Edgar Filing: INTERMOUNTAIN COMMUNITY BANCORP

IMCB-2011.6.30-10Q

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 June 30, 2011



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

Securities registered pursuant to Section 12(b) of the Act:




None		None
(Title of each class)		(Name of each exchange on which registered)

Securities registered pursuant to Section 12(g) of the Act:

Common Stock (no par value)

(Title of class)

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 companyþ
		(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 August 4, 2011 was 8,409,840.

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Intermountain Community Bancorp

FORM 10-Q

For the Quarter Ended June 30, 2011

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PART I — Financial Information
Item 1 — Financial Statements (Unaudited)
Consolidated Balance Sheets for June 30, 2011 and December 31, 2010	3
Consolidated Statements of Operations for the three months and six months ended June 30, 2011 and 2010	4
Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and 2010	5
Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2011 and 2010	6
Notes to Consolidated Financial Statements	7
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
Item 3 — Quantitative and Qualitative Disclosures About Market Risk	54
Item 4 — Controls and Procedures	54
PART II — Other Information
Item 1 — Legal Proceedings	54
Item 1A — Risk Factors	54
Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds	61
Item 3 — Defaults Upon Senior Securities	61
Item 4 — [Removed and Reserved]	61
Item 5 — Other Information	61
Item 6 — Exhibits	61
Signatures	61
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)



	June 30, 2011			December 31, 2010
	(Dollars in thousands)
ASSETS
Cash and cash equivalents:
Interest-bearing	$	77,724		$	132,693
Non-interest bearing and vault	13,571			11,973
Restricted cash	2,832			3,290
Available-for-sale securities, at fair value	210,064			183,081
Held-to-maturity securities, at amortized cost	22,154			22,217
Federal Home Loan Bank (“FHLB”) of Seattle stock, at cost	2,310			2,310
Loans held for sale	1,615			3,425
Loans receivable, net	548,195			563,228
Accrued interest receivable	4,183			4,360
Office properties and equipment, net	38,982			40,246
Bank-owned life insurance	8,946			8,765
Other intangibles	249			310
Other real estate owned (“OREO”)	7,818			4,429
Prepaid expenses and other assets	22,037			24,782
Total assets	$	960,680		$	1,005,109
LIABILITIES
Deposits	$	736,029		$	778,833
Securities sold subject to repurchase agreements	99,687			105,116
Advances from Federal Home Loan Bank	34,000			34,000
Cashier checks issued and payable	520			580
Accrued interest payable	1,484			1,406
Other borrowings	16,527			16,527
Accrued expenses and other liabilities	11,990			9,294
Total liabilities	900,237			945,756
Commitments and contingent liabilities
STOCKHOLDERS’ EQUITY
Common stock 300,000,000 shares authorized; 8,428,196 and 8,431,385 shares issued and 8,409,840 and 8,390,877 shares outstanding as of June 30, 2011 and December 31, 2010	78,822			78,803
Preferred stock 1,000,000 shares authorized; 27,000 shares issued and outstanding as of June 30, 2011 and December 31, 2010	25,969			25,794
Accumulated other comprehensive income (loss), net of tax	1,162			(1,229		)
Accumulated deficit	(45,510		)	(44,015		)
Total stockholders’ equity	60,443			59,353
Total liabilities and stockholders’ equity	$	960,680		$	1,005,109

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						Six Months Ended
	June 30,						June 30,
	2011			2010			2011			2010
	(Dollars in thousands, except per share data)
Interest income:
Loans	$	8,432		$	9,814		$	16,766		$	19,463
Investments	2,358			1,785			4,512			3,752
Total interest income	10,790			11,599			21,278			23,215
Interest expense:
Deposits	1,134			2,051			2,382			4,441
Other borrowings	671			789			1,200			1,595
Total interest expense	1,805			2,840			3,582			6,036
Net interest income	8,985			8,759			17,696			17,179
Provision for losses on loans	(2,712		)	(4,914		)	(4,345		)	(11,723		)
Net interest income after provision for losses on loans	6,273			3,845			13,351			5,456
Other income:
Fees and service charges	1,863			2,047			3,534			3,835
Loan related fee income	545			799			1,120			1,293
Net gain on sale of securities	—			70			—			142
Other-than-temporary impairment (“OTTI”) losses on investments (1)	—			(237		)	—			(256		)
Bank-owned life insurance	91			95			180			185
Other	234			224			562			322
Total other income	2,733			2,998			5,396			5,521
Operating expenses	9,611			11,274			19,351			22,835
Loss before income taxes	(605		)	(4,431		)	(604		)	(11,858		)
Income tax benefit	—			1,934			—			5,051
Net loss	(605		)	(2,497		)	(604		)	(6,807		)
Preferred stock dividend	448			428			891			847
Net loss applicable to common stockholders	$	(1,053	)	$	(2,925	)	$	(1,495	)	$	(7,654	)
Loss per share — basic	$	(0.13	)	$	(0.35	)	$	(0.18	)	$	(0.91	)
Loss per share — diluted	$	(0.13	)	$	(0.35	)	$	(0.18	)	$	(0.91	)
Weighted average common shares outstanding — basic	8,409,786			8,388,128			8,403,177			8,380,265
Weighted average common shares outstanding — diluted	8,409,786			8,388,128			8,403,177			8,380,265

_____________________________________

(1) Consisting of $0, $1,529, $0 and $1,529 of total other-than-temporary impairment net losses, net of $0, $1,292, $0 and $1,273 recognized in other comprehensive income, for the three months ended June 30, 2011, and June 30, 2010 and six months ended June 30, 2011 and June 30, 2010, respectively.

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)



	Six Months Ended
	June 30,
	2011			2010
	(Dollars in thousands)
Cash flows from operating activities:
Net loss	$	(604	)	$	(6,807	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation	1,524			1,580
Stock-based compensation expense	122			209
Net amortization of premiums on securities	1,171			1,751
Provisions for losses on loans	4,345			11,723
Amortization of core deposit intangibles	61			66
(Gain) on sale of loans, investments, property and equipment	(287		)	(962		)
(Gain) on sale of other real estate owned	(93		)	(52		)
OTTI credit loss on available-for-sale investments	—			256
Charge down on other real estate owned	419			1,947
Accretion of deferred gain on sale of branch property	(8		)	(8		)
Net accretion of loan and deposit discounts and premiums	(7		)	(21		)
Increase in cash surrender value of bank-owned life insurance	(181		)	(185		)
Change in:
Accrued interest receivable	177			115
Prepaid expenses and other assets	1,079			1,679
Accrued interest payable	78			151
Accrued expenses and other liabilities	1,941			(622		)
Proceeds from sale of loans	23,728			43,931
Originations of loans held for sale	(21,630		)	(40,238		)
Net cash provided by operating activities	11,835			14,513
Cash flows from investing activities:
Purchases of available-for-sale securities	(47,352		)	(36,306		)
Proceeds from calls or maturities of available-for-sale securities	157			12,858
Principal payments on mortgage-backed securities	23,000			28,035
Purchases of held-to-maturity securities	—			(7,927		)
Proceeds from calls or maturities of held-to-maturity securities	47			45
Origination of loans, net principal payments	2,580			15,843
Purchase of office properties and equipment	(259		)	(288		)
Proceeds from sale of office properties and equipment	—			40
Proceeds from sale of other real estate owned	4,400			5,817
Net change in restricted cash	459			(1,054		)
Net cash provided by (used in) investing activities	(16,968		)	17,063
Cash flows from financing activities:
Net change in demand, money market and savings deposits	(14,526		)	3,704
Net change in certificates of deposit	(28,279		)	(16,246		)
Net change in repurchase agreements	(5,429		)	3,315
Retirement of treasury stock	(4		)	(4		)
Net cash used in financing activities	(48,238		)	(9,231		)
Net change in cash and cash equivalents	(53,371		)	22,345
Cash and cash equivalents, beginning of period	144,666			103,189
Cash and cash equivalents, end of period	$	91,295		$	125,534
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	3,503		$	5,886
Income taxes, net of tax refunds received	8			(6,894		)
Noncash investing and financing activities:
Loans converted to other real estate owned	8,115			4,928
Accrual of preferred stock dividend	716			683

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						Six Months Ended
	June 30,						June 30,
	2011			2010			2011			2010
	(Dollars in thousands)
Net loss	$	(605	)	$	(2,497	)	$	(604	)	$	(6,807	)
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	3,719			4,291			3,945			4,906
Non-credit loss on impairment on available-for-sale debt	—			(1,292		)	—			(1,273		)
Less deferred income tax provision	(1,472		)	(1,187		)	(1,561		)	(1,438		)
Change in fair value of qualifying cash flow hedge	(6		)	(75		)	7			170
Net other comprehensive income	2,241			1,737			2,391			2,365
Comprehensive income (loss)	$	1,636		$	(760	)	$	1,787		$	(4,442	)

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, 2010. 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):



	Available-for-Sale
	Amortized Cost		Non-Credit OTTI Recognized in OCI (Losses)			Gross Unrealized Gains		Gross Unrealized Losses			Fair Value/ Carrying Value
June 30, 2011
U.S. treasury securities and obligations of U.S. government agencies	$	11,823	$	—		$	161	$	(108	)	$	11,876
State and municipal securities	7,256		—			288		—			7,544
Mortgage-backed securities & CMO’s	188,359		(1,926		)	5,477		(1,266		)	190,644
	$	207,438	$	(1,926	)	$	5,926	$	(1,374	)	$	210,064
December 31, 2010
U.S. treasury securities and obligations of U.S. government agencies	$	4,020	$	—		$	—	$	(95	)	$	3,925
State and municipal securities	5,251		—			28		(49		)	5,230
Mortgage-backed securities & CMO’s	175,129		(1,926		)	3,648		(2,925		)	173,926
	$	184,400	$	(1,926	)	$	3,676	$	(3,069	)	$	183,081
	Held-to-Maturity
	Carrying Value / Amortized Cost		Non-Credit OTTI Recognized in OCI (Losses)			Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
June 30, 2011
State and municipal securities	$	22,154	$	—		$	547	$	(33	)	$	22,668
December 31, 2010
State and municipal securities	$	22,217	$	—		$	280	$	(385	)	$	22,112

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).

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	Less Than 12 Months				12 Months or Longer				Total
June 30, 2011	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. treasury securities and obligations of U.S. government agencies	$	3,883	$	108	$	—	$	—	$	3,883	$	108
State and municipal securities	2,365		33		—		—		2,365		33
Mortgage-backed securities & CMO’s	5,088		37		14,954		1,229		20,042		1,266
Total	$	11,336	$	178	$	14,954	$	1,229	$	26,290	$	1,407



	Less Than 12 Months				12 Months or Longer				Total
December 31, 2010	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. treasury securities and obligations of U.S. government agencies	$	3,897	$	95	$	—	$	—	$	3,897	$	95
State and municipal securities	11,713		434		—		—		11,713		434
Mortgage-backed securities & CMO’s	36,338		581		14,447		2,344		50,785		2,925
Total	$	51,948	$	1,110	$	14,447	$	2,344	$	66,395	$	3,454

At June 30, 2011, 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	$	—	$	—	$	295	$	296
After one year through five years	24		24		701		741
After five years through ten years	13,809		13,872		9,629		9,971
After ten years	5,246		5,524		11,529		11,660
Subtotal	19,079		19,420		22,154		22,668
Mortgage-backed securities	188,359		190,644		—		—
Total Securities	$	207,438	$	210,064	$	22,154	$	22,668

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 June 30, 2011, 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.

Investment securities are reviewed on an ongoing basis for the presence of OTTI or permanent impairment, taking into consideration current market conditions, fair value in relationship to cost, the extent and nature of the change in fair value, issuer rating changes and trends, whether we intend to sell a security or if it is likely that we will be required to sell the security before recovery of our amortized cost basis of the investment, which may be at maturity, and other factors.

For the calculation and presentation of OTTI of debt securities the Company considers whether they intend to sell a security or if it is likely that they would be required to sell the security before recovery of the amortized cost basis of the investment, which may be maturity. For debt securities, if the Company intends to sell the security or it is likely that it will be required to sell the security before recovering its cost basis, the entire impairment loss would be recognized in earnings as an OTTI. If the Company does not intend to sell the security and it is not likely that it will be required to sell the security but does not expect to recover the entire amortized cost basis of the security, only the portion of the impairment loss representing credit losses would be recognized in earnings. The credit loss on a security is measured as the difference between the amortized cost basis, less prior credit impairment

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losses taken, and the present value of the cash flows expected to be collected. Projected cash flows are discounted by the original or current effective interest rate depending on the nature of the security being measured for potential OTTI. The remaining impairment related to all other factors, the difference between the present value of the cash flows expected to be collected and fair value, is recognized as a charge to other comprehensive income (“OCI”). Impairment losses related to all other factors are presented as separate categories within OCI. For investment securities held to maturity, this amount is accreted over the remaining life of the debt security prospectively based on the amount and timing of future estimated cash flows. The accretion of the amount recorded in OCI increases the carrying value of the investment and does not affect earnings. If there is an indication of additional credit losses the security is reevaluated according to the procedures described above.

The following table presents the OTTI losses for the six months ended June 30, 2011 and June 30, 2010:



	2011				2010
	Held To Maturity		Available For Sale		Held To Maturity		Available For Sale
Total other-than-temporary impairment losses	$	—	$	—	$	—	$	1,529
Portion of other-than-temporary impairment losses transferred from (recognized in) other comprehensive income (1)	—		—		—		(1,273		)
Net impairment losses recognized in earnings (2)	$	—	$	—	$	—	$	256

_____________________________


(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. The Company recognized OTTI on the first investment security in the first quarter of 2009 and the second security in the second quarter of 2010. 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 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):

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	June 30, 2011
	Loans Receivable			%		Individually Evaluated for Impairment		Collectively Evaluated for Impairment
Commercial	$	123,566		22.0	%	$	11,536	$	112,030
Commercial real estate	172,701			30.8		12,161		160,540
Commercial construction	17,694			3.1		1,735		15,959
Land and land development loans	49,197			8.8		7,134		42,063
Agriculture	85,296			15.2		625		84,671
Multifamily	27,112			4.8		—		27,112
Residential real estate	62,016			11.0		3,944		58,072
Residential construction	4,291			0.8		185		4,106
Consumer	12,535			2.2		597		11,938
Municipal	7,360			1.3		—		7,360
Total loans receivable	561,768			100.0	%	$	37,917	$	523,851
Allowance for loan losses	(13,687		)
Deferred loan fees, net of direct origination costs	114
Loans receivable, net	$	548,195
Weighted average interest rate	5.93		%



	December 31, 2010
	Loans Receivable			%		Individually Evaluated for Impairment		Collectively Evaluated for Impairment
Commercial	$	122,656		21.3	%	$	10,698	$	111,958
Commercial real estate	175,559			30.5		13,077		162,482
Commercial construction	17,951			3.1		691		17,260
Land and land development loans	60,962			10.6		5,995		54,967
Agriculture	87,364			15.2		1,460		85,904
Multifamily	26,417			4.6		—		26,417
Residential real estate	60,872			10.6		3,276		57,596
Residential construction	3,219			0.6		277		2,942
Consumer	14,095			2.4		1,094		13,001
Municipal	6,528			1.1		—		6,528
Total loans receivable	575,623			100.0	%	$	36,568	$	539,055
Allowance for loan losses	(12,455		)
Deferred loan fees, net of direct origination costs	60
Loans receivable, net	$	563,228
Weighted average interest rate	6.04		%

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

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	June 30, 2011
	Total Allowance		Individually Evaluated Allowance		Collectively Evaluated Allowance
Commercial	$	2,782	$	1,050	$	1,732
Commercial real estate	5,086		3,037		2,049
Commercial construction	728		376		352
Land and land development loans	2,046		441		1,605
Agriculture	909		28		881
Multifamily	90		—		90
Residential real estate	1,324		598		726
Residential construction	119		18		101
Consumer	577		413		164
Municipal	26		—		26
Total	$	13,687	$	5,961	$	7,726



	December 31, 2010
	Total Allowance		Individually Evaluated Allowance		Collectively Evaluated Allowance
Commercial	$	2,925	$	744	$	2,181
Commercial real estate	3,655		1,475		2,180
Commercial construction	540		145		395
Land and land development loans	2,408		770		1,638
Agriculture	779		92		687
Multifamily	83		—		83
Residential real estate	1,252		545		707
Residential construction	65		—		65
Consumer	613		449		164
Municipal	135		—		135
Total	$	12,455	$	4,220	$	8,235

A summary of current, past due and nonaccrual loans as of June 30, 2011 is as follows, (in thousands):



	Current		30-89 Days Past Due		90 Days or More Past Due and Accruing		Nonaccrual		Total
Commercial	$	118,651	$	515	$	—	$	4,400	$	123,566
Commercial real estate	169,305		388		—		3,008		172,701
Commercial construction	17,647		—		—		47		17,694
Land and land development loans	47,184		312		—		1,701		49,197
Agriculture	84,826		90		—		380		85,296
Multifamily	27,112		—		—		—		27,112
Residential real estate	60,924		288		—		804		62,016
Residential construction	4,273		—		—		18		4,291
Consumer	12,033		128		—		374		12,535
Municipal	7,360		—		—		—		7,360
Total	$	549,315	$	1,721	$	—	$	10,732	$	561,768

A summary of current, past due and nonaccrual loans as of December 31, 2010 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	$	118,036	$	761	$	—	$	3,859	$	122,656
Commercial real estate	171,633		360		—		3,566		175,559
Commercial construction	17,880		—		—		71		17,951
Land and land development loans	58,537		515		—		1,910		60,962
Agriculture	86,782		—		—		582		87,364
Multifamily	26,417		—		—		—		26,417
Residential real estate	58,481		1,361		66		964		60,872
Residential construction	3,109		—		—		110		3,219
Consumer	13,664		42		—		389		14,095
Municipal	6,528		—		—		—		6,528
Total	$	561,067	$	3,039	$	66	$	11,451	$	575,623

Troubled Debt Restructures (loans which had been negotiated at below market interest rates or for which other concessions were granted, but are accruing interest) were $6.5 million and $4.8 million at June 30, 2011 and December 31, 2010, respectively.

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 Consolidated Balance Sheet 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 six-month period ending June 30 are as follows:



	Allowance for Loan Losses June 30, 2011
	Balance, Beginning of Year		Charge-Offs Jan 1 through June 30, 2011			Recoveries Jan 1 through June 30, 2011		Provision			Balance, End of Period
	(Dollars in thousands)
Commercial	$	2,925	$	(803	)	$	265	$	395		$	2,782
Commercial real estate	3,655		(679		)	150		1,960			5,086
Commercial construction	540		—			—		188			728
Land and land development loans	2,408		(1,593		)	302		929			2,046
Agriculture	779		(331		)	42		419			909
Multifamily	83		—			—		7			90
Residential real estate	1,252		(399		)	60		411			1,324
Residential construction	65		(18		)	—		72			119
Consumer	613		(191		)	82		73			577
Municipal	135		—			—		(109		)	26
Allowance for loan losses	$	12,455	$	(4,014	)	$	901	$	4,345		$	13,687

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	Allowance for Loan Losses June 30, 2010
	Balance, Beginning of Year		Charge-Offs Jan 1 through June 30, 2010			Recoveries Jan 1 through June 30, 2010		Provision			Balance, End of Period
	(Dollars in thousands)
Commercial	$	4,785	$	(4,302	)	$	312	$	3,529		$	4,324
Commercial real estate	3,827		(2,487		)	80		1,560			2,980
Commercial construction	1,671		(911		)	10		(245		)	525
Land and land development loans	2,707		(5,222		)	32		5,552			3,069
Agriculture	1,390		(689		)	—		(253		)	448
Multifamily	26		(16		)	—		61			71
Residential real estate	1,412		(1,220		)	26		1,102			1,320
Residential construction	170		(15		)	—		13			168
Consumer	539		(286		)	101		359			713
Municipal	81		(1		)	—		45			125
Allowances for loan losses	$	16,608	$	(15,149	)	$	561	$	11,723		$	13,743

Allowance for Unfunded Commitments



	June 30,
	2011			2010
	(Dollars in thousands)
Balance Beginning January 1	$	17		$	11
Adjustment	(3		)	7
Transfers	—			—
Allowance — Unfunded Commitments at end of period	$	14		$	18

The following table provides information with respect to impaired loans as of the quarter ended June 30, 2011:

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	June 30, 2011						Six Months Ended June 30, 2011

	Recorded Investment		Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
	(Dollars in thousands)
With an allowance recorded:
Commercial	$	4,196	$	4,273	$	1,050	$	2,823	$	163
Commercial real estate	8,767		10,292		3,037		6,525		504
Commercial construction	1,133		1,133		376		648		33
Land and land development loans	1,749		1,749		441		2,851		63
Agriculture	90		176		28		213		23
Multifamily	—		—		—		—		—
Residential real estate	1,185		1,295		598		1,273		64
Residential construction	18		123		18		43		26
Consumer	469		482		413		494		21
Municipal	—		—		—		—
Total	$	17,607	$	19,523	$	5,961	$	14,870	$	897
Without an allowance recorded:
Commercial	$	7,340	$	12,217	$	—	$	8,327	$	724
Commercial real estate	3,394		5,475		—		5,728		308
Commercial construction	602		737		—		312		31
Land and land development loans	5,385		10,232		—		5,721		422
Agriculture	535		1,569		—		806		83
Multifamily	—		—		—		—		—
Residential real estate	2,759		3,254		—		2,145		105
Residential construction	167		167		—		204		6
Consumer	128		148		—		270		8
Municipal	—		—		—		—		—
Total	$	20,310	$	33,799	$	—	$	23,513	$	1,687
Total:
Commercial	$	11,536	$	16,490	$	1,050	$	11,150	$	887
Commercial real estate	12,161		15,767		3,037		12,252		812
Commercial construction	1,735		1,870		376		960		64
Land and land development loans	7,134		11,981		441		8,571		485
Agriculture	625		1,745		28		1,019		106
Multifamily	—		—		—		—		—
Residential real estate	3,944		4,549		598		3,419		169
Residential construction	185		290		18		247		32
Consumer	597		630		413		765		29
Municipal	—		—		—		—		—
Total	$	37,917	$	53,322	$	5,961	$	38,383	$	2,584

The following table provides information with respect to impaired loans as of the year ended December 31, 2010:

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	December 31, 2010						Twelve Months Ended December 31, 2010

	Recorded Investment		Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
	(Dollars in thousands)
With an allowance recorded:
Commercial	$	2,319	$	2,320	$	744	$	3,785	$	173
Commercial real estate	4,383		5,088		1,475		4,804		381
Commercial construction	406		407		145		425		17
Land and land development loans	1,786		1,786		770		2,411		120
Agriculture	428		463		92		1,470		46
Multifamily	—		8		—		—		8
Residential real estate	1,207		1,357		545		1,303		98
Residential construction	—		—		—		302		—
Consumer	538		594		449		394		45
Municipal	—		—		—		—		—
Total	$	11,067	$	12,023	$	4,220	$	14,894	$	888
Without an allowance recorded:
Commercial	$	8,379	$	12,362	$	—	$	5,865	$	1,021
Commercial real estate	8,694		11,510		—		6,589		901
Commercial construction	285		418		—		3,852		36
Land and land development loans	4,209		7,573		—		9,617		575
Agriculture	1,032		1,885		—		2,560		192
Multifamily	—		—		—		347		—
Residential real estate	2,069		2,335		—		2,689		204
Residential construction	277		363		—		420		54
Consumer	556		726		—		311		75
Municipal	—		—		—		—		—
Total	$	25,501	$	37,172	$	—	$	32,250	$	3,058
Total:
Commercial	$	10,698	$	14,682	$	744	$	9,650	$	1,194
Commercial real estate	13,077		16,598		1,475		11,393		1,282
Commercial construction	691		825		145		4,277		53
Land and land development loans	5,995		9,359		770		12,028		695
Agriculture	1,460		2,348		92		4,030		238
Multifamily	—		8		—		347		8
Residential real estate	3,276		3,692		545		3,992		302
Residential construction	277		363		—		722		54
Consumer	1,094		1,320		449		705		120
Municipal	—		—		—		—		—
Total	$	36,568	$	49,195	$	4,220	$	47,144	$	3,946

Credit quality indicators

The loan and lease credit quality indicators for loans are developed through review of individual borrowers on an ongoing basis. Each borrower is evaluated at least annually with more frequent evaluation of larger or potentially riskier loans or leases. The indicators represent the rating for loans or leases as of the date presented based on the most recent assessment performed. These credit quality indicators are defined as follows:

Satisfactory — A satisfactory rated loan is not adversely classified because it does not display any of the characteristics for

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adverse classification.

Watch — A watch loan has a solid but vulnerable repayment source. There is loss exposure only if the primary repayment source and collateral experience prolonged deterioration. Loans in this risk grade category are subject to frequent review and change due to the increased vulnerability of repayment sources and collateral valuations.

Special mention — A special mention loan has potential weaknesses that deserve management’s close attention. If left uncorrected, such potential weaknesses may result in deterioration of the repayment prospects or collateral position at some future date. Special mention loans are not adversely classified and do not warrant adverse classification.

Substandard — A substandard loan is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as substandard generally have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. These loans are characterized by the distinct possibility of loss if the deficiencies are not corrected.

Doubtful — A loan classified doubtful has all the weaknesses inherent in a loan classified substandard with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable, on the basis of currently existing facts, conditions, and values.

Loss — Loans classified loss are considered uncollectible and of such little value that their continuing to be carried as an asset is not warranted. This classification does not necessarily mean that there is to no potential for recovery or salvage value, but rather that it is not appropriate to defer a full write-off even though partial recovery may be realized in the future.

Credit quality indicators by loan segment are summarized as follows:



	Loan Portfolio Credit Grades by Type June 30, 2011
	Satisfactory Grade 1-3		Internal Watch Grade 4		Special Mention Grade 5		Substandard Grade 6		Doubtful Grade 7		Total
	(Dollars in thousands)
Commercial	$	78,314	$	26,626	$	3,579	$	15,047	$	—	$	123,566
Commercial real estate	111,647		44,190		—		16,864		—		172,701
Commercial construction	3,606		5,271		—		8,817		—		17,694
Land and land development loans	10,788		26,278		3,699		8,432		—		49,197
Agriculture	61,047