Note 6. Loans

At September 30, 2012 the Company had $7.9 million of commercial mortgage loans held for sale, which were originated for sale to institutions which issue commercial mortgaged backed securities. The Company has elected fair value treatment for these loans and during the third quarter of 2012, the Company recognized a related gain of $156,000.

Major classifications of loans not including loans held for sale are as follows (in thousands):

	September 30,		December 31,
	2012		2011

Commercial	$	453,444	$	450,411
Commercial mortgage *		614,410		609,487
Construction		263,726		246,611
Total commercial loans		1,331,580		1,306,509
Direct lease financing		146,728		129,682
Residential mortgage		97,589		96,110
Consumer loans and others		276,427		209,041
		1,852,324		1,741,342
Unamortized loan costs		4,668		3,486
Total loans, net of deferred loan costs	$	1,856,992	$	1,744,828

Supplemental loan data:
Construction 1-4 family	$	71,599	$	85,189
Commercial construction, acquisition and development		192,127		161,422
	$	263,726	$	246,611

*	At September 30, 2012, our owner occupied loans amounted to $157.2 million, or 25.6% of commercial mortgages as compared to $137.9 million, or 22.6% at December 31, 2011.

The Company has identified thirty 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 $29.2 million at September 30, 2012, of which $20.2 million had a specific reserve of $10.9 million. The remaining $9.0 million of impaired loans did not have a reserve. Included within the impaired loans at September 30, 2012 are eight troubled debt restructured loans with a balance of $8.3 million with a total specific reserve of $4.2 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 $631,000 in third 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 recognize interest income of $65,000 on impaired loans in the nine months ended September 30, 2012 and did not recognize any interest income for the nine months ended September 30, 2011.

The following table provides information about impaired loans at September 30, 2012 and December 31, 2011 (in thousands):

	Recorded investment		Unpaid principal balance		Related allowance		Average recorded investment		Interest income recognized
September 30, 2012
Without an allowance recorded
Construction	$	276	$	276	$	-	$	911	$	-
Commercial mortgage		3,582		4,403		-		2,058		-
Commercial		4,219		6,257		-		2,017		-
Consumer - home equity		927		927		-		927		-
Residential		-		-		-		316		-
With an allowance recorded
Construction		8,886		8,886		4,899		7,523		-
Commercial mortgage		7,742		8,287		4,028		4,090		-
Commercial		3,435		3,631		1,885		5,397		-
Consumer - home equity		-		-		-		81		-
Residential		93		93		71		47		-
Total
Construction	$	9,162	$	9,162	$	4,899	$	8,434	$	-
Commercial mortgage	$	11,324	$	12,690	$	4,028	$	6,148	$	-
Commercial	$	7,654	$	9,888	$	1,885	$	7,414	$	-
Consumer - home equity	$	927	$	927	$	-	$	1,008	$	-
Residential	$	93	$	93	$	71	$	363	$	-

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 September 30, 2012 or December 31, 2011):

	September 30,		September 30,		December 31,
	2012		2011		2011
	(in thousands)

Non-accrual loans
Construction *	$	8,886	$	2,321	$	4,949
Commercial mortgage *		8,894		3,848		3,672
Commercial *		7,654		4,212		6,450
Consumer		927		1,560		1,252
Residential		93		5,260		1,264
Total non-accrual loans		26,454		17,201		17,587

Loans past due 90 days or more		3,861		5,550		4,101
Total non-performing loans		30,315		22,751		21,688
Other real estate owned		3,065		6,415		7,405
Total non-performing assets	$	33,380	$	29,166	$	29,093

*	Included in the non-accrual loans as of September 30, 2012 were five troubled debt restructured loans classified as follows: $725,000 in commercial mortgage, $2.3 million in commercial and $2.6 million in construction.

Of the $8.3 million of loans that were modified and considered troubled debt restructurings as of September 30, 2012 $5.6 million and $1.1 million were already included in non-accrual and non-performing loan totals as of that date.An analysis of those loans is as follows (dollars in thousands):

	September 30, 2012						December 31, 2011
	Number		Pre- modification recorded investment		Post- modification recorded investment		Number		Pre- modification recorded investment		Post- modification recorded investment
Commercial		1	$	2,255	$	2,255		-	$	-	$	-
Commercial mortgage		3		3,156		3,156		1		759		759
Construction		4		2,913		2,913		-		-		-
Residential mortgage		-		-		-		1		364		364
Total		8	$	8,324	$	8,324		2	$	1,123	$	1,123

The balances below provide information as to how the loans were modified as troubled debt restructurings loans as of September 30, 2012 and December 31, 2011 (dollars in thousands):

	September 30, 2012						December 31, 2011
	Adjusted interest rate		Extended maturity		Combined rate and maturity		Adjusted interest rate		Extended maturity		Combined rate and maturity
Commercial	$	-	$	2,255	$	-	$	-	$	-	$	-
Commercial mortgage		725		214		2,217		759		-		-
Construction		-		2,913		-		-		-		-
Residential mortgage		-		-		-		364		-		-
Total	$	725	$	5,382	$	2,217	$	1,123	$	-	$	-

As of September 30, 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
Nine months ended	Commercial			mortgage			Construction			mortgage			Consumer			financing			Unallocated			Total
September 30, 2012
Beginning balance	$	10,214		$	9,274		$	5,352		$	2,090		$	1,346		$	254		$	1,038		$	29,568
Charge-offs		(3,487	)		(2,466	)		(6,931	)		-			(299	)		(87	)		-			(13,270	)
Recoveries		505			1,028			95			85			-			13			-			1,726
Provision		1,843			476			12,544			81			626			(25	)		(498	)		15,047
Ending balance	$	9,075		$	8,312		$	11,060		$	2,256		$	1,673		$	155		$	540		$	33,071

Ending balance: Individually evaluated for impairment	$	1,884		$	4,028		$	4,899		$	71		$	-		$	-		$	-		$	10,882

Ending balance: Collectively evaluated for impairment	$	7,191		$	4,284		$	6,161		$	2,185		$	1,673		$	155		$	540		$	22,189

Loans:
Ending balance	$	453,444		$	614,410		$	263,726		$	97,589		$	276,427		$	146,728		$	4,668		$	1,856,992

Ending balance: Individually evaluated for impairment	$	7,654		$	11,324		$	9,162		$	93		$	927		$	-		$	-		$	29,160

Ending balance: Collectively evaluated for impairment	$	445,790		$	603,086		$	254,564		$	97,496		$	275,500		$	146,728		$	4,668		$	1,827,832

				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
Nine months ended	Commercial			mortgage			Construction			mortgage			Consumer			financing			Unallocated			Total
September 30, 2011
Beginning balance	$	6,051		$	9,501		$	5,030		$	2,115		$	578		$	164		$	624		$	24,063
Charge-offs		(6,729	)		(642	)		(3,003	)		(1,876	)		(815	)		-			-			(13,065	)
Recoveries		2			14			3			-			-			-			-			19
Provision		11,034			(1,108	)		2,061			2,636			1,688			(36	)		379			16,654
Ending balance	$	10,358		$	7,765		$	4,091		$	2,875		$	1,451		$	128		$	1,003		$	27,671

Ending balance: Individually evaluated for impairment	$	1,127		$	615		$	622		$	1,037		$	449		$	-		$	-		$	3,850

Ending balance: Collectively evaluated for impairment	$	9,231		$	7,150		$	3,469		$	1,838		$	1,002		$	128		$	1,003		$	23,821

Loans:
Ending balance	$	461,679		$	577,237		$	242,806		$	96,139		$	205,243		$	129,400		$	3,144		$	1,715,648

Ending balance: Individually evaluated for impairment	$	4,212		$	3,848		$	2,321		$	5,260		$	1,560		$	-		$	-		$	17,201

Ending balance: Collectively evaluated for impairment	$	457,467		$	573,389		$	240,485		$	90,879		$	203,683		$	129,400		$	3,144		$	1,698,447

The Company did not have loans acquired with deteriorated credit quality at either September 30, 2012 or December 31, 2011.

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

	30-59 Days		60-89 Days		Greater than				Total				Total
September 30, 2012	past due		past due		90 days		Non-accrual		past due		Current		loans
Commercial	$	1,357	$	1,500	$	107	$	7,654	$	10,618	$	442,826	$	453,444
Commercial mortgage		1,042		-		3,077		8,894		13,013		601,397		614,410
Construction		-		-		667		8,886		9,553		254,173		263,726
Direct lease financing		788		1,026		8		-		1,822		144,906		146,728
Consumer - other		1,091		-		2		-		1,093		231,057		232,150
Consumer - home equity		-		420		-		927		1,347		42,930		44,277
Residential mortgage		-		-		-		93		93		97,496		97,589
Unamortized costs		-		-		-		-		-		4,668		4,668
	$	4,278	$	2,946	$	3,861	$	26,454	$	37,539	$	1,819,453	$	1,856,992

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 Company evaluates its loans under an internal loan risk rating system as a means of identifying problem loans. The following table provides information by credit risk rating indicator for each segment of the loan portfolio not including loans held for sale at the dates indicated (in thousands):

									Commercial				Residential
	Commercial				Construction				mortgage				mortgage
	9/30/2012		12/31/2011		9/30/2012		12/31/2011		9/30/2012		12/31/2011		9/30/2012		12/31/2011
Risk Rating
Pass	$	331,624	$	320,287	$	236,486	$	176,824	$	490,001	$	476,421	$	28,792	$	28,981
Special Mention		2,939		1,049		-		-		23,862		21,615		-		-
Substandard		8,045		7,696		9,553		6,716		12,740		6,867		-		1,264
Doubtful		-		-		-		-		-		-		93		-
Loss		-		-		-		-		-		-		-		-
Unrated subject to review		28,253		60,938		10,711		49,700		23,502		26,543		1,590		2,084
Unrated not subject to review		82,583		60,441		6,976		13,371		64,305		78,041		67,114		63,781
Total	$	453,444	$	450,411	$	263,726	$	246,611	$	614,410	$	609,487	$	97,589	$	96,110

					Direct lease
	Consumer				financing				Unamortized costs				Total
	9/30/2012		12/31/2011		9/30/2012		12/31/2011		9/30/2012		12/31/2011		9/30/2012		12/31/2011
Risk Rating
Pass	$	56,020	$	64,236	$	54,747	$	12,025	$	-	$	-	$	1,197,670	$	1,078,774
Special Mention		-		-		-		-		-		-		26,801		22,664
Substandard		3,672		2,718		61		649		-		-		34,071		25,910
Doubtful		-		-		-		-		-		-		93		-
Loss		-		-		-		-		-		-		-		-
Unrated subject to review		25,573		2,873		-		29,174		-		-		89,629		171,312
Unrated not subject to review		191,162		139,214		91,920		87,834		4,668		3,486		508,728		446,168
Total	$	276,427	$	209,041	$	146,728	$	129,682	$	4,668	$	3,486	$	1,856,992	$	1,744,828

* 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 ender the Bank's internal policy 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 aggregate for loans to related borrowers, exceed $3.0 million. The loan portfolio review coverage was approximately 68% at September 30, 2012 and approximately 65% at December 31, 2011. This review is performed by the loan review department, which is independent of the loan origination department and reports directly to the audit committee. Potential problem loans which are identified by either the independent loan review department or line management are reviewed. All classified loans are continuously reviewed quarterly by the independent loan review function of the Bank. Additionally, all loans are subject to ongoing monitoring by portfolio managers and loan officers. 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.