LOANS AND ALLOWANCE

9 Months Ended

Sep. 30, 2012

LOANS AND ALLOWANCE

LOANS AND ALLOWANCE

NOTE 4 - LOANS AND ALLOWANCE

Loans were as follows:

	September 30,2012			December 31, 2011
Commercial
Commercial and industrial	123,783			114,367
Agricultural	23,088			20,741
Commercial Real Estate
Farm	55,532			46,308
Hotel	138,507			146,358
Construction and development	30,312			30,746
Other	507,156			540,752
Residential
1-4 family	381,956			365,710
Home equity	221,844			212,202
Consumer
Direct	46,322			51,157
Indirect	3,025			6,038
Total loans	1,531,525			1,534,379
Allowance for loan losses	(35,246		)	(39,889		)
Net loans	$	1,496,279		$	1,494,490

Activity in the allowance for loan losses by portfolio segment for the nine months ended September 30, 2012 and 2011 were as follows:

	Commercial			Commercial Real Estate			Residential			Consumer			Total
Allowance for loan loss
Balance, January 1, 2012	$	5,562		$	30,476		$	2,972		$	879		$	39,889
Provision charged to expense	(572		)	4,555			2,549			1,068			7,600
Losses charged off	(455		)	(10,025		)	(2,910		)	(2,468		)	(15,858		)
Recoveries	522			1,630			232			1,231			3,615
Balance, September 30, 2012	$	5,057		$	26,636		$	2,843		$	710		$	35,246

	Commercial			Commercial Real Estate			Residential			Consumer			Total
Allowance for loan loss
Balance, January 1, 2011	$	6,386		$	32,653		$	2,281		$	1,285		$	42,605
Provision charged to expense	1,151			10,162			2,383			904			14,600
Losses charged off	(1,834		)	(12,283		)	(2,308		)	(1,793		)	(18,218		)
Recoveries	210			943			420			873			2,446
Balance, September 30, 2011	$	5,913		$	31,475		$	2,776		$	1,269		$	41,433

The balance of recorded investment of loans and allowance for loan losses by portfolio segment as of September 30, 2012 and December 31, 2011 were as follows:

As of September 30, 2012
Ending Balance individually evaluated for impairment	$	1,817	$	4,348	$	—	$	—	$	6,165
Ending Balance collectively evaluated for impairment	3,240		22,288		2,843		710		29,081
Total ending allowance balance	$	5,057	$	26,636	$	2,843	$	710	$	35,246
Loans
Ending Balance individually evaluated for impairment	$	5,126	$	30,391	$	13,797	$	1,003	$	50,317
Ending Balance collectively evaluated for impairment	141,745		701,116		590,003		48,344		1,481,208
Total ending loan balance excludes $5,664 of accrued interest	$	146,871	$	731,507	$	603,800	$	49,347	$	1,531,525

As of December 31, 2011	Commercial		Commercial Real Estate		Residential		Consumer		Total
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

The recorded investment in loans excludes accrued interest receivable due to immateriality.

Activity in the allowance for loan losses by portfolio segment for the three months ended September 30, 2012 and September 30, 2011 was as follows:

	September 30, 2012
	Commercial			Commercial Real Estate			Residential			Consumer			Total
Allowance for loan loss
Balance, July 1	$	4,945		$	29,580		$	2,975		$	789		$	38,289
Provision charged to expense	223			464			840			473			2,000
Losses charged off	(178		)	(3,936		)	(1,078		)	(962		)	(6,154		)
Recoveries	67			528			106			410			1,111
Balance, September 30	$	5,057		$	26,636		$	2,843		$	710		$	35,246

	September 30, 2011
	Commercial			Commercial Real Estate			Residential			Consumer			Total
Allowance for loan loss
Balance, July 1	$	5,789		$	31,851		$	2,588		$	1,234		$	41,462
Provision charged to expense	1,410			2,346			730			514			5,000
Losses charged off	(1,291		)	(3,017		)	(598		)	(755		)	(5,661		)
Recoveries	5			295			56			276			632
Balance, September 30	$	5,913		$	31,475		$	2,776		$	1,269		$	41,433

The following table presents loans individually evaluated for impairment by class of loans as of September 30, 2012:

September 30, 2012	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With an allowance recorded
Commercial
Commercial and industrial	$	3,026	$	3,010	$	1,817
Commercial Real Estate
Farm	461		461		146
Construction and development	2,878		1,765		669
Other	14,295		13,964		3,533
Subtotal — impaired with allowance recorded	20,660		19,200		6,165
With no related allowance recorded
Commercial
Commercial & industrial	2,731		2,114
Agricultural	12		2
Commercial Real Estate
Farm	805		739
Hotel	265		—
Construction and development	4,806		2,877
Other	15,578		10,585
Residential
1-4 Family	12,616		11,185
Home Equity	2,765		2,612
Consumer
Direct	988		972
Indirect	34		31
Subtotal — impaired with allowance recorded	40,600		31,117
Total impaired loans	$	61,260	$	50,317	$	6,165

The recorded investment in loans excludes accrued interest receivable and loan origination fees, net due to immateriality.

The following tables presents the three and nine month average balance of impaired loans at September 30, 2012 and 2011.

At September 30, 2012	Three Month Average Balance		Nine Month Average Balance
Commercial
Commercial and industrial	$	5,233	$	5,052
Agricultural	12		29
Commercial Real Estate
Farm	1,147		1,078
Hotel	—		1,493
Construction and development	4,708		5,403
Other	25,964		26,195
Residential
1-4 family	11,691		11,835
Home equity	2,845		2,742
Consumer
Direct	1,007		1,035
Indirect	42		47
Total loans	52,649		54,909

At September 30, 2011	Three Month Average Balance		Nine Month Average Balance
Commercial
Commercial and industrial	$	5,809	$	6,775
Agricultural	101		115
Commercial Real Estate
Farm	1,072		1,133
Hotel	5,810		7,647
Construction and development	7,345		10,004
Other	28,342		29,570
Residential
1-4 family	10,286		11,771
Home equity	1,929		1,848
Consumer
Direct	1,135		1,158
Indirect	58		64
Total loans	$	61,887	$	70,085

Total interest income recognized and cash basis interest recognized on impaired loans for the third quarter of 2012 and 2011 was $120 and $16 and total income recognized and cash basis interest recognized on impaired loans on the first nine months of 2012 and 2011 was $148 and $89.

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

December 31, 2011	Unpaid Principal Balance	Recorded Investment	Allowance for Loan Losses Allocated
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
Subtotal — impaired with allowance recorded	28,959	28,726	6,669
With no related allowance recorded
Commercial
Commercial & industrial	2,720	2,030
Agricultural	351	57
Commercial Real Estate
Farm	579	531
Hotel	876	384
Construction and development	2,996	1,839
Other	16,325	12,726
Residential
1-4 Family	12,344	12,045
Home Equity	2,548	2,477
Consumer
Direct	1,096	1,083
Indirect	35	33
Subtotal — impaired with allowance recorded	39,870	33,205
Total impaired loans	68,829	61,931	6,669

The following table presents the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of September 30, 2012 and December 31, 2011

	Non-accrual				Past due over 90 days and still accruing
	September 30, 2012		December 31, 2011		September 30, 2012		December 31, 2011
Commercial
Commercial and industrial	$	5,101	$	2,518	$		$	—
Agricultural	2		57
Commercial Real Estate
Farm	1,200		1,016
Hotel	—		384
Construction and development	4,642		3,240
Other	21,144		21,060				3,259
Residential
1-4 Family	10,200		10,873		360
Home Equity	2,196		2,105		12
Consumer
Direct	246		242		7		7
Indirect	31		33
Total	$	44,762	$	41,528	$	379	$	3,266

The following table presents the aging of the recorded investment in past due loans as of September 30, 2012 by class of loans:

September 30, 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	$	123,783	$	1,401	$	438	$	4,338	$	6,177	$	117,606
Agricultural	23,088		—		—		2		2		23,086
Commercial Real Estate
Farm	55,532		297		76		1,032		1,405		54,127
Hotel	138,507		—		—		—		—		138,507
Construction and development	30,312		901		108		4,411		5,420		24,892
Other	507,156		2,873		759		11,901		15,533		491,623
Residential
1-4 Family	381,956		2,481		1,828		6,412		10,721		371,235
Home Equity	221,844		848		429		1,499		2,776		219,068
Consumer
Direct	46,322		221		174		46		441		45,881
Indirect	3,025		34		10		3		47		2,978
Total — excludes $5,664 of accrued interest	$	1,531,525	$	9,056	$	3,822	$	29,644	$	42,522	$	1,489,003

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

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 period ending September 30, 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 troubled debt restructurings increased the allowance for loan losses by $10 for both the three month period and the nine month period ending September 30, 2012.

The following table presents loans by class modified as troubled debt restructurings that occurred during the three month period ending September 30, 2012:

		Pre-Modification		Post-Modification
		Outstanding Recorded		Outstanding Recorded
September 30, 2012	Number of Loans	Investment		Investment
Commercial
Commercial and industrial	1	$	91	$	91
Total	1	$	91	$	91

The following table presents loans by class modified as troubled debt restructurings that occurred during the three month period ending September 30, 2011:

		Pre-Modification		Post-Modification
		Outstanding Recorded		Outstanding Recorded
	Number of Loans	Investment		Investment
Commercial
Commercial and industrial	1	$	181	$	181
Commercial Real Estate
Construction and development	2	3,779		3,779
Other	4	1,862		1,862
Residential
1-4 Family	2	217		217
Home Equity	16	308		308
Total	25	$	6,347	$	6,347

The following table presents loans by class modified as troubled debt restructurings that occurred during the nine month period ending September 30, 2012:

		Pre-Modification		Post-Modification
		Outstanding Recorded		Outstanding Recorded
	Number of Loans	Investment		Investment
Commercial
Commercial and industrial	1	$	91	$	91
Residential
Home Equity	1	70		70
Consumer
Direct	1	4		4
Total	3	$	165	$	165

The following table presents loans by class modified as troubled debt restructurings that occurred during the nine month period ending September 30, 2011:

		Pre-Modification		Post-Modification
		Outstanding Recorded		Outstanding Recorded
	Number of Loans	Investment		Investment
Commercial
Commercial and industrial	2	$	213	$	213
Commercial Real Estate
Construction and development	3	4,287		4,287
Hotel	1	5,833		5,410
Other	16	4,325		3,701
Residential
1-4 Family	6	406		406
Home Equity	39	693		693
Consumer
Direct	7	53		53
Total	74	$	15,810	$	14,763

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 three month period ending September 30, 2012:

	Number of Loans	Recorded Investment
Commercial
Commercial and industrial	2	$	2,058
Commercial real estate:
Other	1	370
Residential
1-4 Family	2	125
Total	5	$	2,553

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 three month period ending September 30, 2011:

Troubled Debt Restructurings
That Subsequently Defaulted:	Number of Loans	Recorded Investment
Residential
1-4 Family	2	$	125
Total	2	$	125

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 nine month period ending September 30, 2012:

	Number of Loans	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

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 nine month period ending September 30, 2011:

Troubled Debt Restructurings
That Subsequently Defaulted:	Number of Loans	Recorded Investment
Commercial
Commercial and industrial	3	$	597
Commercial real estate:
Farm	2	532
Other	7	910
Residential
1-4 Family	4	311
Home Equity	3	33
Total	19	$	2,383

A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms.

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 $265 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of September 30, 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.

During the third quarter of 2012, charge offs of $0 were taken on troubled debt restructuring loans.  No reserves were provided on these loans in prior quarters.  For the first nine months of 2012, charge offs of $2,399 were taken on troubled debt restructurings with reserves of $1,768 provided on these loans in prior quarters.

The terms of certain other loans were modified during the nine month period ending September 30, 2012 that did not meet the definition of a troubled debt restructuring. These loans have a total recorded investment as of September 30, 2012 of $18,668. 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 demonstrate 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 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 September 30, 2012 and December 31, 2011, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

September 30, 2012	Pass		Special Mention		Substandard		Non-accrual
Commercial
Commercial and industrial	$	104,776	$	6,222	$	7,684	$	5,101
Agricultural	23,079		—		7		2
Commercial Real Estate
Farm	52,747		1,105		480		1,200
Hotel	88,918		49,589		—		—
Construction and development	21,006		1,507		3,157		4,642
Other	433,277		30,802		21,933		21,144
Total	$	723,803	89,225		33,261		32,089

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

Beginning in late 2011, loans not meeting the criteria above that are 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 are classified as Watch. If loans are greater than 90 days past due, they are classified as Substandard. Consumer loans not secured by 1-4 family residential real estate that are 60-119 days past due are classified Substandard while loans greater than 119 days are classified as Loss. As of September 30, 2012 and December 31, 2011, the performing/non performing loans by category of loans is as follows

September 30, 2012	Performing		Watch		Substandard
Residential
1-4 Family	$	373,728	$	1,825	$	6,403
Home Equity	219,911		431		1,502
Total	$	593,639	$	2,256	$	7,905

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

September 30, 2012	Performing		Substandard		Loss
Consumer
Direct	$	46,102	$	202	$	18
Indirect	3,012		13		—
Total	$	49,114	$	215	$	18

December 31, 2011	Performing		Substandard		Loss
Consumer
Direct	50,882		201		74
Indirect	5,998		25		15
Total	$	56,880	$	226	$	89