NOTE 4 - LOANS AND ALLOWANCE

Loans were as follows:

	June 30, 2014			December 31, 2013
Commercial
Commercial and industrial	$	193,395		$	180,378
Agricultural	40,087			30,323
Commercial Real Estate
Farm	74,270			76,082
Hotel	92,045			108,226
Construction and development	43,038			35,731
Other	558,490			546,970
Residential
1-4 family	402,188			403,733
Home equity	251,743			244,277
Consumer
Direct	44,762			45,129
Indirect	780			1,077
Total loans	1,700,798			1,671,926
Allowance for loan losses	(23,867		)	(27,609		)
Net loans	$	1,676,931		$	1,644,317

Activity in the allowance for loan losses for the six months ended June 30, 2014 and 2013 and the recorded investment of loans and allowances by portfolio segment and impairment method as of June 30, 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	(14		)	—			963			551			1,500
Losses charged off	(149		)	(4,655		)	(1,377		)	(1,371		)	(7,552		)
Recoveries	73			1,439			115			683			2,310
Balance, June 30, 2014	$	3,201		$	16,994		$	3,110		$	562		$	23,867

	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

As of June 30, 2014
Ending Balance individually evaluated for impairment	$	130		$	730		$	97		$	—		$	957
Ending Balance collectively evaluated for impairment	3,071			16,264			3,013			562			22,910
Total ending allowance balance	$	3,201		$	16,994		$	3,110		$	562		$	23,867
Loans
Ending Balance individually evaluated for impairment	$	709		$	28,989		$	9,992		$	92		$	39,782
Ending Balance collectively evaluated for impairment	232,773			738,854			643,939			45,450			1,661,016
Total ending loan balance excludes $4,982 of accrued interest	$	233,482		$	767,843		$	653,931		$	45,542		$	1,700,798

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 $5,043 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.

Activity in the allowance for loan losses for the three months ended June 30, 2014 and 2013 was as follows:

	Commercial			Commercial Real Estate			Residential			Consumer			Total
Allowance for loan loss
Balance, April 1, 2014	$	3,009		$	20,439		$	3,196		$	603		$	27,247
Provision charged to expense	149			(393		)	718			276			750
Losses charged off	(3		)	(4,047		)	(834		)	(628		)	(5,512		)
Recoveries	46			995			30			311			1,382
Balance, June 30, 2014	$	3,201		$	16,994		$	3,110		$	562		$	23,867

	Commercial			Commercial Real Estate			Residential			Consumer			Total
Allowance for loan loss
Balance, April 1, 2013	$	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, 2013	$	3,635		$	20,108		$	3,459		$	800		$	28,002

The following table presents loans individually evaluated for impairment by class of loans as of June 30, 2014. Performing troubled debt restructurings totaling $6,444 were excluded as allowed by ASC 310-40.

June 30, 2014	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With an allowance recorded
Commercial
Commercial and industrial	$	214	$	197	$	130
Commercial Real Estate
Farm	76		76		21
Hotel
Construction and development	—		—		—
Other	4,006		3,668		709
Residential
1-4 Family	837		797		92
Home Equity	171		171		5
Consumer
Direct	—		—		—
Subtotal — impaired with allowance recorded	5,304		4,909		957
With no related allowance recorded
Commercial
Commercial & industrial	186		99
Agricultural	413		413
Commercial Real Estate
Farm	1,015		779
Hotel	11,550		11,550
Construction and development	84		78
Other	8,761		6,394
Residential
1-4 Family	7,273		6,445
Home Equity	2,771		2,579
Consumer
Direct	126		92
Indirect	—		—
Subtotal — impaired with no allowance recorded	32,179		28,429		—
Total impaired loans	$	37,483	$	33,338	$	957

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2013. Performing troubled debt restructurings totaling $6,593 were excluded as allowed by ASC 310-40.

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 no 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 six month periods ending June 30, 2014 and June 30, 2013, excluding performing troubled debt restructurings as allowed by ASC 310-40.

Six months ended June 30, 2014	Average Balance Impaired Loans		Interest Income Recognized		Cash Basis Income Recognized
Commercial
Commercial & Industrial	$	287	$	8	$	8
Agricultural	137		—		—
Commercial Real Estate
Farm	945		—		—
Hotel	3,850		—		—
Construction and development	398		—		—
Other	11,324		71		71
Residential
1-4 Family	8,258		5		5
Home Equity	2,460		7		7
Consumer
Direct	330		5		5
Indirect	7		1		1
	$	27,996	$	97	$	97

Six months ended June 30, 2013	Average Balance Impaired Loans		Interest Income Recognized		Cash Basis Income Recognized
Commercial
Commercial & Industrial	$	1,387	$	2	$	2
Agricultural	—		—		—
Commercial Real Estate
Farm	1,486		8		8
Hotel	1,989		—		—
Construction and development	1,864		1		1
Other	20,953		32		32
Residential
1-4 Family	10,706		3		3
Home Equity	2,617		3		3
Consumer
Direct	955		11		11
Indirect	17		—		—
	$	41,974	$	60	$	60

The following tables present the average balance of impaired loans and interest income and cash basis interest recognized for the three month periods ending June 30, 2014 and June 30, 2013, excluding performing troubled debt restructurings as allowed by ASC 310-40.

Three months ended June 30, 2014	Average Balance Impaired Loans		Interest Income Recognized		Cash Basis Income Recognized
Commercial
Commercial & Industrial	$	280	$	4	$	4
Agricultural	206		—		—
Commercial Real Estate
Farm	871		—		—
Hotel	5,775		—		—
Construction and development	200		—		—
Other	10,612		23		23
Residential
1-4 Family	7,890		1		1
Home Equity	2,783		6		6
Consumer
Direct	106		2		2
Indirect	5		—		—
	$	28,728	$	36	$	36

Three months ended June 30, 2013	Average Balance Impaired Loans		Interest Income Recognized		Cash Basis Income Recognized
Commercial
Commercial & Industrial	$	1,183	$	2	$	2
Agricultural	—		—		—
Commercial Real Estate
Farm	1,437		8		8
Hotel	—		—		—
Construction and development	1,725		1		1
Other	19,529		26		26
Residential
1-4 Family	10,285		1		1
Home Equity	2,613		1		1
Consumer
Direct	899		7		7
Indirect	17		—		—
	$	37,688	$	46	$	46

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, 2014 and December 31, 2013:

	Non-accrual				Past due over 90 days and still accruing
	June 30, 2014		December 31, 2013		June 30, 2014		December 31, 2013
Commercial
Commercial and industrial	$	94	$	159			$	14
Agricultural	413		—
Commercial Real Estate
Farm	854		1,093
Hotel	—		—
Construction and development	78		329
Other	7,534		11,489
Residential
1-4 Family	5,940		7,635
Home Equity	1,833		1,452
Consumer
Direct	78		174
Indirect	—		10
Total	$	16,824	$	22,341	$	—	$	14

The following table presents the aging of the recorded investment in past due loans as of June 30, 2014 by class of loans:

June 30, 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	$	193,395	$	91	$	16	$	60	$	167	$	193,228
Agricultural	40,087		—		397		—		397		39,690
Commercial Real Estate
Farm	74,270		—		—		332		332		73,938
Hotel	92,045		—		—		—		—		92,045
Construction and development	43,038		—		—		—		—		43,038
Other	558,490		545		232		4,193		4,970		553,520
Residential
1-4 Family	402,188		1,997		1,402		2,633		6,032		396,156
Home Equity	251,743		644		371		1,109		2,124		249,619
Consumer
Direct	44,762		70		7		36		113		44,649
Indirect	780		3		—		—		3		777
Total — excludes $4,982 of accrued interest	$	1,700,798	$	3,350	$	2,425	$	8,363	$	14,138	$	1,686,660

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 $5,043 of accrued interest	$	1,671,926	$	9,735	$	2,529	$	13,129	$	25,393	$	1,646,533

Troubled Debt Restructurings

During the periods ending June 30, 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 June 30, 2014 and December 31, 2013 was $25,927 and $14,347 respectively. The large increase in the TDR balance is the result of one credit relationship which was structured into an A/B note in the second quarter of 2014 with the B note being written off. Included in the TDR totals are non-accrual loans of $3,070 and $3,566 at June 30, 2014 and December 31, 2013. The Company has allocated $352 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of June 30, 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 resulted in no change to the allowance for loan losses for the three month periods ending June 30, 2014 and 2013 and decreased the allowance for loan losses by $20 and increased the allowance for loan losses by $30 for the six month periods ending June 30, 2014 and 2013. These troubled debt restructurings resulted in charge offs of $3,848 and $38 during the three month periods ending June 30, 2014 and 2013 and $3,848 and $420 during the six month periods ending June 30, 2014 and 2013.

The following table presents loans by class modified as troubled debt restructurings that occurred during the six month period ending June 30, 2014:

		Pre-Modification		Post-Modification
		Outstanding Recorded		Outstanding Recorded
For the six month period ending June 30, 2014	Number of Loans	Investment		Investment
Commercial real estate
Hotel	2	$	15,362	$	11,550
Other	2	1,015		1,015
Residential
1-4 Family	1	140		140
Total	5	$	16,517	$	12,705

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
For the six month period ending June 30, 2013	Number of Loans	Investment		Investment
Commercial real estate
Other	1	$	28	$	28
Commercial real estate
Other	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 periods ending June 30, 2014 and 2013:

		Pre-Modification		Post-Modification
		Outstanding Recorded		Outstanding Recorded
For the three month period ending June 30, 2014	Number of Loans	Investment		Investment
Commercial real estate
Hotel	2	$	15,362	$	11,550
Other	2	1,015		1,015
Residential
1-4 Family	1	140		140
Total	5	$	16,517	$	12,705

		Pre-Modification		Post-Modification
		Outstanding Recorded		Outstanding Recorded
For the three month period ending 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 for which there was a payment default within twelve months following the modification during the six month period ending June 30, 2014:

For the six month period ending June 30, 2014	Number of Loans	Recorded Investment
Commercial real estate:
Other	1	$	1,431
Residential
1-4 Family	1	53

Total	2	$	1,484

There were no loans for which there was a payment default within twelve months following the modification during the three month periods ending June 30, 2014 or 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 resulted in no change in the allowance for loan losses and no charge offs during the three month periods ending June 30, 2014 and 2013, respectively. For the six month periods ending June 30, 2014 and 2013, the troubled debt restructurings that subsequently defaulted increased the allowance for loan losses by $0 and $0 and resulted in charge offs of $36 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 terms of certain other loans were modified during the three month period ending June 30, 2014 that did not meet the definition of a troubled debt restructuring. These loans have a total recorded investment as of June 30, 2014 of $981. 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 June 30, 2014, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

June 30, 2014	Pass		Special Mention		Substandard		Non-accrual
Commercial
Commercial and industrial	$	156,614	$	3,331	$	1,918	$	94
Agricultural	39,674		—		—		413
Commercial Real Estate
Farm	72,429		987		—		854
Hotel	61,436		17,144		13,465		—
Construction and development	42,930		—		—		78
Other	414,402		16,455		8,961		7,534
Total	$	787,485	$	37,917	$	24,344	$	8,973

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 past due 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 June 30, 2014 and December 31, 2013, the grading of loans by category of loans is as follows:

June 30, 2014	Performing		Watch		Substandard
Commercial
Commercial and industrial	$	31,422	$	16	$	—
Commercial Real Estate
Construction and development	30		—		—
Other	111,026		112		—
Total	$	142,478	$	128	$	—

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	$	—

June 30, 2014	Performing		Watch		Substandard
Residential
1-4 Family	$	396,248	$	3,310	$	2,630
Home Equity	249,910		720		1,113
Total	$	646,158	$	4,030	$	3,743

December 31, 2013	Performing		Watch		Substandard
Residential
1-4 Family	$	396,098	2,703		4,932
Home Equity	242,825		424		1,028
Total	$	638,923	$	3,127	$	5,960

June 30, 2014	Performing		Substandard		Loss
Consumer
Direct	$	44,684	$	72	$	6
Indirect	780		—		—
Total	$	45,464	$	72	$	6

December 31, 2013	Performing		Substandard		Loss
Consumer
Direct	$	44,955	$	47	$	127
Indirect	1,067		10		—
Total	$	46,022	$	57	$	127

For the six month period ending June 30, 2013

Number of Loans

Recorded Investment

Residential: