Note 6 - Loans and Allowance for Credit Losses

6 Months Ended

Jun. 30, 2014

Receivables [Abstract]

Loans, Notes, Trade and Other Receivables Disclosure [Text Block]

Note 6. 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 June 30, 2014, December 31, 2013, and June 30, 2013 are summarized by type as follows:

	June 30, 2014						December 31, 2013						June 30, 2013
(dollars in thousands)	Amount			%			Amount			%			Amount			%
Commercial	$	726,611			22	%	$	694,350			24	%	$	636,623			24	%
Investment - commercial real estate		1,302,479			40	%		1,119,800			38	%		1,003,723			37	%
Owner occupied - commercial real estate		330,073			10	%		317,491			11	%		311,335			12	%
Real estate mortgage - residential		123,587			4	%		90,418			3	%		78,813			3	%
Construction - commercial and residential		642,264			20	%		574,167			19	%		515,511			19	%
Construction - C&I (owner occupied)		38,368			1	%		34,659			1	%		28,807			1	%
Home equity		108,931			3	%		110,242			4	%		108,565			4	%
Other consumer		7,116			-			4,031			-			7,981			-
Total loans		3,279,429			100	%		2,945,158			100	%		2,691,358			100	%
Less: Allowance for Credit Losses		(43,552	)					(40,921	)					(39,640	)
Net loans	$	3,235,877					$	2,904,237					$	2,651,718

Unamortized net deferred fees amounted to $14.5 million, $12.7 million, and $9.9 million at June 30, 2014, December 31, 2013, and June 30, 2013, respectively. 

As of June 30, 2014 and December 31, 2013, the Bank serviced $76.1 million and $67.6 million, respectively, of SBA loans 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 11% of the loan portfolio. At June 30, 2014, the combination of commercial real estate and real estate construction loans represent approximately 71% 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 60%. 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 working capital, equipment and account receivable financing. This loan category represents approximately 22% of the loan portfolio at June 30, 2014 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 1% of the commercial loan category of loans. In originating SBA loans, the Company assumes the risk of non-payment on the unguaranteed portion of the credit. The Company generally sells the guaranteed 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 3% of the loan portfolio at June 30, 2014 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 4% of the loan portfolio consists of residential mortgage loans. These are typically loans underwritten for shorter terms, generally less than 5 years.

Loans are secured primarily by duly recorded first deeds of trust. In some cases, the Bank may accept a recorded junior 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 has an employee or a 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 $680.6 million at June 30, 2014. A portion 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 54% of the outstanding ADC loan portfolio at June 30, 2014. 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 may bear current interest at a rate with a significant premium to normal market rates. Other loan transactions may 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 tables detail activity in the allowance for credit losses by portfolio segment 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.

				Income Producing		Owner Occupied			Real Estate			Construction
				Commercial		Commercial			Mortgage			Commercial and			Home			Other
(dollars in thousands)	Commercial			Real Estate		Real Estate			Residential			Residential			Equity			Consumer			Total
Three months ended June 30, 2014
Allowance for credit losses:
Balance at beginning of period	$	11,420		$	10,590	$	3,195		$	754		$	14,179		$	1,507		$	373		$	42,018
Loans charged-off		(1,378	)		-		-			(28	)		(225	)		-			(59	)		(1,690	)
Recoveries of loans previously charged-off		72			4		7			-			6			1			-			90
Net loans charged-off		(1,306	)		4		7			(28	)		(219	)		1			(59	)		(1,600	)
Provision for credit losses		1,299			151		71			232			1,527			(177	)		31			3,134
Ending balance	$	11,413		$	10,745	$	3,273		$	958		$	15,487		$	1,331		$	345		$	43,552
Six months ended June 30, 2014
Allowance for credit losses:
Balance at beginning of period	$	9,780		$	10,359	$	3,899		$	944		$	13,934		$	1,871		$	134		$	40,921
Loans charged-off		(1,651	)		-		(35	)		(90	)		(806	)		(149	)		(84	)		(2,815	)
Recoveries of loans previously charged-off		283			4		7			-			71			6			7			378
Net loans charged-off		(1,368	)		4		(28	)		(90	)		(735	)		(143	)		(77	)		(2,437	)
Provision for credit losses		3,001			382		(598	)		104			2,288			(397	)		288			5,068
Ending balance	$	11,413		$	10,745	$	3,273		$	958		$	15,487		$	1,331		$	345		$	43,552
For the Period Ended June 30, 2014
Allowance for credit losses:
Individually evaluated for impairment	$	3,501		$	732	$	1,102		$	-		$	1,605		$	208		$	-		$	7,148
Collectively evaluated for impairment		7,912			10,013		2,171			958			13,882			1,123			345			36,404
Ending balance	$	11,413		$	10,745	$	3,273		$	958		$	15,487		$	1,331		$	345		$	43,552

				Investment			Owner Occupied		Real Estate		Construction
				Commercial			Commercial		Mortgage		Commercial and			Home			Other
(dollars in thousands)	Commercial			Real Estate			Real Estate		Residential		Residential			Equity			Consumer			Total
Three months ended June 30, 2013
Allowance for credit losses:
Balance at beginning of period	$	11,075		$	9,007		$	2,804	$	877	$	12,945		$	1,752		$	351		$	38,811
Loans charged-off		(1,230	)		-			-		-		(991	)		-			(10	)		(2,231	)
Recoveries of loans previously charged-off		24			-			-		-		669			9			1			703
Net loans charged-off		(1,206	)		-			-		-		(322	)		9			(9	)		(1,528	)
Provision for credit losses		2,308			608			220		65		(875	)		4			27			2,357
Ending balance	$	12,177		$	9,615		$	3,024	$	942	$	11,748		$	1,765		$	369		$	39,640
Six months ended June 30, 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		(2,414	)		(109	)		-		-		(1,710	)		(29	)		(52	)		(4,314	)
Recoveries of loans previously charged-off		50			-			-		-		675			9			6			740
Net loans charged-off		(2,364	)		(109	)		-		-		(1,035	)		(20	)		(46	)		(3,574	)
Provision for credit losses		5,129			576			243		283		(608	)		55			44			5,722
Ending balance	$	12,177		$	9,615		$	3,024	$	942	$	11,748		$	1,765		$	369		$	39,640
For the Period Ended June 30, 2013
Allowance for credit losses:
Individually evaluated for impairment	$	3,416		$	1,040		$	1,025	$	-	$	1,396		$	317		$	10		$	7,204
Collectively evaluated for impairment		8,761			8,575			1,999		942		10,352			1,448			359			32,436
Ending balance	$	12,177		$	9,615		$	3,024	$	942	$	11,748		$	1,765		$	369		$	39,640

The Company’s recorded investments in loans as of June 30, 2014, December 31, 2013, and June 30, 2013 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:

			Investment		Owner occupied		Real Estate		Construction
			Commercial		Commercial		Mortgage		Commercial and		Home		Other
(dollars in thousands)	Commercial		Real Estate		Real Estate		Residential		Residential		Equity		Consumer		Total
June 30, 2014
Recorded investment in loans:
Individually evaluated for impairment	$	17,405	$	2,913	$	3,230	$	-	$	12,882	$	561	$	-	$	36,991
Collectively evaluated for impairment		709,206		1,299,566		326,843		123,587		667,750		108,370		7,116		3,242,438
Ending balance	$	726,611	$	1,302,479	$	330,073	$	123,587	$	680,632	$	108,931	$	7,116	$	3,279,429
December 31, 2013
Recorded investment in loans:
Individually evaluated for impairment	$	9,614	$	2,682	$	7,574	$	113	$	13,862	$	682	$	70	$	34,597
Collectively evaluated for impairment		684,736		1,117,118		309,917		90,305		594,964		109,560		3,961		2,910,561
Ending balance	$	694,350	$	1,119,800	$	317,491	$	90,418	$	608,826	$	110,242	$	4,031	$	2,945,158
June 30, 2013
Recorded investment in loans:
Individually evaluated for impairment	$	16,407	$	5,560	$	8,580	$	-	$	18,879	$	561	$	11	$	49,998
Collectively evaluated for impairment		620,216		998,163		302,755		78,813		525,439		108,004		7,970		2,641,360
Ending balance	$	636,623	$	1,003,723	$	311,335	$	78,813	$	544,318	$	108,565	$	7,981	$	2,691,358

At June 30, 2014, the nonperforming loans acquired from Fidelity & Trust Financial Corporation (“Fidelity”) have a carrying value of $1.8 million and an unpaid principal balance of $11.4 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. No adjustments have been made to the fair value amounts of impaired loans subsequent to the allowable period of adjustment from the date of acquisition.

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 the obligor’s performance has not met expectations. Balance sheet and/or income statement has shown deterioration to the point that the obligor could not sustain any further setbacks. Credit is expected to be strengthened through improved obligor 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 company 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 updated generally on a quarterly basis, but no less frequently than annually. The following table presents by class and by credit quality indicator, the recorded investment in the Company's loans and leases as of June 30, 2014, December 31, 2013, and June30, 2013.

			Watch and						Total
(dollars in thousands)	Pass		Special Mention		Substandard		Doubtful		Loans
June 30, 2014
Commercial	$	695,191	$	14,015	$	17,405	$	-	$	726,611
Investment - commercial real estate		1,286,730		12,836		2,913		-		1,302,479
Owner occupied - commercial real estate		313,523		13,320		3,230		-		330,073
Real estate mortgage – residential		122,681		906		-		-		123,587
Construction - commercial and residential		654,631		13,119		12,882		-		680,632
Home equity		106,468		1,902		561		-		108,931
Other consumer		7,116		-		-		-		7,116
Total	$	3,186,340	$	56,098	$	36,991	$	-	$	3,279,429
December 31, 2013
Commercial	$	655,409	$	29,327	$	9,614	$	-	$	694,350
Investment - commercial real estate		1,095,285		21,833		2,682		-		1,119,800
Owner occupied - commercial real estate		294,337		15,580		7,574		-		317,491
Real estate mortgage – residential		89,501		804		113		-		90,418
Construction - commercial and residential		575,321		19,643		13,862		-		608,826
Home equity		107,415		2,145		682		-		110,242
Other consumer		3,961		-		70		-		4,031
Total	$	2,821,229	$	89,332	$	34,597	$	-	$	2,945,158
June 30, 2013
Commercial	$	590,451	$	29,765	$	16,407	$	-	$	636,623
Investment - commercial real estate		966,886		31,277		5,560		-		1,003,723
Owner occupied - commercial real estate		284,507		18,248		8,580		-		311,335
Real estate mortgage – residential		77,969		844		-		-		78,813
Construction - commercial and residential		502,319		23,120		18,879		-		544,318
Home equity		105,854		2,150		561		-		108,565
Other consumer		7,970		-		11		-		7,981
Total	$	2,535,956	$	105,404	$	49,998	$	-	$	2,691,358

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 presents by class of loan, information related to nonaccrual loans as of the periods ended June 30, 2014, December 31, 2013 and June 30, 2013.

(dollars in thousands)	June 30, 2014		December 31, 2013		June 30, 2013
Commercial	$	8,671	$	6,779	$	6,806
Investment - commercial real estate		2,676		2,525		3,266
Owner occupied - commercial real estate		3,230		5,452		2,357
Real estate mortgage - residential		650		887		790
Construction - commercial and residential		6,877		8,366		9,866
Home equity		403		623		411
Other consumer		-		70		11
Total nonaccrual loans (1)(2)	$	22,507	$	24,702	$	23,507

(1) Excludes troubled debt restructurings (“TDRs”) that were performing under their restructured terms totaling $7.9 million at June 30, 2014 and December 31, 2013, and $14.8 million at June 30, 2013.

(2) Gross interest income of $850 thousand would have been recorded in 2014 if nonaccrual loans shown above had been current and in accordance with their original terms, while interest actually recorded on such loans was $479 thousand. 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 June 30, 2014 and December 31, 2013. 

	Loans		Loans		Loans						Total Recorded
	30-59 Days		60-89 Days		90 Days or		Total Past		Current		Investment in
(dollars in thousands)	Past Due		Past Due		More Past Due		Due Loans		Loans		Loans
June 30, 2014
Commercial	$	3,739	$	477	$	8,671	$	12,887	$	713,724	$	726,611
Investment - commercial real estate		5,080		1,596		2,676		9,352		1,293,127		1,302,479
Owner occupied - commercial real estate		318		282		3,230		3,830		326,243		330,073
Real estate mortgage – residential		681		-		650		1,331		122,256		123,587
Construction - commercial and residential		-		6,005		6,877		12,882		667,750		680,632
Home equity		284		739		403		1,426		107,505		108,931
Other consumer		4		17		-		21		7,095		7,116
Total	$	10,106	$	9,116	$	22,507	$	41,729	$	3,237,700	$	3,279,429
December 31, 2013
Commercial	$	1,698	$	11,146	$	6,779	$	19,623	$	674,727	$	694,350
Investment - commercial real estate		818		-		2,525		3,343		1,116,457		1,119,800
Owner occupied - commercial real estate		360		2,121		5,452		7,933		309,558		317,491
Real estate mortgage – residential		-		-		887		887		89,531		90,418
Construction - commercial and residential		-		-		8,366		8,366		600,460		608,826
Home equity		626		359		623		1,608		108,634		110,242
Other consumer		-		15		70		85		3,946		4,031
Total	$	3,502	$	13,641	$	24,702	$	41,845	$	2,903,313	$	2,945,158

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 June 30, 2014, December 31, 2013 and June 30, 2013.

	Unpaid		Recorded		Recorded						Average Recorded				Interest Income
	Contractual		Investment		Investment		Total				Investment				Recognized
	Principal		With No		With		Recorded		Related		Quarter		Year		Quarter		Year
(dollars in thousands)	Balance		Allowance		Allowance		Investment		Allowance		To Date		To Date		To Date		To Date
June 30, 2014
Commercial	$	9,771	$	348	$	8,323	$	8,671	$	3,501	$	8,873	$	11,032	$	3	$	3
Investment - commercial real estate		6,416		1,512		4,529		6,041		732		5,841		5,861		43		78
Owner occupied - commercial		3,230		99		3,131		3,230		1,102		5,277		5,335		-		-
Real estate mortgage – residential		650		650		-		650		-		711		769		-		-
Construction - commercial and residential		12,516		4,347		7,071		11,418		1,605		11,822		12,192		49		552
Home equity		403		125		278		403		208		501		541		-		-
Other consumer		-		-		-		-		-		30		43		-		-
Total	$	32,986	$	7,081	$	23,332	$	30,413	$	7,148	$	33,055	$	35,773	$	95	$	633
December 31, 2013
Commercial	$	6,779	$	2,327	$	4,452	$	6,779	$	1,323	$	8,193	$	8,877	$	53	$	131
Investment - commercial real estate		5,902		1,322		4,580		5,902		1,098		6,183		5,755		38		175
Owner occupied - commercial		5,452		111		5,341		5,452		1,853		5,939		6,285		52		108
Real estate mortgage – residential		887		774		113		887		27		891		792		2		2
Construction - commercial and residential		13,233		5,358		7,575		12,933		1,625		13,405		17,298		44		169
Home equity		623		-		623		623		526		567		508		2		4
Other consumer		70		-		70		70		68		58		34		1		2
Total	$	32,946	$	9,892	$	22,754	$	32,646	$	6,520	$	35,236	$	39,549	$	192	$	591
June 30, 2013
Commercial	$	10,760	$	4,230	$	6,530	$	10,760	$	3,416	$	9,377	$	9,334	$	43	$	85
Investment - commercial real estate		5,403		3,819		1,584		5,403		1,040		5,405		5,470		38		75
Owner occupied - commercial		6,438		5,533		905		6,438		1,025		6,444		6,515		43		99
Real estate mortgage – residential		790		790		-		790		-		741		727		-		-
Construction - commercial and residential		14,489		10,828		3,661		14,489		1,396		18,224		19,894		42		84
Home equity		411		38		373		411		317		446		468		-		-
Other consumer		11		1		10		11		10		6		18		-		-
Total	$	38,302	$	25,239	$	13,063	$	38,302	$	7,204	$	40,643	$	42,426	$	166	$	343

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 by class, information related to loans modified in a TDR held by the Company during the periods ended June 30, 2014 and December 31, 2013.

	Number of		TDRs Performing		TDRs Not Performing		Total
(dollars in thousands)	Contracts		to Modified Terms		to Modified Terms		TDRs
June 30, 2014
Investment - commercial real estate		2	$	3,365	$	-	$	3,365
Construction - commercial and residential		2		4,541		912		5,453
Total		4	$	7,906	$	912	$	8,818
December 31, 2013
Commercial		3	$	-	$	4,042	$	4,042
Investment - commercial real estate		3		3,377		217		3,594
Owner occupied - commercial real estate		1		-		4,081		4,081
Construction - commercial and residential		2		4,567		912		5,479
Total		9	$	7,944	$	9,252	$	17,196

During the first six months ended June 30, 2014, five nonperforming TDRs totaling $8.3 million were removed from TDR status after the loans migrated from nonperforming loans. Two nonperforming TDRs totaling $6.1 million were sold during the second quarter, an owner occupied loan totaling $4.1 million and a commercial loan totaling $2.0 million. One nonperforming TDR totaling approximately $2.0 million was reclassified to OREO after the Company took possession of the underlying collateral. The Company was paid off on another TDR totaling $217 thousand. Finally, one TDR totaling $95 thousand was charged-off. There were no TDR defaults during the first six months of 2014, as compared to the first six months ended 2013 which had one TDR default during the first quarter totaling approximately $495 thousand which was reclassified to nonperforming. A default is considered to have occurred once the TDR is past due 90 days or more, or it has been placed on nonaccrual. 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 and six months ended June 30, 2014 and 2013.