NOTE 5 — LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans were as follows:

	December 31, 2012			December 31, 2011


Commercial
Commercial and industrial	$	126,965		$	114,367
Agricultural		32,769			20,741
Commercial Real Estate
Farm		62,896			46,308
Hotel		131,495			146,358
Construction and development		25,208			30,746
Other		507,231			540,752
Residential
1-4 family		394,195			365,710
Home equity		224,329			212,202
Consumer
Direct		45,844			51,157
Indirect		2,451			6,038

Total loans		1,553,383			1,534,379
Allowance for loan losses		(32,227	)		(39,889	)

Net loans	$	1,521,156		$	1,494,490

The following tables presents the activity in the allowance for loan losses by portfolio segment for the years ending December 31, 2012 and 2011:

2012	Commercial			Commercial Real Estate			Residential			Consumer			Total


Allowance for loan loss
Balance, January 1	$	5,562		$	30,476		$	2,972		$	879		$	39,889
Provision charged to expense		(265	)		4,802			3,490			1,823			9,850
Losses charged off		(1,946	)		(13,553	)		(3,547	)		(3,286	)		(22,332	)
Recoveries		543			2,432			265			1,580			4,820

Balance, December 31	$	3,894		$	24,157		$	3,180		$	996		$	32,227

2011	Commercial			Commercial Real Estate			Residential			Consumer			Total


Allowance for loan loss
Balance, January 1	$	6,386		$	32,653		$	2,281		$	1,285		$	42,605
Provision charged to expense		215			13,406			3,136			1,043			17,800
Losses charged off		(2,211	)		(16,954	)		(3,093	)		(2,636	)		(24,894	)
Recoveries		1,172			1,371			648			1,187			4,378

Balance, December 31	$	5,562		$	30,476		$	2,972		$	879		$	39,889

Activity in the allowance for loan losses was as follows for the year ending December 31, 2010:

	2010


Allowance for loan losses
Balances, January 1	$	46,648
Provision for losses		35,250
Recoveries on loans		3,153
Loans charged off		(42,446	)

Balances, December 31	$	42,605

The following table presents the balance in the allowance for loan losses and the recorded investment by portfolio segment and based on impairment method as of December 31, 2012 and 2011:

December 31, 2012	Commercial		Commercial Real Estate		Residential		Consumer		Total


Allowance for loan loss
Ending Balance individually evaluated for impairment	$	150	$	3,067		—		—	$	3,217
Ending Balance collectively evaluated for impairment		3,744		21,090		3,180		996		29,010

Total ending allowance balance	$	3,894	$	24,157	$	3,180	$	996	$	32,227

Loans
Ending Balance individually evaluated for impairment	$	1,797	$	33,499	$	14,175	$	1,083	$	50,554
Ending Balance collectively evaluated for impairment		157,937		693,331		604,349		47,212		1,502,829

Total ending loan balance excludes $5,206 of accrued interest	$	159,734	$	726,830	$	618,524	$	48,295	$	1,553,383

December 31, 2011	Commercial		Commercial Real Estate		Residential		Consumer		Total


Allowance for loan loss
Ending Balance individually evaluated for impairment	$	1,193	$	5,476	$	—	$	—	$	6,669
Ending Balance collectively evaluated for impairment		4,369		25,000		2,972		879		33,220

Total ending allowance balance	$	5,562		30,476	$	2,972	$	879	$	39,889

Loans
Ending Balance individually evaluated for impairment	$	5,144	$	41,149	$	14,522	$	1,116	$	61,931
Ending Balance collectively evaluated for impairment		129,964		723,015		563,390		56,079		1,472,448

Total ending loan balance excludes $5,835 of accrued interest	$	135,108		764,164	$	577,912	$	57,195	$	1,534,379

Nonperforming loans were as follows:

December 31	2012		2011


Loans past due 90 days or more still on accrual	$	565	$	3,266
Troubled debt restructurings		15,102		20,402
Non-accrual loans		35,451		41,528

Total	$	51,118	$	65,196

Nonperforming loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2012 and 2011:

December 31, 2012	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Interest Income Recognized		Cash Basis Interest Recognized


With an allowance recorded
Commercial
Commercial and industrial	$	305	$	305	$	150
Agricultural				—		—
Commercial Real Estate
Farm		922		922		442
Hotel
Construction and development		742		644		240
Other		9,727		9,419		2,385
Residential
1-4 Family
Home Equity
Consumer
Direct
Indirect

Subtotal — impaired with allowance recorded		11,696		11,290		3,217
With no related allowance recorded
Commercial
Commercial and industrial		2,115		1,492			$	76	$	76
Agricultural		1		—
Commercial Real Estate
Farm		741		663				9		9
Hotel		6,257		5,968
Construction and development		2,685		1,499				108		108
Other		20,047		14,384				129		129
Residential
1-4 Family		13,110	$	11,548				3		3
Home Equity		2,801		2,627				17		17
Consumer
Direct		1,083		1,066				9		9
Indirect		19		17				7		7

Subtotal — impaired with no allowance recorded	$	48,859	$	39,264		—	$	358	$	358

Total impaired loans	$	60,555	$	50,554	$	3,217	$	358	$	358

December 31, 2011	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Interest Income Recognized		Cash Basis Interest Recognized


With an allowance recorded
Commercial
Commercial and industrial	$	3,130	$	3,057	$	1,193
Agricultural
Commercial Real Estate
Farm		486		486		193
Hotel		5,385		5,385		100
Construction and development		5,558		5,476		2,371
Other		14,400		14,322		2,812
Residential
1-4 Family
Home Equity
Consumer
Direct
Indirect

Subtotal — impaired with allowance recorded	$	28,959	$	28,726	$	6,669
With no related allowance recorded
Commercial
Commercial and industrial	$	2,720	$	2,030	$	—	$	22	$	22
Agricultural		351		57
Commercial Real Estate
Farm		579		531
Hotel		876		384
Construction and development		2,996		1,839				1		1
Other		16,325		12,726				135		135
Residential
1-4 Family		12,344		12,045				8		8
Home Equity		2,548		2,477				8		8
Consumer
Direct		1,096		1,083				9		9
Indirect		35		33				5		5

Subtotal — impaired with no allowance recorded	$	39,870	$	33,205	$	—	$	188	$	188

Total impaired loans	$	68,829	$	61,931	$	6,669	$	188	$	188

The following table presents the average recorded investment of impaired loans in 2012 and 2011.

	2012		2011


Commercial
Commercial and industrial	$	4,401	$	6,438
Agricultural		23		103
Commercial Real Estate
Farm		1,180		1,110
Hotel		2,388		7,271
Construction and development		4,751		9,467
Other		25,716		29,079
Residential
1-4 family		11,778		11,825
Home equity		2,719		1,974
Consumer
Direct		1,041		1,143
Indirect		41		58

Total loans	$	54,038	$	68,468

Average impaired loan information for 2010 was as follows:

December 31	2010


Average balance of impaired loans during the year	$	94,905
Interest income recognized on impaired loans		108
Cash basis interest included above		108

The following table presents the recorded investment in non-accrual and loans past due over 90 days still on accrual by class of loans as of December 31, 2012 and 2011:

	Non-accrual				Past due over 90 days and still accruing


December 31,	2012		2011		2012		2011

Commercial
Commercial and industrial	$	1,777	$	2,518	$	—	$	—
Agricultural		—		57		—		—
Commercial Real Estate
Farm		1,584		1,016		—		—
Hotel		—		384		—		—
Construction and development		1,657		3,240		565		—
Other		17,442		21,060		—		3,259
Residential
1-4 Family		10,392		10,873		—		—
Home Equity		2,216		2,105		—		—
Consumer
Direct		366		242		—		7
Indirect		17		33		—		—

Total	$	35,451	$	41,528	$	565	$	3,266

The following table presents the aging of the recorded investment in past due loans as of December 31, 2012 and 2011 by class of loans:

December 31, 2012	Total Loans		30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Loans Not Past Due


Commercial
Commercial and industrial	$	126,965	$	1,421	$	311	$	1,094	$	2,826	$	124,139
Agricultural		32,769		—		—		—		—		32,769
Commercial Real Estate
Farm		62,896		158		—		1,417		1,575		61,321
Hotel		131,495		—		—		—		—		131,495
Construction and development		25,208		—		—		2,121		2,121		23,087
Other		507,231		2,516		1,208		10,607		14,331		492,900
Residential
1-4 Family		394,195		7,788		2,605		5,492		15,885		378,310
Home Equity		224,329		1,170		357		1,428		2,955		221,374
Consumer
Direct		45,844		182		49		242		473		45,371
Indirect		2,451		33		12		5		50		2,401

Total — excludes $5,206 of accrued interest	$	1,553,383	$	13,268	$	4,542	$	22,406	$	40,216	$	1,513,167

December 31, 2011	Total Loans		30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Loans Not Past Due


Commercial
Commercial and industrial	$	114,367	$	1,139	$	655	$	1,831	$	3,625	$	110,742
Agricultural		20,741						57		57		20,684
Commercial Real Estate
Farm		46,308				58		905		963		45,345
Hotel		146,358						384		384		145,974
Construction and development		30,746		61				3,179		3,240		27,506
Other		540,752		4,249		3,576		16,529		24,354		516,398
Residential
1-4 Family		365,710		9,327		2,233		7,182		18,742		346,968
Home Equity		212,202		1,417		500		1,491		3,408		208,794
Consumer
Direct		51,157		382		146		129		657		50,500
Indirect		6,038		87		24		16		127		5,911

Total — excludes $5,835 of accrued interest	$	1,534,379	$	16,662	$	7,192	$	31,703	$	55,557	$	1,478,822

Troubled Debt Restructurings

During the year ending December 31, 2012, 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 or an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk.

Modifications involving a reduction of the stated interest rate of the loan were for periods ranging from 60 months to 30 years. Modifications involving an extension of the maturity date were for periods ranging from 6 months to 14 months.

The following tables present loans by class modified as troubled debt restructurings that occurred during the years ending December 31, 2012 and 2011:

2012		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment


Commercial
Commercial and industrial	2	$	179	$	179
Commercial Real Estate
Hotel	2		7,727		5,968
Other	7		6,241		5,367
Residential
1-4 Family	1		91		91
Home Equity	1		70		70
Consumer
Direct	1		4		4

Total	14	$	14,312	$	11,679

2011		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment


Commercial
Commercial and industrial	3	$	248	$	248
Commercial Real Estate
Construction and development	3		4,287		4,287
Hotel	1		5,922		5,498
Other	15		8,783		6,619
Residential
1-4 Family	8		632		632
Home Equity	45		855		855
Consumer
Direct	6		47		47

Total	81	$	20,774	$	18,186

The troubled debt restructurings described above increased the allowance for loan losses by $10 and $30 and resulted in charge offs of $2,477 and $3,062 during the year ending December 31, 2012 and 2011 respectively.

The following tables present loans by class modified as troubled debt restructurings for which there was a payment default within twelve months following the modification during the years ending December 31, 2012 and 2011:

2012		Recorded Investment


Commercial
Commercial and industrial	3	$	2,195
Commercial real estate:
Development	1		323
Other	9		3,332
Residential
1-4 Family	2		125
Home Equity	1		12

Total	16	$	5,987

2011		Recorded Investment


Commercial
Commercial and industrial	4	$	926
Commercial real estate:
Farm	2		532
Development	1		150
Other	7		910
Residential
1-4 Family	6		521
Home Equity	5		93

Total	25	$	3,132

A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. The troubled debt restructurings that subsequently defaulted described above increased the allowance for loan losses by $256 and $178 and resulted in charge offs of $1,192 and $594 during the years ending December 31, 2012 and 2011 respectively.

In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the company's internal underwriting policy.

The Company has allocated $567 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of December 31, 2012. The Company has committed to lend additional amounts totaling $0 to customers with outstanding loans that are classified as troubled debt restructurings. At December 31, 2011, the comparable numbers were $3,013 of specific reserves and $0 of commitments. The total of troubled debt restructurings at December 31, 2012 and 2011 was $15,102 and $20,402 respectively.

The terms of certain other loans were modified during year ending December 31, 2012 that did not meet the definition of a troubled debt restructuring. These loans have a total recorded investment as of December 31, 2012 of $18,612. The modification of these loans involved either a modification of the terms of a loan to borrowers who were not experiencing financial difficulties or a delay in a payment that was considered to be insignificant.

Credit Quality Indicators:

The Company categorizes loans into risk categories based on relevant information about the ability of the borrower 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 commercial and commercial real estate loans individually by classifying the loans as to credit risk. This analysis includes credit relationships with an outstanding balance greater than $1 million on an annual basis. The Company uses the following definitions for risk ratings:

Special Mention — Loans classified as special mention have above average risk that requires management's ongoing attention. The borrower may demonstrated inability to generate profits or to maintain net worth, chronic delinquency and /or a demonstrated lack of willingness or capacity to meet obligations.

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 classified by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Non-accrual — Loans classified as non-accrual are loans where the further accrual of interest is stopped because payment in full of principal and interest is not expected. In most cases, the principal and interest has been in default for a period of 90 days or more.

As of December 31, 2012 and 2011, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

December 31, 2012	Pass		Special Mention		Substandard		Non-accrual


Commercial
Commercial and industrial	$	112,564	$	9,824	$	2,800	$	1,777
Agricultural		32,764		—		5		—
Commercial Real Estate
Farm		60,071		1,094		147		1,584
Hotel		83,522		47,973		—		—
Construction and development		18,719		1,465		3,367		1,657
Other		439,702		27,621		22,466		17,442

Total	$	747,342	$	87,977	$	28,785	$	22,460

December 31, 2011	Pass		Special Mention		Substandard		Non-accrual


Commercial
Commercial and industrial	$	93,380	$	11,935	$	6,534	$	2,518
Agricultural		20,150		524		10		57
Commercial Real Estate
Farm		42,847		2,151		294		1,016
Hotel		77,259		51,900		16,815		384
Construction and development		15,498		3,212		8,796		3,240
Other		422,385		66,377		30,930		21,060

Total	$	671,519	$	136,099	$	63,379	$	28,275

Loans not analyzed individually as part of the above described process are classified by delinquency. These loans are primarily residential mortgage and consumer loans. All consumer loans fully or partially secured by 1-4 residential real estate that are 60-89 days will be classified as Watch. If loans are greater than 90 days past due, they will be classified as Substandard. Consumer loans not secured by 1-4 family residential real estate that are 60-119 days past due will be classified Substandard while loans greater than 119 days will be classified as Loss. As of December 31, 2012 and 2011, the performing/non performing loans by category of loans is as follows:

December 31, 2012	Performing		Watch		Substandard


Residential
1-4 Family	$	386,098	$	2,605	$	5,492
Home Equity		222,544		357		1,428

Total	$	608,642	$	2,962	$	6,920

December 31, 2012	Performing		Substandard		Loss


Consumer
Direct	$	45,553	$	195	$	96
Indirect		2,434		12		5

Total	$	47,987	$	207	$	101

December 31, 2011	Performing		Watch		Substandard


Residential
1-4 Family	$	356,295	$	2,233	$	7,182
Home Equity		210,211		500		1,491

Total	$	566,506	$	2,733	$	8,673

December 31, 2011	Performing		Substandard		Loss


Consumer
Direct	$	50,882	$	201	$	74
Indirect		5,998		25		15

Total	$	56,880	$	226	$	89