NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES

The following table summarizes the composition of the loan portfolio at June 30, 2011 and December 31, 2010:

	June 30,		December 31,
	2011		2010
	(dollars expressed in thousands)
Commercial, financial and agricultural	$	851,137	1,045,832
Real estate construction and development		332,389	490,766
Real estate mortgage:
One-to-four family residential		956,335	1,050,895
Multi-family residential		132,768	178,289
Commercial real estate		1,415,765	1,642,920
Consumer and installment, net of deferred costs (fees)		29,097	29,112
Loans held for sale		17,112	54,470
Loans, net of deferred costs (fees)	$	3,734,603	4,492,284

The allowance for loan losses is a reserve for estimated credit losses on individually evaluated loans determined to be impaired as well as estimated credit losses inherent in the loan portfolio, and is based on quarterly evaluations of the collectability and historical loss experience of loans. Actual credit losses, net of recoveries, are deducted from the allowance for loan losses. A provision for loan losses, which is a charge against earnings, is recorded to bring the allowance for loan losses to a level that, in management’s judgment, is appropriate to absorb probable losses in the loan portfolio.

The allocation methodology applied by the Company, designed to assess the appropriateness of the allowance for loan losses, includes an allocation methodology, as well as management’s ongoing review and grading of the loan portfolio into criticized loan categories (defined as specific loans warranting either specific allocation, or a criticized status of special mention, substandard, doubtful or loss). The allocation methodology focuses on evaluation of several factors, including but not limited to: evaluation of facts and circumstances related to specific loans, management’s ongoing review and grading of the loan portfolio, consideration of historical loan loss and delinquency experience within each portfolio category, trends in past due and nonaccrual loans, the level of potential problem loans, the risk characteristics of the various classifications of loans, changes in the size and character of the loan portfolio, concentrations of loans to specific borrowers or industries, existing economic conditions, the fair value of underlying collateral, and other qualitative and quantitative factors which could affect potential credit losses. Because each of the criteria used is subject to change, the allocation of the allowance for loan losses is made for analytical purposes and is not necessarily indicative of the trend of future loan losses in any particular loan category. The total allowance for loan losses is available to absorb losses from any segment of the loan portfolio.

When an individual loan is determined to be impaired, the allowance for loan losses attributable to the loan is allocated based on management’s estimate of the borrower’s ability to repay the loan given the availability of collateral, other sources of cash flows, as well as evaluation of legal options available to the Company. The amount of impairment is measured based upon the present value of expected future cash flows discounted at the loan’s effective interest rate, the fair value of the underlying collateral less applicable selling costs, or the observable market price of the loan. If foreclosure is probable or the loan is collateral dependent, impairment is measured using the fair value of the loan’s collateral, less estimated costs to sell. Large groups of homogeneous loans, such as residential mortgage, home equity and installment loans, are aggregated and collectively evaluated for impairment.

The following table presents the aging of loans by loan classification at June 30, 2011 and December 31, 2010:

								Recorded
								Investment
	30-59		60-89	90 Days	Total Past			> 90 Days
	Days		Days	and Over	Due	Current	Total Loans	Accruing
	(dollars expressed in thousands)
June 30, 2011:
Commercial, financial and
agricultural	$	2,849	8,019	82,150	93,018	758,119	851,137	857
Real estate construction and
development		1,661	—	95,797	97,458	234,931	332,389	—
One-to-four-family residential:
Bank portfolio		3,479	3,796	16,714	23,989	167,477	191,466	765
Mortgage Division portfolio		5,930	2,664	24,987	33,581	345,263	378,844	—
Home equity		3,080	1,124	8,624	12,828	373,197	386,025	976
Multi-family residential		332	—	11,138	11,470	121,298	132,768	—
Commercial real estate		15,069	6,795	69,113	90,977	1,324,788	1,415,765	156
Consumer and installment		279	129	41	449	28,648	29,097	7
Loan held for sale		—	—	—	—	17,112	17,112	—
Total	$	32,679	22,527	308,564	363,770	3,370,833	3,734,603	2,761

December 31, 2010:
Commercial, financial and
agricultural	$	5,574	7,286	68,274	81,134	964,698	1,045,832	909
Real estate construction and
development		1,523	10,816	137,176	149,515	341,251	490,766	2,932
One-to-four-family residential:
Bank portfolio		5,157	2,296	14,845	22,298	217,065	239,363	366
Mortgage Division portfolio		9,998	4,968	33,386	48,352	363,601	411,953	—
Home equity		5,373	1,658	8,438	15,469	384,110	399,579	1,316
Multi-family residential		16,279	1,670	12,960	30,909	147,380	178,289	—
Commercial real estate		9,391	15,252	129,187	153,830	1,489,090	1,642,920	—
Consumer and installment		515	265	165	945	28,167	29,112	—
Loan held for sale		—	—	—	—	54,470	54,470	—
Total	$	53,810	44,211	404,431	502,452	3,989,832	4,492,284	5,523

Under the Company’s loan policy, loans are placed on nonaccrual status once principal or interest payments become 90 days past due. However, individual loan officers may submit written requests for approval to continue the accrual of interest on loans that become 90 days past due. These requests may be submitted for approval consistent with the authority levels provided in the Company’s credit approval policies, and they are only granted if an expected near term future event, such as a pending renewal or expected payoff, exists at the time the loan becomes 90 days past due. If the expected near term future event does not occur as anticipated, the loan is then placed on nonaccrual status. At June 30, 2011 and December 31, 2010, the Company had $2.8 million and $5.5 million, respectively, of loans past due 90 days or more and still accruing interest.

The Company’s credit management policies and procedures focus on identifying, measuring and controlling credit exposure. These procedures employ a lender-initiated system of rating credits, which is ratified in the loan approval process and subsequently tested in internal credit reviews, external audits and regulatory bank examinations. The system requires the rating of all loans at the time they are originated or acquired, except for homogeneous categories of loans, such as residential real estate mortgage loans and consumer loans. These homogeneous loans are assigned an initial rating based on the Company’s experience with each type of loan. The Company adjusts the ratings of the homogeneous loans based on payment experience subsequent to their origination.

The Company includes adversely rated credits, including loans requiring close monitoring that would not normally be considered classified credits by the Company’s regulators, on its monthly loan watch list. Loans may be added to the Company’s watch list for reasons that are temporary and correctable, such as the absence of current financial statements of the borrower or a deficiency in loan documentation. Loans may also be added to the Company’s watch list whenever any adverse circumstance is detected which might affect the borrower’s ability to comply with the contractual terms of the loan. The delinquency of a scheduled loan payment, deterioration in the borrower’s financial condition identified in a review of periodic financial statements, a decrease in the value of the collateral securing the loan, or a change in the economic environment within which the borrower operates could initiate the addition of a loan to the Company’s watch list. Loans on the Company’s watch list require periodic detailed loan status reports prepared by the responsible officer which are discussed in formal meetings with credit review and credit administration staff members. Upgrades and downgrades of loan risk ratings may be initiated by the responsible loan officer. However, upgrades of risk ratings associated with significant credit relationships and/or problem credit relationships may only be made with the concurrence of appropriate regional or senior regional credit officers.

Under the Company’s risk rating system, special mention loans are those loans that do not currently expose the Company to sufficient risk to warrant classification as substandard, troubled debt restructuring (TDR) or nonaccrual, but possess weaknesses that deserve management’s close attention. Substandard loans include those loans characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. A loan is classified as a TDR when a borrower is experiencing financial difficulties that lead to the restructuring of a loan, and the Company grants concessions to the borrower in the restructuring that it would not otherwise consider. Loans classified as nonaccrual have all the weaknesses inherent in those loans classified as substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of the currently existing facts, conditions and values, highly questionable and improbable. Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass-rated loans.

The following table presents the credit exposure of the commercial loan portfolio by internally assigned credit grade as of June 30, 2011 and December 31, 2010:

			Real Estate
			Construction
	Commercial		and		Commercial
	and Industrial		Development	Multi-family	Real Estate	Total
	(dollars expressed in thousands)
June 30, 2011:
Pass	$	668,855	89,603	69,700	1,123,591	1,951,749
Special mention		36,637	52,857	21,844	125,426	236,764
Substandard		63,304	90,987	30,086	97,791	282,168
Troubled debt restructuring		1,048	3,145	—	—	4,193
Nonaccrual		81,293	95,797	11,138	68,957	257,185
	$	851,137	332,389	132,768	1,415,765	2,732,059

December 31, 2010:
Pass	$	829,820	151,686	112,369	1,285,902	2,379,777
Special mention		48,264	73,464	47,376	113,469	282,573
Substandard		100,383	128,227	5,584	95,933	330,127
Troubled debt restructuring		—	3,145	—	18,429	21,574
Nonaccrual		67,365	134,244	12,960	129,187	343,756
	$	1,045,832	490,766	178,289	1,642,920	3,357,807

The following table presents the credit exposure of the one-to-four family residential mortgage Bank portfolio and home equity portfolio by internally assigned credit grade as of June 30, 2011 and December 31, 2010:

	Bank		Home
	Portfolio		Equity	Total
	(dollars expressed in thousands)
June 30, 2011:
Pass	$	150,188	375,651	525,839
Special mention		11,863	976	12,839
Substandard		13,466	1,750	15,216
Nonaccrual		15,949	7,648	23,597
	$	191,466	386,025	577,491

December 31, 2010:
Pass	$	175,947	389,566	565,513
Special mention		17,358	1,316	18,674
Substandard		31,579	1,575	33,154
Nonaccrual		14,479	7,122	21,601
	$	239,363	399,579	638,942

The following table presents the credit exposure of the one-to-four family residential Mortgage Division portfolio and consumer and installment portfolio by payment activity as of June 30, 2011 and December 31, 2010:

	Mortgage		Consumer
	Division		and
	Portfolio		Installment	Total
	(dollars expressed in thousands)
June 30, 2011:
Pass	$	261,805	29,063	290,868
Substandard		5,739	—	5,739
Troubled debt restructuring		86,313	—	86,313
Nonaccrual		24,987	34	25,021
	$	378,844	29,097	407,941

December 31, 2010:
Pass	$	277,379	28,947	306,326
Substandard		9,859	—	9,859
Troubled debt restructuring		91,329	—	91,329
Nonaccrual		33,386	165	33,551
	$	411,953	29,112	441,065

Loans deemed to be impaired include TDRs and nonaccrual loans. Impaired loans with outstanding balances equal to or greater than $500,000 are evaluated individually for impairment. For these loans, the Company measures the level of impairment based on the present value of the estimated projected cash flows or the estimated value of the collateral. If the current valuation is lower than the current book balance of the loan, the negative difference is evaluated for possible charge-off. In instances where management determines that a charge-off is not appropriate, a specific reserve is established for the individual loan in question. This specific reserve is included as a part of the overall allowance for loan losses.

The following tables present the recorded investment, unpaid principal balance, related allowance for loan losses, average recorded investment and interest income recognized while on impaired status for impaired loans without a related allowance for loan losses and for impaired loans with a related allowance for loan losses by loan classification at June 30, 2011 and December 31, 2010:

				Related
			Unpaid	Allowance	Average	Interest
	Recorded		Principal	for Loan	Recorded	Income
	Investment		Balance	Losses	Investment	Recognized
	(dollars expressed in thousands)
June 30, 2011:
With No Related Allowance Recorded:
Commercial, financial and agricultural	$	39,020	49,632	—	36,752	38
Real estate construction and development		47,380	54,275	—	58,432	60
Real estate mortgage:
Bank portfolio		5,265	5,320	—	4,781	—
Mortgage Division portfolio		15,533	31,536	—	16,299	—
Home equity portfolio		—	—	—	—	—
Multi-family residential		3,696	3,971	—	4,044	—
Commercial real estate		25,700	30,235	—	40,809	86
Consumer and installment		—	—	—	—	—
		136,594	174,969	—	161,117	184
With A Related Allowance Recorded:
Commercial, financial and agricultural		43,321	83,476	7,489	40,803	—
Real estate construction and development		51,562	71,852	6,961	63,590	35
Real estate mortgage:
Bank portfolio		10,684	11,548	370	9,703	—
Mortgage Division portfolio		95,767	104,506	15,717	100,491	1,325
Home equity portfolio		7,648	8,049	1,700	7,333	—
Multi-family residential		7,442	7,560	683	8,143	—
Commercial real estate		43,257	45,002	6,478	68,687	—
Consumer and installment		34	34	9	80	—
		259,715	332,027	39,407	298,830	1,360
Total:
Commercial, financial and agricultural		82,341	133,108	7,489	77,555	38
Real estate construction and development		98,942	126,127	6,961	122,022	95
Real estate mortgage:
Bank portfolio		15,949	16,868	370	14,484	—
Mortgage Division portfolio		111,300	136,042	15,717	116,790	1,325
Home equity portfolio		7,648	8,049	1,700	7,333	—
Multi-family residential		11,138	11,531	683	12,187	—
Commercial real estate		68,957	75,237	6,478	109,496	86
Consumer and installment		34	34	9	80	—
	$	396,309	506,996	39,407	459,947	1,544

				Related
			Unpaid	Allowance	Average	Interest
	Recorded		Principal	for Loan	Recorded	Income
	Investment		Balance	Losses	Investment	Recognized
	(dollars expressed in thousands)
December 31, 2010:
With No Related Allowance Recorded:
Commercial, financial and agricultural	$	9,777	29,258	—	9,244	246
Real estate construction and development		40,527	40,997	—	79,408	38
Real estate mortgage:
Bank portfolio		4,141	4,324	—	4,088	—
Mortgage Division portfolio		15,469	34,113	—	15,536	—
Home equity portfolio		—	—	—	—	—
Multi-family residential		5,555	5,702	—	4,833	—
Commercial real estate		54,317	56,983	—	47,881	1,249
Consumer and installment		—	—	—	—	—
		129,786	171,377	—	160,990	1,533
With A Related Allowance Recorded:
Commercial, financial and agricultural		57,588	70,668	6,617	54,448	21
Real estate construction and development		96,862	187,568	10,605	189,790	695
Real estate mortgage:
Bank portfolio		10,338	12,550	372	10,204	—
Mortgage Division portfolio		109,246	117,075	16,746	109,721	3,697
Home equity portfolio		7,122	7,601	1,155	5,302	—
Multi-family residential		7,405	12,349	1,024	6,443	—
Commercial real estate		93,299	120,311	14,329	82,244	—
Consumer and installment		165	165	55	290	—
		382,025	528,287	50,903	458,442	4,413
Total:
Commercial, financial and agricultural		67,365	99,926	6,617	63,692	267
Real estate construction and development		137,389	228,565	10,605	269,198	733
Real estate mortgage:
Bank portfolio		14,479	16,874	372	14,292	—
Mortgage Division portfolio		124,715	151,188	16,746	125,257	3,697
Home equity portfolio		7,122	7,601	1,155	5,302	—
Multi-family residential		12,960	18,051	1,024	11,276	—
Commercial real estate		147,616	177,294	14,329	130,125	1,249
Consumer and installment		165	165	55	290	—
	$	511,811	699,664	50,903	619,432	5,946

Recorded investment represents the Company’s investment in its impaired loans reduced by any charge-offs recorded against the allowance for loan losses on these same loans. At June 30, 2011 and December 31, 2010, the Company had recorded charge-offs of $110.7 million and $187.9 million, respectively, on its impaired loans, representing the difference between the unpaid principal balance and the recorded investment reflected in the table above. The unpaid principal balance represents the principal amount contractually owed to the Company by the borrowers on the impaired loans.

The outstanding balance and carrying amount of impaired loans acquired in acquisitions was $573,000 and $94,000 at June 30, 2011, respectively, $1.4 million and $314,000 at December 31, 2010, respectively, and $3.8 million and $940,000 at June 30, 2010, respectively. Changes in the carrying amount of impaired loans acquired in acquisitions for the three and six months ended June 30, 2011 and 2010 were as follows:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2011		2010		2011		2010
	(dollars expressed in thousands)
Balance, beginning of period	$	94	1,314		314		1,945
Transfers to other real estate		—	(178	)	(49	)	(370	)
Loans charged-off		—	(212	)	(29	)	(557	)
Payments and settlements		—	16		(142	)	(78	)
Balance, end of period	$	94	940		94		940

As the loans were classified as nonaccrual loans, there was no accretable yield related to these loans at June 30, 2011 and December 31, 2010. There were no impaired loans acquired during the three and six months ended June 30, 2011 and 2010.

Changes in the allowance for loan losses for the three and six months ended June 30, 2011 and 2010 were as follows:

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2011			2010		2011		2010
	(dollars expressed in thousands)
Balance, beginning of period	$	183,973		250,064		201,033		266,448
Allowance for loan losses allocated to loans sold		—		(64	)	—		(321	)
		183,973		250,000		201,033		266,127
Loans charged-off		(49,258	)	(99,407	)	(86,163	)	(187,789	)
Recoveries of loans previously charged-off		3,471		8,376		13,316		38,631
Net loans charged-off		(45,787	)	(91,031	)	(72,847	)	(149,158	)
Provision for loan losses		23,000		83,000		33,000		125,000
Balance, end of period	$	161,186		241,969		161,186		241,969

The following table represents a summary of changes in the allowance for loan losses by portfolio segment for the three and six months ended June 30, 2011 in addition to the impairment method used by loan category at June 30, 2011:

				Real Estate
	Commercial			Construction		One-to-Four		Multi-				Consumer
	and			and		Family		Family		Commercial		and
	Industrial			Development		Residential		Residential		Real Estate		Installment		Total
	(dollars expressed in thousands)
Three months ended
June 30, 2011:
Allowance for loan losses:
Beginning balance	$	26,571		52,334		55,729		8,520		40,123		696		183,973
Charge-offs		(17,190	)	(9,372	)	(6,762	)	(2,930	)	(12,927	)	(77	)	(49,258	)
Recoveries		1,076		513		1,339		43		385		115		3,471
Provision (benefit) for loan
losses		18,481		(7,707	)	2,303		(346	)	10,480		(211	)	23,000
Ending balance	$	28,938		35,768		52,609		5,287		38,061		523		161,186

Six months ended
June 30, 2011:
Allowance for loan losses:
Beginning balance	$	28,000		58,439		60,762		5,158		47,880		794		201,033
Charge-offs		(22,744	)	(19,686	)	(16,487	)	(2,930	)	(24,021	)	(295	)	(86,163	)
Recoveries		3,966		4,383		2,621		43		2,104		199		13,316
Provision (benefit) for loan
losses		19,716		(7,368	)	5,713		3,016		12,098		(175	)	33,000
Ending balance	$	28,938		35,768		52,609		5,287		38,061		523		161,186

Ending balance: individually
evaluated for impairment	$	5,644		4,734		3,636		432		4,926		—		19,372
Ending balance: collectively
evaluated for impairment	$	23,294		31,034		48,973		4,855		33,135		523		141,814
Financing receivables:
Ending balance	$	851,137		332,389		956,335		132,768		1,415,765		29,097		3,717,491
Ending balance: individually
evaluated for impairment	$	63,570		91,943		22,634		11,138		61,514		—		250,799
Ending balance: collectively
evaluated for impairment	$	787,567		240,446		933,701		121,630		1,354,251		29,097		3,466,692
Ending balance: loans
acquired with deteriorated
credit quality	$	—		—		94		—		—		—		94

The following table represents a summary of the allowance for loan losses by portfolio segment at December 31, 2010 in addition to the impairment method used by loan category at December 31, 2010:

			Real Estate
	Commercial		Construction	One-to-Four	Multi-		Consumer
	and		and	Family	Family	Commercial	and
	Industrial		Development	Residential	Residential	Real Estate	Installment	Total
	(dollars expressed in thousands)
December 31, 2010:
Allowance for loan losses	$	28,000	58,439	60,762	5,158	47,880	794	201,033
Ending balance: individually
evaluated for impairment	$	4,690	6,572	4,975	644	9,997	—	26,878
Ending balance: collectively
evaluated for impairment	$	23,310	51,867	55,787	4,514	37,883	794	174,155
Financing receivables:
Ending balance	$	1,045,832	490,766	1,050,895	178,289	1,642,920	29,112	4,437,814
Ending balance: individually
evaluated for impairment	$	44,585	128,797	30,388	12,960	136,254	—	352,984
Ending balance: collectively
evaluated for impairment	$	1,001,247	361,969	1,020,507	165,329	1,506,666	29,112	4,084,830
Ending balance: loans
acquired with deteriorated
credit quality	$	—	—	314	—	—	—	314