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Loans and Related Allowance for Loan Losses | 6 Months Ended
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Jun. 30, 2013
Loans and Related Allowance for Loan Losses [Abstract] |
Loans and Related Allowance for Loan Losses | Note 7 – Loans and Related Allowance for Loan Losses The following table summarizes the primary segments of the loan portfolio as of June 30, 2013 and December 31, 2012:
(in thousands) | Commercial Real Estate | Acquisition and Development | Commercial and Industrial | Residential Mortgage | Consumer | Total
June 30, 2013 |  |  |  |  |  |  |  |  |  |  |  |
Total loans | $ | 285,984 | $ | 118,356 | $ | 63,844 | $ | 346,636 | $ | 27,030 | $ | 841,850
Individually evaluated for impairment | $ | 15,622 | $ | 20,594 | $ | 2,261 | $ | 5,182 | $ | 107 | $ | 43,766
Collectively evaluated for impairment | $ | 270,362 | $ | 97,762 | $ | 61,583 | $ | 341,454 | $ | 26,923 | $ | 798,084
December 31, 2012 |  |  |  |  |  |  |  |  |  |  |  |
Total loans | $ | 298,851 | $ | 128,391 | $ | 69,013 | $ | 346,919 | $ | 31,655 | $ | 874,829
Individually evaluated for impairment | $ | 15,941 | $ | 24,112 | $ | 3,449 | $ | 4,304 | $ | 36 | $ | 47,842
Collectively evaluated for impairment | $ | 282,910 | $ | 104,279 | $ | 65,564 | $ | 342,615 | $ | 31,619 | $ | 826,987
The segments of the Bank’s loan portfolio are disaggregated to a level that allows management to monitor risk and performance. The commercial real estate (“CRE”) loan segment is then segregated into two classes. Non-owner occupied CRE loans, which include loans secured by non-owner occupied, nonfarm, and nonresidential properties, generally have a greater risk profile than all other CRE loans, which include loans secured by farmland, multifamily structures and owner-occupied commercial structures. The acquisition and development (“A&D”) loan segment is segregated into two classes. One-to-four family residential construction loans are generally made to individuals for the acquisition of and/or construction on a lot or lots on which a residential dwelling is to be built. All other A&D loans are generally made to developers or investors for the purpose of acquiring, developing and constructing residential or commercial structures. A&D loans have a higher risk profile because the ultimate buyer, once development is completed, is generally not known at the time of the loan is made. The commercial and industrial (“C&I”) loan segment consists of loans made for the purpose of financing the activities of commercial customers. The residential mortgage loan segment is segregated into two classes. Amortizing term loans are primarily first lien loan s. H ome equity lines of credit are generally second lien loan s. The consumer loan segment consists primarily of installment loans (direct and indirect) and overdraft lines of credit connected with customer deposit accounts. Management uses a 10-point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first six categories are considered not criticized, and are aggregated as “Pass” rated. The criticized rating categories utilized by management generally follow bank regulatory definitions. The Special Mention category includes assets that are currently protected but are potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a Substandard classification. Loans in the Substandard category have well-defined weaknesses that jeopardize the liquidation of the debt, and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected. All loans greater than 90 days past due are considered Substandard. The portion of a specific allocation of the allowance for loan losses that management believes is associated with a pending event that could trigger loss in the short-term will be classified in the Doubtful category. Any portion of a loan that has been charged off is placed in the Loss category. To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Bank has a structured loan rating process with several layers of internal and external oversight. Generally, consumer and residential mortgage loans are included in the Pass categories unless a specific action, such as bankruptcy, repossession, or death occurs to raise awareness of a possible credit event. The Bank’s Commercial Loan Officers are responsible for the timely and accurate risk rating of the loans in the commercial segments at origination and on an ongoing basis. The Bank’s experienced Credit Quality and Loan Review Department performs an annual review of all commercial relationships of $500,000 or greater. Confirmation of the appropriate risk grade is included as part of the review process on an ongoing basis. The Credit Quality and Loan Review Department continually reviews and assesses loans within the portfolio. In addition, the Bank engages an external consultant to conduct loan reviews on at least an annual basis. Generally, the external consultant reviews commercial relationships greater than $750,000 and/or criticized relationships greater than $500,000. Detailed reviews, including plans for resolution, are performed on loans classified as Substandard on a quarterly basis. Loans in the Special Mention and Substandard categories that are collectively evaluated for impairment are given separate consideration in the determination of the allowance. The following table presents the classes of the loan portfolio summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard and Doubtful within the internal risk rating system as of June 30, 2013 and December 31, 2012:
(in thousands) | Pass | Special Mention | Substandard | Doubtful | Total
June 30, 2013 |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  |  |  |  |  |  |  |  |
Non owner-occupied | $ | 109,273 | $ | 9,364 | $ | 30,036 | $ | 0 | $ | 148,673
All other CRE |  | 107,258 |  | 8,733 |  | 21,320 |  | 0 |  | 137,311
Acquisition and development |  |  |  |  |  |  |  |  |  |
1-4 family residential construction |  | 8,584 |  | 0 |  | 5,115 |  | 0 |  | 13,699
All other A&D |  | 75,486 |  | 1,899 |  | 27,272 |  | 0 |  | 104,657
Commercial and industrial |  | 59,407 |  | 1,873 |  | 2,564 |  | 0 |  | 63,844
Residential mortgage |  |  |  |  |  |  |  |  |  |
Residential mortgage - term |  | 257,009 |  | 733 |  | 11,561 |  | 0 |  | 269,303
Residential mortgage - home equity |  | 74,922 |  | 523 |  | 1,888 |  | 0 |  | 77,333
Consumer |  | 26,781 |  | 19 |  | 230 |  | 0 |  | 27,030
Total | $ | 718,720 | $ | 23,144 | $ | 99,986 | $ | 0 | $ | 841,850
December 31, 2012 |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  |  |  |  |  |  |  |  |
Non owner-occupied | $ | 126,230 | $ | 6,464 | $ | 18,840 | $ | 0 | $ | 151,534
All other CRE |  | 110,365 |  | 9,072 |  | 27,880 |  | 0 |  | 147,317
Acquisition and development |  |  |  |  |  |  |  |  |  |
1-4 family residential construction |  | 9,284 |  | 1,101 |  | 5,967 |  | 0 |  | 16,352
All other A&D |  | 79,136 |  | 1,073 |  | 31,830 |  | 0 |  | 112,039
Commercial and industrial |  | 60,234 |  | 2,029 |  | 6,750 |  | 0 |  | 69,013
Residential mortgage |  |  |  |  |  |  |  |  |  |
Residential mortgage - term |  | 255,993 |  | 751 |  | 11,885 |  | 0 |  | 268,629
Residential mortgage - home equity |  | 75,935 |  | 195 |  | 2,160 |  | 0 |  | 78,290
Consumer |  | 31,376 |  | 22 |  | 257 |  | 0 |  | 31,655
Total | $ | 748,553 | $ | 20,707 | $ | 105,569 | $ | 0 | $ | 874,829
Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. A loan is considered to be past due when a payment has not been received for 30 days past its contractual due date. For all loan segments, the accrual of interest is discontinued when principal or interest is delinquent for 90 days or more unless the loan is well-secured and in the process of collection. All non-accrual loans are considered to be impaired. Interest payments received on non-accrual loans are applied as a reduction of the loan principal balance. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured. The Corporation’s policy for recognizing interest income on impaired loans does not differ from its overall policy for interest recognition. The following table presents the classes of the loan portfolio summarized by the aging categories of performing loans and non-accrual loans as of June 30, 2013 and December 31, 2012:
(in thousands) | Current | 30-59 Days Past Due | 60-89 Days Past Due | 90 Days+ Past Due | Total Past Due and Accruing | Non-Accrual | Total Loans
June 30, 2013 |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |
Non owner-occupied | $ | 143,956 | $ | 395 | $ | 213 | $ | 0 | $ | 608 | $ | 4,109 | $ | 148,673
All other CRE |  | 135,008 |  | 259 |  | 0 |  | 0 |  | 259 |  | 2,044 |  | 137,311
Acquisition and development |  |  |  |  |  |  |  |  |  |  |  |  |  |
1-4 family residential construction |  | 12,159 |  | 0 |  | 0 |  | 0 |  | 0 |  | 1,540 |  | 13,699
All other A&D |  | 96,293 |  | 121 |  | 479 |  | 0 |  | 600 |  | 7,764 |  | 104,657
Commercial and industrial |  | 63,635 |  | 44 |  | 22 |  | 2 |  | 68 |  | 141 |  | 63,844
Residential mortgage |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage - term |  | 262,325 |  | 776 |  | 2,126 |  | 513 |  | 3,415 |  | 3,563 |  | 269,303
Residential mortgage - home equity |  | 76,598 |  | 499 |  | 14 |  | 114 |  | 627 |  | 108 |  | 77,333
Consumer |  | 26,204 |  | 508 |  | 192 |  | 18 |  | 718 |  | 108 |  | 27,030
Total | $ | 816,178 | $ | 2,602 | $ | 3,046 | $ | 647 | $ | 6,295 | $ | 19,377 | $ | 841,850
December 31, 2012 |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |
Non owner-occupied | $ | 146,796 | $ | 321 | $ | 64 | $ | 0 | $ | 385 | $ | 4,353 | $ | 151,534
All other CRE |  | 143,108 |  | 2,368 |  | 0 |  | 0 |  | 2,368 |  | 1,841 |  | 147,317
Acquisition and development |  |  |  |  |  |  |  |  |  |  |  |  |  |
1-4 family residential construction |  | 16,280 |  | 61 |  | 0 |  | 0 |  | 61 |  | 11 |  | 16,352
All other A&D |  | 100,232 |  | 619 |  | 221 |  | 200 |  | 1,040 |  | 10,767 |  | 112,039
Commercial and industrial |  | 68,228 |  | 580 |  | 29 |  | 0 |  | 609 |  | 176 |  | 69,013
Residential mortgage |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage - term |  | 251,673 |  | 7,446 |  | 5,244 |  | 1,639 |  | 14,329 |  | 2,627 |  | 268,629
Residential mortgage - home equity |  | 77,224 |  | 583 |  | 130 |  | 249 |  | 962 |  | 104 |  | 78,290
Consumer |  | 30,434 |  | 800 |  | 327 |  | 58 |  | 1,185 |  | 36 |  | 31,655
Total | $ | 833,975 | $ | 12,778 | $ | 6,015 | $ | 2,146 | $ | 20,939 | $ | 19,915 | $ | 874,829
Non-accrual loans which have been subject to a partial charge-off totaled $7.4 million as of June 30, 2013, compared to $6.7 million as of December 31, 2012. An allowance for loan losses (“ALL”) is maintained to absorb losses from the loan portfolio. The ALL is based on management’s continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience, and the amount of non-performing loans. The Bank’s methodology for determining the ALL is based on the requirements of ASC Section 310-10-35, Receivables-Overall-Subsequent Measurement, for loans individually evaluated for impairment and ASC Subtopic 450-20, Contingencies-Loss Contingencies, for loans collectively evaluated for impairment, as well as the Interagency Policy Statement on the Allowance for Loan and Lease Losses and other bank regulatory guidance. The total of the two components represents the Bank’s ALL. The following table summarizes the primary segments of the ALL, segregated by the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of June 30, 2013 and December 31, 2012.
(in thousands) | Commercial Real Estate | Acquisition and Development | Commercial and Industrial | Residential Mortgage | Consumer | Total
June 30, 2013 |  |  |  |  |  |  |  |  |  |  |  |
Total ALL | $ | 5,261 | $ | 4,875 | $ | 753 | $ | 4,304 | $ | 329 | $ | 15,522
Individually evaluated for impairment | $ | 35 | $ | 2,612 | $ | 0 | $ | 78 | $ | 0 | $ | 2,725
Collectively evaluated for impairment | $ | 5,226 | $ | 2,263 | $ | 753 | $ | 4,226 | $ | 329 | $ | 12,797
December 31, 2012 |  |  |  |  |  |  |  |  |  |  |  |
Total ALL | $ | 5,206 | $ | 5,029 | $ | 906 | $ | 4,507 | $ | 399 | $ | 16,047
Individually evaluated for impairment | $ | 126 | $ | 1,506 | $ | 0 | $ | 0 | $ | 0 | $ | 1,632
Collectively evaluated for impairment | $ | 5,080 | $ | 3,523 | $ | 906 | $ | 4,507 | $ | 399 | $ | 14,415
Management evaluates individual loans in all of the commercial segments for possible impairment, if the loan (a) is greater than $500,000 or (b) is part of a relationship that is greater than $750,000 and is either (i) in nonaccrual status or (ii) risk-rated Substandard and greater than 60 days past due. Loans are considered to be impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in evaluating impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. The Bank does not separately evaluate individual consumer and residential mortgage loans for impairment, unless such loans are part of a larger relationship that is impaired; otherwise loans in these segments are considered impaired when they are classified as non-accrual. Once the determination has been made that a loan is impaired, the determination of whether a specific allocation of the allowance is necessary is measured by comparing the recorded investment in the loan to the fair value of the loan using one of three methods: (a) the present value of expected future cash flows discounted at the loan’s effective interest rate; (b) the loan’s observable market price; or (c) the fair value of the collateral less selling costs. The method is selected on a loan-by-loan basis, with management primarily utilizing the fair value of collateral method. If the fair value of the collateral less selling costs method is utilized for collateral securing loans in the commercial segments, then an updated external appraisal is ordered on the collateral supporting the loan if the loan balance is greater than $500,000 and the existing appraisal is greater than 18 months old. If an appraisal is less than 12 months old (the age at which the internal appraisal grid begins) and if management believes that general market conditions in that geographic market have changed considerably, the property has deteriorated or perhaps lost an income stream, or a recent appraisal for a similar property indicates a significant change, then management may adjust the fair value indicated by the existing appraisal until a new appraisal is obtained. If the most recent appraisal is greater than 12 months old or if an updated appraisal has not been received and reviewed in time for the determination of estimated fair value at quarter (or year) end, then the estimated fair value of the collateral is determined by adjusting the existing appraisal by the appropriate percentage from an internally prepared appraisal discount grid. This grid considers the age of a third party appraisal and the geographic region where the collateral is located in order to discount an appraisal that is greater than 12 months old. The discount rates in the appraisal discount grid are updated quarterly to reflect the most current knowledge that management has available, including the results of current appraisals. If there is a delay in receiving an updated appraisal or if the appraisal is found to be deficient in our internal appraisal review process and re-ordered, then the Bank continues to use a discount factor from the appraisal discount grid based on the collateral location and current appraisal age in order to determine the estimated fair value. A specific allocation of the ALL is recorded if there is any deficiency in collateral value determined by comparing the estimated fair value to the recorded investment of the loan. When updated appraisals are received and reviewed, adjustments are made to the specific allocation as needed. The evaluation of the need and amount of a specific allocation of the ALL and whether a loan can be removed from impairment status is made on a quarterly basis. The following table presents impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary as of June 30, 2013 and December 31, 2012:
|  |  |  |  |  | Impaired |  |  |  |
|  |  |  | Loans with No |  |
|  | Impaired Loans with |  | Specific |  |  |  |
|  | Specific Allowance |  | Allowance |  | Total Impaired Loans
|  |  |  |  |  |  |  |  |  | Unpaid
|  | Recorded |  | Related |  | Recorded |  | Recorded |  | Principal
(in thousands) |  | Investment |  | Allowances |  | Investment |  | Investment |  | Balance
June 30, 2013 |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  |  |  |  |  |  |  |  |
Non owner-occupied | $ | 132 | $ | 35 | $ | 4,902 | $ | 5,034 | $ | 7,664
All other CRE |  | 0 |  | 0 |  | 10,588 |  | 10,588 |  | 10,892
Acquisition and development |  |  |  |  |  |  |  |  |  |
1-4 family residential construction |  | 3,219 |  | 669 |  | 8 |  | 3,227 |  | 3,315
All other A&D |  | 5,805 |  | 1,943 |  | 11,562 |  | 17,367 |  | 21,841
Commercial and industrial |  | 0 |  | 0 |  | 2,261 |  | 2,261 |  | 2,277
Residential mortgage |  |  |  |  |  |  |  |  |  |
Residential mortgage - term |  | 706 |  | 78 |  | 3,923 |  | 4,629 |  | 5,223
Residential mortgage – home equity |  | 0 |  | 0 |  | 553 |  | 553 |  | 553
Consumer |  | 0 |  | 0 |  | 107 |  | 107 |  | 107
Total impaired loans | $ | 9,862 | $ | 2,725 | $ | 33,904 | $ | 43,766 | $ | 51,872
December 31, 2012 |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  |  |  |  |  |  |  |  |
Non owner-occupied | $ | 0 | $ | 0 | $ | 5,309 | $ | 5,309 | $ | 7,929
All other CRE |  | 1,019 |  | 126 |  | 9,613 |  | 10,632 |  | 10,785
Acquisition and development |  |  |  |  |  |  |  |  |  |
1-4 family residential construction |  | 2,052 |  | 471 |  | 10 |  | 2,062 |  | 2,062
All other A&D |  | 5,410 |  | 1,035 |  | 16,640 |  | 22,050 |  | 26,232
Commercial and industrial |  | 0 |  | 0 |  | 3,449 |  | 3,449 |  | 3,449
Residential mortgage |  |  |  |  |  |  |  |  |  |
Residential mortgage - term |  | 0 |  | 0 |  | 3,755 |  | 3,755 |  | 4,086
Residential mortgage – home equity |  | 0 |  | 0 |  | 549 |  | 549 |  | 549
Consumer |  | 0 |  | 0 |  | 36 |  | 36 |  | 36
Total impaired loans | $ | 8,481 | $ | 1,632 | $ | 39,361 | $ | 47,842 | $ | 55,128
Loans that are collectively evaluated for impairment are analyzed with general allowances being made as appropriate. For general allowances, historical loss trends are used in the estimation of losses in the current portfolio. These historical loss amounts are modified by other qualitative factors. The classes described above, which are based on the Federal call code assigned to each loan, provide the starting point for the ALL analysis. Management tracks the historical net charge-off activity (full and partial charge-offs, net of full and partial recoveries) at the call code level. A historical charge-off factor is calculated utilizing a defined number of consecutive historical quarters. Consumer pools currently utilize a rolling 12 quarters, while Commercial pools currently utilize a rolling eight quarters. “Pass” rated credits are segregated from “Criticized” credits for the application of qualitative factors. The un-criticized (“pass”) pools for commercial and residential real estate are further segmented based upon the geographic location of the underlying collateral. There are seven geographic regions utilized – six that represent the Bank’s lending footprint and a seventh for all out-of-market credits. Different economic environments and resultant credit risks exist in each region that are acknowledged in the assignment of qualitative factors. Loans in the criticized pools, which possess certain qualities or characteristics that may lead to collection and loss issues, are closely monitored by management and subject to additional qualitative factors. Management supplements the historical charge-off factor with a number of additional qualitative factors that are likely to cause estimated credit losses associated with the existing loan pools to differ from historical loss experience. The additional factors, which are evaluated quarterly and updated using information obtained from internal, regulatory, and governmental sources, are: (a) national and local economic trends and conditions; (b) levels of and trends in delinquency rates and non-accrual loans; (c) trends in volumes and terms of loans; (d) effects of changes in lending policies; (e) experience, ability, and depth of lending staff; (f) value of underlying collateral; and (g) concentrations of credit from a loan type, industry and/or geographic standpoint. Management reviews the loan portfolio on a quarterly basis using a defined, consistently applied process in order to make appropriate and timely adjustments to the ALL. When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ALL. Residential mortgage and consumer loans are charged off after they are 120 days contractually past due. All other loans are charged off based on an evaluation of the facts and circumstances of each individual loan. When the Bank believes that its ability to collect is solely dependent on the liquidation of the collateral, a full or partial charge-off is recorded promptly to bring the recorded investment to an amount that the Bank believes is supported by an ability to collect on the collateral. The circumstances that may impact the Bank’s decision to charge-off all or a portion of a loan include default or non-payment by the borrower, scheduled foreclosure actions, and/or prioritization of the Bank’s claim in bankruptcy. There may be circumstances where, due to pending events, the Bank will place a specific allocation of the ALL on a loan for which a partial charge-off has been previously recognized. This specific allocation may be either charged off or removed depending upon the outcome of the pending event. Full or partial charge-offs are not recovered until full principal and interest on the loan have been collected, even if a subsequent appraisal supports a higher value. Loans with partial charge-offs remain in non-accrual status. Both full and partial charge-offs reduce the recorded investment of the loan and the ALL and are considered to be charge-offs for purposes of all credit loss metrics and trends, including the historical rolling charge-off rates used in the determination of the ALL. Activity in the ALL is presented for the six- and three-months ended June 30, 2013 and June 30, 2012:
(in thousands) | Commercial Real Estate | Acquisition and Development | Commercial and Industrial | Residential Mortgage | Consumer | Total
ALL balance at January 1, 2013 | $ | 5,206 | $ | 5,029 | $ | 906 | $ | 4,507 | $ | 399 | $ | 16,047
Charge-offs |  | (184) |  | (262) |  | (1,004) |  | (256) |  | (275) |  | (1,981)
Recoveries |  | 127 |  | 21 |  | 51 |  | 119 |  | 192 |  | 510
Provision |  | 112 |  | 87 |  | 800 |  | (66) |  | 13 |  | 946
ALL balance at June 30, 2013 | $ | 5,261 | $ | 4,875 | $ | 753 | $ | 4,304 | $ | 329 | $ | 15,522
ALL balance at January 1, 2012 | $ | 6,218 | $ | 7,190 | $ | 2,190 | $ | 3,430 | $ | 452 | $ | 19,480
Charge-offs |  | (2,280) |  | (670) |  | (9,141) |  | (665) |  | (347) |  | (13,103)
Recoveries |  | 58 |  | 403 |  | 332 |  | 123 |  | 241 |  | 1,157
Provision |  | 1,860 |  | (714) |  | 7,479 |  | 569 |  | 42 |  | 9,236
ALL balance at June 30, 2012 | $ | 5,856 | $ | 6,209 | $ | 860 | $ | 3,457 | $ | 388 | $ | 16,770
(in thousands) | Commercial Real Estate | Acquisition and Development | Commercial and Industrial | Residential Mortgage | Consumer | Total
ALL balance at April 1, 2013 | $ | 5,789 | $ | 4,760 | $ | 645 | $ | 4,483 | $ | 348 | $ | 16,025
Charge-offs |  | (184) |  | (258) |  | (128) |  | (101) |  | (132) |  | (803)
Recoveries |  | 27 |  | 13 |  | 2 |  | 88 |  | 89 |  | 219
Provision |  | (371) |  | 360 |  | 234 |  | (166) |  | 24 |  | 81
ALL balance at June 30, 2013 | $ | 5,261 | $ | 4,875 | $ | 753 | $ | 4,304 | $ | 329 | $ | 15,522
ALL balance at April 1, 2012 | $ | 6,635 | $ | 5,879 | $ | 929 | $ | 3,377 | $ | 393 | $ | 17,213
Charge-offs |  | (1,119) |  | (424) |  | (50) |  | (382) |  | (174) |  | (2,149)
Recoveries |  | 58 |  | 391 |  | 2 |  | 24 |  | 119 |  | 594
Provision |  | 282 |  | 363 |  | (21) |  | 438 |  | 50 |  | 1,112
ALL balance at June 30, 2012 | $ | 5,856 | $ | 6,209 | $ | 860 | $ | 3,457 | $ | 388 | $ | 16,770
The ALL is based on estimates, and actual losses may vary from current estimates. Management believes that the granularity of the homogeneous pools and the related historical loss ratios and other qualitative factors, as well as the consistency in the application of assumptions, result in an ALL that is representative of the risk found in the components of the portfolio at any given date. The following tables present the average recorded investment in impaired loans by class and related interest income recognized for the periods indicated:
| Six months ended | Six months ended
| June 30, 2013 | June 30, 2012
|  |  | Interest | Interest |  |  | Interest | Interest
|  |  | income | income |  |  | income | income
|  |  | recognized | recognized |  |  | recognized | recognized
| Average | on an | on a cash | Average | on an | on a cash
(in thousands) | investment | accrual basis | basis | investment | accrual basis | basis
Commercial real estate |  |  |  |  |  |  |  |  |  |  |  |
Non owner-occupied | $ | 5,194 | $ | 23 | $ | 0 | $ | 8,170 | $ | 12 | $ | 0
All other CRE |  | 10,657 |  | 178 |  | 46 |  | 8,110 |  | 134 |  | 0
Acquisition and development |  |  |  |  |  |  |  |  |  |  |  |
1-4 family residential construction |  | 2,961 |  | 42 |  | 0 |  | 2,351 |  | 46 |  | 0
All other A&D |  | 20,022 |  | 269 |  | 303 |  | 22,909 |  | 207 |  | 0
Commercial and industrial |  | 3,042 |  | 66 |  | 0 |  | 7,022 |  | 72 |  | 0
Residential mortgage |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage - term |  | 4,174 |  | 33 |  | 2 |  | 5,112 |  | 67 |  | 36
Residential mortgage – home equity |  | 566 |  | 12 |  | 0 |  | 1,013 |  | 7 |  | 3
Consumer |  | 86 |  | 0 |  | 0 |  | 47 |  | 0 |  | 0
Total | $ | 46,702 | $ | 623 | $ | 351 | $ | 54,734 | $ | 545 | $ | 39
| Three months ended | Three months ended
| June 30, 2013 | June 30, 2012
|  |  | Interest | Interest |  |  | Interest | Interest
|  |  | income | income |  |  | income | income
|  |  | recognized | recognized |  |  | recognized | recognized
| Average | on an | on a cash | Average | on an | on a cash
(in thousands) | investment | accrual basis | basis | investment | accrual basis | basis
Commercial real estate |  |  |  |  |  |  |  |  |  |  |  |
Non owner-occupied | $ | 5,136 | $ | 11 | $ | 0 | $ | 7,467 | $ | 6 | $ | 0
All other CRE |  | 10,670 |  | 89 |  | 0 |  | 8,483 |  | 54 |  | 0
Acquisition and development |  |  |  |  |  |  |  |  |  |  |  |
1-4 family residential construction |  | 3,410 |  | 18 |  | 0 |  | 2,282 |  | 22 |  | 0
All other A&D |  | 19,008 |  | 127 |  | 303 |  | 22,759 |  | 102 |  | 0
Commercial and industrial |  | 2,838 |  | 31 |  | 0 |  | 4,009 |  | 38 |  | 0
Residential mortgage |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage - term |  | 4,384 |  | 14 |  | 0 |  | 5,151 |  | 32 |  | 21
Residential mortgage – home equity |  | 575 |  | 6 |  | 0 |  | 979 |  | 3 |  | 0
Consumer |  | 112 |  | 0 |  | 0 |  | 60 |  | 0 |  | 0
Total | $ | 46,133 | $ | 296 | $ | 303 | $ | 51,190 | $ | 257 | $ | 21
In the normal course of business, the Bank modifies loan terms for various reasons. These reasons may include as a retention strategy, remaining competitive in the current interest rate environment, and re-amortizing or extending a loan term to better match the loan’s payment stream with the borrower’s cash flows. A modified loan is considered to be a troubled debt restructuring (“TDR”) when the Bank has determined that the borrower is troubled (i.e. experiencing financial difficulties). The Bank evaluates the probability that the borrower will be in payment default on any of its debt obligations in the foreseeable future without modification. To make this determination, the Bank performs a global financial review of the borrower and loan guarantors to assess their current ability to meet their financial obligations. When the Bank restructures a loan to a troubled borrower, the loan terms (i.e., interest rate, payment amount, amortization period, and/or maturity date) are modified in such a way as to enable the borrower to cover the modified debt service payments based on current financials and cash flow adequacy. If a borrower’s hardship is thought to be temporary, then modified terms are only offered for that time period. Where possible, the Bank obtains additional collateral and/or secondary payment sources at the time of the restructure in order to put the Bank in the best possible position if the borrower is not able to meet the modified terms. To date, the Bank has not forgiven any principal as a restructuring concession. The Bank will not offer modified terms if it believes that modifying the loan terms will only delay an inevitable permanent default. All loans designated as TDRs are considered impaired loans and may be in either accruing or non-accruing status. The Corporation’s policy for recognizing interest income on impaired loans does not differ from its overall policy for interest recognition. Accordingly, the accrual of interest is discontinued when principal or interest is delinquent for 90 days or more unless the loan is well-secured and in the process of collection. If the loan was accruing at the time of the modification, then it continues to be in accruing status subsequent to the modification. Non-accrual TDRs may return to accruing status when there has been sufficient payment performance for a period of at least six months. Loans may be removed from TDR status in the calendar year following the modification if the interest rate at the time of modification was consistent with the interest rate for a loan with comparable credit risk and the loan has performed according to its modified terms for at least six months. The volume and type of TDR activity is considered in the assessment of the local economic trends’ qualitative factor used in the determination of the ALL for loans that are evaluated collectively for impairment. The following table presents the volume and recorded investment at the time of modification of TDRs by class and type of modification that occurred during the periods indicated:
| Temporary Rate |  |  |  | Modification of Payment
| Modification | Extension of Maturity | and Other Terms
| Number of | Recorded | Number of | Recorded | Number of | Recorded
(in thousands) | Contracts | Investment | Contracts | Investment | Contracts | Investment
Six months ended June 30, 2013 |  |  |  |  |  |  |  |  |
Commercial real estate |  |  |  |  |  |  |  |  |
Non owner-occupied | 0 | $ | 0 | 2 | $ | 268 | 0 | $ | 0
All other CRE | 0 |  | 0 | 0 |  | 0 | 0 |  | 0
Acquisition and development |  |  |  |  |  |  |  |  |
1-4 family residential construction | 0 |  | 0 | 0 |  | 0 | 0 |  | 0
All other A&D | 0 |  | 0 | 4 |  | 567 | 0 |  | 0
Commercial and industrial | 0 |  | 0 | 0 |  | 0 | 0 |  | 0
Residential mortgage |  |  |  |  |  |  |  |  |
Residential mortgage – term | 1 |  | 172 | 0 |  | 0 | 0 |  | 0
Residential mortgage – home equity | 0 |  | 0 | 0 |  | 0 | 0 |  | 0
Consumer | 0 |  | 0 | 0 |  | 0 | 0 |  | 0
Total | 1 | $ | 172 | 6 | $ | 835 | 0 | $ | 0
| Temporary Rate |  | Modification of Payment
| Modification | Extension of Maturity | and Other Terms
| Number of | Recorded | Number of | Recorded | Number of | Recorded
(in thousands) | Contracts | Investment | Contracts | Investment | Contracts | Investment
Three months ended June 30, 2013 |  |  |  |  |  |  |  |  |
Commercial real estate |  |  |  |  |  |  |  |  |
Non owner-occupied | 0 | $ | 0 | 0 | $ | 0 | 0 | $ | 0
All other CRE | 0 |  | 0 | 0 |  | 0 | 0 |  | 0
Acquisition and development |  |  |  |  |  |  |  |  |
1-4 family residential construction | 0 |  | 0 | 0 |  | 0 | 0 |  | 0
All other A&D | 0 |  | 0 | 2 |  | 315 | 0 |  | 0
Commercial and industrial | 0 |  | 0 | 0 |  | 0 | 0 |  | 0
Residential mortgage |  |  |  |  |  |  |  |  |
Residential mortgage – term | 0 |  | 0 | 0 |  | 0 | 0 |  | 0
Residential mortgage – home equity | 0 |  | 0 | 0 |  | 0 | 0 |  | 0
Consumer | 0 |  | 0 | 0 |  | 0 | 0 |  | 0
Total | 0 | $ | 0 | 2 | $ | 315 | 0 | $ | 0
During the six months ended June 30, 2013, there were three new TDRs. In addition, four existing TDRs which had reached their original modification maturity were re-modified. An $11,266 reduction of the ALL resulted from the movement of the three new loans being evaluated collectively for impairment to being evaluated individually for impairment. There was no impact to the recorded investment relating to the transfer of these loans. There was one new TDR with a temporary rate modification during the six months ended June 30, 2012 for which there was no impact to the recorded investment and a $4,300 reduction of the ALL resulting from the movement of the loan being evaluated collectively for impairment to being evaluated individually for impairment. During the three and six months ended June 30, 2013, there were two non-performing A&D loans totaling $.4 million that were transferred to OREO due to payment defaults. During the three and six months ended June 30, 2012, there were no receivables modified as troubled debt restructurings within the previous 12 months for which there was a payment default during the periods indicated.

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