Note 5. LOANS

Loans receivable, net, consists of the following at December 31, 2012 and 2011:

	December 31,
(in thousands)	2012			2011
Residential real estate	$	90,228		$	80,056
Commercial real estate	231,835			256,508
Construction, land acquisition and development	32,502			33,450
Commercial and industrial	110,073			174,233
Consumer	109,783			111,778
State and political subdivisions	23,354			23,496
Total loans, gross	597,775			679,521
Unearned discount	(103		)	(159		)
Net deferred loan fees and costs	260			516
Allowance for loan and lease losses	(18,536		)	(20,834		)
Loans, net	$	579,396		$	659,044

The Company has granted loans, letters of credit and lines of credit to certain executive officers and directors of the Company as well as to certain related parties of executive officers and directors. These loans, letters of credit and lines of credit were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and, when made, did not involve more than normal risk of collectability. See Note 14 to these consolidated financial statements for more information about related party transactions.

For information about credit concentrations within the Company’s loan portfolio, refer to Note 15 to these consolidated statements.

The Company originates one-to-four family mortgage loans for sale in the secondary market. During the years ended December 31, 2012, 2011 and 2010, the Company sold $26.2 million, $28.1 million and $43.9 million of one-to-four family mortgages, respectively. The Company retains servicing rights on these mortgages.

The Company had $1.6 million and $94 thousand in loans held-for-sale at December 31, 2012 and 2011, respectively. All loans held for sale are one-to-four family residential mortgage loans.

During the year ended December 31, 2010, the Company sold $36.7 million in loans from its Indirect Auto Loan Portfolio. The Company retained the servicing rights to these loans. The Company did not sell any indirect auto loans in 2012 and 2011.

The Company sold three non-performing commercial real estate loans during the year ended December 31, 2012. The three loans had an aggregate recorded investment of $6.8 million at the time of sale, after charge-offs recorded. No gain or loss was recognized upon the sale of these loans.

The Company does not have any lending programs commonly referred to as subprime lending. Subprime lending generally targets borrowers with weakened credit histories typically characterized by payment delinquencies, previous charge-offs, judgments, bankruptcies, or borrowers with questionable repayment capacity as evidenced by low credit scores or high debt-burden ratios.

The Company provides for loan losses based on the consistent application of its documented ALLL methodology. Loan losses are charged to the ALLL and recoveries are credited to it. Additions to the ALLL are provided by charges against income based on various factors which, in our judgment, deserve current recognition of estimated probable losses. Loan losses are charged-off in the period the loans, or portion thereof, are deemed uncollectible. Generally, the Company will record a loan charge-off (including a partial charge-off) to reduce a loan to the estimated recoverable amount based on the methodology detailed below. The Company regularly reviews the loan portfolio and makes adjustments for loan losses in order to maintain the ALLL in accordance with GAAP. The ALLL consists primarily of the following two components:

(1) Specific allowances are established for impaired loans, which are defined by the Company as all loan relationships with an aggregate outstanding balance greater than $100 thousand that are rated substandard and on non-accrual status, rated doubtful or loss, or are considered a TDR. The amount of impairment provided for as an allowance is represented by the deficiency, if any, between the carrying value of the loan and either (a) the present value of expected future cash flows discounted at the loan’s effective interest rate, (b) the loan’s observable market price, or (c) the fair value of the underlying collateral, less estimated costs to sell, for collateral dependent loans. Impaired loans that have no impairment losses are not considered for general valuation allowances described below. If the Company determines that collection of the impairment amount is remote, the Company will record a charge-off.

(2) General allowances are established for loan losses on a portfolio basis for loans that do not meet the definition of impaired. The Company divides its portfolio into loan segments, with loans exhibiting similar characteristics. Loans rated special mention or substandard and accruing which are embedded in these loan segments are then separated from these loan segments. These loans are then subject to an analysis placing increased emphasis on the credit risk associated with these loans. The Company applies an estimated loss rate to each loan group. The loss rates applied are based on the Company’s own historical loss experience based on the loss rate for each segment of loans with similar risk characteristics in its portfolio. In addition management evaluates and applies certain qualitative or environmental factors that are likely to cause estimated credit losses associated with the Company’s existing portfolio that may differ from historical experience, which are discussed below. This evaluation is inherently subjective, as it requires material estimates that may be susceptible to significant revisions based upon changes in economic and real estate market conditions. Actual loan losses may be significantly more than the ALLL that is established, which could have a material negative effect on the Company’s financial results.

Management makes adjustments for loan losses based on its evaluation of several qualitative and environmental factors, including but not limited to:

· Changes in national, local, and business economic conditions and developments, including the condition of various market segments;

· Changes in the nature and volume of the Company’s loan portfolio;

· Changes in the Company’s lending policies and procedures, including underwriting standards, collection, charge-off and recovery practices and results;

· Changes in the experience, ability and depth of the Company’s lending management and staff;

· Changes in the quality of the Company’s loan review system and the degree of oversight by the Company’s Board of Directors;

· Changes in the trend of the volume and severity of past due and classified loans, including trends in the volume of non-accrual loans, troubled debt restructurings and other loan modifications;

· The existence and effect of any concentrations of credit and changes in the level of such concentrations;

· The effect of external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the Company’s current loan portfolio; and

· Analysis of our customers’ credit quality, including knowledge of their operating environment and financial condition.

Management evaluates the ALLL based on the combined total of the specific and general components. Generally, when the loan portfolio increases, absent other factors, the ALLL methodology results in a higher dollar amount of estimated probable losses. Conversely, when the loan portfolio decreases, absent other factors, the ALLL methodology results in a lower dollar amount of estimated probable losses.

Each quarter, management evaluates the ALLL and adjusts the ALLL as appropriate through a provision for loan losses. While the Company uses the best information available to make evaluations, future adjustments to the ALLL may be necessary if conditions differ substantially from the information used in making the evaluations. In addition, as an integral part of its examination process, the Office of the Comptroller of the Currency (“OCC”) periodically reviews the Company’s ALLL. The OCC may require the Company to adjust the ALLL based on its analysis of information available to it at the time of its examination.

In the fourth quarter of 2012, the Company changed its loan segment structure to combine the indirect auto loans and installment/HELOC loans, which were previously considered separate classes of consumer loans. Management determined that both loan classes exhibited similar risk characteristics and therefore did not need to be separately evaluated in the ALLL calculation. In addition, the Company no longer segregates solid waste landfill loans from other commercial and industrial loans. During 2012, a significant amount of the solid waste landfill loans were paid off. The remaining balance of these loans was not material to warrant evaluation as a separate class at December 31, 2012.

The following tables present activity in the ALLL, by loan category, the amount of gross loans receivable that are evaluated individually and collectively for impairment, and the related portion of the ALLL that is allocated to each loan portfolio segment for the years ended December 31, 2012, 2011 and 2010:

Allowance for Loan and Lease Losses by Loan Category
December 31, 2012

	Real Estate
(in thousands)	Residential Real Estate			Commercial Real Estate			Construction, Land Acquisition and Development			Commercial and Industrial			Consumer			State and Political Subdivisions		Total
Allowance for loan losses:

Beginning Balance, January 1, 2012	$	1,823		$	11,151		$	2,590		3,292			1,526			$	452	$	20,834
Charge-offs	(683		)	(3,298		)	(258		)	(3,389		)	(673		)	—		(8,301		)
Recoveries	35			1,035			265			265			338			—		1,938
Provisions	589			(826		)	(435		)	3,999			517			221		4,065
Ending Balance, December 31, 2012	$	1,764		$	8,062		$	2,162		$	4,167		$	1,708		$	673	$	18,536

Ending balance, December 31, 2012:
Individually evaluated for impairment	$	40		$	268		$	2		$	—		$	—		$	—	$	310

Ending balance, December 31, 2012:
Collectively evaluated for impairment	$	1,724		$	7,794		$	2,160		$	4,167		$	1,708		$	673	$	18,226

Loans receivable:

Ending balance, December 31, 2012	$	90,228		$	231,835		$	32,502		$	110,073		$	109,783		$	23,354	$	597,775

Ending balance, December 31, 2012:
Individually evaluated for impairment	$	2,773		$	11,459		$	993		$	—		$	—		$	—	$	15,225

Ending balance, December 31, 2012:
Collectively evaluated for impairment	$	87,455		$	220,376		$	31,509		$	110,073		$	109,783		$	23,354	$	582,550

Allowance for Loan and Lease Losses by Loan Category
December 31, 2011

	Real Estate									Commercial and Industrial					Consumer
(in thousands)	Residential Real Estate			Commercial Real Estate			Construction, Land Acquisition and Development			Solid Waste Landfills		Commercial and Industrial			Indirect Auto			Installment/ HELOC			State and Political Subdivisions			Total
Allowance for loan losses:

Beginning Balance, January 1, 2011	$	2,176		$	9,640		$	4,170		$	11	$	4,839		597			$	576		$	566		$	22,575
Charge-offs	(1,273		)	(2,395		)	(1,857		)	—		(416		)	(530		)	(209		)	—			(6,680		)
Recoveries	57			93			2,188			—		1,852			219			7			—			4,416
Provisions	863			3,813			(1,911		)	5		(2,999		)	516			350			(114		)	523
Ending Balance, December 31, 2011	$	1,823		$	11,151		$	2,590		$	16	$	3,276		$	802		$	724		$	452		$	20,834

Ending balance, December 31, 2011:
individually evaluated for impairment	$	65		$	545		$	91		$	—	$	—		$	—		$	—		$	—		$	701

Ending balance, December 31, 2011:
collectively evaluated for impairment	$	1,758		$	10,606		$	2,499		$	16	$	3,276		$	802		$	724		$	452		$	20,133

Loans receivable:
																					—
Ending balance, December 31, 2011	$	80,056		$	256,508		$	33,450		$	42,270	$	131,963		$	63,722		$	48,056		$	23,496		$	679,521

Ending balance, December 31, 2011:
individually evaluated for impairment	$	3,615		13,012			2,979			—		4,066			—			31			—			$	23,703

Ending balance, December 31, 2011:
collectively evaluated for impairment	$	76,441		$	243,496		$	30,471		$	42,270	$	127,897		$	63,722		$	48,025		$	23,496		$	655,818

Allowance for Loan and Lease Losses by Loan Category
December 31, 2010

	Real Estate									Commercial & Industrial					Consumer
(in thousands)	Residential Real Estate			Commercial Real Estate			Construction, Land Acquisition and Development			Solid Waste Landfills		Other			Indirect Auto			Installment/ HELOC			State and Political Subdivisions		Total
Allowance for loan losses:

Beginning Balance, January 1, 2010	$	696		$	8,397		$	6,285		—		$	4,507		938			$	1,069		$	566	$	22,458
Charge-offs	(221		)	(5,049		)	(12,893		)	—		(6,883		)	(507		)	(229		)	—		(25,782		)
Recoveries	32			152			303			—		151			189			31			—		858
Provisions	1,669			6,140			10,475			11		7,064			(23		)	(295		)	—		25,041
Ending Balance, December 31, 2010	$	2,176		$	9,640		$	4,170		$	11	$	4,839		$	597		$	576		$	566	$	22,575

Ending balance, December 31, 2010:
individually evaluated for impairment	$	785		372			310			—		339			—			—			—		$	1,806

Ending balance, December 31, 2010:
collectively evaluated for impairment	$	1,391		$	9,268		$	3,860		$	11	$	4,500		$	597		$	576		$	566	$	20,769

Loans receivable:

Ending balance, December 31, 2010	$	87,925		$	256,327		$	77,395		$	52,270	$	145,427		$	63,509		$	47,344		$	27,739	$	757,936

Ending balance, December 31, 2010:
individually evaluated for impairment	$	2,926		9,477			11,365			—		6,029			—			132			—		$	29,929

Ending balance, December 31, 2010:
collectively evaluated for impairment	$	84,999		$	246,850		$	66,030		$	52,270	$	139,398		$	63,509		$	47,212		$	27,739	$	728,007

Credit Quality Indicators — Commercial Loans

The Company continuously monitors the credit quality of its commercial loans. Credit quality is monitored by reviewing certain credit quality indicators. Management has determined that internally assigned credit risk ratings by loan type are the key credit quality indicators that best help management monitor the credit quality of the Company’s loans.

The Bank’s commercial loan classification and credit grading processes are part of the lending, underwriting, and credit administration functions to ensure an ongoing assessment of credit quality. Accurate and timely loan classification or credit grading is a critical component of loan portfolio management. Loan officers are required to review their loan portfolio risk ratings regularly for accuracy. The loan review function uses the same risk rating system in the loan review process. This allows an independent third party to assess the quality of the portfolio and compare the accuracy of ratings with the loan officer’s and management’s assessment.

A formal loan classification and credit grading system reflects the risk of default and credit losses. A written description of the risk ratings is maintained that includes a discussion of the factors used to assign appropriate classifications of credit grades to loans. The process identifies groups of loans that warrant the special attention of management. The risk grade groupings provide a mechanism to identify risk within the loan portfolio and provide management and the Board with periodic reports by risk category. The credit risk ratings play an important role in the establishment and evaluation of the provision for loan and lease losses and the ALLL. After determining the historical loss factor which is adjusted for qualitative and environmental factors for each portfolio segment, the portfolio segment balances that have been collectively evaluated for impairment are multiplied by the general reserve loss factor for the respective portfolio segments in order to determine the general reserve. Loans that have an internal credit rating of special mention or substandard follow the same process; however, the qualitative and environmental factors are further adjusted for the increased risk.

The Company utilizes a loan rating system that assigns a degree of risk to commercial loans 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. The Company analyzes these non-homogeneous loans individually by grading the loans as to credit risk and probability of collection for each type of loan. Commercial loans include commercial indirect auto loans which are not individually risk rated, and Construction, Land Acquisition and Development Loans include residential construction loans which are also not individually risk rated. These loans are monitored on a pool basis due to their homogeneous nature as described in “Credit Quality Indicators — Other Loans” below. The Company risk rates certain residential real estate loans and consumer loans that are part of a larger commercial relationship using its credit grading system. These loans are described in “Commercial Credit Quality Indicators.” The grading system contains the following basic risk categories:

1. Minimal Risk

2. Above Average Credit Quality

3. Average Risk

4. Acceptable Risk

5. Pass - Watch

6. Special Mention

7. Substandard - Accruing

8. Substandard - Non-Accrual

9. Doubtful

10. Loss

This analysis is performed on a quarterly basis using the following definitions for risk ratings:

Pass - Assets rated 1 through 5 are considered pass ratings. These assets show no current or potential problems and are considered fully collectible. All such loans are considered collectively for ALLL calculation purposes. However, accruing TDRs that have been performing for an extended period of time, do not represent a higher risk of loss, and have been upgraded to a pass rating are evaluated individually for impairment.

Special Mention — Assets classified as special mention assets do not currently expose the Company to a sufficient degree of risk to warrant an adverse classification but do possess credit deficiencies or potential weaknesses deserving close attention. Special Mention assets have a potential weakness or pose an unwarranted financial risk which, if not corrected, could weaken the asset and increase risk in the future.

Substandard - Assets classified as substandard have well defined weaknesses based on objective evidence, and are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful - Assets classified as doubtful have all of the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses present make collection or liquidation in full highly questionable and improbable based on current circumstances.

Loss - Assets classified as loss are those considered uncollectible and of such little value that their continuance as assets is not warranted.

The following tables detail the recorded investment in loans receivable by loan type and credit quality indicator at December 31, 2012 and 2011:

Commercial Credit Quality Indicators

December 31, 2012

	Real Estate
(in thousands)	Residential Real Estate		Commercial Real Estate		Construction, Land Acquisition and Development		Commercial and Industrial		Consumer		State and Political Subdivisions		Total
Internal Risk Rating
Pass	$	17,138	$	200,147	$	23,052	$	93,864	$	3,324	$	17,580	$	355,105
Special Mention	564		8,587		57		7,437		—		849		17,494
Substandard	2,309		23,101		7,395		3,395		143		4,925		41,268
Doubtful	—		—		—		—		—		—		—
Loss	—		—		—		—		—		—		—
Total	$	20,011	$	231,835	$	30,504	$	104,696	$	3,467	$	23,354	$	413,867

Commercial Credit Quality Indicators

December 31, 2011

	Real Estate						Commercial and Industrial
					Construction,						Consumer
(in thousands)	Residential Real Estate		Commercial Real Estate		Land Acquisition and Development		Solid Waste Landfills		Other		Installment/ HELOC		State and Political Subdivisions		Total
Internal Risk Rating
Pass	$	19,267	$	198,730	$	15,924	$	42,270	$	117,104	$	2,489	$	23,464	$	419,248
Special Mention	313		12,908		256		—		3,690		288		—		17,455
Substandard	3,906		44,870		14,090		—		5,532		144		32		68,574
Doubtful	—		—		—		—		—		—		—		—
Loss	—		—		—		—		—		—		—		—
Total	$	23,486	$	256,508	$	30,270	$	42,270	$	126,326	$	2,921	$	23,496	$	505,277

Credit Quality Indicators — Other Loans

Residential, consumer, and commercial indirect auto loans are monitored on a pool basis due to their homogeneous nature. Loans that are delinquent 90 days or more are placed on non-accrual status. The Company utilizes accruing vs. non-accruing status as the credit quality indicator for these loan pools. The following tables present the recorded investment in residential, consumer and indirect auto loans based on payment activity at December 31, 2012 and 2011:

Other Loans Credit Quality Indicators

December 31, 2012

	Accruing		Non-accruing
(in thousands)	Loans		Loans		Total
Residential real estate	$	68,446	$	1,771	$	70,217
Construction, land acquisition and development - residential	1,998		—		1,998
Commercial - indirect auto	5,377		—		5,377
Consumer	106,272		44		106,316
Total	$	182,093	$	1,815	$	183,908

Other Loans Credit Quality Indicators

December 31, 2011

	Accruing		Non-accruing
(in thousands)	Loans		Loans		Total
Residential real estate	$	55,112	$	1,458	$	56,570
Construction, land acquisition and development - residential	3,180		—		3,180
Consumer - indirect auto	63,718		4		63,722
Commercial - indirect auto	5,637		—		5,637
Installment/HELOC	45,103		32		45,135
Total	$	172,750	$	1,494	$	174,244

Included in loans receivable are loans for which the accrual of interest income has been discontinued due to deterioration in the financial condition of the borrowers. The recorded investment of these non-accrual loans was $9.7 million and $19.9 million at December 31, 2012 and 2011, respectively. Generally, loans are placed on non-accruing status when they become 90 days or more delinquent, and remain on non-accrual status until they are brought current, have six months of performance under the loan terms, and factors indicating reasonable doubt about the timely collection of payments no longer exists. Therefore, loans may be current in accordance with their loan terms, or may be less than 90 days delinquent and still be on a non-accruing status. Loans past due ninety days or more and still accruing interest were $57 thousand and $5 thousand at December 31, 2012 and 2011, respectively, and consisted of loans that are well secured and in the process of renewal.

The following tables set forth the detail, and payment status, of past due and non-accrual loans at December 31, 2012 and 2011:

Performing and Non-Performing Loan Delinquency Status

	December 31, 2012
	Delinquency Status
	0-29 Days		30-59 Days		60-89 Days		>/= 90 Days
(in thousands)	Past Due		Past Due		Past Due		Past Due		Total
Performing (Accruing) Loans:
Real Estate:
Residential Real Estate	$	86,301	$	422	$	31	$	30	$	86,784
Commercial Real Estate	226,344		194		—		—		226,538
Construction, Land Acquisition and Development	31,899		29		—		—		31,928
Total Real Estate	344,544		645		31		30		345,250

Commercial and Industrial	109,312		517		20		27		109,876

Consumer	107,821		1,489		333		—		109,643

State and Political Subdivisions	23,354		—		—		—		23,354
Total Peforming (Accruing) Loans	585,031		2,651		384		57		588,123

Non-Accrual Loans:
Real Estate:
Residential Real Estate	953		105		230		2,156		3,444
Commercial Real Estate	250		121		4,352		574		5,297
Construction, Land Acquisition and Development	446		—		—		128		574
Total Real Estate	1,649		226		4,582		2,858		9,315

Commercial and Industrial	61		30		11		95		197

Consumer	2		—		2		136		140

State and Political Subdivisions	—		—		—		—		—
Total Non-Accrual Loans	1,712		256		4,595		3,089		9,652

Total Loans Receivable	$	586,743	$	2,907	$	4,979	$	3,146	$	597,775

Performing and Non-Performing Loan Delinquency Status

	December 31, 2011
	Delinquency Status
	0-29 Days		30-59 Days		60-89 Days		>/= 90 Days
(in thousands)	Past Due		Past Due		Past Due		Past Due		Total
Performing (Accruing) Loans:
Real Estate:
Residential Real Estate	$	74,379	$	1,293	$	248	$	—	$	75,920
Commercial Real Estate	243,873		2,381		1,235		—		247,489
Construction, Land Acquisition and Development	30,945		241		—		—		31,186
Total Real Estate	349,197		3,915		1,483		—		354,595

Commercial and Industrial:
Solid Waste Landfills	42,270		—		—		—		42,270
Other	126,774		667		91		5		127,537
Total Commercial and Industrial	169,044		667		91		5		169,807

Consumer:
Indirect Auto	62,753		845		120		—		63,718
Installment/HELOC	47,617		244		163		—		48,024
Total Consumer	110,370		1,089		283		—		111,742

State and Political Subdivisions	23,464		—		—		—		23,464
Total Peforming (Accruing) Loans	652,075		5,671		1,857		5		659,608

Non-Accrual Loans:
Real Estate:
Residential Real Estate	1,994		964		94		1,084		4,136
Commercial Real Estate	291		220		—		8,508		9,019
Construction, Land Acquisition and Development	426		—		—		1,838		2,264
Total Real Estate	2,711		1,184		94		11,430		15,419

Commercial and Industrial:
Solid Waste Landfills	—		—		—		—		—
Other	4,114		4		126		182		4,426
Total Commercial and Industrial	4,114		4		126		182		4,426

Consumer:
Indirect Auto	—		—		—		4		4
Installment/HELOC	—		—		—		32		32
Total Consumer	—		—		—		36		36

State and Political Subdivisions	—		—		—		32		32
Total Non-Accrual Loans	6,825		1,188		220		11,680		19,913

Total Loans Receivable	$	658,900	$	6,859	$	2,077	$	11,685	$	679,521

Impaired Loans

The following tables provide a distribution of the recorded investment, unpaid principal balance and related allowance for the Company’s impaired loans, which have been analyzed for impairment under ASC 310, at December 31, 2012 and 2011. Non-accrual loans other than TDRs, with individual balances less than $100 thousand are not evaluated individually for impairment and are accordingly not included in the following tables. However, these loans are evaluated collectively for impairment as homogenous pools in the general allowance under ASC Topic 450. Total non-accrual loans, other than TDRs, with individual balances less than $100 thousand that were evaluated under ASC Topic 450 amounted to $1.9 million at both December 31, 2012 and 2011. At December 31, 2011 the Company held an impaired loan for which 70% of the principal balance outstanding was guaranteed by the U.S. Department of Agriculture (“USDA”). The guaranteed portion is included in the loans with no recorded allowance at December 31, 2011, as the Company believed it would be repaid in full from the USDA guarantee. This loan was sold in 2012.

	December 31, 2012
(in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance
With No Allowance Recorded:
Real Estate:
Residential Real Estate	$	1,276	$	1,378	$	—
Commercial Real Estate	389		665		—
Construction, Land Acquisition and Development	709		804		—
Total Real Estate Loans	2,374		2,847		—

Commercial and Industrial	—		—		—

Consumer	—		—		—

State and Political Subdivisions	—		—		—
Total Impaired Loans with No Related Allowance Recorded	2,374		2,847		—

With a Related Allowance Recorded:
Real Estate:
Residential Real Estate	1,498		1,512		40
Commercial Real Estate	11,069		11,069		268
Construction, Land Acquisition and Development	285		285		2
Total Real Estate Loans	12,852		12,866		310

Commercial and Industrial	—		—		—

Consumer	—		—		—

State and Political Subdivisions	—		—		—
Total Impaired Loans with a Related Allowance Recorded	12,852		12,866		310

Total of impaired loans
Real Estate:
Residential Real Estate	2,773		2,890		40
Commercial Real Estate	11,459		11,734		268
Construction, Land Acquisition and Development	993		1,088		2
Total Real Estate Loans	15,225		15,712		310

Commercial and Industrial	—		—		—

Consumer	—		—		—

State and Political Subdivisions	—		—		—
Total Impaired Loans	$	15,225	$	15,712	$	310

	December 31, 2011
(in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance
With No Allowance Recorded:
Real Estate:
Residential Real Estate	$	961	$	1,097	$	—
Commercial Real Estate (2)	725		815		—
Construction, Land Acquisition and Development	2,058		5,387		—
Total Real Estate Loans	3,744		7,299		—

Commercial and Industrial:
Solid Waste Landfills	—		—		—
Other	4,066		4,601		—
Total Commercial and Industrial	4,066		4,601		—

Consumer:
Indirect Auto	—		—		—
Installment/HELOC	31		35		—
Total Consumer	31		35		—

State and Political Subdivisions	—		—		—
Total Impaired Loans with No Related Allowance Recorded	7,841		11,935		—

With a Related Allowance Recorded:
Real Estate:
Residential Real Estate	2,654		3,274		65
Commercial Real Estate	12,287		14,187		545
Construction, Land Acquisition and Development	921		984		91
Total Real Estate Loans	15,862		18,445		701

Commercial and Industrial:
Solid Waste Landfills	—		—		—
Other	—		—		—
Total Commercial and Industrial	—		—		—

Consumer:
Indirect Auto	—		—		—
Installment/HELOC	—		—		—
Total Consumer	—		—		—

State and Political Subdivisions	—		—		—
Total Impaired Loans with a Related Allowance Recorded	15,862		18,445		701

Total of impaired loans
Real Estate:
Residential Real Estate	3,615		4,371		65
Commercial Real Estate	13,012		15,002		545
Construction, Land Acquisition and Development	2,979		6,371		91
Total Real Estate Loans	19,606		25,744		701

Commercial and Industrial:
Solid Waste Landfills	—		—		—
Other	4,066		4,601		—
Total Commercial and Industrial	4,066		4,601		—

Consumer:
Indirect Auto	—		—		—
Installment/HELOC	31		35		—
Total Consumer	31		35		—

State and Political Subdivisions	—		—		—
Total Impaired Loans	$	23,703	$	30,380	$	701

The total recorded investment in impaired loans, which consists of non-accrual loans with an aggregate loan relationship greater than $100,000 and TDRs, amounted to $15.2 million and $23.7 million at December 31, 2012 and 2011, respectively. The related allowance on impaired loans was $0.3 million and $0.7 million as of December 31, 2012 and 2011, respectively.

The following table presents the average balance and the interest income recognized on impaired loans for the years ended December 31, 2012, 2011, and 2010:

	Year Ended December 31,
	2012				2011				2010
(in thousands)	Average Balance		Interest Income (1)		Average Balance		Interest Income (1)		Average Balance		Interest Income (1)
Real Estate:
Residential Real Estate	$	3,882	$	11	$	2,834	$	7	$	2,491	$	13
Commercial Real Estate	14,196		328		12,827		184		13,456		393
Construction, Land Acquisition & Development	2,340		37		6,445		38		21,707		53
Total Real Estate	20,418		376		22,106		229		37,654		459

Commercial and Industrial:
Solid Waste Landfills	—		—		—		—		—		—
Other	2,521		—		4,971		9		4,081		160
Commercial and Industrial:	2,521		—		4,971		9		4,081		160

Consumer:
Indirect Auto	—		—		—		—		85		—
Installment/HELOC	232		—		58		—		280		—
Total Consumer	232		—		58		—		365		—

State and Political Subdivisions	157		—		—		—		1,105		—
Total Impaired Loans	$	23,328	$	376	$	27,135	$	238	$	43,205	$	619

(1) Interest income represents income recognized on performing TDRs.

Included in total impaired loans are performing TDRs of $7.5 million and $5.7 million as of December 31, 2012 and 2011, respectively. The Bank was not committed to lend additional funds to loans classified as a TDR as of December 31, 2012.

The additional interest income that would have been earned on non-accrual and restructured loans for the years ended December 31, 2012, 2011, and 2010 had these loans performed in accordance with their original terms approximated $1.4 million, $2.2 million, and $2.9 million, respectively.

Troubled Debt Restructured Loans

TDRs at December 31, 2012 and 2011 were $8.9 million and $10.8 million, respectively. The balances at December 31, 2012 included approximately $1.4 million of TDRs in non-accrual status and $7.5 million of TDRs in accrual status compared to $5.1 million of TDRs in non-accrual status and $5.7 million of TDRs in accrual status at December 31, 2011. Approximately $257 thousand and $156 thousand in specific reserves have been established for these loans as of December 31, 2012 and 2011, respectively.

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, or a permanent reduction of the recorded investment in the loan.

The following tables show the pre- and post- modification recorded investment in loans modified as TDRs during the years ended December 31, 2012 and 2011:

	Year Ended December 31, 2012					Year Ended December 31, 2011
(dollars in thousands)	Number of Contracts	Pre- Modification Outstanding Recorded Investments		Post- Modification Outstanding Recorded Investments		Number of Contracts	Pre- Modification Outstanding Recorded Investments		Post- Modification Outstanding Recorded Investments
Troubled Debt Restructuring:
Residential Real Estate	1	$	624	$	624	6	$	537	$	417
Commercial Real Estate	3	2,428		2,428		—	—		—
Construction, Land Acquisition and Development	1	39		39		6	1,373		1,373
Commercial and Industrial	—	—		—		1	4,681		4,681
Total New Troubled Debt Restructuring	5	$	3,091	$	3,091	13	$	6,591	$	6,471

The TDRs described above increased the allowance for loan losses by $224 thousand and $95 thousand through allocation of a specific reserve for the years ended December 31, 2012 and 2011, respectively, and resulted in charge-offs of $120 thousand during the year ended December 31, 2011. There were no charge-offs that resulted from the TDRs described above during the year ended December 31, 2012.

The following table shows the types of modifications made during the years ended December 31, 2012 and 2011:

	Year Ended December 31, 2012
					Construction
					Land Acquisition		Commercial
	Residential		Commercial		and		and
(in thousands)	Real Estate		Real Estate		Development		Industrial		Total
Type of modification
Extension of term	$	624	$	432	$	39	$	—	$	1,095
Extension of term and rate concession			1,996		—		—		1,996
Extension of term and principal forgiveness	—		—		—		—		—
Total TDRs	$	624	$	2,428	$	39	$	—	$	3,091

	Year Ended December 31, 2011
					Construction
					Land Acquisition		Commercial
	Residential		Commercial		and		and
(in thousands)	Real Estate		Real Estate		Development		Industrial		Total
Type of modification
Extension of term	$	362	$	—	$	1,373	$	4,681	$	6,416
Extension of term and rate concession	—		—		—		—		—
Extension of term and principal forgiveness	55		—		—		—		55
Total TDRs	$	417	$	—	$	1,373	$	4,681	$	6,471

The following table summarizes TDRs which have re-defaulted (defined as past due 90 days) during the years ended December 31, 2012 and 2011 that were restructured within the twelve months prior to such re-default:

	Year Ended December 31, 2012			Year Ended December 31, 2011
	Number of	Recorded		Number of	Recorded
(dollars in thousands)	Contracts	Investment		Contracts	Investment
Residential real estate	2	$	196	—	$	—
Commercial real estate	—	—		1	145
Construction, land acquisition and development	1	408
Commercial and industrial	—	—		1	90
Total	3	$	604	2	$	235