Note 8 – Credit Quality of Loans

6 Months Ended

Jun. 30, 2011

Loan Credit Quality [Text Block]

Note 8 – Credit Quality of Loans

Loan Payment Status.  The following tables present a breakdown of the Company’s non-covered loan portfolio by payment status, covered loans by payment status and total loan portfolio by payment status at June 30, 2011.

June 30, 2011	Current		30 to 89 Days Past Due		90+ Days Past Due (Still Accruing)		Nonaccrual		Total
	(Dollars in thousands)
Not covered by FDIC loss-share agreements
Real estate:
One-to-four family residential	$	107,775	$	512	$	-	$	1,406	$	109,693
Multifamily residential		18,955		-		-		-		18,955
Construction		20,370		-		-		-		20,370
Commercial land		26,800		982		-		3,167		30,949
Residential development		14,702		1,450		-		5,155		21,307
Other commercial real estate		213,220		1,932		225		10,081		225,458
Consumer real estate		101,243		725		-		2,400		104,368
Total real estate		503,065		5,601		225		22,209		531,100
Commercial business		36,440		7		27		174		36,648
Other consumer		5,736		79		-		40		5,855
Total loans not covered by FDIC loss-share agreements	$	545,241	$	5,687	$	252	$	22,423	$	573,603

June 30, 2011	Current		30 to 89 Days Past Due		90+ Days Past Due (Still Accruing)		Nonaccrual		Total
	(Dollars in thousands)
Covered by FDIC loss-share agreements
Real estate:
One-to-four family residential	$	28,260	$	4,483	$	-	$	9,675	$	42,418
Multifamily residential		2,922		-		-		216		3,138
Construction		1,399		-		-		-		1,399
Commercial land		4,882		964		-		6,458		12,304
Residential development		1,295		1,718		80		5,738		8,831
Other commercial real estate		62,278		4,366		148		11,095		77,887
Consumer real estate		10,053		757		-		481		11,291
Total real estate		111,089		12,288		228		33,663		157,268
Commercial business		10,967		296		37		1,002		12,302
Other consumer		6,174		403		4		896		7,477
Total loans covered by FDIC loss-share agreements	$	128,230	$	12,987	$	269	$	35,561	$	177,047

June 30, 2011	Current		30 to 89 Days Past Due		90+ Days Past Due (Still Accruing)		Nonaccrual		Total
	(Dollars in thousands)
Total loans
Real estate:
One-to-four family residential	$	136,035	$	4,995	$	-	$	11,081	$	152,111
Multifamily residential		21,877		-		-		216		22,093
Construction		21,769		-		-		-		21,769
Commercial land		31,682		1,946		-		9,625		43,253
Residential development		15,997		3,168		80		10,893		30,138
Other commercial real estate		275,498		6,298		373		21,176		303,345
Consumer real estate		111,296		1,482		-		2,881		115,659
Total real estate		614,154		17,889		453		55,872		688,368
Commercial business		47,407		303		64		1,176		48,950
Other consumer		11,910		482		4		936		13,332
Total loans	$	673,471	$	18,674	$	521	$	57,984	$	750,650

The following tables present a breakdown of the Company’s non-covered loan portfolio by payment status, covered loans by payment status and total loan portfolio by payment status at December 31, 2010.

December 31, 2010	Current		30 to 89 Days Past Due		90+ Days Past Due (Still Accruing)		Nonaccrual		Total
	(Dollars in thousands)
Not covered by FDIC loss-share agreements
Real estate:
One-to-four family residential	$	97,851	$	1,299	$	-	$	1,864	$	101,014
Multifamily residential		20,674		-		-		-		20,674
Construction		19,570		630		-		14		20,214
Land and development		57,527		2,801		2,000		559		62,887
Other commercial real estate		217,423		7,899		-		9,161		234,483
Consumer real estate		105,634		1,047		-		2,513		109,194
Total real estate		518,679		13,676		2,000		14,111		548,466
Commercial business		34,645		61		-		287		34,993
Other consumer		5,409		50		-		16		5,475
Total loans not covered by FDIC loss-share agreements	$	558,733	$	13,787	$	2,000	$	14,414	$	588,934

December 31, 2010	Current		30 to 89 Days Past Due		90+ Days Past Due (Still Accruing)		Nonaccrual		Total
	(Dollars in thousands)
Covered by FDIC loss-share agreements
Real estate:
One-to-four family residential	$	27,314	$	1,973	$	-	$	3,468	$	32,755
Multifamily residential		2,993		-		-		-		2,993
Construction		158		-		-		49		207
Land and development		19,385		549		-		9,904		29,838
Other commercial real estate		40,084		2,090		472		9,471		52,117
Consumer real estate		8,526		51		37		213		8,827
Total real estate		98,460		4,663		509		23,105		126,737
Commercial business		11,616		376		17		1,051		13,060
Other consumer		6,191		728		-		860		7,779
Total loans covered by FDIC loss-share agreements	$	116,267	$	5,767	$	526	$	25,016	$	147,576

December 31, 2010	Current		30 to 89 Days Past Due		90+ Days Past Due (Still Accruing)		Nonaccrual		Total
	(Dollars in thousands)
Total loans
Real estate:
One-to-four family residential	$	125,165	$	3,272	$	-	$	5,332	$	133,769
Multifamily residential		23,667		-		-		-		23,667
Construction		19,728		630		-		63		20,421
Land and development		76,912		3,350		2,000		10,463		92,725
Other commercial real estate		257,507		9,989		472		18,632		286,600
Consumer real estate		114,160		1,098		37		2,726		118,021
Total real estate		617,139		18,339		2,509		37,216		675,203
Commercial business		46,261		437		17		1,338		48,053
Other consumer		11,600		778		-		876		13,254
Total loans	$	675,000	$	19,554	$	2,526	$	39,430	$	736,510

Restructured Loans.  In accordance with GAAP, we account for certain loan modifications or restructurings as troubled debt restructurings (“TDRs”). In general, the modification or restructuring of a debt constitutes a TDR if we, for economic or legal reasons related to the borrower’s financial difficulties, grant a concession to the borrowers that we would not otherwise consider. TDRs do not necessarily increase nonaccrual loans.  Generally a TDR may return to accrual status when the borrower has sustained repayment performance in accordance with the modified terms.  The number of payments needed to meet these criteria varies from loan to loan.  However, as a general rule, most TDRs should be able to return to accrual status after the payment of six consecutive regular scheduled payments.

As of December 31, 2010, we had 32 TDRs totaling $7.4 million. Of this amount, $1.8 million were covered by FDIC loss-share agreements.  Of the remaining non-covered loans, $3.7 million were on nonaccrual, $181,000 was 30 to 89 days delinquent and $1.7 million were current and accruing.  As of June 30, 2011, we had 33 TDRs totaling $7.4 million.  Of this amount, $1.7 million were covered by FDIC loss-share agreements.  Of the remaining non-covered loans, $1.1 million were on nonaccrual, $225,000 were over 90 days delinquent and accruing, $761,000 were 30 to 89 days delinquent and accruing and $3.6 million current and accruing.

Also, in the normal course of business, the Company will make loan restructurings or modifications to borrowers for reasons unrelated to the borrower’s financial condition.  These restructurings or modifications are made based on the prevailing interest rates and terms offered to other borrowers for similar types of loans at the time of the modification. These types of debt restructurings or loan modifications would not be considered troubled debt restructurings.

Impaired Loans.  The Company evaluates impairment of its non-covered residential mortgage and consumer loans on a collective basis, while non-covered commercial and construction loans are evaluated individually for impairment.  The Company identifies a non-covered loan as impaired when it is probable that principal and interest will not be collected according to the contractual terms of the loan agreement.  Specific allowances or principal write-downs are established for certain individual non-covered loans that management considers impaired.  The remainder of the portfolio of non-covered loans is segmented into groups of loans with similar risk characteristics for evaluation and analysis.

The following table details the Company’s impaired loans at June 30, 2011.

	Legal Balance		Write-down		Book Balance		Specific Allowance
	(Dollars in thousands)
Real estate:
One-to-four family residential	$	-	$	-	$	-	$	-
Commercial land		2,732		1,084		1,648		-
Residential development		7,330		2,111		5,219		-
Commercial real estate - office		6,459		831		5,628		-
Commercial real estate - retail		2,494		2,170		324		-
Commercial real estate - other		2,118		888		1,230		-
Consumer real estate		204		169		35
Commercial business		128		128		-		-
Total impaired loans	$	21,465	$	7,381	$	14,084	$	-

The following table details the Company’s impaired loans at December 31, 2010.

	Legal Balance		Write-down		Book Balance		Specific Allowance
	(Dollars in thousands)
Real estate:
One-to-four family residential	$	964	$	200	$	764	$	-
Commercial land		3,403		774		2,629		-
Residential development		7,579		1,388		6,191		416
Commercial real estate - office		4,692		539		4,153		-
Commercial real estate - retail		4,008		2,185		1,823		-
Commercial real estate - other		445		298		147		-
Consumer real estate		692		486		206		-
Total impaired loans	$	21,783	$	5,870	$	15,913	$	416

Loan Classification. We categorize loans into risk categories based on relevant information about the ability of borrowers to service their debts such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors.  We analyze loans individually by classifying the loans as to credit risk.  This analysis is performed on at least a quarterly basis.  We use the following definitions for risk ratings: Special Mention - Loans classified as special mention have a potential weakness that deserves management’s close attention.  If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of our credit position at some future date. 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 one or more well-defined weaknesses that jeopardize the liquidation of the debt.  They are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. Doubtful -  Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values highly questionable and improbable.  Loans not meeting the criteria above as part of the above described process are considered to be Pass rated loans.   The Company’s portfolio of FDIC-covered loans was considered to be Pass rated loans at June 30, 2011 and December 31, 2010, as the loans were marked to fair value at acquisition and have FDIC loss-share agreements for any potential losses.

As of June 30, 2011, and December 31, 2010, the risk category of loans is as follows:

			Criticized Loans
June 30, 2011	Pass		Special Mention		Substandard		Doubtful		Total
	(Dollars in thousands)
Real estate:
One-to-four family residential	$	149,837	$	548	$	1,726	$	-	$	152,111
Multifamily residential		21,825		268		-		-		22,093
Construction		21,768		-		-		-		21,768
Commercial land		34,199		4,891		4,163		-		43,253
Residential development		18,414		1,992		9,732		-		30,138
Other commercial real estate		270,118		10,652		22,575		-		303,345
Consumer real estate		111,980		789		2,890		-		115,659
Total real estate		628,141		19,140		41,086		-		688,367
Commercial business		48,299		288		363		-		48,950
Other consumer		13,243		24		66		-		13,333
Total loans	$	689,683	$	19,452	$	41,515	$	-	$	750,650

			Criticized Loans
December 31, 2010	Pass		Special Mention		Substandard		Doubtful		Total
	(Dollars in thousands)
Real estate:
One-to-four family residential	$	131,072	$	1,167	$	1,530	$	-	$	133,769
Multifamily residential		23,394		273		-		-		23,667
Construction		18,488		1,933		-		-		20,421
Land and development		66,104		10,533		16,012		75		92,724
Other commercial real estate		257,770		7,882		20,949		-		286,601
Consumer real estate		113,036		1,327		3,523		135		118,021
Total real estate		609,864		23,115		42,014		210		675,203
Commercial business		47,423		376		254		-		48,053
Other consumer		11,200		-		2,054		-		13,254
Total loans	$	668,487	$	23,491	$	44,322	$	210	$	736,510