Allowance for Loan Losses and Credit Quality

6 Months Ended

Jun. 30, 2011

Loans & Allowance for Loan Losses and Credit Quality [Abstract]

Allowance for Loan Losses and Credit Quality

Note 5. Allowance for Loan Losses and Credit Quality

The allowance for loan losses is maintained at a level that the Company believes is sufficient to absorb probable loan losses inherent in the loan portfolio. The allowance is increased by charges to earnings in the form of provision for loan losses and recoveries of prior loan charge-offs, and decreased by loans charged off. The provision is calculated to bring the allowance to a level which, according to a systematic process of measurement, reflects the amount management estimates is needed to absorb probable losses within the portfolio. While management utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Company’s control, including, among other things, the performance of the Company’s loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications.

Management performs quarterly assessments to determine the appropriate level of allowance for loan losses. Differences between actual loan loss experience and estimates are reflected through adjustments that are made by either increasing or decreasing the allowance based upon current measurement criteria. Commercial, consumer real estate, and non-real estate consumer loan portfolios are evaluated separately for purposes of determining the allowance. The specific components of the allowance include allocations to individual commercial credits and allocations to the remaining non-homogeneous and homogeneous pools of loans that have been deemed impaired. Management’s general reserve allocations are based on judgment of qualitative and quantitative factors about both macro and micro economic conditions reflected within the portfolio of loans and the economy as a whole. Factors considered in this evaluation include, but are not necessarily limited to, probable losses from loan and other credit arrangements, general economic conditions, changes in credit concentrations or pledged collateral, historical loan loss experience, and trends in portfolio volume, maturities, composition, delinquencies, and non-accruals. The allowance methodology was recently enhanced to further segment the commercial loan portfolio by risk grade. Historical loss rates for each risk grade of commercial loans are adjusted by environmental factors to estimate the amount of reserve needed by segment. While management has allocated the allowance for loan losses to various portfolio segments, the entire allowance is available for use against any type of loan loss deemed appropriate by management.

The following tables detail the Company’s allowance for loan loss activity, by portfolio segment, for the three- and six-month periods ended June 30, 2011 and 2010.


	For the Three Months Ended June 30, 2011
				Consumer Real			Consumer and
(In Thousands)	Commercial			Estate			Other			Total
Allowance for credit losses:
Beginning balance	$	12,300		$	12,641		$	1,541		$	26,482
Provision for loan losses		2,504			408			167			3,079
Loans charged off		(2,727	)		(457	)		(272	)		(3,456	)
Recoveries credited to allowance		223			49			105			377

Net charge-offs		(2,504	)		(408	)		(167	)		(3,079	)

Ending balance	$	12,300		$	12,641		$	1,541		$	26,482


	For the Three Months Ended June 30, 2010
				Consumer Real			Consumer and
(In Thousands)	Commercial			Estate			Other			Total
Allowance for credit losses:
Beginning balance	$	14,043		$	8,417		$	2,048		$	24,508
Provision for loan losses		1,989			1,304			303			3,596
Loans charged off		(2,503	)		(588	)		(282	)		(3,373	)
Recoveries credited to allowance		120			24			136			280

Net charge-offs		(2,383	)		(564	)		(146	)		(3,093	)

Ending balance	$	13,649		$	9,157		$	2,205		$	25,011


	For the Six Months Ended June 30, 2011
				Consumer Real			Consumer and
(In Thousands)	Commercial			Estate			Other			Total
Allowance for credit losses:
Beginning balance	$	12,300		$	12,641		$	1,541		$	26,482
Provision for loan losses		2,865			1,621			205			4,691
Loans charged off		(3,167	)		(1,829	)		(487	)		(5,483	)
Recoveries credited to allowance		302			208			282			792

Net charge-offs		(2,865	)		(1,621	)		(205	)		(4,691	)

Ending balance	$	12,300		$	12,641		$	1,541		$	26,482


	For the Six Months Ended June 30, 2010
				Consumer Real			Consumer and
(In Thousands)	Commercial			Estate			Other			Total
Allowance for credit losses:
Beginning balance	$	13,802		$	8,457		$	2,018		$	24,277
Provision for loan losses		4,082			2,582			597			7,261
Loans charged off		(4,582	)		(1,918	)		(605	)		(7,105	)
Recoveries credited to allowance		347			36			195			578

Net charge-offs		(4,235	)		(1,882	)		(410	)		(6,527	)

Ending balance	$	13,649		$	9,157		$	2,205		$	25,011

The Company identifies loans for potential impairment through a variety of means including, but not limited to, ongoing loan review, renewal processes, delinquency data, market communications, and public information. If it is determined that it is probable that the Company will not collect all principal and interest amounts contractually due, the loan is generally deemed to be impaired.

The following table presents the Company’s recorded investment in loans considered to be impaired and related information on those impaired loans for the period ended June 30, 2011, and December 31, 2010. Data for December 31, 2010, has been modified from the presentation in previous periods to match the current period presentation.


	June 30, 2011
							Quarter-to-Date				Year-to-Date
					Unpaid		Average		Interest		Average		Interest
	Recorded		Related		Principal		Recorded		Income		Recorded		Income
(Amounts in Thousands)	Investment		Allowance		Balance		Investment		Recognized		Investment		Recognized
Loans without a related allowance
Construction — commercial	$	758	$	—	$	770	$	888	$	3	$	953	$	3
Land development		185		—		185		916		—		916		—
Other land loans		1,083		—		1,083		1,588		1		2,517		1
Commercial and industrial		3,908		—		3,930		3,937		4		4,363		4
Multi-family residential		1,422		—		1,433		1,539		2		1,545		15
Non-farm, non-residential		2,503		—		2,615		2,684		30		3,072		30
Farmland		—		—		—		—		—		—		—
Home equity lines		1,293		—		1,331		1,318		14		1,398		20
Single family residential mortgage		8,666		—		8,875		9,034		98		9,639		132
Owner-occupied construction		259		—		264		332		3		333		4
Consumer loans		53		—		57		58		2		60		2

	$	20,130	$	—	$	20,543	$	22,294	$	156	$	24,796	$	211

Loans with a related allowance
Construction — commercial	$	268	$	25	$	268	$	269	$	—	$	269	$	—
Land development		—		—		—		—		—		—		—
Other land loans		112		4		112		113		2		113		3
Commercial and industrial		612		340		637		641		8		651		8
Multi-family residential		788		310		788		780		—		786		—
Non-farm, non-residential		3,129		883		3,129		3,048		8		3,052		11
Farmland		334		60		334		333		—		333		—
Home equity lines		—		—		—		—		—		—		—
Single family residential mortgage		8,230		1,317		8,298		8,247		83		8,342		146
Owner-occupied construction		—		—		—		—		—		—		—
Consumer loans		—		—		—		—		—		—		—

	$	13,473	$	2,939	$	13,566	$	13,431	$	101	$	13,546	$	168


	December 31, 2010
							Year-to-Date
					Unpaid		Average		Interest
	Recorded		Related		Principal		Recorded		Income
(Amounts in Thousands)	Investment		Allowance		Balance		Investment		Recognized
Loans without a related allowance
Construction — commercial	$	285	$	—	$	732	$	730	$	3
Land development		50		—		144		143		2
Other land loans		323		—		742		152		13
Commercial and industrial		3,518		—		5,384		6,237		10
Multi-family residential		2,526		—		2,673		2,680		105
Non-farm, non-residential		3,824		—		4,985		4,658		53
Home equity lines		1,302		—		1,595		1,605		38
Single family residential mortgage		7,992		—		10,882		9,093		330
Owner-occupied construction		6		—		6		6		—
Consumer loans		98		—		102		11		5

	$	19,924	$	—	$	27,245	$	25,315	$	559

Loans with a related allowance
Construction — commercial	$	—	$	—	$	—	$	—	$	—
Land development		113		5		113		114		7
Other land loans		—		—		—		—		—
Commercial and industrial		—		—		—		—		—
Multi-family residential		723		257		759		768		21
Non-farm, non-residential		1,070		158		1,140		1,151		26
Home equity lines		95		34		98		98		2
Single family residential mortgage		8,801		1,870		7,548		8,913		310
Owner-occupied construction		—		—		—		—		—
Consumer loans		—		—		—		—		—

	$	10,802	$	2,324	$	9,658	$	11,044	$	366

As part of the ongoing monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators including trends related to the risk rating of commercial loans, the level of classified commercial loans, net charge-offs, non-performing loans and general economic conditions. The Company’s loan review function generally reviews all commercial loan relationships greater than $2.00 million on an annual basis and at various times through the year. Smaller commercial and retail loans are sampled for review throughout the year by our internal loan review department. Through the loan review process, loans are identified for upgrade or downgrade in risk rating and changed to reflect current information as part of the process.

The Company utilizes a risk grading matrix to assign a risk grade to each of its loans. A description of the general characteristics of the risk grades is as follows:

	•		Pass — This grade includes loans to borrowers of acceptable credit quality and risk. The Company further differentiates within this grade based upon borrower characteristics which include: capital strength, earnings stability, leverage, and industry.

	•		Special Mention — This grade includes loans that require more than a normal degree of supervision and attention. These loans have all the characteristics of an adequate asset, but due to being adversely affected by economic or financial conditions have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan.

	•		Substandard — This grade includes loans that have well defined weaknesses which make payment default or principal exposure possible, but not yet certain. Such loans are apt to be dependent upon collateral liquidation, a secondary source of repayment, or an event outside of the normal course of business to meet the repayment terms.

	•		Doubtful — This grade includes loans that are placed on non-accrual status. These loans have all the weaknesses inherent in a “substandard’ loan with the added factor that the weaknesses are so severe that collection or liquidation in full, on the basis of current existing facts, conditions and values, is extremely unlikely, but because of certain specific pending factors, the amount of loss cannot yet be determined.

•

Loss — This grade includes loans that are to be charged-off or charged-down when payment is acknowledged to be uncertain or when the timing or value of payments cannot be determined. “Loss” is not intended to imply that the asset has no recovery or salvage value, but simply that it is not practical or desirable to defer writing off all or some portion of the loan, even though partial recovery may be affected in the future.

The following tables present the Company’s investment in loans by internal credit grade indicator at June 30, 2011, and December 31, 2010.


	June 30, 2011
			Special
(Amounts in Thousands)	Pass		Mention		Substandard		Doubtful		Loss		Total
Construction — commercial	$	33,028	$	518	$	1,420	$	—	$	—	$	34,966
Land development		4,255		254		185		—		—		4,694
Other land loans		16,103		5,924		1,327		—		—		23,354
Commercial and industrial		87,151		443		4,560		737		—		92,891
Multi-family residential		73,360		1,235		3,568		—		—		78,163
Non-farm, non-residential		304,944		7,245		20,814		472		—		333,475
Agricultural		1,654		—		23		—		—		1,677
Farmland		34,700		1,636		891		—		—		37,227
Home equity lines		106,964		1,979		3,052		—		—		111,995
Single family residential mortgage		511,574		11,146		37,807		—		—		560,527
Owner-occupied construction		17,272		132		658		—		—		18,062
Consumer loans		64,013		115		564		—		—		64,692
Other		12,206		3		12		—		—		12,221

Total loans	$	1,267,224	$	30,630	$	74,881	$	1,209	$	—	$	1,373,944


	December 31, 2010
			Special
(Amounts in Thousands)	Pass		Mention		Substandard		Doubtful		Loss		Total
Construction — commercial	$	40,497	$	663	$	1,534	$	—	$	—	$	42,694
Land development		14,458		1,226		966		—		—		16,650
Other land loans		16,723		6,138		1,607		—		—		24,468
Commercial and industrial		87,156		1,756		5,211		—		—		94,123
Multi-family residential		61,059		2,553		4,212		—		—		67,824
Non-farm, non-residential		316,026		18,942		16,936		—		—		351,904
Agricultural		1,318		—		24		—		—		1,342
Farmland		33,042		2,569		1,343		—		—		36,954
Home equity lines		106,803		1,923		2,894		—		—		111,620
Single family residential mortgage		498,830		15,224		34,449		654		—		549,157
Owner-occupied construction		17,389		789		171		—		—		18,349
Consumer loans		62,676		306		493		—		—		63,475
Other		7,635		11		—		—		—		7,646

Total loans	$	1,263,612	$	52,100	$	69,840	$	654	$	—	$	1,386,206

The following tables detail the Company’s recorded investment in loans related to each segment in the allowance for loan losses by portfolio segment and disaggregated on the basis of the Company’s impairment methodology at June 30, 2011, and December 31, 2010.


	June 30, 2011
									Acquired,		Allowance for
	Loans		Allowance		Loans		Allowance		Impaired		Acquired,
	Individually		for Loans		Collectively		for Loans		Loans		Impaired
	Evaluated for		Individually		Evaluated for		Collectively		Evaluated for		Loans
(Amounts in Thousands)	Impairment		Evaluated		Impairment		Evaluated		Impairment		Evaluated
Commercial loans
Construction — commercial	$	1,026	$	25	$	33,940	$	821	$	—	$	—
Land development		185		—		4,509		224		—		—
Other land loans		1,195		4		21,734		584		425		—
Commercial and industrial		4,520		340		87,752		1,849		619		—
Multi-family residential		2,210		310		75,953		1,773		—		—
Non-farm, non-residential		5,632		883		327,399		5,055		444		—
Agricultural		—		—		1,677		23		—		—
Farmland		334		60		36,893		380		—		—

Total commercial loans		15,102		1,622		589,857		10,709		1,488		—
Consumer real estate loans
Home equity lines		1,293		—		110,702		2,029		—		—
Single family residential mortgage		16,896		1,317		541,998		8,943		1,633		—
Owner-occupied construction		259		—		17,803		276		—		—

Total consumer real estate loans		18,448		1,317		670,503		11,248		1,633		—
Consumer and other loans
Consumer loans		53		—		64,639		1,586		—		—
Other		—		—		12,221		—		—		—

Total consumer and other loans		53		—		76,860		1,586		—		—

Total loans	$	33,603	$	2,939	$	1,337,220	$	23,543	$	3,121	$	—


	December 31, 2010
									Acquired,		Allowance for
	Loans		Allowance		Loans		Allowance		Impaired		Acquired,
	Individually		for Loans		Collectively		for Loans		Loans		Impaired
	Evaluated for		Individually		Evaluated for		Collectively		Evaluated for		Loans
(Amounts in Thousands)	Impairment		Evaluated		Impairment		Evaluated		Impairment		Evaluated
Commercial loans
Construction — commercial	$	285	$	—	$	42,409	$	1,472	$	—	$	—
Land development		50		5		16,600		1,767		—		—
Other land loans		436		—		23,520		747		512		—
Commercial and industrial		3,518		—		90,084		4,511		521		—
Multi-family residential		3,249		257		64,575		824		—		—
Non-farm, non-residential		4,894		158		346,586		2,688		424		—
Agricultural		—		—		1,342		19		—		—
Farmland		—		—		36,954		70		—		—

Total commercial loans		12,432		420		622,070		12,098		1,457		—
Consumer real estate loans
Home equity lines		1,397		34		110,223		2,104		—		—
Single family residential mortgage		16,793		1,870		530,600		7,999		1,764		—
Owner-occupied construction		6		—		18,343		193		—		—

Total consumer real estate loans		18,196		1,904		659,166		10,296		1,764		—
Consumer and other loans
Consumer loans		98		—		63,377		1,764		—		—
Other		—		—		7,646		—		—		—

Total consumer and other loans		98		—		71,023		1,764		—		—

Total loans	$	30,726	$	2,324	$	1,352,259	$	24,158	$	3,221	$	—

Non-accrual and Past Due Loans

Non-accrual loans, presented by loan class, consisted of the following at June 30, 2011, and December 31, 2010:


	June 30,		December 31,
(Amounts in Thousands)	2011		2010
Construction — commercial	$	1,026	$	285
Land development		185		50
Other land loans		807		321
Commercial and industrial		4,113		3,518
Multi-family residential		2,210		2,463
Non-farm, non-residential		5,304		4,670
Farmland		334		—
Home equity lines		900		868
Single family residential mortgage		6,163		6,364
Owner-occupied construction		259		6
Consumer loans		53		99

Total		21,354		18,644
Acquired, impaired loans		683		770

Total non-accrual loans	$	22,037	$	19,414

The following tables present the aging of the recorded investment in past due loans, by loan class, as of June 30, 2011, and December 31, 2010. There were no loans past due 90 days and still accruing interest at June 30, 2011 or December 31, 2010. Non-accrual loans, excluding those 0 to 29 days past due, are included in the applicable delinquency category.


	June 30, 2011
							Total		Current		Total
(Amounts in Thousands)	30 - 59 Days		60-89 Days		90+ Days		Past Due		Loans		Loans
Construction — commercial	$	139	$	281	$	348	$	768	$	34,198	$	34,966
Land development		—		—		—		—		4,694		4,694
Other land loans		—		—		359		359		22,995		23,354
Commercial and industrial		117		—		4,505		4,622		88,269		92,891
Multi-family residential		395		—		1,626		2,021		76,142		78,163
Non-farm, non-residential		2,178		868		2,381		5,427		328,048		333,475
Agricultural		25		—		—		25		1,652		1,677
Farmland		567		—		—		567		36,660		37,227
Home equity lines		165		362		900		1,427		110,568		111,995
Single family residential mortgage		3,040		668		4,246		7,954		552,573		560,527
Owner-occupied construction		120		—		51		171		17,891		18,062
Consumer loans		188		—		53		241		64,451		64,692
Other		—		1		—		1		12,220		12,221

Total loans	$	6,934	$	2,180	$	14,469	$	23,583	$	1,350,361	$	1,373,944


	December 31, 2010
							Total		Current		Total
(Amounts in Thousands)	30 - 59 Days		60-89 Days		90+ Days		Past Due		Loans		Loans
Construction — commercial	$	531	$	—	$	122	$	653	$	42,041	$	42,694
Land development		—		—		50		50		16,600		16,650
Other land loans		—		—		684		684		23,784		24,468
Commercial and industrial		3,648		121		356		4,125		89,998		94,123
Multi-family residential		956		—		1,793		2,749		65,075		67,824
Non-farm, non-residential		3,251		2,056		3,249		8,556		343,348		351,904
Agricultural		19		—		—		19		1,323		1,342
Farmland		110		—		—		110		36,844		36,954
Home equity lines		682		250		608		1,540		110,080		111,620
Single family residential mortgage		10,287		1,741		4,213		16,241		532,916		549,157
Owner-occupied construction		855		326		6		1,187		17,162		18,349
Consumer loans		433		47		31		511		62,964		63,475
Other		—		—		—		—		7,646		7,646

Total loans	$	20,772	$	4,541	$	11,112	$	36,425	$	1,349,781	$	1,386,206