Note F Impaired Loans and Allowance for Loan Losses

During the first, second, third and fourth quarters of 2013, newly identified TDRs totaled $4.4 million, $4.1 million, $1.7 million and $0.5 million, respectively, summing to $10.7 million, of which $3.4 million were accruing commercial real estate loans, $1.4 million were accruing residential real estate mortgage loans, $0.2 million were accruing commercial and financial loans and $0.1 million were accruing consumer loans. Loans modified, but where full collection under the modified terms is doubtful are classified as nonaccrual loans from the date of modification and are therefore excluded from the tables below.

The Company’s TDR concessions granted generally do not include forgiveness of principal balances. Loan modifications are not reported in calendar years after modification if the loans were modified at an interest rate equal to the yields of new loan originations with comparable risk and the loans are performing based on the terms of the restructuring agreements.

When a loan is modified as a TDR, there is not a direct, material impact on the loans within the Consolidated Balance Sheet, as principal balances are generally not forgiven. Most loans prior to modification were classified as an impaired loan and the allowance for loan losses is determined in accordance with the Company’s policy as disclosed in Note A.

The following table presents loans that were modified within the twelve months ending December 31, 2013:


	Number of Contracts		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Specific Reserve Recorded		Valuation Allowance Recorded
	(In thousands)
Construction and land development		1	$	14	$	13	$	0	$	1
Residential real estate		11		1,422		1,254		0		168
Commercial real estate		7		3,421		3,059		0		362
Commercial and financial		2		154		154		0		0
Consumer		1		92		74		0		18

		22	$	5,103	$	4,554	$	0	$	549

Accruing loans that were restructured within the twelve months ending December 31, 2013, 2012 and 2011 and defaulted during the twelve months ended December 31, 2013, 2012 and 2011 are presented in the table below. The Company considers a loan to have defaulted when it becomes 60 days or more delinquent under the modified terms, has been transferred to nonaccrual status, or has been transferred to other real estate owned. A defaulted TDR is generally placed on nonaccrual and specific allowance for loan loss is assigned in accordance with the Company’s policy as disclosed in Note A.


	Number of Contracts		Recorded Investment
	(Dollars in thousands)
December 31, 2013:
Residential real estate		1	$	328
Commercial real estate		1		1,620

December 31, 2012:
Residential real estate		7	$	913

December 31, 2011:
Construction and land development		1	$	37
Residential real estate		1		220
Commercial and financial		1		8

At December 31, 2013 and 2012, the Company’s recorded investment in impaired loans and related valuation allowance was as follows:


	Impaired Loans for the Year Ended December 31, 2013
	Recorded Investment		Unpaid Principal Balance		Related Valuation Allowance		Average Recorded Investment		Interest Income Recognized
			( In thousands )
With no related allowance recorded:
Construction and land development	$	2,561	$	3,180	$	0	$	2,446	$	102
Commercial real estate		4,481		6,577		0		7,382		28
Residential real estate		12,366		17,372		0		14,512		81
Commercial and financial		153		153		0		19		9
Consumer		425		569		0		162		19
With an allowance recorded:
Construction and land development		1,120		1,197		149		1,347		36
Commercial real estate		7,937		8,046		638		17,264		395
Residential real estate		23,365		24,766		4,528		22,899		566
Commercial and financial		13		13		13		1		1
Consumer		548		573		118		571		23
Total:
Construction and land development		3,681		4,377		149		3,793		138
Commercial real estate		12,418		14,623		638		24,646		423
Residential real estate		35,731		42,138		4,528		37,411		647
Commercial and financial		166		166		13		20		10
Consumer		973		1,142		118		733		42

	$	52,969	$	62,446	$	5,446	$	66,603	$	1,260


	Impaired Loans for the Year Ended December 31, 2012
	Recorded Investment		Unpaid Principal Balance		Related Valuation Allowance		Average Recorded Investment		Interest Income Recognized
			( In thousands )
With no related allowance recorded:
Construction and land development	$	1,128	$	1,608	$	0	$	1,399	$	5
Commercial real estate		12,357		14,337		0		12,103		433
Residential real estate		15,463		22,022		0		12,019		455
Commercial and financial		0		0		0		7		0
Consumer		223		255		0		431		12
With an allowance recorded:
Construction and land development		2,897		2,941		230		3,539		127
Commercial real estate		26,130		26,648		2,264		39,527		1,304
Residential real estate		24,256		24,752		4,700		26,795		696
Commercial and financial		0		0		0		34		0
Consumer		447		460		75		585		22
Total:
Construction and land development		4,025		4,549		230		4,938		132
Commercial real estate		38,487		40,985		2,264		51,630		1,737
Residential real estate		39,719		46,774		4,700		38,814		1,151
Commercial and financial		0		0		0		41		0
Consumer		670		715		75		1,016		34

	$	82,901	$	93,023	$	7,269	$	96,439	$	3,054

Impaired loans also include loans that have been modified in troubled debt restructurings where concessions to borrowers who experienced financial difficulties have been granted. At December 31, 2013 and 2012, accruing TDRs totaled $25.1 million and $41.9 million, respectively.

The average recorded investment in impaired loans for the years ended December 31, 2013, 2012 and 2011 was $66,603,000, $96,439,000 and $119,528,000, respectively. The impaired loans were measured or impairment based on the value of underlying collateral for the present value of expected future cash flows discounted at the loan’s effective interest rate. The valuation allowance is included in the allowance for loan losses.

Interest payments received on impaired loans are recorded as interest income unless collection of the remaining recorded investment is doubtful at which time payments received are recorded as reductions to principal. For the years ended December 31, 2013, 2012 and 2011, the Company recorded $1,260,000, $3,054,000 and $3,541,000, respectively, in interest income on impaired loans.

For impaired loans whose impairment is measured based on the present value of expected future cash flows a total of $1.1 million, $1.0 million and $1.1 million, respectively, for 2013, 2012 and 2011 was included in interest income and represents the change in present value attributable to the passage of time.

The nonaccrual loans and accruing loans past due 90 days or more were $27,672,000 and $160,000, respectively, at December 31, 2013, $40,955,000 and $1,000, respectively at the end of 2012, and were $28,526,000 and $0, respectively, at year-end 2011.

Activity in the allowance for loans losses for the three years ended December 31, 2013, 2012 and 2011 are summarized as follows:


	Beginning Balance		Provision for Loan Losses			Charge- Offs			Recoveries		Net Charge- Offs			Ending Balance
	(In thousands)
December 31 , 2013
Construction and land development	$	1,134	$	66		$	(604	)	$	212	$	(392	)	$	808
Commercial real estate		8,849		(522	)		(2,714	)		547		(2,167	)		6,160
Residential real estate		11,090		3,273			(3,153	)		449		(2,704	)		11,659
Commercial and financial		468		(24	)		(60	)		326		266			710
Consumer		563		395			(253	)		26		(227	)		731

	$	22,104	$	3,188		$	(6,784	)	$	1,560	$	(5,224	)	$	20,068

December 31 , 2012
Construction and land development	$	1,883	$	(478	)	$	(612	)	$	341	$	(271	)	$	1,134
Commercial real estate		11,477		3,209			(8,539	)		2,702		(5,837	)		8,849
Residential real estate		10,966		7,767			(8,381	)		738		(7,643	)		11,090
Commercial and financial		402		283			(346	)		129		(217	)		468
Consumer		837		15			(410	)		121		(289	)		563

	$	25,565	$	10,796		$	(18,288	)	$	4,031	$	(14,257	)	$	22,104

December 31, 2011
Construction and land development	$	7,214	$	(1,645	)	$	(4,739	)	$	1,053	$	(3,686	)	$	1,883
Commercial real estate		18,563		(3,777	)		(3,663	)		354		(3,309	)		11,477
Residential real estate		10,102		7,833			(7,482	)		513		(6,969	)		10,966
Commercial and financial		480		(379	)		0			301		301			402
Consumer		1,385		(58	)		(562	)		72		(490	)		837

	$	37,744	$	1,974		$	(16,446	)	$	2,293	$	(14,153	)	$	25,565

As discussed in Note A, “Significant Accounting Policies,” the allowance for loan losses is composed of specific allowances for certain impaired loans and general allowances grouped into loan pools based on similar characteristics. The Company’s loan portfolio and related allowance at December 31, 2013 and 2012 is shown in the following tables.


	Individually Evaluated for Impairment				Collectively Evaluated for Impairment				Total
	Carrying Value		Associated Allowance		Carrying Value		Associated Allowance		Carrying Value		Associated Allowance
	(In thousands)
December 31, 2013
Construction and land development	$	3,681	$	149	$	63,769	$	659	$	67,450	$	808
Commercial real estate		12,418		638		507,964		5,522		520,382		6,160
Residential real estate		35,731		4,528		557,015		7,131		592,746		11,659
Commercial and financial		166		13		78,470		697		78,636		710
Consumer		973		118		44,020		613		44,993		731

	$	52,969	$	5,446	$	1,251,238	$	14,622	$	1,304,207	$	20,068


	Individually Evaluated for Impairment				Collectively Evaluated for Impairment				Total
	Carrying Value		Associated Allowance		Carrying Value		Associated Allowance		Carrying Value		Associated Allowance
	(In thousands)
December 31, 2012
Construction and land development	$	4,025	$	230	$	56,711	$	904	$	60,736	$	1,134
Commercial real estate		38,487		2,264		448,341		6,585		486,828		8,849
Residential real estate		39,719		4,700		529,612		6,390		569,331		11,090
Commercial and financial		0		0		61,903		468		61,903		468
Consumer		670		75		46,613		488		47,283		563

	$	82,901	$	7,269	$	1,143,180	$	14,835	$	1,226,081	$	22,104