4. Loans and Allowance for Loan Losses

Loans consist of the following segments as of June 30, 2011, and December 31, 2010.



	June 30, 2011		December 31, 2010
Commercial	$	254,035	$	310,376
Real estate:
Construction, land, and land development	112,521		116,601
1-4 family residential first mortgages	51,146		51,760
Home equity	26,138		26,111
Commercial	387,248		372,404
Consumer and other loans	7,190		11,514
	838,278		888,766
Net unamortized fees and costs	202		117
	$	838,076	$	888,649

Loans are stated at the principal amounts outstanding, net of unamortized loan fees and costs, with interest income recognized on the interest method based upon those outstanding loan balances. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method. Loans are reported by the segments identified above and are analyzed by management on this basis and are not further broken down by class. All loan policies identified below apply to all segments of the loan portfolio.

Delinquencies are determined for all segments of loans based on the payment terms of the individual loan agreements. The accrual of interest on past due and other impaired loans is generally discontinued at 90 days or when, in the opinion of management, the borrower may be unable to make all contractual payments as they become due. Unless considered collectible, all interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income, if accrued in the current year, or charged to the allowance for loan losses, if accrued in the prior year. Interest income is subsequently recognized only to the extent cash payments are received. Generally, all payments received while a loan is on nonaccrual status are applied to the principal balance of the loan. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured.

A loan is classified as a TDR when for economic or legal reasons related to the borrower's financial difficulties a concession is granted to the borrower that would not otherwise be considered. Concessions may include a restructuring of the terms of a loan to alleviate the burden on the borrower's near-term cash requirements, such as an extension of the payment terms beyond the original maturity date or a change in the interest rate charged. TDR loans with extended payment terms are accounted for as impaired until performance is established. A change to the interest rate would change the classification of a loan to a TDR if the restructured loan yields a rate which is below a market rate for that of a new loan with comparable risk. TDR loans with below market rates are considered impaired until fully collected. TDR loans may be reported as nonaccrual, rather than as a TDR, if they are not performing per the restructured terms.

Based upon West Bank's ongoing assessment of credit quality within the loan portfolio, it maintains a list of Classified and Watch List loans where there is a potential for contractual payment or collateral shortfall. A loan on the Classified and Watch List is considered impaired when it is probable West Bank will be unable to collect all contractual principal and interest payments due in accordance with the terms of the loan agreement. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. The amount of impairment, if any, and any subsequent changes are included in the allowance for loan losses.

The following table sets forth the recorded investment in nonperforming loans, disaggregated by segment, held by the Company as of June 30, 2011, and December 31, 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.



	June 30, 2011		December 31, 2010		Change
Nonaccrual loans:
Commercial	$	1,319	$	4,011	$	(2,692	)
Real estate:
Construction, land, and land development	60		60		—
1-4 family residential first mortgages	879		1,001		(122		)
Home equity	7		59		(52		)
Commercial	3,245		2,814		431
Consumer and other loans	—		—		—
Total nonaccrual loans	5,510		7,945		(2,435		)
Loans past due 90 days and still accruing interest:
Commercial	—		—		—
Real estate:
Construction, land, and land development	—		—		—
1-4 family residential first mortgages	—		198		(198		)
Home equity	—		—		—
Commercial	—		—		—
Consumer and other loans	—		—		—
Total loans past due 90 days and still accruing interest	—		198		(198		)
Troubled debt restructured loans*:
Commercial	—		—		—
Real estate:
Construction, land, and land development	1,181		1,195		(14		)
1-4 family residential first mortgages	—		—		—
Home equity	—		—		—
Commercial	232		3,578		(3,346		)
Consumer and other loans	12		14		(2		)
Total troubled debt restructured loans	1,425		4,787		(3,362		)
Total nonperforming loans	$	6,935	$	12,930	$	(5,995	)

* 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.

The following tables summarize the recorded investment in impaired loans by segment, broken down by loans with no related allowance and loans with a related allowance and the amount of that allowance as of June 30, 2011, and December 31, 2010, and the average recorded investment and interest income recognized on these loans for the three and six months ended June 30, 2011.



							Three months ended				Six months ended
	June 30, 2011						June 30, 2011				June 30, 2011
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance
recorded:
Commercial	$	1,319	$	1,378	N/A		$	1,451	$	—	$	1,902	$	—
Real Estate:
Construction, land, and land
development	136		136		N/A		136		2		137		3
1-4 family residential	879		879		N/A		1,133		—		1,032		1
Home equity	7		7		N/A		7		—		17		—
Commercial	3,476		4,647		N/A		3,642		11		4,788		51
Consumer and other	12		12		N/A		12		—		13		1
	5,829		7,059		N/A		6,381		13		7,889		56
With an allowance recorded:
Commercial	4,688		4,688		$	600	4,953		73		6,108		138
Real Estate:
Construction, land, and land
development	13,401		13,401		1,900		13,579		177		13,835		350
1-4 family residential	282		282		142		71		6		112		6
Home equity	—		—		—		—		—		—		—
Commercial	—		—		—		—		—		—		—
Consumer and other	42		42		21		43		1		43		1
	18,413		18,413		2,663		18,646		257		20,098		495
Total:
Commercial	6,007		6,066		600		6,404		73		8,010		138
Real Estate:
Construction, land, and land
development	13,537		13,537		1,900		13,715		179		13,972		353
1-4 family residential	1,161		1,161		142		1,204		6		1,144		7
Home equity	7		7		—		7		—		17		—
Commercial	3,476		4,647		—		3,642		11		4,788		51
Consumer and other	54		54		21		55		1		56		2
	$	24,242	$	25,472	$	2,663	$	25,027	$	270	$	27,987	$	551



	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	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	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	1,002		1,050		25
Home equity	59		59		—
Commercial	6,392		6,392		—
Consumer and other	59		59		21
	$	31,013	$	35,249	$	3,688

The following table reconciles the balance of nonaccrual loans with impaired loans as of June 30, 2011, and December 31, 2010.



	June 30, 2011		December 31, 2010
Nonaccrual loans	$	5,510	$	7,945
Troubled debt restructured loans	1,425		4,787
Other impaired loans still accruing interest	17,307		18,281
Total impaired loans	$	24,242	$	31,013

The balance of impaired loans at June 30, 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.

Of the total amount of impaired loans, as of June 30, 2011, and December 31, 2010, $12 (0%) and $345 (1%), respectively, were not real estate collateral dependent. Additionally, $10,013 (41%) and $23,537 (76%) of impaired loans were real estate collateral dependent as of June 30, 2011, and December 31, 2010, respectively, but were not supported by an appraisal less than 12 months old. The remaining $14,217 (59%) as of June 30, 2011, and $7,131 (23%) as of December 31, 2010, of impaired loans were real estate collateral dependent loans and supported by current (less than 12 months old) appraised values of qualified licensed appraisers.

The following tables provide an analysis of the payment status of the recorded investment in loans as of June 30, 2011, and December 31, 2010.



	June 30, 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	$	389	$	909	$	519	$	1,817	$	252,218	$	254,035	$	—
Real estate:
Construction, land, and
land development	201		384		—		585		111,936		112,521		—
1-4 family residential
first mortgages	257		87		599		943		50,203		51,146		—
Home equity	975		—		7		982		25,156		26,138		—
Commercial	1,755		597		2,174		4,526		382,722		387,248		—
Consumer and other	12		13		—		25		7,165		7,190		—
Total	$	3,589	$	1,990	$	3,299	$	8,878	$	829,400	$	838,278	$	—
Nonaccrual loans included
above	$	—	$	—	$	3,299	$	3,299	$	2,211	$	5,510	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 June 30, 2011, and December 31, 2010.



	June 30, 2011
	Pass		Watch		Substandard		Doubtful		Total
Commercial	$	224,757	$	5,997	$	23,281	$	—	$	254,035
Real estate:
Construction, land, and land development	87,198		3,027		22,296		—		112,521
1-4 family residential first mortgages	47,800		1,850		1,496		—		51,146
Home equity	25,870		105		163		—		26,138
Commercial	365,951		9,553		11,744		—		387,248
Consumer and other	7,051		72		67		—		7,190
Total	$	758,627	$	20,604	$	59,047	$	—	$	838,278



	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. West Bank 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 secured by cash equivalent collateral.

Risk rating 2: The loan is secured by properly margined marketable securities.

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 has been impacted by current economic conditions but is still generally paying as agreed. Declining earnings and strained cash flow may cause some slowness in payments. Leverage is increasing and guarantees may not fully support the debt. There may be noncompliance with loan covenants.

Risk rating 6: A potential weakness exists that may inadequately protect West Bank's credit position.

Risk rating 7: A well-defined weakness exists that jeopardizes the orderly reduction of debts. West Bank is inadequately protected by the valuation or paying capacity of the collateral pledged.

Risk rating 8: A loan is past due more than 90 days or there is reason to believe West Bank 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 6, 7, and 8 exist with the added condition that collection or liquidation of the loan in full is highly improbable. A loan reaching this category would most likely be charged off.

Credit quality indicators for all loans and West Bank'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 West Bank'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 higher.

In all portfolio segments, the primary risks are that a borrower's income stream diminishes to the point he or she is 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 consists of the operations of the business. For consumer loans, including 1-4 family residential and home equity loans, that income stream typically consists of wages or a salary. 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, inventory can become obsolete, and for all types of loans secured by real estate, it is possible for the value of the real estate to decline.

The allowance for loan losses is established through a provision for loan losses charged to expense. Loans in each of the Company's segments are charged against the allowance for loan losses when management believes that collectibility of the principal is unlikely. The allowance is an amount that management believes will be adequate to absorb probable losses on existing loans, based on an evaluation of the collectibility of loans and prior loss experience. This evaluation also takes into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, the review of specific problem loans, and current economic conditions that may affect the borrower's ability to pay. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions or the other factors relied upon.

The allowance consists of specific and general components. The specific component relates to loans that meet the definition of impaired. The general component covers the remaining loans and is based on historical loss experience adjusted for qualitative factors such as delinquency trends, loan growth, economic elements, and local market conditions. These same policies are applied to all segments of loans. In addition, regulatory agencies, as an integral part of their examination process, periodically review West Bank's allowance for loan losses, and may require West Bank to make additions to the allowance based on their judgment about information available to them at the time of their examinations.

The following tables detail changes in the allowance for loan losses by segment for the three and six months ended June 30, 2011 and 2010.



	Three Months Ended June 30, 2011
				Real Estate
	Commercial			Construction and Land			1-4 Family Residential		Home Equity			Commercial			Consumer and Other			Total
Beginning balance	$	6,102		$	3,890		$	629	$	717		$	6,016		$	156		$	17,510
Charge-offs	(628		)	—			—		(40		)	(50		)	(3		)	(721		)
Recoveries	528			—			8		7			1			7			551
Provision ⁽¹⁾	24			(138		)	298		(20		)	307			(21		)	450
Ending balance	$	6,026		$	3,752		$	935	$	664		$	6,274		$	139		$	17,790



	Three Months Ended June 30, 2010
				Real Estate
	Commercial			Construction and Land			1-4 Family Residential			Home Equity			Commercial			Consumer and Other			Total
Beginning balance	$	7,740		$	4,257		$	692		$	686		$	6,746		$	152		$	20,273
Charge-offs	(367		)	(100		)	(104		)	(20		)	(51		)	(19		)	(661		)
Recoveries	58			—			5			—			—			16			79
Provision ⁽¹⁾	1,885			(86		)	141			(85		)	(473		)	18			1,400
Ending balance	$	9,316		$	4,071		$	734		$	581		$	6,222		$	167		$	21,091



	Six Months Ended June 30, 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	(2,107		)	—			(526		)	(40		)	(298		)	(3		)	(2,974		)
Recoveries	681			—			24			12			1			9			727
Provision ⁽¹⁾	(488		)	(35		)	790			34			748			(99		)	950
Ending balance	$	6,026		$	3,752		$	935		$	664		$	6,274		$	139		$	17,790



	Six Months Ended June 30, 2010
				Real Estate
	Commercial			Construction and Land			1-4 Family Residential			Home Equity			Commercial			Consumer and Other			Total
Beginning balance	$	7,988		$	3,260		$	649		$	654		$	6,438		$	137		$	19,126
Charge-offs	(1,160		)	(206		)	(143		)	(54		)	(53		)	(67		)	(1,683		)
Recoveries	207			—			6			—			7			28			248
Provision ⁽¹⁾	2,281			1,017			222			(19		)	(170		)	69			3,400
Ending balance	$	9,316		$	4,071		$	734		$	581		$	6,222		$	167		$	21,091



(1)	The negative provision for the various segments are primarily related to the decrease 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 June 30, 2011, and December 31, 2010.



	June 30, 2011
			Real Estate
	Commercial		Construction and Land		1-4 Family Residential		Home Equity		Commercial		Consumer and Other		Total
Ending balance:
Individually evaluated for impairment	$	600	$	1,900	$	142	$	—	$	—	$	21	$	2,663
Collectively evaluated for impairment	5,426		1,852		793		664		6,274		118		15,127
Total	$	6,026	$	3,752	$	935	$	664	$	6,274	$	139	$	17,790


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

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 June 30, 2011, and December 31, 2010.



	June 30, 2011
			Real Estate
	Commercial		Construction and Land		1-4 Family Residential		Home Equity		Commercial		Consumer and Other		Total
Ending balance:
Individually evaluated for impairment	$	6,007	$	13,537	$	1,161	$	7	$	3,476	$	54	$	24,242
Collectively evaluated for impairment	248,028		98,984		49,985		26,131		383,772		7,136		814,036
Total	$	254,035	$	112,521	$	51,146	$	26,138	$	387,248	$	7,190	$	838,278



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