NOTE F — IMPAIRED LOANS AND ALLOWANCE FOR LOAN LOSSES

During the three months ending March 31, 2016 and 2015, the total of newly identified Troubled Debt Restructurings (“TDRs”) totaled $1.0 million and $1.0 million, respectively.

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 three months ending March 31, 2016:

			Pre-		Post-
			Modification		Modification
	Number		Outstanding		Outstanding		Specific		Valuation
	of		Recorded		Recorded		Reserve		Allowance
(Dollars in thousands)	Contracts		Investment		Investment		Recorded		Recorded
Residential real estate		2	$	491	$	470	$	0	$	21
Total		2	$	491	$	470	$	0	$	21

The following table presents loans that were modified within the three months ending March 31, 2015:

			Pre-		Post-
			Modification		Modification
	Number		Outstanding		Outstanding		Specific		Valuation
	of		Recorded		Recorded		Reserve		Allowance
(Dollars in thousands)	Contracts		Investment		Investment		Recorded		Recorded
Residential real estate		2	$	911	$	859	$	0	$	52
Total		2	$	911	$	859	$	0	$	52

Only 2 contracts with a pre-modification and post-modification outstanding recorded investment of $0.5 million and $0.5 million, respectively, were modified during the three month period ended March 31, 2016, compared to 2 contracts with a pre-modification and post-modification outstanding recorded investment of $0.9 million and $0.9 million, respectively, for the three month period ended March 31, 2015.

No accruing loans that were restructured within the twelve months preceding March 31, 2016 defaulted during the three months ended March 31, 2016, and no loans restructured within the twelve months preceding March 31, 2015 defaulted during the twelve months ended March 31, 2015. 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. A defaulted TDR is generally placed on nonaccrual and specific allowance for loan loss is assigned in accordance with the Company’s policy.

As of March 31, 2016 and December 31, 2015, the Company’s recorded investment in impaired loans and the related valuation allowance were as follows:

	March 31, 2016
			Unpaid		Related
	Recorded		Principal		Valuation
(Dollars in thousands)	Investment		Balance		Allowance
Impaired Loans with No Related Allowance Recorded:
Construction and land development	$	218	$	297	$	0
Commercial real estate		2,068		3,579		0
Residential real estate		9,685		14,156		0
Commercial and financial		16		16		0
Consumer		191		287		0
Impaired Loans with an Allowance Recorded:
Construction and land development		640		669		35
Commercial real estate		6,926		6,926		435
Residential real estate		11,893		12,262		1,714
Commercial and financial		0		0		0
Consumer		345		345		38
Total:
Construction and land development		858		966		35
Commercial real estate		8,994		10,505		435
Residential real estate		21,578		26,418		1,714
Commercial and financial		16		16		0
Consumer		536		632		38
		31,982	$	38,537	$	2,222

	December 31, 2015
			Unpaid		Related
	Recorded		Principal		Valuation
(Dollars in thousands)	Investment		Balance		Allowance
Impaired Loans with No Related Allowance Recorded:
Construction and land development	$	107	$	255	$	0
Commercial real estate		2,363		3,911		0
Residential real estate		9,256		13,707		0
Commercial and financial		17		17		0
Consumer		264		349		0
Impaired Loans with an Allowance Recorded:
Construction and land development		835		870		84
Commercial real estate		7,087		7,087		429
Residential real estate		12,447		12,803		1,964
Commercial and financial		0		0		0
Consumer		351		351		40
Total:
Construction and land development		942		1,125		84
Commercial real estate		9,450		10,998		429
Residential real estate		21,703		26,510		1,964
Commercial and financial		17		17		0
Consumer		615		700		40
	$	32,727	$	39,350	$	2,517

For the three months ended March 31, 2016 and 2015, the Company’s average recorded investments in impaired loans and related interest income were as follows:

	Three Months Ended				Three Months Ended
	March 31, 2016				March 31, 2015
	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	$	143	$	0	$	1,841	$	18
Commercial real estate		2,265		3		2,957		4
Residential real estate		9,399		34		11,660		35
Commercial and financial		17		0		119		2
Consumer		240		0		87		0
Impaired Loans with an Allowance Recorded:
Construction & land development		770		7		848		5
Commercial real estate		7,033		74		8,110		74
Residential real estate		12,263		85		16,530		99
Commercial and financial		0		0		0		0
Consumer		349		4		528		6
Total:
Construction & land development		913		7		2,689		23
Commercial real estate		9,298		77		11,067		78
Residential real estate		21,662		119		28,190		134
Commercial and financial		17		4		119		2
Consumer		589		0		615		6
	$	32,479	$	207	$	42,680	$	243

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 March 31, 2015 and at December 31, 2015, accruing TDRs totaled $20.0 million at each date.

The average recorded investment in impaired loans for the three month periods ended March 31, 2016 and 2015, was $32.5 million and $42.7 million, respectively. The impaired loans are measured for impairment based on the value of underlying collateral or the present value of expected future cash flows discounted at the loan’s effective rate. The valuation allowance is included in the allowance for loan losses.

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 three months ended March 31, 2016 and 2015, the Company recorded $207,000 and $243,000, 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 $47,000 and $72,000, respectively, was included in interest income for the three months ended March 31, 2016 and 2015, and represents the change in present value attributable to the passage of time.

Nonaccrual loans and accruing loans past due 90 days or more (excluding purchased loans) totaled $11.9 million and $0.1 million, respectively, at March 31, 2016, and $12.8 million and $0 at December 31, 2015, respectively. Purchased nonaccrual and accruing loans past due 90 days or more were $3.7 million and $0 at March 31, 2016, and $4.6 million and $0 at December 31, 2015.

Activity in the allowance for loan losses (excluding PCI loans) for the three-month period ended March 31, 2016 is summarized as follows:

	Allowance for Loan Losses for the Three Months Ended March 31, 2016
			Provision						Net
	Beginning		for Loan		Charge-				(Charge-Offs)		Ending
(Dollars in thousands)	Balance		Losses		Offs		Recoveries		Recoveries		Balance
Construction & land development	$	1,151	$	59	$	0	$	75	$	75	$	1,285
Commercial real estate		6,756		15		(173)		79		(94)		6,677
Residential real estate		8,057		410		(117)		162		45		8,512
Commercial and financial		2,042		(419)		(55)		423		368		1,991
Consumer		1,122		134		(27)		30		3		1,259
	$	19,128	$	199	$	(372)	$	769	$	397	$	19,724

Activity in the allowance for loan losses (excluding PCI loans) for the three-month period ended March 31, 2015 is summarized as follows:

	Allowance for Loan Losses for the Three Months Ended March 31, 2015
			Provision						Net
	Beginning		for Loan		Charge-				(Charge-Offs)		Ending
(Dollars in thousands)	Balance		Losses		Offs		Recoveries		Recoveries		Balance
Construction & land development	$	722	$	120	$	(47)	$	47	$	0	$	842
Commercial real estate		4,528		230		(156)		225		69		4,827
Residential real estate		9,784		(367)		(167)		416		249		9,666
Commercial and financial		1,179		124		(19)		90		71		1,374
Consumer		794		297		(194)		22		(172)		919
	$	17,007	$	404	$	(583)	$	800	$	217	$	17,628

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 (excluding PCI loans) and related allowance at March 31, 2016 and December 31, 2015 is shown in the following tables:

	At March 31 2016
	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	$	858	$	35	$	146,622	$	1,250	$	147,480	$	1,285
Commercial real estate		8,994		435		1,147,688		6,242		1,156,682		6,677
Residential real estate		21,578		1,714		740,565		6,798		762,143		8,512
Commercial and financial		16		0		276,711		1,991		276,727		1,991
Consumer		536		38		95,115		1,221		95,651		1,259
	$	31,982	$	2,222	$	2,406,701	$	17,502	$	2,438,683	$	19,724

	At December 31, 2015
	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	$	942	$	84	$	107,731	$	1,067	$	108,673	$	1,151
Commercial real estate		9,450		429		989,938		6,327		999,388		6,756
Residential real estate		21,703		1,964		701,160		6,093		722,863		8,057
Commercial and financial		17		0		227,417		2,042		227,434		2,042
Consumer		615		40		85,248		1,082		85,863		1,122
	$	32,727	$	2,517	$	2,111,494	$	16,611	$	2,144,221	$	19,128

Loans collectively evaluated for impairment at December 31, 2015 included loans acquired from BANKshares on October 1, 2014 and Grand Bankshares on July 17, 2015 that are not PCI loans, and loans at March 31, 2016 included loans acquired from Floridian as well that are not PCI loans. These loans are performing loans recorded at estimated fair value at the acquisition date. The fair value adjustment represents the total fair value discount of each PUL, and are accreted into interest income over the remaining lives of the related loans on a level yield basis.

The table below summarizes PCI loans that were individually evaluated for impairment based on expected cash flows at March 31, 2016 and December 31, 2015:

	PCI Loans Individually Evaluated for Impairment
	March 31, 2016				December 31, 2015
	Carrying		Associated		Carrying		Associated
(Dollars in thousands)	Value		Allowance		Value		Allowance
Construction & land development	$	114	$	0	$	114	$	0
Commercial real estate		14,674		0		9,990		0
Residential real estate		695		0		922		0
Commercial and financial		1,048		0		1,083		0
Consumer		0		0		0		0
	$	16,531	$	0	$	12,109	$	0