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 whose purchase price has been discounted, in part, due to credit deterioration occurring subsequent to origination. Accordingly, management believes it is probable that all contractual principal and interest on these 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 June 30, 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	$	—	$	—	$	—	$	400	$	400	$	76,908	$	77,308
Real estate - construction	136		—		—		2,773		2,909		58,678		61,587
Real estate - mortgage:
1-4 family residential	384		1,007		76		9,007		10,474		630,002		640,476
Commercial	84		133		206		19,192		19,615		273,039		292,654
Consumer	79		7		—		31		117		55,799		55,916
Total	$	683	$	1,147	$	282	$	31,403	$	33,515	$	1,094,426	$	1,127,941
PI loans
Commercial and agricultural	$	69	$	11	$	2,250	$	—	$	2,330	$	6,694	$	9,024
Real estate - construction	—		—		4,203		—		4,203		6,234		10,437
Real estate - mortgage:
1-4 family residential	289		58		2,921		—		3,268		16,260		19,528
Commercial	26		254		13,252		—		13,532		88,315		101,847
Consumer	6		2		13		—		21		1,067		1,088
Total	$	390	$	325	$	22,639	$	—	$	23,354	$	118,570	$	141,924
Total Loans	$	1,073	$	1,472	$	22,921	$	31,403	$	56,869	$	1,212,996	$	1,269,865

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 $33.9 million and $40.5 million in Granite Purchased Loans categorized as Substandard or Doubtful at June 30, 2014 and December 31, 2013, respectively.

The following table presents loans held for investment balances by risk grade as of June 30, 2014:



(dollars in thousands)	Pass		Special Mention		Substandard		Doubtful
	(Ratings 1-5)		(Rating 6)		(Rating 7)		(Rating 8)		Total
Commercial and agricultural	$	81,579	$	1,361	$	3,392	$	—	$	86,332
Real estate - construction	61,125		2,930		7,969		—		72,024
Real estate - mortgage:
1-4 family residential	633,335		8,347		18,322		—		660,004
Commercial	316,326		28,451		49,724		—		394,501
Consumer	56,614		19		63		308		57,004
Total	$	1,148,979	$	41,108	$	79,470	$	308	$	1,269,865

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 $3.5 million at June 30, 2014. Loans are increased by net deferred loan discounts or fees of $3.6 million at December 31, 2013.

At June 30, 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 $212.6 million at June 30, 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 $137.8 million and $23.7 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 June 30, 2014 and December 31, 2013, respectively, of which there was $38.1 million and $31.8 million of credit availability for borrowing, respectively. At June 30, 2014, $7.7 million of loans and $50.0 million of securities were pledged to collateralize potential borrowings from the Federal Reserve Discount Window, of which $53.4 million was available as borrowing capacity. We could also access $288.9 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 $0.9 million and $0.8 million for the three months ended June 30, 2014 and June 30, 2013, respectively. At June 30, 2014 and December 31, 2013, COB had certain impaired loans of $31.7 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:



	June 30, 2014				December 31, 2013
(dollars in thousands)	Recorded Investment		Associated Reserves		Recorded Investment		Associated Reserves
Impaired loans, not individually reviewed for impairment	$	4,750	$	—	$	4,612	$	—
Impaired loans, individually reviewed, with no impairment	29,890		—		39,865		—
Impaired loans, individually reviewed, with impairment	9,693		855		2,965		927
Total impaired loans, excluding purchased impaired *	$	44,333	$	855	$	47,442	$	927

Purchased impaired loans with subsequent deterioration	$	141,924	4,123		$	161,307	5,560
Purchased impaired loans with no subsequent deterioration	$	—	—		$	345	—
Total Reserves			$	4,978			$	6,487

Average impaired loans calculated using a simple average	$	45,888			$	65,527



* Included at June 30, 2014 and December 31, 2013 were $12.9 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)
	June 30, 2014		December 31, 2013
Loans held for investment:
Commercial and agricultural	$	400	$	516
Real estate - construction	2,773		4,677
Real estate - mortgage:
1-4 family residential	9,007		11,580
Commercial	19,192		18,380
Consumer	31		12
Total nonaccrual loans	$	31,403	$	35,165
Loans more than 90 days delinquent, still on accrual	282		—
Total nonperforming loans	$	31,685	$	35,165

There were no loans held for sale on nonaccrual status as of June 30, 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 June 30, 2014:



			Unpaid
(dollars in thousands)	Recorded		Principal		Related
	Investment		Balance		Allowance
With no related allowance recorded:
Commercial and agricultural	$	242	$	485	$	—
Real estate - construction	2,179		2,736		—
Real estate - mortgage:
1-4 family residential	8,220		10,940		—
Commercial	19,249		24,655		—
Consumer	—		—		—
Total	$	29,890	$	38,816	$	—
With an allowance recorded:
Commercial and agricultural	$	—	$	—	$	—
Real estate - construction	547		643		280
Real estate - mortgage:
1-4 family residential	3,698		4,020		452
Commercial	5,448		5,792		123
Consumer	—		—		—
Total	$	9,693	$	10,455	$	855
Total individually evaluated impaired loans
Commercial and agricultural	$	242	$	485	$	—
Real estate - construction	2,726		3,379		280
Real estate - mortgage:
1-4 family residential	11,918		14,960		452
Commercial	24,697		30,447		123
Consumer	—		—		—
Total	$	39,583	$	49,271	$	855

PI loans with subsequent credit deterioration:
Commercial and agricultural	$	9,024	$	7,823	$	581
Real estate - construction	10,437		11,521		729
Real estate - mortgage:
1-4 family residential	19,528		21,076		411
Commercial	101,847		109,289		2,212
Consumer	1,088		712		190
Total	$	141,924	$	150,421	$	4,123

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 June 30, 2014 and June 30, 2013:



	For Three Months Ended				For Three Months Ended
	June 30, 2014				June 30, 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	$	—	$	1,398	$	1
Real estate - construction	2,191		7		9,513		—
Real estate - mortgage:
1-4 family residential	8,263		23		12,662		9
Commercial	19,686		33		30,466		25
Consumer	—		—		—		—
Total	$	30,382	$	63	$	54,039	$	35
With an allowance recorded:
Commercial and agricultural	$	—	$	—	$	107	$	—
Real estate - construction	583		—		219		3
Real estate - mortgage:
1-4 family residential	3,706		14		1,662		1
Commercial	5,474		33		3,912		—
Consumer	—		—		164		—
Total	$	9,763	$	47	$	6,064	$	4
Total:
Commercial and agricultural	$	242	$	—	$	1,505	$	1
Real estate - construction	2,774		7		9,732		3
Real estate - mortgage:
1-4 family residential	11,969		37		14,324		10
Commercial	25,160		66		34,378		25
Consumer	—		—		164		—
Total	$	40,145	$	110	$	60,103	$	39



	For Six Months Ended				For Six Months Ended
	June 30, 2014				June 30, 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	$	—	$	1,414	$	8
Real estate - construction	2,209		18		9,705		—
Real estate - mortgage:
1-4 family residential	8,250		51		12,643		33
Commercial	20,004		137		31,042		144
Consumer	—		—		—		—
Total	$	30,705	$	206	$	54,804	$	185
With an allowance recorded:
Commercial and agricultural	$	—	$	—	$	107	$	—
Real estate - construction	594		—		220		6
Real estate - mortgage:
1-4 family residential	3,722		32		1,682		4
Commercial	5,504		91		3,933		—
Consumer	—		—		167		1
Total	$	9,820	$	123	$	6,109	$	11
Total:
Commercial and agricultural	$	242	$	—	$	1,521	$	8
Real estate - construction	2,803		18		9,925		6
Real estate - mortgage:
1-4 family residential	11,972		83		14,325		37
Commercial	25,508		228		34,975		144
Consumer	—		—		167		1
Total	$	40,525	$	329	$	60,913	$	196

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 June 30, 2014, there was $17.8 million in restructured loans, of which $12.9 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 June 30, 2014, and December 31, 2013, our financial statements reflected a PI loan ALL of $4.1 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 June 30, 2014
(dollars in thousands)	Purchased Impaired		Purchased Contractual		Total Purchased Loans		Unpaid Principal Balance
Commercial and agricultural	$	9,024	$	3,727	$	12,751	$	11,627
Real estate - construction	10,437		—		10,437		11,521
Real estate - mortgage:
1-4 family residential	19,528		24,232		43,760		46,072
Commercial	101,847		11		101,858		109,300
Consumer	1,088		—		1,088		712
Total	$	141,924	$	27,970	$	169,894	$	179,232



	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	9,893		—		9,893		11,368
Real estate - mortgage:
1-4 family residential	26,853		22,127		48,980		51,359
Commercial	113,178		373		113,551		122,197
Consumer	999		—		999		798
Total	$	161,652	$	28,448	$	190,100	$	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
	June 30, 2014						June 30, 2013
	Purchased Impaired						Purchased Impaired
(dollars in thousands)	Carrying Amount			Future Accretion			Carrying Amount			Future Accretion
Balance, beginning of period	$	149,033		$	28,327		$	205,884		$	26,096
Accretion	2,415			(2,415		)	4,191			(4,191		)
Increase in future accretion	—			1,852			—			6,801
Payments received	(9,524		)	—			(20,403		)	—
Foreclosed and transferred to OREO	—			—			(513		)	—
Subtotal before allowance	141,924			27,764			189,159			28,706
Allowance for credit losses	(4,123		)	—			(4,066		)	—
Net carrying amount, end of period	$	137,801		$	27,764		$	185,093		$	28,706



	For Six Months Ended						For Six Months Ended
	June 30, 2014						June 30, 2013
	Purchased Impaired						Purchased Impaired
(dollars in thousands)	Carrying Amount			Future Accretion			Carrying Amount			Future Accretion
Balance, beginning of period	$	161,652		$	29,987		$	228,392		$	30,299
Accretion	5,079			(5,079		)	8,394			(8,394		)
Increase in future accretion	—			2,856			—			6,801
Reclassification of loans and adjustments	(4,180		)	—			—			—
Payments received	(20,605		)	—			(46,331		)	—
Foreclosed and transferred to OREO	(22		)	—			(1,296		)	—
Subtotal before allowance	141,924			27,764			189,159			28,706
Allowance for credit losses	(4,123		)	—			(4,066		)	—
Net carrying amount, end of period	$	137,801		$	27,764		$	185,093		$	28,706

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 June 30, 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 June 30, 2014, we charged off $2.0 million in loans and realized $1.7 million in recoveries, for $0.4 million of net charge-offs.

The ALL, as a percentage of loans held for investment, was 1.89% at June 30, 2014, compared to 2.11% at June 30, 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						For Six Months Ended
(dollars in thousands)	June 30, 2014			June 30, 2013			June 30, 2014			June 30, 2013
Balance, beginning of period	$	26,039		$	29,641		$	26,785		$	29,314
Recovery of losses charged to continuing operations	(1,685		)	(1,057		)	(2,369		)	(947		)
Net recoveries (charge-offs):
Charge-offs	(2,033		)	(6,102		)	(4,010		)	(9,113		)
Recoveries	1,654			2,603			3,569			5,831
Net charge-offs	(379		)	(3,499		)	(441		)	(3,282		)
Balance, end of period	$	23,975		$	25,085		$	23,975		$	25,085
Annualized net charge-offs during the period to average loans held for investment	0.12		%	1.26		%	0.07		%	0.59		%
Annualized net charge-offs during the period to ALL	6.34		%	55.79		%	3.71		%	26.17		%
Allowance for loan losses to loans held for investment	1.89		%	2.11		%	1.89		%	2.11		%

The following table presents ALL activity by portfolio segment for the three months ended June 30, 2014:



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

ALL:
Beginning balance April 1, 2014	$	3,441		$	5,308		$	7,923		$	6,966		$	2,401		$	26,039
Charge-offs	(621		)	(91		)	(151		)	(730		)	(440		)	(2,033		)
Recoveries	262			363			263			527			239			1,654
Provision (recovery of provision)	426			(802		)	(625		)	(1,097		)	413			(1,685		)
Ending balance June 30, 2014	$	3,508		$	4,778		$	7,410		$	5,666		$	2,613		$	23,975

The following table presents ALL activity by portfolio segment for the three months ended June 30, 2013:



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

Beginning balance April 1, 2013	$	3,373		$	5,594		$	8,803		$	9,291		$	2,580		$	29,641
Charge-offs	(875		)	(584		)	(2,537		)	(1,371		)	(735		)	(6,102		)
Recoveries	633			271			492			1,075			132			2,603
Provision (recovery of provision)	(939		)	371			642			(1,608		)	477			(1,057		)
Ending balance June 30, 2013	$	2,192		$	5,652		$	7,400		$	7,387		$	2,454		$	25,085

The following table presents ALL activity by portfolio segment for the six months ended June 30, 2014:



							Real Estate - Mortgage
(dollars in thousands)	Commercial and Agricultural			Real Estate - Construction			1-4 Family Residential			Commercial			Consumer			Total
ALL:
Beginning balance at January 1, 2014	$	2,931		$	5,233		$	8,869		$	7,195		$	2,557		$	26,785
Charge-offs	(1,010		)	(624		)	(635		)	(796		)	(945		)	(4,010		)
Recoveries	654			1,327			498			593			497			3,569
Provision (recovery of provision)	933			(1,158		)	(1,322		)	(1,326		)	504			(2,369		)
Ending balance at June 30, 2014	$	3,508		$	4,778		$	7,410		$	5,666		$	2,613		$	23,975

The following table presents ALL activity by portfolio segment for the six months ended June 30, 2013:



							Real Estate - Mortgage
(dollars in thousands)	Commercial and Agricultural			Real Estate - Construction			1-4 Family Residential			Commercial			Consumer			Total
ALL:
Beginning balance at January 1, 2013	$	3,238		$	4,987		$	8,701		$	9,627		$	2,761		$	29,314
Charge-offs	(1,194		)	(928		)	(3,169		)	(2,262		)	(1,560		)	(9,113		)
Recoveries	911			1,067			677			2,007			1,169			5,831
Provision (recovery of provision)	(763		)	526			1,191			(1,985		)	84			(947		)
Ending balance at June 30, 2013	$	2,192		$	5,652		$	7,400		$	7,387		$	2,454		$	25,085

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 June 30, 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	$	—	$	280	$	452	$	123	$	—	$	855
Collectively evaluated for impairment	2,927		3,769		6,547		3,331		2,423		18,997
PI loans evaluated for credit impairment	581		729		411		2,212		190		4,123
Total ALL	$	3,508	$	4,778	$	7,410	$	5,666	$	2,613	$	23,975
Loans held for investment
Individually evaluated for impairment	$	242	$	2,726	$	11,929	$	24,698	$	—	$	39,595
Collectively evaluated for impairment	77,066		58,861		628,547		267,956		55,916		1,088,346
PI loans with subsequent credit deterioration	9,024		10,437		19,528		101,847		1,088		141,924
Total loans	$	86,332	$	72,024	$	660,004	$	394,501	$	57,004	$	1,269,865



					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		49,456		595,135		258,167		43,883		1,007,766
PI loans with subsequent credit deterioration	10,729		9,792		26,628		113,178		980		161,307
PI loans with no credit deterioration	—		101		225		—		19		345
Total loans	$	72,252	$	64,083	$	636,107	$	394,924	$	44,882	$	1,212,248

Troubled Debt Restructuring

The following tables present a breakdown of troubled debt restructurings that were restructured during the three months and six months ended June 30, 2014 and June 30, 2013, respectively, segregated by portfolio segment:



	For Three Months Ended June 30, 2014					For Three Months Ended June 30, 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	—	$	—	$	—	—	$	—	$	—
Real estate - construction	—	—		—		1	114		114
Real estate - mortgage:
1-4 family residential	1	17		21		4	915		894
Commercial	—	—		—		1	460		421
Consumer	—	—		—		—	—		—
Total	1	$	17	$	21	6	$	1,489	$	1,429



	For Six Months Ended June 30, 2014					For Six Months Ended June 30, 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	—	$	—	$	—	—	$	—	$	—
Real estate - construction	—	—		—		1	114		114
Real estate - mortgage:
1-4 family residential	7	752		828		8	2,692		2,667
Commercial	—	—		—		2	1,611		1,228
Consumer	—	—		—		—	—		—
Total	7	$	752	$	828	11	$	4,417	$	4,009

During the six months ended June 30, 2014, we modified seven 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 five remaining loans. During the six months ended June 30, 2013, we modified eleven loans that were considered to be troubled debt restructurings. We extended the terms for two of these loans, modified the interest rate for one of these loans, and modified the remaining eight loans in both ways.

There were no loans restructured in the twelve months prior to June 30, 2014 that went into default during the six months ended June 30, 2014. There were also no loans restructured in the twelve months prior to June 30, 2013 that went into default during the six months ended June 30, 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 $0.8 million as of June 30, 2014 and $0.5 million at December 31, 2013.