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Note 3 - Loans and Allowance for Loan Losses

12 Months Ended

Dec. 31, 2011

3.	Loans and Allowance for Loan Losses

Major classifications of loans are summarized in the following table.


December 31, (In thousands)	2011			2010
Real Estate:
Real estate – construction and land development	$	119,989		$	154,208
Real estate mortgage – residential		445,464			469,273
Real estate mortgage – farmland and other commercial enterprises		384,331			416,904
Commercial:
Commercial and industrial		48,771			57,029
States and political subdivisions		23,601			26,302
Lease financing		7,578			16,187
Other		21,435			25,628
Consumer:
Secured		14,214			22,607
Unsecured		7,151			5,925
Total loans		1,072,534			1,194,063
Less unearned income		(426	)		(1,223	)
Total loans, net of unearned income	$	1,072,108		$	1,192,840

Loans with a carrying value of $417 million and $354 million at December 31, 2011 and December 31, 2010, respectively, were pledged to secure borrowings and lines of credit. Such borrowings include Federal Home Loan Bank (“FHLB”) advances and short-term borrowing arrangements with the Federal Reserve.

Loans to directors, executive officers, and principal shareholders (including loans to affiliated companies of which they are principal owners) and loans to members of the immediate family of such persons were $23.2 million at December 31, 2011 and 2010. Such loans were made in the normal course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other customers and did not involve more than the normal risk of collectability. An analysis of the activity with respect to these loans is presented in the table below.


(In thousands)	Amount
Balance, December 31, 2010	$	23,188
New loans		7,767
Repayments		(8,152	)
Loans no longer meeting disclosure requirements, new loans meeting disclosure requirements, and other adjustments, net		399
Balance, December 31, 2011	$	23,202

Activity in the allowance for loan losses by portfolio segment was as follows for the year ending December 31, 2011:


(In thousands)	Real Estate			Commercial			Consumer			Total
Year Ended December 31, 2011
Balance, beginning of period	$	24,527		$	3,260		$	997		$	28,784
Provision for loan losses		12,548			511			428			13,487
Recoveries		241			860			245			1,346
Loans charged off		(13,778	)		(1,123	)		(452	)		(15,353	)
Balance, end of period	$	23,538		$	3,508		$	1,218		$	28,264

Activity in the allowance for loan losses was as follows for the years ending December 31, 2010 and 2009:


Years Ended December 31, (In thousands)	2010			2009
Balance, beginning of year	$	23,364		$	16,828
Provision for loan losses		17,233			20,768
Recoveries		577			536
Loans charged off		(12,390	)		(14,768	)
Balance, end of year	$	28,784		$	23,364

The following table presents individually impaired loans by class of loans for the dates indicated. The recorded investment column excludes immaterial amounts attributed to net deferred loan costs.


As of and for the Year Ended December 31, 2011 (In thousands)	Recorded Investment		Unpaid Principal Balance		Allowance for Loan Losses Allocated		Average		Interest Income Recognized		Cash Basis Interest Recognized
Impaired loans with no related allowance recorded:
Real Estate
Real estate – construction and land development	$	26,363	$	26,337			$	36,529	$	325	$	325
Real estate mortgage – residential		22,923		22,843				22,606		983		973
Real estate mortgage – farmland and other commercial enterprises		43,765		43,438				47,783		2,002		1,932
Commercial
Commercial and industrial		2,982		2,939				3,727		186		144
Consumer
Unsecured		19		18				9
Total	$	96,052	$	95,575			$	110,654	$	3,496	$	3,374

Impaired loans with an allowance recorded:
Real Estate
Real estate – construction and land development	$	13,440	$	13,425	$	139	$	14,697	$	394	$	391
Real estate mortgage – residential		13,239		13,197		998		11,665		502		499
Real estate mortgage – farmland and other commercial enterprises		15,070		15,035		600		14,243		642		635
Commercial
Commercial and industrial		456		453		159		447		19		20
Consumer
Secured		60		58		30		66		6		4
Total	$	42,265	$	42,168	$	1,926	$	41,118	$	1,563	$	1,549


Year Ended December 31, 2010 (In thousands)	Recorded Investment		Unpaid Principal Balance		Allowance for Loan Losses Allocated
Impaired loans with no related allowance recorded:
Real Estate
Real estate – construction and land development	$	27,350	$	27,298
Real estate mortgage – residential		13,103		13,059
Real estate mortgage – farmland and other commercial enterprises		17,895		17,864
Commercial
Commercial and industrial		14		14
Total	$	58,362	$	58,235

Impaired loans with an allowance recorded:
Real Estate
Real estate – construction and land development	$	31,529	$	31,452	$	2,793
Real estate mortgage – residential		20,147		19,986		2,051
Real estate mortgage – farmland and other commercial enterprises		19,897		19,810		824
Commercial
Commercial and industrial		447		444		310
Consumer
Secured		93		93		55
Total	$	72,113	$	71,785	$	6,033

The following table presents information for impaired loans as of the dates indicated.


Years Ended December 31, (In thousands)	2010		2009
Average of individually impaired loans during year	$	119,596	$	70,845
Interest income recognized during impairment		4,022		3,866
Cash-basis interest income recognized		3,933		3,257

The following tables present the balance of the allowance for loan losses and the recorded investment in loans by portfolio segment based on impairment method as of December 31, 2011 and 2010. Loan amounts in the tables below exclude immaterial amounts attributed to accrued interest receivable.


December 31, 2011 (In thousands)	Real Estate		Commercial		Consumer		Total
Allowance for Loan Losses
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	1,737	$	159	$	30	$	1,926
Collectively evaluated for impairment		21,801		3,349		1,188		26,338
Total ending allowance balance	$	23,538	$	3,508	$	1,218	$	28,264

Loans
Loans individually evaluated for impairment	$	134,275	$	3,392	$	76	$	137,743
Loans collectively evaluated for impairment		815,509		97,567		21,289		934,365
Total ending loan balance, net of unearned income	$	949,784	$	100,959	$	21,365	$	1,072,108


December 31, 2010 (In thousands)	Real Estate		Commercial		Consumer		Total
Allowance for Loan Losses
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	5,668	$	310	$	55	$	6,033
Collectively evaluated for impairment		18,859		2,950		942		22,751
Total ending allowance balance	$	24,527	$	3,260	$	997	$	28,784

Loans
Loans individually evaluated for impairment	$	129,469	$	458	$	93	$	130,020
Loans collectively evaluated for impairment		910,916		123,465		28,439		1,062,820
Total ending loan balance, net of unearned income	$	1,040,385	$	123,923	$	28,532	$	1,192,840

The following tables present the recorded investment in nonperforming loans by class of loans as of December 31, 2011 and 2010. The tables below exclude immaterial amounts attributed to net deferred loan costs and accrued interest receivable.


December 31, 2011 (In thousands)	Nonaccrual		Restructured Loans		Loans Past Due 90 Days or More and Still Accruing
Real Estate:
Real estate – construction and land development	$	30,744	$	6,207
Real estate mortgage – residential		14,578		4,894
Real estate mortgage – farmland and other commercial enterprises		13,831		8,024
Commercial:
Commercial and industrial		386
Lease financing		124
Consumer:
Secured		80
Unsecured		12			$	1
Total	$	59,755	$	19,125	$	1


December 31, 2010 (In thousands)	Nonaccrual		Restructured Loans		Loans Past Due 90 Days or More and Still Accruing
Real Estate:
Real estate – construction and land development	$	35,893	$	16,793
Real estate mortgage – residential		10,728		9,147	$	28
Real estate mortgage – farmland and other commercial enterprises		6,528		11,038
Commercial:
Commercial and industrial		627
Lease financing		50				9
Other		31
Consumer:
Secured		109
Unsecured		5				5
Total	$	53,971	$	36,978	$	42

The Company has allocated $493 thousand and $3.7 million of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of December 31, 2011 and 2010, respectively. The Company has committed to lend additional amounts totaling up to zero and $46 thousand at December 31, 2011 and 2010, respectively, to customers with outstanding loans that are classified as troubled debt restructurings.

During the year ending December 31, 2011, the terms of four loans were modified as troubled debt restructurings. The modification of the terms of such loans included one forbearance arrangement to reduce a customer’s monthly principal and interest payment for a period of six months and three arrangements to adjust the stated interest rate of the loans to a below market rate for new debt with similar risk. The loan representing the forbearance arrangement was subsequently repaid in full. The rate on two loans was reduced to 4% and 6.75% from 6% and 9.25%, respectively. The rate on the third loan was increased to 5% from 4%, but was still considered below the market rate for new debt with similar risk characteristics.

The following table presents loans by class modified as troubled debt restructurings that occurred during the year ending December 31, 2011.


(Dollars in thousands) Troubled Debt Restructurings:	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Real Estate:
Real estate – construction and land development		1	$	159	$	159
Real estate mortgage – residential		3		1,348		1,360
Total		4	$	1,507	$	1,519

The troubled debt restructurings identified above increased the allowance for loan losses by $114 thousand. There were no charge-offs related to these loans during the year ending December 31, 2011.

During the year ending December 31, 2011, the Company had one restructured credit for which there was a payment default within twelve months following the modification. This credit represents a real estate construction and land development project with an outstanding balance of $2.8 million at December 31, 2011. This credit has a specific reserve allocation of $21 thousand at December 31, 2011 and related charge-offs were recorded during 2011 in the amount of $335 thousand.

The tables below present an age analysis of past due loans 30 days or more by class of loans as of the dates indicated. Past due loans that are also classified as nonaccrual are included in their respective past due category. The tables exclude immaterial amounts attributed to net deferred loan costs and accrued interest receivable.


December 31, 2011 (In thousands)	30-89 Days Past Due		90 Days or More Past Due		Total		Current		Total Loans
Real Estate:
Real estate – construction and land development	$	3,343	$	18,970	$	22,313	$	97,676	$	119,989
Real estate mortgage – residential		5,836		7,352		13,188		432,276		445,464
Real estate mortgage – farmland and other commercial enterprises		1,684		12,497		14,181		370,150		384,331
Commercial:
Commercial and industrial		98		300		398		48,373		48,771
States and political subdivisions								23,601		23,601
Lease financing, net		80		96		176		6,976		7,152
Other		29				29		21,406		21,435
Consumer:
Secured		200		17		217		13,997		14,214
Unsecured		61		5		66		7,085		7,151
Total	$	11,331	$	39,237	$	50,568	$	1,021,540	$	1,072,108


December 31, 2010 (In thousands)	30-89 Days Past Due		90 Days or More Past Due		Total		Current		Total Loans
Real Estate:
Real estate – construction and land development	$	394	$	23,418	$	23,812	$	130,396	$	154,208
Real estate mortgage – residential		5,187		7,167		12,354		456,919		469,273
Real estate mortgage – farmland and other commercial enterprises		1,595		6,266		7,861		409,043		416,904
Commercial:
Commercial and industrial		194		538		732		56,297		57,029
States and political subdivisions								26,302		26,302
Lease financing, net		276		59		335		14,629		14,964
Other		114		3		117		25,511		25,628
Consumer:
Secured		145		102		247		22,360		22,607
Unsecured		69		12		81		5,844		5,925
Total	$	7,974	$	37,565	$	45,539	$	1,147,301	$	1,192,840

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends and conditions. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis includes large-balance loans and non-homogeneous loans, such as commercial real estate and certain residential real estate loans. Loan rating grades, as described further below, are assigned based on a continuous process. The amount and adequacy of the allowance for loan loss is determined on a quarterly basis. The Company uses the following definitions for its risk ratings:

Special Mention. Loans classified as special mention have a potential weakness that deserves management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the borrowers repayment ability, weaken the collateral or inadequately protect the Company’s credit position at some future date. These credits pose elevated risk, but their weaknesses do not yet justify a substandard classification.

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful. Loans classified as doubtful have all the weaknesses inherent of those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loans not meeting the criteria above which are analyzed individually as part of the above described process are considered to be pass rated loans. Based on the most recent analysis performed, the risk category of loans by class of loans is as follows for the dates indicated. Each of the following tables exclude immaterial amounts attributed to accrued interest receivable.


	Real Estate						Commercial
December 31, 2011 (In thousands)	Real Estate-Construction and Land Development		Real Estate Mortgage-Residential		Real Estate Mortgage-Farmland and Other Commercial Enterprises		Commercial and Industrial		States and Political Subdivisions		Lease Financing		Other
Credit risk profile by internally assigned rating grades:
Pass	$	65,306	$	386,134	$	303,512	$	41,556	$	23,601	$	7,022	$	20,415
Special Mention		7,443		16,585		19,393		2,969				6		1,000
Substandard		47,091		41,468		59,395		4,103				124		20
Doubtful		149		1,277		2,031		143
Total	$	119,989	$	445,464	$	384,331	$	48,771	$	23,601	$	7,152	$	21,435


	Real Estate						Commercial
December 31, 2010 (In thousands)	Real Estate-Construction and Land Development		Real Estate Mortgage-Residential		Real Estate Mortgage-Farmland and Other Commercial Enterprises		Commercial and Industrial		States and Political Subdivisions		Lease Financing		Other
Credit risk profile by internally assigned rating grades:
Pass	$	79,535	$	407,317	$	341,684	$	52,961	$	26,302	$	14,905	$	24,360
Special Mention		14,180		18,858		31,747		2,531						1,199
Substandard		57,477		41,704		37,938		1,255				59		69
Doubtful		3,016		1,394		5,535		282
Total	$	154,208	$	469,273	$	416,904	$	57,029	$	26,302	$	14,964	$	25,628

The Company considers the performance of the loan portfolio and its impact on the allowance for loan losses. For consumer loan classes, the Company also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the consumer loans outstanding based on payment activity as of December 31, 2011 and 2010.


	December 31, 2011				December 31, 2010
	Consumer				Consumer
(In thousands)	Secured		Unsecured		Secured		Unsecured
Credit risk profile based on payment activity:
Performing	$	14,134	$	7,138	$	22,498	$	5,915
Nonperforming		80		13		109		10
Total	$	14,214	$	7,151	$	22,607	$	5,925