Major categories of loans, including loans covered under loss-share agreements with the FDIC (“covered”) and loans not covered under loss-share agreements (“non-covered”) at June 30, 2013 and December 31, 2012 are summarized below (dollars in thousands):

	June 30, 2013						December 31, 2012
	Covered		Non-covered				Covered		Non-covered
	Loans (1)		Loans (2)		Total		Loans (1)		Loans (2)		Total

Commercial real estate	$	108,244	$	1,100,280	$	1,208,524	$	114,757	$	1,034,686	$	1,149,443
Commercial construction		23,370		174,178		197,548		33,447		183,747		217,194
Commercial and industrial		8,983		165,540		174,523		10,898		150,870		161,768
Leases		-		14,949		14,949		-		13,209		13,209
Total commercial		140,597		1,454,947		1,595,544		159,102		1,382,512		1,541,614
Residential construction		212		32,913		33,125		215		34,514		34,729
Residential mortgage		76,156		333,281		409,437		87,015		359,260		446,275
Consumer and other		2,317		8,518		10,835		2,598		10,042		12,640
	$	219,282	$	1,829,659	$	2,048,941	$	248,930	$	1,786,328	$	2,035,258

(1) The unpaid principal balance for covered loans was $230.6 million and $272.7 million at June 30, 2013 and December 31, 2012, respectively.
(2) Amount includes $300.7 million and $347.2 million of acquired, non-covered loans as of June 30, 2013 and December 31, 2012, respectively.

The Company evaluates loans acquired with evidence of credit deterioration in accordance with the provisions of ASC Topic 310-30: Loans and Debt Securities Acquired with Deteriorated Credit Quality. Credit-impaired loans are those loans showing evidence of credit deterioration since origination and it is probable, at the date of acquisition, the Company will not collect all contractually required principal and interest payments. Generally, the acquired loans that meet the Company's definition for nonaccrual status fall within the definition of credit-impaired covered loans.

Covered loans acquired will be reimbursed for a substantial portion of any future losses on them under the terms of the FDIC loss-share agreements. The covered loans are reported in loans exclusive of the expected reimbursement from the FDIC. Covered loans are initially recorded at fair value at the acquisition date. The covered loans are and will be subject to the Company's internal and external credit review and monitoring. Prospective losses incurred on covered loans are eligible for partial reimbursement by the FDIC. Subsequent decreases in the amount expected to be collected result in a provision for loan losses, an increase in the allowance for loan losses, and a proportional increase to the FDIC indemnification asset for the estimated amount to be reimbursed. Subsequent increases in the amount expected to be collected result in the reversal of any previously-recorded provision for loan losses and related allowance for loan losses and decreases to the FDIC indemnification asset, or accretion of certain fair value amounts into interest income in future periods if no provision for loan losses had been recorded.

A portion of the fair value discount on acquired covered loans has an accretable yield associated with those loans that is accreted into interest income over the estimated remaining life of the loans. The remaining nonaccretable difference represents cash flows not expected to be collected. The changes in the carrying amount of covered acquired loans and accretable yield for loans receivable for the six months ended June 30, 2013 and the year ended December 31, 2012 is as follows (dollars in thousands):

The Company has the ability to borrow funds from the Federal Home Loan Bank (“FHLB”) and from the Federal Reserve Bank. At June 30, 2013 and December 31, 2012, real estate loans with carrying values of $358.1 million and $462.4 million, respectively, were pledged to secure borrowing facilities from these institutions.

The Company has adopted comprehensive lending policies, underwriting standards and loan review procedures, which are reviewed on a regular basis. Each class of financing receivable detailed below is subject to risks that could have an adverse impact on the credit quality of the loan portfolio.

Commercial real estate loans consist primarily of loans secured by nonresidential (owner occupied and/or non-owner occupied) real estate, multifamily housing, and agricultural loans. Commercial real estate is primarily dependent on successful operation or management of the property. While these loans are normally secured by commercial buildings for office, storage and warehouse space, it is possible that the liquidation of the collateral will not fully satisfy the obligation. The primary risk associated with multifamily loans is the ability of the income-producing property that collateralizes the loan to produce adequate cash flow to service the debt. High unemployment or generally weak economic conditions may result in customers having to provide rental rate concessions to achieve adequate occupancy rates.

Commercial construction loans, including land development loans, are highly dependent on the supply and demand for commercial real estate in the markets served by BNC as well as the demand for newly constructed residential homes and lots that customers are developing. Continuing deterioration in demand could result in significant decreases in the underlying collateral values and make repayment of the outstanding loans more difficult for customers.

Each commercial loan or lease is centrally underwritten based primarily upon the customer's ability to generate the required cash flow to service the debt in accordance with the contractual terms and conditions of the loan agreement. A complete understanding of the borrower's businesses including the experience and background of the principals is obtained prior to approval. To the extent that the loan or lease is secured by collateral, which is usually personal property or business assets such as inventory or accounts receivable, which is true for the majority of commercial loans and leases, the likely value of the collateral and what level of strength the collateral brings to the transaction is evaluated. To the extent that the principals or other parties provide personal guarantees, the relative financial strength and liquidity of each guarantor is assessed. Common risks include general economic conditions within the markets the Bank serves, as well as risks that are specific to each transaction including demand for products and services, personal events such as disability or change in marital status, and reductions in the value of collateral.

Residential construction loans are made to individuals and are typically secured by 1-4 family residential property. Significant and rapid declines in real estate values or demand can result in increased difficulty in converting these construction loans to permanent loans. Such a decline in values has led to unprecedented levels of foreclosures and losses within the banking industry. In addition, there has been an increase in the average time houses are on the market for sale.

Each residential mortgage loan is underwritten using credit scoring and analysis tools. These credit scoring tools take into account factors such as payment history, credit utilization, length of credit history, types of credit currently in use, and recent credit inquiries. To the extent that the loan is secured by collateral, the likely value of that collateral is evaluated. Common risks to each class of non-commercial loans include risks that are not specific to individual transactions such as general economic conditions within the markets BNC serves, particularly unemployment and potential declines in real estate values. Personal events such as disability or change in marital status also add risk to residential mortgage loans. Second mortgage loans and home equity lines of credit generally involve greater credit risk than first mortgage loans because they are secured by mortgages that are subordinate to the first mortgage on the property. If the borrower is forced into foreclosure, the Company will receive no proceeds from the sale of the property until the first mortgage has been completely repaid. Over the past two years the Company has significantly tightened underwriting criteria and requirements for second mortgage and home equity lines of credit. This includes requiring higher credit scores from borrowers and limiting loan-to-value ratios.

Since substantially all first mortgage loans originated by the Company are eligible for sale in the secondary market, and the Company typically does not service the related first mortgage loans if they are sold, the Company may be unable to track the delinquency status of the related first mortgage loans and whether such loans are at risk of foreclosure by others. At June 30, 2013, second mortgage loans and home equity lines of credit for which the Company did not own or service the related first mortgage loans totaled approximately $92.0 million, which represented approximately 98% of the total second liens held by the Company. The Company monitors the increased credit risk associated with second mortgage loans and home equity lines of credit for which the Company does not own or service the related first mortgage loans by obtaining updated credit information on all borrowers from the credit bureaus as part of the overall management of the relationship. If these procedures identify significant deterioration in a borrower's credit quality, the Company may freeze the borrower's ability to make additional principal draws under the home equity lines of credit.

Home equity lines of credit are offered as “revolving” lines of credit which have a 15 year maturity and draw period. Scheduled monthly interest payments are the only required payments during the term of the line. The full principal amount is due at maturity as a lump-sum balloon payment. At maturity, home equity loans are re-underwritten based on our current underwriting standards and updated appraisals are generally obtained. Our underwriting criteria for such loans require the borrowers to qualify as if the loans require principal and interest payments for the complete term of the loans sufficient to fully amortize the loans. If the borrowers qualify under our current underwriting standards, the loans are either renewed, converted to conventional second mortgage loans that are fully amortizing, or refinanced along with the existing first mortgage into a new first mortgage loan. Borrowers may be required to repay a portion of the outstanding principal balance to qualify for such renewals. The following table summarizes the maturity dates of our home equity lines of credit as of June 30, 2013 (dollars in thousands):

Consumer and other loans include loans secured by personal property such as automobiles, marketable securities, other titled recreational vehicles including boats and motorcycles, as well as unsecured consumer debt. The value of underlying collateral within this class is especially volatile due to potential rapid depreciation in values since date of loan origination in excess of principal repayment. Consumer loan collections are sensitive to job loss, illness and other personal factors.

An analysis of the allowance for loan losses for the three and six months ended June 30, 2013 and 2012, respectively, is as follows (dollars in thousands):

	Commercial		Commercial		Commercial				Residential		Residential		Consumer
2013	Real Estate		Construction		and Industrial		Leases		Construction		Mortgage		and Other		Total
Allowance for loan losses:
Three months ended:
Balance April 1, 2013	$	12,531	$	10,054	$	3,547	$	-	$	345	$	11,536	$	135	$	38,148
Charge-offs		(318)		(4,805)		(900)		-		-		(3,092)		(214)		(9,329)
Recoveries		868		801		193		-		16		90		10		1,978
Provision (a)		880		(498)		718		-		17		842		329		2,288
Change in FDIC indemnification asset (a)		(1,070)		1,445		(17)		-		(1)		(603)		20		(226)
Balance June 30, 2013	$	12,891	$	6,997	$	3,541	$	-	$	377	$	8,773	$	280	$	32,859

Six months ended:
Balance January 1, 2013	$	15,718	$	9,807	$	3,578	$	18	$	593	$	10,441	$	137	$	40,292
Charge-offs		(1,725)		(7,924)		(2,239)		-		-		(5,671)		(226)		(17,785)
Recoveries		872		835		286		-		21		233		15		2,262
Provision (a)		(365)		2,360		1,935		(18)		(235)		2,391		335		6,403
Change in FDIC indemnification asset (a)		(1,609)		1,919		(19)		-		(2)		1,379		19		1,687
Balance June 30, 2013	$	12,891	$	6,997	$	3,541	$	-	$	377	$	8,773	$	280	$	32,859

2012
Allowance for loan losses:
Three months ended:
Balance April 1, 2012	$	10,695	$	13,115	$	4,966	$	18	$	620	$	7,250	$	58	$	36,722
Charge-offs		(2,075)		(5,525)		(1,405)		-		(163)		(1,248)		(87)		(10,503)
Recoveries		4		676		185		-		-		555		6		1,426
Provision (b)		2,630		2,864		1,845		-		193		681		117		8,330
Change in FDIC indemnification asset (b)		3,081		-		-		-		-		1,800		-		4,881
Balance June 30, 2012	$	14,335	$	11,130	$	5,591	$	18	$	650	$	9,038	$	94	$	40,856

Six months ended:
Balance January 1, 2012	$	11,789	$	10,957	$	4,338	$	18	$	699	$	3,058	$	149	$	31,008
Charge-offs		(3,789)		(7,689)		(2,130)		-		(180)		(2,587)		(111)		(16,486)
Recoveries		17		865		217		-		-		578		9		1,686
Provision (b)		2,912		4,717		2,798		-		131		2,904		47		13,509
Change in FDIC indemnification asset (b)		3,406		2,280		368		-		-		5,085		-		11,139
Balance June 30, 2012	$	14,335	$	11,130	$	5,591	$	18	$	650	$	9,038	$	94	$	40,856

(a) The provision for loan losses includes the "net" provision on covered loans after coverage provided by FDIC loss-share agreements, which totaled $(62,000) and $400,000 for the three and six months ended June 30, 2013, respectively. This resulted in a (decrease) increase in the FDIC indemnification asset of $(226,000) and $1.7 million for the three and six months ended June 30, 2013, respectively, which is the difference between the net provision on covered loans and the total additions to the allowance for loan losses allocable to the covered loans portfolio of $(288,000) and $2.1 million for the three and six months ended June 30, 2013, respectively.
(b) The provision for loan losses includes the "net" provision on covered loans after coverage provided by FDIC loss-share agreements, which totaled $1.0 million and $2.7 million for the three and six months ended June 30, 2012, respectively. This resulted in an increase in the FDIC indemnification asset of $4.9 million and $11.1 million for the three and six months ended June 30, 2012, respectively, which is the difference between the net provision on covered loans and the total additions to the allowance for loan losses allocable to the covered loans portfolio of $5.9 million and $13.8 million for the three and six months ended June 30, 2012, respectively.

The following table provides a breakdown of the recorded investment in loans and the allowance for loan losses based on the method of determining the allowance:

		Commercial		Commercial		Commercial				Residential		Residential		Consumer
June 30, 2013		Real Estate		Construction		and Industrial		Leases		Construction		Mortgage		and Other		Total
Ending balances:
Specific reserves:
	Impaired loans	$	2,926	$	738	$	24	$	-	$	52	$	1,717	$	52	$	5,509
	Purchase credit impaired loans		4,516		613		717		-		-		2,795		-		8,641
Total specific reserves			7,442		1,351		741		-		52		4,512		52		14,150
General reserves			5,449		5,646		2,800		-		325		4,261		228		18,709
Total		$	12,891	$	6,997	$	3,541	$	-	$	377	$	8,773	$	280	$	32,859

Loans:
Ending balance:
Individually evaluated for impairment		$	34,093	$	12,949	$	776	$	-	$	582	$	15,313	$	62	$	63,775
Purchase credit impaired loans			111,568		27,652		9,843		-		970		59,139		2,314		211,486
Loans collectively evaluated for impairment			1,062,863		156,947		163,904		14,949		31,573		334,985		8,459		1,773,680
Total		$	1,208,524	$	197,548	$	174,523	$	14,949	$	33,125	$	409,437	$	10,835	$	2,048,941

December 31, 2012
Ending balances:
Specific reserves:
	Impaired loans	$	578	$	3,023	$	4	$	-	$	2	$	1,612	$	-	$	5,219
	Purchase credit impaired loans		6,518		2,704		1,569		-		-		4,000		18		14,809
Total specific reserves			7,096		5,727		1,573		-		2		5,612		18		20,028
General reserves			8,622		4,080		2,005		18		591		4,829		119		20,264
Total		$	15,718	$	9,807	$	3,578	$	18	$	593	$	10,441	$	137	$	40,292

Loans:
Ending balance:
Individually evaluated for impairment		$	26,076	$	19,367	$	1,682	$	-	$	361	$	16,850	$	127	$	64,463
Purchase credit impaired loans			121,983		34,666		12,397		-		5,741		68,273		2,590		245,650
Loans collectively evaluated for impairment			1,001,384		163,161		147,689		13,209		28,627		361,152		9,923		1,725,145
Total		$	1,149,443	$	217,194	$	161,768	$	13,209	$	34,729	$	446,275	$	12,640	$	2,035,258

The following presents information related to impaired loans, excluding purchased impaired loans, as of June 30, 2013 and December 31, 2012 (dollars in thousands):

								Impaired Loans - With
		Impaired Loans - With Allowance						No Allowance
				Unpaid		Allowance for				Unpaid
		Recorded		Principal		Loan Losses		Recorded		Principal
June 30, 2013:		Investment		Balance		Allocated		Investment		Balance
Originated:
	Commercial real estate	$	27,652	$	27,585	$	2,926	$	6,522	$	6,507
	Commercial construction		4,982		5,046		738		7,981		8,287
	Commercial and industrial		778		776		24		-		-
	Residential construction		583		582		52		-		-
	Residential mortgage		14,523		14,487		1,717		826		826
	Consumer and other		62		62		52		-		-
Total originated			48,580		48,538		5,509		15,329		15,620
Acquired (non-covered):
	Commercial real estate		-		-		-		173		180
	Commercial construction		-		-		-		245		245
	Commercial and industrial		-		-		-		298		310
	Residential mortgage		-		-		-		1,659		1,805
	Consumer and other		-		-		-		4		5
Total acquired (non-covered)			-		-		-		2,379		2,545
Acquired (covered):
	Commercial real estate		-		-		-		745		779
	Commercial construction		-		-		-		313		340
	Commercial and industrial		-		-		-		137		170
	Residential mortgage		-		-		-		6,647		6,885
Total acquired (covered)			-		-		-		7,842		8,174
Total loans		$	48,580	$	48,538	$	5,509	$	25,550	$	26,339

								Impaired Loans - With
		Impaired Loans - With Allowance						No Allowance
				Unpaid		Allowance for				Unpaid
		Recorded		Principal		Loan Losses		Recorded		Principal
December 31, 2012:		Investment		Balance		Allocated		Investment		Balance
Originated:
	Commercial real estate	$	7,918	$	7,891	$	562	$	17,915	$	17,867
	Commercial construction		11,838		11,815		3,022		7,581		7,552
	Commercial and industrial		99		99		1		1,352		1,351
	Residential construction		362		361		2		-		-
	Residential mortgage		10,772		10,755		1,526		4,801		4,788
	Consumer and other		-		-		-		124		122
Total originated			30,989		30,921		5,113		31,773		31,680
Acquired (non-covered):
	Commercial real estate		500		800		16		248		256
	Commercial and industrial		240		240		3		0		0
	Residential mortgage		601		607		87		765		895
	Consumer and other		0		0		0		5		5
Total acquired (non-covered)			1,341		1,647		106		1,018		1,156
Acquired (covered):
	Commercial real estate		-		-		-		548		625
	Commercial construction		-		-		-		530		561
	Commercial and industrial		-		-		-		143		176
	Residential mortgage		-		-		-		5,504		5,749
Total acquired (covered)			-		-		-		6,725		7,111
Total loans		$	32,330	$	32,568	$	5,219	$	39,516	$	39,947

The following presents information related to the average recorded investment, excluding purchase impaired loans, and interest income recognized on impaired loans for the three and six months ended June 30, 2013 and 2012 (dollars in thousands):

		Three Months Ended June 30,								Six Months Ended June 30,
		2013				2012				2013				2012
		Average		Interest		Average		Interest		Average		Interest		Average		Interest
		recorded		income		recorded		income		recorded		income		recorded		income
		investment		recognized		investment		recognized		investment		recognized		investment		recognized
Impaired loans with allowance:
	Commercial real estate	$	23,271	$	215	$	19,147	$	96	$	14,945	$	272	$	12,375	$	146
	Commercial construction		6,837		50		7,461		93		7,060		91		8,810		145
	Commercial and industrial		531		4		1,297		11		305		4		1,933		39
	Residential construction		435		3		314		4		338		5		157		4
	Residential mortgage		13,284		76		11,553		63		11,202		124		8,988		104
	Consumer and other		50		-		74		-		25		-		37		-
Total impaired loans with allowance		$	44,408	$	348	$	39,846	$	267	$	33,875	$	496	$	32,300	$	438
Impaired loans with no allowance:
	Commercial real estate	$	11,502	$	102	$	7,066	$	186	$	15,180	$	276	$	8,918	$	298
	Commercial construction		10,732		8		10,042		107		9,987		32		11,564		189
	Commercial and industrial		579		1		577		7		623		4		661		10
	Residential construction		-		-		204		-		-		-		737		9
	Residential mortgage		10,627		15		8,680		67		10,120		44		7,306		80
	Consumer and other		16		-		43		4		50		-		82		4
Total impaired loans with no allowance		$	33,456	$	126	$	26,612	$	371	$	35,960	$	356	$	29,268	$	590

For the three and six months ended June 30, 2013 and 2012, the amount of interest income recognized within the period that the loans were impaired was primarily related to loans modified in a troubled debt restructuring (“TDR”) that remained on accrual status. For the three and six months ended June 30, 2013 and 2012, the amount of interest income recognized using a cash-basis method of accounting during the period that the loans were impaired was not material.

The following presents an aging analysis of past due loans as of June 30, 2013 and December 31, 2012 (dollars in thousands):

						Greater
						than
		30-59 Days		60-89 Days		90 Days				Total				Total
June 30, 2013:		Past Due		Past Due		Past Due		Nonaccrual		Past Due		Current		Loans
Originated:
	Commercial real estate	$	1,729	$	869	$	659	$	4,663	$	7,920	$	902,660	$	910,580
	Commercial construction		-		-		-		8,210		8,210		139,168		147,378
	Commercial and industrial		263		75		-		312		650		145,618		146,268
	Leases		-		-		-		-		-		14,949		14,949
	Residential construction		-		-		-		223		223		27,944		28,167
	Residential mortgage		2,375		380		-		5,954		8,709		265,012		273,721
	Consumer and other		9		-		-		39		48		7,833		7,881
Total originated			4,376		1,324		659		19,401		25,760		1,503,184		1,528,944
Acquired (non-covered):
	Commercial real estate		328		-		-		603		931		188,769		189,700
	Commercial construction		-		-		-		245		245		26,555		26,800
	Commercial and industrial		1,547		-		164		304		2,015		17,257		19,272
	Residential construction		-		-		-		-		-		4,746		4,746
	Residential mortgage		207		57		-		1,719		1,983		57,577		59,560
	Consumer and other		6		-		-		4		10		627		637
Total acquired (non-covered)			2,088		57		164		2,875		5,184		295,531		300,715
Acquired (covered):
	Commercial real estate		782		-		-		17,585		18,367		89,877		108,244
	Commercial construction		156		21		-		6,851		7,028		16,342		23,370
	Commercial and industrial		41		-		-		1,482		1,523		7,460		8,983
	Residential construction		-		-		-		-		-		212		212
	Residential mortgage		359		432		-		18,326		19,117		57,039		76,156
	Consumer and other		4		21		-		73		98		2,219		2,317
Total acquired (covered)			1,342		474		-		44,317		46,133		173,149		219,282
Total loans		$	7,806	$	1,855	$	823	$	66,593	$	77,077	$	1,971,864	$	2,048,941

						Greater
						than
		30-59 Days		60-89 Days		90 Days				Total				Total
December 31, 2012:		Past Due		Past Due		Past Due		Nonaccrual		Past Due		Current		Loans
Originated:
	Commercial real estate	$	731	$	1,080	$	-	$	3,522	$	5,333	$	818,764	$	824,097
	Commercial construction		369		-		-		7,586		7,955		145,924		153,879
	Commercial and industrial		243		8		-		1,121		1,372		123,040		124,412
	Leases		-		-		-		-		-		13,209		13,209
	Residential construction		-		-		-		-		-		21,704		21,704
	Residential mortgage		1,205		2,133		-		7,356		10,694		282,037		292,731
	Consumer and other		9		127		-		-		136		8,988		9,124
Total originated			2,557		3,348		-		19,585		25,490		1,413,666		1,439,156
Acquired (non-covered):
	Commercial real estate		1,255		-		-		1,179		2,434		208,155		210,589
	Commercial construction		315		-		-		-		315		29,553		29,868
	Commercial and industrial		113		-		-		248		361		26,097		26,458
	Residential construction		136		-		-		-		136		12,674		12,810
	Residential mortgage		960		-		-		1,425		2,385		64,144		66,529
	Consumer and other		1		1		-		5		7		911		918
Total acquired (non-covered)			2,780		1		-		2,857		5,638		341,534		347,172
Acquired (covered):
	Commercial real estate		5,257		84		-		12,730		18,071		96,686		114,757
	Commercial construction		-		113		-		14,961		15,074		18,373		33,447
	Commercial and industrial		55		-		-		1,170		1,225		9,673		10,898
	Residential construction		-		-		-		-		-		215		215
	Residential mortgage		3,593		352		-		18,057		22,002		65,013		87,015
	Consumer and other		70		1		-		63		134		2,464		2,598
Total acquired (covered)			8,975		550		-		46,981		56,506		192,424		248,930
Total loans		$	14,312	$	3,899	$	-	$	69,423	$	87,634	$	1,947,624	$	2,035,258

The Company uses several credit quality indicators to manage credit risk in an ongoing manner. The Company's primary credit quality indicators use an internal credit risk rating system that categorizes loans and leases into pass, special mention, or classified categories. Credit risk ratings are applied individually to those classes of loans and leases that have significant or unique credit characteristics that benefit from a case-by-case evaluation. These are typically loans and leases to businesses or individuals in the classes which comprise the commercial portfolio segment. Groups of loans and leases that are underwritten and structured using standardized criteria and characteristics are typically risk rated and monitored collectively. These are typically loans and leases to individuals in the classes which comprise the consumer portfolio segment.

At least annually the Company will review all loans exceeding a certain threshold and assign a risk rating. Loans excluded from the scope of the annual review process are generally classified as pass credits until: (a) they become past due; (b) management becomes aware of a deterioration in the creditworthiness of the borrower; or (c) the customer contacts the Company for a modification or new loan. The Company uses the following definitions for risk ratings:

Special Mention. Loans classified as special mention 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 of the institution's credit position at some future date.

Substandard. Loans classified as substandard are inadequately protected by the current net worth and payment 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 uncollectible and are in the process of being charged-off, as soon as practical, once so classified.

The following presents the recorded investment in the Company's loans, by credit quality indicator, as of June 30, 2013 and December 31, 2012 (dollars in thousands):

				Pass		Special
June 30, 2013:		Total		Credits		Mention		Substandard		Doubtful		Loss
Originated:
	Commercial real estate	$	910,580	$	817,261	$	40,916	$	52,403	$	-	$	-
	Commercial construction		147,378		115,370		13,196		18,812		-		-
	Commercial and industrial		146,268		137,757		5,482		3,018		11		-
	Leases		14,949		14,949		-		-		-		-
	Residential construction		28,167		25,859		544		1,764		-		-
	Residential mortgage		273,721		235,094		19,860		18,767		-		-
	Consumer and other		7,881		7,606		195		80		-		-
Total originated			1,528,944		1,353,896		80,193		94,844		11		-
Total acquired (non-covered):
	Commercial real estate		189,700		166,313		12,967		10,420		-		-
	Commercial construction		26,800		17,848		2,395		6,557		-		-
	Commercial and industrial		19,272		17,718		896		658		-		-
	Residential construction		4,746		1,997		1,795		954		-		-
	Residential mortgage		59,560		48,754		6,262		4,544		-		-
	Consumer and other		637		563		70		4		-		-
Total acquired (non-covered):			300,715		253,193		24,385		23,137		-		-
Acquired (covered):
	Commercial real estate		108,244		63,785		15,638		17,299		11,522		-
	Commercial construction		23,370		11,798		1,940		7,777		1,855		-
	Commercial and industrial		8,983		5,294		1,756		721		1,212		-
	Residential construction		212		196		16		-		-		-
	Residential mortgage		76,156		39,982		14,099		9,478		12,189		408
	Consumer and other		2,317		2,077		168		71		1		-
Total acquired (covered)			219,282		123,132		33,617		35,346		26,779		408
Total loans		$	2,048,941	$	1,730,221	$	138,195	$	153,327	$	26,790	$	408

				Pass		Special
December 31, 2012:		Total		Credits		Mention		Substandard		Doubtful		Loss
Originated:
	Commercial real estate	$	824,097	$	739,050	$	39,562	$	45,485	$	-	$	-
	Commercial construction		153,879		115,996		18,088		19,795		-		-
	Commercial and industrial		124,412		117,546		4,385		2,481		-		-
	Leases		13,209		13,209		-		-		-		-
	Residential construction		21,704		19,546		440		1,718		-		-
	Residential mortgage		292,731		250,083		21,831		20,817		-		-
	Consumer and other		9,124		8,760		320		44		-		-
Total originated			1,439,156		1,264,190		84,626		90,340		-		-
Acquired (non-covered):
	Commercial real estate		210,589		192,016		6,993		11,080		500		-
	Commercial construction		29,868		24,060		2,228		3,580		-		-
	Commercial and industrial		26,458		24,491		1,401		326		-		240
	Residential construction		12,810		7,086		176		5,548		-		-
	Residential mortgage		66,529		57,965		4,445		4,119		-		-
	Consumer and other		918		903		10		5		-		-
Total acquired (non-covered)			347,172		306,521		15,253		24,658		500		240
Acquired (covered):
	Commercial real estate		114,757		69,401		19,744		14,960		10,642		10
	Commercial construction		33,447		14,605		1,493		9,715		7,634		-
	Commercial and industrial		10,898		6,251		2,745		1,118		784		-
	Residential construction		215		16		199		-		-		-
	Residential mortgage		87,015		46,039		17,069		11,956		11,808		143
	Consumer and other		2,598		2,237		291		58		11		1
Total acquired (covered)			248,930		138,549		41,541		37,807		30,879		154
Total loans		$	2,035,258	$	1,709,260	$	141,420	$	152,805	$	31,379	$	394

A modification of a loan constitutes a TDR when a borrower is experiencing financial difficulty and the modification constitutes a concession. The Company offers various types of concessions when modifying a loan, however, forgiveness of principal is rarely granted. Commercial and industrial loans modified in a TDR often involve temporary interest-only payments, term extensions, and converting revolving credit lines to term loans. Additional collateral, a co-borrower, or a guarantor is often requested. Commercial mortgage and construction loans modified in a TDR often involve reducing the interest rate for the remaining term of the loan, extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk, or substituting or adding a new borrower or guarantor. Construction loans modified in a TDR may also involve extending the interest-only payment period. Residential mortgage loans modified in a TDR are primarily comprised of loans where monthly payments are lowered to accommodate the borrowers' financial needs for a period of time. After the lowered monthly payment period ends, the borrower reverts back to paying principal and interest per the original terms with the maturity date adjusted accordingly. Land loans are also included in the class of residential mortgage loans. Land loans are typically structured as interest-only monthly payments with a balloon payment due at maturity. Land loans modified in a TDR typically involve extending the balloon payment by one to three years, changing the monthly payments from interest-only to principal and interest. Home equity modifications are made infrequently and are not offered if the Company also holds the first mortgage. Home equity modifications are uniquely designed to meet the specific needs of each borrower. Occasionally, the terms will be modified to a standalone second lien mortgage, thereby changing their loan class from home equity to residential mortgage.

Loans modified in a TDR are, in many cases, already on non-accrual status and partial charge-offs have in some cases already been taken against the outstanding loan balance. As a result, loans modified in a TDR for the Company may have the financial effect of increasing the specific allowance associated with the loan. An allowance for impaired consumer and commercial loans that have been modified in a TDR is measured based on the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's observable market price, or the estimated fair value of the collateral, less any selling costs, if the loan is collateral dependent. Management exercises significant judgment in developing these estimates.

The following table provides a summary of loans modified as TDRs at June 30, 2013 and December 31, 2012 (dollars in thousands):

								Allowance for
						Total		Loan Losses
		Accrual		Nonaccrual		TDRs		Allocated
June 30, 2013:
Commercial real estate		$	4,737	$	2,317	$	7,054	$	708
Commercial construction			2,479		4,296		6,775		554
Commercial and industrial			118		-		118		12
Residential mortgage			5,282		1,990		7,272		1,072
Consumer and other			23		40		63		86
	Total modifications	$	12,639	$	8,643	$	21,282	$	2,432
	Total contracts		33		16		49

								Allowance for
						Total		Loan Losses
		Accrual		Nonaccrual		TDRs		Allocated
December 31, 2012:
Commercial real estate		$	16,010	$	2,314	$	18,324	$	904
Commercial construction			11,420		1,030		12,450		1,960
Commercial and industrial			322		1,029		1,351		-
Residential mortgage			8,015		4,639		12,654		1,165
Consumer and other			122		11		133		-
	Total modifications	$	35,889	$	9,023	$	44,912	$	4,029
	Total contracts		44		20		64

As of June 30, 2013 and December 31, 2012, the Company had no available commitments outstanding on TDRs.

The Company offers a variety of modifications to borrowers. The modification categories offered can generally be described in the following categories:

Term modification - A modification in which the maturity date, timing of payments or frequency of payments is changed.

Interest only modification – A modification in which the loan is converted to interest only payments for a period of time.

Payment modification – A modification in which the principal and interest payment are lowered from the original contractual terms.

Combination modification – Any other type of modification, including the use of multiple categories above.

The following table presents new TDRs, by modification category, for the three and six months ended June 30, 2013 and 2012 (dollars in thousands). All balances represent the recorded investment as of the end of the period in which the modification was made.

		Three Months Ended June 30, 2013
						Interest
		Rate		Term		only		Combination		Total
		modifications		modifications		modifications		modifications		modifications
Commercial real estate		$	101	$	-	$	-	$	99	$	200
Commercial construction			128		-		152		67		347
Commercial and industrial			-		89		-		-		89
Residential mortgage			452		-		686		202		1,340
Consumer and other			-		23		-		-		23
	Total modifications	$	681	$	112	$	838	$	368	$	1,999

		Six Months Ended June 30, 2013
						Interest
		Rate		Term		only		Combination		Total
		modifications		modifications		modifications		modifications		modifications
Commercial real estate		$	101	$	648	$	-	$	911	$	1,660
Commercial construction			128		-		152		553		833
Commercial and industrial			-		89		-		-		89
Residential mortgage			452		-		686		202		1,340
Consumer and other			-		23		-		-		23
	Total modifications	$	681	$	760	$	838	$	1,666	$	3,945

		Three Months Ended June 30, 2012
						Interest
		Rate		Term		only		Combination		Total
		modifications		modifications		modifications		modifications		modifications
Commercial real estate		$	-	$	2,024	$	1,141	$	8,596	$	11,761
Commercial construction			-		12		1,313		-		1,325
Commercial and industrial			-		34		-		294		328
Residential mortgage			-		456		3,233		2,778		6,467
	Total modifications	$	-	$	2,526	$	5,687	$	11,668	$	19,881

		Six Months Ended June 30, 2012
						Interest
		Rate		Term		only		Combination		Total
		modifications		modifications		modifications		modifications		modifications
Commercial real estate		$	-	$	2,517	$	1,141	$	10,625	$	14,283
Commercial construction			-		641		1,313		-		1,954
Commercial and industrial			-		34		-		294		328
Residential mortgage			-		456		3,233		2,896		6,585
	Total modifications	$	-	$	3,648	$	5,687	$	13,815	$	23,150

The following table summarizes the period-end balance for loans modified and classified as TDRs in the previous 12 months for which a payment default has occurred during the period (dollars in thousands). The Company defines payment default as movement of the restructuring to nonaccrual status, foreclosure or charge-off, whichever occurs first.

The Company originates certain single family, residential first mortgage loans for sale on a presold basis. Loan sale activity for the three and six months ended June 30, 2013 and 2012 is summarized below (dollars in thousands):