Loans and Allowance for Loan Losses

3 Months Ended

Mar. 31, 2013

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, 2013 were $1.02 billion compared to $1.04 billion at December 31, 2012, a decrease of $18.2 million, or 1.8%. The components of our loan portfolio disaggregated by class of loan within the loan portfolio segments at March 31, 2013 and December 31, 2012, and the percentage change in loans from the end of 2012 to the end of the first quarter of 2013, are as follows:

	March 31, 2013					December 31, 2012					Percent Increase (Decrease)
	Balance		%			Balance		%
Commercial:
Commercial and industrial	$	272,890,000		26.7	%	$	285,322,000		27.4	%		(4.4	%)
Vacant land, land development, and residential construction		45,174,000		4.4			48,099,000		4.6			(6.1	)
Real estate – owner occupied		253,089,000		24.7			259,277,000		24.9			(2.4	)
Real estate – non-owner occupied		327,776,000		32.1			324,886,000		31.2			0.9
Real estate – multi-family and residential rental		50,035,000		4.9			50,922,000		4.9			(1.7	)
Total commercial		948,964,000		92.8			968,506,000		93.0			(2.0	)
Retail:
Home equity and other		38,257,000		3.7			38,917,000		3.7			(1.7	)
1-4 family mortgages		35,735,000		3.5			33,766,000		3.3			5.8
Total retail		73,992,000		7.2			72,683,000		7.0			1.8
Total loans	$	1,022,956,000		100.0	%	$	1,041,189,000		100.0	%		(1.8	%)

Nonperforming loans as of March 31, 2013 and December 31, 2012 were as follows:

	March 31, 2013		December 31, 2012
Loans past due 90 days or more still accruing interest	$	0	$	0
Nonaccrual loans		12,395,000		18,970,000
Total nonperforming loans	$	12,395,000	$	18,970,000

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

	March 31, 2013		December 31, 2012
Commercial:
Commercial and industrial	$	1,802,000	$	1,677,000
Vacant land, land development, and residential construction		1,444,000		2,194,000
Real estate – owner occupied		1,256,000		2,087,000
Real estate – non-owner occupied		4,905,000		9,010,000
Real estate – multi-family and residential rental		1,085,000		2,021,000
Total commercial		10,492,000		16,989,000
Retail:
Home equity and other		838,000		889,000
1-4 family mortgages		1,065,000		1,092,000
Total retail		1,903,000		1,981,000
Total nonaccrual loans	$	12,395,000	$	18,970,000

An age analysis of past due loans is as follows as of March 31, 2013:

	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	$	0	$	771,000	$	771,000	$	272,119,000	$	272,890,000	$	0
Vacant land, land development, and residential construction		0		0		1,140,000		1,140,000		44,034,000		45,174,000		0
Real estate – owner occupied		92,000		51,000		749,000		892,000		252,197,000		253,089,000		0
Real estate – non-owner occupied		0		1,860,000		632,000		2,492,000		325,284,000		327,776,000		0
Real estate – multi-family and residential rental		290,000		0		196,000		486,000		49,549,000		50,035,000		0
Total commercial		382,000		1,911,000		3,488,000		5,781,000		943,183,000		948,964,000		0
Retail:
Home equity and other		17,000		0		13,000		30,000		38,227,000		38,257,000		0
1-4 family mortgages		0		0		436,000		436,000		35,299,000		35,735,000		0
Total retail		17,000		0		449,000		466,000		73,526,000		73,992,000		0
Total past due loans	$	399,000	$	1,911,000	$	3,937,000	$	6,247,000	$	1,016,709,000	$	1,022,956,000	$	0

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

Impaired loans were as follows as of March 31, 2013:

	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	$	2,972,000	$	1,556,000			$	1,587,000
Vacant land, land development and residential construction		2,342,000		1,378,000				1,389,000
Real estate – owner occupied		2,314,000		1,349,000				1,453,000
Real estate – non-owner occupied		7,440,000		4,717,000				5,105,000
Real estate – multi-family and residential rental		1,729,000		684,000				549,000
Total commercial		16,797,000		9,684,000				10,083,000
Retail:
Home equity and other		580,000		480,000				481,000
1-4 family mortgages		1,630,000		767,000				778,000
Total retail		2,210,000		1,247,000				1,259,000
Total with no related allowance recorded	$	19,007,000	$	10,931,000			$	11,342,000
With an allowance recorded:
Commercial:
Commercial and industrial	$	2,616,000	$	2,506,000	$	1,407,000			$	2,216,000
Vacant land, land development and residential construction		1,958,000		1,480,000		726,000				1,849,000
Real estate – owner occupied		3,417,000		2,953,000		1,162,000				3,289,000
Real estate – non-owner occupied		30,428,000		30,322,000		10,411,000				31,643,000
Real estate – multi-family and residential rental		2,761,000		2,691,000		910,000				3,307,000
Total commercial		41,180,000		39,952,000		14,616,000				42,304,000
Retail:
Home equity and other		369,000		346,000		155,000				370,000
1-4 family mortgages		559,000		471,000		122,000				473,000
Total retail		928,000		817,000		277,000				843,000
Total with an allowance recorded	$	42,108,000	$	40,769,000	$	14,893,000			$	43,147,000
Total impaired loans:
Commercial	$	57,977,000	$	49,636,000	$	14,616,000			$	52,387,000
Retail		3,138,000		2,064,000		277,000				2,102,000
Total impaired loans	$	61,115,000	$	51,700,000	$	14,893,000			$	54,489,000

Interest income of $0.6 million was recognized on impaired loans during the first quarter of 2013.

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 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
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

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 and payment activity.

Loans by credit quality indicators were as follows as of March 31, 2013:

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	$	190,314,000	$	8,065,000	$	148,122,000	$	166,374,000	$	23,568,000
Grades 5 – 7		79,038,000		33,858,000		100,606,000		124,228,000		22,613,000
Grades 8 – 9		3,538,000		3,251,000		4,361,000		37,174,000		3,854,000
Total commercial	$	272,890,000	$	45,174,000	$	253,089,000	$	327,776,000	$	50,035,000

Retail credit exposure – credit risk profiled by collateral type:

	Retail Home Equity and Other		Retail 1-4 Family Mortgages
Total retail	$	38,257,000	$	35,735,000

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

All commercial loans are graded using the following criteria:

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 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, 2013 are as follows:

	Commercial Loans			Retail Loans			Unallocated			Total
Allowance for loan losses:
Beginning balance	$	26,043,000		$	2,645,000		$	(11,000	)	$	28,677,000
Provision for loan losses		(1,164,000	)		(363,000	)		27,000			(1,500,000	)
Charge-offs		(2,412,000	)		(3,000	)		0			(2,415,000	)
Recoveries		1,250,000			23,000			0			1,273,000
Ending balance	$	23,717,000		$	2,302,000		$	16,000		$	26,035,000
Ending balance: individually evaluated for impairment	$	14,616,000		$	277,000		$	0		$	14,893,000
Ending balance: collectively evaluated for impairment	$	9,101,000		$	2,025,000		$	16,000		$	11,142,000
Total loans:
Ending balance	$	948,964,000		$	73,992,000					$	1,022,956,000
Ending balance: individually evaluated for impairment	$	49,636,000		$	2,064,000					$	51,700,000
Ending balance: collectively evaluated for impairment	$	899,328,000		$	71,928,000					$	971,256,000

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

Loans modified as troubled debt restructurings during the three months ended March 31, 2013 were as follows:

	Number of Contracts		Pre- Modification Recorded Principal Balance		Post- Modification Recorded Principal Balance
Commercial:
Commercial and industrial		1	$	875,000	$	875,000
Vacant land, land development and residential construction		0		0		0
Real estate – owner occupied		0		0		0
Real estate – non-owner occupied		2		2,068,000		2,068,000
Real estate – multi-family and residential rental		0		0		0
Total commercial		3		2,943,000		2,943,000
Retail:
Home equity and other		0		0		0
1-4 family mortgages		0		0		0
Total retail		0		0		0
Total		3	$	2,943,000	$	2,943,000

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, 2013 (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		1		44,000
Real estate – non-owner occupied		0		0
Real estate – multi-family and residential rental		0		0
Total commercial		1		44,000
Retail:
Home equity and other		0		0
1-4 family mortgages		0		0
Total retail		0		0
Total		1	$	44,000

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 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

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.