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	June 30, 2015		December 31, 2014		June 30, 2014
Commercial	$	97,284	$	88,590	$	90,096
Commercial real estate
Owner-occupied	191,743		157,783		154,260
Non-owner occupied	331,056		317,136		314,439
Construction and development
Land and land development	64,435		67,881		64,246
Construction	18,214		28,591		20,902
Residential real estate
Non-jumbo	220,199		220,071		219,569
Jumbo	49,203		52,879		52,487
Home equity	72,504		67,115		61,248
Consumer	18,683		19,456		19,777
Other	12,423		11,507		6,798
Total loans, net of unearned fees	1,075,744		1,031,009		1,003,822
Less allowance for loan losses	11,272		11,167		11,006
Loans, net	$	1,064,472	$	1,019,842	$	992,816

The following table presents the contractual aging of the recorded investment in past due loans by class as of June 30, 2015 and 2014 and December 31, 2014.



	At June 30, 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	$	344	$	—	$	661	$	1,005	$	96,279	$	—
Commercial real estate
Owner-occupied	118		—		630		748		190,995		—
Non-owner occupied	320		5,629		309		6,258		324,798		—
Construction and development
Land and land development	—		21		5,228		5,249		59,186		—
Construction	—		—		—		—		18,214		—
Residential mortgage
Non-jumbo	2,263		1,335		2,137		5,735		214,464		—
Jumbo	—		1,111		724		1,835		47,368		—
Home equity	171		195		37		403		72,101		—
Consumer	204		27		34		265		18,410		8
Other	—		—		—		—		12,423		—
Total	$	3,420	$	8,318	$	9,760	$	21,498	$	1,054,238	$	8



	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 June 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	$	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	$	—

Nonaccrual loans: The following table presents the nonaccrual loans included in the net balance of loans at June 30, 2015, December 31, 2014 and June 30, 2014.



	June 30,				December 31,
Dollars in thousands	2015		2014		2014
Commercial	$	1,065	$	416	$	392
Commercial real estate
Owner-occupied	880		953		1,218
Non-owner occupied	1,541		583		626
Construction and development
Land & land development	5,627		8,849		4,619
Construction	—		—		—
Residential mortgage
Non-jumbo	3,501		2,950		2,663
Jumbo	724		—		2,626
Home equity	208		339		267
Consumer	37		129		83
Total	$	13,583	$	14,219	$	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
	June 30,				December 31,		Method used to measure impairment
Loan Category	2015		2014		2014		Method used to measure impairment
Commercial	$	41	$	506	$	132	Fair value of collateral
	302		—		362		Discounted cash flow
Commercial real estate
Owner-occupied	5,654		1,924		1,683		Fair value of collateral
	9,015		8,969		9,124		Discounted cash flow
Non-owner occupied	1,607		513		508		Fair value of collateral
	6,140		5,236		5,999		Discounted cash flow
Construction and development
Land & land development	9,002		14,023		11,998		Fair value of collateral
	2,270		1,446		2,310		Discounted cash flow
Residential mortgage
Non-jumbo	1,791		3,440		1,676		Fair value of collateral
	4,475		2,592		5,252		Discounted cash flow
Jumbo	5,655		6,648		7,594		Fair value of collateral
	880		2,073		886		Discounted cash flow
Home equity	186		186		285		Fair value of collateral
	523		—		523		Discounted cash flow
Consumer	—		37		2		Fair value of collateral
	75		—		82		Discounted cash flow
Total	$	47,616	$	47,593	$	48,416

The following tables present loans individually evaluated for impairment at June 30, 2015, December 31, 2014 and June 30, 2014.



	June 30, 2015
Dollars in thousands	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Impaired Balance		Interest Income Recognized while impaired

Without a related allowance
Commercial	$	343	$	343	$	—	$	362	$	42
Commercial real estate
Owner-occupied	10,101		10,100		—		8,156		598
Non-owner occupied	6,938		6,940		—		6,333		566
Construction and development
Land & land development	11,139		11,139		—		11,916		672
Construction	—		—		—		—		—
Residential real estate
Non-jumbo	3,307		3,316		—		3,345		318
Jumbo	4,933		4,931		—		7,472		474
Home equity	710		709		—		709		61
Consumer	74		75		—		77		14
Total without a related allowance	$	37,545	$	37,553	$	—	$	38,370	$	2,745

With a related allowance
Commercial	$	—	$	—	$	—	$	—	$	—
Commercial real estate
Owner-occupied	4,569		4,569		232		4,577		378
Non-owner occupied	806		807		64		799		55
Construction and development
Land & land development	133		133		133		534		63
Construction	—		—		—		—		—
Residential real estate
Non-jumbo	2,948		2,950		331		2,959		239
Jumbo	1,600		1,604		71		1,600		89
Home equity	—		—		—		—		—
Consumer	—		—		—		—		—
Total with a related allowance	$	10,056	$	10,063	$	831	$	10,469	$	824

Total
Commercial	$	34,029	$	34,031	$	429	$	32,677	$	2,374
Residential real estate	13,498		13,510		402		16,085		1,181
Consumer	74		75		—		77		14
Total	$	47,601	$	47,616	$	831	$	48,839	$	3,569



	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



	June 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	$	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

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 $30.2 million, of which $28.6 million were current with respect to restructured contractual payments at June 30, 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 and six months ended June 30, 2015, and restructured TDRs during the three months and six months ended June 30, 2014 were insignificant. 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 June 30, 2015			For the Six Months Ended June 30, 2015
Dollars in thousands	Number of Defaults	Recorded Investment at Default Date		Number of Defaults	Recorded Investment at Default Date
Commercial	—	$	—	—	$	—
Commercial real estate
Owner-occupied	—	—		—	—
Non-owner occupied	—	—		—	—
Construction and development
Land & land development	—	—		—	—
Construction	—	—		—	—
Residential real estate
Non-jumbo	3	833		3	833
Jumbo	—	—		—	—
Home equity	—	—		—	—
Consumer	—	—		1	17
Total	3	$	833	4	$	850

The following table details the activity regarding TDRs by loan type for the three months and six months ended June 30, 2015, and the related allowance on TDRs.



For the Three Months Ended June 30, 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 April 1, 2015	$	5,758		$	—	$	381		$	9,428		$	6,184		$	5,822		$	4,731		$	523	$	46		$	—	$	32,873
Additions	—			—		—			—			—			—			—			—		—			—		—
Charge-offs	(168		)	—		—			—			—			—			—			—		—			—		(168		)
Net (paydowns) advances	(2,259		)	—		(38		)	(49		)	(44		)	(138		)	(31		)	—		(4		)	—		(2,563		)
Transfer into foreclosed properties	—			—		—			—			—			—			—			—		—			—		—
Refinance out of TDR status	—			—		—			—			—			—			—			—		—			—		—
Balance, June 30, 2015	$	3,331		$	—	$	343		$	9,379		$	6,140		$	5,684		$	4,700		$	523	$	42		$	—	$	30,142

Allowance related to troubled debt restructurings	$	—		$	—	$	—		$	201		$	16		$	291		$	40		$	—	$	—		$	—	$	548



For the Six Months Ended June 30, 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	(168		)	—		—			—			—			—			—			—		—			—		(168		)
Net (paydowns) advances	(2,287		)	—		(67		)	(122		)	(79		)	(561		)	(1,237		)	—		(8		)	—		(4,361		)
Transfer into OREO	—			—		—			—			—			—			—			—		—			—		—
Refinance out of TDR status	—			—		—			—			—			—			—			—		—			—		—
Balance, June 30, 2015	$	3,331		$	—	$	343		$	9,379		$	6,140		$	5,684		$	4,700		$	523	$	42		$	—	$	30,142

Allowance related to troubled debt restructurings	$	—		$	—	$	—		$	201		$	16		$	291		$	40		$	—	$	—		$	—	$	548

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	6/30/2015		12/31/2014		6/30/2015		12/31/2014		6/30/2015		12/31/2014		6/30/2015		12/31/2014		6/30/2015		12/31/2014
Pass	$	52,702	$	53,873	$	18,214	$	28,591	$	95,056	$	86,361	$	190,028	$	155,189	$	320,719	$	306,710
OLEM (Special Mention)	2,597		1,673		—		—		1,431		1,837		630		1,064		3,768		8,933
Substandard	9,136		12,335		—		—		797		392		1,085		1,530		6,569		1,493
Doubtful	—		—		—		—		—		—		—		—		—		—
Loss	—		—		—		—		—		—		—		—		—		—
Total	$	64,435	$	67,881	$	18,214	$	28,591	$	97,284	$	88,590	$	191,743	$	157,783	$	331,056	$	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	6/30/2015		12/31/2014		6/30/2014		6/30/2015		12/31/2014		6/30/2014
Residential real estate
Non-jumbo	$	216,698	$	217,408	$	216,619	$	3,501	$	2,663	$	2,950
Jumbo	48,479		50,253		52,487		724		2,626		—
Home Equity	72,296		66,848		60,909		208		267		339
Consumer	18,637		19,373		19,648		46		83		129
Other	12,423		11,507		6,798		—		—		—
Total	$	368,533	$	365,389	$	356,461	$	4,479	$	5,639	$	3,418

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.