Note 6. Allowance for Loan Losses

The Company maintains an allowance for loan losses in an amount determined by management on the basis of the character of the loans, loan performance, the financial condition of borrowers, the value of collateral securing loans and other relevant factors.

The following table summarizes the changes in the Company’s allowance for loan losses for the periods indicated.


	Three months ended June 30,						Six months ended June 30,
	2013			2012			2013			2012
	(in thousands)
Allowance for loan losses, beginning of period	$	19,759		$	17,434		$	19,197		$	16,574
Loans charged off		(160	)		(635	)		(533	)		(1,059	)
Recoveries on loans previously charged-off		151			280			336			464

Net charge-offs		(9	)		(355	)		(197	)		(595	)
Provision charged to expense		750			900			1,500			2,000

Allowance for loan losses, end of period	$	20,500		$	17,979		$	20,500		$	17,979

Further information pertaining to the allowance for loan losses for the three months ending June 30, 2013 follows:


	Construction and Land Development		Commercial and Industrial			Commercial Real Estate		Residential Real Estate			Consumer			Home Equity		Unallocated		Total
	(Dollars in thousands)
Allowance for loan losses:
Balance at March 31, 2013	$	3,199	$	3,523		$	8,779	$	2,071		$	357		$	833	$	997	$	19,759
Charge-offs		—		(6	)		—		—			(154	)		—		—		(160	)
Recoveries		—		56			1		1			92			1		—		151
Provision		42		(358	)		644		(42	)		68			98		298		750

Ending balance at June 30, 2013	$	3,241	$	3,215		$	9,424	$	2,030		$	363		$	932	$	1,295	$	20,500

Amount of allowance for loan losses for loans deemed to be impaired	$	1,000	$	92		$	204	$	147		$	—		$	96	$	—	$	1,539

Amount of allowance for loan losses for loans not deemed to be impaired	$	2,241	$	3,123		$	9,220	$	1,883		$	363		$	836	$	1,295	$	18,961

Loans:
Ending balance	$	34,919	$	101,918		$	609,462	$	283,392		$	8,123		$	125,918	$	—	$	1,163,732

Loans deemed to be impaired	$	1,500	$	1,102		$	2,365	$	1,171		$	—		$	96	$	—	$	6,234

Loans not deemed to be impaired	$	33,419	$	100,816		$	607,097	$	282,221		$	8,123		$	125,822	$	—	$	1,157,498

Further information pertaining to the allowance for loan losses for the six months ending June 30, 2013 follows:


	Construction and Land Development		Commercial and Industrial			Commercial Real Estate		Residential Real Estate		Consumer			Home Equity		Unallocated		Total
	(Dollars in thousands)
Allowance for loan losses:
Balance at December 31, 2012	$	3,041	$	3,118		$	9,065	$	1,994	$	333		$	886	$	760	$	19,197
Charge-offs		—		(234	)		—		—		(299	)		—		—		(533	)
Recoveries		—		121			4		4		206			1		—		336
Provision		200		210			355		32		123			45		535		1,500

Ending balance at June 30, 2013	$	3,241	$	3,215		$	9,424	$	2,030	$	363		$	932	$	1,295	$	20,500

Amount of allowance for loan losses for loans deemed to be impaired	$	1,000	$	92		$	204	$	147	$	—		$	96	$	—	$	1,539

Amount of allowance for loan losses for loans not deemed to be impaired	$	2,241	$	3,123		$	9,220	$	1,883	$	363		$	836	$	1,295	$	18,961

Loans:
Ending balance	$	34,919	$	101,918		$	609,462	$	283,392	$	8,123		$	125,918	$	—	$	1,163,732

Loans deemed to be impaired	$	1,500	$	1,102		$	2,365	$	1,171	$	—		$	96	$	—	$	6,234

Loans not deemed to be impaired	$	33,419	$	100,816		$	607,097	$	282,221	$	8,123		$	125,822	$	—	$	1,157,498

Further information pertaining to the allowance for loan losses for three months ending June 30, 2012 follows:


	Construction and Land Development			Commercial and Industrial			Commercial Real Estate		Residential Real Estate			Consumer			Home Equity			Unallocated			Total
	(Dollars in thousands)
Allowance for loan losses:
Balance at March 31, 2012	$	2,920		$	3,220		$	7,341	$	1,784		$	317		$	741		$	1,111		$	17,434
Charge-offs		—			(289	)		—		(59	)		(287	)		—			—			(635	)
Recoveries		—			164			2		3			111			—			—			280
Provision		(31	)		371			411		65			152			(60	)		(8	)		900

Ending balance at June 30, 2012	$	2,889		$	3,466		$	7,754	$	1,793		$	293		$	681		$	1,103		$	17,979

Amount of allowance for loan losses for loans deemed to be impaired	$	1,000		$	871		$	450	$	92		$	—		$	—		$	—		$	2,413

Amount of allowance for loan losses for loans not deemed to be impaired	$	1,889		$	2,595		$	7,304	$	1,701		$	293		$	681		$	1,103		$	15,566

Loans:
Ending balance	$	36,422		$	78,971		$	535,232	$	259,006		$	6,597		$	112,602		$	—		$	1,028,830

Loans deemed to be impaired	$	1,500		$	2,328		$	2,321	$	513		$	—		$	—		$	—		$	6,662

Loans not deemed to be impaired	$	34,922		$	76,643		$	532,911	$	258,493		$	6,597		$	112,602		$	—		$	1,022,168

Further information pertaining to the allowance for loan losses for six months ending June 30, 2012 follows:


	Construction and Land Development			Commercial and Industrial			Commercial Real Estate		Residential Real Estate			Consumer			Home Equity			Unallocated		Total
	(Dollars in thousands)
Allowance for loan losses:
Balance at December 31, 2012	$	2,893		$	3,139		$	6,566	$	1,886		$	356		$	704		$	1,030	$	16,574
Charge-offs		—			(399	)		—		(219	)		(441	)		—			—		(1,059	)
Recoveries		—			206			3		9			246			—			—		464
Provision		(4	)		520			1,185		117			132			(23	)		73		2,000

Ending balance at June 30, 2012	$	2,889		$	3,466		$	7,754	$	1,793		$	293		$	681		$	1,103	$	17,979

Amount of allowance for loan losses for loans deemed to be impaired	$	1,000		$	871		$	450	$	92		$	—		$	—		$	—	$	2,413

Amount of allowance for loan losses for loans not deemed to be impaired	$	1,889		$	2,595		$	7,304	$	1,701		$	293		$	681		$	1,103	$	15,566

Loans:
Ending balance	$	36,422		$	78,971		$	535,232	$	259,006		$	6,597		$	112,602		$	—	$	1,028,830

Loans deemed to be impaired	$	1,500		$	2,328		$	2,321	$	513		$	—		$	—		$	—	$	6,662

Loans not deemed to be impaired	$	34,922		$	76,643		$	532,911	$	258,493		$	6,597		$	112,602		$	—	$	1,022,168

The Company utilizes a six grade internal loan rating system for commercial real estate, construction and commercial loans as follows:

Loans rated 1-3 (Pass):

Loans in this category are considered “pass” rated loans with low to average risk.

Loans rated 4 (Monitor):

These loans represent classified loans that management is closely monitoring for credit quality. These loans have had or may have minor credit quality deterioration as of June 30, 2013 and December 31, 2012.

Loans rated 5 (Substandard):

Substandard loans represent classified loans that management is closely monitoring for credit quality. These loans have had more significant credit quality deterioration as of June 30, 2013 and December 31, 2012.

Loans rated 6 (Doubtful):

Doubtful loans represent classified loans that management is closely monitoring for credit quality. These loans had more significant credit quality deterioration as of June 30, 2013 and December 31, 2012 and are doubtful for full collection.

Impaired:

Impaired loans represent classified loans that management is closely monitoring for credit quality. A loan is classified as impaired when it is probable that the Company will be unable to collect all amounts due.

The following table presents the Company’s loans by risk rating at June 30, 2013.

Construction
and land
development

Commercial
and
industrial

Commercial
real
estate

(Dollars in thousands)

Grade:

1-3 (Pass)

26,027

100,344

602,932

4 (Monitor)

7,392

472

4,165

5 (Substandard)

—

6 (Doubtful)

—

Impaired

1,500

1,102

2,365

Total

34,919

101,918

609,462

The following table presents the Company’s loans by risk rating at December 31, 2012.


	Construction and land development		Commercial and industrial		Commercial real estate
	(Dollars in thousands)
Grade:
1-3(Pass)	$	29,719	$	86,587	$	569,760
4 (Monitor)		7,399		606		4,424
5 (Substandard)		—		—		—
6 (Doubtful)		—		—		—
Impaired		1,500		1,282		2,281

Total	$	38,618	$	88,475	$	576,465

The Company utilized payment performance as credit quality indicators for residential real estate, consumer and overdrafts, and the home equity portfolio. The indicators are depicted in the table “aging of past due loans,” below.

Further information pertaining to the allowance for loan losses at June 30, 2013 follows:

Accruing
30-89 Days
Past Due

Non
Accrual

Accrual
Greater
Than
90 Days

Total
Past Due

Current
Loans

Total

(Dollars in thousands)

Construction and land development

—

1,500

—

1,500

33,419

34,919

Commercial and industrial

1,173

444

—

1,617

100,301

101,918

Commercial real estate

5,240

357

—

5,597

603,865

609,462

Residential real estate

1,205

913

—

2,118

281,274

283,392

Consumer and overdrafts

—

8,092

8,123

Home equity

847

—

872

125,046

125,918

Total

8,475

3,260

—

11,735

1,151,997

1,163,732

Further information pertaining to the allowance for loan losses at December 31, 2012 follows:


	Accruing 30-89 Days Past Due		Non Accrual		Accrual Greater Than 90 Days		Total Past Due		Current Loans		Total
	(Dollars in thousands)
Construction and land development	$	—	$	1,500	$	—	$	1,500	$	37,118	$	38,618
Commercial and industrial		1,256		676				1,932		86,543		88,475
Commercial real estate		3,450		674		—		4,124		572,341		576,465
Residential real estate		864		1,597		—		2,461		279,396		281,857
Consumer and overdrafts		32		24		—		56		7,394		7,450
Home equity		1,088		—		—		1,088		117,835		118,923

Total	$	6,690	$	4,471	$	—	$	11,161	$	1,100,627	$	1,111,788

A loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. When a loan is impaired, the Company measures impairment based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except that as a practical expedient, the Company measures impairment based on a loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent. Loans are charged-off when management believes that the collectability of the loan’s principal is not probable. The specific factors that management considers in making the determination that the collectability of the loan’s principal is not probable include; the delinquency status of the loan, the fair value of the collateral, if secured, and the financial strength of the borrower and/or guarantors. For collateral dependent loans, the amount of the recorded investment in a loan that exceeds the fair value of the collateral is charged-off against the allowance for loan losses in lieu of an allocation of a specific allowance amount when such an amount has been identified definitively as uncollectible. The Company’s policy for recognizing interest income on impaired loans is contained within Note 1 of the consolidated financial statements.

The following is information pertaining to impaired loans for June 30, 2013:


	Carrying Value		Unpaid Principal Balance		Required Reserve		Average Carrying Value For 3 Months Ending 6/30/13		Average Carrying Value For 6 Months Ending 6/30/13		Interest Income Recognized for 3 Months Ending 6/30/13		Interest Income Recognized for 6 Months Ending 6/30/13
	(Dollars in thousands)
With no required reserve recorded:
Construction and land development	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial and industrial		206		235		—		385		451		1		1
Commercial real estate		122		122		—		113		136		—		—
Residential real estate		266		266		—		146		96		—		—
Consumer		—		—		—		—		—		—		—
Home equity		—		—		—		—		—		—		—

Total	$	594	$	623	$	—	$	644	$	683	$	1	$	1

With required reserve recorded:
Construction and land development	$	1,500	$	3,292	$	1,000	$	1,500	$	1,500	$		$	—
Commercial and industrial		896		1,128		92		866		856		8		17
Commercial real estate		2,243		2,330		204		2,169		2,143		20		46
Residential real estate		905		991		147		909		834		—		—
Consumer		—		—		—		—		—		—		—
Home equity		96		96		96		96		96		—		—

Total	$	5,640	$	7,837	$	1,539	$	5,540	$	5,429	$	28	$	63

Total:
Construction and land development	$	1,500	$	3,292	$	1,000	$	1,500	$	1,500	$		$	—
Commercial and industrial		1,102		1,363		92		1,251		1,307		9		18
Commercial real estate		2,365		2,452		204		2,282		2,279		20		46
Residential real estate		1,171		1,257		147		1,055		930		—		—
Consumer		—		—		—		—		—		—		—
Home equity		96		96		96		96		96		—		—

Total	$	6,234	$	8,460	$	1,539	$	6,184	$	6,112	$	29	$	64

The following is information pertaining to impaired loans for June 30, 2012:


	Carrying Value		Unpaid Principal Balance		Required Reserve		Average Carrying Value for 3 Months Ending 6/30/12		Average Carrying Value for 6 Months Ending 6/30/12		Interest Income Recognized For 3 Months Ending 6/30/12		Interest Income Recognized For 6 months Ending 6/30/12
	(Dollars in thousands)
With no required reserve recorded:
Construction and land development	$	—	$	—	$	—	$	—	$	643	$	—	$	—
Commercial and industrial		409		454		—		282		334		—		—
Commercial real estate		176		201		—		178		180		—		—
Residential real estate		31		32		—		32		97		—		—
Consumer		—		—		—		—		—		—		—
Home equity		—		—		—		—		—		—		—

Total	$	616	$	687	$	—	$	492	$	1,254	$	—	$	—

With required reserve recorded:
Construction and land development	$	1,500	$	3,292	$	1,000	$	1,500	$	857	$	—	$	—
Commercial and industrial		1,919		2,147		871		1,556		1,408		12		27
Commercial real estate		2,145		2,183		450		3,056		3,410		58		78
Residential real estate		482		482		92		482		657		—		1
Consumer		—		—		—		—		—		—		—
Home equity		—		—		—		—		—		—		—

Total	$	6,046	$	8,104	$	2,413	$	6,594	$	6,332	$	70	$	106

Total
Construction and land development	$	1,500	$	3,292	$	1,000	$	1,500	$	1,500	$	—	$	—
Commercial and industrial		2,328		2,601		871		1,838		1,742		12		27
Commercial real estate		2,321		2,384		450		3,234		3,590		58		78
Residential real estate		513		514		92		514		754		—		1
Consumer		—		—		—		—		—		—		—
Home equity		—		—		—		—		—		—		—

Total	$	6,662	$	8,791	$	2,413	$	7,086	$	7,586	$	70	$	106

There were no troubled debt restructurings occurring during the six month period ended June 30, 2013.