(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 nine months ended September 30, 2011 and 2010:

(dollars in thousands)	Three Months Ended September 30, 2011
	Commercial			Real estate mortgage			Real estate construction			Consumer			Total
Beginning balance	$	4,638		$	5,921		$	5,788		$	3,060		$	19,407
Provision		(318	)		785			1,211			822			2,500
Charge-offs		(163	)		(732	)		(2,216	)		(467	)		(3,578	)
Recoveries		58			424			1			124			607
Ending Balance	$	4,215		$	6,398		$	4,784		$	3,539		$	18,936

(dollars in thousands)	Three Months Ended September 30, 2010
	Commercial			Real estate mortgage			Real estate construction			Consumer			Total
Beginning balance	$	4,197		$	4,954		$	4,653		$	3,171		$	16,975
Provision		777			1,856			1,117			200			3,950
Charge-offs		(763	)		(791	)		(1,175	)		(486	)		(3,215	)
Recoveries		16			21			1			188			226
Ending Balance	$	4,227		$	6,040		$	4,596		$	3,073		$	17,936

(dollars in thousands)	Nine Months Ended September 30, 2011
	Commercial			Real estate mortgage			Real estate construction			Consumer			Total
Beginning balance	$	3,915		$	6,507		$	4,947		$	3,443		$	18,812
Provision		1,375			1,692			3,904			1,530			8,501
Charge-offs		(1,320	)		(2,351	)		(4,070	)		(2,004	)		(9,745	)
Recoveries		245			550			3			570			1,368
Ending Balance	$	4,215		$	6,398		$	4,784		$	3,539		$	18,936

(dollars in thousands)	Nine Months Ended September 30, 2010
	Commercial			Real estate mortgage			Real estate construction			Consumer			Total
Beginning balance	$	1,515		$	8,060		$	2,330		$	4,307		$	16,212
Provision		4,440			(568	)		5,031			(253	)		8,650
Charge-offs		(1,887	)		(1,477	)		(2,872	)		(1,617	)		(7,853	)
Recoveries		159			25			107			636			927
Ending Balance	$	4,227		$	6,040		$	4,596		$	3,073		$	17,936

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

(dollars in thousands)	September 30, 2011
	Commercial		Real estate mortgage		Real estate construction		Consumer		Total
Allowance for loan losses:
Individually evaluated for impairment	$	826	$	1,207	$	1,717	$	82	$	3,832
Collectively evaluated for impairment		3,389		5,191		3,067		3,457		15,104
Total allowance for loan losses	$	4,215	$	6,398	$	4,784	$	3,539	$	18,936

Non-covered loans
Individually evaluated for impairment	$	7,360	$	14,398	$	31,688	$	541	$	53,987
Collectively evaluated for impairment		141,165		388,500		71,469		164,446		765,580
Total non-covered loans (1)	$	148,525	$	402,898	$	103,157	$	164,987	$	819,567

(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.

Non-Covered Impaired Loans

The Company had non-covered impaired loans which consisted of nonaccrual loans and restructured loans. As of September 30, 2011, the Company had $910 thousand in commitments to extend additional credit on these non-covered impaired loans. Non-covered impaired loans and the related allowance for loan losses at September 30, 2011 and December 31, 2010 were as follows:

(dollars in thousands)	September 30, 2011				December 31, 2010
	Recorded Investment		Allowance		Recorded Investment		Allowance
With no related allowance recorded
Nonaccrual loans	$	21,090	$	-	$	11,382	$	-
Restructured loans		14,729		-		19,936		-
Total with no related allowance	$	35,819	$	-	$	31,318	$	-

With an allowance recorded
Nonaccrual loans	$	5,786	$	1,266	$	14,464	$	2,343
Restructured loans		12,382		2,566		-		-
Total with an allowance recorded		18,168		3,832		14,464		2,343
Total	$	53,987	$	3,832	$	45,782	$	2,343

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

(dollars in thousands)	September 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	$	5,132	$	7,037	$	-	$	1,855	$	1,858	$	-
Real estate mortgages:
One-to-four family residential		1,876		3,231		-		2,700		3,400		-
Multi-family and commercial		5,504		5,978		-		7,036		7,163		-
Total real estate mortgages		7,380		9,209		-		9,736		10,563		-
Real estate construction:
One-to-four family residential		22,682		26,448		-		19,222		19,644		-
Multi-family and commercial		427		428		-		387		387		-
Total real estate construction		23,109		26,876		-		19,609		20,031		-
Consumer:
Indirect		-		-		-		-		-		-
Direct		199		713		-		118		118		-
Total consumer		199		713		-		118		118		-
Total with no related allowance recorded	$	35,820	$	43,835	$	-	$	31,318	$	32,570	$	-

With an allowance recorded
Commercial	$	2,228	$	2,245	$	826	$	1,567	$	1,567	$	898
Real estate mortgages:
One-to-four family residential		183		190		21		1,180		1,188		207
Multi-family and commercial		6,836		6,855		1,186		709		1,036		138
Total real estate mortgages		7,019		7,045		1,207		1,889		2,224		345
Real estate construction:
One-to-four family residential		8,578		9,045		1,717		11,008		11,166		1,100
Multi-family and commercial		-		-				-		-		-
Total real estate construction		8,578		9,045		1,717		11,008		11,166		1,100
Consumer:
Indirect		-		-		-		-		-		-
Direct		342		342		82		-		-		-
Total consumer		342		342		82		-		-		-
Total with an allowance recorded		18,167		18,677		3,832		14,464		14,957		2,343
Total impaired non-covered loans	$	53,987	$	62,512	$	3,832	$	45,782	$	47,527	$	2,343

The average recorded investment in non-covered impaired loans was approximately $48.5 million during the nine months ended September 30, 2011, and $9.6 million for the year ended December 31, 2010.

Trouble Debt Restructurings

A troubled debt restructured loan (“TDR”) is as restructuring when the Company 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 considered impaired as the Company will not collect all amounts due, both principal and interest, in accordance with the terms of the original loan agreement.

The Company adopted the amendments in Accounting Standards Update No. 2011-02 during the current period ended September 30, 2011. As required, the Company reassessed all restructurings that occurred on or after the beginning of the current fiscal year (January 1, 2011) for identification as troubled debt restructurings. The Company did not identify any additional loans which would be considered troubled debt restructurings.

Trouble debt restructurings at September 30, 2011 and December 31, 2011 were as follows:


(dollars in thousands)	September 30, 2011						December 31, 2010
	Accrual Status		Nonaccrual Status		Total Modifications		Accrual Status		Nonaccrual Status		Total Modifications
Troubled Debt Restructurings:
Commercial	$	3,381	$	-	$	3,381	$	118	$	-	$	118
Real estate mortgages:
One-to-four family residential		-		1,233		1,233		-		2,195		2,195
Multi-family and commercial		8,850		2,070		10,920		4,610		642		5,252
Total real estate mortgage		8,850		3,303		12,153		4,610		2,837		7,447

Real estate construction:
One-to-four family residential		14,538		15,686		30,224		15,208		14,399		29,607
Multi-family and commercial		-		386		386		-		387		387
Total real estate construction		14,538		16,072		30,610		15,208		14,786		29,994

Consumer:
Indirect		-		-		-		-		-		-
Direct		342		-		342		-		-		-
Total consumer		342		-		342		-		-		-
Total restructured loans	$	27,111	$	19,375	$	46,486	$	19,936	$	17,623	$	37,559

The Company's policy is that loans placed on non-accrual will typically remain on non-accrual status until all principal and interest payments are brought current and the prospect for future payment in accordance with the loan agreement appear relatively certain. The Company's policy generally refers to six months of payment performance as sufficient to warrant a return to accrual status.

Trouble Debt Restructurings Modification Terms

The Company offers a variety of modifications to borrowers. In restructuring a loan with a borrower the Company normally employs several types of modifications terms. The modification terms offered by the Company are as follows:

Rate Modification: A modification in which the interest rate is changed.

Term Modification: A modification in which the maturity date, the timing of payments, or frequency of payments is changed.

Interest Only Modification: A modification in which the loan is converted to interest only payments for a period of time.

Payment Modification: A modification in which the dollar amount of the payment is changed, other than an interest only modification described above.

Combination Modification: Any other type of modification, including the use of multiple terms above.

The following table present loans restructured during the three and nine months ended September 30, 2011. During the periods presented all modification terms were a combination of terms employed by the Company.

(dollars in thousands)	Three Months Ended September 30, 2011						Nine Months Ended September 30, 2011
	Number of Contracts		Pre-Modification Recorded Investment		Post-Modification Recorded Investment		Number of Contracts		Pre-Modification Recorded Investment		Post-Modification Recorded Investment
Troubled Debt Restructurings:
Commercial		1	$	628	$	628		5	$	2,804	$	2,804
Real estate mortgages:
One-to-four family residential		-		-		-		-		-		-
Multi-family and commercial		3		1,687		1,667		10		6,110		6,083
Total real estate mortgage		3		1,687		1,667		10		6,110		6,083

Real estate construction:
One-to-four family residential		5		3,712		3,591		8		7,116		6,995
Multi-family and commercial		-		-		-		-		-		-
Total real estate construction		5		3,712		3,591		8		7,116		6,995

Consumer:
Indirect		-		-		-		-		-		-
Direct		1		342		342		1		342		342
Total consumer		1		342		342		1		342		342
Total restructured loans		10	$	6,369	$	6,228		24	$	16,372	$	16,224

The following table summarizes restructured loans which have defaulted within the first twelve months after restructure. The table details the number and recorded investment of loans with defaults occurring during the three and nine month periods ended September 30, 2011:

(dollars in thousands)	Three Months Ended				Nine Months Ended
	September 30, 2011				September 30, 2011
	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment

Trouble Debt Restructuring which defaulted:
Commercial		-	$	-		-	$	-
Real estate mortgages:
One-to-four family residential		-		-		-		-
Multi-family and commercial		1		163		1		163
Total real estate mortgage		1		163		1		163

Real estate construction:
One-to-four family residential		-		-		-		-
Multi-family and commercial		-		-		-		-
Total real estate construction		-		-		-		-

Consumer:
Indirect		-		-		-		-
Direct		-		-		-		-
Total consumer		-		-		-		-
Total restructured loans which defaulted		1	$	163		1	$	163

Non-Covered Nonaccrual Loans and Loans Past Due

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

(dollars in thousands)	September 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	$	891	$	86	$	-	$	977	$	3,979	$	43,569	$	148,525
Real estate mortgages:
One-to-four family residential		75		331		-		406		2,058		40,501		42,965
Multi-family and commercial		1,890		-		-		1,890		3,489		354,554		359,933
Total real estate mortgages		1,965		331		-		2,296		5,547		395,055		402,898

Real estate construction:
One-to-four family residential		-		-		-		-		16,724		49,690		66,414
Multi-family and commercial		-		-		-		-		427		36,316		36,743
Total real estate construction		-		-		-		-		17,151		86,006		103,157

Consumer:
Indirect		916		266		-		1,182		-		82,739		83,921
Direct		576		151		-		727		199		80,140		81,066
Total consumer		1,492		417		-		1,909		199		162,879		164,987
Total	$	4,348	$	834	$	-	$	5,182	$	26,876	$	787,509		819,567
Deferred loan costs, net														2,068
Total non-covered loans													$	821,635

(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 September 30, 2011 and December 31, 2010:

(dollars in thousands)	September 30, 2011
	Pass/Watch		Special Mention		Substandard		Doubtful/Loss		Total
Commercial	$	120,488	$	6,666	$	21,371	$	-	$	148,525
Real estate mortgages:
One-to-four family residential		35,202		2,244		5,519		-		42,965
Multi-family and commercial		294,875		25,300		39,758		-		359,933
Total real estate mortgages		330,077		27,544		45,277		-		402,898

Real estate construction:
One-to-four family residential		20,135		6,150		40,129		-		66,414
Multi-family and commercial		29,456		4,446		2,841		-		36,743
Total real estate construction		49,591		10,596		42,970		-		103,157

Consumer:
Indirect		82,138		17		1,766		-		83,921
Direct		75,079		861		5,126		-		81,066
Total consumer		157,217		878		6,892		-		164,987
Total	$	657,373	$	45,684	$	116,510	$	-		819,567
Deferred loan costs, net										2,068
									$	821,635

(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