Note 4 - Loans and Allowance for Loan Losses

9 Months Ended

Sep. 30, 2012

Loans, Notes, Trade and Other Receivables Disclosure [Text Block]

NOTE 4: LOANS AND ALLOWANCE FOR LOAN LOSSES

At September 30, 2012, the Company’s loan portfolio was $1.86 billion, compared to $1.74 billion at December 31, 2011.  The various categories of loans are summarized as follows:

(In thousands)	September 30, 2012		December 31, 2011
Consumer
Credit cards	$	175,760	$	189,970
Student loans		36,441		47,419
Other consumer		107,604		109,211
Total consumer		319,805		346,600
Real Estate
Construction		128,423		109,825
Single family residential		355,976		355,094
Other commercial		546,224		536,372
Total real estate		1,030,623		1,001,291
Commercial
Commercial		138,719		141,422
Agricultural		130,727		85,728
Total commercial		269,446		227,150
Other		3,527		4,728
Loans		1,623,401		1,579,769
Loans acquired, covered by FDIC loss share (net of discount)		163,657		158,075
Loans acquired, not covered by FDIC loss share (net of discount)		73,023		--
Total loans before allowance for loan losses	$	1,860,081	$	1,737,844

Loan Origination/Risk Management – The Company seeks to manage its credit risk by diversifying its loan portfolio, determining that borrowers have adequate sources of cash flow for loan repayment without liquidation of collateral; obtaining and monitoring collateral; providing an adequate allowance for loans losses by regularly reviewing loans through the internal loan review process.  The loan portfolio is diversified by borrower, purpose and industry.  The Company seeks to use diversification within the loan portfolio to reduce its credit risk, thereby minimizing the adverse impact on the portfolio, if weaknesses develop in either the economy or a particular segment of borrowers.  Collateral requirements are based on credit assessments of borrowers and may be used to recover the debt in case of default.  Furthermore, factors that influenced the Company’s judgment regarding the allowance for loan losses consists of a three-year historical loss average segregated by each primary loan sector.  On an annual basis, historical loss rates are calculated for each sector.

Consumer – The consumer loan portfolio consists of credit card loans, student loans and other consumer loans.  The Company no longer originates student loans, and the current portfolio is guaranteed by the Department of Education at 97% of principal and interest.  Credit card loans are diversified by geographic region to reduce credit risk and minimize any adverse impact on the portfolio. Although they are regularly reviewed to facilitate the identification and monitoring of creditworthiness, credit card loans are unsecured loans, making them more susceptible to be impacted by economic downturns resulting in increasing unemployment.  Other consumer loans include direct and indirect installment loans and overdrafts.  Loans in this portfolio segment are sensitive to unemployment and other key consumer economic measures.

Real estate – The real estate loan portfolio consists of construction loans, single family residential loans and commercial loans.  Construction and development loans (“C&D”) and commercial real estate loans (“CRE”) can be particularly sensitive to valuation of real estate.  Commercial real estate cycles are inevitable.  The long planning and production process for new properties and rapid shifts in business conditions and employment create an inherent tension between supply and demand for commercial properties.  While general economic trends often move individual markets in the same direction over time, the timing and magnitude of changes are determined by other forces unique to each market.  CRE cycles tend to be local in nature and longer than other credit cycles.  Factors influencing the CRE market are traditionally different from those affecting residential real estate markets; thereby making predictions for one market based on the other difficult.  Additionally, submarkets within commercial real estate – such as office, industrial, apartment, retail and hotel – also experience different cycles, providing an opportunity to lower the overall risk through diversification across types of CRE loans.  Management realizes that local demand and supply conditions will also mean that different geographic areas will experience cycles of different amplitude and length.  The Company monitors these loans closely and has no significant concentrations in its real estate loan portfolio.

Commercial – The commercial loan portfolio includes commercial and agricultural loans, representing loans to commercial customers and farmers for use in normal business or farming operations to finance working capital needs, equipment purchase or other expansion projects.  Collection risk in this portfolio is driven by the creditworthiness of the underlying borrowers, particularly cash flow from customers’ business or farming operations.  The Company continues its efforts to keep loan terms short, reducing the negative impact of upward movement in interest rates.  Term loans are generally set up with a one or three year balloon, and the Company has recently instituted a pricing mechanism for commercial loans.  It is standard practice to require personal guaranties on all commercial loans, particularly as they relate to closely-held or limited liability entities.

Nonaccrual and Past Due Loans – Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due.  Loans are placed on nonaccrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions.  Loans may be placed on nonaccrual status regardless of whether or not such loans are considered past due.  When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due.  Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Nonaccrual loans, excluding loans acquired, segregated by class of loans, are as follows:

(In thousands)	September 30, 2012		December 31, 2011
Consumer:
Credit cards	$	295	$	305
Student loans		--		--
Other consumer		804		839
Total consumer		1,099		1,144
Real estate:
Construction		537		121
Single family residential		2,203		3,198
Other commercial		3,746		7,233
Total real estate		6,486		10,552
Commercial:
Commercial		689		757
Agricultural		206		454
Total commercial		895		1,211
Other		--		--
Total	$	8,480	$	12,907

An age analysis of past due loans, excluding loans acquired, segregated by class of loans, is as follows:

(In thousands)	Gross 30-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans		90 Days Past Due & Accruing
September 30, 2012
Consumer:
Credit cards	$	696	$	595	$	1,291	$	174,469	$	175,760	$	300
Student loans		2,376		2,324		4,700		31,741		36,441		2,324
Other consumer		1,320		521		1,841		105,763		107,604		184
Total consumer		4,392		3,440		7,832		311,973		319,805		2,808
Real estate:
Construction		129		408		537		127,886		128,423		--
Single family residential		1,645		1,870		3,515		352,461		355,976		451
Other commercial		1,295		3,527		4,822		541,402		546,224		--
Total real estate		3,069		5,805		8,874		1,021,749		1,030,623		451
Commercial:
Commercial		1,416		565		1,981		136,738		138,719		66
Agricultural		42		180		222		130,505		130,727		--
Total commercial		1,458		745		2,203		267,243		269,446		66
Other		--		--		--		3,527		3,527		--
Total	$	8,919	$	9,990	$	18,909	$	1,604,492	$	1,623,401	$	3,325
December 31, 2011
Consumer:
Credit cards	$	820	$	605	$	1,425	$	188,545	$	189,970	$	300
Student loans		1,894		2,483		4,377		43,042		47,419		2,483
Other consumer		1,398		664		2,062		107,149		109,211		335
Total consumer		4,112		3,752		7,864		338,736		346,600		3,118
Real estate:
Construction		548		121		669		109,156		109,825		--
Single family residential		3,581		2,262		5,843		349,251		355,094		121
Other commercial		806		6,240		7,046		529,326		536,372		15
Total real estate		4,935		8,623		13,558		987,733		1,001,291		136
Commercial:
Commercial		467		467		934		140,488		141,422		9
Agricultural		103		312		415		85,313		85,728		5
Total commercial		570		779		1,349		225,801		227,150		14
Other		--		--		--		4,728		4,728		--
Total	$	9,617	$	13,154	$	22,771	$	1,556,998	$	1,579,769	$	3,268

Impaired Loans – A loan is considered impaired when it is probable that the Company will not receive all amounts due according to the contractual terms of the loans, including scheduled principal and interest payments.  This includes loans that are delinquent 90 days or more, nonaccrual loans and certain other loans identified by management.  Certain other loans identified by management consist of performing loans with specific allocations of the allowance for loan losses.  Impaired loans are carried at the present value of estimated future cash flows using the loan’s existing rate, or the fair value of the collateral if the loan is collateral dependent.  Specific allocations are applied when quantifiable factors are present requiring a greater allocation than that established by the Company based on its analysis of historical losses for each loan category.

Impairment is evaluated in total for smaller-balance loans of a similar nature and on an individual loan basis for other loans.  Impaired loans, or portions thereof, are charged-off when deemed uncollectible.

Impaired loans, net of government guarantees and excluding loans acquired, segregated by class of loans, are as follows:

(In thousands)	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance		Average Investment in Impaired Loans		Interest Income Recognized		Average Investment in Impaired Loans		Interest Income Recognized
September 30, 2012											Three Months Ended				Nine Months Ended
Consumer:
Credit cards	$	595	$	595	$	--	$	595	$	89	$	563	$	4	$	570	$	12
Student loans		70		70		--		70		2		--		--		--		--
Other consumer		1,087		952		125		1,077		252		1,193		14		1,192		44
Total consumer		1,752		1,617		125		1,742		343		1,756		18		1,762		56
Real estate:
Construction		5,478		3,937		1,497		5,434		512		5,634		68		5,493		203
Single family residential		3,909		2,965		734		3,699		437		3,611		43		4,034		149
Other commercial		23,424		7,843		14,233		22,076		1,727		21,992		265		23,405		862
Total real estate		32,811		14,745		16,464		31,209		2,676		31,237		376		32,932		1,214
Commercial:
Commercial		873		541		317		858		248		827		10		810		30
Agricultural		213		132		7		139		24		132		2		267		10
Total commercial		1,086		673		324		997		272		959		12		1,077		40
Other		--		--		--		--		--		--		--		--		--
Total	$	35,649	$	17,035	$	16,913	$	33,948	$	3,291	$	33,952	$	406	$	35,771	$	1,310

December 31, 2011											Three Months Ended September 30, 2011				Nine Months Ended September 30, 2011
Consumer:
Credit cards	$	605	$	605	$	--	$	605	$	91	$	569	$	13	$	743	$	38
Student loans		--		--		--		--		--		--		--		--		--
Other consumer		1,359		1,203		128		1,331		266		1,211		13		1,290		42
Total consumer		1,964		1,808		128		1,936		357		1,780		26		2,033		80
Real estate:
Construction		5,324		3,783		1,498		5,281		415		5,855		64		7,127		231
Single family residential		5,152		4,243		589		4,832		402		6,712		73		6,264		203
Other commercial		28,538		13,642		13,100		26,742		1,942		30,828		336		31,015		1,009
Total real estate		39,014		21,668		15,187		36,855		2,759		43,395		473		44,406		1,443
Commercial:
Commercial		949		569		312		881		214		1,173		13		1,308		42
Agricultural		572		332		104		436		153		584		6		563		18
Total commercial		1,521		901		416		1,317		367		1,757		19		1,871		60
Other		--		--		--		--		--		--		--		--		--
Total	$	42,499	$	24,377	$	15,731	$	40,108	$	3,483	$	46,932	$	518	$	48,310	$	1,583

At September 30, 2012, and December 31, 2011, impaired loans, net of government guarantees and excluding loans acquired, totaled $33.9 million and $40.1 million, respectively.  Allocations of the allowance for loan losses relative to impaired loans were $3.3 million at September 30, 2012, and $3.5 million at December 31, 2011.  Approximately $406,000 and $1.3 million of interest income was recognized on average impaired loans of $34.0 million and $35.8 million for the three and nine months ended September 30, 2012.  Interest income recognized on impaired loans on a cash basis during the three and nine months ended September 30, 2012 and 2011 was not material.

Included in certain impaired loan categories are troubled debt restructurings (“TDRs”).  When the Company restructures a loan to a borrower that is experiencing financial difficulty and grants a concession that it would not otherwise consider, a “troubled debt restructuring” results and the Company classifies the loan as a TDR.  The Company grants various types of concessions, primarily interest rate reduction and/or payment modifications or extensions, with an occasional forgiveness of principal.

Under ASC Topic 310-10-35 – Subsequent Measurement, a TDR is considered to be impaired, and an impairment analysis must be performed.  The Company assesses the exposure for each modification, either by collateral discounting or by calculation of the present value of future cash flows, and determines if a specific allocation to the allowance for loan losses is needed.

Once an obligation has been restructured because of such credit problems, it continues to be considered a TDR until paid in full; or, if an obligation yields a market interest rate and no longer has any concession regarding payment amount or amortization, then it is not considered a TDR at the beginning of the calendar year after the year in which the improvement takes place.  The Company returns TDRs to accrual status only if (1) all contractual amounts due can reasonably be expected to be repaid within a prudent period, and (2) repayment has been in accordance with the contract for a sustained period, typically at least six months.

The following table presents a summary of troubled debt restructurings, excluding loans acquired, segregated by class of loans.

	Accruing TDR Loans				Nonaccrual TDR Loans				Total TDR Loans
(Dollars in thousands)	Number		Balance		Number		Balance		Number		Balance
September 30, 2012
Consumer:
Other consumer		3	$	46		--	$	--		3	$	46
Total consumer		3		46		--		--		3		46
Real estate:
Construction		2		1,212		--		--		2		1,212
Single-family residential		3		574		1		18		4		592
Other commercial		15		9,085		2		2,347		17		11,432
Total real estate		20		10,871		3		2,365		23		13,236
Commercial:
Commercial		2		78		2		324		4		402
Total commercial		2		78		2		324		4		402
Total		25	$	10,995		5	$	2,689		30	$	13,684
December 31, 2011
Consumer:
Other consumer		5	$	23		--	$	--		5	$	23
Total consumer		5		23		--		--		5		23
Real estate:
Construction		1		1,277		--		--		1		1,277
Single-family residential		5		957		1		34		6		991
Other commercial		13		8,601		7		5,082		20		13,683
Total real estate		19		10,835		8		5,116		27		15,951
Commercial:
Commercial		2		332		1		35		3		367
Agricultural		2		201		--		--		2		201
Total commercial		4		533		1		35		5		568
Total		28	$	11,391		9	$	5,151		37	$	16,542

The following table presents loans that were restructured as TDRs during the three and nine months ended September 30, 2012 and 2011, excluding loans acquired, segregated by class of loans.

							Modification Type
(Dollars in thousands)	Number of Loans		Balance Prior to TDR		Balance at September 30		Change in Maturity Date		Change in Rate		Financial Impact on Date of Restructure
Nine Months Ended September 30, 2012
Consumer:
Other consumer		1	$	48	$	33	$	--	$	33	$	--
Total consumer		1		48		33		--		33		--
Real estate:
Other commercial		4		1,054		887		--		887		--
Total real estate		4		1,054		887		--		887		--
Commercial:
Commercial		1		50		39		--		39		--
Total commercial		1		50		39		--		39		--
Total		6	$	1,152	$	959	$	--	$	959	$	--
Three Months Ended September 30, 2011
Consumer:
Other consumer		1	$	514	$	514	$	514	$	--	$	--
Total consumer		1		514		514		514		--		--
Total		1	$	514	$	514	$	514	$	--	$	--
Nine Months Ended September 30, 2011
Consumer:
Other consumer		3	$	20	$	13	$	13	$	--	$	--
Total consumer		3		20		13		13		--		--
Real estate:
Single-family residential		1		262		259		259		--		--
Other commercial		2		526		524		524		--		--
Total real estate		3		788		783		783		--		--
Commercial:
Commercial		2		346		340		340		--		--
Total commercial		2		346		340		340		--		--
Total		8	$	1,154	$	1,136	$	1,136	$	--	$	--

During the three months ended September 30, 2012, the Company did not modify any loans which were deemed troubled debt restructurings.  During the nine months ended September 30, 2012, the Company modified a total of six loans with a recorded investment of $1.2 million prior to modification which were deemed troubled debt restructurings.  Although there was additional modification of terms on some of the loans, the prevailing modification on all restructured loans was a lowering of the interest rate.  Based on the fair value of the collateral, no specific reserve was determined necessary for any of these loans.  Also, there was no immediate financial impact from the restructuring of these loans, as it was not considered necessary to charge-off interest or principal on the date of restructure.

The following table presents loans for which a payment default occurred during the three and nine months ended September 30, 2012 and 2011, and that had been modified as a TDR within 12 months or less of the payment default, excluding loans acquired, segregated by class of loans.  We define a payment default as a payment received more than 90 days after its due date.

(Dollars in thousands)	Number of Loans		Recorded Balance at September 30		Charge-offs		Transfers to OREO
Three Months Ended September, 2012
Real estate:
Other commercial		1	$	--	$	--	$	473
Total real estate		1		--		--		473
Commercial:
Commercial		1		7		125		--
Total commercial		1		7		125		--
Total		2	$	7	$	125	$	473
Nine Months Ended September, 2012
Real estate:
Other commercial		1	$	--	$	--	$	473
Total real estate		1		--		--		473
Commercial:
Commercial		1		7		125		--
Total commercial		1		7		125		--
Total		2	$	7	$	125	$	473
Three Months Ended September, 2011
Real estate:
Other commercial		1	$	724	$	556	$	--
Total real estate		1		724		556		--
Total		1	$	724	$	556	$	--
Nine Months Ended September, 2011
Real estate:
Other commercial		5	$	4,057	$	556	$	--
Total real estate		5		4,057		556		--
Commercial:
Commercial		1		35		3		--
Total commercial		1		35		3		--
Total		6	$	4,092	$	559	$	--

Credit Quality Indicators – As part of the on-going monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators including trends related to (i) the weighted-average risk rating of commercial and real estate loans, (ii) the level of classified commercial and real estate loans, (iii) net charge-offs, (iv) non-performing loans (see details above) and (v) the general economic conditions in the States of Arkansas, Kansas and Missouri.

The Company utilizes a risk rating matrix to assign a risk rate to each of its commercial and real estate loans. Loans are rated on a scale of 1 to 8.  A description of the general characteristics of the 8 risk ratings is as follows:

·   Risk Rate 1 – Pass (Excellent) – This category includes loans which are virtually free of credit risk.  Borrowers in this category represent the highest credit quality and greatest financial strength.

·   Risk Rate 2 – Pass (Good) - Loans under this category possess a nominal risk of default.  This category includes borrowers with strong financial strength and superior financial ratios and trends.  These loans are generally fully secured by cash or equivalents (other than those rated "excellent”).

·   Risk Rate 3 – Pass (Acceptable – Average) - Loans in this category are considered to possess a normal level of risk.  Borrowers in this category have satisfactory financial strength and adequate cash flow coverage to service debt requirements.  If secured, the perfected collateral should be of acceptable quality and within established borrowing parameters.

·   Risk Rate 4 – Pass (Monitor) - Loans in the Watch (Monitor) category exhibit an overall acceptable level of risk, but that risk may be increased by certain conditions, which represent "red flags".  These "red flags" require a higher level of supervision or monitoring than the normal "Pass" rated credit.  The borrower may be experiencing these conditions for the first time, or it may be recovering from weakness, which at one time justified a harsher rating.  These conditions may include: weaknesses in financial trends; marginal cash flow; one-time negative operating results; non-compliance with policy or borrowing agreements; poor diversity in operations; lack of adequate monitoring information or lender supervision; questionable management ability/stability.

·   Risk Rate 5 – Special Mention - A loan in this category has potential weaknesses that deserve management's close attention.  If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution's credit position at some future date.  Special Mention loans are not adversely classified (although they are "criticized") and do not expose an institution to sufficient risk to warrant adverse classification.  Borrowers may be experiencing adverse operating trends, or an ill-proportioned balance sheet.  Non-financial characteristics of a Special Mention rating may include management problems, pending litigation, a non-existent, or ineffective loan agreement or other material structural weakness, and/or other significant deviation from prudent lending practices.

·   Risk Rate 6 – Substandard - A Substandard loan is inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged, if any.  Loans so classified must have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt.  The loans are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.  This does not imply ultimate loss of the principal, but may involve burdensome administrative expenses and the accompanying cost to carry the loan.

·   Risk Rate 7 – Doubtful – A loan classified Doubtful has all the weaknesses inherent in a substandard loan except that the weaknesses make collection or liquidation in full (on the basis of currently existing facts, conditions, and values) highly questionable and improbable. Doubtful borrowers are usually in default, lack adequate liquidity, or capital, and lack the resources necessary to remain an operating entity.  The possibility of loss is extremely high, but because of specific pending events that may strengthen the asset, its classification as loss is deferred.  Pending factors include: proposed merger or acquisition; liquidation procedures; capital injection; perfection of liens on additional collateral; and refinancing plans.  Loans classified as Doubtful are placed on nonaccrual status.

·   Risk Rate 8 – Loss - Loans classified Loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted.  This classification does not mean that the loans has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless loan, even though partial recovery may be affected in the future.  Borrowers in the Loss category are often in bankruptcy, have formally suspended debt repayments, or have otherwise ceased normal business operations.  Loans should be classified as Loss and charged-off in the period in which they become uncollectible.

Loans acquired, including loans covered by FDIC loss share agreements, are evaluated using this internal grading system.  However, since these loans are accounted for in pools, all of the loan pools were considered satisfactory at September 30, 2012 and December 31, 2011, respectively.  Loans acquired, covered by loss share agreements, have additional protection provided by the FDIC.  See Note 5, Loans Acquired, for further discussion of the acquired loan pools and loss sharing agreements.

Classified loans for the Company include loans in Risk Ratings 6, 7 and 8.  Loans may be classified, but not considered impaired, due to one of the following reasons:  (1) The Company has established minimum dollar amount thresholds for loan impairment testing.  Loans rated 6 – 8 that fall under the threshold amount are not tested for impairment and therefore are not included in impaired loans.  (2) Of the loans that are above the threshold amount and tested for impairment, after testing, some are considered to not be impaired and are not included in impaired loans.  Total classified loans were $45.5 million and $60.6 million as of September 30, 2012 and December 31, 2011, respectively.

The following table presents a summary of loans by credit risk rating as of September 30, 2012 and December 31, 2011, segregated by class of loans.

(In thousands)	Risk Rate 1-4		Risk Rate 5		Risk Rate 6		Risk Rate 7		Risk Rate 8		Total
September 30, 2012
Consumer:
Credit cards	$	175,165	$	--	$	595	$	--	$	--	$	175,760
Student loans		34,117		--		2,324		--		--		36,441
Other consumer		105,777		48		1,720		36		23		107,604
Total consumer		315,059		48		4,639		36		23		319,805
Real estate:
Construction		121,984		239		6,200		--		--		128,423
Single family residential		348,654		1,650		5,609		63		--		355,976
Other commercial		511,509		8,758		25,957		--		--		546,224
Total real estate		982,147		10,647		37,766		63		--		1,030,623
Commercial:
Commercial		135,936		166		2,612		5		--		138,719
Agricultural		130,323		--		404		--		--		130,727
Total commercial		266,259		166		3,016		5		--		269,446
Other		3,527		--		--		--		--		3,527
Loans acquired, covered by FDIC loss share		163,657		--		--		--		--		163,657
Loans acquired, not covered by FDIC loss share		73,023		--		--		--		--		73,023
Total	$	1,803,672	$	10,861	$	45,421	$	104	$	23	$	1,860,081

(In thousands)	Risk Rate 1-4		Risk Rate 5		Risk Rate 6		Risk Rate 7		Risk Rate 8		Total
December 31, 2011
Consumer:
Credit cards	$	189,365	$	--	$	605	$	--	$	--	$	189,970
Student loans		44,936		--		2,483		--		--		47,419
Other consumer		107,217		12		1,906		50		26		109,211
Total consumer		341,518		12		4,994		50		26		346,600
Real estate:
Construction		100,534		3,699		5,592		--		--		109,825
Single family residential		345,880		1,377		7,821		16		--		355,094
Other commercial		491,466		8,465		36,441		--		--		536,372
Total real estate		937,880		13,541		49,854		16		--		1,001,291
Commercial:
Commercial		136,107		510		4,762		43		--		141,422
Agricultural		84,747		148		833		--		--		85,728
Total commercial		220,854		658		5,595		43		--		227,150
Other		4,728		--		--		--		--		4,728
Loans acquired, covered by FDIC loss share		158,075		--		--		--		--		158,075
Total	$	1,663,055	$	14,211	$	60,443	$	109	$	26	$	1,737,844

Net (charge-offs)/recoveries for the three and nine months ended September 30, 2012 and 2011, excluding loans acquired, segregated by class of loans, were as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
(In thousands)	2012			2011			2012			2011
Consumer:
Credit cards	$	(564	)	$	(879	)	$	(1,968	)	$	(2,706	)
Student loans		(20	)		(9	)		(58	)		(31	)
Other consumer		(231	)		(222	)		(380	)		(825	)
Total consumer		(815	)		(1,110	)		(2,406	)		(3,562	)
Real estate:
Construction		--			(15	)		46			(787	)
Single-family residential		(246	)		(125	)		(457	)		(480	)
Other commercial		(466	)		36			(1,741	)		(468	)
Total real estate		(712	)		(104	)		(2,152	)		(1,735	)
Commercial:
Commercial		(24	)		(276	)		(67	)		(847	)
Agriculture		--			3			(184	)		34
Total commercial		(24	)		(273	)		(251	)		(813	)
Other		--			--			--			--
Total	$	(1,551	)	$	(1,487	)	$	(4,809	)	$	(6,110	)

Allowance for Loan Losses – The allowance for loan losses is a reserve established through a provision for loan losses charged to expense, which represents management’s best estimate of probable losses that have been incurred within the existing portfolio of loans.  The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio.  The Company’s allowance for loan loss methodology includes allowance allocations calculated in accordance with ASC Topic 310, Receivables, and allowance allocations calculated in accordance with ASC Topic 450, Contingencies.  Accordingly, the methodology is based on historical loss experience by type of credit and internal risk grade, specific homogeneous risk pools and specific loss allocations, with adjustments for current events and conditions.  The Company’s process for determining the appropriate level of the allowance for loan losses is designed to account for credit deterioration as it occurs.  The provision for loan losses reflects loan quality trends, including the levels of and trends related to nonaccrual loans, past due loans, potential problem loans, criticized loans and net charge-offs or recoveries, among other factors.  The provision for loan losses also reflects the totality of actions taken on all loans for a particular period.  In other words, the amount of the provision reflects not only the necessary increases in the allowance for loan losses related to newly identified criticized loans, but it also reflects actions taken related to other loans including, among other things, any necessary increases or decreases in required allowances for specific loans or loan pools.

The allowance for loan losses is determined monthly based on management’s assessment of several factors such as (1) historical loss experience based on volumes and types, (2) reviews or evaluations of the loan portfolio and allowance for loan losses, (3) trends in volume, maturity and composition, (4) off balance sheet credit risk, (5) volume and trends in delinquencies and nonaccruals, (6) lending policies and procedures including those for loan losses, collections and recoveries, (7) national, state and local economic trends and conditions, (8) concentrations of credit that might affect loss experience across one or more components of the loan portfolio, (9) the experience, ability and depth of lending management and staff and (10) other factors and trends that will affect specific loans and categories of loans.

As management evaluates the allowance for loan losses, it is categorized as follows: (1) specific allocations, (2) allocations for classified assets with no specific allocation, (3) general allocations for each major loan category and (4) unallocated portion.

Specific allocations are made when factors are present requiring a greater reserve than would be required when using the assigned risk rating allocation.  As a general rule, if a specific allocation is warranted, it is the result of an analysis of a previously classified credit or relationship.  The Company’s evaluation process in specific allocations includes a review of appraisals or other collateral analysis.  These values are compared to the remaining outstanding principal balance.  If a loss is determined to be reasonably possible, the possible loss is identified as a specific allocation.  If the loan is not collateral dependent, the measurement of loss is based on the expected future cash flows of the loan.

The Company establishes allocations for loans rated “watch” through “doubtful” based upon analysis of historical loss experience by category.  A percentage rate is applied to each of these loan categories to determine the level of dollar allocation.

Management recognizes that unforeseen risks are inherent in the loan portfolio, and seeks to quantify, to the extent possible, factors that affect both the value and collectability of the asset.  Relative to ASC Topic 310, the Company has identified the following risk assessment factors that have the potential to affect loan quality, and correspondingly, loan recognition.  The factors are identified as (1) lending policies and procedures, (2) economic outlook and business conditions, (3) level and trend in delinquencies, (4) concentrations of credit and (5) external factors and competition.

The Company establishes general allocations for each major loan category.  This section also includes allocations to loans which are collectively evaluated for loss such as credit cards, one-to-four family owner occupied residential real estate loans and other consumer loans.  The allocations in this section are based on an analysis of historical losses for each loan category.  Management gives consideration to trends, changes in loan mix, delinquencies, prior losses and other related information.

Allowance allocations other than specific, classified and general are included in the unallocated portion.  While allocations are made for loans based upon historical loss analysis, the unallocated portion is designed to cover the uncertainty of how current economic conditions and other uncertainties may impact the existing loan portfolio.  Factors to consider include national and state economic conditions such as increases in unemployment, the recent real estate lending crisis, the volatility in the stock market and the unknown impact of the various government stimulus programs. Various Federal Reserve articles and reports indicate the economy is in a moderate recovery, but questions remain about the durability of growth and whether it can be sustained by private demand.  While the recession may be over, when compared to normal economic conditions, production, income, sales and employment are at very low levels.  With moderate economic growth, it is possible the recovery could take years.  The unemployment rate seems likely to remain elevated for several years.  The unallocated reserve addresses inherent probable losses not included elsewhere in the allowance for loan losses.  While calculating allocated reserve, the unallocated reserve supports uncertainties within the loan portfolio.

The following table details activity in the allowance for loan losses by portfolio segment for the three and nine months ended September 30, 2012.  Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

(In thousands)	Commercial			Real Estate			Credit Card			Other Consumer and Other			Unallocated			Total
Three Months Ended September 30, 2012
Balance, beginning of period	$	1,983		$	10,468		$	5,486		$	1,776		$	8,684		$	28,397
Provision for loan losses		83			327			527			236			126			1,299
Charge-offs		(86	)		(773	)		(806	)		(358	)		--			(2,023	)
Recoveries		62			61			242			107			--			472
Net charge-offs		(24	)		(712	)		(564	)		(251	)		--			(1,551	)
Balance, September 30, 2012	$	2,042		$	10,083		$	5,449		$	1,761		$	8,810		$	28,145
Nine Months Ended September 30, 2012
Balance, beginning of year	$	2,063		$	10,117		$	5,513		$	1,847		$	10,568		$	30,108
Provision for loan losses		230			2,118			1,904			352			(1,758	)		2,846
Charge-offs		(380	)		(3,390	)		(2,632	)		(836	)		--			(7,238	)
Recoveries		129			1,238			664			398			--			2,429
Net charge-offs		(251	)		(2,152	)		(1,968	)		(438	)		--			(4,809	)
Balance, September 30, 2012	$	2,042		$	10,083		$	5,449		$	1,761		$	8,810		$	28,145
Period-end amount allocated to:
Loans individually evaluated for impairment	$	272		$	2,676		$	89		$	254		$	--		$	3,291
Loans collectively evaluated for impairment		1,770			7,407			5,360			1,507			8,810			24,854
Balance, September 30, 2012	$	2,042		$	10,083		$	5,449		$	1,761		$	8,810		$	28,145

Activity in the allowance for loan losses for the three and nine months ended September 30, 2011 was as follows:

(In thousands)	Commercial			Real Estate			Credit Card			Other Consumer and Other			Unallocated		Total
Three Months Ended September 30, 2011
Balance, beginning of period	$	2,524		$	9,929		$	5,487		$	1,777		$	8,079	$	27,796
Provision for loan losses		116			(64	)		919			320			1,551		2,842
Charge-offs		(345	)		(255	)		(1,140	)		(450	)		--		(2,190	)
Recoveries		72			151			261			219			--		703
Net charge-offs		(273	)		(104	)		(879	)		(231	)		--		(1,487	)
Balance, September 30	$	2,367		$	9,761		$	5,527		$	1,866		$	9,630	$	29,151
Nine Months Ended September 30, 2011
Balance, beginning of year	$	2,277		$	9,692		$	5,549		$	1,958		$	6,940	$	26,416
Provision for loan losses		903			1,804			2,684			764			2,690		8,845
Charge-offs		(1,185	)		(2,280	)		(3,441	)		(1,360	)		--		(8,266	)
Recoveries		372			545			735			504			--		2,156
Net charge-offs		(813	)		(1,735	)		(2,706	)		(856	)		--		(6,110	)
Balance, September 30	$	2,367		$	9,761		$	5,527		$	1,866		$	9,630	$	29,151
Period-end amount allocated to:
Loans individually evaluated for impairment	$	312		$	2,371		$	107		$	279		$	--	$	3,069
Loans collectively evaluated for impairment		2,055			7,390			5,420			1,587			9,630		26,082
Balance, September 30	$	2,367		$	9,761		$	5,527		$	1,866		$	9,630	$	29,151
Period-end amount allocated to:
Loans individually evaluated for impairment	$	367		$	2,759		$	91		$	266		$	--	$	3,483
Loans collectively evaluated for impairment		1,696			7,358			5,422			1,581			10,568		26,625
Balance, December 31, 2011	$	2,063		$	10,117		$	5,513		$	1,847		$	10,568	$	30,108

The Company’s recorded investment in loans, excluding loans acquired, related to each balance in the allowance for loan losses by portfolio segment on the basis of the Company’s impairment methodology was as follows:

(In thousands)	Commercial		Real Estate		Credit Card		Other Consumer and Other		Total
September 30, 2012
Loans individually evaluated for impairment	$	997	$	31,209	$	595	$	1,147	$	33,948
Loans collectively evaluated for impairment		268,449		999,414		175,165		146,425		1,589,453
Balance, end of period	$	269,446	$	1,030,623	$	175,760	$	147,572	$	1,623,401
December 31, 2011
Loans individually evaluated for impairment	$	1,317	$	36,855	$	605	$	1,331	$	40,108
Loans collectively evaluated for impairment		225,833		964,436		189,365		160,027		1,539,661
Balance, end of period	$	227,150	$	1,001,291	$	189,970	$	161,358	$	1,579,769