(5) 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 months ended March 31, 2012 and 2011:

(dollars in thousands)	Three Months Ended March 31, 2012
	Commercial			Real estate mortgage			Real estate construction			Consumer			Total
Beginning balance	$	4,034		$	6,500		$	4,046		$	3,452		$	18,032
Provision		573			581			647			199			2,000
Charge-offs		(585	)		(561	)		(600	)		(487	)		(2,233	)
Recoveries		19			18			2			155			194
Ending Balance	$	4,041		$	6,538		$	4,095		$	3,319		$	17,993

(dollars in thousands)	Three Months Ended March 31, 2011
	Commercial			Real estate mortgage			Real estate construction		Consumer			Total
Beginning balance	$	3,915		$	6,507		$	4,947	$	3,443		$	18,812
Provision		1,302			558			511		629			3,000
Charge-offs		(469	)		(1,285	)		-		(1,145	)		(2,899	)
Recoveries		81			88			1		155			325
Ending Balance	$	4,829		$	5,868		$	5,459	$	3,082		$	19,238

The following table provides a summary of the allowance for loan losses and related non-covered loans, by portfolio segment, at March 31, 2012 and December 31, 2011:

(dollars in thousands)	March 31, 2012
	Commercial		Real estate mortgage		Real estate construction		Consumer		Total
Allowance for loan losses:
Individually evaluated for impairment	$	730	$	1,258	$	1,722	$	91	$	3,801
Collectively evaluated for impairment		3,311		5,280		2,373		3,228		14,192
Total allowance for loan losses	$	4,041	$	6,538	$	4,095	$	3,319	$	17,993

Non-covered loans
Individually evaluated for impairment	$	7,148	$	16,672	$	25,648	$	874	$	50,342
Collectively evaluated for impairment		149,446		400,670		62,551		153,773		766,440
Total non-covered loans (1)	$	156,594	$	417,342	$	88,199	$	154,647	$	816,782

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

(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.

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 March 31, 2012, 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 at March 31, 2012 and December 31, 2011 were as follows:

(dollars in thousands)	March 31, 2012				December 31, 2011
	Recorded investment		Allowance		Recorded investment		Allowance
With no related allowance recorded
Nonaccrual loans	$	13,124	$	-	$	18,744	$	-
Restructured loans		13,854		-		11,208		-
Total with no related allowance	$	26,978	$	-	$	29,952	$	-

With an allowance recorded
Nonaccrual loans	$	9,216	$	197	$	3,356	$	262
Restructured loans		14,148		3,604		15,285		3,486
Total with an allowance recorded		23,364		3,801		18,641		3,748
Total	$	50,342	$	3,801	$	48,593	$	3,748

The following table further summarizes impaired non-covered loans, by class, at March 31, 2012 and December 31, 2011:

(dollars in thousands)	March 31, 2012						December 31, 2011
	Recorded investment		Unpaid principal balance		Related allowance		Recorded investment		Unpaid principal balance		Related allowance
With no related allowance recorded
Commercial	$	4,371	$	4,401	$	-	$	3,801	$	5,692	$	-
Real estate mortgages:
One-to-four family residential		1,868		3,369		-		1,557		3,217		-
Multi-family and commercial		8,963		9,601		-		7,062		8,791		-
Total real estate mortgages		10,831		12,970		-		8,619		12,008		-
Real estate construction:
One-to-four family residential		11,254		12,334		-		16,932		21,803		-
Multi-family and commercial		100		100		-		387		387		-
Total real estate construction		11,354		12,434		-		17,319		22,190		-
Consumer:
Indirect		-		-		-		-		-		-
Direct		422		422		-		213		900		-
Total consumer		422		422		-		213		900		-
Total with no related allowance recorded	$	26,978	$	30,227	$	-	$	29,952	$	40,790	$	-

With an allowance recorded
Commercial	$	2,777	$	3,116	$	730	$	2,724	$	3,128	$	588
Real estate mortgages:
One-to-four family residential		168		186		12		174		190		13
Multi-family and commercial		5,673		5,672		1,246		5,238		5,238		1,199
Total real estate mortgages		5,841		5,858		1,258		5,412		5,428		1,212
Real estate construction:
One-to-four family residential		14,294		19,245		1,722		10,164		10,845		1,869
Multi-family and commercial		-		-		-		-		-		-
Total real estate construction		14,294		19,245		1,722		10,164		10,845		1,869
Consumer:
Indirect		-		-		-		-		-		-
Direct		452		452		91		341		341		79
Total consumer		452		452		91		341		341		79
Total with an allowance recorded		23,364		28,671		3,801		18,641		19,742		3,748
Total impaired non-covered loans	$	50,342	$	58,898	$	3,801	$	48,593	$	60,532	$	3,748

The average recorded investment in non-covered impaired loans was approximately $49.5 million and $47.5 million for the three months ended March 31, 2012 and 2011, respectively. For the three months ended March 31, 2012 and 2011, the Company recognized interest income on non-covered impaired loans of $54 thousand and $7 thousand, respectively. Additional interest income of $206 thousand and $50 thousand would have been recognized had the non-covered impaired loans accrued interest, in accordance with their original terms, for the three months ended March 31, 2012 and 2011, respectively.

Troubled Debt Restructurings

A troubled debt restructured loan ("TDR") is classified as a 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.

Troubled debt restructurings at March 31, 2012 and December 31, 2011 were as follows:

(dollars in thousands)	March 31, 2012						December 31, 2011
	Accrual status		Nonaccrual status		Total modifications		Accrual status		Nonaccrual status		Total modifications
Troubled debt restructurings:
Commercial	$	4,077	$	285	$	4,362	$	3,341	$	-	$	3,341
Real estate mortgages:
One-to-four family residential		-		933		933		-		933		933
Multi-family and commercial		10,317		937		11,254		9,420		937		10,357
Total real estate mortgage		10,317		1,870		12,187		9,420		1,870		11,290

Real estate construction:
One-to-four family residential		13,269		11,932		25,201		13,391		13,283		26,674
Multi-family and commercial		-		-		-		-		387		387
Total real estate construction		13,269		11,932		25,201		13,391		13,670		27,061

Consumer:
Indirect		-		-		-		-		-		-
Direct		339		-		339		341		-		341
Total consumer		339		-		339		341		-		341
Total restructured loans	$	28,002	$	14,087	$	42,089	$	26,493	$	15,540	$	42,033

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.

Troubled 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 tables present loans restructured during the three months ended March 31, 2012 and 2011. During the periods presented, all modification terms were a combination of terms employed by the Company.

(dollars in thousands)	For the Three Months Ended March 31, 2012
	Number of contracts		Pre-modification recorded investment		Post-modification recorded investment
Troubled debt restructurings:
Commercial		1	$	285	$	285
Real estate mortgages:
One-to-four family residential		-		-		-
Multi-family and commercial		-		-		-
Total real estate mortgage		-		-		-

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

Consumer:
Indirect		-		-		-
Direct		-		-		-
Total consumer		-		-		-
Total restructured loans		1	$	285	$	285

(dollars in thousands)	For the Three Months Ended March 31, 2011
	Number of contracts		Pre-modification recorded investment		Post-modification recorded investment
Troubled debt restructurings:
Commercial		2	$	742	$	742
Real estate mortgages:
One-to-four family residential		-		-		-
Multi-family and commercial		3		3,290		3,290
Total real estate mortgage		3		3,290		3,290

Real estate construction:
One-to-four family residential		1		879		879
Multi-family and commercial		-		-		-
Total real estate construction		1		879		879

Consumer:
Indirect		-		-		-
Direct		-		-		-
Total consumer		-		-		-
Total restructured loans		6	$	4,911	$	4,911

For the three months ended March 31, 2012 and 2011, there were no troubled debt restructuring that subsequently defaulted within the first twelve months of restructure.

Non-Covered Nonaccrual Loans and Loans Past Due

The following table summarizes non-covered nonaccrual loans and past due loans, by class, as of March 31, 2012 and December 31, 2011:

(dollars in thousands)	March 31, 2012
	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	$	1,387	$	373	$	131	$	1,891	$	3,071	$	151,632	$	156,594
Real estate mortgages:
One-to-four family residential		519		-		-		519		2,036		36,432		38,987
Multi-family and commercial		415		577		-		992		4,319		373,044		378,355
Total real estate mortgages		934		577		-		1,511		6,355		409,476		417,342

Real estate construction:
One-to-four family residential		-		-		-		-		12,279		44,684		56,963
Multi-family and commercial		25		-		-		25		100		31,111		31,236
Total real estate construction		25		-		-		25		12,379		75,795		88,199

Consumer:
Indirect		1,123		112		-		1,235		-		77,574		78,809
Direct		1,068		334		-		1,402		535		73,901		75,838
Total consumer		2,191		446		-		2,637		535		151,475		154,647
Total	$	4,537	$	1,396	$	131	$	6,064	$	22,340	$	788,378		816,782
Deferred loan costs, net														1,868
Total non-covered loans													$	818,650

(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

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 nine risk ratings can be generally described by the following groups:

Pass/Watch: Pass/watch loans, risk rated 1 through 5, range from minimal credit risk to lower than average, but still acceptable, credit risk.

Special Mention: Special mention loans, risk rated 6, are loans that 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, risk rated 7, 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: Doubtful/loss loans are risk rated 8 and 9. 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 March 31, 2012 and December 31, 2011:

(dollars in thousands)	March 31, 2012
	Pass/Watch		Special mention		Substandard		Doubtful/Loss		Total
Commercial	$	128,432	$	8,163	$	19,999	$	-	$	156,594
Real estate mortgages:
One-to-four family residential		32,080		1,770		5,137		-		38,987
Multi-family and commercial		313,251		31,512		33,592		-		378,355
Total real estate mortgages		345,331		33,282		38,729		-		417,342

Real estate construction:
One-to-four family residential		27,148		1,087		28,728		-		56,963
Multi-family and commercial		24,500		4,196		2,540		-		31,236
Total real estate construction		51,648		5,283		31,268		-		88,199

Consumer:
Indirect		77,156		12		1,641		-		78,809
Direct		69,306		840		5,692		-		75,838
Total consumer		146,462		852		7,333		-		154,647
Total	$	671,873	$	47,580	$	97,329	$	-		816,782
Deferred loan costs, net										1,868
									$	818,650

(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