XML 65 R12.htm IDEA: XBRL DOCUMENT

Note 5 - Loans and Allowance for Loan Losses

3 Months Ended

Mar. 31, 2013

Policy Loans Receivable, Policy [Policy Text Block]

Note 5 – Loans and Allowance for Loan Losses

The Company’s loan portfolio was comprised of the following at:

	March 31, 2013								December 31, 2012
	PCI loans		All other loans			Total			PCI loans		All other loans			Total
	(dollars in thousands)
Commercial:
Commercial and industrial	$	6,543	$	112,253		$	118,796		$	7,323	$	111,809		$	119,132
Commercial real estate (CRE) - owner-occupied		42,068		243,285			285,353			44,925		254,491			299,416
CRE - investor income producing		77,744		289,690			367,434			85,959		285,998			371,957
Acquisition, construction and development (AC&D)		36,308		104,561			140,869			39,541		101,120			140,661
Other commercial		9		4,885			4,894			742		4,886			5,628
Total commercial loans		162,672		754,674			917,346			178,490		758,304			936,794

Consumer:
Residential mortgage		39,100		141,268			180,368			40,483		148,049			188,532
Home equity lines of credit (HELOC)		1,955		154,847			156,802			1,949		161,676			163,625
Residential construction		10,596		44,609			55,205			11,265		41,547			52,812
Other loans to individuals		1,640		18,597			20,237			2,095		13,458			15,553
Total consumer loans		53,291		359,321			412,612			55,792		364,730			420,522
Total loans		215,963		1,113,995			1,329,958			234,282		1,123,034			1,357,316
Deferred fees		-		(209	)		(209	)		-		(609	)		(609	)
Total loans, net of deferred fees	$	215,963	$	1,113,786		$	1,329,749		$	234,282	$	1,122,425		$	1,356,707

Included in the March 31, 2013 and December 31, 2012 loan totals is $91.9 million and $101.7 million, respectively, of covered loans pursuant to FDIC loss share agreements assumed by the Bank in connection with the Citizens South merger. At March 31, 2013, approximately $87.7 million is included in PCI loans and $4.2 million is included in all other loans. At December 31, 2012, $96.9 million is included in PCI loans and $4.8 million is included in all other loans.

At both March 31, 2013 and December 31, 2012, the Company had sold participations in loans aggregating $11.6 million and $10.8 million, respectively, to other financial institutions on a nonrecourse basis. Collections on loan participations and remittances to participating institutions conform to customary banking practices.

The Bank accepts residential mortgage loan applications and funds loans of qualified borrowers. Funded loans are sold with limited recourse to investors under the terms of pre-existing commitments. The Bank executes all of its loan sales agreements under best efforts contracts with investors. The Company does not service residential mortgage loans for the benefit of others.

Loans sold with limited recourse are 1-4 family residential mortgages originated by the Company and sold to various other financial institutions. Various recourse agreements exist, ranging from thirty days to twelve months. The Company’s exposure to credit loss in the event of nonperformance by the other party to the loan is represented by the contractual notional amount of the loan. Since none of the loans has ever been returned to the Company, the amount of total loans sold with limited recourse does not necessarily represent future cash requirements. The Company uses the same credit policies in making loans held for sale as it does for on-balance sheet instruments. Total loans sold with limited recourse in the three months ended March 31, 2013 were $30.1 million. Total loans sold with limited recourse in the three months ended March 31, 2012 were $21.4 million.

At March 31, 2013 and December 31, 2012, the carrying value of loans pledged as collateral on FHLB borrowings totaled $321.1 million and $144.2 million, respectively. At March 31, 2013 and December 31, 2012, the carrying value of loans pledged as collateral on the Federal Reserve Discount Window totaled $89.5 million and $83.1 million, respectively.

Concentrations of Credit - Loans are primarily made within the Company’s operating footprint of North Carolina, South Carolina and Georgia. Real estate loans can be affected by the condition of the local real estate market. Commercial and industrial loans can be affected by the local economic conditions. The commercial loan portfolio has concentrations in business loans secured by real estate and real estate development loans. Primary concentrations in the consumer loan portfolio include home equity lines of credit and residential mortgages. At March 31, 2013 and December 31, 2012, the Company had no loans outstanding with non-U.S. entities.

Allowance for Loan Losses - The following table presents, by portfolio segment, the activity in the allowance for loan losses for the three months ended March 31, 2013.

	Commercial and industrial			CRE - owner-occupied			CRE - investor income producing			AC&D			Other commercial			Residential mortgage			Home equity lines of credit			Residential construction			Other loans to individuals			Unallocated		Total

For the three months ended March 31, 2013							(dollars in thousands)
Allowance for Loan Losses:
Balance, beginning of period	$	849		$	496		$	1,102		$	4,157		$	8		$	454		$	1,463		$	1,046		$	49		$	-	$	9,624
Provision for loan losses		795			(219	)		255			(238	)		(9	)		(122	)		35			(649	)		25			-		(127	)
Charge-offs		(13	)		-			(253	)		-			-			(2	)		(82	)		-			(16	)		-		(366	)
Recoveries		45			45			131			299			7			19			24			53			8			-		631
Net recoveries		32			45			(122	)		299			7			17			(58	)		53			(8	)		-		265
Balance, end of period	$	1,676		$	322		$	1,235		$	4,218		$	6		$	349		$	1,440		$	450		$	66		$	-	$	9,762

PCI Impairment Allowance for Loan Losses:
Balance, beginning of period	$	225		$	-		$	-		$	542		$	-		$	200		$	-		$	-		$	-		$	-	$	967
PCI provision for loan losses		(225	)		-			16			(143	)		386			118			3			245			36			-		436
PCI impairment charge-off		-			-			(16	)		(14	)		(386	)		-			-			-			-			-		(416	)
Balance, end of period	$	-		$	-		$	-		$	385		$	-		$	318		$	3		$	245		$	36		$	-	$	987

Total Allowance for Loan Losses	$	1,676		$	322		$	1,235		$	4,603		$	6		$	667		$	1,443		$	695		$	102		$	-	$	10,749

For the three months ended March 31, 2012
Allowance for Loan Losses:
Balance, beginning of period	$	703		$	740		$	2,106		$	3,883		$	17		$	309		$	1,898		$	455		$	43		$	-	$	10,154
Provision for loan losses		427			18			(208	)		(408	)		88			(10	)		(35	)		117			(16	)		150		123
Charge-offs		(169	)		-			(54	)		(345	)		(94	)		-			(165	)		-			(1	)		-		(828	)
Recoveries		11			-			1			81			-			1			-			-			13			-		107
Net charge-offs		(158	)		-			(53	)		(264	)		(94	)		1			(165	)		-			12			-		(721	)
Balance, end of period	$	972		$	758		$	1,845		$	3,211		$	11		$	300		$	1,698		$	572		$	39		$	150	$	9,556

The following table presents, by portfolio segment, the balance in the allowance for loan losses disaggregated on the basis of the Company’s impairment measurement method and the related recorded investment in loans at March 31, 2013 and December 31, 2012.

	Commercial and industrial		CRE - owner-occupied		CRE - investor income producing		AC&D		Other commercial		Residential mortgage		Home equity lines of credit		Residential construction		Other loans to individuals		Total

At March 31, 2013					(dollars in thousands)
Allowance for Loan Losses:
Individually evaluated for impairment	$	767	$	-	$	190	$	-	$	-	$	247	$	433	$	-	$	-	$	1,637
Collectively evaluated for impairment		909		322		1,045		4,218		6		102		1,007		450		66		8,125
		1,676		322		1,235		4,218		6		349		1,440		450		66		9,762
Purchased credit-impaired		-		-		-		385		-		318		3		245		36		987
Total	$	1,676	$	322	$	1,235	$	4,603	$	6	$	667	$	1,443	$	695	$	102	$	10,749

Recorded Investment in Loans:
Individually evaluated for impairment	$	1,625	$	2,322	$	3,878	$	3,547	$	164	$	3,559	$	2,087	$	2	$	68	$	17,252
Collectively evaluated for impairment		110,628		240,963		285,812		101,014		4,721		137,709		152,760		44,607		18,529		1,096,743
		112,253		243,285		289,690		104,561		4,885		141,268		154,847		44,609		18,597		1,113,995
Purchased credit-impaired		6,543		42,068		77,744		36,308		9		39,100		1,955		10,596		1,640		215,963
Total	$	118,796	$	285,353	$	367,434	$	140,869	$	4,894	$	180,368	$	156,802	$	55,205	$	20,237	$	1,329,958

At December 31, 2012
Allowance for Loan Losses:
Individually evaluated for impairment	$	115	$	-	$	-	$	-	$	-	$	249	$	351	$	-	$	-	$	715
Collectively evaluated for impairment		734		496		1,102		4,157		8		205		1,112		1,046		49		8,909
		849		496		1,102		4,157		8		454		1,463		1,046		49		9,624
Purchased credit-impaired		225		-		-		542		-		200		-		-		-		967
Total	$	1,074	$	496	$	1,102	$	4,699	$	8	$	654	$	1,463	$	1,046	$	49	$	10,591

Recorded Investment in Loans:
Individually evaluated for impairment	$	607	$	2,337	$	4,243	$	4,855	$	168	$	3,463	$	1,925	$	71	$	73	$	17,742
Collectively evaluated for impairment		111,202		252,154		281,755		96,265		4,718		144,586		159,751		41,476		13,385		1,105,292
		111,809		254,491		285,998		101,120		4,886		148,049		161,676		41,547		13,458		1,123,034
Purchased credit-impaired		7,323		44,925		85,959		39,541		742		40,483		1,949		11,265		2,095		234,282
Total	$	119,132	$	299,416	$	371,957	$	140,661	$	5,628	$	188,532	$	163,625	$	52,812	$	15,553	$	1,357,316

The Company’s loan loss allowance methodology includes four components, as described below:

Specific Reserve Component. Specific reserves represent the current impairment estimate on specific loans, for which it is probable that the Company will be unable to collect all amounts due according to contractual terms based on current information and events. Impairment measurement reflects only a deterioration of credit quality and not changes in market rates that may cause a change in the fair value of the impaired loan. The amount of impairment may be measured in one of three ways, including (i) calculating the present value of expected future cash flows, discounted at the loan’s interest rate implicit in the original document and deducting estimated selling costs, if any; (ii) observing quoted market prices for identical or similar instruments traded in active markets, or employing model-based valuation techniques for which all significant assumptions are observable in the market; and (iii) determining the fair value of collateral, which is utilized for both collateral dependent loans and for loans when foreclosure is probable.

Quantitative Reserve Component. Quantitative reserves represent the current loss contingency estimate on pools of loans, which is an estimate of the amount for which it is probable that the Company will be unable to collect all amounts due on homogeneous groups of loans according to contractual terms should one or more events occur, excluding those loans specifically identified above. During the fourth quarter of 2011, the Company introduced two enhancements to this component of the allowance. First, management completed its previously disclosed project to collect and evaluate internal loan loss data and now incorporates the Company’s historical loss experience in this component. Previously, given the Company’s limited operating history, this component of the allowance for loan losses was based on the historical loss experience of comparable institutions. Second, the new methodology now segregates loans by product type in addition to the previous segregation by internal risk grade.

This component of the allowance for loan losses is based on the historical loss experience of the Company. This loss experience is collected quarterly by evaluating internal loss data. The estimated historical loss rates are grouped by loan product type. The Company utilizes average historical losses to represent management’s estimate of losses inherent in that portfolio. The historical look back period is estimated by loan type and the Company applies the appropriate historical loss period which best reflects the inherent loss in the portfolio considering prevailing market conditions. A minimum reserve is utilized when the Company has insufficient internal loss history. Minimums are determined by analyzing Federal Reserve Bank charge-off data for all insured federal- and state-chartered commercial banks. The following look back periods were utilized by management in determining the quantitative reserve component at March 31, 2013:

15 quarter – Commercial & industrial and AC&D

ii.

12 quarter – CRE-investor income producing, residential mortgage, and HELOCs

iii.

9 quarter – Residential construction

iv.

Minimum – CRE-owner-occupied, other commercial and other consumer

At December 31, 2012, management utilized the following look back periods:

12 quarter – AC&D, residential mortgage and residential construction

ii.

8 quarter – Commercial & industrial, CRE-owner-occupied, CRE-investor income producing, and HELOCs

iii.

Minimum –Other commercial and other consumer

In all cases, except residential construction, the changes in look back periods are the result of sufficient build up in loss histories to support a longer period. The residential construction look back period was shortened in order to eliminate a single loan loss in the fourth quarter of 2010 which management believes does not represent the risk of the current portfolio. These changes in methodology did not have a material impact on the estimated allowance at March 31, 2013.

Qualitative Reserve Component. Qualitative reserves represent an estimate of the amount for which it is probable that environmental or other relevant factors will cause the aforementioned loss contingency estimate to differ from the Company’s historical loss experience or other assumptions. During the second quarter of 2012, the Company refined its allowance methodology to eliminate the use of traditional risk grade factors as a forward-looking qualitative indicator, which had been introduced during the fourth quarter of 2011, and instead focuses directly on five specific environmental factors. These five factors include portfolio trends, portfolio concentrations, economic and market conditions, changes in lending practices and other factors. Management believes these refinements simplify application of the qualitative component of the allowance methodology. Each of the factors, except other factors, can range from 0.00% (not applicable) to 0.15% (very high). Other factors are reviewed on a situational basis and are adjusted in 5 basis point increments, up or down, with a maximum of 0.50%. Details of the five environmental factors for inclusion in the allowance methodology are as follows:

Portfolio trends, which may relate to such factors as type or level of loan origination activity, changes in asset quality (i.e., past due, special mention, non-performing) and/or changes in collateral values;

ii.

Portfolio concentrations, which may relate to individual borrowers and/or guarantors, geographic regions, industry sectors, loan types and/or other factors;

iii.

Economic and market trends, which may relate to trends and/or levels of gross domestic production, unemployment, bankruptcies, foreclosures, housing starts, housing prices, equity prices, competitor activities and/or other factors;

iv.

Changes in lending practices, which may relate to changes in credit policies, procedures, systems or staff; and

Other factors, which is intended to capture environmental factors not specifically identified above.

In addition, qualitative reserves on purchased performing loans are based on the Company’s judgment around the timing difference expected to occur between accretion of the fair market value credit adjustment and realization of actual loans losses.

Reserve on Purchased-Credit Impaired Loans. In determining the acquisition date fair value of PCI loans, and in subsequent accounting, the Company generally aggregates purchased loans into pools of loans with common risk characteristics. Expected cash flows at the acquisition date in excess of the fair value of loans are recorded as interest income over the life of the loans using a level yield method if the timing and amount of the future cash flows of the pool is reasonably estimable. Subsequent to the acquisition date, significant increases in cash flows over those expected at the acquisition date are recognized as interest income prospectively. Decreases in expected cash flows after the acquisition date are recognized by recording an allowance for loan losses. In pools where impairment has already been recognized, an increase in cash flows will result in a reversal of prior impairment. Management analyzes these acquired loan pools using various assessments of risk to determine and calculate an expected loss. The expected loss is derived using an estimate of a loss given default based upon the collateral type and/or specific review by loan officers of loans generally greater than $1.0 million, and the probability of default that was determined based upon management’s review of the loan portfolio. Trends are reviewed in terms of traditional credit metrics such as accrual status, past due status, and weighted-average grade of the loans within each of the accounting pools. In addition, the relationship between the change in the unpaid principal balance and change in the fair value mark is assessed to correlate the directional consistency of the expected loss for each pool. This analysis resulted in net impairment in two pools and a net recovery in another pool for the three months ended March 31, 2013. These pools are spread across several reporting segments and a full breakdown of the net impairment or recovery is detailed in the allowance by segment table above for the three-months ended March 31, 2013. There was no impairment for the three-months ended March 31, 2012.

The Company evaluates and estimates off-balance sheet credit exposure at the same time it estimates credit losses for loans by a similar process. These estimated credit losses are not recorded as part of the allowance for loan losses, but are recorded to a separate liability account by a charge to income, if material. Loan commitments, unused lines of credit and standby letters of credit make up the off-balance sheet items reviewed for potential credit losses. At March 31, 2013 and December 31, 2012, $125 thousand was recorded as an other liability for off-balance sheet credit exposure.

Credit Quality Indicators - The Company uses several credit quality indicators to manage credit risk in an ongoing manner. The Company's primary credit quality indicator is an internal credit risk rating system that categorizes loans into pass, special mention, or classified categories. Credit risk ratings are applied individually to those classes of loans that have significant or unique credit characteristics that benefit from a case-by-case evaluation. These are typically loans to businesses or individuals in the classes that comprise the commercial portfolio segment. Groups of loans that are underwritten and structured using standardized criteria and characteristics, such as statistical models (e.g., credit scoring or payment performance), are typically risk rated and monitored collectively. These are typically loans to individuals in the classes that comprise the consumer portfolio segment.

The following are the definitions of the Company's credit quality indicators:

Pass:		Loans in classes that comprise the commercial and consumer portfolio segments that are not adversely rated, are contractually current as to principal and interest, and are otherwise in compliance with the contractual terms of the loan agreement. Purchased performing and PCI loans that were recorded at estimated fair value on the acquisition date are generally assigned a “pass” loan grade because their net financial statement value is based on the present value of expected cash flows. Management believes there is a low likelihood of loss related to those loans that are considered pass.

Special Mention:		Loans in classes that comprise the commercial and consumer portfolio segments that have potential weaknesses that deserve management's close attention. If not addressed, these potential weaknesses may result in deterioration of the repayment prospects for the loan. Management believes there is a moderate likelihood of some loss related to those loans that are considered special mention.

Classified:		Loans in the classes that comprise the commercial portfolio segment that are inadequately protected by the sound worth and paying capacity of the borrower or of the collateral pledged, if any. Management believes that there is a distinct possibility that the Company will sustain some loss if the deficiencies related to classified loans are not corrected in a timely manner.

The Company's credit quality indicators are periodically updated on a case-by-case basis. The following tables present the recorded investment in the Company's loans as of March 31, 2013 and December 31, 2012, by loan class and by credit quality indicator.

	As of March 31, 2013
(dollars in thousands)	Commercial and Industrial		CRE-Owner Occupied		CRE-Investor Income Producing		AC&D		Other Commercial		Total Commercial
Pass	$	115,632	$	279,777	$	356,707	$	130,541	$	4,729	$	887,386
Special mention		226		2,779		5,851		6,478		-		15,334
Classified		2,938		2,797		4,876		3,850		165		14,626
Total	$	118,796	$	285,353	$	367,434	$	140,869	$	4,894	$	917,346

	Residential Mortgage		Home Equity Lines of Credit		Residential Construction		Other Loans to Individuals		Total Consumer
Pass	$	177,787	$	151,373	$	55,039	$	19,704	$	403,903
Special mention		837		1,235		-		353		2,425
Classified		1,744		4,194		166		180		6,284
Total	$	180,368	$	156,802	$	55,205	$	20,237	$	412,612

Total Loans									$	1,329,958

	As of December 31, 2012
(dollars in thousands)	Commercial and Industrial		CRE-Owner Occupied		CRE-Investor Income Producing		AC&D		Other Commercial		Total Commercial
Pass	$	115,907	$	292,418	$	361,212	$	126,167	$	5,460	$	901,164
Special mention		173		3,804		5,564		9,252		-		18,793
Classified		3,052		3,194		5,181		5,242		168		16,837
Total	$	119,132	$	299,416	$	371,957	$	140,661	$	5,628	$	936,794

	Residential Mortgage		Home Equity Lines of Credit		Residential Construction		Other Loans to Individuals		Total Consumer
Pass	$	185,686	$	158,335	$	52,612	$	15,444	$	412,077
Special mention		1,115		2,599		-		78		3,792
Classified		1,731		2,691		200		31		4,653
Total	$	188,532	$	163,625	$	52,812	$	15,553	$	420,522

Total Loans									$	1,357,316

Aging Analysis of Accruing and Non-Accruing Loans - The Company considers a loan to be past due or delinquent when the terms of the contractual obligation are not met by the borrower. PCI loans are included as a single category in the table below as management believes, regardless of their age, there is a lower likelihood of aggregate loss related to these loan pools. Additionally, PCI loans are discounted to allow for the accretion of income on a level yield basis over the life of the loan based on expected cash flows. Regardless of accruing status, the associated discount on these loan pools results in income recognition. The following presents, by class, an aging analysis of the Company’s accruing and non-accruing loans as of March 31, 2013 and December 31, 2012.

	30-59 Days Past Due		60-89 Days Past Due		Past Due 90 Days or More		PCI Loans		Current		Total Loans
As of March 31, 2013	(dollars in thousands)
Commercial:
Commercial and industrial	$	224	$	-	$	303	$	6,543	$	111,726	$	118,796
CRE - owner-occupied		-		-		330		42,068		242,955		285,353
CRE - investor income producing		67		8		232		77,744		289,383		367,434
AC&D		556		138		1,185		36,308		102,682		140,869
Other commercial		204		-		-		9		4,681		4,894
Total commercial loans		1,051		146		2,050		162,672		751,427		917,346

Consumer:
Residential mortgage		176		69		473		39,100		140,550		180,368
Home equity lines of credit		417		598		818		1,955		153,014		156,802
Residential construction		313		-		2		10,596		44,294		55,205
Other loans to individuals		3		18		2		1,640		18,574		20,237
Total consumer loans		909		685		1,295		53,291		356,432		412,612
Total loans	$	1,960	$	831	$	3,345	$	215,963	$	1,107,859	$	1,329,958

As of December 31, 2012
Commercial:
Commercial and industrial	$	1,316	$	83	$	230	$	7,323	$	110,180	$	119,132
CRE - owner-occupied		48		1,903		113		44,925		252,427		299,416
CRE - investor income producing		224		27		366		85,959		285,381		371,957
AC&D		-		699		1,428		39,541		98,993		140,661
Other commercial		-		-		168		742		4,718		5,628
Total commercial loans		1,588		2,712		2,305		178,490		751,699		936,794

Consumer:
Residential mortgage		18		196		499		40,483		147,336		188,532
Home equity lines of credit		590		-		1,094		1,949		159,992		163,625
Residential construction		-		-		71		11,265		41,476		52,812
Other loans to individuals		36		4		-		2,095		13,418		15,553
Total consumer loans		644		200		1,664		55,792		362,222		420,522
Total loans	$	2,232	$	2,912	$	3,969	$	234,282	$	1,113,921	$	1,357,316

Impaired Loans - All classes of loans are considered impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. Impaired loans may include all classes of nonaccrual loans and loans modified in a TDR. If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported net, at the present value of estimated future cash flows using the rate implicit in the original loan agreement or at the fair value of collateral if repayment is expected solely from the collateral. Additionally, a portion of the Company’s qualitative factors accounts for potential impairment on loans generally less than $150 thousand. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans, or portions thereof, are charged off when deemed uncollectible.

During the first quarter of 2013, the Company’s quarterly cash flow analysis indicated that two of the Company’s fourteen PCI loan pools, both real estate pools, had net impairment of $436 thousand. This net impairment is spread among almost all of the loan segments presented in the table above. As a result of changes in cash flows, increases and decreases, certain segments saw reversals of previously recognized impairment. At December 31, 2012, the Company’s quarterly cash flow analyses indicated that three of fourteen PCI loan pools were impaired. This analysis resulted in $225 thousand net impairment in a commercial pool, $542 thousand net impairment in an AC&D pool and $200 thousand net impairment of a residential mortgage pool at December 31, 2012 These amounts are not included in the tables below. There was no impairment of PCI loans for the first quarter of 2012.

The table below presents impaired loans, by class, and the corresponding allowance for loan losses at March 31, 2013 and December 31, 2012:

	March 31, 2013						December 31, 2012
	Recorded Investment		Unpaid Principal Balance		Related Allowance For Loan Losses		Recorded Investment		Unpaid Principal Balance		Related Allowance For Loan Losses
	(dollars in thousands)
Impaired Loans with No Related Allowance Recorded:
Commercial:
Commercial and industrial	$	380	$	1,065	$	-	$	377	$	1,170	$	-
CRE - owner-occupied		2,322		3,654		-		2,337		2,675		-
CRE - investor income producing		268		4,111		-		4,243		4,424		-
AC&D		3,547		10,445		-		4,855		9,306		-
Other commercial		164		172		-		168		172		-
Total commercial loans		6,681		19,447		-		11,980		17,747		-
Consumer:
Residential mortgage		2,358		3,058		-		2,252		2,363		-
Home equity lines of credit		1,388		3,166		-		1,419		2,439		-
Residential construction		2		693		-		71		551		-
Other loans to individuals		68		103		-		73		75		-
Total consumer loans		3,816		7,020		-		3,815		5,428		-
Total impaired loans with no related allowance recorded	$	10,497	$	26,467	$	-	$	15,795	$	23,175	$	-

Impaired Loans with an Allowance Recorded:
Commercial:
Commercial and industrial	$	1,245	$	1,245	$	767	$	230	$	230	$	115
CRE - owner-occupied		-		-		-		-		-		-
CRE - investor income producing		3,610		3,610		190		-		-		-
AC&D		-		-		-		-		-		-
Other commercial		-		-		-		-		-		-
Total commercial loans		4,855		4,855		957		230		230		115
Consumer:
Residential mortgage		1,201		1,248		247		1,211		1,250		249
Home equity lines of credit		699		906		433		506		707		351
Residential construction		-		-		-		-		-		-
Other loans to individuals		-		-		-		-		-		-
Total consumer loans		1,900		2,154		680		1,717		1,957		600
Total impaired loans with an allowance recorded	$	6,755	$	7,009	$	1,637	$	1,947	$	2,187	$	715

Total Impaired Loans:
Commercial:
Commercial and industrial	$	1,625	$	2,310	$	767	$	607	$	1,400	$	115
CRE - owner-occupied		2,322		3,654		-		2,337		2,675		-
CRE - investor income producing		3,878		7,721		190		4,243		4,424		-
AC&D		3,547		10,445		-		4,855		9,306		-
Other commercial		164		172		-		168		172		-
Total commercial loans		11,536		24,302		957		12,210		17,977		115
Consumer:
Residential mortgage		3,559		4,306		247		3,463		3,613		249
Home equity lines of credit		2,087		4,072		433		1,925		3,146		351
Residential construction		2		693		-		71		551		-
Other loans to individuals		68		103		-		73		75		-
Total consumer loans		5,716		9,174		680		5,532		7,385		600

Total impaired loans	$	17,252	$	33,476	$	1,637	$	17,742	$	25,362	$	715

The average recorded investment and interest income recognized on impaired loans, by class, for the three months ended March 31, 2013 and March 31, 2012 is shown in the table below.

	Three Months Ended March 31,
	2013				2012
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(dollars in thousands)
Impaired Loans with No Related Allowance Recorded:
Commercial:
Commercial and industrial	$	536	$	-	$	639	$	-
CRE - owner-occupied		1,361		4		324		7
CRE - investor income producing		2,673		-		710		-
AC&D		6,726		18		8,954		21
Other commercial		131		-		-		-
Total commercial loans		11,427		22		10,627		28
Consumer:
Residential mortgage		1,341		18		409		-
Home equity lines of credit		1,034		-		503		-
Residential construction		78		-		94		-
Other loans to individuals		59		1		12		-
Total consumer loans		2,512		19		1,018		-
Total impaired loans with no related allowance recorded	$	13,939	$	41	$	11,645	$	28

Impaired Loans with an Allowance Recorded:
Commercial:
Commercial and industrial	$	436	$	-	$	130	$	-
CRE - owner-occupied		12		-		-		-
CRE - investor income producing		1,411		36		1,378		-
AC&D		609		-		1,593		-
Other commercial		-		-		-		-
Total commercial loans		2,468		36		3,101		-
Consumer:
Residential mortgage		1,134		9		-		9
Home equity lines of credit		431		-		319		-
Residential construction		-		-		-		-
Other loans to individuals		-		-		-		-
Total consumer loans		1,565		9		319		9
Total impaired loans with an allowance recorded	$	4,033	$	45	$	3,420	$	9

Total Impaired Loans:
Commercial:
Commercial and industrial	$	972	$	-	$	769	$	-
CRE - owner-occupied		1,373		4		324		7
CRE - investor income producing		4,084		36		2,088		-
AC&D		7,335		18		10,547		21
Other commercial		131		-		-		-
Total commercial loans		13,895		58		13,728		28
Consumer:
Residential mortgage		2,475		27		409		9
Home equity lines of credit		1,465		-		822		-
Residential construction		78		-		94		-
Other loans to individuals		59		1		12		-
Total consumer loans		4,077		28		1,337		9

Total impaired loans	$	17,972	$	86	$	15,065	$	37

During the three months ended March 31, 2013 and 2012, the Company recognized $86 thousand and $37 thousand, respectively, in interest income with respect to impaired loans, specifically accruing TDRs, within the period the loans were impaired.

Nonaccrual and Past Due Loans - It is the general policy of the Company to place a loan on nonaccrual status when there is probable loss or when there is reasonable doubt that all principal will be collected, or when it is over 90 days past due. At March 31, 2013, there was a $2 thousand loan past due 90 days or more and accruing interest. This loan is considered fully collectible at March 31, 2013. At December 31, 2012, there was a $77 thousand loan past due 90 days or more and accruing interest. The recorded investment in nonaccrual loans at March 31, 2013 and December 31, 2012 follows:

	March 31,		December 31,
	2013		2012
	(dollars in thousands)
Commercial:
Commercial and industrial	$	1,600	$	607
CRE - owner-occupied		1,990		1,996
CRE - investor income producing		268		633
AC&D		2,578		3,872
Other commercial		164		168
Total commercial loans		6,600		7,276
Consumer:
Residential mortgage		1,051		1,096
Home equity lines of credit		2,070		1,925
Residential construction		2		71
Other loans to individuals		4		6
Total consumer loans		3,125		3,098
Total nonaccrual loans	$	9,725	$	10,374

Purchased Credit-Impaired Loans – PCI loans had an unpaid principal balance of $257.5 million and $278.2 million and a carrying value of $216.0 million and $234.3 million at March 31, 2013 and December 31, 2012, respectively. PCI loans represented 10.9% and 11.5% of total assets at March 31, 2013 and December 31, 2012, respectively. Determining the fair value of the PCI loans required the Company to estimate cash flows expected to result from those loans and to discount those cash flows at appropriate rates of interest. For such loans, the excess of cash flows expected at acquisition over the estimated fair value is recognized as interest income over the remaining lives of the loans and is called the accretable yield. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition reflects the impact of estimated credit losses and is called the nonaccretable difference. In accordance with GAAP, there was no carry-over of previously established allowance for loan losses from acquired companies.

In conjunction with the Citizens South acquisition, the PCI loan portfolio was accounted for at fair value as follows (dollars in thousands):

	October 1, 2012

Contractual principal and interest at acquisition	$	294,283
Nonaccretable difference		(47,941	)
Expected cash flows at acquisition		246,342
Accretable yield		(37,724	)

Basis in PCI loans at acquisition - estimated fair value	$	208,618

In conjunction with the Community Capital acquisition, the PCI loan portfolio was accounted for at fair value as follows (dollars in thousands):

	November 1, 2011

Contractual principal and interest at acquisition	$	146,843
Nonaccretable difference		(61,145	)
Expected cash flows at acquisition		85,698
Accretable yield		(14,424	)

Basis in PCI loans at acquisition - estimated fair value	$	71,274

A summary of changes in the accretable yield for PCI loans for the three months ended March 31, 2013 and 2012 follows (dollars in thousands):

	Three Months Ended March 31,

	2013			2012

Accretable yield, beginning of period	$	42,734		$	14,264
Interest income		(3,575	)		(1,216	)
Reclassification of nonaccretable difference due to improvement in expected cash flows		4,693			-
Other changes, net		1,716			(270	)
Accretable yield, end of period	$	45,568		$	12,778

Troubled Debt Restructuring - In situations where, for economic or legal reasons related to a borrower's financial difficulties, management may grant a concession for other than an insignificant period of time to the borrower that would not otherwise be considered, the related loan is classified as a TDR. Management strives to identify borrowers in financial difficulty early and work with them to modify to more affordable terms. These modified terms may include rate reductions, principal forgiveness, payment forbearance and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. All loan modifications are made on a case-by-case basis.

The Company had allocated $242 thousand and $54 thousand, respectively, of specific reserves to customers whose loan terms have been modified in a TDR as of March 31, 2013 and December 31, 2012. As of March 31, 2013, the Company had 18 TDR loans totaling $9.2 million, of which $1.8 million are nonaccrual loans. As of December 31, 2012, the Company had 18 TDR loans totaling $10.2 million, of which $2.8 million are nonaccrual loans.

For the three months ended March 31, 2013, the following table represents a breakdown of the types of concessions made by loan class. There were no new TDRs identified for the three months ended March 31, 2012.

	Three months ended March 31, 2013
(dollars in thousands)	Number of loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Below market interest rate
CRE - investor income producing		1	$	3,610	$	3,610
Residential mortgage		1		43		43
Total		2	$	3,653	$	3,653

There were no loans that were modified as TDRs within the 12 months ended March 31, 2013 or 2012 and for which there was a payment default during the three months ended March 31, 2013 or 2012.

The Company does not deem a TDR to be successful until it has been re-established as an accruing loan. The following table presents the successes and failures of the types of modifications indicated within the 12 months ended March 31, 2013 and 2012 (dollars in thousands):

	Twelve Months Ended March 31, 2013
	Paying as restructured				Nonaccrual				Foreclosure/Default
	Number of loans		Recorded Investment		Number of loans		Recorded Investment		Number of loans		Recorded Investment

Below market interest rate		2	$	3,653		-	$	-		-	$	-
Total		2	$	3,653		-	$	-		-	$	-

	Twelve Months Ended March 31, 2012
	Paying as restructured				Nonaccrual				Foreclosure/Default
	Number of loans		Recorded Investment		Number of loans		Recorded Investment		Number of loans		Recorded Investment

Below market interest rate		1	$	394		1	$	273		-	$	-
Extended payment terms		2		434		2		503		-		-
Forgiveness of principal		1		23		1		-		4		-
Total		4	$	851		4	$	776		4	$	-

Related Party Loans – From time to time, the Company engages in loan transactions with its directors, executive officers and their related interests (collectively referred to as “related parties”). Such loans are made in the ordinary course of business and on substantially the same terms and collateral as those for comparable transactions prevailing at the time and do not involve more than the normal risk of collectability or present other unfavorable features. A summary of activity in loans to related parties is as follows (dollars in thousands):

	Three Months Ended
	March 31,
	2013			2012

Beginning balance	$	4,184		$	3,998
Disbursements		40			83
Repayments		(1,565	)		(110	)
Ending balance	$	2,659		$	3,971

At March 31, 2013 and December 31, 2012, the Company had pre-approved but unused lines of credit totaling $3.0 million and $1.8 million, respectively, to related parties.