Loans

3 Months Ended

Mar. 31, 2013

Loans

Loans

5) Loans

        Loans were as follows:

	March 31, 2013			December 31, 2012
	(Dollars in thousands)
Loans held-for-investment:
Commercial	$	356,688		$	375,469
Real estate:
Commercial and residential		361,340			354,934
Land and construction		24,611			22,352
Home equity		45,347			43,865
Consumer		14,036			15,714
Loans		802,022			812,334
Deferred loan origination (fees) costs, net		(97	)		(21	)
Loans, including deferred fees and costs		801,925			812,313
Allowance for loan losses		(19,342	)		(19,027	)
Loans, net	$	782,583		$	793,286

        Changes in the allowance for loan losses were as follows for the periods indicated:

	Three Months Ended March 31, 2013
	Commercial			Real Estate		Consumer			Total
	(Dollars in thousands)
Balance, beginning of period	$	12,866		$	6,034	$	127		$	19,027
Charge-offs		(840	)		—		—			(840	)
Recoveries		1,150			5		—			1,155
Net recoveries		310			5		—			315
Provision (credit) for loan losses		(721	)		731		(10	)		—
Balance, end of period	$	12,455		$	6,770	$	117		$	19,342

	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

        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 at the following period-ends:

	March 31, 2013
	Commercial		Real Estate		Consumer		Total
	(Dollars in thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	2,031	$	977	$	18	$	3,026
Collectively evaluated for impairment		10,424		5,793		99		16,316
Total allowance balance	$	12,455	$	6,770	$	117	$	19,342
Loans:
Individually evaluated for impairment	$	8,128	$	10,112	$	141	$	18,381
Collectively evaluated for impairment		348,560		421,186		13,895		783,641
Total loan balance	$	356,688	$	431,298	$	14,036	$	802,022

	December 31, 2012
	Commercial		Real Estate		Consumer		Total
	(Dollars in thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	1,963	$	760	$	17	$	2,740
Collectively evaluated for impairment		10,903		5,274		110		16,287
Total allowance balance	$	12,866	$	6,034	$	127	$	19,027
Loans:
Individually evaluated for impairment	$	10,161	$	9,336	$	147	$	19,644
Collectively evaluated for impairment		365,308		411,815		15,567		792,690
Total loan balance	$	375,469	$	421,151	$	15,714	$	812,334

        The following table presents loans held-for-investment individually evaluated for impairment by class of loans as of March 31, 2013 and December 31, 2012. 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, 2013						December 31, 2012
	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	$	3,939	$	3,939	$	—	$	7,829	$	6,978	$	—
Real estate:
Commercial and residential		3,622		3,622		—		2,755		2,741		—
Land and construction		2,177		2,177		—		2,310		2,223		—
Home Equity		2,137		2,137		—		2,141		2,141		—
Total with no related allowance recorded		11,875		11,875		—		15,035		14,083		—
With an allowance recorded:
Commercial		4,272		4,189		2,031		3,678		3,182		1,963
Real estate:
Commercial and residential		1,882		1,882		683		3,183		1,937		465
Home Equity		294		294		294		295		295		295
Consumer		141		141		18		147		147		17
Total with an allowance recorded		6,589		6,506		3,026		7,303		5,561		2,740
Total	$	18,464	$	18,381	$	3,026	$	22,338	$	19,644	$	2,740

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

	Three Months Ended March 31, 2013
			Real Estate
	Commercial		Commercial and Residential		Land and Construction		Home Equity		Consumer		Total
	(Dollars in thousands)
Average of impaired loans during the period	$	9,145	$	5,090	$	2,200	$	2,434	$	144	$	19,013
Interest income during impairment	$	—	$	—	$	—	$	—	$	—	$	—
Cash-basis interest earned	$	—	$	—	$	—	$	—	$	—	$	—

	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

        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, 2012
	2013		2012
	(Dollars in thousands)
Nonaccrual loans—held-for-sale	$	—	$	184	$	—
Nonaccrual loans—held-for-investment		16,115		14,005		17,335
Restructured and loans over 90 days past due and still accruing		549		2,155		859
Total nonperforming loans	$	16,664	$	16,344	$	18,194
Other restructured loans	$	1,717	$	431	$	1,450
Impaired loans, excluding loans held-for-sale	$	18,381	$	16,591	$	19,644

        The following table presents the nonperforming loans by class as of March 31, 2013 and December 31, 2012:

	March 31, 2013						December 31, 2012
	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	$	5,863	$	549	$	6,412	$	7,852	$	859	$	8,711
Real estate:
Commercial and residential		5,503		—		5,503		4,676		—		4,676
Land and construction		2,177		—		2,177		2,223		—		2,223
Home equity		2,431		—		2,431		2,437		—		2,437
Consumer		141		—		141		147		—		147
Total	$	16,115	$	549	$	16,664	$	17,335	$	859	$	18,194

        The following table presents the aging of past due loans as of March 31, 2013 by class of loans:

	March 31, 2013
	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	$	1,445	$	646	$	4,368	$	6,459	$	350,229	$	356,688
Real estate:
Commercial and residential		—		—		3,485		3,485		357,855		361,340
Land and construction		—		—		69		69		24,542		24,611
Home equity		87		—		2,043		2,130		43,217		45,347
Consumer		103				—		103		13,933		14,036
Total	$	1,635	$	646	$	9,965	$	12,246	$	789,776	$	802,022

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

	December 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	$	1,699	$	355	$	5,120	$	7,174	$	368,295	$	375,469
Real estate:
Commercial and residential		1,603		—		3,290		4,893		350,041		354,934
Land and construction		—		—		78		78		22,274		22,352
Home equity		742		—		2,045		2,787		41,078		43,865
Consumer		—		—		—		—		15,714		15,714
Total	$	4,044	$	355	$	10,533	$	14,932	$	797,402	$	812,334

        Past due loans 30 days or greater totaled $12,246,000 and $14,932,000 at March 31, 2013 and December 31, 2012, respectively, of which $11,267,000 and $12,020,000 were on nonaccrual. At March 31, 2013, there were also $4,848,000 loans less than 30 days past due included in nonaccrual loans held-for-investment. At December 31, 2012, there were also $5,315,000 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.

        Loss.    Loans classified as loss are considered uncollectable or of so little value that their continuance as assets is not warranted. This classification does not necessarily mean that a loan has no recovery or salvage value; but rather, there is much doubt about whether, how much, or when the recovery would occur. Loans classified as loss are immediately charged off against the allowance for loan losses. Therefore, there is no balance to report at March 31, 2013 or December 31, 2012.

        The following table provides a summary of the loan portfolio by loan type and credit quality classification at March 31, 2013 and December 31, 2012:

	March 31, 2013						December 31, 2012
	Nonclassified		Classified		Total		Nonclassified		Classified		Total
	(Dollars in thousands)
Commercial	$	340,372	$	16,316	$	356,688	$	355,440	$	20,029	$	375,469
Real estate:
Commercial and residential		351,911		9,429		361,340		345,045		9,889		354,934
Land and construction		22,433		2,178		24,611		18,858		3,494		22,352
Home equity		42,591		2,756		45,347		41,187		2,678		43,865
Consumer		13,656		380		14,036		15,321		393		15,714
Total	$	770,963	$	31,059	$	802,022	$	775,851	$	36,483	$	812,334

        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.

        The recorded investment of troubled debt restructurings at March 31, 2013 was $3,662,000, which included $1,396,000 of nonaccrual loans and $2,266,000 of accruing loans. The book balance of troubled debt restructurings at December 31, 2012 was $4,107,000, which included $1,798,000 of nonaccrual loans and $2,309,000 of accruing loans. Approximately $920,000 and $1,152,000 in specific reserves were established with respect to these loans as of March 31, 2013 and December 31, 2012, respectively. As of March 31, 2013 and December 31, 2012, the Company had no additional amounts committed on any loan classified as a troubled debt restructuring.

        There were no loans modified as troubled debt restructuring during the three months ended March 31, 2013. 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 month ended March 31, 2013 or 2012.

        A loan that is a troubled debt restructuring on nonaccrual status may return to accruing status after a period of at least six months of consecutive payments in accordance with the modified terms.