Loans | 12 Months Ended |
Dec. 31, 2013 |
Receivables [Abstract] | ' |
Loans | ' |
NOTE 5. LOANS |
Outstanding loan balances consist of the following at December 31, 2013, and December 31, 2012: |
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(Dollars in thousands) | | For the years ended December 31, | | | | | | | | | | | | | | | | | | | | | |
| | 2013 | | | 2012 | | | | | | | | | | | | | | | | | | | | | |
Commercial | | $ | 170,429 | | | $ | 232,276 | | | | | | | | | | | | | | | | | | | | | |
Real estate – construction loans | | | 18,545 | | | | 16,863 | | | | | | | | | | | | | | | | | | | | | |
Real estate – commercial (investor) | | | 205,384 | | | | 211,318 | | | | | | | | | | | | | | | | | | | | | |
Real estate – commercial (owner occupied) | | | 83,976 | | | | 75,085 | | | | | | | | | | | | | | | | | | | | | |
Real estate – ITIN loans | | | 56,101 | | | | 60,105 | | | | | | | | | | | | | | | | | | | | | |
Real estate – mortgage | | | 14,590 | | | | 18,452 | | | | | | | | | | | | | | | | | | | | | |
Real estate – equity lines | | | 45,462 | | | | 45,181 | | | | | | | | | | | | | | | | | | | | | |
Consumer | | | 3,472 | | | | 4,422 | | | | | | | | | | | | | | | | | | | | | |
Other | | | 36 | | | | 349 | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Gross portfolio loans | | $ | 597,995 | | | $ | 664,051 | | | | | | | | | | | | | | | | | | | | | |
Less: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Deferred loan fees, net | | | (303 | ) | | | (312 | ) | | | | | | | | | | | | | | | | | | | | |
Allowance for loan losses | | | 14,172 | | | | 11,103 | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net portfolio loans | | $ | 584,126 | | | $ | 653,260 | | | | | | | | | | | | | | | | | | | | | |
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Gross loan balances in the table above include net premiums of $53 thousand and net discounts of $24 thousand as of December 31, 2013, and December 31, 2012, respectively. |
Loans are reported as past due when any portion of the principal and interest are not received on the due date. The days past due will continue to increase for each day until full principal and interest are received (i.e. if payment is not received within thirty days of the due date, the loan will be considered thirty days past due; if payment is not received within sixty days of the due date, the loan will be considered sixty days past due, etc). Loans that become ninety days past due may be placed in nonaccrual status. |
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Age analysis of past due loans, segregated by class of loans, as of December 31, 2013, and December 31, 2012, were as follows: |
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(Dollars in thousand) | | 30-59 | | | 60-89 | | | Greater | | | Total Past | | | Current | | | Total | | | Recorded | |
Days Past | Days Past | Than 90 | Due | Investment > |
Due | Due | Days | | 90 Days and |
| | | | Accruing |
31-Dec-13 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 170,429 | | | $ | 170,429 | | | $ | 0 | |
Commercial real estate: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Construction | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 18,545 | | | | 18,545 | | | | 0 | |
Other | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 289,360 | | | | 289,360 | | | | 0 | |
Residential: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
1-4 family | | | 3,125 | | | | 436 | | | | 3,167 | | | | 6,728 | | | | 63,963 | | | | 70,691 | | | | 0 | |
Home equities | | | 131 | | | | 25 | | | | 0 | | | | 156 | | | | 45,306 | | | | 45,462 | | | | 0 | |
Consumer | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 3,508 | | | | 3,508 | | | | 0 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 3,256 | | | $ | 461 | | | $ | 3,167 | | | $ | 6,884 | | | $ | 591,111 | | | $ | 597,995 | | | $ | 0 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | 30-59 | | | 60-89 | | | Greater | | | Total Past | | | Current | | | Total | | | Recorded | |
Days Past | Days Past | Than 90 | Due | Investment > |
Due | Due | Days | | 90 Days and |
| | | | Accruing |
31-Dec-12 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial | | $ | 312 | | | $ | 59 | | | $ | 0 | | | $ | 371 | | | $ | 231,905 | | | $ | 232,276 | | | $ | 0 | |
Commercial real estate: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Construction | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 16,863 | | | | 16,863 | | | | 0 | |
Other | | | 1,265 | | | | 2,326 | | | | 8,343 | | | | 11,934 | | | | 274,469 | | | | 286,403 | | | | 0 | |
Residential: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
1-4 family | | | 2,758 | | | | 1,460 | | | | 5,019 | | | | 9,237 | | | | 69,320 | | | | 78,557 | | | | 0 | |
Home equities | | | 126 | | | | 23 | | | | 0 | | | | 149 | | | | 45,032 | | | | 45,181 | | | | 0 | |
Consumer | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 4,771 | | | | 4,771 | | | | 0 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 4,461 | | | $ | 3,868 | | | $ | 13,362 | | | $ | 21,691 | | | $ | 642,360 | | | $ | 664,051 | | | $ | 0 | |
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A loan is considered impaired when based on current information and events; the Company determines it is probable that it will not be able to collect all amounts due according to the original loan contract, including scheduled interest payments. Generally, when the Company identifies a loan as impaired, it measures the loan for potential impairment using discounted cash flows, except when the sole remaining source of the repayment for the loan is the liquidation of the collateral. In these cases, the current fair value of collateral is used, less selling costs. The starting point for determining the fair value of collateral is through obtaining external appraisals. Generally, external appraisals are updated every six to twelve months. The Company obtains appraisals from a pre-approved list of independent, third party, local appraisal firms. Approval and addition to the list is based on experience, reputation, character, consistency and knowledge of the respective real estate market. At a minimum, it is ascertained that the appraiser is: (1) currently licensed in the state in which the property is located, (2) is experienced in the appraisal of properties similar to the property being appraised, (3) is actively engaged in the appraisal work, (4) has knowledge of current real estate market conditions and financing trends, (5) is reputable, and (6) is not on Freddie Mac’s nor the Bank’s Exclusionary List of appraisers and brokers. In certain cases appraisals will be reviewed by another independent third party to ensure the quality of the appraisal and the expertise and independence of the appraiser. Upon receipt and review, an external appraisal is utilized to measure a loan for potential impairment. The Company’s impairment analysis documents the date of the appraisal used in the analysis, whether the officer preparing the report deems it current, and, if not, allows for internal valuation adjustments with justification. Typical justified adjustments might include discounts for continued market deterioration subsequent to appraisal date, adjustments for the release of collateral contemplated in the appraisal, or the value of other collateral or consideration not contemplated in the appraisal. An appraisal over one year old in most cases will be considered stale dated and an updated or new appraisal will be required. Any adjustments from appraised value to net realizable value are detailed and justified in the impairment analysis, which is reviewed and approved by the Company’s Chief Credit Officer. Although an external appraisal is the primary source to value collateral dependent loans, the Company may also utilize values obtained through purchase and sale agreements, negotiated short sales, broker price opinions, or the sales price of the note. These alternative sources of value are used only if deemed to be more representative of value based on updated information regarding collateral resolution. Impairment analyses are updated, reviewed and approved on a quarterly basis at or near the end of each reporting period. Based on these processes, the Company does not believe there are significant time lapses for the recognition of additional loan loss provisions or charge offs from the date they become known. |
The following table summarizes impaired loans by loan class as of December 31, 2013, and December 31, 2012: |
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(Dollars in thousands) | | As of December 31, 2013 | | | | | | | | | | | | | | | | | |
| | Recorded Investment | | | Unpaid Principal Balance | | | Related Allowance | | | | | | | | | | | | | | | | | |
With no related allowance recorded: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial real estate: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other | | $ | 15,736 | | | $ | 18,184 | | | $ | 0 | | | | | | | | | | | | | | | | | |
Residential: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
1-4 family | | | 3,714 | | | | 6,091 | | | | 0 | | | | | | | | | | | | | | | | | |
Home equities | | | 539 | | | | 545 | | | | 0 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total with no related allowance recorded | | $ | 19,989 | | | $ | 24,820 | | | $ | 0 | | | | | | | | | | | | | | | | | |
With an allowance recorded: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial | | $ | 6,590 | | | $ | 6,808 | | | $ | 2,988 | | | | | | | | | | | | | | | | | |
Commercial real estate: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other | | | 6,011 | | | | 6,020 | | | | 814 | | | | | | | | | | | | | | | | | |
Residential: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
1-4 family | | | 8,805 | | | | 9,804 | | | | 963 | | | | | | | | | | | | | | | | | |
Home equities | | | 746 | | | | 746 | | | | 229 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total with an allowance recorded | | $ | 22,152 | | | $ | 23,378 | | | $ | 4,994 | | | | | | | | | | | | | | | | | |
Subtotal: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial | | $ | 6,590 | | | $ | 6,808 | | | $ | 2,988 | | | | | | | | | | | | | | | | | |
Commercial real estate | | $ | 21,747 | | | $ | 24,204 | | | $ | 814 | | | | | | | | | | | | | | | | | |
Residential | | $ | 13,804 | | | $ | 17,186 | | | $ | 1,192 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total impaired loans | | $ | 42,141 | | | $ | 48,198 | | | $ | 4,994 | | | | | | | | | | | | | | | | | |
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(Dollars in thousands) | | As of December 31, 2012 | | | | | | | | | | | | | | | | | |
| | Recorded Investment | | | Unpaid Principal Balance | | | Related Allowance | | | | | | | | | | | | | | | | | |
With no related allowance recorded: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial | | $ | 109 | | | $ | 109 | | | $ | 0 | | | | | | | | | | | | | | | | | |
Commercial real estate: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other | | | 24,479 | | | | 29,558 | | | | 0 | | | | | | | | | | | | | | | | | |
Residential: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
1-4 family | | | 5,809 | | | | 8,630 | | | | 0 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total with no related allowance recorded | | $ | 30,397 | | | $ | 38,297 | | | $ | 0 | | | | | | | | | | | | | | | | | |
With an allowance recorded: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial | | $ | 3,349 | | | $ | 3,370 | | | $ | 1,051 | | | | | | | | | | | | | | | | | |
Commercial real estate: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other | | | 4,598 | | | | 4,598 | | | | 194 | | | | | | | | | | | | | | | | | |
Residential: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
1-4 family | | | 8,755 | | | | 9,603 | | | | 980 | | | | | | | | | | | | | | | | | |
Home equities | | | 561 | | | | 561 | | | | 76 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total with an allowance recorded | | $ | 17,263 | | | $ | 18,132 | | | $ | 2,301 | | | | | | | | | | | | | | | | | |
Subtotal: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial | | $ | 3,458 | | | $ | 3,479 | | | $ | 1,051 | | | | | | | | | | | | | | | | | |
Commercial real estate | | $ | 29,077 | | | $ | 34,156 | | | $ | 194 | | | | | | | | | | | | | | | | | |
Residential | | $ | 15,125 | | | $ | 18,794 | | | $ | 1,056 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total impaired loans | | $ | 47,660 | | | $ | 56,429 | | | $ | 2,301 | | | | | | | | | | | | | | | | | |
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Had nonaccrual loans performed in accordance with their contractual terms, the Company would have recognized additional interest income, net of tax, of approximately $722 thousand, $759 thousand, and $354 thousand for the years ended December 31, 2013, 2012, and 2011, respectively. |
Nonaccrual loans, segregated by loan class, were as follows: |
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(Dollars in thousands) | | For the years ended December 31, | | | | | | | | | | | | | | | | | | | | | |
| | 2013 | | | 2012 | | | | | | | | | | | | | | | | | | | | | |
Commercial | | $ | 6,527 | | | $ | 2,935 | | | | | | | | | | | | | | | | | | | | | |
Commercial real estate: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other | | | 14,539 | | | | 24,008 | | | | | | | | | | | | | | | | | | | | | |
Residential: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
1-4 family | | | 8,217 | | | | 11,630 | | | | | | | | | | | | | | | | | | | | | |
Home equities | | | 513 | | | | 0 | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 29,796 | | | $ | 38,573 | | | | | | | | | | | | | | | | | | | | | |
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The following table summarizes average recorded investment and interest income recognized on impaired loans by loan class for the years ended December 31, 2013, 2012 and 2011: |
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(Dollars in thousands) | | 2013 | | | 2012 | | | 2011 | | | | | |
| | Average | | | Interest | | | Average | | | Interest | | | Average | | | Interest | | | | | |
Recorded | Income | Recorded | Income | Recorded | Income | | | | |
Investment | Recognized | Investment | Recognized | Investment | Recognized | | | | |
Commercial | | $ | 7,239 | | | $ | 82 | | | $ | 1,211 | | | $ | 7 | | | $ | 1,184 | | | $ | 1 | | | | | |
Commercial real estate: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Construction | | | 0 | | | | 0 | | | | 82 | | | | 0 | | | | 1,087 | | | | 3 | | | | | |
Other | | | 24,186 | | | | 291 | | | | 22,486 | | | | 385 | | | | 17,181 | | | | 347 | | | | | |
Residential: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
1-4 family | | | 13,971 | | | | 80 | | | | 16,036 | | | | 75 | | | | 17,778 | | | | 163 | | | | | |
Home equities | | | 875 | | | | 26 | | | | 678 | | | | 15 | | | | 1,262 | | | | 67 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 46,271 | | | $ | 479 | | | $ | 40,493 | | | $ | 482 | | | $ | 38,492 | | | $ | 581 | | | | | |
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The impaired loans for which these interest income amounts were recognized primarily relate to accruing restructured loans. |
Loans are reported as troubled debt restructurings (TDR) when the Bank grants a concession(s) to a borrower experiencing financial difficulties that it would not otherwise consider. Examples of such concessions include a reduction in the loan rate, forgiveness of principal or accrued interest, extending the maturity date(s) significantly, or providing a lower interest rate than would be normally available for a transaction of similar risk. As a result of these concessions, restructured loans are impaired as the Bank will not collect all amounts due, both principal and interest, in accordance with the terms of the original loan agreement. Impairment reserves on non-collateral dependent restructured loans are measured by comparing the present value of expected future cash flows of the restructured loans, discounted at the effective interest rate of the original loan agreement. These impairment reserves are recognized as a specific component to be provided for in the ALLL. |
The types of modifications offered can generally be described in the following categories: |
Rate – A modification in which the interest rate is modified. |
Rate and Maturity – A modification in which the interest rate is modified and maturity date, timing of payments or frequency of payments is modified. |
Rate and Payment Deferral – A modification in which the interest rate is modified and a portion of the principal is deferred. |
Maturity – A modification in which the maturity date, timing of payments, or frequency of payments is modified. |
Payment Deferral – A modification in which a portion of the principal is deferred. |
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The following tables present the period ending balances of newly restructured loans and the types of modifications that occurred during the years ended December 31, 2013, 2012 and 2011: |
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(Dollars in thousands) | | For the year ended December 31, 2013 | | | | | |
| | Rate | | | Rate & | | | Rate & | | | Maturity | | | Payment | | | Total | | | | | |
Maturity | Payment | Deferral | | | | |
| Deferral | | | | | |
Commercial | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 6,093 | | | $ | 0 | | | $ | 6,093 | | | | | |
Commercial real estate: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other | | | 0 | | | | 6,029 | | | | 0 | | | | 918 | | | | 2,129 | | | | 9,076 | | | | | |
Residential: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
1-4 family | | | 550 | | | | 205 | | | | 539 | | | | 0 | | | | 0 | | | | 1,294 | | | | | |
Home equities | | | 0 | | | | 161 | | | | 0 | | | | 0 | | | | 0 | | | | 161 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 550 | | | $ | 6,395 | | | $ | 539 | | | $ | 7,011 | | | $ | 2,129 | | | $ | 16,624 | | | | | |
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(Dollars in thousands) | | For the year ended December 31, 2012 | | | | | |
| | Rate | | | Rate & | | | Rate & | | | Maturity | | | Payment | | | Total | | | | | |
Maturity | Payment | Deferral | | | | |
| Deferral | | | | | |
Commercial | | $ | 0 | | | $ | 17 | | | $ | 0 | | | $ | 104 | | | $ | 453 | | | $ | 574 | | | | | |
Commercial real estate: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other | | | 0 | | | | 740 | | | | 0 | | | | 2,838 | | | | 1,131 | | | | 4,709 | | | | | |
Residential: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
1-4 family | | | 1,622 | | | | 0 | | | | 367 | | | | 0 | | | | 0 | | | | 1,989 | | | | | |
Home equities | | | 55 | | | | 209 | | | | 0 | | | | 0 | | | | 0 | | | | 264 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 1,677 | | | $ | 966 | | | $ | 367 | | | $ | 2,942 | | | $ | 1,584 | | | $ | 7,536 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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(Dollars in thousands) | | For the year ended December 31, 2011 | | | | | | | | | | | | | |
| | Rate | | | Rate & | | | Payment | | | Total | | | | | | | | | | | | | |
Maturity | Deferral | | | | | | | | | | | | |
Commercial | | $ | 5,329 | | | $ | 0 | | | $ | 49 | | | $ | 5,378 | | | | | | | | | | | | | |
Commercial real estate: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other | | | 6,206 | | | | 0 | | | | 2,088 | | | | 8,294 | | | | | | | | | | | | | |
Residential: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
1-4 family | | | 4,223 | | | | 43 | | | | 0 | | | | 4,266 | | | | | | | | | | | | | |
Home equities | | | 297 | | | | 0 | | | | 0 | | | | 297 | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 16,055 | | | $ | 43 | | | $ | 2,137 | | | $ | 18,235 | | | | | | | | | | | | | |
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The tables below provide information regarding the number of loans where the contractual terms have been restructured in a manner which grants a concession to a borrower experiencing financial difficulties for the years ended December 31, 2013, 2012, and 2011. |
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(Dollars in thousands) | | 2013 | | | | | | | | | | | | | | | | | |
Troubled Debt Restructurings | | Number of | | | Pre-Modification | | | Post-Modification | | | | | | | | | | | | | | | | | |
Contracts | Outstanding Recorded | Outstanding Recorded | | | | | | | | | | | | | | | | |
| Investment | Investment | | | | | | | | | | | | | | | | |
Commercial | | | 3 | | | $ | 6,837 | | | $ | 6,638 | | | | | | | | | | | | | | | | | |
Commercial real estate: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other | | | 4 | | | | 9,050 | | | | 8,604 | | | | | | | | | | | | | | | | | |
Residential: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
1-4 family | | | 15 | | | | 1,286 | | | | 1,360 | | | | | | | | | | | | | | | | | |
Home equities | | | 2 | | | | 165 | | | | 166 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | | 24 | | | $ | 17,338 | | | $ | 16,768 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | 2012 | | | | | | | | | | | | | | | | | |
Troubled Debt Restructurings | | Number of | | | Pre-Modification | | | Post-Modification | | | | | | | | | | | | | | | | | |
Contracts | Outstanding Recorded | Outstanding Recorded | | | | | | | | | | | | | | | | |
| Investment | Investment | | | | | | | | | | | | | | | | |
Commercial | | | 4 | | | $ | 579 | | | $ | 579 | | | | | | | | | | | | | | | | | |
Commercial real estate: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other | | | 4 | | | | 4,968 | | | | 4,968 | | | | | | | | | | | | | | | | | |
Residential: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
1-4 family | | | 18 | | | | 1,974 | | | | 2,020 | | | | | | | | | | | | | | | | | |
Home equities | | | 4 | | | | 261 | | | | 268 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | | 30 | | | $ | 7,782 | | | $ | 7,835 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | 2011 | | | | | | | | | | | | | | | | | |
Troubled Debt Restructurings | | Number of | | | Pre-Modification | | | Post-Modification | | | | | | | | | | | | | | | | | |
Contracts | Outstanding Recorded | Outstanding Recorded | | | | | | | | | | | | | | | | |
| Investment | Investment | | | | | | | | | | | | | | | | |
Commercial | | | 2 | | | $ | 5,390 | | | $ | 5,390 | | | | | | | | | | | | | | | | | |
Commercial real estate: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other | | | 5 | | | | 8,309 | | | | 8,309 | | | | | | | | | | | | | | | | | |
Residential: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
1-4 family | | | 44 | | | | 4,792 | | | | 4,799 | | | | | | | | | | | | | | | | | |
Home equities | | | 5 | | | | 299 | | | | 303 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | | 56 | | | $ | 18,790 | | | $ | 18,801 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At December 31, 2013 and December 31, 2012, impaired loans of $8.8 million and $8.6 million were classified as performing restructured loans, respectively. The restructurings were granted in response to borrower financial difficulty, and generally provide for a temporary modification of loan repayment terms. |
In order for a restructured loan to be considered performing and on accrual status, the loan’s collateral coverage generally will be greater than or equal to 100% of the loan balance, the loan is current on payments, and the borrower must either prefund an interest reserve or demonstrate the ability to make payments from a verified source of cash flow. The Company had no obligations to lend additional funds on the restructured loans as of December 31, 2013 and December 2012, respectively. |
As of December 31, 2013, the Company had $33.4 million in TDRs compared to $24.7 million as of December 31, 2012. As of December 31, 2013, the Company had one hundred and eighteen restructured loans that qualified as TDRs, of which one hundred and two were performing according to their restructured terms. TDRs represented 5.59% of gross portfolio loans as of December 31, 2013, compared with 3.71% at December 31, 2012. |
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The following table represents loans modified as TDRs within the previous 12 months for which there was a payment default during the twelve months ended December 31, 2013, 2012 and 2011, respectively: |
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | 2013 | | | 2012 | | | 2011 | | | | | |
Troubled Debt Restructurings that Subsequently Defaulted | | Number of | | | Recorded | | | Number of | | | Recorded | | | Number of | | | Recorded | | | | | |
Contracts | Investment | Contracts | Investment | Contracts | Investment | | | | |
Residential: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
1-4 family | | | 9 | | | | 591 | | | | 6 | | | | 677 | | | | 5 | | | $ | 438 | | | | | |
Home equities | | | | | | | | | | | | | | | | | | | 1 | | | | 39 | | | | | |
Commercial real estate: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other | | | | | | | | | | | 1 | | | $ | 1,000 | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | | 9 | | | $ | 591 | | | | 7 | | | $ | 1,677 | | | | 6 | | | $ | 477 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The foundation or primary factor in determining the appropriate credit quality indicators is the degree of a debtor’s willingness and ability to perform as agreed. The Company defines a performing loan as a loan where any installment of principal or interest is not 90 days or more past due, and management believes the ultimate collection of original contractual principal and interest is likely. The Company defines a nonperforming loan as an impaired loan which may be on nonaccrual, 90 days past due and still accruing, or has been restructured and is not in compliance with its modified terms, and our ultimate collection of original contractual principal and interest is uncertain. |
Performing and nonperforming loans, segregated by class of loans, are as follows: |
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | December 31, 2013 | | | | | | | | | | | | | | | | | |
| | Performing | | | Nonperforming | | | Total | | | | | | | | | | | | | | | | | |
Commercial | | $ | 163,902 | | | $ | 6,527 | | | $ | 170,429 | | | | | | | | | | | | | | | | | |
Commercial real estate: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Construction | | | 18,545 | | | | 0 | | | | 18,545 | | | | | | | | | | | | | | | | | |
Other | | | 274,821 | | | | 14,539 | | | | 289,360 | | | | | | | | | | | | | | | | | |
Residential: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
1-4 family | | | 62,474 | | | | 8,217 | | | | 70,691 | | | | | | | | | | | | | | | | | |
Home equities | | | 44,949 | | | | 513 | | | | 45,462 | | | | | | | | | | | | | | | | | |
Consumer | | | 3,508 | | | | 0 | | | | 3,508 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 568,199 | | | $ | 29,796 | | | $ | 597,995 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | December 31, 2012 | | | | | | | | | | | | | | | | | |
| | Performing | | | Nonperforming | | | Total | | | | | | | | | | | | | | | | | |
Commercial | | $ | 229,341 | | | $ | 2,935 | | | $ | 232,276 | | | | | | | | | | | | | | | | | |
Commercial real estate: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Construction | | | 16,863 | | | | 0 | | | | 16,863 | | | | | | | | | | | | | | | | | |
Other | | | 262,395 | | | | 24,008 | | | | 286,403 | | | | | | | | | | | | | | | | | |
Residential: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
1-4 family | | | 66,927 | | | | 11,630 | | | | 78,557 | | | | | | | | | | | | | | | | | |
Home equities | | | 45,181 | | | | 0 | | | | 45,181 | | | | | | | | | | | | | | | | | |
Consumer | | | 4,771 | | | | 0 | | | | 4,771 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 625,478 | | | $ | 38,573 | | | $ | 664,051 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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In conjunction with evaluating the performing versus nonperforming nature of the Company’s loan portfolio, management evaluates the following credit risk and other relevant factors in determining the appropriate credit quality indicator (grade) for each loan class: |
Pass Grade - Borrowers classified as Pass Grades specifically demonstrate: |
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| • | | Strong Cash Flows – borrower’s cash flows must meet or exceed the Company’s minimum debt service coverage ratio. | | | | | | | | | | | | | | | | | | | | | | | | | |
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| • | | Collateral Margin – generally, the borrower must have pledged an acceptable collateral class with an adequate collateral margin. | | | | | | | | | | | | | | | | | | | | | | | | | |
Those borrowers who qualify for unsecured loans must fully demonstrate above average cash flows and strong secondary sources of repayment to mitigate the lack of unpledged collateral. |
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| • | | Qualitative Factors – in addition to meeting the Company’s minimum cash flow and collateral requirements, a number of other qualitative factors are also factored into assigning a pass grade including the borrower’s level of leverage (debt to equity), prospects, history and experience in their industry, credit history, and any other relevant factors including a borrower’s character. | | | | | | | | | | | | | | | | | | | | | | | | | |
Watch Grade – Generally, borrowers classified as Watch exhibit some level of deterioration in one or more of the following: |
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| • | | Adequate Cash Flows – borrowers in this category demonstrate adequate cash flows and debt service coverage ratios, but also exhibit one or more less than positive conditions such as declining trends in the level of cash flows, increasing or sole reliance on secondary sources of cash flows, and/or do not meet the Company’s minimum debt service coverage ratio. However, cash flow remains at acceptable levels to meet debt service requirements. | | | | | | | | | | | | | | | | | | | | | | | | | |
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| • | | Adequate Collateral Margin – the collateral securing the debt remains adequate but also exhibits a declining trend in value or expected volatility due to macro or industry specific conditions. The current collateral value, less selling costs, remains adequate to cover the outstanding debt under a liquidation scenario. | | | | | | | | | | | | | | | | | | | | | | | | | |
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| • | | Qualitative Factors – while the borrower’s cash flow and collateral margin generally remain adequate, one or more quantitative and qualitative factors may also factor into assigning a Watch Grade including the borrower’s level of leverage (debt to equity), deterioration in prospects, limited experience in their industry, newly formed company, overall deterioration in the industry, negative trends or recent events in a borrower’s credit history, deviation from core business, and any other relevant factors. | | | | | | | | | | | | | | | | | | | | | | | | | |
Special Mention Grade – Generally, borrowers classified as Special Mention exhibit a greater level of deterioration than Watch graded loans and warrant management’s close attention. If left uncorrected, the potential weaknesses could threaten repayment prospects in the future. Special Mention loans are not adversely classified and do not expose the Company to sufficient risk to warrant an adverse risk grade. |
The following represents potential characteristics of a Special Mention Grade but do not necessarily generate automatic reclassification into this loan grade: |
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| • | | Adequate Cash Flows – borrowers in this category demonstrate adequate cash flows and debt service coverage ratios, but also reflect adverse trends in operations or continuing financial deterioration that, if it does not stabilize and reverse in a reasonable timeframe, retirement of the debt may be jeopardized. | | | | | | | | | | | | | | | | | | | | | | | | | |
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| • | | Adequate Collateral Margin – the collateral securing the debt remains adequate but also exhibits a continuing declining trend in value or volatility due to macro or industry specific conditions. The current collateral value, less selling costs, remains adequate, but should the negative collateral trend continue, the full recovery of the outstanding debt under a liquidation scenario could be jeopardized. | | | | | | | | | | | | | | | | | | | | | | | | | |
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| • | | Qualitative Factors – while the borrower’s cash flow and/or collateral margin continue to deteriorate but generally remain adequate, one or more quantitative and qualitative factors may also be factoring into assigning a Special Mention Grade including inadequate or incomplete loan documentation, perfection of collateral, inadequate credit structure, borrower unable or unwilling to produce current and adequate financial information, and any other relevant factors. | | | | | | | | | | | | | | | | | | | | | | | | | |
Substandard Grade – A Substandard credit is inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. Substandard credits have a well-defined weakness or weaknesses that jeopardize the liquidation or timely collection of the debt. Substandard credits are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. However, a potential loss does not have to be recognizable in an individual credit for it to be considered a substandard credit. As such, substandard credits may or may not be classified as impaired. |
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The following represents, but is not limited to, the potential characteristics of a Substandard Grade and do not necessarily generate automatic reclassification into this loan grade: |
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| • | | Sustained or substantial deteriorating financial trends, | | | | | | | | | | | | | | | | | | | | | | | | | |
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| • | | Unresolved management problems, | | | | | | | | | | | | | | | | | | | | | | | | | |
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| • | | Collateral is insufficient to repay debt; collateral is not sufficiently supported by independent sources, such as asset-based financial audits, appraisals, or equipment evaluations, | | | | | | | | | | | | | | | | | | | | | | | | | |
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| • | | Improper perfection of lien position, which is not readily correctable, | | | | | | | | | | | | | | | | | | | | | | | | | |
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| • | | Unanticipated and severe decline in market values, | | | | | | | | | | | | | | | | | | | | | | | | | |
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| • | | High reliance on secondary source of repayment, | | | | | | | | | | | | | | | | | | | | | | | | | |
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| • | | Legal proceedings, such as bankruptcy or a divorce, which has substantially decreased the borrower’s capacity to repay the debt, | | | | | | | | | | | | | | | | | | | | | | | | | |
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| • | | Fraud committed by the borrower, | | | | | | | | | | | | | | | | | | | | | | | | | |
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| • | | IRS liens that take precedence, | | | | | | | | | | | | | | | | | | | | | | | | | |
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| • | | Forfeiture statutes for assets involved in criminal activities, | | | | | | | | | | | | | | | | | | | | | | | | | |
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| • | | Protracted repayment terms outside of policy that are for longer than the same type of credit in the Company portfolio, | | | | | | | | | | | | | | | | | | | | | | | | | |
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| • | | Any other relevant quantitative or qualitative factor that negatively affects the current net worth and paying capacity of the borrower or of the collateral pledged, if any. | | | | | | | | | | | | | | | | | | | | | | | | | |
Doubtful Grade – A credit risk rated as Doubtful has all the weaknesses inherent in a credit classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. As such, all doubtful loans are considered impaired. The possibility of loss is extremely high, but because of certain pending factors that may work to the advantage and strengthening of the credit, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors may include, but are not limited to: |
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| • | | Proposed merger(s), | | | | | | | | | | | | | | | | | | | | | | | | | |
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| • | | Acquisition or liquidation procedures, | | | | | | | | | | | | | | | | | | | | | | | | | |
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| • | | Capital injection, | | | | | | | | | | | | | | | | | | | | | | | | | |
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| • | | Perfecting liens on additional collateral, | | | | | | | | | | | | | | | | | | | | | | | | | |
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| • | | Refinancing plans. | | | | | | | | | | | | | | | | | | | | | | | | | |
Generally, a Doubtful grade does not remain outstanding for a period greater than six months. After six months, the pending events should have either occurred or not occurred. The credit grade should have improved or the principal balance charged against the ALLL. |
Credit grade definitions, including qualitative factors, for all credit grades are reviewed and approved annually by the Company’s Loan Committee. The following table summarizes internal risk rating by loan class as of December 31, 2013, and December 31, 2012: |
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | December 31, 2013 | | | | | |
| | Pass | | | Watch | | | Special Mention | | | Substandard | | | Doubtful | | | Total | | | | | |
Commercial | | $ | 131,042 | | | $ | 24,274 | | | $ | 7,177 | | | $ | 7,936 | | | $ | 0 | | | $ | 170,429 | | | | | |
Commercial real estate: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Construction | | | 18,048 | | | | 497 | | | | 0 | | | | 0 | | | | 0 | | | | 18,545 | | | | | |
Other | | | 247,656 | | | | 18,343 | | | | 2,309 | | | | 21,052 | | | | 0 | | | | 289,360 | | | | | |
Residential: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
1-4 family | | | 56,832 | | | | 1,340 | | | | 0 | | | | 12,519 | | | | 0 | | | | 70,691 | | | | | |
Home equities | | | 41,147 | | | | 2,311 | | | | 25 | | | | 1,979 | | | | 0 | | | | 45,462 | | | | | |
Consumer | | | 3,307 | | | | 38 | | | | 130 | | | | 33 | | | | 0 | | | | 3,508 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 498,032 | | | $ | 46,803 | | | $ | 9,641 | | | $ | 43,519 | | | $ | 0 | | | $ | 597,995 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | December 31, 2012 | | | | | |
| | Pass | | | Watch | | | Special Mention | | | Substandard | | | Doubtful | | | Total | | | | | |
Commercial | | $ | 203,280 | | | $ | 16,330 | | | $ | 6,850 | | | $ | 5,816 | | | $ | 0 | | | $ | 232,276 | | | | | |
Commercial real estate: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Construction | | | 16,790 | | | | 73 | | | | 0 | | | | 0 | | | | 0 | | | | 16,863 | | | | | |
Other | | | 225,772 | | | | 30,421 | | | | 897 | | | | 29,313 | | | | 0 | | | | 286,403 | | | | | |
Residential: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
1-4 family | | | 62,356 | | | | 1,180 | | | | 457 | | | | 14,564 | | | | 0 | | | | 78,557 | | | | | |
Home equities | | | 40,935 | | | | 2,666 | | | | 0 | | | | 1,580 | | | | 0 | | | | 45,181 | | | | | |
Consumer | | | 4,376 | | | | 354 | | | | 0 | | | | 41 | | | | 0 | | | | 4,771 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 553,509 | | | $ | 51,024 | | | $ | 8,204 | | | $ | 51,314 | | | $ | 0 | | | $ | 664,051 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The following tables below summarize the Allowance for Credit Losses and Recorded Investment in Financing Receivables as of December 31, 2013, and December 31, 2012: |
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | As of December 31, 2013 | | | | | |
| | Commercial | | | Commercial | | | Consumer | | | Residential | | | Unallocated | | | Total | | | | | |
Real Estate | | | | |
Allowance for credit losses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Beginning balance | | $ | 4,168 | | | $ | 2,783 | | | $ | 28 | | | $ | 3,335 | | | $ | 789 | | | $ | 11,103 | | | | | |
Charge offs | | | (882 | ) | | | (230 | ) | | | (25 | ) | | | (1,633 | ) | | | 0 | | | | (2,770 | ) | | | | |
Recoveries | | | 58 | | | | 2,483 | | | | 1 | | | | 547 | | | | 0 | | | | 3,089 | | | | | |
Provision | | | 3,713 | | | | (2,252 | ) | | | 31 | | | | 244 | | | | 1,014 | | | | 2,750 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ending balance | | $ | 7,057 | | | $ | 2,784 | | | $ | 35 | | | $ | 2,493 | | | $ | 1,803 | | | $ | 14,172 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ending balance: individually evaluated for impairment | | $ | 2,988 | | | $ | 814 | | | $ | 0 | | | $ | 1,192 | | | $ | 0 | | | $ | 4,994 | | | | | |
Ending balance: collectively evaluated for impairment | | $ | 4,069 | | | $ | 1,970 | | | $ | 35 | | | $ | 1,301 | | | $ | 1,803 | | | $ | 9,178 | | | | | |
Financing receivables | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ending balance | | $ | 170,429 | | | $ | 307,905 | | | $ | 3,508 | | | $ | 116,153 | | | $ | 0 | | | $ | 597,995 | | | | | |
Ending balance individually evaluated for impairment | | $ | 6,590 | | | $ | 21,747 | | | $ | 0 | | | $ | 13,804 | | | $ | 0 | | | $ | 42,141 | | | | | |
Ending balance collectively evaluated for impairment | | $ | 163,839 | | | $ | 286,158 | | | $ | 3,508 | | | $ | 102,349 | | | $ | 0 | | | $ | 555,854 | | | | | |
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | As of December 31, 2012 | | | | | |
| | Commercial | | | Commercial | | | Consumer | | | Residential | | | Unallocated | | | Total | | | | | |
Real Estate | | | | |
Allowance for credit losses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Beginning balance | | $ | 2,773 | | | $ | 3,796 | | | $ | 33 | | | $ | 3,690 | | | $ | 330 | | | $ | 10,622 | | | | | |
Charge offs | | | (604 | ) | | | (6,541 | ) | | | (5 | ) | | | (2,712 | ) | | | 0 | | | | (9,862 | ) | | | | |
Recoveries | | | 118 | | | | 13 | | | | 2 | | | | 810 | | | | 0 | | | | 943 | | | | | |
Provision | | | 1,881 | | | | 5,515 | | | | (2 | ) | | | 1,547 | | | | 459 | | | | 9,400 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ending balance | | $ | 4,168 | | | $ | 2,783 | | | $ | 28 | | | $ | 3,335 | | | $ | 789 | | | $ | 11,103 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ending balance: individually evaluated for impairment | | $ | 1,051 | | | $ | 194 | | | $ | 0 | | | $ | 1,056 | | | $ | 0 | | | $ | 2,301 | | | | | |
Ending balance: collectively evaluated for impairment | | $ | 3,117 | | | $ | 2,589 | | | $ | 28 | | | $ | 2,279 | | | $ | 789 | | | $ | 8,802 | | | | | |
Financing receivables | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ending balance | | $ | 232,276 | | | $ | 303,266 | | | $ | 4,771 | | | $ | 123,738 | | | $ | 0 | | | $ | 664,051 | | | | | |
Ending balance individually evaluated for impairment | | $ | 3,458 | | | $ | 29,077 | | | $ | 0 | | | $ | 15,125 | | | $ | 0 | | | $ | 47,660 | | | | | |
Ending balance collectively evaluated for impairment | | $ | 228,818 | | | $ | 274,189 | | | $ | 4,771 | | | $ | 108,613 | | | $ | 0 | | | $ | 616,391 | | | | | |
The ALLL totaled $14.2 million or 2.37% of total portfolio loans at December 31, 2013 and $11.1 million or 1.67% at December 31, 2012. The related allowance allocation for the Individual Tax Identification Number (ITIN) portfolio which is included in the residential classification was $1.3 million and $1.5 million at December 31, 2013, and December 31, 2012, respectively. In addition, as of December 31, 2013, the Company had $192 million in commitments to extend credit, and recorded a reserve for unfunded commitments of $698 thousand in other liabilities line item in the Consolidated Balance Sheets. |
During 2012, pursuant to ASC 860, Transfers and Servicing, and in connection with the sale of our former mortgage subsidiary, the Company reclassified mortgage loans held-for-sale to secured borrowings. Accordingly, at December 31, 2012, $65.1 million in loans held-for-sale were reclassified as a secured commercial loan, and were included in portfolio loan balances at December 31, 2012. At the time of the transfer, management determined that no additional allowance reserves were necessary due to the short term nature of the agreement, and insignificant loss histories of this loan class. As of December 31, 2013, the secured commercial borrowing did not have an outstanding balance, a decrease of $65.1 million compared to December 31, 2012. The decrease in the secured commercial borrowing line is primarily attributable to increases in market interest rates resulting in lower loan volume. Consequently, the ALLL to total loans ratio reported at December 31, 2013, increased significantly compared to the reported ratio at December 31, 2012. |
The ALLL is based upon estimates of loan losses and is maintained at a level considered adequate to provide for probable losses inherent in the outstanding loan portfolio. The Company’s ALLL methodology significantly incorporates management’s current judgments, and reflects the reserve amount that is necessary for estimated loan losses and risks inherent in the loan portfolio in accordance with ASC Topic 450 Contingencies and ASC Topic 310 Receivables. |
The allowance is increased by provisions charged to expense and reduced by net charge offs. In periodic evaluations of the adequacy of the allowance balance, management considers our past loan loss experience by type of credit, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, current economic conditions and other factors. We formally assess the adequacy of the ALLL on a monthly basis. These assessments include the periodic re-grading of classified loans based on changes in their individual credit characteristics including delinquency, seasoning, recent financial performance of the borrower, economic factors, changes in the interest rate environment and other factors as warranted. Loans are initially graded when originated. They are reviewed as they are renewed, when there is a new loan to the same borrower and/or when identified facts demonstrate heightened risk of default. Confirmation of the quality of our grading process is obtained by independent reviews conducted by outside consultants specifically hired for this purpose and by periodic examination by various bank regulatory agencies. |
Management monitors delinquent loans continuously and identifies problem loans to be evaluated individually for impairment testing. For loans that are determined impaired, formal impairment measurement is performed at least quarterly on a loan-by-loan basis. |
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Our method for assessing the appropriateness of the allowance includes specific allowances for identified problem loans, an allowance factor for categories of credits and allowances for changing environmental factors (e.g., portfolio trends, concentration of credit, growth, economic factors). Allowances for identified problem loans are based on specific analysis of individual credits. Loss estimation factors for loan categories are based on analysis of local economic factors applicable to each loan category. Allowances for changing environmental factors are management’s best estimate of the probable impact these changes have had on the loan portfolio as a whole. |
The ALLL was adequately funded as of December 31, 2013. There is, however, no assurance that future loan losses will not exceed the levels provided for in the ALLL and could possibly result in additional charges to the provision for loan losses. In addition, bank regulatory authorities, as part of their periodic examination of the Bank, may require additional charges to the provision for loan losses in future periods if warranted as a result of their review. |
Approximately 70% of our gross loan portfolio is secured by real estate, and a significant decline in real estate market values may require an increase in the ALLL. The recent U.S. recession, the housing market downturn, and declining real estate values in our markets have negatively impacted aspects of our residential development, commercial real estate, commercial construction and commercial loan portfolios. A continued deterioration in our markets may adversely affect our loan portfolio and may lead to additional charges to the provision for loan losses. |
All impaired loans are individually evaluated for impairment. If the measurement of each impaired loans’ value is less than the recorded investment in the loan, we recognize this impairment and adjust the carrying value of the loan to fair value through the ALLL. This can be accomplished by charging-off the impaired portion of the loan or establishing a specific component within the ALLL. If the Bank determines the sources of repayment will not result in a reasonable probability that the carrying value of a loan can be recovered, the amount of a loan’s specific impairment is charged off against the ALLL. Due to the recent decline in real estate values in our markets and the deterioration of the U.S. economy, it became increasingly likely that impairment reserves on collateral dependent loans, particularly those relating to real estate, would not be recoverable and represented a confirmed loss. As a result, the Company began recognizing the charge off of impairment reserves on impaired loans in the period they arise for collateral dependent loans. This process has effectively accelerated the recognition of charge offs recognized since 2009. The change in our assessment of the possible recoverability of our collateral dependent impaired loans’ carrying values has ultimately had no impact on our impairment valuation procedures or the amount of provision for loans losses included within the Consolidated Statements of Operations. Impairment reserves on non-collateral dependent restructured loans are measured by comparing the present value of expected future cash flows on the restructured loans discounted at the interest rate of the original loan agreement to the loan’s carrying value. These impairment reserves are recognized as a specific component to be provided for in the ALLL. |
The unallocated portion of ALLL provides for coverage of credit losses inherent in the loan portfolio but not captured in the credit loss factors that are utilized in the risk rating-based component, or in the specific impairment reserve component of the ALLL, and acknowledges the inherent imprecision of all loss prediction models. As of December 31, 2013, the unallocated allowance amount represented 13% of the ALLL, compared to 7% at December 31, 2012. The level in unallocated ALLL in both the current period and prior year reflects management’s evaluation of continued weak and uncertain business and economic conditions, credit risk and depressed collateral values of real estate in our markets. The ALLL composition should not be interpreted as an indication of specific amounts or loan categories in which future charge offs may occur. |
The Company has lending policies and procedures in place with the objective of optimizing loan income within an accepted risk tolerance level. Management reviews and approves these policies and procedures annually. Monitoring and reporting systems supplement the review process with regular frequency as related to loan production, loan quality, concentrations of credit, potential problem loans, loan delinquencies, and nonperforming loans. |
The following is a brief summary, by loan type, of management’s evaluation of the general risk characteristics and underwriting standards: |
Commercial Loans – Commercial loans are underwritten after evaluating the borrower’s financial ability to maintain profitability including future expansion objectives. In addition, the borrower’s qualitative qualities are evaluated, such as management skills and experience, ethical traits, and overall business acumen. Commercial loans are primarily extended based on the cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The borrower’s cash flow may deviate from initial projections, and the value of collateral securing these loans may vary. |
Most commercial loans are generally secured by the assets being financed and other business assets such as accounts receivable or inventory. Management may also incorporate a personal guarantee; however, some short term loans may be extended on an unsecured basis. Repayment of commercial loans secured by accounts receivable may be substantially dependent on the ability of the borrower to collect amounts due from its customers. In addition, the Company maintains a commercial loan with its former mortgage subsidiary in which mortgage loans are pledged as collateral. |
Commercial Real Estate (CRE) Loans – CRE loans are subject to similar underwriting standards and processes as commercial loans. CRE loans are viewed predominantly as cash flow loans and secondarily as loans collateralized by real estate. Generally, CRE lending involves larger principal amounts with repayment largely dependent on the successful operation of the property securing the loan or the business conducted on the collateralized property. CRE loans tend to be more adversely affected by conditions in the real estate markets or by general economic conditions. |
The properties securing the Company’s CRE portfolio are diverse in terms of type and primary source of repayment. This diversity helps reduce the Company’s exposure to adverse economic events that affect any single industry. Management monitors and evaluates CRE loans based on occupancy status (investor versus owner occupied), collateral, geography, and risk grade criteria. |
Generally, CRE loans to developers and builders that are secured by non owner occupied properties require the borrower to have had an existing relationship with the Company and a proven record of success. Construction loans are underwritten utilizing feasibility studies, sensitivity analysis of absorption and lease rates, and financial analysis of the developers and property owners. Construction loans are generally based upon estimates of cost and value associated with the complete project (as-is value). These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment largely dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long term lenders, sales of developed property, or an interim loan commitment from the Company until permanent financing is secured. These loans are closely monitored by on-site inspections, and are considered to have higher inherent risks than other CRE loans due to their ultimate repayment sensitivity to interest rate changes, governmental regulation of real property, general economic conditions, and the availability of long term financing. |
Consumer Loans – The Company’s consumer loan portfolio is generally limited to home equity loans with nominal originations in unsecured personal loans. The Company is highly dependent on third party credit scoring analysis to supplement the internal underwriting process. To monitor and manage consumer loan risk, policies and procedures are developed and modified, as needed, jointly by management and staff personnel. This activity, coupled with relatively small loan amounts that are spread across many individual borrowers, minimizes risk. Additionally, trend and outlook reports are reviewed by management on a regular basis. Underwriting standards for home equity loans are heavily influenced by statutory requirements, which include, but are not limited to, a maximum loan-to-value percentage of 80%, collection remedies, the number of such loans a borrower can have at one time, and documentation requirements. |
The Company maintains an independent loan review program that reviews and validates the credit risk program on a periodic basis. Results of these reviews are presented to the Board of Directors and Audit Committee. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Company’s policies and procedures. |
Management’s continuing evaluation of all known relevant quantitative and qualitative internal and external risk factors provide the foundation for the three major components of the Company’s ALLL: (1) historical valuation allowances established in accordance with ASC 450, Contingencies (“ASC 450”) for groups of similarly situated loan pools; (2) general valuation allowances established in accordance with ASC 450 and based on qualitative credit risk factors; and (3) specific valuation allowances established in accordance with ASC 310, Receivables (“ASC 310”) and based on estimated probable losses on specific impaired loans. All three components are aggregated and constitute the Company’s ALLL; while portions of the allowance may be allocated to specific credits, the allowance net of specific reserves is available for the remaining credits that management deems as “loss.” It is the Company’s policy to classify a credit as loss with a concurrent charge off when management considers the credit uncollectible and of such little value that its continuance as a bankable asset is not warranted. A loss classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer recognizing the likely credit loss of a valueless asset even though partial recovery may occur in the future. |
In accordance with ASC 450, historical valuation allowances are established for loan pools with similar risk characteristics common to each loan grouping. The Company’s loan portfolio is evaluated by general loan class including commercial, commercial real estate (which includes construction and other real estate), residential real estate (which includes 1-4 family and home equity loans), consumer and other loans. |
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These loan pools are similarly risk-graded and each portfolio is evaluated by identifying all relevant risk characteristics that are common to these segmented groups of loans. These characteristics include a significant emphasis on historical losses within each loan group, inherent risks for each, and specific loan class characteristics such as trends related to nonaccrual loans, past due loans, criticized loans, net charge offs or recoveries, among other relevant credit risk factors. Management periodically reviews and updates its historical loss ratios based on net charge off experience for each loan class. Other credit risk factors are also reviewed periodically and adjusted as necessary to account for any changes in potential loss exposure. |
General valuation allowances, as prescribed by ASC 450, are based on qualitative factors such as changes in asset quality trends, concentrations of credit or changes in concentrations of credit, changes in underwriting standards, changes in experience or depth of lending staff or management, the effectiveness of loan grading and the internal loan review function, and any other relevant factors. Management evaluates each qualitative component quarterly to determine the associated risks to the quality of the Company’s loan portfolio. |