LOANS

9 Months Ended

Sep. 30, 2011

LOANS

LOANS

5.  LOANS

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

	September 30, 2011		December 31, 2010
Commercial and industrial - owner-occupied mortgage	$	177,754	$	191,913
Commercial and industrial - general purpose	347,341		339,447
Real estate - commercial mortgage	504,836		449,861
Real estate - residential mortgage	75,022		83,696
Real estate - commercial construction	46,963		44,331
Real estate - residential construction	4,560		14,910
Loans to individuals	4,046		4,770
Tax exempt and other	1,899		2,442
Loans - net of unearned income	1,162,421		1,131,370
Less: Allowance for loan losses	23,467		33,078
Loans - net	$	1,138,954	$	1,098,292

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

	For the			For the Three Months Ended
	Last 12 Months			September 30, 2011			June 30, 2011			March 31, 2011			December 31, 2010
Beginning balance	$	32,488		$	27,731		$	27,589		$	33,078		$	32,488
Provision (credit)	2,200			(3,500		)	1,100			1,900			2,700
Charge-offs	(11,973		)	(1,151		)	(1,042		)	(7,629		)	(2,151		)
Recoveries	752			387			84			240			41
Ending balance	$	23,467		$	23,467		$	27,731		$	27,589		$	33,078

During the first nine 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 nine months ended September 30, 2011, the activity in the allowance for loan losses disaggregated by portfolio segment is shown below. At September 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 September 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 September 30, 2011
Total allowance for loan losses:
Beginning balance	$	15,992		$	8,322		$	1,087		$	173		$	16		$	2,141		$	27,731
(Credit) provision	(4,368		)	426			223			(58		)	(1		)	278			(3,500		)
Charge-offs	(750		)	(90		)	(300		)	(11		)	—			—			(1,151		)
Recoveries	339			—			47			1			—			—			387
Ending balance	$	11,213		$	8,658		$	1,057		$	105		$	15		$	2,419		$	23,467
Nine months ended September 30, 2011
Total allowance for loan losses:
Beginning balance	$	20,144		$	7,893		$	1,809		$	181		$	17		$	3,034		$	33,078
(Credit) provision	(2,133		)	2,128			150			(28		)	(2		)	(615		)	(500		)
Charge-offs	(7,258		)	(1,531		)	(974		)	(59		)	—			—			(9,822		)
Recoveries	460			168			72			11			—			—			711
Ending balance	$	11,213		$	8,658		$	1,057		$	105		$	15		$	2,419		$	23,467
September 30, 2011
Total allowance for loan losses:
Individually evaluated for impairment	$	4,682		$	1,553		$	—		$	—		$	—		$	—		$	6,235
Collectively evaluated for impairment	6,531			7,105			1,057			105			15			2,419			17,232
Ending balance	$	11,213		$	8,658		$	1,057		$	105		$	15		$	2,419		$	23,467
Total loans:
Individually evaluated for impairment	$	21,805		$	12,982		$	942		$	14		$	—		$	—		$	35,743
Collectively evaluated for impairment	503,290			538,817			78,640			4,032			1,899			—			1,126,678
Ending balance	$	525,095		$	551,799		$	79,582		$	4,046		$	1,899		$	—		$	1,162,421
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	501,207			486,008			96,302			4,754			2,442			—			1,090,713
Ending balance	$	531,360		$	494,192		$	98,606		$	4,770		$	2,442		$	—		$	1,131,370

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

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

	September 30, 2011			December 31, 2010
Troubled debt restructurings with specifically allocated allowances for loss	$	16,500		$	26,500
Allowance for loan loss specifically allocated to troubled debt restructurings	(2,738		)	(8,158		)
	13,762			18,342
Troubled debt restructurings with no specifically allocated allowance for loan loss	492			547
Net troubled debt restructurings	14,254			18,889
Other impaired loans with specifically allocated allowances for loss	18,153			13,610
Allowance for loan loss specifically allocated to other impaired loans	(3,497		)	(4,422		)
	14,656			9,188
Other impaired loans with no specifically allocated allowance for loan loss	598			—
Net other impaired loans	15,254			9,188
Total net impaired loans	$	29,508		$	28,077
Average impaired loan balance	$	28,938		$	15,602
Interest income recognized on impaired loans	$	517		$	448

The Company has TDRs at September 30, 2011 that include a $10 million commercial loan and a $7 million commercial real estate loan performing according to their revised terms. The Company’s TDRs primarily resulted from interest rate concessions and maturity extensions. The Company has allocated $3 million of specific reserves to customers whose loan terms have been modified in TDRs as of September 30, 2011. The Company has no commitments to lend any additional amounts to customers with outstanding loans that are classified as TDRs. The Company had no new TDRs in 2011.

The table below presents loans by class modified as TDRs for which there was a payment default within twelve months following the modification during both the three and nine months ended September 30, 2011. A loan is generally considered to be in payment default once it is individually determined that a payment default will be declared under the modified terms. The TDR that subsequently defaulted as presented below resulted in no change to the allowance for loan losses and no charge-offs during both the three and nine months ended September 30, 2011.

	Number of loans	Recorded investment (in thousands)
Loans to individuals	1	$	14
Total	1	$	14

The terms of certain other loans were modified during the three and nine months ended September 30, 2011 that did not meet the definition of a TDR. These loans modified during the nine months ended September 30, 2011 had a total recorded investment at September 30, 2011 of $2 million, of which $466 thousand was modified during the three months ended September 30, 2011. The modification of these loans involved either a modification of the terms of a loan to borrowers who were not experiencing financial difficulties or a delay in a payment that was considered to be insignificant.

In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Company’s internal underwriting policy.

A certain loan which was modified during the three and nine months ended September 30, 2011 and did not meet the definition of a TDR as the modification was a delay in a payment that was considered to be insignificant had a delay in principal payment of three months.

The following table presents the Company’s impaired loans disaggregated by class for the nine months ended September 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
September 30, 2011
With an allowance recorded:
Commercial and industrial - owner-occupied mortgage	$	7,456	$	7,456	$	1,675	$	2,513	$	1
Commercial and industrial - general purpose	14,215		14,504		3,007		13,610		305
Real estate - commercial mortgage	6,482		6,614		1,116		3,376		—
Real estate - commercial construction	6,500		6,500		437		6,500		197
Totals	$	34,653	$	35,074	$	6,235	$	25,999	$	503
With no related allowance recorded:
Commercial and industrial - general purpose	$	134	$	134	$	—	$	1,703	$	—
Real estate - residential mortgage	942		942		—		1,222		14
Loans to individuals	14		14		—		14		—
Totals	$	1,090	$	1,090	$	—	$	2,939	$	14
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 September 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 nine month periods ended September 30, 2011 and 2010. At September 30, 2011 and December 31, 2010, there were two loans totaling $55 thousand and three loans totaling $104 thousand, respectively, restructured and no longer accruing interest. At September 30, 2011 and December 31, 2010, there were four TDRs totaling $17 million and five TDRs totaling $27 million, respectively, still accruing interest. At both September 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 September 30, 2011 and December 31, 2010 disaggregated by class (in thousands):

	Non-accrual loans		Loans past due over 90 days still accruing
September 30, 2011
Commercial and industrial - general purpose	$	4,223	$	—
Real estate - commercial mortgage	6,643		—
Real estate - residential mortgage	690		—
Loans to individuals	84		1
Total	$	11,640	$	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 September 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
September 30, 2011
Commercial and industrial - owner-occupied mortgage	$	7,456	$	—	$	—	$	—	$	7,456	$	170,298	$	177,754
Commercial and industrial - general purpose	1,163		11,471		—		4,223		16,857		330,484		347,341
Real estate - commercial mortgage	1,609		—		—		6,643		8,252		496,584		504,836
Real estate - residential mortgage	2,809		423		—		690		3,922		71,100		75,022
Real estate - commercial construction	—		—		—		—		—		46,963		46,963
Real estate - residential construction	—		—		—		—		—		4,560		4,560
Loans to individuals	15		—		1		84		100		3,946		4,046
Tax exempt and other	—		—		—		—		—		1,899		1,899
Total	$	13,052	$	11,894	$	1	$	11,640	$	36,587	$	1,125,834	$	1,162,421
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 nine months of 2011, the Company sold commercial and industrial loans and commercial real estate loans of $5 million and $4 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 September 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
September 30, 2011
Watch list loans:
Loans requiring special attention but neither criticized nor classified	$	10,401	$	8,290	$	5,845	$	3,597	$	—	$	—	$	192	$	—	$	28,325
Special mention	1,447		18,420		13,762		2,543		4,592		—		1,262		—		42,026
Substandard	7,708		17,228		12,905		764		6,500		1,476		131		—		46,712
Doubtful	—		2,653		1,314		—		—		—		5		—		3,972
Loss	—		—		—		—		—		—		—		—		—
Total watch list loans	19,556		46,591		33,826		6,904		11,092		1,476		1,590		—		121,035
Pass	158,198		300,750		471,010		—		35,871		3,084		—		1,899		970,812
Performing (1)	—		—		—		68,118		—		—		2,456		—		70,574
Total loans	$	177,754	$	347,341	$	504,836	$	75,022	$	46,963	$	4,560	$	4,046	$	1,899	$	1,162,421
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.