Note 4. Loans and Allowance for Loan Losses

Loans consist of the following segments as of December 31, 2011 and 2010.



	2011		2010
Commercial	$	255,702	$	310,376
Real estate:
Construction, land, and land development	101,607		116,601
1-4 family residential first mortgages	63,218		51,760
Home equity	26,423		26,111
Commercial	386,137		372,404
Consumer and other loans	6,155		11,514
	839,242		888,766
Net unamortized fees and costs	283		117
	$	838,959	$	888,649

The loan portfolio includes $501,418 and $484,920 of fixed rate loans and $337,824 and $403,846 of variable rate loans as of December 31, 2011 and 2010, respectively.

Real estate loans of approximately $337,000 and $314,000 were pledged as security for FHLB advances as of December 31, 2011 and 2010, respectively.

The Company has had, and may be expected to have in the future, banking transactions in the ordinary course of business with directors, executive officers, their immediate families, affiliated companies in which they are principal stockholders, and five percent stockholders (commonly referred to as related parties), all of which have been originated, in the opinion of management, on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated parties. Loan transactions with related parties were as follows for the years ended December 31, 2011 and 2010.



	2011			2010
Balance, beginning of year	$	17,934		$	24,227
New loans	7,474			7,210
Repayments	(6,574		)	(13,471		)
Change in classification	—			(32		)
Balance, end of year	$	18,834		$	17,934

The following table sets forth the recorded investment in nonperforming loans, disaggregated by segment, held by the Company as of December 31, 2011 and 2010. The recorded investment represents principal balances net of any partial charge-offs. The related accrued interest and net unamortized fees and costs are immaterial and are excluded from the table.



	2011		2010
Nonaccrual loans:
Commercial	$	800	$	4,011
Real estate:
Construction, land, and land development	4,220		60
1-4 family residential first mortgages	923		1,001
Home equity	—		59
Commercial	2,629		2,814
Consumer and other loans	—		—
Total nonaccrual loans	8,572		7,945
Loans past due 90 days and still accruing interest:
Commercial	—		—
Real estate:
Construction, land, and land development	—		—
1-4 family residential first mortgages	—		198
Home equity	—		—
Commercial	—		—
Consumer and other loans	—		—
Total loans past due 90 days and still accruing interest	—		198
Troubled debt restructured loans ⁽¹⁾:
Commercial	—		—
Real estate:
Construction, land, and land development	1,094		1,195
1-4 family residential first mortgages	171		—
Home equity	—		—
Commercial	856		3,578
Consumer and other loans	—		14
Total troubled debt restructured loans	2,121		4,787
Total nonperforming loans	$	10,693	$	12,930


(1)	While troubled debt restructured loans are commonly reported by the industry as nonperforming, those not classified in the nonaccrual category are accruing interest due to payment performance. Troubled debt restructured loans on nonaccrual status, if any, are included in the nonaccrual category.

The following table shows the pre- and post-modification recorded investment in TDR loans by type of modification and loan segment that have occurred during the year ended December 31, 2011.



	December 31, 2011
		Pre-Modification		Post-Modification
	Number	Outstanding		Outstanding
	of Loans	Recorded Investment		Recorded Investment
Lengthened amortization:
Commercial	—	$	—	$	—
Real estate:
Construction, land, and land development	—	—		—
1-4 family residential first mortgages	—	—		—
Home equity	1	164		164
Commercial	2	971		971
Consumer and other loans	—	—		—
	3	1,135		1,135
Reduced interest rate:
Commercial	—	—		—
Real estate:
Construction, land, and land development	—	—		—
1-4 family residential first mortgages	1	175		175
Home equity	—	—		—
Commercial	—	—		—
Consumer and other loans	—	—		—
	1	175		175
	4	$	1,310	$	1,310

There was no financial impact for specific reserves or from charge-offs for the modified loans included in the previous table.

The following table shows the recorded investment in TDR loans by segment that have been modified within the previous twelve months and have subsequently had a payment default during the year ended December 31, 2011.



	December 31, 2011
	Number	Recorded
	of Loans	Investment
Commercial	—	$	—
Real estate:
Construction, land and land development	—	—
1-4 family residential first mortgages	1	175
Home equity	—	—
Commercial	1	116
Consumer and other loans	—	—
Total	2	$	291

As a result of adopting the amendments in ASU No. 2011-02, the Company reassessed all loan modifications that occurred on or after the beginning of 2011 for identification as TDRs. The Company identified no additional loans for which the allowance for loan losses had previously been measured under a general allowance for credit losses methodology. The amendments in this ASU require prospective application of the impairment measurement guidance for those loans newly identified as impaired. As of December 31, 2011, there was no recorded loan investment for which the allowance for credit losses was previously measured under a general allowance for loan losses methodology that was presently impaired.

The following tables summarize the recorded investment in impaired loans by segment, broken out by loans with no related allowance and loans with a related allowance and the amount of that allowance as of December 31, 2011 and 2010, and the average recorded investment and interest income recognized on these loans for the year ended December 31, 2011.



	December 31, 2011
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial	$	800	$	800	N/A		$	1,752	$	—
Real estate:
Construction, land, and land development	—		—		N/A		126		6
1-4 family residential first mortgages	1,094		1,094		N/A		1,021		2
Home equity	—		—		N/A		62		3
Commercial	3,484		4,678		N/A		4,120		65
Consumer and other	—		—		N/A		11		1
	5,378		6,572		N/A		7,092		77
With an allowance recorded:
Commercial	4,577		4,577		$	100	5,419		264
Real estate:
Construction, land, and land development	17,359		17,359		2,630		13,568		671
1-4 family residential first mortgages	283		283		84		190		21
Home equity	156		156		156		12		2
Commercial	1,278		1,278		200		98		8
Consumer and other	42		42		12		43		3
	23,695		23,695		3,182		19,330		969
Total:
Commercial	5,377		5,377		100		7,171		264
Real estate:
Construction, land, and land development	17,359		17,359		2,630		13,694		677
1-4 family residential first mortgages	1,377		1,377		84		1,211		23
Home equity	156		156		156		74		5
Commercial	4,762		5,956		200		4,218		73
Consumer and other	42		42		12		54		4
Total impaired loans	$	29,073	$	30,267	$	3,182	$	26,422	$	1,046



	December 31, 2010
	Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded:
Commercial	$	2,086	$	6,270	N/A
Real estate:
Construction, land, and land development	139		143		N/A
1-4 family residential first mortgages	836		884		N/A
Home equity	59		59		N/A
Commercial	6,392		6,392		N/A
Consumer and other	14		14		N/A
	9,526		13,762		N/A
With an allowance recorded:
Commercial	7,026		7,026		$	1,742
Real estate:
Construction, land, and land development	14,250		14,250		1,900
1-4 family residential first mortgages	166		166		25
Home equity	—		—		—
Commercial	—		—		—
Consumer and other	45		45		21
	21,487		21,487		3,688
Total:
Commercial	9,112		13,296		1,742
Real estate:
Construction, land, and land development	14,389		14,393		1,900
1-4 family residential first mortgages	1,002		1,050		25
Home equity	59		59		—
Commercial	6,392		6,392		—
Consumer and other	59		59		21
Total impaired loans	$	31,013	$	35,249	$	3,688

N/A - Not applicable

The following table reconciles the balance of nonaccrual loans with impaired loans as of December 31, 2011 and 2010.



	2011		2010
Nonaccrual loans	$	8,572	$	7,945
Troubled debt restructured loans	2,121		4,787
Other impaired loans still accruing interest	18,380		18,281
Total impaired loans	$	29,073	$	31,013

The balance of impaired loans at December 31, 2011, was comprised of 16 different borrowers, and the balance of impaired loans at December 31, 2010, was comprised of 23 different borrowers. West Bank has no commitments to advance additional funds on any of the impaired loans.

The average recorded investments in impaired loans during 2011, 2010, and 2009, totaled $26,422, $38,552, and $50,919, respectively. Interest income forgone on impaired loans was $450 during 2011, $664 during 2010, and $1,411 during 2009. Interest income recognized on impaired loans was $1,046 in 2011, $1,467 in 2010, and $1,808 in 2009.

The following tables provide an analysis of the payment status of the recorded investment in loans as of December 31, 2011 and 2010.



	December 31, 2011
	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days Past Due		Total Past Due		Current		Total Loans		90 Days and Still Accruing
Commercial	$	179	$	1	$	—	$	180	$	255,522	$	255,702	$	—
Real estate:
Construction, land, and
land development	4,220		—		—		4,220		97,387		101,607		—
1-4 family residential
first mortgages	703		6		809		1,518		61,700		63,218		—
Home equity	47		75		—		122		26,301		26,423		—
Commercial	—		60		2,434		2,494		383,643		386,137		—
Consumer and other	1		—		—		1		6,154		6,155		—
Total	$	5,150	$	142	$	3,243	$	8,535	$	830,707	$	839,242	$	—
Nonaccrual loans included
above	$	4,235	$	60	$	3,243	$	7,538	$	1,034	$	8,572	N/A



	December 31, 2010
	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days Past Due		Total Past Due		Current		Total Loans		90 Days and Still Accruing
Commercial	$	329	$	15	$	3,661	$	4,005	$	306,371	$	310,376	$	—
Real estate:
Construction, land, and
land development	464		—		60		524		116,077		116,601		—
1-4 family residential
first mortgages	521		—		1,199		1,720		50,040		51,760		198
Home equity	—		—		59		59		26,052		26,111		—
Commercial	254		—		2,679		2,933		369,471		372,404		—
Consumer and other	42		1		—		43		11,471		11,514		—
Total	$	1,610	$	16	$	7,658	$	9,284	$	879,482	$	888,766	$	198
Nonaccrual loans included
above	$	—	$	—	$	7,460	$	7,460	$	485	$	7,945	N/A

N/A - Not applicable

The following tables show the recorded investment in loans by credit quality indicator and loan segment as of December 31, 2011 and 2010.



	December 31, 2011
	Pass		Watch		Substandard		Doubtful		Total
Commercial	$	227,088	$	10,458	$	18,156	$	—	$	255,702
Real estate:
Construction, land, and land development	78,402		2,087		21,118		—		101,607
1-4 family residential first mortgages	60,474		664		2,080		—		63,218
Home equity	25,987		280		156		—		26,423
Commercial	367,094		6,209		12,834		—		386,137
Consumer and other	6,029		72		54		—		6,155
Total	$	765,074	$	19,770	$	54,398	$	—	$	839,242



	December 31, 2010
	Pass		Watch		Substandard		Doubtful		Total
Commercial	$	283,239	$	5,990	$	21,147	$	—	$	310,376
Real estate:
Construction, land, and land development	88,930		3,722		23,949		—		116,601
1-4 family residential first mortgages	48,152		1,217		2,391		—		51,760
Home equity	25,902		89		120		—		26,111
Commercial	343,869		12,894		15,641		—		372,404
Consumer and other	11,371		82		61		—		11,514
Total	$	801,463	$	23,994	$	63,309	$	—	$	888,766

All loans are subject to the assessment of a credit quality indicator. Risk ratings are assigned for each loan at the time of approval and change as circumstances dictate during the term of the loan. The Company utilizes a 9-point risk rating scale as shown below, with ratings 1 - 5 included in the Pass column, rating 6 included in the Watch column, ratings 7 - 8 included in the Substandard column, and rating 9 included in the Doubtful column. The Substandard column includes all loans classified as impaired as well as loans with ratings 7 and 8, which are included in the general evaluation of the allowance for loan losses.

Risk rating 1: The loan is fully secured by cash equivalent collateral.

Risk rating 2: The loan is fully secured by properly margined marketable securities, bonds, or cash surrender value of life insurance.

Risk rating 3: The borrower is in strong financial condition and has strong debt service capacity. The loan is performing as agreed and the financial characteristics and trends of the borrower exceed industry statistics.

Risk rating 4: The borrower is in satisfactory financial condition and has satisfactory debt service capacity. The loan is performing as agreed and the financial characteristics and trends of the borrower fall in line with industry statistics.

Risk rating 5: The borrower's financial condition is less than satisfactory. The loan is still generally paying as agreed, but strained cash flow may cause some slowness in payments. Collateral values adequately preclude loss. Financial characteristics and trends lag industry statistics. There may be noncompliance with loan covenants.

Risk rating 6: The borrower's financial condition is deficient. Payment delinquencies may be more common. Collateral values still protect from loss, but margins are narrow. Loan may be reliant on secondary sources of repayment, including liquidation of collateral and guarantor support.

Risk rating 7: The loan is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Well-defined weaknesses exist that jeopardize the liquidation of the debt. The Company is inadequately protected by the valuation or paying capacity of the collateral pledged. If deficiencies are not corrected, there is a distinct possibility that a loss will be sustained.

Risk rating 8: All the characteristics of rating 7 exist with the added condition that the loan is past due more than 90 days or there is reason to believe the Company will not receive its principal and interest according to the terms of the loan agreement.

Risk rating 9: All of the weaknesses inherent in risk ratings 7 and 8 exist with the added condition that collection or liquidation, on the basis of currently known facts, conditions, and values is highly questionable and improbable. A loan reaching this category would most likely be charged off.

Credit quality indicators for all loans and the Company's risk rating process are dynamic and updated on a continuous basis. Risk ratings are updated as circumstances that could affect the repayment of an individual loan are brought to management's attention through an established monitoring process. Individual lenders initiate changes as appropriate for ratings 1 through 5 and changes for ratings 6 through 9 are initiated via communications with management. The likelihood of loss increases as the risk rating increases and is generally preceded by a loan appearing on the Watch List, which consists of all loans with a risk rating of 6 or worse.

In all portfolio segments, the primary risks are that a borrower's income stream diminishes to the point they are not able to make scheduled principal and interest payments and any collateral securing the loan has declined in value. For commercial loans, including construction and commercial real estate loans, that income stream is generated by the operations of the business. For consumer loans, including 1-4 family residential and home equity loans, that income stream typically consists of wages. The risk of declining collateral values is present for most types of loans. For commercial loans, accounts receivable, fixed assets, and inventory generally comprise the collateral. Accounts receivable can diminish in value if collections are not timely. Fixed assets tend to depreciate over time and inventory can become obsolete. For all types of loans secured by real estate, it is possible for the value of the real estate to decline.

The following tables detail changes in the allowance for loan losses by segment for the years ended December 31, 2011 and 2010, and in total for the year ended December 31, 2009.



	2011
				Real Estate
	Commercial			Construction and Land			1-4 Family Residential			Home Equity			Commercial			Consumer and Other			Total
Beginning balance	$	7,940		$	3,787		$	647		$	658		$	5,823		$	232		$	19,087
Charge-offs	(2,976		)	(2		)	(946		)	(97		)	(722		)	(21		)	(4,764		)
Recoveries	1,809			2			42			29			1			22			1,905
Provision ⁽¹⁾	(2,364		)	(215		)	1,472			242			1,565			(150		)	550
Ending balance	$	4,409		$	3,572		$	1,215		$	832		$	6,667		$	83		$	16,778



	2010																					2009
				Real Estate
	Commercial			Construction and Land			1-4 Family Residential			Home Equity			Commercial			Consumer and Other			Total			Total
Beginning balance	$	7,988		$	3,260		$	649		$	654		$	6,438		$	137		$	19,126		$	15,441
Charge-offs	(5,785		)	(209		)	(371		)	(266		)	(53		)	(234		)	(6,918		)	(21,380		)
Recoveries	716			10			33			16			10			44			829			565
Provision ⁽¹⁾	5,021			726			336			254			(572		)	285			6,050			24,500
Ending balance	$	7,940		$	3,787		$	647		$	658		$	5,823		$	232		$	19,087		$	19,126


(1)	The negative provisions for the various segments are primarily related to the decline in each of those portfolio segments during the time periods disclosed.

The following tables show a breakdown of the allowance for loan losses disaggregated on the basis of impairment analysis method by segment as of December 31, 2011 and 2010, and in total as of December 31, 2009.



	December 31, 2011
			Real Estate
	Commercial		Construction and Land		1-4 Family Residential		Home Equity		Commercial		Consumer and Other		Total
Ending balance:
Individually evaluated
for impairment	$	100	$	2,630	$	84	$	156	$	200	$	12	$	3,182
Collectively evaluated
for impairment	4,309		942		1,131		676		6,467		71		13,596
Total	$	4,409	$	3,572	$	1,215	$	832	$	6,667	$	83	$	16,778



	December 31, 2010														2009
			Real Estate
	Commercial		Construction and Land		1-4 Family Residential		Home Equity		Commercial		Consumer and Other		Total		Total
Ending balance:
Individually evaluated
for impairment	$	1,742	$	1,900	$	25	$	—	$	—	$	21	$	3,688	$	4,935
Collectively evaluated
for impairment	6,198		1,887		622		658		5,823		211		15,399		14,191
Total	$	7,940	$	3,787	$	647	$	658	$	5,823	$	232	$	19,087	$	19,126

The following tables show the recorded investment in loans, exclusive of unamortized fees and costs, disaggregated on the basis of impairment analysis method by segment as of December 31, 2011 and 2010, and in total as of December 31, 2009.



	December 31, 2011
			Real Estate
	Commercial		Construction and Land		1-4 Family Residential		Home Equity		Commercial		Consumer and Other		Total
Ending balance:
Individually evaluated
for impairment	$	5,377	$	17,359	$	1,377	$	156	$	4,762	$	42	$	29,073
Collectively evaluated
for impairment	250,325		84,248		61,841		26,267		381,375		6,113		810,169
Total	$	255,702	$	101,607	$	63,218	$	26,423	$	386,137	$	6,155	$	839,242



	December 31, 2010														2009
			Real Estate
	Commercial		Construction and Land		1-4 Family Residential		Home Equity		Commercial		Consumer and Other		Total		Total
Ending balance:
Individually evaluated
for impairment	$	9,112	$	14,389	$	1,002	$	59	$	6,392	$	59	$	31,013	$	41,554
Collectively evaluated
for impairment	301,264		102,212		50,758		26,052		366,012		11,455		857,753		979,460
Total	$	310,376	$	116,601	$	51,760	$	26,111	$	372,404	$	11,514	$	888,766	$	1,021,014