Note 3 - Loans and Allowance for Loan Losses

12 Months Ended

Dec. 31, 2012

Financing Receivables [Text Block]

3.  Loans and Allowance for Loan Losses

Major classifications of loans are summarized in the following table.

December 31, (In thousands)	2012		2011
Real Estate:
Real estate – construction and land development	$	102,454	$	119,989
Real estate mortgage – residential		368,762		397,357
Real estate mortgage – farmland and other commercial enterprises		425,477		432,438
Commercial:
Commercial and industrial		46,812		48,771
States and political subdivisions		21,472		23,601
Lease financing		2,732		7,578
Other		19,156		21,435
Consumer:
Secured		11,732		14,214
Unsecured		6,515		7,151
Total loans		1,005,112		1,072,534
Less unearned income		117		426
Total loans, net of unearned income	$	1,004,995	$	1,072,108

Loans with a carrying value of $466 million and $417 million at December 31, 2012 and December 31, 2011, respectively, were pledged to secure borrowings and lines of credit. Such borrowings primarily include Federal Home Loan Bank (“FHLB”) advances and short-term borrowing arrangements with the Federal Reserve.

Loans to directors, executive officers, and principal shareholders of the Parent Company and its subsidiaries (including loans to affiliated companies of which they are principal owners) and loans to members of the immediate family of such persons were $20.0 million at December 31, 2012. 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, 2011	$	23,202
New loans		8,965
Repayments		(10,909	)
Loans no longer meeting disclosure requirements, new loans meeting disclosure requirements, and other adjustments, net		(1,271	)
Balance, December 31, 2012	$	19,987

Activity in the allowance for loan losses by portfolio segment was as follows for the years ended December 31, 2012 and 2011:

(In thousands)	Real Estate			Commercial			Consumer			Total
2012
Balance, beginning of period	$	23,538		$	3,508		$	1,218		$	28,264
Provision for loan losses		4,930			(1,825	)		(333	)		2,772
Recoveries		666			145			234			1,045
Loans charged off		(6,880	)		(315	)		(441	)		(7,636	)
Balance, end of period	$	22,254		$	1,513		$	678		$	24,445
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 year ended December 31, 2010:

(In thousands)	2010
Balance, beginning of year	$	23,364
Provision for loan losses		17,233
Recoveries		577
Loans charged off		(12,390	)
Balance, end of year	$	28,784

The following tables present individually impaired loans by class of loans for the dates indicated.

As of and for the Year Ended December 31, 2012 (In thousands)	Unpaid Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Allowance for Loan Losses Allocated		Average		Interest Income Recognized		Cash Basis Interest Recognized
Real Estate
Real estate – construction and land development	$	26,831	$	12,712	$	11,068	$	23,780	$	2,075	$	34,880	$	871	$	804
Real estate mortgage – residential		7,474		2,215		5,259		7,474		1,069		13,754		333		324
Real estate mortgage – farmland and other commercial enterprises		33,491		13,294		18,803		32,097		1,588		38,077		1,859		1,876
Commercial
Commercial and industrial		210		-		207		207		198		403		17		17
Consumer
Secured		21		-		21		21		17		66		6		6
Unsecured		309		-		310		310		196		271		17		16
Total	$	68,336	$	28,221	$	35,668	$	63,889	$	5,143	$	87,451	$	3,103	$	3,043

As of and for the Year Ended December 31, 2011 (In thousands)	Unpaid Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Allowance for Loan Losses Allocated		Average		Interest Income Recognized		Cash Basis Interest Recognized
Real Estate
Real estate – construction and land development	$	39,762	$	26,363	$	13,440	$	39,803	$	139	$	51,226	$	719	$	716
Real estate mortgage – residential		30,620		19,129		11,603		30,732		704		28,732		1,282		1,271
Real estate mortgage – farmland and other commercial enterprises		63,893		47,559		16,706		64,265		894		67,565		2,847		2,768
Commercial
Commercial and industrial		3,392		2,982		456		3,438		159		4,174		205		164
Consumer
Secured		58		-		60		60		30		66		6		4
Unsecured		18		19		-		19		-		9		-		-
Total	$	137,743	$	96,052	$	42,265	$	138,317	$	1,926	$	151,772	$	5,059	$	4,923

The following table presents information for impaired loans for the year ended December 31, 2010.

(In thousands)	2010
Average of individually impaired loans during year	$	119,596
Interest income recognized during impairment		4,022
Cash-basis interest income recognized		3,933

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, 2012 and 2011.

December 31, 2012 (In thousands)	Real Estate		Commercial		Consumer		Total
Allowance for Loan Losses
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	4,732	$	198	$	213	$	5,143
Collectively evaluated for impairment		17,522		1,315		465		19,302
Total ending allowance balance	$	22,254	$	1,513	$	678	$	24,445
Loans
Loans individually evaluated for impairment	$	63,351	$	207	$	331	$	63,889
Loans collectively evaluated for impairment		833,342		89,848		17,916		941,106
Total ending loan balance, net of unearned income	$	896,693	$	90,055	$	18,247	$	1,004,995

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	$	134,800	$	3,438	$	79	$	138,317
Loans collectively evaluated for impairment		814,984		97,521		21,286		933,791
Total ending loan balance, net of unearned income	$	949,784	$	100,959	$	21,365	$	1,072,108

The following tables present the recorded investment in nonperforming loans by class of loans as of December 31, 2012 and 2011.

December 31, 2012 (In thousands)	Nonaccrual		Restructured Loans		Loans Past Due 90 Days or More and Still Accruing
Real Estate:
Real estate – construction and land development	$	7,700	$	8,736	$	-
Real estate mortgage – residential		6,025		634		-
Real estate mortgage – farmland and other commercial enterprises		12,878		16,940		103
Commercial:
Commercial and industrial		649		-		-
Lease financing		53		-		-
Consumer:
Secured		9		-		-
Unsecured		94		39		-
Total	$	27,408	$	26,349	$	103

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		11,906		3,897		-
Real estate mortgage – farmland and other commercial enterprises		16,503		9,021		-
Commercial:
Commercial and industrial		386		-		-
Lease financing		124		-		-
Consumer:
Secured		80		-		-
Unsecured		12		-		1
Total	$	59,755	$	19,125	$	1

The Company has allocated $2.9 million and $493 thousand of specific reserves to customers whose loan terms have been modified in troubled debt restructurings and that are in compliance with those terms as of December 31, 2012 and 2011, respectively.  The Company had no commitments to lend additional amounts to customers with outstanding loans that are classified as troubled debt restructurings at December 31, 2012 and 2011.

During 2012, the Company had three credits that were modified as troubled debt restructurings. One restructuring includes a commercial real estate credit whereby the stated interest rate was reduced to 5.0% from 7.25% and repayment terms that include an initial six month interest only component. One restructuring includes a residential real estate credit whereby the stated interest rate was reduced to 4.125% from 6.0% and the due date extended by three months. The remaining restructured credit represents a secured consumer loans in which the maturity date was extended.

During 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 years ended December 31, 2012 and 2011.

(Dollars in thousands) Troubled Debt Restructurings:	Number of Loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
2012
Real Estate:
Real estate mortgage – residential	1	$	72	$	72
Real estate mortgage – farmland and other commercial enterprises	1		8,796		8,717
Consumer:
Unsecured	1		38		38
Total	3	$	8,906	$	8,827
2011
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 $442 thousand and $114 thousand for 2012 and 2011, respectively. There were no charge-offs related to these loans in 2012 or 2011.

The Company had one restructured credit in 2012 for which there was a payment default within twelve months following the modification. This credit had an outstanding balance of $72 thousand at December 31, 2012 and is secured by residential real estate. This credit had a specific reserve allocation of $5 thousand at year-end 2012. There were no charge-offs recorded during 2012 related to this credit.  For 2011, the Company had one such credit. 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 had 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.

December 31, 2012 (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	$	908	$	1,361	$	2,269	$	100,185	$	102,454
Real estate mortgage – residential		2,303		2,500		4,803		363,959		368,762
Real estate mortgage – farmland and other commercial enterprises		1,990		10,724		12,714		412,763		425,477
Commercial:
Commercial and industrial		108		53		161		46,651		46,812
States and political subdivisions		-		-		-		21,472		21,472
Lease financing, net		1		53		54		2,561		2,615
Other		38		399		437		18,719		19,156
Consumer:
Secured		69		-		69		11,663		11,732
Unsecured		137		-		137		6,378		6,515
Total	$	5,554	$	15,090	$	20,644	$	984,351	$	1,004,995

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		3,382		6,990		10,372		386,985		397,357
Real estate mortgage – farmland and other commercial enterprises		4,138		12,859		16,997		415,441		432,438
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

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 borrower’s 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, which are considered to have a low risk of loss.  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, 2012 (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	$	68,721	$	328,214	$	348,918	$	41,527	$	21,472	$	2,615	$	18,592
Special Mention		7,562		18,485		35,027		4,201		-		-		559
Substandard		26,171		21,984		41,532		1,008		-		-		5
Doubtful		-		79		-		76		-		-		-
Total	$	102,454	$	368,762	$	425,477	$	46,812	$	21,472	$	2,615	$	19,156

	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	$	346,648	$	342,998	$	41,556	$	23,601	$	7,022	$	20,415
Special Mention		7,443		14,525		21,453		2,969		-		6		1,000
Substandard		47,091		35,007		65,856		4,103		-		124		20
Doubtful		149		1,177		2,131		143		-		-		-
Total	$	119,989	$	397,357	$	432,438	$	48,771	$	23,601	$	7,152	$	21,435

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, 2012 and 2011.

	December 31, 2012				December 31, 2011
	Consumer				Consumer
(In thousands)	Secured		Unsecured		Secured		Unsecured
Credit risk profile based on payment activity:
Performing	$	11,723	$	6,382	$	14,134	$	7,138
Nonperforming		9		133		80		13
Total	$	11,732	$	6,515	$	14,214	$	7,151