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Loans and Asset Quality Information

9 Months Ended

Sep. 30, 2012

Loans and Asset Quality Information Part I

Note 8 – 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)	September 30, 2012					December 31, 2011					September 30, 2011
	Amount		Percentage			Amount		Percentage			Amount		Percentage
All loans (non-covered and covered):

Commercial, financial, and agricultural	$	161,846		7	%		162,099		7	%		161,300		7	%
Real estate – construction, land development & other land loans		329,375		13	%		363,079		15	%		370,735		15	%
Real estate – mortgage – residential (1-4 family) first mortgages		823,069		34	%		805,542		33	%		803,688		33	%
Real estate – mortgage – home equity loans / lines of credit		243,556		10	%		256,509		11	%		258,653		11	%
Real estate – mortgage – commercial and other		807,914		33	%		762,895		31	%		756,568		31	%
Installment loans to individuals		73,833		3	%		78,982		3	%		80,309		3	%
Subtotal		2,439,593		100	%		2,429,106		100	%		2,431,253		100	%
Unamortized net deferred loan costs		1,478					1,280					1,295
Total loans	$	2,441,071					2,430,386					2,432,548

As of September 30, 2012, December 31, 2011 and September 30, 2011, net loans include unamortized premiums of $601,000, $949,000, and $1,065,000, respectively, related to acquired loans.

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

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

Commercial, financial, and agricultural	$	154,956		7	%		152,627		8	%		150,252		7	%
Real estate – construction, land development & other land loans		273,985		13	%		290,983		14	%		298,650		14	%
Real estate – mortgage – residential (1-4 family) first mortgages		681,168		32	%		646,616		31	%		637,129		31	%
Real estate – mortgage – home equity loans / lines of credit		223,154		10	%		233,171		11	%		236,578		12	%
Real estate – mortgage – commercial and other		729,310		34	%		666,882		32	%		656,035		32	%
Installment loans to individuals		73,023		4	%		77,593		4	%		78,785		4	%
Subtotal		2,135,596		100	%		2,067,872		100	%		2,057,429		100	%
Unamortized net deferred loan costs		1,478					1,280					1,295
Total non-covered loans	$	2,137,074					2,069,152					2,058,724

The carrying amount of the covered loans at September 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	$	71		148		6,819		8,671		6,890		8,819
Real estate – construction, land development & other land loans		1,577		2,601		53,813		94,481		55,390		97,082
Real estate – mortgage – residential (1-4 family) first mortgages		815		1,908		141,086		168,840		141,901		170,748
Real estate – mortgage – home equity loans / lines of credit		15		308		20,387		25,999		20,402		26,307
Real estate – mortgage – commercial and other		2,265		4,128		76,339		103,399		78,604		107,527
Installment loans to individuals		2		3		808		881		810		884
Total	$	4,745		9,096		299,252		402,271		303,997		411,367

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		(42,651	)
Transfers to foreclosed real estate		(15,106	)
Loan charge-offs		(6,816	)
Accretion of loan discount		10,455
Carrying amount of nonimpaired covered loans at September 30, 2012	$	299,252

As reflected in the table above, the Company accreted $10,455,000 of the loan discount on purchased nonimpaired loans into interest income during the first nine months of 2012. As of September 30, 2012, there was remaining loan discount of $62,805,000 related to purchased performing 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. At September 30, 2012, the Company also had $23,070,000 of loan discount related to purchased nonperforming loans. It is not expected that this amount will be accreted. An additional $21,495,000 in partial charge-offs have been recorded on purchased loans outstanding at September 30, 2012.

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		(330	)		(23	)		(307	)
Transfer to foreclosed real estate		(7,636	)		(3,487	)		(4,149	)
Change due to loan charge-off		(109	)		(109	)		—
Other		(1,145	)		(1,562	)		417
Balance at September 30, 2012	$	9,096			4,351			4,745

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. For the nine months ended September 30, 2012 and 2011, the Company received $0 and $717,000 in payments that exceeded the initial carrying amount of the purchased impaired loans, which is included in the loan discount accretion amount discussed previously.

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

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

Non-covered nonperforming assets
Nonaccrual loans	$	69,413		73,566		75,013
Restructured loans - accruing		38,522		11,720		11,257
Accruing loans > 90 days past due		—		—		—
Total non-covered nonperforming loans		107,935		85,286		86,270
Foreclosed real estate		38,065		37,023		32,673
Total non-covered nonperforming assets	$	146,000		122,309		118,943

Covered nonperforming assets
Nonaccrual loans (1)	$	37,619		41,472		36,536
Restructured loans - accruing		17,945		14,218		16,912
Accruing loans > 90 days past due		—		—		—
Total covered nonperforming loans		55,564		55,690		53,448
Foreclosed real estate		58,367		85,272		104,785
Total covered nonperforming assets	$	113,931		140,962		158,233

Total nonperforming assets	$	259,931		263,271		277,176

(1) At September 30, 2012, December 31, 2011, and September 30, 2011, the contractual balance of the nonaccrual loans covered by FDIC loss share agreements was $67.9 million, $69.0 million, and $65.0 million, respectively.

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

($ in thousands)	As of /for the nine months ended September 30, 2012		As of /for the year ended December 31, 2011		As of /for the nine months ended September 30, 2011
Impaired loans at period end
Non-covered	$	107,935		85,286		86,270
Covered		55,564		55,690		53,448
Total impaired loans at period end	$	163,499		140,976		139,718

Average amount of impaired loans for period
Non-covered	$	92,027		89,023		89,957
Covered		56,228		63,289		65,189
Average amount of impaired loans for period – total	$	148,255		152,312		155,146

Allowance for loan losses related to impaired loans at period end
Non-covered	$	9,410		5,804		5,429
Covered		4,074		5,106		2,287
Allowance for loan losses related to impaired loans - total	$	13,484		10,910		7,716

Amount of impaired loans with no related allowance at period end
Non-covered	$	34,150		35,721		35,897
Covered		40,595		43,702		43,918
Total impaired loans with no related allowance at period end	$	74,745		79,423		79,815

Loans and Asset Quality Information Part II

Note 8 – Loans and Asset Quality Information

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 September 30, 2012.

($ in thousands)	Non-covered		Covered		Total
Commercial, financial, and agricultural:
Commercial – unsecured	$	104		189		293
Commercial – secured		3,386		3		3,389
Secured by inventory and accounts receivable		701		31		732

Real estate – construction, land development & other land loans		16,858		18,032		34,890

Real estate – residential, farmland and multi-family		21,980		9,013		30,993

Real estate – home equity lines of credit		3,211		726		3,937

Real estate – commercial		20,354		9,556		29,910

Consumer		2,819		69		2,888
Total	$	69,413		37,619		107,032

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 September 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	$	289		61		104		36,379		36,833
Commercial - secured		930		336		3,386		108,956		113,608
Secured by inventory and accounts receivable		32		—		701		20,542		21,275

Real estate – construction, land development & other land loans		2,021		1,690		16,858		216,391		236,960

Real estate – residential, farmland, and multi-family		8,532		2,997		21,980		793,444		826,953

Real estate – home equity lines of credit		1,337		315		3,211		198,291		203,154

Real estate - commercial		3,925		756		20,354		615,543		640,578

Consumer		538		238		2,819		52,640		56,235
Total non-covered	$	17,604		6,393		69,413		2,042,186		2,135,596
Unamortized net deferred loan costs										1,478
Total non-covered loans									$	2,137,074

Covered loans	$	5,118		2,583		37,619		258,677		303,997

Total loans	$	22,722		8,976		107,032		2,300,863		2,441,071

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

Beginning balance	$	5,061			17,819			14,959			2,146			5,719			1,791			28		47,523
Charge-offs		(571	)		(4,628	)		(1,399	)		(1,098	)		(1,247	)		(307	)		—		(9,250	)
Recoveries		219			487			92			10			21			82			—		911
Provisions		468			1,109			1,731			825			1,354			315			168		5,970
Ending balance	$	5,177			14,787			15,383			1,883			5,847			1,881			196		45,154

As of and for the nine months ended September 30, 2012

Beginning balance	$	3,780			11,306			13,532			1,690			3,414			1,872			16		35,610
Charge-offs		(2,633	)		(7,480	)		(5,635	)		(1,830	)		(3,417	)		(993	)		—		(21,988	)
Recoveries		253			801			346			129			68			214			—		1,811
Provisions		3,777			10,160			7,140			1,894			5,782			788			180		29,721
Ending balance	$	5,177			14,787			15,383			1,883			5,847			1,881			196		45,154

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

Individually evaluated for impairment	$	871			109			369			—			1,276			—			—		2,625

Collectively evaluated for impairment	$	4,306			14,678			15,014			1,883			4,571			1,881			196		42,529

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

Loans receivable as of September 30, 2012:

Ending balance – total	$	171,716			236,960			826,953			203,154			640,578			56,235			—		2,135,596

Ending balances as of September 30, 2012: Loans

Individually evaluated for impairment	$	951			14,187			5,546			275			29,091			—			—		50,050

Collectively evaluated for impairment	$	170,765			222,773			821,407			202,879			611,487			56,235			—		2,085,546

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 nine months ended September 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 September 30, 2011

Beginning balance	$	3,905			11,790			12,084			1,849			2,859			1,960			18			34,465
Charge-offs		(102	)		(3,937	)		(1,349	)		(189	)		(1,149	)		(173	)		(179	)		(7,078	)
Recoveries		15			220			286			10			5			9			24			569
Provisions		161			3,215			1,456			97			1,303			78			131			6,441
Ending balance	$	3,979			11,288			12,477			1,767			3,018			1,874			(6	)		34,397

As of and for the nine months ended September 30, 2011

Beginning balance	$	4,731			12,520			11,283			3,634			3,972			1,961			174			38,275
Charge-offs		(1,998	)		(13,519	)		(6,945	)		(953	)		(2,529	)		(533	)		(415	)		(26,892	)
Recoveries		51			471			579			53			33			112			97			1,396
Provisions		1,195			11,816			7,560			(967	)		1,542			334			138			21,618
Ending balance	$	3,979			11,288			12,477			1,767			3,018			1,874			(6	)		34,397

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

Individually evaluated for impairment	$	145			655			49			—			25			—			—			874

Collectively evaluated for impairment	$	3,834			10,633			12,428			1,767			2,993			1,874			(6	)		33,523

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

Loans receivable as of September 30, 2011:

Ending balance – total	$	169,545			254,361			785,412			211,999			576,459			59,653			—			2,057,429

Ending balances as of September 30, 2011: Loans

Individually evaluated for impairment	$	2,377			39,651			12,940			528			30,833			17			—			86,346

Collectively evaluated for impairment	$	167,168			214,710			772,472			211,471			545,626			59,636			—			1,971,083

Loans acquired with deteriorated credit quality	$	—			922			—			—			—			—			—			922

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

($ in thousands)	Covered Loans

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

Beginning balance	$	5,931
Charge-offs		(2,640	)
Recoveries		—
Provisions		1,103
Ending balance	$	4,394

As of and for the nine months ended September 30, 2012

Beginning balance	$	5,808
Charge-offs		(6,788	)
Recoveries		—
Provisions		5,374
Ending balance	$	4,394

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

Individually evaluated for impairment	$	4,394
Collectively evaluated for impairment		—
Loans acquired with deteriorated credit quality		17

Loans receivable as of September 30, 2012:

Ending balance – total	$	303,997

Ending balances as of September 30, 2012: Loans

Individually evaluated for impairment	$	57,607
Collectively evaluated for impairment		246,390
Loans acquired with deteriorated credit quality		4,745

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	$	5,808
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 nine months ended September 30, 2011.

($ in thousands)	Covered Loans

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

Beginning balance	$	5,540
Charge-offs		(4,988	)
Recoveries		—
Provisions		2,705
Ending balance	$	3,257

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

Beginning balance	$	11,155
Charge-offs		(17,703	)
Recoveries		—
Provisions		9,805
Ending balance	$	3,257

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

Individually evaluated for impairment	$	3,257
Collectively evaluated for impairment		—
Loans acquired with deteriorated credit quality		—

Loans receivable as of September 30, 2011:

Ending balance – total	$	373,824

Ending balances as of September 30, 2011: Loans

Individually evaluated for impairment	$	33,163
Collectively evaluated for impairment		340,661
Loans acquired with deteriorated credit quality		9,037

The following table presents the Company’s impaired loans as of September 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		—		—		—		108
Secured by inventory and accounts receivable		—		—		—		7

Real estate – construction, land development & other land loans		11,748		16,202		—		9,681

Real estate – residential, farmland, and multi-family		2,346		2,787		—		2,966

Real estate – home equity lines of credit		274		581		—		80

Real estate – commercial		19,782		21,594		—		14,361

Consumer		—		—		—		3
Total non-covered impaired loans with no allowance	$	34,150		41,164		—		27,206

Total covered impaired loans with no allowance	$	40,595		79,150		—		40,417

Total impaired loans with no allowance recorded	$	74,745		120,314		—		67,623

Non-covered loans with an allowance recorded:
Commercial, financial, and agricultural:
Commercial - unsecured	$	103		444		43		199
Commercial - secured		3,386		4,000		980		2,281
Secured by inventory and accounts receivable		701		788		153		680

Real estate – construction, land development & other land loans		10,983		14,508		3,006		14,266

Real estate – residential, farmland, and multi-family		37,696		41,507		3,202		28,018

Real estate – home equity lines of credit		2,960		4,085		155		3,215

Real estate – commercial		15,136		17,543		1,560		13,365

Consumer		2,820		2,859		311		2,797
Total non-covered impaired loans with allowance	$	73,785		85,734		9,410		64,821

Total covered impaired loans with allowance	$	14,969		18,671		4,074		15,811

Total impaired loans with an allowance recorded	$	88,754		104,405		13,484		80,632

Interest income recorded on non-covered and covered impaired loans during the nine months ended September 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 September 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	$	10,081		25,473		10		539		626		104		36,833
Commercial - secured		33,284		69,884		1,792		3,943		1,319		3,386		113,608
Secured by inventory and accounts receivable		3,457		15,974		257		767		119		701		21,275

Real estate – construction, land development & other land loans		31,087		162,999		3,891		13,628		8,497		16,858		236,960

Real estate – residential, farmland, and multi-family		246,143		487,571		7,891		29,967		33,401		21,980		826,953

Real estate – home equity lines of credit		126,885		65,701		2,487		2,895		1,975		3,211		203,154

Real estate - commercial		128,567		438,254		28,453		16,365		8,585		20,354		640,578

Consumer		28,553		23,208		78		928		649		2,819		56,235
Total	$	608,057		1,289,064		44,859		69,032		55,171		69,413		2,135,596
Unamortized net deferred loan costs														1,478
Total non-covered loans													$	2,137,074

Total covered loans	$	48,087		130,986		—		8,580		78,725		37,619		303,997

Total loans	$	656,144		1,420,050		44,859		77,612		133,896		107,032		2,441,071

At September 30, 2012, there was an insignificant amount of covered and non-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 September 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 nine months ended September 30, 2012.

($ in thousands)	For the three months ended September 30, 2012				For the nine months ended September 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
Real estate – residential, farmland, and multi-family		6		1,204		7		1,507

Non-covered TDRs - Nonaccrual
Real estate – construction, land development & other land loans		—		—		1		238
Real estate – residential, farmland, and multi-family		5		705		5		705
Real estate – commercial		2		370		2		370

Total non-covered TDRs arising during period		13	$	2,279		16	$	3,120

Total covered TDRs arising during period– Accruing		—	$	—		6	$	7,342
Total covered TDRs arising during period – Nonaccrual		1		1		1		1

Total TDRs arising during period		14	$	2,280		23	$	10,463

Accruing restructured loans that defaulted during the three and nine months ended September 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 foreclosed real estate. As part of a routine regulatory exam that concluded in the third quarter of 2012, the Company reclassified approximately $12 million of performing loans to TDR status in the second quarter of 2012 and another $18 million in the third quarter of 2012. Because these loans were restructured prior to January 1, 2012, they are not included in the above table.

($ in thousands)	For the three months ended September 30, 2012				For the nine months ended September 30, 2012
	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment
Non-covered accruing TDRs that subsequently defaulted
Commercial, financial, and agricultural:
Commercial- secured		6	$	601		6	$	601
Real estate – construction, land development & other land loans		2		253		4		917
Real estate – residential, farmland, and multi-family		2		168		3		509
Real estate - commercial		6		2,899		7		3,079
Consumer		1		2		1		2

Total non-covered TDRs that subsequently defaulted		17	$	3,923		21	$	5,108

Total accruing covered TDRs that subsequently defaulted		7	$	407		21	$	3,834

Total accruing TDRs that subsequently defaulted		24	$	4,330		42	$	8,942