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Loans
 9 Months Ended
Sep. 30, 2012
Loans [Abstract]  
Loans
Note E – Loans

The following tables present the allowance for loan losses and the carrying amount of loans based on management's overall assessment of probable incurred losses (in $1,000s), and should not be interpreted as an indication of future charge-offs:

 
 
September 30, 2012
 
 
 
Secured by Real Estate
  
  
  
  
  
 
 
 
Commercial
  
Residential
(including
multi-
family)
  
Construction,
Land
Development
and Other
Land
  
Commercial
and Other
Business-
Purpose
Loans
  
Consumer
  
Other
  
Unallocated
  
Total
 
 
 
  
  
  
  
  
  
  
 
Allowance for loan
losses:
 
  
  
  
  
  
  
  
 
Individually
evaluated for
impairment
 
$
8,468
  
$
3,148
  
$
805
  
$
1,606
  
$
32
  
  
  
$
14,059
 
Collectively
evaluated for
probable incurred
losses
  
16,195
   
8,797
   
2,628
   
5,676
   
374
  
$
15
  
$
18,441
   
52,126
 
 
                                
Total allowance
for loan losses
 
$
24,663
  
$
11,945
  
$
3,433
  
$
7,282
  
$
406
  
$
15
  
$
18,441
  
$
66,185
 
 
                                
 
                                
Portfolio loans:
                                
Individually
evaluated for
impairment
 
$
123,598
  
$
46,249
  
$
19,071
  
$
16,278
  
$
99
          
$
205,295
 
Collectively
evaluated for
probable incurred
losses
  
673,747
   
228,140
   
46,700
   
117,805
   
10,052
  
$
2,450
       
1,078,894
 
 
                                
Total portfolio
loans
 
$
797,345
  
$
274,389
  
$
65,771
  
$
134,083
  
$
10,151
  
$
2,450
      
$
1,284,189
 


 
 
December 31, 2011
 
 
 
Secured by Real Estate
  
  
  
  
  
 
 
 
Commercial
  
Residential
(including
multi-
family)
  
Construction,
Land
Development
and Other
Land
  
Commercial
and Other
Business-
Purpose
Loans
  
Consumer
  
Other
  
Unallocated
  
Total
 
 
 
  
  
  
  
  
  
  
 
Allowance for loan
losses:
 
  
  
  
  
  
  
  
 
Individually
evaluated for
impairment
 
$
10,636
  
$
3,920
  
$
3,134
  
$
3,732
  
$
29
  
  
  
$
21,451
 
Collectively
evaluated for
probable incurred
losses
  
26,685
   
15,866
   
7,355
   
10,262
   
662
  
$
17
  
$
4,447
   
65,294
 
 
                                
Total allowance
for loan losses
 
$
37,321
  
$
19,786
  
$
10,489
  
$
13,994
  
$
691
  
$
17
  
$
4,447
  
$
86,745
 
 
                                
Portfolio loans:
                                
Individually
evaluated for
impairment
 
$
167,792
  
$
56,210
  
$
36,638
  
$
23,583
  
$
63
          
$
284,286
 
Collectively
evaluated for
probable incurred
losses
  
739,585
   
275,900
   
68,630
   
157,766
   
12,165
  
$
2,781
       
1,256,827
 
 
                                
Total portfolio
loans
 
$
907,377
  
$
332,110
  
$
105,268
  
$
181,349
  
$
12,228
  
$
2,781
      
$
1,541,113
 

The allowance for loan losses is maintained at a level believed adequate by management to absorb potential losses inherent in the loan portfolio at the balance sheet date.  Management's determination of the adequacy of the allowance is an estimate based on evaluation of the portfolio (including potential impairment of individual loans and concentrations of credit), past loss experience, current economic conditions, volume, amount and composition of the loan portfolio and other factors.  The allowance is increased by provisions for loan losses charged to operations and reduced by net charge-offs.

The tables below summarize activity in the allowance for loan losses for the three and nine months ended September 30, 2012 and 2011 (in $1,000s) by loan type:

 
 
Three Months Ended September 30, 2012
 
 
 
Secured by Real Estate
  
  
  
  
  
 
 
 
Commercial
  
Residential
(including
multi-
family)
  
Construction,
Land
Development
and Other
Land
  
Commercial
and Other
Business-
Purpose
Loans
  
Consumer
  
Other
  
Unallocated
  
Total
 
 
 
  
  
  
  
  
  
  
 
Beginning balance
 
$
29,730
  
$
14,138
  
$
5,493
  
$
10,191
  
$
402
  
$
370
  
$
13,114
  
$
73,438
 
 
                                
Charge-offs
  
(6,577
)
  
(3,380
)
  
(1,188
)
  
(658
)
  
(189
)
  
23
       
(11,969
)
Recoveries
  
1,819
   
647
   
490
   
957
   
278
   
63
       
4,254
 
Net charge-offs
  
(4,758
)
  
(2,733
)
  
(698
)
  
299
   
89
   
86
       
(7,715
)
 
                                
Provision for loan
losses
  
3,029
   
1,647
   
(1,089
)
  
(2,654
)
  
(42
)
  
(429
)
      
462
 
 
                                
Additional
unallocated
allowance
  
(3,338
)
  
(1,107
)
  
(273
)
  
(554
)
  
(43
)
  
(12
)
  
5,327
     
 
                                
Ending balance
 
$
24,663
  
$
11,945
  
$
3,433
  
$
7,282
  
$
406
  
$
15
  
$
18,441
  
$
66,185
 


 
 
Nine Months Ended September 30, 2012
 
 
 
Secured by Real Estate
  
  
  
  
  
 
 
 
Commercial
  
Residential
(including
multi-
family)
  
Construction,
Land
Development
and Other
Land
  
Commercial
and Other
Business-
Purpose
Loans
  
Consumer
  
Other
  
Unallocated
  
Total
 
 
 
  
  
  
  
  
  
  
 
Beginning balance
 
$
37,321
  
$
19,786
  
$
10,489
  
$
13,994
  
$
691
  
$
17
  
$
4,447
  
$
86,745
 
 
                                
Charge-offs
  
(16,143
)
  
(10,446
)
  
(4,752
)
  
(7,218
)
  
(522
)
  
(656
)
      
(39,737
)
Recoveries
  
5,784
   
4,416
   
1,639
   
5,222
   
424
   
70
       
17,555
 
Net charge-offs
  
(10,359
)
  
(6,030
)
  
(3,113
)
  
(1,996
)
  
(98
)
  
(586
)
      
(22,182
)
 
                                
Provision for loan
losses
  
6,470
   
1,097
   
(3,226
)
  
(3,260
)
  
(76
)
  
617
       
1,622
 
 
                                
Additional
unallocated
allowance
  
(8,769
)
  
(2,908
)
  
(717
)
  
(1,456
)
  
(111
)
  
(33
)
  
13,994
     
 
                                
Ending balance
 
$
24,663
  
$
11,945
  
$
3,433
  
$
7,282
  
$
406
  
$
15
  
$
18,441
  
$
66,185
 


 
 
Three Months Ended September 30, 2011
 
 
Secured by Real Estate
  
  
  
  
 
 
 
Commercial
  
Residential
(including
multi-
family)
  
Construction,
Land
Development
and Other
Land
  
Commercial
and Other
Business-
Purpose
Loans
  
Consumer
  
Other
  
Total
 
 
 
  
  
  
  
  
  
 
Beginning balance
 
$
48,880
  
$
22,421
  
$
14,868
  
$
19,382
  
$
916
  
$
64
  
$
106,531
 
 
                            
Charge-offs
  
(11,259
)
  
(5,822
)
  
(5,647
)
  
(4,842
)
  
(137
)
      
(27,707
)
Recoveries
  
906
   
536
   
322
   
1,000
   
62
   
2
   
2,828
 
Net charge-offs
  
(10,353
)
  
(5,286
)
  
(5,325
)
  
(3,842
)
  
(75
)
  
2
   
(24,879
)
 
                            
Provision for loan
losses
  
7,376
   
3,728
   
3,298
   
572
   
573
   
(17
)
  
15,530
 
 
                            
Ending balance
 
$
45,903
  
$
20,863
  
$
12,841
  
$
16,112
  
$
1,414
  
$
49
  
$
97,182
 


 
 
Nine Months Ended September 30, 2011
 
 
Secured by Real Estate
  
  
  
  
 
 
 
Commercial
  
Residential
(including
multi-
family)
  
Construction,
Land
Development
and Other
Land
  
Commercial
and Other
Business-
Purpose
Loans
  
Consumer
  
Other
  
Total
 
 
 
  
  
  
  
  
  
 
Beginning balance
 
$
47,823
  
$
36,139
  
$
17,505
  
$
24,098
  
$
681
  
$
59
  
$
126,305
 
 
                            
Allowance for loan
losses of previously-
discontinued bank
subsidiary
  
1,043
   
117
   
651
   
500
   
68
   
1
   
2,380
 
 
                            
Charge-offs
  
(26,133
)
  
(16,263
)
  
(17,480
)
  
(15,664
)
  
(729
)
      
(76,269
)
Recoveries
  
2,950
   
2,477
   
3,475
   
2,959
   
155
   
4
   
12,020
 
Net charge-offs
  
(23,183
)
  
(13,786
)
  
(14,005
)
  
(12,705
)
  
(574
)
  
4
   
(64,249
)
 
                            
Provision for loan
losses
  
20,220
   
(1,607
)
  
8,690
   
4,219
   
1,239
   
(15
)
  
32,746
 
 
                            
Ending balance
 
$
45,903
  
$
20,863
  
$
12,841
  
$
16,112
  
$
1,414
  
$
49
  
$
97,182
 

The average total portfolio loans for the nine months ended September 30, 2012 and 2011 were $1.4 billion and $1.8 billion, respectively.  The ratio of net charge-offs (annualized) to average portfolio loans outstanding was 3.13% and 7.08% for the nine months ended September 30, 2012 and 2011, respectively.





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Nonperforming loans (i.e., loans which are 90 days or more past due and still accruing interest and loans on nonaccrual status) and other nonperforming assets are summarized below (in $1,000s):

 
 
September 30,
2012
  
June 30,
2012
  
March 31,
2012
  
December 31,
2011
 
Nonaccrual loans:
 
  
  
  
 
Loans secured by real estate:
 
  
  
  
 
Commercial
 
$
81,274
  
$
93,792
  
$
114,225
  
$
121,250
 
Residential (including multi-family)
  
34,142
   
36,525
   
39,094
   
45,357
 
Construction, land development and other land
  
13,087
   
17,409
   
21,411
   
29,088
 
Total loans secured by real estate
  
128,503
   
147,726
   
174,730
   
195,695
 
Commercial and other business-purpose loans
  
12,432
   
13,238
   
14,901
   
17,818
 
Consumer
  
216
   
174
   
182
   
124
 
Total nonaccrual loans
  
141,151
   
161,138
   
189,813
   
213,637
 
 
                
Past due (>90 days) loans and accruing interest:
                
Loans secured by real estate:
                
Commercial
  
702
   
1,029
   
515
   
3,778
 
Residential (including multi-family)
      
231
   
1,089
   
259
 
Construction, land development and other land
          
312
     
Total loans secured by real estate
  
702
   
1,260
   
1,916
   
4,037
 
Commercial and other business-purpose loans
  
190
   
93
   
233
   
148
 
Consumer
      
14
   
17
   
38
 
Total past due loans
  
892
   
1,367
   
2,166
   
4,223
 
 
                
Total nonperforming loans
 
$
142,043
  
$
162,505
  
$
191,979
  
$
217,860
 
 
                
Real estate owned and other
repossessed assets
  
 
89,835
   
 
95,331
   
 
101,651
   
 
95,587
 
 
                
Total nonperforming assets
 
$
231,878
  
$
257,836
  
$
293,630
  
$
313,447
 

Impaired loans which do not have an allowance requirement include collateral-dependent loans for which direct write-downs have been made to the carrying amount of such loans and, accordingly, no additional allowance requirement or allocation is currently necessary.





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Impaired loans are summarized in the following table (in $1,000s), based on loans which either have an allowance for loan losses recorded or no such allowance as of September 30, 2012:

 
 
Carrying
Value
  
Unpaid
Principal
Balance
  
Related
Allowance
for Loan
Losses
 
 
 
  
  
 
With an allowance recorded:
 
  
  
 
Loans secured by real estate:
 
  
  
 
Commercial
 
$
71,160
  
$
84,140
  
$
8,923
 
Residential (including multi-family)
  
23,777
   
40,582
   
3,668
 
Construction, land development and other land
  
12,337
   
16,434
   
1,026
 
Total loans secured by real estate
  
107,274
   
141,156
   
13,617
 
Commercial and other business-purpose loans
  
10,171
   
21,418
   
2,401
 
Consumer
  
309
   
1,444
   
50
 
 
  
117,754
   
164,018
   
16,068
 
With no related allowance recorded:
            
Loans secured by real estate:
            
Commercial
  
77,884
   
106,702
     
Residential (including multi-family)
  
33,722
   
40,313
     
Construction, land development and other land
  
10,443
   
17,798
     
Total loans secured by real estate
  
122,049
   
164,813
     
Commercial and other business-purpose loans
  
9,321
   
12,595
     
Consumer
  
46
   
106
     
 
  
131,416
   
177,514
     
 
            
Total
 
$
249,170
  
$
341,532
  
$
16,068
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Included in total impaired loans as of September 30, 2012 is $191.4 million of loans modified as troubled debt restructurings (see further discussion under the Troubled Debt Restructurings section of this Note).

Interest income is recorded on impaired loans if not on nonaccrual status, or may be recorded on a cash basis in some circumstances, if such payments are not credited to principal.  For the three and nine months ended September 30, 2012 and 2011, the average recorded investment in impaired loans and interest income recorded on impaired loans were as follows (in $1,000s):

 
 
Three Months Ended
September 30, 2012
  
Nine Months Ended
September 30, 2012
 
 
 
Average
  
Interest
  
Average
  
Interest
 
 
 
Recorded
  
Income
  
Recorded
  
Income
 
 
 
Investment
  
Recorded
  
Investment
  
Recorded
 
 
 
  
  
  
 
Commercial
 
$
165,291
  
$
5,116
  
$
162,299
  
$
2,791
 
Residential (including multi-family)
  
61,769
   
2,060
   
60,123
   
829
 
Construction, land development and other land
  
32,224
   
723
   
29,706
   
127
 
Total loans secured by real estate
  
259,284
   
7,899
   
252,128
   
3,747
 
Commercial and other business-purpose loans
  
24,195
   
856
   
23,114
   
216
 
Consumer
  
275
   
10
   
307
     
 
                
Total
 
$
283,754
  
$
8,765
  
$
275,549
  
$
3,963
 

 
 
 
Three Months Ended
September 30, 2011
  
Nine Months Ended
September 30, 2011
 
 
 
Average
  
Interest
  
Average
  
Interest
 
 
 
Recorded
  
Income
  
Recorded
  
Income
 
 
 
Investment
  
Recorded
  
Investment
  
Recorded
 
 
 
  
  
  
 
Commercial
 
$
179,631
  
$
1,346
  
$
178,599
  
$
2,324
 
Residential (including multi-family)
  
62,878
   
350
   
62,633
   
600
 
Construction, land development and other land
  
46,902
   
199
   
47,933
   
310
 
Total loans secured by real estate
  
289,411
   
1,895
   
289,165
   
3,234
 
Commercial and other business-purpose loans
  
27,519
   
264
   
30,107
   
338
 
Consumer
  
218
   
2
   
290
   
2
 
 
                
Total
 
$
317,148
  
$
2,161
  
$
319,562
  
$
3,574
 
 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Impaired loans are summarized in the following table (in $1,000s), based on loans which either have an allowance for loan losses recorded or no such allowance as of December 31, 2011:

 
 
Carrying
Value
  
Unpaid
Principal
Balance
  
Related
Allowance
for Loan
Losses
 
 
 
  
  
 
With an allowance recorded:
 
  
  
 
Loans secured by real estate:
 
  
  
 
Commercial
 
$
68,486
  
$
79,753
  
$
11,053
 
Residential (including multi-family)
  
32,054
   
36,628
   
5,288
 
Construction, land development and other land
  
15,443
   
21,391
   
3,464
 
Total loans secured by real estate
  
115,983
   
137,772
   
19,805
 
Commercial and other business-purpose loans
  
16,037
   
17,294
   
4,696
 
Consumer
  
166
   
173
   
95
 
 
  
132,186
   
155,239
   
24,596
 
With no related allowance recorded:
            
Loans secured by real estate:
            
Commercial
  
105,548
   
145,956
     
Residential (including multi-family)
  
33,928
   
45,902
     
Construction, land development and other land
  
24,278
   
39,537
     
Total loans secured by real estate
  
163,754
   
231,395
     
Commercial and other business-purpose loans
  
11,658
   
16,976
     
Consumer
  
12
   
48
     
 
  
175,424
   
248,419
     
 
            
Total
 
$
307,610
  
$
403,658
  
$
24,596
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Included in impaired loans as of December 31, 2011 is $207.0 million of loans modified as troubled debt restructurings (see further discussion under the Troubled Debt Restructurings section of this Note).
 

The following tables summarize the aging and amounts of past due loans (in $1,000s):

 
 
September 30, 2012
 
 
 
Past Due Loans
  
Total
  
  
 
 
 
(based on payment due dates)
  
Amount of
  
  
 
 
 
  
  
Loans on
  
Loans More
  
Loans Either
  
 
 
 
More Than
  
  
Nonaccrual
  
Than 29 Days
  
Current or
  
 
 
 
29 Days,
  
More Than
  
Status
  
Past Due or on
  
Less Than
  
Total
 
 
 
and Less Than
  
89 Days
  
(Generally, 90
  
Nonaccrual
  
30 Days
  
Portfolio
 
 
 
90 Days
  
(Accruing)
  
Days or More)
  
Status
  
Past Due
  
Loans
 
 
 
  
  
  
  
  
 
Loans secured by real estate:
 
  
  
  
  
  
 
Commercial
 
$
18,574
  
$
702
  
$
81,274
  
$
100,550
  
$
696,795
  
$
797,345
 
Residential (including multi-
family)
  
5,469
       
34,142
   
39,611
   
234,778
   
274,389
 
Construction, land development
and other land
  
673
       
13,087
   
13,760
   
52,011
   
65,771
 
Total loans secured by real
estate
  
 
24,716
   
 
702
   
 
128,503
   
 
153,921
   
 
983,584
   
 
1,137,505
 
Commercial and other business-
purpose loans
  
3,015
   
190
   
12,432
   
15,637
   
118,446
   
134,083
 
Consumer
  
341
       
216
   
557
   
9,594
   
10,151
 
Other
                  
2,450
   
2,450
 
 
                        
Total
 
$
28,072
  
$
892
  
$
141,151
  
$
170,115
  
$
1,114,074
  
$
1,284,189
 


 
 
December 31, 2011
 
 
 
Past Due Loans
  
Total
  
  
 
 
 
(based on payment due dates)
  
Amount of
  
  
 
 
 
  
  
Loans on
  
Loans More
  
Loans Either
  
 
 
 
More Than
  
  
Nonaccrual
  
Than 29 Days
  
Current or
  
 
 
 
29 Days,
  
More Than
  
Status
  
Past Due or on
  
Less Than
  
Total
 
 
 
and Less Than
  
89 Days
  
(Generally, 90
  
Nonaccrual
  
30 Days
  
Portfolio
 
 
 
90 Days
  
(Accruing)
  
Days or More)
  
Status
  
Past Due
  
Loans
 
 
 
  
  
  
  
  
 
Loans secured by real estate:
 
  
  
  
  
  
 
Commercial
 
$
16,770
  
$
3,778
  
$
121,250
  
$
141,798
  
$
765,579
  
$
907,377
 
Residential (including multi-
family)
  
4,913
   
259
   
45,357
   
50,529
   
281,581
   
332,110
 
Construction, land development
and other land
  
3,691
       
29,088
   
32,779
   
72,489
   
105,268
 
Total loans secured by real
estate
  
 
25,374
   
 
4,037
   
 
195,695
   
 
225,106
   
 
1,119,649
   
 
1,344,755
 
Commercial and other business-
purpose loans
  
3,930
   
148
   
17,818
   
21,896
   
159,453
   
181,349
 
Consumer
  
476
   
38
   
124
   
638
   
11,590
   
12,228
 
Other
                  
2,781
   
2,781
 
 
                        
Total
 
$
29,780
  
$
4,223
  
$
213,637
  
$
247,640
  
$
1,293,473
  
$
1,541,113
 

Capitol categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt obligations based on:  current financial information, aging analysis, historical payment experience, credit documentation and public information, among other factors.  Capitol analyzes loans individually by classifying the loans as to credit risk.  This analysis generally includes all loans and is generally performed at least quarterly.  The following loan risk rating definitions are used:

Pass.  Loans classified with a pass rating have been deemed to have acceptable credit quality by bank management.
Watch.  Loans classified as watch have potential weaknesses that deserve management's close attention.  If not improved, those potential weaknesses may result in deterioration of the repayment prospects for the loan in the future.

Substandard.  Loans classified as substandard are inadequately protected by the fair value of collateral or by the borrower's current net worth or paying capacity.  Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt obligation by the borrower.  These loans are characterized by the reasonable possibility that some loss will be sustained if the deficiencies are not favorably resolved.

Based on management's most recent analysis, the risk categories of loans are summarized as follows (in $1,000s):

 
 
September 30, 2012
 
 
 
Pass
  
  
Total
Portfolio
Loans
 
 
 
Watch
  
Substandard
 
 
 
  
  
  
 
Loans secured by real estate:
 
  
  
  
 
Commercial
 
$
547,913
  
$
94,135
  
$
155,297
  
$
797,345
 
Residential (including multi-family)
  
189,579
   
26,876
   
57,934
   
274,389
 
Construction, land development and
other land
  
35,119
   
10,395
   
20,257
   
65,771
 
Total loans secured by real estate
  
772,611
   
131,406
   
233,488
   
1,137,505
 
Commercial and other business-purpose
loans
  
101,103
   
9,374
   
23,606
   
134,083
 
Consumer
  
9,168
   
495
   
488
   
10,151
 
Other
  
2,450
           
2,450
 
 
                
Total
 
$
885,332
  
$
141,275
  
$
257,582
  
$
1,284,189
 


 
 
December 31, 2011
 
 
 
Pass
  
  
Total
Portfolio
Loans
 
 
 
Watch
  
Substandard
 
 
 
  
  
  
 
Loans secured by real estate:
 
  
  
  
 
Commercial
 
$
606,691
  
$
90,673
  
$
210,013
  
$
907,377
 
Residential (including multi-family)
  
224,285
   
31,319
   
76,506
   
332,110
 
Construction, land development and
other land
  
52,315
   
12,134
   
40,819
   
105,268
 
Total loans secured by real estate
  
883,291
   
134,126
   
327,338
   
1,344,755
 
Commercial and other business-purpose
loans
  
135,017
   
14,412
   
31,920
   
181,349
 
Consumer
  
11,134
   
574
   
520
   
12,228
 
Other
  
2,487
   
294
       
2,781
 
 
                
Total
 
$
1,031,929
  
$
149,406
  
$
359,778
  
$
1,541,113
 

Troubled Debt Restructurings

Loan modifications or restructurings are accounted for as troubled debt restructurings if, for economic or legal reasons, it has been determined a borrower is experiencing financial difficulties and the bank grants a "concession" to the borrower that it would not otherwise consider.  For all classes of loans, a troubled debt restructuring may involve a modification of terms such as a reduction of the stated interest rate or loan balance, a reduction of the accrued interest, an extension of the maturity date at an interest rate lower than a current market rate for a new loan with similar risk, or some combination thereof involving a concession to the borrower to facilitate repayment.

The Corporation has designated a troubled debt restructuring as a loan that has been modified because the borrower is experiencing financial difficulty and the loan meets one or more of the following criteria:

1.
An extension or renewal of a substandard rated loan with no change in rate or terms, and the terms provided are not representative of current market rates for credits with similar risk characteristics;
2.
A loan modification where the repayment terms are modified for a specific period of time in order to allow the borrower to liquidate or dispose of the related collateral to provide the ability to pay the loan off in full;
3.
Modification of the interest rate for a defined period of time in order to allow the borrower to repay the debt, based on current cash flow sources;
4.
A loan modified to an "interest only" structure for a period of time that will result in the loan being paid off, returned to the contracted terms or refinanced; or
5.
A modification of a loan into an A/B note structure, where the A note is at market rate terms and conditions, and the B note has been charged off.

Loans modified and classified as troubled debt restructurings are impaired loans.  Each loan that is designated as a troubled debt restructuring is individually evaluated for impairment to determine the specific reserve to be established.  The specific reserve is determined using the discounted cash flow method, the collateral dependency method or, when available, the observable market price method, and is calculated as the difference between the carrying value of the loan and the result of the impairment measurement method.

The loan portfolios contain primarily three categories of troubled debt restructurings, (1) loans for which the rate or terms have been modified (2) loans for which the rate or terms have not been modified but the loan was extended or renewed, and (3) loans that have been modified with interest only terms.  The following are the factors that enter into the determination of the specific reserve for each of these categories:

Loans for which the rate or terms have been modified:  The specific reserve for loans in this category, for which the repayment ability is based on the cash flows of the borrower, is generally determined using a discounted cash flow analysis, adjusted for a probability-of-default factor.  The discount period used is based on when the bank believes, depending on cash flows from the borrower or project, that the loan will be paid in full or refinanced.  If an event for paydown or an expected refinance cannot be documented, a discount period that will result in the cash flows being adjusted for a probability of default from the borrower, reducing the loan balance down to the collateral value, will be used.  The specific reserve for loans in this category that have been deemed collateral dependent is determined using the collateral dependency method.

Loans for which there has been no rate or term modification:  If there has been no change in the rate and term, a discounted cash flow analysis, adjusted for a probability of default, is calculated to determine the specific reserve.


Loans that have interest only terms:  Unless there is a specific event that can be documented which will result in the loan being paid, returned to the original contract terms or refinanced, these loans are treated as collateral-dependent and the specific reserve is based on the net value of the collateral held.

The following table summarizes loans modified as troubled debt restructurings during the three and nine months ended September 30, 2012 and 2011 (in $1,000s):

 
 
Three Months Ended September 30, 2012
 
 
 
Number of
Contracts
  
Pre-restructuring
Outstanding
Recorded
Investment
  
Post-restructuring
Outstanding
Recorded
Investment
  
Post-
restructuring
Loan Loss
Reserve
 
Troubled debt restructurings:
 
  
  
  
 
Loans secured by real estate:
 
  
  
  
 
Commercial
  
24
  
$
15,067
  
$
12,400
  
$
505
 
Residential
  
17
   
2,704
   
2,433
   
154
 
Construction, land development
and other land
  
8
   
982
   
958
   
55
 
Total loans secured by
real estate
  
49
   
18,753
   
15,791
   
714
 
Commercial and other business-
purpose loans
  
10
   
760
   
764
   
65
 
 
                
Total
  
59
  
$
19,513
  
$
16,555
  
$
779
 


 
 
Nine Months Ended September 30, 2012
 
 
 
Number of
Contracts
  
Pre-restructuring
Outstanding
Recorded
Investment
  
Post-restructuring
Outstanding
Recorded
Investment
  
Post-
restructuring
Loan Loss
Reserve
 
Troubled debt restructurings:
 
  
  
  
 
Loans secured by real estate:
 
  
  
  
 
Commercial
  
107
  
$
40,655
  
$
35,339
  
$
1,981
 
Residential
  
77
   
10,391
   
9,265
   
581
 
Construction, land development
and other land
  
20
   
2,453
   
2,294
   
126
 
Total loans secured by
real estate
  
204
   
53,499
   
46,898
   
2,688
 
Commercial and other business-
purpose loans
  
28
   
1,868
   
1,700
   
90
 
Consumer
  
2
   
39
   
38
   
9
 
 
                
Total
  
234
  
$
55,406
  
$
48,636
  
$
2,787
 

Of the amounts in the table above for the nine months ended September 30, 2012, approximately $17.7 million, or 36%, and 83 contracts, or 35%, are substandard rated loans that were extended or renewed with no change in rate or terms, and the terms provided were not representative of current market rates for loans with similar risk characteristics.  The remainder of the troubled debt restructuring pool constitutes loans where repayment terms and/or interest rates were modified, or the loan was modified to an "interest only" structure.

 
 
Three Months Ended September 30, 2011
 
 
 
Number of
Contracts
  
Pre-restructuring
Outstanding
Recorded
Investment
  
Post-restructuring
Outstanding
Recorded
Investment
  
Post-
restructuring
Loan Loss
Reserve
 
Troubled debt restructurings:
 
  
  
  
 
Loans secured by real estate:
 
  
  
  
 
Commercial
  
30
  
$
10,180
  
$
8,828
  
$
672
 
Residential
  
28
   
4,971
   
4,403
   
465
 
Construction, land development
and other land
  
15
   
3,273
   
3,221
   
353
 
Total loans secured by
real estate
  
73
   
18,424
   
16,452
   
1,490
 
Commercial and other business-
purpose loans
  
19
   
2,628
   
1,929
   
384
 
 
                
Total
  
92
  
$
21,052
  
$
18,381
  
$
1,874
 


 
 
Nine Months Ended September 30, 2011
 
 
 
Number of
Contracts
  
Pre-restructuring
Outstanding
Recorded
Investment
  
Post-restructuring
Outstanding
Recorded
Investment
  
Post-
restructuring
Loan Loss
Reserve
 
Troubled debt restructurings:
 
  
  
  
 
Loans secured by real estate:
 
  
  
  
 
Commercial
  
138
  
$
73,191
  
$
64,782
  
$
6,578
 
Residential
  
135
   
27,722
   
24,555
   
2,276
 
Construction, land development
and other land
  
52
   
16,197
   
13,377
   
2,004
 
Total loans secured by
real estate
  
325
   
117,110
   
102,714
   
10,858
 
Commercial and other business-
purpose loans
  
86
   
15,785
   
13,315
   
3,330
 
Consumer
  
2
   
269
   
239
   
232
 
 
                
Total
  
413
  
$
133,164
  
$
116,268
  
$
14,420
 

Of the amounts in the table above for the nine months ended September 30, 2011, approximately $61 million, or 53%, and 247 contracts, or 60%, are substandard rated loans that were extended or renewed with no change in rate or terms, and the terms provided were not representative of current market rates for loans with similar risk characteristics.  The remainder of the troubled debt restructuring pool constitutes loans where repayment terms and/or interest rates were modified, or the loan was modified to an "interest only" structure.

The following table summarizes loans modified as troubled debt restructurings in the last twelve months for which there was a payment default (i.e., when a loan becomes 90 days or more past due) during the three and nine months ended September 30, 2012 and 2011 (in $1,000s):

 
 
Three Months Ended
September 30, 2012
  
Nine Months Ended
September 30, 2012
 
 
 
Number of
Contracts
  
Recorded
Investment
  
Number of
Contracts
  
Recorded
Investment
 
Troubled debt restructurings that
subsequently defaulted:
 
  
  
  
 
Loans secured by real estate:
 
  
  
  
 
Commercial
  
13
  
$
4,574
   
29
  
$
6,489
 
Residential
  
8
   
549
   
21
   
1,761
 
Construction, land development
and other land
  
6
   
1,081
   
14
   
1,784
 
Total loans secured by
real estate
  
27
   
6,204
   
64
   
10,034
 
Commercial and other business-
purpose loans
  
4
   
215
   
10
   
441
 
Consumer
  
1
   
47
   
2
   
48
 
 
                
Total
  
32
  
$
6,466
   
76
  
$
10,523
 


 
 
Three Months Ended
September 30, 2011
  
Nine Months Ended
September 30, 2011
 
 
 
Number of
Contracts
  
Recorded
Investment
  
Number of
Contracts
  
Recorded
Investment
 
Troubled debt restructurings that
subsequently defaulted:
 
  
  
  
 
Loans secured by real estate:
 
  
  
  
 
Commercial
  
3
  
$
1,527
   
47
  
$
27,142
 
Residential
  
12
   
1,686
   
37
   
8,660
 
Construction, land development
and other land
          
18
   
7,407
 
Total loans secured by
real estate
  
15
   
3,213
   
102
   
43,209
 
Commercial and other business-
purpose loans
  
4
   
663
   
18
   
3,371
 
 
                
Total
  
19
  
$
3,876
   
120
  
$
46,580
 



The total amount of troubled debt restructurings as of September 30, 2012 and December 31, 2011 is detailed in the following tables by loan type and accrual status (in $1,000s):

 
 
Troubled Debt Restructurings
at September 30, 2012
 
 
 
On
Non-Accrual
Status
  
On Accrual
Status
  
Total
 
 
 
  
  
 
Loans secured by real estate:
 
  
  
 
Commercial
 
$
47,809
  
$
67,770
  
$
115,579
 
Residential (including multi-family)
  
18,703
   
23,357
   
42,060
 
Construction, land development and other
land
  
7,729
   
9,693
   
17,422
 
Total loans secured by real estate
  
74,241
   
100,820
   
175,061
 
Commercial and other business-purpose loans
  
9,111
   
7,060
   
16,171
 
Consumer
  
48
   
139
   
187
 
 
            
Total
 
$
83,400
  
$
108,019
  
$
191,419
 


 
 
Troubled Debt Restructurings
at December 31, 2011
 
 
 
On
Non-Accrual
Status
  
On Accrual
Status
  
Total
 
 
 
  
  
 
Loans secured by real estate:
 
  
  
 
Commercial
 
$
65,589
  
$
52,784
  
$
118,373
 
Residential (including multi-family)
  
25,358
   
20,625
   
45,983
 
Construction, land development and other
land
  
13,714
   
10,635
   
24,349
 
Total loans secured by real estate
  
104,661
   
84,044
   
188,705
 
Commercial and other business-purpose loans
  
8,336
   
9,876
   
18,212
 
Consumer
      
54
   
54
 
 
            
Total
 
$
112,997
  
$
93,974
  
$
206,971