Loans and Allowance for Loan Losses

12 Months Ended

Dec. 31, 2011

Loans and Allowance for Loan Losses [Abstract]

Loans and Allowance for Loan Losses

(7)    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. For residential real estate, installment and other loans, loss factors are applied 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 allowance for loan losses by segment for 2011 and 2010 is summarized as follows:

Year Ended December 31, 2011
	Commercial Real Estate			Commercial			Residential Real Estate			Home Equity Loans			Indirect			Consumer			Total
	(Dollars in thousands)
Allowance for loan losses:
Balance, beginning of year	$	11,127		$	1,317		$	805		$	1,512		$	904		$	471		$	16,136
Losses charged off		(5,195	)		(262	)		(1,664	)		(1,895	)		(695	)		(398	)		(10,109	)
Recoveries		280			42			22			62			209			68			683
Provision charged to expense		4,502			312			2,168			2,610			473			288			10,353
Balance, end of year	$	10,714		$	1,409		$	1,331		$	2,289		$	891		$	429		$	17,063
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	3,747		$	148		$	37		$	—		$	—		$	—		$	3,932
Collectively evaluated for impairment		6,967			1,261			1,294			2,289			891			429			13,131
Total ending allowance balance	$	10,714		$	1,409		$	1,331		$	2,289		$	891		$	429		$	17,063
Loans:
Individually evaluated for impairment	$	31,746		$	705		$	1,141		$	—		$	—		$	—		$	33,592
Collectively evaluated for impairment		350,106			75,865			63,383			126,958			180,089			13,095			809,496
Total ending loans balance	$	381,852		$	76,570		$	64,524		$	126,958		$	180,089		$	13,095		$	843,088
Year Ended December 31, 2010
	Commercial Real Estate			Commercial			Residential Real Estate			Home Equity Loans			Indirect			Consumer			Total
	(Dollars in thousands)
Allowance for loan losses:
Balance, beginning of year	$	14,390		$	862		$	528		$	1,591		$	799		$	622		$	18,792
Losses charged off		(8,508	)		(1,507	)		(1,491	)		(1,091	)		(455	)		(573	)		(13,625	)
Recoveries		87			157			30			39			293			138			744
Provision charged to expense		5,158			1,805			1,738			973			267			284			10,225
Balance, end of year	$	11,127		$	1,317		$	805		$	1,512		$	904		$	471		$	16,136
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	6,865		$	206		$	46		$	—		$	—		$	—		$	7,117
Collectively evaluated for impairment		4,262			1,111			759			1,512			904			471			9,019
Total ending allowance balance	$	11,127		$	1,317		$	805		$	1,512		$	904		$	471		$	16,136
Loans:
Individually evaluated for impairment	$	38,853		$	1,333		$	4,482		$	—		$	—		$	—		$	44,668
Collectively evaluated for impairment		336,950			64,329			70,203			132,536			150,031			13,862			767,911
Total ending loans balance	$	375,803		$	65,662		$	74,685		$	132,536		$	150,031		$	13,862		$	812,579

Delinquencies

Management monitors delinquency and potential commercial problem loans. Bank-wide delinquency at December 31, 2011 was 3.71% of total loans. Total 30-59 day delinquency and 60-89 day delinquency was 0.43% and 0.30% of total loans at December 31, 2011, respectively. Bank-wide delinquency at December 31, 2010 was 4.47% of total loans. Total 30-59 day delinquency and 60-89 day delinquency was 0.54% and 0.33% of total loans at December 31, 2010, respectively. Information regarding delinquent loans as of December 31, 2011 and December 31, 2010 is as follows:

Age Analysis of Past Due Loans as of December 31, 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 real estate	$	290	$	804	$	19,023	$	20,117	$	361,735	$	381,852	$	—
Commercial		54		249		805		1,108		75,462		76,570		—
Residential real estate		545		1,172		3,554		5,271		59,253		64,524		—
Home equity loans		1,942		181		1,666		3,789		123,169		126,958		—
Indirect		664		71		124		859		179,230		180,089
Consumer		131		12		28		171		12,924		13,095		—
Total	$	3,626	$	2,489	$	25,200	$	31,315	$	811,773	$	843,088	$	—

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 real estate	$	1,906	$	856	$	19,970	$	22,732	$	353,071	$	375,803	$	—
Commercial		31		211		793		1,035		64,627		65,662		—
Residential real estate		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 is as follows:

Impaired Loans

For the Period Ended December 31, 2011

At December 31, 2011	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Balance
	(Dollars in thousands)
With no related allowance recorded:
Commercial real estate	$	12,585	$	20,138	$	—	$	14,805
Commercial		386		386		—		419
Residential real estate		1,069		1,897		—		1,470
Home equity loans		—		—		—		—
Indirect		—		—		—		—
Consumer		—		—		—		—
With allowance recorded:
Commercial real estate		19,161		19,823		3,747		18,130
Commercial		319		794		148		570
Residential real estate		72		72		37		72
Home equity loans		—		—		—		—
Indirect		—		—		—		—
Consumer		—		—		—		—
Total	$	33,592	$	43,110	$	3,932	$	35,466
At December 31, 2010	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Balance
	(Dollars in thousands)
With no related allowance recorded:
Commercial real estate	$	6,393	$	10,367	$	—	$	8,643
Commercial		549		549		—		600
Residential real estate		3,102		3,432		—		3,211
Home equity loans		—		—		—		—
Indirect		—		—		—		—
Consumer		—		—		—		—
With allowance recorded:
Commercial real estate		32,460		35,483		6,865		29,946
Commercial		784		1,432		206		1,143
Residential real estate		1,380		1,416		46		1,420
Home equity loans		—		—		—		—
Indirect		—		—		—		—
Consumer		—		—		—		—
Total	$	44,668	$	52,679	$	7,117	$	44,963

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 December 31, 2011 are loans with a recorded investment of $3,099, the terms of which were modified in troubled debt restructurings and considered nonaccrual. The Corporation has allocated reserves of $307 for the nonaccrual TDR loans at December 31, 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 December 31, 2011 and December 31, 2010. At December 31, 2011 the borrowers had made timely payments of principal and interest on those loans per the modified agreements. Information regarding TDR loans for the year ended December 31, 2011 is as follows:

	December 31, 2011
	(Dollars in thousands)
	Number of Contracts		Post-Modification Outstanding Recorded Investment
Troubled Debt Restructurings Commercial Real Estate		5	$	3,099

There were no loans modified in a TDR during 2011 that subsequently defaulted (i.e., 60 days or more past due following a modification).

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 and 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.

Nonaccrual Loans

Nonaccrual loan balances at December 31, 2011 and December 31, 2010 are as follows:

Loans On Non Accrual Status	December 31, 2011		December 31, 2010
	(Dollars in thousands)
Commercial real estate	$	21,512	$	25,941
Commercial		1,072		1,333
Residential real estate		6,551		10,287
Home equity loans		4,365		3,137
Indirect		711		667
Consumer		260		466
Total Nonaccrual Loans	$	34,471	$	41,831

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 December 31, 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 the residential real estate segment, 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 real estate, commercial and residential real estate loans by internal credit risk grade and the recorded investment of residential real estate, home equity, indirect and consumer loans based on delinquency status as of December 31, 2011 and December 31, 2010:

Commercial Credit Exposure	Commercial Real Estate		Commercial		Residential Real Estate*		Home Equity Loans		Indirect		Consumer		Total
	December 31, 2011
	(Dollars in thousands)
Loans graded by internal credit risk grade:
Grade 1 — Minimal	$	—	$	3,157	$	—	$	—	$	—	$	—	$	3,157
Grade 2 — Modest		—		—		—		—		—		—		—
Grade 3 — Better than average		1,602		19		—		—		—		—		1,621
Grade 4 — Average		44,527		5,322		237		—		—		—		50,086
Grade 5 — Acceptable		278,458		63,880		4,835		—		—		—		347,173
Total Pass Credits		324,587		72,378		5,072		—		—		—		402,037
Grade 6 — Special mention		16,390		2,947		157		—		—		—		19,494
Grade 7 — Substandard		40,875		1,245		1,830		—		—		—		43,950
Grade 8 — Doubtful		—		—		—		—		—		—		—
Grade 9 — Loss		—		—		—		—		—		—		—
Total loans internally credit risk graded		381,852		76,570		7,059		—		—		—		465,481
Loans not monitored by internal risk grade:
Current loans not internally risk graded		—		—		53,276		123,169		179,230		12,924		368,599
30-59 days past due loans not internally risk graded		—		—		545		1,942		664		131		3,282
60-89 days past due loans not internally risk graded		—		—		1,172		181		71		12		1,436
90+ days past due loans not internally risk graded		—		—		2,472		1,666		124		28		4,290
Total loans not internally credit risk graded		—		—		57,465		126,958		180,089		13,095		377,607
Total loans internally and not internally credit risk graded	$	381,852	$	76,570	$	64,524	$	126,958	$	180,089	$	13,095	$	843,088

* 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.

Commercial Credit Exposure	Commercial Real Estate		Commercial		Residential Real Estate*		Home Equity Loans		Indirect		Consumer		Total
	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		3,055		162		—		—		—		—		3,217
Grade 4 — Average		59,651		8,343		267		—		—		—		68,261
Grade 5 — Acceptable		246,475		49,727		5,733		—		—		—		301,935
Total Pass Credits		309,181		61,356		6,000		—		—		—		376,537
Grade 6 — Special mention		13,807		2,599		170		—		—		—		16,576
Grade 7 — Substandard		52,815		1,707		2,516		—		—		—		57,038
Grade 8 — Doubtful		—		—		—		—		—		—		—
Grade 9 — Loss		—		—		—		—		—		—		—
Total loans internally credit risk graded		375,803		65,662		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	$	375,803	$	65,662	$	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.