(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 years ended December 31:

(dollars in thousands)	Year Ended December 31, 2012
	Commercial			Real estate mortgage			Real estate construction			Consumer			Total
Beginning balance	$	4,034		$	6,500		$	4,046		$	3,452		$	18,032
Provision		1,763			2,889			1,699			749			7,100
Charge-offs		(1,640	)		(3,311	)		(2,706	)		(1,526	)		(9,183	)
Recoveries		248			438			11			501			1,198
Ending Balance	$	4,405		$	6,516		$	3,050		$	3,176		$	17,147

	Year Ended December 31, 2011
	Commercial			Real estate mortgage			Real estate construction			Consumer			Total
Beginning balance	$	3,915		$	6,507		$	4,947		$	3,443		$	18,812
Provision		1,557			7,852			(759	)		1,850			10,500
Charge-offs		(1,707	)		(8,547	)		(144	)		(2,543	)		(12,941	)
Recoveries		269			688			2			702			1,661
Ending Balance	$	4,034		$	6,500		$	4,046		$	3,452		$	18,032

The Company had an additional allowance for loan losses for covered loans of $3.3 million and $870 thousand for the years ended December 31, 2012 and 2011, 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, 2012 and 2011:

(dollars in thousands)	December 31, 2012
	Commercial		Real estate mortgage		Real estate construction		Consumer		Total
Allowance for non-covered loan losses:
Individually evaluated for impairment	$	1,468	$	1,154	$	881	$	52	$	3,555
Collectively evaluated for impairment		2,937		5,362		2,169		3,124		13,592
Total allowance for loan losses	$	4,405	$	6,516	$	3,050	$	3,176	$	17,147

Non-covered loans:
Individually evaluated for impairment	$	9,974	$	11,357	$	19,607	$	916	$	41,854
Collectively evaluated for impairment		152,507		441,270		61,791		153,974		809,542
Total non-covered loans (1)	$	162,481	$	452,627	$	81,398	$	154,890	$	851,396

(1) Total non-covered loans excludes deferred loan costs of $1.7 million.

(dollars in thousands)	December 31, 2011
	Commercial		Real estate mortgage		Real estate construction		Consumer		Total
Allowance for non-covered 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 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.

Non-Covered Impaired Loans

The Company had non-covered impaired loans consisting of nonaccrual loans and restructured loans. As of December 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 were as follows:

(dollars in thousands)	December 31,
	2012				2011
	Recorded investment		Allowance		Recorded investment		Allowance
With no related allowance recorded
Nonaccrual loans	$	15,479	$	-	$	18,744	$	-
Restructured loans		8,635		-		11,208		-
Total with no related allowance	$	24,114	$	-	$	29,952	$	-

With an allowance recorded
Nonaccrual loans	$	72	$	5	$	3,356	$	262
Restructured loans		17,668		3,550		15,285		3,486
Total with an allowance recorded		17,740		3,555		18,641		3,748
Total	$	41,854	$	3,555	$	48,593	$	3,748

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

(dollars in thousands)	December 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	$	3,737	$	4,231	$	-	$	3,801	$	5,692	$	-
Real estate mortgages:
One-to-four family residential		938		1,132		-		1,557		3,217		-
Multi-family and commercial		3,605		4,283		-		7,062		8,791		-
Total real estate mortgages		4,543		5,415		-		8,619		12,008		-
Real estate construction:
One-to-four family residential		15,251		23,133		-		16,932		21,803		-
Multi-family and commercial		-		-		-		387		387		-
Total real estate construction		15,251		23,133		-		17,319		22,190		-
Consumer:
Indirect		-		-		-		-		-		-
Direct		583		1,017		-		213		900		-
Total consumer		583		1,017		-		213		900		-
Total with no related allowance recorded	$	24,114	$	33,796	$	-	$	29,952	$	40,790	$	-

With an allowance recorded
Commercial	$	6,237	$	6,237	$	1,468	$	2,724	$	3,128	$	588
Real estate mortgages:
One-to-four family residential		524		524		53		174		190		13
Multi-family and commercial		6,290		6,657		1,101		5,238		5,238		1,199
Total real estate mortgages		6,814		7,181		1,154		5,412		5,428		1,212
Real estate construction:
One-to-four family residential		4,094		4,112		855		10,164		10,845		1,869
Multi-family and commercial		262		262		26		-		-		-
Total real estate construction		4,356		4,374		881		10,164		10,845		1,869
Consumer:
Indirect		-		-		-		-		-		-
Direct		333		333		52		341		341		79
Total consumer		333		333		52		341		341		79
Total with an allowance recorded		17,740		18,125		3,555		18,641		19,742		3,748
Total impaired non-covered loans	$	41,854	$	51,921	$	3,555	$	48,593	$	60,532	$	3,748

The average balance of non-covered impaired loans for the years ended December 31, 2012, 2011 and 2010 was $45.2 million, $47.2 million and $9.6 million, respectively. Interest income recognized on non-covered impaired loans was $605 thousand, $375 thousand and $160 thousand for the years ended December 31, 2012, 2011 and 2010, respectively. Additional interest income of $599 thousand, $1.7 million and $200 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, 2012, 2011 and 2010, respectively.

Troubled Debt Restructurings

A troubled debt restructured loan is classified 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.

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

(dollars in thousands)	December 31, 2012						December 31, 2011
	Accrual status		Nonaccrual status		Total modifications		Accrual status		Nonaccrual status		Total modifications
Troubled debt restructurings:
Commercial	$	7,008	$	1,160	$	8,168	$	3,341	$	-	$	3,341
Real estate mortgages:
One-to-four family residential		573		340		913		-		933		933
Multi-family and commercial		7,993		1,823		9,816		9,420		937		10,357
Total real estate mortgage		8,566		2,163		10,729		9,420		1,870		11,290

Real estate construction:
One-to-four family residential		10,135		9,013		19,148		13,391		13,283		26,674
Multi-family and commercial		262		-		262		-		387		387
Total real estate construction		10,397		9,013		19,410		13,391		13,670		27,061

Consumer:
Direct		332		20		352		341		-		341
Total consumer		332		20		352		341		-		341
Total restructured loans	$	26,303	$	12,356	$	38,659	$	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 for the years ended December 31, 2012 and 2011. For the periods presented, all modification terms were a combination of terms employed by the Company.

(dollars in thousands)	For the Year Ended December 31, 2012
	Number of contracts		Pre-modification recorded investment		Post-modification recorded investment
Troubled debt restructurings:
Commercial		18	$	4,812	$	4,403
Real estate mortgages:
One-to-four family residential		3		565		561
Multi-family and commercial		2		701		694
Total real estate mortgage		5		1,266		1,255

Real estate construction:
One-to-four family residential		2		1,064		933
Multi-family and commercial		1		262		262
Total real estate construction		3		1,326		1,195

Consumer:
Indirect		-		-		-
Direct		-		-		-
Total consumer		-		-		-
Total restructured loans		26	$	7,404	$	6,853

(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, 2012, there was a $557 thousand commercial loan and a $37 thousand real estate mortgage multi-family and commercial loan that had been restructured within the previous 12 months that subsequently defaulted. For the year ended December 31, 2011, there was a $163 thousand real estate mortgage multi-family and commercial loan that had been restructured within the previous 12 months that subsequently 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, 2012 and 2011:

(dollars in thousands)	December 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	$	232	$	373	$	-	$	605	$	2,966	$	158,910	$	162,481
Real estate mortgages:
One-to-four family residential		-		-		-		-		889		35,984		36,873
Multi-family and commercial		-		-		-		-		1,903		413,851		415,754
Total real estate mortgages		-		-		-		-		2,792		449,835		452,627

Real estate construction:
One-to-four family residential		-		63		-		63		9,210		37,199		46,472
Multi-family and commercial		-		-		-		-				34,926		34,926
Total real estate construction		-		63		-		63		9,210		72,125		81,398

Consumer:
Indirect		966		112		-		1,078		-		76,518		77,596
Direct		469		415		-		884		583		75,827		77,294
Total consumer		1,435		527		-		1,962		583		152,345		154,890
Total	$	1,667	$	963	$	-	$	2,630	$	15,551	$	833,215		851,396
Deferred loan costs, net														1,738
Total non-covered loans													$	853,134

(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 tables summarize the internal risk rating, by class, as of December 31, 2012 and 2011:

(dollars in thousands)	December 31, 2012
	Pass/Watch		Special mention		Substandard		Doubtful/Loss		Total
Commercial	$	140,809	$	4,412	$	17,260	$	-	$	162,481
Real estate mortgages:
One-to-four family residential		31,511		1,139		4,223		-		36,873
Multi-family and commercial		363,408		26,287		26,059		-		415,754
Total real estate mortgages		394,919		27,426		30,282		-		452,627

Real estate construction:
One-to-four family residential		25,389		776		20,307		-		46,472
Multi-family and commercial		32,166		472		2,288		-		34,926
Total real estate construction		57,555		1,248		22,595		-		81,398

Consumer:
Indirect		76,076		16		1,504		-		77,596
Direct		71,176		450		5,668		-		77,294
Total consumer		147,252		466		7,172		-		154,890
Total	$	740,535	$	33,552	$	77,309	$	-		851,396
Deferred loan costs, net										1,738
									$	853,134

(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