Edgar Filing: INTERMOUNTAIN COMMUNITY BANCORP

IMCB-2012.3.31-10Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)



þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012



o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

COMMISSION FILE NUMBER 000-50667

INTERMOUNTAIN COMMUNITY BANCORP

(Exact name of registrant as specified in its charter)




Idaho		82-0499463
(State or other jurisdiction of		(IRS Employer
incorporation or organization)		Identification No.)

414 Church Street, Sandpoint, ID 83864

(Address of principal executive offices) (Zip code)

Registrant’s telephone number, including area code:

(208) 263-0505

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer o	Accelerated filer o	Non-accelerated filer o	Smaller reporting company þ
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ

The number of shares outstanding of the registrant’s Common Stock, no par value per share, as of May 7, 2012 was 20,775,493.

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Intermountain Community Bancorp

FORM 10-Q

For the Quarter Ended March 31, 2012

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PART I — Financial Information
Item 1 — Financial Statements (Unaudited)
Consolidated Balance Sheets for March 31, 2012 and December 31, 2011	3
Consolidated Statements of Operations for the three months ended March 31, 2012 and 2011	4
Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011	7
Consolidated Statements of Comprehensive Income (Loss) for the three ended March 31, 2012 and 2011	6
Notes to Consolidated Financial Statements	8
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations	35
Item 3 — Quantitative and Qualitative Disclosures About Market Risk	58
Item 4 — Controls and Procedures	58
PART II — Other Information
Item 1 — Legal Proceedings	58
Item 1A — Risk Factors	59
Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds	67
Item 3 — Defaults Upon Senior Securities	67
Item 4 —Mine Safety Disclosure	67
Item 5 — Other Information	67
Item 6 — Exhibits	67
Signatures	67
EX-31.1
EX-31.2
EX-32
EX-101

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PART I — Financial Information

Item - 1 Financial Statements

Intermountain Community Bancorp

Consolidated Balance Sheets

(Unaudited)



	March 31, 2012			December 31, 2011
	(Dollars in thousands)
ASSETS
Cash and cash equivalents:
Interest-bearing	$	76,316		$	82,242
Non-interest bearing and vault	13,908			24,958
Restricted cash	12,561			2,668
Available-for-sale securities, at fair value	264,313			219,039
Held-to-maturity securities, at amortized cost	15,024			16,143
Federal Home Loan Bank (“FHLB”) of Seattle stock, at cost	2,310			2,310
Loans held for sale	4,172			5,561
Loans receivable, net	492,983			502,252
Accrued interest receivable	4,108			4,100
Office properties and equipment, net	37,155			37,687
Bank-owned life insurance ("BOLI")	9,214			9,127
Other intangibles	159			189
Other real estate owned (“OREO”)	6,852			6,650
Prepaid expenses and other assets	19,556			21,292
Total assets	$	958,631		$	934,218
LIABILITIES
Deposits	$	731,458		$	729,373
Securities sold subject to repurchase agreements	63,635			85,104
Advances from Federal Home Loan Bank	29,000			29,000
Cashier checks issued and payable	355			481
Unexercised stock warrant liability	1,007			—
Accrued interest payable	1,821			1,676
Other borrowings	16,527			16,527
Accrued expenses and other liabilities	11,879			10,441
Total liabilities	855,682			872,602
STOCKHOLDERS’ EQUITY
Common stock 300,000,000 shares authorized; 20,776,220 and 8,427,212 shares issued and 20,770,214 and 8,409,840 shares outstanding as of March 31, 2012 and December 31, 2011, respectively	91,511			78,916
Preferred stock, Series A, 27,000 shares issued and outstanding as of March 31, 2012 and December 31, 2011; liquidation preference of $1,000 per share	26,241			26,149
Mandatorily Convertible Cumulative Participating Preferred Stock, Series B, 698,993 and 0 shares issued and outstanding as of March 31, 2012 and December 31, 2011, respectively; liquidation preference of $0.01 per share	28,735			—
Accumulated other comprehensive income, net of tax	2,064			2,370
Accumulated deficit	(45,602		)	(45,819		)
Total stockholders’ equity	102,949			61,616
Total liabilities and stockholders’ equity	$	958,631		$	934,218

The accompanying notes are an integral part of the consolidated financial statements.

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Intermountain Community Bancorp

Consolidated Statements of Operations

(Unaudited)



	Three Months Ended
	March 31,
	2012			2011
	(Dollars in thousands, except per share data)
Interest income:
Loans	$	7,071		$	8,335
Investments	2,049			2,153
Total interest income	9,120			10,488
Interest expense:
Deposits	822			1,248
Other borrowings	676			529
Total interest expense	1,498			1,777
Net interest income	7,622			8,711
Provision for losses on loans	(959		)	(1,633		)
Net interest income after provision for losses on loans	6,663			7,078
Other income:
Fees and service charges	1,625			1,670
Loan related fee income	582			575
Net gain on sale of securities	585			—
Other-than-temporary impairment (“OTTI”) losses on investments (1)	(271		)	—
Bank-owned life insurance	87			89
Fair value adjustment on cash flow hedge	(384		)	—
Other	212			329
Total other income	2,436			2,663
Operating expenses
Salaries and employee benefits	4,136			4,947
Occupancy expense	1,684			1,787
Advertising	112			130
Fees an service charges	622			651
Printing, postage and supplies	300			337
Legal and accounting	350			235
FDIC assessment	313			445
OREO operations	104			476
Other expenses	677			732
Total operating expenses	8,298			9,740
Net income before income taxes	801			1
Income tax (provision) benefit	—			—
Net income	801			1
Preferred stock dividend	466			443
Net income (loss) applicable to common stockholders	$	335		$	(442	)
Earnings (loss) per share — basic	$	0.01		$	(0.05	)
Earnings (loss) per share — diluted	$	0.01		$	(0.05	)
Weighted average common shares outstanding — basic (2)	44,278,310			8,396,495
Weighted average common shares outstanding — diluted (3)	44,426,732			8,396,495


(1)	Consisting of $7 and 0 of total other-than-temporary impairment net losses, net of $(264) and $0, recognized in other comprehensive income, for the three months ended March 31, 2012, and March 31, 2011, respectively.

(2) Includes the weighted average number of non-voting common shares that would be outstanding if the Series B preferred

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shares issued in the January 2012 private offering are converted to non-voting common shares.

(3) Includes the weighted average number of non-voting common shares that would be outstanding if the warrants issued in the January 2012 private offering are exercised directly for 1,700,000 non-voting common shares or exercised for Series B preferred shares and then converted, utilizing the Treasury stock method.

The accompanying notes are an integral part of the consolidated financial statements.

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Intermountain Community Bancorp

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)



	Three Months Ended
	March 31,
	2012			2011
	(Dollars in thousands)
Net income	$	801		$	1
Other comprehensive income:
Change in unrealized gains on investments, and mortgage backed securities (“MBS”) available for sale, excluding non-credit loss on impairment of securities	(731		)	394
Realized net gains reclassified from other comprehensive income	(585		)	—
Non-credit loss on impairment on available-for-sale debt securities	263			(168		)
Less deferred income tax benefit (provision) on securities	417			(89		)
Change in fair value of qualifying cash flow hedge, net of tax	330			13
Net other comprehensive income (loss)	(306		)	150
Comprehensive income	$	495		$	151

The accompanying notes are an integral part of the consolidated financial statements.

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Intermountain Community Bancorp

Consolidated Statements of Cash Flows

(Unaudited)



	Three Months Ended
	March 31,
	2012			2011
	(Dollars in thousands)
Cash flows from operating activities:
Net income	$	801		$	1
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation	676			768
Stock-based compensation expense	30			72
Net amortization of premiums on securities	1,075			604
Provisions for losses on loans	959			1,633
Goodwill impairment
Amortization of core deposit intangibles	29			31
(Gain) on sale of loans, investments, property and equipment	(973		)	(147		)
Impact of hedge dedesignation and current fair value adjustment	458			—
OTTI credit loss on available-for-sale investments	271			—
OREO valuation adjustments	(20		)	361
Accretion of deferred gain on sale of branch property	(4		)	(3		)
Net accretion of loan and deposit discounts and premiums	(3		)	(3		)
Increase in cash surrender value of bank-owned life insurance	(87		)	(89		)
Change in:
Accrued interest receivable	(8		)	339
Prepaid expenses and other assets	1,869			606
Accrued interest payable	1,301			(66		)
Accrued expenses and other liabilities	(125		)	(197		)
Proceeds from sale of loans originated for sale	18,242			10,466
Loans originated for sale	(16,465		)	(8,717		)
Net cash provided by operating activities	8,026			5,659
Cash flows from investing activities:
Purchases of available-for-sale securities	(62,360		)	(4,038		)
Proceeds from calls or maturities of available-for-sale securities	1,233			132
Principal payments on mortgage-backed securities	12,190			13,132
Proceeds from calls or maturities of held-to-maturity securities	2,967			22
Origination of loans, net principal payments	7,694			20,094
Purchase of office properties and equipment	(144		)	(83		)
Proceeds from sale of other real estate owned	439			1,270
Net change in restricted cash	(9,893		)	67
Net cash used in investing activities	(47,874		)	30,596
Cash flows from financing activities:
Proceeds from issuance of series B preferred stock, gross	32,460			—
Proceeds from issuance of common stock, gross	13,832			—
Proceeds from issuance of warrant, gross	1,007			—
Capital issuance costs	(5,042		)	—
Net change in demand, money market and savings deposits	17,931			5,969
Net change in certificates of deposit	(15,846		)	(17,161		)
Net change in repurchase agreements	(21,469		)	(12,877		)
Retirement of treasury stock	—			(4		)
Net cash provided by financing activities	22,873			(24,073		)
Net change in cash and cash equivalents	(16,975		)	12,182
Cash and cash equivalents, beginning of period	107,199			144,666
Cash and cash equivalents, end of period	$	90,224		$	156,848
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	1,655		$	1,843
Income taxes, net of tax refunds received	8			—
Noncash investing and financing activities:
Loans converted to other real estate owned	620			888
Accrual of preferred stock dividend	374			356

The accompanying notes are an integral part of the consolidated financial statements.

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Intermountain Community Bancorp

Notes to Consolidated Financial Statements (Unaudited)

1. Basis of Presentation:

The foregoing unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission. Accordingly, these financial statements do not include all of the disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2011. In the opinion of management, the unaudited interim consolidated financial statements furnished herein include adjustments, all of which are of a normal recurring nature, necessary for a fair statement of the results for the interim periods presented.

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities known to exist as of the date the financial statements are published, and the reported amounts of revenues and expenses during the reporting period. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of Intermountain Community Bancorp’s (“Intermountain’s” or “the Company’s”) consolidated financial statements; accordingly, it is possible that the actual results could differ from these estimates and assumptions, which could have a material effect on the reported amounts of Intermountain’s consolidated financial position and results of operations.

2. Investments:

The amortized cost and fair values of investments are as follows (in thousands):

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	Available-for-Sale
	Amortized Cost		Cumulative Non-Credit OTTI (Losses) Recognized in OCI			Gross Unrealized Gains		Gross Unrealized Losses			Fair Value/ Carrying Value
March 31, 2012
State and municipal securities	$	39,661	$	—		$	1,751	$	(3	)	$	41,409
Mortgage-backed securities - Agency Pass Throughs	75,163		—			2,007		(303		)	76,867
Mortgage-backed securities - Agency CMO's	111,895		—			1,908		(333		)	113,470
SBA Pools	18,595		—			—		(147		)	18,448
Mortgage-backed securities - Non Agency CMO's (investment grade)	5,590		—			368		—			5,958
Mortgage-backed securities - Non Agency CMO's (below investment grade)	10,003		(1,747		)	444		(539		)	8,161
	$	260,907	$	(1,747	)	$	6,478	$	(1,325	)	$	264,313
December 31, 2011
U.S. treasury securities and obligations of U.S. government agencies	$	21	$	—		$	—	$	—		$	21
State and municipal securities	35,352		—			1,791		(8		)	37,135
Mortgage-backed securities - Agency Pass Throughs	59,436		—			2,252		(126		)	61,562
Mortgage-backed securities - Agency CMO's	103,349		—			2,526		(328		)	105,547
Mortgage-backed securities - Non Agency CMO's (investment grade)	5,934		—			389		—			6,323
Mortgage-backed securities - Non Agency CMO's (below investment grade)	10,489		(2,011		)	435		(462		)	8,451
	$	214,581	$	(2,011	)	$	7,393	$	(924	)	$	219,039
	Held-to-Maturity
	Carrying Value / Amortized Cost		Cumulative Non-Credit OTTI (Losses) Recognized in OCI			Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
March 31, 2012
State and municipal securities	$	15,024	$	—		$	1,374	$	—		$	16,398
December 31, 2011
State and municipal securities	$	16,143	$	—		$	1,328	$	—		$	17,471

The following table summarizes the duration of Intermountain’s unrealized losses on available-for-sale and held-to-maturity securities as of the dates indicated (in thousands).



	Less Than 12 Months					12 Months or Longer					Total
March 31, 2012	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Residential mortgage-back securities	$	72,633	$	(623	)	$	3,772	$	(552	)	$	76,405	$	(1,175	)
SBA Pools	18,336		(147		)	—		—			18,336		(147		)
State and municipal securities	3,496		(3		)	—		—			3,496		(3		)
Total	$	94,465	$	(773	)	$	3,772	$	(552	)	$	98,237	$	(1,325	)

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	Less Than 12 Months					12 Months or Longer					Total
December 31, 2011	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
State and municipal securities	$	1,659	$	(8	)	$	—	$	—		$	1,659	$	(8	)
Mortgage-backed securities & CMO’s	39,905		(433		)	3,993		(483		)	43,898		(916		)
Total	$	41,564	$	(441	)	$	3,993	$	(483	)	$	45,557	$	(924	)

At March 31, 2012, the amortized cost and fair value of available-for-sale and held-to-maturity debt securities, by contractual maturity, are as follows (in thousands):



	Available-for-Sale				Held-to-Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
One year or less	$	—	$	—	$	130	$	130
After one year through five years	2,009		2,124		2,367		2,531
After five years through ten years	—		—		7,779		8,457
After ten years	37,652		39,285		4,748		5,280
Subtotal	39,661		41,409		15,024		16,398
Mortgage-backed securities	202,651		204,456		—		—
SBA Pools	18,595		18,448		—		—
Total Securities	$	260,907	$	264,313	$	15,024	$	16,398

Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

Intermountain’s investment portfolios are managed to provide and maintain liquidity; to maintain a balance of high quality, diversified investments to minimize risk; to offset other asset portfolio elements in managing interest rate risk; to provide collateral for pledging; and to maximize returns. At March 31, 2012, the Company does not intend to sell any of its available-for-sale securities that have a loss position and it is not likely that it will be required to sell the available-for-sale securities before the anticipated recovery of their remaining amortized cost or maturity date. The unrealized losses on residential mortgage-backed securities without other-than-temporary impairment (“OTTI”) were considered by management to be temporary in nature.

The following table presents the OTTI losses for the three months ended March 31, 2012 and March 31, 2011:



	2012				2011
	Held To Maturity		Available For Sale		Held To Maturity		Available For Sale
Total other-than-temporary impairment losses	$	—	$	7	$	—	$	—
Portion of other-than-temporary impairment losses transferred from (recognized in) other comprehensive income (1)	—		264		—		—
Net impairment losses recognized in earnings (2)	$	—	$	271	$	—	$	—

_____________________________


(1)	Represents other-than-temporary impairment losses related to all other factors.


(2)	Represents other-than-temporary impairment losses related to credit losses.

The OTTI recognized on investment securities available for sale relates to two non-agency collateralized mortgage obligations. Each of these securities holds various levels of credit subordination. These securities were valued by third-party pricing services using matrix or model pricing methodologies and were corroborated by broker indicative bids. We estimated the cash flows of the underlying collateral for each security considering credit, interest and prepayment risk models that incorporate management’s estimate of projected key assumptions including prepayment rates, collateral default rates and loss severity. Assumptions utilized vary from security to security, and are influenced by factors such as underlying loan interest rates, geographic location, borrower characteristics, vintage, and historical experience. We then used a third party to obtain information about the structure of each security, including subordination and other credit enhancements, in order to determine how the underlying collateral cash flows will be distributed to each security issued in the structure. These cash flows were then discounted at the interest rate equal to the yield anticipated at the time the security was purchased. We review the actual collateral performance of these securities on a

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quarterly basis and update the inputs as appropriate to determine the projected cash flows.

See Note 11 “Fair Value of Financial Instruments” for more information on the calculation of fair or carrying value for the investment securities.

3. Loans and Allowance for Loan Losses:

The components of loans receivable are as follows (in thousands):



	March 31, 2012
	Loans Receivable			%		Individually Evaluated for Impairment		Collectively Evaluated for Impairment
Commercial	$	114,460		22.7	%	$	9,367	$	105,093
Commercial real estate	172,508			34.2		7,861		164,647
Commercial construction	6,405			1.3		747		5,658
Land and land development loans	34,258			6.8		4,549		29,709
Agriculture	75,749			14.9		2,368		73,381
Multifamily	16,949			3.4		—		16,949
Residential real estate	57,879			11.5		3,868		54,011
Residential construction	2,554			0.5		—		2,554
Consumer	9,866			2.0		293		9,573
Municipal	13,369			2.7		—		13,369
Total loans receivable	503,997			100.0	%	$	29,053	$	474,944
Allowance for loan losses	(11,372		)
Deferred loan fees, net of direct origination costs	358
Loans receivable, net	$	492,983
Weighted average interest rate	5.59		%



	December 31, 2011
	Loans Receivable			%		Individually Evaluated for Impairment		Collectively Evaluated for Impairment
Commercial	$	110,395		21.4	%	$	8,585	$	101,810
Commercial real estate	167,586			32.6		10,918		156,668
Commercial construction	6,335			1.2		747		5,588
Land and land development loans	38,499			7.5		5,173		33,326
Agriculture	81,316			15.8		2,423		78,893
Multifamily	26,038			5.1		—		26,038
Residential real estate	58,861			11.4		4,013		54,848
Residential construction	2,742			0.5		—		2,742
Consumer	11,847			2.3		276		11,571
Municipal	11,063			2.2		—		11,063
Total loans receivable	514,682			100.0	%	$	32,135	$	482,547
Allowance for loan losses	(12,690		)
Deferred loan fees, net of direct origination costs	260
Loans receivable, net	$	502,252
Weighted average interest rate	5.69		%

The components of allowance for loan loss by types are as follows (in thousands):

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	March 31, 2012
	Total Allowance		Individually Evaluated Allowance		Collectively Evaluated Allowance
Commercial	$	2,577	$	1,009	$	1,568
Commercial real estate	3,953		1,675		2,278
Commercial construction	474		262		212
Land and land development loans	2,210		746		1,464
Agriculture	138		—		138
Multifamily	77		—		77
Residential real estate	1,575		976		599
Residential construction	62		—		62
Consumer	258		175		83
Municipal	48		—		48
Total	$	11,372	$	4,843	$	6,529



	December 31, 2011
	Total Allowance		Individually Evaluated Allowance		Collectively Evaluated Allowance
Commercial	$	2,817	$	1,300	$	1,517
Commercial real estate	4,880		2,804		2,076
Commercial construction	500		252		248
Land and land development loans	2,273		728		1,545
Agriculture	172		32		140
Multifamily	91		—		91
Residential real estate	1,566		939		627
Residential construction	59		—		59
Consumer	295		195		100
Municipal	37		—		37
Total	$	12,690	$	6,250	$	6,440

A summary of current, past due and nonaccrual loans as of March 31, 2012 is as follows, (in thousands):



	Current		30-89 Days Past Due		90 Days or More Past Due and Accruing		Nonaccrual		Total
Commercial	$	110,269	$	151	$	—	$	4,040	$	114,460
Commercial real estate	171,290		290		—		928		172,508
Commercial construction	6,360		—		—		45		6,405
Land and land development loans	32,080		96		—		2,082		34,258
Agriculture	75,626		—		—		123		75,749
Multifamily	16,949		—		—		—		16,949
Residential real estate	56,788		333		—		758		57,879
Residential construction	2,554		—		—		—		2,554
Consumer	9,758		84		—		24		9,866
Municipal	13,369		—		—		—		13,369
Total	$	495,043	$	954	$	—	$	8,000	$	503,997

A summary of current, past due and nonaccrual loans as of December 31, 2011 is as follows, (in thousands):

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	Current		30-89 Days Past Due		90 Days or More Past Due and Accruing		Nonaccrual		Total
Commercial	$	106,509	$	200	$	—	$	3,686	$	110,395
Commercial real estate	164,578		705		—		2,303		167,586
Commercial construction	6,289		—		—		46		6,335
Land and land development loans	35,835		12		—		2,652		38,499
Agriculture	81,129		—		—		187		81,316
Multifamily	26,038		—		—		—		26,038
Residential real estate	58,037		423		—		401		58,861
Residential construction	2,742		—		—		—		2,742
Consumer	11,739		91		—		17		11,847
Municipal	11,063		—		—		—		11,063
Total	$	503,959	$	1,431	$	—	$	9,292	$	514,682

The following table provides a summary of Troubled Debt Restructuring ("TDR") by performing status, (in thousands).




	March 31, 2012						December 31, 2011
Troubled Debt Restructurings	Nonaccrual		Accrual		Total		Nonaccrual		Accrual			Total
Commercial	$	369	$	609	$	978	$	571	$	371		$	942
Commercial real estate	—		2,048		2,048		382		1,889			2,271
Commercial construction	45		295		340		295		46			341
Land and land development loans	73		1,845		1,918		794		782			1,576
Agriculture	—		110		110		—		22		.	22
Residential real estate	—		993		993		1,377		—			1,377
Consumer	—		75		75		64		27			91
Total	$	487	$	5,975	$	6,462	$	3,483	$	3,137		$	6,620

A modified loan is considered a TDR when two conditions are met: 1) the borrower is experiencing financial difficulty and 2) concessions are made by the Company that would not otherwise be considered for a borrower with similar credit characteristics. Modified terms are dependent upon the financial position and needs of the individual borrower, as the Company does not employ modification programs for temporary or trial periods. The most common types of modifications include interest rate adjustments, covenant modifications, forbearance and/or other concessions. If the modification agreement is violated, the loan is handled by the Company's Special Assets group for resolution, which may result in foreclosure or other asset disposition.

Generally, TDRs are classified as impaired loans and are TDRs for the remaining life of the loan. Impaired and TDR classification may be removed if the borrower demonstrates compliance with the modified terms and the restructuring agreement specifies an interest rate equal to that which would be provided to a borrower with similar credit at the time of restructuring.

The Company's loans that were modified in the three month period ended March 31, 2012 and considered a TDR are as follows (dollars in thousands):

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	Three months ended March 31, 2012
	Number	Pre-Modification Recorded Investment		Post-Modification Recorded Investment
Commercial	1	$	75	$	75
Commercial real estate	1	100		100
Agriculture	1	110		110
	3	$	285	$	285

The balances below provide information as to how the loans were modified as TDRs during the three months ended March 31, 2012, (in thousands).



	Three months ended March 31, 2012
	Adjusted Interest Rate Only		Other*
Commercial	$	75	$	—
Commercial real estate	—		100
Agriculture	110		—
	$	185	$	100
(*) Other includes term or principal concessions or a combination of concessions, including interest rates.

As of March 31, 2012, the Company had specific reserves of $1.8 million on TDRs, and there were 2 TDRs in default totaling $178,000.

The allowance for loan losses and reserve for unfunded commitments are maintained at levels considered adequate by management to provide for probable loan losses as of the reporting dates. The allowance for loan losses and reserve for unfunded commitments are based on management’s assessment of various factors affecting the loan portfolio, including problem loans, business conditions and loss experience, and an overall evaluation of the quality of the underlying collateral. Changes in the allowance for loan losses and the reserve for unfunded commitments during the three month periods ending March 31, 2012 and 2011 are as follows:



	Allowance for Loan Losses March 31, 2012
	Balance, Beginning of Year		Charge-Offs Jan 1 through Mar 31, 2012			Recoveries Jan 1 through Mar 31 2012		Provision			Balance, End of Period
	(Dollars in thousands)
Commercial	$	2,817	$	(679	)	$	37	$	402		$	2,577
Commercial real estate	4,880		(1,137		)	85		125			3,953
Commercial construction	500		—			2		(28		)	474
Land and land development loans	2,273		(473		)	38		372			2,210
Agriculture	172		(31		)	51		(54		)	138
Multifamily	91		—			—		(14		)	77
Residential real estate	1,566		(163		)	54		118			1,575
Residential construction	59		—			7		(4		)	62
Consumer	295		(127		)	59		31			258
Municipal	37		—			—		11			48
Allowance for loan losses	$	12,690	$	(2,610	)	$	333	$	959		$	11,372

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	Allowance for Loan Losses March 31, 2011
	Balance, Beginning of Year		Charge-Offs Jan 1 through Mar 31, 2011			Recoveries Jan 1 through Mar 31, 2011		Provision			Balance, End of Period
	(Dollars in thousands)
Commercial	$	2,925	$	—		$	—	$	(514	)	$	2,411
Commercial real estate	3,655		(477		)	1		913			4,092
Commercial construction	540		(382		)	58		352			568
Land and land development loans	2,408		(476		)	154		392			2,478
Agriculture	779		(294		)	40		320			845
Multifamily	83		—			—		(10		)	73
Residential real estate	1,252		(213		)	40		180			1,259
Residential construction	65		—			—		53			118
Consumer	613		(99		)	42		21			577
Municipal	135		—			—		(74		)	61
Allowances for loan losses	$	12,455	$	(1,941	)	$	335	$	1,633		$	12,482

Allowance for Unfunded Commitments



	March 31,
	2012		2011
	(Dollars in thousands)
Balance Beginning January 1	$	13	$	17
Adjustment	1		1
Transfers	—		—
Allowance — Unfunded Commitments at end of period	$	14	$	18

Management's policy is to charge off loans or portions of loans as soon as an identifiable loss amount can be determined from evidence obtained, such as current cash flow information, updated appraisals or similar real estate evaluations, equipment, inventory or similar collateral evaluations, accepted offers on loan sales or negotiated discounts, and/or guarantor asset valuations. In situations where problem loans are dependent on collateral liquidation for repayment, management obtains updated independent valuations, such as appraisals or broker opinions, generally no less frequently than once every six months and more frequently for larger or more troubled loans. In the time period between these independent valuations, the Company monitors market conditions for any significant event or events that would materially change the valuations, and updates them as appropriate. If the valuations suggest an increase in collateral values, the Company does not recover prior amounts charged off until the assets are actually sold and the increase realized. However, if the updated valuations suggest additional loss, the Company charges off the additional amount.

The following tables summarize impaired loans:

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	Impaired Loans
	March 31, 2012						December 31, 2011
	Recorded Investment		Principal Balance		Related Allowance		Recorded Investment		Principal Balance		Related Allowance
	(Dollars in thousands)
With an allowance recorded:
Commercial	$	2,976	$	3,304	$	1,009	$	2,942	$	3,323	$	1,300
Commercial real estate	5,094		5,485		1,675		7,439		8,732		2,804
Commercial construction	452		588		262		747		902		252
Land and land development loans	2,166		3,693		746		1,745		3,237		728
Agriculture	—		—		—		32		405		32
Multifamily	—		—		—		—		—		—
Residential real estate	1,827		2,026		976		1,928		2,165		939
Residential construction	—		—		—		—		—		—
Consumer	251		252		175		247		264		195
Municipal	—		—		—		—		—		—
Total	$	12,766	$	15,348	$	4,843	$	15,080	$	19,028	$	6,250
Without an allowance recorded:
Commercial	$	6,391	$	10,457	$	—	$	5,643	$	9,099	$	—
Commercial real estate	2,767		4,545		—		3,479		5,038		—
Commercial construction	295		295		—		—		198		—
Land and land development loans	2,383		4,614		—		3,428		6,165		—
Agriculture	2,368		2,423		—		2,391		2,512		—
Multifamily	—		—		—		—		—		—
Residential real estate	2,041		2,350		—		2,085		2,296		—
Residential construction	—		—		—		—		—		—
Consumer	42		67		—		29		56		—
Municipal	—		—		—		—		—		—
Total	$	16,287	$	24,751	$	—	$	17,055	$	25,364	$	—
Total:
Commercial	$	9,367	$	13,761	$	1,009	$	8,585	$	12,422	$	1,300
Commercial real estate	7,861		10,030		1,675		10,918		13,770		2,804
Commercial construction	747		883		262		747		1,100		252
Land and land development loans	4,549		8,307		746		5,173		9,402		728
Agriculture	2,368		2,423		—		2,423		2,917		32
Multifamily	—		—		—		—		—		—
Residential real estate	3,868		4,376		976		4,013		4,461		939
Residential construction	—		—		—		—		—		—
Consumer	293		319		175		276		320		195
Municipal	—		—		—		—		—		—
Total	$	29,053	$	40,099	$	4,843	$	32,135	$	44,392	$	6,250

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	Impaired Loans
	Three Months Ended March 31, 2012				Three Months Ended March 31, 2011
	Average Recorded Investment		Interest Income Recognized (*)		Average Recorded Investment		Interest Income Recognized (*)
	(Dollars in thousands)
With an allowance recorded:
Commercial	$	2,959	$	81	$	2,137	$	42
Commercial real estate	6,267		113		5,403		261
Commercial construction	600		24		406		6
Land and land development loans	1,956		177		3,401		34
Agriculture	16		—		274		11
Multifamily	—		—		—		—
Residential real estate	1,878		42		1,318		41
Residential construction	—		—		55		23
Consumer	249		7		507		12
Municipal	—		—		—		—
Total	$	13,925	$	444	$	13,501	$	430
Without an allowance recorded:
Commercial	$	6,017	$	959	$	8,820	$	542
Commercial real estate	3,123		211		6,894		369
Commercial construction	148		5		167		11
Land and land development loans	2,906		224		5,888		316
Agriculture	2,380		125		942		77
Multifamily	—		—		—		—
Residential real estate	2,063		73		1,839		69
Residential construction	—		—		223		3
Consumer	36		4		341		5
Municipal	—		—		—		—
Total	$	16,673	$	1,601	$	25,114	$	1,392
Total:
Commercial	$	8,976	$	1,040	$	10,957	$	584
Commercial real estate	9,390		324		12,297		630
Commercial construction	748		29		573		17
Land and land development loans	4,862		401		9,289		350
Agriculture	2,396		125		1,216		88
Multifamily	—		—		—		—
Residential real estate	3,941		115