Loans Receivable and Allowance for Loan Losses

Loans receivable that management has the intent and ability to hold for the foreseeable future, or until maturity or payoff, are stated at their outstanding unpaid principal balances, net of an allowance for loan losses (allowance or ALL) and any deferred fees and costs. Interest income is accrued on the unpaid principal balance. Loan origination fees and costs are deferred and recognized as an adjustment of the yield (interest income) of the related loans. The Company is generally amortizing these amounts over the contractual life of the loan or to the first review date if the loan is on demand. Certain qualifying loans of the Bank totaling $510.9 million at December 31, 2013, collateralize a letter of credit and a line of credit commitment the Bank has with the FHLB.

A summary of the Bank's loans receivable at December 31, 2013 and 2012 is as follows:



	December 31,
(in thousands)	2013		2012
Commercial and industrial	$	447,144	$	376,988
Commercial tax-exempt	81,734		92,202
Owner occupied real estate	302,417		268,372
Commercial construction and land development	133,176		100,399
Commercial real estate	473,188		394,404
Residential	97,766		83,899
Consumer	215,447		212,533
	1,750,872		1,528,797
Less: allowance for loan losses	23,110		25,282
Net loans receivable	$	1,727,762	$	1,503,515

Certain directors and executive officers of the Company, including their associates and companies, have loans with the Bank. Such loans were made in the ordinary course of business at the Bank's normal credit terms including interest rates and collateralization, as those prevailing at the time for comparable loans with persons not related to the Bank and do not represent more than a normal risk of collection. Total loans to these persons and companies amounted to approximately $6.9 million and $14.2 million at December 31, 2013 and 2012, respectively. During 2013, it was determined that $5.6 million of these loans to certain companies were no longer considered related as a result of changes in ownership of the entity. New advances of $3.5 million were made and repayments totaled $5.2 million during 2013.

The following table summarizes nonaccrual loans by loan type at December 31, 2013 and 2012:



	December 31,
(in thousands)	2013		2012
Nonaccrual loans:
Commercial and industrial	$	10,217	$	11,289
Commercial tax-exempt	—		—
Owner occupied real estate	4,838		3,119
Commercial construction and land development	8,587		6,300
Commercial real estate	6,705		5,659
Residential	7,039		3,203
Consumer	2,577		2,846
Total nonaccrual loans	$	39,963	$	32,416

Generally, the Bank's policy is to move a loan to nonaccrual status when it becomes 90 days past due or when the Company does not believe it will collect all of the contractual principal and interest payments. In addition, when a loan is placed on nonaccrual status, unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is charged against the ALL. Interest received on nonaccrual loans generally is either applied against principal or reported as interest income, according to management's judgment as to the collectibility of principal. If a loan is substandard and accruing, accrued interest is recognized as income. Once a loan is on nonaccrual status, it is not returned to accrual status unless the loan has been current for at least six consecutive months and the borrower and/or any guarantors demonstrate the ability to repay the loan in accordance with its contractual terms. Under certain circumstances such as bankruptcy, if a loan is under collateralized, or if the borrower and/or guarantors do not show evidence of the ability to pay, the loan may be placed on nonaccrual status even though it is not past due by 90 days or more. Therefore, the total nonaccrual loan balance of $40.0 million exceeds the balance of total loans that are 90 days past due of $21.7 million at December 31, 2013, as presented in the aging analysis tables that follow.

No additional funds were committed on nonaccrual loans including restructured loans that were nonaccruing. Typically, commitments are canceled and no additional advances are made when a loan is placed on nonaccrual.

The following table is an age analysis of past due loan receivables as of December 31, 2013 and 2012:



			Past Due Loans										Recorded Investment in Loans 90 Days and Greater and Still Accruing
(in thousands)	Current		30-59 Days Past Due		60-89 Days Past Due		90 Days Past Due and Greater		Total Past Due		Total Loan Receivables
December 31, 2013
Commercial and industrial	$	438,522	$	1,830	$	1,041	$	5,751	$	8,622	$	447,144	$	17
Commercial tax-exempt	81,734		—		—		—		—		81,734		—
Owner occupied real estate	295,278		2,618		1,674		2,847		7,139		302,417		—
Commercial construction and land development	124,240		3,355		342		5,239		8,936		133,176		—
Commercial real estate	465,765		2,142		444		4,837		7,423		473,188		235
Residential	85,352		4,194		6,304		1,916		12,414		97,766		117
Consumer	210,906		2,095		1,335		1,111		4,541		215,447		—
Total	$	1,701,797	$	16,234	$	11,140	$	21,701	$	49,075	$	1,750,872	$	369



			Past Due Loans										Recorded Investment in Loans 90 Days and Greater and Still Accruing
(in thousands)	Current		30-59 Days Past Due		60-89 Days Past Due		90 Days Past Due and Greater		Total Past Due		Total Loan Receivables
December 31, 2012
Commercial and industrial	$	368,769	$	1,096	$	3,256	$	3,867	$	8,219	$	376,988	$	30
Commercial tax-exempt	92,202		—		—		—		—		92,202		—
Owner occupied real estate	265,817		610		353		1,592		2,555		268,372		—
Commercial construction and land development	89,250		4,251		4,318		2,580		11,149		100,399		188
Commercial real estate	386,821		3,846		78		3,659		7,583		394,404		—
Residential	76,587		4,303		1,252		1,757		7,312		83,899		—
Consumer	208,335		2,277		410		1,511		4,198		212,533		2
Total	$	1,487,781	$	16,383	$	9,667	$	14,966	$	41,016	$	1,528,797	$	220

A summary of the ALL and balance of loans receivable by loan class and by impairment method as of December 31, 2013 and 2012 is detailed in the tables that follow.



(in thousands)	Comm. and industrial		Comm. tax-exempt		Owner occupied real estate		Comm. constr. and land devel-opment		Comm. real estate		Resi-dential		Con-sumer		Unallo-cated		Total

December 31, 2013
Allowance for loan losses:
Individually evaluated for impairment	$	1,559	$	—	$	1,366	$	1,660	$	—	$	524	$	476	$	—	$	5,585
Collectively evaluated for impairment	6,619		72		814		3,899		4,161		436		827		697		17,525
Total ALL	$	8,178	$	72	$	2,180	$	5,559	$	4,161	$	960	$	1,303	$	697	$	23,110
Loans receivable:
Loans evaluated individually	$	13,055	$	—	$	5,822	$	11,669	$	10,953	$	7,979	$	3,121	$	—	$	52,599
Loans evaluated collectively	434,089		81,734		296,595		121,507		462,235		89,787		212,326		—		1,698,273
Total loans receivable	$	447,144	$	81,734	$	302,417	$	133,176	$	473,188	$	97,766	$	215,447	$	—	$	1,750,872



(in thousands)	Comm. and industrial		Comm. tax-exempt		Owner occupied real estate		Comm. constr. and land devel-opment		Comm. real estate		Resi-dential		Con-sumer		Unallo-cated		Total
December 31, 2012
Allowance for loan losses:
Individually evaluated for impairment	$	2,399	$	—	$	1,451	$	2,470	$	800	$	—	$	—	$	—	$	7,120
Collectively evaluated for impairment	7,560		83		678		4,752		3,183		324		793		789		18,162
Total ALL	$	9,959	$	83	$	2,129	$	7,222	$	3,983	$	324	$	793	$	789	$	25,282
Loans receivable:
Loans evaluated individually	$	13,082	$	—	$	3,380	$	15,549	$	17,136	$	4,163	$	3,331	$	—	$	56,641
Loans evaluated collectively	363,906		92,202		264,992		84,850		377,268		79,736		209,202		—		1,472,156
Total loans receivable	$	376,988	$	92,202	$	268,372	$	100,399	$	394,404	$	83,899	$	212,533	$	—	$	1,528,797

The Bank may create a specific allowance for all of or a part of a particular loan in lieu of a charge-off or charge-down as a result of management's evaluation of impaired loans. In these instances, the Bank has determined that a loss is not imminent based upon available information surrounding the credit at the time of the analysis including, but not limited to, unresolved legal matters; however, management believes an allowance is appropriate to acknowledge the probable risk of loss.

Typically, commercial construction and land development and commercial real estate loans present a greater risk of nonpayment by a borrower than other types of loans. The market value of and cash flow from real estate, particularly real estate held for investment, can fluctuate significantly in a relatively short period of time. Commercial and industrial, tax exempt and owner occupied real estate loans generally carry a lower risk factor comparatively within the commercial portfolio because the repayment of these loans relies primarily on the cash flow from a business which is more stable and predictable.

Consumer loan collections are dependent on the borrower's continued financial stability and thus are more likely to be affected by adverse personal circumstances. Consumer and residential loans are also impacted by the market value of real estate. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount that can be recovered on these loans. The risk of nonpayment is affected by changes in economic conditions, the credit risks of a particular borrower, the term of the loan and, in the case of a collateralized loan, uncertainties as to the value of the collateral and other factors.

Management bases its quantitative analysis of probable future loan losses (when determining the ALL) on those loans collectively reviewed for impairment on a two-year period of actual historical losses. Management may increase or decrease the historical loss period at some point in the future based on the state of the local, regional and national economies and other factors.

The qualitative factors such as changes in levels and trends of charge-offs and delinquencies; material changes in the mix, volume or duration of the loan portfolio; changes in lending policies and procedures including underwriting standards; changes in the experience, ability and depth of lending management and other relevant staff; the existence and effect of any concentrations of credit; changes in the overall values of collateral; changes in the quality of the loan review program and changes in national and local economic trends and conditions among other things, are factors which have not been identified by the quantitative processes. The determination of qualitative factors inherently involves a higher degree of subjectivity and considers risk factors that may not have yet manifested themselves in historical loss experience.

The following tables summarize the transactions in the ALL for the years ended December 31, 2013, 2012 and 2011:



(in thousands)	Comm. and industrial			Comm. tax-exempt			Owner occupied real estate			Comm. construction and land development			Comm. real estate			Resi-dential			Consumer			Unallo-cated			Total
2013
Balance at January 1	$	9,959		$	83		$	2,129		$	7,222		$	3,983		$	324		$	793		$	789		$	25,282
Provision charged to operating expenses	524			(11		)	343			691			2,951			958			1,511			(92		)	6,875
Recoveries of loans previously charged-off	1,122			—			3			490			—			10			76			—			1,701
Loans charged-off	(3,427		)	—			(295		)	(2,844		)	(2,773		)	(332		)	(1,077		)	—			(10,748		)
Balance at December 31	$	8,178		$	72		$	2,180		$	5,559		$	4,161		$	960		$	1,303		$	697		$	23,110



(in thousands)	Comm. and industrial			Comm. tax-exempt		Owner occupied real estate			Comm. construction and land development			Comm. real estate			Resi-dential			Consumer			Unallo-cated		Total
2012
Balance at January 1	$	8,400		$	79	$	729		$	7,840		$	3,241		$	435		$	831		$	65	$	21,620
Provision charged to operating expenses	3,634			4		2,165			243			2,498			193			639			724		10,100
Recoveries of loans previously charged-off	227			—		7			517			97			4			67			—		919
Loans charged-off	(2,302		)	—		(772		)	(1,378		)	(1,853		)	(308		)	(744		)	—		(7,357		)
Balance at December 31	$	9,959		$	83	$	2,129		$	7,222		$	3,983		$	324		$	793		$	789	$	25,282



(in thousands)	Comm. and industrial			Comm. tax-exempt			Owner occupied real estate			Comm. construction and land development			Comm. real estate			Resi-dential			Consumer			Unallo-cated			Total
2011
Balance at January 1	$	9,679		$	86		$	910		$	5,420		$	4,002		$	442		$	702		$	377		$	21,618
Provision charged to operating expenses	6,510			(7		)	13			13,038			76			113			1,161			(312		)	20,592
Recoveries of loans previously charged-off	156			—			60			11			15			68			135			—			445
Loans charged-off	(7,945		)	—			(254		)	(10,629		)	(852		)	(188		)	(1,167		)	—			(21,035		)
Balance at December 31	$	8,400		$	79		$	729		$	7,840		$	3,241		$	435		$	831		$	65		$	21,620

The following table presents information regarding the Company's impaired loans as of December 31, 2013 and 2012:



	December 31, 2013						December 31, 2012
(in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
Loans with no related allowance:
Commercial and industrial	$	9,838	$	12,587	$	—	$	7,426	$	11,746	$	—
Commercial tax-exempt	—		—		—		—		—		—
Owner occupied real estate	4,456		4,664		—		1,929		2,301		—
Commercial construction and land development	8,514		9,047		—		7,716		8,500		—
Commercial real estate	10,953		12,795		—		12,965		14,619		—
Residential	4,901		5,366		—		4,163		4,423		—
Consumer	2,645		2,868		—		3,331		3,547		—
Total impaired loans with no related allowance	41,307		47,327		—		37,530		45,136		—
Loans with an allowance recorded:
Commercial and industrial	3,217		3,217		1,559		5,656		6,526		2,399
Owner occupied real estate	1,366		1,366		1,366		1,451		1,451		1,451
Commercial construction and land development	3,155		3,155		1,660		7,833		7,833		2,470
Commercial real estate	—		—		—		4,171		4,172		800
Residential	3,078		3,078		524		—		—		—
Consumer	476		476		476		—		—		—
Total impaired loans with an allowance recorded	11,292		11,292		5,585		19,111		19,982		7,120
Total impaired loans:
Commercial and industrial	13,055		15,804		1,559		13,082		18,272		2,399
Commercial tax-exempt	—		—		—		—		—		—
Owner occupied real estate	5,822		6,030		1,366		3,380		3,752		1,451
Commercial construction and land development	11,669		12,202		1,660		15,549		16,333		2,470
Commercial real estate	10,953		12,795		—		17,136		18,791		800
Residential	7,979		8,444		524		4,163		4,423		—
Consumer	3,121		3,344		476		3,331		3,547		—
Total impaired loans	$	52,599	$	58,619	$	5,585	$	56,641	$	65,118	$	7,120

The following table presents additional information regarding the Company's impaired loans for the twelve months ended December 31, 2013, 2012 and 2011:



	December 31, 2013				December 31, 2012				December 31, 2011
(in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Loans with no related allowance:
Commercial and industrial	$	9,461	$	164	$	11,567	$	171	$	12,901	$	141
Commercial tax-exempt	—		—		—		—		—		—
Owner occupied real estate	3,087		3		3,846		150		5,333		191
Commercial construction and land development	7,122		172		10,319		510		11,803		231
Commercial real estate	15,267		366		12,434		319		9,500		192
Residential	5,020		64		3,994		43		3,557		6
Consumer	3,024		30		2,539		18		1,945		—
Total impaired loans with no related allowance	42,981		799		44,699		1,211		45,039		761
Loans with an allowance recorded:
Commercial and industrial	4,563		—		5,258		—		7,974		—
Owner occupied real estate	1,407		—		1,571		—		453		—
Commercial construction and land development	7,926		—		11,375		—		4,637		—
Commercial real estate	—		—		655		—		—		—
Residential	1,805		—		—		—		—		—
Consumer	280		—		—		—		—		—
Total impaired loans with an allowance recorded	15,981		—		18,859		—		13,064		—
Total impaired loans:
Commercial and industrial	14,024		164		16,825		171		20,875		141
Commercial tax-exempt	—		—		—		—		—		—
Owner occupied real estate	4,494		3		5,417		150		5,786		191
Commercial construction and land development	15,048		172		21,694		510		16,440		231
Commercial real estate	15,267		366		13,089		319		9,500		192
Residential	6,825		64		3,994		43		3,557		6
Consumer	3,304		30		2,539		18		1,945		—
Total impaired loans	$	58,962	$	799	$	63,558	$	1,211	$	58,103	$	761

Impaired loans averaged approximately $59.0 million, $63.6 million and $58.1 million during 2013, 2012 and 2011, respectively. All nonaccrual loans are considered impaired and interest income is handled as discussed earlier in the nonaccrual section of this Note. Interest income continued to accrue on impaired loans that were still accruing and totaled $799,000, $1.2 million and $761,000 during 2013, 2012 and 2011, respectively.

The Bank assigns loan risk ratings to commercial loans as credit quality indicators of its loan portfolio: pass, special mention, substandard accrual, substandard nonaccrual and doubtful. Monthly, we track loans that are no longer pass rated. We review the cash flow, operating results and financial condition of the borrower and any guarantors, as well as the collateral position against established policy guidelines as a means of providing a targeted list of loans and loan relationships that require additional attention within the loan portfolio. Special mention loans are those loans that are currently adequately protected, but potentially weak. The potential weaknesses may, if not corrected, weaken the loan's credit quality or inadvertently jeopardize our credit position in the future. Substandard accrual and substandard nonaccrual assets are characterized by well-defined weaknesses that jeopardize the liquidation of the debt and by the possibility that the Bank will sustain some loss if the weaknesses are not corrected. Substandard accrual loans would move from accrual to nonaccrual when the Bank does not believe it will collect all of its contractual principal and interest payments. Some identifiers used to determine the collectibility are as follows: when the loan is 90 days past due in principal or interest, there are triggering events in the borrower's or any guarantor's financial statements that show continuing deterioration, the borrower's or any guarantor's source of repayment is depleting, or if bankruptcy or other legal matters are present, regardless if the loan is 90 days past due or not. Doubtful loans have all of the weaknesses inherent in those classified as substandard accrual and substandard nonaccrual with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable. Pass rated loans are reviewed throughout the year through the recurring review process of an independent loan review function and through the application of other credit metrics.

Credit quality indicators for commercial loans broken out by loan type are presented in the following tables for the years ended December 31, 2013 and 2012. There were no loans classified as doubtful for the years ended December 31, 2013 or December 31, 2012.



	December 31, 2013
(in thousands)	Pass		Special Mention		Substandard Accrual		Substandard Nonaccrual		Doubtful		Total
Commercial credit exposure:
Commercial and industrial	$	410,530	$	8,064	$	18,333	$	10,217	$	—	$	447,144
Commercial tax-exempt	81,734		—		—		—		—		81,734
Owner occupied real estate	285,416		3,624		8,539		4,838		—		302,417
Commercial construction and land development	120,687		—		3,902		8,587		—		133,176
Commercial real estate	464,408		318		1,757		6,705		—		473,188
Total	$	1,362,775	$	12,006	$	32,531	$	30,347	$	—	$	1,437,659



	December 31, 2012
(in thousands)	Pass		Special Mention		Substandard Accrual		Substandard Nonaccrual		Doubtful		Total
Commercial credit exposure:
Commercial and industrial	$	335,463	$	6,120	$	24,116	$	11,289	$	—	$	376,988
Commercial tax-exempt	92,202		—		—		—		—		92,202
Owner occupied real estate	253,338		4,160		7,755		3,119		—		268,372
Commercial construction and land development	81,219		5,046		7,834		6,300		—		100,399
Commercial real estate	379,313		574		8,858		5,659		—		394,404
Total	$	1,141,535	$	15,900	$	48,563	$	26,367	$	—	$	1,232,365

Consumer credit exposures are rated as performing or nonperforming as detailed below at December 31, 2013 and 2012:



	December 31, 2013
(in thousands)	Performing		Nonperforming		Total
Consumer credit exposure:
Residential	$	90,727	$	7,039	$	97,766
Consumer	212,870		2,577		215,447
Total	$	303,597	$	9,616	$	313,213



	December 31, 2012
(in thousands)	Performing		Nonperforming		Total
Consumer credit exposure:
Residential	$	80,696	$	3,203	$	83,899
Consumer	209,687		2,846		212,533
Total	$	290,383	$	6,049	$	296,432

A troubled debt restructuring is a loan in which the contractual terms have been modified, resulting in the Bank granting a concession to a borrower who is experiencing financial difficulties, in order for the Bank to have a greater chance of collecting the indebtedness from the borrower. An additional benefit to the Bank in granting a concession is to possibly avoid foreclosure or repossession of loan collateral at a time when collateral values are low.

The following table presents the recorded investment at the time of restructure of new TDRs and their concession, modified during the twelve month periods ended December 31, 2013, 2012 and 2011. The recorded investment at the time of restructure was the same pre-modification and post-modification, therefore there was no financial effect of the modification on the recorded investment. The loans included are considered TDRs as a result of the Bank implementing one or more of the following concessions: granting a material extension of time, entering into a forbearance agreement, adjusting the interest rate, accepting interest only payments for an extended period of time, a change in the amortization period or a combination of any of these concessions.



New TDRs with Concession Type:	Twelve Months Ended
	December 31, 2013			December 31, 2012			December 31, 2011
(dollars in thousands)	Number of Contracts	Recorded Investment at Time of Restructure		Number of Contracts	Recorded Investment at Time of Restructure		Number of Contracts	Recorded Investment at Time of Restructure
Commercial and industrial:
Material extension of time	—	$	—	1	$	1,262	2	$	629
Forbearance agreement	—	—		—	—		4	12,456
Interest rate adjustment	—	—		1	3,404		—	—
Change in amortization period	7	1,079		—	—		4	405
Combination of concessions	3	749		2	3,231		—	—
Owner occupied real estate:
Material extension of time	2	738		—	—		—	—
Forbearance agreement	1	193		—	—		1	87
Combination of concessions	—	—		1	1,451		—	—
Commercial construction and land development:
Material extension of time	4	2,738		5	3,396		16	10,932
Forbearance agreement	—	—		—	—		1	231
Combination of concessions	—	—		1	3,546		—	—
Commercial real estate:
Material extension of time	—	—		1	68		—	—
Forbearance agreement	—	—		—	—		1	93
Interest rate adjustment	—	—		—	—		1	1,194
Change in amortization period	—	—		—	—		3	3,081
Combination of concessions	4	6,220		1	3,275		—	—
Residential:
Material extension of time	2	570		2	329		—	—
Forbearance agreement	1	3,096		—	—		—	—
Interest rate adjustment	—	—		—	—		1	195
Change in amortization period	1	346		—	—		1	355
Combination of concessions	1	134		1	195		1	78
Consumer:
Material extension of time	1	35		4	426		—	—
Forbearance agreement	1	480		—	—		—	—
Combination of concessions	—	—		2	182		—	—
Total	28	$	16,378	22	$	20,765	36	$	29,736

Included in the 28 contracts in the table above for the twelve month period ended December 31, 2013, are eight contracts totaling $8.7 million that had been restructured prior to December 31, 2013 and which had additional concessions granted during 2013.

One commercial construction and land development loan identified as an accruing TDR had an unused commitment totaling $43,000 at December 31, 2013 as compared to two commercial construction and land development relationships identified as accruing TDRs that had additional unused commitments totaling $14,000 at December 31, 2012.

The following table represents loans receivable modified as TDRs within the 12 months previous to December 31, 2013, 2012 and 2011, respectively, and that subsequently defaulted during the 12 month periods ended December 31, 2013, 2012 and 2011, respectively. The Bank's policy is to consider a loan past due or delinquent if payment is not received on or before the due date.



TDRs That Subsequently Payment Defaulted:	Twelve Months Ended
	December 31, 2013			December 31, 2012			December 31, 2011
(dollars in thousands)	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
Commercial and industrial	8	$	1,372	3	$	3,901	4	$	5,531
Owner occupied real estate	3	926		—	—		—	—
Commercial construction and land development	2	2,288		6	6,169		11	9,162
Commercial real estate	1	3,275		1	66		2	747
Residential	2	3,338		2	258		3	617
Consumer	2	553		4	308		—	—
Total	18	$	11,752	16	$	10,702	20	$	16,057

Of the 18 contracts that subsequently payment defaulted during the year ended December 31, 2013, 17 contracts totaling $11.1 million were still in payment default at December 31, 2013. Five of the 17 contracts, totaling $5.4 million, were less than 30 days past due.

All TDRs are considered impaired and, therefore, are individually evaluated for impairment in the calculation of the ALL. Prior to their classification as TDRs, certain of these loans had been collectively evaluated for impairment in the calculation of the ALL.