5. Loans

12 Months Ended

Dec. 31, 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 includes 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), whichever 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:

Dollars in thousands	2013		2012
Commercial	$	88,352	$	85,829
Commercial real estate
Owner-occupied		149,618		154,252
Non-owner occupied		280,790		276,082
Construction and development
Land and land development		71,453		79,335
Construction		15,155		3,772
Residential real estate
Non-jumbo		212,946		216,714
Jumbo		53,406		61,567
Home equity		54,844		53,263
Consumer		19,889		20,586
Other		3,276		3,701
Total loans, net of unearned fees		949,729		955,101
Less allowance for loan losses		12,659		17,933
Loans, net	$	937,070	$	937,168

The following presents loan maturities at December 31, 2013:

	Within		After 1 but		After
Dollars in thousands	1Year		within 5 Years		5 Years
Commercial	$	31,351	$	37,753	$	19,248
Commercial real estate		32,535		90,640		307,233
Construction and development		35,864		8,888		41,856
Residential real estate		11,376		18,772		291,048
Consumer		4,069		14,005		1,815
Other		497		1,032		1,747
	$	115,692	$	171,090	$	662,947
Loans due after one year with:
Variable rates			$	100,298
Fixed rates				733,739
			$	834,037

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

	At December 31, 2013
	Past Due										> 90 days
Dollars in thousands	30-59 days		60-89 days		> 90 days		Total		Current		and accruing
Commercial	$	74	$	34	$	1,190	$	1,298	$	87,054	$	-
Commercial real estate
Owner-occupied		328		459		487		1,274		148,344		-
Non-owner occupied		912		115		128		1,155		279,635		-
Construction and development
Land and land development		1,627		-		8,638		10,265		61,188		-
Construction		-		-		-		-		15,155		-
Residential mortgage
Non-jumbo		2,708		1,673		1,321		5,702		207,244		-
Jumbo		-		-		-		-		53,406		-
Home equity		588		87		-		675		54,169		-
Consumer		224		82		106		412		19,477		-
Other		-		-		-		-		3,276		-
Total	$	6,461	$	2,450	$	11,870	$	20,781	$	928,948	$	-
	At December 31, 2012
	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	$	-

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

Dollars in thousands	2013		2012
Commercial	$	1,224	$	5,002
Commercial real estate
Owner-occupied		1,953		1,524
Non-owner occupied		365		1,032
Construction and development
Land & land development		12,830		13,487
Construction		-		154
Residential mortgage
Non-jumbo		2,446		3,518
Jumbo		-		12,564
Home equity		-		440
Consumer		128		55
Other		-		-
Total	$	18,946	$	37,776

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
	December 31,				Method Used
Loan Category	2013		2012		to measure impairment
Commerical	$	1,864	$	10,776	Fair value of collateral
		158		165	Discounted cash flow
Commerical real estate
Owner-occupied		10,067		14,028	Fair value of collateral
		2,483		2,686	Discounted cash flow
Non-owner occupied		5,832		9,468	Fair value of collateral
Construction and development
Land & land development		24,625		29,307	Fair value of collateral
		644		656	Discounted cash flow
Residential mortgage
Non-jumbo		5,516		5,626	Fair value of collateral
		566		692	Discounted cash flow
Jumbo		8,768		21,543	Fair value of collateral
Home equity		212		219	Fair value of collateral
Consumer		47		66	Discounted cash flow
Total	$	60,782	$	95,232

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

	December 31, 2013
							Average		Interest Income
	Recorded		Unpaid		Related		Impaired		Recognized
Dollars in thousands	Investment		Principal Balance		Allowance		Balance		while impaired
Without a related allowance
Commercial	$	1,161	$	1,167	$	-	$	1,518	$	98
Commercial real estate
Owner-occupied		8,434		8,434		-		7,675		226
Non-owner occupied		5,075		5,077		-		5,110		253
Construction and development
Land & land development		14,732		14,737		-		11,628		325
Construction		-		-		-		-		-
Residential real estate
Non-jumbo		3,587		3,595		-		2,858		157
Jumbo		7,862		7,867		-		7,910		405
Home equity		186		186		-		186		11
Consumer		26		27		-		28		1
Total without a related allowance	$	41,063	$	41,090	$	-	$	36,913	$	1,476
With a related allowance
Commercial	$	855	$	855	$	406	$	1,013	$	-
Commercial real estate
Owner-occupied		4,116		4,116		305		3,945		184
Non-owner occupied		747		755		175		515		28
Construction and development
Land & land development		10,532		10,532		3,186		11,310		147
Construction		-		-		-		-		-
Residential real estate
Non-jumbo		2,485		2,487		256		2,292		107
Jumbo		900		901		37		906		45
Home equity		27		26		22		27		-
Consumer		20		20		13		9		-
Total with a related allowance	$	19,682	$	19,692	$	4,400	$	20,017	$	511
Total
Commercial	$	45,652	$	45,673	$	4,072	$	42,714	$	1,261
Residential real estate		15,047		15,062		315		14,179		725
Consumer		46		47		13		37		1
Total	$	60,745	$	60,782	$	4,400	$	56,930	$	1,987

	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

The average recorded investment of impaired loans during 2011 was $55.5 million, and $1.1 million interest income was recognized on those loans while impaired.

A modification of a loan is considered a troubled debt restructuring (“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 $34.5 million, of which $33.6 million were current with respect to restructured contractual payments at December 31, 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 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.

	2013					2012
		Pre-		Post-			Pre-		Post-
		modification		modification			modification		modification
	Number of	Recorded		Recorded		Number of	Recorded		Recorded
dollars in thousands	Modifications	Investment		Investment		Modifications	Investment		Investment
Commercial	2	$	76	$	79	9	$	6,238	$	5,681
Commercial real estate
Owner-occupied	-		-		-	-		-		-
Non-owner occupied	1		244		244	3		4,063		3,685
Construction and development
Land & land development	2		747		748	3		3,715		2,927
Construction	-		-		-	-		-		-
Residential real estate
Non-jumbo	7		1,137		1,137	8		1,394		1,405
Jumbo	-		-		-	3		2,301		2,701
Home equity	-		-		-	-		-		-
Consumer	1		11		12	4		66		66
Total	13	$	2,215	$	2,220	30	$	17,777	$	16,465

The following table presents defaults during 2013 of TDRs that were restructured during 2013 and defaults during 2012 of TDRs that were restructured during 2012.  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.

	2013			2012
	Number	Recorded		Number	Recorded
	of	Investment		of	Investment
dollars in thousands	Defaults	at Default Date		Defaults	at Default Date
Commercial	-	$	-	3	$	2,377
Commercial real estate
Owner-occupied	-		-	-		-
Non-owner occupied	-		-	-		-
Construction and development
Land & land development	1		698	-		-
Construction	-		-	-		-
Residential real estate
Non-jumbo	2		347	3		382
Jumbo	-		-	1		1,300
Home equity	-		-	-		-
Consumer	-		-	3		58
Total	3	$	1,045	10	$	4,117

The following table details the activity regarding TDRs by loan type during 2013, and the related allowance on TDRs.

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 January 1, 2013	$	9,570		$	-	$	4,981		$	10,692		$	7,331		$	5,089		$	19,000		$	-	$	65		$	-	$	56,728
Additions		747			-		76			-			244			1,137			-			-		11			-		2,215
Charge-offs		(888	)		-		(195	)		(63	)		-			(37	)		(4,680	)		-		(10	)		-		(5,873)
Net (paydowns) advances		(3,265	)		-		(3,620	)		(412	)		(140	)		(458	)		(42	)		-		(20	)		-		(7,957)
Transfer into OREO		-			-		-			(519	)		-			(189	)		(8,000	)		-		-			-		(8,708)
Refinance out of TDR status		-			-		-			-			(1,891	)		-			-			-		-			-		(1,891)
Balance December 31, 2013	$	6,164		$	-	$	1,242		$	9,698		$	5,544		$	5,542		$	6,278		$	-	$	46		$	-	$	34,514
Allowance related to
troubled debt restructurings	$	190		$	-	$	16		$	204		$	175		$	243		$	37		$	-	$	13		$	-	$	878

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 exceeding $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	2013		2012		2013		2012		2013		2012		2013		2012		2013		2012
Pass	$	41,662	$	43,572	$	15,022	$	3,619	$	82,323	$	73,425	$	143,982	$	139,176	$	268,967	$	262,132
OLEM (Special Mention)		5,550		7,349		133		-		4,544		1,260		1,412		1,034		10,222		11,477
Substandard		24,131		28,414		-		153		1,485		11,144		4,224		14,042		1,601		2,473
Doubtful		110		-		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-		-		-
Total	$	71,453	$	79,335	$	15,155	$	3,772	$	88,352	$	85,829	$	149,618	$	154,252	$	280,790	$	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	2013		2012		2013		2012
Residential real estate
Non-jumbo	$	210,500	$	213,196	$	2,446	$	3,518
Jumbo		53,406		49,003		-		12,564
Home Equity		54,844		52,823		-		440
Consumer		19,761		20,531		128		55
Other		3,276		3,701		-		-
Total	$	341,787	$	339,254	$	2,574	$	16,577

Industry concentrations:  At December 31, 2013 and 2012, we had no concentrations of loans to any single industry in excess of 10% of total loans.

Loans to related parties:  We have had, and may be expected to have in the future, banking transactions in the ordinary course of business with our directors, principal officers, their immediate families and affiliated companies in which they are principal shareholders (commonly referred to as related parties).  These transactions have been, in our opinion, on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with others.

The following presents the activity with respect to related party loans aggregating $60,000 or more to any one related party (other changes represent additions to and changes in director and executive officer status):

Dollars in thousands	2013			2012
Balance, beginning	$	18,973		$	17,063
Additions		7,978			10,097
Amounts collected		(8,317	)		(8,204)
Other changes, net		(57	)		17
Balance, ending	$	18,577		$	18,973

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.