NOTE 4 - LOANS AND ALLOWANCE

Loans were as follows:

	June 30, 2013			December 31, 2012
Commercial
Commercial and industrial	$	141,595		$	134,156
Agricultural	23,955			22,355
Commercial Real Estate
Farm	69,550			66,119
Hotel	122,875			131,495
Construction and development	30,380			25,208
Other	511,002			507,231
Residential
1-4 family	406,961			394,195
Home equity	231,688			224,329
Consumer
Direct	43,691			45,844
Indirect	1,584			2,451
Total loans	1,583,281			1,553,383
Allowance for loan losses	(28,002		)	(32,227		)
Net loans	$	1,555,279		$	1,521,156

Activity in the allowance for loan losses for the six months ended June 30, 2013 and 2012 and the recorded investment of loans and allowances by portfolio segment and impairment method as of June 30, 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	487			331			1,371			545			2,734
Losses charged off	(967		)	(4,686		)	(1,319		)	(1,500		)	(8,472		)
Recoveries	221			306			227			759			1,513
Balance, June 30, 2013	$	3,635		$	20,108		$	3,459		$	800		$	28,002

	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	(795		)	4,091			1,709			595			5,600
Losses charged off	(277		)	(6,089		)	(1,832		)	(1,506		)	(9,704		)
Recoveries	455			1,102			126			821			2,504
Balance, June 30, 2012	$	4,945		$	29,580		$	2,975		$	789		$	38,289

As of June 30, 2013
Ending Balance individually evaluated for impairment	$	280		$	1,359		$	108		$	2		$	1,749
Ending Balance collectively evaluated for impairment	3,355			18,749			3,351			798			26,253
Total ending allowance balance	$	3,635		$	20,108		$	3,459		$	800		$	28,002
Loans
Ending Balance individually evaluated for impairment	$	981		$	28,189		$	12,679		$	903		$	42,752
Ending Balance collectively evaluated for impairment	164,569			705,618			625,970			44,372			1,540,529
Total ending loan balance excludes $5,222 of accrued interest	$	165,550		$	733,807		$	638,649		$	45,275		$	1,583,281

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.

Activity in the allowance for the loan losses by portfolio segment for the three months ended June 30, 2013 and June 30, 2012 was as follows:

As of June 30, 2013	Commercial			Commercial Real Estate			Residential			Consumer			Total
Allowance for loan loss
Balance, April 1	$	4,279		$	23,238		$	3,263		$	948		$	31,728
Provision charged to expense	(38		)	93			740			205			1,000
Losses charged off	(696		)	(3,478		)	(621		)	(681		)	(5,476		)
Recoveries	90			255			77			328			750
Balance, June 30	$	3,635		$	20,108		$	3,459		$	800		$	28,002

As of June 30, 2012	Commercial			Commercial Real Estate			Residential			Consumer			Total
Allowance for loan loss
Balance, April 1	$	5,331		$	30,240		$	2,012		$	958		$	38,541
Provision charged to expense	(577		)	1,198			1,527			352			2,500
Losses charged off	(97		)	(2,181		)	(618		)	(887		)	(3,783		)
Recoveries	288			323			54			366			1,031
Balance, June 30	$	4,945		$	29,580		$	2,975		$	789		$	38,289

The following table presents loans individually evaluated for impairment by class of loans as of June 30, 2013. Performing troubled debt restructurings totaling $7,699 were excluded as allowed by ASC 310-40.

June 30, 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	$	556	$	539	$	280
Commercial Real Estate
Farm	76		76		22
Hotel
Construction and development	860		778		174
Other	9,347		8,396		1,163
Residential
1-4 Family	1,102		997		105
Home Equity	51		51		3
Consumer
Direct	129		129		2
Subtotal — impaired with allowance recorded	12,121		10,966		1,749
With no related allowance recorded
Commercial
Commercial & industrial	1,025		442				$	23	$	23
Agricultural	—		—				—		—
Commercial Real Estate
Farm	1,462		1,186				34		34
Hotel	—		—				—		—
Construction and development	2,105		642				2		2
Other	12,442		9,412				299		299
Residential
1-4 Family	10,352		9,125				243		243
Home Equity	2,820		2,506				44		44
Consumer
Direct	786		761				20		20
Indirect	14		13				—		—
Subtotal — impaired with allowance recorded	31,006		24,087				665		665
Total impaired loans	$	43,127	$	35,053	$	1,749	$	665	$	665

The following table presents the average balance of impaired loans for the quarters ending June 30, 2013 and June 30, 2012, excluding performing troubled debt restructurings as allowed by ASC 310-40.

At June 30, 2013	Three Month Average Balance		Six Month Average Balance
Commercial
Commercial & industrial	$	1,183	$	1,387
Agricultural
Commercial Real Estate
Farm	1,437		1,486
Hotel			1,989
Construction and development	1,725		1,864
Other	19,529		20,953
Residential
1-4 Family	10,285		10,706
Home Equity	2,613		2,617
Consumer
Direct	899		955
Indirect	17		17
Total	$	37,688	$	41,974

At June 30, 2012	Three Month Average Balance		Six Month Average Balance
Commercial
Commercial & industrial	$	4,999	$	5,028
Agricultural	28		38
Commercial Real Estate
Farm	1,048		1,038
Hotel	102		1,991
Construction and development	4,828		5,657
Other	26,591		26,743
Residential
1-4 Family	12,055		12,052
Home Equity	2,939		2,785
Consumer
Direct	1,043		1,056
Indirect	61		52
Total	$	53,694	$	56,440

The following table presents loans individually evaluated for impairment by class of loans at 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 June 30, 2013 and December 31, 2012

	Non-accrual				Past due over 90 days and still accruing
	June 30, 2013		December 31, 2012		June 30, 2013		December 31, 2012
Commercial
Commercial and industrial	$	582	$	1,777
Agricultural
Commercial Real Estate
Farm	1,262		1,584
Hotel
Construction and development	947		1,657				$	565
Other	16,494		17,442
Residential
1-4 Family	8,851		10,392		$	372
Home Equity	2,136		2,216
Consumer
Direct	224		366
Indirect	13		17
Total	$	30,509	$	35,451	$	372	$	565

The following table presents the aging of the recorded investment in past due loans as of June 30, 2013 by class of loans:

June 30, 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	$	141,595	$	56	$	—	$	85	$	141	$	141,454
Agricultural	23,955		—		—		—		—		23,955
Commercial Real Estate
Farm	69,550		—		—		1,140		1,140		68,410
Hotel	122,875		—		—		—		—		122,875
Construction and development	30,380		—		89		858		947		29,433
Other	511,002		478		812		9,910		11,200		499,802
Residential
1-4 Family	406,961		2,232		1,103		5,013		8,348		398,613
Home Equity	231,688		795		310		1,392		2,497		229,191
Consumer
Direct	43,691		84		63		137		284		43,407
Indirect	1,584		7		—		11		18		1,566
Total — excludes $5,222 of accrued interest	$	1,583,281	$	3,652	$	2,377	$	18,546	$	24,575	$	1,558,706

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 period ending June 30, 2013, 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 did not increase the allowance for loan losses for either of the three month periods ending June 30, 2013 and 2012 and $30 and $0 for the six months period ending June 30, 2013 and 2012. These troubled debt restructuring resulted in charge offs of $38 and $15 during the three month periods ending June 30, 2013 and 2012 and $420 and $2,399 during the six month period ending June 30, 2013 and 2012. Reserves of $0 and $0 for the three and six month periods in 2013 and $217 in $1,768 for the three and six month periods 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 June 30, 2013:

		Pre-Modification		Post-Modification
		Outstanding Recorded		Outstanding Recorded
June 30, 2013	Number of Loans	Investment		Investment
Commercial
Commercial and industrial	1	$	28	$	28
Commercial real estate
Other	1	95		95
Residential
1-4 Family	2	75		75
Home Equity	1	20		20
Total	5	$	218	$	218

The following table presents loans by class modified as troubled debt restructurings that occurred during the six month period ending June 30, 2013:

		Pre-Modification		Post-Modification
		Outstanding Recorded		Outstanding Recorded
	Number of Loans	Investment		Investment
Commercial
Commercial and industrial	1	$	28	$	28
Commercial real estate
Other real estate	3	344		344
Residential
1-4 Family	5	261		261
Home Equity	1	20		20
Consumer
Direct	1	30		30
Total	11	$	683	$	683

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

		Pre-Modification		Post-Modification
		Outstanding Recorded		Outstanding Recorded
June 30, 2012	Number of Loans	Investment		Investment
Residential
Home Equity	1	$	70	$	70
Total	1	$	70	$	70

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

		Pre-Modification		Post-Modification
		Outstanding Recorded		Outstanding Recorded
	Number of Loans	Investment		Investment
Residential
Home Equity	1	$	70	$	70
Consumer
Direct	1	4		4
Total	2	$	74	$	74

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 June 30, 2013:

June 30, 2013	Number of Loans	Recorded Investment
Residential:
1-4 Family	—	$	—

Total	—	$	—

	Number of Loans	Recorded Investment
Commercial
Commercial and industrial	1	$	137
Commercial real estate:
Development	1	323
Other	2	2,019
Residential
Home Equity	1	12

Total	5	$	2,491

	Number of Loans	Recorded Investment
Commercial
Commercial and industrial	1	$	137
Commercial real estate:
Development	1	323
Other	8	2,962
Residential
Home Equity	1	12

Total	11	$	3,434

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 $27 and resulted in charge offs of $0 and $0 during the three month period ending June 30, 2013 and 2012 respectively. For the six month period ending June 30, 2013 and 2012, the troubled debt restructurings that subsequently defaulted increased the allowance for loan losses by $0 and $199 and resulted in charge offs of $0 and $0.

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 $571 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of June 30, 2013. The Company has not committed to lend any additional amounts 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 June 30, 2013 and December 31, 2012 was $16,756 and $18,932 respectively. Included in the TDR totals are non-accrual loans of $4,851 and $3,829 at June 30, 2013 and December 31, 2012 respectively.

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 June 30, 2013 and December 31, 2012, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

June 30, 2013	Pass		Special Mention		Substandard		Non-accrual
Commercial
Commercial and industrial	$	136,263	$	3,864	$	886	$	582
Agricultural	23,952		—		3		—
Commercial Real Estate
Farm	68,172		116		—		1,262
Hotel	67,839		55,036		—		—
Construction and development	26,856		1,195		1,382		947
Other	455,992		25,552		12,964		16,494
Total	$	779,074	$	85,763	$	15,235	$	19,285

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. The tables below show the grading of the loan by its past due status as compared to the table of non-accrual loans which is based on whether interest is accruing or not. As of June 30, 2013 and December 31, 2012, the grading of loans by category of loans is as follows:

June 30, 2013	Performing		Watch		Substandard
Residential
1-4 Family	$	400,846	$	1,103	$	5,012
Home Equity	229,985		310		1,393
Total	$	630,831	$	1,413	$	6,405

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

June 30, 2013	Performing		Substandard		Loss
Consumer
Direct	$	43,491	$	109	$	91
Indirect	1,573		11		—
Total	$	45,064	$	120	$	91

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

Number of Loans

Recorded Investment

Residential