Allowance For Loan Losses And Credit Quality Of Financing Receivables

6 Months Ended

Jun. 30, 2012

Allowance For Loan Losses And Credit Quality Of Financing Receivables [Abstract]

Allowance For Loan Losses And Credit Quality Of Financing Receivables

NOTE 4 – ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY OF FINANCING RECEIVABLES

The following table presents changes in the allowance for loan losses disaggregated by the class of loans receivable for the three and six months ended June 30, 2012 and 2011:

		Commercial						Commercial			Residential			Consumer
(Dollars in thousands)		and Industrial			Construction			Real Estate			Real Estate			and Other			Unallocated			Total
Three Months Ended
June 30, 2012:
Beginning balance	$	305		$	582		$	5,186		$	976		$	31		$	537		$	7,617
Charge-offs		-			-			(2,230	)		(123	)		(29	)		-			(2,382	)
Recoveries		1			-			58			-			8			-			67
Provision		124			(412	)		1,533			202			1			(490	)		958
Ending balance	$	430		$	170		$	4,547		$	1,055		$	11		$	47		$	6,260
June 30, 2011:
Beginning balance	$	448		$	1,347		$	3,953		$	832		$	54		$	592		$	7,226
Charge-offs		(13	)		(909	)		(394	)		-			(11	)		-			(1,327	)
Recoveries		2			516			1			-			6			-			525
Provision		(9	)		15			1,213			113			(4	)		(216	)		1,112
Ending balance	$	428		$	969		$	4,773		$	945		$	45		$	376		$	7,536

		Commercial						Commercial			Residential			Consumer
(Dollars in thousands)		and Industrial			Construction			Real Estate			Real Estate			and Other			Unallocated			Total
Six Months Ended:
June 30, 2012:
Beginning balance	$	304		$	294		$	4,833		$	987		$	9		$	783		$	7,210
Charge-offs		-			-			(2,525	)		(280	)		(45	)		-			(2,850	)
Recoveries		2			-			69			-			11			-			82
Provision		124			(124	)		2,170			348			36			(736	)		1,818
Ending balance	$	430		$	170		$	4,547		$	1,055		$	11		$	47		$	6,260
June 30, 2011:
Beginning balance	$	436		$	1,183		$	3,760		$	798		$	56		$	164		$	6,397
Charge-offs		(13	)		(909	)		(395	)		(12	)		(23	)		-			(1,352	)
Recoveries		3			516			8			-			13			-			540
Provision		2			179			1,400			159			(1	)		212			1,951
Ending balance	$	428		$	969		$	4,773		$	945		$	45		$	376		$	7,536

The following table presents the balance in the allowance of loan losses at June 30, 2012, and December 31, 2011 disaggregated on the basis of our impairment method by class of loans receivable along with the balance of loans receivable by class disaggregated on the basis of our impairment methodology:

		Allowance for Loan Losses						Loans Receivable
			Balance			Balance
			Related to			Related to
			Loans			Loans				Individually		Collectively
			Individually			Collectively				Evaluated		Evaluated
			Evaluated			Evaluated				for		for
(Dollars in thousands)		Balance	Impairment			Impairment		Balance		Impairment		Impairment
June 30, 2012:
Commercial and industrial	$	430	$	200	$	230	$	13,106	$	396	$	12,710
Construction		170		112		58		7,103		3,529		3,574
Commercial real estate		4,547		1,614		2,933		228,042		18,013		210,029
Residential real estate		1,055		307		748		97,635		2,908		94,727
Consumer and other		11		-		11		1,328		-		1,328
Unallocated		47		-		-		-		-		-
Total	$	6,260	$	2,233	$	3,980	$	347,214	$	24,846	$	322,368
December 31, 2011:
Commercial and industrial	$	304	$	16	$	288	$	13,711	$	32	$	13,679
Construction		294		50		244		8,520		2,458		6,062
Commercial real estate		4,833		1,572		3,261		216,191		22,722		193,469
Residential real estate		987		319		668		100,175		2,482		97,693
Consumer and other		9		-		9		1,336		-		1,336
Unallocated		783		-		-		-		-		-
Total	$	7,210	$	1,957	$	4,470	$	339,933	$	27,694	$	312,239

An age analysis of loans receivable which were past due as of June 30, 2012, and December 31, 2011 is as follows:

														Recorded
														Investment
						Greater						Total		> 90Days
		30-59 Days		60-89 days		Than		Total Past				Financing		and
(Dollars in thousands)		Past Due		Past Due		90 Days (a)		Due		Current		Receivables		Accruing
June 30, 2012:
Commercial and industrial	$	22	$	111	$	396	$	529	$	12,577	$	13,106	$	-
Construction		-		-		3,647		3,647		3,456		7,103		118
Commercial real estate		3,004		2,802		17,410		23,216		204,826		228,042		-
Residential real estate		1,268		551		2,908		4,727		92,908		97,635		-
Consumer and other		13		4		-		17		1,311		1,328		-
Total	$	4,307	$	3,468	$	24,361	$	32,136	$	315,078	$	347,214	$	118
December 31, 2011:
Commercial and industrial	$	428	$	-	$	32	$	460	$	13,251	$	13,711	$	-
Construction		558		-		3,243		3,801		4,719		8,520		785
Commercial real estate		5,238		137		19,311		24,686		191,505		216,191		-
Residential real estate		940		-		2,482		3,422		96,753		100,175		-
Consumer and other		17		1		18		36		1,300		1,336		18
Total	$	7,181	$	138	$	25,086	$	32,405	$	307,528	$	339,933	$	803

(a) includes loans greater than 90 days past due and still accruing and non-accrual loans

Loans for which the accrual of interest has been discontinued at June 30, 2012, and December 31, 2011 were:

(Dollars in thousands)		June 30, 2012		December 31, 2011
Commercial and industrial	$	396	$	32
Construction		3,529		2,458
Commercial real estate		17,410		19,311
Residential real estate		2,908		2,482
Total	$	24,243	$	24,283

In determining the adequacy of the allowance for loan losses, we estimate losses based on the identification of specific problem loans through our credit review process and we also estimate losses inherent in other loans on an aggregate basis by loan type. The credit review process includes the independent evaluation of the loan officer assigned risk ratings by the Chief Credit Officer and a third party loan review company. Such risk ratings are assigned loss component factors that reflect our loss estimate for each group of loans. It is management's and the board of directors' responsibility to oversee the lending process to ensure that all credit risks are properly identified, monitored, and controlled, and that loan pricing, terms, and other safeguards against non-performance and default are commensurate with the level of risk undertaken and is rated as such based on a risk-rating system. Factors considered in assigning risk ratings and loss component factors include: borrower specific information related to expected future cash flows and operating results, collateral values, financial condition, payment status and other information; levels of and trends in portfolio charge-offs and recoveries; levels in portfolio delinquencies; effects of changes in loan concentrations and observed trends in the economy and other qualitative measurements.

Our risk-rating system as defined below is consistent with the system used by regulatory agencies and consistent with industry practices. Loans rated "Substandard", "Doubtful" or "Loss" is consistent with the regulatory definitions of classified assets.

Pass: This category represents loans performing to contractual terms and conditions and the primary source of repayment is adequate to meet the obligation. We have five categories within the Pass classification depending on strength of repayment sources, collateral values and financial condition of the borrower.

Special Mention: This category represents loans performing to contractual terms and conditions; however, the primary source of repayment or the borrower is exhibiting some deterioration or weaknesses in financial condition that could potentially threaten the borrowers' future ability to repay our loan principal and interest or fees due.

Substandard: This category represents loans that the primary source of repayment has significantly deteriorated or weakened which has or could threaten the borrowers' ability to make scheduled payments. The weaknesses require close supervision by management and there is a distinct possibility that we could sustain a loss if the deficiencies are not corrected. Such weaknesses could jeopardize the timely and ultimate collection of our loan principal and interest or fees due. Loss may not be expected or evident, however, loan repayment is inadequately supported by current financial information or pledged collateral.

Doubtful: Loans so classified have all the inherent weaknesses of a substandard loan with the added provision that collection or liquidation in full is highly questionable and not reasonably assured. The probability of at least partial loss is high, but extraneous factors might strengthen the asset to prevent loss. The validity of the extraneous factors must be continuously monitored. Once these factors are questionable the loan should be considered for full or partial charge-off.

Loss: Loans so classified are considered uncollectible, and of little value that their continuance as active assets is not warranted. Such loans are fully charged off.

The following tables illustrate our corporate credit risk profile by creditworthiness category as of June 30, 2012, and December 31, 2011:

				Special
(Dollars in thousands)		Pass		Mention		Substandard			Doubtful		Total
June 30, 2012:
Commercial and industrial	$	12,376	$	333	$	22		$	375	$	13,106
Construction		3,574		-		3,529			-		7,103
Commercial real estate		199,673		6,330		21,467			572		228,042
Residential real estate		93,092		452		3,759			332		97,635
Consumer and other		1,328		-		-			-		1,328
	$	310,043	$	7,115	$	28,777		$	1,279	$	347,214
December 31, 2011:
Commercial and industrial	$	13,103	$	398	$	202	$		8	$	13,711
Construction		5,057		-		3,463			-		8,520
Commercial real estate		180,862		6,987		27,769			573		216,191
Residential real estate		95,491		494		4,190			-		100,175
Consumer and other		1,336		-		-			-		1,336
	$	295,849	$	7,879	$	35,624	$		581	$	339,933

A loan is considered impaired, in accordance FASB ASC 310-10-35-16, when based on current information and events, it is probable that we will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, postponement or forgiveness of principal, forbearance or other actions intended to maximize collection. The average recorded investment in impaired loans is calculated using the average of impaired loans over the past five quarter-end periods. We recognize income on impaired loans under the cash basis when the collateral on the loan is sufficient to cover the outstanding obligation to us. If these factors do not exist, we will record all payments as a reduction of principal on such loans.

The following table reflects our impaired loans by class as of June 30, 2012, and December 31, 2011:

	June 30, 2012						December 31, 2011
				Unpaid						Unpaid
		Recorded		Principal		Related		Recorded		Principal		Related
(Dollars in thousands)		Investment (1)		Balance (2)		Allowance		Investment (1)		Balance (2)		Allowance
With no related allowance recorded:
Commercial and industrial	$	-	$	-	$	-	$	-	$	-	$	-
Construction		2,134		3,111		-		2,062		2,331		-
Commercial real estate		6,209		6,970		-		10,362		12,932		-
Residential real estate		1,848		1,842		-		1,758		1,757		-
Total impaired loans without a
related allowance		10,191		11,923		-		14,182		17,020		-
With an allowance recorded:
Commercial and industrial		401		396		200		32		32		16
Construction		1,391		1,395		112		396		396		50
Commercial real estate		11,832		13,930		1,614		12,404		12,399		1,572
Residential real estate		1,074		1,067		307		732		724		319
Total impaired loans with an
allowance		14,698		16,788		2,233		13,564		13,551		1,957
Total impaired loans	$	24,889	$	28,711	$	2,233	$	27,746	$	30,571	$	1,957

(1) The recorded investment of impaired loans includes the outstanding principal balance and any unpaid interest and escrow balances due.

(2) Unpaid principal balance includes the present recorded principal balance plus any amounts that have been previously charged-off.

The average recorded investment and income recognized is presented for the six month periods ended June 30, 2012, and 2011:

	For the Six Months Ended				For the Six Months Ended
	June 30, 2012				June 30, 2011
		Average	Interest			Average	Interest
		Recorded	Income			Recorded	Income
(Dollars in thousands)		Investment	Recognized			Investment	Recognized
With no related allowance recorded:
Commercial and industrial	$	-	$	-	$	19	$	-
Construction		2,293		-		3,795		1
Commercial real estate		8,534		30		8,859		80
Residential real estate		1,663		32		816		17
Consumer and other		-		-		3		-
Total impaired loans without a related allowance		12,490		62		13,492		98
With an allowance recorded:
Commercial and industrial		127		-		77		-
Construction		796		-		1,941		-
Commercial real estate		13,571		49		9,694		105
Residential real estate		732		15		611		1
Consumer and other		-		-		-		-
Total impaired loans with an allowance		15,226		64		12,323		106
Total impaired loans	$	27,716	$	126	$	25,815	$	204

The following table presents the recorded investment in troubled debt restructured loans as of June 30, 2012, based on payment performance status:

		Commercial
(Dollars in thousands)		Real Estate
Performing	$	604
Non-performing		1,864
Total	$	2,468

Troubled debt restructured loans are considered impaired and are included in the previous impaired loans disclosures in this footnote. As of June 30, 2012, we have not committed to lend additional amounts to customers with outstanding loans that are classified as troubled debt restructurings.

Troubled debt restructured loans can include one or a combination of the following: an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; temporary reduction in the interest rate; change in scheduled payment amount; or permanent reduction of the principal or interest of the loan.

During the first six months of 2012, we have not restructured any troubled debt or required an allocation of the allowance for credit losses. There were no payment defaults of loans during the six months ended June 30, 2012, which were modified in a troubled debt restructuring within the previous twelve months.

A troubled debt restructured loan is considered to be in payment default once it is greater than 30 days contractually past due under the modified terms. The troubled debt restructurings that subsequently defaulted resulted in a net allocation of the allowance for credit losses of $4 thousand at June 30, 2012. There were no charge-offs on defaulted troubled debt restructurings during the six month period ended June 30, 2012.