NOTE F — IMPAIRED LOANS AND ALLOWANCE FOR LOAN LOSSES

During the six months ending June 30, 2014 and 2013, newly identified troubled debt restructurings (“TDRs”) totaled $5.3 million and $5.7 million, respectively. Loans that are modified, but where full collection under the modified terms is doubtful are classified as nonaccrual loans from the date of modification.

The Company’s TDR concessions granted generally do not include forgiveness of principal balances. Loan modifications are not reported in calendar years after modification if the loans were modified at an interest rate equal to the yields of new loan originations with comparable risk and the loans are performing based on the terms of the restructuring agreements.

When a loan is modified as a TDR, there is not a direct, material impact on the loans within the Consolidated Balance Sheet, as principal balances are generally not forgiven. Most loans prior to modification were classified as an impaired loan and the allowance for loan losses is determined in accordance with Company policy.

The following table presents loans that were modified within the six months ending June 30, 2014:

			Pre-		Post-
			Modification		Modification
	Number		Outstanding		Outstanding		Specific		Valuation
(Dollars in thousands)	of		Recorded		Recorded		Reserve		Allowance
Troubled Debt Restructurings Modified	Contracts		Investment		Investment		Recorded		Recorded
Residential real estate		3	$	601	$	564	$	0	$	37
Commercial real estate		1		4,300		3,975		0		325
		4	$	4,901	$	4,539	$	0	$	362

No accruing loans that were restructured within the twelve months preceding June 30, 2014 defaulted during the six months ended June 30, 2014. The Company considers a loan to have defaulted when it becomes 90 days or more delinquent under the modified terms, has been transferred to nonaccrual status, or has been transferred to other real estate owned.

As of June 30, 2014 and December 31, 2013, the Company’s recorded investment in impaired loans and the related valuation allowance were as follows:

	June 30, 2014
			Unpaid		Related
	Recorded		Principal		Valuation
(Dollars in thousands)	Investment		Balance		Allowance
Impaired Loans with No Related Allowance Recorded:
Construction and land development	$	2,209	$	2,673	$	0
Commercial real estate		3,125		4,677		0
Residential real estate		10,023		14,051		0
Commercial and financial		150		150		0
Consumer		281		324		0
Impaired Loans with an Allowance Recorded:
Construction and land development		1,047		1,432		311
Commercial real estate		12,085		12,187		815
Residential real estate		20,427		21,450		3,440
Commercial and financial		10		10		10
Consumer		545		599		117
Total:
Construction and land development		3,256		4,105		311
Commercial real estate		15,210		16,864		815
Residential real estate		30,450		35,501		3,440
Commercial and financial		160		160		10
Consumer		826		923		117
	$	49,902	$	57,553	$	4,693

	December 31, 2013
			Unpaid		Related
	Recorded		Principal		Valuation
(Dollars in thousands)	Investment		Balance		Allowance
Impaired Loans with No Related Allowance Recorded:
Construction and land development	$	2,561	$	3,180	$	0
Commercial real estate		4,481		6,577		0
Residential real estate		12,366		17,372		0
Commercial and financial		153		153		0
Consumer		425		569		0
Impaired Loans with an Allowance Recorded:
Construction and land development		1,120		1,197		149
Commercial real estate		7,937		8,046		638
Residential real estate		23,365		24,766		4,528
Commercial and financial		13		13		13
Consumer		548		573		118
Total:
Construction and land development		3,681		4,377		149
Commercial real estate		12,418		14,623		638
Residential real estate		35,731		42,138		4,528
Commercial and financial		166		166		13
Consumer		973		1,142		118
	$	52,969	$	62,446	$	5,446

For the six months ended June 30, 2014 and 2013, the Company’s average recorded investments in impaired loans and related interest income were as follows:

	Six Months Ended				Six Months Ended
	June 30, 2014				June 30, 2013
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
(Dollars in thousands)	Investment		Recognized		Investment		Recognized
Impaired Loans with No Related Allowance
Recorded:
Construction & land development	$	2,196	$	51	$	2,216	$	50
Commercial real estate		2,394		7		9,194		18
Residential real estate		12,333		7		15,084		10
Commercial and financial		76		5		0		0
Consumer		345		0		142		1
Impaired Loans with an Allowance Recorded:
Construction & land development		1,311		12		1,547		19
Commercial real estate		9,853		361		24,115		274
Residential real estate		22,215		251		23,418		286
Commercial and financial		88		0		0		0
Consumer		541		10		586		11
Total:
Construction & land development		3,507		63		3,763		69
Commercial real estate		12,247		368		33,309		292
Residential real estate		34,548		258		38,502		296
Commercial and financial		164		5		0		0
Consumer		886		10		728		12
	$	51,352	$	704	$	76,302	$	669

Impaired loans also include loans that have been modified in troubled debt restructurings where concessions to borrowers who experienced financial difficulties have been granted. At June 30, 2014 and December 31, 2013, accruing TDRs totaled $28.2 million and $25.1 million, respectively.

Interest payments received on impaired loans are recorded as interest income unless collection of the remaining recorded investment is doubtful at which time payments received are recorded as reductions to principal. For the six months ended June 30, 2014 and 2013, the Company recorded $704,000 and $669,000, respectively, in interest income on impaired loans.

For impaired loans whose impairment is measured based on the present value of expected future cash flows, a total of $141,000 and $799,000, respectively, was included in interest income for the six months ended June 30, 2014 and 2013, and represents the change in present value attributable to the passage of time.

Activity in the allowance for loan losses for the three and six-month periods ended June 30, 2014 is summarized as follows:

	Allowance for Loan Losses for the Three Months Ended June 30, 2014
			Provision						Net
	Beginning		for Loan		Charge-				(Charge-offs)		Ending
(Dollars in thousands)	Balance		Losses		Offs		Recoveries		/Recoveries		Balance
Construction & land development	$	796	$	240	$	(196)	$	27	$	(169)	$	867
Commercial real estate		6,753		(1,528)		(50)		18		(32)		5,193
Residential real estate		10,358		(32)		(95)		400		305		10,631
Commercial and financial		853		(167)		0		23		23		709
Consumer		712		43		(40)		25		(15)		740
	$	19,472	$	(1,444)	$	(381)	$	493	$	112	$	18,140

	Allowance for Loan Losses for the Six Months Ended June 30, 2014
			Provision						Net
	Beginning		for Loan		Charge-				(Charge-offs)		Ending
(Dollars in thousands)	Balance		Losses		Offs		Recoveries		/Recoveries		Balance
Construction & land development	$	808	$	204	$	(199)	$	54	$	(145)	$	867
Commercial real estate		6,160		(1,087)		(134)		254		120		5,193
Residential real estate		11,659		(1,410)		(207)		589		382		10,631
Commercial and financial		710		53		(108)		54		(54)		709
Consumer		731		61		(97)		45		(52)		740
	$	20,068	$	(2,179)	$	(745)	$	996	$	251	$	18,140

Activity in the allowance for loan losses for the three and six-month periods ended June 30, 2013 is summarized as follows:

	Allowance for Loan Losses for the Three Months Ended June 30, 2013
			Provision						Net
	Beginning		for Loan		Charge-				(Charge-offs)		Ending
(Dollars in thousands)	Balance		Losses		Offs		Recoveries		/Recoveries		Balance
Construction & land development	$	1,108	$	(26)	$	(223)	$	18	$	(205)	$	877
Commercial real estate		8,448		(427)		(1,517)		221		(1,296)		6,725
Residential real estate		10,722		1,107		(826)		150		(676)		11,153
Commercial and financial		558		(193)		0		198		198		563
Consumer		704		104		(52)		4		(48)		760
	$	21,540	$	565	$	(2,618)	$	591	$	(2,027)	$	20,078

	Allowance for Loan Losses for the Six Months Ended June 30, 2013
			Provision						Net
	Beginning		for Loan		Charge-				(Charge-offs)		Ending
(Dollars in thousands)	Balance		Losses		Offs		Recoveries		/Recoveries		Balance
Construction & land development	$	1,134	$	167	$	(557)	$	133	$	(424)	$	877
Commercial real estate		8,849		(378)		(2,046)		300		(1,746)		6,725
Residential real estate		11,090		1,588		(1,772)		247		(1,525)		11,153
Commercial and financial		468		(123)		(60)		278		218		563
Consumer		563		264		(79)		12		(67)		760
	$	22,104	$	1,518	$	(4,514)	$	970	$	(3,544)	$	20,078

The allowance for loan losses is composed of specific allowances for certain impaired loans and general allowances grouped into loan pools based on similar characteristics. The Company’s loan portfolio and related allowance at June 30, 2014 and 2013 is shown in the following tables:

	At June 30, 2014
	Individually Evaluated for				Collectively Evaluated for
	Impairment				Impairment				Total
	Carrying		Associated		Carrying		Associated		Carrying		Associated
(Dollars in thousands)	Value		Allowance		Value		Allowance		Value		Allowance
Construction & land development	$	3,256	$	311	$	54,137	$	556	$	57,393	$	867
Commercial real estate		15,210		815		523,007		4,378		538,217		5,193
Residential real estate		30,450		3,440		576,346		7,191		606,796		10,631
Commercial and financial		160		10		87,125		699		87,285		709
Consumer		826		117		44,675		623		45,501		740
	$	49,902	$	4,693	$	1,285,290	$	13,447	$	1,335,192	$	18,140

	At June 30, 2013
	Individually Evaluated for				Collectively Evaluated for
	Impairment				Impairment				Total
	Carrying		Associated		Carrying		Associated		Carrying		Associated
(Dollars in thousands)	Value		Allowance		Value		Allowance		Value		Allowance
Construction & land development	$	3,848	$	175	$	57,268	$	702	$	61,116	$	877
Commercial real estate		21,156		1,054		492,442		5,671		513,598		6,725
Residential real estate		37,162		4,006		544,216		7,147		581,378		11,153
Commercial and financial		0		0		65,224		563		65,224		563
Consumer		712		124		43,865		636		44,577		760
	$	62,878	$	5,359	$	1,203,015	$	14,719	$	1,265,893	$	20,078