NOTE 4 - LOANS AND ALLOWANCE

Loans were as follows:

	March 31, 2014			December 31, 2013
Commercial
Commercial and industrial	$	185,469		$	180,378
Agricultural	41,008			30,323
Commercial Real Estate
Farm	74,023			76,082
Hotel	99,833			108,226
Construction and development	42,778			35,731
Other	553,164			546,970
Residential
1-4 family	403,197			403,733
Home equity	244,337			244,277
Consumer
Direct	42,827			45,129
Indirect	915			1,077
Total loans	1,687,551			1,671,926
Allowance for loan losses	(27,247		)	(27,609		)
Net loans	$	1,660,304		$	1,644,317

Activity in the allowance for loan losses for the three months ended March 31, 2014 and 2013 and the recorded investment of loans and allowances by portfolio segment and impairment method as of March 31, 2014 and December 31, 2013 were as follows:

	Commercial			Commercial Real Estate			Residential			Consumer			Total
Allowance for loan loss
Balance, January 1, 2014	$	3,291		$	20,210		$	3,409		$	699		$	27,609
Provision charged to expense	(163		)	393			245			275			750
Losses charged off	(146		)	(608		)	(543		)	(743		)	(2,040		)
Recoveries	27			444			85			372			928
Balance, March 31, 2014	$	3,009		$	20,439		$	3,196		$	603		$	27,247

	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

As of March 31, 2014
Ending Balance individually evaluated for impairment	$	12		$	937		$	105		$	—		$	1,054
Ending Balance collectively evaluated for impairment	2,997			19,502			3,091			603			26,193
Total ending allowance balance	$	3,009		$	20,439		$	3,196		$	603		$	27,247
Loans
Ending Balance individually evaluated for impairment	$	265		$	18,883		$	11,352		$	131		$	30,631
Ending Balance collectively evaluated for impairment	226,212			750,915			636,182			43,611			1,656,920
Total ending loan balance excludes $5,073 of accrued interest	$	226,477		$	769,798		$	647,534		$	43,742		$	1,687,551

As of December 31, 2013	Commercial		Commercial Real Estate		Residential		Consumer		Total
Ending Balance individually evaluated for impairment	$	13	$	1,167	$	105	$	2	$	1,287
Ending Balance collectively evaluated for impairment	3,278		19,043		3,304		697		26,322
Total ending allowance balance	$	3,291	$	20,210	$	3,409	$	699	$	27,609

Loans
Ending Balance individually evaluated for impairment	$	300	$	21,240	$	10,797	$	785	$	33,122
Ending Balance collectively evaluated for impairment	210,401		745,769		637,213		45,421		1,638,804
Total ending loan balance excludes $5,206 of accrued interest	$	210,701	$	767,009	$	648,010	$	46,206	$	1,671,926

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, 2014. Performing troubled debt restructurings totaling $6,510 were excluded as allowed by ASC 310-40.

March 31, 2014	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With an allowance recorded
Commercial
Commercial and industrial	$	108	$	90	$	12
Commercial Real Estate
Farm	76		76		21
Hotel
Construction and development	—		—		—
Other	4,891		4,591		916
Residential
1-4 Family	990		919		100
Home Equity	173		173		5
Consumer
Direct	—		—		—
Subtotal — impaired with allowance recorded	6,238		5,849		1,054
With no related allowance recorded
Commercial
Commercial & industrial	256		175
Agricultural	—		—
Commercial Real Estate
Farm	1,042		811
Hotel	—		—
Construction and development	471		322
Other	8,991		6,571
Residential
1-4 Family	8,477		7,618
Home Equity	2,857		2,642
Consumer
Direct	150		121
Indirect	10		10
Subtotal — impaired with allowance recorded	22,254		18,270
Total impaired loans	$	28,492	$	24,119	$	1,054

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2013:

December 31, 2013	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With an allowance recorded
Commercial
Commercial and industrial	$	194	$	177	$	13
Agricultural`	—		—		—
Commercial Real Estate
Farm	625		436		61
Hotel	—		—		—
Construction and development	—		—		—
Other	7,309		6,382		1,106
Residential
1-4 Family	1,089		981		102
Home Equity	50		50		3
Consumer
Direct	126		126		2
Indirect	—		—		—
Subtotal — impaired with allowance recorded	9,393		8,152		1,287
With no related allowance recorded
Commercial
Commercial & industrial	204		123
Agricultural	—		—
Commercial Real Estate
Farm	767		657
Hotel	—		—
Construction and development	942		795
Other	8,651		6,377
Residential
1-4 Family	8,931		8,007
Home Equity	1,860		1,759
Consumer
Direct	675		649
Indirect	11		10
Subtotal — impaired with allowance recorded	22,041		18,377
Total impaired loans	$	31,434	$	26,529	$	1,287

The following tables present the average balance of impaired loans and interest income and cash basis interest recognized for the quarters ending March 31, 2014 and March 31, 2013, excluding performing troubled debt restructurings as allowed by ASC 310-40.

March 31, 2014	Average Balance Impaired Loans		Interest Income Recognized		Cash Basis Income Recognized
Commercial
Commercial & Industrial	$	282	$	4	$	4
Agricultural	—		—		—
Commercial Real Estate
Farm	990		—		—
Hotel	—		—		—
Construction and development	558		—		—
Other	11,955		48		48
Residential
1-4 Family	8,766		4		4
Home Equity	2,316		1		1
Consumer
Direct	449		3		3
Indirect	10		1		1
	$	25,326	$	61	$	61

March 31, 2013	Average Balance Impaired Loans		Interest Income Recognized		Cash Basis Income Recognized
Commercial
Commercial & Industrial	$	1,590	$	—	$	—
Agricultural	—		—		—
Commercial Real Estate
Farm	1,598		—		—
Hotel	2,984		—		—
Construction and development	2,086		—		—
Other	22,530		6		6
Residential
1-4 Family	11,012		2		2
Home Equity	2,645		2		2
Consumer
Direct	986		4		4
Indirect	19		—		—
	$	45,450	$	14	$	14

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, 2014 and December 31, 2013:

	Non-accrual				Past due over 90 days and still accruing
	March 31, 2014		December 31, 2013		March 31, 2014		December 31, 2013
Commercial
Commercial and industrial	$	135	$	159			$	14
Agricultural	—		—
Commercial Real Estate
Farm	887		1,093
Hotel	—		—
Construction and development	323		329
Other	9,459		11,489
Residential
1-4 Family	7,296		7,635
Home Equity	1,857		1,452
Consumer
Direct	104		174
Indirect	10		10
Total	$	20,071	$	22,341	$	—	$	14

The following table presents the aging of the recorded investment in past due loans as of March 31, 2014 by class of loans:

March 31, 2014	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	$	185,469	$	—	$	16	$	51	$	67	$	185,402
Agricultural	41,008		—		—		—		—		41,008
Commercial Real Estate
Farm	74,023		—		—		697		697		73,326
Hotel	99,833		—		—		—		—		99,833
Construction and development	42,778		—		—		243		243		42,535
Other	553,164		715		44		5,075		5,834		547,330
Residential
1-4 Family	403,197		4,913		570		3,951		9,434		393,763
Home Equity	244,337		588		338		1,075		2,001		242,336
Consumer
Direct	42,827		100		15		24		139		42,688
Indirect	915		1		—		—		1		914
Total — excludes $5,073 of accrued interest	$	1,687,551	$	6,317	$	983	$	11,116	$	18,416	$	1,669,135

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

December 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	$	180,378	$	64	$	24	$	72	$	160	$	180,218
Agricultural	30,323		—		—		—		—		30,323
Commercial Real Estate
Farm	76,082		—		—		697		697		75,385
Hotel	108,226		—		—		—		—		108,226
Construction and development	35,731		466		—		329		795		34,936
Other	546,970		984		187		5,944		7,115		539,855
Residential
1-4 Family	403,733		7,381		1,969		4,936		14,286		389,447
Home Equity	244,277		646		313		1,025		1,984		242,293
Consumer
Direct	45,129		192		32		126		350		44,779
Indirect	1,077		2		4		—		6		1,071
Total — excludes $5,206 of accrued interest	$	1,671,926	$	9,735	$	2,529	$	13,129	$	25,393	$	1,646,533

Troubled Debt Restructurings

During the periods ending March 31, 2014 and 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 total of troubled debt restructurings at March 31, 2014 and December 31, 2013 was $13,918 and $14,347 respectively. Included in the TDR totals are non-accrual loans of $3,361 and $3,566 at March 31, 2014 and December 31, 2013 and performing loans of $6,510 at March 31, 2014 and $6,593 at December 31, 2013. The Company has allocated $466 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of March 31, 2014. 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, 2013, the comparable numbers were $534 of specific reserves and $0 of commitments.

The troubled debt restructurings decreased the allowance for loan losses by $20 and increased the allowance by $0 for the three month periods ending March 31, 2014 and 2013 and resulted in charge offs of $0 and $0 during the three month periods ending March 31, 2014 and 2013.

There were no new TDRs that occurred during the three month period ending March 31, 2014.

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 for which there was a payment default within twelve months following the modification during the three month period ending March 31, 2014:

March 31, 2014	Number of Loans	Recorded Investment
Commercial real estate:
Other	1	$	1,431
Residential
1-4 Family	1	53

Total	2	$	1,484

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 $0 and resulted in charge offs of $0 and $0 during the three month period ending March 31, 2014 and 2013, 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 terms of certain other loans were modified during the three month period ending March 31, 2014 that did not meet the definition of a troubled debt restructuring. These loans have a total recorded investment as of March 31, 2014 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, 2014, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

March 31, 2014	Pass		Special Mention		Substandard		Non-accrual
Commercial
Commercial and industrial	$	146,369	$	3,278	$	1,743	$	135
Agricultural	41,008		—		—		—
Commercial Real Estate
Farm	71,937		1,011		—		887
Hotel	53,177		29,254		17,402		—
Construction and development	42,345		—		—		323
Other	400,159		19,416		10,284		9,459
Total	$	754,995	$	52,959	$	29,429	$	10,804

At December 31, 2013, the risk category of loans by class of loans was as follows:

December 31, 2013	Pass		Special Mention		Substandard		Non-accrual
Commercial
Commercial and industrial	$	144,744	$	4,538	$	1,250	$	159
Agricultural	30,206		—		—		—
Commercial Real Estate
Farm	73,006		105		—		1,093
Hotel	61,195		31,401		15,630		—
Construction and development	34,672		—		466		329
Other	388,719		20,893		9,931		11,489
Total	$	732,542	$	56,937	$	27,277	$	13,070

Loans not analyzed individually as part of the above described process are classified by delinquency. These loans are primarily smaller (<$250) commercial, smaller commercial real estate (<$250), residential mortgage and consumer loans. All commercial, commercial real estate, 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. Smaller commercial and commercial real estate loans on non-accrual are included in the non-accrual tables above. 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, 2014 and December 31, 2013, the grading of loans by category of loans is as follows:

March 31, 2014	Performing		Watch		Substandard
Commercial
Commercial and industrial	$	33,927	$	17	$	—
Commercial Real Estate
Farm	188		—		—
Construction and development	110		—		—
Other	113,803		43		—
Total	$	148,028	$	60	$	—

December 31, 2013	Performing		Watch		Substandard
Commercial
Commercial and industrial	$	29,664	$	23	$	—
Agricultural	117		—		—
Commercial Real Estate
Farm	1,878		—		—
Construction and development	264		—		—
Other	115,938		—		—
Total	$	147,861	$	23	$	—

March 31, 2014	Performing		Watch		Substandard
Residential
1-4 Family	$	398,678	$	570	$	3,949
Home Equity	242,918		339		1,080
Total	$	641,596	$	909	$	5,029

December 31, 2013	Performing		Watch		Substandard
Residential
1-4 Family	$	396,836	1,965		4,932
Home Equity	242,934		315		1,028
Total	$	639,770	$	2,280	$	5,960

March 31, 2014	Performing		Substandard		Loss
Consumer
Direct	$	42,788	$	15	$	24
Indirect	915		—		—
Total	$	43,703	$	15	$	24

December 31, 2013	Performing		Substandard		Loss
Consumer
Direct	$	44,970	$	32	$	127
Indirect	1,073		4		—
Total	$	46,043	$	36	$	127

March 31, 2013

Number of Loans

Recorded Investment

Residential: