Note 6. Loans

At June 30, 2013 the Company had $49.4 million of loans held for sale, which were originated for sale either to institutions which issue commercial mortgage backed securities or to secondary government guaranteed loan markets. The Company has elected fair value treatment for these loans and, during the six months ended June 30, 2013, the Company recognized a related fair value gain of $1.5 million. In the six months ended June 30, 2013 the Company recognized $6.4 million in gains upon the sale of loans.

Major classifications of loans, excluding loans held for sale, are as follows (in thousands):



	June 30,	December 31,
	2013	2012

Commercial	$ 481,537	$ 470,109
Commercial mortgage *	651,034	617,069
Construction	266,911	258,684
Total commercial loans	1,399,482	1,345,862
Direct lease financing	172,250	156,697
Residential mortgage	93,960	97,717
Consumer and other loans	295,576	296,915
	1,961,268	1,897,191
Unamortized loan fees and costs	6,114	5,663
Total loans, net of deferred loan fees and costs	$ 1,967,382	$ 1,902,854

Supplemental loan data:
Construction 1-4 family	$ 64,144	$ 60,343
Commercial construction, acquisition and development	202,767	198,341
	$ 266,911	$ 258,684

* At June 30, 2013, our owner-occupied loans amounted to $171.3 million, or 26.3% of commercial mortgages as compared to $172.5 million, or 28.0% at December 31, 2012.

The following table provides information about impaired loans at June 30, 2013 and December 31, 2012 (in thousands):



	Recorded investment	Unpaid principal balance	Related allowance	Average recorded investment	Interest income recognized
June 30, 2013
Without an allowance recorded
Construction	$ 1,899	$ 3,888	$ -	$ 1,654	$ -
Commercial mortgage	6,356	8,552	-	5,638	-
Commercial	6,782	6,782	-	5,709	-
Consumer - home equity	927	927	-	927	-
Residential	2,016	2,016	-	672	-
With an allowance recorded
Construction	453	588	90	1,650	-
Commercial mortgage	2,968	2,968	1,249	5,286	-
Commercial	20,153	21,907	7,302	12,223	-
Consumer - home equity	189	189	51	63	-
Residential	-	-	-	60	-
Total
Construction	$ 2,352	$ 4,476	$ 90	$ 3,304	$ -
Commercial mortgage	$ 9,324	$ 11,520	$ 1,249	$ 10,924	$ -
Commercial	$ 26,935	$ 28,689	$ 7,302	$ 17,932	$ -
Consumer - home equity	$ 1,116	$ 1,116	$ 51	$ 990	$ -
Residential	$ 2,016	$ 2,016	$ -	$ 732	$ -



	Recorded investment	Unpaid principal balance	Related allowance	Average recorded investment	Interest income recognized
December 31, 2012
Without an allowance recorded
Construction	$ 1,656	$ 5,054	$ -	$ 1,060	$ -
Commercial mortgage	4,583	6,730	-	2,563	-
Commercial	4,356	5,481	-	2,485	-
Consumer - home equity	927	927	-	927	-
Residential	-	-	-	253	-
With an allowance recorded
Construction	3,158	4,147	1,273	6,650	-
Commercial mortgage	4,806	4,806	1,706	4,233	-
Commercial	6,264	7,067	4,069	5,571	-
Consumer - home equity	-	-	-	65	-
Residential	91	91	69	56	-
Total
Construction	$ 4,814	$ 9,201	$ 1,273	$ 7,710	$ -
Commercial mortgage	$ 9,389	$ 11,536	$ 1,706	$ 6,796	$ -
Commercial	$ 10,620	$ 12,548	$ 4,069	$ 8,056	$ -
Consumer - home equity	$ 927	$ 927	$ -	$ 992	$ -
Residential	$ 91	$ 91	$ 69	$ 309	$ -

The following tables summarize the Company’s non-accrual loans, loans past due 90 days and still accruing and other real estate owned for the periods indicated (the Company had no non-accrual leases at June 30, 2013, June 30, 2012, or December 31, 2012) (in thousands):



	June 30,	June 30,	December 31,
	2013	2012	2012

Non-accrual loans
Construction	$ 2,352	$ 8,698	$ 4,538
Commercial mortgage	9,324	5,559	9,175
Commercial	26,935	9,536	10,459
Consumer	1,116	927	927
Residential	2,016	95	91
Total non-accrual loans	41,743	24,815	25,190

Loans past due 90 days or more	755	3,105	4,435
Total non-performing loans	42,498	27,920	29,625
Other real estate owned	6,308	4,919	4,241
Total non-performing assets	$ 48,806	$ 32,839	$ 33,866

The Company’s loans that were modified as of June 30, 2013 and December 31, 2012 and considered troubled debt restructurings are as follows (in thousands):



	June 30, 2013			December 31, 2012
	Number	Pre-modification recorded investment	Post-modification recorded investment	Number	Pre-modification recorded investment	Post-modification recorded investment
Commercial	2	$ 1,287	$ 1,287	2	$ 2,416	$ 2,416
Commercial mortgage	3	3,094	3,094	3	3,144	3,144
Construction	4	1,457	1,457	3	1,479	1,479
Residential mortgage	-	-	-	-	-	-
Total	9	$ 5,838	$ 5,838	8	$ 7,039	$ 7,039

The balances below provide information as to how the loans were modified as troubled debt restructurings loans as of June 30, 2013 and December 31, 2012 (dollars in thousands):



	June 30, 2013			December 31, 2012
	Adjusted interest rate	Extended maturity	Combined rate and maturity	Adjusted interest rate	Extended maturity	Combined rate and maturity
Commercial	$ -	$ 1,127	$ 160	$ -	$ 2,255	$ 161
Commercial mortgage	692	214	2,188	714	214	2,216
Construction	-	1,457	-	-	1,479	-
Residential mortgage	-	-	-	-	-	-
Total	$ 692	$ 2,798	$ 2,348	$ 714	$ 3,948	$ 2,377

The following table summarizes as of June 30, 2013 loans that were restructured within the last 12 months that have subsequently defaulted (dollars in thousands):



	Number	Pre-modification recorded investment
Commercial	1	$ 161
Commercial mortgage	-	-
Construction	-	-
Residential mortgage	-	-
Total	1	$ 161

As of June 30, 2013 and December 31, 2012, the Company has no commitments to lend additional funds to loan customers whose terms have been modified in troubled debt restructurings.

A detail of the changes in the allowance for loan and lease losses by loan category is as follows (in thousands):



		Commercial		Residential		Direct lease
Six months ended	Commercial	mortgage	Construction	mortgage	Consumer	financing	Unallocated	Total
June 30, 2013
Beginning balance	$ 12,244	$ 6,223	$ 9,505	$ 2,089	$ 1,799	$ 239	$ 941	$ 33,040
Charge-offs	(1,729)	(2,005)	(4,382)	(54)	(185)	-		(8,355)
Recoveries	38	12	481	-	50	8		589
Provision (credit)	5,014	5,755	5,061	(14)	(501)	254	(569)	15,000
Ending balance	$ 15,567	$ 9,985	$ 10,665	$ 2,021	$ 1,163	$ 501	$ 372	$ 40,274

Ending balance: Individually
evaluated for impairment	$ 7,302	$ 1,249	$ 90	$ -	$ 51	$ -	$ -	$ 8,692

Ending balance: Collectively
evaluated for impairment	$ 8,265	$ 8,736	$ 10,575	$ 2,021	$ 1,112	$ 501	$ 372	$ 31,582


Loans:
Ending balance	$ 481,537	$ 651,034	$ 266,911	$ 93,960	$ 295,576	$ 172,250	$ 6,114	$ 1,967,382

Ending balance: Individually
evaluated for impairment	$ 26,936	$ 9,323	$ 2,352	$ 2,016	$ 1,116	$ -	$ -	$ 41,743

Ending balance: Collectively
evaluated for impairment	$ 454,601	$ 641,711	$ 264,559	$ 91,944	$ 294,460	$ 172,250	$ 6,114	$ 1,925,639



		Commercial		Residential		Direct lease
Twelve months ended	Commercial	mortgage	Construction	mortgage	Consumer	financing	Unallocated	Total
December 31, 2012
Beginning balance	$ 10,214	$ 9,274	$ 5,352	$ 2,090	$ 1,346	$ 254	$ 1,038	$ 29,568
Charge-offs	(3,682)	(5,828)	(11,317)	-	(339)	(87)	-	(21,253)
Recoveries	566	1,528	96	85	-	12	-	2,287
Provision (credit)	5,146	1,249	15,374	(86)	792	60	(97)	22,438
Ending balance	$ 12,244	$ 6,223	$ 9,505	$ 2,089	$ 1,799	$ 239	$ 941	$ 33,040

Ending balance: Individually
evaluated for impairment	$ 4,069	$ 1,706	$ 1,273	$ 69	$ -	$ -	$ -	$ 7,117

Ending balance: Collectively
evaluated for impairment	$ 8,175	$ 4,517	$ 8,232	$ 2,020	$ 1,799	$ 239	$ 941	$ 25,923


Loans:
Ending balance	$ 470,109	$ 617,069	$ 258,684	$ 97,717	$ 296,915	$ 156,697	$ 5,663	$ 1,902,854

Ending balance: Individually
evaluated for impairment	$ 10,620	$ 9,389	$ 4,814	$ 91	$ 927	$ -	$ -	$ 25,841

Ending balance: Collectively
evaluated for impairment	$ 459,489	$ 607,680	$ 253,870	$ 97,626	$ 295,988	$ 156,697	$ 5,663	$ 1,877,013



		Commercial		Residential		Direct lease
Six months ended	Commercial	mortgage	Construction	mortgage	Consumer	financing	Unallocated	Total
June 30, 2012
Beginning balance	$ 10,214	$ 9,274	$ 5,352	$ 2,090	$ 1,346	$ 254	$ 1,038	$ 29,568
Charge-offs	(2,454)	(1,646)	(4,837)	-	(258)	(87)	-	(9,282)
Recoveries	254	1,018	9	85	-	12	-	1,378
Provision (credit)	2,109	(1,442)	8,728	(21)	552	152	(571)	9,507
Ending balance	$ 10,123	$ 7,204	$ 9,252	$ 2,154	$ 1,640	$ 331	$ 467	$ 31,171

Ending balance: Individually
evaluated for impairment	$ 2,739	$ 902	$ 3,303	$ 73	$ -	$ -	$ -	$ 7,017

Ending balance: Collectively
evaluated for impairment	$ 7,384	$ 6,302	$ 5,949	$ 2,081	$ 1,640	$ 331	$ 467	$ 24,154


Loans:
Ending balance	$ 441,167	$ 596,639	$ 269,636	$ 97,226	$ 255,769	$ 140,012	$ 3,863	$ 1,804,312

Ending balance: Individually
evaluated for impairment	$ 9,536	$ 7,990	$ 8,974	$ 95	$ 927	$ -	$ -	$ 27,522

Ending balance: Collectively
evaluated for impairment	$ 431,631	$ 588,649	$ 260,662	$ 97,131	$ 254,842	$ 140,012	$ 3,863	$ 1,776,790

The Company did not have loans acquired with deteriorated credit quality at either June 30, 2013 or December 31, 2012.

A detail of the Company’s delinquent loans by loan category is as follows (in thousands):



	30-59 Days	60-89 Days	Greater than		Total		Total
June 30, 2013	past due	past due	90 days	Non-accrual	past due	Current	loans
Commercial	$ 3,921	$ 3,005	$ -	$ 26,935	$ 33,861	$ 447,676	$ 481,537
Commercial mortgage	-	7,171	-	9,324	16,495	634,539	651,034
Construction	-	-	-	2,352	2,352	264,559	266,911
Direct lease financing	3,436	505	63	-	4,004	168,246	172,250
Consumer - other	330	51	692	1,116	2,189	249,110	251,299
Consumer - home equity	106	61	-	-	167	44,110	44,277
Residential mortgage	-	-	-	2,016	2,016	91,944	93,960
Unamortized costs	-	-	-	-	-	6,114	6,114
	$ 7,793	$ 10,793	$ 755	$ 41,743	$ 61,084	$ 1,906,298	$ 1,967,382



	30-59 Days	60-89 Days	Greater than		Total		Total
December 31, 2012	past due	past due	90 days	Non-accrual	past due	Current	loans
Commercial	$ -	$ 5,750	$ 1,350	$ 10,459	$ 17,559	$ 452,550	$ 470,109
Commercial mortgage	686	300	2,412	9,175	12,573	604,496	617,069
Construction	-	-	667	4,538	5,205	253,479	258,684
Direct lease financing	1,313	1,168	6	-	2,487	154,210	156,697
Consumer - other	330	99	-	927	1,356	251,915	253,271
Consumer - home equity	2	6	-	-	8	43,636	43,644
Residential mortgage	749	1,175	-	91	2,015	95,702	97,717
Unamortized costs	-	-	-	-	-	5,663	5,663
	$ 3,080	$ 8,498	$ 4,435	$ 25,190	$ 41,203	$ 1,861,651	$ 1,902,854

The Company evaluates its loans under an internal loan risk rating system as a means of identifying problem loans. The following table provides information by credit risk rating indicator for each segment of the loan portfolio excluding loans held for sale at the dates indicated (in thousands):



					Commercial		Residential
	Commercial		Construction		mortgage		mortgage
	6/30/2013	12/31/2012	6/30/2013	12/31/2012	6/30/2013	12/31/2012	6/30/2013	12/31/2012
Risk Rating
Pass	$ 357,519	$ 335,563	$ 240,464	$ 247,214	$ 476,681	$ 489,615	$ 25,907	$ 28,495
Special Mention	5,010	6,788	4,348	-	28,621	23,200	-	1,175
Substandard	33,707	12,252	8,444	5,205	21,025	9,704	2,016	-
Doubtful	-	-	-	-	-	-	-	91
Loss	-	-	-	-	-	-	-	-
Unrated subject to review *	34,355	17,614	7,689	2,301	62,051	18,286	170	236
Unrated not subject to review *	50,946	97,892	5,966	3,964	62,656	76,264	65,867	67,720
Total	$ 481,537	$ 470,109	$ 266,911	$ 258,684	$ 651,034	$ 617,069	$ 93,960	$ 97,717

			Direct lease
	Consumer		financing		Unamortized costs		Total
	6/30/2013	12/31/2012	6/30/2013	12/31/2012	6/30/2013	12/31/2012	6/30/2013	12/31/2012
Risk Rating
Pass	$ 82,773	$ 89,128	$ 63,405	$ 52,241	$ -	$ -	$ 1,246,749	$ 1,242,256
Special Mention	1,359	99	-	-	-	-	39,338	31,262
Substandard	2,521	3,626	34	69	-	-	67,747	30,856
Doubtful	-	-	-	-	-	-	-	91
Loss	-	-	-	-	-	-	-	-
Unrated subject to review *	7,784	4,593	-	3,337	-	-	112,049	46,367
Unrated not subject to review *	201,139	199,469	108,811	101,050	6,114	5,663	501,499	552,022
Total	$ 295,576	$ 296,915	$ 172,250	$ 156,697	$ 6,114	$ 5,663	$ 1,967,382	$ 1,902,854

* Unrated loans consist of performing loans which did not exhibit any negative characteristics which would require the loan to be evaluated, or fell below the dollar threshold requiring review under the Bank’s internal policy and are not loans otherwise selected in ongoing portfolio evaluation. The scope of the Bank’s loan review policy encompasses commercial and construction loans and leases which singly, or in aggregate for loans to related borrowers, exceed $3.0 million. The loan portfolio review coverage was approximately 69% at June 30, 2013 and approximately 69% at December 31, 2012. This review is performed by the loan review department, which is independent of the loan origination department and reports directly to the audit committee. Potential problem loans which are identified by either the independent loan review department or line management are reviewed. Adversely classified loans are reviewed quarterly by the independent loan review function of the Bank. Additionally, all loans are subject to ongoing monitoring by portfolio managers and loan officers. Also, many of the Bank’s loans are relatively short term, and are subject to reconsideration with a full review in loan committee between one and three years.