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Allowance for Loan and Lease Losses
 3 Months Ended
Mar. 31, 2012
Allowance For Loan And Lease Losses  
Allowance for Loan and Lease Losses

6. Allowance for Loan and Lease Losses


Management reviews the appropriateness of the allowance for loan and lease losses (“allowance”) on a regular basis. Management considers the accounting policy relating to the allowance to be a critical accounting policy, given the inherent uncertainty in evaluating the levels of the allowance required to cover credit losses in the portfolio and the material effect that assumptions could have on the Company’s results of operations. The Company has developed a methodology to measure the amount of estimated loan loss exposure inherent in the loan portfolio to assure that an appropriate allowance is maintained. The Company’s methodology is based upon guidance provided in SEC Staff Accounting Bulletin No. 102, Selected Loan Loss Allowance Methodology and Documentation Issues and allowance allocations are calculated in accordance with ASC Topic 310, Receivables and ASC Topic 450, Contingencies.


The Company’s methodology for determining and allocating the allowance for loan and lease losses focuses on ongoing reviews of larger individual loans and leases, historical net charge-offs, delinquencies in the loan and lease portfolio, the level of impaired and nonperforming loans, values of underlying loan and lease collateral, the overall risk characteristics of the portfolios, changes in character or size of the portfolios, geographic location, current economic conditions, changes in capabilities and experience of lending management and staff, and other relevant factors. The various factors used in the methodologies are reviewed on a regular basis.


At least annually, management reviews all commercial and commercial real estate loans exceeding a certain threshold and assigns a risk rating. The Company uses an internal loan rating system of pass credits, special mention loans, substandard loans, doubtful loans, and loss loans (which are fully charged off). The definitions of “special mention”, “substandard”, “doubtful” and “loss” are consistent with banking regulatory definitions. Factors considered in assigning loan ratings include: the customer’s ability to repay based upon customer’s expected future cash flow, operating results, and financial condition; the underlying collateral, if any; and the economic environment and industry in which the customer operates. Special mention loans have potential weaknesses that if left uncorrected may result in deterioration of the repayment prospects and a downgrade to a more severe risk rating. A substandard loan credit has a well-defined weakness which makes payment default or principal exposure likely, but not yet certain. There is a possibility that the Company will sustain some loss if the deficiencies are not corrected. A doubtful loan has a high possibility of loss, but the extent of the loss is difficult to quantify because of certain important and reasonably specific pending factors.

 

At least quarterly, management reviews all commercial and commercial real estate loans and leases and agriculturally related loans with an outstanding principal balance of over $500,000 that are internally risk rated special mention or worse, giving consideration to payment history, debt service payment capacity, collateral support, strength of guarantors, local market trends, industry trends, and other factors relevant to the particular borrowing relationship. Through this process, management identifies impaired loans. For loans and leases considered impaired, estimated exposure amounts are based upon collateral values or present value of expected future cash flows discounted at the original effective interest rate of each loan. For commercial loans, commercial mortgage loans, and agricultural loans not specifically reviewed, and for homogenous loan portfolios such as residential mortgage loans and consumer loans, estimated exposure amounts are assigned based upon historical net loss experience and current charge-off trends, past due status, and management’s judgment of the effects of current economic conditions on portfolio performance. In determining and assigning historical loss factors to the various homogeneous portfolios, the Company calculates average net losses over a period of time and compares this average to current levels and trends to ensure that the calculated average loss factor is reasonable.


Since the methodology is based upon historical experience and trends as well as management’s judgment, factors may arise that result in different estimations. Significant factors that could give rise to changes in these estimates may include, but are not limited to, changes in economic conditions in the local area, concentration of risk, changes in interest rates, and declines in local property values. While management’s evaluation of the allowance as of March 31, 2012, considers the allowance to be appropriate, under adversely different conditions or assumptions, the Company would need to increase the allowance.


The following tables detail activity in the allowance for loan and lease losses by portfolio segment for the three months ended March 31, 2012 and 2011. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

 

Three months ended March 31, 2012  
(in thousands)   Commercial and Industrial     Commercial Real Estate     Residential Real Estate     Consumer and Other     Finance Leases     Total  
Allowance for credit losses:                                    
                                     
Beginning balance   $ 8,936     $ 12,662     $ 4,247     $ 1,709     $ 39     $ 27,593  
                                                 
Charge-offs     (252 )     (969 )     (409 )     (259 )     0       (1,889 )
Recoveries     19       0       0       100       0       119  
Provision     (433 )     621       653       318       (34 )     1,125  
Ending Balance   $ 8,270     $ 12,314     $ 4,491     $ 1,868     $ 5     $ 26,948  


Three months ended March 31, 2011  
(in thousands)   Commercial and Industrial     Commercial Real Estate     Residential Real Estate     Consumer and Other     Finance Leases     Total  
Allowance for credit losses:                                    
                                     
Beginning balance   $ 7,824     $ 14,445     $ 3,526     $ 1,976     $ 61     $ 27,832  
                                                 
    Charge-offs     (589 )     (311 )     (1,098 )     (166 )     0       (2,164 )
Recoveries     327       41       1       88       0       457  
Provision     1,132       (284 )     1,380       (311 )     (7 )     1,910  
Ending Balance   $ 8,694     $ 13,891     $ 3,809     $ 1,587     $ 54     $ 28,035  

 

At March 31, 2012 and December 31, 2011, the allocation of the allowance for loan and lease losses summarized on the basis of the Company’s impairment methodology was as follows:


(in thousands)   Commercial and Industrial     Commercial Real Estate     Residential Real Estate     Consumer and Other     Finance Leases     Total  
                                     
March 31, 2012                                    
Individually evaluated for impairment   $ 2,044     $ 494     $ 0     $ 0     $ 0     $ 2,538  
Collectively evaluated for impairment     6,226       11,820       4,491       1,868       5       24,410  
Ending balance   $ 8,270     $ 12,314     $ 4,491     $ 1,868     $ 5     $ 26,948  
                                                 
December 31, 2011                                                
Individually evaluated for impairment   $ 2,863     $ 667     $ 0     $ 0     $ 0     $ 3,530  
Collectively evaluated for impairment     6,073       11,995       4,247       1,709       39       24,063  
Ending balance   $ 8,936     $ 12,662     $ 4,247     $ 1,709     $ 39     $ 27,593  


The recorded investment in loans and leases summarized on the basis of the Company’s impairment methodology as of March 31, 2012 and December 31, 2011 was as follows:

 

(in thousands)   Commercial and Industrial     Commercial Real Estate     Residential Real Estate     Consumer and Other     Finance Leases     Total  
                                     
March 31, 2012                                    
Individually evaluated for impairment   $ 6,309     $ 23,213     $ 426     $ 0     $ 0     $ 29,948  
Collectively evaluated for impairment     457,323       748,457       674,803       61,739       5,867       1,948,189  
Total   $ 463,633     $ 771,669     $ 675,229     $ 61,739     $ 5,867     $ 1,978,137  
                                                 
December 31, 2011                                                
Individually evaluated for impairment   $ 10,161     $ 22,150     $ 445     $ 0     $ 0     $ 32,756  
Collectively evaluated for impairment     474,533       744,084       660,867       63,748       6,489       1,949,721  
Total   $ 484,694     $ 766,234     $ 661,312     $ 63,748     $ 6,489     $ 1,982,477  


A loan is impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans consist of our non-homogenous nonaccrual loans, and all loans restructured in a troubled debt restructuring (TDR). Specific reserves on individually identified impaired loans that are not collateral dependent are measured based on the present value of expected future cash flows discounted at the original effective interest rate of each loan. For loans that are collateral dependent, impairment is measured based on the fair value of the collateral less estimated selling costs, and such impaired amounts are generally charged off. The majority of impaired loans are collateral dependent impaired loans that have limited exposure or require limited specific reserves because of the amount of collateral support with respect to these loans, and previous charge-offs. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured. In these cases, interest is recognized on a cash basis.


Impaired loans are set forth in the tables below as of March 31, 2012 and December 31, 2011.

 

  03/31/2012     12/31/2011  
(in thousands)   Recorded Investment     Unpaid Principal Balance     Related Allowance     Recorded Investment     Unpaid Principal Balance     Related Allowance  
With no related allowance  
                                     
Commercial and industrial                                    
Commercial and industrial other   $ 2,223     $ 2,663     $ 0     $ 2,489     $ 2,915     $ 0  
Commercial real estate                                                
Construction     8,004       13,613       0       9,018       14,628       0  
Commercial real estate other     14,715       15,362       0       12,150       12,496       0  
Residential real estate                                                
Residential real estate other     426       426       0       445       445       0  
Subtotal   $ 25,368     $ 32,064     $ 0     $ 24,102     $ 30,484     $ 0  
                                                 
With related allowance                                          
                                                 
Commercial and industrial                                                
Commercial and industrial other     4,086       4,086       2,044       4,197       4,197       2,113  
Commercial real estate                                                
Construction     0       0       0       3,475       3,475       750  
Commercial real estate other     494       494       494       982       982       667  
Subtotal   $ 4,580     $ 4,580     $ 2,538     $ 8,654     $ 8,654     $ 3,530  
Total   $ 29,948     $ 36,644     $ 2,538     $ 32,756     $ 39,138     $ 3,530  


The average recorded investment and interes income recognized on impaired loans was as follows:

 

    03/31/2012     03/31/2011  
(in thousands)   Average Recorded Investment     Interest Income Recognized     Average Recorded Investment     Interest Income Recognized  
With no related allowance  
                         
Commercial and industrial                        
Commercial and industrial other     2,143       0       3,441       0  
Commercial real estate                                
Construction     9,207       0       0       0  
Commercial real estate other     16,619       0       12,216       10  
Residential real estate                                
Residential real estate other     407       0       0       0  
Subtotal   $ 28,376     $ 0     $ 15,657     $ 10  
                                 
With related allowance                                
                                 
Commercial and industrial                                
Commercial and industrial other     4,142       0       2,842       0  
Commercial real estate                                
Construction     0       0       13,113       0  
Commercial real estate other     493       0       4,535       0  
Subtotal   $ 4,635     $ 0     $ 20,490     $ 0  
Total   $ 33,011     $ 0     $ 36,147     $ 10  
   


Loans are considered modified in a TDR when, due to a borrower’s financial difficulties; the Company makes a concession(s) to the borrower that it would not otherwise consider. These modifications may include, among others, an extension for the term of the loan, and granting a period when interest-only payments can be made with the principal payments made over the remaining term of the loan or at maturity. There were no loans modified as TDRs during the three months ended March 31, 2012. 

 

A loan that was restructured as a TDR is considered to be in payment default once it is 90 days contractually past due under the modified terms. During the three months ended March 31, 2012, there were no TDRs that had been restructured in the 12 months prior to March 31, 2012 that became 91 days past due.


The following tables present credit quality indicators (internal risk grade) by class of commercial and industrial loans and commercial real estate loans as of March 31, 2012 and December 31, 2011.

 

March 31, 2012                                    
  Commercial and Industrial Other   Commercial and Industrial Agriculture   Commercial Real Estate Other   Commercial Real Estate Agriculture   Commercial Real Estate Construction   Total  
 
(in thousands)
Internal risk grade:                                    
Pass   $ 371,875     $ 51,687     $ 628,232     $ 51,533     $ 9,710     $ 1,113,037  
Special Mention     21,633       715       32,150       285       7,866       62,649  
Substandard     17,055       668       28,798       1,516       10,235       58,272  
Doubtful     0       0       1,344       0       0       1,344  
Total   $ 410,563     $ 53,070     $ 690,524     $ 53,334     $ 27,811     $ 1,235,302  


December 31, 2011                                    
  Commercial and Industrial Other   Commercial and Industrial Agriculture   Commercial Real Estate Other   Commercial Real Estate Agriculture   Commercial Real Estate Construction   Total  
 
(in thousands)
Internal risk grade:                                    
Pass   $ 377,083     $ 65,795     $ 602,915     $ 50,333     $ 28,232     $ 1,124,358  
Special Mention     14,488       1,059       25,743       1,022       9,844       52,156  
Substandard     25,557       712       35,707       1,716       9,228       72,920  
Doubtful     0       0       1,494       0       0       1,494  
Total   $ 417,128     $ 67,566     $ 665,859     $ 53,071     $ 47,304     $ 1,250,928  


The following tables present credit quality indicators by class of residential real estate loans and by class of consumer loans. Nonperforming loans include nonaccrual, impaired, and loans 90 days past due and accruing interest. All other loans are considered performing as of March 31, 2012 and December 31, 2011.

 

March 31, 2012                              
                     
(in thousands) Residential Home Equity   Residential Mortgages   Consumer Indirect   Consumer Other   Total  
Performing   $ 155,840     $ 512,317     $ 31,149     $ 30,371     $ 729,677  
Nonperforming     1,565       5,507       219       0       7,291  
Total   $ 157,405     $ 517,824     $ 31,368     $ 30,371     $ 736,968  

 

December 31, 2011  
   
(in thousands) Residential Home Equity   Residential Mortgages   Consumer Indirect   Consumer Other   Total  
Performing   $ 159,734     $ 494,316     $ 32,548     $ 30,961     $ 717,559  
Nonperforming     1,544       5,718       239       0       7,501  
Total   $ 161,278     $ 500,034     $ 32,787     $ 30,961     $ 725,060