Note 4 — Allowance for Loan Losses

The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management's judgment, should be charged off.

The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired.

A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired. Generally, troubled debt restructurings are initially classified as non-accrual until sufficient time has passed to assess whether the restructured loan will continue to perform. Generally, the Company returns a troubled debt restructuring to accrual status upon six months of performance under the new terms.

Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

Management has determined that all TDRs and all non-accrual loans are impaired; however, non-accrual loans with an impaired balance of $250 thousand or less will be evaluated under ASC 450 with other groups of smaller or homogeneous loans with similar risk characteristics. Management will use judgment to determine if there are other loans outside of these two categories that fit the definition of impaired. If a loan is impaired, a specific reserve is recorded so that the loan is reported, net, at the present value of estimated future cash flows including balloon payments, if any, using the loan's existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Large groups of homogeneous loans with smaller individual balances, such as consumer and residential real estate loans, are generally evaluated collectively for impairment, and accordingly, are not separately identified for impairment disclosures. TDRs are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan's effective rate at inception. If a TDR is considered to be "collateral-dependent," the loan is reported at the fair value of the collateral net of estimated costs to sell. For TDRs that subsequently default, the Company determines the allowance amount in accordance with its accounting policy for the allowance for loan losses.

The general component of the allowance covers non-impaired loans and is based on historical loss experience, adjusted for qualitative factors. The historical loss experience is determined by loan class, and is based on the actual loss history experienced by the Company over an eight-quarter historical loan loss period (which period is expected to be expanded for future calculations). This actual loss experience is supplemented with other qualitative factors based on the risks present for each loan class. These qualitative factors include consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures and practices; experience, ability, and depth of lending management and other relevant staff; local, regional and national economic trends and conditions; industry conditions; and effects of changes in credit concentrations. The following loan classes have been identified:

·	Commercial and industrial

·	Commercial real estate

·	Real estate -- construction

·	Residential mortgages (1st and 2nd liens)

·	Home equity

Consumer

For performing loans, an estimate of adequacy is made by applying qualitative factors specific to the portfolio to the period-end balances. Consideration is also given to the type and collateral of the loans with particular attention paid to commercial real estate construction loans, due to the inherent risk of this type of loan. Specific and general reserves are available for any identified loss.

The Company recorded a provision for loan losses for the year ended December 31, 2012 of $8.5 million, a decrease of $16.4 million or 65.8% from $24.9 million for the year ended December 31, 2011. During the year ended December 31, 2012, the Company recorded $30.7 million in net loan charge-offs, an increase of $17.4 million from $13.3 million for the year ended December 31, 2011. Net charge-offs related to the loan sales during 2012 were $28.6 million.

An analysis of the changes in the allowance for loan losses follows: (in thousands)

Year ended December 31,	2012		2011			2010
Balance, January 1,	$	39,958	$	28,419		$	12,333

Loans charged-off:
Commercial and industrial		8,534		9,490			8,501
Commercial real estate		15,794		4,059			2,788
Real estate construction		3,671		232			3,548
Residential mortgages (1st and 2nd liens)		3,727		411			769
Home equity		1,953		191			315
Consumer		267		214			317
Total Charge-offs		33,946		14,597			16,238

Loans recovered after charge-off:
Commercial and industrial loans		2,456		781			69
Real estate - construction loans		340		415			-
Residential mortgages (1st and 2nd liens)		115		3			-
Home equity loans		246		2			-
Consumer loans		112		97			118
Total recoveries		3,269		1,298			187
Net loans charged-off		30,677		13,299			16,051
Reclass to allowance for contingent liabilities		-		(50	)		51
Provision for loan losses		8,500		24,888			32,086
Balance, December 31,	$	17,781	$	39,958		$	28,419

The qualitative factors utilized by the Company in computing its allowance for loan losses are determined based on the various risk characteristics of each loan class. Relevant risk characteristics are as follows:

Commercial and industrial loans – Loans in this class are made to businesses. Generally these loans are secured by assets of the business and repayment is expected from the cash flows of the business. A weakened economy, and resultant decreased consumer and/or business spending will have an effect on the credit quality in this loan class.

Commercial real estate mortgages – Loans in this class include income-producing investment properties and owner-occupied real estate used for business purposes. The underlying properties are generally located largely in the Company's primary market area. The cash flows of the income producing investment properties are adversely impacted by a downturn in the economy as evidenced by increased vacancy rates, which in turn, will have an effect on credit quality. Generally, management seeks to obtain annual financial information for borrowers with loans in excess of $250 thousand in this category. In the case of owner-occupied real estate used for business purposes, a weakened economy and resultant decreased consumer and/or business spending will have an adverse effect on credit quality.

Real estate-construction loans – Loans in this class primarily include land loans to local individuals, contractors and developers for developing the land for sale or for the purpose of making improvements thereon. Repayment is derived from sale of the lots/ units including any pre-sold units. Credit risk is affected by market conditions, time to sell at an adequate price and cost overruns. To a lesser extent this class includes commercial development projects the Company finances, which in most cases require interest only during construction, and then convert to permanent financing. Credit risk is affected by construction delays, cost overruns, market conditions and the availability of permanent financing, to the extent such permanent financing is not being provided by us.

Residential mortgages and home equity loans – Loans in these classes are made to and secured by owner-occupied residential real estate and repayment is dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality in this loan class. The Bank generally does not originate loans with a loan-to-value ratio greater than 80% and does not grant sub-prime loans.

Consumer loans – Loans in this class may be either secured or unsecured and repayment is dependent on the credit quality of the individual borrower and, if applicable, sale of the collateral securing the loan (such as automobile and manufactured homes). Therefore, the overall health of the economy, including unemployment rates and housing prices, will have a significant effect on the credit quality in this loan class.

Further information pertaining to the allowance for loan losses at December 31, 2012 is as follows: (in thousands)

	Commercial and industrial		Commercial real estate		Real estate construction		Residential mortgages (1st and 2nd liens)		Home equity		Consumer and other loans		Total
Allowance for loan losses:
Ending balance: individually evaluated for impairment	$	340	$	22	$	1	$	575	$	86	$	-	$	1,024
Ending balance: collectively evaluated for impairment		6,917		7,198		165		1,276		979		222		16,757
Ending balance	$	7,257	$	7,220	$	166	$	1,851	$	1,065	$	222	$	17,781
Loan balances:
Ending balance: individually evaluated for impairment	$	10,369	$	9,443	$	1,961	$	4,660	$	502	$	21	$	26,956
Ending balance: collectively evaluated for impairment		158,340		359,828		13,508		141,915		65,966		14,267		753,824
Ending balance (loan portfolio)	$	168,709	$	369,271	$	15,469	$	146,575	$	66,468	$	14,288	$	780,780

Further information pertaining to the allowance for loan losses at December 31, 2011 is as follows: (in thousands)

	Commercial and industrial		Commercial real estate		Real estate construction		Residential mortgages (1st and 2nd liens)		Home equity		Consumer and other loans		Total
Allowance for loan losses:
Ending balance: individually evaluated for impairment	$	7,477	$	3,092	$	57	$	-	$	-	$	-	$	10,626
Ending balance: collectively evaluated for impairment		17,603		7,937		566		2,401		512		313		29,332
Ending balance	$	25,080	$	11,029	$	623	$	2,401	$	512	$	313	$	39,958
Loan balances:
Ending balance: individually evaluated for impairment	$	36,559	$	66,402	$	19,251	$	8,345	$	3,897	$	646	$	135,100
Ending balance: collectively evaluated for impairment		170,093		362,244		30,453		152,274		75,787		43,703		834,554
Ending balance (loan portfolio)	$	206,652	$	428,646	$	49,704	$	160,619	$	79,684	$	44,349	$	969,654

The following is a summary of current and past due loans at December 31, 2012: (in thousands)

	Past Due
	30 - 59 days		60 - 89 days		90 days and over		Total		Current		Total
Commercial:
Commercial and industrial	$	6,591	$	1,274	$	6,529	$	14,394	$	154,315	$	168,709
Commercial real estate		1,145		329		5,192		6,666		362,605		369,271
Real estate construction		1,382		-		1,961		3,343		12,126		15,469
Consumer:
Residential mortgages (1st and 2nd liens)		2,867		6		2,466		5,339		141,236		146,575
Home equity		261		100		266		627		65,841		66,468
Consumer and other loans		189		18		21		228		14,060		14,288
Total	$	12,435	$	1,727	$	16,435	$	30,597	$	750,183	$	780,780

The following is a summary of current and past due loans at December 31, 2011: (in thousands)

	Past Due
	30 - 59 days		60 - 89 days		90 days and over		Total		Current		Total
Commercial:
Commercial and industrial	$	9,774	$	8,574	$	16,867	$	35,215	$	171,437	$	206,652
Commercial real estate		4,981		4,843		45,344		55,168		373,478		428,646
Real estate construction		1,282		-		6,978		8,260		41,444		49,704
Consumer:
Residential mortgages (1st and 2nd liens)		3,479		1,144		7,028		11,651		148,968		160,619
Home equity		-		198		3,897		4,095		75,589		79,684
Consumer and other loans		215		78		646		939		43,410		44,349
Total	$	19,731	$	14,837	$	80,760	$	115,328	$	854,326	$	969,654

The following is a summary of impaired loans, by class of loan, at December 31, 2012 and 2011: (in thousands)

	December 31, 2012						December 31, 2011
	Impaired Loans						Impaired Loans
	Unpaid Principal Balance		Recorded Balance		Allowance Allocated		Unpaid Principal Balance		Recorded Balance		Allowance Allocated
With no allowance recorded:
Commercial and industrial	$	7,913	$	7,492	$	-	$	21,162	$	20,885	$	-
Commercial real estate		8,859		7,282		-		52,679		46,687		-
Real estate construction		1,334		1,305		-		19,939		17,044		-
Residential mortgages (1st & 2nd liens)		1,918		1,788		-		8,914		8,345		-
Home equity		418		416		-		3,995		3,897		-
Consumer and other loans		21		21		-		646		646		-
Subtotal	$	20,463	$	18,304	$	-	$	107,335	$	97,504	$	-

With an allowance recorded:
Commercial and industrial	$	2,884	$	2,877	$	340	$	15,877	$	15,674	$	7,477
Commercial real estate		2,161		2,161		22		20,609		19,715		3,092
Real estate construction		656		656		1		2,207		2,207		57
Residential mortgages (1st & 2nd liens)		3,015		2,872		575		-		-		-
Home equity		86		86		86		-		-		-
Subtotal	$	8,802	$	8,652	$	1,024	$	38,693	$	37,596	$	10,626
Total	$	29,265	$	26,956	$	1,024	$	146,028	$	135,100	$	10,626

The following presents information pertaining to average balances of impaired loans and interest income recognized on impaired loans for the years ended December 31, 2012 and 2011: (in thousands)

	Year Ended December 31, 2012						Year Ended December 31, 2011
	Impaired Loans						Impaired Loans
	Average recorded investment in impaired loans		Interest income recognized on impaired loans		Interest income recognized on a cash basis on impaired loans		Average recorded investment in impaired loans		Interest income recognized on impaired loans		Interest income recognized on a cash basis on impaired loans
Commercial and industrial	$	23,215	$	447	$	-	$	25,179	$	1,422	$	-
Commercial real estate		38,477		501		-		55,449		2,970		-
Real estate construction		13,681		410		-		30,641		-		-
Residential mortgages (1st & 2nd liens)		9,538		127		-		6,956		-		-
Home equity		2,607		13		-		3,369		-		-
Consumer		429		-		-		337		-		-
Total	$	87,947	$	1,498	$	-	$	121,931	$	4,392	$	-

The following is a summary of information pertaining to non-performing assets: (in thousands)

	December 31,		December 31,
	2012		2011
Non-accrual Loans	$	16,435	$	80,760
Non-accrual Loans Held-for-Sale		907		-
Loans 90 Days Past Due and Still Accruing		-		-
Other Real Estate Owned		1,572		1,800
Total Non-performing Assets	$	18,914	$	82,560
TDRs accruing interest	$	9,954	$	1,496
TDRs - nonaccruing	$	6,650	$	24,979

The following table summarizes non-accrual loans by loan class as of December 31, 2012 and 2011: (dollars in thousands)

	Non-accrual Loans
						Total		% of								Total		% of
			% of			Loans		Total					% of			Loans		Total
	12/31/2012		Total			12/31/2012		Loans			12/31/2011		Total			12/31/2011		Loans
Commercial and industrial	$	6,529		39.8	%	$	168,709		0.8	%	$	16,867		20.9	%	$	206,652		1.7	%
Commercial real estate		5,192		31.6			369,271		0.7			45,344		56.2			428,646		4.7
Real estate construction		1,961		11.9			15,469		0.3			6,978		8.6			49,704		0.7
Residential mortgages (1st & 2nd liens)		2,466		15.0			146,575		0.3			7,028		8.7			160,619		0.7
Home equity		266		1.6			66,468		-			3,897		4.8			79,684		0.4
Consumer and other loans		21		0.1			14,288		-			646		0.8			44,349		0.1
Total non-accrual loans	$	16,435		100.0	%	$	780,780		2.1	%	$	80,760		100.0	%	$	969,654		8.3	%

The following table details the collateral value securing non-accrual loans: (in thousands)

	December 31, 2012				December 31, 2011
	Non-accrual Loans				Non-accrual Loans
	Principal Balance		Collateral Value		Principal Balance		Collateral Value
Commercial and industrial (1)	$	6,529	$	4,400	$	16,867	$	-
Commercial real estate		5,192		12,675		45,344		68,067
Real estate construction		1,961		3,661		6,978		6,715
Residential mortgages (1st and 2nd liens)		2,466		5,141		7,028		14,133
Home equity		266		849		3,897		7,438
Consumer loans		21		-		646		-
Total	$	16,435	$	26,726	$	80,760	$	96,353

(1) Repayment of commercial and industrial loans is expected primarily from the cash flow of the business. The collateral typically securing these loans is a lien on all corporate assets via a blanket UCC filing and does not usually include real estate. For purposes of this disclosure, the Company has ascribed no value to the non-real estate collateral for this class of loans.

Additional interest income of approximately $854 thousand, $4.3 million and $1.5 million would have been recorded during the years ended December 31, 2012, 2011 and 2010, respectively, if non-accrual loans had performed in accordance with their original terms.

The following table summarizes the activity in the allowance for loan losses by loan class for the periods indicated: (in thousands)

	Commercial and Industrial Loans			Commercial Real Estate Mortgages			Real Estate Construction Loans			Residential mortgages (1st and 2nd liens)			Home equity loans			Consumer loans			Total

Year ended December 31, 2012
Balance at beginning of period	$	25,080		$	11,029		$	623		$	2,401		$	512		$	313		$	39,958
Charge-offs		(8,534	)		(15,794	)		(3,671	)		(3,727	)		(1,953	)		(267	)		(33,946	)
Recoveries		2,456			-			340			115			246			112			3,269
(Credit) provision for loan losses		(11,745	)		11,985			2,874			3,062			2,260			64			8,500
Balance at end of period	$	7,257		$	7,220		$	166		$	1,851		$	1,065		$	222		$	17,781

Year ended December 31, 2011
Balance at beginning of period	$	13,826		$	9,226		$	3,177		$	519		$	1,392		$	279		$	28,419
Charge-offs		(9,490	)		(4,059	)		(232	)		(411	)		(191	)		(214	)		(14,597	)
Recoveries		781			-			415			3			2			97			1,298
Reclass to allowance for contingent liabilities		-			(50	)		-			-			-			-			(50	)
Provision (credit) for loan losses		19,963			5,912			(2,737	)		2,290			(691	)		151			24,888
Balance at end of period	$	25,080		$	11,029		$	623		$	2,401		$	512		$	313		$	39,958

The Company recorded an $8.5 million consolidated provision for loan losses during the year ended December 31, 2012, a decline of $16.4 million from the $24.9 million recorded in 2011. Despite $8.5 million in charge-offs recorded for commercial and industrial loans in 2012, the Company recorded an $11.7 million credit to its provision for loan losses for this class of loans resulting in an $18 million net reduction in the commercial and industrial loans allowance balance at December 31, 2012 versus 2011. The 2012 credit provision in this loan class resulted from several factors, most notably a reduction in the ASC 450-20 loss factors on unimpaired pass rated loans from 9.98% at December 31, 2011 to 4.30% at December 31, 2012; a reduction in the loss factors on unimpaired special mention loans from 8.68% at December 31, 2011 to 4.60% at December 31, 2012; and a decline in the Company's specific reserves for impaired substandard commercial and industrial loans as computed under ASC 310-10 at December 31, 2012 as compared to 2011. The impact on the computed allowance for loan losses at December 31, 2012 stemming from these changes was reductions of $10 million, $1 million and $7 million, respectively. The reduction in the ASC 450-20 loss factors was primarily due to an expansion of the look back period used in calculating historical losses from a trailing four quarter average to a trailing eight-quarter average time frame (is expected will continue to be expanded for future calculations). This change more accurately represents the Company's incurred and expected losses in the December 31, 2012 commercial and industrial loan portfolio. In addition, the $4 million decline in the commercial real estate mortgages allowance balance at December 31, 2012 versus 2011 largely reflected a $3 million decrease in specific reserves for impaired substandard commercial real estate mortgages as computed under ASC 310-10 at December 31, 2012 versus 2011, coupled with a 22 basis point decline in the ASC 450-20 loss factors on unimpaired pass rated loans at December 31, 2012 when compared to 2011.

CREDIT QUALITY INFORMATION

The Bank utilizes an eight-grade risk-rating system for commercial and industrial loans, commercial real estate and construction loans. Loans in risk grades 1- 4 are considered "pass" loans. The Bank's risk grades are as follows:

Risk Grade 1 Excellent:

Loans secured by liquid collateral such as certificates of deposit, reputable bank letters of credit, or other cash equivalents; loans that are guaranteed or otherwise backed by the full faith and credit of the United States government or an agency thereof, such as the Small Business Administration; or loans to any publicly held company with a current long-term debt rating of A or better.

Risk Grade 2 Good:

Loans to businesses that have strong financial statements containing an unqualified opinion from a CPA firm and at least three consecutive years of profits; loans supported by un-audited financial statements containing strong balance sheets, five consecutive years of profits, a five-year satisfactory relationship with the Bank, and key balance sheet and income statement trends that are either stable or positive; loans secured by publicly traded marketable securities where there is no impediment to liquidation; loans to individuals backed by liquid personal assets, established credit history, and unquestionable character; or loans to publicly held companies with current long-term debt ratings of Baa or better.

Risk Grade 3 Satisfactory:

Loans supported by financial statements (audited or un-audited) that indicate average or slightly below average risk and having some deficiency or vulnerability to changing economic conditions; loans with some weakness but offsetting features of other support are readily available; loans that are meeting the terms of repayment, but which may be susceptible to deterioration if adverse factors are encountered. Loans may be graded Satisfactory when there is no recent information on which to base a current risk evaluation and the following conditions apply:

·	At inception, the loan was properly underwritten, did not possess an unwarranted level of credit risk, and the loan met the above criteria for a risk grade of Excellent, Good, or Satisfactory;

·	At inception, the loan was secured with collateral possessing a loan value adequate to protect the Bank from loss.

·	The loan has exhibited two or more years of satisfactory repayment with a reasonable reduction of the principal balance.

·	During the period that the loan has been outstanding, there has been no evidence of any credit weakness. Some examples of weakness include slow payment, lack of cooperation by the borrower, breach of loan covenants, or

·	The borrower is in an industry known to be experiencing problems. If any of these credit weaknesses is observed, a lower risk grade may be warranted.

Risk Grade 4 Satisfactory/Monitored:

Loans in this category are considered to be of acceptable credit quality, but contain greater credit risk than satisfactory loans due to weak balance sheets, marginal earnings or cash flow, or other uncertainties. These loans warrant a higher than average level of monitoring to ensure that weaknesses do not advance. The level of risk in a Satisfactory/Monitored loan is within acceptable underwriting guidelines so long as the loan is given the proper level of management supervision.

Risk Grade 5 Special Mention:

Loans which possess some credit deficiency or potential weakness which deserves close attention. Such loans pose an unwarranted financial risk that, if not corrected, could weaken the loan by adversely impacting the future repayment ability of the borrower. The key distinctions of a Special Mention classification are that (1) it is indicative of an unwarranted level of risk and (2) weaknesses are considered "potential," not "defined," impairments to the primary source of repayment.

Risk Grade 6 Substandard:

One or more of the following characteristics may be exhibited in loans classified Substandard:

·	Loans which possess a defined credit weakness. The likelihood that a loan will be paid from the primary source of repayment is uncertain. Financial deterioration is under way and very close attention is warranted to ensure that the loan is collected without loss.

·	Loans are inadequately protected by the current net worth and paying capacity of the obligor.

·	The primary source of repayment is gone, and the Bank is forced to rely on a secondary source of repayment, such as collateral liquidation or guarantees.

·	Loans have a distinct possibility that the Bank will sustain some loss if deficiencies are not corrected.

·	Unusual courses of action are needed to maintain a high probability of repayment.

·	The borrower is not generating enough cash flow to repay loan principal; however, it continues to make interest payments.

·	The lender is forced into a subordinated or unsecured position due to flaws in documentation.

·	Loans have been restructured so that payment schedules, terms, and collateral represent concessions to the borrower when compared to the normal loan terms.

·	The lender is seriously contemplating foreclosure or legal action due to the apparent deterioration in the loan.

·	There is a significant deterioration in market conditions to which the borrower is highly vulnerable.

Risk Grade 7 Doubtful:

One or more of the following characteristics may be present in loans classified Doubtful:

·	Loans have all of the weaknesses of those classified as Substandard. However, based on existing conditions, these weaknesses make full collection of principal highly improbable.

·	The primary source of repayment is gone, and there is considerable doubt as to the quality of the secondary source of repayment.

·	The possibility of loss is high but because of certain important pending factors which may strengthen the loan, loss classification is deferred until the exact status of repayment is known.

Risk Grade 8 Loss:

Loans are considered uncollectible and of such little value that continuing to carry them as assets is not feasible. Loans will be classified Loss when it is neither practical nor desirable to defer writing off or reserving all or a portion of a basically worthless asset, even though partial recovery may be possible at some time in the future.

The Bank considers real estate, home equity and consumer loans secured by real estate that are contractually past due 90 days or more or where legal action has commenced against the borrower to be substandard. The Bank follows the Federal Financial Institutions Examination Council ("FFIEC") Uniform Retail Credit Classification guidelines.

The Bank annually reviews the ratings on all commercial and industrial, commercial real estate and construction loans greater than $1 million. Semi-annually, the Bank engages an independent third-party to review a significant portion of loans within these loan classes. Management uses the results of these reviews as part of its ongoing review process.

The following table identifies credit risk by the internally assigned grade at December 31, 2012: (in thousands)

Credit Risk Profile By Internally Assigned Grade
	----------Commercial Credit Exposure----------						----------Consumer Credit Exposure----------
	Commercial and industrial		Commercial real estate		Real estate construction		Residential mortgages (1st and 2nd liens)		Home equity		Consumer and other loans		Total
Grade:
Pass	$	143,804	$	311,123	$	4,790	$	141,915	$	65,966	$	14,267	$	681,865
Special mention		5,995		38,670		-		-		-		-		44,665
Substandard		18,910		19,478		10,679		4,660		502		21		54,250
Total	$	168,709	$	369,271	$	15,469	$	146,575	$	66,468	$	14,288	$	780,780

The following table identifies credit risk by the internally assigned grade at December 31, 2011: (in thousands)

	----------Commercial Credit Exposure----------						----------Consumer Credit Exposure----------
	Commercial and industrial		Commercial real estate		Real estate construction		Residential mortgages (1st and 2nd liens)		Home equity		Consumer and other loans		Total
Grade:
Pass	$	144,952	$	289,856	$	4,932	$	152,274	$	75,787	$	43,703	$	711,504
Special mention		16,448		41,283		7,772		-		-		-		65,503
Substandard		45,009		97,507		35,388		8,345		3,897		646		190,792
Doubtful		243		-		1,612		-		-		-		1,855
Total	$	206,652	$	428,646	$	49,704	$	160,619	$	79,684	$	44,349	$	969,654

TDRs are modifications or renewals where the Company has granted a concession to a borrower in financial distress. The Company reviews all modifications and renewals for determination of TDR status. The Company allocated $800 thousand and $3 million of specific reserves to customers whose loan terms have been modified in TDRs as of December 31, 2012 and 2011, respectively. These loans involved the restructuring of terms to allow customers to mitigate the risk of foreclosure by meeting a lower payment requirement based upon their current cash flow. These may also include loans that renewed at existing contractual rates, but below market rates for comparable credit.

A total of $35 thousand and $85 thousand were committed to be advanced in connection with TDRs as of December 31, 2012 and 2011, respectively. This represents the amount the Company is legally required to advance under existing loan agreements. These loans are not in default under the terms of the loan agreements and are accruing. It is the Company's policy to evaluate advances on such loans on a case by case basis. Absent a legal obligation to advance pursuant to the terms of the loan agreement, the Company generally will not advance funds for which it has outstanding commitments but may do so in certain circumstances.

The following table presents information regarding TDRs as of December 31, 2012 and 2011: (dollars in thousands)

	December 31, 2012				December 31, 2011
Total Troubled Debt Restructurings	Number of Loans		Outstanding Recorded Balance		Number of Loans		Outstanding Recorded Balance

Commercial and industrial		41	$	6,468		52	$	6,011
Commercial real estate		9		6,238		9		12,083
Real estate construction		-		-		2		5,183
Residential mortgages (1st and 2nd lien)		15		3,587		11		2,986
Consumer		5		311		5		212
		70	$	16,604		79	$	26,475

The following table presents, by class, information regarding TDRs executed during the years ended December 31, 2012 and 2011: (dollars in thousands)

	For the year ended						For the year ended
	December 31, 2012						December 31, 2011
			Pre-Modification		Post-Modification				Pre-Modification		Post-Modification
	Number		Outstanding		Outstanding		Number		Outstanding		Outstanding
New Troubled Debt	of		Recorded		Recorded		of		Recorded		Recorded
Restructurings	Loans		Balance		Balance		Loans		Balance		Balance

Commercial and industrial		17	$	6,674	$	6,674		29	$	4,099	$	4,123
Commercial real estate		-		-		-		8		8,697		8,697
Residential mortgages (1st and 2nd liens)		6		1,617		1,617		5		1,437		1,622
Home equity		-		-		-		1		291		291
Consumer		1		49		49		1		34		34
		24	$	8,340	$	8,340		44	$	14,558	$	14,767

The table below presents by class, information regarding loans modified as TDRs that had payment defaults of 90 days or more within twelve months of restructuring during the years ended December 31, 2012 and 2011: (dollars in thousands)

	For the year ended				For the year ended
	December 31, 2012				December 31, 2011
			Outstanding				Outstanding
	Number		Recorded		Number		Recorded
Defaulted Troubled Debt Restructurings	of Loans		Balance		of Loans		Balance

Commercial and industrial		2		1,125		9	$	41
Commercial real estate		-		-		2		4,879
Residential mortgages (1st and 2nd liens)		2		807		-		-
		4		1,932		11	$	4,920

According to accounting guidance, not all loan modifications are TDRs. In some cases, the Company might provide a concession, such as a reduction in interest rate, but the borrower is not experiencing financial distress. This could be the case if the Company is matching a competitor's interest rate.

The following table presents information regarding modifications and renewals executed during the years ended December 31, 2012 and 2011 that are not considered TDRs: (dollars in thousands)

	For the year ended				For the year ended
	December 31, 2012				December 31, 2011
			Outstanding				Outstanding
	Number		Recorded		Number		Recorded
	of Loans		Balance		of Loans		Balance
Commercial and industrial		13	$	8,111		-	$	-
Commercial real estate		34		40,004		5		1,599
		47	$	48,115		5	$	1,599