LOANS AND ALLOWANCE FOR LOAN LOSSES

The following table summarizes the composition of the loan portfolio at September 30, 2014 and December 31, 2013:



(dollars in thousands)	September 30, 2014			December 31, 2013
Commercial, financial and agricultural	$	645,862		600,704
Real estate construction and development	75,609			121,662
Real estate mortgage:
One-to-four-family residential	997,581			921,488
Multi-family residential	126,310			121,304
Commercial real estate	1,089,430			1,048,234
Consumer and installment	16,840			18,681
Loans held for sale	28,866			25,548
Net deferred loan fees	(921		)	(526	)
Total loans	$	2,979,577		2,857,095

Aging of Loans. The following table presents the aging of loans by loan classification at September 30, 2014 and December 31, 2013:



(dollars in thousands)	30-59 Days		60-89 Days	Recorded Investment > 90 Days Accruing	Nonaccrual	Total Past Due	Current	Total Loans
September 30, 2014:
Commercial, financial and agricultural	$	506	661	197	11,508	12,872	632,990	645,862
Real estate construction and development	—		178	—	4,191	4,369	71,240	75,609
Real estate mortgage:
Residential mortgage	3,770		1,320	252	15,326	20,668	600,629	621,297
Home equity	1,087		123	320	6,979	8,509	367,775	376,284
Multi-family residential	—		—	—	726	726	125,584	126,310
Commercial real estate	916		51	—	9,127	10,094	1,079,336	1,089,430
Consumer and installment and net deferred loan fees	57		52	26	4	139	15,780	15,919
Loans held for sale	—		—	—	—	—	28,866	28,866
Total	$	6,336	2,385	795	47,861	57,377	2,922,200	2,979,577

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 September 30, 2014 and December 31, 2013:



Commercial Loan Portfolio Credit Exposure by Internally Assigned Credit Grade (dollars in thousands)	Commercial and Industrial		Real Estate Construction and Development	Multi-family	Commercial Real Estate	Total
September 30, 2014:
Pass	$	598,309	70,735	93,829	1,048,210	1,811,083
Special mention	20,532		141	6,278	23,075	50,026
Substandard	15,226		178	610	4,591	20,605
Performing troubled debt restructuring	287		364	24,867	4,427	29,945
Nonaccrual	11,508		4,191	726	9,127	25,552
Total	$	645,862	75,609	126,310	1,089,430	1,937,211
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 (dollars in thousands)	Residential Mortgage		Home Equity	Consumer and Installment and Net Deferred Loan Fees	Total
September 30, 2014:
Pass	$	523,867	367,775	15,781	907,423
Substandard	4,380		1,530	134	6,044
Performing troubled debt restructuring	77,724		—	—	77,724
Nonaccrual	15,326		6,979	4	22,309
Total	$	621,297	376,284	15,919	1,013,500
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 September 30, 2014 and December 31, 2013:



(dollars in thousands)	Recorded Investment		Unpaid Principal Balance	Related Allowance for Loan Losses	Average Recorded Investment	Interest Income Recognized
September 30, 2014:
With No Related Allowance Recorded:
Commercial, financial and agricultural	$	5,157	6,777	—	5,212	—
Real estate construction and development	2,869		12,389	—	2,890	—
Real estate mortgage:
Residential mortgage	—		—	—	—	—
Home equity	—		—	—	—	—
Multi-family residential	—		—	—	—	—
Commercial real estate	4,681		5,168	—	4,330	87
Consumer and installment	—		—	—	—	—
	12,707		24,334	—	12,432	87
With A Related Allowance Recorded:
Commercial, financial and agricultural	6,638		20,579	598	6,708	2
Real estate construction and development	1,686		4,356	231	1,698	12
Real estate mortgage:
Residential mortgage	93,050		110,018	7,905	96,014	1,561
Home equity	6,979		7,898	1,396	7,112	—
Multi-family residential	25,593		28,602	3,188	27,737	857
Commercial real estate	8,873		11,356	2,162	8,209	20
Consumer and installment	4		4	—	12	—
	142,823		182,813	15,480	147,490	2,452
Total:
Commercial, financial and agricultural	11,795		27,356	598	11,920	2
Real estate construction and development	4,555		16,745	231	4,588	12
Real estate mortgage:
Residential mortgage	93,050		110,018	7,905	96,014	1,561
Home equity	6,979		7,898	1,396	7,112	—
Multi-family residential	25,593		28,602	3,188	27,737	857
Commercial real estate	13,554		16,524	2,162	12,539	107
Consumer and installment	4		4	—	12	—
	$	155,530	207,147	15,480	159,922	2,539



(dollars in thousands)	Recorded Investment		Unpaid Principal Balance	Related Allowance for Loan Losses	Average Recorded Investment	Interest Income Recognized
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 September 30, 2014 and December 31, 2013, the Company had recorded charge-offs of $51.6 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 September 30, 2014 and December 31, 2013, the Company had $73.4 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 September 30, 2014 and December 31, 2013:



(dollars in thousands)	September 30, 2014		December 31, 2013
Performing Troubled Debt Restructurings:
Commercial, financial and agricultural	$	287	—
Real estate construction and development	364		—
Real estate mortgage:
One-to-four-family residential	77,724		78,153
Multi-family residential	24,867		27,955
Commercial real estate	4,427		4,519
Total performing troubled debt restructurings	$	107,669	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 September 30, 2014 and December 31, 2013:



(dollars in thousands)	September 30, 2014		December 31, 2013
Nonperforming Troubled Debt Restructurings:
Commercial, financial and agricultural	$	456	711
Real estate construction and development	3,479		3,605
Real estate mortgage:
One-to-four-family residential	4,145		6,266
Total nonperforming troubled debt restructurings	$	8,080	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 $8.6 million and $9.1 million at September 30, 2014 and December 31, 2013, respectively.

The following tables present loans classified as TDRs that were modified during the three and nine months ended September 30, 2014 and 2013:



	Three Months Ended September 30, 2014					Three Months Ended September 30, 2013
(dollars in thousands)	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
Loan Modifications Classified as Troubled Debt Restructurings:
Commercial, financial and agricultural	1	$	287	$	287	—	$	—	$	—
Real estate mortgage:
One-to-four-family residential	14	2,167		2,095		15	3,405		3,095



	Nine Months Ended September 30, 2014					Nine Months Ended September 30, 2013
(dollars in thousands)	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
Loan Modifications Classified as Troubled Debt Restructurings:
Commercial, financial and agricultural	1	$	287	$	287	2	$	246	$	201
Real estate mortgage:
One-to-four-family residential	41	6,214		5,429		35	8,275		7,637

The following tables present TDRs that defaulted within 12 months of modification during the three and nine months ended September 30, 2014 and 2013:



	Three Months Ended			Three Months Ended
	September 30, 2014			September 30, 2013
(dollars in thousands)	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
Troubled Debt Restructurings That Subsequently Defaulted:
Commercial, financial and agricultural	—	$	—	1	$	156
Real estate mortgage:
One-to-four-family residential	2	183		1	110



	Nine Months Ended			Nine Months Ended
	September 30, 2014			September 30, 2013
(dollars in thousands)	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
Troubled Debt Restructurings That Subsequently Defaulted:
Commercial, financial and agricultural	—	$	—	1	$	156
Real estate mortgage:
One-to-four-family residential	8	1,385		2	193

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 and nine months ended September 30, 2014 and 2013 were as follows:



	Three Months Ended					Nine Months Ended
	September 30,					September 30,
(dollars in thousands)	2014			2013		2014		2013
Balance, beginning of period	$	78,018		85,633		81,033		91,602
Loans charged-off	(2,234		)	(7,040	)	(11,921	)	(20,794	)
Recoveries of loans previously charged-off	3,910			5,684		10,582		13,469
Net loan recoveries (charge-offs)	1,676			(1,356	)	(1,339	)	(7,325	)
(Benefit) provision for loan losses	(5,000		)	—		(5,000	)	—
Balance, end of period	$	74,694		84,277		74,694		84,277

The following table represents a summary of changes in the allowance for loan losses by portfolio segment for the three and nine months ended September 30, 2014:



(dollars in thousands)	Commercial and Industrial			Real Estate Construction and Development		One-to- Four-Family Residential		Multi- Family Residential		Commercial Real Estate		Consumer and Installment		Total
Three Months Ended September 30, 2014:
Allowance for loan losses:
Beginning balance	$	13,731		6,600		29,145		7,374		20,820		348		78,018
Charge-offs	(399		)	(2	)	(1,316	)	(71	)	(436	)	(10	)	(2,234	)
Recoveries	1,763			114		938		114		946		35		3,910
(Benefit) provision for loan losses	(1,236		)	(3,979	)	335		340		(415	)	(45	)	(5,000	)
Ending balance	$	13,859		2,733		29,102		7,757		20,915		328		74,694

Nine Months Ended September 30, 2014:
Allowance for loan losses:
Beginning balance	$	13,401		7,407		32,619		5,249		22,052		305		81,033
Charge-offs	(3,015		)	(67	)	(4,943	)	(3,155	)	(645	)	(96	)	(11,921	)
Recoveries	3,778			1,470		3,207		123		1,918		86		10,582
(Benefit) provision for loan losses	(305		)	(6,077	)	(1,781	)	5,540		(2,410	)	33		(5,000	)
Ending balance	$	13,859		2,733		29,102		7,757		20,915		328		74,694

The following table represents a summary of changes in the allowance for loan losses by portfolio segment for the three and nine months ended September 30, 2013:



(dollars in thousands)	Commercial and Industrial			Real Estate Construction and Development		One-to- Four-Family Residential		Multi- Family Residential		Commercial Real Estate		Consumer and Installment		Total
Three Months Ended September 30, 2013:
Allowance for loan losses:
Beginning balance	$	13,966		11,412		35,266		4,122		20,573		294		85,633
Charge-offs	(2,241		)	—		(2,256	)	—		(2,488	)	(55	)	(7,040	)
Recoveries	1,773			2,557		879		—		443		32		5,684
Provision (benefit) for loan losses	526			(4,967	)	824		39		3,551		27		—
Ending balance	$	14,024		9,002		34,713		4,161		22,079		298		84,277

Nine Months Ended September 30, 2013:
Allowance for loan losses:
Beginning balance	$	13,572		14,434		38,897		4,252		20,048		399		91,602
Charge-offs	(3,927		)	(448	)	(10,983	)	(162	)	(5,121	)	(153	)	(20,794	)
Recoveries	3,863			4,273		3,398		141		1,683		111		13,469
Provision (benefit) for loan losses	516			(9,257	)	3,401		(70	)	5,469		(59	)	—
Ending balance	$	14,024		9,002		34,713		4,161		22,079		298		84,277

The following table represents a summary of the impairment method used by loan category at September 30, 2014 and December 31, 2013:



(dollars in thousands)	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
September 30, 2014:
Allowance for loan losses:
Impaired loans individually evaluated for impairment	$	—	—	1,198	1,891	1,475	—	4,564
Impaired loans collectively evaluated for impairment	598		231	8,103	1,297	687	—	10,916
All other loans collectively evaluated for impairment	13,261		2,502	19,801	4,569	18,753	328	59,214
Total allowance for loan losses	$	13,859	2,733	29,102	7,757	20,915	328	74,694
Loans:
Impaired loans individually evaluated for impairment	$	5,512	2,869	8,764	24,900	9,176	—	51,221
Impaired loans collectively evaluated for impairment	6,283		1,686	91,265	693	4,378	4	104,309
All other loans collectively evaluated for impairment	634,067		71,054	897,552	100,717	1,075,876	15,915	2,795,181
Total loans	$	645,862	75,609	997,581	126,310	1,089,430	15,919	2,950,711

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