Note 2 - Loans

6 Months Ended

Jun. 30, 2011

Loans, Notes, Trade and Other Receivables Disclosure [Text Block]

NOTE 2- LOANS

The following table shows the distribution of our loan portfolio in the manner that we break down the loan portfolio for use in our analysis of the determination of our loan loss allowance. This presentation differs somewhat by loan category from classification of loans presented elsewhere in our regulatory reports and within this report. These variations primarily relate to how we analyze real estate loans internally for the adequacy of the loan loss allowance, which is different from how we are required to report them for regulatory purposes.
 

Loans at period end were as follows:
(In Thousands of Dollars)	June 30, 2011		December 31, 2010
Commercial & Industrial
Pass loans	$	136,028	$	143,882
Watch loans		14,625		12,714
Special mention loans		4,150		4,262
Substandard loans		4,608		1,560
Impaired loans		1,715		3,424
Doubtful loans		329		141
Restructured loans		1,555		36
Total Commercial & Industrial		163,010		166,019
Commercial Real Estate
Pass loans		382,489		394,699
Watch loans		55,391		50,596
Special mention loans		20,879		31,324
Substandard loans		8,001		8,450
Impaired loans		13,171		15,987
Doubtful loans		0		881
Restructured loans		11,962		5,768
Total Commercial Real Estate		491,893		507,705
First lien residential mortgage loans
Performing loans		191,612		192,084
Loans > 60 days past due		1,276		2,102
Nonaccrual loans		4,315		5,189
Restructured loans		4,472		4,252
Total First lien residential mortgage loans		201,675		203,627
Junior lien residential mortgage loans
Performing loans		72,094		75,562
Loans > 60 days past due		230		148
Nonaccrual loans		483		556
Total Junior lien residential mortgage loans		72,807		76,266
Consumer Loans
Performing loans		76,204		77,531
Loans > 60 days past due		182		288
Nonaccrual loans		191		184
Total Consumer Loans		76,577		78,003
Total Loans	$	1,005,962	$	1,031,620

Allowance for Loan Losses

The allowance for loan losses is determined based on management’s estimate of losses incurred within the loan portfolio. We rely on historical loss rates in conjunction with our judgment of the current environment to determine the appropriate level for the allowance at the end of each reporting period. The loan portfolio is segmented into five loan types: commercial and industrial loans, commercial real estate loans; consumer loans; residential mortgages – first liens; and residential mortgage – junior liens. These segments are further segmented by credit quality classifications. For commercial and industrial loans and commercial real estate loans, these segments are based on our loan grading system described previously in Note 1 of our annual report dated December 31, 2010. For consumer and residential mortgage loans, loans are segmented based on delinquency and nonaccrual categories. All loan segments also contain a separate category for restructured loans, if they exist.

Commercial and industrial and commercial real estate loans graded as pass or watch, are assigned a unique pooled loss rate based on historical losses incurred over the prior three years. The losses are weighted for each year, with the most recent 12 month period receiving a higher weight and the oldest 12 month period receiving a lower weight in the calculation of the historical loss. We then adjust the calculated historical loss rate up or down based on current environmental factors. These adjustments include items such as current unemployment rates, changes in the value of underlying collateral, and other observable items that indicate trends in asset quality. The current outstanding balance for each of these grades is then multiplied by the adjusted historical loss factor to determine the amount of allowance for loan losses to reserve on that pool of loans.

Loans graded special mention or substandard use a shorter 12 month loss history to determine the loss rate. Losses over the preceding 12 month period are divided by the average balance outstanding of substandard and impaired loans to determine a historical loss rate. That calculated historical loss rate is multiplied by a migration rate (rate at which special mention loan move to a more severe risk category) to determine the loss rate for special mention loans. The calculated historical loss rate, without adjustment for migration, is used for substandard loans.

Loans graded as impaired or restructured are reviewed individually for reserves. A specific reserve is established within the allowance for the difference between the carrying value of the loan and its calculated value. To determine the value of the loan, the present value of expected cash flows, the collateral value, or some combination of the two is used. The specific reserve is established as the difference between the carrying value of the loan and the calculated value.

For consumer and residential loan segments, loans that are current, or less than 60 days past due are each assigned a historical loss factor as described above for commercial pass and watch loans. For loans that are more than 60 days past due, a loss factor is determined based on charge offs within the last 12 months, divided by the sum of the average balance of loans 60 days or more past due and nonaccrual loans. These loss factors are multiplied by the outstanding balances in each segment at the end of the reporting period to determine the amount of allowance for loan loss.

After each of the steps outlined above is completed, the results are aggregated and compared with the existing balance of the allowance for loan losses. If the resulting calculation is greater than the balance, the allowance for loan losses is increased through a charge to earnings on the provision for loan losses line. If the resulting balance is below the current balance of the allowance for loan losses, a reversal of the provision for loan losses is recorded.

Activity in the allowance for loan losses was as follows:

(In Thousands of Dollars)
	Three months ended June 30,						Six months ended June 30,
	2011			2010			2011			2010
Beginning balance	$	21,347		$	20,121		$	21,431		$	19,114
Provision for loan losses		4,256			3,066			7,267			5,557
Loans charged off		(4,422	)		(2,928	)		(7,710	)		(4,736	)
Recoveries		146			329			339			653
Ending balance	$	21,327		$	20,588		$	21,327		$	20,588

As of June 30, key measurements of the allowance for loan losses were as follows:

	Three months ended June 30,						Six months ended June 30,
(In Thousands of Dollars)	2011			2010			2011			2010
Average total loans* outstanding during the period	$	1,010,060		$	1,090,129		$	1,017,685		$	1,099,582
Allowance for loan loss as a percent of total loans*		2.11	%		1.90	%		2.11	%		1.90	%
Net Charge-offs^ as a percent of average loans*		1.69	%		0.95	%		1.45	%		0.74	%

*All loan ratios exclude loans held for sale                                                                                     ^ Annualized

Analysis of the allowance for loan losses for the current and prior year to date periods is as follows:

(In Thousands of Dollars)
Six months ending June 30, 2011	Beginning Balance		Charged off			Recoveries		Provision			Ending Balance
Commercial & Industrial
Pass loans	$	1,392							(116	)	$	1,276
Watch loans		194							(32	)		162
Special mention loans		240							(31	)		209
Substandard loans		386							40			426
Impaired loans		661		(774	)		122		427			436
Doubtful loans		115		(115	)				187			187
Restructured loans		36							0			36
Total Commercial & Industrial		3,024		(889	)		122		475			2,732
Commercial Real Estate
Pass loans		4,210							808			5,018
Watch loans		700							218			918
Special mention loans		1,339							(455	)		884
Substandard loans		1,439							(84	)		1,355
Impaired loans		3,900		(4,239	)		43		2,985			2,689
Doubtful loans		188		(188	)		0		0			0
Restructured loans		599	0			0			133			732
Total Commercial Real Estate		12,375		( 4,427	)		43		3,605			11,596
First lien residential mortgage loans
Performing loans		1,737							856			2,593
Loans > 60 days past due		631							(121	)		510
Nonaccrual loans		1,523		(1,764	)		40		1,326			1,125
Restructured loans		69	0			0			375			444
Total First lien residential mortgage loans		3,960		( 1,764	)		40		2,436			4,672
Junior lien residential mortgage loans
Performing loans		563							(199	)		364
Loans > 60 days past due		44							25			69
Nonaccrual loans		167		(113	)		0		67			121
Total Junior lien residential mortgage loans		774		(113	)		0		(107	)		554
Consumer Loans
Performing loans		902							89			991
Loans > 60 days past due		159							(58	)		101
Nonaccrual loans		101		(517	)		134		387			105
Total Consumer Loans		1,162		(518	)		134		418			1,197
Unallocated Allowance		136		0			0		440			576
Total	$	21,431	$	(7,710	)	$	339	$	7,267		$	21,327

(In Thousands of Dollars)
Six months ending June 30, 2010	Beginning Balance		Charged off			Recoveries		Provision			Ending Balance
Commercial & Industrial
Pass loans	$	1,920							(206	)	$	1,714
Watch loans		309							(73	)		236
Special mention loans		662							(280	)		382
Substandard loans		590							774			1,364
Impaired loans		159		(761	)		290		710			398
Doubtful loans		0							0			0
Restructured loans		0							0			0
Total Commercial & Industrial		3,640		(761	)		290		925			4,094
Commercial Real Estate
Pass loans		4,067							(620	)		3,447
Watch loans		708							(163	)		545
Special mention loans		910							340			1,250
Substandard loans		1,519							(358	)		1,161
Impaired loans		3,269		(2,255	)		15		3,172			4,201
Doubtful loans		0							0			0
Restructured loans		0							0			0
Total Commercial Real Estate		10,473		(2,255	)		15		2,371			10,604
First lien residential mortgage loans
Performing loans		1,392							1			1,393
Loans > 60 days past due		648							(44	)		604
Nonaccrual loans		462		(949	)		116		1,531			1,160
Restructured loans		0							0			0
Total First lien residential mortgage loans		2,502		(949	)		116		1,488			3,157
Junior lien residential mortgage loans
Performing loans		558							54			612
Loans > 60 days past due		242							(92	)		150
Nonaccrual loans		167		(146	)		0		22			43
Total Junior lien residential mortgage loans		967		(146	)		0		(16	)		805
Consumer Loans
Performing loans		1,178							(150	)		1,028
Loans > 60 days past due		179							(27	)		152
Nonaccrual loans		168		(625	)		232		332			107
Total Consumer Loans		1,525		(625	)		232		155			1,287
Unallocated Allowance		7		0			0		634			641
Total	$	19,114	$	(4,736	)	$	653	$	5,557		$	20,588

Age Analysis of Past Due Loans

(In thousands of dollars)
At June 30, 2011	Current		30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Total Accruing Loans
Commercial and Industrial	$	154,871	$	3,181	$	1,168	$	578	$	4,927	$	159,798
Commercial Real Estate		345,632		5,629		1,442		772		7,843		353,475
Residential Mortgages 1st Liens		339,190		737		901		404		2,042		341,232
Residential Mortgages Junior Liens		71,372		300		169		0		469		71,841
Consumer		58,699		529		149		33		711		59,410
Total	$	969,764	$	10,376	$	3,829	$	1,787	$	15,992	$	985,756
At December 31, 2010
Commercial and Industrial	$	159,532	$	916	$	400	$	0	$	1,316	$	160,848
Commercial Real Estate		352,615		3,514		981		18		4,513		357,128
Residential Mortgages 1st Liens		349,086		1,025		1,529		573		3,127		352,213
Residential Mortgages Junior Liens		74,934		628		148		0		776		75,710
Consumer		58,368		703		273		15		991		59,359
Total	$	994,535	$	6,786	$	3,331	$	606	$	10,723	$	1,005,258

Impaired loans were as follows:

(In Thousands of Dollars)	June 30, 2011		December 31, 2010
Period end loans with no allocated allowance for loan losses
Commercial and Industrial	$	1,812	$	833
Commercial Real Estate		14,885		7,713
Residential Mortgages 1st Liens		8,787		8,789
Residential Mortgages Junior Liens		483		556
Consumer		191		184
Total	$	26,158	$	18,075
Period end loans with allocated allowance for loan losses
Commercial and Industrial	$	1,787	$	2,768
Commercial Real Estate		10,248		14,923
Residential Mortgages 1st Liens		0		652
Residential Mortgages Junior Liens		0		0
Consumer		0		0
Total	$	12,035	$	18,343
Amount of the allowance for loan losses allocated	$	2,708	$	5,529
Average of impaired loans during the 6 month period ended
Commercial and Industrial	$	4,352	$	5,051
Commercial Real Estate		28,784		21,341
Residential Mortgages 1st Liens		10,552		6,218
Residential Mortgages Junior Liens		638		312
Consumer		239		256
Total	$	44,565	$	33,178
	June 30, 2011		June 30, 2010
Interest income recognized during impairment	$	434	$	77
Cash-basis interest income recognized	$	25	$	54

Performing adjusted loans, past due 90 day loans, and nonaccrual loans were as follows:

(In Thousands of Dollars)	June 30, 2011		December 31, 2010
Performing adjusted loans (Restructured and accruing)
Commercial and Industrial	$	1,555	$	36
Commercial Real Estate		11,962		5,768
Residential Mortgages 1st Liens		4,472		4,252
Total restructured loans	$	17,989	$	10,056
Loans past due over 90 days still on accrual at period end
Commercial and Industrial	$	578	$	0
Commercial Real Estate		772		18
Residential Mortgages 1st Liens		404		573
Residential Mortgages Junior Liens		0		0
Consumer		33		15
Total loans past due 90 days and on accrual at period end	$	1,787	$	606
Nonaccrual loans at period end
Commercial and Industrial	$	2,044	$	3,565
Commercial Real Estate		13,171		16,868
Residential Mortgages 1st Liens		4,316		5,189
Residential Mortgages Junior Liens		483		556
Consumer		191		184
Total nonaccrual loans	$	20,205	$	26,362
Total performing adjusted loans, past due over 90 days loans, and nonaccrual loans	$	39,981	$	37,024