Loans

6 Months Ended

Jun. 30, 2012

Loans

Loans

4) Loans

        Loans were as follows:

	June 30, 2012			December 31, 2011
	(Dollars in thousands)
Loans held-for-investment:
Commercial	$	384,260		$	366,590
Real estate:
Commercial and residential		333,048			311,479
Land and construction		19,822			23,016
Home equity		47,813			52,017
Consumer		13,024			11,166
Loans		797,967			764,268
Deferred loan origination costs and fees, net		139			323
Loans, including deferred costs		798,106			764,591
Allowance for loan losses		(20,023	)		(20,700	)
Loans, net	$	778,083		$	743,891

        Changes in the allowance for loan losses were as follows:

	Three Months Ended June 30, 2012
	Commercial			Real Estate			Consumer			Total
	(Dollars in thousands)
Balance, beginning of period	$	13,734		$	6,409		$	163		$	20,306
Charge-offs		(1,280	)		(101	)		—			(1,381	)
Recoveries		60			223			—			283
Net (charge-offs)/recoveries		(1,220	)		122			—			(1,098	)
Provision/(credit) for loan losses		864			8			(57	)		815
Balance, end of period	$	13,378		$	6,539		$	106		$	20,023

	Three Months Ended June 30, 2011
	Commercial			Real Estate			Consumer			Total
	(Dollars in thousands)
Balance, beginning of period	$	13,594		$	9,539		$	876		$	24,009
Charge-offs		(1,681	)		(601	)		(8	)		(2,290	)
Recoveries		91			401			1			493
Net (charge-offs)/recoveries		(1,590	)		(200	)		(7	)		(1,797	)
Provision/(credit) for loan losses		1,988			(1,177	)		144			955
Balance, end of period	$	13,992		$	8,162		$	1,013		$	23,167

	Six Months Ended June 30, 2012
	Commercial			Real Estate			Consumer			Total
	(Dollars in thousands)
Balance, beginning of period	$	13,215		$	7,338		$	147		$	20,700
Charge-offs		(2,190	)		(146	)		—			(2,336	)
Recoveries		521			223			—			744
Net (charge-offs)/recoveries		(1,669	)		77			—			(1,592	)
Provision/(credit) for loan losses		1,832			(876	)		(41	)		915
Balance, end of period	$	13,378		$	6,539		$	106		$	20,023

	Six Months Ended June 30, 2011
	Commercial			Real Estate			Consumer			Total
	(Dollars in thousands)
Balance, beginning of period	$	13,952		$	10,363		$	889		$	25,204
Charge-offs		(2,800	)		(1,596	)		(8	)		(4,404	)
Recoveries		230			411			1			642
Net (charge-offs)/recoveries		(2,570	)		(1,185	)		(7	)		(3,762	)
Provision/(credit) for loan losses		2,610			(1,016	)		131			1,725
Balance, end of period	$	13,992		$	8,162		$	1,013		$	23,167

        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 June 30, 2012 and December 31, 2011:

	June 30, 2012
	Commercial		Real Estate		Consumer		Total
	(Dollars in thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	1,944	$	82	$	18	$	2,044
Collectively evaluated for impairment		11,434		6,457		88		17,979
Total ending allowance balance	$	13,378	$	6,539	$	106	$	20,023
Loans:
Individually evaluated for impairment	$	11,121	$	3,690	$	160	$	14,971
Collectively evaluated for impairment		373,139		396,993		12,864		782,996
Total ending loan balance	$	384,260	$	400,683	$	13,024	$	797,967

	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 ending 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 ending 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 June 30, 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.

	June 30, 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	$	7,421	$	6,470	$	—	$	7,644	$	5,972	$	—
Real estate:
Commercial and residential		1,092		1,092		—		2,916		2,057		—
Land and construction		2,197		2,197		—		3,491		3,039		—
Consumer		—		—		—		—		—		—
Total with no related allowance recorded		10,710		9,759		—		14,051		11,068		—
With an allowance recorded:
Commercial		4,651		4,651		1,944		6,526		5,982		2,249
Real estate:
Commercial and residential		3		3		1		80		80		44
Land and construction		—		—		—		817		740		32
Home Equity		398		398		81		32		32		—
Consumer		160		160		18		12		12		2
Total with an allowance recorded		5,212		5,212		2,044		7,467		6,846		2,327
Total	$	15,922	$	14,971	$	2,044	$	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 June 30, 2012
			Real Estate
	Commercial		Commercial and Residential		Land and Construction		Home Equity		Consumer		Total
	(Dollars in thousands)
Average of impaired loans during the period	$	11,034	$	2,252	$	2,210	$	199	$	86	$	15,781
Interest income during impairment	$	—	$	—	$	—	$	—	$	—	$	—
Cash-basis interest earned	$	—	$	—	$	—	$	—	$	—	$	—

	Three Months Ended June 30, 2011
			Real Estate
	Commercial		Commercial and Residential		Land and Construction		Home Equity		Consumer		Total
	(Dollars in thousands)
Average of impaired loans during the period	$	13,146	$	2,780	$	7,306	$	141	$	938	$	24,311
Interest income during impairment	$	—	$	—	$	—	$	—	$	—	$	—
Cash-basis interest earned	$	—	$	—	$	—	$	—	$	—	$	—

	Six Months Ended June 30, 2012
			Real Estate
	Commercial		Commercial and Residential		Land and Construction		Home Equity		Consumer		Total
	(Dollars in thousands)
Average of impaired loans during the period	$	11,341	$	2,214	$	2,733	$	143	$	61	$	16,492
Interest income during impairment	$	—	$	1	$	14	$	—	$	—	$	15
Cash-basis interest earned	$	—	$	1	$	14	$	—	$	—	$	15

	Six Months Ended June 30, 2011
			Real Estate
	Commercial		Commercial and Residential		Land and Construction		Home Equity		Consumer		Total
	(Dollars in thousands)
Average of impaired loans during the period	$	13,555	$	4,248	$	7,823	$	94	$	925	$	26,645
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:

	June 30,
					December 31, 2011
	2012		2011
	(Dollars in thousands)
Nonaccrual loans—held-for-sale	$	177	$	202	$	186
Nonaccrual loans—held-for-investment		12,890		21,607		14,353
Restructured and loans over 90 days past due and still accruing		1,665		1,073		2,291
Total nonperforming loans	$	14,732	$	22,882	$	16,830
Other restructured loans	$	416	$	1,375	$	1,270
Impaired loans, excluding loans held-for-sale	$	14,971	$	24,055	$	17,914

        The following table presents the nonperforming loans by class as of June 30, 2012 and December 31, 2011:

	June 30, 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	$	9,040	$	1,665	$	10,705	$	8,876	$	1,803	$	10,679
Real estate:
Commercial and residential		1,104		—		1,104		2,137		—		2,137
Land and construction		2,365		—		2,365		3,514		456		3,970
Home equity		398		—		398		—		32		32
Consumer		160		—		160		12		—		12
Total	$	13,067	$	1,665	$	14,732	$	14,539	$	2,291	$	16,830

        The following table presents the aging of past due loans as of June 30, 2012 by class of loans:

	June 30, 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	$	1,718	$	2,794	$	2,189	$	6,701	$	377,559	$	384,260
Real estate:
Commercial and residential		1,164		1,369		101		2,634		330,414		333,048
Land and construction		2,472		—		—		2,472		17,350		19,822
Home equity		—		—		—		—		47,813		47,813
Consumer		—		—		—		—		13,024		13,024
Total	$	5,354	$	4,163	$	2,290	$	11,807	$	786,160	$	797,967

        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 $11,807,000 and $10,511,000 at June 30, 2012 and December 31, 2011, respectively, of which $5,353,000 and $6,312,000 were on nonaccrual. At June 30, 2012, there were also $7,537,000 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 June 30, 2012 and December 31, 2011:

	June 30, 2012						December 31, 2011
	Nonclassified		Classified		Total		Nonclassified		Classified		Total
	(Dollars in thousands)
Commercial	$	353,651	$	30,609	$	384,260	$	333,506	$	33,084	$	366,590
Real estate:
Commercial and residential		317,845		15,203		333,048		294,653		16,826		311,479
Land and construction		13,832		5,990		19,822		15,343		7,673		23,016
Home equity		47,168		645		47,813		51,368		649		52,017
Consumer		12,635		389		13,024		10,853		313		11,166
Total	$	745,131	$	52,836	$	797,967	$	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 and six months ended June 30, 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 recorded investment of troubled debt restructurings at June 30, 2012 was $5,240,000, which included $3,163,000 of nonaccrual loans and $2,077,000 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 $849,000 and $574,000 in specific reserves were established with respect to these loans as of June 30, 2012 and December 31, 2011, respectively. As of June 30, 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 June 30, 2012:

	During the Three Months Ended June 30, 2012
Troubled Debt Restructurings:	Number of Contracts		Pre-modification Outstanding Recorded Investment		Post-modification Outstanding Recorded Investment
	(Dollars in thousands)
Consumer		1	$	117	$	117

        The troubled debt restructurings described above increased the allowance for loan losses by $13,000 through the allocation of specific reserves, and resulted in no net charge-offs during the three months period ended June 30, 2012.

        The following table presents loans by class modified as troubled debt restructurings during the six month period ended June 30, 2012:

	During the Six Months Ended June 30, 2012
Troubled Debt Restructurings:	Number of Contracts		Pre-modification Outstanding Recorded Investment		Post-modification Outstanding Recorded Investment
	(Dollars in thousands)
Commercial		1	$	112	$	112
Consumer		1		117		117
Total		2	$	229	$	229

        The troubled debt restructurings described above increased the allowance for loan losses by $44,000 through the allocation of specific reserves, and resulted in no net charge-offs during the six months period ended June 30, 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 month and six month periods ended June 30, 2012.