Loans Receivable and Allowance for Loan Losses

Loans receivable that management has the intent and ability to hold for the foreseeable future, or until maturity or payoff, are stated at their outstanding unpaid principal balances, net of an ALL and any deferred fees and costs. Interest income is accrued on the unpaid principal balance. Loan origination fees and costs are deferred and recognized as an adjustment of the yield (interest income) of the related loans. The Company is generally amortizing these amounts over the contractual life of the loan or to the loan's call date. Certain qualifying loans of the Bank totaling $259.0 million, collateralize a letter of credit, a line of credit commitment and a long-term borrowing the Bank has with the Federal Home Loan Bank (FHLB).

A summary of the Bank's loans receivable at March 31, 2012 and December 31, 2011 is as follows:



(in thousands)	March 31, 2012		December 31, 2011
Commercial and industrial	$	344,521	$	321,988
Commercial tax-exempt	78,038		81,532
Owner occupied real estate	283,375		279,372
Commercial construction and land development	104,967		103,153
Commercial real estate	373,500		364,405
Residential	82,201		83,940
Consumer	205,436		202,278
	1,472,038		1,436,668
Less: allowance for loan losses	23,759		21,620
Net loans receivable	$	1,448,279	$	1,415,048

The following table summarizes nonaccrual loans by loan type at March 31, 2012 and December 31, 2011:



(in thousands)	March 31, 2012		December 31, 2011
Nonaccrual loans:
Commercial and industrial	$	9,689	$	10,162
Commercial tax-exempt	—		—
Owner occupied real estate	2,920		2,895
Commercial construction and land development	6,623		8,511
Commercial real estate	7,771		7,820
Residential	3,412		2,912
Consumer	2,055		1,829
Total nonaccrual loans	$	32,470	$	34,129

Generally, the Bank's policy is to move a loan to nonaccrual status as soon as it becomes 90 days past due or when the Company does not believe it will collect all of its principal and interest payments. In addition, when a loan is placed on nonaccrual status, unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is charged against the allowance for loan losses. Interest received on nonaccrual loans generally is either applied against principal or reported as interest income, according to management's judgment as to the collectibility of principal. If a loan is substandard and accruing, interest is recognized as accrued. Once a loan is on nonaccrual status, it is not returned to accrual status unless the loan has been current for at least six consecutive months and the borrower and/or any guarantors demonstrate evidence of the ability to repay the loan. Under certain circumstances such as bankruptcy, if a loan is under collateralized, or if the borrower and/or guarantors do not show evidence of the ability to pay, the loan may be placed on nonaccrual status even though it is not past due by 90 days or more. During the three months ended March 31, 2012, several large relationships improved their payment status but remained on nonaccrual under policy guidelines. In addition several large nonaccrual relationships were under forbearance agreements and were in compliance to the terms, which placed them in a current status. Therefore, the total nonaccrual loan balance of $32.5 million exceeds the balance of total loans that are 90 days past due of $18.2 million at March 31, 2012 as presented in the aging analysis tables.

Typically, commitments are canceled and no additional advances are made when a loan is placed on nonaccrual. At March 31, 2012 there was $128,000 available to be advanced on two nonaccrual commercial construction and land development loans.

The following tables are an age analysis of past due loan receivables as of March 31, 2012 and December 31, 2011:



			Past Due Loans										Recorded Investment in Loans 90 Days and Greater and Still Accruing
(in thousands)	Current		30-59 Days Past Due		60-89 Days Past Due		90 Days Past Due and Greater		Total Past Due		Total Loan Receivables
March 31, 2012
Commercial and industrial	$	330,791	$	9,386	$	607	$	3,737	$	13,730	$	344,521	$	—
Commercial tax-exempt	78,038		—		—		—		—		78,038		—
Owner occupied real estate	276,704		4,620		175		1,876		6,671		283,375		—
Commercial construction and land development	98,988		660		135		5,184		5,979		104,967		—
Commercial real estate	362,685		6,670		191		3,954		10,815		373,500		—
Residential	77,787		1,914		—		2,500		4,414		82,201		—
Consumer	202,918		1,020		513		985		2,518		205,436		8
Total	$	1,427,911	$	24,270	$	1,621	$	18,236	$	44,127	$	1,472,038	$	8



			Past Due Loans										Recorded Investment in Loans 90 Days and Greater and Still Accruing
(in thousands)	Current		30-59 Days Past Due		60-89 Days Past Due		90 Days Past Due and Greater		Total Past Due		Total Loan Receivables
December 31, 2011
Commercial and industrial	$	317,016	$	696	$	1,083	$	3,193	$	4,972	$	321,988	$	—
Commercial tax-exempt	81,532		—		—		—		—		81,532		—
Owner occupied real estate	274,720		2,423		328		1,901		4,652		279,372		—
Commercial construction and land development	94,160		470		219		8,304		8,993		103,153		—
Commercial real estate	354,818		2,191		1,272		6,124		9,587		364,405		—
Residential	75,841		4,587		607		2,905		8,099		83,940		621
Consumer	199,671		1,314		350		943		2,607		202,278		71
Total	$	1,397,758	$	11,681	$	3,859	$	23,370	$	38,910	$	1,436,668	$	692

The increase in the 30-59 days past due column was primarily the result of three relationships totaling approximately $9.1 million that fluctuate between being current and 30 - 59 days past due. At December 31, 2011 these three relationships were current. In addition, a relationship of approximately $1.5 million moved from the current category to 30-59 at March 31, 2012. This same relationship was current at December 31, 2011 and consistently had been current in prior periods.

A summary of the ALL and balance of loans receivable by loan class and by impairment method as of March 31, 2012 and December 31, 2011 is detailed in the tables that follow.



(in thousands)	Comm. and industrial		Comm. tax-exempt		Owner occupied real estate		Comm. construc tion and land devel opment		Comm. real estate		Resi dential		Con sumer		Unallo cated		Total

March 31, 2012
Allowance for loan losses:
Individually evaluated for impairment	$	800	$	—	$	1,076	$	3,799	$	—	$	—	$	—	$	—	$	5,675
Collectively evaluated for impairment	7,451		72		718		5,141		3,347		426		783		146		18,084
Total allowance for loan losses	$	8,251	$	72	$	1,794	$	8,940	$	3,347	$	426	$	783	$	146	$	23,759
Loans receivable:
Loans evaluated individually	$	14,009	$	—	$	7,506	$	25,584	$	11,930	$	4,037	$	2,055	$	—	$	65,121
Loans evaluated collectively	330,512		78,038		275,869		79,383		361,570		78,164		203,381		—		1,406,917
Total loans receivable	$	344,521	$	78,038	$	283,375	$	104,967	$	373,500	$	82,201	$	205,436	$	—	$	1,472,038

December 31, 2011
Allowance for loan losses:
Individually evaluated for impairment	$	1,000	$	—	$	30	$	2,600	$	—	$	—	$	—	$	—	$	3,630
Collectively evaluated for impairment	7,400		79		699		5,240		3,241		435		831		65		17,990
Total allowance for loan losses	$	8,400	$	79	$	729	$	7,840	$	3,241	$	435	$	831	$	65	$	21,620
Loans receivable:
Loans evaluated individually	$	15,504	$	—	$	7,492	$	23,216	$	12,117	$	3,346	$	1,829	$	—	$	63,504
Loans evaluated collectively	306,484		81,532		271,880		79,937		352,288		80,594		200,449		—		1,373,164
Total loans receivable	$	321,988	$	81,532	$	279,372	$	103,153	$	364,405	$	83,940	$	202,278	$	—	$	1,436,668

The Bank may create a specific allowance for all of or a part of a particular loan in lieu of a charge-off or charge-down as a result of management's evaluation of impaired loans. In these instances, the Bank has determined that a loss is not imminent based upon available information surrounding the credit at the time of the analysis including, but not limited to, unresolved legal matters; however, management believes an allowance is appropriate to acknowledge the risk of loss.

Generally, construction and land development and commercial real estate loans present a greater risk of non-payment by a borrower than other types of loans. The market value of real estate, particularly real estate held for investment, can fluctuate significantly in a relatively short period of time. Commercial and industrial, tax exempt and owner occupied real estate loans generally carry a lower risk factor because the repayment of these loans relies primarily on the cash flow from a business which is more stable and predictable. However, the significance and duration of the economic downturn caused the Bank to experience an elevated level of charge-offs in the commercial and industrial loan category in 2011.

Consumer loan collections are dependent on the borrower's continued financial stability and thus are more likely to be affected by adverse personal circumstances. Consumer and residential loans are also impacted by the market value of real estate. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount that can be recovered on these loans. The risk of non-payment is affected by changes in economic conditions, the credit risks of a particular borrower, the duration of the loan and, in the case of a collateralized loan, uncertainties as to the future value of the collateral and other factors.

Management bases its quantitative analysis of probable future loan losses (when determining the ALL) on those loans collectively reviewed for impairment on a two-year period of actual historical losses. Given the continued state of the economy and its impact on borrowers' financial conditions and on loan collateral values, management feels a two-year period is an appropriate historical time frame, valid until such time that the economy, borrower repayment ability and loan collateral values show sustained signs of improvement. Management may increase or decrease the historical loss period at some point in the future based on the state of the economy and other circumstances.

The qualitative factors such as changes in levels and trends of charge-offs and delinquencies; material changes in the mix, volume or duration of the loan portfolio; changes in lending policies and procedures including underwriting standards; changes in the experience, ability and depth of lending management and other relevant staff; the existence and effect of any concentrations of credit; changes in the overall values of collateral; changes in the quality of the loan review program and changes in national and local economic trends and conditions among other things, are factors which have not been identified by the quantitative processes. The determination of qualitative factors inherently involves a higher degree of subjectivity and considers risk factors that may not have yet manifested themselves in historical loss experience.

The following tables summarize the transactions in the ALL for the three months ended March 31, 2012 and 2011:



(in thousands)	Comm. and industrial			Comm. tax-exempt			Owner occupied real estate			Comm. construction and land development			Comm. real estate			Resi dential			Consumer			Unallo-cated		Total
2012
Balance at January 1	$	8,400		$	79		$	729		$	7,840		$	3,241		$	435		$	831		$	65	$	21,620
Provision charged to operating expenses	(47		)	(7		)	1,104			1,054			269			45			1			81		2,500
Recoveries of loans previously charged-off	20			—			4			434			3			1			24			—		486
Loans charged-off	(122		)	—			(43		)	(388		)	(166		)	(55		)	(73		)	—		(847		)
Balance at March 31	$	8,251		$	72		$	1,794		$	8,940		$	3,347		$	426		$	783		$	146	$	23,759



(in thousands)	Comm. and industrial			Comm. tax-exempt			Owner occupied real estate			Comm. construction and land development			Comm. real estate			Resi dential			Consumer			Unallo-cated			Total
2011
Balance at January 1	$	9,679		$	86		$	910		$	5,420		$	4,002		$	442		$	702		$	377		$	21,618
Provision charged to operating expenses	(602		)	(3		)	34			978			1,011			120			488			(234		)	1,792
Recoveries of loans previously charged-off	38			—			—			—			6			—			2			—			46
Loans charged-off	(254		)	—			(2		)	(382		)	(436		)	(101		)	(431		)	—			(1,606		)
Balance at March 31	$	8,861		$	83		$	942		$	6,016		$	4,583		$	461		$	761		$	143		$	21,850

The following table presents additional information regarding the Company's impaired loans as of March 31, 2012 and December 31, 2011:



	March 31, 2012						December 31, 2011
(in thousands)	Recorded Invest- ment		Unpaid Principal Balance		Related Allowance		Recorded Invest- ment		Unpaid Principal Balance		Related Allowance
Loans with no related allowance:
Commercial and industrial	$	12,313	$	17,987	$	—	$	14,504	$	19,672	$	—
Commercial tax-exempt	—		—		—		—		—		—
Owner occupied real estate	6,050		6,434		—		7,000		8,845		—
Commercial construction and land development	11,148		18,528		—		11,203		19,756		—
Commercial real estate	11,930		12,163		—		12,117		12,390		—
Residential	4,037		4,286		—		3,346		3,729		—
Consumer	2,055		2,272		—		1,829		2,168		—
Total impaired loans with no related allowance	47,533		61,670		—		49,999		66,560		—
Loans with an allowance recorded:
Commercial and industrial	1,696		2,696		800		1,000		1,000		1,000
Owner occupied real estate	1,456		1,456		1,076		492		659		30
Commercial construction and land development	14,436		14,875		3,799		12,013		12,013		2,600
Total impaired loans with an allowance recorded	17,588		19,027		5,675		13,505		13,672		3,630
Total impaired loans:
Commercial and industrial	14,009		20,683		800		15,504		20,672		1,000
Commercial tax-exempt	—		—		—		—		—		—
Owner occupied real estate	7,506		7,890		1,076		7,492		9,504		30
Commercial construction and land development	25,584		33,403		3,799		23,216		31,769		2,600
Commercial real estate	11,930		12,163		—		12,117		12,390		—
Residential	4,037		4,286		—		3,346		3,729		—
Consumer	2,055		2,272		—		1,829		2,168		—
Total impaired loans	$	65,121	$	80,697	$	5,675	$	63,504	$	80,232	$	3,630

The following table presents additional information regarding the Company's impaired loans for the three months ended March 31, 2012 and 2011:



	March 31, 2012				March 31, 2011
(in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Loans with no related allowance:
Commercial and industrial	$	12,886	$	61	$	26,645	$	108
Commercial tax-exempt	—		—		—		—
Owner occupied real estate	6,711		80		7,848		71
Commercial construction and land development	11,641		121		16,916		113
Commercial real estate	12,016		57		7,810		41
Residential	3,606		11		3,893		—
Consumer	2,003		—		2,025		—
Total impaired loans with no related allowance	48,863		330		65,137		333
Loans with an allowance recorded:
Commercial and industrial	1,801		—		2,074		—
Owner occupied real estate	816		—		260		—
Commercial construction and land development	12,821		—		1,477		—
Total impaired loans with an allowance recorded	15,438		—		3,811		—
Total impaired loans:
Commercial and industrial	14,687		61		28,719		108
Commercial tax-exempt	—		—		—		—
Owner occupied real estate	7,527		80		8,108		71
Commercial construction and land development	24,462		121		18,393		113
Commercial real estate	12,016		57		7,810		41
Residential	3,606		11		3,893		—
Consumer	2,003		—		2,025		—
Total impaired loans	$	64,301	$	330	$	68,948	$	333

Impaired loans averaged approximately $64.3 million and $68.9 million for the three months ended March 31, 2012 and 2011, respectively. All nonaccrual loans are considered impaired and interest income is handled as discussed earlier in the nonaccrual section of this footnote. Interest income continued to accrue on impaired loans that were still accruing and totaled $330,000 and $333,000 for the three months ended March 31, 2012 and 2011, respectively.

The Bank assigns loan risk ratings as credit quality indicators of its loan portfolio: pass, special mention, substandard accrual, substandard nonaccrual and doubtful. Monthly, we track commercial loans that are no longer pass rated. We review the cash flow, operating results and financial condition of the borrower and any guarantors, as well as the collateral position against established policy guidelines as a means of providing a targeted list of loans and loan relationships that require additional attention within the loan portfolio. We categorize loans possessing increased risk as either special mention, substandard accrual, substandard nonaccrual or doubtful. Special mention loans are those loans that are currently adequately protected, but potentially weak. The potential weaknesses may, if not corrected, weaken the loan's credit quality or inadvertently jeopardize our credit position in the future. Substandard accrual and substandard nonaccrual assets are characterized by well-defined weaknesses that jeopardize the liquidation of the debt and by the possibility that the Bank will sustain some loss if the weaknesses are not corrected. Substandard accrual loans would move from accrual to nonaccrual when the Bank does not believe it will collect all of its principal and interest payments. Some identifiers to determine the collectability are as follows: when the loan is 90 days past due in principal or interest, there are triggering events in the borrower's or any guarantor's financial statements that show continuing deterioration, the borrower's or any guarantor's source of repayment is depleting, or if bankruptcy or other legal matters are present, regardless if the loan is 90 days past due or not. Doubtful loans have all of the weaknesses inherent in those classified as substandard accrual and substandard nonaccrual loans with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable. Pass rated loans are reviewed throughout the year through the recurring review process of an independent loan review function and through the application of other credit metrics.

Credit quality indicators for commercial loans broken out by loan type are presented in the following tables for the periods ended March 31, 2012 and December 31, 2011. There were no loans classified as doubtful for periods ended March 31, 2012 and December 31, 2011.



	March 31, 2012
(in thousands)	Pass Rated Loans		Special Mention		Substandard Accrual		Substandard Nonaccrual		Total
Commercial credit exposure:
Commercial and industrial	$	305,833	$	4,227	$	24,772	$	9,689	$	344,521
Commercial tax-exempt	74,163		3,875		—		—		78,038
Owner occupied real estate	263,620		3,323		13,512		2,920		283,375
Commercial construction and land development	79,231		3,022		16,091		6,623		104,967
Commercial real estate	354,365		5,471		5,893		7,771		373,500
Total	$	1,077,212	$	19,918	$	60,268	$	27,003	$	1,184,401



	December 31, 2011
(in thousands)	Pass Rated Loans		Special Mention		Substandard Accrual		Substandard Nonaccrual		Total
Commercial credit exposure:
Commercial and industrial	$	280,884	$	9,176	$	21,766	$	10,162	$	321,988
Commercial tax-exempt	77,657		3,875		—		—		81,532
Owner occupied real estate	263,001		2,887		10,589		2,895		279,372
Commercial construction and land development	76,374		3,071		15,197		8,511		103,153
Commercial real estate	349,786		794		6,005		7,820		364,405
Total	$	1,047,702	$	19,803	$	53,557	$	29,388	$	1,150,450

Consumer loan credit exposures are rated either performing or nonperforming as detailed below at March 31, 2012 and December 31, 2011:



	March 31, 2012
(in thousands)	Performing		Nonperforming		Total
Consumer credit exposure:
Residential	$	78,789	$	3,412	$	82,201
Consumer	203,381		2,055		205,436
Total	$	282,170	$	5,467	$	287,637



	December 31, 2011
(in thousands)	Performing		Nonperforming		Total
Consumer credit exposure:
Residential	$	81,028	$	2,912	$	83,940
Consumer	200,449		1,829		202,278
Total	$	281,477	$	4,741	$	286,218

During the third quarter of 2011, the Bank adopted the FASB guidance on the determination of whether a loan restructuring is considered to be a troubled debt restructuring (TDR). A TDR is a loan whose contractual terms have been modified resulting in the Bank granting a concession to a borrower who is experiencing financial difficulties in order for the Bank to have a greater chance of collecting the indebtedness from the borrower. Concessions could include, but are not limited to: interest rate reductions, maturity extensions or principal forgiveness. An additional benefit to the Bank in granting a concession is to avoid foreclosure or repossession of collateral at a time when real estate values are low. As a result of adopting this amendment to the credit quality guidance, the Bank reassessed the terms and conditions to customers on restructured loans that had been completed retrospective to January 1, 2011.

The following table presents new TDRs, with the recorded investment at the time of restructure, being the same pre-modification and post-modification, modified during the three month periods ended March 31, 2012 and 2011.



	New TDRs for the Three Months Ended
	March 31, 2012			March 31, 2011
(dollars in thousands)	Number of Contracts	Recorded Investment at Time of Restructure		Number of Contracts	Recorded Investment at Time of Restructure
Commercial and industrial	—	$	—	2	$	8,526
Commercial tax-exempt	—	—		—	—
Owner occupied real estate	—	—		—	—
Commercial construction and land development	4	3,047		—	—
Commercial real estate	1	68		—	—
Residential	1	195		—	—
Consumer	1	17		—	—
Total	7	$	3,327	2	$	8,526

The loans included above are considered TDRs as a result of the Bank implementing one or more of the following concessions: granting a material extension of time, entering into a forbearance agreement, adjusting the interest rate, accepting interest only for a period of time or a change in amortization period. The following tables present the number of contracts and balance at time of TDR by concession type for the three months ended March 31, 2012 and 2011:



(dollars in thousands)	Granting a Material Extension of Time		Forbearance Agreement		Accepting Interest Only for a Period of Time		Adjusting the Interest Rate		Change in Amortization Period		Adjusting the Interest Rate & Change in Amortization Period
March 31, 2012
Commercial construction and land development:
Number of Contracts	4		—		—		—		—		—
Balance at time of TDR	$	3,047	$	—	$	—	$	—	$	—	$	—
Commercial real estate:
Number of Contracts	1		—		—		—		—		—
Balance at time of TDR	$	68	$	—	$	—	$	—	$	—	$	—
Residential:
Number of Contracts	—		—		—		—		—		1
Balance at time of TDR	$	—	$	—	$	—	$	—	$	—	$	195
Consumer:
Number of Contracts	1		—		—		—		—		—
Balance at time of TDR	$	17	$	—	$	—	$	—	$	—	$	—



(dollars in thousands)	Granting a Material Extension of Time		Forbearance Agreement		Accepting Interest Only for a Period of Time		Adjusting the Interest Rate		Change in Amortization Period		Adjusting the Interest Rate & Change in Amortization Period
March 31, 2011
Commercial and industrial:
Number of Contracts	—		2		—		—		—		—
Balance at time of TDR	$	—	$	8,526	$	—	$	—	$	—	$	—

The following table represents loans receivable modified as a TDR within the previous 12 months to March 31, 2012 and 2011, respectively, and that subsequently defaulted during the three month periods ended March 31, 2012 and 2011, respectively. The Bank's policy is to consider a loan past due or delinquent if payment is not received on or before the due date.



Troubled Debt Restructurings That Subsequently Defaulted:	Three Months Ended			Three Months Ended
	March 31, 2012			March 31, 2011
(dollars in thousands)	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
Commercial and industrial	1	$	179	2	$	8,276
Commercial tax-exempt	—	—		—	—
Owner occupied real estate	1	83		—	—
Commercial construction and land development	4	3,145		—	—
Commercial real estate	4	3,395		—	—
Residential	2	431		—	—
Consumer	—	—		—	—
Total	12	$	7,233	2	$	8,276

Of the 12 contracts that subsequently payment defaulted during the three month period ended March 31, 2012, seven contracts totaling $5.7 million were still in payment default at March 31, 2012, however, all were less than 30 days past due.

All TDRs are considered impaired and therefore are individually evaluated for impairment in the calculation of the ALL. Prior to their classification as TDRs, certain of these loans had been collectively evaluated for impairment in the calculation of the ALL.