized cost.

(3) Loans placed on nonaccrual status are included in average assets.

Provision and Allowance for Loan Losses. We maintain an allowance at a level necessary to absorb management’s best estimate of probable loan losses in the portfolio. Management considers, among other factors, historical loss experience, type and amount of loans, borrower concentrations and current conditions of the economy. In addition, the allowance considers the level of loans which management monitors as a result of inconsistent repayment patterns. Management has identified commercial real estate loans as an area for expected increased lending. Such loans carry a higher degree of credit risk than our historical single-family lending.

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We had a negative provision for loan losses of $94,400 for the six months ended June 30, 2014, as compared to a negative provision for loan losses of $11,900 for the six months ended June 30, 2013. At June 30, 2014, the allowance for loan losses was $1.5 million, or 1.29%, of the total loan portfolio, as compared to $1.5 million, or 1.32%, of the total loan portfolio at December 31, 2013.

Analysis of Loan Loss Experience. The following table sets forth an analysis of the allowance for loan losses for the periods indicated.

	Six Months Ended June 30,
	2014			2013
Allowance for loan losses at beginning of period	$	1,528,000		$	1,395,000
Charge-offs:
Real estate loans:
Owner occupied one-to four-family		0			25,777
Non-owner occupied one-to four-family		0			66,079
Lines of credit		0			0
Commercial		0			0
Residential construction		0			0
Land		0			0
Commercial		0			0
Consumer		0			0
Total charge-offs		0			91,856
Recoveries		94,431			58,748
Net charge-offs		(94,431	)		33,108
Recovery of loan losses		(94,431	)		(11,892	)
Allowance at end of period	$	1,528,000		$	1,350,000
Allowance for loan losses to total loans at the end of the period		1.29	%		1.15	%
Net charge-offs to average loans outstanding during the period		.08	%		.03	%

Noninterest Income. Total noninterest income decreased by $21,200, or 11.4%, from $185,200 for the six months ended June 30, 2013 to $164,000 for the six months ended June 30, 2014. The decrease was primarily due to a decrease of $43,300, or 100.0%, in the gain on sale of investments and a decrease of $41,600, or 83.0%, in the gain on sale of loans, offset in part by $26,700 in proceeds received from an insurance company for two REO properties previously sold and a $41,700 gain on the sale of an REO property.

Noninterest Expenses. Total noninterest expenses increased by $320,200, or 14.9%, from $2,144,200 for the six months ended June 30, 2013 to $2,464,400 for the six months ended June 30, 2014. The increase primarily was attributable to an increase in salaries and employee benefits of $158,400, or 14.5%, an increase in directors fees of $24,800, or 51.9%, an increase in legal fees of $42,300, or 58.6%, and an increase in other general and administrative expenses of $62,400, or 21.0%. The increase in other general and administrative expenses was primarily due to a $100,000 write-down of the luxury residential property sold from REO during the quarter. There was also a decrease of $62,400, or 63.4%, in advertising expense.

Income Tax Expense. We recognized an income tax benefit of $23,200 during the six months ended June 30, 2014, as compared to an income tax expense of $43,800 for the six months ended June 30, 2013.

Liquidity Management. Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds available to meet short-term liquidity needs consist of deposit inflows, loan repayments and maturities and sales of investment securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.

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We regularly adjust our investments in liquid assets available to meet short-term liquidity needs based upon our assessment of (i) expected loan demand, (ii) expected deposit flows, (iii) yields available on interest-earning deposits and securities and (iv) the objectives of our asset/liability management policy. We do not have long-term debt or other financial obligations that would create long-term liquidity concerns.

Our most liquid assets are cash and cash equivalents. The level of these assets depends on our operating, financing, lending and investing activities during any given period. At June 30, 2014, cash and cash equivalents totaled $14.2 million. Securities classified as available-for-sale, amounting to $16.4 million at June 30, 2014, provides an additional source of liquidity. In addition, at June 30, 2014, we had the ability to borrow a total of approximately $49.7 million from the Federal Home Loan Bank of Atlanta and had $20.0 million in Federal Home Loan Bank advances outstanding. For additional liquidity, if needed, we have a $3.0 million line of credit with another bank, on which we had no outstanding balance at June 30, 2014.

Certificates of deposit due within one year of June 30, 2014 totaled $34.3 million, or 53.0%, of certificates of deposit. We believe the large percentage of certificates of deposit that mature within one year reflects customers’ hesitancy to invest their funds for long periods due to the recent low interest rate environment and local competitive pressures. If these maturing deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit and borrowings. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before June 30, 2015. We believe, however, based on past experience, that a significant portion of our certificates of deposit will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.

Capital Management.We are subject to various regulatory capital requirements administered by the Office of the Comptroller of the Currency, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At June 30, 2014, we exceeded all of our regulatory capital requirements and were considered “well capitalized” under regulatory guidelines.

Off-Balance Sheet Arrangements

In the normal course of operations, we engage in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments, unused lines of credit and letters of credit. For the six months ended June 30, 2014, we did not engage in any off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

This item is not applicable as the Company is a smaller reporting company.

Item 4. Controls and Procedures

As of the end of the period covered by this report, management of the Company carried out an evaluation, under the supervision and with the participation of the Company’s principal executive officer and principal financial officer, of the effectiveness of the Company’s disclosure controls and procedures as that term is defined in Rule 13a-5(e). Based on this evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective in ensuring that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934, as amended,

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is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms and is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

It should be noted that the design of the Company’s disclosure controls and procedures is based in part upon certain reasonable assumptions about the likelihood of future events, and there can be no reasonable assurance that any design of disclosure controls and procedures will succeed in achieving its stated goals under all potential future conditions, regardless of how remote, but the Company’s principal executive and financial officers have concluded that the Company’s disclosure controls and procedures are, in fact, effective at a reasonable assurance level.

There have been no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Securities and Exchange Commission Rule 13a-15 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II.OTHER INFORMATION

Item 1. Legal Proceedings

Periodically, there may be various claims and lawsuits against us, such as claims to enforce liens, condemnation proceedings on properties in which we hold security interests, claims involving the making and servicing of real property loans and other issues incident to our business. We are not a party to any pending legal proceedings that we believe would have a material adverse effect on our financial condition, results of operations or cash flows.

Item 1A. Risk Factors

For information regarding the Company’s risk factors, see the section entitled“Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013 filed with the Securities and Exchange Commission on March 28, 2014. As of the date of this filing, the risk factors of the Company have not changed materially from those reported in the Form 10-K.

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

There were no stock repurchases during the three months ended June 30, 2014. On July 25, 2013, Fraternity Community Bancorp, Inc. announced that it had approved a stock repurchase program to acquire up to 142,830 shares, or 10%, of the Company’s outstanding common stock. As of June 30, 2014, there remained 77,130 shares that may be repurchased under this authority.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

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Item 6. Exhibits

No.	Description
3.1	Articles of Incorporation of Fraternity Community Bancorp, Inc. (1)
3.2	Bylaws of Fraternity Community Bancorp, Inc. (1)
4.0	Form of Common Stock Certificate of Fraternity Community Bancorp, Inc. (1)
31.1	Rule 13a-14(a) Certification of Chief Executive Officer
31.2	Rule 13a-14(a) Certification of Chief Financial Officer
32.0	Section 1350 Certifications
101.0	The following materials from Fraternity Community Bancorp’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Statements of Financial Condition; (ii) the Consolidated Statements of Income; (iii) the Consolidated Statements of Comprehensive Income; (iv) the Consolidated Statements of Changes in Stockholders’ Equity; (v) the Consolidated Statements of Cash Flows; and (vi) the related Notes.

(1) Incorporated herein by reference to the Company’s Registration Statement on Form S-1, as amended (File No. 333-170215).

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SIGNATURES

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

	FRATERNITY COMMUNITY BANCORP, INC.
August 14, 2014
	By:	/s/ Thomas K. Sterner
		Thomas K. Sterner
		Chairman of the Board and Chief Executive Officer
		(Principal Executive Officer)
	By:	/s/ Michelle L. Miller
		Michelle L. Miller
		Chief Financial Officer
		(Principal Financial Officer)