Loans

9 Months Ended

Sep. 30, 2011

Loans

Loans

4) Loans

        Loans were as follows:

			September 30, 2011			December 31, 2010
			(Dollars in thousands)
Loans held-for-sale:
	Loans held-for-sale—SBA		$	3,391		$	8,750
	Loans held-for-sale—other			421			2,260
		Total loans held-for-sale	$	3,812		$	11,010
Loans held-for-investment:
	Commercial		$	365,532		$	378,412
	Real estate:
		Commercial and residential		310,722			337,457
		Land and construction		36,357			62,356
		Home equity		51,668			53,697
	Consumer			11,829			13,244
		Loans		776,108			845,166
Deferred loan origination costs and fees, net				576			883
	Loans, including deferred costs			776,684			846,049
Allowance for loan losses				(21,049	)		(25,204	)
	Loans, net		$	755,635		$	820,845

        Prior to February 15, 2011, SBA loans that were sold were subject to a warranty for a period of 90 days. In accordance with generally accepted accounting principles, the Company treated sold SBA loans as secured borrowings during the warranty period. The secured borrowings were classified as "short-term borrowings" on the unaudited consolidated balance sheets. At December 31, 2010, the balance of loans held-for-sale included $2,445,000 of SBA loans that were transferred to third parties, with associated deferred gains of $192,000, which are included in other liabilities on the consolidated balance sheets. Effective February 15, 2011, the SBA no longer required a warranty period in loan sales agreements. Therefore, gains on loan sales completed after February 15, 2011 are recognized upon completion of the transaction, thus there are no short-term borrowings or deferred gains associated with the SBA loans held-for-sale at September 30, 2011.

        Changes in the allowance for loan losses were as follows:

														Three Months Ended September 30, 2010 Total
		Three Months Ended September 30, 2011
		Commercial			Real Estate			Consumer			Total
		(Dollars in thousands)
Balance, beginning of period		$	13,992		$	8,162		$	1,013		$	23,167		$	26,753
Charge-offs			(3,042	)		(901	)		—			(3,943	)		(3,963	)
Recoveries			283			25			2			310			442
	Net (charge-offs)/recoveries		(2,759	)		(876	)		2			(3,633	)		(3,521	)
Provision/(credit) for loan losses			1,809			554			(848	)		1,515			2,058
	Balance, end of period	$	13,042		$	7,840		$	167		$	21,049		$	25,290

														Nine Months Ended September 30, 2010 Total
		Nine Months Ended September 30, 2011
		Commercial			Real Estate			Consumer			Total
		(Dollars in thousands)
Balance, beginning of period		$	13,952		$	10,363		$	889		$	25,204		$	28,768
Charge-offs			(5,841	)		(2,497	)		(8	)		(8,346	)		(30,347	)
Recoveries			513			436			3			952			1,115
	Net charge-offs		(5,328	)		(2,061	)		(5	)		(7,394	)		(29,232	)
Provision for loan losses			4,418			(462	)		(717	)		3,239			25,754
	Balance, end of period	$	13,042		$	7,840		$	167		$	21,049		$	25,290

        The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment, based on the impairment method as of September 30, 2011 and December 31, 2010:

				September 30, 2011
				Commercial		Real Estate		Consumer		Total
				(Dollars in thousands)
Allowance for loan losses:
	Ending allowance balance attributable to loans:
		Individually evaluated for impairment		$	2,384	$	623	$	46	$	3,053
		Collectively evaluated for impairment			10,658		7,217		121		17,996
			Total ending allowance balance	$	13,042	$	7,840	$	167	$	21,049
	Loans:
		Individually evaluated for impairment		$	10,442	$	8,016	$	617	$	19,075
		Collectively evaluated for impairment			355,090		390,731		11,212		757,033
			Total ending loan balance	$	365,532	$	398,747	$	11,829	$	776,108

				December 31, 2010
				Commercial		Real Estate		Consumer		Total
				(Dollars in thousands)
Allowance for loan losses:
	Ending allowance balance attributable to loans:
		Individually evaluated for impairment		$	3,427	$	1,855	$	778	$	6,060
		Collectively evaluated for impairment			10,525		8,508		111		19,144
			Total ending allowance balance	$	13,952	$	10,363	$	889	$	25,204
	Loans:
		Individually evaluated for impairment		$	14,374	$	16,041	$	898	$	31,313
		Collectively evaluated for impairment			364,038		437,469		12,346		813,853
			Total ending loan balance	$	378,412	$	453,510	$	13,244	$	845,166

        The following table presents loans held-for-investment individually evaluated for impairment by class of loans as of September 30, 2011 and December 31, 2010. The recorded investment included in the following table represents loan principal net of any partial charge-offs recognized on the loans. The unpaid principal balance represents the recorded balance prior to any partial charge-offs.

			September 30, 2011						December 31, 2010
			Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
			(Dollars in thousands)
With no related allowance recorded:
	Commercial		$	4,270	$	3,580	$	—	$	5,557	$	5,125	$	—
	Real estate:
		Commercial and residential		1,297		1,297		—		4,392		2,431		—
		Land and construction		4,962		4,434		—		6,138		3,429		—
	Consumer			161		161		—		—		—		—
		Total with no related allowance recorded		10,690		9,472		—		16,087		10,985		—
With an allowance recorded:
	Commercial			7,361		6,862		2,384		9,695		9,249		3,427
	Real estate:
		Commercial and residential		85		85		14		4,753		4,753		1,002
		Land and construction		3,429		2,200		609		6,862		5,428		853
		Home Equity		—		—		—		—		—		—
	Consumer			456		456		46		898		898		778
		Total with an allowance recorded		11,331		9,603		3,053		22,208		20,328		6,060
		Total	$	22,021	$	19,075	$	3,053	$	38,295	$	31,313	$	6,060

        The following table presents interest recognized and cash-basis interest earned on impaired loans for the periods indicated:

	Three Months Ended September 30, 2011
			Real Estate										Three Months Ended September 30, 2010 Total
	Commercial		Commercial and Residential		Land and Construction		Home Equity		Consumer		Total
	(Dollars in thousands)
Average of impaired loans during the period	$	11,740	$	1,297	$	4,411	$	3,317	$	800	$	21,565	$	47,111
Interest income during impairment	$	—	$	—	$	—	$	—	$	2	$	2	$	1
Cash-basis interest earned	$	—	$	—	$	—	$	—	$	—	$	—	$	—

	Nine Months Ended September 30, 2011
			Real Estate										Nine Months Ended September 30, 2010 Total
	Commercial		Commercial and Residential		Land and Construction		Home Equity		Consumer		Total
	(Dollars in thousands)
Average of impaired loans during the period	$	12,777	$	3,186	$	6,213	$	1,729	$	848	$	24,753	$	55,950
Interest income during impairment	$	2	$	—	$	—	$	1	$	2	$	5	$	41
Cash-basis interest earned	$	—	$	—	$	—	$	1	$	—	$	1	$	27

        Nonperforming loans include both smaller dollar balance homogenous loans that are collectively evaluated for impairment and individually classified loans. Nonperforming loans were as follows at period-end:

		September 30,
						December 31, 2010
		2011		2010
		(Dollars in thousands)
Nonaccrual loans—held-for-sale		$	191	$	4,552	$	2,026
Nonaccrual loans—held-for-investment			16,419		41,757		28,821
Restructured and loans over 90 days past due and still accruing			2,656		2,687		2,492
	Total	$	19,266	$	48,996	$	33,339

        The following table presents the nonperforming loans by class as of September 30, 2011 and December 31, 2010:

		September 30, 2011						December 31, 2010
		Nonaccrual		Restructured and Loans Over 90 Days Past Due and Still Accruing		Total		Nonaccrual		Restructured and Loans Over 90 Days Past Due and Still Accruing		Total
		(Dollars in thousands)
Commercial		$	8,487	$	2,206	$	10,693	$	13,545	$	829	$	14,374
Real estate:
	Commercial and residential		1,285		—		1,285		6,450		1,663		8,113
	Land and construction		6,831		—		6,831		9,954		—		9,954
	Home equity		—		—		—		—		—		—
Consumer			7		450		457		898		—		898
	Total	$	16,610	$	2,656	$	19,266	$	30,847	$	2,492	$	33,339

        The following table presents the aging of past due loans as of September 30, 2011 by class of loans:

		September 30, 2011
		30 - 59 Days Past Due		60 - 89 Days Past Due		90 Days or Greater Past Due		Total Past Due		Loans Not Past Due		Total
		(Dollars in thousands)
Commercial		$	1,976	$	2,950	$	4,126	$	9,052	$	356,480	$	365,532
Real estate:
	Commercial and residential		1,065		—		—		1,065		309,657		310,722
	Land and construction		—		—		5,761		5,761		30,596		36,357
	Home equity		400		—		—		400		51,268		51,668
Consumer			—		—		456		456		11,373		11,829
	Total	$	3,441	$	2,950	$	10,343	$	16,734	$	759,374	$	776,108

        The following table presents the aging of past due loans as of December 31, 2010 by class of loans:

		December 31, 2010
		30 - 59 Days Past Due		60 - 89 Days Past Due		90 Days or Greater Past Due		Total Past Due		Loans Not Past Due		Total
		(Dollars in thousands)
Commercial		$	3,176	$	807	$	14,374	$	18,357	$	360,055	$	378,412
Real estate:
	Commercial and residential		1,078		1,595		7,184		9,857		327,600		337,457
	Land and construction		—		—		8,857		8,857		53,499		62,356
	Home equity		80		—		—		80		53,617		53,697
Consumer			—		—		898		898		12,346		13,244
	Total	$	4,334	$	2,402	$	31,313	$	38,049	$	807,117	$	845,166

        Past due loans 30 days or greater totaled $16,734,000 and $38,049,000 at September 30, 2011 and December 31, 2010, respectively, of which $10,045,000 and $28,821,000 were on nonaccrual. At September 30, 2011, there were also $6,374,000 loans less than 30 days past due included in nonaccrual loans held-for-investment. There were no current loans included in nonaccrual loans held-for-investment at December 31, 2010. Management's classification of a loan as "nonaccrual" is an indication that there is reasonable doubt as to the full recovery of principal or interest on the loan. At that point, the Company stops accruing interest income, and reverses any uncollected interest that had been accrued as income. The Company begins recognizing interest income only as cash interest payments are received and it has been determined the collection of all outstanding principal is not in doubt. The loans may or may not be collateralized, and collection efforts are pursued.

Credit Quality Indicators

        Concentrations of credit risk arise when a number of clients are engaged in similar business activities, or activities in the same geographic region, or have similar features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic conditions. The Company's loan portfolio is concentrated in commercial (primarily manufacturing, wholesale, and service) and real estate lending, with the balance in consumer loans. While no specific industry concentration is considered significant, the Company's lending operations are located in the Company's market areas that are dependent on the technology and real estate industries and their supporting companies. Thus, the Company's borrowers could be adversely impacted by a continued downturn in these sectors of the economy which could reduce the demand for loans and adversely impact the borrowers' ability to repay their loans.

        The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis is performed on a quarterly basis. Nonclassified loans generally include those loans that are expected to be repaid in accordance with contractual loans terms. Classified loans are those loans that are assigned a substandard, substandard-nonaccrual, or doubtful risk rating using the following definitions:

        Substandard.    Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

        Substandard-Nonaccrual.    Loans classified as substandard-nonaccrual are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. In addition, the Company no longer accrues interest on the loan because of the underlying weaknesses.

        Doubtful.    Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

        The following table provides a summary of the loan portfolio by loan type and credit quality classification at September 30, 2011 and December 31, 2010:

		September 30, 2011						December 31, 2010
		Nonclassified		Classified		Total		Nonclassified		Classified		Total
		(Dollars in thousands)
Commercial		$	336,855	$	28,677	$	365,532	$	340,319	$	38,093	$	378,412
Real estate:
	Commercial and residential		291,686		19,036		310,722		320,867		16,590		337,457
	Land and construction		14,165		22,192		36,357		32,664		29,692		62,356
	Home equity		51,019		649		51,668		50,757		2,940		53,697
Consumer			11,647		182		11,829		12,346		898		13,244
	Total	$	705,372	$	70,736	$	776,108	$	756,953	$	88,213	$	845,166

        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 underwriting policy.

        During the three months and nine months ended September 30, 2011, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or more combination of the following: a reduction of the stated interest rate of the loan; an extension of maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan.

        As a result of adopting the amended guidance in determining whether a restructuring is a troubled debt restructuring, the Company reassessed all restructurings that occurred on or after January 1, 2011 for identification as troubled debt restructurings. The Company did not identify any loans as troubled debt restructurings for which the allowance for loan losses had previously been measured under a general allowance for loan losses methodology.

        The book balance of troubled debt restructurings at September 30, 2011 was $5,651,000, which included $3,445,000 of nonaccrual loans and $2,206,000 of accruing loans. The book balance of troubled debt restructurings at December 31, 2010 was $7,924,000, which included $5,432,000 of nonaccrual loans and $2,492,000 of accruing loans. Approximately $301,000 and $1,134,000 in specific reserves were established with respect to these loans as of September 30, 2011 and December 31, 2010. As of September 30, 2011 and December 31, 2010, the Company had no additional amounts committed on any loan classified as a troubled debt restructuring.

        The following table presents loans by class modified as troubled debt restructurings during the three month period ended September 30, 2011:

	During the Three Months Ended September 30, 2011
Troubled Debt Restructurings:	Number of Contracts		Pre-modification Outstanding Recorded Investment		Post-modification Outstanding Recorded Investment
	(Dollars in thousands)
Commercial		6	$	1,557	$	1,370

        The troubled debt restructurings described above increased the allowance for loan losses by $144,000 through the allocation of specific reserves, and resulted in net charge-offs of $174,000 during the three month period ended September 30, 2011.

        The following table presents loans by class modified as troubled debt restructurings during the nine month period ended September 30, 2011:

	During the Nine Months Ended September 30, 2011
Troubled Debt Restructurings:	Number of Contracts		Pre-modification Outstanding Recorded Investment		Post-modification Outstanding Recorded Investment
	(Dollars in thousands)
Commercial		7	$	2,249	$	2,057

        The troubled debt restructurings described above increased the allowance for loan losses by $158,000 through the allocation of specific reserves, and resulted in net charge-offs of $174,000 during the nine months period ended September 30, 2011.

        A loan is considered to be in payment default when it is 30 days contractually past due under the modified terms. There were no defaults on troubled debt restructurings, within twelve months following the modification, during the three month and nine month periods ended September 30, 2011.