Note 11 – Credit Quality and Nonperforming Assets

Credit Quality Classifications

The Company monitors the credit quality of loans on a continuous basis using the regulatory and accounting classifications of pass, special mention, substandard and impaired to characterize the associated credit risk. Balances classified as “loss” are immediately charged off. The Company conforms to the following definitions for risk classifications utilized:

•

Pass: Larger non-homogeneous loans not meeting the risk rating definitions below, and smaller homogeneous loans that are not assessed on an individual basis.

•

Special mention: Loans which have potential issues that deserve the close attention of management. If left uncorrected, those potential weaknesses could eventually diminish the prospects for full repayment of principal and interest according to the contractual terms of the loan agreement, or could result in deterioration of the Company's credit position at some future date.

•

Substandard: Loans that have at least one clear and well-defined weakness which could jeopardize the ultimate recoverability of all principal and interest, such as a borrower displaying a highly leveraged position, unfavorable financial operating results and/or trends, uncertain repayment sources or a deteriorated financial condition.

•

Impaired: A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans include all nonperforming loans, restructured troubled debt (TDRs), and certain other loans that are still being maintained on accrual status. A TDR may be nonperforming or performing, depending on its accrual status and the demonstrated ability of the borrower to comply with restructured terms (see “Troubled Debt Restructurings” section below for additional information on TDRs).

Credit quality classifications for the Company's loan balances were as follows, as of the dates indicated:

Credit Quality Classifications
(dollars in thousands, unaudited)
	September 30, 2014
	Pass		Special Mention		Substandard		Impaired		Total

Real Estate:
1-4 family residential construction	$	4,908	$	-	$	-	$	-	$	4,908
Other construction/land		19,050		253		10		4,522		23,835
1-4 family - closed end		100,113		527		597		12,820		114,057
Equity lines		44,832		514		1,244		700		47,290
Multi-family residential		7,245		422		-		-		7,667
Commercial real estate - owner occupied		171,724		20,983		2,797		3,572		199,076
Commercial real estate - non-owner occupied		92,438		3,363		226		12,830		108,857
Farmland		129,553		2,700		77		-		132,330
Total real estate		569,863		28,762		4,951		34,444		638,020

Agricultural		23,902		592		-		127		24,621
Commercial and industrial		99,550		2,379		305		2,925		105,159
Mortgage Warehouse		96,459		-		-		-		96,459
Consumer loans		16,191		266		21		2,938		19,416
Total gross loans and leases	$	805,965	$	31,999	$	5,277	$	40,434	$	883,675

	December 31, 2013
	Pass		Special Mention		Substandard		Impaired		Total

Real Estate:
1-4 family residential construction	$	1,720	$	-	$	-	$	-	$	1,720
Other construction/land		18,243		334		203		6,751		25,531
1-4 family - closed end		67,051		1,305		770		17,898		87,024
Equity lines		51,019		254		1,429		1,021		53,723
Multi-family residential		8,059		426		-		-		8,485
Commercial real estate - owner occupied		158,155		17,033		3,261		7,563		186,012
Commercial real estate - non-owner occupied		89,475		3,630		240		13,495		106,840
Farmland		105,623		1,780		819		282		108,504
Total real estate		499,345		24,762		6,722		47,010		577,839

Agricultural		24,178		532		-		470		25,180
Commercial and industrial		93,224		3,358		1,236		5,444		103,262
Mortgage Warehouse		73,425		-		-		-		73,425
Consumer loans		19,387		478		208		3,463		23,536
Total gross loans and leases	$	709,559	$	29,130	$	8,166	$	56,387	$	803,242

Past Due and Nonperforming Assets

Nonperforming assets are comprised of loans for which the Company is no longer accruing interest, and foreclosed assets, including mobile homes and other real estate owned (OREO). OREO consists of properties acquired by foreclosure or similar means, which the Company is offering or will offer for sale. Nonperforming loans and leases result when reasonable doubt surfaces with regard to the ability of the Company to collect all principal and interest. At that point, we stop accruing interest on the loan or lease in question and reverse any previously-recognized interest to the extent that it is uncollected or associated with interest-reserve loans. Any asset for which principal or interest has been in default for 90 days or more is also placed on non-accrual status even if interest is still being received, unless the asset is both well secured and in the process of collection. An aging of the Company's loan balances is presented in the following tables, by number of days past due as of the indicated dates:

Loan Portfolio Aging
(dollars in thousands, unaudited)
	September 30, 2014
	30-59 Days Past Due		60-89 Days Past Due		90 Days Or More Past Due⁽¹⁾		Total Past Due		Current		Total Financing Receivables		Non-Accrual Loans⁽²⁾

Real Estate:
1-4 family residential construction	$	-	$	-	$	-	$	-	$	4,908	$	4,908	$	-
Other construction/land		638		-		3,338		3,976		19,859		23,835		3,338
1-4 family - closed end		68		529		8,384		8,981		105,076		114,057		8,446
Equity lines		447		-		-		447		46,843		47,290		385
Multi-family residential		-		-		-		-		7,667		7,667		-
Commercial real estate - owner occupied		139		345		1,143		1,627		197,449		199,076		2,359
Commercial real estate - non-owner occupied		206		-		7,045		7,251		101,606		108,857		7,655
Farmland		109		-		-		109		132,221		132,330		-
Total real estate		1,607		874		19,910		22,391		615,629		638,020		22,183

Agricultural		893		-		127		1,020		23,601		24,621		127
Commercial and industrial		642		103		98		843		104,316		105,159		791
Mortgage Warehouse		-		-		-		-		96,459		96,459		-
Consumer loans		287		4		4		295		19,121		19,416		775
Total gross loans and leases	$	3,429	$	981	$	20,139	$	24,549	$	859,126	$	883,675	$	23,876

⁽¹⁾

As of September 30, 2014 there were no loans over 90 days past due and still acrruing.

⁽²⁾

Included in total financing receivables

	December 31, 2013
	30-59 Days Past Due		60-89 Days Past Due		90 Days Or More Past Due⁽¹⁾		Total Past Due		Current		Total Financing Receivables		Non-Accrual Loans⁽²⁾

Real Estate:
1-4 family residential construction	$	-	$	-	$	-	$	-	$	1,720	$	1,720	$	-
Other construction/land		294		-		116		410		25,121		25,531		5,528
1-4 family - closed end		2,181		300		171		2,652		84,372		87,024		13,168
Equity lines		98		-		288		386		53,337		53,723		778
Multi-family residential		-		-		-		-		8,485		8,485		-
Commercial real estate - owner occupied		1,917		144		2,011		4,072		181,940		186,012		5,516
Commercial real estate - non-owner occupied		-		-		7,667		7,667		99,173		106,840		8,058
Farmland		331		-		-		331		108,173		108,504		282
Total real estate		4,821		444		10,253		15,518		562,321		577,839		33,330

Agricultural		892		327		125		1,344		23,836		25,180		470
Commercial and industrial		1,318		587		1,298		3,203		100,059		103,262		2,622
Mortgage Warehouse		-		-		-		-		73,425		73,425		-
Consumer loans		181		-		-		181		23,355		23,536		992
Total gross loans and leases	$	7,212	$	1,358	$	11,676	$	20,246	$	782,996	$	803,242	$	37,414

⁽¹⁾

As of December 31, 2013 there were no loans over 90 days past due and still accruing.

⁽²⁾

Included in total financing receivables

Troubled Debt Restructurings

A loan that is modified for a borrower who is experiencing financial difficulty is classified as a troubled debt restructuring (TDR), if the modification constitutes a concession. At September 30, 2014, the Company had a total of $32.2 million in TDRs, including $19.2 million in TDRs that were on non-accrual status. Generally, a non-accrual loan that has been modified as a TDR remains on non-accrual status for a period of at least six months to demonstrate the borrower's ability to comply with the modified terms. However, performance prior to the modification, or significant events that coincide with the modification, could result in a loan's return to accrual status after a shorter performance period or even at the time of loan modification. TDRs may have the TDR designation removed in the calendar year following the restructuring, if the loan is in compliance with all modified terms and is yielding a market rate of interest. Regardless of the period of time that has elapsed, if the borrower's ability to meet the revised payment schedule is uncertain then the loan will be kept on non-accrual status. Moreover, a TDR is generally considered to be in default when it appears that the customer will not likely be able to repay all principal and interest pursuant to the terms of the restructured agreement.

The Company may agree to different types of concessions when modifying a loan or lease. The tables below summarize TDRs which were modified during the noted periods, by type of concession:

Troubled Debt Restructurings, by Type of Loan Modification
(dollars in thousands, unaudited)
	Nine months ended September 30, 2014

	Rate Modification		Term Modification		Interest Only Modification		Rate & Term Modification		Rate & Interest Only Modification		Term & Interest Only Modification		Rate, Term & Interest Only Modification		Total

Real estate:
Other construction/land	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
1-4 family - closed-end		-		13		-		-		-		-		-		13
Equity lines		-		548		-		29		-		-		-		577
Commercial real estate - owner occupied		279		123		-		-		-		-		-		402
Total real estate loans		279		684		-		29		-		-		-		992
Commercial and industrial		-		133		-		4		-		30		-		167
Consumer loans		-		9		-		103		-		-		-		112
	$	279	$	826	$	-	$	136	$	-	$	30	$	-	$	1,271

	For the year ended December 31, 2013
	Rate Modification		Term Modification		Interest Only Modification		Rate & Term Modification		Rate & Interest Only Modification		Term & Interest Only Modification		Rate, Term & Interest Only Modification		Total

Real Estate:
Other construction/land	$	-	$	416	$	-	$	-	$	-	$	-	$	-	$	416
1-4 family - closed-end		-		3,338		-		238		-		-		102		3,678
Equity lines		-		-		40		-		-		-		-		40
Commercial real estate - owner occupied		-		-		-		557		-		-		-		557
Total real estate loans		-		3,754		40		795		-		-		102		4,691
Commercial and industrial		-		1,563		-		308		-		-		-		1,871
Consumer loans		-		469		-		-		-		-		92		561
	$	-	$	5,786	$	40	$	1,103	$	-	$	-	$	194	$	7,123

The following tables present, by class, additional details related to loans classified as TDRs during the referenced periods, including the recorded investment in the loan both before and after modification and balances that were modified during the period:

Troubled Debt Restructurings
(dollars in thousands, unaudited)
	For the three months Ended September 30, 2014

			Pre-Modification		Post-Modification
	Number of Loans		Outstanding Recorded Investment		Outstanding Recorded Investment		Reserve Difference⁽¹⁾		Reserve

Real Estate:
Other Construction/Land		-	$	-	$	-	$	-	$	-
1-4 family - closed-end		-		-		-		-		-
Equity Lines		3		227		227		11		20
Commercial RE- owner occupied		-		-		-		-		-
Total Real Estate Loans				227		227		11		20

Commercial and Industrial		-		-		-		-		-
Consumer loans		1		103		103		14		15
			$	330	$	330	$	25	$	35

⁽¹⁾

This represents the change in the ALLL reserve for these credits measured as the difference between the specific post-modification impairment reserve and the pre-modification reserve calculated under our general allowance for loan loss methodology.


	For the nine months Ended September 30, 2014

			Pre-Modification		Post-Modification
	Number of Loans		Outstanding Recorded Investment		Outstanding Recorded Investment		Reserve Difference⁽¹⁾		Reserve

Real Estate:
Other Construction/Land		-	$	-	$	-	$	-	$	-
1-4 family - closed-end		1		13		13		-		-
Equity Lines		6		577		577		180		33
Commercial RE- owner occupied		2		402		402		-		136
Total Real Estate Loans				992		992		180		169

Commercial and Industrial		5		167		167		53		57
Consumer loans		4		112		112		15		15
			$	1,271	$	1,271	$	248	$	241

⁽¹⁾

The tables below summarize TDRs that defaulted during the periods noted, and any charge-offs on those TDRs resulting from such default.

Troubled Debt Restructurings
(dollars in thousands, unaudited)
	Subsequent default three months ended September 30, 2014
	Number of Loans		Recorded Investment		Charge-Offs

Real Estate:
Other Construction/Land		-	$	-	$	-
1-4 family - closed-end		-		-		-
Commercial real estate- owner occupied		1		715		-
Total Real Estate Loans				715		-
Commercial and Industrial		-		-		-
Consumer Loans		-		-		-
			$	715	$	-

	Subsequent default nine months ended September 30, 2014

	Number of Loans		Recorded Investment		Charge-Offs
Real Estate:
Other Construction/Land		3	$	1,546	$	-
1-4 family - closed-end		2		8,305		-
Commercial real estate- owner occupied		2		937		31
Total Real Estate Loans				10,788		31
Commercial and Industrial		1		127		-
Consumer Loans		2		133		58
			$	11,048	$	89