LOANS AND ALLOWANCE FOR LOAN LOSSES

The following table summarizes the composition of the loan portfolio at September 30, 2015 and December 31, 2014:



(dollars in thousands)	September 30, 2015			December 31, 2014
Commercial, financial and agricultural	$	747,144		695,267
Real estate construction and development	148,548			89,851
Real estate mortgage:
One-to-four-family residential:
Residential mortgage	705,377			621,168
Home equity	396,697			395,542
Multi-family residential	94,277			115,434
Commercial real estate	1,286,765			1,183,042
Consumer and installment	19,523			18,950
Net deferred loan fees	(1,817		)	(1,422	)
Total loans held for portfolio	3,396,514			3,117,832
Loans held for sale	39,041			31,411
Total loans	$	3,435,555		3,149,243

Aging of Loans. The following table presents the aging of loans by loan classification at September 30, 2015 and December 31, 2014:



(dollars in thousands)	30-59 Days		60-89 Days	Recorded Investment > 90 Days Accruing	Nonaccrual	Total Past Due	Current	Total Loans
September 30, 2015:
Commercial, financial and agricultural	$	55	161	—	5,402	5,618	741,526	747,144
Real estate construction and development	—		—	—	3,214	3,214	145,334	148,548
Real estate mortgage:
Residential mortgage	3,553		1,761	—	6,600	11,914	693,463	705,377
Home equity	1,509		380	67	4,602	6,558	390,139	396,697
Multi-family residential	—		—	—	290	290	93,987	94,277
Commercial real estate	11		—	—	4,361	4,372	1,282,393	1,286,765
Consumer and installment and net deferred loan fees	140		49	—	17	206	17,500	17,706
Loans held for sale	—		—	—	—	—	39,041	39,041
Total loans	$	5,268	2,351	67	24,486	32,172	3,403,383	3,435,555

December 31, 2014:
Commercial, financial and agricultural	$	132	430	54	9,486	10,102	685,165	695,267
Real estate construction and development	431		—	—	3,393	3,824	86,027	89,851
Real estate mortgage:
Residential mortgage	2,690		986	35	13,890	17,601	603,567	621,168
Home equity	1,857		334	72	6,831	9,094	386,448	395,542
Multi-family residential	—		—	—	19,731	19,731	95,703	115,434
Commercial real estate	196		54	—	4,122	4,372	1,178,670	1,183,042
Consumer and installment and net deferred loan fees	136		33	2	23	194	17,334	17,528
Loans held for sale	—		—	—	—	—	31,411	31,411
Total loans	$	5,442	1,837	163	57,476	64,918	3,084,325	3,149,243

Under the Company’s loan policy, loans are placed on nonaccrual status once principal or interest payments become 90 days past due. However, individual loan officers may submit written requests for approval to continue the accrual of interest on loans that become 90 days past due. These requests may be submitted for approval consistent with the authority levels provided in the Company’s credit approval policies, and they are only granted if an expected near term future event, such as a pending renewal or expected payoff, exists at the time the loan becomes 90 days past due. If the expected near term future event does not occur as anticipated, the loan is then placed on nonaccrual status.

Credit Quality Indicators. The Company’s credit management policies and procedures focus on identifying, measuring and controlling credit exposure. These procedures employ a lender-initiated system of rating credits, which is ratified in the loan approval process and subsequently tested in internal credit reviews and regulatory bank examinations. The system requires the rating of all loans at the time they are originated or acquired, except for homogeneous categories of loans, such as residential real estate mortgage loans and consumer loans. These homogeneous loans are assigned an initial rating based on the Company’s experience with each type of loan. The Company adjusts the ratings of the homogeneous loans based on payment experience subsequent to their origination.

The Company includes adversely rated credits, including loans requiring close monitoring that would not normally be considered classified credits by the Company’s regulators, on its monthly loan watch list. Loans may be added to the Company’s watch list for reasons that are temporary and correctable, such as the absence of current financial statements of the borrower or a deficiency in loan documentation. Loans may also be added to the Company’s watch list whenever any adverse circumstance is detected which might affect the borrower’s ability to comply with the contractual terms of the loan. The delinquency of a scheduled loan payment, deterioration in the borrower’s financial condition identified in a review of periodic financial statements, a decrease in the value of the collateral securing the loan, or a change in the economic environment within which the borrower operates could initiate the addition of a loan to the Company’s watch list. Loans on the Company’s watch list require periodic detailed loan status reports prepared by the responsible officer which are discussed in formal meetings with credit review and credit administration staff members. Upgrades and downgrades of loan risk ratings may be initiated by the responsible loan officer. However, upgrades of risk ratings associated with significant credit relationships and/or problem credit relationships may only be made with the concurrence of appropriate regional credit officers.

Under the Company’s risk rating system, special mention loans are those loans that do not currently expose the Company to sufficient risk to warrant classification as substandard, troubled debt restructuring (“TDR”) or nonaccrual, but possess weaknesses that deserve management’s close attention. Substandard loans include those loans characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. A loan is classified as a TDR when a borrower is experiencing financial difficulties that lead to the restructuring of a loan, and the Company grants concessions to the borrower in the restructuring that it would not otherwise consider. Loans classified as TDRs that are accruing interest are classified as performing TDRs. Loans classified as TDRs that are not accruing interest are classified as nonperforming TDRs and are included with all other nonaccrual loans for presentation purposes. Loans classified as nonaccrual have all the weaknesses inherent in those loans classified as substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of the currently existing facts, conditions and values, highly questionable and improbable. Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass-rated loans.

The following tables present the credit exposure of loans held for portfolio by internally assigned credit grade and payment activity as of September 30, 2015 and December 31, 2014:



Commercial Loan Portfolio Credit Exposure by Internally Assigned Credit Grade (dollars in thousands)	Commercial and Industrial		Real Estate Construction and Development	Multi-family	Commercial Real Estate	Total
September 30, 2015:
Pass	$	708,534	140,553	87,738	1,262,093	2,198,918
Special mention	25,884		4,781	5,612	16,736	53,013
Substandard	7,324		—	637	3,575	11,536
Performing troubled debt restructuring	—		—	—	—	—
Nonaccrual	5,402		3,214	290	4,361	13,267
Total	$	747,144	148,548	94,277	1,286,765	2,276,734
December 31, 2014:
Pass	$	653,951	85,973	89,148	1,147,824	1,976,896
Special mention	18,713		143	5,945	20,691	45,492
Substandard	12,833		—	610	6,640	20,083
Performing troubled debt restructuring	284		342	—	3,765	4,391
Nonaccrual	9,486		3,393	19,731	4,122	36,732
Total	$	695,267	89,851	115,434	1,183,042	2,083,594



Consumer Loan Portfolio Credit Exposure by Payment Activity (dollars in thousands)	Residential Mortgage		Home Equity	Consumer and Installment and Net Deferred Loan Fees	Total
September 30, 2015:
Pass	$	619,646	390,139	17,500	1,027,285
Substandard	2,641		1,956	189	4,786
Performing troubled debt restructuring	76,490		—	—	76,490
Nonaccrual	6,600		4,602	17	11,219
Total	$	705,377	396,697	17,706	1,119,780
December 31, 2014:
Pass	$	528,388	386,448	17,334	932,170
Substandard	2,662		2,263	171	5,096
Performing troubled debt restructuring	76,228		—	—	76,228
Nonaccrual	13,890		6,831	23	20,744
Total	$	621,168	395,542	17,528	1,034,238

Impaired Loans. Loans deemed to be impaired include performing TDRs and nonaccrual loans. Impaired loans with outstanding balances equal to or greater than $250,000 are evaluated individually for impairment. For these loans, the Company measures the level of impairment based on the present value of the estimated projected cash flows, or if the impaired loans are collateral dependent, the estimated value of the collateral, less applicable selling costs. If the current valuation is lower than the current book balance of the loan, the amount of the difference is evaluated for possible charge-off. In instances where management determines that a charge-off is not appropriate, a specific reserve is established for the individual loan in question. This specific reserve is included as a part of the overall allowance for loan losses.

The following tables present the recorded investment, unpaid principal balance, related allowance for loan losses, average recorded investment and interest income recognized while on impaired status for impaired loans without a related allowance for loan losses and for impaired loans with a related allowance for loan losses by loan classification at September 30, 2015 and December 31, 2014:



(dollars in thousands)	Recorded Investment		Unpaid Principal Balance	Related Allowance for Loan Losses	Average Recorded Investment	Interest Income Recognized ⁽¹⁾
September 30, 2015:
With No Related Allowance Recorded:
Commercial, financial and agricultural	$	2,265	3,226	—	3,003	—
Real estate construction and development	2,615		12,318	—	2,792	—
Real estate mortgage:
Residential mortgage	—		—	—	—	—
Home equity	1,037		1,123	—	1,322	—
Multi-family residential	—		—	—	—	—
Commercial real estate	2,515		2,793	—	2,757	—
Consumer and installment	—		—	—	—	—
	8,432		19,460	—	9,874	—
With A Related Allowance Recorded:
Commercial, financial and agricultural	3,137		5,491	336	4,160	8
Real estate construction and development	599		2,530	200	640	8
Real estate mortgage:
Residential mortgage	83,090		95,993	6,894	86,834	1,782
Home equity	3,565		4,278	974	4,545	—
Multi-family residential	290		468	18	9,834	—
Commercial real estate	1,846		3,484	271	2,024	5
Consumer and installment	17		17	1	13	—
	92,544		112,261	8,694	108,050	1,803
Total:
Commercial, financial and agricultural	5,402		8,717	336	7,163	8
Real estate construction and development	3,214		14,848	200	3,432	8
Real estate mortgage:
Residential mortgage	83,090		95,993	6,894	86,834	1,782
Home equity	4,602		5,401	974	5,867	—
Multi-family residential	290		468	18	9,834	—
Commercial real estate	4,361		6,277	271	4,781	5
Consumer and installment	17		17	1	13	—
	$	100,976	131,721	8,694	117,924	1,803

____________________


(1)	Interest income on impaired loans recognized while on impaired status was $662,000 for the three months ended September 30, 2015.



(dollars in thousands)	Recorded Investment		Unpaid Principal Balance	Related Allowance for Loan Losses	Average Recorded Investment	Interest Income Recognized
December 31, 2014:
With No Related Allowance Recorded:
Commercial, financial and agricultural	$	1,937	2,911	—	2,278	—
Real estate construction and development	2,626		12,333	—	3,106	—
Real estate mortgage:
Residential mortgage	—		—	—	—	—
Home equity	—		—	—	—	—
Multi-family residential	19,050		24,759	—	25,234	959
Commercial real estate	4,119		4,190	—	6,063	116
Consumer and installment	—		—	—	—	—
	27,732		44,193	—	36,681	1,075
With A Related Allowance Recorded:
Commercial, financial and agricultural	7,833		22,089	1,626	9,212	6
Real estate construction and development	1,109		3,403	219	1,312	17
Real estate mortgage:
Residential mortgage	90,118		106,163	7,639	94,835	2,082
Home equity	6,831		7,988	1,366	7,056	—
Multi-family residential	681		3,581	1,157	902	—
Commercial real estate	3,768		5,619	463	5,546	21
Consumer and installment	23		23	1	14	—
	110,363		148,866	12,471	118,877	2,126
Total:
Commercial, financial and agricultural	9,770		25,000	1,626	11,490	6
Real estate construction and development	3,735		15,736	219	4,418	17
Real estate mortgage:
Residential mortgage	90,118		106,163	7,639	94,835	2,082
Home equity	6,831		7,988	1,366	7,056	—
Multi-family residential	19,731		28,340	1,157	26,136	959
Commercial real estate	7,887		9,809	463	11,609	137
Consumer and installment	23		23	1	14	—
	$	138,095	193,059	12,471	155,558	3,201

Recorded investment represents the Company’s investment in its impaired loans (excluding accrued interest receivable and fees) reduced by cumulative charge-offs recorded against the allowance for loan losses on these same loans. At September 30, 2015 and December 31, 2014, the Company had recorded charge-offs of $30.7 million and $55.0 million, respectively, on its impaired loans, representing the difference between the unpaid principal balance and the recorded investment reflected in the tables above. The unpaid principal balance represents the principal amount contractually owed to the Company by the borrowers on the impaired loans.

Troubled Debt Restructurings. In the ordinary course of business, the Company modifies loan terms across loan types, including both consumer and commercial loans, for a variety of reasons. Modifications to consumer loans may include, but are not limited to, changes in interest rate, maturity, amortization and financial covenants. In the original underwriting, loan terms are established that represent the then current and projected financial condition of the borrower. Over any period of time, modifications to these loan terms may be required due to changes in the original underwriting assumptions. These changes may include the financial covenants of the borrower as well as underwriting standards.

Loan modifications are generally performed at the request of the borrower, whether commercial or consumer, and may include reductions in interest rates, changes in payments and maturity date extensions. Although the Company does not have formal, standardized loan modification programs for its commercial or consumer loan portfolios, it addresses loan modifications on a case-by-case basis and also participates in the United States Department of the Treasury’s (“U.S. Treasury”) Home Affordable Modification Program (“HAMP”). HAMP gives qualifying homeowners an opportunity to refinance into more affordable monthly payments, with the U.S. Treasury compensating the Company for a portion of the reduction in monthly amounts due from borrowers participating in this program. At September 30, 2015 and December 31, 2014, the Company had $70.8 million and $72.7 million, respectively, of modified loans in the HAMP program.

For a loan modification to be classified as a TDR, all of the following conditions must be present: (1) the borrower is experiencing financial difficulty, (2) the Company makes a concession to the original contractual loan terms and (3) the Company would not consider the concessions but for economic or legal reasons related to the borrower’s financial difficulty. Modifications of loan terms to borrowers experiencing financial difficulty are made in an attempt to protect as much of the investment in the loan as possible. These modifications are generally made to either prevent a loan from becoming nonaccrual or to return a nonaccrual loan to performing status based on the expectations that the borrower can adequately perform in accordance with the modified terms.

The determination of whether a modification should be classified as a TDR requires significant judgment after taking into consideration all facts and circumstances surrounding the transaction. No single characteristic or factor, taken alone, is determinative of whether a modification should be classified as a TDR. The fact that a single characteristic is present is not considered sufficient to overcome the preponderance of contrary evidence. Assuming all of the TDR criteria are met, the Company considers one or more of the following concessions to the loan terms to represent a TDR: (1) a reduction of the stated interest rate, (2) an extension of the maturity date or dates at a stated interest rate lower than the current market rate for a new loan with similar terms or (3) forgiveness of principal or accrued interest.

Loans renegotiated at a rate equal to or greater than that of a new loan with comparable risk at the time the contract is modified are excluded from TDR classification in the calendar years subsequent to the renegotiation if the loan is in compliance with the modified terms for at least six months.

The Company does not accrue interest on any TDRs unless it believes collection of all principal and interest under the modified terms is reasonably assured. Generally, six months of consecutive payment performance by the borrower under the restructured terms is required before a TDR is returned to accrual status. However, the period could vary depending upon the individual facts and circumstances of the loan. TDRs accruing interest are classified as performing TDRs. The following table presents the categories of performing TDRs as of September 30, 2015 and December 31, 2014:



(dollars in thousands)	September 30, 2015		December 31, 2014
Performing Troubled Debt Restructurings:
Commercial, financial and agricultural	$	—	284
Real estate construction and development	—		342
Real estate mortgage:
One-to-four-family residential	76,490		76,228
Commercial real estate	—		3,765
Total performing troubled debt restructurings	$	76,490	80,619

The Company does not accrue interest on TDRs which have been modified for a period less than six months or are not in compliance with the modified terms. These loans are considered nonperforming TDRs and are included with other nonaccrual loans for classification purposes. The following table presents the categories of loans considered nonperforming TDRs as of September 30, 2015 and December 31, 2014:



(dollars in thousands)	September 30, 2015		December 31, 2014
Nonperforming Troubled Debt Restructurings:
Commercial, financial and agricultural	$	35	243
Real estate construction and development	2,777		2,788
Real estate mortgage:
One-to-four-family residential	2,059		4,003
Multi-family residential	—		19,050
Commercial real estate	—		371
Total nonperforming troubled debt restructurings	$	4,871	26,455

Both performing and nonperforming TDRs are considered to be impaired loans. When an individual loan is determined to be a TDR, the amount of impairment is based upon the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the underlying collateral less applicable selling costs. The impairment amount is either charged off as a reduction to the allowance for loan losses or provided for as a specific reserve within the allowance for loan losses. The allowance for loan losses allocated to TDRs was $6.1 million at September 30, 2015 and December 31, 2014.

The following tables present loans classified as TDRs that were modified during the three and nine months ended September 30, 2015 and 2014:



	Three Months Ended September 30, 2015					Three Months Ended September 30, 2014
(dollars in thousands)	Number of Contracts	Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Number of Contracts	Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
Loan Modifications Classified as Troubled Debt Restructurings:
Commercial, financial and agricultural	—	$	—	$	—	1	$	287	$	287
Real estate mortgage:
One-to-four-family residential	4	550		522		14	2,167		2,095



	Nine Months Ended September 30, 2015					Nine Months Ended September 30, 2014
(dollars in thousands)	Number of Contracts	Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Number of Contracts	Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
Loan Modifications Classified as Troubled Debt Restructurings:
Commercial, financial and agricultural	—	$	—	$	—	1	$	287	$	287
Real estate mortgage:
One-to-four-family residential	16	2,942		2,788		41	6,214		5,429

The following tables present TDRs that defaulted within 12 months of modification during the three and nine months ended September 30, 2015 and 2014:



	Three Months Ended			Three Months Ended
	September 30, 2015			September 30, 2014
(dollars in thousands)	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
Troubled Debt Restructurings That Subsequently Defaulted:
Real estate mortgage:
One-to-four-family residential	—	$	—	2	$	183



	Nine Months Ended			Nine Months Ended
	September 30, 2015			September 30, 2014
(dollars in thousands)	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
Troubled Debt Restructurings That Subsequently Defaulted:
Real estate mortgage:
One-to-four-family residential	—	$	—	8	$	1,385

Upon default of a TDR, which is considered to be 90 days or more past due under the modified terms, impairment is measured based on the fair value of the underlying collateral less applicable selling costs. The impairment amount is either charged off as a reduction to the allowance for loan losses or provided for as a specific reserve within the allowance for loan losses.

Allowance for Loan Losses. The following tables represent a summary of changes in the allowance for loan losses by portfolio segment for the three and nine months ended September 30, 2015 and 2014:



(dollars in thousands)	Commercial and Industrial			Real Estate Construction and Development		One-to- Four-Family Residential		Multi- Family Residential		Commercial Real Estate		Consumer and Installment		Total
Three Months Ended September 30, 2015:
Allowance for loan losses:
Beginning balance	$	11,321		2,231		22,403		3,430		19,349		82		58,816
Charge-offs	(888		)	—		(172	)	(29	)	(73	)	(27	)	(1,189	)
Recoveries	1,095			383		544		3		56		61		2,142
Provision (benefit) for loan losses	(539		)	(247	)	(1,764	)	(29	)	2,621		(42	)	—
Ending balance	$	10,989		2,367		21,011		3,375		21,953		74		59,769

Three Months Ended September 30, 2014:
Allowance for loan losses:
Beginning balance	$	13,731		6,600		29,145		7,374		20,820		348		78,018
Charge-offs	(399		)	(2	)	(1,316	)	(71	)	(436	)	(10	)	(2,234	)
Recoveries	1,763			114		938		114		946		35		3,910
Provision (benefit) for loan losses	(1,236		)	(3,979	)	335		340		(415	)	(45	)	(5,000	)
Ending balance	$	13,859		2,733		29,102		7,757		20,915		328		74,694



(dollars in thousands)	Commercial and Industrial			Real Estate Construction and Development		One-to- Four-Family Residential		Multi- Family Residential		Commercial Real Estate		Consumer and Installment		Total
Nine months ended September 30, 2015:
Allowance for loan losses:
Beginning balance	$	12,574		3,490		24,055		5,630		20,983		142		66,874
Charge-offs	(4,992		)	(178	)	(1,899	)	(227	)	(918	)	(70	)	(8,284	)
Recoveries	3,520			685		1,957		2,236		177		104		8,679
Provision (benefit) for loan losses	(113		)	(1,630	)	(3,102	)	(4,264	)	1,711		(102	)	(7,500	)
Ending balance	$	10,989		2,367		21,011		3,375		21,953		74		59,769

Nine months ended September 30, 2014:
Allowance for loan losses:
Beginning balance	$	13,401		7,407		32,619		5,249		22,052		305		81,033
Charge-offs	(3,015		)	(67	)	(4,943	)	(3,155	)	(645	)	(96	)	(11,921	)
Recoveries	3,778			1,470		3,207		123		1,918		86		10,582
Provision (benefit) for loan losses	(305		)	(6,077	)	(1,781	)	5,540		(2,410	)	33		(5,000	)
Ending balance	$	13,859		2,733		29,102		7,757		20,915		328		74,694

The following table represents a summary of the impairment method used by loan category at September 30, 2015 and December 31, 2014:



(dollars in thousands)	Commercial and Industrial		Real Estate Construction and Development	One-to- Four-Family Residential	Multi- Family Residential	Commercial Real Estate	Consumer and Installment and Net Deferred Loan Fees	Total
September 30, 2015:
Allowance for loan losses:
Impaired loans individually evaluated for impairment	$	—	—	3,468	—	—	—	3,468
Impaired loans collectively evaluated for impairment	336		200	4,400	18	271	1	5,226
All other loans collectively evaluated for impairment	10,653		2,167	13,143	3,357	21,682	73	51,075
Total allowance for loan losses	$	10,989	2,367	21,011	3,375	21,953	74	59,769
Loans:
Impaired loans individually evaluated for impairment	$	2,210	2,615	39,901	—	2,570	—	47,296
Impaired loans collectively evaluated for impairment	3,192		599	47,791	290	1,791	17	53,680
All other loans collectively evaluated for impairment	741,742		145,334	1,014,382	93,987	1,282,404	17,689	3,295,538
Total loans held for portfolio	$	747,144	148,548	1,102,074	94,277	1,286,765	17,706	3,396,514

December 31, 2014:
Allowance for loan losses:
Impaired loans individually evaluated for impairment	$	1,053	—	1,184	—	—	—	2,237
Impaired loans collectively evaluated for impairment	573		219	7,821	1,157	463	1	10,234
All other loans collectively evaluated for impairment	10,948		3,271	15,050	4,473	20,520	141	54,403
Total allowance for loan losses	$	12,574	3,490	24,055	5,630	20,983	142	66,874
Loans:
Impaired loans individually evaluated for impairment	$	4,712	2,626	7,388	19,050	3,765	—	37,541
Impaired loans collectively evaluated for impairment	5,058		1,109	89,561	681	4,122	23	100,554
All other loans collectively evaluated for impairment	685,497		86,116	919,761	95,703	1,175,155	17,505	2,979,737
Total loans held for portfolio	$	695,267	89,851	1,016,710	115,434	1,183,042	17,528	3,117,832