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

(6) Loans and Allowance for Loan Losses

The allowance for loan losses is maintained by the Corporation at a level considered by Management to be adequate to cover probable credit losses inherent in the loan portfolio. The amount of the provision for loan losses charged to operating expenses is the amount necessary, in the estimation of Management, to maintain the allowance for loan losses at an adequate level. While Management’s periodic analysis of the allowance for loan losses may dictate portions of the allowance be allocated to specific problem loans, the entire amount is available for any loan charge-offs that may occur. Loan losses are charged off against the allowance when Management believes that the full collectability of the loan is unlikely. Recoveries of amounts previously charged-off are credited to the allowance.

The allowance is comprised of a general allowance and a specific allowance for identified problem loans. The general allowance is determined by applying estimated loss factors to the credit exposures from outstanding loans. The methodology applies to the Corporation’s total loan portfolio including the performing portion of commercial and commercial real estate loans, real estate, and all types of other loans. The loss factors are applied accordingly on a portfolio basis. Loss factors are based on the Corporation’s historical loss experience and are reviewed for appropriateness on a quarterly basis, along with other factors affecting the collectability of the loan portfolio. These other factors include but are not limited to: changes in lending policies and procedures, including underwriting standards and collection, charge-off and recovery practices; changes in national and local economic and business conditions, including the condition of various market segments; changes in the nature and volume of the portfolio; changes in the experience, ability, and depth of lending management and staff; changes in the volume and severity of past due and classified loans, the volume of nonaccrual loans, troubled debt restructurings and other loan modifications; the existence and effect of any concentrations of credit, and changes in the level of such concentrations; and the effect of external factors, such as legal and regulatory requirements, on the level of estimated credit losses in the Corporation’s current portfolio. Specific allowances are established for all impaired loans when Management has determined that, due to identified significant conditions, it is probable that a loss will be incurred.

Activity in the loan balances and the allowance for loan losses by segment at September 30, 2011 and December 31, 2010 are summarized as follows:

Nine Months Ended September 30, 2011
	Commercial			Commercial Real Estate			Residential			Home Equity Loans			Indirect			Consumer			Total
	(Dollars in thousands)
Allowance for loan losses:
Balance, beginning of period	$	1,317		$	11,127		$	805		$	1,512		$	904		$	471		$	16,136
Losses charged off		(236	)		(2,669	)		(1,746	)		(957	)		(264	)		(490	)		(6,362	)
Recoveries		38			249			49			15			77			98			526
Provision charged to expense		6			3,079			2,142			1,744			234			340			7,545
Balance, end of period	$	1,125		$	11,786		$	1,250		$	2,314		$	951		$	419		$	17,845
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	157		$	5,234		$	—		$	—		$	—		$	—		$	5,391
Collectively evaluated for impairment		968			6,552			1,250			2,314			951			419			12,454
Total ending allowance balance	$	1,125		$	11,786		$	1,250		$	2,314		$	951		$	419		$	17,845
Loans:
Individually evaluated for impairment	$	839		$	33,966		$	1,002		$	—		$	—		$	—		$	35,807
Collectively evaluated for impairment		68,919			350,712			64,745			129,665			174,521			13,123			801,685
Total ending loans balance	$	69,758		$	384,678		$	65,747		$	129,665		$	174,521		$	13,123		$	837,492

	Twelve Months Ended December 31, 2010
	Commercial			Commercial Real Estate			Residential			Home Equity Loans			Indirect			Consumer			Total
	(Dollars in thousands)
Allowance for loan losses:
Balance, beginning of year	$	862		$	14,390		$	528		$	1,591		$	799		$	622		$	18,792
Losses charged off		(1,507	)		(8,508	)		(1,491	)		(1,091	)		(455	)		(573	)		(13,625	)
Recoveries		157			87			30			39			293			138			744
Provision charged to expense		1,805			5,158			1,738			973			267			284			10,225
Balance, end of year	$	1,317		$	11,127		$	805		$	1,512		$	904		$	471		$	16,136
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	206		$	6,865		$	46		$	—		$	—		$	—		$	7,117
Collectively evaluated for impairment		1,111			4,262			759			1,512			904			471			9,019
Total ending allowance balance	$	1,317		$	11,127		$	805		$	1,512		$	904		$	471		$	16,136
Loans:
Individually evaluated for impairment	$	1,333		$	38,853		$	4,482		$	—		$	—		$	—		$	44,668
Collectively evaluated for impairment		64,329			336,950			70,203			132,536			150,031			13,862			767,911
Total ending loans balance	$	65,662		$	375,803		$	74,685		$	132,536		$	150,031		$	13,862		$	812,579

Delinquencies

Delinquencies are a sign of weakness in credit quality. Lending staff at the Corporation monitor the financial performance and delinquency of borrowers in its portfolios. Staff members are responsible for managing delinquencies by following up with borrowers and arranging for payments. The Corporation determines if a commercial or commercial real estate loan is delinquent based on the number of days past due according to the contractual terms of the loan. For residential, home equity and consumer loans, the Corporation considers the borrower delinquent if the borrower is in arrears by two or more monthly payments. The following procedure is followed in managing delinquent accounts:

• 15-30 days past due- a collection notice is sent reminding the borrower of past due status and the urgency of bringing the account current.

• 45 days past due- a default letter is sent declaring the loan in default and advising the borrower that legal action will be necessary if the account is not brought current immediately.

• 60 days past due- an “attorney letter” accelerating the loan is sent advising the borrower that legal proceedings to collect the debt will begin immediately.

Management monitors delinquencies and potential problem loans on a recurring basis. At September 30, 2011 there were $29,318 in total past due loans or 3.50% of total loans compared to $36,316 or 4.48% of total loans at December 31, 2010. A table showing total loan delinquencies as of September 30, 2011 and December 31, 2010 by loan segment is as follows:

Age Analysis of Past Due Loans

as of September 30, 2011

(Dollars in thousands)	30-59 Days Past Due		60-89 Days Past  Due		Greater than 90  Days		Total Past Due		Current		Total Loans		Recorded Investment > 90 Days and Accruing
Commercial	$	—	$	—	$	849	$	849	$	68,909	$	69,758	$	—
Commercial Real Estate		287		3,236		15,574		19,097		365,581		384,678		—
Residential		556		718		3,858		5,132		60,615		65,747		—
Home Equity Loans		1,034		130		2,128		3,292		126,373		129,665		—
Indirect		684		87		10		781		173,740		174,521
Consumer		28		7		132		167		12,956		13,123		—
Total	$	2,589	$	4,178	$	22,551	$	29,318	$	808,174	$	837,492	$	—

Age Analysis of Past Due Loans

as of December 31, 2010

(Dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loans		Recorded Investment > 90 Days and Accruing
Commercial	$	31	$	211	$	793	$	1,035	$	64,627	$	65,662	$	—
Commercial Real Estate		1,906		856		19,970		22,732		353,071		375,803		—
Residential		1,018		1,284		7,172		9,474		65,211		74,685		—
Home Equity Loans		776		235		1,130		2,141		130,395		132,536		—
Indirect		612		123		112		847		149,184		150,031
Consumer		61		—		26		87		13,775		13,862		—
Total	$	4,404	$	2,709	$	29,203	$	36,316	$	776,263	$	812,579	$	—

Impaired Loans

A loan is considered impaired when it is probable that not all principal and interest amounts will be collected according to the loan contract. Residential mortgage, installment and other consumer loans are evaluated collectively for impairment. Individual commercial loans are evaluated for impairment. Impaired loans are written down by the establishment of a specific allowance where necessary. Interest income recognized on impaired loans while considered impaired was immaterial for all periods. Information regarding impaired loans as of September 30, 2011 and December 31, 2010 is as follows:

At September 30, 2011	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Balance
(Dollars in thousands)
With no related allowance recorded:
Commercial	$	335	$	335	$	—	$	432
Commercial Real Estate		9,491		14,005		—		10,278
Residential		1,002		1,750		—		1,399
Home Equity Loans		—		—		—		—
Indirect		—		—		—		—
Consumer		—		—		—		—
With allowance recorded:
Commercial		504		979		157		681
Commercial Real Estate		24,475		26,347		5,234		24,941
Residential		—		—		—		662
Home Equity Loans		—		—		—		—
Indirect		—		—		—		—
Consumer		—		—		—		—
Total	$	35,807	$	43,416	$	5,391	$	38,393

At December 31, 2010	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Balance
(Dollars in thousands)
With no related allowance recorded:
Commercial	$	549	$	549	$	—	$	600
Commercial Real Estate		6,393		10,367		—		8,643
Residential		3,102		3,432		—		3,211
Home Equity Loans		—		—		—		—
Indirect		—		—		—		—
Consumer		—		—		—		—
With allowance recorded:
Commercial		784		1,432		206		1,143
Commercial Real Estate		32,460		35,483		6,865		29,946
Residential		1,380		1,416		46		1,420
Home Equity Loans		—		—		—		—
Indirect		—		—		—		—
Consumer		—		—		—		—
Total	$	44,668	$	52,679	$	7,117	$	44,963

Nonaccrual loans at September 30, 2011 were $37,115, compared to $41,831 at December 31, 2010. Nonaccrual loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

Loans On NonAccrual Status

	September 30, 2011			December 31, 2010
	(Dollars in thousands)
Commercial	$	1,124		$	1,333
Commercial Real Estate		23,589			25,941
Residential		7,705			11,052
Home Equity Loans		3,629			2,372
Indirect		728			667
Consumer		340			466
Total Nonaccrual Loans	$	37,115		$	41,831
Percentage of nonaccrual loans to portfolio loans		4.43	%		5.15	%
Percentage of nonaccrual loans to total assets		3.17	%		3.63	%

Troubled Debt Restructuring

A restructuring of a debt constitutes a troubled debt restructuring (“TDR”) if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. That concession either stems from an agreement between the creditor and the debtor or is imposed by law or a court. The Corporation adheres to ASC 310-40, Troubled Debt Restructurings by Creditors, to determine whether a troubled debt restructuring applies in a particular instance. Included in loans individually evaluated for impairment as of September 30, 2011 are loans with a recorded investment of $1,817 whose terms have been modified in troubled debt restructurings and considered nonaccrual. The Corporation has allocated reserves of $113 for the nonaccrual TDR loans at September 30, 2011. At December 31, 2010, the recorded investment of one loan whose terms had been modified in a troubled debt restructuring was $636. This loan was accruing with no specific reserve allocated at December 31, 2010. There are no commitments to lend additional amounts to borrowers with loans that are classified as troubled debt restructurings at September 30, 2011 and December 31, 2010. At September 30, 2011 the borrowers have made timely payments of principal and interest on those loans per the modified agreements. Information regarding TDR loans for the three and nine month periods ended September 30, 2011 is as follows:

	For the Three Months Ended				For the Nine Months Ended
	September 30, 2011				September 30, 2011
	(Dollars in thousands)				(Dollars in thousands)
	Number of Contracts		Post-Modification Outstanding Recorded Investment		Number of Contracts		Post-Modification Outstanding Recorded Investment
Troubled Debt Restructurings Commercial Real Estate		—	$	—		1	$	391

There were no loans modified in a TDR from October 1, 2010 through September 30, 2011 that subsequently defaulted (i.e., 60 days or more past due following a modification) during the three and nine months ended September 30, 2011.

A modification of a loan constitutes a TDR when a borrower is experiencing financial difficulty and the modification constitutes a concession. The Corporation offers various types of concessions when modifying a loan, however, forgiveness of principal is rarely granted. Commercial loans modified in a TDR often involve temporary interest-only payments, term extensions, and converting revolving credit lines to term loans. Additional collateral, a co-borrower, or a guarantor may be requested. Commercial mortgage and construction loans modified in a TDR often involve reducing the interest rate for the remaining term of the loan, extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk, or substituting or adding a new borrower or guarantor. Construction loans modified in a TDR may also involve extending the interest-only payment period. Land loans are also included in the class of commercial real estate loans. Land loans are typically structured as interest-only monthly payments with a balloon payment due at maturity. Land loans modified in a TDR typically involve extending the balloon payment by one to three years, changing the monthly payments from interest-only to principal and interest, while leaving the interest rate unchanged.

Loans modified in a TDR are typically already on nonaccrual status and partial charge-offs have in some cases already been taken against the outstanding loan balance. As a result, loans modified in a TDR for the Corporation may have the financial effect of increasing the specific allowance associated with the loan. The allowance for impaired loans that have been modified in a TDR is measured based on the estimated fair value of the collateral, less any selling costs, if the loan is collateral dependent or on the present value of expected future cash flows discounted at the loan’s effective interest rate. Management exercises significant judgment in developing these estimates.

Credit Risk Grading

Sound credit systems, practices and procedures such as credit risk grading systems; effective credit review and examination processes; effective loan monitoring, problem identification, and resolution processes; and a conservative loss recognition process and charge-off policy are integral to Management’s proper assessment of the adequacy of the allowance. Many factors are considered when grades are assigned to individual loans such as current and historic delinquency, financial statements of the borrower, current net realizable value of collateral and the general economic environment and specific economic trends affecting the portfolio. Commercial, commercial real estate and residential construction loans are assigned internal credit risk grades. The loan’s internal credit risk grade is reviewed on at least an annual basis and more frequently if needed based on specific borrower circumstances. Credit quality indicators used in Management’s periodic analysis of the adequacy of the allowance include the Corporation’s internal credit risk grades which are described below and are included in the table below for September 30, 2011 and December 31, 2010:

• Grades 1 -5: defined as “Pass” credits — loans which are protected by the borrower’s current net worth and paying capacity or by the value of the underlying collateral. Pass credits are current or have not displayed a significant past due history.

• Grade 6: defined as “Special Mention” credits — loans where a potential weakness or risk exists, which could cause a more serious problem if not monitored. Loans listed for special mention generally demonstrate a history of repeated delinquencies, which may indicate a deterioration of the repayment abilities of the borrower.

• Grade 7: defined as “Substandard” credits — loans that have a well-defined weakness based on objective evidence and are characterized by the distinct possibility that the Corporation will sustain some loss if the deficiencies are not corrected.

• Grade 8: defined as “Doubtful” credits — loans classified as doubtful have all the weaknesses inherent in a substandard asset. In addition, these weaknesses make collection or liquidation in full highly questionable and improbable.

• Grade 9: defined as “Loss” credits — loans classified as a loss are considered uncollectible, or of such value that continuance as an asset is not warranted.

For residential, home equity, indirect and consumer loan segments, the Corporation monitors credit quality using a combination of the delinquency status of the loan and/or the Corporation’s internal credit risk grades as indicated above.

The following table presents the recorded investment of commercial, commercial real estate and residential construction loans by internal credit risk grade and the recorded investment in residential, home equity, indirect and consumer loans based on delinquency status as of September 30, 2011 and December 31, 2010:

	Commercial		Commercial Real Estate		Residential*		Home Equity Loans		Indirect		Consumer		Total
Commercial Credit Exposure	September 30, 2011
	(Dollars in thousands)
Loans graded by internal credit risk grade:
Grade 1 - Minimal	$	3,172	$	—	$	—	$	—	$	—	$	—	$	3,172
Grade 2 - Modest		—		—		—		—		—		—		—
Grade 3 - Better than average		147		2,912		—		—		—		—		3,059
Grade 4 - Average		3,453		58,079		259		—		—		—		61,791
Grade 5 - Acceptable		59,007		262,408		4,903		—		—		—		326,318
Total Pass Credits		65,779		323,399		5,162		—		—		—		394,340
Grade 6 - Special mention		2,685		16,223		720		—		—		—		19,628
Grade 7 - Substandard		1,294		45,056		1,444		—		—		—		47,794
Grade 8 - Doubtful		—		—		—		—		—		—		—
Grade 9 - Loss		—		—		—		—		—		—		—
Total loans internally credit risk graded		69,758		384,678		7,326		—		—		—		461,762
Loans not monitored by internal risk grade:
Current loans not internally risk graded		—		—		53,289		126,373		173,740		12,956		366,358
30-59 days past due loans not internally risk graded		—		—		556		1,034		684		28		2,302
60-89 days past due loans not internally risk graded		—		—		718		130		87		7		942
90+ days past due loans not internally risk graded		—		—		3,858		2,128		10		132		6,128
Total loans not internally credit risk graded		—		—		58,421		129,665		174,521		13,123		375,730
Total loans internally and not internally credit risk graded	$	69,758	$	384,678	$	65,747	$	129,665	$	174,521	$	13,123	$	837,492
	Commercial		Commercial Real Estate		Residential*		Home Equity Loans		Indirect		Consumer		Total
Commercial Credit Exposure	December 31, 2010
	(Dollars in thousands)
Loans graded by internal credit risk grade:
Grade 1 - Minimal	$	3,124	$	—	$	—	$	—	$	—	$	—	$	3,124
Grade 2 - Modest		—		—		—		—		—		—		—
Grade 3 - Better than average		162		3,055		—		—		—		—		3,217
Grade 4 - Average		8,343		59,651		267		—		—		—		68,261
Grade 5 - Acceptable		49,727		246,475		5,733		—		—		—		301,935
Total Pass Credits		61,356		309,181		6,000		—		—		—		376,537
Grade 6 - Special mention		2,599		13,807		170		—		—		—		16,576
Grade 7 - Substandard		1,707		52,815		2,516		—		—		—		57,038
Grade 8 - Doubtful		—		—		—		—		—		—		—
Grade 9 - Loss		—		—		—		—		—		—		—
Total loans internally credit risk graded		65,662		375,803		8,686		—		—		—		450,151
Loans not monitored by internal risk grade:
Current loans not internally risk graded		—		—		57,389		130,395		149,184		13,775		350,743
30-59 days past due loans not internally risk graded		—		—		1,018		776		612		61		2,467
60-89 days past due loans not internally risk graded		—		—		1,032		235		123		—		1,390
90+ days past due loans not internally risk graded		—		—		6,560		1,130		112		26		7,828
Total loans not internally credit risk graded		—		—		65,999		132,536		150,031		13,862		362,428
Total loans internally and not internally credit risk graded	$	65,662	$	375,803	$	74,685	$	132,536	$	150,031	$	13,862	$	812,579

* Residential loans with an internal commercial credit risk grade include loans that are secured by non owner occupied 1-4 family residential properties and conventional 1-4 family residential properties.

The Corporation adheres to underwriting standards consistent with its Loan Policy for indirect and consumer loans. Final approval of a consumer credit depends on the repayment ability of the borrower. Repayment ability generally requires the determination of the borrower’s capacity to meet current and proposed debt service requirements. A borrower’s repayment ability is monitored based on delinquency, generally for time periods of 30 to 59 days past due, 60 to 89 days past due and greater than 90 days past due. This information is provided in the above past due loans table.