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:



Dollars in thousands	September 30, 2014		December 31, 2013		September 30, 2013
Commercial	$	83,762	$	88,352	$	83,844
Commercial real estate
Owner-occupied	156,765		149,618		151,260
Non-owner occupied	314,577		280,790		279,412
Construction and development
Land and land development	61,088		71,453		73,089
Construction	27,239		15,155		12,323
Residential real estate
Non-jumbo	218,125		212,946		215,058
Jumbo	51,917		53,406		59,701
Home equity	64,256		54,844		53,674
Consumer	19,906		19,889		20,472
Other	6,753		3,276		3,375
Total loans, net of unearned fees	1,004,388		949,729		952,208
Less allowance for loan losses	11,041		12,659		13,039
Loans, net	$	993,347	$	937,070	$	939,169

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



	At September 30, 2014
	Past Due										> 90 days and Accruing
Dollars in thousands	30-59 days		60-89 days		> 90 days		Total		Current		> 90 days and Accruing
Commercial	$	74	$	179	$	259	$	512	$	83,250	$	—
Commercial real estate
Owner-occupied	365		442		478		1,285		155,480		—
Non-owner occupied	288		—		120		408		314,169		—
Construction and development
Land and land development	388		10		4,214		4,612		56,476		—
Construction	—		—		—		—		27,239		—
Residential mortgage
Non-jumbo	3,381		555		2,921		6,857		211,268		—
Jumbo	—		1,181		1,435		2,616		49,301		—
Home equity	190		113		29		332		63,924		—
Consumer	350		196		46		592		19,314		—
Other	—		—		—		—		6,753		—
Total	$	5,036	$	2,676	$	9,502	$	17,214	$	987,174	$	—



	At December 31, 2013
	Past Due										> 90 days and Accruing
Dollars in thousands	30-59 days		60-89 days		> 90 days		Total		Current		> 90 days 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 September 30, 2013
	Past Due										> 90 days and Accruing
Dollars in thousands	30-59 days		60-89 days		> 90 days		Total		Current		> 90 days 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	$	—

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



	September 30,				December 31,
Dollars in thousands	2014		2013		2013
Commercial	$	309	$	2,557	$	1,224
Commercial real estate
Owner-occupied	593		3,795		1,953
Non-owner occupied	344		—		365
Construction and development
Land & land development	4,591		12,851		12,830
Construction	—		38		—
Residential mortgage
Non-jumbo	3,602		3,119		2,446
Jumbo	1,435		9,000		—
Home equity	220		266		—
Consumer	146		145		128
Total	$	11,240	$	31,771	$	18,946

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

	September 30,				December 31,		Method used to measure impairment
Loan Category	2014		2013		2013		Method used to measure impairment
Commercial	$	51	$	5,997	$	1,864	Fair value of collateral
	403		160		158		Discounted cash flow
Commercial real estate
Owner-occupied	1,257		9,054		10,067		Fair value of collateral
	9,181		2,497		2,483		Discounted cash flow
Non-owner occupied	512		5,884		5,832		Fair value of collateral
	7,358		—		—		Discounted cash flow
Construction and development
Land & land development	12,934		24,870		24,625		Fair value of collateral
	1,479		649		644		Discounted cash flow
Residential mortgage
Non-jumbo	1,548		5,133		5,516		Fair value of collateral
	4,980		884		566		Discounted cash flow
Jumbo	7,791		17,786		8,768		Fair value of collateral
	890		—		—		Discounted cash flow
Home equity	285		213		212		Fair value of collateral
	523		—		—		Discounted cash flow
Consumer	3		52		47		Fair value of collateral
	32		—		—		Discounted cash flow
Total	$	49,227	$	73,179	$	60,782

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



	September 30, 2014
Dollars in thousands	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Impaired Balance		Interest Income Recognized while impaired

Without a related allowance
Commercial	$	403	$	403	$	—	$	409	$	26
Commercial real estate
Owner-occupied	5,808		5,807		—		5,879		211
Non-owner occupied	4,989		4,991		—		5,014		248
Construction and development
Land & land development	13,597		13,596		—		14,099		478
Construction	—		—		—		—		—
Residential real estate
Non-jumbo	4,284		4,294		—		3,631		175
Jumbo	7,786		7,791		—		7,817		310
Home equity	808		808		—		186		11
Consumer	35		35		—		38		2
Total without a related allowance	$	37,710	$	37,725	$	—	$	37,073	$	1,461

With a related allowance
Commercial	$	50	$	51	$	7	$	12	$	1
Commercial real estate
Owner-occupied	4,631		4,631		256		4,618		214
Non-owner occupied	2,879		2,879		87		733		28
Construction and development
Land & land development	817		817		10		865		38
Construction	—		—		—		—		—
Residential real estate
Non-jumbo	2,234		2,234		201		2,076		99
Jumbo	890		890		49		893		45
Home equity	—		—		—		—		—
Consumer	—		—		—		—		—
Total with a related allowance	$	11,501	$	11,502	$	610	$	9,197	$	425

Total
Commercial	$	33,174	$	33,175	$	360	$	31,629	$	1,244
Residential real estate	16,002		16,017		250		14,603		640
Consumer	35		35		—		38		2
Total	$	49,211	$	49,227	$	610	$	46,270	$	1,886



	December 31, 2013
Dollars in thousands	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Impaired Balance		Interest Income Recognized 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



	September 30, 2013
Dollars in thousands	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Impaired Balance		Interest Income Recognized 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

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 $35.9 million, of which $33.9 million were current with respect to restructured contractual payments at September 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 nine months ended September 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 September 30, 2014					For the Three Months Ended September 30, 2013
Dollars in thousands	Number of Modifications	Pre-modification Recorded Investment		Post-modification Recorded Investment		Number of Modifications	Pre-modification Recorded Investment		Post-modification Recorded Investment
Commercial	—	$	—	$	—	—	$	—	$	—
Commercial real estate
Owner-occupied	—	—		—		—	—		—
Non-owner occupied	1	2,154		2,154		—	—		—
Construction and development
Land & land development	—	—		—		—	—		—
Construction	—	—		—		—	—		—
Residential real estate
Non-jumbo	3	634		670		2	487		487
Jumbo	—	—		—		—	—		—
Home equity	1	411		523		—	—		—
Consumer	—	—		—		—	—		—
Total	5	$	3,199	$	3,347	2	$	487	$	487



	For the Nine Months Ended September 30, 2014					For the Nine Months Ended September 30, 2013
Dollars in thousands	Number of Modifications	Pre-modification Recorded Investment		Post-modification Recorded Investment		Number of Modifications	Pre-modification Recorded Investment		Post-modification Recorded Investment
Commercial	3	$	82	$	86	1	$	23	$	23
Commercial real estate
Owner-occupied	—	—		—		—	—		—
Non-owner occupied	1	2,154		2,154		—	—		—
Construction and development
Land & land development	—	—		—		1	49		50
Construction	—	—		—		—	—		—
Residential real estate
Non-jumbo	3	634		670		4	728		514
Jumbo	—	—		—		—	—		—
Home equity	1	411		523		—	—		—
Consumer	—	—		—		—	—		—
Total	8	$	3,281	$	3,433	6	$	800	$	587

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 September 30, 2014			For the Nine Months Ended September 30, 2014
Dollars in thousands	Number of Defaults	Recorded Investment at Default Date		Number of Defaults	Recorded Investment at Default Date
Commercial	2	$	59	3	$	86
Commercial real estate
Owner-occupied	—	—		—	—
Non-owner occupied	—	—		—	—
Construction and development
Land & land development	1	699		1	698
Construction	—	—		—	—
Residential real estate
Non-jumbo	2	278		2	278
Jumbo	—	—		—	—
Home equity	—	—		—	—
Consumer	—	—		—	—
Total	5	$	1,036	6	$	1,062

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



For the Three Months Ended September 30, 2014
	Construction & Land Development								Commercial Real Estate						Residential Real Estate
Dollars in thousands	Land & Land Develop- ment			Construc- tion		Commer- cial			Owner Occupied			Non- Owner Occupied			Non- jumbo			Jumbo			Home Equity		Con- sumer			Other		Total
Troubled debt restructurings
Balance June 30, 2014	$	5,968		$	—	$	498		$	9,589		$	5,465		$	5,494		$	6,201		$	—	$	38		$	—	$	33,253
Additions	—			—		—			—			2,154			670			—			523		—			—		3,347
Charge-offs	—			—		—			—			—			—			—			—		—			—		—
Net (paydowns) advances	(155		)	—		(52		)	(22		)	(37		)	(216		)	(52		)	—		(3		)	—		(537		)
Transfer into OREO	—			—		—			—			—			(88		)	—			—		—			—		(88		)
Refinance out of TDR status	—			—		—			—			—			—			—			—		—			—		—
Balance, September 30, 2014	$	5,813		$	—	$	446		$	9,567		$	7,582		$	5,860		$	6,149		$	523	$	35		$	—	$	35,975

Allowance related to troubled debt restructurings	$	10		$	—	$	7		$	183		$	87		$	201		$	49		$	—	$	—		$	—	$	537



For the Nine Months Ended September 30, 2014
	Construction & Land Development								Commercial Real Estate						Residential Real Estate
Dollars in thousands	Land & Land Develop- ment			Construc- tion		Commer- cial			Owner Occupied			Non- Owner Occupied			Non- jumbo			Jumbo			Home Equity		Con- 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			—			2,154			670			—			523		—			—		3,433
Charge-offs	—			—		—			—			—			—			—			—		(3		)	—		(3		)
Net (paydowns) advances	(350		)	—		(883		)	(132		)	(116		)	(263		)	(129		)	—		(9		)	—		(1,882		)
Transfer into OREO	—			—		—			—			—			(88		)	—			—		—			—		(88		)
Refinance out of TDR status	—			—		—			—			—			—			—			—		—			—		—
Balance, September 30, 2014	$	5,813		$	—	$	446		$	9,567		$	7,582		$	5,860		$	6,149		$	523	$	35		$	—	$	35,975

Allowance related to troubled debt restructurings	$	10		$	—	$	7		$	183		$	87		$	201		$	49		$	—	$	—		$	—	$	537

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	9/30/2014		12/31/2013		9/30/2014		12/31/2013		9/30/2014		12/31/2013		9/30/2014		12/31/2013		9/30/2014		12/31/2013
Pass	$	47,344	$	41,662	$	27,239	$	15,022	$	82,094	$	82,323	$	154,128	$	143,982	$	303,848	$	268,967
OLEM (Special Mention)	724		5,550		—		133		1,320		4,544		1,658		1,412		9,226		10,222
Substandard	13,020		24,131		—		—		348		1,485		979		4,224		1,503		1,601
Doubtful	—		110		—		—		—		—		—		—		—		—
Loss	—		—		—		—		—		—		—		—		—		—
Total	$	61,088	$	71,453	$	27,239	$	15,155	$	83,762	$	88,352	$	156,765	$	149,618	$	314,577	$	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	9/30/2014		12/31/2013		9/30/2013		9/30/2014		12/31/2013		9/30/2013
Residential real estate
Non-jumbo	$	214,523	$	210,500	$	211,939	$	3,602	$	2,446	$	3,119
Jumbo	50,482		53,406		50,701		1,435		—		9,000
Home Equity	64,037		54,844		53,408		219		—		266
Consumer	19,760		19,761		20,327		146		128		145
Other	6,753		3,276		3,375		—		—		—
Total	$	355,555	$	341,787	$	339,750	$	5,402	$	2,574	$	12,530

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.