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 First Bank, which afford First Bank significant loss protection. (See the Company's 2010 Annual Report on Form 10-K for more information regarding the Cooperative Bank transaction and Note 4 above for the more information regarding The Bank of Asheville transaction.) 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, 2011					December 31, 2010					September 30, 2010
	Amount		Percentage			Amount		Percentage			Amount		Percentage
All loans (non-covered and covered):

Commercial, financial, and agricultural	$	161,300		7	%		155,016		6	%		160,824		7	%
Real estate – construction, land development & other land loans		370,735		15	%		437,700		18	%		473,446		19	%
Real estate – mortgage – residential (1-4 family) first mortgages		803,688		33	%		802,658		33	%		810,794		32	%
Real estate – mortgage – home equity loans / lines of credit		258,653		11	%		263,529		11	%		266,608		11	%
Real estate – mortgage – commercial and other		756,568		31	%		710,337		29	%		713,794		28	%
Installment loans to individuals		80,309		3	%		83,919		3	%		83,846		3	%
Subtotal		2,431,253		100	%		2,453,159		100	%		2,509,312		100	%
Unamortized net deferred loan costs		1,295					973					862
Total loans	$	2,432,548					2,454,132					2,510,174

As of September 30, 2011, December 31, 2010 and September 30, 2010, net loans include unamortized premiums of $1,065,000, $687,000, and $736,000, respectively, related to acquired loans.

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

($ in thousands)	September 30, 2011					December 31, 2010					September 30, 2010
	Amount		Percentage			Amount		Percentage			Amount		Percentage
Non-covered loans:

Commercial, financial, and agricultural	$	150,252		7	%		150,545		7	%		155,498		7	%
Real estate – construction, land development & other land loans		298,650		14	%		344,939		17	%		370,805		18	%
Real estate – mortgage – residential (1-4 family) first mortgages		637,129		31	%		622,353		30	%		615,681		29	%
Real estate – mortgage – home equity loans / lines of credit		236,578		12	%		246,418		12	%		243,092		12	%
Real estate – mortgage – commercial and other		656,035		32	%		636,197		30	%		629,316		30	%
Installment loans to individuals		78,785		4	%		81,579		4	%		81,185		4	%
Subtotal		2,057,429		100	%		2,082,031		100	%		2,095,577		100	%
Unamortized net deferred loan costs		1,295					973					862
Total non-covered loans	$	2,058,724					2,083,004					2,096,439

The carrying amount of the covered loans at September 30, 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	$	101		637		10,947		22,348		11,048		22,985
Real estate – construction, land development & other land loans		3,866		11,196		68,219		115,021		72,085		126,217
Real estate – mortgage – residential (1-4 family) first mortgages		1,227		2,695		165,332		201,303		166,559		203,998
Real estate – mortgage – home equity loans / lines of credit		130		578		21,945		29,603		22,075		30,181
Real estate – mortgage – commercial and other		3,708		5,539		96,825		123,981		100,533		129,520
Installment loans to individuals		5		7		1,519		1,733		1,524		1,740
Total	$	9,037		20,652		364,787		493,989		373,824		514,641

The carrying amount of the covered loans at December 31, 2010 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	$	−		−		4,471		5,272		4,471		5,272
Real estate – construction, land development & other land loans		1,898		3,328		90,863		147,615		92,761		150,943
Real estate – mortgage – residential (1-4 family) first mortgages		−		−		180,305		212,826		180,305		212,826
Real estate – mortgage – home equity loans / lines of credit		−		−		17,111		20,332		17,111		20,332
Real estate – mortgage – commercial and other		2,709		3,594		71,431		93,490		74,140		97,084
Installment loans to individuals		−		−		2,340		2,595		2,340		2,595
Total	$	4,607		6,922		366,521		482,130		371,128		489,052

The following table presents information regarding covered purchased nonimpaired loans since December 31, 2009. 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, 2009	$	485,572
Principal repayments		(43,801	)
Transfers to foreclosed real estate		(75,121	)
Loan charge-offs		(7,736	)
Accretion of loan discount		7,607
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		(33,385	)
Transfers to foreclosed real estate		(47,795	)
Loan charge-offs		(15,045	)
Accretion of loan discount		9,868
Carrying amount of nonimpaired covered loans at September 30, 2011	$	364,787

As reflected in the table above, the Company accreted $9,868,000 of the loan discount on purchased nonimpaired loans into interest income during the first nine months of 2011.

The following table presents information regarding all purchased impaired loans since December 31, 2009, 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, 2009	$	39,293			3,242			36,051
Change due to payments received		(685	)		2			(687	)
Transfer to foreclosed real estate		(27,569	)		(225	)		(27,344	)
Change due to loan charge-off		(3,149	)		(625	)		(2,524	)
Other		190			(65	)		255
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		(1,049	)		(358	)		(691	)
Transfer to foreclosed real estate		(19,881	)		(9,308	)		(10,573	)
Change due to loan charge-off		(4,367	)		(1,709	)		(2,658	)
Other		709			224			485
Balance at September 30, 2011	$	21,944			11,985			9,959

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 nine months ended September 30, 2011 and 2010, the Company received $717,000 and $67,000 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 other real estate. Nonperforming assets are summarized as follows:

ASSET QUALITY DATA ($ in thousands)	September 30, 2011		December 31, 2010		September 30, 2010

Non-covered nonperforming assets
Nonaccrual loans	$	75,013		62,326		80,318
Restructured loans – accruing		11,257		33,677		20,447
Accruing loans > 90 days past due		-		-		–
Total non-covered nonperforming loans		86,270		96,003		100,765
Other real estate		32,673		21,081		17,475
Total non-covered nonperforming assets	$	118,943		117,084		118,240

Covered nonperforming assets
Nonaccrual loans (1)	$	36,536		58,466		75,116
Restructured loans – accruing		16,912		14,359		4,160
Accruing loans > 90 days past due		-		-		–
Total covered nonperforming loans		53,448		72,825		79,276
Other real estate		104,785		94,891		101,389
Total covered nonperforming assets	$	158,233		167,716		180,665

Total nonperforming assets	$	277,176		284,800		298,905

(1) At September 30, 2011, December 31, 2010, and September 30, 2010, the contractual balance of the nonaccrual loans covered by FDIC loss share agreements was $65.0 million, $86.2 million, and $103.9 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, 2011		As of /for the year ended December 31, 2010		As of /for the nine months ended September 30, 2010
Impaired loans at period end
Non-covered	$	86,270		96,003		100,765
Covered		53,448		72,825		79,276
Total impaired loans at period end	$	139,718		168,828		180,041

Average amount of impaired loans for period
Non-covered	$	89,957		89,751		85,126
Covered		65,189		95,373		99,391
Average amount of impaired loans for period – total	$	155,146		185,124		184,517

Allowance for loan losses related to impaired loans at period end
Non-covered	$	5,429		7,613		15,767
Covered		2,287		11,155		−
Allowance for loan losses related to impaired loans - total	$	7,716		18,768		15,767

Amount of impaired loans with no related allowance at period end
Non-covered	$	35,897		42,874		24,473
Covered		43,918		49,991		79,276
Total impaired loans with no related allowance at period end	$	79,815		92,865		103,749

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 above 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, 2011.

($ in thousands)	Non-covered		Covered		Total
Commercial, financial, and agricultural:
Commercial – unsecured	$	88		22		110
Commercial – secured		2,216		−		2,216
Secured by inventory and accounts receivable		350		147		497

Real estate – construction, land development & other land loans		26,710		19,091		45,801

Real estate – residential, farmland and multi-family		25,656		11,421		37,077

Real estate – home equity lines of credit		2,825		1,182		4,007

Real estate – commercial		14,563		4,447		19,010

Consumer		2,605		226		2,831
Total	$	75,013		36,536		111,549

The following table presents the Company's nonaccrual loans as of December 31, 2010.

($ in thousands)	Non-covered		Covered		Total
Commercial, financial, and agricultural:
Commercial – unsecured	$	64		160		224
Commercial – secured		1,566		3		1,569
Secured by inventory and accounts receivable		802		−		802

Real estate – construction, land development & other land loans		22,654		30,847		53,501

Real estate – residential, farmland and multi-family		27,055		19,716		46,771

Real estate – home equity lines of credit		2,201		685		2,886

Real estate – commercial		7,461		7,039		14,500

Consumer		523		16		539
Total	$	62,326		58,466		120,792

The following table presents an analysis of the payment status of the Company's loans as of September 30, 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	$	72		488		88		40,360		41,008
Commercial - secured		1,159		542		2,216		102,414		106,331
Secured by inventory and accounts receivable		69		5		350		21,782		22,206

Real estate – construction, land development & other land loans		988		906		26,710		225,757		254,361

Real estate – residential, farmland, and multi-family		7,410		2,881		25,656		749,465		785,412

Real estate – home equity lines of credit		2,257		466		2,825		206,451		211,999

Real estate - commercial		1,183		735		14,563		559,978		576,459

Consumer		614		171		2,605		56,263		59,653
Total non-covered	$	13,752		6,194		75,013		1,962,470		2,057,429
Unamortized net deferred loan costs										1,295
Total non-covered loans									$	2,058,724

Covered loans	$	7,191		3,242		36,536		326,855		373,824

Total loans	$	20,943		9,436		111,549		2,289,325		2,432,548

The Company had no non-covered or covered loans that were past due greater than 90 days and accruing interest at September 30, 2011.

The following table presents an analysis of the payment status of the Company's loans as of December 31, 2010.

($ 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	$	225		92		64		41,564		41,945
Commercial - secured		1,165		195		1,566		102,657		105,583
Secured by inventory and accounts receivable		100		−		802		21,369		22,271

Real estate – construction, land development & other land loans		2,951		7,022		22,654		270,892		303,519

Real estate – residential, farmland, and multi-family		10,290		2,942		27,055		726,456		766,743

Real estate – home equity lines of credit		496		253		2,201		213,984		216,934

Real estate - commercial		2,581		1,193		7,461		552,020		563,255

Consumer		595		297		523		60,366		61,781
Total non-covered	$	18,403		11,994		62,326		1,989,308		2,082,031
Unamortized net deferred loan costs										973
Total non-covered loans									$	2,083,004

Total covered loans	$	6,713		4,127		58,466		301,822		371,128

Total loans	$	25,116		16,121		120,792		2,291,130		2,454,132

The Company had no non-covered or covered loans that were past due greater than 90 days and accruing interest at December 31, 2010.

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 non-covered loans for the year ended December 31, 2010.

($ 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 year ended December 31, 2010

Beginning balance	$	4,992			9,286			10,779			3,228			6,839			1,610			609			37,343
Charge-offs		(4,691	)		(15,721	)		(6,962	)		(2,490	)		(2,354	)		(1,587	)		−			(33,805	)
Recoveries		145			130			548			59			38			171			−			1,091
Provisions		4,285			18,825			6,918			2,837			(551	)		1,767			(435	)		33,646
Ending balance	$	4,731			12,520			11,283			3,634			3,972			1,961			174			38,275

Ending balances as of December 31, 2010: Allowance for loan losses

Individually evaluated for impairment	$	867			3,740			1,070			269			611			−			−			6,557

Collectively evaluated for impairment	$	3,864			8,780			10,213			3,365			3,361			1,961			174			31,718

Loans acquired with deteriorated credit quality	$	−			−			−			−			−			−			−			−

Loans receivable as of December 31, 2010:

Ending balance – total	$	169,799			303,519			766,743			216,934			563,255			61,781			−			2,082,031

Ending balances as of December 31, 2010: Loans

Individually evaluated for impairment	$	3,487			64,549			15,786			1,223			25,213			28			−			110,286

Collectively evaluated for impairment	$	166,312			238,970			750,957			215,711			538,042			61,753			−			1,971,745

Loans acquired with deteriorated credit quality	$	−			1,144			−			−			−			−			−			1,144

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 nine 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 activity in the allowance for loan losses for covered loans for the year ended December 31, 2010.

($ in thousands)	Covered Loans

As of and for the year ended December 31, 2010

Beginning balance	$	−
Charge-offs		(9,761	)
Recoveries		−
Provisions		20,916
Ending balance	$	11,155

Ending balances as of December 31, 2010: Allowance for loan losses

Individually evaluated for impairment	$	11,155

Collectively evaluated for impairment		−

Loans acquired with deteriorated credit quality		−


Loans receivable as of December 31, 2010:

Ending balance – total	$	371,128


Ending balances as of December 31, 2010: Loans

Individually evaluated for impairment	$	72,690

Collectively evaluated for impairment		298,438

Loans acquired with deteriorated credit quality		4,607

The following table presents the Company's impaired loans as of September 30, 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		266		333		−		556
Secured by inventory and accounts receivable		62		538		−		149

Real estate – construction, land development & other land loans		14,037		20,423		−		18,569

Real estate – residential, farmland, and multi-family		6,787		9,090		−		5,737

Real estate – home equity lines of credit		47		300		−		87

Real estate – commercial		14,686		16,513		−		12,500

Consumer		12		39		−		16
Total non-covered impaired loans with no allowance	$	35,897		47,236		−		37,614

Total covered impaired loans with no allowance	$	43,918		75,366		−		50,362

Total impaired loans with no allowance recorded	$	79,815		122,602		−		87,976

Non-covered loans:
With an allowance recorded:
Commercial, financial, and agricultural:
Commercial - unsecured	$	88		88		15		170
Commercial - secured		1,950		1,952		413		1,311
Secured by inventory and accounts receivable		288		288		87		349

Real estate – construction, land development & other land loans		15,462		18,597		2,345		17,138

Real estate – residential, farmland, and multi-family		21,351		22,226		1,883		21,993

Real estate – home equity lines of credit		2,778		2,799		106		2,401

Real estate – commercial		5,861		6,159		132		6,760

Consumer		2,595		2,596		448		2,222
Total non-covered impaired loans with allowance	$	50,373		54,705		5,429		52,344

Total covered impaired loans with allowance	$	9,530		15,129		2,287		14,827

Total impaired loans with an allowance recorded	$	59,903		69,834		7,716		67,171

Interest income recorded on non-covered and covered impaired loans during the three and nine months ended September 30, 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 following table presents the Company's impaired loans as of December 31, 2010.

($ 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	$	−		−		−		138
Commercial - secured		902		967		−		758
Secured by inventory and accounts receivable		240		650		−		186

Real estate – construction, land development & other land loans		22,026		26,012		−		15,639

Real estate – residential, farmland, and multi-family		8,269		9,447		−		7,437

Real estate – home equity lines of credit		302		502		−		381

Real estate – commercial		11,115		11,321		−		7,284

Consumer		20		40		−		46
Total non-covered impaired loans with no allowance	$	42,874		48,939		−		31,869

Total covered impaired loans with no allowance	$	49,991		77,321		−		83,955

Total impaired loans with no allowance recorded	$	92,865		126,260		−		115,824

Non-covered loans:
With an allowance recorded:
Commercial, financial, and agricultural:
Commercial - unsecured	$	124		124		24		243
Commercial - secured		579		579		88		1,385
Secured by inventory and accounts receivable		1,026		1,026		609		613

Real estate – construction, land development & other land loans		17,540		19,926		3,932		21,362

Real estate – residential, farmland, and multi-family		23,012		23,012		1,820		22,166

Real estate – home equity lines of credit		2,148		2,223		357		1,928

Real estate – commercial		8,013		8,088		497		9,275

Consumer		687		687		286		910
Total non-covered impaired loans with allowance	$	53,129		55,665		7,613		57,882

Total covered impaired loans with allowance	$	22,834		27,105		11,155		11,418

Total impaired loans with an allowance recorded	$	75,963		82,770		18,768		69,300

Interest income recorded on non-covered and covered impaired loans during the year ended December 31, 2010 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, 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)		Total
Non-covered loans:
Commercial, financial, and agricultural:
Commercial - unsecured	$	12,802		26,856		−		272		1,078		41,008
Commercial - secured		34,569		63,620		1,402		1,966		4,774		106,331
Secured by inventory and accounts receivable		4,421		15,800		96		1,280		609		22,206

Real estate – construction, land development & other land loans		39,900		158,572		5,008		11,118		39,763		254,361

Real estate – residential, farmland, and multi-family		260,911		445,393		8,769		17,314		53,025		785,412

Real estate – home equity lines of credit		134,160		68,408		2,558		2,664		4,209		211,999

Real estate - commercial		149,336		352,647		31,627		12,997		29,852		576,459

Consumer		31,923		24,006		72		91		3,561		59,653
Total	$	668,022		1,155,302		49,532		47,702		136,871		2,057,429
Unamortized net deferred loan costs												1,295
Total non-covered loans											$	2,058,724

Total covered loans	$	71,351		163,177		−		15,770		123,526		373,824

Total loans	$	739,373		1,318,479		49,532		63,472		260,397		2,432,548

The following table presents the Company's recorded investment in loans by credit quality indicators as of December 31, 2010.

($ 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)		Total
Non-covered loans:
Commercial, financial, and agricultural:
Commercial – unsecured	$	14,850		25,992		−		332		771		41,945
Commercial – secured		40,995		55,918		2,100		2,774		3,796		105,583
Secured by inventory and accounts receivable		6,364		14,165		−		873		869		22,271

Real estate – construction, land development & other land loans		66,321		162,147		7,649		14,068		53,334		303,519

Real estate – residential, farmland, and multi-family		302,667		376,187		15,941		22,436		49,512		766,743

Real estate – home equity lines of credit		137,674		68,876		3,001		3,060		4,323		216,934

Real estate – commercial		190,284		301,828		33,706		12,141		25,296		563,255

Consumer		34,600		24,783		140		408		1,850		61,781
Total	$	793,755		1,029,896		62,537		56,092		139,751		2,082,031
Unamortized net deferred loan costs												973
Total non-covered loans											$	2,083,004

Total covered loans	$	38,276		187,526		−		7,579		137,747		371,128

Total loans	$	832,031		1,217,422		62,537		63,671		277,498		2,454,132

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 three and nine month periods ended September 30, 2011 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 non-accrual or accruing based on the loan's payment status. The troubled debt restructurings that are non-accrual are reported within the non-accrual 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, 2011.

	For the three months ended September 30, 2011				For the nine months ended September 30, 2011
	Number of Contracts		Outstanding Recorded Investment (as of period end)		Number of Contracts		Outstanding Recorded Investment (as of period end)
Non-covered TDRs – Accruing
Real estate – construction, land development & other land loans		1	$	42		1	$	42

Real estate – residential, farmland, and multi-family		1		735		5		1,645

Real estate - commercial		−		−		2		1,259

Non-covered TDRs - Nonaccrual
Real estate – construction, land development & other land loans		−		−		1		357

Real estate – residential, farmland, and multi-family		1		262		2		378

Real estate - commercial		−		−		4		1,408

Total non-covered TDRs arising during period		3	$	1,039		15	$	5,089

Total covered TDRs arising during period– Accruing		16	$	1,229		36	$	4,755
Total covered TDRs arising during period – Nonaccrual		6		635		8		1,472

Total TDRs arising during period		25	$	2,903		59	$	11,316

Accruing loans that defaulted during the three and nine months ended September 30, 2011 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 non-accrual status, or has been transferred to other real estate owned.

	For the three months ended September 30, 2011				For the nine months ended September 30, 2011
	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		1	$	3,320		7	$	13,162

Real estate – residential, farmland, and multi-family		2		124		5		1,281

Real estate - commercial		1		254		10		7,005

Total non-covered TDRs that subsequently defaulted		4	$	3,698		22	$	21,448

Total accruing covered TDRs that subsequently defaulted		6	$	2,650		31	$	13,082

Total accruing TDRs that subsequently defaulted		10	$	6,348		53	$	34,530