Loans and Allowance for Loan Losses

General

Loans held for investment are stated at the principal amounts outstanding adjusted for purchase premiums/discounts, deferred net loan fees and costs, and unearned income. We report our loan portfolio by segments and classes, which are disaggregations of portfolio segments. Our portfolio segments are: Commercial and agricultural, Real estate, and Consumer loans. The Commercial and agricultural loan and Consumer loan portfolios are not further segregated into classes. The classes within the Real estate portfolio segment include Real estate - construction and Real estate - mortgage, which is further broken into 1-4 family residential mortgage and Commercial real estate mortgage loans.

Loan fees and the incremental direct costs associated with originating a loan are deferred and subsequently recognized over the life of the loan as an adjustment to interest income.

In addition to originating loans, we also purchase loans. At acquisition, purchased loans are designated as either purchased contractual loans ("PC loans") or purchased impaired loans ("PI loans"). PC loans are acquired loans where management believes it is probable that it will receive all principal as of the date of acquisition. These loans are accounted for under the contractual cash flow method, under ASC 310-20. Any discount or premium paid on PC loans is recorded in interest income using the effective yield method over the expected life of the loans.

PI loans are acquired loans where management believes, at acquisition date, it is probable that all principal on the acquired loans will not be received. PI loans are placed in homogeneous risk-based pools where accounting for projected cash flows is performed, as allowed under ASC 310-30. Once a pool is established the individual loans within each pool do not change. As management obtains new information related to changes in expected principal loss and expected cash flows, by pool, we record either an increase in yield when new expected cash flows increase, an allowance for loan losses when new expected cash flows decline, or a decrease in yield when there is only a timing difference in expected cash flows.

Loans acquired in the Merger ("Granite Purchased Loans") included PI loans and PC loans. Loans designated as PC loans included performing revolving consumer and performing revolving commercial loans on acquisition date.

The following table presents an aging analysis of accruing and nonaccruing loans as of March 31, 2014:



(dollars in thousands)	Accruing
	30-59 days past due		60-89 days past due		More than 90 days past due		Nonaccrual		Total past due and nonaccrual		Current and accruing		Total Loans
PC and Originated Loans
Commercial and agricultural	$	43	$	—	$	—	$	450	$	493	$	65,763	$	66,256
Real estate - construction	68		—		—		3,437		3,505		52,599		56,104
Real estate - mortgage:
1-4 family residential	4,130		—		—		10,151		14,281		597,094		611,375
Commercial	1,760		324		355		19,533		21,972		267,586		289,558
Consumer	68		3		—		32		103		47,356		47,459
Total	$	6,069	$	327	$	355	$	33,603	$	40,354	$	1,030,398	$	1,070,752
PI loans
Commercial and agricultural	$	97	$	—	$	2,354	$	—	$	2,451	$	7,271	$	9,722
Real estate - construction	54		—		4,569		—		4,623		6,577		11,200
Real estate - mortgage:
1-4 family residential	137		195		2,366		—		2,698		17,701		20,399
Commercial	123		—		15,440		—		15,563		90,989		106,552
Consumer	2		—		13		—		15		1,145		1,160
Total	$	413	$	195	$	24,742	$	—	$	25,350	$	123,683	$	149,033
Total Loans	$	6,482	$	522	$	25,097	$	33,603	$	65,704	$	1,154,081	$	1,219,785

The following table presents an aging analysis of accruing and nonaccruing loans as of December 31, 2013:



(dollars in thousands)	Accruing
	30-59 days past due		60-89 days past due		More than 90 days past due		Nonaccrual		Total past due and nonaccrual		Current and accruing		Total Loans
PC and Originated Loans
Commercial and agricultural	$	18	$	43	$	—	$	516	$	577	$	60,946	$	61,523
Real estate - construction	168		634		—		4,677		5,479		48,711		54,190
Real estate - mortgage:
1-4 family residential	3,454		522		—		11,580		15,556		593,698		609,254
Commercial	1,765		77		—		18,380		20,222		261,524		281,746
Consumer	56		17		—		12		85		43,798		43,883
Total	$	5,461	$	1,293	$	—	$	35,165	$	41,919	$	1,008,677	$	1,050,596
PI loans
Commercial and agricultural	$	35	$	16	$	1,977	$	—	$	2,028	$	8,701	$	10,729
Real estate - construction	48		—		2,758		—		2,806		7,087		9,893
Real estate - mortgage:
1-4 family residential	135		9		2,907		—		3,051		23,802		26,853
Commercial	903		—		17,479		—		18,382		94,796		113,178
Consumer	6		—		12		—		18		981		999
Total	$	1,127	$	25	$	25,133	$	—	$	26,285	$	135,367	$	161,652
Total Loans	$	6,588	$	1,318	$	25,133	$	35,165	$	68,204	$	1,144,044	$	1,212,248

All PI loans are considered to be accruing for all periods presented, in accordance with ASC 310-30.

Risk Grades

The risk-grade categories presented in the following table, which are standard categories used by the bank regulators, are:

Pass - Loans categorized as Pass are higher quality loans that have adequate sources of repayment and little risk of collection.

Special Mention - A Special Mention loan has potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution's credit position at some future date. Special Mention loans are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.

Substandard - A Substandard loan is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of Substandard loans, does not have to exist in individual assets classified Substandard.

Doubtful - A loan classified as Doubtful has all the weaknesses inherent in one classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonable specific pending factors, which may work to the advantage of strengthening of the asset, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors include proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional collateral and refinancing plans.

Loans categorized as Special Mention or worse are considered Criticized. Loans categorized as Substandard or Doubtful are considered Classified. Purchased loans acquired in the Merger are recorded at estimated fair value on the date of acquisition without the carryover of related ALL. The table below includes $38.7 million and $40.5 million in Granite Purchased Loans categorized as Substandard or Doubtful at March 31, 2014 and December 31, 2013, respectively.

The following table presents loans held for investment balances by risk grade as of March 31, 2014:



(dollars in thousands)	Pass		Special Mention		Substandard		Doubtful
	(Ratings 1-5)		(Rating 6)		(Rating 7)		(Rating 8)		Total
Commercial and agricultural	$	70,782	$	1,180	$	4,016	$	—	$	75,978
Real estate - construction	54,331		3,275		9,698		—		67,304
Real estate - mortgage:
1-4 family residential	601,449		9,234		21,091		—		631,774
Commercial	310,951		29,466		55,693		—		396,110
Consumer	48,205		39		66		309		48,619
Total	$	1,085,718	$	43,194	$	90,564	$	309	$	1,219,785

The following table presents loans held for investment balances by risk grade as of December 31, 2013:



(dollars in thousands)	Pass		Special Mention		Substandard		Doubtful
	(Ratings 1-5)		(Rating 6)		(Rating 7)		(Rating 8)		Total
Commercial and agricultural	$	67,277	$	1,262	$	3,713	$	—	$	72,252
Real estate - construction	50,138		3,984		9,961		—		64,083
Real estate - mortgage:
1-4 family residential	601,304		10,887		23,916		—		636,107
Commercial	307,661		29,711		57,552		—		394,924
Consumer	44,450		40		47		345		44,882
Total	$	1,070,830	$	45,884	$	95,189	$	345	$	1,212,248

Loans included in the preceding loan composition table are net of participations sold. Loans are increased by net loan premiums and deferred loan discounts or fees of $3.3 million at March 31, 2014. Loans are increased by net deferred loan discounts or fees of $3.6 million at December 31, 2013.

At March 31, 2014 and December 31, 2013, loans held for sale consisted of originated residential mortgage loans held for sale carried at the lower of cost or fair market value.

Loans serviced for others are not included in the consolidated balance sheet. The unpaid principal balance of loans serviced for others amounted to $201.5 million at March 31, 2014 and $190.2 million at December 31, 2013.

Loans Pledged

To borrow from the FHLB, members must pledge collateral to secure advances and letters of credit. Acceptable collateral includes, among other types of collateral, a variety of residential, multifamily, home equity lines and second mortgages, and commercial loans. Gross loans of $154.2 million and $23.9 million of investment securities, and gross loans of $169.5 million and $24.1 million of investment securities, were pledged to collateralize FHLB advances and letters of credit at March 31, 2014 and December 31, 2013, respectively, of which there was $29.7 million and $31.8 million of credit availability for borrowing, respectively. At March 31, 2014, $8.8 million of loans and $50.5 million of securities were pledged to collateralize potential borrowings from the Federal Reserve Discount Window, of which $54.1 million was available as borrowing capacity. We could also access $292.9 million of additional borrowings from the FHLB under credit lines by pledging additional collateral.

Nonaccruing and Impaired Loans

Interest income on loans is calculated by using the interest method based on the daily outstanding balance. The recognition of interest income is discontinued when, in management's opinion, the collection of all or a portion of interest becomes doubtful. Loans are returned to accrual status when the factors indicating doubtful collectability cease to exist and the loan has performed in accordance with its terms for a demonstrated period of time. The past due status of loans is based on the contractual payment terms. Had nonaccruing loans been on accruing status, interest income would have been higher by $1.0 million and $1.1 million for the three months ended March 31, 2014 and March 31, 2013, respectively. At March 31, 2014 and December 31, 2013, COB had certain impaired loans of $33.6 million and $35.2 million, respectively, which were on nonaccruing interest status.

All loan classes are considered past due when the contractual amounts due with respect to principal and interest are not received within 30 days of the contractual due date. When we cannot reasonably expect full and timely repayment of a loan, the loan is placed on nonaccrual.

All loan classes on which principal or interest is in default for 90 days or more are put on nonaccrual status, unless there is sufficient documentation to conclude that the loan is well secured and in the process of collection. A debt is "well-secured" if collateralized by liens on or pledges of real or personal property, including securities, which have a realizable value sufficient to discharge the debt in full, or by the guarantee of a financially responsible party. A debt is "in process of collection" if collection is proceeding in due course either through legal action, including judgment enforcement procedures, or, in appropriate circumstances, through collection efforts not involving legal action that are reasonably expected to result in repayment of the debt or its restoration to a current status.

Loans that are less than 90 days delinquent may also be placed on nonaccrual if deterioration in the financial condition of the borrower has increased the probability of less than full repayment.

At the time a loan is placed on nonaccrual, all accrued, unpaid interest is charged off, unless it is documented that repayment of all principal and presently accrued but unpaid interest is probable. Charge-offs of accrued and unpaid interest are charged against the current year's interest income and not against the current ALL.

For all loan classes, a nonaccrual loan may be returned to accrual status when we can reasonably expect continued timely payments until payment in full. All prior arrearage does not have to be eliminated, nor do all previously charged off amounts need to have been recovered, but the loan can still be returned to accrual status if the following conditions are met: (1) all principal and interest amounts contractually due (including arrearage) are reasonably assured of repayment within a reasonable period; and (2) there is a sustained period of repayment performance (generally a minimum of six months) by the borrower, in accordance with the contractual terms involving payments of cash or cash equivalents.

For all classes within all loan portfolios, cash receipts received on nonaccrual loans are applied entirely against principal until the loan or lease has been collected in full, after which time any additional cash receipts are recognized as interest income.

For all loan classes, as soon as any portion of a loan becomes uncollectible, the loan will be charged down or charged off as follows:


•	If unsecured, the loan must be charged off in full.


•	If secured, the outstanding principal balance of the loan should be charged down to the net liquidation value of the collateral.

Loans are considered uncollectible when:


•	No regularly scheduled payment has been made within four months and the determination is made that any further payment is unlikely, or


•	The loan is unsecured, the borrower has filed for bankruptcy protection and there is no other (guarantor, etc.) support from an entity outside of the bankruptcy proceedings.

Based on a variety of credit, collateral and documentation issues, loans with lesser degrees of delinquency or obvious loss may also be deemed uncollectible.

A loan is considered impaired, based on current information and events, if it is probable that we will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. If the loan has been modified to provide relief to the borrower, the loan is deemed to be impaired if all principal and interest will not be repaid according to the original contract.

When a loan has been determined to be impaired, the amount of the impairment is measured using the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, the observable market price of the loan, or the fair value of the collateral if the loan is collateral dependent. When the present value of expected future cash flows is used, the effective interest rate is the original contractual interest rate of the loan adjusted for any premium or discount. When the contractual interest rate is variable, the effective interest rate of the loan changes over time. A specific reserve is established as a component of the ALL when a loan has been determined to be impaired. Subsequent to the initial measurement of impairment, if there is a significant change to the impaired loan's expected future cash flows, or if actual cash flows are significantly different from the cash flows previously estimated, we recalculate the impairment and appropriately adjust the specific reserve. Similarly, if we measure impairment based on the observable market price of an impaired loan or the fair value of the collateral of an impaired collateral-dependent loan, we will adjust the specific reserve if there is a significant change in either of those bases.

When a loan is impaired and principal and interest is in doubt when contractually due, interest income is not recognized. Cash receipts received on nonaccruing impaired loans within any class are generally applied entirely against principal until the loan has been collected in full, after which time any additional cash receipts are recognized as interest income. Cash receipts received on accruing impaired loans within any class are applied in the same manner as accruing loans that are not considered impaired.

The following table summarizes information relative to impaired loans for the dates indicated:



	March 31, 2014				December 31, 2013
(dollars in thousands)	Balance		Associated Reserves		Balance		Associated Reserves
Impaired loans, not individually reviewed for impairment	$	4,670	$	—	$	4,612	$	—
Impaired loans, individually reviewed, with no impairment	33,317		—		39,865		—
Impaired loans, individually reviewed, with impairment	8,112		1,119		2,965		927
Total impaired loans, excluding purchased impaired *	$	46,099	$	1,119	$	47,442	$	927

Purchased impaired loans with subsequent deterioration	$	138,789	5,237		$	161,307	5,560
Purchased impaired loans with no subsequent deterioration	$	10,244	—		$	344	—
Total Reserves			$	6,356			$	6,487

Average impaired loans calculated using a simple average	$	46,771			$	65,527



* Included at March 31, 2014 and December 31, 2013 were $12.5 million and $12.1 million, respectively, in restructured and performing loans.

The following table presents loans held for investment on nonaccrual status by loan class for the dates indicated:



(dollars in thousands)
	March 31, 2014		December 31, 2013
Loans held for investment:
Commercial and agricultural	$	450	$	516
Real estate - construction	3,437		4,677
Real estate - mortgage:
1-4 family residential	10,151		11,580
Commercial	19,533		18,380
Consumer	32		12
Total nonaccrual loans	$	33,603	$	35,165
Loans more than 90 days delinquent, still on accrual	355		—
Total nonperforming loans	$	33,958	$	35,165

There were no loans held for sale on nonaccrual status as of March 31, 2014 or December 31, 2013.

The following table presents individually reviewed impaired loans and purchased impaired loans with subsequent credit deterioration, segregated by portfolio segment, and the corresponding reserve for impaired loan losses as of March 31, 2014:



			Unpaid
(dollars in thousands)	Recorded		Principal		Related
	Investment		Balance		Allowance
With no related allowance recorded:
Commercial and agricultural	$	242	$	485	$	—
Real estate - construction	2,677		3,195		—
Real estate - mortgage:
1-4 family residential	9,064		11,740		—
Commercial	21,334		25,856		—
Consumer	—		—		—
Total	$	33,317	$	41,276	$	—
With an allowance recorded:
Commercial and agricultural	$	—	$	—	$	—
Real estate - construction	648		956		73
Real estate - mortgage:
1-4 family residential	3,920		4,207		561
Commercial	3,544		4,555		485
Consumer	—		—		—
Total	$	8,112	$	9,718	$	1,119
Total individually evaluated impaired loans
Commercial and agricultural	$	242	$	485	$	—
Real estate - construction	3,325		4,151		73
Real estate - mortgage:
1-4 family residential	12,984		15,947		561
Commercial	24,878		30,411		485
Consumer	—		—		—
Total	$	41,429	$	50,994	$	1,119

PI loans with subsequent credit deterioration:
Commercial and agricultural	$	5,425	$	4,278	$	638
Real estate - construction	9,946		10,919		1,148
Real estate - mortgage:
1-4 family residential	16,031		17,460		390
Commercial	106,248		114,322		2,871
Consumer	1,139		737		190
Total	$	138,789	$	147,716	$	5,237

The following table presents individually reviewed impaired loans, and purchased impaired loans with subsequent credit deterioration, segregated by portfolio segment, and the corresponding reserve for impaired loan losses as of December 31, 2013:



			Unpaid
(dollars in thousands)	Recorded		Principal		Related
	Investment		Balance		Allowance
With no related allowance recorded:
Commercial and agricultural	$	398	$	643	$	—
Real estate - construction	4,734		8,893		—
Real estate - mortgage:
1-4 family residential	11,154		14,431		—
Commercial	23,579		28,905		—
Consumer	—		—		—
Total	$	39,865	$	52,872	$	—
With an allowance recorded:
Commercial and agricultural	$	—	$	—	$	—
Real estate - construction	—		—		—
Real estate - mortgage:
1-4 family residential	2,965		3,032		927
Commercial	—		—		—
Consumer	—		—		—
Total	$	2,965	$	3,032	$	927
Total individually evaluated impaired loans
Commercial and agricultural	$	398	$	643	$	—
Real estate - construction	4,734		8,893		—
Real estate - mortgage:
1-4 family residential	14,119		17,463		927
Commercial	23,579		28,905		—
Consumer	—		—		—
Total	$	42,830	$	55,904	$	927
PI loans with subsequent credit deterioration:
Commercial and agricultural	$	10,729	$	10,344	$	382
Real estate - construction	9,792		11,216		1,015
Real estate - mortgage:
1-4 family residential	26,628		28,143		724
Commercial	113,178		121,813		3,251
Consumer	980		785		188
Total	$	161,307	$	172,301	$	5,560

The following summary includes impaired loans individually reviewed. Average recorded investment and interest income recognized on impaired loans, segregated by portfolio segment, is shown in the following tables as of March 31, 2014 and March 31, 2013:



	For Three Months Ended				For Three Months Ended
	March 31, 2014				March 31, 2013
	Average		Interest		Average		Interest
(dollars in thousands)	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
With no related allowance recorded:
Commercial and agricultural	$	242	$	—	$	886	$	—
Real estate - construction	2,688		10		9,233		—
Real estate - mortgage:
1-4 family residential	9,050		28		13,472		26
Commercial	21,503		89		34,010		87
Consumer	—		—		—		—
Total	$	33,483	$	127	$	57,601	$	113
With an allowance recorded:
Commercial and agricultural	$	—	$	—	$	917	$	5
Real estate - construction	650		2		2,111		—
Real estate - mortgage:
1-4 family residential	3,829		19		4,666		8
Commercial	3,552		30		8,663		4
Consumer	—		—		—		—
Total	$	8,031	$	51	$	16,357	$	17
Total:
Commercial and agricultural	$	242	$	—	$	1,803	$	5
Real estate - construction	3,338		12		11,344		—
Real estate - mortgage:
1-4 family residential	12,879		47		18,138		34
Commercial	25,055		119		42,673		91
Consumer	—		—		—		—
Total	$	41,514	$	178	$	73,958	$	130

Impaired loans also include loans for which we may elect to grant a concession, providing terms more favorable than those prevalent in the market (e.g., rate, amortization term), and formally restructure due to the weakening credit status of a borrower. Restructuring is designed to facilitate a repayment plan that minimizes the potential losses that we otherwise may have to incur. If these impaired loans are on nonaccruing status as of the date of restructuring, the loans are included in nonperforming loans. Nonperforming restructured loans will remain as nonperforming until the borrower can demonstrate adherence to the restructured terms for a period of no less than six months and when it is otherwise determined that continued adherence is reasonably assured. Some restructured loans continue as accruing loans after restructuring if the borrower is not past due at the time of restructuring, adequate collateral valuations support the restructured loans, and the cash flows of the underlying business appear adequate to support the restructured debt service. Not included in nonperforming loans are loans that have been restructured that were performing as of the restructure date. At March 31, 2014, there was $18.1 million in restructured loans, of which $12.5 million were accruing and in a performing status. At December 31, 2013, there was $18.1 million in restructured loans, of which $12.1 million were accruing and in a performing status.

Granite Purchased Loans

Granite Purchased Loans include PI loans and PC loans. PC loans include performing revolving consumer and commercial loans.

PI loans are segregated into pools and recorded at estimated fair value on the date of acquisition without the carryover of the related ALL. PI loans are accounted for under ASC 310-30 when the loans have evidence of credit deterioration since origination and it is probable at the date of acquisition we will not collect all contractually required principal and interest payments. Evidence of credit quality deterioration as of the date of acquisition may include statistics such as past due status, nonaccrual status and risk grade. PI loans generally meet our definition for nonaccrual status; however, even if the borrower is not currently making payments, we will classify loans as accruing if we can reasonably estimate the amount and timing of future cash flows. All Granite Purchased PI loans are presented on an accruing basis. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the nonaccretable difference.

Periodically, we estimate the expected cash flows for each pool of the PI loans and evaluate whether the expected cash flows for each pool have changed from prior estimates. Decreases to the expected cash flows will generally result in a provision for loan losses. Subsequent increases in cash flows result in a reversal of the provision for loan losses to the extent of prior charges, or reclassification from nonaccretable difference to accretable yield with a positive impact on future interest income. Excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized into interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of such cash flows.

We have elected to account for the Granite Purchased PI loans under ASC 310-30 and the Granite Purchased PC loans under ASC 310-20.

At March 31, 2014, and December 31, 2013, our financial statements reflected a PI loan ALL of $5.2 million and $5.6 million, respectively, and an ALL for PC loans of $0.3 million and $0.3 million, respectively.

The following table presents the balance of all Granite Purchased Loans:



	At March 31, 2014
(dollars in thousands)	Purchased Impaired		Purchased Contractual		Total Purchased Loans		Unpaid Principal Balance
Commercial and agricultural	$	9,722	$	4,044	$	13,766	$	12,654
Real estate - construction	11,200		—		11,200		12,218
Real estate - mortgage:
1-4 family residential	20,399		25,041		45,440		47,829
Commercial	106,552		365		106,917		114,984
Consumer	1,160		—		1,160		766
Total	$	149,033	$	29,450	$	178,483	$	188,451



	At December 31, 2013
(dollars in thousands)	Purchased Impaired		Purchased Contractual		Total Purchased Loans		Unpaid Principal Balance
Commercial and agricultural	$	10,729	$	5,948	$	16,677	$	16,452
Real estate - construction	9,892		—		9,892		11,368
Real estate - mortgage:
1-4 family residential	26,854		22,127		48,981		51,359
Commercial	113,178		373		113,551		122,197
Consumer	998		—		998		798
Total	$	161,651	$	28,448	$	190,099	$	202,174

The tables below include only those Granite Purchased Loans accounted for under the expected cash flow method (PI loans) for the periods indicated. These tables do not include PC loans, including Granite Purchased PC loans or purchased performing residential mortgage loans.



	For Three Months Ended						For Three Months Ended
	March 31, 2014						March 31, 2013
	Purchased Impaired						Purchased Impaired
(dollars in thousands)	Carrying Amount			Future Accretion			Carrying Amount			Future Accretion
Balance, beginning of period	$	161,651		$	29,987		$	228,392		$	30,299
Accretion	2,665			(2,665		)	4,203			(4,203		)
Increase in future accretion	—			1,005			—			—
Reclassification of loans and adjustments	(4,180		)	—			—			—
Payments received	(11,081		)	—			(25,928		)	—
Foreclosed and transferred to OREO	(22		)	—			(783		)	—
Subtotal before allowance	149,033			28,327			205,884			26,096
Allowance for credit losses	(5,237		)	—			(5,373		)	—
Net carrying amount, end of period	$	143,796		$	28,327		$	200,511		$	26,096

Allowance for Loan Losses

COB's ALL, which is utilized to absorb actual losses in the loan portfolio, is maintained at a level consistent with management's best estimate of probable loan losses to be incurred as of the balance sheet date. Management assesses COB's ALL quarterly. This assessment includes a methodology that separates the total loan portfolio into homogeneous loan classifications for purposes of evaluating risk. The required allowance is calculated by applying a risk adjusted reserve requirement to the dollar volume of loans within a homogenous group. For purposes of the ALL, we have grouped our loans into pools according to the loan segmentation regime employed on schedule RC-C of the FFIEC's Consolidated Reports of Condition and Income. Major loan portfolio subgroups include: risk graded commercial loans, mortgage loans, home equity loans, retail loans and retail credit lines. Management also analyzes the loan portfolio on an ongoing basis to evaluate current risk levels, and risk grades are adjusted accordingly. While management uses the best information available to make evaluations, future adjustments may be necessary, if economic or other conditions differ substantially from the assumptions used.

Historical loss rates are calculated by associating losses to the risk-graded pool to which they relate for each of the previous eight quarters. Then, using a look back period consisting of the twenty most recent quarters, loss factors are calculated for each risk-graded pool using a simple average. This represents a change in methodology which began in the third quarter of 2013. Previously, we used a look back period beginning in the third quarter of 2006 and a weighted average of losses. The impact of this change was immaterial to the allowance calculation in the period we adopted the methodology change.

In addition to our ability to use our own historical loss data and migration between risk grades, we have a rigorous process for computing the qualitative factors that impact the ALL. A committee, independent of the historical loss migration team, reviews risk factors that may impact the ALL. Some factors are statistically quantifiable, such as concentration, growth, delinquency, and nonaccrual risk by loan type, while other factors are qualitative in nature, such as staff competency, competition within our markets and economic and regulatory changes impacting the loans held for investment.

We lend primarily in North Carolina. As of March 31, 2014, a majority of the principal amount of the loans held for investment in our portfolio was to businesses and individuals in North Carolina. This geographic concentration subjects the loan portfolio to the general economic conditions within this area. The risks created by this concentration have been considered by management in the determination of the adequacy of the ALL. Management believes the ALL is adequate to cover estimated losses on loans at each balance sheet date.

During the three month period ended March 31, 2014, we charged off $2.0 million in loans and realized $1.9 million in recoveries, for $0.1 million of net charge-offs. The majority of the loans charged off were loans that were previously impaired and had specific reserves assigned in prior periods.

The ALL, as a percentage of loans held for investment, was 2.13% at March 31, 2014, compared to 2.66% at March 31, 2013. At December 31, 2013, the ALL, as a percentage of loans held for investment, was 2.21%.

An analysis of the changes in the ALL is as follows:



	For Three Months Ended
(dollars in thousands)	March 31, 2014			March 31, 2013
Balance, beginning of period	$	26,785		$	29,314
Provision for (recovery of) losses charged to continuing operations	(684		)	110
Net recoveries (charge-offs):
Charge-offs	(1,977		)	(3,010		)
Recoveries	1,915			3,227
Net recoveries (charge-offs)	(62		)	217
Balance, end of period	$	26,039		$	29,641
Annualized net charge-offs (recoveries) during the period to average loans	0.02		%	(0.08		)%
Annualized net charge-offs (recoveries) during the period to ALL	0.97		%	(2.93		)%
Allowance for loan losses to loans held for investment	2.13		%	2.66		%

The following table presents ALL activity by portfolio segment for the three months ended March 31, 2014:



							Real Estate - Mortgage
(dollars in thousands)	Commercial and Agricultural			Real Estate - Construction			1-4 Family Residential			Commercial			Consumer			Total

ALL:
Beginning balance	$	2,931		$	5,233		$	8,869		$	7,195		$	2,557		$	26,785
Charge-offs	(389		)	(533		)	(484		)	(66		)	(505		)	(1,977		)
Recoveries	392			964			235			66			258			1,915
Provision	507			(356		)	(697		)	(229		)	91			(684		)
Ending balance	$	3,441		$	5,308		$	7,923		$	6,966		$	2,401		$	26,039

The following table presents ALL activity by portfolio segment for the three months ended March 31, 2013:



							Real Estate - Mortgage
(dollars in thousands)	Commercial and Agricultural			Real Estate - Construction			1-4 Family Residential			Commercial			Consumer			Total
ALL:

Beginning balance	$	3,238		$	4,987		$	8,701		$	9,627		$	2,761		$	29,314
Charge-offs	(319		)	(344		)	(632		)	(891		)	(824		)	(3,010		)
Recoveries	278			796			185			932			1,036			3,227
Provision	176			155			549			(377		)	(393		)	110
Ending balance	$	3,373		$	5,594		$	8,803		$	9,291		$	2,580		$	29,641

The following table details the recorded investment in loans related to each segment in the allowance for loan losses by portfolio segment and disaggregated on the basis of impairment evaluation methodology at March 31, 2014:



					Real Estate - Mortgage
(dollars in thousands)	Commercial and Agricultural		Real Estate - Construction		1-4 Family Residential		Commercial		Consumer		Total
ALL:
Individually evaluated for impairment	$	—	$	73	$	561	$	485	$	—	$	1,119
Collectively evaluated for impairment	2,803		4,087		6,972		3,610		2,211		19,683
PI loans evaluated for credit impairment	638		1,148		390		2,871		190		5,237
PI loans with no credit deterioration	—		—		—		—		—		—
Total ALL	$	3,441	$	5,308	$	7,923	$	6,966	$	2,401	$	26,039
Loans held for investment
Individually evaluated for impairment	$	242	$	3,326	$	12,997	$	24,878	$	—	$	41,443
Collectively evaluated for impairment	66,014		52,778		598,378		264,680		47,459		1,029,309
PI loans with subsequent credit deterioration	5,425		9,946		16,031		106,248		1,139		138,789
PI loans with no credit deterioration	4,297		1,254		4,368		304		21		10,244
Total loans	$	75,978	$	67,304	$	631,774	$	396,110	$	48,619	$	1,219,785



					Real Estate - Mortgage
(dollars in thousands)	Commercial and Agricultural		Real Estate - Construction		1-4 Family Residential		Commercial		Consumer		Total
ALL:
Individually evaluated for impairment	$	—	$	—	$	927	$	—	$	—	$	927
Collectively evaluated for impairment	2,549		4,218		7,218		3,944		2,369		20,298
PI loans evaluated for credit impairment	382		1,015		724		3,251		188		5,560
PI loans with no credit deterioration	—		—		—		—		—		—
Total ALL	$	2,931	$	5,233	$	8,869	$	7,195	$	2,557	$	26,785
Loans held for investment
Individually evaluated for impairment	$	398	$	4,734	$	14,119	$	23,579	$	—	$	42,830
Collectively evaluated for impairment	61,125		49,457		595,135		258,167		43,883		1,007,767
PI loans with subsequent credit deterioration	10,729		9,792		26,628		113,178		980		161,307
PI loans with no credit deterioration	—		100		225		—		19		344
Total loans	$	72,252	$	64,083	$	636,107	$	394,924	$	44,882	$	1,212,248

Troubled Debt Restructuring

The following table presents a breakdown of troubled debt restructurings that were restructured during the three months ended March 31, 2014 and March 31, 2013, segregated by portfolio segment:



	For Three Months Ended March 31, 2014					For Three Months Ended March 31, 2013
		Pre-Modification		Post-Modification			Pre-Modification		Post-Modification
		Outstanding		Outstanding			Outstanding		Outstanding
(dollars in thousands)	Number	Recorded		Recorded		Number	Recorded		Recorded
	of Loans	Investment		Investment		of Loans	Investment		Investment
Commercial and agricultural	1	$	11	$	11	—	$	—	$	—
Real estate - construction	—	—		—		—	—		—
Real estate - mortgage:
1-4 family residential	5	735		732		4	1,777		1,773
Commercial	—	—		—		1	1,151		807
Consumer	—	—		—		—	—		—
Total	6	$	746	$	743	5	$	2,928	$	2,580

During the three months ended March 31, 2014, we modified six loans that were considered to be troubled debt restructurings. We extended the terms for two of these loans and both extended the terms and modified the interest rate for the four remaining loans. During the three months ended March 31, 2013, we modified five loans that were considered to be troubled debt restructurings. We extended the terms and modified the interest rate for each of these loans.

There were no loans restructured in the twelve months prior to March 31, 2014 that went into default during the three months ended March 31, 2014. There were also no loans restructured in the twelve months prior to March 31, 2013 that went into default during the three months ended March 31, 2013.

In the determination of the ALL, management considers troubled debt restructurings and any subsequent defaults in these restructurings as impaired loans. The amount of the impairment is measured using the present value of expected future cash flows discounted at the loan's effective interest rate, the observable market price of the loan, or the fair value of the collateral if the loan is collateral dependent.

Unfunded Commitments

The reserve for unfunded commitments, which is included in other liabilities, is calculated by estimating the amount of additional

funding on the commitment and multiplying that amount by the historical loss rate (including Q&E factors). The following

describes our method for determining the estimated additional funding by commitment type:


•	Straight Lines of Credit - Unfunded balance of line of credit (100% utilization)


•	Revolving Lines of Credit - Average Utilization (for the last 12 months) less Current Utilization


•	Letters of Credit - 10% utilization

The reserve for unfunded commitments was $0.6 million as of March 31, 2014 and $0.5 million at December 31, 2013.