Loans

6 Months Ended

Jun. 30, 2011

Loans

Loans

4.             Loans

The balances in the various loan categories are as follows as of June 30, 2011 and December 31, 2010:

	June 30,			December 31,
(dollars in thousands)	2011			2010
Commercial	$	265,621		$	269,034
Real estate construction	38,615			40,705
Land loans	5,808			9,072
Real estate other	137,199			138,633
Factoring and asset based	132,182			122,542
SBA	69,396			67,538
Other	4,415			4,023
Total gross loans	653,236			651,547
Unearned fee income	(1,573		)	(1,444		)
Total loan portfolio	651,663			650,103
Less allowance for credit losses	(16,872		)	(15,546		)
Loans, net	$	634,791		$	634,557

The Bank categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, collateral adequacy, credit documentation, and current economic trends, among other factors.  The Bank analyzes loans individually by classifying the loans as to credit risk.  This analysis typically includes larger, non-homogeneous loans such as commercial real estate and commercial and industrial loans.  This analysis is performed on an ongoing basis as new information is obtained.  The Bank uses the following definitions for loan risk ratings:

Pass — Loans classified as pass include larger non-homogenous loans not meeting the risk rating definitions below and smaller, homogeneous loans not assessed on an individual basis.

Special Mention — Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard — Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt by the borrower. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Substandard loans for which payments have ceased and are 90 days or more past due, or for which the likelihood of full collection of interest and principal is doubtful, are placed on nonaccrual.  Loans that have been placed on nonaccrual status are also considered impaired.

The following table summarizes the credit quality of the loan portfolio, based upon internally assigned risk ratings, as of June 30, 2011 and December 31, 2010.

	As of June 30, 2011
			Special
	Pass		Mention		Substandard		Total
Commercial	$	257,250	$	375	$	7,996	$	265,621
Real estate construction	36,675		—		1,940		38,615
Land loans	4,020		—		1,788		5,808
Real estate other	95,521		7,833		33,845		137,199
Factoring and asset based	129,438		—		2,744		132,182
SBA	61,885		1,008		6,503		69,396
Other	4,415		—		—		4,415
Total gross loans	$	589,204	$	9,216	$	54,816	$	653,236

	As of December 31, 2010
			Special
	Pass		Mention		Substandard		Total
Commercial	$	257,638	$	4,011	$	7,385	$	269,034
Real estate construction	31,395		—		9,310		40,705
Land loans	4,384		—		4,688		9,072
Real estate other	90,759		11,958		35,916		138,633
Factoring and asset based	122,452		—		90		122,542
SBA	59,902		1,103		6,533		67,538
Other	4,023		—		—		4,023
Total gross loans	$	570,553	$	17,072	$	63,922	$	651,547

For all loan classes, past due loans are reviewed on a monthly basis to identify loans for nonaccrual status.  Generally, when payments have ceased and are 90 days or more past due, or the likelihood of full collection of interest and principal is doubtful, the loan is placed on nonaccrual.  However, regardless of the delinquency status, if a loan is fully secured and in the process of collection and resolution of collection is expected in the near term (generally less than 90 days), then the loan will not be placed on nonaccrual.  When interest accruals are discontinued, unpaid interest recognized in the current year is reversed, and unpaid interest accrued in prior years is charged to the allowance for loan losses.  The Bank’s method of income recognition for loans classified as nonaccrual is to apply the cash receipt to principal when the ultimate collectability of principal is in doubt or recognize interest income on a cash basis.  Nonaccrual loans will not normally be returned to accrual status unless all past due principal and interest has been paid and the borrower has evidenced their ability to meet the contractual provisions of the note.

The following table summarizes the payment status of the loan portfolio as of June 30, 2011 and December 31, 2010.

	As of June 30, 2011
			Still Accruing
			30-89 Days		Over 90 Days
(dollars in thousands)	Current		Past Due		Past Due		Nonaccrual		Total
Commercial	$	264,359	$	—	$	—	$	1,262	$	265,621
Real estate construction	36,675		1,940		—		—		38,615
Land loans	5,170		—		—		638		5,808
Real estate other	129,829		—		—		7,370		137,199
Factoring and asset based	129,468		—		—		2,714		132,182
SBA	68,619		134		—		643		69,396
Other	4,399		16		—		—		4,415
Total gross loans	$	638,519	$	2,090	$	—	$	12,627	$	653,236

	As of December 31, 2010
			Still Accruing
			30-89 Days		Over 90 Days
	Current		Past Due		Past Due		Nonaccrual		Total
Commercial	$	266,044	$	1,860	$	—	$	1,130	$	269,034
Real estate construction	35,363		—		—		5,342		40,705
Land loans	5,896		—		—		3,176		9,072
Real estate other	132,000		—		—		6,633		138,633
Factoring and asset based	122,542		—		—		—		122,542
SBA	67,291		19		—		228		67,538
Other	3,836		—		—		187		4,023
Total gross loans	$	632,972	$	1,879	$	—	$	16,696	$	651,547

A loan is categorized as a troubled debt restructuring if a significant concession is granted to provide for a reduction of either interest or principal due to deterioration in the financial condition of the borrower. Troubled debt restructurings can take the form of a reduction of the stated interest rate, splitting a loan into separate loans with market terms on one loan and concessionary terms on the other loan, receipts of assets from a debtor in partial or full satisfaction of a loan, the extension of the maturity date or dates at a stated interest rate lower than the current market rate for new debt with similar risk, the reduction of the face amount or maturity amount of the debt as stated in the instrument or other agreement, the reduction of accrued interest, or any other concessionary type of renegotiated debt.  Depending on the payment history of the loan, a troubled debt restructuring can be considered performing and accruing interest or be placed on nonaccrual.  However, all troubled debt restructurings are considered impaired.

The following table summarizes the loans categorized as troubled debt restructurings at June 30, 2011 and December 30, 2010.  The troubled debt restructurings considered performing and nonaccrual are both included in the “Substandard” category in the preceding credit quality table, and included in the “Current” and “Nonaccrual” categories, respectively, in the preceding payment status table.

	As of June 30, 2011
	Performing				Nonaccrual				Total
	Pre-		Post-		Pre-		Post-		Pre-		Post-
	Modification		Modification		Modification		Modification		Modification		Modification
(dollars in thousands)	Investment		Investment		Investment		Investment		Investment		Investment
Commercial	$	—	$	—	$	294	$	267	$	294	$	267
Real estate construction	—		—		—		—		—		—
Land loans	—		—		2,616		14		2,616		14
Real estate other	3,853		4,442		7,711		6,399		11,564		10,841
Factoring and asset based	—		—		—		—		—		—
SBA	484		484		—		—		484		484
Other	—		—		—		—		—		—
Total gross loans	$	4,337	$	4,926	$	10,621	$	6,680	$	14,958	$	11,606

	As of December 31, 2010
	Performing				Nonaccrual				Total
	Pre-		Post-		Pre-		Post-		Pre-		Post-
	Modification		Modification		Modification		Modification		Modification		Modification
	Investment		Investment		Investment		Investment		Investment		Investment
Commercial	$	40	$	37	$	—	$	—	$	40	$	37
Real estate construction	—		—		3,292		3,051		3,292		3,051
Land loans	—		—		5,119		2,197		5,119		2,197
Real estate other	3,853		4,457		7,711		6,759		11,564		11,216
Factoring and asset based	—		—		—		—		—		—
SBA	—		—		—		—		—		—
Other	—		—		—				—		—
Total gross loans	$	3,893	$	4,494	$	16,122	$	12,007	$	20,015	$	16,501

Loans are designated as impaired, when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement.  As of June 30, 2011 and December 31, 2010 loans designated as impaired consisted only of nonaccrual loans and troubled debt restructurings.  There were no loans outstanding that were less than or greater than 90 days or more past due and accruing interest that were considered impaired at June 30, 2011 and December 31, 2010.

	June 30,		December 31,
(dollars in thousands)	2011		2010
Nonaccrual loans (1)	$	12,627	$	16,696
Trouble debt restructurings - performing	4,926		4,494
Loans past due 90 days or more and accruing interest	—		—
Loans current or past due less than 90 days and accruing interest	—		—
Total impaired loans	$	17,553	$	21,190

(1)  Nonaccrual loans include troubled debt restructurings of $6.7 million and $12.0 million at June 30, 2011 and December 31, 2010, respectively.

Impaired loans at June 30, 2011 were comprised of loans with legal contractual balances totaling approximately $23.1 million reduced by approximately $886,000 received in non-accrual interest and impairment charges of $4.6 million which have been charged against the allowance for credit losses.

Impaired loans at December 31, 2010 were comprised of loans with legal contractual balances totaling approximately $27.8 million reduced by $960,000 received in non-accrual interest and impairment charges of $5.7 million which have been charged against the allowance for credit losses.

The following summarizes the breakdown of impaired loans by category as of June 30, 2011 and December 31, 2010:

	As of June 30, 2011				As of December 31, 2010
	Upaid				Upaid
	Principal		Recorded		Principal		Recorded
(dollars in thousands)	Balance		Investment		Balance		Investment
Commercial	$	2,562	$	1,262	$	2,153	$	1,167
Real estate construction	—		—		7,653		5,342
Land loans	2,389		638		5,288		3,176
Real estate other	13,726		11,812		12,318		11,090
Factoring and asset based	2,714		2,714		—		—
SBA	1,691		1,127		390		228
Other	—		—		—		187
Total gross loans	$	23,082	$	17,553	$	27,802	$	21,190

Consistent with the Bank’s method of income recognition for loans, interest on impaired loans, except those classified as nonaccrual, is recognized using the accrual method.  The Bank did not record income from the receipt of cash payments related to nonaccrual loans during the three and six months ended June 30, 2011 and 2010.  Interest income recognized on impaired loans represents interest the Bank recognized on performing troubled debt restructurings and loans greater than 90 days past due and still accruing interest.

The following table summarizes the average recorded investment in impaired loans and related interest income recognized for the three and six months ended June 30, 2011 and 2010.

	Three months ended June 30,
	2011				2010
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
(dollars in thousands)	Investment		Recognized		Investment		Recognized
Commercial	$	1,313	$	—	$	934	$	—
Real estate construction	—		—		5,353		—
Land loans	1,616		—		4,509		—
Real estate other	13,424		169		14,195		49
Factoring and asset based	1,357		—		100		—
SBA	426		—		498		—
Other	—		—		192		—
Total gross loans	$	18,136	$	169	$	25,779	$	49

	Six months ended June 30,
	2011				2010
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
(dollars in thousands)	Investment		Recognized		Investment		Recognized
Commercial	$	1,196	$	—	$	448	$	1
Real estate construction	2,671		—		6,008		—
Land loans	1,907		—		4,734		—
Real estate other	11,712		219		18,079		99
Factoring and asset based	1,357		—		100		—
SBA	435		—		493		—
Other	94		—		192		—
Total gross loans	$	19,371	$	219	$	30,055	$	100

The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed.  Subsequent recoveries, if any, are credited to the allowance.  The entire allowance is available for any loan that, in management’s judgment should be charged-off.

The allowance generally consists of specific and general reserves.  Specific reserves relate to loans that are individually classified as impaired; however, it is currently the Bank’s practice to immediately charge-off any identified financial loss pertaining to impaired loans versus providing a specific reserve.  As such, the allowance for credit losses of $16.9 million and $15.5 million as of June 30, 2011 and December 31, 2010, respectively, reflected general reserves for non-impaired loans and was based on historical loss rates for each portfolio segment, adjusted for the effects of qualitative or environmental factors that were likely to cause estimated credit losses as of the evaluation date to differ from the portfolio segment’s historical loss experience. Qualitative factors included consideration of the following: changes in lending policies and procedures; changes in economic conditions, changes in the nature and volume of the portfolio; changes in the experience, ability and depth of lending management and other relevant staff; changes in the volume and severity of past due, nonaccrual and other adversely graded loans; changes in the loan review system; changes in the value of the underlying collateral for collateral-dependent loans; concentrations of credit and the effect of other external factors such as competition and legal and regulatory requirements.

The following table summarizes the loans individually and collectively evaluated for impairment and the corresponding allowance for loan losses as of June 30, 2011 and December 31, 2010.

	As of June 30, 2011
	Individually Evaluated				Collectively Evaluated				Total Evaluated
	For Impairment				For Impairment				For Impairment
(dollars in thousands)	Loans		Allowance		Loans		Allowance		Loans		Allowance
Commercial	$	1,262	$	—	$	264,359	$	5,105	$	265,621	$	5,105
Real estate construction	—		—		38,615		1,250		38,615		1,250
Land loans	638		—		5,170		602		5,808		602
Real estate other	11,812		—		125,387		5,717		137,199		5,717
Factoring and asset based	2,714		—		129,468		1,999		132,182		1,999
SBA	1,127		—		68,269		2,100		69,396		2,100
Other	—		—		4,415		99		4,415		99
Total	$	17,553	$	—	$	635,683	$	16,872	$	653,236	$	16,872

	As of December 31, 2010
	Individually Evaluated				Collectively Evaluated				Total Evaluated
	For Impairment				For Impairment				For Impairment
(dollars in thousands)	Loans		Allowance		Loans		Allowance		Loans		Allowance
Commercial	$	1,167	$	—	$	267,867	$	4,616	$	269,034	$	4,616
Real estate construction	5,342		—		35,363		1,628		40,705		1,628
Land loans	3,176		—		5,896		622		9,072		622
Real estate other	11,090		—		127,543		5,358		138,633		5,358
Factoring and asset based	—		—		122,542		1,670		122,542		1,670
SBA	228		—		67,310		1,575		67,538		1,575
Other	187		—		3,836		77		4,023		77
Total	$	21,190	$	—	$	630,357	$	15,546	$	651,547	$	15,546

The following table summarizes the activity in the allowance for loan losses for the quarters and six months ended June 30, 2011 and 2010.

	Three months ended June 30,					Six months ended June 30,
(dollars in thousands)	2011			2010		2011			2010
Balance, beginning of period	$	15,171		$	16,155	$	15,546		$	16,012
Loans charged off by category:
Commercial and other	—			329		322			1,218
Real estate construction	—			46		—			46
Real estate land	—			107		340			127
Real estate other	380			1,996		1,475			2,533
Factoring and asset based	—			42		—			42
Consumer	—			—		—			606
Total charge-offs	380			2,520		2,137			4,571
Recoveries by category:
Commercial and other	29			220		68			378
Real estate construction	202			5		693			783
Real estate land	1,850			127		1,952			134
Real estate other	—			—		—			—
Factoring and asset based	—			—		—			—
Consumer	—			—		—			—
Total recoveries	2,081			352		2,713			1,296
Net charge-offs (recoveries)	(1,701		)	2,168		(576		)	3,275
Provision charged to expense	—			1,150		750			2,400
Balance, end of period	$	16,872		$	15,137	$	16,872		$	15,137