Note 5 – CREDIT QUALITY ASSESSMENT

Allowance for Loan and Lease Losses

Summary information on the allowance for loan and lease loss activity for the period indicated is provided in the following table:

	Nine Months Ended September 30,
(In thousands)	2013		2012
Balance at beginning of year	$	42,957	$	49,426
Provision (credit) for loan and lease losses		(1,670)		2,481
Loan and lease charge-offs		(9,639)		(11,456)
Loan and lease recoveries		7,774		2,167
Net charge-offs		(1,865)		(9,289)
Balance at period end	$	39,422	$	42,618

The following tables provide information on the activity in the allowance for loan and lease losses by the respective loan portfolio segment for the period indicated:

	For the Nine Months Ended September 30, 2013
				Commercial Real Estate															Residential Real Estate
										Commercial
	Commercial			Commercial			Commercial			Owner									Residential			Residential
(Dollars in thousands)	Business			AD&C			Investor R/E			Occupied R/E			Leasing			Consumer			Mortgage			Construction			Total
Balance at beginning of year	$	6,495		$	4,737		$	9,583		$	6,997		$	332		$	3,846		$	8,522		$	2,445		$	42,957
Provision (credit)		1,332			(4,037)			1,026			(642)			(321)			1,204			231			(463)			(1,670)
Charge-offs		(2,405)			-			(4,744)			(229)			-			(1,327)			(829)			(105)			(9,639)
Recoveries		692			3,080			3,347			332			10			160			144			9			7,774
Net charge-offs		(1,713)			3,080			(1,397)			103			10			(1,167)			(685)			(96)			(1,865)
Balance at end of period	$	6,114		$	3,780		$	9,212		$	6,458		$	21		$	3,883		$	8,068		$	1,886		$	39,422

Total loans and leases	$	332,670		$	158,739		$	518,029		$	569,350		$	962		$	368,764		$	595,180		$	118,316		$	2,662,010
Allowance for loans and leases to total loans and leases ratio		1.84	%		2.38	%		1.78	%		1.13	%		2.18	%		1.05	%		1.36	%		1.59	%		1.48	%

Balance of loans specifically evaluated for impairment	$	6,562		$	5,086		$	7,729		$	5,385			na.		$	29		$	4,438		$	1,860		$	31,089
Allowance for loans specifically evaluated for impairment	$	1,550		$	946		$	146		$	391			na.			na.		$	650		$	547		$	4,230
Specific allowance to specific loans ratio		23.62	%		18.60	%		1.89	%		7.26	%		na.			na.			14.65	%		29.41	%		13.61	%

Balance of loans collectively evaluated	$	326,108		$	153,653		$	510,300		$	563,965		$	962		$	368,735		$	590,742		$	116,456		$	2,630,921
Allowance for loans collectively evaluated	$	4,564		$	2,834		$	9,066		$	6,067		$	21		$	3,883		$	7,418		$	1,339		$	35,192
Collective allowance to collective loans ratio		1.40	%		1.84	%		1.78	%		1.08	%		2.18	%		1.05	%		1.26	%		1.15	%		1.34	%

	For the Year Ended December 31, 2012
				Commercial Real Estate															Residential Real Estate
										Commercial
	Commercial			Commercial			Commercial			Owner									Residential			Residential
(Dollars in thousands)	Business			AD&C			Investor R/E			Occupied R/E			Leasing			Consumer			Mortgage			Construction			Total
Balance at beginning of year	$	6,727		$	6,664		$	8,248		$	7,329		$	795		$	4,873		$	10,583		$	4,207		$	49,426
Provision (credit)		(758)			826			4,928			804			(478)			44			(167)			(1,550)			3,649
Charge-offs		(1,022)			(3,281)			(3,690)			(1,174)			(8)			(1,298)			(2,107)			(224)			(12,804)
Recoveries		1,548			528			97			38			23			227			213			12			2,686
Net charge-offs		526			(2,753)			(3,593)			(1,136)			15			(1,071)			(1,894)			(212)			(10,118)
Balance at end of period	$	6,495		$	4,737		$	9,583		$	6,997		$	332		$	3,846		$	8,522		$	2,445		$	42,957

Total loans and leases	$	346,708		$	151,933		$	456,888		$	571,510		$	3,421		$	356,990		$	523,364		$	120,314		$	2,531,128
Allowance for loans and leases to total loans and leases ratio		1.87	%		3.12	%		2.10	%		1.22	%		9.70	%		1.08	%		1.63	%		2.03	%		1.70	%

Balance of loans specifically evaluated for impairment	$	8,984		$	6,332		$	11,843		$	15,184			na.		$	31		$	4,528		$	1,871		$	48,773
Allowance for loans specifically evaluated for impairment	$	2,597		$	-		$	774		$	598			na.			na.		$	713		$	467		$	5,149
Specific allowance to specific loans ratio		28.91	%		-			6.54	%		3.94	%		na.			na.			15.75	%		24.96	%		10.56	%

Balance of loans collectively evaluated	$	337,724		$	145,601		$	445,045		$	556,326		$	3,421		$	356,959		$	518,836		$	118,443		$	2,482,355
Allowance for loans collectively evaluated	$	3,898		$	4,737		$	8,809		$	6,399		$	332		$	3,846		$	7,809		$	1,978		$	37,808
Collective allowance to collective loans ratio		1.15	%		3.25	%		1.98	%		1.15	%		9.70	%		1.08	%		1.51	%		1.67	%		1.52	%

The following table provides summary information regarding impaired loans at the dates indicated and for the periods then ended:

(In thousands)	September 30, 2013		December 31, 2012
Impaired loans with a specific allowance	$	15,142	$	27,526
Impaired loans without a specific allowance		15,947		21,247
Total impaired loans	$	31,089	$	48,773

Allowance for loan and lease losses related to impaired loans	$	4,230	$	5,149
Allowance for loan and lease losses related to loans collectively evaluated		35,192		37,808
Total allowance for loan and lease losses	$	39,422	$	42,957

Average impaired loans for the period	$	39,843	$	57,438
Contractual interest income due on impaired loans during the period	$	2,292	$	4,433
Interest income on impaired loans recognized on a cash basis	$	1,694	$	1,121
Interest income on impaired loans recognized on an accrual basis	$	332	$	560

The following tables present the recorded investment with respect to impaired loans, the associated allowance by the applicable portfolio segment and the principal balance of the impaired loans prior to amounts charged-off at the dates indicated:

	September 30, 2013
			Commercial Real Estate								Total Recorded
							Commercial		All		Investment in
			Commercial		Commercial		Owner		Other		Impaired
(In thousands)	Commercial		AD&C		Investor R/E		Occupied R/E		Loans		Loans
Impaired loans with a specific allowance
Non-accruing	$	1,189	$	1,379	$	770	$	207	$	-	$	3,545
Restructured accruing		905		-		-		995		2,379		4,279
Restructured non-accruing		266		2,439		-		2,581		2,032		7,318
Balance	$	2,360	$	3,818	$	770	$	3,783	$	4,411	$	15,142

Allowance	$	1,550	$	946	$	146	$	391	$	1,197	$	4,230

Impaired loans without a specific allowance
Non-accruing	$	1,079	$	1,268	$	5,483	$	675	$	-	$	8,505
Restructured accruing		1,607		-		852		188		1,128		3,775
Restructured non-accruing		1,516		-		624		739		788		3,667
Balance	$	4,202	$	1,268	$	6,959	$	1,602	$	1,916	$	15,947

Total impaired loans
Non-accruing	$	2,268	$	2,647	$	6,253	$	882	$	-	$	12,050
Restructured accruing		2,512		-		852		1,183		3,507		8,054
Restructured non-accruing		1,782		2,439		624		3,320		2,820		10,985
Balance	$	6,562	$	5,086	$	7,729	$	5,385	$	6,327	$	31,089

Unpaid principal balance in total impaired loans	$	8,645	$	13,448	$	12,585	$	7,028	$	6,944	$	48,650

	September 30, 2013
			Commercial Real Estate								Total Recorded
							Commercial		All		Investment in
			Commercial		Commercial		Owner		Other		Impaired
(In thousands)	Commercial		AD&C		Investor R/E		Occupied R/E		Loans		Loans
Average impaired loans for the period	$	7,539	$	5,782	$	11,343	$	8,705	$	6,474	$	39,843
Contractual interest income due on impaired loans during the period	$	481	$	590	$	430	$	578	$	213
Interest income on impaired loans recognized on a cash basis	$	250	$	269	$	74	$	1,010	$	91
Interest income on impaired loans recognized on an accrual basis	$	117	$	-	$	23	$	58	$	134

	December 31, 2012
			Commercial Real Estate								Total Recorded
							Commercial		All		Investment in
			Commercial		Commercial		Owner		Other		Impaired
(In thousands)	Commercial		AD&C		Investor R/E		Occupied R/E		Loans		Loans
Impaired loans with a specific allowance
Non-accruing	$	2,514	$	-	$	10,219	$	4,319	$	-	$	17,052
Restructured accruing		2,981		-		-		1,503		3,419		7,903
Restructured non-accruing		228		-		-		1,039		1,304		2,571
Balance	$	5,723	$	-	$	10,219	$	6,861	$	4,723	$	27,526

Allowance	$	2,597	$	-	$	774	$	598	$	1,180	$	5,149

Impaired loans without a specific allowance
Non-accruing	$	1,846	$	3,033	$	577	$	6,191	$	-	$	11,647
Restructured accruing		1,392		-		-		-		815		2,207
Restructured non-accruing		23		3,299		1,047		2,132		892		7,393
Balance	$	3,261	$	6,332	$	1,624	$	8,323	$	1,707	$	21,247

Total impaired loans
Non-accruing	$	4,360	$	3,033	$	10,796	$	10,510	$	-	$	28,699
Restructured accruing		4,373		-		-		1,503		4,234		10,110
Restructured non-accruing		251		3,299		1,047		3,171		2,196		9,964
Balance	$	8,984	$	6,332	$	11,843	$	15,184	$	6,430	$	48,773

Unpaid principal balance in total impaired loans	$	11,506	$	21,590	$	15,405	$	17,928	$	6,904	$	73,333

	December 31, 2012
			Commercial Real Estate								Total Recorded
							Commercial		All		Investment in
			Commercial		Commercial		Owner		Other		Impaired
(In thousands)	Commercial		AD&C		Investor R/E		Occupied R/E		Loans		Loans
Average impaired loans for the period	$	8,659	$	12,270	$	13,838	$	16,172	$	6,499	$	57,438
Contractual interest income due on impaired loans during the period	$	527	$	1,222	$	1,181	$	1,391	$	112
Interest income on impaired loans recognized on a cash basis	$	121	$	323	$	175	$	420	$	82
Interest income on impaired loans recognized on an accrual basis	$	257	$	-	$	-	$	102	$	201

Credit Quality

The following tables provide information on the credit quality of the loan portfolio by segment at the dates indicated:

	September 30, 2013
			Commercial Real Estate										Residential Real Estate
							Commercial
			Commercial		Commercial		Owner						Residential		Residential
(In thousands)	Commercial		AD&C		Investor R/E		Occupied R/E		Leasing		Consumer		Mortgage		Construction		Total
Non-performing loans and assets:
Non-accrual loans and leases	$	4,050	$	5,086	$	6,877	$	4,202	$	-	$	2,004	$	5,643	$	2,327	$	30,189
Loans and leases 90 days past due		-		-		-		-		-		10		-		-		10
Restructured loans and leases		2,512		-		852		1,183		-		29		3,478		-		8,054
Total non-performing loans and leases		6,562		5,086		7,729		5,385		-		2,043		9,121		2,327		38,253
Other real estate owned		408		-		-		-		-		-		1,254		-		1,662
Total non-performing assets	$	6,970	$	5,086	$	7,729	$	5,385	$	-	$	2,043	$	10,375	$	2,327	$	39,915

	December 31, 2012
			Commercial Real Estate										Residential Real Estate
							Commercial
			Commercial		Commercial		Owner						Residential		Residential
(In thousands)	Commercial		AD&C		Investor R/E		Occupied R/E		Leasing		Consumer		Mortgage		Construction		Total
Non-performing loans and assets:
Non-accrual loans and leases	$	4,611	$	6,332	$	11,843	$	13,681	$	865	$	2,410	$	4,681	$	3,125	$	47,548
Loans and leases 90 days past due		24		-		-		209		-		14		-		-		247
Restructured loans and leases		4,373		-		-		1,503		-		31		4,203		-		10,110
Total non-performing loans and leases		9,008		6,332		11,843		15,393		865		2,455		8,884		3,125		57,905
Other real estate owned		1,829		-		220		2,396		-		-		1,401		80		5,926
Total non-performing assets	$	10,837	$	6,332	$	12,063	$	17,789	$	865	$	2,455	$	10,285	$	3,205	$	63,831

	September 30, 2013
			Commercial Real Estate										Residential Real Estate
							Commercial
			Commercial		Commercial		Owner						Residential		Residential
(In thousands)	Commercial		AD&C		Investor R/E		Occupied R/E		Leasing		Consumer		Mortgage		Construction		Total
Past due loans and leases
31-60 days	$	4,989	$	-	$	5,901	$	3,540	$	-	$	713	$	5,985	$	-	$	21,128
61-90 days		984		382		78		5,022		-		596		-		-		7,062
> 90 days		-		-		-		-		-		10		-		-		10
Total past due		5,973		382		5,979		8,562		-		1,319		5,985		-		28,200
Non-accrual loans and leases		4,050		5,086		6,877		4,202		-		2,004		5,643		2,327		30,189
Loans aquired with deteriorated credit quality		1,655		-		1,598		2,635		-		-		-		-		5,888
Current loans		320,992		153,271		503,575		553,951		962		365,441		583,552		115,989		2,597,733
Total loans and leases	$	332,670	$	158,739	$	518,029	$	569,350	$	962	$	368,764	$	595,180	$	118,316	$	2,662,010

	December 31, 2012
			Commercial Real Estate										Residential Real Estate
							Commercial
			Commercial		Commercial		Owner						Residential		Residential
(In thousands)	Commercial		AD&C		Investor R/E		Occupied R/E		Leasing		Consumer		Mortgage		Construction		Total
Past due loans and leases
31-60 days	$	2,138	$	-	$	2,020	$	1,556	$	7	$	496	$	5,443	$	-	$	11,660
61-90 days		212		-		-		1,809		68		101		1,603		-		3,793
> 90 days		24		-		-		209		-		14		-		-		247
Total past due		2,374		-		2,020		3,574		75		611		7,046		-		15,700
Non-accrual loans and leases		4,611		6,332		11,843		13,681		865		2,410		4,681		3,125		47,548
Loans aquired with deteriorated credit quality		1,978		332		949		3,941		-		-		-		-		7,200
Current loans		337,745		145,269		442,076		550,314		2,481		353,969		511,637		117,189		2,460,680
Total loans and leases	$	346,708	$	151,933	$	456,888	$	571,510	$	3,421	$	356,990	$	523,364	$	120,314	$	2,531,128

The following tables provide information by credit risk rating indicators for each segment of the commercial loan portfolio for the dates indicated:

	September 30, 2013
			Commercial Real Estate
							Commercial
			Commercial		Commercial		Owner
(In thousands)	Commercial		AD&C		Investor R/E		Occupied R/E		Total
Pass	$	292,973	$	151,546	$	493,523	$	528,610	$	1,466,652
Special Mention		19,345		109		1,713		17,300		38,467
Substandard		20,063		7,084		22,750		23,440		73,337
Doubtful		289		-		43		-		332
Total	$	332,670	$	158,739	$	518,029	$	569,350	$	1,578,788

		December 31, 2012
			Commercial Real Estate
							Commercial
			Commercial		Commercial		Owner
(In thousands)	Commercial		AD&C		Investor R/E		Occupied R/E		Total
Pass	$	305,348	$	141,802	$	405,448	$	520,844	$	1,373,442
Special Mention		13,603		1,793		21,963		17,262		54,621
Substandard		26,091		8,338		28,885		32,613		95,927
Doubtful		1,666		-		592		791		3,049
Total	$	346,708	$	151,933	$	456,888	$	571,510	$	1,527,039

Homogeneous loan pools do not have individual loans subjected to internal risk ratings therefore, the credit indicator applied to these pools is based on their delinquency status. The following tables provide information by credit risk rating indicators for those remaining segments of the loan portfolio at the dates indicated:

	September 30, 2013
					Residential Real Estate
					Residential		Residential
(In thousands)	Leasing		Consumer		Mortgage		Construction		Total
Performing	$	962	$	366,721	$	586,059	$	115,989	$	1,069,731
Non-performing:
90 days past due		-		10		-		-		10
Non-accruing		-		2,004		5,643		2,327		9,974
Restructured loans and leases		-		29		3,478		-		3,507
Total	$	962	$	368,764	$	595,180	$	118,316	$	1,083,222

	December 31, 2012
					Residential Real Estate
					Residential		Residential
(In thousands)	Leasing		Consumer		Mortgage		Construction		Total
Performing	$	2,556	$	354,535	$	514,480	$	117,189	$	988,760
Non-performing:
90 days past due		-		14		-		-		14
Non-accruing		865		2,410		4,681		3,125		11,081
Restructured loans and leases		-		31		4,203		-		4,234
Total	$	3,421	$	356,990	$	523,364	$	120,314	$	1,004,089

During the nine months ended September 30, 2013, the Company restructured $1.6 million in loans. Modifications consisted principally of interest rate concessions. No modifications resulted in the reduction of the principal in the associated loan balances. Restructured loans are subject to periodic credit reviews to determine the necessity and adequacy of a specific loan loss allowance based on the collectability of the recorded investment in the restructured loan. Loans restructured during 2013 did not require significant specific reserves at September 30, 2013. For the year ended December 31, 2012, the Company restructured $4.9 million in loans. Modifications consisted principally of interest rate concessions and no modifications resulted in the reduction of the recorded investment in the associated loan balances. Loans restructured during 2012 had specific reserves of $1.2 million at December 31, 2012. Commitments to lend additional funds on loans that have been restructured at September 30, 2013 and December 31, 2012 amounted to $5.3 million and $5.1 million, respectively.

The following table provides the amounts of the restructured loans at the date of restructuring for specific segments of the loan portfolio during the period indicated:

	For the Nine Months Ended September 30, 2013
			Commercial Real Estate
							Commercial		All
			Commercial		Commercial		Owner		Other
(In thousands)	Commercial		AD&C		Investor R/E		Occupied R/E		Loans		Total
Troubled debt restructurings
Restructured accruing	$	483	$	-	$	852	$	-	$	-	$	1,335
Restructured non-accruing		221		-		-		-		-		221
Balance	$	704	$	-	$	852	$	-	$	-	$	1,556

Specific allowance	$	22	$	-	$	-	$	-	$	-	$	22

Restructured and subsequently defaulted	$	-	$	-	$	-	$	-	$	-	$	-

	For the Year Ended December 31, 2012
			Commercial Real Estate
							Commercial		All
			Commercial		Commercial		Owner		Other
(In thousands)	Commercial		AD&C		Investor R/E		Occupied R/E		Loans		Total
Troubled debt restructurings
Restructured accruing	$	2,600	$	-	$	-	$	1,014	$	-	$	3,614
Restructured non-accruing		-		-		-		-		1,304		1,304
Balance	$	2,600	$	-	$	-	$	1,014	$	1,304	$	4,918

Specific allowance	$	552	$	-	$	-	$	204	$	467	$	1,223

Restructured and subsequently defaulted	$	-	$	-	$	-	$	-	$	-	$	-

Changes in the accretable yield related to loans acquired with evidence of deteriorated credit quality are as follows:

(In thousands)	Amount
Balance at January 1, 2013	$	693
Accretion recognized to date		(333)
Net reclassification from accretable to non-accretable		-
Balance at September 30, 2013	$	360

Other Real Estate Owned

Other real estate owned totaled $1.7 million and $5.9 million at September 30, 2013 and December 31, 2012.