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

(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 for unidentified problem loans 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 June 30, 2012 and June 30, 2011 are summarized as follows:

Six Months Ended June 30, 2012
	Commercial Real Estate			Commercial			Residential Real Estate			Home Equity Loans			Indirect			Consumer			Total
							(Dollars in thousands)
Allowance for loan losses:
Balance, beginning of period	$	10,714		$	1,409		$	1,331		$	2,289		$	891		$	429		$	17,063
Losses charged off		(1,319	)		(165	)		(975	)		(555	)		(577	)		(106	)		(3,697	)
Recoveries		30			20			83			15			190			29			367
Provision charged to expense		1,971			(424	)		1,277			397			481			(135	)		3,567
Balance, end of period	$	11,396		$	840		$	1,716		$	2,146		$	985		$	217		$	17,300
Three Months Ended June 30, 2012
	Commercial Real Estate			Commercial			Residential Real Estate			Home Equity Loans			Indirect			Consumer			Total
							(Dollars in thousands)
Allowance for loan losses:
Balance, beginning of period	$	11,651		$	585		$	1,574		$	2,298		$	807		$	200		$	17,115
Losses charged off		(340	)		(165	)		(508	)		(152	)		(399	)		(57	)		(1,621	)
Recoveries		10			3			16			11			87			12			139
Provision charged to expense		75			417			634			(11	)		490			62			1,667
Balance, end of period	$	11,396		$	840		$	1,716		$	2,146		$	985		$	217		$	17,300
As of June 30, 2012
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	3,181		$	80		$	37		$	—		$	—		$	—		$	3,298
Collectively evaluated for impairment		8,215			760			1,679			2,146			985			217			14,002
Total ending allowance balance	$	11,396		$	840		$	1,716		$	2,146		$	985		$	217		$	17,300
Loans:
Individually evaluated for impairment	$	28,102		$	306		$	1,161		$	—		$	—		$	—		$	29,569
Collectively evaluated for impairment		370,149			79,155			63,673			126,568			184,892			13,453			837,890
Total ending loans balance	$	398,251		$	79,461		$	64,834		$	126,568		$	184,892		$	13,453		$	867,459
Six Months Ended June 30, 2011
	Commercial Real Estate			Commercial			Residential Real Estate			Home Equity Loans			Indirect			Consumer			Total
							(Dollars in thousands)
Allowance for loan losses:
Balance, beginning of period	$	11,127		$	1,317		$	805		$	1,512		$	904		$	471		$	16,136
Losses charged off		(2,092	)		(224	)		(1,026	)		(686	)		(338	)		(245	)		(4,611	)
Recoveries		216			35			10			2			72			46			381
Provision charged to expense		2,430			54			1,460			1,063			283			155			5,445
Balance, end of period	$	11,681		$	1,182		$	1,249		$	1,891		$	921		$	427		$	17,351
Three Months Ended June 30, 2011
							(Dollars in thousands)
Allowance for loan losses:
Balance, beginning of period	$	12,003		$	1,151		$	926		$	1,940		$	902		$	393		$	17,315
Losses charged off		(1,862	)		(224	)		(753	)		(341	)		(143	)		(176	)		(3,499	)
Recoveries		114			4			6			1			47			18			190
Provision charged to expense		1,426			251			1,070			291			115			192			3,345
Balance, end of period	$	11,681		$	1,182		$	1,249		$	1,891		$	921		$	427		$	17,351
As of June 30, 2011
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	5,602		$	166		$	302		$	—		$	—		$	—		$	6,070
Collectively evaluated for impairment		6,079			1,016			947			1,891			921			427			11,281
Total ending allowance balance	$	11,681		$	1,182		$	1,249		$	1,891		$	921		$	427		$	17,351
Loans:
Individually evaluated for impairment	$	35,349		$	771		$	2,126		$	—		$	—		$	—		$	38,246
Collectively evaluated for impairment		351,542			71,908			66,711			130,143			158,885			12,877			792,066
Total ending loans balance	$	386,891		$	72,679		$	68,837		$	130,143		$	158,885		$	12,877		$	830,312

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. Lenders 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 proceeding to collect the debt will begin immediately.

Management monitors delinquencies and potential problem loans on a recurring basis. At June 30, 2012 there was $27,158 in total past due loans or 3.13% of total loans compared to $31,315 or 3.71% of total loans at December 31, 2011. A table showing total loan delinquencies as of June 30, 2012 and December 31, 2011 by loan segment is as follows:

Age Analysis of Past Due Loans as of June 30, 2012
(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	$	701	$	425	$	16,435	$	17,561	$	380,690	$	398,251	$	—
Commercial		404		123		491		1,018		78,443		79,461		—
Residential real estate		506		608		3,579		4,693		60,141		64,834		—
Home equity loans		1,342		272		1,386		3,000		123,568		126,568		—
Indirect		518		96		5		619		184,273		184,892
Consumer		60		163		44		267		13,186		13,453		—
Total	$	3,531	$	1,687	$	21,940	$	27,158	$	840,301	$	867,459	$	—

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	$	—

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 the periods reported. Information regarding impaired loans as of June 30, 2012 and June 30, 2011 is as follows:

	At June 30, 2012						Three Months Ended June 30, 2012		Six Months Ended June 30, 2012
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Balance		Average Recorded Balance
(Dollars in thousands)
With no related allowance recorded:
Commercial real estate	$	8,241	$	12,981	$	—	$	9,121	$	9,758
Commercial		171		171		—		208		177
Residential real estate		1,089		2,138		—		1,353		1,184
Home equity loans		—		—		—		—		—
Indirect		—		—		—		—		—
Consumer		—		—		—		—		—
With allowance recorded:
Commercial real estate		19,861		21,465		3,181		19,600		19,511
Commercial		135		135		80		313		269
Residential real estate		72		72		37		72		72
Home equity loans		—		—		—		—		—
Indirect		—		—		—		—		—
Consumer		—		—		—		—		—
Total	$	29,569	$	36,962	$	3,298	$	30,667	$	30,971

	At December 31, 2011						Three Months Ended June 30, 2011		Six Months Ended June 30, 2011
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Balance		Average Recorded Balance
(Dollars in thousands)
With no related allowance recorded:
Commercial real estate	$	12,585	$	20,138	$	—	$	10,575	$	9,609
Commercial		386		386		—		368		484
Residential real estate		1,069		1,897		—		1,771		2,491
Home equity loans		—		—		—		—		—
Indirect		—		—		—		—		—
Consumer		—		—		—		—		—
With allowance recorded:
Commercial real estate		19,161		19,823		3,747		26,667		28,307
Commercial		319		794		148		531		837
Residential real estate		72		72		37		662		1,041
Home equity loans		—		—		—		—		—
Indirect		—		—		—		—		—
Consumer		—		—		—		—		—
Total	$	33,592	$	43,110	$	3,932	$	40,574	$	42,769

Nonaccrual loans at June 30, 2012 were $34,993 compared to $34,471 at December 31, 2011.

	June 30, 2012			December 31, 2011
	(Dollars in thousands)
Commercial real estate	$	22,456		$	21,512
Commercial		644			1,072
Residential real estate		6,724			6,551
Home equity loans		4,252			4,365
Indirect		530			711
Consumer		387			260
Total Nonaccrual Loans	$	34,993		$	34,471
Percentage of nonaccrual loans to portfolio loans		4.03	%		4.09	%
Percentage of nonaccrual loans to total assets		2.90	%		2.95	%

Troubled Debt Restructuring

A restructuring of a debt constitutes a troubled debt restructuring 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 structuring applies in a particular instance. As of June 30, 2012, the Corporation had five loans that were classified as troubled debt restructurings which totaled $2,972. As of December 31, 2011, the Corporation had five loans that were classified as a troubled debt restructuring in the amount of $3,099. The Corporation has allocated $455 and $307 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of June 30, 2012 and December 31, 2011, respectively. There are no commitments to lend additional amounts to borrowers with loans that are classified as troubled debt restructurings at June 30, 2012 and December 31, 2011.

Information regarding TDR loans for the three and six months end June 30, 2012 is as follows:

	For the Six Months Ended June 30, 2012				For the Three Months Ended June 30, 2012
	(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		5	$	2,972		—	$	—

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 June 30, 2012 and December 31, 2011:

• 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 June 30, 2012 and December 31, 2011:

	Commercial Real Estate		Commercial		Residential Real Estate*		Home Equity Loans		Indirect		Consumer		Total
Commercial Credit Exposure	June 30, 2012
	(Dollars in thousands)
Loans graded by internal credit risk grade:
Grade 1-Minimal	$	—	$	110	$	—	$	—	$	—	$	—	$	110
Grade 2-Modest		—		—		—		—		—		—		—
Grade 3-Better than average		1,566		13		—		—		—		—		1,579
Grade 4-Average		38,195		4,837		232		—		—		—		43,264
Grade 5-Acceptable		319,260		70,231		4,681		—		—		—		394,172
Total Pass Credits		359,021		75,191		4,913		—		—		—		439,125
Grade 6-Special mention		5,789		3,642		46		—		—		—		9,477
Grade 7-Substandard		32,676		628		1,533		—		—		—		34,837
Grade 8-Doubtful		765		—		—		—		—		—		765
Grade 9-Loss		—		—		—		—		—		—		—
Total loans internally credit risk graded		398,251		79,461		6,492		—		—		—		484,204
Loans not monitored by internal risk grade:
Current loans not internally risk graded		—		—		55,181		123,568		184,273		13,186		376,208
30-59 days past due loans not internally risk graded		—		—		506		1,342		518		60		2,426
60-89 days past due loans not internally risk graded		—		—		608		272		96		163		1,139
90+ days past due loans not internally risk graded		—		—		2,047		1,386		5		44		3,482
Total loans not internally credit risk graded		—		—		58,342		126,568		184,892		13,453		383,255
Total loans internally and not internally credit risk graded	$	398,251	$	79,461	$	64,834	$	126,568	$	184,892	$	13,453	$	867,459

	Commercial Real Estate		Commercial		Residential Real Estate*		Home Equity Loans		Indirect		Consumer		Total
Commercial Credit Exposure	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 include conventional 1-4 family residential property loans and conventional 1-4 family residential property loans used to finance the cost of construction when upon completion of construction the loan converts into a permanent mortgage.

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 delinquent loan table. Additionally, a good indicator of repayment ability is a borrower’s credit history. A borrower’s credit history is evaluated though the use of credit reports and/or an automated underwriting system. A borrower’s credit score is an indication of a person’s creditworthiness that is used to access the likelihood that a borrower will repay their debts. A credit score is generally based upon a person’s past credit history and is a number between 300 and 850—the higher the number, the more creditworthy the person is deemed to be.