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Allowance for Loan Losses and Credit Quality Indicators

3 Months Ended

Mar. 31, 2012

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

Allowance for Loan Losses and Credit Quality Indicators

Note 6. Allowance for Loan Losses and Credit Quality Indicators

Allowance for Loan Losses

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 nonhomogeneous 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 loans with similar risk characteristics that are not classified or graded 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 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 nonaccruals. 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 activity within the allowance for loan losses, by portfolio segment, for the three months ended March 31, 2012 and 2011:


	Three Months Ended March 31, 2012
	Commercial			Consumer Real Estate			Consumer and Other			Total
(Amounts in thousands)
Beginning balance	$	17,752		$	7,711		$	742		$	26,205
Provision for loan losses		262			618			42			922
Loans charged off		(253	)		(1,105	)		(204	)		(1,562	)
Recoveries credited to allowance		104			35			96			235

Net charge-offs		(149	)		(1,070	)		(108	)		(1,327	)

Ending balance	$	17,865		$	7,259		$	676		$	25,800


	Three Months Ended March 31, 2011
	Commercial			Consumer Real Estate			Consumer and Other			Total
(Amounts in thousands)
Beginning balance	$	12,300		$	12,641		$	1,541		$	26,482
Provision for loan losses		361			1,213			38			1,612
Loans charged off		(440	)		(1,372	)		(215	)		(2,027	)
Recoveries credited to allowance		79			159			177			415

Net charge-offs		(361	)		(1,213	)		(38	)		(1,612	)

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

Credit Quality Indicators

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 tables present the Company’s recorded investment in loans considered to be impaired and related information on those impaired loans for the periods indicated:


	March 31, 2012						December 31, 2011
(Amounts in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
Impaired loans with no related allowance:
Commercial loans
Construction — commercial	$	12	$	12	$	—	$	411	$	411	$	—
Land development		—		—		—		250		250		—
Other land loans		—		—		—		—		—		—
Commercial and industrial		76		76		—		114		127		—
Multi-family residential		278		278		—		278		278		—
Single family non-owner occupied		1,146		1,189		—		1,206		1,244		—
Non-farm, non-residential		1,960		1,992		—		1,616		1,647		—
Agricultural		—		—		—		—		—		—
Farmland		—		—		—		258		258		—
Consumer real estate loans
Home equity lines		383		396		—		368		378		—
Single family owner occupied		5,811		5,910		—		2,428		2,508		—
Owner occupied construction		—		—		—		—		—		—
Consumer and other loans
Consumer loans		1		1		—		6		6		—

Total impaired loans with no allowance		9,667		9,854		—		6,935		7,107		—
Impaired loans with a related allowance:
Commercial loans
Construction — commercial	$	—	$	—	$	—	$	—	$	—	$	—
Land development		—		—		—		—		—		—
Other land loans		111		111		4		112		112		4
Commercial and industrial		1,689		1,726		1,512		4,031		4,069		2,048
Multi-family residential		—		—		—		—		—		—
Single family non-owner occupied		2,535		2,539		139		2,232		2,232		124
Non-farm, non-residential		7,084		7,321		3,568		5,317		5,480		1,819
Agricultural		—		—		—		—		—		—
Farmland		—		—		—		—		—		—
Consumer real estate loans
Home equity lines		—		—		—		—		—		—
Single family owner occupied		3,278		3,368		841		5,529		5,612		1,203
Owner occupied construction		—		—		—		—		—		—
Consumer and other loans
Consumer loans		—		—		—		—		—		—

Total impaired loans with an allowance		14,697		15,065		6,064		17,221		17,505		5,198

Total impaired loans	$	24,364	$	24,919	$	6,064	$	24,156	$	24,612	$	5,198


	For the Three Months Ended				For the Three Months Ended
	March 31, 2012				March 31, 2011
(Amounts in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Impaired loans with no related allowance:
Commercial loans
Construction — commercial	$	30	$	—	$	163	$	—
Land development		—		—		—		—
Other land loans		—		—		692		—
Commercial and industrial		483		—		4,179		—
Multi-family residential		596		—		1,798		13
Single family non-owner occupied		1,514		9		1,368		—
Non-farm, non-residential		2,684		10		2,968		—
Agricultural		—		—		—		—
Farmland		—		—		—		—
Consumer real estate loans
Home equity lines		502		6		368		3
Single family owner occupied		7,185		21		1,021		—
Owner occupied construction		—		—		—		—
Consumer and other loans
Consumer loans		2		—		6		—

Total impaired loans with no allowance		12,996		46		12,563		16
Impaired loans with a related allowance:
Commercial loans
Construction — commercial	$	—	$	—	$	—	$	—
Land development		—		—		—		—
Other land loans		111		1		113		1
Commercial and industrial		2,210		—		651		—
Multi-family residential		—		—		502		—
Single family non-owner occupied		2,541		31		2,515		27
Non-farm, non-residential		7,310		91		1,593		3
Agricultural		—		—		—		—
Farmland		—		—		—		—
Consumer real estate loans
Home equity lines		—		—		98		—
Single family owner occupied		3,372		25		5,389		36
Owner occupied construction		—		—		—		—
Consumer and other loans
Consumer loans		—		—		—		—

Total impaired loans with an allowance		15,544		148		10,861		67

Total impaired loans	$	28,540	$	194	$	23,424	$	83

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 March 31, 2012, and December 31, 2011.


	March 31, 2012
(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	$	12	$	—	$	19,581	$	557	$	—	$	—
Land development		—		—		2,571		116		—		—
Other land loans		111		4		23,431		503		30		—
Commercial and industrial		1,757		1,504		78,632		1,411		248		8
Multi-family residential		278		—		78,537		2,154		—		—
Single family non-owner occupied		3,681		139		103,334		2,396		1,232		—
Non-farm, non-residential		9,044		3,568		346,511		5,080		474		—
Agricultural		—		—		1,607		20		—		—
Farmland		—		—		37,751		405		—		—

Total commercial loans		14,883		5,215		691,955		12,642		1,984		8
Consumer real estate loans
Home equity lines		383		—		109,368		1,334		—		—
Single family owner occupied		9,089		841		469,918		4,902		404		—
Owner occupied construction		—		—		17,995		182		—		—

Total consumer real estate loans		9,472		841		597,281		6,418		404		—
Consumer and other loans
Consumer loans		1		—		65,035		676		—		—
Other		—		—		5,510		—		—		—

Total consumer and other loans		1		—		70,545		676		—		—

Total loans	$	24,356	$	6,056	$	1,359,781	$	19,736	$	2,388	$	8


	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

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, nonperforming 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 nonaccrual 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 held for investment by internal credit grade indicator at March 31, 2012, and December 31, 2011:


	March 31, 2012
(Amounts in thousands)	Pass		Special Mention		Substandard		Doubtful		Loss		Total
Commercial loans
Construction — commercial	$	19,058	$	—	$	535	$	—	$	—	$	19,593
Land development		2,398		—		173		—		—		2,571
Other land loans		22,936		174		462		—		—		23,572
Commercial and industrial		76,586		909		1,377		1,765		—		80,637
Multi-family residential		75,236		954		2,625		—		—		78,815
Single family non-owner occupied		93,767		2,692		11,788		—		—		108,247
Non-farm, non-residential		319,056		10,732		23,519		2,722		—		356,029
Agricultural		1,548		21		38		—		—		1,607
Farmland		36,057		573		1,121		—		—		37,751
Consumer real estate loans
Home equity lines		104,710		1,660		3,381		—		—		109,751
Single family owner occupied		440,571		7,172		31,668		—		—		479,411
Owner occupied construction		17,505		235		255		—		—		17,995
Consumer and other loans
Consumer loans		64,261		157		618		—		—		65,036
Other		5,497		6		7		—		—		5,510

Total loans	$	1,279,186	$	25,285	$	77,567	$	4,487	$	—	$	1,386,525


	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

Nonaccrual loans, presented by loan class, consisted of the following at March 31, 2012, and December 31, 2011:


(Amounts in thousands)	March 31, 2012		December 31, 2011
Commercial loans
Construction — commercial	$	57	$	461
Land development		49		297
Other land loans		139		35
Commercial and industrial		1,858		3,905
Multi-family residential		480		341
Single family non-owner occupied		1,837		1,639
Non-farm, non-residential		10,360		8,063
Farmland		103		271
Consumer real estate loans
Home equity lines		448		516
Single family owner occupied		8,938		8,255
Owner occupied construction		30		1
Consumer and other loans
Consumer loans		40		52

Total		24,339		23,836
Acquired impaired loans		278		651

Total nonaccrual loans	$	24,617	$	24,487

The following tables present the aging of past due loans, by loan class, at March 31, 2012, and December 31, 2011. Nonaccrual 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 March 31, 2012, or December 31, 2011.


	March 31, 2012
(Amounts in thousands)	30 - 59 Days Past Due		60 - 89 Days Past Due		90+ Days Past Due		Total Past Due		Current Loans		Total Loans
Commercial loans
Construction — commercial	$	—	$	—	$	12	$	12	$	19,581	$	19,593
Land development		—		—		48		48		2,523		2,571
Other land loans		186		—		258		444		23,128		23,572
Commercial and industrial		941		24		569		1,534		79,103		80,637
Multi-family residential		—		395		480		875		77,940		78,815
Single family non-owner occupied		1,872		1,490		1,127		4,489		103,758		108,247
Non-farm, non-residential		3,149		1,141		3,159		7,449		348,580		356,029
Agricultural		17		—		—		17		1,590		1,607
Farmland		89		—		—		89		37,662		37,751
Consumer real estate loans
Home equity lines		512		87		181		780		108,971		109,751
Single family owner occupied		5,792		228		5,598		11,618		467,793		479,411
Owner occupied construction		30		—		—		30		17,965		17,995
Consumer and other loans
Consumer loans		116		50		1		167		64,869		65,036
Other		—		—		—		—		5,510		5,510

Total loans	$	12,704	$	3,415	$	11,433	$	27,552	$	1,358,973	$	1,386,525


	December 31, 2011
(Amounts in thousands)	30 - 59 Days Past Due		60 - 89 Days Past Due		90+ Days Past Due		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

The Company’s loan restructurings totaled $9.72 million and $9.45 million at March 31, 2012, and December 31, 2011, respectively, which are reported net of those on nonaccrual status of $2.83 million and $3.27 million, respectively. The allowance for loan losses at March 31, 2012, and December 31, 2011, included reserves related to loan restructurings of $675 thousand and $1.14 million, respectively. Interest income recognized on loan restructurings for the three months ended March 31, 2012 and 2011, totaled $94 thousand and $123 thousand, respectively.

When restructuring loans for borrowers experiencing financial difficulty, the Company generally makes concessions in interest rates, loan terms and/or amortization terms. All restructured loans to borrowers experiencing financial difficulty 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 information for loans modified as troubled debt restructurings (“TDRs”), excluding those on nonaccrual status, that were restructured during the three months ended March 31, 2012 and 2011 by type of concession made and loan class. The post-modification recorded investment represents the loan balance immediately following modification.


	Three Months Ended March 31,
	2012						2011
(Amounts in thousands)	Total Contracts		Pre-Modification Recorded Investment		Post-Modification Recorded Investment		Total Contracts		Pre-Modification Recorded Investment		Post-Modification Recorded Investment
Below market interest rate
Non-farm, non-residential		—	$	—	$	—		1	$	107	$	107
Single family owner occupied		—		—		—		1		281		258

Total		—		—		—		2		388		365
Extended payment term
Single family owner occupied		1		351		316		—		—		—

Total		1		351		316		—		—		—

Total		1	$	351	$	316		2	$	388	$	365

There were no payment defaults on loans modified as TDRs during the three months ended March 31, 2012 or 2011 that were restructured within the previous 12 months.