4. Loans

The balances in the various loan categories are as follows as of March 31, 2013 and December 31, 2012:

	March 31,			December 31,
(dollars in thousands)	2013			2012

Commercial	$	471,200		$	436,293
Real estate construction	37,975			35,501
Land loans	10,353			8,973
Real estate other	136,244			139,931
Factoring and asset based	200,831			195,343
SBA	91,893			87,375
Other	5,667			5,163
Total gross loans	954,163			908,579
Unearned fee income	(3,701		)	(3,056		)
Total loan portfolio	950,462			905,523
Less allowance for credit losses	(20,543		)	(19,948		)
Loans, net	$	929,919		$	885,575

The Bank individually categorizes larger, non-homogenous loans into credit 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. 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 March 31, 2013 and December 31, 2012.

	March 31, 2013
			Special				Substandard
(dollars in thousands)	Pass		Mention		Substandard		(Nonaccrual)		Total

Commercial	$	450,683	$	15,173	$	4,895	$	449	$	471,200
Real estate construction	37,975		—		—		—		37,975
Land loans	10,317		—		27		9		10,353
Real estate other	105,924		—		24,632		5,688		136,244
Factoring and asset based	197,496		1,817		—		1,518		200,831
SBA	85,345		276		4,348		1,924		91,893
Other	5,667		—		—		—		5,667
Total gross loans	$	893,407	$	17,266	$	33,902	$	9,588	$	954,163

	As of December 31, 2012
			Special				Substandard
	Pass		Mention		Substandard		(Nonaccrual)		Total

Commercial	$	429,754	$	4,877	$	986	$	676	$	436,293
Real estate construction	35,501		—		—		—		35,501
Land loans	8,722		—		240		11		8,973
Real estate other	106,519		1,410		26,219		5,783		139,931
Factoring and asset based	192,798		803		292		1,450		195,343
SBA	77,028		437		7,863		2,047		87,375
Other	5,163		—		—		—		5,163
Total gross loans	$	855,485	$	7,527	$	35,600	$	9,967	$	908,579

For all loan classes, past due loans are reviewed on a monthly basis to identify loans for nonaccrual status. Loans are generally placed on non-accrual when payments have ceased and are 90 days or more past due, or when the likelihood of full collection of interest and principal is doubtful. However, if a loan is fully secured and in the process of collection and resolution of collection (generally within 90 days), then the loan will generally not be placed on nonaccrual, regardless of its delinquency status. Nonaccrual loans will not normally be returned to accrual status, although consideration will be given to situations where all past due principal and interest has been paid and the borrower has evidenced their ability to meet the contractual provisions of the note. When interest accruals are discontinued, all unpaid interest is reversed against current year income. The Bank’s method of income recognition for loans classified as nonaccrual is to apply cash received to principal when the ultimate collectability of principal is in doubt or recognize interest income on a cash basis.

The following table summarizes the payment status of the loan portfolio as of March 31, 2013 and December 31, 2012.

	As of March 31, 2013
			Still Accruing
			30-59 Days		60-89 Days		Over 90 Days
(dollars in thousands)	Current		Past Due		Past Due		Past Due		Nonaccrual		Total

Commercial	$	470,751	$	—	$	—	$	—	$	449	$	471,200
Real estate construction	37,975		—		—		—		—		37,975
Land loans	10,344		—		—		—		9		10,353
Real estate other	130,556		—		—		—		5,688		136,244
Factoring and asset based	199,313		—		—		—		1,518		200,831
SBA	89,902		67		—		—		1,924		91,893
Other	5,608		59		—		—		—		5,667
Total gross loans	$	944,449	$	126	$	—	$	—	$	9,588	$	954,163

	As of December 31, 2012
			Still Accruing
			30-59 Days		60-89 Days		Over 90 Days
(dollars in thousands)	Current		Past Due		Past Due		Past Due		Nonaccrual		Total

Commercial	$	435,543	$	74	$	—	$	—	$	676	$	436,293
Real estate construction	35,501		—		—		—		—		35,501
Land loans	8,962		—		—		—		11		8,973
Real estate other	134,148		—		—		—		5,783		139,931
Factoring and asset based	193,893		—		—		—		1,450		195,343
SBA	85,328		—		—		—		2,047		87,375
Other	5,119		42		2		—		—		5,163
Total gross loans	$	898,494	$	116	$	2	$	—	$	9,967	$	908,579

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.

As of March 31, 2013, the Company had twenty-six loans totaling $14.9 million classified as troubled debt restructurings. The twenty-six loans were comprised of two commercial loans, twenty-one other real estate loans, and three SBA loans. Troubled debt restructurings represented 1.6% of total gross loans as of March 31, 2013. As of December 31, 2012, the Company had twenty-five loans totaling $15.9 million classified as troubled debt restructurings. The twenty-five loans were comprised of two commercial loans, twenty-three other real estate loans, and three SBA loans. Troubled debt restructurings represented 1.8% of total gross loans as of December 31, 2012.

As of March 31, 2013 and December 31, 2012, the Company had commitments of $111,000, to lend additional funds for other real estate loans classified as troubled debt restructurings.

During the three months ended March 31, 2013, there were no additional loans modified and designated as troubled debt restructurings. During the three months ended March 31, 2012, the Company modified $2.3 million in factor loans and $38,000 in SBA loans. The modification of the terms of such loans included extended amortization periods or extended maturity dates. Based on the impairment evaluation of these individual credits, a charge-off of $750,000 was deemed necessary during the three month period ended March 31, 2012.

A loan is considered to be in payment default when it is 90 says contractually past due under the modified terms. There were no loans modified within the last twelve months that defaulted during the three months ended March 31, 2013.

The following table summarizes the loans categorized as troubled debt restructurings at March 31, 2013 and December 30, 2012. The troubled debt restructurings considered performing and nonaccrual are included in the “Substandard” and “Substandard (Nonaccrual)” categories, respectively, in the preceding credit quality table, and included in the “Current” and “Nonaccrual” categories, respectively, in the preceding payment status table.

	As of March 31, 2013
	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	$	—	$	—	$	2,598	$	450	$	2,598	$	450
Real estate construction	—		—		—		—		—		—
Land loans	—		—						—		—
Real estate other	9,314		8,302		7,711		5,688		17,025		13,990
Factoring and asset based	—		—		—		—		—		—
SBA	480		496		—		—		480		496
Other	—		—		—		—		—		—
Total gross loans	$	9,794	$	8,798	$	10,309	$	6,138	$	20,103	$	14,936

	As of December 31, 2012
	Performing				Nonaccrual				Total
	Pre-		Post-		Pre-		Post-		Pre-		Post-
	Modification		Modification		Modification		Modification		Modification		Modification
	Investment		Investment		Investment		Investment		Investment		Investment

Commercial	$	—	$	—	$	2,598	$	676	$	2,598	$	676
Real estate construction	—		—		—		—		—		—
Land loans	—		—		—		—		—		—
Real estate other	10,291		8,902		7,711		5,783		18,002		14,685
Factoring and asset based	—		—		—		—		—		—
SBA	480		500		—		—		480		500
Other	—		—		—		—		—		—
Total gross loans	$	10,771	$	9,402	$	10,309	$	6,459	$	21,080	$	15,861

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 March 31, 2013 and December 31, 2012 loans designated as impaired consisted of nonaccrual loans, troubled debt restructurings and loans past due 90 days or more and still accruing interest.

The following table summarizes the loans categorized as impaired at March 31, 2013 and December 31, 2012.

	March 31,		December 31,
(dollars in thousands)	2013		2012

Nonaccrual loans (1)	$	9,588	$	9,967
Trouble debt restructurings - performing	8,798		9,402
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	$	18,386	$	19,369

(1) Nonaccrual loans include troubled debt restructurings of $6.1 million and $6.5 million at March 31, 2013 and December 31, 2012, respectively.

Impaired loans at March 31, 2013 were comprised of loans with legal contractual balances totaling approximately $24.3 million reduced by approximately $1.6 million received in non-accrual interest and impairment charges of $4.3 million which have been charged against the allowance for loan losses.

Impaired loans at December 31, 2012 were comprised of loans with legal contractual balances totaling approximately $24.9 million reduced by $1.4 million received in non-accrual interest and impairment charges of $4.1 million which have been charged against the allowance for loan losses.

The following summarizes the breakdown of impaired loans by category as of March 31, 2013 and December 31, 2012:

	As of March 31, 2013				As of December 31, 2012
	Unpaid				Unpaid
	Principal		Recorded		Principal		Recorded
(dollars in thousands)	Balance		Investment		Balance		Investment

Commercial	$	1,805	$	449	$	2,007	$	676
Real estate construction	—		—		—		—
Land loans	36		9		37		11
Real estate other	15,891		13,990		16,491		14,685
Factoring and asset based	3,281		1,518		2,965		1,450
SBA	3,331		2,420		3,427		2,547
Other	—		—		—		—
Total gross loans	$	24,344	$	18,386	$	24,927	$	19,369

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 months ended March 31, 2013 and 2012. 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 months ended March 31, 2013 and 2012:

	Three months ended March 31,
	2013				2012
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
(dollars in thousands)	Investment		Recognized		Investment		Recognized

Commercial	$	563	$	37	$	816	$	6
Real estate construction	—		—		1,935		30
Land loans	10		1		620		—
Real estate other	14,338		62		13,550		93
Factoring and asset based	1,484		31		1,633		—
SBA	2,484		22		2,114		8
Other	—		—		—		—
Total gross loans	$	18,878	$	153	$	20,668	$	137

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 or are otherwise exhibiting negative credit characteristics suggesting potential loss exposure greater than historical loss experience would suggest. Specific reserves are calculated by evaluating the present value of expected future cash flows pertaining to the loan, the fair value of the collateral supporting the loan, less selling costs, or the loan’s observable market price. It is currently the Bank’s practice to immediately charge-off any identified financial loss pertaining to impaired loans when management believes the uncollectibility of the loan is confirmed; Therefore, as seen in the table below, there are typically only a small number of individual loans for which a specific reserve exists. General reserves are based on historical loss rates for each portfolio segment, adjusted for the effects of qualitative or environmental factors that are likely to cause estimated credit losses as of the evaluation date to differ from the portfolio segment’s historical loss experience. Qualitative factors include consideration of the following: changes in lending policies and procedures; loan charge-off trends; changes in economic conditions, changes in business 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; concentrations of credit and the effect of other external factors such as competition and legal and regulatory requirements.

The allowance for loan losses totaled $20.5 million and $19.9 million as of March 31, 2013 and December 31, 2012, respectively. The following table summarizes the loans individually and collectively evaluated for impairment and the corresponding allowance for loan losses as of March 31, 2013 and December 31, 2012.

	As of March 31, 2013
	Individually Evaluated				Collectively Evaluated				Total Evaluated
	For Impairment				For Impairment				For Impairment
(dollars in thousands)	Loans		Allowance		Loans		Allowance		Loans		Allowance

Commercial	$	449	$	—	$	470,751	$	7,582	$	471,200	$	7,582
Real estate construction	—		—		37,975		721		37,975		721
Land loans	9		—		10,344		320		10,353		320
Real estate other	13,990		1,065		122,254		3,256		136,244		4,321
Factoring and asset based	1,518		—		199,313		4,731		200,831		4,731
SBA	2,420		—		89,473		2,743		91,893		2,743
Other	—		—		5,667		125		5,667		125
Total	$	18,386	$	1,065	$	935,777	$	19,478	$	954,163	$	20,543

	As of December 31, 2012
	Individually Evaluated				Collectively Evaluated				Total Evaluated
	For Impairment				For Impairment				For Impairment
(dollars in thousands)	Loans		Allowance		Loans		Allowance		Loans		Allowance

Commercial	$	676	$	—	$	435,617	$	6,394	$	436,293	$	6,394
Real estate construction	—		—		35,501		673		35,501		673
Land loans	11		—		8,962		333		8,973		333
Real estate other	14,685		1,408		125,246		3,770		139,931		5,178
Factoring and asset based	1,450		—		193,893		4,352		195,343		4,352
SBA	2,547		—		84,828		2,905		87,375		2,905
Other	—		—		5,163		113		5,163		113
Total	$	19,369	$	1,408	$	889,210	$	18,540	$	908,579	$	19,948

The following table summarizes the activity in the allowance for loan losses for the quarters ended March 31, 2013 and 2012.

	Three months ended March 31, 2013
			Real					Real			Factoring
			estate		Land			estate			and asset
(dollars in thousands)	Commercial		construction		loans			other			based		SBA			Other		Total

As of December 30, 2012	$	6,394	$	673	$	333		$	5,178		$	4,352	$	2,905		$	113	$	19,948
Provision charged to expense	1,145		46		(14		)	(857		)	579		(161		)	12		750
Charge-offs	150		—		—			—			200		—			—		350
Recoveries	193		2		1			—			—		(1		)	—		195
As of March 31, 2013	$	7,582	$	721	$	320		$	4,321		$	4,731	$	2,743		$	125	$	20,543

	Three months ended March 31, 2012
			Real					Real		Factoring
			estate		Land			estate		and asset
(dollars in thousands)	Commercial		construction		loans			other		based		SBA			Other			Total

As of December 31, 2011	$	5,545	$	1,220	$	613		$	6,111	$	2,381	$	2,567		$	103		$	18,540
Provision charged to expense	432		365		(109		)	51		1,104		(80		)	(13		)	1,750
Charge-offs	73		—		—			—		750		187			—			1,010
Recoveries	18		2		4			—		—		—			—			24
As of March 31, 2012	$	5,922	$	1,587	$	508		$	6,162	$	2,735	$	2,300		$	90		$	19,304