NOTE F — IMPAIRED LOANS AND VALUATION ALLOWANCE FOR LOAN LOSSES

During the first, second and third quarters of 2013, newly identified troubled debt restructurings (“TDRs”) totaled $4.4 million, $4.1 million, and $1.7 million, respectively, summing to $10.2 million, of which $3.4 million were accruing commercial real estate loans, $1.0 million were accruing residential real estate mortgages, and $0.1 million were accruing consumer loans. Loans modified, but where full collection under the modified terms is doubtful are classified as nonaccrual loans from the date of modification and are therefore excluded from the tables below.

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’s policy.

The following table presents loans that were modified within the nine months ending September 30, 2013:


			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
Construction and land development		1	$	14	$	14	$	0	$	0
Residential real estate		8		990		865		0		125
Commercial real estate		7		3,421		3,059		0		362
Commercial and financial		1		25		24		0		1
Consumer		1		92		74		0		18

		18	$	4,542	$	4,036	$	0	$	506

Accruing loans that were restructured within the twelve months preceding September 30, 2013 and defaulted during the nine months ended September 30, 2013 are presented in the table below. The Company considers a loan to have defaulted when it becomes 60 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.


	2013
(Dollars in thousands)	Number of		Recorded
Troubled Debt Restructurings Defaulted	Contracts		Investment
Construction and land development		0	$	0
Residential real estate		2		397
Commercial real estate		1		1,620
Commercial and financial		0		0
Consumer		0		0

		3	$	2,017

As of September 30, 2013 and December 31, 2012, the Company’s recorded investment in impaired loans and the related valuation allowance were as follows:


	September 30, 2013
			Unpaid		Related
	Recorded		Principal		Valuation
(Dollars in thousands)	Investment		Balance		Allowance
Impaired Loans with No Related Allowance Recorded:
Construction and land development	$	2,674	$	3,301	$	0
Commercial real estate		4,755		6,836		0
Residential real estate		14,212		20,224		0
Commercial and financial		24		24		0
Consumer		127		166		0
Impaired Loans with an Allowance Recorded:
Construction and land development		1,181		1,261		173
Commercial real estate		8,968		9,495		684
Residential real estate		21,741		22,295		4,202
Commercial and financial		0		0		0
Consumer		551		573		118
Total:
Construction and land development		3,855		4,562		173
Commercial real estate		13,723		16,331		684
Residential real estate		35,953		42,519		4,202
Commercial and financial		24		24		0
Consumer		678		739		118

	$	54,233	$	64,175	$	5,177


	December 31, 2012
			Unpaid		Related
	Recorded		Principal		Valuation
(Dollars in thousands)	Investment		Balance		Allowance
Impaired Loans with No Related Allowance Recorded:
Construction and land development	$	1,128	$	1,608	$	0
Commercial real estate		12,357		14,337		0
Residential real estate		15,463		22,022		0
Commercial and financial		0		0		0
Consumer		223		255		0
Impaired Loans with an Allowance Recorded:
Construction and land development		2,897		2,941		230
Commercial real estate		26,130		26,648		2,264
Residential real estate		24,256		24,752		4,700
Commercial and financial		0		0		0
Consumer		447		460		75
Total:
Construction and land development		4,025		4,549		230
Commercial real estate		38,487		40,985		2,264
Residential real estate		39,719		46,774		4,700
Commercial and financial		0		0		0
Consumer		670		715		75

	$	82,901	$	93,023	$	7,269

For the nine months ended September 30, 2013 and 2012, the Company’s average recorded investments in impaired loans and related interest income were as follows:


	Nine Months Ended				Nine Months Ended
	September 30, 2013				September 30, 2012
	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	$	2,382	$	79	$	1,495	$	1
Commercial real estate		8,288		14		11,831		326
Residential real estate		14,816		40		11,608		129
Commercial and financial		3		1		9		0
Consumer		140		3		463		0
Impaired Loans with an Allowance Recorded:
Construction & land development		1,410		30		3,637		98
Commercial real estate		20,144		319		42,769		1,204
Residential real estate		23,105		406		27,223		617
Commercial and financial		0		0		38		8
Consumer		579		18		605		17
Total:
Construction & land development		3,792		109		5,132		99
Commercial real estate		28,432		333		54,600		1,530
Residential real estate		37,921		446		38,831		746
Commercial and financial		3		1		47		8
Consumer		719		21		1,068		17

	$	70,867	$	910	$	99,678	$	2,400

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 September 30, 2013 and December 31, 2012, accruing TDRs totaled $25.5 million and $41.9 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 nine months ended September 30, 2013 and 2012, the Company recorded $910,000 and $2,400,000, 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 $1,069,000 and $759,000, respectively, was included in interest income for the nine months ended September 30, 2013 and 2012, and represents the change in present value attributable to the passage of time.

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


	Allowance for Loan Losses for the Three Months Ended September 30, 2013
			Provision								Net
	Beginning		for Loan			Charge-					Charge-			Ending
(Dollars in thousands)	Balance		Losses			Offs			Recoveries		Offs			Balance
Construction & land development	$	877	$	(46	)	$	(25	)	$	41	$	16		$	847
Commercial real estate		6,725		377			(500	)		239		(261	)		6,841
Residential real estate		11,153		750			(677	)		83		(594	)		11,309
Commercial and financial		563		72			0			24		24			659
Consumer		760		27			(33	)		6		(27	)		760

	$	20,078	$	1,180		$	(1,235	)	$	393	$	(842	)	$	20,416



	Allowance for Loan Losses for the Nine Months Ended September 30, 2013
			Provision								Net
	Beginning		for Loan			Charge-					Charge-			Ending
(Dollars in thousands)	Balance		Losses			Offs			Recoveries		Offs			Balance
Construction & land development	$	1,134	$	121		$	(582	)	$	174	$	(408	)	$	847
Commercial real estate		8,849		(1	)		(2,546	)		539		(2,007	)		6,841
Residential real estate		11,090		2,388			(2,449	)		330		(2,119	)		11,309
Commercial and financial		468		(51	)		(60	)		302		242			659
Consumer		563		291			(112	)		18		(94	)		760

	$	22,104	$	2,698		$	(5,749	)	$	1,363	$	(4,386	)	$	20,416



	Allowance for Loan Losses for the Three Months Ended September 30, 2012
			Provision								Net
	Beginning		for Loan			Charge-					Charge-			Ending
(Dollars in thousands)	Balance		Losses			Offs			Recoveries		Offs			Balance
Construction & land development	$	1,355	$	(194	)	$	(92	)	$	210	$	118		$	1,279
Commercial real estate		11,977		225			(1,906	)		117		(1,789	)		10,413
Residential real estate		10,312		950			(995	)		234		(761	)		10,501
Commercial and financial		329		(34	)		0			40		40			335
Consumer		662		(47	)		(34	)		10		(24	)		591

	$	24,635	$	900		$	(3,027	)	$	611	$	(2,416	)	$	23,119



	Allowance for Loan Losses for the Nine Months Ended September 30, 2012
			Provision								Net
	Beginning		for Loan			Charge-					Charge-			Ending
(Dollars in thousands)	Balance		Losses			Offs			Recoveries		Offs			Balance
Construction & land development	$	1,883	$	(329	)	$	(571	)	$	296	$	(275	)	$	1,279
Commercial real estate		11,477		6,285			(7,637	)		288		(7,349	)		10,413
Residential real estate		10,966		3,856			(4,819	)		498		(4,321	)		10,501
Commercial and financial		402		116			(291	)		108		(183	)		335
Consumer		837		(268	)		(88	)		110		22			591

	$	25,565	$	9,660		$	(13,406	)	$	1,300	$	(12,106	)	$	23,119

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 September 30, 2013 and 2012 is shown in the following tables.


	At September 30, 2013
	Individually Evaluated for Impairment				Collectively Evaluated for Impairment				Total
	Carrying		Associated		Carrying		Associated		Carrying		Associated
(Dollars in thousands)	Value		Allowance		Value		Allowance		Value		Allowance
Construction & land development	$	3,855	$	173	$	58,911	$	674	$	62,766	$	847
Commercial real estate		13,723		684		485,347		6,157		499,070		6,841
Residential real estate		35,953		4,202		546,623		7,107		582,576		11,309
Commercial and financial		24		0		70,755		659		70,779		659
Consumer		678		118		47,043		642		47,721		760

	$	54,233	$	5,177	$	1,208,679	$	15,239	$	1,262,912	$	20,416


	At September 30, 2012
	Individually Evaluated for Impairment				Collectively Evaluated for Impairment				Total
	Carrying		Associated		Carrying		Associated		Carrying		Associated
(Dollars in thousands)	Value		Allowance		Value		Allowance		Value		Allowance
Construction & land development	$	4,525	$	444	$	51,688	$	835	$	56,213	$	1,279
Commercial real estate		44,833		3,533		428,970		6,880		473,803		10,413
Residential real estate		38,281		4,440		524,140		6,061		562,421		10,501
Commercial and financial		37		1		58,185		334		58,222		335
Consumer		953		100		50,866		491		51,819		591

	$	88,629	$	8,518	$	1,113,849	$	14,601	$	1,202,478	$	23,119