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 $465.3 million at March 31, 2015, collateralize a letter of credit, a line of credit commitment and borrowings the Bank has with the Federal Home Loan Bank (FHLB).

A summary of the Bank's loans receivable is as follows:



(in thousands)	March 31, 2015		December 31, 2014
Commercial and industrial	$	536,349	$	525,127
Commercial tax-exempt	67,176		71,151
Owner occupied real estate	311,259		332,070
Commercial construction and land development	137,063		138,064
Commercial real estate	607,400		594,276
Residential	116,143		110,951
Consumer	228,320		226,895
Gross loans receivable	2,003,710		1,998,534
Less: allowance for loan losses	25,755		24,998
Net loans receivable	$	1,977,955	$	1,973,536

The following table summarizes nonaccrual loans by loan type:



(in thousands)	March 31, 2015		December 31, 2014
Nonaccrual loans:
Commercial and industrial	$	12,375	$	11,634
Commercial tax-exempt	—		—
Owner occupied real estate	6,210		7,416
Commercial construction and land development	3,241		3,228
Commercial real estate	6,362		5,824
Residential	4,971		4,987
Consumer	1,573		1,877
Total nonaccrual loans	$	34,732	$	34,966

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 loan payments have 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 $34.7 million exceeds the $16.0 million balance of total loans that are 90 days past due at March 31, 2015, 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 present an aging analysis of loans receivable:



			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 Loans Receivable
March 31, 2015
Commercial and industrial	$	527,272	$	2,897	$	1,212	$	4,968	$	9,077	$	536,349	$	—
Commercial tax-exempt	67,176		—		—		—		—		67,176		—
Owner occupied real estate	299,018		2,504		5,024		4,713		12,241		311,259		—
Commercial construction and land development	136,468		236		328		31		595		137,063		—
Commercial real estate	600,420		3,463		1,160		2,357		6,980		607,400		—
Residential	106,939		6,410		151		2,643		9,204		116,143		—
Consumer	222,739		4,097		201		1,283		5,581		228,320		—
Total	$	1,960,032	$	19,607	$	8,076	$	15,995	$	43,678	$	2,003,710	$	—



			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 Loans Receivable
December 31, 2014
Commercial and industrial	$	514,428	$	1,574	$	3,398	$	5,727	$	10,699	$	525,127	$	—
Commercial tax-exempt	71,151		—		—		—		—		71,151		—
Owner occupied real estate	325,681		606		44		5,739		6,389		332,070		445
Commercial construction and land development	137,263		611		190		—		801		138,064		—
Commercial real estate	591,383		1,104		175		1,614		2,893		594,276		—
Residential	101,233		5,067		1,900		2,751		9,718		110,951		—
Consumer	222,767		2,650		437		1,041		4,128		226,895		—
Total	$	1,963,906	$	11,612	$	6,144	$	16,872	$	34,628	$	1,998,534	$	445

A summary of the ALL and balance of loans receivable by loan class and by impairment method is presented 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		Residen-tial		Con- sumer		Unallo-cated		Total

March 31, 2015
Allowance for loan losses:
Individually evaluated for impairment	$	4,365	$	—	$	1,355	$	—	$	—	$	—	$	—	$	—	$	5,720
Collectively evaluated for impairment	7,654		52		589		4,529		4,945		803		870		593		20,035
Total ALL	$	12,019	$	52	$	1,944	$	4,529	$	4,945	$	803	$	870	$	593	$	25,755
Loans receivable:
Loans evaluated individually	$	17,722	$	—	$	6,249	$	3,670	$	10,504	$	5,639	$	2,229	$	—	$	46,013
Loans evaluated collectively	518,627		67,176		305,010		133,393		596,896		110,504		226,091		—		1,957,697
Total loans receivable	$	536,349	$	67,176	$	311,259	$	137,063	$	607,400	$	116,143	$	228,320	$	—	$	2,003,710



(in thousands)	Comm. and industrial		Comm. tax-exempt		Owner occupied real estate		Comm. construction and land development		Comm. real estate		Residen-tial		Con- sumer		Unallo-cated		Total

December 31, 2014
Allowance for loan losses:
Individually evaluated for impairment	$	4,401	$	—	$	1,242	$	—	$	—	$	—	$	—	$	—	$	5,643
Collectively evaluated for impairment	7,313		55		689		4,242		4,707		796		931		622		19,355
Total ALL	$	11,714	$	55	$	1,931	$	4,242	$	4,707	$	796	$	931	$	622	$	24,998
Loans receivable:
Loans evaluated individually	$	16,982	$	—	$	7,464	$	3,810	$	9,976	$	5,657	$	2,433	$	—	$	46,322
Loans evaluated collectively	508,145		71,151		324,606		134,254		584,300		105,294		224,462		—		1,952,212
Total loans receivable	$	525,127	$	71,151	$	332,070	$	138,064	$	594,276	$	110,951	$	226,895	$	—	$	1,998,534

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 are generally of comparatively lower risk because the repayment of these loans relies primarily on the cash flow from a business which is typically 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, 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 continuously assesses the quality of the Company's loan portfolio in conjunction with the current state of the economy and its impact on our borrowers repayment ability and on loan collateral values in order to determine the appropriate historical loss period to use in our quantitative analysis. 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 analysis. 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:



(in thousands)	Comm. and industrial			Comm. tax-exempt			Owner occupied real estate			Comm. construction and land development		Comm. real estate			Residen-tial			Consumer			Unallo-cated			Total
2015
Balance at January 1	$	11,714		$	55		$	1,931		$	4,242	$	4,707		$	796		$	931		$	622		$	24,998
Provision charged to operating expenses	530			(3		)	66			285		688			20			(57		)	(29		)	1,500
Recoveries of loans previously charged-off	54			—			—			2		7			1			12			—			76
Loans charged-off	(279		)	—			(53		)	—		(457		)	(14		)	(16		)	—			(819		)
Balance at March 31	$	12,019		$	52		$	1,944		$	4,529	$	4,945		$	803		$	870		$	593		$	25,755



(in thousands)	Comm. and industrial			Comm. tax-exempt			Owner occupied real estate			Comm. construction and land development			Comm. real estate			Residen-tial			Consumer			Unallo-cated		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

The following table presents information regarding the Company's impaired loans. The recorded investment represents the contractual obligation less any charged off principal.



	March 31, 2015						December 31, 2014
(in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
Impaired loans with no related allowance:
Commercial and industrial	$	7,601	$	8,343	$	—	$	8,766	$	9,437	$	—
Commercial tax-exempt	—		—		—		—		—		—
Owner occupied real estate	3,482		3,935		—		6,155		6,636		—
Commercial construction and land development	3,670		3,670		—		3,810		3,810		—
Commercial real estate	10,504		10,567		—		9,976		10,097		—
Residential	5,639		6,953		—		5,657		7,011		—
Consumer	2,229		2,384		—		2,433		2,686		—
Total impaired loans with no related allowance	33,125		35,852		—		36,797		39,677		—
Impaired loans with an allowance recorded:
Commercial and industrial	10,121		10,121		4,365		8,216		8,216		4,401
Owner occupied real estate	2,767		2,767		1,355		1,309		1,309		1,242
Total impaired loans with an allowance recorded	12,888		12,888		5,720		9,525		9,525		5,643
Total impaired loans:
Commercial and industrial	17,722		18,464		4,365		16,982		17,653		4,401
Commercial tax-exempt	—		—		—		—		—		—
Owner occupied real estate	6,249		6,702		1,355		7,464		7,945		1,242
Commercial construction and land development	3,670		3,670		—		3,810		3,810		—
Commercial real estate	10,504		10,567		—		9,976		10,097		—
Residential	5,639		6,953		—		5,657		7,011		—
Consumer	2,229		2,384		—		2,433		2,686		—
Total impaired loans	$	46,013	$	48,740	$	5,720	$	46,322	$	49,202	$	5,643

The following table presents additional information regarding the Company's impaired loans for the three months ended:



	Three Months Ended
	March 31, 2015				March 31, 2014
(in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Impaired loans with no related allowance:
Commercial and industrial	$	8,849	$	70	$	7,890	$	40
Commercial tax-exempt	—		—		—		—
Owner occupied real estate	5,459		—		4,786		10
Commercial construction and land development	3,679		6		8,241		17
Commercial real estate	10,662		39		10,770		48
Residential	5,669		8		4,488		13
Consumer	2,337		7		2,635		7
Total impaired loans with no related allowance	36,655		130		38,810		135
Impaired loans with an allowance recorded:
Commercial and industrial	8,572		—		3,246		—
Owner occupied real estate	1,787		—		1,686		—
Commercial construction and land development	—		—		3,477		—
Residential	—		—		3,079		—
Consumer	—		—		476		—
Total impaired loans with an allowance recorded	10,359		—		11,964		—
Total impaired loans:
Commercial and industrial	17,421		70		11,136		40
Commercial tax-exempt	—		—		—		—
Owner occupied real estate	7,246		—		6,472		10
Commercial construction and land development	3,679		6		11,718		17
Commercial real estate	10,662		39		10,770		48
Residential	5,669		8		7,567		13
Consumer	2,337		7		3,111		7
Total impaired loans	$	47,014	$	130	$	50,774	$	135

Impaired loans averaged approximately $47.0 million and $50.8 million for the three months ended March 31, 2015 and 2014, 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 $130,000 and $135,000 for the three months ended March 31, 2015 and 2014, respectively.

The Bank assigns the following loan risk ratings to commercial loans as credit quality indicators of its loan portfolio: pass, special mention, substandard accrual, substandard nonaccrual and doubtful. Monthly, management tracks 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. 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 the Bank's 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 assess 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 at period end are presented in the following tables. There were no loans classified as doubtful for the periods ended March 31, 2015 or December 31, 2014.



	March 31, 2015
(in thousands)	Pass		Special Mention		Substandard Accrual		Substandard Nonaccrual		Total
Commercial credit exposure:
Commercial and industrial	$	488,040	$	17,454	$	18,480	$	12,375	$	536,349
Commercial tax-exempt	67,176		—		—		—		67,176
Owner occupied real estate	293,499		4,238		7,312		6,210		311,259
Commercial construction and land development	133,494		187		141		3,241		137,063
Commercial real estate	596,528		2,766		1,744		6,362		607,400
Total	$	1,578,737	$	24,645	$	27,677	$	28,188	$	1,659,247



	December 31, 2014
(in thousands)	Pass		Special Mention		Substandard Accrual		Substandard Nonaccrual		Total
Commercial credit exposure:
Commercial and industrial	$	473,984	$	20,785	$	18,724	$	11,634	$	525,127
Commercial tax-exempt	71,151		—		—		—		71,151
Owner occupied real estate	311,668		4,268		8,718		7,416		332,070
Commercial construction and land development	133,033		190		1,613		3,228		138,064
Commercial real estate	584,239		1,584		2,629		5,824		594,276
Total	$	1,574,075	$	26,827	$	31,684	$	28,102	$	1,660,688

Consumer loan credit exposures are rated either performing or nonperforming as detailed below at March 31, 2015 and December 31, 2014:



	March 31, 2015
(in thousands)	Performing		Nonperforming		Total
Consumer credit exposure:
Residential	$	111,172	$	4,971	$	116,143
Consumer	226,747		1,573		228,320
Total	$	337,919	$	6,544	$	344,463



	December 31, 2014
(in thousands)	Performing		Nonperforming		Total
Consumer credit exposure:
Residential	$	105,964	$	4,987	$	110,951
Consumer	225,018		1,877		226,895
Total	$	330,982	$	6,864	$	337,846

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 which 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, 2015 and 2014. 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, 2015			March 31, 2014
(dollars in thousands)	Number of Contracts	Recorded Investment at Time of Restructure		Number of Contracts	Recorded Investment at Time of Restructure
Commercial and industrial:
Forbearance agreement	1	$	3,307	—	$	—
Change in amortization period	—	—		3	261
Combination of concessions	—	—		1	30
Owner occupied real estate:
Change in amortization period	—	—		1	128
Commercial construction and land development:
Material extension of time	—	—		1	242
Change in amortization period	—	—		1	214
Commercial real estate:
Change in amortization period	—	—		14	1,893
Residential:
Interest rate adjustment	—	—		1	143
Total	1	$	3,307	22	$	2,911

The following table represents loans receivable modified as TDRs within the 12 months previous to March 31, 2015 and 2014, respectively, and that subsequently defaulted during the three month periods ended March 31, 2015 and 2014, respectively. The Bank's policy is to consider a loan past due and in default if payment is not received on or before the due date.



TDRs That Subsequently Payment Defaulted:	Three Months Ended
	March 31, 2015			March 31, 2014
(dollars in thousands)	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
Commercial and industrial	—	$	—	7	$	1,260
Owner occupied real estate	2	731		3	914
Commercial construction and land development	1	236		2	1,930
Commercial real estate	3	2,667		—	—
Residential	—	—		2	3,213
Consumer	—	—		1	476
Total	6	$	3,634	15	$	7,793

Of the six contracts that subsequently payment defaulted during the three month period ended March 31, 2015, three were still in payment default at March 31, 2015.

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.