(7) Credit Quality of Loans and Allowance for Loan Losses

An analysis of the allowance for loan losses for the three and six months ended June 30, 2011, and June 30, 2010 follows:


	For the Three Months Ended						For the Six Months Ended
	June 30, 2011			June 30, 2010			June 30, 2011			June 30, 2010
	(Dollars in thousands)
Beginning balance	$	15,219		$	11,329		$	13,247		$	9,725
Provision for loan losses		1,273			1,780			5,203			4,780
Recoveries		44			26			146			73
Loans charged off		(1,088	)		(2,673	)		(3,148	)		(4,116	)

Ending balance	$	15,448		$	10,462		$	15,448		$	10,462

The following tables summarize the balances by loan category of the allowance for loan losses with changes arising from charge-offs, recoveries and provision expense for the six months ending June 30, 2011, three months ending June 30, 2011 and for the year ending December 31, 2010:

Allowance for Loan Losses

As of and for the Six Months Ended June 30, 2011


Allowance for Credit Losses	Real Estate Construction and Land Development			Real Estate Secured by Farmland		Real Estate Secured by Residential Properties			Real Estate Secured by Nonfarm Nonresidential			Consumer Installment			Credit Cards and Related Plans			Commercial and Industrial			Loans to Finance Agricultural Production			All Other Loans			General Qualitative & Quantitative Portion		Total
	(Dollars in thousands)
Beginning balance	$	6,168		$	28	$	3,450		$	1,007		$	12		$	21		$	882		$	18		$	139		$	1,522	$	13,247
Charge-offs		(1,917	)		—		(704	)		(43	)		(15	)		(9	)		(338	)		—			(122	)		—		(3,148	)
Recoveries		6			—		2			—			2			1			78			—			57			—		146
Provisions		3,210			5		1,491			168			31			175			—			(3	)		100			26		5,203

Ending Balance	$	7,467		$	33	$	4,239		$	1,132		$	30		$	188		$	622		$	15		$	174		$	1,548	$	15,448

Ending Balance: individually evaluated for impairment	$	1,931		$	—	$	1,124		$	585		$	—		$	170		$	249		$	—		$	—		$	—	$	4,059

Ending Balance: collectively evaluated for impairment	$	5,536		$	33	$	3,115		$	547		$	30		$	18		$	373		$	15		$	174		$	1,548	$	11,389

Loans
Ending Balance	$	84,291		$	33,641	$	117,458		$	211,556		$	5,191		$	2,422		$	47,780		$	23,715		$	16,633		$	—	$	542,687

Ending Balance: individually evaluated for impairment	$	16,331		$	—	$	8,762		$	5,508		$	—		$	200		$	511		$	—		$	—		$	—	$	31,312

Ending Balance: collectively evaluated for impairment	$	67,960		$	33,641	$	108,696		$	206,048		$	5,191		$	2,222		$	47,269		$	23,715		$	16,633		$	—	$	511,375

Allowance for Loan Losses

As of and for the Three Months Ended June 30, 2011


Allowance for Credit Losses	Real Estate Construction and Land Development			Real Estate Secured by Farmland		Real Estate Secured by Residential Properties			Real Estate Secured by Nonfarm Nonresidential			Consumer Installment			Credit Cards and Related Plans			Commercial and Industrial			Loans to Finance Agricultural Production		All Other Loans			General Qualitative & Quantitative Portion		Total
	(Dollars in thousands)
Beginning balance	$	7,587		$	29	$	4,002		$	1,118		$	16		$	189		$	1,132		$	15	$	130		$	1,001	$	15,219
Charge-offs		(644	)		—		(255	)		(43	)		(6	)		—			(84	)		—		(56	)		—		(1,088	)
Recoveries		6			—		1			—			—			1			15			—		21			—		44
Provisions		518			4		491			57			20			(2	)		(441	)		—		79			547		1,273

Ending Balance	$	7,467		$	33	$	4,239		$	1,132		$	30		$	188		$	622		$	15	$	174		$	1,548	$	15,448

Ending Balance: individually evaluated for impairment	$	1,931		$	—	$	1,124		$	585		$	—		$	170		$	249		$	—	$	—		$	—	$	4,059

Ending Balance: collectively evaluated for impairment	$	5,536		$	33	$	3,115		$	547		$	30		$	18		$	373		$	15	$	174		$	1,548	$	11,389

Loans
Ending Balance	$	84,291		$	33,641	$	117,458		$	211,556		$	5,191		$	2,422		$	47,780		$	23,715	$	16,633		$	—	$	542,687

Ending Balance: individually evaluated for impairment	$	16,331		$	—	$	8,762		$	5,508		$	—		$	200		$	511		$	—	$	—		$	—	$	31,312

Ending Balance: collectively evaluated for impairment	$	67,960		$	33,641	$	108,696		$	206,048		$	5,191		$	2,222		$	47,269		$	23,715	$	16,633		$	—	$	511,375

Allowance for Loan Losses

As of and for the Year Ended December 31, 2010


Allowance for Credit Losses	Real Estate Construction and Land Development			Real Estate Secured by Farmland		Real Estate Secured by Residential Properties			Real Estate Secured by Nonfarm Nonresidential			Consumer Installment			Credit Cards and Related Plans			Commercial and Industrial			Loans to Finance Agricultural Production		All Other Loans			General Qualitative & Quantitative Portion			Total
	(Dollars in thousands)
Beginning balance	$	4,623		$	25	$	2,383		$	541		$	23		$	13		$	523		$	16	$	169		$	1,409		$	9,725
Charge-offs		(5,977	)		—		(2,022	)		(213	)		(54	)		(11	)		(1,191	)		—		(277	)		(—	)		(9,745	)
Recoveries		111			—		19			—			7			1			19			—		130			—			287
Provisions		7,411			3		3,070			679			36			18			1,531			2		117			113			12,980

Ending Balance	$	6,168		$	28	$	3,450		$	1,007		$	12		$	21		$	882		$	18	$	139		$	1,522		$	13,247

Ending Balance: individually evaluated for impairment	$	803		$	—	$	916		$	546		$	—		$	—		$	102		$	—	$	—		$	—		$	2,367

Ending Balance: collectively evaluated for impairment	$	5,365		$	28	$	2,534		$	461		$	12		$	21		$	780		$	18	$	139		$	1,522		$	10,880

Loans
Ending Balance	$	90,145		$	26,661	$	120,278		$	217,709		$	4,209		$	2,261		$	60,238		$	28,215	$	17,915		$	—		$	567,631

Ending Balance: individually evaluated for impairment	$	15,940		$	—	$	6,103		$	3,812		$	—		$	—		$	397		$	—	$	—		$	—		$	26,252

Ending Balance: collectively evaluated for impairment	$	74,205		$	26,661	$	114,175		$	213,897		$	4,209		$	2,261		$	59,841		$	28,215	$	17,915		$	—		$	541,379

Loans are closely monitored by management for changes in quality. This monitoring includes assessing the appropriateness of the credit quality indicator in relation to the risk of the loan. Management uses the following indicators to grade the risk of each loan based on a system of eight possible ratings.

Pass: Include loans that are risk rated one through three. The primary source of repayment for pass loans is very likely to be sufficient, with secondary sources readily available; strong financial position; minimal risk; profitability, liquidity and capitalization are better than industry norms.

Weak Pass: Include loans that are risk rated four. The asset quality for weak pass assets is generally acceptable. Primary source of loan repayment is acceptable and secondary sources are likely to be realized, if needed; acceptable business credit, but borrowers operations, cash flow, or financial condition evidence more than average risk; requires above average levels of supervision and attention from Loan Officer. The source of increased risk has been identified, can be effectively managed/corrected, and the increased risk is not significant to warrant a more severe rating.

Special Mention: Include loans that are risk rated five. A special mention asset is considered to be high risk due to potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in the deterioration of the repayment prospects for the asset or in the Company's credit position at some future date. Special mention assets are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.

Substandard: Include loans that are risk rated six through eight. Loans rated as substandard are considered to be very high risk. A substandard asset is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weakness that jeopardizes the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Some loans that are substandard do not meet the definition of an impaired loan and therefore are not deemed impaired.

The following tables present loans as of June 30, 2011 and December 31, 2010 classified by risk type:

Credit Quality Indicators

As of June 30, 2011


	Pass		Weak Pass		Special Mention		Substandard		Total
	(Dollars in thousands)
Real Estate—Construction and Land Development Loans	$	33,764	$	24,465	$	8,073	$	17,989	$	84,291
Real Estate—Secured by Farmland		25,423		4,495		3,723		—		33,641
Real Estate—Secured by Residential Properties		61,182		33,678		12,145		10,453		117,458
Real Estate—Secured by Nonfarm Nonresidential		90,634		79,101		29,664		12,157		211,556
Consumer Installment		3,225		1,629		240		97		5,191
Credit Cards and Related Plans		1,245		783		104		290		2,422
Commercial and Industrial		26,305		18,483		2,115		877		47,780
Loans to Finance Agriculture Production		17,131		3,996		2,588		—		23,715
All Other Loans		7,006		9,540		83		4		16,633

Total	$	265,915	$	176,170	$	58,735	$	41,867	$	542,687

Credit Quality Indicators

As of December 31, 2010


	Pass		Weak Pass		Special Mention		Substandard		Total
	(Dollars in thousands)
Real Estate—Construction and Land Development Loans	$	35,356	$	27,978	$	9,466	$	17,345	$	90,145
Real Estate—Secured by Farmland		17,869		6,294		2,495		3		26,661
Real Estate—Secured by Residential Properties		64,457		43,364		3,469		8,988		120,278
Real Estate—Secured by Nonfarm Nonresidential		94,208		96,287		20,107		7,107		217,709
Consumer Installment		2,466		1,460		265		18		4,209
Credit Cards and Related Plans		1,211		869		89		92		2,261
Commercial and Industrial		33,416		22,805		3,292		725		60,238
Loans to Finance Agriculture Production		18,346		7,230		2,639		—		28,215
All Other Loans		8,442		9,341		119		13		17,915

Total	$	275,771	$	215,628	$	41,941	$	34,291	$	567,631

The following tables summarize the past due loans by category as of June 30, 2011 and December 31, 2010:

Past Due Loans

As of June 30, 2011


	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total
	(Dollars in thousands)
Real Estate Construction and Land Development	$	767	$	2,684	$	6,672	$	10,123	$	74,168	$	84,291
Real Estate Secured by Farmland		—		—		—		—		33,641		33,641
Real Estate Secured by Residential Properties		892		337		2,531		3,760		113,698		117,458
Real Estate Secured by Nonfarm Nonresidential		275		280		2,141		2,696		208,860		211,556
Consumer Installment		48		3		—		51		5,140		5,191
Credit Cards and Related Plans		90		5		—		95		2,327		2,422
Commercial and Industrial		359		446		—		805		46,975		47,780
Loans to Finance Agricultural Production		—		—		—		—		23,715		23,715
All Other Loans		14		—		—		14		16,619		16,633

Total	$	2,445	$	3,755	$	11,344	$	17,544	$	525,143	$	542,687

Past Due Loans

As of December 31, 2010


	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total
	(Dollars in thousands)
Real Estate Construction and Land Development	$	2,997	$	929	$	9,627	$	13,553	$	76,592	$	90,145
Real Estate Secured by Farmland		—		—		—		—		26,661		26,661
Real Estate Secured by Residential Properties		251		389		2,526		3,166		117,112		120,278
Real Estate Secured by Nonfarm Nonresidential		545		—		919		1,464		216,245		217,709
Consumer Installment		35		6		5		46		4,163		4,209
Credit Cards and Related Plans		3		—		—		3		2,258		2,261
Commercial and Industrial		111		19		553		683		59,555		60,238
Loans to Finance Agricultural Production		—		—		—		—		28,215		28,215
All Other Loans		22		4		—		26		17,889		17,915

Total	$	3,964	$	1,347	$	13,630	$	18,941	$	548,690	$	567,631

The following tables summarize impaired loans as of June 30, 2011 and December 31, 2010. The recorded investment balance includes the loan balance, deferred fees that have yet to be recognized and accrued interest. The deferred fees that have yet to be recognized are not material amounts. At June 30, 2011, $9.0 million of the recorded investment in impaired loans were loans that were written down through partial charge-offs of $6.0 million. At December 31, 2010, $11.8 million of the recorded investment in impaired loans were loans that were written down through partial charge-offs of $7.3 million.

Impaired Loans


	Balance at June 30, 2011						Six Months Ended June 30, 2011				Three Months Ended June 30, 2011
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(Dollars in thousands)
With no related allowance recorded:
Real Estate Construction and Land Development	$	7,995	$	11,610	$	—	$	7,819	$	82	$	7,105	$	33
Real Estate Secured by Farmland		—		—		—		—		—		—		—
Real Estate Secured by Residential Properties		3,860		4,222		—		3,846		38		3,855		22
Real Estate Secured by Nonfarm Nonresidential		2,501		2,544		—		1,517		24		2,183		17
Consumer Installment		—		—		—				—				—
Credit Cards and Related Plans		—		—		—		—		—		—		—
Commercial and Industrial		175		449		—		366		7		298		2
Loans to Finance Agricultural Production		—		—		—		—		—		—		—
All Other Loans		—		—		—		—		—		—		—

Total impaired loans with no related allowance	$	14,531	$	18,825	$	—	$	13,548	$	151	$	13,441	$	74

With an allowance recorded:
Real Estate Construction and Land Development	$	8,267	$	9,996	$	1,931	$	8,206	$	86	$	8,791	$	40
Real Estate Secured by Farmland		—		—		—		—		—		—		—
Real Estate Secured by Residential Properties		5,042		4,901		1,124		3,912		39		4,904		28
Real Estate Secured by Nonfarm Nonresidential		3,011		3,076		585		3,245		51		3,089		24
Consumer Installment		—		—		—		—		—		—		—
Credit Cards and Related Plans		201		200		170		200		6		200		3
Commercial and Industrial		301		300		249		404		8		358		2
Loans to Finance Agricultural Production		—		—		—		—		—		—		—
All Other Loans		—		—		—		—		—		—		—

Total impaired loans with related allowance recorded	$	16,822	$	18,473	$	4,059	$	15,967	$	190	$	17,342	$	97

Total
Construction and Land Development	$	16,262	$	21,606	$	1,931	$	16,025	$	168	$	15,896	$	73
Residential		8,902		9,123		1,124		7,758		77		8,759		50
Commercial		5,988		6,369		834		5,532		90		5,928		45
Consumer		201		200		170		200		6		200		3

Total impaired loans	$	31,353	$	37,298	$	4,059	$	29,515	$	341	$	30,783	$	171

Impaired Loans

As of December 31, 2010


	Recorded Investment		Unpaid Principal Balance		Related Allowance
	(Dollars in thousands)
With no related allowance recorded:
Real Estate Construction and Land Development	$	9,212	$	13,354	$	—
Real Estate Secured by Farmland		—		—		—
Real Estate Secured by Residential Properties		2,700		2,972		—
Real Estate Secured by Nonfarm Nonresidential		1,029		1,097		—
Consumer Installment		—		—		—
Credit Cards and Related Plans		—		—		—
Commercial and Industrial		218		217		—
Loans to Finance Agricultural Production		—		—		—
All Other Loans		—		—		—

Total impaired loans with no related allowance	$	13,159	$	17,640	$	—

With an allowance recorded:
Real Estate Construction and Land Development	$	6,771	$	9,497	$	803
Real Estate Secured by Farmland		—		—		—
Real Estate Secured by Residential Properties		3,411		3,405		915
Real Estate Secured by Nonfarm Nonresidential		2,794		2,784		546
Consumer Installment		—		—		—
Credit Cards and Related Plans		—		—		—
Commercial and Industrial		179		199		102
Loans to Finance Agricultural Production		—		—		—
All Other Loans		—		—		—

Total impaired loans with related allowance recorded	$	13,155	$	15,885	$	2,366

Total
Construction and Land Development	$	15,983	$	22,851	$	803
Residential		6,111		6,377		915
Commercial		4,220		4,297		648
Consumer		—		—		—

Total impaired loans	$	26,314	$	33,525	$	2,366

The following table presents nonaccrual loans as of June 30, 2011 and December 31, 2010 by loan category:

Nonaccrual Loans


	June 30, 2011		December 31, 2010
	(Dollars in thousands)
Real Estate Construction and Land Development	$	10,646	$	10,839
Real Estate Secured by Farmland		—		—
Real Estate Secured by Residential Properties		4,962		3,268
Real Estate Secured by Nonfarm Nonresidential		2,436		1,231
Consumer Installment		—		5
Credit Cards and Related Plans		—		—
Commercial and Industrial		253		553
Loans to Finance Agricultural Production		—		—
All Other Loans		—		—

Total	$	18,297	$	15,896