Loans

6 Months Ended

Jun. 30, 2013

Loans

Loans

5) Loans

        Loans were as follows:

	June 30, 2013			December 31, 2012
	(Dollars in thousands)
Loans held-for-investment:
Commercial	$	383,068		$	375,469
Real estate:
Commercial and residential		370,620			354,934
Land and construction		26,705			22,352
Home equity		48,667			43,865
Consumer		13,097			15,714
Loans		842,157			812,334
Deferred loan origination fees, net		(207	)		(21	)
Loans, net of deferred fees		841,950			812,313
Allowance for loan losses		(19,342	)		(19,027	)
Loans, net	$	822,608		$	793,286

        Changes in the allowance for loan losses were as follows for the periods indicated:

	Three Months Ended June 30, 2013
	Commercial			Real Estate			Consumer		Total
	(Dollars in thousands)
Balance, beginning of period	$	12,455		$	6,770		$	117	$	19,342
Charge-offs		(119	)		(56	)		—		(175	)
Recoveries		188			257			—		445
Net recoveries		69			201			—		270
Provision (credit) for loan losses		287			(583	)		26		(270	)
Balance, end of period	$	12,811		$	6,388		$	143	$	19,342

	Three Months Ended June 30, 2012
	Commercial			Real Estate			Consumer			Total
	(Dollars in thousands)
Balance, beginning of period	$	13,734		$	6,409		$	163		$	20,306
Charge-offs		(1,280	)		(101	)		—			(1,381	)
Recoveries		60			223			—			283
Net (charge-offs)/recoveries		(1,220	)		122			—			(1,098	)
Provision (credit) for loan losses		864			8			(57	)		815
Balance, end of period	$	13,378		$	6,539		$	106		$	20,023

	Six Months Ended June 30, 2013
	Commercial			Real Estate			Consumer		Total
	(Dollars in thousands)
Balance, beginning of period	$	12,866		$	6,034		$	127	$	19,027
Charge-offs		(959	)		(56	)		—		(1,015	)
Recoveries		1,338			262			—		1,600
Net recoveries		379			206			—		585
Provision (credit) for loan losses		(434	)		148			16		(270	)
Balance, end of period	$	12,811		$	6,388		$	143	$	19,342

	Six Months Ended June 30, 2012
	Commercial			Real Estate			Consumer			Total
	(Dollars in thousands)
Balance, beginning of period	$	13,215		$	7,338		$	147		$	20,700
Charge-offs		(2,190	)		(146	)		—			(2,336	)
Recoveries		521			223			—			744
Net (charge-offs)/recoveries		(1,669	)		77			—			(1,592	)
Provision (credit) for loan losses		1,832			(876	)		(41	)		915
Balance, end of period	$	13,378		$	6,539		$	106		$	20,023

        The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment, based on the impairment method at the following period-ends:

	June 30, 2013
	Commercial		Real Estate		Consumer		Total
	(Dollars in thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	2,588	$	786	$	28	$	3,402
Collectively evaluated for impairment		10,223		5,602		115		15,940
Total allowance balance	$	12,811	$	6,388	$	143	$	19,342
Loans:
Individually evaluated for impairment	$	5,342	$	9,569	$	135	$	15,046
Collectively evaluated for impairment		377,726		436,423		12,962		827,111
Total loan balance	$	383,068	$	445,992	$	13,097	$	842,157

	December 31, 2012
	Commercial		Real Estate		Consumer		Total
	(Dollars in thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	1,963	$	760	$	17	$	2,740
Collectively evaluated for impairment		10,903		5,274		110		16,287
Total allowance balance	$	12,866	$	6,034	$	127	$	19,027
Loans:
Individually evaluated for impairment	$	10,161	$	9,336	$	147	$	19,644
Collectively evaluated for impairment		365,308		411,815		15,567		792,690
Total loan balance	$	375,469	$	421,151	$	15,714	$	812,334

        The following table presents loans held-for-investment individually evaluated for impairment by class of loans as of June 30, 2013 and December 31, 2012. The recorded investment included in the following table represents loan principal net of any partial charge-offs recognized on the loans. The unpaid principal balance represents the recorded balance prior to any partial charge-offs.

	June 30, 2013						December 31, 2012
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
	(Dollars in thousands)
With no related allowance recorded:
Commercial	$	1,031	$	948	$	—	$	7,829	$	6,978	$	—
Real estate:
Commercial and residential		3,509		3,509		—		2,755		2,741		—
Land and construction		2,070		2,070		—		2,310		2,223		—
Home Equity		2,077		2,077		—		2,141		2,141		—
Total with no related allowance recorded		8,687		8,604		—		15,035		14,083		—
With an allowance recorded:
Commercial		4,487		4,394		2,588		3,678		3,182		1,963
Real estate:
Commercial and residential		1,560		1,560		480		3,183		1,937		465
Land and construction		59		59		12		—		—		—
Home Equity		294		294		294		295		295		295
Consumer		135		135		28		147		147		17
Total with an allowance recorded		6,535		6,442		3,402		7,303		5,561		2,740
Total	$	15,222	$	15,046	$	3,402	$	22,338	$	19,644	$	2,740

        The following tables present interest recognized and cash-basis interest earned on impaired loans for the periods indicated:

	Three Months Ended June 30, 2013
			Real Estate
	Commercial		Commercial and Residential		Land and Construction		Home Equity		Consumer		Total
	(Dollars in thousands)
Average of impaired loans during the period	$	6,736	$	5,286	$	2,153	$	2,401	$	138	$	16,714
Interest income during impairment	$	—	$	—	$	—	$	—	$	—	$	—
Cash-basis interest earned	$	—	$	—	$	—	$	—	$	—	$	—

	Three Months Ended June 30, 2012
			Real Estate
	Commercial		Commercial and Residential		Land and Construction		Home Equity		Consumer		Total
	(Dollars in thousands)
Average of impaired loans during the period	$	11,034	$	2,252	$	2,210	$	199	$	86	$	15,781
Interest income during impairment	$	—	$	—	$	—	$	—	$	—	$	—
Cash-basis interest earned	$	—	$	—	$	—	$	—	$	—	$	—

	Six Months Ended June 30, 2013
			Real Estate
	Commercial		Commercial and Residential		Land and Construction		Home Equity		Consumer		Total
	(Dollars in thousands)
Average of impaired loans during the period	$	7,877	$	5,083	$	2,177	$	2,413	$	141	$	17,691
Interest income during impairment	$	—	$	—	$	—	$	—	$	—	$	—
Cash-basis interest earned	$	—	$	—	$	—	$	—	$	—	$	—

	Six Months Ended June 30, 2012
			Real Estate
	Commercial		Commercial and Residential		Land and Construction		Home Equity		Consumer		Total
	(Dollars in thousands)
Average of impaired loans during the period	$	11,341	$	2,214	$	2,733	$	143	$	61	$	16,492
Interest income during impairment	$	—	$	1	$	14	$	—	$	—	$	15
Cash-basis interest earned	$	—	$	1	$	14	$	—	$	—	$	15

        Nonperforming loans include both smaller dollar balance homogenous loans that are collectively evaluated for impairment and individually classified loans. Nonperforming loans were as follows at period-end:

	June 30,
					December 31, 2012
	2013		2012
	(Dollars in thousands)
Nonaccrual loans—held-for-sale	$	—	$	177	$	—
Nonaccrual loans—held-for-investment		13,868		12,890		17,335
Restructured and loans over 90 days past due and still accruing		510		1,665		859
Total nonperforming loans	$	14,378	$	14,732	$	18,194
Other restructured loans	$	668	$	416	$	1,450
Impaired loans, excluding loans held-for-sale	$	15,046	$	14,971	$	19,644

        The following table presents the nonperforming loans by class as of June 30, 2013 and December 31, 2012:

	June 30, 2013						December 31, 2012
	Nonaccrual		Restructured and Loans Over 90 Days Past Due and Still Accruing		Total		Nonaccrual		Restructured and Loans Over 90 Days Past Due and Still Accruing		Total
	(Dollars in thousands)
Commercial	$	4,164	$	510	$	4,674	$	7,852	$	859	$	8,711
Real estate:
Commercial and residential		5,069		—		5,069		4,676		—		4,676
Land and construction		2,129		—		2,129		2,223		—		2,223
Home equity		2,371		—		2,371		2,437		—		2,437
Consumer		135		—		135		147		—		147
Total	$	13,868	$	510	$	14,378	$	17,335	$	859	$	18,194

        The following table presents the aging of past due loans as of June 30, 2013 by class of loans:

	June 30, 2013
	30 - 59 Days Past Due		60 - 89 Days Past Due		90 Days or Greater Past Due		Total Past Due		Loans Not Past Due		Total
	(Dollars in thousands)
Commercial	$	2,540	$	567	$	1,871	$	4,978	$	378,090	$	383,068
Real estate:
Commercial and residential		139		—		1,639		1,778		368,842		370,620
Land and construction		—		—		59		59		26,646		26,705
Home equity		—		—		294		294		48,373		48,667
Consumer		—		99		—		99		12,998		13,097
Total	$	2,679	$	666	$	3,863	$	7,208	$	834,949	$	842,157

        The following table presents the aging of past due loans as of December 31, 2012 by class of loans:

	December 31, 2012
	30 - 59 Days Past Due		60 - 89 Days Past Due		90 Days or Greater Past Due		Total Past Due		Loans Not Past Due		Total
	(Dollars in thousands)
Commercial	$	1,699	$	355	$	5,120	$	7,174	$	368,295	$	375,469
Real estate:
Commercial and residential		1,603		—		3,290		4,893		350,041		354,934
Land and construction		—		—		78		78		22,274		22,352
Home equity		742		—		2,045		2,787		41,078		43,865
Consumer		—		—		—		—		15,714		15,714
Total	$	4,044	$	355	$	10,533	$	14,932	$	797,402	$	812,334

        Past due loans 30 days or greater totaled $7,208,000 and $14,932,000 at June 30, 2013 and December 31, 2012, respectively, of which $4,446,000 and $12,020,000 were on nonaccrual. At June 30, 2013, there were also $9,422,000 loans less than 30 days past due included in nonaccrual loans held-for-investment. At December 31, 2012, there were also $5,315,000 loans less than 30 days past due included in nonaccrual loans held-for-investment. Management's classification of a loan as "nonaccrual" is an indication that there is reasonable doubt as to the full recovery of principal or interest on the loan. At that point, the Company stops accruing interest income, and reverses any uncollected interest that had been accrued as income. The Company begins recognizing interest income only as cash interest payments are received and it has been determined the collection of all outstanding principal is not in doubt. The loans may or may not be collateralized, and collection efforts are pursued.

Credit Quality Indicators

        Concentrations of credit risk arise when a number of customers are engaged in similar business activities, or activities in the same geographic region, or have similar features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic conditions. The Company's loan portfolio is concentrated in commercial (primarily manufacturing, wholesale, and service) and real estate lending, with the balance in consumer loans. While no specific industry concentration is considered significant, the Company's lending operations are located in the Company's market areas that are dependent on the technology and real estate industries and their supporting companies. Thus, the Company's borrowers could be adversely impacted by a continued downturn in these sectors of the economy which could reduce the demand for loans and adversely impact the borrowers' ability to repay their loans.

        The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis is performed on a quarterly basis. Nonclassified loans generally include those loans that are expected to be repaid in accordance with contractual loans terms. Classified loans are those loans that are assigned a substandard, substandard-nonaccrual, or doubtful risk rating using the following definitions:

        Substandard.    Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

        Substandard-Nonaccrual.    Loans classified as substandard-nonaccrual are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. In addition, the Company no longer accrues interest on the loan because of the underlying weaknesses.

        Doubtful.    Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

        Loss.    Loans classified as loss are considered uncollectable or of so little value that their continuance as assets is not warranted. This classification does not necessarily mean that a loan has no recovery or salvage value; but rather, there is much doubt about whether, how much, or when the recovery would occur. Loans classified as loss are immediately charged off against the allowance for loan losses. Therefore, there is no balance to report at June 30, 2013 or December 31, 2012.

        The following table provides a summary of the loan portfolio by loan type and credit quality classification at June 30, 2013 and December 31, 2012:

	June 30, 2013						December 31, 2012
	Nonclassified		Classified		Total		Nonclassified		Classified		Total
	(Dollars in thousands)
Commercial	$	372,077	$	10,991	$	383,068	$	355,440	$	20,029	$	375,469
Real estate:
Commercial and residential		363,222		7,398		370,620		345,045		9,889		354,934
Land and construction		24,576		2,129		26,705		18,858		3,494		22,352
Home equity		45,974		2,693		48,667		41,187		2,678		43,865
Consumer		12,729		368		13,097		15,321		393		15,714
Total	$	818,578	$	23,579	$	842,157	$	775,851	$	36,483	$	812,334

        In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Company's underwriting policy.

        The recorded investment of troubled debt restructurings at June 30, 2013 was $2,759,000, which included $1,581,000 of nonaccrual loans and $1,178,000 of accruing loans. The book balance of troubled debt restructurings at December 31, 2012 was $4,107,000, which included $1,798,000 of nonaccrual loans and $2,309,000 of accruing loans. Approximately $804,000 and $1,152,000 in specific reserves were established with respect to these loans as of June 30, 2013 and December 31, 2012, respectively. As of June 30, 2013 and December 31, 2012, the Company had no additional amounts committed on any loan classified as a troubled debt restructuring.

        There were no new loans modified as troubled debt restructurings during the three month period ended June 30, 2013. The following table presents loans by class modified as troubled debt restructurings during the three month period ended June 30, 2012:

	During the Three Months Ended June 30, 2012
Troubled Debt Restructurings:	Number of Contracts		Pre-modification Outstanding Recorded Investment		Post-modification Outstanding Recorded Investment
	(Dollars in thousands)
Consumer		1	$	117	$	117
Total		1	$	117	$	117

        The troubled debt restructurings described above increased the allowance for loan losses by $13,000 through the allocation of specific reserves, and resulted in no net charge-offs during the three month period ended June 30, 2012.

        There were no new loans modified as troubled debt restructurings during the six month period ended June 30, 2013. The following table presents loans by class modified as troubled debt restructurings during the six month period ended June 30, 2012:

	During the Six Months Ended June 30, 2012
Troubled Debt Restructurings:	Number of Contracts		Pre-modification Outstanding Recorded Investment		Post-modification Outstanding Recorded Investment
	(Dollars in thousands)
Commercial		1	$	112	$	112
Consumer		1		117		117
Total		2	$	229	$	229

        The troubled debt restructurings described above increased the allowance for loan losses by $44,000 through the allocation of specific reserves, and resulted in no net charge-offs during the six month period ended June 30, 2012.

        A loan is considered to be in payment default when it is 30 days contractually past due under the modified terms. There were no defaults on troubled debt restructurings, within twelve months following the modification, during the three month period ended June 30, 2013 and 2012.

        A loan that is a troubled debt restructuring on nonaccrual status may return to accruing status after a period of at least six months of consecutive payments in accordance with the modified terms.