6. Loans

3 Months Ended

Mar. 31, 2014

Loans and Leases Receivable Disclosure [Abstract]

Loans

NOTE6. 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:

	March 31,		December 31,		March 31,
Dollars in thousands	2014		2013		2013
Commercial	$	93,517	$	88,352	$	86,877
Commercial real estate
Owner-occupied		150,025		149,618		151,942
Non-owner occupied		297,197		280,790		288,475
Construction and development
Land and land development		67,342		71,453		76,277
Construction		18,327		15,155		5,782
Residential real estate
Non-jumbo		215,665		212,946		213,965
Jumbo		51,406		53,406		62,849
Home equity		56,161		54,844		53,765
Consumer		19,106		19,889		19,638
Other		5,037		3,276		3,191
Total loans, net of unearned fees		973,783		949,729		962,761
Less allowance for loan losses		11,069		12,659		17,020
Loans, net	$	962,714	$	937,070	$	945,741

The following table presents the contractual aging of the recorded investment in past due loans by class as of March 31, 2014 and 2013 and December 31, 2013.

	At March 31, 2014
	Past Due										> 90 days
Dollars in thousands	30-59 days		60-89 days		> 90 days		Total		Current		and Accruing
Commercial	$	52	$	50	$	796	$	898	$	92,619	$	-
Commercial real estate
Owner-occupied		-		236		125		361		149,664		-
Non-owner occupied		1,076		-		768		1,844		295,353		-
Construction and development
Land and land development		754		-		6,123		6,877		60,465		-
Construction		-		-		-		-		18,327		-
Residential mortgage
Non-jumbo		2,780		804		1,821		5,405		210,260		-
Jumbo		712		-		-		712		50,694		-
Home equity		75		-		69		144		56,017		-
Consumer		207		32		45		284		18,822		-
Other		-		-		-		-		5,037		-
Total	$	5,656	$	1,122	$	9,747	$	16,525	$	957,258	$	-

	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 March 31, 2013
	Past Due										> 90 days
Dollars in thousands	30-59 days		60-89 days		> 90 days		Total		Current		and Accruing
Commercial	$	148	$	44	$	1,921	$	2,113	$	84,764	$	-
Commercial real estate
Owner-occupied		1,075		310		-		1,385		150,557		-
Non-owner occupied		222		708		909		1,839		286,636		-
Construction and development
Land and land development		65		794		10,538		11,397		64,880		-
Construction		-		-		153		153		5,629		-
Residential mortgage
Non-jumbo		4,910		1,052		2,362		8,324		205,641		-
Jumbo		-		-		12,565		12,565		50,284		-
Home equity		247		48		-		295		53,470		-
Consumer		244		34		44		322		19,316		-
Other		-		-		-		-		3,191		-
Total	$	6,911	$	2,990	$	28,492	$	38,393	$	924,368	$	-

Nonaccrual loans: The following table presents the nonaccrual loans included in the net balance of loans at March 31, 2014, December 31, 2013, and March 31, 2013.

Dollars in thousands	3/31/2014		12/31/2013		3/31/2013
Commercial	$	866	$	1,224	$	4,763
Commercial real estate
Owner-occupied		2,404		1,953		495
Non-owner occupied		430		365		1,030
Construction and development
Land & land development		10,252		12,830		12,923
Construction		-		-		153
Residential mortgage
Non-jumbo		2,593		2,446		4,001
Jumbo		-		-		12,565
Home equity		297		-		303
Consumer		73		128		72
Total	$	16,915	$	18,946	$	36,305

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.

Loan Category	03/31/2014		12/31/2013		03/31/2013		Method used to measure impairment
Commerical	$	899	$	1,864	$	10,322	Fair value of collateral
		-		158		164	Discounted cash flow
Commerical real estate
Owner-occupied		4,856		10,067		13,334	Fair value of collateral
		7,598		2,483		2,673	Discounted cash flow
Non-owner occupied		518		5,832		6,858	Fair value of collateral
		5,259		-		-	Discounted cash flow
Construction and development
Land & land development		16,107		24,625		27,395	Fair value of collateral
		1,457		644		656	Discounted cash flow
Construction		-		-		-	Fair value of collateral
Residential mortgage
Non-jumbo		3,450		5,516		5,190	Fair value of collateral
		2,603		566		829	Discounted cash flow
Jumbo		6,644		8,768		21,450	Fair value of collateral
		2,086		-		-	Discounted cash flow
Home equity		186		212		213	Fair value of collateral
Consumer		40		47		62	Fair value of collateral
Total	$	51,703	$	60,782	$	89,146

The following tables present loans individually evaluated for impairment at March 31, 2014, December 31, 2013 and March 31, 2013.

	March 31, 2014
							Average		Interest Income
	Recorded		Unpaid		Related		Impaired		Recognized
Dollars in thousands	Investment		Principal Balance		Allowance		Balance		while impaired
Without a related allowance
Commercial	$	824	$	824	$	-	$	824	$	27
Commercial real estate
Owner-occupied		7,836		7,836		-		7,836		231
Non-owner occupied		5,035		5,037		-		5,037		249
Construction and development
Land & land development		11,793		11,793		-		11,793		323
Construction		-		-		-		-		-
Residential real estate
Non-jumbo		3,209		3,217		-		3,217		140
Jumbo		7,828		7,833		-		7,833		401
Home equity		186		186		-		186		11
Consumer		40		40		-		40		3
Total without a related allowance	$	36,751	$	36,766	$	-	$	36,766	$	1,385
With a related allowance
Commercial	$	75	$	75	$	18	$	75	$	5
Commercial real estate
Owner-occupied		4,618		4,618		324		4,618		213
Non-owner occupied		740		740		85		740		28
Construction and development
Land & land development		5,771		5,771		2,553		5,771		40
Construction		-		-		-		-		-
Residential real estate
Non-jumbo		2,835		2,836		337		2,836		134
Jumbo		896		897		56		897		45
Home equity		-		-		-		-		-
Consumer		-		-		-		-		-
Total with a related allowance	$	14,935	$	14,937	$	3,373	$	14,937	$	465
Total
Commercial	$	36,692	$	36,694	$	2,980	$	36,694	$	1,116
Residential real estate		14,954		14,969		393		14,969		731
Consumer		40		40		-		40		3
Total	$	51,686	$	51,703	$	3,373	$	51,703	$	1,850

	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

	March 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	$	9,442	$	9,446	$	-	$	9,446	$	439
Commercial real estate
Owner-occupied		9,882		9,886		-		9,886		455
Non-owner occupied		5,430		5,432		-		5,432		271
Construction and development
Land & land development		15,623		15,622		-		14,883		575
Construction		-		-		-		-		-
Residential real estate
Non-jumbo		3,523		3,531		-		3,531		153
Jumbo		7,264		7,265		-		7,265		360
Home equity		185		186		-		186		11
Consumer		35		35		-		35		1
Total without a related allowance	$	51,384	$	51,403	$	-	$	50,664	$	2,265
With a related allowance
Commercial	$	1,031	$	1,040	$	403	$	1,040	$	8
Commercial real estate
Owner-occupied		6,121		6,121		437		6,120		282
Non-owner occupied		1,426		1,426		152		1,427		29
Construction and development
Land & land development		12,429		12,429		1,421		12,429		157
Construction		-		-		-		-		-
Residential real estate
Non-jumbo		2,487		2,488		303		2,487		87
Jumbo		14,180		14,185		3,707		14,185		94
Home equity		28		27		28		28		-
Consumer		26		27		14		26		2
Total with a related allowance	$	37,728	$	37,743	$	6,465	$	37,742	$	659
Total
Commercial	$	61,384	$	61,402	$	2,413	$	60,663	$	2,216
Residential real estate		27,667		27,682		4,038		27,682		705
Consumer		61		62		14		61		3
Total	$	89,112	$	89,146	$	6,465	$	88,406	$	2,924

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 $33.5 million, of which $32.2 million were current with respect to restructured contractual payments at March 31, 2014, and $34.5 million, of which $33.6 million were current with respect to restructured contractual payments at December 31, 2013. 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 months ended March 31, 2014 and 2013. 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
	March 31, 2014						March 31, 2013
			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		-		-		-		-		-		-
Construction and development
Land & land development		-		-		-		1		49		50
Construction		-		-		-		-		-		-
Residential real estate
Non-jumbo		-		-		-		-		-		-
Jumbo		-		-		-		-		-		-
Home equity		-		-		-		-		-		-
Consumer		-		-		-		-		-		-
Total		-	$	-	$	-		1	$	49	$	50

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
	March 31, 2014
	Number of		Recorded Investment
dollars in thousands	Defaults		at Default Date
Commercial		1	$	56
Commercial real estate
Owner-occupied		-		-
Non-owner occupied		-		-
Construction and development
Land & land development		1		698
Construction		-		-
Residential real estate
Non-jumbo		4		576
Jumbo		-		-
Home equity		-		-
Consumer		-		-
Total		6	$	1,330

The following table details the activity regarding TDRs by loan type during the first three months of 2014, and the related allowance on TDRs.

March 31, 2014
	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, 2014	$	6,164		$	-	$	1,242		$	9,698		$	5,544		$	5,542		$	6,278		$	-	$	46		$	-	$	34,514
Additions		-			-		-			-			-			-			-			-		-			-		-
Charge-offs		-			-		-			-			-			-			-			-		(3	)		-		(3	)
Net (paydowns) advances		(95	)		-		(733	)		(54	)		(52	)		(29	)		(41	)		-		(3	)		-		(1,007	)
Transfer into OREO		-			-		-			-			-			-			-			-		-			-		-
Refinance out of TDR status		-			-		-			-			-			-			-			-		-			-		-
Balance March 31, 2014	$	6,069		$	-	$	509		$	9,644		$	5,492		$	5,513		$	6,237		$	-	$	40		$	-	$	33,504
Allowance related to
troubled debt? restructurings	$	171		$	-	$	18		$	176		$	85		$	334		$	56		$	-	$	-		$	-	$	840

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	3/31/2014		12/31/2013		3/31/2014		12/31/2013		3/31/2014		12/31/2013		3/31/2014		12/31/2013		3/31/2014		12/31/2013
Pass	$	45,857	$	41,662	$	18,035	$	15,022	$	91,387	$	82,323	$	143,443	$	143,982	$	285,977	$	268,967
OLEM (Special Mention)		5,304		5,550		292		133		1,225		4,544		1,927		1,412		9,560		10,222
Substandard		16,071		24,131		-		-		515		1,485		4,655		4,224		1,660		1,601
Doubtful		110		110		-		-		390		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-		-		-
Total	$	67,342	$	71,453	$	18,327	$	15,155	$	93,517	$	88,352	$	150,025	$	149,618	$	297,197	$	280,790

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	3/31/2014		12/31/2013		3/31/2013		3/31/2014		12/31/2013		3/31/2013
Residential real estate
Non-jumbo	$	213,071	$	210,500	$	209,964	$	2,594	$	2,446	$	4,001
Jumbo		51,406		53,406		50,284		-		-		12,565
Home Equity		55,865		54,844		53,462		296		-		303
Consumer		19,033		19,761		19,566		73		128		72
Other		5,037		3,276		3,191		-		-		-
Total	$	344,412	$	341,787	$	336,467	$	2,963	$	2,574	$	16,941

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.