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	March 31, 2015		December 31, 2014		March 31, 2014
Commercial	$	89,928	$	88,590	$	93,517
Commercial real estate
Owner-occupied	180,269		157,783		150,025
Non-owner occupied	325,764		317,136		297,197
Construction and development
Land and land development	66,558		67,881		67,342
Construction	19,094		28,591		18,327
Residential real estate
Non-jumbo	219,938		220,071		215,665
Jumbo	50,492		52,879		51,406
Home equity	68,894		67,115		56,161
Consumer	18,485		19,456		19,106
Other	11,074		11,507		5,037
Total loans, net of unearned fees	1,050,496		1,031,009		973,783
Less allowance for loan losses	10,827		11,167		11,069
Loans, net	$	1,039,669	$	1,019,842	$	962,714

The following table presents the contractual aging of the recorded investment in past due loans by class as of March 31, 2015 and 2014 and December 31, 2014.



	At March 31, 2015
	Past Due										> 90 days and Accruing
Dollars in thousands	30-59 days		60-89 days		> 90 days		Total		Current		> 90 days and Accruing
Commercial	$	388	$	—	$	744	$	1,132	$	88,796	$	—
Commercial real estate
Owner-occupied	119		—		629		748		179,521		—
Non-owner occupied	664		—		406		1,070		324,694		—
Construction and development
Land and land development	1,376		1,361		4,980		7,717		58,841		—
Construction	—		—		—		—		19,094		—
Residential mortgage
Non-jumbo	2,891		1,090		1,888		5,869		214,069		—
Jumbo	—		—		713		713		49,779		—
Home equity	395		—		172		567		68,327		—
Consumer	139		62		22		223		18,262		—
Other	—		—		—		—		11,074		—
Total	$	5,972	$	2,513	$	9,554	$	18,039	$	1,032,457	$	—



	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 March 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	$	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	$	—

Nonaccrual loans: The following table presents the nonaccrual loans included in the net balance of loans at March 31, 2015, December 31, 2014 and March 31, 2014.



	March 31,				December 31,
Dollars in thousands	2015		2014		2014
Commercial	$	788	$	866	$	392
Commercial real estate
Owner-occupied	934		2,404		1,218
Non-owner occupied	406		430		626
Construction and development
Land & land development	5,333		10,252		4,619
Construction	—		—		—
Residential mortgage
Non-jumbo	3,429		2,593		2,663
Jumbo	713		—		2,626
Home equity	349		297		267
Consumer	65		73		83
Total	$	12,017	$	16,915	$	12,494

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
	March 31,				December 31,		Method used to measure impairment
Loan Category	2015		2014		2014		Method used to measure impairment
Commercial	$	44	$	899	$	132	Fair value of collateral
	337		—		362		Discounted cash flow
Commercial real estate
Owner-occupied	5,665		4,856		1,683		Fair value of collateral
	9,056		7,598		9,124		Discounted cash flow
Non-owner occupied	1,633		518		508		Fair value of collateral
	6,184		5,259		5,999		Discounted cash flow
Construction and development
Land & land development	11,733		16,107		11,998		Fair value of collateral
	2,286		1,457		2,310		Discounted cash flow
Residential mortgage
Non-jumbo	1,719		3,450		1,676		Fair value of collateral
	4,677		2,603		5,252		Discounted cash flow
Jumbo	5,672		6,644		7,594		Fair value of collateral
	884		2,086		886		Discounted cash flow
Home equity	186		186		285		Fair value of collateral
	523		—		523		Discounted cash flow
Consumer	2		40		2		Fair value of collateral
	78		—		82		Discounted cash flow
Total	$	50,679	$	51,703	$	48,416

The following tables present loans individually evaluated for impairment at March 31, 2015, December 31, 2014 and March 31, 2014.



	March 31, 2015
Dollars in thousands	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Impaired Balance		Interest Income Recognized while impaired

Without a related allowance
Commercial	$	381	$	381	$	—	$	381	$	21
Commercial real estate
Owner-occupied	9,312		9,312		—		5,364		180
Non-owner occupied	5,183		5,185		—		3,858		180
Construction and development
Land & land development	13,121		13,121		—		13,121		436
Construction	—		—		—		—		—
Residential real estate
Non-jumbo	3,763		3,772		—		3,772		167
Jumbo	5,669		5,672		—		5,672		235
Home equity	710		709		—		709		31
Consumer	80		80		—		80		7
Total without a related allowance	$	38,219	$	38,232	$	—	$	32,957	$	1,257

With a related allowance
Commercial	$	—	$	—	$	—	$	—	$	—
Commercial real estate
Owner-occupied	5,409		5,409		255		5,409		215
Non-owner occupied	2,632		2,632		21		2,632		123
Construction and development
Land & land development	898		898		176		898		—
Construction	—		—		—		—		—
Residential real estate
Non-jumbo	2,623		2,624		276		2,624		119
Jumbo	883		884		43		884		44
Home equity	—		—		—		—		—
Consumer	—		—		—		—		—
Total with a related allowance	$	12,445	$	12,447	$	771	$	12,447	$	501

Total
Commercial	$	36,936	$	36,938	$	452	$	31,663	$	1,155
Residential real estate	13,648		13,661		319		13,661		596
Consumer	80		80		—		80		7
Total	$	50,664	$	50,679	$	771	$	45,404	$	1,758



	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



	March 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	$	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

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 $32.9 million, of which $30.2 million were current with respect to restructured contractual payments at March 31, 2015, and $34.7 million, of which $32.2 million were current with respect to restructured contractual payments at December 31, 2014. There were no commitments to lend additional funds under these restructurings at either balance sheet date.

There were no TDRs that were restructured during the three months ended March 31, 2015 or 2014. Generally, modifications are 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.

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, 2015
Dollars in thousands	Number of Defaults	Recorded Investment at Default Date
Commercial	1	$	27
Commercial real estate
Owner-occupied	—	—
Non-owner occupied	—	—
Construction and development
Land & land development	—	—
Construction	—	—
Residential real estate
Non-jumbo	3	833
Jumbo	—	—
Home equity	—	—
Consumer	1	17
Total	5	$	877

The following table details the activity regarding TDRs by loan type for the three months and three months ended March 31, 2015, and the related allowance on TDRs.



For the Three Months Ended March 31, 2015
	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, 2015	$	5,786		$	—	$	410		$	9,501		$	6,219		$	6,245		$	5,937		$	523	$	50		$	—	$	34,671
Additions	—			—		—			—			—			—			—			—		—			—		—
Charge-offs	—			—		—			—			—			—			—			—		—			—		—
Net (paydowns) advances	(28		)	—		(29		)	(73		)	(35		)	(423		)	(1,206		)	—		(4		)	—		(1,798		)
Transfer into foreclosed properties	—			—		—			—			—			—			—			—		—			—		—
Refinance out of TDR status	—			—		—			—			—			—			—			—		—			—		—
Balance, March 31, 2015	$	5,758		$	—	$	381		$	9,428		$	6,184		$	5,822		$	4,731		$	523	$	46		$	—	$	32,873

Allowance related to troubled debt restructurings	$	168		$	—	$	—		$	209		$	21		$	276		$	43		$	—	$	—		$	—	$	717

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	3/31/2015		12/31/2014		3/31/2015		12/31/2014		3/31/2015		12/31/2014		3/31/2015		12/31/2014		3/31/2015		12/31/2014
Pass	$	52,284	$	53,873	$	19,094	$	28,591	$	87,582	$	86,361	$	177,752	$	155,189	$	315,360	$	306,710
OLEM (Special Mention)	2,452		1,673		—		—		1,702		1,837		1,275		1,064		3,798		8,933
Substandard	11,822		12,335		—		—		644		392		1,242		1,530		6,606		1,493
Doubtful	—		—		—		—		—		—		—		—		—		—
Loss	—		—		—		—		—		—		—		—		—		—
Total	$	66,558	$	67,881	$	19,094	$	28,591	$	89,928	$	88,590	$	180,269	$	157,783	$	325,764	$	317,136

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	3/31/2015		12/31/2014		3/31/2014		3/31/2015		12/31/2014		3/31/2014
Residential real estate
Non-jumbo	$	216,509	$	217,408	$	213,071	$	3,429	$	2,663	$	2,594
Jumbo	49,779		50,253		51,406		713		2,626		—
Home Equity	68,545		66,848		55,865		349		267		296
Consumer	18,420		19,373		19,033		65		83		73
Other	11,074		11,507		5,037		—		—		—
Total	$	364,327	$	365,389	$	344,412	$	4,556	$	5,639	$	2,963

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.