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Allowance for Loan Losses and Credit Quality

9 Months Ended

Sep. 30, 2011

Loans and 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 Company enhanced its allowance for loan loss methodology during the first quarter of 2011. The enhancement included, among other things, further segmentation of the commercial loan portfolio by risk code and consideration of additional qualitative factors as outlined in the Interagency Policy Statement for Loan and Lease Losses. Under the previous methodology, qualitative adjustments were a multiple of the historical loss rate calculated by the Company for each segment, as compared to the enhanced methodology that utilizes addition to and subtraction from the historical loss rate.

Initially, the qualitative factors for the consumer loan segments under the enhanced methodology were calculated by determining an equivalent rate to the prior method. As part of the continued refinement of the enhanced methodology, the adjustments historically applied to consumer loans were reviewed. As of the third quarter of 2011, it was determined that qualitative adjustments to the consumer loan segments’ loss rates should be revised downward based upon review and analysis of historical loss experience within the portfolio as the Company is now estimating fewer losses on the consumer portfolio. As a result of the downward revision, the allocation of the allowance to the consumer loan segments is 30%. Historically, net consumer charge-offs comprised 28% of total net charge-offs. The decrease in estimated losses on the consumer portfolio segment was offset by increases in estimated losses on the commercial portfolio segment. The increase is particularly in specific loss estimated on certain impaired loans as a result of new information regarding the values of underlying collateral.

As an additional enhancement to the loan loss methodology in the third quarter of 2011, the Company further segmented the one-to-four family residential real estate class into owner occupied and non-owner occupied segments, which management believes provides better granularity and segmentation of loans with similar risk characteristics. This also contributed to the overall reduction of estimated losses on non-impaired consumer loan segments in the allowance model, as losses on the Company’s non-owner occupied residential real estate loans have historically been higher than losses on owner occupied residential real estate loans. The following tables reflect the change of the segmentation in the single family residential loan class for the period ended September 30, 2011.

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


	For the Three Months Ended September 30, 2011
(In Thousands)	Commercial			Consumer Real Estate			Consumer and Other			Total
Allowance for credit losses:
Beginning balance	$	12,300		$	12,641		$	1,541		$	26,482
Provision for loan losses		7,393			(4,811	)		(662	)		1,920
Loans charged off		(2,157	)		(712	)		(193	)		(3,062	)
Recoveries credited to allowance		968			15			84			1,067

Net charge-offs		(1,189	)		(697	)		(109	)		(1,995	)

Ending balance	$	18,504		$	7,133		$	770		$	26,407


	For the Three Months Ended September 30, 2010
(In Thousands)	Commercial			Consumer Real Estate			Consumer and Other			Total
Allowance for credit losses:
Beginning balance	$	13,649		$	9,157		$	2,205		$	25,011
Provision for loan losses		1,853			1,667			290			3,810
Loans charged off		(1,994	)		(342	)		(315	)		(2,651	)
Recoveries credited to allowance		110			16			124			250

Net charge-offs		(1,884	)		(326	)		(191	)		(2,401	)

Ending balance	$	13,618		$	10,498		$	2,304		$	26,420


	For the Nine Months Ended September 30, 2011
(In Thousands)	Commercial			Consumer Real Estate			Consumer and Other			Total
Allowance for credit losses:
Beginning balance	$	12,300		$	12,641		$	1,541		$	26,482
Provision for loan losses		10,258			(3,190	)		(457	)		6,611
Loans charged off		(5,324	)		(2,541	)		(680	)		(8,545	)
Recoveries credited to allowance		1,270			223			366			1,859

Net charge-offs		(4,054	)		(2,318	)		(314	)		(6,686	)

Ending balance	$	18,504		$	7,133		$	770		$	26,407


	For the Nine Months Ended September 30, 2010
(In Thousands)	Commercial			Consumer Real Estate			Consumer and Other			Total
Allowance for credit losses:
Beginning balance	$	13,802		$	8,457		$	2,018		$	24,277
Provision for loan losses		5,936			4,249			886			11,071
Loans charged off		(6,577	)		(2,260	)		(919	)		(9,756	)
Recoveries credited to allowance		457			52			319			828

Net charge-offs		(6,120	)		(2,208	)		(600	)		(8,928	)

Ending balance	$	13,618		$	10,498		$	2,304		$	26,420

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 periods ended September 30, 2011, and December 31, 2010.


	September 30, 2011
							Quarter-to-Date				Year-to-Date
(Amounts in Thousands)	Recorded Investment		Related Allowance		Unpaid Principal Balance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Loans without a related allowance
Commercial loans
Construction — commercial	$	66	$	—	$	70	$	73	$	1	$	76	$	4
Land development		—		—		—		—		—		—		—
Other land loans		68		—		68		67		—		118		1
Commercial and industrial		267		—		291		314		4		746		8
Single family residential		4,291		—		4,385		4,380		23		4,658		68
Multi-family residential		546		—		564		1,059		11		1,150		26
Non-farm, non-residential		2,017		—		2,137		2,236		30		2,655		60
Farmland		475		—		475		552		—		552		—
Consumer real estate loans
Home equity lines		940		—		978		984		17		1,061		36
Single family residential mortgage		6,453		—		6,600		7,030		81		7,588		168
Owner-occupied construction		119		—		125		125		2		126		6
Consumer loans		54		—		60		62		2		66		4

	$	15,296	$	—	$	15,753	$	16,882	$	171	$	18,796	$	381

Loans with a related allowance
Commercial loans
Construction — commercial	$	265	$	25	$	268	$	268	$	2	$	269	$	2
Land development		—		—		—		—		—		—		—
Other land loans		112		5		112		112		1		113		4
Commercial and industrial		4,032		2,045		4,064		4,041		8		4,066		16
Single family residential		2,242		124		2,242		2,002		25		2,012		108
Multi-family residential		591		196		591		591		—		591		—
Non-farm, non-residential		6,373		2,153		6,456		6,423		98		6,430		109
Farmland		—		—		—		—		—		—		—
Consumer real estate loans
Home equity lines		338		200		339		336		—		335		—
Single family residential mortgage		5,969		1,210		6,048		6,198		51		6,310		114
Owner-occupied construction		—		—		—		—		—		—		—
Consumer loans		—		—		—		—		—		—		—

	$	19,922	$	5,958	$	20,120	$	19,971	$	185	$	20,126	$	353


	December 31, 2010
							Year-to-Date
(Amounts in Thousands)	Recorded Investment		Related Allowance		Unpaid Principal Balance		Average Recorded Investment		Interest Income Recognized
Loans without a related allowance
Commercial loans
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
Consumer real estate loans
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
Commercial loans
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
Consumer real estate loans
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 effected in the future.

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


	September 30, 2011
(Amounts in Thousands)	Pass		Special Mention		Substandard		Doubtful		Loss		Total
Commercial loans
Construction — commercial	$	30,678	$	412	$	1,189	$	—	$	—	$	32,279
Land development		2,879		250		175		—		—		3,304
Other land loans		16,845		5,880		276		—		—		23,001
Commercial and industrial		87,209		499		2,759		2,427		—		92,894
Single family residential		93,622		2,543		11,714		—		—		107,879
Multi-family residential		79,068		985		2,886		—		—		82,939
Non-farm, non-residential		294,641		7,695		23,039		455		—		325,830
Agricultural		1,529		—		41		—		—		1,570
Farmland		35,004		853		748		—		—		36,605
Consumer real estate loans
Home equity lines		104,251		1,884		3,309		—		—		109,444
Single family residential mortgage		425,091		7,908		28,105		—		—		461,104
Owner-occupied construction		18,619		130		530		—		—		19,279
Consumer and other loans
Consumer loans		66,277		174		569		—		—		67,020
Other		11,497		2		9		—		—		11,508

Total loans	$	1,267,210	$	29,215	$	75,349	$	2,882	$	—	$	1,374,656


	December 31, 2010
(Amounts in Thousands)	Pass		Special Mention		Substandard		Doubtful		Loss		Total
Commercial loans
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
Consumer real estate loans
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 and other loans
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 September 30, 2011, and December 31, 2010.


	September 30, 2011
(Amounts in Thousands)	Loans Individually Evaluated for Impairment		Allowance for Loans Individually Evaluated		Loans Collectively Evaluated for Impairment		Allowance for Loans Collectively Evaluated		Acquired, Impaired Loans Evaluated for Impairment		Allowance for Acquired, Impaired Loans Evaluated
Commercial loans
Construction—commercial	$	331	$	25	$	31,948	$	944	$	—	$	—
Land development		—		—		3,304		273		—		—
Other land loans		180		5		22,672		555		149		—
Commercial and industrial		4,299		2,045		87,965		1,969		630		—
Single family residential		6,533		124		100,096		2,791		1,250		—
Multi-family residential		1,137		196		81,802		2,069		—		—
Non-farm, non-residential		8,390		2,153		316,986		4,931		454		—
Agricultural		—		—		1,570		25		—		—
Farmland		475		—		36,130		399		—		—

Total commercial loans		21,345		4,548		682,473		13,956		2,483		—
Consumer real estate loans
Home equity lines		1,278		200		108,166		1,206		—		—
Single family residential mortgage		12,422		1,210		448,297		4,320		385		—
Owner-occupied construction		119		—		19,160		197		—		—

Total consumer real estate loans		13,819		1,410		575,623		5,723		385		—
Consumer and other loans
Consumer loans		54		—		66,966		770		—		—
Other		—		—		11,508		—		—		—

Total consumer and other loans		54		—		78,474		770		—		—

Total loans	$	35,218	$	5,958	$	1,336,570	$	20,449	$	2,868	$	—


	December 31, 2010
(Amounts in Thousands)	Loans Individually Evaluated for Impairment		Allowance for Loans Individually Evaluated		Loans Collectively Evaluated for Impairment		Allowance for Loans Collectively Evaluated		Acquired, Impaired Loans Evaluated for Impairment		Allowance for Acquired, Impaired Loans 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 September 30, 2011, and December 31, 2010:


	September 30,		December 31,
(Amounts in Thousands)	2011		2010
Commercial loans
Construction — commercial	$	331	$	285
Land development		—		50
Other land loans		68		321
Commercial and industrial		3,892		3,518
Single family residential		4,011		N/A
Multi-family residential		1,138		2,463
Non-farm, non-residential		7,935		4,670
Farmland		475		—
Consumer real estate loans
Home equity lines		886		868
Single family residential mortgage		3,561		6,364
Owner-occupied construction		119		6
Consumer and other loans
Consumer loans		54		99

Total		22,470		18,644
Acquired, impaired loans		407		770

Total non-accrual loans	$	22,877	$	19,414

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


	September 30, 2011
(Amounts in Thousands)	30 -59 Days		60 -89 Days		90+ Days		Total Past Due		Current Loans		Total Loans
Commercial loans
Construction — commercial	$	1,059	$	—	$	11	$	1,070	$	31,209	$	32,279
Land development		—		46		—		46		3,258		3,304
Other land loans		—		—		68		68		22,933		23,001
Commercial and industrial		343		—		3,539		3,882		89,012		92,894
Single family residential		1,456		412		2,946		4,814		103,065		107,879
Multi-family residential		63		452		1,138		1,653		81,286		82,939
Non-farm, non-residential		776		439		5,996		7,211		318,619		325,830
Agricultural		31		—		—		31		1,539		1,570
Farmland		137		—		475		612		35,993		36,605
Consumer real estate loans
Home equity lines		805		147		563		1,515		107,929		109,444
Single family residential mortgage		2,345		1,985		1,859		6,189		454,915		461,104
Owner-occupied construction		2		—		—		2		19,277		19,279
Consumer and other loans
Consumer loans		171		28		10		209		66,811		67,020
Other		—		—		—		—		11,508		11,508

Total loans	$	7,188	$	3,509	$	16,605	$	27,302	$	1,347,354	$	1,374,656


	December 31, 2010
(Amounts in Thousands)	30 -59 Days		60 -89 Days		90+ Days		Total Past Due		Current Loans		Total Loans
Commercial 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
Consumer real estate loans
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 and other loans
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

Troubled Debt Restructurings

At September 30, 2011, the allowance for loan losses related to total loan restructurings was $959 thousand. Total interest income recognized on loan restructurings for the three- and nine- month periods ended September 30, 2011, totaled $173 thousand and $428 thousand, respectively.

When restructuring loans for troubled borrowers, the Company generally makes concessions in interest rates, loan terms and/or amortization terms. All restructured loans to troubled borrowers in excess of $250 thousand are evaluated for a specific reserve based on the net present value method. Restructured loans under $250 thousand are subject to the reserve calculation at the historical loss rate for classified loans.

There were no loans modified as troubled debt restructurings within the previous 12 months for which there was a payment default for the three- and nine-month periods ended September 30, 2011. The Company’s review of loan modifications beginning January 1, 2011, did not identify any new troubled debt restructurings resulting from the adoption of the guidance outlined in ASU 2011-02.

For the three- and nine-month periods ended September 30, 2011, the following table presents a breakdown of the types of concessions made by loan class.


	For the Three Months ended September 30, 2011						For the Nine Months ended September 30, 2011
	Number of loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Below market interest rate
Single family residential mortgage		1	$	70,524	$	70,524		1	$	70,524	$	70,524

Below market interest rate and extended payment terms
Non-farm, non-residential		—		—		—		2		106,682		106,682
Single family residential mortgage		1		86,689		86,689		4		542,198		542,198

Total		1		86,689		86,689		6		648,880		648,880

Total loan concessions		2	$	157,213	$	157,213		7	$	719,404	$	719,404

The following table presents the successes and failures of the types of modification within the previous 12 months as of September 30, 2011.


	Paid in Full				Paying as Restructured
	Number of loans		Recorded Investment		Number of loans		Recorded Investment
Below market interest rate		1	$	—		1	$	70,523
Below market interest rate and extended payment terms		—		—		7		1,685,722

Total		1	$	—		8	$	1,756,245


	Converted to Non-accrual				Foreclosure/Default
	Number of loans		Recorded Investment		Number of loans		Recorded Investment
Below market interest rate		—	$	—		—	$	—
Below market interest rate and extended payment terms		—		—		—		—

Total		—	$	—		—	$	—