ALLOWANCE FOR LOAN LOSSES

We maintain the allowance for loan losses at a level considered adequate to provide for estimated probable credit losses inherent in the loan portfolio. 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 or is considered 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. Beginning in 2014, for purposes of loans that have been modified in a troubled debt restructuring and not internally graded as substandard, doubtful, or loss("performing TDRs") we began measuring impairment using the discounted cash flows method. Under this method, a specific reserve is established in an amount equal to the excess, if any, of the recorded investment in each impaired loan over its discounted cash flows.

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. 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 three month periods ended March 31, 2015 and 2014, and for the year ended December 31, 2014 is as follows:



	Three Months Ended March 31,				Year Ended December 31,
Dollars in thousands	2015		2014		2014

Balance, beginning of year	$	11,167	$	12,659	$	12,659
Losses:
Commercial	77		390		390
Commercial real estate
Owner occupied	266		11		11
Non-owner occupied	—		—		—
Construction and development
Land and land development	180		2,376		3,535
Construction	—		—		—
Residential real estate
Non-jumbo	160		9		435
Jumbo	—		8		65
Home equity	32		—		14
Consumer	43		45		265
Other	24		23		118
Total	782		2,862		4,833
Recoveries:
Commercial	2		6		34
Commercial real estate
Owner occupied	3		7		40
Non-owner occupied	2		3		318
Construction and development
Land and land development	11		26		298
Construction	—		—		—
Real estate - mortgage
Non-jumbo	7		20		87
Jumbo	95		163		163
Home equity	1		2		4
Consumer	49		20		74
Other	22		25		73
Total	192		272		1,091
Net losses	590		2,590		3,742
Provision for loan losses	250		1,000		2,250
Balance, end of period	$	10,827	$	11,069	$	11,167

Activity in the allowance for loan losses by loan class during the first three months of 2015 is as follows:



	Construction & Land Development							Commercial Real Estate					Residential Real Estate
Dollars in thousands	Land & Land Develop- ment		Construc- tion			Commer- cial		Owner Occupied		Non- Owner Occupied			Non- jumbo		Jumbo			Home Equity		Con- sumer			Other			Total
Allowance for loan losses
Beginning balance	$	3,417	$	427		$	1,204	$	927	$	1,316		$	1,280	$	2,081		$	187	$	97		$	231		$	11,167
Charge-offs	180		—			77		266		—			160		—			32		43			24			782
Recoveries	11		—			2		3		2			7		95			1		49			22			192
Provision	370		(183		)	9		571		(25		)	125		(613		)	103		(24		)	(83		)	250
Ending balance	$	3,618	$	244		$	1,138	$	1,235	$	1,293		$	1,252	$	1,563		$	259	$	79		$	146		$	10,827

Allowance related to:
Loans individually evaluated for impairment	$	176	$	—		$	—	$	255	$	21		$	276	$	43		$	—	$	—		$	—		$	771
Loans collectively evaluated for impairment	3,442		244			1,138		980		1,272			976		1,520			259		79			146			10,056
Total	$	3,618	$	244		$	1,138	$	1,235	$	1,293		$	1,252	$	1,563		$	259	$	79		$	146		$	10,827

Loans
Loans individually evaluated for impairment	$	14,019	$	—		$	381	$	14,721	$	7,817		$	6,347	$	6,556		$	709	$	79		$	—		$	50,629
Loans collectively evaluated for impairment	52,539		19,094			89,547		165,548		317,947			213,591		43,936			68,185		18,406			11,074			$	999,867
Total	$	66,558	$	19,094		$	89,928	$	180,269	$	325,764		$	219,938	$	50,492		$	68,894	$	18,485		$	11,074		$	1,050,496