Loans and Allowance for Loan Losses

6 Months Ended

Jun. 30, 2011

Loans and Allowance for Loan Losses [Abstract]

Loans and Allowance for Loan Losses

(6) Loans and Allowance for Loan Losses

The allowance for loan losses is maintained by the Corporation at a level considered by Management to be adequate to cover probable credit losses inherent in the loan portfolio. The amount of the provision for loan losses charged to operating expenses is the amount necessary, in the estimation of Management, to maintain the allowance for loan losses at an adequate level. While Management’s periodic analysis of the allowance for loan losses may dictate portions of the allowance be allocated to specific problem loans, the entire amount is available for any loan charge-offs that may occur. Loan losses are charged off against the allowance when Management believes that the full collectability of the loan is unlikely. Recoveries of amounts previously charged-off are credited to the allowance.

The allowance is comprised of a general allowance and a specific allowance for identified problem loans. The general allowance is determined by applying estimated loss factors to the credit exposures from outstanding loans. The methodology applies to the Corporation’s total loan portfolio including the performing portion of commercial and commercial real estate loans, real estate, and all types of other loans. The loss factors are applied accordingly on a portfolio basis. Loss factors are based on the Corporation’s historical loss experience and are reviewed for appropriateness on a quarterly basis, along with other factors affecting the collectability of the loan portfolio. These other factors include but are not limited to: changes in lending policies and procedures, including underwriting standards and collection, charge-off and recovery practices; changes in national and local economic and business conditions, including the condition of various market segments; changes in the nature and volume of the portfolio; changes in the experience, ability, and depth of lending management and staff; changes in the volume and severity of past due and classified loans, the volume of nonaccrual loans, troubled debt restructurings and other loan modifications; the existence and effect of any concentrations of credit, and changes in the level of such concentrations; and the effect of external factors, such as legal and regulatory requirements, on the level of estimated credit losses in the Corporation’s current portfolio. Specific allowances are established for all impaired loans when Management has determined that, due to identified significant conditions, it is probable that a loss will be incurred.

Activity in the loan balances and the allowance for loan losses by segment at June 30, 2011 and December 31, 2010 are summarized as follows:

				Commercial						Home
June 30, 2011	Commercial			Real Estate			Residential			Equity Loans			Indirect			Consumer			Total
							(Dollars in thousands)
Allowance for loan losses:
Balance, beginning of period	$	1,317		$	11,127		$	805		$	1,512		$	904		$	471		$	16,136
Losses charged off		(224	)		(2,092	)		(1,026	)		(686	)		(338	)		(245	)		(4,611	)
Recoveries		35			216			10			2			72			46			381
Provision charged to expense		54			2,430			1,460			1,063			283			155			5,445
Balance, end of period	$	1,182		$	11,681		$	1,249		$	1,891		$	921		$	427		$	17,351
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	166		$	5,602		$	302		$	—		$	—		$	—		$	6,070
Collectively evaluated for impairment		1,016			6,079			947			1,891			921			427			11,281
Total ending allowance balance	$	1,182		$	11,681		$	1,249		$	1,891		$	921		$	427		$	17,351
Loans:
Individually evaluated for impairment	$	771		$	35,349		$	2,126		$	—		$	—		$	—		$	38,246
Collectively evaluated for impairment		71,908			351,542			66,711			130,143			158,885			12,877			792,066
Total ending loans balance	$	72,679		$	386,891		$	68,837		$	130,143		$	158,885		$	12,877		$	830,312

				Commercial						Home
December 31, 2010	Commercial			Real Estate			Residential			Equity Loans			Indirect			Consumer			Total
										(Dollars in thousands)
Allowance for loan losses:
Balance, beginning of year	$	862		$	14,390		$	528		$	1,591		$	799		$	622		$	18,792
Losses charged off		(1,507	)		(8,508	)		(1,491	)		(1,091	)		(455	)		(573	)		(13,625	)
Recoveries		157			87			30			39			293			138			744
Provision charged to expense		1,805			5,158			1,738			973			267			284			10,225
Balance, end of year	$	1,317		$	11,127		$	805		$	1,512		$	904		$	471		$	16,136
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	206		$	6,865		$	46		$	—		$	—		$	—		$	7,117
Collectively evaluated for impairment		1,111			4,262			759			1,512			904			471			9,019
Total ending allowance balance	$	1,317		$	11,127		$	805		$	1,512		$	904		$	471		$	16,136
Loans:
Individually evaluated for impairment	$	1,333		$	38,853		$	4,482		$	—		$	—		$	—		$	44,668
Collectively evaluated for impairment		64,329			336,950			70,203			132,536			150,031			13,862			767,911
Total ending loans balance	$	65,662		$	375,803		$	74,685		$	132,536		$	150,031		$	13,862		$	812,579

Delinquencies

Delinquencies are a sign of weakness in credit quality. Lending staff at the Corporation monitor the financial performance and delinquency of borrowers in its portfolios. Lenders are responsible for managing delinquencies by following up with borrowers and arranging for payments. The Corporation determines if a commercial or commercial real estate loan is delinquent based on the number of days past due according to the contractual terms of the loan. For residential, home equity and consumer loans, the Corporation considers the borrower delinquent if they are in arrears by two or more monthly payments. The following procedure is followed in managing delinquent accounts:

• 15-30 days past due- a collection notice is sent reminding the customer of past due status and the urgency of bringing the account current.

• 45 days past due- a default letter is sent declaring the loan in default and advising the customer that legal action will be necessary if the account is not brought current immediately.

• 60 days past due- an “attorney letter” accelerating the loan is sent advising the borrower that legal proceedings to collect the debt will begin immediately.

Management monitors delinquencies and potential problem loans on a recurring basis. At June 30, 2011 there was $36,837 in total past due loans or 4.44% of total loans compared to $36,316 or 4.48% of total loans at December 31, 2010. A table showing total loan delinquencies as of June 30, 2011 and December 31, 2010 by loan segment is as follows:

Age Analysis of Past Due Loans
as of June 30, 2011

													Recorded
			60-89		Greater								Investment >
	30-59 Days		Days		than		Total						90 Days and
(Dollars in thousands)	Past Due		Past Due		90 Days		Past Due		Current		Total Loans		Accruing
Commercial	$	232	$	13	$	784	$	1,029	$	71,650	$	72,679	$	—
Commercial Real Estate		3,716		2,134		19,618		25,468		361,423		386,891		—
Residential		540		827		5,320		6,687		62,150		68,837		—
Home Equity Loans		609		1,184		1,133		2,926		127,217		130,143		—
Indirect		426		74		31		531		158,354		158,885
Consumer		82		114		—		196		12,681		12,877		—
Total	$	5,605	$	4,346	$	26,886	$	36,837	$	793,475	$	830,312	$	—

Age Analysis of Past Due Loans
as of December 31, 2010

													Recorded
			60-89		Greater								Investment>
	30-59 Days		Days		than		Total Past						90 Days and
(Dollars in thousands)	Past Due		Past Due		90 Days		Due		Current		Total Loans		Accruing
Commercial	$	31	$	211	$	793	$	1,035	$	64,627	$	65,662	$	—
Commercial Real Estate		1,906		856		19,970		22,732		353,071		375,803		—
Residential		1,018		1,284		7,172		9,474		65,211		74,685		—
Home Equity Loans		776		235		1,130		2,141		130,395		132,536		—
Indirect		612		123		112		847		149,184		150,031
Consumer		61		—		26		87		13,775		13,862		—
Total	$	4,404	$	2,709	$	29,203	$	36,316	$	776,263	$	812,579	$	—

Impaired Loans

     A loan is considered impaired when it is probable that not all principal and interest amounts will be collected according to the loan contract. Residential mortgage, installment and other consumer loans are evaluated collectively for impairment. Individual commercial loans are evaluated for impairment. Impaired loans are written down by the establishment of a specific allowance where necessary. Information regarding impaired loans as of June 30, 2011 and December 31, 2010 is as follows:

			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
At June 30, 2011	Investment		Balance		Allowance		Balance		Recognized
(Dollars in thousands)
With no related allowance recorded:
Commercial	$	252	$	507	$	—	$	368	$	—
Commercial Real Estate		9,139		14,384		—		10,575		171
Residential		1,177		1,227		—		1,771		—
Home Equity Loans		—		—		—		—		—
Indirect		—		—		—		—		—
Consumer		—		—		—		—		—
With allowance recorded:
Commercial		519		993		166		531		—
Commercial Real Estate		26,210		29,317		5,602		26,667		—
Residential		949		949		302		662		—
Home Equity Loans		—		—		—		—		—
Indirect		—		—		—		—		—
Consumer		—		—		—		—		—
Total	$	38,246	$	47,377	$	6,070	$	40,574	$	171

			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
At December 31, 2010	Investment		Balance		Allowance		Balance		Recognized
(Dollars in thousands)
With no related allowance recorded:
Commercial	$	549	$	549	$	—	$	600	$	16
Commercial Real Estate		6,393		10,367		—		8,643		133
Residential		3,102		3,432		—		3,211		—
Home Equity Loans		—		—		—		—		—
Indirect		—		—		—		—		—
Consumer		—		—		—		—		—
With allowance recorded:
Commercial		784		1,432		206		1,143		—
Commercial Real Estate		32,460		35,483		6,865		29,946		6
Residential		1,380		1,416		46		1,420		—
Home Equity Loans		—		—		—		—		—
Indirect		—		—		—		—		—
Consumer		—		—		—		—		—
Total	$	44,668	$	52,679	$	7,117	$	44,963	$	155

Nonaccrual loans at June 30, 2011 were $37,954, compared to $41,831 at December 31, 2010.

Loans On NonAccrual Status

	June 30, 2011			December 31, 2010
	(Dollars in thousands)
Commercial	$	1,069		$	1,333
Commercial Real Estate		24,532			25,941
Residential		8,678			11,052
Home Equity Loans		2,855			2,372
Indirect		579			667
Consumer		241			466
Total Nonaccrual Loans	$	37,954		$	41,831
Percentage of nonaccrual loans to portfolio loans		4.57	%		5.15	%
Percentage of nonaccrual loans to total assets		3.28	%		3.63	%

Troubled Debt Restructuring

     A restructuring of a debt constitutes a troubled debt restructuring if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. That concession either stems from an agreement between the creditor and the debtor or is imposed by law or a court. The Corporation adheres to ASC 310-40, Troubled Debt Restructurings by Creditors, to determine whether a troubled debt structuring applies in a particular instance. As of June 30, 2011, the Corporation had three loans that were classified as troubled debt restructurings which totaled $2,169. As of December 31, 2010, the Corporation had one loan that was classified as a troubled debt restructuring in the amount of $636. The Corporation has allocated $123 and $0 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of June 30, 2011 and December 31, 2010, respectively. There are no commitments to lend additional amounts to borrowers with loans that are classified as troubled debt restructurings at June 30, 2011 and December 31, 2010. At June 30, 2011 the borrowers have made timely payments of principal and interest on those loans per the modified agreements.

Credit Risk Grading

     Sound credit systems, practices and procedures such as credit risk grading systems; effective credit review and examination processes; effective loan monitoring, problem identification, and resolution processes; and a conservative loss recognition process and charge-off policy are integral to Management’s proper assessment of the adequacy of the allowance. Many factors are considered when grades are assigned to individual loans such as current and historic delinquency, financial statements of the borrower, current net realizable value of collateral and the general economic environment and specific economic trends affecting the portfolio. Commercial, commercial real estate and residential construction loans are assigned internal credit risk grades. The loan’s internal credit risk grade is reviewed on at least an annual basis and more frequently if needed based on specific borrower circumstances. Credit quality indicators used in Management’s periodic analysis of the adequacy of the allowance include the Corporation’s internal credit risk grades which are described below and are included in the table below for June 30, 2011 and December 31, 2010:

     • Grades 1 -5: defined as “Pass” credits — loans which are protected by the borrower’s current net worth and paying capacity or by the value of the underlying collateral. Pass credits are current or have not displayed a significant past due history.

     • Grade 6: defined as “Special Mention” credits — loans where a potential weakness or risk exists, which could cause a more serious problem if not monitored. Loans listed for special mention generally demonstrate a history of repeated delinquencies, which may indicate a deterioration of the repayment abilities of the borrower.

     • Grade 7: defined as “Substandard” credits — loans that have a well-defined weakness based on objective evidence and are characterized by the distinct possibility that the Corporation will sustain some loss if the deficiencies are not corrected.

     • Grade 8: defined as “Doubtful” credits — loans classified as doubtful have all the weaknesses inherent in a substandard asset. In addition, these weaknesses make collection or liquidation in full highly questionable and improbable.

     • Grade 9: defined as “Loss” credits — loans classified as a loss are considered uncollectible, or of such value that continuance as an asset is not warranted.

For residential, home equity, indirect and consumer loan segments, the Corporation monitors credit quality using a combination of the delinquency status of the loan and/or the Corporation’s internal credit risk grades as indicated above.

The following table presents the recorded investment of commercial, commercial real estate and residential construction loans by internal credit risk grade and the recorded investment in residential, home equity, indirect and consumer loans based on delinquency status as of June 30, 2011 and December 31, 2010:

			Commercial Real				Home Equity
	Commercial		Estate		Residential*		Loans		Indirect		Consumer		Total
Commercial Credit Exposure							June 30, 2011
							(Dollars in thousands)
Loans graded by internal credit risk grade:
Grade 1 - Minimal	$	3,172	$	—	$	—	$	—	$	—	$	—	$	3,172
Grade 2 - Modest		—		—		—		—		—		—		—
Grade 3 - Better than average		149		2,935		—		—		—		—		3,084
Grade 4 - Average		8,033		52,231		264		—		—		—		60,528
Grade 5 - Acceptable		57,590		263,494		4,054		—		—		—		325,138
Total Pass Credits		68,944		318,660		4,318		—		—		—		391,922
Grade 6 - Special mention		2,689		17,038		377		—		—		—		20,104
Grade 7 - Substandard		1,046		51,193		1,628		—		—		—		53,867
Grade 8 - Doubtful		—		—		—		—		—		—		—
Grade 9 - Loss		—		—		—		—		—		—		—
Total loans internally credit risk graded		72,679		386,891		6,323		—		—		—		465,893
Loans not monitored by internal risk grade:
Current loans not internally risk graded		—		—		56,657		127,217		158,354		12,681		354,909
30-59 days past due loans not internally risk graded		—		—		540		609		426		82		1,657
60-89 days past due loans not internally risk graded		—		—		827		1,184		74		114		2,199
90+ days past due loans not internally risk graded		—		—		4,490		1,133		31		—		5,654
Total loans not internally credit risk graded		—		—		62,514		130,143		158,885		12,877		364,419
Total loans internally and not internally credit risk graded	$	72,679	$	386,891	$	68,837	$	130,143	$	158,885	$	12,877	$	830,312

			Commercial				Home Equity
	Commercial		Real Estate		Residential*		Loans		Indirect		Consumer		Total
Commercial Credit Exposure							December 31, 2010
							(Dollars in thousands)
Loans graded by internal credit risk grade:
Grade 1 - Minimal	$	3,124	$	—	$	—	$	—	$	—	$	—	$	3,124
Grade 2 - Modest		—		—		—		—		—		—		—
Grade 3 - Better than average		162		3,055		—		—		—		—		3,217
Grade 4 - Average		8,343		59,651		267		—		—		—		68,261
Grade 5 - Acceptable		49,727		246,475		5,733		—		—		—		301,935
Total Pass Credits		61,356		309,181		6,000		—		—		—		376,537
Grade 6 - Special mention		2,599		13,807		170		—		—		—		16,576
Grade 7 - Substandard		1,707		52,815		2,516		—		—		—		57,038
Grade 8 - Doubtful		—		—		—		—		—		—		—
Grade 9 - Loss		—		—		—		—		—		—		—
Total loans internally credit risk graded		65,662		375,803		8,686		—		—		—		450,151
Loans not monitored by internal risk grade:
Current loans not internally risk graded		—		—		57,389		130,395		149,184		13,775		350,743
30-59 days past due loans not internally risk graded		—		—		1,018		776		612		61		2,467
60-89 days past due loans not internally risk graded		—		—		1,032		235		123		—		1,390
90+ days past due loans not internally risk graded		—		—		6,560		1,130		112		26		7,828
Total loans not internally credit risk graded		—		—		65,999		132,536		150,031		13,862		362,428
Total loans internally and not internally credit risk graded	$	65,662	$	375,803	$	74,685	$	132,536	$	150,031	$	13,862	$	812,579

* Residential loans include conventional 1-4 family residential property loans and conventional 1-4 family residential property loans used to finance the cost of construction when upon completion of construction the loan converts into a permanent mortgage.

The Corporation adheres to underwriting standards consistent with its Loan Policy for indirect and consumer loans. Final approval of a consumer credit depends on the repayment ability of the borrower. Repayment ability generally requires the determination of the borrower’s capacity to meet current and proposed debt service requirements. A borrower’s repayment ability is monitored based on delinquency, generally for time periods of 30 to 59 days past due, 60 to 89 days past due and greater than 90 days past due. This information is provided in the above delinquent loan table. Additionally, a good indicator of repayment ability is a borrower’s credit history. A borrower’s credit history is evaluated though the use of credit reports and/or an automated underwriting system. A borrower’s credit score is an indication of a person’s creditworthiness that is used to access the likelihood that a borrower will repay their debts. A credit score is generally based upon a person’s past credit history and is a number between 300 and 850 — the higher the number, the more creditworthy the person is deemed to be.

Below is a table that shows the weighted average credit scores for residential, home equity, indirect and consumer loans for the six and twelve months ended June 30, 2011 and December 31, 2010.

Consumer Credit Score Migration	June 30, 2011		December 31, 2010
Total residential		703		701
Total home equity loans		751		750
Total loans to individuals		728		728
Total indirect		770		771
Total revolving lines		713		713