Loans

3 Months Ended

Mar. 31, 2012

Loans

Loans

4) Loans

        Loans were as follows:

	March 31, 2012			December 31, 2011
	(Dollars in thousands)
Loans held-for-sale:
Loans held-for-sale—SBA	$	4,778		$	753
Loans held-for-sale—other		184			413
Total loans held-for-sale	$	4,962		$	1,166
Loans held-for-investment:
Commercial	$	357,906		$	366,590
Real estate:
Commercial and residential		319,914			311,479
Land and construction		18,583			23,016
Home equity		48,444			52,017
Consumer		11,810			11,166
Loans		756,657			764,268
Deferred loan origination costs and fees, net		237			323
Loans, including deferred costs		756,894			764,591
Allowance for loan losses		(20,306	)		(20,700	)
Loans, net	$	736,588		$	743,891

        Changes in the allowance for loan losses were as follows:

	Three Months Ended March 31, 2012
	Commercial			Real Estate			Consumer		Total
	(Dollars in thousands)
Balance, beginning of period	$	13,215		$	7,338		$	147	$	20,700
Charge-offs		(910	)		(45	)		—		(955	)
Recoveries		461			—			—		461
Net charge-offs		(449	)		(45	)		—		(494	)
Provision/(credit) for loan losses		968			(884	)		16		100
Balance, end of period	$	13,734		$	6,409		$	163	$	20,306

	Three Months Ended March 31, 2011
	Commercial			Real Estate			Consumer			Total
	(Dollars in thousands)
Balance, beginning of period	$	13,952		$	10,363		$	889		$	25,204
Charge-offs		(1,119	)		(995	)		—			(2,114	)
Recoveries		139			10			—			149
Net charge-offs		(980	)		(985	)		—			(1,965	)
Provision/(credit) for loan losses		622			161			(13	)		770
Balance, end of period	$	13,594		$	9,539		$	876		$	24,009

        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 March 31, 2012 and December 31, 2011:

	March 31, 2012
	Commercial		Real Estate		Consumer		Total
	(Dollars in thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	2,641	$	201	$	2	$	2,844
Collectively evaluated for impairment		11,093		6,208		161		17,462
Total allowance balance	$	13,734	$	6,409	$	163	$	20,306
Loans:
Individually evaluated for impairment	$	10,947	$	5,633	$	11	$	16,591
Collectively evaluated for impairment		346,959		381,308		11,799		740,066
Total loan balance	$	357,906	$	386,941	$	11,810	$	756,657

	December 31, 2011
	Commercial		Real Estate		Consumer		Total
	(Dollars in thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	2,249	$	76	$	2	$	2,327
Collectively evaluated for impairment		10,966		7,262		145		18,373
Total allowance balance	$	13,215	$	7,338	$	147	$	20,700
Loans:
Individually evaluated for impairment	$	11,954	$	5,948	$	12	$	17,914
Collectively evaluated for impairment		354,636		380,564		11,154		746,354
Total loan balance	$	366,590	$	386,512	$	11,166	$	764,268

        The following table presents loans held-for-investment individually evaluated for impairment by class of loans as of March 31, 2012 and December 31, 2011. 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.

	March 31, 2012						December 31, 2011
	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	$	4,730	$	4,651	$	—	$	7,644	$	5,972	$	—
Real estate:
Commercial and residential		1,134		1,134		—		2,916		2,057		—
Land and construction		2,224		2,224		—		3,491		3,039		—
Total with no related allowance recorded		8,088		8,009		—		14,051		11,068		—
With an allowance recorded:
Commercial		6,307		6,296		2,641		6,526		5,982		2,249
Real estate:
Commercial and residential		2,275		2,275		201		80		80		44
Land and construction		—		—		—		817		740		32
Home Equity		—		—		—		32		32		—
Consumer		11		11		2		12		12		2
Total with an allowance recorded		8,593		8,582		2,844		7,467		6,846		2,327
Total	$	16,681	$	16,591	$	2,844	$	21,518	$	17,914	$	2,327

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

	Three Months Ended March 31, 2012
			Real Estate
	Commercial		Commercial and Residential		Land and Construction		Home Equity		Consumer		Total
	(Dollars in thousands)
Average of impaired loans during the period	$	11,450	$	2,773	$	3,002	$	16	$	11	$	17,252
Interest income during impairment	$	—	$	1	$	14	$	—	$	—	$	15
Cash-basis interest earned	$	—	$	1	$	14	$	—	$	—	$	15

	Three Months Ended March 31, 2011
			Real Estate
	Commercial		Commercial and Residential		Land and Construction		Home Equity		Consumer		Total
	(Dollars in thousands)
Average of impaired loans during the period	$	13,814	$	5,076	$	8,015	$	141	$	895	$	27,941
Interest income during impairment	$	1	$	—	$	—	$	1	$	—	$	2
Cash-basis interest earned	$	1	$	—	$	—	$	—	$	—	$	1

        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:

	March 31,
					December 31, 2011
	2012		2011
	(Dollars in thousands)
Nonaccrual loans—held-for-sale	$	184	$	1,989	$	186
Nonaccrual loans—held-for-investment		14,005		22,896		14,353
Restructured and loans over 90 days past due and still accruing		2,155		282		2,291
Total	$	16,344	$	25,167	$	16,830
Other restructured loans	$	431	$	1,389	$	1,270
Impaired loans, excluding loans held-for-sale	$	16,591	$	24,567	$	17,914

        The following table presents the nonperforming loans by class as of March 31, 2012 and December 31, 2011:

	March 31, 2012						December 31, 2011
	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	$	8,360	$	2,155	$	10,515	$	8,876	$	1,803	$	10,679
Real estate:
Commercial and residential		3,412		—		3,412		2,137		—		2,137
Land and construction		2,406		—		2,406		3,514		456		3,970
Home equity		—		—		—		—		32		32
Consumer		11		—		11		12		—		12
Total	$	14,189	$	2,155	$	16,344	$	14,539	$	2,291	$	16,830

        The following table presents the aging of past due loans as of March 31, 2012 by class of loans:

	March 31, 2012
	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	$	2,987	$	1,226	$	4,199	$	8,412	$	349,494	$	357,906
Real estate:
Commercial and residential		854		1,455		—		2,309		317,605		319,914
Land and construction		—		—		—		—		18,583		18,583
Home equity		—		—		—		—		48,444		48,444
Consumer		—		—		—		—		11,810		11,810
Total	$	3,841	$	2,681	$	4,199	$	10,721	$	745,936	$	756,657

        The following table presents the aging of past due loans as of December 31, 2011 by class of loans:

	December 31, 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	$	1,999	$	508	$	3,394	$	5,901	$	360,689	$	366,590
Real estate:
Commercial and residential		2,293		—		—		2,293		309,186		311,479
Land and construction		—		—		1,532		1,532		21,484		23,016
Home equity		753		—		32		785		51,232		52,017
Consumer		—		—		—		—		11,166		11,166
Total	$	5,045	$	508	$	4,958	$	10,511	$	753,757	$	764,268

        Past due loans 30 days or greater totaled $10,721,000 and $10,511,000 at March 31, 2012 and December 31, 2011, respectively, of which $6,576,000 and $6,312,000, respectively, were on nonaccrual. At March 31, 2012, there were also $7,428,000 loans less than 30 days past due included in nonaccrual loans held-for-investment. At December 31, 2011, there were also $8,041,000 loans less than 30 days past due included in nonaccrual loans held-for-investment. 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 March 31, 2012 and December 31, 2011:

	March 31, 2012						December 31, 2011
	Nonclassified		Classified		Total		Nonclassified		Classified		Total
	(Dollars in thousands)
Commercial	$	328,099	$	29,807	$	357,906	$	333,506	$	33,084	$	366,590
Real estate:
Commercial and residential		304,243		15,671		319,914		294,653		16,826		311,479
Land and construction		12,508		6,075		18,583		15,343		7,673		23,016
Home equity		47,795		649		48,444		51,368		649		52,017
Consumer		11,405		405		11,810		10,853		313		11,166
Total	$	704,050	$	52,607	$	756,657	$	705,723	$	58,545	$	764,268

        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 ended March 31, 2012, 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; or an extension of maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk.

        The book balance of troubled debt restructurings at March 31, 2012 was $7,442,000, which included $4,856,000 of nonaccrual loans and $2,586,000 of accruing loans. The book balance of troubled debt restructurings at December 31, 2011 was $7,396,000, which included $4,323,000 of nonaccrual loans and $3,073,000 of accruing loans. Approximately $1,429,000 and $574,000 in specific reserves were established with respect to these loans as of March 31, 2012 and December 31, 2011, respectively. As of March 31, 2012 and December 31, 2011, 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 March 31, 2012:

	During the Three Months Ended March 31, 2012
Troubled Debt Restructurings:	Number of Contracts		Pre-modification Outstanding Recorded Investment		Post-modification Outstanding Recorded Investment
	(Dollars in thousands)
Commercial		2	$	412	$	412
Total		2	$	412	$	412

        The troubled debt restructurings described above increased the allowance for loan losses by $27,000 through the allocation of specific reserves, and resulted in no net charge-offs during the three month period ended March 31, 2012.

        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 months ended March 31, 2012.