LOANS, ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY

The following table summarizes changes in the allowance for loan losses by loan category and bifurcates the amount of allowance allocated to each loan category based on collective impairment analysis and loans evaluated individually for impairment:



	December 31, 2012
	Commercial and Industrial			Commercial Real Estate			Commercial Construction			Small Business			Residential Real Estate			Home Equity			Consumer Other			Total
	(Dollars in thousands)
Allowance for loan losses
Beginning balance	$	11,682		$	23,514		$	2,076		$	1,896		$	3,113		$	4,597		$	1,382		$	48,260
Charge-offs	(6,191		)	(4,348		)	—			(616		)	(1,094		)	(3,178		)	(1,165		)	(16,592		)
Recoveries	963			188			—			134			151			93			581			2,110
Provision	7,007			3,244			735			110			760			6,191			9			18,056
Ending balance	$	13,461		$	22,598		$	2,811		$	1,524		$	2,930		$	7,703		$	807		$	51,834
Ending balance: individually evaluated for impairment	$	1,084		$	516		$	—		$	353		$	1,302		$	35		$	130		$	3,420
Ending balance: collectively evaluated for impairment	$	12,377		$	22,082		$	2,811		$	1,171		$	1,628		$	7,668		$	677		$	48,414
Financing receivables
Ending balance: total loans by group	$	687,511		$	2,122,153		$	188,768		$	78,594		$	612,881		$	802,149		$	26,955		$	4,519,011		(1)
Ending balance: individually evaluated for impairment	$	8,575		$	33,868		$	—		$	2,279		$	15,373		$	4,435		$	2,129		$	66,659
Ending balance: collectively evaluated for impairment	$	678,936		$	2,088,285		$	188,768		$	76,315		$	597,508		$	797,714		$	24,826		$	4,452,352

	December 31, 2011
	Commercial and Industrial			Commercial Real Estate			Commercial Construction			Small Business			Residential Real Estate			Home Equity			Consumer Other			Total
Allowance for loan losses
Beginning balance	$	10,423		$	21,939		$	2,145		$	3,740		$	2,915		$	3,369		$	1,724		$	46,255
Charge-offs	(2,888		)	(2,631		)	(769		)	(1,190		)	(559		)	(1,626		)	(1,678		)	(11,341		)
Recoveries	420			97			500			160			—			52			635			1,864
Provision	$	3,727		$	4,109		$	200		$	(814	)	$	757		$	2,802		$	701		$	11,482
Ending balance	$	11,682		$	23,514		$	2,076		$	1,896		$	3,113		$	4,597		$	1,382		$	48,260
Ending balance: individually evaluated for impairment	$	562		$	457		$	—		$	148		$	1,245		$	31		$	239		$	2,682
Ending balance: collectively evaluated for impairment	$	11,120		$	23,057		$	2,076		$	1,748		$	1,868		$	4,566		$	1,143		$	45,578
Financing receivables
Ending balance: total loans by group	$	575,716		$	1,847,654		$	128,904		$	78,509		$	426,201		$	696,063		$	41,343		$	3,794,390		(1)
Ending balance: individually evaluated for impairment	$	5,608		$	37,476		$	843		$	2,326		$	12,984		$	326		$	2,138		$	61,701
Ending balance: collectively evaluated for impairment	$	570,108		$	1,810,178		$	128,061		$	76,183		$	413,217		$	695,737		$	39,205		$	3,732,689



	December 31, 2010
	Commercial and Industrial			Commercial Real Estate			Commercial Construction			Small Business			Residential Real Estate			Home Equity			Consumer Other			Total
Allowance for loan losses
Beginning balance	$	7,545		$	19,451		$	2,457		$	3,372		$	2,840		$	3,945		$	2,751		$	42,361
Charge-offs	(5,170		)	(3,448		)	(1,716		)	(2,279		)	(557		)	(939		)	(2,078		)	(16,187		)
Recoveries	361			1			—			217			59			131			657			1,426
Provision	7,687			5,935			1,404			2,430			573			232			394			18,655
Ending balance	$	10,423		$	21,939		$	2,145		$	3,740		$	2,915		$	3,369		$	1,724		$	46,255
Ending balance: individually evaluated for impairment	$	511		$	411		$	151		$	221		$	991		$	17		$	245		$	2,547
Ending balance: collectively evaluated for impairment	$	9,912		$	21,528		$	1,994		$	3,519		$	1,924		$	3,352		$	1,479		$	43,708
Financing receivables
Ending balance: total loans by group	$	502,952		$	1,717,118		$	129,421		$	80,026		$	478,111		$	579,278		$	68,773		$	3,555,679		(1)
Ending balance: individually evaluated for impairment	$	3,823		$	26,665		$	1,999		$	2,494		$	9,963		$	428		$	2,014		$	47,386
Ending balance: collectively evaluated for impairment	$	499,129		$	1,690,453		$	127,422		$	77,532		$	468,148		$	578,850		$	66,759		$	3,508,293


(1)	The amount of deferred fees included in the ending balance was $3.1 million, $2.9 million, and $2.8 million at December 31, 2012, 2011, and 2010, respectively.

For the purpose of estimating the allowance for loan losses, management segregates the loan portfolio into the portfolio segments detailed in the above tables. Each of these loan categories possesses unique risk characteristics that are considered when determining the appropriate level of allowance for each segment. Some of the risk characteristics unique to each loan category include:

Commercial Portfolio:

Commercial & Industrial — Loans in this category consist of revolving and term loan obligations extended to business and corporate enterprises for the purpose of financing working capital and/or capital investment. Collateral generally consists of pledges of business assets including, but not limited to: accounts receivable, inventory, plant & equipment, or real estate, if applicable. Repayment sources consist of: primarily, operating cash flow, and secondarily, liquidation of assets.

Commercial Real Estate — Loans in this category consist of mortgage loans to finance investment in real property such as multi-family residential, commercial/retail, office, industrial, hotels, educational and healthcare facilities and other specific use properties. Loans are typically written with amortizing payment structures. Collateral values are determined based upon third party appraisals and evaluations. Loan to value ratios at origination are governed by established policy and regulatory guidelines. Repayment sources consist of: primarily, cash flow from operating leases and rents, and secondarily, liquidation of assets.

Commercial Construction — Loans in this category consist of short-term construction loans, revolving and nonrevolving credit lines and construction/permanent loans to finance the acquisition, development and construction or rehabilitation of real property. Project types include: residential 1-4 family condominium and multi-family homes, commercial/retail, office, industrial, hotels, educational and healthcare facilities and other specific use properties. Loans may be written with nonamortizing or hybrid payment structures depending upon the type of project. Collateral values are determined based upon third party appraisals and evaluations. Loan to value ratios at origination are governed by established policy and regulatory guidelines. Repayment sources vary depending upon the type of project and may consist of: sale or lease of units, operating cash flows or liquidation of other assets.

Small Business — Loans in this category consist of revolving, term loan and mortgage obligations extended to sole proprietors and small businesses for purposes of financing working capital and/or capital investment. Collateral generally consists of pledges of business assets including, but not limited to: accounts receivable, inventory, plant & equipment, or real estate (if applicable). Repayment sources consist of: primarily, operating cash flows, and secondarily, liquidation of assets.

For the commercial portfolio it is the Bank’s policy to obtain personal guarantees for payment from individuals holding material ownership interests of the borrowing entities.

Consumer Portfolio:

Residential Real Estate — Residential mortgage loans held in the Bank’s portfolio are made to borrowers who demonstrate the ability to make scheduled payments with full consideration to underwriting factors such as current and expected income, employment status, current assets, other financial resources, credit history and the value of the collateral. Collateral consists of mortgage liens on 1-4 family residential properties. The Company does not originate sub-prime loans.

Home Equity — Home equity loans and lines are made to qualified individuals for legitimate purposes secured by senior or junior mortgage liens on owner-occupied 1-4 family homes, condominiums or vacation homes or on nonowner occupied 1-4 family homes with more restrictive loan to value requirements. The home equity loan has a fixed rate and is billed equal payments comprised of principal and interest. The home equity line of credit has a variable rate and is billed interest only payments during the draw period. At the end of the draw period, the home equity line of credit is billed a percentage of the principal balance plus all accrued interest. Borrower qualifications include favorable credit history combined with supportive income requirements and combined loan to value ratios within established policy guidelines.

Consumer — Other — Other consumer loan products including personal lines of credit and amortizing loans made to qualified individuals for various purposes such as education, auto loans, debt consolidation, personal expenses or overdraft protection. Borrower qualifications include favorable credit history combined with supportive income and collateral requirements within established policy guidelines. Consumer - Other loans may be secured or unsecured.

Credit Quality:

The Company continually monitors the asset quality of the loan portfolio using all available information. Based on this information, loans demonstrating certain payment issues or other weaknesses may be categorized as delinquent, impaired, nonperforming and/or put on nonaccrual status. Additionally, in the course of resolving such loans, the Company may choose to restructure the contractual terms of certain loans to match the borrower’s ability to repay the loan based on their current financial condition. If a restructured loan meets certain criteria, it may be categorized as a troubled debt restructuring (“TDR”).

The Company reviews numerous credit quality indicators when assessing the risk in its loan portfolio. For the commercial portfolio, the Company utilizes a 10-point commercial risk-rating system, which assigns a risk-grade to each borrower based on a number of quantitative and qualitative factors associated with a commercial loan transaction. Factors considered include industry and market conditions, position within the industry, earnings trends, operating cash flow, asset/liability values, debt capacity, guarantor strength, management and controls, financial reporting, collateral, and other considerations. The risk-ratings categories are defined as follows:

1- 6 Rating — Pass

Risk-rating grades “1” through “6” comprise those loans ranging from ‘Substantially Risk Free’ which indicates borrowers are of unquestioned credit standing and the pinnacle of credit quality, well established companies with a very strong financial condition, and loans fully secured by cash collateral, through ‘Acceptable Risk’, which indicates borrowers may exhibit declining earnings, strained cash flow, increasing leverage and/or weakening market fundamentals that indicate above average or below average asset quality, margins and market share. Collateral coverage is protective.

7 Rating — Potential Weakness

Borrowers exhibit potential credit weaknesses or downward trends deserving management’s close attention. If not checked or corrected, these trends will weaken the Bank’s asset and position. While potentially weak, currently these borrowers are marginally acceptable; no loss of principal or interest is envisioned.

8 Rating — Definite Weakness

Borrowers exhibit well defined weaknesses that jeopardize the orderly liquidation of debt. Loan may be inadequately protected by the current net worth and paying capacity of the obligor or by the collateral pledged, if any. Normal repayment from the borrower is in jeopardy, although no loss of principal is envisioned. However, there is a distinct possibility that a partial loss of interest and/or principal will occur if the deficiencies are not corrected. Collateral coverage may be inadequate to cover the principal obligation.

9 Rating — Partial Loss Probable

Borrowers exhibit well defined weaknesses that jeopardize the orderly liquidation of debt with the added provision that the weaknesses make collection of the debt in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Serious problems exist to the point where partial loss of principal is likely.

10 Rating — Definite Loss

Borrowers deemed incapable of repayment. Loans to such borrowers are considered uncollectible and of such little value that continuation as active assets of the Bank is not warranted.

The credit quality of the commercial loan portfolio is actively monitored and any changes in credit quality are reflected in risk-rating changes. Risk-ratings are assigned or reviewed for all new loans, when advancing significant additions to existing relationships (over $50,000), at least quarterly for all actively managed loans, and any time a significant event occurs, including at renewal of the loan.

The Company utilizes a comprehensive strategy for monitoring commercial credit quality. Borrowers are required to provide updated financial information at least annually which is carefully evaluated for any changes in financial condition. Larger loan relationships are subject to a full annual credit review by an experienced credit analysis group. Additionally, the Company retains an independent loan review firm to evaluate the credit quality of the commercial loan portfolio. The independent loan review process achieves a significant review of the commercial loan portfolio exposure and reports the results of these reviews to the Audit Committee of the Board of Directors on a quarterly basis.

The following table details the internal risk-rating categories for the Company’s commercial portfolio:



		December 31, 2012
Category	Risk Rating	Commercial and Industrial		Commercial Real Estate		Commercial Construction		Small Business		Total
		(Dollars in thousands)
Pass	1 - 6	$	647,984	$	1,928,148	$	177,693	$	71,231	$	2,825,056
Potential weakness	7	16,420		92,651		6,195		3,213		118,479
Definite weakness	8	21,979		98,688		4,880		4,080		129,627
Partial loss probable	9	1,128		2,666		—		70		3,864
Definite loss	10	—		—		—		—		—
Total		$	687,511	$	2,122,153	$	188,768	$	78,594	$	3,077,026
		December 31, 2011
Category	Risk Rating	Commercial and Industrial		Commercial Real Estate		Commercial Construction		Small Business		Total
		(Dollars in thousands)
Pass	1 - 6	$	528,798	$	1,626,745	$	114,633	$	70,543	$	2,340,719
Potential weakness	7	33,313		124,661		7,859		4,041		169,874
Definite weakness	8	12,683		93,438		6,412		3,762		116,295
Partial loss probable	9	922		2,810		—		163		3,895
Definite loss	10	—		—		—		—		—
Total		$	575,716	$	1,847,654	$	128,904	$	78,509	$	2,630,783

For the Company’s consumer portfolio, the quality of the loan is best indicated by the repayment performance of an individual borrower. However, the Company does supplement performance data with current Fair Isaac Corporation (“FICO”) and Loan to Value (“LTV”) estimates. Current FICO data is purchased and appended to all consumer loans on a quarterly basis. In addition, automated valuation services and broker opinions of value are used to supplement original value data for the residential and home equity portfolios, periodically. The following table shows the weighted average FICO scores and the weighted average combined LTV ratio, exclusive of loans acquired from Central, for the periods indicated below:



	December 31
	2012		2011
Residential portfolio
FICO score (re-scored)(1)	727		731
LTV (re-valued)(2)	67.0	%	67.0	%
Home equity portfolio
FICO score (re-scored)(1)	763		762
LTV (re-valued)(2)	54.0	%	55.0	%


(1)	The average FICO scores above are based upon rescores available from November and actual score data for loans booked between December 1 and December 31, for the years indicated.


(2)	The LTV ratios are based upon updated automated valuations as of November 30, 2011 for the years indicated, if applicable. For home equity loans and lines in a subordinate lien, the LTV data represents a combined LTV, taking into account the senior lien data for loans and lines.

The Bank’s philosophy toward managing its loan portfolios is predicated upon careful monitoring, which stresses early detection and response to delinquent and default situations. Delinquent loans are managed by a team of seasoned collection specialists and the Bank seeks to make arrangements to resolve any delinquent or default situation over the shortest possible time frame. As a general rule, loans more than 90 days past due with respect to principal or interest are classified as nonaccrual loans. As permitted by banking regulations, certain consumer loans past due 90 days or more may continue to accrue interest. The Company also may use discretion regarding other loans over 90 days delinquent if the loan is well secured and in process of collection. Set forth is information regarding the Company’s nonperforming loans at the period shown.

The following table shows nonaccrual loans at the dates indicated:



	December 31
	2012			2011
	(Dollars in thousands)
Commercial and industrial	$	2,666		$	1,883
Commercial real estate	6,574			12,829
Commercial construction	—			280
Small business	570			542
Residential real estate	11,472			9,867
Home equity	7,311		(1)	3,130
Consumer — other	121			381
Total nonaccrual loans(2)	$	28,714		$	28,912


(1)	The increase in nonaccrual home equity loans was driven by regulatory guidance issued during 2012, pertaining to income recognition practices on performing junior lien mortgages. While the loans are currently performing they are placed on nonaccrual as a result of delinquency with respect to the first position, which is held by another financial institution.


(2)	Included in these amounts were $6.6 million and $9.2 million nonaccruing TDRs at December 31, 2012 and 2011, respectively.

The following table shows the age analysis of past due financing receivables as of the dates indicated:



	December 31, 2012
	30-59 days			60-89 days			90 days or more			Total Past Due			Current		Total Financing Receivables		Recorded Investment >90 Days and Accruing
	Number of Loans	Principal Balance		Number of Loans	Principal Balance		Number of Loans	Principal Balance		Number of Loans	Principal Balance		Current		Total Financing Receivables		Recorded Investment >90 Days and Accruing
	(Dollars in thousands)
Commercial and industrial	14	$	1,305	7	$	336	23	$	1,875	44	$	3,516	$	683,995	$	687,511	$	—
Commercial real estate	19	5,028		8	2,316		31	6,054		58	13,398		2,108,755		2,122,153		—
Commercial construction	—	—		—	—		—	—		—	—		188,768		188,768		—
Small business	20	750		8	94		10	320		38	1,164		77,430		78,594		—
Residential real estate	17	3,053		7	1,848		40	7,501		64	12,402		592,266		604,668		—
Residential construction	—	—		—	—		—	—		—	—		8,213		8,213		—
Home equity	32	2,756		10	632		17	1,392		59	4,780		797,369		802,149		—
Consumer — other	208	1,217		32	224		28	153		268	1,594		25,361		26,955		52
Total	310	$	14,109	72	$	5,450	149	$	17,295	531	$	36,854	$	4,482,157	$	4,519,011	$	52



	December 31, 2011
	30-59 days			60-89 days			90 days or more			Total Past Due			Current		Total Financing Receivables		Recorded Investment >90 Days and Accruing
	Number of Loans	Principal Balance		Number of Loans	Principal Balance		Number of Loans	Principal Balance		Number of Loans	Principal Balance		Current		Total Financing Receivables		Recorded Investment >90 Days and Accruing
	(Dollars in thousands)
Commercial and industrial	21	$	2,143	10	$	2,709	20	$	1,279	51	$	6,131	$	569,585	$	575,716	$	—
Commercial real estate	7	3,684		7	2,522		29	6,737		43	12,943		1,834,711		1,847,654		—
Commercial construction	—	—		—	—		3	280		3	280		128,624		128,904		—
Small business	19	320		3	21		12	148		34	489		78,020		78,509		—
Residential real estate	14	2,770		10	3,208		31	6,065		55	12,043		404,527		416,570		—
Residential construction	—	—		—	—		—	—		—	—		9,631		9,631		—
Home equity	28	1,483		19	1,139		19	1,502		66	4,124		691,939		696,063		—
Consumer — other	260	1,821		57	303		58	374		375	2,498		38,845		41,343		41
Total	349	$	12,221	106	$	9,902	172	$	16,385	627	$	38,508	$	3,755,882	$	3,794,390	$	41

In the course of resolving nonperforming loans, the Bank may choose to restructure the contractual terms of certain loans. The Bank attempts to work-out an alternative payment schedule with the borrower in order to avoid foreclosure actions. Any loans that are modified are reviewed by the Bank to identify if a TDR has occurred, which is when, for economic or legal reasons related to a borrower’s financial difficulties, the Bank grants a concession to the borrower that it would not otherwise consider. Terms may be modified to fit the ability of the borrower to repay in line with its current financial status and the restructuring of the loan may include the transfer of assets from the borrower to satisfy the debt, a modification of loan terms, or a combination of the two.

The following table shows the Company’s total TDRs and other pertinent information as of the dates indicated:



	December 31
	2012		2011
	(Dollars in thousands)
TDRs on accrual status	$	46,764	$	37,151
TDRs on nonaccrual status	6,554		9,230
Total TDR’s	$	53,318	$	46,381
Amount of specific reserves included in the allowance for loan loss associated with TDRs:	$	3,049	$	1,887
Additional commitments to lend to a borrower who has been a party to a TDR:	$	1,847	$	693

The Bank’s policy is to have any restructured loan which is on nonaccrual status prior to being modified remain on nonaccrual status for six months, subsequent to being modified, before management considers its return to accrual status. If the restructured loan is on accrual status prior to being modified, it is reviewed to determine if the modified loan should remain on accrual status. Additionally, loans classified as TDRs are adjusted to reflect the changes in value of the recorded investment in the loan, if any, resulting from the granting of a concession. For all residential loans modifications, the borrower must perform during a 90 day trial period before the modification is finalized.

The following table shows the modifications which occurred during the periods indicated and the change in the recorded investment subsequent to the modifications occurring:



	Troubled Debt Restructurings
	Years Ended December 31
	2012
	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment(1)
	(Dollars in thousands)

Commercial & industrial	18	$	3,372	$	3,372
Commercial real estate	15	7,121		7,121
Small business	14	621		621
Residential real estate	20	3,495		3,499
Home equity	20	1,195		1,198
Consumer — other	33	328		329
Total	120	$	16,132	$	16,140

	2011
Commercial & industrial	11	$	1,165	$	1,165
Commercial real estate	17	8,707		8,707
Small business	37	1,270		1,270
Residential real estate	16	3,460		3,536
Home equity	2	101		101
Consumer — other	89	985		985
Total	172	$	15,688	$	15,764

	2010
Commercial & industrial	11	$	1,286	$	1,286
Commercial real estate	14	12,491		12,491
Small business	47	1,514		1,514
Residential real estate	19	5,797		5,938
Home equity	4	292		296
Consumer — other	108	1,405		1,405
Total	203	$	22,785	$	22,930


(1)	The post-modification balances represent the balance of the loan on the date of modification. These amounts may show an increase when modifications include a capitalization of interest.

The following table shows the Company’s post-modification balance of TDRs listed by type of modification as of the periods indicated:



	Years Ended December 31
	2012		2011		2010
	(Dollars in thousands)
Extended maturity	$	5,867	$	5,216	$	10,691
Adjusted interest rate	2,182		1,746		52
Combination rate & maturity	5,007		8,802		12,187
Court ordered concession	3,084		—		—
Total	$	16,140	$	15,764	$	22,930

The following table shows the loans that have been modified during the past twelve months which have subsequently defaulted during the periods indicated. The Company considers a loan to have defaulted when it reaches 90 days past due.



	Years Ended December 31
	2012			2011			2010
	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
	(Dollars in thousands)
Troubled debt restructurings that subsequently defaulted
Commercial & industrial	1	$	231	—	$	—	—	$	—
Commercial real estate	3	696		—	—		1	263
Small business	—	—		5	75		—	—
Residential real estate	1	238		—	—		2	500
Home equity	—	—		—	—		—	—
Consumer — other	—	—		1	22		2	18
Subtotal	5	$	1,165	6	$	97	5	$	781

All TDR loans are considered impaired and therefore are subject to a specific review for impairment. The impairment analysis appropriately discounts the present value of the anticipated cash flows by the loan’s contractual rate of interest in effect prior to the loan’s modification. The amount of impairment, if any, is recorded as a specific loss allocation to each individual loan in the allowance for loan losses. Commercial loans (commercial and industrial, commercial construction, commercial real estate and small business loans), residential loans, and home equity loans that have been classified as TDRs and which subsequently default are reviewed to determine if the loan should be deemed collateral dependent. In such an instance, any shortfall between the value of the collateral and the book value of the loan is determined by measuring the recorded investment in the loan against the fair value of the collateral less estimated costs to sell. The Bank charges off the amount of any confirmed loan loss in the period when the loans, or portion of loans, are deemed uncollectible. Smaller balance consumer TDR loans are reviewed for performance to determine when a charge-off is appropriate.

A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. 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.

The table below sets forth information regarding the Company’s impaired loans as of the dates indicated:



	Years Ended December 31
	2012
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
	(Dollars in thousands)
With no related allowance recorded
Commercial & industrial	$	5,849	$	7,343	$	—	$	6,993	$	391
Commercial real estate	12,999		13,698		—		13,984		952
Commercial construction	—		—		—		—		—
Small business	1,085		1,147		—		1,217		80
Residential real estate	2,545		2,630		—		2,589		118
Home equity	4,119		4,166		—		4,190		195
Consumer — other	700		705		—		858		72
Subtotal	27,297		29,689		—		29,831		1,808
With an allowance recorded
Commercial & industrial	$	2,726	$	2,851	$	1,084	$	2,883	$	143
Commercial real estate	20,869		21,438		516		21,678		1,340
Commercial construction	—		—		—		—		—
Small business	1,194		1,228		353		1,255		77
Residential real estate	12,828		13,601		1,302		13,014		560
Home equity	316		389		35		324		23
Consumer — other	1,429		1,453		130		1,610		60
Subtotal	39,362		40,960		3,420		40,764		2,203
Total	$	66,659	$	70,649	$	3,420	$	70,595	$	4,011
	2011
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
	(Dollars in thousands)
With no related allowance recorded
Commercial & industrial	$	3,380	$	4,365	$	—	$	4,672	$	300
Commercial real estate	19,433		20,010		—		19,760		1,365
Commercial construction	843		843		—		839		59
Small business	1,131		1,193		—		1,199		84
Residential real estate	—		—		—		—		—
Home equity	22		22		—		22		1
Consumer — other	31		32		—		35		3
Subtotal	24,840		26,465		—		26,527		1,812
With an allowance recorded
Commercial & industrial	$	2,228	$	2,280	$	562	$	2,244	$	99
Commercial real estate	18,043		19,344		457		19,951		1,173
Commercial construction	—		—		—		—		—
Small business	1,195		1,218		148		1,292		73
Residential real estate	12,984		13,651		1,245		13,059		512
Home equity	304		349		31		316		19
Consumer — other	2,107		2,125		239		1,928		73
Subtotal	36,861		38,967		2,682		38,790		1,949
Total	$	61,701	$	65,432	$	2,682	$	65,317	$	3,761



	2010
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
	(Dollars in thousands)
With no related allowance recorded
Commercial & industrial	$	2,451	$	2,917	$	—	$	2,539	$	171
Commercial real estate	19,538		20,280		—		20,223		1,394
Commercial construction	230		230		—		248		13
Small business	1,541		1,656		—		1,689		122
Residential real estate	205		205		—		205		10
Home equity	—		—		—		—		—
Consumer — other	10		10		—		7		—
Subtotal	23,975		25,298		—		24,911		1,710
With an allowance recorded
Commercial & industrial	$	1,372	$	1,373	$	511	$	1,384	$	94
Commercial real estate	7,127		7,379		411		7,346		438
Commercial construction	1,769		1,769		151		1,762		76
Small business	953		954		221		956		63
Residential real estate	9,758		10,146		991		9,836		396
Home equity	428		435		17		432		21
Consumer — other	2,004		2,035		245		1,364		58
Subtotal	23,411		24,091		2,547		23,080		1,146
Total	$	47,386	$	49,389	$	2,547	$	47,991	$	2,856

The following table displays certain information pertaining to purchased credit impaired loans at the dates indicated:



		At
		Acquisition
		November 9, 2012
		(Dollars in thousands)
Contractually required principal and interest payments receivable	(1)	$	47,548
Less: expected cash flows	(1)	38,815
Initial nonaccretable difference		$	8,733

Expected cash flows	(1)	$	38,815
Less: fair value (initial carrying amount)		35,720
Accretable Yield		$	3,095

		November 9, 2012		December 31, 2012
		(Dollars in thousands)
Outstanding balance		$	40,799	$	36,278
Carrying amount		$	35,720	$	32,054

(1) Reflective of anticipated prepayments.

The following table summarizes activity in the accretable yield for the PCI loan portfolio:



	Year Ended December 31, 2012
	(Dollars in thousands)
Balance at the beginning of the period	$	—
Acquisition	3,095
Accretion	(903		)
Reclassification from nonaccretable difference for loans with improved cash flows (1)	272
Balance at end of period	$	2,464


(1)	Results in increased interest income during the period in which the loan paid off.

Loans to Insiders

The Bank has granted loans to principal officers, directors (and their affiliates) and principal security holders. All such loans were made in the ordinary course of business on substantially the same terms, including interest rate and collateral, as those prevailing at the time for comparable transactions with other persons, and do not involve more than the normal risk of collectability or present other unfavorable features. Annual activity consists of the following at the periods indicated:



	2012			2011
	(Dollars in thousands)
Principal balance of loans outstanding as of January 1,	$	41,184		$	29,986
Loan advances	89,666			68,512
Loan payments/payoffs (1)	(82,991		)	(57,314		)
Principal balance of loans outstanding as of December 31,	$	47,859		$	41,184


(1)	Includes the removal of $900,000 related to a director who retired during 2012, and no longer considered an insider. Amount does not reflect an actual payoff of a loan.