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6. Allowance For Loan Losses
 12 Months Ended
Dec. 31, 2013
Allowance for Loan and Lease Losses, Adjustments, Net [Abstract]  
Allowance For Loan Losses

The allowance for loan losses is maintained at a level considered adequate to provide for our estimate of probable credit losses inherent in the loan portfolio.  The allowance is increased by provisions charged to operating expense and reduced by net charge-offs.  Loans are charged against the allowance for loan losses when we believe that collectability is unlikely.  While we use the best information available to make our evaluation, future adjustments may be necessary if there are significant changes in conditions.

 

The allowance is comprised of three distinct reserve components:  (1) specific reserves related to loans individually evaluated, (2) quantitative reserves related to loans collectively evaluated, and (3) qualitative reserves related to loans collectively evaluated.  A summary of the methodology we employ on a quarterly basis with respect to each of these components in order to evaluate the overall adequacy of our allowance for loan losses is as follows.

 

Specific Reserve for Loans Individually Evaluated

 

First, we identify loan relationships having aggregate balances in excess of $500,000 and that may also have credit weaknesses.  Such loan relationships are identified primarily through our analysis of internal loan evaluations, past due loan reports, and loans adversely classified by regulatory authorities.  Each loan so identified is then individually evaluated to determine whether it is impaired – that is, based on current information and events, it is probable that we will be unable to collect all amounts due in accordance with the contractual terms of the underlying loan agreement.  Substantially all of our impaired loans historically have been collateral dependent, meaning repayment of the loan is expected to be provided solely from the sale of the loan’s underlying collateral.  For such loans, we measure impairment based on the fair value of the loan’s collateral, which is generally determined utilizing current appraisals.  A specific reserve is established in an amount equal to the excess, if any, of the recorded investment in each impaired loan over the fair value of its underlying collateral, less estimated costs to sell. Our policy is to re-evaluate the fair value of collateral dependent loans at least every twelve months unless there is a known deterioration in the collateral’s value, in which case a new appraisal is obtained.

 

Quantitative Reserve for Loans Collectively Evaluated

 

Second, we stratify the loan portfolio into the following ten loan pools:  land and land development, construction, commercial, commercial real estate -- owner-occupied, commercial real estate -- non-owner occupied, conventional residential mortgage, jumbo residential mortgage, home equity, consumer, and other.  Loans within each pool are then further segmented between (1) loans which were individually evaluated for impairment and not deemed to be impaired, (2) larger-balance loan relationships exceeding $2 million which are assigned an internal risk rating in conjunction with our normal ongoing loan review procedures and (3) smaller-balance homogenous loans.

 

 

 

 

Quantitative reserves relative to each loan pool are established as follows:  for all loan segments detailed above an allocation equaling 100% of the respective pool’s average 12 month historical net loan charge-off rate (determined based upon the most recent twelve quarters) is applied to the aggregate recorded investment in the pool of loans.

 

Qualitative Reserve for Loans Collectively Evaluated

 

Third, we consider the necessity to adjust our average historical net loan charge-off rates relative to each of the above ten loan pools for potential risks factors that could result in actual losses deviating from prior loss experience.  For example, if we observe a significant increase in delinquencies within the conventional mortgage loan pool above historical trends, an additional allocation to the average historical loan charge-off rate is applied.  Such qualitative risk factors considered are:  (1) levels of and trends in delinquencies and impaired loans, (2) levels of and trends in charge-offs and recoveries, (3) trends in volume and term of loans, (4) effects of any changes in risk selection and underwriting standards, and other changes in lending policies, procedures, and practice, (5) experience, ability, and depth of lending management and other relevant staff, (6) national and local economic trends and conditions, (7) industry conditions, and (8) effects of changes in credit concentrations.

 

An analysis of the allowance for loan losses for the years ended December 31, 2013, 2012 and 2011 is as follows:

 

Dollars in thousands 2013   2012   2011
           
  Balance, beginning of year $ 17,933   $ 17,712   $ 17,224
  Losses                
      Commercial   723     1,273     506
      Commercial real estate                
           Owner occupied   1,031     636     508
           Non-owner occupied   9     806     78
      Construction and development                
           Land and land development   3,596     3,390     3,568
           Construction   -     367     -
      Residential real estate                
           Non-jumbo   541     1,372     3,178
           Jumbo   4,741     737     1,511
           Home equity   77     5     346
      Consumer   79     136     162
      Other   162     95     86
  Total   10,959     8,817     9,943
  Recoveries                
      Commercial   12     13     35
      Commercial real estate                
           Owner occupied   8     33     37
           Non-owner occupied   674     31     55
      Construction and development                
           Land and land development   187     61     43
           Construction   -     -     -
      Real estate - mortgage                
           Non-jumbo   127     81     83
           Jumbo   6     86     14
           Home equity   5     61     1
      Consumer   79     95     112
      Other   87     77     51
  Total   1,185     538     431
  Net losses   9,774     8,279     9,512
  Provision for loan losses   4,500     8,500     10,000
  Balance, end of year $ 12,659   $ 17,933   $ 17,712

 

 

 

 

Activity in the allowance for loan losses by loan class during 2013 and 2012 is as follows:

 

 

  2013
  Construction & Land Development                                      
  Land &           Commercial Real Estate   Residential Real Estate              
  Land               Non-                          
  Develop-   Construc-   Commer-   Owner   Owner   Non-       Home   Con-          
Dollars in thousands ment   tion   cial   Occupied   Occupied   jumbo   Jumbo   Equity   sumer   Other     Total
Allowance for loan losses                                          
Beginning balance $ 5,220   $ 138   $ 782   $ 1,387   $ 3,269   $ 2,617   $ 3,942   $ 425   $ 132   $ 21     $ 17,933
   Charge-offs   3,596     -     723     1,031     9     541     4,741     77     79     162       10,959
   Recoveries   187     -     12     8     674     127     6     5     79     87       1,185
   Provision   3,644     131     1,252     605     (3,293 )   (360 )   2,681     (180 )   (84 )   104       4,500
Ending balance $ 5,455   $ 269   $ 1,323   $ 969   $ 641   $ 1,843   $ 1,888   $ 173   $ 48   $ 50     $ 12,659
                                                                   
Allowance related to:                                                                  
Loans individually                                                                  
   evaluated for impairment $ 3,186   $ -   $ 406   $ 306   $ 175   $ 256   $ 37   $ 22   $ 13   $ -     $ 4,401
Loans collectively                                                                  
   evaluated for impairment   2,269     269     918     663     466     1,586     1,851     151     35     50       8,258
Loans acquired with                                                                  
   deteriorated credit quality   -     -     -     -     -     -     -     -     -     -       -
Total $ 5,455   $ 269   $ 1,324   $ 969   $ 641   $ 1,842   $ 1,888   $ 173   $ 48   $ 50     $ 12,659
                                                                   
Loans                                                                  
Loans individually                                                                  
   evaluated for impairment $ 25,269   $ -   $ 2,023   $ 12,550   $ 5,832   $ 6,082   $ 8,768   $ 212   $ 47   $ -     $ 60,783
Loans collectively                                                                  
   evaluated for impairment   46,184     15,155     86,329     137,068     274,958     206,864     44,638     54,632     19,842     3,276       888,946
Loans acquired with                                                                  
   deteriorated credit quality   -     -     -     -     -     -     -     -     -     -       -
Total $ 71,453   $ 15,155   $ 88,352   $ 149,618   $ 280,790   $ 212,946   $ 53,406   $ 54,844   $ 19,889   $ 3,276     $ 949,729

 

 

 

  2012
  Construction & Land Development                                      
  Land &           Commercial Real Estate   Residential Real Estate              
  Land               Non-                          
  Develop-   Construc-   Commer-   Owner   Owner   Non-       Home   Con-          
Dollars in thousands ment   tion   cial   Occupied   Occupied   jumbo   Jumbo   Equity   sumer   Other     Total
Allowance for loan losses                                          
Beginning balance $ 7,262   $ 120   $ 770   $ 1,335   $ 3,283   $ 2,587   $ 1,331   $ 830   $ 161   $ 33     $ 17,712
   Charge-offs   3,390     367     1,273     636     806     1,372     737     5     136     95       8,817
   Recoveries   61     -     13     33     31     81     86     61     95     77       538
   Provision   1,287     385     1,272     655     761     1,321     3,262     (461 )   12     6       8,500
Ending balance $ 5,220   $ 138   $ 782   $ 1,387   $ 3,269   $ 2,617   $ 3,942   $ 425   $ 132   $ 21     $ 17,933
                                                                   
Allowance related to:                                                                  
Loans individually                                                                  
   evaluated for impairment $ 2,611   $ -   $ 85   $ 461   $ 286   $ 394   $ 3,216   $ 28   $ 16   $ -     $ 7,097
Loans collectively                                                                  
   evaluated for impairment   2,609     138     697     926     2,983     2,223     726     397     116     21       10,836
Loans acquired with                                                                  
   deteriorated credit quality   -     -     -     -     -     -     -     -     -     -       -
Total $ 5,220   $ 138   $ 782   $ 1,387   $ 3,269   $ 2,617   $ 3,942   $ 425   $ 132   $ 21     $ 17,933
                                                                   
Loans                                                                  
Loans individually                                                                  
   evaluated for impairment $ 29,963   $ -   $ 10,941   $ 16,714   $ 9,468   $ 6,318   $ 21,543   $ 219   $ 66   $ -     $ 95,232
Loans collectively                                                                  
   evaluated for impairment   49,372     3,772     74,888     137,538     266,614     210,396     40,024     53,044     20,520     3,701       859,869
Loans acquired with                                                                  
   deteriorated credit quality   -     -     -     -     -     -     -     -     -     -       -
Total $ 79,335   $ 3,772   $ 85,829   $ 154,252   $ 276,082   $ 216,714   $ 61,567   $ 53,263   $ 20,586   $ 3,701     $ 955,101