Loans and Allowance for Loan Losses

12 Months Ended

Dec. 31, 2012

Loans and Allowance for Loan Losses [Abstract]

LOANS AND ALLOWANCE FOR LOAN LOSSES

NOTE 3 – LOANS AND ALLOWANCE FOR LOAN LOSSES

Year-end loans disaggregated by class of loan within the loan portfolio segments were as follows:

											Percent
	December 31, 2012					December 31, 2011					Increase
	Balance		%			Balance		%			(Decrease)
Commercial:
Commercial and industrial	$	285,322,000		27.4	%	$	266,548,000		24.8	%		7.0	%
Vacant land, land development, and residential construction		48,099,000		4.6			63,467,000		5.9			(24.2	)
Real estate – owner occupied		259,277,000		24.9			264,426,000		24.7			(1.9	)
Real estate – non-owner occupied		324,886,000		31.2			334,165,000		31.2			(2.8	)
Real estate – multi-family and residential rental		50,922,000		4.9			68,299,000		6.4			(25.4	)
Total commercial		968,506,000		93.0			996,905,000		93.0			(2.8	)
Retail:
Home equity and other		38,917,000		3.7			42,336,000		3.9			(8.1	)
1-4 family mortgages		33,766,000		3.3			33,181,000		3.1			1.8
Total retail		72,683,000		7.0			75,517,000		7.0			(3.8	)
Total loans	$	1,041,189,000		100.0	%	$	1,072,422,000		100.0	%		(2.9	)%

Concentrations within the loan portfolio were as follows at year-end:

	2012					2011
	Balance		Percentage of Loan Portfolio			Balance		Percentage of Loan Portfolio
Commercial real estate loans to lessors of non-residential buildings	$	302,723,000		29.1	%	$	320,536,000		29.9	%

Year-end nonperforming loans were as follows:

	2012		2011
Loans past due 90 days or more still accruing interest	$	0	$	0
Nonaccrual loans, including troubled debt restructurings		18,970,000		45,074,000
Troubled debt restructurings, accruing interest		0		0
Total nonperforming loans	$	18,970,000	$	45,074,000

As discussed in the “Troubled Debt Restructuring” section of Note 1, 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 December 31, 2012 and 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:

	December 31,		December 31,
	2012		2011
Commercial:
Commercial and industrial	$	1,677,000	$	5,916,000
Vacant land, land development, and residential construction		2,194,000		3,448,000
Real estate – owner occupied		2,087,000		6,635,000
Real estate – non-owner occupied		9,010,000		24,169,000
Real estate – multi-family and residential rental		2,021,000		2,532,000
Total commercial		16,989,000		42,700,000
Retail:
Home equity and other		889,000		1,013,000
1-4 family mortgages		1,092,000		1,361,000
Total retail		1,981,000		2,374,000
Total nonaccrual loans	$	18,970,000	$	45,074,000

An age analysis of past due loans is as follows as of December 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	$	80,000	$	0	$	871,000	$	951,000	$	284,371,000	$	285,322,000	$	0
Vacant land, land development, and residential construction		289,000		0		614,000		903,000		47,196,000		48,099,000		0
Real estate – owner occupied		199,000		0		1,337,000		1,536,000		257,741,000		259,277,000		0
Real estate – non-owner occupied		303,000		0		1,123,000		1,426,000		323,460,000		324,886,000		0
Real estate – multi-family and residential rental		0		0		613,000		613,000		50,309,000		50,922,000		0
Total commercial		871,000		0		4,558,000		5,429,000		963,077,000		968,506,000		0
Retail:
Home equity and other		1,000		0		13,000		14,000		38,903,000		38,917,000		0
1- 4 family mortgages		47,000		190,000		437,000		674,000		33,092,000		33,766,000		0
Total retail		48,000		190,000		450,000		688,000		71,995,000		72,683,000		0
Total past due loans	$	919,000	$	190,000	$	5,008,000	$	6,117,000	$	1,035,072,000	$	1,041,189,000	$	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 with no related allowance recorded were as follows as of December 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	$	1,926,000	$	1,617,000		$	3,140,000
Vacant land, land development and residential construction		2,356,000		1,401,000			1,848,000
Real estate – owner occupied		2,368,000		1,557,000			3,139,000
Real estate – non-owner occupied		9,984,000		5,492,000			6,578,000
Real estate – multi-family and residential rental		1,188,000		413,000			756,000
Total commercial		17,822,000		10,480,000			15,461,000
Retail:
Home equity and other		580,000		483,000			579,000
1-4 family mortgages		1,636,000		789,000			730,000
Total retail		2,216,000		1,272,000			1,309,000
Total with no related allowance recorded	$	20,038,000	$	11,752,000		$	16,770,000

Impaired loans with an allowance recorded and total impaired loans were as follows as of December 31, 2012:

	Unpaid Contractual Principal Balance		Recorded Principal Balance		Related Allowance		Year-To-Date Average Recorded Principal Balance
With an allowance recorded:
Commercial:
Commercial and industrial	$	3,221,000	$	1,926,000	$	924,000	$	3,110,000
Vacant land, land development and residential construction		2,333,000		2,219,000		1,367,000		3,267,000
Real estate – owner occupied		4,307,000		3,626,000		1,388,000		4,913,000
Real estate – non-owner occupied		33,818,000		32,964,000		11,773,000		25,061,000
Real estate – multi-family and residential rental		4,471,000		3,923,000		1,408,000		7,429,000
Total commercial		48,150,000		44,658,000		16,860,000		43,780,000
Retail:
Home equity and other		423,000		394,000		204,000		286,000
1-4 family mortgages		555,000		475,000		125,000		482,000
Total retail		978,000		869,000		329,000		768,000
Total with an allowance recorded	$	49,128,000	$	45,527,000	$	17,189,000	$	44,548,000
Total impaired loans:
Commercial	$	65,972,000	$	55,138,000	$	16,860,000	$	59,241,000
Retail		3,194,000		2,141,000		329,000		2,077,000
Total impaired loans	$	69,166,000	$	57,279,000	$	17,189,000	$	61,318,000

Impaired loans with no related allowance recorded 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

Impaired loans with an allowance recorded and total 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 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

The adoption of the new troubled debt restructuring guidance in 2011 resulted in an increase of $26.2 million in both the Unpaid Contractual Principal Balance and Recorded Principal Balance figures above, with an associated increase of $5.7 million in the Related Allowance as of December 31, 2011.

Impaired loans for which no allocation of the allowance for loan losses has been made generally reflect situations whereby the loans have been charged-down to estimated collateral value. Interest income recognized on impaired loans, consisting entirely of accruing troubled debt restructurings, totaled $2.0 million in 2012 and $0.2 million during 2011 and 2010. Lost interest income on nonaccrual loans totaled $0.8 million during 2012, $1.4 million during 2011, and $2.1 million during 2010.

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 December 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	$	180,314,000	$	6,526,000	$	150,467,000	$	154,127,000	$	24,015,000
Grades 5 – 7		101,832,000		37,697,000		102,988,000		128,041,000		22,082,000
Grades 8 – 9		3,176,000		3,876,000		5,822,000		42,718,000		4,825,000
Total commercial	$	285,322,000	$	48,099,000	$	259,277,000	$	324,886,000	$	50,922,000

Retail credit exposure – credit risk profiled by collateral type:

	Retail Home Equity and Other		Retail 1-4 Family Mortgages
Total retail	$	38,917,000	$	33,766,000

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.

The allowance for loan losses and recorded investments in loans for the year-ended December 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		(2,800,000	)		(207,000	)		(93,000	)		(3,100,000	)
Charge-offs		(12,075,000	)		(569,000	)		0			(12,644,000	)
Recoveries		7,487,000			402,000			0			7,889,000
Ending balance	$	26,043,000		$	2,645,000		$	(11,000	)	$	28,677,000
Ending balance: individually evaluated for impairment	$	16,860,000		$	329,000		$	0		$	17,189,000
Ending balance: collectively evaluated for impairment	$	9,183,000		$	2,316,000		$	(11,000	)	$	11,488,000
Total loans:
Ending balance	$	968,506,000		$	72,683,000					$	1,041,189,000
Ending balance: individually evaluated for impairment	$	55,138,000		$	2,141,000					$	57,279,000
Ending balance: collectively evaluated for impairment	$	913,368,000		$	70,542,000					$	983,910,000

The allowance for loan losses and recorded investments in loans for the year-ended December 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		4,125,000			2,730,000			45,000		6,900,000
Charge-offs		(16,978,000	)		(2,919,000	)		0		(19,897,000	)
Recoveries		3,925,000			236,000			0		4,161,000
Ending balance	$	33,431,000		$	3,019,000		$	82,000	$	36,532,000
Ending balance: individually evaluated for impairment	$	18,645,000		$	351,000		$	0	$	18,996,000
Ending balance: collectively evaluated for impairment	$	14,786,000		$	2,668,000		$	82,000	$	17,536,000
Total loans:
Ending balance	$	996,905,000		$	75,517,000				$	1,072,422,000
Ending balance: individually evaluated for impairment	$	68,893,000		$	2,085,000				$	70,978,000
Ending balance: collectively evaluated for impairment	$	928,012,000		$	73,432,000				$	1,001,444,000

The allowance for loan losses and recorded investments in loans for the year-ended December 31, 2010 are as follows:

	Commercial Loans			Retail Loans			Unallocated		Total
Allowance for loan losses:
Beginning balance	$	46,603,000		$	1,256,000		$	19,000	$	47,878,000
Provision for loan losses		29,030,000			2,752,000			18,000		31,800,000
Charge-offs		(35,968,000	)		(1,160,000	)		0		(37,128,000	)
Recoveries		2,694,000			124,000			0		2,818,000
Ending balance	$	42,359,000		$	2,972,000		$	37,000	$	45,368,000
Ending balance: individually evaluated for impairment	$	8,504,000		$	1,198,000		$	0	$	9,702,000
Ending balance: collectively evaluated for impairment	$	33,855,000		$	1,774,000		$	37,000	$	35,666,000
Total loans:
Ending balance	$	1,175,970,000		$	86,660,000				$	1,262,630,000
Ending balance: individually evaluated for impairment	$	62,849,000		$	3,107,000				$	65,956,000
Ending balance: collectively evaluated for impairment	$	1,113,121,000		$	83,553,000				$	1,196,674,000

Loans modified as troubled debt restructurings during 2012 were as follows:

	Number of Contracts		Pre- Modification Recorded Principal Balance		Post- Modification Recorded Principal Balance
Commercial:
Commercial and industrial		8	$	1,357,000	$	1,353,000
Vacant land, land development and residential construction		0		0		0
Real estate – owner occupied		6		1,745,000		1,744,000
Real estate – non-owner occupied		15		28,987,000		28,987,000
Real estate – multi-family and residential rental		0		0		0
Total commercial		29		32,089,000		32,084,000
Retail:
Home equity and other		0		0		0
1-4 family mortgages		0		0		0
Total retail		0		0		0
Total		29	$	32,089,000	$	32,084,000

The following loans, modified as troubled debt restructurings within the previous twelve months, became over 30 days past due during the twelve months ended December 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 and residential 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

Loans modified as troubled debt restructurings during 2011 were as follows:

	Number of Contracts		Pre- Modification Recorded Principal Balance		Post- Modification Recorded Principal Balance
Commercial:
Commercial and industrial		26	$	4,942,000	$	4,936,000
Vacant land, land development and residential construction		13		5,543,000		5,542,000
Real estate – owner occupied		11		6,727,000		6,220,000
Real estate – non-owner occupied		16		8,921,000		8,918,000
Real estate – multi-family and residential rental		23		4,002,000		3,842,000
Total commercial		89		30,135,000		29,458,000
Retail:
Home equity and other		0		0		0
1-4 family mortgages		1		165,000		165,000
Total retail		1		165,000		165,000
Total		90	$	30,300,000	$	29,623,000

The following loans, modified as troubled debt restructurings within the previous twelve months, became over 30 days past due during the twelve months ended December 31, 2011 (amounts as of period end):

	Number of Contracts		Recorded Principal Balance
Commercial:
Commercial and industrial		5	$	1,347,000
Vacant land, land development and residential construction		2		297,000
Real estate – owner occupied		1		69,000
Real estate – non-owner occupied		5		1,506,000
Real estate – multi-family and residential rental		10		490,000
Total commercial		23		3,709,000
Retail:
Home equity and other		0		0
1-4 family mortgages		0		0
Total retail		0		0
Total		23	$	3,709,000

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.