Loans and Allowance for Loan Losses

General. The Bank provides to its customers a full range of short- to medium-term commercial, agricultural, Small Business Administration guaranteed, mortgage, home equity, and personal loans, both secured and unsecured. The Bank also makes real estate mortgage and construction loans.

The following table presents loans at June 30, 2014 and December 31, 2013 by class:



	June 30,			December 31,
	2014			2013
	(in thousands)
Construction and land development	$	127,553		$	131,035
Commercial real estate:
Owner occupied	417,340			382,766
Non-owner occupied	203,250			196,926
Residential mortgages:
Secured 1-4 family	178,288			174,072
Multifamily	64,805			41,713
Home equity lines of credit	197,095			194,145
Commercial	184,438			185,443
Consumer and other	45,975			51,667
Total	1,418,744			1,357,767
Less: Net deferred loan origination fees	1,124			979
Allowance for loan losses	(16,449		)	(18,063		)
Loans, net	$	1,403,419		$	1,340,683

Real Estate Loans. Real estate loans include construction and land development loans, commercial real estate loans, residential mortgages, and home equity lines of credit.

Commercial real estate loans totaled $620.6 million and $579.7 million at June 30, 2014 and December 31, 2013, respectively. This lending involves loans secured by owner-occupied commercial buildings for office, storage and warehouse space, as well as non-owner occupied commercial buildings. The Bank generally requires the personal guaranty of borrowers and a demonstrated cash flow capability sufficient to service the debt. Loans secured by commercial real estate may be larger in size and may involve a greater degree of risk than one-to-four family residential mortgage loans. Payments on such loans are often dependent on successful operation or management of the properties.

Construction/development lending totaled $127.6 million and $131.0 million at June 30, 2014 and December 31, 2013, respectively. The Bank originates one-to-four family residential construction loans for the construction of custom homes (where the home buyer is the borrower) and provides financing to builders and consumers for the construction of pre-sold homes. The Bank generally receives a pre-arranged permanent financing commitment from an outside banking entity prior to financing the construction of pre-sold homes; however, the Bank also engages in selected speculative housing lending to existing builder clients utilizing lots that the Bank has a collateral interest in. The Bank also makes commercial real estate construction loans, primarily for owner-occupied properties. The Bank limits its construction lending risk through adherence to established underwriting procedures.

Residential one-to-four family loans amounted to $178.3 million and $174.1 million at June 30, 2014 and December 31, 2013, respectively. The Bank's residential mortgage loans are typically construction loans that convert into permanent financing and are secured by properties located within the Bank's market areas.

Home equity lines of credit totaled $197.1 million and $194.1 million at June 30, 2014 and December 31, 2013, respectively. The Bank's home equity lines of credit generally are variable rate lines of credit secured by junior liens on 1-4 family residential properties with interest only payment options during a draw period. At the end of the draw period, the line of credit generally converts to an amortizing payment with repayment terms of up to 30 years.

Commercial Loans. At June 30, 2014 and December 31, 2013, the Bank's commercial loan portfolio totaled $184.4 million and $185.4 million, respectively. Commercial loans include both secured and unsecured loans for working capital, expansion, and other business purposes. Short-term working capital loans are secured by accounts receivable, inventory and/or equipment. The Bank also makes term commercial loans secured by equipment and real estate. Lending decisions are based on an evaluation of the financial strength, cash flow, management and credit history of the borrower, and the quality of the collateral securing the loan. With few exceptions, the Bank requires personal guarantees and secondary sources of repayment. Commercial loans generally provide greater yields and reprice more frequently than other types of loans, such as real estate loans.

Consumer Loans. Loans to individuals (consumer loans) include automobile loans, boat and recreational vehicle financing, and miscellaneous secured and unsecured personal loans. Consumer loans totaled $46.0 million and $51.7 million at June 30, 2014 and December 31, 2013, respectively. Consumer loans generally can carry significantly greater risks than other loans, even if secured, if the collateral consists of rapidly depreciating assets such as automobiles, boats, recreational vehicles, and equipment. Repossessed collateral securing a defaulted consumer loan may not provide an adequate source of repayment of the loan. Consumer loan collections are sensitive to job loss, illness and other personal factors. The Bank manages the risks inherent in consumer lending by following established credit guidelines and underwriting practices designed to minimize risk of loss.

Loan Approvals. The Bank's loan policies and procedures establish the basic guidelines governing its lending operations. The guidelines address the type of loans that the Bank seeks, target markets, underwriting and collateral requirements, terms, interest rate and yield considerations and compliance with laws and regulations. All loans or credit lines are subject to approval procedures and amount limitations. These limitations apply to the borrower's total outstanding indebtedness to the Bank, including any indebtedness as a guarantor. The policies are reviewed and approved at least annually by the Board of Directors of the Bank. The Bank supplements its own supervision of the loan underwriting and approval process with periodic loan reviews by independent, outside professionals experienced in loan review. Responsibility for loan review, loan underwriting, and approval resides with the Chief Credit Officer position. On an annual basis, the Board of Directors of the Bank determines officers lending authority. Authorities may include loans, letters of credit, overdrafts, uncollected funds and such other authorities as determined by the Board of Directors.

Substantially all of the Company's loans have been granted to customers in the Piedmont, foothills, northwestern mountains, and the Research Triangle regions of North Carolina and the upstate region of South Carolina.

Credit Review and Evaluation. The Bank has a credit review department that reports to the Chief Credit Officer. The focus of the department is on policy compliance and proper grading of higher credit risk loans as well as new and existing loans on a sample basis. Additional reporting for problem/criticized assets has been developed along with an after-the-fact loan review. A newly expanded Enterprise Risk Management role also performs ongoing credit review and evaluation to help manage and assess overall credit risk for the Bank.

The Bank uses a risk grading program to facilitate the evaluation of probable inherent loan losses and the adequacy of the allowance for loan losses for real estate, commercial and consumer loans. In this program, risk grades are initially assigned by loan officers, reviewed by regional credit officers, and further reviewed by internal credit review analysts on a test basis. The Bank strives to maintain the loan portfolio in accordance with conservative loan underwriting policies that result in loans specifically tailored to the needs of the Bank's market area. Every effort is made to identify and minimize the credit risks associated with such lending strategies.

Loans over $20,000 are risk graded on a scale from 1 (highest quality) to 8 (loss). Acceptable loans at inception are grades 1 through 4, and these grades have underwriting requirements that at least meet the minimum requirements of a secondary market source. If borrowers do not meet credit history requirements, other mitigating criteria such as substantial liquidity and low loan-to-value ratios could be considered and would generally have to be met in order to make the loan. The Bank's loan policy states that a guarantor may be necessary if reasonable doubt exists as to the borrower's ability to repay. The Board of Directors has authorized the loan officers to have individual approval authority for risk grade 1 through 4 loans up to maximum exposure limits for each customer. New or renewed loans that are graded 5 (special mention) or lower must have approval from a regional credit officer. Any changes in risk assessments as determined by loan officers, credit administrators, regulatory examiners and management are also considered.

The following is a summary of credit quality indicators by class at June 30, 2014 and December 31, 2013:



Real Estate Credit Exposure as of June 30, 2014
			Commercial Real Estate
	Construction		Owner Occupied		Non-owner Occupied		1-4 Family		Multifamily		Home Equity
	(in thousands)
High Quality	$	—	$	—	$	—	$	88	$	—	$	145
Good Quality	340		750		1,565		810		946		6,256
Satisfactory	21,120		121,367		49,414		101,975		7,854		120,062
Merits Attention	91,877		258,125		142,141		63,600		55,163		62,853
Special Mention	11,231		24,904		7,214		4,394		280		5,473
Substandard	780		3,807		1,144		2,756		556		1,294
Substandard impaired	2,205		8,387		1,772		4,665		6		1,012
Doubtful	—		—		—		—		—		—
Loss	—		—		—		—		—		—
	$	127,553	$	417,340	$	203,250	$	178,288	$	64,805	$	197,095



Other Credit Exposures as of June 30, 2014
	Commercial		Consumer and Other		Total Loans
	(in thousands)
High Quality	$	2,002	$	1,785	$	4,020
Good Quality	4,748		1,360		16,775
Satisfactory	56,526		22,178		500,496
Merits Attention	107,531		19,590		800,880
Special Mention	5,168		783		59,447
Substandard	5,676		2		16,015
Substandard impaired	2,787		277		21,111
Doubtful	—		—		—
Loss	—		—		—
	$	184,438	$	45,975	$	1,418,744



Real Estate Credit Exposure as of December 31, 2013
			Commercial Real Estate
	Construction		Owner Occupied		Non-owner Occupied		1-4 Family		Multifamily		Home Equity
	(in thousands)
High Quality	$	—	$	—	$	—	$	90	$	—	$	161
Good Quality	356		—		1,587		982		957		6,627
Satisfactory	22,403		125,560		47,453		99,578		7,691		118,339
Merits Attention	90,343		226,320		133,072		62,242		31,686		61,026
Special Mention	14,434		20,284		7,392		5,307		551		5,075
Substandard	1,168		4,244		2,624		3,005		572		1,632
Substandard impaired	2,331		6,358		4,798		2,868		256		1,285
Doubtful	—		—		—		—		—		—
Loss	—		—		—		—		—		—
	$	131,035	$	382,766	$	196,926	$	174,072	$	41,713	$	194,145



Other Credit Exposures as of December 31, 2013
	Commercial		Consumer and Other		Total Loans
	(in thousands)
High Quality	$	2,640	$	2,162	$	5,053
Good Quality	5,084		1,160		16,753
Satisfactory	63,674		21,221		505,919
Merits Attention	94,313		26,126		725,128
Special Mention	7,874		676		61,593
Substandard	9,553		32		22,830
Substandard impaired	2,305		290		20,491
Doubtful	—		—		—
Loss	—		—		—
	$	185,443	$	51,667	$	1,357,767

Nonaccrual loans and past due loans. Nonperforming assets include loans classified as nonaccrual, foreclosed bank-owned property and loans past due 90 days or more on which interest is still being accrued. It is the general policy of the Bank to stop accruing interest for all classes of loans past due 90 days or when it is apparent that the collection of principal and/or interest is doubtful. In addition, certain restructured loans are placed on nonaccrual status until sufficient evidence of timely payment is obtained. When a loan is placed on nonaccrual status, any interest previously accrued but not collected is reversed against interest income in the current period. Amounts received on nonaccrual loans generally are applied first to principal and then to interest only after all principal has been collected. There were no financing receivables past due over 90 days accruing interest as of June 30, 2014 and December 31, 2013.

Nonperforming loans as of June 30, 2014 totaled $19.0 million, or 1.32% of total loans, compared with $15.4 million, or 1.12% of total loans, as of December 31, 2013. The Bank aggressively pursues the collection and repayment of all loans. Other nonperforming assets, such as repossessed and foreclosed collateral is aggressively liquidated by the Bank's collection department. The total number of loans on nonaccrual status has increased from 195 at December 31, 2013 to 202 at June 30, 2014.

The following is a breakdown of nonaccrual loans as of June 30, 2014 and December 31, 2013:



	June 30, 2014		December 31, 2013
	(in thousands)
Financing Receivables on Nonaccrual status
Construction	$	2,205	$	2,331
Commercial real estate:
Owner occupied	6,403		4,417
Non-owner occupied	1,740		1,806
Mortgages:
Secured 1-4 family first lien	4,576		2,734
Multifamily	6		256
Home equity lines of credit	1,011		1,285
Commercial	2,787		2,306
Consumer and other	254		258
Total	$	18,982	$	15,393

Past due loans reported in the following table do not include loans granted forbearance terms since payments terms have been modified or extended, although the loans are past due based on original contract terms. All loans with forbearance terms are included and reported as impaired loans. Loans are considered past due if the required principal and interest income have not been received as of the date such payments were due. The following table presents the Bank's aged analysis of past due loans:



	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans
June 30, 2014	(in thousands)
Construction	$	1,271	$	—	$	847	$	2,118	$	125,435	$	127,553
Commercial real estate:
Owner occupied	1,080		77		3,507		4,664		412,676		417,340
Non-owner occupied	681		—		863		1,544		201,706		203,250
Commercial	484		1,153		2,092		3,729		180,709		184,438
Mortgages:
Secured 1-4 family- first lien	975		224		3,144		4,343		173,945		178,288
Multifamily	—		—		—		—		64,805		64,805
Home equity lines of credit	523		96		160		779		196,316		197,095
Consumer and other	151		58		37		246		45,729		45,975
Total	$	5,165	$	1,608	$	10,650	$	17,423	$	1,401,321	$	1,418,744

December 31, 2013
Construction	$	855	$	207	$	541	$	1,603	$	129,432	$	131,035
Commercial real estate:
Owner occupied	1,973		—		58		2,031		380,735		382,766
Non-owner occupied	1,172		129		432		1,733		195,193		196,926
Commercial	2,029		742		142		2,913		182,530		185,443
Mortgages:
Secured 1-4 family- first lien	2,738		1,190		1,186		5,114		168,958		174,072
Multifamily	—		249		—		249		41,464		41,713
Home equity lines of credit	909		341		75		1,325		192,820		194,145
Consumer and other	322		62		52		436		51,231		51,667
Total	$	9,998	$	2,920	$	2,486	$	15,404	$	1,342,363	$	1,357,767

Impaired Loans. Management considers certain loans graded “substandard impaired” (loans graded 7), "doubtful" (loans graded 7B) or “loss” (loans graded 8) to be individually impaired and may consider “substandard” loans (loans graded 6) individually impaired depending on the borrower's payment history. The Bank measures impairment based upon probable cash flows or the value of the collateral. Collateral value is assessed based on collateral value trends, liquidation value trends, and other liquidation expenses to determine logical and credible discounts that may be needed. Updated appraisals are required for all impaired loans and typically at renewal or modification of larger loans if the appraisal is more than 12 months old.

Impaired loans for all classes of loans typically include nonaccrual loans, loans over 90 days past due still accruing, troubled debt restructured loans and other potential problem loans considered impaired based on other underlying factors. Troubled debt restructured loans are those for which concessions, including the reduction of interest rates below a rate otherwise available to that borrower or the deferral of interest or principal have been granted due to the borrower's weakened financial condition. Interest on troubled debt restructured loans is accrued at the restructured rates when it is anticipated that no loss of original principal will occur and a sustained payment performance period is obtained. Due to the borrowers' inability to make the payments required under the original loan terms, the Bank modifies the terms by granting a longer amortized repayment structure or reduced interest rates. Potential problem loans are loans which are currently performing and are not included in nonaccrual or restructured loans above, but about which we have serious doubts as to the borrower's ability to comply with present repayment terms. These loans are likely to be included later in nonaccrual, past due or troubled debt restructured loans, so they are considered by management in assessing the adequacy of the allowance for loan losses.

Impaired loans under $250,000 are collectively reviewed for impairment based on homogeneous pools established for each class of impaired loans with similar risk characteristics in accordance with ASC 310-10-35-21 and are not included with non-impaired loans. Separate loss given probability of default rates are calculated for each impaired pool representing the risk associated with impaired loans less than $250,000 for that pool of loans. Total impaired loans under $250,000 collectively evaluated were $7.8 million and $6.2 million, as of June 30, 2014 and December 31, 2013, respectively. Reserves on impaired loans collectively evaluated were $2.4 million and $2.1 million as of June 30, 2014 and December 31, 2013, respectively.

The following table presents the Bank's investment in loans considered to be impaired and related information on those impaired loans as of June 30, 2014 and December 31, 2013:



	June 30, 2014						Quarter to Date June 30, 2014				Year to Date June 30, 2014
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(in thousands)

Impaired loans without a related allowance for loan losses
Construction	$	1,154	$	1,252	$	—	$	1,628	$	8	$	2,671	$	36
Commercial real estate:
Owner occupied	7,725		8,386		—		7,861		40		7,392		110
Non-owner occupied	1,470		1,541		—		1,534		4		1,868		8
Commercial	769		769		—		771		12		1,296		23
Mortgages:
Secured 1-4 family real estate	606		683		—		611		7		641		14
Multifamily	—		—		—		—		—		37		—
Home equity lines of credit	—		—		—		—		—		66		—
Consumer and other	—		—		—		—		—		—		—
Impaired loans with a related allowance for loan losses
Construction	$	826	$	937	$	191	$	669	$	—	$	383	$	—
Commercial real estate:
Owner occupied	5,581		5,582		134		5,474		65		5,274		126
Non-owner occupied	642		642		42		643		8		643		16
Commercial	1,617		1,617		908		1,290		12		894		12
Mortgages:
Secured 1-4 family real estate	1,798		1,824		720		1,434		3		960		3
Multifamily	—		—		—		—		—		—		—
Home equity lines of credit	—		—		—		—		—		—		—
Consumer and other	—		—		—		—		—		—		—
Total impaired loans
Construction	$	1,980	$	2,189	$	191	$	2,297	$	8	$	3,054	$	36
Commercial real estate:
Owner occupied	13,306		13,968		134		13,335		105		12,666		236
Non-owner occupied	2,112		2,183		42		2,177		12		2,511		24
Commercial	2,386		2,386		908		2,061		24		2,190		35
Mortgages:
Secured 1-4 family real estate	2,404		2,507		720		2,045		10		1,601		17
Multifamily	—		—		—		—		—		37		—
Home equity lines of credit	—		—		—		—		—		66		—
Consumer and other	—		—		—		—		—		—		—
Total impaired loans individually reviewed for impairment	$	22,188	$	23,233	$	1,995	$	21,915	$	159	$	22,125	$	348



	December 31, 2013						Quarter to Date June 30, 2013				Year to Date June 30, 2013
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(in thousands)
Impaired loans without a related allowance for loan losses
Construction	$	2,816	$	2,997	$	—	$	5,665	$	60	$	3,938	$	36
Commercial real estate:
Owner occupied	5,445		5,981		—		3,282		49		2,443		24
Non-owner occupied	4,469		4,537		—		5,417		113		3,907		53
Commercial	4,095		4,502		—		4,433		79		3,317		40
Mortgages:
Secured 1-4 family real estate	661		731		—		710		14		514		7
Multifamily	—		—		—		258		—		192		—
Home equity lines of credit	425		477		—		468		—		345		—
Consumer and other	—		—		—		—		—		1		—
Impaired loans with a related allowance for loan losses
Construction	$	200	$	215	$	40	$	1,613	$	25	$	846	$	3
Commercial real estate:
Owner occupied	5,131		5,172		201		7,679		116		7,655		58
Non-owner occupied	645		645		50		464		2		426		—
Commercial	308		313		105		1,193		—		1,193		—
Mortgages:
Secured 1-4 family real estate	331		341		161		401		3		396		—
Multifamily	—		—		—		—		—		—		—
Home equity lines of credit	—		—		—		743		2		741		—
Consumer and other	—		—		—		—		—		—		—
Total impaired loans
Construction	$	3,016	$	3,212	$	40	$	7,278	$	85	$	4,784	$	39
Commercial real estate:
Owner occupied	10,576		11,153		201		10,961		165		10,098		82
Non-owner occupied	5,114		5,182		50		5,881		115		4,333		53
Commercial	4,403		4,815		105		5,626		79		4,510		40
Mortgages:
Secured 1-4 family real estate	992		1,072		161		1,111		17		910		7
Multifamily	—		—		—		258		—		192		—
Home equity lines of credit	425		477		—		1,211		2		1,086		—
Consumer and other	—		—		—		—		—		1		—
Total impaired loan individually reviewed for impairment	$	24,526	$	25,911	$	557	$	32,326	$	463	$	25,914	$	221

Troubled Debt Restructured Loans. Total amount of troubled debt restructured loans outstanding as of June 30, 2014 was $14.2 million with related reserves of $393,912. Approximately $11.0 million of troubled debt restructured loans are current and accruing interest as of June 30, 2014, as these loans have sufficient evidence of paying according to the new restructured terms. Total amount of troubled debt restructured loans outstanding as of December 31, 2013 were $21.5 million with related reserves of $1.2 million. Approximately $15.3 million of troubled debt restructured loans were accruing interest as of December 31, 2013, as these loans have sufficient evidence of paying according to the new restructured terms.

The following tables include the recorded investment and number of modifications for troubled debt restructured loans for the three and six months ended June 30, 2014 and 2013. The Company reports the recorded investment in the loans prior to a modification and also the recorded investment in the loans after the loans were restructured. Reductions in the recorded investment are primarily due to the partial charge-off of the principal balance prior to modification.



	Three Months Ended June 30, 2014			Six Months Ended June 30, 2014
	Number of Loans	Recorded Investment		Number of Loans	Recorded Investment
		(in thousands)			(in thousands)
Principal payment reduction
Commercial real estate:
Non-owner occupied	—	$	—	1	$	477
Total	—	$	—	1	$	477



	Three Months Ended June 30, 2013			Six Months Ended June 30, 2013
	Number of loans	Recorded investment		Number of loans	Recorded investment
Extended payment terms		(In thousands)
Commercial real estate:
Owner occupied	1	$	499	2	724
Non-owner occupied	—	—		1	165
Total extended payment terms	1	$	499	3	$	889

Total	1	$	499	4	$	889

The following tables present loans that were modified as troubled debt restructurings during the previous twelve months and for which there was a payment default during the three and six months ended June 30, 2013. There were no loans modified as troubled debt restructurings during the previous twelve months for which there was a payment default during the three and six months ended June 30, 2014.



	Three Months Ended June 30, 2013			Six Months Ended June 30, 2013
	Number of loans	Recorded investment		Number of loans	Recorded investment
Extended payment terms		(In thousands)			(In thousands)
Construction	—	$	—	2	$	593
Commercial real estate:
Non-owner occupied	—	—		1	121
Total extended payment terms	—	$	—	3	$	714

Allowance for Loan Losses. The allowance for loan losses is a reserve established through a provision for loan losses charged to expense, which represents management's best estimate for probable losses that have been incurred within the existing portfolio of loans. The primary risks inherent in the Bank's loan portfolio, including the adequacy of the allowance or reserve for loan losses, are based on management's assumptions regarding, among other factors, general and local economic conditions, which are difficult to predict and are beyond the Bank's control. In estimating these risks, and the related loss reserve levels, management also considers the financial conditions of specific borrowers and credit concentrations with specific borrowers, groups of borrowers, and industries.

The allowance for loan losses is adjusted by direct charges to provision expense. Losses on loans are charged against the allowance for loan losses in the accounting period in which they are determined by management to be uncollectible. Recoveries during the period are credited to the allowance for loan losses. The provision for (recovery of) loan losses was $(891,000) for the quarter ended June 30, 2014 as compared to $55,000 for the quarter ended June 30, 2013. The provision expense is determined by management with the use of the Bank's allowance for loan losses model. The components of the model are specific reserves for impaired loans and a general allocation for unimpaired loans. The general allocation has two components, an estimate based on historical loss experience and an additional estimate based on internal and external environmental factors due to the uncertainty of historical loss experience in predicting current embedded losses in the portfolio that will be realized in the future.

The portion of the general allocation on environmental factors includes estimates of losses related to interest rate trends, unemployment trends, real estate characteristics, past due and nonaccrual trends, watch list trends, charge-off trends, and underwriting and servicing assessments. The real estate characteristics component includes trends in real estate concentrations, exceptions to Federal Deposit Insurance Corporation ("FDIC") guidelines for loan-to-value ratios, and changes in real estate market values. Other factors impacting the allowance at June 30, 2014 were watch list trends, unemployment rate trends, and underwriting and servicing assessments.

The following tables present changes in the allowance for loan losses for the three and six months ended June 30, 2014 and 2013:



	March 31, 2014		Charge-offs		Recoveries		Provision (Recovery)			June 30, 2014
	(Amounts in thousands)
Construction	$	2,403	$	69	$	71	$	(100	)	$	2,305
Commercial real estate:
Owner occupied	2,988		—		763		(903		)	2,848
Non-owner occupied	1,971		80		116		(412		)	1,595
Commercial	4,072		81		111		606			4,708
Mortgages:
Secured 1-4 family- first lien	2,111		8		8		392			2,503
Multifamily	429		—		—		(57		)	372
Home equity lines of credit	2,108		19		40		(409		)	1,720
Consumer and other	440		90		56		(8		)	398
	$	16,522	$	347	$	1,165	$	(891	)	$	16,449

	March 31, 2013		Charge-offs		Recoveries		Provision (Recovery)			June 30, 2013
	(Amounts in thousands)
Construction	$	4,034	$	1,188	$	82	$	737		$	3,665
Commercial real estate:
Owner occupied	4,413		234		18		(37		)	4,160
Non-owner occupied	3,811		—		18		(370		)	3,459
Commercial	4,005		224		236		(32		)	3,985
Mortgages:
Secured 1-4 family- first lien	2,878		387		79		74			2,644
Multifamily	579		—		—		(66		)	513
Home equity lines of credit	4,134		—		31		(322		)	3,843
Consumer and other	638		82		28		71			655
	$	24,492	$	2,115	$	492	$	55		$	22,924




	December 31, 2013		Charge-offs		Recoveries		Provision (Recovery)			June 30, 2014
	(Amounts in thousands)
Construction	$	3,169	$	326	$	163	$	(701	)	$	2,305
Commercial real estate:
Owner occupied	3,089		—		784		(1,025		)	2,848
Non-owner occupied	2,081		889		697		(294		)	1,595
Commercial	3,733		826		430		1,371			4,708
Mortgages:
Secured 1-4 family- first lien	2,368		240		15		360			2,503
Multifamily	436		80		—		16			372
Home equity lines of credit	2,656		149		210		(997		)	1,720
Consumer and other	531		128		76		(81		)	398
	$	18,063	$	2,638	$	2,375	$	(1,351	)	$	16,449

	December 31, 2012		Charge-offs		Recoveries		Provision (Recovery)			June 30, 2013
	(Amounts in thousands)
Construction	$	4,269	$	1,834	$	598	$	632		$	3,665
Commercial real estate:
Owner occupied	4,374		244		42		(12		)	4,160
Non-owner occupied	3,935		175		24		(325		)	3,459
Commercial	4,291		622		321		(5		)	3,985
Mortgages:
Secured 1-4 family- first lien	3,191		639		100		(8		)	2,644
Multifamily	594		—		—		(81		)	513
Home equity lines of credit	3,822		81		116		(14		)	3,843
Consumer and other	673		172		49		105			655
	$	25,149	$	3,767	$	1,250	$	292		$	22,924

The following tables provide a breakdown of allowance for loan losses for collectively evaluated and individually evaluated loans by type as of June 30, 2014 and December 31, 2013.



	Reserves for loans individually evaluated for impairment		Loans individually evaluated for impairment		Reserves for loans collectively evaluated for impairment		Loans collectively evaluated for impairment
As of June 30, 2014	(Amounts in thousands)
Construction	$	191	$	1,980	$	2,115	$	125,573
Commercial real estate:
Owner occupied	134		13,306		2,714		404,034
Non-owner occupied	42		2,112		1,552		201,138
Commercial	908		2,386		3,801		182,052
Mortgages:
Secured 1-4 family- first lien	720		2,404		1,783		175,884
Multifamily	—		—		372		64,805
Home equity lines of credit	—		—		1,719		197,095
Consumer and other	—		—		398		45,975
	$	1,995	$	22,188	$	14,454	$	1,396,556

	Reserves for loans individually evaluated for impairment		Loans individually evaluated for impairment		Reserves for loans collectively evaluated for impairment		Loans collectively evaluated for impairment
As of December 31, 2013	(Amounts in thousands)
Construction	$	40	$	3,016	$	3,129	$	128,019
Commercial real estate:
Owner occupied	201		10,576		2,888		372,190
Non-owner occupied	50		5,114		2,031		191,812
Commercial	105		4,403		3,628		181,040
Mortgages:
Secured 1-4 family- first lien	161		992		2,207		173,080
Multifamily	—		—		436		41,713
Home equity lines of credit	—		425		2,656		193,720
Consumer and other	—		—		531		51,667
	$	557	$	24,526	$	17,506	$	1,333,241

Included in the tables above is one remaining acquired receivable with deteriorated credit quality. The remaining receivable is a single one-to-four family residential loan with a recorded investment of $88,763 and $90,741 as of June 30, 2014 and December 31, 2013, respectively, with related allowances of $24,270 and $3,567 as of June 30, 2014 and December 31, 2013, respectively.

The allowance model is applied to determine the specific allowance balance for impaired loans and the general allowance balance for unimpaired loans and impaired loans collectively evaluated grouped by loan type.

The Company's loan charge-off policy for all loan classes is to charge down loans to net realizable value once a portion of the loan is determined to be uncollectable, and the underlying collateral shortfall is assessed. Unsecured loans (primarily consumer loans) are charged off against the reserve once the loan becomes 90 days past due or it is determined that a portion of the loan is uncollectable. Secured loans (primarily construction, real estate, commercial and other loans) are moved to nonaccrual status when the loan becomes 90 days delinquent or a portion of the loan is determined to be uncollectable and supporting collateral is not considered to be sufficient to cover potential losses. Nonaccrual loans are reviewed at least quarterly to determine if all or a portion of the loan is uncollectable. Nonaccrual loans that are determined to be solely collateral dependent are promptly charged down to net realizable value upon determination that they are impaired.

In addition to the allowance for loan losses, the Company also estimates probable losses related to unfunded lending commitments, such as letters of credit, financial guarantees and unfunded loan commitments. Unfunded lending commitments are analyzed and segregated by loan classification. These classifications, in conjunction with an analysis of historical loss experience, current economic conditions, performance trends within specific portfolio segments and any other pertinent information, result in the estimation of the reserve for unfunded lending commitments. The reserve for credit losses related to unfunded lending commitments was $109,369 and $116,309 as of June 30, 2014 and December 31, 2013, respectively.

The Company maintains reserves for mortgage loans sold to agencies and investors in the event that, either through error or disagreement between the parties, the Company is required to indemnify the purchase. The reserves take into consideration risks associated with underwriting, key factors in the mortgage industry, loans with specific reserve requirements, past due loans and potential indemnification by the Company. Reserves are estimated based on consideration of factors in the mortgage industry such as declining collateral values and rising levels of delinquency, default and foreclosure, coupled with increased incidents of quality reviews at all levels of the mortgage industry seeking justification for pushing back losses to loan originators and wholesalers. As of June 30, 2014, the Company had reserves for mortgage loans sold of $202,080, and charges against reserves for the three months ended June 30, 2014 were $2,182. For the three months ended June 30, 2014, the Company recorded $7,512 in recapture of provision expense related to potential repurchase and warranties exposure on the $36.8 million in loan sales that occurred during the period. For the three months ended June 30, 2013, the Company recorded $3,898 in provision expense related to potential repurchase and warranties exposure. There were no charges against reserves for the three months ended June 30, 2013. For the six months ended June 30, 2014, the Company recorded $12,424 in recapture of provision expense related to potential repurchase and warranties exposure and charges against reserves were $2,182. For the six months ended June 30, 2013, the Company recorded $1.3 million in recapture of provision expense related to potential repurchase and warranties exposure and charges against reserves were $83,198. Reduction in provisions for the three months ended June 30, 2013 were the result of decreased mortgage activity, improvements in historical loss experience, and declines in specific reserves as claims were paid and settled from previously established reserves. For the three and six ended June 30, 2014 and 2013, the Company did not repurchase any mortgage loans sold. As of December 31, 2013, the Company had reserves for mortgage loans sold of $216,687 related to potential repurchase and warranties exposure.