Credit Quality

The Company's provision for credit losses was modest in the fourth quarter 2012 compared to a provision for credit losses of $1.5 million in the same quarter last year, and a benefit for credit losses of $0.6 million in the third quarter of 2012. Net charge-offs in the final quarter of 2012 were $2.0 million or .53% of average loans on an annualized basis, representing a decline from $2.5 million or .67% in the same quarter of 2011, and an increase from $1.0 million or .27% in the prior quarter. See Table 11 below for further details by loan category.
 
Table 11            
ALLOWANCE FOR CREDIT LOSSES AND NET CHARGE-OFFS
    Charge-offs as   Charge-offs as   Charge-offs as
    a % of average   a % of average   a % of average
(Dollars in thousands) Q4 loan balance Q4 loan balance Q3 loan balance
  2012 annualized 2011 annualized 2012 annualized
Allowance for credit losses, beginning of period  $ 32,288    $ 37,016    $ 33,900  
Total provision (benefit) for credit losses  13    1,499    (593)  
Loan net charge-offs:            
 Commercial  802 1.21%  292 0.39%  102 0.14%
 Commercial real estate construction  (2) -0.02%  48 1.29%  148 1.56%
 Residential real estate construction  350 16.77%  140 4.08%  (4) -0.17%
 Total real estate construction  348 3.31%  188 2.63%  144 1.21%
 Mortgage  119 0.85%  177 1.04%  101 0.69%
 Home equity  212 0.35%  723 1.10%  373 0.60%
 Total real estate mortgage  331 0.45%  900 1.09%  474 0.62%
 Commercial real estate  150 0.07%  812 0.39%  126 0.06%
 Installment and consumer  249 8.31%  119 3.44%  48 1.52%
 Overdraft  104 0.00%  221 0.00%  125 0.00%
 Total loan net charge-offs  1,984 0.53%  2,532 0.67%  1,019 0.27%
             
Total allowance for credit losses  $ 30,317    $ 35,983    $ 32,288  
Components of allowance for credit losses:            
 Allowance for loan losses  $ 29,448    $ 35,212    $ 31,457  
 Reserve for unfunded commitments  869    771    831  
Total allowance for credit losses  $ 30,317    $ 35,983    $ 32,288  
             
Net loan charge-offs to average loans (annualized) 0.53%   0.67%   0.27%  
Allowance for loan losses to total loans 1.97%   2.35%   2.11%  
Allowance for credit losses to total loans 2.03%   2.40%   2.17%  
Allowance for loan losses to nonperforming loans 117%   87%   97%  
Allowance for credit losses to nonperforming loans 121%   89%   100%  
 

The allowance for credit losses was $30.3 million or 2.03% of total loans at December 31, 2012, compared to an allowance for credit losses of $36.0 million or 2.40% of total loans a year earlier, and $32.3 million or 2.17% at September 30, 2012. The decline in the allowance for credit losses and the allowance relative to total loans over both periods reflected the improving trend in the overall risk profile of the loan portfolio as evidenced by lower charge off activity and a positive risk rating migration within the loan portfolio. The year-end 2012 allowance for credit losses relative to nonperforming loans increased to 121% from 89% twelve months earlier. The Company's estimate of the allowance for credit losses will continue to be closely correlated to the loan portfolio's credit quality performance trends and the region's economic conditions.

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