LOANS, ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY

The following tables bifurcates the amount of allowance allocated to each loan category based on the type of impairment analysis as of the periods indicated:



	June 30, 2013
	(Dollars in thousands)
	Commercial and Industrial		Commercial Real Estate		Commercial Construction		Small Business		Residential Real Estate		Home Equity		Other Consumer		Total
Financing receivables
Ending balance: total loans by group	$	742,343	$	2,150,833	$	231,719	$	77,283	$	513,551	$	792,450	$	21,932	$	4,530,111	(1	)
Ending balance: individually evaluated for impairment	$	9,759	$	36,439	$	1,608	$	2,039	$	15,883	$	4,069	$	1,584	$	71,381
Ending balance: purchase credit impaired loans	$	—	$	18,304	$	—	$	—	$	8,991	$	380	$	—	$	27,675
Ending balance: collectively evaluated for impairment	$	732,584	$	2,096,090	$	230,111	$	75,244	$	488,677	$	788,001	$	20,348	$	4,431,055



	December 31, 2012
	(Dollars in thousands)
	Commercial and Industrial		Commercial Real Estate		Commercial Construction		Small Business		Residential Real Estate		Home Equity		Other Consumer		Total
Financing receivables
Ending balance: total loans by group	$	687,511	$	2,122,153	$	188,768	$	78,594	$	612,881	$	802,149	$	26,955	$	4,519,011	(1	)
Ending balance: individually evaluated for impairment	$	8,575	$	33,868	$	—	$	2,279	$	15,373	$	4,435	$	2,129	$	66,659
Ending Balance: purchase credit impaired loans	$	—	$	21,853	$	—	$	—	$	9,821	$	380	$	—	$	32,054
Ending balance: collectively evaluated for impairment	$	678,936	$	2,066,432	$	188,768	$	76,315	$	587,687	$	797,334	$	24,826	$	4,420,298


(1)	The amount of deferred fees included in the ending balance was $2.6 million and $3.1 million at June 30, 2013 and December 31, 2012, respectively.

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



	Three Months Ended June 30, 2013
	(Dollars in thousands)
	Commercial and Industrial			Commercial Real Estate			Commercial Construction		Small Business			Residential Real Estate			Home Equity			Other Consumer			Total
Allowance for loan losses
Beginning balance	$	13,443		$	22,569		$	3,139	$	1,244		$	3,048		$	7,716		$	747		$	51,906
Charge-offs	(1,302		)	(196		)	—		(276		)	(186		)	(257		)	(260		)	(2,477		)
Recoveries	103			8			—		37			86			30			183			447
Provision	2,081			648			283		290			11			(222		)	9			3,100
Ending balance	$	14,325		$	23,029		$	3,422	$	1,295		$	2,959		$	7,267		$	679		$	52,976



	Three Months Ended June 30, 2012
	(Dollars in thousands)
	Commercial and Industrial			Commercial Real Estate			Commercial Construction			Small Business			Residential Real Estate			Home Equity			Other Consumer			Total
Allowance for loan losses
Beginning balance	$	11,454		$	22,829		$	2,233		$	1,459		$	3,072		$	6,077		$	1,216		$	48,340
Charge-offs	(4,707		)	(2,133		)	—			(136		)	(105		)	(1,391		)	(296		)	(8,768		)
Recoveries	113			—			—			46			—			18			154			331
Provision	4,698			680			(13		)	(49		)	14			3,150			20			8,500
Ending balance	$	11,558		$	21,376		$	2,220		$	1,320		$	2,981		$	7,854		$	1,094		$	48,403



	Six Months Ended June 30, 2013
	(Dollars in thousands)
	Commercial and Industrial			Commercial Real Estate			Commercial Construction		Small Business			Residential Real Estate			Home Equity			Other Consumer			Total
Allowance for loan losses
Beginning balance	$	13,461		$	22,598		$	2,811	$	1,524		$	2,930		$	7,703		$	807		$	51,834
Charge-offs	(1,725		)	(603		)	—		(421		)	(247		)	(534		)	(521		)	(4,051		)
Recoveries	239			8			—		76			86			51			333			793
Provision	2,350			1,026			611		116			190			47			60			4,400
Ending balance	$	14,325		$	23,029		$	3,422	$	1,295		$	2,959		$	7,267		$	679		$	52,976
Ending balance: Individually evaluated for impairment	$	775		$	410		$	—	$	153		$	1,670		$	52		$	92		$	3,152
Ending balance: Collectively evaluated for impairment	$	13,550		$	22,619		$	3,422	$	1,142		$	1,289		$	7,215		$	587		$	49,824
	Six Months Ended June 30, 2012
	(Dollars in thousands)
	Commercial and Industrial			Commercial Real Estate			Commercial Construction		Small Business			Residential Real Estate			Home Equity			Other Consumer			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	(4,722		)	(2,737		)	—		(306		)	(214		)	(2,141		)	(593		)	(10,713		)
Recoveries	313			—			—		98			—			31			314			756
Provision	4,285			599			144		(368		)	82			5,367			(9		)	10,100
Ending balance	$	11,558		$	21,376		$	2,220	$	1,320		$	2,981		$	7,854		$	1,094		$	48,403
Ending balance: Individually evaluated for impairment	$	278		$	445		$	—	$	140		$	1,209		$	30		$	178		$	2,280
Ending balance: Collectively evaluated for impairment	$	11,280		$	20,931		$	2,220	$	1,180		$	1,772		$	7,824		$	916		$	46,123

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. The home equity loan has a fixed rate and is billed equal payments comprised of principal and interest. The home equity line of credit has a variable rate and is billed in interest-only payments during the draw period. At the end of the draw period, the home equity line of credit is billed as a percentage of the principal balance plus all accrued interest. Borrower qualifications include favorable credit history combined with supportive income requirements and combined loan to value ratios within established policy guidelines.

Other Consumer—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:



		June 30, 2013
Category	Risk Rating	Commercial and Industrial		Commercial Real Estate		Commercial Construction		Small Business		Total
		(Dollars in thousands)
Pass	1 - 6	$	704,065	$	1,976,410	$	217,096	$	70,108	$	2,967,679
Potential weakness	7	17,088		74,143		6,955		3,036		101,222
Definite weakness-loss unlikely	8	20,410		98,818		7,668		4,106		131,002
Partial loss probable	9	780		1,462		—		33		2,275
Definite loss	10	—		—		—		—		—
Total		$	742,343	$	2,150,833	$	231,719	$	77,283	$	3,202,178



		December 31, 2012
Category	Risk Rating	Commercial and Industrial		Commercial Real Estate		Commercial Construction		Small Business		Total
		(Dollars in thousands)
Pass	1 - 6	$	647,984	$	1,928,148	$	177,693	$	71,231	$	2,825,056
Potential weakness	7	16,420		92,651		6,195		3,213		118,479
Definite weakness-loss unlikely	8	21,979		98,688		4,880		4,080		129,627
Partial loss probable	9	1,128		2,666		—		70		3,864
Definite loss	10	—		—		—		—		—
Total		$	687,511	$	2,122,153	$	188,768	$	78,594	$	3,077,026

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 and automated valuation services and broker opinions of value are used to supplement original value data for the residential and home equity portfolios, periodically. 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 accrual 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:



	June 30, 2013		December 31, 2012
Residential portfolio
FICO score (re-scored) (1)	739		727
LTV (re-valued) (2)	70.0	%	67.0	%
Home equity portfolio
FICO score (re-scored) (1)	763		763
LTV (re-valued) (2)	55.0	%	54.0	%


(1)	The average FICO scores for June 30, 2013 are based upon rescores available from May 2013 and actual score data for loans booked between June 1 and June 30, 2013. The average FICO scores for December 31, 2012 are based upon rescores available from November 2012 and actual score data for loans booked between December 1 and December 31, 2012.


(2)	The combined LTV ratios for June 30, 2013 are based upon updated automated valuations as of February 2013. The combined LTV ratios for December 31, 2012 are based upon updated automated valuations as of November 30, 2011. For home equity loans and lines in a subordinate lien, the LTV data represents a combined LTV, taking into account the senior lien data for loans and lines.

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:



	June 30, 2013		December 31, 2012
	(Dollars in thousands)
Commercial and industrial	$	3,009	$	2,666
Commercial real estate	8,526		6,574
Commercial construction	1,608		—
Small business	698		570
Residential real estate	12,496		11,472
Home equity (1)	10,024		7,311
Other consumer	134		121
Total nonaccrual loans (2)	$	36,495	$	28,714


(1)	Includes home equity loans which are currently performing but have been placed on nonaccrual as a result of delinquency with respect to the first position, which is held by another financial institution.


(2)	Included in these amounts were $9.8 million and $6.6 million of nonaccruing TDRs at June 30, 2013 and December 31, 2012, respectively.

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



	June 30, 2013
	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	15	$	1,481	13	$	1,821	22	$	2,407	50	$	5,709	$	736,634	$	742,343	$	—
Commercial real estate	51	5,454		10	9,581		27	6,529		88	21,564		2,129,269		2,150,833		—
Commercial construction	—	—		—	—		1	1,608		1	1,608		230,111		231,719		—
Small business	25	717		11	149		13	359		49	1,225		76,058		77,283		—
Residential real estate	15	3,359		4	1,768		38	6,982		57	12,109		501,442		513,551		—
Home equity	16	592		12	1,174		23	2,009		51	3,775		788,675		792,450		—
Other consumer	112	559		14	39		28	180		154	778		21,154		21,932		54
Total	234	$	12,162	64	$	14,532	152	$	20,074	450	$	46,768	$	4,483,343	$	4,530,111	$	54



	December 31, 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	14	$	1,305	7	$	336	23	$	1,875	44	$	3,516	$	683,995	$	687,511	$	—
Commercial real estate	19	5,028		8	2,316		31	6,054		58	13,398		2,108,755		2,122,153		—
Commercial construction	—	—		—	—		—	—		—	—		188,768		188,768		—
Small business	20	750		8	94		10	320		38	1,164		77,430		78,594		—
Residential real estate	17	3,053		7	1,848		40	7,501		64	12,402		600,479		612,881		—
Home equity	32	2,756		10	632		17	1,392		59	4,780		797,369		802,149		—
Other consumer	208	1,217		32	224		28	153		268	1,594		25,361		26,955		52
Total	310	$	14,109	72	$	5,450	149	$	17,295	531	$	36,854	$	4,482,157	$	4,519,011	$	52

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:



	June 30, 2013		December 31, 2012
	(Dollars in thousands)
TDRs on accrual status	$	38,898	$	46,764
TDRs on nonaccrual	9,777		6,554
Total TDRs	$	48,675	$	53,318
Amount of specific reserves included in the allowance for loan losses associated with TDRs:	$	2,796	$	3,049
Additional commitments to lend to a borrower who has been a party to a TDR:	$	1,921	$	1,847

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					Six Months Ended
	June 30, 2013					June 30, 2013
	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	2	$	282	$	282	2	$	282	$	282
Commercial real estate	1	664		664		2	1,063		1,063
Small business	1	$	18	$	18	5	282		282
Residential real estate	2	744		744		6	1,900		1,926
Home equity	1	29		29		3	194		194
Other consumer	—	—		—		2	11		11
Total	7	$	1,737	$	1,737	20	$	3,732	$	3,758



	Three Months Ended					Six Months Ended
	June 30, 2012					June 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	7	$	1,115	$	1,115	11	$	1,273	$	1,273
Commercial real estate	7	3,839		3,839		9	4,907		4,907
Small business	1	17		17		8	360		360
Residential real estate	1	261		261		2	378		378
Home equity	1	64		66		1	64		66
Other consumer	2	65		65		4	150		150
Total	19	$	5,361	$	5,363	35	$	7,132	$	7,134


(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 June 30				Six Months Ended June 30
	2013		2012		2013		2012
	(Dollars in thousands)				(Dollars in thousands)
Extended maturity	$	329	$	313	$	991	$	354
Adjusted interest rate	—		2,119		—		3,557
Combination rate & maturity	1,408		2,931		2,756		3,223
Court ordered concession	—		—		11		—
Total	$	1,737	$	5,363	$	3,758	$	7,134

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 June 30
	2013			2012
	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
	(Dollars in thousands)
Troubled debt restructurings that subsequently defaulted
Commercial & industrial	2	$	1,767	—	$	—
Commercial real estate	1	398		—	—
Small business	2	22		—	—
Total	5	$	2,187	—	$	—

	Six Months Ended June 30
	2013			2012
	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
	(Dollars in thousands)
Troubled debt restructurings that subsequently defaulted
Commercial & industrial	2	$	1,767	—	$	—
Commercial real estate	1	398		1	250
Small business	3	253		—	—
Other consumer	—	—		1	6
Total	6	$	2,418	2	$	256

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), residential loans, and home equity 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 estimated 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 for performance to determine when a charge-off is appropriate.

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:



	June 30, 2013
	Recorded Investment		Unpaid Principal Balance		Related Allowance
	(Dollars in thousands)
With no related allowance recorded
Commercial & industrial	$	6,780	$	8,577	$	—
Commercial real estate	18,252		18,928		—
Commercial construction	1,608		1,608		—
Small business	1,297		1,455		—
Residential real estate	2,221		2,330		—
Home equity	3,664		3,717		—
Other consumer	541		542		—
Subtotal	34,363		37,157		—
With an allowance recorded
Commercial & industrial	$	2,979	$	3,751	$	775
Commercial real estate	18,187		18,330		410
Commercial construction	—		—		—
Small business	742		778		153
Residential real estate	13,662		14,502		1,670
Home equity	405		457		52
Other consumer	1,043		1,069		92
Subtotal	37,018		38,887		3,152
Total	$	71,381	$	76,044	$	3,152



	December 31, 2012
	Recorded Investment		Unpaid Principal Balance		Related Allowance
	(Dollars in thousands)
With no related allowance recorded
Commercial & industrial	$	5,849	$	7,343	$	—
Commercial real estate	12,999		13,698		—
Commercial construction	—		—		—
Small business	1,085		1,147		—
Residential real estate	2,545		2,630		—
Home equity	4,119		4,166		—
Other consumer	700		705		—
Subtotal	27,297		29,689		—
With an allowance recorded
Commercial & industrial	$	2,726	$	2,851	$	1,084
Commercial real estate	20,869		21,438		516
Commercial construction	—		—		—
Small business	1,194		1,228		353
Residential real estate	12,828		13,601		1,302
Home equity	316		389		35
Other consumer	1,429		1,453		130
Subtotal	39,362		40,960		3,420
Total	$	66,659	$	70,649	$	3,420

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



	Three Months Ended				Six Months Ended
	June 30, 2013				June 30, 2013
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(Dollars in thousands)
With no related allowance recorded
Commercial & industrial	$	8,396	$	114	$	8,836	$	230
Commercial real estate	18,392		312		18,448		628
Commercial construction	1,608		13		1,608		26
Small business	1,393		22		1,454		46
Residential real estate	2,236		25		2,253		44
Home equity	3,674		43		3,691		85
Other consumer	560		10		585		23
Subtotal	36,259		539		36,875		1,082
With an allowance recorded
Commercial & industrial	$	3,076	$	43	$	3,221	$	89
Commercial real estate	18,242		263		18,235		526
Commercial construction	—		—		—		—
Small business	748		12		760		23
Residential real estate	13,688		127		13,732		255
Home equity	407		5		410		10
Other consumer	1,074		10		1,113		20
Subtotal	37,235		460		37,471		923
Total	$	73,494	$	999	$	74,346	$	2,005



	Three Months Ended				Six Months Ended
	June 30, 2012				June 30, 2012
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(Dollars in thousands)
With no related allowance recorded
Commercial & industrial	$	6,401	$	85	$	6,490	$	172
Commercial real estate	20,214		350		20,407		707
Commercial construction	—		—		—		—
Small business	1,474		25		1,517		52
Residential real estate	—		—		—		—
Home equity	100		2		100		3
Other consumer	72		1		56		1
Subtotal	28,261		463		28,570		935
With an allowance recorded
Commercial & industrial	$	1,343	$	28	$	1,398	$	60
Commercial real estate	15,685		229		16,432		473
Commercial construction	—		—		—		—
Small business	1,043		16		1,082		32
Residential real estate	12,958		157		13,053		296
Home equity	240		4		241		8
Other consumer	1,781		16		1,822		34
Subtotal	33,050		450		34,028		903
Total	$	61,311	$	913	$	62,598	$	1,838

Certain loans acquired by the Company may have shown evidence of deterioration of credit quality since origination and it was therefore deemed unlikely that the Bank would be able to collect all contractually required payments. As such, these loans were deemed to be Purchase Credit Impaired (“PCI”) loans and the carrying value and prospective income recognition are predicated upon future cash flows expected to be collected. The following table displays certain information pertaining to purchased credit impaired loans at the dated indicated:



	June 30, 2013		December 31, 2012
	(Dollars in thousands)
Outstanding balance	$	30,705	$	36,278
Carrying amount	$	27,675	$	32,054

The following table summarizes activity in the accretable yield for the PCI loan portfolio:



	(Dollars in thousands)
Balance at January 1, 2012	$	—
Acquisition	3,095
Accretion	(903		)
Reclassification from nonaccretable difference for loans with improved cash flows (1)	272
Balance at December 31, 2012	2,464

Balance at January 1, 2013	$	2,464
Accretion	(1,142		)
Other change in expected cash flows (2)	439
Reclassification from nonaccretable difference for loans with improved cash flows (1)	335
Balance at June 30, 2013	$	2,096

(1) Results in increased interest income during the period in which the loan paid off.

(2) Represents changes in cash flows expected to be collected and resulting in increased interest income as a prospective yield adjustment over the remaining life of the loan(s).