6. Loans

6 Months Ended

Jun. 30, 2014

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:

	June 30,		December 31,		June 30,
Dollars in thousands	2014		2013		2013
Commercial	$	90,096	$	88,352	$	78,963
Commercial real estate
Owner-occupied		154,260		149,618		149,660
Non-owner occupied		314,439		280,790		277,773
Construction and development
Land and land development		64,246		71,453		73,427
Construction		20,902		15,155		7,634
Residential real estate
Non-jumbo		219,569		212,946		216,759
Jumbo		52,487		53,406		58,567
Home equity		61,248		54,844		53,774
Consumer		19,777		19,889		20,147
Other		6,798		3,276		3,397
Total loans, net of unearned fees		1,003,822		949,729		940,101
Less allowance for loan losses		11,006		12,659		14,122
Loans, net	$	992,816	$	937,070	$	925,979

The following table presents the contractual aging of the recorded investment in past due loans by class as of June 30, 2014 and 2013 and December 31, 2013.

	At June 30, 2014
	Past Due										> 90 days
Dollars in thousands	30-59 days		60-89 days		> 90 days		Total		Current		and Accruing
Commercial	$	33	$	363	$	396	$	792	$	89,304	$	-
Commercial real estate
Owner-occupied		642		348		759		1,749		152,511		-
Non-owner occupied		237		-		234		471		313,968		-
Construction and development
Land and land development		142		14		4,860		5,016		59,230		-
Construction		-		-		-		-		20,902		-
Residential mortgage
Non-jumbo		3,198		1,760		2,060		7,018		212,551		-
Jumbo		707		723		-		1,430		51,057		-
Home equity		196		36		143		375		60,873		-
Consumer		452		183		72		707		19,070		-
Other		-		-		-		-		6,798		-
Total	$	5,607	$	3,427	$	8,524	$	17,558	$	986,264	$	-

	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 June 30, 2013
	Past Due										> 90 days
Dollars in thousands	30-59 days		60-89 days		> 90 days		Total		Current		and Accruing
Commercial	$	144	$	55	$	1,669	$	1,868	$	77,095	$	-
Commercial real estate
Owner-occupied		85		-		314		399		149,261		-
Non-owner occupied		543		-		899		1,442		276,331		-
Construction and development
Land and land development		698		-		9,929		10,627		62,800		-
Construction		-		-		60		60		7,574		-
Residential mortgage
Non-jumbo		4,086		1,171		2,494		7,751		209,008		-
Jumbo		709		-		9,000		9,709		48,858		-
Home equity		101		26		25		152		53,622		-
Consumer		239		64		63		366		19,781		-
Other		53		-		-		53		3,344		-
Total	$	6,658	$	1,316	$	24,453	$	32,427	$	907,674	$	-

Nonaccrual loans:  The following table presents the nonaccrual loans included in the net balance of loans at June 30, 2014, December 31, 2013 and June 30, 2013.

Dollars in thousands	6/30/2014		12/31/2013		6/30/2013
Commercial	$	416	$	1,224	$	3,996
Commercial real estate
Owner-occupied		953		1,953		796
Non-owner occupied		583		365		899
Construction and development
Land & land development		8,849		12,830		11,445
Construction		-		-		60
Residential mortgage
Non-jumbo		2,950		2,446		4,333
Jumbo		-		-		9,000
Home equity		339		-		271
Consumer		129		128		92
Total	$	14,219	$	18,946	$	30,892

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	6/30/2014		12/31/2013		6/30/2013		Method used to measure impairment
Commerical	$	506	$	1,864	$	7,825	Fair value of collateral
		-		158		162	Discounted cash flow
Commerical real estate
Owner-occupied		1,924		10,067		12,074	Fair value of collateral
		8,969		2,483		2,657	Discounted cash flow
Non-owner occupied		513		5,832		6,814	Fair value of collateral
		5,236		-		-	Discounted cash flow
Construction and development
Land & land development		14,023		24,625		26,710	Fair value of collateral
		1,446		644		654	Discounted cash flow
Residential mortgage
Non-jumbo		3,440		5,516		5,322	Fair value of collateral
		2,592		566		891	Discounted cash flow
Jumbo		6,648		8,768		17,824	Fair value of collateral
		2,073		-		-	Discounted cash flow
Home equity		186		212		213	Fair value of collateral
Consumer		37		47		62	Fair value of collateral
Total	$	47,593	$	60,782	$	81,208

The following tables present loans individually evaluated for impairment at June 30, 2014, December 31, 2013 and June 30, 2013.

	June 30, 2014
							Average		Interest Income
	Recorded		Unpaid		Related		Impaired		Recognized
Dollars in thousands	Investment		Principal Balance		Allowance		Balance		while impaired
Without a related allowance
Commercial	$	506	$	506	$	-	$	506	$	35
Commercial real estate
Owner-occupied		6,287		6,288		-		6,287		248
Non-owner occupied		5,012		5,014		-		5,012		249
Construction and development
Land & land development		13,853		13,853		-		13,853		293
Construction		-		-		-		-		-
Residential real estate
Non-jumbo		3,390		3,398		-		3,390		161
Jumbo		7,823		7,828		-		7,823		401
Home equity		186		186		-		186		11
Consumer		38		37		-		38		3
Total without a related allowance	$	37,095	$	37,110	$	-	$	37,095	$	1,401
With a related allowance
Commercial	$	-	$	-	$	-	$	-	$	-
Commercial real estate
Owner-occupied		4,605		4,605		266		4,605		213
Non-owner occupied		735		735		79		735		79
Construction and development
Land & land development		1,616		1,616		898		1,616		40
Construction		-		-		-		-		-
Residential real estate
Non-jumbo		2,633		2,634		299		2,633		107
Jumbo		893		893		53		893		44
Home equity		-		-		-		-		-
Consumer		-		-		-		-		-
Total with a related allowance	$	10,482	$	10,483	$	1,595	$	10,482	$	483
Total
Commercial	$	32,614	$	32,617	$	1,243	$	32,614	$	1,157
Residential real estate		14,925		14,939		352		14,925		724
Consumer		38		37		-		38		3
Total	$	47,577	$	47,593	$	1,595	$	47,577	$	1,884

	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

	June 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	$	6,942	$	7,104	$	-	$	8,133	$	435
Commercial real estate
Owner-occupied		9,770		9,774		-		10,638		491
Non-owner occupied		5,396		5,398		-		3,969		199
Construction and development
Land & land development		16,904		16,904		-		16,853		725
Construction		-		-		-		-		-
Residential real estate
Non-jumbo		3,250		3,258		-		3,035		120
Jumbo		7,911		7,916		-		9,352		503
Home equity		186		186		-		186		11
Consumer		37		38		-		37		2
Total without a related allowance	$	50,396	$	50,578	$	-	$	52,203	$	2,486
With a related allowance
Commercial	$	874	$	883	$	387	$	565	$	4
Commercial real estate
Owner-occupied		4,957		4,957		741		3,967		186
Non-owner occupied		1,415		1,416		165		1,421		28
Construction and development
Land & land development		10,460		10,460		1,844		10,483		65
Construction		-		-		-		-		-
Residential real estate
Non-jumbo		2,952		2,955		307		2,963		141
Jumbo		9,907		9,908		1,044		10,277		45
Home equity		28		27		27		28		-
Consumer		25		24		13		25		2
Total with a related allowance	$	30,618	$	30,630	$	4,528	$	29,729	$	471
Total
Commercial	$	56,718	$	56,896	$	3,137	$	56,029	$	2,133
Residential real estate		24,234		24,250		1,378		25,841		820
Consumer		62		62		13		62		4
Total	$	81,014	$	81,208	$	4,528	$	81,932	$	2,957

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 $33.2 million, of which $31.6 million were current with respect to restructured contractual payments at June 30, 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 and six months ended June 30, 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
	June 30, 2014					June 30, 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	3	$	82	$	86	1	$	23	$	23
Commercial real estate
Owner-occupied	-		-		-	-		-		-
Non-owner occupied	-		-		-	-		-		-
Construction and development
Land & land development	-		-		-	-		-		-
Construction	-		-		-	-		-		-
Residential real estate
Non-jumbo	-		-		-	2		241		241
Jumbo	-		-		-	-		-		-
Home equity	-		-		-	-		-		-
Consumer	-		-		-	-		-		-
Total	3	$	82	$	86	3	$	264	$	264

	For the Six Months Ended					For the Six Months Ended
	June 30, 2014					June 30, 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	3	$	82	$	86	1	$	23	$	23
Commercial real estate
Owner-occupied	-		-		-	-		-		-
Non-owner occupied	-		-		-	-		-		-
Construction and development
Land & land development	-		-		-	1		49		50
Construction	-		-		-	-		-		-
Residential real estate
Non-jumbo	-		-		-	2		241		241
Jumbo	-		-		-	-		-		-
Home equity	-		-		-	-		-		-
Consumer	-		-		-	-		-		-
Total	3	$	82	$	86	4	$	313	$	314

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 Six Months Ended
	June 30, 2014			June 30, 2014
	Number	Recorded		Number	Recorded
	of	Investment		of	Investment
dollars in thousands	Defaults	at Default Date		Defaults	at Default Date
Commercial	2	$	78	2	$	78
Commercial real estate
Owner-occupied	-		-	-		-
Non-owner occupied	-		-	-		-
Construction and development
Land & land development	1		695	1		698
Construction	-		-	-		-
Residential real estate
Non-jumbo	2		335	2		334
Jumbo	-		-	-		-
Home equity	-		-	-		-
Consumer	-		-	-		-
Total	5	$	1,108	5	$	1,110

The following table details the activity regarding TDRs by loan type for the three months and six months ended June 30, 2014, and the related allowance on TDRs.

For the Three Months Ended June 30, 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 June 30, 2013	$	6,069		$	-	$	509		$	9,644		$	5,492		$	5,513		$	6,237		$	-	$	40		$	-	$	33,504
Additions		-			-		86			-			-			-			-			-		-			-		86
Charge-offs		-			-		-			-			-			-			-			-		-			-		-
Net (paydowns) advances		(101	)		-		(97	)		(55	)		(27	)		(19	)		(36	)		-		(2	)		-		(337)
Transfer into OREO		-			-		-			-			-			-			-			-		-			-		-
Refinance out of TDR status		-			-		-			-			-			-			-			-		-			-		-
Balance June 30, 2014	$	5,968		$	-	$	498		$	9,589		$	5,465		$	5,494		$	6,201		$	-	$	38		$	-	$	33,253
Allowance related to
troubled debt restructurings	$	171		$	-	$	-		$	188		$	79		$	298		$	52		$	-	$	-		$	-	$	788

For the Six Months Ended June 30, 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	$	6,163		$	-	$	1,243		$	9,699		$	5,544		$	5,541		$	6,278		$	-	$	47		$	-	$	34,515
Additions		-			-		86			-			-			-			-			-		-			-		86
Charge-offs		-			-		-			-			-			-			-			-		(3	)		-		(3)
Net (paydowns) advances		(195	)		-		(831	)		(110	)		(79	)		(47	)		(77	)		-		(6	)		-		(1,345)
Transfer into OREO		-			-		-			-			-			-			-			-		-			-		-
Refinance out of TDR status		-			-		-			-			-			-			-			-		-			-		-
Balance June 30, 2014	$	5,968		$	-	$	498		$	9,589		$	5,465		$	5,494		$	6,201		$	-	$	38		$	-	$	33,253
Allowance related to
troubled debt restructurings	$	171		$	-	$	-		$	188		$	79		$	298		$	52		$	-	$	-		$	-	$	788

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	6/30/2014		12/31/2013		6/30/2014		12/31/2013		6/30/2014		12/31/2013		6/30/2014		12/31/2013		6/30/2014		12/31/2013
Pass	$	45,624	$	41,662	$	20,432	$	15,022	$	88,446	$	82,323	$	150,578	$	143,982	$	303,213	$	268,967
OLEM (Special Mention)		4,539		5,550		470		133		1,203		4,544		1,903		1,412		9,483		10,222
Substandard		14,083		24,131		-		-		447		1,485		1,779		4,224		1,743		1,601
Doubtful		-		110		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-		-		-
Total	$	64,246	$	71,453	$	20,902	$	15,155	$	90,096	$	88,352	$	154,260	$	149,618	$	314,439	$	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	6/30/2014		12/31/2013		6/30/2013		6/30/2014		12/31/2013		6/30/2013
Residential real estate
Non-jumbo	$	216,619	$	210,500	$	212,426	$	2,950	$	2,446	$	4,333
Jumbo		52,487		53,406		49,567		-		-		9,000
Home Equity		60,909		54,844		53,503		339		-		271
Consumer		19,648		19,761		20,056		129		128		91
Other		6,798		3,276		3,397		-		-		-
Total	$	356,461	$	341,787	$	338,949	$	3,418	$	2,574	$	13,695

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.