(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 and six months ended June 30, 2012 and 2011:

(dollars in thousands)	Three Months Ended June 30, 2012
	Commercial			Real estate mortgage			Real estate construction			Consumer			Total
Beginning balance	$	4,041		$	6,538		$	4,095		$	3,319		$	17,993
Provision		807			1,284			20			239			2,350
Charge-offs		(391	)		(2,004	)		(133	)		(427	)		(2,955	)
Recoveries		14			26			1			136			177
Ending Balance	$	4,471		$	5,844		$	3,983		$	3,267		$	17,565

(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)	Six Months Ended June 30, 2012
	Commercial			Real estate mortgage			Real estate construction			Consumer			Total
Beginning balance	$	4,034		$	6,500		$	4,046		$	3,452		$	18,032
Provision		1,380			1,865			667			438			4,350
Charge-offs		(976	)		(2,565	)		(733	)		(914	)		(5,188	)
Recoveries		33			44			3			291			371
Ending Balance	$	4,471		$	5,844		$	3,983		$	3,267		$	17,565

(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

The following table provides a summary of the allowance for loan losses and related non-covered loans, by portfolio segment, at June 30, 2012 and December 31, 2011:

(dollars in thousands)	June 30, 2012
	Commercial		Real estate mortgage		Real estate construction		Consumer		Total
Allowance for loan losses:
Individually evaluated for impairment	$	1,364	$	832	$	1,957	$	93	$	4,246
Collectively evaluated for impairment		3,107		5,012		2,026		3,174		13,319
Total allowance for loan losses	$	4,471	$	5,844	$	3,983	$	3,267	$	17,565

Non-covered loans:
Individually evaluated for impairment	$	10,172	$	14,453	$	23,569	$	765	$	48,959
Collectively evaluated for impairment		147,915		405,749		56,013		154,324		764,001
Total non-covered loans (1)	$	158,087	$	420,202	$	79,582	$	155,089	$	812,960

(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 when 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

At June 30, 2012 and December 31, 2011, the Company had non-covered impaired loans which consisted of nonaccrual loans and restructured loans. As of June 30, 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 June 30, 2012 and December 31, 2011 were as follows:

(dollars in thousands)	June 30, 2012				December 31, 2011
	Recorded investment		Allowance		Recorded investment		Allowance
With no related allowance recorded
Nonaccrual loans	$	11,122	$	-	$	18,744	$	-
Restructured loans		13,471		-		11,208		-
Total with no related allowance	$	24,593	$	-	$	29,952	$	-

With an allowance recorded
Nonaccrual loans	$	6,043	$	464	$	3,356	$	262
Restructured loans		18,323		3,782		15,285		3,486
Total with an allowance recorded		24,366		4,246		18,641		3,748
Total	$	48,959	$	4,246	$	48,593	$	3,748

The following table further summarizes impaired non-covered loans, by class, at June 30, 2012 and December 31, 2011:

(dollars in thousands)	June 30, 2012						December 31, 2011
	Recorded investment		Unpaid principal balance		Related allowance		Recorded investment		Unpaid principal balance		Related allowance
With no related allowance recorded
Commercial	$	4,395	$	4,494	$	-	$	3,801	$	5,692	$	-
Real estate mortgages:
One-to-four family residential		1,061		1,087		-		1,557		3,217		-
Multi-family and commercial		7,862		9,042		-		7,062		8,791		-
Total real estate mortgages		8,923		10,129		-		8,619		12,008		-
Real estate construction:
One-to-four family residential		11,165		14,000		-		16,932		21,803		-
Multi-family and commercial		25		25		-		387		387		-
Total real estate construction		11,190		14,025		-		17,319		22,190		-
Consumer:
Direct		85		202		-		213		900		-
Total consumer		85		202		-		213		900		-
Total with no related allowance recorded	$	24,593	$	28,850	$	-	$	29,952	$	40,790	$	-

With an allowance recorded
Commercial	$	5,777	$	6,026	$	1,364	$	2,724	$	3,128	$	588
Real estate mortgages:
One-to-four family residential		528		528		35		174		190		13
Multi-family and commercial		5,002		5,055		797		5,238		5,238		1,199
Total real estate mortgages		5,530		5,583		832		5,412		5,428		1,212
Real estate construction:
One-to-four family residential		12,016		15,316		1,849		10,164		10,845		1,869
Multi-family and commercial		363		364		108		-		-		-
Total real estate construction		12,379		15,680		1,957		10,164		10,845		1,869
Consumer:
Direct		680		680		93		341		341		79
Total consumer		680		680		93		341		341		79
Total with an allowance recorded		24,366		27,969		4,246		18,641		19,742		3,748
Total impaired non-covered loans	$	48,959	$	56,819	$	4,246	$	48,593	$	60,532	$	3,748

The average recorded investment in non-covered impaired loans was $49.7 million and $48.8 million for the three and six months ended June 30, 2012, respectively, compared to $50.0 million and $48.3 million for the same periods a year ago. For the three and six months ended June 30, 2012, the Company recognized interest income on non-covered impaired loans of $150 thousand and $204 thousand, respectively. For the same periods a year ago, interest income recognized on non-covered impaired loans was $5 thousand and $12 thousand, respectively. Additional interest income of $205 thousand and $280 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, 2012, compared to $22 thousand and $72 thousand for the three and six month ended June 30, 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 June 30, 2012 and December 31, 2011 were as follows:

(dollars in thousands)	June 30, 2012						December 31, 2011
	Accrual status		Nonaccrual status		Total modifications		Accrual status		Nonaccrual status		Total modifications
Troubled debt restructurings:
Commercial	$	8,002	$	1,208	$	9,210	$	3,341	$	-	$	3,341
Real estate mortgages:
One-to-four family residential		528		-		528		-		933		933
Multi-family and commercial		9,387		1,680		11,067		9,420		937		10,357
Total real estate mortgage		9,915		1,680		11,595		9,420		1,870		11,290

Real estate construction:
One-to-four family residential		13,276		9,685		22,961		13,391		13,283		26,674
Multi-family and commercial		265		-		265		-		387		387
Total real estate construction		13,541		9,685		23,226		13,391		13,670		27,061

Consumer:
Direct		336		23		359		341		-		341
Total consumer		336		23		359		341		-		341
Total restructured loans	$	31,794	$	12,596	$	44,390	$	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 and six months ended June 30, 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 June 30, 2012
	Number of contracts		Pre-modification recorded investment		Post-modification recorded investment
Troubled debt restructurings:
Commercial		8	$	4,013	$	3,892
Real estate mortgages:
One-to-four family residential		1		173		173
Multi-family and commercial		1		376		376
Total real estate mortgage		2		549		549

Real estate construction:
One-to-four family residential		1		631		631
Multi-family and commercial		1		265		265
Total real estate construction		2		896		896
Total restructured loans		12	$	5,458	$	5,337

(dollars in thousands)	For the Three Months Ended June 30, 2011
	Number of contracts		Pre-modification recorded investment		Post-modification recorded investment
Troubled debt restructurings:
Commercial		1	$	427	$	427
Real estate mortgages:
Multi-family and commercial		2		655		655
Total real estate mortgage		2		655		655

Real estate construction:
One-to-four family residential		2		2,352		2,352
Total real estate construction		2		2,352		2,352
Total restructured loans		5	$	3,434	$	3,434

(dollars in thousands)	For the Six Months Ended June 30, 2012
	Number of contracts		Pre-modification recorded investment		Post-modification recorded investment
Troubled debt restructurings:
Commercial		12	$	4,983	$	4,862
Real estate mortgages:
One-to-four family residential		1		173		173
Multi-family and commercial		1		376		376
Total real estate mortgage		2		549		549

Real estate construction:
One-to-four family residential		1		631		631
Multi-family and commercial		1		265		265
Total real estate construction		2		896		896
Total restructured loans		16	$	6,428	$	6,307

(dollars in thousands)	For the Six Months Ended June 30, 2011
	Number of contracts		Pre-modification recorded investment		Post-modification recorded investment
Troubled debt restructurings:
Commercial		1	$	427	$	427
Real estate mortgages:
Multi-family and commercial		5		4,018		4,018
Total real estate mortgage		5		4,018		4,018

Real estate construction:
One-to-four family residential		3		3,469		3,469
Total real estate construction		3		3,469		3,469
Total restructured loans		9	$	7,914	$	7,914

For the three and six months ended June 30, 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 June 30, 2012 and December 31, 2011:

(dollars in thousands)	June 30, 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	$	959	$	67	$	-	$	1,026	$	2,170	$	154,891	$	158,087
Real estate mortgages:
One-to-four family residential		130		-		-		130		1,061		36,509		37,700
Multi-family and commercial		756		-		-		756		3,477		378,269		382,502
Total real estate mortgages		886		-		-		886		4,538		414,778		420,202

Real estate construction:
One-to-four family residential		1,199		-		-		1,199		9,905		38,574		49,678
Multi-family and commercial		-		-		-		-		123		29,781		29,904
Total real estate construction		1,199		-		-		1,199		10,028		68,355		79,582

Consumer:
Indirect		939		88		-		1,027		-		77,672		78,699
Direct		293		81		-		374		429		75,587		76,390
Total consumer		1,232		169		-		1,401		429		153,259		155,089
Total	$	4,276	$	236	$	-	$	4,512	$	17,165	$	791,283		812,960
Deferred loan costs, net														1,866
Total non-covered loans													$	814,826

(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 June 30, 2012 and December 31, 2011:

(dollars in thousands)	June 30, 2012
	Pass/Watch		Special mention		Substandard		Doubtful/Loss		Total
Commercial	$	131,807	$	6,550	$	19,730	$	-	$	158,087
Real estate mortgages:
One-to-four family residential		31,998		945		4,757		-		37,700
Multi-family and commercial		326,006		30,789		25,707		-		382,502
Total real estate mortgages		358,004		31,734		30,464		-		420,202

Real estate construction:
One-to-four family residential		23,961		995		24,722		-		49,678
Multi-family and commercial		25,725		1,748		2,431		-		29,904
Total real estate construction		49,686		2,743		27,153		-		79,582

Consumer:
Indirect		77,000		21		1,678		-		78,699
Direct		70,033		542		5,815		-		76,390
Total consumer		147,033		563		7,493		-		155,089
Total	$	686,530	$	41,590	$	84,840	$	-		812,960
Deferred loan costs, net										1,866
									$	814,826

(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