Note 4 - Loans and Allowance for Credit Losses

12 Months Ended

Dec. 31, 2012

Loans And Allowance For Credit Losses [Text Block]

Note 4: Loans and Allowance for Credit Losses

A summary of the major categories of loans outstanding is shown in the following table. Re-classification of some purchased non-covered loans occurred in the year ended December 31, 2011 upon conversion of such loans to the Company’s accounting systems.

	At December 31, 2012
	Commercial			Commercial Real Estate			Construction			Residential Real Estate			Consumer Installment & Other			Total
	(In thousands)
Originated loans	$	340,116		$	632,927		$	7,984		$	222,458		$	460,698		$	1,664,183
Purchased covered loans:
Impaired		308			7,585			1,824			-			257			9,974
Non impaired		59,135			247,534			5,462			9,374			66,932			388,437
Purchase discount		(8,459	)		(15,140	)		(279	)		(433	)		(1,817	)		(26,128	)
Purchased non-covered loans:
Impaired		1,261			6,763			-			-			297			8,321
Non impaired		9,840			38,673			1,619			3,110			18,554			71,796
Purchase discount		(870	)		(1,748	)		(95	)		(474	)		(2,039	)		(5,226	)
Total	$	401,331		$	916,594		$	16,515		$	234,035		$	542,882		$	2,111,357

	At December 31, 2011
	Commercial			Commercial Real Estate			Construction			Residential Real Estate			Consumer Installment & Other			Total
	(In thousands)
Originated loans	$	398,446		$	704,655		$	14,580		$	271,111		$	473,815		$	1,862,607
Purchased covered loans:
Impaired		1,296			20,697			2,977			-			262			25,232
Non impaired		117,777			333,428			13,372			13,016			78,735			556,328
Purchase discount		(19,535	)		(22,318	)		(2,473	)		(524	)		(1,432	)		(46,282	)
Purchased non-covered loans:
Impaired		2,262			17,090			-			-			638			19,990
Non impaired		14,129			67,045			6,076			3,598			25,294			116,142
Purchase discount		(1,013	)		(6,101	)		(95	)		(474	)		(2,528	)		(10,211	)
Total	$	513,362		$	1,114,496		$	34,437		$	286,727		$	574,784		$	2,523,806

Changes in the carrying amount of impaired purchased covered loans were as follows:

	For the Years Ended December 31,
	2012			2011
Impaired purchased covered loans	(In thousands)
Carrying amount at the beginning of the period	$	18,591		$	33,556
Reductions during the period		(10,726	)		(14,965	)
Carrying amount at the end of the period	$	7,865		$	18,591

Changes in the carrying amount of impaired purchased non-covered loans were as follows:

	For the Years Ended December 31,
	2012			2011
Impaired purchased non-covered loans	(In thousands)
Carrying amount at the beginning of the period	$	15,572		$	33,725
Reductions during the period		(8,808	)		(18,153	)
Carrying amount at the end of the period	$	6,764		$	15,572

Changes in the accretable yield for purchased loans were as follows:

	For the Years Ended December 31,
	2012			2011
Accretable Yield:	(In thousands)
Balance at the beginning of the period	$	9,990		$	6,089
Reclassification from nonaccretable difference		12,121			16,906
Accretion		(17,163	)		(13,005	)
Disposals and other		-			-
Balance at the end of the period	$	4,948		$	9,990
Accretion	$	(17,163	)	$	(13,005	)
Reduction in FDIC indemnification asset		13,207			9,315
(Increase) in interest income	$	(3,956	)	$	(3,690	)

The following summarizes activity in the allowance for credit losses:

	Allowance for Credit Losses For the Year Ended December 31, 2012
	Commercial			Commercial Real Estate			Construction			Residential Real Estate			Consumer Installment and Other			Purchased Non-covered Loans			Purchased Covered Loans			Unallocated			Total
	(In thousands)
Allowance for loan losses:
Balance at beginning of period	$	6,012		$	10,611		$	2,342		$	781		$	3,072		$	-		$	-		$	9,779		$	32,597
Additions:
Provision		5,967			451			135			755			3,084			110			1,814			(1,116	)		11,200
Deductions:
Chargeoffs		(6,851	)		(1,202	)		(2,217	)		(1,156	)		(5,685	)		(110	)		(953	)		-			(18,174	)
Recoveries		1,317			203			224			-			2,723			-			144			-			4,611
Net loan losses		(5,534	)		(999	)		(1,993	)		(1,156	)		(2,962	)		(110	)		(809	)		-			(13,563	)
Balance at end of period		6,445			10,063			484			380			3,194			-			1,005			8,663			30,234
Liability for off-balance sheet credit exposure		1,734			9			-			-			419			-			-			531			2,693
Total allowance for credit losses	$	8,179		$	10,072		$	484		$	380		$	3,613		$	-		$	1,005		$	9,194		$	32,927

	Allowance for Credit Losses For the Year Ended December 31, 2011
	Commercial			Commercial Real Estate			Construction			Residential Real Estate			Consumer Installment and Other			Purchased Covered Loans			Unallocated		Total
	(In thousands)
Allowance for loan losses:
Balance at beginning of period	$	8,094		$	9,607		$	3,260		$	617		$	6,372		$	-		$	7,686	$	35,636
Additions:
Provision		3,069			2,336			1,248			903			564			987			2,093		11,200
Deductions:
Chargeoffs		(8,280	)		(1,332	)		(2,167	)		(739	)		(6,754	)		(987	)		-		(20,259	)
Recoveries		3,129			-			1			-			2,890			-			-		6,020
Net loan losses		(5,151	)		(1,332	)		(2,166	)		(739	)		(3,864	)		(987	)		-		(14,239	)
Balance at end of period		6,012			10,611			2,342			781			3,072			-			9,779		32,597
Liability for off-balance sheet credit exposure		1,660			-			34			-			198			-			801		2,693
Total allowance for credit losses	$	7,672		$	10,611		$	2,376		$	781		$	3,270		$	-		$	10,580	$	35,290

	Allowance for Credit Losses For the Year Ended December 31, 2010
	Commercial			Commercial Real Estate			Construction			Residential Real Estate			Consumer Installment and Other			Purchased Covered Loans		Unallocated			Total
	(In thousands)
Allowance for loan losses:
Balance at beginning of period	$	7,406		$	9,918		$	2,669		$	1,529		$	7,814		$	-	$	11,707		$	41,043
Additions:
Provision		6,584			941			2,259			774			4,663			-		(4,021	)	$	11,200
Deductions:
Chargeoffs		(6,844	)		(1,256	)		(1,668	)		(1,686	)		(8,814	)		-		-			(20,268	)
Recoveries		948			4			-			-			2,709			-		-			3,661
Net loan and lease chargeoffs		(5,896	)		(1,252	)		(1,668	)		(1,686	)		(6,105	)		-		-			(16,607	)
Balance at end of period		8,094			9,607			3,260			617			6,372			-		7,686			35,636
Liability for off-balance sheet credit exposure		1,784			-			299			-			610			-		-			2,693
Total allowance for credit losses	$	9,878		$	9,607		$	3,559		$	617		$	6,982		$	-	$	7,686		$	38,329

The recorded investment in loans was evaluated for impairment as follows:

	Recorded Investment in Loans Evaluated for Impairment At December 31, 2012
	Commercial		Commercial Real Estate		Construction		Residential Real Estate		Consumer Installment and Other		Purchased Non- covered Loans		Purchased Covered Loans		Unallocated		Total
	(In thousands)
Allowance for credit losses:
Individually evaluated for impairment	$	1,865	$	134	$	-	$	-	$	100	$	-	$	753	$	-	$	2,852
Collectively evaluated for impairment		6,314		9,938		484		380		3,513		-		252		9,194		30,075
Purchased loans with evidence of credit deterioration		-		-		-		-		-		-		-		-		-
Total	$	8,179	$	10,072	$	484	$	380	$	3,613	$	-	$	1,005	$	9,194	$	32,927
Carrying value of loans:
Individually evaluated for impairment		5,153		4,161		-		-		-		3,029		16,680		-		29,023
Collectively evaluated for impairment		334,963		628,766		7,984		222,458		460,698		65,098		347,738		-		2,067,705
Purchased loans with evidence of credit deterioration		-		-		-		-		-		6,764		7,865		-		14,629
Total	$	340,116	$	632,927	$	7,984	$	222,458	$	460,698	$	74,891	$	372,283	$	-	$	2,111,357

	Recorded Investment in Loans Evaluated for Impairment At December 31, 2011
	Commercial		Commercial Real Estate		Construction		Residential Real Estate		Consumer Installment and Other		Purchased Non- covered Loans		Purchased Covered Loans		Unallocated		Total
	(In thousands)
Allowance for credit losses:
Individually evaluated for impairment	$	-	$	229	$	1,794	$	-	$	-	$	-	$	-	$	-	$	2,023
Collectively evaluated for impairment		7,672		10,382		582		781		3,270		-		-		10,580		33,267
Purchased loans with evidence of credit deterioration		-		-		-		-		-		-		-		-		-
Total	$	7,672	$	10,611	$	2,376	$	781	$	3,270	$	-	$	-	$	10,580	$	35,290
Carrying value of loans:
Individually evaluated for impairment		-		1,399		3,126		-		-		5,611		5,988		-		16,124
Collectively evaluated for impairment		398,446		703,256		11,454		271,111		473,815		104,738		510,699		-		2,473,519
Purchased loans with evidence of credit deterioration		-		-		-		-		-		15,572		18,591		-		34,163
Total	$	398,446	$	704,655	$	14,580	$	271,111	$	473,815	$	125,921	$	535,278	$	-	$	2,523,806

The Bank’s customers are small businesses, professionals and consumers. Given the scale of these borrowers, corporate credit rating agencies do not evaluate the borrowers’ financial condition. The Bank maintains a Loan Review Department which reports directly to the Board of Directors. The Loan Review Department performs independent evaluations of loans and assigns credit risk grades to evaluated loans using grading standards employed by bank regulatory agencies. Loans judged to carry lower-risk attributes are assigned a “pass” grade, with a minimal likelihood of loss. Loans judged to carry higher-risk attributes are referred to as “classified loans,” and are further disaggregated, with increasing expectations for loss recognition, as “substandard,” “doubtful,” and “loss.” If the Bank becomes aware of deterioration in a borrower’s performance or financial condition between Loan Review examinations, assigned risk grades will be re-evaluated promptly. Credit risk grades assigned by the Loan Review Department are subject to review by the Bank’s regulatory authority during regulatory examinations.

The following summarizes the credit risk profile by internally assigned grade:

	Credit Risk Profile by Internally Assigned Grade At December 31, 2012
	Commercial		Commercial Real Estate		Construction		Residential Real Estate		Consumer Installment and Other		Purchased Non- covered Loans			Purchased Covered Loans (1)			Total
	(In thousands)
Grade:
Pass	$	324,452	$	599,472	$	7,518	$	219,655	$	459,076	$	51,901		$	274,976		$	1,937,050
Substandard		11,413		33,455		466		2,803		1,158		27,066			122,815			199,176
Doubtful		4,251		-		-		-		46		1,145			470			5,912
Loss		-		-		-		-		418		5			150			573
Default risk purchase discount		-		-		-		-		-		(5,226	)		(26,128	)		(31,354	)
Total	$	340,116	$	632,927	$	7,984	$	222,458	$	460,698	$	74,891		$	372,283		$	2,111,357

 (1) Credit risk profile reflects internally assigned grade of purchased covered loans without regard to FDIC indemnification.

	Credit Risk Profile by Internally Assigned Grade At December 31, 2011
	Commercial		Commercial Real Estate		Construction		Residential Real Estate		Consumer Installment and Other		Purchased Non- covered Loans			Purchased Covered Loans (1)			Total
	(In thousands)
Grade:
Pass	$	377,526	$	675,181	$	10,754	$	266,822	$	472,383	$	79,656		$	404,925		$	2,287,247
Substandard		20,695		29,474		3,826		4,289		1,014		52,994			175,410			287,702
Doubtful		225		-		-		-		66		3,444			1,070			4,805
Loss		-		-		-		-		352		38			155			545
Default risk purchase discount		-		-		-		-		-		(10,211	)		(46,282	)		(56,493	)
Total	$	398,446	$	704,655	$	14,580	$	271,111	$	473,815	$	125,921		$	535,278		$	2,523,806

(1) Credit risk profile reflects internally assigned grade of purchased covered loans without regard to FDIC indemnification.

The following tables summarize loans by delinquency and nonaccrual status:

	Summary of Loans by Delinquency and Nonaccrual Status At December 30, 2012
	Current and Accruing		30-89 Days Past Due and Accruing		Past Due 90 days or More and Accruing		Nonaccrual		Total Loans
	(In thousands)
Commercial	$	333,474	$	1,032	$	-	$	5,610	$	340,116
Commercial real estate		616,276		10,750		-		5,901		632,927
Construction		7,984		-		-		-		7,984
Residential real estate		220,032		2,193		-		233		222,458
Consumer installment & other		455,007		5,205		455		31		460,698
Total originated loans		1,632,773		19,180		455		11,775		1,664,183
Purchased non-covered loans		65,567		1,821		4		7,499		74,891
Purchased covered loans		352,619		6,488		155		13,021		372,283
Total	$	2,050,959	$	27,489	$	614	$	32,295	$	2,111,357

	Summary of Loans by Delinquency and Nonaccrual Status At December 31, 2011
	Current and Accruing		30-89 Days Past Due and Accruing		Past Due 90 days or More and Accruing		Nonaccrual		Total Loans
	(In thousands)
Commercial	$	388,322	$	6,953	$	-	$	3,171	$	398,446
Commercial real estate		679,633		16,967		1,626		6,429		704,655
Construction		10,664		570		-		3,346		14,580
Residential real estate		262,917		5,648		-		2,546		271,111
Consumer installment & other		467,015		6,324		421		55		473,815
Total originated loans		1,808,551		36,462		2,047		15,547		1,862,607
Purchased non-covered loans		101,585		1,095		34		23,207		125,921
Purchased covered loans		501,823		18,902		241		14,312		535,278
Total	$	2,411,959	$	56,459	$	2,322	$	53,066	$	2,523,806

The following is a summary of the effect of nonaccrual loans on interest income:

	For the Years Ended December 31,
	2012			2011			2010
	(In thousands)
Interest income that would have been recognized had the loans performed in accordance with their original terms	$	4,337		$	7,132		$	8,112
Less: Interest income recognized on nonaccrual loans		(2,605	)		(4,290	)		(6,587	)
Total reduction of interest income	$	1,732		$	2,842		$	1,525

There were no commitments to lend additional funds to borrowers whose loans were on nonaccrual status at December 31, 2012 and December 31, 2011.

The following summarizes impaired loans:

	Impaired Loans At December 31, 2012
	Recorded Investment		Unpaid Principal Balance		Related Allowance
	(In thousands)
Impaired loans with no related allowance recorded:
Commercial	$	3,100	$	9,506	$	-
Commercial real estate		24,135		27,972		-
Construction		2,363		2,992		-
Residential real estate		668		668		-
Consumer installment and other		2,328		2,616		-
Impaired loans with an allowance recorded:
Commercial		12,129		13,739		2,588
Commercial real estate		4,038		4,038		164
Total:
Commercial	$	15,229	$	23,245	$	2,588
Commercial real estate		28,173		32,010		164
Construction		2,363		2,992		-
Residential real estate		668		668		-
Consumer installment and other		2,328		2,616		-

	Impaired Loans At December 31, 2011
	Recorded Investment		Unpaid Principal Balance		Related Allowance
	(In thousands)
Impaired loans with no related allowance recorded:
Commercial	$	5,483	$	11,727	$	-
Commercial real estate		33,095		43,793		-
Construction		4,194		7,209		-
Consumer installment and other		2,990		3,658		-
Impaired loans with an allowance recorded:
Commercial real estate		1,399		1,399		229
Construction		3,126		3,183		1,794
Total:
Commercial	$	5,483	$	11,727	$	-
Commercial real estate		34,494		45,192		229
Construction		7,320		10,392		1,794
Consumer installment and other		2,990		3,658		-

Impaired loans may include troubled debt restructured loans. Impaired loans at December 31, 2012, included $6,678 thousand of restructured loans, including $988 thousand that were on nonaccrual status. Impaired loans at December 31, 2011, included $3,126 thousand of restructured loans, which were on nonaccrual status.

	Impaired Loans
	For the Years Ended
	December 31, 2012				December 31, 2011
	Average Recorded Investment		Recognized Interest Income		Average Recorded Investment		Recognized Interest Income
	(In thousands)				(In thousands)
Commercial	$	12,996	$	239	$	14,315	$	586
Commercial real estate		28,420		1,225		37,873		1,740
Construction		6,651		216		18,436		455
Residential real estate		818		-		281		-
Consumer installment and other		2,611		43		2,578		43
Total	$	51,496	$	1,723	$	73,483	$	2,824

The following table provides information on troubled debt restructurings:

	Troubled Debt Restructurings At December 31, 2012
	Number of Contracts		Pre-Modification Carrying Value		Period-End Carrying Value		Period-End Individual Impairment Allowance
	(In thousands)
Commercial		3	$	1,318	$	1,196	$	797
Commercial real estate		2		5,391		5,482		-
Total		5	$	6,709	$	6,678	$	797

	Troubled Debt Restructurings At December 31, 2011
	Number of Contracts		Pre-Modification Carrying Value		Period-End Carrying Value		Period-End Individual Impairment Allowance
	(In thousands)
Commercial		2	$	326	$	321	$	-
Construction		1		3,183		3,126		1,794
Total		3	$	3,509	$	3,447	$	1,794

During the year ended December 31, 2012 and 2011, the Company modified three loans in each period with carrying values totaling $5,821 thousand and $3,509 thousand, respectively that were considered troubled debt restructurings. During the year ended December 31, 2010, there were no troubled debt restructurings. The concessions granted in the restructurings completed in 2012 and 2011 largely consisted of modifications of payment terms extending maturity dates to allow for deferred principal repayment. During the year ended December 31, 2012, troubled debt restructured construction and commercial loans with carrying values totaling $3,068 thousand and $988 thousand, respectively, defaulted. During the year ended December 31, 2011, no troubled debt restructurings were in default.

The Company pledges loans to secure borrowings from the Federal Home Loan Bank (FHLB). At December 31, 2012, loans pledged to secure borrowing totaled $32,084 thousand compared with $69,145 thousand at December 31, 2011. The amount of loans pledged exceeds collateral requirements. The loans restricted due to collateral requirements approximate $32,084 thousand and $35,894 thousand at December 31, 2012 and December 31, 2011, respectively. The FHLB does not have the right to sell or repledge such loans.

There were no loans held for sale at December 31, 2012 and December 31, 2011.