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	2014		2013
Commercial	$	88,590	$	88,352
Commercial real estate
Owner-occupied	157,783		149,618
Non-owner occupied	317,136		280,790
Construction and development
Land and land development	67,881		71,453
Construction	28,591		15,155
Residential real estate
Non-jumbo	220,071		212,946
Jumbo	52,879		53,406
Home equity	67,115		54,844
Consumer	19,456		19,889
Other	11,507		3,276
Total loans, net of unearned fees	1,031,009		949,729
Less allowance for loan losses	11,167		12,659
Loans, net	$	1,019,842	$	937,070

The following presents loan maturities at December 31, 2014:



	Within		After 1 but		After
Dollars in thousands	1 Year		within 5 Years		5 Years
Commercial	$	33,396	$	38,720	$	16,474
Commercial real estate	24,264		74,774		375,881
Construction and development	28,360		16,065		52,047
Residential real estate	9,058		16,747		314,260
Consumer	3,727		13,420		2,309
Other	455		770		10,282
	$	99,260	$	160,496	$	771,253
Loans due after one year with:
Variable rates			$	110,169
Fixed rates			821,580
			$	931,749

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



	At December 31, 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	$	328	$	117	$	330	$	775	$	87,815	$	—
Commercial real estate
Owner-occupied	121		194		801		1,116		156,667		—
Non-owner occupied	146		—		406		552		316,584		—
Construction and development
Land and land development	346		2,002		4,253		6,601		61,280		—
Construction	—		—		—		—		28,591		—
Residential mortgage
Non-jumbo	4,104		2,719		1,498		8,321		211,750		—
Jumbo	—		—		2,626		2,626		50,253		—
Home equity	1,067		94		83		1,244		65,871		—
Consumer	260		42		63		365		19,091		—
Other	—		—		—		—		11,507		—
Total	$	6,372	$	5,168	$	10,060	$	21,600	$	1,009,409	$	—



	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	$	—

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



Dollars in thousands	2014		2013
Commercial	$	392	$	1,224
Commercial real estate
Owner-occupied	1,218		1,953
Non-owner occupied	626		365
Construction and development
Land & land development	4,619		12,830
Construction	—		—
Residential mortgage
Non-jumbo	2,663		2,446
Jumbo	2,626		—
Home equity	267		—
Consumer	83		128
Total	$	12,494	$	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
	December 31,				Method used to measure impairment
Loan Category	2014		2013		Method used to measure impairment
Commercial	$	132	$	1,864	Fair value of collateral
	362		158		Discounted cash flow
Commercial real estate
Owner-occupied	1,683		10,067		Fair value of collateral
	9,124		2,483		Discounted cash flow
Non-owner occupied	508		5,832		Fair value of collateral
	5,999		—		Discounted cash flow
Construction and development
Land & land development	11,998		24,625		Fair value of collateral
	2,310		644		Discounted cash flow
Residential mortgage
Non-jumbo	1,676		5,516		Fair value of collateral
	5,252		566		Discounted cash flow
Jumbo	7,594		8,768		Fair value of collateral
	886		—		Discounted cash flow
Home equity	285		212		Fair value of collateral
	523		—		Discounted cash flow
Consumer	2		47		Fair value of collateral
	82		—		Discounted cash flow
Total	$	48,416	$	60,782

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



	December 31, 2014
Dollars in thousands	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Impaired Balance		Interest Income Recognized while impaired

Without a related allowance
Commercial	$	370	$	369	$	—	$	430	$	27
Commercial real estate
Owner-occupied	5,362		5,361		—		5,309		192
Non-owner occupied	3,645		3,647		—		4,420		199
Construction and development
Land & land development	13,410		13,410		—		14,149		483
Construction	—		—		—		—		—
Residential real estate
Non-jumbo	4,289		4,300		—		3,853		185
Jumbo	7,589		7,594		—		7,761		241
Home equity	809		808		—		265		14
Consumer	84		84		—		36		2
Total without a related allowance	$	35,558	$	35,573	$	—	$	36,223	$	1,343

With a related allowance
Commercial	$	125	$	125	$	81	$	38	$	—
Commercial real estate
Owner-occupied	5,446		5,446		287		5,461		216
Non-owner occupied	2,860		2,860		74		1,003		40
Construction and development
Land & land development	898		898		46		933		42
Construction	—		—		—		—		—
Residential real estate
Non-jumbo	2,627		2,628		282		2,093		98
Jumbo	885		886		46		892		45
Home equity	—		—		—		—		—
Consumer	—		—		—		—		—
Total with a related allowance	$	12,841	$	12,843	$	816	$	10,420	$	441

Total
Commercial	$	32,116	$	32,116	$	488	$	31,743	$	1,199
Residential real estate	16,199		16,216		328		14,864		583
Consumer	84		84		—		36		2
Total	$	48,399	$	48,416	$	816	$	46,643	$	1,784



	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

The average recorded investment of impaired loans during 2012 was $79.4 million, and $2.4 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 $34.7 million, of which $32.2 million were current with respect to restructured contractual payments at December 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 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.



	2014					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	2	$	76	$	79
Commercial real estate
Non-owner occupied	1	2,154		2,154		1	244		244
Construction and development
Land & land development	—	—		—		2	747		748
Residential real estate
Non-jumbo	5	1,044		1,080		7	1,137		1,137
Home equity	1	411		523		—	—		—
Consumer	1	18		18		1	11		12
Total	11	$	3,709	$	3,861	13	$	2,215	$	2,220

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.



	2014			2013
Dollars in thousands	Number of Defaults	Recorded Investment at Default Date		Number of Defaults	Recorded Investment at Default Date
Commercial	3	$	86	—	$	—
Construction and development
Land & land development	—	—		1	698
Residential real estate
Non-jumbo	1	167		2	347
Total	4	$	253	3	$	1,045

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



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			1,080			—			523		18			—		3,861
Charge-offs	—			—		—			—			—			—			—			—		(3		)	—		(3		)
Net (paydowns) advances	(377		)	—		(919		)	(198		)	(159		)	(288		)	(341		)	—		(12		)	—		(2,294		)
Transfer into foreclosed properties	—			—		—			—			—			(88		)	—			—		—			—		(88		)
Refinance out of TDR status	—			—		—			—			(1,320		)	—			—			—		—			—		(1,320		)
Balance, December 31, 2014	$	5,786		$	—	$	410		$	9,501		$	6,219		$	6,245		$	5,937		$	523	$	50		$	—	$	34,671

Allowance related to troubled debt restructurings	$	38		$	—	$	4		$	252		$	74		$	282		$	46		$	—	$	—		$	—	$	696

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	2014		2013		2014		2013		2014		2013		2014		2013		2014		2013
Pass	$	53,873	$	41,662	$	28,591	$	15,022	$	86,361	$	82,323	$	155,189	$	143,982	$	306,710	$	268,967
OLEM (Special Mention)	1,673		5,550		—		133		1,837		4,544		1,064		1,412		8,933		10,222
Substandard	12,335		24,131		—		—		392		1,485		1,530		4,224		1,493		1,601
Doubtful	—		110		—		—		—		—		—		—		—		—
Loss	—		—		—		—		—		—		—		—		—		—
Total	$	67,881	$	71,453	$	28,591	$	15,155	$	88,590	$	88,352	$	157,783	$	149,618	$	317,136	$	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	2014		2013		2014		2013
Residential real estate
Non-jumbo	$	217,408	$	210,500	$	2,663	$	2,446
Jumbo	50,253		53,406		2,626		—
Home Equity	66,848		54,844		267		—
Consumer	19,373		19,761		83		128
Other	11,507		3,276		—		—
Total	$	365,389	$	341,787	$	5,639	$	2,574

Industry concentrations: At December 31, 2014 and 2013, 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	2014			2013
Balance, beginning	$	18,577		$	18,973
Additions	13,842			7,978
Amounts collected	(11,833		)	(8,317		)
Other changes, net	—			(57		)
Balance, ending	$	20,586		$	18,577

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.