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Allowance for Loan Losses and Credit Quality

12 Months Ended

Dec. 31, 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 management deems 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 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 loans and credit relationships and allocations to the remaining non-homogeneous and homogeneous pools of loans that have been deemed impaired. Additionally, a loan that becomes adversely classified or graded is removed from a group of non-classified or non-graded loans with similar risk characteristics in order to evaluate the removed loan collectively in a group of adversely classified or graded loans with similar risk characteristics. 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. 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.

As part of the Company’s continuing refinement of its methodology, the qualitative adjustments historically applied to consumer loans were revised downward based upon review and analysis of historical loss experience within the portfolio, as the Company now estimates fewer losses on that portfolio. The decrease in estimated losses on the consumer portfolio segment was offset by increases in estimated losses on the commercial portfolio segment. Primarily, the increase was in the specific loss estimated on certain impaired loans as a result of new information regarding the values of underlying collateral. This refinement initially created a small difference in the allowance allocated to each portfolio segment. The allocation of the allowance at the beginning of 2011 has been reclassified to reflect the application of the refinement.

During 2011, the Company further segmented the single family residential real estate class into owner occupied and non-owner occupied classes, which management believes provides better granularity and segmentation of loans with similar risk characteristics. This segmentation 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 table details the activity in the allowance for loan loss by portfolio segment:


(Amounts in thousands)	Commercial			Consumer Real Estate			Consumer and Other			Total
Allowance for credit losses:
Beginning balance, January 1, 2009	$	8,104		$	7,199		$	2,479		$	17,782
Provision for loan losses		10,850			3,420			1,531			15,801
Loans charged off		(5,937	)		(2,395	)		(2,023	)		(10,355	)
Recoveries credited to allowance		590			113			346			1,049

Net charge-offs		(5,347	)		(2,282	)		(1,677	)		(9,306	)

Ending balance, December 31, 2009	$	13,607		$	8,337		$	2,333		$	24,277


Beginning balance, January 1, 2010	$	13,607		$	8,337		$	2,333		$	24,277
Provision for loan losses		6,552			8,106			99			14,757
Loans charged off		(7,980	)		(4,352	)		(1,270	)		(13,602	)
Recoveries credited to allowance		339			109			602			1,050

Net charge-offs		(7,641	)		(4,243	)		(668	)		(12,552	)

Ending balance, December 31, 2010	$	12,518		$	12,200		$	1,764		$	26,482


Beginning balance, January 1, 2011	$	12,300		$	12,641		$	1,541		$	26,482
Provision for loan losses		12,007			(2,681	)		(279	)		9,047
Loans charged off		(7,981	)		(2,501	)		(978	)		(11,460	)
Recoveries credited to allowance		1,426			252			458			2,136

Net charge-offs		(6,555	)		(2,249	)		(520	)		(9,324	)

Ending balance, December 31, 2011	$	17,752		$	7,711		$	742		$	26,205

The negative provision in the consumer real estate and consumer and other segments was the result of the aforementioned methodology refinement.

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 December 31, 2011 and 2010:


	December 31, 2011
(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	$	411	$	—	$	411	$	282	$	—
Land development		250		—		250		293		—
Other land loans		—		—		—		766		—
Commercial and industrial		114		—		127		2,251		4
Multi-family residential		278		—		278		1,177		24
Single family non-owner occupied		1,206		—		1,244		1,659		39
Non-farm, non-residential		1,616		—		1,647		2,059		25
Agricultural		—		—		—		—		—
Farmland		258		—		258		167		—
Consumer real estate loans
Home equity lines		368		—		378		476		15
Single family owner occupied		2,428		—		2,508		1,825		43
Owner occupied construction		—		—		—		60		3
Consumer and other loans
Consumer loans		6		—		6		23		2

	$	6,935	$	—	$	7,107	$	11,038	$	155


Loans with a related allowance
Commercial loans
Construction — commercial	$	—	$	—	$	—	$	135	$	3
Land development		—		—		—		—		—
Other land loans		112		4		112		113		6
Commercial and industrial		4,031		2,048		4,069		2,358		21
Multi-family residential		—		—		—		470		—
Single family non-owner occupied		2,232		124		2,232		2,323		107
Non-farm, non-residential		5,317		1,819		5,480		4,112		191
Agricultural		—		—		—		—		—
Farmland		—		—		—		83		—
Consumer real estate loans
Home equity lines		—		—		—		108		—
Single family owner occupied		5,529		1,203		5,612		5,794		164
Owner occupied construction		—		—		—		—		—
Consumer and other loans
Consumer loans		—		—		—		—		—

	$	17,221	$	5,198	$	17,505	$	15,496	$	492


	December 31, 2010
(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	$	122	$	—	$	132	$	471	$	—
Land development		50		—		50		500		—
Other land loans		362		—		362		889		—
Commercial and industrial		3,808		—		3,837		3,540		—
Multi-family residential		2,329		—		2,345		1,475		32
Single family non-owner occupied		1,197		—		1,238		823		4
Non-farm, non-residential		2,974		—		3,068		2,009		15
Consumer real estate loans
Home equity lines		330		—		335		221		7
Single family owner occupied		678		—		698		1,237		32
Owner occupied construction		—		—		—		—		—
Consumer and other loans
Consumer loans		1		—		1		2		—

	$	11,851	$	—	$	12,066	$	11,167	$	90


Loans with a related allowance
Commercial loans
Construction — commercial	$	—	$	—	$	—	$	131	$	—
Land development		—		—		—		—		—
Other land loans		113		5		113		28		2
Commercial and industrial		—		—		—		3,172		—
Multi-family residential		723		257		758		987		28
Single family non-owner occupied		3,386		770		3,395		1,247		38
Non-farm, non-residential		1,080		158		1,140		1,992		59
Consumer real estate loans
Home equity lines		95		34		98		298		3
Single family owner occupied		5,415		1,100		5,491		2,181		67
Owner occupied construction		—		—		—		—		—
Consumer and other loans
Consumer loans		—		—		—		—		—

	$	10,812	$	2,324	$	10,995	$	10,036	$	197

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, liquidity 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 realized in the future.

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

		00000000000		00000000000		00000000000		00000000000		00000000000		00000000000
	December 31, 2011
(Amounts in thousands)	Pass		Special Mention		Substandard		Doubtful		Loss		Total
Commercial loans
Construction — commercial	$	34,512	$	15	$	955	$	—	$	—	$	35,482
Land development		2,479		—		423		—		—		2,902
Other land loans		17,171		5,629		584		—		—		23,384
Commercial and industrial		86,288		568		2,679		2,404		—		91,939
Multi-family residential		74,486		965		1,599		—		—		77,050
Single family non-owner occupied		93,444		1,346		11,953		—		—		106,743
Non-farm, non-residential		303,071		9,635		22,855		444		—		336,005
Agricultural		1,327		7		40		—		—		1,374
Farmland		35,568		1,055		538		—		—		37,161
Consumer real estate loans
Home equity lines		105,535		2,237		3,615		—		—		111,387
Single family owner occupied		435,001		8,936		29,130		—		—		473,067
Owner occupied construction		19,190		128		259		—		—		19,577
Consumer and other loans
Consumer loans		66,357		198		574		—		—		67,129
Other		12,857		1		9		—		—		12,867

Total loans	$	1,287,286	$	30,720	$	75,213	$	2,848	$	—	$	1,396,067

		00000000000		00000000000		00000000000		00000000000		00000000000		00000000000
	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
Single family non-owner occupied		90,985		3,563		10,412		—		—		104,960
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 owner occupied		407,845		11,661		24,037		654		—		444,197
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

Loans graded as special mention decreased $21.38 million, or 41.04%, between the years ended December 31, 2011 and 2010, primarily due to the improved performance of borrowers which mitigated the potential weakness previously identified.

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 December 31, 2011 and 2010:


	December 31, 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	$	411	$	—	$	35,071	$	865	$	—	$	—
Land development		250		—		2,652		481		—		—
Other land loans		112		4		23,123		542		149		—
Commercial and industrial		3,738		1,847		87,563		1,668		638		201
Multi-family residential		278		—		76,772		1,889		—		—
Single family non-owner occupied		3,438		124		102,063		2,836		1,242		—
Non-farm, non-residential		6,933		1,819		328,610		5,114		462		—
Agricultural		—		—		1,374		19		—		—
Farmland		258		—		36,903		343		—		—

Total commercial loans		15,418		3,794		694,131		13,757		2,491		201
Consumer real estate loans
Home equity lines		368		—		111,019		1,365		—		—
Single family owner occupied		7,957		1,203		464,715		4,931		395		—
Owner occupied construction		—		—		19,577		212		—		—

Total consumer real estate loans		8,325		1,203		595,311		6,508		395		—
Consumer and other loans
Consumer loans		6		—		67,123		742		—		—
Other		—		—		12,867		—		—		—

Total consumer and other loans		6		—		79,990		742		—		—

Total loans	$	23,749	$	4,997	$	1,369,432	$	21,007	$	2,886	$	201


	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	$	122	$	—	$	42,572	$	1,472	$	—	$	—
Land development		50		—		16,600		1,772		—		—
Other land loans		113		5		23,843		742		512		—
Commercial and industrial		3,401		—		90,201		4,511		521		—
Multi-family residential		3,052		257		64,772		824		—		—
Single family non-owner occupied		4,583		770		98,981		2,442		1,396		—
Non-farm, non-residential		4,054		158		347,426		2,688		424		—
Agricultural		—		—		1,342		19		—		—
Farmland		—		—		36,954		70		—		—

Total commercial loans		15,375		1,190		722,691		14,540		2,853		—
Consumer real estate loans
Home equity lines		425		34		111,195		2,104		—		—
Single family owner occupied		6,093		1,100		437,736		5,557		368		—
Owner occupied construction		—		—		18,349		193		—		—

Total consumer real estate loans		6,518		1,134		567,280		7,854		368		—
Consumer and other loans
Consumer loans		1		—		63,474		1,764		—		—
Other		—		—		7,646		—		—		—

Total consumer and other loans		1		—		71,120		1,764		—		—

Total loans	$	21,894	$	2,324	$	1,361,091	$	24,158	$	3,221	$	—

Non-accrual and Past Due Loans

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


(Amounts in thousands)	2011		2010
Commercial loans
Construction — commercial	$	461	$	285
Land development		297		50
Other land loans		35		321
Commercial and industrial		3,905		3,518
Multi-family residential		341		2,463
Single family non-owner occupied		1,639		2,426
Non-farm, non-residential		8,063		4,670
Farmland		271		—
Consumer real estate loans
Home equity lines		516		868
Single family owner occupied		8,255		3,938
Owner-occupied construction		1		6
Consumer and other loans
Consumer loans		52		99

Total		23,836		18,644
Acquired, impaired loans		651		770

Total non-accrual loans	$	24,487	$	19,414

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


	December 31, 2011
(Amounts in thousands)	30 -59 Days		60 -89 Days		90+ Days		Total Past Due		Current Loans		Total Loans
Commercial loans
Construction — commercial	$	48	$	—	$	411	$	459	$	35,023	$	35,482
Land development		—		—		297		297		2,605		2,902
Other land loans		205		—		279		484		22,900		23,384
Commercial and industrial		150		30		3,568		3,748		88,191		91,939
Multi-family residential		667		—		342		1,009		76,041		77,050
Single family non-owner occupied		1,222		414		1,020		2,656		104,087		106,743
Non-farm, non-residential		837		860		2,180		3,877		332,128		336,005
Agricultural		—		7		—		7		1,367		1,374
Farmland		152		—		258		410		36,751		37,161
Consumer real estate loans
Home equity lines		642		222		235		1,099		110,288		111,387
Single family owner occupied		5,230		1,993		5,333		12,556		460,511		473,067
Owner occupied construction		—		29		—		29		19,548		19,577
Consumer and other loans
Consumer loans		198		71		12		281		66,848		67,129
Other		—		—		—		—		12,867		12,867

Total loans	$	9,351	$	3,626	$	13,935	$	26,912	$	1,369,155	$	1,396,067


	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
Single family non-owner occupied		1,784		345		2,169		4,298		100,662		104,960
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 owner occupied		8,503		1,396		2,044		11,943		432,254		444,197
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 December 31, 2011, total loan restructurings were $12.72 million which included $3.27 million of loans on non-accrual status. The allowance for loan losses related to loan restructurings was $1.14 million. Total interest income recognized on loan restructurings for the year ended December 31, 2011, totaled $561 thousand. The Company’s review of loan modifications beginning January 1, 2011, did not identify any TDRs resulting from the adoption of the guidance outlined in ASU 2011-02.

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.

The following table presents loans modified as TDRs, excluding those on non-accrual status, within the previous 12 months by the types of concessions made by loan class during the year ended December 31, 2011. The post-modification total represents the recorded investment immediately following the modification.


(Amounts in thousands)	Number of Loans		Pre-Modification Recorded Investment		Post-Modification Recorded Investment
Below market interest rate
Non-farm, non-residential		1	$	373	$	373
Single family owner occupied		2		159		159

Total		3		532		532
Extended payment terms
Non-farm, non-residential		1		126		126
Single family owner occupied		1		267		267

Total		2		393		393
Below market interest rate and extended payment terms
Non-farm, non-residential		1		107		107
Single family residential mortgage		4		759		736

		5		866		843

Total loan concessions		10	$	1,791	$	1,768

The following table presents loans modified as TDRs within the previous 12 months for which there was a payment default during the year ended December 31, 2011:


(Amounts in thousands)	Number of Loans		Pre-Modification Recorded Investment		Post-Modification Recorded Investment

Non-farm, non-residential		1	$	38	$	38

Total loan concessions		1	$	38	$	38