LOANS, ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY

The following tables bifurcates the amount of allowance allocated to each loan category based on collective impairment analysis or evaluated individually for impairment as of the periods indicated:



	September 30, 2012
	(Dollars in Thousands)
	Commercial and Industrial		Commercial Real Estate		Commercial Construction		Small Business		Residential Real Estate		Consumer Home Equity		Consumer Other		Total
FINANCING RECEIVABLES:
Ending Balance: Total Loans by Group	$	653,861	$	1,939,245	$	175,731	$	78,794	$	384,948	$	794,375	$	29,181	$	4,056,135	(1	)
Ending Balance: Individually Evaluated for Impairment	$	8,451	$	35,653	$	—	$	2,636	$	16,273	$	4,284	$	2,293	$	69,590
Ending Balance: Collectively Evaluated for Impairment	$	645,410	$	1,903,592	$	175,731	$	76,158	$	368,675	$	790,091	$	26,888	$	3,986,545



	December 31, 2011
	(Dollars in Thousands)
	Commercial and Industrial		Commercial Real Estate		Commercial Construction		Small Business		Residential Real Estate		Consumer Home Equity		Consumer Other		Total
FINANCING RECEIVABLES:
Ending Balance: Total Loans by Group	$	575,716	$	1,847,654	$	128,904	$	78,509	$	426,201	$	696,063	$	41,343	$	3,794,390	(1	)
Ending Balance: Individually Evaluated for Impairment	$	5,608	$	37,476	$	843	$	2,326	$	12,984	$	326	$	2,138	$	61,701
Ending Balance: Collectively Evaluated for Impairment	$	570,108	$	1,810,178	$	128,061	$	76,183	$	413,217	$	695,737	$	39,205	$	3,732,689


(1)	The amount of deferred fees included in the ending balance was $3.2 million and $2.9 million at September 30, 2012 and December 31, 2011, respectively.

The following tables summarize changes in allowance for loan losses by loan category for the periods indicated:



	Three Months Ended September 30, 2012
	(Dollars in Thousands)
	Commercial and Industrial			Commercial Real Estate			Commercial Construction		Small Business			Residential Real Estate			Consumer Home Equity			Consumer Other			Total
ALLOWANCE FOR LOAN LOSSES:
Beginning Balance	$	11,558		$	21,376		$	2,220	$	1,320		$	2,981		$	7,854		$	1,094		$	48,403
Charge-offs	(1,267		)	(621		)	—		(98		)	(227		)	(365		)	(247		)	(2,825		)
Recoveries	122			188			—		21			79			36			116			562
Provision	1,555			962			359		128			101			443			58			3,606
Ending Balance	$	11,968		$	21,905		$	2,579	$	1,371		$	2,934		$	7,968		$	1,021		$	49,746



	Three Months Ended September 30, 2011
	(Dollars in Thousands)
	Commercial and Industrial			Commercial Real Estate			Commercial Construction			Small Business			Residential Real Estate			Consumer Home Equity			Consumer Other			Total
ALLOWANCE FOR LOAN LOSSES:
Beginning Balance	$	11,083		$	22,995		$	2,071		$	2,053		$	3,242		$	3,713		$	1,480		$	46,637
Charge-offs	(749		)	(242		)	—			(386		)	(88		)	(333		)	(374		)	(2,172		)
Recoveries	77			98			425			18			—			13			182			813
Provision	1,191			134			(605		)	312			27			723			218			2,000
Ending Balance	$	11,602		$	22,985		$	1,891		$	1,997		$	3,181		$	4,116		$	1,506		$	47,278



							Nine Months Ended September 30, 2012
							(Dollars in Thousands)
	Commercial and Industrial			Commercial Real Estate			Commercial Construction		Small Business			Residential Real Estate			Consumer Home Equity			Consumer Other			Total
ALLOWANCE FOR LOAN LOSSES:
Beginning Balance	$	11,682		$	23,514		$	2,076	$	1,896		$	3,113		$	4,597		$	1,382		$	48,260
Charge-offs	(5,989		)	(3,358		)	—		(404		)	(441		)	(2,506		)	(840		)	(13,538		)
Recoveries	435			188			—		119			79			67			430			1,318
Provision	5,840			1,561			503		(240		)	183			5,810			49			13,706
Ending Balance	$	11,968		$	21,905		$	2,579	$	1,371		$	2,934		$	7,968		$	1,021		$	49,746
Ending Balance: Individually Evaluated for Impairment	$	281		$	737		$	—	$	201		$	1,326		$	36		$	174		$	2,755
Ending Balance: Collectively Evaluated for Impairment	$	11,687		$	21,168		$	2,579	$	1,170		$	1,608		$	7,932		$	847		$	46,991



							Nine Months Ended September 30, 2011
							(Dollars in Thousands)
	Commercial and Industrial			Commercial Real Estate			Commercial Construction			Small Business			Residential Real Estate			Consumer Home Equity			Consumer Other			Total
ALLOWANCE FOR LOAN LOSSES:
Beginning Balance	$	10,423		$	21,939		$	2,145		$	3,740		$	2,915		$	3,369		$	1,724		$	46,255
Charge-offs	(2,455		)	(1,386		)	(769		)	(970		)	(490		)	(912		)	(1,261		)	(8,243		)
Recoveries	348			98			500			72			—			30			536			1,584
Provision	3,286			2,334			15			(845		)	756			1,629			507			7,682
Ending Balance	$	11,602		$	22,985		$	1,891		$	1,997		$	3,181		$	4,116		$	1,506		$	47,278
Ending Balance: Individually Evaluated for Impairment	$	558		$	306		$	—		$	299		$	1,258		$	24		$	240		$	2,685
Ending Balance: Collectively Evaluated for Impairment	$	11,044		$	22,679		$	1,891		$	1,698		$	1,923		$	4,092		$	1,266		$	44,593

For the purpose of estimating the allowance for loan losses, management segregates the loan portfolio into the portfolio segments detailed in the above tables. Each of these loan categories possesses unique risk characteristics that are considered when determining the appropriate level of allowance for each segment. Some of the risk characteristics unique to each loan category include:

Commercial Portfolio:

Commercial & Industrial—Loans in this category consist of revolving and term loan obligations extended to business and corporate enterprises for the purpose of financing working capital and/or capital investment. Collateral generally consists of pledges of business assets including, but not limited to: accounts receivable, inventory, plant & equipment, or real estate, if applicable. Repayment sources consist of: primarily, operating cash flow, and secondarily, liquidation of assets.

Commercial Real Estate—Loans in this category consist of mortgage loans to finance investment in real property such as multi-family residential, commercial/retail, office, industrial, hotels, educational and healthcare facilities and other specific use properties. Loans are typically written with amortizing payment structures. Collateral values are determined based upon third party appraisals and evaluations. Loan to value ratios at origination are governed by established policy and regulatory guidelines. Repayment sources consist of: primarily, cash flow from operating leases and rents, and secondarily, liquidation of assets.

Commercial Construction—Loans in this category consist of short-term construction loans, revolving and nonrevolving credit lines and construction/permanent loans to finance the acquisition, development and construction or rehabilitation of real property. Project types include: residential 1-4 family condominium and multi-family homes, commercial/retail, office, industrial, hotels, educational and healthcare facilities and other specific use properties. Loans may be written with nonamortizing or hybrid payment structures depending upon the type of project. Collateral values are determined based upon third party appraisals and evaluations. Loan to value ratios at origination are governed by established policy and regulatory guidelines. Repayment sources vary depending upon the type of project and may consist of: sale or lease of units, operating cash flows or liquidation of other assets.

Small Business—Loans in this category consist of revolving, term loan and mortgage obligations extended to sole proprietors and small businesses for purposes of financing working capital and/or capital investment. Collateral generally consists of pledges of business assets including, but not limited to: accounts receivable, inventory, plant & equipment, or real estate if applicable. Repayment sources consist of: primarily, operating cash flows, and secondarily, liquidation of assets.

For the commercial portfolio it is the Bank’s policy to obtain personal guarantees for payment from individuals holding material ownership interests of the borrowing entities.

Consumer Portfolio:

Residential Real Estate—Residential mortgage loans held in the Bank’s portfolio are made to borrowers who demonstrate the ability to make scheduled payments with full consideration to underwriting factors such as current and expected income, employment status, current assets, other financial resources, credit history and the value of the collateral. Collateral consists of mortgage liens on 1-4 family residential properties. The Company does not originate sub-prime loans.

Home Equity—Home equity loans and lines are made to qualified individuals for legitimate purposes secured by senior or junior mortgage liens on owner-occupied 1-4 family homes, condominiums or vacation homes or on nonowner occupied 1-4 family homes with more restrictive loan to value requirements. Borrower qualifications include favorable credit history combined with supportive income requirements and combined loan to value ratios within established policy guidelines.

Consumer—Other—Other consumer loan products including personal lines of credit and amortizing loans made to qualified individuals for various purposes such as education, auto loans, debt consolidation, personal expenses or overdraft protection. Borrower qualifications include favorable credit history combined with supportive income and collateral requirements within established policy guidelines. These loans may be secured or unsecured.

Credit Quality:

The Company continually monitors the asset quality of the loan portfolio using all available information. Based on this information, loans demonstrating certain payment issues or other weaknesses may be categorized as delinquent, impaired, nonperforming and/or put on nonaccrual status. Additionally, in the course of resolving such loans, the Company may choose to restructure the contractual terms of certain loans to match the borrower’s ability to repay the loan based on their current financial condition. If a restructured loan meets certain criteria, it may be categorized as a troubled debt restructuring (“TDR”).

The Company reviews numerous credit quality indicators when assessing the risk in its loan portfolio. For the commercial portfolio, the Company utilizes a 10-point commercial risk-rating system, which assigns a risk-grade to each borrower based on a number of quantitative and qualitative factors associated with a commercial loan transaction. Factors considered include industry and market conditions, position within the industry, earnings trends, operating cash flow, asset/liability values, debt capacity, guarantor strength, management and controls, financial reporting, collateral, and other considerations. The risk-ratings categories are defined as follows:

1- 6 Rating – Pass

Risk-rating grades “1” through “6” comprise those loans ranging from ‘Substantially Risk Free’ which indicates borrowers are of unquestioned credit standing and the pinnacle of credit quality, well established companies with a very strong financial condition, and loans fully secured by cash collateral, through ‘Acceptable Risk’, which indicates borrowers may exhibit declining earnings, strained cash flow, increasing leverage and/or weakening market fundamentals that indicate above average or below average asset quality, margins and market share. Collateral coverage is protective.

7 Rating – Potential Weakness

Borrowers exhibit potential credit weaknesses or downward trends deserving management’s close attention. If not checked or corrected, these trends will weaken the Bank’s asset and position. While potentially weak, currently these borrowers are marginally acceptable; no loss of principal or interest is envisioned.

8 Rating – Definite Weakness

Borrowers exhibit well defined weaknesses that jeopardize the orderly liquidation of debt. Loan may be inadequately protected by the current net worth and paying capacity of the obligor or by the collateral pledged, if any. Normal repayment from the borrower is in jeopardy, although no loss of principal is envisioned. However, there is a distinct possibility that a partial loss of interest and/or principal will occur if the deficiencies are not corrected. Collateral coverage may be inadequate to cover the principal obligation.

9 Rating – Partial Loss Probable

Borrowers exhibit well defined weaknesses that jeopardize the orderly liquidation of debt with the added provision that the weaknesses make collection of the debt in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Serious problems exist to the point where partial loss of principal is likely.

10 Rating – Definite Loss

Borrowers deemed incapable of repayment. Loans to such borrowers are considered uncollectible and of such little value that continuation as active assets of the Bank is not warranted.

The credit quality of the commercial loan portfolio is actively monitored and any changes in credit quality are reflected in risk-rating changes. Risk-ratings are assigned or reviewed for all new loans, when advancing significant additions to existing relationships (over $50,000), at least quarterly for all actively managed loans, and any time a significant event occurs, including at renewal of the loan.

The Company utilizes a comprehensive strategy for monitoring commercial credit quality. Borrowers are required to provide updated financial information at least annually which is carefully evaluated for any changes in credit quality. Larger loan relationships are subject to a full annual credit review by an experienced credit analysis group. Additionally, the Company retains an independent loan review firm to evaluate the credit quality of the commercial loan portfolio. The independent loan review process achieves significant penetration into the commercial loan portfolio and reports the results of these reviews to the Audit Committee of the Board of Directors on a quarterly basis.

The following table details the internal risk-rating categories for the Company’s commercial portfolio:



		September 30, 2012
Category	Risk Rating	Commercial and Industrial		Commercial Real Estate		Commercial Construction		Small Business		Total
		(Dollars in Thousands)
PASS	1 - 6	$	615,349	$	1,759,857	$	164,545	$	71,340	$	2,611,091
POTENTIAL WEAKNESS	7	19,584		77,791		6,159		3,673		107,207
DEFINITE WEAKNESS—LOSS UNLIKELY	8	17,541		100,602		5,027		3,697		126,867
PARTIAL LOSS PROBABLE	9	1,387		995		—		84		2,466
DEFINITE LOSS	10	—		—		—		—		—
TOTAL		$	653,861	$	1,939,245	$	175,731	$	78,794	$	2,847,631



		December 31, 2011
Category	Risk Rating	Commercial and Industrial		Commercial Real Estate		Commercial Construction		Small Business		Total
		(Dollars in Thousands)
PASS	1 - 6	$	528,798	$	1,626,745	$	114,633	$	70,543	$	2,340,719
POTENTIAL WEAKNESS	7	33,313		124,661		7,859		4,041		169,874
DEFINITE WEAKNESS—LOSS UNLIKELY	8	12,683		93,438		6,412		3,762		116,295
PARTIAL LOSS PROBABLE	9	922		2,810		—		163		3,895
DEFINITE LOSS	10	—		—		—		—		—
TOTAL		$	575,716	$	1,847,654	$	128,904	$	78,509	$	2,630,783

For the Company’s consumer portfolio, the quality of the loan is best indicated by the repayment performance of an individual borrower. However, the Company does supplement performance data with current Fair Isaac Corporation (“FICO”) and Loan to Value (“LTV”) estimates. Current FICO data is purchased and appended to all consumer loans on a quarterly basis. In addition, automated valuation services and broker opinions of value are used to supplement original value data for the residential and home equity portfolios, periodically, typically twice per annum. At September 30, 2012 and December 31, 2011, 61.1% and 54.8% of the home equity loans were in first lien position, respectively. In addition, for all second position home equity loans, management reviews the performance of the first position lien, which is often held at another institution, when determining the performing status of the loan. The following table shows the weighted average FICO scores and the weighted average combined LTV ratios as of the periods indicated below:



	September 30, 2012		December 31, 2011
RESIDENTIAL PORTFOLIO:
FICO Score (re-scored) (1)	727		731
Combined LTV (re-valued) (2)	67.0	%	67.0	%
HOME EQUITY PORTFOLIO:
FICO Score (re-scored) (1)	763		762
Combined LTV (re-valued) (2)	55.0	%	55.0	%


(1)	The average FICO scores for September 30, 2012 are based upon rescores available from August 2012 and actual score data for loans booked between September 1 and September 30, 2012. The average FICO scores for December 31, 2011 are based upon rescores available from November 2011 and actual score data for loans booked between December 1 and December 31, 2011.


(2)	The combined LTV ratios for September 30, 2012 are based upon updated automated valuations as of May 31, 2012. The combined LTV ratios for December 31, 2011 are based upon updated automated valuations as of November 30, 2011.

The Bank’s philosophy toward managing its loan portfolios is predicated upon careful monitoring, which stresses early detection and response to delinquent and default situations. Delinquent loans are managed by a team of seasoned collection specialists and the Bank seeks to make arrangements to resolve any delinquent or default situation over the shortest possible time frame. As a general rule, loans more than 90 days past due with respect to principal or interest are classified as nonaccrual loans. As permitted by banking regulations, certain consumer loans past due 90 days or more may continue to accrue interest. The Company also may use discretion regarding other loans over 90 days delinquent if the loan is well secured and in process of collection. Set forth is information regarding the Company’s nonperforming loans at the period shown.

The following table shows nonaccrual loans at the dates indicated:



	September 30, 2012		December 31, 2011
	(Dollars In Thousands)
COMMERCIAL AND INDUSTRIAL	$	2,981	$	1,883
COMMERCIAL REAL ESTATE	9,249		12,829
COMMERCIAL CONSTRUCTION	—		280
SMALL BUSINESS	604		542
RESIDENTIAL REAL ESTATE	10,383		9,867
HOME EQUITY	7,608		3,130
CONSUMER—OTHER	181		381
TOTAL NONACCRUAL LOANS (1)	$	31,006	$	28,912


(1)	Included in these amounts were $6.0 million and $9.2 million of nonaccruing TDRs at September 30, 2012 and December 31, 2011, respectively.

The following table shows the age analysis of past due financing receivables as of the dates indicated:



	September 30, 2012
	30-59 days			60-89 days			90 days or more			Total Past Due					Total Financing Receivables		Recorded Investment >90 Days and Accruing
	Number of Loans	Principal Balance		Number of Loans	Principal Balance		Number of Loans	Principal Balance		Number of Loans	Principal Balance		Current		Total Financing Receivables		Recorded Investment >90 Days and Accruing
	(Dollars in Thousands)
LOAN PORTFOLIO:
Commercial and Industrial	11	$	1,266	10	$	987	25	$	1,783	46	$	4,036	$	649,825	$	653,861	$	—
Commercial Real Estate	12	2,375		7	1,319		27	6,580		46	10,274		1,928,971		1,939,245		—
Commercial Construction	1	155		—	—		—	—		1	155		175,576		175,731		—
Small Business	9	410		3	46		8	315		20	771		78,023		78,794		—
Residential Real Estate	15	3,352		9	2,698		30	6,365		54	12,415		363,245		375,660		—
Residential Construction	—	—		—	—		—	—		—	—		9,288		9,288		—
Home Equity	17	993		8	327		20	1,696		45	3,016		791,359		794,375		35
Consumer—Other	144	972		40	196		30	154		214	1,322		27,859		29,181		41
TOTAL	209	$	9,523	77	$	5,573	140	$	16,893	426	$	31,989	$	4,024,146	$	4,056,135	$	76



	December 31, 2011
	30-59 days			60-89 days			90 days or more			Total Past Due					Total Financing Receivables		Recorded Investment >90 Days and Accruing
	Number of Loans	Principal Balance		Number of Loans	Principal Balance		Number of Loans	Principal Balance		Number of Loans	Principal Balance		Current		Total Financing Receivables		Recorded Investment >90 Days and Accruing
	(Dollars in Thousands)
LOAN PORTFOLIO:
Commercial and Industrial	21	$	2,143	10	$	2,709	20	$	1,279	51	$	6,131	$	569,585	$	575,716	$	—
Commercial Real Estate	7	3,684		7	2,522		29	6,737		43	12,943		1,834,711		1,847,654		—
Commercial Construction	—	—		—	—		3	280		3	280		128,624		128,904		—
Small Business	19	320		3	21		12	148		34	489		78,020		78,509		—
Residential Real Estate	14	2,770		10	3,208		31	6,065		55	12,043		404,527		416,570		—
Residential Construction	—	—		—	—		—	—		—	—		9,631		9,631		—
Home Equity	28	1,483		19	1,139		19	1,502		66	4,124		691,939		696,063		—
Consumer—Other	260	1,821		57	303		58	374		375	2,498		38,845		41,343		41
TOTAL	349	$	12,221	106	$	9,902	172	$	16,385	627	$	38,508	$	3,755,882	$	3,794,390	$	41

In the course of resolving nonperforming loans, the Bank may choose to restructure the contractual terms of certain loans. The Bank attempts to work-out an alternative payment schedule with the borrower in order to avoid foreclosure actions. Any loans that are modified are reviewed by the Bank to identify if a TDR has occurred, which is when, for economic or legal reasons related to a borrower’s financial difficulties, the Bank grants a concession to the borrower that it would not otherwise consider. Terms may be modified to fit the ability of the borrower to repay in line with its current financial status and the restructuring of the loan may include the transfer of assets from the borrower to satisfy the debt, a modification of loan terms, or a combination of the two.

The following table shows the Company’s total TDRs and other pertinent information as of the dates indicated:



	September 30, 2012		December 31, 2011
	(Dollars in Thousands)
TDRs ON ACCRUAL STATUS	$	46,823	$	37,151
TDRs ON NONACCRUAL	5,962		9,230
TOTAL TDRs	$	52,785	$	46,381
AMOUNT OF SPECIFIC RESERVES INCLUDED IN THE ALLOWANCE FOR LOAN LOSSES ASSOCIATED WITH TDRs:	$	2,189	$	1,887
ADDITIONAL COMMITMENTS TO LEND TO A BORROWER WHO HAS BEEN A PARTY TO A TDR:	$	896	$	693

The Bank’s policy is to have any restructured loan which is on nonaccrual status prior to being modified remain on nonaccrual status for six months, subsequent to being modified, before management considers its return to accrual status. If the restructured loan is on accrual status prior to being modified, it is reviewed to determine if the modified loan should remain on accrual status. Additionally, loans classified as TDRs are adjusted to reflect the changes in value of the recorded investment in the loan, if any, resulting from the granting of a concession. For all residential loan modifications, the borrower must perform during a 90 day trial period before the modification is finalized.

The following table shows the modifications which occurred during the periods indicated and the change in the recorded investment subsequent to the modifications occurring:



	Three Months Ended,					Nine Months Ended
	September 30, 2012					September 30, 2012
	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment (1)		Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment (1)
				(Dollars in Thousands)
TROUBLED DEBT RESTRUCTURINGS:
Commercial & Industrial	4	$	329	$	329	15	$	1,602	$	1,602
Commercial Real Estate	5	1,624		1,624		13	6,274		6,274
Small Business	8	327		327		16	724		724
Residential Real Estate	5	889		893		9	1,539		1,543
Home Equity	3	111		113		12	767		769
Consumer—Other	8	57		57		30	459		459
TOTAL	33	$	3,337	$	3,343	95	$	11,365	$	11,371


(1)	The post-modification balances represent the balance of the loan on the date of modifications. These amounts may show an increase when modifications include a capitalization of interest.



	Three Months Ended					Nine Months Ended
	September 30, 2011					September 30, 2011
	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment (1)		Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment (1)
				(Dollars in Thousands)
TROUBLED DEBT RESTRUCTURINGS:
Commercial & Industrial	1	$	200	$	200	5	$	410	$	410
Commercial Real Estate	2	872		872		8	6,151		6,151
Small Business	14	480		480		34	1,267		1,267
Residential Real Estate	2	203		203		11	3,082		3,130
Consumer—Home Equity	—	—		—		3	127		127
Consumer—Other	26	302		302		71	816		816
TOTAL	45	$	2,057	$	2,057	132	$	11,853	$	11,901


(1)	The post-modification balances represent the balance of the loan on the date of modifications. These amounts may show an increase when modifications include a capitalization of interest.

The following table shows the Company’s post-modification balance of TDRs listed by type of modification as of the periods indicated:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011
	(Dollars in Thousands)				(Dollars in Thousands)
EXTENDED MATURITY	$	721	$	481	$	4,058	$	3,978
ADJUSTED INTEREST RATE	1,207		622		1,561		647
COMBINATION RATE & MATURITY	1,136		954		4,358		7,276
COURT ORDERED CONCESSION	279		—		1,394		—
TOTAL	$	3,343	$	2,057	$	11,371	$	11,901

The following table shows the loans that have been modified during the past twelve months which have subsequently defaulted during the periods indicated. The Company considers a loan to have defaulted when it reaches 90 days past due.



	Three Months Ended September 30,
	2012			2011
	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
	(Dollars in Thousands)
TROUBLED DEBT RESTRUCTURINGS THAT SUBSEQUENTLY DEFAULTED:
Commercial & Industrial	—	$	—	—	$	—
Commercial Real Estate	1	202		—	—
Small Business	—	—		2	66
Residential Real Estate	1	190		1	378
Consumer—Home Equity	—	—		—	—
Consumer—Other	—	—		2	11
TOTAL	2	$	392	5	$	455



	Nine Months Ended September 30,
	2012			2011
	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
	(Dollars in Thousands)
TROUBLED DEBT RESTRUCTURINGS THAT SUBSEQUENTLY DEFAULTED:
Commercial & Industrial	—	$	—	—	$	—
Commercial Real Estate	1	202		—	—
Small Business	—	—		2	66
Residential Real Estate	1	190		1	378
Consumer—Home Equity	—	—		—	—
Consumer—Other	—	—		2	11
TOTAL	2	$	392	5	$	455

All TDR loans are considered impaired and therefore are subject to a specific review for impairment. The impairment analysis appropriately discounts the present value of the anticipated cash flows by the loan’s contractual rate of interest in effect prior to the loan’s modification. The amount of impairment, if any, is recorded as a specific loss allocation to each individual loan in the allowance for loan losses. Commercial loans (commercial and industrial, commercial construction, commercial real estate and small business loans) and residential loans that have been classified as TDRs and which subsequently default are reviewed to determine if the loan should be deemed collateral dependent. In such an instance, any shortfall between the value of the collateral and the book value of the loan is determined by measuring the recorded investment in the loan against the fair value of the collateral less costs to sell. The Bank charges off the amount of any confirmed loan loss in the period when the loans, or portion of loans, are deemed uncollectible. Smaller balance consumer TDR loans are reviewed to determine when a charge-off is appropriate. In the limited circumstances that a loan is removed from TDR classification it is the Company’s policy to continue to base its measure of loan impairment on the contractual terms specified by the loan agreement.

A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

The tables below set forth information regarding the Company’s impaired loans by loan portfolio as of the dates indicated:



	September 30, 2012
	Recorded Investment		Unpaid Principal Balance		Related Allowance
	(Dollars in Thousands)
WITH NO RELATED ALLOWANCE RECORDED:
Commercial & Industrial	$	7,434	$	8,427	$	—
Commercial Real Estate	18,387		19,054		—
Commercial Construction	—		—		—
Small Business	1,439		1,506		—
Residential Real Estate	2,702		2,755		—
Consumer—Home Equity	3,485		3,576		—
Consumer—Other	74		75		—
Subtotal	33,521		35,393		—
WITH AN ALLOWANCE RECORDED:
Commercial & Industrial	$	1,017	$	1,517	$	281
Commercial Real Estate	17,266		17,645		737
Commercial Construction	—		—		—
Small Business	1,197		1,229		201
Residential Real Estate	13,571		14,480		1,326
Consumer—Home Equity	799		874		36
Consumer—Other	2,219		2,220		174
Subtotal	36,069		37,965		2,755
TOTAL	$	69,590	$	73,358	$	2,755



	December 31, 2011
	Recorded Investment		Unpaid Principal Balance		Related Allowance
	(Dollars in Thousands)
WITH NO RELATED ALLOWANCE RECORDED:
Commercial & Industrial	$	3,380	$	4,365	$	—
Commercial Real Estate	19,433		20,010		—
Commercial Construction	843		843		—
Small Business	1,131		1,193		—
Residential Real Estate	—		—		—
Consumer—Home Equity	22		22		—
Consumer—Other	31		32		—
Subtotal	24,840		26,465		—
WITH AN ALLOWANCE RECORDED:
Commercial & Industrial	$	2,228	$	2,280	$	562
Commercial Real Estate	18,043		19,344		457
Commercial Construction	—		—		—
Small Business	1,195		1,218		148
Residential Real Estate	12,984		13,651		1,245
Consumer—Home Equity	304		349		31
Consumer—Other	2,107		2,125		239
Subtotal	36,861		38,967		2,682
TOTAL	$	61,701	$	65,432	$	2,682

The following tables set forth information regarding interest income recognized on impaired loans, by portfolio, for the periods indicated:



	Three Months Ended				Nine Months Ended
	September 30, 2012				September 30, 2012
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(Dollars in Thousands)
WITH NO RELATED ALLOWANCE RECORDED:
Commercial & Industrial	$	8,181	$	107	$	8,584	$	323
Commercial Real Estate	18,625		329		19,033		1,005
Commercial Construction	—		—		—		—
Small Business	1,461		25		1,543		79
Residential Real Estate	2,709		81		2,730		84
Consumer—Home Equity	3,527		39		3,571		117
Consumer—Other	81		1		78		3
Subtotal	34,584		582		35,539		1,611
WITH AN ALLOWANCE RECORDED:
Commercial & Industrial	$	1,077	$	23	$	1,487	$	74
Commercial Real Estate	17,444		255		18,103		790
Commercial Construction	—		—		—		—
Small Business	1,176		16		1,171		49
Residential Real Estate	13,592		168		13,720		434
Consumer—Home Equity	803		14		815		41
Consumer—Other	2,283		30		2,447		98
Subtotal	36,375		506		37,743		1,486
TOTAL	$	70,959	$	1,088	$	73,282	$	3,097



	Three Months Ended				Nine Months Ended
	September 30, 2011				September 30, 2011
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(Dollars in Thousands)
WITH NO RELATED ALLOWANCE RECORDED:
Commercial & Industrial	$	2,236	$	46	$	2,527	$	143
Commercial Real Estate	19,391		345		19,600		1,020
Commercial Construction	551		11		560		32
Small Business	1,641		28		1,627		82
Residential Real Estate	2		—		5		—
Consumer—Home Equity	22		—		22		1
Consumer—Other	90		2		113		5
Subtotal	23,933		432		24,454		1,283
WITH AN ALLOWANCE RECORDED:
Commercial & Industrial	$	756	$	12	$	926	$	41
Commercial Real Estate	13,247		183		13,304		569
Commercial Construction	—		—		—		—
Small Business	1,401		21		1,505		67
Residential Real Estate	12,721		132		12,744		378
Consumer—Home Equity	457		8		480		22
Consumer—Other	2,043		20		1,919		56
Subtotal	30,625		376		30,878		1,133
TOTAL	$	54,558	$	808	$	55,332	$	2,416