(6) Allowance for Non-Covered Loan Losses and Credit Quality

Activity in the Non-Covered Allowance for Loan Losses

The following table summarizes activity related to the allowance for loan losses on non-covered loans, by portfolio segment, for the three and six months ended June 30, 2011 and 2010:

(dollars in thousands)	Three Months Ended June 30, 2011
	Commercial			Real estate mortgage			Real estate construction			Consumer			Total
Beginning balance	$	4,829		$	5,868		$	5,459		$	3,082		$	19,238
Provision		391			2,059			472			78			3,000
Charge-offs		(688	)		(2,045	)		(144	)		(392	)		(3,269	)
Recoveries		106			39			1			292			438
Ending Balance	$	4,638		$	5,921		$	5,788		$	3,060		$	19,407

(dollars in thousands)	Three Months Ended June 30, 2010
	Commercial			Real estate mortgage			Real estate construction			Consumer			Total
Beginning balance	$	2,171		$	7,806		$	2,289		$	4,198		$	16,464
Provision		2,537			(2,637	)		3,380			(730	)		2,550
Charge-offs		(582	)		(217	)		(1,022	)		(498	)		(2,319	)
Recoveries		71			2			6			201			280
Ending Balance	$	4,197		$	4,954		$	4,653		$	3,171		$	16,975

(dollars in thousands)	Six Months Ended June 30, 2011
	Commercial			Real estate mortgage			Real estate construction			Consumer			Total
Beginning balance	$	3,915		$	6,507		$	4,947		$	3,443		$	18,812
Provision		1,693			2,617			983			707			6,000
Charge-offs		(1,157	)		(3,330	)		(144	)		(1,537	)		(6,168	)
Recoveries		187			127			2			447			763
Ending Balance	$	4,638		$	5,921		$	5,788		$	3,060		$	19,407

(dollars in thousands)	Six Months Ended June 30, 2010
	Commercial			Real estate mortgage			Real estate construction			Consumer			Total
Beginning balance	$	1,515		$	8,060		$	2,330		$	4,307		$	16,212
Provision		3,663			(2,423	)		3,913			(453	)		4,700
Charge-offs		(1,124	)		(687	)		(1,697	)		(1,130	)		(4,638	)
Recoveries		143			4			107			447			701
Ending Balance	$	4,197		$	4,954		$	4,653		$	3,171		$	16,975

The following table provides a summary of the allowance for loan losses and related non-covered loans, by portfolio segment, at June 30, 2011 and December 31, 2010:

(dollars in thousands)	June 30, 2011
	Commercial		Real estate mortgage		Real estate construction		Consumer		Total
Allowance for loan losses:
Individually evaluated for impairment	$	1,225	$	312	$	2,643	$	-	$	4,180
Collectively evaluated for impairment		3,413		5,609		3,145		3,060		15,227
Total allowance for loan losses	$	4,638	$	5,921	$	5,788	$	3,060	$	19,407

Non-covered loans
Individually evaluated for impairment	$	6,741	$	12,047	$	31,831	$	220	$	50,839
Collectively evaluated for impairment		147,034		390,956		70,202		168,890		777,082
Total non-covered loans (1)	$	153,775	$	403,003	$	102,033	$	169,110	$	827,921

(1) Total non-covered loans excludes deferred loan costs of $2.1 million.

(dollars in thousands)	December 31, 2010
	Commercial		Real estate mortgage		Real estate construction		Consumer		Total
Allowance for loan losses:
Individually evaluated for impairment	$	898	$	345	$	1,100	$	-	$	2,343
Collectively evaluated for impairment		3,017		6,162		3,847		3,443		16,469
Total allowance for loan losses	$	3,915	$	6,507	$	4,947	$	3,443	$	18,812

Non-covered loans
Individually evaluated for impairment	$	3,422	$	11,625	$	30,617	$	118	$	45,782
Collectively evaluated for impairment		141,897		383,640		84,992		175,778		786,307
Total non-covered loans (1)	$	145,319	$	395,265	$	115,609	$	175,896	$	832,089

(1) Total non-covered loans excludes deferred loan costs of $2.2 million.

Credit Quality and Nonperforming Non-Covered Loans

The Company manages credit quality and controls its credit risk through lending limits, credit review, approval policies and extensive, ongoing internal monitoring. Through this monitoring process, nonperforming loans are identified. Non-covered nonperforming loans consist of non-covered nonaccrual loans. Non-covered nonperforming loans are assessed for potential loss exposure on an individual or homogeneous group basis.

A loan is considered impaired when, based upon currently known information, it is deemed probable that the Company will be unable to collect all amounts due as scheduled according to the original terms of the agreement. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, based on the loan's observable market price or the fair value of collateral, if the loan is collateral dependent.

Loans are placed on nonaccrual status when collection of principal or interest is considered doubtful (generally, loans are 90 days or more past due). Loans placed on nonaccrual will typically remain on nonaccrual status until all principal and interest payments are brought current and the prospects for future payments, in accordance with the loan agreement, appear relatively certain.

Interest income previously accrued on nonaccrual loans, but not yet received, is reversed in the period the loan is placed on nonaccrual status. Payments received are generally applied to principal. However, based on management's assessment of the ultimate collectability of an impaired or nonaccrual loan, interest income may be recognized on a cash basis. Nonaccrual loans are returned to an accrual status when management determines the circumstances have improved to the extent that there has been a sustained period of repayment performance and both principal and interest are deemed collectible.

Loans are reported as restructured when the Bank grants a concession(s) to a borrower experiencing financial difficulties that it would not otherwise consider. Examples of such concessions include forgiveness of principal or accrued interest, extending the maturity date(s) or providing a lower interest rate than would be normally available for a transaction of similar risk. As a result of these concessions, restructured loans are impaired as the Bank will not collect all amounts due, both principal and interest, in accordance with the terms of the original loan agreement.

Non-Covered Impaired Loans

The Company had non-covered impaired loans which consisted of nonaccrual loans and restructured loans. As of June 30, 2011, the Company had $1.6 million in commitments to extend additional credit on these non-covered impaired loans. Non-covered impaired loans and the related allowance for loan losses at June 30, 2011 and December 31, 2010 were as follows:

(dollars in thousands)	June 30, 2011				December 31, 2010
	Recorded Investment		Allowance		Recorded Investment		Allowance
With no related allowance recorded
Nonaccrual loans	$	15,877	$	-	$	11,382	$	-
Restructured loans		17,621		-		19,936		-
Total with no related allowance	$	33,498	$	-	$	31,318	$	-

With an allowance recorded
Nonaccrual loans	$	12,075	$	2,306	$	14,464	$	2,343
Restructured loans		5,266		1,874		-		-
Total with an allowance recorded		17,341		4,180		14,464		2,343
Total	$	50,839	$	4,180	$	45,782	$	2,343

The following table further summarizes impaired non-covered loans, by class, at June 30, 2011 and December 31, 2010:

(dollars in thousands)	June 30, 2011						December 31, 2010
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded
Commercial	$	3,528	$	4,814	$	-	$	1,855	$	1,858	$	-
Real estate mortgages:
One-to-four family residential		812		812		-		2,700		3,400		-
Multi-family and commercial		8,923		9,787		-		7,036		7,163		-
Total real estate mortgages		9,735		10,599		-		9,736		10,563		-
Real estate construction:
One-to-four family residential		19,628		20,836		-		19,222		19,644		-
Multi-family and commercial		387		387		-		387		387		-
Total real estate construction		20,015		21,223		-		19,609		20,031		-
Consumer:
Indirect		-		560		-		-		-		-
Direct		220		1,214		-		118		118		-
Total consumer		220		1,774		-		118		118		-
Total with no related allowance recorded	$	33,498	$	38,410	$	-	$	31,318	$	32,570	$	-

With an allowance recorded
Commercial	$	3,213	$	3,440	$	1,225	$	1,567	$	1,567	$	898
Real estate mortgages:
One-to-four family residential		1,419		2,623		38		1,180		1,188		207
Multi-family and commercial		892		915		274		709		1,036		138
Total real estate mortgages		2,311		3,538		312		1,889		2,224		345
Real estate construction:
One-to-four family residential		11,817		12,831		2,643		11,008		11,166		1,100
Multi-family and commercial		-		-		-		-		-		-
Total real estate construction		11,817		12,831		2,643		11,008		11,166		1,100
Consumer:
Indirect		-		-		-		-		-		-
Direct		-		-		-		-		-		-
Total consumer		-		-		-		-		-		-
Total with an allowance recorded		17,341		19,809		4,180		14,464		14,957		2,343
Total impaired non-covered loans	$	50,839	$	58,219	$	4,180	$	45,782	$	47,527	$	2,343

The average recorded investment in non-covered impaired loans was approximately $48.3 million during the six months ended June 30, 2011, and $9.6 million for the year ended December 31, 2010. Interest income recognized on non-covered impaired loans was $5 thousand and $12 thousand for the three and six months ended June 30, 2011, respectively. For the same periods a year ago, interest income recognized on non-covered impaired loans was $77 thousand and $82 thousand, respectively. Additional interest income of $22 thousand and $72 thousand would have been recognized had the non-covered impaired loans accrued interest, in accordance with their original terms, for the three and six months ended June 30, 2011, compared to $103 thousand and $182 thousand for the three and six month ended June 30, 2010, respectively.

Non-Covered Nonaccrual Loans and Loans Past Due

The following table summarizes non-covered nonaccrual loans and past due loans, by class, as of June 30, 2011 and December 31, 2010:

(dollars in thousands)	June 30, 2011
	30 - 59 Days Past Due		60 - 89 Days Past Due		Greater Than 90 Days and Accruing		Total Past Due		Nonaccrual		Current		Total Non-Covered Loans
Commercial	$	732	$	789	$	86	$	1,607	$	4,337	$	147,831	$	153,775
Real estate mortgages:
One-to-four family residential		229		290		-		519		2,232		41,504		44,255
Multi-family and commercial		1,883		335		-		2,218		3,435		353,095		358,748
Total real estate mortgages		2,112		625		-		2,737		5,667		394,599		403,003

Real estate construction:
One-to-four family residential		751		-		-		751		17,342		48,108		66,201
Multi-family and commercial		-		-		-		-		386		35,446		35,832
Total real estate construction		751		-		-		751		17,728		83,554		102,033

Consumer:
Indirect		1,090		320		-		1,410		-		84,490		85,900
Direct		814		302		212		1,328		220		81,662		83,210
Total consumer		1,904		622		212		2,738		220		166,152		169,110
Total	$	5,499	$	2,036	$	298	$	7,833	$	27,952	$	792,136		827,921
Deferred loan costs, net														2,117
Total non-covered loans													$	830,038

(dollars in thousands)	December 31, 2010
	30 - 59 Days Past Due		60 - 89 Days Past Due		Greater Than 90 Days and Accruing		Total Past Due		Nonaccrual		Current		Total Non-Covered Loans
Commercial	$	1,010	$	461	$	-	$	1,471	$	3,304	$	140,544	$	145,319
Real estate mortgages:
One-to-four family residential		928		32		-		960		3,880		41,877		46,717
Multi-family and commercial		-		1,799		-		1,799		3,134		343,615		348,548
Total real estate mortgages		928		1,831		-		2,759		7,014		385,492		395,265

Real estate construction:
One-to-four family residential		2,034		2,656		-		4,690		15,023		53,232		72,945
Multi-family and commercial		-		-		-		-		387		42,277		42,664
Total real estate construction		2,034		2,656		-		4,690		15,410		95,509		115,609

Consumer:
Indirect		1,159		259		34		1,452		-		88,779		90,231
Direct		1,214		271		10		1,495		118		84,052		85,665
Total consumer		2,373		530		44		2,947		118		172,831		175,896
Total	$	6,345	$	5,478	$	44	$	11,867	$	25,846	$	794,376		832,089
Deferred loan costs, net														2,204
Total non-covered loans													$	834,293

Non-Covered Credit Quality Indicators

The Company's internal risk rating methodology assigns risk ratings from 1 to 9, where a higher rating represents higher risk. The 9 risk ratings can be generally described by the following groups:

Pass/Watch: These loans range from minimal credit risk to lower than average, but still acceptable, credit risk.

Special Mention: Loans assigned this category present certain potential weaknesses that require management's attention. Those weaknesses, if left uncorrected, may result in deterioration of the borrower's repayment ability or the Company's credit position in the future.

Substandard: Substandard loans are inadequately protected by the current worth and paying capacity of the borrower or of the collateral pledged, if any. There are well-defined weaknesses that may jeopardize the repayment of debt. Such weaknesses include deteriorated financial condition of the borrower resulting from insufficient income, excessive expenses or other factors that result in inadequate cash flows to meet all scheduled obligations.

Doubtful/Loss: Loans assigned as doubtful have all the weaknesses inherent with substandard loans, with the added characteristic that the weaknesses make collection in full, on the basis of currently existing facts, conditions and values, highly questionable. The possibility of loss is high, but because of certain important and reasonably specific pending factors that may work to the advantage of, and strengthen the credit, its classification as an estimated loss is deferred until a more exact status may be determined. The Company charges off loans that would otherwise be classified loss.

The following table summarizes our internal risk rating, by class, as of June 30, 2011 and December 31, 2010:

(dollars in thousands)	June 30, 2011
	Pass/Watch		Special Mention		Substandard		Doubtful/Loss		Total
Commercial	$	122,847	$	6,349	$	24,579	$	-	$	153,775
Real estate mortgages:
One-to-four family residential		36,300		2,164		5,791		-		44,255
Multi-family and commercial		286,783		30,772		41,193		-		358,748
Total real estate mortgages		323,083		32,936		46,984		-		403,003

Real estate construction:
One-to-four family residential		19,884		5,983		40,334		-		66,201
Multi-family and commercial		27,821		5,216		2,795		-		35,832
Total real estate construction		47,705		11,199		43,129		-		102,033

Consumer:
Indirect		83,527		12		2,361		-		85,900
Direct		76,435		1,144		5,631		-		83,210
Total consumer		159,962		1,156		7,992		-		169,110
Total	$	653,597	$	51,640	$	122,684	$	-		827,921
Deferred loan costs, net										2,117
									$	830,038

(dollars in thousands)	December 31, 2010
	Pass/Watch		Special Mention		Substandard		Doubtful/Loss		Total
Commercial	$	112,145	$	6,265	$	26,909	$	-	$	145,319
Real estate mortgages:
One-to-four family residential		36,626		1,788		8,303		-		46,717
Multi-family and commercial		283,790		24,617		40,141		-		348,548
Total real estate mortgages		320,416		26,405		48,444		-		395,265

Real estate construction:
One-to-four family residential		27,485		3,860		41,600		-		72,945
Multi-family and commercial		32,015		9,917		732		-		42,664
Total real estate construction		59,500		13,777		42,332		-		115,609

Consumer:
Indirect		87,679		11		2,541		-		90,231
Direct		78,846		1,132		5,687		-		85,665
Total consumer		166,525		1,143		8,228		-		175,896
Total	$	658,586	$	47,590	$	125,913	$	-		832,089
Deferred loan costs, net										2,204
									$	834,293