Allowance For Loan Losses

3 Months Ended

Mar. 31, 2012

Allowance For Loan Losses [Abstract]

Allowance For Loan Losses

(6) Allowance for Loan Losses

The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the un-collectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management's judgment, should be charged off.

The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired.

A loan is impaired when, based on current information and events, it is probable that Suffolk will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired. Generally, troubled debt restructurings are initially classified as non-accrual until sufficient time has passed to assess whether the restructured loan will continue to perform. Generally, Suffolk returns a troubled-debt restructuring to accrual status upon six months of performance under the new terms.

Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

Commercial and commercial real estate loans over $250,000 are individually evaluated for impairment. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan's existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Large groups of homogeneous loans with smaller individual balances, such as consumer and residential real estate loans, are evaluated collectively for impairment, and accordingly, are not separately identified for impairment disclosures. Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan's effective rate at inception. If a troubled debt restructuring is considered to be "collateral-dependent," the loan is reported, net, at the fair value of the collateral. For troubled debt restructurings that subsequently default, Suffolk determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.

The general component covers non impaired loans and is based on historical loss experience, adjusted for qualitative factors. The historical loss experience is determined by portfolio segment, and is based on the actual loss history experienced by Suffolk over the historical loan loss period which is a rolling twelve month period. This actual loss experience is supplemented with other qualitative factors based on the risks present for each portfolio segment. These qualitative factors include consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations. The following portfolio segments have been identified:

• Commercial, financial & agricultural loans

• Commercial real estate mortgages

• Real estate — construction loans

• Residential mortgages (1st and 2nd liens)

• Home equity loans

• Consumer loans

In addition, qualitative factors are considered for areas of concern that cannot be fully quantified in the allocation based on historical net charge-off ratios. Qualitative factors include:

• Economic outlook

• Trends in delinquency and problem loans

• Changes in loan volume and nature of terms of loans

• Effects of changes in lending policy

• Experience, ability, and depth of lending management and staff

• Concentrations of credit

• Board and loan review oversight

• Changes in value of underlying collateral

• Competition, regulation, and other external factors

For performing loans, an estimate of adequacy is made by applying qualitative factors specific to the portfolio to the period-end balances. Consideration is also given to the type and collateral of the loans with particular attention paid to commercial real estate construction loans, due to the inherent risk of this type of loan. Allocated and general reserves are available for any identified loss.

Delinquent, non-performing, and classified loans have trended upward in recent quarters. These are primary factors in the determination of the allowance.

At March 31, 2012, non-performing loans, including non-accrual loans and loans contractually past due 90 days or more with regard to payment of principal and/or interest, totaled $83,152,000 as compared to $80,760,000 at December 31, 2011. When compared to total loans, non-performing loans rose to 8.8 percent at March 31, 2012, up from 8.3 percent at December 31, 2011. An increase in commercial non-accrual loans was primarily responsible for the growth in total non-accrual loans at March 31, 2012.

The following table presents information about the allowance for loan losses: (in thousands of dollars)

	For the Three Months Ended
	March 31, 2012			March 31, 2011
Balance, January 1,	$	39,958		$	28,419
Loans charged-off:
Commercial, financial & agricultural loans		337			727
Commercial real estate mortgages		—			—
Real estate — construction loans		—			—
Residential mortgages (1st and 2nd liens)		395			48
Home equity loans		61			70
Consumer loans		32			57
Other loans		—			—
Total Charge-offs	$	825		$	902
Loans recovered after charge-off:
Commercial, financial & agricultural loans	$	855		$	37
Commercial real estate mortgages					—
Real estate — construction loans		—			—
Residential mortgages (1st and 2nd liens)		1			—
Home equity loans		—			—
Consumer loans		19			14
Other loans		—			—
Total recoveries	$	875		$	51
Net (recoveries) charge-offs		(50	)		851
Reclass to Allowance for Contingent Liabilities		—			—
Provision for loan losses		—			19,971
Balance, End of Period	$	40,008		$	47,539

Further information pertaining to the allowance for loan losses at March 31, 2012 is as follows: (in thousands)

	Commercial, financial, and agricultural		Commercial real estate		Real estate construction loans		Residential mortgages (1st and 2nd liens)		Home equity loans		Consumer loans		Total
Allowance for loan losses:
Ending balance (total allowance)	$	25,598	$	11,029	$	623	$	2,007	$	451	$	300	$	40,008
Ending balance: individually evaluated for impairment		6,935		1,288		—		—		—		—	$	8,223
Ending balance: collectively evaluated for impairment		18,663		9,741		623		2,007		451		300	$	31,785
Loan balances:
Ending balance (loan portfolio) (1)	$	211,184	$	412,722	$	48,284	$	152,318	$	77,015	$	37,790	$	939,313
Ending balance: individually evaluated for impairment		30,388		65,791		18,576		8,506		4,013		683	$	127,957
Ending balance: collectively evaluated for impairment		180,796		346,931		29,708		143,812		73,002		37,107	$	811,356

(1) Other loans of $423, not included here, consist primarily of advances under lines of credit.

Further information pertaining to the allowance for loan losses at December 31, 2011 is as follows: (in thousands)

	Commercial, financial, and agricultural		Commercial real estate		Real estate construction loans		Residential mortgages (1st and 2nd liens)		Home equity loans		Consumer loans		Total
Allowance for loan losses:
Ending balance (total allowance)	$	25,080	$	11,029	$	623	$	2,401	$	512	$	313	$	39,958
Ending balance: individually evaluated for impairment		7,477		3,092		57		—		—		—		10,626
Ending balance: collectively evaluated for impairment		17,603		7,937		566		2,401		512		313		29,332
Loan balances:
Ending balance (loan portfolio) (1)	$	206,652	$	428,646	$	49,704	$	160,619	$	79,684	$	43,831	$	969,136
Ending balance: individually evaluated for impairment		36,559		66,402		19,251		8,345		3,897		646		135,100
Ending balance: collectively evaluated for impairment		170,093		362,244		30,453		152,274		75,787		43,185		834,036

(1) Other loans of $543, not included here, consist primarily of advances under lines of credit.

The following is a summary of current and past due loans at March 31, 2012: (in thousands)

	Past Due								Current		Total
	30-59 days		60-89 days		90 days & over		Total
Commercial:
Commercial, financial, and agricultural	$	2,131	$	2,489	$	19,384	$	24,004	$	187,180	$	211,184
Commercial real estate mortgages		2,178		1,400		44,871		48,449		364,273		412,722
Real estate construction loans		—		8,832		7,003		15,835		32,449		48,284
Consumer:
Residential mortgages (1st and 2nd liens)		3,873		454		7,197		11,524		140,794		152,318
Home equity loans		424		196		4,014		4,634		72,381		77,015
Consumer loans		122		11		683		816		36,974		37,790
Total (1)	$	8,728	$	13,382	$	83,152	$	105,262	$	834,051	$	939,313

(1) Other loans of $423, not included here, consist primarily of advances under lines of credit.

The following is a summary of current and past due loans at December 31, 2011: (in thousands)

	Past Due								Current		Total
	30-59 days		60-89 days		90 days & over		Total
Commercial:
Commercial, financial, and agricultural	$	9,774	$	8,574	$	16,867	$	35,215	$	171,437	$	206,652
Commercial real estate mortgages		4,981		4,843		45,344		55,168		373,478		428,646
Real estate construction loans		1,282		—		6,978		8,260		41,444		49,704
Consumer:
Residential mortgages (1st and 2nd liens)		3,479		1,144		7,028		11,651		148,968		160,619
Home equity loans		—		198		3,897		4,095		75,589		79,684
Consumer loans		215		78		646		939		42,892		43,831
Total (1)	$	19,731	$	14,837	$	80,760	$	115,328	$	853,808	$	969,136

(1) Other loans of $543, not included here, consist primarily of advances under lines of credit.

The following is a summary of impaired loans: (in thousands)

	March 31, 2012								December 31, 2011
	Impaired Loans with Valuation Reserves		Impaired Loans without Valuation Reserves		Total Impaired Loans		Total Valuation Reserves		Impaired Loans with Valuation Reserves		Impaired Loans without Valuation Reserves		Total Impaired Loans		Total Valuation Reserves
Commercial, financial & agricultural loans	$	15,678	$	14,710	$	30,388	$	6,935	$	15,674	$	20,885	$	36,559	$	7,477
Commercial real estate mortgages		15,358		50,433		65,791		1,288		19,715		46,687		66,402		3,092
Real estate construction loans		—		18,576		18,576		—		2,207		17,044		19,251		57
Residential mortgages (1st & 2nd liens)		—		8,506		8,506		—		—		8,345		8,345		—
Home equity loans		—		4,013		4,013		—		—		3,897		3,897		—
Consumer loans		—		683		683		—		—		646		646		—
Total	$	31,036	$	96,921	$	127,957	$	8,223	$	37,596	$	97,504	$	135,100	$	10,626

	Quarter ended March 31, 2012		Quarter ended March 31, 2011
Average investment in impaired loans	$	129,209	$	111,515
Interest income recognized on impaired loans	$	771	$	1,071
Interest income recognized on a cash basis on impaired loans	$	—	$	—

The following is a summary of information pertaining to impaired and non-accrual loans: (in thousands)

	March 31, 2012		December 31, 2011
Impaired loans without a valuation allowance	$	96,921	$	97,504
Impaired loans with a valuation allowance		31,036		37,596
Total impaired loans	$	127,957	$	135,100
Valuation allowance related to impaired loans	$	8,223	$	10,626
Total non-accrual loans		83,152		80,760
Total loans past due 90 days or more and still accruing		—		—
Troubled debt restructurings accruing interest		6,977		5,479
Troubled debt restructurings - nonaccruing		21,291		20,996

Additional interest income of approximately $1,413,000 and $4,267,000 would have been recorded during the three and twelve month periods ended March 31, 2012 and December 31, 2011, respectively, if the loans had performed in accordance with their original terms.

A total of $2,923,000 is committed to be advanced in connection with impaired loans as of March 31, 2012.

The following table summarizes loan balances and allocates the allowance for loan losses by risk rating as of March 31, 2012: (in thousands)

	Commercial, financial, and agricultural			Commercial real estate mortgages			Real estate construction loans			Residential mortgages (1st and 2nd liens)			Home equity loans			Consumer loans (4)			Total
Unimpaired loans:
Total pass loans (1)		153,575			275,830			9,266			143,812			73,002			37,107		$	692,592
Loss factor (2)		10.60	%		2.97	%		2.43	%		1.40	%		0.62	%		0.81	%		3.96	%
Reserve		16,286			8,190			225			2,007			451			300			27,459
Total special mention loans		16,037			48,284			5,356			—			—						69,677
Loss factor		7.00	%		2.18	%		1.94	%											3.27	%
Reserve		1,122			1,053			104			—			—						2,279
Total substandard loans		11,184			22,817			15,086			—			—						49,087
Loss factor		11.22	%		2.18	%		1.95	%											4.17	%
Reserve		1,255			498			294			—			—			—			2,047
Impaired loans:
Total substandard loans		30,190			65,791			16,930			8,506			4,013			683			126,113
Loss factor		22.97	%		1.96	%		0.00	%(3)											6.52	%
Reserve		6,935			1,288			—			—			—			—			8,223
Total doubtful loans		198			—			1,646			—			—			—			1,844
Loss factor																				0.00	%
Reserve		—			—			—			—			—			—			—
Total unimpaired loans	$	180,796		$	346,931		$	29,708		$	143,812		$	73,002		$	37,107		$	811,356
Total reserve on unimpaired loans	$	18,663		$	9,741		$	623		$	2,007		$	451		$	300		$	31,785

(1) Other loans of $423, not included here, consist primarily of advances under lines of credit.

(2) Loss factor calculation is specific reserve as a percentage of balance for a portfolio segment.

(3) Loss factor is driven by higher collateral positions and charge-offs taken within this portfolio segment.

(4) Net of unearned discount.

The following table summarizes loan balances and allocates the allowance for loan losses by risk rating as of December 31, 2011: (in thousands)

	Commercial, financial, and agricultural			Commercial real estate mortgages			Real estate construction loans			Residential mortgages (1st and 2nd liens)			Home equity loans			Consumer loans (4)			Total
Unimpaired loans:
Total pass loans (1)	$	144,952		$	289,856		$	4,932		$	152,274		$	75,787		$	43,185		$	710,986
Loss factor (2)		10.43	%		2.19	%		1.74	%		1.58	%		0.68	%		0.72	%		3.49	%
Reserve		15,121			6,359			86			2,401			512			313			24,792
Total special mention loans		16,448			41,283			7,772			—			—			—			65,503
Loss factor		8.68	%		2.18	%		1.88	%											3.78	%
Reserve		1,428			900			146			—			—			—			2,474
Total substandard loans		8,693			31,105			17,749			—			—			—			57,547
Loss factor		12.12	%		2.18	%		1.88	%											3.59	%
Reserve		1,054			678			334			—			—			—			2,066
Impaired loans:
Total substandard loans		36,316			66,402			17,639			8,345			3,897			646			133,245
Loss factor		20.52	%		4.66	%		0.32	%(3)											7.96	%
Reserve		7,452			3,092			57			—			—			—			10,601
Total doubtful loans		243			—			1,612			—			—			—			1,855
Loss factor		10.29	%					0.00	%											1.35	%
Reserve		25			—			—			—			—			—			25
Total unimpaired loans	$	170,093		$	362,244		$	30,453		$	152,274		$	75,787		$	43,185		$	834,036
Total reserve on unimpaired loans	$	17,603		$	7,937		$	566		$	2,401		$	512		$	313		$	29,332

(1) Other loans of $543, not included here, consist primarily of advances under lines of credit.

(2) Loss factor calculation is specific reserve as a percentage of balance for a portfolio segment.

(3) Loss factor is driven by higher collateral positions and charge-offs taken within this portfolio segment.

(4) Net of unearned discount.

The following table summarizes the allowance for loan losses by loan type for the three months ended March 31, 2012: (in thousands)

Allowance for loan losses	Commercial, financial & agricultural loans			Commercial real estate mortgages		Real estate contruction loans		Residential mortgages (1st and 2nd liens)			Home equity loans			Consumer loans			Total
Beginning balance	$	25,080		$	11,029	$	623	$	2,401		$	512		$	313		$	39,958
Total charge-offs		(337	)		—		—		(395	)		(61	)		(32	)		(825	)
Total recoveries		855			—		—		1			—			19			875
Provision for loan losses																		—
Ending balance	$	25,598		$	11,029	$	623	$	2,007		$	451		$	300		$	40,008

Credit Quality Information

The Bank utilizes an eight-grade risk-rating system for commercial loans, commercial real estate and construction loans. Loans in risk grades 1-4 are considered "pass" loans. The Bank's risk grades are as follows:

Risk Grade 1 Excellent:

Loans secured by liquid collateral, such as certificates of deposit, reputable bank letters of credit, or other cash equivalents; loans that are guaranteed or otherwise backed by the full faith and credit of the United States government or an agency thereof, such as the Small Business Administration; or loans to any publicly held company with a current long-term debt rating of A or better.

Risk Grade 2 Good:

Loans to businesses that have strong financial statements containing an unqualified opinion from a CPA firm and at least three consecutive years of profits; loans supported by un-audited financial statements containing strong balance sheets, five consecutive years of profits, a five-year satisfactory relationship with the Bank, and key balance sheet and income statement trends that are either stable or positive; loans secured by publicly traded marketable securities where there is no impediment to liquidation; loans to individuals backed by liquid personal assets, established credit history, and unquestionable character; or loans to publicly held companies with current long-term debt ratings of Baa or better.

Risk Grade 3 Satisfactory:

Loans supported by financial statements (audited or un-audited) that indicate average or slightly below average risk and having some deficiency or vulnerability to changing economic conditions; loans with some weakness but offsetting features of other support are readily available; loans that are meeting the terms of repayment, but which may be susceptible to deterioration if adverse factors are encountered.

Loans may be graded Satisfactory when there is no recent information on which to base a current risk evaluation and the following conditions apply:

• At inception, the loan was properly underwritten, did not possess an unwarranted level of credit risk, and the loan met the above criteria for a risk grade of Excellent, Good, or Satisfactory;

• At inception, the loan was secured with collateral possessing a loan value adequate to protect the Bank from loss.

• The loan has exhibited two or more years of satisfactory repayment with a reasonable reduction of the principal balance.

• During the period that the loan has been outstanding, there has been no evidence of any credit weakness. Some examples of weakness include slow payment, lack of cooperation by the borrower, breach of loan covenants, or

• The borrower is in an industry known to be experiencing problems. If any of these credit weaknesses is observed, a lower risk grade may be warranted.

Risk Grade 4 Satisfactory/Monitored:

Loans in this category are considered to be of acceptable credit quality, but contain greater credit risk than satisfactory loans due to weak balance sheets, marginal earnings or cash flow, or other uncertainties. These loans warrant a higher than average level of monitoring to ensure that weaknesses do not advance. The level of risk in a Satisfactory/Monitored loan is within acceptable underwriting guidelines so long as the loan is given the proper level of management supervision.

Risk Grade 5 Special Mention:

Loans which possess some credit deficiency or potential weakness which deserves close attention. Such loans pose an unwarranted financial risk that, if not corrected, could weaken the loan by adversely impacting the future repayment ability of the borrower. The key distinctions of a Special Mention classification are that (1) it is indicative of an unwarranted level of risk and (2) weaknesses are considered "potential," not "defined," impairments to the primary source of repayment.

Risk Grade 6 Substandard:

One or more of the following characteristics may be exhibited in loans classified Substandard:

• Loans which possess a defined credit weakness. The likelihood that a loan will be paid from the primary source of repayment is uncertain. Financial deterioration is under way and very close attention is warranted to ensure that the loan is collected without loss.

• Loans are inadequately protected by the current net worth and paying capacity of the obligor.

• The primary source of repayment is gone, and the Bank is forced to rely on a secondary source of repayment, such as collateral liquidation or guarantees.

• Loans have a distinct possibility that the Bank will sustain some loss if deficiencies are not corrected.

• Unusual courses of action are needed to maintain a high probability of repayment.

• The borrower is not generating enough cash flow to repay loan principal; however, it continues to make interest payments.

• The lender is forced into a subordinated or unsecured position due to flaws in documentation.

• Loans have been restructured so that payment schedules, terms, and collateral represent concessions to the borrower when compared to the normal loan terms.

• The lender is seriously contemplating foreclosure or legal action due to the apparent deterioration in the loan.

• There is a significant deterioration in market conditions to which the borrower is highly vulnerable.

Risk Grade 7 Doubtful:

One or more of the following characteristics may be present in loans classified Doubtful:

• Loans have all of the weaknesses of those classified as Substandard. However, based on existing conditions, these weaknesses make full collection of principal highly improbable.

• The primary source of repayment is gone, and there is considerable doubt as to the quality of the secondary source of repayment.

• The possibility of loss is high but because of certain important pending factors which may strengthen the loan, loss classification is deferred until the exact status of repayment is known.

Risk Grade 8 Loss:

Loans are considered uncollectible and of such little value that continuing to carry them as assets is not feasible. Loans will be classified Loss when it is neither practical nor desirable to defer writing off or reserving all or a portion of a basically worthless asset, even though partial recovery may be possible at some time in the future.

The Bank considers real estate, home equity and consumer loans secured by real estate (such as mobile homes) that are contractually past due 90 days or more or where legal action has commenced against the borrower to be substandard. The Bank follows the Federal Financial Institutions Examination Council ("FFIEC") Uniform Retail Credit Classification guidelines.

The Bank reviews formally, annually, the ratings on all commercial and industrial, commercial real estate and construction loans greater than $1 million. Quarterly, the Bank engages an independent third-party to review a significant portion of loans within these segments. Management uses the results of these reviews as part of its annual review process.

The following table identifies the credit risk profile by internally assigned grade as of March 31,2012: (in thousands)

Credit Risk Profile By Internally Assigned Grade

	Commercial Credit Exposure						Consumer Credit Exposure
	Commercial, financial, and agricultural		Commercial real estate mortgages		Real estate construction loans		Residential mortgages (1st and 2nd liens)		Home equity loans		Consumer loans		Total
Grade:
Pass (1)	$	153,575	$	275,830	$	9,266	$	143,812	$	73,002	$	37,107	$	692,592
Special mention		16,037		48,284		5,356		—		—		—		69,677
Substandard		41,374		88,608		32,016		8,506		4,013		683		175,200
Doubtful		198		—		1,646		—		—		—		1,844
Total	$	211,184	$	412,722	$	48,284	$	152,318	$	77,015	$	37,790	$	939,313

(1) Other loans of $423, not included here, consist primarily of advances under lines of credit.

The following table presents the credit risk profile by internally assigned grade as of December 31, 2011: (in thousands)

Credit Risk Profile By Internally Assigned Grade

	Commercial Credit Exposure						Consumer Credit Exposure
	Commercial, financial, and agricultural		Commercial real estate mortgages		Real estate construction loans		Residential mortgages (1st and 2nd liens)		Home equity loans		Consumer loans		Total
Grade:
Pass (1)	$	144,952	$	289,856	$	4,932	$	152,274	$	75,787	$	43,185	$	710,986
Special mention		16,448		41,283		7,772		—		—		—		65,503
Substandard		45,009		97,507		35,388		8,345		3,897		646		190,792
Doubtful		243		—		1,612		—		—		—		1,855
Total	$	206,652	$	428,646	$	49,704	$	160,619	$	79,684	$	43,831	$	969,136

(1) Other loans of $543, not included here, consist primarily of advances under lines of credit.

The following table summarizes loans that have been modified as troubled debt restructurings during 2012: (dollars in thousands):

Troubled Debt Restructurings	Number of Loans		Pre- Modification Recorded Principal Balance		Post- Modification Recorded Principal Balance
Commercial, financial, and agricultural		9	$	3,316	$	3,316
Commercial, secured by real estate		—		—		—
Real estate construction loans		—		—		—
Residential mortgages		—		—		—
Home Equity		—		—		—
Consumer		—		—		—
Total		9	$	3,316	$	3,316

The following loans, modified as troubled debt restructurings within the last twelve months, became over 30 days past due during the twelve months ended March 31, 2012: (amount at period end, dollars in thousands)

Defaulted Troubled Debt Restructurings	Number of Loans		Recorded Principal Balance
Commercial, financial, and agricultural		1	$	15
Commercial, secured by real estate		—		—
Real estate construction loans		—		—
Residential mortgages		1		494
Home Equity		—		—
Consumer		—		—
Total		2	$	509