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Loans and Asset Quality Information

6 Months Ended

Jun. 30, 2012

Note 7 – Loans and Asset Quality Information

The loans and foreclosed real estate that were acquired in FDIC-assisted transactions are covered by loss share agreements between the FDIC and the Company’s banking subsidiary, First Bank, which afford First Bank significant loss protection. (See the Company’s 2011 Annual Report on Form 10-K for more information regarding these transactions.) Because of the loss protection provided by the FDIC, the risk of the Cooperative Bank and The Bank of Asheville loans and foreclosed real estate are significantly different from those assets not covered under the loss share agreements. Accordingly, the Company presents separately loans subject to the loss share agreements as “covered loans” in the information below and loans that are not subject to the loss share agreements as “non-covered loans.”

The following is a summary of the major categories of total loans outstanding:

($ in thousands)	June 30, 2012				December 31, 2011				June 30, 2011
	Amount		Percentage		Amount		Percentage		Amount		Percentage
All loans (non-covered and covered):

Commercial, financial, and agricultural	$	163,761		7%		162,099		7%		158,303		6%
Real estate – construction, land development & other land loans		343,620		14%		363,079		15%		386,354		16%
Real estate – mortgage – residential (1-4 family) first mortgages		815,605		34%		805,542		33%		803,209		33%
Real estate – mortgage – home equity loans / lines of credit		250,627		10%		256,509		11%		266,995		11%
Real estate – mortgage – commercial and other		789,290		32%		762,895		31%		745,858		31%
Installment loans to individuals		73,522		3%		78,982		3%		80,423		3%
Subtotal		2,436,425		100%		2,429,106		100%		2,441,142		100%
Unamortized net deferred loan costs		1,376				1,280				1,298
Total loans	$	2,437,801				2,430,386				2,442,440

As of June 30, 2012, December 31, 2011 and June 30, 2011, net loans include unamortized premiums of $717,000, $949,000, and $1,182,000, respectively, related to acquired loans.

The following is a summary of the major categories of non-covered loans outstanding:

($ in thousands)	June 30, 2012				December 31, 2011				June 30, 2011
	Amount		Percentage		Amount		Percentage		Amount		Percentage
Non-covered loans:

Commercial, financial, and agricultural	$	155,879		7%		152,627		8%		145,811		7%
Real estate – construction, land development & other land loans		283,818		13%		290,983		14%		306,140		15%
Real estate – mortgage – residential (1-4 family) first mortgages		669,088		32%		646,616		31%		631,640		31%
Real estate – mortgage – home equity loans / lines of credit		229,415		11%		233,171		11%		241,973		12%
Real estate – mortgage – commercial and other		702,717		33%		666,882		32%		635,103		31%
Installment loans to individuals		72,613		4%		77,593		4%		78,749		4%
Subtotal		2,113,530		100%		2,067,872		100%		2,039,416		100%
Unamortized net deferred loan costs		1,376				1,280				1,298
Total non-covered loans	$	2,114,906				2,069,152				2,040,714

The carrying amount of the covered loans at June 30, 2012 consisted of impaired and nonimpaired purchased loans, as follows:

($ in thousands)	Impaired Purchased Loans – Carrying Value		Impaired Purchased Loans – Unpaid Principal Balance		Nonimpaired Purchased Loans – Carrying Value		Nonimpaired Purchased Loans - Unpaid Principal Balance		Total Covered Loans – Carrying Value		Total Covered Loans – Unpaid Principal Balance
Covered loans:
Commercial, financial, and agricultural	$	68		146		7,814		9,885		7,882		10,031
Real estate – construction, land development & other land loans		1,577		2,606		58,225		99,332		59,802		101,938
Real estate – mortgage – residential (1-4 family) first mortgages		827		1,915		145,690		173,707		146,517		175,622
Real estate – mortgage – home equity loans / lines of credit		12		309		21,200		26,400		21,212		26,709
Real estate – mortgage – commercial and other		2,332		4,153		84,241		113,936		86,573		118,089
Installment loans to individuals		3		4		906		990		909		994
Total	$	4,819		9,133		318,076		424,250		322,895		433,383

The carrying amount of the covered loans at December 31, 2011 consisted of impaired and nonimpaired purchased loans, as follows:

($ in thousands)	Impaired Purchased Loans – Carrying Value		Impaired Purchased Loans – Unpaid Principal Balance		Nonimpaired Purchased Loans – Carrying Value		Nonimpaired Purchased Loans - Unpaid Principal Balance		Total Covered Loans – Carrying Value		Total Covered Loans – Unpaid Principal Balance
Covered loans:
Commercial, financial, and agricultural	$	69		319		9,403		11,736		9,472		12,055
Real estate – construction, land development & other land loans		3,865		8,505		68,231		115,489		72,096		123,994
Real estate – mortgage – residential (1-4 family) first mortgages		1,214		2,639		157,712		189,436		158,926		192,075
Real estate – mortgage – home equity loans / lines of credit		127		577		23,211		29,249		23,338		29,826
Real estate – mortgage – commercial and other		2,585		4,986		93,428		125,450		96,013		130,436
Installment loans to individuals		4		6		1,385		1,583		1,389		1,589
Total	$	7,864		17,032		353,370		472,943		361,234		489,975

The following table presents information regarding covered purchased nonimpaired loans since December 31, 2010. The amounts include principal only and do not reflect accrued interest as of the date of the acquisition or beyond.

($ in thousands)
Carrying amount of nonimpaired covered loans at December 31, 2010	$	366,521
Additions due to acquisition of The Bank of Asheville (at fair value)		84,623
Principal repayments		(40,576	)
Transfers to foreclosed real estate		(53,999	)
Loan charge-offs		(14,797	)
Accretion of loan discount		11,598
Carrying amount of nonimpaired covered loans at December 31, 2011	$	353,370
Principal repayments		(25,012	)
Transfers to foreclosed real estate		(11,974	)
Loan charge-offs		(4,176	)
Accretion of loan discount		5,868
Carrying amount of nonimpaired covered loans at June 30, 2012	$	318,076

As reflected in the table above, the Company accreted $5,868,000 of the loan discount on purchased nonimpaired loans into interest income during the first six months of 2012. As of June 30, 2012, there was remaining loan discount of $73,519,000 related to purchased nonimpaired loans. If these loans continue to be repaid by the borrowers, the Company will accrete the remaining loan discount into interest income over the lives of the respective loans. In such circumstances, a corresponding entry to reduce the indemnification asset will be recorded amounting to 80% of the loan discount accretion, which reduces noninterest income.

The following table presents information regarding all purchased impaired loans since December 31, 2010, substantially all of which are covered loans. The Company has applied the cost recovery method to all purchased impaired loans at their respective acquisition dates due to the uncertainty as to the timing of expected cash flows, as reflected in the following table.

($ in thousands) Purchased Impaired Loans	Contractual Principal Receivable			Fair Market Value Adjustment – Write Down (Nonaccretable Difference)			Carrying Amount
Balance at December 31, 2010	$	8,080			2,329			5,751
Additions due to acquisition of The Bank of Asheville		38,452			20,807			17,645
Change due to payments received		(1,620	)		(327	)		(1,293	)
Transfer to foreclosed real estate		(19,881	)		(9,308	)		(10,573	)
Change due to loan charge-off		(7,522	)		(4,193	)		(3,329	)
Other		807			224			583
Balance at December 31, 2011	$	18,316			9,532			8,784
Change due to payments received		(287	)		(54	)		(233	)
Transfer to foreclosed real estate		(7,636	)		(3,487	)		(4,149	)
Change due to loan charge-off		(109	)		(109	)		—
Other		(1,151	)		(1,568	)		417
Balance at June 30, 2012	$	9,133			4,314			4,819

Each of the purchased impaired loans is on nonaccrual status and considered to be impaired. Because of the uncertainty of the expected cash flows, the Company is accounting for each purchased impaired loan under the cost recovery method, in which all cash payments are applied to principal. Thus, there is no accretable yield associated with the above loans. During the first six months of 2012 and 2011, the Company received no payments that exceeded the initial carrying amount of the purchased impaired loans.

Nonperforming assets are defined as nonaccrual loans, restructured loans, loans past due 90 or more days and still accruing interest, and other real estate. Nonperforming assets are summarized as follows:

ASSET QUALITY DATA ($ in thousands)	June 30, 2012		December 31, 2011		June 30, 2011

Non-covered nonperforming assets
Nonaccrual loans	$	73,918		73,566		71,570
Restructured loans - accruing		20,684		11,720		16,893
Accruing loans > 90 days past due		—		—		—
Total non-covered nonperforming loans		94,602		85,286		88,463
Other real estate		37,895		37,023		31,849
Total non-covered nonperforming assets	$	132,497		122,309		120,312

Covered nonperforming assets
Nonaccrual loans (1)	$	39,075		41,472		37,057
Restructured loans - accruing		19,054		14,218		24,325
Accruing loans > 90 days past due		—		—		—
Total covered nonperforming loans		58,129		55,690		61,382
Other real estate		70,850		85,272		102,883
Total covered nonperforming assets	$	128,979		140,962		164,265

Total nonperforming assets	$	261,476		263,271		284,577

(1) At June 30, 2012, December 31, 2011, and June 30, 2011, the contractual balance of the nonaccrual loans covered by FDIC loss share agreements was $60.4 million, $69.0 million, and $69.4 million, respectively.

The following table presents information related to the Company’s impaired loans.

($ in thousands)	As of /for the six months ended June 30, 2012		As of /for the year ended December 31, 2011		As of /for the six months ended June 30, 2011
Impaired loans at period end
Non-covered	$	94,602		85,286		88,463
Covered		58,129		55,690		61,382
Total impaired loans at period end	$	152,731		140,976		149,845

Average amount of impaired loans for period
Non-covered	$	86,723		89,023		91,187
Covered		56,449		63,289		69,102
Average amount of impaired loans for period – total	$	143,172		152,312		160,289

Allowance for loan losses related to impaired loans at period end
Non-covered	$	11,051		5,804		6,019
Covered		5,158		5,106		4,727
Allowance for loan losses related to impaired loans - total	$	16,209		10,910		10,746

Amount of impaired loans with no related allowance at period end
Non-covered	$	22,235		35,721		31,514
Covered		40,613		43,702		49,755
Total impaired loans with no related allowance at period end	$	62,848		79,423		81,269

All of the impaired loans noted in the table above were on nonaccrual status at each respective period end except for those classified as restructured loans (see table on previous page for balances).

The remaining tables in this note present information derived from the Company’s allowance for loan loss model. Relevant accounting guidance requires certain disclosures to be disaggregated based on how the Company develops its allowance for loan losses and manages its credit exposure. This model combines loan types in a different manner than the tables previously presented.

The following table presents the Company’s nonaccrual loans as of June 30, 2012.

($ in thousands)	Non-covered		Covered		Total
Commercial, financial, and agricultural:
Commercial – unsecured	$	211		188		399
Commercial – secured		2,227		—		2,227
Secured by inventory and accounts receivable		637		—		637

Real estate – construction, land development & other land loans		19,781		16,963		36,744

Real estate – residential, farmland and multi-family		24,146		10,084		34,230

Real estate – home equity lines of credit		3,878		758		4,636

Real estate – commercial		20,277		11,009		31,286

Consumer		2,761		73		2,834
Total	$	73,918		39,075		112,993

The following table presents the Company’s nonaccrual loans as of December 31, 2011.

($ in thousands)	Non-covered		Covered		Total
Commercial, financial, and agricultural:
Commercial - unsecured	$	452		—		452
Commercial - secured		2,190		358		2,548
Secured by inventory and accounts receivable		588		102		690

Real estate – construction, land development & other land loans		22,772		21,204		43,976

Real estate – residential, farmland and multi-family		25,430		11,050		36,480

Real estate – home equity lines of credit		3,161		1,068		4,229

Real estate - commercial		16,203		7,459		23,662

Consumer		2,770		231		3,001
Total	$	73,566		41,472		115,038

The following table presents an analysis of the payment status of the Company’s loans as of June 30, 2012.

($ in thousands)	30-59 Days Past Due		60-89 Days Past Due		Nonaccrual Loans		Current		Total Loans Receivable
Non-covered loans
Commercial, financial, and agricultural:
Commercial - unsecured	$	83		58		211		37,991		38,343
Commercial - secured		446		443		2,227		110,248		113,364
Secured by inventory and accounts receivable		55		—		637		21,277		21,969

Real estate – construction, land development & other land loans		1,544		425		19,781		222,973		244,723

Real estate – residential, farmland, and multi-family		6,648		2,109		24,146		777,203		810,106

Real estate – home equity lines of credit		1,759		460		3,878		201,589		207,686

Real estate - commercial		4,715		381		20,277		597,135		622,508

Consumer		690		181		2,761		51,199		54,831
Total non-covered	$	15,940		4,057		73,918		2,019,615		2,113,530
Unamortized net deferred loan costs										1,376
Total non-covered loans									$	2,114,906

Covered loans	$	5,253		2,147		39,075		276,420		322,895

Total loans	$	21,193		6,204		112,993		2,296,035		2,437,801

The Company had no non-covered or covered loans that were past due greater than 90 days and accruing interest at June 30, 2012.

The following table presents an analysis of the payment status of the Company’s loans as of December 31, 2011.

($ in thousands)	30-59 Days Past Due		60-89 Days Past Due		Nonaccrual Loans		Current		Total Loans Receivable
Non-covered loans
Commercial, financial, and agricultural:
Commercial - unsecured	$	67		591		452		37,668		38,778
Commercial - secured		672		207		2,190		108,682		111,751
Secured by inventory and accounts receivable		247		—		588		20,993		21,828

Real estate – construction, land development & other land loans		1,250		1,411		22,772		221,372		246,805

Real estate – residential, farmland, and multi-family		9,751		4,259		25,430		756,215		795,655

Real estate – home equity lines of credit		1,126		237		3,161		202,912		207,436

Real estate - commercial		2,620		1,006		16,203		567,354		587,183

Consumer		657		286		2,770		54,723		58,436
Total non-covered	$	16,390		7,997		73,566		1,969,919		2,067,872
Unamortized net deferred loan costs										1,280
Total non-covered loans									$	2,069,152

Covered loans	$	6,511		3,388		41,472		309,863		361,234

Total loans	$	22,901		11,385		115,038		2,279,782		2,430,386

The Company had no non-covered or covered loans that were past due greater than 90 days and accruing interest at December 31, 2011.

The following table presents the activity in the allowance for loan losses for non-covered loans for the three and six months ended June 30, 2012.

($ in thousands)	Commercial, Financial, and Agricultural			Real Estate – Construction, Land Development, & Other Land Loans			Real Estate – Residential, Farmland, and Multi- family			Real Estate – Home Equity Lines of Credit			Real Estate – Commercial and Other			Consumer			Unallo- cated		Total

As of and for the three months ended June 30, 2012

Beginning balance	$	4,954			16,419			15,369			2,132			5,737			1,826			18		46,455
Charge-offs		(744	)		(174	)		(2,145	)		(281	)		(805	)		(334	)		—		(4,483	)
Recoveries		18			126			60			85			6			62			—		357
Provisions		833			1,448			1,675			210			781			237			10		5,194
Ending balance	$	5,061			17,819			14,959			2,146			5,719			1,791			28		47,523

As of and for the six months ended June 30, 2012

Beginning balance	$	3,780			11,306			13,532			1,690			3,414			1,872			16		35,610
Charge-offs		(2,062	)		(2,852	)		(4,236	)		(732	)		(2,170	)		(686	)		—		(12,738	)
Recoveries		34			314			254			119			47			132			—		900
Provisions		3,309			9,051			5,409			1,069			4,428			473			12		23,751
Ending balance	$	5,061			17,819			14,959			2,146			5,719			1,791			28		47,523

Ending balances as of June 30, 2012: Allowance for loan losses

Individually evaluated for impairment	$	869			4,819			635			439			1,480			—			—		8,242

Collectively evaluated for impairment	$	4,192			13,000			14,324			1,707			4,239			1,791			28		39,281

Loans acquired with deteriorated credit quality	$	—			—			—			—			—			—			—		—

Loans receivable as of June 30, 2012:

Ending balance – total	$	173,676			244,723			810,106			207,686			622,508			54,831			—		2,113,530

Ending balances as of June 30, 2012: Loans

Individually evaluated for impairment	$	1,009			23,860			9,508			1,331			21,918			—			—		57,626

Collectively evaluated for impairment	$	172,667			220,863			800,598			206,355			600,590			54,831			—		2,055,904

Loans acquired with deteriorated credit quality	$	—			—			—			—			—			—			—		—

The following table presents the activity in the allowance for loan losses for non-covered loans for the year ended December 31, 2011.

($ in thousands)	Commercial, Financial, and Agricultural			Real Estate – Construction, Land Development, & Other Land Loans			Real Estate – Residential, Farmland, and Multi-family			Real Estate – Home Equity Lines of Credit			Real Estate – Commercial and Other			Consumer			Unallo- cated			Total


Beginning balance	$	4,731			12,520			11,283			3,634			3,972			1,961			174			38,275
Charge-offs		(2,703	)		(16,240	)		(9,045	)		(1,147	)		(3,355	)		(845	)		(524	)		(33,859	)
Recoveries		389			1,142			719			107			37			182			93			2,669
Provisions		1,363			13,884			10,575			(904	)		2,760			574			273			28,525
Ending balance	$	3,780			11,306			13,532			1,690			3,414			1,872			16			35,610

Ending balances: Allowance for loan losses

Individually evaluated for impairment	$	60			607			150			—			200			—			—			1,017

Collectively evaluated for impairment	$	3,720			10,699			13,382			1,690			3,214			1,872			16			34,593

Loans acquired with deteriorated credit quality	$	—			—			—			—			—			—			—			—

Loans receivable:

Ending balance – total	$	172,357			246,805			795,655			207,436			587,183			58,436			—			2,067,872

Ending balances: Loans

Individually evaluated for impairment	$	2,526			34,750			11,880			527			30,846			12			—			80,541

Collectively evaluated for impairment	$	169,831			212,055			783,775			206,909			556,337			58,424			—			1,987,331

Loans acquired with deteriorated credit quality	$	—			920			—			—			—			—			—			920

The following table presents the activity in the allowance for loan losses for non-covered loans for the three and six months ended June 30, 2011.

($ in thousands)	Commercial, Financial, and Agricultural			Real Estate – Construction, Land Development, & Other Land Loans			Real Estate – Residential, Farmland, and Multi- family			Real Estate – Home Equity Lines of Credit			Real Estate – Commercial and Other			Consumer			Unallo- cated			Total

As of and for the three months ended June 30, 2011

Beginning balance	$	4,142			10,203			12,463			3,359			3,359			2,223			24			35,773
Charge-offs		(740	)		(5,589	)		(2,248	)		(141	)		(313	)		(157	)		(121	)		(9,309	)
Recoveries		28			219			61			37			—			20			29			394
Provisions		475			6,957			1,808			(1,406	)		(187	)		(126	)		86			7,607
Ending balance	$	3,905			11,790			12,084			1,849			2,859			1,960			18			34,465

As of and for the six months ended June 30, 2011

Beginning balance	$	4,731			12,520			11,283			3,634			3,972			1,961			174			38,275
Charge-offs		(1,896	)		(9,582	)		(5,596	)		(764	)		(1,380	)		(360	)		(236	)		(19,814	)
Recoveries		36			251			293			43			28			103			73			827
Provisions		1,034			8,601			6,104			(1,064	)		239			256			7			15,177
Ending balance	$	3,905			11,790			12,084			1,849			2,859			1,960			18			34,465

Ending balances as of June 30, 2011: Allowance for loan losses

Individually evaluated for impairment	$	50			1,221			235			—			340			—			—			1,846

Collectively evaluated for impairment	$	3,855			10,569			11,849			1,849			2,519			1,960			18			32,619

Loans acquired with deteriorated credit quality	$	—			—			—			—			—			—			—			—

Loans receivable as of June 30, 2011:

Ending balance – total	$	165,091			267,346			774,448			213,920			558,879			59,732			—			2,039,416

Ending balances as of June 30, 2011: Loans

Individually evaluated for impairment	$	2,049			47,181			7,656			531			34,198			20			—			91,635

Collectively evaluated for impairment	$	163,042			220,165			766,792			213,389			524,681			59,712			—			1,947,781

Loans acquired with deteriorated credit quality	$	—			1,234			—			—			—			—			—			1,234

The following table presents the activity in the allowance for loan losses for covered loans for the three and six months ended June 30, 2012.

($ in thousands)	Covered Loans

As of and for the three months ended June 30, 2012

Beginning balance	$	6,372
Charge-offs		(1,714	)
Recoveries		—
Provisions		1,273
Ending balance	$	5,931

As of and for the six months ended June 30, 2012

Beginning balance	$	5,808
Charge-offs		(4,148	)
Recoveries		—
Provisions		4,271
Ending balance	$	5,931

Ending balances as of June 30, 2012: Allowance for loan losses

Individually evaluated for impairment	$	5,914
Collectively evaluated for impairment		—
Loans acquired with deteriorated credit quality		17

Loans receivable as of June 30, 2012:

Ending balance – total	$	322,895

Ending balances as of June 30, 2012: Loans

Individually evaluated for impairment	$	42,598
Collectively evaluated for impairment		280,297
Loans acquired with deteriorated credit quality		4,819

The following table presents the activity in the allowance for loan losses for covered loans for the year ended December 31, 2011.

($ in thousands)	Covered Loans

As of and for the year ended December 31, 2011
Beginning balance	$	11,155
Charge-offs		(18,123	)
Recoveries		—
Provisions		12,776
Ending balance	$	5,808

Ending balances as of December 31, 2011: Allowance for loan losses

Individually evaluated for impairment	$	5,481
Collectively evaluated for impairment		—
Loans acquired with deteriorated credit quality		327

Loans receivable as of December 31, 2011:

Ending balance – total	$	361,234

Ending balances as of December 31, 2011: Loans

Individually evaluated for impairment	$	44,723
Collectively evaluated for impairment		316,511
Loans acquired with deteriorated credit quality		7,864

The following table presents the activity in the allowance for loan losses for covered loans for the three and six months ended June 30, 2011.

($ in thousands)	Covered Loans

As of and for the three months ended June 30, 2011

Beginning balance	$	7,002
Charge-offs		(4,789	)
Recoveries		—
Provisions		3,327
Ending balance	$	5,540

As of and for the six months ended June 30, 2011

Beginning balance	$	11,155
Charge-offs		(12,715	)
Recoveries		—
Provisions		7,100
Ending balance	$	5,540

Ending balances as of June 30, 2011: Allowance for loan losses

Individually evaluated for impairment	$	5,540
Collectively evaluated for impairment		—
Loans acquired with deteriorated credit quality		—

Loans receivable as of June 30, 2011:

Ending balance – total	$	401,726

Ending balances as of June 30, 2011: Loans

Individually evaluated for impairment	$	37,149
Collectively evaluated for impairment		364,577
Loans acquired with deteriorated credit quality		13,538

The following table presents the Company’s impaired loans as of June 30, 2012.

($ in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment
Non-covered loans with no related allowance recorded:
Commercial, financial, and agricultural:
Commercial - unsecured	$	—		—		—		—
Commercial - secured		69		225		—		144
Secured by inventory and accounts receivable		—		—		—		9

Real estate – construction, land development & other land loans		6,950		11,676		—		8,992

Real estate – residential, farmland, and multi-family		4,242		6,010		—		3,172

Real estate – home equity lines of credit		—		—		—		15

Real estate – commercial		10,974		12,683		—		12,554

Consumer		—		—		—		4
Total non-covered impaired loans with no allowance	$	22,235		30,594		—		24,890

Total covered impaired loans with no allowance	$	40,613		75,350		—		40,357

Total impaired loans with no allowance recorded	$	62,848		105,944		—		65,247

Non-covered loans with an allowance recorded:
Commercial, financial, and agricultural:
Commercial - unsecured	$	211		612		40		231
Commercial - secured		2,158		2,436		315		1,912
Secured by inventory and accounts receivable		637		1,112		143		673

Real estate – construction, land development & other land loans		18,156		22,302		6,093		15,360

Real estate – residential, farmland, and multi-family		23,476		26,658		2,361		24,792

Real estate – home equity lines of credit		3,877		4,493		453		3,300

Real estate – commercial		21,089		24,102		1,309		12,776

Consumer		2,763		2,801		337		2,789
Total non-covered impaired loans with allowance	$	72,367		84,516		11,051		61,833

Total covered impaired loans with allowance	$	17,516		19,421		5,158		16,092

Total impaired loans with an allowance recorded	$	89,883		103,937		16,209		77,925

Interest income recorded on non-covered and covered impaired loans during the six months ended June 30, 2012 is considered insignificant.

The related allowance listed above includes both reserves on loans specifically reviewed for impairment and general reserves on impaired loans that were not specifically reviewed for impairment.

The following table presents the Company’s impaired loans as of December 31, 2011.

($ in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment
Non-covered loans with no related allowance recorded:
Commercial, financial, and agricultural:
Commercial - unsecured	$	—		—		—		—
Commercial - secured		295		478		—		504
Secured by inventory and accounts receivable		27		493		—		124

Real estate – construction, land development & other land loans		15,105		20,941		—		17,876

Real estate – residential, farmland, and multi-family		3,442		4,741		—		5,278

Real estate – home equity lines of credit		46		300		—		79

Real estate – commercial		16,794		18,817		—		13,359

Consumer		12		39		—		15
Total non-covered impaired loans with no allowance	$	35,721		45,809		—		37,235

Total covered impaired loans with no allowance	$	43,702		78,578		—		49,030

Total impaired loans with no allowance recorded	$	79,423		124,387		—		86,265

Non-covered loans with an allowance recorded:
Commercial, financial, and agricultural:
Commercial - unsecured	$	452		454		59		226
Commercial - secured		1,895		1,899		295		1,427
Secured by inventory and accounts receivable		561		571		156		391

Real estate – construction, land development & other land loans		10,360		12,606		2,244		15,782

Real estate – residential, farmland, and multi-family		24,460		26,153		2,169		22,487

Real estate – home equity lines of credit		3,115		3,141		117		2,544

Real estate – commercial		5,965		6,421		283		6,602

Consumer		2,757		2,759		481		2,329
Total non-covered impaired loans with allowance	$	49,565		54,004		5,804		51,788

Total covered impaired loans with allowance	$	11,988		15,670		5,106		14,259

Total impaired loans with an allowance recorded	$	61,553		69,674		10,910		66,047

Interest income recorded on non-covered and covered impaired loans during the year ended December 31, 2011 is considered insignificant.

The related allowance listed above includes both reserves on loans specifically reviewed for impairment and general reserves on impaired loans that were not specifically reviewed for impairment.

The Company tracks credit quality based on its internal risk ratings. Upon origination a loan is assigned an initial risk grade, which is generally based on several factors such as the borrower’s credit score, the loan-to-value ratio, the debt-to-income ratio, etc. Loans that are risk-graded as substandard during the origination process are declined. After loans are initially graded, they are monitored monthly for credit quality based on many factors, such as payment history, the borrower’s financial status, and changes in collateral value. Loans can be downgraded or upgraded depending on management’s evaluation of these factors. Internal risk-grading policies are consistent throughout each loan type.

The following describes the Company’s internal risk grades in ascending order of likelihood of loss:

	Numerical Risk Grade	Description
Pass:
	1	Cash secured loans.
	2	Non-cash secured loans that have no minor or major exceptions to the lending guidelines.
	3	Non-cash secured loans that have no major exceptions to the lending guidelines.
Weak Pass:
	4	Non-cash secured loans that have minor or major exceptions to the lending guidelines, but the exceptions are properly mitigated.
Watch or Standard:
	9	Loans that meet the guidelines for a Risk Graded 5 loan, except the collateral coverage is sufficient to satisfy the debt with no risk of loss under reasonable circumstances. This category also includes all loans to insiders and any other loan that management elects to monitor on the watch list.
Special Mention:
	5	Existing loans with major exceptions that cannot be mitigated.
Classified:
	6	Loans that have a well-defined weakness that may jeopardize the liquidation of the debt if deficiencies are not corrected.
	7	Loans that have a well-defined weakness that make the collection or liquidation improbable.
	8	Loans that are considered uncollectible and are in the process of being charged-off.

The following table presents the Company’s recorded investment in loans by credit quality indicators as of June 30, 2012.

($ in thousands)	Credit Quality Indicator (Grouped by Internally Assigned Grade)
	Pass (Grades 1, 2, & 3)		Weak Pass (Grade 4)		Watch or Standard Loans (Grade 9)		Special Mention Loans (Grade 5)		Classified Loans (Grades 6, 7, & 8)		Nonaccrual Loans		Total
Non-covered loans:
Commercial, financial, and agricultural:
Commercial - unsecured	$	11,933		25,351		12		323		513		211		38,343
Commercial - secured		34,861		69,630		1,705		2,481		2,460		2,227		113,364
Secured by inventory and accounts receivable		3,688		16,539		265		695		145		637		21,969

Real estate – construction, land development & other land loans		32,230		161,242		5,304		11,971		14,195		19,781		244,723

Real estate – residential, farmland, and multi-family		250,715		476,852		9,105		17,883		31,405		24,146		810,106

Real estate – home equity lines of credit		131,210		66,044		2,521		2,338		1,695		3,878		207,686

Real estate - commercial		135,080		417,454		27,537		13,025		9,135		20,277		622,508

Consumer		28,153		22,676		86		514		641		2,761		54,831
Total	$	627,870		1,255,788		46,535		49,230		60,189		73,918		2,113,530
Unamortized net deferred loan costs														1,376
Total non-covered loans													$	2,114,906

Total covered loans	$	51,912		137,930		—		8,459		85,519		39,075		322,895

Total loans	$	679,782		1,393,718		46,535		57,689		145,708		112,993		2,437,801

At June 30, 2012, there was an insignificant amount of non-covered loans that were graded “8” with an accruing status. At June 30, 2012, there were no covered loans that were graded “8” with an accruing status.

The following table presents the Company’s recorded investment in loans by credit quality indicators as of December 31, 2011.

($ in thousands)	Credit Quality Indicator (Grouped by Internally Assigned Grade)
	Pass (Grades 1, 2, & 3)		Weak Pass (Grade 4)		Watch or Standard Loans (Grade 9)		Special Mention Loans (Grade 5)		Classified Loans (Grades 6, 7, & 8)		Nonaccrual Loans		Total
Non-covered loans:
Commercial, financial, and agricultural:
Commercial - unsecured	$	13,516		23,735		13		217		845		452		38,778
Commercial - secured		36,587		66,105		1,912		2,196		2,761		2,190		111,751
Secured by inventory and accounts receivable		3,756		16,197		282		756		249		588		21,828

Real estate – construction, land development & other land loans		37,596		156,651		6,490		9,903		13,393		22,772		246,805

Real estate – residential, farmland, and multi-family		257,163		456,188		10,248		17,687		28,939		25,430		795,655

Real estate – home equity lines of credit		130,913		67,606		2,422		1,868		1,466		3,161		207,436

Real estate - commercial		140,577		372,614		30,722		11,502		15,565		16,203		587,183

Consumer		30,693		23,550		67		368		988		2,770		58,436
Total	$	650,801		1,182,646		52,156		44,497		64,206		73,566		2,067,872
Unamortized net deferred loan costs														1,280
Total non-covered loans													$	2,069,152

Total covered loans	$	62,052		161,508		—		8,033		88,169		41,472		361,234

Total loans	$	712,853		1,344,154		52,156		52,530		152,375		115,038		2,430,386

At December 31, 2011, there was an insignificant amount of non-covered loans that were graded “8” with an accruing status. At December 31, 2011, there were no covered loans that were graded “8” with an accruing status.

Troubled Debt Restructurings

The restructuring of a loan is considered a “troubled debt restructuring” if both (i) the borrower is experiencing financial difficulties and (ii) the creditor has granted a concession. Concessions may include interest rate reductions or below market interest rates, principal forgiveness, restructuring amortization schedules and other actions intended to minimize potential losses.

The vast majority of the Company’s troubled debt restructurings modified during the period ended June 30, 2012 related to interest rate reductions combined with restructured amortization schedules. The Company does not grant principal forgiveness.

All loans classified as troubled debt restructurings are considered to be impaired and are evaluated as such for determination of the allowance for loan losses. The Company’s troubled debt restructurings can be classified as either nonaccrual or accruing based on the loan’s payment status. The troubled debt restructurings that are nonaccrual are reported within the nonaccrual loan totals presented previously.

The following table presents information related to loans modified in a troubled debt restructuring during the three and six months ended June 30, 2012.

($ in thousands)	For the three months ended June 30, 2012				For the six months ended June 30, 2012
	Number of Contracts		Restructured Balances		Number of Contracts		Restructured Balances
Non-covered TDRs – Accruing
Real estate – construction, land development & other land loans		1	$	300		1	$	300
Real estate – residential, farmland, and multi-family		1		303		1		303

Non-covered TDRs - Nonaccrual
Real estate – construction, land development & other land loans		1		238		1		238

Total non-covered TDRs arising during period		3	$	841		3	$	841

Total covered TDRs arising during period– Accruing		3	$	5,428		6	$	7,342
Total covered TDRs arising during period – Nonaccrual		—		—		—		—

Total TDRs arising during period		6	$	6,269		9	$	8,183

Accruing restructured loans that defaulted during the three and six months ended June 30, 2012 are presented in the table below. The Company considers a loan to have defaulted when it becomes 90 or more days delinquent under the modified terms, has been transferred to nonaccrual status, or has been transferred to other real estate owned.

($ in thousands)	For the three months ended June 30, 2012				For the six months ended June 30, 2012
	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment
Non-covered accruing TDRs that subsequently defaulted
Real estate – construction, land development & other land loans		—	$	—		2	$	664
Real estate – residential, farmland, and multi-family		1		341		1		341
Real estate - commercial		1		180		1		180

Total non-covered TDRs that subsequently defaulted		2	$	521		4	$	1,185

Total accruing covered TDRs that subsequently defaulted		3	$	716		14	$	3,427

Total accruing TDRs that subsequently defaulted		5	$	1,237		18	$	4,612