LOANS AND ALLOWANCE FOR CREDIT LOSSES

12 Months Ended

Dec. 31, 2011

Receivables [Abstract]

Loans, Notes, Trade and Other Receivables Disclosure [Text Block]

3. LOANS AND ALLOWANCE FOR CREDIT LOSSES

     The following table presents the loan portfolio as of December 31, 2011 and 2010:

(Dollars in thousands)	December 31,
	2011			2010
Commercial	$	299,766		$	309,327
Real estate construction		30,162			44,085
Real estate mortgage		324,994			349,016
Commercial real estate		832,767			818,577
Installment and other consumer		13,612			15,265
Total loans		1,501,301			1,536,270
Allowance for loan losses		(35,212	)		(40,217	)
Total loans, net	$	1,466,089		$	1,496,053

     Total loans decreased by 2% or $35 million from the balance at December 31, 2010, and the decrease reflected the continued challenges in local residential real estate markets, consumers de-leveraging and uncertainties with respect to the strength of the economy. Commercial, real estate construction, and real estate mortgage loan balances declined from year end and more than offset growth in commercial real estate loan balances. At December 31, 2011, and 2010, Bancorp had $.8 million and $1.3 million, respectively, of overdrafts classified as loans in the installment and other consumer loan category.

The Company has lending policies and underwriting processes in place that are designed to make loans within an acceptable level of risk for the estimated return. Management reviews and approves these policies and processes on a regular basis. Management frequently reviews reports related to loan production, loan quality, loan delinquencies and nonperforming and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions.

Commercial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and prudently execute its business. Underwriting standards are designed to promote relationship banking rather than transactional banking. The Company’s lending officers examine current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed. Commercial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Management monitors and evaluates commercial loans based on collateral, geography and risk rating criteria. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and typically incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

Commercial real estate loans are subject to underwriting standards and processes similar to commercial loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally largely dependent on the successful lease-up of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. Management monitors and evaluates commercial real estate loans based on collateral, geography, and risk rating criteria. As a general rule, the Company avoids financing single purpose projects unless other underwriting factors are present to help mitigate risk. The Company also utilizes third parties to provide insight and guidance about economic conditions and trends affecting market areas it serves.

Our residential and commercial construction portfolios are portfolios we consider to have higher risk. Construction loans are underwritten utilizing independent appraisal reviews, sensitivity analysis of absorption and lease rates financial analysis of the developers, property owners, and investors as well as on a selective basis, feasibility studies. Construction loans are generally based upon estimates of costs and value associated with the complete project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from the Company or other approved third party long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, pre-leasing that does not materialize, general economic conditions, the availability of long-term financing, and completion of construction within timelines and costs originally set forth.

     The Bank originates fixed and adjustable rate residential mortgages. These residential loans are typically sold on the secondary market with the servicing responsibility released by the Company. These loan sales have no recourse, however sales are subject to proper compliance with standard underwriting rules that if not met, may allow the secondary market buyer to require the Company to repurchase the note. Upon origination, these residential mortgage loans are recorded as loans held for sale until the sale has closed.

The Bank originates home equity loans and lines through an online application system in which all applications are centrally reviewed with underwriting and verifications completed by an experienced underwriter. Monthly loan portfolio reports provide home equity loan performance monitoring. Annual review of credit policies document the acceptance of policy and procedure changes as needed. Credit risk is minimized by accepting borrowers with a proven credit history, verified income sources for repayment and owner occupied properties as acceptable collateral. Portfolio balances, performance and underwriting standards can be influenced by regional economic cycles related to unemployment levels, de-leveraging by borrowers, and market values for residential properties.

The Company originates consumer loans utilizing a computer-based credit scoring analysis to supplement the underwriting process. To monitor and manage consumer loan risk, policies and procedures are developed and modified, as needed, jointly by line and staff personnel. This activity, coupled with relatively small loan amounts that are spread across many individual borrowers, minimizes risk. Additionally, trend and outlook reports are reviewed by management on a regular basis.

The Company maintains credit administration and credit review functions that are designed to help confirm our credit standards are being followed. Significant findings and periodic reports are communicated to the Chief Credit Officer and Chief Executive Officer and, in certain cases, to the Loan, Investment & Asset/Liability Committee, which is comprised of certain directors. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Company’s policies and procedures.

Loans greater than 90 days past due are classified into nonaccrual status. The following table presents an age analysis of the loan portfolio as of December 31, 2011 and 2010:

(Dollars in thousands)	December 31, 2011
	30 - 89 days		Greater than		Total		Current		Total
	past due		90 days past due		past due		loans		loans
Commercial	$	849	$	5,692	$	6,541	$	293,225	$	299,766
Real estate construction		-		5,522		5,522		24,640		30,162
Real estate mortgage		3,787		6,226		10,013		314,981		324,994
Commercial real estate		3,619		6,328		9,947		822,820		832,767
Installment and other consumer		56		1		57		13,555		13,612
Total	$	8,311	$	23,769	$	32,080	$	1,469,221	$	1,501,301
(Dollars in thousands)	December 31, 2010
	30 - 89 days		Greater than		Total		Current		Total
	past due		90 days past due		past due		loans		loans
Commercial	$	953	$	9,984	$	10,937	$	298,390	$	309,327
Real estate construction		2,098		4,039		6,137		37,948		44,085
Real estate mortgage		4,662		5,669		10,331		338,685		349,016
Commercial real estate		3,988		12,157		16,145		802,432		818,577
Installment and other consumer		53		-		53		15,212		15,265
Total	$	11,754	$	31,849	$	43,603	$	1,492,667	$	1,536,270

     The following table presents an analysis of impaired loans as of December 31, 2011, and 2010:

											Year ended
(Dollars in thousands)	December 31, 2011										December 31, 2011
	Unpaid principal		Impaired loans		Impaired loans		Total impaired		Related		Average impaired
	balance 1		with no allowance		with allowance		loan balance		allowance		loan balance
Commercial	$	18,736	$	7,750	$	224	$	7,974	$	1	$	10,504
Real estate construction		9,716		5,823		41		5,864		-		8,405
Real estate mortgage		30,732		11,949		6,779		18,728		329		20,892
Commercial real estate		25,426		15,070		8,604		23,674		173		25,969
Installment and other consumer		1,812		5		175		180		-		54
Total	$	86,422	$	40,597	$	15,823	$	56,420	$	503	$	65,824
											Year ended
(Dollars in thousands)	December 31, 2010										December 31, 2010
	Unpaid principal		Impaired loans		Impaired loans		Total impaired		Related		Average impaired
	balance 1		with no allowance		with allowance		loan balance		allowance		loan balance
Commercial	$	22,692	$	13,377	$	1,679	$	15,056	$	2	$	19,992
Real estate construction		15,570		10,692		323		11,015		2		20,191
Real estate mortgage		28,856		15,491		7,828		23,319		443		20,610
Commercial real estate		28,717		21,648		5,634		27,282		103		17,187
Installment and other consumer		-		-		-		-		-		45
Total	$	95,835	$	61,208	$	15,464	$	76,672	$	550	$	78,025

¹ The unpaid principal balance on impaired loans represents the amount owed by the borrower. The carrying value of impaired loans is lower than the unpaid principal balance due to charge-offs.

     At December 31, 2011, and 2010, Bancorp’s recorded investment in loans that were considered to be impaired was $56.4 million and $76.7 million, respectively. A loan is considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due including both interest and principal according to the contractual terms of the loan agreement. For loans that are collateral dependent; the Company charges off the amount of impairment at the time of impairment. At December 31, 2011, a specific reserve allowance in the amount of $.5 million was established related to $15.8 million of impaired loans which were considered to be troubled debt restructurings (“TDR”) that were on interest accruing status, compared to a specific reserve allowance in the amount of $.6 million was established related to $15.5 million of impaired loans which were considered to be troubled debt restructurings and were on an interest accruing status at December 31, 2010.

The average recorded investment in impaired loans for the years ended December 31, 2011, 2010, and 2009, was approximately, $65.8 million, $78.0 million and $134.3 million, respectively. For the years ended December 31, 2011, 2010, and 2009, interest income recognized on impaired loans totaled $1,035,000, $568,000, and $526,000, respectively.

     A loan is accounted for as a TDR if the Company, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower that it would not otherwise consider granting. A TDR typically involves a modification of terms such as a reduction of the stated interest rate or face amount of the loan, a reduction of accrued interest, or an extension of the maturity date(s) at a stated interest rate lower than the current market rate for a new loan with similar risk.

The following table presents an analysis of TDRs for the periods ended December 31, 2011, and 2010:

(Dollars in thousands)	TDRs recorded for the twelve months ending					TDRs recorded in the twelve months prior to December 31, 2011 that
	December 31, 2011					subsequently defaulted in the twelve months ending December 31, 2011
	Number of	Pre-TDR outstanding		Post-TDR outstanding		Number of	Pre-TDR outstanding		Amount Defaulted
	loans	recorded investment		recorded investment		loans	recorded investment
Commercial	11	$	949	$	949	2	$	115	$	97
Real estate construction	1		744		744	-		-		-
Real estate mortgage	9		2,653		2,653	1		59		49
Commercial real estate	7		1,603		1,520	1		374		374
Consumer loans	3		225		225	-		-		-
Total	31	$	6,174	$	6,091	4	$	548	$	520
(Dollars in thousands)	TDRs recorded for the twelve months ending					TDRs recorded in the twelve months prior to December 31, 2010 that
	December 31, 2010					subsequently defaulted in the twelve months ending December 31, 2010
	Number of	Pre-TDR outstanding		Post-TDR outstanding		Number of	Pre-TDR outstanding		Amount Defaulted
	loans	recorded investment		recorded investment		loans	recorded investment
Commercial	36	$	16,144	$	15,304	-	$	-	$	-
Real estate construction	16		7,479		7,479	7		1,916		1,666
Real estate mortgage	17		7,554		7,554	-		-		-
Commercial real estate	22		22,078		21,586	-		-		-
Total	91	$	53,255	$	51,923	7	$	1,916	$	1,666

For TDRs that are collateral dependent, the Company charges off the amount of impairment at the time of impairment, rather than creating a specific reserve allowance for the impaired amount. TDRs that are performing and on an interest accruing status are measured for impairment based on the present value of expected future cash flows discounted at the loan’s effective interest rate. Impairment resulting from this measurement is recorded as a specific reserve allowance in the allowance for credit losses.

The following table presents nonaccrual loans by category as of December 31, 2011, and 2010:

	December 31,
(Dollars in thousands)	2011		2010
Commercial	$	7,750	$	13,377
Real estate construction		5,823		10,692
Real estate mortgage		11,949		15,491
Commercial real estate		15,070		21,671
Installment and other consumer		5		-
Total loans on nonaccrual status	$	40,597	$	61,231

     Loans on which the accrual of interest has been discontinued were approximately $40.6 million, $61.2 million and $99.3 million at December 31, 2011, 2010, and 2009, respectively. Interest income foregone on nonaccrual loans was approximately $4.1 million, $6.5 million and $10.7 million in 2011, 2010, and 2009, respectively.

     The Company uses a risk rating matrix to assign a risk rating to loans not evaluated on a homogenous pool level. At December 31, 2011, $1.10 billion of loans were risk rated and $397.6 million were evaluated on a homogeneous pool basis. Individually risk rated loans are rated on a scale of 1 to 10. A description of the general characteristics of the 10 risk ratings is as follows:

• Ratings 1, 2 and 3 - These ratings include loans to very high credit quality borrowers of investment or near investment grade. These borrowers have significant capital strength, moderate leverage, stable earnings and growth, and readily available financing alternatives. Smaller entities, regardless of strength, would generally not fit in these ratings. These ratings also include loans that are collateralized by U. S. Government securities and certificates of deposits.
   
• Rating 4 - These ratings include loans to borrowers of solid credit quality with moderate risk. Borrowers in these ratings are differentiated from higher ratings on the basis of size (capital and/or revenue), leverage, asset quality and the stability of the industry or market area. 
   
• Ratings 5 and 6 - These ratings include “pass rating” loans to borrowers of acceptable credit quality and risk. Such borrowers are differentiated from Rating 4 in terms of size, secondary sources of repayment or they are of lesser stature in other key credit metrics in that they may be over-leveraged, undercapitalized, inconsistent in performance or in an industry or an economic area that is known to have a higher level of risk, volatility, or susceptibility to weaknesses in the economy. However, no material adverse trends are evident with borrowers in these pass ratings.
   
• Rating 7 - This rating includes loans on management’s “watch list” and is intended to be utilized on a temporary basis for pass rating borrowers where a significant risk-modifying action is anticipated in the near term.
   
• Rating 8 - This rating includes “Substandard” loans, in accordance with regulatory guidelines, for which the accrual of interest may or may not be discontinued. By definition under regulatory guidelines, a “Substandard” loan has defined weaknesses which make payment default or principal exposure likely, but not yet certain. Such loans are apt to be dependent upon collateral liquidation, a secondary source of repayment, or an event outside of the normal course of business.
   
• Rating 9 - This rating includes “Doubtful” loans in accordance with regulatory guidelines. Such loans are placed on nonaccrual status and may be dependent upon collateral having a value that is difficult to determine or upon some near-term event which lacks certainty.
   
• Rating 10 - This rating includes “Loss” loans in accordance with regulatory guidelines. Such loans are to be charged-off or charged-down when payment is acknowledged to be uncertain or when the timing or value of payments cannot be determined. “Loss” is not intended to imply that the loan or some portion of it will never be paid, nor does it in any way imply that there has been a forgiveness of debt.

The Company considers loans assigned a risk rating 8 through 10 to be classified loans. The weighted average risk ratings did not exhibit material change from December 31, 2010, to December 31, 2011. Overall classified loan balances have decreased, however, both in total and as a percentage of the total loan portfolio. The following table presents weighted average risk ratings of the loan portfolio and classified loans by category:

(Dollars in thousands)	December 31, 2011				December 31, 2010
	Weighted average		Classified		Weighted average		Classified
	risk rating		loans		risk rating		loans
Commercial		5.84	$	22,401		5.89	$	32,895
Real estate construction		6.99		13,159		7.33		24,131
Real estate mortgage		6.50		24,004		6.34		20,913
Commercial real estate		5.67		35,255		5.75		42,045
Installment and other consumer 1		7.87		358		7.41		137
Total			$	95,177			$	120,121
Total loans risk rated	$	1,103,713			$	1,096,859

¹ Installment and other consumer loans are primarily evaluated on a homogenous pool level and generally not individually risk rated unless certain factors are met.

     Important credit quality metrics for this portfolio include nonaccrual and past due status. Total loans evaluated on a homogeneous pool basis were $397.6 million and $439.4 million at December 31, 2011 and 2010, respectively. The following table presents loans by category that the credit risk is evaluated on a portfolio basis. The real estate mortgage category includes home equity lines of credit and home equity loans and certain small business loans:

(Dollars in thousands)	December 31, 2011						December 31, 2010
	Current		Nonaccrual		30 - 89 days		Current		Nonaccrual		30 - 89 days
	status		status		past due		status		status		past due
Commercial	$	46,774	$	11	$	112	$	54,217	$	245	$	7
Real estate construction		-		4		-		-		1,136		-
Real estate mortgage		254,107		13		1,480		269,862		4,958		1,931
Commercial real estate		81,601		1		283		90,782		1,334		8
Installment and other consumer		13,146		-		56		14,878		-		52
Total	$	395,628	$	29	$	1,931	$	429,739	$	7,673	$	1,998

The allowance for credit losses is a reserve established through a provision for credit losses charged to expense, which represents management’s best estimate as of the balance sheet date, of probable losses that have been incurred within the existing loan portfolio. The allowance for credit losses is based on historical loss experience by type of credit and internal risk rating, specific homogeneous risk pools and specific loss allocations, with adjustments for current events and conditions. The Company’s process for determining the appropriate amount of the allowance for credit losses is designed to account for credit deterioration as it occurs. The provision for credit losses is reflective of loan quality trends, and considers trends related to nonaccrual loans, past due loans, potential problem loans, criticized loans and net charge-offs or recoveries, among other factors. The provision for credit losses also reflects the totality of actions taken on all loans for a particular period.

The allowance for credit losses reflects management’s continuing evaluation of industry concentrations, specific credit risks, loan loss experience, current loan portfolio quality, present economic, political and regulatory conditions and unidentified losses inherent in the current loan portfolio. Portions of the allowance may be allocated for specific loans; however, the entire allowance is available for any loan that, in management’s judgment, should be charged off. While management utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Company’s control, including, among other things, the performance of the overall loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications.

The Company’s allowance for loan losses consists of three key elements: specific reserve allowances, formula allowance, and an unallocated allowance that represents an amount to capture risk associated with qualitative factors and uncertainty that is inherent in estimates used to determine the allowance.

Specific reserve allowances may be established when management can estimate the amount of an impairment of a loan, typically on a non real estate collateralized loan or to address the unique risks associated with a group of loans or particular type of credit exposure. The Company does not establish specific reserve allowances on collateral dependent impaired loans. Impairment on these loans is charged off to the allowance for credit losses when impairment is established.

The formula allowance is calculated by applying loss factors to individual loans based on the assignment of risk ratings, or through the assignment of loss factors to homogenous pools of loans. Changes in risk ratings of both performing and nonperforming loans affect the amount of the formula allowance. Loss factors are based on our historical loss experience and such other data as management believes to be pertinent, and may be adjusted for significant factors that, in management’s judgment, affect the collectability of the portfolio as of the evaluation date. At December 31, 2011, and 2010, the allowance for loan losses was $35.2 million and $40.2 million, respectively, while the reserve for unfunded commitments was $.8 million for both years ended 2011 and 2010.

The unallocated loan loss allowance represents an amount for imprecision or uncertainty that is inherent in estimates used to determine the allowance. In determining whether to carry an unallocated allowance and, if so, the amount of the allowance, management considers a variety of qualitative factors, including regional economic and business conditions that impact important categories of our portfolio, loan growth rates, the depth and skill of lending staff, the interest rate environment, and the results of bank regulatory examinations and findings of our internal credit examiners. Currently, we have an unallocated allowance for loan losses that is the result of our judgment about risks inherent in the loan portfolio due to economic uncertainties, as well as our evaluation of historical loss experience relative to current trends, and other subjective factors.

     The following is an analysis of the changes in the allowance for credit losses:

(Dollars in thousands)	Year Ended December 31,
	2011			2010			2009
Balance, beginning of period	$	41,067		$	39,418		$	29,934
Provision for credit losses		8,133			18,652			90,057
Losses charged to the allowance		(15,410	)		(19,476	)		(82,345	)
Recoveries credited to the allowance		2,193			2,473			1,772
Balance, end of period	$	35,983		$	41,067		$	39,418
Components of allowance for credit losses
Allowance for loan losses	$	35,212		$	40,217		$	38,490
Reserve for unfunded commitments		771			850			928
Total allowance for credit losses	$	35,983		$	41,067		$	39,418

The provision for credit losses was $8.1 million, $18.7 million, and $90.1 million for the years ended December 31, 2011, 2010 and 2009, respectively, while net loan charge-offs were $13.2 million, $17.0 million, and $80.6 million, over those same years. The provision for credit losses decreased $10.6 million in 2011 compared to 2010, primarily due to a significant reduction in unfavorable loan risk rating migration within the Company’s loan portfolio and lower net loan charge-offs in the commercial, residential real estate construction, and mortgage categories, as well as in nonstandard mortgages, which was only partially offset by higher home equity and commercial real estate net charge-offs.

The 2009 provision for credit losses reflected a substantial unfavorable loan risk rating migration and material net charge-offs within the loan portfolio in 2009, which resulted in, among other things, a substantial increase in the general valuation allowances within the allowance for credit losses model during 2009 and 2010.

The following table presents summary account activity of the allowance for credit losses by loan category as of December 31, 2011, and 2010:

(Dollars in thousands)	December 31, 2011
				Real estate			Real estate			Commercial			Installment and
	Commercial			construction			mortgage			real estate			other consumer			Unallocated			Total
Balance, beginning of period	$	8,541		$	4,474		$	8,156		$	12,462		$	1,273		$	6,161		$	41,067
Provision for credit losses		1,262			(174	)		5,853			1,849			1,118			(1,775	)		8,133
Losses charged to the allowance		(3,393	)		(2,088	)		(5,771	)		(2,526	)		(1,632	)		-			(15,410	)
Recoveries credited to the allowance		1,336			278			223			48			308			-			2,193
Balance, end of period	$	7,746		$	2,490		$	8,461		$	11,833		$	1,067		$	4,386		$	35,983
Loans valued for impairment:
Individually	$	7,974		$	5,864		$	18,728		$	23,674		$	180		$	-		$	56,420
Collectively		291,792			24,298			306,266			809,093			13,432			-			1,444,881
Total	$	299,766		$	30,162		$	324,994		$	832,767		$	13,612		$	-		$	1,501,301
(Dollars in thousands)	December 31, 2010
				Real estate			Real estate			Commercial			Installment and
	Commercial			construction			mortgage			real estate			other consumer			Unallocated			Total
Balance, beginning of period	$	8,224		$	7,240		$	8,211		$	9,492		$	1,294		$	4,957		$	39,418
Provision for credit losses		4,474			113			7,025			4,262			1,574			1,204			18,652
Losses charged to the allowance		(5,229	)		(3,576	)		(7,461	)		(1,321	)		(1,889	)		-			(19,476	)
Recoveries credited to the allowance		1,072			697			381			29			294			-			2,473
Balance, end of period	$	8,541		$	4,474		$	8,156		$	12,462		$	1,273		$	6,161		$	41,067
Loans valued for impairment:
Individually	$	15,056		$	11,015		$	23,319		$	27,282		$	-		$	-		$	76,672
Collectively		294,271			33,070			325,697			791,295			15,265			-			1,459,598
Total	$	309,327		$	44,085		$	349,016		$	818,577		$	15,265		$	-		$	1,536,270