LOANS AND ALLOWANCE FOR LOAN LOSSES

The following table summarizes the composition of the loan portfolio at March 31, 2014 and December 31, 2013:



	March 31, 2014			December 31, 2013
	(dollars expressed in thousands)
Commercial, financial and agricultural	$	632,089		600,704
Real estate construction and development	121,237			121,662
Real estate mortgage:
One-to-four-family residential	910,513			921,488
Multi-family residential	125,116			121,304
Commercial real estate	1,063,813			1,048,234
Consumer and installment	17,399			18,681
Loans held for sale	21,402			25,548
Net deferred loan fees	(588		)	(526	)
Total loans	$	2,890,981		2,857,095

Aging of Loans. The following table presents the aging of loans by loan classification at March 31, 2014 and December 31, 2013:



	30-59 Days		60-89 Days	Recorded Investment > 90 Days Accruing	Nonaccrual	Total Past Due	Current	Total Loans
	(dollars expressed in thousands)
March 31, 2014:
Commercial, financial and agricultural	$	6,879	1,165	—	13,023	21,067	611,022	632,089
Real estate construction and development	—		—	—	4,642	4,642	116,595	121,237
Real estate mortgage:
Residential mortgage	5,568		2,928	21	18,566	27,083	535,087	562,170
Home equity	1,540		355	232	7,097	9,224	339,119	348,343
Multi-family residential	—		—	—	1,638	1,638	123,478	125,116
Commercial real estate	975		3	—	8,826	9,804	1,054,009	1,063,813
Consumer and installment and net deferred loan fees	82		96	—	13	191	16,620	16,811
Loans held for sale	—		—	—	—	—	21,402	21,402
Total	$	15,044	4,547	253	53,805	73,649	2,817,332	2,890,981
December 31, 2013:
Commercial, financial and agricultural	$	447	394	80	10,523	11,444	589,260	600,704
Real estate construction and development	—		—	—	4,914	4,914	116,748	121,662
Real estate mortgage:
Residential mortgage	4,262		2,637	162	20,063	27,124	545,040	572,164
Home equity	2,256		963	182	7,361	10,762	338,562	349,324
Multi-family residential	—		—	—	1,793	1,793	119,511	121,304
Commercial real estate	1,423		391	—	8,283	10,097	1,038,137	1,048,234
Consumer and installment and net deferred loan fees	87		39	—	19	145	18,010	18,155
Loans held for sale	—		—	—	—	—	25,548	25,548
Total	$	8,475	4,424	424	52,956	66,279	2,790,816	2,857,095

Under the Company’s loan policy, loans are placed on nonaccrual status once principal or interest payments become 90 days past due. However, individual loan officers may submit written requests for approval to continue the accrual of interest on loans that become 90 days past due. These requests may be submitted for approval consistent with the authority levels provided in the Company’s credit approval policies, and they are only granted if an expected near term future event, such as a pending renewal or expected payoff, exists at the time the loan becomes 90 days past due. If the expected near term future event does not occur as anticipated, the loan is then placed on nonaccrual status.

Credit Quality Indicators. The Company’s credit management policies and procedures focus on identifying, measuring and controlling credit exposure. These procedures employ a lender-initiated system of rating credits, which is ratified in the loan approval process and subsequently tested in internal credit reviews, external audits and regulatory bank examinations. The system requires the rating of all loans at the time they are originated or acquired, except for homogeneous categories of loans, such as residential real estate mortgage loans and consumer loans. These homogeneous loans are assigned an initial rating based on the Company’s experience with each type of loan. The Company adjusts the ratings of the homogeneous loans based on payment experience subsequent to their origination.

The Company includes adversely rated credits, including loans requiring close monitoring that would not normally be considered classified credits by the Company’s regulators, on its monthly loan watch list. Loans may be added to the Company’s watch list for reasons that are temporary and correctable, such as the absence of current financial statements of the borrower or a deficiency in loan documentation. Loans may also be added to the Company’s watch list whenever any adverse circumstance is detected which might affect the borrower’s ability to comply with the contractual terms of the loan. The delinquency of a scheduled loan payment, deterioration in the borrower’s financial condition identified in a review of periodic financial statements, a decrease in the value of the collateral securing the loan, or a change in the economic environment within which the borrower operates could initiate the addition of a loan to the Company’s watch list. Loans on the Company’s watch list require periodic detailed loan status reports prepared by the responsible officer which are discussed in formal meetings with credit review and credit administration staff members. Upgrades and downgrades of loan risk ratings may be initiated by the responsible loan officer. However, upgrades of risk ratings associated with significant credit relationships and/or problem credit relationships may only be made with the concurrence of appropriate regional credit officers.

Under the Company’s risk rating system, special mention loans are those loans that do not currently expose the Company to sufficient risk to warrant classification as substandard, troubled debt restructuring (TDR) or nonaccrual, but possess weaknesses that deserve management’s close attention. Substandard loans include those loans characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. A loan is classified as a TDR when a borrower is experiencing financial difficulties that lead to the restructuring of a loan, and the Company grants concessions to the borrower in the restructuring that it would not otherwise consider. Loans classified as TDRs which are accruing interest are classified as performing TDRs. Loans classified as TDRs which are not accruing interest are classified as nonperforming TDRs and are included with all other nonaccrual loans for presentation purposes. Loans classified as nonaccrual have all the weaknesses inherent in those loans classified as substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of the currently existing facts, conditions and values, highly questionable and improbable. Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass-rated loans.

The following tables present the credit exposure of the loan portfolio by internally assigned credit grade and payment activity as of March 31, 2014 and December 31, 2013:



Commercial Loan Portfolio Credit Exposure by Internally Assigned Credit Grade	Commercial and Industrial		Real Estate Construction and Development	Multi-family	Commercial Real Estate	Total
			(dollars expressed in thousands)
March 31, 2014:
Pass	$	593,492	43,306	95,032	1,019,458	1,751,288
Special mention	14,690		238	—	21,775	36,703
Substandard	10,884		73,051	610	9,265	93,810
Performing troubled debt restructuring	—		—	27,836	4,489	32,325
Nonaccrual	13,023		4,642	1,638	8,826	28,129
Total	$	632,089	121,237	125,116	1,063,813	1,942,255
December 31, 2013:
Pass	$	559,243	42,429	91,001	1,001,719	1,694,392
Special mention	16,211		929	—	21,714	38,854
Substandard	14,727		73,390	555	11,999	100,671
Performing troubled debt restructuring	—		—	27,955	4,519	32,474
Nonaccrual	10,523		4,914	1,793	8,283	25,513
Total	$	600,704	121,662	121,304	1,048,234	1,891,904



Consumer Loan Portfolio Credit Exposure by Payment Activity	Residential Mortgage		Home Equity	Consumer and Installment and Net Deferred Loan Fees	Total
	(dollars expressed in thousands)
March 31, 2014:
Pass	$	458,330	339,119	16,620	814,069
Substandard	5,688		2,127	178	7,993
Performing troubled debt restructuring	79,586		—	—	79,586
Nonaccrual	18,566		7,097	13	25,676
Total	$	562,170	348,343	16,811	927,324
December 31, 2013:
Pass	$	468,642	338,562	18,010	825,214
Substandard	5,306		3,401	126	8,833
Performing troubled debt restructuring	78,153		—	—	78,153
Nonaccrual	20,063		7,361	19	27,443
Total	$	572,164	349,324	18,155	939,643

Impaired Loans. Loans deemed to be impaired include performing TDRs and nonaccrual loans. Impaired loans with outstanding balances equal to or greater than $500,000 are evaluated individually for impairment. For these loans, the Company measures the level of impairment based on the present value of the estimated projected cash flows, or if the impaired loans are collateral dependent, the estimated value of the collateral, less applicable selling costs. If the current valuation is lower than the current book balance of the loan, the amount of the difference is evaluated for possible charge-off. In instances where management determines that a charge-off is not appropriate, a specific reserve is established for the individual loan in question. This specific reserve is included as a part of the overall allowance for loan losses.

The following tables present the recorded investment, unpaid principal balance, related allowance for loan losses, average recorded investment and interest income recognized while on impaired status for impaired loans without a related allowance for loan losses and for impaired loans with a related allowance for loan losses by loan classification at March 31, 2014 and December 31, 2013:



	Recorded Investment		Unpaid Principal Balance	Related Allowance for Loan Losses	Average Recorded Investment	Interest Income Recognized
	(dollars expressed in thousands)
March 31, 2014:
With No Related Allowance Recorded:
Commercial, financial and agricultural	$	5,833	8,852	—	5,273	—
Real estate construction and development	3,085		12,851	—	3,175	—
Real estate mortgage:
Residential mortgage	—		—	—	—	—
Home equity	—		—	—	—	—
Multi-family residential	442		709	—	444	—
Commercial real estate	6,809		9,157	—	6,678	29
Consumer and installment	—		—	—	—	—
	16,169		31,569	—	15,570	29
With A Related Allowance Recorded:
Commercial, financial and agricultural	7,190		21,094	678	6,500	—
Real estate construction and development	1,557		3,881	242	1,603	—
Real estate mortgage:
Residential mortgage	98,152		116,685	8,860	98,184	521
Home equity	7,097		8,027	1,419	7,229	—
Multi-family residential	29,032		29,177	2,342	29,167	297
Commercial real estate	6,506		10,100	994	6,381	6
Consumer and installment	13		13	—	16	—
	149,547		188,977	14,535	149,080	824
Total:
Commercial, financial and agricultural	13,023		29,946	678	11,773	—
Real estate construction and development	4,642		16,732	242	4,778	—
Real estate mortgage:
Residential mortgage	98,152		116,685	8,860	98,184	521
Home equity	7,097		8,027	1,419	7,229	—
Multi-family residential	29,474		29,886	2,342	29,611	297
Commercial real estate	13,315		19,257	994	13,059	35
Consumer and installment	13		13	—	16	—
	$	165,716	220,546	14,535	164,650	853



	Recorded Investment		Unpaid Principal Balance	Related Allowance for Loan Losses	Average Recorded Investment	Interest Income Recognized
	(dollars expressed in thousands)
December 31, 2013:
With No Related Allowance Recorded:
Commercial, financial and agricultural	$	3,119	4,342	—	4,270	1
Real estate construction and development	3,172		12,931	—	17,152	418
Real estate mortgage:
Residential mortgage	—		—	—	—	—
Home equity	596		632	—	564	—
Multi-family residential	443		709	—	474	—
Commercial real estate	6,884		9,221	—	11,636	273
Consumer and installment	—		—	—	—	—
	14,214		27,835	—	34,096	692
With A Related Allowance Recorded:
Commercial, financial and agricultural	7,404		21,565	497	10,136	—
Real estate construction and development	1,742		4,326	294	9,419	—
Real estate mortgage:
Residential mortgage	98,216		118,305	9,740	102,775	2,043
Home equity	6,765		7,637	1,472	6,406	—
Multi-family residential	29,305		29,322	2,438	31,377	1,226
Commercial real estate	5,918		9,468	990	10,003	26
Consumer and installment	19		19	—	22	—
	149,369		190,642	15,431	170,138	3,295
Total:
Commercial, financial and agricultural	10,523		25,907	497	14,406	1
Real estate construction and development	4,914		17,257	294	26,571	418
Real estate mortgage:
Residential mortgage	98,216		118,305	9,740	102,775	2,043
Home equity	7,361		8,269	1,472	6,970	—
Multi-family residential	29,748		30,031	2,438	31,851	1,226
Commercial real estate	12,802		18,689	990	21,639	299
Consumer and installment	19		19	—	22	—
	$	163,583	218,477	15,431	204,234	3,987

Recorded investment represents the Company’s investment in its impaired loans reduced by cumulative charge-offs recorded against the allowance for loan losses on these same loans. At March 31, 2014 and December 31, 2013, the Company had recorded charge-offs of $54.8 million and $54.9 million, respectively, on its impaired loans, representing the difference between the unpaid principal balance and the recorded investment reflected in the tables above. The unpaid principal balance represents the principal amount contractually owed to the Company by the borrowers on the impaired loans.

Troubled Debt Restructurings. In the ordinary course of business, the Company modifies loan terms across loan types, including both consumer and commercial loans, for a variety of reasons. Modifications to consumer loans may include, but are not limited to, changes in interest rate, maturity, amortization and financial covenants. In the original underwriting, loan terms are established that represent the then current and projected financial condition of the borrower. Over any period of time, modifications to these loan terms may be required due to changes in the original underwriting assumptions. These changes may include the financial covenants of the borrower as well as underwriting standards.

Loan modifications are generally performed at the request of the borrower, whether commercial or consumer, and may include reductions in interest rates, changes in payments and maturity date extensions. Although the Company does not have formal, standardized loan modification programs for its commercial or consumer loan portfolios, it addresses loan modifications on a case-by-case basis and also participates in the United States Department of the Treasury's (U.S. Treasury) Home Affordable Modification Program (HAMP). HAMP gives qualifying homeowners an opportunity to refinance into more affordable monthly payments, with the U.S. Treasury compensating the Company for a portion of the reduction in monthly amounts due from borrowers participating in this program. At March 31, 2014 and December 31, 2013, the Company had $75.7 million and $75.3 million, respectively, of modified loans in the HAMP program.

For a loan modification to be classified as a TDR, all of the following conditions must be present: (1) the borrower is experiencing financial difficulty, (2) the Company makes a concession to the original contractual loan terms and (3) the Company would not consider the concessions but for economic or legal reasons related to the borrower’s financial difficulty. Modifications of loan terms to borrowers experiencing financial difficulty are made in an attempt to protect as much of the investment in the loan as possible. These modifications are generally made to either prevent a loan from becoming nonaccrual or to return a nonaccrual loan to performing status based on the expectations that the borrower can adequately perform in accordance with the modified terms.

The determination of whether a modification should be classified as a TDR requires significant judgment after taking into consideration all facts and circumstances surrounding the transaction. No single characteristic or factor, taken alone, is determinative of whether a modification should be classified as a TDR. The fact that a single characteristic is present is not considered sufficient to overcome the preponderance of contrary evidence. Assuming all of the TDR criteria are met, the Company considers one or more of the following concessions to the loan terms to represent a TDR: (1) a reduction of the stated interest rate, (2) an extension of the maturity date or dates at a stated interest rate lower than the current market rate for a new loan with similar terms or (3) forgiveness of principal or accrued interest.

Loans renegotiated at a rate equal to or greater than that of a new loan with comparable risk at the time the contract is modified are excluded from TDR classification in the calendar years subsequent to the renegotiation if the loan is in compliance with the modified terms for at least six months.

The Company does not accrue interest on any TDRs unless it believes collection of all principal and interest under the modified terms is reasonably assured. Generally, six months of consecutive payment performance by the borrower under the restructured terms is required before a TDR is returned to accrual status. However, the period could vary depending upon the individual facts and circumstances of the loan. TDRs accruing interest are classified as performing TDRs. The following table presents the categories of performing TDRs as of March 31, 2014 and December 31, 2013:



	March 31, 2014		December 31, 2013
	(dollars expressed in thousands)
Performing Troubled Debt Restructurings:
Real estate mortgage:
One-to-four-family residential	$	79,586	78,153
Multi-family residential	27,836		27,955
Commercial real estate	4,489		4,519
Total performing troubled debt restructurings	$	111,911	110,627

The Company does not accrue interest on TDRs which have been modified for a period less than six months or are not in compliance with the modified terms. These loans are considered nonperforming TDRs and are included with other nonaccrual loans for classification purposes. The following table presents the categories of loans considered nonperforming TDRs as of March 31, 2014 and December 31, 2013:



	March 31, 2014		December 31, 2013
	(dollars expressed in thousands)
Nonperforming Troubled Debt Restructurings:
Commercial, financial and agricultural	$	484	711
Real estate construction and development	3,531		3,605
Real estate mortgage:
One-to-four-family residential	5,147		6,266
Total nonperforming troubled debt restructurings	$	9,162	10,582

Both performing and nonperforming TDRs are considered to be impaired loans. When an individual loan is determined to be a TDR, the amount of impairment is based upon the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the underlying collateral less applicable selling costs. The impairment amount is either charged off as a reduction to the allowance for loan losses or provided for as a specific reserve within the allowance for loan losses. The allowance for loan losses allocated to TDRs was $8.1 million and $9.1 million at March 31, 2014 and December 31, 2013, respectively.

The following tables present loans classified as TDRs that were modified during the three months ended March 31, 2014 and 2013:



	Three Months Ended March 31, 2014					Three Months Ended March 31, 2013
	Number of Contracts	Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Number of Contracts	Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
	(dollars expressed in thousands)
Loan Modifications Classified as Troubled Debt Restructurings:
Commercial, financial and agricultural	—	$	—	$	—	1	$	90	$	45
Real estate mortgage:
One-to-four-family residential	15	2,580		2,157		10	2,223		1,898

The following tables present TDRs that defaulted within 12 months of modification during the three months ended March 31, 2014 and 2013:



	Three Months Ended			Three Months Ended
	March 31, 2014			March 31, 2013
	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
	(dollars expressed in thousands)
Troubled Debt Restructurings That Subsequently Defaulted:
Real estate mortgage:
One-to-four-family residential	1	$	438	—	—

Upon default of a TDR, which is considered to be 90 days or more past due under the modified terms, impairment is measured based on the fair value of the underlying collateral less applicable selling costs. The impairment amount is either charged off as a reduction to the allowance for loan losses or provided for as a specific reserve within the allowance for loan losses.

Allowance for Loan Losses. Changes in the allowance for loan losses for the three months ended March 31, 2014 and 2013 were as follows:



	Three Months Ended
	March 31,
	2014			2013
	(dollars expressed in thousands)
Balance, beginning of period	$	81,033		91,602
Loans charged-off	(3,447		)	(6,883	)
Recoveries of loans previously charged-off	2,245			3,451
Net loans charged-off	(1,202		)	(3,432	)
Provision for loan losses	—			—
Balance, end of period	$	79,831		88,170

The following table represents a summary of changes in the allowance for loan losses by portfolio segment for the three months ended March 31, 2014:



	Commercial and Industrial			Real Estate Construction and Development		One-to- Four-Family Residential		Multi- Family Residential		Commercial Real Estate		Consumer and Installment		Total
	(dollars expressed in thousands)
Three Months Ended March 31, 2014:
Allowance for loan losses:
Beginning balance	$	13,401		7,407		32,619		5,249		22,052		305		81,033
Charge-offs	(1,622		)	(30	)	(1,426	)	(132	)	(188	)	(49	)	(3,447	)
Recoveries	752			600		791		7		57		38		2,245
Provision (benefit) for loan losses	1,340			(891	)	(764	)	145		122		48		—
Ending balance	$	13,871		7,086		31,220		5,269		22,043		342		79,831

The following table represents a summary of changes in the allowance for loan losses by portfolio segment for the three months ended March 31, 2013:



	Commercial and Industrial			Real Estate Construction and Development		One-to- Four-Family Residential		Multi- Family Residential		Commercial Real Estate		Consumer and Installment		Total
	(dollars expressed in thousands)
Three Months Ended March 31, 2013:
Allowance for loan losses:
Beginning balance	$	13,572		14,434		38,897		4,252		20,048		399		91,602
Charge-offs	(676		)	(282	)	(4,389	)	(3	)	(1,477	)	(56	)	(6,883	)
Recoveries	1,067			395		1,231		—		718		40		3,451
Provision (benefit) for loan losses	205			(1,544	)	921		(47	)	431		34		—
Ending balance	$	14,168		13,003		36,660		4,202		19,720		417		88,170

The following table represents a summary of the impairment method used by loan category at March 31, 2014 and December 31, 2013:



	Commercial and Industrial		Real Estate Construction and Development	One-to- Four-Family Residential	Multi- Family Residential	Commercial Real Estate	Consumer and Installment and Net Deferred Loans Fees	Total
	(dollars expressed in thousands)
March 31, 2014:
Allowance for loan losses:
Impaired loans individually evaluated for impairment	$	—	—	1,421	808	301	—	2,530
Impaired loans collectively evaluated for impairment	678		242	8,858	1,534	693	—	12,005
All other loans collectively evaluated for impairment	13,193		6,844	20,941	2,927	21,049	342	65,296
Total allowance for loan losses	$	13,871	7,086	31,220	5,269	22,043	342	79,831
Loans:
Impaired loans individually evaluated for impairment	$	6,190	2,881	10,515	28,483	9,012	—	57,081
Impaired loans collectively evaluated for impairment	6,833		1,761	94,734	991	4,303	13	108,635
All other loans collectively evaluated for impairment	619,066		116,595	805,264	95,642	1,050,498	16,798	2,703,863
Total loans	$	632,089	121,237	910,513	125,116	1,063,813	16,811	2,869,579

December 31, 2013:
Allowance for loan losses:
Impaired loans individually evaluated for impairment	$	—	62	2,275	1,034	385	—	3,756
Impaired loans collectively evaluated for impairment	497		232	8,937	1,404	605	—	11,675
All other loans collectively evaluated for impairment	12,904		7,113	21,407	2,811	21,062	305	65,602
Total allowance for loan losses	$	13,401	7,407	32,619	5,249	22,052	305	81,033
Loans:
Impaired loans individually evaluated for impairment	$	3,480	3,440	12,276	28,641	9,168	—	57,005
Impaired loans collectively evaluated for impairment	7,043		1,474	93,301	1,107	3,634	19	106,578
All other loans collectively evaluated for impairment	590,181		116,748	815,911	91,556	1,035,432	18,136	2,667,964
Total loans	$	600,704	121,662	921,488	121,304	1,048,234	18,155	2,831,547