LOANS

As discussed in Note A, the Predecessor Company balances and presentation are not comparable to the Successor Company balances and presentation due to the application of push-down accounting and the change in management of the combined company.

The following is a summary of loans as of December 31, 2012 and 2011:



	Successor Company			Predecessor Company
	2012			2011
Commercial:
Commercial real estate	$	392,955		$	367,598
Commercial and industrial	98,701			62,417
Construction and development	72,566			91,435
Consumer:
Residential real estate	125,277			151,534
Construction and development	6,203			8,462
Home equity	63,486			48,940
Other consumer	4,325			6,048
Total loans	763,513			736,434
Less:
Deferred loan fees	(97		)	(345		)
Allowance for loan losses	(3,998		)	(2,131		)
Total	$	759,418		$	733,958

The Company has granted loans to certain directors and executive officers of the Company and their related interests. Such loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other borrowers and, in management’s opinion, do not involve more than the normal risk of collectability. All loans to directors and executive officers or their related interests are submitted to the Board of Directors for approval. A summary of contractual obligations due from directors, executive officers and their interests (“D&O”) follows:



	Successor Company			Predecessor Company
	February 1 to December 31, 2012			January 1 to January 31, 2012			Year Ended December 31, 2011

Loans to directors and officers as a group at beginning of period	$	30,910		$	30,910		$	31,877
New advances to D&O	1,027			714			728
Payoffs and principal reductions	(1,938		)	(714		)	(1,695		)
Loans to directors and officers as a group at end of period	$	29,999		$	30,910		$	30,910

The Company completed various loan sales to investors during 2012. The proceeds from these loan sales totaled $20,497. There was no gain or loss recorded on these loan sales. In the fourth quarter of 2012, the Company purchased commercial and industrial loans from an unrelated third party. These loans were recorded at their estimated fair value at the date of purchase of $7,698.

PCI Loans

Loans for which it is probable at acquisition that all contractually required payments will not be collected are considered PCI loans. No PCI loans were purchased in 2012. The contractually required payments including principal and interest, expected cash flows to be collected and fair values as of the dates of Piedmont's respective acquisitions of Rowan and Crescent Financial during the predecessor year ended December 31, 2011 were as follows:



Contractually required payments	$	409,720
Nonaccretable difference	(60,290		)
Cash flows expected to be collected at acquisition	349,430
Accretable yield	(32,068		)
Fair value of acquired loans at acquisition	$	317,362

The remaining carrying value and outstanding balances of PCI loans totaled $203,107 and $224,298, respectively as of December 31, 2012.

The following table presents a summary of changes in accretable yield, or income expected to be collected, related to PCI loans for the periods presented:



	Successor Company			Predecessor Company
	February 1 to December 31, 2012			January 1 to January 31, 2012			Year Ended December 31, 2011

Balance, beginning of period	$	28,144		$	29,645		$	—
Loans purchased	—			—			32,068
Accretion of income	(13,863		)	(1,389		)	(2,423		)
Reclassifications from nonaccretable difference	14,031			—			—
Disposals	(680		)	(112		)	—
Balance, end of period	$	27,632		$	28,144		$	29,645

The contractually required payments represent the total undiscounted amount of all uncollected contractual principal and contractual interest payments both past due and scheduled for the future, adjusted for the timing of estimated prepayments and any full or partial charge-offs prior to the respective Piedmont acquisitions. Nonaccretable difference represents contractually required payments in excess of the amount of estimated cash flows expected to be collected. The accretable yield represents the excess of estimated cash flows expected to be collected over the initial fair value of the PCI loans, which is their fair value at the time of the respective Piedmont investment. The accretable yield is recognized into interest income over the estimated life of the PCI loans using the level yield method. The accretable yield will change due to changes in:


•	the estimate of the remaining life of PCI loans which may change the amount of future interest income, and possibly principal, expected to be collected;


•	the estimate of the amount of contractually required principal and interest payments over the estimated life that will not be collected (the nonaccretable difference); and


•	indices for PCI loans with variable rates of interest.

The impact of loan modifications is included in the evaluation of expected cash flows for subsequent decreases or increases of cash flows. For variable rate PCI loans, expected future cash flows will be recalculated as the rates adjust over the lives of the loans. At acquisition, the expected future cash flows were based on the variable rates that were in effect at that time.

Allowance for Loan Losses

Activity in the allowance for loan losses for the 2012 Predecessor Period, 2012 Successor Period and year ended December 31, 2011 as well as the ending balances of loans and related allowance by class of loans as of December 31, 2012 and 2011 are summarized as follows:



	Predecessor Company
	Commercial Real Estate		Residential Real Estate		Construction			Commercial		Consumer		Total
2012 Predecessor Period
Allowance for loan losses:
Beginning balance	$	663	$	601	$	534		$	324	$	9	$	2,131
Charge-offs	—		—		(1		)	—		—		(1		)
Recoveries	—		—		—			2		—		2
Provision	48		26		98			21		2		195
Ending allowance balance	$	711	$	627	$	631		$	347	$	11	$	2,327



	Successor Company
	Commercial Real Estate		Commercial and Industrial			Commercial Construction			Residential Real Estate			Consumer Construction			Home Equity			Other Consumer			Total
2012 Successor Period
Beginning balance	$	505	$	218		$	305		$	154		$	28		51			15			$	1,276
Charge-offs	—		(249		)	(399		)	(341		)	(15		)	(1,596		)	(147		)	(2,747		)
Recoveries	—		17			125			153			—			6			9			310
Provision	1,019		812			566			974			5			1,624			159			5,159
Ending allowance balance	$	1,524	$	798		$	597		$	940		$	18		$	85		$	36		$	3,998

Ending allowance attributable to loans:
Individually Evaluated for Impairment	$	14	$	—		$	8		$	9		$	—		$	14		$	1		$	46
Collectively Evaluated for Impairment	1,067		798			322			379			18			71			19			2,674
Purchased credit-impaired	443		—			267			552			—			—			16			1,278
Ending allowance balance	$	1,524	$	798		$	597		$	940		$	18		$	85		$	36		$	3,998

Loans:
Individually Evaluated for Impairment	$	1,697	$	—		$	415		$	1,452		$	—		$	1,342		$	224		$	5,130
Collectively Evaluated for Impairment	266,001		85,356			31,741			100,794			5,392			62,101			3,891			555,276
Purchased credit-impaired	125,257		13,345			40,410			23,031			811			43			210			203,107
Total loans	$	392,955	$	98,701		$	72,566		$	125,277		$	6,203		$	63,486		$	4,325		$	763,513



	Predecessor Company
	Commercial Real Estate			Residential Real Estate			Construction			Commercial			Consumer			Total
Year Ended December 31, 2011
Allowance for loan losses:
Beginning balance	$	409		$	605		$	514		$	340		$	12		$	1,880
Charge-offs	(12		)	(158		)	(496		)	—			(7		)	(673		)
Recoveries	4			9			19			8			4			44
Provision	262			145			497			(24		)	—			880
Ending allowance balance	$	663		$	601		$	534		$	324		$	9		$	2,131

Ending allowance attributable to loans:
Individually Evaluated for Impairment	$	—		$	—		$	—		$	—		$	—		$	—
Collectively Evaluated for Impairment	663			601			534			324			9			2,131
Purchased credit-impaired	—			—			—			—			—			—
Ending allowance balance	$	663		$	601		$	534		$	324		$	9		$	2,131

Loans:
Individually Evaluated for Impairment	$	1,348		$	995		$	131		$	—		$	—		$	2,474
Collectively Evaluated for Impairment	204,884			162,592			33,215			35,901			5,629			442,221
Purchased credit-impaired	161,366			36,887			66,551			26,516			419			291,739
Total loans	$	367,598		$	200,474		$	99,897		$	62,417		$	6,048		$	736,434

At the dates of the Piedmont investment in Legacy VantageSouth, Rowan, and Crescent Financial, respectively, the acquired loan portfolio was adjusted to fair value and the allowance for loan losses was eliminated. For PCI loans, impairment and the associated allowance for loan losses is evaluated based on decreases in expected cash flows since the initial valuation. Non-impaired purchased loans and loans originated subsequent to the acquisition date are evaluated individually or collectively for impairment, depending on whether loans are identified as individually impaired.

For purposes of the disclosures included herein, loans originated prior to Piedmont's respective investments in Legacy VantageSouth, Rowan, and Crescent Financial are labeled as "Legacy Loans" and loans originated after the Piedmont's respective investments are labeled as "New Loans".

Analysis of Credit Quality

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk which is reviewed at least annually. The Company uses the following general definitions for risk ratings:


•	Pass. These loans range from superior quality with minimal credit risk to loans requiring heightened management attention but that are still an acceptable risk and continue to perform as contracted.


•	Special Mention. Loans classified as special mention have a potential weakness that deserves management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution's credit position at some future date.

•

Substandard. Loans classified as substandard are inadequately protected by the current net 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 institution will sustain some loss if the deficiencies are not corrected.


•	Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as 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.

Based on the most recent analysis performed, the risk category of loans by class of loans is as follows:



	Successor Company
	December 31, 2012
	Pass		Special Mention		Substandard		Doubtful		Total
New Loans
Commercial:
Commercial real estate	$	135,144	$	285	$	514	$	—	$	135,943
Commercial and industrial	70,334		1,223		216		—		71,773
Construction and development	17,673		—		626		—		18,299
Consumer:
Residential real estate	46,608		336		406		—		47,350
Construction and development	1,182		77		—		—		1,259
Home equity	10,676		52		115		—		10,843
Other consumer	1,525		7		—		—		1,532
Total loans	$	283,142	$	1,980	$	1,877	$	—	$	286,999

Legacy Loans
Commercial:
Commercial real estate	$	200,494	$	41,426	$	15,092	$	—	$	257,012
Commercial and industrial	24,461		1,201		1,266		—		26,928
Construction and development	26,117		20,976		6,791		383		54,267
Consumer:
Residential real estate	63,620		7,240		7,029		38		77,927
Construction and development	3,941		549		454		—		4,944
Home equity	48,579		1,989		2,075		—		52,643
Other consumer	2,422		138		233		—		2,793
Total loans	$	369,634	$	73,519	$	32,940	$	421	$	476,514



	Predecessor Company
	December 31, 2011
	Pass		Special Mention		Substandard		Doubtful		Total
New Loans
Commercial real estate	$	32,732	$	139	$	208	$	—	$	33,079
Residential real estate	22,172		385		406		—		22,963
Construction	1,095		71		—		—		1,166
Commercial	13,484		1		19		—		13,504
Consumer	952		—		—		—		952
Total loans	$	70,435	$	596	$	633	$	—	$	71,664

Legacy Loans
Commercial real estate	$	281,192	$	36,938	$	16,010	$	379	$	334,519
Residential real estate	151,284		11,902		14,180		145		177,511
Construction	55,718		25,931		16,563		519		98,731
Commercial	44,368		2,242		2,303		—		48,913
Consumer	4,715		337		44		—		5,096
Total loans	$	537,277	$	77,350	$	49,100	$	1,043	$	664,770

Past Due Analysis

The following table summarizes the aging of the loan portfolio (excluding PCI loans) by past due status, based on contractual terms, as of December 31, 2012 and 2011:



	Successor Company
	December 31, 2012
	30-89 Days Past Due		90 Days or Greater Past Due		Total Past Due		Current		Total Loans
New Loans:
Commercial:
Commercial real estate	$	1,454	$	208	$	1,662	$	134,281	$	135,943
Commercial and industrial	616		30		646		71,127		71,773
Construction and development	—		74		74		18,225		18,299
Consumer:
Residential real estate	653		406		1,059		46,291		47,350
Construction and development	—		—		—		1,259		1,259
Home equity	—		115		115		10,728		10,843
Other consumer	90		—		90		1,442		1,532
Total	$	2,813	$	833	$	3,646	$	283,353	$	286,999

Legacy Loans:
Commercial:
Commercial real estate	$	744	$	1,249	$	1,993	$	129,762	$	131,755
Commercial and industrial	262		—		262		13,321		13,583
Construction and development	326		156		482		13,375		13,857
Consumer:
Residential real estate	942		669		1,611		53,285		54,896
Construction and development	83		70		153		3,980		4,133
Home equity	1,200		597		1,797		50,803		52,600
Other consumer	114		223		337		2,246		2,583
Total	$	3,671	$	2,964	$	6,635	$	266,772	$	273,407



	Predecessor Company
	December 31, 2011
	30-89 Days Past Due		90 Days or Greater Past Due		Total Past Due		Current		Total Loans
New Loans:
Commercial real estate	$	—	$	208	$	208	$	32,871	$	33,079
Residential real estate	—		406		406		22,557		22,963
Construction	—		—		—		1,166		1,166
Commercial	—		—		—		13,504		13,504
Consumer	—		—		—		952		952
Total	$	—	$	614	$	614	$	71,050	$	71,664

Legacy Loans:
Commercial real estate	—		523		523		172,630		173,153
Residential real estate	450		463		913		139,711		140,624
Construction	95		708		803		31,377		32,180
Commercial	29		66		95		22,302		22,397
Consumer	4		—		4		4,673		4,677
Total	$	578	$	1,760	$	2,338	$	370,693	$	373,031

The recorded investment, by class, in loans on nonaccrual status as of December 31, 2012 and 2011 (excluding PCI loans) was as follows:



Successor Company	Nonaccrual Loans December 31, 2012
New Loans:
Commercial:
Commercial real estate	$	514
Commercial and industrial	44
Construction and development	74
Consumer:
Residential real estate	510
Home equity	115
Total	$	1,257

Legacy Loans:
Commercial:
Commercial real estate	$	1,249
Commercial and industrial	20
Construction and development	409
Consumer:
Residential real estate	1,332
Construction and development	70
Home equity	1,435
Other consumer	223
Total	$	4,738



Predecessor Company	Nonaccrual Loans December 31, 2011
New Loans:
Commercial real estate	$	208
Residential real estate	406
Consumer	1
Total	$	615

Legacy Loans:
Commercial real estate	$	523
Residential real estate	767
Construction	1,558
Commercial	45
Total	$	2,893

There were no non-PCI loans 90 days or more past due and accruing as of December 31, 2012 or 2011.

Impaired Loans

The following table provides information on impaired loans, excluding PCI loans and loans evaluated collectively as a homogeneous group.



	Successor Company
	Recorded investment with a recorded allowance		Recorded investment with no recorded allowance		Total		Related Allowance		Unpaid Principal Balance
December 31, 2012
New Loans
Commercial:
Commercial real estate	$	208	$	306	$	514	$	14	$	519
Construction and development	40		—		40		8		70
Consumer:
Residential real estate	406		—		406		6		449
Home equity	115		—		115		14		115
Other consumer	—		—		—		—		—
Total	769		306		1,075		42		1,153

Legacy Loans
Commercial:
Commercial real estate	—		1,183		1,183		—		1,183
Construction and development	—		375		375		—		558
Consumer:
Residential real estate	350		696		1,046		3		1,156
Home equity	38		1,189		1,227		—		2,057
Other consumer	224		—		224		1		224
Total	612		3,443		4,055		4		5,178
Total impaired loans	$	1,381	$	3,749	$	5,130	$	46	$	6,331



	Predecessor Company
	With a recorded allowance		With no recorded allowance		Total		Related Allowance		Unpaid Principal Balance
December 31, 2011
New Loans
Total	—		—		—		—		—

Legacy Loans
Commercial real estate	$	—	$	1,348	$	1,348	$	—	$	1,348
Residential real estate	—		995		995		—		995
Construction	—		131		131		—		131
Total	—		2,474		2,474		—		2,474
Total impaired loans	$	—	$	2,474	$	2,474	$	—	$	2,474

The following table provides to average balance of impaired loans for each period presented and interest income recognized during the period in which the loans were considered impaired.



	Successor Company
	February 1 to December 31, 2012
	Average Balance		Interest Income
Impaired loans:
New Loans
Commercial:
Commercial real estate	$	129	$	—
Construction and development	10		—
Consumer:
Residential real estate	102		—
Home equity	29		—
Total	270		—

Legacy Loans
Commercial:
Commercial real estate	947		—
Construction and development	127		—
Consumer:
Residential real estate	664		4
Home equity	904		4
Other consumer	56		—
Total	2,698		8
Total impaired loans	$	2,968	$	8

The average balance of impaired loans for the year ended December 31, 2011 totaled $1,259 and interest income of $204 was recorded on impaired loans during that period. The average balance of impaired loans during the 2012 Predecessor Period totaled $2,474 and there was no interest income recorded on impaired loans during that period.

The Company may modify certain loans under terms that are below market in order to maximize the amount collected from a borrower that is experiencing financial difficulties. These modifications are considered troubled debt restructurings ("TDRs"). As of December 31, 2012, the Company had two residential real estate loans for $209, one commercial loan for $20, one commercial construction loan for $118, one home equity loan for $37, and one commercial real estate loan for $306 that were classified as TDRs. One commercial construction TDR in the amount of $118 has defaulted on its modified terms and the remaining TDRs are performing under their modified terms. As of December 31, 2011, the company had two construction and development loans for $372, one commercial and industrial loan for $45 and one residential real estate loan for $389 that were classified as TDRs. None of these loans had defaulted on their modified terms. TDRs are evaluated individually for impairment based on the collateral value, if the loan is determined to be collateral dependent, or discounted expected cash flows, if the loan is not determined to be collateral dependent. The Company has no commitments to lend additional funds to any borrowers that have been had a loan modified in a TDR.