Note 7: Loans Receivable and Allowance for Loan Losses

The following table sets forth the Company's gross loans by major categories as of June 30, 2011 and December 31, 2010:

(Dollars in thousands)	June 30, 2011			December 31, 2010

Commercial real estate	$	388,081		$	374,935
Construction and land development		67,576			73,795
Commercial and industrial		81,783			78,428
Owner occupied real estate		81,799			70,833
Consumer and other		16,358			17,808
Residential mortgage		4,221			5,026
Total loans receivable		639,818			620,825

Deferred costs (fees)		(430	)		(470	)
Allowance for loan losses		(15,108	)		(11,444	)
Net loans receivable	$	624,280		$	608,911

A loan is considered impaired, in accordance with ASC 310, Receivables, when based on current information and events, it is probable that the Company will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include nonperforming commercial loans, but also include internally classified accruing loans. As of June 30, 2011 and December 31, 2010, management did not identify any troubled debt restructurings in the loan portfolio.

The following table presents the Company's impaired loans at June 30, 2011 and December 31, 2010:

(Dollars in thousands)	June 30, 2011		December 31, 2010
Impaired loans without a valuation allowance	$	39,937	$	72,908
Impaired loans with a valuation allowance		35,361		14,206
Total impaired loans	$	75,298	$	87,114

Valuation allowance related to impaired loans	$	6,044	$	2,786
Total nonaccrual loans		37,591		39,992
Total loans past-due ninety days or more and still accruing		1,338		-

Impaired loans with a valuation allowance increased from $14.2 million at December 31, 2010 to $35.4 million at June 30, 2011. The increase was primarily due to valuation allowances which were recorded during the six month period ending June 30, 2011 for impaired loans which previously did not have a valuation allowance as of December 31, 2010. The valuation allowances recorded for these impaired loans were primarily driven by updated appraisals of collateral received during the six month period ending June 30, 2011. Management determined that these valuation allowances did not have to be immediately charged off during this time period. Total impaired loans decreased by $11.8 million to $75.3 million at June 30, 2011 compared to $87.1 million at December 31, 2010. This decrease was mainly driven by upgrades to loans previously categorized as impaired as a result of improved financial performance and strength of the borrowers. The valuation allowance related to impaired loans increased from $2.8 million at December 31, 2010 to $6.0 million at June 30, 2011.

As of June 30, 2011 and December 31, 2010, the average recorded investment in impaired loans was approximately $81.3 million and $100.3 million, respectively. The Company earned $1.1 million and $2.7 million of interest income on impaired loans (internally classified as accruing loans) for the six months ended June 30, 2011 and the year ended December 31, 2010, respectively. The Company recognized interest income on a cash basis on impaired loans of $1.2 million and $2.9 million during the six months ended June 30, 2011 and the year ended December 31, 2010, respectively. There were no commitments to extend credit to any borrowers with impaired loans as of the end of the periods presented herein.

The following table summarizes information in regards to impaired loans by loan portfolio class as of June 30, 2011 and December 31, 2010:

	At June 30, 2011
(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:

Commercial real estate	$	21,117	$	22,519	$	-	$	32,347	$	591
Construction and land development		14,779		26,033		-		16,849		99
Commercial and industrial		1,958		1,958		-		3,468		53
Owner occupied real estate		1,306		1,306		-		1,847		19
Consumer and other		777		1,001		-		694		-
Total	$	39,937	$	52,817	$	-	$	55,205	$	762

With an allowance recorded:

Commercial real estate	$	20,308	$	24,662	$	3,079	$	12,376	$	252
Construction and land development		8,243		9,740		1,104		7,175		21
Commercial and industrial		5,000		6,509		1,528		3,698		11
Owner occupied real estate		1,810		1,810		333		2,882		64
Total	$	35,361	$	42,721	$	6,044	$	26,131	$	348

Total:

Commercial real estate	$	41,425	$	47,181	$	3,079	$	44,723	$	843
Construction and land development		23,022		35,773		1,104		24,024		120
Commercial and industrial		6,958		8,467		1,528		7,166		64
Owner occupied real estate		3,116		3,116		333		4,729		83
Consumer and other		777		1,001		-		694		-
Total	$	75,298	$	95,538	$	6,044	$	81,336	$	1,110

	At December 31, 2010
(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:

Commercial real estate	$	40,840	$	46,119	$	-	$	43,144	$	1,341
Construction and land development		22,802		35,042		-		32,061		291
Commercial and industrial		6,482		7,992		-		7,040		160
Owner occupied real estate		2,278		2,278		-		2,370		132
Consumer and other		506		684		-		536		6
Total	$	72,908	$	92,115	$	-	$	85,151	$	1,930

With an allowance recorded:

Commercial real estate	$	7,683	$	7,872	$	1,937	$	7,882	$	422
Construction and land development		2,289		2,440		45		2,602		23
Commercial and industrial		798		798		287		809		26
Owner occupied real estate		3,436		3,436		517		3,832		267
Total	$	14,206	$	14,546	$	2,786	$	15,125	$	738

Total:

Commercial real estate	$	48,523	$	53,991	$	1,937	$	51,026	$	1,763
Construction and land development		25,091		37,482		45		34,663		314
Commercial and industrial		7,280		8,790		287		7,849		186
Owner occupied real estate		5,714		5,714		517		6,202		399
Consumer and other		506		684		-		536		6
Total	$	87,114	$	106,661	$	2,786	$	100,276	$	2,668

As of June 30, 2011 and December 31, 2010, there were loans of approximately $37.6 million and $40.0 million, respectively, which were classified as non-accrual. If these loans were performing under their original contractual rate, interest income on such loans would have increased approximately $1.2 million and $2.4 million, for the six months ended June 30, 2011 and the year ended December 31, 2010, respectively. There were loans of approximately $1.3 million past due 90 days and accruing interest at June 30, 2011. There were no loans past due 90 days and accruing interest at December 31, 2010.

The following is an analysis of the changes in the allowance for loan losses for the six months ended June 30, 2011 and year ended December 31, 2010:

(Dollars in thousands)	June 30, 2011			December 31, 2010
Balance at beginning of year	$	11,444		$	12,841

Provision for loan losses		5,050			16,600
Recoveries of loans previously charged off		49			1,171
Loan charge-offs		(1,435	)		(19,168	)
Balance at end of year	$	15,108		$	11,444

The following provides the ending balances of the allowance for credit losses and loan receivables by loan portfolio class as of June 30, 2011 and December 31, 2010:

	At June 30, 2011
	Allowance for Credit Losses
(Dollars in thousands)	Commercial Real Estate			Construction and Land Development			Commercial and Industrial			Owner Occupied Real Estate			Consumer and Other			Residential Mortgage			Unallocated			Total

Three Months Ended June 30, 2011:
Beginning balance:	$	7,407		$	1,595		$	2,769		$	1,645		$	121		$	32		$	881		$	14,450
Charge-offs		(512	)		(370	)		-			-			-			-			-			(882	)
Recoveries		-			2			-			-			38			-			-			40
Provisions		1,751			592			(40	)		(49	)		(35	)		1			(720	)		1,500
Ending balance	$	8,646		$	1,819		$	2,729		$	1,596		$	124		$	33		$	161		$	15,108

Six Months Ended June 30, 2011:
Beginning balance:	$	7,243		$	837		$	1,443		$	1,575		$	130		$	41		$	175		$	11,444
Charge-offs		(1,034	)		(370	)		-			-			(31	)		-			-			(1,435	)
Recoveries		9			2			-			-			38			-			-			49
Provisions		2,428			1,350			1,286			21			(13	)		(8	)		(14	)		5,050
Ending balance	$	8,646		$	1,819		$	2,729		$	1,596		$	124		$	33		$	161		$	15,108


Ending balance: individually evaluated for impairment	$	3,079		$	1,104		$	1,528		$	333		$	-		$	-		$	-		$	6,044
Ending balance: collectively evaluated for impairment	$	5,567		$	715		$	1,201		$	1,263		$	124		$	33		$	161		$	9,064
Ending balance: loans acquired with deteriorated credit quality	$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-

	At December 31, 2010
	Allowance for Credit Losses
(Dollars in thousands)	Commercial Real Estate		Construction and Land Development		Commercial and Industrial		Owner Occupied Real Estate		Consumer and Other		Residential Mortgage		Unallocated		Total

Ending balance	$	7,243	$	837	$	1,443	$	1,575	$	130	$	41	$	175	$	11,444

Ending balance: individually evaluated for impairment	$	1,937	$	45	$	287	$	517	$	-	$	-	$	-	$	2,786
Ending balance: collectively evaluated for impairment	$	5,306	$	792	$	1,156	$	1,058	$	130	$	41	$	175	$	8,658
Ending balance: loans acquired with deteriorated credit quality	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

	At June 30, 2011
	Loans Receivable
(Dollars in thousands)	Commercial Real Estate		Construction and Land Development		Commercial and Industrial		Owner Occupied Real Estate		Consumer and Other		Residential Mortgage		Unallocated		Total

Ending balance	$	388,081	$	67,576	$	81,783	$	81,799	$	16,358	$	4,221	$	-	$	639,818

Ending balance: individually evaluated for impairment	$	41,425	$	23,022	$	6,958	$	3,116	$	777	$	-	$	-	$	75,298
Ending balance: collectively evaluated for impairment	$	346,656	$	44,554	$	74,825	$	78,683	$	15,581	$	4,221	$	-	$	564,520
Ending balance: loans acquired with deteriorated credit quality	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

	At December 31, 2010
	Loans Receivable
(Dollars in thousands)	Commercial Real Estate		Construction and Land Development		Commercial and Industrial		Owner Occupied Real Estate		Consumer and Other		Residential Mortgage		Unallocated		Total

Ending balance	$	374,935	$	73,795	$	78,428	$	70,833	$	17,808	$	5,026	$	-	$	620,825

Ending balance: individually evaluated for impairment	$	48,523	$	25,091	$	7,280	$	5,714	$	506	$	-	$	-	$	87,114
Ending balance: collectively evaluated for impairment	$	326,412	$	48,704	$	71,148	$	65,119	$	17,302	$	5,026	$	-	$	533,711
Ending balance: loans acquired with deteriorated credit quality	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the past due status as of June 30, 2011 and December 31, 2010:

	At June 30, 2011
(Dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loans Receivable		Loans Receivable > 90 Days and Accruing

Commercial real estate	$	-	$	8,556	$	17,808	$	26,364	$	361,717	$	388,081	$	1,338
Construction and land development		-		-		18,214		18,214		49,362		67,576		-
Commercial and industrial		-		-		1,342		1,342		80,441		81,783		-
Owner occupied real estate		-		1,239		788		2,027		79,772		81,799		-
Consumer and other		-		12		777		789		15,569		16,358		-
Residential mortgage		-		-		-		-		4,221		4,221		-
Total	$	-	$	9,807	$	38,929	$	48,736	$	591,082	$	639,818	$	1,338

	At December 31, 2010
(Dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loans Receivable		Loans Receivable > 90 Days and Accruing

Commercial real estate	$	1,249	$	12,155	$	14,955	$	28,359	$	346,576	$	374,935	$	-
Construction and land development		-		3,006		18,970		21,976		51,819		73,795		-
Commercial and industrial		251		-		4,500		4,751		73,677		78,428		-
Owner occupied real estate		-		2,179		1,061		3,240		67,593		70,833		-
Consumer and other		164		198		461		823		16,985		17,808		-
Residential mortgage		-		-		-		-		5,026		5,026		-
Total	$	1,664	$	17,538	$	39,947	$	59,149	$	561,676	$	620,825	$	-

The following table presents the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company's internal risk rating system as of June 30, 2011 and December 31, 2010:

	At June 30, 2011
(Dollars in thousands)	Pass		Special Mention		Substandard		Doubtful		Total

Commercial real estate	$	316,690	$	14,852	$	56,539	$	-	$	388,081
Construction and land development		39,490		-		28,086		-		67,576
Commercial and industrial		75,909		1,857		4,017		-		81,783
Owner occupied real estate		77,569		287		3,943		-		81,799
Consumer and other		15,256		-		1,102		-		16,358
Residential mortgage		4,221		-		-		-		4,221
Total	$	529,135	$	16,996	$	93,687	$	-	$	639,818

	At December 31, 2010
(Dollars in thousands)	Pass		Special Mention		Substandard		Doubtful		Total

Commercial real estate	$	299,916	$	18,531	$	56,488	$	-	$	374,935
Construction and land development		36,775		-		37,020		-		73,795
Commercial and industrial		65,361		2,794		10,273		-		78,428
Owner occupied real estate		60,849		3,923		6,061		-		70,833
Consumer and other		16,977		-		831		-		17,808
Residential mortgage		5,026		-		-		-		5,026
Total	$	484,904	$	25,248	$	110,673	$	-	$	620,825

The following table shows non-accrual loans by class as of June 30, 2011 and December 31, 2010:

(Dollars in thousands)	June 30, 2011		December 31, 2010
Commercial real estate	$	16,470	$	14,955
Construction and land development		18,214		18,970
Commercial and industrial		1,342		4,500
Owner occupied real estate		788		1,061
Consumer and other		777		506
Residential mortgage		-		-
Total	$	37,591	$	39,992