LOANS

12 Months Ended

Dec. 31, 2011

LOANS

4. LOANS

Loans are summarized as follows:

	December 31,
(Dollars in thousands)	2011			2010
Commercial	$	30,135		$	44,747
Commercial Real Estate:
Land Development		35,924			56,086
Building Lots		3,880			11,333
Other		418,981			490,345
Real estate construction		4,925			11,034
Residential mortgage		151,866			164,049
Consumer and home equity		69,971			77,822
Indirect consumer		21,892			29,588
		737,574			885,004
Less:
Loans held for sale in probable branch divestiture and probable loan sale		(46,112	)		—
Net deferred loan origination fees		(209	)		(473	)
Allowance for loan losses		(17,181	)		(22,665	)
		(63,502	)		(23,138	)
Net Loans	$	674,072		$	861,866

We utilize eligible real estate loans to collateralize advances and letters of credit from the Federal Home Loan Bank. We had $117 million in residential mortgage loans pledged under this arrangement at December 31, 2011 and$217 million in residential mortgage and multi-family loans pledged at December 31, 2010.

The following table presents the activity in the allowance for loan losses by portfolio segment for the year ending December 31, 2011:

December 31, 2011
(Dollars in thousands)	Commercial			Commercial Real Estate			Real Estate Construction			Residential Mortgage			Consumer & Home Equity			Indirect Consumer			Total
Allowance for loan losses:
Beginning Balance	$	1,657		$	18,595		$	158		$	751		$	708			796		$	22,665
Provision for loan losses		786			19,853			(55	)		837			107			(318	)		21,210
Allowance associated with probable branch divestiture and probable loan sale		(1	)		(5	)		—			(236	)		(41	)		—			(283	)
Charge-offs		(1,093	)		(24,987	)		—			(438	)		(246	)		(188	)		(26,952	)
Recoveries		73			271			—			8			82			107			541
Total ending allowance balance	$	1,422		$	13,727		$	103		$	922		$	610			397		$	17,181

Activity in the allowance for loan losses was as follows:

	As of and For the Years Ended December 31,
(Dollars in thousands)	2010			2009
Balance, beginning of year	$	17,719		$	13,565
Provision for loan losses		16,881			9,524
Charge-offs		(12,195	)		(5,626	)
Recoveries		260			256
Balance, end of year	$	22,665		$	17,719

We did not implement any changes to our allowance related accounting policies or methodology during the current period.

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on the impairment method as of December 31, 2011 and 2010:

December 31, 2011
(Dollars in thousands)	Commercial			Commercial Real Estate			Real Estate Construction		Residential Mortgage			Consumer & Home Equity			Indirect Consumer		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	410		$	3,403			—	$	481		$	109		$	39	$	4,442
Collectively evaluated for impairment		1,012			10,324			103		441			501			358		12,739
Loans held for sale		—			—			—		—			—			—		—
Total ending allowance balance	$	1,422		$	13,727			103	$	922		$	610		$	397	$	17,181
Loans:
Loans individually evaluated for impairment	$	3,230		$	61,345		$	—	$	1,681		$	193		$	123	$	66,572
Loans collectively evaluated for impairment		26,905			397,440			4,925		150,185			69,778			21,769		671,002
Loans held for sale		(18	)		(11,411	)		—		(29,520	)		(5,163	)		—		(46,112	)
Total ending loans balance	$	30,117		$	447,374		$	4,925	$	122,346		$	64,808		$	21,892	$	691,462

December 31, 2010
(Dollars in thousands)	Commercial		Commercial Real Estate		Real Estate Construction		Residential Mortgage		Consumer & Home Equity		Indirect Consumer		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	691	$	11,872		24	$	334	$	147	$	29	$	13,097
Collectively evaluated for impairment		966		6,723		134		417		561		767		9,568
Total ending allowance balance	$	1,657	$	18,595		158	$	751	$	708	$	796	$	22,665
Loans:
Loans individually evaluated for impairment	$	1,870	$	86,250	$	1,267	$	1,609	$	337	$	91	$	91,424
Loans collectively evaluated for impairment		42,877		471,514		9,767		162,440		77,485		29,497		793,580
Total ending loans balance	$	44,747	$	557,764	$	11,034	$	164,049	$	77,822	$	29,588	$	885,004

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2011 and 2010. The difference between the unpaid principal balance and recorded investment represents partial write downs/charge offs taken on individual impaired credits. The recorded investment and average recorded investment in loans excludes accrued interest receivable and loan origination fees.

December 31, 2011
(Dollars in thousands)	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized
With no related allowance recorded:
Commercial	$	2,154	$	2,154	$	—	$	1,808	$	86	$	86
Commercial Real Estate:
Land Development		12,719		7,124		—		8,336		203		203
Building Lots		3,662		1,305		—		522		2		2
Other		36,475		32,337		—		36,743		1,461		1,461
Real Estate Construction		—		—		—		295		10		10
Residential Mortgage		—		—		—		—		—		—
Consumer and Home Equity		—		—		—		—		—		—
Indirect Consumer		—		—		—		—		—		—
With an allowance recorded:
Commercial		1,076		1,076		410		1.210		57		57
Commercial Real Estate:
Land Development		2,952		2,952		442		8,438		206		206
Building Lots		477		477		265		1,894		6		6
Other		17,518		17,150		2,696		24,481		974		974
Real Estate Construction		—		—		—		216		8		8
Residential Mortgage		1,802		1,681		481		1,648		19		19
Consumer and Home Equity		193		193		109		261		—		—
Indirect Consumer		123		123		39		134		—		—
Total	$	79,151	$	66,572	$	4,442	$	85,986	$	3,032	$	3,032

December 31, 2010
(Dollars in thousands)	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With no related allowance recorded:
Commercial	$	312	$	312	$	—
Commercial Real Estate:
Land Development		5,569		5,569		—
Building Lots		—		—		—
Other		34,327		32,332		—
Real Estate Construction		185		185		—
Residential Mortgage		—		—		—
Consumer and Home Equity		—		—		—
Indirect Consumer		—		—		—
With an allowance recorded:
Commercial		1,558		1,558		691
Commercial Real Estate:
Land Development		17,326		17,326		4,562
Building Lots		3,430		3,430		39
Other		27,593		27,593		7,271
Real Estate Construction		1,082		1,082		24
Residential Mortgage		1,609		1,609		334
Consumer and Home Equity		337		337		147
Indirect Consumer		91		91		29
Total	$	93,419	$	91,424	$	13,097

Impaired loans as of December 31, are summarized below.

	As of and For the Year Ended December 31,
(Dollars in thousands)	2010		2009
Year-end impaired loans	$	91,424	$	66,956
Amount of allowance for loan loss allocated		13,097		7,101
Average impaired loans outstanding		80,764		60,858
Interest income recognized		2,461		2,173
Interest income received		2,461		2,173

The following table presents the recorded investment in restructured, nonaccrual and loans past due over 90 days still on accrual by class of loans as of December 31, 2011 and 2010.

December 31, 2011
(Dollars in thousands)	Restructured on Non-Accrual Status		Restructured on Accrual Status		Loans Past Due Over 90 Days Still Accruing		Non-accrual excluding Restructured
Commercial	$	31	$	195		—	$	584
Commercial Real Estate:
Land Development		1,705		—		—		3,184
Building Lots		—		—		—		1,782
Other		15,961		15,522		—		14,879
Real Estate Construction		—		—		—		—
Residential Mortgage		335		305		—		969
Consumer and Home Equity		—		25		—		234
Indirect Consumer		—		—		—		86
Total	$	18,032	$	16,047		—	$	21,718

December 31, 2010
(Dollars in thousands)	Restructured on Non-Accrual Status		Restructured on Accrual Status		Loans Past Due Over 90 Days Still Accruing		Non-accrual excluding Restructured
Commercial	$	—	$	179		—	$	597
Commercial Real Estate:
Land Development		—		—		—		15,356
Building Lots		—		—		—		3,430
Other		—		3,394		—		19,939
Real Estate Construction		—		—		—		—
Residential Mortgage		—		306		—		2,294
Consumer and Home Equity		—		27		—		365
Indirect Consumer		—		—		—		188
Total	$	—	$	3,906		—	$	42,169

The following table presents the aging of the unpaid principal in past due loans as of December 31, 2011 and 2010 by class of loans:

December 31, 2011
(Dollars in thousands)	30 – 59 Days Past Due		60 – 89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Loans Not Past Due		Total
Commercial	$	424	$	469	$	1,426	$	2,319	$	27,816	$	30,135
Commercial Real Estate:
Land Development		—		—		2,420		2,420		33,504		35,924
Building Lots		—		—		1,782		1,782		2,098		3,880
Other		5,333		6,467		17,815		29,615		389,366		418,981
Real Estate Construction		—		—		—		—		4,925		4,925
Residential Mortgage		331		812		3,677		4,820		147,046		151,866
Consumer and Home Equity		310		261		638		1,209		68,762		69,971
Indirect Consumer		327		95		86		508		21,384		21,892
Total(1)	$	6,725	$	8,104	$	27,844	$	42,673	$	694,901	$	737,574

(1) Includes loans held for sale in probable branch divestiture and probable loan sale

December 31, 2010
(Dollars in thousands)	30 – 59 Days Past Due		60 – 89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Loans Not Past Due		Total
Commercial	$	719	$	683	$	574	$	1,976	$	42,771	$	44,747
Commercial Real Estate:
Land Development		—		—		7,682		7,682		48,404		56,086
Building Lots		—		—		3,430		3,430		7,903		11,333
Other		2,824		10,110		16,294		29,228		461,117		490,345
Real Estate Construction		1,082		—		—		1,082		9,952		11,034
Residential Mortgage		313		962		4,386		5,661		158,388		164,049
Consumer and Home Equity		527		70		680		1,277		76,545		77,822
Indirect Consumer		386		51		188		625		28,963		29,588
Total	$	5,851	$	11,876	$	33,234	$	50,961	$	834,043	$	885,004

Troubled Debt Restructurings:

We have allocated $937,000 and $151,000 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of December 31, 2011 and December 31, 2010. We are not committed to lend additional funds to debtors whose loans have been modified in a troubled debt restructuring. Specific reserves are generally assessed prior to loans being modified as a TDR, as most of these loans migrate from our internal watch list and have been specifically reserved for as part of our normal reserving methodology.

During the period ending December 31, 2011, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan.

Modifications involving a reduction of the stated interest rate of the loan were for periods ranging from six months to one year. Modifications involving an extension of the maturity date were for periods ranging from three to six months.

The following table presents loans by class modified as troubled debt restructurings that occurred during the year ending December 31, 2011:

December 31, 2011
(Dollars in thousands)	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled Debt Restructurings:
Commercial		1	$	31	$	31
Commercial Real Estate:
Land Development		2		2,865		1,706
Building Lots		—		—		—
Other		18		33,220		31,483
Real Estate Construction		—		—		—
Residential Mortgage		1		430		335
Consumer and Home Equity		—		—		—
Indirect Consumer		—		—		—
Total		22	$	36,546	$	33,555

The troubled debt restructurings described above increased the allowance for loan losses by $1.3 million and resulted in charge offs of $3.0 million during the year ending December 31, 2011.

The following table presents loans by class modified as troubled debt restructurings for which there was a payment default within twelve months following the modification during the year ending December 31, 2011:

December 31, 2011
(Dollars in thousands)	Number of Loans		Recorded Investment
Troubled Debt Restructurings:
Commercial		1	$	8
Commercial Real Estate:
Land Development		—		—
Building Lots		—		—
Other		1		817
Real Estate Construction		—		—
Residential Mortgage		1		335
Consumer and Home Equity		—		—
Indirect Consumer		—		—
Total		3	$	1,160

A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms. The troubled debt restructurings that subsequently defaulted described above increased the allowance for loan losses by $12,000 and resulted in charge offs of $220,000 for the year ending December 31, 2011.

Credit Quality Indicators:

We categorize loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. We analyze loans individually by classifying the loans as to credit risk. This analysis includes commercial and commercial real estate loans. We also evaluate credit quality on residential mortgage, consumer and home equity and indirect consumer loans based on the aging status and payment activity of the loan. This analysis is performed on a monthly basis. We use the following definitions for risk ratings:

Criticized:  Loans classified as criticized have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in our credit position at some future date.

Substandard:  Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful:  Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loss:  Loans classified as loss are considered non-collectible and their continuance as bankable assets is not warranted.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. Loans listed as not rated are included in groups of homogeneous loans. For our residential mortgage, consumer and home equity, and indirect consumer homogeneous loans, we also evaluate credit quality based on the aging status of the loan, which was previously presented, and by payment activity.

As of December 31, 2011 and 2010, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

December 31, 2011 (Dollars in thousands)	Not Rated		Pass		Criticized		Substandard		Doubtful		Loss		Total
Commercial	$	—	$	24,082	$	1,634	$	4,389	$	30	$	—	$	30,135
Commercial Real Estate:
Land Development		—		20,656		5,192		10,076		—		—		35,924
Building Lots		—		1,549		549		1,782		—		—		3,880
Other		—		338,483		22,746		57,752		—		—		418,981
Real Estate Construction		—		4,925		—		—		—		—		4,925
Residential Mortgage		146,003		—		573		5,290		—		—		151,866
Consumer and Home Equity		68,101		—		729		1,141		—		—		69,971
Indirect Consumer		21,627		—		4		261		—		—		21,892
Total(1)	$	235,731	$	389,695	$	31,427	$	80,691	$	30	$	—	$	737,574

(1) Includes loans held for sale in probable branch divestiture and probable loan sale

December 31, 2010 (Dollars in thousands)	Not Rated		Pass		Criticized		Substandard		Doubtful		Loss		Total
Commercial	$	$		40,518	$	2,359	$	1,412	$	458	$	—	$	44,747
Commercial Real Estate:
Land Development		—		29,769		3,422		22,895		—		—		56,086
Building Lots		—		7,903		—		3,430		—		—		11,333
Other		—		409,387		21,012		59,800		125		21		490,345
Real Estate Construction		—		9,767		—		1,267		—		—		11,034
Residential Mortgage		157,572		—		917		5,560		—		—		164,049
Consumer and Home Equity		76,127		—		599		1,072		—		24		77,822
Indirect Consumer		29,342		—		—		227		—		19		29,588
Total	$	263,041	$	497,344	$	28,309	$	95,663	$	583	$	64	$	885,004

The following table presents the unpaid principal balance in residential mortgage, consumer and home equity and indirect consumer loans based on payment activity as of December 31, 2011 and 2010:

December 31, 2011 (Dollars in thousands)	Residential Mortgage		Consumer & Home Equity		Indirect Consumer
Performing	$	150,562	$	69,737	$	21,806
Restructured on non-accrual		335		—		—
Non-accrual		969		234		86
Total	$	151,866	$	69,971	$	21,892

December 31, 2010 (Dollars in thousands)	Residential Mortgage		Consumer & Home Equity		Indirect Consumer
Performing	$	161,755	$	77,457	$	29,400
Restructured on non-accrual		—		—		—
Non-accrual		2,294		365		188
Total	$	164,049	$	77,822	$	29,588