Note 4 - Loans and Allowance for Credit Losses

3 Months Ended

Mar. 31, 2013

Loans and Leases Receivable, Impaired, Description

4.  Loans and Allowance for Credit Losses

The Bank makes loans to customers primarily in the Washington, DC metropolitan area and surrounding communities. A substantial portion of the Bank’s loan portfolio consists of loans to businesses secured by real estate and other business assets.

Loans, net of unamortized net deferred fees, at March 31, 2013, December 31, 2012, and March 31, 2012 are summarized by type as follows:

	March 31, 2013						December 31, 2012						March 31, 2012
(dollars in thousands)	Amount			%			Amount			%			Amount			%
Commercial	$	579,618			23	%	$	545,070			22	%	$	492,824			23	%
Investment - commercial real estate (1)		910,829			36	%		914,638			37	%		829,984			38	%
Owner occupied - commercial real estate		303,561			12	%		297,857			12	%		275,723			13	%
Real estate mortgage - residential		69,256			3	%		61,871			3	%		43,057			2	%
Construction - commercial and residential (1)		538,071			21	%		533,722			21	%		417,346			19	%
Construction - C&I (owner occupied) (1)		34,002			1	%		28,808			1	%		27,412			1	%
Home equity		108,570			4	%		106,844			4	%		95,437			4	%
Other consumer		4,117			-			4,285			-			5,157			-
Total loans		2,548,024			100	%		2,493,095			100	%		2,186,940			100	%
Less: Allowance for Credit Losses		(38,811	)					(37,492	)					(31,875	)
Net loans	$	2,509,213					$	2,455,603					$	2,155,065

(1) Includes loans for land acquisition and development.

Unamortized net deferred fees amounted to $9.1 million and $8.8 million at March 31, 2013 and December 31, 2012, respectively.

As of March 31, 2013 and December 31, 2012, the Bank serviced $39.1 million and $41.2 million, respectively, of SBA loans participations which are not reflected as loan balances on the Consolidated Balance Sheets.

Loan Origination / Risk Management

The Company’s goal is to mitigate risks in the event of unforeseen threats to the loan portfolio as a result of economic downturn or other negative influences. Plans for mitigating inherent risks in managing loan assets include: carefully enforcing loan policies and procedures, evaluating each borrower’s business plan during the underwriting process and throughout the loan term, identifying and monitoring primary and alternative sources for loan repayment, and obtaining collateral to mitigate economic loss in the event of liquidation. Specific loan reserves are established based upon credit and/or collateral risks on an individual loan basis. A risk rating system is employed to proactively estimate loss exposure and provide a measuring system for setting general and specific reserve allocations.

The composition of the Company’s loan portfolio is heavily weighted toward commercial real estate, both owner occupied and investment real estate. The combination of owner occupied commercial real estate and owner occupied commercial real estate construction represent 13% of the loan portfolio. At March 31, 2013, the combination of commercial real estate and real estate construction loans represent approximately 70% of the loan portfolio. When owner occupied commercial real estate and owner occupied commercial construction loans are excluded, the percentage of commercial real estate and construction loans to total loans decreases to 57%. These loans are underwritten to mitigate lending risks typical of this type of loan such as declines in real estate values, changes in borrower cash flow and general economic conditions. The Bank typically requires a maximum loan to value of 80% and minimum cash flow debt service coverage of 1.15 to 1.00. Personal guarantees are generally required, but may be limited.  In making real estate commercial mortgage loans, the Bank generally requires that interest rates adjust not less frequently than five years.

The Company is also an active traditional commercial lender providing loans for a variety of purposes, including cash flow, equipment and account receivable financing. This loan category represents approximately 23% of the loan portfolio at March 31, 2013 and was generally variable or adjustable rate. Commercial loans meet reasonable underwriting standards, including appropriate collateral and cash flow necessary to support debt service. Personal guarantees are generally required, but may be limited. SBA loans represent 2% of the commercial loan category of loans. In originating SBA loans, the Company assumes the risk of non-payment on the uninsured portion of the credit. The Company generally sells the insured portion of the loan generating noninterest income from the gains on sale, as well as servicing income on the portion participated. SBA loans are subject to the same cash flow analyses as other commercial loans. SBA loans are subject to a maximum loan size established by the SBA.

Approximately 4% of the loan portfolio at March 31, 2013 consists of home equity loans and lines of credit and other consumer loans. These credits, while making up a smaller portion of the loan portfolio, demand the same emphasis on underwriting and credit evaluation as other types of loans advanced by the Bank.

The remaining 3% of the loan portfolio consists of longer-term residential mortgage loans. These are typically loans underwritten to the same underwriting standards as residential loans held for sale but for shorter terms, generally less than 10 years.

Loans are secured primarily by duly recorded first deeds of trust. In some cases, the Bank may accept a recorded second trust position.  In general, borrowers will have a proven ability to build, lease, manage and/or sell a commercial or residential project and demonstrate satisfactory financial condition. Additionally, an equity contribution toward the project is customarily required.

Construction loans require that the financial condition and experience of the general contractor and major subcontractors be satisfactory to the Bank.  Guaranteed, fixed price contracts are required whenever appropriate, along with payment and performance bonds or completion bonds for larger scale projects.

Loans intended for residential land acquisition, lot development and construction are made on the premise that the land: 1) is or will be developed for building sites for residential structures, and; 2) will ultimately be utilized for construction or improvement of residential zoned real properties, including the creation of housing.  Residential development and construction loans will finance projects such as single family subdivisions, planned unit developments, townhouses, and condominiums. Residential land acquisition, development and construction loans generally are underwritten with a maximum term of 36 months, including extensions approved at origination.

Commercial land acquisition and construction loans are secured by real property where loan funds will be used to acquire land and to construct or improve appropriately zoned real property for the creation of income producing or owner user commercial properties.  Borrowers are generally required to put equity into each project at levels determined by the appropriate Loan Committee. Commercial land acquisition and construction loans generally are underwritten with a maximum term of 24 months.

Substantially all construction draw requests must be presented in writing on American Institute of Architects documents and certified either by the contractor, the borrower and/or the borrower’s architect.  Each draw request shall also include the borrower’s soft cost breakdown certified by the borrower or its Chief Financial Officer. Prior to an advance, the Bank or its contractor inspects the project to determine that the work has been completed, to justify the draw requisition.

Commercial permanent loans are secured by improved real property which is generating income in the normal course of operation.  Debt service coverage, assuming stabilized occupancy, must be satisfactory to support a permanent loan.  The debt service coverage ratio is ordinarily at least 1.15 to 1.00. As part of the underwriting process, debt service coverage ratios are stress tested assuming a 200 basis point increase in interest rates from their current levels.

Commercial permanent loans generally are underwritten with a term not greater than 10 years or the remaining useful life of the property, whichever is lower. The preferred term is between 5 to 7 years, with amortization to a maximum of 25 years.

The Company’s loan portfolio includes loans made for real estate Acquisition, Development and Construction (“ADC”) purposes, including both investment and owner occupied projects. ADC loans amounted to $572.1 million at March 31, 2013. The majority of the ADC portfolio, both speculative and non-speculative, includes loan funded interest reserves at origination. ADC loans containing loan funded interest reserves represent approximately 33% of the outstanding ADC loan portfolio at March 31, 2013. The decision to establish a loan-funded interest reserve is made upon origination of the ADC loan and is based upon a number of factors considered during underwriting of the credit including: (i) the feasibility of the project; (ii) the experience of the sponsor; (iii) the creditworthiness of the borrower and guarantors; (iv) borrower equity contribution; and (v) the level of collateral protection. When appropriate, an interest reserve provides an effective means of addressing the cash flow characteristics of a properly underwritten ADC loan. The Company does not significantly utilize interest reserves in other loan products. The Company recognizes that one of the risks inherent in the use of interest reserves is the potential masking of underlying problems with the project and/or the borrower’s ability to repay the loan. In order to mitigate this inherent risk, the Company employs a series of reporting and monitoring mechanisms on all ADC loans, whether or not an interest reserve is provided, including: (i) construction and development timelines which are monitored on an ongoing basis which track the progress of a given project to the timeline projected at origination; (ii) a construction loan administration department independent of the lending function; (iii) third party independent construction loan inspection reports; (iv) monthly interest reserve monitoring reports detailing the balance of the interest reserves approved at origination and the days of interest carry represented by the reserve balances as compared to the then current anticipated time to completion and/or sale of speculative projects; and (v) quarterly commercial real estate construction meetings among senior Company management, which includes monitoring of current and projected real estate market conditions. If a project has not performed as expected, it is not the customary practice of the Company to increase loan funded interest reserves.

From time to time the Company may make loans for its own portfolio or through its higher risk loan affiliate, ECV. Such loans, which are made to finance projects (which may also be financed at the Bank level), may have higher risk characteristics than loans made by the Bank, such as lower priority interests and/or higher loan to value ratios. The Company seeks an overall financial return on these transactions commensurate with the risks and structure of each individual loan. Certain transactions bear current interest at a rate with a significant premium to normal market rates. Other loan transactions carry a standard rate of current interest, but also earn additional interest based on a percentage of the profits of the underlying project or a fixed accrued rate of interest.

The following table details activity in the allowance for credit losses by portfolio segment for the three months ended March 31, 2013 and 2012.  Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

(dollars in thousands)	Commercial			Investment Commercial Real Estate			Owner occupied Commercial Real Estate		Real Estate Mortgage Residential			Construction Commercial and Residential			Home Equity			Other Consumer			Total
March 31, 2013
Allowance for credit losses:
Balance at beginning of period	$	9,412		$	9,148		$	2,781	$	659		$	13,391		$	1,730		$	371		$	37,492
Loans charged-off		(1,184	)		(109	)		-		-			(719	)		(29	)		(42	)		(2,083	)
Recoveries of loans previously charged-off		26			-			-		-			6			-			5			37
Net loans charged-off		(1,158	)		(109	)		-		-			(713	)		(29	)		(37	)		(2,046	)
Provision for credit losses		2,821			(32	)		23		218			267			51			17			3,365
Ending balance	$	11,075		$	9,007		$	2,804	$	877		$	12,945		$	1,752		$	351		$	38,811
For the Period Ended March 31, 2013
Allowance for credit losses:
Individually evaluated for impairment	$	2,360		$	818		$	704	$	-		$	3,358		$	218		$	-		$	7,458
Collectively evaluated for impairment		8,715			8,189			2,100		877			9,587			1,534			351			31,353
Ending balance	$	11,075		$	9,007		$	2,804	$	877		$	12,945		$	1,752		$	351		$	38,811
March 31, 2012
Allowance for credit losses:
Balance at beginning of period	$	9,609		$	7,304		$	1,898	$	399		$	8,546		$	1,528		$	369		$	29,653
Loans charged-off		(773	)		(291	)		-		(300	)		(240	)		(244	)		(5	)		(1,853	)
Recoveries of loans previously charged-off		7			2			-		-			94			1			1			105
Net loans charged-off		(766	)		(289	)		-		(300	)		(146	)		(243	)		(4	)		(1,748	)
Provision for credit losses		(306	)		1,130			248		(99	)		3,260			44			(307	)		3,970
Ending balance	$	8,537		$	8,145		$	2,146	$	-		$	11,660		$	1,329		$	58		$	31,875
For the Period Ended March 31, 2012
Allowance for credit losses:
Individually evaluated for impairment	$	1,874		$	829		$	201	$	-		$	2,899		$	138		$	4		$	5,945
Collectively evaluated for impairment		6,663			7,316			1,945		-			8,761			1,191			54			25,930
Ending balance	$	8,537		$	8,145		$	2,146	$	-		$	11,660		$	1,329		$	58		$	31,875

The Company’s recorded investments in loans as of March 31, 2013, December 31, 2012 and March 31, 2012 related to each balance in the allowance for loan losses by portfolio segment and disaggregated on the basis of the Company’s impairment methodology was as follows:

(dollars in thousands)	Commercial		Investment Commercial Real Estate		Owner occupied Commercial Real Estate		Real Estate Mortgage Residential		Construction Commercial and Residential		Home Equity		Other Consumer		Total
March 31, 2013
Recorded investment in loans:
Individually evaluated for impairment	$	14,395	$	5,564	$	6,449	$	-	$	30,972	$	538	$	-	$	57,918
Collectively evaluated for impairment		565,223		905,265		297,112		69,256		541,101		108,032		4,117		2,490,106
Ending balance	$	579,618	$	910,829	$	303,561	$	69,256	$	572,073	$	108,570	$	4,117	$	2,548,024
December 31, 2012
Recorded investment in loans:
Individually evaluated for impairment	$	15,177	$	11,401	$	8,723	$	-	$	36,502	$	510	$	43	$	72,356
Collectively evaluated for impairment		529,893		903,237		289,134		61,871		526,028		106,334		4,242		2,420,739
Ending balance	$	545,070	$	914,638	$	297,857	$	61,871	$	562,530	$	106,844	$	4,285	$	2,493,095
March 31, 2012
Recorded investment in loans:
Individually evaluated for impairment	$	9,395	$	9,880	$	2,895	$	-	$	24,358	$	512	$	8	$	47,048
Collectively evaluated for impairment		483,429		820,104		272,828		43,057		420,400		94,925		5,149		2,139,892
Ending balance	$	492,824	$	829,984	$	275,723	$	43,057	$	444,758	$	95,437	$	5,157	$	2,186,940

At March 31, 2013, the nonperforming loans acquired in 2008 from Fidelity & Trust Financial Corporation (“Fidelity”) have a carrying value of $2.0 million and an unpaid principal balance of $11.7 million and were evaluated separately in accordance with ASC Topic 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality.”  The various impaired loans were recorded at estimated fair value with any excess being charged-off or treated as a non-accretable discount. Subsequent downward adjustments to the valuation of impaired loans acquired will result in additional loan loss provisions and related allowance for credit losses. Subsequent upward adjustments to the valuation of impaired loans acquired will result in accretable discount.

Credit Quality Indicators

The Company uses several credit quality indicators to manage credit risk in an ongoing manner. The Company's primary credit quality indicators are to use an internal credit risk rating system that categorizes loans into pass, watch, special mention, or classified categories. Credit risk ratings are applied individually to those classes of loans that have significant or unique credit characteristics that benefit from a case-by-case evaluation. These are typically loans to businesses or individuals in the classes which comprise the commercial portfolio segment. Groups of loans that are underwritten and structured using standardized criteria and characteristics, such as statistical models (e.g., credit scoring or payment performance), are typically risk rated and monitored collectively. These are typically loans to individuals in the classes which comprise the consumer portfolio segment.

The following are the definitions of the Company's credit quality indicators:

Pass: Loans in all classes that comprise the commercial and consumer portfolio segments that are not adversely rated, are contractually current as to principal and interest, and are otherwise in compliance with the contractual terms of the loan agreement. Management believes that there is a low likelihood of loss related to those loans that are considered pass.

Watch: Loan paying as agreed with generally acceptable asset quality; however Borrower’s performance has not met expectations.  Balance sheet and/or income statement has shown deterioration to the point that the company could not sustain any further setbacks.  Credit is expected to be strengthened through improved company performance and/or additional collateral within a reasonable period of time.

Special Mention:	Loans in the classes that comprise the commercial portfolio segment that have potential weaknesses that deserve management's close attention. If not addressed, these potential weaknesses may result in deterioration of the repayment prospects for the loan. The special mention credit quality indicator is not used for classes of loans that comprise the consumer portfolio segment. Management believes that there is a moderate likelihood of some loss related to those loans that are considered special mention.
Classified:	Classified (a) Substandard - Loans inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the bank will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard loans, does not have to exist in individual loans classified substandard.
	Classified (b) Doubtful - Loans that have all the weaknesses inherent in a loan classified substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors, which may work to the advantage and strengthening of the assets, its classification as an estimated loss is deferred until its more exact status may be determined.

The Company's credit quality indicators are periodically updated on a case-by-case basis. The following table presents by class and by credit quality indicator, the recorded investment in the Company's loans and leases as of March 31, 2013, December 31, 2012 and March 31, 2012.

(dollars in thousands)	Pass		Watch and Special Mention		Substandard		Doubtful		Total Loans
March 31, 2013
Commercial	$	532,391	$	32,832	$	14,395	$	-	$	579,618
Investment - commercial real estate		886,172		19,093		5,564		-		910,829
Owner occupied - commercial real estate		281,632		15,480		6,449		-		303,561
Real estate mortgage – residential		68,521		735		-		-		69,256
Construction - commercial and residential		523,535		17,566		30,972		-		572,073
Home equity		105,857		2,175		538		-		108,570
Other consumer		4,106		11		-		-		4,117
Total	$	2,402,214	$	87,892	$	57,918	$	-	$	2,548,024
December 31, 2012
Commercial	$	495,072	$	34,821	$	15,170	$	7	$	545,070
Investment - commercial real estate		892,569		10,668		11,401		-		914,638
Owner occupied - commercial real estate		275,864		13,270		8,723		-		297,857
Real estate mortgage – residential		61,134		737		-		-		61,871
Construction - commercial and residential		508,166		17,862		36,502		-		562,530
Home equity		104,302		2,032		510		-		106,844
Other consumer		4,230		12		43		-		4,285
Total	$	2,341,337	$	79,402	$	72,349	$	7	$	2,493,095
March 31, 2012
Commercial	$	454,373	$	29,019	$	9,395	$	37	$	492,824
Investment - commercial real estate		815,951		4,902		9,131		-		829,984
Owner occupied - commercial real estate		254,405		18,423		2,895		-		275,723
Real estate mortgage – residential		42,308		-		749		-		43,057
Construction - commercial and residential		387,770		32,631		24,357		-		444,758
Home equity		94,925		-		512		-		95,437
Other consumer		5,149		-		8		-		5,157
Total	$	2,054,881	$	84,975	$	47,047	$	37	$	2,186,940

Nonaccrual and Past Due Loans

Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on nonaccrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed on nonaccrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

The following table presents by class of loan, information related to nonaccrual loans as of the periods ended March 31, 2013, December 31, 2012 and March 31, 2012.

(dollars in thousands)	March 31, 2013		December 31, 2012		March 31, 2012
Commercial	$	4,039	$	4,799	$	3,565
Investment - commercial real estate		3,269		3,458		7,013
Owner occupied - commercial real estate		2,368		2,578		277
Real estate mortgage - residential		691		699		731
Construction - commercial and residential		17,318		18,594		24,591
Home equity		481		513		530
Other consumer		-		43		8
Total nonaccrual loans (1)(2)	$	28,166	$	30,684	$	36,715

(1) Excludes performing troubled debt restructurings (“TDRs”) totaling $14.8 million at March 31, 2013, $15.3 million at December 31, 2012 and $11.4 million at March 31, 2012.

(2) Gross interest income that would have been recorded in 2013 if nonaccrual loans shown above had been current and in accordance with their original terms was $507 thousand, while interest actually recorded on such loans was zero for the three months ended March 31, 2013. See Note 1 to the Consolidated Financial Statements for a description of the Company’s policy for placing loans on nonaccrual status.

The following table presents by class, an aging analysis and the recorded investments in loans past due as of March 31, 2013.

(dollars in thousands)	Loans 30-59 Days Past Due		Loans 60-89 Days Past Due		Loans 90 Days or More Past Due		Total Past Due Loans		Current Loans		Total Recorded Investment in Loans
March 31, 2013
Commercial	$	3,826	$	3,358	$	4,039	$	11,223	$	568,395	$	579,618
Investment - commercial real estate		2,635		820		3,269		6,724		904,105		910,829
Owner occupied - commercial real estate		367		4,081		2,368		6,816		296,745		303,561
Real estate mortgage – residential		-		107		691		798		68,458		69,256
Construction - commercial and residential		10,642		-		17,318		27,960		544,113		572,073
Home equity		1,344		795		481		2,620		105,950		108,570
Other consumer		-		15		-		15		4,102		4,117
Total	$	18,814	$	9,176	$	28,166	$	56,156	$	2,491,868	$	2,548,024

Impaired Loans

Loans are considered impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. Impairment is evaluated in total for smaller-balance loans of a similar nature and on an individual loan basis for other loans. If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans, or portions thereof, are charged off when deemed uncollectible.

The following table presents by class, information related to impaired loans for the periods ended March 31, 2013, December 31, 2012 and March 31, 2012.

(dollars in thousands)	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized
March 31, 2013
Commercial	$	8,493	$	4,821	$	3,172	$	7,993	$	2,360	$	8,621	$	42
Investment - commercial real estate		5,407		3,821		1,586		5,407		818		5,504		37
Owner occupied - commercial		6,449		5,538		911		6,449		704		6,554		56
Real estate mortgage – residential		691		691		-		691		-		695		-
Construction - commercial and residential		21,959		13,611		8,348		21,959		3,358		22,597		42
Home equity		481		132		349		481		218		497		-
Other consumer		-		-		-		-		-		22		-
Total	$	43,480	$	28,614	$	14,366	$	42,980	$	7,458	$	44,490	$	177
December 31, 2012
Commercial	$	9,461	$	5,767	$	3,481	$	9,248	$	2,158	$	7,772	$	245
Investment - commercial real estate		5,600		3,830		1,770		5,600		1,201		6,609		152
Owner occupied - commercial		6,659		5,602		1,057		6,659		753		2,746		252
Real estate mortgage – residential		699		699		-		699		-		714		-
Construction - commercial and residential		25,347		14,727		8,508		23,235		3,718		26,430		202
Home equity		513		134		379		513		243		534		9
Other consumer		43		1		42		43		41		17		2
Total	$	48,322	$	30,760	$	15,237	$	45,997	$	8,114	$	44,822	$	862
March 31, 2012
Commercial	$	8,382	$	5,226	$	1,891	$	7,117	$	1,265	$	9,539	$	43
Investment - commercial real estate		9,155		6,277		2,157		8,434		821		10,330		39
Owner occupied - commercial		277		-		207		207		70		280		-
Real estate mortgage – residential		731		731		-		731		-		886		-
Construction - commercial and residential		29,013		20,299		5,914		26,213		2,800		26,372		42
Home equity		530		307		85		392		138		577		-
Other consumer		8		-		4		4		4		8		-
Total	$	48,096	$	32,840	$	10,258	$	43,098	$	5,098	$	47,992	$	124

Modifications

A modification of a loan constitutes a troubled debt restructuring (“TDR”) when a borrower is experiencing financial difficulty and the modification constitutes a concession. The Company offers various types of concessions when modifying a loan. Commercial and industrial loans modified in a TDR often involve temporary interest-only payments, term extensions, and converting revolving credit lines to term loans. Additional collateral, a co-borrower, or a guarantor is often requested. Commercial mortgage and construction loans modified in a TDR often involve reducing the interest rate for the remaining term of the loan, extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk, or substituting or adding a new borrower or guarantor. Construction loans modified in a TDR may also involve extending the interest-only payment period.

Loans modified in a TDR for the Company may have the financial effect of increasing the specific allowance associated with the loan. An allowance for impaired consumer and commercial loans that have been modified in a TDR is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the estimated fair value of the collateral, less any selling costs, if the loan is collateral dependent. Management exercises significant judgment in developing these estimates.

The following table presents the TDR loan modifications by portfolio segment outstanding as of March 31, 2013 and December 31, 2012:

(dollars in thousands)	Number of Contracts		TDRs Performing to Modified Terms		TDRs Not Performing to Modified Terms		Total TDRs
March 31, 2013
Commercial		3	$	3,954	$	495	$	4,449
Investment - commercial real estate		2		2,138		217		2,355
Owner occupied - commercial real estate		1		4,081		-		4,081
Construction - commercial and residential		2		4,641		961		5,602
Total		8	$	14,814	$	1,673	$	16,487
December 31, 2012
Commercial		3	$	4,449	$	-	$	4,449
Investment - commercial real estate		2		2,142		217		2,359
Owner occupied - commercial real estate		1		4,081		-		4,081
Construction - commercial and residential		2		4,641		966		5,607
Total		8	$	15,313	$	1,183	$	16,496

During the first three months of 2013, one performing TDR totaling approximately $500 thousand experienced default on its modified terms.  A default is considered to have occurred once the TDR is past due 90 days or more, or it has been placed on nonaccrual. This one previously performing TDR was reclassified to nonperforming in the first quarter of 2013. Commercial and consumer loans modified in a TDR are closely monitored for delinquency as an early indicator of possible future default. If loans modified in a TDR subsequently default, the Company evaluates the loan for possible further impairment. The allowance may be increased, adjustments may be made in the allocation of the allowance, or partial charge-offs may be taken to further write-down the carrying value of the loan. There were no loans modified in a TDR during the three months ended March 31, 2013 and March 31, 2012.