NOTE 4 - LOANS AND ALLOWANCE

Loans were as follows:

	March 31, 2013			December 31, 2012
Commercial
Commercial and industrial	$	136,895		$	134,156
Agricultural	18,091			22,355
Commercial Real Estate
Farm	63,971			66,119
Hotel	127,027			131,495
Construction and development	27,994			25,208
Other	509,373			507,231
Residential
1-4 family	403,083			394,195
Home equity	222,915			224,329
Consumer
Direct	42,032			45,844
Indirect	1,939			2,451
Total loans	1,553,320			1,553,383
Allowance for loan losses	(31,728		)	(32,227		)
Net loans	$	1,521,592		$	1,521,156

Activity in the allowance for loan losses for the three months ended March 31, 2013 and 2012 and the recorded investment of loans and allowances by portfolio segment and impairment method as of March 31, 2013 and December 31, 2012 were as follows:

	Commercial			Commercial Real Estate			Residential			Consumer			Total
Allowance for loan loss
Balance, January 1, 2013	$	3,894		$	24,157		$	3,180		$	996		$	32,227
Provision charged to expense	525			238			631			340			1,734
Losses charged off	(271		)	(1,208		)	(698		)	(819		)	(2,996		)
Recoveries	131			51			150			431			763
Balance, March 31, 2013	$	4,279		$	23,238		$	3,263		$	948		$	31,728

	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	(218		)	2,893			182			243			3,100
Losses charged off	(180		)	(3,908		)	(1,214		)	(619		)	(5,921		)
Recoveries	167			779			72			455			1,473
Balance, March 31, 2012	$	5,331		$	30,240		$	2,012		$	958		$	38,541

As of March 31, 2013
Ending Balance individually evaluated for impairment	$	355		$	3,143		$	121		$	2		$	3,621
Ending Balance collectively evaluated for impairment	3,924			20,095			3,142			946			28,107
Total ending allowance balance	$	4,279		$	23,238		$	3,263		$	948		$	31,728
Loans
Ending Balance individually evaluated for impairment	$	1,384		$	34,518		$	13,137		$	927		$	49,966
Ending Balance collectively evaluated for impairment	153,602			693,847			612,861			43,044			1,503,354
Total ending loan balance excludes $5,230 of accrued interest	$	154,986		$	728,365		$	625,998		$	43,971		$	1,553,320

As of December 31, 2012	Commercial		Commercial Real Estate		Residential		Consumer		Total
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	154,714		696,554		604,349		47,212		1,502,829
Total ending loan balance excludes $5,206 of accrued interest	$	156,511	$	730,053	$	618,524	$	48,295	$	1,553,383

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

The following table presents loans individually evaluated for impairment by class of loans as of March 31, 2013. Performing troubled debt restructurings totaling $9,619 were excluded as allowed by ASC 310-40.

March 31, 2013	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	$	509	$	496	$	355	$		$
Commercial Real Estate
Farm	625		625		204
Hotel
Construction and development	641		543		252
Other	11,951		11,276		2,687
Residential
1-4 Family	1,239		1,137		118
Home Equity	52		51		3
Consumer
Direct	130		130		2
Subtotal — impaired with allowance recorded	15,147		14,258		3,621
With no related allowance recorded
Commercial
Commercial & industrial	1,475		888
Agricultural	—		—
Commercial Real Estate
Farm	1,093		986
Hotel	—		—
Construction and development	2,539		1,487
Other	12,606		9,982				6		6
Residential
1-4 Family	10,787		9,339				2		2
Home Equity	2,804		2,610				2		2
Consumer
Direct	785		776				4		4
Indirect	23		21
Subtotal — impaired with allowance recorded	32,112		26,089				14		14
Total impaired loans	$	47,259	$	40,347	$	3,621	$	14	$	14

The following table presents the average balance of impaired loans for the quarters ending March 31, 2013 and March 31, 2012, excluding performing troubled debt restructurings as allowed by ASC 310-40.

	Average Balance
	March 31 2013		March 31 2012
Commercial
Commercial & industrial	$	1,590	$	4,871
Agricultural	—		46
Commercial Real Estate
Farm	1,598		1,010
Hotel	2,984		2,986
Construction and development	2,086		6,099
Other	22,530		26,426
Residential
1-4 Family	11,012		11,979
Home Equity	2,645		2,639
Consumer
Direct	986		1,063
Indirect	19		51
Total	$	45,450	$	57,170

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

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
Commercial Real Estate
Farm	922		922		442
Construction and development	742		644		240
Other	9,727		9,419		2,385
Subtotal — impaired with allowance recorded	11,696		11,290		3,217
With no related allowance recorded
Commercial
Commercial & 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 allowance recorded	48,859		39,264				358		358
Total impaired loans	$	60,555	$	50,554	$	3,217	$	358	$	358

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 March 31, 2013 and December 31, 2012

	Non-accrual				Past due over 90 days and still accruing
	March 31, 2013		December 31, 2012		March 31, 2013		December 31, 2012
Commercial
Commercial and industrial	$	1,365	$	1,777
Agricultural			—
Commercial Real Estate
Farm	1,611		1,584
Hotel			—
Construction and development	1,548		1,657				$	565
Other	19,939		17,442		$	100
Residential
1-4 Family	9,142		10,392
Home Equity	2,256		2,216
Consumer
Direct	196		366
Indirect	21		17
Total	$	36,078	$	35,451	$	100	$	565

The following table presents the aging of the recorded investment in past due loans as of March 31, 2013 by class of loans:

March 31, 2013	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	$	136,895	$	693	$	136	$	742	$	1,571	$	135,324
Agricultural	18,091		—		—		—		—		18,091
Commercial Real Estate
Farm	63,971		—		—		1,278		1,278		62,693
Hotel	127,027		—		—		—		—		127,027
Construction and development	27,994		—		—		1,448		1,448		26,546
Other	509,373		703		2,806		10,955		14,464		494,909
Residential
1-4 Family	403,083		5,779		1,269		4,082		11,130		391,953
Home Equity	222,915		703		370		1,475		2,548		220,367
Consumer
Direct	42,032		129		17		125		271		41,761
Indirect	1,939		3		1		4		8		1,931
Total — excludes $5,230 of accrued interest	$	1,553,320	$	8,010	$	4,599	$	20,109	$	32,718	$	1,520,602

The following table presents the aging of the recorded investment in past due loans as of December 31, 2012 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	$	134,156	$	1,421	$	311	$	1,094	$	2,826	$	131,330
Agricultural	22,355		—		—		—		—		22,355
Commercial Real Estate
Farm	66,119		158		—		1,417		1,575		64,544
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

Troubled Debt Restructurings

During the periods ending March 31, 2013 and 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 $30 and $0 for the three month periods ending March 31, 2013 and 2012 and resulted in charge offs of $0 and $0 during the three month periods ending March 31, 2013 and 2012. Reserves of $0 in 2013 and $0 in 2012 were provided for these loans in prior quarters.

The following table presents loans by class modified as troubled debt restructurings that occurred during the three month period ending March 31, 2013:

		Pre-Modification		Post-Modification
		Outstanding Recorded		Outstanding Recorded
March 31, 2013	Number of Loans	Investment		Investment
Commercial real estate
Other	2	$	249	$	249
Residential
1-4 Family	3	186		186
Consumer
Direct	1	30		30
Total	6	$	465	$	465

The following table presents loans by class modified as troubled debt restructurings that occurred during the three month period ending March 31, 2012:

		Pre-Modification		Post-Modification
		Outstanding Recorded		Outstanding Recorded
March 31, 2012	Number of Loans	Investment		Investment
Consumer
Direct	1	$	4	$	4
Total	1	$	4	$	4

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 March 31, 2013:

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 $0 and $146 and resulted in charge offs of $0 and $0 during the three month period ending March 31, 2013 and 2012 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 $411 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of March 31, 2013. 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, 2012, the comparable numbers were $567 of specific reserves and $0 of commitments. The total of troubled debt restructurings at March 31, 2013 and December 31, 2012 was $18,820 and $18,932 respectively. Included in the TDR totals are non-accrual loans of $4,919 and $3,829 at March 31, 2013 and December 31, 2012 respectively.

The terms of certain other loans were modified during the three month period ending March 31, 2013 that did not meet the definition of a troubled debt restructuring. These loans have a total recorded investment as of March 31, 2013 of $0. 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 have demonstrated the 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 March 31, 2013, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

March 31, 2013	Pass		Special Mention		Substandard		Non-accrual
Commercial
Commercial and industrial	$	129,488	$	4,134	$	1,908	$	1,365
Agricultural	18,087		—		4		—
Commercial Real Estate
Farm	61,940		420		—		1,611
Hotel	77,272		49,755		—		—
Construction and development	22,484		1,395		2,567		1,548
Other	441,754		29,833		17,847		19,939
Total	$	751,025	$	85,537	$	22,326	$	24,463

At December 31, 2012, the risk category of loans by class of loans was as follows:

December 31, 2012	Pass		Special Mention		Substandard		Non-accrual
Commercial
Commercial and industrial	$	119,755	$	9,824	$	2,800	$	1,777
Agricultural	22,350		—		5		—
Commercial Real Estate
Farm	63,294		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

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 family 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 March 31, 2013 and December 31, 2012, the grading of loans by category of loans is as follows:

March 31, 2013	Performing		Watch		Substandard
Residential
1-4 Family	$	397,732	$	1,269	$	4,082
Home Equity	221,069		371		1,475
Total	$	618,801	$	1,640	$	5,557

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

March 31, 2013	Performing		Substandard		Loss
Consumer
Direct	$	41,890	$	86	$	56
Indirect	1,933		1		5
Total	$	43,823	$	87	$	61

December 31, 2012	Performing		Substandard		Loss
Consumer
Direct	$	45,553	$	195	$	96
Indirect	2,434		12		5
Total	$	47,987	$	207	$	101

March 31, 2013

Number of Loans

Recorded Investment

Residential: