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, 2016		December 31, 2015		June 30, 2015
Commercial	$	101,521	$	97,201	$	97,284
Commercial real estate
Owner-occupied	190,534		203,555		191,743
Non-owner occupied	348,099		337,294		331,056
Construction and development
Land and land development	65,702		65,500		64,435
Construction	8,506		9,970		18,214
Residential real estate
Non-jumbo	225,919		221,750		220,199
Jumbo	52,105		50,313		49,203
Home equity	75,904		74,300		72,504
Mortgage warehouse lines	80,282		—		—
Consumer	19,520		19,251		18,683
Other	10,008		11,669		12,423
Total loans, net of unearned fees	1,178,100		1,090,803		1,075,744
Less allowance for loan losses	11,377		11,472		11,272
Loans, net	$	1,166,723	$	1,079,331	$	1,064,472

The following table presents the contractual aging of the recorded investment in past due loans by class as of June 30, 2016 and 2015 and December 31, 2015.



	At June 30, 2016
	Past Due										> 90 days and Accruing
Dollars in thousands	30-59 days		60-89 days		> 90 days		Total		Current		> 90 days and Accruing
Commercial	$	318	$	107	$	211	$	636	$	100,885	$	—
Commercial real estate
Owner-occupied	157		—		1,278		1,435		189,099		—
Non-owner occupied	180		14		—		194		347,905		—
Construction and development
Land and land development	45		475		4,748		5,268		60,434		—
Construction	—		—		—		—		8,506		—
Residential mortgage
Non-jumbo	3,978		950		2,466		7,394		218,525		—
Jumbo	—		—		—		—		52,105		—
Home equity	—		77		447		524		75,380		—
Mortgage warehouse lines	—		—		—		—		80,282		—
Consumer	145		52		84		281		19,239		—
Other	—		—		—		—		10,008		—
Total	$	4,823	$	1,675	$	9,234	$	15,732	$	1,162,368	$	—



	At December 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	$	345	$	26	$	632	$	1,003	$	96,198	$	—
Commercial real estate
Owner-occupied	158		386		437		981		202,574		—
Non-owner occupied	1		—		856		857		336,437		—
Construction and development
Land and land development	1,182		194		4,547		5,923		59,577		—
Construction	—		—		—		—		9,970		—
Residential mortgage
Non-jumbo	2,276		2,647		1,591		6,514		215,236		—
Jumbo	—		—		—		—		50,313		—
Home equity	374		172		100		646		73,654		—
Consumer	155		41		92		288		18,963		9
Other	—		—		—		—		11,669		—
Total	$	4,491	$	3,466	$	8,255	$	16,212	$	1,074,591	$	9



	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		42		273		18,410		8
Other	—		—		—		—		12,423		—
Total	$	3,420	$	8,318	$	9,768	$	21,506	$	1,054,238	$	8

Nonaccrual loans: The following table presents the nonaccrual loans included in the net balance of loans at June 30, 2016, December 31, 2015 and June 30, 2015.



	June 30,				December 31,
Dollars in thousands	2016		2015		2015
Commercial	$	399	$	1,065	$	853
Commercial real estate
Owner-occupied	1,278		880		437
Non-owner occupied	4,495		1,541		5,518
Construction and development
Land & land development	5,400		5,627		5,623
Construction	—		—		—
Residential mortgage
Non-jumbo	2,937		3,501		2,987
Jumbo	—		724		—
Home equity	594		208		258
Mortgage warehouse lines	—		—		—
Consumer	91		37		83
Total	$	15,194	$	13,583	$	15,759

Impaired loans: Impaired loans include the following:

▪

Loans which we risk-rate (consisting of loan relationships having aggregate balances in excess of $2.5 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	2016		2015		2015		Method used to measure impairment
Commercial	$	655	$	41	$	41	Fair value of collateral
	162		302		201		Discounted cash flow
Commercial real estate
Owner-occupied	1,103		5,654		783		Fair value of collateral
	7,084		9,015		7,616		Discounted cash flow
Non-owner occupied	4,691		1,607		5,728		Fair value of collateral
	7,638		6,140		7,722		Discounted cash flow
Construction and development
Land & land development	6,373		9,002		6,597		Fair value of collateral
	2,145		2,270		2,177		Discounted cash flow
Residential mortgage
Non-jumbo	1,735		1,791		1,753		Fair value of collateral
	4,477		4,475		4,378		Discounted cash flow
Jumbo	3,711		5,655		3,869		Fair value of collateral
	864		880		871		Discounted cash flow
Home equity	186		186		186		Fair value of collateral
	523		523		523		Discounted cash flow
Consumer	1		—		—		Fair value of collateral
	52		75		68		Discounted cash flow
Total	$	41,400	$	47,616	$	42,513

The following tables present loans individually evaluated for impairment at June 30, 2016, December 31, 2015 and June 30, 2015.



	June 30, 2016
Dollars in thousands	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Impaired Balance		Interest Income Recognized while impaired

Without a related allowance
Commercial	$	798	$	798	$	—	$	199	$	9
Commercial real estate
Owner-occupied	5,305		5,305		—		5,375		208
Non-owner occupied	10,469		10,470		—		10,912		297
Construction and development
Land & land development	7,364		7,365		—		7,408		162
Construction	—		—		—		—		—
Residential real estate
Non-jumbo	3,866		3,880		—		3,780		169
Jumbo	3,713		3,711		—		3,725		177
Home equity	709		709		—		709		21
Mortgage warehouse lines	—		—		—		—		—
Consumer	53		53		—		57		5
Total without a related allowance	$	32,277	$	32,291	$	—	$	32,165	$	1,048

With a related allowance
Commercial	$	19	$	19	$	19	$	—	$	—
Commercial real estate
Owner-occupied	2,882		2,882		13		2,906		112
Non-owner occupied	1,859		1,859		144		1,850		72
Construction and development
Land & land development	1,153		1,153		141		1,152		—
Construction	—		—		—		—		—
Residential real estate
Non-jumbo	2,331		2,332		179		2,335		112
Jumbo	864		864		28		866		43
Home equity	—		—		—		—		—
Mortgage warehouse lines	—		—		—		—		—
Consumer	—		—		—		—		—
Total with a related allowance	$	9,108	$	9,109	$	524	$	9,109	$	339

Total
Commercial	$	29,849	$	29,851	$	317	$	29,802	$	860
Residential real estate	11,483		11,496		207		11,415		522
Consumer	53		53		—		57		5
Total	$	41,385	$	41,400	$	524	$	41,274	$	1,387



	December 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	$	242	$	242	$	—	$	319	$	17
Commercial real estate
Owner-occupied	5,401		5,402		—		5,438		191
Non-owner occupied	10,740		10,741		—		9,982		310
Construction and development
Land & land development	7,635		7,635		—		9,497		263
Construction	—		—		—		—		—
Residential real estate
Non-jumbo	3,590		3,600		—		3,316		160
Jumbo	3,871		3,869		—		4,412		181
Home equity	709		709		—		709		32
Consumer	68		68		—		72		6
Total without a related allowance	$	32,256	$	32,266	$	—	$	33,745	$	1,160

With a related allowance
Commercial	$	—	$	—	$	—	$	—	$	—
Commercial real estate
Owner-occupied	2,997		2,997		45		3,003		135
Non-owner occupied	2,709		2,709		386		2,728		72
Construction and development
Land & land development	1,139		1,139		85		1,154		—
Construction	—		—		—		—		—
Residential real estate
Non-jumbo	2,530		2,531		226		2,552		114
Jumbo	871		871		34		878		43
Home equity	—		—		—		—		—
Consumer	—		—		—		—		—
Total with a related allowance	$	10,246	$	10,247	$	776	$	10,315	$	364

Total
Commercial	$	30,863	$	30,865	$	516	$	32,121	$	988
Residential real estate	11,571		11,580		260		11,867		530
Consumer	68		68		—		72		6
Total	$	42,502	$	42,513	$	776	$	44,060	$	1,524



	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

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 $29.9 million, of which $28.6 million were current with respect to restructured contractual payments at June 30, 2016, and $30.5 million, of which $28.9 million were current with respect to restructured contractual payments at December 31, 2015. 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, 2016, there were no loans restructured during the three and six months ended June 30, 2015 . 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 June 30, 2016					For the Six Months Ended June 30, 2016
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	—	—		—		—	—		—
Construction and development
Land & land development	—	—		—		—	—		—
Construction	—	—		—		—	—		—
Residential real estate
Non-jumbo	2	145		145		3	395		395
Jumbo	—	—		—		—	—		—
Home equity	—	—		—		—	—		—
Mortgage warehouse lines	—	—		—		—	—		—
Consumer	1	2		2		1	2		2
Total	3	$	147	$	147	4	$	397	$	397

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, 2016			For the Six Months Ended June 30, 2016
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	1	1,182		1	1,182
Construction	—	—		—	—
Residential real estate
Non-jumbo	2	145		2	145
Jumbo	—	—		—	—
Home equity	—	—		—	—
Mortgage warehouse lines	—	—		—	—
Consumer	1	2		1	2
Total	4	$	1,329	4	$	1,329

The following table details the activity regarding TDRs by loan type for the three months and six months ended June 30, 2016, and the related allowance on TDRs.



For the Three Months Ended June 30, 2016
	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		Mortgage Warehouse Lines		Con- sumer			Other		Total
Troubled debt restructurings
Balance April 1, 2016	$	3,997		$	—	$	200		$	9,282		$	6,014		$	5,664		$	4,607		$	523	$	—	$	62		$	—	$	30,349
Additions	—			—		—			—			—			145			—			—		—		1			—		146
Charge-offs	—			—		—			(127		)	—			—			—			—		—		—			—		(127		)
Net (paydowns) advances	(41		)	—		(2		)	(37		)	(13		)	(352		)	(32		)	—		—		(9		)	—		(486		)
Transfer into foreclosed properties	—			—		—			—			—			—			—			—		—		—			—		—
Refinance out of TDR status	—			—		—			—			—			—			—			—		—		—			—		—
Balance, June 30, 2016	$	3,956		$	—	$	198		$	9,118		$	6,001		$	5,457		$	4,575		$	523	$	—	$	54		$	—	$	29,882

Allowance related to troubled debt restructurings	$	—		$	—	$	—		$	149		$	7		$	179		$	28		$	—	$	—	$	—		$	—	$	363



For the Six Months Ended June 30, 2016
	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		Mortgage Warehouse Lines		Con- sumer			Other		Total
Troubled debt restructurings
Balance January 1, 2016	$	4,188		$	—	$	242		$	9,314		$	6,059		$	5,496		$	4,634		$	523	$	—	$	68		$	—	$	30,524
Additions	—			—		—			—			—			395			—			—		—		1			—		396
Charge-offs	—			—		—			(127		)	—			(52		)	—			—		—		—			—		(179		)
Net (paydowns) advances	(232		)	—		(44		)	(69		)	(58		)	(382		)	(59		)	—		—		(15		)	—		(859		)
Transfer into foreclosed properties	—			—		—			—			—			—			—			—		—		—			—		—
Refinance out of TDR status	—			—		—			—			—			—			—			—		—		—			—		—
Balance, June 30, 2016	$	3,956		$	—	$	198		$	9,118		$	6,001		$	5,457		$	4,575		$	523	$	—	$	54		$	—	$	29,882

Allowance related to troubled debt restructurings	$	—		$	—	$	—		$	149		$	7		$	179		$	28		$	—	$	—	$	—		$	—	$	363

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 $2.5 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				Mortgage Warehouse Lines
Dollars in thousands	6/30/2016		12/31/2015		6/30/2016		12/31/2015		6/30/2016		12/31/2015		6/30/2016		12/31/2015		6/30/2016		12/31/2015		6/30/2016		12/31/2015
Pass	$	57,398	$	57,155	$	8,506	$	9,970	$	99,462	$	95,174	$	188,201	$	202,226	$	342,383	$	329,861	$	80,282	$	—
OLEM (Special Mention)	1,611		1,598		—		—		1,162		1,295		726		546		914		1,602		—		—
Substandard	6,693		6,747		—		—		897		732		1,607		783		4,802		5,831		—		—
Doubtful	—		—		—		—		—		—		—		—		—		—		—		—
Loss	—		—		—		—		—		—		—		—		—		—		—		—
Total	$	65,702	$	65,500	$	8,506	$	9,970	$	101,521	$	97,201	$	190,534	$	203,555	$	348,099	$	337,294	$	80,282	$	—

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	6/30/2016		12/31/2015		6/30/2015		6/30/2016		12/31/2015		6/30/2015
Residential real estate
Non-jumbo	$	222,982	$	218,763	$	216,698	$	2,937	$	2,987	$	3,501
Jumbo	52,105		50,313		48,479		—		—		724
Home Equity	75,310		74,042		72,296		594		258		208
Consumer	19,418		19,149		18,637		102		102		46
Other	10,008		11,669		12,423		—		—		—
Total	$	379,823	$	373,936	$	368,533	$	3,633	$	3,347	$	4,479

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.