Loans and Allowance for Loan Losses

6 Months Ended

Jun. 30, 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 June 30, 2012 were $1.06 billion compared to $1.07 billion at December 31, 2011, a decline of $11.4 million, or 1.1%. The components of our loan portfolio disaggregated by class of loan within the loan portfolio segments at June 30, 2012 and December 31, 2011, and the percentage change in loans from the end of 2011 to the end of the second quarter of 2012, are as follows:

	June 30, 2012					December 31, 2011					Percent Increase (Decrease)
	Balance		%			Balance		%
Commercial:
Commercial and industrial	$	277,428,000		26.2	%	$	266,548,000		24.8	%		4.1	%
Vacant land, land development, and residential construction		58,774,000		5.5			63,467,000		5.9			(7.4	)
Real estate – owner occupied		276,361,000		26.1			264,426,000		24.7			4.5
Real estate – non-owner occupied		318,476,000		30.0			334,165,000		31.2			(4.7	)
Real estate – multi-family and residential rental		56,452,000		5.3			68,299,000		6.4			(17.3	)
Total commercial		987,491,000		93.1			996,905,000		93.0			(0.9	)
Retail:
Home equity and other		40,883,000		3.9			42,336,000		3.9			(3.4	)
1-4 family mortgages		32,622,000		3.0			33,181,000		3.1			(1.7	)
Total retail		73,505,000		6.9			75,517,000		7.0			(2.7	)
Total loans	$	1,060,996,000		100.0	%	$	1,072,422,000		100.0	%		(1.1	)%

Nonperforming loans as of June 30, 2012 and December 31, 2011 were as follows:

	June 30, 2012		December 31, 2011
Loans past due 90 days or more still accruing interest	$	0	$	0
Nonaccrual loans		28,524,000		45,074,000
Total nonperforming loans	$	28,524,000	$	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 June 30, 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, if any, was as follows:

	June 30, 2012		December 31, 2011
Commercial:
Commercial and industrial	$	4,371,000	$	5,916,000
Vacant land, land development, and residential construction		3,195,000		3,448,000
Real estate – owner occupied		3,371,000		6,635,000
Real estate – non-owner occupied		13,144,000		24,169,000
Real estate – multi-family and residential rental		2,048,000		2,532,000
Total commercial		26,129,000		42,700,000
Retail:
Home equity and other		894,000		1,013,000
1-4 family mortgages		1,501,000		1,361,000
Total retail		2,395,000		2,374,000
Total nonaccrual loans	$	28,524,000	$	45,074,000

An age analysis of past due loans is as follows as of June 30, 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	$	282,000	$	197,000	$	1,856,000	$	2,335,000	$	275,093,000	$	277,428,000	$	0
Vacant land, land development, and residential construction		0		0		1,506,000		1,506,000		57,268,000		58,774,000		0
Real estate – owner occupied		0		52,000		1,665,000		1,717,000		274,644,000		276,361,000		0
Real estate – non-owner occupied		0		800,000		4,181,000		4,981,000		313,495,000		318,476,000		0
Real estate – multi-family and residential rental		0		0		795,000		795,000		55,657,000		56,452,000		0
Total commercial		282,000		1,049,000		10,003,000		11,334,000		976,157,000		987,491,000		0
Retail:
Home equity and other		159,000		0		0		159,000		40,724,000		40,883,000		0
1-4 family mortgages		84,000		0		505,000		589,000		32,033,000		32,622,000		0
Total retail		243,000		0		505,000		748,000		72,757,000		73,505,000		0
Total past due loans	$	525,000	$	1,049,000	$	10,508,000	$	12,082,000	$	1,048,914,000	$	1,060,996,000	$	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 as of June 30, 2012, and average impaired loans for the three and six months ended June 30, 2012, were as follows:

	Unpaid Contractual Principal Balance		Recorded Principal Balance		Related Allowance	Second Quarter Average Recorded Principal Balance		Year-To-Date Average Recorded Principal Balance
With no related allowance recorded:
Commercial:
Commercial and industrial	$	3,896,000	$	3,129,000		$	3,270,000	$	3,598,000
Vacant land, land development and residential construction		2,898,000		1,794,000			1,958,000		2,224,000
Real estate – owner occupied		5,100,000		3,535,000			3,661,000		3,631,000
Real estate – non-owner occupied		11,639,000		6,685,000			7,145,000		7,473,000
Real estate – multi-family and residential rental		4,027,000		852,000			855,000		794,000
Total commercial		27,560,000		15,995,000			16,889,000		17,720,000
Retail:
Home equity and other		500,000		477,000			600,000		642,000
1-4 family mortgages		1,151,000		651,000			675,000		693,000
Total retail		1,651,000		1,128,000			1,275,000		1,335,000
Total with no related allowance recorded	$	29,211,000	$	17,123,000		$	18,164,000	$	19,055,000

	Unpaid Contractual Principal Balance		Recorded Principal Balance		Related Allowance		Second Quarter Average Recorded Principal Balance		Year-To-Date Average Recorded Principal Balance
With an allowance recorded:
Commercial:
Commercial and industrial	$	4,871,000	$	4,272,000	$	1,680,000	$	3,909,000	$	3,613,000
Vacant land, land development and residential construction		3,185,000		2,844,000		1,416,000		3,366,000		3,667,000
Real estate – owner occupied		5,699,000		5,427,000		2,343,000		5,545,000		6,043,000
Real estate – non-owner occupied		21,331,000		15,919,000		5,907,000		17,904,000		19,272,000
Real estate – multi-family and residential rental		5,773,000		5,021,000		1,238,000		7,787,000		9,582,000
Total commercial		40,859,000		33,483,000		12,584,000		38,511,000		42,177,000
Retail:
Home equity and other		438,000		375,000		362,000		300,000		277,000
1-4 family mortgages		850,000		642,000		254,000		586,000		524,000
Total retail		1,288,000		1,017,000		616,000		886,000		801,000
Total with an allowance recorded	$	42,147,000	$	34,500,000	$	13,200,000	$	39,397,000	$	42,978,000
Total impaired loans:
Commercial	$	68,419,000	$	49,478,000	$	12,584,000	$	55,400,000	$	59,897,000
Retail		2,939,000		2,145,000		616,000		2,161,000		2,136,000
Total impaired loans	$	71,358,000	$	51,623,000	$	13,200,000	$	57,561,000	$	62,033,000

Interest income of $0.4 million and $0.8 was recognized on impaired loans during the second quarter and first six months of 2012, respectively.

Impaired loans as of December 31, 2011, and average impaired loans for the three and six months ended June 30, 2011, were as follows:

	Unpaid Contractual Principal Balance		Recorded Principal Balance		Related Allowance	Second Quarter Average Recorded Principal Balance		Year-To-Date Average Recorded Principal Balance
With no related allowance recorded:
Commercial:
Commercial and industrial	$	4,670,000	$	4,254,000		$	1,871,000	$	1,959,000
Vacant land, land development and residential construction		5,308,000		2,755,000			1,587,000		4,415,000
Real estate – owner occupied		5,525,000		3,572,000			4,187,000		4,432,000
Real estate – non-owner occupied		14,017,000		8,131,000			10,453,000		12,227,000
Real estate – multi-family and residential rental		1,309,000		671,000			1,520,000		1,364,000
Total commercial		30,829,000		19,383,000			19,618,000		24,397,000
Retail:
Home equity and other		1,000,000		727,000			768,000		562,000
1-4 family mortgages		1,300,000		729,000			427,000		330,000
Total retail		2,300,000		1,456,000			1,195,000		892,000
Total with no related allowance recorded	$	33,129,000	$	20,839,000		$	20,813,000	$	25,289,000

	Unpaid Contractual Principal Balance		Recorded Principal Balance		Related Allowance		Second Quarter Average Recorded Principal Balance		Year-To-Date Average Recorded Principal Balance
With an allowance recorded:
Commercial:
Commercial and industrial	$	3,500,000	$	3,023,000	$	1,172,000	$	3,913,000	$	4,916,000
Vacant land, land development and residential construction		5,551,000		4,267,000		1,799,000		6,812,000		5,998,000
Real estate – owner occupied		8,544,000		7,039,000		2,180,000		4,330,000		4,972,000
Real estate – non-owner occupied		32,331,000		22,009,000		7,319,000		9,757,000		9,129,000
Real estate – multi-family and residential rental		13,913,000		13,172,000		6,175,000		3,026,000		3,175,000
Total commercial		63,839,000		49,510,000		18,645,000		27,838,000		28,190,000
Retail:
Home equity and other		286,000		229,000		215,000		1,005,000		1,307,000
1-4 family mortgages		517,000		400,000		136,000		573,000		685,000
Total retail		803,000		629,000		351,000		1,578,000		1,992,000
Total with an allowance recorded	$	64,642,000	$	50,139,000	$	18,996,000	$	29,416,000	$	30,182,000
Total impaired loans:
Commercial	$	94,668,000	$	68,893,000	$	18,645,000	$	47,456,000	$	52,587,000
Retail		3,103,000		2,085,000		351,000		2,773,000		2,884,000
Total impaired loans	$	97,771,000	$	70,978,000	$	18,996,000	$	50,229,000	$	55,471,000

Interest income of less than $0.1 million was recognized on impaired loans during the second quarter and first six months of 2011.

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 June 30, 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	$	176,712,000	$	10,645,000	$	164,083,000	$	137,302,000	$	24,327,000
Grades 5 – 7		94,025,000		43,223,000		99,216,000		139,841,000		28,446,000
Grades 8 – 9		6,691,000		4,906,000		13,062,000		41,333,000		3,679,000
Total commercial	$	277,428,000	$	58,774,000	$	276,361,000	$	318,476,000	$	56,452,000

Retail credit exposure – credit risk profiled by collateral type:

	Retail Home Equity and Other		Retail 1-4 Family Mortgages
Total retail	$	40,883,000	$	32,622,000

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 and six months ended June 30, 2012 are as follows:

	Commercial Loans			Retail Loans			Unallocated			Total
Allowance for loan losses:
Balance at March 31, 2012	$	27,808,000		$	3,048,000		$	87,000		$	30,943,000
Provision for loan losses		(3,026,000	)		62,000			(36,000	)		(3,000,000	)
Charge-offs		(1,650,000	)		(58,000	)		0			(1,708,000	)
Recoveries		3,339,000			115,000			0			3,454,000
Ending balance	$	26,471,000		$	3,167,000		$	51,000		$	29,689,000
Allowance for loan losses:
Balance at December 31, 2011	$	33,431,000		$	3,019,000		$	82,000		$	36,532,000
Provision for loan losses		(3,125,000	)		156,000			(31,000	)		(3,000,000	)
Charge-offs		(9,113,000	)		(171,000	)		0			(9,284,000	)
Recoveries		5,278,000			163,000			0			5,441,000
Ending balance	$	26,471,000		$	3,167,000		$	51,000		$	29,689,000
Ending balance: individually evaluated for impairment	$	12,584,000		$	616,000		$	0		$	13,200,000
Ending balance: collectively evaluated for impairment	$	13,887,000		$	2,551,000		$	51,000		$	16,489,000
Total loans:
Ending balance	$	987,491,000		$	73,505,000					$	1,060,996,000
Ending balance: individually evaluated for impairment	$	49,478,000		$	2,145,000					$	51,623,000
Ending balance: collectively evaluated for impairment	$	938,013,000		$	71,360,000					$	1,009,373,000

During the three and six months ended June 30, 2012, there were no purchases or sales of loans not categorized as held for sale 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 and six months ended June 30, 2011 are as follows:

	Commercial Loans			Retail Loans			Unallocated		Total
Allowance for loan losses:
Balance at March 31, 2011	$	39,506,000		$	2,534,000		$	79,000	$	42,119,000
Provision for loan losses		1,102,000			584,000			14,000		1,700,000
Charge-offs		(6,170,000	)		(563,000	)		0		(6,733,000	)
Recoveries		1,549,000			85,000			0		1,634,000
Ending balance	$	35,987,000		$	2,640,000		$	93,000	$	38,720,000
Allowance for loan losses:
Balance at December 31, 2010	$	42,359,000		$	2,972,000		$	37,000	$	45,368,000
Provision for loan losses		2,488,000			1,356,000			56,000		3,900,000
Charge-offs		(10,908,000	)		(1,856,000	)		0		(12,764,000	)
Recoveries		2,048,000			168,000			0		2,216,000
Ending balance	$	35,987,000		$	2,640,000		$	93,000	$	38,720,000
Ending balance: individually evaluated for impairment	$	5,643,000		$	440,000		$	0	$	6,083,000
Ending balance: collectively evaluated for impairment	$	30,344,000		$	2,200,000		$	93,000	$	32,637,000
Total loans:
Ending balance	$	1,045,406,000		$	77,593,000				$	1,122,999,000
Ending balance: individually evaluated for impairment	$	39,324,000		$	2,653,000				$	41,977,000
Ending balance: collectively evaluated for impairment	$	1,006,082,000		$	74,940,000				$	1,081,022,000

During the three and six months ended June 30, 2011, there were no purchases or sales of loans not categorized as held for sale or reclassifications of loans held for sale.

Loans modified as troubled debt restructurings during the three months ended June 30, 2012 were as follows:

	Number of Contracts		Pre- Modification Recorded Principal Balance		Post- Modification Recorded Principal Balance
Commercial:
Commercial and industrial		3	$	190,000	$	190,000
Vacant land, land development and residential construction		0		0		0
Real estate – owner occupied		2		567,000		567,000
Real estate – non-owner occupied		0		0		0
Real estate – multi-family and residential rental		1		100,000		100,000
Total commercial		6		857,000		857,000
Retail:
Home equity and other		0		0		0
1-4 family mortgages		0		0		0
Total retail		0		0		0
Total		6	$	857,000	$	857,000

Loans modified as troubled debt restructurings during the six months ended June 30, 2012 were as follows:

	Number of Contracts		Pre- Modification Recorded Principal Balance		Post- Modification Recorded Principal Balance
Commercial:
Commercial and industrial		6	$	773,000	$	770,000
Vacant land, land development and residential construction		0		0		0
Real estate – owner occupied		5		1,613,000		1,612,000
Real estate – non-owner occupied		1		4,391,000		4,391,000
Real estate – multi-family and residential rental		1		100,000		100,000
Total commercial		13		6,877,000		6,873,000
Retail:
Home equity and other		0		0		0
1-4 family mortgages		0		0		0
Total retail		0		0		0
Total		13	$	6,877,000	$	6,873,000

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

	Number of Contracts		Recorded Principal Balance
Commercial:
Commercial and industrial		1	$	51,000
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 and residential rental		0		0
Total commercial		1		51,000
Retail:
Home equity and other		0		0
1-4 family mortgages		0		0
Total retail		0		0
Total		1	$	51,000

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.