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Loans

9 Months Ended

Sep. 30, 2011

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

Loans

Note 4. Loans

Loans, net of unearned income, consist of the following:


		September 30, 2011								December 31, 2010
(Dollars in Thousands)		Amount				Percent				Amount				Percent
Commercial loans
Construction — commercial		$	32,279				2.35	%		$	42,694				3.08	%
Land development			3,304				0.24	%			16,650				1.20	%
Other land loans			23,001				1.67	%			24,468				1.77	%
Commercial and industrial			92,894				6.76	%			94,123				6.79	%
Single family residential			107,879				7.85	%			N/A				N/A
Multi-family residential			82,939				6.03	%			67,824				4.89	%
Non-farm, non-residential			325,830				23.70	%			351,904				25.39	%
Agricultural			1,570				0.12	%			1,342				0.10	%
Farmland			36,605				2.66	%			36,954				2.67	%

Total commercial loans			706,301				51.38	%			635,959				45.89	%
Consumer real estate loans
Home equity lines			109,444				7.96	%			111,620				8.05	%
Single family residential mortgage			461,104				33.54	%			549,157				39.61	%
Owner-occupied construction			19,279				1.40	%			18,349				1.32	%

Total consumer real estate loans			589,827				42.90	%			679,126				48.98	%
Consumer and other loans
Consumer loans			67,020				4.88	%			63,475				4.58	%
Other			11,508				0.84	%			7,646				0.55	%

Total consumer and other loans			78,528				5.72	%			71,121				5.13	%

Total loans		$	1,374,656				100.00	%		$	1,386,206				100.00	%

Loans held for sale		$	3,575							$	4,694

During the third quarter of 2011, the Company enhanced its loan loss methodology by further segmenting the one-to-four family residential real estate class into owner occupied and non-owner occupied segments. The enhancement in the one-to-four family residential real estate class resulted in the owner occupied portion being reported in the consumer real estate loan segment and the non-owner occupied portion being reported in the commercial loans segment.

Acquired, Impaired Loans

Loans acquired in a business combination are recorded at estimated fair value on their purchase date. Under applicable accounting standards, it is not appropriate to carryover a valuation for allowance for loan losses at the time of acquisition when the acquired loans have evidence of credit deterioration. Evidence of credit quality deterioration as of the purchase date may include measures such as credit scores, decline in collateral value, past due and non-accrual status. For acquired, impaired loans the difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the nonaccretable difference which is included in the carrying amount of the loans. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses. Subsequent increases in cash flows result in a reversal of the provision for loan losses to the extent of prior charges, or a reversal of the nonaccretable difference with a positive impact on interest income prospectively. Further, any excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized in interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of such cash flows. Acquired performing loans are recorded at fair value, including a credit component. The fair value adjustment is accreted as an adjustment to yield over the estimated lives of the loans. There is no allowance for loan losses established at the acquisition date for acquired performing loans. A provision for loan losses is recorded for any credit deterioration in these loans subsequent to acquisition.

The following table presents information regarding acquired, impaired loans for the three- and nine-month periods ended September 30, 2011 and 2010. The Company has estimated the cash flows to be collected on the loans and discounted those cash flows at a market rate of interest.


		Acquired, Impaired Loans
		2011												2010
(In thousands)		TriStone				Other				Total				TriStone				Other				Total
Balance, January 1		$	2,814			$	407			$	3,221			$	3,838			$	4,196			$	8,034
Principal payments received			(482	)			—				(482	)			(997	)			(224	)			(1,221	)
Accretion			122				—				122				46				—				46
Other			4				—				4				463				—				463
Charge-offs			—				—				—				(499	)			—				(499	)

Balance, September 30		$	2,458			$	407			$	2,865			$	2,851			$	3,972			$	6,823


Balance, June 30		$	2,714			$	407			$	3,121			$	2,834			$	3,972			$	6,806
Principal payments received			(309	)			—				(309	)			(36	)			—				(36	)
Accretion			53				—				53				16				—				16
Other			—				—				—				37				—				37
Charge-offs			—				—				—				—				—				—

Balance, September 30		$	2,458			$	407			$	2,865			$	2,851			$	3,972			$	6,823

The remaining balance of the accretable difference at September 30, 2011, and December 31, 2010, was $822 thousand and $944 thousand, respectively.

Off-Balance Sheet Financial Instruments

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and financial guarantees. These instruments involve, to varying degrees, elements of credit and interest rate risk beyond the amount recognized on the balance sheet. The contractual amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit and financial guarantees written is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

Commitments to extend credit are agreements to lend to a customer as long as there is not a violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the counterparties. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income producing commercial properties.

Standby letters of credit and written financial guarantees are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. To the extent deemed necessary, collateral of varying types and amounts is held to secure customer performance under certain of those letters of credit outstanding.

Financial instruments whose contract amounts represent credit risk are commitments to extend credit (including availability of lines of credit) of $206.98 million and standby letters of credit and financial guarantees written of $2.90 million at September 30, 2011. Additionally, the Company had gross notional amounts of outstanding commitments to lend related to secondary market mortgage loans of $10.42 million at September 30, 2011.