Loans and Allowance for Loan Losses

3 Months Ended

Mar. 31, 2012

Loans and Allowance for Loan Losses [Abstract]

LOANS AND ALLOWANCE FOR LOAN LOSSES

3. LOANS AND ALLOWANCE FOR LOAN LOSSES

Our total loans at March 31, 2012 were $1.05 billion compared to $1.07 billion at December 31, 2011, a decrease of $20.7 million, or 1.9%. The components of our loan portfolio disaggregated by class of loan within the loan portfolio segments at March 31, 2012 and December 31, 2011, and the percentage change in loans from the end of 2011 to the end of the first quarter of 2012, are as follows:

	March 31, 2012					December 31, 2011					Percent Increase (Decrease)
	Balance		%			Balance		%
Commercial:
Commercial and industrial	$	259,705,000		24.7		$	266,548,000		24.8	%		(2.6	)%
Vacant land, land development, and residential construction		61,262,000		5.8			63,467,000		5.9			(3.5	)
Real estate – owner occupied		271,337,000		25.8			264,426,000		24.7			2.6
Real estate – non-owner occupied		319,157,000		30.3			334,165,000		31.2			(4.5	)
Real estate – multi-family and residential rental		64,991,000		6.2			68,299,000		6.4			(4.8	)
Total commercial		976,452,000		92.8			996,905,000		93.0			(2.1	)
Retail:
Home equity and other		41,940,000		4.0			42,336,000		3.9			(0.9	)
1-4 family mortgages		33,282,000		3.2			33,181,000		3.1			0.3
Total retail		75,222,000		7.2			75,517,000		7.0			(0.4	)
Total loans	$	1,051,674,000		100.0	%	$	1,072,422,000		100.0	%		(1.9	)%

Nonperforming loans as of March 31, 2012 and December 31, 2011 were as follows:

	March 31, 2012		December 31, 2011
Loans past due 90 days or more still accruing interest	$	0	$	0
Nonaccrual loans		38,668,000		45,074,000
Total nonperforming loans	$	38,668,000	$	45,074,000

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 March 31, 2012 and December 31, 2011, there were no accruing troubled debt restructurings included in nonperforming loans.

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

	March 31, 2012		December 31, 2011
Commercial:
Commercial and industrial	$	4,662,000	$	5,916,000
Vacant land, land development, and residential construction		2,562,000		3,448,000
Real estate – owner occupied		4,362,000		6,635,000
Real estate – non-owner occupied		17,074,000		24,169,000
Real estate – multi-family and residential rental		7,554,000		2,532,000
Total commercial		36,214,000		42,700,000
Retail:
Home equity and other		1,004,000		1,013,000
1-4 family mortgages		1,450,000		1,361,000
Total retail		2,454,000		2,374,000
Total nonaccrual loans	$	38,668,000	$	45,074,000

An age analysis of past due loans is as follows as of March 31, 2012:

	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	$	254,000	$	0	$	1,924,000	$	2,178,000	$	257,527,000	$	259,705,000	$	0
Vacant land, land development, and residential construction		0		0		1,732,000		1,732,000		59,530,000		61,262,000		0
Real estate – owner occupied		1,303,000		0		1,463,000		2,766,000		268,571,000		271,337,000		0
Real estate – non-owner occupied		254,000		0		8,165,000		8,419,000		310,738,000		319,157,000		0
Real estate – multi-family and residential rental		59,000		0		972,000		1,031,000		63,960,000		64,991,000		0
Total commercial		1,870,000		0		14,256,000		16,126,000		960,326,000		976,452,000		0
Retail:
Home equity and other		19,000		0		243,000		262,000		41,678,000		41,940,000		0
1-4 family mortgages		129,000		0		523,000		652,000		32,630,000		33,282,000		0
Total retail		148,000		0		766,000		914,000		74,308,000		75,222,000		0
Total past due loans	$	2,018,000	$	0	$	15,022,000	$	17,040,000	$	1,034,634,000	$	1,051,674,000	$	0

An age analysis of past due loans is as follows as of December 31, 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	$	0	$	2,037,000	$	2,284,000	$	4,321,000	$	262,227,000	$	266,548,000	$	0
Vacant land, land development, and residential construction		0		145,000		2,448,000		2,593,000		60,874,000		63,467,000		0
Real estate – owner occupied		85,000		786,000		2,836,000		3,707,000		260,719,000		264,426,000		0
Real estate – non-owner occupied		456,000		728,000		9,837,000		11,021,000		323,144,000		334,165,000		0
Real estate – multi-family and residential rental		42,000		443,000		957,000		1,442,000		66,857,000		68,299,000		0
Total commercial		583,000		4,139,000		18,362,000		23,084,000		973,821,000		996,905,000		0
Retail:
Home equity and other		46,000		0		242,000		288,000		42,048,000		42,336,000		0
1-4 family mortgages		274,000		133,000		445,000		852,000		32,329,000		33,181,000		0
Total retail		320,000		133,000		687,000		1,140,000		74,377,000		75,517,000		0
Total past due loans	$	903,000	$	4,272,000	$	19,049,000	$	24,224,000	$	1,048,198,000	$	1,072,422,000	$	0

Impaired loans were as follows as of March 31, 2012:

	Unpaid Contractual Principal Balance		Recorded Principal Balance		Related Allowance	Year-To-Date Average Recorded Principal Balance
With no related allowance recorded:
Commercial:
Commercial and industrial	$	5,303,000	$	3,410,000		$	3,832,000
Vacant land, land development and residential construction		4,547,000		2,122,000			2,439,000
Real estate – owner occupied		5,753,000		3,787,000			3,679,000
Real estate – non-owner occupied		13,078,000		7,605,000			7,868,000
Real estate – multi-family and residential rental		1,816,000		857,000			764,000
Total commercial		30,497,000		17,781,000			18,582,000
Retail:
Home equity and other		1,000,000		723,000			725,000
1-4 family mortgages		1,308,000		699,000			714,000
Total retail		2,308,000		1,422,000			1,439,000
Total with no related allowance recorded	$	32,805,000	$	19,203,000		$	20,021,000

	Unpaid Contractual Principal Balance		Recorded Principal Balance		Related Allowance		Year-To-Date Average Recorded Principal Balance
With an allowance recorded:
Commercial:
Commercial and industrial	$	4,052,000	$	3,546,000	$	1,763,000	$	3,284,000
Vacant land, land development and residential construction		5,056,000		3,888,000		1,798,000		4,078,000
Real estate – owner occupied		6,576,000		5,662,000		2,295,000		6,351,000
Real estate – non-owner occupied		28,381,000		19,890,000		6,021,000		20,949,000
Real estate – multi-family and residential rental		13,489,000		10,553,000		2,734,000		11,862,000
Total commercial		57,554,000		43,539,000		14,611,000		46,524,000
Retail:
Home equity and other		285,000		226,000		213,000		228,000
1-4 family mortgages		640,000		530,000		199,000		465,000
Total retail		925,000		756,000		412,000		693,000
Total with an allowance recorded	$	58,479,000	$	44,295,000	$	15,023,000	$	47,217,000
Total impaired loans:
Commercial	$	88,051,000	$	61,320,000	$	14,611,000	$	65,106,000
Retail		3,233,000		2,178,000		412,000		2,132,000
Total impaired loans	$	91,284,000	$	63,498,000	$	15,023,000	$	67,238,000

Interest income of $0.3 million was recognized on impaired loans during the first quarter of 2012.

Impaired loans were as follows as of December 31, 2011:

	Unpaid Contractual Principal Balance		Recorded Principal Balance		Related Allowance	Year-To-Date Average Recorded Principal Balance
With no related allowance recorded:
Commercial:
Commercial and industrial	$	4,670,000	$	4,254,000		$	3,194,000
Vacant land, land development and residential construction		5,308,000		2,755,000			6,413,000
Real estate – owner occupied		5,525,000		3,572,000			4,246,000
Real estate – non-owner occupied		14,017,000		8,131,000			11,953,000
Real estate – multi-family and residential rental		1,309,000		671,000			862,000
Total commercial		30,829,000		19,383,000			26,668,000
Retail:
Home equity and other		1,000,000		727,000			439,000
1-4 family mortgages		1,300,000		729,000			433,000
Total retail		2,300,000		1,456,000			872,000
Total with no related allowance recorded	$	33,129,000	$	20,839,000		$	27,540,000

	Unpaid Contractual Principal Balance		Recorded Principal Balance		Related Allowance		Year-To-Date Average Recorded Principal Balance
With an allowance recorded:
Commercial:
Commercial and industrial	$	3,500,000	$	3,023,000	$	1,172,000	$	4,972,000
Vacant land, land development and residential construction		5,551,000		4,267,000		1,799,000		4,319,000
Real estate – owner occupied		8,544,000		7,039,000		2,180,000		6,648,000
Real estate – non-owner occupied		32,331,000		22,009,000		7,319,000		14,942,000
Real estate – multi-family and residential rental		13,913,000		13,172,000		6,175,000		8,322,000
Total commercial		63,839,000		49,510,000		18,645,000		39,203,000
Retail:
Home equity and other		286,000		229,000		215,000		1,069,000
1-4 family mortgages		517,000		400,000		136,000		655,000
Total retail		803,000		629,000		351,000		1,724,000
Total with an allowance recorded	$	64,642,000	$	50,139,000	$	18,996,000	$	40,927,000
Total impaired loans:
Commercial	$	94,668,000	$	68,893,000	$	18,645,000	$	65,871,000
Retail		3,103,000		2,085,000		351,000		2,596,000
Total impaired loans	$	97,771,000	$	70,978,000	$	18,996,000	$	68,467,000

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 March 31, 2012:

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	$	167,519,000	$	10,291,000	$	155,000,000	$	124,286,000	$	26,546,000
Grades 5 – 7		85,360,000		45,238,000		105,824,000		148,430,000		29,227,000
Grades 8 – 9		6,826,000		5,733,000		10,513,000		46,441,000		9,218,000
Total commercial	$	259,705,000	$	61,262,000	$	271,337,000	$	319,157,000	$	64,991,000

Retail credit exposure – credit risk profiled by collateral type:

	Retail Home Equity and Other		Retail 1-4  Family Mortgages
Total retail	$	41,940,000	$	33,282,000

Loans by credit quality indicators were as follows as of December 31, 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	$	169,231,000	$	9,539,000	$	143,075,000	$	123,048,000	$	27,245,000
Grades 5 – 7		89,463,000		46,454,000		110,413,000		164,049,000		26,278,000
Grades 8 – 9		7,854,000		7,474,000		10,938,000		47,068,000		14,776,000
Total commercial	$	266,548,000	$	63,467,000	$	264,426,000	$	334,165,000	$	68,299,000

Retail credit exposure – credit risk profiled by collateral type:

	Retail Home Equity and Other		Retail 1-4 Family Mortgages
Total retail	$	42,336,000	$	33,181,000

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 months ended March 31, 2012 are as follows:

	Commercial Loans			Retail Loans			Unallocated		Total
Allowance for loan losses:
Beginning balance	$	33,431,000		$	3,019,000		$	82,000	$	36,532,000
Provision for loan losses		(99,000	)		94,000			5,000		0
Charge-offs		(7,464,000	)		(112,000	)		0		(7,576,000	)
Recoveries		1,940,000			47,000			0		1,987,000
Ending balance	$	27,808,000		$	3,048,000		$	87,000	$	30,943,000
Ending balance: individually evaluated for impairment	$	14,611,000		$	412,000		$	0	$	15,023,000
Ending balance: collectively evaluated for impairment	$	13,197,000		$	2,636,000		$	87,000	$	15,920,000
Total loans:
Ending balance	$	976,452,000		$	75,222,000				$	1,051,674,000
Ending balance: individually evaluated for impairment	$	61,320,000		$	2,178,000				$	63,498,000
Ending balance: collectively evaluated for impairment	$	915,132,000		$	73,044,000				$	988,176,000

During the three months ended March 31, 2012, there were no purchases or sales of loans or reclassifications of loans held for sale.

Activity in the allowance for loan losses and the recorded investments in loans as of and during the three months ended March 31, 2011 are as follows:

	Commercial Loans			Retail Loans			Unallocated		Total
Allowance for loan losses:
Beginning balance	$	42,359,000		$	2,972,000		$	37,000	$	45,368,000
Provision for loan losses		1,386,000			772,000			42,000		2,200,000
Charge-offs		(4,739,000	)		(1,292,000	)		0		(6,031,000	)
Recoveries		499,000			82,000			0		581,000
Ending balance	$	39,505,000		$	2,534,000		$	79,000	$	42,118,000
Ending balance: individually evaluated for impairment	$	8,723,000		$	464,000		$	0	$	9,187,000
Ending balance: collectively evaluated for impairment	$	30,782,000		$	2,070,000		$	79,000	$	32,931,000
Total loans:
Ending balance	$	1,126,379,000		$	80,507,000				$	1,206,886,000
Ending balance: individually evaluated for impairment	$	55,588,000		$	2,894,000				$	58,482,000
Ending balance: collectively evaluated for impairment	$	1,070,791,000		$	77,613,000				$	1,148,404,000

During the three months ended March 31, 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 March 31, 2012 were as follows:

	Number of Contracts		Pre- Modification Recorded Principal Balance		Post- Modification Recorded Principal Balance
Commercial:
Commercial and industrial		3	$	583,000	$	580,000
Vacant land, land development and residential construction		0		0		0
Real estate – owner occupied		3		1,046,000		1,045,000
Real estate – non-owner occupied		1		4,391,000		4,391,000
Real estate – multi-family and residential rental		0		0		0
Total commercial		7		6,020,000		6,016,000
Retail:
Home equity and other		0		0		0
1-4 family mortgages		0		0		0
Total retail		0		0		0
Total		7	$	6,020,000	$	6,016,000

The following loans, modified as troubled debt restructurings within the previous twelve months, became over 30 days past due within the three months ended March 31, 2012 (amounts as of period end):

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

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 renewed or modified 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.