Note 3 - Loans and Allowance for Loan Losses

3 Months Ended

Mar. 31, 2014

Receivables [Abstract]

Loans, Notes, Trade and Other Receivables Disclosure [Text Block]

3. LOANS AND ALLOWANCE FOR LOAN LOSSES

Our total loans at March 31, 2014 were $1.07 billion compared to $1.05 billion at December 31, 2013, an increase of $13.6 million, or 1.3%. The components of our loan portfolio disaggregated by class of loan within the loan portfolio segments at March 31, 2014 and December 31, 2013, and the percentage change in loans from the end of 2013 to the end of the first quarter of 2014, are as follows:

	March 31, 2014					December 31, 2013					Percent Increase
	Balance		%			Balance		%			(Decrease)
Commercial:
Commercial and industrial	$	289,009,000		27.1	%	$	286,373,000		27.2	%		0.9	%
Vacant land, land development, and residential construction		37,190,000		3.5			36,741,000		3.5			1.2
Real estate – owner occupied		264,299,000		24.8			261,877,000		24.9			0.9
Real estate – non-owner occupied		378,034,000		35.4			364,066,000		34.6			3.8
Real estate – multi-family and residential rental		35,686,000		3.3			37,639,000		3.5			(5.2	)
Total commercial		1,004,218,000		94.1			986,696,000		93.7			1.8
Retail:
Home equity and other		31,778,000		3.0			35,080,000		3.3			(9.4	)
1-4 family mortgages		30,800,000		2.9			31,467,000		3.0			(2.1	)
Total retail		62,578,000		5.9			66,547,000		6.3			(6.0	)
Total loans	$	1,066,796,000		100.0	%	$	1,053,243,000		100.0	%		1.3	%

Nonperforming loans as of March 31, 2014 and December 31, 2013 were as follows:

	March 31, 2014		December 31, 2013
Loans past due 90 days or more still accruing interest	$	0	$	0
Nonaccrual loans		6,342,000		6,718,000
Total nonperforming loans	$	6,342,000	$	6,718,000

The recorded principal balance of nonaccrual loans was as follows:

	March 31, 2014		December 31, 2013
Commercial:
Commercial and industrial	$	919,000	$	1,501,000
Vacant land, land development, and residential construction		361,000		785,000
Real estate – owner occupied		684,000		389,000
Real estate – non-owner occupied		335,000		168,000
Real estate – multi-family and residential rental		492,000		208,000
Total commercial		2,791,000		3,051,000
Retail:
Home equity and other		762,000		788,000
1-4 family mortgages		2,789,000		2,879,000
Total retail		3,551,000		3,667,000
Total nonaccrual loans	$	6,342,000	$	6,718,000

An age analysis of past due loans is as follows as of March 31, 2014:

	30 – 59 Days Past Due		60 – 89 Days Past Due		Greater Than 89 Days Past Due		Total Past Due		Current		Total Loans		Recorded Balance > 89 Days and Accruing
Commercial:
Commercial and industrial	$	0	$	0	$	121,000	$	121,000	$	288,888,000	$	289,009,000	$	0
Vacant land, land development, and residential construction		0		0		95,000		95,000		37,095,000		37,190,000		0
Real estate – owner occupied		0		0		0		0		264,299,000		264,299,000		0
Real estate – non-owner occupied		0		0		0		0		378,034,000		378,034,000		0
Real estate – multi-family and residential rental		0		0		0		0		35,686,000		35,686,000		0
Total commercial		0		0		216,000		216,000		1,004,002,000		1,004,218,000		0
Retail:
Home equity and other		0		0		0		0		31,778,000		31,778,000		0
1-4 family mortgages		0		0		391,000		391,000		30,409,000		30,800,000		0
Total retail		0		0		391,000		391,000		62,187,000		62,578,000		0
Total past due loans	$	0	$	0	$	607,000	$	607,000	$	1,066,189,000	$	1,066,796,000	$	0

An age analysis of past due loans is as follows as of December 31, 2013:

	30 – 59 Days Past Due		60 – 89 Days Past Due		Greater Than 89 Days Past Due		Total Past Due		Current		Total Loans		Recorded Balance > 89 Days and Accruing
Commercial:
Commercial and industrial	$	0	$	0	$	309,000	$	309,000	$	286,064,000	$	286,373,000	$	0
Vacant land, land development, and residential construction		0		0		0		0		36,741,000		36,741,000		0
Real estate – owner occupied		65,000		0		50,000		115,000		261,762,000		261,877,000		0
Real estate – non-owner occupied		0		0		0		0		364,066,000		364,066,000		0
Real estate – multi-family and residential rental		0		0		64,000		64,000		37,575,000		37,639,000		0
Total commercial		65,000		0		423,000		488,000		986,208,000		986,696,000		0
Retail:
Home equity and other		14,000		0		0		14,000		35,066,000		35,080,000		0
1-4 family mortgages		21,000		44,000		375,000		440,000		31,027,000		31,467,000		0
Total retail		35,000		44,000		375,000		454,000		66,093,000		66,547,000		0
Total past due loans	$	100,000	$	44,000	$	798,000	$	942,000	$	1,052,301,000	$	1,053,243,000	$	0

Impaired loans as of March 31, 2014, and average impaired loans for the three months ended March 31, 2014, were as follows:

	Unpaid Contractual Principal Balance		Recorded Principal Balance		Related Allowance		Year-To-Date Average Recorded Principal Balance
With no related allowance recorded:
Commercial:
Commercial and industrial	$	1,693,000	$	205,000		-	$	358,000
Vacant land, land development and residential construction		459,000		343,000				353,000
Real estate – owner occupied		1,165,000		684,000				735,000
Real estate – non-owner occupied		1,831,000		1,761,000				1,247,000
Real estate – multi-family and residential rental		41,000		1,000				1,000
Total commercial		5,189,000		2,994,000				2,694,000
Retail:
Home equity and other		707,000		649,000				555,000
1-4 family mortgages		1,190,000		611,000				629,000
Total retail		1,897,000		1,260,000				1,184,000
Total with no related allowance recorded	$	7,086,000	$	4,254,000			$	3,878,000

	Unpaid Contractual Principal Balance		Recorded Principal Balance		Related Allowance		Year-To-Date Average Recorded Principal Balance
With an allowance recorded:
Commercial:
Commercial and industrial	$	1,006,000	$	953,000	$	451,000	$	1,197,000
Vacant land, land development and residential construction		4,213,000		3,908,000		728,000		4,023,000
Real estate – owner occupied		1,488,000		1,488,000		455,000		1,500,000
Real estate – non-owner occupied		19,470,000		19,451,000		7,370,000		20,262,000
Real estate – multi-family and residential rental		1,207,000		1,089,000		504,000		1,886,000
Total commercial		27,384,000		26,889,000		9,508,000		28,868,000
Retail:
Home equity and other		118,000		92,000		92,000		190,000
1-4 family mortgages		2,237,000		2,160,000		879,000		2,196,000
Total retail		2,355,000		2,252,000		971,000		2,386,000
Total with an allowance recorded	$	29,739,000	$	29,141,000	$	10,479,000	$	31,254,000
Total impaired loans:
Commercial	$	32,573,000	$	29,883,000	$	9,508,000	$	31,562,000
Retail		4,252,000		3,512,000		971,000		3,570,000
Total impaired loans	$	36,825,000	$	33,395,000	$	10,479,000	$	35,132,000

Interest income of $0.5 million was recognized on impaired loans during the first quarter of 2014.               

Impaired loans were as follows as of December 31, 2013:

	Unpaid Contractual Principal Balance		Recorded Principal Balance		Related Allowance		Year-To-Date Average Recorded Principal Balance
With no related allowance recorded:
Commercial:
Commercial and industrial	$	2,229,000	$	511,000		-	$	1,205,000
Vacant land, land development and residential construction		475,000		362,000				991,000
Real estate – owner occupied		1,270,000		785,000				1,084,000
Real estate – non-owner occupied		895,000		733,000				4,049,000
Real estate – multi-family and residential rental		41,000		1,000				390,000
Total commercial		4,910,000		2,392,000				7,719,000
Retail:
Home equity and other		507,000		461,000				471,000
1-4 family mortgages		1,272,000		647,000				727,000
Total retail		1,779,000		1,108,000				1,198,000
Total with no related allowance recorded	$	6,689,000	$	3,500,000			$	8,917,000

	Unpaid Contractual Principal Balance		Recorded Principal Balance		Related Allowance		Year-To-Date Average Recorded Principal Balance
With an allowance recorded:
Commercial:
Commercial and industrial	$	1,517,000	$	1,440,000	$	792,000	$	1,880,000
Vacant land, land development and residential construction		4,436,000		4,139,000		844,000		3,354,000
Real estate – owner occupied		1,513,000		1,513,000		528,000		2,550,000
Real estate – non-owner occupied		21,088,000		21,072,000		7,969,000		28,388,000
Real estate – multi-family and residential rental		3,219,000		2,684,000		1,127,000		2,915,000
Total commercial		31,773,000		30,848,000		11,260,000		39,087,000
Retail:
Home equity and other		320,000		289,000		96,000		329,000
1-4 family mortgages		2,274,000		2,231,000		1,030,000		1,628,000
Total retail		2,594,000		2,520,000		1,126,000		1,957,000
Total with an allowance recorded	$	34,367,000	$	33,368,000	$	12,386,000	$	41,044,000
Total impaired loans:
Commercial	$	36,683,000	$	33,240,000	$	11,260,000	$	46,806,000
Retail		4,373,000		3,628,000		1,126,000		3,155,000
Total impaired loans	$	41,056,000	$	36,868,000	$	12,386,000	$	49,961,000

Credit Quality Indicators. We utilize a comprehensive grading system for our commercial loans. All commercial loans are graded on a ten grade rating system. The rating system utilizes standardized grade paradigms that analyze several critical factors such as cash flow, operating performance, financial condition, collateral, industry condition and management. All commercial loans are graded at inception and reviewed and, if appropriate, re-graded at various intervals thereafter. The risk assessment for retail loans is primarily based on the type of collateral and payment activity.

Loans by credit quality indicators were as follows as of March 31, 2014:

Commercial credit exposure – credit risk profiled by internal credit risk grades:

	Commercial and Industrial		Commercial Vacant Land, and Residential Construction		Commercial Real Estate - Owner Occupied		Commercial Real Estate - Non-Owner Occupied		Commercial Real Estate Multi-Family and Residential Rental
Internal credit risk grade groupings:
Grades 1 – 4	$	197,051,000	$	7,993,000	$	161,357,000	$	232,226,000	$	15,411,000
Grades 5 – 7		90,776,000		24,946,000		99,484,000		124,526,000		19,167,000
Grades 8 – 9		1,182,000		4,251,000		3,458,000		21,282,000		1,108,000
Total commercial	$	289,009,000	$	37,190,000	$	264,299,000	$	378,034,000	$	35,686,000

Retail credit exposure – credit risk profiled by collateral type:

	Retail Home Equity and Other		Retail 1-4 Family Mortgages
Total retail	$	31,778,000	$	30,800,000

Loans by credit quality indicators were as follows as of December 31, 2013:

Commercial credit exposure – credit risk profiled by internal credit risk grades:

	Commercial and Industrial		Commercial Vacant Land, Land Development, and Residential Construction		Commercial Real Estate - Owner Occupied		Commercial Real Estate - Non-Owner Occupied		Commercial Real Estate - and Residential Multi-Family Rental
Internal credit risk grade groupings:
Grades 1 – 4	$	208,151,000	$	6,973,000	$	156,230,000	$	219,325,000	$	15,465,000
Grades 5 – 7		76,237,000		25,535,000		103,066,000		122,717,000		19,469,000
Grades 8 – 9		1,985,000		4,233,000		2,581,000		22,024,000		2,705,000
Total commercial	$	286,373,000	$	36,741,000	$	261,877,000	$	364,066,000	$	37,639,000

Retail credit exposure – credit risk profiled by collateral type:

	Retail		Retail
	Home Equity		1-4 Family
	and Other		Mortgages
Total retail	$	35,080,000	$	31,467,000

All commercial loans are graded using the following criteria:

Grade 1. Excellent credit rating that contain very little, if any, risk of loss.

Grade 2. Strong sources of repayment and have low repayment risk.

Grade 3. Good sources of repayment and have limited repayment risk.

Grade 4. Adequate sources of repayment and acceptable repayment risk; however, characteristics are present that render the credit more vulnerable to a negative event.

Grade 5. Marginally acceptable sources of repayment and exhibit defined weaknesses and negative characteristics.

Grade 6. Well defined weaknesses which may include negative current cash flow, high leverage, or operating losses. Generally, if the credit does not stabilize or if further deterioration is observed in the near term, the loan will likely be downgraded and placed on the Watch List (i.e., list of lending relationships that receive increased scrutiny and review by the Board of Directors and senior management).

Grade 7. Defined weaknesses or negative trends that merit close monitoring through Watch List status.

Grade 8. Inadequately protected by current sound net worth, paying capacity of the obligor, or pledged collateral, resulting in a distinct possibility of loss requiring close monitoring through Watch List status.

Grade 9. Vital weaknesses exist where collection of principal is highly questionable.

Grade 10. Considered uncollectable and of such little value that continuance as an asset is not warranted.

The primary risk elements with respect to commercial loans are the financial condition of the borrower, the sufficiency of collateral, and timeliness of scheduled payments. We have a policy of requesting and reviewing periodic financial statements from commercial loan customers and employ a disciplined and formalized review of the existence of collateral and its value. The primary risk element with respect to each residential real estate loan and consumer loan is the timeliness of scheduled payments. We have a reporting system that monitors past due loans and have adopted policies to pursue creditor’s rights in order to preserve our collateral position.

Activity in the allowance for loan losses and the recorded investments in loans as of and during the three months ended March 31, 2014 are as follows:

	Commercial Loans			Retail Loans			Unallocated			Total
Allowance for loan losses:
Beginning balance	$	20,455,000		$	2,358,000		$	8,000		$	22,821,000
Provision for loan losses		(1,454,000	)		(434,000	)		(12,000	)		(1,900,000	)
Charge-offs		(586,000	)		(2,000	)		0			(588,000	)
Recoveries		586,000			35,000			0			621,000
Ending balance	$	19,001,000		$	1,957,000		$	(4,000	)	$	20,954,000
Ending balance: individually evaluated for impairment	$	9,508,000		$	971,000		$	0		$	10,479,000
Ending balance: collectively evaluated for impairment	$	9,493,000		$	986,000		$	(4,000	)	$	10,475,000
Total loans:
Ending balance	$	1,004,218,000		$	62,578,000					$	1,066,796,000
Ending balance: individually evaluated for impairment	$	29,883,000		$	3,512,000					$	33,395,000
Ending balance: collectively evaluated for impairment	$	974,335,000		$	59,066,000					$	1,033,401,000

Activity in the allowance for loan losses and the recorded investments in loans as of and during the three months ended March 31, 2013 are as follows:

	Commercial Loans			Retail Loans			Unallocated			Total
Allowance for loan losses:
Beginning balance	$	26,043,000		$	2,645,000		$	(11,000	)	$	28,677,000
Provision for loan losses		(1,164,000	)		(363,000	)		27,000			(1,500,000	)
Charge-offs		(2,412,000	)		(3,000	)		0			(2,415,000	)
Recoveries		1,250,000			23,000			0			1,273,000
Ending balance	$	23,717,000		$	2,302,000		$	16,000		$	26,035,000
Ending balance: individually evaluated for impairment	$	14,616,000		$	277,000		$	0		$	14,893,000
Ending balance: collectively evaluated for impairment	$	9,101,000		$	2,025,000		$	16,000		$	11,142,000
Total loans:
Ending balance	$	948,964,000		$	73,992,000					$	1,022,956,000
Ending balance: individually evaluated for impairment	$	49,636,000		$	2,064,000					$	51,700,000
Ending balance: collectively evaluated for impairment	$	899,328,000		$	71,928,000					$	971,256,000

Loans modified as troubled debt restructurings during the three months ended March 31, 2014 were as follows:

			Pre-		Post-
			Modification		Modification
			Recorded		Recorded
	Number of		Principal		Principal
	Contracts		Balance		Balance
Commercial:
Commercial and industrial		1	$	14,000	$	14,000
Vacant land, land development and residential construction		0		0		0
Real estate – owner occupied		0		0		0
Real estate – non-owner occupied		2		354,000		323,000
Real estate – multi-family and residential rental		0		0		0
Total commercial		3		368,000		337,000
Retail:
Home equity and other		0		0		0
1-4 family mortgages		0		0		0
Total retail		0		0		0
Total		3	$	368,000	$	337,000

Loans modified as troubled debt restructurings during the three months ended March 31, 2013 were as follows:

			Pre-		Post-
			Modification		Modification
			Recorded		Recorded
	Number of		Principal		Principal
	Contracts		Balance		Balance
Commercial:
Commercial and industrial		1	$	875,000	$	875,000
Vacant land, land development and residential construction		0		0		0
Real estate – owner occupied		0		0		0
Real estate – non-owner occupied		2		2,068,000		2,068,000
Real estate – multi-family and residential rental		0		0		0
Total commercial		3		2,943,000		2,943,000
Retail:
Home equity and other		0		0		0
1-4 family mortgages		0		0		0
Total retail		0		0		0
Total		3	$	2,943,000	$	2,943,000

The following loans, modified as troubled debt restructurings within the previous twelve months, became over 30 days past due within the three months ended March 31, 2014 (amounts as of period end):

			Recorded
	Number of		Principal
	Contracts		Balance
Commercial:
Commercial and industrial		0	$	0
Vacant land, land development and residential construction		0		0
Real estate – owner occupied		0		0
Real estate – non-owner occupied		0		0
Real estate – multi-family and residential rental		0		0
Total commercial		0		0
Retail:
Home equity and other		0		0
1-4 family mortgages		0		0
Total retail		0		0
Total		0	$	0

The following loans, modified as troubled debt restructurings within the previous twelve months, became over 30 days past due within the three months ended March 31, 2013 (amounts as of period end):

			Recorded
	Number of		Principal
	Contracts		Balance
Commercial:
Commercial and industrial		0	$	0
Vacant land, land development and residential construction		0		0
Real estate – owner occupied		1		44,000
Real estate – non-owner occupied		0		0
Real estate – multi-family and residential rental		0		0
Total commercial		1		44,000
Retail:
Home equity and other		0		0
1-4 family mortgages		0		0
Total retail		0		0
Total		1	$	44,000

Activity for loans categorized as troubled debt restructurings during the three months ended March 31, 2014 is as follows:

	Commercial and Industrial			Commercial Vacant Land, </ FONT></ FONT></ />Land  Development, and Residential Construction			Commercial Real Estate - Owner Occupied			Commercial Real Estate - Non-Owner Occupied			Commercial Real Estate - Multi-Family and Residential Rental
Commercial Loan Portfolio:
Beginning Balance	$	1,656,000		$	4,501,000		$	1,816,000		$	22,311,000		$	2,620,000
Charge-Offs		0			0			(11,000	)		0			(420,000	)
Payments		(266,000	)		(3,149,000	)		(49,000	)		(1,001,000	)		(1,468,000	)
Transfers to ORE		0			0			0			0			0
Net Additions/Deletions		14,000			2,898,000			0			319,000			0
Ending Balance	$	1,404,000		$	4,250,000		$	1,756,000		$	21,629,000		$	732,000

	Retail		Retail
	Home Equity		1-4 Family
	and Other		Mortgages
Retail Loan Portfolio:
Beginning Balance	$	0	$	2,191,000
Charge-Offs		0		0
Payments		0		(69,000	)
Transfers to ORE		0		0
Net Additions/Deletions		0		0
Ending Balance	$	0	$	2,122,000

Activity for loans categorized as troubled debt restructurings during the three months ended March 31, 2013 is as follows:

	Commercial and Industrial			Commercial Vacant Land, Land Development, and Residential Construction			Commercial Real Estate - Owner Occupied			Commercial Real Estate - Non-Owner Occupied			Commercial Real Estate - Multi-Familyand Residential Rental
Commercial Loan Portfolio:
Beginning Balance	$	2,720,000		$	3,071,000		$	4,116,000		$	37,672,000		$	3,027,000
Charge-Offs		(35,000	)		(695,000	)		0			(711,000	)		(15,000	)
Payments		(514,000	)		(49,000	)		(61,000	)		(3,211,000	)		(54,000	)
Transfers to ORE		(74,000	)		0			(363,000	)		(803,000	)		0
Net Additions/Deletions		1,171,000			0			187,000			2,057,000			0
Ending Balance	$	3,268,000		$	2,327,000		$	3,879,000		$	35,004,000		$	2,958,000

	Retail		Retail
	Home Equity		1-4 Family
	and Other		Mortgages
Retail Loan Portfolio:
Beginning Balance	$	0	$	154,000
Charge-Offs		0		0
Payments		0		(2,000	)
Transfers to ORE		0		0
Net Additions/Deletions		0		0
Ending Balance	$	0	$	152,000

The allowance related to loans categorized as troubled debt restructurings was as follows:

	March 31,		December 31,
	2014		2013
Commercial:
Commercial and industrial	$	95,000	$	187,000
Vacant land, land development, and residential construction		695,000		798,000
Real estate – owner occupied		455,000		528,000
Real estate – non-owner occupied		7,236,000		7,828,000
Real estate – multi-family and residential rental		304,000		1,010,000
Total commercial		8,785,000		10,351,000
Retail:
Home equity and other		0		0
1-4 family mortgages		32,000		0
Total retail		32,000		0
Total related allowance	$	8,817,000	$	10,351,000

In general, our policy dictates that a renewal or modification of an 8- or 9-rated commercial loan meets the criteria of a troubled debt restructuring, although we review and consider all renewed and modified loans as part of our troubled debt restructuring assessment procedures. Loan relationships rated 8 contain significant financial weaknesses, resulting in a distinct possibility of loss, while relationships rated 9 reflect vital financial weaknesses, resulting in a highly questionable ability on our part to collect principal; we believe borrowers warranting such ratings would have difficulty obtaining financing from other market participants. Thus, due to the lack of comparable market rates for loans with similar risk characteristics, we believe 8- or 9-rated loans renewed or modified were done so at below market rates. Loans that are identified as troubled debt restructurings are considered impaired and are individually evaluated for impairment when assessing these credits in our allowance for loan losses calculation.