LOANS

6 Months Ended

Jun. 30, 2011

LOANS

LOANS

5.  LOANS

At June 30, 2011 and December 31, 2010, net loans disaggregated by class consisted of the following (in thousands):

	June 30,		December 31,
	2011		2010
Commercial and industrial - owner-occupied mortgage	$	179,560	$	191,913
Commercial and industrial - general purpose	341,373		339,447
Real estate - commercial mortgage	487,257		449,861
Real estate - residential mortgage	77,760		83,696
Real estate - commercial construction	46,463		44,331
Real estate - residential construction	4,531		14,910
Loans to individuals	4,254		4,770
Tax exempt and other	2,020		2,442
Loans - net of unearned income	1,143,218		1,131,370
Less: Allowance for loan losses	27,731		33,078
Loans - net	$	1,115,487	$	1,098,292

The following table presents information about the allowance for loan losses (in thousands):

	For the			For the Three Months Ended
	Last			June 30,			March 31,			December 31,			September 30,
	12 Months			2011			2011			2010			2010
Beginning balance	$	31,259		$	27,589		$	33,078		$	32,488		$	31,259
Provision charged to operations	8,200			1,100			1,900			2,700			2,500
Charge-offs	(12,083		)	(1,042		)	(7,629		)	(2,151		)	(1,261		)
Recoveries	355			84			240			41			(10		)
Ending balance	$	27,731		$	27,731		$	27,589		$	33,078		$	32,488

During the first six months of 2011 there have been no changes in the accounting policies or methodology for determining and recording the provision for loan losses.

For the three and six months ended June 30, 2011, the activity in the allowance for loan losses disaggregated by portfolio segment is shown below. At June 30, 2011 and December 31, 2010, the ending balance in the allowance for loan losses disaggregated by portfolio segment and impairment methodology follows below (in thousands). Also shown below are total loans at June 30, 2011 and December 31, 2010 disaggregated by portfolio segment and impairment methodology (in thousands).

	Commercial and industrial			Real estate - commercial			Real estate - residential (1)			Loans to individuals			Tax exempt and other			Unallocated			Total
Three months ended June 30, 2011
Total allowance for loan losses:
Beginning balance	$	16,566		$	7,745		$	1,293		$	193		$	18		$	1,774		$	27,589
Provision charged to operations	123			577			29			6			(2		)	367			1,100
Charge-offs	(756		)	—			(258		)	(28		)	—			—			(1,042		)
Recoveries	59			—			23			2			—			—			84
Ending balance	$	15,992		$	8,322		$	1,087		$	173		$	16		$	2,141		$	27,731
Six months ended June 30, 2011
Total allowance for loan losses:
Beginning balance	$	20,144		$	7,893		$	1,809		$	181		$	17		$	3,034		$	33,078
Provision charged to operations	2,235			1,702			(73		)	30			(1		)	(893		)	3,000
Charge-offs	(6,508		)	(1,441		)	(674		)	(48		)	—			—			(8,671		)
Recoveries	121			168			25			10			—			—			324
Ending balance	$	15,992		$	8,322		$	1,087		$	173		$	16		$	2,141		$	27,731
June 30, 2011
Total allowance for loan losses:
Individually evaluated for impairment	$	7,600		$	1,515		$	—		$	—		$	—		$	—		$	9,115
Collectively evaluated for impairment	8,392			6,807			1,087			173			16			2,141			18,616
Ending balance	$	15,992		$	8,322		$	1,087		$	173		$	16		$	2,141		$	27,731
Total loans:
Individually evaluated for impairment	$	24,305		$	12,113		$	1,143		$	14		$	—		$	—		$	37,575
Collectively evaluated for impairment	496,628			521,607			81,148			4,240			2,020			—			1,105,643
Ending balance	$	520,933		$	533,720		$	82,291		$	4,254		$	2,020		$	—		$	1,143,218
December 31, 2010
Total allowance for loan losses:
Individually evaluated for impairment	$	11,728		$	729		$	123		$	—		$	—		$	—		$	12,580
Collectively evaluated for impairment	8,416			7,164			1,686			181			17			3,034			20,498
Ending balance	$	20,144		$	7,893		$	1,809		$	181		$	17		$	3,034		$	33,078
Total loans:
Individually evaluated for impairment	$	30,153		$	8,184		$	2,304		$	16		$	—		$	—		$	40,657
Collectively evaluated for impairment	501,311			486,008			96,729			4,770			2,442			—			1,091,260
Ending balance	$	531,464		$	494,192		$	99,033		$	4,786		$	2,442		$	—		$	1,131,917

(1) This portfolio segment is comprised of the real estate - residential mortgage and the real estate - residential construction classes.

As of June 30, 2011 and December 31, 2010, the recorded investment in loans that are considered to be impaired is summarized below (in thousands).

	June 30,			December 31,
	2011			2010
Troubled debt restructurings with specifically allocated allowances for loss	$	26,500		$	26,500
Allowance for loan loss specifically allocated to troubled debt restructurings	(7,370		)	(8,158		)
	19,130			18,342
Troubled debt restructurings with no specifically allocated allowance for loan loss	494			547
Net troubled debt restructurings	19,624			18,889
Other impaired loans with specifically allocated allowances for loss	9,653			13,610
Allowance for loan loss specifically allocated to other impaired loans	(1,745		)	(4,422		)
	7,908			9,188
Other impaired loans with no specifically allocated allowance for loan loss	928			—
Net other impaired loans	8,836			9,188
Total net impaired loans	$	28,460		$	28,077
Average impaired loan balance	$	38,465		$	15,602
Interest income recognized on impaired loans	$	546		$	448

The Company has TDRs at June 30, 2011 that include two $10 million commercial loans and a $7 million commercial real estate loan performing according to their new terms. The Company’s TDRs primarily resulted from interest rate concessions and maturity extensions. The Company has allocated $7 million of specific reserves to customers whose loan terms have been modified in TDRs as of June 30, 2011. The Company has no commitments to lend any additional amounts to customers with outstanding loans that are classified as TDRs.

The following table presents the Company’s impaired loans disaggregated by class for the six months ended June 30, 2011 and the year ended December 31, 2010 (in thousands).

	Recorded investment (1)		Unpaid principal balance		Related allowance		Average recorded investment		Interest income recognized
June 30, 2011
With an allowance recorded:
Commercial and industrial - owner-occupied mortgage	$	275	$	275	$	56	$	138	$	—
Commercial and industrial - general purpose	23,765		24,005		7,544		23,155		406
Real estate - commercial mortgage	5,613		5,718		1,105		5,730		—
Real estate - commercial construction	6,500		6,500		410		6,500		131
Totals	$	36,153	$	36,498	$	9,115	$	35,523	$	537
With no related allowance recorded:
Commercial and industrial - general purpose	$	264	$	264	$	—	$	1,704	$	—
Real estate - residential mortgage	1,143		1,143		—		1,223		9
Loans to individuals	15		15		—		15		—
Totals	$	1,422	$	1,422	$	—	$	2,942	$	9
December 31, 2010
With an allowance recorded:
Commercial and industrial - general purpose	$	30,049	$	30,132	$	11,728	$	8,026	$	204
Real estate - commercial mortgage	1,684		1,743		247		882		—
Real estate - residential mortgage	799		799		79		403		—
Real estate - commercial construction	6,500		6,500		482		4,897		212
Real estate - residential construction	1,078		1,078		44		812		—
Totals	$	40,110	$	40,252	$	12,580	$	15,020	$	416
With no related allowance recorded:
Commercial and industrial - general purpose	$	104	$	104	$	—	$	132	$	14
Real estate - residential mortgage	427		427		—		432		17
Loans to individuals	16		16		—		18		1
Totals	$	547	$	547	$	—	$	582	$	32

(1) Recorded investment is defined here as unpaid principal balance less non-accrual interest paid.

At June 30, 2011 and December 31, 2010, non-accrual loans were $12 million and $15 million, respectively. There was no interest income recognized on non-accrual loans for either of the three or six month periods ended June 30, 2011 and 2010. At June 30, 2011 and December 31, 2010, there were two loans totaling $56 thousand and three loans totaling $104 thousand, respectively, restructured and no longer accruing interest. At both periods June 30, 2011 and December 31, 2010, there were five TDRs with an aggregate principal balance of $27 million still accruing interest. At both June 30, 2011 and December 31, 2010, loans 90 days or more past due and still accruing interest totaled $1 thousand.

The following table presents the recorded investment in non-accrual and past due loans over 90 days still on accrual as of June 30, 2011 and December 31, 2010 disaggregated by class (in thousands).

	Non-accrual loans		Loans past due over 90 days still accruing
June 30, 2011
Commercial and industrial - owner-occupied mortgage	$	275	$	—
Commercial and industrial - general purpose	4,667		—
Real estate - commercial mortgage	5,613		—
Real estate - residential mortgage	969		—
Loans to individuals	65		1
Total	$	11,589	$	1
December 31, 2010
Commercial and industrial - general purpose	$	11,017	$	—
Real estate - commercial mortgage	1,684		—
Real estate - residential mortgage	973		—
Real estate - residential construction	1,078		—
Loans to individuals	104		1
Total	$	14,856	$	1

At June 30, 2011 and December 31, 2010, past due loans disaggregated by class were as follows (in thousands).

	30 - 59 days past due and accruing		60 - 89 days past due and accruing		Greater than 90 days past due and still accruing		Non-accrual loans		Total past due		Loans not past due and still accruing		Total loans
June 30, 2011
Commercial and industrial - owner-occupied mortgage	$	—	$	—	$	—	$	275	$	275	$	179,285	$	179,560
Commercial and industrial - general purpose	2,514		21,235		—		4,667		28,416		312,957		341,373
Real estate - commercial mortgage	1,325		162		—		5,613		7,100		480,157		487,257
Real estate - residential mortgage	579		216		—		969		1,764		75,996		77,760
Real estate - commercial construction	6,500		—		—		—		6,500		39,963		46,463
Real estate - residential construction	—		—		—		—		—		4,531		4,531
Loans to individuals	396		6		1		65		468		3,786		4,254
Tax exempt and other	—		—		—		—		—		2,020		2,020
Total	$	11,314	$	21,619	$	1	$	11,589	$	44,523	$	1,098,695	$	1,143,218
December 31, 2010
Commercial and industrial - owner-occupied mortgage	$	—	$	—	$	—	$	—	$	—	$	191,913	$	191,913
Commercial and industrial - general purpose	452		20,247		—		11,017		31,716		307,731		339,447
Real estate - commercial mortgage	1,344		3,341		—		1,684		6,369		443,492		449,861
Real estate - residential mortgage	198		175		—		973		1,346		82,350		83,696
Real estate - commercial construction	—		—		—		—		—		44,331		44,331
Real estate - residential construction	—		—		—		1,078		1,078		13,832		14,910
Loans to individuals	24		8		1		104		137		4,633		4,770
Tax exempt and other	—		—		—		—		—		2,442		2,442
Total	$	2,018	$	23,771	$	1	$	14,856	$	40,646	$	1,090,724	$	1,131,370

During the first six months of 2011, the Company sold commercial and industrial loans and commercial real estate loans of $5 million and $3 million, respectively. These loans were of deteriorating credit quality and demonstrated material weaknesses making full recapture of principal and interest questionable. Charge-offs amounting to $4 million and $1 million had been taken on these commercial and industrial loans and commercial real estate loans, respectively. No gain or loss was recognized upon the sale of these loans.

At June 30, 2011 and December 31, 2010, based upon the most recent analysis performed, the following table presents the Company’s loan portfolio credit risk profile by internally assigned grade disaggregated by class of loan (in thousands).

	Commercial and industrial - owner-occupied mortgage		Commercial and industrial - general purpose		Real estate - commercial mortgage		Real estate - residential mortgage		Real estate - commercial construction		Real estate - residential construction		Loans to individuals		Tax exempt and other		Total
June 30, 2011
Watch list loans:
Loans requiring special attention but neither criticized nor classified	$	4,134	$	10,241	$	11,338	$	4,644	$	—	$	—	$	202	$	—	$	30,559
Special mention	2,910		13,613		15,628		399		4,592		—		869		—		38,011
Substandard	8,035		20,236		14,309		1,259		6,500		1,476		529		—		52,344
Doubtful	—		12,790		—		—		—		—		6		—		12,796
Loss	—		16		—		—		—		—		—		—		16
Total watch list loans	15,079		56,896		41,275		6,302		11,092		1,476		1,606		—		133,726
Pass	164,481		284,477		445,982		—		35,371		3,055		—		2,020		935,386
Performing (1)	—		—		—		71,458		—		—		2,648		—		74,106
Total loans	$	179,560	$	341,373	$	487,257	$	77,760	$	46,463	$	4,531	$	4,254	$	2,020	$	1,143,218
December 31, 2010
Watch list loans:
Loans requiring special attention but neither criticized nor classified	$	2,916	$	18,267	$	15,059	$	2,057	$	—	$	3,147	$	140	$	—	$	41,586
Special mention	2,526		16,221		26,226		97		4,576		4,804		869		—		55,319
Substandard	7,906		24,244		11,887		2,222		6,500		3,027		562		—		56,348
Doubtful	—		12,717		—		—		—		—		28		—		12,745
Loss	—		—		—		—		—		—		—		—		—
Total watch list loans	13,348		71,449		53,172		4,376		11,076		10,978		1,599		—		165,998
Pass	178,565		267,998		396,689		—		33,255		3,932		—		2,442		882,881
Performing (1)	—		—		—		79,320		—		—		3,171		—		82,491
Total loans	$	191,913	$	339,447	$	449,861	$	83,696	$	44,331	$	14,910	$	4,770	$	2,442	$	1,131,370

(1) In general, certain homogeneous loans are not risk-graded, but rather measured based upon payment performance. Loans categorized here are typically performing as agreed upon with the borrower.

Watch list loans consist of criticized loans, classified loans, and those loans requiring special attention but not warranting categorization as either criticized or classified. Criticized loans, i.e. special mention loans, have potential weaknesses, often temporary in nature, requiring management’s extra vigilance. Classified loans, i.e. substandard, doubtful and loss loans, exhibit more serious weaknesses and generally carry a higher risk of loss. Such loans require more intensive oversight, remediation plans and, if problems remain unresolved, a workout strategy is developed.