Loans and Asset Quality Information

12 Months Ended

Dec. 31, 2012

Loans And Asset Quality Information

Loans and Asset Quality Information Part I

Note 4. 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 Note 2 to the financial statements included in the Company’s 2011 Annual Report on Form 10-K for detailed information regarding these transactions. Because of the loss protection provided by the FDIC, the risk of the loans and foreclosed real estate that are covered by loss share agreements 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)	December 31, 2012				December 31, 2011
	Amount		Percentage		Amount		Percentage
All loans (non-covered and covered):
Commercial, financial, and agricultural	$	160,790		7%	$	162,099		7%
Real estate – construction, land development & other land loans		298,458		13%		363,079		15%
Real estate – mortgage – residential (1-4 family) first mortgages		815,281		34%		805,542		33%
Real estate – mortgage – home equity loans / lines of credit		238,925		10%		256,509		11%
Real estate – mortgage – commercial and other		789,746		33%		762,895		31%
Installment loans to individuals		71,933		3%		78,982		3%
Subtotal		2,375,133		100%		2,429,106		100%
Unamortized net deferred loan costs		1,324				1,280
Total loans	$	2,376,457			$	2,430,386

As of December 31, 2012 and 2011, net loans include an unamortized premium of $485,000 and $949,000, respectively, related to acquired loans.

At December 31, 2012, the Company also had $30 million classified as “loans held for sale” that are not included in the loan balances disclosed above or in the disclosures presented in the remainder of Note 4. In the fourth quarter of 2012, the Company identified approximately $68 million of non-covered higher-risk loans that it targeted for sale to a third-party investor. Based on an offer to purchase these loans received prior to year-end, the Company wrote the loans down by approximately $38 million to their estimated liquidation value of approximately $30 million and reclassified them as “loans held for sale.” The sale of the loans was completed in January 2013 with the Company receiving sales proceeds of approximately $30 million.

Loans in the amount of $2.1 billion were pledged as collateral for certain borrowings as of both December 31, 2012 and December 31, 2011 (see Note 10). 

The loans above also include loans to executive officers and directors serving the Company at December 31, 2012 and to their associates, totaling approximately $6.9 million and $5.3 million at December 31, 2012 and 2011, respectively. During 2012, additions to such loans were approximately $3.6 and repayments totaled approximately $2.0. These loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other non-related borrowers. Management does not believe these loans involve more than the normal risk of collectability or present other unfavorable features.

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

($ in thousands)	December 31, 2012				December 31, 2011
	Amount		Percentage		Amount		Percentage
Non-covered loans:
Commercial, financial, and agricultural	$	155,273		7%	$	152,627		8%
Real estate – construction, land development & other land loans		251,569		12%		290,983		14%
Real estate – mortgage – residential (1-4 family) first mortgages		679,401		33%		646,616		31%
Real estate – mortgage – home equity loans / lines of credit		219,443		11%		233,171		11%
Real estate – mortgage – commercial and other		715,973		34%		666,882		32%
Installment loans to individuals		71,160		3%		77,593		4%
Subtotal		2,092,819		100%		2,067,872		100%
Unamortized net deferred loan costs		1,324				1,280
Total non-covered loans	$	2,094,143			$	2,069,152

The carrying amount of the covered loans at December 31, 2012 consisted of loans that were identified on the date of their purchase as being impaired and those that were classified on the date of their purchase as nonimpaired, 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		5,446		7,009		5,517		7,157
Real estate – construction, land development & other land loans		1,575		2,594		45,314		82,676		46,889		85,270
Real estate – mortgage – residential (1-4 family) first mortgages		794		1,902		135,086		161,416		135,880		163,318
Real estate – mortgage – home equity loans / lines of credit		16		56		19,466		24,431		19,482		24,487
Real estate – mortgage – commercial and other		2,369		4,115		71,404		94,502		73,773		98,617
Installment loans to individuals		—		—		773		828		773		828
Total	$	4,825		8,815		277,489		370,862		282,314		379,677

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		(51,582	)
Transfers to foreclosed real estate		(30,181	)
Loan charge-offs		(10,584	)
Accretion of loan discount		16,466
Carrying amount of nonimpaired covered loans at December 31, 2012	$	277,489

As reflected in the table above, the Company accreted $16,466,000 and $11,598,000 of the loan discount on purchased nonimpaired loans into interest income during 2012 and 2011, respectively. As of December 31, 2012, there was remaining loan discount of $56,515,000 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 covered 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 December 31, 2012, the Company also had $18,406,000 of loan discount related to purchased nonperforming loans. It is not expected that this amount will be accreted, as it represents estimated losses on these loans. An additional $22,441,000 in partial charge-offs have been recorded on purchased loans outstanding at December 31, 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		(355	)		44			(399	)
Transfer to foreclosed real estate		(7,636	)		(3,487	)		(4,149	)
Change due to loan charge-off		(359	)		(531	)		172
Other		(1,151	)		(1,568	)		417
Balance at December 31, 2012	$	8,815			3,990			4,825

Each of the purchased impaired loans are 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 2012 and 2011, the Company did not receive any 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, nonperforming loans held for sale, and foreclosed real estate. Nonperforming assets are summarized as follows:

ASSET QUALITY DATA ($ in thousands)	December 31, 2012		December 31, 2011
Non-covered nonperforming assets
Nonaccrual loans	$	33,034		73,566
Restructured loans – accruing		24,848		11,720
Accruing loans > 90 days past due		—		—
Total non-covered nonperforming loans		57,882		85,286
Nonperforming loans held for sale		21,938		—
Foreclosed real estate		26,285		37,023
Total non-covered nonperforming assets	$	106,105		122,309
Covered nonperforming assets
Nonaccrual loans (1)	$	33,491		41,472
Restructured loans – accruing		15,465		14,218
Accruing loans > 90 days past due		—		—
Total covered nonperforming loans		48,956		55,690
Foreclosed real estate		47,290		85,272
Total covered nonperforming assets	$	96,246		140,962
Total nonperforming assets	$	202,351		263,271

(1) At December 31, 2012 and December 31, 2011, the contractual balance of the nonaccrual loans covered by FDIC loss share agreements was $64.4 million and $69.0 million, respectively.

If the nonaccrual and restructured loans as of December 31, 2012, 2011 and 2010 had been current in accordance with their original terms and had been outstanding throughout the period (or since origination if held for part of the period), gross interest income in the amounts of approximately $7,689,000, $8,724,000 and $8,136,000 for nonaccrual loans and $2,392,000, $1,873,000 and $1,943,000 for restructured loans would have been recorded for 2012, 2011, and 2010, respectively. Interest income on such loans that was actually collected and included in net income in 2012, 2011 and 2010 amounted to approximately $2,824,000, $2,578,000 and $3,195,000 for nonaccrual loans (prior to their being placed on nonaccrual status), and $1,179,000, $1,351,000, and $1,342,000 for restructured loans, respectively. At December 31, 2012 and 2011, we had no commitments to lend additional funds to debtors whose loans were nonperforming.

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

($ in thousands)	As of /for the year ended December 31, 2012		As of /for the year ended December 31, 2011		As of /for the year ended December 31, 2010
Impaired loans at period end
Non-covered	$	57,882		85,286		96,003
Covered		48,956		55,690		72,825
Total impaired loans at period end	$	106,838		140,976		168,828
Average amount of impaired loans for period
Non-covered	$	85,198		89,023		89,751
Covered		54,773		63,289		95,373
Average amount of impaired loans for period – total	$	139,971		152,312		185,124
Allowance for loan losses related to impaired loans at period end
Non-covered	$	5,051		5,804		7,613
Covered		3,509		5,106		11,155
Allowance for loan losses related to impaired loans - total	$	8,560		10,910		18,768
Amount of impaired loans with no related allowance at period end
Non-covered	$	12,049		35,721		42,874
Covered		35,196		43,702		49,991
Total impaired loans with no related allowance at period end	$	47,245		79,423		92,865

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 December 31, 2012.

($ in thousands)	Non-covered		Covered		Total
Commercial, financial, and agricultural:
Commercial - unsecured	$	307		150		457
Commercial - secured		2,398		3		2,401
Secured by inventory and accounts receivable		17		59		76
Real estate – construction, land development & other land loans		6,354		11,698		18,052
Real estate – residential, farmland and multi-family		9,629		10,712		20,341
Real estate – home equity lines of credit		1,622		465		2,087
Real estate - commercial		9,885		10,342		20,227
Consumer		2,822		62		2,884
Total	$	33,034		33,491		66,525

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 December 31, 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	$	91		10		307		35,278		35,686
Commercial - secured		1,020		220		2,398		110,074		113,712
Secured by inventory and accounts receivable		52		4		17		21,270		21,343
Real estate – construction, land development & other land loans		490		263		6,354		211,001		218,108
Real estate – residential, farmland, and multi-family		9,673		2,553		9,629		797,584		819,439
Real estate – home equity lines of credit		976		320		1,622		197,962		200,880
Real estate - commercial		4,326		1,131		9,885		612,598		627,940
Consumer		462		219		2,822		52,208		55,711
Total non-covered	$	17,090		4,720		33,034		2,037,975		2,092,819
Unamortized net deferred loan costs										1,324
Total non-covered loans									$	2,094,143
Covered loans	$	6,564		3,417		33,491		238,842		282,314
Total loans	$	23,654		8,137		66,525		2,276,817		2,376,457

The Company had no non-covered or covered loans that were past due greater than 90 days and accruing interest at December 31, 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 year ended December 31, 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 year ended December 31, 2012
Beginning balance	$	3,780			11,306			13,532			1,690			3,414			1,872			16		35,610
Charge-offs		(4,912	)		(19,312	)		(20,879	)		(3,287	)		(16,616	)		(1,539	)		—		(66,545	)
Recoveries		354			986			430			209			333			273			—		2,585
Provisions		5,465			19,876			20,999			3,272			18,116			1,333			932		69,993
Ending balance	$	4,687			12,856			14,082			1,884			5,247			1,939			948		41,643
Ending balances as of December 31, 2012:  Allowance for loan losses
Individually evaluated for impairment	$	—			—			50			—			957			—			—		1,007
Collectively evaluated for impairment	$	4,687			12,856			14,032			1,884			4,290			1,939			948		40,636
Loans acquired with deteriorated credit quality	$	—			—			—			—			—			—			—		—
Loans receivable as of December 31, 2012:
Ending balance – total	$	170,741			218,108			819,439			200,880			627,940			55,711			—		2,092,819
Ending balances as of December 31, 2012: Loans
Individually evaluated for impairment	$	—			4,276			1,705			—			15,040			—			—		21,021
Collectively evaluated for impairment	$	170,741			213,832			817,734			200,880			612,900			55,711			—		2,071,798
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
As of and for the year ended December 31, 2011
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 as of December 31, 2011:  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 as of December 31, 2011:
Ending balance – total	$	172,357			246,805			795,655			207,436			587,183			58,436			—			2,067,872
Ending balances as of December 31, 2011: 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 covered loans for the year ended December 31, 2012.

($ in thousands)	Covered Loans
As of and for the year ended December 31, 2012
Beginning balance	$	5,808
Charge-offs		(10,728	)
Recoveries		—
Provisions		9,679
Ending balance	$	4,759
Ending balances as of December 31, 2012:  Allowance for loan losses
Individually evaluated for impairment	$	4,459
Collectively evaluated for impairment		300
Loans acquired with deteriorated credit quality		17
Loans receivable as of December 31, 2012:
Ending balance – total	$	282,314
Ending balances as of December 31, 2012: Loans
Individually evaluated for impairment	$	74,914
Collectively evaluated for impairment		207,400
Loans acquired with deteriorated credit quality		4,825

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 Company’s impaired loans as of December 31, 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		—		—		—		87
Secured by inventory and accounts receivable		—		—		—		5
Real estate – construction, land development & other land loans		4,277		4,305		—		8,600
Real estate – residential, farmland, and multi-family		1,597		1,618		—		2,692
Real estate – home equity lines of credit		—		—		—		64
Real estate – commercial		6,175		6,851		—		12,724
Consumer		—		—		—		2
Total non-covered impaired loans with no allowance	$	12,049		12,774		—		24,174
Total covered impaired loans with no allowance	$	35,196		71,413		—		39,372
Total impaired loans with no allowance recorded	$	47,245		84,187		—		63,546
Non-covered  loans with an allowance recorded:
Commercial, financial, and agricultural:
Commercial - unsecured	$	307		386		58		221
Commercial - secured		2,398		2,762		436		2,304
Secured by inventory and accounts receivable		17		43		4		548
Real estate – construction, land development & other land loans		3,934		5,730		1,213		12,199
Real estate – residential, farmland, and multi-family		23,859		25,844		1,955		27,186
Real estate – home equity lines of credit		1,645		2,120		96		2,901
Real estate – commercial		10,851		13,048		936		12,863
Consumer		2,822		2,858		353		2,802
Total non-covered impaired loans with allowance	$	45,833		52,791		5,051		61,024
Total covered impaired loans with allowance	$	13,760		18,271		3,509		15,401
Total impaired loans with an allowance recorded	$	59,593		71,062		8,560		76,425

Interest income recorded on non-covered and covered impaired loans during the year ended December 31, 2012 was 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 was 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 December 31, 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	$	10,283		24,031		10		472		583		307		35,686
Commercial - secured		32,196		72,838		1,454		3,676		1,150		2,398		113,712
Secured by inventory and accounts receivable		2,344		18,126		248		491		117		17		21,343
Real estate – construction, land development & other land loans		31,582		163,588		3,830		9,045		3,709		6,354		218,108
Real estate – residential, farmland, and multi-family		249,313		499,922		7,154		29,091		24,330		9,629		819,439
Real estate – home equity lines of credit		125,310		66,412		2,160		3,526		1,850		1,622		200,880
Real estate - commercial		123,814		449,316		21,801		14,050		9,074		9,885		627,940
Consumer		27,826		23,403		77		954		629		2,822		55,711
Total	$	602,668		1,317,636		36,734		61,305		41,442		33,034		2,092,819
Unamortized net deferred loan costs														1,324
Total non-covered  loans													$	2,094,143
Total covered loans	$	42,935		124,451		—		7,569		73,868		33,491		282,314
Total loans	$	645,603		1,442,087		36,734		68,874		115,310		66,525		2,376,457

At December 31, 2012, there was an insignificant amount of 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 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 year ended December 31, 2011 and 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 years ended December 31, 2012 and 2011. 

($ in thousands)	For the year ended December 31, 2012
	Number of Contracts		Pre-Modification Restructured Balances		Post-Modification Restructured Balances
Non-covered TDRs – Accruing
Real estate – construction, land development & other land loans		2	$	642	$	642
Real estate – residential, farmland, and multi-family		8		1,653		1,653
Real estate – commercial		—		—		—
Non-covered TDRs - Nonaccrual
Commercial, financial, and agricultural:
Commercial – secured		1		11		11
Real estate – construction, land development & other land loans		2		332		332
Real estate – residential, farmland, and multi-family		17		3,736		3,736
Real estate – home equity lines of credit		1		123		123
Real estate – commercial		5		1,082		1,082
Total non-covered TDRs arising during period		36		7,579		7,579
Total covered TDRs arising during period– Accruing		6	$	7,526	$	7,342
Total covered TDRs arising during period – Nonaccrual		4		1,230		1,231
Total TDRs arising during period		46	$	16,335	$	16,152

($ in thousands)	For the year ended December 31, 2011
	Number of Contracts		Pre-Modification Restructured Balances		Post-Modification Restructured Balances
Non-covered TDRs – Accruing
Real estate – construction, land development & other land loans		2	$	501	$	543
Real estate – residential, farmland, and multi-family		5		1,635		1,645
Real estate – commercial		4		1,871		1,871
Non-covered TDRs - Nonaccrual
Commercial, financial, and agricultural:
Commercial – secured		—		—		—
Real estate – construction, land development & other land loans		1		357		357
Real estate – residential, farmland, and multi-family		3		382		438
Real estate – home equity lines of credit		—		—		—
Real estate – commercial		4		1,408		1,408
Total non-covered TDRs arising during period		19		6,154		6,262
Total covered TDRs arising during period– Accruing		37	$	6,528	$	6,528
Total covered TDRs arising during period – Nonaccrual		8		1,472		1,472
Total TDRs arising during period		64	$	14,154	$	14,262

As part of a routine regulatory exam that concluded in the third quarter of 2012, the Company reclassified approximately $30 million of performing loans to TDR status during the second and third quarters of 2012. Because these loans were restructured prior to January 1, 2012 they are not included in the tables above. Also, in connection with an anticipated planned asset disposition, the Company recorded $6 million in charge-offs to write-down the TDRs to their estimated liquidation value at December 31, 2012, and reclassified approximately $5 million of TDRs to the “nonperforming loans held for sale” category as of December 31, 2012.

There were no non-covered accruing restructured loans that were modified in the previous 12 months and that defaulted during the years ended December 31, 2012 and 2011. There were three covered accruing restructured loans totaling $0.4 million that were modified in the previous 12 months and that defaulted during the year ended December 31, 2012. There were no covered accruing restructured loans that were modified in the previous 12 months and that defaulted during the year ended December 31, 2011. 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.