Note 6. Loans

The Company analyzes credit risk prior to making loans, on an individual loan basis. The Company considers relevant aspects of the borrowers' financial position and cash flow, past borrower performance, management's knowledge of market conditions, side collateral and the ratio of the loan amount to estimated collateral value in making its credit determinations.

Major classifications of loans are as follows (in thousands):

	March 31,		December 31,
	2012		2011

Commercial	$	445,912	$	450,411
Commercial mortgage *		617,871		609,487
Construction		248,232		246,611
Total commercial loans		1,312,015		1,306,509
Direct lease financing		130,321		129,682
Residential mortgage		94,438		96,110
Consumer loans and others		208,584		209,041
		1,745,358		1,741,342
Unamortized loan costs		3,509		3,486
Total loans, net of deferred loan costs	$	1,748,867	$	1,744,828

Supplemental loan data:
Construction 1-4 family	$	85,461	$	85,189
Commercial construction, acquisition and development		162,771		161,422
	$	248,232	$	246,611

* At March 31, 2012, our owner occupied loans amounted to $144.0 million, or 23.3% of commercial mortgages as compared to $137.9 million, or 22.6% at December 31, 2011.

The Company has identified twenty-eight loans as impaired, where it is probable that interest and principal will not be collected according to the contractual terms of the loan agreement. The balance of these impaired loans was $21.4 million at March 31, 2012, of which $17.2 million had a specific reserve of $8.8 million. The remaining $4.2 million of impaired loans did not have a reserve. Included within the impaired loans at March 31, 2012 are seven troubled debt restructured loans with a balance of $7.8 million with a total specific reserve of $3.3 million. The Company recognizes income on impaired loans when they are placed into non-accrual status on a cash basis when the loans are both current and the collateral on the loan is sufficient to cover the outstanding obligation to the Company. If these factors do not exist, the Company will not recognize income on such loans. Interest income would have increased by $357,000 in first quarter 2012 if interest on impaired loans had been accrued. The balance of impaired loans was $17.6 million at December 31, 2011, of which $14.5 million had specific reserves of $5.9 million. The Company did not recognize interest income on impaired loans in first quarter ended March 31, 2012 and 2011, respectively.

The following table provides information about impaired loans at March 31, 2012 and December 31, 2011 (in thousands):

	Recorded investment		Unpaid principal balance		Related allowance		Average recorded investment		Interest income recognized
March 31, 2012
Without an allowance recorded
Construction	$	827	$	827	$	-	$	414	$	-
Commercial mortgage		1,169		1,500		-		584		-
Commercial		1,262		2,995		-		1,081		-
Consumer - home equity		927		927		-		927		-
Residential		-		-		-		632		-
With an allowance recorded
Construction		9,824		9,905		5,259		7,387		-
Commercial mortgage		2,654		2,654		1,133		3,163		-
Commercial		4,756		4,952		2,376		5,153		-
Consumer - home equity		-		-		-		162		-
Residential		-		-		-		-		-
Total
Construction	$	10,651	$	10,732	$	5,259	$	7,801	$	-
Commercial mortgage	$	3,823	$	4,154	$	1,133	$	3,747	$	-
Commercial	$	6,018	$	7,947	$	2,376	$	6,234	$	-
Consumer - home equity	$	927	$	927	$	-	$	1,089	$	-
Residential	$	-	$	-	$	-	$	632	$	-

December 31, 2011
Without an allowance recorded
Construction	$	-	$	-	$	-	$	100	$	-
Commercial mortgage		-		-		-		310		-
Commercial		900		2,042		6,831		626		-
Consumer - home equity		927		927		3,765		371		-
Residential		1,264		1,414		149		662		-
With an allowance recorded
Construction		4,949		4,949		2,296		2,123		-
Commercial mortgage		3,672		3,672		712		2,793		-
Commercial		5,550		5,550		2,724		3,075		-
Consumer - home equity		325		325		204		510		-
Residential		-		-		-		5,048		-
Total
Construction	$	4,949	$	4,949	$	2,296	$	2,223	$	-
Commercial mortgage	$	3,672	$	3,672	$	712	$	3,103	$	-
Commercial	$	6,450	$	7,592	$	9,555	$	3,701	$	-
Consumer - home equity	$	1,252	$	1,252	$	3,969	$	881	$	-
Residential	$	1,264	$	1,414	$	149	$	5,710	$	-

The following tables summarize the Company's non-accrual loans, loans past due 90 days and other real estate owned for the periods indicated (the Company had no non-accrual leases at March 31, 2012 or December 31, 2011):

	March 31,		December 31,
	2012		2011
	(in thousands)

Non-accrual loans
Construction *	$	10,375	$	4,949
Commercial mortgage *		3,609		3,672
Commercial *		6,018		6,450
Consumer		927		1,252
Residential		-		1,264
Total non-accrual loans		20,929		17,587

Loans past due 90 days or more		3,914		4,101
Total non-performing loans		24,843		21,688
Other real estate owned		7,726		7,405
Total non-performing assets	$	32,569	$	29,093

* Included in the non-accrual loans as of March 31, 2012 are five troubled debt restructured loans. $748,000 in commercial mortgage, $3.2 million in commercial, and $3.4 million in construction.

The Company's loans that were modified and considered troubled debt restructurings in the three month period ended March 31, 2012 and year ended December 31, 2011 were already included in non-accrual and non-performing loan totals and are further detailed as follows (dollars in thousands):

	March 31, 2012					December 31, 2011
	Number	Pre-modification recorded investment		Post-modification recorded investment		Number		Pre-modification recorded investment		Post-modification recorded investment
Commercial	1	$	3,155	$	3,155		-	$	-	$	-
Commercial mortgage	2		962		962		1		759		759
Construction	4		3,701		3,701		-		-		-
Residential mortgage	-		-		-		1		364		364
Total	7	$	7,818	$	7,818		2	$	1,123	$	1,123

The balances below provide information as to how the loans were modified as troubled debt restructurings loans during the three months ended March 31, 2012 and year ended December 31, 2011. All of the loans were already included in non-accrual and non-performing loans.

	March 31, 2012						December 31, 2011
	Adjusted interest rate		Extended maturity		Combined rate and maturity		Adjusted interest rate		Extended maturity		Combined rate and maturity
	(in thousands)
Commercial	$	-	$	3,155	$	-	$	-	$	-	$	-
Commercial mortgage		748		214		-		759		-		-
Construction		-		3,701		-		-		-		-
Residential mortgage		-		-		-		364		-		-
Total	$	748	$	7,070	$	-	$	1,123	$	-	$	-

As of March 31, 2012 and December 31, 2011, the Company has no commitments to lend additional funds to loan customers whose terms have been modified in troubled debt restructurings.

A detail of the changes in the allowance for loan and lease losses by loan category is as follows (in thousands):

				Commercial						Residential						Direct lease
Three months ended	Commercial			mortgage			Construction			mortgage			Consumer			financing			Unallocated			Total
March 31, 2012
Beginning balance	$	10,214		$	9,274		$	5,352		$	2,090		$	1,346		$	254		$	1,038		$	29,568
Charge-offs		(1,457	)		(991	)		(702	)		-			(172	)		(86	)		-			(3,408	)
Recoveries		35			1			1			83			-			-			-			120
Provision		1,342			698			4,007			(248	)		50			52			(681	)		5,220
Ending balance	$	10,134		$	8,982		$	8,658		$	1,925		$	1,224		$	220		$	357		$	31,500

Ending balance: Individually evaluated for impairment	$	2,376		$	1,133		$	5,259		$	-		$	-		$	-		$	-		$	8,768

Ending balance: Collectively evaluated for impairment	$	7,758		$	7,849		$	3,399		$	1,925		$	1,224		$	220		$	357		$	22,732


Loans:
Ending balance	$	445,912		$	617,871		$	248,232		$	94,438		$	208,584		$	130,321		$	3,509		$	1,748,867

Ending balance: Individually evaluated for impairment	$	6,018		$	3,823		$	10,651		$	-		$	927		$	-		$	-		$	21,419

Ending balance: Collectively evaluated for impairment	$	439,894		$	614,048		$	237,581		$	94,438		$	207,657		$	130,321		$	3,509		$	1,727,448

				Commercial						Residential						Direct lease
Twelve months ended	Commercial			mortgage			Construction			mortgage			Consumer			financing			Unallocated		Total
December 31, 2011
Beginning balance	$	6,051		$	9,501		$	5,030		$	2,115		$	578		$	164		$	624	$	24,063
Charge-offs		(7,453	)		(1,198	)		(3,254	)		(2,870	)		(1,280	)		(39	)		-		(16,094	)
Recoveries		2			89			4			-			6			-			-		101
Provision		11,614			882			3,572			2,845			2,042			129			414		21,498
Ending balance	$	10,214		$	9,274		$	5,352		$	2,090		$	1,346		$	254		$	1,038	$	29,568

Ending balance: Individually evaluated for impairment	$	2,724		$	712		$	2,296		$	-		$	204		$	-		$	-	$	5,936

Ending balance: Collectively evaluated for impairment	$	7,490		$	8,562		$	3,056		$	2,090		$	1,142		$	254		$	1,038	$	23,632


Loans:
Ending balance	$	450,411		$	609,487		$	246,611		$	96,110		$	209,041		$	129,682		$	3,486	$	1,744,828

Ending balance: Individually evaluated for impairment	$	6,450		$	3,672		$	4,949		$	1,264		$	1,252		$	-		$	-	$	17,587

Ending balance: Collectively evaluated for impairment	$	443,961		$	605,815		$	241,662		$	94,846		$	207,789		$	129,682		$	3,486	$	1,727,241



				Commercial						Residential						Direct lease
Three months ended	Commercial			mortgage			Construction			mortgage			Consumer			financing			Unallocated		Total
March 31, 2011
Beginning balance	$	6,051		$	9,501		$	5,030		$	2,115		$	578		$	164		$	624	$	24,063
Charge-offs		(4	)		(102	)		(2,143	)		(31	)		(668	)		-			-		(2,948	)
Recoveries		2			12			1			-			-			-			-		15
Provision		1,322			(639	)		1,737			752			1,199			31			270		4,672
Ending balance	$	7,371		$	8,772		$	4,625		$	2,836		$	1,109		$	195		$	894	$	25,802

Ending balance: Individually evaluated for impairment	$	1,347		$	419		$	611		$	1,340		$	428		$	-		$	-	$	4,145

Ending balance: Collectively evaluated for impairment	$	6,024		$	8,353		$	4,014		$	1,496		$	681		$	195		$	894	$	21,657


Loans:
Ending balance	$	430,081		$	601,046		$	202,105		$	94,682		$	197,876		$	107,624		$	2,839	$	1,636,253

Ending balance: Individually evaluated for impairment	$	2,544		$	2,785		$	1,695		$	6,571		$	633		$	-		$	-	$	14,228

Ending balance: Collectively evaluated for impairment	$	427,537		$	598,261		$	200,410		$	88,111		$	197,243		$	107,624		$	2,839	$	1,622,025

The Company did not have loans acquired with deteriorated credit quality at either March 31, 2012 or December 31, 2011.

A detail of the Company's delinquent loans by loan category is as follows (in thousands):

Age Analysis of Past Due Loans

March 31, 2012	30-59 Days past due		60-89 Days past due		Greater than 90 days		Non-accrual		Total past due		Current		Total loans
Commercial	$	-	$	241	$	955	$	6,018	$	7,214	$	438,698	$	445,912
Commercial mortgage		-		-		1,900		3,609		5,509		612,362		617,871
Construction		3,009		-		667		10,375		14,051		234,181		248,232
Direct lease financing		1,260		54		392		-		1,706		128,615		130,321
Consumer - other		-		-		-		927		927		163,380		164,307
Consumer - home equity		-		20		-		-		20		44,257		44,277
Residential mortgage		-		-		-		-		-		94,438		94,438
Unamortized costs		-		-		-		-		-		3,509		3,509
	$	4,269	$	315	$	3,914	$	20,929	$	29,427	$	1,719,440	$	1,748,867

December 31, 2011
Commercial	$	-	$	242	$	817	$	6,450	$	7,509	$	442,902	$	450,411
Commercial mortgage		278		1,763		1,597		3,672		7,310		602,177		609,487
Construction		-		825		942		4,949		6,716		239,895		246,611
Direct lease financing		1,230		606		745		-		2,581		127,101		129,682
Consumer - other		-		-		-		1,252		1,252		164,145		165,397
Consumer - home equity		-		2		-		-		2		43,642		43,644
Residential mortgage		-		-		-		1,264		1,264		94,846		96,110
Unamortized costs		-		-		-		-		-		3,486		3,486
	$	1,508	$	3,438	$	4,101	$	17,587	$	26,634	$	1,718,194	$	1,744,828

The following table classifies loans by categories which are used throughout the industry as of March 31, 2012 and December 31, 2011 (in thousands):

													Commercial						Residential
	Commercial						Construction						mortgage						mortgage
	3/31/2012			12/31/2011			3/31/2012			12/31/2011			3/31/2012			12/31/2011			3/31/2012			12/31/2011
Risk Rating
Pass	$	309,456		$	320,287		$	172,949		$	176,824		$	483,820		$	476,421		$	28,714		$	28,981
Special Mention		1,046			1,049			-			-			21,615			21,615			-			-
Substandard		7,209			7,696			11,042			6,716			7,461			6,867			-			1,264
Doubtful		-			-			-			-			-			-			-			-
Loss		-			-			-			-			-			-			-			-
Unrated *		128,201			121,379			64,241			63,071			104,975			104,584			65,724			65,865
Total	$	445,912		$	450,411		$	248,232		$	246,611		$	617,871		$	609,487		$	94,438		$	96,110
Unrated subject to review		42	%		50	%		86	%		79	%		37	%		25	%		5	%		3	%

							Direct lease
	Consumer						financing						Unamortized costs						Total
	3/31/2012			12/31/2011			3/31/2012			12/31/2011			3/31/2012			12/31/2011			3/31/2012			12/31/2011
Risk Rating
Pass	$	62,691		$	64,236		$	13,919		$	12,025		$	-		$	-		$	1,071,549		$	1,078,774
Special Mention		-			-			-			-			-			-			22,661			22,664
Substandard		2,366			2,718			104			649			-			-			28,182			25,910
Doubtful		-			-			-			-			-			-			-			-
Loss		-			-			-			-			-			-			-			-
Unrated *		143,527			142,087			116,298			117,008			3,509			3,486			626,475			617,480
Total	$	208,584		$	209,041		$	130,321		$	129,682		$	3,509		$	3,486		$	1,748,867		$	1,744,828
Unrated subject to review		4	%		2	%		24	%		25	%		0	%		0	%		30	%		28	%

* Unrated loans consist of performing loans which did not exhibit any negative characteristics which would require the loan to be evaluated, or fell below the dollar threshold requiring review and was not one of the loans otherwise selected in ongoing portfolio evaluation. The scope of the Bank's loan review policy encompasses commercial and construction loans and leases which singly or in the aggregate in the case of loans with related borrowers, equal or exceed $3,000,000. The loan portfolio review coverage was approximately 64% at March 31, 2012 and approximately 65% at December 31, 2011. This review is performed by the loan review department, which is independent of the loan department and reports directly to the audit committee. All classified loans are reviewed by the independent loan review function of the Bank. Potential problem loans which are identified by either the independent loan review department or line management are also reviewed. All loans are subject to review by their relationship manager and senior loan personnel. Also, many of the Bank's loans are relatively short term, and are subject to reconsideration with a full review in loan committee between one and three years.