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 $622.4 million at March 31, 2014, collateralize a letter of credit and a line of credit commitment the Bank has with the Federal Home Loan Bank (FHLB).

A summary of the Bank's loans receivable at March 31, 2014 and December 31, 2013 is as follows:



(in thousands)	March 31, 2014		December 31, 2013
Commercial and industrial	$	465,931	$	447,144
Commercial tax-exempt	77,566		81,734
Owner occupied real estate	306,765		302,417
Commercial construction and land development	123,789		133,176
Commercial real estate	512,582		473,188
Residential	98,827		97,766
Consumer	216,785		215,447
	1,802,245		1,750,872
Less: allowance for loan losses	23,934		23,110
Net loans receivable	$	1,778,311	$	1,727,762

The following table summarizes nonaccrual loans by loan type at March 31, 2014 and December 31, 2013:



(in thousands)	March 31, 2014		December 31, 2013
Nonaccrual loans:
Commercial and industrial	$	9,014	$	10,217
Commercial tax-exempt	—		—
Owner occupied real estate	6,005		4,838
Commercial construction and land development	10,734		8,587
Commercial real estate	6,043		6,705
Residential	6,551		7,039
Consumer	2,524		2,577
Total nonaccrual loans	$	40,871	$	39,963

Generally, the Bank's policy is to move a loan to nonaccrual status when it becomes 90 days past due or when the Bank 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. The total nonaccrual loan balance of $40.9 million exceeds the balance of total loans that are 90 days past due of $21.9 million at March 31, 2014 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 tables are an age analysis of past due loan receivables as of March 31, 2014 and December 31, 2013:



			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
March 31, 2014
Commercial and industrial	$	457,140	$	2,948	$	1,620	$	4,223	$	8,791	$	465,931	$	—
Commercial tax-exempt	77,566		—		—		—		—		77,566		—
Owner occupied real estate	292,866		2,084		7,579		4,236		13,899		306,765		—
Commercial construction and land development	115,941		280		147		7,421		7,848		123,789		—
Commercial real estate	503,464		4,491		907		3,720		9,118		512,582		—
Residential	87,665		10,129		192		841		11,162		98,827		—
Consumer	212,229		2,068		1,078		1,410		4,556		216,785		—
Total	$	1,746,871	$	22,000	$	11,523	$	21,851	$	55,374	$	1,802,245	$	—



			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

A summary of the ALL and balance of loans receivable by loan class and by impairment method as of March 31, 2014 and December 31, 2013 is detailed in the tables that follow:



(in thousands)	Comm. and industrial		Comm. tax-exempt		Owner occupied real estate		Comm. construction and land development		Comm. real estate		Residential		Con sumer		Unallocated		Total

March 31, 2014
Allowance for loan losses:
Individually evaluated for impairment	$	1,273	$	—	$	1,500	$	2,339	$	—	$	524	$	476	$	—	$	6,112
Collectively evaluated for impairment	6,641		68		736		3,503		4,640		499		853		882		17,822
Total ALL	$	7,914	$	68	$	2,236	$	5,842	$	4,640	$	1,023	$	1,329	$	882	$	23,934
Loans receivable:
Loans evaluated individually	$	11,589	$	—	$	6,984	$	11,972	$	10,284	$	7,489	$	3,066	$	—	$	51,384
Loans evaluated collectively	454,342		77,566		299,781		111,817		502,298		91,338		213,719		—		1,750,861
Total loans receivable	$	465,931	$	77,566	$	306,765	$	123,789	$	512,582	$	98,827	$	216,785	$	—	$	1,802,245



(in thousands)	Comm. and industrial		Comm. tax-exempt		Owner occupied real estate		Comm. construction and land development		Comm. real estate		Residential		Con sumer		Unallocated		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

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 three months ended March 31, 2014 and 2013:



(in thousands)	Comm. and industrial			Comm. tax-exempt			Owner occupied real estate			Comm. construction and land development			Comm. real estate			Residential			Consumer			Unallocated		Total
2014
Balance at January 1	$	8,178		$	72		$	2,180		$	5,559		$	4,161		$	960		$	1,303		$	697	$	23,110
Provision charged to operating expenses	(915		)	(4		)	(162		)	195			1,122			346			133			185		900
Recoveries of loans previously charged-off	1,005			—			243			100			73			—			23			—		1,444
Loans charged-off	(354		)	—			(25		)	(12		)	(716		)	(283		)	(130		)	—		(1,520		)
Balance at March 31	$	7,914		$	68		$	2,236		$	5,842		$	4,640		$	1,023		$	1,329		$	882	$	23,934



(in thousands)	Comm. and industrial			Comm. tax-exempt			Owner occupied real estate			Comm. construction and land development			Comm. real estate			Residential			Consumer			Unallocated			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	347			(8		)	260			276			1,137			127			299			(138		)	2,300
Recoveries of loans previously charged-off	138			—			3			486			—			3			36			—			666
Loans charged-off	(36		)	—			(184		)	(17		)	(82		)	(116		)	(341		)	—			(776		)
Balance at March 31	$	10,408		$	75		$	2,208		$	7,967		$	5,038		$	338		$	787		$	651		$	27,472

The following table presents information regarding the Company's impaired loans as of March 31, 2014 and December 31, 2013:



	March 31, 2014						December 31, 2013
(in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
Loans with no related allowance:
Commercial and industrial	$	8,505	$	9,057	$	—	$	9,838	$	12,587	$	—
Commercial tax-exempt	—		—		—		—		—		—
Owner occupied real estate	4,634		4,850		—		4,456		4,664		—
Commercial construction and land development	7,785		7,941		—		8,514		9,047		—
Commercial real estate	10,284		12,607		—		10,953		12,795		—
Residential	4,411		4,925		—		4,901		5,366		—
Consumer	2,590		2,857		—		2,645		2,868		—
Total impaired loans with no related allowance	38,209		42,237		—		41,307		47,327		—
Loans with an allowance recorded:
Commercial and industrial	3,084		3,084		1,273		3,217		3,217		1,559
Owner occupied real estate	2,350		2,350		1,500		1,366		1,366		1,366
Commercial construction and land development	4,187		4,563		2,339		3,155		3,155		1,660
Residential	3,078		3,078		524		3,078		3,078		524
Consumer	476		476		476		476		476		476
Total impaired loans with an allowance recorded	13,175		13,551		6,112		11,292		11,292		5,585
Total impaired loans:
Commercial and industrial	11,589		12,141		1,273		13,055		15,804		1,559
Commercial tax-exempt	—		—		—		—		—		—
Owner occupied real estate	6,984		7,200		1,500		5,822		6,030		1,366
Commercial construction and land development	11,972		12,504		2,339		11,669		12,202		1,660
Commercial real estate	10,284		12,607		—		10,953		12,795		—
Residential	7,489		8,003		524		7,979		8,444		524
Consumer	3,066		3,333		476		3,121		3,344		476
Total impaired loans	$	51,384	$	55,788	$	6,112	$	52,599	$	58,619	$	5,585

The following table presents additional information regarding the Company's impaired loans for the three months ended March 31, 2014 and 2013:



	Three Months Ended
	March 31, 2014				March 31, 2013
(in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Loans with no related allowance:
Commercial and industrial	$	7,890	$	40	$	8,508	$	31
Commercial tax-exempt	—		—		—		—
Owner occupied real estate	4,786		10		1,951		—
Commercial construction and land development	8,241		17		8,023		45
Commercial real estate	10,770		48		12,862		145
Residential	4,488		13		4,572		17
Consumer	2,635		7		3,062		6
Total impaired loans with no related allowance	38,810		135		38,978		244
Loans with an allowance recorded:
Commercial and industrial	3,246		—		5,190		—
Owner occupied real estate	1,686		—		1,436		—
Commercial construction and land development	3,477		—		7,842		—
Commercial real estate	—		—		4,171		—
Residential	3,079		—		—		—
Consumer	476		—		—		—
Total impaired loans with an allowance recorded	11,964		—		18,639		—
Total impaired loans:
Commercial and industrial	11,136		40		13,698		31
Commercial tax-exempt	—		—		—		—
Owner occupied real estate	6,472		10		3,387		—
Commercial construction and land development	11,718		17		15,865		45
Commercial real estate	10,770		48		17,033		145
Residential	7,567		13		4,572		17
Consumer	3,111		7		3,062		6
Total impaired loans	$	50,774	$	135	$	57,617	$	244

Impaired loans averaged approximately $50.8 million and $57.6 million for the three months ended March 31, 2014 and 2013, respectively. All nonaccrual loans are considered impaired and interest income is handled as discussed earlier in the nonaccrual section of this Note 4. Interest income continued to accrue on certain impaired loans totaling $135,000 and $244,000 for the three months ended March 31, 2014 and 2013, 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 periods ended March 31, 2014 and December 31, 2013. There were no loans classified as doubtful for the periods ended March 31, 2014 or December 31, 2013.



	March 31, 2014
(in thousands)	Pass		Special Mention		Substandard Accrual		Substandard Nonaccrual		Total
Commercial credit exposure:
Commercial and industrial	$	435,605	$	5,187	$	16,125	$	9,014	$	465,931
Commercial tax-exempt	77,566		—		—		—		77,566
Owner occupied real estate	288,510		3,632		8,618		6,005		306,765
Commercial construction and land development	110,495		285		2,275		10,734		123,789
Commercial real estate	503,827		1,207		1,505		6,043		512,582
Total	$	1,416,003	$	10,311	$	28,523	$	31,796	$	1,486,633



	December 31, 2013
(in thousands)	Pass		Special Mention		Substandard Accrual		Substandard Nonaccrual		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

Consumer loan credit exposures are rated either performing or nonperforming as detailed below at March 31, 2014 and December 31, 2013:



	March 31, 2014
(in thousands)	Performing		Nonperforming		Total
Consumer credit exposure:
Residential	$	92,276	$	6,551	$	98,827
Consumer	214,261		2,524		216,785
Total	$	306,537	$	9,075	$	315,612



	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

A troubled debt restructuring (TDR) 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 three month periods ended March 31, 2014 and 2013. 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:	Three Months Ended
	March 31, 2014			March 31, 2013
(dollars in thousands)	Number of Contracts	Recorded Investment at Time of Restructure		Number of Contracts	Recorded Investment at Time of Restructure
Commercial and industrial:
Change in amortization period	3	$	261	—	$	—
Owner occupied real estate:
Forbearance agreement	—	—		1	193
Change in amortization period	1	128		—	—
Commercial construction and land development:
Material extension of time	1	242		3	1,051
Change in amortization period	1	214		—	—
Commercial real estate:
Change in amortization period	14	1,893		—	—
Residential:
Material extension of time	—	—		1	260
Interest rate adjustment	1	143		—	—
Consumer:
Material extension of time	—	—		1	35
Total	21	$	2,881	6	$	1,539

The following table represents loans receivable modified as TDR within the 12 months previous to March 31, 2014 and 2013, respectively, and that subsequently defaulted during the three month periods ended March 31, 2014 and 2013, 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:	Three Months Ended
	March 31, 2014			March 31, 2013
(dollars in thousands)	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
Commercial and industrial	7	$	1,260	1	$	244
Owner occupied real estate	3	914		—	—
Commercial construction and land development	2	1,930		2	3,853
Commercial real estate	—	—		1	3,275
Residential	2	3,213		3	602
Consumer	1	476		3	353
Total	15	$	7,793	10	$	8,327

Of the 15 contracts that subsequently payment defaulted during the three month period ended March 31, 2014, ten were still in payment default at March 31, 2014.

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.