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

Activity in the Non-Covered Allowance for Loan Losses

Changes in the allowance for loan losses for non-covered loans, for the years ended December 31, are summarized below:

(dollars in thousands)	2011			2010			2009
Beginning balance	$	18,812		$	16,212		$	12,250
Provision for loan losses		10,500			12,150			10,200
Charge-offs		(12,941	)		(10,778	)		(8,270	)
Recoveries		1,661			1,228			2,032
Ending balance	$	18,032		$	18,812		$	16,212

(1) Total non-covered loans excludes deferred loan costs of $1.9 million.

The Company recorded an additional allowance for loan losses for covered loans of $870 thousand and $1.3 million for the years ended December 31, 2011 and 2010, respectively. See Note (7) for discussion on covered assets.

The following tables provide a summary of the allowance for loan losses and related non-covered loans, by portfolio segment, as of December 31, 2011 and 2010:

(dollars in thousands)	December 31, 2011
	Commercial		Real estate mortgage		Real estate construction		Consumer		Total
Allowance for loan losses:
Individually evaluated for impairment	$	588	$	1,212	$	1,869	$	79	$	3,748
Collectively evaluated for impairment		3,446		5,288		2,177		3,373		14,284
Total allowance for loan losses	$	4,034	$	6,500	$	4,046	$	3,452	$	18,032

Non-covered loans
Individually evaluated for impairment	$	6,525	$	14,032	$	27,483	$	553	$	48,593
Collectively evaluated for impairment		143,861		397,081		62,873		158,569		762,384
Total non-covered loans (1)	$	150,386	$	411,113	$	90,356	$	159,122	$	810,977

(1) Total non-covered loans excludes deferred loan costs of $1.9 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	$	11,624	$	30,618	$	118	$	45,782
Collectively evaluated for impairment		141,897		383,641		84,991		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 nonaccrual restructured loans and non-covered past due loans greater than ninety days. 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 on nonaccrual status. As of December 31, 2011, the Company had no commitments to extend additional credit on these non-covered impaired loans. Non-covered impaired loans and the related allowance for loan losses were as follows:

(dollars in thousands)	December 31,
	2011				2010				2009
	Recorded Investment		Allowance		Recorded Investment		Allowance		Recorded Investment		Allowance
With no related allowance recorded
Nonaccrual loans	$	18,744	$	-	$	11,382	$	-	$	427	$	-
Restructured loans		11,208		-		19,936		-		-		-
Total with no related allowance	$	29,952	$	-	$	31,318	$	-	$	427	$	-

With an allowance recorded
Nonaccrual loans	$	3,356	$	262	$	3,456	$	1,243	$	2,968	$	1,211
Restructured loans		15,285		3,486		11,008		1,100		-		-
Total with an allowance recorded		18,641		3,748		14,464		2,343		2,968		1,211
Total	$	48,593	$	3,748	$	45,782	$	2,343	$	3,395	$	1,211

The following table further summarizes impaired non-covered loans, by class, as of December 31, 2011 and 2010:

(dollars in thousands)	December 31, 2011						December 31, 2010
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded
Commercial	$	3,801	$	5,692	$	-	$	1,855	$	1,858	$	-
Real estate mortgages:
One-to-four family residential		1,557		3,217		-		2,700		3,400		-
Multi-family and commercial		7,062		8,791		-		7,036		7,163		-
Total real estate mortgages		8,619		12,008		-		9,736		10,563		-
Real estate construction:
One-to-four family residential		16,932		21,803		-		19,222		19,644		-
Multi-family and commercial		387		387		-		387		387		-
Total real estate construction		17,319		22,190		-		19,609		20,031		-
Consumer:
Indirect		-		-		-		-		-		-
Direct		213		900		-		118		118		-
Total consumer		213		900		-		118		118		-
Total with no related allowance recorded	$	29,952	$	40,790	$	-	$	31,318	$	32,570	$	-

With an allowance recorded
Commercial	$	2,724	$	3,128	$	588	$	1,567	$	1,567	$	898
Real estate mortgages:
One-to-four family residential		174		190		13		1,180		1,188		207
Multi-family and commercial		5,238		5,238		1,199		709		1,036		138
Total real estate mortgages		5,412		5,428		1,212		1,889		2,224		345
Real estate construction:
One-to-four family residential		10,164		10,845		1,869		11,008		11,166		1,100
Multi-family and commercial		-		-		-		-		-		-
Total real estate construction		10,164		10,845		1,869		11,008		11,166		1,100
Consumer:
Indirect		-		-		-		-		-		-
Direct		341		341		79		-		-		-
Total consumer		341		341		79		-		-		-
Total with an allowance recorded		18,641		19,742		3,748		14,464		14,957		2,343
Total impaired non-coverd loans	$	48,593	$	60,532	$	3,748	$	45,782	$	47,527	$	2,343

The average balance of non-covered impaired loans for the years ended December 31, 2011, 2010 and 2009 was $47.2 million, $9.6 million and $5.6 million, respectively. Interest income recognized on non-covered impaired loans was $375 thousand, $160 thousand and $144 thousand for the years ended December 31, 2011, 2010 and 2009, respectively. Additional interest income of $1.7 million, $200 thousand and $108 thousand would have been recognized had the non-covered impaired loans accrued interest, in accordance with their original terms, for the years ended December 31, 2011, 2010 and 2009, respectively.

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 December 31, 2011 and 2010 were as follows:

(dollars in thousands)	December 31, 2011						December 31, 2010
	Accrual Status		Nonaccrual Status		Total Modifications		Accrual Status		Nonaccrual Status		Total Modifications
Troubled Debt Restructurings:
Commercial	$	3,341	$	-	$	3,341	$	118	$	-	$	118
Real estate mortgages:
One-to-four family residential		-		933		933		-		2,195		2,195
Multi-family and commercial		9,420		937		10,357		4,610		642		5,252
Total real estate mortgage		9,420		1,870		11,290		4,610		2,837		7,447

Real estate construction:
One-to-four family residential		13,391		13,283		26,674		15,208		14,399		29,607
Multi-family and commercial		-		387		387		-		387		387
Total real estate construction		13,391		13,670		27,061		15,208		14,786		29,994

Consumer:
Indirect		-		-		-		-		-		-
Direct		341		-		341		-		-		-
Total consumer		341		-		341		-		-		-
Total restructured loans	$	26,493	$	15,540	$	42,033	$	19,936	$	17,623	$	37,559

The Company's policy is that loans placed on nonaccrual will typically remain on nonaccrual 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 for the year ended December 31, 2011. For the period, all modification terms were a combination of terms employed by the Company.

(dollars in thousands)	For the Year Ended December 31, 2011
	Number of Contracts		Pre-Modification Recorded Investment		Post-Modification Recorded Investment
Troubled Debt Restructurings:
Commercial		2	$	1,039	$	1,039
Real estate mortgages:
One-to-four family residential		-		-		-
Multi-family and commercial		10		6,395		6,212
Total real estate mortgage		10		6,395		6,212

Real estate construction:
One-to-four family residential		8		5,796		5,796
Multi-family and commercial		-		-		-
Total real estate construction		8		5,796		5,796

Consumer:
Indirect		-		-		-
Direct		1		341		341
Total consumer		1		341		341
Total restructured loans		21	$	13,571	$	13,388

For the year ended December 31, 2011, a $163 thousand real estate mortgage multi-family and commercial loan that had previously been restructured defaulted.

Non-Covered Nonaccrual Loans and Loans Past Due

The following tables summarize non-covered nonaccrual loans and past due loans, by class, as of December 31, 2011 and 2010:

(dollars in thousands)	December 31, 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	$	1,482	$	4	$	-	$	1,486	$	3,183	$	145,717	$	150,386
Real estate mortgages:
One-to-four family residential		53		154		-		207		1,732		38,392		40,331
Multi-family and commercial		1,687		484		-		2,171		2,881		365,730		370,782
Total real estate mortgages		1,740		638		-		2,378		4,613		404,122		411,113

Real estate construction:
One-to-four family residential		27		-		-		27		13,705		45,078		58,810
Multi-family and commercial		100		-		-		100		387		31,059		31,546
Total real estate construction		127		-		-		127		14,092		76,137		90,356

Consumer:
Indirect		1,288		198		-		1,486		-		78,910		80,396
Direct		1,023		294		-		1,317		212		77,197		78,726
Total consumer		2,311		492		-		2,803		212		156,107		159,122
Total	$	5,660	$	1,134	$	-	$	6,794	$	22,100	$	782,083		810,977
Deferred loan costs, net														1,853
Total non-covered loans													$	812,830

(dollars in thousands)	December 31, 2010
	30 - 59 Days Past Due		60 - 89 Days Past Due		Greater T han 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 tables summarize our internal risk rating, by class, as of December 31, 2011 and 2010:

(dollars in thousands)	December 31, 2011
	Pass/Watch		Special Mention		Substandard		Doubtful/ Loss		Total
Commercial	$	122,189	$	7,791	$	20,406	$	-	$	150,386
Real estate mortgages:
One-to-four family residential		33,609		1,462		5,260		-		40,331
Multi-family and commercial		307,402		26,220		37,160		-		370,782
Total real estate mortgages		341,011		27,682		42,420		-		411,113

Real estate construction:
One-to-four family residential		26,110		2,313		30,387		-		58,810
Multi-family and commercial		24,402		4,416		2,728		-		31,546
Total real estate construction		50,512		6,729		33,115		-		90,356

Consumer:
Indirect		78,531		15		1,850		-		80,396
Direct		72,602		844		5,280		-		78,726
Total consumer		151,133		859		7,130		-		159,122
Total	$	664,845	$	43,061	$	103,071	$	-		810,977
Deferred loan costs, net										1,853
									$	812,830

(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