Loans and Allowance for Loan Losses

9 Months Ended

Sep. 30, 2011

Loans and Allowance for Loan Losses [Abstract]

LOANS AND ALLOWANCE FOR LOAN LOSSES

3. LOANS AND ALLOWANCE FOR LOAN LOSSES

Our total loans at September 30, 2011 were $1.09 billion compared to $1.26 billion at December 31, 2010, a decrease of $168.6 million, or 13.4%. The components of our loan portfolio disaggregated by class of loan within the loan portfolio segments at September 30, 2011 and December 31, 2010, and the percentage change in loans from the end of 2010 to the end of the third quarter of 2011, are as follows:

	September 30, 2011					December 31, 2010					Percent Increase (Decrease)
	Balance		%			Balance		%
Commercial:
Commercial and industrial	$	262,972,000		24.0	%	$	288,515,000		22.8	%		(8.9	)%
Vacant land, land development, and residential construction		64,039,000		5.9			83,786,000		6.6			(23.6	)
Real estate – owner occupied		266,749,000		24.4			277,377,000		22.0			(3.8	)
Real estate – non-owner occupied		348,929,000		31.9			449,104,000		35.6			(22.3	)
Real estate – multi-family and residential rental		70,284,000		6.4			77,188,000		6.1			(8.9	)
Total commercial		1,012,973,000		92.6			1,175,970,000		93.1			(13.9	)
Retail:
Home equity and other		44,751,000		4.1			51,186,000		4.1			(12.6	)
1-4 family mortgages		36,313,000		3.3			35,474,000		2.8			2.4
Total retail		81,064,000		7.4			86,660,000		6.9			(6.5	)
Total loans	$	1,094,037,000		100.0	%	$	1,262,630,000		100.0	%		(13.4	)%

Nonperforming loans as of September 30, 2011 and December 31, 2010 were as follows:

	September 30, 2011		December 31, 2010
Loans past due 90 days or more still accruing interest	$	0	$	766,000
Nonaccrual loans, including troubled debt restructurings		39,540,000		63,915,000
Troubled debt restructurings, accruing interest		0		4,763,000
Total nonperforming loans	$	39,540,000	$	69,444,000

As discussed in the “Troubled Debt Restructurings” section of our Significant Accounting Policies, troubled debt restructurings can be in either accrual or nonaccrual status. Nonaccrual troubled debt restructurings are included in nonperforming loans whereas accruing troubled debt restructurings are generally excluded from nonperforming loans. At September 30, 2011, there were no accruing troubled debt restructurings included in nonperforming loans. At December 31, 2010, we categorized an accruing troubled debt restructured lending relationship as nonperforming due to certain circumstances surrounding this particular relationship. That credit relationship has been paid-off.

The recorded principal balance of nonaccrual loans, including troubled debt restructurings, was as follows:

	September 30, 2011		December 31, 2010
Commercial:
Commercial and industrial	$	6,755,000	$	10,128,000
Vacant land, land development, and residential construction		3,108,000		12,441,000
Real estate – owner occupied		7,093,000		10,172,000
Real estate – non-owner occupied		16,206,000		22,609,000
Real estate – multi-family and residential rental		3,048,000		4,686,000
Total commercial		36,210,000		60,036,000
Retail:
Home equity and other		1,630,000		2,425,000
1-4 family mortgages		1,700,000		1,454,000
Total retail		3,330,000		3,879,000
Total nonaccrual loans	$	39,540,000	$	63,915,000

An age analysis of past due loans is as follows as of September 30, 2011:

	30 – 59 Days Past Due		60 – 89 Days Past Due		Greater Than 89 Days Past Due		Total Past Due		Current		Total Loans		Recorded Balance > 89 Days and Accruing
Commercial:
Commercial and industrial	$	258,000	$	100,000	$	2,937,000	$	3,295,000	$	259,677,000	$	262,972,000	$	0
Vacant land, land development, and residential construction		0		0		2,305,000		2,305,000		61,734,000		64,039,000		0
Real estate – owner occupied		141,000		0		3,127,000		3,268,000		263,481,000		266,749,000		0
Real estate – non-owner occupied		1,246,000		0		10,586,000		11,832,000		337,097,000		348,929,000		0
Real estate – multi-family and residential rental		166,000		0		1,149,000		1,315,000		68,969,000		70,284,000		0
Total commercial		1,811,000		100,000		20,104,000		22,015,000		990,958,000		1,012,973,000		0
Retail:
Home equity and other		94,000		0		783,000		877,000		43,874,000		44,751,000		0
1-4 family mortgages		0		222,000		650,000		872,000		35,441,000		36,313,000		0
Total retail		94,000		222,000		1,433,000		1,749,000		79,315,000		81,064,000		0
Total past due loans	$	1,905,000	$	322,000	$	21,537,000	$	23,764,000	$	1,070,273,000	$	1,094,037,000	$	0

An age analysis of past due loans is as follows as of December 31, 2010:

	30 – 59 Days Past Due		60 – 89 Days Past Due		Greater Than 89 Days Past Due		Total Past Due		Current		Total Loans		Recorded Balance > 89 Days and Accruing
Commercial:
Commercial and industrial	$	280,000	$	2,074,000	$	1,474,000	$	3,828,000	$	284,687,000	$	288,515,000	$	19,000
Vacant land, land development, and residential construction		0		453,000		3,586,000		4,039,000		79,747,000		83,786,000		0
Real estate – owner occupied		1,194,000		574,000		6,497,000		8,265,000		269,112,000		277,377,000		0
Real estate – non-owner occupied		164,000		4,341,000		12,520,000		17,025,000		432,079,000		449,104,000		747,000
Real estate – multi-family and residential rental		672,000		0		2,692,000		3,364,000		73,824,000		77,188,000		0
Total commercial		2,310,000		7,442,000		26,769,000		36,521,000		1,139,449,000		1,175,970,000		766,000
Retail:
Home equity and other		1,024,000		179,000		227,000		1,430,000		49,756,000		51,186,000		0
1-4 family mortgages		365,000		0		316,000		681,000		34,793,000		35,474,000		0
Total retail		1,389,000		179,000		543,000		2,111,000		84,549,000		86,660,000		0
Total past due loans	$	3,699,000	$	7,621,000	$	27,312,000	$	38,632,000	$	1,223,998,000	$	1,262,630,000	$	766,000

Impaired loans were as follows as of September 30, 2011:

	Unpaid Contractual Principal Balance		Recorded Principal Balance		Related Allowance	Third Quarter Average Recorded Principal Balance		Year-To-Date Average Recorded Principal Balance
With no related allowance recorded:
Commercial:
Commercial and industrial	$	1,403,000	$	1,274,000		$	1,353,000	$	1,704,000
Vacant land, land development and residential construction		5,493,000		2,703,000			2,278,000		6,387,000
Real estate – owner occupied		5,437,000		3,547,000			4,071,000		4,233,000
Real estate – non-owner occupied		14,652,000		8,836,000			9,286,000		12,306,000
Real estate – multi-family and residential rental		1,681,000		905,000			1,579,000		979,000
Total commercial		28,666,000		17,265,000			18,567,000		25,609,000
Retail:
Home equity and other		867,000		855,000			856,000		503,000
1-4 family mortgages		342,000		319,000			363,000		228,000
Total retail		1,209,000		1,174,000			1,219,000		731,000
Total with no related allowance recorded	$	29,875,000	$	18,439,000		$	19,786,000	$	26,340,000

	Unpaid Contractual Principal Balance		Recorded Principal Balance		Related Allowance		Third Quarter Average Recorded Principal Balance		Year-To-Date Average Recorded Principal Balance
With an allowance recorded:
Commercial:
Commercial and industrial	$	6,128,000	$	5,922,000	$	1,808,000	$	4,886,000	$	6,422,000
Vacant land, land development and residential construction		4,269,000		3,259,000		1,076,000		2,064,000		3,814,000
Real estate – owner occupied		6,930,000		5,385,000		1,523,000		4,205,000		5,821,000
Real estate – non-owner occupied		19,661,000		13,424,000		3,726,000		11,291,000		10,650,000
Real estate – multi-family and residential rental		2,772,000		2,301,000		410,000		2,428,000		2,887,000
Total commercial		39,760,000		30,291,000		8,543,000		24,874,000		29,594,000
Retail:
Home equity and other		737,000		717,000		312,000		753,000		1,314,000
1-4 family mortgages		968,000		956,000		269,000		778,000		932,000
Total retail		1,705,000		1,673,000		581,000		1,531,000		2,246,000
Total with an allowance recorded	$	41,465,000	$	31,964,000	$	9,124,000	$	26,405,000	$	31,840,000
Total impaired loans:
Commercial	$	68,426,000	$	47,556,000	$	8,543,000	$	43,441,000	$	55,203,000
Retail		2,914,000		2,847,000		581,000		2,750,000		2,977,000
Total impaired loans	$	71,340,000	$	50,403,000	$	9,124,000	$	46,191,000	$	58,180,000

The adoption of the new troubled debt restructuring guidance effective September 30, 2011 resulted in an increase of $10.8 million in both the Unpaid Contractual Principal Balance and Recorded Principal Balance figures above, with an associated increase of $4.2 million in the Related Allowance.

Interest income of $0.2 million and $0.7 million was recognized on impaired loans during the third quarter of 2011 and the first nine months of 2011, respectively.

Impaired loans were as follows as of December 31, 2010:

	Unpaid Contractual Principal Balance		Recorded Principal Balance		Related Allowance
With no related allowance recorded:
Commercial:
Commercial and industrial	$	3,133,000	$	2,135,000
Vacant land, land development and residential construction		13,255,000		10,071,000
Real estate – owner occupied		9,327,000		4,920,000
Real estate – non-owner occupied		23,380,000		15,775,000
Real estate – multi-family and residential rental		1,657,000		1,052,000
Total commercial		50,752,000		33,953,000
Retail:
Home equity and other		277,000		151,000
1-4 family mortgages		151,000		137,000
Total retail		428,000		288,000
Total with no related allowance recorded	$	51,180,000	$	34,241,000
With an allowance recorded:
Commercial:
Commercial and industrial	$	7,405,000	$	6,922,000	$	3,554,000
Vacant land, land development and residential construction		5,702,000		4,370,000		954,000
Real estate – owner occupied		7,047,000		6,257,000		1,996,000
Real estate – non-owner occupied		13,773,000		7,875,000		1,091,000
Real estate – multi-family and residential rental		5,544,000		3,472,000		909,000
Total commercial		39,471,000		28,896,000		8,504,000
Retail:
Home equity and other		1,799,000		1,910,000		1,007,000
1-4 family mortgages		1,141,000		909,000		191,000
Total retail		2,940,000		2,819,000		1,198,000
Total with an allowance recorded	$	42,411,000	$	31,715,000	$	9,702,000
Total impaired loans:
Commercial		90,223,000		62,849,000		8,504,000
Retail		3,368,000		3,107,000		1,198,000
Total impaired loans	$	93,591,000	$	65,956,000	$	9,702,000

Credit Quality Indicators. We utilize a comprehensive grading system for our commercial loans. All commercial loans are graded on a ten grade rating system. The rating system utilizes standardized grade paradigms that analyze several critical factors such as cash flow, operating performance, financial condition, collateral, industry condition and management. All commercial loans are graded at inception and reviewed and, if appropriate, re-graded at various intervals thereafter. The risk assessment for retail loans is primarily based on the type of collateral.

Loans by credit quality indicators were as follows as of September 30, 2011:

Commercial credit exposure – credit risk profiled by internal credit risk grades:

	Commercial and Industrial		Commercial Vacant Land, Land Development, and Residential Construction		Commercial Real Estate - Owner Occupied		Commercial Real Estate - Non-Owner Occupied		Commercial Real Estate - Multi-Family and Residential Rental
Internal credit risk grade groupings:
Grades 1 – 4	$	157,192,000	$	8,594,000	$	143,620,000	$	125,525,000	$	29,660,000
Grades 5 – 7		97,597,000		47,858,000		107,680,000		168,897,000		26,695,000
Grades 8 – 9		8,183,000		7,587,000		15,449,000		54,507,000		13,929,000
Total commercial	$	262,972,000	$	64,039,000	$	266,749,000	$	348,929,000	$	70,284,000

Retail credit exposure – credit risk profiled by collateral type:

	Retail Home Equity and Other		Retail 1-4 Family Mortgages
Total retail	$	44,751,000	$	36,313,000

Loans by credit quality indicators were as follows as of December 31, 2010:

Commercial credit exposure – credit risk profiled by internal credit risk grades:

	Commercial and Industrial		Commercial Vacant Land, Land Development, and Residential Construction		Commercial Real Estate - Owner Occupied		Commercial Real Estate - Non-Owner Occupied		Commercial Real Estate - Multi-Family and Residential Rental
Internal credit risk grade groupings:
Grades 1 – 4	$	161,623,000	$	8,098,000	$	137,340,000	$	160,746,000	$	29,902,000
Grades 5 – 7		113,904,000		58,326,000		123,572,000		249,246,000		31,852,000
Grades 8 – 9		12,988,000		17,362,000		16,465,000		39,112,000		15,434,000
Total commercial	$	288,515,000	$	83,786,000	$	277,377,000	$	449,104,000	$	77,188,000

Retail credit exposure – credit risk profiled by collateral type:

	Retail Home Equity and Other		Retail 1-4 Family Mortgages
Total retail	$	51,186,000	$	35,474,000

All commercial loans are graded using the following number system:

Grade 1. Excellent credit rating that contain very little, if any, risk of loss.

Grade 2. Strong sources of repayment and have low repayment risk.

Grade 3. Good sources of repayment and have limited repayment risk.

Grade 4. Adequate sources of repayment and acceptable repayment risk; however, characteristics are present that render the credit more vulnerable to a negative event.

Grade 5. Marginally acceptable sources of repayment and exhibit defined weaknesses and negative characteristics.

Grade 6. Well defined weaknesses which may include negative current cash flow, high leverage, or operating losses. Generally, if the credit does not stabilize or if further deterioration is observed in the near term, the loan will likely be downgraded and placed on the Watch List (i.e., list of lending relationships that receive increased scrutiny and review by the Board of Directors and senior management).

Grade 7. Defined weaknesses or negative trends that merit close monitoring through Watch List status.

Grade 8. Inadequately protected by current sound net worth, paying capacity of the obligor, or pledged collateral, resulting in a distinct possibility of loss requiring close monitoring through Watch List status.

Grade 9. Vital weaknesses exist where collection of principal is highly questionable.

Grade 10. Considered uncollectable and of such little value that their continuance as an asset is not warranted.

The primary risk elements with respect to commercial loans are the financial condition of the borrower, the sufficiency of collateral, and timeliness of scheduled payments. We have a policy of requesting and reviewing periodic financial statements from commercial loan customers and employ a disciplined and formalized review of the existence of collateral and its value. The primary risk element with respect to each residential real estate loan and consumer loan is the timeliness of scheduled payments. We have a reporting system that monitors past due loans and have adopted policies to pursue creditor’s rights in order to preserve our collateral position.

Activity in the allowance for loan losses and the recorded investments in loans as of and during the three and nine months ended September 30, 2011 are as follows:

	Commercial Loans			Retail Loans			Unallocated			Total
Allowance for loan losses:
Balance at June 30, 2011	$	35,986,000		$	2,641,000		$	93,000		$	38,720,000
Provision for loan losses		586,000			533,000			(19,000	)		1,100,000
Charge-offs		(1,260,000	)		(82,000	)		0			(1,342,000	)
Recoveries		838,000			35,000			0			873,000
Ending balance	$	36,150,000		$	3,127,000		$	74,000		$	39,351,000
Allowance for loan losses:
Balance at December 31, 2010	$	42,358,000		$	2,972,000		$	38,000		$	45,368,000
Provision for loan losses		3,074,000			1,890,000			36,000			5,000,000
Charge-offs		(12,168,000	)		(1,938,000	)		0			(14,106,000	)
Recoveries		2,886,000			203,000			0			3,089,000
Ending balance	$	36,150,000		$	3,127,000		$	74,000		$	39,351,000
Ending balance: individually evaluated for impairment	$	8,543,000		$	581,000		$	0		$	9,124,000
Ending balance: collectively evaluated for impairment	$	27,607,000		$	2,546,000		$	74,000		$	30,227,000
Total loans:
Ending balance	$	1,012,973,000		$	81,064,000					$	1,094,037,000
Ending balance: individually evaluated for impairment	$	47,556,000		$	2,847,000					$	50,403,000
Ending balance: collectively evaluated for impairment	$	965,417,000		$	78,217,000					$	1,043,634,000

Activity in the allowance for loan losses during the nine months ended September 30, 2010 is as follows:

Beginning balance	$	47,878,000
Provision for loan losses		25,000,000
Charge-offs		(31,236,000	)
Recoveries		2,234,000
Ending balance	$	43,876,000

During the three and nine months ended September 30, 2011, there were no purchases or sales of loans or reclassifications of loans held for sale.

Loans modified as troubled debt restructurings during the three months ended September 30, 2011 were as follows:

	Number of Contracts		Pre- Modification Recorded Principal Balance		Post- Modification Recorded Principal Balance
Commercial:
Commercial and industrial		2	$	110,000	$	110,000
Vacant land, land development and residential construction		6		2,219,000		2,219,000
Real estate – owner occupied		0		0		0
Real estate – non-owner occupied		2		701,000		701,000
Real estate – multi-family and residential rental		6		709,000		549,000
Total commercial		16		3,739,000		3,579,000
Retail:
Home equity and other		0		0		0
1-4 family mortgages		0		0		0
Total retail		0		0		0
Total		16	$	3,739,000	$	3,579,000

There were no loans modified as troubled debt restructurings within the previous twelve months that became over 30 days past due during the three months ended September 30, 2011.

Loans modified as troubled debt restructurings during the nine months ended September 30, 2011 were as follows:

	Number of Contracts		Pre- Modification Recorded Principal Balance		Post- Modification Recorded Principal Balance
Commercial:
Commercial and industrial		14	$	2,339,000	$	2,330,000
Vacant land, land development and residential construction		8		3,422,000		3,421,000
Real estate – owner occupied		7		3,973,000		3,466,000
Real estate – non-owner occupied		9		7,006,000		7,004,000
Real estate – multi-family and residential rental		10		1,450,000		1,290,000
Total commercial		48		18,190,000		17,511,000
Retail:
Home equity and other		0		0		0
1-4 family mortgages		0		0		0
Total retail		0		0		0
Total		48	$	18,190,000	$	17,511,000

The following loans, modified as troubled debt restructurings within the previous twelve months, became over 30 days past due within the nine months ended September 30, 2011 (amounts as of period end):

	Number of Contracts		Recorded Principal Balance
Commercial:
Commercial and industrial		2	$	280,000
Vacant land, land development and residential construction		0		0
Real estate – owner occupied		0		0
Real estate – non-owner occupied		1		793,000
Real estate – multi-family and residential rental		2		135,000
Total commercial		5		1,208,000
Retail:
Home equity and other		0		0
1-4 family mortgages		0		0
Total retail		0		0
Total		5	$	1,208,000

As a result of adopting the amendments in ASU 2011-02 effective September 30, 2011, we reassessed all loan renewals and modifications that occurred on or after January 1, 2011 to determine whether they should now be considered troubled debt restructurings. In general, our policy dictates that a renewal or modification of an 8- or 9-rated loan meets the criteria of a troubled debt restructuring, although we review and consider all renewed and modified loans as part of our troubled debt restructuring assessment procedures. Loan relationships rated 8 contain significant financial weaknesses, resulting in a distinct possibility of loss, while relationships rated 9 reflect vital financial weaknesses, resulting in a highly questionable ability on our part to collect principal; we believe borrowers warranting such ratings would have difficulty obtaining financing from other market participants. Thus, due to the lack of comparable market rates for loans with similar risk characteristics, we believe 8- or 9-rated loans that were renewed or modified during the first nine months of 2011 were done so at below market rates. Loans that are identified as troubled debt restructurings are considered impaired and are individually evaluated for impairment when assessing these credits in our allowance for loan losses calculation. Certain of the loans, totaling $10.8 million as of September 30, 2011, that were identified as troubled debt restructurings under the new guidance had been previously measured under a general allowance methodology (i.e., pooling) for calculation of our allowance for loan losses. The allowance for loan losses associated with these specific loans totaled $4.2 million as of September 30, 2011, or approximately $1.0 million higher than would have been recorded using a general allowance methodology.