6. Loans

9 Months Ended

Sep. 30, 2013

Loans and Leases Receivable Disclosure [Abstract]

Loans

Loans are generally stated at the amount of unpaid principal, reduced by unearned discount and allowance for loan losses. Interest on loans is accrued daily on the outstanding balances. Loan origination fees and certain direct loan origination costs are deferred and amortized as adjustments of the related loan yield over its contractual life. We categorize residential real estate loans in excess of $600,000 as jumbo loans.

Generally, loans are placed on nonaccrual status when principal or interest is greater than 90 days past due based upon the loan's contractual terms. Interest is accrued daily on impaired loans unless the loan is placed on nonaccrual status. Impaired loans are placed on nonaccrual status when the payments of principal and interest are in default for a period of 90 days, unless the loan is both well-secured and in the process of collection. Interest on nonaccrual loans is recognized primarily using the cost-recovery method. Loans may be returned to accrual status when repayment is reasonably assured and there has been demonstrated performance under the terms of the loan or, if applicable, the terms of the restructured loans.

Commercial-related loans or portions thereof (which are risk-rated) are charged off to the allowance for loan losses when the loss has been confirmed. This determination is made on a case by case basis considering many factors, including the prioritization of our claim in bankruptcy, expectations of the workout/restructuring of the loan and valuation of the borrower’s equity. We deem a loss confirmed when a loan or a portion of a loan is classified “loss” in accordance with bank regulatory classification guidelines, which state, “Assets classified loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted”.

Consumer-related loans are generally charged off to the allowance for loan losses upon reaching specified stages of delinquency, in accordance with the Federal Financial Institutions Examination Council policy. For example, credit card loans are charged off by the end of the month in which the account becomes 180 days past due or within 60 days from receiving notification about a specified event (e.g., bankruptcy of the borrower), which ever is earlier. Residential mortgage loans are generally charged off to net realizable value no later than when the account becomes 180 days past due. Other consumer loans, if collateralized, are generally charged off to net realizable value at 120 days past due.

Loans are summarized as follows:

	September 30,		December 31,		September 30,
Dollars in thousands	2013		2012		2012
Commercial	$	83,844	$	85,829	$	88,997
Commercial real estate
Owner-occupied		151,260		154,252		150,090
Non-owner occupied		279,412		276,082		279,132
Construction and development
Land and land development		73,089		79,335		82,857
Construction		12,323		3,772		2,087
Residential real estate
Non-jumbo		215,058		216,714		215,584
Jumbo		59,701		61,567		62,748
Home equity		53,674		53,263		53,455
Consumer		20,472		20,586		21,290
Other		3,375		3,701		2,513
Total loans, net of unearned fees		952,208		955,101		958,753
Less allowance for loan losses		13,039		17,933		17,820
Loans, net	$	939,169	$	937,168	$	940,933

The following table presents the contractual aging of the recorded investment in past due loans by class as of September 30, 2013 and 2012 and December 31, 2012.

	At September 30, 2013
											Recorded
											Investment
	Past Due										> 90 days
Dollars in thousands	30-59 days		60-89 days		> 90 days		Total		Current		and Accruing
Commercial	$	10	$	111	$	1,583	$	1,704	$	82,140	$	-
Commercial real estate
Owner-occupied		846		229		432		1,507		149,753		-
Non-owner occupied		587		244		-		831		278,581		-
Construction and development
Land and land development		154		-		8,669		8,823		64,266		-
Construction		-		-		38		38		12,285		-
Residential mortgage
Non-jumbo		3,467		2,031		2,225		7,723		207,335		-
Jumbo		-		-		9,000		9,000		50,701		-
Home equity		214		49		24		287		53,387		-
Consumer		197		77		91		365		20,107		-
Other		50		-		-		50		3,325		-
Total	$	5,525	$	2,741	$	22,062	$	30,328	$	921,880	$	-

	At December 31, 2012
											Recorded
											Investment
	Past Due										> 90 days
Dollars in thousands	30-59 days		60-89 days		> 90 days		Total		Current		and Accruing
Commercial	$	225	$	5	$	2,294	$	2,524	$	83,305	$	-
Commercial real estate
Owner-occupied		57		-		1,023		1,080		153,172		-
Non-owner occupied		182		193		908		1,283		274,799		-
Construction and development
Land and land development		-		-		11,795		11,795		67,540		-
Construction		-		-		153		153		3,619		-
Residential mortgage
Non-jumbo		3,344		2,616		2,797		8,757		207,957		-
Jumbo		-		-		12,564		12,565		49,002		-
Home equity		337		448		179		964		52,299		-
Consumer		255		79		48		382		20,204		-
Other		-		-		-		-		3,701		-
Total	$	4,400	$	3,341	$	31,761	$	39,503	$	915,598	$	-

	At September 30, 2012
											Recorded
											Investment
	Past Due										> 90 days
Dollars in thousands	30-59 days		60-89 days		> 90 days		Total		Current		and Accruing
Commercial	$	273	$	634	$	1,594	$	2,501	$	86,496	$	-
Commercial real estate
Owner-occupied		216		581		400		1,197		148,893		-
Non-owner occupied		513		-		1,882		2,395		276,737		-
Construction and development
Land and land development		17		39		13,412		13,468		69,389		-
Construction		50		-		153		203		1,884		-
Residential mortgage
Non-jumbo		2,681		2,029		2,544		7,254		208,330		-
Jumbo		-		-		15,273		15,273		47,475		-
Home equity		280		5		149		434		53,021		-
Consumer		319		36		46		401		20,889		-
Other		-		-		-		-		2,513		-
Total	$	4,349	$	3,324	$	35,453	$	43,126	$	915,627	$	-

Nonaccrual loans: The following table presents the nonaccrual loans included in the net balance of loans at September 30, 2013, December 31, 2012 and September 30, 2012.

Dollars in thousands	9/30/2013		12/31/2012		9/30/2012
Commercial	$	2,557	$	5,002	$	5,343
Commercial real estate
Owner-occupied		3,795		1,524		921
Non-owner occupied		-		1,032		1,882
Construction and development
Land & land development		12,851		13,487		16,558
Construction		38		154		203
Residential mortgage
Non-jumbo		3,119		3,518		3,122
Jumbo		9,000		12,564		15,272
Home equity		266		440		415
Consumer		145		55		87
Other		-		-		-
Total	$	31,771	$	37,776	$	43,803

Impaired loans: Impaired loans include the following:

§   Loans which we risk-rate (consisting of loan relationships having aggregate balances in excess of $2.0 million, or loans exceeding $500,000 and exhibiting credit weakness) through our normal loan review procedures and which, based on current information and events, it is probable that we will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement. Risk-rated loans with insignificant delays or insignificant short falls in the amount of payments expected to be collected are not considered to be impaired.

§   Loans that have been modified in a troubled debt restructuring.

Both commercial and consumer loans are deemed impaired upon being contractually modified in a troubled debt restructuring. Troubled debt restructurings typically result from our loss mitigation activities and occur when we grant a concession to a borrower who is experiencing financial difficulty in order to minimize our economic loss and to avoid foreclosure or repossession of collateral. Once restructured in a troubled debt restructuring, a loan is generally considered impaired until its maturity, regardless of whether the borrower performs under the modified terms. Although such a loan may be returned to accrual status if the criteria set forth in our accounting policy are met, the loan would continue to be evaluated for an asset-specific allowance for loan losses and we would continue to report the loan in the impaired loan table below.

The table below sets forth information about our impaired loans.

Method Used to Measure Impairment of Impaired Loans
Dollars in thousands
Loan Category	9/30/2013		12/31/2012		9/30/2012		Method used to measure impairment
Commerical	$	5,997	$	10,776	$	12,411	Fair value of collateral
		160		165		-	Discounted cash flow
Commerical real estate
Owner-occupied		9,054		14,028		13,248	Fair value of collateral
		2,497		2,686		2,698	Discounted cash flow
Non-owner occupied		5,884		9,468		12,057	Fair value of collateral
Construction and development
Land & land development		24,870		29,307		30,482	Fair value of collateral
		649		656		656	Discounted cash flow
Residential mortgage
Non-jumbo		5,133		5,626		5,461	Fair value of collateral
		884		692		959	Discounted cash flow
Jumbo		17,786		21,543		23,094	Fair value of collateral
Home equity		213		219		219	Fair value of collateral
Consumer		52		66		42	Fair value of collateral
Total	$	73,179	$	95,232	$	101,327

The following tables present loans individually evaluated for impairment at September 30, 2013, December 31, 2012 and September 30, 2012.

	September 30, 2013
							Average		Interest Income
	Recorded		Unpaid		Related		Impaired		Recognized
Dollars in thousands	Investment		Principal Balance		Allowance		Balance		while impaired
Without a related allowance
Commercial	$	4,254	$	4,268	$	-	$	5,632	$	334
Commercial real estate
Owner-occupied		7,609		7,613		-		8,839		293
Non-owner occupied		5,368		5,370		-		5,800		289
Construction and development
Land & land development		20,923		20,921		-		20,331		404
Construction		-		-		-		-		-
Residential real estate
Non-jumbo		2,888		2,895		-		2,930		171
Jumbo		7,876		7,882		-		8,168		419
Home equity		186		186		-		186		11
Consumer		28		28		-		32		2
Total without a related allowance	$	49,132	$	49,163	$	-	$	51,918	$	1,923
With a related allowance
Commercial	$	1,891	$	1,889	$	702	$	2,537	$	-
Commercial real estate
Owner-occupied		3,938		3,938		216		3,956		138
Non-owner occupied		514		514		110		516		28
Construction and development
Land & land development		4,597		4,598		1,390		3,992		121
Construction		-		-		-		-		-
Residential real estate
Non-jumbo		3,119		3,122		316		2,843		130
Jumbo		9,904		9,904		1,040		10,152		45
Home equity		27		27		27		27		-
Consumer		24		24		13		25		1
Total with a related allowance	$	24,014	$	24,016	$	3,814	$	24,048	$	463
Total
Commercial	$	49,094	$	49,111	$	2,418	$	51,603	$	1,607
Residential real estate		24,000		24,016		1,383		24,306		776
Consumer		52		52		13		57		3
Total	$	73,146	$	73,179	$	3,814	$	75,966	$	2,386

	December 31, 2012
							Average		Interest Income
	Recorded		Unpaid		Related		Impaired		Recognized
Dollars in thousands	Investment		Principal Balance		Allowance		Balance		while impaired
Without a related allowance
Commercial	$	10,518	$	10,537	$	-	$	3,131	$	134
Commercial real estate
Owner-occupied		9,992		9,996		-		8,528		368
Non-owner occupied		6,143		6,145		-		6,056		304
Construction and development
Land & land development		11,596		11,596		-		11,093		367
Construction		-		-		-		-		-
Residential real estate
Non-jumbo		3,497		3,505		-		3,040		125
Jumbo		7,347		7,349		-		5,399		272
Home equity		191		191		-		191		11
Consumer		38		38		-		32		1
Total without a related allowance	$	49,322	$	49,357	$	-	$	37,470	$	1,582
With a related allowance
Commercial	$	404	$	404	$	85	$	515	$	6
Commercial real estate
Owner-occupied		6,719		6,718		461		4,442		187
Non-owner occupied		3,321		3,323		286		3,341		115
Construction and development
Land & land development		18,367		18,367		2,611		17,633		344
Construction		-		-		-		-		-
Residential real estate
Non-jumbo		2,812		2,813		394		2,378		77
Jumbo		14,189		14,194		3,216		13,585		59
Home equity		28		28		28		29		-
Consumer		28		28		16		2		-
Total with a related allowance	$	45,868	$	45,875	$	7,097	$	41,925	$	788
Total
Commercial	$	67,060	$	67,086	$	3,443	$	54,739	$	1,825
Residential real estate		28,064		28,080		3,638		24,622		544
Consumer		66		66		16		34		1
Total	$	95,190	$	95,232	$	7,097	$	79,395	$	2,370

	September 30, 2012
							Average		Interest Income
	Recorded		Unpaid		Related		Impaired		Recognized
Dollars in thousands	Investment		Principal Balance		Allowance		Balance		while impaired
Without a related allowance
Commercial	$	12,059	$	12,075	$	-	$	3,148	$	54
Commercial real estate
Owner-occupied		11,370		11,373		-		8,058		346
Non-owner occupied		8,537		8,540		-		6,349		304
Construction and development
Land & land development		15,624		15,624		-		14,060		524
Construction		-		-		-		-		-
Residential real estate
Non-jumbo		3,987		3,996		-		3,545		135
Jumbo		8,902		8,905		-		6,497		257
Home equity		191		191		-		192		12
Consumer		39		38		-		30		1
Total without a related allowance	$	60,709	$	60,742	$	-	$	41,879	$	1,633
With a related allowance
Commercial	$	336	$	336	$	86	$	299	$	6
Commercial real estate
Owner-occupied		4,573		4,573		241		4,409		209
Non-owner occupied		3,516		3,517		475		3,361		115
Construction and development
Land & land development		15,514		15,514		2,762		15,026		182
Construction		-		-		-		-		-
Residential real estate
Non-jumbo		2,422		2,424		502		1,787		101
Jumbo		14,183		14,189		3,211		13,193		32
Home equity		28		28		28		29		-
Consumer		4		4		4		1		-
Total with a related allowance	$	40,576	$	40,585	$	7,309	$	38,105	$	645
Total
Commercial	$	71,529	$	71,552	$	3,564	$	54,710	$	1,740
Residential real estate		29,713		29,733		3,741		25,243		537
Consumer		43		42		4		31		1
Total	$	101,285	$	101,327	$	7,309	$	79,984	$	2,278

A modification of a loan is considered a TDR when a borrower is experiencing financial difficulty and the modification constitutes a concession that we would not otherwise consider. This may include a transfer of real estate or other assets from the borrower, a modification of loan terms, or a combination of both. A loan continues to be classified as a TDR for the life of the loan. Included in impaired loans are TDRs of $43.8 million, of which $33.7 million were current with respect to restructured contractual payments at September 30, 2013, and $56.7 million, of which $42.3 million were current with respect to restructured contractual payments at December 31, 2012. There were no commitments to lend additional funds under these restructurings at either balance sheet date.

The following table presents by class the TDRs that were restructured during the three and nine months ended September 30, 2013 and 2012. Generally, the modifications were extensions of term, modifying the payment terms from principal and interest to interest only for an extended period, or reduction in interest rate. All TDRs are evaluated individually for allowance for loan loss purposes.

	For the Three Months Ended						For the Three Months Ended
	September 30, 2013						September 30, 2012
			Pre-modification		Post-modification				Pre-modification		Post-modification
	Number of		Recorded		Recorded		Number of		Recorded		Recorded
Dollars in thousands	Modifications		Investment		Investment		Modifications		Investment		Investment
Commercial		-	$	-	$	-		-	$	-	$	-
Commercial real estate
Owner-occupied		-		-		-		-		-		-
Non-owner occupied		-		-		-		1		1,929		1,929
Construction and development
Land & land development		-		-		-		2		1,927		1,927
Construction		-		-		-		-		-		-
Residential real estate
Non-jumbo		2		487		487		3		688		688
Jumbo		-		-		-		-		-		-
Home equity		-		-		-		-		-		-
Consumer		-		-		-		-		-		-
Total		2	$	487	$	487		6	$	4,544	$	4,544

	For the Nine Months Ended						For the Nine Months Ended
	September 30, 2013						September 30, 2012
			Pre-modification		Post-modification				Pre-modification		Post-modification
	Number of		Recorded		Recorded		Number of		Recorded		Recorded
Dollars in thousands	Modifications		Investment		Investment		Modifications		Investment		Investment
Commercial		1	$	23	$	23		3	$	1,109	$	1,117
Commercial real estate
Owner-occupied		-		-		-		-		-		-
Non-owner occupied		-		-		-		3		4,063		3,685
Construction and development
Land & land development		1		49		50		3		3,715		2,927
Construction		-		-		-		-		-		-
Residential real estate
Non-jumbo		4		728		514		7		1,245		1,256
Jumbo		-		-		-		3		2,301		2,701
Home equity		-		-		-		-		-		-
Consumer		-		-		-		2		42		42
Total		6	$	800	$	587		21	$	12,475	$	11,728

The following table presents defaults during the stated period of TDRs that were restructured during the past twelve months. For purposes of these tables, a default is considered as either the loan was past due 30 days or more at any time during the period, or the loan was fully or partially charged off during the period.

	For the Three Months Ended				For the Nine Months Ended
	September 30, 2013				September 30, 2013
	Number		Recorded		Number		Recorded
	of		Investment		of		Investment
Dollars in thousands	Defaults		at Default Date		Defaults		at Default Date
Commercial		-	$	-		-	$	-
Commercial real estate
Owner-occupied		-		-		-		-
Non-owner occupied		-		-		-		-
Construction and development
Land & land development		-		-		2		1,676
Construction		-		-		-		-
Residential real estate
Non-jumbo		1		239		3		760
Jumbo		-		-		-		-
Home equity		-		-		-		-
Consumer		2		22		2		24
Total		3	$	261		7	$	2,460

The following tables detail the activity regarding TDRs by loan type for the three months and nine months ended September 30, 2013, and the related allowance on TDRs.

For the Three Months Ended September 30, 2013
	Construction & Land Development
	Land &								Commercial Real Estate						Residential Real Estate
	Land											Non-
	Develop-			Construc-		Commer-			Owner			Owner			Non-						Home		Con-
Dollars in thousands	ment			tion		cial			Occupied			Occupied			jumbo			Jumbo			Equity		sumer			Other		Total
Troubled debt restructurings
Balance June 30, 2013	$	8,549		$	-	$	3,735		$	9,986		$	5,367		$	5,018		$	15,349		$	-	$	62		$	-	$	48,066
Additions		-			-		-			-			-			487			-			-		-			-		487
Charge-offs		-			-		-			-			-			-			(113	)		-		-			-		(113	)
Net (paydowns) advances		(3,007	)		-		(1,441	)		(211	)		(31	)		(28	)		84			-		(10	)		-		(4,644	)
Transfer into OREO		-			-		-			-			-			-			-			-		-			-		-
Refinance out of TDR status		-			-		-			-			-			-			-			-		-			-		-
Balance September 30, 2013	$	5,542		$	-	$	2,294		$	9,775		$	5,336		$	5,477		$	15,320		$	-	$	52		$	-	$	43,796
Allowance related to troubled debt restructurings	$	22		$	-	$	131		$	216		$	110		$	302		$	1,040		$	-	$	13		$	-	$	1,834

For the Nine Months Ended September 30, 2013
	Construction & Land Development
	Land &								Commercial Real Estate						Residential Real Estate
	Land											Non-
	Develop-			Construc-		Commer-			Owner			Owner			Non-						Home		Con-
Dollars in thousands	ment			tion		cial			Occupied			Occupied			jumbo			Jumbo			Equity		sumer			Other		Total
Troubled debt restructurings
Balance December 31, 2012	$	9,570		$	-	$	4,981		$	10,692		$	7,331		$	5,089		$	19,000		$	-	$	65		$	-	$	56,728
Additions		49			-		23			-			-			728			-			-		-			-		800
Charge-offs		(888	)		-		(33	)		(63	)		-			(9	)		(3,678	)		-		-			-		(4,671	)
Net paydowns		(3,189	)		-		(2,677	)		(336	)		(104	)		(331	)		(2	)		-		(13	)		-		(6,652	)
Transfer into OREO		-			-		-			(518	)		-			-			-			-		-			-		(518	)
Refinance out of TDR status		-			-		-			-			(1,891	)		-			-			-		-			-		(1,891	)
Balance September 30, 2013	$	5,542		$	-	$	2,294		$	9,775		$	5,336		$	5,477		$	15,320		$	-	$	52		$	-	$	43,796
Allowance related to troubled debt restructurings	$	22		$	-	$	131		$	216		$	110		$	302		$	1,040		$	-	$	13		$	-	$	1,834

We categorize loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. We analyze loans individually by classifying the loans as to credit risk. We internally grade all commercial loans at the time of loan origination. In addition, we perform an annual loan review on all non-homogenous commercial loan relationships with an aggregate exposure of $2 million, at which time these loans are re-graded. We use the following definitions for our risk grades:

Pass: Loans graded as Pass are loans to borrowers of acceptable credit quality and risk. They are higher quality loans that do not fit any of the other categories described below.

OLEM (Special Mention): Commercial loans categorized as OLEM are potentially weak. The credit risk may be relatively minor yet represent a risk given certain specific circumstances. If the potential weaknesses are not monitored or mitigated, the asset may weaken or inadequately protect our position in the future.

Substandard: Commercial loans categorized as Substandard are inadequately protected by the borrower’s ability to repay, equity, and/or the collateral pledged to secure the loan. These loans have identified weaknesses that could hinder normal repayment or collection of the debt. These loans are characterized by the distinct possibility that we will sustain some loss if the identified weaknesses are not mitigated.

Doubtful: Commercial loans categorized as Doubtful have all the weaknesses inherent in those loans classified as Substandard, with the added elements that the full collection of the loan is improbable and the possibility of loss is high.

Loss: Loans classified as loss are considered to be non-collectible and of such little value that their continuance as a bankable asset is not warranted. This does not mean that the loan has absolutely no recovery value, but rather it is neither practical nor desirable to defer writing off the loan, even though partial recovery may be obtained in the future.

The following table presents the recorded investment in construction and development, commercial, and commercial real estate loans which are generally evaluated based upon the internal risk ratings defined above.

Loan Risk Profile by Internal Risk Rating

	Construction and Development												Commercial Real Estate
	Land and land development				Construction				Commercial				Owner Occupied				Non-Owner Occupied
Dollars in thousands	9/30/2013		12/31/2012		9/30/2013		12/31/2012		9/30/2013		12/31/2012		9/30/2013		12/31/2012		9/30/2013		12/31/2012
Pass	$	43,400	$	43,572	$	12,285	$	3,619	$	75,968	$	73,425	$	145,349	$	139,176	$	268,002	$	262,132
OLEM (Special Mention)		5,603		7,349		-		-		1,501		1,260		1,422		1,034		11,141		11,477
Substandard		23,977		28,414		38		153		5,264		11,144		4,489		14,042		269		2,473
Doubtful		109		-		-		-		1,111		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-		-		-
Total	$	73,089	$	79,335	$	12,323	$	3,772	$	83,844	$	85,829	$	151,260	$	154,252	$	279,412	$	276,082

The following table presents the recorded investment in consumer, residential real estate, and home equity loans, which are generally evaluated based on the aging status of the loans, which was previously presented, and payment activity.

	Performing						Nonperforming
Dollars in thousands	9/30/2013		12/31/2012		9/30/2012		9/30/2013		12/31/2012		9/30/2012
Residential real estate
Non-jumbo	$	211,939	$	213,196	$	212,529	$	3,119	$	3,518	$	3,055
Jumbo		50,701		49,003		47,476		9,000		12,564		15,272
Home Equity		53,408		52,823		53,040		266		440		415
Consumer		20,327		20,531		21,202		145		55		88
Other		3,375		3,701		2,513		-		-		-
Total	$	339,750	$	339,254	$	336,760	$	12,530	$	16,577	$	18,830

Loan commitments: ASC Topic 815, Derivatives and Hedging, requires that commitments to make mortgage loans should be accounted for as derivatives if the loans are to be held for sale, because the commitment represents a written option and accordingly is recorded at the fair value of the option liability.