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Allowance For Loan Losses

9 Months Ended

Sep. 30, 2011

Allowance For Loan Losses [Abstract]

9.	Allowance for Loan Losses

An analysis of the changes in the allowance for loan losses follows (in thousands, except ratios):


	Three months ended September 30,						Nine months ended September 30,
	2011			2010			2011			2010
Balance at beginning of period	$	16,958		$	20,737		$	19,765		$	19,685
Charge-offs:
Commercial		—			(277	)		(942	)		(482	)
Commercial loans secured by real estate		(646	)		(645	)		(1,284	)		(3,596	)
Real estate-mortgage		(5	)		(87	)		(45	)		(245	)
Consumer		(42	)		(78	)		(152	)		(212	)

Total charge-offs		(693	)		(1,087	)		(2,423	)		(4,535	)

Recoveries:
Commercial		292			63			816			216
Commercial loans secured by real estate		10			1			76			38
Real estate-mortgage		17			18			43			23
Consumer		35			21			117			76

Total recoveries		354			103			1,052			353


Net charge-offs		(339	)		(984	)		(1,371	)		(4,182	)
Provision (credit) for loan losses		(550	)		1,000			(2,325	)		5,250

Balance at end of period	$	16,069		$	20,753		$	16,069		$	20,753


As a percent of average loans and loans held for sale, net of unearned income:
Annualized net charge-offs		0.20	%		0.56	%		0.28	%		0.79	%
Annualized provision (credit) for loan losses		(0.33	)		0.57			(0.47	)		0.99
Allowance as a percent of loans and loans held for sale, net of unearned income at period end		2.41			2.97			2.41			2.97

The following tables summarize the rollforward of the allowance for loan loss by portfolio segment (in thousands).


	Balance at December 31, 2010		Charge- Offs			Recoveries		Provision (Credit)			Balance at September 30, 2011
Commercial	$	3,851	$	(942	)	$	816	$	735		$	4,460
Commercial loans secured by real estate		12,717		(1,284	)		76		(3,017	)		8,492
Real estate- mortgage		1,117		(45	)		43		222			1,337
Consumer		206		(152	)		117		25			196
Allocation for general risk		1,874		—			—		(290	)		1,584

Total	$	19,765	$	(2,423	)	$	1,052	$	(2,325	)	$	16,069

The following tables summarize the primary segments of the loan portfolio (in thousands).


	At September 30, 2011
	Commercial		Commercial Loans Secured By Real Estate		Real Estate- Mortgage		Consumer		Total
Individually evaluated for impairment	$	24	$	4,273	$	—	$	—	$	4,297
Collectively evaluated for impairment		78,602		352,445		209,430		18,472		658,949

Total loans	$	78,626	$	356,718	$	209,430	$	18,472	$	663,246


	At September 30, 2011
	Commercial		Commercial Loans Secured By Real Estate		Real Estate- Mortgage		Consumer		Allocation for General Risk		Total
Specific reserve allocation	$	—	$	1,208	$	—	$	—	$	—	$	1,208
General reserve allocation		4,460		7,284		1,337		196		1,584		14,861

Total allowance for loan losses	$	4,460	$	8,492	$	1,337	$	196	$	1,584	$	16,069


	At December 31, 2010
	Commercial		Commercial Loans Secured By Real Estate		Real Estate- Mortgage		Consumer		Total
Individually evaluated for impairment	$	4,065	$	8,082	$	—	$	—	$	12,147
Collectively evaluated for impairment		74,257		361,822		203,317		19,233		658,629

Total loans	$	78,322	$	369,904	$	203,317	$	19,233	$	670,776


	At December 31, 2010
	Commercial		Commercial Loans Secured By Real Estate		Real Estate- Mortgage		Consumer		Allocation for General Risk		Total
Specific reserve allocation	$	1,905	$	1,901	$	—	$	—	$	—	$	3,806
General reserve allocation		1,946		10,816		1,117		206		1,874		15,959

Total allowance for loan losses	$	3,851	$	12,717	$	1,117	$	206	$	1,874	$	19,765

The segments of the Company's loan portfolio are disaggregated to a level that allows management to monitor risk and performance. The overall risk profile for the commercial loan segment is driven by non-owner occupied commercial real estate (CRE) loans, which include loans secured by non-owner occupied nonfarm nonresidential properties, as the majority of the commercial portfolio is centered in these types of accounts. The residential mortgage loan segment is comprised of first lien amortizing residential mortgage loans and home equity loans. The consumer loan segment consists primarily of installment loans and overdraft lines of credit connected with customer deposit accounts.

Management evaluates for possible impairment any individual loan in the commercial segment with a loan balance in excess of $100,000 that is in nonaccrual status or classified as a Troubled Debt Restructure (TDR). Loans are considered to be impaired when, based on current information and events, it is probable that the Company 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 Company does not separately evaluate individual consumer and residential mortgage loans for impairment, unless such loans are part of a larger relationship that is impaired, or are classified as a TDR agreement.

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 for collateral dependent loans. The method is selected on a loan-by loan basis, with management primarily utilizing the fair value of collateral method. The evaluation of the need and amount of a specific allocation of the allowance and whether a loan can be removed from impairment status is made on a quarterly basis. The Company's policy for recognizing interest income on impaired loans does not differ from its overall policy for interest recognition.

The need for an updated appraisal on collateral dependent loans is determined on a case by case basis. The useful life of an appraisal or evaluation will vary depending upon the circumstances of the property and the economic conditions in the marketplace. A new appraisal is not required if there is an existing appraisal which, along with other information, is sufficient to determine a reasonable value for the property and to support an appropriate and adequate allowance for loan losses. At a minimum, annual documented reevaluation of the property is completed by the bank's Assigned Risk department to support the value of the property.

When reviewing an appraisal associated with an existing real estate transaction, the Assigned Risk department must determine if there have been material changes to the underlying assumptions in the appraisal which affect the original estimate of value. Some of the factors that could cause material changes to reported values include:

•

the passage of time;

•

the volatility of the local market;

•

the availability of financing;

•

natural disasters;

•

the inventory of competing properties;

•

new improvements to, or lack of maintenance of, the subject property or competing properties upon physical inspection by the bank;

•

changes in underlying economic and market assumptions, such as material changes in current and projected vacancy, absorption rates, capitalization rates, lease terms, rental rates, sales prices, concessions, construction overruns and delays, zoning changes, etc.; and

•

environmental contamination.

The value of the property is adjusted to appropriately reflect the above listed factors and the value is discounted to reflect the value impact of a forced or distressed sale, any outstanding senior liens, any outstanding unpaid real estate taxes, transfer taxes and closing costs that would occur with sale of the real estate. If the Assigned Risk department personnel determine that a reasonable value cannot be derived based on available information, a new appraisal is ordered. The determination of the need for a new appraisal, versus completion of a property valuation by the bank's Assigned Risk department personnel rests with the Assigned Risk department and not the originating account officer.

The following tables present impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary (in thousands).


	September 30, 2011
	Impaired Loans with Specific Allowance				Impaired Loans with No Specific Allowance		Total Impaired Loans
	Recorded Investment		Related Allowance		Recorded Investment		Recorded Investment		Unpaid Principal Balance
Commercial	$	—	$	—	$	24	$	24	$	731
Commercial loans secured by real estate		2,937		1,208		1,336		4,273		5,111

Total impaired loans	$	2,937	$	1,208	$	1,360	$	4,297	$	5,842


	December 31, 2010
	Impaired Loans with Specific Allowance				Impaired Loans with No Specific Allowance		Total Impaired Loans
	Recorded Investment		Related Allowance		Recorded Investment		Recorded Investment		Unpaid Principal Balance
Commercial	$	4,041	$	1,905	$	24	$	4,065	$	4,842
Commercial loans secured by real estate		4,938		1,901		3,144		8,082		8,341

Total impaired loans	$	8,979	$	3,806	$	3,168	$	12,147	$	13,183

The following table presents the average recorded investment in impaired loans and related interest income recognized for the periods indicated (in thousands).


	Three months ended September 30,				Nine months ended September 30,
	2011		2010		2011		2010
Average investment in impaired loans	$	5,857	$	20,417	$	8,222	$	19,085
Interest income recognized on a cash basis on impaired loans		—		169		173		464

Management uses a ten point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first six categories are considered not criticized. The first five "Pass" categories are aggregated, while the Pass 6, Special Mention, Substandard and Doubtful categories are disaggregated to separate pools. 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, or for which any portion of the loan represents a specific allocation of the allowance for loan losses are placed in Substandard or Doubtful.

To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Company has a structured loan rating process, which dictates that, at a minimum, credit reviews are mandatory for all commercial and commercial mortgage loan relationships with aggregate balances in excess of $250,000 within a 12-month period. Generally, consumer and residential mortgage loans are included in the Pass categories unless a specific action, such as bankruptcy, delinquency, or death occurs to raise awareness of a possible credit event. The Company's commercial relationship managers are responsible for the timely and accurate risk rating of the loans in their portfolios at origination and on an ongoing basis. Risk ratings are assigned by the account officer, but require independent review and rating concurrence from the Company's internal Loan Review Department. The Loan Review Department is an experienced independent function which reports directly to the Board Audit Committee. The scope of commercial portfolio coverage by the Loan Review Department is defined and presented to the Audit Committee for approval on an annual basis. The anticipated scope of coverage for 2011 requires a minimum range-of-coverage of 60% to 70% of the commercial loan portfolio.

In addition to loan monitoring by the account officer and Loan Review Department, the Company also requires presentation of all credits rated Pass-6 with aggregate balances greater than $1,000,000, all credits rated Special Mention or Substandard with aggregate balances greater than $250,000, and all credits rated Doubtful with aggregate balances greater than $100,000 on an individual basis to the Company's Loan Loss Reserve Committee on a quarterly basis.

The following tables present 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 (in thousands).

		$000,000		$000,000		$000,000		$000,000		$000,000
	September 30, 2011
	Pass		Special Mention		Substandard		Doubtful		Total
Commercial	$	75,391	$	192	$	3,043	$	—	$	78,626
Commercial loans secured by real estate		307,721		26,850		21,652		495		356,718

Total	$	383,112	$	27,042	$	24,695	$	495	$	435,344

		$000,000		$000,000		$000,000		$000,000		$000,000
	December 31, 2010
	Pass		Special Mention		Substandard		Doubtful		Total
Commercial	$	61,961	$	8,797	$	5,793	$	1,771	$	78,322
Commercial loans secured by real estate		306,555		33,165		29,754		430		369,904

Total	$	368,516	$	41,962	$	35,547	$	2,201	$	448,226

It is the policy of the bank that the outstanding balance of any residential mortgage loan that exceeds 90-days past due as to principal and/or interest is transferred to non-accrual status and an evaluation is completed to determine the fair value of the collateral less selling costs. A charge down is recorded for any deficiency balance determined from the collateral evaluation. The remaining non-accrual balance is reported as impaired with no specific allowance. It is the policy of the bank that the outstanding balance of any consumer loan that exceeds 90-days past due as to principal and/or interest is charged off. The following tables present the performing and non-performing outstanding balances of the residential and consumer portfolios (in thousands).


	September 30, 2011
	Performing		Non-performing
Real estate-mortgage	$	208,091	$	1,339
Consumer		18,472		—

Total	$	226,563	$	1,339


	December 31, 2010
	Performing		Non-performing
Real estate-mortgage	$	201,438	$	1,879
Consumer		19,233		—

Total	$	220,671	$	1,879

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. The following tables present the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans (in thousands).


	September 30, 2011
	Current		30-59 Days Past Due		60-89 Days Past Due		90 Days Past Due And Accruing		Total Past Due		Non-Accrual		Total Loans
Commercial	$	78,602	$	—	$	—	$	—	$	—	$	24	$	78,626
Commercial loans secured by real estate		352,399		655		—		—		655		3,664		356,718
Real estate-mortgage		205,477		2,268		346		—		2,614		1,339		209,430
Consumer		18,443		—		29		—		29		—		18,472

Total	$	654,921	$	2,923	$	375	$	—	$	3,298	$	5,027	$	663,246


	December 31, 2010
	Current		30-59 Days Past Due		60-89 Days Past Due		90 Days Past Due And Accruing		Total Past Due		Non-Accrual		Total Loans
Commercial	$	74,643	$	—	$	—	$	—	$	—	$	3,679	$	78,322
Commercial loans secured by real estate		362,890		283		—		—		283		6,731		369,904
Real estate-mortgage		199,003		1,892		543		—		2,435		1,879		203,317
Consumer		19,160		29		44		—		73		—		19,233

Total	$	655,696	$	2,204	$	587	$	—	$	2,791	$	12,289	$	670,776

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.

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.

Management tracks the historical net charge-off activity at each risk rating grade level for the entire commercial portfolio and at the aggregate level for the consumer, residential mortgage and small business portfolios. A historical charge-off factor is calculated utilizing a rolling 12 consecutive historical quarters for the commercial portfolios. This historical charge-off factor for the consumer, residential mortgage and small business portfolios are based on a three year historical average of actual loss experience.

The Company uses a comprehensive methodology and procedural discipline to maintain an ALL to absorb inherent losses in the loan portfolio. The Company believes this is a critical accounting policy since it involves significant estimates and judgments. The allowance consists of three elements: 1) an allowance established on specifically identified problem loans, 2) formula driven general reserves established for loan categories based upon historical loss experience and other qualitative factors which include delinquency and non-performing loan trends, economic trends, concentrations of credit, trends in loan volume, experience and depth of management, examination and audit results, effects of any changes in lending policies, and trends in policy, financial information, and documentation exceptions, and 3) a general risk reserve which provides support for variance from our assessment of the previously listed qualitative factors, provides protection against credit risks resulting from other inherent risk factors contained in the Company's loan portfolio, and recognizes the model and estimation risk associated with the specific and formula driven allowances. The qualitative factors used in the formula driven general reserves are evaluated quarterly (and revised if necessary) by the Company's management to establish allocations which accommodate each of the listed risk factors.

"Pass" rated credits are segregated from "Criticized" credits for the application of qualitative factors.

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.