LOANS AND ALLOWANCE

9 Months Ended

Sep. 30, 2011

LOANS AND ALLOWANCE

LOANS AND ALLOWANCE

NOTE 4 - LOANS AND ALLOWANCE

Loans were as follows:

	September 30, 2011			December 31, 2010
Commercial
Commercial and industrial	$	116,190		$	138,291
Agricultural	16,194			27,178
Commercial Real Estate
Farm	45,441			48,307
Hotel	147,384			152,416
Construction and development	31,863			59,319
Other	561,922			589,192
Residential
1-4 family	368,896			380,987
Home equity	213,821			213,607
Consumer
Direct	53,455			59,139
Indirect	7,126			12,535
Total loans	1,562,292			1,680,971
Allowance for loan losses	(41,433		)	(42,605		)
Net loans	$	1,520,859		$	1,638,366

Activity in the allowance for loan losses was as follows:

	September 30,
	2011			2010
Allowance for loan losses
Balances, January 1	$	42,605		$	46,648
Provision for losses	14,600			29,250
Recoveries on loans	2,446			1,904
Loans charged off	(18,218		)	(35,342		)
Balances, September 30	$	41,433		$	42,460

Activity in the allowance for loan losses for the nine months ended September 30, 2011 and the recorded investment of loans and allowances by portfolio segment and impairment method as of September 30, 2011 were as follows:

	Commercial			Commercial Real Estate			Residential			Consumer			Total
Allowance for loan loss
Balance, January 1, 2011	$	6,386		$	32,653		$	2,281		$	1,285		$	42,605
Provision charged to expense	1,151			10,162			2,383			904			14,600
Losses charged off	(1,834		)	(12,283		)	(2,308		)	(1,793		)	(18,218		)
Recoveries	210			943			420			873			2,446
Balance, September 30, 2011	$	5,913		$	31,475		$	2,776		$	1,269		$	41,433
Ending Balance individually evaluated for impairment	$	1,337		$	7,793		$	—		$	—		$	9,130
Ending Balance collectively evaluated for impairment	4,576			23,682			2,776			1,269			32,303
Total ending allowance balance	$	5,913		$	31,475		$	2,776		$	1,269		$	41,433
Loans
Ending Balance individually evaluated for impairment	$	5,444		$	44,718		$	12,938		$	1,138		$	64,238
Ending Balance collectively evaluated for impairment	126,940			741,892			569,779			59,443			1,498,054
Total ending loan balance excludes $5,906 of accrued interest	$	132,384		$	786,610		$	582,717		$	60,581		$	1,562,292

Activity in the allowance for loan losses by portfolio segment for the three months ended September 30, 2011 and in total for the three month period ended September 30, 2010 was as follows:

	September 30, 2011
	Commercial			Commercial Real Estate			Residential			Consumer			Total			September 30, 2010
Allowance for loan loss
Balance, July 1	$	5,789		$	31,851		$	2,588		$	1,234		$	41,462		$	41,436
Provision charged to expense	1,410			2,346			730			514			5,000			7,000
Losses charged off	(1,291		)	(3,017		)	(598		)	(755		)	(5,661		)	(6,709		)
Recoveries	5			295			56			276			632			733
Balance, September 30	$	5,913		$	31,475		$	2,776		$	1,269		$	41,433		$	42,460

The balance of recorded investment of loans and allowance for loan losses by portfolio segment and impairment method as of December 31, 2010 were as follows:

Balance, December 31, 2010	Commercial		Commercial Real Estate		Residential		Consumer		Total
Ending Balance individually evaluated for impairment	$	1,753	$	8,571	$	—	$	—	$	10,324
Ending Balance collectively evaluated for impairment	4,633		24,082		2,281		1,285		32,281
Total ending allowance balance	$	6,386	$	32,653	$	2,281	$	1,285	$	42,605
Loans
Ending Balance individually evaluated for impairment	$	8,223	$	64,048	$	16,801	$	1,504	$	90,576
Ending Balance collectively evaluated for impairment	157,246		785,186		577,793		70,170		1,590,395
Total ending loan balance excludes $6,779 of accrued interest	$	165,469	$	849,234	$	594,594	$	71,674	$	1,680,971

The following table presents loans individually evaluated for impairment by class of loans as of September 30, 2011:

	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With an allowance recorded
Commercial
Commercial and industrial	$	3,267	$	3,170	$	1,337
Agricultural
Commercial Real Estate
Farm	487		486		131
Hotel	5,410		5,410		62
Construction and development	4,892		4,773		2,164
Other	17,843		16,930		5,436
Total	$	31,899	$	30,769	$	9,130
With no related allowance recorded
Commercial
Commercial and industrial	$	2,847	$	2,192	$	—
Agricultural	375		82
Commercial Real Estate
Farm	701		659
Hotel	876		384
Construction and development	3,983		2,913
Other	16,410		13,163
Residential
1-4 Family	11,095		10,872
Home Equity	2,125		2,066
Consumer
Direct	1,088		1,076
Indirect	65		62
Total	$	39,565	$	33,469	$	—

The following table presents the average balance of impaired loans by class for the three and nine month period ended September 30, 2011and interest income recognized on impaired loans and cash basis interest for the nine month period ended September 30, 2011

	Three Month Average Balance		Nine Month Average Balance		Interest Income Recognized / Cash Basic Interest
Commercial
Commercial and industrial	$	5,809	$	6,775	$	19
Agricultural	101		115
Commercial Real Estate
Farm	1,072		1,133
Hotel	5,810		7,647
Construction and development	7,345		10,004		1
Other	28,342		29,570		49
Residential
1-4 Family	10,286		11,771		5
Home Equity	1,929		1,848		7
Consumer
Direct	1,135		1,158		3
Indirect	58		64		5
Total	$	61,887	$	70,085	$	89
The amounts at September 30, 2010 were as follows:	$	96,635	$	96,013	$	78

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2010:

	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With an allowance recorded
Commercial
Commercial and industrial	$	4,935	$	4,902	$	1,753
Agricultural
Commercial Real Estate
Farm	461		465		71
Hotel	13,178		12,603		1,151
Construction and development	41,924		17,613		3,110
Other	22,580		20,458		4,239
Total	$	83,078	$	56,041	$	10,324
With no related allowance recorded
Commercial
Commercial and industrial	$	3,966	$	3,191	$	—
Agricultural	422		130
Commercial Real Estate
Farm	766		735
Hotel	59		60
Construction and development	1,677		1,390
Other	14,120		10,724
Residential
1-4 Family	15,171		14,889
Home Equity	2,000		1,912
Consumer
Direct	1,431		1,430
Indirect	78		74
Total	$	39,690	$	34,535	$	—

The following table presents the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of September 30, 2011 and December 31, 2010

	September 30, 2011				December 31, 2010
	Non-accrual		Past due over 90 days and still accruing		Non-accrual		Past due over 90 days and still accruing
Commercial
Commercial and industrial	$	2,532	$	298	$	4,587	$	—
Agricultural	82				130
Commercial Real Estate
Farm	1,145				736
Hotel	384				6,533
Construction and development	3,549				19,004
Other	22,825		657		24,531		41
Residential
1-4 Family	9,679				10,682		849
Home Equity	1,794		38		1,688		85
Consumer
Direct	236				261		14
Indirect	62				74
Total	$	42,288	$	993	$	68,226	$	989

The following table presents the aging of the recorded investment in past due loans as of September 30, 2011 by class of loans:

	Total Loans		30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Loans Not Past Due
Commercial
Commercial and industrial	$	116,190	$	2,848	$	379	$	2,086	$	5,313	$	110,877
Agricultural	16,194						82		82		16,112
Commercial Real Estate
Farm	45,441		139		25		927		1,091		44,350
Hotel	147,384						384		384		147,000
Construction and development	31,863		409		3,779		2,990		7,178		24,685
Other	561,922		6,085		2,672		16,389		25,146		536,776
Residential
1-4 Family	368,896		1,764		1,936		5,893		9,593		359,303
Home Equity	213,821		457		393		1,338		2,188		211,633
Consumer
Direct	53,455		201		34		49		284		53,171
Indirect	7,126		92		18		27		137		6,989
Total — excludes $5,906 of accrued interest	$	1,562,292	$	11,995	$	9,236	$	30,165	$	51,396	$	1,510,896

The following table presents the aging of the recorded investment in past due loans as of December 31, 2010 by class of loans:

	Total Loans		30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Loans Not Past Due
Commercial
Commercial and industrial	$	138,291	$	1,202	$	233	$	3,151	$	4,586	$	133,705
Agricultural	27,178						130		130		27,048
Commercial Real Estate
Farm	48,307						528		528		47,779
Hotel	152,416						512		512		151,904
Construction and development	59,319				728		18,276		19,004		40,315
Other	589,192		4,237		2,678		17,646		24,561		564,631
Residential
1-4 Family	380,987		7,101		2,633		8,013		17,747		363,240
Home Equity	213,607		642		261		1,375		2,278		211,329
Consumer
Direct	59,139		508		153		138		799		58,340
Indirect	12,535		114		6		36		156		12,379
Total — excludes $6,779 of accrued interest	$	1,680,971	$	13,804	$	6,692	$	49,805	$	70,301	$	1,610,670

Troubled Debt Restructurings

During the period ending September 30, 2011, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan or an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk.

Modifications involving a reduction of the stated interest rate of the loan were for periods ranging from 60 months to 30 years. Modifications involving an extension of the maturity date were for periods ranging from 6 months to 14 months.

The following table presents loans by class modified as troubled debt restructurings that occurred during the three month period ending September 30, 2011:

		Pre-Modification		Post-Modification
		Outstanding Recorded		Outstanding Recorded
	Number of Loans	Investment		Investment
Commercial
Commercial and industrial	1	$	181	$	181
Commercial Real Estate
Construction and development	2	3,779		3,779
Other	4	1,862		1,862
Residential
1-4 Family	2	217		217
Home Equity	16	308		308
Total	25	$	6,347	$	6,347

The following table presents loans by class modified as troubled debt restructurings that occurred during the nine month period ending September 30, 2011:

		Pre-Modification		Post-Modification
		Outstanding Recorded		Outstanding Recorded
	Number of Loans	Investment		Investment
Commercial
Commercial and industrial	2	$	213	$	213
Commercial Real Estate
Construction and development	3	4,287		4,287
Hotel	1	5,833		5,410
Other	16	4,325		3,701
Residential
1-4 Family	6	406		406
Home Equity	39	693		693
Consumer
Direct	7	53		53
Total	74	$	15,810	$	14,763

The troubled debt restructurings described above increased the allowance for loan losses by $20 for both the three and nine month periods ending September 30, 2011 and resulted in charge offs of $40 during the three month period and $463 during the nine month period ending September 30, 2011.

The following table presents loans by class modified as troubled debt restructurings for which there was a payment default within twelve months following the modification during the three month period ending September 30, 2011:

Troubled Debt Restructurings
That Subsequently Defaulted:	Number of Loans	Recorded Investment
Residential
1-4 Family	2	$	125
Total	2	$	125

The following table presents loans by class modified as troubled debt restructurings for which there was a payment default within twelve months following the modification during the nine month period ending September 30, 2011:

Troubled Debt Restructurings
That Subsequently Defaulted:	Number of Loans	Recorded Investment
Commercial
Commercial and industrial	3	$	597
Commercial real estate:
Farm	2	532
Other	7	910
Residential
1-4 Family	4	311
Home Equity	3	33
Total	19	$	2,383

A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms.

In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the company’s internal underwriting policy.

At September 30, 2011, the Company had $21,950 of troubled debt restructurings compared to $22,250 at December 31, 2010.  The Company has allocated $4,549 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of September 30, 2011. The Company has committed to lend additional amounts totaling $0 to customers with outstanding loans that are classified as troubled debt restructurings.  At December 31, 2010, the comparable numbers were $2,599 of specific reserves and $517 of commitments.

The terms of certain other loans were modified during the nine month period ending September 30, 2011 that did not meet the definition of a troubled debt restructuring. These loans have a total recorded investment as of September 30, 2011 of $5,429. The modification of these loans involved either a modification of the terms of a loan to borrowers who were not experiencing financial difficulties or a delay in a payment that was considered to be insignificant

Credit Quality Indicators:

The Company categorizes loans into risk categories based on relevant information about the ability of the borrower to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes commercial and commercial real estate loans individually by classifying the loans as to credit risk. This analysis includes credit relationships with an outstanding balance greater than $1 million on an annual basis. The Company uses the following definitions for risk ratings:

Special Mention — Loans classified as special mention have above average risk that requires management’s ongoing attention. The borrower may demonstrated inability to generate profits or to maintain net worth, chronic delinquency and/or a demonstrated lack of willingness or capacity to meet obligations.

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 classified by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Non-accrual — Loans classified as non-accrual are loans where the further accrual of interest is stopped because payment in full of principal and interest is not expected. In most cases, the principal and interest has been in default for a period of 90 days or more.

As of September 30, 2011, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

	Pass		Special Mention		Substandard		Non-accrual
Commercial
Commercial and industrial	$	94,500	$	13,005	$	6,188	$	2,497
Agricultural	15,294		807		11		82
Commercial Real Estate
Farm	40,764		3,178		353		1,146
Hotel	75,961		67,789		3,250		384
Construction and development	15,826		7,364		5,125		3,548
Other	436,704		60,859		41,556		22,803
Total	$	679,049	$	153,002	$	56,483	$	30,460

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be performing or under performing. These loans are primarily residential mortgage and consumer loans. Performing loans are loans risk graded 1-4 and under performing loans are loans risk graded 5, 6, or 9. As of September 30, 2011, the performing/under performing loans by class of loans are as follows:

	Performing		Under performing
Residential
1-4 Family	$	335,862	$	33,034
Home Equity	207,550		6,271
Consumer
Direct	51,673		1,782
Indirect	6,926		200
Total	$	602,011	$	41,287

As of December 31, 2010, the risk category of loans by class of loans is as follows:

	Pass		Special Mention		Substandard		Non-accrual
Commercial
Commercial and industrial	$	113,349	$	14,019	$	6,336	$	4,587
Agricultural	25,113		1,766		169		130
Commercial Real Estate
Farm	38,206		7,590		1,775		736
Hotel	86,884		55,666		3,332		6,534
Construction and development	16,083		10,697		13,535		19,004
Other	479,863		45,491		39,308		24,530
Total	$	759,498	$	135,229	$	64,455	$	55,521

As of December 31, 2010, the performing/under performing loans by class of loans are as follows:

	Performing		Under performing
Residential
1-4 Family	$	351,181	$	29,806
Home Equity	207,833		5,774
Consumer
Direct	57,240		1,899
Indirect	12,248		287
Total	$	628,502	$	37,766